As filed with the Securities and Exchange Commission on June 25, 2010.April 27, 2012.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
ANNUAL REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 20092011
Commission file number 333-08752
Fomento Económico Mexicano, S.A.B. de C.V.
(Exact name of registrant as specified in its charter)
Mexican Economic Development, Inc.
(Translation of registrant’s name into English)
United Mexican States
(Jurisdiction of incorporation or organization)
General Anaya No. 601 Pte.
Colonia Bella Vista
Monterrey, NL 64410 Mexico
(Address of principal executive offices)
Juan F. Fonseca
General Anaya No. 601 Pte.
Colonia Bella Vista
Monterrey, NL 64410 Mexico
(52-818) 328-6167
investor@femsa.com.mx
(Name, telephone, e-mail and/or facsimile number and
address of company contact person)
Securities registered or to be registered pursuant topto Section 12(b) of the Act:
Title of each class: | Name of each exchange on which | |||
American Depositary Shares, each representing 10 BD Units, and each BD Unit consisting of one Series B Share, two Series D-B Shares and two Series D-L Shares, without par value | New York Stock Exchange |
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:
None
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:
2,161,177,770 | BD Units, each consisting of one Series B Share, two Series D-B Shares and two Series D-L Shares, without par value. The BD Units represent a total of 2,161,177,770 Series B Shares, 4,322,355,540 Series D-B Shares and 4,322,355,540 Series D-L Shares. | |
1,417,048,500 | B Units, each consisting of five Series B Shares without par value. The B Units represent a total of 7,085,242,500 Series B Shares. |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
x Yes | ¨ No |
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 | x No |
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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). N/A
¨ Yes | ¨ No |
Indicate by check mark whether the registrant: (1) has filed all reports required to be file 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.
x Yes | ¨ No |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated filer x | Accelerated filer ¨ | Non-accelerated filer ¨ |
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP ¨ | IFRS ¨ | Other x |
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 | x Item 18 |
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 | x No |
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95 | ||||||
Board Practices | 96 |
i
ii
ITEM 16D. | NOT APPLICABLE | 137 | ||||
ITEM 16E. | PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS | 137 | ||||
ITEM 16F. | NOT APPLICABLE | 138 | ||||
ITEM 16G. | CORPORATE GOVERNANCE | 138 | ||||
ITEM 16H. | NOT APPLICABLE | 140 | ||||
ITEM 17. | NOT APPLICABLE | 140 | ||||
ITEM 18. | FINANCIAL STATEMENTS | 140 | ||||
ITEM 19. | EXHIBITS | 141 |
iii
This annual report contains information materially consistent with the information presented in the audited financial statements and is free of material misstatements of fact that are not material inconsistencies with the information in the audited financial statements.
The terms “FEMSA,” “our company,” “we,” “us” and “our,” are used in this annual report to refer to Fomento Económico Mexicano, S.A.B. de C.V. and, except where the context otherwise requires, its subsidiaries on a consolidated basis. We refer to our subsidiary Coca-Cola FEMSA, S.A.B. de C.V., as “Coca-Cola FEMSA,” and our subsidiary FEMSA Comercio, S.A. de C.V., as “FEMSA Comercio.”
The term “S.A.B.” stands forsociedad anónima bursátil, which is the term used in the United Mexican States, or Mexico, to denominate a publicly traded company under the Mexican Securities Market Law (Ley del Mercado de Valores), which we refer to as the Mexican Securities Law.
References to “U.S. dollars,” “US$,” “dollars” or “$” are to the lawful currency of the United States of America.America (which we refer to as the United States). References to “Mexican pesos,” “pesos” or “Ps.” are to the lawful currency of Mexico. References to “euros” or “€” are to the United Mexican States, or Mexico.lawful currency of the European Economic and Monetary Union (which we refer to as the Euro Zone).
Currency Translations and Estimates
This annual report contains translations of certain Mexican peso amounts into U.S. dollars at specified rates solely for the convenience of the reader. These translations should not be construed as representations that the Mexican peso amounts actually represent such U.S. dollar amounts or could be converted into U.S. dollars at the rate indicated. Unless otherwise indicated, such U.S. dollar amounts have been translated from Mexican pesos at an exchange rate of Ps. 13.057613.9510 to US$ 1.00, the noon buying rate for Mexican pesos on December 31, 2009,30, 2011, as published by the Federal Reserve Bank of New York. On AprilMarch 30, 2010,2012, this exchange rate was Ps. 12.228112.8115 to US$ 1.00. See “Item 3. Key Information—Exchange Rate Information” for information regarding exchange rates since January 1, 2005.2007.
To the extent estimates are contained in this annual report, we believe that such estimates, which are based on internal data, are reliable. Amounts in this annual report are rounded, and the totals may therefore not precisely equal the sum of the numbers presented.
Per capita growth rates and population data have been computed based upon statistics prepared by theInstituto Nacional de Estadística, Geografía e Informáticaof Mexico (National Institute of Statistics, Geography and Information, which we refer to as the Mexican Institute of Statistics)INEGI), the Federal Reserve Bank of New York, the U.S. Federal Reserve Board andBanco de México (Bank of Mexico), local entities in each country and upon our estimates.
This annual report contains words, such as “believe,” “expect” and “anticipate” and similar expressions that identify forward-looking statements. Use of these words reflects our views about future events and financial performance. Actual results could differ materially from those projected in these forward-looking statements as a result of various factors that may be beyond our control, including but not limited to effects on our company from changes in our relationship with or among our affiliated companies, movements in the prices of raw materials, competition, significant developments in Mexico or international economic or political conditions or changes in our regulatory environment. Accordingly, we caution readers not to place undue reliance on these forward-looking statements. In any event, these statements speak only as of their respective dates, and we undertake no obligation to update or revise any of them, whether as a result of new information, future events or otherwise.
ITEMS 1-2. | NOT APPLICABLE |
ITEM 3. | KEY INFORMATION |
Selected Consolidated Financial Data
This annual report includes, under Item 18, our audited consolidated balance sheets as of December 31, 20092011 and 2008,2010, and the related consolidated statements of income, cash flows and changes in stockholders’ equity for the years ended December 31, 2009, 20082011, 2010 and 2007, the consolidated statement of cash flows for the years ended December 31, 2009 and 2008 and consolidated statement of changes in financial position for the year ended December 31, 2007.2009. Our audited consolidated financial statements are prepared in accordance with Mexican Financial Reporting Standards (Normas de Información Financiera Mexicanas, which we refer to as Mexican FRS or NIF), which differ in certain significant respects from accounting principles generally accepted in the United States, or U.S. GAAP.
Notes 26 and 27 to our audited consolidated financial statements provide a description of the principal differences between Mexican Financial Reporting StandardsFRS and U.S. GAAP as they relate to our company, together with a reconciliation to U.S. GAAP of net income, comprehensive income and stockholders’ equity as well as U.S. GAAP consolidated balance sheets, statements of income and comprehensive income and cash flows for the same periods presented for Mexican Financial Reporting StandardsFRS purposes and for the consolidated statement of changes in stockholders’ equity for the years ended December 31, 20092011 and 2008. 2010.
In the reconciliation to U.S. GAAP for the year ended December 31, 2009, we present our subsidiary Coca-Cola FEMSA, which is a consolidated subsidiary for purposes of Mexican Financial Reporting Standards,FRS, under the equity method for U.S. GAAP purposes, due to the substantive participating rights of The Coca-Cola Company as a minority shareholder in Coca-Cola FEMSA.FEMSA during that year. On February 1, 2010, FEMSA and The Coca-Cola Company signed an amendment to their Shareholders’ Agreement. As a result of this amendment, FEMSA began to consolidate Cola-Cola FEMSA for U.S. GAAP purposes on this date. See Note 26A to our audited consolidated financial statements.
The effectsBeginning in 2012, Mexican issuers with securities registered in the National Securities Registry (Registro Nacional de Valores) of inflation accounting under Mexicanthe Comisión Nacional Bancaria y de Valores (Mexican National Banking and Securities Commission, or the CNBV) are required to prepare financial statements in accordance with International Financial Reporting Standards have not been reversedas issued by the International Accounting Standards Board, which we refer to as IFRS. Accordingly, as of January 1, 2012, we are preparing our financial information in the reconciliation to U.S. GAAP.accordance with IFRS and will present financial information for 2011 on a comparable basis. See note 26Note 28 to our audited consolidated financial statements.
Beginning on January 1, 2008, in accordance with changes to NIF B-10 under the Mexican Financial Reporting Standards,FRS, we discontinued the use of inflation accounting for our subsidiaries that operate in “non-inflationary” countries where cumulative inflation for the three preceding years was less than 26%. Our subsidiaries in Mexico, Guatemala, Panama, Colombia and Brazil operate in non-inflationary economic environments, and therefore 20092011, 2010 and 20082009 figures reflect inflation effects only through 2007. Our subsidiaries in Nicaragua, Costa Rica, Venezuela and Argentina operate in economic environments in which cumulative inflation during the same three-year periodperiods was greater than 26% or greater,, and we therefore continue recognizing inflationary accounting for 20092011, 2010 and 2008.2009. For comparison purposes, the figures prior to 2008 have been restated in Mexican pesos with purchasing power as of December 31, 2007, taking into account local inflation for each country with reference to the consumer price index. Local currencies have been converted into Mexican pesos using official exchange rates published by the local central bank of each country. Our subsidiary in the Euro Zone, CB Equity LLP (which we refer to as CB Equity), operated in a non-inflationary economic environment in 2011 and 2010. See note 3Note 4 to our audited consolidated financial statements.
As a result of discontinuing inflationary accounting for subsidiaries that operate in non-inflationary economic environments, the financial statements are no longer considered to be presented in a reporting currency that comprehensively includes the effects of price level changes. Therefore, the inflationary effects of inflationary economic environments arising in 2009, 2010 and 2011 result in a difference that must be reconciled for U.S. GAAP purposes, except for Venezuela, which is considered to be a hyperinflationary environment since January 2010 and for which inflationary effects have not been reversed under U.S. GAAP. See Notes 26 and 27 to our audited consolidated financial statements.
On April 30, 2010, FEMSA announced the closing of the transaction pursuant to which FEMSA agreed to exchange 100% of its beer operations for a 20% economic interest in Heineken Holding N.V. and Heineken N.V., which, together with their respective subsidiaries, we refer to as Heineken or the Heineken Group. See “Item 4. Information on the Company—FEMSA Cerveza and Equity Method Investment in the Heineken Group.” Under Mexican FRS, we have reclassified our consolidated statements of income and cash flows for the year ended December 31, 2009 to reflect Cuauhtémoc Moctezuma Holding, S.A. de C.V. (formerly FEMSA Cerveza, S.A. de C.V.), which we refer to as Cuauhtémoc Moctezuma or FEMSA Cerveza, as a discontinued operation. However, FEMSA Cerveza is not presented as a discontinued operation under U.S. GAAP. See “Item 5. Operating and Financial Review and Prospects—U.S. GAAP Reconciliation” and Notes 26 and 27 to our audited consolidated financial statements.
The following table presents selected financial information of our company. This information should be read in conjunction with, and is qualified in its entirety by, our audited consolidated financial statements and the notes to those statements. See “Item 18. Financial Statements.” The selected financial information is presented on a consolidated basis and is not necessarily indicative of our financial position or results offrom operations at or for any future date or period. CertainUnder Mexican FRS, FEMSA Cerveza figures for years prior to 20092010 have been reclassified and presented as discontinued operations for comparison purposes to 20092011 and 2010 figures. See note 2Note 5B to our audited consolidated financial statements.
Selected Consolidated Financial Information Year Ended December 31, | Selected Consolidated Financial Information Year Ended December 31, | |||||||||||||||||||||||||||||||||||||||||||||||
2009(1) | 2009 | 2008 | 2007 | 2006 | 2005 | 2011(2) | 2011 | 2010 | 2009 | 2008 | 2007 | |||||||||||||||||||||||||||||||||||||
(In millions of U.S. dollars and millions of Mexican pesos, except for percentages, per share data and weighted average number of shares outstanding) | (in millions of U.S. dollars and millions of Mexican pesos, except for percentages, per share data and weighted average number of shares outstanding) | |||||||||||||||||||||||||||||||||||||||||||||||
Income Statement Data: | ||||||||||||||||||||||||||||||||||||||||||||||||
Mexican FRS: | ||||||||||||||||||||||||||||||||||||||||||||||||
Mexican FRS:(1) | ||||||||||||||||||||||||||||||||||||||||||||||||
Total revenues | $ | 15,090 | Ps. | 197,033 | Ps. | 168,022 | Ps. | 147,556 | Ps. | 136,120 | Ps. | 119,462 | $ | 14,554 | Ps.203,044 | Ps.169,702 | Ps.160,251 | Ps.133,808 | Ps.114,459 | |||||||||||||||||||||||||||||
Income from operations | 2,069 | 27,012 | 22,684 | 19,736 | 18,637 | 17,601 | 1,928 | 26,904 | 22,529 | 21,130 | 17,349 | 14,300 | ||||||||||||||||||||||||||||||||||||
Income taxes | 299 | 3,908 | 4,207 | 4,950 | 4,608 | 4,620 | 550 | 7,687 | 5,671 | 4,959 | 3,108 | 3,931 | ||||||||||||||||||||||||||||||||||||
Consolidated net income before discontinued operations | 1,483 | 20,684 | 17,961 | 11,799 | 7,630 | 8,438 | ||||||||||||||||||||||||||||||||||||||||||
Income from the exchange of shares with Heineken, net of taxes | — | — | 26,623 | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
Net income from discontinued operations | — | — | 706 | 3,283 | 1,648 | 3,498 | ||||||||||||||||||||||||||||||||||||||||||
Consolidated net income | 1,155 | 15,082 | 9,278 | 11,936 | 9,860 | 9,073 | 1,483 | 20,684 | 45,290 | 15,082 | 9,278 | 11,936 | ||||||||||||||||||||||||||||||||||||
Net controlling interest income | 759 | 9,908 | 6,708 | 8,511 | 7,127 | 5,951 | 1,085 | 15,133 | 40,251 | 9,908 | 6,708 | 8,511 | ||||||||||||||||||||||||||||||||||||
Net noncontrolling interest income | 396 | 5,174 | 2,570 | 3,425 | 2,733 | 3,122 | ||||||||||||||||||||||||||||||||||||||||||
Net controlling interest income(4): | ||||||||||||||||||||||||||||||||||||||||||||||||
Net non-controlling interest income | 398 | 5,551 | 5,039 | 5,174 | 2,570 | 3,425 | ||||||||||||||||||||||||||||||||||||||||||
Net controlling interest income before discontinued operations: | ||||||||||||||||||||||||||||||||||||||||||||||||
Per Series B Share | 0.05 | 0.75 | 0.64 | 0.33 | 0.25 | 0.25 | ||||||||||||||||||||||||||||||||||||||||||
Per Series D Share | 0.07 | 0.94 | 0.81 | 0.42 | 0.32 | 0.32 | ||||||||||||||||||||||||||||||||||||||||||
Net controlling income from discontinued operations: | ||||||||||||||||||||||||||||||||||||||||||||||||
Per Series B Share | — | — | 1.37 | 0.16 | 0.08 | 0.17 | ||||||||||||||||||||||||||||||||||||||||||
Per Series D Share | — | — | 1.70 | 0.20 | 0.10 | 0.21 | ||||||||||||||||||||||||||||||||||||||||||
Net controlling interest income: | ||||||||||||||||||||||||||||||||||||||||||||||||
Per Series B Share | 0.04 | 0.49 | 0.33 | 0.42 | 0.36 | 0.31 | 0.05 | 0.75 | 2.01 | 0.49 | 0.33 | 0.42 | ||||||||||||||||||||||||||||||||||||
Per Series D Share | 0.05 | 0.62 | 0.42 | 0.53 | 0.44 | 0.39 | 0.07 | 0.94 | 2.51 | 0.62 | 0.42 | 0.53 | ||||||||||||||||||||||||||||||||||||
Weighted average number of shares outstanding (in millions): | ||||||||||||||||||||||||||||||||||||||||||||||||
Series B Shares | 9,246.4 | 9,246.4 | 9,246.4 | 9,246.4 | 8,834.9 | 9,246.4 | 9,246.4 | 9,246.4 | 9,246.4 | 9,246.4 | 9,246.4 | |||||||||||||||||||||||||||||||||||||
Series D Shares | 8,644.7 | 8,644.7 | 8,644.7 | 8,644.7 | 8,260.1 | 8,644.7 | 8,644.7 | 8,644.7 | 8,644.7 | 8,644.7 | 8,644.7 | |||||||||||||||||||||||||||||||||||||
Allocation of earnings: | ||||||||||||||||||||||||||||||||||||||||||||||||
Series B Shares | 46.11 | % | 46.11 | % | 46.11 | % | 46.11 | % | 46.11 | % | 46.11 | % | 46.11 | % | 46.11 | % | 46.11 | % | 46.11 | % | 46.11 | % | ||||||||||||||||||||||||||
Series D Shares | 53.89 | % | 53.89 | % | 53.89 | % | 53.89 | % | 53.89 | % | 53.89 | % | 53.89 | % | 53.89 | % | 53.89 | % | 53.89 | % | 53.89 | % | ||||||||||||||||||||||||||
U.S. GAAP: | ||||||||||||||||||||||||||||||||||||||||||||||||
Total revenues | $ | 7,881 | Ps. | 102,902 | Ps. | 91,650 | Ps. | 83,362 | Ps. | 75,704 | Ps. | 63,031 | ||||||||||||||||||||||||||||||||||||
Income from operations | 663 | 8,661 | 7,881 | 7,667 | 7,821 | 6,911 | ||||||||||||||||||||||||||||||||||||||||||
Participation in Coca-Cola FEMSA’s earnings(5) | 346 | 4,516 | 2,994 | 3,635 | 2,420 | 2,205 | ||||||||||||||||||||||||||||||||||||||||||
Net income | 818 | 10,685 | 6,599 | 8,589 | 6,804 | 6,059 | ||||||||||||||||||||||||||||||||||||||||||
Less: Net noncontrolling interest income | (60 | ) | (783 | ) | 253 | (32 | ) | 169 | — | |||||||||||||||||||||||||||||||||||||||
Net controlling interest income | 758 | 9,902 | 6,852 | 8,557 | 6,973 | 6,059 | ||||||||||||||||||||||||||||||||||||||||||
Net controlling interest income(4): | ||||||||||||||||||||||||||||||||||||||||||||||||
Per Series B Share | 0.04 | 0.49 | 0.34 | 0.43 | 0.35 | 0.32 | ||||||||||||||||||||||||||||||||||||||||||
Per Series D Share | 0.05 | 0.62 | 0.43 | 0.53 | 0.43 | 0.40 | ||||||||||||||||||||||||||||||||||||||||||
Weighted average number of shares outstanding (in millions): | ||||||||||||||||||||||||||||||||||||||||||||||||
Series B Shares | 9,246.4 | 9,246.4 | 9,246.4 | 9,246.4 | 8,834.9 | |||||||||||||||||||||||||||||||||||||||||||
Series D Shares | 8,644.7 | 8,644.7 | 8,644.7 | 8,644.7 | 8,260.1 | |||||||||||||||||||||||||||||||||||||||||||
Balance Sheet Data: | ||||||||||||||||||||||||||||||||||||||||||||||||
Mexican FRS: | ||||||||||||||||||||||||||||||||||||||||||||||||
Total assets | $ | 16,166 | Ps. | 211,091 | Ps. | 187,345 | Ps. | 168,187 | Ps. | 156,215 | Ps. | 139,823 | ||||||||||||||||||||||||||||||||||||
Current liabilities | 3,505 | 45,767 | 44,094 | 33,517 | 28,060 | 22,510 | ||||||||||||||||||||||||||||||||||||||||||
Long-term debt and notes payable(6) | 2,666 | 34,810 | 32,210 | 30,665 | 35,673 | 32,129 | ||||||||||||||||||||||||||||||||||||||||||
Other long-term liabilities | 1,125 | 14,685 | 14,146 | 14,352 | 14,274 | 10,786 | ||||||||||||||||||||||||||||||||||||||||||
Capital stock | 410 | 5,348 | 5,348 | 5,348 | 5,348 | 5,348 | ||||||||||||||||||||||||||||||||||||||||||
Total stockholders’ equity | 8,870 | 115,829 | 96,895 | 89,653 | 78,208 | 74,398 | ||||||||||||||||||||||||||||||||||||||||||
Controlling interest | 6,251 | 81,637 | 68,821 | 64,578 | 56,654 | 52,400 | ||||||||||||||||||||||||||||||||||||||||||
Noncontrolling interest | 2,619 | 34,192 | 28,074 | 25,075 | 21,554 | 21,998 |
U.S. GAAP: Total assets Current liabilities Long-term debt(6) Other long-term liabilities Noncontrolling interest Controlling interest Capital stock Stockholders’ equity(7) Other information: Mexican FRS: Depreciation(8) Capital expenditures(9) Operating margin(10) U.S. GAAP: Depreciation(8) Operating margin(10) U.S. GAAP:(4) Total revenues Income from operations Participation in Coca-Cola FEMSA’s earnings(4) Consolidated net income Less: Net income attributable to the non-controlling interest income Net income attributable to controlling interest income Net controlling interest income: Per Series B Share Per Series D Share Weighted average number of shares outstanding (in millions): Series B Shares Series D Shares Balance Sheet Data: Mexican FRS:(1) Total assets of continuing operations Total assets of discontinued operations Current liabilities of continuing operations Current liabilities of discontinued operations Long-term debt of continuing operations(5) Other long-term liabilities of continuing operations Non-current liabilities of discontinued operations Capital stock Total stockholders’ equity Controlling interest Non-controlling interest U.S. GAAP:(4) Total assets Current liabilities Long-term debt(5) Other long-term liabilities Non-controlling interest Controlling interest Capital stock Stockholders’ equity(6) Other information: Mexican FRS:(1) Depreciation(7) Capital expenditures(8) Operating margin(9) U.S. GAAP: Depreciation(7) Operating margin(9) Selected Consolidated Financial Information
Year Ended December 31, 2009(1) 2009 2008 2007 2006 2005 (In millions of U.S. dollars and millions of Mexican pesos, except for percentages, per
share data and weighted average number of shares outstanding) $ 12,100 Ps. 158,000 Ps. 139,219 Ps. 127,167 Ps. 116,392 Ps. 98,869 1,803 23,539 23,654 18,579 14,814 10,090 1,847 24,119 19,557 16,569 18,749 15,177 835 10,900 9,966 8,715 8,738 4,996 98 1,274 505 698 166 52 7,518 98,168 85,537 82,606 73,925 68,554 410 5,348 5,348 5,348 5,348 5,348 7,616 99,442 86,042 83,304 74,091 68,606 $ 482 Ps. 6,295 Ps. 5,508 Ps. 4,930 Ps. 4,954 Ps. 4,682 1,009 13,178 14,234 11,257 9,422 7,508 13.7 % 13.7 % 13.5 % 13.4 % 13.7 % 14.7 % $ 213 Ps. 2,786 Ps. 2,439 Ps. 2,114 Ps. 2,080 Ps. 2,079 8.4 % 8.4 % 8.6 % 9.2 % 10.3 % 11.0 % Selected Consolidated Financial Information
Year Ended December 31, 2011(2) 2011 2010 2009 2008 2007 (in millions of U.S. dollars and millions of Mexican pesos, except for percentages, per
share data and weighted average number of shares outstanding) $ 14,640 Ps.204,242 Ps.177,053 Ps.102,902 Ps.91,650 Ps.83,362 1,810 25,252 21,235 8,661 7,881 7,667 — — 183 4,516 2,994 3,635 1,279 17,851 72,204 (10) 10,685 6,599 8,589 (387 ) (5,402 ) (4,759 ) (783 ) 253 (32 ) 892 12,449 67,445 9,902 6,852 8,557 0.04 0.62 3.36 0.49 0.34 0.43 0.06 0.78 4.20 0.62 0.43 0.53 9,246.4 9,246.4 9,246.4 9,246.4 9,246.4 9,246.4 8,644.7 8,644.7 8,644.7 8,644.7 8,644.7 8,644.7 $ 19,691 Ps.274,704 Ps.223,578 Ps.153,638 Ps.126,833 Ps.114,537 — — — 72,268 71,201 68,881 2,769 38,630 30,516 37,218 35,351 28,783 — — — 10,883 12,912 13,581 1,723 24,031 22,203 21,260 21,853 23,066 1,500 20,929 17,846 8,500 8,285 9,882 — — — 32,216 22,738 18,453 383 5,348 5,348 5,348 5,348 5,348 13,699 191,114 153,013 115,829 96,895 89,653 9,575 133,580 117,348 81,637 68,821 64,578 4,124 57,534 35,665 34,192 28,074 25,075 $ 27,956 Ps.390,016 Ps.334,517 Ps.158,000 Ps.139,219 Ps.127,167 2,772 38,676 30,629 23,539 23,654 18,579 1,722 24,031 21,927 24,119 19,557 16,569 3,164 44,148 39,825 10,900 9,966 8,715 7,205 100,517 78,495 1,274 505 698 13,092 182,644 163,641 98,168 85,537 82,606 383 5,348 5,348 5,348 5,348 5,348 20,297 283,161 242,136 99,442 86,042 83,304 $ 394 Ps.5,498 Ps.4,527 Ps.4,391 Ps.3,762 Ps.4,930 897 12,515 11,171 9,067 7,816 5,939 13.2 % 13.2 % 13.3 % 13.2 % 13.0 % 12.5 % $ 412 Ps.5,743 Ps.4,884 Ps.2,786 Ps.2,439 Ps.2,114 12.4 % 12.4 % 11.9 % 8.4 % 8.6 % 9.2 %
(1) | As a result of the FEMSA Cerveza share exchange with the Heineken Group on April 30, 2010, related figures are presented as discontinued operations for Mexican FRS purposes. As a result, prior year financial information has been modified in order to conform to 2010 financial information. |
(2) | Translation to U.S. dollar amounts at an exchange rate of Ps. |
Beginning in 2008, |
(4) |
Includes long-term debt minus the current portion of long-term debt. |
Includes bottle breakage. |
Includes investments in property, plant and equipment, intangible and other assets. |
Operating margin is calculated by dividing income from operations by total revenues. |
(10) | Includes gain recognized in other income due to control acquisition of Coca-Cola FEMSA. See Note 26A to our audited consolidated financial statements. |
We have historically paid dividends per BD Unit (including in the form of American Depositary Shares, or ADSs) approximately equal to or greater than 1% of the market price on the date of declaration, subject to changes in our results offrom operations and financial position, including due to extraordinary economic events and to the factors described in “Risk Factors��“Item 3. Key Information—Risk Factors” that affect our financial condition and liquidity. These factors may affect whether or not dividends are declared and the amount of such dividends. We do not expect to be subject to any contractual restrictions on our ability to pay dividends, although our subsidiaries may be subject to such restrictions. Because we are a holding company with no significant operations of our own, we will have distributable profits and cash to pay dividends only to the extent that we receive dividends from our subsidiaries. Accordingly, we cannot assure you that we will pay dividends or as to the amount of any dividends.
The following table sets forth for each year the nominal amount of dividends per share that we declared in Mexican pesospeso and U.S. dollar amounts and their respective payment dates for the 20052007 to 20092011 fiscal years:
Date Dividend Paid | Fiscal Year with Respect to which Dividend was Declared | Aggregate Amount of Dividend Declared | Per Series B Share Dividend(1) | Per Series B Share Dividend(1) | Per Series D Share Dividend(1) | Per Series D Share Dividend(1) | Fiscal Year with Respect to which Dividend was Declared | Aggregate Amount of Dividend Declared | Per Series B Share Dividend | Per Series B Share Dividend | Per Series D Share Dividend | Per Series D Share Dividend | |||||||||||||||||||||||||||||
June 15, 2006 | 2005 | Ps. | 986,000,000 | Ps. | 0.0492 | $ | 0.0043 | Ps. | 0.0615 | $ | 0.0054 | ||||||||||||||||||||||||||||||
May 15, 2007 | 2006 | Ps. | 1,485,000,000 | Ps. | 0.0741 | $ | 0.0069 | Ps. | 0.0926 | $ | 0.0086 | 2006(1) | Ps.1,485,000,000 | Ps.0.0741 | $ | 0.0069 | Ps.0.0926 | $ | 0.0086 | ||||||||||||||||||||||
May 8, 2008 | 2007 | Ps. | 1,620,000,000 | Ps. | 0.0807 | $ | 0.0076 | Ps. | 0.1009 | $ | 0.0095 | 2007(1) | Ps.1,620,000,000 | Ps.0.0807 | $ | 0.0076 | Ps.0.1009 | $ | 0.0095 | ||||||||||||||||||||||
May 4, 2009 and November 3, 2009(2) | 2008 | Ps. | 1,620,000,000 | Ps. | 0.0807 | $ | 0.0061 | Ps. | 0.1009 | $ | 0.0076 | 2008 | Ps.1,620,000,000 | Ps.0.0807 | $ | 0.0061 | Ps.0.1009 | $ | 0.0076 | ||||||||||||||||||||||
May 4, 2009 | Ps. | 0.0404 | $ | 0.0030 | Ps. | 0.0505 | $ | 0.0038 | Ps.0.0404 | $ | 0.0030 | Ps.0.0505 | $ | 0.0038 | |||||||||||||||||||||||||||
November 3, 2009 | Ps. | 0.0404 | $ | 0.0030 | Ps. | 0.0505 | $ | 0.0038 | Ps.0.0404 | $ | 0.0030 | Ps.0.0505 | $ | 0.0038 | |||||||||||||||||||||||||||
May 4, 2010 and November 3, 2010(3) | 2009 | Ps. | 2,600,000,000 | Ps. | 0.1296 | N/a | Ps. | 0.1621 | N/a | 2009 | Ps.2,600,000,000 | Ps.0.1296 | $ | 0.0105 | Ps.0.1621 | $ | 0.0132 | ||||||||||||||||||||||||
May 4, 2010 | Ps. | 0.0648 | $ | 0.0053 | Ps. | 0.0810 | $ | 0.0066 | Ps.0.0648 | $ | 0.0053 | Ps.0.0810 | $ | 0.0066 | |||||||||||||||||||||||||||
November 3, 2010 | Ps. | 0.0648 | N/a | (4) | Ps. | 0.0810 | N/a | (4) | Ps.0.0648 | $ | 0.0053 | Ps.0.0810 | $ | 0.0066 | |||||||||||||||||||||||||||
May 3, 2011 and November 2, 2011(4) | 2010 | Ps.4,600,000,000 | Ps.0.2294 | $ | 0.0199 | Ps.0.28675 | $ | 0.0249 | |||||||||||||||||||||||||||||||||
May 3, 2011 | Ps.0.1147 | $ | 0.0099 | Ps.0.14338 | $ | 0.0124 | |||||||||||||||||||||||||||||||||||
November 2, 2011 | Ps.0.1147 | $ | 0.0100 | Ps.0.14338 | $ | 0.0125 | |||||||||||||||||||||||||||||||||||
May 3, 2012 and November 6, 2012(5) | 2011 | Ps.6,200,000,000 | Ps.0.3092 | N/a | (6) | Ps.0.3865 | N/a | ||||||||||||||||||||||||||||||||||
May 3, 2012 | Ps.0.1546 | N/a | Ps.0.1932 | N/a | |||||||||||||||||||||||||||||||||||||
November 2, 2012 | Ps.0.1546 | N/a | Ps.0.1932 | N/a |
(1) | The per series dividend amount has been adjusted for comparability purposes to reflect the 3:1 stock split effective May 25, |
(2) | The dividend payment for 2008 was divided into two equal payments. The first payment was |
(3) | The dividend payment for 2009 was divided into two equal payments. The first payment was |
(4) | The dividend payment for 2010 was divided into two equal payments. The first payment was payable on May 3, 2011, with a record date of May 2, 2011, and the second payment was payable on November 2, 2011, with a record date of November 1, 2011. |
(5) | The dividend payment for 2011 was divided into two equal payments. The first payment will become payable on May 3, 2012 with a record date of May 2, 2012, and the second payment will become payable on November 6, 2012 with a record date of November 5, 2012. |
(6) | The U.S. dollar amount of the |
At the annual ordinary general shareholders meeting, or AGM, the board of directors submits the financial statements of our company for the previous fiscal year, together with a report thereon by the board of directors. Once the holders of Series B Shares have approved the financial statements, they determine the allocation of our net profits for the preceding year. Mexican law requires the allocation of at least 5% of net profits to a legal reserve, which is not subsequently available for distribution, until the amount of the legal reserve equals 20% of our paid in capital stock. As of the date of this report, the legal reserve of our company is fully constituted. Thereafter, the holders of Series B Shares may determine and allocate a certain percentage of net profits to any general or special reserve, including a reserve for open-market purchases of our shares. The remainder of net profits is available for distribution in the form of dividends to our shareholders. Dividends may only be paid if net profits are sufficient to offset losses from prior fiscal years.
Our bylaws provide that dividends will be allocated among the shares outstanding and fully paid at the time a dividend is declared in such manner that each Series D-B Share and Series D-L Share receives 125% of the dividend distributed in respect of each Series B Share. Holders of Series D-B Shares and Series D-L Shares are entitled to this dividend premium in connection with all dividends paid by us other than payments in connection with the liquidation of our company.
Subject to certain exceptions contained in the deposit agreement dated May 11, 2007, among FEMSA, The Bank of New York, as ADS depositary, and holders and beneficial owners from time to time of our American Depositary Shares, or ADSs, evidenced by American Depositary Receipts, or ADRs, any dividends distributed to holders of our ADSs will be paid to the ADS depositary in Mexican pesos and will be converted by the ADS depositary into U.S. dollars. As a result, restrictions on conversion of Mexican pesos into foreign currencies and exchange rate fluctuations may affect the ability of holders of our ADSs to receive U.S. dollars and the U.S. dollar amount actually received by holders of our ADSs.
The following table sets forth, for the periods indicated, the high, low, average and period-endyear-end noon buying exchange rate published by the Federal Reserve Bank of New York for cable transfers of pesos per U.S. dollar. The Federal Reserve Bank of New York discontinued the publication of foreign exchange rates on December 31, 2008, and therefore, the data provided for the periods beginning January 1, 2009 isare based on the rates published by the U.S. Federal Reserve Board in its H.10 Weekly Release of Foreign Exchange Rates. The rates have not been restated in constant currency units and therefore represent nominal historical figures.
Period ended December 31, | Exchange Rate | |||||||||||||||||||||||
Year ended December 31, | Exchange Rate | |||||||||||||||||||||||
High | Low | Average(1) | Period End | High | Low | Average(1) | Year End | |||||||||||||||||
2005 | 11.41 | 10.41 | 10.89 | 10.63 | ||||||||||||||||||||
2006 | 11.46 | 10.43 | 10.91 | 10.80 | ||||||||||||||||||||
2007 | 11.27 | 10.67 | 10.93 | 10.92 | 11.27 | 10.67 | 10.93 | 10.92 | ||||||||||||||||
2008 | 13.94 | 9.92 | 11.21 | 13.83 | 13.94 | 9.92 | 11.21 | 13.83 | ||||||||||||||||
2009 | 15.41 | 12.63 | 13.50 | 13.06 | 15.41 | 12.63 | 13.50 | 13.06 | ||||||||||||||||
2010 | 13.19 | 12.16 | 12.64 | 12.38 | ||||||||||||||||||||
2011 | 14.25 | 11.51 | 12.46 | 13.95 |
(1) | Average month-end rates. |
Exchange Rate | |||||||||
High | Low | Period End | |||||||
2008: | |||||||||
First Quarter | Ps. | 10.97 | Ps. | 10.63 | Ps. | 10.63 | |||
Second Quarter | 10.60 | 10.27 | 10.30 | ||||||
Third Quarter | 10.97 | 9.92 | 10.97 | ||||||
Fourth Quarter | 13.94 | 10.97 | 13.83 | ||||||
2009: | |||||||||
First Quarter | Ps. | 15.41 | Ps. | 13.33 | Ps. | 14.21 | |||
Second Quarter | 13.89 | 12.89 | 13.17 | ||||||
Third Quarter | 13.80 | 12.82 | 13.48 | ||||||
Fourth Quarter | 13.67 | 12.63 | 13.06 | ||||||
December | 13.08 | 12.63 | 13.06 | ||||||
2010: | |||||||||
January | Ps. | 13.03 | Ps. | 12.65 | Ps. | 13.03 | |||
February | 13.19 | 12.76 | 12.76 | ||||||
March | 12.74 | 12.30 | 12.30 | ||||||
First Quarter | 13.19 | 12.30 | 12.30 | ||||||
April | 12.41 | 12.16 | 12.23 | ||||||
May | 13.14 | 12.27 | 12.86 | ||||||
June(1) | 12.92 | 12.54 | 12.54 |
Exchange Rate | ||||||||||||
High | Low | Period End | ||||||||||
2010: | ||||||||||||
First Quarter | Ps.13.19 | Ps.12.30 | Ps.12.30 | |||||||||
Second Quarter | 13.14 | 12.16 | 12.83 | |||||||||
Third Quarter | 13.17 | 12.49 | 12.63 | |||||||||
Fourth Quarter | 12.61 | 12.21 | 12.38 | |||||||||
2011: | ||||||||||||
First Quarter | 12.25 | 11.92 | 11.92 | |||||||||
Second Quarter | 11.97 | 11.51 | 11.72 | |||||||||
Third Quarter | 13.87 | 11.57 | 13.77 | |||||||||
Fourth Quarter | 14.25 | 13.10 | 13.95 | |||||||||
2012: | ||||||||||||
January | 13.75 | 12.93 | 13.04 | |||||||||
February | 12.95 | 12.63 | 12.79 | |||||||||
March | 12.99 | 12.63 | 12.81 | |||||||||
First Quarter | 13.75 | 12.63 | 12.81 |
Risks Related to Our Company
Coca-Cola FEMSA
Coca-Cola FEMSA’s business depends on its relationship with The Coca-Cola Company, and changes in this relationship may adversely affect its results offrom operations and financial position.condition.
Approximately 99%Substantially all of Coca-Cola FEMSA’s sales volume in 2009 wasare derived from sales ofCoca-Colatrademark beverages. Coca-Cola FEMSA produces, markets and distributesCoca-Colatrademark beverages through standard bottler agreements in certain territories in Mexico and Latin America, which we refer to as Coca-Cola FEMSA’s territories.“territories.” See “Item 4. Information on the Company—Coca-Cola FEMSA—Coca-Cola FEMSA’s Territories.” Through its rights under theCoca-Cola FEMSA’s bottler agreements and as a large shareholder, The Coca-Cola Company has the right to participate in the process utilized for the making of important decisions ofrelated to Coca-Cola FEMSA’s business.
The Coca-Cola Company may unilaterally set the price for its concentrate. In addition, under itsCoca-Cola FEMSA’s bottler agreements, Coca-Cola FEMSAit is prohibited from bottling or distributing any other beverages without The Coca-Cola Company’s authorization or consent, and it may not transfer control of the bottler rights of any of its territories without the consent of The Coca-Cola Company. On March 10, 2010, FEMSA announced that subsidiaries of FEMSA have signed an agreement with subsidiaries of the The Coca-Cola Company to amend the shareholders agreement of Coca-Cola FEMSA. The main purpose of the amendment is to set forth that the appointment and compensation of the chief executive officer and all officers reporting to the chief executive officer, as well as the adoption of decisions related to the ordinary operations of Coca-Cola FEMSA shall only require a simple majority vote of the board of directors. See “Item 4. Information on the Company—The Company—Overview.” The Coca-Cola Company may require that Coca-Cola FEMSA demonstrate its financial ability to meet its business.
The Coca-Cola Company also makes significant contributions to Coca-Cola FEMSA’s marketing expenses, although it is not required to contribute a particular amount. Accordingly, The Coca-Cola Company may discontinue or reduce such contributions at any time.
Coca-Cola FEMSA depends on The Coca-Cola Company to renew its bottler agreements. In Mexico,As of December 31, 2011, Coca-Cola FEMSA has fourhad seven bottler agreements;agreements in Mexico, with each one corresponding to a different territory as follows: (i) the agreements for two territoriesMexico’s Valley territory expire in June 2013 and April 2016; (ii) the agreements for the other two territoriesCentral territory expire in May 2015.2015 and July 2016; (iii) the agreement for the Northeast territory expires in September 2014; (iv) the agreement for the Bajio territory expires in May 2015; and (v) the agreement for the Southeast territory expires in June 2013. Coca-Cola FEMSA’s bottler agreements with The Coca-Cola Company will expire for Coca-Cola FEMSA’s territories in the following countries:other countries as follows: Argentina in September 2014; Brazil in April 2014; Colombia in June 2014; Venezuela in August 2016; Guatemala in March 2015; Costa Rica in September 2017; Nicaragua in May 2016; and Panama in November 2014. All of Coca-Cola FEMSA’s bottler agreements are automatically renewable for ten-year terms, subject to the right of either party thereto to give prior notice that it does not wish to renew a specificthe relevant agreement. In addition, these agreements generally may be terminated in the event acase of material breach of these agreements occurs, the agreements may be terminated.breach. Termination would prevent Coca-Cola FEMSA from sellingCoca-Cola trademark beverages in the affected territory and would have an adverse effect on Coca-Cola FEMSA’s business, financial conditions,condition, results offrom operations and prospects.
The Coca-Cola Company has significantsubstantial influence on the conduct of Coca-Cola FEMSA’s business, which may result in Coca-Cola FEMSA taking actions contrary to the interests of its remaining shareholders.
The Coca-Cola Company has significantsubstantial influence on the conduct of Coca-Cola FEMSA’s business. Currently,As of April 20, 2012, The Coca-Cola Company indirectly owns 31.6%owned 29.4% of Coca-Cola FEMSA’s outstanding capital stock, representing 37.0% of its capital stock with full voting rights. The Coca-Cola Company is entitled to appoint fourfive of Coca-Cola FEMSA’s 18maximum of 21 directors and the vote of at least two of them is required to approve certain actions by Coca-Cola FEMSA’s board of directors. We are entitled to appoint 13 of Coca-Cola FEMSA’s maximum of 21 directors and all of its executive officers. On February 1, 2010, we and The Coca-Cola Company signed a second amendment to the shareholders agreement that confirms our power to govern theCoca-Cola FEMSA’s operating and financial policies of Coca-Cola FEMSA in order to exercise control over its operations in the ordinary course of business. Consequently, we are entitled to appoint 11 of Coca-Cola FEMSA’s 18 directors and all of its executive officers. The Coca-Cola Company has the power to determine the outcome of certain protective rights, such as mergers, acquisitions or the
sale of any line of business, requiring approval by its board of directors, and may have the power
to determine the outcome of certain actions requiring approval of Coca-Cola FEMSA’s shareholders. See “Item 10. Additional Information—Material Contracts—Coca-Cola FEMSA.” The interests of The Coca-Cola Company may be different from the interests of Coca-Cola FEMSA’s remaining shareholders, which may result in Coca-Cola FEMSA taking actions contrary to the interests of its remaining shareholders.
Coca-Cola FEMSA has significant transactions with affiliates, particularly The Coca-Cola Company, which may create the potential for conflicts of interest and could result in less favorable terms to Coca-Cola FEMSA.
Coca-Cola FEMSA engages in several transactions with subsidiaries of The Coca-Cola Company, including cooperative marketing arrangements and a number of bottler agreements.Company. In addition, Coca-Cola FEMSA has entered into cooperative marketing arrangements with The Coca-Cola Company and is a party to a number of bottler agreements with The Coca-Cola Company. Coca-Cola FEMSA also has agreed to develop still beverages and waters in its territories with The Coca-Cola Company and has entered into agreements to acquire companies with The Coca-Cola Company. See “Item 7. Major Shareholders and Related Party Transactions—Related Party Transactions—Business Transactions between Coca-Cola FEMSA and The Coca-Cola Company.”
Coca-Cola FEMSA could engage in transactions may createon less favorable terms with related parties, due to potential conflicts of interest, which could result incompared to terms less favorable to Coca-Cola FEMSA thanthat could be obtained fromwith an unaffiliated third-party.third party.
Competition could adversely affect Coca-Cola FEMSA’s financial performance.
The beverage industry in the territories in which Coca-Cola FEMSA operates is highly competitive. Coca-Cola FEMSA faces competition from other bottlers of sparkling beverages such asPepsi products, and from producers of low cost beverages, or “B brands.” Coca-Cola FEMSA also competes in different beverage categories, other than sparkling beverages, such as water, juice-based beverages, teas, sport drinks and sport drinks.value-added dairy products. Although competitive conditions are different in each of Coca-Cola FEMSA’s territories, Coca-Cola FEMSAit competes principally in terms of price, packaging, consumer sales promotions, customer service and product innovation. See “Item 4. Information on the Company—Coca-Cola FEMSA—Competition.” There can be no assurances that Coca-Cola FEMSA will be able to avoid lower pricing as a result of competitive pressure. Lower pricing, changes made in response to competition and changes in consumer preferences may have an adverse effect on Coca-Cola FEMSA’s financial performance.
Changes in consumer preference could reduce demand for some of Coca-Cola FEMSA’s productsproducts.
The non-alcoholic beverage industry is rapidly evolving as a result of, among other things, changes in consumer preferences. Specifically, consumers are becoming increasingly more aware of and concerned about environmental and health issues. Concerns over the environmental impact of plastic may reduce the consumption of Coca-Cola FEMSA’s products sold in plastic bottles or result in additional taxes that would adversely affect consumer demand. In addition, researchers, health advocates and dietary guidelines are encouraging consumers to reduce their consumption of certain types of beverages sweetened with sugar and high fructose corn syrup (or HFCS), which could reduce demand for certain of Coca-Cola FEMSA’s products. A reduction in consumer demand would adversely affect Coca-Cola FEMSA’s results offrom operations.
Water shortages or any failure to maintain existing concessions could adversely affect Coca-Cola FEMSA’s business.
Water is an essential component of all of Coca-Cola FEMSA’s products. Coca-Cola FEMSA obtains water from various sources in its territories, including springs, wells, rivers and localmunicipal and state water companies pursuant to either contracts to obtain water or pursuant to concessions granted by governments in its various territories.
Coca-Cola FEMSA obtains the vast majority of the water used in its production pursuant to concessions to exploit wells, which are generally granted based on studies of the existing and projected groundwater supply. Coca-Cola FEMSA’s existing water concessions or contracts to obtain water may be terminated by governmental
authorities under certain circumstances and their renewal depends on receiving necessary authorizations from local and/or federal water authorities. See “Item 4. Information on the Company—Regulatory Matters—Water Supply Law.” In some of Coca-Cola FEMSA’s other territories, itsthe existing water supply may not be sufficient to meet itsCoca-Cola FEMSA’s future production needs, and the available water supply may be adversely affected by shortages or changes in governmental regulations.regulations and environmental changes.
We cannot assure you that water will be available in sufficient quantities to meet Coca-Cola FEMSA’s future production needs or will prove sufficient to meet itsCoca-Cola FEMSA’s water supply needs.
Increases in the prices of raw materials would increase Coca-Cola FEMSA’s cost of salesgoods sold and may adversely affect itsCoca-Cola FEMSA’s results offrom operations.
In addition to water, Coca-Cola FEMSA’s most significant raw materials are (1) concentrate, which it acquires from affiliates of The Coca-Cola Company, (2) packaging materials and (3) sweeteners. Prices for sparkling beverages concentrate are determined by The Coca-Cola Company as a percentage of the weighted average retail price in local currency, net of applicable taxes. In 2005, The Coca-Cola Company decided to gradually increase concentrate prices for sparkling beverages over a three-year period in Mexico, which began in 2007 and in Brazil in 2006.and Mexico. These increases were fully implemented in Brazil in 2008 and in Mexico in 2009, but2009. However, Coca-Cola FEMSA may experience further increases in its territories in the future. The prices for Coca-Cola FEMSA’s remaining raw materials are driven by market prices and local availability as well as the imposition of import duties and import restrictions and fluctuations in exchange rates. Coca-Cola FEMSA is also required to meet all of its supply needs from suppliers approved by The Coca-Cola Company, which may limit the number of suppliers available to it. Coca-Cola FEMSA’s sales prices are denominated in the local currency in each country in which it operates, while the prices of certain materials, including those used in the bottling of its products, (mainlymainly resin, ingots used to make plastic bottles, finished plastic bottles, aluminum cans and high fructose corn syrup),HFCS, are paid in or determined with reference to the U.S. dollar. These pricesdollar, and therefore may increase if the U.S. dollar appreciates against the currencycurrencies of any countrythe countries in which Coca-Cola FEMSA operates, as was the case in 2008 and 2009. While the U.S. dollar did not appreciate against the currency of any of the countries in which occurredCoca-Cola FEMSA operates in 2009.See2010 or most of 2011, we cannot assure you that an appreciation of the U.S. dollar with respect to such currencies will not occur in the future.See “Item 4. Information on the Company—Coca-Cola FEMSA—Raw Materials.”
After concentrate, packaging materials and sweeteners constitute the largest portion of Coca-Cola FEMSA’s raw material costs. Coca-Cola FEMSA’s most significant packaging raw material costs arise from the purchase of resin and plastic ingots to make plastic bottles and from the purchase of finished plastic bottles, the prices of which are tied to crude oil prices and global resin supply. The average U.S. dollar prices that Coca-Cola FEMSA paid for resin and plastic ingots decreasedin U.S. dollars increased significantly in 2009 and in 20082011, as compared to 2007, although2010. We cannot provide any assurance that prices will not increase further in future periods. Average sweetener prices, including of sugar and HFCS, paid by Coca-Cola FEMSA did not benefit from such price decreaseduring 2011 were higher as compared to 2010 in all of the countries in which it operates. During the 2009-2011 period, international sugar prices were volatile due to the devaluation of the Mexican peso against the U.S. dollar in 2009. Prices may increase in future periods.various factors, including shifting demands, availability and climate issues affecting production and distribution. Sugar prices in all of the countries in which Coca-Cola FEMSA operates other than Brazil are subject to local regulations and other barriers to market entry that cause itCoca-Cola FEMSA to pay in excess of international market prices for sugar. Sugar prices worldwide have been volatile during 2009, mainly due to a production shortfall in India, one of the largest global producers of sugar. Average sweetener prices paid during 2009 were higher as compared to 2008 in all of the countries in which Coca-Cola FEMSA operates. See “Item 4. Information on the Company—Coca-Cola FEMSA—Raw Materials.”
We cannot assure you that Coca-Cola FEMSA’s raw material prices will not further increase in the future. Increases in the prices of raw materials would increase Coca-Cola FEMSA’s cost of salesgoods sold and adversely affect its financial performance.
In Venezuela, sugar supply was affected in 2009. We cannot assure you that Coca-Cola FEMSA will be able to meet its sugar requirements in the long-term if sugar supply conditions do not improve in Venezuela. See “Item 4. Information on the Company—Coca-Cola FEMSA—Raw Materials.”
Taxes could adversely affect Coca-Cola FEMSA’s business.
The countries in which Coca-Cola FEMSA operates may adopt new tax laws or modify existing law to increase taxes applicable to its business. For example, in Mexico, a general tax reform became effective on January 1, 2010, pursuant to which, as applicable to Coca-Cola FEMSA, there will beis a temporary increase in the income tax rate from 28% to 30% from 2010 through 2012. This increase will be followed by a reduction to 29% for the year 2013 and a further reduction in 2014 to return to the previous rate of 28%. In addition, the value added tax (VAT) rate increased in 2010 from 15% to 16%. This increase might affect demandhad an impact on Coca-Cola FEMSA’s results from operations due to the reduction in disposable income of consumers.
In Panama, there was an increase in a certain consumer tax, effective as of April 1, 2010, affecting syrups, powders and concentrate. Some of these materials are used for and consumptionthe production of Coca-Cola FEMSA’s products and, consequently, its financial performance.sparkling beverages. These taxes increased from 6% to 10%.
Coca-Cola FEMSA’s products are also subject to certain taxes in many of the countries in which it operates. Certain countries in Central America, as well as Brazil and Argentina and Brazilalso impose taxes on sparkling beverages. See “Item 4. Information on the Company—Regulatory Matters—Taxation of Sparkling Beverages.” We
cannot assure you that any governmental authority in any country where Coca-Cola FEMSA operates will not impose new taxes or increase taxes on its products in the future.
The imposition of new taxes or increases in taxes on Coca-Cola FEMSA’s products may have a material adverse effect on itsCoca-Cola FEMSA’s business, financial condition, prospects and financial performance.results from operations.
Regulatory developments may adversely affect Coca-Cola FEMSA’s business.
Coca-Cola FEMSA is subject to regulation in each of the territories in which it operates. The principal areas in which Coca-Cola FEMSA is subject to regulation are environment, labor, taxation, health and antitrust. Regulation can also affect Coca-Cola FEMSA’s ability to set prices for its products. See “Item 4. Information of the Company—Regulatory Matters.” The adoption of new laws or regulations or a stricter interpretation or enforcement thereof in the countries in which Coca-Cola FEMSA operates may increase its operating costs or impose restrictions on its operations, which, in turn, may adversely affect its financial condition, business and results offrom operations. In particular, environmental standards are continually becoming more stringent in several of the countries in which Coca-Cola FEMSA operates, and Coca-Cola FEMSA is also continually in the process of keeping up and complying with these standards, although we cannot assure you that Coca-Cola FEMSA will be able to meet anythe timelines for compliance established by the relevant regulatory authorities. See “Item 4. Information on the Company—Regulatory Matters—Environmental Matters.” Further changes in current regulations may result in an increase in compliance costs, which may have an adverse effect on Coca-Cola FEMSA’s future results offrom operations or financial condition.
Voluntary price restraints or statutory price controls have been imposed historically in several of the countries in which Coca-Cola FEMSA operates. ItCoca-Cola FEMSA is currently subject to price controls in Argentina.Argentina and Venezuela. The imposition of these restrictions or voluntary price restraints in other territories may have an adverse effect on Coca-Cola FEMSA’s results offrom operations and financial position. See “Item 4. Information of the Company—Regulatory Matters—Price Controls.” We cannot assure you that governmental authorities in any country where Coca-Cola FEMSA operates will not impose statutory price controls or that itCoca-Cola FEMSA will not need to implement voluntary price restraints in the future.
In December 2009, the Venezuelan government issued a decree requiring a reduction in energy consumption by at least 20% for industrial companies whose consumption is greater than two megawatts per hour and to submit an energy-usage reduction plan. Some of Cola FEMSA’s bottling operations in Venezuela outside of Caracas met this threshold and Cola FEMSA submitted a plan, which included the purchase of generators for its plants. The Venezuelan government subsequently implemented power cuts and other measures for all industries in Caracas whose consumption was above 35 kilowatts per hour in January 2010. All of Cola FEMSA’s bottling and distribution centers as well as administrative offices in Caracas met this threshold.
In January 2010, the Venezuelan government amended theLey para la Defensa y Acceso a las Personas a los Bienes y Servicios( (Defense of and Access to Goods and Services Defense Law). Any violation by a company that produces, distributes and sells goods and services could lead to fines, penalties or the confiscation of the assets used to produce, distribute and sell these goods without compensation. Although we believe that Coca-Cola FEMSA is in compliance with this law, consumer protection laws in Venezuela are subject to continuing review and changes, and any such changes could lead to an adverse impact on Coca-Cola FEMSA.
In July 2011, the Venezuelan government passed theLey de Costos y Precios Justos (Fair Costs and Prices Law). The purpose of this law is to establish the regulations and administrative processes necessary to maintain the price stability of, and equal access to, goods and services. The law also creates the National Ministry of Costs and Prices, whose main role is to oversee price controls and set maximum retail prices on certain consumer goods and services. Of Coca-Cola FEMSA’s products, only certain of its still water beverages were affected by these regulations, which mandated Coca-Cola FEMSA to lower its sale prices as of April 2012. Any failure to comply with this law would result in fines, temporary suspension or the closure of operations. While Coca-Cola FEMSA is currently in compliance with this law, we cannot assure you that the Venezuelan government’s future regulation of goods and services will not result in a forced reduction of prices in other of Coca-Cola FEMSA’s products, which could have a negative effect on its results of operations.
In January 2012, the Costa Rican government approved a decree that regulates the sale of food and beverages in schools. The decree came into effect in 2012. Enforcement of this law will be gradual, from applicability in 2012 to 2014, depending on the specific characteristics of the food or beverage in question. In accordance with the decree, the sale of specific sparkling beverages and still beverages that contain sugar, syrup or HFCS in any type of presentation in schools is prohibited. Coca-Cola FEMSA will still be allowed to sell water and certain still beverages in schools. We cannot assure you that the Costa Rican government will not further restrict sales of other of Coca-Cola FEMSA’s products in schools in the future; any such further restrictions could lead to an adverse impact on Coca-Cola FEMSA’s results of operations.
Coca-Cola FEMSA’s operations have from time to time been subject to investigations and proceedings by antitrust authorities and litigation relating to alleged anticompetitive practices. Coca-Cola FEMSA has also been subject to investigations and proceedings on environmental and labor matters. See “Item 8. Financial Information—Legal Proceedings.” We cannot assure you that these investigations and proceedings could not have an adverse effect on Coca-Cola FEMSA’s results offrom operations or financial condition. See “Item 8. Financial Information—Legal Proceedings.”
Economic and political conditions in the countries other Latin American countriesthan Mexico in which Coca-Cola FEMSA operates may have an increasingly adverse effect onadversely affect its business.
In addition to conducting operationsoperating in Mexico, our subsidiary Coca-Cola FEMSA conductconducts operations in Guatemala, Nicaragua, Costa Rica, Panama, Colombia, Venezuela, Brazil and Argentina. Product salesTotal revenues and income from Coca-Cola FEMSA’s combined non-Mexican operations have increased as a percentage of theirits consolidated
product sales total revenues and income from operations from 42.8%47.4% and 29.5%32.4%, respectively, in 20052006, to 64.2%64.3% and 56.8%62.0%, respectively, in 2009. We expect this trend to continue in future periods. 2011.As a consequence, Coca-Cola FEMSA’s future results will behave been increasingly affected by the economic and political conditions in the countries, other than Mexico, where it conducts operations.
Consumer demand, preferences, real prices and the costs of raw materials are heavily influenced by macroeconomic and political conditions in the other countries in which Coca-Cola FEMSA operates. These conditions vary by country and may not be correlated to conditions in Coca-Cola FEMSA’s Mexican operations. For example, Brazil and Colombia have a history of economic volatility and political instability. In Venezuela, Coca-Cola FEMSA faces exchange rate risk as well as scarcity of raw materials and restrictions with respect to the import of such materials. Deterioration in economic and political conditions in any of these countries would have an adverse effect on Coca-Cola FEMSA’s financial position and results from operations. In Venezuela, Coca-Cola FEMSA continues to face exchange rate risk as well as scarcity of raw materials and restrictions with respect to the importation of such materials. Venezuelan political events may also affect Coca-Cola FEMSA’s operations. The political uncertainty involving Venezuela’s October 2012 elections or otherwise could have a negative effect on the Venezuelan economy, which in turn could result in an adverse effect on Coca-Cola FEMSA’s business. We cannot provide any assurances that political developments in Venezuela, over which we have no control, will not have an adverse effect on Coca-Cola FEMSA’s business, financial condition or results from operations.
In addition, presidential elections were held in November 2011 in each of Guatemala and Nicaragua. The elections in Guatemala led to the election of a new president and political party (thePartido Patriota(Patriotic Party)). The elections in Nicaragua led to the reelection of José Daniel Ortega Saavedra, a member of thePartido Frente Sandinista de Liberación Nacional(Sandinista National Liberation Front), as president. We cannot assure you that the elected presidents in these countries will continue to apply the same policies that have been applied to Coca-Cola FEMSA in the past.
Depreciation of the local currencies of the countries in which Coca-Cola FEMSA operates against the U.S. dollar may increase its operating costs. Coca-Cola FEMSA has also operated under exchange controls in Venezuela since 2003 that affect thelimit its ability to remit dividends abroad or make payments other than in local currencies and that may increase the real price paid for raw materials and services purchased in local currency. In January 2010, the Venezuelan government announced a devaluation of its official exchange ratesrate and the establishment of a multiple exchange rate system, of (1)which was set at 2.60 bolivars to US$ 1.00 for high priority categories (2)and 4.30 bolivars to US$ 1.00 for non-priority categories, and (3) the recognition ofwhich recognized the existence of other exchange rates thatin which the Venezuelan government shall determine. Coca-Cola FEMSA expects this devaluation will have an adverse impact onintervene. In December 2010, the Venezuelan government announced its financial results, by increasing operating costs and by reducing the Mexican peso amounts from its Venezuelan operations reported in its financial statements asdecision to implement a result of the translation accounting rules under Mexican Financial Reporting Standards. The exchange rate that will be used to translate our financial statements as of January 2010 will be 4.30 bolivars per U.S. dollar. As of December 31, 2009, the financial statements were translated to Mexican pesos using thenew singular fixed exchange rate of 2.154.30 bolivars perto US$ 1.00, which resulted in a devaluation of the bolivar against the U.S. dollar. As a result of this devaluation, the balance sheet ofFuture changes in the Venezuelan subsidiary will reflect a reduction in shareholders’ equity of approximately Ps. 3,700 million, which was accounted for in January 2010.
Futureexchange control regime, and future currency devaluationdevaluations or the imposition of exchange controls in any of the countries in which Coca-Cola FEMSA has operations wouldcould have an adverse effect on its financial position and results offrom operations.
We cannot assure you thatthose political or social developments in any of the countries in which Coca-Cola FEMSA has operations, and over which it has no control, will not have a corresponding adverse effect on the economic situation and on Coca-Cola FEMSA’sits business, financial condition or results from operations.
Weather conditions may adversely affect Coca-Cola FEMSA’s results from operations.
Lower temperatures and higher rainfall may negatively impact consumer patterns, which may result in lower per capita consumption of Coca-Cola FEMSA’s beverage offerings. Additionally, adverse weather conditions may affect road infrastructure in the territories in which Coca-Cola FEMSA operates and limit its ability to sell and distribute its products, thus affecting Coca-Cola FEMSA’s results from operations. As was the case in most of Coca-Cola FEMSA’s territories in 2011, adverse weather conditions affected Coca-Cola FEMSA’s sales in certain regions of these territories.
FEMSA Comercio
Competition from other retailers in Mexico could adversely affect FEMSA Comercio’s business.
The Mexican retail sector is highly competitive. FEMSA participates in the retail sector primarily through FEMSA Comercio. FEMSA Comercio’s OXXO convenience stores face competition on a regional basis from 7-Eleven, Super Extra, which is owned and managed by Grupo Modelo, our main competitor in the Mexican beer market, Super City AM/PM and CircleCírculo K stores. OXXO convenience stores also face competition from numerous small chains of retailers across Mexico. In the future, OXXO storesMexico and from retailers that participate with store formats other than convenience stores. FEMSA Comercio may face additional competition from other retailers that do not currently participate in the convenience store sector or from new market entrants. Increased competition may limit the number of new locations available to FEMSA Comercio and require FEMSA Comercio to modify its product offering or pricing. In addition, consumers may prefer alternative products or store formats offered by competitors. As a result, FEMSA Comercio’s results offrom operations and financial position may be adversely affected by competition in the future.
Sales of OXXO convenience stores may be adversely affected by changes in economic conditions in Mexico.
Convenience stores often sell certain products at a premium. The convenience store market is thus highly sensitive to economic conditions, since an economic slowdown is often accompanied by a decline in consumer purchasing power, which in turn results in a decline in the overall consumption of FEMSA Comercio’s main product categories. During periods of economic slowdown, OXXO stores may experience a decline in traffic per store and purchases per customer, and this may result in a decline in FEMSA Comercio’s results offrom operations.
FEMSA Comercio may not be able to maintain its historic growth rate.
FEMSA Comercio increased the number of OXXO stores at an averagea compound annual growth rate of 15.4%14.5% from 20052007 to 2009.2011. The growth in the number of OXXO stores has driven growth in total revenue and operating income at FEMSA Comercio over the same period. As the overall number of stores increases, percentage growth in the number of OXXO stores is likely to decrease. In addition, as convenience store penetration in Mexico grows, the number of viable new store locations may decrease, and new store locations may be less favorable in terms of same store sales, average ticket and store traffic. As a result, FEMSA Comercio’s future results offrom operations and financial condition may not be consistent with prior periods and may be characterized by lower growth rates in terms of total revenue and operating income. In Colombia, FEMSA Comercio may not be able to maintain similar historic growth rates to those in Mexico.
FEMSA Comercio’s business may be adversely affected by an increase in the crime rate in Mexico.
In recent years, crime rates have increased, particularly in the north of Mexico, and there has been a particular increase in drug-related crime and other organized crime. Although FEMSA Comercio has stores across the majority of the Mexican territory, the north of Mexico represents an important region in FEMSA Comercio’s operations. An increase in crime rates could negatively affect sales and customer traffic, increase security expenses incurred in each store, result in higher turnover of personnel or damage to the perception of the OXXO brand, each of which could have an adverse effect on FEMSA Comercio’s business.
FEMSA Comercio’s business may be adversely affected by changes in information technology.
FEMSA Comercio invests aggressively in information technology (which we refer to as IT) in order to maximize its value generation potential. Given the rapid speed at which FEMSA Comercio adds new services and products to its commercial offerings, the development of IT systems, hardware and software needs to keep pace with the growth of the business. If these systems became unstable or if planning for future IT investments were inadequate, it could affect FEMSA Comercio’s business by reducing the flexibility of its value proposition to consumers or by increasing its operating complexity, either of which could adversely affect FEMSA Comercio’s revenue-per-store trends.
Risks Related to Our Holding of Heineken N.V. and Heineken Holding N.V. Shares
As required in this annual report, any financial and operating information presented in relation to FEMSA Cerveza is for the periods ended on December 31, 2009, 2008 and 2007, when we had control over this segment. See “Item 5. Operating and Financial Review and Prospects—Recent Developments.” The risk factors below reflect the closing of the Heineken transaction on April 30, 2010.
FEMSA will not control Heineken’sHeineken N.V.’s and Heineken Holding N.V.’s decisions.
On April 30, 2010, FEMSA announced the closing of the transaction pursuant to which FEMSA agreed to exchange 100% of its beer operations for a 20% economic interest in the Heineken Group, which we refer to as the Heineken transaction. See “Item 5. Operating and Financial Review and Prospects—Recent Developments.” As a consequence of the Heineken transaction, FEMSA will participatenow participates in the Heineken Holding N.V. Board of Directors, which we refer to as the Heineken Holding Board, and in the Heineken N.V. Supervisory Board, which we refer to as the Heineken Supervisory Board. However, FEMSA willis not be a majority or controlling shareholder of Heineken N.V. or Heineken Holding N.V., nor will wedoes it control the decisions of the Heineken Holding Board or the Heineken Supervisory Board. Therefore, the decisions made by the majority or controlling shareholders of Heineken N.V. or Heineken Holding N.V. or the Heineken Holding Board or the Heineken Supervisory Board may not be consistent with or may not consider the interests of FEMSA’s shareholders or may be adverse to the interests of FEMSA’s shareholders. Additionally, FEMSA willhas agreed not to disclose non-public information and decisions taken by Heineken.
Heineken is present in several markets at the global level.a large number of countries.
With respect to theHeineken is a global distributor and brewer of beer industry, FEMSA is present in several markets at the global level.a large number of countries. As a consequence of the Heineken transaction, FEMSA shareholders are indirectly exposed to the political, economic and social circumstances affecting the markets in which Heineken is present, which may have an adverse effect on the value of FEMSA’s interest in Heineken, and, consequently, the value of FEMSA shares.
Strengthening of the Mexican peso.
FEMSA exchanged an investment in the shares in a Mexican company the operating currency of which is the same as the consolidated entity for an investment in the shares of a Dutch company the operating currency of which is the Euro (€). Therefore, inIn the event of an appreciationa depreciation of the Mexican pesoeuro against the Euro,Mexican peso, the fair value of FEMSA’s share investment in shares will be adversely affected.
Furthermore, the cash flow that is expected to be received in the form of dividends from Heineken will be in Euros,euros, and therefore, in the event of an appreciationa depreciation of the Mexican pesoeuro against the Euro,Mexican peso, the amount of expected cash flow once the dividends are converted into pesos (FEMSA’s operating currency) will be adversely affected.
Heineken is aN.V. and Heineken Holding N.V. are publicly listed company.companies.
Heineken is aN.V. and Heineken Holding N.V. are listed companycompanies whose stock trades publicly and is subject to market fluctuation. A reduction in the price of Heineken N.V. or Heineken Holding N.V. shares would result in a reduction in the economic value of FEMSA’s participation in Heineken.
Risks Related to Our Principal Shareholders and Capital Structure
A majority of our voting shares are held by a voting trust, which effectively controls the management of our company, and whose interests may differ from those of other shareholders.
As of April 30, 2010,March 23, 2012, a voting trust, of which the participants of which are members of seven families, owned 38.69% of our capital stock and 74.86% of our capital stock with full voting rights, consisting of the Series B Shares. Consequently, the voting trust has the power to elect a majority of the members of our board of directors and to play a significant or controlling role in the outcome of substantially all matters to be decided by our board of directors or our shareholders. The interests of the voting trust may differ from those of our other shareholders. See “Item 7. Major Shareholders and Related Party Transactions” and “Item 10. Additional Information—Bylaws—Voting Rights and Certain Minority Rights.”
Holders of Series D-B and D-L Shares have limited voting rights.
Holders of Series D-B and D-L Shares have limited voting rights and are only entitled to vote on specific matters, such as certain changes in the form of our corporate organization, dissolution, or liquidation, a merger with a company with a distinct corporate purpose, a merger in which we are not the surviving entity, a change of our jurisdiction of incorporation, the cancellation of the registration of the Series D-B and D-L Shares and any other matters that expressly require approval from such holders under the Mexican Securities Law. As a result of these limited voting rights, Series D-B and D-L holders will not be able to influence our business or operations. See “Item 7. Major Shareholders and Related Party Transactions—Major Shareholders” and “Item 10. Additional Information—Bylaws—Voting Rights and Certain Minority Rights.”
Holders of ADSs may not be able to vote at our shareholder meetings.
Our shares are traded on the New York Stock Exchange, or NYSE, in the form of ADSs. We cannot assure you that holders of our shares in the form of ADSs will receive notice of shareholders’ meetings from our ADS depositary in sufficient time to enable such holders to return voting instructions to the ADS depositary in a timely manner. In the event that instructions are not received with respect to any shares underlying ADSs, the ADS depositary will, subject to certain limitations, grant a proxy to a person designated by us in respect of these shares. In the event that this proxy is not granted, the ADS depositary will vote these shares in the same manner as the majority of the shares of each class for which voting instructions are received.
Holders of BD Units in the United States and holders of ADSs may not be able to participate in any future preemptive rights offering and as a result may be subject to dilution of their equity interests.
Under applicable Mexican law, if we issue new shares for cash as a part of a capital increase, other than in connection with a public offering of newly issued shares or treasury stock, we are generally required to grant our shareholders the right to purchase a sufficient number of shares to maintain their existing ownership percentage. Rights to purchase shares in these circumstances are known as preemptive rights. WeBy law, we may not legally allow holders of our shares or ADSs who are located in the United States to exercise any preemptive rights in any future capital increases unless (1) we file a registration statement with the U.S. Securities and Exchange Commission, which we refer to as the SEC, with respect to that future issuance of shares or (2) the offering qualifies for an exemption from the registration requirements of the U.S. Securities Act of 1933. At the time of any future capital increase, we will evaluate the costs and potential liabilities associated with filing a
registration statement with the SEC, as well as the benefits of preemptive rights to holders of our shares in the form of ADSs in the United States and any other factors that we consider important in determining whether to file a registration statement.
We may decide not to file a registration statement with the SEC to allow holders of our shares or ADSs who are located in the United States to participate in a preemptive rights offering. In addition, under current Mexican law, the sale by the ADS depositary of preemptive rights and the distribution of the proceeds from such sales to the holders of our shares in the form of ADSs is not possible. As a result, the equity interest of holders of our shares in the form of ADSs would be diluted proportionately. See “Item 10. Additional Information—Bylaws—Preemptive Rights.”
The protections afforded to minority shareholders in Mexico are different from those afforded to minority shareholders in the United States.
Under Mexican law, the protections afforded to minority shareholders are different from, and may be less than, those afforded to minority shareholders in the United States. Mexican laws do not provide a remedy to shareholders relating to violations of fiduciary duties. There is no procedure for class actions as such actions are conducted in the United States and there are different procedural requirements for bringing shareholder lawsuits against directors for the benefit of companies. Therefore, it may be more difficult for minority shareholders to enforce their rights against us, our directors or our controlling shareholders than it would be for minority shareholders of a United States company.
Investors may experience difficulties in enforcing civil liabilities against us or our directors, officers and controlling persons.
FEMSA is organized under the laws of Mexico, and most of our directors, officers and controlling persons reside outside the United States. In addition, all or a substantial portion of our assets and their respective assets are located outside the United States. As a result, it may be difficult for investors to effect service of process within the United States on such persons or to enforce judgments against them, including any action based on civil liabilities under the U.S. federal securities laws. There is doubt as to the enforceability against such persons in Mexico, whether in original actions or in actions to enforce judgments of U.S. courts, of liabilities based solely on the U.S. federal securities laws.
Developments in other countries may adversely affect the market for our securities.
The market value of securities of Mexican companies is, to varying degrees, influenced by economic and securities market conditions in other emerging market countries. Although economic conditions are different in each country, investors’ reaction to developments in one country can have effects on the securities of issuers in other countries, including Mexico. We cannot assure you that events elsewhere, especially in emerging markets, will not adversely affect the market value of our securities.
The failure or inability of our subsidiaries to pay dividends or other distributions to us may adversely affect us and our ability to pay dividends to holders of ADSs.
FEMSA is a holding company. Accordingly, FEMSA’s cash flows are principally derived from dividends, interest and other distributions made to FEMSA by its subsidiaries. Currently, FEMSA’s subsidiaries do not have contractual obligations that require them to pay dividends to FEMSA. In addition, debt and other contractual obligations of our subsidiaries may in the future impose restrictions on our subsidiaries’ ability to make dividend or other payments to FEMSA, which in turn may adversely affect FEMSA’s ability to pay dividends to shareholders and meet its debt and other obligations. As of December 31, 2009,2011, FEMSA had no restrictions on its ability to pay dividends. Given the exchange of 100% of our FEMSA Cerveza business for a 20% economic interest in the Heineken Group, FEMSA’s non-controlling shareholder position in Heineken N.V. and Heineken Holding N.V. means that it will be unable to require payment of dividends with respect to the Heineken N.V. or Heineken Holding N.V. shares.
Risks Related to Mexico and the Other Countries in Which We Operate
Adverse economic conditions in Mexico may adversely affect our financial position and results offrom operations.
We are a Mexican corporation, and our Mexican operations are our single most important geographic territory. Given the exchange of 100% of our FEMSA Cerveza business for a 20% economic interest in the Heineken Group, FEMSA shareholders may face a lesser degree of exposure with respect to economic conditions in Mexico and a greater degree of indirect exposure to the political, economic and social circumstances affecting the markets in which Heineken is present. For the year ended December 31, 2009, 64%2011, 60% of our consolidated total revenues were attributable to Mexico.Mexico and at the net income level the percentage attributable to our Mexican
operations is further reduced. The Mexican economy is currently experiencingexperienced a downturn as a result of the impact of the global financial crisis on many emerging economies that began in the second half of 2008. However, in2008 and continued through 2010. In the firstfourth quarter of 2010,2011, Mexican gross domestic product, or GDP, increased by approximately 4.3%3.7% on an annualized basis compared to the same period in 20092010, due to an improvement in the manufacturing and services sectors of the economy and marking the beginning of the economic recovery since the 2008 downturn.economy. The Mexican economy continues to be heavily influenced by the U.S. economy, and therefore, further deterioration in economic conditions in, or delays in recovery of, the U.S. economy may hinder any recovery in Mexico. In the past, Mexico has experienced both prolonged periods of weak economic conditions and deteriorations in economic conditions that have had a negative impact on our results offrom operations. Given the continuing global macroeconomic downturn in 2009 and possibly 2010, and the slow and uncertain recovery in 2011, which also affected the Mexican economy, we cannot assure you that such conditions will not have a material adverse effect on our results offrom operations and financial position.position going forward.
Our business may be significantly affected by the general condition of the Mexican economy, or by the rate of inflation in Mexico, interest rates in Mexico and exchange rates for, or exchange controls affecting, the Mexican peso. Decreases in the growth rate of the Mexican economy, periods of negative growth and/or increases in inflation or interest rates may result in lower demand for our products, lower real pricing of our products or a shift to lower margin products. Because a large percentage of our costs and expenses are fixed, we may not be able to reduce costs and expenses upon the occurrence of any of these events, and our profit margins may suffer as a result.
In addition, an increase in interest rates in Mexico would increase the cost to us of variable rate debt, which constituted 53.8%41% of our total debt as of December 31, 20092011 (including the effect of interest rate swaps), and have an adverse effect on our financial position and results offrom operations. During 2009, due to constraints in the international credit market and limited credit availability in the international markets, as well as changes in the currency mix of our debt, our weighted average interest rate decreased by 1.6 basis points.
Depreciation of the Mexican peso relative to the U.S. dollar could adversely affect our financial position and results offrom operations.
Depreciation of the Mexican peso relative to the U.S. dollar increases the cost to us of a portion of the raw materials we acquire, the price of which is paid in or determined with reference to U.S. dollars, and of our debt obligations denominated in U.S. dollars and thereby negatively affects our financial position and results offrom operations. A severe devaluation or depreciation of the Mexican peso may result in disruption of the international foreign exchange markets and may limit our ability to transfer or to convert Mexican pesos into U.S. dollars and other currencies for the purpose of making timely payments of interest and principal on our U.S. dollar-denominated debt or obligations in other currencies. Although the value of the Mexican peso against the U.S. dollar had been fairly stable until mid-2008, in the fourth quarter of 2008, the Mexican peso depreciated approximately 27% compared to the fourth quarter of 2007. Since 2008, the Mexican peso has continued to experience exchange rate fluctuations relative to the U.S. dollar, as follows. During 2009 and 2010, the Mexican peso experienced a recovery relative to the U.S. dollar of approximately 6%5.2% and 5.6% compared to the year of 2008 and in2009, respectively. During 2011, the Mexican peso experienced a devaluation relative to the U.S. dollar of approximately 12.7% compared to 2010. In the first quarter of 2010,2012, the Mexican peso has appreciated approximately 6%8.2% relative to the U.S. dollar compared to the fourth quarter of 2009.2011.
While the Mexican government does not currently restrict, and since 1982 has not restricted, the right or ability of Mexican or foreign persons or entities to convert Mexican pesos into U.S. dollars or to transfer other currencies out of Mexico, the Mexican government could institute restrictive exchange rate policies in the future, as it has done in the past. Currency fluctuations may have an adverse effect on our financial position, results offrom operations and cash flows in future periods.
When the financial markets are volatile, as they have been in recent periods, our results offrom operations may be substantially affected by variations in exchange rates and commodity prices, and to a lesser degree, interest rates. These effects include foreign exchange gain and loss on assets and liabilities denominated in U.S. dollars, fair value gain and loss on derivative financial instruments, commodities prices and changes in interest income and interest expense. These effects can be much more volatile than our operating performance and our operating cash flows.
Political events in Mexico could adversely affect our operations.
Mexican political events may significantly affect our operations. Presidential elections in Mexico occur every six years, and the most recent election occurred in July 2006. Elections of the senate also occurred in July 2006, and although thePartido Acción Nacional(or the PAN) won a plurality of the seats in the Mexican congress in the election, no party succeeded in securing a majority. Elections of theCámara de Diputados(House of Representatives) occurred in 2009, and although thePartido Revolucionario Institucional(or the PRI) won a plurality of seats in the House of Representatives, no party succeeded in securing a majority. The legislative gridlock resulting from the absence of a clear majority by aany single party, which is likelyexpected to continue even afteruntil the Mexican presidential and federal congressional elections to be held in July 2012, has impeded the progress of structural reforms in Mexico, which may adversely affect economic conditions in Mexico, and consequently, our results of operations.
The Mexican presidential election of local, state and congress representatives in 2009. This situation mayJuly 2012 will result in government gridlocka change in administration, as Mexican law does not allow a sitting president to run for a second consecutive term. The presidential race is expected to be highly contested among a number of different parties, including the PRI, the PAN and thePartido de la Revolución Democrática (the Party of the Democratic Revolution, or PRD), each with its own political uncertainty. Weplatform. As a result, we cannot provide any assurances that political developmentspredict which party will win the presidential election or whether changes in Mexican governmental policy will result from a change in administration. Such changes, should they occur, may adversely affect economic conditions and/or the industries in which we operate in Mexico, over which we have no control, will not have an adverse effect onand therefore our business, financial condition or results of operations.operations and financial position.
Insecurity in Mexico could increase, and this could adversely affect our results.
The presence and increasing levels of violence among drug cartels, and between these and the Mexican law enforcement and armed forces, pose a risk to our business. Organized criminal activity and related violent incidents increasedremained high during 20092011 and the first quarter of 2012 and are relatively concentrated along the northern Mexican border, as well as in certain other Mexican states such as Sinaloa, Michoacán and Michoacán.Guerrero. Mexican President Felipe Calderón has acted to fight the drug cartels and has disrupted the balance of power among them. The principal driver of organized criminal activity is the drug trade that aims to supply and profit from the uninterrupted demand for drugs and the supply of weapons from the United States. This situation could impact our business because consumer habits and patterns adjust to the increased perceived and real insecurity as people refrain from going out as much and gradually shift some on-premise consumption to off-premise consumption of food and beverages on certain social occasions. Insecurity could increase, and this could therefore adversely affect our operational and financial results.
Depreciation of local currencies in other Latin American countries in which we operate may adversely affect our financial position.
Total revenues increased in certain of our non-Mexican beverage operations at a higher rate relative to their respective Mexican operations in 2009. This2010. Although this was not the case in 2011, the recurrence of such a higher rate of total revenue growth could result in a greater contribution to the respective results offrom operations for these territories, but may also expose us to greater risk in these territories as a result. The devaluation of the local currencies against the U.S. dollar in our non-Mexican territories can increase our operating costs in these countries, and depreciation of the local currencies against the Mexican peso can negatively affect our results offrom operations for these countries. In recent years, the value of the currency in the countries in which we operate had been relatively stable.stable except in Venezuela. Future currency devaluation or the imposition of exchange controls in any of these countries, including Mexico, would have an adverse effect on our financial position and results offrom operations.
ITEM 4. | INFORMATION ON THE COMPANY |
We are a Mexican company headquartered in Monterrey, Mexico, and our origin dates back to 1890. Our company was incorporated on May 30, 1936 and has a duration of 99 years. The duration can be extended indefinitely by resolution of our shareholders. Our legal name is Fomento Económico Mexicano, S.A.B. de C.V., and in commercial contexts we frequently refer to ourselves as FEMSA. Our principal executive offices are located at General Anaya No. 601 Pte., Colonia Bella Vista, Monterrey, Nuevo León 64410,
Mexico. Our telephone number at this location is (52-81) 8328-6000. Our website is www.femsa.com. We are organized as asociedad anónima bursátil de capital variable under the laws of Mexico.
We conduct our operations through the following principal holding companies, each of which we refer to as a principal sub-holding company:
Coca-Cola FEMSA, which engages in the production, distribution and marketing of soft drinks; and
FEMSA Comercio, which operates convenience stores.stores; and
CB Equity, which holds our investment in Heineken.
On April 30, 2010, FEMSA announced the closing of the transaction pursuant to which FEMSA agreed to exchange 100% of its beer operations for a 20% economic interest in the Heineken Group. Under Mexican FRS, we have reclassified our consolidated statements of income and cash flows for the year ended December 31, 2009 to reflect FEMSA Cerveza as a discontinued operation. However, FEMSA Cerveza is not a discontinued operation under U.S. GAAP. See “Item 5. Operating and Financial Review and Prospects—Recent Developments”U.S. GAAP Reconciliation” and “Item 10. Additional Information—Material Contracts.” As required in this annual report, anyNotes 26 and 27 to our audited consolidated financial and operating information presented in relation to FEMSA Cerveza is for the periods ended on December 31, 2009, 2008 and 2007, when we had control over this segment.statements.
FEMSA traces its origins to the establishment of Mexico’s first brewery, Cervecería Cuauhtémoc, S.A., which we refer to as Cuauhtémoc, thatwhich was founded in 1890 by four Monterrey businessmen: Francisco G. Sada, José A. Muguerza, Isaac Garza and José M. Schneider. Descendants of certain of the founders of Cuauhtémoc controlare participants of the voting trust that controls the management of our company.
The strategic integration of our company dates back to 1936 when our packaging operations were established to supply crown caps to the brewery. During this period, these operations were part of what was known as the Monterrey Group, which also included interests in banking, steel and other packaging operations.
In 1974, the Monterrey Group was split between two branches of the descendants of the founding families of Cuauhtémoc. The steel and other packaging operations formed the basis for the creation of Corporación Siderúrgica, S.A. (later(now Alfa, S.A.B. de C.V.), controlled by the Garza Sada family, and the beverage and banking operations were consolidated under the FEMSAValores Industriales, S.A. de C.V. (the corporate predecessor of FEMSA) corporate umbrella controlled by the Garza Lagüera family. FEMSA’s shares were first listed on what is now the Bolsa Mexicana de Valores, S.A.B. de C.V. (which we refer to as the Mexican Stock ExchangeExchange) on September 19, 1978. Between 1977 and 1981, FEMSA diversified its operations through acquisitions in the soft drinks and mineral water industries, the establishment of the first convenience stores under the trade name OXXO and other investments in the hotel, construction, auto parts, food and fishing industries, which were considered non-core businesses and were subsequently divested.
In August 1982, the Mexican government suspended payment on its international debt obligations and nationalized the Mexican banking system. In 1985, certain controlling shareholders of FEMSA acquired a
controlling interest in Cervecería Moctezuma, S.A., which was then Mexico’s third-largest brewery and which we refer to as Moctezuma, and related companies in the packaging industry. FEMSA subsequently undertook an extensive corporate and financial restructuring that was completed in December 1988, and pursuant to which FEMSA’s assets were combined under a single corporate entity, which became Grupo Industrial Emprex, S.A. de C.V., which we refer to as Emprex.
In October 1991, certain majority shareholders of FEMSA acquired a controlling interest in Bancomer, S.A., which we refer to as Bancomer. The investment in Bancomer was undertaken as part of the Mexican government’s reprivatization of the banking system, which had been nationalized in 1982. The Bancomer acquisition was financed in part by a subscription by Emprex’s shareholders, including FEMSA, of shares in Grupo Financiero Bancomer, S.A. de C.V. (currently Grupo Financiero BBVA Bancomer, S.A. de C.V.), which we refer to as BBVA Bancomer, the Mexican financial services holding company that was formed to hold a controlling interest in Bancomer. In February 1992, FEMSA offered Emprex’s shareholders the opportunity to exchange the BBVA Bancomer shares to which they were entitled for Emprex shares owned by FEMSA. In August 1996, the shares of
BBVA Bancomer that were received by FEMSA in the exchange with Emprex’s shareholders were distributed as a dividend to FEMSA’s shareholders.
Upon the completion of these transactions, we began a series of strategic transactions to strengthen the competitive positions of our operating subsidiaries. These transactions included the sale of a 30% strategic interest in Coca-Cola FEMSA to a wholly-owned subsidiary of The Coca-Cola Company and a subsequent public offering of Coca-Cola FEMSA shares, both of which occurred in 1993, and the sale of a 22% strategic interest in FEMSA Cerveza to Labatt Brewing Company Limited, which we refer to as Labatt, in 1994. Labatt, which was later acquired by InBev S.A., or InBev (known at the time of the acquisition of Labatt as Interbrew and currently referred to as A-B InBev), subsequently increased its interest in FEMSA Cerveza to 30%.
In 1998, we completed a reorganization that:
simplifiedchanged our capital structure by converting our outstanding capital stock at the time of the reorganization into BD Units and B Units, and
united the shareholders of FEMSA and the former shareholders of Emprex at the same corporate level through an exchange offer that was consummated on May 11, 1998.
As part of the reorganization, FEMSA listed ADSs on the New York Stock ExchangeNYSE representing BD Units, and listed the BD Units and its B Units on the Mexican Stock Exchange.
In May 2003, our subsidiary Coca-Cola FEMSA expanded its operations throughout Latin America by acquiring 100% of Panamco México, S.A. de C.V,Panamerican Beverages, Inc., which we refer to as Panamco, then the largest soft drink bottler in Latin America in terms of sales volume in 2002. Through its acquisition of Panamco, Coca-Cola FEMSA began producing and distributingCoca-Cola trademark beverages in additional territories in Mexico, Central America, Colombia, Venezuela and Brazil, along with bottled water, beer and other beverages in some of these territories. The Coca-Cola Company and its subsidiaries received Series D Shares in exchange for their equity interest in Panamco of approximately 25%.
OnIn August 31, 2004, we consummated a series of transactions with InBev, Labatt and certain of their affiliates to terminate the existing arrangements between FEMSA Cerveza and Labatt. As a result of these transactions, FEMSA acquired 100% ownership of FEMSA Cerveza and previously existing arrangements among affiliates of FEMSA and InBev relating to governance, transfer of ownership and other matters with respect to FEMSA Cerveza were terminated.
OnIn June 1, 2005, we consummated an equity offering of 80.5 million BD Units (including BD Units in the form of ADSs) and 52.78 million B units that resulted in net proceeds to us of US$ 700 million after underwriting spreads and commissions. We used the proceeds of the equity offering to refinance indebtedness incurred in connection with the transactions with InBev, Labatt and certain of their affiliates.
On
In January 13, 2006, FEMSA Cerveza, through one of its subsidiaries, acquired 68% of the equity of the Brazilian brewer Cervejarias Kaiser, which we refer to as Kaiser, from the Molson Coors Brewing Company, or Molson Coors, for US$ 68 million. Molson Coors retained a 15% ownership stake in Kaiser, while Heineken N.V.’s ownership of 17% remained unchanged. In December 2006, Molson Coors completed its exit from Kaiser by exercising its option to sell its 15% holding to FEMSA Cerveza. On December 22, 2006, FEMSA Cerveza made a capital increase of US$ 200 million in Kaiser. At the time, Heineken N.V. elected not to participate in the increase, thereby diluting its 17% interest in Kaiser to 0.17%, and FEMSA Cerveza thereby increasingincreased its stake to 99.83% of the equity of Kaiser, however,Kaiser. However, in August 2007, FemsaFEMSA Cerveza and Heineken N.V. closed a stock purchase agreement whereby Heineken N.V. purchased the shares necessary to regain its 17% interest in Kaiser. As a result of this transaction, FEMSA Cerveza obtained ownership of 83% of Kaiser and Heineken N.V. obtained ownership of 17%.
OnIn November 3, 2006, we acquired from certain subsidiaries of The Coca-Cola Company 148,000,000 Series “D”D shares of Coca-Cola FEMSA, representing 8.02% of the total outstanding stock of Coca-Cola FEMSA. We acquired these shares at a price of US$ 2.888 per share, or US$ 427.4 million in the aggregate, pursuant to a
Memorandum of Understanding with The Coca-Cola Company. As of June 18, 2010, FEMSAApril 20, 2012, we indirectly owns 53.7% of the capital stockowned Series A Shares of Coca-Cola FEMSA equal to 50.0% of its capital stock (63.0% of its capital stock with full voting rights) and The Coca-Cola Company indirectly owns 31.6% of the capital stockowned Series D Shares of Coca-Cola FEMSA equal to 29.4% of its capital stock (37.0% of its capital stock with full voting rights). The remaining 14.7%20.6% of itsCoca-Cola FEMSA’s capital consistsstock consisted of Series L Shares with limited voting rights, which trade on the Mexican Stock Exchange andand/or on the New York Stock ExchangeNYSE in the form of ADSs under the trading symbol KOF.
In March 2007, at our company’s AGM, our shareholders approved a three-for-one stock split of FEMSA’s outstanding stock and our ADSs traded on the NYSE. The pro rata stock split had no effect on the ownership structure of FEMSA. The new units issued in the stock split were distributed by the Mexican Stock Exchange on May 28, 2007, to holders of record as of May 25, 2007, and ADSs traded on the NYSE were distributed on May 30, 2007, to holders of record as of May 25, 2007.
OnIn November 8, 2007, Administración, S.A.P.I. de C.V., or Administración, S.A.P.I., a Mexican company owned directly or indirectly by Coca-Cola FEMSA and by The Coca-Cola Company, acquired 58,350,908 shares representing 100% of the shares of the capital stock of Jugos del Valle, for US$ 370 million in cash, with assumed liabilities of US$ 86 million. On June 30, 2008, Administración S.A.P.I. and Jugos del Valle merged, and Jugos del Valle became the surviving entity. Subsequent to the initial acquisition of Jugos del Valle, Coca-Cola FEMSA offered to sell 30% of its interest in Administración S.A.P.I. to other Coca-Cola bottlers in Mexico. As of December 31, 2009 and 2008, Coca-Cola FEMSA has a recorded investment of 19.8% of the capital stock of Jugos del Valle. In December 2008, the surviving Jugos del Valle entity sold its operations to The Coca-Cola Company, Coca-Cola FEMSA and other bottlers ofCoca-Cola trademark brands in Brazil. These still beverage operations were integrated into a joint business with The Coca-Cola Company in Brazil. Through Coca-Cola FEMSA’s joint ventures with The Coca-Cola Company, we distribute the Jugos del Valle line of juice-based beverages and have begun to develop and distribute new products. As of December 31, 2011, 2010, 2009 and 2008, Coca-Cola FEMSA has a recorded investment of 19.8% of the capital stock of Jugos del Valle.
OnIn April 22, 2008, FEMSA shareholders approved a proposal to amend our bylaws in order to preserve the unit structure for our shares that has been in place since May 1998, and to maintain our existing share structure beyond May 11, 2008. Our bylaws previously provided that on May 11, 2008 our Series D-B Shares would convert into Series B Shares and our Series D-L Shares would convert into Series L Shares with limited voting rights. In addition, our bylaws provided that, on May 11, 2008, our current unit structure would cease to exist and each of our B Units would be unbundled into five Series B Shares, while each BD Unit would unbundle into three Series B Shares and two newly issued Series L Shares. Following the April 22, 2008 shareholder approvals, the automatic conversion of our share and unit structures no longer exist, and, absent shareholder action, our share structure will continue to be comprised of Series B Shares, which must represent not less than 51% of our outstanding capital stock, and Series D-B and Series D-L Shares, which together may represent up to 49% of our outstanding capital stock. Our Unit structure, absent shareholder action, will continue to consist of B Units, which bundle five Series B Shares, and BD Units, which bundle one Series B Share, two Series D-B Shares and two Series D-L Shares. See “Item 9. The Offer and Listing—Description of Securities.”
In May 2008, Coca-Cola FEMSA completed its acquisition of Refrigerantes Minas Gerais, Ltda., or REMIL, in Brazil for US$ 364.1 million, net of cash received, and assumed liabilities of US$ 196.9 million.
In connection with the acquisition, Coca-Cola FEMSA identified intangible assets of indefinite life of US$ 224.7 million.
On January 11, 2010, FEMSA announced that its Board of Directors unanimously approved a definitive agreement under which FEMSA would exchange its FEMSA Cerveza business for a 20% economic interest in Heineken, one of the world’s leading brewers. Under the terms of the agreement, FEMSA received 43,018,320 shares of Heineken Holding N.V. and 43,009,699 shares of Heineken N.V., with an additional 29,172,504 shares of Heineken N.V. (which shares we refer to as the Allotted Shares) to be delivered pursuant to an allotted share delivery instrument, or the ASDI. Heineken also assumed US$ 2.1 billion of indebtedness, including FEMSA Cerveza’s unfunded pension obligations. The Allotted Shares were delivered to FEMSA in several installments during 2010 and 2011, with the final installment delivered on October 5, 2011. As of December 31, 2011, FEMSA’s interest in Heineken N.V. represented 12.53% of Heineken N.V.’s outstanding capital and 14.94% of Heineken Holding N.V.’s outstanding capital. The principal terms of the Heineken transaction documents are summarized below in “Item 10. Additional Information—Material Contracts.”
On March 10,In February 2010, FEMSA announced that subsidiaries of FEMSA signed an agreement with subsidiaries of The Coca-Cola Company to amend the shareholders agreement for Coca-Cola FEMSA. The main purpose of the amendment is to set forth that the appointment and compensation of the chief executive officer and all officers reporting to the chief executive officer, as well as the adoption of decisions related to the ordinary operations of Coca-Cola FEMSA, shall only require a simple majority vote of the board of directors. Decisions related to extraordinary matters (such as business acquisitions or combinations in an amount exceeding US$ 100 million, among others) shall continue to require the vote of the majority of the board of directors, including the affirmative
vote of two of the board members appointed by The Coca-Cola Company. The amendment was approved at Coca-Cola FEMSA’s extraordinary shareholders meeting on April 14, 2010, and is reflected in the by-lawsbylaws of Coca-Cola FEMSA. This amendment was signed without transfer of any consideration. The percentage of our voting interest in our subsidiary Coca-Cola FEMSA remains the same after the signing of this amendment.
OnIn April 2010, Heineken N.V. and Heineken Holding N.V. held their AGM, and approved the acquisition of 100% of the shares of the beer operations owned by FEMSA, under the terms announced in January 2010. The AGM of Heineken appointed, subject to the completion of the acquisition of FEMSA’s beer operations, Mr. Jose Antonio Fernández Carbajal as member of the Board of Directors of Heineken Holding N.V. and the Heineken Supervisory Board, and Mr. Javier Astaburuaga Sanjines as second representative in the Heineken Supervisory Board. Their appointments became effective on April 30, 2010.
In April 2010, FEMSA held its AGM, during which shareholders approved the transaction with Heineken. Shareholders approved the exchange of 100% of FEMSA’s beer operations in Mexico and Brazil for a 20% economic interest in the Heineken Group, and the assumption by Heineken of debt in the amount of US$2.1 billion, under the transaction terms described in January 2010.
In April 2010, FEMSA announced the closing of the transaction pursuant to which FEMSA agreed to exchange 100% of its beer operations for a 20% economic interest in the Heineken Group. The principal terms of the Heineken transaction documents are summarized below in “Item 10. Additional Information—Material Contracts.”
In September 2010, FEMSA sold Promotora de Marcas Nacionales, S. de R.L. de C.V., which we refer to as Promotora, to The Coca-Cola Company. Promotora was the owner of theMundet brands of soft drinks in Mexico.
In September 2010, FEMSA signed definitive agreements with GPC III, B.V. to sell its flexible packaging and label operations, Grafo Regia, S.A. de C.V. This transaction was part of FEMSA’s strategy to divest non-core assets. The transaction was closed on December 31, 2010.
During the third quarter of 2010, Coca-Cola FEMSA completed a transaction with a Brazilian subsidiary of The Coca-Cola Company to produce, sell and distributeMatte Leão branded products. This transaction reinforced Coca-Cola FEMSA’s non-carbonated product offering through the platform that is operated by The Coca-Cola Company and its bottling partners in Brazil. As a part of the agreement, Coca-Cola FEMSA has been selling and distributing certainMatte Leão branded ready-to-drink products since the first quarter of 2010. As of April 20, 2012, Coca-Cola FEMSA had a 19.4% indirect interest in theMatte Leãobusiness in Brazil.
In March 2011, a consortium of investors formed by FEMSA, the Macquarie Mexican Infrastructure Fund and other investors, acquired Energía Alterna Istmeña, S. de R.L. de C.V., which we refer to as EAI, and Energía Eólica Mareña, S.A. de C.V., which we refer to as EEM, from subsidiaries of Preneal, S.A., which we refer to as Preneal. EAI and EEM together constitute the Mareña Renovables Wind Power Farm, a 396 megawatt late-stage wind energy project in the southeastern region of the State of Oaxaca. The Mareña Renovables Wind Power Farm is expected to be the largest wind power farm in Latin America.
In March 2011, Coca-Cola FEMSA, with The Coca-Cola Company and through Compañía Panameña de Bebidas S.A.P.I. de C.V., acquired Grupo Industrias Lácteas, which we refer to as Estrella Azul, a Panamanian company engaged for more than 50 years in the dairy and juice-based beverage categories. Coca-Cola FEMSA acquired a 50% interest and will continue to develop this business with The Coca-Cola Company. Beginning in April 2011, both The Coca-Cola Company and Coca-Cola FEMSA commenced the gradual integration of Estrella Azul into the existing beverage platform they share for the development of non-carbonated products in Panama.
In October 2011, Coca-Cola FEMSA merged with Administradora de Acciones del Noreste, S.A. de C.V., which constituted the beverage division of Grupo Tampico, S.A. de C.V. (which we refer to as Grupo Tampico) and was one of the largest family-ownedCoca-Cola product bottlers in Mexico, as calculated by sales volume. This franchise territory operates in the states of Tamaulipas, San Luis Potosí and Veracruz, as well as in certain parts of the states of Hidalgo, Puebla and Querétaro, and sold 155.7 million unit cases of beverages in 2011. The aggregate enterprise value at the announcement date of this transaction was Ps. 9,300 million. Grupo Tampico’s principal shareholders received 63.5 million newly issued Coca-Cola FEMSA Series L Shares. Coca-Cola FEMSA began to consolidate the beverage division of Grupo Tampico in its financial statements as of October 2011.
In December 2011, Coca-Cola FEMSA began the construction of a production plant in Minas Gerais, Brazil, which will require an investment of 250 million Brazilian reais (equivalent to approximately US$ 140 million). We expect that the construction will generate 800 direct and indirect jobs. As of December 31, 2011, it was anticipated that the new plant would be completed within 18 months and begin operations in June 2013. The plant will be located on a parcel of land 300,000 square meters in size, and it is expected that by 2015 the annual production capacity will be approximately 2.1 billion liters of sparkling beverages, representing an increase of approximately 47% as compared to the current installed capacity of Coca-Cola FEMSA’s plant in Belo Horizonte, Brazil. The new plant will produce all of Coca-Cola FEMSA’s existing brands and presentations ofCoca-Cola products.
In December 2011, Coca-Cola FEMSA merged with the beverage division of Corporación de los Ángeles, S.A. de C.V. (which we refer to as Grupo CIMSA), which division was a Mexican family-owned bottler ofCoca-Cola trademark products. This franchise territory operates mainly in the states of Morelos and Mexico, as well as in certain parts of the states of Guerrero and Michoacán, and sold 154.8 million unit cases of beverages in 2011. The aggregate enterprise value at the announcement date of this transaction was Ps. 11,000 million. A total of 75.4 million new Coca-Cola FEMSA Series L Shares were issued in connection with the transaction, and Coca-Cola FEMSA began to consolidate the beverage division of Grupo CIMSA in its financial statements as of December 2011. As part of its merger with the beverage division of Grupo CIMSA, Coca-Cola FEMSA acquired a 13.2% equity interest in Promotora Industrial Azucarera, S.A. de C.V., which we refer to as Piasa.
On December 15, 2011, Coca-Cola FEMSA entered into an agreement to merge the beverage division of Grupo Fomento Queretano, S.A.P.I. de C.V. (which we refer to Grupo Fomento Queretano) into Coca-Cola FEMSA. Grupo Fomento Queretano’s beverage division operates mainly in the Mexican state of Querétaro, as well as in parts of the states of Mexico, Hidalgo and Guanajuato. The merger agreement was approved by both Coca-Cola FEMSA’s and Grupo Fomento Queretano’s boards of directors, and is subject to the approval of theComisión Federal de Competencia (the Mexican Antitrust Commission, or the CFC) and of the shareholders meetings of both companies. The transaction will involve the issuance of approximately 45.1 million new Coca-Cola FEMSA Series L Shares, and in addition Coca-Cola FEMSA will assume Ps. 1,221 million in net debt. This transaction is expected to be completed in the second quarter of 2012.
In February 2012, Coca-Cola FEMSA announced that it had entered into a 12-month exclusivity agreement with The Coca-Cola Company to evaluate the potential acquisition by Coca-Cola FEMSA of a controlling ownership stake in the bottling operations owned by The Coca-Cola Company in the Philippines. Both parties believe that Coca-Cola FEMSA’s expertise and successful track record operating in fragmented markets and emerging economies could be effectively deployed in such territory, and contribute significantly toward expanding the penetration of, and consumer preference for, The Coca-Cola Company’s brands in that market. This exclusivity agreement does not require either party to enter into any transaction, and there can be no assurances that a definitive agreement will be executed.
On February 23, 2012, a wholly-owned subsidiary of Mitsubishi Corporation, and Stichting Depositary PGGM Infrastructure Funds, a pension fund managed by PGGM, acquired the 45% interest held by FEMSA in the parent companies of the Mareña Renovables Wind Power Farm. Certain subsidiaries of FEMSA, FEMSA Comercio and Coca-Cola FEMSA have entered into 20-year wind power supply agreements with the Mareña Renovables Wind Power Farm to purchase energy output produced by it. These agreements will remain in full force and effect. The sale of FEMSA’s participation as an investor will result in a gain.
We conduct our business through our principal sub-holding companies as shown in the following diagram and table:
Principal Sub-holding Companies(1)—Companies—Ownership Structure
As of April 30, 2010March 31, 2012
(1) |
|
Compañía Internacional de Bebidas, S.A. de C.V., which we refer to as CIBSA. |
|
Percentage of capital stock, equal to 63.0% of capital stock with full voting rights. |
(3) | Ownership in CB Equity held through various FEMSA subsidiaries. |
(4) | Combined economic interest in Heineken N.V. and Heineken Holding N.V. |
The following tables presenttable presents an overview of our operations by reportable segment and by geographic region under Mexican Financial Reporting Standards:region:
Operations by Segment—Overview
Year Ended December 31, 20092011 and % of growth vs. last year(1)(1)
Coca-Cola FEMSA | FEMSA Cerveza | FEMSA Comercio | Coca-Cola FEMSA | FEMSA Comercio | CB Equity(2) | ||||||||||||||||||||||||||||||||||||||
(in millions of Mexican pesos, except for employees and percentages) | (in millions of Mexican pesos, except for employees and percentages) | ||||||||||||||||||||||||||||||||||||||||||
Total revenues | Ps. | 102,767 | 23.9 | % | Ps. | 46,336 | 9.3 | % | Ps. | 53,549 | 13.6 | % | Ps.124,715 | 20.5 | % | Ps.74,112 | 19.0 | % | Ps. — | — % | |||||||||||||||||||||||
Income from operations | 15,835 | 15.6 | 5,894 | 9.3 | 4,457 | 44.8 | 20,152 | 18.0 | % | 6,276 | 20.7 | % | (7) | (133)% | |||||||||||||||||||||||||||||
Total assets | 110,661 | 13.0 | 72,029 | 6.2 | 19,693 | 14.6 | 151,608 | 32.9 | % | 26,998 | 14.0 | % | 76,791 | 14.6% | |||||||||||||||||||||||||||||
Employees | 67,426 | 3.7 | 24,741 | (2) | (4.9 | ) | 23,473 | 7.7 | 78,979 | 15.4 | % | 83,820 | 14.7 | % | — | N/a |
Total Revenues Summary by Segment(1)(1)
Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||
2009 | 2008 | 2007 | 2011 | 2010 | 2009 | |||||||||||||||
(in millions of Mexican pesos) | (in millions of Mexican pesos) | |||||||||||||||||||
Coca-Cola FEMSA | 102,767 | Ps. | 82,976 | Ps. | 69,251 | Ps.124,715 | Ps.103,456 | Ps.102,767 | ||||||||||||
FEMSA Cerveza | 46,336 | 42,385 | 39,566 | |||||||||||||||||
FEMSA Comercio | 53,549 | 47,146 | 42,103 | 74,112 | 62,259 | 53,549 | ||||||||||||||
CB Equity(2) | — | — | N/a | |||||||||||||||||
Other | 12,302 | 9,401 | 8,124 | 13,373 | 12,010 | 10,991 | ||||||||||||||
Consolidated total revenues | 197,033 | Ps. | 168,022 | Ps. | 147,556 | Ps.203,044 | Ps.169,702 | Ps.160,251 |
Total Revenues Summary by Geographic Region(3)4)(5)
Year Ended December 31, | |||||||||
2009 | 2008 | 2007 | |||||||
(in millions of Mexican pesos) | |||||||||
Mexico(4) | Ps. | 126,872 | Ps. | 114,640 | Ps. | 106,136 | |||
Latincentro(5) | 16,211 | 12,853 | 11,901 | ||||||
Venezuela | 22,448 | 15,217 | 9,792 | ||||||
Mercosur(6) | 32,362 | 25,755 | 20,127 | ||||||
Consolidated total revenues | 197,033 | Ps. | 168,022 | Ps. | 147,556 |
Year Ended December 31, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
Mexico and Central America(3)(6) | Ps.130,256 | Ps.111,769 | Ps.101,023 | |||||||||
South America(3)(7) | 53,113 | 44,468 | 37,507 | |||||||||
Venezuela | 20,173 | 14,048 | 22,448 | |||||||||
Consolidated total revenues(3) | Ps.203,044 | Ps.169,702 | Ps.160,251 |
(1) | The sum of the financial data for each of our segments and percentages with respect thereto differ from our consolidated financial information due to intercompany transactions, which are eliminated in consolidation, and certain assets and activities of FEMSA. |
(2) |
(3) | For 2009, consolidated total revenues have been modified to exclude FEMSA Cerveza financial information due to its presentation as a discontinued operation. |
(4) | In 2011, Coca-Cola FEMSA changed its business structure and organization. As a result, revenues by geographic region have been regrouped into the following two regions: Mexico and Central America; and South America. See Note 25 to our audited consolidated financial statements. |
(5) | The sum of the financial data for each geographic region differs from our consolidated financial information due to intercompany transactions, which are eliminated in consolidation. |
Includes |
The following table sets forth our significant subsidiaries as of April 30, 2010:February 29, 2012:
Name of Company | Jurisdiction of Establishment | Percentage Owned | ||||
CIBSA | Mexico | 100.0 | % | |||
Coca-Cola FEMSA(1) | Mexico | | 50.0 | % | ||
Propimex, S. de R.L. de C.V. (a limited liability company; formerly Propimex, S.A. de C.V.) | Mexico | | 50.0 | % | ||
Controladora Interamericana de Bebidas, S.A. de C.V. | Mexico | | 50.0 | % | ||
Coca-Cola FEMSA de Venezuela, S.A. (formerly Panamco Venezuela, S.A. de C.V.) | Venezuela | | 50.0 | % | ||
Spal Industria Brasileira de Bebidas, S.A. | Brazil | | 48.9 | % | ||
FEMSA Comercio | Mexico | 100.0 | % | |||
CB Equity | United Kingdom | 100.0 | % |
(1) | Percentage of capital stock. FEMSA owns 63.0% of the capital stock with full voting rights. |
We areFEMSA is a consumer-focusedleading company that strives to combine world-class execution with leading brands. Our soft drink operation,participates in the non-alcoholic beverage industry through Coca-Cola FEMSA, is the largest independent bottler ofCoca-Cola products in Latin America, and the second largest in the world measured in terms of sales volumesvolume; in 2009. Our convenience store chain OXXO isthe retail industry through FEMSA Comercio, operating the largest and fastest-growing chain of convenience stores in MexicoLatin America; and in the beer industry, through its ownership of the second-largest equity stake in Heineken, one of the world’s leading brewers, with a total of 7,492 stores as of March 31, 2010 and a significant growth driveroperations in its own right.over 70 countries.
We understand the importance of connecting with our end consumers by interpreting their needs, and ultimately delivering the right products to them for the right occasions and the optimal value proposition. We strive to achieve this by developing brand value, expanding our significant distribution capabilities, and improving the efficiency of our operations while aiming to reach our full potential. We continue to improve our information gathering and processing systems in order to better know and understand what our consumers want and need, and we are improving our production and distribution by more efficiently leveraging our asset base.
We believe that the competencies that our businesses have developed can be replicated in other geographic regions. This underlying principle guided our consolidation efforts, which culminated in Coca-Cola FEMSA’s acquisition of Panamco onin May 6, 2003. The continental platform that this combination produced—encompassing a significant territorial expanse in Mexico and Central America, including some of the most populous metropolitan areas in Latin America—has provided us with opportunities to create value through both an improved ability to execute our strategies and the use of superior marketing tools. As we increaseWe have also increased our capabilities to operate and succeed in other geographic regions, by developing significant management and marketing tools to gain an understanding of local consumer needs and trends, as is the case with OXXO’s new Colombian operations. Going forward, we canintend to use those capabilities to drive thecontinue our international expansion of OXXO as well.both Coca-Cola FEMSA and OXXO.
Our ultimate objectives are achieving sustainable revenue growth, improving profitability and increasing the return on invested capital in each of our operations. We believe that by achieving these goals we will create sustainable value for our shareholders.
Overview
Coca-Cola FEMSA is the largest franchise bottler ofCoca-Colatrademark beverages in Latin America, and the second largest in the world, calculated in each case by sales volume in 2009.world. Coca-Cola FEMSA operates in the following territories:
Mexico – a substantial portion of central Mexico (including Mexico City and the states of Michoacán and Guanajuato) and the southeast and northeast of Mexico (including the Gulf region).
Central America – Guatemala (Guatemala City and surrounding areas), Nicaragua (nationwide), Costa Rica (nationwide) and Panama (nationwide).
Colombia – most of the country.
Venezuela – nationwide.
Argentina – Buenos Aires and surrounding areas.
Brazil – the area of greater São Paulo, Campinas, Santos, the state of Mato Grosso do Sul, part of the state of Minas Gerais and part of the state of Goiás.
Argentina – Buenos Aires and surrounding areas.
Coca-Cola FEMSA was organized on October 30, 1991 as asociedad anónima de capital variable (a variable capital stock corporation) under the laws of Mexico with a duration of 99 years. On December 5, 2006, in response toas required by amendments to the Mexican Securities Law, Coca-Cola FEMSA became asociedad anónima bursátil de capital variable (a listed variable capital listed stock corporation). Coca-Cola FEMSA’s legal name is Coca-Cola FEMSA, S.A.B. de C.V. Coca-Cola FEMSA’s principal executive offices are located at Guillermo González Camarena No. 600, Col. Centro de Ciudad Santa Fé,Fe, Delegación Álvaro Obregón, México, D.F., 01210, México. Coca-Cola FEMSA’s telephone number at this location is (52-55) 5081-5100. Coca-Cola FEMSA’s website iswww.coca-colafemsa.com. www.coca-colafemsa.com.
The following is an overview of Coca-Cola FEMSA’s operations by reporting segment in 2009:2011.
Operations by Reporting Segment—Overview
Year Ended December 31, 20092011(1)
Total Revenues | Percentage of Total Revenues | Income from Operations | Percentage of Income from Operations | |||||
Mexico | 36,785 | 36% | 6,849 | 43% | ||||
Latincentro(2) | 15,993 | 15% | 2,937 | 19% | ||||
Venezuela | 22,430 | 22% | 1,815 | 11% | ||||
Mercosur(3) | 27,559 | 27% | 4,234 | 27% | ||||
Consolidated | 102,767 | 100% | 15,835 | 100% |
Total Revenues | Percentage of Total Revenues | Income from Operations | Percentage of Income from Operations | |||||||||||||
Mexico and Central America(2) | 52,196 | 41.9 | % | 8,906 | 44.2 | % | ||||||||||
South America (excluding Venezuela)(3) | 52,408 | 42.0 | % | 7,943 | 39.4 | % | ||||||||||
Venezuela | 20,111 | 16.1 | % | 3,303 | 16.4 | % | ||||||||||
Consolidated | 124,715 | 100.0 | % | 20,152 | 100.0 | % |
(1) | Expressed in millions of Mexican pesos, except for percentages. |
(2) | Includes Mexico, Guatemala, Nicaragua, Costa Rica |
(3) | Includes Colombia, Brazil and Argentina. |
Corporate History
In 1979, one of our subsidiaries acquired certain sparkling beverage bottlers that are now a part of its company.Coca-Cola FEMSA. At that time, the acquired bottlers had 13 Mexican distribution centers operating 701 distribution routes, and their production capacity was 83 million physical cases. In 1991, FEMSA transferred its ownership in the bottlers to FEMSA Refrescos, S.A. de C.V., the corporate predecessor toof Coca-Cola FEMSA, S.A.B. de C.V.
In June 1993, a subsidiary of The Coca-Cola Company subscribed for 30% of Coca-Cola FEMSAFEMSA’s capital stock in the form of Series D Shares for US$ 195 million. In September 1993, FEMSA sold Series L Shares that
represented 19% of Coca-Cola FEMSA’s capital stock to the public, and Coca-Cola FEMSA listed these shares on the Mexican Stock Exchange and, in the form of ADSs, on the New York Stock Exchange.NYSE. In a series of transactions between 1994 and 1997, Coca-Cola FEMSA acquired territories in Argentina and additional territories in southern Mexico.
In May 2003, Coca-Cola FEMSA acquired Panamco and began producing and distributingCoca-Colatrademark beverages in additional territories in the central and the gulf regions of Mexico and in Central America (Guatemala, Nicaragua, Costa Rica and Panama), Colombia, Venezuela and Brazil, along with bottled water, beer and other beverages in some of these territories. As a result of the acquisition, the interest of The Coca-Cola Company in the capital stock of Coca-Cola FEMSA increased from 30%30.0% to 39.6%.
During August 2004, Coca-Cola FEMSA conducted a rights offering to allow existing holders of its Series L Shares and ADSs to acquire newly-issued Series L Shares in the form of Series L Shares and ADSs, respectively, at the same price per share at which ourselveswe and The Coca-Cola Company subscribed in connection with the Panamco acquisition. OnIn March 8, 2006, its shareholders approved the non-cancellation of the 98,684,857 Series L Shares (equivalent to approximately 9.87 million ADSs, or over one-third of the outstandingissued Series L Shares)Shares at the time) that were not subscribed for in the rights offering which arewere available for issuancesubscription at an issuancea price of no less than US$ 2.216 per share or its equivalent in Mexican currency.
OnIn November 3, 2006, we acquired, through a subsidiary, 148,000,000 of Coca-Cola FEMSA Series D Shares from certain subsidiaries of The Coca-Cola Company representing 9.4% of the total outstanding voting shares and 8.0% of the total outstanding equity of Coca-Cola FEMSA, at a price of US$ 2.888 per share for an aggregate amount of US$ 427.4 million. With this purchase, we increased our ownership to 53.7% of Coca-Cola FEMSAFEMSA’s capital stock. Pursuant to Coca-Cola FEMSAFEMSA’s bylaws, the acquired shares were converted from Series D Shares to Series A Shares.
OnIn November 8, 2007, Administración, S.A.P.I., a Mexican company owned directly or indirectly by Coca-Cola FEMSA and The Coca-Cola Company, acquired 100% of the shares of capital stock of Jugos del Valle. See “—The Company—Corporate Background.”
In December 2008, The business of Jugos del Valle in the United States was acquired and sold its Brazilian operations, Holdinbrás, Ltd. to a subsidiary ofby The Coca-Cola Company. Subsequently, Coca-Cola FEMSA and The Coca-Cola Company and all Mexican and BrazilianCoca-Cola bottlers entered into a joint business for the Mexican and the Brazilian operations, respectively, of Jugos del Valle, through transactions completed during 2008. Taking into account the participations held by the beverage divisions of Grupo Tampico and Grupo CIMSA, Coca-Cola FEMSA currently holds an interest of 24.0% in the Mexican joint business and other bottlersapproximately 19.7% in the Brazilian joint businesses ofCoca-Cola trademark brands in Brazil. These operations were integrated into the Sucos Mais business, a joint venture with The Coca-Cola Company in Brazil. Jugos del Valle. Jugos del Valle sells fruit juice-based beverages and fruit derivatives.
OnIn May 30, 2008, Coca-Cola FEMSA entered into a transaction with The Coca-Cola Company to acquire its wholly-owned bottling territory,franchise REMIL, located in the State of Minas Gerais in Brazil. During the second quarter of 2008,Brazil, and Coca-Cola FEMSA closed this transaction forpaid a purchase price of US$ 364.1 million.million in June 2008. Coca-Cola FEMSA consolidatesbegan to consolidate REMIL in its financial statements as of June 1, 2008.
In December 2007 and May 2008, Coca-Cola FEMSA sold most of its proprietary brands to The Coca-Cola Company. The proprietary brands are now being licensed back to Coca-Cola FEMSA by The Coca-Cola Company for a total amount ofpursuant to Coca-Cola FEMSA’s bottler agreements. The December 2007 transaction was valued at US$ 6448 million and the May 2008 transaction was valued at US$ 16 million. BothCoca-Cola FEMSA believes that both of these transactions were conducted on an arm’s length basis. These trademarks are now being licensed toRevenues from the sale of proprietary brands in which Coca-Cola FEMSA by The Coca-Cola Company subject to existing bottler agreements.has a significant continuing involvement are deferred and amortized against the related costs of future sales over the estimated sales period.
In July 2008, Coca-Cola FEMSA acquired the jug water business of Agua de los Angeles,Ángeles, S.A. de C.V. (Agua, or Agua de los Angeles), a jug water businessÁngeles, in the Valley of Mexico (Mexico City and surrounding areas) from Grupo Embotellador CIMSA, S.A. de C.V., at the time one of theCoca-Cola bottlers bottling franchises in Mexico, for a purchase price of US$ 18.3 million. The trademarks remain with The Coca-Cola Company. Coca-Cola FEMSA subsequently merged Agua de los AngelesÁngeles into its jug water business under theCiel brand.
In February 2009, Coca-Cola FEMSA, completedtogether with The Coca-Cola Company, acquired the transaction withBrisa bottled water business in Colombia from Bavaria, a subsidiary of SABMiller, to jointly acquire withSABMiller. Coca-Cola FEMSA acquired the production
assets and the distribution territory, and The Coca-Cola Company acquired theBrisa bottled water business (includingbrand. Coca-Cola FEMSA and The Coca-Cola Company equally shared in paying theBrisa brand). The purchase price of US$ 92 million was shared equally by Coca-Cola FEMSA and The Coca-Cola Company.million. Following a transition period, in June 2009, Coca-Cola FEMSA beganstarted to sell and distribute theBrisaportfolio of products in Colombia.
In May 2009, Coca-Cola FEMSA entered into an agreement to develop theCrystal trademark water products in Brazil jointly with The Coca-Cola Company.
In August 2010, Coca-Cola FEMSA acquired from The Coca-Cola Company, along with other BrazilianCoca-Cola bottlers, the business operations of theMatte Leãotea brand. As of June 18, 2010,April 20, 2012, Coca-Cola FEMSA had a 19.4% indirect interest in theMatte Leão business in Brazil.
In March 2011, Coca-Cola FEMSA, with The Coca-Cola Company and through Compañía Panameña de Bebidas S.A.P.I. de C.V., acquired Estrella Azul, a Panamanian conglomerate that participates in the dairy and juice-based beverage categories in Panama. Coca-Cola FEMSA will continue to develop this business with The Coca-Cola Company.
In October 2011, Coca-Cola FEMSA merged with the beverage division of Administradora de Acciones del Noreste, S.A. de C.V., which constituted Grupo Tampico’s beverage division and was one of the largest family-owned bottlers ofCoca-Cola trademark products in Mexico, as calculated by sales volume. This franchise territory operates in the states of Tamaulipas, San Luis Potosí and Veracruz, as well as in certain parts of the states of Hidalgo, Puebla and Querétaro, and sold 155.7 million unit cases of beverages in 2011. The aggregate enterprise value at the announcement date of this transaction was Ps. 9,300 million, and a total of 63.5 million new Coca-Cola FEMSA Series L Shares were issued in connection with the transaction. Coca-Cola FEMSA began to consolidate the beverage division of Grupo Tampico in its financial statements as of October 2011.
In December 2011, Coca-Cola FEMSA merged with the beverage division of Grupo CIMSA, a Mexican family-owned bottler ofCoca-Cola trademark products with operations mainly in the states of Morelos and México, as well as in certain parts of the states of Guerrero and Michoacán. This franchise territory sold 154.8 million unit cases of beverages in 2011. The aggregate enterprise value of this transaction was Ps. 11,000 million, and a total of 75.4 million new Coca-Cola FEMSA Series L Shares were issued in connection with this transaction. Coca-Cola FEMSA began to consolidate the beverage division of Grupo CIMSA in its financial statements as of December 2011. As part of Coca-Cola FEMSA’s merger with the beverage division of Grupo CIMSA, it also acquired a 13.2% equity interest in Piasa.
Recent Mergers and Acquisitions
On December 15, 2011, Coca-Cola FEMSA entered into an agreement to merge the beverage division of Grupo Fomento Queretano into Coca-Cola FEMSA. Grupo Fomento Queretano’s beverage division operates mainly in the Mexican state of Querétaro, as well as in parts of the states of Mexico, Hidalgo and Guanajuato. The merger agreement was approved by both Coca-Cola FEMSA’s and Grupo Fomento Queretano’s boards of directors, and is subject to the approval of the CFC and of the shareholders meetings of both companies. The transaction will involve the issuance of approximately 45.1 million new Coca-Cola FEMSA Series L Shares, and in addition Coca-Cola FEMSA will assume Ps. 1,221 million in net debt. This transaction is expected to be completed in the second quarter of 2012.
In February 2012, Coca-Cola FEMSA entered into a 12-month exclusivity agreement with The Coca-Cola Company to evaluate the potential acquisition by Coca-Cola FEMSA of a controlling ownership stake in the bottling operations owned by The Coca-Cola Company in the Philippines. Coca-Cola FEMSA remains in the process of evaluating this potential acquisition.
Capital Stock
As of April 20, 2012, we indirectly owned Series A Shares equal to 53.7% of Coca-Cola FEMSA equal to 50.0% of its capital stock (63.0% of its capital stock with full voting rights). As of June 18, 2010,April 20, 2012, The Coca-Cola Company indirectly owned Series D Shares equal to 31.6% of the capital stock of Coca-Cola FEMSA (37%equal to 29.4% of Coca-Cola FEMSA’sits capital stock (37.0% of its capital stock with full voting rights). Series L Shares with limited voting rights, which trade on the Mexican Stock Exchange andand/or in the form of ADSs on the New York Stock Exchange, constituteNYSE, constituted the remaining 14.7%20.6% of Coca-Cola FEMSA’s capital stock.
Business Strategy
In August 2011, Coca-Cola FEMSA is the largest bottlerrestructured its business under two new divisions: Mexico and Central America; and South America, creating a more flexible structure to execute its strategies and extend Coca-Cola FEMSA’s track record of growth. Previously, Coca-Colatrademark beverages FEMSA managed its business under three divisions: Mexico; Latincentro; and Mercosur. With this new business structure, Coca-Cola FEMSA aligned its business strategies more efficiently, ensuring a faster introduction of new products and categories, and a more rapid and effective design and deployment of commercial models.
Coca-Cola FEMSA operates with a large geographic footprint in Latin America in terms of total sales volume in 2009, with operationstwo divisions:
Mexico and Central America (covering certain territories in Mexico, Guatemala, Nicaragua, Costa Rica Panama, Colombia, Venezuela, Argentina and Brazil. While its corporate headquarters are in Mexico City, it has established divisional headquarters in the following three regions:
Mexico with headquarters in Mexico City;
Latincentro (covering territories in Guatemala, Nicaragua, Costa Rica, Panama, Colombia and Venezuela) with headquarters in San José, Costa Rica;Panama); and
MercosurSouth America (covering certain territories in ArgentinaColombia, Brazil, Venezuela and Brazil) with headquarters in São Paulo, Brazil.Argentina).
One of Coca-Cola FEMSA seeksFEMSA’s goals is to provide its shareholders with an attractive return on their investment by increasing its profitability. The key factors in achieving increased revenuesmaximize growth and profitability to create value for its shareholders. Its efforts to achieve this goal are based on: (1) transforming Coca-Cola FEMSA’s commercial models to focus on its customers’ value potential and using a value-based segmentation approach to capture the industry’s value potential; (2) implementing multi-segmentation strategies in its major markets to target distinct market clusters divided by consumption occasion, competitive intensity and socioeconomic levels; (2)(3) implementing well-planned product, packaging and pricing strategies through different distribution channels; and (3)(4) driving product innovation along its different product categoriescategories; (5) developing new businesses and (4)distribution channels; and (6) achieving the full operating potential of its commercial models and processes to drive operational efficiencies throughout its company. To achieve these goals, Coca-Cola FEMSA continuesintends to continue to focus its efforts on, among other initiatives, the following:
working with The Coca-Cola Company to develop a business model to continue exploring and participating in new lines of beverages, extending existing product lines and effectively advertising and marketing its products;
developing and expanding its still beverage portfolio through innovation, strategic acquisitions and by entering into joint venturesagreements to acquire companies with The Coca-Cola Company;
expanding its bottled water strategy, in conjunction with The Coca-Cola Company, through innovation and selective acquisitions to maximize its profitability across its market territories;
strengthening its selling capabilities and go-to-market strategies, including pre-sale, conventional selling and hybrid routes, in order to get closer to its clients and help them satisfy the beverage needs of consumers;
• | implementing selective packaging strategies designed to increase consumer demand for its products and to build a strong returnable base for theCoca-Cola |
replicating its best practices throughout the whole value chain;
rationalizing and adapting its organizational and asset structure in order to be in a better position to respond to a changing competitive environment;
committing to building a multi-cultural collaborative team, from top to bottom; and
broadening its geographicalgeographic footprint through organic growth and strategic joint ventures, mergers and acquisitions.
Coca-Cola FEMSA seeks to increase per capita consumption of its products in the territories in which it operates. To that end, its marketing teams continuously develop sales strategies tailored to the different characteristics of its various territories and distribution channels. Coca-Cola FEMSA continues to develop its product portfolio to better meet market demand and maintain its overall profitability. To stimulate and respond to consumer demand, itCoca-Cola FEMSA continues to introduce new categories, products and new presentations. See “—Product and Packaging Mix.” It also seeks to increase placement of coolers, including promotional displays, in retail outlets to showcase
and promote its products. In addition, because itCoca-Cola FEMSA views its relationship with The Coca-Cola Company as integral to its business, itCoca-Cola FEMSA uses market information systems and strategies developed with The Coca-Cola Company to improve its business and marketing strategies. See “—Marketing—Channel Marketing.”
In each of its facilities, Coca-Cola FEMSA also continuously seeks to increase productivity in its facilities through infrastructure and process reengineering for improved asset utilization. Its capital expenditure program includes investments in production and distribution facilities, bottles, cases, coolers and information systems. Coca-Cola FEMSA believes that this program will allow it to maintain its capacity and flexibility to innovate and to respond to consumer demand for its non-alcoholic beverages.products.
Finally, Coca-Cola FEMSA focuses on management quality as a key element of its growth strategy, and remains committed to fostering the development of quality management at all levels. Both we and The Coca-Cola Company and we provide Coca-Cola FEMSA with managerial experience. To build upon these skills, Coca-Cola FEMSA also offers management training programs designed to enhance its executives’ abilities and to provide a forum for exchanging experiences, know-how and talent among an increasing number of multinational executives from its new and existing territories.
Sustainable development is an integral part of Coca-Cola FEMSA’s strategic framework for business growth. Coca-Cola FEMSA bases its efforts on five core areas: (i) Ethics and Corporate Values, which defines its commitment to acting, defining and organizing itself based on its corporate values and culture; (ii) Quality of Life in the Company, which encourages the integral development of its employees and their families; (iii) Health and Wellness, to promote an attitude of health, self-care, nutrition and physical activity, both within and outside the company; (iv) Community Engagement, to develop education and learning projects that improve the quality of life
in the communities where Coca-Cola FEMSA operates; and (v) Environmental Care, to establish guidelines that result in actions to minimize the impact that Coca-Cola FEMSA’s operations might have on the environment and create a broader awareness of caring for the environment.
Coca-Cola FEMSA’s Territories
The following map shows Coca-Cola FEMSA’s territories, giving estimates in each case of the population to which it offers products, the number of retailers of its sparkling beverages and the per capita consumption of its sparkling beverages:beverages as of December 31, 2011:
Per capita consumption data for a territory isare determined by dividing sparklingtotal beverage sales volume within the territory (in bottles, cans and fountain containers) by the estimated population within such territory, and isare expressed on the basis of the number of eight-ounce servings of Coca-Cola FEMSA products consumed annually per capita. In evaluating the development of local volume sales in its territories and to determine product potential, Coca-Cola FEMSA and The Coca-Cola Company measure, among other factors, the per capita consumption of its sparklingall of Coca-Cola FEMSA’s beverages.
Coca-Cola FEMSA’s Products
Coca-Cola FEMSA produces, markets and distributesCoca-Cola trademark beverages, proprietary brands and brands licensed from us. Thebeverages. TheseCoca-Cola trademark beverages include: sparkling beverages (colas and flavored sparkling beverages); water;, waters and still beverages (including juice drinks, ready-to-drinkcoffee, teas and isotonics). InThe following table sets forth Coca-Cola FEMSA’s main brands as of December 2007 and May 2008, Coca-Cola FEMSA sold most of its proprietary brands to The Coca-Cola Company. See “Item 7. Major Shareholders and Related Party Transactions—Related Party Transactions—Business Transactions between Coca-Cola FEMSA and The Coca-Cola Company.”31, 2011:
Colas: | Mexico | and Central America(1) | America(2) | ||||||||||
Coca-Cola | ü | ü | ü | ||||||||||
Coca-Cola | ü | ü | ü | ||||||||||
Coca-Cola Zero | ü | ü | |||||||||||
Flavored | Mexico | and Central America(1) | America(2) | ||||||||||
| |||||||||||||
Chinotto | ü | ||||||||||||
Crush | ü | ||||||||||||
Fanta | ü | ü | |||||||||||
Fresca | ü | ||||||||||||
Frescolita | ü | ü | |||||||||||
Hit | ü | ||||||||||||
Kist | ü | ||||||||||||
Kuat | ü | ||||||||||||
Lift | ü | ||||||||||||
Mundet | ü | ||||||||||||
Quatro | ü | ||||||||||||
Simba | ü | ||||||||||||
Sprite | ü | ü | |||||||||||
Schweppes | ü | ü | ü | ||||||||||
Water: | Mexico | and Central America(1) | America(2) | ||||||||||
Alpina | ü | ||||||||||||
Aquarius(3) | ü | ||||||||||||
Brisa | ü | ||||||||||||
Ciel | ü | ||||||||||||
Crystal | ü | ||||||||||||
| |||||||||||||
Manantial | ü | ||||||||||||
Nevada | ü |
| ||||||||||||
Other Categories: | Mexico and Central America(1) | America | Venezuela | |||||||||
| ||||||||||||
| ü | |||||||||||
Hi-C | ü | ü | ||||||||||
Jugos del Valle(5) | ü | ü | ü | |||||||||
Nestea(6) | ü | ü | ||||||||||
| ||||||||||||
Powerade(7) | ü | ü | ü | |||||||||
Matte Leao(8) | ü | |||||||||||
Valle Frut(9) | ü | ü | ü | |||||||||
Estrella Azul(10) | ü | |||||||||||
Hugo(11) | ü | |||||||||||
Del Prado(12) | ü |
(1) | Includes Mexico, Guatemala, Nicaragua, Costa Rica |
(2) | Includes Colombia, Brazil and Argentina. |
(3) |
(4) |
(5) |
(6) |
(7) | Isotonic. |
(8) | Ready to drink tea. |
(9) | Orangeade. IncludesFreshin Costa Rica, Nicaragua, Panama, Colombia and Venezuela. |
(10) | Milk and value-added dairy and juices. |
(11) | Milk and juice blend. |
(12) | Juice-based beverages. |
Sales Overview
Coca-Cola FEMSA measures total sales volume in terms of unit cases. UnitOne unit case refers to 192 ounces of finished beverage product (24 eight-ounce servings) and, when applied to soda fountains, refers to the volume of syrup, powders and concentrate that is required to produce 192 ounces of finished beverage product.Theproduct. The following table illustrates itsCoca-Cola FEMSA’s historical sales volume for each of its territories.
