Business Context and Reporting Period
Company: Embraer S.A.
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Third Quarter ended September 30, 2020 (3Q20)
Context: The quarter was significantly impacted by the ongoing COVID-19 pandemic, resulting in reduced commercial air travel and lower aircraft deliveries. The Company executed restructuring programs and liability management strategies to preserve liquidity.
Key Financial Metrics
| Metric | 3Q20 Value | 3Q19 Value |
|---|---|---|
| Revenues | US$ 758.7 million | US$ 1,174.0 million (implied) |
| Gross Margin | 7.2% | 13.1% |
| Reported EBIT | US$ (37.7) million | US$ (20.8) million |
| Adjusted EBIT | US$ (45.3) million | N/A (No special items in 3Q19) |
| Adjusted EBITDA | US$ (0.6) million | N/A |
| Net Loss (Attributable to Shareholders) | US$ (121.2) million | US$ (77.2) million |
| Adjusted Net Loss | US$ (148.3) million | US$ (48.4) million |
| Free Cash Flow | US$ (566.5) million | US$ (257.4) million |
| Total Cash & Investments | US$ 2.2 billion | N/A |
| Total Debt | US$ 4.5 billion | N/A |
| Firm Order Backlog | US$ 15.1 billion | N/A |
Material Changes vs. Prior Period
- Revenue Decline: Revenues fell 35.5% year-over-year to US$ 758.7 million, driven by a 56.5% drop in Commercial Aviation and a 41.5% drop in Executive Jets due to pandemic-related delivery delays. Defense & Security revenues increased 47.3% due to timing of deliveries.
- Margin Compression: Consolidated gross margin decreased to 7.2% from 13.1% in 3Q19, impacted by lower volume in Commercial Aviation and Services & Support, and US$ 25.0 million in excess idle capacity expenses.
- Profitability: Adjusted EBIT margin was -6.0%. The Commercial Aviation segment incurred a significant operating loss, offset partially by positive adjusted EBIT in Executive Jets, Defense & Security, and Services & Support.
- Cash Flow: Free cash flow usage increased to US$ (566.5) million, primarily due to working capital increases (higher inventories) and lower net income.
- Debt Structure: Total debt increased by US$ 750 million to US$ 4.5 billion following a bond issuance. The average debt maturity was extended from 3.8 years to 4.5 years.
Guidance, Outlook, and Risks
- Guidance: Financial and delivery guidance for 2020 remains suspended due to continued uncertainty related to the COVID-19 pandemic.
- Outlook: Management expects 4Q20 deliveries to improve relative to previous quarters, particularly in the Executive Jets segment which is seasonal. Inventories are anticipated to decline in 4Q20 as deliveries increase.
- Special Items: 3Q20 results included net positive special items of US$ 7.6 million, comprising:
- Restructuring expenses: US$ (54.0) million.
- Provisions for expected credit losses: US$ (13.0) million.
- Reversal of impairment (Executive Jets): US$ 15.9 million.
- Reversal of impairment (Commercial Aviation): US$ 58.7 million.
- Risks: Key risks include the duration and severity of the pandemic, exchange rate fluctuations (hedged via zero-cost collars), and the ability to absorb fixed costs amidst low delivery volumes.
Investor Verification Checklist
- Liquidity Position: Verify the sustainability of the US$ 2.2 billion cash balance against the US$ (566.5) million quarterly free cash burn rate.
- Inventory Levels: Monitor the US$ 3.2 billion inventory balance and the timeline for reduction as deliveries recover.
- Debt Maturity: Confirm the impact of the new 2028 bond issuance on the debt maturity profile and interest coverage ratios.
- Commercial Aviation Recovery: Assess the pace of recovery in regional airline demand, which drives 23.3% of current revenues.
- Special Items: Review the details of the US$ 58.7 million impairment reversal in Commercial Aviation to understand the underlying asset valuation changes.