Business context and reporting period
Braskem S.A. filed this Form 20-F for the fiscal year ended December 31, 2018, not for the fourth quarter alone. The consolidated financial statements are prepared under IFRS as issued by the IASB and audited by KPMG. Braskem is a multinational petrochemical producer with Chemicals, Polyolefins, USA and Europe, Mexico, and Vinyls segments. Amounts below are in Brazilian reais (R$), unless otherwise indicated.
Key financial metrics
| Metric | 2018 | 2017 |
|---|---|---|
| Net sales revenue | R$58.0 billion | R$49.3 billion |
| Gross profit / gross margin | R$11.6 billion / 19.9% | R$13.1 billion / 26.6% |
| Operating profit | R$8.3 billion | R$9.2 billion |
| Profit for the year | R$2.9 billion | R$3.9 billion |
| Net cash from operating activities | R$9.3 billion | R$2.5 billion |
| Net cash used in investing activities | R$2.5 billion | R$2.4 billion |
| Capital expenditure on property, plant and equipment and intangibles | R$2.7 billion | R$2.3 billion |
| Cash, cash equivalents and financial investments | R$7.9 billion | R$6.1 billion |
| Total assets | R$58.8 billion | R$52.7 billion |
| Shareholders’ equity, including non-controlling interest | R$5.7 billion | R$5.5 billion |
Net financial expenses were R$4.7 billion, including a R$2.3 billion net foreign-exchange loss. Corporate borrowings, net of transaction costs, were R$25.2 billion; Mexico project-finance borrowings were R$10.5 billion. Approximately 97% of consolidated indebtedness was foreign-currency denominated. Current assets were R$21.0 billion against current liabilities of R$22.8 billion, or negative working capital of R$1.7 billion.
Material changes versus the prior comparable period
- Revenue increased 17.7%, but cost of products sold rose 28.3%. Gross profit declined 11.6%, operating profit 10.1%, and annual profit 26.8% from 2017.
- Management attributed revenue growth largely to currency depreciation and stronger reported sales in Chemicals and USA and Europe. Higher feedstock costs, including naphtha, ethane, propane and propylene, pressured margins.
- Operating cash flow increased to R$9.3 billion from R$2.5 billion, supported in part by changes in payables and other working-capital items. Cash and cash equivalents increased by R$1.8 billion during the year.
- Capacity utilization weakened: ethylene 91% versus 94%, polyethylene 88% versus 90%, polypropylene 87% versus 93%, and PVC 76% versus 86%. The Mexico PE rate was 77% versus 88%.
- Braskem adopted IFRS 9 and IFRS 15 effective January 1, 2018; comparative figures were not restated. Management reported no significant change to revenue recognition from IFRS 15. IFRS 9 adoption included an R$9.4 million after-tax expected-credit-loss effect.
Outlook, management commentary, risks and unusual items
- Near-term investment: 2019 capital expenditure was budgeted at R$3.315 billion, including maintenance, efficiency, health, safety and environmental projects, the Bahia cracker’s scheduled shutdown, and the U.S. polypropylene plant. That plant was under construction and targeted to start operations in 2020.
- Operations and input supply: 2018 production was disrupted by Brazil’s truckers’ strike, a Northeast blackout, lower fourth-quarter demand, and issues affecting the Alagoas chlor-alkali operations. Braskem depends on a limited number of suppliers, notably Petrobras in Brazil and Pemex TRI for Mexico ethane. Pemex TRI deliveries were near the contract’s 70% long-term performance threshold as of January 2019.
- Alagoas mining and plant disruption: Following a government geological report linking salt-extraction activity to instability in Maceió, Braskem suspended salt extraction in May 2019 and shut the related chlor-alkali and dichloroethane plants, with knock-on effects at Camaçari. The company described plans to import caustic soda, EDC and sea salt to support operations. Multiple lawsuits sought large asset freezes, bonds, funds, dividend restrictions and other relief; some freezes were reversed subject to judicial bonds, and the Federal Prosecutor’s Office requests remained undecided as of the filing date. The ultimate cause, liability and financial exposure were not resolved.
- Global Settlement: The company disclosed approximately US$957 million of agreed payments to authorities in connection with corruption allegations. A 2019 CGU/AGU agreement added approximately R$410 million after credit for amounts already committed. The company reported compliance with the agreements, but said third-party claims and additional authority actions could still result in further costs.
- Mexico project debt: Braskem Idesa had non-payment covenant defaults under its project-finance facility, resulting in R$9.6 billion of long-term debt being classified as current at year-end and exposing the project to possible acceleration. The company said scheduled payments continued. A lender waiver package approved October 9, 2019 extended project completion deadlines and permitted reclassification to non-current in subsequent reporting.
- Controls and listing: KPMG issued an unqualified opinion on the 2018 consolidated financial statements but an adverse opinion on internal control over financial reporting. Management identified material weaknesses involving the control environment and risk assessment, IT controls, raw-material purchasing, legal services and contingencies, and financial reporting. The delayed 2017 filing led the NYSE to suspend ADS trading and begin delisting proceedings in May 2019; Braskem appealed. The filing does not provide a clear final outcome as of its date.
- Dividends and ownership: A proposed R$2.7 billion 2018 dividend distribution faced court challenges related to the Maceió matter. In October 2019, shareholders approved payment of the R$667 million mandatory dividend and retention of the remaining R$2.0 billion of 2018 profit. Odebrecht’s judicial restructuring and pledged Braskem shares created potential change-of-control and financing risks; proposed negotiations to sell Odebrecht’s stake to LyondellBasell had been terminated.
Most important facts for investors to verify
- Whether Alagoas-related investigations, remediation, litigation or court orders create material cash, operating, financing or dividend impacts; track final findings and the status and value of required bonds.
- Whether Braskem Idesa’s lender waivers remain effective, the debt is reclassified as non-current in subsequent statements, and Pemex TRI meets contracted ethane-delivery commitments.
- Whether operating cash flow is sustainable after working-capital movements, and how the margin decline, feedstock prices and utilization rates develop.
- Reconcile total borrowings and maturities, including the Mexico project financing, and monitor liquidity against the disclosed negative working capital and 2019 commitments.
- Track remediation of the material weaknesses, timely SEC reporting, and the outcome of the NYSE ADS appeal or any change in trading venue.
- Confirm dividend payments and any further restrictions, and monitor Odebrecht-related control, share-pledge and change-of-control developments.