Sales Volume Year Ended December 31, | ||||||
2009 | 2008 | 2007 | ||||
(millions of unit cases) | ||||||
Mexico | 1,227.2 | 1,149.0 | 1,110.4 | |||
Latincentro | ||||||
Central America(1) | 135.8 | 132.6 | 128.1 | |||
Colombia(2) | 232.2 | 197.9 | 197.8 | |||
Venezuela | 225.2 | 206.7 | 209.0 | |||
Mercosur | ||||||
Argentina | 184.1 | 186.0 | 179.4 | |||
Brazil(3) | 424.1 | 370.6 | 296.1 | |||
Combined Volume | 2,428.6 | 2,242.8 | 2,120.8 |
Sales Volume Year Ended December 31, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
(millions of unit cases) | ||||||||||||
Mexico and Central America | ||||||||||||
Mexico(1) | 1,366.5 | 1,242.3 | 1,227.2 | |||||||||
Central America(2) | 144.3 | 137.0 | 135.8 | |||||||||
South America (excluding Venezuela) | ||||||||||||
Colombia(3) | 252.1 | 244.3 | 232.2 | |||||||||
Brazil(4) | 485.3 | 475.6 | 424.1 | |||||||||
Argentina | 210.7 | 189.3 | 184.1 | |||||||||
Venezuela | 189.8 | 211.0 | 225.2 | |||||||||
|
|
|
|
|
| |||||||
Combined Volume | 2,648.7 | 2,499.5 | 2,428.6 |
(1) | Includes results of the beverage division of Grupo Tampico from October 2011 and of the beverage division of Grupo CIMSA from December 2011. |
(2) | Includes Guatemala, Nicaragua, Costa Rica and Panama. |
As of June |
Excludes beer sales volume. As of |
Product and Packaging Mix
Out of the more than 100120 brands and line extensions of beverages sold and distributed bythat Coca-Cola FEMSA theirsells and distributes, its most important brand,Coca-Cola, together with itsthe line extensions thereof,Coca-Cola light,Coca-Cola ZeroLight andCoca-Cola light caffeine freeZero, accounted for 61.4%61.6% of total sales volume in 2009.2011. Coca-Cola FEMSA’s next largest brands,Ciel (a(a water brand from Mexico),Fanta(and (and its line extensions),Sprite(and (and its line extensions), andValleFrutand Hit, (and its line extensions), accounted for 10.5%10.4%, 5.8%5.1%, 2.6%, 1.5%2.7% and 1.3%2.2%, respectively, of total sales volume in 2009.2011. Coca-Cola FEMSA uses the term line extensions to refer to the different flavors in which itCoca-Cola FEMSA offers its brands. Coca-Cola FEMSA produces, markets and distributesCoca-Cola trademark beverages in each of its territories in containers authorized by The Coca-Cola Company, which consist of a variety of returnable and non-returnable presentations in the form of glass bottles, cans and plastic bottles mainly made of polyethylene terephtalate,terephthalate, which it referswe refer to as PET.
Coca-Cola FEMSA uses the term presentation to refer to the packaging unit in which it sells its products. Presentation sizes for itsCoca-Cola FEMSA’sCoca-Cola trademark beverages range from a 6.5-ounce personal size to a 3-liter multiple serving size. For all of itsCoca-Cola FEMSA’s products excluding water, Coca-Cola FEMSAit considers a multiple serving size asto be equal to, or larger than, 1.0 liter.liters. In general, personal sizes have a higher price per unit case as compared to multiple serving sizes. Coca-Cola FEMSA offers both returnable and non-returnable presentations, which allow Coca-Cola FEMSAit to offer different combinations ofportfolio alternatives based on convenience and priceaffordability to implement revenue management strategies and to target specific distribution channels and population segments in its territories. In addition, itCoca-Cola FEMSA sells someCoca-Cola trademark beverage syrups in containers designed for soda fountain use, which it refers to as fountain. ItCoca-Cola FEMSA also sells bottled water products in bulk sizes, which term refers to presentations equal to or larger than 5 liters, thatwhich have a much lower average price per unit case than itsCoca-Cola FEMSA’s other beverage products.
The characteristics of Coca-Cola FEMSA’s territories are very diverse. Central Mexico and itsCoca-Cola FEMSA’s territories in Argentina are densely populated and have a large number of competing sparkling beveragesbeverage brands as compared to the rest of its territories. Coca-Cola FEMSA’s territories in Brazil isare densely populated but hashave lower per capita consumption of sparkling beverage products as compared to Mexico. Portions of southern Mexico, Central America and Colombia are large and mountainous areas with lower population density, lower per capita income and lower per capita consumption of
sparkling beverages. In Venezuela, Coca-Cola FEMSA faces operational disruptions from time to time, including interruptionswhich may have an effect on its volumes sold, and consequently, may result in energy supply. In 2009, although its sparkling beverages volume increased,lower per capita consumption of Coca-Cola FEMSA’s products has remained stable due to such short-term operating disruptions.consumption.
The following discussion analyzes Coca-Cola FEMSA’s product and packaging mix by reporting segment. The volume data presented isare for the years 2009, 20082011, 2010, and 2007.2009.
Mexico.Mexico and Central America.Coca-Cola FEMSA’s product portfolio consists ofCoca-Cola trademark beverages, and since 2001 has included Mundet trademark beverages licensed from FEMSA in some Mexican territories.beverages. In 2007,2008, as part of its efforts to strengthen theCoca-Colabrand it launchedits multi-category beverage portfolio, Coca-Cola Zero,FEMSA incorporated theJugos del Valle a line extension of the Coca-Cola brandjuice-based beverages in Mexico, and subsequently in Central America.Sparkling beverage perPer capita consumption of itsCoca-Cola FEMSA’s beverage products in its Mexican territoriesMexico and Central America was 632 and 179 eight-ounce servings, respectively, in 2009 was 436 eight-ounce servings.2011.
The following table highlights historical sales volume and mix in Mexico and Central America for itsCoca-Cola FEMSA’s products:
Year Ended December 31, | |||||||||
2009 | 2008 | 2007 | |||||||
(millions of unit cases) | |||||||||
Product Sales Volume | |||||||||
Total | 1,227.2 | 1,149.0 | 1,110.4 | ||||||
% Growth | 6.8 | % | 3.5 | % | 3.7 | % | |||
(in percentages) | |||||||||
Unit Case Volume Mix by Category | |||||||||
Sparkling beverages | 73.4 | % | 75.4 | % | 78.3 | % | |||
Water(1) | 21.5 | % | 21.6 | % | 20.7 | ||||
Still beverages | 5.1 | % | 3.0 | % | 1.0 | ||||
Total | 100.0 | % | 100.0 | % | 100.0 | % | |||
Year Ended December 31, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
(millions of unit cases) | ||||||||||||
Total Sales Volume(1) | ||||||||||||
Total | 1,510.8 | 1,379.3 | 1,363.0 | |||||||||
% Growth | 9.5 | % | 1.2 | % | 6.3 | % |
(in percentages) | ||||||||||||
Unit Case Volume Mix by Category(1) | ||||||||||||
Sparkling beverages | 74.9 | % | 75.2 | % | 74.7 | % | ||||||
Water(2) | 19.7 | 19.4 | 20.2 | |||||||||
Still beverages | 5.4 | 5.4 | 5.1 | |||||||||
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Total | 100.0 | % | 100.0 | % | 100.0 | % | ||||||
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(1) | Includes results from the operations of the beverage division of Grupo Tampico from October 2011 and from the beverage division of Grupo CIMSA from December 2011. |
(2) | Includes bulk water |
In 2011, multiple serving presentations represented 67.6% of total sparkling beverages sales volume in Mexico, remaining flat as compared to 2010, and 55.7% of total sparkling beverages sales volume in Central America, a 60 basis points decrease as compared to 2010. Coca-Cola FEMSA’s strategy is to foster consumption in single serving presentations while maintaining multiple serving volumes. In 2011, returnable packaging, as a percentage of total sparkling beverage sales volume, accounted for 31.7% in Mexico, a 130 basis points increase as compared to 2010, and 31.7% in Central America, a 150 basis points decrease as compared to 2010.
In 2011, Coca-Cola FEMSA’s sparkling beverages decreased as a percentage of its total sales volume, from 75.2% in 2010 to 74.9% in 2011, mainly due to the integration of the beverage divisions of Grupo Tampico and Grupo CIMSA in Mexico, which have a higher mix of water in their portfolios.
In 2011, Coca-Cola FEMSA’s most popular sparkling beverage presentations in Mexico were the 2.5-liter returnable plastic bottle, the 3.0-liter non-returnable plastic bottle and the 0.6-liter non-returnable plastic bottle (the 20-ounce bottle that is also popular in the United States) and the 2.5-liter non-returnable plastic bottle,, which together accounted for 56.7%56.8% of total sparkling beverage sales volume in Mexico in 2009. In 2009, multiple serving presentations represented 66.9% of total sparkling beverages sales volume in Mexico, a 7.7% growth compared to 2008. Coca-Cola FEMSA’s commercial strategy is to foster consumption in single serving presentations while maintaining multiple serving volumes. In 2009, its sparkling beverages decreased as a percentage of its total sales volume from 75% in 2008 to 73.4% in 2009, mainly due to the introduction of the Jugos del Valle line of products.Mexico.
Total sales volume reached 1,227.21,510.8 million unit cases in 2009,2011, an increase of 6.8%9.5% as compared to 1,149.01,379.3 million unit cases in 2008.2010. The integration of the beverage divisions of Grupo Tampico and Grupo CIMSA in Mexico contributed 48.9 million unit cases in 2011, of which 63.0% were sparkling beverages, 5.2% bottled water, 27.4% bulk water and 4.4% still beverages. Excluding the integration of these territories, volume grew 6.0% in 2011, to 1,461.8 million unit cases. Organically sparkling beverages sales volume increased 6.0% as compared to 2010, contributing more than 70% of incremental volumes. The bottled water category, including bulk water, grew 5.6%, accounting for more than 15% of incremental volumes. The still beverage category accounted for approximately 37%increased 7.5%, representing the remainder of the total incremental volumes during the year. Still beverage growth was mainly driven by the introduction of the Jugos del Valle line of products, especially ValleFrut.volumes.
Latincentro (Colombia and Central America)South America (Excluding Venezuela).Coca-Cola FEMSA’s product salesportfolio in Latincentro consist predominantlySouth America consists mainly ofCoca-Cola trademark beverages.beverages and theKaiser beer brands in Brazil, which Coca-Cola FEMSA sells and distributes. In 2008, as part of its efforts to strengthen its multi-category beverage portfolio, Coca-Cola FEMSA incorporated theJugos del Valle line of juice-based beverages in Colombia. In 2009, this line of beverages was re-launched in Brazil as well. The acquisition of Brisa in 2009 helped Coca-Cola FEMSA to become the leader, as calculated by sales volume, in the water market in Colombia. In 2010, Coca-Cola FEMSA incorporated ready-to-drink beverages under theMatte Leão brand in Brazil. During 2011, as part of its continuous effort to develop non-carbonated beverages, Coca-Cola FEMSA launchedCepita in non-returnable PET bottles andHi-C, an orangeade, both in Argentina. Beginning in 2009, as part of its efforts to foster sparkling beverage per capita consumption in Brazil, Coca-Cola FEMSA re-launched a 2.0-liter returnable plastic bottle for theCoca-Cola brand and introduced two single-serving 0.25-liter presentations. During 2011, these presentations contributed significantly to incremental volumes in Brazil. Per capita consumption of its sparklingCoca-Cola FEMSA’s beverages products in Colombia, Brazil and Central AmericaArgentina was 92129, 261 and 146395 eight-ounce servings, respectively, in 2009.
2011. The following table highlights historical total sales volume and sales volume mix in Latincentro:South America (excluding Venezuela), not including beer:
Year Ended December 31, | Year Ended December 31, | ||||||||||||||||||||
2009 | 2008 | 2007 | 2011 | 2010 | 2009 | ||||||||||||||||
(millions of unit cases) | (millions of unit cases) | ||||||||||||||||||||
Product Sales Volume | |||||||||||||||||||||
Total Sales Volume | |||||||||||||||||||||
Total | 368.0 | 330.5 | 325.9 | 948.1 | 909.2 | 840.4 | |||||||||||||||
% Growth | 11.3 | % | 1.4 | % | 4.7 | % | 4.3 | % | 11.2 | % | 8.4 | % | |||||||||
(in percentages) | (in percentages) | ||||||||||||||||||||
Unit Case Volume Mix by Category | |||||||||||||||||||||
Sparkling beverages | 79.3 | % | 87.9 | % | 88.5 | % | 85.9 | % | 85.5 | % | 87.2 | % | |||||||||
Water(1) | 13.0 | % | 7.7 | % | 8.3 | % | 9.2 | 10.1 | 8.8 | ||||||||||||
Still beverages | 7.7 | % | 4.4 | % | 3.2 | % | 4.9 | 4.4 | 4.0 | ||||||||||||
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Total | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | |||||||||
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(1) | Includes bulk water volume. |
In 2009, multiple serving presentations as a percentage of total sparkling beverage sales volume, represented 56.7% in Central America and 58.3% in Colombia. In 2008, as part of its efforts to strengthen the Coca-Cola brand, Coca-Cola FEMSA launchedCoca-Cola Zero, a line extension of the Coca-Cola brand in Colombia. The acquisition ofBrisa in 2009 helped Coca-Cola FEMSA to become leader, based on sales volume, in the water market in Colombia.
Total sales volume was 368.0948.1 million unit cases in 2009, increasing 11.3% compared to 330.5 million in 2008. Water sales, including bulk water, represented approximately 60% of total incremental volume, mainly driven by the integration of theBrisa bottled water business in Colombia. Still beverages represented the majority of the balance, mainly driven by the introduction of the of the Jugos del Valle line of products. See “—The Company—Corporate Background.”
Venezuela.Coca-Cola FEMSA’s product portfolio in Venezuela consists ofCoca-Cola trademark beverages. Sparkling beverages per capita consumption of its products in Venezuela during 2009 was 174 eight-ounce servings.
The following table highlights historical total sales volume and sales volume mix in Venezuela:
Year Ended December 31, | |||||||||
2009 | 2008 | 2007 | |||||||
(millions of unit cases) | |||||||||
Product Sales Volume | |||||||||
Total | 225.2 | 206.7 | 209.0 | ||||||
% Growth | 9.0 | % | (1.1 | )% | 14.5 | % | |||
(in percentages) | |||||||||
Unit Case Volume Mix by Category | |||||||||
Sparkling beverages | 91.7 | % | 91.3 | % | 90.4 | % | |||
Water(1) | 5.7 | % | 5.8 | % | 5.7 | ||||
Still beverages | 2.6 | % | 2.9 | % | 3.9 | ||||
Total | 100.0 | % | 100.0 | % | 100.0 | % | |||
During 2009, Coca-Cola FEMSA continued facing periodic operating difficulties that prevented it from producing and distributing to satisfy market demand for its products. Coca-Cola FEMSA implemented a product portfolio rationalization strategy to minimize the impact of these disruptions, which led to2011, an increase in sales in 2009of 4.3% as compared to 2008. Coca-Cola FEMSA’s sparkling beverage volume grew 9.4% mainly driven by flavored sparkling beverages.
In 2009, multiple serving presentations represented 77.2% of total sparkling beverages sales volume in Venezuela. Total sales volume was 225.2909.2 million unit cases in 2009, an increase of 9.0% compared to 206.7 million in 2008.
Mercosur (Brazil and Argentina).Coca-Cola FEMSA’s product portfolio in Mercosur consists mainly ofCoca-Cola trademark beverages and theKaiserbeer brand in Brazil, which Coca-Cola FEMSA sells and distributes on behalf of FEMSA Cerveza. Sparkling beverages per capita consumption of its products in Brazil and Argentina was 214 and 359 eight-ounce servings, respectively, in 2009.
The following table highlights historical total sales volume and sales volume mix in Mercosur, not including beer:
Year Ended December 31, | |||||||||
2009 | 2008 | 2007 | |||||||
(millions of unit cases) | |||||||||
Product Sales Volume | |||||||||
Total | 608.2 | 556.6 | 475.5 | ||||||
% Growth | 9.3 | % | 17.1 | % | 9.6 | % | |||
(in percentages) | |||||||||
Unit Case Volume Mix by Category | |||||||||
Sparkling beverages | 92.0 | % | 93.3 | % | 93.5 | % | |||
Water(1) | 4.1 | 4.2 | 4.5 | ||||||
Still beverages | 3.9 | 2.5 | 2.0 | ||||||
Total | 100.0 | % | 100.0 | % | 100.0 | % | |||
Beginning in June 2008, Coca-Cola FEMSA integrated the bottling franchise of REMIL in the State of Minas Gerais into its existing Brazilian operations. REMIL contributed 44.2 million unit cases of beverages to Coca-Cola FEMSA’s sales volume during the first five months of 2009. Sparkling beverages represented approximately 95% of this volume. In 2008, in its continued effort to develop the still beverage category in Argentina, Coca-Cola FEMSA launched Aquarius, a flavored water.
Total sales volume was 608.2 million unit cases in 2009, an increase of 9.3% compared to 556.6 million in 2008. Excluding REMIL, total sales volume increased 1.3%.2010. Growth in stillsparkling beverages, mainly driven by sales of AquariustheCoca-Cola brand in both Argentina and Colombia, and theFanta andSchweppes brands in Brazil, accounted for mostthe majority of the growth during the year. Growth in still beverages, mainly driven by theJugos del Valle line of products in Brazil and theCepita juice brand andHi-C orangeade in Argentina, represented the balance of incremental volumes. These increases compensated for a decrease in volume in Coca-Cola FEMSA’s water portfolio, including bulk water, mainly driven by the reduction in volume of theBrisa brand in Colombia.
In 2009,2011, returnable packaging, as a percentage of total sparkling beverage sales volume, accounted for 28.5%for: 39.6% in Colombia, a 240 basis points decrease as compared to 2010; 27.8% in Argentina, a decrease of 70 basis points as compared to 2010; and 12.4%15.8% in Brazil.Brazil, a 100 basis points increase as compared to 2010. In 2009,2011, multiple serving presentations represented 70.8%62.1%, 71.3% and 85.5%85.0% of total sparkling beverages sales volume in Colombia, Brazil and Argentina, respectively.
Coca-Cola FEMSA primarily purchases its glass bottles in Mexico from SIVESA, a wholly-owned subsidiary of FEMSA Cerveza. The aggregate amount of our purchases from SIVESA amounted to Ps. 355.1 million, Ps. 408.5 million and Ps. 331.9 million in 2009, 2008 and 2007, respectively.
Coca-Cola FEMSA sellscontinues to distribute and distributessell theKaiser brands of beer in its territories in Brazil. In January 2006, FEMSA Cerveza acquired a controlling stake in Cervejarias Kaiser. Since that time, Coca-Cola FEMSA has distributed the Kaiser beer portfolio in Coca-Cola FEMSA’sits Brazilian territories through the 20-year term, consistent with the arrangements between Coca-Cola FEMSA andin place with Cervejarias Kaiser in placesince 2006, prior to 2004.the acquisition of Cervejarias Kaiser by FEMSA Cerveza. Beginning within the second quarter of 2005, Coca-Cola FEMSA ceased including beer that it distributes in Brazil in its reported sales volumes. On April 30, 2010, FEMSA announced the closing of the transaction pursuant to which FEMSA agreed to exchangewe exchanged 100% of itsour beer operations for a 20% economic interest in the Heineken Group. Group closed.
Venezuela. Coca-Cola FEMSA’s product portfolio in Venezuela consists ofCoca-Cola trademark beverages. Per capita consumption of Coca-Cola FEMSA’s beverages in Venezuela during 2011 was 150 eight-ounce servings.
The following table highlights historical total sales volume and sales volume mix in Venezuela:
Year Ended December 31, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
(millions of unit cases) | ||||||||||||
Total Sales Volume | ||||||||||||
Total | 189.8 | 211.0 | 225.2 | |||||||||
% Growth | (10.0 | %) | (6.3 | %) | 9.0 | % | ||||||
(in percentages) | ||||||||||||
Unit Case Volume Mix by Category | ||||||||||||
Sparkling beverages | 91.7 | % | 91.3 | % | 91.7 | % | ||||||
Water(1) | 5.4 | 6.5 | 5.7 | |||||||||
Still beverages | 2.9 | 2.2 | 2.6 | |||||||||
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Total | 100.0 | % | 100.0 | % | 100.0 | % | ||||||
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(1) | Includes bulk water volume. |
Coca-Cola FEMSA has agreed with Cervejarias Kaiserimplemented a product portfolio rationalization strategy that allows it to continue to distributeminimize the impact of certain operating disruptions that have been recurrent in Venezuela over the last several years. During 2011, Coca-Cola FEMSA faced a 26-day strike at one of its Venezuelan production and sell the Kaiser beer portfolio indistribution facilities and a difficult economic environment that prevented it from growing sales volume of its products. As a result, Coca-Cola FEMSA’s Brazilian territories through the 20-year term, consistent with the arrangementsparkling beverage volume decreased by 9.6%.
In 2011, multiple serving presentations represented 78.4% of total sparkling beverages sales volume in place since 2006.
Recent Acquisition
Venezuela, an 80 basis points increase as compared to 2010. In February 2009, Coca-Cola FEMSA acquired with The Coca-Cola Company theBrisa bottled water business2011, returnable presentations represented 8.0% of total sparkling beverages sales volume in Colombia from Bavaria,Venezuela, a subsidiary40 basis points increase as compared to 2010. Total sales volume was 189.8 million unit cases in 2011, a decrease of SABMiller. Coca-Cola FEMSA acquired the production assets and the rights10.0% as compared to distribute211.0 million unit cases in the territory, and The Coca-Cola Company obtained theBrisa brand. Coca-Cola FEMSA and The Coca-Cola Company equally shared in paying the purchase price of US$ 92 million. Following a transition period, in June 2009, it started to sell and distribute theBrisa portfolio of products in Colombia.2010.
Seasonality
Sales of Coca-Cola FEMSA’s products are seasonal, as its sales levels generally increase during the summer months of each country and during the Christmas holiday season. In Mexico, Central America, Colombia and Venezuela, Coca-Cola FEMSA typically achieves its highest sales during the summer months of April through September, as well as during the Christmas holidays in December. In Brazil and Argentina, and Brazil, itsCoca-Cola FEMSA’s highest sales levels occur during the summer months of October through March and the Christmas holidays in December.
Marketing
Coca-Cola FEMSA, in conjunction with The Coca-Cola Company, has developed a marketing strategy to promote the sale and consumption of itsCoca-Cola FEMSA’s products. Coca-Cola FEMSA relies extensively on advertising, sales promotions and retailer support programs to target the particular preferences of its soft drink consumers. ItsCoca-Cola FEMSA’s consolidated marketing expenses in 2009,2011, net of contributions by The Coca-Cola Company, were Ps. 3,2784,508 million. The Coca-Cola Company contributed an additional Ps. 1,9452,561 million in 2009,2011, which mainly includes contributions for coolers, bottles and cases. Through the use of advanced information technology, itIT, Coca-Cola FEMSA has collected customer and consumer information that allows it to tailor its marketing strategies to target different types of customers located in each of its territories, and to meet the specific needs of the various markets it serves.
Retailer Support Programs. Support programs include providing retailers with point-of-sale display materials and consumer sales promotions, such as contests, sweepstakes and the giveaway of product samples.
Coolers. Cooler distribution among retailers is important for the visibility and consumption of Coca-Cola FEMSA’s products and to ensure that they are sold at the proper temperature.
Advertising. Coca-Cola FEMSA advertises in all major communications media. It focuses its advertising efforts on increasing brand recognition by consumers and improving its customer relations. National advertising campaigns are designed and proposed by The Coca-Cola Company’s local affiliates, with Coca-Cola FEMSA’s input at the local or regional level.
Channel Marketing. In order to provide more dynamic and specialized marketing of its products, Coca-Cola FEMSA’s strategy is to classify its markets and develop targeted efforts for each consumer segment or distribution channel. ItsCoca-Cola FEMSA’s principal channels are small retailers, “on-premise” consumption such as restaurants and bars, supermarkets and third-party distributors. Presence in these channels entails a comprehensive and detailed analysis of the purchasing patterns and preferences of various groups of soft drinkbeverage consumers in each of the different types of locations or distribution channels. In response to this analysis, Coca-Cola FEMSA tailors its product, price, packaging and distribution strategies to meet the particular needs of and exploit the potential of each channel.
Multi-Segmentation. Coca-Cola FEMSA has been implementing a multi-segmentation strategy in the majority of its markets. This strategy consists of the implementation of different product/price/package portfolios by market cluster or group. These clusters are defined based on consumption occasion, competitive intensity and socio-economic levels, rather than solely on the types of distribution channels.
Client Value Management. Coca-Cola FEMSA has been transforming its commercial models to focus on its customers’ value potential using a value-based segmentation approach to capture the industry’s potential. Coca-Cola FEMSA started the rollout of this new model in its Mexico, Central America, Colombia and Brazil operations in 2009 and had covered close to 90% of its total volumes as of the end of 2011.
Coca-Cola FEMSA believes that the implementation of its channel marketing strategythese strategies described above also enables it to respond to competitive initiatives with channel-specific responses as opposed to market-wide responses. In addition, it allows Coca-Cola FEMSA to be more efficient in the way it goes to market and invests its marketing resources in those segments that could provide a higher return. Coca-Cola FEMSA’s channel marketing, segmentation and distribution activities are facilitated by its management information systems. Coca-Cola FEMSA has invested significantly in creating these systems, including in hand-held computers to support the gathering of product, consumer and delivery information for most of its sales routes throughout its territories.
Multi-segmentation. Coca-Cola FEMSA has been implementing a multi-segmentation strategy in the majority of its markets. This strategy consists on the implementation of different product/price/package portfolios
by market cluster or group. These clusters are defined based on consumption occasion, competitive intensityProduct Sales and socio-economic levels, rather than solely on the types of distribution channels.
Product Distribution
The following table provides an overview of its productCoca-Cola FEMSA’s distribution centers and the number of retailers to which it sellssell its products:
Product Distribution Summary
as of December 31, 20092011
Mexico | Latincentro(2) | Venezuela | Mercosur(3) | Mexico and Central America(1) | South America(2) | Venezuela | ||||||||||||||
Distribution centers | 84 | 60 | 33 | 33 | 152 | 65 | 32 | |||||||||||||
Retailers (in thousands)(1) | 620,255 | 475,119 | 211,749 | 269,888 | ||||||||||||||||
Retailers(3) | 863,409 | 663,678 | 209,597 |
(1) |
(2) | Includes |
(3) |
Coca-Cola FEMSA continuously evaluates its distribution model in order to fit with the local dynamics of the market place. Coca-Cola FEMSA is currently analyzingmarketplace and analyze the way it goes to market, recognizing different service needs from its customers, while looking for a more efficient distribution model. As part of this strategy, Coca-Cola FEMSA is rolling out a variety of new distribution models throughout its territories, looking forseeking improvements in its distribution network.
Coca-Cola FEMSA uses two mainseveral sales methodsand distribution models depending on market, geographic conditions and geographic conditions:the customer’s profile: (1) the traditional orpre-sale system, which separates the sales and delivery functions, permitting trucks to be loaded with the mix of products that retailers have previously ordered, thereby increasing both sales and distribution efficiency; (2) the conventional truck route system, in which the person in charge of the delivery makes immediate sales from inventory available on the truck and (2) the pre-sale system, which separates the sales and delivery functions and allows sales personnel to sell products prior to delivery and trucks to be loaded with the mix of products that retailers have previously ordered, thereby increasing distribution efficiency. Coca-Cola FEMSA also usestruck; (3) a hybrid distribution system, in some of its territories, where the same truck holdscarries product available for immediate sale and product previously ordered through the pre-sale system. system; (4) the telemarketing system, which could be combined with pre-sales visits; and (5) sales through third-party wholesalers of Coca-Cola FEMSA’s products.
As part of the pre-sale system, sales personnel also provide merchandising services during retailer visits, which itCoca-Cola FEMSA believes enhance the presentation of its productsshopper experience at the point of sale. Coca-Cola FEMSA believes that an adequate number of service visits to retailers and frequency of deliveries are essential elements in an effective selling and distribution system for its products. In certain areas, Coca-Cola FEMSA also makes sales through third-party wholesalers of its products. The vast majority of its sales are for cash.
Coca-Cola FEMSA’s distribution centers range from large warehousing facilities and re-loading centers to small deposit centers. In addition to its fleet of trucks, Coca-Cola FEMSA distributes its products in certain
locations through a fleet of electric carts and hand-trucks in order to comply with local environmental and traffic regulations. In some of its territories, Coca-Cola FEMSA retains third parties to transport its finished products from the bottling plants to the distribution centers.
Mexico. Coca-Cola FEMSA contracts with one of our subsidiaries for the transportation of finished products to its distribution centers from its Mexican production facilities. See “Item 7. Major Shareholders and Related Party Transactions—Related Party Transactions.” From the distribution centers, itCoca-Cola FEMSA then distributes its finished products to retailers through its own fleet of trucks.
In Mexico, Coca-Cola FEMSA sells a majority of its beverages at small retail stores to customersconsumers who may take the beverages for consumption at home or elsewhere for consumption. Coca-Cola FEMSAelsewhere. It also sells products through the “on-premise” consumerconsumption segment, supermarkets and other locations. The “on-premise” consumerconsumption segment consists of sales through sidewalk stands, restaurants, bars and various types of dispensing machines, as well as sales through point-of-sale programs in concert halls, auditoriums and theaters.
BrazilBrazil.. In Brazil, Coca-Cola FEMSA sold approximately 23%21.1% of its total sales volume through supermarkets in 2009.2011. Also in Brazil, the delivery of its finished products to customers is completed by a third-party.third party, while it maintains control over the selling function. In designated zones in Brazil, third-party distributors purchase itsCoca-Cola FEMSA products at a discount from the wholesale price and resell the products to retailers.
Territories other than Mexico and Brazil. Coca-Cola FEMSA distributes its finished products to retailers through a combination of its own fleet of trucks and third-party distributors. In most of its territories, an important part of Coca-Cola FEMSA’s total sales volume is sold through small retailers, with low supermarket penetration.
Competition
Although we believeCoca-Cola FEMSA believes that Coca-Cola FEMSA’sits products enjoy wider recognition and greater consumer loyalty than those of its principal competitors, the markets in the territories in which it operates are highly competitive. Coca-Cola FEMSA’s principal competitors are localPepsi bottlers of Pepsi and other bottlers and distributors of national and regional sparkling beverage brands. Coca-Cola FEMSA faces increased competition in many of its territories from producers of low pricelow-price beverages, commonly referred to as “B brands.” A number of itsCoca-Cola FEMSA’s competitors in Central America, Venezuela, Brazil and Argentina offer beer in addition to sparkling beverages, still beverages, and water, which may enable them to achieve distribution efficiencies.
Recently, pricePrice discounting and packaging have joined consumer sales promotions, customer service and non-price retailer incentives as the primary means of competition among bottlers. Coca-Cola FEMSA competes by seeking to offer products at an attractive price in the different segments in its markets and by building on the value of its brands. Coca-Cola FEMSA believes that the introduction of new products and new presentations has been a significant competitive technique that allows it to increase demand for its products, provide different options to consumers and increase new consumption opportunities. See “—Sales Overview.”
Mexico and Central America. Coca-Cola FEMSA’s principal competitors in Mexico are bottlers ofPepsi products, whose territories overlap but are not co-extensive with its own. In central MexicoCoca-Cola FEMSA’s. Coca-Cola FEMSA competes with a subsidiary of PepsiCo, Pepsi Beverage Company, the largest bottler of Pepsi products globally, andjoint venture recently formed by Grupo Embotelladores Unidos, S.A.B. de C.V., the formerPepsi bottler in central and southeast Mexico.Mexico, a subsidiary of PepsiCo, and Empresas Polar, S.A., the leading beer distributor andPepsi bottler in Venezuela. Coca-Cola FEMSA’s main competition in the juice category in Mexico is Grupo Jumex, the largest juice producer in the country.Jumex. In the water category, Coca-Cola FEMSA’s main competitor isBonafont, a water brand owned by Groupe Danone.Group Danone, is its main competition. In addition, Coca-Cola FEMSA competes with Cadbury Schweppes in sparkling beverages and with other national and regional brands in its Mexican territories, as well as low-price producers, such asBig Cola and Consorcio AGA, S.A. de C.V., that principallywhich offer multiple serving sizevarious presentations of sparkling and still beverages.
In the countries that comprise Coca-Cola FEMSA’s Central America region, its main competitors arePepsi andBig Cola bottlers. In Guatemala and Nicaragua, it competes with a joint venture between AmBev and The Central American Bottler Corporation. In Costa Rica, Coca-Cola FEMSA’s principal competitor is Florida Bebidas S.A., a subsidiary of Florida Ice and Farm Co. In Panama, its main competitor is Cervecería Nacional, S.A. Coca-Cola FEMSA also faces competition from “B brands” offering multiple-serving size presentations in some Central American countries.
Latincentro (Colombia and Central America)South America (excluding Venezuela). Coca-Cola FEMSA’s principal competitor in Colombia is Postobón, a well-established local bottler that sells flavored sparkling beverages, some of which have a wide consumption preference, such asmanzana Postobón (apple Postobón), which is the second most popular flavor in the Colombian sparkling beverage industry in terms of total sales volume. Postobón also sellsPepsi products. Postobón is a vertically integrated producer, the owners of which hold other significant commercial interests in Colombia. ItCoca-Cola FEMSA also competes with low-price producers, such as the producers ofBig Cola, which basicallyprincipally offer multiple servingmultiple-serving size presentations in the sparkling and still beverage industry.
In Brazil, Coca-Cola FEMSA competes against AmBev, a Brazilian company with a portfolio of brands that includesPepsi, local brands with flavors such as guaraná, and proprietary beer brands. Coca-Cola FEMSA also competes against “B brands” or “Tubainas,” which are small, local producers of low-cost flavored sparkling beverages in multiple-serving presentations that represent a significant portion of the countries that comprisesparkling beverage market.
In Argentina, Coca-Cola FEMSA’s Central America region, its main competitors are competitor is Buenos Aires Embotellador S.A. (BAESA), aPepsi andBig Cola bottlers.bottler, which is owned by Argentina’s principal brewery, Quilmes Industrial S.A., and is indirectly controlled by AmBev. In Guatemala and Nicaragua,addition, Coca-Cola FEMSA competes with a joint venture between AmBevnumber of competitors offering generic, low-priced sparkling beverages as well as many other generic products and The Central American Bottler Corporation. In Costa Rica, its principal competitor is Florida Bebidas S.A., subsidiary of Florida Ice and Farm Co. S.A. In Panama, its main competitor is Cervecería Nacional, S.A. Coca-Cola FEMSA also faces competition from low-price producers offering multiple serving size presentations in some Central American countries.private label proprietary supermarket brands.
VenezuelaVenezuela.. In Venezuela, Coca-Cola FEMSA’s main competitor is Pepsi-Cola Venezuela, C.A., a joint venture formed between PepsiCo and Empresas Polar, S.A., the leading beer distributor in the country. Coca-Cola FEMSA also competes with the producers ofBig Cola in partspart of the country.
Mercosur (Brazil and Argentina). In Brazil, Coca-Cola FEMSA competes against AmBev, a Brazilian company with a portfolio of brands that includesPepsi, local brands with flavors such as guaraná, and proprietary beers. Coca-Cola FEMSA also competes against “B brands” or “Tubainas,” which are small, local producers of low-cost flavored sparkling beverages in multiple serving presentations that represent a significant portion of the sparkling beverage market.
In Argentina, Coca-Cola FEMSA’s main competitor is Buenos Aires Embotellador S.A. (BAESA), aPepsi bottler, which is owned by Argentina’s principal brewery, Quilmes Industrial S.A., and indirectly controlled by AmBev. In addition, Coca-Cola FEMSA competes with a number of competitors offering generic, low-priced sparkling beverages as well as many other generic products and private label proprietary supermarket brands.
Raw Materials
Pursuant to theCoca-Cola FEMSA’s bottler agreements, with The it is authorized to manufacture, sell and distributeCoca-Cola Company, Coca-Cola FEMSA trademark beverages within specific geographic areas, and is required to purchase concentrate and artificial sweeteners in some of its territories, for allCoca-Colatrademark beverages, concentrate from companies designated by The Coca-Cola Company and artificial sweeteners from companies authorized by The Coca-Cola Company. The price of concentrateConcentrate prices for allCoca-Colatrademarksparkling beverages isare determined as a percentage of the weighted average retail price Coca-Cola FEMSA charges to its retailers in local currency net of applicable taxes. Although The Coca-Cola Company has the right to unilaterally set the price of concentrates, in practice this percentage has historically been set pursuant to periodic negotiations with The Coca-Cola Company.
In 2005, The Coca-Cola Company decided to gradually increase concentrate prices for sparkling beverages over a three-year period in Brazil beginning in 2006 and in Mexico beginning in 2007.Mexico. These increases were fully implemented in Brazil in 2008 and in Mexico in 2009. As part of the cooperation framework that Coca-Cola FEMSA arrived atreached with The Coca-Cola Company at the end of 2006, The Coca-Cola Company will provide a relevant portion of the funds derived from the concentrate increase for marketing support of Coca-Cola FEMSA’s sparkling and still beverages portfolio. See “Item 7. Major Shareholders and Related Party Transactions—Related Party Transactions—Business Transactions between Coca-Cola FEMSA and The Coca-Cola Company.”
In addition to concentrate, Coca-Cola FEMSA purchases sweeteners, carbon dioxide and other raw materials,(CO2), resin and ingots to make plastic bottles, finished plastic and glass bottles, cans, closurescaps and fountain containers, as well as other packaging materials and raw materials. Sweeteners are combined with water to produce basic syrup, which is added to the concentrate as the sweetener for the sparkling beverage.most of Coca-Cola FEMSA’s beverages. Coca-Cola FEMSA’s bottler agreements provide that, with respect toCoca-Colatrademark beverages, these materials may be purchased only from suppliers approved by The Coca-Cola Company, including affiliates of FEMSA.ours. Prices for packaging materials and high fructose corn syrupHFCS historically have been determined with reference to the U.S. dollar, although the local currency equivalent in a particular country is subject to price volatility in accordance with changes in exchange rates. Coca-Cola FEMSA’s most significant packaging raw material costs arise from the purchase of resin, plastic ingots to make plastic bottles and finished plastic bottles, which itCoca-Cola FEMSA obtains from international and local producers. The prices of these materials are tied to crude oil prices and global resin supply. In recent years, Coca-Cola FEMSA has experienced volatility in the prices it pays for these materials. Across its territories, Coca-Cola FEMSA’s territories, its average price for resin in U.S. dollars decreased significantly during 2009.increased approximately 30% in 2011 as compared to 2010.
Under Coca-Cola FEMSA’s agreements with The Coca-Cola Company, it may use raw or refined sugar or high fructose corn syrupHFCS as sweeteners in its products. Sugar prices in all of the countries in which Coca-Cola FEMSA operates, other than Brazil, are subject to local regulations and other barriers to market entry that cause itCoca-Cola FEMSA to pay in excess of international market prices for sugar in certain countries. Coca-Cola FEMSA hasIn recent years, international sugar prices have experienced sugar price volatility in its territories as a result of changes in local conditions and regulations and, in 2009, mainly due to a production shortfall in India, one of the largest global producers of sugar.significant volatility.
None of the materials or supplies that Coca-Cola FEMSA uses isare presently in short supply, although the supply of specific materials could be adversely affected by strikes, weather conditions, governmental controls or national emergency situations.
Mexico and Central America. In Mexico, Coca-Cola FEMSA purchases its returnable plastic bottles from Continental PET Technologies deGraham Packaging México, S.A. de C.V, a subsidiary of Continental Can, Inc.C.V., known as Graham, which is the exclusive supplier of returnable plastic bottles to The Coca-Cola Company and its bottlers in Mexico. In addition, Coca-Cola FEMSA mainly purchases
resin from Indorama Ventures Polymers México, S. de R.L. de C.V. (formerly Arteva Specialties, S. de R.L. de C.V. and Industrias Voridian,), M. & G. Polímeros México S.A. de C.V. thatand DAK Resinas Americas Mexico S.A. de C.V., which ALPLA Fábrica de Plásticos,México S.A. de C.V., known as ALPLA, manufacturesand Envases Innovativos de México S.A. de C.V. manufacture into non-returnable plastic bottles for Coca-Cola FEMSA.
Coca-Cola FEMSA purchases all of its cans from Promotora Mexicana de Embotelladoras, S.A. de C.V., known as PROMESA, a cooperative ofCoca-Cola bottlers in which, it holdsas of April 20, 2012, Coca-Cola FEMSA held a 5.0%25.0% equity interest. Coca-Cola FEMSA mainly purchases its glass bottles from Silices de Veracruz,Compañía Vidriera, S.A. de C.V., known as SIVESA,VITRO, and Glass & Silice, S.A. de C.V. (formerly Vidriera de Chihuahua, S.A. de C.V., or VICHISA), a wholly-owned subsidiary of Cuauhtémoc Moctezuma (formerly FEMSA Cerveza. Cerveza), which currently is a wholly-owned subsidiary of the Heineken Group.
Coca-Cola FEMSA purchases sugar from, among other suppliers, Piasa and Beta San Miguel, S.A. de C.V., a sugar cane producerproducers in which, it holds aas of April 20, 2012, Coca-Cola FEMSA held approximately 13.2% and 2.5% equity interest.interests, respectively. Coca-Cola FEMSA purchases HFCS from CP Ingredientes, S.A. de C.V. and Almidones Mexicanos, S.A. de C.V., known as Almex.
Imported sugar is subject to import duties, the amount of which is set by the Mexican government. As a result, sugar prices in Mexico are in excess of international market prices for sugar.sugar, and in 2011, were 47% higher on average in Mexico. In 2009,2011, sugar prices increased approximately 29% as compared to 2008.
Latincentro (Colombia and Central America). In Colombia, Coca-Cola FEMSA uses sugar as a sweetener in most of its products, which it buys from several domestic sources. Coca-Cola FEMSA purchases pre-formed ingots from Amcor and Tapón Corona de Colombia S.A. Coca-Cola FEMSA purchases all its glass bottles and cans from a supplier in which its competitor, Postobón, owns a 40% equity interest. Glass bottles and cans are available only from this one local source.2010.
In Central America, the majority of Coca-Cola FEMSA’s raw materials such as glass and plastic bottles and cans are purchased from several local suppliers. Coca-Cola FEMSA purchases all of its cans from PROMESA. Sugar is available from one supplier in each country.suppliers that represent several local producers. Local sugar prices in certainthe countries that comprisedcomprise the region are increasinghave increased, mainly due to highervolatility in international prices and the limited availability of sugar or high fructose corn syrup.prices. In Costa Rica, Coca-Cola FEMSA acquires plastic non-returnable bottles from ALPLA C.R. S.A., and in Nicaragua it acquires such plastic bottles from ALPLA Nicaragua, S.A.
VenezuelaSouth America (excluding Venezuela). In Colombia, Coca-Cola FEMSA uses sugar as a sweetener in most of its products, and buys such sugar from several domestic sources. During 2011, Coca-Cola FEMSA started to use HFCS as an alternative sweetener for its products. Coca-Cola FEMSA purchases HFCS from Archer Daniels Midland Company. It purchases plastic bottles from Amcor and Tapón Corona de Colombia S.A. It purchases all of its glass bottles from Peldar O-I and cans from Crown, both suppliers in which Grupo Ardila Lulle, owners of Coca-Cola FEMSA’s competitor Postobón, owns a minority equity interest. Glass bottles and cans are available only from these local sources.
Sugar is available in Brazil at local market prices, which historically have been similar to international prices. Sugar prices in Brazil in recent periods have been volatile, mainly due to the increased demand for sugar cane for production of alternative fuels, and Coca-Cola FEMSA’s average acquisition cost for sugar in 2011 increased approximately 30% as compared to 2010. Coca-Cola FEMSA purchases glass bottles, plastic bottles and cans from several domestic and international suppliers.
In Argentina, Coca-Cola FEMSA mainly uses HFCS that it purchases from several different local suppliers as a sweetener in its products, instead of sugar. Coca-Cola FEMSA purchases glass bottles, plastic cases and other raw materials from several domestic sources. It purchases pre-formed plastic ingots, as well as returnable plastic bottles, at competitive prices from Embotelladora del Atlántico S.A., a local subsidiary of Embotelladora Andina S.A., aCoca-Cola bottler with operations in Argentina, Chile and Brazil, and other local suppliers. Coca-Cola FEMSA also acquires pre-formed plastic ingots from ALPLA Avellaneda S.A. and other suppliers. Coca-Cola FEMSA produces its own can presentations, aseptic packaging and hot filled products for distribution of its products to its customers in Buenos Aires.
Venezuela. Coca-Cola FEMSA uses sugar as a sweetener in all of its products, and purchases such sugar mainly from the local market. Since 2003, from time to time, Coca-Cola FEMSA has experienced a sugar shortage due to lower domestic production and the inability of the predominant sugar importers to obtain permission to import in a timely manner. Sugar supply was severely affected in 2009 due to (1) shortages inWhile sugar cane production, (2) the implementation of new regulations imposing a quota on the maximum amount of available sugar distributeddistribution to the food and beverages industry and (3) a production decreaseto retailers is controlled by certainthe government, Coca-Cola FEMSA did not experience any disruptions during 2011 with respect to access to sufficient sugar mills. Wesupply. However, we cannot assure you that Coca-Cola FEMSA will be ablenot experience disruptions in its ability to meet its sugar requirements in the long-term if sugar supply conditions do not improve.future, should the Venezuelan government impose restrictive measures in the future. Coca-Cola FEMSA buys glass bottles from one local supplier, Productos de Vidrio, S.A., but there are alternative suppliers authorized by The Coca-Cola Company. Coca-Cola FEMSA acquires most of its plastic non-returnable bottles from ALPLA de Venezuela, S.A. and all of its aluminum cans from a local producer, Dominguez Continental, C.A.
Under current regulations promulgated by the Venezuelan authorities, Coca-Cola FEMSA’s ability to import some of its raw materials and other supplies used in its production could be limited, and access to the official exchange rate for these items for Coca-Cola FEMSA and its suppliers, including, among others,other items, resin, aluminum, plastic caps, distribution trucks and vehicles, is only achieved by obtaining proper approvals from the relevant authorities.
Mercosur (Brazil and Argentina). Sugar is widely available in Brazil at local market prices, which historically have been similar to international prices. Sugar prices in Brazil in recent periods have been volatile, mainly due to the increased demand for sugar cane for production of alternative fuels, and Coca-Cola FEMSA’s average acquisition cost for sugar in 2009 increased. Coca-Cola FEMSA purchases glass bottles, plastic bottles and cans from several domestic and international suppliers.
Argentina. In Argentina, Coca-Cola FEMSA mainly uses high fructose corn syrup that it purchases from several different local suppliers as a sweetener in its products instead of sugar. Coca-Cola FEMSA purchases glass bottles, plastic cases and other raw materials from several domestic sources. Coca-Cola FEMSA purchases pre-formed plastic ingots, as well as returnable plastic bottles, at competitive prices from Embotelladora del Atlántico S.A., a local subsidiary of Embotelladora Andina S.A., a Coca-Cola bottler with operations in Argentina, Chile and Brazil, and other local suppliers. Coca-Cola FEMSA also acquires plastic non-returnable bottles from ALPLA
Avellaneda S.A. Coca-Cola FEMSA produces its own can presentations and juice-based products for distribution to customers in Buenos Aires.
Plants and Facilities
Over the past several years, Coca-Cola FEMSA made significant capital improvementsinvestments to modernize its facilities and improve operating efficiency and productivity, including:
increasing the annual capacity of its bottling plants by installing new production lines;
installing clarification facilities to process different types of sweeteners;
installing plastic bottle-blowing equipment;
modifying equipment to increase flexibility to produce different presentations, including faster sanitation and changeover times on production lines; and
closing obsolete production facilities.
As of December 31, 2009,2011, Coca-Cola FEMSA owned thirty-one35 bottling plants company-wide. By country, it has tenfourteen bottling facilities in Mexico, five in Central America, six in Colombia, four in Venezuela, four in Brazil and two in Argentina.
As of December 31, 2009,2011, Coca-Cola FEMSA operated 210249 distribution centers, approximately 40%51% of which were in its Mexican territories. Coca-Cola FEMSA owns more than 88%86% of these distribution centers and leases the remainder. See “—“Item 4. Information on the Company—Coca-Cola FEMSA—Product Sales and Distribution.”
The table below summarizes by country, the principal use, installed capacity and percentage utilization of Coca-Cola FEMSA’s production facilities:
Bottling Facility Summary
As of December 31, 20092011
Country | Installed Capacity (thousands of unit cases) | % Utilization (1) | Installed Capacity (thousands of unit cases) | % Utilization(1) | |||||||||
Mexico | 1,594,568 | 75 | % | 1,897,760 | 70 | % | |||||||
Guatemala | 36,850 | 70 | % | 34,544 | 80 | % | |||||||
Nicaragua | 85,766 | 43 | % | 65,475 | 58 | % | |||||||
Costa Rica | 78,486 | 58 | % | 84,238 | 54 | % | |||||||
Panama | 38,399 | 62 | % | 40,754 | 64 | % | |||||||
Colombia | 370,776 | 59 | % | 531,046 | 47 | % | |||||||
Venezuela | 275,205 | 81 | % | 296,052 | 63 | % | |||||||
Brazil | 623,676 | 66 | % | 650,356 | 68 | % | |||||||
Argentina | 285,825 | 66 | % | 316,040 | 66 | % |
(1) | Annualized rate. |
Overview and Background
FEMSA Cerveza produces beer in Mexico and Brazil and exports its products to 58 countries worldwide, with North America being its most important export market, followed by certain markets in Europe, Latin America and Asia. In 2009, FEMSA Cerveza was ranked the tenth-largest brewer in the world in terms of sales volume. In Mexico, its main market, FEMSA Cerveza is the second-largest beer producer in terms of sales volume. In 2009, approximately 66.4% of FEMSA Cerveza’s sales volume came from Mexico, with the remaining 24.8% from Brazil and 8.8% from exports. In 2009, FEMSA Cerveza sold 40.548 million hectoliters of beer.
FEMSA Cerveza’s principal operating subsidiaries are Cervecería Cuauhtémoc Moctezuma, S.A. de C.V., which operates six breweries in Mexico, Cervejarias Kaiser Brasil S.A., or Kaiser, which operates eight breweries in Brazil, and Cervezas Cuauhtémoc Moctezuma, S.A. de C.V., which operated our company-owned distribution centers across Mexico.
Our management identified Brazil as one of the most attractive and profitable beer markets in the world. As a result, in August 2007, after a series of transactions, FEMSA Cerveza acquired 83% of the Brazilian brewer Kaiser, one of the leading beer marketers in that country, and Heineken N.V. owns the remaining 17% stake in Kaiser. See “Item 4. Information on the Company—Corporate Background.”
On April 30, 2010, FEMSA announced the closing of the transaction pursuant to which FEMSA agreed to exchange 100% of its beer operations for a 20% economic interest in the Heineken Group. See “Item 5. Operating and Financial Review and Prospects—Recent Developments” and “Item 10. Additional Information—Material Contracts.”
Beer Sales Volume
FEMSA Cerveza volume figures contained in this annual report refer to invoiced sales volume of beer. In Mexico, invoiced sales volume represents the quantity of hectoliters of beer sold by FEMSA Cerveza’s breweries to unaffiliated distributors and by affiliated distributors to retailers. In Brazil, invoiced sales volume represents the quantity of hectoliters of beer sold by Kaiser. Kaiser sells its products primarily to the BrazilianCoca-Cola bottlers, which sell and distribute Kaiser beers in their respective territories. The term hectoliter means 100 liters or approximately 26.4 U.S. gallons.
FEMSA Cerveza’s total beer sales volume totaled 40.548 million hectoliters in 2009, a decrease of 1.2% from total sales volume of 41.053 million hectoliters in 2008. In 2009, FEMSA Cerveza’s Mexican beer sales volume decreased by 1.7% to 26.929 million hectoliters. Brazil sales volume totaled 10.049 million hectoliters in 2009, a decrease of 1.3% from total sales volume of 10.181 million hectoliters in 2008. In 2009, export beer sales volume increased by 2.6% to 3.570 million hectoliters as compared to 3.479 million hectoliters in 2008.
FEMSA Cerveza Total Beer Sales Volumes
Year Ended December 31, | ||||||||||
2009 | 2008 | 2007 | 2006 | 2005 | ||||||
(in thousands of hectoliters) | ||||||||||
Mexico beer sales volume | 26,929 | 27,393 | 26,962 | 25,951 | 24,580 | |||||
Brazil beer sales volume | 10,049 | 10,181 | 9,795 | 8,935 | NA | |||||
Export beer sales volume | 3,570 | 3,479 | 3,183 | 2,811 | 2,438 | |||||
Total beer sales volume | 40,548 | 41,053 | 39,940 | 37,697 | 27,018 |
FEMSA Cerveza’s Mexican beer sales volume recorded a compounded average growth rate of 2.3% while compounded annual growth in the Mexican beer industry was 3% during the period from 2005 to 2009. This
compares with the 0.8% compounded average growth rate of the Mexican gross domestic product for the same period. FEMSA Cerveza’s Mexican beer sales for the same period recorded a 7.3% compounded average growth rate. FEMSA Cerveza’s export sales volume recorded a compounded average growth rate of 10.0% for the same period, while the compounded average growth rate for FEMSA Cerveza export sales was 14.9%.
FEMSA Cerveza’s Brazilian beer sales volume recorded a compounded average growth rate of 4.0% for the period from 2006 through 2009.
Mexico Operations
The Mexican Beer Market
The Mexican beer market was the sixth-largest beer market in the world in terms of industry sales volume in 2009 and is characterized by (1) concentrated domestic beer production, (2) regional market share differences, (3) the prevalence of government licensing regulations, (4) favorable demographics in the beer drinking population, and (5) fragmented retail markets.
Mexican beer production
Since 1985, Mexico has effectively had only two independent domestic beer producers, FEMSA Cerveza and Grupo Modelo. Grupo Modelo, a publicly traded company based in Mexico City, is the holding company of 76.8% of Diblo, S.A. de C.V., which operates the brewing and packaging subsidiaries of Grupo Modelo. Grupo Modelo’s principal beer brands areCorona,Modelo,VictoriaandPacífico. FEMSA Cerveza’s sales in the Mexican market have depended on its ability to compete with Grupo Modelo.
Historically, beer imports have not been a significant factor in the Mexican beer market, primarily due to the Mexican consumer preference for Mexican brands. In 2009, this segment accounted for approximately 2.0% of total Mexican beer market in terms of sales volume, a decrease of 0.4 p.p. compared to 2008, and reaching a similar market share to that of four years ago. The elimination of tariffs imposed on imported beers in 2001 had a limited effect on the Mexican beer market due to the fact that imported beers are largely premium and super-premium products sold in aluminum cans, which are a more expensive means of packaging in Mexico than beer sold in returnable bottles, and also given the dynamics of the beer market, where the point of sale is highly fragmented.
Regional market share differences
FEMSA Cerveza and Grupo Modelo are strongest in beer markets in different regions of Mexico. FEMSA Cerveza has a stronger market position in the northern and southern areas of Mexico while Grupo Modelo has a stronger market position in central Mexico. We believe that these regional market positions can be traced in part to consumer loyalty to the brand of beer that has historically been associated with a particular region.
We also believe that regional market strength is a function of the proximity of the breweries to the markets they serve. Transportation costs restricted the most efficient distribution of beer to a geographic area of approximately 300 to 500 kilometers surrounding a brewery. Generally, FEMSA Cerveza commands a majority of the beer sales in regions that were nearest to its largest breweries. FEMSA Cerveza’s largest breweries are in Orizaba, Veracruz and in Monterrey, Nuevo León. Grupo Modelo’s largest breweries are located in Mexico City, Oaxaca and Zacatecas.
The northern region of Mexico has traditionally enjoyed a higher per capita income level, attributable in part to its rapid industrialization within the last 50 years and to its commercial proximity to the United States. In addition, per capita beer consumption is also greater in this region due to its warmer climate and a more ingrained beer culture.
Mexican Regional Demographic Statistics
as of December 31, 2009
Region | Percent of Total Population | Percent of Total Gross Domestic Product | Per Capita Gross Domestic Product(1) | |||||
Northern | 27.1 | % | 33.5 | % | Ps. 124.9 | |||
Southern | 22.9 | 15.3 | 67.1 | |||||
Central | 50.0 | 51.2 | 103.1 | |||||
Total | 100.0 | % | 100.0 | % | Ps. 100.7 |
Government regulation
The Mexican federal government regulates beer consumption in Mexico primarily through taxation while local governments in Mexico regulate primarily through the issuance of licenses that authorize retailers to sell alcoholic beverages.
Up to 2009, Federal taxes on beer consist of a 15% value-added tax and an excise tax which is the higher of (1) 25% and (2) Ps. 3 per liter for non-returnable presentation or Ps. 1.74 for returnable presentations, as part of an environmental initiative by the Mexican governmental to encourage returnable presentations. Beginning on January 1, 2010, Mexican federal tax regulation increased value-added tax from 15% to 16% and the excise tax from 25% to 26.5% for 2010, 2011 and 2012. In 2013, the excise tax will decrease to 26%. The tax component of retail beer prices is significantly higher in Mexico than in the United States.
The number of retail outlets authorized to sell beer is controlled by local jurisdictions, which issue licenses authorizing the sale of alcoholic beverages. Other regulations regarding beer consumption in Mexico vary according to local jurisdiction and include limitations on the hours during which restaurants, bars and other retail outlets are allowed to sell beer and other alcoholic beverages. FEMSA Cerveza has been engaged in addressing these limitations at various levels, including efforts with governmental and civil authorities to promote better education for the responsible consumption of beer. For instance, as part of its ongoing community activities, FEMSA Cerveza was the first to implement a nationwide designated driver program (Conductor designado) in Mexico.
Since July 1984, Mexican federal regulation has required that all forms of beer packaging carry a warning advising that excessive consumption of beer is hazardous to one’s health. In addition, theLey General de Salud (General Health Law) requires that all beers sold in Mexico maintain a sanitation registration with theSecretaría de Salud (Ministry of Health).
Demographics of beer drinking population
We estimate that annual per capita beer consumption for the total Mexican population reached approximately 60 liters, or 0.6 hectoliters, in 2009, as compared to approximately 80 liters, or 0.8 hectoliters, in the United States. The legal drinking age is 18 in Mexico. We consider the population segment of men between the ages of 18 and 45 to be FEMSA Cerveza’s primary market. At least 37% of the Mexican population is under the age of 18 and, therefore, is not considered to be part of the beer drinking population.
Macroeconomic influences affecting beer consumption
We believe that consumption activity in the Mexican beer market is heavily influenced by the general level of economic activity in Mexico, the country’s gross wage base, changes in real disposable income and employment
levels. As a result, the beer industry reacts sharply to economic change. The industry generally experiences high volume growth in periods of economic strength and slower volume growth or volume contraction in periods of economic weakness. Domestic beer sales declined in Mexico in 1982, 1983 and 1995. These sales decreases correspond to periods in which the Mexican economy experienced severe disruptions. Similarly, the economic slowdown observed in 2002 corresponded to a reduction in domestic beer sales in 2002. In 2003, given the effect of a continued economic slowdown on consumers, FEMSA Cerveza decided not to increase prices in real terms. The reduction in prices in real terms (after giving effect to inflation) was the main driver for increasing sales volumes during 2003. In 2004, growth in Mexico’s gross domestic product was the main driver for increasing beer sales volume, despite price increases in nominal terms in the Mexican beer industry. In 2005, 2006 and 2007, beer sales volume growth outpaced growth in Mexico’s gross domestic product and in 2008, although FEMSA Cerveza experienced a reduction in consumer demand due to the general economic downturn, volume growth outpaced growth in Mexico’s gross domestic product for the fourth consecutive year. In 2009, the Mexican economy suffered the greatest gross domestic product drop in its modern history, caused mainly by the world economic crisis and the swine flu outbreak. Despite this, beer sales volume outpaced GDP once again, even though prices increased above inflation.
Beer Prices
During 2007, FEMSA Cerveza increased prices to partially compensate for the increase in raw material prices. In 2008, FEMSA Cerveza increased prices twice in the year, however the net effect was below the Mexican consumer price index. In 2009, FEMSA Cerveza once again increased prices in Mexico, which, along with the effect of the 2008 increase, resulted in a slight growth above the Mexican consumer price index.
According to theBanco de México’s consumer beer price index, for the Mexican beer industry as a whole, average consumer beer prices increased 6.4% in nominal terms in 2009, which means that prices increased 1.1% over average inflation.
Product Overview
As of December 31, 2009, in Mexico FEMSA Cerveza produced and/or distributed 21 brands of beer in 14 different presentations resulting in a portfolio of 111 different product offerings. The most important brands in FEMSA Cerveza’s Mexican portfolio included:Tecate, Sol, Carta BlancaandIndio.These four brands, all of which were distributed nationwide in Mexico, accounted for approximately 87% of FEMSA Cerveza’s Mexico beer sales volume in 2009.
Per capita information, product segments, relative prices and packaging information with respect to FEMSA Cerveza have been computed and are based upon our statistics and assumptions.
Beer Presentations
In its Mexican operations, FEMSA Cerveza produces and distributes beer in returnable glass bottles and kegs and in non-returnable aluminum cans and glass bottles. FEMSA Cerveza uses the term presentation to reflect these packaging options.
Returnable presentations
The most popular form of packaging in the Mexican beer market is the returnable bottle. FEMSA Cerveza believes that the popularity of the returnable bottle is attributable to its lower price to the consumer. Returnable bottles may be reused an average of 30 times before being recycled. As a result, beer producers are able to charge lower prices for beer in returnable bottles. During periods when the Mexican economy is weak, returnable sales volume generally increase at a faster rate relative to non-returnable sales volume, given that non-returnable bottles are a more expensive presentation.
Non-returnable presentations
FEMSA Cerveza’s presentation mix in Mexico has been growing in non-returnable presentations in the last few years, as we tailor our offering to consumer preferences and provide different convenient alternatives. However, we believe that demand for these presentations is highly sensitive to economic factors because of their higher prices. The vast majority of export sales are in non-returnable presentations.
Relative Pricing
Returnable bottles and kegs are the least expensive beer presentation on a per-milliliter basis. Cans and non-returnable bottles have historically been priced higher than returnable bottles. The consumer preference for presentations in cans has varied considerably over the past 20 years, rising in periods of economic prosperity and declining in periods of economic austerity, reflecting the price differential between these forms of packaging.
Seasonality
Demand for FEMSA Cerveza’s beer is highest in the Mexican summer season, and consequently, brewery utilization rates are at their highest during this period. Demand for FEMSA Cerveza’s products also tends to increase in the month of December, reflecting consumption during the holiday season. Demand for FEMSA Cerveza’s products decreases during the months of November, January and February primarily as a result of colder weather in the northern regions of Mexico.
Primary Distribution
FEMSA Cerveza’s primary distribution in Mexico is from its production facilities to its distribution centers’ warehouses. FEMSA Cerveza delivers to a combination of company-owned and third-party distributors. In an effort to improve the efficiency and alignment of the distribution network, FEMSA Cerveza adjusts its relationship with independent distributors by implementing franchise agreements and, as a result, has achieved economies of scale through integration with FEMSA Cerveza’s operating systems. In recent years, FEMSA Cerveza has achieved infrastructure and personnel efficiencies through the integration of company-owned distribution centers. The results of these efficiencies have been partially diminished by the acquisition of third-party distribution centers. FEMSA Cerveza increased its directly distributed volume in respect of its Mexican beer sales volume to 91%, operating through 225 company-owned distribution centers. The remaining 9% of the beer sales volume was sold through 39 third-party distribution centers, most of them operating under franchise agreements with FEMSA Cerveza. A franchise agreement is offered only to those distributors that meet certain standards of operating capabilities, performance and alignment. FEMSA Cerveza has historically acquired those distributors that do not meet these standards. Through this initiative FEMSA Cerveza continues to seek to increase its Mexico beer sales volume through company-owned distribution centers.
Since 2004, FEMSA Cerveza’s brewing subsidiary was appointed as the exclusive importer, producer, distributor, marketer and seller ofCoors Light beer in Mexico.
Retail Distribution
The main sales outlets for beer in Mexico are small, independently-owned “mom and pop” grocery stores, dedicated beer stores or “depósitos,” liquor stores and bars. Supermarkets account for only a small percentage of beer sales in Mexico. In addition, as of December 31, 2009, FEMSA Comercio operates a chain of 7,334 convenience stores under the trade name OXXO that exclusively sell FEMSA Cerveza’s brands.
The Mexican retail market is fragmented and characterized by a preponderance of small outlets that are unable and unwilling to maintain meaningful inventory levels, and therefore FEMSA Cerveza must make frequent product deliveries to its retailers. Through the pre-sale process, FEMSA Cerveza improves its distribution practices, enhances efficiency by separating the selling and distribution processes and consequently improves the effectiveness of routes. During 2008, FEMSA Cerveza implemented a new method of serving its customers by addressing customer needs through alternative pre-sale processes, through which FEMSA Cerveza has sought to increase its
efficiency while at the same time improve the capabilities of its sales force to better implement sales strategies at the point of sale and better serve different customer types. As of the December 31, 2009, approximately 21% of the customers were served through alternative pre-sale processes including electronic ordering and telephone sales in a call center. See “—Marketing Strategy.”
As of December 31, 2009, FEMSA Cerveza serves approximately 330,000 retailers in Mexico and its distribution network operates approximately 2,067 retail distribution routes, which represents a decrease of 240 routes, principally due to an increase in the number of retailer visits per route during 2009.
Enterprise Resource Planning
FEMSA Cerveza operates an Enterprise Resource Planning system, or ERP, that provides an information and control platform to support commercial activities nationwide in Mexico and correlates them with the administrative and business development decision-making processes occurring in FEMSA Cerveza’s central office. The Mexican beer sales volume of all FEMSA Cerveza’s company-owned distribution centers, including our main third-party distributors, operates through ERP.
Marketing Strategy
FEMSA Cerveza focuses on the consumer by segmenting markets and positions its brands accordingly, striving to develop brand and packaging portfolios that provide the best alternatives for every consumption occasion at the appropriate price. By segmenting markets, we refer to the technique whereby we design and execute relevant and distinctive positioning and communication strategies that allowed us to satisfy different consumer needs. Continuous market research provides feedback that is used to develop and adapt our product offerings to best satisfy consumers’ needs. We increasingly focus on micro-segmentation, where we use our market research and our information technology systems to target smaller market segments, including in some cases the individual point-of-sale.
FEMSA Cerveza also focuses on the retailer by designing and implementing trade marketing programs at the point-of-sale, such as promotional programs providing merchandising materials and, where appropriate, refrigeration equipment. A channel refers to a point-of-sale category, or sub-category, such as a supermarket, beer depot or restaurants. Furthermore, we always attempt to develop new channels in order to capture incremental consumption opportunities for FEMSA Cerveza’s brands.
In order to coordinate the brand and trade strategies, we developed and implemented integrated marketing programs, which aimed to improve brand value through effective application of all variables of the marketing mix. Our marketing program for a particular brand sought to emphasize in a consistent manner the distinctive attributes of that brand.
FEMSA Cerveza implements an initiative to efficiently enable corporate growth strategies. This effort, which relies on our extensive consumer and market research practices, seeks the development of new packaging and product alternatives that would allow us to capture new consumers and to strengthen the presence of our brands through brand line extensions. Innovation is a key priority at FEMSA Cerveza and is implemented throughout the value chain with the objective of allowing FEMSA Cerveza to continue to offer different options to consumers.
Plants and Facilities
As of December 31, 2009, FEMSA Cerveza operates six breweries in Mexico with an aggregate monthly production capacity of 3.18 million hectoliters, equivalent to approximately 38.180 million hectoliters of annual capacity. Each of FEMSA Cerveza’s Mexican breweries received ISO 9001 and 9002 certification and a Clean Industry Certification (Certificado de Industria Limpia) given by Mexican environmental authorities. A key consideration in the selection of a site for a brewery is its proximity to potential markets, as the cost of transportation is a critical component of the overall cost of beer to the consumer. FEMSA Cerveza’s Mexican breweries are strategically located across the country, as shown in the table below, to better serve FEMSA Cerveza’s distribution system.
FEMSA Cerveza Mexico Facility Capacity Summary
Year Ended December 31, 2009
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Between 2005 and 2009, FEMSA Cerveza increased its average monthly production capacity by approximately 374,000 hectoliters through additional investments in existing facilities.
FEMSA Cerveza operates seven effluent water treatment systems in Mexico to treat the water used by the breweries, all of which are wholly-owned by FEMSA Cerveza except for the effluent treatment system at the
Orizaba brewery, which is a joint venture among FEMSA Cerveza, several other local companies and the government of the state of Veracruz.
In November 2007, FEMSA Cerveza announced an investment of US$ 275 million for the construction of a new brewery in Meoqui, Chihuahua, in Northern Mexico and as of December 31, 2009 FEMSA Cerveza had invested Ps. 270 million (US$ 20 million) in the project.
Glass Bottles and Cans
During 2009, FEMSA Cerveza produced (1) beverage cans and can ends, (2) glass bottles and (3) crown caps for glass bottle presentations principally to meet the packaging needs of its Mexican operations. The packaging operations includes a silica sand mine, which provide materials necessary for the production of glass bottles. The following table provides a summary of the facilities for these operations:
FEMSA Cerveza Mexico Glass Bottle and Beverage Can Operations Product Summary
Year Ended December 31, 2009
Product | Location | Annual Production Capacity(1) | % Average Capacity Utilization | |||
Beverage cans | Ensenada | 1,700 | 80.5 | |||
Toluca | 3,000 | 95.7 | ||||
4,700 | 90.2 | |||||
Can ends | Monterrey | 5,100 | 82.6 | |||
Crown cap | Monterrey | 18,000 | 89.2 | |||
Glass bottles | Orizaba | 1,450 | 76.3 | |||
Bottle decoration | Nogales | 330 | 40.6 | |||
Silica sand | Acayucan | 720 | 74.8 |
Two plants produce aluminum beverage can bodies at production facilities in Ensenada and Toluca, and another plant produces can ends at a production facility in Monterrey. During 2009, 68% of the beverage can volume produced by these plants was used by FEMSA Cerveza and the remaining amount was sold to third parties.
Glass bottles are produced at a glass production facility in Orizaba, Veracruz and bottles are decorated at a plant in Nogales, Veracruz. During 2009, 63% of the glass bottle volume produced by these plants was used by FEMSA Cerveza, 17% was sold to Coca-Cola FEMSA and 20% was sold to third parties.
Due to the downturn in the global economy in 2009, FEMSA Cerveza suspended the construction of the glass bottle facility in Meoqui, Chihuahua. As a result, 2009 results were impacted by an expense of Ps. 119 million.
Raw Materials
Malted barley, hops, certain grains, yeast and water are the principal ingredients used in manufacturing FEMSA Cerveza’s beer products. The principal raw materials used by FEMSA Cerveza’s packaging plants include aluminum, steel and silica sand. All of these raw materials are generally available in the open market. FEMSA Cerveza satisfies its commodity requirements through purchases from various sources, including purchases pursuant to contractual arrangements and purchases in the open market.
Aluminum and steel are two of the most significant raw materials used in FEMSA Cerveza’s packaging operations to make aluminum cans, can ends and bottle caps. FEMSA Cerveza purchases aluminum and steel directly from international and local suppliers on a contractual basis. Companies such as Alcoa, Nittetsu-Shoji, Novelis, CSN, Rasselstein and AHMSA have been selected as suppliers. Prices of aluminum and steel are generally
quoted in U.S. dollars, and FEMSA Cerveza’s cost is therefore affected by changes in exchange rates. For example, a depreciation of the Mexican peso against the U.S. dollar would increase the cost to FEMSA Cerveza of aluminum and steel, and would decrease FEMSA Cerveza’s margins as its sales are generally denominated in Mexican pesos. FEMSA Cerveza’s silica sand mine is able to satisfy all of the silica sand requirements of its glass bottle plant.
Barley is FEMSA Cerveza’s most significant raw material for the production of its beer products. International markets determine the prices and supply sources of agricultural raw materials, which are affected by the level of crop production, inventories, weather conditions, domestic and export demand, as well as government regulations affecting agriculture. The principal source of barley for the Mexican beer industry is the domestic harvest. If domestic production in Mexico is insufficient to meet the industry’s requirements, barley (or its equivalent in malt) can be obtained from international markets. Raw material prices have increased in recent years, in particular the price for barley due to the fact that during 2006 and 2007 the harvests of Europe and Australia (two of the largest producers) fell because of droughts and untimely rains. Additionally, the price of wheat, which is not an ingredient of FEMSA Cerveza’s beers, but competes for land with barley and other grains, increased significantly in 2007 and during most of 2008, adding pressure to the price of grains worldwide. In the second half of 2008, wheat prices declined due to higher harvests and lower demand. In 2009, crop prices and the worldwide economic situation improved the stock-to-use ratios for grains as compared to 2008.
Hops is the only raw material that is not available domestically in Mexico. FEMSA Cerveza imports hops from the United States and Europe.
As part of its normal operations, FEMSA Cerveza uses derivative financial instruments to hedge risk exposures associated with the price of some raw materials that are traded on international markets, such as aluminum, natural gas and wheat.
Brazil Operations
The Brazilian Beer Market
The Brazilian beer market was the third-largest beer market in the world in terms of industry sales volume in 2009 and is characterized by (1) concentrated domestic beer production, (2) favorable demographics in the beer drinking population, and (3) a fragmented retail channel.
Concentrated Brazilian beer production
The Brazilian beer market is comprised of one large producer holding substantial market share, three medium sized producers and some minor regional brewers. The large producer is Companhia de Bebidas das Americas, or AmBev, a publicly traded company based in São Paulo that is majority-owned by the Belgian brewer A-B Inbev which principal beer brands areSkol, BrahmaandAntarctica.AmBev is also a large bottler of sparkling beverages, with brands such asGuaraná AntarcticaandPepsi Cola.The three medium sized producers are FEMSA Cerveza, Grupo Schincariol, whose main brand isNova Schin, and Cervejaria Petropolis, whose main brands areItaipava andCrystal. FEMSA Cerveza’s sales in the Brazilian market depend on its ability to compete in a complex competitive environment with a large producer with predominant market share and two strong regional local brewers. Historically, beer imports have not been a significant factor in the Brazilian beer market, but are increasing as the super premium beer segment develops.
Demographics of beer drinking population
We estimate that annual per capita beer consumption for the total Brazilian population reached approximately 57 liters in 2009. The legal drinking age is 18 in Brazil. We consider the population segment of men between the ages of 18 and 45 to be FEMSA Cerveza’s primary market. Approximately 31% of the Brazilian population is under the age of 18 and, therefore, is not considered to be part of the beer drinking population.
Product Overview
As of December 31, 2009, in Brazil FEMSA Cerveza produced and/or distributed 15 brands of beer in 11 different presentations resulting in a portfolio of 47 different product offerings. The most important brands in FEMSA Cerveza’s Brazilian portfolio include:Kaiser, Bavaria Clásica, Sol, HeinekenandXingu.These five brands, all of which are distributed nationwide in Brazil, accounted for approximately 96% of FEMSA Cerveza’s Brazil beer sales volume in 2009.
Beer Presentations
In its Brazilian breweries, FEMSA Cerveza produces and distributes beer in returnable glass bottles and kegs and in non-returnable aluminum cans and glass bottles. In the Brazilian beer market, the most popular presentation is the 600 ml returnable bottle because of the affordability of this presentation combined with its popularity in the on-premise segment. However, in the past years the sales volume mix slightly shifted towards non-returnable presentations, which can be attributed in part to improvements in the Brazilian economy and changes in consumer habits.
Primary Distribution
FEMSA Cerveza’s primary distribution in Brazil is from its production facilities to the warehouses of the various Coca-Cola franchise bottlers in Brazil. There are 19 Coca-Cola bottlers across Brazil, each responsible for a certain geographic territory including subsidiaries of Coca-Cola FEMSA.
Retail Sales and Distribution
FEMSA Cerveza relies on the 19 different bottlers of the Coca-Cola system across Brazil for the sale and secondary distribution of its beers. The bottlers leverage their infrastructure, sales force, expertise, distribution assets and refrigeration equipment at the point of sale to offer a broad portfolio of products to the retailer.
Plants and Facilities
As of December 31, 2009, FEMSA Cerveza operates eight breweries in Brazil with an aggregate monthly production capacity of 1.7 million hectoliters, equivalent to approximately 20 million hectoliters of annual capacity. All eight Brazilian breweries received ISO 9001, ISO 14.001 and OHASA 18.001 certifications. A key consideration in the selection of a site for a brewery is its proximity to potential markets, as the cost of transportation is a critical component of the overall cost of beer to the consumer. FEMSA Cerveza’s Brazilian breweries are strategically located across the country, as shown in the table below, to better serve FEMSA Cerveza’s distribution system.
FEMSA Cerveza Brazil Facility Allocation
as of December 31, 2009
FEMSA Cerveza Brazil Facility Capacity Summary
Year Ended December 31, 2009
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Exports
FEMSA Cerveza’s principal export market is the United States and its export strategy focuses on that country. In particular, FEMSA Cerveza concentrates efforts on its core markets located in the sun-belt states bordering Mexico, while seeking to develop its brands in key imported beer markets located in the eastern United
States. FEMSA Cerveza believes that these two regions of the United States represent one of its greatest potential markets outside of Mexico.
Prior to January 1, 2005, Labatt USA was the importer of FEMSA Cerveza’s brands in the United States. On June 21, 2004, FEMSA Cerveza and two of its subsidiaries entered into distributor and sublicense agreements with Heineken USA. In accordance with these agreements, on January 1, 2005, Heineken USA became the exclusive importer, marketer and seller of FEMSA Cerveza’s brands in the United States. In April 2007, FEMSA Cerveza and Heineken USA entered into a new ten-year agreement pursuant to which Heineken USA will continue to be the exclusive importer, marketer and distributor of FEMSA Cerveza’s beer brands in the United States. This agreement went into effect on January 1, 2008. Heineken will continue to benefit from the existing relationship between OXXO and FEMSA Cerveza after the closing of the Heineken transaction.
Export beer sales volume of 3.570 million hectoliters in 2009 represent 8.8% of FEMSA Cerveza’s total beer sales volume. FEMSA Cerveza’s export beer revenues of Ps. 4,737 represent 10.2% of total revenues in 2009. The following table highlights FEMSA Cerveza’s export beer sales volumes and export beer sales:
FEMSA Cerveza Export Summary
Year Ended December 31, | |||||||||||||||
2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||
Export beer sales volume(1) | 3,570 | 3,479 | 3,183 | 2,811 | 2,438 | ||||||||||
Volume growth(2) | 2.6 | % | 9.3 | % | 13.2 | % | 15.3 | % | 8.8 | % | |||||
Percent of total beer sales volumes(3) | 8.8 | % | 8.5 | % | 8.0 | % | 7.4 | % | 9.0 | % | |||||
Mexican pesos(4) (millions) | 4,737 | 3,608 | 3,339 | 2,977 | 2,717 | ||||||||||
U.S. dollars(5) (millions) | 350 | 327 | 299 | 256 | 227 | ||||||||||
Revenue growth (US$)(2) | 7.0 | % | 9.4 | % | 16.5 | % | 13.0 | % | 45.8 | % | |||||
Percent of total revenues | 10.2 | % | 8.5 | % | 8.4 | % | 8.1 | % | 10.2 | % |
Source: FEMSA Cerveza.
As of December 31, 2009, FEMSA Cerveza exports its products to 58 countries. The principal export market for FEMSA Cerveza is North America, which accounts for 89% of FEMSA Cerveza’s export beer sales volume in 2009.
FEMSA Cerveza’s principal export brands areTecate, XX Lager,Dos Equis (Ambar) andSol. These brands collectively account for 93% of FEMSA Cerveza’s export sales volume for the year ended December 31, 2009.
Overview and Background
FEMSA Comercio operates the largest chain of convenience stores in Mexico, measured in terms of number of stores as of December 31, 2009,2011, under the trade name OXXO. As of December 31, 2009,2011, FEMSA Comercio operated 7,3349,561 OXXO stores, of which 7,3299,538 are located throughout the country, with a particularly strong presence in the northern part of Mexico, and the remaining five23 stores are located in Bogotá, Colombia.
FEMSA Comercio, the largest single customer of FEMSA CervezaCuauhtémoc Moctezuma and of the Coca-Cola system in Mexico, was established by FEMSA in 1978 when two OXXO stores were opened in Monterrey, one store in Mexico City and another store in Guadalajara. The motivating factor behind FEMSA’s entrance into the retail
industry was to enhance beer sales through company-owned retail outlets as well as to gather information on customer preferences. In 2009, sales of beer through OXXO represented 13.4% of FEMSA Cerveza’s domestic beer sales volume as well as approximately 15.1% of FEMSA Comercio’s revenues. In 2009,2011, a typical OXXO store carried 1,9542,324 different store keeping units (SKUs) in 31 main product categories.
In recent years, FEMSA Comercio has gained importance asrepresented an effective distribution channel for our beverage products, as well as a rapidly growing point of contact with our consumers. Based on the belief that location plays a major role in the long-term success of a retail operation such as a convenience store, as well as a role in our continually improving ability to accelerate and streamline the new-store development process, FEMSA Comercio has focused on a strategy of rapid, profitable growth. FEMSA Comercio opened 716, 811960, 1,092 and 9601,135 net new OXXO stores in 2007, 20082009, 2010 and 2009,2011, respectively. The accelerated expansion in the number of stores yielded total revenue growth of 13.6%19.0% to reach Ps. 53,54974,112 million in 2009.2011. Same store sales increased an average of 9.2%, driven by increases in store traffic and average customer ticket. Starting in 2008, FEMSA Comercio revenues reflect an accounting effect of the mix shift from physical prepaid wireless air-time cards to the sale of electronic air-time for which only the margin is recorded, not the full revenue amount of the electronic recharge. Therefore, store sales increased 1.3%, which is lower than the retail industry average of 2.9% for the same period. Excluding this effect, same store sales would have increased above the retail industry average. FEMSA Comercio performed approximately 2,032 million2.7 billion transactions in 20092011 compared to 1,695 million2.3 billion transactions in 2008.2010.
Business Strategy
A fundamental element of FEMSA Comercio’s business strategy is to utilize its position in the convenience store market to grow in a cost-effective and profitable manner. As a market leader in convenience store retailing, based on internal company surveys, management believes that FEMSA Comercio has an in-depth understanding of its markets and significant expertise in operating a national store chain. FEMSA Comercio intends to continue increasing its store base while capitalizing on the market knowledge gained at existing stores.
FEMSA Comercio has developed proprietary models to assist in identifying appropriate store locations, store formats and product categories. Its model utilizes location-specific demographic data and FEMSA Comercio’s experience in similar locations to fine tune the store format and product offerings to the target market. Market segmentation is becoming an important strategic tool, and it should increasingly allow FEMSA Comercio to improve the operating efficiency of each location and the overall profitability of the chain.
FEMSA Comercio has made and will continue to make significant investments in information technologyIT to improve its ability to capture customer information from its existing stores and to improve its overall operating performance. AllThe majority of products carried through OXXO stores are bar-coded, and all OXXO stores are equipped with point-of-sale systems that are integrated into a company-wide computer network. To implement revenue management strategies, FEMSA Comercio created a division in charge of product category management for products, such as beverages, fast food and perishables, to enhance and better utilize its consumer information base and market intelligence capabilities. FEMSA Comercio has implementedutilizes a technology platform supported by an ERPenterprise resource planning (ERP) system, as well as other technological solutions such as merchandising and point-of-sale systems, which will allow FEMSA Comercio to continue redesigning its key operating processes and enhance the usefulness of its market information going forward. In addition, FEMSA Comercio has expanded its operations by opening fivesix new stores in Bogotá, Colombia in 2009.2011.
FEMSA Comercio has adopted innovative promotional strategies in order to increase store traffic and sales. In particular, FEMSA Comercio sells high-frequency items such as beverages, snacks and cigarettes at competitive prices. FEMSA Comercio’s ability to implement this strategy profitably is partly attributable to the size of the OXXO chain, as FEMSA Comercio is able to work together with its suppliers to implement their revenue-management strategies through differentiated promotions. OXXO’s national and local marketing and promotional strategies are an effective revenue driver and a means of reaching new segments of the population while strengthening the OXXO brand. For example, the organization has refined its expertise in executing cross promotions (discounts on multi-packs or sales of complementary products at a special price) and targeted promotions to attract new customer segments, such as housewives, by expanding the offerings in the grocery product category in certain stores. FEMSA Comercio is also strengthening its capabilities to increasingly provide consumers with services such as utility bill payment and other basic transactions.
Store Locations
With 7,3299,538 OXXO stores in Mexico and five23 stores in Colombia as of December 31, 2009,2011, FEMSA Comercio operates the largest convenience store chain in Latin America measured by number of stores. OXXO stores are concentrated in the northern part of Mexico, but also have a growing presence in central Mexico and the Gulf coast.rest of the country.
FEMSA Comercio
Regional Allocation of OXXO Stores in Mexico and Latin America(*)
as of December 31, 20092011
FEMSA Comercio has aggressively expanded its number of stores over the past several years. The average investment required to open a new store varies, depending on location and format and whether the store is opened in an existing retail location or requires construction of a new store. FEMSA Comercio is generally able to use supplier credit to fund the initial inventory of new stores.
Growth in Total OXXO Stores
Year Ended December 31, | Year Ended December 31, | ||||||||||||||||||||||||||||||||||
2009 | 2008 | 2007 | 2006 | 2005 | 2011 | 2010 | 2009 | 2008 | 2007 | ||||||||||||||||||||||||||
Total OXXO stores | 7,334 | 6,374 | 5,563 | 4,847 | 4,141 | 9,561 | 8,426 | 7,334 | 6,374 | 5,563 | |||||||||||||||||||||||||
Store growth (% change over previous year) | 15.1 | % | 14.6 | % | 14.8 | % | 17.0 | % | 19.5 | % | 13.5 | % | 14.9 | % | 15.1 | % | 14.6 | % | 14.8 | % |
FEMSA Comercio currently expects to continue the growth trend established over the past several years by emphasizing growth in areas of high economic potential in existing markets and by expanding in underserved and unexploited markets. Management believes that the southeast part of Mexico is particularly underserved by the convenience store industry.
The identification of locations and pre-opening planning in order to optimize the results of new stores are important elements in FEMSA Comercio’s growth plan. FEMSA Comercio continuously reviews store performance against certain operating and financial benchmarks to optimize the overall performance of the chain. Stores unable to maintain benchmark standards are generally closed. Between December 31, 20052007 and 2009,2011, the total number of OXXO stores increased by 3,1933,998, which resulted from the opening of 3,2834,091 new stores and the closing of 9093 existing stores.
Competition
OXXO competes in the convenience store segment of theoverall retail market, withwhich we believe is highly competitive. OXXO convenience stores face direct competition from 7-Eleven, Super Extra, Super City Circle-K and AM/PM,Círculo K, and other local convenience stores as well as from a number of other local convenience stores. The format of these stores is similar to the format of the OXXO stores.modern and traditional retail formats. OXXO competes both for consumers and for new locations for stores and the managers to operate those stores. Based on an internal market survey conducted by FEMSA Comercio, management believes that asFEMSA Comercio operates approximately 66% of December 31, 2009, there were approximately 11,688the stores in Mexico that could be considered part of the convenience store segment of the retail market.market as of the end of December 31, 2011. OXXO is the largest chain inconvenience stores also face competition from numerous small chains of retailers across Mexico operating almost two-thirds of theseand from retailers that participate with store formats other than convenience stores. Furthermore, FEMSA Comercio operates in the 32 Mexican states and has much broader geographical coverage than any of its competitors in Mexico.
Market and Store Characteristics
Market Characteristics
FEMSA Comercio is placing increased emphasis on market segmentation and differentiation of store formats to more appropriately serve the needs of customers on a location-by-location basis. The principal segments include residential neighborhoods, commercial and office locations and stores near schools and universities, along with other types of specialized locations.
Approximately 67%62% of OXXO’s customers are between the ages of 15 and 35. FEMSA Comercio also segments the market according to demographic criteria, including income level.
Store Characteristics
The average size of an OXXO store is approximately 108106 square meters of selling space, excluding space dedicated to refrigeration, storage or parking. The average constructed area of a store is approximately 186 square meters and, when parking areas are included, the average store size increases tois approximately 441432 square meters.
FEMSA Comercio—Operating Indicators
Year Ended December 31, | |||||||||||||||
2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||
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Total FEMSA Comercio revenues | 13.6 | % | 12.0 | % | 14.3 | % | 18.7 | % | 21.8 | % | |||||
OXXO same-store sales(1) | 1.3 | % | 0.4 | % | 3.3 | % | 8.2 | % | 8.7 | % | |||||
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Beer-related data: | |||||||||||||||
Beer sales as % of total store sales | 15.1 | % | 14.6 | % | 13.4 | % | 13.5 | % | 13.0 | % | |||||
OXXO store sales as a % of FEMSA Cerveza’s volume | 13.4 | % | 12.3 | % | 11.0 | % | 9.9 | % | 8.6 | % |
Year Ended December 31, | ||||||||||||||||||||
2011 | 2010 | 2009 | 2008 | 2007 | ||||||||||||||||
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Total FEMSA Comercio revenues | 19.0 | % | 16.3 | % | 13.6 | % | 12.0 | % | 14.3 | % | ||||||||||
OXXO same-store sales(1) | 9.2 | % | 5.2 | % | 1.3 | % | 0.4 | % | 3.3 | % |
(1) | Same-store sales growth is calculated by comparing the sales of stores for each year that have been in operation for |
Beer, cigarettes, soft drinks, snacks and cellular telephone air-time soft drinks and cigarettes represent the main product categories for OXXO stores. FEMSA Comercio has a distribution agreement with FEMSA Cerveza.Cuauhtémoc Moctezuma (which is now part of the Heineken Group). As a result of this agreement, OXXO stores only carry beer brands produced and distributed by FEMSA Cerveza. As part of the Heineken transaction,Cuauhtémoc Moctezuma. OXXO stores will continue to benefit from the existing relationship under which FEMSA Cerveza (now part of Heineken)Cuauhtémoc Moctezuma will continue to be the exclusive supplier of beer to OXXO until June 2020. Prior to 2001, OXXO stores had informal agreements with Coca-Cola bottlers, including Coca-Cola FEMSA’s territories in central Mexico, to sell only their products. SinceBeginning in 2001, a limited number ofcertain OXXO stores began sellingPepsi products other brands of sparkling beverages in certainsome cities in northern Mexico, as part of a defensive competitive strategy.Mexico.
Approximately 71%67% of OXXO stores are operated by independent managers responsible for all aspects of store operations. The managers are commission agents and are not employees of FEMSA Comercio. Each store manager is the legal employer of the store’s staff, which typically numbers six people per store. FEMSA Comercio continually invests in on-site operating personnel, with the objective of promoting loyalty, customer-servicecustomer service and low personnel turnover in the stores.
Advertising and Promotion
FEMSA Comercio’s marketing efforts include both specific product promotions and image advertising campaigns. These strategies seek to increase store traffic and sales, and to reinforce the OXXO name and market position.
FEMSA Comercio manages its advertising on three levels depending on the nature and scope of the specific campaign: local or store-specific, regional and national. Store-specific and regional campaigns are closely monitored to ensure consistency with the overall corporate image of OXXO stores and to avoid conflicts with national campaigns. FEMSA Comercio primarily uses point of purchase materials, flyers, handbills and print and radio media for promotional campaigns, although television is used occasionally for the introduction of new products and services. The OXXO chain’s image and brand name are presented consistently across all stores, irrespective of location.
Inventory and Purchasing
FEMSA Comercio has placed considerable emphasis on improving operating performance. As part of these efforts, FEMSA Comercio continues to invest in extensive information management systems to improve inventory management. Electronic data collection has enabled FEMSA Comercio to reduce average inventory levels. Inventory replenishment decisions are carried out on a store-by-store basis.
Management believes that the OXXO chain’s scale of operations provides FEMSA Comercio with a competitive advantage in its ability to realize strategic alliances with suppliers. General category offerings are determined on a national level, although purchasing decisions are implemented on a local, regional or national level,
depending on the nature of the product category. Given the fragmented nature of the retail industry in Mexico in general, Mexican producers of beer, soft drinks, bread, dairy products, snacks, cigarettes and other high-frequency products have established proprietary distribution systems with extensive direct distribution routes. As a result, approximately 51%52% of the OXXO chain’s total sales consist of products carried by the OXXO chainthat are delivered directly to the stores by suppliers. Other products with longer shelf lives are distributed to stores by FEMSA Comercio’s distribution
system, which includes ten13 regional warehouses located in Monterrey, Mexico City, Guadalajara, Mexicali, Mérida, León, Obregón, Puebla, Chihuahua, Reynosa, Tijuana, Villahermosa and Reynosa.two in Mexico City. The distribution centers operate a fleet of approximately 354627 trucks that make deliveries to each store approximately once atwice per week.
Seasonality
OXXO stores experience periods of high demand in December, as a result of the holidays, and in July and August, as a result of increased consumption of beer and soft drinks during the hot summer months. The months of November and February are generally the weakest sales months for OXXO stores. In general, colder weather during these months reduces store traffic and consumption of cold beverages.
Other Stores
FEMSA Comercio also operates other small format stores, which include soft discount stores with a focus on perishables, liquor stores and smaller convenience stores.
FEMSA Cerveza and Equity Method Investment in the Heineken Group
Until April 30, 2010, FEMSA Cerveza was our wholly-owned subsidiary, producing beer in Mexico and Brazil and exporting its products to more than 50 countries worldwide, with North America being its most important export market, followed by certain markets in Europe, Latin America and Asia. As of December 31, 2009, FEMSA Cerveza was ranked the tenth-largest brewer in the world in terms of sales volume, and in Mexico, its main market, FEMSA Cerveza was ranked the second-largest beer producer in terms of sales volume. In 2009, approximately 66.4% of FEMSA Cerveza’s sales volume came from Mexico, with the remaining 24.8% from Brazil and 8.8% from exports. As of December 31, 2009, FEMSA Cerveza sold 40.548 million hectoliters of beer and produced and/or distributed 21 brands of beer in 14 different presentations resulting in a portfolio of 111 different product offerings in Mexico.
As of December 31, 2009, FEMSA Cerveza represented 23.5% of our total revenues and 34.1% of our total assets. For the period from January 1, 2010 to April 30, 2010, FEMSA Cerveza contributed net income of Ps. 706 million to our net income. On April 30, 2010, FEMSA announced the closing of the transaction pursuant to which FEMSA agreed to exchange 100% of its beer operations for a 20% economic interest in the Heineken Group. The principal terms of the Heineken transaction documents are summarized below in “Item 10. Additional Information—Material Contracts.”
As of April 30, 2010, FEMSA owns a non-controlling interest in the Heineken Group, one of the world’s leading brewers. Our 20% economic interest in the Heineken Group was initially comprised of 43,018,320 shares of Heineken Holding N.V. and 43,009,699 shares of Heineken N.V., with an additional 29,172,504 Allotted Shares to be delivered pursuant to the ASDI. As of December 31, 2011, the delivery of the Allotted Shares had been completed. See Note 9 to our audited consolidated financial statements. For 2011, FEMSA recognized equity income of Ps. 5,080 million regarding its 20% economic interest in the Heineken Group.
As described above, FEMSA Comercio has a distribution agreement with Cuauhtémoc Moctezuma (which is now a part of the Heineken Group) pursuant to which OXXO stores only carry beer brands produced and distributed by Cuauhtémoc Moctezuma. OXXO stores will continue to benefit from the existing relationship under which Cuauhtémoc Moctezuma will continue to be the names Bara, Sixexclusive supplier of beer to OXXO until June 2020. As of April 30, 2010, Coca-Cola FEMSA has agreed with Cervejarias Kaiser (also now part of the Heineken Group) to continue to distribute and Matador.sell the Kaiser beer portfolio in Coca-Cola FEMSA’s Brazilian territories for a 20-year term beginning in 2003, consistent with the arrangement already in place. In addition, our corporate and shared services subsidiary will continue to provide certain services to Cuauhtémoc Moctezuma and its subsidiaries.
Our other business consists of the following smaller operations that support our core operations:
Our commercial refrigerators, labels and flexible packaging subsidiaries. The refrigeration business produces vertical and horizontal commercial refrigerators for the soft drink, beer and food industries, with an annual capacity of 257,280404,000 units at December 31, 2009.2011. In 2009,2011, this business sold 227,085350,040 refrigeration units, 45%30% of which were sold to Coca-Cola FEMSA, 9% of which were sold to FEMSA Cerveza and the remainder of which were sold to third parties. TheUntil December 31, 2010, our labeling and flexible packaging business has its facility in Monterrey with an annual production capacity of 335,081 thousands meters of flexible packaging.was our wholly-owned subsidiary. In 2009,2010, this business sold 41%14% of its label sales volume to FEMSA Cerveza,Cuauhtémoc Moctezuma, 20% to Coca-Cola FEMSA and 39%66% to third parties. Management believes that growth at these businesses will continue to reflect the marketing strategy of Coca-Cola FEMSA.Our labeling and flexible packaging business was sold on December 31, 2010.
Our logistics services subsidiary provides a broad range of logistics and vehicle maintenance services to Coca-Cola FEMSA, FEMSA Empaques, the packaging operations of FEMSA Cerveza, FEMSA Comercio, Cuauhtémoc Moctezuma and third-party clients that either supply or participate directly in the Mexican beverage industry orbeverages, consumer products and retail industries. It has operations in other industries. This business provides integrated logistics support for its clients’ supply chain, including the management of carriersMexico, Brazil, Colombia, Panama, Costa Rica and other supply chain services.Nicaragua.
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Our corporate services subsidiary employs all of our corporate staff, including the personnel managing the areas of finance, corporate accounting, taxation, legal, financial and strategic planning, human resources and internal audit. Through this subsidiary, we direct, control, supervise and review the operations of our sub-holding companies. As of December 31, 2009,2011, FEMSA Cerveza,Comercio, FEMSA ComercioLogística and our packaging subsidiaries pay management fees for the services provided to them. In addition, Coca-Cola FEMSA has entered into a services agreement pursuant to which it pays for specific services. As part of the Heineken transaction, the corporate and shared services subsidiary willsubsidiaries continue to provide some limited corporate services and shared services to Cerveceríasubsidiaries of Cuauhtémoc Moctezuma (now part of Heineken)the Heineken Group), for which the entity willsuch companies continue to pay.
Description of Property, Plant and Equipment
As of December 31, 2009,2011, we owned all of our manufacturing facilities and substantially all of our warehouses and distribution centers. Our properties primarily consisted of production and distribution facilities for our beer and soft drink operations and office space. In addition, FEMSA Comercio owns approximately 12.0%10.9% of the OXXO store locations, while the other stores are located in properties that are rented under long-term lease arrangements with third parties.
The table below sets forth the location, principal use and production area of our production facilities, and the sub-holding company that owns such facilities.each of which is owned by Coca-Cola FEMSA.
Production Facilities of FEMSA
As of December 31, 20092011
| Location | Principal Use | Production Area | |||
(in thousands of sq. meters) | ||||||
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Mexico | San Cristóbal de las Casas, Chiapas | Soft Drink Bottling Plant | 45 | |||
Cuautitlán, Estado de México | Soft Drink Bottling Plant | 35 | ||||
Los Reyes la Paz, Estado de México | Soft Drink Bottling Plant | 50 | ||||
Toluca, Estado de México | Soft Drink Bottling Plant | 242 | ||||
León, Guanajuato | Soft Drink Bottling Plant | |||||
Morelia, | Soft Drink Bottling Plant | 50 | ||||
Ixtacomitán, Tabasco | Soft Drink Bottling Plant | 117 | ||||
Apizaco, Tlaxcala | Soft Drink Bottling Plant | 80 | ||||
Coatepec, Veracruz | Soft Drink Bottling Plant | 142 | ||||
La Pureza Altamira, Tamaulipas | Soft Drink Bottling Plant | 300 | ||||
Poza Rica, Veracruz | Soft Drink Bottling Plant | 42 | ||||
Pacífico, Estado de México | Soft Drink Bottling Plant | 89 | ||||
Cuernavaca, Morelos | Soft Drink Bottling Plant | 37 | ||||
Toluca, Estado de México | Soft Drink Bottling Plant | 41 | ||||
Guatemala | Guatemala City | Soft Drink Bottling Plant | 47 | |||
Nicaragua | Managua | Soft Drink Bottling Plant | 54 | |||
Costa Rica | Calle Blancos, San José | Soft Drink Bottling Plant | 52 | |||
Coronado, San José | Soft Drink Bottling Plant | 14 | ||||
Panama | Panama City | Soft Drink Bottling Plant | 29 | |||
Colombia | Barranquilla | Soft Drink Bottling Plant | 37 | |||
Bogotá | Soft Drink Bottling Plant | 105 | ||||
Bucaramanga | Soft Drink Bottling Plant | 26 | ||||
Cali | Soft Drink Bottling Plant | 76 | ||||
Manantial | Soft Drink Bottling Plant | 67 | ||||
Medellín | Soft Drink Bottling Plant | 47 | ||||
Venezuela | Antimano | Soft Drink Bottling Plant | 15 | |||
Barcelona | Soft Drink Bottling Plant | 141 | ||||
Maracaibo | Soft Drink Bottling Plant | 68 | ||||
Valencia | Soft Drink Bottling Plant | 100 | ||||
Brazil | Campo Grande | Soft Drink Bottling Plant | 36 | |||
Jundiaí | Soft Drink Bottling Plant | 191 | ||||
Mogi das Cruzes | Soft Drink Bottling Plant | 119 | ||||
Belo Horizonte | Soft Drink Bottling Plant | 73 | ||||
Argentina | Alcorta | Soft Drink Bottling Plant | 73 | |||
Monte Grande, Buenos Aires | Soft Drink Bottling Plant | 32 |
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We maintain an “all risk” insurance policy covering our properties (owned and leased), machinery and equipment and inventories as well as losses due to business interruptions. The policy covers damages caused by natural disaster, including hurricane, hail, earthquake and damages caused by human acts, including explosion, fire, vandalism, riot and losses incurred in connection with goods in transit. In addition, we maintain an “all risk” liability insurance policy that covers product liability. We purchase our insurance coverage through an insurance broker. The policies for “all risk” property insurance and “all risk” liability insurance are issued by ACE Seguros, S.A., and the coverage is partially reinsured in the international reinsurance market. We believe that our coverage is consistent with the coverage maintained by similar companies operating in Mexico.
Capital Expenditures and Divestitures
Our consolidated capital expenditures for the years ended December 31, 2009, 2008,2011, 2010, and 20072009 were Ps. 13,17812,515 million, Ps. 14,23411,171 million and Ps. 11,2579,103 million respectively, and were for the most part financed from cash from operations generated by our subsidiaries. These amounts were invested in the following manner:
Year Ended December 31, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
(in millions of Mexican pesos) | ||||||||||||
Coca-Cola FEMSA | Ps. | 7,826 | Ps. | 7,478 | Ps. | 6,282 | ||||||
FEMSA Comercio | 4,096 | 3,324 | 2,668 | |||||||||
Other | 593 | 369 | 153 | |||||||||
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Total(1) | Ps. | 12,515 | Ps. | 11,171 | Ps. | 9,103 |
Coca-Cola FEMSA FEMSA Cerveza FEMSA Comercio Other Total Year Ended December 31, 2009 2008 2007 (in millions of Mexican pesos) Ps. 6,282 Ps. 4,802 Ps. 3,682 4,111 6,418 5,373 2,668 2,720 2,112 117 294 90 Ps. 13,178 Ps. 14,234 Ps. 11,257
(1) | Capital expenditures and divestitures in 2009 have been modified in order to conform to presentation of 2011 and 2010 figures due to the discontinued operations of FEMSA Cerveza. |
Coca-Cola FEMSA
During 2009,2011, Coca-Cola FEMSA’s capital expenditures focused on increasing plant operatingproduction capacity, improving the efficiency of distribution infrastructure, placing coolers with retailers, returnable bottles and cases, improving the efficiency of its distribution infrastructure and information technology.IT. Capital expenditures in Mexico and Central America were approximately Ps. 2,7104,117 million and accounted for approximately 43%53% of Coca-Cola FEMSA’s capital expenditures.
FEMSA Cerveza
Production
During 2009, FEMSA Cerveza invested approximately Ps. 653 million on equipment substitution and upgrades in its facilities. FEMSA Cerveza’s monthly installed capacity as of December 31, 2009 was 4.86 million hectoliters, equivalent to an annualized installed capacity of 58.3 million hectoliters. In addition, FEMSA Cerveza invested Ps. 295 million in plant improvements and equipment upgrades for its beverage can and glass bottle operations.
Distribution
In 2009, FEMSA Cerveza invested Ps. 387 million in its distribution network. Approximately Ps. 276 million of this amount was invested inexpenditures, with South America representing the replacement of trucks in its distribution fleet, Ps. 70 million in land, buildings and improvements to leased properties dedicated to various distribution functions, and the remaining Ps. 41 million in other distribution-related investments.
Market-related Investments
During 2009, FEMSA Cerveza invested Ps. 2,154 million in market-related activities and brand support in the domestic market. Approximately 53% of these investments were directed to customer agreements with retailers and commercial support to owned and third-party distributors. Investments in retail agreements that exceed a one-year term are capitalized and amortized over the life of the agreement. In general, FEMSA Cerveza’s retail agreements were for a period of four to five years. Other market-related investments include the purchase of refrigeration equipment, coolers and billboards. These items were placed with retailers as a mean of facilitating the retailers’ ability to service consumers and to promote the image and profile of FEMSA Cerveza’s brands.
Information Technology Investments and Others
In addition, during 2009, FEMSA Cerveza invested Ps. 622 million in system software projects.balance.
FEMSA Comercio
FEMSA Comercio’s principal investment activity is the construction and opening of new stores. During 2009,2011, FEMSA Comercio opened 9601,135 net new OXXO stores. FEMSA Comercio invested Ps. 2,6684,096 million in 20092011 in the addition of new stores, warehouses and improvements to leased properties.
Competition Legislation
TheLey Federal de Competencia Económica (Federal Economic Competition Law or Mexican Competition Law) became effective on June 22, 1993. The Mexican Competition Law and theReglamento de la Ley Federal de Competencia Económica (Regulations under the Mexican Competition Law), effective as of October 13, 2007, regulate monopolies and monopolistic practices and require Mexican government approval of certain mergers and acquisitions. The Mexican Competition Law subjects the activities of certain Mexican companies, including us, to regulatory scrutiny. In addition, the Regulations under the Mexican Competition Law prohibit members of any trade association from reaching any agreement relating to the price of their products. Management believes that we are currently in compliance in all material respects with Mexican competition legislation.
In Mexico and in some of the other countries in which we operate, we are involved in different ongoing competition related proceedings. We believe that the outcome of these proceedings will not have a material adverse effect on our financial position or results offrom operations. See “Item 8. Financial Information—Legal Proceedings—Coca-Cola FEMSA—Antitrust Matters.”
Price Controls
Voluntary price restraints or statutory price controls have been imposed historically in several of the countries in which Coca-Cola FEMSA operates. Currently, there are no price controls on Coca-Cola FEMSA’s products in any of its territories, except for (i) Argentina, where authorities directly supervise certain products sold through supermarkets to control inflation, and (ii) Venezuela, where the government has recently imposed price controls on certain products including still bottled water. See “Item 3. Key Information—Risk Factors—Regulatory developments may adversely affect Coca-Cola FEMSA’s business.”
Taxation of Sparkling Beverages
All the countries in which Coca-Cola FEMSA operates, except for Panama, impose a value-added tax on the sale of sparkling beverages, with a rate of 16% in Mexico beginning in January 2010 (15% through the end of 2009),2011, 12% in Guatemala, 15% in Nicaragua, 13% in Costa Rica, 16% in Colombia (applied only to the first sale in supply chain), 12% in Venezuela (beginning in April 2009), 17% (Mato Grosso do Sul) and 18% (São Paulo and Minas Gerais) in Brazil, and 21% in Argentina. In addition, several of the countries in which Coca-Cola FEMSA operates impose the following excise or other taxes:
Guatemala imposes an excise tax of 0.18 cents in local currency (Ps. 0.280.3221 as of December 31, 2009)2011) per liter of sparkling beverage.
Costa Rica imposes a specific tax on non-alcoholic bottled beverages based on the combination of packaging and flavor, a 5%currently assessed at 15.50 colones (Ps. 0.4180 as of December 31, 2011) per 250 ml, and an excise tax on local brands a 10% tax onof 5%, foreign brands of 10% and amixers of 14% tax on mixers, and another specific tax on non-alcoholic beverages of 14.39 colones (Ps. 0.33 as of December 31, 2009) for every 250 ml..
Nicaragua imposes a 9% tax on consumption, and municipalities impose a 1% tax on Coca-Cola FEMSA’s Nicaraguan gross income.
Panama imposes a 5% tax based on the cost of goods produced. Panama also imposes a 10% selective consumption tax on syrups, powders and concentrate.
Brazil imposes an average production tax of approximately 4.9% and an average sales tax of 7.8%approximately 9.6%, both assessed by the federal government. Most of these taxes are fixed, based on average retail prices in each state where the company operates (VAT) or fixed by the federal government (excise and sales tax).
Argentina imposes an excise tax on sparkling beverages containing less than 5% lemon juice or less than 10% fruit juice of 8.7%, and an excise tax on flavored sparkling beveragebeverages with 10% or more fruit juice and on sparkling water of 4.2%, although this excise tax is not applicable to certain of Coca-Cola FEMSA’s products.
Environmental Matters
In all of the countries where we operate, our businessesterritories, our operations are subject to federal and state laws and regulations relating to the protection of the environment.
Mexico
In Mexico, the principal legislation is theLey General del Equilibrio Ecológico y la Protección al Ambiente (Federal General Law for Ecological Equilibrium and Environmental Protection, or the Mexican Environmental Law) and theLey General para la Prevención y Gestión Integral de los Residuos(General Law for the Prevention and Integral Management of Waste), which are enforced by theSecretaría de Medio Ambiente y Recursos Naturales(Ministry of the Environment and Natural Resources, or SEMARNAT). SEMARNAT can bring administrative and criminal proceedings against companies that violate environmental laws, and it also has the power to temporarily close non-complying facilities. Under the Mexican Environmental Law, rules have been promulgated concerning water, air and noise pollution and hazardous substances. In particular, Mexican environmental laws and regulations require that we file periodic reports with respect to air and water emissions and hazardous wastes and set forth standards for waste water discharge that apply to our operations. We are also subject to certain minimal restrictions on the operation of delivery trucks in Mexico City. We have implemented several programs designed to facilitate compliance with air, waste, noise and energy standards established by current Mexican federal and state environmental laws, including a program that installs catalytic converters and liquid petroleum gas in delivery trucks for our operations in Mexico City. See “—“Item 4. Information on the Company—Coca-Cola FEMSA—ProductTotal Sales and Distribution.”
In addition, we are subject to theLey de Aguas Nacionales,as amended (the National Water Law), enforced by theComisión Nacional del Agua (the Mexican(the National Water Commission), or CONAGUA.. Adopted in December 1992, and amended in 2004, the lawNational Water Law provides that plants located in Mexico that use deep water wells to supply their water requirements must pay a fee to the citylocal governments for the discharge of residual waste water to drainage. Pursuant to this law, certain local authorities test the quality of the waste water discharge and charge plants an additional fee for measurements that exceed certain standards published by CONAGUA.the National Water Commission. In the case of non-compliance with the law, penalties, including closures, may be imposed. All of Coca-Cola FEMSA’s bottler plants located in Mexico City, as well as the Toluca plant,have met these standards as of 2001.standards. In addition, Coca-Cola FEMSA’s plants in Apizaco and San Cristóbal are certified with ISO 14001.
In Coca-Cola FEMSA’s Mexican operations, it established a partnership with The Coca-Cola Company and ALPLA, a supplier of plastic bottles to Coca-Cola FEMSA in Mexico, to createIndustria Mexicana de Reciclaje (IMER), a PET recycling facility located in Toluca, Mexico. This facility started operations in 2005 and has a recycling capacity of approximately 25,000 metric tons per year from which 15,000 metric tons can be re-used in PET bottles for food packaging purposes. Coca-Cola FEMSA has also continued contributing funds to a nationwide recycling company,Ecología y Compromiso Empresarial(Environmentally Committed Companies). In addition, Coca-Cola FEMSA’s plants located in Toluca, Reyes, Cuautitlán, Apizaco, San Cristobal,Cristóbal, Morelia, Ixtacomitan, Coatepec, Poza Rica and CoatepecCuernavaca have received aCertificado de Industria Limpia (Certificate of Clean Industry).
As part of our environmental protection and sustainability strategies, someseveral of our subsidiaries have entered into a20-year wind power supply agreementagreements with Energíthe Mareña Alterna Istmeña S. de R.L. de C.V.Renovables Wind Power Farm to receive electrical energy supplyfor use at production and distribution facilities of FEMSA and Coca-Cola FEMSA and FEMSA Cerveza’s plants,throughout Mexico, as well as at manyfor a significant number of OXXO convenience stores. The wind farm will be entirely financed by the supplier, itMareña Renovables Wind Power Farm will be located in the state of Oaxaca and it is expected to have an outputa capacity of 220396 megawatts. We anticipate that the wind power supplyMareña Renovables Wind Power Farm will begin operations in 2011.2013.
Also as part of Coca-Cola FEMSA’s environmental protection and sustainability strategies, in December 2009, some of its affiliates,Coca-Cola FEMSA, jointly with other third parties,strategic partners, entered into a generation and wind energy supply agreement with a Mexican subsidiary of the Spanish wind farm developer, GAMESA Energía, S.A., or GAMESA, to supply green energy to a plantCoca-Cola FEMSA’s bottling facility in Toluca, Mexico, owned by Coca-Cola FEMSA’sits subsidiary, Propimex, S. de R.L. de C.V. (formerly Propimex, S.A. de C.V.), or Propimex, and to some of its suppliers of PET bottles. The plant,wind farm generating such energy, which is located in La Ventosa, Oaxaca, is expected to generate approximately 100 thousand megawatt hours of energy annually. The energy supply services began in April 2010.2010 and, during 2010, provided Coca-Cola FEMSA with approximately 45 thousand megawatt hours of energy. In 2010, GAMESA sold its interest in the Mexican subsidiary that owned the wind farm to Iberdrola Renovables México, S.A. de C.V.
Central America
Coca-Cola FEMSA’s Central American operations are subject to several federal and state laws and regulations relating to the protection of the environment, which have been enacted in the last ten years, as awareness has increased in this region about the protection of the environment and the disposal of dangeroushazardous and toxic materials as well as water usage. In some countries in Central America, Coca-Cola FEMSA is in the process of bringing its operations into compliance with new environmental laws on the timeline established by the relevant regulatory authorities. Coca-Cola FEMSA’s Costa Rica and Panama operations have participated in a joint effort
along with the local division of The Coca-Cola Company calledMisión Planeta (Mission Planet) for the collection and recycling of non-returnable plastic bottles.
Colombia
Coca-Cola FEMSA’s Colombian operations are subject to several Colombian federal, state and municipal laws and regulations related to the protection of the environment and the disposal of treated water and toxic and dangeroushazardous materials. These laws include the control of atmospheric emissions, noise emissions, disposal of treated water and strict limitations on the use of chlorofluorocarbons. For Coca-Cola FEMSA’s plants in Colombia, it has obtained theCertificación Ambiental Fase IV (Phase IV Environmental Certificate) demonstrating its compliance at the highest level with relevant Colombian regulations. Coca-Cola FEMSA is also engaged in nationwide campaigns for the collection and recycling of glass and plastic bottles as well as reforestation programs. In 2011, jointly with the FEMSA Foundation, Coca-Cola FEMSA has received a “Certificaciówas awarded with the “Western Hemisphere Corporate Citizenship Award” for the social responsibility programs it carried out to respond to the extreme weather experienced in Colombia in 2010 and 2011, known locally as the “winter emergency.” In addition, Coca-Cola FEMSA also obtained the ISO 9001, ISO-22000 and PAS 220 certifications for its plants located in Medellín, Ambiental Fase IV”(Phase IV Environmental Certificate)Cali, Bogotá, Barranquilla, Bucaramanga and La Calera, as recognition for each ofthe highest quality in its Columbian plants.production processes.
Venezuela
Coca-Cola FEMSA’s Venezuelan operations are subject to several Venezuelan federal, state and municipal laws and regulations related to the protection of the environment. The most relevant of these laws are theLey Orgánica del Ambiente (Organic Environmental Law), theLey Sobre Sustancias, Materiales y Desechos Peligrosos(Substance, Material and Dangerous Waste Law), theLey Penal del Ambiente (Criminal EnvironmentEnvironmental Law) and theLey de Aguas(Water Law). Since the enactment of the Organic Environmental Law in 1995, Coca-Cola FEMSA’s Venezuelan subsidiary has presented the proper authorities with plans to bring their production facilities and distribution centers into compliance with the law,applicable laws, which mainly consist of building or expanding the capacity of water treatment plants in Coca-Cola FEMSA’s bottling facilities. Even though Coca-Cola FEMSA has had to adjust some of the originally proposed timelines due to construction delays, in 2009, Coca-Cola FEMSA completed the construction and received all the required permits to operate a new water treatment plant in its bottling facility located in the city of Barcelona. At the end of 2009,2011, Coca-Cola FEMSA also agreed with the relevant authorities to constructconstructed a new water treatment plant in its bottling plant in the city of Valencia, plant within the next 18 months.which began operations in February 2012. During 2011, Coca-Cola FEMSA expects to complete thealso commenced construction of a new water treatment plant projects in the rest of its Antimano bottling facilitiesplant in Caracas, which construction is expected to conclude during the first halfsecond quarter of 2011.2012. Coca-Cola FEMSA is also inconcluding the process of obtaining the necessary authorizations and licenses before it can begin the construction and expansion of its current water treatment plant in its bottling facility in Maracaibo. In December 2011, Coca-Cola FEMSA also obtained the ISO 14000 certification for all of its plants in Venezuela.
In addition, in December 2010, the Venezuelan government approved theLey Integral de Gestión de la Basura (Comprehensive Waste Management Law), which will regulate solid waste management and which may be applicable to manufacturers of products for mass consumption. The full scope of this law has not yet been established.
Brazil
FEMSA Cerveza and Coca-Cola FEMSA’s Brazilian operations are subject to several federal, state and municipal laws and regulations related to the protection of the environment. Among the most relevant laws and regulations are those dealing with the emission of toxic and dangeroushazardous gases, disposal of wastewater and solid waste, and disposal of wastewater,soil contamination by hazardous chemicals, which impose penalties, such as fines, facility closures or criminal charges depending upon the level of non-compliance.
Coca-Cola FEMSA’s production plant located in Jundiaí has been recognized by the Brazilian authorities for its compliance with environmental regulations and for having standards well above those imposed by the law. The plant has been certified for thefor: (i) ISO 9001 since March 1995;1993; (ii) ISO 14001 since March 1997; (iii) norm OHSAS 18001 since 2005; and iv)(iv) ISO 22000 since 2007. FEMSA Cerveza’s other plants2007; and Coca-Cola FEMSA’s Brazilian operations are also ISO 9001, ISO 14001 and OHSAS 18001 certified.(v) PAS: 96 since 2010.
In Brazil it is also necessary to obtain concessions from the government to cast drainage. Coca-Cola FEMSA’s plants in Brazil have been granted this concession, except Mogi das Cruzes, where it has timely begun the process of obtaining one. In December, 2010, Coca-Cola FEMSA is in the process of expandingincreased the capacity of itsthe water treatment plant in its Jundiaí facility, which is expected to be completed in 2010.facility.
In Brazil, a municipal regulation of the City of São Paulo, implemented pursuant to Law 13.316/2002, came into effect in May 2008. This regulation requires Coca-Cola FEMSA to collect for recycling a specified annual percentage of plastic bottles made from PET sold in the municipality;City of São Paulo; such percentage increases each year. As of May 2009, itCoca-Cola FEMSA was required to collect for recycling 50% of the PET bottles it sold in the City of São Paulo and byPaulo. As of May 2010, it iswas required to collect 75%, and as of PET bottles for recycling andMay 2011, it was required to collect 90% in May 2011.. Currently, Coca-Cola FEMSA is not able to collect the entire required volume required of the PET bottles it has sold in the City of São Paulo for recycling.
If Coca-Cola FEMSA does not meet the requirements of this regulation, which arewe believe to be more onerous than those imposed by the countries with the highest recycling standards, it could be fined and be subject to other sanctions, such as the suspension of operations in any of its plants and/or distribution centers located in the City of São Paulo. In May 2008, Coca-Cola FEMSA, together with other bottlers in São Paulo, through theAssociação Brasileira das Indústrias de Refrigerantes e de Bebidas Não-alcoólicas (Brazilian Soft Drink and Non-Alcoholic Beverage Association, or ABIR), filed a motion requesting a court to overturn this regulation on the basis of impossibility of compliance. Through ABIR, Coca-Cola FEMSA is negotiating the reduction of recycling percentages and more reasonable timelines for compliance. In addition, in November 2009, in response to a requirement of the municipal authority request for Coca-Cola FEMSA to demonstrate the destination of the PET bottles sold by it in the City of São Paulo, itCoca-Cola FEMSA filed a motion showing all of its recycling programs and requesting a more practical timeline to comply with the requirements of the law. In October 2010, the municipal authority of the City of São Paulo levied a fine on Coca-Cola FEMSA’s Brazilian operating subsidiary of 250,000 Brazilian reais (approximately Ps. 1,750,000 as of December 31, 2010) on the grounds that the report submitted by Coca-Cola FEMSA’s Brazilian operating subsidiary did not comply with the 75% proper disposal requirement for the period from May 2008 to May 2010. Coca-Cola FEMSA filed an appeal against this fine. Coca-Cola FEMSA is currently awaiting resolution of both matters.
In August 2010, Law No. 12.305/2010 established the Brazilian National Solid Waste Policy. This policy is based on the principle of these matters.shared responsibility between the government, companies and the public, and provides for the post-consumption return of products to companies and requires public authorities to implement waste management programs. This law is regulated by Federal Decree No. 7.404/2010, and was published in December 2010. Coca-Cola FEMSA is currently discussing with the relevant authorities the impact this law may have on Brazilian companies in complying with the regulation in effect in the City of São Paulo.
Argentina
Coca-Cola FEMSA’s Argentine operations are subject to federal and provincialmunicipal laws and regulations relating to the protection of the environment. The most significant of these are regulations concerning waste water discharge, which are enforced by theSecretaría de Ambiente y Desarrollo Sustentable(Ministry of Natural Resources and Sustainable Development) and theOrganismo Provincial para el Desarrollo Sostenible(Provincial Organization for Sustainable Development) for the province of Buenos Aires. Coca-Cola FEMSA’s Alcorta plant is in compliance with environmental standards and Coca-Cola FEMSA has been certified for ISO 14001:2004 for theits plants and operative units in Buenos Aires.
For all of Coca-Cola FEMSA’s plant operations, Coca-Cola FEMSAit employs twoan environmental management systems: (i) system:Sistema de Administración Ambiental (Environmental Administration System, or EKOSYSTEM) that is contained withinSistema Integral de Calidad (Integral Quality System, or SICKOF) and (ii) Sistema de Administracion Ambiental (Environmental Administration System or EKOSYSTEM). We do not believe that Coca-Cola FEMSA’s business activities pose a material risk to the environment, and we believe that Coca-Cola FEMSA is in material compliance with all applicable laws and regulations.
Coca-Cola FEMSA has expended, and may be required to expend in the future, funds for compliance with and remediation under local environmental laws and regulations. Currently, we do not believe that such costs will have a material adverse effect on Coca-Cola FEMSA’s results offrom operations, or financial condition. However, since environmental laws and regulations and their enforcement are becoming increasingly more stringent in Coca-Cola FEMSA’s territories, and there is increased awarenessrecognition by local authorities of the need for higher environmental standards in the countries where it operates, changes in current regulations may result in an increase in costs, which may have an adverse effect on Coca-Cola FEMSA’s future results offrom operations or financial condition. Coca-Cola FEMSA’s management is not aware of any significant pending regulatory changes that would require a significant amount of additional remedial capital expenditures.
We do not believe that Coca-Cola FEMSA’s business activities pose a material risk to the environment, and we believe that Coca-Cola FEMSA is in material compliance with all applicable environmental laws and regulations.
Other regulations
In December 2009, the Venezuelan government issued a decree requiring a reduction in energy consumption by at least 20% for industrial companies whose consumption is greater than two megawatts per hour and to submit an energy-usage reduction plan. Some of Coca-Cola FEMSA’s bottling operations in Venezuela outside of Caracas met this threshold and it submitted a plan, which included the purchase of generators for its plants. In January 2010, the Venezuelan government subsequently implemented power cuts and other measures for all industries in Caracas whose consumption was above 35 kilowatts per hour. All of Coca-Cola FEMSA’s bottling and distribution centers as well as administrative offices in Caracas met this threshold.
In January 2010, the Venezuelan government amended theLey para la Defensa y Acceso a las Personas a los Bienes y Servicios( Defense of and Access to Goods and Services Defense Law).Law. Any violation by a company that produces, distributes and sells goods and services could lead to among other consequences, fines, penalties or the confiscation of the assets used to produce, distribute and sell these goods without compensation. Although we believe Coca-Cola FEMSA is in compliance with this law, consumer protection laws in Venezuela are subject to continuing review and changes,changes.
In July 2011, the Venezuelan government passed the Fair Costs and Prices Law. The purpose of this law is to establish the regulations and administrative processes necessary to maintain the price stability of, and equal access to, goods and services. The law also creates the National Ministry of Costs and Prices, whose main role is to oversee price controls and set maximum retail prices on certain consumer goods and services. Of Coca-Cola FEMSA’s products, only certain of its still water beverages were affected by these regulations, which mandated a lowering of its sale prices as of April 2012. Any failure to comply with this law would result in fines, temporary suspension or the closure of operations. While Coca-Cola FEMSA is presently in compliance with this law, we cannot assure you that the Venezuelan government’s future regulation of goods and services will not result in a forced reduction of prices in respect of certain of Coca-Cola FEMSA’s other products, which could have a negative effect on its results of operations.
In January 2012, the Costa Rican government approved a decree that regulates the sale of food and beverages in schools. The decree came into effect in 2012. Enforcement of this law will be gradual, from applicability in 2012 to 2014, depending on the specific characteristics of the food or beverage in question. In accordance with the decree, the sale of specific sparkling beverages and still beverages that contain sugar, syrup or HFCS in any type of presentation in schools is prohibited. Coca-Cola FEMSA will still be allowed to sell water and certain still beverages in schools. We cannot assure you that the Costa Rican government will not further restrict sales of other of Coca-Cola FEMSA’s products in schools in the future; any such changesfurther restrictions could lead to an adverse impact on Coca-Cola FEMSA.FEMSA’s results of operations.
Water Supply Law
In Mexico, Coca-Cola FEMSA and FEMSA Cerveza purchaseobtains water in Mexico directly from municipal waterutility companies and pumppumps water from its own wells and rivers pursuant to concessions obtained from the Mexican government on a plant-by-plant basis. Water use in Mexico is regulated primarily by theLey de Aguas Nacionales de 1992 (1992 National Water Law),Law, and regulations issued thereunder, which created theComisión Nacional del Agua(National Water Commission).Commission. The National Water Commission is charged within charge of overseeing the national system of water use. Under the 1992National Water Law, concessions for the use of a specific volume of
ground or surface water generally run for five, ten, or fifteen-yearfrom five- to fifty-year terms, depending on the supply of groundwater in each region as projected by the National Water Commission. Concessionaires may request that concession terms to be extended upon termination.before expiration. The Mexican government is authorized to reduce the volume of ground or surface water granted for use by a concession by whatever volume of water is not used by the concessionaire for two consecutive years. However, because the current concessions for each of Coca-Cola FEMSA and FEMSA Cerveza’sFEMSA’s plants in Mexico do not match each plant’s projected needs for water in future years, we successfully negotiated with the Mexican government the right to transfer the unused volume under concessions from certain plants to other plants anticipating greater water usage in the future. These concessions may be terminated if, among other things, we use more water than permitted or we fail to pay required concession-related fees and do not cure such situations in a timely manner.
Although we have not undertaken independent studies to confirm the sufficiency of the existing or future groundwater supply, we believe that our existing concessions satisfy our current water requirements in Mexico.
In Argentina, a state water company provides water to Coca-Cola FEMSA’s Alcorta plant on a limited basis; however, we believe the authorized amount meets Coca-Cola FEMSA’s requirements for this plant. Water is pumped fromIn Coca-Cola FEMSA’s own wells in its Monte Grande plant in Argentina, without the need for any specific permit or license.it pumps water from its own wells, in accordance with Law 25.688.
In Brazil, we buy water directly from municipal utility companies and pumpwe also capture water from our ownunderground sources, wells or rivers (Mogi das Cruzes and FEMSA Cerveza’s plants)surface sources (i.e. rivers), pursuant to concessions granted by the Brazilian government for each plant. According to the Brazilian Constitution, water is considered an asset of common use and maycan only be exploited for the national interest by Brazilians or companies incorporatedformed under Brazilian law. DealersConcessionaires and users have the responsibility for any damage to the environment. The exploitation and use of water is regulated by theCódigo de Mineração (Code of Mining, Decree Law nº.No. 227/67), by theCódigo de Águas Minerais (Mineral Water Code, Decree Law nº.No. 7841/45), the National Water Resources Policy (Law nº.No. 9433/97) and by regulations issued thereunder. CompaniesThe companies that exploit water are supervised by theDepartamento Nacional de Produção Mineira—Mineiral—DNPM (National Department of Mineral Production) and the National Water Agency in connection with sanitary, federal health agencies, as well as state and municipal authorities. In Coca-Cola FEMSA’s JundaíJundiaí and Belo Horizonte plants, we do not exploit mineral water. In the Mogi das Cruzes and Campo Grande plants, we have all the necessary permits related tofor the exploitation of mineral water.
In Colombia, in addition to natural spring water, Coca-Cola FEMSA acquiresobtains water directly from its own wells and from local publicutility companies. Coca-Cola FEMSA is required to have a specific concession to exploit water from natural sources. Water use in Colombia is regulated by law no.No. 9 of 1979 and decrees no. 1594 of 1984 and no. 2811 of 1974. The National Institute of National Resources supervises companies that exploit water.
In Nicaragua, the use of water is regulated by theLey General de Aguas Nacionales (National Water Law), and in Costa Rica, the use of water is regulated by theLey de Aguas (Water Law). In both of these countries, Coca-Cola FEMSA owns and exploits its own water wells granted to it through governmental concessions. In Guatemala, no license or permits are required to exploit water from the private wells in Coca-Cola FEMSA’s own plants. In Panama, Coca-Cola FEMSA acquires water from a state water company.company, and the use of water is regulated by theReglamento de Uso de Aguas de Panamá(Panama Use of Water Regulation). In Venezuela, Coca-Cola FEMSA uses private wells in addition to water provided by the municipalities, and Coca-Cola FEMSAit has taken the appropriate actions, including actions to comply with water regulations, to have water supply available from these sources.sources, regulated by theLey de Aguas (Water Law).
We cannot assure you that water will be available in sufficient quantities to meet our future production needs, that we will be able to maintain our current concessions or that additional regulations relating to water use will not be adopted in the future in our territories. We believe that we are in material compliance with the terms of our existing water concessions and that we are in compliance with all relevant water regulations.
ITEM 4A. | UNRESOLVED STAFF COMMENTS |
None
ITEM 5. | OPERATING AND FINANCIAL REVIEW AND PROSPECTS |
The following discussion should be read in conjunction with, and is entirely qualified by reference to, our audited consolidated financial statements and the notes to those financial statements. Our audited consolidated financial statements were prepared in accordance with Mexican Financial Reporting Standards,FRS, which differ in certain significant respects from U.S. GAAP. Notes 26 and 27 to our audited consolidated financial statements provide a description of the principal differences between Mexican Financial Reporting StandardsFRS and U.S. GAAP as they relate to us, as well as U.S. GAAP consolidated balance sheets, statements of income and comprehensive income, and cash flows for the same periods presented for Mexican Financial Reporting StandardsFRS purposes and for the consolidated statement of changes in stockholders’ equity for the years ended December 31, 20082010 and 2009,2011, and reconciliation to U.S. GAAP of net income, comprehensive income and stockholders’ equity. See “—U.S. GAAP Reconciliation.”
Overview of Events, Trends and Uncertainties
Management currently considers the following events, trends and uncertainties to be important to understanding its results offrom operations and financial position during the periods discussed in this section:
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At FEMSA Cerveza, total beer sales volumes decreased in Mexico and Brazil and increased in the export market. The high price of raw materials, particularly aluminum and barley, represented in 2009 an uncertainty in our cost structure. Heineken USA has been distributing FEMSA Cerveza’s beer brands in the United States since January 1, 2005 with very encouraging results, and we have signed an agreement that extends this commercial relationship until December 2017.
FEMSA Comercio accelerated its rate of OXXO store openings and continues to grow in terms of total revenues and as a percentage of our consolidated total revenues. FEMSA Comercio has lower operating margins than our beverage businesses. We expectbusiness. Given that FEMSA Comercio has lower operating margins and fixed costs, it is more sensitive to continue to expand the OXXO chain during 2010.changes in sales which could negatively affect operating margins.
Our results offrom operations and financial position are affected by the economic and market conditions in the countries where our subsidiaries conduct their operations, particularly in Mexico. Changes in these conditions are influenced by a number of factors, including those discussed in “Item 3. Key Information—Risk Factors.”
On December 15, 2011, Coca-Cola FEMSA entered into an agreement to merge the beverage division of Grupo Fomento Queretano into Coca-Cola FEMSA. Grupo Fomento Queretano’s beverage division operates mainly in the Mexican state of Querétaro, as well as in parts of the states of Mexico, Hidalgo and Guanajuato. The merger agreement was approved by both Coca-Cola FEMSA’s and Grupo Fomento Queretano’s boards of directors, and is subject to the approval of the CFC and of the shareholders meetings of both companies. The transaction will involve the issuance of approximately 45.1 million new Coca-Cola FEMSA Series L Shares, and in addition Coca-Cola FEMSA will assume Ps. 1,221 million in net debt. This transaction is expected to be completed in the second quarter of 2012.
In February 27, 2009,2012, Coca-Cola FEMSA announced that it had successfully closed the transaction with Bavaria,entered into a subsidiary of SABMiller, to jointly acquire12-month exclusivity agreement with The Coca-Cola Company theBrisa bottled water business (including theBrisa brand and production assets). As of June 1, 2009, Coca-Cola FEMSA sells and distributes theBrisa portfolio in Colombia. This transaction facilitates Coca-Cola FEMSA’s continued increasing presence into evaluate the water business and complements Coca-Cola FEMSA’s brand portfolio. The purchase price of US$ 92 million was shared equallypotential acquisition by Coca-Cola FEMSA andof a controlling ownership stake in the bottling operations owned by The Coca-Cola Company.
In July 2009,Company in the Philippines. Both parties believe that Coca-Cola FEMSA paid downFEMSA’s expertise and successful track record operating in fragmented markets and emerging economies could be effectively deployed in such territory, and contribute significantly toward expanding the maturities relatedpenetration of, and consumer preference for, The Coca-Cola Company’s brands in that market. This exclusivity agreement does not require either party to the Yankee Bond inherited with the acquisition of Panamco for an amount of US$ 265 millionenter into any transaction, and the Certificado Bursátil for an amount of Ps. 500 million, both with cash generated from our operations.
On January 11, 2010, FEMSA announcedthere can be no assurances that its Board of Directors unanimously approved a definitive agreement under which FEMSA would exchange its FEMSA Cerveza business for a 20% economic interest in Heineken, one of the world’s leading brewers. Under the terms of the agreement, FEMSA would receive 43,018,320 shares of Heineken Holding N.V. and 72,182,201 shares of Heineken N.V., of which 29,172,502 will be delivered pursuant to an allotted share delivery instrument. It is expected that the allotted shares will be acquired by Heineken in the secondary market for delivery to FEMSA over a term not to exceed five years. Nonetheless, during the period for the delivery of the allotted shares, FEMSA will be subject to all the economic benefits, as well as the risk and obligations, of the Heineken Group as if such shares had been delivered at the closing of the transaction on April 30, 2010. Heineken would also assume US$ 2.1 billion of indebtedness, including FEMSA Cerveza’s unfunded pension obligations. The principal terms of the Heineken transaction documents are summarized below in “Item 10. Additional Information—Material Contracts.”
In January 2010, Coca-Cola FEMSA informed that Venezuelan Government authorities announced a devaluation of its currency, the Bolivar, and the establishment of a multiple exchange rate system: (1) 2.60 Bolivar to US$ 1.00 for high priority categories, (2) 4.30 Bolivar to US$ 1.00 for non-priority categories, and (3) the recognition of the existence of other exchange rates which the government shall determine. We expect this event will have an effect on our financial results, increasing our operating costs, as a result of the exchange rate movement applied to our U.S. dollar-denominated raw material cost, and reducing our Venezuelan operation results when translated into our reporting currency, the Mexican peso. According to accounting practices, the exchange rate that will be used to translate our financial statements as of January 2010, will be 4.30 Bolivar per U.S. dollar. As of December 31, 2009, the financial statements were translated to Mexican pesos using the exchange rate of 2.15 bolivars per U.S. dollar. As a result of this devaluation, the balance sheet of the Venezuelan subsidiary of Coca-Cola FEMSA reflected a reduction in shareholders’ equity of Ps. 3,700 million which will be accounted for at the time of the devaluation in January 2010. The devaluation of the bolivars did not result in significant exchange losses in January 2010 as a result of remeasuring U.S. dollar denominated monetary items on hand as of December 31, 2009.executed.
