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, 2020 (1Q20)
Context: The quarter was significantly impacted by the COVID-19 pandemic, resulting in operational pauses, conservative accounting provisions, and the termination of the strategic partnership with The Boeing Company regarding the Commercial Aviation division.
Key Financial Metrics
| Metric | 1Q20 (US$ Millions) | 1Q19 (US$ Millions) |
|---|---|---|
| Revenue | 633.8 | 823.3 |
| EBIT (Reported) | (46.9) | (15.2) |
| EBIT Margin (Reported) | -7.4% | -1.8% |
| EBITDA (Reported) | 9.3 | 30.9 |
| Net Loss (Attributable to Shareholders) | (292.0) | (42.5) |
| Loss per ADS | (1.59) | (0.23) |
| Free Cash Flow | (676.5) | (665.3) |
| Total Cash & Investments | 2,500.6 | 2,483.4 |
| Total Debt | 3,832.2 | 3,587.1 |
| Net Debt | 1,331.6 | 1,103.7 |
| Firm Order Backlog | 15.9 Billion | N/A |
Material Changes vs. Prior Period
- Revenue Decline: Revenue decreased 23.0% year-over-year to US$ 633.8 million, driven by a 50.0% drop in Commercial Aviation revenues due to lower deliveries (5 jets in 1Q20 vs. 11 in 1Q19) and the Boeing partnership separation.
- Profitability Impact: Reported EBIT turned negative at US$ (46.9) million compared to US$ (15.2) million in 1Q19. This deterioration includes US$ 55.6 million in special items: US$ 22.2 million in fair value losses on Republic Airways Holdings and US$ 33.4 million in bad debt provisions.
- Adjusted Performance: Excluding special items, Adjusted EBIT was positive at US$ 8.7 million (1.4% margin), an improvement over the US$ (15.2) million reported in 1Q19. Adjusted EBITDA margin improved to 10.2% from 3.8%.
- Foreign Exchange: The company recorded a foreign exchange loss of US$ 24.7 million in 1Q20, compared to a gain of US$ 9.1 million in 1Q19, due to a 29.0% appreciation of the US Dollar against the Brazilian Real.
- Working Capital: Inventories increased by US$ 541.3 million to US$ 2,925.3 million due to seasonally low deliveries, contributing to negative free cash flow.
Guidance, Outlook, and Risks
- Guidance Suspended: Financial and delivery guidance for 2020 remains suspended due to uncertainty surrounding the COVID-19 pandemic.
- Boeing Termination: On April 25, 2020, Boeing terminated the Master Transaction Agreement (MTA) and the Contribution Agreement for the KC-390 Millennium. Embraer asserts the termination was wrongful and has commenced arbitration proceedings to seek damages.
- Liquidity Strategy: The company maintains a solid liquidity position with US$ 2.5 billion in cash. Major debt maturities do not begin until 2022. The company is evaluating additional financing to enhance its cash position.
- Operational Risks: Risks include the ongoing impact of the pandemic on commercial airline customers, supply chain disruptions, and the resolution of the legal dispute with Boeing.
Investor Verification Checklist
- Special Items Impact: Verify the sustainability of Adjusted EBIT/EBITDA by monitoring the resolution of the US$ 33.4 million bad debt provision and the US$ 22.2 million Republic Airways valuation loss.
- Boeing Arbitration: Track the progress of the arbitration regarding the wrongful termination of the Commercial Aviation partnership and potential damages.
- Cash Burn Rate: Monitor free cash flow usage, which is historically negative in Q1 but exacerbated by inventory buildup and FX losses.
- Debt Maturity Profile: Confirm the timeline of debt maturities, noting that significant obligations are deferred until 2022, providing a buffer against immediate liquidity stress.
- FX Exposure: Assess the effectiveness of the company's hedging strategy given the volatility between the US Dollar and Brazilian Real.