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, 2017 (1Q17)
Business Overview: Embraer is a global aerospace manufacturer with segments in Commercial Aviation, Executive Jets, and Defense & Security. The company designs, develops, manufactures, and markets aircraft and systems.
Key Financial Metrics
| Metric (in millions USD) | 1Q17 | 1Q16 |
|---|---|---|
| Revenue | 1,026.3 | 1,309.0 |
| Net Income (Attributable to Shareholders) | 42.5 | 103.9 |
| Adjusted Net Income | 23.2 | (1.7) |
| EBIT | 23.4 | 85.7 |
| Adjusted EBIT | 31.0 | 85.7 |
| EBITDA | 95.8 | 159.5 |
| Adjusted EBITDA | 103.4 | 159.5 |
| EBIT Margin | 2.3% | 6.5% |
| Adjusted EBIT Margin | 3.0% | 6.5% |
| Adjusted EBITDA Margin | 10.1% | 12.2% |
| Earnings per ADS (Basic) | $0.23 | $0.57 |
| Adjusted EPS (Basic) | $0.13 | ($0.01) |
| Total Cash Position | 3,482.0 | 3,443.3 |
| Total Debt | 4,287.8 | 3,663.2 |
| Net Debt | (805.8) | (219.9) |
| Adjusted Free Cash Flow | (199.3) | (201.5) |
Material Changes vs. Prior Period
- Revenue Decline: Revenue decreased 21.6% year-over-year to $1,026.3 million, driven by lower commercial and executive jet deliveries and the postponement of a satellite launch.
- Delivery Volume: Total jet deliveries dropped to 33 units (18 commercial, 15 executive) in 1Q17, compared to 44 units in 1Q16.
- Profitability Compression: Gross margin declined from 20.0% in 1Q16 to 15.1% in 1Q17 due to a less favorable product mix and lower volume. Adjusted EBIT margin fell from 6.5% to 3.0%.
- Debt Position: Total debt increased by $527.9 million to $4,287.8 million, primarily due to a $750 million bond issuance in January 2017. Net debt increased to $805.8 million.
- Working Capital: Inventories increased by $161.8 million to $2,658.2 million, reflecting seasonal buildup and delayed deliveries of executive jets.
Guidance, Outlook, and Risks
- 2017 Outlook: Embraer reiterated its full-year 2017 guidance: 97 to 102 commercial jet deliveries and 105 to 125 executive jet deliveries (70-80 light, 35-45 large).
- E2 Program Progress: The E-195 E2 prototype completed its inaugural flight in March 2017, ahead of schedule. Entry into service remains on track: E-190 E2 (H1 2018), E-195 E2 (H1 2019), and E-175 E2 (2021).
- Unusual Items: Results included a $7.6 million provision for a voluntary dismissal program. Additionally, a satellite launch (SGDC) was postponed due to a general strike in French Guiana, shifting milestone revenues to later in the year.
- Risks and Contingencies:
- Legal: A putative securities class action was filed in August 2016 regarding FCPA investigation disclosures. The company currently believes there is no adequate basis to estimate provisions.
- FX Exposure: Approximately 20% of costs are in Brazilian Reais while only 10% of revenues are in Reais. The company has hedged 45% of this exposure for 2017.
Investor Verification Checklist
- Delivery Seasonality: Verify if the low Q1 delivery volume aligns with historical seasonal patterns and if the full-year guidance is achievable given the Q1 shortfall.
- Working Capital Trends: Monitor the $161.8 million increase in inventory to ensure it converts to revenue in subsequent quarters without obsolescence risks.
- Debt Service Capacity: Review the impact of the new $750 million bond issuance on interest coverage ratios, noting the LTM EBITDA to financial expense ratio decreased to 2.12x.
- FX Hedging Effectiveness: Assess the performance of the currency hedges given the appreciation of the Brazilian Real against the USD in Q1.
- Legal Exposure: Track the status of the FCPA-related class action lawsuit for potential future provisions.