On February 5, 2010, Coca-Cola23, 2012, a wholly-owned subsidiary of Mitsubishi Corporation, and Stichting Depositary PGGM Infrastructure Funds, a pension fund managed by PGGM, acquired the 45% interest held by FEMSA successfully issued an aggregate principal amountin the parent companies of US$ 500 millionthe Mareña Renovables Wind Power Farm, a 396 megawatt late-stage wind energy project in
the southeastern region of senior notes due 2020, at a yieldthe State of 4.689% (U.S. Treasury + 105 basis points) with a coupon of 4.625%.
On February 25, 2010, and on April 16, 2010, Coca-Cola FEMSA repaid its Mexican peso-denominated bonds,Certificado BursátilKOF 09 andCertificado BursátilKOF03-03, at maturity in an aggregate principal amount of Ps. 2,000 million and Ps. 1,000 million, respectively.
On March 10, 2010, FEMSA announced thatOaxaca. Certain subsidiaries of FEMSA, have signed an agreement with subsidiaries of The Coca-Cola Company to amend the shareholders agreement for Coca-Cola FEMSA. The main purpose of the amendment is to set forth that the appointmentFEMSA Comercio and compensation of the chief executive officer and all officers reporting to the chief executive officer, as well as the adoption of decisions related to the ordinary operations of Coca-Cola FEMSA shall only require have entered into 20-year wind power supply agreements with the Mareña simple majority vote of the board of directors. Decisions relatedRenovables Wind Power Farm to extraordinary matters (such as business acquisitions or combinations, among others) shall continue requiring of the vote of the majority of the board of directors, including the affirmative vote of two of the members appointedpurchase energy output produced by it. These agreements will remain in full force and effect. The Coca-Cola Company. This amendment was signed without transfer of any consideration. The
percentage of our voting interest in our subsidiary Coca-Cola FEMSA remains the same after the signing of this amendment.
On March 29, 2010, FEMSA announced that the Comisión Federal de Competencia, Mexico’s anti-trust regulator, has approved without reservation the strategic exchange of 100% of the shares of the beer operations owned by FEMSA for an interest in the Heineken Group, under the terms described in FEMSA’s disclosure of January 11, 2010. Hart-Scott-Rodino approval has also been granted by the relevant trade authorities in the United States.
On April 14, 2010, Coca-Cola FEMSA held its AGM during which its shareholders approved the Company’s consolidated financial statements for the year ended December 31, 2009, the declaration of dividends corresponding to fiscal year 2009 and the composition of the Board of Directors and Committees for 2010. Shareholders approved the payment of a cash dividend in the amount of approximately Ps. 2,604 million. The dividend paid as of April 26, 2010, in the amount of Ps. 1.41 per each ordinary share, equivalent to Ps. 14.10 per ADS.
On April 22, 2010, Heineken N.V. and Heineken Holding N.V. held their AGM, and approved the acquisition of 100% of the shares of the beer operations owned by FEMSA, under the terms announced on January 11, 2010. The AGM of Heineken appointed, subject to the completion of the acquisitionsale of FEMSA’s beer operations, Mr. Jose Antonio Fernandez Carbajalparticipation as member of the Board of Directors of Heineken Holding N.V. and Heineken N.V. Supervisory Board, and Mr. Javier Astaburuaga Sanjines as second representativean investor will result in the Heineken N.V. Supervisory Board.
On April 26, 2010, FEMSA held its AGM, during which shareholders approved the transaction with Heineken, the Company’s consolidated financial statements for the year ended December 31, 2009, the declaration of dividends corresponding to fiscal year 2009 and the composition of the Board of Directors for 2010. Shareholders approved the exchange of 100% of FEMSA’s beer operations in Mexico and Brazil for a 20% economic interest in the Heineken Group, and the assumption by Heineken of debt in the amount of US$2.1 billion dollars, under the transaction terms described on January 11, 2010. Additionally, shareholders approved the payment of a cash dividend in the amount of Ps. 2,600 million, consisting of Ps. 0.162076 per each Series “D” share and Ps. 0.1296608 per each Series “B” share, which amounts to Ps. 0.777965 per “BD” Unit or Ps. 7.77965 per ADS, and Ps. 0.648304 per “B” Unit. The dividend payment split into two equal payments, one was paid on May 4, 2010 and the second is payable on November 3, 2010.gain.
On April 30, 2010, FEMSA announced the closing of the transaction pursuant to which FEMSA agreed to exchange 100% of its beer operations for a 20% economic interest in the Heineken Group. The principal terms of the Heineken transaction documents are summarized below in “Item 10. Additional Information—Material Contracts.”
Changes in Mexican Financial Reporting Standards
The Mexican National Banking and Securities Commission announced the adoptionAdoption of International Financial Reporting Standards for public companies
TheComisión Nacional Bancaria y de Valores (Mexican National Banking and Securities Commission, or CNBV) CNBV has announced that, commencing in 2012, all Mexican public companies must report their financial information in accordance with International Financial Reporting Standards (IFRS).IFRS. Since 2006, theConsejo Mexicano para la Investigación y Desarrollo de Normas de Información Financiera (Mexican Board of Research and Development of Financial Reporting Standards) has been modifying Mexican Financial Reporting StandardsFRS in order to ensure their convergence with IFRS. WeStarting on January 1, 2012, we are reporting our financial information in the process of analyzing the potential impact of adopting IFRS.accordance with IFRS and will present financial information for 2011 on a comparable basis.
Effects of Changes in Economic Conditions
Our results offrom operations are affected by changes in economic conditions in Mexico and in the other countries in which we operate. For the years ended December 31, 2011, 2010, and 2009, 2008 and 2007,60%, 62%, 66% and 69%59%, respectively, of our total sales were attributable to Mexico (not including export sales). After the acquisitions of Panamco and Kaiser,Mexico. As a result, we have greatersignificant exposure to the economic conditions of certain countries, in which we have not historically conducted operations, particularly countriesthose in Central America, Colombia, Venezuela and Brazil, although we continue to generate a substantial portion of our total sales from Mexico. The participation of these other countries as a percentage of our total sales has increasednot changed significantly during the last five years and is expected to continue increasingincrease in future periods.periods due to acquisitions.
The Mexican economy is currently experiencinggradually recovering from a downturn as a result of the impact of the global financial crisis on many emerging economies during the second half of last year.in 2009. In the third quarter of 2009,2011, Mexican GDP contractedexpanded by approximately 6.2%3.9% compared to the same period in 2008 and experienced a contractionan expansion of 6.5%5.4% for the full year of 2009,2010, according to INEGI. According to the Banco Nacional de México survey regarding the economic expectations of specialists, Mexican GDP is expected to increase by 4.2%3.43% in 2010,2012, as of the lastlatest estimate, published inon April 2010.2, 2012. The Mexican economy continues to be heavily influenced by the U.S. economy, and therefore, further deterioration in economic conditions in, or delays in the recovery of, the U.S. economy may hinder any recovery in Mexico.
Our future results may be significantly affected by the general economic and financial conditions in the countries where we operate, including by levels of economic growth, by the devaluation of the local currency, by inflation and high interest rates or by political developments, and may result in lower demand for our products, lower real pricing or a shift to lower margin products. Because a large percentage of our costs are fixed costs, we may not be able to reduce such costs and expenses, and our profit margins may suffer as a result of downturns in the economy of each country.
The decrease ofin interest rates in Mexico in 20092011 decreases our cost of Mexican peso-denominated variable interest rate indebtedness and could have a favorable effect on our financial position and results of operations during 2010. During 2008, due to constraints in the international credit market and limited credit availability in the international markets and Mexico, as well as changes in the currency mix of our debt, our weighted average interest rate increased by 70 basis points.2012.
Beginning in the fourth quarter of 20082009 and through 2009,2011, the value ofexchange rate between the Mexican peso relative toand the U.S. dollar fluctuated significantly, withfrom a low during 2008 of Ps. 9.9211.51 per U.S. dollar, to a high of Ps. 13.9414.25 per U.S. dollar. At December 31, 2009,30, 2011, the exchange rate (noon buying rate) was Ps. 13.057613.9510 to US$ 1.00. On AprilMarch 30, 2010,2012, the exchange rate was 12.2281.Ps. 12.8115 to US$ 1.00. See “Item 3. Key Information—Exchange Rate Information.” A depreciation of the Mexican peso or local currencies in the countries in which we operate relative to the U.S. dollar increases our cost of raw materials priced in U.S. dollars, including raw materials whose prices are set with reference to the U.S. dollar. In addition, a depreciation of the Mexican peso or local currencies in the countries in which we operate relative to the U.S. dollar will increase our U.S.-denominatedU.S. dollar-denominated debt obligations, which could negatively affect our financial position and results of operations, as we experienced in the fourth quarter of 2009.from operations.
Companies with structural characteristics that result in margin expansion in excess of sales growth are referred to as having high “operating leverage.”
The operating subsidiaries of Coca-Cola FEMSA and FEMSA Cerveza are engaged, to varying degrees, in capital-intensive activities. The high utilization of the installed capacity of the production facilities results in better fixed cost absorption, as increased output results in higher revenues without additional fixed costs. Absent significant increases in variable costs, gross profit margins will expand when production facilities are operated at higher utilization rates. Alternatively, higher fixed costs will result in lower gross profit margins in periods of lower output.
In addition, the commercial operations of Coca-Cola FEMSA and FEMSA Cerveza are carried out through extensive distribution networks, the principal fixed assets of which are warehouses and trucks. The distribution systems of both Coca-Cola FEMSAtrucks and FEMSA Cerveza are designed to handle large volumes of beverages. Fixed costs represent an important proportion of the total distribution expense of both Coca-Cola FEMSA and FEMSA Cerveza.FEMSA. Generally, the higher the volume that passes through the distribution system, the lower the fixed distribution cost as a percentage of the corresponding revenues. As a result, operating margins improve when the distribution capacity is operated at higher utilization rates. Alternatively, periods of decreased utilization because of lower volumes will negatively affect our operating margins.
FEMSA Comercio operations result in a low margin business with relatively fixed costs. These two characteristics make FEMSA Comercio a business with an operating margin that might be affected more easily by a change in sales levels.
The preparation of our audited consolidated financial statements requires that we make estimates and assumptions that affect (1) the reported amounts of our assets and liabilities, (2) the disclosure of our contingent liabilities at the date of the financial statements and (3) the reported amounts of revenues and expenses during the reporting period. We base our estimates and judgments on our historical experience and on various other reasonable factors that together form the basis for making judgments about the carrying values of our assets and liabilities. Our actual results may differ from these estimates under different assumptions or conditions. We evaluate our estimates and judgments on an on-going basis. Our significant accounting policies are described in noteNote 4 to our audited consolidated financial statements. We believe our most critical accounting policies that imply the application of estimates and/or judgments are the following:
Allowance for doubtful accountsProperty, plant and equipment
Property, plant and equipment are depreciated over their estimated useful lives. The estimated useful lives are reviewed annually and represent the period we expect the assets to remain in service and to generate revenues. We base our estimates on the experience of our technical personnel. Depreciation is computed using the straight line method of accounting.
Where an item of property, plant and equipment is comprised of major components having different useful lives, these components are accounted for and depreciated as separate items (major components) of property, plant and equipment.
Imported assets are recorded using the exchange rate as of the acquisition date and are restated using the inflation factor of the country where the asset is acquired for inflationary economic environments.
We test depreciable long-lived assets for impairment at fair value when there are indicators of impairment and determine our allowance for doubtful accountswhether impairment exists, by first comparing the book value of the assets with their recoverable value based on an evaluation of the aging of our receivable portfolioundiscounted cash flows, and if such assets are not recoverable, then with their fair value, which is calculated considering their operating conditions and the economic situation of our clients,future cash flows expected to be generated based on their estimated remaining useful life as welldetermined by management.
Returnable and non-returnable bottles are aggregated as on our historical loss rate on receivables and the general economic environment in which we operate. Through 2009, our beer operations represented the most important part of property, plant and equipment. Returnable bottles are depreciated based on the consolidated allowance for doubtful accounts as a result of the credit that FEMSA Cerveza extended to retailers, on terms and conditions in accordance with industry practices.straight-line method over acquisition cost. Coca-Cola FEMSA and FEMSA Comercio sales are generally realized in cash.estimates depreciation rates considering returnable bottles useful lives.
Bottles and cases; allowance for bottle breakage
Through December 31, 2007, weWe recorded returnable bottles and cases at acquisition cost and restated them applying inflation factors. Pursuant to our adoption of NIF B-10, in 2008 we began recording these values at acquisition cost and currentlyfactors only restate them in circumstances wherewhen they form part of our operations in countries with an inflationary economic environment. For FEMSA Cerveza and Coca-Cola FEMSA, breakage is expensed as it is incurred. We compare quarterly bottle breakage expense with the calculated depreciation expenseincurred as part of our returnable bottles and cases in plant and distribution centers, estimating a useful life of five years for glass beer bottles, four years for returnable glass soft drink bottles and plastic cases and 18 months for returnable plastic bottles. These useful lives are determined in accordance with our business experience.depreciation. The annual calculated depreciation expense has been similar to the annual bottle breakage expense. Whenever we decide to discontinue a particular returnable presentation and retire it from the market, we write off the discontinued presentation through an increase in breakage expense.
Property, plant and equipment
Property, plant and equipment are depreciated over their estimated useful lives. The estimated useful lives represent the period we expect the assets to remain in service and to generate revenues. We base our estimates on the experience of our technical personnel. Depreciation is computed using the straight line method of accounting.
Until 2007, imported equipment was restated applying the inflation and exchange rates of the country of origin, in accordance with Mexican Financial Reporting Standards in effect at that date. Since 2008, imported equipment is recorded using the exchange rateexpense presented as of the acquisition date and, if part of an inflationary economic environment, is restated applying the inflation rate of the reporting entity.
We value at fair value long-lived assets for impairment and determine whether impairment exists, by comparing the book value of the assets with their fair value, which is calculated considering their operating conditions and the future cash flows expected to be generated based on their estimated remaining useful life as determined by management.depreciation.
Valuation and impairment of intangible assets and goodwill
We identify all intangible assets associated with business acquisitions.acquisitions and investments in shares. We separate intangible assets between those with a finite useful life and those with an indefinite useful life, in accordance with the period over which we expect to receive the benefits. Intangible assets and goodwill identified in investments in shares are presented within the total investment in shares.
The intangible assets of indefinite life associated with business acquisitions are subject to annual impairment tests. As of December 31, 2009,2011, we have recorded intangible assets with indefinite lives, which consist of:
• | Coca-Cola FEMSA’s rights to produce and distributeCoca-Cola trademark products for Ps. |
Trademarks and distribution rights forGoodwill relating to Coca-Cola FEMSA acquisitions during 2011 that amounted to Ps. 11,357 million as a result of the acquisition of the 30% interest of FEMSA Cerveza and distribution rights acquired from a third-party distributor;
Trademarks and goodwill as a result of the acquisition of Kaiser for Ps. 5,864 million;5,214; and
Other intangible assets with indefinite lives that amounted to Ps. 787343 million.
For Mexican Financial Reporting Standards purposes, goodwill is the difference between the price paid and the fair value of the shares and/or net assets acquired that was not assigned directly to an intangible asset. Goodwill is recorded in the functional currency of the subsidiary in which the investment was made and is translated into Mexican pesos applying the closing rate for each period. In countries with inflationary economic environments, this asset is restated applying inflation factors in the country of origin and is then translated into Mexican pesos at the year-end exchange rate. Since 2005, Bulletin B-7 (“Business Acquisitions”) establishes that goodwill is no longer subject to amortization, and is instead subject to an annual impairment test.
Impairment of goodwill and intangible assets with indefinite lives
We annually review the carrying value of our goodwill whenever circumstances indicate that the carrying amount of the reporting unit might exceed its implied fair value for long-lived assets. We also review annually the carrying value of our intangible assets with indefinite lives and goodwill for impairment based on recognized valuation techniques. While we believe that our estimates are reasonable, different assumptions regarding such estimates could materially affect our evaluations.
Investments in shares, including related goodwill, are subject to impairments testing whenever certain events or changes in circumstances occur that indicate that the carrying amount may exceed fair value. We recognize an impairment loss when it is considered to be other than a temporary loss. As of December 31, 2011, identified intangible assets and goodwill relating to our 20% economic interest in the Heineken Group amounted to €3,055 million (approximately US$ 3,940 million) and €1,200 million (approximately US$ 1,548 million), respectively.
Following our evaluations during 20092011 and up to the date of this annual report, we do not have any information which leads to anya significant impairment of goodwill or intangible assets with indefinite lives.lives or of our investments in shares of affiliated companies. We can give no assurance that our expectations will not change as a result of new information or developments. Future changes in economic or political conditions in any country in which we operate or in the industries in which we participate however, may cause us to change our current assessment.
Executory contracts
As part of the normal course of business, we frequently invest in the development of our beer distribution channels through a variety of commercial agreements with different retailers in order to generate sales volume. These agreements are considered to be executory contracts and accordingly the costs incurred under these contracts are recognized as performance under the contracts is received.
These agreements require cash disbursements to be made in advance to certain retailers in order to fund activities intended to generate sales volume. These advance cash disbursements are then compensated for as sales
are invoiced. These disbursements are considered to be market-related investments, which are capitalized as other assets. The amortization of amounts capitalized is presented as a reduction of net sales in relation to the volume sold to each retailer. The period of amortization is between three and four years, which is the normal term of the commercial agreements.
We periodically evaluate the carrying value of executory contracts. If the carrying value is considered to be impaired, these assets are written down as appropriate. The accuracy of the carrying value is based on our ability to predict certain key variables such as sales volume, prices and other industry and economic factors. Predicting these key variables involves assumptions based on future events. These assumptions are consistent with our internal projections.
Employee benefits
Our employee benefits which we used to refer to as labor liabilities, are comprised of obligations for pension plan, seniority premium, post-retirement medical services and severance indemnities. The determination of our obligations and expenses for pension and other post-retirement benefits are determined by actuarial calculations and are dependent on our determination of certain assumptions used to estimate such amounts. We evaluate our assumptions at least annually.
In 2008, we adopted NIF D-3 (“Employee Benefits”), which eliminates the recognition of the additional liability resulting from the difference between obligations for accumulated benefits and net projected liability, in addition to making other important changes. On January 1, 2008, our additional liability cancelled was Ps. 1,510 million, of which Ps. 948 million corresponds to intangible assets and Ps. 354 to cumulative other comprehensive income, net of its deferred tax of Ps. 208 million.
Through 2007, our labor costs for past services related to severance indemnities and pension and retirement plans were amortized within the remaining labor life of employees. Beginning in 2008, NIF D-3 establishes a maximum five-year period to amortize the initial balance of the labor costs of past services of pension and retirement plans and the same amortization period for the labor cost of past service of severance indemnities, previously defined by Bulletin D-3 (“Labor Liabilities”) as unrecognized transition obligations and unrecognized prior service costs. As of December 31, 2009, 2008 and 2007, labor costs for past services amounted to Ps. 204 million, Ps. 221 million and Ps. 146 million, respectively; and were recorded within the operating income.
During 2007, actuarial gains and losses related to severance indemnities were amortized to account for the average labor life of our employees. Beginning in 2008, actuarial gains and losses related to severance indemnities are registered under operating income during the year in which they are generated. The balance of unrecognized actuarial gains and losses as of January 1, 2008 was recorded in other expenses and amounted to Ps. 198 million.
In 2007, FEMSA Cerveza approved a plan to allow certain qualifying employees to retire early beginning in 2008. This plan consisted of allowing employees over the age of 55 with 20 years of service to take advantage of early retirement in order to obtain the same pension benefits they would have obtained had they retired at their regular retirement age. In addition, this plan authorized FEMSA Cerveza to make severance payments to certain employees who otherwise would not have met the criteria for eligibility. The plan was intended to improve the efficiency of FEMSA’s Cerveza operating structure. The total financial impact of the plan was Ps. 236 million, from which Ps.125 million was recorded in our consolidated income statement for 2007 as part of other expenses (See note 18 to our audited consolidated financial statements) and Ps. 111 million recorded in 2008 consolidated results.
While we believe that our assumptions are appropriate, significant differences in our actual experience or significant changes in our assumptions may materially affect our pension and other post-retirement obligations and our future expense. The following table is a summary of the three key assumptions to be used in determining 20092011 annual labor liability expense, along with the impact on this expense of a 1% change in each assumed rate.
Assumptions 2009(1) | Nominal Rates 2009(3) | Nominal Rates 2008(3) | Real Rates 2009 and 2008(4)(5) | Impact of Rate Change(2) | ||||||||||||||||||||||||||||||||||||||||||
+1% | -1% | |||||||||||||||||||||||||||||||||||||||||||||
Nominal Rates(3) | Real Rates(4) | Impact of Rate Changes(2) | ||||||||||||||||||||||||||||||||||||||||||||
Assumptions 2011(1) | 2011 | 2010 | 2009 | 2011 | 2010 | 2009 | +1% | -1% | ||||||||||||||||||||||||||||||||||||||
(in millions of Mexican pesos) | (in millions of Mexican pesos) | |||||||||||||||||||||||||||||||||||||||||||||
Mexican and Foreign Subsidiaries: | ||||||||||||||||||||||||||||||||||||||||||||||
Discount rate | 8.2 | % | 8.2 | % | 4.5 | % | Ps. (900) | Ps. 748 | 7.6 | % | 7.6 | % | 8.2 | % | 4.0 | % | 4.0 | % | 4.5 | % | Ps. (386 | ) | Ps.567 | |||||||||||||||||||||||
Salary increase | 5.1 | % | 5.1 | % | 1.5 | % | 502 | (515 | ) | 4.8 | % | 4.8 | % | 5.1 | % | 1.2 | % | 1.2 | % | 1.5 | % | 419 | (275 | ) | ||||||||||||||||||||||
Long-term asset return | 8.2 | % | 11.3 | % | 4.5 | % | 12 | (5 | ) | 9.0 | % | 8.2 | % | 8.2 | % | 5.0 | % | 3.6 | % | 4.5 | % | (16 | ) | 17 |
(1) | Calculated using a measurement date as of December |
(2) | The impact is not the same for an increase of 1% as for a decrease of 1% because the rates are not linear. |
(3) | For countries considered non-inflationary economic environments according to Mexican |
(4) | For countries considered inflationary economic environments according to Mexican |
Income taxes
As we describe in noteNote 23 to our audited consolidated financial statements, on January 1, 2010, the Mexican tax reform became effective. Theas effective in 2011 did not impact our tax result. However, the following are the most important changes are:pursuant to the Mexican tax reform as effective in 2010 that are applicable to recent and upcoming years: an increase in the value added taxVAT rate (IVA) from 15% in 2009 to 16%, in 2010 and future years; an increase onin the special tax on production and services from 25% in 2009 to 26.5% in 2010 and future years; and an increase in the statutory income tax rate from 28% in 2009 to 30% for 2010, 2011 and 2012, andwith a reduction from 30% to 29% and 28% for 2013 and 2014, respectively. In addition, the Mexican tax reform as effective in 2010 requires that income tax payments related to consolidated tax benefits obtained since 1999 be paid during the reversal of the deferred tax recognized from 1999 thru 2004, which will be amortized over the nextsucceeding five years (notes 23Dbeginning in the sixth year when tax benefits were used. See Note 23 C and 23ED to our audited consolidated financial statements).statements.
Mexican tax reform effective in 2007 introduced theTheImpuesto Empresarial de Tasa Unica (IETU) that functions similarsimilarly to an alternative minimum corporate income tax, except that any amounts paid are not creditable against future income tax payments. Mexican taxpayers are now subject to the higher of the IETU or the income tax liability computed under Mexican Income Tax Law. This new taxThe IETU is calculated on a cash-flow basis, the rate for 2009 was 17.0% and the ratesrate for 2009both 2010 and 2010 will be 17.0%2011 was 17.5%.
We have paid corporate income tax since IETU came into effect and, 17.5%, respectively.
Basedbased on our financial projections estimated for our Mexican tax returns, we expect to paycontinue paying corporate income tax in the future and do not expect to pay IETU, therefore we did not record deferred IETU. As such, the enactment of IETU did not impact our consolidated financial position or results offrom operations, as it only recognizes deferred income tax.
We recognize deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax basis of assets and liabilities. We regularly review our deferred taxestax assets for recoverability and/or payment, and establish a valuation allowance based on our judgment regarding historical taxable income, projected future taxable income and the expected timing of the reversals of existing temporary differences. If these estimates and related assumptions change in the future, we may be required to record additional valuation allowances against our deferred taxestax assets, resulting in an impact in net income.
The statutory income tax rate in Mexico was 30% for each of 2011 and 2010, and 28% for 2009, 20082009. The statutory income tax rate in Panama was 25%, 27.5% and 2007.30%, respectively, for 2011, 2010 and 2009. The statutory income tax rates for 2011 in other countries in which we do business were: 31% in Guatemala; 30% in Nicaragua; 30% in Costa Rica; 33% in Colombia; 34% in Venezuela; 34% in Brazil; and 35% in Argentina. Tax loss carry-forwards may be applied to income tax over certain periods of time, varying by country as follows: in Mexico, 10 years; in Nicaragua, Costa Rica and Venezuela, 3 years; in Panama and Argentina, 5 years; in Colombia, tax losses may be carried forward for an indefinite period of time but are limited to 25% of taxable income for the relevant year; and in Brazil, tax losses may be carried forward for an indefinite period of time but cannot be restated and are limited to 30% of taxable income for the relevant year. We make judgments about the recoverability of tax loss carry-forward assets as described above.
Indirect tax and legal contingencies
We are subject to various claims and contingencies related to indirect tax and legal proceedings as described in noteNote 24 to our audited consolidated financial statements. Due to their nature, such legal proceedings involve inherent uncertainties including, but not limited to, court rulings, negotiations between affected parties and governmental actions. Management periodically assesses the probability of loss for such contingencies and accrues a liability and/or discloses the relevant circumstances, as appropriate. If the potential loss from any claim or legal proceeding is considered probable and the amount can be reasonably estimated, we accrue a liability for the estimated loss.
Derivative Financial Instrumentsfinancial instruments
We are required to measure all derivative financial instruments at fair value and recognize them in the balance sheet as an asset or liability. Changes in the fair value of derivative financial instruments are recorded each year in net income or as a component of cumulative other comprehensive income, based on whether the type of hedging instrument provides a hedge and is designated as such, and the ineffectiveness of the hedge. The fair values of derivative financial instruments are determined considering quoted prices in recognized markets. If such instruments are not traded, fair value is determined by applying techniques based upon technical models supported by sufficient reliable and verifiable data, recognized in the financial sector. We base our forward price curves upon market price quotations.
Under MexicanAs described in Note 28 to our audited consolidated financial statements, we are adopting IFRS for the preparation of our financial information beginning in 2012. Pursuant to current SEC reporting requirements, foreign private issuers may provide in their SEC filings financial statements prepared in accordance with IFRS, without a reconciliation to U.S. GAAP.
The consolidated financial statements to be issued by us for the year ending December 31, 2012 will be our first annual financial statements that comply with IFRS. Our IFRS transition date is January 1, 2011, and therefore, the year ended December 31, 2011 will be the comparative period to be covered. IFRS 1, “First-Time Adoption of International Financial Reporting Standards (Normas de Información Financiera, or NIF)Standards” (which we refer to as IFRS 1), sets forth mandatory exceptions and allows certain optional exemptions to the complete retrospective application of IFRS.
Mandatory Exceptions
During 2009,We have applied the following new accounting standards were issuedmandatory exceptions to retrospective application of IFRS, effective as of our IFRS transition date:
Accounting Estimates
Estimates prepared under IFRS as of January 1, 2011 are consistent with the estimates recognized under Mexican Financial Reporting Standards, whichFRS as of the same date, unless we are required to implementadjust such estimates to agree with IFRS.
Derecognition of Financial Assets and Liabilities
We applied the derecognition rules of IAS 39, “Financial Instruments: Recognition and Measurement” (which we refer to as described below. ExceptIAS 39) prospectively for transactions occurring on or after our IFRS transition date.
Hedge Accounting
As of our IFRS transition date, we have measured at fair value all derivative financial instruments and hedging relationships designated and documented effectively as otherwise noted,accounting hedges, as required by IAS 39, which is consistent with the treatment under Mexican FRS. As a result, there was no impact in our consolidated financial statements due to the application of this exception.
Non-controlling Interest
We have applied the requirements of IAS 27, “Consolidated and Separate Financial Statements” (which we will adopt these standards when they become effective. refer to as IAS 27) related to non-controlling interests prospectively beginning on our IFRS transition date.
Optional Exemptions
We arehave elected the following optional exemptions to retrospective application of IFRS, effective as of our IFRS transition date:
Business Combinations and Acquisitions of Associates and Joint Ventures
According to IFRS 1, an entity may elect not to apply IFRS 3, “Business Combinations” retrospectively to acquisitions made prior to the transition date to IFRS.
The exemption for past business combinations also applies to past acquisitions of investments in associates and of interests in joint ventures.
We have adopted this exemption and did not amend our business acquisitions or investments in associates and joint ventures prior to our IFRS transition date and we did not remeasure the values determined at the acquisition dates, including the amount of previously recognized goodwill in past acquisitions.
Share-based Payments
We have share-based plans, which we pay to our qualifying employees based on our own shares and those of our subsidiary, Coca-Cola FEMSA. Management decided to apply the optional exemptions established in IFRS 1, whereas we did not apply IFRS 2, “Share-based Payment” (which we refer to as IFRS 2): (i) to the equity instruments granted before November 7, 2002, (ii) to equity instruments granted after November 7, 2002 and that were earned before the latter of (a) our IFRS transition date and (b) January 1, 2005 and (iii) liabilities related to share-based payment transactions that were settled before our IFRS transition date.
Deemed Cost
An entity may individually elect to measure an item of its property, plant and equipment at the transition date to IFRS at its fair value and use that fair value as its deemed cost at that date. In addition, a first-time adopter may elect to use a previous generally accepted accounting principles revaluation of an item of property, plant and equipment at, or before, the transition date to IFRS as deemed cost at the date of the revaluation, if the revaluation was, at such date of the revaluation, broadly comparable to either (i) fair value, or (ii) cost or depreciated cost in accordance with IFRS and adjusted to reflect changes in a general or specific price index.
We have presented both our property, plant and equipment and our intangible assets at IFRS historical cost in all countries. In Venezuela, this IFRS historical cost represents actual historical cost in the processyear of determiningacquisition, indexed for inflation in a hyperinflationary economy based on the impactprovisions of these new accounting standards on our financial reporting standards and results of operations, butIAS 29, “Hyperinflationary Economies” (which we do not anticipate any significant impact exceptrefer to as may be described below.IAS 29).
NIF B-5, “Financial Information by Segment”Cumulative Translation Effect
NIF B-5 includes definitionsA first-time adopter is neither required to recognize translation differences and criteriaaccumulate these in a separate component of equity, nor on a subsequent disposal of a foreign operation, to reclassify the cumulative translation difference for reporting financial information by operating segment. NIF B-5 establishes that an operating segment shall meet the following criteria: (i) the segment engages in business activitiesforeign operation from which it earnsequity to profit or is in the process of obtaining revenues, and incurs related costs and expenses; (ii) the operating results are reviewed regularly by the main authorityloss as part of the entity’s decision maker;gain or loss on disposal that would have existed at the IFRS transition date.
We applied this exemption and (iii) specific financial information is available. NIF B-5 requires disclosures relatedconsequently we reclassified the accumulated translation effect recorded under Mexican FRS to operating segments subject to reporting, including details ofretained earnings assets and, liabilities, reconciliations, information about products and services, and geographical areas. NIF B-5 is effective beginning on January 1, 2011, and this guidance shall be applied retrospectively for comparative purposes.we calculate the translation effect of our foreign operations prospectively according to IAS 21, “The Effects of Changes in Foreign Exchange Rates.”
NIF B-9, “Interim Financial Reporting”Borrowing Costs
NIF B-9 prescribesWe applied the contentIFRS 1 exemption related to be includedborrowing costs incurred for qualifying assets existing at the IFRS transition date, based on our similar Mexican FRS accounting policy, and beginning January 1, 2011 we capitalize eligible borrowing costs in a complete or condensed set of financial statements for an interim period. In accordance with this standard,IAS 23, “Borrowing Costs” (which we refer to as IAS 23).
Recording Effects of the complete setTransition from Mexican FRS to IFRS
The following disclosures provide a qualitative description of financial statements shall include: (i) a statement of financial positionthe most significant preliminary effects from the transition to IFRS determined as of the enddate of the issuance of our consolidated financial statements.
Inflation Effects
According to Mexican FRS, the Mexican peso ceased to be the currency of an inflationary economy on December 31, 2007, as the three years’ cumulative inflation as of such date did not exceed 26%.
According to IAS 29, the last hyperinflationary period (ii)for the Mexican peso was in 1998. As a result, we have eliminated the cumulative inflation recognized within long-lived assets and contributed capital for our Mexican operations, based on Mexican FRS during the years 1999 through 2007, which were not deemed hyperinflationary for IFRS purposes.
For our foreign operations, the cumulative inflation from the acquisition date was eliminated (except in the case of Venezuela, which was deemed to be a hyperinflationary economy) from the date on which we began to consolidate them.
Employee Benefits
According to NIF D-3, a severance provision and the corresponding expenditure must be recognized based on the experience of an entity in terminating the employment relationship before the retirement date, or if the entity deems to pay benefits as a result of an offer made to employees to encourage a voluntary termination. For IFRS purposes, this provision is only recorded pursuant to IAS 19 (Revised 2011), “Employee Benefits” (which we refer to as IAS 19 (Revised 2011)), at the moment the entity has a demonstrable commitment to end the relationship with the employee or to make a bid to encourage voluntary retirement. This is evidenced by a formal plan that describes the characteristics of the termination of employment. Accordingly, at our IFRS transition date, we derecognized our severance indemnity recorded under Mexican FRS against retained earnings given that no such formal plan exists. A formal plan was not required for recording under Mexican FRS.
IAS 19 (Revised 2011), early adopted by us, eliminates the use of the “corridor” method, which defers the actuarial gains/losses and requires that such gains/losses be recorded directly within other comprehensive income in each reporting period. The standard also eliminates deferral of past service costs and requires entities to record them in comprehensive income in each reporting period. These requirements increased our liability for employee benefits with a corresponding reduction in retained earnings at our IFRS transition date.
Embedded Derivatives
For Mexican FRS purposes, we recorded embedded derivatives for agreements denominated in foreign currency. Pursuant to the principles set forth in IAS 39, there is an exception for embedded derivatives on those contracts that are denominated in certain foreign currencies if, for example, the foreign currency is commonly used in the economic environment in which the transaction takes place. We concluded that all of our embedded derivatives fell within the scope of this exception.
Therefore, at our IFRS transition date, we derecognized all embedded derivatives recognized under Mexican FRS.
Stock Bonus Program
Under NIF D-3, we recognized our stock bonus program plan offered to certain key executives as a defined contribution plan. IFRS require that such share-based payment plans be recorded under the principles set forth in IFRS 2. The most significant difference for changing the accounting treatment is related to the period during which compensation expense is recognized, which under NIF D-3 means the total amount of the bonus is recorded in the period in which it was granted, while in IFRS 2 it shall be recognized over the vesting period of such awards.
Additionally, the trust that holds the equity shares allocated to executives is considered to hold plan assets and is not consolidated under Mexican FRS. However, for IFRS Standing Interpretations Committee Interpretation (SIC) 12, “Consolidation – Special Purpose Entities,” we will consolidate the trust and reflect our own shares in treasury stock and reduce the non-controlling interest for Coca-Cola FEMSA shares held by the trust.
Deferred Income Taxes
The IFRS adjustments recognized by us had an impact on the calculation of deferred income taxes according to the requirements established by IAS 12, “Income Taxes” (IAS 12).
Furthermore, we derecognized a deferred liability recorded in the exchange of shares of FEMSA Cerveza with the Heineken Group. IFRS have an exception for recognition of a deferred tax liability for an investment in a subsidiary if the parent is able to control the timing of the reversal and it is probable that it will not reverse in the foreseeable future.
Retained Earnings
All the adjustments arising from our conversion to IFRS as of the transition date were recorded against retained earnings.
Other Differences in Presentation and Disclosures in the Financial Statements
Generally, IFRS disclosure requirements are more extensive than those of Mexican FRS, which will result in increased disclosures about accounting policies, significant judgments and estimates, financial instruments and management risks, among others. We will restructure our income statement forunder IFRS to comply with IAS 1, “Presentation of Financial Statements” (IAS 1). In addition, there may be some other differences in presentation.
There are other differences between Mexican FRS and IFRS. However, we consider the period, (iii)differences mentioned above to describe the significant effects.
As a statementresult of changes in shareholders’ equity for the period, (iv) a statementtransition to IFRS, the effects as of cash flows forJanuary 1, 2011 on the period and (v) notes providing the relevant accounting policies and other explanatory notes. Condensed financial statements shall include: (a)principal items of a condensed statement of financial position (b) a condensed income statement, (c) a condensed statementare described as follows:
Mexican FRS | IFRS Transition Effects | Preliminary IFRS | ||||||||||
Current assets | Ps. | 51,460 | Ps. | (47 | ) | Ps. | 51,413 | |||||
Non-current assets | 172,118 | (10,078 | ) | 162,040 | ||||||||
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Total assets | 223,578 | (10,125 | ) | 213,453 | ||||||||
Current liabilities | 30,516 | (254 | ) | 30,262 | ||||||||
Non-current liabilities | 40,049 | (10,012 | ) | 30,037 | ||||||||
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Total liabilities | 70,565 | (10,266 | ) | 60,299 | ||||||||
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Total stockholders’ equity | Ps. | 153,013 | Ps. | 141 | Ps. | 153,154 |
The information presented above has been prepared in accordance with the standards and interpretations issued and in effect or issued and early adopted by us at the date of changes in shareholders’ equity, (d) a condensed statementpreparation of cash flows and (e) selected explanatory notes. NIF B-9 is effective beginning on January 1, 2011. Interimour consolidated financial statements shall(see Note 28 B to our consolidated financial statements). The standards and interpretations that are applicable at December 31, 2012, including those that will be presented in comparative form.
NIF C-1, “Cash and Cash Equivalents”
NIF C-1 establishes that cash shall be measured at nominal value, and cash equivalents shall be measured at their acquisition cost for initial recognition. Subsequently, cash equivalents should be measured according to their designation: precious metals shall be measured at fair value, foreign currencies shall be translated to the reporting currency applying the closing exchange rate, other cash equivalents denominated in a different measure of exchange shall be recognized to the extent provided for this purposeapplicable on an optional basis, are not known with certainty at the closing datetime of preparing our Mexican FRS consolidated financial statements and available-for-sale investments shall be presented at fair value. Cash and cash equivalents shall be presented inas of December 31, 2011. Additionally, the first line of assets (including restricted cash). NIF C-1 is effective beginning on January 1, 2010 and has been applied
since that date, causing an increase in the cash balances reportedIFRS accounting policies selected by us may change as a result of changes in the treatmenteconomic environment or industry trends that are observable after the issuance of our Mexican FRS consolidated financial statements. The information presented herein does not intend to comply with IFRS, and it should be noted that under IFRS, only one set of financial statements comprising the statements of financial position, comprehensive income, changes in stockholders’ equity and cash flows, together with comparative information and explanatory notes, can provide a fair presentation of restricted cash.
New Accounting Pronouncements under U.S. Generally Accepted Accounting Principles (GAAP)
During 2009, the following new accounting standard was issued under U.S. GAAP, which we are required to implement as described below. We will adopt this standard as of January 1, 2010. We are in the process of determining the impact of this new accounting standard on our financial reporting standards andposition, results of operations but we do not anticipate any significant impact.
“Amendments to SFAS Interpretation FIN 46R,” or SFAS No. 167, ASC 810
The objective of issuing amendments to ASC 810 is to improve financial reporting by enterprises involved with variable interest entities. The Board undertook this project to address (i) the effects on certain provisions of ASC 810 “Consolidation” as a result of the elimination of the qualifying special-purpose entity concept in ASC 860-10-65, and (ii) constituent concerns about the application of certain key provisions of ASC 810, including those in which the accounting and disclosures under ASC 810 do not always provide timely and useful information about an enterprise’s involvement in a variable interest entity. This Statement retains the scope of ASC 810 with the addition of entities previously considered qualifying special-purpose entities, as the concept of these entities was eliminated in ASC 860-10-65. ASC 810 shall be effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009. Earlier application is prohibited.cash flows.
The following table sets forth our consolidated income statement under Mexican Financial Reporting StandardsFRS for the years ended December 31, 2009, 20082011, 2010, and 2007:2009:
Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||||||||||
2009 | 2009 | 2008 | 2007 | 2011(1) | 2011 | 2010 | 2009 | |||||||||||||||||||||||||
(in millions of U.S. dollars and Mexican pesos) | (in millions of U.S. dollars and Mexican pesos) | |||||||||||||||||||||||||||||||
Net sales | $ | 15,018 | Ps. | 196,103 | Ps. | 167,171 | Ps. | 147,069 | $ | 14,470 | Ps.201,867 | Ps.168,376 | Ps.158,503 | |||||||||||||||||||
Other operating revenues | 72 | 930 | 851 | 487 | 84 | 1,177 | 1,326 | 1,748 | ||||||||||||||||||||||||
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Total revenues | 15,090 | 197,033 | 168,022 | 147,556 | 14,554 | 203,044 | 169,702 | 160,251 | ||||||||||||||||||||||||
Cost of sales | 8,133 | 106,195 | 90,399 | 79,739 | 8,459 | 118,009 | 98,732 | 92,313 | ||||||||||||||||||||||||
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Gross profit | 6,957 | 90,838 | 77,623 | 67,817 | 6,095 | 85,035 | 70,970 | 67,938 | ||||||||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||||||||||
Administrative | 851 | 11,111 | 9,531 | 9,121 | 591 | 8,249 | 7,766 | 7,835 | ||||||||||||||||||||||||
Selling | 4,037 | 52,715 | 45,408 | 38,960 | 3,576 | 49,882 | 40,675 | 38,973 | ||||||||||||||||||||||||
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Total operating expenses | 4,888 | 63,826 | 54,939 | 48,081 | 4,167 | 58,131 | 48,441 | 46,808 | ||||||||||||||||||||||||
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Income from operations | 2,069 | 27,012 | 22,684 | 19,736 | 1,928 | 26,904 | 22,529 | 21,130 | ||||||||||||||||||||||||
Other expenses, net | (269 | ) | (3,506 | ) | (2,374 | ) | (1,297 | ) | (209 | ) | (2,917 | ) | (282 | ) | (1,877 | ) | ||||||||||||||||
Interest expense | (398 | ) | (5,197 | ) | (4,930 | ) | (4,721 | ) | (210 | ) | (2,934 | ) | (3,265 | ) | (4,011 | ) | ||||||||||||||||
Interest income | 43 | 565 | 598 | 769 | 72 | 999 | 1,104 | 1,205 | ||||||||||||||||||||||||
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Interest expense, net | (355 | ) | (4,632 | ) | (4,332 | ) | (3,952 | ) | (138 | ) | (1,935 | ) | (2,161 | ) | (2,806 | ) | ||||||||||||||||
Foreign exchange (loss) gain, net | (30 | ) | (396 | ) | (1,694 | ) | 691 | |||||||||||||||||||||||||
Foreign exchange gain (loss), net | 84 | 1,165 | (614 | ) | (431 | ) | ||||||||||||||||||||||||||
Gain on monetary position, net | 37 | 487 | 657 | 1,639 | 9 | 146 | 410 | 486 | ||||||||||||||||||||||||
Market value gain (loss) on ineffective portion of derivative financial instrument | 2 | 25 | (1,456 | ) | 69 | |||||||||||||||||||||||||||
Market value (loss) gain on ineffective portion of derivative financial instruments | (11 | ) | (159 | ) | 212 | 124 | ||||||||||||||||||||||||||
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Comprehensive financing result | (346 | ) | (4,516 | ) | (6,825 | ) | (1,553 | ) | (56 | ) | (783 | ) | (2,153 | ) | (2,627 | ) | ||||||||||||||||
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Equity method of associates | 370 | 5,167 | 3,538 | 132 | ||||||||||||||||||||||||||||
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Income before income taxes | 1,454 | 18,990 | 13,485 | 16,886 | 2,033 | 28,371 | 23,632 | 16,758 | ||||||||||||||||||||||||
Income taxes | 299 | 3,908 | 4,207 | 4,950 | 550 | 7,687 | 5,671 | 4,959 | ||||||||||||||||||||||||
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Consolidated net income before discontinued operations | 1,483 | 20,684 | 17,961 | 11,799 | ||||||||||||||||||||||||||||
Income from the exchange of shares with Heineken, net | — | — | 26,623 | — | ||||||||||||||||||||||||||||
Net income from discontinued operations | — | — | 706 | 3,283 | ||||||||||||||||||||||||||||
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Consolidated net income | 1,155 | 15,082 | Ps. | 9,278 | Ps. | 11,936 | 1,483 | 20,684 | 45,290 | 15,082 | ||||||||||||||||||||||
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Net controlling interest income | 759 | 9,908 | 6,708 | 8,511 | 1,085 | 15,133 | 40,251 | 9,908 | ||||||||||||||||||||||||
Net noncontrolling interest income | 396 | 5,174 | 2,570 | 3,425 | ||||||||||||||||||||||||||||
Net non-controlling interest income | 398 | 5,551 | 5,039 | 5,174 | ||||||||||||||||||||||||||||
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Consolidated net income | 1,155 | 15,082 | Ps. | 9,278 | Ps. | 11,936 | 1,483 | 20,684 | 45,290 | 15,082 | ||||||||||||||||||||||
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(1) | Translation to U.S. dollar amounts at an exchange rate of Ps. 13.9510 to US$ 1.00, provided solely for the convenience of the reader. |
The following table sets forth certain operating results by reportable segment under Mexican Financial Reporting StandardsFRS for each of our segments for the years ended December 31, 2009, 20082011, 2010, and 2007:2009. Due to the discontinued operation of FEMSA Cerveza it is not considered as a reportable segment.
Year Ended December 31 | Year Ended December 31, | |||||||||||||||||||||||||||||||||||||
2009 | 2008 | 2007 | Percentage Growth | Percentage Growth | ||||||||||||||||||||||||||||||||||
2009 vs. 2008 | 2008 vs. 2007 | 2011 | 2010 | 2009 | 2011 vs. 2010 | 2010 vs. 2009 | ||||||||||||||||||||||||||||||||
(in millions of Mexican pesos at December 31, 2009, except for percentages) | (in millions of Mexican pesos at December 31, 2010, except for percentages) | |||||||||||||||||||||||||||||||||||||
Net sales | ||||||||||||||||||||||||||||||||||||||
Coca-Cola FEMSA | Ps. | 102,229 | Ps. | 82,468 | Ps. | 68,969 | 24.0 | % | 19.6 | % | Ps.124,066 | Ps.102,988 | Ps.102,229 | 20.5 | % | 0.7 | % | |||||||||||||||||||||
FEMSA Cerveza | 45,899 | 41,966 | 39,284 | 9.4 | % | 6.8 | % | |||||||||||||||||||||||||||||||
FEMSA Comercio | 53,549 | 47,146 | 42,103 | 13.6 | % | 12.0 | % | 74,112 | 62,259 | 53,549 | 19.0 | % | 16.3 | % | ||||||||||||||||||||||||
CB Equity(1) | — | — | N/a | N/a | N/a | |||||||||||||||||||||||||||||||||
Total revenues | ||||||||||||||||||||||||||||||||||||||
Coca-Cola FEMSA | 102,767 | 82,976 | 69,251 | 23.9 | % | 19.8 | % | 124,715 | 103,456 | 102,767 | 20.5 | % | 0.7 | % | ||||||||||||||||||||||||
FEMSA Cerveza | 46,336 | 42,385 | 39,566 | 9.3 | % | 7.1 | % | |||||||||||||||||||||||||||||||
FEMSA Comercio | 53,549 | 47,146 | 42,103 | 13.6 | % | 12.0 | % | 74,112 | 62,259 | 53,549 | 19.0 | % | 16.3 | % | ||||||||||||||||||||||||
CB Equity | — | — | N/a | N/a | N/a | |||||||||||||||||||||||||||||||||
Cost of sales | �� | |||||||||||||||||||||||||||||||||||||
Coca-Cola FEMSA | 54,952 | 43,895 | 35,876 | 25.2 | % | 22.4 | % | 67,488 | 55,534 | 54,952 | 21.5 | % | 1.1 | % | ||||||||||||||||||||||||
FEMSA Cerveza | 22,418 | 19,540 | 17,833 | 14.7 | % | 9.6 | % | |||||||||||||||||||||||||||||||
FEMSA Comercio | 35,825 | 32,565 | 30,301 | 10.0 | % | 7.5 | % | 48,636 | 41,220 | 35,825 | 18.0 | % | 15.1 | % | ||||||||||||||||||||||||
CB Equity | — | — | N/a | N/a | N/a | |||||||||||||||||||||||||||||||||
Gross profit | ||||||||||||||||||||||||||||||||||||||
Coca-Cola FEMSA | 47,815 | 39,081 | 33,375 | 22.3 | % | 17.1 | % | 57,227 | 47,922 | 47,815 | 19.4 | % | 0.2 | % | ||||||||||||||||||||||||
FEMSA Cerveza | 23,918 | 22,845 | 21,733 | 4.7 | % | 5.1 | % | |||||||||||||||||||||||||||||||
FEMSA Comercio | 17,724 | 14,581 | 11,802 | 21.6 | % | 23.5 | % | 25,476 | 21,039 | 17,724 | 21.1 | % | 18.7 | % | ||||||||||||||||||||||||
CB Equity | — | — | N/a | N/a | N/a | |||||||||||||||||||||||||||||||||
Income from operations | ||||||||||||||||||||||||||||||||||||||
Coca-Cola FEMSA | 15,835 | 13,695 | 11,486 | 15.6 | % | 19.2 | % | 20,152 | 17,079 | 15,835 | 18.0 | % | 7.9 | % | ||||||||||||||||||||||||
FEMSA Cerveza | 5,894 | 5,394 | 5,497 | 9.3 | % | (1.9 | )% | |||||||||||||||||||||||||||||||
FEMSA Comercio | 4,457 | 3,077 | 2,320 | 44.8 | % | 32.6 | % | 6,276 | 5,200 | 4,457 | 20.7 | % | 16.7 | % | ||||||||||||||||||||||||
CB Equity | (7 | ) | (3 | ) | N/a | (133.0 | )% | N/a | ||||||||||||||||||||||||||||||
Depreciation | ||||||||||||||||||||||||||||||||||||||
Coca-Cola FEMSA | 3,473 | 3,036 | 2,637 | 14.4 | % | 15.1 | % | 4,163 | 3,333 | 3,472 | 24.9 | % | (4.0 | )% | ||||||||||||||||||||||||
FEMSA Cerveza | 1,927 | 1,748 | 1,637 | 10.2 | % | 6.8 | % | |||||||||||||||||||||||||||||||
FEMSA Comercio | 819 | 663 | 543 | 23.5 | % | 22.1 | % | 1,175 | 990 | 819 | 18.7 | % | 20.9 | % | ||||||||||||||||||||||||
CB Equity | — | — | N/a | N/a | N/a | |||||||||||||||||||||||||||||||||
Gross margin | ||||||||||||||||||||||||||||||||||||||
Coca-Cola FEMSA | 46.5 | % | 47.1 | % | 48.2 | % | (0.6 | ) p.p.(3) | (1.1 | ) p.p.(3) | 45.9 | % | 46.3 | % | 46.5 | % | (0.4 | ) p.p. | (0.2 | ) p.p. | ||||||||||||||||||
FEMSA Cerveza | 51.6 | % | 53.9 | % | 54.9 | % | (2.3 | ) p.p. | (1.0 | ) p.p. | ||||||||||||||||||||||||||||
FEMSA Comercio | 33.1 | % | 30.9 | % | 28.0 | % | 2.2 | p.p. | 2.9 | p.p. | 34.4 | % | 33.8 | % | 33.1 | % | 0.6 | p.p. | 0.7 | p.p. | ||||||||||||||||||
CB Equity | — | N/a | N/a | N/a | N/a | |||||||||||||||||||||||||||||||||
Operating margin | ||||||||||||||||||||||||||||||||||||||
Coca-Cola FEMSA | 15.4 | % | 16.5 | % | 16.6 | % | (1.1 | ) p.p. | (0.1 | ) p.p. | 16.2 | % | 16.5 | % | 15.4 | % | (0.3 | ) p.p. | 1.1 | p.p. | ||||||||||||||||||
FEMSA Cerveza | 12.7 | % | 12.7 | % | 13.9 | % | 0.0 | p.p. | (1.2 | ) p.p. | ||||||||||||||||||||||||||||
FEMSA Comercio | 8.3 | % | 6.5 | % | 5.5 | % | 1.8 | p.p. | 1.0 | p.p. | 8.5 | % | 8.4 | % | 8.3 | % | 0.1 | p.p. | 0.1 | p.p. | ||||||||||||||||||
CB Equity | N/a | N/a | N/a | N/a. | N/a |
(1) | CB Equity holds Heineken N.V. and Heineken Holding N.V. Shares. |
(2) | Includes breakage of bottles. |
Gross margin is calculated with reference to total revenues. |
As used herein, p.p. refers to a percentage point increase (or decrease), contrasted with a straight percentage increase (or decrease). |
Operating margin is calculated with reference to total revenues. |
Results of Operationsfrom operations for the Year Ended December 31, 20092011 Compared to the Year Ended December 31, 20082010
FEMSA Consolidated
Under Mexican FRS, we reclassified our financial statements to reflect FEMSA Cerveza as a discontinued operation.
Total Revenues
FEMSA’s consolidated total revenues increased 17.3%19.6% to Ps. 197,033203,044 million in 20092011 compared to Ps. 168,022169,702 million in 2008.2010. All of FEMSA’s operations—soft drinks, beerbeverages and retail—contributed positively to this revenue growth. Coca-Cola FEMSA’s total revenues increased 23.9%20.5% to Ps. 102,767124,715 million, driven by a 13.9% higher average price per unit casedouble-digit total revenue growth in both of its divisions and a volume growththe integration of 8.3%, from 2,242.8 million unit casesthe beverage divisions of Grupo Tampico and Grupo CIMSA in 2008 to 2,428.6 million unit cases in 2009.Mexico. FEMSA Comercio’s revenues increased 13.6%19.0% to Ps. 53,54974,112 million, mainly driven by the opening of 9601,135 net new stores combined with an average increase of 1.3%9.2% in same-store sales. Total revenues at FEMSA Cerveza increased 9.3% over 2008 to Ps. 46,336 million, mainly driven by higher average price per hectoliter in local currency in all of our markets and volume increases in our export sales volume.
Gross Profit
Consolidated cost of salesgross profit increased 17.5%19.8% to Ps. 106,19585,035 million in 20092011 compared to Ps. 90,39970,970 million in 2008. Approximately 70% of this increase came from2010, driven by Coca-Cola FEMSA as a result of cost pressures due to (i) the devaluation of local currencies in Coca-Cola FEMSA’s main operations as applied to its dollar-denominated raw material costs, (ii) the higher cost of sweetener across its operations, (iii) the integration of REMIL and (iv) the third and final stage of the scheduled Coca-Cola Company concentrate price increase announced in 2006 in Mexico.
Consolidated gross profit increased 17.0% to Ps. 90,838 million in 2009 compared to Ps. 77,623 million in 2008 due to gross profit increases in all of our operations.FEMSA. Gross margin contractedincreased by 0.1 percentage points, from 46.2%41.8% of consolidated total revenues in 20082010 to 46.1%41.9% in 2009. Gross margin improvement at FEMSA Comercio partially offset raw-material cost pressures at FEMSA Cerveza and Coca-Cola FEMSA.2011.
Income from Operations
Consolidated operating expenses increased 16.2%20.0% to Ps. 63,82658,131 million in 20092011 compared to Ps. 54,93948,441 million in 2008. Approximately 74%2010. The majority of this increase resulted from Coca-Cola FEMSA and additional operating expenses at Coca-Cola FEMSA due to higher labor costs and increased marketing expenses in certain of our divisions. FEMSA Comercio, accounted for approximately 20% of the increase, resulting from accelerated store expansion, and FEMSA Cerveza accounted for the balance.expansion. As a percentage of total revenues, consolidated operating expenses decreasedincreased from 32.7%28.5% in 20082010 to 32.4%28.6% in 2009.2011.
Consolidated administrative expenses increased 16.6%6.2% to Ps. 11,1118,249 million in 20092011 compared to Ps. 9,5317,766 million in 2008.2010. As a percentage of total revenues, consolidated administrative expenses remained stable at 5.6%decreased from 4.6% in 2009 compared with 5.7%2010 to 4.1% in 2008, due to operating leverage driven by higher revenues achieved in all of FEMSA’s operations.2011.
Consolidated selling expenses increased 16.1%22.6% to Ps. 52,71549,882 million in 20092011 as compared to Ps. 45,40840,675 million in 2008. Approximately 74% of this2010. This increase was attributable to greater selling expenses at Coca-Cola FEMSA and 22% to FEMSA Comercio. As a percentage of total revenues, selling expenses decreased 0.2increased 0.5 percentage points, from 24.0% in 2010 to 27.0%24.5% in 2008 to 26.8% in 2009.
We incur various expenses related to the distribution of our products that are accounted for in our selling expenses. During 2009 and 2008, our distribution costs amounted to Ps. 15,080 million and Ps. 12,135 million, respectively.2011.
Consolidated income from operations increased 19.1%19.4% to Ps. 27,01226,904 million in 20092011 as compared to Ps. 22,68422,529 million in 2008. This increase was2010, driven by the results of Coca-Cola FEMSA and FEMSA Comercio, which accounted for 81% of the increase, and FEMSA Cerveza accounted for the balance.Comercio. Consolidated operating margin
increased 0.2 percentage points from 2008 levels, to 13.7% remained stable at 13.3% as a percentage of 20092011 consolidated total revenues. Gross margin improvement at FEMSA Comercio, combined with expense containment initiatives across our beer operations, offset raw material pressures at the beverages operations.
Some of our subsidiaries pay management fees to us in consideration for corporate services we provide to them. These fees are recorded as administrative expenses in the respective business segments. Our subsidiaries’ payments of management fees are eliminated in consolidation and, therefore, have no effect on our consolidated operating expenses.
Coca-Cola FEMSA
Total Revenues
Coca-Cola FEMSA total revenues increased 23.9%20.5% to Ps. 102,767124,715 million in 2009,2011, compared to Ps. 82,976103,456 million in 20082010 as a result of double-digit total revenue growth in all of its divisions. Organic growth across Coca-Cola FEMSA’s operations contributed more than 75% of incremental revenue. The acquisition of REMIL in BrazilSouth America andBrisa in Colombia together contributed to slightly less than 15% of this growth, while a positive exchange rate translation effect resulting from Mexico and Central America divisions and the depreciationintegration of the peso againstbeverage divisions of Grupo Tampico and Grupo CIMSA in its operations’ local currencies representedMexican territories during the balance.fourth quarter of 2011. Excluding the integration of the beverage divisions of Grupo
Coca-Cola FEMSA’s
Tampico and Grupo CIMSA in Mexico, total revenues grew approximately 19% in 2011. On a currency neutral basis and excluding the recently merged franchise territories in Mexico, total revenues increased approximately 16% in 2011. Consolidated average price per unit case increased 13.9%13.8%, reaching Ps. 40.9545.38 in 20092011 as compared to Ps. 35.9439.89 in 2008, reflecting higher average prices in all of Coca-Cola FEMSA’s territories resulting from selective price increases implemented during the year across geographies.2010.
Coca-Cola FEMSA’sConsolidated total sales volume increased 8.3% to 2,428.6reached 2,648.6 million unit cases in 2009,2011, compared to 2,242.82,499.5 million unit cases in 2008. Excluding the acquisitions2010, an increase of REMIL andBrisa, total sales volume increased 5.1% to reach 2,357.0 million unit cases. Organic volume6.0%. Volume growth resulted from increases in sparkling beverages, which accounted for approximately 45%80% of incremental volumes, mainly driven by theCoca-Cola brand. The still beverage category, mainly driven by the Jugos del Valle line of business in its main operations,Mexico, Brazil and Venezuela, andHi-C orangeade and theCepita juice brand in Argentina contributed with less than 45%approximately 15% of the incremental volumes, and the bottled water category represented the balance. Excluding the integration of the beverage divisions of Grupo Tampico and Grupo CIMSA in Mexico, volumes grew 4.0% to 2,599.7 million unit cases.
Gross Profit
Cost of sales increased 25.2%21.5% to Ps. 54,95267,488 million in 20092011 compared to Ps. 43,89555,534 million in 2008,2010, as a result of cost pressures due to (i) the devaluation of local currencies inhigher sweetener and PET costs across Coca-Cola FEMSA’s main operations, in Mexico, Colombiawhich were partially offset by the appreciation of the average exchange rates of the Brazilian real, the Colombian peso and Brazil,the Mexican peso as applied to itsCoca-Cola FEMSA’s U.S. dollar-denominated raw material costs, (ii) the higher cost of sweetener across its operations, (iii) the integration of REMIL and (iv) the third and final stage of the scheduled Coca-Cola Company concentrate price increase announced in 2006 in Mexico. All of these items were partially offset by lower resin costs. Gross profit increased 22.3%19.4% to Ps. 47,81557,227 million in 2009,2011, as compared to 2008, driven by gross profit growth across all of Coca-Cola FEMSA’s divisions, however2010. Coca-Cola FEMSA’s gross margin decreased 0.60.4 percentage points to 46.5%45.9% in 2009.2011.
Operating Expenses
Operating expenses increased 20.2% to Ps. 37,075 million in 2011. As a percentage of total revenues, operating expenses remained flat at 29.7% in 2011 as compared to 29.8% in 2010.
Income from Operations
Operating expenses increased 26.0% to Ps. 31,980 million in 2009, mainly as a result of (i) higher labor costs in Venezuela, (ii) increased marketing investments in the Mexico division, (iii) the integration of REMIL in Brazil and (iv) increased marketing expenses in the Latincentro division, mainly due to the integration of theBrisa portfolio in Colombia and the continued expansion of the Jugos del Valle line of products in Colombia and Central America. As a percentage of sales, operating expenses increased to 31.1% in 2009 from 30.6% in 2008.
Income from operations increased 15.6%18.0% to Ps. 15,83520,152 million in 2009,2011, as compared to Ps. 13,69517,079 million in 2008. Increases in operating income from the Latincentro division, including Venezuela, accounted for approximately 50% of this growth, while operating income growth in the Mercosur division accounted for more than 40% of incremental operating income.2010 driven by Coca-Cola FEMSA’s South America division. Operating margin was 15.4%16.2% in 2009,2011, a declinecontraction of 110 basis0.3 percentage points as compared to 2008.2010.
FEMSA Cerveza
Total Revenues
FEMSA Cerveza total revenues increased 9.3% to Ps. 46,336 million in 2009 as compared to Ps. 42,385 million in 2008, mainly due to higher average prices per hectoliter. Beer sales increased 8.9% to Ps. 42,491 million in 2009 compared to Ps. 39,014 million in 2008, representing 91.7% of total revenues in 2009. Mexico beer revenues represented 66.0% of total revenues in 2009 compared to 68.9% in 2008. Brazil beer revenues represented 15.5% of total revenues in 2009, up from 14.6% in 2008. Export beer revenues represented 10.2% of total beer revenues in 2009, up from 8.5% in 2008.
Mexico sales volume decreased 1.7% to 26.929 million hectoliters in 2009 in the context of extreme economic headwinds, particularly affecting our key territories. TheTecate family andIndio brands once again delivered strong growth. Mexico price per hectoliter increased 6.4% to Ps. 1,135 in 2009, as a result of price increases implemented during the second quarter of 2009, in addition to the increases carried out late in the third quarter of 2008.
Brazil sales volume decreased 1.3% to 10.049 million hectoliters in 2009 compared to 10.181 million hectoliters in 2008. Average price per hectoliter in Brazil increased 17.9% over 2008 in Mexican peso terms to Ps. 715.8 in 2009 due to a positive exchange rate translation effect, driven by the depreciation of the peso against the Brazilian Real. In Brazilian Real terms, average price per hectoliter increased 4.8% percent, reflecting price increases implemented at the beginning of the year.
Export sales volumes increased 2.6% in 2009 compared to 2008, reaching 3.570 million hectoliters in 2009 compared to 3.479 million hectoliters in 2008. This percentage increase outperformed the United States import beer category by a significant margin. The increase was primarily driven by ourDos Equis brand in the United States and by ourSol brand in other key markets. Export price per hectoliter in pesos increased 27.9% compared to 2008 to Ps. 1,326.7 in 2009, reflecting the peso’s depreciation against the U.S. dollar. In U.S. dollar terms, price per hectoliter improved by 4.3% to US$ 98.0 due to moderate price increases and a favorable brand mix shift fromTecate to higher-pricedDos Equis.
Gross Profit
Cost of sales increased 14.7% to Ps. 22,418 million in 2009 compared to Ps. 19,540 million in 2008, ahead of the 9.3% of total revenue growth in the year. This increase was mainly driven by (i) the depreciation of the peso against the U.S. dollar applied to the unhedged portion of input costs denominated in foreign currencies, (ii) year-over-year increases in the cost of raw materials, particularly in grains and, to a lesser extent, aluminum, and (iii) the translation effect of the depreciation of the peso against the Brazilian Real. Gross profit reached Ps. 23,918 million in 2009, an increase of 4.7% as compared to Ps. 22,845 million in 2008. Gross margin decreased 2.3 percentage points from 53.9% in 2008 to 51.6% in 2009.
Income from Operations
Operating expenses increased 3.3% to Ps. 18,024 million in 2009 compared to Ps. 17,451 million in 2008. However, as percentage of total revenues, operating expenses decreased to 38.9% in 2009 as compared to 41.2% in 2008 mainly due to continued rationalization and cost containment efforts at the selling expense level in Mexico and Brazil. Administrative expenses increased 3.1% to Ps. 4,221 million in 2009 compared to Ps. 4,093 million in 2008. Selling expenses increased 3.3% to Ps. 13,803 million in 2009 as compared to Ps. 13,358 million in 2008. Income from operations increased 9.3% to Ps. 5,894 million in 2009. Operating margin remained flat as compared to 2008 at 12.7% of consolidated total revenues. Operating expense containment offset the contraction experienced at the gross margin level.
FEMSA Comercio
Total Revenues
FEMSA Comercio total revenues increased 13.6%19.0% to Ps. 53,54974,112 million in 20092011 compared to Ps. 47,14662,259 million in 2008,2010, primarily as a result of the opening of 9601,135 net new stores during 2009,2011, together with an average increase ofin same-store sales of 1.3%9.2%. As of December 31, 2009,2011, there were a total of 7,3299,561 stores in Mexico and five stores in Colombia.Mexico. FEMSA Comercio same-store sales increased an average of 1.3%9.2% compared to 2008,2010, driven by a 3.3%4.6% increase in store traffic which more than offset a slight reduction of 1.6%and 4.3% in average ticket. As was the case in 2008, the same-store sales, ticket and traffic dynamics continued to reflect the effects from the continued mix shift from physical prepaid wireless air-time cards to the sale of electronic air-time, for which only the margin is recorded, rather than the full amount of the electronic recharge. As 2009 progressed, this effect diminished.
Gross Profit
Cost of sales increased 10.0%18.0% to Ps. 35,82548,636 million in 2009,2011, below total revenue growth, compared with Ps. 32,56541,220 million in 2008.2010. As a result, gross profit reached Ps. 17,72425,476 million in 2009,2011, which represented a 21.6%21.1% increase from 2008.2010. Gross margin expanded 2.20.6 percentage points to reach 33.1%34.4% of total revenues. This increase reflects a positive mix shift due to the growth of higher margin categories and a more effective collaboration and execution with our key supplier partners combined with a more efficient use of promotion-related marketing resources and a positive mix shift due to the growth of higher-margin categories and, to a lesser extent, the continued shift towards electronic air-time recharges described above.resources.
Income from Operations
Operating expenses increased 15.3%21.2% to Ps. 13,26719,200 million in 20092011 compared with Ps. 11,50415,839 million in 2008,2010, largely driven by the growing number of stores as well as by incremental expenses, such as those for the strengthening of FEMSA Comercio’s organizational structure, mainly IT-related, and partially offset by broad expense-containment initiatives at the store level and by scale-driven efficiencies. targeted marketing programs.
Administrative expenses increased 15.1%21.2% to Ps. 9591,438 million in 2009,2011, compared with Ps. 8331,186 million in 2008,2010; however, as a percentage of sales, they remained stable at 1.8%1.9%.
Selling expenses increased 15.3%21.2% to Ps. 12,30817,762 million in 20092011 compared with Ps. 10,67114,653 million in 2008. 2010.
Income from operations increased 44.8%20.7% to Ps. 4,4576,276 million in 20092011 compared with Ps. 3,0775,200 million in 2008,2010, resulting in an operating margin expansion of 1.80.1 percentage points to 8.3%8.5% as a percentage of total revenues for the year, compared with 6.5%8.4% in 2008. This all-time high operating margin was driven by gross margin expansion, which more than offset the increase in operating expenses.2010.
FEMSA Consolidated—Net Income
Other Expenses
Other expenses include employee profit sharing, which we refer to as PTU, participation in affiliated companies, impairment of long-lived assets, contingencies, as well as their subsequent interest and penalties, severance payments derived from restructuring programs and all other non-recurring expenses related to activities different from the main activities of the Company and that are not recognized as part of the comprehensive financing result. During 2009,2011, other expenses increased to Ps. 3,5062,917 million from Ps. 2,374282 million in 2008,2010, largely driven mainly by the one-timenet effect of non-recurring items. Such items include the tax amnesty program offered byincome in 2010 from the Brazilian tax authoritiessale of our flexible packaging business and certain labor obligations provisions relatedthe sale of the Mundet brand to employee vacations, as well as by increases in PTU.The Coca-Cola Company.
Comprehensive Financing Result
Net interest expense reached Ps. 4,632 millionComprehensive financing result decreased 63.6% in 2009 compared with Ps. 4,332 million in 2008. Foreign exchange recorded a loss of Ps. 396 million in 2009 from a loss of Ps. 1,694 million in 2008, reflecting an important improvement due to the significant loss reported in 2008, driven by lower foreign exchange losses in 2009 due to the lower depreciation of local currencies in our markets against the U.S. dollar. Additionally, the monetary position represented a lower gain of Ps. 487 million in 2009 compared2011 to Ps. 657783 million, in 2008, due to a lower liability monetary position in 2009 (monetary liabilities less monetary assets) and a lower inflation rate in countries in which inflationary adjustments are applied.
The market value of the ineffective portion of our derivative financial instruments reflects a shift to a gain of Ps. 25 million in 2009 from a loss of Ps. 1,456 million in 2008, reflecting an improvement due to the significant loss reporteda foreign exchange gain (of Ps. 1,165 million) in 2008,2011 driven by lossesthe effect of the devaluation of the Mexican peso on the U.S. dollar-denominated component of our cash position as compared to a loss of Ps. 614 million in certain derivative instruments that do not meet hedging criteria for accounting purposes, due to mark-to-market recognition in our U.S. dollar cross-swap.2010.
Comprehensive financing result decreased 33.8% in 2009Equity Method of Associates
Equity Method of Associates increased 46.0% to Ps. 4,5165,167 million reflecting an important improvement duein 2011 compared with Ps. 3,538 million in 2010, mainly driven by the inclusion of the full year of our 20% interest in Heineken’s net income in 2011, compared to the significant loss reportedinclusion of eight months of our 20% interest in 2008, driven by lower foreign exchange losses in 2009 due to the lower depreciation of local currencies in our markets against the U.S. dollar and a shift to gains in certain derivative instruments during the year, as mentioned above.Heineken’s 2010 net income.
Income Taxes
Our accounting provision for income taxes in 20092011 was Ps. 5,9737,687 million, excluding a one-time benefit of Ps. 2,066 million under the tax amnesty program offered by the Brazilian tax authorities in 2009 due to the utilization of tax losses which we had reserved but we did not previously have sufficient certainty of its recoverability, resulting in a net accounting provision for income taxes in 2009 of Ps. 3,908 million,as compared to Ps. 4,2075,671 million in 2008,2010, resulting in an effective tax rate of 20.6%27.1% in 20092011, as compared with 31.2%to 24.0% in 2008.2010.
Consolidated Net Income before Discontinued Operations
Net income from continuing operations increased 62.6%15.2% to Ps. 15,08220,684 million in 20092011 compared to Ps. 9,278 million17,961million in 2008.2010. These results were driven by (i) operatingthe growth in income growth during the year, (ii) a significant improvementfrom operations, which more than compensated for an increase in the comprehensive financing resultother expenses line largely driven by the factors mentioned abovenet effect of non-recurring items. These include the tough comparison base caused by income from the sale of our flexible packaging business and (iii)the sale of the Mundet brand to The Coca-Cola Company, and a loss on disposal of long-lived assets in 2011.
Consolidated Net Income
Consolidated net income was Ps. 20,684 million in 2011 compared to Ps. 45,290 million in 2010, a difference mainly attributable to the one-time benefit that resulted from the Brazilian tax amnesty program in 2009.
Heineken transaction-related gain recorded during 2010 (of Ps. 26,623 million). Net controlling interest income amounted to Ps. 9,90815,133 million in 20092011 compared to Ps. 6,70840,251 million in 2008, an increase2010, which difference was also due principally to the effect in 2010 of 47.7%.the Heineken transaction. Net controlling incomeinterest in 20092011 per one FEMSA ShareUnit(1) was Ps. 2.774.23 (US$2.123.03 per ADS).
1 | FEMSA Units consist of FEMSA BD Units and FEMSA B Units. Each FEMSA BD Unit is comprised of one Series B Share, two Series D-B Shares and two Series D-L Shares. Each FEMSA B Unit is comprised of five Series B Shares. The number of FEMSA Units outstanding as of December 31, 2011 was 3,578,226,270, which is equivalent to the total number of FEMSA Shares outstanding as of the same date, divided by five. |
Results of Operationsfrom operations for the Year Ended December 31, 20082010 Compared to the Year Ended December 31, 20072009
Beginning on January 1, 2008, in accordance with changes to NIF B-10 under the Mexican Financial Reporting Standards, we discontinued the use of inflation accounting for our subsidiaries that operate in “non-inflationary” countries where cumulative inflation for the three preceding years was less than 26%. For comparison purposes, the figures prior to 2008 have been restated in Mexican pesos with purchasing power as of December 31, 2007, taking into account local inflation for each country with reference to the consumer price index. Local currencies have been converted into Mexican pesos using official exchange rates published by the local central bank of each country. See “Item 3. Key Information—Selected Consolidated Financial Data.”
FEMSA Consolidated
Under Mexican FRS, we reclassified our financial statements to reflect FEMSA Cerveza as a discontinued operation.
Total Revenues
OurFEMSA’s consolidated total revenues increased 13.9%5.9% to Ps. 168,022169,702 million in 20082010 compared to Ps. 147,556160,251 million in 2007.2009. All of our operations—soft drinks, beerFEMSA’s beverage and retail—retail operations contributed positively to this revenue growth. Coca-Cola FEMSA’s total revenues increased 19.8%0.7% to Ps. 82,976103,456 million, driven by a 12.5% higher average price per unit casethe revenue growth in its Mercosur and a volume growth of 5.8% as compared to 2007, from 2,120.8 million unit cases in 2007 to 2,242.8 million unit cases in 2008.Mexico divisions. FEMSA Comercio’s revenues increased 12.0%16.3% to Ps. 47,146 million. The net62,259 million, mainly driven by the opening of 8111,092 net new stores combined with stable same store sales drove this revenue growth. Total revenues at FEMSA Cerveza increased 7.1% compared to 2007 to Ps. 42,385 million, mainly driven by a higheran average price per hectoliter, primarilyincrease of 5.2% in Mexico, and volume increases in our three main markets, Mexico, the U.S., and Brazil.same-store sales.
Gross Profit
Consolidated cost of salesgross profit increased 13.4%4.5% to Ps. 90,39970,970 million in 20082010 compared to Ps. 79,73967,938 million in 2007. Approximately 75.2% of this increase came from Coca-Cola2009, driven by FEMSA as a result of cost pressures from the depreciation of local currencies against the U.S. dollar in its main operations as applied to its dollar-denominated raw material costs, as well its integration of the Jugos del Valle line of business in Mexico, which carries a higher cost of sales. FEMSA Comercio accounted for 21.2% of this increase as a result of its rapid pace of store expansion.
Consolidated gross profit increased 14.5% to Ps. 77,623 million in 2008 compared to Ps. 67,817 million in 2007 due to gross profit increases in all of our operations.Comercio. Gross margin improvedcontracted by 0.20.6 percentage points, as compared to 2007, from 46.0%42.4% of consolidated total revenues in 20072009 to 46.2%41.8% in 2008.2010 as the faster growth of lower-margin FEMSA Comercio tends to compress FEMSA’s consolidated margins over time. Gross margin improvement at FEMSA Comercio more thanpartially offset raw material prices pressureraw-material cost pressures at FEMSA Cerveza and Coca-Cola FEMSA, and helped offset the depreciation of local currencies against the U.S. dollar as applied to our U.S. dollar-denominated costs, resulting in a net overall gross margin improvement.FEMSA.
Income from Operations
Consolidated operating expenses increased 14.3%3.5% to Ps. 54,93948,441 million in 20082010 compared to Ps. 48,08146,808 million in 2007. Approximately 50%2009. The majority of this increase resulted from additional operating expenses at Coca-Cola FEMSA in connection with the integration of new operations in Brazil, together with incremental expenses in its Latincentro divisionComercio, due to higher labor costs. FEMSA Comercio accounted for 30% of the increase, resulting from thean accelerated store expansion. FEMSA Cerveza accounted for the balance. As a percentage of total revenues, consolidated operating expenses remained stable at 32.7%decreased from 29.2% in 2008 compared with 32.6%2009 to 28.5% in 2007.2010.
Consolidated administrative expenses increased 4.5%decreased 0.9% to Ps. 9,5317,766 million in 20082010 compared to Ps. 9,1217,835 million in 2007. However, as2009. As a percentage of total revenues, consolidated administrative expenses decreased 0.5 percentage points to 5.7%remained stable at 4.6% in 20082010 compared with 6.2%4.9% in 2007, due to operating leverage driven by higher revenues achieved in all of our operations.2009.
Consolidated selling expenses increased 16.6%4.4% to Ps. 45,40840,675 million in 20082010 as compared to Ps. 38,96038,973 million in 2007. Approximately 49% of this2009. This increase came from Coca-Colawas attributable to FEMSA while 30% came from FEMSA Comercio and the remainder of the balance from FEMSA Cerveza.Comercio. As a percentage of total revenues, selling expenses increased 0.6decreased 0.3 percentage points from to 27.0%24.3% in 2008 compared2009 to 26.4%24.0% in 2007.
We incur various expenses related to the distribution of our products that are accounted for in our selling expenses. During 2008 and 2007, our distribution costs amounted to Ps. 12,135 million and Ps. 10,601 million, respectively.2010.
Consolidated income from operations increased 14.9%6.6% to Ps. 22,68422,529 million in 20082010 as compared to Ps. 19,73621,130 million in 2007,2009. This increase was driven by the results atof Coca-Cola FEMSA and FEMSA Comercio, which more than offset the decrease at FEMSA Cerveza.Comercio. Excluding one-time Heineken Transaction-related expenses, consolidated income from operations would have grown 8.7% in that period. Consolidated operating margin increased 0.1 percentage points from 2007 levels13.2% in 2009, to 13.5%13.3% as a percentage of 20082010 consolidated total revenues. Operating margin improvements at FEMSA Comercio combined with a stable margin at Coca-Cola FEMSA, offset the margin pressure at FEMSA Cerveza, which was driven by higher raw material costs and operating expenses.
Some of our subsidiaries pay management fees to us in consideration for corporate services we provide to them. These fees are recorded as administrative expenses in the respective business segments. Our subsidiaries’ payments of management fees are eliminated in consolidation and, therefore, have no effect on our consolidated operating expenses.
Coca-Cola FEMSA
Total Revenues
Coca-Cola FEMSA total revenues increased 19.8%0.7% to Ps. 82,976103,456 million in 2008,2010, compared to Ps. 69,251102,767 million in 2007,2009 as a result of revenue growth in all of its divisions. Growth in Coca-Cola FEMSA’s Latincentro division was mainly driven by incremental pricing, growthMercosur and Mexico divisions and despite the devaluation of the Venezuelan bolívar, which affected our revenues in its Mexico division was mainly driven by incremental volumethat country. On a currency-neutral basis and growth in its Mercosur division was mainly driven by the integration of REMIL. The Latincentro division, including Venezuela, accounted for more than 45% of Coca-Cola FEMSA’s revenue growth. The Mexico and Mercosur divisions, excluding the effectacquisition of the REMIL acquisitionBrisa in Brazil, represented close to 30% of incremental revenue growth. REMIL contributed more than 20% of incrementalColombia, total revenues and a positive net foreign exchange gain, derived from translating local currencies from the countriesincreased approximately 15% in which Coca-Cola FEMSA operates into Mexican pesos (which we refer to as a “translation effect”) represented most of the balance.2010.
Coca-Cola FEMSA’sConsolidated average price per unit case increased 12.5%decreased 2.6%, reaching Ps. 35.9339.89 in 20082010 as compared to Ps. 31.9540.95 in 2007. Price increases implemented2009, reflecting the devaluation in most of Coca-Cola FEMSA’s territories and the addition of the Jugos del Valle line of business, which carries higher average prices per unit case, accounted for this growth.Venezuelan bolívar.
Coca-Cola FEMSA’sConsolidated total sales volume reached 2,242.82,499.5 million unit cases in 2008,2010, compared to 2,120.82,428.6 million unit cases in 2007,2009, an increase of 5.8%2.9%. Excluding REMIL, total sales volume increasedVolume growth resulted largely from increases in sparkling beverages, which grew 2.6% to reach 2,176.7 million unit cases. Coca-Cola FEMSA’s water business,and accounted for more than 70% of incremental volumes, mainly driven by the bulk water business in Mexico, andCoca-Cola brand. The still beverages,beverage category, mainly driven by the introduction of Jugos del Valle and the new products derived from that line of business, accounted for approximately 80% of these increases in sales volume. Sparkling beverage sales, mainly driven by theCoca-Cola brand and the strong performance ofCoca-Cola Zero outside of Mexico represented the balance.
Gross Profit
Coca-Cola FEMSA cost of sales increased 22.4% to Ps. 43,895 million in 2008 compared to Ps. 35,876 million in 2007, as a result of cost pressures related to the devaluation of local currencies in most of Coca-Cola FEMSA’s operations as applied to its U.S. dollar-denominated raw material costs. The integration of REMIL and lower profitability from the Jugos del Valle line of business in Mexico, which was expected in 2008 becauseCoca-Cola FEMSA’s key operations, contributed with approximately 20% of the Jugos del Valle agreement to retain profits at the joint venture company in 2008 for reinvestment, also contributed to this increase. Gross profit increased 17.1% to Ps. 39,081 million in 2008 compared to 2007, driven by a 40.8% increase in its Mercosur division, a 27.6% increase in its Latincentro division, including Venezuela, and a 1.8% increase in its Mexico division. In spite of this increase in gross profit, gross margin decreased 1.1 percentage points to 47.1% in 2008.
Cost of sales includes raw materials, in particular concentrate and sweeteners, packaging materials, depreciation expenses attributable to production facilities, wages and other employment expenses associated with the labor force employed at production facilities, as well as certain overhead expenses. Concentrate prices are determined as a percentage of the retail price of products in the local currency, net of applicable taxes. Packaging materials, mainly PET and aluminum, and high fructose corn syrup, used as sweetener in some countries, are denominated in U.S. dollars.
Income from operations
Operating expenses in absolute terms increased 16.0% compared to 2007 to Ps. 25,386 million, mainly as a result of salary increases in excess of inflation in some of the countries in which Coca-Cola FEMSA operates, and higher operating expenses in the Mercosur division, mainly due to the integration of REMIL, that were partially offset by lower marketing investment in some of its operations. As a percentage of sales, operating expenses declined from 31.6% in 2007 to 30.6% in 2008, as a result of higher revenue growth that compensated for higher operating expenses.
Income from operations increased 19.2% to Ps. 13,695 million in 2008, as compared to Ps. 11,486 million in 2007. Coca-Cola FEMSA’s Mercosur and Latincentro divisions, including Venezuela, each accounted for more than 40% of this increase. Operating margin remained almost flat at 16.5% in 2008 compared to 16.6% in 2007.
FEMSA Cerveza
Total Revenues
FEMSA Cerveza total revenues increased 7.1% to Ps. 42,385 million in 2008 as compared to Ps. 39,566 million in 2007. Beer sales increased 7.0% to Ps. 39,014 million in 2008 compared to Ps. 36,457 million in 2007 and represented 92.0% of total revenues in 2008. Sales from FEMSA Cerveza’s packaging division accounted for 8% of total revenues. Higher average prices per hectoliter accounted for approximately 55 percent of total revenue growth, while incremental volumes were approximately 36 percent. The balance came from other revenues. Mexico beer revenuesand the bottled water category represented 68.9%the balance. Excluding the acquisitions of Brisa, total revenues in 2008 compared to 68.8% in 2007. Brazil beer revenues represented 14.6% of total revenues in 2008, down slightly from 14.9% in 2007. Export beer revenues remained almost flat at 8.5% of total revenues in 2008, compared to 8.4% in 2007.
Mexico sales volume increased 1.6% to 27.393reach 2,479.6 million hectoliters in 2008. This increase was mainly driven by theTecate andIndio brand families throughout the country together with the successful introduction of line extensions such asSol Limón y Sal. Mexico price per hectoliter increased 5.7% to Ps. 1,066.8 in 2008, as a result of incremental volumes brought under FEMSA Cerveza’s own distribution network, which for the year stands at 90% of its total domestic volume. Price increases implemented during the year also contributed to this effect.
Brazil sales volume increased 3.9% to 10.181 million hectoliters in 2008 compared to 9.795 million hectoliters in 2007, outpacing the growth of the Brazilian beer industry. During the year, FEMSA Cerveza’s Sol,Kaiser andBavaria brands accounted for most of the growth. Average price per hectoliter in Brazil increased 0.8% over 2007 in Mexican peso terms to Ps. 607.2 in 2008. In Brazilian real terms, average price per hectoliter increased 2.0% percent, reflecting price increases implemented late in the year.
Export sales volumes increased 9.3% in 2008 compared to 2007 reaching 3.479 million hectoliters compared to 3.183 million hectoliters in 2007, primarily driven by increased demand for FEMSA Cerveza’sDos Equis andTecate brands in the United States and for itsSol brand in other key markets. Export price per hectoliter in Mexican pesos decreased 1.1% compared to 2007 to Ps. 1,037.0 in 2008. In U.S. dollar terms, price per hectoliter improved by 0.2% to US$94.0, due to moderate price increases implemented during the year, which more than offset changes in packaging mix.unit cases.
Gross Profit
Cost of sales increased 9.6%1.1% to Ps. 19,54055,534 million in 20082010 compared to Ps. 17,83354,952 million in 2007, ahead2009, as a result of increases in the cost of sweeteners of our operations, which were partially offset by the appreciation of the 7.1% total revenue growth inBrazilian real, the year. This increase was mainly driven by higher raw material costs, particularly for aluminumColombian peso and grains, the Mexican peso depreciation of 25% as applied to itsCoca-Cola FEMSA’s U.S. dollar-denominated costs and to a lesser extent the 2.8% total volume growth, which more than offset operating efficiencies achieved during the year.raw material costs. Gross profit reachedincreased 0.2% to Ps. 22,84547,922 million in 2008, an increase2010, as compared to 2009, despite the devaluation of 5.1%the Venezuelan bolívar; Coca-Cola FEMSA’s gross margin decreased 0.2 percentage points to 46.3% in 2010.
Operating Expenses
Operating expenses decreased 3.6% to Ps. 30,843 million in 2010. As a percentage of sales, operating expenses decreased to 29.8% in 2010 from 31.1% in 2009.
Income from Operations
Income from operations increased 7.9% to Ps. 17,079 million in 2010, as compared to Ps. 21,73315,835 million in 2007. Gross2009 driven by Coca-Cola FEMSA’s Mercosur and Latincentro divisions. Operating margin decreased 1.0was 16.5% in 2010, an expansion of 1.1 percentage points from 54.9% in 2007 to 53.9% in 2008.
Income from operations
Operating expenses increased 7.5% to Ps. 17,451 million in 2008 compared to Ps. 16,236 million in 2007. However, as percentage of total revenues, operating expenses remained almost flat at 41.2% as compared to 41.0% in 2007. Administrative expenses decreased 4.7% to Ps. 4,093 million in 2008 compared to Ps. 4,295 million in 2007 due to expense rationalization together with a decline in capitalized investments in the ERP system, which have been fully amortized. Selling expenses increased 11.9% to Ps. 13,358 million in 2008 as compared to Ps. 11,941 million in 2007, mainly due to continuous marketing investment in channel development and brand-building activities behindSol andTecate in Mexico as well as forDos Equis andTecate in the United States and forKaiser
andSol in Brazil. The increase also resulted from incremental volumes that we brought under FEMSA Cerveza’s direct distribution network. Income from operations decreased 1.9% to Ps. 5,394 million in 2008, to 12.7% of consolidated total revenues, reflecting mainly the decline in gross margin.2009.
FEMSA Comercio
Total Revenues
FEMSA Comercio total revenues increased 12.0%16.3% to Ps. 47,14662,259 million in 20082010 compared to Ps. 42,10353,549 million in 2007,2009, primarily as a result of the opening of 8111,092 net new stores during 2008 together2010, combined with stablean average increase of same-store sales.sales of 5.2%. As of December 31, 2008,2010, there were a total of 6,3748,409 stores in Mexico.Mexico and 17 stores in Colombia. FEMSA Comercio same-store sales were virtually flat, upincreased an average of 0.4%5.2% compared to 2007. A 13.0%2009, driven by a 3.9% increase in store traffic which was driven by a broader mix of products and services, more than offset a decrease of 11.2%1.3% in average customer ticket. DuringAs was the year, storecase in 2009, the same-store sales, ticket and traffic and ticket dynamics continued to reflect the effects from the continued mix shift from physical prepaid wireless phoneair-time cards to the sale of electronic air-time, for which only the margin is recorded, notrather than the full amount of revenues coming from the air-timeelectronic recharge.
Gross Profit
Cost of sales increased 7.5%15.1% to Ps. 32,56541,220 million in 2008,2010, below total revenue growth, compared with Ps. 30,30135,825 million in 2007.2009. As a result, gross profit reached Ps. 14,58121,039 million in 2008,2010, which represented a 23.5%an 18.7% increase from 2007.2009. Gross margin expanded 2.90.7 percentage points to reach 30.9%33.8% of total revenues. A significant portionThis increase reflects a positive mix shift due to (i) the growth of this improvement resulted fromhigher margin categories, (ii) more effective collaboration and execution with FEMSA Comercio’s key supplier partners and more efficient use of promotion-related marketing resources, and (iii) to a lesser extent, the continued mix shift towardstoward electronic air-time recharges as described above. The balance came from growth in higher-margin categories such as ready-to-drink coffee and alternative beverages, among others, as well as better pricing strategies and improved commercial terms with supplier partners.
Income from operationsOperations
Operating expenses increased 21.3%19.4% to Ps. 11,50415,839 million in 20082010 compared with Ps. 9,48213,267 million in 2007. Administrative expenses increased 10.9% to Ps. 833 million in 2008 compared with Ps. 751 million in 2007, however, as percentage of sales remained stable at 1.8%. Selling expenses increased 22.2% to Ps. 10,671 in 2008 compared with Ps. 8,731 million in 2007, mainly2009, largely driven by the growing number of stores as well as by incremental expenses such as (i) higher energy costsutility tariffs at the store level and expenses related to(ii) the strengthening of FEMSA Comercio’s organizational structure, mainly IT-related, which was deferred in accordance2009 in response to the challenging economic environment that prevailed in Mexico at the time.
Administrative expenses increased 23.7% to Ps. 1,186 million in 2010, compared with management plans.Ps. 959 million in 2009, however, as a percentage of sales remained stable at 1.9%.
Selling expenses increased 19.1% to Ps. 14,653 in 2010 compared with Ps. 12,308 million in 2009. Income from operations increased 32.6%16.7% to Ps. 3,0775,200 million in 20082010 compared with Ps. 2,3204,457 million in 2007,2009, resulting in an operating margin expansion of 1.0 percentage point10 basis points to 6.5%8.4% as a percentage of total revenues for the year, compared with 5.5%8.3% in 2007. This all-time high operating margin was driven by gross margin expansion which more than offset the increase in operating expenses.2009.
FEMSA Consolidated—Net Income
Other Expenses
Other expenses include employee profit sharing, which we refer to as PTU, impairment of long-lived assets, contingencies, as well as their subsequent interest and penalties, severance payments derived from restructuring programs participation in affiliated companies, gains or losses on sales of fixed assets, and all other non-recurring expenses related to activities other than ourdifferent from the main activities of the Company and that are not recognized as part of the Comprehensivecomprehensive financing result. During 2008,2010, other expenses increasedcontracted to Ps. 2,374282 million from Ps. 1,2971,877 million in 2007, driven mainly by increases in employee profit sharing expenses and in impairment charges of long-lived assets, together with strategic restructuring programs mainly at Coca-Cola FEMSA during 2008.2009.
Comprehensive Financing Result
Net interest expense reachedComprehensive financing result decreased 18.0% in 2010 to Ps. 4,3322,153 million, in 2008 compared with Ps. 3,952 million in 2007, mainlyreflecting an improvement over the low comparison base of 2009, driven by higherlower interest expense derived from an increase in our average total debt rate during the year.
Foreign exchange recorded a loss of Ps. 1,694 million in 2008 from a gain of Ps. 691 million in 2007, due to the depreciation of the local currencies in our markets against the U.S. dollar, as applied to our U.S. dollar-denominated liability position.
Monetary position amounted to a lower gain of Ps. 657 million in 2008 compared to Ps. 1,639 million in 2007, reflecting changes in Mexican Financial Reporting Standards, as inflationary adjustments are no longer applied to the vast majority of our liability positions.
The market value of the ineffective portion of our derivative financial instruments reflects a shift to a loss of Ps. 1,456 million in 2008 from a gain of Ps. 69 million in 2007, driven by the recognition of mark-to-market losses in our U.S. dollar cross currency swaps and to a lesser extent, the unwinding of certain commodity hedges that do not meet hedging criteria for accounting purposes.expenses.
Income Taxes
TheOur accounting provision for income taxes in 20082010 was Ps. 4,2075,671 million compared to Ps. 4,9504,959 million in 2007,2009, resulting in an effective tax rate of 31.2%24.0% in 20082010 as compared with 29.3%29.6% in 2007.2009 as the inclusion of the participation in Heineken’s 2010 net income is shown net of taxes.
Consolidated Net Income before Discontinued Operations
Net income from continuing operations increased 52.2% to Ps. 17,961 million in 2010 compared to Ps. 11,799 million in 2009. These results were driven by the combination of (i) the inclusion of FEMSA’s 20% participation in the last eight months of Heineken’s 2010 net income, (ii) growth in income from operations, and (iii) a reduction in the other expenses line.
Consolidated Net Income
Net consolidated income decreased 22.3% toreached Ps. 9,27845,290 million in 20082010 compared to Ps. 11,93615,082 million in 2007. This decline resulted2009, driven by (i) the one-time Heineken transaction-related gain and (ii) a double-digit increase in FEMSA’s net income from our higher comprehensive financing result due to the factors mentioned above, which more than offset operating income growth.continuing operations.
Net controlling interest income amounted to Ps. 6,70840,251 million in 20082010 compared to Ps. 8,5119,908 million in 2007, a decline of 21.2%.2009. Net controlling incomeinterest in 20082010 per one FEMSA Unit(2) was Ps. 1.87 ($1.3611.25 (US$ 9.08 per ADS).
Liquidity and Capital Resources
Liquidity
Each of our sub-holding companies generally finances its operational and capital requirements on an independent basis. As of December 31, 2009, 68.2%2011, 76.9% of our outstanding consolidated total indebtedness was at the level of our sub-holding companies. This structure is attributable, in part, to the inclusion of third parties in the capital structure of Coca-Cola FEMSA. Currently, we expect to continue to finance our operations and capital requirements primarily at the level of our sub-holding companies. Nonetheless, we may decide to incur indebtedness at our holding company in the future to finance the operations and capital requirements of our subsidiaries or significant acquisitions, investments or capital expenditures. As a holding company, we depend on dividends and other distributions from our subsidiaries to service our indebtedness.
We continuously evaluate opportunities to pursue acquisitions or engage in joint ventures or other transactions. We would expect to finance any significant future transactions with a combination of cash from operations, long-term indebtedness and capital stock.
TheOur principal source of liquidity of each sub-holding company has generally been cash generated from our operations. We have traditionally been able to rely on cash generated from operations because a significant majority of the sales of Coca-Cola FEMSA FEMSA Cerveza and FEMSA Comercio are on a cash or short-term credit basis, and FEMSA Comercio’s OXXO stores are able to finance a significant portion of their initial and ongoing inventories with supplier credit. Our principal use of cash has generally been for capital expenditure programs, debt repayment and dividend payments.
In 2008, we adopted NIF B-2 (“Statement of Cash Flows”) pursuant to which we present cash inflows and outflows in nominal currency for the year ended December 31, 2008. NIF B-2 replaces the statement of changes in financial position, which we still present for the year ended December 31, 2007, and which includes inflation effects and unrealized foreign exchange effects. The application of NIF B-2 is prospective, and therefore the cash flow
statement for the years ended December 31, 2009 and 2008, is not comparable to the statements of changes in financial position for the year ended December 31, 2007.
The following is a summary of the principal sources and uses of cash for the years ended December 31, 20092011, 2010 and 2008,2009, from our consolidated statement of cash flows:
Principal Sources and Uses of Cash
of Continuing Operations
Years ended December 31, 20092011, 2010 and 20082009
(in millions of Mexican pesos)(1)
2009 | 2008 | 2011 | 2010 | 2009 | ||||||||||||||||||
Net cash flows provided by operating activities | Ps. | 30,907 | Ps. | 23,064 | Net cash flows provided by operating activities | Ps.22,244 | Ps.17,802 | Ps.22,744 | ||||||||||||||
Net cash flows used in investing activities(1) | (15,834 | ) | (18,060 | ) | ||||||||||||||||||
Net cash flows (used in) provided by investing activities(2) | Net cash flows (used in) provided by investing activities(2) | (18,090 | ) | 6,178 | (11,376 | ) | ||||||||||||||||
Net cash flows used in financing activities | (7,711 | ) | (6,160 | ) | (6,922 | ) | (10,496 | ) | (7,889 | ) | ||||||||||||
Dividends paid | (2,255 | ) | (2,065 | ) | Dividends paid | (6,625 | ) | (3,813 | ) | (2,246 | ) |
(1) |
(2) | Includes |
The following table summarizes the sources and uses of cash for the yearnet investments in the period ended December 31, 2007, from our consolidated statements of changes in financial position:
Principal Sources and Uses of Cash
Year ended December 31, 2007(1)
(in millions of Mexican pesos)
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(3) | Includes dividends declared and paid. |
2 | FEMSA Units consist of FEMSA BD Units and FEMSA B Units. Each FEMSA BD Unit is comprised of one Series B share, two Series D-B shares and two Series D-L shares. Each FEMSA B Unit is comprised of five Series B shares. The number of FEMSA Units outstanding as of December 31, 2010 was 3,578,226,270, which is equivalent to the total number of FEMSA shares outstanding as of the same date, divided by five. |
Our sub-holding companies generally incur short-term indebtedness in the event that they are temporarily unable to finance operations or meet any capital requirements with cash from operations. A significant decline in the business of any of our sub-holding companies may affect the sub-holding company’s ability to fund its capital requirements. A significant and prolonged deterioration in the economies in which we operate or in our businesses may affect our ability to obtain short-term and long-term credit or to refinance existing indebtedness on terms satisfactory to us.
We have financed significant acquisitions, principally Coca-Cola FEMSA’s acquisition of Coca-Cola Buenos Aires in 1994 and its acquisition of Panamco in May 2003 and our acquisition of the 30% interest in FEMSA Cerveza owned by affiliates of InBev in August 2004, capital expenditures and other capital requirements that could not be financed with cash from operations by incurring long-term indebtedness and through the issuance of equity.
Our consolidated total indebtedness as of December 31, 2009,2011, was Ps. 43,66329,604 million compared to Ps. 43,85825,506 million as of December 31, 2008.2010. Short-term debt (including maturities of long-term debt) and long-term debt were Ps. 8,8535,573 million and Ps. 34,81024,031 million, respectively, as of December 31, 2009,2011, as compared to Ps. 11,6483,303 million and Ps. 32,21022,203 million, respectively, as of December 31, 2008.2010. Cash and cash equivalents and
financial marketable securities were Ps. 17,63626,329 million as of December 31, 2009,2011, as compared to Ps. 9,11027,097 million as of December 31, 2008.2010.
We believe that our sources of liquidity as of December 31, 2009,2011, were adequate for the conduct of our sub-holding companies’ businesses and that we will have sufficient fundsworking capital available to meet our expenditure demands and financing needs in 20102012 and in the following years.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Contractual Obligations
The table below sets forth our contractual obligations as of December 31, 2009.2011.
Maturity | Maturity | |||||||||||||||||||||||||||||||||
Less than 1 year | 1 - 3 years | 3 - 5 years | In excess of 5 years | Total | Less than 1 year | 1 - 3 years | 3 - 5 years | In excess of 5 years | Total | |||||||||||||||||||||||||
(in millions of Mexican pesos) | (in millions of Mexican pesos) | |||||||||||||||||||||||||||||||||
Long-Term Debt | ||||||||||||||||||||||||||||||||||
Mexican pesos | Ps. | 4,931 | Ps. | 18,217 | Ps. | 7,158 | Ps. | 5,789 | 36,095 | Ps.3,067 | Ps.5,158 | Ps.5,325 | Ps.5,837 | Ps.19,387 | ||||||||||||||||||||
Brazilian reais | 9 | 30 | 24 | 36 | 99 | |||||||||||||||||||||||||||||
Colombian pesos | 935 | — | — | — | 935 | |||||||||||||||||||||||||||||
U.S. dollars | 95 | 985 | 2,092 | — | 3,172 | 42 | 209 | — | 6,990 | 7,241 | ||||||||||||||||||||||||
Argentine pesos | — | 69 | — | — | 69 | 644 | 81 | — | — | 725 | ||||||||||||||||||||||||
Capital Leases | ||||||||||||||||||||||||||||||||||
U.S. dollars | 11 | 4 | — | — | 15 | |||||||||||||||||||||||||||||
Interest payments(2) | ||||||||||||||||||||||||||||||||||
Colombian pesos | 205 | 181 | — | — | 386 | |||||||||||||||||||||||||||||
Brazilian reais | 33 | 82 | 78 | — | 193 | |||||||||||||||||||||||||||||
Interest payments(1) | ||||||||||||||||||||||||||||||||||
Mexican pesos | 1,981 | 2,712 | 685 | 325 | 5,703 | 1,042 | 1,690 | 781 | 795 | 4,309 | ||||||||||||||||||||||||
Brazilian reais | 22 | 28 | 9 | 4 | 62 | |||||||||||||||||||||||||||||
Colombian pesos | 53 | 10 | — | — | 63 | |||||||||||||||||||||||||||||
U.S. dollars | 42 | 70 | 9 | — | 121 | 326 | 647 | 646 | 1,023 | 2,642 | ||||||||||||||||||||||||
Argentine pesos | 14 | 10 | — | — | 24 | 86 | 2 | — | — | 88 | ||||||||||||||||||||||||
Interest rate swaps and cross currency swaps(3) | ||||||||||||||||||||||||||||||||||
Interest rate swaps and cross currency swaps(2) | ||||||||||||||||||||||||||||||||||
Mexican pesos | 661 | 1,136 | 369 | 321 | 2,487 | 887 | 1,516 | 1,011 | 694 | 4,109 | ||||||||||||||||||||||||
Brazilian reais | 22 | 28 | 10 | 2 | 62 | |||||||||||||||||||||||||||||
Colombian pesos | 53 | 12 | — | — | 65 | |||||||||||||||||||||||||||||
U.S. dollars | 22 | 50 | 4 | — | 76 | 325 | 648 | 646 | 646 | 2,266 | ||||||||||||||||||||||||
Unhedged cross currency swaps | — | 248 | 107 | — | 355 | |||||||||||||||||||||||||||||
Argentine pesos | 86 | 13 | — | — | 99 | |||||||||||||||||||||||||||||
Operating leases | ||||||||||||||||||||||||||||||||||
Mexican pesos | 1,607 | 2,932 | 2,544 | 6,182 | 13,265 | 2,370 | 4,380 | 3,914 | 11,324 | 21,988 | ||||||||||||||||||||||||
U.S. dollars | 106 | 89 | 27 | — | 222 | 113 | 210 | 873 | — | 1,196 | ||||||||||||||||||||||||
Brazilian reais | 151 | 259 | 43 | 16 | 469 | |||||||||||||||||||||||||||||
Others | 203 | 187 | 18 | — | 408 | |||||||||||||||||||||||||||||
Commodity price contracts | ||||||||||||||||||||||||||||||||||
U.S. dollars | 2,767 | 2,260 | 172 | — | 5,199 | 427 | 327 | — | — | 754 | ||||||||||||||||||||||||
Purchase obligations | 72 | — | — | — | 72 | |||||||||||||||||||||||||||||
Expected benefits to be paid for pension plans, seniority premiums, post-retirement medical benefits and severance indemnities | 663 | 1,062 | 1,075 | 2,895 | 5,695 | 579 | 759 | �� | 682 | 1,739 | 3,759 | |||||||||||||||||||||||
Other long-term liabilities(4) | 464 | 1,316 | 121 | 7,486 | 9,537 | |||||||||||||||||||||||||||||
Other long-term liabilities(3) | — | — | — | 4,760 | 4,760 |
(1) |
Interest was calculated using long-term debt as of and interest rate amounts in effect on December 31, |
Reflects the amount of future payments that we would be required to make. The amounts were calculated by applying the difference between the interest rate swaps and cross currency swaps and the nominal interest rates contracted to long-term debt as of December 31, |
Other long-term liabilities |
As of December 31, 2009,2011, Ps. 8,8535,573 million of our total consolidated indebtedness was short-term debt (including maturities of long-term debt).
As of December 31, 2009,2011, our consolidated average cost of borrowing, after giving effect to the cross currency and interest rate swaps, was approximately 7.8%6.3%, a decreasean increase of 1.60.5% percentage points compared to 9.4%5.8% in 2008.2010. As of December 31, 2009,2011, after giving effect to cross currency swaps, 86.9%approximately 63% of our total consolidated indebtedness was denominated and payable in Mexican pesos, 7.4%27% in U.S. dollars, 1.1%6% in Colombian pesos, 2.9%4% in Argentine pesos and the remaining 1.7%1% in Venezuelan bolívares fuertes.Brazilian reais.
Overview of Debt Instruments
The following table shows the allocations of total debt of our company as of December 31, 2009:2011:
Total Debt Profile of the Company | Total Debt Profile of the Company | |||||||||||||||||||||||||||||
FEMSA and others | Coca-Cola FEMSA | FEMSA Cerveza | FEMSA Comercio | Total Debt | FEMSA and Others | Coca-Cola FEMSA | FEMSA Comercio | Total Debt | ||||||||||||||||||||||
(in millions of Mexican pesos) | (in millions of Mexican pesos) | |||||||||||||||||||||||||||||
Short-term Debt | ||||||||||||||||||||||||||||||
Mexican pesos: | ||||||||||||||||||||||||||||||
Bank loans | 1,400 | — | — | — | 1,400 | |||||||||||||||||||||||||
Argentine pesos: | ||||||||||||||||||||||||||||||
Bank loans | — | 1,179 | — | — | 1,179 | Ps. — | Ps. 325 | Ps. — | Ps. 325 | |||||||||||||||||||||
Colombian pesos | ||||||||||||||||||||||||||||||
Bank loans | — | 496 | — | — | 496 | — | 295 | — | 295 | |||||||||||||||||||||
Venezuelan bolívares fuertes: | ||||||||||||||||||||||||||||||
Bank loans | — | 741 | — | — | 741 | |||||||||||||||||||||||||
Mexican pesos | ||||||||||||||||||||||||||||||
Capital leases | — | 18 | — | 18 | ||||||||||||||||||||||||||
Long-term Debt(1) | ||||||||||||||||||||||||||||||
Mexican pesos: | ||||||||||||||||||||||||||||||
Bank loans | 9,512 | 10,550 | 10,555 | — | 30,617 | — | 4,550 | — | 4,550 | |||||||||||||||||||||
Units of Investment (UDI) | 2,964 | — | — | — | 2,964 | |||||||||||||||||||||||||
Units of Investment (UDIs) | 3,337 | — | — | 3,337 | ||||||||||||||||||||||||||
Senior notes | 3,500 | 8,000 | — | 11,500 | ||||||||||||||||||||||||||
U.S. dollars: | ||||||||||||||||||||||||||||||
Bank loans | — | 2,873 | 3,309 | — | 6,182 | — | 7,241 | — | 7,241 | |||||||||||||||||||||
Leasing | — | 15 | — | — | 15 | |||||||||||||||||||||||||
Brazilian reais: | ||||||||||||||||||||||||||||||
Bank Loans | — | 81 | — | 81 | ||||||||||||||||||||||||||
Capital leases | 193 | 18 | — | 211 | ||||||||||||||||||||||||||
Colombian pesos: | ||||||||||||||||||||||||||||||
Bank Loans | — | 935 | — | 935 | ||||||||||||||||||||||||||
Capital leases | — | 386 | — | 386 | ||||||||||||||||||||||||||
Argentine pesos: | ||||||||||||||||||||||||||||||
Bank Loans | — | 69 | — | — | 69 | — | 725 | — | 725 | |||||||||||||||||||||
Total | Ps. 13,876 | Ps. 15,923 | Ps. 13,864 | — | Ps. 43,663 | Ps. 7,030 | Ps. 22,574 | — | Ps. 29,604 | |||||||||||||||||||||
Average Cost(2) | ||||||||||||||||||||||||||||||
Mexican pesos | 8.5 | % | 6.2 | % | 8.2 | % | — | 7.7 | % | 6.1 | % | 6.8 | % | — | 6.6 | % | ||||||||||||||
U.S. dollars | — | 2.0 | % | 1.6 | % | — | 1.8 | % | — | 4.3 | % | — | 4.3 | % | ||||||||||||||||
Brazilian reais | 11.0 | % | 4.5 | % | — | 8.8 | % | |||||||||||||||||||||||
Argentine pesos | — | 20.7 | % | — | — | 20.7 | % | — | 17.3 | % | — | 17.3 | % | |||||||||||||||||
Venezuelan bolívares fuertes | — | 18.1 | % | — | — | 18.1 | % | |||||||||||||||||||||||
Colombian pesos | — | 4.9 | % | — | — | 4.9 | % | — | 6.4 | % | — | 6.4 | % | |||||||||||||||||
Total | 8.5 | % | 7.1 | % | 6.6 | % | — | 7.4 | % | 6.2 | % | 6.4 | % | — | 6.3 | % |
(1) | Includes the Ps. |
(2) | Includes the effect of cross currency and interest rate swaps. Average cost is determined based on interest rates as of December 31, 2011. |
Restrictions Imposed by Debt Instruments
Generally, the covenants contained in the credit agreements and other instruments governing indebtedness entered into by us or our sub-holding companies include limitations on the incurrence of any additional debt based on debt service coverage ratios or leverage tests. These credit agreements also generally include restrictive covenants applicable to us, our sub-holding companies and their subsidiaries. There are no cross-guarantees between sub-holding companies.
As of December 31, 2009, FEMSA’s obligation of Ps. 2,800 million under a bank loan is guaranteed by FEMSA Cerveza. Additionally, FEMSA’s obligation of Ps. 3,112 million is guaranteed by FEMSA Comercio. In addition, FEMSA guaranteed a FEMSA Cerveza obligation of Ps. 3,473 million. Certain of our financing instruments mentioned above are subject to either acceleration or repurchase at the lender’s or holder’s option if, in the case of FEMSA, the persons exercising control over FEMSA no longer exercise such control and, in the case of FEMSA Cerveza, FEMSA ceases to control FEMSA Cerveza.
We are2011, we were in compliance with all of our restrictiveCoca-Cola FEMSA’s covenants. FEMSA was not subject to any financial covenants as of December 31, 2009.that date. A significant and prolonged deterioration in our consolidated results offrom operations could cause us to cease to be in compliance under certain indebtedness in the future. We can provide no assurances that we will be able to incur indebtedness or to refinance existing indebtedness on similar terms in the future.
Summary of Debt
The following is a summary of our indebtedness by sub-holding company and for FEMSA as of December 31, 2009:2011:
• | Coca-Cola FEMSA. Coca-Cola FEMSA’s total indebtedness was Ps. |
As part of Coca-Cola FEMSA’s financing policy, it expects to continue to finance its liquidity needs with cash from cash operations. Nonetheless, as a result of regulations in certain countries in which it operates, it may not be beneficial or, as the case of exchange controls in Venezuela, practicable for Coca-Cola FEMSA to remit cash generated in local operations to fund cash requirements in other countries. Exchange controls like those in Venezuela may also increase the real price of remitting cash from operations to fund debt requirements in other countries. In addition, in the event that cash from operations in these countries is not sufficient to fund future working capital requirements and capital expenditures, Coca-Cola FEMSA may decide, or be required, to fund cash requirements in these countries through local borrowings rather than remitting funds from another country. In addition, in the future Coca-Cola FEMSA may be required to finance its working capital and capital expenditure needs with short-term or other borrowings.
Coca-Cola FEMSA’s average cost of debt, based on interest rates as of December 31, 2011 and after giving effect to cross currency and interest rate swaps, was 2.6%4.3% in U.S. dollars, 7.2%6.8% in Mexican pesos, 12.5%6.4% in Colombian pesos, 18.9%4.5% in Venezuelan bolívaresBrazilian reais and 21.6%17.3% in Argentine pesos as of December 31, 2009,2011, compared to 5.5%4.5% in U.S. dollars, 9.0%6.2% in Mexican pesos, 15.2%4.5% in Colombian pesos, 22.2%4.5% in Venezuelan bolívares fuertesBrazilian reais and 19.6%16.0% in Argentine pesos as of December 31, 2008.2010.
• | FEMSA Cerveza. |
• | FEMSA Comercio. As of December 31, |
• | FEMSA |
Contingencies
We have various loss contingencies, for which reserves have been recorded in those cases where we believe an unfavorable resolution is probable.probable and can be reasonably quantified. See “Item 8. Financial Information—Legal Proceedings.” Most of these loss contingencies were recorded in Coca-Cola FEMSA’s books as reserves as a result of Panamco and Kaiser acquisitions.acquisition. Any amounts required to be paid in connection with these loss contingencies would be required to be paid from available cash.
In 2009, the Brazilian government offered an amnesty, which grants a discount for fines and surcharges regarding indirect tax contingencies and allows the application of income tax losses to the remaining balance. In November 2009, our Brazilian operations announced to the Brazilian government the adoption of this amnesty. As a result, the Company cancelled indirect tax contingencies of Ps. 1,008 and applied income tax losses of Ps. 6,886. After amnesty adoption, as of December 31, 2009, Brazilian indirect tax contingencies and income tax losses carryforward amounted to Ps. 941, and Ps. 6,617, respectively. Additionally, since the acquisition of Kaiser, the Company identified some loss contingencies as more likely than not to occur. MolsonCoors, the previous parent of Kaiser agreed to indemnify for any loss related to those contingencies recognized as part of Kaiser’s acquisition in 2006; such indemnity is limited to 82.95%, which was the percentage of Kaiser that the Company acquired from MolsonCoors. Consequently, the Company maintains an account receivable with MolsonCoors of Ps. 1,487 regarding the usage of tax losses to cancel those contingencies, which are recorded as part of accounts receivable and other assets. See “Item 18. Financial statements—Note 23 Taxes.”
The following table presents the nature and amount of loss contingencies recorded as of December 31, 2009:2011:
Loss Contingencies As of December 31, | ||||
(in millions of Mexican pesos) | ||||
| Ps. | |||
Legal | 1,128 | |||
Labor | 231 | |||
| ||||
| Ps. |
As is customary in Brazil, we have been asked by the tax authorities to collateralize tax contingencies currently in litigation in respectamounting to Ps. 2,418 million and of Ps. 3,2512,292 million as of December 31, 2011 and 2010, respectively, by pledging fixed assets or providing bank guarantees.
In connection with certain past business combinations, Coca-Cola FEMSA has been indemnified by the sellers for certain contingencies. The agreements in connection with Coca-Cola FEMSA’s recent mergers with the beverage divisions of Grupo Tampico and entering into available lines of credit to cover such contingencies.Grupo CIMSA, respectively contain comparable indemnification provisions. See “Item 4. Information on the Company—The Company—Coca-Cola FEMSA—Recent Mergers and Acquisitions.”
We have other contingencies for which wethat, based on a legal assessment of their risk of loss, have not recordedbeen classified by our legal counsel as more than remote but less than probable. These contingencies have a reserve.financial impact that is disclosed as loss contingencies in the notes of the consolidated financial statements. These contingencies, or our assessment of them, may change in the future, and we may record reserves or be required to pay amounts in respect of these contingencies. As of December 31, 2009,2011, the aggregate amount of such contingencies for which we havehad not recorded a reserve was Ps. 11,9226,781 million. These contingencies have been classified as less than probable by our legal counsel.
Capital Expenditures
For the past five years, we have had significant capital expenditure programs, which for the most part were financed with cash from operations. Capital expenditures reached Ps. 13,17812,515 million in 20092011 compared to Ps. 14,23411,171 million in 2008, a decrease2010, an increase of 7.4%12.0%. This was primarily due to a reduction ofcapacity-related investments in the beverage business unitsat Coca-Cola FEMSA and incremental investments at FEMSA Comercio, mainly related to the economic downturn.store expansion. The principal components of our capital expenditures have been for equipment, market-related investments and production capacity and distribution network expansion at both Coca-Cola FEMSA and the opening of new stores at FEMSA Cerveza.Comercio. See “Item 4. Information on the Company—Capital Expenditures and Divestitures.”
Expected Capital Expenditures for 20102012
Our capital expenditure budget for 20102012 is expected to be approximately US$ 7721,100 million. The following discussion is based on each of our sub-holding companies’ internal 20102012 budgets. The capital expenditure plan for 20102012 is subject to change based on market and other conditions and the subsidiaries’ results offrom operations and financial resources.
Coca-Cola FEMSA’s capital expenditures in 20102012 are expected to be approximately up to approximately US$ 500700 million. Coca-Cola FEMSA’s capital expenditures in 20102012 are primarily intended for:
investmentinvestments in manufacturing lines;production capacity (primarily for one plant in Colombia and one in Brazil);
market investments (primarily for the placement of coolers);
returnable bottles and cases;
market investments (primarily for the placement of refrigeration equipment);improvements throughout its distribution network; and
improvements throughout distribution network
IT investments.investments in IT.
Coca-Cola FEMSA estimates that of its projected capital expenditures for 2010,2012, approximately 45%35.0% will be allocated in respect offor its Mexican territories and the remainingremainder will be for its non-Mexican territories. Coca-Cola FEMSA believes that internally generated funds will be sufficient to meet its budgetbudgeted capital expenditures for 2010.2012. Coca-Cola FEMSA’s capital expenditure plan for 20102012 may change based on market and other conditions and based on its results offrom operations and financial results.resources.
FEMSA Comercio’s capital expenditure budget in 20102012 is expected to total approximately US$ 238350 million, and will be allocated to the opening of new OXXO stores and to a lesser extent to the refurbishing of existing OXXO stores and the investment in two new distribution centers. In addition, investments are planned in FEMSA Comercio’s information technology,IT, ERP software updates and transportation equipment.
Hedging Activities
Our business activities require the holding or issuing of derivative instruments to hedge our exposure to market risks related to changes in interest rates, foreign currency exchange rates, equity risk and commodity price risk. See “Item 11. Quantitative and Qualitative Disclosures about Market Risk.”
The following table provides a summary of the fair value of derivative financial instruments as of December 31, 2009.2011. If such instruments are not traded in a formal market, fair value is determined by applying techniques based upon technical models we believe are supported by sufficient, reliable and verifiable market data, recognized in the financial sector.
Fair Value At December 31, 2011 | ||||||||||||||||
Maturity less than 1 year | Maturity 1 - 3 years | Maturity 3 - 5 years | Maturity in excess of 5 years | Fair Value Asset (Liability) | ||||||||||||
(in millions of Mexican pesos) | ||||||||||||||||
Prices quoted by external sources | Ps. 457 | Ps. (229) | Ps. (184) | Ps. 860 | Ps. 903 |
Prices quoted by external sources Fair Value At December 31, 2009 Maturity
less than 1
year Maturity
1 - 3
years Maturity
3 - 5
years Maturity in
excess of 5
years Fair Value
Asset
(Liability) (in millions of Mexican pesos) (791 ) (526 ) 342 468 (507 )
Plan for the Disposal of Certain Fixed Assets
We have identified certain fixed assets consisting of land, buildings and equipment for disposal, and we have an approved program for disposal of these fixed assets. These assets are not in use and have been valued at their estimated net realizable value without exceeding their restated acquisition cost. These assets are allocated as follows:
December 31, | December 31, | |||||||||||||
2009 | 2008 | 2011 | 2010 | |||||||||||
(in millions of Mexican pesos) | (in millions of Mexican pesos) | |||||||||||||
Coca-Cola FEMSA | Ps. | 288 | Ps. | 394 | Ps. | 79 | Ps. | 1899 | ||||||
FEMSA Cerveza | 208 | 291 | ||||||||||||
FEMSA and other | 42 | 45 | ||||||||||||
Other subsidiaries | 22 | 43 | ||||||||||||
|
| |||||||||||||
Total | Ps. | 538 | Ps. | 730 | Ps. | 101 | Ps. | 2322 |
In inflationary economic environments, fixed assets recorded at their estimated realizable value are considered monetary assets on which a loss on monetary position is computed and recorded in results of operation.
The principal differences between Mexican Financial Reporting StandardsFRS and U.S. GAAP that affect our net income and majority stockholders’ equity relate to the accounting treatment of the following items:
consolidation of our subsidiary Coca-Cola FEMSA, which is a consolidated subsidiary for purposes of Mexican Financial Reporting StandardsFRS but presented under the equity method for U.S. GAAP purposes;purposes up until January 31, 2010. As of February 1, 2010, we acquired control of Coca-Cola FEMSA through a business acquisition without any transfer of consideration under U.S. GAAP (see “Item 18. Financial Statements”);
discontinued operations of FEMSA Cerveza due to the disposal of FEMSA Cerveza, which was accounted for as discontinued operations for purposes of Mexican FRS, and considered to be a continuing operation due to significant involvement with the disposed operation and accounted for as a disposal of net assets under U.S. GAAP (see “Item 18. Financial Statements”);
subsequent accounting of our investment in Heineken under the equity method for purposes of Mexican FRS; for U.S. GAAP purposes our investment in Heineken has been recognized based on the cost method because it was unable to obtain the required information to reconcile Heineken’s net income from IFRS to U.S. GAAP (see “Item 18. Financial Statements”);
FEMSA’s noncontrollingnon-controlling interest acquisition and sales;
deferred income taxes and deferred employee profit sharing;
restatement of imported machinery and equipment up to 2007;
capitalization of comprehensive financing result;
labor liabilities,employee benefits; and
start-up expenses.effects of inflation, as pursuant to Mexican FRS through 2007, our audited consolidated financial statements recognize certain effects of inflation in accordance with Bulletin B-10. As a result of discontinued inflationary accounting for subsidiaries that operate in non-inflationary environments, our financial statements are no longer considered to be presented in a reporting currency that comprehensively includes the effects of price level changes. Therefore, the inflationary effects of inflationary economic environments arising in 2009, 2010 and 2011 resulted in a difference to be reconciled for U.S. GAAP purposes, except for the inflation effects from our subsidiary in Venezuela. Venezuela is considered to be a hyperinflationary environment since 2010, and we have therefore applied the accommodation provided for in Item 17(c)(2)(iv)(B) of the instructions to Form 20-F, pursuant to which a U.S. GAAP reconciliation is not required if financial statements stated in the currency of a hyperinflationary economy are translated into the reporting currency in accordance with IAS 21, “Changes in Foreign Exchange Rates.” Because we apply NIF B-10, which complies with the indexation requirements of IAS 21 and IAS 29, “Financial Reporting in Hyperinflationary Economies,” we are eligible for such accommodation.
For a more detailed description of the differences between Mexican Financial Reporting StandardsFRS and U.S. GAAP as they relate to us, as well as U.S. GAAP consolidated balance sheets, statements of income and comprehensive income, and cash flows for the same periods presented for Mexican Financial Reporting StandardsFRS purposes, and for the consolidated statement of changes in stockholders’ equity for the years ended December 31, 20092011 and 2008 and2010, as well as reconciliation of net income, comprehensive income and stockholders’ equity under Mexican Financial Reporting StandardsFRS to net income, comprehensive income and stockholders’ equity under U.S. GAAP, see notesNotes 26 and 27 to our audited consolidated financial statements.
Pursuant to Mexican Financial Reporting Standards through 2007, our audited consolidated financial statements recognize certain effects of inflation in accordance with Bulletin B-10. These effects were not reversed in our U.S. GAAP financial information. Beginning in 2008, we discontinued inflationary accounting in accordance with NIF B-10 in non-inflationary economic environments.
Under U.S. GAAP, we had net income attributable to controlling interest of Ps. 9,90212,449 million and Ps. 6,85267,445 million in 20092011 and 2008,2010, respectively. Under Mexican Financial Reporting Standards,FRS, we had net controlling interest income of Ps. 9,90815,133 million and Ps. 6,70840,251 million in 20092011 and 2008,2010, respectively. In 2009,2011, net income attributable to controlling interest under U.S. GAAP was slightly lower than net controlling income under Mexican Financial Reporting Standards,FRS, mainly due to greater similarity among both accounting standards.the elimination of income attributable to Heineken under U.S. GAAP, in accordance with the equity method, which was applied for Mexican FRS but not U.S. GAAP.
Controlling interest equity under U.S. GAAP as of December 31, 20092011 and 20082010 was Ps. 98,168182,644 million and Ps. 85,537163,641 million, respectively. Under Mexican Financial Reporting Standards,FRS, controlling interest equity as of December 31, 20092011 and 20082010 was Ps. 81,637133,580 million and Ps. 68,821117,348 million, respectively. The principal reasonsreason for the difference between controlling interest stockholders’ equity under U.S. GAAP and controlling interest equity under Mexican Financial Reporting Standards wereFRS was the effectreconciliation effects of the goodwill generated byfair valuation of recognized regarding the noncontrolling interest acquisitions, deferred income tax, labor liabilities, deferred employee profit sharing and start-up expenses.Coca-Cola FEMSA acquisition in 2010 for U.S. GAAP purposes.
ITEM 6. | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES |
Management of our business is vested in the board of directors and in our chief executive officer. Our bylaws provide that the board of directors will consist of no more than 21 directors and their corresponding alternate directors elected by our shareholders at the AGM. Directors are elected for a term of one year. Alternate directors are authorized to serve on the board of directors in place of their specific directors who are unable to attend meetings and may participate in the activities of the board of directors. Nineteen members form our board of directors. Our bylaws provide that the holders of the Series B Shares elect at least eleven directors and that the holders of the Series D Shares elect five directors. See “Item 10. Additional Information—Bylaws.”
In accordance with our bylaws and article 24 of the Mexican Securities Law, at least 25% of the members of our board of directors must be independent (as defined by the Mexican Securities Law).
The board of directors may appoint interim directors in the event that a director is absent or an elected director and corresponding alternate are unable to serve. Such interim directors shall serve until the next AGM, at which the shareholders shall elect a replacement.
Our bylaws provide that the board of directors shall meet at least once every 3three months. Actions by the board of directors must be approved by at least a majority of the directors present and voting. The chairman of the board of directors, the chairman of our audit or corporate practices committee, or at least 25% of our directors may call a board of directors’ meeting and include matters in the meeting agenda.
Our board of directors was elected at the AGM held on March 23, 2012, and currently consists of 17 directors and 15 alternate directors. The following table sets forth the current members of our board of directors:
Series “B”B Directors
José Antonio Fernández Carbajal Chairman of the Board and Chief Executive Officer of FEMSA | Born: | February 1954 | ||
First elected (Chairman): | 2001 | |||
First elected (Director): | 1984 | |||
Term expires: | ||||
Principal occupation: | Chairman and Chief Executive Officer of FEMSA |
Other directorships: | Chairman of the board of Coca-Cola FEMSA and Fundación FEMSA A.C., Vice-Chairman of the supervisory board of Heineken N.V. and member of the board of Heineken Holding | |||
Business experience: | Joined FEMSA’s strategic planning department in | |||
Education: | Holds a degree in industrial engineering and an MBA from ITESM | |||
Alternate director: | Federico Reyes García | |||
Eva Garza Lagüera Gonda(1) Director | Born: | April 1958 | ||
First elected: | 1999 | |||
Term expires: | ||||
Principal occupation: | Private investor | |||
Other | Member of the boards of directors of Coca-Cola FEMSA, ITESM and Premio Eugenio Garza Sada | |||
Education: | Holds a degree in Communication Sciences from ITESM | |||
Alternate director: | ||||
Director | Born: | |||
First elected: | ||||
Term expires: | ||||
Principal occupation: | Private investor | |||
Education: | Holds a business administration degree from ITESM | |||
Alternate director: | ||||
José Fernando Calderón Rojas Director | Born: | July 1954 | ||
First elected: | 2005 | |||
Term expires: | ||||
Principal occupation: | ||||
Other directorships: | ||||
Education: | Holds a law degree from the Universidad Autónoma de Nuevo León (UANL) and completed specialization studies in tax at UANL | |||
Alternate director: | Francisco José Calderón Rojas(3) |
Consuelo Garza de Garza Director | Born: | October 1930 | ||
First elected: | 1995 | |||
Term expires: | ||||
Business experience: | Founder and former President of Asociación Nacional Pro-Superación Personal, (a non-profit organization) | |||
Alternate director: | Alfonso Garza Garza(4) |
Max Michel Suberville Director | Born: | July 1932 | ||||
First elected: | 1985 | |||||
Term expires: | ||||||
Principal occupation: | Private Investor | |||||
Other directorships: | Co-chairman of the equity committee of El Puerto de Liverpool, S.A.B. de C.V. (Liverpool). Member of the boards of Coca-Cola FEMSA, Peñoles, Grupo Nacional Provincial, | |||||
Education: | Holds a graduate degree from The Massachusetts Institute of Technology and completed post-graduate studies at Harvard University | |||||
Alternate director: | Max Michel González(5) | |||||
Alberto Bailleres González Director | Born: | August 1931 | ||||
First elected: | 1989 | |||||
Term expires: | ||||||
Principal occupation: | Chairman of the boards of directors of Grupo BAL, S.A. de C.V. Peñoles, GNP, Fresnillo plc, Grupo Palacio de Hierro, S.A.B. de C.V., Profuturo | |||||
Other directorships: | Member of the boards of directors of BBVA Bancomer, Bancomer, Dine, S.A.B. de C.V. (formerly Grupo Desc) (Dine), Televisa, Grupo Kuo, S.A.B. de C.V. (formerly Grupo Desc) (Kuo) | |||||
Education: | Holds an economics degree and an Honorary Doctorate both from Instituto Tecnológico Autónomo de México | |||||
Alternate director: | Arturo Fernández Pérez | |||||
Francisco Javier Fernández Carbajal(6) Director | Born: | April 1955 | ||||
First elected: | 2005 | |||||
Term expires: | ||||||
Principal occupation: | Chief Executive Officer of Servicios Administrativos Contry, S.A. de C.V. | |||||
Other directorships: | ||||||
Education: | Holds degrees in mechanical and electrical engineering from ITESM and an MBA from Harvard Business School | |||||
Alternate director: | Javier Astaburuaga Sanjines |
Ricardo Guajardo Touché Director | Born: | May 1948 | ||
First elected: | 1988 | |||
Term expires: | ||||
Principal occupation: | Chairman of the board of directors of Solfi, S.A. | |||
Other directorships: | Member of the | |||
Education: | Holds degrees in electrical engineering from ITESM and the University of Wisconsin and a | |||
Alternate director: |
Alfredo Livas Cantú Director | Born: | July 1951 | ||||
First elected: | 1995 | |||||
Term expires: | ||||||
Principal occupation: | ||||||
Other directorships: | Member of the boards of directors of Grupo | |||||
Education: | Holds an economics degree from UANL and an MBA and masters degree in economics from the University of Texas | |||||
Alternate Director: | Sergio Deschamps Ebergenyi | |||||
Mariana Garza Lagüera Gonda(2) Director | Born: | April 1970 | ||||
First elected: | 2001 | |||||
Term expires: | ||||||
Private Investor | ||||||
Other directorships: | Member of the boards of directors of Coca-Cola FEMSA, Hospital San José Tec de Monterrey and Museo de Historia Mexicana | |||||
Education: | Holds a business administration degree in Industrial Engineering from ITESM and a Master of International Management from the Thunderbird American Graduate School of International Management | |||||
Alternate director: |
José Manuel Canal Hernando Director | Born: | February 1940 | ||||
First elected: | 2003 | |||||
Term expires: | ||||||
Principal occupation: | Private consultant | |||||
Other directorships: | Member of the boards of directors of Coca-Cola FEMSA, | |||||
Education: | Holds a CPA degree from the Universidad Nacional Autónoma de México | |||||
Alternate director: | Ricardo Saldívar Escajadillo |
Series | ||||
Armando Garza Sada Director | Born: | June 1957 | ||
First elected: | 2003 | |||
Term expires: | ||||
Principal occupation: | Chairman of the board of directors of Alfa | |||
Other directorships: | Member of the boards of | |||
Business experience: | He has a long professional career in Alfa, including Executive Vice-President of Corporate Development | |||
Education: | Holds a | |||
Alternate director: | ||||
| Born: | July | ||
First elected: | ||||
Term expires: | ||||
Principal occupation: | ||||
Business experience: | ||||
Education: | Holds a | |||
Alternate director: | Francisco Zambrano Rodríguez | |||
Helmut Paul Director | Born: | March 1940 | ||
First elected: | 1988 | |||
Term expires: | ||||
Principal occupation: | ||||
Other directorships: | Member of the board of directors of Coca-Cola FEMSA | |||
Business experience: | Advisor at Darby Overseas Investment, Ltd. | |||
Education: | Holds an MBA from the University of Hamburg | |||
Alternate director: |
Michael Larson Director | Born: | |||
First elected: | ||||
Term expires: | ||||
Principal occupation: | ||||
Other directorships: | Member of the boards of | |||
Business experience: | Former member of the boards of directors of Pan American Silver, Corp. and Hamilton Lane Advisors | |||
Education: | Holds | |||
Robert E. Denham Director | Born: | August 1945 | ||
First elected: | 2001 | |||
Term expires: | ||||
Principal occupation: | Partner of Munger, Tolles & Olson LLP law firm | |||
Other directorships: | Member of the boards of | |||
Education: | Magna cum laude graduate from the University of Texas, holds a JD from Harvard Law School and | |||
(1) | Wife of José Antonio Fernández Carbajal. |
(2) | Sister-in-law of José Antonio Fernández Carbajal. |
(3) | Brother of José Calderón Rojas. |
(4) | Son of Consuelo Garza de Garza. |
(5) | Son of Max Michel Suberville. |
(6) | Brother of José Antonio Fernández Carbajal. |
(7) | Nephew of Max Michel Suberville. |
The names and positions of the members of our current senior management and that of our principal sub-holding companies, their dates of birth and information on their principal business activities both within and outside of FEMSA are as follows:
FEMSA | ||||
José Antonio Fernández Carbajal Chairman of the Board and Chief Executive Officer of FEMSA | See “—Directors.” Joined FEMSA: | |||
| Appointed to current position: | 1987 1994 | ||
Javier Gerardo Astaburuaga Sanjines Chief Financial Officer and Executive Vice-President of Finance and Strategic Development | Born: Joined FEMSA: Appointed to current position: Business experience within FEMSA: | July 1959 1982 | ||
2006 | ||||
Joined FEMSA as a financial information analyst and later acquired experience in corporate development, administration and finance, held various senior positions at FEMSA Cerveza between 1993 and 2001, including Chief Financial Officer, and for two years was FEMSA Cerveza’s Director of Sales for the north region of Mexico until 2003, in which year he was appointed FEMSA Cerveza’s Co-Chief Executive | ||||
Directorships: | Member of the board of Coca-Cola FEMSA and member of the | |||
Education: | Holds a CPA degree from ITESM | |||
Federico Reyes García
| Born: Joined FEMSA: Appointed to current position: | September 1945
2006 | ||
Business experience within FEMSA: | ||||
Executive Vice-President of Corporate Development from 1992 to 1993, and Chief Financial Officer from 1999 until 2006 | ||||
Directorships: | Member of the boards of Coca-Cola FEMSA and | |||
Education: | Holds a degree in business and finance from ITESM | |||
José González Ornelas
| Born: Joined FEMSA: Appointed to current position: | April 1951 1973 2001 | ||
Business experience within FEMSA: | ||||
Has held several managerial positions in FEMSA including Chief Financial Officer of FEMSA Cerveza, Director of Planning and Corporate Development of FEMSA and Chief Executive Officer of FEMSA Logística, S.A. de C.V. | ||||
Directorships: | Member of the board of directors of Productora de Papel, S.A. | |||
Education: | Holds a CPA degree from UANL and has post-graduate studies in business administration from the Instituto Panamericano de Alta Dirección de Empresa (IPADE) | |||
Alfonso Garza Garza
| Born: Joined FEMSA: Appointed to current position: | July 1962 1985 | ||
2009 | ||||
Business experience within FEMSA: | Has experience in several FEMSA business units and departments, including domestic sales, international sales, procurement and marketing, mainly at | |||
Directorships: | Member of the | |||
Education: | Holds a degree in Industrial Engineering from ITESM and an MBA from IPADE | |||
Genaro Borrego Estrada
Corporate Affairs | Born: Joined FEMSA: Appointed to current position: | February 1949 2007 2007 |
Professional | Constitutional Governor of the Mexican State of Zacatecas from 1986 to 1992, General Director of the Mexican Social Security Institute from 1993 to 2000, and Senator in Mexico for the State of Zacatecas from 2000 to 2006 |
Directorships: | Member of the board of TANE, S.A. de C.V. | |||
Education: | Holds a bachelor’s degree in International Relations from the Universidad Iberoamericana | |||
Carlos Aldrete Ancira General Counsel and Secretary of the Board of Directors | Born: Joined FEMSA: Appointed to current position: | August 1956 1979 1996 | ||
| ||||
Directorships: | Secretary of the | |||
Business experience within FEMSA: | Extensive experience in international business and financial transactions, debt issuances and corporate restructurings and expertise in securities and private mergers and acquisitions law | |||
Education: | Holds a law degree from the UANL and a masters degree in Comparative Law from the College of Law of the University of Illinois | |||
Coca-Cola FEMSA | ||||
Carlos Salazar Lomelín Chief Executive Officer of Coca-Cola FEMSA | Born: Joined FEMSA: Appointed to current position: | April 1951 1973 | ||
2000 | ||||
Business experience within FEMSA: | Has held managerial positions in several subsidiaries of FEMSA, including Grafo Regia, S.A. de C.V. and Plásticos Técnicos Mexicanos, S.A. de C.V., served as Chief Executive Officer of FEMSA Cerveza, where he also held various management positions in the Commercial Planning and Export divisions | |||
Directorships: | Member of the boards of Coca-Cola FEMSA, BBVA Bancomer, | |||
Education: | Holds a bachelor’s degree in economics from ITESM, and performed postgraduate studies in business administration at ITESM and economic development in Italy | |||
Héctor Treviño Gutiérrez Chief Financial Officer | Born: Joined FEMSA: Appointed to current position: | August 1956 1981 1993 | ||
Business experience within FEMSA: | Has held managerial positions in the international financing, financial planning, strategic planning and corporate development areas of FEMSA | |||
Directorships: | ||||
Education: | Holds a degree in chemical engineering from ITESM and an MBA from the Wharton Business School |
FEMSA Comercio | ||||
Eduardo Padilla Silva Chief Executive Officer of FEMSA Comercio | Born: Joined FEMSA: Appointed to current position: | January 1955 1997 2004 | ||
Business experience within FEMSA: | Director of Planning and Control of FEMSA from 1997 to 1999 and Chief Executive Officer of the Strategic Procurement Business Division of FEMSA from 2000 until 2003 |
Other business experience: | Had a 20-year career in Alfa, culminating with a ten-year tenure as Chief Executive Officer of Terza, S.A. de C.V., major areas of expertise include operational control, strategic planning and financial restructuring | |||
Directorships: | Member of the | |||
Education: | Holds a degree in mechanical engineering from ITESM, |
Compensation of Directors and Senior Management
The compensation of Directors is approved at the AGM. For the year ended December 31, 2009,2011, the aggregate compensation paid to our directors was approximately Ps. 1213.5 million.
