Business Context and Reporting Period
Company: Embraer S.A.
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: First Quarter 2015 (ended March 31, 2015)
Business Overview: Embraer is a global manufacturer of commercial jets (up to 120 seats), executive jets, and defense/security systems. The company operates in three primary segments: Commercial Aviation, Executive Jets, and Defense & Security.
Key Financial Metrics
| Metric (in millions USD) | 1Q15 | 1Q14 | 4Q14 |
|---|---|---|---|
| Revenue | 1,055.9 | 1,242.3 | 2,045.5 |
| EBIT | 79.6 | 92.1 | 196.3 |
| EBIT Margin | 7.5% | 7.4% | 9.6% |
| EBITDA | 149.1 | 151.0 | 281.3 |
| EBITDA Margin | 14.1% | 12.2% | 13.8% |
| Net Loss (Attributable to Shareholders) | (61.7) | 110.6 | 91.4 |
| Adjusted Net Income | 48.3 | 62.9 | 129.4 |
| Loss per Basic ADS | (0.3370) | 0.6044 | 0.4983 |
| Total Cash Position | 1,808.0 | 2,270.5 | 2,423.6 |
| Total Debt | 2,389.3 | 2,217.8 | 2,508.1 |
| Net Debt Position | (581.3) | 52.7 | (84.5) |
| Free Cash Flow | (439.6) | (403.8) | 287.5 |
Material Changes vs. Prior Period
- Revenue Decline: Revenue decreased 15% year-over-year to $1,055.9 million. This was driven by lower deliveries in Executive Jets and a decrease in Defense & Security revenues, partially offset by a 19% increase in Commercial Aviation revenue.
- Profitability: Despite lower revenue, EBIT margin improved slightly to 7.5% (from 7.4% in 1Q14) and EBITDA margin rose to 14.1% (from 12.2%). Gross margin increased from 21.6% to 23.7% due to higher Commercial Aviation deliveries, favorable FX rates, and production efficiencies.
- Net Loss: The company reported a net loss of $61.7 million compared to a net income of $110.6 million in 1Q14. This reversal was primarily caused by a $118.0 million income tax expense (vs. a $17.7 million gain in 1Q14) resulting from non-cash deferred taxes on non-monetary assets due to the 21% depreciation of the Brazilian Real against the USD.
- Liquidity: Net debt position shifted from a net cash position of $52.7 million in 1Q14 to a net debt of $581.3 million in 1Q15, driven by negative free cash flow of $439.6 million.
- Backlog: Firm order backlog ended at $20.4 billion, a slight decrease from $20.9 billion at year-end 2014 but an increase from $19.2 billion in 1Q14.
Guidance, Outlook, and Risks
- Outlook: The company expects total development investment net of supplier contributions for 2015 to be in line with its $300 million outlook. CAPEX for 1Q15 (excluding contracted CAPEX) was $72.3 million, consistent with the annual outlook.
- Operational Highlights:
- Commercial Aviation: Delivered 20 aircraft (all E175s). Secured new orders from KLM Cityhopper (17 firm, 17 options) and Republic Airways (5 firm).
- Executive Jets: Delivered 12 aircraft. The Legacy 500 received industry awards and the Legacy 450 is expected to enter service in Q4 2015.
- Defense: KC-390 prototype completed its maiden flight. Delivered two A-29 Super Tucanos to the US Air Force.
- Risks and Contingencies:
- SEC/DOJ Investigation: Ongoing investigations regarding potential FCPA violations related to aircraft sales outside Brazil. The company cannot currently estimate the financial impact or accruals for potential fines.
- Foreign Exchange: Significant exposure to the Brazilian Real. The company utilizes hedging strategies to mitigate cash flow exposure, with approximately 55% of Real cash flow exposure hedged for 2015.
Investor Verification Checklist
- Deferred Tax Impact: Verify the sustainability of the $110.0 million non-cash deferred tax expense and its sensitivity to future Real/USD exchange rate fluctuations.
- Cash Flow Trajectory: Monitor the negative free cash flow trend ($439.6 million outflow) and its impact on the net debt position.
- Regulatory Exposure: Assess the potential financial magnitude of the ongoing SEC and DOJ investigations regarding FCPA compliance.
- Segment Mix: Confirm the shift in revenue mix toward Commercial Aviation (62.7% of revenue) and the stability of Defense & Security contracts.
- Backlog Conversion: Track the conversion of the $20.4 billion backlog into deliveries, particularly for the E-Jets E2 program ramp-up.