Business Context and Reporting Period
Embraer S.A., a global aerospace company headquartered in Brazil, reported its unaudited financial results for the first quarter ended March 31, 2019 (1Q19). The company operates across Commercial Aviation, Executive Jets, Defense & Security, and Services & Support segments. A significant corporate development during the period was the shareholder approval of a strategic partnership with Boeing, pending regulatory clearance.
Key Financial Metrics
| Metric | 1Q19 (US$) | 1Q18 (US$) |
|---|---|---|
| Revenues | 823.3 million | 960.0 million (implied) |
| Gross Margin | 19.9% | 15.6% |
| EBIT | (15.2) million | (5.3) million |
| EBIT Margin | -1.8% | -0.6% |
| EBITDA | 30.9 million | 57.8 million |
| EBITDA Margin | 3.8% | 6.0% |
| Net Loss (Attributable to Shareholders) | (42.5) million | (37.0) million |
| Loss per ADS | (0.23) | (0.20) |
| Adjusted Net Loss | (61.8) million | (60.5) million |
| Free Cash Flow | (665.3) million | (435.2) million |
| Total Cash | 2,483.4 million | N/A |
| Total Debt | 3,587.1 million | 3,647.7 million (end 2018) |
| Net Debt | 1,103.7 million | 439.9 million (end 2018) |
| Firm Order Backlog | 16.0 billion | N/A |
Material Changes vs. Prior Period
- Revenue Decline: Consolidated revenues fell 14.3% year-over-year to US$ 823.3 million, driven by lower commercial jet deliveries (11 vs. 14 in 1Q18), reduced used jet sales in Executive Jets, and declines in the Defense & Security segment.
- Margin Improvement: Despite lower volumes, the consolidated gross margin improved from 15.6% to 19.9%, attributed to better profitability in Defense & Security and Services & Support segments.
- EBIT Deterioration: EBIT widened to a loss of US$ 15.2 million from US$ 5.3 million in 1Q18, primarily due to fixed cost dilution from lower delivery volumes and increased other operating expenses (US$ 53.5 million vs. US$ 29.7 million) related to impairments, taxes, and Boeing separation costs.
- Cash Flow Pressure: Free cash flow usage increased significantly to US$ 665.3 million (from US$ 435.2 million) due to higher working capital investments (inventories and receivables) and a lack of supplier contributions to offset development expenditures.
- Net Debt Increase: Net debt rose to US$ 1,103.7 million from US$ 439.9 million at the end of 2018, reflecting the negative free cash flow and debt payments.
Guidance, Outlook, and Risks
- Guidance Reaffirmed: Management reaffirmed its 2019 financial and delivery guidance, expecting 85 to 95 commercial jet deliveries and 90 to 110 total executive jet deliveries. Deliveries are expected to increase in upcoming quarters.
- Boeing Partnership: The strategic partnership, where Boeing acquires an 80% stake in Embraer's commercial aircraft and services operations for approximately US$ 4.2 billion, was approved by shareholders (96.8% in favor). Closing is expected by the end of 2019, subject to regulatory approvals.
- Program Updates: The E-Jets E2 program continues on schedule. The Praetor 600 and Praetor 500 are on track for Type Certificates in 2Q19 and 3Q19, respectively. The KC-390 military transport is preparing for entry into service.
- Risks and Contingencies: The transaction with Boeing remains subject to antitrust approvals in Brazil, the US, and other jurisdictions. The company faces exchange rate risks, with approximately 20% of costs denominated in Reais versus 10% of revenues; however, 55% of this exposure is hedged.
Investor Verification Checklist
- Verify the regulatory approval status and expected closing timeline of the Boeing strategic partnership.
- Monitor the trajectory of commercial jet deliveries to ensure alignment with the 85-95 unit annual guidance.
- Assess the impact of working capital build-up (inventories and receivables) on future free cash flow generation.
- Review the progress of the Praetor 500 and 600 Type Certifications and subsequent order conversion rates.
- Confirm the stability of the Defense & Security segment revenue following the 14.9% decline in 1Q19.