Brookfield Business Partners L.P. — FY 2019 Form 20-F
Reporting period: Fiscal year ended December 31, 2019; filed March 5, 2020. This is an annual report, not a standalone Q4 filing. Financial statements are prepared under IFRS and audited by Deloitte, which issued unqualified opinions on the financial statements and internal control over financial reporting. Amounts are in U.S. dollars unless noted.
Business context
Brookfield Business Partners owns and operates business services, infrastructure services and industrial businesses globally. Its strategy emphasizes active operations, acquisitions and capital recycling, with returns expected primarily from capital appreciation and a modest distribution yield. Brookfield controls the partnership and provides management services.
Financial results and liquidity
| Metric | 2019 | 2018 |
|---|---|---|
| Revenue | $43.032 billion | $37.168 billion |
| Direct operating costs | $38.327 billion | $34.134 billion |
| Income before tax | $626 million | $1.301 billion |
| Net income | $434 million | $1.203 billion |
| Net income attributable to unitholders | $88 million | $422 million |
| Basic and diluted earnings per LP unit | $0.62 | $1.11 |
| Company EBITDA (non-IFRS) | $1.213 billion | $843 million |
| Company FFO (non-IFRS) | $1.102 billion | $733 million |
| Operating cash flow | $2.163 billion | $1.341 billion |
| Investing cash flow | ($17.939 billion) | ($3.999 billion) |
| Financing cash flow | $15.925 billion | $3.561 billion |
| Cash and cash equivalents, year-end | $1.986 billion | $1.949 billion |
| Non-recourse subsidiary borrowings, year-end | $22.399 billion | $10.866 billion |
| Net debt to capitalization | 65% | 58% |
- Revenue increased about 16%; the filing attributes the increase mainly to acquisitions and a full year of Westinghouse, partly offset by sales of BGIS and BGRS and lower Greenergy volumes and foreign-exchange effects.
- Revenue less direct operating costs was $4.705 billion, or about 10.9% of revenue. This is a simple derived measure, not a reported margin; UK fuel duty is recorded gross in both revenue and costs and materially affects comparability.
- Net income fell 64% and unitholder-attributable net income fell to $88 million. Management cites higher depreciation and amortization, acquisition costs, greater impairments, and the absence of a prior-year Teekay Offshore step-up gain. Disposition gains partly supported 2019 results.
- Company EBITDA and Company FFO are non-IFRS measures defined by the partnership; neither is a substitute for IFRS results and definitions may differ from other issuers.
- Year-end debt was entirely non-recourse subsidiary borrowing; there were no corporate borrowings. The operating debt weighted-average interest rate was 5.5%, with a 5.7-year weighted-average maturity. Maximum subsidiary borrowing capacity was $26.720 billion, of which $22.399 billion was drawn. The partnership reported compliance with material covenant requirements, including waivers where applicable.
- Corporate-level bilateral facilities totaling $1.575 billion and a $500 million Brookfield acquisition facility were undrawn at year-end. Quarterly distributions were $0.0625 per unit; the board declared the same amount for payment March 31, 2020.
Material changes and unusual items
- Major 2019 acquisitions included Clarios, Healthscope, Ouro Verde and a controlling interest in Genworth. Together with institutional partners, the partnership also increased its Teekay Offshore interest. Acquisitions drove substantial increases in assets, debt and non-controlling interests.
- Assets rose to $51.751 billion from $27.318 billion; total equity increased to $11.053 billion from $6.494 billion. The partnership issued 14.907 million LP units in 2019 and Brookfield received 6.610 million additional redemption-exchange units.
- 2019 net impairment expense was $609 million, including $261 million of Teekay Offshore goodwill impairment and $157 million in business services. The filing also reports impairment losses on property, plant and equipment.
- Net acquisition/disposition gains were $726 million, principally from the sales of BGIS, BGRS and NAP and certain BRK Ambiental assets. Dispositions generated significant gains but are not recurring operating earnings.
- IFRS 16 adoption added $978 million of right-of-use assets and $987 million of lease liabilities at transition. In 2019 it reduced direct operating costs by $242 million, increased depreciation by $203 million and interest expense by $49 million, and increased Company EBITDA by about $83 million and Company FFO by about $70 million.
- Q4 2019 revenue was $11.320 billion and net income was $87 million, versus $10.209 billion and $394 million in Q4 2018. Q4 net income attributable to LPs was a loss of $57 million versus income of $70 million; diluted EPS was ($0.70) versus $1.04.
Outlook, risks and contingencies
- Management intends to grow cash flows through acquisitions and operating improvements, sell mature assets opportunistically, and reinvest proceeds. It reported work to improve Healthscope operations and occupancy, optimize Genworth’s capital structure and investment returns, and pursue productivity gains at Westinghouse and Clarios. Management cautions that growth and acquisition outcomes are not assured.
- Subsequent to year-end, the partnership completed Nova Cold’s sale and Teekay Offshore’s privatization, acquired a minority interest in BrandSafway, and agreed to acquire a 40% interest in IndoStar, expected to close in Q2 2020.
- Principal risks include leverage and refinancing needs, cyclical markets and commodity exposure, foreign exchange and interest rates, acquisition integration and impairment, construction cost overruns and performance guarantees, environmental and safety liabilities, and changing regulation. The report also identifies potential business disruption from the coronavirus outbreak as uncertain at the filing date.
- Brookfield’s control, management fees, investment-opportunity allocation and related-party dealings create conflicts of interest. Unitholders have limited voting rights, and the partnership’s agreements modify fiduciary duties. The annual base management fee was $59 million.
- Outstanding guarantees, insurance bonds, letters of credit and surety bonds totaled approximately $1.983 billion. Contractual obligations totaled $33.119 billion, including borrowings, lease liabilities, interest, decommissioning liabilities, pensions and other agreements. Management said no known litigation was expected to have a material adverse effect.
Most important facts for investors to verify
- Whether acquisition-led growth translates into sustainable cash flow after interest, capital expenditures, taxes and distributions; reconcile Company FFO and EBITDA to IFRS results.
- Debt at operating subsidiaries, upcoming maturities, refinancing terms, covenant headroom and the impact of further acquisitions or Brookfield redemption requests.
- Performance and integration of Clarios, Healthscope and Genworth, including the effects of non-controlling ownership and purchase-accounting estimates.
- Recoverability assumptions behind the $609 million impairment charge, especially Teekay Offshore vessel cash flows and redeployment prospects.
- Construction project execution, the approximately $7 billion backlog, and the possible costs of guarantees, contingencies and environmental or decommissioning obligations.
- Progress in extending internal-control coverage: controls at Clarios, Healthscope, Ouro Verde and Genworth, representing 52% of assets and 16% of revenue, were excluded from management’s 2019 assessment.
- Potential effects of Brookfield-related conflicts, management fees, dilution and the redemption-exchange mechanism on public unitholders.