Business Context and Reporting Period
Embraer S.A. reported its third-quarter (3Q19) and nine-month 2019 results on November 12, 2019. The company is a global aerospace manufacturer operating in Commercial Aviation, Executive Jets, Defense & Security, and Services & Support. A material event during the period was the classification of the Commercial Aviation segment as "discontinued operations" following shareholder approval of a strategic partnership with Boeing, though the company continues to present consolidated results including this segment for guidance purposes. The transaction is expected to close in early 2020.
Key Financial Metrics
| Metric | 3Q19 | 3Q18 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Revenues (US$ million) | 1,175.6 | 1,159.4 | 3,377.6 | 3,373.4 |
| EBIT (US$ million) | (20.8) | 54.3 | (9.3) | 28.6 |
| EBIT Margin | -1.8% | 4.7% | -0.3% | 0.8% |
| EBITDA (US$ million) | 18.2 | 83.0 | 116.2 | 102.9 |
| Net Loss to Shareholders (US$ million) | (77.2) | (12.5) | (112.4) | (77.3) |
| Loss per ADS (US$) | (0.42) | (0.07) | (0.61) | (0.26) |
| Free Cash Flow (US$ million) | (257.4) | (162.6) | (921.3) | (554.5) |
| Net Debt (US$ million) | 1,347.2 | N/A | N/A | N/A |
| Total Debt (US$ million) | 3,522.6 | N/A | N/A | N/A |
| Firm Order Backlog (US$ billion) | 16.2 | 13.6 | N/A | N/A |
Material Changes vs. Prior Period
- Deliveries: Total jet deliveries increased to 44 in 3Q19 (17 commercial, 27 executive) compared to 39 in 3Q18. Large executive jet deliveries rose significantly due to the first full quarter of Praetor 600 deliveries.
- Profitability: EBIT turned negative in 3Q19 (-1.8% margin) compared to a positive 4.7% margin in 3Q18. This decline was driven by unfavorable delivery mix in Commercial Aviation, cost base revisions on the KC-390 contract in Defense & Security, and separation costs of US$ 34.8 million.
- Cash Flow: Free cash flow usage widened to US$ (257.4) million in 3Q19 from US$ (162.6) million in 3Q18, attributed to higher capital expenditures, development spending, and lower net income.
- Debt: Net debt increased to US$ 1,347.2 million at the end of 3Q19 from US$ 1,090.3 million in 2Q19 due to negative free cash flow.
- Segment Performance: Defense & Security revenues declined 28.7% year-over-year due to KC-390 contract adjustments, while Executive Jets revenues grew 16.3%.
Guidance, Outlook, and Risks
Updated Guidance
- 2019 Deliveries: Reaffirmed 85–95 commercial jets, 90–110 executive jets, two KC-390s, and now expects five Super Tucano deliveries.
- 2019 Financials: Reaffirmed revenues of US$ 5.3–5.7 billion and breakeven EBIT margin. Introduced Free Cash Flow guidance of a usage between US$ (300) million and US$ (100) million.
- 2020 Outlook: Reaffirmed revenues of US$ 2.5–2.8 billion, EBIT margin of 2–5%, and breakeven Free Cash Flow. Expects a special dividend of US$ 1.3–1.6 billion to be paid in 2020 following the Boeing transaction closing.
Risks and Contingencies
- Transaction Timing: The strategic partnership with Boeing is expected to close in early 2020, subject to anti-trust approvals and other conditions. Delays impact cash flow and dividend timing.
- Separation Costs: The company incurred US$ 66.6 million in separation costs year-to-date related to the carve-out of the Commercial Aviation business.
- Defense Contract Revisions: Ongoing cost base revisions on the KC-390 development contract negatively impacted Defense & Security revenues and margins.
Investor Verification Checklist
- Verify the timeline and regulatory approval status of the Boeing strategic partnership, as it dictates the timing of the US$ 1.3–1.6 billion special dividend.
- Monitor the impact of KC-390 cost base revisions on the Defense & Security segment's future profitability.
- Assess the company's ability to generate positive free cash flow in 4Q19 to meet the updated full-year cash usage guidance.
- Review the reconciliation of Adjusted Net Income to understand the impact of deferred taxes and social contributions on reported losses.
- Confirm the progress of E-Jets E2 program development and supplier contributions to mitigate high R&D spending.