Embraer S.A. Form 6-K Summary: Fourth Quarter and Fiscal Year 2014 Results
Business Context and Reporting Period
This Form 6-K reports the unaudited financial results for the fourth quarter ended December 31, 2014 (4Q14), and the full fiscal year 2014 for Embraer S.A., a global manufacturer of commercial, executive, and defense aircraft. The filing was released on March 4, 2015. The company operates in three primary segments: Commercial Aviation, Executive Jets, and Defense & Security.
Key Financial Metrics
| Metric | 4Q14 | FY 2014 | FY 2013 |
|---|---|---|---|
| Revenue | $2,045.5 million | $6,288.8 million | $6,235.0 million |
| EBIT | $196.3 million | $543.3 million | $713.4 million |
| EBIT Margin | 9.6% | 8.6% | 11.4% |
| EBITDA | $281.3 million | $829.6 million | $1,004.0 million |
| EBITDA Margin | 13.8% | 13.2% | 16.1% |
| Net Income (Shareholders) | $91.4 million | $334.7 million | $342.0 million |
| Earnings per ADS (Basic) | $0.4983 | $1.8247 | $1.8764 |
| Free Cash Flow | $287.4 million | ($403.6) million | $212.6 million |
| Net Debt Position | ($84.5) million | ($84.5) million | $429.3 million (Net Cash) |
| Total Cash Balance | $2,423.6 million | $2,423.6 million | $2,623.6 million |
Material Changes vs. Prior Period
- Revenue: Full-year 2014 revenue increased 0.9% to $6.29 billion, driven by a 21.7% growth in the Defense & Security segment. Commercial Aviation revenue declined slightly due to a mix shift toward smaller E175 models.
- Profitability: EBIT margin for 2014 (8.6%) was below the guidance range of 9.0% to 9.5%. This was primarily due to a less favorable product mix (higher proportion of smaller E175 jets) and lower-than-anticipated large jet deliveries in the Executive segment. 4Q13 results included non-recurring gains of $147.0 million related to the American Airlines bankruptcy resolution, which inflated the prior year comparison.
- Cash Flow: The company shifted from a net cash position of $429.3 million in 2013 to a net debt position of $84.5 million in 2014. This reversal was caused by negative Free Cash Flow of $403.6 million in 2014, driven by increased trade receivables, inventory build-up for new executive jet models, and a decline in customer advances.
- Deliveries: Total deliveries for 2014 were 92 commercial and 116 executive aircraft, meeting the company's guidance. Commercial deliveries increased slightly (92 vs. 90 in 2013), while executive deliveries decreased (116 vs. 119 in 2013).
Guidance, Outlook, and Risks
2015 Guidance:
- Revenue: Expected between $6.1 billion and $6.6 billion.
- Deliveries: 95 to 100 commercial jets; 80 to 90 light executive jets; 35 to 40 large executive jets.
- Margins: EBIT margin expected between 8.0% and 8.5%; EBITDA margin between 12.0% and 13.0%.
- Investments: Total investments projected at $650 million (Research: $50M, Development: $300M, CAPEX: $300M).
- Free Cash Flow: Expected to be greater than negative $100 million.
Management Commentary: Management anticipates a less favorable revenue mix in 2015 due to a higher portion of smaller E175 deliveries. The Executive Jet segment faces pressure from the pre-owned market, though new models (Legacy 500 and 450) are expected to drive growth. Defense revenues may be pressured by the exchange rate as a significant portion is denominated in Brazilian Reais.
Risks and Contingencies:
- SEC/DOJ Investigation: The company is under investigation regarding potential violations of the U.S. Foreign Corrupt Practices Act (FCPA) related to aircraft sales outside Brazil. The scope has been expanded voluntarily. The company states there is no adequate basis to estimate accruals or quantify potential fines at this time.
- Exchange Rate: Fluctuations in the Brazilian Real to U.S. Dollar exchange rate impact reported revenues and deferred tax provisions.
Investor Verification Checklist
- Verify the impact of the ongoing SEC/DOJ FCPA investigation on future cash flows and potential legal settlements.
- Monitor the execution of the E-Jets E2 program and the entry into service of the Legacy 450 and 500 executive jets.
- Assess the trend in working capital, specifically the levels of trade receivables and inventory, which drove negative free cash flow in 2014.
- Track the mix of commercial deliveries (E175 vs. larger models) to validate the 2015 margin guidance.
- Review the company's ability to maintain liquidity given the shift from net cash to net debt and the projected negative free cash flow for 2015.