For the year ended December 31, 2009,2011, the aggregate compensation paid to executive officers and senior management of FEMSA and its subsidiaries was approximately Ps. 1,4941,279 million. Aggregate compensation includes bonuses we paid to certain members of senior management and payments in connection with the EVA stock incentive plan described in noteNote 16 to our audited consolidated financial statements. Our senior management and executive officers participate in our benefit plan and post-retirement medical services plan on the same basis as our other employees. Members of our board of directors do not participate in our benefit plan and post-retirement medical services plan, unless they are retired employees of our company. As of December 31, 2009,2011, amounts set aside or accrued for all employees under these retirement plans were Ps. 7,8834,403 million, of which Ps. 3,4171,991 million is already funded.
In 2004, we, along with our subsidiaries, commenced a new stock incentive plan for the benefit of our executive officers, which we refer to as the EVA stock incentive plan. This plan replaced the stock incentive plan described in note 16 to our audited consolidated financial statements and was developed using as the main metric for the first three years of the plan for evaluation the Economic Value Added, or EVA, framework developed by Stern Stewart & Co., a compensation consulting firm. Under the EVA stock incentive plan, eligible executive officers are entitled to receive a special cash bonus, which will be used to purchase shares.
Under this plan, each year, our Chief Executive Officer in conjunction with our board of directors, together with the chief executive officer of the respective sub-holding company, determines the amount of the special cash bonus used to purchase shares. This amount is determined based on each executive officer’s level of responsibility and based on the EVA generated by Coca-Cola FEMSA or FEMSA, as applicable.
The shares are administrated by a trust for the benefit of the selected executive officers. Under the EVA stock incentive plan, each time a special bonus is assigned to an executive officer, the executive officer contributes the special bonus received to the administrative trust. Pursuant to the plan, the administrative trust acquires BD Units of FEMSA or, in the case of officers of Coca-Cola FEMSA, a specified proportion of publicly traded local shares of FEMSA and Series L Shares of Coca-Cola FEMSA on the Mexican Stock Exchange using the special bonus contributed by each executive officer. The ownership of the publicly traded local shares of FEMSA and, in the case of Coca-Cola FEMSA executives, the Series L Shares of Coca-Cola FEMSA vests at a rate per year equivalent to 20% of the number of publicly traded local shares of FEMSA and Series L Shares of Coca-Cola FEMSA.
As of AprilMarch 30, 2010,2012, the trust that manages the EVA stock incentive plan held a total of 12,321,0238,757,485 BD Units of FEMSA and 3,135,2862,606,007 Series L Shares of Coca-Cola FEMSA, each representing 0.07%0.24% and 0.17%0.13% of the total number of shares outstanding of FEMSA and of Coca-Cola FEMSA, respectively.
We maintain life insurance policies for all of our employees. These policies mitigate the risk of having to pay death benefits in the event of an industrial accident. We maintain a directorsdirectors’ and officers’ insurance policy covering all directors and certain key executive officers for liabilities incurred in their capacities as directors and officers.
Several of our directors are participants of a voting trust. Each of the trust participants of the voting trust is deemed to have beneficial ownership with shared voting power over the shares deposited in the voting trust. As of April 30, 2010,March 23, 2012, 6,922,159,485 Series B Shares representing 74.86% of the outstanding Series B Shares were deposited in the voting trust. See “Item 7. Major Shareholders and Related Party Transactions.”
The following table shows the Series B Shares, Series D-B Shares and Series D-L Shares as of April 30, 201015, 2012 beneficially owned by our directors who are participants in the voting trust, other than the shares deposited in the voting trust:
Series B | Series D-B | Series D-L | Series B | Series D-B | Series D-L | ||||||||||||||||||||||||||||||||||
Beneficial Owner | Shares | Percent of Class | Shares | Percent of Class | Shares | Percent of Class | Shares | Percent of Class | Shares | Percent of Class | Shares | Percent of Class | |||||||||||||||||||||||||||
Eva Garza Lagüera Gonda | 2,665,480 | 0.03 | % | 5,330,960 | 0.12 | % | 5,330,960 | 0.12 | % | 2,665,844 | 0.03 | % | 5,331,688 | 0.12 | % | 5,331,688 | 0.12 | % | |||||||||||||||||||||
Mariana Garza Lagüera Gonda | 2,665,480 | 0.03 | % | 5,330,960 | 0.12 | % | 5,330,960 | 0.12 | % | 2,944,090 | 0.03 | % | 5,888,180 | 0.12 | % | 5,888,180 | 0.12 | % | |||||||||||||||||||||
Barbara Garza Lagüera Gonda | 2,665,480 | 0.03 | % | 5,330,960 | 0.12 | % | 5,330,960 | 0.12 | % | 2,665,480 | 0.03 | % | 5,330,960 | 0.12 | % | 5,330,960 | 0.12 | % | |||||||||||||||||||||
Paulina Garza Lagüera Gonda | 2,665,480 | 0.03 | % | 5,330,960 | 0.12 | % | 5,330,960 | 0.12 | % | 2,665,480 | 0.03 | % | 5,330,960 | 0.12 | % | 5,330,960 | 0.12 | % | |||||||||||||||||||||
Consuelo Garza de Garza | 69,401,775 | 0.75 | % | 12,574,950 | 0.29 | % | 12,574,950 | 0.29 | % | 69,488,677 | 0.75 | % | 12,886,904 | 0.29 | % | 12,886,904 | 0.29 | % | |||||||||||||||||||||
Alberto Bailleres | 7,894,821 | 0.08 | % | 15,789,642 | 0.36 | % | 15,789,642 | 0.36 | % | ||||||||||||||||||||||||||||||
Alberto Bailleres González | 9,475,196 | 0.10 | % | 11,664,112 | 0.26 | % | 11,664,112 | 0.26 | % | ||||||||||||||||||||||||||||||
Alfonso Garza Garza | 272,029 | — | 544,058 | 0.01 | % | 544,058 | 0.01 | % | 714,995 | — | 1,381,590 | 0.03 | % | 1,381,590 | 0.03 | % | |||||||||||||||||||||||
Max Michel Suberville | 17,379,630 | 0.19 | % | 34,759,260 | 0.80 | % | 34,759,260 | 0.80 | % |
To our knowledge, no other director or officer is the beneficial owner of more than 1% of any class of our capital stock.
Our bylaws state that the board of directors will meet at least once every three months following the end of each quarter to discuss our operating results and the advancement in the achievement of strategic objectives. Our board of directors can also hold extraordinary meetings. See “Item 10. Additional Information—Bylaws.”
Under our bylaws, directors serve one-year terms although they continue in office even after the term for which they were appointed ends for up to 30 calendar days, as set forth in article 24 of Mexican Securities Law. None of our directors or senior managers of our subsidiaries has service contracts providing for benefits upon termination of employment, other than post-retirement medical services plans and post-retirement pension plans for our senior managers on the same basis as our other employees.
Our board of directors is supported by committees, which are working groups that analyze issues and provide recommendations to the board of directors regarding their respective areas of focus. The executive officers interact periodically with the committees to address management issues. Each committee has a secretary who attends meetings but is not a member of the committee. The following are the three committees of the board of directors:
• | Audit Committee. The Audit Committee is responsible for (1) reviewing the accuracy and integrity of quarterly and annual financial statements in accordance with accounting, internal control and auditing requirements, (2) |
• |
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• | Corporate Practices Committee. The Corporate Practices Committee is responsible for preventing or reducing the risk of performing operations that could damage the value of our company or that benefit a particular group of shareholders. The committee may call a shareholders’ meeting and include matters on the agenda for that meeting that it may deem appropriate, approve policies on the use of our company’s assets or related party transactions, approve the compensation of the chief executive officer and relevant officers and support our board of directors in the elaboration of reports on accounting practices. The chairman of the Corporate Practices Committee is |
As of December 31, 2009,2011, our headcount by geographic region was as follows: 84,807134,985 in Mexico, 5,4125,874 in Central America, 9,0408,929 in Colombia, 8,3348,431 in Venezuela, 15,66315,229 in Brazil and 3,9534,022 in Argentina. We include in headcount employees of third-party distributors who we do not consider to be ourand non-management store employees. The table below sets forth headcount for the years ended December 31, 2009, 20082011, 2010, and 2007:2009:
Headcount for the Year Ended December 31,(1)
Headcount for the Year Ended December 31, | ||||||||||||||||||||||||||||||||||||||||||
2009 | 2008 | 2007 | 2011 | 2010 | 2009 | |||||||||||||||||||||||||||||||||||||
Non-Union | Union | Total | Non-Union | Union | Non-Union | Union | Non-Union | Union | Total | Non-Union | Union | Non-Union | Union | |||||||||||||||||||||||||||||
Sub-holding company | ||||||||||||||||||||||||||||||||||||||||||
Coca-Cola FEMSA(1) | 35,734 | 31,692 | 67,426 | 34,773 | 30,248 | 32,657 | 25,465 | |||||||||||||||||||||||||||||||||||
FEMSA Cerveza | 14,003 | 10,738 | 24,741 | 15,181 | 10,844 | 13,751 | 10,708 | |||||||||||||||||||||||||||||||||||
FEMSA Comercio(2) | 5,713 | 17,760 | 23,473 | 4,919 | 16,342 | 4,488 | 11,336 | |||||||||||||||||||||||||||||||||||
Coca-Cola FEMSA(2) | 41,462 | 37,517 | 78,979 | 35,364 | 33,085 | 35,734 | 31,692 | |||||||||||||||||||||||||||||||||||
FEMSA Comercio(3) | 56,914 | 26,906 | 83,820 | 51,919 | 21,182 | 43,142 | 17,760 | |||||||||||||||||||||||||||||||||||
Other | 6,592 | 4,947 | 11,539 | 6,186 | 4,488 | 2,661 | 3,954 | 8,043 | 6,628 | 14,671 | 6,270 | 5,989 | 6,592 | 4,947 | ||||||||||||||||||||||||||||
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Total | 62,042 | 65,137 | 127,179 | 61,059 | 61,922 | 53,557 | 51,463 | 106,419 | 71,051 | 177,470 | 93,553 | 60,256 | 85,468 | 54,399 | ||||||||||||||||||||||||||||
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(1) | As of April 30, 2010, FEMSA no longer controls FEMSA Cerveza. As a result, employee headcount of FEMSA Cerveza as of December 31, 2009, is not included for comparability purposes. |
(2) | Includes employees of third-party distributors |
As of December 31, 2009,2011, our subsidiaries had entered into 448302 collective bargaining or similar agreements with personnel employed at our operations. Each of the labor unions in Mexico is associated with one of 8eight different national Mexican labor organizations. In general, we have a good relationship with the labor unions throughout our operations, except for in Colombia, Venezuela and Venezuela,Guatemala which are or have been the subject of significant labor-related litigation. See “Item 8. Financial Information—Legal Proceedings—Coca-Cola FEMSA.” The agreements applicable to our Mexican operations generally have an indefinite term and provide for an annual salary review and for review of other terms and conditions, such as fringe benefits, every two years.
The table below sets forth the number of collective bargaining agreements and unions for our employees:
Collective Bargaining Labor Agreements Between
Sub-holding Companies and Unions
As of December 31, 20092011
Sub-holding Company | Collective Bargaining Agreements | Labor Unions | Collective Bargaining Agreements | Labor Unions | ||||||||
Coca-Cola FEMSA | 102 | 48 | 117 | 67 | ||||||||
FEMSA Cerveza | 188 | 18 | ||||||||||
FEMSA Comercio(1) | 80 | 4 | 104 | 4 | ||||||||
Others | 78 | 8 | 81 | 11 | ||||||||
Total | 448 | 78 | 302 | 82 |
(1) | Does not include non-management store employees, who are employed directly by each individual store. |
ITEM 7. | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS |
The following table identifies each owner of more than 5% of any class of our shares known to the company as of April 30, 2010.March 23, 2012. Except as described below, we are not aware of any holder of more than 5% of any class of our shares. Only the Series B Shares have full voting rights under our bylaws.
Ownership of Capital Stock as of April 30, 2010March 23, 2012
Series B Shares(1) | Series D-B Shares(2) | Series D-L Shares(3) | Total Shares of FEMSA Common Stock | Series B Shares(1) | Series D-B Shares(2) | Series D-L Shares(3) | Total Shares of FEMSA CapitalStock | |||||||||||||||||||||||||||||||||||||||
Shares Owned | Percent of Class | Shares Owned | Percent of Class | Shares Owned | Percent of Class | Shares Owned | Percent of Class | Shares Owned | Percent of Class | Shares Owned | Percent of Class | |||||||||||||||||||||||||||||||||||
Shareholder | ||||||||||||||||||||||||||||||||||||||||||||||
Technical Committee and Trust Participants under the Voting Trust(4) | 6,922,159,485 | 74.86 | % | 0 | 0.00 | % | 0 | 0 | % | 38.69 | % | 6,922,159,485 | 74.86 | % | — | 0 | % | — | 0 | % | 38.69 | % | ||||||||||||||||||||||||
William H. Gates III(5) | 271,831,490 | 2.9 | % | 543,662,980 | 12.6 | % | 543,662,980 | 12.6 | % | 7.6 | % | 281,053,490 | 3.04 | % | 562,106,980 | 13.00 | % | 562,106,980 | 13.00 | % | 7.85 | % | ||||||||||||||||||||||||
Aberdeen Asset Management PLC(6) | 271,902,190 | 2.95 | % | 543,804,380 | 12.58 | % | 543,804,380 | 12.58 | % | 7.60 | % |
(1) | As of |
(2) | As of |
(3) | As of |
(4) | As a consequence of the voting trust’s internal procedures, the following trust participants are deemed to have beneficial ownership with shared voting power over those same deposited shares: BBVA Bancomer Servicios, S.A., as Trustee under Trust No. F/25078-7 (controlled by Max Michel Suberville), J.P. Morgan (Suisse), S.A., as Trustee under a trust controlled by Paulina Garza Lagüera Gonda, Bárbara Garza Lagüera Gonda, Mariana Garza Lagüera Gonda, Eva Gonda Rivera, Eva Maria Garza Lagüera Gonda, Consuelo Garza Lagüera de Garza, Alfonso Garza Garza, Patricio Garza Garza, Juan Carlos Garza Garza, Eduardo Garza Garza, Eugenio Garza Garza, Alberto Bailleres González, Maria Teresa Gual Aspe de Bailleres, Inversiones Bursátiles Industriales, S.A. de C.V. (controlled by the Garza Lagüera family), Corbal, S.A. de C.V. (controlled by Alberto Bailleres |
(5) | As reported on Schedule 13D filed on |
(6) | As reported on Schedule 13G filed on January 11, 2012 by Aberdeen Asset Management PLC. |
As of June 18, 2010,March 30, 2012, there were 25148 holders of record of ADSs in the United States, which represented approximately 60%58% of our outstanding BD Units. Since a substantial number of ADSs are held in the name of nominees of the beneficial owners, including the nominee of The Depository Trust Company, the number of beneficial owners of ADSs is substantially greater than the number of record holders of these securities.
The trust participants, who are our principal shareholders, agreed in Aprilon May 6, 1998 to deposit a majority of their shares, which we refer to as the trust assets, of FEMSA into the voting trust, and later entered into an amended agreement on August 8, 2005, following the substitution by Banco Invex, S.A. as trustee to the voting trust. The primary purpose of the voting trust is to permit the trust assets to be voted as a block, in accordance with the instructions of the technical committee. The trust participants are separated into seven trust groups and the technical committee is comprised of one representative appointed by each trust group. The number of B Units corresponding with each trust group (the proportional share of the shares deposited in the trust of such group) determines the number of votes that each trust representative has on the technical committee. Most matters are decided by a simple majority of the trust assets.
The trust participants agreed to certain transfer restrictions with respect to the trust assets. The trust is irrevocable, for a term that will conclude on May 31, 2013 (subject to additional five-year renewal terms), during which time, trust assets may be transferred by trust participants to spouses and immediate family members and, subject to certain conditions, to companies that are 100% owned by trust participants, which we refer to as the permitted transferees, provided in all cases that the transferee agrees to be bound by the terms of the voting trust. In the event that a trust participant wishes to sell part of its trust assets to someone other than a permitted transferee, the other trust participants have a right of first refusal to purchase the trust assets that the trust participant wishes to sell. If none of the trust participants elects to acquire the trust assets from the selling trust participant, the technical committee will have a right to nominate (subject to the approval of technical committee members representing 75% of the trust assets, excluding trust assets that are the subject of the sale) a purchaser for such trust assets. In the event that none of the trust participants or a nominated purchaser elects to acquire trust assets, the selling trust participant will have the right to sell the trust assets to a third-party on the same terms and conditions that were offered to the trust participants. Acquirors of trust assets will only be permitted to become parties to the voting trust upon the affirmative vote by the technical committee of at least 75% of the trust shares, which must include trust shares represented by at least three trust group representatives. In the event that a trust participant holding a majority of the trust assets elects to sell its trust assets, the other trust participants have “tag along” rights that will enable them to sell their trust assets to the acquiror of the selling trust participant’s trust assets.
Because of their ownership of a majority of the Series B Shares, the trust participants may be deemed to control our company. Other than as a result of their ownership of the Series B Shares, the trust participants do not have any voting rights that are different from those of other shareholders.
Interest of Management in Certain Transactions
The following is a summary of transactions we have entered into with entities for which members of our board of directors or management serve as a member of the board of directors or management. Each of these transactions was entered into in the ordinary course of business, and we believe each is on terms comparable to those that could be obtained in arm’s length negotiations with unaffiliated third parties. Under our by-laws,bylaws, transactions entered with related parties not in the ordinary course of business are subject to the approval of our board of directors, subject to the prior opinion of the corporate practices committee.
On April 30, 2010, José Antonio Fernández Carbajal, our Chairman and Chief Executive Officer, started to serve as a member of the Board of Directors of Heineken Holding, N.V. and the Supervisory Board of Heineken N.V. Javier Astaburuaga Sanjines, our Chief Financial Officer, also serves on the supervisory Board of Heineken N.V. as of April 30, 2010. Since that date, we have made purchases of beer in the ordinary course of business from the Heineken Group in the amount of Ps. 7,063 million for the last eight months of 2010 and Ps. 9,397 million for 2011. During the last eight months of 2010, we also supplied logistics and administrative services to subsidiaries of Heineken for a total of Ps. 1,048 million, and in 2011 for Ps. 2,169 million. As of the end of December 31, 2011 and 2010, our net balance due to Heineken amounted to Ps. 1,291 million and Ps. 1,038 million, respectively.
We, along with certain of our subsidiaries, regularly engage in financing and insurance coverage transactions, including entering into loans and bond offerings in the local capital markets, and credit line facilities, with subsidiaries of BBVA Bancomer, a financial services holding company of which José Antonio Fernández Carbajal, our Chairman and Chief Executive Officer, Alberto Bailleres andGonzález, José Fernando Calderón Rojas, Ricardo Guajardo Touché, and José Manuel Canal Hernando, who are also directors of FEMSA, are directors. We made interest expense payments and fees paid to BBVA Bancomer in respect of these transactions of Ps. 591128 million, Ps. 780108 million, and Ps. 305260 million as of the end of December 31, 2009, 20082011, 2010 and 2007,2009, respectively. The total amount due to BBVA Bancomer as of the end of December 31, 20092011 and 2008 were2010 was Ps. 10,1241.1 billion and Ps. 999 million, respectively, and we also had a balance with BBVA Bancomer of Ps. 2,791 million and Ps. 10,0602,944 million, respectively.
We maintain an insurance policy covering auto insurancerespectively, as of December 31, 2011 and medical expenses for executives issued by Grupo Nacional Provincial, S.A., an insurance company of which the chairman of the board and chief executive
officer is Alberto Bailleres, one of our directors. The aggregate amount of premiums paid under these policies was approximately Ps. 123 million, Ps. 83 million and Ps. 31 million in 2009, 2008 and 2007, respectively.
We, along with certain of our subsidiaries, spent Ps. 247 million, Ps. 253 million and Ps. 178 million in the ordinary course of business in 2009, 2008 and 2007, respectively, in publicity and advertisement purchased from Grupo Televisa, S.A.B., a media corporation in which our Chairman and Chief Executive Officer, José Antonio Fernández Carbajal, and two of our Directors, Alberto Bailleres and Lorenzo Zambrano, serve as directors.2010.
We regularly engage in the ordinary course of business in hedging transactions, and enter into loans and credit line facilities on an arm’s length basis with subsidiaries of Grupo Financiero Banamex, S.A. de C.V., or Grupo Financiero Banamex, a financial services holding company in which Lorenzo Zambrano, one ofqualified as our directors also serves as director.related party until March 2011. The interest expense and fees paid to Grupo Financiero Banamex as of December 31, 2011, 2010, and 2009 2008 and 2007 waswere Ps. 24628 million, Ps. 28956 million, and Ps. 53961 million, respectively. As of the end of December 31, 2010, the total amount due to Grupo Financiero Banamex was Ps. 500 million, and we also had a receivable balance with Grupo Financiero Banamex of Ps. 2,103 million.
We maintain an insurance policy covering auto insurance and medical expenses for executives issued by Grupo Nacional Provincial, S.A.B., an insurance company of which Alberto Bailleres González and Max Michelle Suberville, who are also directors of FEMSA, are directors. The aggregate amount of premiums paid under these policies was approximately Ps. 59 million, Ps. 69 million, and Ps. 78 million in 2011, 2010 and 2009, respectively.
We, along with certain of our subsidiaries, spent Ps. 86 million, Ps. 37 million, and Ps. 13 million in the ordinary course of business in 2011, 2010 and 2009, respectively, in publicity and advertisement purchased from Grupo Televisa, S.A.B., a media corporation in which our Chairman and Chief Executive Officer, José Antonio Fernández Carbajal, and two of our Directors, Alberto Bailleres González and Michael Larson, serve as directors.
Coca-Cola FEMSA, in its ordinary course of business, purchased Ps. 1,0441,248 million, Ps. 1,206 million, and Ps. 8631,044 million in 20092011, 2010, and 2008,2009, respectively, in juices from subsidiaries of Jugos del Valle.
In October 2011, Coca-Cola FEMSA executed certain agreements with affiliates of Grupo Tampico to acquire specific products and services such as plastic cases, certain truck and car brands, as well as auto parts, exclusively for the territories of Grupo Tampico, which provide for certain preferences to be elected as suppliers in Coca-Cola FEMSA’s suppliers’ bidding processes.
FEMSA Comercio, in its ordinary course of business, purchased Ps. 1,7332,270 million, Ps. 1,5782,018 million, and Ps. 1,3241,733 million in 2009, 20082011, 2010, and 2007,2009, respectively, in baked goods and snacks for its stores from subsidiaries of Grupo Bimbo, of which the chairmanRicardo Guajardo Touché, one of the boardFEMSA’s directors, is Roberto Servitje, a director of FEMSA. Additionally,director. FEMSA Comercio also purchased Ps. 1,413 million, Ps. 1,439316 million and Ps. 1,064126 million in 2009, 20082011 and 2007,2010, respectively, in cigarettesjuices from British American Tobacco Mexico (BAT Mexico),subsidiaries of which Alfredo Livas Cantú, who is member of the board of directors of FEMSA, is also a member of the board of directors.Jugos del Valle. These purchases were entered into in the ordinary course of business, and we believe they were made on terms comparable to those that could be obtained in arm’s length negotiations with unaffiliated third parties.
José Antonio Fernández Carbajal, Eva Garza de Fernández,Lagüera Gonda, Mariana Garza Lagüera Gonda, Ricardo Guajardo Touché, Alfonso Garza Garza and Lorenzo H. Zambrano,Armando Garza Sada, who are directors of FEMSA, are also members of the board of directors of ITESM, which is a prestigious university system with headquarters in Monterrey, Mexico that routinely receives donations from FEMSA and its subsidiaries. As ofFor the end ofyears ended December 31, 2009, 20082011, 2010, and 2007,2009, donations to ITESM amounted to Ps. 10081 million, Ps. 7963 million, and Ps. 10872 million, respectively.
Business Transactions between Coca-Cola FEMSA and The Coca-Cola Company
Coca-Cola FEMSA regularly engages in transactions with The Coca-Cola Company and its affiliates. Coca-Cola FEMSA purchases all of its concentrate requirements forCoca-Cola trademark beverages from The Coca-Cola Company. Total payments by Coca-Cola FEMSA to The Coca-Cola Company for concentrates were approximately Ps. 16,86321,183 million, Ps. 13,51819,371 million, and Ps. 12,23916,863 million in 2011, 2010, and 2009, 2008 and 2007, respectively.
Coca-Cola FEMSA and The Coca-Cola Company pay and reimburse each other for marketing expenditures. The Coca-Cola Company also contributes to Coca-Cola FEMSA’s coolers, bottles and cases investment program. Coca-Cola FEMSA received contributions to its marketing expenses and the coolers investment program of Ps. 2,561 million, Ps. 2,386 million, and Ps. 1,945 million Ps. 1,995 millionin 2011, 2010, and 1,582 million in 2009, 2008 and 2007, respectively.
In December 2007 and in May 2008, Coca-Cola FEMSA sold most of its proprietary brands to The Coca-Cola Company. The proprietary brands are now being licensed back to Coca-Cola FEMSA by The Coca-Cola Company pursuant to Coca-Cola FEMSA’s bottler agreements. The December 2007 transaction was valued at US$ 48 million and the May 2008 transaction was valued at US$ 16 million. Coca-Cola FEMSA believes that both of these transactions were conducted on an arm’s length basis. Revenues from the sale of proprietary brands realized in prior years in which Coca-Cola FEMSA has a significant continuing involvement are deferred and amortized against the related costs of future sales over the estimated sales period. The balance to be amortized amounted to Ps. 616302 million, Ps. 571547 million, and Ps. 603616 million as of December 31, 2009, 20082011, 2010, and 2007,2009, respectively. The short-term portions are included in other current liabilities as of December 31, 2009, 20082011, 2010, and 2007,2009, and amounted to Ps. 203,197 million, Ps. 139276 million, and Ps. 113203 million, respectively.
In Argentina, Coca-Cola FEMSA purchases a portion of its plastic ingot requirements for producing plastic bottles and all of its returnable plastic bottle requirements from Embotelladora del Atlántico S.A., a local subsidiary of Embotelladora Andina, S.A., a Coca-Cola bottler with operations in Argentina, Chile and Brazil in which The Coca-Cola Company has a substantial interest.
In November 2007, Administración S.A.P.IS.A.P.I. acquired 100% of the shares of capital stock of Jugos del Valle. The business of Jugos del Valle in the United States was acquired and sold by The Coca-Cola Company. In June 2008, Administración S.A.P.I. and Jugos del Valle (surviving company) were merged. Subsequently, Coca-Cola FEMSA and The Coca-Cola Company and all Mexican and BrazilianCoca-Cola bottlers entered into a joint business for the Mexican and the Brazilian operations, respectively, of Jugos del Valle, through transactions completed during 2008. Coca-Cola FEMSA currently holds an interest of approximately 20%24.0% in each of the Mexican joint business and approximately 19.7% in the Brazilian joint businesses.business. Jugos del Valle sells juice-based beverages and fruit derivatives. Coca-Cola FEMSA distributes the Jugos del Valle line of juice-based beverages in Brazil and its territories in Latincentro.South America.
In February 2009, Coca-Cola FEMSA acquired with The Coca-Cola Company theBrisa bottled water business in Colombia from Bavaria, a subsidiary of SABMiller. Coca-Cola FEMSA acquired the production assets and the rights to distribute in the territory, and The Coca-Cola Company acquired theBrisa brand. Coca-Cola FEMSA and The Coca-Cola Company equally shared in paying the purchase price of US$ 92 million. Following a transition period, in June 2009, Coca-Cola FEMSA started to sell and distribute theBrisa portfolio of products in Colombia.
In May 2009, Coca-Cola FEMSA completed a transaction to develop theCrystal trademark water business in Brazil jointly with The Coca-Cola Company.
In August 2010, Coca-Cola FEMSA acquired from The Coca-Cola Company along with other BrazilianCoca-Colabottlers the business operations of theMatte Leãotea brand. As of April 20, 2012 Coca-Cola FEMSA had a 19.4% indirect interest in theMatte Leão business in Brazil.
In September 2010, FEMSA sold Promotora to The Coca-Cola Company. Promotora was the owner of theMundet brands of soft drinks in Mexico.
In March 2011, Coca-Cola FEMSA, together with The Coca-Cola Company and through Compañía Panameña de Bebidas S.A.P.I. de C.V., acquired Estrella Azul, a Panamanian conglomerate that participates in the dairy and juice-based beverage categories in Panama. Coca-Cola FEMSA will continue to develop this business with The Coca-Cola Company.
In February 2012, Coca-Cola FEMSA announced that it had entered into a 12-month exclusivity agreement with The Coca-Cola Company to evaluate the potential acquisition by Coca-Cola FEMSA of a controlling
ownership stake in the bottling operations owned by The Coca-Cola Company in the Philippines. Both parties believe that Coca-Cola FEMSA’s expertise and successful track record operating in fragmented markets and emerging economies could be effectively deployed in such territory, and contribute significantly toward expanding the penetration of, and consumer preference for, The Coca-Cola Company’s brands in that market. This exclusivity agreement does not require either party to enter into any transaction, and there can be no assurances that a definitive agreement will be executed.
ITEM 8. | FINANCIAL INFORMATION |
Consolidated Financial Statements
See pages F-1 through F-64,F-144, incorporated herein by reference.
For a discussion of our dividend policy, see “Item 3. Key Information—Dividends” and “Item 10. Additional Information.”
We are party to various legal proceedings in the ordinary course of business. Other than as disclosed in this annual report, we are not currently involved in any litigation or arbitration proceeding, including any proceeding that is pending or threatened of which we are aware, which we believe will have, or has had, a material adverse effect on our company. Other legal proceedings that are pending against or involve us and our subsidiaries are incidental to the conduct of our and their business. We believe that the ultimate disposition of such other proceedings individually or on an aggregate basis will not have a material adverse effect on our consolidated financial condition or results offrom operations.
Coca-Cola FEMSA
Mexico
Antitrust Matters
During 2000, theComisión Federal de Competencia in Mexico (Mexican Antitrust Commission or CFC), CFC, pursuant to complaints filed by PepsiCo. and certain of its bottlers in Mexico, began an investigation of The Coca-Cola Company Export Corporation (TCCEC)and its bottlers for alleged monopolistic practices through exclusivity arrangements with certain retailers.
After the corresponding legal proceedings in Mexico in 2008, in theTribunal Colegiado de Circuito (Mexicana Mexican Federal Court),Court rendered a final adverse judgment was rendered against two of the sixeight Mexican Coca-Cola FEMSA subsidiaries involved in the proceedings (which total number includes the beverage divisions of Grupo CIMSA and Grupo Tampico), upholding a fine of approximately Ps. 10.5 million imposed by the CFC on each of the two subsidiaries and ordering the immediate suspension of such practices of alleged exclusivity arrangements and conditional dealing. Coca-Cola FEMSA has already paid these two fines and it has established reserves for the other four. The Mexican Supreme Court decided to resolve the proceedings withWith respect to the complaints against the remaining foursix subsidiaries (including the beverage divisions of Grupo CIMSA and on June 9, 2010,Grupo Tampico), a final favorable resolution was rendered in the Mexican Federal Court orderedon June 9, 2010. In March 2011, the CFC dropped all fines against and ruled in favor of all of the involved subsidiaries, on the grounds of insufficient evidence to reconsider certain aspects of these proceedings, which means thatprove individual and specific liability in the CFC may issue a new resolution of this case, following specific guidelines provided by the Mexican Supreme Court. Coca-Cola FEMSA has not received the full text of this judgment yet. Although we cannot predict the outcome, if any finesalleged antitrust violations. These resolutions are reinstated, we estimate they will not have a material adverse effect on Coca-Cola FEMSA’s financial condition or results of operations.final and unappealable.
In February 2009, the CFC began a new investigation of alleged monopolistic practices consisting of sparkling beverage sales subject to exclusivity agreements and the granting of discounts and/or benefits in exchange for exclusivity arrangements with certain retailers. As part ofIn December 2011, the CFC closed this investigation on the CFC has been requiring several Coca-Cola bottlers in Mexico to deliver information regarding their commercial practices and Coca-Cola FEMSA was required to do so in February 2010. In the event that the CFC findsgrounds of insufficient evidence of monopolistic practices it may begin administrative proceedings againstby The Coca-Cola Company and its bottlers. However, on February 9, 2012, the companies involved. We cannot determineplaintiff appealed the scopedecision of the investigation at this time.CFC. The CFC has not yet ruled on whether to accept or deny the appeal.
Central America
Antitrust Matters in Costa Rica
During August 2001, theComisión para Promover la Competenciain Costa Rica (Costa Rican Antitrust Commission), pursuant to a complaint filed by PepsiCo. and its bottler in Costa Rica, initiated an investigation of the sales practices of The Coca-Cola Company and Coca-Cola FEMSA’s Costa Rican subsidiary for alleged monopolistic practices in retail distribution, including sales exclusivity arrangements. A ruling from the Costa Rican Antitrust Commission was issued in July 2004, which found Coca-Cola FEMSA’s subsidiary in Costa Rica engaged in monopolistic practices with respect to exclusivity arrangements, pricing and the sharing of coolers under certain limited circumstances and imposed a fine of US$ 130,000 fine.(approximately Ps. 1.5 million). The court dismissed Coca-Cola FEMSA’s appeal of the Costa Rican Antitrust Commission’s ruling was dismissed.ruling. On August 30, 2011, Coca-Cola FEMSA has filed judicial proceedings challengingappealed the ruling ofcourt’s dismissal before the Costa Rican Antitrust Commission andSupreme Court, but the process is still pending in court. We believe thatSupreme Court affirmed the dismissal on December 1, 2011. Notwithstanding the above, this matter will not have a material adverse effect on itsCoca-Cola FEMSA’s financial condition or results of operations.operations because Coca-Cola FEMSA has already paid the Costa Rican Antitrust Commission’s fine and is currently complying with its resolution.
In November 2004,Ajecen del Sur S.A., the bottler ofBig Cola in Costa Rica, filed a complaint before the Costa Rican Antitrust Commission related to monopolistic practices in retail distribution and exclusivity agreements against The Coca-Cola Company and Coca-Cola FEMSA’s Costa Rican subsidiary. The Costa Rican Antitrust Commission has decided to pursue an investigation. The period for gathering of evidence ended in August 2008, and the final arguments have been filed. Coca-Cola FEMSA expects that the maximum fine that could be imposed is US$ 300 thousand. Coca-Cola FEMSA is waiting for theinvestigation, but has issued a final resolution to be issued by the Costa Rican Antitrust Commission.in Coca-Cola FEMSA’s favor imposing no fine.
Colombia
Labor Matters
During July 2001, a labor union and several individuals from the Republic of Colombia filed a lawsuit in the U.S. District Court for the Southern District of Florida against certain of Coca-Cola FEMSA’s subsidiaries. The plaintiffs alleged that the subsidiaries engaged in wrongful acts against the labor union and its members in Colombia, including kidnapping, torture, death threats and intimidation. The complaint alleges claims under the U.S. Alien Tort Claims Act, Torture Victim Protection Act, Racketeer Influenced and Corrupt Organizations Act and state tort law and seeks injunctive and declaratory relief and damages of more than US$ 500 million, including treble and punitive damages and the cost of the suit, including attorney fees. In September 2006, the federal district court dismissed the complaint with respect to all claims. The plaintiffs appealed and in August 2009, the Appellate Court affirmed the decision in favor of Coca-Cola FEMSA’s subsidiaries. The plaintiffs moved for a rehearing, and
in September 2009, the rehearing motion was denied. Plaintiffs attempted to seek reconsiderationen banc, but so far, the court has not considered it.
Venezuela
Tax Matters
In 1999, some of Coca-Cola FEMSA’s Venezuelan subsidiaries received notice of indirect tax claims asserted by the Venezuelan tax authorities. These subsidiaries have taken the appropriate measures against these claims at the administrative level and filed appeals with the Venezuelan courts. The claims currently amount to approximately US$ 21.1 million.million (approximately Ps. 250 million). Coca-Cola FEMSA has certain rights to indemnification from Venbottling Holding, Inc., a former shareholder of Panamco and The Coca-Cola Company, for a substantial portion of the claims. Coca-Cola FEMSA does not believe that the ultimate resolution of these cases will have a material adverse effect on its financial condition or results offrom operations.
Brazil
Antitrust Matters
Several claims have been filed against Coca-Cola FEMSA by private parties that allege anticompetitive practices by Coca-Cola FEMSA’s Brazilian subsidiaries. The plaintiffs are Ragi (Dolly), a Brazilian producer of “B Brands,” and PepsiCoPepsiCo. alleging anticompetitive practices by Spal Indústria Brasileira de Bebidas S.A. and Recofarma Indústria do Amazonas Ltda. Of the four claims Dolly filed against Coca-Cola FEMSA, the only one remaining concerns a denial of access to common suppliers. Of the two claims made by PepsiCo, the first concerns exclusivity arrangements at the point of sale, and the second is aan alleged corporate espionage allegation against the Pepsi bottler, BAESA, which the Ministry of Economy recommended be dismissed for lack of evidence. Under Brazilian law, each of these claims could result in substantial monetary fines and other penalties, although Coca-Cola FEMSA believes each of the claims is without merit.
Since December 31, 2009,2011, the following significant changes havechange has occurred in our business, each of which isas described in more detail in “Item 5. Operating and Financial Review and Prospects—Recent Developments” and in noteNote 29 to our audited consolidated financial statements:
On March 10, 2010,In February 2012, a wholly-owned subsidiary of Mitsubishi Corporation and Stichting Depositary PGGM Infrastructure Funds, a pension fund managed by PGGM, acquired the 45% interest held by FEMSA announced that subsidiaries of FEMSA have signed an agreement with subsidiaries of The Coca-Cola Company to amendin the shareholders agreement for Coca-Cola FEMSA; and
On April 30, 2010, FEMSA announced the closingparent companies of the transaction pursuant to which FEMSA agreed to exchange 100%Mareña Renovables Wind Power Farm. The sale of its beer operations forFEMSA’s participation as an investor will result in a 20% economic interest in the Heineken Group.gain.
ITEM 9. | THE OFFER AND LISTING |
We have three series of capital stock, each with no par value:
Series B Shares;
Series D-B Shares; and
Series D-L Shares.
Series B Shares have full voting rights, and Series D-B and D-L Shares have limited voting rights. The shares of our company are not separable and may be transferred only in the following forms:
B Units, consisting of five Series B Shares; and
BD Units, consisting of one Series B Share, two Series D-B Shares and two Series D-L Shares.
At our AGM held on March 29, 2007, our shareholders approved a three-for-one stock split in respect all of our outstanding capital stock. Following the stock split, our total capital stock consists of 2,161,177,770 BD Units and 1,417,048,500 B Units. Our stock split also resulted in a three-for-one stock split of our American Depositary Shares.ADSs. The stock-split was conducedconducted on a pro-rata basis in respect of all holders of our shares and all ADSsADS holders of record as of May 25, 2007, and the ratio of voting and non-voting shares was maintained, thereby preserving our ownership structure as it was prior to the stock-split.
On April 22, 2008, FEMSA shareholders approved a proposal to amend our bylaws in order to preserve the unit structure for our shares that has been in place since May 1998, and to maintain our existing share structure beyond May 11, 2008, absent further shareholder action.
Previously, our bylaws provided that on May 11, 2008, each Series D-B Share would automatically convert into one Series B Share with full voting rights, and each Series D-L Share would automatically convert into one Series L Share with limited voting rights. At that time:
the BD Units and the B Units would cease to exist and the underlying Series B Shares and Series L Shares would be separate; and
the Series B Shares and Series L Shares would be entitled to share equally in any dividend, and the dividend preferences of the Series D-B Shares and Series D-L Shares of 125% of any amount distributed in respect of each Series B Share existing prior to May 11, 2008, would be terminated.
However, following the April 22, 2008, shareholder approvals, these changes will no longer occur and instead our share and unit structure will remain unchanged, absent shareholder action, as follows:
the BD Units and the B Units will continue to exist; and
the dividend preferences of the Series D-B Shares and Series D-L Shares of 125% of any amount distributed in respect of each Series B Share will continue to exist.
The following table sets forth information regarding our capital stock as of April 30, 2010:March 31, 2012:
Class | Number | Percentage of Capital | Percentage of Full Voting Rights | |||||
Series B Shares (no par value) | 9,246,420,270 | 51.68 | % | 100 | % | |||
Series D-B Shares (no par value) | 4,322,355,540 | 24.16 | 0 | |||||
Series D-L Shares (no par value) | 4,322,355,540 | 24.16 | 0 | |||||
Total Shares | 17,891,131,350 | 100 | 100 | |||||
Units | ||||||||
BD Units | 2,161,177,770 | 60.4 | 23.437 | |||||
B Units | 1,417,048,500 | 39.6 | 76.63 | |||||
Total Units | 3,578,226,270 | 100 | 100 |
Class Series B Shares (no par value) Series D-B Shares (no par value) Series D-L Shares (no par value) Total Shares Units BD Units B Units Total Units Number Percentage of
Capital Percentage of
Full Voting
Rights 9,246,420,270 51.68 % 100 % 4,322,355,540 24.16 % 0 % 4,322,355,540 24.16 % 0 % 17,891,131,350 100 % 100 % 2,161,177,770 60.40 % 23.47 % 1,417,048,500 39.60 % 76.63 % 3,578,226,270 100 % 100 %
Since May 11, 1998, ADSs representing BD Units have been listed on the New York Stock Exchange,NYSE, and the BD Units and the B Units have been listed on the Mexican Stock Exchange. Each ADS represents 10 BD Units deposited under the deposit agreement with the ADS depositary. As of June 18, 2010,March 30, 2012, approximately 62%58% of BD Units traded in the form of ADSs.
The New York Stock ExchangeNYSE trading symbol for the ADSs is “FMX” and the Mexican Stock Exchange trading symbols are “FEMSA UBD” for the BD Units and “FEMSA UB” for the B Units.
Fluctuations in the exchange rate between the Mexican peso and the U.S. dollar have affected the U.S. dollar equivalent of the Mexican peso price of our shares on the Mexican Stock Exchange and, consequently, have also affected the market price of our ADSs. See “Item 3. Key Information—Exchange Rate Information.”
Trading on the Mexican Stock Exchange
The Mexican Stock Exchange, located in Mexico City, is the only stock exchange in Mexico. Founded in 1907, it is organized as asociedad anónima bursátil. Trading on the Mexican Stock Exchange takes place principally through automated systems and is open between the hours of 8:9:30 a.m. and 3:4:00 p.m. Mexico City time,Eastern Time, each business day. Trades in securities listed on the Mexican Stock Exchange can also be effected off the exchange. The Mexican Stock Exchange operates a system of automatic suspension of trading in shares of a particular issuer as a
means of controlling excessive price volatility, but under current regulations this system does not apply to securities such as the BD Units that are directly or indirectly (for example, in the form of ADSs) quoted on a stock exchange (including for these purposes the New York Stock Exchange)NYSE) outside Mexico.
Settlement is effected three business days after a share transaction on the Mexican Stock Exchange. Deferred settlement, even by mutual agreement, is not permitted without the approval of theComisión Nacional Bancaria y de Valores (Mexican National Banking and Securities Commission or CNBV). CNBV. Most securities traded on the Mexican Stock Exchange, including ours, are on deposit withS.D. Indeval Instituto para el Depósito de Valores S.A. de C.V., which we refer to as Indeval, a privately owned securities depositary that acts as a clearinghouse for Mexican Stock Exchange transactions.
The following tables set forth, for the periods indicated, the reported high, low and closing sale prices and the average daily trading volumes for the B Units and BD Units on the Mexican Stock Exchange and the reported high, low and closing sale prices and the average daily trading volumes for the ADSs on the New York Stock Exchange.NYSE.
B Units(1) | B Units(1) | |||||||||||||||||||||||||||||||||||
Nominal pesos | Close US$(4) | Average Daily Trading Volume (Units) | Nominal pesos | Close US$(4) | Average Daily Trading Volume (Units) | |||||||||||||||||||||||||||||||
High(2) | Low(2) | Close(3) | FX rate | High(2) | Low(2) | Close(3) | FX rate | |||||||||||||||||||||||||||||
2005 | 24.17 | 15.60 | 21.67 | 10.63 | 2.04 | 674,773 | ||||||||||||||||||||||||||||||
2006 | 34.03 | 23.00 | 33.33 | 10.80 | 3.09 | 197,478 | ||||||||||||||||||||||||||||||
2007 | 42.33 | 31.79 | 37.00 | 10.92 | 3.39 | 1,814 | 42.33 | 31.79 | 37.00 | 10.92 | 3.39 | 1,814 | ||||||||||||||||||||||||
2008 | 46.00 | 32.00 | 34.99 | 13.83 | 2.53 | 7,286 | ||||||||||||||||||||||||||||||
2009 | 57.00 | 30.50 | 55.00 | 13.06 | 4.21 | 300 | ||||||||||||||||||||||||||||||
2010 | ||||||||||||||||||||||||||||||||||||
First Quarter | 41.95 | 32.00 | 41.94 | 10.63 | 3.95 | 692 | 55.00 | 44.00 | 48.50 | 12.30 | 3.94 | 1,900 | ||||||||||||||||||||||||
Second Quarter | 46.00 | 40.00 | 40.00 | 10.30 | 3.88 | 34,993 | 51.00 | 45.05 | 49.97 | 12.83 | 3.89 | 1,881 | ||||||||||||||||||||||||
Third Quarter | 44.00 | 40.00 | 42.00 | 10.97 | 3.83 | 481 | 51.99 | 47.50 | 50.50 | 12.63 | 4.00 | 1,364 | ||||||||||||||||||||||||
Fourth Quarter | 42.00 | 34.99 | 34.99 | 13.83 | 2.53 | 7 | 57.99 | 49.50 | 57.98 | 12.38 | 4.68 | 1,629 | ||||||||||||||||||||||||
2009 | ||||||||||||||||||||||||||||||||||||
2011 | ||||||||||||||||||||||||||||||||||||
First Quarter | 34.00 | 30.50 | 30.50 | 14.21 | 2.15 | 18 | 57.99 | 50.00 | 51.50 | 11.92 | 4.32 | 2,062 | ||||||||||||||||||||||||
Second Quarter | 38.79 | 31.00 | 35.60 | 13.17 | 2.70 | 556 | 58.00 | 51.50 | 58.00 | 11.72 | 4.95 | 975 | ||||||||||||||||||||||||
Third Quarter | 41.00 | 35.00 | 38.60 | 13.48 | 2.86 | 363 | 71.00 | 59.00 | 71.00 | 13.77 | 5.16 | 2,597 | ||||||||||||||||||||||||
Fourth Quarter | 57.00 | 38.00 | 55.00 | 13.06 | 4.21 | 440 | 81.00 | 78.05 | 78.05 | 13.96 | 5.59 | 795 | ||||||||||||||||||||||||
October | 55.00 | 38.00 | 54.49 | 13.16 | 4.14 | 579 | 81.00 | 79.00 | 79.00 | 13.17 | 6.00 | 1,880 | ||||||||||||||||||||||||
November | 57.00 | 54.40 | 57.00 | 12.92 | 4.41 | 538 | 79.00 | 79.00 | 79.00 | 13.62 | 5.80 | 975 | ||||||||||||||||||||||||
December | 57.00 | 55.00 | 55.00 | 13.06 | 4.21 | 667 | 78.05 | 78.05 | 78.05 | 13.95 | 5.59 | 8,300 | ||||||||||||||||||||||||
2010 | ||||||||||||||||||||||||||||||||||||
2012 | ||||||||||||||||||||||||||||||||||||
January | 55.00 | 44.00 | 49.90 | 13.03 | 3.83 | 437 | 78.00 | 75.00 | 75.00 | 13.04 | 5.75 | 3,182 | ||||||||||||||||||||||||
February | 49.92 | 47.00 | 48.46 | 12.76 | 3.80 | 1,200 | 76.00 | 75.00 | 76.00 | 12.79 | 5.94 | 807 | ||||||||||||||||||||||||
March | 51.50 | 48.00 | 48.50 | 12.30 | 3.94 | 5,047 | 82.00 | 80.50 | 80.50 | 12.81 | 6.28 | 167 | ||||||||||||||||||||||||
First Quarter | 55.00 | 44.00 | 48.50 | 12.30 | 3.94 | 1,900 | 82.00 | 75.00 | 80.50 | 12.81 | 6.28 | 872 | ||||||||||||||||||||||||
April | 51.00 | 48.00 | 51.00 | 12.23 | 4.17 | 5,115 | ||||||||||||||||||||||||||||||
May | 50.99 | 45.05 | 45.05 | 12.86 | 3.50 | 169 | ||||||||||||||||||||||||||||||
June(5) | 50.00 | 49.98 | 49.98 | 12.54 | 3.98 | 283 |
(1) | The prices and average daily trading volume for the B Units were taken from Bloomberg and reflect our 3:1 stock split, which was effective May 25, 2007. |
(2) | High and low closing prices for the periods presented. |
(3) | Closing price on the last day of the periods presented. |
(4) | Represents the translation from Mexican pesos to U.S. dollars of the closing price of the B Units on the last day of the periods presented based on the noon buying rate for the purchase of U.S. dollars, as reported by the Federal Reserve Bank of New York using the period-end exchange rate. |
BD Units(1) | BD Units(1) | |||||||||||||||||||||||||||||||||||
Nominal pesos | Close US$(4) | Average Daily Trading Volume (Units) | Nominal pesos | Close US$(4) | Average Daily Trading Volume (Units) | |||||||||||||||||||||||||||||||
High(2) | Low(2) | Close(3) | FX rate | High(2) | Low(2) | Close(3) | FX rate | |||||||||||||||||||||||||||||
2005 | 26.46 | 18.63 | 25.69 | 10.63 | 2.42 | 2,088,995 | ||||||||||||||||||||||||||||||
2006 | 42.25 | 25.69 | 41.72 | 10.80 | 3.86 | 2,368,706 | ||||||||||||||||||||||||||||||
2007 | 48.58 | 32.73 | 41.70 | 10.92 | 3.82 | 3,889,800 | 48.58 | 32.73 | 41.70 | 10.92 | 3.82 | 3,889,800 | ||||||||||||||||||||||||
2008 | 49.19 | 26.10 | 41.37 | 13.83 | 2.99 | 3,089,044 | ||||||||||||||||||||||||||||||
2009 | 63.20 | 30.49 | 62.65 | 13.06 | 4.80 | 3,011,747 | ||||||||||||||||||||||||||||||
2010 | ||||||||||||||||||||||||||||||||||||
First Quarter | 46.53 | 36.13 | 44.77 | 10.63 | 4.21 | 3,197,835 | 64.39 | 53.33 | 59.03 | 12.30 | 4.80 | 4,213,385 | ||||||||||||||||||||||||
Second Quarter | 49.19 | 42.77 | 46.96 | 10.30 | 4.56 | 3,037,459 | 58.94 | 53.22 | 55.68 | 12.83 | 4.34 | 3,066,006 | ||||||||||||||||||||||||
Third Quarter | 49.16 | 38.50 | 41.58 | 10.97 | 3.79 | 2,743,194 | 66.14 | 55.79 | 63.66 | 12.63 | 5.04 | 3,526,727 | ||||||||||||||||||||||||
Fourth Quarter | 42.03 | 26.10 | 41.37 | 13.83 | 2.99 | 3,394,665 | 71.21 | 62.58 | 69.32 | 12.38 | 5.60 | 3,177,203 | ||||||||||||||||||||||||
2009 | ||||||||||||||||||||||||||||||||||||
2011 | ||||||||||||||||||||||||||||||||||||
First Quarter | 44.24 | 30.49 | 35.86 | 14.21 | 2.52 | 3,032,889 | 70.61 | 64.01 | 69.85 | 11.92 | 5.86 | 2,562,803 | ||||||||||||||||||||||||
Second Quarter | 45.99 | 35.32 | 42.41 | 13.17 | 3.22 | 2,833,756 | 77.79 | 70.52 | 77.79 | 11.72 | 6.64 | 2,546,271 | ||||||||||||||||||||||||
Third Quarter | 52.26 | 40.98 | 51.38 | 13.48 | 3.81 | 2,637,506 | 91.39 | 75.28 | 90.16 | 13.77 | 6.55 | 3,207,475 | ||||||||||||||||||||||||
Fourth Quarter | 63.20 | 55.92 | 62.65 | 13.06 | 4.80 | 3,552,563 | 97.80 | 87.05 | 97.02 | 13.96 | 6.95 | 2,499,269 | ||||||||||||||||||||||||
October | 62.53 | 55.92 | 55.99 | 13.16 | 4.26 | 4,060,068 | 94.80 | 88.26 | 89.40 | 13.17 | 6.79 | 2,491,967 | ||||||||||||||||||||||||
November | 59.15 | 56.63 | 58.88 | 12.92 | 4.56 | 3,740,842 | 92.76 | 87.05 | 92.76 | 13.62 | 6.81 | 3,160,130 | ||||||||||||||||||||||||
December | 63.20 | 59.77 | 62.65 | 13.06 | 4.80 | 2.882,455 | 97.80 | 90.07 | 97.02 | 13.95 | 6.95 | 1,877,181 | ||||||||||||||||||||||||
2010 | ||||||||||||||||||||||||||||||||||||
2012 | ||||||||||||||||||||||||||||||||||||
January | 64.39 | 54.29 | 55.36 | 13.03 | 4.25 | 5,766,620 | 98.04 | 88.64 | 91.33 | 13.04 | 7.00 | 2,777,054 | ||||||||||||||||||||||||
February | 55.12 | 53.33 | 54.86 | 12.76 | 4.30 | 3,353,689 | 96.59 | 92.65 | 94.47 | 12.79 | 7.38 | 3,352,297 | ||||||||||||||||||||||||
March | 59.83 | 55.89 | 59.03 | 12.30 | 4.80 | 3,543,818 | 105.33 | 93.98 | 105.33 | 12.81 | 8.22 | 2,494,913 | ||||||||||||||||||||||||
First Quarter | 64.39 | 53.33 | 59.03 | 12.30 | 4.80 | 4,213,385 | 105.33 | 88.64 | 105.33 | 12.81 | 8.22 | 2,865,624 | ||||||||||||||||||||||||
April | 59.69 | 56.98 | 58.39 | 12.23 | 4.78 | 3,195,390 | ||||||||||||||||||||||||||||||
May | 57.76 | 53.54 | 56.49 | 12.86 | 4.39 | 3,427,210 | ||||||||||||||||||||||||||||||
June(5) | 59.03 | 54.61 | 59.03 | 12.54 | 4.71 | 2,466,750 |
(1) | The prices and average daily trading volume for the BD Units were taken from Bloomberg and reflect our 3:1 stock split, which was effective May 25, 2007. |
(2) | High and low closing prices for the periods presented. |
(3) | Closing price on the last day of the periods presented. |
(4) | Represents the translation from Mexican pesos to U.S. dollars of the closing price of the BD Units on the last day of the periods presented based on the noon buying rate for the purchase of U.S. dollars, as reported by the Federal Reserve Bank of New York using the period-end exchange rate. |
ADSs(1) | ADSs(1) | |||||||||||||||||||||||
U.S. dollars | Average Daily Trading Volume (ADSs) | U.S. dollars | Average Daily Trading Volume (ADSs) | |||||||||||||||||||||
High(2) | Low(2) | Close(3) | High(2) | Low(2) | Close(3) | |||||||||||||||||||
2005 | 24.58 | 16.97 | 24.17 | 986,032 | ||||||||||||||||||||
2006 | 39.17 | 24.41 | 38.59 | 1,159,232 | ||||||||||||||||||||
2007 | 44.42 | 29.96 | 38.17 | 1,350,303 | 44.42 | 29.96 | 38.17 | 1,350,303 | ||||||||||||||||
2008 | 49.39 | 19.25 | 30.13 | 1,321,098 | ||||||||||||||||||||
First Quarter | 43.35 | 33.37 | 41.78 | 1,173,074 | ||||||||||||||||||||
Second Quarter | 47.48 | 41.58 | 45.51 | 1,156,991 | ||||||||||||||||||||
Third Quarter | 49.39 | 35.07 | 38.14 | 1,408,044 | ||||||||||||||||||||
Fourth Quarter | 38.17 | 19.25 | 30.13 | 1,539,345 | ||||||||||||||||||||
2009 | 49.00 | 19.91 | 47.88 | 1,188,775 | ||||||||||||||||||||
2010 | ||||||||||||||||||||||||
First Quarter | 32.06 | 19.91 | 25.21 | 1,168,072 | 50.01 | 40.82 | 47.53 | 1,394,455 | ||||||||||||||||
Second Quarter | 34.96 | 25.27 | 32.24 | 820,917 | 48.14 | 40.49 | 42.89 | 854,938 | ||||||||||||||||
Third Quarter | 40.01 | 30.58 | 38.05 | 899,509 | 52.09 | 42.78 | 50.43 | 752,792 | ||||||||||||||||
Fourth Quarter | 49.00 | 42.65 | 47.88 | 1,859,885 | 57.38 | 49.89 | 55.92 | 534,197 | ||||||||||||||||
October | 45.98 | 42.95 | 43.31 | 3,002,220 | 55.05 | 49.89 | 54.91 | 762,224 | ||||||||||||||||
November | 45.69 | 42.65 | 45.51 | 1,425,004 | 56.83 | 53.89 | 56.55 | 498,769 | ||||||||||||||||
December | 49.00 | 46.52 | 47.88 | 1,112,896 | 57.38 | 55.46 | 55.92 | 350,353 | ||||||||||||||||
2010 | ||||||||||||||||||||||||
2011 | ||||||||||||||||||||||||
First Quarter | 58.93 | 52.67 | 58.70 | 523,823 | ||||||||||||||||||||
Second Quarter | 66.49 | 59.60 | 66.49 | 519,035 | ||||||||||||||||||||
Third Quarter | 73.00 | 61.34 | 64.82 | 641,559 | ||||||||||||||||||||
Fourth Quarter | 72.23 | 61.73 | 69.71 | 527,067 | ||||||||||||||||||||
October | 72.23 | 64.36 | 67.05 | 634,239 | ||||||||||||||||||||
November | 68.92 | 61.73 | 68.21 | 560,506 | ||||||||||||||||||||
December | 69.77 | 64.81 | 69.71 | 386,457 | ||||||||||||||||||||
2012 | ||||||||||||||||||||||||
January | 50.01 | 41.72 | 42.16 | 2,140,702 | 70.52 | 67.47 | 70.52 | 591,823 | ||||||||||||||||
February | 42.80 | 40.82 | 42.80 | 1,068,725 | 75.18 | 72.47 | 73.60 | 482,579 | ||||||||||||||||
March | 47.59 | 43.74 | 47.53 | 1,047,073 | 82.27 | 72.56 | 82.27 | 504,965 | ||||||||||||||||
First Quarter | 50.01 | 40.82 | 47.53 | 1,394,455 | 82.27 | 52.95 | 82.27 | 525,762 | ||||||||||||||||
April | 48.75 | 46.01 | 47.33 | 843,109 | ||||||||||||||||||||
May | 46.97 | 40.73 | 42.18 | 1,025,424 | ||||||||||||||||||||
June(4) | 46.98 | 41.93 | 46.98 | 728,891 |
(1) | Each ADS is comprised of 10 BD Units. Prices and average daily trading volume were taken from Bloomberg and reflect our 3:1 stock split, which was effective May 25, 2007. |
(2) | High and low closing prices for the periods presented. |
(3) | Closing price on the last day of the periods presented. |
ITEM 10. | ADDITIONAL INFORMATION |
The following is a summary of the material provisions of our bylaws and applicable Mexican law. Our bylaws were last amended on April 22, 2008. For a description of the provisions of our bylaws relating to our board of directors and executive officers, see “Item 6. Directors, Senior Management and Employees.”
Organization and Registry
We are asociedad anónima bursátil de capital variable organized in Mexico under the Mexican General Corporations Law and the Mexican Securities Law. We were incorporated in 1936 under the name Valores Industriales, S.A., as asociedad anónima, and are currently named Fomento Económico Mexicano, S.A.B. de C.V. We are registered in theRegistro Público de la Propiedad y del ComerioComercio(Public Registry of Property and Commerce) of Monterrey, Nuevo León under the mercantile electronic number 1044*9.n.
Voting Rights and Certain Minority Rights
Each Series B Share entitles its holder to one vote at any of our ordinary or extraordinary general shareholders meetings. Our bylaws state that the board of directors must be composed of no more than 21 members. Holders of Series B Shares are entitled to elect at least 11 members of our board of directors. Holders of Series D Shares are entitled to elect five members of our board of directors. Our bylaws also contemplate that, should a conversion of the Series D-L Shares to Series L Shares occur pursuant to the vote of our Series D-B and Series D-L shareholders at special and extraordinary shareholders meetings, the holders of Series D-L shares (who would become holders of newly-issued Series L Shares) will be entitled to elect two members of the board of directors. None of our shares has cumulative voting rights, which is a right not regulated under Mexican law.
Under our bylaws, the holders of Series D Shares are entitled to vote at extraordinary shareholders meetings called to consider any of the following limited matters: (1) the transformation from one form of corporate organization to another, other than from a company with variable capital stock to a company without variable capital stock or vice versa, (2) any merger in which we are not the surviving entity or with other entities whose principal corporate purposes are different from those of our company or our subsidiaries, (3) change of our jurisdiction of incorporation, (4) dissolution and liquidation and (5) the cancellation of the registration of the Series D Shares or Series L Shares in the Mexican Stock Exchange or in any other foreign stock market where listed, except in the case of the conversion of these shares as provided for in our bylaws.
Holders of Series D Shares are also entitled to vote on the matters that they are expressly authorized to vote on by the Mexican Securities Law and at any extraordinary shareholders meeting called to consider any of the following matters:
To approve a conversion of all of the outstanding Series D-B Shares and Series D-L Shares into Series B shares with full voting rights and Series L Shares with limited voting rights, respectively.
To agree to the unbundling of their share Units.
This conversion and/or unbundling of shares would become effective two (2) years after the date on which the shareholders agreed to such conversion and/or unbundling.
Under Mexican law, holders of shares of any series are entitled to vote as a class in a special meeting governed by the same rules that apply to extraordinary shareholders meetings on any action that would have an effect on the rights of holders of shares of such series. There are no procedures for determining whether a particular proposed shareholder action requires a class vote, and Mexican law does not provide extensive guidance on the criteria to be applied in making such a determination.
The Mexican Securities Law, the Mexican General Corporations Law and our bylaws provide for certain minority shareholder protections. These minority protections include provisions that permit:
holders of at least 10% of our outstanding capital stock entitled to vote, including in a limited or restricted manner, to require the chairman of the board of directors or of the auditAudit or corporate practicesCorporate Practices Committees to call a shareholders’ meeting;
holders of at least 5% of our outstanding capital stock, including limited or restricted vote, may bring an action for liabilities against our directors, the secretary of the board of directors or the relevant officers;
holders of at least 10% of our outstanding capital stock who are entitled to vote, including limited or restricted vote, at any shareholders meeting to request that resolutions with respect to any matter on which they considered they were not sufficiently informed be postponed;
holders of 20% of our outstanding capital stock to oppose any resolution adopted at a shareholders meeting in which they are entitled to vote, including limited or restricted vote, and file a petition for a court order to suspend the resolution temporarily within 15 days following the adjournment of the meeting at which the action was taken, provided that (1) the challenged resolution violates Mexican law or our bylaws, (2) the opposing shareholders neither attended the meeting nor voted in favor of the challenged resolution and (3) the opposing shareholders deliver a bond to the court to secure payment of any damages that we may suffer as a result of suspending the resolution in the event that the court ultimately rules against the opposing shareholder; and
holders of at least 10% of our outstanding capital stock who are entitled to vote, including limited or restricted vote, to appoint one member of our board of directors and one alternate member of our board of directors.
Shareholders Meetings
General shareholders meetings may be ordinary meetings or extraordinary meetings. Extraordinary meetings are those called to consider certain matters specified in Article 182 and 228 BIS of the Mexican General Corporations Law, Articles 53 and 108(II) of the Mexican Securities Law and in our bylaws. These matters include: amendments to our bylaws, liquidation, dissolution, merger and transformation from one form of corporate organization to another, issuance of preferred stock and increases and reductions of the fixed portion of our capital stock. In addition, our bylaws require an extraordinary meeting to consider the cancellation of the registration of shares with the Mexican Registry of Securities, or RNV or with other foreign stock exchanges on which our shares may be listed, the amortization of distributable earnings into capital stock, and an increase in our capital stock in terms of the Mexican Securities Law. General meetings called to consider all other matters, including increases or decreases affecting the variable portion of our capital stock, are ordinary meetings. An ordinary meeting must be held at least once each year within the first four months following the end of the preceding fiscal year. Holders of BD Units or B Units are entitled to attend all shareholders meetings of the Series B Shares and Series D Shares and to vote on matters that are subject to the vote of holders of the underlying shares.
The quorum for an ordinary shareholders meeting on first call is more than 50% of the Series B Shares, and action may be taken by a majority of the Series B Shares represented at the meeting. If a quorum is not available, a second or subsequent meeting may be called and held by whatever number of Series B Shares is represented at the meeting, at which meeting action may be taken by a majority of the Series B Shares that are represented at the meeting.
The quorum for an extraordinary shareholders meeting is at least 75% of the shares entitled to vote at the meeting, and action may be taken by a vote of the majority of all the outstanding shares that are entitled to vote. If a quorum is not available, a second meeting may be called, at which the quorum will be the majority of the outstanding capital stock entitled to vote, and actions will be taken by holders of the majority of all the outstanding capital stock entitled to vote.
Shareholders meetings may be called by the board of directors, the audit committee or the corporate practices committee and, under certain circumstances, a Mexican court. Holders of 10% or more of our capital stock may require the chairman of the board of directors, or the chairman of the audit or corporate practices committees to call a shareholders meeting. A notice of meeting and an agenda must be published in thePeriódico Oficial del Estado de Nuevo León (Official State Gazette of Nuevo León)n, or the Official State Gazette) or a newspaper of general circulation in Monterrey, Nuevo León, Mexico at least 15 days prior to the date set for the meeting. Notices must set forth the place, date and time of the meeting and the matters to be addressed and must be signed by whomeverwhoever convened the meeting. Shareholders meetings will be deemed validly held and convened without a prior notice or publication whenever all the shares representing our capital stock are fully represented. All relevant information relating to the shareholders meeting must be made available to shareholders starting on the date of publication of the notice. To attend a meeting, shareholders must deposit their shares with the company or with Indeval or an institution for the deposit of securities prior to the meeting as indicated in the notice. If entitled to attend a meeting, a shareholder may be represented by an attorney-in-fact.
In addition to the provisions of the Mexican General Corporations Law, the ordinary shareholders meeting shall be convened to approve any transaction that, in a fiscal year, represents 20% or more of the consolidated assets of the company as of the immediately prior quarter, whether such transaction is executed in one or several operations. All shareholders shall be entitled to vote on in such ordinary shareholders meeting, including those with limited or restricted voting rights.
Dividend Rights
At the AGM, the board of directors submits the financial statements of the company for the previous fiscal year, together with a report thereon by the board of directors. Once the holders of Series B Shares have approved the financial statements, they determine the allocation of our net profits for the preceding year. Mexican law requires the allocation of at least 5% of net profits to a legal reserve, which is not subsequently available for distribution, until the amount of the legal reserve equals 20% of our paid in capital stock. Thereafter, the holders of Series B Shares may determine and allocate a certain percentage of net profits to any general or special reserve, including a reserve for open-market purchases of our shares. The remainder of net profits is available for distribution in the form of dividends to the shareholders. Dividends may only be paid if net profits are sufficient to offset losses from prior fiscal years.
Our bylaws provide that dividends will be allocated among the shares outstanding and fully paid at the time a dividend is declared in such manner that each Series D-B Share and Series D-L Share receives 125% of the dividend distributed in respect of each Series B Share. Holders of Series D-B Shares and Series D-L Shares are entitled to this dividend premium in connection with all dividends paid by us.
Change in Capital
Our outstanding capital stock consists of both a fixed and a variable portion. The fixed portion of our capital stock may be increased or decreased only by an amendment of the bylaws adopted by an extraordinary shareholders meeting. The variable portion of our capital stock may be increased or decreased by resolution of an ordinary shareholders meeting. Capital increases and decreases must be recorded in our share registry and book of capital variations, if applicable.
A capital stock increase may be effected through the issuance of new shares for payment in cash or in kind, or by capitalization of indebtedness or of certain items of stockholders’ equity. Treasury stock may only be sold pursuant to a public offering.
Any increase or decrease in our capital stock or any redemption or repurchase will be subject to the following limitations: (1) Series B Shares will always represent at least 51% of our outstanding capital stock and the Series D-L Shares and Series L Shares will never represent more than 25% of our outstanding capital stock; and (2) the Series D-B, Series D-L and Series L Shares will not exceed, in the aggregate, 49% of our outstanding capital stock.
Preemptive Rights
Under Mexican law, except in limited circumstances which are described below, in the event of an increase in our capital stock, a holder of record generally has the right to subscribe to shares of a series held by such holder sufficient to maintain such holder’s existing proportionate holding of shares of that series. Preemptive rights must be exercised during a term fixed by the shareholders at the meeting declaring the capital increase, which term must last at least 15 days following the publication of notice of the capital increase in the Official State Gazette. As a result of applicable United States securities laws, holders of ADSs may be restricted in their ability to participate in the exercise of preemptive rights under the terms of the deposit agreement. Shares subject to a preemptive rights offering, with respect to which preemptive rights have not been exercised, may be sold by us to third parties on the same terms and conditions previously approved by the shareholders or the board of directors. Under Mexican law, preemptive rights cannot be waived in advance or be assigned, or be represented by an instrument that is negotiable separately from the corresponding shares.
Our bylaws provide that shareholders will not have preemptive rights to subscribe shares in the event of a capital stock increase or listing of treasury stock in the following events: (i) merger of the Company; (ii) conversion of obligations in terms of the Mexican General Credit Instruments and Credit Operations Law (Ley General de Títulos y Operaciones de Crédito); (iii) public offering in terms of articles 53, 56 and related provisions of the Mexican Securities Law; and (iv) capital increase made through the payment in kind of the issued shares or through the cancellation of debt of the Company.
Limitations on Share Ownership
Ownership by non-Mexican nationals of shares of Mexican companies is regulated by the Foreign Investment Law and its regulations. The Foreign Investment Commission is responsible for the administration of the Foreign Investment Law and its regulations.
As a general rule, the Foreign Investment Law allows foreign holdings of up to 100% of the capital stock of Mexican companies, except for those companies engaged in certain specified restricted industries. The Foreign Investment Law and its regulations require that Mexican shareholders retain the power to determine the administrative control and the management of corporations in industries in which special restrictions on foreign holdings are applicable. Foreign investment in our shares is not limited under either the Foreign Investment Law or its regulations.
Management of the Company
Management of the company is entrusted to the board of directors and also to the chief executive officer, who is required to follow the strategies, policies and guidelines approved by the board of directors and the authority, obligations and duties expressly authorized in the Mexican Securities Law.
At least 25% of the members of the board of directors shall be independent. Independence of the members of the board of directors is determined by the shareholders meeting, subject to the CNBV’s challenge of such determination. In the performance of its responsibilities, the board of directors will be supported by a corporate practices committee and an audit committee. The corporate practices committee and the audit committee consist solely of independent directors. Each committee is formed by at least three board members appointed by the shareholders or by the board of directors as proposed by the chairman of the board.directors. The chairmen of said committees are appointed (taking into consideration their experience, capacity and professional prestige) and removed exclusively by a vote in a shareholders meeting or by the board of directors as proposed by the chairman of the board.directors.
Surveillance
Surveillance of the company is entrusted to the board of directors, which shall be supported in the performance of these functions by the corporate practices committee, the audit committee and our external auditor.
The external auditor has the abilitymay be invited to attend board of directors meetings as an observer, with a right to participate but without voting rights.
Authority of the Board of Directors
The board of directors is our legal representative and is authorized to take any action in connection with our operations not expressly reserved to our shareholders. Pursuant to the Mexican Securities Law, the board of directors must approve,observing at all moments their duty of care and duty of loyalty, among other matters:
any transactions with related parties outside the ordinary course of our business
significant asset transfers or acquisitions;
material guarantees or collateral;
internal policies; and
other material transactions.
Meetings of the board of directors are validly convened and held if a majority of the members are present. Resolutions passed at these meetings will be valid if approved by a majority of members of the board of directors are present at the meeting. If required, the chairman of the board of directors may cast a tie-breaking vote.
Redemption
We may redeem part of our shares for cancellation with distributable earnings pursuant to a decision of an extraordinary shareholders meeting. Only shares subscribed and fully paid for may be redeemed. Any shares intended to be redeemed shall be purchased on the Mexican Stock Exchange in accordance with the Mexican General Corporations Law and the Mexican Securities Law. No shares will be redeemed, if as a consequence of such redemption, the Series D and Series L Shares in the aggregate exceed the percentages permitted by our bylaws or if any such redemption will reduce our fixed capital below its minimum.
Repurchase of Shares
According to our bylaws, subject to the provisions of the Mexican Securities Law and under rules promulgated by the CNBV, we may repurchase our shares.
In accordance with the Mexican Securities Law, our subsidiaries may not purchase, directly or indirectly, shares of our capital stock or any security that represents such shares.
Forfeiture of Shares
As required by Mexican law, our bylaws provide that non-Mexican holders of BD Units, B Units or shares (1) are considered to be Mexican with respect to such shares that they acquire or hold and (2) may not invoke the protection of their own governments in respect of the investment represented by those shares. Failure to comply with our bylaws may result in a penalty of forfeiture of a shareholder’s capital stock in favor of the Mexican state. In the opinion of Carlos E. Aldrete Ancira, our general counsel, under this provision, a non-Mexican shareholder (including a non-Mexican holder of ADSs) is deemed to have agreed not to invoke the protection of its own government by asking such government to interpose a diplomatic claim against the Mexican state with respect to its rights as a shareholder, but is not deemed to have waived any other rights it may have, including any rights under the United States securities laws, with respect to its investment in our company. If a shareholder should invoke governmental protection in violation of this agreement, its shares could be forfeited to the Mexican state.
Duration
The bylaws provide that the duration of our company is 99 years, commencing on May 30, 1936, unless extended by a resolution of an extraordinary shareholders meeting.
Appraisal Rights
Whenever the shareholders approve a change of corporate purpose, change of jurisdiction of incorporation or the transformation from one form of corporate organization to another, any shareholder entitled to vote on such change that has voted against it, may withdraw as a shareholder of our company and have its shares redeemed by FEMSA at a price per share calculated as specified under applicable Mexican law, provided that it exercises its right within 15 days following the adjournment of the meeting at which the change was approved. Under Mexican law, the amount which a withdrawing shareholder is entitled to receive is equal to its proportionate interest in our capital stock or according to our most recent balance sheet approved by an ordinary general shareholders meeting.
Delisting of Shares
In the event of a cancellation of the registration of any of our shares with the RNV, whether by order of the CNBV or at our request with the prior consent of 95% of the holders of our outstanding capital stock, our bylaws and the new Mexican Securities Law require us to make a public offer to acquire these shares prior to their cancellation.
Liquidation
Upon the dissolution of our company, one or more liquidators must be appointed by an extraordinary general meeting of the shareholders to wind up its affairs. All fully paid and outstanding shares of capital stock will be entitled to participate equally in any distribution upon liquidation.
Actions Against Directors
Shareholders (including holders of Series D-B and Series D-L Shares) representing, in the aggregate, not less than 5% of our capital stock may directly bring an action against directors.
In the event of actions derived from any breach of the duty of care and the duty of loyalty, liability is exclusively in favor of the company. The Mexican Securities Law establishes that liability may be imposed on the members and the secretary of the board of directors, as well as to the relevant officers.
Notwithstanding, the Mexican Securities Law provides that the members of the board of directors will not incur, individually or jointly, liability for damages and losses caused to the company, when their acts were made in good faith, in any of the following events (1) the directors complied with the requirements of the Mexican Securities Law and with the company’s bylaws, (2) the decision making or voting was based on information provided by the relevant officers, the external auditor or the independent experts, whose capacity and credibility do not offer reasonable doubt; (3) the negative economic effects could not have been foreseen, based on the information available; and (4) they comply with the resolutions of the shareholders’ meeting when such resolutions comply with applicable law.
Fiduciary Duties—Duty of Care
The Mexican Securities Law provides that the directors shall act in good faith and in our best interest and in the best interest of our subsidiaries. In order to fulfill its duty, the board of directors may:
request information about us or our subsidiaries that is reasonably necessary to fulfill its duties;
require our officers and certain other persons, including the external auditors, to appear at board of directors’ meetings to report to the board of directors;
postpone board of directors’ meetings for up to three days when a director has not been given sufficient notice of the meeting or in the event that a director has not been provided with the information provided to the other directors; and
require a matter be discussed and voted upon by the full board of directors in the presence of the secretary of the board of directors.
Our directors may be liable for damages for failing to comply their duty of care if such failure causes economic damage to us or our subsidiaries and the director (1) failed to attend, board of directors’ or committee meetings and as a result of, such failure, the board of directors was unable to take action, unless such absence is approved by the shareholders meeting, (2) failed to disclose to the board of directors or the committees material information necessary for the board of directors to reach a decision, unless legally or contractually prohibited from doing so in order to maintain confidentiality, and (3) failed to comply with the duties imposed by the Mexican Securities Law or our bylaws.
Fiduciary Duties—Duty of Loyalty
The Mexican Securities Law provides that the directors and secretary of the board of directors shall keep confidential any non-public information and matters about which they have knowledge as a result of their position. Also, directors should abstain from participating, attending or voting at meetings related to matters where they have a conflict of interest.
The directors and secretary of the board of directors will be deemed to have violated the duty of loyalty, and will be liable for damages, when they obtain an economic benefit by virtue of their position. Further, the directors will fail to comply with their duty of loyalty if they:
vote at a board of directors’ meeting or take any action on a matter involving our assets where there is a conflict of interest;
fail to disclose a conflict of interest during a board of directors’ meeting;
enter into ana voting arrangement to support a particular shareholder or group of shareholders against the other shareholders;
approve of transactions without complying with the requirements of the Mexican Securities Law;
use company property in violation of the policies approved by the board of directors;
unlawfully use material non-public information; and
usurp a corporate opportunity for their own benefit or the benefit of third parties, without the prior approval of the board of directors.
Limited Liability of Shareholders
The liability of shareholders for our company’s losses is limited to their shareholdings in our company.
The following summary contains a description of certain U.S. federal income and Mexican federal tax consequences of the purchase, ownership and disposition of our ADSs by a holder that is a citizen or resident of the United States, a U.S. domestic corporation or a person or entity that otherwise will be subject to U.S. federal income tax on a net income basis in respect of our ADSs, whom we refer to as a U.S. holder, but it does not purport to be a description of all of the possible tax considerations that may be relevant to a decision to purchase, hold or dispose of ADSs. In particular, this discussion does not address all Mexican or U.S. federal income tax considerations that
may be relevant to a particular investor, nor does it address the special tax rules applicable to certain categories of investors, such as banks, dealers, traders who elect to mark to market, tax-exempt entities, insurance companies, certain short-term holders of ADSs or investors who hold our ADSs as part of a hedge, straddle, conversion or integrated transaction or investors who have a “functional currency” other than the U.S. dollar. This summary deals only with U.S. holders that will hold our ADSs as capital assets and does not address the tax treatment of a U.S. holder that owns or is treated as owning 10% or more of the voting shares (including ADSs) of the company.
This summary is based upon the federal tax laws of the United States and Mexico as in effect on the date of this annual report, including the provisions of the income tax treaty between the United States and Mexico which we refer to as the Tax Treaty, which are subject to change. The summary does not address any tax consequences under the laws of any state or locality of Mexico or the United States or the laws of any taxing jurisdiction other than the federal laws of Mexico and the United States. Holders of our ADSs should consult their tax advisors as to the U.S., Mexican or other tax consequences of the purchase, ownership and disposition of ADSs, including, in particular, the effect of any foreign, state or local tax laws.
Mexican Taxation
For purposes of this summary, the term “non-resident holder” means a holder that is not a resident of Mexico for tax purposes and that does not hold our ADSs in connection with the conduct of a trade or business through a permanent establishment for tax purposes in Mexico. For purposes of Mexican taxation, an individual is a resident of Mexico if he or she has established his or her home in Mexico, or if he or she has another home outside Mexico, but his or herCentro de Intereses Vitales (Center of Vital Interests) (as defined in the Mexican Tax Code) is located in Mexico and, among other circumstances, more than 50% of that person’s total income during a calendar year comes from within Mexico. A legal entity is a resident of Mexico either if it has either its principal place of business or its place of effective management in Mexico. A Mexican citizen is presumed to be a resident of Mexico unless he or she can demonstrate that the contrary is true. If a legal entity or an individual is deemed to have a permanent establishment in Mexico for tax purposes, all income attributable to the permanent establishment will be subject to Mexican taxes, in accordance with applicable tax laws.
Taxation of Dividends. Under Mexican income tax law, dividends, either in cash or in kind, paid with respect to our shares represented by our ADSs are not subject to Mexican withholding tax.
Taxation of Dispositions of ADSs. Gains from the sale or disposition of ADSs by non-resident holders will not be subject to Mexican tax, if the disposition is carried out through a stock exchange recognized under applicable Mexican tax law.
In compliance with certain requirements, gains on the sale or other disposition of ADSs made in circumstances different from those set forth in the prior paragraph generally would be subject to Mexican tax, regardless of the nationality or residence of the transferor. However, under the Tax Treaty, a holder that is eligible to claim the benefits of the Tax Treaty will be exempt from Mexican tax on gains realized on a sale or other disposition of our ADSs in a transaction that is not carried out through the Mexican Stock Exchange or other approved securities markets, so long as the holder did not own, directly or indirectly, 25% or more of our outstanding capital stock (including shares represented by our ADSs) within the 12-month period preceding such sale or other disposition. Deposits of shares in exchange for ADSs and withdrawals of shares in exchange for our ADSs will not give rise to Mexican tax.
Other Mexican Taxes. There are no Mexican inheritance, gift, succession or value added taxes applicable to the ownership, transfer, exchange or disposition of our ADSs. There are no Mexican stamp, issue, registration or similar taxes or duties payable by holders of our ADSs.
United States Taxation
Taxation of Dividends.The gross amount of any dividends paid with respect to our shares represented by our ADSs generally will be included in the gross income of a U.S. holder as ordinary income on the day on which the dividends are received by the ADS depositary and will not be eligible for the dividends received deduction
allowed to corporations under the Internal Revenue Code of 1986, as amended. Dividends, which will be paid in Mexican pesos, will be includible in the income of a U.S. holder in a U.S. dollar amount calculated, in general, by reference to the exchange rate in effect on the date that they are received by the ADS depositary (regardless of whether such Mexican pesos are in fact converted into U.S. dollars on such date). If such dividends are converted
into U.S. dollars on the date of receipt, a U.S. holder generally should not be required to recognize foreign currency gain or loss in respect of the dividends. U.S. holders should consult their tax advisors regarding the treatment of the foreign currency gain or loss, if any, on any Mexican pesos received that are converted into U.S. dollars on a date subsequent to the date of receipt. Subject to certain exceptions for short-term and hedged positions, the U.S. dollar amount of dividends received by an individual U.S. holder in respect of the ADSs for taxable years beginning before January 1, 20112013 is subject to taxation at a maximum rate of 15% if the dividends are “qualified dividends.” Dividends paid on the ADSs will be treated as qualified dividends if (1) we are eligible for the benefits of a comprehensive income tax treaty with the United States that the Internal Revenue Service has approved for the purposes of the qualified dividend rules and (2) we were not, in the year prior to the year in which the dividend was paid, and are not, in the year in which the dividend is paid, a passive foreign investment company. The income tax treaty between Mexico and the United States has been approved for the purposes of the qualified dividend rules. Based on our audited consolidated financial statements and relevant market and shareholder data, we believe that we were not treated as a passive foreign investment company for U.S. federal income tax purposes with respect to our 20082011 taxable year. In addition, based on our audited consolidated financial statements and our current expectations regarding the value and nature of our assets, the sources and nature of our income, and relevant market and shareholder data, we do not anticipate becoming a passive foreign investment company for our 20092012 taxable year. Dividends generally will constitute foreign source “passive income” for U.S. foreign tax credit purposes.
Distributions to holders of additional shares with respect to our ADSs that are made as part of a pro rata distribution to all of our shareholders generally will not be subject to U.S. federal income tax.
A holder of ADSs that is, with respect to the United States, a foreign corporation or non-U.S. holder generally will not be subject to U.S. federal income or withholding tax on dividends received on ADSs unless such income is effectively connected with the conduct by the non-U.S. holder of a trade or business in the United States.
Taxation of Capital Gains. A gain or loss realized by a U.S. holder on the sale or other disposition of ADSs will be subject to U.S. federal income taxation as a capital gain or loss in an amount equal to the difference between the amount realized on the disposition and such U.S. holder’s tax basis in the ADSs. Any such gain or loss will be a long-term capital gain or loss if the ADSs were held for more than one year on the date of such sale. Any long-term capital gain recognized by a U.S. holder that is an individual is subject to a reduced rate of federal income taxation. The deduction of capital losses is subject to limitations for U.S. federal income tax purposes. Deposits and withdrawals of shares by U.S. holders in exchange for ADSs will not result in the realization of gains or losses for U.S. federal income tax purposes.
Any gain realized by a U.S. holder on the sale or other disposition of ADSs will be treated as U.S. source income for U.S. foreign tax credit purposes.
A non-U.S. holder of ADSs will not be subject to U.S. federal income or withholding tax on any gain realized on the sale of ADSs, unless (1) such gain is effectively connected with the conduct by the non-U.S. holder of a trade or business in the United States, or (2) in the case of a gain realized by an individual non-U.S. holder, the non-U.S. holder is present in the United States for 183 days or more in the taxable year of the sale and certain other conditions are met.
United States Backup Withholding and Information Reporting. A U.S. holder of ADSs may, under certain circumstances, be subject to “backup withholding” with respect to certain payments to such U.S. holder, such as dividends, interest or the proceeds of a sale or disposition of ADSs, unless such holder (1) is a corporation or comes within certain exempt categories, and demonstrates this fact when so required, or (2) provides a correct taxpayer identification number, certifies that it is not subject to backup withholding and otherwise complies with applicable requirements of the backup withholding rules. Any amount withheld under these rules does not constitute a separate tax and will be creditable against the holder’s U.S. federal income tax liability. While non-U.S. holders generally are exempt from backup withholding, a non-U.S. holder may, in certain circumstances, be required to comply with certain information and identification procedures in order to prove this exemption.
We and our subsidiaries are parties to a variety of material agreements with third parties, including shareholders’ agreements, supply agreements and purchase and service agreements. Set forth below are summaries of the material terms of such agreements. The actual agreements have either been filed as exhibits to, or incorporated by reference in, this annual report. See “Item 19. Exhibits.”
Material Contracts Relating to Coca-Cola FEMSA
Shareholders Agreement
Coca-Cola FEMSA operates pursuant to a shareholders agreement among two subsidiaries of FEMSA, The Coca-Cola Company and certain of its subsidiaries. This agreement, together with Coca-Cola FEMSA’s bylaws, sets forth the basic rules under which Coca-Cola FEMSA operates.
In February 2010, Coca-Cola FEMSA’s main shareholders, FEMSA and The Coca-Cola Company, amended the shareholders agreement, and Coca-Cola FEMSA’s by-lawsbylaws were amended accordingly. The amendment mainly relates to changes in the voting requirements for decisions on: (1) ordinary operations within an annual business plan and (2) appointment of the chief executive officer and all officers reporting to him, all of which now may be taken by the board of directors by simple majority voting. Also, the amendment provides that payment of dividends, up to an amount equivalent to 20% of the preceding years’ accumulated net income,retained earnings, may be approved by a simple majority of the shareholders. Any decision on extraordinary matters, as they are defined in Coca-Cola FEMSA’s by-lawsbylaws and which include, among other things, any new business acquisition or business combinations in an amount exceeding US$ 100 million and outside the ordinary operations contained in the annual business plan, or any change in the existing line of business, among other things, in an amount exceeding US$ 100 million shall require the approval of the majority of the members of the board of directors, with the vote of two of the members appointed by The Coca-Cola Company. Also, any decision related to such extraordinary matters or any payment of dividends above 20% of the preceding years’ accumulated net incomeretained earnings shall require the approval of the majority of the shareholders of each of Coca-Cola FEMSA’s Series A and Series D Shares voting together as a single class, a majority of which must include the majority of the Coca-Cola FEMSA Series D shareholders.
Under Coca-Cola FEMSA’s bylaws and shareholders agreement, its Series A Shares and Series D Shares are the only shares with full voting rights and, therefore, control actions by its shareholders. The shareholders agreement also sets forth the principal shareholders’ understanding as to the effect of adverse actions of The Coca-Cola Company under the bottler agreements. Coca-Cola FEMSA’s bylaws and shareholders agreement provide that a majority of the directors appointed by the holders of its Series A Shares, upon making a reasonable, good faith determination that any action of The Coca-Cola Company under any bottler agreement between The Coca-Cola Company and Coca-Cola FEMSA or any of its subsidiaries is materially adverse to Coca-Cola FEMSA’s business interests and that The Coca-Cola Company has failed to cure such action within 60 days of notice, may declare a simple majority period at any time within 90 days after giving notice. During the “simple majority period,” as defined in Coca-Cola FEMSA’s bylaws, certain decisions, namely the approval of material changes in Coca-Cola FEMSA’s business plans, the introduction of a new, or termination of an existing, line of business, and related party transactions outside the ordinary course of business, to the extent the presence and approval of at least two Coca-Cola FEMSA Series D directors would otherwise be required, can be made by a simple majority vote of its entire board of directors, without requiring the presence or approval of any Coca-Cola FEMSA Series D director. A majority of the Coca-Cola FEMSA Series A directors may terminate a simple majority period but, once having done so, cannot declare another simple majority period for one year after the termination. If a simple majority period persists for one year or more, the provisions of the shareholders agreement for resolution of irreconcilable differences may be triggered, with the consequences outlined in the following paragraph.
In addition to the rights of first refusal provided for in Coca-Cola FEMSA’s bylaws regarding proposed transfers of its Series A Shares or Series D Shares, the shareholders agreement contemplates three circumstances under which one principal shareholder may purchase the interest of the other in Coca-Cola FEMSA: (1) a change in control in a principal shareholder; (2) the existence of irreconcilable differences between the principal shareholders; or (3) the occurrence of certain specified defaults.events of default.
In the event that (1) one of the principal shareholders buys the other’s interest in Coca-Cola FEMSA in any of the circumstances described above or (2) the ownership of Coca-Cola FEMSA’s shares of capital stock other than
the Series L Shares of the subsidiaries of The Coca-Cola Company or FEMSA is reduced below 20% and upon the request of the shareholder whose interest is not so reduced, the shareholders agreement requires that Coca-Cola FEMSA’s bylaws be amended to eliminate all share transfer restrictions and all special-majority voting and quorum requirements, after which the shareholders agreement would terminate.
The shareholders agreement also contains provisions relating to the principal shareholders’ understanding as to Coca-Cola FEMSA’s growth. It states that it is The Coca-Cola Company’s intention that Coca-Cola FEMSA will be viewed as one of a small number of its “anchor” bottlers in Latin America. In particular, the parties agree that it is desirable that Coca-Cola FEMSA expands by acquiring additional bottler territories in Mexico and other Latin American countries in the event any become available through horizontal growth. In addition, The Coca-Cola Company has agreed, subject to a number of conditions, that if it obtains ownership of a bottler territory that fits with Coca-Cola FEMSA’s operations, it will give Coca-Cola FEMSA the option to acquire such territory. The Coca-Cola Company has also agreed to support prudent and sound modifications to Coca-Cola FEMSA’s capital structure to support horizontal growth. The Coca-Cola Company’s agreement as to horizontal growth expires upon either the elimination of the super-majority voting requirements described above or The Coca-Cola Company’s election to terminate the agreement as a result of a default.
The Coca-Cola Memorandum
In connection with the acquisition of Panamco, in 2003, Coca-Cola FEMSA established certain understandings primarily relating to operational and business issues with both The Coca-Cola Company and our company that were memorialized in writing prior to completion of the acquisition. Although the memorandum has not been amended, Coca-Cola FEMSA continues to develop its relationship with The Coca-Cola Company (through,inter alia, acquisitions and taking on new product categories), and Coca-Cola FEMSA therefore believes that the memorandum should be interpreted in the context of subsequent events, some of which have been noted in the description below. The terms are as follows:
The current shareholder arrangements between directly wholly-owned subsidiaries of our company and The Coca-Cola Company will continue in place. On February 1, 2010, FEMSA amended its shareholders agreement with The Coca-Cola Company. See “—Shareholders Agreement.”
We will continue to consolidate Coca-Cola FEMSA’s financial results under Mexican Financial Reporting Standards.IFRS.
The Coca-Cola Company and our company will continue to discuss in good faith the possibility of implementing changes to Coca-Cola FEMSA’s capital structure in the future.
There will be no changes in concentrate pricing or marketing support by The Coca-Cola Company up to May 2004. After such time, The Coca-Cola Company has complete discretion to implement any changes with respect to these matters, but any decision in this regard will be discussed with Coca-Cola FEMSA and will take Coca-Cola FEMSA’s operating condition into consideration. In 2005, The Coca-Cola Company decided to gradually increase concentrate prices for sparkling beverages over a three-year period in Brazil beginning in 2006 and in Mexico beginning in 2007. These increases were fully implemented in Brazil 2008 and in Mexico in 2009.
The Coca-Cola Company may require the establishment of a different long-term strategy for Brazil. If, after taking into account our performance in Brazil, The Coca-Cola Company does not consider us to be part of this long-term strategic solution for Brazil, then we will sell our Brazilian franchise to The Coca-Cola Company or its designee at fair market value. Fair market value would be determined by independent investment bankers retained by each party at their own expense pursuant to specified procedures. Coca-Cola FEMSA currently believes the likelihood of this term applying is remote.
FEMSA, The Coca-Cola Company and Coca-Cola FEMSA will meet to discuss the optimal Latin American territorial configuration for the Coca-Cola bottler system. During these meetings, Coca-Cola FEMSA will consider all possible combinations and any asset swap transactions that may arise from these discussions. In addition, Coca-Cola FEMSA will entertain any potential combination as long as it is strategically sound and done at fair market value.
Coca-Cola FEMSA would like to keep open strategic alternatives that relate to the integration of sparkling beverages and beer. The Coca-Cola Company, our company and Coca-Cola FEMSA would explore these alternatives on a market-by-market basis at the appropriate time.
The Coca-Cola Company agreed to sell to a subsidiary of our company sufficient shares to permit FEMSA to beneficially own 51% of Coca-Cola FEMSA’s outstanding capital stock (assuming that this subsidiary of FEMSA does not sell any shares and that there are no issuances of Coca-Cola FEMSA’s stock other than as contemplated by the acquisition). As a result of this understanding, on November 3, 2006, FEMSA acquired, through a subsidiary, 148,000,000 of Coca-Cola FEMSA’s Series D shares from certain subsidiaries of The Coca-Cola Company, representing 9.4% of the total outstanding voting shares and 8.02% of the total outstanding equity of Coca-Cola FEMSA, at a price of US$ 2.888 per share for an aggregate amount of US$ 427.4 million. Pursuant to Coca-Cola FEMSA’s bylaws, the acquired shares were converted from Coca-Cola FEMSA Series D Shares to Coca-Cola FEMSA Series A Shares.
Coca-Cola FEMSA may be entering some markets where significant infrastructure investment may be required. The Coca-Cola Company and FEMSA will conduct a joint study that will outline strategies for these markets, as well as the investment levels required to execute these strategies. Subsequently, it is intended that our company and The Coca-Cola Company will reach agreement on the level of funding to be provided by each of the partners. The parties intend that this allocation of funding responsibilities would not be overly burdensome for either partner.
Coca-Cola FEMSA entered into a stand-by credit facility, on December 19, 2003 with The Coca-Cola Export Corporation, which expired in December 2006 and was never used.
Cooperation Framework with The Coca-Cola Company
On September 1, 2006, Coca-Cola FEMSA and The Coca-Cola Company arrived atreached a comprehensive cooperation framework for a new stage of collaboration going forward. This new framework includes the main aspects of Coca-Cola FEMSA’s relationship with The Coca-Cola Company and defines the terms for the new collaborative business model. The framework is structured around three main objectives:objectives, which have been implemented as outlined below.
• | Sustainable growth of sparkling beverages, still beverages and bottled water: Together with The Coca-Cola Company, Coca-Cola FEMSA has defined a platform to jointly pursue incremental growth in the sparkling beverage category, as well as accelerated development of still beverages and bottled water across Latin America. To this end, The Coca-Cola Company will provide a relevant portion of the funds derived from the concentrate increase for marketing support of the entire portfolio. In addition, the |
• | Horizontal growth: The |
• | Long-term vision in relationship economics: Coca-Cola FEMSA and The Coca-Cola Company understand each other’s business objectives and growth plans, and the new framework provides long-term perspective on the economics of their relationship. This will allow Coca-Cola FEMSA and The Coca-Cola Company to focus on continuing to drive the business forward and generating profitable growth. |
Bottler Agreements
Bottler agreements are the standard agreements for each territory that The Coca-Cola Company enters into with bottlers outside the United States. Coca-Cola FEMSA manufactures, packages, distributes and sells sparkling beverages, bottled still beverages and water under a separate bottler agreement for each of its territories. Coca-Cola FEMSA is required to purchase concentrate and artificial sweeteners in some of its territories for allCoca-Cola trademark beverages from companies designated by The Coca-Cola Company.
These bottler agreements provide that Coca-Cola FEMSA will purchase its entire requirement of concentrate forCoca-Cola trademark beverages from The Coca-Cola Company and other authorized suppliers at prices, terms of payment and on other terms and conditions of supply as determined from time to time by The Coca-Cola Company at its sole discretion. Concentrate prices are determined as a percentage of the weighted average retail price in local currency, net of applicable taxes. Although the price multipliers used to calculate the cost of concentrate and the currency of payment, among other terms, are set by The Coca-Cola Company at its sole discretion, Coca-Cola FEMSA sets the price of products sold to customers at its discretion, subject to the applicability of price restraints. Coca-Cola FEMSA has the exclusive right to distributeCoca-Cola trademark beverages for sale in its territories in authorized containers of the nature prescribed by the bottler agreements and currently used by Coca-Cola FEMSA. These containers include various configurations of cans and returnable and non-returnable bottles made of glass and plastic and fountain containers.
The bottler agreements include an acknowledgment by Coca-Cola FEMSA that The Coca-Cola Company is the sole owner of the trademarks that identify theCoca-Cola trademark beverages and of the secret formulas with which The Coca-Cola Company’s concentrates are made. Subject to Coca-Cola FEMSA’s exclusive right to distributeCoca-Colatrademark beverages in its territories, The Coca-Cola Company reserves the right to import and exportCoca-Cola trademark beverages to and from each of its territories. Coca-Cola FEMSA’s bottler agreements do not contain restrictions on The Coca-Cola Company’s ability to set the price of concentrates charged to its subsidiaries and do not impose minimum marketing obligations on The Coca-Cola Company. The prices at which Coca-Cola FEMSA purchases concentrates under the bottler agreements may vary materially from the prices it has historically paid. However, under Coca-Cola FEMSA’s bylaws and the shareholders agreement among certain subsidiaries of The Coca-Cola Company and certain subsidiaries of our company, an adverse action by The Coca-Cola Company under any of the bottler agreements may result in a suspension of certain veto rights of the directors appointed by The Coca-Cola Company. This provides Coca-Cola FEMSA with limited protection against The Coca-Cola Company’s ability to raise concentrate prices to the extent that such increase is deemed detrimental to Coca-Cola FEMSA pursuant to the shareholdersuch shareholders agreement and the Coca-Cola FEMSA’s bylaws. See “—Shareholders Agreement.”
The Coca-Cola Company has the ability, at its sole discretion, to reformulate any of theCoca-Cola trademark beverages and to discontinue any of theCoca-Cola trademark beverages, subject to certain limitations, so long as allCoca-Cola trademark beverages are not discontinued. The Coca-Cola Company may also introduce new beverages in Coca-Cola FEMSA’s territories in which case Coca-Cola FEMSA has a right of first refusal with respect to the manufacturing, packaging, distribution and sale of such new beverages subject to the same obligations as then exist with respect to theCoca-Cola trademark beverages under the bottler agreements. The bottler agreements prohibit Coca-Cola FEMSA from producing, bottling or handling cola products other than those of The Coca-Cola Company, or other products or packages that would imitate, infringe upon, or cause confusion with the products, trade dress, containers or trademarks of The Coca-Cola Company, or from acquiring or holding an interest in a party that engages in such restricted activities. The bottler agreements also prohibit Coca-Cola FEMSA from producing, bottling or handling any sparkling beverage product except under the authority of, or with the consent of, The Coca-Cola Company. The bottler agreements impose restrictions concerning the use of certain trademarks, authorized containers, packaging and labeling of The Coca-Cola Company so as to conform to policies prescribed by The Coca-Cola Company. In particular, Coca-Cola FEMSA is obligated to:
• | maintain plant and equipment, staff and distribution facilities capable of manufacturing, packaging and distributing theCoca-Cola trademark beverages in authorized containers in accordance with Coca-Cola FEMSA bottler agreements and in sufficient quantities to satisfy fully the demand in its territories; |
undertake adequate quality control measures prescribed by The Coca-Cola Company;
• | develop, stimulate and satisfy fully the demand forCoca-Cola trademark beverages using all approved means, which includes the investment in advertising and marketing plans; |
maintain a sound financial capacity as may be reasonably necessary to assure performance by Coca-Cola FEMSA and its affiliates of their obligations to The Coca-Cola Company; and
submit annually, to The Coca-Cola Company, Coca-Cola FEMSA’s marketing, management, promotional and advertising plans for the ensuing year.
The Coca-Cola Company contributed a significant portion of Coca-Cola FEMSA’s total marketing expenses in its territories during 20092011 and has reiterated its intention to continue providing such support as part of its new cooperation framework. Although Coca-Cola FEMSA believes that The Coca-Cola Company will continue to provide funds for advertising and marketing, it is not obligated to do so. Consequently, future levels of advertising and marketing support provided by The Coca-Cola Company may vary materially from the levels historically provided. See “—Shareholders Agreement.”
Coca-Cola FEMSA has separate bottler agreements with The Coca-Cola Company for each of the territories in which it operates. These bottler agreements are renewable for ten-year terms, subject to the right of either party to give prior notice that it does not wish to renew a specific agreement.
In Mexico,As of December 31, 2011, Coca-Cola FEMSA has fourhad seven bottler agreements;agreements in Mexico, with each one corresponding to a different territory as follows: (i) the agreements for two territoriesMexico’s Valley territory expire in June 2013 and April 2016; (ii) the agreements for the other two territoriesCentral territory expire in May 2015.2015 and July 2016; (iii) the agreement for the Northeast territory expires in September 2014; (iv) the agreement for the Bajio territory expires in May 2015; and (v) the agreement for the Southeast territory expires in June 2013. Coca-Cola FEMSA’s bottler agreements with The Coca-Cola Company will expire for itsCoca-Cola FEMSA’s territories in the following countries:other countries as follows: Argentina in September 2014; Brazil in April 2014; Colombia in June 2014; Venezuela in August 2016; Guatemala in March 2015; Costa Rica in September 2017; Nicaragua in May 2016; and Panama in November 2014.
The bottler agreements are subject to termination by The Coca-Cola Company in the event of default by Coca-Cola FEMSA. The default provisions include limitations on the change in ownership or control of Coca-Cola FEMSA and the assignment or transfer of the bottler agreements and are designed to preclude any person not acceptable to The Coca-Cola Company from obtaining an assignment of a bottler agreement or from acquiring Coca-Cola FEMSA independently of other rights set forth in the shareholders agreement. These provisions may prevent changes in Coca-Cola FEMSA’s principal shareholders, including mergers or acquisitions involving sales or dispositions of Coca-Cola FEMSA’s capital stock, which will involve an effective change of control without the consent of The Coca-Cola Company. See “—Shareholders Agreement.”
Coca-Cola FEMSA has also entered into tradename licensing agreements with The Coca-Cola Company pursuant to which Coca-Cola FEMSA is authorized to use certain trademark names of The Coca-Cola Company. These agreements have a ten-year term, but are terminated if Coca-Cola FEMSA’s ceases to manufacture, market, sell and distributeCoca-Cola trademark products pursuant to the bottler agreements or if the shareholders agreement is terminated. The Coca-Cola Company also has the right to terminate a license agreement if Coca-Cola FEMSA uses its trademark names in a manner not authorized by the bottler agreements.
Material Contracts Relating to our Holding of Heineken Shares
Share Exchange Agreement
As ofOn January 11, 2010, FEMSA and certain of our subsidiaries entered into a share exchange agreement, which we refer to as the Share Exchange Agreement, with Heineken Holding N.V. and Heineken.Heineken N.V. The Share Exchange Agreement requiresrequired Heineken N.V., in consideration for 100% of the shares of EMPREX Cerveza, S.A. de C.V. (now Heineken Mexico Holding, S.A. de C.V.), which we refer to as EMPREX Cerveza, to deliver at the closing of the Heineken transaction 86,028,019 newnewly-issued Heineken N.V. shares to FEMSA with a commitment to deliver, pursuant to the ASDI, 29,172,504 additional Heineken sharesAllotted Shares over a period of not more than five years from the date of the closing of the Heineken transaction, such additional shares (the “Allotted Shares”). If Heineken is unable to fulfill its obligations to delivertransaction. As of October 5, 2011, we had received the totality of the Allotted Shares, these obligations may be settled in cash with a significant penalty. The Allotted Shares will be delivered to us pursuant to an allotted shares delivery instrument.Shares.
The Share Exchange Agreement providesprovided that, simultaneously with the closing of the transaction, Heineken Holding willN.V. would swap 43,018,320 Heineken N.V. shares with FEMSA for an equal number of newly issued Heineken Holding N.V. shares. After the closing of the Heineken transaction, we ownowned 7.5% of Heineken shares, which will increaseN.V.’s shares. This percentage increased to 12.5%12.53% upon full delivery of the Allotted Shares and, an additional 14.9% intogether with our ownership of 14.94% of Heineken Holding which will representN.V.’s shares, represents an aggregate 20% economic interest in the Heineken Group.
Under the terms of the Share Exchange Agreement, in exchange for such economic interest in the Heineken Group, FEMSA delivered 100% of the shares representing the capital stock of EMPREX Cerveza, which owned 100% of the shares of FEMSA Cerveza. As a result of the transaction, EMPREX Cerveza has become a wholly owned subsidiaryand FEMSA Cerveza became wholly-owned subsidiaries of Heineken.
The principal provisions of the Share Exchange AgreementsAgreement are as follows:
Deliverydelivery to Heineken N.V., by FEMSA, of 100% of the outstanding share capital of EMPREX Cerveza, which together with its subsidiaries, constitutes the entire beer business and operations of FEMSA in Mexico and Brazil (including the United States and other export business);
Deliverydelivery to FEMSA by Heineken N.V. of 86,028,019 new Heineken N.V. shares;
Simultaneouslysimultaneously with the closing of the Heineken transaction, a swap between Heineken Holding N.V. and FEMSA of 43,018,320 Heineken N.V. shares for an equal number of newly issued shares in Heineken Holding;Holding N.V.;
Thethe commitment by Heineken N.V. to assume indebtedness of EMPREX Cerveza and subsidiaries amounting to approximately US$2.1 billion;
Thethe provision by FEMSA to the Heineken Group of indemnities customary in transactions of this nature concerning FEMSA and FEMSA Cerveza and its subsidiaries and their businesses;
FEMSA’s covenants to operate the EMPREX Cerveza business in the ordinary course consistent with past practice until the closing of the transaction, subject to customary exceptions, with the economic risks and benefits of the EMPREX Cerveza business transferring to Heineken as of January 1, 2010;
Thethe provision by Heineken N.V. and Heineken Holding N.V. to FEMSA of indemnities customary in transactions of this nature concerning the Heineken Group; and
FEMSA’s covenants, subject to certain limitations, to not engage in the production, manufacture, packaging, distribution, marketing or sale of beer and similar beverages in Latin America, the United States, Canada and the Caribbean.
Corporate Governance Agreement
As ofOn April 30, 2010, FEMSA, CB Equity LLP (as transferee of the Heineken N.V. & Heineken Holding N.V. Exchange Shares and Allotted Shares), Heineken N.V. Heineken Holding N.V. and L’Arche Green N.V., as majority shareholder of Heineken Holding N.V., entered into the corporate governance agreement, which we refer to as the Corporate Governance Agreement, which establishes the terms of the relationship between Heineken and FEMSA after the closing of the Heineken transaction.
The Corporate Governance Agreement covers, among other things, the following topics:
FEMSA’s representation on the Heineken Holding Board and the Heineken Supervisory Board and the creation of an Americas committee, also with FEMSA’s representation;
FEMSA’s representation on the selection and appointment committee and the audit committee of the Heineken Supervisory Board;
FEMSA’s commitment to not increase its holding in Heineken Holding N.V. above 20% and to not increase its holding in the Heineken Group above a maximum 20% economic interest (subject to certain exceptions); and
FEMSA’s agreement to not transfer any shares in Heineken N.V. or Heineken Holding N.V. for a five-year period, subject to certain exceptions, including among others, (i) beginning in the third anniversary, the right to sell up to 1% of all outstanding shares of each of Heineken N.V. and Heineken Holding N.V. in any calendar quarter and (ii) beginning in the third anniversary, the right to dividend or distribute to its shareholders each of Heineken N.V. and Heineken Holding N.V. shares.
Under the Corporate Governance Agreement, FEMSA is entitled to nominate two (2) representatives to the Heineken Supervisory Board, one of whom will be appointed as Vice Chairman of the board of Heineken N.V. and will also serve as a representative of FEMSA on the Heineken Holding Board. FEMSA’sN.V. Board of Directors. Our nominees for appointment to the Heineken Supervisory Board were José Antonio Fernández Carbajal, FEMSA’sour Chairman and Chief Executive Officer, and Javier Astaburuaga Sanjines, FEMSA’sour Chief Financial Officer, which have already beenwho were both approved by Heineken’sHeineken N.V.’s general meeting of shareholders. Mr. José Antonio Fernández haswas also been approved to the Heineken Holding N.V. Board of Directors by the general meeting of shareholders of Heineken Holding.Holding N.V.
In addition, the Heineken Supervisory Board has created an Americas committee to oversee the strategic direction of the business in the American continent and assess new business opportunities in that region. The Americas committee consists of two existing members of the Heineken Supervisory Board and one FEMSA representative, who acts as the chairman. The chairman of the Americas committee is José Antonio Fernández Carbajal.Carbajal, our Chairman and Chief Executive Officer.
The Corporate Governance Agreement has no fixed term, but certain provisions cease to apply if FEMSA ceases to have the right to nominate a representative to the Heineken Holding N.V. Board of Directors and the Heineken N.V. Supervisory Board. For example, in certain circumstances, FEMSA would be entitled to only one representative on the Heineken Supervisory Board, including in the event that FEMSA’s economic interest in the Heineken Group were to fall below 14%, the current FEMSA control structure were to change or FEMSA were to be subject to a change of control. In the event that FEMSA’s economic interest in Heineken falls below 7% or a beer producer acquires control of FEMSA, all of FEMSA’s corporate governance rights would end pursuant to the Corporate Governance Agreement.
We file reports, including annual reports on Form 20-F, and other information with the SEC pursuant to the rules and regulations of the SEC that apply to foreign private issuers. You may read and copy any materials filed with the SEC at its public reference rooms in Washington, D.C., at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. Filings we make electronically with the SEC are also available to the public over the Internet at the SEC’s website at www.sec.gov.
ITEM 11. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Our business activities require the holding or issuing of derivative financial instruments that expose us to market risks related to changes in interest rates, foreign currency exchange rates, equity risk and commodity price risk.
Interest rate risk exists principally with respect to our indebtedness that bears interest at floating rates. At December 31, 2009,2011, we had outstanding total debt of Ps. 43,66329,604 million, of which 17.1%47% bore interest at fixed interest rates and 82.9%53% bore interest at variable interest rates. Swap contracts held by us effectively switch a portion of our variable rate indebtedness into fixed-rate indebtedness. After giving effect to these contracts, as of December 31, 2009, 46.2%2011, 59% of our total debt was fixed rate and 53.8%41% of our total debt was variable rate. The interest rate on our variable rate debt is determined by reference to the London Interbank Offered Rate, or LIBOR, (a benchmark rate used for Eurodollar loans), theTasa de Interés Interbancaria de Equilibrio (Equilibrium Interbank Interest Rate)Rate, or TIIE,TIIE), and theCertificados de la Tesorería(Treasury Certificates)Certificates, or CETESCETES) rate. If these reference rates increase, our interest payments would consequently increase.
The table below provides information about our derivative financial instruments that are sensitive to changes in interest rates and exchange rates. The table presents notional amounts and weighted average interest rates by expected contractual maturity dates. Notional amounts are used to calculate the contractual payments to be exchanged under the contract. Weighted average variable rates are based on the reference rates on December 31, 2009,2011, plus spreads contracted by us. Our derivative financial instruments’ current payments are denominated in U.S. dollars and Mexican pesos. All of the payments in the table are presented in Mexican pesos, our reporting currency, utilizing the December 31, 200930, 2011 exchange rate of 13.0576 Mexican pesosPs. 13.9510 per U.S. dollar.
The table below also includes the estimated fair value as of December 31, 20092011 of:
short and long-term debt, based on the discounted value of contractual cash flows, in which the discount rate is estimated using rates currently offered for debt with similar terms and remaining maturities;
long-term notes payable and capital leases, based on quoted market prices; and
cross currency swaps and interest rate swaps, based on quoted market prices to terminate the contracts as of December 31, 2009.2011.
As of December 31, 2009,2011, the fair value represents a decreasean increase in total debt of Ps. 37698 million overmore than book value due to a decreasean increase in the interest rate in Mexico.
Principal by Year of Maturity
At December 31, 2009 | At December 31, 2008 | At December 31, 2011 | At December 31, 2010 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2010 | 2011 | 2012 | 2013 | 2014 | 2015 and thereafter | Carrying Value | Fair Value | Carrying Value | Fair Value | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 and thereafter | Carrying Value | Fair Value | Carrying Value | Fair Value | |||||||||||||||||||||||||||||||||||||||||||||||
(in millions of Mexican pesos) | (in millions of Mexican pesos, except for percentages) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Short-term debt: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Variable rate debt: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fixed rate debt: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Mexican pesos | 1,400 | 1,400 | 1,400 | 3,820 | 3,753 | 18 | — | — | — | — | — | 18 | 18 | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
Interest rate(1) | 8.2 | % | 8.2 | % | 11.6 | % | 6.9 | % | 6.9 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Argentine pesos | 1,179 | 1,179 | 1,179 | 816 | 768 | 325 | — | — | — | — | — | 325 | 317 | 506 | 506 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Interest rate(1) | 20.7 | % | 20.7 | % | 19.6 | % | 14.9 | % | 14.9 | % | 15.3 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Variable rate debt: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Colombian pesos | 496 | 496 | 496 | 798 | 816 | 295 | — | — | — | — | — | 295 | 295 | 1,072 | 1,072 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Interest rate(1) | 4.9 | % | 4.9 | % | 15.2 | % | 6.8 | % | 6.8 | % | 4.4 | % | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Venezuelan Bolívares fuertes | 741 | 741 | 741 | 365 | 372 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest rate(1) | 18.1 | % | 18.1 | % | 22.2 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Subtotal | 3,816 | 3,816 | 3,816 | 5,799 | 5,709 | 638 | — | — | — | — | — | 638 | 630 | 1,578 | 1,578 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Long-term debt: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fixed rate debt: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Mexican pesos | 2,200 | 280 | 1,916 | — | — | 4,396 | 4,535 | 5,036 | 5,136 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Mexican pesos: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Domestic senior notes | — | — | — | — | — | 2,500 | 2,500 | 2,631 | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest rate(1) | 8.3 | % | 8.3 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Units of Investment (UDIs) | — | — | — | — | — | 3,337 | 3,337 | 3,337 | 3,193 | 3,193 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest rate(1) | 4.2 | % | 4.2 | % | 4.2 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
U.S. dollars: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Capital leases | — | — | — | — | — | — | — | — | 4 | 4 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest rate(1) | 10.1 | % | 12.3 | % | 10.0 | % | 10.2 | % | 10.2 | % | 3.8 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
J.P. Morgan (Yankee Bond) | — | 3,605 | 3,605 | — | — | — | — | — | 6,990 | 6,990 | 7,737 | 6,179 | 6,179 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest rate | 7.3 | % | 4.6 | % | 4.6 | % | 4.6 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Units of Investment (UDIs) | 2,964 | 2,964 | 2,964 | 2,692 | 2,692 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest rate(1) | 4.2 | % | 4.2 | % | 4.2 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
U.S. dollars | 36 | 3 | — | — | — | — | 39 | 39 | 217 | 217 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest rate(1) | 3.5 | % | 3.8 | % | 3.6 | % | 4.8 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Japanese yen | — | — | 120 | 120 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest rate(1) | 2.8 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Argentine pesos | 69 | 69 | 69 | — | — | 514 | 81 | — | — | — | — | 595 | 570 | 684 | 684 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Interest rate(1) | 20.5 | % | 20.5 | % | 16.4 | % | 15.7 | % | 16.3 | % | 16.5 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Brazilian reais | — | — | 1 | 1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Brazilian reais: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Bank loans | 5 | 10 | 10 | 10 | 10 | 36 | 81 | 87 | 102 | 102 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest rate(1) | 10.7 | % | 4.5 | % | 4.5 | % | 4.5 | % | 4.5 | % | 4.5 | % | 4.5 | % | 4.5 | % | 4.5 | % | 4.5 | % | ||||||||||||||||||||||||||||||||||||||||||||||
Subtotal | 2,236 | 352 | 1,916 | — | — | 2,964 | 7,468 | 7,607 | 11,671 | 11,771 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Capital leases | 4 | 5 | 5 | 4 | — | — | 18 | — | 21 | 21 |
Variable rate debt: Mexican pesos Interest rate(1) U.S. dollars Interest rate(1) Colombian pesos Interest rate(1) Subtotal Total debt Derivative financial instruments: Interest rate swaps: Mexican pesos: Variable to fixed Interest pay rate(1) Interest receive rate(1) U.S. dollars: Variable to fixed rate(1) Interest pay rate(1) Interest receive rate(1) Cross currency swaps: Units of Investment (or UDIs) Fixed to Fixed Interest pay rate(1) Interest receive rate(1) At December 31, 2009 At December 31,
2008 2010 2011 2012 2013 2014 2015 and
thereafter Carrying
Value Fair
Value Carrying
Value Fair
Value (in millions of Mexican pesos) 2,731 6,067 7,996 5,210 1,392 2,825 26,221 26,045 19,217 19,059 5.4 % 6.7 % 6.4 % 5.0 % 5.2 % 3.3 % 5.7 % 8.9 % 70 1,113 2,228 2,731 16 6,158 6,158 6,266 6,265 0.8 % 0.7 % 0.6 % 0.5 % 1.9 % 0.6 % 2.3 % — 905 905 15.4 % 2,801 7,180 10,224 7,941 1,408 2,825 32,379 32,203 26,388 26,229 8,853 7,532 12,140 7,941 1,408 5,789 43,663 43,626 43,858 43,709 862 1,762 2,215 3,885 — 8,724 (316 ) 9,045 (178 ) 9.5 % 9.1 % 8.1 % 8.1 % 8.4 % 9.3 % 5.0 % 4.9 % 4.9 % 4.9 % 4.9 % 8.7 % — — 653 979 — 50 1,682 (34 ) — — 3.8 % 3.1 % 8.6 % 3.5 % 0.5 % 0.5 % 5.1 % 0.7 % — — — — 2,500 2,500 (217 ) 3,595 95 — — — — 9.6 % 9.6 % 10.0 % — — — — 4.9 % 4.9 % 4.2 %
Principal by Year of Maturity
At December 31, 2009 | At December 31, 2008 | At December 31, 2011 | At December 31, 2010 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2010 | 2011 | 2012 | 2013 | 2014 | 2015 and thereafter | Carrying Value | Fair Value | Carrying Value | Fair Value | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 and thereafter | Carrying Value | Fair Value | Carrying Value | Fair Value | ||||||||||||||||||||||||||||||||||||||||||||||
(in millions of Mexican pesos) | (in millions of Mexican pesos, except for percentages) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
U.S. dollars to Mexican pesos: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest rate(1) | 4.5 | % | 4.5 | % | 4.5 | % | 4.5 | % | 4.5 | % | 4.5 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Subtotal | 523 | 96 | 15 | 14 | 10 | 12,863 | 13,521 | 14,362 | 10,162 | 10,162 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Variable rate debt: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Mexican pesos: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Bank loans | 67 | 266 | 1,392 | 2,825 | — | — | 4,550 | 4,456 | 4,550 | 4,550 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest rate(1) | 5.0 | % | 5.0 | % | 5.0 | % | 5.0 | % | 5.0 | % | 5.1 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Domestic senior notes | 3,000 | 3,500 | — | — | 2,500 | — | 9,000 | 8,981 | 8,000 | 7,945 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest rate(1) | 4.7 | % | 4.8 | % | 4.9 | % | 4.8 | % | 4.8 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
U.S. dollars | 42 | 209 | — | — | — | — | 251 | 251 | 222 | 222 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest rate(1) | 0.7 | % | 0.7 | % | 0.7 | % | 0.6 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Argentine pesos | 130 | — | — | — | — | — | 130 | 116 | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest rate(1) | 27.3 | % | 27.3 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Brazilian reais | �� | 33 | 39 | 43 | 48 | 30 | — | 193 | 193 | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest rate(1) | 11.0 | % | 11.0 | % | 11.0 | % | 11.0 | % | 11.0 | % | 11.0 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Colombian pesos: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Bank loans | 935 | — | — | — | — | — | 935 | 929 | 994 | 994 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest rate(1) | 6.1 | % | 6.1 | % | 4.7 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Capital leases | 205 | 181 | — | — | — | — | 386 | 384 | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest rate(1) | 7.1 | % | 6.6 | % | 6.9 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Subtotal | 4,412 | 4,195 | 1,435 | 2,873 | 2,530 | — | 15,445 | 15,310 | 13,766 | 13,711 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total long-term debt | 4,935 | 4,291 | 1,450 | 2,887 | 2,540 | 12,863 | 28,966 | 29,672 | 23,928 | 23,873 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
(notional amounts, except for percentages) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Derivative financial instruments: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest rate swaps(2): | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Mexican pesos: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Variable to fixed | — | 846 | 846 | 423 | — | — | 2,115 | 433 | 2,115 | 578 | 1,600 | 2,500 | 575 | 1,963 | — | — | 6,638 | (239 | ) | 5,260 | (302 | ) | |||||||||||||||||||||||||||||||||||||||||||
Interest pay rate(1) | — | 8.1 | % | 8.1 | % | 8.1 | % | 8.1 | % | 8.1 | % | 8.1 | % | 8.1 | % | 8.4 | % | 8.6 | % | 8.3 | % | 8.1 | % | ||||||||||||||||||||||||||||||||||||||||||
Interest receive rate(1) | — | 0.7 | % | 0.7 | % | 0.7 | % | 0.7 | % | 0.9 | % | 4.7 | % | 4.7 | % | 5.0 | % | 5.0 | % | 4.9 | % | 4.9 | % | ||||||||||||||||||||||||||||||||||||||||||
Variable to Variable | — | — | 209 | 105 | — | 314 | 82 | 314 | 96 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest pay rate(1) | — | — | 4.7 | % | 4.7 | % | 4.7 | % | 8.5 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest receive rate(1) | — | — | 0.7 | % | 0.7 | % | 0.7 | % | 3.6 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Japanese yen to Brazilian reais | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fixed to variable | — | — | — | — | 72 | 37 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest pay rate(1) | — | — | — | — | 14.4 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest receive rate(1) | — | — | — | — | 2.8 | % |
Principal by Year of Maturity
At December 31, 2011 | At December 31, 2010 | |||||||||||||||||||||||||||||||||||||||
2012 | 2013 | 2014 | 2015 | 2016 | 2017 and thereafter | Carrying Value | Fair Value | Carrying Value | Fair Value | |||||||||||||||||||||||||||||||
(in millions of Mexican pesos, except for percentages) | ||||||||||||||||||||||||||||||||||||||||
Cross currency swaps: | ||||||||||||||||||||||||||||||||||||||||
Units of Investment (UDIs) to Mexican pesos and variable rate | — | — | — | — | — | 2,500 | 2,500 | 860 | 2,500 | 717 | ||||||||||||||||||||||||||||||
Interest pay rate(1) | 4.6 | % | 4.6 | % | 4.7 | % | ||||||||||||||||||||||||||||||||||
Interest receive rate(1) | 4.2 | % | 4.2 | % | 4.2 | % |
(1) | Weighted average interest rate. |
(2) | Does not include forwards starting swaps with a notional amount of Ps. 1,312 million and a fair value loss of Ps. 43 million. These contracts will become effective in 2012 and mature in 2013. |
A hypothetical, instantaneous and unfavorable change of one percentage point in the average interest rate applicable to variable-rate liabilities held at December 31, 20092011 would increase our variable interest expense by approximately Ps. 19498 million, or 22%6.4%, over the 12-month period of 20092011 assuming no additional debt is incurred during such period, in each case after giving effect to all of our interest and cross currency swap agreements.
Foreign Currency Exchange Rate Risk
Our principal exchange rate risk involves changes in the value of the local currencies, of each country in which we operate, relative to the U.S. dollar. In 2009,2011, the percentage of our consolidated total revenues was denominated as follows:
Total Revenues by CountriesCurrency At December 31, 20092011
Region | % of Consolidated Total Revenues | |||||
Mexico and Central America(1) | Mexican peso and others | 64 | % | |||
Venezuela | Bolívar fuerte | 10 | % | |||
| peso, Colombian peso | |||||
| 26 | |||||
|
(1) | Mexican peso, Quetzal, |
We estimate that a majority of our consolidated costs and expenses are denominated in Mexican pesos for Mexican subsidiaries and in the aforementioned currencies for the foreign subsidiaries, which are principally subsidiaries of Coca-Cola FEMSA and FEMSA Cerveza.FEMSA. Substantially all of our costs and expenses denominated in a foreign currency, other than the functional currency of each country in which we operate, are denominated in U.S. dollars. As of December 31, 20092011, after giving effect to all cross currency swaps, 91.7%63% of our long-term indebtedness was denominated in Mexican pesos, 8.1%27% was denominated in U.S. dollars, and 0.2%5% was denominated in Colombian pesos, 4% was denominated in Argentine pesos.pesos and 1% was denominated in Brazilian reais. We also have short-term indebtedness, which consists of revolving bank loans.loans in Colombian pesos and Argentine pesos. Decreases in the value of the different currencies relative to the U.S. dollar will increase the cost of our foreign currency denominated operating costs and expenses, and the debt service obligations with respect to our foreign currency denominatedcurrency-denominated indebtedness. A depreciation of the Mexican peso relative to the U.S. dollar will also result in foreign exchange losses, as the Mexican peso value of our foreign currency denominatedcurrency-denominated long-term indebtedness is increased.
Our exposure to market risk associated with changes in foreign currency exchange rates relates primarily to U.S. dollar-denominated debt obligations as shown in the interest risk table above. We occasionally utilize financial derivative instruments to hedge our exposure to the U.S. dollar relative to the Mexican peso and other currencies.
As of December 31, 2009,2011, we had forward agreements that meetmet the hedging criteria for accounting purposes, to hedge our operations denominated in U.S. dollars. The notional amount was Ps. 2,933 million with a fair value asset of Ps. 183 million, with a maturity date during 2012. The fair value of foreign currency forward contracts is estimated based on the quoted market price of each agreement at year-end assuming the same maturity dates originally contracted for. For the year ended December 31, 2011, a gain of Ps. 1,19521 million was recorded in our consolidated results.
As of December 31, 2010, we had forward agreements that met the hedging criteria for accounting purposes, to hedge our operations denominated in U.S. dollars. The notional amount was Ps. 578 million with a fair value asset of Ps. 2 million, and a notional amount of Ps. 1,690 million with a fair value liability of Ps. 1618 million, andin each case with a maturity datesdate during 2010.2011. For the year ended December 31, 2009,2010, we recorded a net lossgain on expired forward agreements of Ps. 127 million as a part of foreign exchange. The fair value of the foreign currency forward contracts is estimated based on the quoted market price of each agreement at year-end assuming the same maturity dates originally contracted.contracted for.
As of December 31, 2009, certain forward agreements dodid not meet the hedging criteria for accounting purposes; consequently, changes in the estimated fair value were recorded in our consolidated income statement. For the yearsyear ended December 31, 2009, 2008 and 2007, the net effect of expired contracts that dodid not meet hedging criteria for accounting purposes, were losseswas a loss of Ps. 63 million and Ps. 643 million and a gain of Ps. 22 million, respectively.million. The fair value of the foreign currency forward contracts is estimated based on the quoted market price of each agreement at year end assuming the same maturity dates originally contracted.
As of December 31, 2009,2011, we had options to purchase U.S. dollars to reduce our exposure to the risk of exchange rate fluctuations, with a notional amount of Ps. 1,901 million, for which we have recorded a net fair value asset of Ps. 300 million as part of cumulative other comprehensive income. As of December 31, 2010, we did not have any call option agreements to buy U.S. dollars.
We contracted cross currency swaps to manage the interest rate and foreign exchange risks associated with our borrowings denominated in U.S. dollars and other foreign currencies, which are designated as cash flow hedges. The aggregate notional amount is Ps. 2,115 million with maturity date in 2013. The fair value is estimated based on quoted market exchange rates and interest rates to terminate the contracts at December 31, 2009, with a fair value asset of Ps. 433 million.currencies.
As of December 31, 2009,2011, we havehad cross currency swaps designated as fair value hedges under contracts with an aggregate notional amount of Ps. 2,8142,500 million that expire in 2013 and 2017, for which we have recorded a net fair value asset of Ps. 561860 million. The net effect of our expired contracts for the years ended December 31, 2009, 20082011, 2010 and 20072009 was recorded as a financial expense and amounted tointerest income of Ps. 135, Ps. 1788 million in 2011 and Ps. 372 million respectively.
Asin 2010, and as interest expense of Ps. 32 million as of December 31, 2009.
For the years ended December 31, 2011, 2010, and 2009, certain cross currency swap instruments dodid not meet the hedging criteria for accounting purposes; consequently, changes in the estimated fair value were recorded in the income statement. The notional amount of these contracts is Ps. 2,024 million and mature in 2011 and 2012. The changes in fair value of these contracts represented a loss of Ps. 146 million, a gain of Ps. 169 million.205 million and a gain of Ps. 168 million in 2011, 2010 and 2009, respectively.
As of December 31, 2009,2011, we had determined that our leasing contracts denominated in U.S. dollars host an embedded derivative financial instrument. The fair value of these contracts is based on the exchange rate used to finish the contract as of the end of the period. As ofFor the years ended December 31, 2009, 20082011, 2010 and 2007,2009, the fair value of these contracts representedresulted in a loss of Ps. 50 million, a gain of Ps. 7815 million and lossesa loss of Ps. 138 million and Ps. 919 million, respectively, each of which areis recorded in the income statement as market value lossloss/gain on ineffective portion of derivative financial instruments.
A hypothetical, instantaneous and unfavorable 10% devaluation in the value of the Mexican peso relative to the U.S. dollar occurring on December 31, 2009,2011 would have resulted in an increase in our net consolidated integral result of financing expense of approximately Ps. 482203 million over the 12-month period of 2009,2011, reflecting higher interest expense andgreater losses relating to our U.S dollar-denominated indebtedness, net of a foreign exchange gain, and interest expense generated by the cash balances held by us in U.S. dollars as of that date, net of the loss based on our U.S. dollar-denominated indebtedness at December 31, 2009.date. However, this result does not take into account any gain on monetary position that would be expected to result from an increase in the inflation rate generated by a devaluation of local currencies relative to the U.S. dollar in inflationary economic environments, which gain on monetary position would reduce the consolidated comprehensive financial result.
