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, 2017 (2Q17)
Business Overview: Global manufacturer of commercial and executive jets, and defense & security systems. The company operates three primary segments: Commercial Aviation, Executive Jets, and Defense & Security.
Key Financial Metrics (2Q17)
| Metric | 2Q17 Value | 2Q16 Value |
|---|---|---|
| Revenue | US$ 1,769.6 million | US$ 1,366.4 million |
| EBIT | US$ 174.0 million | US$ (127.4) million |
| Adjusted EBIT | US$ 164.6 million | US$ 72.6 million |
| Net Income (Attributable to Shareholders) | US$ 59.1 million | US$ (99.3) million |
| Adjusted Net Income | US$ 123.0 million | US$ 44.1 million |
| Adjusted Free Cash Flow | US$ 220.0 million | US$ (422.2) million |
| Net Debt | US$ 661.5 million | US$ 613.3 million |
| Firm Order Backlog | US$ 18.5 billion | US$ 19.2 billion (implied) |
Margins (2Q17): Adjusted EBIT margin was 9.3% and Adjusted EBITDA margin was 13.9%. Consolidated gross margin was 17.9%.
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 29.5% year-over-year, driven by higher commercial jet deliveries (35 vs. 26), a favorable mix of executive jet deliveries (more large jets), and the launch of the SGDC satellite in Defense & Security.
- Profitability Turnaround: The company returned to profitability, reporting US$ 59.1 million in net income compared to a loss of US$ 99.3 million in 2Q16. This improvement is largely due to the absence of the US$ 200 million FCPA-related loss contingency charge recorded in 2Q16.
- Cost Reduction: Total operating expenses declined significantly to US$ 143.1 million from US$ 411.1 million in 2Q16, excluding the non-recurring FCPA charge.
- Cash Flow: Adjusted Free Cash Flow swung from negative US$ 422.2 million in 2Q16 to positive US$ 220.0 million in 2Q17, aided by lower working capital requirements and inventory reductions.
- Debt Position: Net debt increased slightly to US$ 661.5 million from US$ 613.3 million in 2Q16, but improved from US$ 805.8 million at the end of 1Q17.
Guidance, Outlook, and Risks
- 2017 Delivery Outlook: Management reiterated its full-year guidance for 97 to 102 commercial jet deliveries and 105 to 125 total executive jet deliveries (70-80 light, 35-45 large).
- CAPEX and R&D: CAPEX outlook remains at US$ 200 million for 2017. Net product development expenditure is expected to finish in line with the US$ 400 million outlook.
- Program Progress: The E-Jets E2 program continues on schedule with over 1,000 flight-test hours. The KC-390 program advanced with prototypes exceeding 1,000 hours.
- Risks and Contingencies:
- Legal: A securities class action lawsuit regarding the FCPA investigation remains pending; the company filed a motion to dismiss in June 2017 but cannot estimate provisions.
- Currency: Approximately 10% of net revenues are in Reais while 20% of costs are in Reais, creating cash flow exposure. The company utilizes hedging strategies (collars) to mitigate this risk.
Investor Verification Checklist
- Non-GAAP Reconciliations: Verify the adjustments made to EBIT, EBITDA, and Net Income to exclude the US$ 200 million FCPA charge from 2Q16 and the US$ 9.4 million non-recurring gains in 2Q17.
- Deferred Tax Impact: Review the US$ 68.9 million positive impact of deferred income tax and social contribution in 2Q17, which significantly boosted Adjusted Net Income.
- Inventory Levels: Confirm the reduction in inventory from US$ 2,658.2 million (1Q17) to US$ 2,460.9 million (2Q17) and its sustainability given delivery rates.
- Backlog Composition: Analyze the US$ 18.5 billion backlog to understand the mix of firm orders vs. options and the timing of future revenue recognition.
- FX Hedging Effectiveness: Assess the performance of the currency hedges (floor R$ 3.40, cap R$ 3.76) against actual exchange rate movements.