Embraer S.A. First Quarter 2016 Financial Summary
Business Context and Reporting Period
This Form 6-K reports the unaudited financial results for Embraer S.A. for the quarter ended March 31, 2016 (1Q16). Embraer is a global aerospace company headquartered in Brazil, operating in Commercial Aviation, Executive Jets, and Defense & Security segments. The reporting period reflects a strategic focus on increasing aircraft deliveries and managing working capital amidst foreign exchange fluctuations.
Key Financial Metrics
| Metric | 1Q16 (US$ Millions) | 1Q15 (US$ Millions) | Change |
|---|---|---|---|
| Revenue | 1,309.0 | 1,055.9 | +24% |
| EBIT | 85.7 | 79.6 | +8% |
| EBIT Margin | 6.5% | 7.5% | -100 bps |
| EBITDA | 167.6 | 149.1 | +12% |
| EBITDA Margin | 12.8% | 14.1% | -130 bps |
| Net Income (Attributable to Shareholders) | 103.9 | (61.7) | Turnaround to Profit |
| EPS (Basic ADS) | $0.5690 | $(0.3370) | N/A |
| Adjusted Net Loss | (1.7) | 48.3 | Decline |
| Total Cash Position | 3,443.3 | 1,853.7 | +86% |
| Total Debt | 3,663.2 | 2,389.3 | +53% |
| Net Debt | (219.9) | (535.6) | Improvement |
| Free Cash Flow | (216.3) | (439.6) | Improvement |
Material Changes vs. Prior Period
- Deliveries: Total aircraft deliveries increased 38% year-over-year to 44 units (21 Commercial, 23 Executive), driven by a significant rise in Executive Jet deliveries (23 vs. 12 in 1Q15).
- Revenue Growth: Revenue rose 24% to $1,309.0 million, primarily due to higher volume in Commercial Aviation and Executive Jets, partially offset by declines in Defense & Security.
- Profitability: While EBIT increased, EBIT and EBITDA margins compressed due to lower gross margins in the Executive Jets segment and increased selling expenses. Gross margin fell from 23.7% to 20.0%.
- Net Income Volatility: Reported Net Income turned positive ($103.9M) from a loss in 1Q15, largely driven by a $32.1 million income tax gain related to foreign exchange variations on non-monetary assets. Excluding these non-cash tax items, Adjusted Net Income was a loss of $1.7 million.
- Liquidity: Net debt improved significantly to $219.9 million from $535.6 million in 1Q15, attributed to lower working capital needs and higher cash balances.
Guidance, Outlook, and Risks
- Outlook: Management reiterated all aspects of its financial and delivery outlook for 2016.
- Development Programs: The E190-E2 (second-generation E-Jet) rolled out in February 2016, with maiden flight scheduled for H2 2016 and entry into service in H1 2018. Development investments are expected to ramp up, with net investment for 2016 projected to align with the $325 million outlook.
- CAPEX: Total CAPEX for 1Q16 was $36.5 million (excluding contracted CAPEX of $3.1 million). The 2016 CAPEX outlook remains $275 million.
- Regulatory Risks: The Company is under ongoing investigation by the SEC and DOJ regarding potential FCPA violations. Discussions for a resolution are underway. The Company states there is currently no adequate basis to estimate potential fines or sanctions.
- Foreign Exchange: The Company maintains a hedging strategy to mitigate cash flow exposure from the Brazilian Real, with approximately 45% of exposure hedged for 2016 within a specific exchange rate range.
Investor Verification Checklist
- Adjusted Net Income: Verify the sustainability of earnings by analyzing the Adjusted Net Loss of $1.7 million, which excludes significant non-cash deferred tax gains.
- Executive Jet Margins: Investigate the drivers behind the decline in Executive Jets gross margin despite a 140% revenue increase in the segment.
- FCPA Resolution: Monitor updates on the SEC/DOJ investigation to assess potential future financial liabilities or sanctions.
- Working Capital: Review the seasonal inventory buildup ($2.5 billion) to ensure it aligns with delivery schedules for the remainder of 2016.
- Debt Structure: Note the increase in short-term loans ($502.3M) and the 24% portion of debt denominated in Reais, assessing refinancing risks.