As of April 30, 2010,March 31, 2012, the exchange rates relative to the U.S. dollar of all the countries in which we operate, as well as their devaluation/revaluation effect compared to December 31, 2009,2011, are as follows:
Country | Currency | Exchange Rate as of April 30, 2010 | (Devaluation) / Revaluation | Currency | Exchange Rate as of March 31, 2012 | (Devaluation) / Revaluation | ||||||||||
Mexico | Mexican peso | 12.3698 | 5.3% | Mexican peso | 12.85 | 8.1 | % | |||||||||
Brazil | Reais | 1.7306 | 0.6% | Brazilian real | 7.05 | 5.4 | % | |||||||||
Venezuela | Bolívar fuerte | 4.3000 | (100.0)% | Bolívar fuerte | 2.99 | 8.1 | % | |||||||||
Colombia | Colombian peso | 1,969.7500 | 3.6% | Colombian peso | 0.01 | (0.1 | )% | |||||||||
Argentina | Argentine peso | 3.8880 | (2.3)% | Argentine peso | 2.93 | 9.7 | % | |||||||||
Costa Rica | Colon | 516.0400 | 9.8% | Colón | 0.03 | 7.2 | % | |||||||||
Guatemala | Quetzal | 8.0228 | 4.0% | |||||||||||||
Nicaragua | Cordoba | 21.1775 | (1.6)% | |||||||||||||
Panama | U.S. dollar | 1.0000 | — |
Country Guatemala Nicaragua Panama Euro Zone Currency Exchange Rate
as of March 31, 2012 (Devaluation) /
Revaluation Quetzal 1.67 6.7 % Cordoba 0.55 9.2 % U.S. dollar 1.0000 – Euro 17.08 5.4 %
A hypothetical, instantaneous and unfavorable 10% devaluation in the value of the currencies of all the countries in which we operate, relative to the U.S. dollar, occurring on December 31, 2009,2011, would produce a reduction in stockholders’ equity as follows:
Country | Currency | Reduction in Stockholders’ Equity | ||||
(in millions of Mexican pesos) | ||||||
Mexico | Mexican peso | 203 | ||||
Brazil | 2,056 | |||||
Venezuela | Bolívar fuerte | 814 | ||||
Colombia | Colombian peso | 1,111 | ||||
Costa Rica | 373 | |||||
Argentina | Argentine peso | 136 | ||||
Guatemala | Quetzal | 122 | ||||
Nicaragua | Cordoba | 159 | ||||
Panama | U.S. dollar | 232 | ||||
Euro Zone | Euro | 7,504 |
As of December 31, 20092011 and 2008,2010, we did not have any equity forward agreements.
We entered into various derivative contracts to hedge the cost of certain raw materials that are exposed to variations of commodity price exchange rates. As of December 31, 2009,2011, we had various derivative instruments contracts with maturity dates in 20102012 and 2013, notional amounts of Ps. 5,199754 million and a fair value liability of Ps. 97719 million. The resultresults of our commodity price contracts for the years ended December 31, 2011, 2010 and 2009, 2008 and 2007, was a loss ofwere Ps. 1,096257 million, a gain of Ps. 17393 million and a loss of Ps. 82247 million, respectively, which were recorded in the results offrom operations of each year. WeAfter discontinuing our beer business, we have certainno derivative contracts that do not meet hedging criteria for accounting purposes. For the years ended December 31, 2009, 2008 and 2007, the fair value of these contracts was recognized as losses on ineffective portion of derivative financial instruments of Ps. 165 million, Ps. 474 million and Ps. 43 million, respectively.
ITEM 12. | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES |
ITEM 12A. | DEBT SECURITIES |
Not applicable.
ITEM 12B. | WARRANTS AND RIGHTS |
Not applicable.
ITEM 12C. | OTHER SECURITIES |
Not applicable.
ITEM 12D. | AMERICAN DEPOSITARY SHARES |
The Bank of New York Mellon serves as the depositary for our ADSs. Holders of our ADSs, evidenced by ADRs, are required to pay various fees to the depositary, and the depositary may refuse to provide any service for which a fee is assessed until the applicable fee has been paid.
ADS holders are required to pay the depositary amounts in respect of expenses incurred by the depositary or its agents on behalf of ADS holders, including expenses arising from compliance with applicable law, taxes or other governmental charges, cable, telex and facsimile transmission, or the conversion of foreign currency into U.S. dollars. The depositary may decide in its sole discretion to seek payment by either billing holders or by deducting the fee from one or more cash dividends or other cash distributions.
ADS holders are also required to pay additional fees for certain services provided by the depositary, as set forth in the table below.
Depositary service | Fee payable by ADS holders | |
Issuance and delivery of ADSs, including in connection with share distributions, | Up to US$5.00 per 100 ADSs (or portion thereof) | |
Distribution of dividends(1) | Up to US$0.02 per ADS | |
Withdrawal of shares underlying ADSs | Up to US$5.00 per 100 ADSs (or portion thereof) |
(1) | As of the date of this annual report, holders of our ADSs were not required to pay additional fees with respect to this service. |
Direct and indirect payments by the depositary
The depositary pays us an agreed amount, which includes reimbursements for certain expenses we incur in connection with the ADS program. These reimbursable expenses include legal and accounting fees, listing fees, investor relations expenses and fees payable to service providers for the distribution of material to ADS holders. For the year ended December 31, 2009,2011, this amount was US$3.2 million.525,590.
ITEMS 13-14. | NOT APPLICABLE |
ITEM 15. | CONTROLS AND PROCEDURES |
(a) Disclosure Controls and Procedures
We have evaluated, with the participation of our chief executive officer and chief financial officer, the effectiveness of our disclosure controls and procedures as of December 31, 2009.2011. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon our evaluation, our chiefprincipal executive officer and chiefprincipal financial officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended (or the Exchange Act) is recorded, processed, summarized and reported, within the time periods specified in the applicable rules and forms, and that it is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
(b) Management’s annual report on internal control over financial reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended.Act. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal“Internal Control—Integrated Framework,” as issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets, (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors, and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on our financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Based on our evaluation under the framework in Internal“Internal Controls—Integrated Framework,” as issued by the Committee of Sponsoring Organizations of the Treadway Commission, our management concluded that our internal control over financial reporting was effective as of December 31, 2009.2011.
Our management assessment and conclusion on the effectiveness of internal control over financial reporting as of December 31, 2011 excludes, in accordance with applicable guidance provided by the SEC, an assessment of the internal control over financial reporting of Grupo Tampico and Grupo CIMSA, the beverage divisions of which were acquired by our subsidiary Coca-Cola FEMSA in October 2011 and December 2011, respectively. The beverage divisions of Grupo Tampico and Grupo CIMSA together represented 2.4% and 2.7% of our total and net assets, respectively, as of December 31, 2011, and 0.7% and 0.3% of our revenues and net income, respectively, for the year ended December 31, 2011.
The effectiveness of our internal control over financial reporting as of December 31, 20092011 has been audited by Mancera, S.C., a member of Ernst & Young Global, an independent registered public accounting firm, as stated in its report included herein.
(c) Attestation Report of the Registered Public Accounting Firm
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The Board of Directors and Stockholders of
Fomento Económico Mexicano, S.A.B. de C.V.
We have audited Fomento Económico Mexicano, S.A.B. de C.V. and subsidiariessubsidiaries’ internal control over financial reporting as of December 31, 2009,2011, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Fomento Económico Mexicano, S.A.B. de C.V. and subsidiaries’ management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with Mexican Financial Reporting Standards, including the reconciliation to U.S. GAAP in accordance with Item 18 of Form 20F. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with Mexican Financial Reporting Standards, including the reconciliation to U.S. GAAP in accordance with Item 18 of Form 20F, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent orof detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As indicated in the accompanying Management’s Annual Report on Internal Control over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Administradora de Acciones del Noroeste, S.A. de C.V. and its subsidiaries (collectively “Grupo Tampico”) and Corporación de los Angeles, S.A. de C.V. and its subsidiaries (collectively “Grupo CIMSA”), acquired in October and December 2011, respectively, which are included in the 2011 consolidated financial statements of Fomento Económico Mexicano, S.A.B. de C.V. and subsidiaries, and constituted 2.4% and 2.7% of Fomento Economico Mexicano, S.A.B. de C.V.’s total and net assets, respectively, as of December 31, 2011 and 0.7% and 0.3% of Fomento Economico Mexicano, S.A.B. de C.V.’s revenues and net income, respectively, for the year then ended. Our audit of internal control over financial reporting of Fomento Económico Mexicano, S.A.B. de C.V. and subsidiaries, also did not include an evaluation of the internal control over financial reporting of Grupo Tampico and Grupo CIMSA.
In our opinion, Fomento Económico Mexicano, S.A.B. de C.V. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009,2011, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Fomento Económico Mexicano, S.A.B. de C.V. and subsidiaries as of December 31, 20092011 and 2008,2010, and the related consolidated statements of income, changes in stockholders’ equity and cash flows for each of the three years thenin the period ended December 31, 2011, and our report dated June 25, 2010April 27, 2012 expressed an unqualified opinion on those financial statements.
Mancera, S.C.
A Member Practice of
Ernst & Young Global
C.P.C. Víctor Luís Soulé GarcíaAgustín Aguilar Laurents
Monterrey, N.L., Mexico
June 25, 2010April 27, 2012
(d) Changes in Internal Control over Financial Reporting
During 2009, there wereThere has been no changeschange in our internal control over financial reporting during 2011 that eitherhas materially affected, or would beis reasonably likely to materially affect, our internal control over financial reporting. The acquisitions of Grupo CIMSA and Grupo Tampico did not have a material effect on our internal control over financial reporting.
ITEM 16A. | AUDIT COMMITTEE FINANCIAL EXPERT |
Our shareholders and our board of directors have designated José Manuel Canal Hernando, an independent director as required by the Mexican Securities Law and applicable New York Stock ExchangeNYSE listing standards, as an “audit committee financial expert” within the meaning of this Item 16A. See “Item 6. Directors, Senior Management and Employees—Directors.”
ITEM 16B. | CODE OF ETHICS |
We have adopted a code of ethics, within the meaning of this Item 16B of Form 20-F. Our code of ethics applies to our chief executive officer, chief financial officer, chief accounting officer and persons performing similar functions as well as to our directors and other officers and employees. Our code of ethics is available on our website at www.femsa.com. If we amend the provisions of our code of ethics that apply to our chief executive officer, chief financial officer, chief accounting officer and persons performing similar functions, or if we grant any waiver of such provisions, we will disclose such amendment or waiver on our web sitewebsite at the same address.
ITEM 16C. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
Audit and Non-Audit Fees
For the fiscal years ended December 31, 20092011 and 2008,2010, Mancera, S.C., a member practice of Ernst & Young Global, was our auditor.
The following table summarizes the aggregate fees billed to us in 20092011 and 20082010 by Mancera, S.C., which is an independent registered public accounting firm, during the fiscal years ended December 31, 20092011 and 2008:2010:
Year ended December 31, | Year ended December 31, | |||||||||||||
2009 | 2008 | 2011 | 2010 | |||||||||||
(in millions of Mexican pesos) | (in millions of Mexican pesos) | |||||||||||||
Audit fees | Ps. | 88 | Ps. | 79 | Ps. 83 | Ps. 72 | ||||||||
Audit-related fees | 7 | 1 | 10 | 6 | ||||||||||
Tax fees | 6 | 6 | 8 | 5 | ||||||||||
Other fees | 1 | — | — | — | ||||||||||
|
| |||||||||||||
Total | Ps. | 102 | Ps. | 86 | Ps. 101 | Ps. 83 | ||||||||
|
|
Audit fees. Audit fees in the above table represent the aggregate fees billed in connection with the audit of our annual financial statements, as well as to other limited procedures in connection with our quarterly financial information and other statutory and regulatory audit activities.
Audit-related fees. Audit-related fees in the above table for the year ended December 31, 2009 and 2008,2011 are the aggregate fees billed for assurance and other services related to the performance of the audit, mainly in connection with proforma financial information, due diligence servicesspecial audits and other technical advice on accounting and audit related matters.reviews. For 2010, the aggregate audit-related fees billed are mainly associated with the Heineken transaction.
Tax fees. Tax fees in the above table are fees billed for services based upon existing facts and prior transactions in order to document, compute, and obtain government approval for amounts included in tax filings such as value-added tax return assistance and transfer pricing documentation and requests for technical advice from taxing authorities.documentation.
Other fees. Other fees inFor the above table represented consulting related services. During 2008,years ended December 31, 2011 and 2010, there were no other fees.
Audit Committee Pre-Approval Policies and Procedures
We have adopted pre-approval policies and procedures under which all audit and non-audit services provided by our external auditors must be pre-approved by the audit committee as set forth in the Audit Committee’s charter. Any service proposals submitted by external auditors need to be discussed and approved by the Audit Committee during its meetings, which take place at least four times a year. Once the proposed service is approved, we or our subsidiaries formalize the engagement of services. The approval of any audit and non-audit services to be provided by our external auditors is specified in the minutes of our Audit Committee. In addition, the members of our board of directors are briefed on matters discussed by the different committees of our board.board of directors.
ITEM 16D. | NOT APPLICABLE |
ITEM 16E. | PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS |
We did not purchase any of our equity securities in 2009.2011. The following table presents purchases by trusts that we administer in connection with our stock incentive plans, which purchases may be deemed to be purchases by an affiliated purchaser of us. See “Item 6. Directors, Senior Management and Employees––EVA Stock Incentive Plan.”
Purchases of Equity Securities
Purchase Date | Total Number of BD Units Purchased | Average Price Paid per BD Units | Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs | Maximum Number (or Appropriate U.S. dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs | |||||
March 1, 2007 | 3,202,140 | Ps | 41.17 | ||||||
March 1, 2008 | 4,592,920 | Ps | 39.51 | ||||||
March 1, 2009 | 5,392,080 | Ps | 38.76 | ||||||
March 1, 2010 | 4,207,675 | Ps | 55.44 | ||||||
Purchase Date March 1, 2008 March 1, 2009 March 1, 2010 March 1, 2011 March 1, 2012ITEM 16F. NOT APPLICABLETotal
Number of
BD Units
PurchasedAverage
Price
Paid per
BD UnitsTotal Number of
Shares (or Units)
Purchased as
Part of Publicly
Announced Plans
or ProgramsMaximum Number (or
Appropriate U.S.
dollar Value) of Shares
(or Units) that May Yet
Be Purchased Under
the Plans or Programs4,592,920 Ps.39.51 5,392,080 Ps.38.76 4,207,675 Ps.55.44 2,438,590 Ps.67.78 2,146,614 Ps.92.36
Pursuant to Rule 303A.11 of the Listed Company Manual of the NYSE, we are required to provide a summary of the significant ways in which our corporate governance practices differ from those required for U.S. companies under the NYSE listing standards. We are a Mexican corporation with shares listed on the Mexican Stock Exchange. Our corporate governance practices are governed by our bylaws, the Mexican Securities Law and the regulations issued by the CNBV. We also disclose the extent of compliance with theCódigo de Mejores Prácticas Corporativas (Mexican Code of Best Corporate Practices), which was created by a group of Mexican business leaders and was endorsed by the CNBV.ITEM 16G. CORPORATE GOVERNANCEITEM 16F. NOT APPLICABLE ITEM 16G. CORPORATE GOVERNANCE
The table below discloses the significant differences between our corporate governance practices and the NYSE standards.
NYSE Standards | Our Corporate Governance Practices | |
Directors | Directors
The Mexican Securities Law sets forth, in article 26, the definition of “independence,” which differs from the one set forth in Section 303A.02 of the Listed Company Manual of the NYSE. Generally, under the Mexican Securities Law, a director is not independent if such director: (i) is an employee or a relevant officer of the company or its subsidiaries; (ii) is an individual with significant influence over the company or its subsidiaries; (iii) is a shareholder or participant of the controlling group of the company; (iv) is a client, supplier, debtor, creditor, partner or employee of an important client, supplier, debtor or creditor of the company; or (v) is a family member of any of the aforementioned persons.
In accordance with the Mexican Securities Law, our shareholders are required to make a determination as to the independence of our directors at an ordinary meeting of our shareholders, though the CNBV may challenge that determination. Our board of directors is not required to make a determination as to the independence of our directors. | |
Executive sessions:Non-management directors must meet at regularly scheduled executive sessions without management. | Executive sessions:Under our bylaws and applicable Mexican law, our non-management and independent directors are not required to meet in executive sessions.
Our bylaws state that the board of directors will meet at least four times a year, following the end of each quarter, to discuss our operating results and progress in achieving strategic objectives. Our board of directors can also hold extraordinary meetings. | |
Nominating/Corporate Governance Committee:A nominating/corporate governance committee composed entirely of independent directors is required. | Nominating/Corporate Governance Committee:We are not required to have a nominating committee, and the Mexican Code of Best Corporate Practices does not provide for a nominating committee.
However, Mexican law requires us to have a Corporate Practices Committee. Our Corporate Practices Committee is composed of three members, and as required by the Mexican Securities Law and our bylaws, the three members are independent. | |
Compensation | Compensation |
NYSE Standards | Our Corporate Governance Practices | |
Audit | Audit | |
Equity compensation plan:Equity compensation plans require shareholder approval, subject to limited exemptions. | Equity compensation plan:Shareholder approval is not required under Mexican law or our bylaws for the adoption and amendment of an equity compensation plan. Such plans should provide for general application to all executives. Our current equity compensation plans have been approved by our board of directors. | |
Code of business conduct and ethics:Corporate governance guidelines and a code of conduct and ethics are required, with disclosure of any waiver for directors or executive officers. | Code of business conduct and ethics: We have adopted a code of ethics, within the meaning of Item 16B of SEC Form 20-F. Our code of ethics applies to our Chief Executive Officer, Chief Financial Officer and persons performing similar functions as well as to our directors and other officers and employees. Our code of ethics is available on our website at www.femsa.com. If we amend the provisions of our code of ethics that apply to our Chief Executive Officer, Chief Financial Officer and persons performing similar functions, or if we grant any waiver of such provisions, we will disclose such amendment or waiver on our website at the same address. |
ITEM 16H. | NOT APPLICABLE |
ITEM 17. | NOT APPLICABLE |
ITEM 18. | FINANCIAL STATEMENTS |
See pages F-1 through F-64,F-144, incorporated herein by reference.
ITEM | EXHIBITS |
1.1 | Bylaws (estatutos sociales) of Fomento Económico Mexicano, S.A.B. de C.V., approved on April 22, 2008, together with an English translation thereof (incorporated by reference to Exhibit 1.1 of FEMSA’s Annual Report on Form 20-F filed on June 30, 2008 (File No. 333-08752)). | |
1.2 | Share Exchange Agreement by and between Heineken Holding N.V., Heineken N.V., Compañía Internacional de Bebidas, S.A. de C.V., Grupo Industrial Emprex, S.A. de C.V., and FEMSA dated as of January 11, | |
1.3 | First Amendment to Share Exchange Agreement by and between Heineken Holding N.V., Heineken N.V., Compañía Internacional de Bebidas, S.A. de C.V., Grupo Industrial Emprex, S.A. de C.V., and FEMSA dated as of April 26, | |
1.4 | Corporate Governance Agreement, dated April 30, 2010, between Heineken Holding N.V., Heineken N.V., L’Arche Green N.V., FEMSA and CB Equity LLP. | |
2.1 | Deposit Agreement, as further amended and restated as of May 11, 2007, among FEMSA, The Bank of New York, and all owners and holders from time to time of any American Depositary Receipts, including the form of American Depositary Receipt (incorporated by reference to FEMSA’s registration statement on Form F-6 filed on April 30, 2007 (File No. 333- 142469)). | |
2.2 | Specimen certificate representing a BD Unit, consisting of one Series B Share, two Series D-B Shares and two Series D-L Shares, together with an English translation (incorporated by reference to FEMSA’s registration statement on Form F-4 filed on April 9, 1998 (File No. 333-8618)). | |
2.3 | Indenture dated | |
2.4 | First Supplemental Indenture dated | |
2.5 | Second Supplemental Indenture dated | |
3.1 | Amended Voting Trust Agreement among certain principal shareholders of FEMSA together with an English translation (incorporated by reference to FEMSA’s Schedule 13D as amended filed on August 11, 2005 (File No. 005-54705)). | |
4.1 | Amended and Restated Shareholders’ Agreement, dated as of July 6, 2002, by and among CIBSA, Emprex, The Coca-Cola Company and Inmex (incorporated by reference to Coca-Cola FEMSA’s Annual Report on Form 20-F filed on June 27, 2003 (File No. 1-12260)). |
4.2 | Amendment, dated May 6, 2003, to the Amended and Restated Shareholders’ Agreement dated July 6, 2002, among CIBSA, Emprex, The Coca-Cola Company, Inmex, Atlantic Industries, Dulux CBAI 2003 B.V. and Dulux CBEXINMX 2003 B.V. (incorporated by reference to Exhibit 4.14 to Coca-Cola FEMSA’s Annual Report on Form 20-F filed on June 27, 2003 (File No. 1-12260)). |
4.3 | Second Amendment, dated February 1, 2010, to the Amended and Restated Shareholders’ Agreement dated July 6, 2002, among CIBSA, Emprex, The Coca-Cola Company, Inmex and Dulux CBAI 2003 B.V. (incorporated by reference to Exhibit 4.3 to Coca-Cola FEMSA’s Annual Report on Form 20-F filed on June 10, 2010 (File No. 1-12260)). | |
4.4 | Amended and Restated Bottler Agreement, dated June 21, 2003, between Coca-Cola FEMSA and The Coca-Cola Company with respect to operations in the southeast of Mexico (incorporated by reference to Exhibit 4.3 to Coca-Cola FEMSA’s Annual Report on Form 20-F filed on April 5, 2004 (File No. 1-12260)). | |
4.5 | Supplemental Agreement, dated June 21, 1993, between Coca-Cola FEMSA and The Coca-Cola Company with respect to operations in the southeast of Mexico (with English translation) (incorporated by reference to Exhibit 10.3 to Coca-Cola FEMSA’s Registration Statement on Form F-1 filed on August 13, 1993 (File No. 333-67380)). | |
4.6 | Amended and Restated Bottler Agreement, dated June 21, 2003, between Coca-Cola FEMSA and The Coca-Cola Company with respect to operations in the southeast of Mexico (incorporated by reference to Coca-Cola FEMSA’s Annual Report on Form 20-F filed on April 5, 2004 (File No. 1-12260)). | |
4.7 | Supplemental Agreement, dated June 21, 1993, between Coca-Cola FEMSA and The Coca-Cola Company with respect to operations in the southeast of Mexico (with English translation) (incorporated by reference to Exhibit 10.4 to Coca-Cola FEMSA’s Registration Statement on Form F-1 filed on August 13, 1993 (File No. 333-67380)). | |
4.8 | Amendments, dated May 17 and July 20, 1995, to Bottler Agreement and Letter of Agreement, dated August 22, 1994, each with respect to operations in Argentina between Coca-Cola FEMSA and The Coca-Cola Company (with English translation) (incorporated by reference to Exhibit 10.3 to Coca-Cola FEMSA’s Annual Report on Form 20-F filed on June 28, 1996 (File No. 1-12260)). | |
4.9 | Bottler Agreement, dated December 1, 1995, between Coca-Cola FEMSA and The Coca-Cola Company with respect to operations in SIRSA (with English translation) (incorporated by reference to Exhibit 10.4 to Coca-Cola FEMSA’s Annual Report on Form 20-F filed on June 28, 1996 (File No. 1-12260)). | |
4.10 | Supplemental Agreement, dated December 1, 1995, between Coca-Cola FEMSA and The Coca-Cola Company with respect to operations in SIRSA (with English translation) (incorporated by reference to Exhibit 10.6 to Coca-Cola FEMSA’s Annual Report on Form 20-F filed on June 28, 1996 (File No. 1-12260)). | |
4.11 | Amendment, dated February 1, 1996, to Bottler Agreement between Coca-Cola FEMSA and The Coca-Cola Company with respect to operations in SIRSA, dated December 1, 1995 (with English translation) (incorporated by reference to Exhibit 10.5 to Coca-Cola FEMSA’s Annual Report on Form 20-F filed on June 28, 1996 (File No. 1-12260)). | |
4.12 | Amendment, dated May 22, 1998, to Bottler Agreement with respect to the former SIRSA territory, dated December 1, 1995, between Coca-Cola FEMSA and The Coca-Cola Company (with English translation) (incorporated by reference to Exhibit 4.12 to Coca-Cola FEMSA’s Annual Report on Form 20-F filed on June 20, 2001 (File No. 1-12260)). | |
4.13 | Supply Agreement, dated June 21, 1993, between Coca-Cola FEMSA and FEMSA Empaques (incorporated by reference to FEMSA’s registration statement on Form F-4 filed on April 9, 1998 (File No. 333-8618)). |
4.14 | Bottler Agreement and Side Letter dated June 1, 2005, between Panamco Golfo, S.A. de C.V. and The Coca-Cola Company with respect to operations in Golfo, Mexico (English translation) (incorporated by reference to Exhibit 4.7 to Coca-Cola FEMSA’s Annual Report on Form 20-F filed on April 18, 2006 (File No. 1-12260)). |
4.15 | Bottler Agreement and Side Letter dated June 1, 2005, between Panamco Baijo, S.A. de C.V., and The Coca-Cola Company with respect to operations in Baijo, Mexico (English translation). (incorporated by reference to Exhibit 4.8 to Coca-Cola FEMSA’s Annual Report on Form 20-F filed on April 18, 2006 (File No. 1-12260)). | |
4.16 | Coca-Cola Tradename License Agreement dated June 21, 1993, between Coca-Cola FEMSA and The Coca-Cola Company (with English translation) (incorporated by reference to FEMSA’s Registration Statement on Form F-4 filed on April 9, 1998 (File No. 333-8618)). | |
4.17 | Amendment to the Trademark License Agreement, dated December 1, 2002, entered by and among Administración de Marcas S.A. de C.V., as proprietor, and The Coca-Cola Export Corporation Mexico branch, as licensee (incorporated by reference to Panamco’s Quarterly Report on Form 10-Q for the period ended March 31, 2003 (File No. 1-2290)). | |
4.18 | Trademark Sub-License Agreement, dated January 4, 2003, entered by and among Panamco Golfo S.A. de C.V., as licensor, and The Coca-Cola Company, as licensee (incorporated by reference to Panamco’s Quarterly Report on Form 10-Q for the period ended March 31, 2003 (File No. 1-12290)). | |
4.19 | Trademark Sub-License Agreement, dated January 4, 2003, entered by and among Panamco Bajio S.A. de C.V., as licensor, and The Coca-Cola Company, as licensee (incorporated by reference to Panamco’s Quarterly Report on Form 10-Q for the period ended March 31, 2003 (File No. 1-12290)). | |
4.20 | Supply Agreement dated April 3, 1998, between ALPLA Fábrica de Plásticos, S.A. de C.V. and Industria Embotelladora de México, S.A. de C.V. (with English translation) (incorporated by reference to Exhibit 4.18 to Coca-Cola FEMSA’s Annual Report on Form 20-F filed on July 1, 2002 (File No. 1-12260)). | |
4.21 | Services Agreement, dated November 7, 2000, between Coca-Cola FEMSA and FEMSA Logística (with English translation) (incorporated by reference to Exhibit 4.15 to Coca-Cola FEMSA’s Annual Report on Form 20-F filed on June 20, 2001 (File No. 1-12260)). | |
4.22 | Promotion and Non-Compete Agreement, dated March 11, 2003, entered by and among The Coca-Cola Export Corporation Mexico branch and Panamco Bajio S.A. de C.V. (with English translation) (incorporated by reference to Panamco’s Quarterly Report on Form 10-Q for the period ended March 31, 2003 (File No. 1-12290)). | |
4.23 | Promotion and Non-Compete Agreement, dated March 11, 2003, entered by and among The Coca-Cola Export Corporation Mexico branch and Panamco Golfo S.A. de C.V. (with English translation) (incorporated by reference to Panamco’s Quarterly Report on Form 10-Q for the period ended March 31, 2003 (File No. 1-12290)). | |
4.24 | Memorandum of Understanding, dated as of March 11, 2003, by and among Panamco, as seller, and The Coca-Cola Company, as buyer (incorporated by reference to Panamco’s Quarterly Report on Form 10-Q for the period ended March 31, 2003 (File No. 1-12290)). |
4.25 | Bottler Agreement, dated August 22, 1994, between Coca-Cola FEMSA and The Coca-Cola Company with respect to operations in Argentina (with English translation) (incorporated by reference to Exhibit 10.1 to Coca-Cola FEMSA’s Annual Report on Form 20-F filed on June 30, 1995 (File No. 1-12260)). |
4.26 | Supplemental Agreement, dated August 22, 1994, between Coca-Cola FEMSA and The Coca-Cola Company with respect to operations in Argentina (with English translation) (incorporated by reference to Exhibit 10.2 to Coca-Cola FEMSA’s Annual Report on Form 20-F filed on June 30, 1995 (File No. 1-12260)). | |
4.27 | The Coca-Cola Company Memorandum to Steve Heyer from Jose Antonio | |
8.1 | Significant Subsidiaries. | |
12.1 | CEO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated | |
12.2 | CFO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated | |
13.1 | Officer Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated |
SIGNATURE
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
Date: April 27, 2012
Fomento Económico Mexicano, S.A.B. de C.V. | ||
By: | /s/ Javier Astaburuaga Sanjines | |
Name: | Javier Astaburuaga Sanjines | |
Title: | Executive Vice-President of Finance and Strategic Development / Chief Financial Officer |
FOMENTO ECONÓMICO MEXICANO, S.A.B. DE C.V. AND SUBSIDIARIES
MONTERREY, N.L., MEXICOMÉXICO
Report of Independent Registered Public Accounting FirmREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of
Fomento Económico Mexicano, S.A.B. de C.V.
We have audited the accompanying consolidated balance sheets of Fomento Económico Mexicano, S.A.B. de C.V. and subsidiaries as of December 31, 20092011 and 2008,2010, and the related consolidated statements of income, changes in stockholders’ equity and cash flows for each of the three years then ended.in the period ended December 31, 2011. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. The financial statements of Heineken N. V. (a corporation in which the Company has a 12.53% and 9.24% interest as of December 31, 2011 and 2010, respectively) which is majority owned by Heineken Holdings N.V. (a corporation in which the Company has a 14.94% interest in both years) (collectively “Heineken”), prepared under International Financial Reporting Standards as adopted by the International Accounting Standards Board (IFRS), have been audited by other auditors whose report dated February 14, 2012 has been furnished to us, and our opinion on the consolidated financial statements, insofar as it relates to the amounts included for Heineken, is based on the report of the other auditors. In the consolidated financial statements, the Company’s investment in Heineken is stated at Ps. 75,075 and Ps. 66,478 million at December 31, 2011 and 2010 respectively and the Company’s equity in the net income of Heineken is stated at Ps. 5,080 for the year ended December 31, 2011 and Ps. 3,319 million for the eight month period from April 30 to December 31, 2010.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.presentation (including the Company’s conversion of the financial statements of Heineken to Mexican Financial Reporting Standards as of December 31, 2011 and 2010 and for the year ended December 31, 2011 and the eight-month period ended December 31, 2010). We believe that our audits and the report of other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of Fomento Económico Mexicano, S.A.B. de C.V. and subsidiaries at December 31, 20092011 and 2008,2010, and the consolidated results of their operations, and consolidated cash flows, for each of the three years thenin the period ended December 31, 2011, in conformity with Mexican Financial Reporting Standards, which differ in certain respects from accounting principles generally accepted in the United States (See Notes 26 and 27 to the consolidated financial statements).
As disclosed in Note 2 to the accompanying consolidated financial statements, among other Mexican Financial Reporting Standards (“MFRS”), the Company adopted MFRS B-8Consolidated and Combined Financial Statementsduring 2009 and MFRS B-2Statement of Cash Flows and MFRS B-10Effects of Inflationduring 2008.The application of all of these new standards was prospective in nature.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Fomento Económico Mexicano, S.A.B. de C.V. and subsidiaries’ internal control over financial reporting as of December 31, 2009,2011, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated June 25, 2010April 27, 2012 expressed an unqualified opinion thereon.
Mancera, S.C.
A Member Practice of
Ernst & Young Global
C.P.C. Víctor Luís Soulé García
Monterrey, N.L., Mexico
June 25, 2010
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
Fomento Económico Mexicano, S.A.B. de C.V.:
We have audited the accompanying consolidated statements of income, changes in stockholders’ equity and changes in financial position of Fomento Económico Mexicano, S.A.B. de C.V. (a Mexican corporation) and subsidiaries (the “Company”) for the year ended December 31, 2007, all expressed in millions of Mexican pesos of purchasing power as of December 31, 2007. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit. We did not audit the financial statements of FEMSA Comercio, S.A. de C.V. and subsidiaries (a consolidated subsidiary), which statements reflect total revenues constituting 29% of consolidated total revenues for the year ended December 31, 2007. Those statements were audited by other auditors whose report has been furnished to us and our opinion, insofar as it relates to the amounts included for FEMSA Comercio, S.A. de C.V. and subsidiaries, is based solely on the report of the other auditors.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit and the report of the other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audit and the report of the other auditors, such consolidated financial statements present fairly, in all material respects, the results of operations, changes in stockholders’ equity and changes in financial position of Fomento Económico Mexicano, S.A.B. de C.V. and subsidiaries for the year ended December 31, 2007, in conformity with Mexican Financial Reporting Standards.
Mexican Financial Reporting Standards vary in certain significant respects from accounting principles generally accepted in the United States of America. The application of the latter would have affected the determination of net income for the year ended December 31, 2007, and the determination of stockholders’ equity as of December 31, 2007, to the extent summarized in Note 27. As discussed in Note 26 l to the consolidated financial statements, in 2009 the Company adopted the provisions of Financial Accounting Standards Board Accounting Standards Codification (“ASC”) 810.10.65 (formerly FAS 160, “Noncontrolling Interest in Consolidated Financial Statements an amendment of ARB No. 51”) which requires, among other changes, to identify and present on the face of the consolidated statement of income the amount of consolidated net income attributable to the parent and the noncontrolling interests. Accordingly, Notes 26 and 27 to the accompanying 2007 financial statements have been retrospectively adjusted.
Galaz, Yamazaki, Ruiz Urquiza,
Mancera, S.C.
A Member Practice of Ernst & Young Global C.P.C. Agustín Aguilar Laurents |
Monterrey, N.L., MexicoMéxico
June 12, 2008
(May 6, 2010 with respect to the retrospective
adjustments related to the adoption of ASC 810.10.65,
as disclosed in Note 26 l)April 27, 2012
FOMENTO ECONÓMICO MEXICANO, S.A.B. DE C.V. AND SUBSIDIARIES
MONTERREY, N.L., MEXICOMÉXICO
Consolidated Balance Sheets
At December 31, 2011 and 2010. Amounts expressed in millions of U.S. dollars ($) and in millions of Mexican pesos (Ps.).
Note | 2011 | 2010 | ||||||||||||||
ASSETS | ||||||||||||||||
Current Assets: | ||||||||||||||||
Cash and cash equivalents | 4 B | $ | 1,887 | Ps. | 26,329 | Ps. | 27,097 | |||||||||
Investments | 4 B | 95 | 1,329 | 66 | ||||||||||||
Accounts receivable | 6 | 753 | 10,499 | 7,702 | ||||||||||||
Inventories | 7 | 1,031 | 14,385 | 11,314 | ||||||||||||
Recoverable taxes | 309 | 4,311 | 4,243 | |||||||||||||
Other current assets | 8 | 152 | 2,114 | 1,038 | ||||||||||||
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Total current assets | 4,227 | 58,967 | 51,460 | |||||||||||||
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Investments in shares | 9 | 5,661 | 78,972 | 68,793 | ||||||||||||
Property, plant and equipment | 10 | 3,828 | 53,402 | 41,910 | ||||||||||||
Intangible assets | 11 | 5,133 | 71,608 | 52,340 | ||||||||||||
Deferred tax asset | 23 C | 33 | 461 | 346 | ||||||||||||
Other assets | 12 | 809 | 11,294 | 8,729 | ||||||||||||
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TOTAL ASSETS | 19,691 | 274,704 | 223,578 | |||||||||||||
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LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||
Current Liabilities: | ||||||||||||||||
Bank loans and notes payable | 17 | 46 | 638 | 1,578 | ||||||||||||
Current portion of long-term debt | 17 | 354 | 4,935 | 1,725 | ||||||||||||
Interest payable | 15 | 216 | 165 | |||||||||||||
Suppliers | 1,539 | 21,475 | 17,458 | |||||||||||||
Accounts payable | 413 | 5,761 | 5,375 | |||||||||||||
Taxes payable | 230 | 3,208 | 2,180 | |||||||||||||
Other current liabilities | 24 A | 172 | 2,397 | 2,035 | ||||||||||||
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Total current liabilities | 2,769 | 38,630 | 30,516 | |||||||||||||
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Long-Term Liabilities: | ||||||||||||||||
Bank loans and notes payable | 17 | 1,723 | 24,031 | 22,203 | ||||||||||||
Employee benefits | 15 B | 162 | 2,258 | 1,883 | ||||||||||||
Deferred tax liability | 23 C | 997 | 13,911 | 10,567 | ||||||||||||
Contingencies and other liabilities | 24 B | 341 | 4,760 | 5,396 | ||||||||||||
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Total long-term liabilities | 3,223 | 44,960 | 40,049 | |||||||||||||
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Total liabilities | 5,992 | 83,590 | 70,565 | |||||||||||||
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Stockholders’ Equity: | ||||||||||||||||
Non-controlling interest in consolidated subsidiaries | 20 | 4,124 | 57,534 | 35,665 | ||||||||||||
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Controlling interest: | ||||||||||||||||
Capital stock | 383 | 5,348 | 5,348 | |||||||||||||
Additional paid-in capital | 1,470 | 20,513 | 20,558 | |||||||||||||
Retained earnings from prior years | 6,219 | 86,756 | 51,045 | |||||||||||||
Net income | 1,085 | 15,133 | 40,251 | |||||||||||||
Cumulative other comprehensive income | 4 V | 418 | 5,830 | 146 | ||||||||||||
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Controlling interest | 9,575 | 133,580 | 117,348 | |||||||||||||
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Total stockholders’ equity | 13,699 | 191,114 | 153,013 | |||||||||||||
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TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 19,691 | Ps. | 274,704 | Ps. | 223,578 | ||||||||||
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The accompanying notes are an integral part of these consolidated balance sheets.
Monterrey, N.L., México.
José Antonio Fernández Carbajal | Javier Astaburuaga Sanjines | |
Chief Executive Officer | Chief Financial Officer |
FOMENTO ECONÓMICO MEXICANO, S.A.B. DE C.V. AND SUBSIDIARIES
MONTERREY, N.L., MÉXICO
Consolidated Income Statements
For the years ended December 31, 2011, 2010 and 2009. Amounts expressed in millions of U.S. dollars ($) and in millions of Mexican pesos (Ps.), except for data per share.
2011 | 2010 | 2009 | ||||||||||||||
Net sales | $ | 14,470 | Ps. | 201,867 | Ps. | 168,376 | Ps. | 158,503 | ||||||||
Other operating revenues | 84 | 1,177 | 1,326 | 1,748 | ||||||||||||
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Total revenues | 14,554 | 203,044 | 169,702 | 160,251 | ||||||||||||
Cost of sales | 8,459 | 118,009 | 98,732 | 92,313 | ||||||||||||
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Gross profit | 6,095 | 85,035 | 70,970 | 67,938 | ||||||||||||
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Operating expenses: | ||||||||||||||||
Administrative | 591 | 8,249 | 7,766 | 7,835 | ||||||||||||
Selling | 3,576 | 49,882 | 40,675 | 38,973 | ||||||||||||
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4,167 | 58,131 | 48,441 | 46,808 | |||||||||||||
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Income from operations | 1,928 | 26,904 | 22,529 | 21,130 | ||||||||||||
Other expenses, net (Note 18) | (209 | ) | (2,917 | ) | (282 | ) | (1,877 | ) | ||||||||
Comprehensive financing result: | ||||||||||||||||
Interest expense | (210 | ) | (2,934 | ) | (3,265 | ) | (4,011 | ) | ||||||||
Interest income | 72 | 999 | 1,104 | 1,205 | ||||||||||||
Foreign exchange gain (loss), net | 84 | 1,165 | (614 | ) | (431 | ) | ||||||||||
Gain on monetary position, net | 9 | 146 | 410 | 486 | ||||||||||||
Market value (loss) gain on ineffective portion of derivative financial instruments | (11 | ) | (159 | ) | 212 | 124 | ||||||||||
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(56 | ) | (783 | ) | (2,153 | ) | (2,627 | ) | |||||||||
Equity method of associates (Note 9) | 370 | 5,167 | 3,538 | 132 | ||||||||||||
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Income before income taxes | 2,033 | 28,371 | 23,632 | 16,758 | ||||||||||||
Income taxes (Note 23 D) | 550 | 7,687 | 5,671 | 4,959 | ||||||||||||
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Consolidated net income before discontinued operations | 1,483 | 20,684 | 17,961 | 11,799 | ||||||||||||
Income from the exchange of shares with Heineken, net of taxes (Note 5 B) | — | — | 26,623 | — | ||||||||||||
Net income from discontinued operations (Note 5 B) | — | — | 706 | 3,283 | ||||||||||||
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Consolidated net income | $ | 1,483 | Ps. | 20,684 | Ps. | 45,290 | Ps. | 15,082 | ||||||||
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Net controlling interest income | 1,085 | 15,133 | 40,251 | 9,908 | ||||||||||||
Net non-controlling interest income | 398 | 5,551 | 5,039 | 5,174 | ||||||||||||
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Consolidated net income | $ | 1,483 | Ps. | 20,684 | Ps. | 45,290 | Ps. | 15,082 | ||||||||
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Net controlling interest income before discontinued operations(1): | ||||||||||||||||
Per series “B” share | $ | 0.05 | Ps. | 0.75 | Ps. | 0.64 | Ps. | 0.33 | ||||||||
Per series “D” share | 0.07 | 0.94 | 0.81 | 0.42 | ||||||||||||
Net income from discontinued operations(1): | ||||||||||||||||
Per series “B” share | — | — | 1.37 | 0.16 | ||||||||||||
Per series “D”share | — | — | 1.70 | 0.20 | ||||||||||||
Net controlling interest income(1): | ||||||||||||||||
Per series “B” share | 0.05 | 0.75 | 2.01 | 0.49 | ||||||||||||
Per series “D”share | 0.07 | 0.94 | 2.51 | 0.62 | ||||||||||||
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The accompanying notes are an integral part of these consolidated income statements.
(1) | U.S. dollars and Mexican pesos, see Note 22 for number of shares. |
FOMENTO ECONÓMICO MEXICANO, S.A.B. DE C.V. AND SUBSIDIARIES
MONTERREY, N.L., MÉXICO
Consolidated Statements of Cash Flows
For the years ended December 31, 2011, 2010 and 2009.
Amounts expressed in millions of U.S. dollars ($) and in millions of Mexican pesos (Ps.).
2011 | 2010 | 2009 | ||||||||||||||
Cash Flow Generated by (Used in) Operating Activities: | ||||||||||||||||
Income before income taxes from continuing operations | $ | 2,033 | Ps. 28,371 | Ps. 23,632 | Ps.�� 16,758 | |||||||||||
Non-cash operating expenses | 37 | 513 | 386 | 664 | ||||||||||||
Other adjustments regarding operating activities | 113 | 1,583 | 545 | 773 | ||||||||||||
Adjustments regarding investing activities: | ||||||||||||||||
Depreciation | 394 | 5,498 | 4,527 | 4,391 | ||||||||||||
Amortization | 75 | 1,043 | 975 | 798 | ||||||||||||
(Gain) loss on sale of long-lived assets | (1 | ) | (9 | ) | 215 | 177 | ||||||||||
Gain on sale of shares | — | (1 | ) | (1,554 | ) | (35 | ) | |||||||||
Disposal of long-lived assets | 50 | 703 | 9 | 129 | ||||||||||||
Interest income | (72 | ) | (999 | ) | (1,104 | ) | (1,205 | ) | ||||||||
Equity method of associates | (370 | ) | (5,167 | ) | (3,538 | ) | (132 | ) | ||||||||
Adjustments regarding financing activities: | ||||||||||||||||
Interest expenses | 210 | 2,934 | 3,265 | 4,011 | ||||||||||||
Foreign exchange (gain) loss, net | (84 | ) | (1,165 | ) | 614 | 431 | ||||||||||
Gain on monetary position, net | (9 | ) | (146 | ) | (410 | ) | (486 | ) | ||||||||
Market value loss (gain) on ineffective portion of derivative financial instruments | 11 | 159 | (212 | ) | (124 | ) | ||||||||||
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2,387 | 33,317 | 27,350 | 26,150 | |||||||||||||
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Accounts receivable and other current assets | (202 | ) | (2,819 | ) | (1,402 | ) | (681 | ) | ||||||||
Inventories | (160 | ) | (2,227 | ) | (1,369 | ) | (698 | ) | ||||||||
Suppliers and other accounts payable | 107 | 1,492 | 823 | 2,373 | ||||||||||||
Other liabilities | (40 | ) | (566 | ) | (249 | ) | (267 | ) | ||||||||
Employee benefits | (36 | ) | (496 | ) | (530 | ) | (302 | ) | ||||||||
Income taxes paid | (463 | ) | (6,457 | ) | (6,821 | ) | (3,831 | ) | ||||||||
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Net cash flows provided by continuing operations | 1,593 | 22,244 | 17,802 | 22,744 | ||||||||||||
Net cash flows provided by discontinued operations | — | — | 1,127 | 8,181 | ||||||||||||
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Net cash flows provided by operating activities | 1,593 | 22,244 | 18,929 | 30,925 | ||||||||||||
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Cash Flow Generated by (Used in) Investing Activities: | ||||||||||||||||
BRISA acquisition, net of cash acquired (see Note 5 A) | — | — | — | (717 | ) | |||||||||||
Payment of debt for the acquisition of Grupo Tampico, net of cash acquired (see Note 5 A) | (173 | ) | (2,414 | ) | — | — | ||||||||||
Payment of debt for the acquisition of Grupo CIMSA , net of cash acquired (see Note 5 A) | (137 | ) | (1,912 | ) | — | — | ||||||||||
Purchase of investments | (97 | ) | (1,351 | ) | (66 | ) | (2,001 | ) | ||||||||
Proceeds from investments | 5 | 68 | 1,108 | — | ||||||||||||
Recovery of long-term financing receivables with FEMSA Cerveza | — | — | 12,209 | — | ||||||||||||
Net effects of FEMSA Cerveza exchange | — | — | 876 | — | ||||||||||||
Other disposals | — | — | 1,949 | — | ||||||||||||
Interest received | 71 | 991 | 1,104 | 1,205 | ||||||||||||
Dividends received | 119 | 1,661 | 1,304 | — | ||||||||||||
Long-lived assets acquisitions | (760 | ) | (10,615 | ) | (9,590 | ) | (7,315 | ) | ||||||||
Long-lived assets sale | 38 | 535 | 624 | 679 | ||||||||||||
Other assets | (324 | ) | (4,515 | ) | (2,448 | ) | (1,880 | ) | ||||||||
Intangible assets | (38 | ) | (538 | ) | (892 | ) | (1,347 | ) | ||||||||
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Net cash flows (used in) generated by investment activities by continuing operations | (1,296 | ) | (18,090 | ) | 6,178 | (11,376 | ) | |||||||||
Net cash flows used in investment activities by discontinued operations | — | — | (4 | ) | (3,389 | ) | ||||||||||
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Net cash flows (used in) generated by investing activities | (1,296 | ) | (18,090 | ) | 6,174 | (14,765 | ) | |||||||||
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Net cash flows available for financing activities | 297 | 4,154 | 25,103 | 16,160 | ||||||||||||
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The accompanying notes are an integral part of this consolidated statement of cash flows.
Cash Flow Generated by (Used in) Financing Activities: Bank loans obtained Bank loans paid Interest paid Dividends declared and paid Acquisition of non-controlling interest Other liabilities Net cash flows used in financing activities by continuing operations Net cash flows used in financing activities by discontinued operations Net cash flows used in financing activities Net cash flows by continuing operations Net cash flows by discontinued operations Net cash flows Translation and restatement effect on cash and cash equivalents Initial cash Initial cash of discontinued operations Initial cash and cash equivalents Ending balance Ending balance by discontinued operations Total ending balance of cash and cash equivalents, net 2011 2010 2009 474 6,606 9,016 14,107 (267 ) (3,732 ) (12,536 ) (15,533 ) (218 ) (3,043 ) (3,018 ) (4,259 ) (475 ) (6,625 ) (3,813 ) (2,246 ) (8 ) (115 ) (219 ) 67 (1 ) (13 ) 74 (25 ) (495 ) (6,922 ) (10,496 ) (7,889 ) — — (1,012 ) (909 ) (495 ) (6,922 ) (11,508 ) (8,798 ) (198 ) (2,768 ) 13,484 3,479 — — 111 3,883 (198 ) (2,768 ) 13,595 7,362 143 2,000 (1,006 ) (1,173 ) 1,942 27,097 15,824 9,635 — — (1,316 ) — 1,942 27,097 14,508 9,635 1,887 26,329 27,097 15,824 — — — (1,316 ) $ 1,887 Ps. 26,329 Ps. 27,097 Ps. 14,508
The accompanying notes are an integral part of this consolidated statement of cash flows.
FOMENTO ECONÓMICO MEXICANO, S.A.B. DE C.V. AND SUBSIDIARIES
MONTERREY, N.L., MÉXICO
Consolidated Statements of Changes in Stockholders’ Equity
For the years ended December 31, 2011, 2010 and 2009. Amounts expressed in millions of Mexican pesos (Ps.).
Capital Stock | Additional Paid-in Capital | Retained Earnings from Prior Years | Net Income | Cumulative Other Comprehensive Income (Loss) | Controlling Interest | Non-Controlling Interest in Consolidated Subsidiaries | Total Stockholders’ Equity | |||||||||||||||||||||||||
Balances at December 31, 2008 | Ps. | 5,348 | Ps. | 20,551 | Ps. | 38,929 | Ps. | 6,708 | Ps. | (2,715) | Ps. | 68,821 | Ps. | 28,074 | Ps. | 96,895 | ||||||||||||||||
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Transfer of prior year net income | 6,708 | (6,708 | ) | — | — | — | ||||||||||||||||||||||||||
Change in accounting principles (see Note 2 K) | (182 | ) | (182 | ) | — | (182 | ) | |||||||||||||||||||||||||
Dividends declared and paid (see Note 21) | (1,620 | ) | (1,620 | ) | (635 | ) | (2,255 | ) | ||||||||||||||||||||||||
Acquisition by FEMSA Cerveza of non-controlling interest | (3 | ) | (3 | ) | 19 | 16 | ||||||||||||||||||||||||||
Comprehensive income | 9,908 | 4,713 | 14,621 | 6,734 | 21,355 | |||||||||||||||||||||||||||
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Balances at December 31, 2009 | 5,348 | 20,548 | 43,835 | 9,908 | 1,998 | 81,637 | 34,192 | 115,829 | ||||||||||||||||||||||||
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Transfer of prior year net income | 9,908 | (9,908 | ) | — | — | — | ||||||||||||||||||||||||||
Dividends declared and paid (see Note 21) | (2,600 | ) | (2,600 | ) | (1,213 | ) | (3,813 | ) | ||||||||||||||||||||||||
Other transactions of non-controlling interest | 10 | 10 | (283 | ) | (273 | ) | ||||||||||||||||||||||||||
Recycling of OCI and decreasing of non-controlling interest due to exchange of FEMSA Cerveza (see Note 5 B) | 525 | (525 | ) | — | (1,221 | ) | (1,221 | ) | ||||||||||||||||||||||||
Other movements of equity method of associates, net of taxes | (98 | ) | (98 | ) | — | (98 | ) | |||||||||||||||||||||||||
Comprehensive income | 39,726 | (1,327 | ) | 38,399 | 4,190 | 42,589 | ||||||||||||||||||||||||||
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Balances at December 31, 2010 | 5,348 | 20,558 | 51,045 | 40,251 | 146 | 117,348 | 35,665 | 153,013 | ||||||||||||||||||||||||
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Transfer of prior year net income | 40,251 | (40,251 | ) | — | — | — | ||||||||||||||||||||||||||
Dividends declared and paid (see Note 21) | (4,600 | ) | (4,600 | ) | (2,025 | ) | (6,625 | ) | ||||||||||||||||||||||||
Acquisition of Grupo Tampico through issuance of Coca-Cola FEMSA shares (see Note 5 A) | — | 7,828 | 7,828 | |||||||||||||||||||||||||||||
Acquisition of Grupo CIMSA through issuance of Coca-Cola FEMSA shares (see Note 5 A) | — | 9,017 | 9,017 | |||||||||||||||||||||||||||||
Other transactions of non-controlling interest | (45 | ) | (45 | ) | (70 | ) | (115 | ) | ||||||||||||||||||||||||
Other movements of equity method of associates, net of taxes | 60 | 60 | — | 60 | ||||||||||||||||||||||||||||
Comprehensive income | 15,133 | 5,684 | 20,817 | 7,119 | 27,936 | |||||||||||||||||||||||||||
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Balances at December 31, 2011 | Ps. | 5,348 | Ps. | 20,513 | Ps. | 86,756 | Ps. | 15,133 | Ps. | 5,830 | Ps. | 133,580 | Ps. | 57,534 | Ps. | 191,114 | ||||||||||||||||
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The accompanying notes are an integral part of these consolidated statements of changes in stockholders’ equity.
FOMENTO ECONÓMICO MEXICANO, S.A.B. DE C.V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
For the years ended December 31, 2011, 2010 and 2009. Amounts expressed in millions of U.S. dollars ($) and in millions of Mexican pesos (Ps.).
Note 1. Activities of the Company
Fomento Económico Mexicano, S.A.B. de C.V. (“FEMSA”) is a Mexican holding company. The principal activities of FEMSA and its subsidiaries (the “Company”), as an economic unit, are carried out by operating subsidiaries and grouped under direct and indirect holding company subsidiaries (the “Subholding Companies”) of FEMSA.
On February 1, 2010, the Company and The Coca-Cola Company signed a second amendment to the shareholders’ agreement that confirms contractually the capability of the Company to govern the operating and financial policies of Coca-Cola FEMSA, to exercise control over the operations in the ordinary course of business and grants protective rights to The Coca-Cola Company on such items as mergers, acquisitions or sales of any line of business. These amendments were signed without transfer of any consideration. The percentage of voting interest of the Company in Coca-Cola FEMSA remains the same after the signing of this amendment.
On April 30, 2010, FEMSA exchanged 100% of its stake in FEMSA Cerveza, the beer business unit, for a 20% economic interest in Heineken Group (“Heineken”). This strategic transaction, as well as the related impacts, is broadly described in Note 5 B.
The following is a description of the activities of the Company as of the date of the issuance of these consolidated financial statements, together with the ownership interest in each Subholding Company:
Subholding Company | % Ownership | Activities | ||
Coca-Cola FEMSA, S.A.B. de C.V. and subsidiaries (“Coca-Cola FEMSA”) | 50.0% (1) (2) (63.0% of the | Production, distribution and marketing of certain Coca-Cola trademark beverages in Mexico, Guatemala, Nicaragua, Costa Rica, Panama, Colombia, Venezuela, Brazil and Argentina. The Coca-Cola Company indirectly owns 29.4% of Coca-Cola FEMSA’s capital stock. In addition, shares representing 20.6% of Coca-Cola FEMSA’s capital stock are traded on the Bolsa Mexicana de Valores (Mexican Stock Exchange “BMV”). Its American Depositary Shares (ADSs) trade on the New York Stock Exchange (NYSE). | ||
FEMSA Comercio, S.A. de C.V. and subsidiaries (“FEMSA Comercio”) | 100% | Operation of a chain of convenience stores in Mexico under the trade name “OXXO.” | ||
CB Equity, LLP (“CB Equity”) | 100% | This company holds Heineken N.V. and Heineken Holding N.V. shares, acquired as part of the exchange of FEMSA Cerveza on April 2010 (see Note 5 B). | ||
Other companies | 100% | Companies engaged in the production and distribution of coolers, commercial refrigeration equipment and plastic cases; as well as transportation logistics and maintenance services to FEMSA’s subsidiaries and to third parties. |
(1) | The Company controls operating and financial policies. |
(2) | The ownership decreased from 53.7% in 2010 to 50.0% as of December 31, 2011 as a result of merger transactions (see Note 5 A). |
Note 2. Basis of Presentation
The accompanying consolidated financial statements were prepared in accordance with Normas de Información Financiera (Mexican Financial Reporting Standards or “Mexican FRS”), individually referred to as “NIFs,” and are stated in millions of Mexican pesos (“Ps.”). The translation of Mexican pesos into U.S. dollars (“$”) is included solely for the convenience of the reader, using the noon buying exchange rate published by the Federal Reserve Bank of New York of 13.9510 pesos per U.S. dollar as of December 30, 2011.
The consolidated financial statements include the financial statements of FEMSA and those companies in which it exercises control. All intercompany account balances and transactions have been eliminated in consolidation.
The Company classifies its costs and expenses by function in the consolidated income statement, in order to conform to the industry’s practices where the Company operates. The income from operations line in the income statement is the result of subtracting cost of sales and operating expenses from total revenues, and it has been included for a better understanding of the Company’s financial and economic performance.
Beginning on January 1, 2008, and according to NIF B-10 “Effects of Inflation,” only inflationary economic environments have to recognize inflation effects. Since that date the Company has operated in a non inflationary economic environment in Mexico. As a result, the financial statements are no longer restated for inflation after December 31, 2007. Figures as of December 31, 2010, 2009 and 2008 are presented as they were reported in last year.
The consolidated balance sheet as of December 31, 2010 and the consolidated statement of cash flows for the years ended December 31, 2010 and 2009 present certain reclassifications for comparable purposes in accordance with several Mexican FRS which came into effect on January 1, 2011 (see Notes 2 C, D and E).
The results of operations of businesses acquired by the Company are included in the consolidated financial statements since the date of acquisition. As a result of certain acquisitions (see Note 5 A), the consolidated financial statements are not comparable to the figures presented in prior years.
The accompanying consolidated financial statements and their accompanying notes were approved for issuance by the Company’s Chief Executive Officer and Chief Financial Officer on April 27, 2012 and subsequent events have been considered through that date (see Note 29).
On January 1, 2011, 2010, and 2009 several Mexican FRS came into effect. Such changes and their application are described as follows:
a) | NIF B-5, “Financial Information by Segment”: |
In 2011, the Company adopted NIF B-5 “Financial Information by Segment”, which superseded Bulletin B-5. NIF B-5 establishes that an operating segment shall meet the following criteria: i) the segment engages in business activities from which it earns or is in the process of obtaining revenues, and incurs in the related costs and expenses; ii) the operating results are reviewed regularly by the main authority of the entity’s decision maker; and iii) specific financial information is available. NIF B-5 also requires disclosures related to operating segments subject to reporting, including details of earnings, assets and liabilities, reconciliations, information about products and services, and geographical areas. This pronouncement was applied retrospectively for comparative purposes and had no impact, except for new disclosure requirements such as: consolidated other expenses, consolidated other net finance expenses, consolidated net income before discontinued operations and investment in associates and joint ventures (see Note 25).
b) | NIF B-9, “Interim Financial Reporting”: |
The Company adopted NIF B-9 “Interim Financial Reporting”, which prescribes the content to be included in a complete or condensed set of financial statements for an interim period. In accordance with this standard, the complete set of financial statements shall include: a) a statement of financial position as of the end of the period, b) an income statement for the period, c) a statement of changes in equity for the period, d) a statement of cash flows for the period, and e) notes providing the relevant accounting policies and other explanatory notes. Condensed financial statements shall include: a) condensed statement of financial position, b) condensed income statement, c) condensed statement of changes in equity, d) condensed statement of cash flows, and e) selected explanatory notes. The adoption of NIF B-9 did not impact the Company’s annual financial statements.
c) | NIF C-4, “Inventories”: |
On January 1, 2011 the Company adopted NIF C-4, which replaced Mexican accounting Bulletin C-4, Inventories. The principal difference between Mexican accounting Bulletin C-4 and Mexican FRS C-4 is that the new standard does not allow using direct costs as the inventory valuation method nor does it allow using the LIFO cost method as the formulas (formerly method) for the assignment of unit cost to the inventories. Mexican FRS C-4 establishes that inventories must be valued at the lower of either acquisition cost or net realizable value. Such standard also establishes that advances to suppliers for the acquisition of merchandise must be classified as inventories provided the risks and benefits are transferred to the Company. This standard also sets some additional disclosures. NIF C-4 was applied retrospectively causing a decrease in the inventory balances reported as of December 31, 2010 as a result of the treatment of presentation of advances to suppliers (see Note 2 D), and additional disclosures related to goods in transit and allowance for obsolescence, which was reclassified to finished products (see Note 7). The application of this standard did not impact on inventory valuation of the Company.
d) | NIF C-5, “Prepaid Expenses”: |
In 2011, the Company adopted NIF C-5, which superseded Mexican accounting Bulletin C-5. This standard establishes that the main characteristic of prepaid expenses is that they do not result in the transfer to the entity of the benefits and risks inherent to the goods or services to be received. Consequently, prepaid expenses must be recognized in the balance sheet as either current or non-current assets, depending on the item classification in the statement of financial position. Moreover, Mexican FRS C-5 establishes that prepayments made for goods or services whose inherent benefits and risks have already been transferred to the entity must be carried to the appropriate caption. The accounting changes resulting from the adoption of this standard were recognized retrospectively, causing an increase in “other current assets” Ps. 133 (see Note 8) and “other assets” Ps. 226 (see Note 12), as a result of the comparative presentation of prepaid expenses, which were reclassified from “inventories” (Ps. 133) and “property, plant, and equipment” (Ps. 226), as of December 31, 2010.
e) | NIF C-6, “Property, Plant and Equipment”: |
In 2011, the Company adopted NIF C-6, which replaced Mexican accounting Bulletin C-6, Property, Machinery and Equipment, and it is effective beginning on January 1, 2011, with the exception for the changes related to the segregation of property, plant and equipment into separate components of those assets with different useful lives that is effective on January 1, 2012. However, the depreciation by separate items (major components), has been applied by the Company since priors years, and consequently did not impact its financials statements. Among other points, NIF C-6 establishes that for acquisitions of free-of charge assets, the cost of the assets must be null, thus eliminating the option of performing appraisals. In the case of asset exchanges, NIF C-6 requires entities to determine the commercial substance of the transaction. The depreciation of all assets must be applied against the components of the assets, and the amount to be depreciated is the cost of acquisition less the asset’s residual value. In addition, NIF C-6 clarifies that regardless of whether the use or non use of the asset is temporary or indefinite, it should not cease the depreciation charge. Depreciation of an asset ceases at the earlier of the date that the asset is classified as held for sale and the date that the asset is derecognized. There are specific disclosures for public entities such as: additions, disposals, depreciation, impairments, among others. This standard was fully applied and did not impact the Company’s financial statements, except for reclassification from the balance of the property, plant and equipment as of December 31, 2010 as a result of the treatment of presentation of advances to suppliers (see Note 2 D) and additional disclosures (see Note 10).
f) | NIF C-18, “Obligations Related to Retirement of Property, Plant and Equipment”: |
In 2011, the Company adopted NIF C-18, which establishes the accounting treatment for the recognition of a liability for legal or constructive obligations related to the retirement of property, plant and equipment recognized as a result of the acquisition, construction, development and/or normal operation of such components. This standard also establishes that an entity must initially recognize a provision for obligations related to retirement of property, plant and equipment based on its best estimate of the disbursements required to settle the present obligation at the time it is assumed, provided a reliable estimate can be made of the amount of the obligation. The best estimate of a provision for an obligation associated with the retirement of property, plant and equipment components should be determined using the expected present value method. The adoption of NIF C-18 did not impact the Company’s financial statements.
g) | NIF C-1, “Cash and Cash Equivalents”: |
In 2010, the Company adopted NIF C-1 “Cash and Cash Equivalents,” which superseded Bulletin C-1 “Cash.” NIF C-1 establishes that cash shall be measured at nominal value, and cash equivalents shall be measured at acquisition cost for initial recognition. Subsequently, cash equivalents should be measured according to its designation: precious metals shall be measured at fair value, foreign currencies shall be translated to the reporting currency applying the closing exchange rate, other cash equivalents denominated in a different measure of exchange shall be recognized to the extent provided for this purpose at the closing date of financial statements, and temporary investments shall be presented at fair value. Cash
and cash equivalents will be presented in the first line of assets, including restricted cash. This pronouncement was applied retrospectively, causing an increase in the cash balances reported as a result of the treatment of presentation of restricted cash, which was reclassified from “other current assets” for the amount of Ps. 394 at December 31, 2010 (see Note 4 B).
h) | Interpretation to Mexican Financial Reporting Standards (“Interpretación a las Normas de Información Financiera”) or “INIF 19”, “Accounting Change as a Result of IFRS Adoption”: |
On September 30, 2010, INIF 19 “Accounting change as a result of IFRS adoption” was issued. INIF 19 states disclosure requirements for: (a) financial statements based on Mexican FRS that were issued before IFRS adoption and (b) financial statements on Mexican FRS that are issued during IFRS adoption process. The adoption of this INIF, resulted in additional disclosures regarding IFRS adoption, such as date of adoption, significant financial impact, significant changes in accounting policies, and others (see Note 28).
i) | NIF B-7, “Business Combinations”: |
In 2009, the Company adopted NIF B-7 “Business Combinations,” which is an amendment to the previous Bulletin B-7 “Business Acquisitions.” NIF B-7 establishes general rules for recognizing the fair value of net assets of businesses acquired as well as the fair value of non-controlling interests, at the purchase date. This statement differs from the previous Bulletin B-7 in the following: a) To recognize all assets and liabilities acquired at their fair value, including the non-controlling interest based on the acquirer accounting policies, b) acquisition-related costs and restructuring expenses should not be part of the purchase price, and c) changes to tax amounts recorded in acquisitions must be recognized as part of the income tax provision. This pronouncement was applied prospectively to business combinations for which the acquisition date was on or after January 1, 2009.
j) | NIF C-7, “Investments in Associates and Other Permanent Investments”: |
NIF C-7 “Investments in Associates and Other Permanent Investments,” establishes general rules of accounting recognition for the investments in associated and other permanent investments not jointly or fully controlled or that are significantly influenced by an entity. This pronouncement includes guidance to determine the existence of significant influence. Previous Bulletin B-8 “Consolidated and Combined Financial Statements and Assessment of Permanent Share Investments,” defined that permanent share investments were accounted for by the equity method if the entity held 10% or more of its outstanding shares. NIF C-7 establishes that permanent share investments should to be accounted for by equity method if: a) an entity holds 10% or more of a public entity, b) an entity holds 25% or more of a non-public company, or c) an entity has significant influence in its investment as defined in NIF C-7. The Company adopted NIF C-7 on January 1, 2009, and its adoption did not have a significant impact in its consolidated financial results.
k) | NIF C-8, “Intangible Assets”: |
In 2009, the Company adopted NIF C-8 “Intangible Assets” which is similar to previous Bulletin C-8 “Intangible Assets.” NIF C-8, establishes the rules of valuation, presentation and disclosures for the initial and subsequent recognition of intangible assets that are acquired either individually, through acquisition of an entity, or generated internally in the course of the entity’s operations. This NIF considers intangible assets as non-monetary items, broadens the criteria of identification to include not only if they are separable (asset could be sold, transferred or used by the entity) but also whether they come from contractual or legal rights. NIF C-8 establishes that preoperative costs capitalized before this standard went into effect should have intangible assets characteristics, otherwise preoperative costs must be expensed as incurred. The impact of adopting NIF C-8 was a Ps. 182, net of deferred income tax, regarding prior years preoperative costs that did not have intangible asset characteristics, charged to January 1, 2009 retained earnings in the consolidated financial statements and is presented as a change in accounting principle in the consolidated statements of changes in stockholders’ equity.
l) | NIF D-8, “Share-Based Payments”: |
In 2009, the Company adopted NIF D-8 “Share-Based Payments” which establishes the recognition of share-based payments. When an entity purchases goods or pays for services with equity instruments, the NIF requires the entity to recognize those goods and services at fair value and the corresponding increase in equity. If the entity cannot determine the fair value of goods and services, it should determine if using an indirect method, based on fair value of the equity instruments. This pronouncement substitutes for the supplementary use of IFRS 2 “Share-Based Payments.” The adoption of NIF D-8 did not impact the Company’s financial statements.
m) | NIF B-8, “Consolidated and Combined Financial Statements”: |
NIF B-8 “Consolidated and Combined Financial Statements,” issued in 2008 amends Bulletin B-8 “Consolidated and Combined Financial Statements and Assessment of Permanent Share Investments.” Prior Bulletin B-8 based its
consolidation principle mainly on ownership of the majority voting capital stock. NIF B-8 differs from previous Bulletin B-8 in the following: a) defines control as the power to govern financial and operating policies, b) establishes that there are other facts, such as contractual agreements that have to be considered to determine if an entity exercises control or not, c) defines “Specific-Purpose Entity” (“SPE”), as those entities that are created to achieve a specific purpose and are considered within the scope of this pronouncement, d) establishes new terms as “controlling interest” instead of “majority interest” and “non-controlling interest” instead of “minority interest,” and e) confirms that non-controlling interest must be assessed at fair value at the subsidiary acquisition date. NIF B-8 was applied prospectively, beginning on January 1, 2009. The amendment to the shareholders agreement described in Note 1, allowed the Company to continue to consolidate Coca-Cola FEMSA for Mexican FRS purposes during 2009.
Adoption of IFRS
TheComisión Nacional Bancaria y de Valores(Mexican National Banking and Securities Commission, or CNBV) announced that from 2012, all public companies listed in Mexico must report their financial information in accordance with International Financial Reporting Standards (“IFRS”). Since 2006, the CINIF (Mexican Board of Research and Development of Financial Reporting Standards) has been modifying Mexican Financial Reporting Standards in order to ensure their convergence with IFRS.
The Company will adopt IFRS beginning in January 1, 2012 with a transition date to IFRS of January 1, 2011. The consolidated financial statements of the Company for 2012 will be presented in accordance with IFRS as issued by the International Accounting Standards Board (IASB). The SEC has previously changed its rules to allow foreign private issuers that report under IFRS as issued by the IASB to not reconcile their financial statements to Generally Accepted Accounting Principles in the United States of America (U.S. GAAP), (see Note 28).
Note 3. Foreign Subsidiary Incorporation
The accounting records of foreign subsidiaries are maintained in local currency and in accordance with local accounting principles of each country. For incorporation into the Company’s consolidated financial statements, each foreign subsidiary’s individual financial statements are adjusted to Mexican FRS, and translated into Mexican pesos, as described as follows:
For inflationary economic environments, the inflation effects of the origin country are recognized, and subsequently translated into Mexican pesos using the year-end exchange rate for the balance sheets and income statements; and
For non-inflationary economic environments, assets and liabilities are translated into Mexican pesos using the year-end exchange rate, stockholders’ equity is translated into Mexican pesos using the historical exchange rate, and the income statement is translated using the average exchange rate of each month.
Local Currencies to Mexican Pesos | ||||||||||||||||||||||||||
Functional / Recording Currency | Average Exchange Rate for | Exchange Rate as of December 31 | ||||||||||||||||||||||||
Country or Zone | 2011 | 2010 | 2009 | 2011 | 2010 | 2009 | ||||||||||||||||||||
Mexico | Mexican peso | Ps. | 1.00 | Ps. | 1.00 | Ps. | 1.00 | Ps. | 1.00 | Ps. | 1.00 | Ps. | 1.00 | |||||||||||||
Guatemala | Quetzal | 1.60 | 1.57 | 1.66 | 1.79 | 1.54 | 1.56 | |||||||||||||||||||
Costa Rica | Colon | 0.02 | 0.02 | 0.02 | 0.03 | 0.02 | 0.02 | |||||||||||||||||||
Panama | U.S. dollar | 12.43 | 12.64 | 13.52 | 13.98 | 12.36 | 13.06 | |||||||||||||||||||
Colombia | Colombian peso | 0.01 | 0.01 | 0.01 | 0.01 | 0.01 | 0.01 | |||||||||||||||||||
Nicaragua | Cordoba | 0.55 | 0.59 | 0.67 | 0.61 | 0.56 | 0.63 | |||||||||||||||||||
Argentina | Argentine peso | 3.01 | 3.23 | 3.63 | 3.25 | 3.11 | 3.44 | |||||||||||||||||||
Venezuela(1) | Bolivar | 2.89 | 2.97 | 6.29 | 3.25 | 2.87 | 6.07 | |||||||||||||||||||
Brazil | Reai | 7.42 | 7.18 | 6.83 | 7.45 | 7.42 | 7.50 | |||||||||||||||||||
Euro Zone | Euro | 17.28 | 16.74 | 18.80 | 18.05 | 16.41 | 18.81 |
(1) | Equals 4.30 bolivars per one U.S. dollar in 2011 and 2010; and 2.15 bolivars per one U.S. dollar for 2009, translated to Mexican pesos applying the year-end exchange rate. |
The variations in the net investment in foreign subsidiaries generated by exchange rate fluctuation are included in the cumulative translation adjustment, which is recorded in stockholders’ equity as part of cumulative other comprehensive income (loss).
Beginning in 2010, the government of Venezuela announced the devaluation of the Bolivar (Bs). The official exchange rate of Bs. 2.150 to the dollar, in effect since 2005, was replaced on January 8, 2010, with a dual-rate regime, which allows two official exchange rates, one for essential products of Bs. 2.60 per U.S. dollar and other non-essential products of Bs. 4.30 per
U.S. dollar. According to this, the exchange rate used by the company to convert the information of the operation for this country changed from Bs 2.15 to 4.30 per U.S. dollar in 2010. As a result of this devaluation, the balance sheet of the Coca-Cola FEMSA Venezuelan subsidiary reflected a reduction in other comprehensive income (part of shareholder’s equity) of Ps. 3,700 which was accounted for at the time of the devaluation in January 2010. The Company has operated under exchange controls in Venezuela since 2003 that affect its ability to remit dividends abroad or make payments other than in local currencies and that may increase the real price to us of raw materials purchased in local currency.
During December 2010, authorities of the Venezuelan Government announced the unification of their two fixed U.S. dollar exchange rates to Bs. 4.30 per U.S. dollar, effective January 1, 2011. As a result of this change, the translation of balance sheet of the Coca-Cola FEMSA’s Venezuelan subsidiary did not have an impact in shareholders’ equity, since transactions performed by this subsidiary were already using the Bs. 4.30 exchange rate.
Intercompany financing balances with foreign subsidiaries are considered as long-term investments, since there is no plan to pay such financing in the foreseeable future. Monetary position and exchange rate fluctuation regarding this financing are recorded in equity as part of cumulative translation adjustment, in cumulative other comprehensive income (loss).
The translation of assets and liabilities denominated in foreign currencies into Mexican pesos is for consolidation purposes and does not indicate that the Company could realize or settle the reported value of those assets and liabilities in Mexican pesos. Additionally, this does not indicate that the Company could return or distribute the reported Mexican peso value equity to its shareholders.
Note 4. Significant Accounting Policies
The Company’s accounting policies are in accordance with Mexican FRS, which require that the Company’s management make certain estimates and use certain assumptions to determine the valuation of various items included in the consolidated financial statements. The Company’s management believes that the estimates and assumptions used were appropriate as of the date of these consolidated financial statements. However actual results are subject to future events and uncertainties, which could materially impact the Company’s actual performance.
The significant accounting policies are as follows:
a) | Recognition of the Effects of Inflation in Countries with Inflationary Economic Environment: |
NIF B-10 establishes two types of inflationary environments: a) inflationary economic environment; this is when cumulative inflation of the three preceding years is 26% or more. In such case, inflation effects are recognized in the financial statements by applying the integral method and the recognized restatement effects for inflationary economic environments is made starting in the period that the entity becomes inflationary; and b) non-inflationary economic environment; this is when cumulative inflation of the three preceding years is less than 26%. In such case, no inflationary effects are recognized in the financial statements, keeping the recognized restatement effects from the last period in which the inflationary accounting was applied.
The Company recognizes the effects of inflation in the financial information of its subsidiaries that operate in inflationary economic environments through the integral method, which consists of:
Using inflation factors to restate non-monetary assets such as inventories, investments in process, property, plant and equipment, intangible assets, including related costs and expenses when such assets are consumed or depreciated. The imported assets are recorded using the exchange rate of the acquisition date, and are restated using the inflation factors of the country where the asset is acquired for inflationary economic environments;
Applying the appropriate inflation factors to restate capital stock, additional paid-in capital, retained earnings and the cumulative other comprehensive income/loss by the necessary amount to maintain the purchasing power equivalent in Mexican pesos on the dates such capital was contributed or income was generated up to the date these consolidated financial statements are presented; and
Including in the Comprehensive Financing Result the gain or loss on monetary position (see Note 4 T).
The Company restates the financial information of its subsidiaries that operate in inflationary economic environments using the consumer price index of each country.
The operations of the Company are classified as follows considering the cumulative inflation of the three preceding years of 2011. The following classification was also applied for the 2010 period:
Mexico Guatemala Colombia Brazil Panama Euro Zone Argentina Venezuela Nicaragua(1) Costa Rica(1) Inflation Rate Cumulative Inflation 2011 2010 2009 2010-2008 Type of Economy 3.8 % 4.4 % 3.6 % 15.2 % Non-Inflationary 6.2 % 5.4 % (0.3 )% 15.0 % Non-Inflationary 3.7 % 3.2 % 2.0 % 13.3 % Non-Inflationary 6.5 % 5.9 % 4.1 % 17.4 % Non-Inflationary 6.3 % 4.9 % 1.9 % 14.1 % Non-Inflationary 2.7 % 2.2 % 0.9 % 4.3 % Non-Inflationary 9.5 % 10.9 % 7.7 % 28.1 % Inflationary 27.6 % 27.2 % 25.1 % 108.2 % Inflationary 7.6 % 9.2 % 0.9 % 25.4 % Inflationary 4.7 % 5.8 % 4.0 % 25.4 % Inflationary
(1) | Costa Rica and Nicaragua have been considered inflationary economies in 2009, 2010 and 2011. While the cumulative inflation for 2008-2010 was less than 26%, inflationary trends in these countries continue to support this classification. |
b) | Cash and Cash Equivalents and Investments: |
Cash and Cash Equivalents:
Cash is measured at nominal value and consists of non-interest bearing bank deposits and restricted cash. Cash equivalents consisting principally of short-term bank deposits and fixed-rate investments with original maturities of three months or less are recorded at its acquisition cost plus accrued interest income not yet received, which is similar to listed market prices.
2011 | 2010 | |||||||
Mexican pesos | Ps. | 7,642 | Ps. | 11,207 | ||||
U.S. dollars | 13,752 | 12,652 | ||||||
Brazilian reais | 1,745 | 1,792 | ||||||
Euros | 785 | 531 | ||||||
Venezuelan bolivars | 1,668 | 460 | ||||||
Colombian pesos | 471 | 213 | ||||||
Argentine pesos | 131 | 153 | ||||||
Others | 135 | 89 | ||||||
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Ps. | 26,329 | Ps. | 27,097 | |||||
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As of December 31, 2011 and 2010, the Company has restricted cash which is pledged as collateral of accounts payable in different currencies as follows:
2011 | 2010 | |||||||
Venezuelan bolivars | Ps. | 324 | Ps. | 143 | ||||
Argentine pesos | — | 2 | ||||||
Brazilian reais | 164 | 249 | ||||||
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Ps. | 488 | Ps. | 394 | |||||
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As of December 31, 2011 and 2010, cash equivalents amounted to Ps. 17,908 and Ps. 19,770, respectively.
Investments:
Investments consist of debt securities and bank deposits with maturities more than three months. Management determines the appropriate classification of investments of the time of purchase and reevaluates such designation as of each balance date. As of December 31, 2011 and 2010 investments are classified as available-for-sale and held-to maturity.
Available-for-sale investments are carried at fair value, with the unrealized gains and losses, net of tax, reported in other comprehensive income. Interest and dividends on investments classified as available-for-sale are included in interest income. The fair values of the investments are readily available based on quoted market prices.
Held-to maturity investments are those that the Company has the positive intent and ability to hold to maturity, and are carried at acquisition cost which includes any cost of purchase and premium or discount related to the investment which is amortized over the life of the investment based on its outstanding balance. Interest and dividends on investments classified as held-to maturity are included in interest income. The carrying value of Held-to maturity investments is similar to its fair value. The following is a detail of available-for-sale and held-to maturity investments.
Available-for-Sale | ||||||||
Debt Securities | 2011 | 2010 | ||||||
Acquisition cost | Ps. | 326 | Ps. | 66 | ||||
Unrealized gross gain | 4 | — | ||||||
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Fair value | Ps. | 330 | Ps. | 66 | ||||
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Held-to Maturity(1) | ||||||||
Bank Deposits | ||||||||
Acquisition cost | Ps. | 993 | Ps. | — | ||||
Accrued interest | 6 | — | ||||||
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Amortized cost | Ps. | 999 | Ps. | — | ||||
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Total investments | Ps. | 1,329 | Ps. | 66 | ||||
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(1) | Investments contracted in euros at a fixed interest rate and maturing on April 2, 2012. |
c) | Accounts Receivable: |
Accounts receivable representing exigible rights arising from sales, services and loans to employees or any other similar concept, are measured at their realizable value and are presented net of discounts and allowance for doubtful accounts.
Allowance for doubtful accounts is based on an evaluation of the aging of the receivable portfolio and the economic situation of the Company’s clients, as well as the Company’s historical loss rate on receivables and the economic environment in which the Company operates. The carrying value of accounts receivable approximates its fair value as of both December 31, 2011 and 2010.
Coca-Cola FEMSA has accounts receivable from The Coca-Cola Company arising from the latter’s participation in advertising and promotional programs and investment in refrigeration equipment and returnable bottles made by Coca-Cola FEMSA (see Note 4 L).
d) | Inventories and Cost of Sales: |
Inventories are measured at the lower of cost or net realizable value.
The cost of inventories is based on the weighted average cost formula and the operating segments of the Company use inventory costing methodologies to value their inventories, such as the standard cost method in Coca-Cola FEMSA and retail method in FEMSA Comercio.
Cost of sales based on average cost is determined based on the average amount of the inventories at the time of sale. Cost of sales includes expenses related to raw materials used in the production process, labor cost (wages and other benefits), depreciation of production facilities, equipment and other costs such as fuel, electricity, breakage of returnable bottles in the production process, equipment maintenance, inspection and plant transfer costs.
e) | Other Current Assets: |
Other current assets are comprised of payments for goods and services whose inherent risks and benefits have not been transferred to the Company and that will be received over the next 12 months, the fair market value of derivative financial instruments with maturity dates of less than one year (see Note 4 U), and long-lived assets available for sale that will be sold within the following year.
Prepaid expenses principally consist of advances to suppliers of raw materials, advertising, promotional, leasing and insurance expenses, and are recognized in the appropriate balance sheet or income statement caption when the risks and benefits have already been transferred to the Company and/or goods, services or benefits are received.
Advertising costs consist of television and radio advertising airtime paid in advance, and is generally amortized over a 12-month period based on the transmission of the television and radio spots. The related production costs are recognized in income from operations the first time the advertising is broadcasted.
Promotional expenses are recognized as incurred, except for those promotional costs related to the launching of new products or presentations before they are on the market. These costs are recorded as prepaid expenses and amortized over the period during which they are estimated to increase sales of the related products or container presentations to normal operating levels, which is generally no longer than one year.
The long-lived assets available-for-sale are recorded at the lower of cost or net realizable value. Long-lived assets are subject to impairment tests (see Note 8).
f) | Capitalization of Comprehensive Financing Result: |
Comprehensive financing result directly attributable to qualifying assets has to be capitalized as part of acquisition cost, except for interest income obtained from temporary investments while the entity is waiting to invest in the qualifying asset. Comprehensive financing result of long-term financing clearly linked to qualifying assets is capitalized directly. When comprehensive financing result of direct or indirect financing is not clearly linked to qualifying assets, the Company capitalizes the proportional comprehensive financing result attributable to those qualifying assets by the weighted average interest rate of each business, including the effects of derivative financial instruments related to that financing.
g) | Investments in Shares: |
Investments in shares of associated companies where the Company holds 10% or more of a public company, 25% or more of a non-public company, or exercises significant influence according to NIF C-7 (see Note 2 J), are initially recorded at their acquisition cost as of acquisition date and are subsequently accounted for by the equity method. In order to apply the equity method from associates, the Company uses the investee’s financial statements for the same period as the Company’s consolidated financial statements and converts them to Mexican FRS if the investee reports financial information in a different GAAP. Equity method income from associates is presented in the consolidated income statements as part of the income from continuing operations.
Goodwill identified at the investment’s acquisition date is presented as part of the investment of shares of an associate in the consolidated balance sheet.
On May 1, 2010, the Company started to account for its 20% interest in Heineken Group under the equity method (see Notes 5 B and 9). Heineken is an international company which prepares its information based on International Financial Reporting Standards (IFRS). The Company has analyzed differences between Mexican FRS and IFRS to reconcile Heineken’s net controlling interest income and comprehensive income as required by NIF C-7, in order to estimate the impact on its figures.
Investments in affiliated companies in which the Company does not have significant influence are recorded at acquisition cost and restated using the consumer price index if that entity operates in an inflationary economic environment.
h) | Property, Plant and Equipment: |
Property, plant and equipment are initially recorded at their cost of acquisition and/or construction. The comprehensive financing result related to the acquisition or construction of qualifying asset is capitalized as part of the cost of that asset. Major maintenance costs are capitalized as part of total acquisition cost. Routine maintenance and repair costs are expensed as incurred. Property, plant and equipment also may include costs of dismantling and removing the items and restoring the site on which they are located. In 2011 Returnable bottles are also part of property, plant and equipment and 2010 has been also aggregated to conform this presentation.
Investments in fixed assets in progress consist of property, plant and equipment not yet in service, in other words, that are not yet used for the purpose that they were bought, built or developed. The Company expects to complete those investments during the following 12 months.
Depreciation is computed using the straight-line method over acquisition cost, reduced by their residual values. Where an item of property, plant and equipment comprises major components having different useful lives, they are accounted and depreciated for as separate items (major components) of property, plant and equipment. The Company estimates depreciation rates, considering the estimated useful lives of the assets, which along with residual value is reviewed, and modified if appropriate, at each financial year-end.
The estimated useful lives of the Company’s principal assets are as follows:
Years | ||||
Buildings | 40–50 | |||
Machinery | 12–20 | |||
Distribution equipment | 10–12 | |||
Refrigeration equipment | 5–7 | |||
Returnable bottles | 1.5–4 | |||
Information technology equipment | 3–5 |
Returnable and Non-Returnable Bottles:
The Company has two types of bottles: returnable and non-returnable.
Non returnable: Are recorded in the results of operations at the time of product sale.
Returnable: Are classified as long-lived assets as a component of property, plant and equipment.
Returnable bottles are recorded at acquisition cost, and for countries with inflationary economy they are restated by applying inflation factors as of the balance sheet date, according to NIF B-10.
There are two types of returnable bottles:
Those that are in the Company’s control within its facilities, plants and distribution centers; and
Those that have been placed in the hands of customers, but still belong to the Company.
Depreciation of returnable bottles is computed using the straight-line method over acquisition cost. The Company estimates depreciation rates considering their estimated useful lives.
Returnable bottles that have been placed in the hands of customers are subject to an agreement with a retailer pursuant to which the Company retains ownership. These bottles are monitored by sales personnel during periodic visits to retailers and the Company has the right to charge any breakage identified to the retailer. Bottles that are not subject to such agreements are expensed when placed in the hands of retailers.
The Company’s returnable bottles in the market and for which a deposit from customers has been received are presented net of such deposits, and the difference between the cost of these assets and the deposits received is depreciated according to their useful lives.
Leasing Contracts:
The Company leases assets such as property, land, and transportation, machinery and computer equipments.
Leases are capitalized if: i) the contract transfers ownership of the leased asset to the lessee at the end of the lease, ii) the contract contains an option to purchase the asset at a bargain purchase price, iii) the lease period is substantially equal to the remaining useful life of the leased asset or iv) the present value of future minimum payments at the inception of the lease is substantially equal to the market value of the leased asset, net of any residual value.
When the inherent risks and benefits of a leased asset remains substantially with the lessor, leases are classified as operating and rent is charged to results of operations as incurred.
i) | Other Assets: |
Other assets represent payments whose benefits will be received in future years and mainly consist of the following:
Agreements with customers for the right to sell and promote the Company’s products during certain periods of time, which are considered monetary assets and amortized under the straight-line method over the life of the contract.
The amortization is recorded reducing net sales, which during years ended December 31, 2011, 2010 and 2009, amounted to Ps. 803, Ps. 553 and Ps. 604, respectively.
Leasehold improvements are amortized using the straight-line method, over the shorter of the useful life of the assets and the period of the lease. The amortization of leasehold improvements as of December 31, 2011, 2010 and 2009 were Ps. 590, Ps. 518 and Ps. 471, respectively.
j) | Intangible Assets: |
Intangible assets represent payments whose benefits will be received in future years. These assets are classified as either intangible assets with a finite useful life or intangible assets with an indefinite useful life, in accordance with the period over which the Company is expected to receive the benefits.
Intangible assets with finite useful lives are amortized and mainly consist of:
Information technology and management systems costs incurred during the development stage which are currently in use. Such amounts were capitalized and then amortized using the straight-line method over the useful life of those assets. Expenses that do not fulfill the requirements for capitalization are expensed as incurred.
Other computer systems cost in the development stage, not yet in use. Such amounts are capitalized as they are expected to add value such as income or cost savings in the future. Such amounts will be amortized on a straight-line basis over their estimated useful life after they are placed in service.
Long-term alcohol licenses are amortized using the straight-line method, and are presented as part of intangible assets of finite useful life.
Intangible assets with indefinite lives are not amortized and are subject to annual impairment tests or more frequently if necessary. These assets are recorded in the functional currency of the subsidiary in which the investment was made and are subsequently translated into Mexican pesos applying the closing rate of each period. Where inflationary accounting is applied, the intangible assets are restated applying inflation factors of the country of origin and then translated into Mexican pesos at the year-end exchange rate. The Company’s intangible assets with indefinite lives mainly consist of rights to produce and distribute Coca-Cola trademark products in the territories acquired. These rights are contained in agreements that are standard contracts that The Coca-Cola Company has with its bottlers.
There are seven bottler agreements for Coca-Cola FEMSA’s territories in Mexico; two expire in June 2013, two expire in May 2015 and additionally three contracts that arose from the merger with Grupo Tampico and CIMSA, expire in September 2014, April and July 2016. The bottler agreement for Argentina expires in September 2014, for Brazil expires in April 2014, in Colombia in June 2014, in Venezuela in August 2016, in Guatemala in March 2015, in Costa Rica in September 2017, in Nicaragua in May 2016 and in Panama in November 2014. All of the Company’s bottler agreements are automatically renewable for ten-year terms, subject to the right of each party to decide not to renew any of these agreements. In addition, these agreements generally may be terminated in the case of material breach. Termination would prevent Coca-Cola FEMSA from selling Coca-Cola trademark beverages in the affected territory and would have an adverse effect on its business, financial conditions, results from operations and prospects.
Goodwill represents the excess of the acquisition cost over the fair value in identifiable net assets on the acquisition date. It equates to synergies both existing in the acquired operations and those further expected to be realized upon integration. Goodwill is recognized separately and is carried at cost, less accumulated impairment losses.
k) | Impairment of Investments in Shares, Long-Lived Assets and Goodwill: |
The Company reviews the carrying value of its long-lived assets and goodwill for impairment and determines whether impairment exists, by comparing the book value of the assets with its fair value which is calculated using recognized methodologies. In case of impairment, the Company records the resulting fair value.
For depreciable and amortizable long-lived assets, such as property, plant and equipment and certain other definite long–lived assets, the Company performs tests for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or group of assets may not be recoverable through their expected future cash flows.
For indefinite life intangible assets, such as distribution rights and trademarks, the Company tests for impairment on an annual basis and whenever certain circumstances indicate that the carrying amount of those intangible assets exceeds its implied fair value calculated using recognized methodologies consistent with them.
For goodwill, the Company tests for impairment on an annual basis and whenever certain circumstances indicate that the carrying amount of the reporting unit might exceed its implied fair value.
For investments in shares, including its goodwill, the Company performs impairment tests whenever certain events or changes in circumstances indicate that the carrying amount may exceed fair value. When the events or circumstances are considered by the Company as an evidence of impairment that is other than temporary, a loss in value is recognized. Impairment charges regarding long-lived assets and goodwill are recognized in other expenses and charges regarding investments in shares are recognized as a decrease in the equity income method of the period.
Impairments regarding amortizable and indefinite life intangible assets are presented in Note 11. No impairment was recognized regarding to depreciable long-lived assets, goodwill nor investments in shares.
l) | Payments from The Coca-Cola Company: |
The Coca-Cola Company participates in certain advertising and promotional programs as well as in Coca-Cola FEMSA’s refrigeration equipment and returnable bottles investment program. The contributions received for advertising and promotional incentives are included as a reduction of selling expenses. The contributions received for the refrigeration equipment and returnable bottles investment program are recorded as a reduction of the investment in refrigeration equipment and returnable bottles. Total contributions received were Ps. 2,561, Ps. 2,386 and Ps. 1,945 during the years ended December 31, 2011, 2010 and 2009, respectively.
m) | Employee Benefits: |
Employee benefits include obligations for pension and retirement plans, seniority premiums, postretirement medical services and severance indemnity liabilities other than restructuring, all based on actuarial calculations, using the projected unit credit method. Costs related to compensated absences, such as vacations and vacation premiums, are recognized on an accrual basis.
Employee benefits are considered to be non-monetary and are determined using long-term assumptions. The yearly cost of employee benefits is charged to income from operations and labor cost of past services is recorded as expenses over the remaining working life period of the employees.
Certain subsidiaries of the Company have established funds for the payment of pension benefits, seniority premiums and postretirement medical services through irrevocable trusts of which the employees are named as beneficiaries.
n) | Contingencies: |
The Company recognizes a liability for a loss when it is probable that certain effects related to past events, would materialize and could be reasonably estimated. These events and its financial impact are disclosed as loss contingencies in the consolidated financial statements and include penalties, interests and any other charge related to contingencies. The Company does not recognize an asset for a gain contingency unless it is certain that will be collected.
o) | Commitments: |
The Company discloses all its commitments regarding material long-lived assets acquisitions, and all contractual obligations (see Note 24 F).
p) | Revenue Recognition: |
Revenue is recognized in accordance with stated shipping terms, as follows:
For Coca-Cola FEMSA sales of products are recognized as revenue upon delivery to the customer and once the customer has taken ownership of the goods. Net sales reflect units delivered at list prices reduced by promotional allowances, discounts and the amortization of the agreements with customers to obtain the rights to sell and promote the products of Coca-Cola FEMSA; and
For FEMSA Comercio retail sales, net revenues are recognized when the product is delivered to customers, and customers take possession of products.
During 2007 and 2008, Coca-Cola FEMSA sold certain of its private label brands to The Coca-Cola Company. Proceeds received from The Coca-Cola Company were initially deferred and are being amortized against the related costs of future product sales over the estimated period of such sales. The balance of unearned revenues as of December 31, 2011 and 2010 amounted to Ps. 302 and Ps. 547, respectively. The short-term portions of such amounts which are presented as other current liabilities, amounted Ps. 197 and Ps. 276 at December 31, 2011 and 2010, respectively.
q) | Operating Expenses: |
Operating expenses are comprised of administrative and selling expenses. Administrative expenses include labor costs (salaries and other benefits) of employees not directly involved in the sale of the Company’s products, as well as professional service fees, depreciation of office facilities and amortization of capitalized information technology system implementation costs.
Selling expenses include:
Distribution: labor costs (salaries and other benefits); outbound freight costs, warehousing costs of finished products, breakage of returnable bottles in the distribution process, depreciation and maintenance of trucks and other distribution facilities and equipment. For the years ended December 31, 2011, 2010 and 2009, these distribution costs amounted to Ps. 15,125, Ps. 12,774 and Ps. 13,395, respectively;
Sales: labor costs (salaries and other benefits) and sales commissions paid to sales personnel; and
Marketing: labor costs (salaries and other benefits), promotional expenses and advertising costs.
r) | Other Expenses: |
Other expenses include Employee Profit Sharing (“PTU”), gains or losses on disposals of long-lived assets, impairment of long-lived assets, contingencies reserves as well as their subsequent interest and penalties, severance payments derived from restructuring programs and all other non-recurring expenses related to activities different from the main activities of the Company that are not recognized as part of the comprehensive financing result.
PTU is applicable to Mexico and Venezuela. In Mexico, employee profit sharing is computed at the rate of 10% of the individual company taxable income, except for considering cumulative dividends received from resident legal persons in Mexico, depreciation of historical rather restated values, foreign exchange gains and losses, which are not included until the asset is disposed of or the liability is due and other effects of inflation are also excluded. In Venezuela, employee profit sharing is computed at a rate equivalent to 15% of after tax income, and it is no more than four months of salary.
According to the assets and liabilities method described in NIF D-4 Income Taxes, the Company does not expect relevant deferred items to materialize. As a result, the Company has not recognized deferred employee profit sharing as of either December 31, 2011, 2010 or 2009.
Severance indemnities resulting from a restructuring program and associated with an ongoing benefit arrangement are charged to other expenses on the date when the Company has made the decision to dismiss personnel under a formal program or for specific causes.
s) | Income Taxes: |
Income tax is charged to results as incurred, as are deferred income taxes. For purposes of recognizing the effects of deferred income taxes in the consolidated financial statements, the Company utilizes both retrospective and prospective analysis over the medium term when more than one tax regime exists per jurisdiction and recognizes the amount based on the tax regime it expects to be subject to, in the future. Deferred income taxes assets and liabilities are recognized for temporary differences resulting from comparing the book and tax values of assets and liabilities plus any future benefits from tax loss carryforwards. Deferred income tax assets are reduced by any benefits for which it is more likely than not that they are not realizable.
The balance of deferred taxes is comprised of monetary and non-monetary items, based on the temporary differences from which it is derived. Deferred taxes are classified as a long-term asset or liability, regardless of when the temporary differences are expected to reverse.
The Company determines deferred taxes for temporary differences of its permanent investments.
The deferred tax provision to be included in the income statement is determined by comparing the deferred tax balance at the end of the year to the balance at the beginning of the year, excluding from both balances any temporary differences that are recorded directly in stockholders’ equity. The deferred taxes related to such temporary differences are recorded in the same stockholders’ equity account that gave rise to them.
t) | Comprehensive Financing Result: |
Comprehensive financing result includes interest, foreign exchange gain and losses, market value gain or loss on ineffective portion of derivative financial instruments and gain or loss on monetary position, except for those amounts capitalized and those that are recognized as part of the cumulative comprehensive income (loss). The components of the Comprehensive Financing Result are described as follows:
Interest: Interest income and expenses are recorded when earned or incurred, respectively, except for interest capitalized on the financing of long-term assets;
Foreign Exchange Gains and Losses: Transactions in foreign currencies are recorded in local currencies using the exchange rate applicable on the date they occur. Assets and liabilities in foreign currencies are adjusted to the year-end exchange rate, recording the resulting foreign exchange gain or loss directly in the income statement, except for the foreign exchange gain or loss from the intercompany financing foreign currency denominated balances that are considered to be of a long-term investment nature and the foreign exchange gain or loss from the financing of long-term assets (see Note 3);
Gain or Loss on Monetary Position: The gain or loss on monetary position results from the changes in the general price level of monetary accounts of those subsidiaries that operate in inflationary environments (see Note 4 A), which is determined by applying inflation factors of the country of origin to the net monetary position at the beginning of each month and excluding the intercompany financing in foreign currency that is considered as long-term investment because of its nature (see Note 3), as well as the gain or loss on monetary position from long-term liabilities to finance long-term assets, and
Market Value Gain or Loss on Ineffective Portion of Derivative Financial Instruments: Represents the net change in the fair value of the ineffective portion of derivative financial instruments, the net change in the fair value of those derivative financial instruments that do not meet hedging criteria for accounting purposes; and the net change in the fair value of embedded derivative financial instruments.
u) | Derivative Financial Instruments: |
The Company is exposed to different risks related to cash flows, liquidity, market and credit. As a result the Company contracts in different derivative financial instruments in order to reduce its exposure to the risk of exchange rate fluctuations between the Mexican peso and other currencies, the risk of exchange rate and interest rate fluctuations associated with its borrowings denominated in foreign currencies and the exposure to the risk of fluctuation in the costs of certain raw materials.
The Company values and records all derivative financial instruments and hedging activities, including certain derivative financial instruments embedded in other contracts, in the balance sheet as either an asset or liability measured at fair value, considering quoted prices in recognized markets. If such instruments are not traded in a formal market, fair value is determined by applying techniques based upon technical models supported by sufficient, reliable and verifiable market data, recognized in the financial sector. Changes in the fair value of derivative financial instruments are recorded each year in current earnings or as a component of cumulative other comprehensive income (loss), based on the item being hedged and the ineffectiveness of the hedge.
As of December 31, 2011 and 2010, the balance in other current assets of derivative financial instruments was Ps. 511 and Ps. 24 (see Note 8), and in other assets Ps. 850 and Ps. 708 (see Note 12), respectively. The Company recognized liabilities regarding derivative financial instruments in other current liabilities of Ps. 69 and Ps. 41 (see Note 24 A), as of the end of December 31, 2011 and 2010, respectively, and other liabilities of Ps. 565 and Ps. 653 (see Note 24 B) for the same periods.
The Company designates its financial instruments as cash flows hedges at the inception of the hedging relationship when transactions meet all hedging accounting requirements. For cash flows hedges, the effective portion is recognized temporarily in cumulative other comprehensive income (loss) within stockholders’ equity and subsequently reclassified to current earnings at the same time the hedged item is recorded in earnings. When derivative financial instruments do not meet all of the accounting requirements for hedging purposes, the change in fair value is immediately recognized in net income. For fair value hedges, the changes in the fair value are recorded in the consolidated results in the period the change occurs as part of the market value gain or loss on ineffective portion of derivative financial instruments.
The Company identifies embedded derivatives that should be segregated from the host contract for purposes of valuation and recognition. When an embedded derivative is identified and the host contract has not been stated at fair value, the embedded derivative is segregated from the host contract, stated at fair value and is classified as trading. Changes in the fair value of the embedded derivatives at the closing of each period are recognized in the consolidated results.
v) | Cumulative Other Comprehensive Income (OCI): |
The cumulative other comprehensive income represents the period net income as described in NIF B-3 “Income Statement,” plus the cumulative translation adjustment resulted from translation of foreign subsidiaries and associates to Mexican pesos and the effect of unrealized gain/loss on cash flows hedges from derivative financial instruments.
2011 | 2010 | |||||||
Unrealized gain on cash flows hedges | Ps. | 367 | Ps. | 140 | ||||
Cumulative translation adjustment | 5,463 | 6 | ||||||
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Ps. | 5,830 | Ps. | 146 | |||||
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The changes in the cumulative translation adjustment (“CTA”) were as follows:
2011 | 2010 | 2009 | ||||||||||
Initial balance | Ps. | 6 | Ps. | 2,894 | Ps. | (826) | ||||||
Recycling of CTA from FEMSA Cerveza business (see Note 5 B) | — | (1,418 | ) | — | ||||||||
Gain (loss) translation effect | 5,436 | (3,031 | ) | 2,183 | ||||||||
Foreign exchange effect from intercompany long-term loans | 21 | 1,561 | 1,537 | |||||||||
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Ending balance | Ps. | 5,463 | Ps. | 6 | Ps. | 2,894 | ||||||
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The changes in the deferred income tax from the cumulative translation adjustment amounted to a provision of Ps. 2,779 and a credit of Ps. 352 for the years ended December 2011 and 2010, respectively (see Note 23 C).
w) | Provisions: |
Provisions are recognized for obligations that result from a past event that will probably result in the use of economic resources and that can be reasonably estimated. Such provisions are recorded at net present values when the effect of the discount is significant. The Company has recognized provisions regarding contingencies and vacations in the consolidated financial statements.
x) | Issuances of Subsidiary Stock: |
The Company recognizes issuances of a subsidiary’s stock as a capital transaction. The difference between the book value of the shares issued and the amount contributed by the non-controlling interest holder or a third party is recorded as additional paid-in capital.
y) | Earnings per Share: |
Earnings per share are determined by dividing net controlling interest income by the average weighted number of shares outstanding during the period.
Earnings per share before discontinued operations are calculated by dividing consolidated net income before discontinued operations by the average weighted number of shares outstanding during the period.
Earnings per share from discontinued operations are calculated by dividing net income from discontinued operations plus income from the exchange of shares with Heineken, net of taxes, by the average weighted number of shares outstanding during the period.
z) | Information by Segment: |
The analytical information by segment is presented considering the business units (Subholding Companies as defined in Note 1) and geographic areas in which the Company operates, which is consistent with the internal reporting presented to the Chief Operating Decision Maker, which is considered to be the main authority of the entity. A segment is a component of the Company that engages in business activities from which it earns or is in the process of obtaining revenues, and incurs in the
related costs and expenses, including revenues and costs and expenses that relate to transactions with any of Company’s other components. All segments’ operating results are reviewed regularly by the Chief Operating Decision Maker to make decisions about resources to be allocated to the segment and to assess its performance, and for which financial information is available.
The main indicators used by the Chief Operating Decision Maker to evaluate performance of the Company in each segment are its income from operations and cash flow from operations before changes in working capital and provisions, which the Company defined as the result of subtracting cost of sales and operating expenses from total revenues and income from operations plus depreciation and amortization, respectively. Inter-segment transfers or transactions are entered and presented into under accounting policies of each segment which are the same to those applied by the Company. Intercompany operations are eliminated and presented within the consolidation adjustment column included in the table in Note 25. Unallocated results items comprise other expenses, net and other net finance expenses (see Note 25).
aa) | Business Combinations: |
Business combinations are accounted for using the acquisition method of accounting which includes an allocation of the estimated fair value of the purchase price to the net assets acquired. Once the purchase price has been allocated, the Company measures its goodwill, as the fair value of the consideration transferred including any contingent consideration less the net recognized amount of the identifiable assets acquired and liabilities assumed.
The valuation of the identifiable assets, in particular intangible assets related distribution rights, requires the Company to make significant assumptions, and also require judgments and estimates. A change in any of these estimates or judgments could change the amount of the purchase price to be allocated to the particular asset or liability and goodwill could be affected by these changes.
Cost related to the acquisition, other than those associated with the issue of debt or equity securities, that the Company incurs in connection with the business combination are expensed as incurred as part of the administrative expenses.
Note 5. Acquisitions and Disposals
a) | Acquisitions: |
Coca-Cola FEMSA made certain business acquisitions that were recorded using the purchase method. The results of the acquired operations have been included in the consolidated financial statements since Coca-Cola FEMSA obtained control of acquired businesses as disclosed below. Therefore, the consolidated income statements and the consolidated balance sheets in the years of such acquisitions are not comparable with previous periods. The consolidated cash flows for the years ended December 31, 2011 and 2009 show the acquired operations net of the cash related to those acquisitions. In 2010 the Company did not have any significant business combinations.
i) | On October 10, 2011, Coca-Cola FEMSA completed the acquisition of 100% of Administradora de Acciones del Noreste, S.A. de C.V. (“Grupo Tampico”) a bottler of Coca-Cola trademark products in the states of Tamaulipas, San Luis Potosí and Veracruz; as well as in parts of the states of Hidalgo, Puebla and Queretaro. This acquisition was made so as to reinforce the Coca-Cola FEMSA’s leadership position in Mexico and Latin America. The transaction involved:(i) the issuance of 63,500,000 shares of previously unissued Coca-Cola FEMSA L shares, and (ii) the assumption of certain debt of Ps. 2,436, in exchange for 100% share ownership of Grupo Tampico, which was accomplished through a merger. The total purchase price was Ps. 10,264 based on a share price of 123.27 per share on October 10, 2011. Transaction related costs of Ps. 20 were expensed by the Coca-Cola FEMSA as incurred as required by Mexican FRS, and recorded as a component of administrative expenses in the accompanying consolidated statements of income. Grupo Tampico was included in operating results from October, 2011. |
The Coca-Cola FEMSA’s estimate of fair value of the Grupo Tampico’s net assets acquired is as follows:
Total current assets, including cash acquired of Ps. 22 | Ps. | 461 | ||
Total non-current assets | 2,529 | |||
Distribution rights | 5,499 | |||
Goodwill | 2,579 | |||
Total assets | 11,068 | |||
Debt | (2,436 | ) | ||
Other liabilities | (804 | ) | ||
Total liabilities | (3,240 | ) | ||
Net assets acquired | 7,828 | |||
Consideration transfered through issuance of shares | Ps. | 7,828 | ||
Debt paid by Coca-Cola FEMSA | 2,436 | |||
Total purchase price | 10,264 | |||
The condensed income statement of Grupo Tampico for the period from October 10 to December 31, 2011 is as follows:
Income Statement | ||||
Total revenues | Ps. 1,056 | |||
Income from operations | 117 | |||
Income before taxes | 43 | |||
Net income | Ps. 31 | |||
ii) | On December 9, 2011, Coca-Cola FEMSA completed the acquisition of 100% of Corporación de los Angeles, S.A. de C.V. (“Grupo CIMSA”), a bottler of Coca-Cola trademark products, which operates mainly in the states of Morelos and Mexico, as well as in parts of the states of Guerrero and Michoacan, Mexico. This acquisition was also made so as to reinforce the Coca-Cola FEMSA’s leadership position in Mexico and Latin America. The transaction involved the issuance of 75,423,728 shares of previously unissued Coca-Cola FEMSA L shares along with the cash payment prior to closing of Ps. 2,100 in exchange for 100% share ownership of Grupo CIMSA, which was accomplished through a merger. The total purchase price was Ps. 11,117 based on a share price of Ps. 119.55 per share on December 9, 2011. Transaction related costs of Ps. 24 were expensed by the Coca-Cola FEMSA as incurred as required by Mexican FRS, and recorded as a component of administrative expenses in the accompanying consolidated statements of income. Grupo CIMSA was included in operating results from December 2011. |
Coca-Cola FEMSA, preliminary estimate of fair value of the Grupo CIMSA’s net assets acquired is as follows:
Total current assets, including cash acquired of Ps. 188 | Ps. | 737 | ||
Total non-current assets | 2,802 | |||
Distribution rights | 6,228 | |||
Goodwill | 1,936 | |||
Total assets | 11,703 | |||
Total liabilities | (586 | ) | ||
Net assets acquired | 11,117 | |||
Consideration transfered through issuance of shares | Ps. | 9,017 | ||
Cash paid by Coca-Cola FEMSA | 2,100 | |||
Total purchase price | 11,117 | |||
Coca-Cola FEMSA’s purchase price allocation is preliminary in nature in that its estimation of the fair value of property and equipment and distribution rights is pending receipt of final valuation reports by a third-party valuation experts. To date, only draft reports have been received.
The condensed income statement of Grupo CIMSA for the period from December 12, to December 31, 2011 is as follows:
Total revenues | Ps. 429 | |||
Income from operations | 60 | |||
Income before taxes | 32 | |||
Net income | Ps. 23 | |||
iii) | On February 27, 2009, Coca-Cola FEMSA, along with The Coca-Cola Company, completed the acquisition of certain assets of the Brisa bottled water business in Colombia. This acquisition was made so as to strengthen Coca-Cola FEMSA’s position in the local water business in Colombia. The Brisa bottled water business was previously owned by a subsidiary of SABMiller. Terms of the transaction called for an initial purchase price of $92, of which $46 was paid by Coca-Cola FEMSA and $46 by The Coca-Cola Company. The Brisa brand and certain other intangible assets were acquired by The Coca-Cola Company, while production related property and equipment and inventory was acquired by Coca-Cola FEMSA. Coca-Cola FEMSA also acquired the distribution rights over Brisa products in its Colombian territory. In addition to the initial purchase price, contingent purchase consideration also existed related to the net revenues of the Brisa bottled water business subsequent to the acquisition. The total purchase price incurred by Coca-Cola FEMSA was Ps. 730, consisting of Ps. 717 in cash payments, and accrued liabilities of Ps. 13. Transaction related costs were expensed by Coca-Cola FEMSA as incurred, as required by Mexican FRS. Following a transition period, Brisa was included in Coca-Cola FEMSA’s operating results beginning June 1, 2009. |
The estimated fair value of Brisa’s net assets acquired by Coca-Cola FEMSA is as follows:
Production related property and equipment, at fair value | Ps. 95 | |||
Distribution rights, at fair value, with an indefinite life | 635 | |||
Net assets acquired / purchase price | Ps. 730 | |||
Brisa’s results operation for the period from the acquisition through December 31, 2009 were not material to our consolidated results of operations.
iv) | Unaudited Pro Forma Financial Data. |
The following unaudited consolidated pro forma financial data represent the Company’s historical financial statements, adjusted to give effect to (i) the acquisitions of Grupo Tampico and Grupo CIMSA mentioned in the preceding paragraphs; and (ii) certain accounting adjustments mainly related to the pro forma depreciation of fixed assets of the acquired companies.
The unaudited pro forma adjustments assume that the acquisitions were made at the beginning of the year immediately preceding the year of acquisition, and are based upon available information and other assumptions that management considers reasonable. The pro forma financial information data does not purport to represent what the effect on the Company’s consolidated operations would have been for each year, had the transactions in fact occurred on January 1, 2010, nor are they intended to predict the Company’s future results of operations.
FEMSA unaudited pro forma consolidated results for the years ended December 31, | ||||||||
2011 | 2010 | |||||||
Total revenues | Ps. | 212,264 | Ps. | 177,857 | ||||
Income before income taxes | 29,296 | 24,268 | ||||||
Consolidated net income before discontinued operations | 21,319 | 18,389 | ||||||
Net controlling interest income before discontinued operations per share Series “B” | 0.77 | 0.66 | ||||||
Net controlling interest income before discontinued operations per share Series “D” | 0.96 | 0.82 | ||||||
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b) | Disposals: |
i) | On April 30, 2010 FEMSA exchanged 100% of FEMSA Cerveza, the beer business unit, for 20% economic interest in Heineken. Under the terms of the agreement, FEMSA exchanged its beer business and received 43,018,320 shares of Heineken Holding N.V., and 72,182,203 shares of Heineken N.V., of which 29,172,504 will be delivered pursuant to an allotted share delivery instrument (“ASDI”). Those shares are considered in substance common stock due to its similarity to common stock, such as rights to receive the same dividends as any other share. Under the ASDI, it was expected that the allotted shares would be acquired by Heineken in the secondary market for delivery to FEMSA over a term not to exceed five years. As of December 31, 2011, the process of delivery of all shares has been completed (and 10,240,553 shares had been delivered to the Company as of December 31, 2010) (see Note 9). |
The total transaction was valued approximately at $7,347, including assumed debt of $2,100, based on shares closing prices of € 35.18 for Heineken N.V., and € 30.82 for Heineken Holding N.V. on April 30, 2010. The Company recorded a net gain after taxes that amounted to Ps. 26,623 which is the difference between the fair value of the consideration received and the book value of FEMSA Cerveza as of April 30, 2010; a deferred income tax of Ps. 10,379 (see “Income from the exchange of shares with Heineken, net of taxes” in the consolidated income statements and Note 23 C), and recycling Ps. 525 (see consolidated statements of changes in stockholders’ equity) from other comprehensive income which are integrated of Ps.1,418 accounted as a gain of cumulative translation adjustment and Ps. 893 as a mark to market loss on derivatives in cumulative comprehensive loss. Additionally, the Company maintained a loss contingency of Ps. 560 as of December 31, 2010, regarding the indemnification accorded with Heineken over FEMSA Cerveza prior tax contingencies. This contingency amounted to Ps. 445 as of December 31, 2011 and Ps. 113 has been reclassified to other current liabilities (see Note 24 B).
As of the date of the exchange, the Company lost control over FEMSA Cerveza and stopped consolidating its financial information and accounted for the 20% economic interest of Heineken acquired by the purchase method as established in NIF C-7 “Investments in Associates and Other Permanent Investments.” Subsequently, this investment in shares has been accounted for by the equity method, because of the Company’s significant influence.
After purchase price adjustments, the Company identified intangible assets of indefinite and finite life brands and goodwill that amounted to € 15,274 million and € 1,200 million respectively and increased certain operating assets and liabilities to fair value, which are presented as part of the investment in shares of Heineken within the consolidated financial statement.
The fair values of the proportional assets acquired and liabilities assumed as part of this transaction are as follows:
In millions of euros | Heineken Figures at Fair Value | Fair Value of Proportional Net Assets Acquired by FEMSA (20%) | ||||||
ASSETS | ||||||||
Property, plant and equipment | 8,506 | 1,701 | ||||||
Intangible assets | 15,274 | 3,055 | ||||||
Other assets | 4,025 | 805 | ||||||
Total non-current assets | 27,805 | 5,561 | ||||||
Inventories | 1,579 | 316 | ||||||
Trade and other receivable | 3,240 | 648 | ||||||
Other assets | 1,000 | 200 | ||||||
Total current assets | 5,819 | 1,164 | ||||||
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Total assets | 33,624 | 6,725 | ||||||
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LIABILITIES | ||||||||
Loans and borrowings | 9,551 | 1,910 | ||||||
Employee benefits | 1,335 | 267 | ||||||
Deferred tax liabilities | 2,437 | 487 | ||||||
Other non-current liabilities | 736 | 147 | ||||||
Total non-current liabilities | 14,059 | 2,811 | ||||||
Trade and other payables | 5,019 | 1,004 | ||||||
Other current liabilities | 1,221 | 244 | ||||||
Total current liabilities | 6,240 | 1,248 | ||||||
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Total liabilities | 20,299 | 4,059 | ||||||
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Net assets acquired | 13,325 | 2,666 | ||||||
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Goodwill identified in the acquisition | 1,200 | |||||||
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Total purchase price | 3,866 | |||||||
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Summarized consolidated balance sheet and income statements of FEMSA Cerveza are presented as follows as of:
Consolidated Balance Sheet | April 30, 2010 | |||
Current assets | Ps.13,770 | |||
Property, plant and equipment | 26,356 | |||
Intangible assets and goodwill | 18,828 | |||
Other assets | 11,457 | |||
Total assets | 70,411 | |||
Current liabilities | 14,039 | |||
Long term liabilities | 27,586 | |||
Total liabilities | 41,625 | |||
Total stockholders’ equity: | ||||
Controlling interest | 27,417 | |||
Non-controlling interest in consolidated subsidiaries | 1,369 | |||
Total stockholders’ equity | 28,786 | |||
Total liabilities and stockholders’ equity | Ps.70,411 | |||
Consolidated Income Statements | April 30, 2010 | December 31, 2009 | ||||||
Total revenues | Ps. | 14,490 | Ps. | 46,329 | ||||
Income from operations | 1,342 | 5,887 | ||||||
Income before income tax | 749 | 2,231 | ||||||
Income tax | 43 | (1,052 | ) | |||||
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Consolidated net income | 706 | 3,283 | ||||||
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| |||||
Less: Net income attributable to the non-controlling interest | 48 | 787 | ||||||
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Net income attributable to the controlling interest | Ps. | 658 | Ps. | 2,496 | ||||
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As a result of the transaction described above, FEMSA Cerveza operations for the period ended on April 30, 2010, and December 31, 2009 are presented in a single line as discontinued operations, net of taxes in the consolidated income statement. Prior years consolidated financial statements and the accompanying notes were reformulated in order to present FEMSA Cerveza as discontinued operations for comparable purposes.
Consolidated statement of cash flows of December 31, 2010 and 2009 presents FEMSA Cerveza as discontinued operations. Intercompany transactions between the Company and FEMSA Cerveza for 2009 were reclassified in order to conform to consolidated financial statements as of December 31, 2010.
ii) | On September 23, 2010, the Company disposed of its subsidiary Promotora de Marcas Nacionales, S.A. de C.V. for which it received a payment of Ps.1,002 from The Coca-Cola Company. The Company recognized a gain of Ps. 845 as a sale of shares within other expenses, which is the difference between the fair value of the consideration received and the carrying value of the net assets disposed. |
iii) | On December 31, 2010, the Company disposed of its subsidiary Grafo Regia, S.A. de C.V for which it received a payment of Ps. 1,021. The Company recognized a gain of Ps. 665, as a sale of shares within other expenses, which is the difference between the fair value of the consideration received and the carrying value of the net assets disposed. |
Note 6. Accounts Receivable
2011 | 2010 | |||||||
Trade | Ps. 8,175 | Ps. 5,739 | ||||||
Allowance for doubtful accounts | (343 | ) | (249 | ) | ||||
The Coca-Cola Company | 1,157 | 1,030 | ||||||
Notes receivable | 339 | 402 | ||||||
Loans to employees | 146 | 111 | ||||||
Travel advances to employees | 54 | 51 | ||||||
Other | 971 | 618 | ||||||
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Ps. 10,499 | Ps. 7,702 | |||||||
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The changes in the allowance for doubtful accounts are as follows:
2011 | 2010 | 2009 | ||||||||||
Opening balance | Ps. 249 | Ps. 246 | Ps. 206 | |||||||||
Provision for the year | 173 | 113 | 91 | |||||||||
Write-off of uncollectible accounts | (86 | ) | (100 | ) | (76 | ) | ||||||
Translation of foreign currency effect | 7 | (10 | ) | 25 | ||||||||
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Ending balance | Ps. 343 | Ps. 249 | Ps. 246 | |||||||||
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Note 7. Inventories
2011 | 2010 | |||||||
Finished products | Ps. 8,339 | Ps. 7,222 | ||||||
Raw materials | 3,656 | 2,674 | ||||||
Spare parts | 779 | 710 | ||||||
Work in process | 82 | 60 | ||||||
Goods in transit | 1,529 | 648 | ||||||
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Ps. 14,385 | Ps. 11,314 | |||||||
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Note 8. Other Current Assets
2011 | 2010 | |||||||
Prepaid expenses | Ps. 1,266 | Ps. 638 | ||||||
Long-lived assets available for sale | 26 | 125 | ||||||
Agreements with customers | 194 | 85 | ||||||
Derivative financial instruments | 511 | 24 | ||||||
Short-term licenses | 28 | 24 | ||||||
Other | 89 | 142 | ||||||
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| |||||
Ps. 2,114 | Ps. 1,038 | |||||||
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Prepaid expenses as of December 31, 2011 and 2010 are as follows:
2011 | 2010 | |||||||
Advances for inventories | Ps. 497 | Ps. 133 | ||||||
Advertising and promotional expenses paid in advance | 211 | 207 | ||||||
Advances to service suppliers | 259 | 154 | ||||||
Prepaid leases | 85 | 84 | ||||||
Prepaid insurance | 58 | 31 | ||||||
Other | 156 | 29 | ||||||
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Ps. 1,266 | Ps. 638 | |||||||
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The advertising and deferred promotional expenses recorded in the consolidated income statements for the years ended December 31, 2011, 2010 and 2009 amounted to Ps. 5,076 Ps. 4,406 and Ps. 3,629, respectively.
Note 9. Investments in Shares
Company | % Ownership | 2011 | 2010 | |||||||||
Heineken Group(1) (2) | 20.00% | (3) | Ps. | 75,075 | Ps. | 66,478 | ||||||
Coca-Cola FEMSA: | ||||||||||||
Compañía Panameña de Bebidas S.A.P.I., S.A. de C,V.(2) | 50.00% | 703 | — | |||||||||
SABB Sistema de Alimentos e Bebidas Do Brasil, LTDA(2) (4) | 19.73% | 931 | 814 | |||||||||
Jugos del Valle, S.A.P.I. de C.V.(1) (2) | 23.99% | 819 | 603 | |||||||||
Holdfab2 Participacoes Societarias, (“Holdfab2”), LTDA(2) | 27.69% | 262 | 300 | |||||||||
Industria Envasadora de Querétaro, S.A. de C.V. (“IEQSA”)(1) (2) | 19.20% | 100 | 67 | |||||||||
Industria Mexicana de Reciclaje, S.A. de C.V.(2) | 35.00% | 70 | 69 | |||||||||
Estancia Hidromineral Itabirito, LTDA(2) | 50.00% | 142 | 87 | |||||||||
Beta San Miguel, S.A. de C.V. (“Beta San Miguel”)(5) | 2.54% | 69 | 69 | |||||||||
KSP Partiçipações, LTDA(2) | 38.74% | 102 | 93 | |||||||||
Promotora Industrial Azucarera, S.A. de C.V. (“PIASA”) (2) | 13.20% | 281 | — | |||||||||
Dispensadoras de Café, S.A.P.I. de C.V. (2) | 50.00% | 161 | — | |||||||||
Other | Various | 16 | 6 | |||||||||
Other investments(6) | Various | 241 | 207 | |||||||||
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Ps. | 78,972 | Ps. | 68,793 | |||||||||
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(1) | The Company has significant influence due to the fact of its representation in the Board of Directors in those companies. |
(2) | Equity method. The date of the financial statements of the investees used to account for the equity method is the same as the one used in the Company consolidated financial statements. |
(3) | As of December 31, 2011 , comprised of 12.53% of Heineken, N.V. and 14.94% of Heineken Holding, N.V., which represents an economic interest of 20% in Heineken (see Note 5 B). |
(4) | During June 2011, a reorganization of the Coca-Cola FEMSA Brazilian investments occurred by way of a merger of the companies Sucos del Valle Do Brasil, LTDA and Mais Industria de Alimentos, LTDA giving rise to a new company by the name of Sistema de Alimentos e Bebidas do Brasil, LTDA. |
(5) | Acquisition cost. |
(6) | Includes 45.00% ownership investments in Energía Alterna Istmeña, S. de R.L. de C.V. and Energía Eólica Mareña, S.A de C.V. |
As mentioned in Note 5, on December 9, 2011, Coca-Cola FEMSA completed the acquisition of 100% of Corporación de los Angeles, S.A. de C.V. (“Grupo CIMSA”). As part of the acquisition of Grupo CIMSA, the Company also acquired a 13.20% equity interest in Promotora Industrial Azucarera S.A de C.V.
On March 28, 2011 Coca-Cola FEMSA made an initial investment for Ps. 620 together with The Coca-Cola Company in Compañía Panameña de Bebidas S.A.P.I. de C.V. (Grupo Estrella Azul), a Panamanian conglomerate in the dairy and juice-based beverage categories business in Panama. The investment of Coca-Cola FEMSA represents 50% of ownership .
On March 17, 2011, a consortium of investors formed by FEMSA, the Macquarie Mexican Infrastructure Fund and other investors, acquired Energía Alterna Istmeña, S. de R.L. de C.V., which we refer to as EAI, and Energía Eólica Mareña, S.A. de C.V., which we refer to as EEM, from subsidiaries of Preneal, S.A., which we refer to as Preneal. EAI and EEM are the owners of a 396 megawatt late-stage wind energy project in the southeastern region of the State of Oaxaca. This project is expected to be the largest wind power farm in Latin America.
In August 2010, Coca-Cola FEMSA made an investment for approximately Ps. 295 (40 million Brazilian Reais) in Holdfab2 Participações Societárias, LTDA representing a 27.69% interest. Holdfab2 has a 50% investment in Leao Junior, a tea producer company in Brazil.
During 2010, the shareholders of Jugos del Valle, including Coca-Cola FEMSA, agreed to spin-off the distribution rights. Those shareholders now purchase product directly from Jugos del Valle for resale to their customers. This reorganization resulted in a decrease of Coca-Cola FEMSA’s investment in shares of Ps. 735 and an increase to its intangible assets (distribution rights of a separate legal entity) for the same amount. During 2011, Coca-Cola FEMSA increased its ownership percentage in Jugos del Valle from 19.80% to 23.99% as a result of the holdings of the acquired companies disclosed in Note 5.
Heineken’s main activities are the production, distribution and marketing of beer worldwide. The Company recognized an equity income of Ps. 5,080 and Ps. 3,319 regarding its interest in Heineken, for the year ended December 31, 2011 and the period from May 1, 2010 to December 31, 2010, respectively.
The following is some relevant financial information from Heineken under IFRS as of December 31, 2011 and 2010 and the consolidated results for the full years as of December 31, 2011 and 2010:
In millions of euros | 2011 | 2010(1) | ||||||
Current assets | 4,708 | 4,318 | ||||||
Long-term assets | 22,419 | 22,344 | ||||||
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Total assets | 27,127 | 26,662 | ||||||
Current liabilities | 6,159 | 5,623 | ||||||
Long-term liabilities | 10,876 | 10,819 | ||||||
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| |||||
Total liabilities | 17,035 | 16,442 | ||||||
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Total stockholders’ equity | 10,092 | 10,220 | ||||||
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In millions of euros | 2011 | 2010(1) | ||||||
Total revenues and other income | 17,187 | 16,372 | ||||||
Total expenses | (14,972 | ) | (14,074 | ) | ||||
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Results from operating activities | 2,215 | 2,298 | ||||||
Profit before income tax | 2,025 | 1,982 | ||||||
Income tax | (465 | ) | (403 | ) | ||||
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Profit | 1,560 | 1,579 | ||||||
Profit attributable to equity holders of the company | 1,430 | 1,447 | ||||||
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Total comprehensive income | 1,007 | 2,130 | ||||||
Total comprehensive income attributable to equity holders of the company | 884 | 1,983 | ||||||
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(1) | Heineken adjusted its comparative figures due to the accounting policy change in employee benefits. |
As of December 31, 2011 and 2010 fair value of Company’s investment in Heineken N.V. Holding and Heineken N.V. represented by shares equivalent to 20% of its outstanding shares amounted to€ 3,942 million and€ 4,048 million based on quoted market prices of those dates. As of April 27, 2012, issuance date of these consolidated financial statements, fair value amounted to € 4,517 million.
During the years ended December 31, 2011 and 2010, the Company has received dividends distributions from Heineken, amounted to Ps. 1,661 and Ps. 1,304, respectively.
Note 10. Property, Plant and Equipment.
Cost | Land | Buildings | Machinery and Equipment | Refrigeration Equipment | Bottles and Cases | Investments in Fixed Assets in Progress | Not Strategic Assets | Others | Total | |||||||||||||||||||||||||||
Cost as of January 1, 2010 | Ps. | 5,412 | Ps. | 12,020 | Ps. | 39,638 | Ps. | 9,027 | Ps. | 2,029 | Ps. | 2,825 | Ps. | 330 | Ps. | 527 | Ps. | 71,808 | ||||||||||||||||||
Additions | 106 | 322 | 3,045 | 834 | 1,013 | 4,155 | — | 115 | 9,590 | |||||||||||||||||||||||||||
Transfer of completed projects in progress | — | 238 | 2,096 | 700 | 409 | (3,443 | ) | — | — | — | ||||||||||||||||||||||||||
Transfer to/(from) assets classified as held for sale | (64 | ) | 7 | 21 | — | — | — | 71 | — | 35 | ||||||||||||||||||||||||||
Disposals | (57 | ) | (116 | ) | (2,515 | ) | (540 | ) | (611 | ) | (40 | ) | (29 | ) | (32 | ) | (3,940 | ) | ||||||||||||||||||
Effects of changes in foreign exchange rates | (269 | ) | — | (5,096 | ) | (730 | ) | — | (495 | ) | (140 | ) | (214 | ) | (6,944 | ) | ||||||||||||||||||||
Changes in value on the recognition of inflation effects | 98 | 470 | 1,029 | 249 | 14 | 47 | — | 64 | 1,971 | |||||||||||||||||||||||||||
Capitalization of comprehensive financing result | — | — | — | — | — | (33 | ) | — | — | (33 | ) | |||||||||||||||||||||||||
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Cost as of December 31, 2010 | Ps. | 5,226 | Ps. | 12,941 | Ps. | 38,218 | Ps. | 9,540 | Ps. | 2,854 | Ps. | 3,016 | Ps. | 232 | Ps. | 460 | Ps. | 72,487 | ||||||||||||||||||
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Cost Cost as of January 1, 2011 Additions and acquired in business combination Transfer of completed projects in progress Transfer to/(from) assets classified as held for sale Disposals Effects of changes in foreign exchange rates Changes in value on the recognition of inflation effects Capitalization of comprehensive financing result Cost as of December 31, 2011 Land Buildings Machinery
and
Equipment Refrigeration
Equipment Bottles
and
Cases Investments
in Fixed
Assets in
Progress Not
Strategic
Assets Others Total Ps. 5,226 Ps. 12,941 Ps. 38,218 Ps. 9,540 Ps. 2,854 Ps. 3,016 Ps. 232 Ps. 460 Ps. 72,487 830 1,552 5,507 1,535 1,441 4,274 — 184 15,323 23 280 2,466 380 398 (3,547 ) — — — 125 108 6 — — — (42 ) — 197 (57 ) (50 ) (2,294 ) (463 ) (694 ) — (109 ) (114 ) (3,781 ) 183 2 1,701 481 110 108 20 44 2,649 114 571 1,368 301 31 83 — 11 2,479 — — — — — (14 ) — — (14 ) Ps. 6,444 Ps. 15,404 Ps. 46,972 Ps. 11,774 Ps. 4,140 Ps. 3,920 Ps. 101 Ps. 585 Ps. 89,340
Accumulated Depreciation | ||||||||||||||||||||||||||||||||||||
Accumulated Depreciation as of January 1, 2010 | Ps. | — | Ps. | (3,487 | ) | Ps. | (22,044 | ) | Ps. | (6,016 | ) | Ps. | (171 | ) | Ps. | — | Ps. | — | Ps. | (195 | ) | Ps. | (31,913 | ) | ||||||||||||
Depreciation for the year | — | (314 | ) | (2,707 | ) | (754 | ) | (701 | ) | — | — | (51 | ) | (4,527 | ) | |||||||||||||||||||||
Transfer (to)/from assets classified as held for sale | — | — | 64 | — | — | — | — | — | 64 | |||||||||||||||||||||||||||
Disposals | — | 32 | 1,951 | 528 | 215 | — | — | 1 | 2,727 | |||||||||||||||||||||||||||
Effects of changes in foreign exchange rates | — | — | 3,231 | 642 | 56 | — | — | 85 | 4,014 | |||||||||||||||||||||||||||
Changes in value on the recognition of inflation effects | — | (224 | ) | (526 | ) | (177 | ) | — | — | — | (15 | ) | (942 | ) | ||||||||||||||||||||||
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Accumulated Depreciation as of December 31, 2010 | Ps. | — | Ps. | (3,993 | ) | Ps. | (20,031 | ) | Ps. | (5,777 | ) | Ps. | (601 | ) | Ps. | — | Ps. | — | Ps. | (175 | ) | Ps. | (30,577 | ) | ||||||||||||
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Accumulated Depreciation | Land | Buildings | Machinery and Equipment | Refrigeration Equipment | Bottles and Cases | Investments in Fixed Assets in Progress | Not Strategic Assets | Others | Total Cost | |||||||||||||||||||||||||||
Accumulated Depreciation as of January 1, 2011 | Ps. | — | Ps. | (3,993 | ) | Ps. | (20,031 | ) | Ps. | (5,777 | ) | Ps. | (601 | ) | Ps. | — | Ps. | — | Ps. | (175 | ) | Ps. | (30,577 | ) | ||||||||||||
Depreciation for the year | — | (361 | ) | (3,197 | ) | (1,000 | ) | (894 | ) | — | — | (46 | ) | (5,498 | ) | |||||||||||||||||||||
Transfer (to)/from assets classified as held for sale | — | (46 | ) | 7 | — | — | — | — | — | (39 | ) | |||||||||||||||||||||||||
Disposals | — | 4 | 2,130 | 206 | 201 | — | — | 64 | 2,605 | |||||||||||||||||||||||||||
Effects of changes in foreign exchange rates | — | 1 | (957 | ) | (339 | ) | 22 | — | — | (28 | ) | (1,301 | ) | |||||||||||||||||||||||
Changes in value on the recognition of inflation effects | — | (300 | ) | (645 | ) | (166 | ) | — | — | — | (17 | ) | (1,128 | ) | ||||||||||||||||||||||
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Accumulated Depreciation as of December 31, 2011 | Ps. | — | Ps. | (4,695 | ) | Ps. | (22,693 | ) | Ps. | (7,076 | ) | Ps. | (1,272 | ) | Ps. | — | Ps. | — | Ps. | (202 | ) | Ps. | (35,938 | ) | ||||||||||||
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Carrying Amount As of January 1, 2010 As of December 31, 2010 As of December 31, 2011 Land Buildings Machinery
and
Equipment Refrigeration
Equipment Bottles
and Cases Investments
in Fixed
Assets in
Progress Not
Strategic
Assets Others Total Ps. 5,412 Ps. 8,533 Ps. 17,594 Ps. 3,011 Ps. 1,858 Ps. 2,825 Ps. 330 Ps. 332 Ps. 39,895 5,226 8,948 18,187 3,763 2,253 3,016 232 285 41,910 6,444 10,709 24,279 4,698 2,868 3,920 101 383 53,402
During the years ended December 31, 2011, 2010 and 2009 the Company capitalized (Ps. 14), (Ps. 33) and Ps. 13, respectively in comprehensive financing costs in relation to Ps. 256, Ps. 708 and Ps. 158 in qualifying assets. Amounts were capitalized assuming an annual capitalization rate of 5.8%, 5.3% and 7.2%, respectively.
