Business Context and Reporting Period
Company: Embraer S.A.
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Nine months ended September 30, 2016 (Interim)
Filing Date: November 18, 2016
Business Overview: Embraer designs, builds, and markets aircraft and aerospace materials for commercial, executive, and defense sectors. The company is incorporated in Brazil and lists shares on the NYSE and BM&FBOVESPA.
Key Financial Metrics (Nine Months Ended Sept 30, 2016)
| Metric | Value (USD Millions) |
|---|---|
| Revenue | 4,189.7 |
| Gross Profit | 829.6 |
| Gross Margin | 19.8% |
| Operating Profit (Loss) | (70.6) |
| Net Loss | (28.0) |
| Net Loss Attributable to Owners | (29.2) |
| Cash and Cash Equivalents | 1,455.5 |
| Total Debt (Loans & Financing) | 3,823.1 |
| Shareholders' Equity | 3,783.7 |
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 8.7% year-over-year (YTD 2016: $4,189.7M vs. YTD 2015: $3,853.7M), driven by growth in Commercial Aviation and Executive Aviation segments.
- Profitability Decline: The company reported a Net Loss of $28.0M compared to a Net Loss of $33.2M in the prior year. However, Operating Profit before financial income dropped significantly from $266.2M in 2015 to a loss of $70.6M in 2016.
- One-Time Charges: The decline in operating profit was primarily due to a $200.0M provision for penalties related to the U.S. Foreign Corrupt Practices Act (FCPA) settlement and $123.3M in restructuring expenses (Voluntary Redundancy Scheme).
- Liquidity: Cash and cash equivalents decreased by $710.0M (from $2,165.5M to $1,455.5M) due to operating cash outflows and investing activities.
- Debt: Total loans and financing increased to $3,823.1M from $3,530.5M in the prior year.
Guidance, Outlook, Risks, and Unusual Items
- FCPA Settlement: In October 2016, Embraer concluded definitive agreements with U.S. (DOJ/SEC) and Brazilian authorities regarding FCPA allegations. The company agreed to pay approximately $205.5M in penalties and disgorgement. A provision of $200.0M was recorded in the second quarter of 2016.
- Restructuring: A Voluntary Redundancy Scheme (VRS) was announced in August 2016, with a provision of $118.0M recorded for the nine-month period. Approximately 1,470 employees adhered to the initial phase.
- Segment Performance:
- Commercial Aviation: Revenue $2,495.2M; Operating Profit $279.9M.
- Defense and Security: Revenue $614.2M; Operating Profit $9.1M.
- Executive Aviation: Revenue $1,061.1M; Operating Loss $(38.1)M.
- Risks:
- Legal Contingencies: Pending securities class actions in U.S. courts regarding the FCPA investigation; potential additional fines in other jurisdictions.
- Financial Guarantees: Significant exposure to residual value guarantees ($299.6M maximum) and financial guarantees ($264.3M maximum).
- Currency Risk: Functional currency is USD; significant exposure to Brazilian Real (BRL) fluctuations affecting costs and deferred taxes.
Investor Verification Checklist
- FCPA Settlement Finality: Verify the exact timing of cash outflows for the $205.5M settlement and confirm no further penalties are expected from related investigations.
- Restructuring Execution: Monitor the completion of the Voluntary Redundancy Scheme and the actual cost realization versus the $118.0M provision.
- Executive Aviation Margins: Assess the sustainability of the Executive Aviation segment, which reported an operating loss of $38.1M despite revenue growth.
- Liquidity Position: Review the company's ability to service $3.8B in debt given the reduction in cash reserves and negative operating cash flow ($219.6M used).
- Deferred Tax Assets: Evaluate the realizability of deferred tax assets given the net loss position and the impact of exchange rate fluctuations on the tax basis.