Business Context and Reporting Period
Embraer S.A. (NYSE: ERJ), a global aerospace company headquartered in Brazil, reported its unaudited financial results for the quarter ended June 30, 2022 (2Q22). The filing, submitted on November 14, 2022, covers operations across Commercial Aviation, Executive Aviation, Defense & Security, and Services & Support. The financial data is presented in US dollars in accordance with IFRS and includes a significant restatement regarding non-cash expenses related to the Eve Holding, Inc. (EVEX) business combination.
Key Financial Metrics
- Revenue: Consolidated revenues were US$ 1,018.9 million, a 9.9% year-over-year (y-o-y) decrease.
- Gross Margin: Consolidated gross margin improved to 22.9% in 2Q22, up from 18.2% in 2Q21.
- Profitability:
- Reported Net Loss attributable to shareholders: US$(146.4) million (EPS: US$(0.80)).
- Adjusted Net Income (non-GAAP): US$ 46.2 million (Adjusted EPS: US$ 0.25).
- Adjusted EBIT: US$ 81.2 million (8.0% margin).
- Adjusted EBITDA: US$ 124.6 million (12.2% margin).
- Cash Flow: Free cash flow (FCF) was a surplus of US$ 91.2 million, a significant improvement from US$ 45.1 million in 2Q21.
- Debt and Liquidity:
- Net Debt: US$ 1.198 billion (down US$ 0.255 billion from 1Q22).
- Liquidity: US$ 1.96 billion.
- Average loan maturity: 3.8 years.
- Backlog: Firm order backlog reached US$ 17.8 billion, the highest post-pandemic level.
Material Changes vs. Prior Period
Restatement Impact: The reported net loss was heavily influenced by a restatement of non-cash expenses totaling approximately US$ 227 million related to the EVEX transaction. This included US$ 142 million in warrant fair value adjustments, US$ 136 million in listing expenses, and US$ 15 million in reclassified transaction costs.
Segment Performance:
- Commercial Aviation: Revenue fell 23% y-o-y to US$ 299.9 million due to lower deliveries (11 jets), though gross margin improved to 13.2% from 4.5%.
- Executive Aviation: Revenue remained flat (+0.2%) at US$ 266.7 million with 21 deliveries. Gross margin rose to 22.1% driven by pricing.
- Defense & Security: Revenue declined 28% to US$ 126.6 million due to fewer Super Tucano deliveries. Gross margin decreased to 28.0% from 34.6%.
- Services & Support: Revenue grew 7.4% to US$ 320.1 million, with gross margin expanding to 31.8%.
Balance Sheet: Net debt decreased quarter-over-quarter due to the payment of the 2022 bond balance and repurchases of 2025, 2027, and 2028 bonds, totaling US$ 396.8 million in debt payments.
Guidance, Outlook, and Risks
Outlook and Commentary: Management highlighted a strong recovery in Adjusted EBIT driven by production, cost, and price efficiencies. The backlog is robust, with a recent announcement of 20 E195-E2 firm orders from Porter to be included in the 3Q22 backlog. The company is aligned with a planned ramp-up of deliveries in coming quarters, which is impacting working capital through increased inventory work-in-progress.
Risks and Contingencies:
- Restatement Uncertainty: The filing notes that the EVEX accounting review is ongoing, and the recognized non-cash expenses are based on current expectations.
- Macroeconomic Factors: Results are subject to general economic, political, and trade conditions in Brazil and global markets.
- Operational Risks: Risks include the capacity to develop and deliver products on agreed dates and adherence to governmental regulations.
- Forward-Looking Statements: The document contains projections based on current expectations which may differ substantially from actual results.
Investor Verification Checklist
- Verify the final accounting treatment and potential further adjustments regarding the EVEX warrant and transaction costs.
- Confirm the inclusion of the 20 Porter E195-E2 orders in the 3Q22 backlog figures.
- Monitor the impact of working capital increases on future free cash flow as production ramps up.
- Review the specific drivers of the gross margin decline in the Defense & Security segment.
- Assess the sustainability of the 22.9% consolidated gross margin given the mix of lower delivery volumes in Commercial Aviation.