For the years ended December 31, 2011, 2010 and 2009 the comprehensive financing result is analyzed as follows:
2011 | 2010 | 2009 | ||||||||||
Comprehensive financing result | Ps.939 | Ps. | 2,165 | Ps.2,682 | ||||||||
Amount capitalized | 156 | 12 | 55 | |||||||||
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Net amount in income statements | Ps.783 | Ps. | 2,153 | Ps.2,627 | ||||||||
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The Company has identified certain long-lived assets that are not strategic to the current and future operations of the business and are not being used, comprised of land, buildings and equipment, in accordance with an approved program for the disposal of certain investments. Such long-lived assets have been recorded at the lower of cost or net realizable value, as follows:
2011 | 2010 | |||||||
Coca-Cola FEMSA | Ps. | 79 | Ps. | 189 | ||||
Other subsidiaries | 22 | 43 | ||||||
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Ps. | 101 | Ps. | 232 | |||||
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Buildings | Ps. | 39 | Ps. | 64 | ||||
Land | 56 | 139 | ||||||
Equipment | 6 | 29 | ||||||
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Ps. | 101 | Ps. | 232 | |||||
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As a result of selling certain not strategic long-lived assets, the Company recognized gain of Ps. 85, loss of Ps. 41, and a gain of Ps. 6 for the years ended December 31, 2011, 2010 and 2009, respectively.
Long-lived assets that are available for sale have been reclassified from property, plant and equipment to other current assets. As of December 31, 2011 and 2010, long-lived assets available for sale amounted to Ps. 26 and Ps. 125 (see Note 8).
Note 11. Intangible Assets
2011 | 2010 | |||||||
Unamortized intangible assets: | ||||||||
Coca-Cola FEMSA: | ||||||||
Rights to produce and distribute Coca-Cola trademark products | Ps | . 63,521 | Ps. | 49,169 | ||||
Goodwill from Grupo Tampico acquisition – Mexico (see Note 5 A) | 2,579 | — | ||||||
Goodwill from Grupo CIMSA acquisition – Mexico (see Note 5 A) | 1,936 | — | ||||||
Other subsidiaries: | ||||||||
Other unamortized intangible assets | 343 | 462 | ||||||
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Ps. | 68,379 | Ps. | 49,631 | |||||
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Amortized intangible assets: | ||||||||
Systems in development costs, net | Ps. | 1,743 | Ps. | 1,788 | ||||
Technology costs and management systems | 990 | 396 | ||||||
Alcohol licenses, net (see Note 4 J) | 438 | 410 | ||||||
Other | 58 | 115 | ||||||
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| |||||
Ps. | 3,229 | Ps. | 2,709 | |||||
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Total intangible assets | Ps. | 71,608 | Ps. | 52,340 | ||||
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The changes in the carrying amount of unamortized intangible assets are as follows:
2011 | 2010 | |||||||
Beginning balance | Ps. | 49,631 | Ps. | 50,143 | ||||
Acquisitions | 16,478 | (1) | 833 | |||||
Cancellations | (119 | ) | (151 | ) | ||||
Impairment | — | (10 | ) | |||||
Translation and restatement of foreign currency effect | 2,389 | (1,184 | ) | |||||
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Ending balance | Ps | .68,379 | Ps | .49,631 | ||||
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(1) | Includes Ps. 8,078 and Ps. 8,164 for acquisitions of Grupo Tampico and Grupo CIMSA, respectively (see Note 5 A). |
The changes in the carrying amount of amortized intangible assets are as follows:
Investments | Amortization | |||||||||||||||||||||||||||
Accumulated at the Beginning of the Year | Additions (1) | Capitalization of Comprehensive Financing Result | Transfer of Completed Project | Accumulated at the Beginning of the Year | For the Year | Total | ||||||||||||||||||||||
2011 | ||||||||||||||||||||||||||||
Systems in development costs | Ps. | 1,788 | Ps. | 249 | Ps. | 170 | Ps. | (464 | ) | Ps. | — | Ps. | — | Ps. | 1,743 | |||||||||||||
Technology costs and management systems | 1,465 | 337 | — | 464 | (1,069 | ) | (207 | ) | 990 | |||||||||||||||||||
Alcohol licenses(1) | 495 | 60 | — | — | (85 | ) | (32 | ) | 438 | |||||||||||||||||||
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2010 | ||||||||||||||||||||||||||||
Systems in development costs | Ps. | 1,188 | Ps. | 706 | Ps. | 45 | Ps. | (151 | ) | Ps. | — | Ps. | — | Ps. | 1,788 | |||||||||||||
Technology costs and management systems | 1,197 | 117 | — | 151 | (887 | ) | (182 | ) | 396 | |||||||||||||||||||
Alcohol licenses(1) | 271 | 224 | — | — | (48 | ) | (37 | ) | 410 | |||||||||||||||||||
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2009 | ||||||||||||||||||||||||||||
Systems in development costs | Ps. | 333 | Ps. | 813 | Ps. | 42 | Ps. | — | Ps. | — | Ps. | — | Ps. | 1,188 | ||||||||||||||
Technology costs and management systems | 963 | 234 | — | — | (675 | ) | (212 | ) | 310 | |||||||||||||||||||
Alcohol licenses(1) | 169 | 102 | — | — | (31 | ) | (17 | ) | 223 | |||||||||||||||||||
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(1) | See Note 4 J. |
During the years ended December 31, 2011, 2010 and 2009 the Company capitalized Ps. 170, Ps. 45 and Ps. 42, respectively in comprehensive financing costs in relation to Ps. 1,761, Ps. 1,221 and Ps. 687 in qualifying assets. Amounts were capitalized assuming an annual capitalization rate of 5.8%, 5.3%, and 7.2%, respectively and an estimated life of the qualifying assets of seven years.
The estimated amortization for intangible assets of definite life is as follows:
2012 | 2013 | 2014 | 2015 | 2016 | ||||||||||||||||
Systems amortization | Ps. | 481 | Ps. | 409 | Ps. | 362 | Ps. | 347 | Ps. | 337 | ||||||||||
Alcohol licenses | 33 | 38 | 43 | 49 | 56 | |||||||||||||||
Others | 17 | 15 | 13 | 13 | 13 |
Note 12. Other Assets
2011 | 2010 | |||||||
Leasehold improvements, net | Ps. 6,135 | Ps. | 5,261 | |||||
Agreements with customers (see Note 4 I) | 256 | 186 | ||||||
Derivative financial instruments | 850 | 708 | ||||||
Guarantee deposits | 948 | 897 | ||||||
Long-term accounts receivable | 1,856 | 681 | ||||||
Advertising and promotional expenses | 112 | 125 | ||||||
Property, plant and equipment paid in advance | 296 | 226 | ||||||
Other | 841 | 645 | ||||||
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| |||||
Ps. 11,294 | Ps. | 8,729 | ||||||
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Long-term accounts receivable are comprised of Ps. 1,829 and Ps. 27 of principal and interest, respectively, and are expected to be collected as follows:
2012 | Ps. | 10 | ||
2013 | 126 | |||
2014 | 63 | |||
2015 | 1,657 | |||
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| |||
Ps. | 1,856 | |||
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Note 13. Balances and Transactions with Related Parties and Affiliated Companies
Balances and transactions with related parties and affiliated companies include consideration of: a) the overall business in which the reporting entity participates; b) close family members of key officers; and c) any fund created in connection with a labor related compensation plan.
On April 30, 2010, the Company lost control over FEMSA Cerveza, which became a subsidiary of Heineken Group. As a result, balances and transactions with Heineken Group and subsidiaries are presented since that date as balances and transactions with related parties. Balances and transactions prior to that date are not disclosed because they were not transactions between related parties of the Company.
The consolidated balance sheets and income statements include the following balances and transactions with related parties and affiliated companies:
Balances | 2011 | 2010 | ||||||
Due from The Coca-Cola Company (see Note 4 L)(1) | Ps. 1,157 | Ps. 1,030 | ||||||
Balance with BBVA Bancomer, S.A. de C.V.(2) | 2,791 | 2,944 | ||||||
Balance with Grupo Financiero Banamex, S.A. de C.V.(2) | — | 2,103 | ||||||
Due from Heineken Group(1) | 857 | 425 | ||||||
Due from Grupo Estrella Azul(3) | 785 | — | ||||||
Other receivables(1) | 494 | 295 | ||||||
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| |||||
Due to BBVA Bancomer, S.A. de C.V.(4) | Ps. 1,106 | Ps. 999 | ||||||
Due to The Coca-Cola Company(5) | 2,853 | 1,911 | ||||||
Due to Grupo Financiero Banamex, S.A. de C.V.(4) | — | 500 | ||||||
Due to British American Tobacco Mexico(5) | 316 | 287 | ||||||
Due to Heineken Group(5) | 2,148 | 1,463 | ||||||
Other payables(5) | 508 | 210 |
(1) | Recorded as part of total of receivable accounts. |
(2) | Recorded as part of cash and cash equivalents. |
(3) | Recorded as part of total other assets. |
(4) | Recorded as part of total bank loans. |
(5) | Recorded as part of total accounts payable. |
Transactions Income: Services and others to Heineken Group Logistic services to Grupo Industrial Saltillo, S.A. de C.V. Sales of Grupo Inmobiliario San Agustín, S.A. shares to Instituto Tecnológico y de Estudios Superiores de Monterrey, A.C. Other revenues from related parties Expenses: Purchase of concentrate from The Coca-Cola Company(1) Purchases of raw material, beer and operating expenses from Heineken Group(1) (2) Purchase of baked goods and snacks from Grupo Bimbo, S.A.B. de C.V.(2) Purchase of cigarettes from British American Tobacco Mexico(2) Advertisement expense paid to The Coca-Cola Company(1) Purchase of juices from Jugos del Valle, S.A.P.I. de C.V.(1) (2) Interest expense and fees paid to BBVA Bancomer, S.A. de C.V. Purchase of sugar from Beta San Miguel(1) Purchase of sugar, cans and aluminum lids from Promotora Mexicana de Embotelladores, S.A. de C.V.(1) Purchase of canned products from IEQSA(1) Purchases from affiliated companies of Grupo Tampico(1) Advertising paid to Grupo Televisa, S.A.B. Interest expense paid to Grupo Financiero Banamex, S.A. de C.V. Insurance premiums for policies with Grupo Nacional Provincial, S.A.B. Donations to Instituto Tecnológico y de Estudios Superiores de Monterrey, A.C. Purchase of plastic bottles from Embotelladora del Atlántico, S.A. (formerly Complejo Industrial Pet, S.A.) (1) Purchase of juice and milk powder from Grupo Estrella Azul(1) Donations to Difusión y Fomento Cultural, A.C. Interest expense paid to The Coca-Cola Company(1) Other expenses with related parties 2011 2010 2009 Ps. 2,169 Ps. 1,048 Ps. — 241 241 234 — 62 64 383 42 22 21,183 19,371 16,863 9,397 7,063 — 2,270 2,018 1,733 1,964 1,883 1,413 874 1,117 780 1,564 1,332 1,044 128 108 260 1,398 1,307 713 701 684 783 262 196 208 175 — — 86 37 13 28 56 61 59 69 78 81 63 72 61 52 54 60 — — 21 29 18 7 5 25 103 31 42
(1) | These companies are related parties of our subsidiary Coca-Cola FEMSA. |
(2) | These companies are related parties of our subsidiary FEMSA Comercio. |
The benefits and aggregate compensation paid to executive officers and senior management of FEMSA and its subsidiaries were as follows:
2011 | 2010 | 2009 | ||||||||||
Short- and long-term benefits paid | Ps. | 1,279 | Ps. | 1,307 | Ps. | 1,206 | ||||||
Severance indemnities | 10 | 34 | 47 | |||||||||
Postretirement benefits (labor cost) | 117 | 83 | 23 |
Note 14. Balances and Transactions in Foreign Currencies
According to NIF B-15, assets, liabilities and transactions denominated in foreign currencies are those realized in a currency different than the recording, functional or reporting currency of each reporting unit. As of the end of and for the years ended December 31, 2011 and 2010, assets, liabilities and transactions denominated in foreign currencies, expressed in Mexican pesos are as follows:
2011 | 2010 | |||||||||||||||||||||||
U.S. dollars | Other Currencies | Total | U.S. dollars | Other Currencies | Total | |||||||||||||||||||
Assets: | ||||||||||||||||||||||||
Short-term | Ps. | 13,733 | Ps. | 18 | Ps. | 13,751 | Ps. | 11,761 | Ps. | 480 | Ps. | 12,241 | ||||||||||||
Long-term | 1,049 | — | 1,049 | 321 | — | 321 | ||||||||||||||||||
Liabilities: | ||||||||||||||||||||||||
Short-term | 2,325 | 205 | 2,530 | 1,501 | 247 | 1,748 | ||||||||||||||||||
Long-term | 7,199 | 445 | 7,644 | 6,962 | — | 6,962 | ||||||||||||||||||
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Transactions | U.S. dollars | Other Currencies | Total | U.S. dollars | Other Currencies | Total | ||||||||||||||||||
Total revenues | Ps. | 1,564 | Ps. | 2 | Ps. | 1,566 | Ps. | 1,111 | Ps. | — | Ps. | 1,111 | ||||||||||||
Expenses and investments: | ||||||||||||||||||||||||
Purchases of raw materials | 9,424 | — | 9,424 | 5,648 | — | 5,648 | ||||||||||||||||||
Interest expense | 319 | 5 | 324 | 294 | — | 294 | ||||||||||||||||||
Consulting fees | 11 | — | 11 | 452 | 24 | 476 | ||||||||||||||||||
Assets acquisitions | 306 | — | 306 | 311 | — | 311 | ||||||||||||||||||
Other | 1,075 | 90 | 1,165 | 804 | 3 | 807 | ||||||||||||||||||
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As of April 27, 2012, approval date of these consolidated financial statements, the exchange rate published by “Banco de México” was Ps. 13.1667 Mexican pesos per one U.S. Dollar, and the foreign currency position was similar to that as of December 31, 2011.
Note 15. Employee Benefits
The Company has various labor liabilities for employee benefits in connection with pension, seniority, post retirement medical and severance benefits. Benefits vary depending upon country.
a) | Assumptions: |
The Company annually evaluates the reasonableness of the assumptions used in its labor liabilities for employee benefits computations. Actuarial calculations for pension and retirement plans, seniority premiums, postretirement medical services and severance indemnity liabilities, as well as the cost for the period, were determined using the following long-term assumptions:
Nominal Rates(1) | Real Rates(2) | |||||||||||||||||||||||||
2011 | 2010 | 2009 | 2011 | 2010 | 2009 | |||||||||||||||||||||
Annual discount rate | 7.6 | % | 7.6 | % | 8.2 | % | 4.0 | % | 4.0 | % | 4.5 | % | ||||||||||||||
Salary increase | 4.8 | % | 4.8 | % | 5.1 | % | 1.2 | % | 1.2 | % | 1.5 | % | ||||||||||||||
Return on assets | 9.0 | % | 8.2 | % | 8.2 | % | 5.0 | % | 3.6 | % | 4.5 | % | ||||||||||||||
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Measurement date: December 2011 |
(1) | For non-inflationary economies. |
(2) | For inflationary economies. |
The basis for the determination of the long-term rate of return is supported by a historical analysis of average returns in real terms for the last 30 years of the Certificados de Tesorería del Gobierno Federal (Mexican Federal Government Treasury Certificates) for Mexican investments, treasury bonds of each country for other investments and the expected rates of long-term returns of the actual investments of the Company.
The annual growth rate for health care expenses is 5.1% in nominal terms, consistent with the historical average health care expense rate for the past 30 years. Such rate is expected to remain consistent for the foreseeable future.
Based on these assumptions, the expected benefits to be paid in the following years are as follows:
Pension and Retirement Plans | Seniority Premiums | Postretirement Medical Services | Severance Indemnities | |||||||||||||
2012 | Ps. 409 | Ps. 16 | Ps. 6 | Ps. 148 | ||||||||||||
2013 | 238 | 15 | 6 | 125 | ||||||||||||
2014 | 234 | 16 | 6 | 119 | ||||||||||||
2015 | 206 | 17 | 6 | 115 | ||||||||||||
2016 | 203 | 19 | 6 | 110 | ||||||||||||
2017 to 2021 | 1,078 | 124 | 25 | 512 | ||||||||||||
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b) | Balances of the Liabilities for Employee Benefits: |
2011 | 2010 | |||||||
Pension and Retirement Plans: | ||||||||
Vested benefit obligation | Ps. | 1,639 | Ps. | 1,461 | ||||
Non-vested benefit obligation | 1,184 | 1,080 | ||||||
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Accumulated benefit obligation | 2,823 | 2,541 | ||||||
Excess of projected benefit obligation over accumulated benefit obligation | 1,103 | 757 | ||||||
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Defined benefit obligation | 3,926 | 3,298 | ||||||
Pension plan funds at fair value | (1,927 | ) | (1,501 | ) | ||||
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Unfunded defined benefit obligation | 1,999 | 1,797 | ||||||
Labor cost of past services(1) | (319 | ) | (349 | ) | ||||
Unrecognized actuarial loss, net | (446 | ) | (272 | ) | ||||
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Total | Ps. | 1,234 | Ps. | 1,176 | ||||
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Seniority Premiums: | ||||||||
Vested benefit obligation | Ps. | 13 | Ps. | 12 | ||||
Non-vested benefit obligation | 126 | 93 | ||||||
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Accumulated benefit obligation | 139 | 105 | ||||||
Excess of projected benefit obligation over accumulated benefit obligation | 102 | 49 | ||||||
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Defined benefit obligation | 241 | 154 | ||||||
Seniority premium plan funds at fair value | (19 | ) | — | |||||
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Unfunded defined benefit obligation | 222 | 154 | ||||||
Unrecognized actuarial gain, net | 22 | 17 | ||||||
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Total | Ps. | 244 | Ps. | 171 | ||||
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Postretirement Medical Services: | ||||||||
Vested benefit obligation | Ps. | 134 | Ps. | 119 | ||||
Non-vested benefit obligation | 102 | 112 | ||||||
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Defined benefit obligation | 236 | 231 | ||||||
Medical services funds at fair value | (45 | ) | (43 | ) | ||||
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Unfunded defined benefit obligation | 191 | 188 | ||||||
Labor cost of past services(1) | (2 | ) | (4 | ) | ||||
Unrecognized actuarial loss, net | (95 | ) | (102 | ) | ||||
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Total | Ps. | 94 | Ps. | 82 | ||||
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Severance Indemnities: | ||||||||
Accumulated benefit obligation | Ps. | 614 | Ps. | 462 | ||||
Excess of projected benefit obligation over accumulated benefit obligation | 122 | 91 | ||||||
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Defined benefit obligation | 736 | 553 | ||||||
Labor cost of past services(1) | (50 | ) | (99 | ) | ||||
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Total | Ps. | 686 | Ps. | 454 | ||||
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Total labor liabilities for employee benefits | Ps. | 2,258 | Ps. | 1,883 | ||||
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(1) | Unrecognized net transition obligation and unrecognized prior service costs. |
The accumulated actuarial gains and losses were generated by the differences in the assumptions used for the actuarial calculations at the beginning of the year versus the actual behavior of those variables at the end of the year.
c) | Trust Assets: |
Trust assets consist of fixed and variable return financial instruments recorded at market value. The trust assets are invested as follows:
2011 | 2010 | |||||||
Fixed return: | ||||||||
Publicly traded securities | 9 | % | 10 | % | ||||
Bank instruments | 3 | % | 8 | % | ||||
Federal government instruments | 69 | % | 60 | % | ||||
Variable return: | ||||||||
Publicly traded shares | 19 | % | 22 | % | ||||
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100 | % | 100 | % | |||||
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The Company has a policy of maintaining at least 30% of the trust assets in Mexican Federal Government instruments. Objective portfolio guidelines have been established for the remaining percentage, and investment decisions are made to comply with those guidelines to the extent that market conditions and available funds allow.
The amounts and types of securities of the Company and related parties included in plan assets are as follows:
2011 | 2010 | |||||||
Debt: | ||||||||
CEMEX, S.A.B. de C.V. | Ps. — | Ps.20 | ||||||
BBVA Bancomer, S.A. de C.V. | 30 | 11 | ||||||
Coca-Cola FEMSA | 2 | 2 | ||||||
Grupo Industrial Bimbo, S.A. de C.V. | 2 | 2 | ||||||
Grupo Televisa, S.A.B. | 3 | — | ||||||
Grupo Financiero Banorte, S.A.B. de C.V. | 7 | — | ||||||
Equity: | ||||||||
FEMSA | 58 | 97 | ||||||
Coca-Cola FEMSA | 5 | — | ||||||
Grupo Televisa, S.A.B. | — | 8 |
The Company does not expect to make material contributions to plan assets during the following fiscal year.
d) | Cost for the Year: |
2011 | 2010 | 2009 | ||||||||||
Pension and Retirement Plans: | ||||||||||||
Labor cost | Ps. | 164 | Ps. | 136 | Ps. | 136 | ||||||
Interest cost | 262 | 219 | 216 | |||||||||
Expected return on trust assets | (149 | ) | (94 | ) | (80 | ) | ||||||
Labor cost of past services(1) | 31 | 30 | 29 | |||||||||
Amortization of net actuarial loss | 23 | 4 | 17 | |||||||||
Curtailment | (18 | ) | — | — | ||||||||
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313 | 295 | 318 | ||||||||||
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Seniority Premiums: | ||||||||||||
Labor cost | 30 | 27 | 25 | |||||||||
Interest cost | 13 | 13 | 12 | |||||||||
Labor cost of past services(1) | 1 | 1 | — | |||||||||
Amortization of net actuarial loss | 7 | — | — | |||||||||
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51 | 41 | 37 | ||||||||||
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Postretirement Medical Services: Labor cost Interest cost Expected return on trust assets Labor cost of past services(1) Amortization of net actuarial loss Curtailment Severance Indemnities: Labor cost Interest cost Labor cost of past services(1) Amortization of net actuarial loss 9 8 7 17 16 15 (4 ) (3 ) (3 ) 2 2 2 5 4 5 (3 ) — — 26 27 26 78 65 61 35 31 32 50 48 50 81 93 45 244 237 188 Ps .634 Ps. 600 Ps. 569
(1) | Amortization of unrecognized net transition obligation and amortization of unrecognized prior service costs. |
e) | Changes in the Balance of the Obligations for Employee Benefits: |
2011 | 2010 | |||||||
Pension and Retirement Plans: | ||||||||
Initial balance | Ps. | 3,298 | Ps. | 2,612 | ||||
Labor cost | 164 | 136 | ||||||
Interest cost | 262 | 219 | ||||||
Curtailment | 6 | 129 | ||||||
Actuarial loss | 88 | 358 | ||||||
Benefits paid | (142 | ) | (156 | ) | ||||
Acquisitions | 250 | — | ||||||
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Ending balance | 3,926 | 3,298 | ||||||
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Seniority Premiums: | ||||||||
Initial balance | 154 | 166 | ||||||
Labor cost | 30 | 27 | ||||||
Interest cost | 13 | 13 | ||||||
Curtailment | (1 | ) | — | |||||
Actuarial loss (gain) | 2 | (33 | ) | |||||
Benefits paid | (19 | ) | (19 | ) | ||||
Acquisitions | 62 | — | ||||||
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Ending balance | 241 | 154 | ||||||
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Postretirement Medical Services: | ||||||||
Initial balance | 231 | 191 | ||||||
Labor cost | 9 | 8 | ||||||
Interest cost | 17 | 16 | ||||||
Curtailment | (6 | ) | 8 | |||||
Actuarial loss | — | 21 | ||||||
Benefits paid | (15 | ) | (13 | ) | ||||
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Ending balance | 236 | 231 | ||||||
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Severance Indemnities: Initial balance Labor cost Interest cost Curtailment Actuarial loss Benefits paid Acquisitions Ending balance 553 535 78 65 35 31 — 1 112 74 (155 ) (153 ) 113 — Ps. 736 Ps. 553
f) | Changes in the Balance of the Trust Assets: |
2011 | 2010 | |||||||
Initial balance | Ps. | 1,544 | Ps. | 1,183 | ||||
Actual return on trust assets | 59 | 114 | ||||||
Life annuities(1) | 152 | 264 | ||||||
Benefits paid | (12 | ) | (17 | ) | ||||
Acquisitions | 248 | — | ||||||
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Ending balance | Ps. | 1,991 | Ps. | 1,544 | ||||
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(1) | Life annuities acquired fromAllianz Mexico. |
g) | Variation in Health Care Assumptions: |
The following table presents the impact to the postretirement medical service obligations and the expenses recorded in the income statement with a variation of 1% in the assumed health care cost trend rates.
Impact of Changes: | ||||||||
+1% | -1% | |||||||
Postretirement medical services obligation | Ps. | 38 | Ps. | (24 | ) | |||
Cost for the year | 5 | (2 | ) |
Note 16. Bonus Program
The bonus program for executives is based on complying with certain goals established annually by management, which include quantitative and qualitative objectives and special projects.
The quantitative objectives represent approximately 50% of the bonus and are based on the Economic Value Added (“EVA”) methodology. The objective established for the executives at each entity is based on a combination of the EVA per entity and the EVA generated by the Company, calculated at approximately 70% and 30%, respectively. The qualitative objectives and special projects represent the remaining 50% of the annual bonus and are based on the critical success factors established at the beginning of the year for each executive.
In addition, the Company provides a defined contribution plan of share compensation to certain key executives, consisting of an annual cash bonus to purchase FEMSA shares or options, based on the executive’s responsibility in the organization, their business’ EVA result achieved, and their individual performance. The acquired shares or options are deposited in a trust, and the executives may access them one year after they are vested at 20% per year. The 50% of Coca-Cola FEMSA’s annual executive bonus is to be used to purchase FEMSA shares or options and the remaining 50% to purchase Coca-Cola FEMSA shares or options. As of December 31, 2011, 2010 and 2009, no options have been granted to employees under the plan.
As of April 30, 2010, the trust linked to FEMSA Cerveza executives was liquidated; as a result 230,642 of FEMSA UBD shares and 27,339 of KOF L shares granted to FEMSA Cerveza executives were vested as part of the share exchange of FEMSA Cerveza.
The incentive plan target is expressed in months of salary, and the final amount payable is computed based on a percentage of compliance with the goals established every year. The bonuses are recorded in income from operations and are paid in cash the following year. During the years ended December 31, 2011, 2010 and 2009, the bonus expense recorded amounted to Ps. 1,241 Ps. 1,016 and Ps. 1,210, respectively.
All shares held in trust are considered outstanding for earnings per share purposes and dividends on shares held by the trusts are charged to retained earnings.
As of December 31, 2011 and 2010, the number of shares held by the trust is as follows:
Number of Shares | ||||||||||||||||
FEMSA UBD | KOF L | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Beginning balance | 10,197,507 | 10,514,672 | 3,049,376 | 3,035,008 | ||||||||||||
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Shares granted to executives | 2,438,590 | 3,700,050 | 651,870 | 989,500 | ||||||||||||
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Shares released from trust to executives upon vesting | (3,236,014 | ) | (3,863,904 | ) | (986,694 | ) | (975,132 | ) | ||||||||
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Forfeitures | — | (153,311 | ) | — | — | |||||||||||
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Ending balance | �� | 9,400,083 | 10,197,507 | 2,714,552 | 3,049,376 | |||||||||||
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The fair value of the shares held by the trust as of the end of December 31, 2011 and 2010 was Ps. 1,297 and Ps. 857, respectively, based on quoted market prices of those dates.
Note 17. Bank Loans and Notes Payable
At December 31,(1) | ||||||||||||||||||||||||||||||||||||
(in millions of Mexican pesos) | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 and Thereafter | 2011 | Fair Value | 2010(1) | |||||||||||||||||||||||||||
Short-term debt: | ||||||||||||||||||||||||||||||||||||
Fixed rate debt: | ||||||||||||||||||||||||||||||||||||
Argentine pesos | ||||||||||||||||||||||||||||||||||||
Bank loans | Ps. | 325 | Ps. | — | Ps. | — | Ps. | — | Ps. | — | Ps. | — | Ps. | 325 | Ps. | 317 | Ps. | 506 | ||||||||||||||||||
Interest rate | 14.9% | 14.9% | 15.3% | |||||||||||||||||||||||||||||||||
Mexican pesos | ||||||||||||||||||||||||||||||||||||
Capital leases | 18 | — | — | — | — | — | 18 | 18 | — | |||||||||||||||||||||||||||
Interest rate | 6.9% | 6.9% | 0.0% | |||||||||||||||||||||||||||||||||
Variable rate debt: | ||||||||||||||||||||||||||||||||||||
Colombian pesos | ||||||||||||||||||||||||||||||||||||
Bank loans | 295 | — | — | — | — | — | 295 | 295 | 1,072 | |||||||||||||||||||||||||||
Interest rate | 6.8% | 6.8% | 4.4% | |||||||||||||||||||||||||||||||||
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Total short-term debt | Ps. | 638 | Ps. | — | Ps. | — | Ps. | — | Ps. | — | Ps. | — | Ps. | 638 | Ps. | 630 | Ps. | 1,578 | ||||||||||||||||||
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Long-term debt: | ||||||||||||||||||||||||||||||||||||
Fixed rate debt: | ||||||||||||||||||||||||||||||||||||
Argentine pesos | ||||||||||||||||||||||||||||||||||||
Bank loans | 514 | 81 | — | — | — | — | 595 | 570 | 684 | |||||||||||||||||||||||||||
Interest rate | 16.4% | 15.7% | 16.3% | 16.5% | ||||||||||||||||||||||||||||||||
Brazilian reais | ||||||||||||||||||||||||||||||||||||
Bank loans | 5 | 10 | 10 | 10 | 10 | 36 | 81 | 87 | 81 | |||||||||||||||||||||||||||
Interest rate | 4.5% | 4.5% | 4.5% | 4.5% | 4.5% | 4.5% | 4.5% | 4.5% | ||||||||||||||||||||||||||||
Capital leases | 4 | 5 | 5 | 4 | — | — | 18 | 21 | ||||||||||||||||||||||||||||
Interest rate | 4.5% | 4.5% | 4.5% | 4.5% | 4.5% | 4.5% | ||||||||||||||||||||||||||||||
U.S. dollars | ||||||||||||||||||||||||||||||||||||
Yankee Bond | — | — | — | — | — | 6,990 | 6,990 | 7,737 | 6,179 | |||||||||||||||||||||||||||
Interest rate | 4.6% | 4.6% | 4.6% | |||||||||||||||||||||||||||||||||
Capital leases | — | — | — | — | — | — | — | — | 4 | |||||||||||||||||||||||||||
Interest rate | 3.8% | |||||||||||||||||||||||||||||||||||
Mexican pesos | ||||||||||||||||||||||||||||||||||||
Units of investment (UDIs) | — | — | — | — | — | 3,337 | 3,337 | 3,337 | 3,193 | |||||||||||||||||||||||||||
Interest rate | 4.2% | 4.2% | 4.2% | |||||||||||||||||||||||||||||||||
Domestic senior notes | — | — | — | — | — | 2,500 | 2,500 | 2,631 | — | |||||||||||||||||||||||||||
Interest rate | 8.3% | 8.3% | 0.0% | |||||||||||||||||||||||||||||||||
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Subtotal | Ps. | 523 | Ps. | 96 | Ps. | 15 | Ps. | 14 | Ps. | 10 | Ps. | 12,863 | Ps. | 13,521 | Ps. | 14,362 | Ps. | 10,162 | ||||||||||||||||||
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Variable rate debt: | ||||||||||||||||||||||||||||||||||||
U.S. dollars | ||||||||||||||||||||||||||||||||||||
Bank loans | 42 | 209 | — | — | — | — | 251 | 251 | 222 | |||||||||||||||||||||||||||
Interest rate | 0.7% | 0.7% | 0.7% | 0.6% | ||||||||||||||||||||||||||||||||
Mexican pesos | ||||||||||||||||||||||||||||||||||||
Domestic senior notes | 3,000 | 3,500 | — | — | 2,500 | — | 9,000 | 8,981 | 8,000 | |||||||||||||||||||||||||||
Interest rate | 4.7% | 4.8% | 4.9% | 4.8% | 4.8% | |||||||||||||||||||||||||||||||
Bank loans | 67 | 266 | 1,392 | 2,825 | — | — | 4,550 | 4,456 | 4,550 | |||||||||||||||||||||||||||
Interest rate | 5.0% | 5.0% | 5.0% | 5.0% | 5.0% | 5.1% | ||||||||||||||||||||||||||||||
Argentine pesos | ||||||||||||||||||||||||||||||||||||
Bank loans | 130 | — | — | — | — | — | 130 | 116 | — | |||||||||||||||||||||||||||
Interest rate | 27.3% | 27.3% | ||||||||||||||||||||||||||||||||||
Brazilian reais | ||||||||||||||||||||||||||||||||||||
Capital leases | 33 | 39 | 43 | 48 | 30 | — | 193 | 193 | — | |||||||||||||||||||||||||||
Interest rate | 11.0% | 11.0% | 11.0% | 11.0% | 11.0% | 11.0% | ||||||||||||||||||||||||||||||
Colombian pesos | ||||||||||||||||||||||||||||||||||||
Bank loans | 935 | — | — | — | — | — | 935 | 929 | 994 | |||||||||||||||||||||||||||
Interest rate | 6.1% | 6.1% | 4.7% | |||||||||||||||||||||||||||||||||
Capital leases | 205 | 181 | — | — | — | — | 386 | 384 | — | |||||||||||||||||||||||||||
Interest rate | 7.1% | 6.6% | 6.9% | |||||||||||||||||||||||||||||||||
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Subtotal | 4,412 | 4,195 | 1,435 | 2,873 | 2,530 | — | 15,445 | 15,310 | 13,766 | |||||||||||||||||||||||||||
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Total long-term debt | Ps. | 4,935 | Ps. | 4,291 | Ps. | 1,450 | Ps. | 2,887 | Ps. | 2,540 | Ps. | 12,863 | Ps. | 28,966 | Ps. | 29,672 | Ps. | 23,928 | ||||||||||||||||||
(4,935 | ) | (1,725 | ) | |||||||||||||||||||||||||||||||||
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Ps. | 24,031 | Ps. | 22,203 | |||||||||||||||||||||||||||||||||
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(1) | All interest rates are weighted average annual rates. |
Derivative Financial Instruments(1) Cross currency swaps: Units of investments to Mexican pesos and variable rate: Interest pay rate Interest receive rate Interest rate swap:(2) Mexican pesos Variable to fixed rate: Interest pay rate Interest receive rate 2012 2013 2014 2015 2016 2017 and
Thereafter 2011 2010 (notional amounts in millions of Mexican pesos) — — — — — 2,500 2,500 2,500 4.6% 4.6% 4.7% 4.2% 4.2% 4.2% 1,600 2,500 575 1,963 6,638 5,260 8.1% 8.1% 8.4% 8.6% 8.3% 8.1% 4.7% 4.7% 5.0% 5.0% 4.9% 4.9%
(1) | All interest rates are weighted average annual rates. |
(2) | Does not include forwards starting swaps with a notional amount of Ps. 1,312 and a fair value loss of Ps. 43. These contracts will become effective in 2012 and mature in 2013. |
On December 4, 2007, the Company obtained the approval from the National Banking and Securities Commission (Comisión Nacional Bancaria y de Valores or “CNBV”) for the issuance of long-term domestic senior notes (“Certificados Bursátiles”) in the amount of Ps. 10,000 (nominal amount) or its equivalent in investment units. As of December 31, 2011, the Company has issued the following domestic senior notes: i) on December 7, 2007, the Company issued domestic senior notes composed of Ps. 3,500 (nominal amount) with a maturity date on November 29, 2013 and a floating interest rate; ii) on December 7, 2007, the Company issued domestic senior notes in the amount of 637,587,000 investment units (Ps. 2,500 nominal amount), with a maturity date on November 24, 2017 and a fixed interest rate, iii) on May 26, 2008, the Company issued domestic senior notes composed of Ps. 1,500 (nominal amount), with a maturity date on May 23, 2011 and a floating interest rate, which was paid at maturity.
Additionally, Coca-Cola FEMSA has the following domestic senior notes: a) issued in the Mexican stock exchange: i) Ps. 3,000 (nominal amount) with a maturity date in 2012 and a variable interest rate, ii) Ps. 2,500 (nominal amount) with a maturity date in 2016 and a variable interest rate and iii) Ps. 2,500 (nominal amount) with a maturity date in 2021 and fixed interest rate of 8.3%; b) issued in the NYSE a Yankee Bond of $500 with interest at a fixed rate of 4.6% and maturity date on February 15, 2020.
The Company has financing from different institutions under agreements that stipulate different restrictions and covenants, which mainly consist of maximum levels of leverage and capitalization as well as minimum consolidated net worth and debt and interest coverage ratios. As of the date of these consolidated financial statements, the Company was in compliance with all restrictions and covenants contained in its financing agreements.
Note 18. Other Expenses, Net
2011 | 2010 | 2009 | ||||||||||
Employee profit sharing (see Note 4 R) | Ps. | 1,237 | Ps. | 785 | Ps. | 1,020 | ||||||
Gain on sale of shares (see Note 5 B) | (1 | ) | (1,554 | ) | (35 | ) | ||||||
Brazil tax amnesty (see Note 23 A) | — | (179 | ) | (311 | ) | |||||||
Vacation provision | — | — | 333 | |||||||||
Disposal of long-lived assets(1) | 703 | 9 | 129 | |||||||||
Severance payments associated with an ongoing benefit | 226 | 583 | 127 | |||||||||
(Gain) loss on sale of long-lived assets | (9 | ) | 215 | 177 | ||||||||
Donations | 200 | 195 | 116 | |||||||||
Contingencies | 146 | 104 | 152 | |||||||||
Security taxes from Colombia | 197 | 29 | 25 | |||||||||
Other | 218 | 95 | 144 | |||||||||
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Total | Ps. | 2,917 | Ps. | 282 | Ps. | 1,877 | ||||||
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(1) | Charges related to fixed assets retirement from ordinary operations and other long-lived assets. |
Note 19. Fair Value of Financial Instruments
The Company uses a three level fair value hierarchy to prioritize the inputs used to measure fair value. The three levels of inputs are described as follows:
Level 1:quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
Level 2:inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly or indirectly.
Level 3:are unobservable inputs for the asset or liability. Unobservable inputs shall be used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date.
The Company measures the fair value of its financial assets and liabilities classified as level 2, applying the income approach method, which estimates the fair value based on expected cash flows discounted to net present value. The following table summarizes financial assets and liabilities measured at fair value, as of December 31, 2011 and 2010:
2011 | 2010 | |||||||||||||||
Level 1 | Level 2 | Level 1 | Level 2 | |||||||||||||
Cash equivalents | Ps. | 17,908 | Ps. | 19,770 | ||||||||||||
Available-for-sale investments | 330 | 66 | ||||||||||||||
Pension plan trust assets | 1,991 | 1,544 | ||||||||||||||
Derivative financial instruments (asset) | Ps. | 1,361 | Ps. | 732 | ||||||||||||
Derivative financial instruments (liability) | 634 | 694 |
The Company does not use inputs classified as level 3 for fair value measurement.
a) | Total Debt: |
The fair value of long-term debt is determined based on the discounted value of contractual cash flows, in which the discount rate is estimated using rates currently offered for debt of similar amounts and maturities. The fair value of notes is based on quoted market prices.
2011 | 2010 | |||||||
Carrying value | Ps. | 29,604 | Ps. | 25,506 | ||||
Fair value | 30,302 | 25,451 |
b) | Interest Rate Swaps: |
The Company uses interest rate swaps to offset the interest rate risk associated with its borrowings, pursuant to which it pays amounts based on a fixed rate and receives amounts based on a floating rate. These instruments are recognized in the consolidated balance sheet at their estimated fair value and have been designated as a cash flows hedge. The estimated fair value is based on formal technical models. Changes in fair value were recorded in cumulative other comprehensive income until such time as the hedged amount is recorded in earnings.
At December 31, 2011, the Company has the following outstanding interest rate swap agreements:
Maturity Date | Notional Amount | Fair Value Asset (Liability) | ||||||
2012 | Ps. | 1,600 | Ps. | (12 | ) | |||
2013 | 3,812 | (181 | ) | |||||
2014 | 575 | (43 | ) | |||||
2015 | 1,963 | (184 | ) |
A portion of certain interest rate swaps do not meet the hedging criteria for accounting purposes; consequently, changes in the estimated fair value of the ineffective portion were recorded in the consolidated results as part of the comprehensive financing result.
The net effect of expired contracts that met hedging criteria is recognized as interest expense as part of the comprehensive financing result.
c) | Forward Agreements to Purchase Foreign Currency: |
The Company enters into forward agreements to reduce its exposure to the risk of exchange rate fluctuations between the Mexican peso and other currencies. These instruments are recognized in the consolidated balance sheet at their estimated fair value which is determined based on prevailing market exchange rates to end the contracts at the end of the period. For contracts that meet hedging criteria, the changes in the fair value are recorded in cumulative other comprehensive income prior to expiration. Net gain/loss on expired contracts is recognized as part of foreign exchange.
Net changes in the fair value of forward agreements that do not meet hedging criteria for accounting purposes are recorded in the consolidated results as part of the comprehensive financing result. The net effect of expired contracts that do not meet hedging criteria for accounting purposes is recognized as a market value gain (loss) on ineffective portion of derivative financial instruments.
d) | Options to Purchase Foreign Currency: |
The Company has entered into a collar strategy to reduce its exposure to the risk of exchange rate fluctuations. A collar is a strategy that limits the exposure to the risk of exchange rate fluctuations in a similar way as a forward agreement.
These instruments are recognized in the consolidated balance sheet at their estimated fair value which is determined based on prevailing market exchange rates to terminate the contracts at the end of the period. Changes in the fair value of these options, corresponding to the intrinsic value are initially recorded as part of cumulative other comprehensive income. Changes in the fair value, corresponding to the intrinsic value are recorded in the income statement under the caption “market value gain/loss on the ineffective portion of derivative financial instruments,” as part of the consolidated results. Net gain/loss on expired contracts is recognized as part of cost of goods sold.
e) | Cross Currency Swaps: |
The Company enters into cross currency swaps to reduce its exposure to risks of exchange rate and interest rate fluctuations associated with its borrowings denominated in U.S. dollars and other foreign currencies. These instruments are recognized in the consolidated balance sheet at their estimated fair value which is estimated based on formal technical models. These contracts are designated as fair value hedges. The fair value changes related to those cross currency swaps are recorded as part of the ineffective portion of derivative financial instruments, net of changes related to the long-term liability.
Net changes in the fair value of current and expired cross currency swaps contracts that did not meet the hedging criteria for accounting purposes are recorded as a gain/loss in the market value on the ineffective portion of derivative financial instruments in the consolidated results as part of the comprehensive financing result.
f) | Commodity Price Contracts: |
The Company enters into commodity price contracts to reduce its exposure to the risk of fluctuation in the costs of certain raw material. The fair value is estimated based on the market valuations to the end of the contracts at the date of closing of the period. Changes in the fair value are recorded in cumulative other comprehensive income.
The fair value of expired commodity price contracts were recorded in cost of sales where the hedged item was recorded.
g) | Embedded Derivative Financial Instruments: |
The Company has determined that its leasing contracts denominated in U.S. dollars host embedded derivative financial instruments. The fair value is estimated based on formal technical models. Changes in the fair value were recorded in current earnings in the comprehensive financing result as market value on derivative financial instruments.
h) | Notional Amounts and Fair Value of Derivative Instruments that Met Hedging Criteria: |
2011 Notional Amounts | Fair Value | |||||||||||
2011 | 2010 | |||||||||||
CASH FLOWS HEDGE: | ||||||||||||
Assets (Liabilities): | ||||||||||||
Forward agreements | Ps. | 2,933 | Ps. | 183 | (1) | Ps. | (16 | ) | ||||
Options to purchase foreign currency | 1,901 | 300 | (1) | — | ||||||||
Interest rate swaps | 7,950 | (420 | )(3) | (418 | ) | |||||||
Commodity price contracts | 754 | (19 | )(2) | 445 | ||||||||
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FAIR VALUE HEDGE: | ||||||||||||
Assets (Liabilities): | ||||||||||||
Cross currency swaps | Ps. | 2,500 | Ps. | 860 | (4) | Ps. | 717 |
(1) | Expires in 2012. |
(2) | Maturity dates in 2012 and 2013. |
(3) | Maturity dates in 2012 and 2015. |
(4) | Expires in 2017. |
i) | Net Effects of Expired Contracts that Met Hedging Criteria: |
Types of Derivatives | Impact in Income Statement Gain (Loss) | 2011 | 2010 | 2009 | ||||||||||
Interest rate swaps | Interest expense | Ps. | (120 | ) | Ps. | (181 | ) | Ps. | (67 | ) | ||||
Forward agreements | Foreign exchange | — | 27 | — | ||||||||||
Cross currency swaps | Foreign exchange/ interest expense | 8 | 2 | (32 | ) | |||||||||
Commodity price contract | Cost of sales | 257 | 393 | 247 | ||||||||||
Forward agreements | Cost of sales | 21 | — | — |
j) | Net Effect of Changes in Fair Value of Derivative Financial Instruments that Did Not Meet the Hedging Criteria for Accounting Purposes: |
Types of Derivatives | Impact in Income Statement | 2011 | 2010 | 2009 | ||||||||||
Interest rate swaps | Market value gain (loss) on ineffective portion of derivative financial instruments | Ps. | — | Ps. | (7 | ) | Ps. | — | ||||||
Forwards for purchase of foreign currency | — | — | (63 | ) | ||||||||||
Cross currency swaps | (146 | ) | 205 | 168 |
k) | Net Effect of Changes in Fair Value of Other Derivative Financial Instruments that Did Not Meet the Hedging Criteria for Accounting Purposes: |
Types of Derivatives | Impact in Income Statement | 2011 | 2010 | 2009 | ||||||||||
Embedded derivative financial instruments | Market value gain (loss) on ineffective portion of derivative financial instruments | Ps. | (50 | ) | Ps. | 15 | Ps. | 19 | ||||||
Others | 37 | (1 | ) | — |
Note 20. Non-controlling Interest in Consolidated Subsidiaries
An analysis of FEMSA’s non-controlling interest in its consolidated subsidiaries for the years ended December 31, 2011 and 2010 is as follows:
2011 | 2010 | |||||||
Coca-Cola FEMSA | Ps. | 57,450 | (1) | Ps. | 35,585 | |||
Other | 84 | 80 | ||||||
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Ps. | 57,534 | Ps. | 35,665 | |||||
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(1) | Includes Ps. 7,828 and Ps. 9,017 for acquisitions through issuance of shares of Grupo Tampico and Grupo CIMSA, respectively (see Note 5 A). |
Note 21. Stockholders’ Equity
The capital stock of FEMSA is comprised of 2,161,177,770 BD units and 1,417,048,500 B units.
As of December 31, 2011 and 2010, the capital stock of FEMSA was comprised of 17,891,131,350 common shares, without par value and with no foreign ownership restrictions. Fixed capital stock amounts to Ps. 300 (nominal value) and the variable capital may not exceed 10 times the minimum fixed capital stock amount.
The characteristics of the common shares are as follows:
Series “B” shares, with unlimited voting rights, which at all times must represent a minimum of 51% of total capital stock;
Series “L” shares, with limited voting rights, which may represent up to 25% of total capital stock; and
Series “D” shares, with limited voting rights, which individually or jointly with series “L” shares may represent up to 49% of total capital stock.
The Series “D” shares are comprised as follows:
Subseries “D-L” shares may represent up to 25% of the series “D” shares;
Subseries “D-B” shares may comprise the remainder of outstanding series “D” shares; and
The non-cumulative premium dividend to be paid to series “D” stockholders will be 125% of any dividend paid to series “B” stockholders.
The Series “B” and “D” shares are linked together in related units as follows:
“B units” each of which represents five series “B” shares and which are traded on the BMV;
“BD units” each of which represents one series “B” share, two subseries “D-B” shares and two subseries “D-L” shares, and which are traded both on the BMV and the NYSE;
As of December 31, 2011 and 2010, FEMSA’s capital stock is comprised as follows:
“B” Units | “BD” Units | Total | ||||||||||
Units | 1,417,048,500 | 2,161,177,770 | 3,578,226,270 | |||||||||
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Shares: | ||||||||||||
Series “B” | 7,085,242,500 | 2,161,177,770 | 9,246,420,270 | |||||||||
Series “D” | — | 8,644,711,080 | 8,644,711,080 | |||||||||
Subseries “D-B” | — | 4,322,355,540 | 4,322,355,540 | |||||||||
Subseries “D-L” | — | 4,322,355,540 | 4,322,355,540 | |||||||||
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Total shares | 7,085,242,500 | 10,805,888,850 | 17,891,131,350 | |||||||||
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The net income of the Company is subject to the legal requirement that 5% thereof be transferred to a legal reserve until such reserve equals 20% of capital stock at nominal value. This reserve may not be distributed to stockholders during the existence of the Company, except as a stock dividend. As of December 31, 2011 and 2010, this reserve in FEMSA amounted to Ps. 596 (nominal value).
Retained earnings and other reserves distributed as dividends, as well as the effects derived from capital reductions, are subject to income tax at the rate in effect at the date of distribution, except for restated stockholder contributions and distributions made from consolidated taxable income, denominated “Cuenta de Utilidad Fiscal Neta” (“CUFIN”).
Dividends paid in excess of CUFIN are subject to income tax at a grossed-up rate based on the current statutory rate. Since 2003, this tax may be credited against the income tax of the year in which the dividends are paid, and in the following two years against the income tax and estimated tax payments. As of December 31, 2011, FEMSA’s balances of CUFIN amounted to Ps. 62,925.
At the ordinary stockholders’ meeting of FEMSA held on March 25, 2011, stockholders approved dividends of Ps. 0.22940 Mexican pesos (nominal value) per series “B” share and Ps. 0.28675 Mexican pesos (nominal value) per series “D” share that were paid in May and November, 2011. Additionally, the stockholders approved a reserve for share repurchase of a maximum of Ps. 3,000.As of December 31, 2011, the Company has not repurchased shares.
At an ordinary stockholders’ meeting of Coca-Cola FEMSA held on March 23, 2011, the stockholders approved a dividend of Ps. 4,358 that was paid on April 27, 2011. The corresponding payment to the non-controlling interest was Ps. 2,017.
As of December 31, 2011, 2010 and 2009 the dividends declared and paid by the Company and Coca-Cola FEMSA were as follows:
2011 | 2010 | 2009 | ||||||||||
FEMSA | Ps. | 4,600 | Ps. | 2,600 | Ps. | 1,620 | ||||||
Coca-Cola FEMSA (100% of dividend) | 4,358 | 2,604 | 1,344 |
Note 22. Net Controlling Interest Income per Share
This represents the net controlling interest income corresponding to each share of the Company’s capital stock, computed on the basis of the weighted average number of shares outstanding during the period. Additionally, the net income distribution is presented according to the dividend rights of each share series.
The following presents the computed weighted average number of shares and the distribution of income per share series as of December 31, 2011, 2010 and 2009:
Millions of Shares | ||||||||||||||||
Series “B” | Series “D” | |||||||||||||||
Number | Weighted Average | Number | Weighted Average | |||||||||||||
Shares outstanding as of December 31, 2011, 2010 and 2009 | 9,246.42 | 9,246.42 | 8,644.71 | 8,644.71 | ||||||||||||
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Dividend rights | 1.00 | 1.25 | ||||||||||||||
Allocation of earnings | 46.11 | % | 53.89 | % | ||||||||||||
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Note 23. Taxes
a) | Income Tax: |
Income tax is computed on taxable income, which differs from net income for accounting purposes principally due to the treatment of the inflationary effects, the cost of labor liabilities for employee benefits, depreciation and other accounting provisions. A tax loss may be carried forward and applied against future taxable income.
Domestic | Foreign | |||||||||||||||||||||||
2011 | 2010 | 2009 | 2011 | 2010 | 2009 | |||||||||||||||||||
Income before income tax from continuing operations | Ps. | 12,275 | Ps. | 11,276 | Ps. | 9,209 | Ps. | 16,096 | Ps. | 12,356 | Ps. | 7,549 | ||||||||||||
Income tax: | ||||||||||||||||||||||||
Current income tax | 3,744 | 2,643 | 2,839 | 3,817 | 2,211 | 2,238 | ||||||||||||||||||
Deferred income tax | (173 | ) | 264 | (401 | ) | 299 | 553 | 283 | ||||||||||||||||
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Domestic income before income tax from continuing operations is presented net of dividends received from foreign entities. The income tax paid in foreign countries is compensated with the consolidated income tax paid in Mexico for the period.
Domestic | Foreign | |||||||||||||||||||||||
2011 | 2010 | 2009 | 2011 | 2010 | 2009 | |||||||||||||||||||
Income before income tax from discontinued operations | Ps. | — | Ps. | 306 | Ps. | 2,688 | Ps. | — | Ps. | 442 | Ps. | (456 | ) | |||||||||||
Income tax: | ||||||||||||||||||||||||
Current income tax | — | 210 | 1,568 | — | 92 | (45 | ) | |||||||||||||||||
Deferred income tax | — | (260 | ) | (508 | ) | — | — | (2,066 | )(1) | |||||||||||||||
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(1) | Application of tax loss carryforwards due to Brazil amnesty adoption. |
The statutory income tax rates applicable in the countries where the Company operates, the years in which tax loss carryforwards may be applied and the open periods that remain subject to examination as of December 31, 2011 are as follows:
Statutory Tax Rate | Expiration (Years) | Open Period (Years) | ||||||||||
Mexico | 30 | % | 10 | 5 | ||||||||
Guatemala | 31 | % | N/A | 4 | ||||||||
Nicaragua | 30 | % | 3 | 4 | ||||||||
Costa Rica | 30 | % | 3 | 4 | ||||||||
Panama | 25 | % | 5 | 3 | ||||||||
Colombia | 33 | % | Indefinite | 2-5 | ||||||||
Venezuela | 34 | % | 3 | 4 | ||||||||
Brazil | 34 | % | Indefinite | 6 | ||||||||
Argentina | 35 | % | 5 | 5 |
The statutory income tax rate in Mexico was 30% for 2011 and 2010, and 28% for 2009.
In Panama, the statutory income tax rate for 2011, 2010 and 2009 was 25%, 27.5% and 30%, respectively.
On January 1, 2010, the Mexican Tax Reform was effective. The most important changes related to Mexican Tax Reform 2010 are described as follows: the value added tax rate (IVA) increases from 15% to 16%, an increase in special tax on productions and services from 25% to 26.5%; and the statutory income tax rate changes from 28% in 2009 to 30% for 2010, 2011 and 2012, and then in 2013 and 2014 will decrease to 29% and 28%, respectively. Additionally, the Mexican tax reform requires that income tax payments related to consolidation tax benefits obtained since 1999, have to be paid during the next five years beginning on the sixth year when tax benefits were used (see Note 23 C).
In Colombia, tax losses may be carried forward for an indefinite period and they are limited to 25% of the taxable income of each year.
In Brazil, tax losses may be carried forward for an indefinite period but cannot be restated and are limited to 30% of the taxable income of each year.
During 2009 and 2010, Brazil adopted new laws providing for certain tax amnesties. The tax amnesty programs offers Brazilian legal entities and individuals an opportunity to pay off their income tax and indirect tax debts under less stringent conditions than would normally apply. The amnesty programs also include a favorable option under which taxpayers may utilize income tax loss carry-forwards (“NOLs”) when settling certain outstanding income tax and indirect tax debts. The Brazilian subsidiary of Coca-Cola FEMSA decided to participate in the amnesty programs allowing it to settle certain previously accrued indirect tax contingencies. During the years ended, December 31, 2010 and 2009 the Company de-recognized indirect tax contingency accruals of Ps. 333 and Ps. 433 respectively (see Note 24 C), making payments of Ps. 118 and Ps. 243, recording a credit to other expenses of Ps. 179 and Ps. 311 (see Note 18), reversing previously recorded Brazil valuation allowances against NOL’s in 2009, and recording certain taxes recoverable. During 2011, there were no tax amnesty programs applied by the Company.
Tax on Assets:
The operations in Guatemala, Nicaragua, Colombia and Argentina are subject to a minumum tax, which is based primary on a percentage of assets. Any payments are recoverable in future years, under certain conditions. In Mexico, the Company has recoverable tax on assets generated in years earlier than 2008, which is recognized as recoverable taxes and can be recovered through tax returns (see Note 23 E).
b) | Business Flat Tax (“IETU”): |
Effective in 2008, the IETU came into effect in Mexico and replaced the Tax on Assets. IETU functions are similar to an alternative minimum corporate income tax, except that amounts paid cannot be creditable against future income tax payments. The payable tax will be the higher between the IETU or the income tax liability computed under the Mexican income tax law. The IETU applies to corporations, including permanent establishments of foreign entities in Mexico, at a rate of 17.5% beginning in 2010. The rate for 2009 was 17.0%. The IETU is calculated under a cash-flows basis, whereby the tax base is determined by reducing cash proceeds with certain deductions and credits. In the case of income derived from export sales, where cash on the receivable has not been collected within 12 months, income is deemed received at the end of this 12-month period. In addition, as opposed to Mexican income tax which allows for fiscal consolidation, companies that incur IETU are required to file their returns on an individual basis.
The Company has paid corporate income tax since IETU came into effect, and based on its financial projections for purposes of its Mexican tax returns, the Company expects to continue to pay corporate income tax in the future and does not expect to pay IETU. As such, the enactment of IETU has not affected the Company’s consolidated financial position or results of operations.
c) | Deferred Income Tax: |
Effective January 2008, in accordance with NIF B-10, “Effects of Inflation,” in Mexico the application of inflationary accounting is suspended. However, for taxes purposes, the balance of non monetary assets is restated through the application of National Consumer Price Index (NCPI) of each country. For this reason, the difference between accounting and taxable values will increase, generating a deferred tax.
The impact to deferred income tax generated by liabilities (assets) temporary differences are as follows:
Deferred Income Taxes | 2011 | 2010 | ||||||
Allowance for doubtful accounts | Ps. | (107 | ) | Ps. | (71 | ) | ||
Inventories | (52 | ) | 37 | |||||
Prepaid expenses | 46 | 75 | ||||||
Property, plant and equipment | 1,676 | 1,418 | ||||||
Investments in shares | 1,830 | 161 | ||||||
Other assets | (701 | ) | (458 | ) | ||||
Amortized intangible assets | 295 | 197 | ||||||
Unamortized intangible assets | 2,409 | 1,769 | ||||||
Labor liabilities for employee benefits | (552 | ) | (448 | ) | ||||
Derivative financial instruments | 23 | 8 | ||||||
Loss contingencies | (721 | ) | (703 | ) | ||||
Temporary non-deductible provision | (935 | ) | (999 | ) | ||||
Employee profit sharing payable | (200 | ) | (125 | ) | ||||
Tax loss carryforwards | (633 | ) | (988 | ) | ||||
Deferred tax from exchange of shares of FEMSA Cerveza (see Note 5 B) | 10,099 | 10,099 | ||||||
Other reserves | 973 | 249 | ||||||
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Deferred income taxes, net | 13,450 | 10,221 | ||||||
Deferred income taxes asset | 461 | 346 | ||||||
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Deferred income taxes liability | Ps. | 13,911 | Ps. | 10,567 | ||||
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The changes in the balance of the net deferred income tax liability are as follows:
2011 | 2010 | 2009 | ||||||||||
Initial balance | Ps. | 10,221 | Ps. | (660 | ) | Ps. | 670 | |||||
Deferred tax provision for the year | 225 | 875 | (31 | ) | ||||||||
Change in the statutory rate | (99 | ) | (58 | ) | (87 | ) | ||||||
Deferred tax from the exchange of shares of FEMSA (see Note 5 B) | — | 10,099 | — | |||||||||
Usage of tax losses related to exchange of FEMSA Cerveza (see Note 5 B) | — | 280 | — | |||||||||
Effect of tax loss carryforwards(1) | — | — | (1,874 | ) | ||||||||
Acquisition of subsidiaries | 186 | — | — | |||||||||
Disposal of subsidiaries | — | (34 | ) | — | ||||||||
Effects in stockholders’ equity: | ||||||||||||
Derivative financial instruments | 75 | 75 | 80 | |||||||||
Cumulative translation adjustment | 2,779 | (352 | ) | 609 | ||||||||
Retained earnings | 23 | (38 | ) | — | ||||||||
Deferred tax cancellation due to change in accounting principle | — | — | (71 | ) | ||||||||
Restatement effect of beginning balances | 40 | 34 | 44 | |||||||||
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Ending balance | Ps. | 13,450 | Ps. | 10,221 | Ps. | (660 | ) | |||||
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(1) | Effect due to 2010 Mexican tax reform, which deferred taxes were reclassified to other current liabilities and other liabilities according to its maturity. |
d) | Provision for the Year: |
2011 | 2010 | 2009 | ||||||||||
Current income taxes | Ps. | 7,561 | Ps. | 4,854 | Ps. | 5,077 | ||||||
Deferred income tax | 225 | 875 | (31 | ) | ||||||||
Change in the statutory rate | (99 | ) | (58 | ) | (87 | ) | ||||||
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Income taxes | Ps. | 7,687 | Ps. | 5,671 | Ps. | 4,959 | ||||||
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e) | Tax Loss Carryforwards and Recoverable Tax on Assets: |
The subsidiaries in Mexico and Brazil have tax loss carryforwards and/or recoverable tax on assets. The taxes effect net of consolidation benefits and their years of expiration are as follows:
Year | Tax Loss Carryforwards | Current Recoverable Tax on Assets | ||||||
2012 | Ps. | — | Ps. | — | ||||
2013 | — | 12 | ||||||
2014 | — | 50 | ||||||
2015 | — | 4 | ||||||
2016 | 13 | 50 | ||||||
2017 | — | 63 | ||||||
2018 | 629 | — | ||||||
2019 and thereafter | 1,147 | — | ||||||
No expiration (Brazil, see Note 23 A) | 342 | — | ||||||
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2,131 | 179 | |||||||
Tax losses used in consolidation | (1,443 | ) | (135 | ) | ||||
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Ps. | 688 | Ps. | 44 | |||||
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The changes in the balance of tax loss carryforwards and recoverable tax on assets, excluding discontinued operations are as follows:
2011 | 2010 | |||||||
Initial balance | Ps. | 803 | Ps. | 1,425 | ||||
Additions | 60 | 18 | ||||||
Usage of tax losses | (140 | ) | (600 | ) | ||||
Translation effect of beginning balances | 9 | (40 | ) | |||||
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Ending balance | Ps. | 732 | Ps. | 803 | ||||
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As of December 31, 2011 and 2010, there is no valuation allowance recorded due to the uncertainty related to the realization of certain tax loss carryforwards and tax on assets.
f) | Reconciliation of Mexican Statutory Income Tax Rate to Consolidated Effective Income Tax Rate: |
2011 | 2010 | 2009 | ||||||||||
Mexican statutory income tax rate | 30.0 | % | 30.0 | % | 28.0 | % | ||||||
Difference between book and tax inflationary effects | (3.6 | )% | (3.9 | )% | (1.8 | )% | ||||||
Difference between statutory income tax rates | 1.2 | % | 1.2 | % | 2.4 | % | ||||||
Non-taxable income | (0.3 | )% | (2.4 | )% | (0.2 | )% | ||||||
Others | (0.2 | )% | (0.9 | )% | 1.2 | % | ||||||
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27.1 | % | 24.0 | % | 29.6 | % | |||||||
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Note 24. Other Liabilities, Contingencies and Commitments
a) | Other Current Liabilities: |
2011 | 2010 | |||||||
Derivative financial instruments | Ps. | 69 | Ps. | 41 | ||||
Sundry creditors | 2,116 | 1,681 | ||||||
Current portion of other long-term liabilities | 197 | 276 | ||||||
Others | 15 | 37 | ||||||
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Total | Ps. | 2,397 | Ps. | 2,035 | ||||
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b) | Contingencies and Other Liabilities: |
2011 | 2010 | |||||||
Contingencies(1) | Ps. | 2,764 | Ps. | 2,712 | ||||
Taxes payable | 480 | 872 | ||||||
Derivative financial instruments | 565 | 653 | ||||||
Current portion of other long-term liabilities | (197 | ) | (276 | ) | ||||
Others | 1,148 | 1,435 | ||||||
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Total | Ps. | 4,760 | Ps. | 5,396 | ||||
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(1) | As of December 31, 2010 included Ps. 560 of tax loss contingencies regarding indemnification accorded with Heineken over FEMSA Cerveza, prior tax contingencies, of which Ps. 113 were recognized as other current liabilities and Ps. 2 were cancelled as of December 31, 2011. |
c) | Contingencies Recorded in the Balance Sheet: |
The Company has various loss contingencies, and reserves have been recorded in those cases where the Company believes an unfavorable resolution is probable. Most of these loss contingencies were recorded as a result of recent business acquisitions. The following table presents the nature and amount of the loss contingencies recorded as of December 31, 2011:
Total | ||||
Indirect tax | Ps. | 1,405 | ||
Labor | 1,128 | |||
Legal | 231 | |||
Total | Ps. | 2,764 | ||
Changes in the Balance of Contingencies Recorded:
2011 | 2010 | |||||||
Initial balance | Ps. | 2,712 | Ps. | 2,467 | ||||
Provision | 356 | 716 | ||||||
Penalties and other charges | 277 | 376 | ||||||
Cancellation and expiration | (359 | ) | (205 | ) | ||||
Payments(1) | (288 | ) | (211 | ) | ||||
Amnesty adoption | — | (333 | ) | |||||
Translation of foreign currency of beginning balance | 66 | (98 | ) | |||||
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Ending balance | Ps. | 2,764 | Ps. | 2,712 | ||||
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(1) | Include Ps. 113 reclassified to other current liabilities. |
d) | Unsettled Lawsuits: |
The Company has entered into legal proceedings with its labor unions, tax authorities and other parties that primarily involve Coca-Cola FEMSA. These proceedings have resulted in the ordinary course of business and are common to the industry in which the Company operates. The aggregate amount being claimed against the Company resulting from such proceedings as of December 31, 2011 is Ps. 6,781. Such contingencies were classified by legal counsel as less than
probable but more than remote of being settled against the Company. However, the Company believes that the ultimate resolution of such legal proceedings will not have a material effect on its consolidated financial position or result of operations.
In recent years in its Mexican, Costa Rican and Brazilian territories, Coca-Cola FEMSA has been requested to present certain information regarding possible monopolistic practices. These requests are commonly generated in the ordinary course of business in the soft drink industry where this subsidiary operates. The Company does not expect any significant liability to arise from these contingencies.
e) | Collateralized Contingencies: |
As is customary in Brazil, the Company has been requested by the tax authorities to collateralize tax contingencies currently in litigation amounting to Ps. 2,418 by pledging fixed assets and entering into available lines of credit which cover such contingencies.
f) | Commitments: |
As of December 31, 2011, the Company has contractual commitments for finance leases for machinery and transport equipment (see Note 17) and operating lease for the rental of production machinery and equipment, distribution equipment, computer equipment and land for FEMSA Comercio’s operations.
The contractual maturities of the operating lease commitments by currency, expressed in Mexican pesos as of December 31, 2011, are as follows:
Mexican pesos | U.S. dollars | Other | ||||||||||
2012 | Ps. | 2,370 | Ps. | 113 | Ps. | 203 | ||||||
2013 | 2,246 | 110 | 107 | |||||||||
2014 | 2,134 | 100 | 80 | |||||||||
2015 | 2,018 | 161 | 10 | |||||||||
2016 | 1,896 | 712 | 8 | |||||||||
2017 and thereafter | 11,324 | — | — | |||||||||
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Total | Ps. | 21,988 | Ps. | 1,196 | Ps. | 408 | ||||||
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Rental expense charged to operations amounted to approximately Ps. 3,249 Ps. 2,602 and Ps. 2,255 for the years ended December 31, 2011, 2010 and 2009, respectively.
Note 25. Information by Segment
The Company restructured the segment information disclosed to its main authority of the entity to focus on income from operations and cash flow from operations before changes in working capital and provisions (see Note 4 Z). Therefore segment disclosures for prior periods have been reclassified for comparison purposes.
a) By Business Unit:
2011 | Coca-Cola FEMSA | FEMSA Comercio | CB Equity | Other (1) | Consolidation Adjustments | Consolidated | ||||||||||||||||||
Total revenues | Ps. | 124,715 | Ps. | 74,112 | Ps. | — | Ps. | 13,373 | Ps. | (9,156 | ) | Ps. | 203,044 | |||||||||||
Intercompany revenue | 2,099 | 2 | — | 7,055 | (9,156 | ) | — | |||||||||||||||||
Income from operations | 20,152 | 6,276 | (7 | ) | 483 | — | 26,904 | |||||||||||||||||
Other expenses, net | (2,917 | ) | ||||||||||||||||||||||
Interest expense | (1,736 | ) | (1,026 | ) | — | (535 | ) | 363 | (2,934 | ) | ||||||||||||||
Interest income | 601 | 12 | 7 | 742 | (363 | ) | 999 | |||||||||||||||||
Other net finance expenses (2) | 1,152 | |||||||||||||||||||||||
Equity method from associates | 86 | — | 5,080 | 1 | — | 5,167 | ||||||||||||||||||
Income taxes | (5,599 | ) | (556 | ) | (267 | ) | (1,265 | ) | — | (7,687 | ) | |||||||||||||
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Consolidated net income before discontinued operations | 20,684 | |||||||||||||||||||||||
Depreciation(3) | 4,163 | 1,175 | — | 160 | — | 5,498 | ||||||||||||||||||
Amortization and non-cash operating expenses | 683 | 707 | — | 166 | — | 1,556 | ||||||||||||||||||
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Cash flows from operations before changes in working capital and provisions(4) Investment in associates and joint ventures Long-term assets Total assets Disposals of long-lived assets Capital expenditures, net(5) Net cash flows provided by (used in) operating activities Net cash flows (used in) provided by investment activities Net cash flows (used in) provided by financing activities 24,998 8,158 (7 ) 809 — 33,958 3,656 — 75,075 241 — 78,972 119,534 16,593 75,075 9,641 (5,106 ) 215,737 151,608 26,998 76,791 28,220 (8,913 ) 274,704 484 211 — 8 — 703 7,826 4,096 — 593 — 12,515 15,307 7,403 (93 ) (373 ) — 22,244 (14,140 ) (4,083 ) 1,668 (1,535 ) — (18,090 ) (2,206 ) 313 — (5,029 ) — (6,922 )
(1) | Includes other companies (see Note 1) and corporate. |
(2) | Includes foreign exchange loss, net; gain on monetary position, net; and market value loss on ineffective portion of derivative financial instruments. |
(3) | Includes bottle breakage. |
(4) | Income from operations plus depreciation and amortization. |
(5) | Includes acquisitions and disposals of property, plant and equipment, intangible assets and other assets. |
2010 | Coca-Cola FEMSA | FEMSA Comercio | CB Equity | Other (1) | Consolidation Adjustments | Consolidated | ||||||||||||||||||
Total revenues | Ps. 103,456 | Ps. 62,259 | Ps. — | Ps. 12,010 | Ps. (8,023 | ) | Ps. 169,702 | |||||||||||||||||
Intercompany revenue | 1,642 | 2 | — | 6,379 | (8,023 | ) | — | |||||||||||||||||
Income from operations | 17,079 | 5,200 | (3 | ) | 253 | — | 22,529 | |||||||||||||||||
Other expenses, net | (282 | ) | ||||||||||||||||||||||
Interest expense | (1,748 | ) | (917 | ) | — | (951 | ) | 351 | (3,265 | ) | ||||||||||||||
Interest income | 285 | 25 | 2 | 1,143 | (351 | ) | 1,104 | |||||||||||||||||
Other net finance expenses(2) | 8 | |||||||||||||||||||||||
Equity method from associates | 217 | — | 3,319 | 2 | — | 3,538 | ||||||||||||||||||
Income taxes | (4,260 | ) | (499 | ) | (208 | ) | (704 | ) | — | (5,671 | ) | |||||||||||||
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Consolidated net income before discontinued operations | 17,961 | |||||||||||||||||||||||
Depreciation(3) | 3,333 | 990 | — | 204 | — | 4,527 | ||||||||||||||||||
Amortization and non-cash operating expenses | 610 | 607 | — | 144 | — | 1,361 | ||||||||||||||||||
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Cash flows from operations before changes in working capital and provisions(4) | 21,022 | 6,797 | (3 | ) | 601 | — | 28,417 | |||||||||||||||||
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Investment in associates and joint ventures | 2,108 | — | 66,478 | 207 | — | 68,793 | ||||||||||||||||||
Long-term assets | 87,625 | 14,655 | 66,478 | 4,785 | (1,425 | ) | 172,118 | |||||||||||||||||
Total assets | 114,061 | 23,677 | 67,010 | 27,705 | (8,875 | ) | 223,578 | |||||||||||||||||
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Disposals of long-lived assets | 7 | — | — | 2 | — | 9 | ||||||||||||||||||
Capital expenditures, net(5) | 7,478 | 3,324 | — | 369 | — | 11,171 | ||||||||||||||||||
Net cash flows provided by (used in) operating activities | 14,350 | 6,704 | — | (3,252 | ) | — | 17,802 | |||||||||||||||||
Net cash flows (used in) provided by investment activities | (6,845 | ) | (3,288 | ) | 553 | 15,758 | — | 6,178 | ||||||||||||||||
Net cash flows used in financing activities | (2,011 | ) | (819 | ) | (504 | ) | (7,162 | ) | — | (10,496 | ) | |||||||||||||
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(1) | Includes other companies (see Note 1) and corporate. |
(2) | Includes foreign exchange loss, net; gain on monetary position, net; and market value gain on ineffective portion of derivative financial instruments. |
(3) | Includes bottle breakage. |
(4) | Income from operations plus depreciation and amortization. |
(5) | Includes acquisitions and disposals of property, plant and equipment, intangible assets and other assets. |
2009 Total revenues Intercompany revenue Income from operations Other expenses, net Interest expense Interest income Other net finance expenses(2) Equity method from associates Income taxes Consolidated net income before discontinued operations Depreciation(3) Amortization and non-cash operating expenses Cash flows from operations before changes in working capital and provisions(4) Disposals of long-lived assets Capital expenditures, net(5) Net cash flows provided by operating activities Net cash flows (used in) provided by investment activities Net cash flows used in financing activities Coca-Cola
FEMSA FEMSA
Comercio Other (1) Consolidation
Adjustments Consolidated Ps. 102,767 Ps. 53,549 Ps. 10,991 Ps. (7,056 ) Ps. 160,251 1,277 2 5,777 (7,056 ) — 15,835 4,457 838 — 21,130 (1,877 ) (1,895 ) (954 ) (1,594 ) 432 (4,011 ) 286 27 1,324 (432 ) 1,205 179 142 — (10 ) — 132 (4,043 ) (544 ) (372 ) — (4,959 ) 11,799 3,472 819 100 — 4,391 438 511 162 — 1,111 19,745 5,787 1,100 — 26,632 124 — 5 — 129 6,282 2,668 153 — 9,103 16,663 4,339 1,742 — 22,744 (8,900 ) (2,634 ) 158 — (11,376 ) (6,029 ) (346 ) (1,514 ) — (7,889 )
(1) | Includes other companies (see Note 1) and corporate. |
(2) | Includes foreign exchange loss, net, gain on monetary position, net and market value gain on ineffective portion of derivative financial instruments. |
(3) | Includes bottle breakage. |
(4) | Income from operations plus depreciation and amortization. |
(5) | Includes acquisitions and disposals of property, plant and equipment, intangible assets and other assets. |
b) | By Geographic Area: |
Geographic disclosures begin with the country level, with the exception of Central America which had been considered a geography by itself. Prior to 2011, the Company aggregated countries into the following geographies for the purposes of its consolidated financial statements: (i) Mexico, (ii) Latincentro, which aggregated Colombia and Central America, (iii) Venezuela (iv) Mercosur, which aggregated Brazil and Argentina, and (v) Europe.
During August 2011, Coca-Cola FEMSA changed certain aspects of its business structure and organization. In order to align the Company’s geographic reporting with Coca-Cola FEMSA’s new internal structure, the Company has decided to change the aggregation of its countries into the following geographies for consolidated financial statement purposes: (i) Mexico and Central America division (comprising the following countries: Mexico, Guatemala, Nicaraga, Costa Rica and Panama), (ii) the South America division (comprising the following countries: Colombia, Brazil, Venezuela and Argentina) and (iii) Europe division. Venezuela operates in an economy with exchange controls and hyper-inflation; and as a result, NIF B-5 “Information by Segments” does not allow its aggregation into the South America segment. The Company is of the view that the quantitative and qualitative aspects of the aggregated operating segments are similar in nature for all periods presented.
Geographic disclosures for prior periods have been reclassified for comparison purposes.
2011 | Total Revenue | Capital Expenditures, Net(3) | Investments in Associates and Joint Ventures | Long-Lived Assets | Total Assets | |||||||||||||||
Mexico and Central America(1) | Ps. 130,256 | Ps. 8,409 | Ps. 2,458 | Ps. 101,380 | Ps. 139,741 | |||||||||||||||
South America(2) | 53,113 | 3,461 | 1,438 | 31,430 | 47,182 | |||||||||||||||
Venezuela | 20,173 | 645 | 1 | 7,852 | 12,717 | |||||||||||||||
Europe | — | — | 75,075 | 75,075 | 76,791 | |||||||||||||||
Consolidation adjustments | (498 | ) | — | — | — | (1,727 | ) | |||||||||||||
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Consolidated | Ps. 203,044 | Ps. 12,515 | Ps. 78,972 | Ps. 215,737 | Ps. 274,704 | |||||||||||||||
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2010 Mexico and Central America(1) South America(2) Venezuela Europe Consolidation adjustments Consolidated 2009 Mexico and Central America(1) South America(2) Venezuela Consolidation adjustments Consolidated Ps. 111,769 Ps. 6,796 Ps. 1,019 Ps. 72,116 Ps. 109,508 44,468 3,870 1,295 28,055 40,584 14,048 505 1 5,469 7,882 — — 66,478 66,478 67,010 (583 ) — — — (1,406 ) Ps. 169,702 Ps. 11,171 Ps. 68,793 Ps. 172,118 Ps. 223,578 Ps. 101,023 Ps. 5,870 37,507 1,980 22,448 1,253 (727 ) — Ps. 160,251 Ps. 9,103
(1) | Central America includes Guatemala, Nicaragua, Costa Rica and Panama. Domestic (Mexico only) revenues were Ps. 122,690, Ps. 105,448 and Ps. 94,819 during the years ended December 31, 2011, 2010 and 2009, respectively. Domestic (Mexico only) long-term assets were Ps. 94,076 and Ps. 64,310 as of December 31, 2011 and 2010, respectively. |
(2) | South America includes Brazil, Argentina, Colombia and Venezuela, although Venezuela is shown separately above. South America revenues include Brazilian revenues of Ps. 31,405, Ps. 27,070 and Ps. 21,465 during the years ended December 31, 2011, 2010 and 2009, respectively. Brazilian long-term assets were Ps. 15,618 and Ps. 14,410 as of December 31, 2011 and 2010, respectively. South America revenues also include Colombian revenues of Ps. 12,320, Ps. 11,057 and Ps. 9,904 during the years ended December 31, 2011, 2010 and 2009, respectively. Colombian long-term assets were Ps. 12,855 and Ps. 11,176 as of December 31, 2011 and 2010, respectively. |
(3) | Includes acquisitions and disposals of property, plant and equipment, intangible assets and other assets. |
Note 26. Differences Between Mexican FRS and U.S. GAAP
As discussed in Note 2, the consolidated financial statements of the Company are prepared in accordance with Mexican FRS, which differs in certain significant respects from authoritative U.S. accounting and reporting standards. Included in this Note and Note 27 are references to certain principles generally accepted in the United States of America (“U.S. GAAP”) Codifications (“ASC”) that have been adopted by the Company.
A reconciliation of the reported net income, stockholders’ equity and comprehensive income to U.S. GAAP is presented in Note 27.
The principal differences between Mexican FRS and U.S. GAAP included in the reconciliation that affect the consolidated financial statements of the Company are described below.
a) | Consolidation of Coca-Cola FEMSA: |
The Company consolidates its investment in Coca-Cola FEMSA under Mexican FRS, in accordance with Bulletin B-8 “Consolidated and Combined Financial Statements and Valuation of Long-Term Investments in Shares” through 2008 and revised NIF B-8 “Consolidated and Combined Financial Statements” beginning in 2009 as disclosed in Note 2 M.
For U.S. GAAP purposes, the existence of substantive participating rights held by the Coca-Cola Company (non-controlling interest), as addressed in the shareholder agreement, did not allow FEMSA to consolidate Coca-Cola FEMSA in its financial statements. Therefore, FEMSA’s investment in Coca-Cola FEMSA had been accounted for by the equity method in FEMSA’s consolidated financial statement under U.S. GAAP for the year ended December 31, 2009.
As of December 31, 2009, the fair value of FEMSA’s investment in Coca-Cola FEMSA represented by 992,078,519 shares equivalent to 53.7% of its outstanding shares amounted to Ps. 85,135 based on quoted market prices of that date.
Coca-Cola FEMSA’s summarized consolidated income statement under U.S. GAAP is presented as follows for the year ended December 31, 2009:
Consolidated Income Statements | 2009 | |||
Total revenues | Ps. 100,393 | |||
Income from operations | 14,215 | |||
Income before income taxes | 12,237 | |||
Income taxes | 3,525 | |||
Consolidated net income | 8,853 | |||
Less: Net income attributable to the non-controlling interest | (446 | ) | ||
Net income attributable to the controlling interest | 8,407 | |||
Consolidated comprehensive income | 10,913 | |||
Less: Comprehensive income attributable to the non-controlling interest | (592 | ) | ||
Consolidated comprehensive income attributable to the controlling interest | Ps. 10,321 | |||
On February 1, 2010, FEMSA and The Coca-Cola Company signed an amendment to their shareholder’s agreement. This amendment allowed FEMSA to continue to consolidate Coca-Cola FEMSA for Mexican FRS purposes during 2009, because the Company has maintained control over its operating and financial policies. As a result of the modifications to the shareholder’s agreement, substantive participating rights held by The Coca-Cola Company were amended and became protective rights. As a result of the modifications made to the shareholders’ agreement, which provided control to the Company over Coca-Cola FEMSA, the Company recognized a business combination without transfer of consideration in order to comply with ASC 805 and beginning February 1, 2010 started to consolidate Coca-Cola FEMSA for U.S. GAAP purposes.
The Company estimated the total fair value of the interest acquired in Coca-Cola FEMSA to be Ps. 148,110 based on Coca-Cola FEMSA’s outstanding shares price quoted in the NYSE of Ps. 80.21 (level 1 information) as of February 1, 2010. As a result of a business combination without transfer of consideration, the Company recognized a gain in other income in the consolidated income statements under U.S. GAAP which amounted to Ps. 39,847. This gain represents the difference between the book value and the fair value of the interest acquired in Coca-Cola FEMSA as of the date of the control acquisition and is reported in “other income, net.”
As of the acquisition date and based on the purchase price allocation, the Company identified intangible assets with indefinite lives consisting of distribution rights of Ps. 113,434 and depreciable long-lived assets that amounted to Ps. 27,409. The Company also recognized goodwill of Ps. 41,761 as part of this transaction. The goodwill recognized with our control acquisition of Coca-Cola FEMSA is primarily related to synergistic value created from having an unified operating system that will strategically position us to better market and distribute our beverage brands in Mexico, Central America, Brazil, Colombia, Venezuela and Argentina.
The fair value of all Coca-Cola FEMSA net assets acquired by the Company is as follows:
Total current assets | Ps. 19,874 | |||
Property, plant and equipment | 31,431 | |||
Distribution rights | 113,434 | |||
Other long-term assets | 5,548 | |||
Total current liabilities | 19,054 | |||
Total long-term liabilities | 40,156 | |||
Total liabilities | 59,210 | |||
Net assets acquired | 111,077 | |||
Goodwill | 41,761 | |||
Total fair value of Coca-Cola FEMSA | 152,838 | |||
Fair value of the Non-controlling Interest in the subsidiaries of Coca-Cola FEMSA(1) | 4,728 | |||
Fair value of the Non-controlling Interest of FEMSA in Coca-Cola FEMSA(2) | 68,535 | |||
Fair value of the Controlling Interest acquired in Coca-Cola FEMSA | 79,575 | |||
(1) | The fair value of the non-controlling interest in the subsidiaries of Coca-Cola FEMSA was estimated using the market approach. |
(2) | The fair value of the non-controlling interest of FEMSA in Coca-Cola FEMSA was estimated using the market approach. The main input used to estimate fair value was share prices quoted in the Mexican Stock Exchange. |
After acquisition date for the year ended December 31, 2010, additional depreciation and amortization of identified assets net of deferred income tax recognized in the Consolidated Income Statement were an amount of Ps. 661.
The Company recognized within its consolidated income statement revenues of Ps. 95,839 and a net income of Ps. 9,734 for the year ended December 31, 2010, for the eleven months of operations related to Coca-Cola FEMSA after the acquisition date.
Unaudited Pro Forma Financial Data
The following unaudited consolidated pro forma financial data represents the Company’s historical financial statements, adjusted to give effect to (i) the acquisition of Coca-Cola FEMSA mentioned in the preceding paragraphs; (ii) certain accounting adjustments related mainly to the depreciation of the step-up adjustment for fixed assets acquired, (iii) eliminating the gain on the acquisition of Coca-Cola FEMSA.
The unaudited pro forma adjustments assume that the acquisition was made at the beginning of the year immediately preceding the year of acquisition and are based upon available information and other assumptions that management considers reasonable. The pro forma financial information data does not purport to represent what the effect on the Company’s consolidated operations would have been, had the transactions in fact occurred at the beginning of each year, nor are they intended to predict the Company’s future results of operations.
FEMSA unaudited pro forma consolidated results for the years ended December 31, | ||||||||
2010(2) | 2009(2) | |||||||
Total revenues | 184,336 | 195,090 | ||||||
Income before taxes(1) | 47,607 | 18,924 | ||||||
Net income(1) | 32,543 | 15,022 | ||||||
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(1) | In 2010 includes gain on the FEMSA Cerveza exchange. |
(2) | Does not include gain due to Coca-Cola FEMSA’s control acquisition. |
b) | Exchange of FEMSA Cerveza and Acquisition of 20% Economic Interest in Heineken: |
As explained in Note 5 B i), on April 30, 2010, FEMSA exchanged 100% of its shares in FEMSA Cerveza for a 20% economic interest in Heineken Group. According to Mexican FRS, the disposal of FEMSA Cerveza has been accounted as a discontinued operation.
For U.S. GAAP purposes, FEMSA Cerveza has not been accounted for as a discontinued operation, given the significant cash flows that continue to be exchanged between FEMSA’s ongoing operations and those of the disposed entity. As a result, the disposition was accounted for as a sale of a group of assets and classified within continuing operations in the consolidated financial statements under U.S. GAAP, and not as the disposal of a component of FEMSA. As such, the Company’s Mexican FRS consolidated income statements have reported FEMSA Cerveza’s results of operations prior to the April 30, 2010 exchange in one line item (discontinued operations). For U.S. GAAP purposes it continues to fully consolidate its line by line results prior to the exchange. See Note 5 B i) for summarized FEMSA Cerveza financial statements for dates and periods prior to April 30, 2010 under Mexican FRS.
The acquisition of the 20% economic interest in Heineken has been accounted for taking into consideration closing prices of Heineken N.V. and Heineken Holding N.V. as of the acquisition date (see Note 5 B i) As of April 30, 2010, under U.S. GAAP, the Company recognized a gain of Ps. 27,132 within other income in the consolidated statements of income and comprehensive income, which represents the difference between the book value of its interest in FEMSA Cerveza and the acquisition value of Heineken recorded at the exchange date. The basis of the assets and liabilities under U.S. GAAP of FEMSA Cerveza at the exchange date was different from the basis of such assets and liabilities under Mexican FRS, additionally the goodwill of Ps. 10,600 allocated to FEMSA Cerveza was cancelled as part of this transaction (see Note 26 M); accordingly, the gain recorded on disposal under U.S. GAAP differs from that under Mexican FRS. The deferred income tax for U.S. GAAP purposes amounted to Ps. 10,099.
For subsequent accounting, the Company recognizes its investment in Heineken for purposes of Mexican FRS under the equity method after reconciling Heineken’s net income and comprehensive income from IFRS to Mexican FRS, as a result of its ability to exercise significant influence over its operating and financial policies as disclosed in Note 5 B i). However, for purposes of U.S. GAAP, the Company recognizes its investment in Heineken based on the cost method because it was unable to obtain the required information to reconcile Heineken’s net income to U.S. GAAP on an accurate and reliable basis.
c) | Restatement of Prior Year Financial Statements for Inflationary Effects: |
As a result of discontinued inflationary accounting in 2008 for subsidiaries that operate in non-inflationary economic environments, the Company’s financial statements are no longer considered to be presented in a reporting currency that comprehensively includes the effects of price level changes; therefore, the inflationary effects of inflationary economic environments arising in 2009, 2010 and 2011 result in a difference to be reconciled for U.S. GAAP purposes. The equity method of Coca-Cola FEMSA recorded by FEMSA as of January 31, 2010 and December 31, 2009 considers this difference, as well as the consolidated net income for the eleven months ended on December 31, 2010 and the consolidated net income for the full year ended on December 31, 2011, regarding inflationary effects of Argentina, Nicaragua and Costa Rica, inflationary economies according to MFRS in which Coca-Cola FEMSA operates. Inflationary effects of Venezuela are not reconcilied because is accounted as a hyper-inflationary economy for U.S. GAAP purposes, since January 1, 2010 (see Note 4 A).
For U.S. GAAP reconciliation purposes, the Company has applied an accommodation available in Item 17(c)(2)(iv)(B) of the instructions to Form 20-F whereby the International Accounting Standard 21 Changes in Foreign Exchange Rates (IAS 21) and IAS 29 Financial Reporting in Hyperinflationary Economies (IAS 29) indexation approach is applied. A U.S. GAAP reconciliation which would otherwise require a hyper-inflationary economy to be reported using the dollar as the functional currency is not required to be provided using this accommodation if amounts in a currency of a hyperinflationary economy are translated into the reporting currency in accordance with IAS 21. Additionally, the information related to the revenues as well as long-term assets and total assets related to the Venezuelan subsidiary are shown separately in the segment disclosure footnote (see Note 25 B). Recent devaluations in the Venezuelan currency are also discussed in Note 3.
d) | Classification Differences: |
Certain items require a different classification in the balance sheet or income statement under U.S. GAAP. These include:
Beginning on January 1, 2010, restricted cash has been classified from other current assets to cash and cash equivalents according to NIF C-1 Cash and Cash Equivalents. Under U.S. GAAP, restricted cash remains classified as other current or long term assets;
Impairment of goodwill and other long-lived assets, the gains or losses on the disposition of fixed assets, all severance payments associated with an ongoing benefit and amendments to pension plans, financial expenses from labor liabilities and employee profit sharing, among others, are recorded as part of operating income under U.S. GAAP, but not under Mexican FRS;
Under Mexican FRS, deferred taxes are classified as non-current, while under U.S. GAAP they are classified based on the classification of the related asset or liability or their estimated reversal date when not associated with an asset or liability;
Under Mexican FRS, market value gain/loss of embedded derivatives contracts are recorded as market value gain/loss of ineffective portion of derivatives financial instruments. For U.S. GAAP purposes, this effect has been reclassified to operating expenses; and
Under Mexican FRS, restructuring costs are recorded as other expenses while for U.S. GAAP purposes restructuring costs are recorded as operating expense.
e) | Deferred Promotional Expenses: |
As explained in Note 4 E, under Mexican FRS, promotional expenses related to the launching of new products or product presentations are recorded as prepaid expenses. For U.S. GAAP purposes, such promotional expenses are expensed as incurred.
f) | Intangible Assets: |
According to Mexican FRS, in 2003 the amortization of goodwill was discontinued. For U.S. GAAP purposes, since 2002 goodwill and indefinite-lived intangible assets are no longer subject to amortization.
Under U.S. GAAP, indefinite-lived intangible assets are recorded at estimated fair value at the date of the acquisition, under Mexican FRS intangible assets with indefinite life are recognized at its estimated fair value, limited to the underlying amount of the purchase price consideration. This results in a difference in accounting for acquired intangible assets between Mexican FRS and U.S. GAAP.
During the year ended December 31, 2009, the Company acquired the Brisa water business in Colombia. For U.S. GAAP, acquired distribution rights intangible assets are recorded at estimated fair value at the date of the purchase. Under Mexican FRS, this distribution rights intangible asset is recorded at its estimated fair value, limited to the underlying amount of the purchase price consideration. This results in a difference in accounting for acquired intangible assets between Mexican FRS and U.S. GAAP. These differences have resulted in a gain being recorded in 2009 for U.S. GAAP purposes in the amount of Ps. 72.
g) | Restatement of Imported Equipment: |
Through December 2007, the Company restated imported machinery and equipment by applying the inflation rate and the exchange rate of the currency of the country of origin. The resulting amounts were then translated into Mexican pesos using the period end exchange rate. This result in a difference in accounting between Mexican FRS and U.S. GAAP.
NIF B-10 establishes that imported machinery and equipment are recorded using the exchange rate of the acquisition date. Subholding Companies that operate in inflationary economic environments have to restate those assets by applying the inflation rate in their own countries. The change in this methodology did not impact significantly the consolidated financial position of the Company.
h) | Capitalization of the Comprehensive Financing Result: |
Through 2006, and according to Bulletin C-6 “Property, plant and equipment” the Company had not capitalized the comprehensive financial result related to fixed assets.
Beginning in 2007, according to NIF D-6 “Capitalization of Comprehensive Financing Result,” the Company capitalized the comprehensive financing result generated by borrowings obtained to finance qualifying assets.
According to U.S. GAAP, if interest expense (does not include all the components of comprehensive result defined by Mexican FRS) is incurred during the construction of qualifying assets and the net effect is material, capitalization is required for all assets that require a period of time to get them ready for their intended use. The net effect of interest expenses incurred to bring qualifying assets to the condition for its intended use was Ps. 92, Ps. 90 and Ps. 90 for the years ended on December 31, 2011, 2010 and 2009, respectively.
A reconciling item is included for the difference in capitalized comprehensive financing result and the related amortization recorded under Mexican FRS and the corresponding capitalized interest expense and related amortization recorded under U.S. GAAP.
i) | Fair Value Measurements: |
The Company adopted a FASB pronouncement that establishes a framework for measuring fair value providing a consistent definition that focuses on exit price and prioritizes the use of market based inputs over company specific inputs. This pronouncement requires companies to consider its own nonperformance risk when measuring liabilities carried at fair value, including derivative financial instruments. The effective date of this standard for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value on a recurring basis (at least annually) started on January 1, 2009.
Additionally, U.S. GAAP establishes a three level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs are fully described in Note 19. The Company has segregated all financial assets and liabilities that are measured at fair value on a recurring basis (at least annually) into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date as shown in Note 19.
The Company is exposed to counterparty credit risk on all derivative financial instruments. Because the amounts are recorded at fair value, the full amount of the Company’s exposure is the carrying value of these instruments. Credit risk is monitored through established approval procedures, which consider grading counterparties periodically in order to offset the net effect of counterparty’s credit risk. As a result the Company only enters into derivative transactions with well-established financial institutions; and estimates that such risk is minimal.
U.S. GAAP allows entities to voluntarily choose to measure certain financial assets and liabilities at fair value (fair value option). The fair value option may be elected on an instrument by instrument basis and is irrevocable, unless a new election date occurs. If the fair value option is elected for an instrument, the unrealized gains and losses for that
instrument shall be reported in earnings at each subsequent reporting date. The Company did not elect to adopt fair value option for any of its outstanding instruments; therefore, it did not have any impact on its consolidated financial statements.
In accordance with the financial instruments disclosures, it is necessary to disclose, in the body of the financial statements or in the notes, the fair value of financial instruments for which it is practicable to estimate it, and the method(s) used to estimate the fair value. The Company estimates that carrying amounts of cash and cash equivalents, accounts receivable, interest payable, suppliers, accounts payable and other current liabilities approximate their fair value due to their short maturity.
Additionally as explained in Note 16, the Company has a bonus program in which the cost of the equity instruments is measured based on the fair value of the instruments on the date they are granted.
j) | Deferred Income Taxes, Employee Profit Sharing and Uncertain Tax Positions: |
The calculation of deferred income taxes and employee profit sharing for U.S. GAAP purposes differs from Mexican FRS as follows:
Under Mexican FRS, inflation effects on the deferred taxes balance generated by monetary items are recognized in the income statement as part of the result of monetary position of subsidiaries in inflationary economic environments. Under U.S. GAAP, the deferred taxes balance is classified as a non-monetary item. As a result, the consolidated U.S. GAAP income statement differs with respect to the presentation of the gain or loss on monetary position and deferred income taxes provision;
Under Mexican FRS, deferred employee profit sharing is calculated using the asset and liability method, which is the method used to compute deferred income taxes under U.S. GAAP. Employee profit sharing is deductible for purposes of Mexican taxes from profit. This deduction reduces the payments of income taxes in subsequent years. For Mexican FRS purposes, the Company did not record deferred employee profit sharing, since is not expected to materialize in the future; and
The differences in the deferred income tax of the control acquisition of Coca-Cola FEMSA, deferred income tax of the exchange of FEMSA Cerveza shares, deferred promotional expenses, intangible assets, restatement of imported machinery and equipment, capitalization of comprehensive financial result, employee benefits and deferred employee profit sharing, explained in Note 26 A, B, E, F, G, H, and J, generate a difference when calculating deferred income taxes under U.S. GAAP compared to that presented under Mexican FRS (see Note 23 C).
The reconciliation of deferred income tax and employee profit sharing, as well as the changes in the balances of deferred taxes, are as follows:
Reconciliation of Deferred Income Taxes, Net | 2011 | 2010 | ||||||
Deferred income taxes under Mexican FRS | Ps. | 13,450 | Ps. | 10,221 | ||||
U.S. GAAP adjustments: | ||||||||
Deferred promotional expenses | (4 | ) | (14 | ) | ||||
Deferred income tax of Coca-Cola FEMSA´s fair value adjustments | 23,813 | 21,833 | ||||||
Intangible assets | (91 | ) | (22 | ) | ||||
Deferred charges | (51 | ) | (20 | ) | ||||
Deferred revenues | 17 | 26 | ||||||
Equity method of Heineken | (1,490 | ) | (859 | ) | ||||
Restatement of imported equipment | (3 | ) | 85 | |||||
Capitalization of interest expense | 4 | 4 | ||||||
Tax deduction for deferred employee profit sharing | 19 | 50 | ||||||
Employee benefits | (243 | ) | (220 | ) | ||||
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Total U.S. GAAP adjustments | 21,971 | 20,863 | ||||||
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Deferred income taxes, net, under U.S. GAAP | Ps. | 35,421 | Ps. | 31,084 | ||||
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Changes in the Balance of Deferred Income Taxes Initial liability (asset) balance Provision for the year Change in the statutory income tax rate Deferred tax of the exchange of FEMSA Cerveza Control acquisition of Coca-Cola FEMSA and fair value adjustments Application of tax loss carryforwards due to amnesty adoption Reversal of tax loss carryforwards allowance Acquisition of subsidiaries Reversal of tax loss carryforwards Financial instruments Cumulative translation adjustment Unrecognized labor liabilities Others Ending liability (asset) balance 2011 2010 2009 Ps. 31,084 Ps. (2,405 ) Ps. 37 (885 ) (159 ) (795 ) (99 ) (58 ) (90 ) — 10,001 — — 23,843 — — — 2,066 (2,066 ) 186 — — — — (1,874 ) 38 (19 ) 319 5,060 (60 ) (134 ) (3 ) (59 ) 132 40 — — Ps. 35,421 Ps. 31,084 Ps. (2,405 )
Reconciliation of Deferred Employee Profit Sharing | 2011 | 2010 | ||||||
Deferred employee profit sharing under Mexican FRS | Ps. | — | Ps. | — | ||||
U.S. GAAP adjustments: | ||||||||
Allowance for doubtful accounts | (2 | ) | (1 | ) | ||||
Inventories | (1 | ) | 8 | |||||
Property, plant and equipment | 154 | 25 | ||||||
Deferred charges | 4 | 4 | ||||||
Intangible assets | (1 | ) | (1 | ) | ||||
Labor liabilities | (274 | ) | (233 | ) | ||||
Other liabilities | (148 | ) | (186 | ) | ||||
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Total U.S. GAAP adjustments | (268 | ) | (384 | ) | ||||
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Valuation allowance | 202 | 206 | ||||||
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Deferred employee profit sharing under U.S. GAAP | Ps. | (66 | ) | Ps. | (178 | ) | ||
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Changes in the Balance of Deferred Employee Profit Sharing | 2011 | 2010 | 2009 | |||||||||
Initial balance (asset) liability | Ps. | (178 | ) | Ps. | 134 | Ps. | 214 | |||||
Provision for the year | 120 | (257 | ) | (234 | ) | |||||||
Acquisition of Coca-Cola FEMSA | — | (17 | ) | — | ||||||||
Net effect on exchange of FEMSA Cerveza | — | (118 | ) | — | ||||||||
Labor liabilities | (4 | ) | 82 | 42 | ||||||||
Valuation allowance | (4 | ) | (2 | ) | 112 | |||||||
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Ending balance (asset) liability | Ps. | (66 | ) | Ps. | (178 | ) | Ps. | 134 | ||||
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According to U.S. GAAP, the Company is required to recognize in its financial statements the impact of a tax position when it is more likely than not that the position will be sustained upon examination. If the tax position meets the more-likely-than-not recognition threshold, the tax effect is recognized at the largest amount of the benefit that is greater than 50% likely of being realized. Any excess between the tax position taken in the tax return and the tax position recognized in the financial statements using the criteria above results in the recognition of a liability in the financial statements for the uncertain position. Similarly, if a tax position fails to meet the more-likely-than-not recognition threshold, the benefit taken in tax return will also result in the recognition of a liability in the financial statements for the full amount of the unrecognized benefit. According to Mexican FRS, the Company is required to record tax contingencies in its financial statements when such liabilities are probable in nature and estimable. However, this difference between Mexican FRS and U.S. GAAP is not material to the Company’s consolidated financial statements during any of the periods presented herein, and has thus not resulted in a reconciling item.
k) | Employee Benefits: |
NIF D-3 “Employee Benefits” eliminates the recognition of the additional labor liability resulting from the difference between actual benefits and the net projected liabilities, establishes a maximum of five years to amortize the beginning balance of past labor costs of pension plans and severance indemnities and requires recording actuarial gains or losses of severance indemnities as part of the income from operations during the period when those are incurred. The adoption of NIF D-3 generates a difference in the unamortized net transition obligation and in the amortization expense of pension plans and severance indemnities. Under U.S. GAAP the Company is required to fully recognize as an asset or liability from the overfunded or underfunded status of defined pension and other postretirement benefit plans.
For the adoption of NIF B-10 for Mexican FRS, the Company is required to apply real rates for inflationary economic environments and nominal rates for non-inflationary economic environments in the actuarial calculations. The Company uses the same criteria for interest rates for both U.S. GAAP and Mexican FRS.
The reconciliation of the pension cost for the year and related labor liabilities is as follows:
Cost for the Year | 2011 | 2010 | 2009 | |||||||||
Net cost recorded under Mexican FRS | Ps. | 634 | Ps. | 600 | Ps. | 569 | ||||||
Net cost of Coca-Cola FEMSA | — | (313 | ) | |||||||||
Net cost of FEMSA Cerveza (discontinued operation) | 182 | 574 | ||||||||||
U.S. GAAP adjustments: | ||||||||||||
Amortization of unrecognized transition obligation | (54 | ) | (46 | ) | (53 | ) | ||||||
Amortization of prior service cost | (1 | ) | (1 | ) | 5 | |||||||
Amortization of net actuarial loss | (11 | ) | (4 | ) | 2 | |||||||
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Total U.S. GAAP adjustment | (66 | ) | (51 | ) | (46 | ) | ||||||
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Cost for the year under U.S. GAAP | Ps. | 568 | Ps. | 731 | Ps. | 784 | ||||||
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Labor Liabilities | 2011 | 2010 | ||||||
Employee benefits under Mexican FRS | Ps. | 2,258 | Ps. | 1,883 | ||||
U.S. GAAP adjustments: | ||||||||
Unrecognized net transition obligation | 53 | 115 | ||||||
Unrecognized labor cost of past services | 319 | 337 | ||||||
Unrecognized net actuarial loss | 518 | 356 | ||||||
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U.S. GAAP adjustments to stockholders’ equity | 890 | 808 | ||||||
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Labor liabilities under U.S. GAAP | Ps. | 3,148 | Ps. | 2,691 | ||||
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Estimates of the unrecognized items expected to be recognized as components of net periodic pension cost during 2012 are shown in the table below:
Pension and Retirement Plans | Seniority Premiums | Postretirement Medical Services | ||||||||||
Actuarial net loss and prior service cost recognized in cumulative other comprehensive income during the year | Ps. | 82 | Ps. | 11 | Ps. | 2 | ||||||
Actuarial net loss and prior service cost recognized as a component of net periodic cost | 42 | 5 | 2 | |||||||||
Net transition liability recognized as a component of net periodic cost | 9 | — | 2 | |||||||||
Actuarial net loss, prior service cost and transition liability included in cumulative other comprehensive income | 570 | (23 | ) | 98 | ||||||||
Estimate to be recognized as a component of net periodic cost over the following fiscal year: | ||||||||||||
Transition obligation | (11 | ) | — | (1 | ) | |||||||
Prior service credit | (3 | ) | — | — | ||||||||
Actuarial gain | (21 | ) | 3 | (5 | ) | |||||||
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l) | Non-controlling Interests: |
Under Mexican FRS, the non-controlling interest in consolidated subsidiaries is presented as a separate component within stockholders’ equity in the consolidated balance sheet.
Beginning as of January 1, 2009, under U.S. GAAP, this item is presented as separate component within consolidated stockholders’ equity in the consolidated balance sheet. Additionally, consolidated net income is adjusted to include the net income attributed to the non-controlling interest. And consolidated comprehensive income is adjusted to include the net income attributed to the non-controlling interest. Because these changes are to be applied retrospectively, they eliminate the differences between MFRS and U.S. GAAP in the presentation of the non-controlling interest in the consolidated financial statements.
m) | FEMSA’s Non-controlling Interest Acquisition: |
In accordance with Mexican FRS, the Company applied the entity theory to the acquisition of the non-controlling interest by FEMSA in May 1998, through an exchange offer. Accordingly, no goodwill was created as a result of such acquisition and the difference between the book value of the shares acquired by FEMSA and the FEMSA shares exchanged was recorded as additional paid-in capital. The direct out-of-pocket costs identified with the purchase of non-controlling interest were included in other expenses.
In accordance with U.S. GAAP at the time, the acquisition of non-controlling interest was accounted for under the purchase method, using the market value of shares received by FEMSA in the exchange offer to determine the cost of the acquisition of such non-controlling interest and the related goodwill. Under U.S. GAAP at the time, the direct out-of-pocket costs identified with the purchase of non-controlling interest was treated as additional goodwill.
Additionally, U.S. GAAP accounting standards related to goodwill, require the allocation of goodwill to the related reporting. Reporting units are identified at the operating segment or the component level that will generate the related cash flows. As of December 31, 2011, the remaining allocation of the goodwill generated by the previously mentioned acquisition of non-controlling interest was as follows:
FEMSA Comercio | Ps. 1,085 | |||
Other | 918 | |||
Ps. 2,003 | ||||
As of February 1, 2010 the goodwill allocated to Coca-Cola FEMSA amounted to Ps. 4,753 and was re-evaluated as part of the control acquisition of Coca-Cola FEMSA.
As of April 30, 2010, the goodwill allocated to FEMSA Cerveza amounted to Ps. 10,600 and was cancelled due to the transaction described in Note 26 B, as part of the disposition of FEMSA Cerveza net assets.
n) | Deconsolidation of Crystal Brand Water in Brazil: |
During 2009, Coca-Cola FEMSA established a joint venture with The Coca-Cola Company for the production and sale of Crystal brand water in Brazil. Coca-Cola FEMSA has recorded a gain for U.S. GAAP purposes of Ps. 120 related to the deconsolidation of its net assets related to the Crystal operations. Approximately, Ps. 120 of previously recorded unearned revenues related to Crystal operations remain recorded for Mexican FRS purposes, and are being amortized into income along with the results from the joint venture over the following three years (through 2012) for Mexican FRS purposes.
o) | Statement of Cash Flows: |
Statement of Cash Flows prepared under Mexican FRS is similar to cash flows standards for U.S. GAAP except for different presentation of interest costs, and certain other supplemental disclosures.
p) | Financial Information Under U.S. GAAP: |
Consolidated Balance Sheets | 2011 | 2010 | ||||||
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Current Assets: | ||||||||
Cash and | Ps. 25,841 | Ps. 26,703 | ||||||
Investments | 1,329 | 66 | ||||||
Accounts receivable | 10,499 | 7,702 | ||||||
Inventories | 14,384 | 11,350 | ||||||
Recoverable taxes | 4,311 | 4,243 | ||||||
Other current assets | 3,026 | 1,635 | ||||||
Total current assets | 59,390 | 51,699 | ||||||
Investments in | ||||||||
Heineken | 69,749 | 63,413 | ||||||
Other investments | 3,897 | 2,315 | ||||||
Property, plant and equipment | 55,632 | 44,650 | ||||||
Intangible assets | 189,511 | 163,170 | ||||||
Deferred income tax and deferred employee profit sharing | 543 | 541 | ||||||
Other assets | 11,294 | 8,729 | ||||||
TOTAL ASSETS | Ps. | 390,016 | Ps. | 334,517 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current Liabilities: | ||||||||
Bank loans and notes payable | Ps. | 638 | Ps. | 1,578 | ||||
Current maturities of | 4,935 | 1,725 | ||||||
Interest payable | 216 | 165 | ||||||
Suppliers | 21,475 | 17,458 | ||||||
Deferred income tax | 46 | 113 | ||||||
Taxes payable | 3,208 | 2,180 | ||||||
Accounts payable, and | 8,158 | 7,410 | ||||||
Total current liabilities | 38,676 | 30,629 | ||||||
Long-Term Liabilities: | ||||||||
Bank loans and notes payable | 24,031 | 21,927 | ||||||
Employee benefits | 3,148 | 2,691 | ||||||
Deferred taxes liability | 36,292 | 31,539 | ||||||
Contingencies and other liabilities | 4,708 | 5,595 | ||||||
Total long-term liabilities | 68,179 | 61,752 | ||||||
Total liabilities | 106,855 | 92,381 | ||||||
Equity: | ||||||||
Controlling interest | 182,644 | 163,641 | ||||||
Non-controlling interest | 100,517 | 78,495 | ||||||
Total equity: | 283,161 | 242,136 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | Ps. | 390,016 | Ps. | 334,517 | ||||
Consolidated Statements of Income and Comprehensive Income | 2011 | 2010 | 2009 | |||||||||
Net sales | Ps. | 201,421 | Ps. | 175,257 | Ps. | 102,039 | ||||||
Other operating revenues | 2,821 | 1,796 | 863 | |||||||||
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| |||||||
Total revenues | 204,242 | 177,053 | 102,902 | |||||||||
Cost of sales | 118,662 | 102,665 | 59,841 | |||||||||
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| |||||||
Gross profit | 85,580 | 74,388 | 43,061 | |||||||||
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| |||||||
Operating expenses: | ||||||||||||
Administrative | 10,070 | 9,420 | 7,769 | |||||||||
Selling | 50,208 | 43,302 | 26,451 | |||||||||
Restructuring | — | 446 | 180 | |||||||||
Market value (gain) loss of derivative financial instruments | 50 | (15 | ) | — | ||||||||
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| |||||||
60,328 | 53,153 | 34,400 | ||||||||||
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| |||||||
Income from operations | 25,252 | 21,235 | 8,661 | |||||||||
Comprehensive financing result: | ||||||||||||
Interest expense | (2,721 | ) | (3,966 | ) | (3,013 | ) | ||||||
Interest income | 999 | 1,121 | 310 | |||||||||
Foreign exchange gain (loss), net | 1,068 | (332 | ) | (26 | ) | |||||||
Gain (loss) on monetary position, net | 51 | 219 | (1 | ) | ||||||||
Market value gain (loss) on ineffective portion of derivative financial instruments | (109 | ) | 202 | 73 | ||||||||
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| |||||||
(712 | ) | (2,756 | ) | (2,657 | ) | |||||||
Other (expenses) income, net | (213 | ) | 68,337 | 52 | ||||||||
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| |||||||
Income before taxes | 24,327 | 86,816 | 6,056 | |||||||||
Taxes | 6,563 | 15,014 | (127 | ) | ||||||||
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| |||||||
Income before participation in affiliated companies | 17,764 | 71,802 | 6,183 | |||||||||
Participation in affiliated companies: | ||||||||||||
Coca-Cola FEMSA | — | 183 | 4,516 | |||||||||
Other associates companies | 87 | 219 | (14 | ) | ||||||||
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87 | 402 | 4,502 | ||||||||||
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| |||||||
Consolidated net income | Ps. | 17,851 | Ps. | 72,204 | Ps. | 10,685 | ||||||
Less: Net income attributable to the non-controlling interest | (5,402 | ) | (4,759 | ) | (783 | ) | ||||||
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| |||||||
Net income attributable to controlling interest | Ps. | 12,449 | Ps. | 67,445 | Ps. | 9,902 | ||||||
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| |||||||
Consolidated net income | Ps. | 17,851 | Ps. | 72,204 | Ps. | 10,685 | ||||||
Other comprehensive income (loss) | 13,297 | (1,702 | ) | 4,335 | ||||||||
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|
|
| |||||||
Consolidated comprehensive income | 31,148 | 70,502 | 15,020 | |||||||||
Less: Comprehensive income attributable to the non-controlling interest | (9,290 | ) | (4,867 | ) | (776 | ) | ||||||
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| |||||||
Consolidated comprehensive income attributable to the controlling interest | 21,858 | 65,635 | 14,244 | |||||||||
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| |||||||
Net controlling interest income per share: | ||||||||||||
Per Series “B” | Ps. | 0.62 | Ps. | 3.36 | Ps. | 0.49 | ||||||
Per Series “D” | 0.78 | 4.20 | 0.62 | |||||||||
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Consolidated Cash Flows Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by (used in) operating activities: Inflation effect Depreciation Amortization Equity method of associates Deferred income taxes Other adjustments regarding operating activities Profit regarding Coca-Cola FEMSA (see Note 27 A) Income from the exchange of FEMSA Cerveza (see Note 27 B) Changes in operating assets and liabilities net of business acquisitions: Working capital investment Dividends received from Coca-Cola FEMSA (Recoverable) payable taxes, net Interest payable Labor obligations Derivative financial instruments Net cash flows provided by operating activities Cash flows from investing activities: Long-lived assets sale Acquisition of property, plant and equipment Purchase of investments Proceeds from investments Other assets acquisitions Recovery of long-term financial receivables with FEMSA Cerveza Net effect of FEMSA Cerveza exchange Cash incorporated from Coca-Cola FEMSA Other disposals Payment of debt for the acquisition of Grupo Tampico, net of cash acquired (Note 5A) Payment of debt for the acquisition of Grupo CIMSA, net of cash acquired (Note 5A) Net cash flows (used in) provided by investing activities Cash flows from financing activities: Bank loans obtained Bank loans paid Dividends declared and paid Restricted cash activity for the year Other financing activities Net cash flows (used in) provided by financing activities Effect of exchange rate changes on cash and cash equivalents Cash and cash equivalents: Net (decrease) increase Initial cash Ending balance Supplemental cash flow information: Interest paid Income taxes paid 2011 2010 2009 Ps. 17,851 Ps. 72,204 Ps. 10,685 (49 ) (215 ) (1 ) 5,743 4,884 2,786 1,043 1,620 2,487 (87 ) (402 ) (4,502 ) (986 ) 9,784 (3,185 ) 644 1,336 5,353 — (39,847 ) — — (27,132 ) — (2,887 ) (5,609 ) (1,640 ) — — 722 1,190 (1,946 ) 673 244 (851 ) (370 ) (496 ) (741 ) (512 ) (353 ) (281 ) (428 ) 21,857 12,804 12,068 535 643 422 (10,615 ) (9,195 ) (3,779 ) (1,329 ) (66 ) — 66 1,108 — (5,053 ) (2,111 ) (3,660 ) — 12,209 — — (158 ) — — 5,950 — — 1,949 — (2,414 ) — — (1,912 ) — — (20,722 ) 10,329 (7,017 ) 6,606 12,381 16,775 (3,732 ) (12,569 ) (14,541 ) (6,623 ) (3,813 ) (1,620 ) (94 ) (181 ) (88 ) (125 ) (194 ) (4 ) (3,968 ) (4,376 ) 522 1,971 50 (596 ) (862 ) 18,807 4,977 26,703 7,896 2,919 Ps. 25,841 Ps. 26,703 Ps. 7,896 Ps. (3043 ) Ps. (2,868 ) Ps. (2,586 ) (6,457 ) (6,171 ) (3,737 )
The effect of exchange rate changes on cash balances held in foreign currencies was Ps. 1,971 as a gain as of December 31, 2011, Ps. 50 as a gain as of December 31, 2010, and a loss of Ps. 596 as of December 31, 2009, respectively.
Consolidated Statements of Changes in Stockholders’ Equity | 2011 | 2010 | ||||||
Stockholders’ equity at the beginning of the year | Ps. | 242,136 | Ps. | 99,442 | ||||
Dividends declared and paid | (6,625 | ) | (3,813 | ) | ||||
Non-controlling interest other comprehensive income | 3,888 | (891 | ) | |||||
Acquisition of Grupo Tampico through issuance of Coca-Cola FEMSA shares (Note 5 A) | 7,828 | — | ||||||
Acquisition of Grupo CIMSA through issuance of Coca-Cola FEMSA shares (Note 5 A) | 9,017 | — | ||||||
Acquisition of Coca-Cola FEMSA | — | 77,277 | ||||||
Other transactions of non-controlling interest | (115 | ) | (273 | ) | ||||
Other comprehensive income (loss) attributable a the controlling interest: | ||||||||
Derivative financial instruments | 157 | 1,036 | ||||||
Labor liabilities | (29 | ) | (302 | ) | ||||
Cumulative translation adjustment | 9,295 | (3,130 | ) | |||||
Reversal of inflation effect | (242 | ) | 1,111 | |||||
Recycling of OCI due to exchange of beer business | — | (525 | ) | |||||
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| |||||
Other comprehensive gain (loss) | 9,181 | (1,810 | ) | |||||
Net income | 17,851 | 72,204 | ||||||
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| |||||
Stockholders’ equity at the end of the year | Ps. | 283,161 | Ps. | 242,136 | ||||
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|
|
As of December 31, 2011, the balance of cumulative translation adjustment is Ps. 8,240. As of December 31, 2011 the total balance of other comprehensive income is Ps. 9,553 net of a deferred income tax of Ps. 5,095.
Note 27. Reconciliation of Mexican FRS to U.S. GAAP
Note | 2009 | 2008 | |||||||||||
ASSETS | |||||||||||||
Current Assets: | |||||||||||||
Cash and cash equivalents | $ | 1,189 | Ps. | 15,523 | Ps. | 9,110 | |||||||
Marketable securities | 4 b | ) | 162 | 2,113 | — | ||||||||
Accounts receivable | 6 | 899 | 11,732 | 10,801 | |||||||||
Inventories | 7 | 1,138 | 14,858 | 13,065 | |||||||||
Recoverable taxes | 259 | 3,388 | 2,951 | ||||||||||
Other current assets | 8 | 135 | 1,766 | 3,060 | |||||||||
Total current assets | 3,782 | 49,380 | 38,987 | ||||||||||
Investments in shares | 9 | 180 | 2,344 | 1,965 | |||||||||
Property, plant and equipment | 10 | 4,981 | 65,038 | 61,425 | |||||||||
Bottles and cases | 319 | 4,162 | 3,733 | ||||||||||
Intangible assets | 11 | 5,451 | 71,181 | 65,860 | |||||||||
Deferred tax asset | 23 d | ) | 96 | 1,254 | 1,247 | ||||||||
Other assets | 12 | 1,357 | 17,732 | 14,128 | |||||||||
TOTAL ASSETS | 16,166 | 211,091 | 187,345 | ||||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||||
Current Liabilities: | |||||||||||||
Bank loans and notes payable | 17 | 292 | 3,816 | 5,799 | |||||||||
Current portion of long-term debt | 17 | 386 | 5,037 | 5,849 | |||||||||
Interest payable | 13 | 170 | 376 | ||||||||||
Suppliers | 1,512 | 19,737 | 16,726 | ||||||||||
Accounts payable | 583 | 7,607 | 5,804 | ||||||||||
Taxes payable | 444 | 5,793 | 4,044 | ||||||||||
Other current liabilities | 24 a | ) | 275 | 3,607 | 5,496 | ||||||||
Total current liabilities | 3,505 | 45,767 | 44,094 | ||||||||||
Long-Term Liabilities: | |||||||||||||
Bank loans and notes payable | 17 | 2,666 | 34,810 | 32,210 | |||||||||
Labor liabilities | 15 b | ) | 257 | 3,354 | 2,886 | ||||||||
Deferred tax liability | 23 d | ) | 74 | 972 | 2,400 | ||||||||
Contingencies and other liabilities | 24 b | ) | 794 | 10,359 | 8,860 | ||||||||
Total long-term liabilities | 3,791 | 49,495 | 46,356 | ||||||||||
Total liabilities | 7,296 | 95,262 | 90,450 | ||||||||||
Stockholders’ Equity: | |||||||||||||
Noncontrolling interest in consolidated subsidiaries | 20 | 2,619 | 34,192 | 28,074 | |||||||||
Controlling interest: | |||||||||||||
Capital stock | 410 | 5,348 | 5,348 | ||||||||||
Additional paid-in capital | 1,574 | 20,548 | 20,551 | ||||||||||
Retained earnings from prior years | 3,357 | 43,835 | 38,929 | ||||||||||
Net income | 759 | 9,908 | 6,708 | ||||||||||
Cumulative other comprehensive income (loss) | 4 v | ) | 151 | 1,998 | (2,715 | ) | |||||||
Controlling interest | 6,251 | 81,637 | 68,821 | ||||||||||
Total stockholders’ equity | 8,870 | 115,829 | 96,895 | ||||||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 16,166 | Ps. | 211,091 | Ps. | 187,345 | |||||||
a) | Reconciliation of Net Income: |
2011 | 2010 | 2009 | ||||||||||
Net consolidated income under Mexican FRS | Ps. | 20,684 | Ps. | 45,290 | Ps. | 15,082 | ||||||
Non-controlling interest under Mexican FRS of Coca-Cola FEMSA | — | (222 | ) | (4,390 | ) | |||||||
U.S. GAAP adjustments: | ||||||||||||
Reversal of inflation effect (Note 26 C) | 82 | (24 | ) | — | ||||||||
Participation in Coca-Cola FEMSA (Note 26 A) | — | (39 | ) | (63 | ) | |||||||
Coca-Cola FEMSA acquisition depreciation and amortization (Note 26 A) | (245 | ) | (961 | ) | — | |||||||
Heineken equity method (Note 26 B) | (3,418 | ) | (2,789 | ) | — | |||||||
Net effect on exchange of FEMSA Cerveza (Note 26 B) | — | (9,881 | ) | — | ||||||||
Restatement of imported equipment (Note 26 G) | (187 | ) | (165 | ) | (12 | ) | ||||||
Capitalization of interest expense (Note 26 H) | (131 | ) | 57 | (49 | ) | |||||||
Deferred income taxes (Note 26 J) | 1,112 | 769 | (9 | ) | ||||||||
Deferred employee profit sharing (Note 26 J) | (120 | ) | 257 | 80 | ||||||||
Gain on control acquisition of Coca-Cola FEMSA (Note 26 A) | — | 39,847 | — | |||||||||
Gain on de-consolidation of Crystal operation (Note 26 N) | (25 | ) | (44 | ) | — | |||||||
Deferred promotional expenses (Note 26 F) | 34 | 58 | — | |||||||||
Employee benefits (Note 26 K) | 65 | 51 | 46 | |||||||||
|
|
|
|
|
| |||||||
Total U.S. GAAP adjustments | (2,833 | ) | 27,136 | (7 | ) | |||||||
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|
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|
|
| |||||||
Net income under U.S. GAAP | Ps. | 17,851 | Ps. | 72,204 | Ps. | 10,685 | ||||||
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|
|
b) | Reconciliation of Stockholders’ Equity: |
2011 | 2010 | |||||||
Total stockholders’ equity under Mexican FRS | Ps. | 191,114 | Ps. | 153,013 | ||||
U.S. GAAP adjustments: | ||||||||
Control acquisition of Coca-Cola FEMSA (Note 26 A)(1) | 98,339 | 90,980 | ||||||
Coca-Cola FEMSA acquisition depreciation and amortization (Note 26 A) | (1,206 | ) | (961 | ) | ||||
Gain on acquisition of Brisa intangible assets (Note 26 F) | 72 | 72 | ||||||
Gain on deconsolidation of Crystal operation (Note 26 N ) | 50 | 75 | ||||||
Deferred promotional expenses (Note 26 E) | (13 | ) | (46 | ) | ||||
Reversal of inflation effect (Note 26 C) | (831 | ) | (443 | ) | ||||
Participation in Coca-Cola FEMSA (Note 26 A) | — | (39 | ) | |||||
Heineken equity method (Note 26 B) | (5,326 | ) | (3,065 | ) | ||||
Intangible assets and goodwill (Note 26 F) | 100 | 100 | ||||||
Restatement of imported equipment (Note 26 G) | 181 | 351 | ||||||
Capitalization of interest expense (Note 26 H) | 71 | 200 | ||||||
Deferred income taxes (Note 26 J) | (569 | ) | 523 | |||||
Deferred employee profit sharing (Note 26 J) | 66 | 181 | ||||||
Employee benefits (Note 26 K) | (890 | ) | (808 | ) | ||||
FEMSA’s non-controlling interest acquisition (Note 26 M) | 2,003 | 2,003 | ||||||
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|
|
| |||||
Total U.S. GAAP adjustments | 92,047 | 89,123 | ||||||
|
|
|
| |||||
Stockholders’ equity under U.S. GAAP | Ps. | 283,161 | Ps. | 242,136 | ||||
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|
|
(1) | The |
c) |
2011 | 2010 | 2009 | ||||||||||
Consolidated comprehensive income under Mexican FRS | Ps. | 27,936 | Ps. | 42,589 | Ps. | 21,355 | ||||||
Comprehensive income of the non-controlling interest under Mexican FRS | (7,119 | ) | (4,190 | ) | (6,734 | ) | ||||||
|
|
|
|
|
| |||||||
Comprehensive income of the controlling interest under Mexican FRS | 20,817 | 38,399 | 14,621 | |||||||||
U.S. GAAP adjustments: | ||||||||||||
Net income (Note 27 A) | (2,682 | ) | 27,192 | (7 | ) | |||||||
Cumulative translation adjustment | 2,777 | 36 | 91 | |||||||||
Reversal of inflation effect | (242 | ) | 1,111 | (746 | ) | |||||||
Heineken equity method | 1,217 | (276 | ) | — | ||||||||
Recycling of OCI due to exchange of beer business | (525 | ) | — | |||||||||
Additional labor liability in excess of unamortized transition obligation | (29 | ) | (302 | ) | 285 | |||||||
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|
|
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| |||||||
Comprehensive income under U.S. GAAP | Ps. | 21,858 | Ps. | 65,635 | Ps. | 14,244 | ||||||
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Note 28. Implementation of International Financial Reporting Standards
The consolidated financial statements to be issued by the Company for the year ending December 31, 2012 will be its first annual financial statements that comply with IFRS as issued by the International Accounting Standards Board. The transition date is January 1, 2011 and, therefore, the year ended December 31, 2011 will be the comparative period to be covered. IFRS 1, “First-Time Adoption of International Financial Reporting Standards” (IFRS 1), sets mandatory exceptions and allows certain optional exemptions to the complete retrospective application of IFRS.
The Company applied the following mandatory exceptions to retrospective application of IFRS, effective as of the transition date:
Accounting Estimates:
Estimates prepared under IFRS as of January 1, 2011 are consistent with the estimates recognized under Mexican FRS as of the same date, unless the Company is required to adjust such estimates to agree with IFRS.
Derecognition of Financial Assets and Liabilities:
The Company applied the derecognition rules of IAS 39, “Financial Instruments: Recognition and Measurement” (IAS 39), prospectively for transactions occurring on or after the date of transition.
Hedge Accounting:
As of the transition date, the Company measured at fair value all derivative financial instruments and hedging relationships designated and documented effectively as accounting hedges as required by IAS 39, which is consistent with the treatment under Mexican FRS.
As a result, there was no impact in the Company’s consolidated financial statements due to the application of this exception.
Non-controlling Interest:
The Company applied the requirements in IAS 27, “Consolidated and Separate Financial Statements” (IAS 27) related to non-controlling interests prospectively beginning on the transition date.
The Company has elected the following optional exemptions to retrospective application of IFRS, effective as of the transition date:
Business Combinations and Acquisitions of Associates and Joint Ventures:
According to IFRS 1, an entity may elect not to apply IFRS 3 “Business Combinations” (IFRS 3) retrospectively to acquisitions made prior of the transition date to IFRS.
The exemption for past business combinations also applies to past acquisitions of investments in associates and of interests in joint ventures.
The Company adopted this exemption and did not amend its business acquisitions or investments in associates and joint ventures prior to the transition date and it did not remeasure the values determined at acquisition dates, including the amount of previously recognized goodwill in past acquisitions.
Share-based Payments:
The Company has share-based plans, which it pays to its qualifying employees based on its own shares and those of its subsidiary, Coca-Cola FEMSA. Management decided to apply the optional exemptions established in IFRS 1, where it did not apply IFRS 2, “Share-based Payment” (IFRS 2), (i) to the equity instruments granted before November 7, 2002, (ii) to equity instruments granted after November 7, 2002 and that were earned before the latter of (a) the IFRS transition date and (b) January 1, 2005, and (iii) to liabilities related to share-based payment transactions that were settled before the transition date.
Deemed Cost:
An entity may individually elect to measure an item of its property, plant and equipment at the transition date to IFRS at its fair value and use that fair value as its deemed cost at that date. In addition, a first-time adopter may elect to use a previous GAAP revaluation of an item of property, plant and equipment at, or before, of the transition date to IFRS as deemed cost at the date of the revaluation, if the revaluation was, at the date of the revaluation, broadly comparable to: (i) fair value; or (ii) cost or depreciated cost in accordance with IFRS, adjusted to reflect changes in a general or specific price index.
The Company has presented both its property, plant, and equipment and its intangible assets at IFRS historical cost in all countries. In Venezuela this IFRS historical cost represents actual historical cost in the year of acquisition, indexed for inflation in a hyper-inflationary economy based on the provisions of IAS 29.
Cumulative Translation Effect:
A first-time adopter is neither required to recognize translation differences and accumulate these in a separate component of equity nor on a subsequent disposal of a foreign operation, to reclassify the cumulative translation difference for that foreign operation from equity to profit or loss as part of the gain or loss on disposal that would have existed at transition date.
The Company applied this exemption and consequently it reclassified the accumulated translation effect recorded under Mexican FRS to retained earnings and beginning January 1, 2011, it calculates the translation effect of its foreign operations prospectively according to IAS 21, “The Effects of Changes in Foreign Exchange Rates.”
Borrowing Costs:
The Company applied the IFRS 1 exemption related to borrowing costs incurred for qualifying assets existing at the transition date based on the similar Company’s Mexican FRS accounting policy, and beginning January 1, 2011 it capitalizes eligible borrowing costs in accordance with IAS 23, “Borrowing Costs” (IAS 23).
Recording Effects of the Transition from Mexican FRS to IFRS:
The following disclosures provide a qualitative description of the most significant preliminary effects from the transition of IFRS determined as of the date of the issuance of the consolidated financial statements:
a) | Inflation Effects: | |
According to Mexican FRS, the Mexican peso ceased to be the currency of an inflationary economy in December 2007, as the three year cumulative inflation as of such date did not exceed 26%.
According to IAS 29 “Hyperinflationary Economies” (IAS 29), the last hyperinflationary period for the Mexican peso was in 1998. As a result, the Company eliminated the cumulative inflation recognized within long-lived assets and contributed capital for the Company’s Mexican operations, based on Mexican FRS during the years 1999 through 2007, which were not deemed hyperinflationary for IFRS purposes.
For the foreign operations, the cumulative inflation from the acquisition date was eliminated (except in the case of Venezuela, which was deemed a hyperinflationary economy) from the date the Company began to consolidate them.
b) | Employee Benefits: |
According to NIF D-3 “Employee Benefits” (NIF D-3), a severance provision and the corresponding expenditure, must be recognized based on the experience of the entity in terminating the employment relationship before the retirement date, or if the entity deems to pay benefits as a result of an offer made to employees to encourage a voluntary termination. For IFRS purposes, this provision is only recorded pursuant to IAS 19 (Revised 2011), at the moment the entity has a demonstrable commitment to end the relationship with the employee or to make a bid to encourage voluntary retirement. This is evidenced by a formal plan that describes the characteristics of the termination of employment. Accordingly, at the transition date, the Company derecognized its severance indemnity recorded under Mexican FRS against retained earnings given that no such formal plan exists. A formal plan was not required for recording under Mexican FRS.
IAS 19 (Revised 2011), early adopted by the Company, eliminates the use of the corridor method, which defers the actuarial gains/losses, and requires that they recorded directly within other comprehensive income in each reporting period. The
standard also eliminates deferral of past service costs and requires entities to record them in comprehensive income in each reporting period. These requirements increased its liability for employee benefits with a corresponding reduction in retained earnings at the transition date.
c) | Embedded Derivatives: |
For Mexican FRS purposes, the Company recorded embedded derivatives for agreements denominated in foreign currency. Pursuant to the principles set forth in IAS 39, there is an exception for embedded derivatives on those contracts that are denominated in certain foreign currencies, if for example the foreign currency is commonly used in the economic environment in which the transaction takes place. The Company concluded that all of its embedded derivatives fell within the scope of this exception.
Therefore, at the transition date, the Company derecognized all embedded derivatives recognized under Mexican FRS.
d) | Stock Bonus Program: |
Under Mexican FRS NIF D-3, the Company recognizes its stock bonus program plan offered to certain key executives as a defined contribution plan. IFRS requires that such share-based payment plans be recorded under the principles set forth in IFRS 2, “Share-based Payments.” The most significant difference for changing the accounting treatment is related to the period during which compensation expense is recognized, which under NIF D-3 the total amount of the bonus is recorded in the period in which it was granted, while in IFRS 2 it shall be recognized over the vesting period of such awards.
Additionally, the trust that holds the equity shares allocated to executives, is considered to hold plan assets and is not consolidated under Mexican FRS. However, for IFRS SIC 12, “Consolidation - Special Purpose Entities,” the Company will consolidate the trust and reflect its own shares in treasury stock and reduce the non-controlling interest for the Coca-Cola FEMSA’s shares held by the trust.
e) | Deferred Income Taxes: |
The IFRS adjustments recognized by the Company had an impact on the calculation of deferred income taxes according to the requirements established by IAS 12, “Income Taxes” (IAS 12).
Furthermore, the Company derecognized a deferred liability recorded in the exchange of shares of FEMSA Cerveza with the Heineken Group. IFRS has an exception for recognition of a deferred tax liability for an investment in a subsidiary if the parent is able to control the timing of the reversal and it is probable that it will not reverse in the foreseeable future.
f) | Retained Earnings: |
All the adjustments arising from the Company’s conversion to IFRS as of the transition date were recorded against retained earnings.
g) | Other Differences in Presentation and Disclosures in the Financial Statements: |
Generally, IFRS disclosure requirements are more extensive than those of NIF, which will result in increased disclosures about accounting policies, significant judgments and estimates, financial instruments and management risks, among others. The Company will restructure its Income Statement under IFRS to comply with IAS 1, “Presentation of Financial Statements” (IAS 1). In addition, there may be some other differences in presentation.
There are other differences between Mexican FRS and IFRS, however. The Company considers differences mentioned above describe the significant effects.
