EMBJ

Business Context and Reporting Period

Company: Embraer S.A.
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Second Quarter ended June 30, 2018 (2Q18)
Business Overview: Global manufacturer of commercial and executive jets, defense and security systems, and aircraft services. The quarter was significantly impacted by a non-recurring cost base revision on the KC-390 military transport aircraft development contract following an incident with a prototype aircraft.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Consolidated revenues fell 29.1% year-over-year to US$ 1,256.5 million. This was driven by lower aircraft deliveries in Commercial Aviation and Executive Jets segments and an 88.8% revenue drop in Defense & Security due to the KC-390 cost revision and a high comparison base in 2Q17 (SGDC satellite launch).
• Profitability Impact: Reported EBIT swung from a profit of US$ 177.5 million in 2Q17 to a loss of US$ 17.7 million in 2Q18. The primary driver was a US$ 127.2 million non-recurring charge related to the KC-390 development contract cost base revision.
• Adjusted Performance: Excluding the KC-390 special item, Adjusted EBIT was US$ 109.5 million (8.7% margin), down from US$ 168.1 million (9.5% margin) in 2Q17.
• Deliveries: Total jet deliveries decreased to 48 in 2Q18 (28 commercial, 20 executive) compared to 59 in 2Q17 (35 commercial, 24 executive).
• Cash Flow: Free cash flow generation dropped significantly to US$ 47.8 million from US$ 219.8 million in 2Q17, attributed to lower working capital benefits (higher inventories) and the reported net loss.

Guidance, Outlook, and Material Events

• 2018 Guidance Reaffirmed: Management reaffirmed full-year 2018 guidance, which excludes the non-recurring KC-390 impact.
  • Commercial Deliveries: 85 to 95 jets.
  • Executive Deliveries: 105 to 125 jets (70-80 light, 35-45 large).
  • Adjusted EBIT: US$ 270-355 million (5.0-6.0% margin).
  • Adjusted EBITDA: US$ 540-650 million (10.0-11.0% margin).
  • Free Cash Flow: Expected to be a use of US$ 100 million or better.
• Boeing Partnership: On July 5, 2018, Embraer announced a non-binding Memorandum of Understanding (MOU) with Boeing to create a joint venture. Boeing would acquire 80% of Embraer's Commercial Aviation business for US$ 3.8 billion, with Embraer retaining a 20% stake. The transaction is expected to close by the end of 2019, subject to regulatory and corporate approvals.
• KC-390 Program Update: Following a runway excursion incident with prototype 001 in May, the entry into service with the Brazilian Air Force is delayed from late 2018 to 2019. The economic impact of approximately US$ 127 million was recognized in 2Q18.
• Segment Highlights:
  • Commercial Aviation: Widerøe began service with E190-E2; American Airlines ordered 15 E175s (US$ 705 million).
  • Executive Jets: Legacy 450 set a transatlantic speed record; Phenom 300E and 100EV debuted at EBACE.

Investor Verification Checklist

• KC-390 Cost Revision: Verify the details of the US$ 127.2 million charge and its classification as a non-recurring item to ensure it is properly excluded from future performance comparisons.
• Boeing Transaction Status: Monitor the progress of the non-binding MOU with Boeing, specifically the timeline for definitive agreements, due diligence, and regulatory approvals required for the US$ 3.8 billion sale of the Commercial Aviation unit.
• Working Capital Trends: Review the increase in inventories (up US$ 54.6 million QoQ) and its impact on free cash flow generation relative to the guidance of a US$ 100 million use of cash for the full year.
• FX Exposure: Assess the impact of the Brazilian Real devaluation against the US Dollar on net financial expenses and deferred tax charges, noting that 12% of debt is denominated in Reais while 81% of cash is in USD.
• Delivery Seasonality: Confirm the expectation of significant Executive Jet deliveries in Q4 2018 to meet the full-year guidance range of 105-125 units.