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, 2017 (3Q17)
Business Overview: Global manufacturer of commercial jets, executive jets, and defense & security systems. The company is currently in a transition phase involving the ramp-up of the new E-Jets E2 family and the KC-390 military transport aircraft.
Key Financial Metrics (3Q17)
| Metric | Value (US$ Millions) | Margin / Rate |
|---|---|---|
| Consolidated Revenue | 1,310.4 | - |
| Gross Profit | 248.4 | 19.0% |
| EBIT (Operating Profit) | 65.2 | 5.0% |
| Adjusted EBIT | 68.8 | 5.3% |
| EBITDA | 139.8 | 10.7% |
| Adjusted EBITDA | 143.4 | 10.9% |
| Net Income (Attributable to Shareholders) | 110.0 | - |
| Adjusted Net Income | 75.2 | - |
| Earnings per ADS (Basic) | 0.60 | - |
| Adjusted EPS (ADS Basic) | 0.41 | - |
| Net Debt | (722.8) | - |
| Total Cash Position | 3,584.1 | - |
| Adjusted Free Cash Flow | (22.7) | - |
Material Changes vs. Prior Period (3Q16)
- Revenue Decline: Consolidated revenues decreased 13.5% year-over-year to $1,310.4 million, driven by lower deliveries in Commercial Aviation (25 jets vs. 29) and Executive Jets (20 jets vs. 25).
- Profitability Improvement: Despite lower revenue, EBIT improved significantly from a loss of $28.9 million in 3Q16 to a profit of $65.2 million in 3Q17. This turnaround is largely due to the absence of $123.6 million in non-recurring charges recorded in 3Q16 (voluntary dismissal program and FCPA penalties).
- Net Income Volatility: Reported Net Income swung from a loss of $33.7 million in 3Q16 to a profit of $110.0 million in 3Q17. Adjusted Net Income increased from $38.9 million to $75.2 million.
- Debt Position: Net debt increased to $722.8 million from $661.5 million in 2Q17, primarily due to free cash flow usage in the quarter.
- Backlog Growth: Firm order backlog increased to $18.8 billion, up from $18.5 billion in 2Q17, supported by new orders including a $2 billion deal with SkyWest.
Guidance, Outlook, and Risks
2018 Outlook
Management characterizes 2018 as a "transition year" due to the entry into service of the E190-E2 and a flattish Executive Jets market. Key guidance includes:
- Revenues: $5.3 billion to $6.0 billion.
- Commercial Aviation Deliveries: 85 to 95 jets (expected decline due to E1 to E2 transition).
- Executive Jets Deliveries: 105 to 125 jets.
- EBIT Margin: 5.0% to 6.0%.
- Free Cash Flow: Usage of $150 million or better.
Management Commentary & Risks
- Transition Costs: The company anticipates negative impacts on short-term results due to ramp-up costs for the E2 family and KC-390 production.
- FX Exposure: Approximately 20% of costs are in Brazilian Reais while only 10% of revenues are in Reais. The company utilizes hedging strategies (collars) to mitigate this exposure.
- Legal Contingency: A securities class action lawsuit regarding the FCPA investigation remains pending; the company believes there is no adequate basis to estimate provisions.
- Product Milestones: The E190-E2 is on track for entry into service in April 2018. The KC-390 first delivery is expected in the second half of 2018.
Investor Verification Checklist
- Non-GAAP Reconciliations: Verify the specific adjustments made to derive Adjusted EBIT and Adjusted Net Income, particularly the treatment of deferred taxes related to FX fluctuations on non-monetary assets.
- Delivery Mix: Confirm the impact of the E175 vs. E190/E195 mix on revenue per unit, as the E175 represents a lower price point but higher volume.
- Working Capital Trends: Monitor the decline in accounts payable ($137.6 million decrease in 3Q17) and its impact on future cash flow.
- Development Spend: Track net development expenditures for the E2 program, which are projected to finish near $400 million for 2017.
- Backlog Conversion: Assess the rate at which the $18.8 billion backlog converts to revenue, noting the shift toward the E2 family which has a different pricing and delivery schedule.