As a result of the transition to IFRS, the effects as of January 1, 2011 on the principal items of a condensed statement of financial position are described as follow:
Mexican FRS | IFRS Transition Effects | Preliminary IFRS | ||||||||||
Current assets | Ps. | 51,460 | Ps. | (47 | ) | Ps. | 51,413 | |||||
Non-current assets | 172,118 | (10,078 | ) | 162,040 | ||||||||
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|
|
|
|
| |||||||
Total assets | 223,578 | (10,125 | ) | 213,453 | ||||||||
|
|
|
|
|
| |||||||
Current liabilities | 30,516 | (254 | ) | 30,262 | ||||||||
Non-current liabilities | 40,049 | (10,012 | ) | 30,037 | ||||||||
|
|
|
|
|
| |||||||
Total liabilities | 70,565 | (10,266 | ) | 60,299 | ||||||||
|
|
|
|
|
| |||||||
Total stockholders’ equity | 153,013 | 141 | 153,154 | |||||||||
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The information presented above has been prepared in accordance with the standards and interpretations issued and in effect or issued and early adopted by the Company (as a discussed in Note 28 B) at the date of preparation of these consolidated financial statements. The standards and interpretations that are applicable at December 31, 2012, including those that will be applicable on an optional basis, are not known with certainty at the time of preparing the Mexican FRS consolidated financial statements at December 31, 2011. Additionally, the IFRS accounting policies selected by the Company may change as a result of changes in the economic environment or industry trends that are observable after the issuance of this Mexican FRS consolidated financial statements. The information presented herein, does not intend to comply with IFRS, and it should be noted that under IFRS, only one set of financial statements comprising the statements of financial position, comprehensive income, changes in stockholders’ equity and cash flows, together with comparative information and explanatory notes can provide a fair presentation of the financial position of the Company, the results of its operations and cash flows.
Note 29. Subsequent Events
On February 27, 2012, the Company’s Board of Directors agreed to propose an ordinary dividend of Ps. 6,200 which represents an increase of 35% as compared to the dividend that was paid in 2011. This dividend was approved at the Annual Shareholders meeting on March 23, 2012.
On December 15, 2011, Coca-Cola FEMSA and Grupo Fomento Queretano agreed to merge their beverage divisions. Grupo Fomento Queretano’s beverage division operates mainly in the state of Queretaro, as well as in parts of the states of Mexico, Hidalgo and Guanajuato. The merger agreement was approved by both Coca-Cola FEMSA’s and Grupo Fomento Queretano’s Boards of Directors and is subject to the approval of the Comisión Federal de Competencia, the Mexican antitrust authority. The transaction will involve the issuance of approximately 45.1 million of the Coca-Cola FEMSA’s newly issued series L shares, and in addition Coca-Cola FEMSA will assume Ps. 1,221 in net debt. This transaction is expected to be completed in second quarter of 2012.
On February 20, 2012, the Coca-Cola FEMSA entered into a 12-month exclusivity agreement with The Coca-Cola Company to evaluate the potential acquisition of a controlling ownership stake in the bottling operations owned by The Coca-Cola Company in the Philippines. This agreement does not require either party to enter into a transaction, and there can be no assurances that a definitive agreement will be executed.
On February 23, 2012, a wholly-owned subsidiary of Mitsubishi Corporation and Stichting Depositary PGGM Infrastructure Funds, a pension fund managed by PGGM, acquired the 45% interest held by FEMSA on the parent companies of Energía Alterna Istmeña, S. de R.L. de C.V., which we refer to as EAI, and Energía Eólica Mareña, S.A. de C.V., which we refer to as EEM. EAI and EEM are the owners of a 396 megawatt late-stage wind energy project in the south-eastern region of the State of Oaxaca. Certain subsidiaries of FEMSA, FEMSA Comercio and Coca-Cola FEMSA have entered into 20-years wind power supply agreements with ENAI and EEM to purchase energy output produced by such companies. The selling of FEMSA’s participation as and investor, will generated a gain on the disposal.
Report of Independent Registered Public Accounting Firm
To: The Executive and Supervisory Board of Heineken N.V.
We have audited the accompanying consolidated statements of financial position of Heineken N.V. and subsidiaries as of December 31, 2011 and 2010 and the related consolidated income statements, consolidated statements of comprehensive income, cash flows and changes in equity, for each of the years in the two-year period ended December 31, 2011. These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board and are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Heineken N.V. and subsidiaries as of December 31, 2011 and 2010, and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 2011, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board.
As discussed in note 2e to the financial statements, the Company has elected to change its method of accounting for employee benefits in 2011 with respect to the recognition of actuarial gains and losses arising from defined benefit plans. After the policy change, the Company recognizes all actuarial gains and losses in the period in which they occur, in other comprehensive income. In prior years, the Company applied the corridor method. The change in accounting policy was recognized retrospectively in accordance with IAS 8 ‘Accounting Policies, Changes in Accounting Estimates and Errors’ and comparatives have been restated.
/s/ KPMG ACCOUNTANTS N.V.
Amsterdam, the Netherlands
February 14, 2012
Heineken N.V. financial statements | ||||
FOMENTO ECONÓMICO MEXICANO, S.A.B. DE C.V. AND SUBSIDIARIES
MONTERREY, N.L., MEXICO
Consolidated Income StatementsStatement
For the years ended December 31, 2009, 2008 and 2007. Amounts expressed in millions of U.S. dollars ($) and in millions of Mexican pesos (Ps.), except for data per share.
Note | 2011 | 2010* | ||||||||||
For the year ended 31 December | ||||||||||||
In millions of EUR | ||||||||||||
Revenue | 5 | 17,123 | 16,133 | |||||||||
Other income | 8 | 64 | 239 | |||||||||
Raw materials, consumables and services | 9 | (10,966 | ) | (10,291 | ) | |||||||
Personnel expenses | 10 | (2,838 | ) | (2,665 | ) | |||||||
Amortisation, depreciation and impairments | 11 | (1,168 | ) | (1,118 | ) | |||||||
Total expenses | (14,972 | ) | (14,074 | ) | ||||||||
Results from operating activities | 2,215 | 2,298 | ||||||||||
Interest income | 12 | 70 | 100 | |||||||||
Interest expenses | 12 | (494 | ) | (590 | ) | |||||||
Other net finance income/(expenses) | 12 | (6 | ) | (19 | ) | |||||||
Net finance expenses | (430 | ) | (509 | ) | ||||||||
Share of profit of associates and joint ventures and impairments thereof (net of income tax) | 16 | 240 | 193 | |||||||||
Profit before income tax | 2,025 | 1,982 | ||||||||||
Income tax expenses | 13 | (465 | ) | (403 | ) | |||||||
Profit | 1,560 | 1,579 | ||||||||||
Attributable to: | ||||||||||||
Equity holders of the Company (net profit) | 1,430 | 1,447 | ||||||||||
Non-controlling interests | 130 | 132 | ||||||||||
Profit | 1,560 | 1,579 | ||||||||||
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Weighted average number of shares – basic | 23 | 585,100,381 | 562,234,726 | |||||||||
Weighted average number of shares – diluted | 23 | 586,277,702 | 563,387,135 | |||||||||
Basic earnings per share (EUR) | 23 | 2.44 | 2.57 | |||||||||
Diluted earnings per share (EUR) | 23 | 2.44 | 2.57 |
2009 | 2008 | 2007(1) | ||||||||||||||
Net sales | $ | 15,018 | Ps. | 196,103 | Ps. | 167,171 | Ps. | 147,069 | ||||||||
Other operating revenues | 72 | 930 | 851 | 487 | ||||||||||||
Total revenues | 15,090 | 197,033 | 168,022 | 147,556 | ||||||||||||
Cost of sales | 8,133 | 106,195 | 90,399 | 79,739 | ||||||||||||
Gross profit | 6,957 | 90,838 | 77,623 | 67,817 | ||||||||||||
Operating expenses: | ||||||||||||||||
Administrative | 851 | 11,111 | 9,531 | 9,121 | ||||||||||||
Selling | 4,037 | 52,715 | 45,408 | 38,960 | ||||||||||||
4,888 | 63,826 | 54,939 | 48,081 | |||||||||||||
Income from operations | 2,069 | 27,012 | 22,684 | 19,736 | ||||||||||||
Other expenses, net (Note 18) | (269 | ) | (3,506 | ) | (2,374 | ) | (1,297 | ) | ||||||||
Comprehensive financing result: | ||||||||||||||||
Interest expense | (398 | ) | (5,197 | ) | (4,930 | ) | (4,721 | ) | ||||||||
Interest income | 43 | 565 | 598 | 769 | ||||||||||||
Foreign exchange (loss) gain, net | (30 | ) | (396 | ) | (1,694 | ) | 691 | |||||||||
Gain on monetary position, net | 37 | 487 | 657 | 1,639 | ||||||||||||
Market value gain (loss) on ineffective portion of derivative financial instruments | 2 | 25 | (1,456 | ) | 69 | |||||||||||
(346 | ) | (4,516 | ) | (6,825 | ) | (1,553 | ) | |||||||||
Income before income taxes | 1,454 | 18,990 | 13,485 | 16,886 | ||||||||||||
Income taxes (Note 23 e) | 299 | 3,908 | 4,207 | 4,950 | ||||||||||||
Consolidated net income | $ | 1,155 | Ps. 15,082 | Ps. 9,278 | Ps. | 11,936 | ||||||||||
Net controlling interest income | 759 | 9,908 | 6,708 | 8,511 | ||||||||||||
Net noncontrolling interest income | 396 | 5,174 | 2,570 | 3,425 | ||||||||||||
Consolidated net income | $ | 1,155 | Ps. 15,082 | Ps. 9,278 | Ps. | 11,936 | ||||||||||
Net controlling interest income (U.S. dollars and Mexican pesos) (Note 22): | ||||||||||||||||
Per Series “B” share | $ | 0.04 | Ps. | 0.49 | Ps. | 0.33 | Ps. | 0.42 | ||||||||
Per Series “D” share | $ | 0.05 | Ps. | 0.62 | Ps. | 0.42 | Ps. | 0.53 |
* | Comparatives have been adjusted due to the accounting policy change in employee benefits (see note 2e) |
The accompanying notes are an integral part of these consolidated income statements.
FOMENTO ECONÓMICO MEXICANO, S.A.B. DE C.V. AND SUBSIDIARIESHeineken N.V. financial statements
MONTERREY, N.L., MEXICO
Note | 2011 | 2010* | ||||||||||
For the year ended 31 December | ||||||||||||
In millions of EUR | ||||||||||||
Profit | 1,560 | 1,579 | ||||||||||
Other comprehensive income: | ||||||||||||
Foreign currency translation differences for foreign operations | 24 | (493 | ) | 390 | ||||||||
Effective portion of change in fair value of cash flow hedges | 24 | (21 | ) | 43 | ||||||||
Effective portion of cash flow hedges transferred to profit or loss | 24 | (11 | ) | 45 | ||||||||
Ineffective portion of cash flow hedges | 24 | — | 9 | |||||||||
Net change in fair value available-for-sale investments | 24 | 71 | 11 | |||||||||
Net change in fair value available-for-sale investments transferred to profit or loss | 24 | (1 | ) | (17 | ) | |||||||
Actuarial gains and losses | 24/28 | (93 | ) | 99 | ||||||||
Share of other comprehensive income of associates/joint ventures | 24 | (5 | ) | (29 | ) | |||||||
Other comprehensive income, net of tax | 24 | (553 | ) | 551 | ||||||||
Total comprehensive income | 1,007 | 2,130 | ||||||||||
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Attributable to: | ||||||||||||
Equity holders of the Company | 884 | 1,983 | ||||||||||
Non-controlling interests | 123 | 147 | ||||||||||
Total comprehensive income | 1,007 | 2,130 | ||||||||||
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* | Comparatives have been adjusted due to the accounting policy change in employee benefits (see note 2e) |
Heineken N.V. financial statements | Consolidated Statement of Financial Position |
Note | 2011 | 2010* | ||||||||||
As at 31 December | ||||||||||||
In millions of EUR | ||||||||||||
Assets | ||||||||||||
Property, plant & equipment | 14 | 7,860 | 7,687 | |||||||||
Intangible assets | 15 | 10,835 | 10,890 | |||||||||
Investments in associates and joint ventures | 16 | 1,764 | 1,673 | |||||||||
Other investments and receivables | 17 | 1,129 | 1,103 | |||||||||
Advances to customers | 32 | 357 | 449 | |||||||||
Deferred tax assets | 18 | 474 | 542 | |||||||||
Total non-current assets | 22,419 | 22,344 | ||||||||||
Inventories | 19 | 1,352 | 1,206 | |||||||||
Other investments | 17 | 14 | 17 | |||||||||
Trade and other receivables | 20 | 2,260 | 2,273 | |||||||||
Prepayments and accrued income | 170 | 206 | ||||||||||
Cash and cash equivalents | 21 | 813 | 610 | |||||||||
Assets classified as held for sale | 7 | 99 | 6 | |||||||||
Total current assets | 4,708 | 4,318 | ||||||||||
Total assets | 27,127 | 26,662 | ||||||||||
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Equity | ||||||||||||
Share capital | 922 | 922 | ||||||||||
Share premium | 2,701 | 2,701 | ||||||||||
Reserves | 498 | 814 | ||||||||||
Allotted Share Delivery Instrument | — | 666 | ||||||||||
Retained earnings | 5,653 | 4,829 | ||||||||||
Equity attributable to equity holders of the Company | 9,774 | 9,932 | ||||||||||
Non-controlling interests | 318 | 288 | ||||||||||
Total equity | 22 | 10,092 | 10,220 | |||||||||
Liabilities | ||||||||||||
Loans and borrowings | 25 | 8,199 | 8,078 | |||||||||
Tax liabilities | 160 | 178 | ||||||||||
Employee benefits | 28 | 1,174 | 1,097 | |||||||||
Provisions | 30 | 449 | 475 | |||||||||
Deferred tax liabilities | 18 | 894 | 991 | |||||||||
Total non-current liabilities | 10,876 | 10,819 | ||||||||||
Bank overdrafts | 21 | 207 | 132 | |||||||||
Loans and borrowings | 25 | 981 | 862 | |||||||||
Trade and other payables | 31 | 4,624 | 4,265 | |||||||||
Tax liabilities | 207 | 241 | ||||||||||
Provisions | 30 | 140 | 123 | |||||||||
Liabilities classified as held for sale | 7 | — | — | |||||||||
Total current liabilities | 6,159 | 5,623 | ||||||||||
Total liabilities | 17,035 | 16,442 | ||||||||||
Total equity and liabilities | 27,127 | 26,662 | ||||||||||
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* | Comparatives have been adjusted due to the accounting policy change in employee benefits (see note 2e) |
Note | 2011 | 2010* | ||||||||||
For the year ended 31 December | ||||||||||||
In millions of EUR | ||||||||||||
Operating activities | ||||||||||||
Profit | 1,560 | 1,579 | ||||||||||
Adjustments for: | ||||||||||||
Amortisation, depreciation and impairments | 11 | 1,168 | 1,118 | |||||||||
Net interest expenses | 12 | 424 | 490 | |||||||||
Gain on sale of property, plant & equipment, intangible assets and subsidiaries, joint ventures and associates | 8 | (64 | ) | (239 | ) | |||||||
Investment income and share of profit and impairments of associates and joint ventures and dividend income on AFS and HFT investments | (252 | ) | (200 | ) | ||||||||
Income tax expenses | 13 | 465 | 403 | |||||||||
Other non-cash items | 244 | 163 | ||||||||||
Cash flow from operations before changes in working capital and provisions | 3,545 | 3,314 | ||||||||||
Change in inventories | (145 | ) | 95 | |||||||||
Change in trade and other receivables | (21 | ) | 515 | |||||||||
Change in trade and other payables | 417 | (156 | ) | |||||||||
Total change in working capital | 251 | 454 | ||||||||||
Change in provisions and employee benefits | (76 | ) | (220 | ) | ||||||||
Cash flow from operations | 3,720 | 3,548 | ||||||||||
Interest paid | (485 | ) | (554 | ) | ||||||||
Interest received | 65 | 15 | ||||||||||
Dividend received | 137 | 91 | ||||||||||
Income taxes paid | (526 | ) | (443 | ) | ||||||||
Cash flow related to interest, dividend and income tax | (809 | ) | (891 | ) | ||||||||
Cash flow from operating activities | 2,911 | 2,657 | ||||||||||
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Investing activities | ||||||||||||
Proceeds from sale of property, plant & equipment and intangible assets | 101 | 113 | ||||||||||
Purchase of property, plant & equipment | 14 | (800 | ) | (648 | ) | |||||||
Purchase of intangible assets | 15 | (56 | ) | (56 | ) | |||||||
Loans issued to customers and other investments | (127 | ) | (145 | ) | ||||||||
Repayment on loans to customers | 64 | 72 | ||||||||||
Cash flow (used in)/from operational investing activities | (818 | ) | (664 | ) | ||||||||
Free operating cash flow | 2,093 | 1,993 | ||||||||||
Acquisition of subsidiaries, net of cash acquired | 6 | (806 | ) | 17 | ||||||||
Acquisition/Additions of associates, joint ventures and other investments | (166 | ) | (77 | ) | ||||||||
Disposal of subsidiaries, net of cash disposed of | (9 | ) | 270 | |||||||||
Disposal of associates, joint ventures and other investments | 44 | 47 | ||||||||||
Cash flow (used in)/from acquisitions and disposals | (937 | ) | 257 | |||||||||
Cash flow (used in)/from investing activities | (1,755 | ) | (407 | ) | ||||||||
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2009 | 2008 | |||||||||||
Cash Flow Generated by (Used in) Operating Activities: | ||||||||||||
Income before income taxes | $ | 1,454 | Ps. | 18,990 | Ps. | 13,485 | ||||||
Non-cash operating expenses | 208 | 2,716 | 930 | |||||||||
Other adjustments regarding operating activities | 168 | 2,191 | 1,390 | |||||||||
Adjustments regarding investing activities: | ||||||||||||
Depreciation | 482 | 6,295 | 5,508 | |||||||||
Amortization | 214 | 2,794 | 2,560 | |||||||||
Loss on sale of long-lived assets | 17 | 221 | 185 | |||||||||
Write-off of long-lived assets | 26 | 336 | 502 | |||||||||
Interest income | (43 | ) | (565 | ) | (598 | ) | ||||||
Adjustments regarding financing activities: | ||||||||||||
Interest expenses | 398 | 5,197 | 4,930 | |||||||||
Foreign exchange loss, net | 30 | 396 | 1,694 | |||||||||
Gain on monetary position, net | (37 | ) | (487 | ) | (657 | ) | ||||||
Market value (gain) loss on ineffective portion of derivative financial instruments | (2 | ) | (25 | ) | 1,456 | |||||||
2,915 | 38,059 | 31,385 | ||||||||||
Accounts receivable | (73 | ) | (953 | ) | (367 | ) | ||||||
Inventories | (191 | ) | (2,496 | ) | (2,900 | ) | ||||||
Other assets | — | — | 35 | |||||||||
Suppliers and other accounts payable | 239 | 3,115 | 1,599 | |||||||||
Other liabilities | (41 | ) | (541 | ) | 653 | |||||||
Labor liabilities | (52 | ) | (681 | ) | (587 | ) | ||||||
Income taxes paid | (429 | ) | (5,596 | ) | (6,754 | ) | ||||||
Net cash flows provided by operating activities | 2,368 | 30,907 | 23,064 | |||||||||
Cash Flow Generated by (Used in) Investing Activities: | ||||||||||||
BRISA acquisition, net of cash acquired (see Note 5) | (55 | ) | (717 | ) | — | |||||||
REMIL acquisition, net of cash acquired (see Note 5) | — | — | (3,633 | ) | ||||||||
Other acquisitions, net of cash acquired | — | — | (233 | ) | ||||||||
Purchase of marketable securities | (153 | ) | (2,001 | ) | — | |||||||
Interest received | 43 | 565 | 598 | |||||||||
Long-lived assets acquisitions | (654 | ) | (8,536 | ) | (10,186 | ) | ||||||
Long-lived assets sales | 81 | 1,060 | 541 | |||||||||
Other assets | (280 | ) | (3,658 | ) | (3,460 | ) | ||||||
Bottles and cases | (68 | ) | (882 | ) | (990 | ) | ||||||
Intangible assets | (128 | ) | (1,665 | ) | (697 | ) | ||||||
Net cash flows used in investing activities | (1,214 | ) | (15,834 | ) | (18,060 | ) | ||||||
Net cash flows available for financing activities | 1,154 | 15,073 | 5,004 | |||||||||
Cash Flow Generated by (Used in) Financing Activities: | ||||||||||||
Bank loans obtained | 1,607 | 20,981 | 22,545 | |||||||||
Bank loans repaid | (1,623 | ) | (21,198 | ) | (20,693 | ) | ||||||
Interest paid | (399 | ) | (5,206 | ) | (5,733 | ) | ||||||
Dividends paid | (172 | ) | (2,255 | ) | (2,065 | ) | ||||||
Acquisition of noncontrolling interest | 4 | 49 | (223 | ) | ||||||||
Other liabilities payments | (7 | ) | (82 | ) | 9 | |||||||
Net cash flows used in financing activities | (590 | ) | (7,711 | ) | (6,160 | ) | ||||||
Increase (decrease) in cash and cash equivalents | 564 | 7,362 | (1,156 | ) | ||||||||
Translation and restatement effects | (90 | ) | (1,171 | ) | 97 | |||||||
Initial cash | 738 | 9,635 | 10,694 | |||||||||
Initial restricted cash | (40 | ) | (525 | ) | (238 | ) | ||||||
Initial balance of cash and cash equivalents, net | 698 | 9,110 | 10,456 | |||||||||
Decrease (increase) in restricted cash of the year | 17 | 222 | (287 | ) | ||||||||
Ending balance of cash and cash equivalents, net | $ | 1,189 | Ps. | 15,523 | Ps. | 9,110 | ||||||
* | Comparatives have been adjusted due to the accounting policy change in employee benefits (see note 2e) |
Consolidated Statement of |
Note | 2011 | 2010* | ||||||||||
For the year ended 31 December 2011 | ||||||||||||
In millions of EUR | ||||||||||||
Financing activities | ||||||||||||
Proceeds from loans and borrowings | 1,782 | 1,920 | ||||||||||
Repayment of loans and borrowings | (1,587 | ) | (3,127 | ) | ||||||||
Dividends paid | (580 | ) | (483 | ) | ||||||||
Purchase own shares | (687 | ) | (381 | ) | ||||||||
Acquisition of non-controlling interests | (11 | ) | (92 | ) | ||||||||
Disposal of interests without a change in control | 43 | — | ||||||||||
Other | 6 | (9 | ) | |||||||||
Cash flow (used in)/from financing activities | (1,034 | ) | (2,172 | ) | ||||||||
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Net Cash Flow | 122 | 78 | ||||||||||
Cash and cash equivalents as at 1 January | 478 | 364 | ||||||||||
Effect of movements in exchange rates | 6 | 36 | ||||||||||
Cash and cash equivalents as at 31 December | 21 | 606 | 478 | |||||||||
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* | Comparatives have been adjusted due to the accounting policy change in employee benefits (see note 2e) |
| Consolidated Statement of Changes in
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In millions of EUR | Note | Share capital | Share Premium | Translation reserve | Hedging reserve | Fair value reserve | Other legal reserves | Reserve for own shares | ASDI | Retained earnings | Equity attributable to equity holders of the Company | Non- controlling interests | Total equity* | |||||||||||||||||||||||||||||||||||||||
Balance as at 1 January 2010 | 784 | — | (451 | ) | (124 | ) | 100 | 676 | (42 | ) | — | 4,408 | 5,351 | 296 | 5,647 | |||||||||||||||||||||||||||||||||||||
Policy changes (note 2e) | — | — | — | — | — | — | — | — | (397 | ) | (397 | ) | — | (397 | ) | |||||||||||||||||||||||||||||||||||||
Restated balance as at 1 January 2010 | 784 | — | (451 | ) | (124 | ) | 100 | 676 | (42 | ) | — | 4,011 | 4,954 | 296 | 5,250 | |||||||||||||||||||||||||||||||||||||
Other comprehensive income | 24 | — | — | 358 | 97 | (10 | ) | 75 | — | — | 16 | 536 | 15 | 551 | ||||||||||||||||||||||||||||||||||||||
Profit | — | — | — | — | — | 241 | — | — | 1,206 | 1,447 | 132 | 1,579 | ||||||||||||||||||||||||||||||||||||||||
Total comprehensive income | — | — | 358 | 97 | (10 | ) | 316 | — | — | 1,222 | 1,983 | 147 | 2,130 | |||||||||||||||||||||||||||||||||||||||
Transfer to retained earnings | — | — | — | — | — | (93 | ) | — | — | 93 | — | — | — | |||||||||||||||||||||||||||||||||||||||
Dividends to shareholders | — | — | — | — | — | — | — | — | (351 | ) | (351 | ) | (138 | ) | (489 | ) | ||||||||||||||||||||||||||||||||||||
Share issued | 138 | 2,701 | — | — | — | — | — | 1,026 | — | 3,865 | — | 3,865 | ||||||||||||||||||||||||||||||||||||||||
Purchase/re issuance own/non-controlling shares | — | — | — | — | — | — | (381 | ) | — | — | (381 | ) | — | (381 | ) | |||||||||||||||||||||||||||||||||||||
Allotted Share Delivery Instrument | — | — | — | — | — | — | 362 | (360 | ) | (2 | ) | — | — | — | ||||||||||||||||||||||||||||||||||||||
Own shares delivered | — | — | — | — | — | — | 6 | — | (6 | ) | — | — | — | |||||||||||||||||||||||||||||||||||||||
Share-based payments | — | — | — | — | — | — | — | — | 15 | 15 | — | 15 | ||||||||||||||||||||||||||||||||||||||||
Share purchase mandate | — | — | — | — | — | — | — | — | (96 | ) | (96 | ) | — | (96 | ) | |||||||||||||||||||||||||||||||||||||
Acquisition of non-controlling interests without a change in control | — | — | — | — | — | — | — | — | (57 | ) | (57 | ) | (35 | ) | (92 | ) | ||||||||||||||||||||||||||||||||||||
Acquisition of non-controlling interests with a change in control | — | — | — | — | — | — | — | — | — | — | 20 | 20 | ||||||||||||||||||||||||||||||||||||||||
Changes in consolidation | — | — | — | — | — | — | — | — | — | — | (2 | ) | (2 | ) | ||||||||||||||||||||||||||||||||||||||
Balance as at 31 December 2010 | 922 | 2,701 | (93 | ) | (27 | ) | 90 | 899 | (55 | ) | 666 | 4,829 | 9,932 | 288 | 10,220 | |||||||||||||||||||||||||||||||||||||
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* | Comparatives have been adjusted due to the |
** | See note 22 for Hyperinflation impact |
Heineken N.V. financial statements | Consolidated Statement of |
In millions of EUR | Note | Share capital | Share Premium | Translation reserve | Hedging reserve | Fair value reserve | Other legal reserves | Reserve for own shares | ASDI | Retained earnings | Equity attributable to equity holders of the Company | Non- controlling interests | Total equity | |||||||||||||||||||||||||||||||||||||||
Balance as at 1 January 2011 | 922 | 2,701 | (93 | ) | (27 | ) | 90 | 899 | (55 | ) | 666 | 4,829 | 9,932 | 288 | 10,220 | |||||||||||||||||||||||||||||||||||||
Other comprehensive income ** | 24 | — | — | (482 | ) | (42 | ) | 69 | — | — | — | (91 | ) | (546 | ) | (7 | ) | (553 | ) | |||||||||||||||||||||||||||||||||
Profit | — | — | — | — | — | 253 | — | — | 1,177 | 1,430 | 130 | 1,560 | ||||||||||||||||||||||||||||||||||||||||
Total comprehensive income | — | — | (482 | ) | (42 | ) | 69 | 253 | — | — | 1,086 | 884 | 123 | 1,007 | ||||||||||||||||||||||||||||||||||||||
Transfer to retained earnings | — | — | — | — | — | (126 | ) | — | — | 126 | — | — | — | |||||||||||||||||||||||||||||||||||||||
Dividends to shareholders | — | — | — | — | — | — | — | — | (474 | ) | (474 | ) | (97 | ) | (571 | ) | ||||||||||||||||||||||||||||||||||||
Purchase/reissuance own/non-controlling shares | — | — | — | — | — | — | (687 | ) | — | — | (687 | ) | (1 | ) | (688 | ) | ||||||||||||||||||||||||||||||||||||
Allotted Share Delivery Instrument | — | — | — | — | — | — | 694 | (666 | ) | (28 | ) | — | — | — | ||||||||||||||||||||||||||||||||||||||
Own shares delivered | — | — | — | — | — | — | 5 | — | (5 | ) | — | — | — | |||||||||||||||||||||||||||||||||||||||
Share-based payments | — | — | — | — | — | — | — | — | 11 | 11 | — | 11 | ||||||||||||||||||||||||||||||||||||||||
Share purchase mandate | — | — | — | — | — | — | — | — | 96 | 96 | — | 96 | ||||||||||||||||||||||||||||||||||||||||
Acquisition of non-controlling interests without a change in control | — | — | — | — | — | — | — | — | (21 | ) | (21 | ) | (1 | ) | (22 | ) | ||||||||||||||||||||||||||||||||||||
Disposal of interests without a change in control | — | — | — | — | — | — | — | — | 33 | 33 | 6 | 39 | ||||||||||||||||||||||||||||||||||||||||
Balance as at 31 December 2011 | 922 | 2,701 | (575 | ) | (69 | ) | 159 | 1,026 | (43 | ) | — | 5,653 | 9,774 | 318 | 10,092 | |||||||||||||||||||||||||||||||||||||
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** | See note 22 for Hyperinflation impact |
Heineken N.V. financial statements | Notes to the consolidated financial statements |
1. Reporting entity
HEINEKEN N.V. (the ‘Company’) is a company domiciled in the Netherlands. The address of the Company’s registered office is Tweede Weteringplantsoen 21, Amsterdam. The consolidated financial statements of the Company as at and for the year ended 31 December 2011 comprise the Company, its subsidiaries (together referred to as ‘HEINEKEN’ or the ‘Group’ and individually as ‘HEINEKEN’ entities) and HEINEKEN’s interest in jointly controlled entities and associates.
A summary of the main subsidiaries, jointly controlled entities and associates is included in note 36 and 16 respectively.
HEINEKEN is primarily involved in the brewing and selling of beer.
2. Basis of preparation
(a) | Statement of compliance |
The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as endorsed by the EU and also comply with the financial reporting requirements included in Part 9 of Book 2 of the Dutch Civil Code. All standards and interpretations issued by the International Accounting Standards Board (IASB) and the International Financial Reporting Interpretations Committee (IFRIC) effective year-end 2011 have been adopted by the EU, except that the EU carved out certain hedge accounting provisions of IAS 39. The Company does not utilise this carve-out permitted by the EU, as it is not applicable. Consequently, the accounting policies applied by the Company also comply fully with IFRS as issued by the IASB. The Company presents a condensed income statement, using the facility of Article 402 of Part 9, Book 2, of the Dutch Civil Code.
The consolidated financial statements have been prepared by the Executive Board of the Company and authorised for issue on 14 February 2012 and will be submitted for adoption to the Annual General Meeting of Shareholders on 19 April 2012.
(b) | Basis of measurement |
The consolidated financial statements have been prepared on the historical cost basis except for the following:
Available-for-sale investments
Derivative financial instruments
Liabilities for equity-settled share-based payment arrangements
Long-term interest-bearing liabilities on which fair value hedge accounting is applied
The defined benefit assets
The financial statements of subsidiaries whose functional currency is the currency of a hyperinflationary economy are stated in terms of the measuring unit current at the end of the reporting period.
The methods used to measure fair values are discussed further in note 4.
(c) | Functional and presentation currency |
These consolidated financial statements are presented in euro, which is the Company’s functional currency. All financial information presented in euro has been rounded to the nearest million unless stated otherwise.
(d) | Use of estimates and judgements |
The preparation of consolidated financial statements in conformity with IFRSs requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expenses. Actual results may differ from these estimates.
Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future periods affected.
In particular, information about assumptions and estimation uncertainties and critical judgements in applying accounting policies that have the most significant effect on the amounts recognised in the consolidated financial statements are described in the following notes:
Note 6 Acquisitions and disposals of subsidiaries and non-controlling interests
Note 15 Intangible assets
Note 16 Investments in associates and joint ventures
Note 17 Other investments and receivables
Note 18 Deferred tax assets and liabilities
Note 28 Employee benefits
Note 29 Share-based payments – Long-Term Variable award (LTV)
Note 30 Provisions
Note 32 Financial risk management and financial instruments
Note 34 Contingencies.
Heineken N.V. financial statements | Notes to the consolidated financial statements continued | |||||
(e) | Changes in accounting policies |
Accounting for employee benefits
On 1 January 2011 HEINEKEN changed its accounting policy with respect to the recognition of actuarial gains and losses arising from defined benefit plans. After the policy change, HEINEKEN recognises all actuarial gains and losses arising immediately in other comprehensive income (OCI). In prior years, HEINEKEN applied the corridor method. To the extent that any cumulative unrecognised actuarial gain or loss exceeds ten percent of the greater of the present value of the defined benefit obligation and the fair value of plan assets, that portion was recognised in profit or loss over the expected average remaining working lives of the employees participating in the plan. Otherwise, the actuarial gain or loss was not recognised. As such, this change means that deferral of actuarial gains and losses within the corridor are no longer applied.
HEINEKEN believes this accounting policy change provides more relevant information as all amounts will be recognised on balance, which is consistent with industry practice and in accordance with the amended reporting standard of Employee Benefits as issued by the International Accounting Standards Board on 16 June 2011.
The change in accounting policy was recognised retrospectively in accordance with IAS 8 ‘Accounting Policies, Changes in Accounting Estimates and Errors’, and comparatives have been restated. This results in a EUR15 million and EUR11 million positive impact on ‘Results from operating activities’ and ‘Net profit’ for the year ended 31 December 2010, respectively. The adjustment results in a EUR296 million decline in ‘Total Equity’ for the full year 2010 on Group level. No statement of financial position as at 1 January 2010 has been included. The information included below provides insight in all balance sheet items affected by this change in policy.
The following table summarises the transitional adjustments on implementation of the new accounting policy for the full year 2010:
In millions of EUR | Employee Benefit obligation | Deferred Tax Assets | Retained earnings/profit or loss | |||||||||
Balance as reported at 1 January 2010 | 634 | 561 | 4,408 | |||||||||
Effect of policy change on 1 January 2010 retained earnings | 548 | 151 | (397 | ) | ||||||||
Restated balance at 1 January 2010 | 1,182 | 712 | 4,011 | |||||||||
Balance as reported at 31 December 2010 | 687 | 429 | 5,125 | |||||||||
Effect of policy change during 2010 on retained earnings | 410 | 113 | (307 | ) | ||||||||
P&L impact for the period 2010 | — | — | 11 | |||||||||
Restated balance at 31 December 2010 | 1,097 | 542 | 4,829 | |||||||||
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The 2010 amounts as included in the notes to these consolidated financial statements as at and for the year ended 31 December 2010 have been restated as a result of this policy change.
3. Significant accounting policies
General
The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements and have been applied consistently by HEINEKEN entities.
(a) | Basis of consolidation |
(i) | Business combinations |
Business combinations are accounted for using the acquisition method as at the acquisition date, which is the date on which control is transferred to the Group. Control is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, the Group takes into consideration potential voting rights that currently are exercisable.
The Group measures goodwill at the acquisition date as the fair value of the consideration transferred plus the fair value of any previously-held equity interest in the acquiree and the recognised amount of any non-controlling interests in the acquiree, less the net recognised amount (generally fair value) of the identifiable assets acquired and liabilities assumed. When the excess is negative, a bargain purchase gain is recognised immediately in profit or loss.
The consideration transferred does not includes amounts related to the settlement of pre-existing relationships. Such amounts are generally recognised in profit or loss.
Costs related to the acquisition, other than those associated with the issue of debt or equity securities, that the Group incurs in connection with a business combination are expensed as incurred.
Any contingent consideration payable is recognised at fair value at the acquisition date. If the contingent consideration is classified as equity, it is not remeasured and settlement is accounted for within equity. Otherwise, subsequent changes to the fair value of the contingent considerations are recognised in profit or loss.
Heineken N.V. financial statements | Notes to the consolidated financial statements continued |
(ii) | Acquisitions of non-controlling interests |
Acquisitions of non-controlling interests are accounted for as transactions with owners in their capacity as owners and therefore no goodwill is recognised as a result. Adjustments to non-controlling interests arising from transactions that do not involve the loss of control are based on a proportionate amount of the net assets of the subsidiary.
(iii) | Subsidiaries |
Subsidiaries are entities controlled by HEINEKEN. Control exists when HEINEKEN has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights that currently are exercisable or convertible are taken into account. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by HEINEKEN. Losses applicable to the non-controlling interests in a subsidiary are allocated to the non-controlling interests even if doing so causes the non-controlling interests to have a deficit balance.
(iv) | Special Purpose Entities (SPEs) |
An SPE is consolidated if, based on an evaluation of the substance of its relationship with HEINEKEN and the SPE’s risks and rewards, HEINEKEN concludes that it controls the SPE. SPEs controlled by HEINEKEN were established under terms that impose strict limitations on the decision-making powers of the SPE’s management and that result in HEINEKEN receiving the majority of the benefits related to the SPE’s operations and net assets, being exposed to the majority of risks incident to the SPE’s activities, and retaining the majority of the residual or ownership risks related to the SPEs or their assets.
(v) | Loss of control |
Upon the loss of control, HEINEKEN derecognises the assets and liabilities of the subsidiary, any non-controlling interests and the other components of equity related to the subsidiary. Any surplus or deficit arising on the loss of control is recognised in profit or loss. If HEINEKEN retains any interest in the previous subsidiary, then such interest is measured at fair value at the date that control is lost. Subsequently it is accounted for as an equity-accounted investee or as an available-for-sale financial asset depending on the level of influence retained.
(vi) | Investments in associates and joint ventures |
Investments in associates are those entities in which HEINEKEN has significant influence, but not control, over the financial and operating policies. Significant influence is presumed to exist when the Group holds between 20 and 50 per cent of the voting power of another entity. Joint ventures are those entities over whose activities HEINEKEN has joint control, established by contractual agreement and requiring unanimous consent for strategic financial and operating decisions.
Investments in associates and joint ventures are accounted for using the equity method (equity-accounted investees) and are recognised initially at cost. The cost of the investment includes transaction costs.
The consolidated financial statements include HEINEKEN’s share of the profit or loss and other comprehensive income, after adjustments to align the accounting policies with those of HEINEKEN, from the date that significant influence or joint control commences until the date that significant influence or joint control ceases.
When HEINEKEN’s share of losses exceeds the carrying amount of the associate, including any long-term investments, the carrying amount is reduced to nil and recognition of further losses is discontinued except to the extent that HEINEKEN has an obligation or has made a payment on behalf of the associate or joint venture.
(vii) | Transactions eliminated on consolidation |
Intra-HEINEKEN balances and transactions, and any unrealised gains and losses or income and expenses arising from intra-HEINEKEN transactions, are eliminated in preparing the consolidated financial statements. Unrealised gains arising from transactions with equity-accounted associates and JVs are eliminated against the investment to the extent of HEINEKEN’s interest in the investee. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment.
(b) | Foreign currency |
(i) | Foreign currency transactions |
Transactions in foreign currencies are translated to the respective functional currencies of HEINEKEN entities at the exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to the functional currency at the exchange rate at that date. The foreign currency gain or loss arising on monetary items is the difference between amortised cost in the functional currency at the beginning of the period, adjusted for effective interest and payments during the period, and the amortised cost in foreign currency translated at the exchange rate at the end of the reporting period.
Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated to the functional currency at the exchange rate at the date that the fair value was determined.
Non-monetary items in a foreign currency that are measured in terms of historical cost are translated using the exchange rate at the date of the transaction. Foreign currency differences arising on retranslation are recognised in profit or loss, except for differences arising on the retranslation of available-for-sale (equity) investments and foreign currency differences arising on the retranslation of a financial liability designated as a hedge of a net investment, which are recognised in other comprehensive income.
Non-monetary assets and liabilities denominated in foreign currencies that are measured at cost remain translated into the functional currency at historical exchange rates.
Heineken N.V. financial statements | Notes to the consolidated financial statements continued |
(ii) | Foreign operations |
The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on acquisition, are translated to euro at exchange rates at the reporting date. The income and expenses of foreign operations, excluding foreign operations in hyperinflationary economies, are translated to euro at exchange rates approximating the exchange rates ruling at the dates of the transactions. Group entities, with a functional currency being the currency of a hyperinflationary economy, first restate their financial statements in accordance with IAS 29, Financial Reporting in Hyperinflationary Economies (see ‘Reporting in hyperinflationary economies’ below). The related income, costs and balance sheet amounts are translated at the foreign exchange rate ruling at the balance sheet date.
Foreign currency differences are recognised in other comprehensive income and are presented within equity in the translation reserve. However, if the operation is a non-wholly-owned subsidiary, then the relevant proportionate share of the translation difference is allocated to the non-controlling interests. When a foreign operation is disposed of such that control, significant influence or joint control is lost, the cumulative amount in the translation reserve related to that foreign operation is reclassified to profit or loss as part of the gain or loss on disposal. When HEINEKEN disposes of only part of its interest in a subsidiary that includes a foreign operation while retaining control, the relevant proportion of the cumulative amount is reattributed to non-controlling interests. When HEINEKEN disposes of only part of its investment in an associate or joint venture that includes a foreign operation while retaining significant influence or joint control, the relevant proportion of the cumulative amount is reclassified to profit or loss.
Foreign exchange gains and losses arising from a monetary item receivable from or payable to a foreign operation, the settlement of which is neither planned nor likely in the foreseeable future, are considered to form part of a net investment in a foreign operation and are recognised in other comprehensive income, and are presented within equity in the translation reserve.
The following exchange rates, for the most important countries in which HEINEKEN has operations, were used while preparing these consolidated financial statements:
Year-end | Year-end | Average | Average | |||||||||||||
In EUR | 2011 | 2010 | 2011 | 2010 | ||||||||||||
BRL | 0.4139 | 0.4509 | 0.4298 | 0.4289 | ||||||||||||
GBP | 1.1972 | 1.1618 | 1.1522 | 1.1657 | ||||||||||||
MXN | 0.0554 | 0.0604 | 0.0578 | 0.0598 | ||||||||||||
NGN | 0.0049 | 0.0050 | 0.0047 | 0.0051 | ||||||||||||
PLN | 0.2243 | 0.2516 | 0.2427 | 0.2503 | ||||||||||||
RUB | 0.0239 | 0.0245 | 0.0245 | 0.0248 | ||||||||||||
USD | 0.7729 | 0.7484 | 0.7184 | 0.7543 |
(iii) | Reporting in hyperinflationary economies |
When the economy of a country in which we operate is deemed hyperinflationary and the functional currency of a Group entity is the currency of that hyperinflationary economy, the financial statements of such Group entities are adjusted so that they are stated in terms of the measuring unit current at the end of the reporting period. This involves restatement of income and expenses to reflect changes in the general price index from the start of the reporting period and, restatement of non-monetary items in the balance sheet, such as P, P & E to reflect current purchasing power as at the period end using a general price index from the date when they were first recognised. Comparative amounts are not adjusted. Any differences arising were recorded in equity on adoption.
(iv) | Hedge of net investments in foreign operations |
Foreign currency differences arising on the retranslation of a financial liability designated as a hedge of a net investment in a foreign operation are recognised in other comprehensive income to the extent that the hedge is effective and regardless of whether the net investment is held directly or through an intermediate parent. These differences are presented within equity in the translation reserve. To the extent that the hedge is ineffective, such differences are recognised in profit or loss. When the hedged part of a net investment is disposed of, the relevant amount in the translation reserve is transferred to profit or loss as part of the profit or loss on disposal.
(c) | Non-derivative financial instruments |
(i) | General |
Non-derivative financial instruments comprise investments in equity and debt securities, trade and other receivables, cash and cash equivalents, loans and borrowings, and trade and other payables.
Non-derivative financial instruments are recognised initially at fair value plus, for instruments not at fair value through profit or loss, any directly attributable transaction costs. Subsequent to initial recognition non-derivative financial instruments are measured as described hereafter.
If HEINEKEN has a legal right to offset financial assets with financial liabilities and if HEINEKEN intends either to settle on a net basis or to realise the asset and settle the liability simultaneously then financial assets and liabilities are presented in the statement of financial position as a net amount.
Cash and cash equivalents comprise cash balances and call deposits. Bank overdrafts form an integral part of HEINEKEN’s cash management are included as a component of cash and cash equivalents for the purpose of the statement of cash flows.
Accounting policies for interest income, interest expenses and other net finance income and expenses are discussed in note 3r.
Heineken N.V. financial statements | Notes to the consolidated financial statements continued |
(ii) | Held-to-maturity investments |
If HEINEKEN has the positive intent and ability to hold debt securities to maturity, they are classified as held-to-maturity. Debt securities are loans and long-term receivables and are measured at amortised cost using the effective interest method, less any impairment losses. Investments held-to-maturity are recognised or derecognised on the day they are transferred to or by HEINEKEN.
(iii) | Available-for-sale investments |
HEINEKEN’s investments in equity securities and certain debt securities are classified as available-for-sale. Subsequent to initial recognition, they are measured at fair value and changes therein – other than impairment losses (see note 3i(i)), and foreign currency differences on available-for-sale monetary items (see note 3b(i)) – are recognised in other comprehensive income and presented within equity in the fair value reserve. When these investments are derecognised, the relevant cumulative gain or loss in the fair value reserve is transferred to profit or loss.
Where these investments are interest-bearing, interest calculated using the effective interest method is recognised in the profit or loss. Available-for-sale investments are recognised or derecognised by HEINEKEN on the date it commits to purchase or sell the investments.
(iv) | Investments at fair value through profit or loss |
An investment is classified at fair value through profit or loss if it is classified as held for trading or is designated as such upon initial recognition. Investments are designated at fair value through profit or loss if HEINEKEN manages such investments and makes purchase and sale decisions based on their fair value in accordance with HEINEKEN’s documented risk management or investment strategy. Upon initial recognition, attributable transaction costs are recognised in profit or loss as incurred.
Investments at fair value through profit or loss are measured at fair value, with changes therein recognised in profit or loss as part of the other net finance income/(expenses). Investments at fair value through profit and loss are recognised or derecognised by HEINEKEN on the date it commits to purchase or sell the investments.
(v) | Other |
Other non-derivative financial instruments are measured at amortised cost using the effective interest method, less any impairment losses. Included in non-derivative financial instruments are advances to customers. Subsequently, the advances are amortised over the term of the contract as a reduction of revenue.
(d) | Derivative financial instruments (including hedge accounting) |
(i) | General |
HEINEKEN uses derivatives in the ordinary course of business in order to manage market risks. Generally HEINEKEN seeks to apply hedge accounting in order to minimise the effects of foreign currency, interest rate or commodity price fluctuations in profit or loss.
Derivatives that can be used are interest rate swaps, forward rate agreements, caps and floors, commodity swaps, spot and forward exchange contracts and options. Transactions are entered into with a limited number of counterparties with strong credit ratings. Foreign currency, interest rate and commodity hedging operations are governed by internal policies and rules approved and monitored by the Executive Board.
Derivative financial instruments are recognised initially at fair value, with attributable transaction costs recognised in profit or loss as incurred. Derivatives for which hedge accounting is not applied are accounted for as instruments at fair value through profit or loss. When derivatives qualify for hedge accounting, subsequent measurement is at fair value, and changes therein accounted for as described in 3b(iv), 3d(ii) and 3d(iii).
(ii) | Cash flow hedges |
Changes in the fair value of the derivative hedging instrument designated as a cash flow hedge are recognised in other comprehensive income and presented in the hedging reserve within equity to the extent that the hedge is effective. To the extent that the hedge is ineffective, changes in fair value are recognised in profit or loss.
If the hedging instrument no longer meets the criteria for hedge accounting, expires or is sold, terminated or exercised, then hedge accounting is discontinued and the cumulative unrealised gain or loss previously recognised in other comprehensive income and presented in the hedging reserve in equity, is recognised in profit or loss immediately, or when a hedging instrument is terminated, but the hedged transaction still is expected to occur, the cumulative gain or loss at that point remains in other comprehensive income and is recognised in accordance with the above-mentioned policy when the transaction occurs. When the hedged item is a non-financial asset, the amount recognised in other comprehensive income is transferred to the carrying amount of the asset when it is recognised. In other cases the amount recognised in other comprehensive income is transferred to the same line of profit or loss in the same period that the hedged item affects profit or loss.
(iii) | Fair value hedges |
Changes in the fair value of a derivative hedging instrument designated as a fair value hedge are recognised in profit or loss. The hedged item also is stated at fair value in respect of the risk being hedged; the gain or loss attributable to the hedged risk is recognised in profit or loss and adjusts the carrying amount of the hedged item.
If the hedge no longer meets the criteria for hedge accounting, the adjustment to the carrying amount of a hedged item for which the effective interest method is used is amortised to profit or loss over the period to maturity.
(iv) | Separable embedded derivatives |
Embedded derivatives are separated from the host contract and accounted for separately if the economic characteristics and risks of the host contract and the embedded derivative are not closely related, a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative, and the combined instrument is not measured at fair value through profit or loss. Changes in the fair value of separable embedded derivatives are recognised immediately in profit or loss.
Heineken N.V. financial statements | Notes to the consolidated financial statements continued |
(e) | Share capital |
(i) | Ordinary shares |
Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares are recognised as a deduction from equity, net of any tax effects.
(ii) | Repurchase of share capital (treasury shares) |
When share capital recognised as equity is repurchased, the amount of the consideration paid, which includes directly attributable costs, is net of any tax effects recognised as a deduction from equity. Repurchased shares are classified as treasury shares and are presented in the reserve for own shares.
When treasury shares are sold or reissued subsequently, the amount received is recognised as an increase inequity, and the resulting surplus or deficit on the transaction is transferred to or from retained earnings.
(iii) | Dividends |
Dividends are recognised as a liability in the period in which they are declared.
(f) | Property, Plant and Equipment (P, P & E) |
(i) | Owned assets |
Items of P, P & E are measured at cost less government grants received (refer (q)), accumulated depreciation (refer (iv)) and accumulated impairment losses (3i(ii)).
Cost comprises the initial purchase price increased with expenditures that are directly attributable to the acquisition of the asset (like transports and non-recoverable taxes). The cost of self-constructed assets includes the cost of materials and direct labour and any other costs directly attributable to bringing the asset to a working condition for its intended use (like an appropriate proportion of production overheads), and the costs of dismantling and removing the items and restoring the site on which they are located. Borrowing costs related to the acquisition or construction of qualifying assets are capitalised as part of the cost of that asset. Cost also may include transfers from equity of any gain or loss on qualifying cash flow hedges of foreign currency purchases of P, P & E.
Spare parts that are acquired as part of an equipment purchase and only to be used in connection with this specific equipment are capitalised and amortised as part of the equipment. For example, purchased software that is integral to the functionality of the related equipment is capitalised as part of that equipment. In all other cases spare parts are carried as inventory and recognised in profit and loss as consumed. Where an item of P, P & E comprises major components having different useful lives, they are accounted for as separate items (major components) of P, P & E.
Returnable bottles and kegs in circulation are recorded within P, P & E and a corresponding liability is recorded in respect of the obligation to repay the customers’ deposits. Deposits paid by customers for returnable items are reflected in the consolidated statement of financial position within current liabilities.
(ii) | Leased assets |
Leases in terms of which HEINEKEN assumes substantially all the risks and rewards of ownership are classified as finance leases. Upon initial recognition P, P & E acquired by way of finance lease is measured at an amount equal to the lower of its fair value and the present value of the minimum lease payments at inception of the lease. Lease payments are apportioned between the outstanding liability and finance charges so as to achieve a constant periodic rate of interest on the remaining balance of the liability.
Other leases are operating leases and are not recognised in HEINEKEN’s statement of financial position. Payments made under operating leases are charged to profit or loss on a straight-line basis over the term of the lease. When an operating lease is terminated before the lease period has expired, any payment required to be made to the lessor by way of penalty is recognised as an expense in the period in which termination takes place.
(iii) | Subsequent expenditure |
The cost of replacing a part of an item of P, P & E is recognised in the carrying amount of the item or recognised as a separate asset, as appropriate, if it is probable that the future economic benefits embodied within the part will flow to HEINEKEN and its cost can be measured reliably. The carrying amount of the replaced part is derecognised. The costs of the day-to-day servicing of P, P & E are recognised in profit or loss when incurred.
(iv) | Depreciation |
Depreciation is calculated over the depreciable amount, which is the cost of an asset, or other amount substituted for cost, less its residual value.
Land is not depreciated as it is deemed to have an infinite life. Depreciation on other P, P & E is charged to profit or loss on a straight-line basis over the estimated useful lives of items of P, P & E, and major components that are accounted for separately, since this most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset. Assets under construction are not depreciated. Leased assets are depreciated over the shorter of the lease term and their useful lives unless it is reasonable certain that HEINEKEN will obtain ownership by the end of the lease term. The estimated useful lives for the current and comparative years are as follows:
• Buildings | 30 – 40 years | |||
• Plant and equipment | 10 – 30 years | |||
• Other fixed assets | 3 – 10 years | |||
Where parts of an item of P, P & E have different useful lives, they are accounted for as separate items of P, P & E.
The depreciation methods, residual value as well as the useful lives are reassessed, and adjusted if appropriate, at each financial year-end.
Resources Generated by (Used in) Operating Activities:Heineken N.V. financial statements Notes to the consolidated financial statements continued
(v) | Gains and losses on sale |
Net gains on sale of items of P, P & E are presented in profit or loss as other income. Net losses on sale are included in depreciation. Net gains and losses are recognised in profit or loss when the significant risks and rewards of ownership have been transferred to the buyer, recovery of the consideration is probable, the associated costs can be estimated reliably, and there is no continuing management involvement with the P, P & E.
(g) | Intangible assets |
(i) | Goodwill |
Goodwill arises on the acquisition of subsidiaries, associates and joint ventures and represents the excess of the cost of the acquisition over HEINEKEN’s interest in net fair value of the net identifiable assets, liabilities and contingent liabilities of the acquiree.
Goodwill on acquisitions of subsidiaries is included in ‘intangible assets’. Goodwill arising on the acquisition of associates and joint ventures is included in the carrying amount of the associate, respectively the joint ventures. In respect of acquisitions prior to 1 October 2003, goodwill is included on the basis of deemed cost, being the amount recorded under previous GAAP. Goodwill on acquisitions purchased before 1 January 2003 has been deducted from equity.
Goodwill arising on the acquisition of a non-controlling interest in a subsidiary represents the excess of the cost of the additional investment over the carrying amount of the interest in the net assets acquired at the date of exchange.
Goodwill is measured at cost less accumulated impairment losses (refer accounting policy 3i(ii)). Goodwill is allocated to individual or groups of cash-generating units (CGUs) for the purpose of impairment testing and is tested annually for impairment. Negative goodwill is recognised directly in profit or loss as other income.
(ii) | Brands |
Brands acquired, separately or as part of a business combination, are capitalised if they meet the definition of an intangible asset and the recognition criteria are satisfied.
Brands acquired as part of a business combination are valued at fair value based on the royalty relief method. Brands acquired separately are measured at cost.
Strategic brands are well-known international/local brands with a strong market position and an established brand name. Strategic brands are amortised on an individual basis over the estimated useful life of the brand. Other brands are amortised on a portfolio basis per country.
(iii) | Customer-related and contract-based intangibles |
Customer-related and contract-based intangibles are capitalised if they meet the definition of an intangible asset and the recognition criteria are satisfied. If the amounts are not material these are included in the brand valuation. The relationship between brands and customer-related intangibles is carefully considered so that brands and customer-related intangibles are not both recognised on the basis of the same cash flows.
Customer-related and contract-based intangibles acquired as part of a business combination are valued at fair value. Customer-related and contract-based intangibles acquired separately are measured at cost.
Customer-related and contract-based intangibles are amortised over the remaining useful life of the customer relationships or the period of the contractual arrangements.
(iv) | Software, research and development and other intangible assets |
Purchased software is measured at cost less accumulated amortisation (refer (vi)) and impairment losses (refer accounting policy 3i(ii)). Expenditure on internally developed software is capitalised when the expenditure qualifies as development activities, otherwise it is recognised in profit or loss when incurred.
Expenditure on research activities, undertaken with the prospect of gaining new technical knowledge and understanding, is recognised in profit or loss when incurred.
Development activities involve a plan or design for the production of new or substantially improved products, software and processes. Development expenditure is capitalised only if development costs can be measured reliably, the product or process is technically and commercially feasible, future economic benefits are probable, and HEINEKEN intends to and has sufficient resources to complete development and to use or sell the asset. The expenditure capitalised includes the cost of materials, direct labour and overhead costs that are directly attributable to preparing the asset for its intended use, and capitalised borrowing costs. Other development expenditure is recognised in profit or loss when incurred.
Capitalised development expenditure is measured at cost less accumulated amortisation (refer (vi)) and accumulated impairment losses (refer accounting policy 3i(ii)).
Other intangible assets that are acquired by HEINEKEN and have finite useful lives, are measured at cost less accumulated amortisation (refer (vi)) and impairment losses (refer accounting policy 3i(ii)). Expenditure on internally generated goodwill and brands is recognised in profit or loss when incurred.
Consolidated net income
Heineken N.V. financial statements | Notes to the consolidated financial statements continued |
(v) | Subsequent expenditure |
Subsequent expenditure is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure is expensed when incurred.
(vi) | Amortisation |
Amortisation is calculated over the cost of the asset, or other amount substituted for cost, less its residual value. Intangible assets with a finite life are amortised on a straight-line basis over their estimated useful lives, other than goodwill, from the date they are available for use, since this most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset. The estimated useful lives are as follows:
• Strategic brands | 40 – 50 years | |||
• Other brands | 15 – 25 years | |||
• Customer-related and contract-based intangibles | 5 – 20 years | |||
• Software | 3 – 7 years | |||
• Capitalised development costs | 3 years | |||
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Amortisation methods, useful lives and residual values are reviewed at each reporting date and adjusted if appropriate.
(vii) | Gains and losses on sale |
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Net gains on sale of intangible assets are presented in profit or loss as other income. Net losses on sale are included in amortisation. Net gains and losses are recognised in profit or loss when the significant risks and rewards of ownership have been transferred to the buyer, recovery of the consideration is probable, the associated costs can be estimated reliably, and there is no continuing management involvement with the intangible assets.
(h) | Inventories |
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(i) | General |
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Inventories are measured at the lower of cost and net realisable value. The cost of inventories is based on the weighted average cost formula, and includes expenditure incurred in acquiring the inventories, production or conversion costs and other costs incurred in bringing them to their existing location and condition. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses.
(ii) | Finished products and work in progress | |||
Finished products and work in progress are measured at manufacturing cost based on weighted averages and takes into account the production stage reached. Costs include an appropriate share of direct production overheads based on normal operating capacity.
(iii) | Other inventories and spare parts | |||
The cost of other inventories is based on weighted averages. Spare parts are valued at the lower of cost and net realisable value. Value reductions and usage of parts are charged to profit or loss. Spare parts that are acquired as part of an equipment purchase and only to be used in connection with this specific equipment are initially capitalised and depreciated as part of the equipment.
(i) | Impairment | |||
(i) | Financial assets |
A financial asset is assessed at each reporting date to determine whether there is any objective evidence that it is impaired. A financial asset is considered to be impaired if objective evidence indicates that one or more events have had a negative effect on the estimated future cash flows of that asset that can be estimated reliably.
An impairment loss in respect of a financial asset measured at amortised cost is calculated as the difference between its carrying amount, and the present value of the estimated future cash flows discounted at the original effective interest rate. An impairment loss in respect of an available-for-sale financial asset is calculated by reference to its current fair value.
Individually significant financial assets are tested for impairment on an individual basis. The remaining financial assets are assessed collectively in groups that share similar credit risk characteristics.
All impairment losses are recognised in profit or loss. Any cumulative loss in respect of an available-for-sale financial asset recognised previously in other comprehensive income and presented in the fair value reserve in equity is transferred to profit or loss.
An impairment loss is reversed if the reversal can be related objectively to an event occurring after the impairment loss was recognised. For financial assets measured at amortised cost and available-for-sale financial assets that are debt securities, the reversal is recognised in profit or loss. For available-for-sale financial assets that are equity securities, the reversal is recognised in other comprehensive income.
Working capital:
Heineken N.V. financial statements | Notes to the consolidated financial statements continued | |||||
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(ii) | Non-financial assets |
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The carrying amounts of HEINEKEN’s non-financial assets, other than inventories (refer accounting policy (h) and deferred tax assets (refer accounting policy (s)), are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists then the asset’s recoverable amount is estimated. For goodwill and intangible assets that are not yet available for use, the recoverable amount is estimated each year at the same time.
The recoverable amount of an asset or CGU is the higher of an asset’s fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset or CGU.
For the purpose of impairment testing, assets that cannot be tested individually are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (the ‘CGU’).
For the purpose of impairment testing, goodwill acquired in a business combination, is allocated to each of the acquirer’s CGUs, or groups of CGUs, that is expected to benefit from the synergies of the combination. Each unit or group of units to which the goodwill is allocated represents the lowest level within the entity at which the goodwill is monitored for internal management purposes. Goodwill is monitored on regional, sub regional or country level depending on the characteristics of the acquisition, the synergies to be achieved and the level of integration.
An impairment loss is recognised if the carrying amount of an asset or its CGU exceeds its recoverable amount. A CGU is the smallest identifiable asset group that generates cash flows that largely are independent from other assets and groups. Impairment losses are recognised in profit or loss. Impairment losses recognised in respect of CGU are allocated first to reduce the carrying amount of any goodwill allocated to the units and then to reduce the carrying amounts of the other assets in the unit (group of units) on a pro rata basis. An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses recognised in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised.
Goodwill that forms part of the carrying amount of an investment in an associate and joint venture is not recognised separately, and therefore is not tested for impairment separately. Instead, the entire amount of the investment in an associate and joint venture is tested for impairment as a single asset when there is objective evidence that the investment in an associate may be impaired.
(j) | Non-current assets held for sale |
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Non-current assets, or disposal groups comprising assets and liabilities, that are expected to be recovered primarily through sale rather than through continuing use, are classified as held for sale. Immediately before classification as held for sale, the assets, or components of a disposal group, are measured at the lower of their carrying amount and fair value less cost to sell. Any impairment loss on a disposal group is first allocated to goodwill, and then to remaining assets and liabilities on a pro rata basis, except that no loss is allocated to inventories, financial assets, deferred tax assets and employee benefit assets, which continue to be measured in accordance with HEINEKEN’s accounting policies. Impairment losses on initial classification as held for sale and subsequent gains or losses on remeasurement are recognised in profit or loss. Gains are not recognised in excess of any cumulative impairment loss.
Intangible assets and P, P & E once classified as held for sale are not amortised or depreciated. In addition, equity accounting of equity-accounted investees ceases once classified as held for sale or distribution.
(k) | Employee benefits |
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(i) | Defined contribution plans |
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A defined contribution plan is a post-employment benefit plan (pension plan) under which the Group pays fixed contributions into a separate entity. The Group has no legal or constructive obligations to pay further contributions if the fund does not hold sufficient assets to pay all employees the benefits relating to employee service in the current and prior periods.
Obligations for contributions to defined contribution pension plans are recognised as an employee benefit expense in profit or loss in the periods during which services are rendered by employees. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in future payments is available. Contributions to a defined contribution plan that are due more than 12 months after the end of the period in which the employee renders the service are discounted to their present value.
(ii) | Defined benefit plans |
A defined benefit plan is a post-employment benefit plan (pension plan) that is not a defined contribution plan. Typically defined benefit plans define an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and compensation.
HEINEKEN’s net obligation in respect of defined benefit pension plans is calculated separately for each plan by estimating the amount of future benefit that employees have earned in return for their service in the current and prior periods; that benefit is discounted to determine its present value. Any unrecognised past service costs and the fair value of any plan assets are deducted. The discount rate is the yield at balance sheet date on AA-rated bonds that have maturity dates approximating the terms of HEINEKEN’s obligations and that are denominated in the same currency in which the benefits are expected to be paid.
The calculations are performed annually by qualified actuaries using the projected unit credit method. When the calculation results in a benefit to HEINEKEN, the recognised asset is limited to the net total of any unrecognised past service costs and the present value of economic benefits available in the form of any future refunds from the plan or reductions in future contributions to the plan. In order to calculate the present value of economic benefits, consideration is given to any minimum funding requirements that apply to any plan in the Group. An economic benefit is available to the Group if it is realisable during the life of the plan, or on settlement of the plan liabilities.
When the benefits of a plan are improved, the portion of the increased benefit relating to past service by employees is recognised as an expense in profit or loss on a straight-line basis over the average period until the benefits become vested. To the extent that the benefits vest immediately, the expense is recognised immediately in profit or loss.
HEINEKEN recognises all actuarial gains and losses arising from defined benefit plans immediately in other comprehensive income and all expenses related to defined benefit plans in personnel expenses in profit or loss.
Interest payable
Labor liabilities
Net resources generated by operating activities
Resources Generated by (Used in) Investing Activities:Heineken N.V. financial statements Notes to the consolidated financial statements continued Sale of noncontrolling interest
(iii) | Other long-term employee benefits |
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HEINEKEN’s net obligation in respect of long-term employee benefits, other than pension plans, is the amount of future benefit that employees have earned in return for their service in the current and prior periods; that benefit is discounted to determine its present value, and the fair value of any related assets is deducted. The discount rate is the yield at balance sheet date on high-quality credit-rated bonds that have maturity dates approximating the terms of HEINEKEN’s obligations. The obligation is calculated using the projected unit credit method. Any actuarial gains and losses are recognised in other comprehensive income in the period in which they arise.
(iv) | Termination benefits |
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Termination benefits are payable when employment is terminated by the Group before the normal retirement date, or whenever an employee accepts voluntary redundancy in exchange for these benefits.
Termination benefits are recognised as an expense when HEINEKEN is demonstrably committed to either terminating the employment of current employees according to a detailed formal plan without possibility of withdrawal, or providing termination benefits as a result of an offer made to encourage voluntary redundancy. Termination benefits for voluntary redundancies are recognised if HEINEKEN has made an offer encouraging voluntary redundancy, it is probable that the offer will be accepted, and the number of acceptances can be estimated reliably.
Benefits falling due more than 12 months after the balance sheet date are discounted to their present value.
(v) | Share-based payment plan (LTV) |
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As from 1 January 2005 HEINEKEN established a share plan for the Executive Board and as from 1 January 2006 HEINEKEN also established a share plan for senior management (see note 29).
The grant date fair value of the share rights granted is recognised as personnel expenses with a corresponding increase in equity (equity-settled), over the period that the employees become unconditionally entitled to the share rights. The costs of the share plan for both the Executive Board and senior management members are spread evenly over the performance period.
At each balance sheet date, HEINEKEN revises its estimates of the number of share rights that are expected to vest, for the 100 per cent internal performance conditions of the share plan 2010 – 2012 and the share plan 2011– 2013 of the senior management members and the Executive Board and for the 75 per cent internal performance conditions of the share plan 2008– 2010 and 2009 – 2011 of the senior management members. It recognises the impact of the revision of original estimates – only applicable for internal performance conditions, if any, in profit or loss, with a corresponding adjustment to equity. The fair value for the share plan 2009 – 2011 is measured at grant date using the Monte Carlo model taking into account the terms and conditions of the plan.
(vi) | Matching share entitlement |
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As from 21 April 2011 HEINEKEN established a matching share entitlement for the Executive Board. The grant date fair value of the matching shares is recognised as personnel expenses in the income statement as it is deemed an equity settled incentive.
(vii) | Short-term employee benefits |
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Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided.
A liability is recognised for the amount expected to be paid under short-term benefits if the Group has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably.
(l) | Provisions |
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(i) | General | |||
A provision is recognised if, as a result of a past event, HEINEKEN has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are measured at the present value of the expenditures to be expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to passage of time is recognised as part of the net finance expenses.
(ii) | Restructuring |
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A provision for restructuring is recognised when HEINEKEN has approved a detailed and formal restructuring plan, and the restructuring has either commenced or has been announced publicly. Future operating losses are not provided for. The provision includes the benefit commitments in connection with early retirement and redundancy schemes.
(iii) | Onerous contracts | |||
A provision for onerous contracts is recognised when the expected benefits to be derived by HEINEKEN from a contract are lower than the unavoidable cost of meeting its obligations under the contract. The provision is measured at the present value of the lower of the expected cost of terminating the contract and the expected net cost of continuing with the contract. Before a provision is established, HEINEKEN recognises any impairment loss on the assets associated with that contract.
(iv) | Other |
The other provisions, not being provisions for restructuring or onerous contracts, consist mainly of surety and guarantees, litigation and claims and environmental provisions.
Resources Generated by (Used in) Financing Activities:Heineken N.V. financial statements Notes to the consolidated financial statements continued Bank loans obtained
(m) | Loans and borrowings |
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Loans and borrowings are recognised initially at fair value, net of transaction costs incurred. Loans and borrowings are subsequently stated at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognised in profit or loss over the period of the borrowings using the effective interest method. Loans and borrowings included in a fair value hedge are stated at fair value in respect of the risk being hedged.
Loans and borrowings for which the Group has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date, are classified as non-current liabilities.
(n) | Revenue |
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(i) | Products sold |
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Revenue from the sale of products in the ordinary course of business is measured at the fair value of the consideration received or receivable, net of sales tax, excise duties, returns, customer discounts and other sales-related discounts. Revenue from the sale of products is recognised in profit or loss when the amount of revenue can be measured reliably, the significant risks and rewards of ownership have been transferred to the buyer, recovery of the consideration is probable, the associated costs and possible return of products can be estimated reliably, and there is no continuing management involvement with the products.
If it is probable that discounts will be granted and the amount can be measured reliably, then the discount is recognised as a reduction of revenue as the sales are recognised.
(ii) | Other revenue |
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Other revenues are proceeds from royalties, rental income, pub management services and technical services to third parties, net of sales tax. Royalties are recognised in profit or loss on an accrual basis in accordance with the substance of the relevant agreement. Rental income, pub management services and technical services are recognised in profit or loss when the services have been delivered.
(o) | Other income |
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Other income are gains from sale of P, P & E, intangible assets and (interests in) subsidiaries, joint ventures and associates, net of sales tax. They are recognised in profit or loss when ownership has been transferred to the buyer.
(p) | Expenses | |||
(i) | Operating lease payments |
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Payments made under operating leases are recognised in profit or loss on a straight-line basis over the term of the lease. Lease incentives received are recognised in profit or loss as an integral part of the total lease expense, over the term of the lease.
(ii) | Finance lease payments | |||
Minimum lease payments under finance leases are apportioned between the finance expense and the reduction of the outstanding liability. The finance expense is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability. Contingent lease payments are accounted for by revising the minimum lease payments over the remaining term of the lease when the lease adjustment is confirmed.
(q) | Government grants |
Government grants are recognised at their fair value when it is reasonably assured that HEINEKEN will comply with the conditions attaching to them and the grants will be received.
Government grants relating to P, P & E are deducted from the carrying amount of the asset.
Government grants relating to costs are deferred and recognised in profit or loss over the period necessary to match them with the costs that they are intended to compensate.
(r) | Interest income, interest expenses and other net finance income and expenses |
Interest income and expenses are recognised as they accrue in profit or loss, using the effective interest method unless collectability is in doubt.
Borrowing costs that are not directly attributable to the acquisition, construction or production of a qualifying asset are recognised in profit or loss using the effective interest method.
Other net finance income and expenses comprises dividend income, gains and losses on the disposal of available-for-sale investments, changes in the fair value of investments designated at fair value through profit or loss and held for trading investments, changes in fair value of hedging instruments that are recognised in profit or loss, unwinding of the discount on provisions and impairment losses recognised on investments. Dividend income is recognised in profit or loss on the date that HEINEKEN’s right to receive payment is established, which in the case of quoted securities is the ex-dividend date.
Foreign currency gains and losses are reported on a net basis in the other net finance income and expenses.
Cash and cash equivalents:
Heineken N.V. financial statements | Notes to the consolidated financial statements continued |
(s) | Income tax |
Income tax comprises current and deferred tax. Current tax and deferred tax are recognised in profit or loss except to the extent that it relates to a business combination, or items recognised directly in equity or in other comprehensive income.
Current tax is the expected income tax payable or receivable in respect of taxable profit or loss for the year, using tax rates enacted or substantially enacted at the balance sheet date, and any adjustment to income tax payable in respect of profits of previous years. Current tax payable also includes any tax liability arising from the declaration of dividends.
Deferred tax is recognised in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and their tax bases.
Deferred tax assets and liabilities are not recognised for the following temporary differences: (i) the initial recognition of goodwill, (ii) the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit or loss, (iii) differences relating to investments in subsidiaries, joint ventures and associates resulting from translation of foreign operations and (iv) differences relating to investments in subsidiaries and joint ventures to the extent that the Company is able to control the timing of the reversal of the temporary difference and they will probably not reverse in the foreseeable future.
Deferred tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred tax asset is realised or the deferred tax liability is settled.
Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different taxable entities which intend either to settle current tax liabilities and assets on a net basis, or to realise the assets and settle the liabilities simultaneously.
In determining the amount of current and deferred tax the Company takes into account the impact of uncertain tax positions and whether additional taxes and interest may be due. The Company believes that its accruals for tax liabilities are adequate for all open tax years based on its assessment of many factors, including interpretations of tax law and prior experience. This assessment relies on estimates and assumptions and may involve a series of judgements about future events. New information may become available that causes the Company to change its judgement regarding the adequacy of existing tax liabilities; such changes to tax liabilities will impact tax expense in the period that such a determination is made.
A deferred tax asset is recognised for unused tax losses, tax credits and deductible temporary differences, to the extent that it is probable that future taxable profits will be available against which they can be utilised. Deferred tax assets are reviewed at each balance sheet date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised.
(t) | Discontinued operations |
A discontinued operation is a component of the Group’s business that represents a separate major line of business or geographical area of operations that has been disposed of or is held for sale or distribution, or is a subsidiary acquired exclusively with a view to resale. Classification as a discontinued operation occurs upon disposal or when the operation meets the criteria to be classified as held for sale, if earlier. When an operation is classified as a discontinued operation, the comparative statement of comprehensive income is re-presented as if the operation had been discontinued from the start of the comparative year.
(u) | Earnings per share |
HEINEKEN presents basic and diluted earnings per share (EPS) data for its ordinary shares. Basic EPS is calculated by dividing the profit or loss attributable to ordinary shareholders of the Company by the weighted average number of ordinary shares outstanding during the period including the weighted average of outstanding ASDI, adjusted for the weighted average of own shares purchased in the year. Diluted EPS is determined by adjusting the profit or loss attributable to ordinary shareholders and the weighted average number of ordinary shares outstanding including weighted average of outstanding ASDI, adjusted for the weighted average of own shares purchased in the year, for the effects of all dilutive potential ordinary shares, which comprise share rights granted to employees.
(v) | Cash flow statement |
The cash flow statement is prepared using the indirect method. Changes in balance sheet items that have not resulted in cash flows such as translation differences, fair value changes, equity-settled share-based payments and other non-cash items, have been eliminated for the purpose of preparing this statement. Assets and liabilities acquired as part of a business combination are included in investing activities (net of cash acquired). Dividends paid to ordinary shareholders are included in financing activities. Dividends received are classified as operating activities. Interest paid is also included in operating activities.
(w) | Operating segments |
Operating segments are reported in a manner consistent with the internal reporting provided to the Executive Board, who is considered to be the Group’s chief operating decision maker. An operating segment is a component of HEINEKEN that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of HEINEKEN’s other components. All operating segments’ operating results are reviewed regularly by the Executive Board to make decisions about resources to be allocated to the segment and to assess its performance, and for which discrete financial information is available.
Inter-segment transfers or transactions are entered into under the normal commercial terms and conditions that would also be available to unrelated third parties.
Segment results, assets and liabilities that are reported to the Executive Board include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Unallocated result items comprise net finance expenses and income tax expenses. Unallocated assets comprise current other investments and cash call deposits.
Segment capital expenditure is the total cost incurred during the period to acquire P, P & E, and intangible assets other than goodwill.
(x) | Emission rights |
Emission rights are related to the emission of CO2, which relates to the production of energy. These rights are freely tradable. Bought emission rights and liabilities due to production of CO2 are measured at cost, including any directly attributable expenditure. Emission rights received for free are also recorded at cost, i.e. with a zero value.
Net increase
Heineken N.V. financial statements | Notes to the consolidated financial statements continued | |||||
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(y) | Recently issued IFRS |
(i) | Standards effective in 2011 and reflected in these consolidated financial statements |
IAS 19 Pensions and IFRIC 14 (amendments effective 1 January 2011) – The limit on a Defined Benefit Assets, Minimum Funding Requirements and their Interaction. These amendments remove unintended consequences arising from the treatment of prepayments where there is a minimum funding requirement. These amendments result in prepayments of contributions in certain circumstances being recognised as an asset rather than an expense.
IFRS 7 Financial Instruments: Disclosure (amendments effective 1 January 2011). The amendments add an explicit statement that qualitative disclosure should be made to better enable users to evaluate an entity’s exposure to risk arising from financial instruments. These amendments are reflected in disclosure note 32 Financial Instruments.
Other standards and interpretations effective from 1 January 2011 did not have a significant impact on the Company.
(ii) | New relevant standards and interpretations not yet adopted |
The following new standards and interpretations to existing standards relevant to HEINEKEN are not yet effective for the year ended 31 December 2011, and have not been applied in preparing these consolidated financial statements. None of these is expected to have a significant effect on the consolidated financial statements of HEINEKEN, except for IAS 19 Employee benefits and IFRS 9 Financial Instruments, which becomes mandatory for the Group’s 2013 consolidated financial statements. HEINEKEN is in the process of evaluating the impact of the applicability of the new standards. HEINEKEN does not plan to early adopt these standards and the extent of the impact has not been determined:
IAS 1 Presentation of Financial Statements was amended in June 2011 for Presentation of Items of Other Comprehensive Income with an effective date of 1 July 2012.
IAS 12 Deferred Tax: Recovery of Underlying Assets. The amendments introduce an exception to the general measurement requirements of IAS 12 Income Taxes in respect of investment properties measured at fair value. The measurement of deferred tax assets and liabilities, in this limited circumstance, is based on a rebuttable presumption that the carrying amount of the investment property will be recovered entirely through sale. The presumption can be rebutted only if the investment property is depreciable and held within a business model whose objective is to consume substantially all of the asset’s economic benefits over the life of the asset.
IAS 19 Employee Benefits was amended. The standard is effective for annual periods beginning on or after 1 January 2013, but has not yet been endorsed by the EU. HEINEKEN is in the process of evaluating the impact of the applicability of the new standard.
IAS 27 Separate financial statements contains accounting and disclosure requirements for investments in subsidiaries, joint ventures and associates when an entity prepares separate financial statements. The standard requires an entity preparing separate financial statements to account for those investments at cost or in accordance with IFRS 9 Financial Instruments. The standard is effective for annual periods beginning on or after 1 January 2013.
IAS 28 Investments in Associates and Joint Ventures prescribes the accounting for investments in associates and sets out the requirements for the application of the equity method when accounting for investments in associates and joint ventures. The standard is effective for annual periods beginning on or after 1 January 2013. This amendment is in line with the new IFRS 11, which no longer gives entities the choice in accounting treatment for joint ventures, only the equity method is allowed. HEINEKEN already applied the equity method since 2008.
IFRS 7 Disclosures – Transfers of Financial Assets. The amendments introduce new disclosure requirements about transfers of financial assets, including disclosures for:
financial assets that are not derecognised in their entirety; and
financial assets that are derecognised in their entirety but for which the entity retains continuing involvement.
IFRS 9 Financial Instruments is part of the IASB’s wider project to replace IAS 39 ‘Financial Instruments: Recognition and Measurement’. IFRS 9 retains but simplifies the mixed measurement model and establishes two primary measurement categories for financial assets, amortised cost and fair value. The basis of classification depends on the entity’s business model and the contractual cash flow characteristics of the financial asset. The standard is effective for annual periods beginning on or after 1 January 2015, but has not yet been endorsed by the EU. HEINEKEN is in the process of evaluating the impact of the applicability of the new standard.
IFRS 10 Consolidated Financial Statements establishes principles for the presentation and preparation of consolidated financial statements when an entity controls one or more other entities. This IFRS supersedes IAS 27 Consolidated and separate financial statements and SIC-12 Consolidation – Special purpose entities and is effective for annual periods beginning on or after 1 January 2013.
IFRS 11 Joint arrangements establish principles for financial reporting by parties to a joint arrangement. This IFRS supersedes IAS 31 Interest in Joint Ventures and SIC-13 Jointly Controlled Entities – Non-monetary contributions by ventures and is effective for annual periods beginning on or after 1 January 2013. Under IFRS 11 the structure of the arrangement is no longer the only determinant for the accounting treatment and entities do no longer have a choice in accounting treatment. HEINEKEN is in the process of evaluating the impact of the applicability of the new standard.
IFRS 12 Disclosure of interests in other entities applies to entities that have an interest in a subsidiary, a joint arrangement, an associate or an unconsolidated structured entity. The IFRS is effective for annual periods beginning on or after 1 January 2013. This IFRS integrates and make consistent the disclosure requirements for all entities mentioned above.
IFRS 13 Fair value measurement defines fair value; sets out in a single IFRS a framework for measuring fair value; and requires disclosures about fair value measurements. The IFRS is to be applied for annual periods beginning on or after 1 January 2013. The IFRS explains how to measure fair value for financial reporting. It does not require fair value measurements in addition to those already required or permitted by other IFRSs and is not intended to establish valuation standards or affect valuation practices outside financial reporting.
Heineken N.V. financial statements | Notes to the consolidated financial statements continued |
4. | Determination of fair values |
(i) | General |
A number of HEINEKEN’s accounting policies and disclosures require the determination of fair value, for both financial and non-financial assets and liabilities. Fair values have been determined for measurement and/or disclosure purposes based on the following methods. When applicable, further information about the assumptions made in determining fair values or for the purpose of impairment testing is disclosed in the notes specific to that asset or liability.
(ii) | Property, plant and equipment |
The fair value of P, P & E recognised as a result of a business combination is based on the quoted market prices for similar items when available and replacement cost when appropriate.
(iii) | Intangible assets |
The fair value of brands acquired in a business combination is based on the ‘relief of royalty’ method. The fair value of customer relationships acquired in a business combination is determined using the multi-period excess earnings method, whereby the subject asset is valued after deducting a fair return on all other assets that are part of creating the related cash flows. The fair value of other intangible assets is based on the discounted cash flows expected to be derived from the use and eventual sale of the assets.
(iv) | Inventories |
The fair value of inventories acquired in a business combination is determined based on its estimated selling price in the ordinary course of business less the estimated costs of completion and sale, and a reasonable profit margin based on the effort required to complete and sell the inventories.
(v) | Investments in equity and debt securities |
The fair value of financial assets at fair value through profit or loss, held-to-maturity investments and available-for-sale financial assets is determined by reference to their quoted closing bid price at the reporting date, or if unquoted, determined using an appropriate valuation technique. The fair value of held-to-maturity investments is determined for disclosure purposes only. In case the quoted price does not exist at the date of exchange or in case the quoted price exists at the date of exchange but was not used as the cost, the investments are valued indirectly based on discounted cash flow models.
(vi) | Trade and other receivables |
The fair value of trade and other receivables is estimated at the present value of future cash flows, discounted at the market rate of interest at the reporting date. This fair value is determined for disclosure purposes or when acquired in a business combination.
(vii) Derivative financial instruments
The fair value of derivative financial instruments is based on their listed market price, if available. If a listed market price is not available, then fair value is in general estimated by discounting the difference between the cash flows based on contractual price and the cash flows based on current price for the residual maturity of the contract using a risk-free interest rate (based on inter-bank interest rates).
Fair values reflect the credit risk of the instrument and include adjustments to take account of the credit risk of the Group entity and counterparty when appropriate.
(viii) | Non-derivative financial instruments |
Fair value, which is determined for disclosure purposes or when fair value hedge accounting is applied, is calculated based on the present value of future principal and interest cash flows, discounted at the market rate of interest at the reporting date. For finance leases the market rate of interest is determined by reference to similar lease agreements.
Fair values reflect the credit risk of the instrument and include adjustments to take account of the credit risk of the Group entity and counterparty when appropriate.
Heineken N.V. financial statements | Notes to the consolidated financial statements continued |
5. | Operating segments |
HEINEKEN distinguishes the following six reportable segments:
Western Europe
Central and Eastern Europe
The Americas
Africa and the Middle East
Asia Pacific
Head Office and Other/eliminations.
The first five reportable segments as stated above are the Group’s business regions. These business regions are each managed separately by a Regional President. The Regional President is directly accountable for the functioning of the segment’s assets, liabilities and results of the region and reports regularly to the Executive Board (the chief operating decision maker) to discuss operating activities, regional forecasts and regional results. The Head Office operating segment falls directly under the responsibility of the Executive Board. For each of the six reportable segments, the Executive Board reviews internal management reports on a monthly basis.
Information regarding the results of each reportable segment is included in the table on the next page. Performance is measured based on EBIT (beia), as included in the internal management reports that are reviewed by the Executive Board. EBIT (beia) is defined as earnings before interest and taxes and net finance expenses, before exceptional items and amortisation of brands and customer relationships. Exceptional items are defined as items of income and expense of such size, nature or incidence, that in view of management their disclosure is relevant to explain the performance of HEINEKEN for the period. EBIT and EBIT (beia) are not financial measures calculated in accordance with IFRS. EBIT (beia) is used to measure performance as management believes that this measurement is the most relevant in evaluating the results of these regions.
HEINEKEN has multiple distribution models to deliver goods to end customers. There is no reliance on major clients. Deliveries to end consumers are done in some countries via own wholesalers or own pubs, in other markets directly and in some others via third parties. As such, distribution models are country specific and on consolidated level diverse. In addition, these various distribution models are not centrally managed or monitored. Consequently, the Executive Board is not allocating resources and assessing the performance based on business type information and therefore no segment information is provided on business type.
Inter-segment pricing is determined on an arm’s-length basis. As net finance expenses and income tax expenses are monitored on a consolidated level (and not on an individual regional basis) and regional presidents are not accountable for that, net finance expenses and income tax expenses are not provided per reportable segment.
Starting 1st of January 2011 Empaque (our Mexican packaging business) was transferred from the America’s region to Head Office as this managerial resides under Global Supply Chain situated in Head Office. Also, in 2011 HEINEKEN reallocated certain management costs from regions to Head Office reflecting a change in the Company’s operating framework from regional to global reporting lines for certain roles within global functions. As a consequence the comparative figures have been restated.
Heineken N.V. financial statements | Notes to the consolidated financial statements continued |
Information about reportable segments
Note | Western Europe | Central and Eastern Europe | The Americas | |||||||||||||||||||||||||
In millions of EUR | 2011 | 2010* | 2011 | 2010* | 2011 | 2010* | ||||||||||||||||||||||
Revenue | ||||||||||||||||||||||||||||
Third party revenue1 | 7,158 | 7,284 | 3,209 | 3,130 | 4,002 | 3,284 | ||||||||||||||||||||||
Interregional revenue | 594 | 610 | 20 | 13 | 27 | 12 | ||||||||||||||||||||||
Total revenue | 7,752 | 7,894 | 3,229 | 3,143 | 4,029 | 3,296 | ||||||||||||||||||||||
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Other income | 48 | 71 | 7 | 8 | 1 | — | ||||||||||||||||||||||
Results from operating activities | 820 | 786 | 318 | 345 | 493 | 429 | ||||||||||||||||||||||
Net finance expenses | ||||||||||||||||||||||||||||
Share of profit of associates and joint ventures and impairments thereof | 3 | 3 | 17 | 21 | 77 | 75 | ||||||||||||||||||||||
Income tax expenses | ||||||||||||||||||||||||||||
Profit | ||||||||||||||||||||||||||||
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Non-controlling interest | ||||||||||||||||||||||||||||
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EBIT reconciliation | ||||||||||||||||||||||||||||
EBIT | 823 | 789 | 335 | 366 | 570 | 504 | ||||||||||||||||||||||
eia2 | 139 | 136 | 11 | 12 | 85 | 96 | ||||||||||||||||||||||
EBIT (beia) | 27 | 962 | 925 | 346 | 378 | 655 | 600 | |||||||||||||||||||||
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Beer volumes2 | ||||||||||||||||||||||||||||
Consolidated beer volume | 45,380 | 45,394 | 45,377 | 42,237 | 50,497 | 37,843 | ||||||||||||||||||||||
Joint Ventures’ volume | — | — | 7,303 | 7,229 | 9,663 | 9,195 | ||||||||||||||||||||||
Licences | 300 | 284 | — | — | 65 | 173 | ||||||||||||||||||||||
Group volume | 45,680 | 45,678 | 52,680 | 49,466 | 60,225 | 47,211 | ||||||||||||||||||||||
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Current segment assets | 1,843 | 2,104 | 985 | 961 | 1,045 | 1,011 | ||||||||||||||||||||||
Other Non-current segment assets | 8,186 | 8,019 | 3,365 | 3,622 | 5,619 | 5,965 | ||||||||||||||||||||||
Investment in associates and joint ventures | 23 | 28 | 165 | 134 | 711 | 758 | ||||||||||||||||||||||
Total segment assets | 10,052 | 10,151 | 4,515 | 4,717 | 7,375 | 7,734 | ||||||||||||||||||||||
Unallocated assets | ||||||||||||||||||||||||||||
Total assets | ||||||||||||||||||||||||||||
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Segment liabilities | 3,723 | 3,444 | 1,160 | 1,145 | 1,068 | 987 | ||||||||||||||||||||||
Unallocated liabilities | ||||||||||||||||||||||||||||
Total equity | ||||||||||||||||||||||||||||
Total equity and liabilities | ||||||||||||||||||||||||||||
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Purchase of P, P & E | 215 | 205 | 170 | 158 | 199 | 117 | ||||||||||||||||||||||
Acquisition of goodwill | — | 4 | 1 | — | 4 | 1,495 | ||||||||||||||||||||||
Purchases of intangible assets | 11 | 5 | 9 | 4 | 20 | 24 | ||||||||||||||||||||||
Depreciation of P, P & E | 343 | 381 | 234 | 253 | 183 | 131 | ||||||||||||||||||||||
Impairment and reversal of impairment of P, P & E | — | 1 | 2 | 9 | (5 | ) | — | |||||||||||||||||||||
Amortisation intangible assets | 100 | 90 | 18 | 22 | 93 | 69 | ||||||||||||||||||||||
Impairment intangible assets | — | 15 | 3 | 1 | — | — |
1 | Includes other revenue of EUR463 million in 2011 and EUR439 million in 2010. |
2 | For definition see ‘Glossary’ Note that these are both non GAAP measures and therefore un-audited. |
Heineken N.V. financial statements | Notes to the consolidated financial statements continued |
Information about reportable segmentscontinued
Africa and the Middle East | Asia Pacific | Head Office & Other/ Eliminations | Consolidated | |||||||||||||||||||||||||||||
2011 | 2010* | 2011 | 2010* | 2011 | 2010* | 2011 | 2010* | |||||||||||||||||||||||||
Revenue | ||||||||||||||||||||||||||||||||
Third party revenue | 2,223 | 1,982 | 216 | 206 | 315 | 247 | 17,123 | 16,133 | ||||||||||||||||||||||||
Interregional revenue | — | 6 | — | — | (641 | ) | (641 | ) | — | — | ||||||||||||||||||||||
Total revenue | 2,223 | 1,988 | 216 | 206 | (326 | ) | (394 | ) | 17,123 | 16,133 | ||||||||||||||||||||||
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Other income | 3 | — | 5 | 158 | — | 2 | 64 | 239 | ||||||||||||||||||||||||
Results from operating activities | 533 | 531 | 64 | 203 | (13 | ) | 4 | 2,215 | 2,298 | |||||||||||||||||||||||
Net finance expenses | (430 | ) | (509 | ) | ||||||||||||||||||||||||||||
Share of profit of associates and joint ventures and impairments thereof | 35 | 28 | 112 | 79 | (4 | ) | (13 | ) | 240 | 193 | ||||||||||||||||||||||
Income tax expenses | (465 | ) | (403 | ) | ||||||||||||||||||||||||||||
Profit | 1,560 | 1,579 | ||||||||||||||||||||||||||||||
Attributable to: | ||||||||||||||||||||||||||||||||
Equity holders of the Company (net profit) | 1,430 | 1,447 | ||||||||||||||||||||||||||||||
Non-controlling interest | 130 | 132 | ||||||||||||||||||||||||||||||
Non-controlling interest | 1,560 | 1,579 | ||||||||||||||||||||||||||||||
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EBIT reconciliation | ||||||||||||||||||||||||||||||||
EBIT | 568 | 559 | 176 | 282 | (17 | ) | (9 | ) | 2,455 | 2,491 | ||||||||||||||||||||||
eia | 2 | 1 | — | (158 | ) | 5 | 45 | 242 | 132 | |||||||||||||||||||||||
EBIT (beia) | 570 | 560 | 176 | 124 | (12 | ) | 36 | 2,697 | 2,623 | |||||||||||||||||||||||
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Beer volumes | ||||||||||||||||||||||||||||||||
Consolidated beer volume | 22,029 | 19,070 | 1,309 | 1,328 | — | — | 164,592 | 145,872 | ||||||||||||||||||||||||
Joint Ventures’ volume | 5,706 | 5,399 | 24,410 | 22,181 | — | — | 47,082 | 44,004 | ||||||||||||||||||||||||
Licences | 1,093 | 1,204 | 769 | 806 | — | — | 2,227 | 2,467 | ||||||||||||||||||||||||
Group volume | 28,828 | 25,673 | 26,488 | 24,315 | — | — | 213,901 | 192,343 | ||||||||||||||||||||||||
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Current segment assets | 854 | 639 | 91 | 74 | (124 | ) | (536 | ) | 4,694 | 4,253 | ||||||||||||||||||||||
Other Non-current segment assets | 1,867 | 1,272 | 2 | 12 | 1,143 | 1,242 | 20,182 | 20,132 | ||||||||||||||||||||||||
Investment in associates and joint ventures | 272 | 262 | 536 | 507 | 57 | (16 | ) | 1,764 | 1,673 | |||||||||||||||||||||||
Total segment assets | 2,993 | 2,173 | 629 | 593 | 1,076 | 690 | 26,640 | 26,058 | ||||||||||||||||||||||||
Unallocated assets | 487 | 604 | ||||||||||||||||||||||||||||||
Total assets | 27,127 | 26,662 | ||||||||||||||||||||||||||||||
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Segment liabilities | 653 | 532 | 36 | 33 | 508 | 625 | 7,148 | 6,766 | ||||||||||||||||||||||||
Unallocated liabilities | 9,887 | 9,676 | ||||||||||||||||||||||||||||||
Total equity | 10,092 | 10,220 | ||||||||||||||||||||||||||||||
Total equity and liabilities | 27,127 | 26,662 | ||||||||||||||||||||||||||||||
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Purchase of P, P & E | 202 | 163 | — | 1 | 14 | 4 | 800 | 648 | ||||||||||||||||||||||||
Acquisition of goodwill | 282 | 1 | — | — | — | 248 | 287 | 1,748 | ||||||||||||||||||||||||
Purchases of intangible assets | — | 9 | — | — | 16 | 14 | 56 | 56 | ||||||||||||||||||||||||
Depreciation of P, P & E | 140 | 100 | — | 1 | 36 | 27 | 936 | 893 | ||||||||||||||||||||||||
Impairment and reversal of impairment of P, P & E | 3 | 2 | — | — | — | 2 | — | 14 | ||||||||||||||||||||||||
Amortisation intangible assets | 6 | 4 | — | — | 12 | 7 | 229 | 192 | ||||||||||||||||||||||||
Impairment intangible assets | — | — | — | — | — | — | 3 | 16 |
* | Comparatives have been adjusted due to the transfer of Empaque causing the move of an amount of EUR54 million of EBIT from the Americas region to Head Office; the centralisation of the Regional Head Offices resulting in a shift of EUR43 million EBIT from regions to Head Office; the policy change in Employee Benefits, causing an increase of EUR15 million in EBIT (EUR11 million in region Western Europe and EUR4 million in the Americas region) |
Heineken N.V. financial statements | Notes to the consolidated financial statements continued |
6. Acquisitions and disposals of subsidiaries and non-controlling interests
Acquisition of the beer operations of Sona Group
On 12 January 2011, HEINEKEN announced that it had acquired from Lewiston Investments SA (‘Seller’) two holding companies which together own the Sona brewery group. The two holding companies had controlling interests in Sona Systems Associates Business Management Limited (‘Sona Systems’), which held certain assets of Sona Breweries Plc (‘Sona’) and International Beer and Beverages (Nigeria) Limited (‘IBBI’), Champion Breweries Plc (‘Champion’), Benue Brewery Limited (‘Benue’) and Life Brewery Company Limited (‘Life’) (together referred to as the ‘acquired businesses’).
Due to the integration of the newly acquired businesses with our existing activities separate financial information on Sona activities is not available anymore.
The following summarises the major classes of consideration transferred, and the recognised amounts of assets acquired and liabilities assumed at the acquisition date.
In millions of EUR* |
Property, plant & equipment
Intangible assets
Other investments
Inventories
Trade and other receivables
Cash and cash equivalents
Assets acquired
The accompanying notes are an integral part of this consolidated statement of changes in financial position.
FOMENTO ECONÓMICO MEXICANO, S.A.B. DE C.V. AND SUBSIDIARIES
MONTERREY, N.L., MEXICO
Consolidated Statements of Changes in Stockholders’ Equity
For the years ended December 31, 2009, 2008 and 2007. Amounts expressed inIn millions of Mexican pesos (Ps.).EUR*
Capital Stock | Additional Paid-in Capital | Retained Earnings from Prior Years | Net Income | Cumulative Other Comprehensive Income (Loss) | Controlling Interest | Non-Controlling Interest in Consolidated Subsidiaries | Total Stockholders’ Equity | ||||||||||||||||||||||||
Balances at December 31, 2006(1) | Ps. | 5,348 | Ps. | 20,557 | Ps. | 32,529 | Ps. | 7,127 | Ps. | (8,907 | ) | Ps. | 56,654 | Ps. | 21,554 | Ps. | 78,208 | ||||||||||||||
Transfer of prior year net income | 7,127 | (7,127 | ) | — | — | — | |||||||||||||||||||||||||
Dividends declared and paid (see Note 21) | (1,525 | ) | (1,525 | ) | (384 | ) | (1,909 | ) | |||||||||||||||||||||||
Sale of noncontrolling interest | 55 | 55 | 360 | 415 | |||||||||||||||||||||||||||
Acquisition by FEMSA Cerveza of noncontrolling interest | (23 | ) | (23 | ) | (16 | ) | (39 | ) | |||||||||||||||||||||||
Comprehensive income | 8,511 | 906 | 9,417 | 3,561 | 12,978 | ||||||||||||||||||||||||||
Balances at December 31, 2007(1) | 5,348 | 20,612 | 38,108 | 8,511 | (8,001 | ) | 64,578 | 25,075 | 89,653 | ||||||||||||||||||||||
Transfer of prior year net income | 8,511 | (8,511 | ) | — | — | — | |||||||||||||||||||||||||
Change in accounting principles (see Note 2 g and i) | (6,070 | ) | 6,424 | 354 | — | 354 | |||||||||||||||||||||||||
Dividends declared and paid (see Note 21) | (1,620 | ) | (1,620 | ) | (445 | ) | (2,065 | ) | |||||||||||||||||||||||
Acquisitions by Coca-Cola FEMSA of noncontrolling interest (see Note 5) | (61 | ) | (61 | ) | (162 | ) | (223 | ) | |||||||||||||||||||||||
Other transactions of noncontrolling interest | 91 | 91 | |||||||||||||||||||||||||||||
Comprehensive income | 6,708 | (1,138 | ) | 5,570 | 3,515 | 9,085 | |||||||||||||||||||||||||
Balances at December 31, 2008 | 5,348 | 20,551 | 38,929 | 6,708 | (2,715 | ) | 68,821 | 28,074 | 96,895 | ||||||||||||||||||||||
Transfer of prior year net income | 6,708 | (6,708 | ) | ||||||||||||||||||||||||||||
Change in accounting principle (see Note 2 c) | (182 | ) | (182 | ) | — | (182 | ) | ||||||||||||||||||||||||
Dividends declared and paid (see Note 21) | (1,620 | ) | (1,620 | ) | (635 | ) | (2,255 | ) | |||||||||||||||||||||||
Acquisition by FEMSA Cerveza of noncontrolling interest | (3 | ) | (3 | ) | 19 | 16 | |||||||||||||||||||||||||
Comprehensive income | 9,908 | 4,713 | 14,621 | 6,734 | 21,355 | ||||||||||||||||||||||||||
Balances at December 31, 2009 | Ps. | 5,348 | Ps. | 20,548 | Ps. | 43,835 | Ps. | 9,908 | Ps. | 1,998 | Ps. | 81,637 | Ps. | 34,192 | Ps. | 115,829 | |||||||||||||||
The accompanying notes are an integral part of these consolidated statements of changes in stockholders’ equity.
FOMENTO ECONÓMICO MEXICANO, S.A.B. DE C.V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
For the years ended December 31, 2009, 2008 and 2007. Amounts expressed in millions of U.S. dollars ($) and in millions of Mexican pesos (Ps.).
Note 1. Activities of the Company.
Fomento Económico Mexicano, S.A.B. de C.V. (“FEMSA”) is a Mexican holding company. The principal activities of FEMSA and its subsidiaries (the “Company”), as an economic unit, are carried out by operating subsidiaries and grouped under direct and indirect holding company subsidiaries (the “Subholding Companies”) of FEMSA. The following is a description of such activities, together with the ownership interest in each Subholding Company:
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Note 2. Basis of Presentation.
The consolidated financial statements include the financial statements of FEMSA and those companies in which it exercises control. All intercompany account balances and transactions have been eliminated in consolidation.
The accompanying consolidated financial statements were prepared in accordance with Normas de Información Financiera (Mexican Financial Reporting Standards or “Mexican FRS”), individually referred to as “NIFs,” and are stated in millions of Mexican pesos (“Ps.”). The translation of Mexican pesos into U.S. dollars (“$”) is included solely for the convenience of the reader, using the noon buying exchange rate published by the Federal Reserve Bank of New York of 13.0576 pesos per U.S. dollar as of December 31, 2009.
The Company classifies its costs and expenses by function in the consolidated income statement, in order to conform to the industry’s practices where the Company operates. The income from operations line in the income statement is the result of subtracting cost of sales and operating expenses from total revenues and it has been included for a better understanding of the Company’s financial and economic performance.
Figures presented for the year ended December 31, 2007, have been restated and translated as of December 31, 2007, which is the date of the last comprehensive recognition of the effects of inflation in the financial information in inflationary and non-inflationary economic environments. Beginning on January 1, 2008 and according to NIF B-10 “Effects of Inflation,” only inflationary economic environments have to recognize inflation effects. As described in Note 4 a), since 2008 the Company has operated in a non-inflationary economic environment in Mexico. Figures as of December 31, 2008 and 2007 are presented as they were reported in last year; as a result figures have not been comprehensively restated as required by NIF B-10 for reporting entities that operate in non-inflationary economic environments.
The consolidated financial statements as of December 31, 2008 present certain reclassifications for comparable purpose (see Note 4 j). Additionally, the amount presented as an account receivable with MolsonCoors as of December 31, 2008 related to Kaiser’s contingencies indemnities, which was presented originally offset of loss contingencies within contingencies and other liabilities in the consolidated balance sheet, has been reclassified to other assets for comparable purposes.
The results of operations of businesses acquired by FEMSA are included in the consolidated financial statements since the date of acquisition. As a result of certain acquisitions (see Note 5), the consolidated financial statements are not comparable to the figures presented in prior years.
The accompanying consolidated financial statements and its notes were approved for issuance by the Company’s Chief Executive Officer and Chief Financial Officer on June 25, 2010 and subsequent events have been considered through that date.
On January 1, 2009, 2008 and 2007 several Mexican FRS came into effect. Such changes and their application are described as follows:
In 2009, the Company adopted NIF B-7 “Business Combinations,” which is an amendment to the previous Bulletin B-7 “Business Acquisitions.” NIF B-7 establishes general rules for recognizing the fair value of net assets of businesses acquired as well as the fair value of noncontrolling interests, at the purchase date. This statement differs from the previous Bulletin B-7 in the following: a) To recognize all assets and liabilities acquired at their fair value, including the noncontrolling interest based on the acquirer accounting policies, b) acquisition-related costs and restructuring expenses should not be part of the purchase price, and c) changes to tax amounts recorded in acquisitions must be recognized as part of the income tax provision. This pronouncement was applied prospectively to business combinations for which the acquisition date is on or after January 1, 2009.
NIF C-7 “Investments in Associates and Other Permanent Investments,” establishes general rules of accounting recognition for the investments in associated and other permanent investments not jointly or fully controlled or that are significantly influenced by an entity. This pronouncement includes guidance to determine the existence of significant influence. Previous Bulletin B-8 “Consolidated and combined financial statements and assessment of permanent share investments,” defined that permanent share investments were accounted for by the equity method if the entity held 10% or more of its outstanding shares. NIF C-7 establishes that permanent share investments should be accounted for by equity method if: a) an entity holds 10% or more of a public entity, b) an entity holds 25% or more of a non-public company, or c) an entity has significant influence in its investment as defined in NIF C-7. The Company adopted NIF C-7 on January 1, 2009, and its adoption did not have a significant impact in its consolidated financial results.
In 2009, the Company adopted NIF C-8 “Intangible Assets” which is similar to previous Bulletin C-8 “Intangible Assets.” NIF C-8, establishes the rules of valuation, presentation and disclosures for the initial and subsequent recognition of intangible assets that are acquired either individually, through acquisition of an entity, or generated internally in the course of the entity’s operations. This NIF considers intangible assets as non-monetary items, broadens the criteria of identification to include not only if they are separable (asset could be sold, transferred or used by the entity) but also whether they come from contractual or legal rights. NIF C-8 establishes that preoperative costs capitalized before this standard went into effect have intangible assets characteristics, otherwise preoperative costs must be expensed as incurred. The impact of adopting NIF C-8 was a Ps. 182, net of deferred income tax, regarding prior years preoperative costs that did not have intangible asset characteristics, charge to retained earnings in the consolidated financial statements and is presented as a change in accounting principle in the consolidated statements of changes in stockholders’ equity.
In 2009, the Company adopted NIF D-8 “Share-Based Payments” which establishes the recognition of share-based payments. When an entity purchases goods or pays for services with equity instruments, the NIF requires the entity to recognize those goods and services at fair value and the corresponding increase in equity. If the entity cannot determine the fair value of goods and services, it should determine it using an indirect method, based on fair value of the equity instruments. This pronouncement substitutes the supplementary use of IFRS 2 “Share-Based Payments.” The adoption of NIF D-8 did not impact the Company’s financial statements.
NIF B-8 “Consolidated and Combined Financial Statements,” issued in 2008 amends Bulletin B-8 “Consolidated and Combined Financial Statements and Assessment of Permanent Share Investments.” Prior Bulletin B-8 based its consolidation principle mainly on ownership of the majority voting capital stock. NIF B-8 differs from previous Bulletin B-8 in the following: a) defines control as the power to govern financial and operating policies, b) establishes that there are other facts, such as contractual agreements that have to be considered to determine if an entity exercises control or not, c) defines “Specific-Purpose Entity” (“SPE”), as those entities that are created to achieve a specific purpose and are considered within the scope of this pronouncement, d) establishes new terms as “controlling interest” instead of “majority interest” and “noncontrolling interest” instead “minority interest,” and e) confirms that noncontrolling interest must be assessed at fair value at the subsidiary acquisition date. NIF B-8 shall be applied prospectively, beginning on January 1, 2009 (see Note 26 a).
In 2008, the Company adopted NIF B-2 “Statement of Cash Flows.” As established in NIF B-2, the Consolidated Statement of Cash Flows is presented as part of these financial statements for the years ended December 31, 2009 and 2008. For the year ended December 31, 2007, NIF B-2 requires the presentation of the Statement of Changes in Financial Position which is not comparable to the Statement of Cash Flows. The adoption of NIF B-2 also resulted in several complementary disclosures not previously required.
In 2008, the Company adopted NIF B-10 “Effects of Inflation.” Before 2008, the Company restated prior year financial statements to reflect the impact of current period inflation for comparability purposes.
NIF B-10 establishes two types of inflationary environments: a) Inflationary Economic Environment; this is when cumulative inflation of the three preceding years is 26% or more. In such case, inflation effects should be recognized in the financial statements by applying the integral method as described in NIF B-10; the recognized restatement effects for inflationary economic environments is made starting in the period that the entity becomes inflationary; and b) Non-Inflationary Economic Environment; this is when cumulative inflation of the three preceding years is less than 26%. In such case, no inflationary effects should be recognized in the financial statements, keeping the recognized restatement effects until the last period in which the inflationary accounting was applied.
In order to reverse the effects of inflationary accounting, NIF B-10 establishes that the results of holding non-monetary assets (RETANM) of previous periods should be reclassified in retained earnings. On January 1, 2008, the amount of RETANM reclassified in retained earnings was Ps. 6,070 (see Consolidated Statements of Changes in Stockholders’ Equity).
Through December 31, 2007, the Company accounted for inventories at replacement cost. As a result of NIF B-10 adoption, beginning in 2008, the Company carries out the inventories valuation based on valuation methods described in Bulletin C-4 “Inventories.” Inventories from Subholding Companies that operate in inflationary environments are restated using inflation factors. The change in accounting for inventories impacted the consolidated income statement, through an increase to cost of sales of Ps. 350 as of December 31, 2008.
In addition, NIF B-10 eliminates the restatement of imported equipment by applying the inflation factors and exchange rate of the country where the asset was purchased. Beginning in 2008, these assets are recorded using the exchange rate of the acquisition date. Subholding Companies that operate in inflationary environments should restate imported equipment using the inflation factors of the country where the asset is acquired. The change in this methodology did not significantly impact the consolidated financial statements of the Company.
NIF B-15 went into effect in 2008 and incorporates the concepts of recording currency, functional currency and reporting currency, and establishes the methodology to translate financial information of a foreign entity, based on those terms. Additionally, this rule is aligned with NIF B-10, which defines translation procedures of financial information from subsidiaries that operate in inflationary and non-inflationary environments. Prior to the application of this rule, translation of financial information from foreign subsidiaries was according to inflationary environments methodology. The adoption of this pronouncement is prospective and did not impact the consolidated financial statements of the Company (see Note 3).
The Company adopted NIF D-3 in 2008, which eliminates the recognition of the additional liability which resulted from the difference between obligations for accumulated benefits and the net projected liability. On January 1, 2008, the additional liability derecognized amounted to Ps. 1,510, from which Ps. 948 corresponds to the intangible asset and Ps. 354 to the controlling cumulative other comprehensive income, net from its deferred tax of Ps. 208.
Through 2007, the labor costs of past services of severance indemnities and pension and retirement plans were amortized within the remaining labor life of employees. Beginning in 2008, NIF D-3 establishes a maximum five-year period to amortize the initial balance of the labor costs of past services of pension and retirement plans and the same amortization period for the labor cost of past service of severance indemnities, previously defined by Bulletin D-3 “Labor Liabilities” as unrecognized transition obligation and unrecognized prior service costs.
As a result, the adoption of NIF D-3 increased the amortization of prior service costs of severance indemnities by Ps. 45 in 2008 compared to 2007. This accounting change did not impact prior service cost of pension and retirement plans amortization since the remaining amortization period as of the adoption date was already five years or less. For the years ended December 31, 2009, 2008 and 2007, labor costs of past services amounted to Ps. 204, Ps. 221 and Ps. 146, respectively; and were recorded within the operating income (see Note 15).
During 2007, actuarial gains and losses of severance indemnities were amortized during the personnel’s average labor life. Beginning in 2008, actuarial gains and losses of severance indemnities are registered in the operating income of the year they were generated and the balance of unrecognized actuarial gains and losses as of January 1, 2008 was recorded in other expenses (see Note 18) and amounted to Ps. 198.
In 2007, NIF B-3 “Income Statement” went into effect. NIF B-3 establishes generic standards for presenting and structuring the statement of income, minimum content requirements and general disclosure standards. Additionally, statutory employee profit sharing (“PTU”) should be presented within other expenses pursuant to Mexican FRS Interpretation No. 4.
In 2007, the Company adopted NIF D-6. This standard establishes that the comprehensive financing result generated by borrowings obtained to finance investment projects must be capitalized as part of the cost of long-term assets when certain conditions are met and amortized over the estimated useful life of the related asset. As of December 31, 2009 the comprehensive financing result capitalized regarding long-term assets amounted to Ps. 145. In 2008 and 2007, the application of this standard did not significantly impact the Company’s financial information.
Note 3. Foreign Subsidiary Incorporation.
The accounting records of foreign subsidiaries are maintained in local currency and in accordance with local accounting principles of each country. For incorporation into the Company’s consolidated financial statements, each foreign subsidiary’s individual financial statements are adjusted to Mexican FRS, and beginning in 2008, translated into Mexican pesos, as described as follows:
For inflationary economic environments, the inflation effects of the origin country are recognized, and subsequently translated into Mexican pesos using the year-end exchange rate for the balance sheets and income statements; and
For non-inflationary economic environments, assets and liabilities are translated into Mexican pesos using the period-end exchange rate, stockholders’ equity is translated into Mexican pesos using the historical exchange rate, and the income statement is translated using the average exchange rate of each month.
Country Functional / Recording Currency Mexico Guatemala Costa Rica Panama Colombia Nicaragua Argentina Venezuela(2) Brazil Local Currencies to Mexican Pesos Average Exchange
Rate for Exchange Rate as of December 31 2009 2008 2009 2008 2007(1) Mexican peso Ps. 1.00 Ps. 1.00 Ps. 1.00 Ps. 1.00 Ps. 1.00 Quetzal 1.66 1.47 1.56 1.74 1.42 Colon 0.02 0.02 0.02 0.02 0.02 U.S. dollar 13.52 11.09 13.06 13.54 10.87 Colombian peso 0.01 0.01 0.01 0.01 0.01 Cordoba 0.67 0.57 0.63 0.68 0.57 Argentine peso 3.63 3.50 3.44 3.92 3.45 Bolivar 6.31 5.20 6.07 6.30 5.05 Reai 6.83 6.11 7.50 5.79 6.13
Prior to the adoption of NIF B-10 in 2008, translation of financial information from all foreign subsidiaries was according to inflationary environments methodology described above.
The variations in the net investment in foreign subsidiaries generated by exchange rate fluctuation are included in the cumulative translation adjustment, which is recorded in stockholders’ equity as part of cumulative other comprehensive income (loss).
Beginning in 2003, the government of Venezuela established a fixed exchange rate control of 2.150 bolivars per U.S. dollar, which is the Company’s cross-currency rate used to translate the financial statements of its Venezuelan subsidiaries. The Company has operated under exchange controls in Venezuela since 2003 that affect its ability to remit dividends abroad or make payments other than in local currencies and that may increase the real price to us of raw materials purchased in local currency.
Intercompany financing balances with foreign subsidiaries are considered as long-term investments, since there is no plan to pay such financing in the foreseeable future. Monetary position and exchange rate fluctuation regarding this financing are recorded in equity as part of cumulative translation adjustment, in cumulative other comprehensive income (loss).
The translation of assets and liabilities denominated in foreign currencies into Mexican pesos is for consolidation purposes and does not indicate that the Company could realize or settle the reported value of those assets and liabilities in Mexican pesos. Additionally, this does not indicate that the Company could return or distribute the reported Mexican peso value equity to its shareholders.
Note 4. Significant Accounting Policies.
The Company’s accounting policies are in accordance with Mexican FRS, which require that the Company’s management make certain estimates and use certain assumptions to determine the valuation of various items included in the consolidated financial statements. The Company’s management believes that the estimates and assumptions used were appropriate as of the date of these consolidated financial statements. However actual results are subject to future events and uncertainties, which could materially impact the Company’s actual performance.
The significant accounting policies are as follows:
In 2009 and 2008, the Company recognizes the effects of inflation in the financial information of its subsidiaries that operate in inflationary economic environments (when cumulative inflation of the three preceding years is 26% or more), through the integral method, which consists of (see Note 2 g):
Using inflation factors to restate non-monetary assets such as inventories, fixed assets, intangible assets, including related costs and expenses when such assets are consumed or depreciated;
Applying the appropriate inflation factors to restate capital stock, additional paid-in capital and retained earnings by the necessary amount to maintain the purchasing power equivalent in Mexican pesos on the dates such capital was contributed or income was generated up to the date these consolidated financial statements are presented; and
Including in the Comprehensive Financing Result the gain or loss on monetary position (see Note 4 t).
The Company restates the financial information of its subsidiaries that operate in inflationary economic environments using the consumer price index of each country.
The operations of the Company are classified as follows considering the cumulative inflation of the three preceding years of 2009. The following classification was also applied for the 2008 period:
Inflation Rate 2009 | Cumulative Inflation 2008-2006 | Type of Economy | ||||||
Mexico | 3.6 | % | 15.0 | % | Non-Inflationary | |||
Guatemala(1) | (0.3 | )% | 25.9 | % | Non-Inflationary | |||
Colombia | 2.0 | % | 18.9 | % | Non-Inflationary | |||
Brazil | 4.1 | % | 15.1 | % | Non-Inflationary | |||
Panama | 1.9 | % | 16.0 | % | Non-Inflationary | |||
Venezuela | 25.1 | % | 87.5 | % | Inflationary | |||
Nicaragua | 0.9 | % | 45.5 | % | Inflationary | |||
Costa Rica | 4.0 | % | 38.1 | % | Inflationary | |||
Argentina | 7.7 | % | 27.8 | % | Inflationary |
Cash and Cash Equivalents
Cash consists of non-interest bearing bank deposits. Cash equivalents consist principally of short-term bank deposits and fixed-rate investments with original maturities of three months or less recorded at its acquisition cost plus interest income not yet received, which is similar to listed market prices. As of December 31, 2009 and 2008, cash equivalents amounted to Ps. 10,365 and Ps. 4,585, respectively.
Marketable Securities
Management determines the appropriate classification of debt securities at the time of purchase and reevaluates such designation as of each balance sheet. Marketable securities are classified as available-for-sale. Available-for-sale securities are carried at fair value, with the unrealized gains and losses, net of tax, reported in other comprehensive income. Interest and dividends on securities classified as available-for-sale are included in investment income. The fair values of the investments are readily available based on quoted market prices. The following is a detail of available-for-sale securities.
December 31, 2009 | Amortized Cost | Gross Unrealized Gain | Fair Value | ||||||
Debt securities | Ps. | 2,001 | Ps. | 112 | Ps. | 2,113 |
Allowance for doubtful accounts is based on an evaluation of the aging of the receivable portfolio and the economic situation of the Company’s clients, as well as the Company’s historical loss rate on receivables and the economic environment in which the Company operates. The carrying value of accounts receivable approximates its fair value as of both December 31, 2009 and 2008.
The operating segments of the Company use inventory costing methodologies provided by Bulletin C-4 “Inventories” to value their inventories, such as average cost in FEMSA Cerveza and Coca-Cola FEMSA and retail method in FEMSA Comercio. Advances to suppliers of raw materials are included in the inventory account.
Cost of sales based on average cost is determined based on the average amount of the inventories at the time of sale. Cost of sales includes expenses related to raw materials used in the production process, labor cost (wages and other benefits), depreciation of production facilities, equipment and other costs such as fuel, electricity, breakage of returnable bottles in the production process, equipment maintenance, inspection and plant transfer costs.
Other current assets are comprised of payments for services that will be received over the next 12 months and the fair market value of derivative financial instruments with maturity dates of less than one year (see Note 4 u).
Prepaid expenses principally consist of advertising, promotional, leasing and insurance expenses, and are recognized in the income statement when the services or benefits are received.
Advertising costs consist of television and radio advertising airtime paid in advance, and are generally amortized over a 12-month period based on the transmission of the television and radio spots. The related production costs are recognized in income from operations the first time the advertising is broadcasted.
Promotional costs are expensed as incurred, except for those promotional costs related to the launching of new products or presentations before they are on the market. These costs are recorded as prepaid expenses and amortized over the period during which they are estimated to increase sales of the related products or container presentations to normal operating levels, which is generally no longer than one year.
Additionally, as of December 31, 2009 and 2008, the Company has restricted cash which is pledged as collateral of accounts payable in different currencies as follows. The restricted cash is presented as part of other current assets due to its short-term nature.
2009 | 2008 | |||||
Venezuelan bolivars | Ps. | 161 | Ps. | 337 | ||
Mexican pesos | 31 | 134 | ||||
Brazilian reais | 111 | 54 | ||||
Ps. | 303 | Ps. | 525 | |||
Non-returnable bottles and cases are recorded in the results of operations at the time of product sale. Returnable bottles and cases are recorded at acquisition cost. There are two types of returnable bottles and cases:
Those that are in the Company’s control within its facilities, plants and distribution centers; and
Those that have been placed in the hands of customers, but still belong to the Company.
Breakage of returnable bottles and cases within plants and distribution centers is recorded as an expense as it is incurred. For the years ended December 31, 2009, 2008 and 2007, breakage expense amounted to Ps. 903, Ps. 782 and Ps. 850, respectively. The Company estimates that breakage expense of returnable bottles and cases in plants and distribution centers is similar to the depreciation calculated on an estimated useful life of approximately five years for returnable beer bottles, four years for returnable soft drinks glass bottles and plastic cases, and 18 months for returnable soft drink plastic bottles.
Returnable bottles and cases that have been placed in the hands of customers are subject to an agreement with a retailer pursuant to which the Company retains ownership. These bottles and cases are monitored by sales personnel during periodic visits to retailers and any breakage identified is charged to the retailer. Bottles and cases that are not subject to such agreements are expensed when placed in the hands of retailers.
The Company’s returnable bottles and cases in the market and for which a deposit from customers has been received are presented net of such deposits, and the difference between the cost of these assets and the deposits received is depreciated according to their useful lives.
Investments in shares of associated companies where the Company holds 10% or more of a public company, 25% or more of a non-public company, or exercises significant influence according to NIF C-7 (see Note 2 b), are initially recorded at their acquisition cost and are subsequently accounted for by the equity method. Investments in affiliated companies in which the Company does not have significant influence are recorded at acquisition cost and restated using the consumer price index if that entity operates in an inflationary environment.
Property, plant and equipment are initially recorded at their cost of acquisition and/or construction. The comprehensive financing result generated to fund long-term assets investment is capitalized as part of the total acquisition cost. As of December 31, 2009, the Company has capitalized Ps. 145 based on a capitalization weighted average rate of 8.08% for long-term assets investments that require more than the operating cycle of the Company to get ready for its intended use. As of December 31, 2008 and 2007, the capitalization of the comprehensive financing result did not have a significant impact in the consolidated financial statements. Major maintenance costs are capitalized as part of total acquisition cost. Routine maintenance and repair costs are expensed as incurred.
Investments in progress consist of long-lived assets not yet in service, in other words, that are not yet used for the purpose that they were bought, built or developed. The Company expects to complete those investments during the following 12 months.
Depreciation is computed using the straight-line method over acquisition cost, reduced by their residual values. The Company estimates depreciation rates, considering the estimated remaining useful lives of the assets.
The estimated useful lives of the Company’s principal assets are as follows:
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Other assets represent payments whose benefits will be received in future years and mainly consist of the following:
Agreements with customers for the right to sell and promote the Company’s products during certain periods of time, which are considered monetary assets and amortized under two methods, in accordance with the terms of such agreements:
Actual volume method, which amortizes the proportion of the volume actually sold to the retailer over the volume target (approximately 85% of the agreements of FEMSA Cerveza are amortized on this basis); and
Straight-line method, which amortizes the asset over the life of the contract (the remaining 15% of the agreements of FEMSA Cerveza and 100% of the agreements of Coca-Cola FEMSA are amortized on this basis).
In addition, for agreements amortized based on the actual volume method, the Company periodically compares the amortization calculated based on the actual volume method against the amortization that would have resulted under the straight-line method and records a provision to the extent that the recorded amortization is less than what would have resulted under the straight-line method. The amortization is recorded reducing net sales, which during years ended December 31, 2009, 2008 and 2007, amounted to Ps. 1,889, Ps. 1,477 and Ps. 1,360, respectively.
Leasehold improvements are amortized using the straight-line method, over the shorter of the useful life of the assets or a term equivalent to the lease period. The amortization of leasehold improvements as of December 31, 2009, 2008 and 2007 were Ps. 710, Ps. 668 and Ps. 581, respectively.
Intangible assets represent payments whose benefits will be received in future years. These assets are classified as either intangible assets with a finite useful life or intangible assets with an indefinite useful life, in accordance with the period over which the Company is expected to receive the benefits.
Intangible assets with finite useful lives are amortized and mainly consist of:
Information technology and management systems costs incurred during the development stage which are currently in use. Such amounts were capitalized and then amortized using the straight-line method over four years. Expenses that do not fulfill the requirements for capitalization are expensed as incurred.
Other computer systems cost in the development stage, not yet in use. Such amounts are capitalized as they are expected to add value such as income or cost savings in the future. Such amounts will be amortized on a straight-line basis over their estimated useful life after they are placed in service.
Long-term alcohol licenses are amortized using the straight-line method. In 2009, FEMSA Cerveza reviewed the expected useful life of long-term alcohol licenses and changed its estimation from 6 to 15 years. The net effect of this change is a decrease in amortization of Ps. 84 in the consolidated financial results as of December 31, 2009. Beginning in 2009, long-term alcohol licenses are presented as part of intangible assets with finite useful life. Prior year balances have been reclassified from other assets to intangible assets for comparable purposes.
Through 2008, start-up expenses, which represented costs incurred prior to the opening of OXXO stores with the characteristics of an intangible asset internally developed. Such amounts were amortized on a straight-line basis in accordance with the terms of the lease contract. In 2009, according to NIF C-8, these amounts were reclassified in retained earnings (see Note 2 c).
Intangible assets with indefinite lives are not amortized and are subject to annual impairment tests or more frequently if necessary. These assets are recorded in the functional currency of the subsidiary in which the investment was made and are subsequently translated into Mexican pesos applying the closing rate of each period. Where inflationary accounting is applied, the intangible assets are restated applying inflation factors of the country of origin and then translated into Mexican pesos at the year-end exchange rate. The Company’s intangible assets with indefinite lives mainly consist of:
Coca-Cola FEMSA’s rights to produce and distribute Coca-Cola trademark products in the territories acquired. These rights are contained in agreements that are standard contracts that The Coca-Cola Company has with its bottlers. There are four bottler agreements for Coca-Cola FEMSA’s territories in Mexico; two expire in June 2013, and the other two in May 2015. The bottler agreement for Argentina expires in September 2014, for Brazil, will expire in April 2014, in Colombia in June 2014, in Venezuela in August 2016, in Guatemala in March 2015, in Costa Rica in September 2017, in Nicaragua in May 2016 and in Panama in November 2014. All of the Company’s bottler agreements are renewable for ten-year terms, subject to the right of each party to decide not to renew any of these agreements. In addition, these agreements generally may be terminated in the case of material breach. Termination would prevent Coca-Cola FEMSA from selling Coca-Cola trademark beverages in the affected territory and would have an adverse effect on its business, financial conditions, results of operations and prospects.
Trademarks and distribution rights, recognized as a result of the acquisition of the 30% of FEMSA Cerveza and payments made by FEMSA Cerveza in the acquisitions of previously granted franchises; and
Trademarks recognized as a result of the acquisition of Kaiser.
Goodwill represents the difference between the price paid and the fair value of the shares and/or net assets acquired not directly associated with another intangible asset. Goodwill is recorded in the functional currency of the subsidiary in which the investment was made and then goodwill is translated to Mexican pesos using the year-end exchange rate. Where inflationary accounting is applied, goodwill is restated by applying inflation factors of the country of origin and translated to Mexican pesos using the year-end exchange rate. As of December 31, 2009, and 2008 the Company has goodwill resulting from the Kaiser acquisition which amounted to Ps. 4,937 and Ps. 3,821, respectively.
The Company reviews the carrying value of its long-lived assets and goodwill for impairment and determines whether impairment exists, by comparing the book value of the assets with its fair value which is calculated using recognized methodologies. In case of impairment, the Company records the resulting fair value.
For depreciable and amortizable long-lived assets, such as property, plant and equipment and certain other definite long –lived assets, the Company performs tests for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or group of assets may not be recoverable through their expected future cash flows.
For indefinite life intangible assets, such as distribution rights and trademarks, the Company tests for impairment on an annual basis and whenever certain circumstances indicate that the carrying amount of those intangible assets exceeds its implied fair value calculated using recognized methodologies consistent with them.
For goodwill, the Company tests for impairment on an annual basis and whenever certain circumstances indicate that the carrying amount of the reporting unit might exceed its implied fair value.
Impairment charges regarding long-lived assets and goodwill are recognized in other expenses.
For the year ended December 31, 2009, the Company has recorded in other expenses Ps. 25 regarding an indefinite life intangible asset that is not expected to generate cash flows in the future. In 2008 and 2007, the Company did not record any impairment regarding indefinite life intangible assets and goodwill.
The Coca-Cola Company participates in certain advertising and promotional programs as well as in Coca-Cola FEMSA’s refrigeration equipment and returnable bottles investment program. The contributions received for advertising and promotional incentives are included as a reduction of selling expenses. The contributions received for the refrigeration equipment and returnable bottles investment program are recorded as a reduction of the investment in refrigeration equipment and returnable bottles. Total contributions received were Ps. 1,945, Ps. 1,995 and Ps. 1,582 during the years ended December 31, 2009, 2008 and 2007, respectively.
Labor liabilities include obligations for pension and retirement plans, seniority premiums, postretirement medical services and severance indemnity liabilities other than restructuring, all based on actuarial calculations, using the projected unit credit method. Costs related to compensated absences, such as vacations and vacation premiums, are recorded on a cumulative basis, in accounts payable.
Labor liabilities are considered to be non-monetary and are determined using long-term assumptions. The yearly cost of labor liabilities is charged to income from operations and labor cost of past services is recorded as expenses over the period during which the employees will receive the benefits of the plan.
Certain subsidiaries of the Company have established funds for the payment of pension benefits and postretirement medical services through irrevocable trusts of which the employees are named as beneficiaries.
The Company recognizes a liability for a loss when it is probable that certain effects related to past events, would materialize and could be reasonably estimated. These events and its financial impact are disclosed as loss contingencies in the consolidated financial statements. The Company does not recognize an asset for a gain contingency unless it is certain that will be collected.
The Company discloses all its commitments regarding material long-lived assets acquisitions, services agreements that exceed the immediate need of the Company and all contractual obligations (see Note 24 g).
The Company recognizes income according to International Accounting Standard 18 “Revenues” (IAS 18) based on NIF A-8 “Supplement” which allows use of International Standards as supplementary when Mexican FRS does not provide guidance on a specific subject.
Revenue is recognized in accordance with stated shipping terms, as follows:
For Coca-Cola FEMSA and FEMSA Cerveza domestic sales, upon delivery to the customer and once the customer has taken ownership of the goods. Domestic revenues are defined as the sales generated by the Company for sales realized in the country where the subsidiaries operate. Domestic revenues represented 96% for the years ended December 31, 2009, 2008 and 97% for the year ended December 31, 2007, respectively;
For FEMSA Cerveza export sales, upon shipment of goods to customers (FOB shipping point), and transfer of ownership and risk of loss; and
For FEMSA Comercio retail sales, net revenues are recognized when the product is delivered to customers, and customers take possession of products.
Net sales reflect units delivered at list prices reduced by promotional allowances, discounts and the amortization of the agreements with customers to obtain the rights to sell and promote the products of the Company.
Additionally, the Company recognizes deferred income on a straight-line basis over the specified period of an agreement, or based on sales volume related to that agreement. As of December 31 2009 and 2008, the Company has recognized deferred income of Ps. 209 and Ps. 169 in the consolidated income statement as a result of the distribution agreement with Heineken USA.
During 2007 and 2008, Coca-Cola FEMSA sold certain of its private label brands to The Coca-Cola Company. Because Coca-Cola FEMSA has significant continuing involvement with these brands, (i.e. it continues producing and selling these products), proceeds received from The Coca-Cola Company were initially deferred and are being amortized against the related costs of future product sales over the estimated period of such sales. The balance of unearned revenues as of December 31, 2009 and 2008 amounted to Ps. 616 and Ps. 571, respectively. The short-term portions of such amounts are presented as other current liabilities, amounted Ps. 203 and Ps. 139 at December 31, 2009 and 2008, respectively.
Operating expenses are comprised of administrative and selling expenses. Administrative expenses include labor costs (salaries and other benefits) of employees not directly involved in the sale of the Company’s products, as well as professional service fees, depreciation of office facilities and amortization of capitalized information technology system implementation costs.
Selling expenses include:
Distribution: labor costs (salaries and other benefits), outbound freight costs, warehousing costs of finished products, breakage of returnable bottles in the distribution process, depreciation and maintenance of trucks and other distribution facilities and equipment. For the years ended December 31, 2009, 2008 and 2007, these distribution costs amounted to Ps. 15,080, Ps. 12,135 and Ps. 10,601, respectively;
Sales: labor costs (salaries and other benefits) and sales commissions paid to sales personnel; and
Marketing: labor costs (salaries and other benefits), promotional expenses and advertising costs.
Other expenses include Employee Profit Sharing (“PTU”), participation in associated companies, gains or losses on sales of fixed assets, impairment of long-lived assets, contingencies reserves as well as their subsequent interest and penalties, severance payments derived from restructuring programs and all other non-recurring expenses related to activities different from the main activities of the Company and that are not recognized as part of the comprehensive financing result.
PTU is applicable to Mexico and Venezuela. In Mexico, employee profit sharing is computed at the rate of 10% of the individual company taxable income, except for considering depreciation of historical rather than restated values, foreign exchange gains and losses, which are not included until the asset is disposed of or the liability is due and other effects of inflation are also excluded. In Venezuela, employee profit sharing is computed at a rate equivalent to 15% of after tax income, and it is no more than four months of salary.
Through 2007, deferred PTU had been recorded when non-recurring temporary differences between the accounting income for the year and the bases used for Mexican employee profit sharing resulted. Since 2008, the Company has not recorded a provision for deferred employee profit sharing because according to the assets and liabilities method described in NIF D-3, the Company does not expect relevant deferred items to materialize. As a result, the Company has not recognized deferred employee profit sharing as of either December 31, 2009 or 2008.
Severance indemnities resulting from a restructuring program and associated with an ongoing benefit arrangement are charged to other expenses on the date when the decision to dismiss personnel under a formal program or for specific causes is taken.
Income tax is charged to results as incurred as are deferred income taxes. For purposes of recognizing the effects of deferred income taxes in the consolidated financial statements, the Company utilizes both prospective and retrospective analysis over the medium term when more than one tax regime exists per jurisdiction and recognizes the amount based on the tax regime it expects to be subject to, in the future. Deferred income taxes assets and liabilities are recognized for temporary differences resulting from comparing the book and tax values of assets and liabilities plus any future benefits from tax loss carryforwards. Deferred income tax assets are reduced by any benefits for which there is more likely than not that they are not realizable.
The balance of deferred taxes is comprised of monetary and non-monetary items, based on the temporary differences from which it is derived. Deferred taxes are classified as a long-term asset or liability, regardless of when the temporary differences are expected to reverse.
The deferred tax provision to be included in the income statement is determined by comparing the deferred tax balance at the end of the year to the balance at the beginning of the year, excluding from both balances any temporary differences that are recorded directly in stockholders’ equity. The deferred taxes related to such temporary differences are recorded in the same stockholders’ equity account that gave rise to them.
Comprehensive financing result includes interest, foreign exchange gain and losses, market value gain or loss on ineffective portion of derivative financial instruments and gain or loss on monetary position, except for those amounts capitalized and those that are recognized as part of the cumulative comprehensive income (loss). The components of the Comprehensive Financing Result are described as follows:
Interest: Interest income and expenses are recorded when earned or incurred, respectively, except for interest capitalized on the financing of long-term assets;
Foreign Exchange Gains and Losses: Transactions in foreign currencies are recorded in local currencies using the exchange rate applicable on the date they occur. Assets and liabilities in foreign currencies are adjusted to the year-end exchange rate, recording the resulting foreign exchange gain or loss directly in the income statement, except for the foreign exchange gain or loss from the intercompany financing foreign currency denominated balances that are considered to be of a long-term investment nature and the foreign exchange gain or loss from the financing of long-term assets (see Note 3);
Gain or Loss on Monetary Position: Since 2008, the gain or loss on monetary position results from the changes in the general price level of monetary accounts of those subsidiaries that operate in inflationary environments, which is determined by applying inflation factors of the country of origin to the net monetary position at the beginning of each month and excluding the intercompany financing in foreign currency that is considered as long-term investment because of its nature (see Note 3), as well as the gain or loss on monetary position from long-term liabilities to finance long-term assets. Prior to 2008, gain or loss on monetary position was determined for all subsidiaries; and
Market Value Gain or Loss on Ineffective Portion of Derivative Financial Instruments: Represents the net change in the fair value of the ineffective portion of derivative financial instruments, the net change in the fair value of those derivate financial instruments that do not meet hedging criteria for accounting purposes; and the net change in the fair value of embedded derivative financial instruments.
