EMBJ

Embraer S.A. Form 6-K Summary

Business Context and Reporting Period

This Form 6-K filing by Embraer S.A. reports financial results and management discussion for the six-month period ended June 30, 2013. The company operates in three primary segments: Commercial Aviation, Executive Aviation, and Defense and Security. The filing includes unaudited condensed consolidated financial statements prepared in accordance with IFRS, incorporating adjustments for the adoption of IFRS 11 (Joint Arrangements) effective January 1, 2013.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Total revenue decreased 7.8% to $2.64 billion. Commercial Aviation revenue dropped 22.5% to $1.50 billion due to a 30.4% reduction in aircraft deliveries (39 units vs. 56 units in 2012). Conversely, Executive Aviation revenue rose 32.1% to $544.9 million, and Defense and Security revenue increased 14.0% to $560.8 million.
• Profitability Compression: Net income plummeted 83.5% to $26.5 million. This was driven by lower operating profit (down 38.3%) and a significant increase in the effective tax rate to 81.4% (from a negative 43.2% in 2012), largely due to exchange rate impacts on non-monetary assets.
• Expense Increases: Research expenses surged 69.2% to $51.6 million, primarily due to the E-Jets E2 program. "Other operating income" turned into an expense of $37.8 million, down from $13.8 million income, due to lower contractual fines from customer cancellations and a $9 million non-recurring provision for a labor lawsuit.
• Backlog Growth: Despite lower deliveries, the total firm order backlog increased to $17.1 billion from $12.9 billion in the prior period.

Guidance, Outlook, and Risks

• Outlook: Management expects to invest approximately $100 million in research activities for 2013 and $580 million in total capital expenditures (including $400 million for R&D and $180 million for property, plant, and equipment). The company believes traditional funding sources are sufficient for foreseeable needs.
• Legal Proceedings: An ongoing internal investigation regarding potential non-compliance with the U.S. Foreign Corrupt Practices Act (FCPA) is underway in response to SEC and DOJ inquiries. The company states it is not possible to estimate the duration, scope, or results, or to quantify potential fines.
• Market Risks: Significant exposure exists to foreign exchange fluctuations (primarily Brazilian Real vs. US Dollar) and interest rate changes. The company utilizes derivatives to hedge these risks. There is also exposure to customer financing defaults via financial and residual value guarantees, with an off-balance sheet exposure of $529.5 million.
• Contingencies: The company faces various tax, labor, and civil lawsuits, with provisions recorded for estimated losses. A specific labor lawsuit resulted in a $9 million provision in Q1 2013.

Investor Verification Checklist

• Delivery Schedule: Verify the company's ability to meet its delivery schedule for the remainder of 2013 given the significant drop in H1 commercial deliveries.
• Tax Rate Volatility: Monitor the effective tax rate, which was anomalously high (81.4%) due to exchange rate impacts on deferred taxes; assess if this is a recurring issue.
• FCPA Investigation: Track updates on the SEC/DOJ investigation regarding foreign sales, as potential fines could be substantial and are currently unquantified.
• Guarantee Exposure: Review the status of financial and residual value guarantees ($529.5 million exposure) and the creditworthiness of customers in the current economic climate.
• Research Spend: Confirm the progress and capitalization status of the E-Jets E2 program, which drove a 69% increase in R&D expenses.