Business Context and Reporting Period
This Form 6-K filing by Embraer S.A. serves as the manual and management proposal for the Annual and Extraordinary General Shareholders' Meetings scheduled for April 29, 2020. The document covers the fiscal year ended December 31, 2019. A defining feature of this period is the strategic partnership with The Boeing Company, approved by shareholders in February 2019, which resulted in the reclassification of Embraer's Commercial Aviation business unit as "held for sale" and "discontinued operations" in the 2019 financial statements. The filing also addresses governance matters, including the election of the Fiscal Council, management compensation, and proposed amendments to the Company's Bylaws.
Key Financial Metrics (Fiscal Year Ended Dec 31, 2019)
Profitability and Loss:
- Net Loss: R$1,316.8 million (attributable to owners of Embraer).
- Revenue (Continuing Operations): R$10,467.9 million (up 33% from 2018).
- Revenue (Discontinued Operations): R$11,334.1 million (up 4.6% from 2018).
- Operating Profit (Continuing): Negative R$643.7 million (Operating Margin: -6.1%).
- Operating Profit (Discontinued): R$333.9 million (Operating Margin: 2.9%).
- Gross Margin (Continuing): 13.7% (up from 9.0% in 2018).
Liquidity and Balance Sheet:
- Cash and Cash Equivalents: R$5,159.0 million (Continuing); R$6,046.1 million (Held for Sale).
- Total Assets: R$42,614.7 million (including R$20,857.4 million held for sale).
- Shareholders' Equity: R$14,569.5 million.
- Net Debt: Negative R$2,468.3 million (including assets/liabilities held for sale).
- EBITDA: R$431.5 million (Continuing operations).
Debt Profile:
- Total Financial Indebtedness: R$13,673.3 million (including R$13,306.6 million held for sale).
- Debt/Equity Ratio: 0.9.
- Financial Indebtedness/EBITDA: 31.7x.
Material Changes vs. Prior Period
Revenue Growth: Continuing operations revenue increased 33% to R$10.5 billion, driven by a 34.9% increase in Executive Aviation revenue (109 aircraft delivered vs. 91 in 2018) and a 39.1% increase in Defense & Security revenue. The latter was significantly impacted in 2018 by a R$458.7 million negative adjustment related to the KC-390 prototype incident, which did not recur in 2019.
Discontinued Operations: The Commercial Aviation segment was reclassified as discontinued. While aircraft deliveries remained stable (89 in 2019 vs. 90 in 2018), operating profit declined 71.5% to R$333.9 million due to segregation costs related to the Boeing transaction (R$485.5 million) and a less favorable product mix (higher share of E2 jets still on a learning curve).
Balance Sheet Restructuring: Current assets increased 26.1% and current liabilities increased 119.3% compared to 2018, primarily due to the reclassification of the Commercial Aviation assets and liabilities as "held for sale" (current). Conversely, non-current assets and liabilities decreased significantly as these items were moved to the held-for-sale category.
Net Loss: The Company recorded a net loss of R$1.3 billion, compared to a net loss of R$669.0 million in 2018. The loss was driven by the net loss from discontinued operations (R$446.4 million) and continuing operations (R$847.7 million), offset partially by a significant financial income of R$250.4 million in continuing operations.
Guidance, Outlook, and Management Commentary
Strategic Partnership with Boeing: The transaction remains subject to European Commission approval and other closing conditions. Upon closing, Boeing will acquire a controlling stake in the Commercial Aviation business, and a joint venture will be formed for the C-390 Millennium aircraft. Embraer will retain its Executive Aviation and Defense & Security businesses.
Management Compensation: The Board proposes an aggregate annual compensation limit of R$69 million for the period May 2020 to April 2021, a reduction from the R$74 million approved in 2019. This reduction reflects a decrease in the number of statutory Board of Executive Officers. The 2019 actual compensation was lower than the limit due to the non-achievement of maximum targets and the postponement of the Boeing transaction closing bonus.
Bylaw Amendments: Management proposes amendments to allow Board committees (Strategy, Personnel and Governance) to include "External Members" (non-directors) in addition to independent directors, provided a majority are independent. Additionally, the Company seeks to include provisions allowing for indemnity agreements for directors, officers, and employees.
Risks and Contingencies:
- Regulatory Approval: The Boeing transaction is contingent on regulatory approvals, specifically from the European Commission.
- Off-Balance Sheet Items: The Company maintains significant residual value guarantees and financial guarantees related to aircraft financing, with an off-balance sheet exposure of R$352.6 billion (R$352,620 million) as of Dec 31, 2019.
- FCPA Investigation: The external monitoring term related to the FCPA settlement with US and Brazilian authorities is set to end on April 22, 2020.
Important Facts for Investor Verification
- Transaction Status: Verify the current status of the European Commission's approval for the Boeing Commercial Aviation sale, as this is a critical condition precedent for the transaction's consummation.
- Discontinued Operations Impact: Confirm the extent of segregation costs and the timeline for the final separation of the Commercial Aviation business, as these significantly impacted 2019 profitability.
- Debt Maturity: Review the maturity profile of the R$13.3 billion debt associated with the discontinued operations to understand future cash flow obligations post-transaction.
- Executive Aviation Deliveries: Monitor the delivery schedule for the Praetor 500/600 and E2 jets, which are the primary growth drivers for the continuing operations.
- Bylaw Changes: Assess the implications of the proposed Bylaw amendments regarding the inclusion of External Members on Board committees and the new indemnity provisions.