The Company is exposed to different risks related to cash flows, liquidity, market and credit. As a result the Company contracts different derivative financial instruments in order to reduce its exposure to the risk of exchange rate fluctuations between the Mexican peso and other currencies, the risk of exchange rate and interest rate fluctuations associated with its borrowings denominated in foreign currencies and the exposure to the risk of fluctuation in the costs of certain raw materials.
The Company values and records all derivative financial instruments and hedging activities, including certain derivative financial instruments embedded in other contracts, in the balance sheet as either an asset or liability measured at fair value, considering quoted prices in recognized markets. If such instruments are not traded in a formal market, fair value is determined by applying techniques based upon technical models supported by sufficient, reliable and verifiable market data, recognized in the financial sector. Changes in the fair value of derivative financial instruments are recorded each year in current earnings or as a component of cumulative other comprehensive income (loss), based on the item being hedged and the ineffectiveness of the hedge.
As of December 31, 2009 and 2008, the balance in other current assets of derivative financial instruments was Ps. 81 and Ps. 1,591 (see Note 8), and in other assets Ps. 1,164 and Ps. 212 (see Note 12), respectively. The Company recognized liabilities regarding derivative financial instruments in other current liabilities of Ps. 868 and Ps. 3,089 (see Note 24 a), as of the end of December 31, 2009 and 2008, respectively, and other liabilities of Ps. 1,286 and Ps. 1,377 (see Note 24 b) for the same periods.
The Company designates its financial instruments as cash flow hedges at the inception of the hedging relationship, when transactions meet all hedging accounting requirements. For cash flow hedges, the effective portion is recognized temporarily in cumulative other comprehensive income (loss) within stockholders’ equity and subsequently reclassified to current earnings at the same time the hedged item is recorded in earnings. When derivative financial instruments do not
meet all of the accounting requirements for hedging purposes, the change in fair value is immediately recognized in net income. For fair value hedges, the changes in the fair value are recorded in the consolidated results in the period the change occurs as part of the market value gain or loss on ineffective portion of derivative financial instruments.
The Company identifies embedded derivatives that should be segregated from the host contract for purposes of valuation and recognition. When an embedded derivative is identified and the host contract has not been stated at fair value the embedded derivative is segregated from the host contract, stated at fair value and is classified as trading. Changes in the fair value of the embedded derivatives at the closing of each period are recognized in the consolidated results.
The cumulative other comprehensive income/loss represents the period net income as described in NIF B-3 “Income Statement,” plus the cumulative translation adjustment resulted from translation of foreign subsidiaries to Mexican pesos and the effect of unrealized gain/loss on cash flow hedges from derivative financial instruments.
2009 | 2008 | |||
Unrealized (loss) on cash flow hedges | Ps. (896) | Ps. (1,889) | ||
Cumulative translation adjustment | 2,894 | (826) | ||
Ps. 1,998 | Ps. (2,715) | |||
The changes in the cumulative translation adjustment were as follows:
2009 | 2008 | ||||
Initial balance | Ps. (826) | Ps. | (1,337) | ||
Conversion effect | 2,183 | (1,023) | |||
Foreign exchange effect from intercompany long-term loans | 1,537 | 1,534 | |||
Ending balance | Ps. 2,894 | Ps. | (826) |
The deferred income tax liability from the cumulative translation adjustment amounted to Ps. 592 and 1,709, respectively (see Note 23 d).
Provisions are recognized for obligations that result from a past event that will probably result in the use of economic resources and that can be reasonably estimated. Such provisions are recorded at net present values when the effect of the discount is significant. The Company has recognized provisions regarding income tax, contingencies and vacations in the consolidated financial statements.
The Company recognizes issuances of a subsidiary’s stock as a capital transaction. The difference between the book value of the shares issued and the amount contributed by the noncontrolling interest holder or a third party is recorded as additional paid-in capital.
Earnings per share are determined by dividing net controlling income by the average weighted number of shares outstanding during the period.
Note 5. Acquisitions.
Coca-Cola FEMSA and FEMSA Cerveza made certain business acquisitions that were recorded using the purchase method. The results of the acquired operations have been included in the consolidated financial statements since Coca-Cola FEMSA and FEMSA Cerveza obtained control of acquired businesses. Therefore, the consolidated income statements and the consolidated balance sheets are not comparable with previous periods. The statement of changes in financial position as of December 31, 2007 presents the effects of the acquisitions and incorporation of such operations by Coca-Cola FEMSA and FEMSA Cerveza, as a single line item within investing activities. The consolidated cash flows as of December 31, 2009 and 2008, show the acquired operations net of the cash related to those acquisitions.
The estimated fair value of the Brisa net assets acquired by Coca-Cola FEMSA is as follows:
| ||||
| ||||
| ||||
The results of operation of Brisa for the period from the acquisition through December 31, 2009 were not material to our consolidated results of operations.
The estimated fair value of the REMIL net assets acquired by Coca-Cola FEMSA is as follows:
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Employee benefits | 6 | |||
Provisions | 2 | |||
Deferred tax liabilities | 44 | |||
Bank overdraft | — | |||
Loans and borrowings (current) | 76 | |||
Tax liabilities (current) | 12 | |||
Trade and other current liabilities | 21 | |||
Liabilities assumed | 161 | |||
Total net identifiable assets | 81 | |||
| ||||||
Consideration transferred | 289 | |||||
Recognition indemnification receivable | (12 | ) | ||||
Non-controlling interests | (1 | ) | ||||
Net identifiable assets acquired | (81 | ) | ||||
Goodwill on acquisition | 195 | |||||
* | Amounts were converted into euros at the rate of EUR/NGN192.6782. Additionally, certain amounts provided in US dollar were converted into euros based on the following exchange rate EUR/USD 1.2903. |
The purchase price accounting for the acquired businesses is prepared on a final basis. The outcome indicates goodwill of EUR195 million. The derived goodwill includes synergies mainly related to the available production capacity.
Goodwill has been allocated to Nigeria in the Africa and Middle East region and is held in NGN. The rationale for the allocation is that the acquisition provides access to the Nigerian market: access to additional capacity, consolidate market share within a fast-growing market and improved profitability through synergy. The entire amount of goodwill is not expected to be tax deductible.
Between HEINEKEN and the Seller certain indemnifications were agreed on, that primarily relate to tax and legal matters existing at the date of acquisition. Our assessment of these contingencies indicates an indemnification receivable of EUR12 million that is considered an included element of the business combination. The purchase price for the acquired businesses was based on an estimate of the net debt and working capital position of the acquired businesses as at 11 January 2011 (the date of the completion of the acquisition). HEINEKEN and the Seller have determined the exact net debt and working capital position of the acquired businesses as at 11 January 2011 by reference to agreed accounting principles and there will be no adjustment to the final purchase price. Non-controlling interests are recognised based on their proportional interest in the net identifiable assets acquired of Champion, Benue and Life for a total of EUR1 million.
In this year acquisition-related costs of EUR1 million have been recognised in the income statement.
Heineken N.V. financial statements | Notes to the consolidated financial statements continued |
Acquisition of two breweries in Ethiopia
On 11 August 2011, HEINEKEN announced that it had acquired from the government of the Federal Democratic Republic of Ethiopia (‘Seller’) two breweries named Bedele and Harar (together referred to as the ‘acquired business’).
The acquired businesses contributed revenue of EUR13 million and results from operating activities of EUR1.5 million (EBIT) for the five-month period from 4 August 2011 to 31 December 2011. For the financial statements of HEINEKEN the additional 8 months would not have been material.
The following summarises the major classes of consideration transferred, and the recognised amounts of assets acquired and liabilities assumed at the acquisition date.
In millions of EUR* |
As of December 31, 2008, Coca-Cola FEMSA has recognized a loss of Ps. 45 as part of the income statement of Coca-Cola FEMSA related to REMIL results after its acquisition.Property, plant & equipment
27 |
Intangible assets
8 |
Inventories
Subsequent to the initial acquisition of Jugos del Valle by Administracion SAPI, Coca-Cola FEMSA offered to sell 30% of its interest in Administración SAPI to Coca-Cola bottlers in Mexico. During 2008, Coca-Cola FEMSA recorded investment in shares of 19.8% of the capital stock of Administración SAPI which represents the Coca-Cola FEMSA’s remaining investment after the sale of its 30.2% holding in Administración SAPI to other Coca-Cola bottlers. After this, Administration SAPI merged with Jugos del Valle, subsisting Jugos del Valle. As of December 31, 2008 the transaction was completed.
8 |
The following unaudited consolidated pro forma financial data represents the Company’s historical financial statements, adjusted to give effect to (i) the acquisition of REMIL mentioned in the preceding paragraphs; and (ii) certain accounting adjustments mainly related to depreciation of fixed assets of the acquired companies.
The results of operation of Brisa for both the years ended December 31, 2009 and 2008 were not material to the Company’s consolidated results of operations for those periods. Accordingly, pro forma 2009 and 2008 financial data considering the acquisition of Brisa as of January 1, 2008 has not been presented herein.
The unaudited pro forma adjustments assume that the acquisitions were made at the beginning of the year immediately preceding the year of acquisition and are based upon available informationTrade and other assumptions that management considers reasonable. The pro forma financial information data does not purport to represent what the effect on the Company’s consolidated operations would have been, had the transactions in fact occurred at the beginning of each year, nor are they intended to predict the Company’s future results of operations.receivables
Cash and cash equivalents
Assets acquired
FEMSA unaudited pro forma consolidated results for the years ended December 31, | ||||
2008 | 2007 | |||
Total revenues | Ps. 169,966 | Ps. 152,195 | ||
Income before taxes | 14,008 | 17,423 | ||
Controlling Interest Net income | 9,662 | 12,290 |
Note 6. Accounts Receivable.
2009 | 2008 | |||||||
Trade | Ps. | 9,506 | Ps. | 8,374 | ||||
Allowance for doubtful accounts | (930 | ) | (805 | ) | ||||
The Coca-Cola Company | 1,034 | 959 | ||||||
Notes receivable | 566 | 476 | ||||||
MolsonCoors | 368 | 255 | ||||||
Loans to employees | 125 | 86 | ||||||
Travel advances to employees | 111 | 65 | ||||||
Insurance claims | 86 | 97 | ||||||
Guarantee deposits | 76 | 60 | ||||||
Jugos del Valle(1) | 2 | 368 | ||||||
Other | 788 | 866 | ||||||
Ps. | 11,732 | Ps. | 10,801 | |||||
The changes in the allowance for doubtful accounts are as follows:
2009 | 2008 | 2007 | |||||||
Opening balance | Ps. 805 | Ps. 657 | Ps. 586 | ||||||
Provision for the year | 363 | 387 | 195 | ||||||
Write-off of uncollectible accounts | (269 | ) | (237 | ) | (98 | ) | |||
Translation of foreign currency effect | 31 | (2 | ) | (26 | ) | ||||
Ending balance | Ps. 930 | Ps. 805 | Ps. 657 | ||||||
Note 7. Inventories.
2009 | 2008 | |||||
Finished products | Ps. 6,963 | Ps. 5,506 | ||||
Raw materials | 5,980 | 6,183 | ||||
Spare parts | 932 | 786 | ||||
Advances to suppliers | 685 | 317 | ||||
Work in process | 456 | 395 | ||||
Allowance for obsolescence | (158 | ) | (122 | ) | ||
Ps. 14,858 | Ps. 13,065 | |||||
Note 8. Other Current Assets.
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2009 | 2008 | |||||
Long-lived assets available for sale | Ps. 373 | Ps. — | ||||
Advertising and deferred promotional expenses | 337 | 309 | ||||
Restricted cash | 303 | 525 | ||||
Advances to services suppliers | 253 | 73 | ||||
Prepaid leases | 131 | 124 | ||||
Agreements with customers | 118 | 136 | ||||
Derivative financial instruments | 81 | 1,591 | ||||
Short-term licenses | 32 | 23 | ||||
Prepaid insurance | 26 | 42 | ||||
Other | 112 | 237 | ||||
Ps. 1,766 | Ps. 3,060 | |||||
The advertising and deferred promotional expenses recorded in the consolidated income statements for the years ended December 31, 2009, 2008 and 2007 amounted to Ps. 6,587, Ps. 5,951 and Ps. 5,455, respectively.
Note 9. Investments in Shares.
Company | % Ownership | 2009 | 2008 | |||
Coca-Cola FEMSA: | ||||||
Jugos del Valle, S.A. de C.V.(1) (2) | 19.79% | Ps. 1,162 | Ps. 1,101 | |||
Sucos del Valle Do Brasil, LTDA(1) (2) (4) | 19.89% | 325 | — | |||
Mais Industria de Alimentos, LTDA(1) (2) (4) | 19.89% | 289 | — | |||
Holdfab Partiçipações, LTDA(1) (2) (4) | 33.05% | — | 359 | |||
Industria Envasadora de Querétaro, S.A. de C.V. (“IEQSA”)(1) (2) | 13.45% | 78 | 112 | |||
Industria Mexicana de Reciclaje, S.A. de C.V.(1) (2) | 35.00% | 76 | 79 | |||
Estancia Hidromineral Itabirito(1)(2) | 50.00% | 76 | — | |||
Beta San Miguel, S.A. de C.V. (“Beta San Miguel”)(3) | 2.54% | 69 | 69 | |||
KSP Partiçipações, S.A.(1) (2) | 38.74% | 88 | 62 | |||
Compañía de Servicios de Bebidas Refrescantes S.A. de C.V. (“Salesko”)(1) (2) | 26.00% | — | 7 | |||
Other | Various | 7 | 8 | |||
FEMSA Cerveza: | ||||||
Río Blanco Trust (waste water treatment plant)(1) (2) | 19.14% | 61 | 69 | |||
Affiliated companies of Kaiser(3) | Various | 25 | 19 | |||
Affiliated companies of FEMSA Cerveza(1) (2) | Various | 39 | 14 | |||
Other(3) | Various | 12 | 13 | |||
Other investments | Various | 37 | 53 | |||
Ps. 2,344 | Ps. 1,965 | |||||
Accounting method:
As of December 31, 2009, the Company indirectly owns 19.79% of Jugos del Valle through its subsidiary Coca-Cola FEMSA. The principal activities of Jugos del Valle is the production, distribution and marketing of fruit juices in Mexico and other countries. Coca-Cola FEMSA recognized other income of Ps. 4 regarding to its interest in Jugos del Valle which is accounted for by equity method.
The following is some relevant financial information from Jugos del Valle as of December 31, 2009 and 2008.
2009 | 2008 | |||||||
Total assets | Ps. | 6,961 | Ps. | 7,109 | ||||
Total liabilities | 1,092 | 1,551 | ||||||
Total stockholders’ equity | 5,869 | 5,558 | ||||||
2009 | 2008 | |||||||
Total revenues | Ps. | 5,052 | Ps. | 3,991 | ||||
Income before taxes | 59 | 265 | ||||||
Net income before discontinuing operations | 7 | 124 | ||||||
Discontinuing operations | 11 | 271 | ||||||
Net income | 18 | 395 | ||||||
Note 10. Property, Plant and Equipment.
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2009 | 2008 | |||||||
Land | Ps. | 8,417 | Ps. | 8,137 | ||||
Buildings, machinery and equipment | 98,713 | 90,800 | ||||||
Accumulated depreciation | (51,681 | ) | (46,203 | ) | ||||
Refrigeration equipment | 12,296 | 10,512 | ||||||
Accumulated depreciation | (8,099 | ) | (7,146 | ) | ||||
Investment in fixed assets in progress (see Note 4 h) | 4,523 | 4,296 | ||||||
Long-lived assets stated at net realizable value | 538 | 730 | ||||||
Other long-lived assets | 331 | 299 | ||||||
Ps. | 65,038 | Ps. | 61,425 | |||||
As of December 31, 2009, the Company has identified long-term assets investments of Ps. 1,742 that are not ready for their intended use and met the definition of qualified assets for comprehensive financing result capitalization, which amounted to Ps. 145. As of December 31, 2008 and 2007, the capitalization of the comprehensive financing result did not have a significant impact in the consolidated financial statements.
The Company has identified certain long-lived assets that are not strategic to the current and future operations of the business and are not being used, comprised of land, buildings and equipment, in accordance with an approved program for the disposal of certain investments. Such long-lived assets have been recorded at their estimated net realizable value without exceeding their acquisition cost, as follows:
2009 | 2008 | |||
Coca-Cola FEMSA | Ps. 288 | Ps. 394 | ||
FEMSA Cerveza | 208 | 291 | ||
FEMSA and others subsidiaries | 42 | 45 | ||
Ps. 538 | Ps. 730 | |||
Buildings | Ps. 182 | Ps. 359 | ||
Land | 174 | 237 | ||
Equipment | 182 | 134 | ||
Ps. 538 | Ps. 730 | |||
As a result of selling certain long-lived assets, the Company recognized a loss of Ps. 26 and gains of Ps. 4 and Ps. 127 for the years ended December 31, 2009, 2008 and 2007, respectively.
Long-lived assets that are available for sale have been reclassified from property, plant and equipment to other current assets. As of December 31, 2009, long-lived assets available for sale amounted to Ps. 373 (see Note 8). In 2008, long-lived assets that were not strategic did not meet available for sale characteristics.
Note 11. Intangible Assets.
2009 | 2008 | |||
Unamortized intangible assets: | ||||
Coca-Cola FEMSA: | ||||
Rights to produce and distribute Coca-Cola trademark products | Ps. 49,520 | Ps. 46,892 | ||
FEMSA Cerveza: | ||||
Trademarks and distribution rights | 11,357 | 11,391 | ||
Goodwill | 4,937 | 3,821 | ||
Kaiser trademarks | 927 | 716 | ||
Other | — | 287 | ||
Other unamortized intangible assets | 787 | 499 | ||
Ps. 67,528 | Ps. 63,606 | |||
Amortized intangible assets: | ||||
Systems in development costs | 2,068 | 597 | ||
Technology costs and management systems | 469 | 498 | ||
Alcohol licenses (see Note 4 j) | 982 | 804 | ||
Start-up expenses (see Note 2 c) | — | 253 | ||
Other | 134 | 102 | ||
Ps. 3,653 | Ps. 2,254 | |||
Total intangible assets | Ps. 71,181 | Ps. 65,860 | ||
The changes in the carrying amount of unamortized intangible assets are as follows:
2009 | 2008 | ||||
Beginning balance | Ps. 63,606 | Ps. 59,110 | |||
Acquisitions | 698 | 2,305 | |||
Impairment | (25 | ) | — | ||
Translation and restatement of foreign currency effect | 3,249 | 2,191 | |||
Ending balance | Ps. 67,528 | Ps. 63,606 | |||
The changes in the carrying amount of amortized intangible assets are as follows:
Investments | Amortization | |||||||||||
Accumulated at the Beginning of the Year | Additions | Accumulated at the Beginning of the Year | For the Year | Total | ||||||||
2009 | ||||||||||||
Systems in development costs | Ps. 597 | Ps. 1,471 | Ps. — | Ps. — | Ps. 2,068 | |||||||
Technology costs and management systems | 2,230 | 389 | (1,732 | ) | (418 | ) | 469 | |||||
Alcohol licenses(1) | 1,084 | 252 | (280 | ) | (74 | ) | 982 | |||||
2008 | ||||||||||||
Systems in development costs | Ps. — | Ps. 597 | Ps. — | Ps. — | Ps. 597 | |||||||
Technology costs and management systems | 2,093 | 137 | (1,504 | ) | (228 | ) | 498 | |||||
Alcohol licenses(1) | 719 | 365 | (144 | ) | (136 | ) | 804 | |||||
2007 | ||||||||||||
Technology costs and management systems | Ps. 1,892 | Ps. 201 | Ps. (1,159 | ) | Ps. (345 | ) | Ps. 589 | |||||
Alcohol licenses(1) | 402 | 317 | (66 | ) | (78 | ) | 575 |
The estimated amortization for intangible assets of definite life is as follows:
2010 | 2011 | 2012 | 2013 | 2014 | ||||||
Systems amortization | Ps. 473 | Ps. 467 | Ps. 442 | Ps. 390 | Ps. 377 | |||||
Alcohol licenses | 95 | 95 | 95 | 95 | 95 | |||||
Others | 17 | 17 | 17 | 17 | 17 |
Note 12. Other Assets.
2009 | 2008 | |||
Leasehold improvements-net | Ps. 5,463 | Ps. 4,930 | ||
Agreements with customers (see Note 4 i) | 4,075 | 4,060 | ||
Brazilian amnesty rights | 2,295 | — | ||
MolsonCoors | 1,431 | 2,144 | ||
Derivative financial instruments | 1,164 | 212 | ||
Guarantee Deposits | 1,138 | 324 | ||
Long-term accounts receivable | 760 | 549 | ||
Advertising and promotional expenses | 628 | 293 | ||
Tax credits | — | 185 | ||
Other | 778 | 1,431 | ||
Ps. 17,732 | Ps. 14,128 | |||
Long-term accounts receivables are comprised of Ps. 737 and Ps. 23 of principal and interests and are expected to be collected as follows:
2010 2011 2012 2013 2014 and thereafter Ps. 169 215 123 84 169 Ps. 760
Note 13. Balances and Transactions with Related Parties and Affiliated Companies.
On January 1, 2007, NIF C-13, “Related Parties,” came into effect. This standard broadens the concept of “related parties” to include: a) the overall business in which the reporting entity participates; b) close family members of key officers; and c) any fund created in connection with a labor related compensation plan. Additionally, NIF C-13 requires that entities provide comparative disclosures in the notes to the financial statements.
The consolidated balance sheets and income statements include the following balances and transactions with related parties and affiliated companies:
Balances | 2009 | 2008 | ||
Due from The Coca-Cola Company (see Note 4 l)(1) | Ps. 1,034 | Ps. 959 | ||
Balance with BBVA Bancomer, S.A. de C.V.(2) | 4,665 | 799 | ||
Due from Promotora Mexicana de Embotelladores, S.A. de C.V.(1) | 195 | 129 | ||
Other receivables(1) | 104 | 480 | ||
Due to BBVA Bancomer, S.A. de C.V.(3) | 10,124 | 10,060 | ||
Due to The Coca-Cola Company(4) | 2,405 | 2,659 | ||
Due to Grupo Financiero Banamex, S.A. de C.V.(3) | 2,265 | 2,406 | ||
Due to British American Tobacco México(4) | 186 | 128 | ||
Other payables(4) | 345 | 233 |
Transactions | 2009 | 2008 | 2007 | |||
Income: | ||||||
Sales of cans and aluminum lids to Promotora Mexicana de Embotelladores, S.A. de C.V.(1) | Ps. 1,145 | Ps. 1,081 | Ps. 1,121 | |||
Logistic services to Grupo Industrial Saltillo, S.A. de C.V.(2) | 234 | 252 | 242 | |||
Sales of Grupo Inmobiliario San Agustín, S.A. shares to Instituto Tecnológico y de Estudios Superiores de Monterrey, A.C.(2) | 64 | 66 | 37 | |||
Other revenues from related parties | 147 | 408 | 902 | |||
Expenses: | ||||||
Purchase of concentrate from The Coca-Cola Company(1) | 16,863 | 13,518 | 12,239 | |||
Purchase of baked goods and snacks from Grupo Bimbo, S.A.B. de C.V.(2) | 1,733 | 1,578 | 1,324 | |||
Purchase of cigarettes from British American Tobacco México(2) | 1,413 | 1,439 | 1,064 | |||
Advertisement expense paid to The Coca-Cola Company(1) | 780 | 931 | 940 | |||
Purchase of juices to Jugos del Valle, S.A. de C.V.(1) | 1,044 | 863 | — | |||
Interest expense and fees paid to BBVA Bancomer S.A. de C.V.(2) | 591 | 780 | 305 | |||
Purchase of sugar from Beta San Miguel(1) | 713 | 687 | 845 | |||
Purchase of sugar, cans and aluminum lids from Promotora Mexicana de Embotelladores, S.A. de C.V.(1) | 783 | 525 | 723 | |||
Purchase of canned products from IEQSA(1) and CICAN(3) | 208 | 333 | 518 | |||
Advertising paid to Grupo Televisa, S.A.B.(2) | 247 | 253 | 178 | |||
Interest expense and fees paid to Grupo Financiero Banamex, S.A. de C.V.(2) | 246 | 289 | 539 | |||
Interest expense and fees paid to Deutsche Bank (Mexico)(2) | — | 85 | — | |||
Insurance premiums for policies with Grupo Nacional Provincial, S.A.B.(2) | 123 | 83 | 31 | |||
Donations to Instituto Tecnológico y de Estudios Superiores de Monterrey, A.C.(2) | 100 | 79 | 108 | |||
Purchase of plastic bottles from Embotelladora del Atlántico, S.A. (formerly Complejo Industrial Pet, S.A.) (1) | 54 | 42 | 37 | |||
Donations to Difusión y Fomento Cultural, A.C.(2) | — | 29 | 32 | |||
Interest expense paid to The Coca-Cola Company(1) | 25 | 27 | 29 | |||
Other expenses with related parties | 99 | 43 | 3 |
The benefits and aggregate compensation paid to executive officers and senior management of FEMSA and its subsidiaries were as follows:
2009 | 2008 | 2007 | ||||
Short- and long-term benefits paid | Ps. 1,494 | Ps. 1,348 | Ps. 1,290 | |||
Severance indemnities | 53 | 11 | 17 | |||
Postretirement benefits (labor cost) | 32 | 32 | 29 |
Note 14. Balances and Transactions in Foreign Currencies.
According to NIF B-15, assets, liabilities and transactions denominated in foreign currencies are those realized in a currency different than the recording, functional or reporting currency of each reporting unit. As of the end of and for the years ended December 31, 2009 and 2008, assets, liabilities and transactions denominated in foreign currencies, expressed in Mexican pesos are as follows:
2009 | 2008 | |||||||||||
U.S. Dollars | Other Currencies | Total | U.S. Dollars | Other Currencies | Total | |||||||
Assets | ||||||||||||
Short-term | Ps. 5,407 | Ps. 7 | Ps. 5,414 | Ps. 4,331 | Ps. 153 | Ps. 4,484 | ||||||
Long-term | 1,218 | — | 1,218 | 315 | — | 315 | ||||||
Liabilities | ||||||||||||
Short-term | 3,492 | 70 | 3,562 | 7,970 | 52 | 8,022 | ||||||
Long-term | 5,897 | — | 5,897 | 6,284 | 120 | 6,404 | ||||||
Transactions | U.S. Dollars | Other Currencies | Total | U.S. Dollars | Other Currencies | Total | ||||||
Revenues | Ps. 7,332 | Ps. — | Ps. 7,332 | Ps. 4,978 | Ps. 933 | Ps. 5,911 | ||||||
Expenses and investments: | ||||||||||||
Purchases of raw materials | 15,304 | 254 | 15,558 | 12,746 | 184 | 12,930 | ||||||
Interest expense | 1,563 | — | 1,563 | 2,363 | — | 2,363 | ||||||
Assets acquisitions | 883 | 387 | 1,270 | 1,343 | 715 | 2,058 | ||||||
Export expenses | 1,709 | 9 | 1,718 | 849 | — | 849 | ||||||
Other | 2,083 | 19 | 2,102 | 1,672 | 85 | 1,757 | ||||||
Ps. 21,542 | Ps. 669 | Ps. 22,211 | Ps. 18,973 | Ps. 984 | Ps. 19,957 | |||||||
As of June 18, 2010, the exchange rate published by “Banco de México” was Ps. 12.5875 Mexican pesos per one U.S. Dollar, and the foreign currency position was similar to that as of December 31, 2009.
Note 15. Labor Liabilities.
The Company has various labor liabilities in connection with pension, seniority, post retirement medical and severance benefits. Benefits vary depending upon country.
In December 2007, FEMSA Cerveza approved a plan to allow certain qualifying personnel to early retire beginning in 2008. This plan consisted of the following: (i) allowed personnel with more than 55 years of age and 20 years of seniority, as of January 15, 2008, to take the early retirement, and (ii) to pay severance indemnities to some employees that do not meet certain characteristics defined by the Company. This plan is intended to improve the efficiency of FEMSA Cerveza’s operating structure. The total financial impact of this plan was Ps. 236, of which Ps. 125 was recorded in the consolidated results of the Company of 2007, and Ps. 111 was recorded in the consolidated results as of December 31, 2008. Both amounts were included as part of other expenses (see Note 18).
The Company annually evaluates the reasonableness of the assumptions used in its labor liabilities computations. Actuarial calculations for pension and retirement plans, seniority premiums, postretirement medical services and severance indemnity liabilities, as well as the cost for the period, were determined using the following long-term assumptions:
Nominal Rates (1) | Real Rates (2) (3) | |||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||
Annual discount rate | 8.2 | % | 8.2 | % | 4.5 | % | 4.5 | % | ||||||
Salary increase | 5.1 | % | 5.1 | % | 1.5 | % | 1.5 | % | ||||||
Return on assets | 8.2 | % | 11.3 | % | 4.5 | % | 4.5 | % | ||||||
Measurement date: December 2009 |
The basis for the determination of the long-term rate of return is supported by a historical analysis of average returns in real terms for the last 30 years of the Certificados de Tesorería del Gobierno Federal (Mexican Federal Government Treasury Certificates) for Mexican investments, treasury bonds of each country for other investments and the expected rates of long-term returns of the actual investments of the Company.
The annual growth rate for health care expenses is 5.1% in nominal terms, consistent with the historical average health care expense rate for the past 30 years. Such rate is expected to remain consistent for the foreseeable future.
Based on these assumptions, the expected benefits to be paid in the following years are as follows:
Pension and Retirement Plans | Seniority Premiums | Postretirement Medical Services | Severance Indemnities | |||||||||
2010 | Ps. | 460 | Ps. | 19 | Ps. | 26 | Ps. | 158 | ||||
2011 | 384 | 18 | 26 | 134 | ||||||||
2012 | 328 | 21 | 26 | 125 | ||||||||
2013 | 352 | 23 | 27 | 120 | ||||||||
2014 | 383 | 25 | 29 | 116 | ||||||||
2015 to 2020 | 2,032 | 171 | 173 | 519 |
2009 | 2008 | |||||||
Pension and retirement plans: | ||||||||
Vested benefit obligation | Ps. | 3,293 | Ps. | 3,122 | ||||
Non-vested benefit obligation | 2,165 | 1,890 | ||||||
Accumulated benefit obligation | 5,458 | 5,012 | ||||||
Excess of projected benefit obligation over accumulated benefit obligation | 1,144 | 1,201 | ||||||
Defined benefit obligation (projected benefit obligation) | 6,602 | 6,213 | ||||||
Pension plan funds at fair value | (3,306 | ) | (2,660 | ) | ||||
Unfunded defined benefit obligation | 3,296 | 3,553 | ||||||
Labor cost of past services(1) | (1,008 | ) | (1,113 | ) | ||||
Unrecognized actuarial loss, net | (181 | ) | (554 | ) | ||||
Total | Ps. | 2,107 | Ps. | 1,886 | ||||
Seniority premiums: | ||||||||
Vested benefit obligation | 5 | 8 | ||||||
Non-vested benefit obligation | 184 | 165 | ||||||
Accumulated benefit obligation | 189 | 173 | ||||||
Excess of projected benefit obligation over accumulated benefit obligation | 104 | 96 | ||||||
Unfunded defined benefit obligation (projected benefit obligation) | 293 | 269 | ||||||
Labor cost of past services(1) | (5 | ) | (8 | ) | ||||
Unrecognized actuarial loss, net | (5 | ) | (13 | ) | ||||
Total | Ps. | 283 | Ps. | 248 | ||||
Postretirement medical services: | ||||||||
Vested benefit obligation | 487 | 443 | ||||||
Non-vested benefit obligation | 501 | 538 | ||||||
Defined benefit obligation | 988 | 981 | ||||||
Medical services funds at fair value | (111 | ) | (92 | ) | ||||
Unfunded defined benefit obligation | 877 | 889 | ||||||
Labor cost of past services(1) | (28 | ) | (43 | ) | ||||
Unrecognized actuarial loss, net | (376 | ) | (482 | ) | ||||
Total | Ps. | 473 | Ps. | 364 | ||||
Severance indemnities: | ||||||||
Accumulated benefit obligation | 633 | 596 | ||||||
Excess of projected benefit obligation over accumulated benefit obligation | 115 | 133 | ||||||
Defined benefit obligation (projected benefit obligation) | 748 | 729 | ||||||
Labor cost of past services(1) | (256 | ) | (339 | ) | ||||
Unrecognized actuarial loss, net | (1 | ) | (2 | ) | ||||
Total | 491 | 388 | ||||||
Total labor liabilities | Ps. | 3,354 | Ps. | 2,886 | ||||
The accumulated actuarial gains and losses were generated by the differences in the assumptions used for the actuarial calculations at the beginning of the year versus the actual behavior of those variables at the end of the year.
Trust assets consist of fixed and variable return financial instruments recorded at market value. The trust assets are invested as follows:
2009 | 2008 | |||||
Fixed Return: | ||||||
Publicly traded securities | 18 | % | 16 | % | ||
Bank instruments | 10 | % | 10 | % | ||
Federal government instruments | 43 | % | 53 | % | ||
Variable Return: | ||||||
Publicly traded | 29 | % | 21 | % | ||
100 | % | 100 | % | |||
The Company has a policy of maintaining at least 30% of the trust assets in Mexican Federal Government instruments. Objective portfolio guidelines have been established for the remaining percentage, and investment decisions are made to comply with those guidelines to the extent that market conditions and available funds allow.
The amounts and types of securities of the Company and related parties included in plan assets are as follows:
2009 | 2008 | |||||
Debt: | ||||||
CEMEX, S.A.B. de C.V.(1) | Ps. | 100 | Ps. | 57 | ||
BBVA Bancomer, S.A. de C.V.(1) | 42 | 41 | ||||
Sigma Alimentos, S.A. de C.V.(1) | 29 | 29 | ||||
Coca-Cola FEMSA | 2 | 2 | ||||
Deutsche Bank (Mexico)(1) | — | 58 | ||||
Capital: | ||||||
FEMSA | 286 | 181 | ||||
Grupo Televisa, S.A.B.(1) | 71 | — |
The Company does not expect to make material contributions to plan assets during the following fiscal year.
2009 | 2008 | 2007 | ||||||||||
Pension and retirement plans: | ||||||||||||
Labor cost | Ps. | 247 | Ps. | 229 | Ps. | 210 | ||||||
Interest cost | 504 | 437 | 235 | |||||||||
Expected return on trust assets | (227 | ) | (307 | ) | (129 | ) | ||||||
Labor cost of past services(1) | 105 | 105 | 102 | |||||||||
Amendments to plan | — | 90 | 120 | |||||||||
Amortization of net actuarial loss | 24 | 15 | 1 | |||||||||
653 | 569 | 539 | ||||||||||
Seniority premiums: | ||||||||||||
Labor cost | 37 | 33 | 30 | |||||||||
Interest cost | 21 | 20 | 10 | |||||||||
Labor cost of past services(1) | 2 | 2 | 2 | |||||||||
Amendments to plan | — | 6 | 1 | |||||||||
Amortization of net actuarial loss | 4 | 20 | 3 | |||||||||
64 | 81 | 46 | ||||||||||
Postretirement medical services: | ||||||||||||
Labor cost | 35 | 27 | 27 | |||||||||
Interest cost | 77 | 59 | 32 | |||||||||
Expected return on trust assets | (8 | ) | (10 | ) | (6 | ) | ||||||
Labor cost of past services(1) | 9 | 10 | 4 | |||||||||
Amendments to plan | — | 15 | 4 | |||||||||
Amortization of net actuarial loss | 22 | 13 | 13 | |||||||||
135 | 114 | 74 | ||||||||||
Severance indemnities: | ||||||||||||
Labor cost | 88 | 99 | 66 | |||||||||
Interest cost | 49 | 58 | 26 | |||||||||
Labor cost of past services(1) | 88 | 104 | 38 | |||||||||
Amortization of net actuarial loss | 66 | 178 | — | |||||||||
291 | 439 | 130 | ||||||||||
Ps. | 1,143 | Ps. | 1,203 | Ps. | 789 | |||||||
|
2009 | 2008 | |||||||
Pension and retirement plans: | ||||||||
Initial balance | Ps. | 6,213 | Ps. | 5,587 | ||||
Labor cost | 247 | 229 | ||||||
Interest cost | 504 | 437 | ||||||
Amendments to plan | — | 90 | ||||||
Actuarial loss | 41 | 149 | ||||||
Benefits paid | (403 | ) | (279 | ) | ||||
Ending balance | 6,602 | 6,213 | ||||||
Seniority premiums: | ||||||||
Initial balance | 269 | 254 | ||||||
Labor cost | 37 | 33 | ||||||
Interest cost | 21 | 20 | ||||||
Amendments to plan | — | 6 | ||||||
Actuarial gain | (7 | ) | (24 | ) | ||||
Benefits paid | (27 | ) | (20 | ) | ||||
Ending balance | 293 | 269 | ||||||
Postretirement medical services: | ||||||||
Initial balance | 981 | 746 | ||||||
Labor cost | 35 | 27 | ||||||
Interest cost | 77 | 59 | ||||||
Amendments to plan | — | 15 | ||||||
Actuarial (gain) loss | (79 | ) | 187 | |||||
Benefits paid | (26 | ) | (53 | ) | ||||
Ending balance | 988 | 981 | ||||||
Severance indemnities: | ||||||||
Initial balance | 729 | 647 | ||||||
Labor cost | 88 | 99 | ||||||
Interest cost | 49 | 58 | ||||||
Actuarial loss | 93 | 11 | ||||||
Benefits paid | (211 | ) | (86 | ) | ||||
Ending balance | 748 | 729 | ||||||
2009 | 2008 | |||||||
Initial balance | Ps. | 2,752 | Ps. | 2,902 | ||||
Actual return on trust assets | 674 | (148 | ) | |||||
Benefits paid | (9 | ) | (2 | ) | ||||
Ending balance | 3,417 | 2,752 | ||||||
The following table presents the impact to the postretirement medical service obligations and the expenses recorded in the income statement with a variation of 1% in the assumed health care cost trend rates.
Impact of Changes: | |||||||
+1% | -1% | ||||||
Postretirement medical services obligation | Ps. | 144 | Ps. | (116 | ) | ||
Cost for the year | 22 | (17 | ) |
Note 16. Bonus Program.
The bonus program for executives is based on complying with certain goals established annually by management, which include quantitative and qualitative objectives and special projects.
The quantitative objectives represent approximately 50% of the bonus and are based on the Economic Value Added (“EVA”) methodology. The objective established for the executives at each entity is based on a combination of the EVA per entity and the EVA generated by the Company, calculated at approximately 70% and 30%, respectively. The qualitative objectives and special projects represent the remaining 50% of the annual bonus and are based on the critical success factors established at the beginning of the year for each executive.
In addition, the Company provides a defined contribution plan of share compensation to certain key executives, consisting of an annual cash bonus to purchase FEMSA shares or options, based on the executive’s responsibility in the organization, their business’ EVA result achieved, and their individual performance. The acquired shares or options are deposited in a trust, and the executives may access them one year after they are vested at 20% per year. The 50% of Coca-Cola FEMSA’s annual executive bonus is to be used to purchase FEMSA shares or options and the remaining 50% to purchase Coca-Cola FEMSA shares or options. As of December 31, 2009, 2008 and 2007, no options have been granted to employees under the plan.
The incentive plan target is expressed in months of salary, and the final amount payable is computed based on a percentage of compliance with the goals established every year. The bonuses are recorded in income from operations and are paid in cash the following year. During the years ended December 31, 2009, 2008 and 2007, the bonus expense recorded amounted to Ps. 1,524, Ps. 1,336 and Ps. 1,179, respectively.
All shares held in trust are considered outstanding for earnings per share purposes and dividends on shares held by the trusts are charged to retained earnings.
As of December 31, 2009 and 2008, the number of shares held by the trust is as follows:
Number of Shares | ||||||||||||
FEMSA UBD | KOF L | |||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||
Beginning balance | 9,752,206 | 7,431,459 | 2,471,075 | 1,663,746 | ||||||||
Shares granted to executives | 5,386,760 | 4,592,920 | 1,340,790 | 1,267,490 | ||||||||
Shares released from trust to executives upon vesting | (3,070,478 | ) | (2,241,393 | ) | (742,249 | ) | (447,159 | ) | ||||
Forfeitures | (86,323 | ) | (30,780 | ) | (15,510 | ) | (13,002 | ) | ||||
Ending balance | 11,985,165 | 9,752,206 | 3,054,106 | 2,471,075 | ||||||||
The fair value the shares held by the trust as of the end of December 31, 2009 and 2008 was Ps. 1,014 and Ps 552, respectively, based on quoted market prices of those dates.
Note 17. Bank Loans and Notes Payable.
At December 31, 2009(1) | Fair Value | 2008(1) | ||||||||||||||||||||
(in millions of Mexican pesos) | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 and Thereafter | 2009 | |||||||||||||||
Short-term debt: | ||||||||||||||||||||||
Variable rate debt: | ||||||||||||||||||||||
Mexican pesos | 1,400 | 1,400 | 1,400 | 3,820 | ||||||||||||||||||
Interest rate | 8.2% | 8.2% | 11.6% | |||||||||||||||||||
Argentine pesos | 1,179 | 1,179 | 1,179 | 816 | ||||||||||||||||||
Interest rate | 20.7% | 20.7% | 19.6% | |||||||||||||||||||
Colombian pesos | 496 | 496 | 496 | 798 | ||||||||||||||||||
Interest rate | 4.9% | 4.9% | 15.2% | |||||||||||||||||||
Venezuelan bolivares | 741 | 741 | 741 | 365 | ||||||||||||||||||
Interest rate | 18.1% | 18.1% | 22.2% | |||||||||||||||||||
Total short-term debt | 3,816 | 3,816 | 3,816 | 5,799 | ||||||||||||||||||
Long-term debt: | ||||||||||||||||||||||
Fixed rate debt: | ||||||||||||||||||||||
U.S. dollars | 36 | 3 | 39 | 39 | 217 | |||||||||||||||||
Interest rate | 3.5% | 3.8% | 3.6% | 4.8% | ||||||||||||||||||
J.P. Morgan (Yankee Bond) | 3,605 | |||||||||||||||||||||
Interest rate | 7.3% | |||||||||||||||||||||
Units of investment (UDIs) | 2,964 | 2,964 | 2,964 | 2,962 | ||||||||||||||||||
Interest rate | 4.2% | 4.2% | 4.2% | |||||||||||||||||||
Mexican pesos | 2,200 | 280 | 1,916 | 4,396 | 4,535 | 5,036 | ||||||||||||||||
Interest rate | 10.1% | 12.3% | 10.0% | 10.2% | 10.2% | |||||||||||||||||
Japanese yen | 120 | |||||||||||||||||||||
Interest rate | 2.8% | |||||||||||||||||||||
Argentine pesos | 69 | 69 | 69 | — | ||||||||||||||||||
Interest rate | 20.5% | 20.5% | ||||||||||||||||||||
Brazilian reais | 1 | |||||||||||||||||||||
Interest rate | 10.7% | |||||||||||||||||||||
Subtotal | 2,236 | 352 | 1,916 | — | — | 2,964 | 7,468 | 7,607 | 11,671 | |||||||||||||
Variable rate debt: | ||||||||||||||||||||||
U.S. dollars | 70 | 1,113 | 2,228 | 2,731 | 16 | 6,158 | 6,158 | 6,266 | ||||||||||||||
Interest rate | 0.8% | 0.7% | 0.6% | 0.5% | 1.9% | 0.6% | 2.3% | |||||||||||||||
Mexican pesos | ||||||||||||||||||||||
Inbursa | 712 | 3,473 | 1,100 | 1,450 | 6,735 | 6,735 | — | |||||||||||||||
Interest rate | 5.2% | 8.2% | 5.2% | 5.1% | 6.7% | |||||||||||||||||
BBVA Bancomer | 2,000 | 1,762 | 3,762 | 3,762 | 2,762 | |||||||||||||||||
Interest rate | 5.5% | 5.2% | 5.4% | 9.0% | ||||||||||||||||||
Crédito Bursátil TIIE 6 Years | 3,500 | 3,500 | 3,399 | 3,500 | ||||||||||||||||||
Interest rate | 4.9% | 4.9% | 8.7% | |||||||||||||||||||
Santander Serfin | 2,800 | 625 | 625 | 4,050 | 4,050 | 3,843 | ||||||||||||||||
Interest rate | 8.5% | 5.1% | 5.1% | 7.4% | 9.0% | |||||||||||||||||
ABN Crédito Bursátil | 1,500 | 3,000 | 4,500 | 4,425 | 3,000 | |||||||||||||||||
Interest rate | 4.9% | 4.9% | 4.9% | 8.7% | ||||||||||||||||||
Others | 19 | 5 | 898 | 1,085 | 292 | 1,375 | 3,674 | 3,674 | 6,112 | |||||||||||||
Interest rate | 4.6% | 4.6% | 5.1% | 5.1% | 5.1% | 1.4% | 3.7% | 9.0% | ||||||||||||||
Colombian pesos | 905 | |||||||||||||||||||||
Interest rate | 15.4% | |||||||||||||||||||||
Subtotal | 2,801 | 7,180 | 10,224 | 7,941 | 1,408 | 2,825 | 32,379 | 32,203 | 26,388 | |||||||||||||
Total long-term debt | 5,037 | 7,532 | 12,140 | 7,941 | 1,408 | 5,789 | 39,847 | 39,810 | 38,059 | |||||||||||||
Current portion of long-term debt | (5,037 | ) | (5,849 | ) | ||||||||||||||||||
Ps. | 34,810 | Ps. | 32,210 | |||||||||||||||||||
Derivative Financial Instruments(1) Cross currency swaps: Units of investments to Mexican pesos and fixed to fixed rate: Interest pay rate Interest receive rate U.S. dollars to Mexican pesos and variable to fixed rate: Interest pay rate Interest receive rate U.S. dollars to Mexican pesos and variable to variable rate: Interest pay rate Interest receive rate Japanese yen to Brazilian reais and fixed to variable rate: Interest pay rate (1) Interest receive rate(1) Interest rate swap: Mexican pesos Variable to fixed rate: Interest pay rate Interest receive rate U.S. dollars Variable to fixed rate: Interest pay rate Interest receive rate 2010 2011 2012 2013 2014 2015 and
Thereafter 2009 2008 (notional amounts in millions of Mexican pesos) — — — — — 2,500 2,500 3,595 9.6% 9.6% 10.0% 4.9% 4.9% 4.2% — 846 846 423 — — 2,115 2,115 8.1% 8.1% 8.1% 8.1% 8.1% 0.7% 0.7% 0.7% 0.7% 0.9% — — 209 105 — — 314 314 4.7% 4.7% 4.7% 8.5% 0.7% 0.7% 0.7% 3.6% 72 14.4% 2.8% 862 1,762 2,215 3,885 — — 8,724 9,045 9.5% 9.1% 8.1% 8.1% 8.4% 9.3% 5.0% 4.9% 4.9% 4.9% 4.9% 8.7% — — 653 979 — 50 1,682 — 3.8% 3.1% 8.6% 3.5% — 0.5% 0.5% 5.1% 0.7% —
On December 4, 2007, the Company obtained the approval from the National Banking and Securities Commission (Comisión Nacional Bancaria y de Valores or “CNBV”) for the issuance of long-term domestic senior notes (“Certificados Bursátiles”) in the amount of Ps. 10,000 (nominal amount) or its equivalent in investment units. As of December 31, 2009, the Company has issued the following domestic senior notes: i) on December 5, 2007, the Company issued domestic senior notes composed of Ps. 3,500 (nominal amount) with a maturity date on November 29, 2013 and a floating interest rate; ii) on December 5, 2007, the Company issued domestic senior notes in the amount of 637,587,000 investment units (Ps. 2,500 nominal amount), with a maturity date on November 24, 2017 and a fixed interest rate, iii) on May 26, 2008, the Company issued domestic senior notes composed of Ps. 1,500 (nominal amount), with a maturity date on May 23, 2011 and a floating interest rate, and iv) on March 9, 2007, the Company issued domestic senior notes composed of Ps. 3,000 (nominal amount), with a maturity date in 2012 and a floating interest rate.
The Company has financing from different institutions under agreements that stipulate different restrictions and covenants, which mainly consist of maximum levels of leverage and capitalization as well as minimum consolidated net worth and debt and interest coverage ratios. As of the date of these consolidated financial statements, the Company was in compliance with all restrictions and covenants contained in its financing agreements.
Note 18. Other Expenses.
In 2007, FEMSA Cerveza approved a plan to allow certain qualifying personnel to early retire beginning in 2008. The financial impact of this plan for the years ended December 31, 2008 and 2007 was Ps. 111 and Ps. 125, respectively, and they were recorded in other expenses as a pension plan amendment (see Note 15).
Coca-Cola FEMSA recognized strategic restructuring programs in 2009 and 2008, which were recorded in other expenses in the consolidated income statement. Such costs consisted of severance payments updates associated with an ongoing benefit arrangement. For the years ended December 31, 2009 and 2008, the related payments were Ps. 113 and 169, respectively.
Employee profit sharing (see Note 4 r) Amnesty adoption effect Vacation provision Write-off of long-lived assets(1) Severance payments associated with an ongoing benefit and amendment to pension plan Loss on sales of fixed assets Donations Participation in affiliated and associated companies Contingencies Amortization of unrecognized actuarial loss, net (see Note 2 i) Other Total 2009 2008 2007 Ps. 1,179 Ps. 933 Ps. 553 642 — — 563 — — 336 502 130 296 346 255 221 185 68 156 138 149 (110 ) 13 (154 ) (5 ) 30 439 — 198 — 228 29 (143 ) Ps. 3,506 Ps. 2,374 Ps. 1,297
Note 19. Fair Value of Financial Instruments.
The Company uses a three level fair value hierarchy to prioritize the inputs used to measure fair value. The three levels of inputs are described as follows:
Level 1:quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
Level 2:inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly or indirectly.
Level 3:are unobservable inputs for the asset or liability. Unobservable inputs shall be used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date.
The Company measures the fair value of its financial assets and liabilities classified as level 2, applying the income approach method, which estimates the fair value based on expected cash flows discounted to net present value. The following table summarizes financial assets and liabilities measured at fair value, as of December 31, 2009 and 2008:
2009 | 2008 | |||||||||||
Level 1 | Level 2 | Level 1 | Level 2 | |||||||||
Cash equivalents | Ps. | 10,365 | Ps. | 4,585 | ||||||||
Marketable securities | 2,113 | |||||||||||
Pension Plan trust assets | 3,417 | 2,752 | ||||||||||
Derivative financial instruments (asset) | Ps. | 1,245 | Ps. | 1,804 | ||||||||
Derivative financial instruments (liability) | 2,154 | 4,466 |
The Company does not use inputs classified as level 3 for fair value measurement.
The fair value of long-term debt is determined based on the discounted value of contractual cash flows, in which the discount rate is estimated using rates currently offered for debt of similar amounts and maturities. The fair value of notes is based on quoted market prices.
2009 | 2008 | |||||
Carrying value | Ps. | 43,663 | Ps. | 43,858 | ||
Fair value | 43,626 | 43,709 |
The Company uses interest rate swaps to offset the interest rate risk associated with its borrowings, pursuant to which it pays amounts based on a fixed rate and receives amounts based on a floating rate. These instruments are recognized in the consolidated balance sheet at their estimated fair value and have been designated as a cash flow hedge. The estimated fair
value is based on formal technical models. Changes in fair value were recorded in cumulative other comprehensive income until such time as the hedged amount is recorded in earnings.
At December 31, 2009, the Company has the following outstanding interest rate swap agreements:
Maturity Date | Notional Amount | Fair Value Asset (Liability) | |||||
2010 | Ps. | 2,267 | Ps. | (72 | ) | ||
2011 | 2,413 | (108 | ) | ||||
2012 | 3,589 | (170 | ) | ||||
2013 | 7,836 | (149 | ) | ||||
2014 | 575 | 3 | |||||
2015 to 2018 | 4,463 | (12 | ) |
A portion of certain interest rate swaps do not meet the hedging criteria for accounting purposes; consequently, changes in the estimated fair value of the ineffective portion were recorded in the consolidated results as part of the comprehensive financing result.
The net effect of expired contracts that met hedging criteria is recognized as interest expense as part of the comprehensive financing result.
The Company enters into forward agreements to reduce its exposure to the risk of exchange rate fluctuations between the Mexican peso and other currencies. These instruments are recognized in the consolidated balance sheet at their estimated fair value which is determined based on prevailing market exchange rates to end the contracts at the end of the period. The changes in the fair value are recorded in cumulative other comprehensive income. Net gain/loss on expired contracts is recognized as part of foreign exchange.
Net changes in the fair value of forward agreements that do not meet hedging criteria for accounting purposes are recorded in the consolidated results as part of the comprehensive financing result. The net effect of expired contracts that do not meet hedging criteria for accounting purposes is recognized as a market value gain/loss on the ineffective portion of derivative financial instruments.
The Company enters into cross currency swaps to reduce its exposure to risks of exchange rate and interest rate fluctuations associated with its borrowings denominated in U.S. dollars and other foreign currencies. These instruments are recognized in the consolidated balance sheet at their estimated fair value which is estimated based on formal technical models. Those contracts are designated as cash flow hedges; consequently, changes in the fair value were recorded as part of cumulative other comprehensive income.
Additionally, the Company has cross currency swaps designated as fair value hedges. The fair value changes related to those cross currency swaps were recorded as part of the ineffective portion of derivative financial instruments, net of changes related to the long-term liability.
Net changes in the fair value of current and expired cross currency swaps contracts that did not meet the hedging criteria for accounting purposes are recorded as a gain/loss in the market value on the ineffective portion of derivative financial instruments in the consolidated results as part of the comprehensive financing result.
The Company enters into various commodity price contracts to reduce its exposure to the risk of fluctuation in the costs of certain raw material. The fair value is estimated based on the market valuations to end of the contracts at the date of closing of the period. Changes in the fair value were recorded in cumulative other comprehensive income.
Net changes in the fair value of current and expired commodity price contracts that do not meet the hedging criteria for accounting purposes were recorded as a market value gain/loss on the ineffective portion of derivative financial instruments.
The Company has determined that its leasing contracts denominated in U.S. dollars host embedded derivative financial instruments. The fair value is estimated based on formal technical models. Changes in the fair value were recorded in current earnings in the comprehensive financing result as market value on derivative financial instruments.
Notional Amounts | Fair Value | ||||||||
2009 | 2008 | ||||||||
CASH FLOW HEDGE: | |||||||||
Assets: | |||||||||
Cross currency swaps | 2,115 | Ps. | 433 | (1) | Ps. | 578 | |||
Forward agreements | — | 458 | |||||||
Interest rate swaps | 575 | 3 | 16 | ||||||
Liabilities: | |||||||||
Forward agreements | 1,195 | Ps. | 16 | (2) | |||||
Interest rate swaps | 20,568 | 511 | Ps. | 300 | |||||
Commodity price contracts | 5,199 | 977 | (3) | 2,955 | |||||
FAIR VALUE HEDGE: | |||||||||
Assets: | |||||||||
Cross currency swaps | 2,814 | Ps. | 561 | (4) | Ps. | 333 |
Types of Derivatives | Impact in Income | 2009 | 2008 | 2007 | ||||||||||
Interest rate swaps | Interest expense | Ps. | 503 | Ps. | 212 | Ps. | 357 | |||||||
Forward agreements | Foreign exchange | (1 | ) | 115 | (15 | ) | ||||||||
Cross currency swaps | Foreign exchange/ interest expense | (135 | ) | (178 | ) | (37 | ) | |||||||
Commodity price contract | Cost of sales | (1,096 | ) | 17 | (82 | ) |
Types of Derivatives | Impact in Income Statement | 2009 | 2008 | 2007 | ||||||||||
Interest rate swaps | Market value gain (loss) on ineffective portion of derivative financial instruments | Ps. | — | Ps. | 24 | Ps. | 34 | |||||||
Commodity price contracts | (165 | ) | (474 | ) | (43 | ) | ||||||||
Forwards for purchase of foreign currency | (63 | ) | (643 | ) | 22 | |||||||||
Cross currency swaps | 169 | (224 | ) | 64 |
Types of Derivatives | Impact in Income | 2009 | 2008 | 2007 | |||||||
Embedded derivative financial instruments | Market value gain (loss) on ineffective portion of derivative financial instruments | Ps. | 78 | (138 | ) | (9 | ) | ||||
Others | 6 | (1 | ) | 1 |
Note 20. Noncontrolling Interest in Consolidated Subsidiaries.
An analysis of FEMSA’s noncontrolling interest in its consolidated subsidiaries for the years ended December 31, 2009 and 2008 is as follows:
2009 | 2008 | |||||
Coca-Cola FEMSA | Ps. | 32,918 | Ps. | 27,575 | ||
FEMSA Cerveza (1) | 1,219 | 464 | ||||
Other | 55 | 35 | ||||
Ps. | 34,192 | Ps. | 28,074 |
Note 21. Stockholders’ Equity.
At an ordinary stockholders’ meeting of FEMSA held on March 29, 2007, a three-for-one stock split was approved for all of FEMSA’s outstanding stock. Such split took effect on May 25, 2007. Subsequent to the stock split, the capital stock of FEMSA is comprised of 2,161,177,770 BD units and 1,417,048,500 B units.
As of December 31, 2009 and 2008, the capital stock of FEMSA was comprised of 17,891,131,350 common shares, without par value and with no foreign ownership restrictions. Fixed capital stock amounts to Ps. 300 (nominal value) and the variable capital may not exceed 10 times the minimum fixed capital stock amount.
The characteristics of the common shares are as follows:
Series “B” shares, with unlimited voting rights, which at all times must represent a minimum of 51% of total capital stock;
Series “L” shares, with limited voting rights, which may represent up to 25% of total capital stock; and
Series “D” shares, with limited voting rights, which individually or jointly with series “L” shares may represent up to 49% of total capital stock.
The Series “D” shares are comprised as follows:
Subseries “D-L” shares may represent up to 25% of the series “D” shares;
Subseries “D-B” shares may comprise the remainder of outstanding series “D” shares; and
The non-cumulative premium dividend to be paid to series “D” stockholders will be 125% of any dividend paid to series “B” stockholders.
The Series “B” and “D” shares are linked together in related units as follows:
“B units” each of which represents five series “B” shares and which are traded on the BMV;
“BD units” each of which represents one series “B” share, two subseries “D-B” shares and two subseries “D-L” shares, and which are traded both on the BMV and the NYSE;
The Company’s statutes addressed that in May 2008, shares structure established in 1998 would be modified, unlinking subseries “D-B” into “B” shares and unlinking subseries “D-L” into “L” shares.
At an ordinary stockholders’ meeting of FEMSA held on April 22, 2008, it was approved to modify the Company’s statutes in order to preserve the unitary shares structure of the Company established on May 1998, and also to maintain the shares structure established after May 11, 2008.
As of December 31, 2009 and 2008, FEMSA’s capital stock is comprised as follows:
“B” Units | “BD” Units | Total | ||||
Units | 1,417,048,500 | 2,161,177,770 | 3,578,226,270 | |||
Shares: | ||||||
Series “B” | 7,085,242,500 | 2,161,177,770 | 9,246,420,270 | |||
Series “D” | — | 8,644,711,080 | 8,644,711,080 | |||
Subseries “D-B” | — | 4,322,355,540 | 4,322,355,540 | |||
Subseries “D-L” | — | 4,322,355,540 | 4,322,355,540 | |||
Total shares | 7,085,242,500 | 10,805,888,850 | 17,891,131,350 | |||
The net income of the Company is subject to the legal requirement that 5% thereof be transferred to a legal reserve until such reserve equals 20% of capital stock at nominal value. This reserve may not be distributed to stockholders during the existence of the Company, except as a stock dividend. As of December 31, 2009, this reserve in FEMSA amounted to Ps. 596 (nominal value).
Retained earnings and other reserves distributed as dividends, as well as the effects derived from capital reductions, are subject to income tax at the rate in effect at the date of distribution, except for restated stockholder contributions and distributions made from consolidated taxable income, denominated “Cuenta de Utilidad Fiscal Neta” (“CUFIN”) or from reinvested consolidated taxable income, denominated “Cuenta de Utilidad Fiscal Neta Reinvertida” (“CUFINRE”).
Dividends paid in excess of CUFIN and CUFINRE are subject to income tax at a grossed-up rate based on the current statutory rate. Since 2003, this tax may be credited against the income tax of the year in which the dividends are paid and in the following two years against the income tax and estimated tax payments. As of December 31, 2009, FEMSA’s balances of CUFIN amounted to Ps. 55,604.
At the ordinary stockholders’ meeting of FEMSA held on March 25, 2009, stockholders approved dividends of Ps. 0.08079 Mexican pesos (nominal value) per series “B” share and Ps. 0.10099 Mexican pesos (nominal value) per series “D” share that were paid in May 2009. Additionally, the stockholders approved a reserve for share repurchase of a maximum of Ps. 3,000.
As of December 31, 2009, the Company has not repurchased shares.
At an ordinary stockholders’ meeting of Coca-Cola FEMSA held on March 23, 2009, the stockholders approved a dividend of Ps. 1,344 that was paid in April 2009. The corresponding payment to the noncontrolling interest was Ps. 622.
As of December 31, 2009, 2008 and 2007 the dividends paid by the Company and Coca-Cola FEMSA were as follows:
2009 | 2008 | 2007 | |||||||
FEMSA | Ps. | 1,620 | Ps. | 1,620 | Ps. | 1,525 | |||
Coca-Cola FEMSA (100% of dividend) | 1,344 | 945 | 831 |
Note 22. Net Controlling Interest Income per Share.
This represents the net controlling interest income corresponding to each share of the Company’s capital stock, computed on the basis of the weighted average number of shares outstanding during the period. Additionally, the net income distribution is presented according to the dividend rights of each share series.
The following presents the computed weighted average number of shares and the distribution of income per share series as of December 31, 2009, 2008 and 2007:
Millions of Shares | ||||||||||
Series “B” | Series “D” | |||||||||
Number | Weighted Average | Number | Weighted Average | |||||||
Shares outstanding as of December 31, 2007, 2008 and 2009 | 9,246.42 | 9,246.42 | 8,644.71 | 8,644.71 | ||||||
Dividend rights | 1.00 | 1.25 | ||||||||
Allocation of earnings | 46.11 | % | 53.89 | % |
Note 23. Taxes.
Income tax is computed on taxable income, which differs from net income for accounting purposes principally due to the treatment of the comprehensive financing result, the cost of labor liabilities, depreciation and other accounting provisions. A tax loss may be carried forward and applied against future taxable income.
Domestic | Foreign | ||||||||||||||||
2009 | 2008 | 2007 | 2009 | 2008 | 2007 | ||||||||||||
Income before income tax | 12,966 | 12,290 | 12,621 | 7,093 | 2,335 | 4,762 | |||||||||||
Income tax: | |||||||||||||||||
Current income tax | 4,408 | 4,931 | 3,821 | 2,193 | 1,736 | 1,368 | |||||||||||
Deferred income tax | (910 | ) | (2,433 | ) | (332 | ) | (1,783 | ) | (27 | ) | 93 |
The difference to sum consolidated income before income tax is mainly dividends which are eliminated in the consolidated financial statement of the Company. The income tax paid in foreign countries is compensated with the consolidated income tax paid in Mexico for the period.
The statutory income tax rates applicable in the countries where the Company operates, the years in which tax loss carryforwards may be applied and the open periods that remain subject to examination as of December 31, 2009 are as follows:
Statutory Tax Rate | Expiration (Years) | Open Period (Years) | |||||
Mexico | 28 | % | 10 | 5 | |||
Guatemala | 31 | % | N/A | 4 | |||
Nicaragua | 30 | % | 3 | 4 | |||
Costa Rica | 30 | % | 3 | 4 | |||
Panama | 30 | % | 5 | 3 | |||
Colombia | 33 | % | 8 | 2 | |||
Venezuela | 34 | % | 3 | 4 | |||
Brazil | 34 | % | Indefinite | 6 | |||
Argentina | 35 | % | 5 | 5 |
The statutory income tax rate in Mexico was 28% for 2009, 2008 and 2007.
On January 1, 2010, the Mexican Tax Reform was effective. The most important changes are described as follows: the value added tax rate (IVA) increases from 15% to 16%, an increase on special tax on productions and services from 25% to 26.5%; and the statutory income tax rate changes from 28% in 2009 to 30% for 2010, 2011 and 2012, and then in 2013 and 2014 will decrease to 29% and 28%, respectively. Additionally, the Mexican tax reform requires the reversal of the deferred tax recognized from 1999 thru 2004, this reversal of deferred taxes will be achieved during the following five years (see Note 23 d and e).
In Colombia, tax losses may be carried forward eight years and they are limited to 25% of the taxable income of each year. Additionally, the statutory tax rate of Colombia decreases from 34% in 2007 to 33% in 2008 and 2009.
In Brazil, tax losses may be carried forward for an indefinite period but cannot be restated and are limited to 30% of the taxable income of each year.
In 2009, the Brazilian government offered an amnesty which grants a discount for fines and surcharges regarding tax contingencies and allows the application of tax losses to the remaining balance. In November 2009, our Brazilian operations announced to the Brazilian government the adoption of this amnesty. As a result, the Company cancelled tax contingencies of Ps. 1,008 (see Note 24) and applied tax losses of Ps. 6,886 (see Note 23 f). After amnesty adoption, as of December 31, 2009, Brazilian tax contingencies and tax losses amounted to Ps. 941, and Ps. 6,617, respectively. Additionally, since the acquisition of Kaiser, the Company identified some loss contingencies as more likely than not to occur. MolsonCoors, previous controller of Kaiser agreed to indemnify for any loss related to those contingencies recognized as part of Kaiser’s acquisition in 2006; such indemnity is limited to 82.95% which was the percentage of Kaiser that the Company acquired from MolsonCoors. Consequently, the Company maintains an account receivable with MolsonCoors of Ps. 1,487 regarding the usage of tax losses to cancel those contingencies, which is recorded as part of accounts receivable and other assets.
On January 1, 2007, the tax on assets rate was reduced from 1.8% to 1.25% and also the deduction of liabilities was eliminated in order to determine the tax to be paid. Effective in 2008, the tax on assets has disappeared in Mexico and it was replaced by the Business Flat Tax (Impuesto Empresarial a Tasa Única, “IETU;” see Note 23 c). The amounts of tax on assets paid corresponding to previous periods to the IETU introduction, can be creditable against the income tax generated during the period, only if the income tax is higher than the IETU generated in the same period, to the extent equivalent to 10% of the lesser tax on asset paid during 2007, 2006 or 2005.
The operations in Guatemala, Nicaragua, Colombia and Argentina are also subject to a minimum tax, which is based primarily on a percentage of assets. Any payments are recoverable in future years, under certain conditions.
Effective in 2008, the IETU came into effect in Mexico and replaced the Tax on Assets. IETU functions are similar to an alternative minimum corporate income tax, except that amounts paid cannot be creditable against future income tax payments. The payable tax will be the higher between the IETU or the income tax liability computed under the Mexican income tax law. The IETU applies to individuals and corporations, including permanent establishments of foreign entities in Mexico, at a rate of 17.5% beginning in 2010. The rates for 2008 and 2009 will be 16.5% and 17.0%, respectively. The IETU is calculated under a cash-flow basis, whereby the tax base is determined by reducing cash proceeds with certain deductions and credits. In the case of income derived from export sales, where cash on the receivable has not been collected within 12 months, income will be deemed received at the end of this 12-month period. In addition, as opposed to Mexican income tax which allows for fiscal consolidation, companies that incur IETU are required to file their returns on an individual basis.
Based on its financial projections for purposes of its Mexican tax returns, the Company expects to pay corporate income tax in the future and does not expect to pay IETU. As such, the enactment of IETU did not impact the Company’s consolidated financial position or results of operations.
Effective January 2008, in accordance with NIF B-10, “Effects of Inflation,” in Mexico the application of inflationary accounting is suspended. However, for taxes purposes, the balance of fixed assets is restated through the application of National Consumer Price Index (NCPI) of each country. For this reason, the difference between accounting and taxable values will increase, generating a deferred tax.
The impact to deferred income tax generated by liabilities (assets) temporary differences are as follows:
Deferred Income Taxes | 2009 | 2008 | ||||
Allowance for doubtful accounts | Ps. | (179) | Ps. | (137) | ||
Inventories | 22 | 137 | ||||
Prepaid expenses | 79 | 137 | ||||
Property, plant and equipment | 4,515 | 5,366 | ||||
Investments in shares | (38) | (24) | ||||
Intangibles and other assets | (1,687) | (2,640) | ||||
Amortized intangible assets | (107) | 48 | ||||
Unamortized intangible assets | 2,233 | 1,714 | ||||
Labor liabilities | (863) | (735) | ||||
Derivative financial instruments | (359) | (832) | ||||
Loss contingencies | (805) | (658) | ||||
Temporary non-deductible provision | (1,667) | (1,170) | ||||
Employee profit sharing payable | (185) | (171) | ||||
Recoverable tax on assets | (21) | (252) | ||||
Tax loss carryforwards | (4,217) | (4,457) | ||||
Valuation allowance for tax loss carryforwards and non-recoverable tax on assets | 2,033 | 3,675 | ||||
Other reserves | 964 | 1,152 | ||||
Deferred income taxes, net | (282) | 1,153 | ||||
Deferred income taxes asset | 1,254 | 1,247 | ||||
Deferred income taxes liability | Ps. | 972 | Ps. | 2,400 | ||
The changes in the balance of the net deferred income tax liability are as follows:
2009 | 2008 | |||||||
Initial balance | Ps. | 1,153 | Ps. | 2,320 | ||||
Loss on monetary position | 87 | 48 | ||||||
Tax provision for the year | (495 | ) | (2,460 | ) | ||||
Application of tax loss carryforwards due to amnesty adoption | 2,066 | — | ||||||
Reversal of tax loss carryforward allowance | (2,066 | ) | — | |||||
Change in the statutory rate | (131 | ) | — | |||||
Effect in tax loss carryforwards(1) | (1,874 | ) | — | |||||
Deferred tax cancellation due to change in accounting principle | (71 | ) | — | |||||
Effects in stockholders’ equity: | ||||||||
Additional labor liability over unrecognized net transition obligation | — | 160 | ||||||
Derivative financial instruments | 415 | (722 | ) | |||||
Cumulative translation adjustment | 592 | 1,709 | ||||||
Restatement effect of beginning balances | 42 | 98 | ||||||
Ending balance | Ps. | (282) | Ps. | 1,153 | ||||
|
2009 | 2008 | 2007 | ||||||||||
Current income taxes | Ps. | 6,600 | Ps. | 6,667 | Ps. | 4,965 | ||||||
Tax on assets | — | — | 224 | |||||||||
Deferred income tax | (495 | ) | (2,460 | ) | (239 | ) | ||||||
Change in the statutory rate(1) | (131 | ) | — | — | ||||||||
Tax law benefit due to amnesty | (2,066 | ) | — | — | ||||||||
Income taxes and tax on assets | Ps. | 3,908 | Ps. | 4,207 | Ps. | 4,950 | ||||||
|
The subsidiaries in Mexico, Panama, Colombia, Venezuela and Brazil have tax loss carryforwards and/or recoverable tax on assets. The tax effect of tax loss carryforwards, net of consolidation future benefits and their years of expiration are as follows:
Year | Tax Loss Carryforwards | Recoverable Tax on Assets | |||||
2010 | Ps. | 241 | Ps. | 6 | |||
2011 | 163 | 1 | |||||
2012 | 144 | 9 | |||||
2013 | 257 | 32 | |||||
2014 | 452 | 59 | |||||
2015 | 1,515 | 10 | |||||
2016 | 734 | 15 | |||||
2017 and thereafter | 3,351 | 131 | |||||
No expiration (Brazil, see Note 23 a) | 6,617 | — | |||||
13,474 | 263 | ||||||
Tax losses used in consolidation | (6,105 | ) | — | ||||
Ps. | 7,369 | Ps. | 263 | ||||
The changes in the balance of tax loss carryforwards and recoverable tax on assets are as follows:
2009 | 2008 | |||||||
Initial balance | Ps. | 13,734 | Ps. | 11,095 | ||||
Provision | 574 | 4,060 | ||||||
Usage of tax losses (1) | (9,693 | ) | (890 | ) | ||||
Translation effect of beginning balances | 3,017 | (531 | ) | |||||
Ending balance | Ps. | 7,632 | Ps. | 13,734 | ||||
|
Due to the uncertainty related to the realization of Ps. 5,979, regarding certain tax loss carryforwards a valuation allowance has been recorded to reduce the deferred income tax asset associated with such carryforwards. The changes in the valuation allowance are as follows:
2009 | 2008 | |||||||
Initial balance | Ps. | 3,675 | Ps. | 3,360 | ||||
Provision | — | 690 | ||||||
Usage of tax losses carryforwards(1) | (2,668 | ) | (213 | ) | ||||
Translation of foreign currency effect | 1,026 | (162 | ) | |||||
Ending balance | Ps. | 2,033 | Ps. | 3,675 | ||||
|
2009 | 2008 | 2007 | |||||||
Mexican statutory income tax rate | 28.0 | % | 28.0 | % | 28.0 | % | |||
Difference between book and tax inflationary effects | (1.4 | )% | (2.2 | )% | (1.1 | )% | |||
Non-deductible expenses | 2.1 | % | 3.3 | % | 1.7 | % | |||
Difference between statutory income tax rates | 2.1 | % | 2.5 | % | 1.7 | % | |||
Non-taxable income | (0.6 | )% | (1.0 | )% | — | ||||
Effect of amnesty adoption | (10.9 | )% | — | — | |||||
Other | 1.3 | % | 0.6 | % | (1.0 | )% | |||
20.6 | % | 31.2 | % | 29.3 | % | ||||
Note 24. Other Liabilities, Contingencies and Commitments.
2009 | 2008 | |||||
Derivative financial instruments | Ps. | 868 | Ps. | 3,089 | ||
Sundry creditors | 2,271 | 2,035 | ||||
Current portion of other long-term liabilities | 464 | 342 | ||||
Others | 4 | 30 | ||||
Total | Ps. | 3,607 | Ps. | 5,496 | ||
2009 | 2008 | |||||||
Contingencies | Ps. | 3,052 | Ps. | 5,050 | ||||
Liability due to amnesty adoption | 2,389 | — | ||||||
Taxes payable | 1,428 | — | ||||||
Derivative financial instruments | 1,286 | 1,377 | ||||||
Current portion of other long-term liabilities | (464 | ) | (342 | ) | ||||
Others | 2,668 | 2,775 | ||||||
Total | Ps. | 10,359 | Ps. | 8,860 | ||||
The Company has various loss contingencies, and reserves have been recorded in those cases where the Company believes an unfavorable resolution is probable. Most of these loss contingencies were recorded as a result of recent business acquisitions. The following table presents the nature and amount of the loss contingencies recorded as of December 31, 2009:
| ||||
| ||||
| ||||
| ||||
In millions of EUR* |
Deferred tax liabilities
Trade and other current liabilities
Liabilities assumed
Total net identifiable assets | 27 | |||
2009 | 2008 | |||||||
Initial balance | Ps. | 5,050 | Ps. | 5,230 | ||||
Provision(1) | 524 | 948 | ||||||
Penalties and other charges | 258 | 50 | ||||||
Reversal of provision | (470 | ) | (690 | ) | ||||
Payments | (390 | ) | (572 | ) | ||||
Amnesty adoption | (1,008 | ) | — | |||||
Transfer to other liabilities | (2,389 | ) | — | |||||
Translation of foreign currency of beginning balance | 1,477 | 84 | ||||||
Ending balance | Ps. | 3,052 | Ps. | 5,050 | ||||
|
Consideration transferred | 115 | |||
Net identifiable assets acquired | (27 | ) | ||
Goodwill on acquisition | 88 | |||
The Company has entered into legal proceedings with its labor unions, tax authorities and other parties that primarily involve Coca-Cola FEMSA and FEMSA Cerveza. These proceedings have resulted in the ordinary course of business and are common to the industry in which the Company operates. The aggregate amount being claimed against the Company resulting from such proceedings as of December 31, 2009 is $11,922. Such contingencies were classified by legal counsel as less than probable but more than remote of being settled against the Company. However, the Company believes that the ultimate resolution of such legal proceedings will not have a material adverse effect on its consolidated financial position or result of operations.
In recent years in its Mexican, Costa Rican and Brazilian territories, Coca-Cola FEMSA and FEMSA Cerveza have been requested to present certain information regarding possible monopolistic practices. These requests are commonly generated in the ordinary course of business in the beer and soft drink industries where those subsidiaries operate. The Company does not expect any significant liability to arise from these contingencies.
As is customary in Brazil, the Company has been requested by the tax authorities to collateralize tax contingencies currently in litigation amounting to Ps. 3,251 by pledging fixed assets and entering into available lines of credit which cover such contingencies.
As of December 31, 2009, the Company has operating lease commitments for the rental of production machinery and equipment, distribution equipment, computer equipment and land for FEMSA Comercio’s operations.
The contractual maturities of the lease commitments by currency, expressed in Mexican pesos as of December 31, 2009, are as follows:
Mexican Pesos | U.S. Dollars | Other | ||||
2010 | Ps. 1,607 | Ps. 178 | Ps. 151 | |||
2011 | 1,504 | 45 | 145 | |||
2012 | 1,428 | 44 | 114 | |||
2013 | 1,335 | 26 | 35 | |||
2014 | 1,209 | 1 | 8 | |||
2015 and thereafter | 6,182 | — | 16 | |||
Total | Ps. 13,265 | Ps. 294 | Ps. 469 | |||
Rental expense charged to operations amounted to approximately Ps. 2,469, Ps. 2,080 and Ps. 1,737 for the years ended December 31, 2009, 2008 and 2007, respectively.
Note 25. Information by Segment.
Analytical information by segment is presented considering the business units and geographic areas in which the Company operates and is presented according to the information used for decision making of the administration.
The information presented is based on the Company’s accounting policies. Intercompany operations are eliminated and presented within the consolidation adjustment column.
a) By Business Unit:
2009 | Coca-Cola FEMSA | FEMSA Cerveza | FEMSA Comercio | Other (1) | Consolidation Adjustments | Consolidated | ||||||||||||
Total revenue | Ps. 102,767 | Ps. 46,336 | Ps. 53,549 | Ps. 12,302 | Ps. (17,921 | ) | Ps. 197,033 | |||||||||||
Intercompany revenue | 1,287 | 6,878 | 12 | 9,744 | (17,921 | ) | — | |||||||||||
Income from operations | 15,835 | 5,894 | 4,457 | 826 | 27,012 | |||||||||||||
Depreciation(2) | 3,473 | 1,927 | 819 | 76 | — | 6,295 | ||||||||||||
Amortization | 307 | 2,005 | 461 | 21 | — | 2,794 | ||||||||||||
Other non-cash charges(3) (4) | 368 | 2,082 | 49 | 217 | — | 2,716 | ||||||||||||
Impairment of long-lived assets | 124 | 207 | — | 5 | — | 336 | ||||||||||||
Interest expense | 1,895 | 2,477 | 954 | 2,158 | (2,287 | ) | 5,197 | |||||||||||
Interest income | 286 | 322 | 27 | 2,217 | (2,287 | ) | 565 | |||||||||||
Income taxes | 4,043 | (1,296 | ) | 544 | 617 | — | 3,908 | |||||||||||
Capital expenditures | 6,282 | 4,111 | 2,668 | 117 | — | 13,178 | ||||||||||||
Net cash flows provided by operating activities | 16,840 | 7,468 | 3,028 | 3,459 | — | 30,795 | ||||||||||||
Net cash flows used in investment activities | (8,900 | ) | (3,537 | ) | (2,634 | ) | (763 | ) | — | (15,834 | ) | |||||||
Net cash flow (used in) provided by financing activities | (6,029 | ) | (3,139 | ) | (346 | ) | 1,803 | — | (7,711 | ) | ||||||||
Long-term assets | 87,022 | 58,557 | 12,378 | 22,491 | (18,737 | ) | 161,711 | |||||||||||
Total assets | 110,661 | 72,029 | 19,693 | 31,475 | (22,767 | ) | 211,091 | |||||||||||
2008 | ||||||||||||||||||
Total revenue | Ps. 82,976 | Ps. 42,385 | Ps. 47,146 | Ps. 9,401 | Ps. (13,886 | ) | Ps. 168,022 | |||||||||||
Intercompany revenue | 1,021 | 5,534 | 10 | 7,321 | (13,886 | ) | — | |||||||||||
Income from operations | 13,695 | 5,394 | 3,077 | 518 | — | 22,684 | ||||||||||||
Depreciation(2) | 3,036 | 1,748 | 663 | 136 | (75 | ) | 5,508 | |||||||||||
Amortization | 240 | 1,871 | 422 | 27 | — | 2,560 | ||||||||||||
Other non-cash charges(3) (4) | 145 | 634 | 46 | 105 | — | 930 | ||||||||||||
Impairment of long-lived assets | 371 | 124 | — | 7 | — | 502 | ||||||||||||
Interest expense | 2,207 | 2,318 | 665 | 1,061 | (1,321 | ) | 4,930 | |||||||||||
Interest income | 433 | 477 | 27 | 982 | (1,321 | ) | 598 | |||||||||||
Income taxes | 2,486 | 1,037 | 351 | 333 | — | 4,207 | ||||||||||||
Capital expenditures | 4,802 | 6,418 | 2,720 | 294 | — | 14,234 | ||||||||||||
Net cash flows provided by operating activities | 12,139 | 4,831 | 2,121 | 3,973 | — | 23,064 | ||||||||||||
Net cash flows used in investment activities | (7,299 | ) | (5,928 | ) | (2,718 | ) | (2,115 | ) | — | (18,060 | ) | |||||||
Net cash flow (used in) provided by financing activities | (5,261 | ) | 480 | 870 | (2,249 | ) | — | (6,160 | ) | |||||||||
Long-term assets | 79,966 | 54,393 | 10,888 | 10,188 | (7,077 | ) | 148,358 | |||||||||||
Total assets | 97,958 | 67,854 | 17,185 | 15,599 | (11,251 | ) | 187,345 | |||||||||||
2007 | Coca-Cola FEMSA | FEMSA Cerveza | FEMSA Comercio | Other(1) | Consolidation Adjustments | Consolidated | |||||||
Total revenue | Ps. 69,251 | Ps. 39,566 | Ps. 42,103 | Ps. 8,124 | Ps. (11,488 | ) | Ps. 147,556 | ||||||
Intercompany revenue | 864 | 4,256 | 16 | 6,352 | (11,488 | ) | — | ||||||
Income from operations | 11,486 | 5,497 | 2,320 | 433 | — | 19,736 | |||||||
Depreciation(2) | 2,637 | 1,637 | 543 | 113 | — | 4,930 | |||||||
Amortization | 241 | 1,786 | 399 | 39 | — | 2,465 | |||||||
Other non-cash charges(4) | 173 | 426 | 28 | 90 | — | 717 | |||||||
Impairment of long-lived assets | — | 91 | — | 2 | — | 93 | |||||||
Interest expense | 2,178 | 2,196 | 453 | 1,031 | (1,137 | ) | 4,721 | ||||||
Interest income | 613 | 342 | 38 | 913 | (1,137 | ) | 769 | ||||||
Income taxes | 3,336 | 888 | 377 | 349 | — | 4,950 | |||||||
Capital expenditures | 3,682 | 5,373 | 2,112 | 90 | — | 11,257 | |||||||
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The purchase price accounting for the acquired business is prepared on a provisional basis. The outcome indicates goodwill of EUR88 million. The derived goodwill includes synergies mainly related to market access and the available production capacity. Goodwill has been allocated to Ethiopia in the Africa and Middle East region and is held in ETB. The rationale for the allocation is that the acquisition provides access to the Ethiopian market: access to additional capacity, consolidate market share within a fast-growing market and improved profitability through synergy. The entire amount of goodwill is not expected to be tax deductible. Acquisition-related costs of EUR2.5 million have been recognised in the income statement for the period ended 31 December 2011.
2007 Mexico Latincentro(1) Venezuela Mercosur(2) Consolidation adjustments Consolidated
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Acquisition of pubs in the UK
On 2 December 2011, HEINEKEN announced that it had acquired from The Royal Bank of Scotland (‘RBS’) (‘Seller’) the Galaxy Pub Estate (‘Galaxy’) in the UK (referred to as the ‘acquired business’). The following summarises the major classes of consideration transferred, and the recognised amounts of assets and assumed liabilities at the acquisition date. Management agreements that were in place were settled upon acquisition.
In millions of EUR* | ||||
Property, plant & equipment | 441 | |||
Cash and cash equivalents | — | |||
Assets acquired | 441 | |||
In millions of EUR* | ||||
Liabilities assumed | — | |||
Total net identifiable assets | 441 | |||
Consideration transferred | 480 | |||
Settlement of pre-existing relationship | (39 | ) | ||
Net identifiable assets acquired | (441 | ) | ||
Goodwill on acquisition | — | |||
* | Amounts were converted into euros at the |
The purchase price accounting for the acquired business is prepared on a provisional basis. The outcome indicates no goodwill as the fair value of the assets acquired approximates the consideration transferred. The rationale for the acquisition is to further drive volume growth and to strengthen the leading position in the UK beer and cider market. The acquisition creates a strong platform from which HEINEKEN is building leadership in the high value UK on-trade channel and will mainly impacts net result. The early amortisation and termination of associated contracts under the acquisition gave rise to a one-off, pre-tax expense of EUR36 million.
Acquisition related cost of EUR3 million have been recognised in the income statement for the period ended 31 December 2011.
Provisional accounting FEMSA acquisition in 2010
The FEMSA acquisition accounting has been concluded during the first half year of 2011. A final adjustment was made to provisional accounting for the FEMSA acquisition. Total impact resulted in an increase of goodwill of EUR4 million, the comparatives have not been restated. The adjustment resulted from the filing of a tax return in March 2011, which was EUR6 million lower, a negative impact of EUR12 million due to a legal provision and recognition of certain employee benefits for EUR10 million. In 2010 FEMSA results were included from 1 May 2010 onwards (8 months) and have been fully consolidated in 2011 (12 months).
Disposals
Disposal of interest without losing control
On 12 May 2010 HEINEKEN acquired an additional interest in Commonwealth Brewery Limited (CBL) and Burns House Limited (BHL) situated in the Bahamas, increasing its ownership to 100 per cent in both entities. This acquisition was subject to government approval that 25 per cent of the combined entities would be disposed of. During the period which ended 31 December 2011, HEINEKEN disposed of 25 per cent of its 100 per cent interest in CBL (which had acquired 100 per cent of BHL prior to this), for an amount of EUR43 million through an initial public offering (IPO) in the Bahamas. As a result, its ownership decreased to 75 per cent. After the disposal of this non-controlling interest, HEINEKEN maintains a controlling interest in CBL. There is no impact on net result, the impact is recognised in equity.
7. Assets (or disposal groups) classified as held for sale
Other assets classified as held for sale represent land and buildings following the commitment of HEINEKEN to a plan to sell certain land and buildings in the UK and our associate in Kazakhstan. Efforts to sell these assets have commenced and are expected to be completed during 2012.
Assets classified as held for sale
In millions of EUR | 2011 | 2010 | ||||||
Current assets | — | — | ||||||
Non-current assets | 99 | 6 | ||||||
99 | 6 | |||||||
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Heineken N.V. financial statements | Notes to
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8. Other income
In millions of EUR | 2011 | 2010 | ||||||
Net gain on sale of property, plant & equipment | 35 | 37 | ||||||
Net gain on sale of intangible assets | 24 | 13 | ||||||
Net gain on sale of subsidiaries, joint ventures and associates | 5 | 189 | ||||||
64 | 239 | |||||||
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In 2010 HEINEKEN transferred in total a 78.3 per cent stake in PT Multi Bintang Indonesia (MBI) and HEINEKEN’s 87 per cent stake in Grande Brasserie de Nouvelle-Caledonie S.A. (GBNC) to its JV Asia Pacific Breweries (APB). As a result of the transaction a gain of EUR157 million before tax was recognised in net gain on sale of subsidiaries, joint ventures and associates.
9. Raw materials, consumables and services
In millions of EUR | 2011 | 2010 | ||||||
Raw materials | 1,576 | 1,474 | ||||||
Non-returnable packaging | 2,075 | 1,863 | ||||||
Goods for resale | 1,498 | 1,655 | ||||||
Inventory movements | (8 | ) | (8 | ) | ||||
Marketing and selling expenses | 2,186 | 2,072 | ||||||
Transport expenses | 1,056 | 979 | ||||||
Energy and water | 525 | 442 | ||||||
Repair and maintenance | 417 | 375 | ||||||
Other expenses | 1,641 | 1,439 | ||||||
10,966 | 10,291 | |||||||
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Other expenses include rentals of EUR241 million (2010: EUR224 million), consultant expenses of EUR166 million (2010: EUR126 million), telecom and office automation of EUR159 million (2010: EUR156 million), travel expenses of EUR137 million (2010: EUR120 million) and other fixed expenses of EUR938 million (2010: EUR813 million).
10. Personnel expenses
In millions of EUR | Note | 2011 | 2010 | |||||||||
Wages and salaries | 1,891 | 1,787 | ||||||||||
Compulsory social security contributions | 333 | 317 | ||||||||||
Contributions to defined contribution plans | 24 | 16 | ||||||||||
Expenses related to defined benefit plans | 28 | 56 | 89 | |||||||||
Increase in other long-term employee benefits | 11 | 9 | ||||||||||
Equity-settled share-based payment plan | 29 | 11 | 15 | |||||||||
Other personnel expenses | 512 | 432 | ||||||||||
2,838 | 2,665 | |||||||||||
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Restructuring costs in Spain for an amount of EUR53 million are included in other personnel expenses.
In 2008 and 2007, under Mexican FRS,
For U.S. GAAP purposes, the existence of substantive participating rights held by the Coca-Cola Company (noncontrolling interest), as addressed in the shareholder agreement, did not allow FEMSA to consolidate Coca-Cola FEMSA in its financial statements. Therefore, FEMSA’s investment in Coca-Cola FEMSA has been accounted for by the equity method in FEMSA’s consolidated financial statement under U.S. GAAP for the years ended December 31, 2009, 2008 and 2007.statements continued
The average number of full-time equivalent (FTE) employees during the year was:
2011 | 2010 | |||||||
The Netherlands | 4,032 | 3,861 | ||||||
Other Western Europe | 14,707 | 15,751 | ||||||
Central and Eastern Europe | 17,424 | 18,043 | ||||||
The Americas | 16,414 | 17,164 | ||||||
Africa and the Middle East | 11,396 | 10,607 | ||||||
Asia Pacific | 279 | 304 | ||||||
HEINEKEN N.V. and subsidiaries | 64,252 | 65,730 | ||||||
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11. Amortisation, depreciation and impairments
In millions of EUR | Note | 2011 | 2010 | |||||||||
Property, plant & equipment | 14 | 936 | 907 | |||||||||
Intangible assets | 15 | 232 | 208 | |||||||||
Impairment on available-for-sale assets | — | 3 | ||||||||||
1,168 | 1,118 | |||||||||||
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12. Net finance income and expenses
Recognised in profit or loss
In millions of EUR | 2011 | 2010 | ||||||
Interest income | 70 | 100 | ||||||
Interest expenses | (494 | ) | (590 | ) | ||||
Dividend income on available-for-sale investments | 2 | 1 | ||||||
Dividend income on investments held for trading | 11 | 7 | ||||||
Net gain/(loss) on disposal of available-for-sale investments | 1 | — | ||||||
Net change in fair value of derivatives | 96 | (75 | ) | |||||
Net foreign exchange gain/(loss) | (107 | ) | 61 | |||||
Impairment losses on available-for-sale investments | — | (3 | ) | |||||
Unwinding discount on provisions | (7 | ) | (7 | ) | ||||
Other net financial income/(expenses) | (2 | ) | (3 | ) | ||||
Other net finance income/(expenses) | (6 | ) | (19 | ) | ||||
Net finance income/(expenses) | (430 | ) | (509 | ) | ||||
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On February 1, 2010, FEMSA and the Coca-Cola Company signed an amendment
Heineken N.V. financial statements | Notes to the |
Recognised in other comprehensive income
In millions of EUR | 2011 | 2010* | ||||||
Foreign currency translation differences for foreign operations | (493 | ) | 390 | |||||
Effective portion of changes in fair value of cash flow hedges | (21 | ) | 43 | |||||
Effective portion of cash flow hedges transferred to profit or loss | (11 | ) | 45 | |||||
Ineffective portion of cash flow hedges transferred to profit or loss | — | 9 | ||||||
Net change in fair value of available-for-sale investments | 71 | 11 | ||||||
Net change in fair value available-for-sale investments transferred to profit or loss | (1 | ) | (17 | ) | ||||
Actuarial (gains) and losses | (93 | ) | 99 | |||||
Share of other comprehensive income of associates/joint ventures | (5 | ) | (29 | ) | ||||
(553 | ) | 551 | ||||||
Recognised in: | ||||||||
Fair value reserve | 69 | (10 | ) | |||||
Hedging reserve | (42 | ) | 97 | |||||
Translation reserve | (482 | ) | 358 | |||||
Other | (98 | ) | 106 | |||||
(553 | ) | 551 | ||||||
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* | Comparatives have been adjusted due to |
The negative impact of foreign currency translation differences for foreign operations in other comprehensive income is mainly due to the impact of devaluation of the Mexican peso on the net assets and goodwill measured in Mexican peso of total EUR295 million. Remaining impact is related to the depreciation of the Polish zloty, the Chilean peso, Nigerian naira and Belarusian ruble, partly offset by the revaluation of the US dollar and the British pound.
13. Income tax expense
Recognised in profit or loss
In millions of EUR | 2011 | 2010* | ||||||
Current tax expense | ||||||||
Current year | 502 | 502 | ||||||
Under/(over) provided in prior years | (26 | ) | 52 | |||||
476 | 554 | |||||||
Deferred tax expense | ||||||||
Origination and reversal of temporary differences | 17 | (19 | ) | |||||
Previously unrecognised deductible temporary differences | (9 | ) | (2 | ) | ||||
Changes in tax rate | 1 | 3 | ||||||
Utilisation/(benefit) of tax losses recognised | (19 | ) | (39 | ) | ||||
Under/(over) provided in prior years | (1 | ) | (94 | ) | ||||
(11 | ) | (151 | ) | |||||
Total income tax expense in profit or loss | 465 | 403 | ||||||
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Heineken N.V. financial statements | Notes to the consolidated financial statements continued |
Reconciliation of the effective tax rate
In millions of EUR | 2011 | 2010* | ||||||
Profit before income tax | 2,025 | 1,982 | ||||||
Share of net profit of associates and joint ventures and impairments thereof | (240 | ) | (193 | ) | ||||
Profit before income tax excluding share of profit of associates and joint ventures (inclusive impairments thereof) | 1,785 | 1,789 | ||||||
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% | 2011 | % | 2010* | |||||||||||||
Income tax using the Company’s domestic tax rate | 25.0 | 446 | 25.5 | 456 | ||||||||||||
Effect of tax rates in foreign jurisdictions | 3.5 | 62 | 1.9 | 34 | ||||||||||||
Effect of non-deductible expenses | 3.2 | 58 | 4.0 | 72 | ||||||||||||
Effect of tax incentives and exempt income | (6.0 | ) | (107 | ) | (8.2 | ) | (146 | ) | ||||||||
Recognition of previously unrecognised temporary differences | (0.5 | ) | (9 | ) | (0.1 | ) | (2 | ) | ||||||||
Utilisation or recognition of previously unrecognised tax losses | (0.3 | ) | (5 | ) | (1.2 | ) | (21 | ) | ||||||||
Unrecognised current year tax losses | 1.0 | 18 | 0.8 | 15 | ||||||||||||
Effect of changes in tax rate | 0.1 | 1 | 0.2 | 3 | ||||||||||||
Withholding taxes | 1.5 | 26 | 1.4 | 25 | ||||||||||||
Under/(over) provided in prior years | (1.5 | ) | (27 | ) | (2.3 | ) | (42 | ) | ||||||||
Other reconciling items | 0.1 | 2 | 0.5 | 9 | ||||||||||||
26.1 | 465 | 22.5 | 403 | |||||||||||||
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* | Comparatives have been adjusted due to the accounting policy change in employee benefits (see note 2e) |
The reported tax rate is 26.1 per cent (2010: 22.5 per cent) and includes the effect of the release of tax provisions after having reached agreement with the tax authorities, mainly explaining the under/over provided amount as part of the current tax expense. The reported 2010 tax rate included the tax-exempt transfer of PT Multi Bintang Indonesia (MBI) and Grande Brasserie de Nouvelle-Caledonie S.A. (GBNC).
Income tax recognised in other comprehensive income
In millions of EUR | Note | 2011 | 2010 | |||||||||
Changes in fair value | — | (5 | ) | |||||||||
Changes in hedging reserve | 13 | (38 | ) | |||||||||
Changes in translation reserve | 11 | — | ||||||||||
Other | 16 | (38 | ) | |||||||||
24 | 40 | (81 | ) | |||||||||
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Heineken N.V. financial statements | Notes to the consolidated financial statements continued |
14. Property, plant and equipment
In millions of EUR | Note | Land and buildings | Plant and equipment | Other fixed assets | Under construction | Total | ||||||||||||||||||
Cost | ||||||||||||||||||||||||
Balance as at 1 January 2010 | 3,460 | 5,337 | 3,518 | 315 | 12,630 | |||||||||||||||||||
Changes in consolidation | 745 | 635 | 253 | 72 | 1,705 | |||||||||||||||||||
Purchases | 38 | 82 | 249 | 279 | 648 | |||||||||||||||||||
Transfer of completed projects under construction | 106 | 142 | 104 | (352 | ) | — | ||||||||||||||||||
Transfer to/(from) assets classified as held for sale | 26 | 34 | 39 | 2 | 101 | |||||||||||||||||||
Disposals | (49 | ) | (130 | ) | (285 | ) | (1 | ) | (465 | ) | ||||||||||||||
Effect of movements in exchange rates | 71 | 107 | 61 | 15 | 254 | |||||||||||||||||||
Balance as at 31 December 2010 | 4,397 | 6,207 | 3,939 | 330 | 14,873 | |||||||||||||||||||
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Balance as at 1 January 2011 | 4,397 | 6,207 | 3,939 | 330 | 14,873 | |||||||||||||||||||
Changes in consolidation | 6 | 505 | 89 | (31 | ) | 3 | 566 | |||||||||||||||||
Purchases | 55 | 99 | 320 | 326 | 800 | |||||||||||||||||||
Transfer of completed projects under construction | 82 | 90 | 150 | (322 | ) | — | ||||||||||||||||||
Transfer to/(from) assets classified as held for sale | (65 | ) | — | — | — | (65 | ) | |||||||||||||||||
Disposals | (35 | ) | (92 | ) | (255 | ) | (6 | ) | (388 | ) | ||||||||||||||
Effect of hyperinflation | 2 | 11 | 2 | 2 | 17 | |||||||||||||||||||
Effect of movements in exchange rates | (71 | ) | (127 | ) | (73 | ) | (1 | ) | (272 | ) | ||||||||||||||
Balance as at 31 December 2011 | 4,870 | 6,277 | 4,052 | 332 | 15,531 | |||||||||||||||||||
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Depreciation and impairment losses | ||||||||||||||||||||||||
Balance as at 1 January 2010 | (1,405 | ) | (2,875 | ) | (2,333 | ) | — | (6,613 | ) | |||||||||||||||
Changes in consolidation | 12 | 31 | 35 | — | 78 | |||||||||||||||||||
Depreciation charge for the year | 11 | (117 | ) | (342 | ) | (434 | ) | — | (893 | ) | ||||||||||||||
Impairment losses | 11 | (15 | ) | (19 | ) | (6 | ) | — | (40 | ) | ||||||||||||||
Reversal impairment losses | 11 | 4 | 21 | 1 | — | 26 | ||||||||||||||||||
Transfer (to)/from assets classified as held for sale | (6 | ) | (14 | ) | (23 | ) | — | (43 | ) | |||||||||||||||
Disposals | 37 | 128 | 263 | — | 428 | |||||||||||||||||||
Effect of movements in exchange rates | (36 | ) | (54 | ) | (39 | ) | — | (129 | ) | |||||||||||||||
Balance as at 31 December 2010 | (1,526 | ) | (3,124 | ) | (2,536 | ) | — | (7,186 | ) | |||||||||||||||
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Balance as at 1 January 2011 | (1,526 | ) | (3,124 | ) | (2,536 | ) | — | (7,186 | ) | |||||||||||||||
Changes in consolidation | 6 | — | 4 | 14 | — | 18 | ||||||||||||||||||
Depreciation charge for the year | 11 | (128 | ) | (356 | ) | (452 | ) | — | (936 | ) | ||||||||||||||
Impairment losses | 11 | — | — | (8 | ) | — | (8 | ) | ||||||||||||||||
Reversal impairment losses | 11 | — | 3 | 5 | — | 8 | ||||||||||||||||||
Transfer (to)/from assets classified as held for sale | 3 | — | — | — | 3 | |||||||||||||||||||
Disposals | 18 | 92 | 224 | — | 334 | |||||||||||||||||||
Effect of movements in exchange rates | 11 | 42 | 43 | — | 96 | |||||||||||||||||||
Balance as at 31 December 2011 | (1,622 | ) | (3,339 | ) | (2,710 | ) | — | (7,671 | ) | |||||||||||||||
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Carrying amount | ||||||||||||||||||||||||
As at 1 January 2010 | 2,055 | 2,462 | 1,185 | 315 | 6,017 | |||||||||||||||||||
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As at 31 December 2010 | 2,871 | 3,083 | 1,403 | 330 | 7,687 | |||||||||||||||||||
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As at 1 January 2011 | 2,871 | 3,083 | 1,403 | 330 | 7,687 | |||||||||||||||||||
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As at 31 December 2011 | 3,248 | 2,938 | 1,342 | 332 | 7,860 |
Heineken N.V. financial statements | Notes to the consolidated financial statements continued |
Impairment losses
In 2011 a total impairment loss of EUR8 million (2010: EUR40 million) was charged to profit or loss.
Financial lease assets
The Group leases P, P & E under a number of finance lease agreements. At 31 December 2011 the net carrying amount of leased P,P & E was EUR39 million (2010: EUR95 million). During the year, the Group acquired leased assets of EUR6 million (2010: EUR17 million).
Security to authorities
Certain P, P & E for EUR137 million (2010: EUR149 million) has been pledged to the authorities in a number of countries as security for the payment of taxation, particularly excise duties on beers, non-alcoholic beverages and spirits and import duties. This mainly relates to Brazil (see note 34).
Property, plant and equipment under construction
P, P & E under construction mainly relates to expansion of the brewing capacity in Mexico, the UK, and Nigeria.
Capitalised borrowing costs
During 2011 no borrowing costs have been capitalised (2010: EUR nil).
15. Intangible assets
In millions of EUR | Note | Goodwill | Brands | Customer- related intangibles | Contract- based intangibles | Software, research and development and other | Total | |||||||||||||||||||||
Cost | ||||||||||||||||||||||||||||
Balance as at 1 January 2010 | 5,713 | 1,382 | 351 | 124 | 259 | 7,829 | ||||||||||||||||||||||
Changes in consolidation | 1,748 | 924 | 943 | 86 | 39 | 3,740 | ||||||||||||||||||||||
Purchases/internally developed | — | — | — | — | 56 | 56 | ||||||||||||||||||||||
Disposals | (1 | ) | (8 | ) | — | — | (16 | ) | (25 | ) | ||||||||||||||||||
Transfers to assets held for sale | — | — | — | — | 3 | 3 | ||||||||||||||||||||||
Effect of movements in exchange rates | 132 | 23 | (10 | ) | 12 | 3 | 160 | |||||||||||||||||||||
Balance as at 31 December 2010 | 7,592 | 2,321 | 1,284 | 222 | 344 | 11,763 | ||||||||||||||||||||||
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Balance as at 1 January 2011 | 7,592 | 2,321 | 1,284 | 222 | 344 | 11,763 | ||||||||||||||||||||||
Changes in consolidation | 6 | 287 | 8 | 18 | 38 | — | 351 | |||||||||||||||||||||
Purchased/internally developed | — | — | — | 6 | 50 | 56 | ||||||||||||||||||||||
Disposals | — | — | — | (91 | ) | (6 | ) | (97 | ) | |||||||||||||||||||
Effect of movements in exchange rates | (70 | ) | (57 | ) | (74 | ) | (13 | ) | (10 | ) | (224 | ) | ||||||||||||||||
Balance as at 31 December 2011 | 7,809 | 2,272 | 1,228 | 162 | 378 | 11,849 | ||||||||||||||||||||||
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Amortisation and impairment losses | ||||||||||||||||||||||||||||
Balance as at 1 January 2010 | (280 | ) | (108 | ) | (74 | ) | (50 | ) | (182 | ) | (694 | ) | ||||||||||||||||
Changes in consolidation | — | — | — | 25 | 3 | 28 | ||||||||||||||||||||||
Amortisation charge for the year | 11 | — | (54 | ) | (88 | ) | (16 | ) | (34 | ) | (192 | ) | ||||||||||||||||
Impairment losses | 11 | — | (1 | ) | — | (15 | ) | — | (16 | ) | ||||||||||||||||||
Disposals | 1 | 2 | — | — | 10 | 13 | ||||||||||||||||||||||
Transfers to assets held for sale | — | — | — | — | (2 | ) | (2 | ) | ||||||||||||||||||||
Effect of movements in exchange rates | — | (2 | ) | (1 | ) | (4 | ) | (3 | ) | (10 | ) | |||||||||||||||||
Balance as at 31 December 2010 | (279 | ) | (163 | ) | (163 | ) | (60 | ) | (208 | ) | (873 | ) | ||||||||||||||||
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Heineken N.V. financial statements | Notes to the consolidated financial statements continued |
In millions of EUR | Note | Goodwill | Brands | Customer- related intangibles | Contract- based intangibles | Software, research and development and other | Total | |||||||||||||||||||||
Balance as at 1 January 2011 | (279 | ) | (163 | ) | (163 | ) | (60 | ) | (208 | ) | (873 | ) | ||||||||||||||||
Changes in consolidation | 6 | — | — | — | 1 | (1 | ) | — | ||||||||||||||||||||
Amortisation charge for the year | 11 | — | (59 | ) | (110 | ) | (24 | ) | (36 | ) | (229 | ) | ||||||||||||||||
Impairment losses | 11 | — | (1 | ) | — | — | (2 | ) | (3 | ) | ||||||||||||||||||
Disposals | — | (1 | ) | — | 91 | 1 | 91 | |||||||||||||||||||||
Effect of movements in exchange rates | — | 3 | 5 | (11 | ) | 3 | — | |||||||||||||||||||||
Balance as at 31 December 2011 | (279 | ) | (221 | ) | (268 | ) | (3 | ) | (243 | ) | (1,014 | ) | ||||||||||||||||
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Carrying amount | ||||||||||||||||||||||||||||
As at 1 January 2010 | 5,433 | 1,274 | 277 | 74 | 77 | 7,135 | ||||||||||||||||||||||
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As at 31 December 2010 | 7,313 | 2,158 | 1,121 | 162 | 136 | 10,890 | ||||||||||||||||||||||
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As at 1 January 2011 | 7,313 | 2,158 | 1,121 | 162 | 136 | 10,890 | ||||||||||||||||||||||
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As at 31 December 2011 | 7,530 | 2,051 | 960 | 159 | 135 | 10,835 | ||||||||||||||||||||||
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Brands and customer-related/contract-based intangibles
The main brands capitalised are the brands acquired in 2008: Scottish & Newcastle (Fosters and Strongbow) and 2010: Cervecería Cuauhtémoc Moctezuma (Dos Equis, Tecate and Sol). The main customer-related and contract-based intangibles were acquired in 2010 and are related to customer relationships with retailers in Mexico (constituting either by way of a contractual agreement or by way of non-contractual relations).
Impairment tests for cash-generating units containing goodwill
For the purpose of impairment testing, goodwill in respect of Western Europe, Central and Eastern Europe (excluding Russia) and the Americas (excluding Brazil) is allocated and monitored on a regional basis. In respect of less integrated Operating Companies of Russia, Brazil and Africa and the Middle East, goodwill is allocated and monitored on an individual country basis.
The aggregate carrying amounts of goodwill allocated to each CGU are as follows:
In millions of EUR | 2011 | 2010* | ||||||
Western Europe | 3,396 | 3,328 | ||||||
Central and Eastern Europe (excluding Russia) | 1,394 | 1,494 | ||||||
Russia | 102 | 105 | ||||||
The Americas (excluding Brazil) | 1,743 | 1,751 | ||||||
Brazil | 111 | 110 | ||||||
Africa and the Middle East (aggregated) | 528 | 245 | ||||||
Head Office and others | 256 | 280 | ||||||
7,530 | 7,313 | |||||||
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* | Comparatives have been adjusted due to the transfer of Empaque from the Americas region to Head Office. |
Throughout the year total goodwill mainly increased due to the acquisition of the Sona and Ethiopian beer business and net foreign currency differences.
Goodwill is tested for impairments annually. The recoverable amounts of the CGUs are based on value-in-use calculations. Value in use was determined by discounting the future cash flows generated from the continuing use of the unit using a pre-tax discount rate.
Heineken N.V. financial statements | Notes to the consolidated financial statements continued |
The key assumptions used for the value-in-use calculations are as follows:
Cash flows were projected based on actual operating results and the three-year business plan. Cash flows for a further seven-year period were extrapolated using expected annual per country volume growth rates, which are based on external sources. Management believes that this forecasted period is justified due to the long-term nature of the beer business and past experiences.
The beer price growth per year after the first three-year period is assumed to be at specific per country expected annual long-term inflation, based on external sources.
Cash flows after the first ten-year period were extrapolated using a perpetual growth rate equal to the expected annual long-term inflation, in order to calculate the terminal recoverable amount.
A per CGU-specific pre-tax Weighted Average Cost of Capital (WACC) was applied in determining the recoverable amount of the units.
The values assigned to the key assumptions used for the value in use calculations are as follows:
Pre- tax WACC | Expected annual long- term inflation 2015-2021 | Expected volume growth rates 2015-2021 | ||||||||||
Western Europe | 8.3 | % | 2.1 | % | (0.4 | )% | ||||||
Central and Eastern Europe (excluding Russia) | 12.3 | % | 2.7 | % | 1.7 | % | ||||||
Russia | 14.8 | % | 4.8 | % | 1.9 | % | ||||||
The Americas (excluding Brazil) | 10.1 | % | 2.5 | % | 1.8 | % | ||||||
Brazil | 16.1 | % | 4.3 | % | 3.0 | % | ||||||
Africa and Middle East | 10.7-21.4 | % | 2.7-8.4 | % | 1.1-5.9 | % | ||||||
Head Office and others | 8.3-12.6 | % | 2.1-3.6 | % | (0.4)-2.4 | % | ||||||
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The values assigned to the key assumptions represent management’s assessment of future trends in the beer industry and are based on both external sources and internal sources (historical data).
HEINEKEN applied its methodology to determine CGU specific WACC’s to perform its annual impairment testing on a consistent basis. The trend and outcome of several WACC’s, for amongst others the Western Europe CGU, turned out lower than expected based on the current economic climate and associated outlooks. HEINEKEN does not believe the risk profile in Western Europe is significantly lower than in prior years. The lower WACC for 2011 is mainly driven by lower observed risk-free rates reflecting the capital flee towards safer deemed economies. HEINEKEN performed an additional impairment sensitivity calculation and concluded that applying a different WACC would not result in a materially different outcome. The WACC’s disclosed are based on our internal consistent methodology.
Sensitivity to changes in assumptions
Limited headroom is available in our CGU’s Russia and Brazil, however the outcome of a sensitivity analysis of a 100 basis points adverse change in key assumptions (lower growth rates or higher discount rates respectively) did not result in a materially different outcome of the impairment test.
Heineken N.V. financial statements | Notes to the consolidated financial statements continued |
16. Investments in associates and joint ventures
HEINEKEN has the following (direct and indirect) significant investments in associates and joint ventures:
Country | Ownership 2011 | Ownership 2010 | ||||||||||
Joint ventures | ||||||||||||
Brau Holding International GmbH & Co KgaA | Germany | 49.9 | % | 49.9 | % | |||||||
Zagorka Brewery A.D. | Bulgaria | 49.4 | % | 49.4 | % | |||||||
Brewinvest S.A. | Greece | 50.0 | % | 50.0 | % | |||||||
Pivara Skopje A.D. | FYR Macedonia | 48.2 | % | 27.6 | % | |||||||
Brasseries du Congo S.A. | Congo | 50.0 | % | 50.0 | % | |||||||
Asia Pacific Investment Pte. Ltd. | Singapore | 50.0 | % | 50.0 | % | |||||||
Asia Pacific Breweries Ltd. | Singapore | 41.9 | % | 41.9 | % | |||||||
Compania Cervecerias Unidas S.A. | Chile | 33.1 | % | 33.1 | % | |||||||
Tempo Beverages Ltd. | Israel | 40.0 | % | 40.0 | % | |||||||
HEINEKEN Lion Australia Pty. | Australia | 50.0 | % | 50.0 | % | |||||||
Sirocco FZCo | Dubai | 50.0 | % | 50.0 | % | |||||||
Diageo HEINEKEN Namibia B.V. | Namibia | 50.0 | % | 50.0 | % | |||||||
United Breweries Limited | India | 37.5 | % | 37.5 | % | |||||||
Millennium Alcobev Private Limited** | India | — | 68.8 | % | ||||||||
DHN Drinks (Pty) Ltd. | South Africa | 44.5 | % | 44.5 | % | |||||||
Sedibeng Brewery Pty Ltd.* | South Africa | 75.0 | % | 75.0 | % | |||||||
UB Nizam Breweries Pvt. Ltd** | India | — | 50.0 | % | ||||||||
UB Ajanta Breweries Pvt. Ltd | India | 50.0 | % | 50.0 | % | |||||||
Associates | ||||||||||||
Cerveceria Costa Rica S.A. | Costa Rica | 25.0 | % | 25.0 | % | |||||||
JSC FE Efes Karaganda Brewery*** | Kazakhstan | 28.0 | % | 28.0 | % | |||||||
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* | HEINEKEN has joint control as the contract and ownership details determine that for
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** | In 2011 these entities ceased to exist, they were merged into United Breweries Limited. |
*** | This entity is classified as Held for
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Reporting date
The reporting date of the financial statements of all HEINEKEN entities and joint ventures disclosed are the same as for the Company except for
(i) Asia Pacific Breweries Ltd., HEINEKEN Lion Australia Pty. and Asia Pacific Investment Pte. Ltd which have a 30 September reporting date (the APB results are included with a three-month delay in reporting);
(ii) DHN Drinks (Pty) Ltd. which has a 30 June reporting date, and;
(iii) United Breweries Limited and Millennium Alcobev Private Limited which have a 31 March reporting date. The results of (ii) and (iii) have been adjusted to include numbers for the full financial year ended 31 December 2011.
Share of profit of associates and joint ventures and impairments thereof |
Certain items require a different classification in the balance sheet or income statement under U.S. GAAP. These include:
As explained in Note 4 d, under Mexican FRS, advances to suppliers are recorded as inventories. Under U.S. GAAP advances to suppliers are classified as prepaid expenses;
Impairment of goodwill and other long-lived assets, the gains or losses on the disposition of fixed assets, all severance payments associated with an ongoing benefit and amendments to pension plans, financial expenses from labor liabilities and employee profit sharing are recorded as part of operating income under U.S. GAAP; and
Under Mexican FRS, deferred taxes are classified as non-current, while under U.S. GAAP they are based on the classification of the related asset or liability or their estimated reversal date when not associated with an asset or liability.
As explained in Note 4 j, through 2008, under Mexican FRS, start-up expenses were capitalized and amortized using the straight-line method in accordance with the terms of the lease contracts at the start of operations. Under U.S. GAAP, these expenses must be recorded in the income statement as incurred. Beginning on January 1, 2009, the Company adopted NIF C-8, which establishes that start-up expenses have to be recorded in the income statement as incurred (see Note 4 j). As a result, since 2009, there are no differences between Mexican FRS and U.S. GAAP.
In millions of EUR | 2011 | 2010 | ||||||
Income associates | 25 | 28 | ||||||
Income joint ventures | 215 | 165 | ||||||
Impairments | — | — | ||||||
240 | 193 | |||||||
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In the year APB (the JV of HEINEKEN and its partner Fraser and Neave) completed the sale of Kingway Brewery for SGD205 million (EUR116 million) of which SGD72 million (EUR41 million) was recorded as income by APB. As HEINEKEN has a share of 45.95 per cent a capital gain of SGD33 million (EUR19 million) is included in the share of profit of JV’s.
According
As a result of the change in U.S. GAAP, the Company performed an initial impairment test as of January 1, 2002 and found no impairment. Subsequent impairment tests are performed annually by the Company, if events or changes in circumstances between annual tests indicate that the asset might be impaired.
Through December 2007, the Company restated imported machinery and equipment applying the inflation rate and the exchange rate of the currency of the country of origin; then the Company translated those amounts into Mexican pesos using the period-end exchange rate.
As explained in Note 2 g, on January 1, 2008, the Company adopted NIF B-10, “Effects of Inflation” which establishes that imported machinery and equipment are recorded using the exchange rate of the acquisition date. Subholding Companies that operate in inflationary economic environments have to restate those assets by applying the inflation rate of the country where the asset is acquired. The change in this methodology did not impact significantly the consolidated financial position of the Company (see Note 2 g).
Under U.S. GAAP, the Company applies SEC regulations referred to above; as such amounts are not reconciled during the preparation of U.S. GAAP financial information for 2007 figures.statements continued
Summary financial information for equity accounted joint ventures and associates
In millions of EUR | Joint ventures 2011 | Joint ventures 2010 | Associates 2011 | Associates 2010 | ||||||||||||
Non-current assets | 1,708 | 1,696 | 73 | 50 | ||||||||||||
Current assets | 1,005 | 869 | 52 | 51 | ||||||||||||
Non-current liabilities | (581 | ) | (611 | ) | (25 | ) | (28 | ) | ||||||||
Current liabilities | (725 | ) | (684 | ) | (30 | ) | (23 | ) | ||||||||
Revenue | 2,313 | 2,108 | 153 | 547 | ||||||||||||
Expenses | (1,914 | ) | (1,887 | ) | (117 | ) | (420 | ) | ||||||||
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In the above table HEINEKEN represents its share of the aggregated amounts of assets, liabilities, revenues and expenses for its Joint Ventures and Associates for the year ended 31 December.
17. Other investments and receivables
In millions of EUR | Note | 2011 | 2010 | |||||||||
Non-current other investments | ||||||||||||
Loans and advances to customers | 32 | 384 | 455 | |||||||||
Indemnification receivable | 32 | 156 | 145 | |||||||||
Other receivables | 32 | 178 | 174 | |||||||||
Held-to-maturity investments | 32 | 5 | 4 | |||||||||
Available-for-sale investments | 32 | 264 | 190 | |||||||||
Non-current derivatives | 32 | 142 | 135 | |||||||||
1,129 | 1,103 | |||||||||||
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Current other investments | ||||||||||||
Investments held for trading | 32 | 14 | 17 | |||||||||
14 | 17 | |||||||||||
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Included in loans are loans to customers with a carrying amount of EUR120 million as at 31 December 2011 (2010: EUR166 million). Effective interest rates range from 6 to 12 per cent. EUR72 million (2010: EUR100 million) matures between one and five years and EUR48 million (2010: EUR66 million) after five years.
The indemnification receivable represents the receivable on FEMSA and Lewiston investments and is a mirroring of the corresponding indemnified liabilities originating from the acquisition of the beer operations of FEMSA and Sona.
The other receivables mainly originate from the acquisition of the beer operations of FEMSA and represent a receivable on the Brazilian Authorities on which interest is calculated in accordance with Brazilian legislation. Collection of this receivable is expected to be beyond a period of five years.
The main available-for-sale investments are S.A. Des Brasseries du Cameroun, Consorcio Cervecero de Nicaragua S.A., Desnoes & Geddes Ltd., Brasserie Nationale d’Haiti S.A. and Cerveceria Nacional Dominicana. As far as these investments are listed they are measured at their quoted market price. For others the value in use or multiples are used. Debt securities (which are interest-bearing) with a carrying amount of EUR20 million (2010: EUR21 million) are included in available-for-sale investments.
Sensitivity analysis – equity price risk
An amount of EUR95 million as at 31 December 2011 (2010: EUR87 million) of available-for-sale investments and investments held for trading is listed on stock exchanges. An impact of 1 per cent increase or decrease in the share price at the reporting date would not result in a material impact on a consolidated Group level.
According to Mexican FRS D-6, the Company has capitalized the comprehensive financing result generated by borrowing obtained to finance investment projects.
According to U.S. GAAP, if interest expense is incurred during the construction of qualifying assets and the net effect is material, capitalization is required for all assets that require a period of time to get them ready for their intended use. The net effect of interest expenses incurred to bring qualifying assets
A reconciling item is included for the difference in capitalized comprehensive financing result policies and their amortization under Mexican FRS and capitalized interest expense policies under U.S. GAAP.
In 2008, the Company adopted a FASB pronouncement that establishes a framework for measuring fair value providing a consistent definition that focuses on exit price and prioritizes, the use of market based inputs over company specific inputs. This pronouncement requires companies to consider its own nonperformance risk when measuring liabilities carried at fair value, including derivative financial instruments. The effective date of this standard for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value on a recurring basis (at least annually) started on January 1, 2009.
Additionally, U.S. GAAP establishes a three level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs are full described in Note 19. The Company has segregated all financial assets and liabilities that are measured at fair value on a recurring basis (at least annually) into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date as shown in Note 19.
The Company is exposed to counterparty credit risk on all derivative financial instruments. Because the amounts are recorded at fair value, the full amount of the Company’s exposure is the carrying value of these instruments. Credit risk is monitored through established approval procedures, which consider grading counterparties periodically in order to offset the net effect of counterparty’s credit risk. As a result the Company only enters into derivative transactions with well-established financial institutions; and estimates that such risk is minimal.
U.S. GAAP allows entities to voluntarily choose to measure certain financial assets and liabilities at fair value (fair value option). The fair value option may be elected on an instrument by instrument basis and is irrevocable, unless a new election date occurs. If the fair value option is elected for an instrument, the unrealized gains and losses for that instrument shall be reported in earnings at each subsequent reporting date. The Company did not elect to adopt fair value option to any of its outstanding instruments; therefore, it did not have any impact on its consolidated financial statements.
In accordance with the financial instruments disclosures, it is necessary to disclose, in the body of the financial statements or in the notes, the fair value of financial instruments for which it is practicable to estimate it, and the method(s) used to estimate the fair value. The Company estimates that carrying amounts of cash and cash equivalents, accounts receivable, interest payable, suppliers, accounts payable and other current liabilities approximate their fair value due to their short maturity.
Additionally as explained in Note 16, the Company has a bonus program in which the cost of the equity instruments is measured based on the fair value of the instruments on the date they are granted.
The calculation of deferred income taxes and employee profit sharing for U.S. GAAP purposes differs from Mexican FRS as follows:
Under Mexican FRS, inflation effects on the deferred taxes balance generated by monetary items are recognized in the income statement as part of the result of monetary position of inflationary economic environments. Under U.S. GAAP, the deferred taxes balance is classified as a non-monetary item. As a result, the consolidated income statement differs with respect to the presentation of the gain or loss on monetary position and deferred income taxes provision;
Under Mexican FRS, deferred employee profit sharing is calculated using the asset and liability method, which is the method used to compute deferred income taxes under U.S. GAAP. Employee profit sharing is deductible for purposes of Mexican taxes from profit. This deduction reduces the payments of income taxes in subsequent years. For Mexican FRS purposes, the Company did not record deferred employee profit sharing, since is not expected to materialize in the future; and
The differences in restatement of imported machinery and equipment, capitalization of interest expenses, employee benefits, deferred employee profit sharing and through 2008 start-up expenses, explained in Note 26 d, f, g, and j, generate a difference when calculating the deferred income taxes under U.S. GAAP compared to that presented under Mexican FRS (see Note 23 d).
The reconciliation of deferred income tax and employee profit sharing, as well as the changes in the balances of deferred taxes, are as follows:
Reconciliation of Deferred Income Taxes, Net | 2009 | 2008 | ||||||
Deferred income taxes under Mexican FRS | Ps. | (282 | ) | Ps. | 1,153 | |||
Deferred income taxes of Coca-Cola FEMSA | (1,640 | ) | (434 | ) | ||||
U.S. GAAP adjustments: | ||||||||
Start-up expenses | — | (62 | ) | |||||
Restatement of imported equipment | (29 | ) | (23 | ) | ||||
Capitalization of interest expense | 62 | 74 | ||||||
Tax deduction for deferred employee profit sharing | (38 | ) | (60 | ) | ||||
Employee benefits | (478 | ) | (611 | ) | ||||
Total U.S. GAAP adjustments | (483 | ) | (682 | ) | ||||
Deferred income taxes, net, under U.S. GAAP | Ps. | (2,405 | ) | Ps. | 37 | |||
Changes in the Balance of Deferred Income Taxes | 2009 | 2008 | 2007 | |||||||||
Initial balance | Ps. | 37 | Ps. | 1,604 | Ps. | 1,808 | ||||||
Provision for the year | (795 | ) | (1,243 | ) | (539 | ) | ||||||
Financial instruments | 319 | (622 | ) | 124 | ||||||||
Application of tax loss carryforwards due to amnesty adoption | 2,066 | — | — | |||||||||
Reversal of tax loss carryforward allowance | (2,066 | ) | — | — | ||||||||
Effect in tax loss carryforwards | (1,874 | ) | — | — | ||||||||
Change in the statutory income tax rate | (90 | ) | — | — | ||||||||
Cumulative translation adjustment | (134 | ) | 437 | 178 | ||||||||
Unrecognized labor liabilities | 132 | (139 | ) | 33 | ||||||||
Ending balance | Ps. | (2,405 | ) | Ps. | 37 | Ps. | 1,604 | |||||
Reconciliation of Deferred Employee Profit Sharing | 2009 | 2008 | ||||||
Deferred employee profit sharing under Mexican FRS | Ps. | Ps. | — | |||||
U.S. GAAP adjustments: | ||||||||
Allowance for doubtful accounts | (5 | ) | (7 | ) | ||||
Inventories | 22 | 58 | ||||||
Prepaid expenses | 6 | 6 | ||||||
Property, plant and equipment | 211 | 278 | ||||||
Deferred charges | (34 | ) | (18 | ) | ||||
Intangible assets | 32 | 54 | ||||||
Capitalization of interest expense | 2 | 2 | ||||||
Start-up expenses | — | (19 | ) | |||||
Derivative financial instruments | 15 | 18 | ||||||
Labor liabilities | (405 | ) | (410 | ) | ||||
Other reserves | (187 | ) | (113 | ) | ||||
Total U.S. GAAP adjustments | (343 | ) | (151 | ) | ||||
Valuation allowance | 477 | 365 | ||||||
Deferred employee profit sharing under U.S. GAAP | Ps. | 134 | Ps. | 214 | ||||
Changes in the Balance of Deferred Employee Profit Sharing | 2009 | 2008 | 2007 | |||||||||
Initial balance | Ps. | 214 | Ps. | 483 | Ps. | 650 | ||||||
Provision for the year | (234 | ) | (576 | ) | (180 | ) | ||||||
Labor liabilities | 42 | (58 | ) | 13 | ||||||||
Valuation allowance | 112 | 365 | — | |||||||||
Ending balance | Ps. | 134 | Ps. | 214 | Ps. | 483 | ||||||
The deferred employee profit sharing includes total reduction by a valuation allowance since the Company estimates it will not be realized.
According to U.S. GAAP, the Company is required to recognize in its financial statements the impact of a tax position when it is more likely than not that the position will be sustained upon examination. If the tax position meets the more-likely-than-not recognition threshold, the tax effect is recognized at the largest amount of the benefit that is greater than 50% likely of being realized Any excess between the tax position taken in the tax return and the tax position recognized in the financial statements using the criteria above results in the recognition of a liability in the financial statements for the uncertain tax position. Similarly, if a tax position fails to meet the more-likely-than-not recognition threshold, the benefit taken in tax return will also result in the recognition of a liability in the financial statements for the full amount of the unrecognized benefit. According to Mexican FRS, the Company is required to record tax contingencies in its financial statements when such liabilities are probable in nature and estimable. However, this difference between Mexican FRS and U.S. GAAP is not material to the Company’s consolidated financial statements during any of the periods presented herein, and has thus not resulted in a reconciling item. continued
18. Deferred tax assets and liabilities |
On January 1, 2008, the Company adopted NIF D-3 “Employee Benefits” according to Mexican FRS. This standard eliminates the recognition of the additional labor liability resulting from the difference between actual benefits and the net projected liabilities, establishes a maximum of five years to amortize the beginning balance of past labor costs of pension plans and severance indemnities and requires recording actuarial gains or losses of severance indemnities as part of the income from operations during the period when those are incurred. The adoption of NIF D-3 generates a difference in the unamortized net transition obligation and in the amortization expense of pension plans and severance indemnities. Under U.S. GAAP the Company is required to fully recognize as an asset or liability from the overfunded or underfunded status of defined pension and other postretirement benefit plans.
The adoption of NIF B-10 for Mexican FRS, required the application of real rates for inflationary economic environments and nominal rates for non-inflationary economic environments in the actuarial calculations. The Company uses the same criteria for interest rates for both U.S. GAAP and Mexican FRS.
The reconciliation of the pension cost for the year and related labor liabilities is as follows:
Cost for the Year | 2009 | 2008 | 2007 | |||||||||
Net cost recorded under Mexican FRS | Ps. | 1,143 | Ps. | 1,203 | Ps. | 789 | ||||||
Net cost of Coca-Cola FEMSA | (313 | ) | (451 | ) | (176 | ) | ||||||
U.S. GAAP adjustments: | ||||||||||||
Amortization of unrecognized transition obligation | (53 | ) | (55 | ) | (8 | ) | ||||||
Amortization of prior service cost | 5 | 4 | 8 | |||||||||
Amortization of net actuarial loss | 2 | (36 | ) | — | ||||||||
Total U.S. GAAP adjustment | (46 | ) | (87 | ) | — | |||||||
Cost for the year under U.S. GAAP | Ps. | 784 | Ps. | 665 | Ps. | 613 | ||||||
Labor Liabilities | 2009 | 2008 | ||||||
Employee benefits under Mexican FRS | Ps. | 3,354 | Ps. | 2,886 | ||||
Employee benefits of Coca-Cola FEMSA | (1,088 | ) | (936 | ) | ||||
U.S. GAAP adjustments: | ||||||||
Unrecognized net transition obligation | 287 | 403 | ||||||
Unrecognized prior service | 696 | 740 | ||||||
Unrecognized net actuarial loss | 730 | 1,040 | ||||||
U.S. GAAP adjustments to stockholders’ equity | 1,713 | 2,183 | ||||||
Labor liabilities under U.S. GAAP | Ps. | 3,979 | Ps. | 4,133 | ||||
Estimates of the unrecognized items expected to be recognized as components of net periodic pension cost during 2010 are shown in the table below:
Pension and Retirement Plans | Seniority Premiums | Postretirement Medical Services | |||||||
Actuarial net loss and prior service cost recognized in cumulative other comprehensive income during the year | Ps. (169 | ) | Ps. (4 | ) | Ps. (90 | ) | |||
Actuarial net loss and prior service cost recognized as a component of net periodic cost | 71 | 3 | 22 | ||||||
Net transition liability recognized as a component of net periodic cost | 49 | 2 | 9 | ||||||
Actuarial net loss, prior service cost and transition liability included in cumulative other comprehensive income | 1,097 | 3 | 404 | ||||||
Estimate to be recognized as a component of net periodic cost over the following fiscal year: | |||||||||
Transition asset / (obligation) | 48 | 1 | (5 | ) | |||||
Prior service credit / (cost) | 49 | — | — | ||||||
Actuarial gain / (loss) | 13 | (1 | ) | (16 | ) |
In 2006, FEMSA Cerveza indirectly acquired an additional equity interest in Kaiser. According to Mexican FRS Bulletin B-7, “Business Acquisitions,” this is a transaction between existing shareholders that does not impact the net assets of the Company, and the payment in excess of the book value of the shares acquired is recorded in stockholders’ equity as a reduction of additional paid-in capital. U.S. GAAP, in effect at that time, establishes that purchases of noncontrolling interest represent a “step acquisition” that must be recorded utilizing the purchase method, whereby the purchase price is allocated to the proportionate fair value of assets and liabilities acquired. The Company did not recognize any goodwill as a result of this acquisition.
Additionally, on August 31, 2007, FEMSA Cerveza sold 16.88% of Kaiser’s outstanding shares to Heineken NV. The excess of the price paid over the book value was recorded directly in stockholders’ equity in accordance with Mexican FRS. Under U.S. GAAP, a parent shall account for the deconsolidation of a subsidiary by recognizing a gain or loss in net income attributable to the parent.
In 2006, FEMSA indirectly acquired an additional 8.02% of the total outstanding equity of Coca-Cola FEMSA. According to Mexican FRS Bulletin B-7, this is a transaction between shareholders that does not impact the net assets of the Company, and the payment in excess of the book value of the shares acquired is recorded in stockholders’ equity as a reduction of additional paid-in capital. Under U.S. GAAP, purchases of noncontrolling interest represent a “step acquisition” that must be accounted for under the purchase method, whereby the purchase price is allocated to the proportionate fair value of assets and liabilities acquired. The difference between the fair value and the price paid for the 8.02% of Coca-Cola FEMSA equity is presented as part of investment in Coca-Cola FEMSA shares in the consolidated balance sheet under U.S. GAAP. The Company did not recognize any goodwill as a result of this acquisition. For the periods presented, the acquisition of the additional 8.02% interest in Coca-Cola FEMSA did not affect the consolidation analysis discussed above because substantive participating rights of The Coca-Cola Company’s were not affected.
Recognised deferred tax assets and liabilities
Deferred tax assets and liabilities are attributable to the following items:
In millions of EUR | Assets | Liabilities | Net | |||||||||||||||||||||
2011 | 2010 | 2011 | 2010 | 2011 | 2010 | |||||||||||||||||||
Property, plant & equipment | 93 | 86 | (590 | ) | (550 | ) | (497 | ) | (464 | ) | ||||||||||||||
Intangible assets | 51 | 62 | (733 | ) | (789 | ) | (682 | ) | (727 | ) | ||||||||||||||
Investments | 91 | 87 | (6 | ) | (9 | ) | 85 | 78 | ||||||||||||||||
Inventories | 16 | 33 | (5 | ) | (6 | ) | 11 | 27 | ||||||||||||||||
Loans and borrowings | 3 | 1 | — | (2 | ) | 3 | (1 | ) | ||||||||||||||||
Employee benefits | 252 | 254 | 12 | 11 | 264 | 265 | ||||||||||||||||||
Provisions | 150 | 133 | 1 | 1 | 151 | 134 | ||||||||||||||||||
Other items | 146 | 77 | (138 | ) | (51 | ) | 8 | 26 | ||||||||||||||||
Tax losses carry-forwards | 237 | 213 | — | — | 237 | 213 | ||||||||||||||||||
Tax assets/(liabilities) | 1,039 | 946 | (1,459 | ) | (1,395 | ) | (420 | ) | (449 | ) | ||||||||||||||
Set-off of tax | (565 | ) | (404 | ) | 565 | 404 | — | — | ||||||||||||||||
Net tax assets/(liabilities) | 474 | 542 | (894 | ) | (991 | ) | (420 | ) | (449 | ) | ||||||||||||||
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Tax losses carry-forwards
HEINEKEN has losses carry-forwards for an amount of EUR1,920 million as at 31 December 2011 (2010: EUR1,833 million), which expire in the following years:
In millions of EUR | 2011 | 2010 | ||||||
2011 | — | 11 | ||||||
2012 | 5 | 8 | ||||||
2013 | 6 | 32 | ||||||
2014 | 28 | 30 | ||||||
2015 | 23 | 32 | ||||||
2016 | 36 | — | ||||||
After 2016 respectively 2015 but not unlimited | 372 | 314 | ||||||
Unlimited | 1,450 | 1,406 | ||||||
1,920 | 1,833 | |||||||
Recognised as deferred tax assets gross | (859 | ) | (807 | ) | ||||
Unrecognised | 1,061 | 1,026 | ||||||
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The unrecognised losses relate to entities for which it is not probable that taxable profit will be available to offset these losses. The majority of the unrecognised losses were acquired as part of the beer operations of FEMSA in 2010.
Under Mexican FRS, the noncontrolling interest in consolidated subsidiaries is presented as a separate component within stockholders’ equity in the consolidated balance sheet.
Beginning as of January 1, 2009, under U.S. GAAP, this item must be presented as separate component within consolidated stockholders’ equity in the consolidated balance sheet. Additionally, consolidated net income shall be adjusted