building a STRONGER foundation - Cemex

11B) ANALYSIS OF GOODWILL IMPAIRMENT
CEMEX, S.A.B. DE C.V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements – (Continued)
As of December 31, 2010, 2009 and 2008
(Millions of Mexican pesos)
Goodwill amounts are allocated to the multiple cash generating units, which together constitute a geographic operating segment commonly
comprising all of the operations in each country. CEMEX’s geographic segments represent its reporting units for purposes of impairment
testing. An impairment loss would be recognized for the amount that the carrying amount of the reporting unit exceeds the respective fair
value, represented by the value in use (discounted cash flows) attributable to such reporting unit. Cash flow projection models include longterm
economic variables. CEMEX believes that its discounted cash flow projections and the discount rates used reasonably reflect current
economic conditions at the time of the calculations, considering that: a) the starting point of the future cash flow models is the operating cash
flow for the previous period; b) the cost of capital reflects current risks and volatility in the markets; and c) the cost of debt represents
CEMEX’s specific interest rates observed in recent transactions.
Impairment tests are significantly sensitive to, among other factors, the estimation of future prices of CEMEX’s products, the development of
operating expenses, local and international economic trends in the construction industry, long-term growth expectations in the different
markets, as well as the discount rates and the rates of growth in perpetuity used. CEMEX uses after-tax discount rates, which are applied to
after-tax cash flows for each reporting unit. Undiscounted cash flows are significantly sensitive to the growth rates in perpetuity used.
Likewise, discounted cash flows are significantly sensitive to the discount rate used. The higher the growth rate in perpetuity applied, the
higher the amount obtained of undiscounted future cash flows by reporting unit. Conversely, the higher the discount rate applied, the lower
the amount obtained of discounted estimated future cash flows by reporting unit.
During the last quarter of 2010, 2009 and 2008, CEMEX performed its annual goodwill impairment test. Based on these analyses, in 2010,
CEMEX determined an impairment loss of goodwill for approximately Ps189 (US$15) associated with the reporting unit in Puerto Rico,
whereas, in 2008, CEMEX determined impairment losses of goodwill for a total of approximately Ps18,314 (US$1,333), associated with
CEMEX’s reporting units in the United States, Ireland and Thailand for approximately Ps16,790 (US$1,222), Ps233 (US$17) and Ps453
(US$33), respectively. The estimated impairment loss in the United States in 2008 was mainly attributable to the acquisition of the Australian
producer Rinker Materials Group finalized in 2007, and overall such losses were attributable to the economic environment described in the
paragraph below. In addition, considering that CEMEX’s investment in Venezuela is expected to be recovered through different means other
than use, CEMEX recognized in 2008 an impairment loss of approximately Ps838 (US$61) associated with the goodwill of this investment.
For the year 2009, based on its goodwill impairment tests, CEMEX did not determine impairment losses of goodwill.
Beginning in the last quarter of 2008, the global economic environment was negatively affected by the intensification of the turmoil in several
major financial institutions, which caused a liquidity shortage for companies in almost all productive sectors and resulted in a significant
decrease in overall economic activity and a worldwide downturn in the main stock markets. These situations generated a reduction of growth
expectations in the countries in which CEMEX operates, motivated by the cancellation or deferral of several investment projects, affecting the
construction industry. Although in 2009 and 2010 most global macroeconomic variables have stabilized, the construction industry has
remained depressed in certain countries mainly as a result of the high level of inventories existing at the beginning of the financial crisis, and
the lack of investment projects considering the reaction of investors to the liquidity problems in countries like Greece, Spain, Ireland and
Portugal, among others.
In 2010 and 2009, discount rates and growth rates in perpetuity used to determine the discounted cash flows in the reporting units with the
main goodwill balances are as follows:
Discount rates Growth rates
Reporting units 2010 2009 2010 2009
United States .......................................................................................... 8.7% 8.5% 2.5% 2.9%
Spain....................................................................................................... 10.2% 9.4% 2.5% 2.5%
Mexico ................................................................................................... 10.0% 10.0% 2.5% 2.5%
Colombia................................................................................................ 10.0% 10.2% 2.5% 2.5%
France..................................................................................................... 9.6% 9.6% 2.5% 2.5%
United Arab Emirates............................................................................. 11.5% 11.4% 2.5% 2.5%
United Kingdom..................................................................................... 9.7% 9.4% 2.5% 2.5%
Egypt ...................................................................................................... 11.1% 10.0% 2.5% 2.5%
Range of rates in other countries ............................................................ 10.3% – 13.9% 9.6% – 14.6% 2.5% 2.5%
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