Embraer S.A. Q1 2019 Financial Summary
Business Context and Reporting Period
This Form 6-K reports the condensed interim financial statements for Embraer S.A. for the quarter ended March 31, 2019. The reporting period is significantly impacted by the strategic partnership with The Boeing Company. Following shareholder approval on February 26, 2019, Embraer's Commercial Aviation segment and related Services & Support operations have been reclassified as Discontinued Operations and Assets Held for Sale. Consequently, the "Continuing Operations" results primarily reflect the Defense & Security and Executive Jets segments.
Key Financial Metrics (Consolidated)
All figures in thousands of Brazilian Reais (R$), unless otherwise noted.
| Metric | Q1 2019 | Q1 2018 (Restated) |
|---|---|---|
| Revenue (Continuing Ops) | 1,512,124 | 1,385,746 |
| Gross Profit (Continuing Ops) | 286,977 | 150,090 |
| Operating Profit (Continuing Ops) | (91,127) | (131,999) |
| Net Loss (Continuing Ops) | (10,489) | (65,496) |
| Net Loss (Discontinued Ops) | (145,395) | (57,910) |
| Total Net Loss for Period | (155,884) | (123,406) |
| Cash and Cash Equivalents | 2,261,478 | 4,963,041 (Dec 31, 2018) |
| Total Assets | 43,587,012 | 43,758,768 (Dec 31, 2018) |
| Assets Held for Sale | 21,172,452 | - |
| Loans and Financing (Total) | 483,359 | 14,134,065 (Dec 31, 2018) |
Material Changes vs. Prior Period
- Discontinued Operations: The most significant change is the reclassification of the Commercial Aviation segment. This resulted in a net loss of R$ 145.4 million for the quarter from discontinued operations, compared to R$ 57.9 million in Q1 2018. Assets and liabilities totaling approximately R$ 21.2 billion are now held for sale.
- Continuing Operations Performance: Despite the loss from discontinued operations, Continuing Operations showed improvement. Revenue increased to R$ 1.51 billion (up from R$ 1.39 billion), and the net loss from continuing operations narrowed significantly to R$ 10.5 million (down from R$ 65.5 million).
- Debt Reduction: Total loans and financing decreased drastically from R$ 14.1 billion at year-end 2018 to R$ 483 million. This reduction is primarily due to the reclassification of Commercial Aviation debt (approx. R$ 13.5 billion) to "Liabilities Held for Sale."
- Cash Flow: Net cash used in operating activities was R$ 1.28 billion, compared to R$ 1.03 billion generated in Q1 2018. This outflow is driven by inventory build-up and changes in working capital.
- Accounting Changes: The company adopted IFRS 16 (Leases) on January 1, 2019, recognizing right-of-use assets and lease liabilities. Comparative data for 2018 was restated to reflect discontinued operations and IFRS 9/15 adoption.
Outlook, Risks, and Contingencies
- Boeing Transaction: The sale of the Commercial Aviation business to Boeing (80% stake) is subject to regulatory approvals (Brazil, US, and others). Management expects completion by the end of 2019 if approvals are received within the expected timeframe.
- Regulatory Investigations: The company is subject to ongoing investigations by the SEC, DOJ, and Brazilian authorities regarding anti-corruption compliance. While definitive agreements were reached in 2016, related proceedings could result in additional fines or sanctions.
- Critical Estimates: Revenue recognition in the Defense & Security segment relies on the percentage-of-completion method. A 10% variance in estimated costs could impact revenue by approximately R$ 1.37 billion (increase) or R$ 1.67 billion (decrease).
- Foreign Exchange: The company's functional currency is the US Dollar, while financial statements are presented in Brazilian Reais. Fluctuations in the exchange rate significantly impact deferred income tax and reported results.
Key Facts for Investor Verification
- Verify the status of regulatory approvals for the Boeing Commercial Aviation joint venture, as this is the primary driver of the "Held for Sale" classification.
- Monitor the cash burn rate in Continuing Operations, as the company reported a net loss of R$ 10.5 million from continuing activities despite revenue growth.
- Review the composition of the R$ 21.2 billion in assets held for sale to understand the net equity contribution to the new joint venture.
- Assess the impact of the R$ 1.28 billion cash outflow from operating activities on liquidity, given the reduction in cash balances from R$ 4.96 billion to R$ 2.26 billion.
- Confirm the treatment of the R$ 145 million loss from discontinued operations to ensure it is not indicative of ongoing operational issues in the remaining Defense & Security and Executive Jets segments.