Braskem S.A. — FY2020 Form 20-F Summary
Reporting period: Fiscal year ended December 31, 2020; filed May 13, 2021. This is an annual report, not a standalone Q4 filing. Financial statements are prepared under IFRS as issued by the IASB and reported in Brazilian reais (R$), unless stated otherwise.
Business context
Braskem is a global petrochemical and thermoplastic-resins producer, with operations in Brazil, the United States, Germany and Mexico. From 2020, it reported three regional segments: Brazil, United States and Europe, and Mexico. Segment reporting changed from five product-based segments in 2019, so comparisons should account for the reorganization. The Brazilian real depreciated 28.9% against the U.S. dollar during 2020, materially affecting reported results and debt.
Key financial metrics
| Metric | FY2020 | FY2019 | Change / context |
|---|---|---|---|
| Net revenue | R$58.54bn | R$52.32bn | +11.9%; real depreciation and higher sales in the U.S./Europe and Mexico contributed |
| Gross profit | R$11.21bn | R$6.44bn | +74.0% |
| Gross margin | 19.2% | 12.3% | Improved on wider resin spreads and lower feedstock prices, with currency effects also relevant |
| Operating profit (loss) | (R$71.9m) | R$153.7m | Turned to a small operating loss; Alagoas-related charges weighed heavily |
| Net financial expenses | R$9.61bn | R$4.76bn | More than doubled, including R$5.30bn of net foreign-exchange losses |
| Net loss | R$7.02bn | R$2.64bn | Loss widened substantially; 2018 had net income of R$2.87bn |
| Net cash from operating activities | R$6.29bn | R$2.27bn | Higher operating cash flow included recovery of judicial deposits and monetization of tax credits |
| Net cash used in investing activities | R$2.72bn | R$2.67bn | Primarily capital investment |
| Cash and cash equivalents | R$13.86bn | R$6.80bn | Included R$904m held by Braskem Idesa |
| Total consolidated indebtedness | R$54.03bn | — | Included R$12.06bn of secured Mexico Complex debt; 96.8% was foreign-currency-denominated |
| Shareholders’ equity | (R$3.87bn) | R$3.94bn | Negative at year-end, mainly reflecting currency effects and the Alagoas provision |
Current assets were R$34.19bn and current liabilities R$28.39bn, giving positive working capital of R$5.80bn. Cash plus financial investments totaled approximately R$17.49bn. No dividends were distributed for 2020 because of the net loss.
Material changes and operating performance
- Brazil Segment revenue rose 4.2% to R$40.79bn, while gross margin improved to 20.3% from 10.0%. Lower feedstock costs and improved resin spreads supported gross profit; Alagoas-related expenses drove the segment to an operating loss of R$257.9m.
- United States and Europe revenue rose 45.7% to R$14.64bn, with higher PP sales volumes and currency translation contributing. Gross margin declined to 15.7% from 18.2%; operating profit increased to R$1.50bn.
- Mexico revenue rose 31.1% to R$4.00bn, supported by sales volumes, stronger North American PE prices and currency translation. Gross margin increased to 23.1%, but operating profit fell to R$124.7m from R$520.9m.
- Consolidated resin demand recovered after a weak second quarter. Brazil and U.S. utilization rates returned to normal levels in the third quarter and remained similar in Q4; Europe’s Q4 utilization was 64% due to a scheduled shutdown.
- International naphtha prices averaged US$355/ton, down 29.7% from 2019. Lower feedstock prices and recovering resin demand supported spreads, although the weaker real increased reported costs and translated foreign-currency debt.
Liquidity, debt and capital allocation
Braskem drew and repaid a US$1.0bn revolving credit facility during 2020 and issued US$600m of subordinated notes due 2081. The R$5.20bn revolving facility was repaid in July; the filing states it was undrawn at year-end and matures in 2023. Management estimated R$19.16bn of 2021 contractual obligations, commitments and budgeted capital expenditures, expecting to fund operations through product sales and debt service through financing and refinancing. The 2021 investment budget was R$3.90bn, mainly for maintenance, safety, productivity and efficiency, with spending also planned for biopolymers and recycled resins.
Braskem Idesa breached certain non-monetary financing covenants. Accordingly, R$6.54bn of long-term obligations was reclassified to current liabilities; no creditor had demanded accelerated repayment, and the subsidiary continued paying on the original schedule while seeking waivers. Total Braskem Idesa borrowings classified as current were R$7.66bn at year-end. This makes creditor waivers and refinancing important liquidity variables.
Outlook, risks, contingencies and unusual items
- COVID-19 and outlook: Management cited uncertainty around the pandemic and global demand. Demand for resins rebounded in the second half of 2020, but the filing provides no specific consolidated earnings or revenue guidance for 2021.
- Mexico supply and operations: Cenagas suspended natural-gas transportation in December 2020, causing Braskem Idesa to halt operations; partial production resumed in January 2021. In March 2021, Braskem Idesa signed a conditional 15-year gas-transport agreement and a memorandum with Pemex concerning possible ethane-contract changes and an import terminal. The ethane agreement remained unmodified, and negotiations continued. Pemex’s outstanding ethane shortfall penalties were approximately US$119m at year-end 2020.
- Alagoas geological event: Braskem recorded a R$9.18bn provision at December 31, 2020 for relocation, compensation, mine closure, monitoring and related measures. In February 2021, the mining agency accepted reconsideration of additional closure measures and maintained the company’s original plan; further requirements and provision changes remain possible. Individuals’ claims totaled approximately R$573m at year-end. A 2021 CBTU claim sought R$222.1m in damages and other obligations, with the claim attributed at approximately R$1.3bn; management assessed the loss risk as possible.
- Other legal and settlement matters: Approximately R$1.1bn remained payable under the anti-corruption leniency agreements, including a final Swiss installment and Brazilian installments through 2025. The independent compliance monitorship concluded in 2020. The filing also describes an ongoing Mexican investigation into allegations related to the Ethylene XXI project; management could not estimate its outcome.
- Internal controls: Management identified a material weakness in IT general controls over weighing systems used to calculate quantities sold. It reported no resulting financial-statement misstatement and expected remediation in 2021. KPMG issued an adverse opinion on internal control over financial reporting, while giving an unqualified opinion on the IFRS financial statements.
- Other risks: Exposure includes petrochemical cyclicality, feedstock and product-price volatility, heavy U.S.-dollar debt, exchange-rate and interest-rate movements, reliance on Petrobras and Pemex/Cenagas, environmental regulation, plastic-waste policies, and possible changes in control by controlling shareholder Novonor.
- Subsequent events: Braskem redeemed US$500m of perpetual bonds in March 2021. The filing also reports an estimated R$1.1bn of additional ICMS-related PIS/COFINS tax credits expected to be recognized in Q1 2021.
Most important facts for investors to verify
- Reconcile the R$54.03bn debt figure, foreign-currency exposure, 2021 maturities and year-end liquidity, including the availability and conditions of financing commitments.
- Track Braskem Idesa’s covenant waivers, debt classification, creditor position, Pemex ethane deliveries and penalties, and the definitive status of the conditional gas and ethane arrangements.
- Review the R$9.18bn Alagoas provision against actual relocation, closure and remediation spending, agency decisions, environmental-study results and pending claims.
- Assess whether the reported recovery in resin demand and margins persisted after 2020, and how the new U.S. PP plant and planned 2021 investments affected cash generation.
- Monitor remediation of the scale-system IT control weakness and any further auditor or management findings.
- Check the final recognition and realization of tax credits, remaining leniency payments and the status of the Mexican compliance investigation.