Business Context and Reporting Period
Company: Embraer S.A.
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: First Quarter ended March 31, 2021 (1Q21)
Release Date: April 29, 2021
Embraer is a global aerospace company headquartered in Brazil with operations in Commercial Aviation, Executive Aviation, Defense & Security, and Services & Support. The company reported results for 1Q21 amidst ongoing impacts from the COVID-19 pandemic, though noting cautious optimism due to improved vaccination rollouts and traffic recovery in key markets.
Key Financial Metrics
| Metric (US$ Millions) | 1Q21 | 1Q20 | 4Q20 |
|---|---|---|---|
| Revenue | 807.3 | 633.8 | 1,841.4 |
| EBIT | (33.1) | (46.9) | 103.6 |
| EBIT Margin | -4.1% | -7.4% | 5.6% |
| Adjusted EBIT | (29.6) | 8.7 | 76.6 |
| Adjusted EBIT Margin | -3.7% | 1.4% | 4.2% |
| Net Loss (Attributable to Shareholders) | (89.7) | (292.0) | (3.3) |
| Adjusted Net Loss | (95.9) | (104.0) | (12.5) |
| Free Cash Flow | (226.6) | (676.6) | 725.1 |
| Total Cash | 2,463.3 | 2,500.6 | 2,752.3 |
| Net Debt | 1,902.2 | 1,331.6 | 1,695.7 |
| Firm Order Backlog | 14,200.0 | N/A | N/A |
Material Changes vs. Prior Period
- Revenue Growth: Consolidated revenues increased 27.4% year-over-year (YoY) to $807.3 million, driven by significant growth in Commercial Aviation (+95.8% YoY), Defense & Security (+25.6% YoY), and Executive Aviation (+17.5% YoY). Services & Support revenues declined 4.3% YoY.
- Profitability: Reported EBIT improved to a loss of $33.1 million from $46.9 million in 1Q20. However, Adjusted EBIT turned negative at $(29.6) million compared to a positive $8.7 million in 1Q20, primarily due to weaker margins in Executive Aviation, Defense & Security, and Services & Support segments.
- Cash Flow: Free cash flow usage was $226.6 million, a significant improvement from the $676.6 million usage in 1Q20. This improvement was driven by better inventory management and lower capital expenditures.
- Deliveries: Total aircraft deliveries rose to 22 (9 commercial, 13 executive) in 1Q21, compared to 14 (5 commercial, 9 executive) in 1Q20.
- Debt Position: Net debt increased to $1.9 billion from $1.7 billion at the end of 4Q20, reflecting the negative free cash flow for the quarter.
Guidance, Outlook, and Risks
- Guidance: Due to continued uncertainty related to the COVID-19 pandemic, Embraer has decided not to publish 2021 financial and delivery guidance at this time.
- New Orders: On April 23, 2021, the company signed a firm order for 30 E195-E2 jets with an undisclosed customer, with deliveries starting in 2022. These orders will be included in the 2Q21 backlog.
- Operational Updates: The start of operations for the E175-E2 jet has been rescheduled by one year to 2024. The Phenom 300 series was recognized as the world's most delivered light jet in 2020.
- Risks and Contingencies:
- Pandemic Impact: Ongoing instability in air traffic and supply chains continues to affect the industry.
- Foreign Exchange: The devaluation of the Brazilian Real vs. the U.S. Dollar negatively affected gross margin in the Defense & Security segment. The company utilizes cash allocation strategies and financial hedges to mitigate exposure.
- Cost Pressures: Higher than expected retrofit and non-quality costs impacted the Executive Aviation segment's gross margin.
Investor Verification Checklist
- Margin Compression: Verify the drivers behind the decline in consolidated gross margin from 29.0% in 1Q20 to 9.5% in 1Q21, specifically regarding non-quality costs and currency impacts.
- Adjusted EBIT Turnaround: Analyze the shift from positive Adjusted EBIT in 1Q20 to negative in 1Q21 despite revenue growth, focusing on segment-specific profitability.
- Inventory Levels: Confirm the stability of inventory levels ($2.48 billion) and the effectiveness of production planning in reducing working capital investment compared to the prior year.
- Backlog Quality: Assess the composition of the $14.2 billion backlog, particularly the impact of the new 30-unit E195-E2 order and the rescheduling of the E175-E2 program.
- Cash Burn Rate: Monitor the trajectory of free cash flow usage, which remains negative in Q1 due to seasonality, and its impact on the net debt position.