Business Context and Reporting Period
Company: Embraer S.A.
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Third Quarter ended September 30, 2018 (3Q18) and Year-to-Date (YTD) 2018.
Business Overview: Global manufacturer of commercial and executive jets, defense & security systems, and aviation services. The company operates in four main segments: Commercial Aviation, Executive Jets, Defense & Security, and Services & Support.
Key Financial Metrics
| Metric (US$ Millions) | 3Q18 | 3Q17 (Restated) | YTD 2018 |
|---|---|---|---|
| Revenue | 1,151.7 | 1,301.5 | 3,400.2 |
| EBIT | 45.4 | 55.4 | 54.1 |
| EBIT Margin | 3.9% | 4.3% | 1.6% |
| Adjusted EBIT | 45.4 | 59.0 | 181.3 |
| Adjusted EBIT Margin | 3.9% | 4.5% | 5.3% |
| EBITDA | 104.8 | 130.0 | 238.4 |
| Net Loss (Attributable to Shareholders) | (21.3) | 103.9 | (160.1) |
| Adjusted Net Loss | (29.1) | 65.4 | (47.6) |
| Free Cash Flow | (166.4) | (22.8) | (549.3) |
| Total Cash | 3,142.1 | 3,584.1 | 3,142.1 |
| Total Debt | 4,022.6 | 4,306.9 | 4,022.6 |
| Net Debt | 880.5 | 722.8 | 880.5 |
Material Changes vs. Prior Period
- Revenue Decline: Consolidated revenue fell 11.5% year-over-year in 3Q18 to $1,151.7 million. This was primarily driven by a 45.3% drop in Commercial Aviation revenue due to lower deliveries (15 jets vs. 25 in 3Q17).
- Segment Performance: While Commercial Aviation declined, Executive Jets revenue grew 43.4% and Defense & Security revenue grew 47.9% year-over-year.
- Profitability: Reported EBIT decreased to $45.4 million (3.9% margin) compared to $55.4 million (4.3% margin) in 3Q17. The decline is attributed to lower revenue volumes impacting fixed cost absorption.
- Special Items: YTD 2018 reported EBIT includes a non-recurring negative impact of $127.2 million related to KC-390 development costs (recognized in 2Q18). Excluding this, YTD Adjusted EBIT was $181.3 million (5.3% margin).
- Cash Flow: Free cash flow turned significantly negative at $(166.4) million in 3Q18, compared to $(22.8) million in 3Q17, driven by lower operating results and increased inventory levels.
Guidance, Outlook, and Risks
- Guidance Reaffirmed: Management reaffirmed 2018 financial and delivery guidance, excluding the non-recurring KC-390 impact.
- Commercial Deliveries: 85 to 95 jets.
- Executive Deliveries: 105 to 125 jets.
- Adjusted EBIT Margin: 5-6% for the full year.
- Adjusted EBITDA Margin: 10-11% for the full year.
- Free Cash Flow: Expected to be a use of $100 million or better for the full year, anticipating significant cash generation in 4Q18.
- Boeing Partnership: Embraer is in negotiations with Boeing regarding a potential joint venture for its Commercial Aviation business. No assurance of consummation or timing is provided.
- Risks and Contingencies:
- FX Exposure: Net income was negatively impacted by foreign exchange losses due to the devaluation of the Brazilian Real against the US Dollar. Approximately 45% of Real cash flow exposure is hedged.
- Inventory Build-up: Inventories increased to $2,790.8 million in anticipation of higher Q4 deliveries, negatively impacting working capital.
- Development Costs: Ongoing investment in the E-Jets E2 program and KC-390 certification.
Investor Verification Checklist
- Q4 Delivery Volume: Verify if the anticipated "significant volume" of deliveries in Q4 materializes to support the cash flow turnaround and margin targets.
- Boeing Transaction Status: Monitor progress on the binding agreement with Boeing, as the outcome could fundamentally alter the company's capital structure and future revenue streams.
- FX Hedging Effectiveness: Assess the impact of the Brazilian Real's volatility on Q4 results and the efficacy of the current hedging program (floor R$3.32, cap R$3.75).
- Inventory Turnover: Track inventory levels in Q4 to ensure the build-up converts to revenue without requiring excessive working capital investment.
- KC-390 Certification: Confirm the timeline for Type Certification by ANAC, as delays could impact Defense & Security revenue recognition.