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, 2019.
Context: Embraer is a global aerospace company with segments in Commercial Aviation, Executive Jets, Defense & Security, and Services & Support. In 2019, the company executed a strategic partnership with Boeing, creating a joint venture for the Commercial Aviation segment. Consequently, Commercial Aviation assets and liabilities are presented as "held for sale" and results as discontinued operations in interim statements, though this filing presents consolidated results including 100% of the segment.
Key Financial Metrics
| Metric | 4Q19 | Full Year 2019 | Full Year 2018 |
|---|---|---|---|
| Revenue | $2,085.0 million | $5,462.6 million | $5,071.1 million |
| EBIT (GAAP) | ($67.6) million | ($77.0) million | $35.3 million |
| Adjusted EBIT | $4.0 million | ($5.4) million | $223.8 million |
| Adjusted EBIT Margin | 0.2% | -0.1% | 4.4% |
| Net Loss (Attributable to Shareholders) | ($209.8) million | ($322.3) million | ($178.2) million |
| Adjusted Net Loss | ($93.4) million | ($217.5) million | ($54.2) million |
| Adjusted Free Cash Flow | $739.4 million | ($181.8) million | ($127.5) million |
| Total Cash Position | $2,779.9 million | $2,779.9 million | $3,207.8 million |
| Total Debt | $3,392.3 million | $3,392.3 million | $3,647.7 million |
| Net Debt | $612.4 million | $612.4 million | $439.9 million |
| Firm Order Backlog | $16.8 billion | $16.8 billion | $16.3 billion |
Material Changes vs. Prior Period
- Revenue Growth: Full-year 2019 revenue increased 7.7% year-over-year, driven by growth in Defense & Security (+26.7%), Executive Jets (+26.5%), and Services & Support (+6.7%), partially offset by a 5.2% decline in Commercial Aviation.
- Profitability: GAAP EBIT turned negative for the full year 2019 compared to a profit in 2018, primarily due to a $71.6 million impairment charge in the Executive Jets segment and $120.8 million in separation costs related to the Boeing joint venture. Adjusted EBIT reached the breakeven guidance target (-0.1% margin).
- Cash Flow: The company generated a record $739.4 million in adjusted free cash flow in 4Q19, significantly reducing net debt from $1,347.2 million in 3Q19 to $612.4 million at year-end.
- Deliveries: Total deliveries for 2019 were 89 commercial jets and 109 executive jets, meeting the company's guidance ranges.
Guidance, Outlook, and Risks
- Guidance Suspension: Due to the uncertainty surrounding the spread of the COVID-19 virus and its potential impact on the global economy, supply chain, and demand, Embraer has suspended its 2020 guidance. Updated projections will be disclosed when visibility improves.
- Operational Impact: As of the filing date, the company reported no extensive delays in supply chain or production. However, it implemented contingency plans, including remote work and temporary paid leave for some Brazilian employees, to ensure health and safety.
- Strategic Partnership: The Commercial Aviation segment is being carved out into a joint venture with Boeing. Separation costs of $120.8 million impacted 2019 results. If these costs were excluded, 2019 Adjusted EBIT would have been $115.4 million (2.1% margin).
- Segment Highlights:
- Commercial Aviation: Backlog stands at $9.0 billion. New orders included 21 E195-E2s for KLM Cityhopper and 13 E195-E2s for Air Peace.
- Executive Jets: Backlog is $1.4 billion. The Phenom 300E was the world's most delivered light jet in 2019.
- Defense & Security: Backlog is $4.1 billion. The first export contract for five KC-390s to Portugal became effective.
Investor Verification Checklist
- COVID-19 Impact: Verify the extent of supply chain disruptions and demand cancellations in 2020, given the suspension of guidance.
- Boeing Joint Venture: Monitor the timeline and regulatory approvals for the finalization of the Commercial Aviation joint venture and the associated separation costs.
- Executive Jets Impairment: Review the details of the $71.6 million impairment charge in the Executive Jets segment to understand the long-term impact on that business unit.
- Cash Position: Confirm the sustainability of the strong liquidity position ($2.78 billion cash) against potential cash flow headwinds from the pandemic.
- FX Exposure: Assess the effectiveness of the company's hedging strategy given the exposure of costs (20% in Reais) versus revenues (10% in Reais).