Business Context and Reporting Period
Company: Embraer S.A.
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2015
Accounting Standards: International Financial Reporting Standards (IFRS)
Functional Currency: U.S. Dollar (USD)
Embraer is a leading global manufacturer of commercial aircraft (regional and mid-capacity jets), executive jets, and defense and security aircraft. The company operates three primary business segments: Commercial Aviation, Executive Jets, and Defense & Security. The 2015 reporting period was significantly impacted by the severe economic recession in Brazil, a sharp depreciation of the Brazilian Real against the U.S. Dollar, and the Chapter 11 bankruptcy filing of a major customer, Republic Airways Holdings.
Key Financial Metrics
| Metric (US$ Millions) | 2015 | 2014 |
|---|---|---|
| Revenue | 5,928.1 | 6,288.8 |
| Gross Profit | 1,111.3 | 1,250.5 |
| Gross Margin | 18.7% | 19.9% |
| Operating Profit | 331.5 | 543.3 |
| Net Income (Total) | 80.8 | 347.7 |
| Net Income (Attributable to Owners) | 69.2 | 334.7 |
| Diluted EPS (USD) | 0.0943 | 0.4538 |
| Cash from Operating Activities | 862.5 | 482.3 |
| Total Debt | 3,530.5 | 2,508.1 |
| Cash and Cash Equivalents | 2,165.5 | 1,713.0 |
| Total Assets | 11,669.5 | 10,411.0 |
Material Changes vs. Prior Period
- Revenue Decline: Total revenue decreased 5.7% to $5.93 billion. While Commercial Aviation revenue increased 5.9% (driven by higher deliveries) and Executive Jets revenue rose 8.0%, the Defense & Security segment saw a 44.3% revenue drop to $811.1 million. This decline was primarily due to the devaluation of the Brazilian Real (which affects the translation of Real-denominated government contracts) and contract adjustments.
- Profitability Compression: Net income attributable to owners plummeted 79.3% to $69.2 million. Operating profit fell 39.0% to $331.5 million. The effective tax rate surged to 76.0% (from 31.0% in 2014) due to significant deferred tax expenses resulting from the Real's depreciation against the Dollar on non-monetary assets.
- Republic Airways Provision: Following Republic Airways Holdings' Chapter 11 filing in February 2016 (disclosed in the 2015 report), Embraer recorded a $100.9 million provision for financial guarantee obligations related to ERJ145 family jets.
- Debt Increase: Total debt increased to $3.53 billion from $2.51 billion, driven by a $1.0 billion bond issuance in June 2015 to fund development programs and working capital.
- Backlog Growth: Despite the revenue decline, the firm order backlog increased to $22.46 billion (750 aircraft), up from $20.92 billion in 2014, bolstered by strong orders for the E-Jets E2 family.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- 2016 Delivery Guidance: Management expects to deliver 105 to 110 commercial jets, 75 to 85 light executive jets, and 40 to 50 large executive jets in 2016.
- Capital Expenditures: The company plans to invest approximately $600 million in 2016 for product development and property, plant, and equipment, with 80% allocated to Brazil.
- Strategic Focus: Continued development of the E-Jets E2 family (estimated total investment of $1.7 billion through 2020) and the expansion of the Executive Jets portfolio (Legacy 450/500).
Key Risks and Contingencies
- Brazilian Economic Environment: The filing highlights severe risks related to Brazil's recession (GDP contracted 3.8% in 2015), high inflation (10.7%), and political instability (Lava Jato investigation). The Brazilian Real depreciated 41.8% against the USD in 2015.
- Customer Concentration: The Defense & Security segment relies heavily on the Brazilian Federal Government (59.0% of segment revenue). The Commercial Aviation segment relies on a select group of key customers, including Republic Airways (now in bankruptcy).
- FCPA Investigation: The company is cooperating with ongoing investigations by the U.S. SEC and DOJ regarding potential violations of the Foreign Corrupt Practices Act. A resolution could result in substantial fines.
- Financial Guarantees: Embraer has significant off-balance sheet exposure related to financial and residual value guarantees. The maximum unrecorded exposure was $434.3 million as of December 31, 2015.
Investor Verification Checklist
- Republic Airways Exposure: Verify the status of the $100.9 million provision and the potential for additional losses related to the 24 firm orders held by Republic Airways in the backlog.
- Defense Segment Viability: Assess the impact of the Brazilian government's budget constraints on the Defense & Security segment, which accounts for a significant portion of revenue and is highly sensitive to the Real/USD exchange rate.
- Tax Rate Volatility: Review the sensitivity of the effective tax rate to future exchange rate fluctuations, as the 2015 rate of 76.0% was heavily influenced by deferred tax adjustments on non-monetary assets.
- FCPA Resolution: Monitor developments in the U.S. government investigations for potential fines or sanctions that could materially impact future earnings.
- E-Jets E2 Certification: Track the progress of the E-Jets E2 family certification and entry into service, as this is critical for maintaining market leadership against competitors like Bombardier and Mitsubishi.