Brookfield Business Partners L.P. — FY2017 Form 20-F
Reporting period: Fiscal year ended December 31, 2017; the filing also reports fourth-quarter results. Figures are in U.S. dollars unless noted. Financial statements are prepared under IFRS and audited by Deloitte, which issued an unqualified opinion. Brookfield Business Partners is a Bermuda limited partnership focused on business services and industrial operations; it is controlled by Brookfield Asset Management.
Financial performance and position
| Metric | FY2017 | FY2016 |
|---|---|---|
| Revenue | $22.823 billion | $7.960 billion |
| Direct operating costs | $21.876 billion | $7.386 billion |
| Net income (loss) | $215 million | $(202) million |
| Net income attributable to unitholders, as reconciled in the filing | $24 million | $(29) million |
| Company EBITDA (non-IFRS) | $240 million | $240 million |
| Company FFO (non-IFRS) | $252 million | $200 million |
| Cash from operating activities | $290 million | $229 million |
| Cash and cash equivalents at year-end | $1.106 billion | $1.050 billion |
| Borrowings at year-end | $3.265 billion | $1.551 billion |
| Net debt / capitalization | 26.3% | 11.0% |
FY2017 cash used in investing activities was $1.595 billion, chiefly reflecting acquisitions; financing activities provided $1.353 billion. Total assets were $15.804 billion and total equity was $6.064 billion at year-end. Debt had a 5.5-year weighted-average maturity and a 7.3% weighted-average interest rate. Operating businesses had $5.9 billion of maximum term-loan and credit-facility capacity, with $3.3 billion drawn; the partnership’s $500 million Brookfield acquisition facility and $250 million bilateral facility were undrawn.
Revenue includes U.K. fuel duties recorded gross: Greenergy’s duty component was approximately $5.036 billion, increasing both revenue and costs without adding to business margin. Company EBITDA and Company FFO are management-defined non-IFRS measures and should be read alongside IFRS results.
Material changes versus the prior period
- Revenue rose $14.863 billion, primarily reflecting the 2017 acquisitions of Greenergy, BRK Ambiental and the Canadian fuel-marketing business, as well as the gross presentation of fuel duties. The scale change makes reported growth a poor proxy for organic growth.
- Consolidated net income improved from a $202 million loss to $215 million income. Results included a $233 million gain on the sale of the bath and shower products business; the sale of Insignia Energy produced a loss. FY2016 included substantially higher impairment charges.
- Company EBITDA was unchanged at $240 million, while Company FFO increased to $252 million from $200 million, including realized disposition gains.
- Borrowings increased $1.714 billion, mainly due to the BRK Ambiental and Greenergy acquisitions. Operating cash flow increased by $61 million.
- Construction Services revenue increased 6% to $4.650 billion, but Company EBITDA fell to $20 million from $104 million due to underperforming projects. Backlog increased to $8.7 billion from $7.3 billion, representing about two years of work.
- Industrial Operations Company EBITDA increased to $87 million from $11 million, benefiting from BRK Ambiental and stronger graphite-electrode pricing and palladium operations. Energy Company EBITDA increased to $91 million from $72 million; Company FFO declined to $52 million from $63 million.
Outlook, risks and unusual items
- Management’s strategy is to grow cash flows through operational improvements, acquisitions and selective asset sales; it did not provide a quantified forecast for FY2018 earnings or cash flow. It described a modest distribution yield as part of its return approach. The declared quarterly distribution was $0.0625 per unit, or $0.25 annualized.
- After year-end, the partnership agreed, with institutional partners, to acquire Westinghouse for approximately $4.6 billion, expected to be funded with about $1 billion of equity, $3 billion of long-term debt and assumed obligations. Closing was expected in Q3 2018, subject to bankruptcy-court approval and other conditions. It also agreed to acquire a controlling interest in Schoeller Allibert for approximately €205 million, subject to customary conditions.
- Management planned a GrafTech IPO and cited improved operating performance and a long-term contracting program. In February 2018, GrafTech issued $1.5 billion of debt, paid down about $400 million of existing debt and distributed about $1.1 billion to shareholders; the partnership’s share was approximately $380 million. The filing cites contracts covering 60%–65% of production capacity at a weighted-average selling price of $9,700 per metric ton.
- IFRS 15, effective in 2018, was expected to reduce opening retained earnings by approximately $250 million net of tax, mainly in Construction Services; the estimate remained subject to finalization. The standard raises the recognition threshold for variable contract consideration.
- Key risks include leverage and refinancing, cyclical and commodity-sensitive operations, construction cost overruns and guarantees, foreign-exchange and environmental exposures, and execution/integration risks from acquisitions. Approximately $1.6 billion of bank guarantees, insurance bonds and letters of credit were outstanding. A Middle East customer’s appeal resulted in payment of an approximately $32 million advance-payment guarantee in February 2018; the partnership was pursuing a counterclaim, and any ultimate loss was not considered probable or measurable.
- Brookfield controls the general partner and provides management services. FY2017 management fees were $33 million; Brookfield also received $142 million of incentive distributions. Brookfield held approximately 68% of the partnership on a fully exchanged basis. About $384 million of reported cash was on deposit with Brookfield.
- Management and the auditor reported effective internal controls, but the assessment and audit excluded BRK Ambiental, Greenergy and the fuel-marketing business. These entities represented 46% of total assets and 63% of revenue.
Investor verification priorities
- Reconcile consolidated net income of $215 million with the $24 million attributed to unitholders and the reported $(1.04) earnings per limited partnership unit; review the effects of incentive distributions and non-controlling interests.
- Separate acquisition-driven and fuel-duty revenue from underlying growth, and assess the durability of EBITDA and FFO excluding asset-sale gains.
- Review debt maturities, interest costs, subsidiary-level covenants and available liquidity, including the cash deposit with Brookfield and the financing needs of announced acquisitions.
- Track Construction Services project profitability, claims, guarantee exposure and the expected IFRS 15 opening-equity adjustment.
- Verify Westinghouse and Schoeller Allibert closing status, final financing and assumed obligations, and GrafTech’s post-year-end debt, distribution and contracting assumptions.
- Assess acquisition accounting and controls at the newly acquired businesses, which were excluded from the FY2017 internal-control evaluation.