Braskem S.A. — FY 2017 Form 20-F Summary
Reporting period: Year ended December 31, 2017. This annual report was filed October 7, 2019, after a delay attributed to additional internal-control procedures. Financial statements are audited and prepared under IFRS as issued by the IASB. Figures below are in Brazilian reais (R$), unless stated otherwise.
Key financial results
| Metric | FY 2017 | FY 2016 | Change or context |
|---|---|---|---|
| Net sales revenue | R$49.26bn | R$47.66bn | Up 3.3% |
| Gross profit / margin | R$13.08bn / 26.6% | R$12.68bn / 26.6% | Gross profit up 3.2%; margin unchanged |
| Operating profit / margin | R$9.21bn / 18.7% | R$5.95bn / 12.5% | Up 54.7% |
| Net profit (loss) | R$3.92bn | (R$729m) | 2017 profit attributable to Braskem shareholders was R$3.87bn |
| Net financial expenses | R$3.94bn | R$6.09bn | Lower mainly because the net foreign-exchange loss fell to R$799m from R$3.21bn |
| Net cash from operating activities | R$2.46bn | R$4.46bn | Down R$2.00bn |
| Net cash used in investing activities | (R$2.41bn) | (R$2.55bn) | 2017 property, plant and equipment and intangible-asset additions were R$2.27bn |
| Net cash used in financing activities | (R$2.99bn) | (R$2.76bn) | Included debt service and R$999m of dividends |
| Cash and financial investments | R$6.08bn | R$7.89bn | Balance-sheet measure includes current financial investments |
| Corporate borrowings, net of transaction costs | R$23.36bn | R$23.33bn | Separate Mexico project debt was R$9.69bn |
Debt and liquidity detail: Reported cash and cash equivalents were R$3.78bn; the broader cash-and-investments figure was R$6.08bn. Braskem Idesa’s project-finance debt was separately reported at R$9.69bn. Because of covenant defaults at year-end, R$8.91bn of that project debt was classified as current, although the company said it continued to pay on the original schedule and creditors had not demanded repayment. The filing reports negative working capital of R$1.15bn, largely reflecting this reclassification. It also describes undrawn liquidity facilities in place at year-end; subsequent to year-end, Braskem replaced earlier facilities with a US$1.0bn revolving credit facility maturing in 2023, undrawn as of the filing.
Business context and changes versus prior periods
- Braskem produces basic petrochemicals and thermoplastic resins through five reported units: Chemicals, Polyolefins, Vinyls, USA and Europe, and Mexico. Brazil generated 53.1% of 2017 net sales revenue; international operations, including exports from Brazil, generated the remainder.
- Revenue growth reflected higher Mexico and USA and Europe sales, partly offset by lower Polyolefins revenue. Mexico sales rose 126.9% to R$3.60bn as the complex increased its operating contribution; USA and Europe revenue rose 10.8% to R$9.85bn.
- Brazilian Polyolefins domestic sales volume increased 5.3%, while exports fell as the company prioritized domestic demand. Chemicals exports and Vinyls exports also declined, in part as sales were redirected to Brazil.
- Operating profit improved substantially from 2016, when results included a R$2.86bn provision related to the Global Settlement and a R$3.21bn net foreign-exchange loss. In 2017, the smaller settlement-related expense and lower FX loss contributed to the recovery. This comparison is affected by accounting reclassifications and restatements described in the filing.
- Segment conditions were mixed: USA and Europe operating profit fell 18.5% to R$1.83bn amid higher propylene costs and lower margins; Mexico operating profit rose to R$1.25bn; and Vinyls returned to operating profit of R$168m from a R$107m loss.
Outlook, risks, contingencies, and unusual items
- No specific earnings guidance is provided. Management’s stated strategy emphasizes productivity and competitiveness, feedstock and geographic diversification, innovation, and strengthening governance and reputation. The company planned a 450,000-ton-per-year polypropylene plant in Texas, with investment approved up to US$675m and start-up then expected in 2020.
- Industry cyclicality, petrochemical prices and margins, feedstock prices, currency movements, and the ability to pass cost increases to customers are material risks. Braskem does not generally hedge its main commodity-price exposure. Naphtha accounted for approximately 40% of consolidated cost of products sold in 2017.
- Braskem depends on key suppliers, particularly Petrobras in Brazil and Pemex TRI for ethane in Mexico. The Petrobras naphtha agreement was due to expire in December 2020; ethane and propane supply arrangements were due to expire in January 2021. The filing said Petrobras had indicated it would not renew the refinery-off-gas agreement on the same terms. Pemex TRI deliveries under a contractual performance test were close to the 70% threshold as of January 2019.
- The company had R$1.09bn of provisions for probable legal contingencies at year-end and disclosed R$7.93bn of claims assessed as possible loss. Separately, the Global Settlement with Brazilian, U.S. and Swiss authorities was approximately US$957m (about R$3.1bn at the agreed exchange rate). A 2019 CGU/AGU agreement added approximately R$410m of disbursements; the filing reported about R$1.6bn outstanding across settlement obligations and scheduled future payments. The agreements do not preclude third-party claims or additional proceedings.
- Material control and reporting issue: Management and the auditor concluded that internal control over financial reporting was ineffective at December 31, 2017, citing ten material weaknesses, including tone at the top, anti-corruption controls, debt disclosures, Braskem America controls, legal contingencies, and financial-statement preparation and review. The auditor gave an unqualified opinion on the IFRS financial statements but an adverse opinion on internal control. The filing also disclosed an additional IT-controls material weakness identified for 2018.
- Subsequent Alagoas mining matter: In 2019, following geological events in Maceió, Braskem suspended salt extraction and related operations in May. Authorities and claimants sought asset freezes, bonds, funds, dividend restrictions, and compensation; some freeze orders were reversed by the Superior Court of Justice subject to judicial bonds, while other requests remained pending at the filing date. These events are subsequent to FY 2017 and create material operational, legal, and liquidity uncertainty.
- Listing and governance: The NYSE suspended trading of Braskem ADSs on May 13, 2019 and began delisting proceedings because of the late 20-F filing. Braskem appealed; ADSs traded over the counter while the appeal was pending. Odebrecht and Petrobras together held substantial voting interests. Odebrecht’s 2019 judicial restructuring did not include Braskem but could affect control and related contractual provisions; proposed sale discussions with LyondellBasell had ended in June 2019.
Important facts for investors to verify
- Current status and lender waivers for Braskem Idesa’s covenant defaults, including whether any debt acceleration or collateral remedies have been triggered.
- Latest court decisions, judicial-bond requirements, remediation estimates, operational restrictions, and cash exposure related to the Alagoas geological and salt-mining events.
- Progress in remediating the 2017 and 2018 material weaknesses, timeliness of subsequent filings, and the status of the NYSE delisting appeal.
- Reconciliation of reported cash, corporate debt, and Mexico project debt, along with liquidity available after guarantees, restricted funds, and scheduled settlement payments.
- Renegotiation or replacement of key feedstock and logistics agreements with Petrobras and Pemex TRI, and the effect of supply volumes and terms on plant utilization and margins.