EMBJ

Business Context and Reporting Period

Company: Embraer S.A.
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Fourth Quarter and Full Year ended December 31, 2016
Business Overview: Global manufacturer of commercial and executive aircraft, and defense & security systems. The company operates three main segments: Commercial Aviation, Executive Jets, and Defense & Security.

Key Financial Metrics

Note: Adjusted metrics exclude non-recurring items related to the Republic Airways bankruptcy, voluntary dismissal program, and FCPA investigation finalization.

Material Changes vs. Prior Period

• Revenue Growth: Full-year 2016 revenue increased 4.9% to $6.22 billion, driven by higher commercial jet deliveries and a 15.0% revenue increase in the Defense & Security segment. 4Q16 revenue declined 2.2% year-over-year due to slightly fewer aircraft deliveries.
• Profitability: Reported EBIT margin for 2016 was 3.3%, down from 5.6% in 2015, primarily due to non-recurring charges. However, Adjusted EBIT margin improved to 8.0% in 2016 from 7.3% in 2015, meeting guidance.
• Deliveries: Total commercial deliveries reached 108 in 2016 (vs. 101 in 2015). Executive jet deliveries were 117 in 2016 (vs. 120 in 2015).
• Liquidity Shift: The company moved from a net cash position of $7.2 million in 2015 to a net debt position of $574.7 million in 2016. This was driven by negative adjusted free cash flow of $359.2 million, largely due to working capital increases (inventories) and higher investments in PP&E and intangibles.
• Non-Recurring Items: 2016 results included $293.1 million in net non-recurring charges, including $205.5 million related to the FCPA investigation finalization and $118.1 million for voluntary dismissal provisions.

Guidance, Outlook, and Risks

2017 Guidance

• Revenue: $5.7 billion to $6.1 billion.
• Deliveries: 97 to 102 commercial jets; 105 to 125 total executive jets (70-80 light, 35-45 large).
• EBIT Margin: 8.0% to 9.0% (EBIT of $450M - $550M).
• EBITDA Margin: 13.5% to 14.5% (EBITDA of $770M - $890M).
• Free Cash Flow: Usage of $150 million or better (negative).
• Investments: Total of $650 million ($50M Research, $400M Development, $200M CAPEX).

Management Commentary & Risks

• Cost Reduction: A cost reduction program targeting $200 million in annual recurring cost savings is underway, including a completed voluntary dismissal program.
• Product Transition: The transition from first-generation E-Jets to the E-Jets E2 family remains on track, with the E190-E2 entry into service planned for H1 2018.
• Market Conditions: The Executive Jets market remains challenging, particularly for pre-owned aircraft affecting new jet demand. The U.S. market remains the primary region for executive jets.
• Legal Contingencies: A putative securities class action was filed in August 2016; the company currently believes there is no adequate basis to estimate provisions. The FCPA investigation has been finalized with penalties recognized in 2016.
• FX Exposure: Approximately 10% of net revenues are in Reais while 20% of costs are in Reais. The company has hedged 45% of its 2017 Real cash flow exposure with a floor of R$ 3.40 and a cap of R$ 3.76.

Investor Verification Checklist

• Non-Recurring Adjustments: Verify the magnitude and nature of the $293.1 million in non-recurring charges (FCPA, Republic Airways, dismissal program) to understand the divergence between reported and adjusted margins.
• Working Capital Trends: Monitor inventory levels, which increased by $181.8 million in 2016 due to softer executive jet demand, and assess the timeline for selling these units in 2017.
• Debt Profile: Review the shift to a net debt position of $574.7 million and the average loan maturity of 5.3 years to evaluate liquidity risks.
• E2 Program Progress: Confirm the timeline for the E190-E2 entry into service (H1 2018) and the impact on future revenue mix.
• Class Action Status: Track the progress of the securities class action filed in August 2016 for potential future provisions.