Business Context and Reporting Period
Company: Embraer S.A.
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Third Quarter ended September 30, 2016 (3Q16)
Business Overview: Embraer is a global manufacturer of commercial jets, executive jets, and defense & security systems. The company operates in three main segments: Commercial Aviation, Executive Jets, and Defense & Security.
Key Financial Metrics
| Metric | 3Q16 | 3Q15 | YTD 2016 |
|---|---|---|---|
| Revenue | $1,514.3 million | $1,284.6 million | $4,189.7 million |
| Gross Margin | 18.8% | 17.5% | 19.8% |
| EBIT (GAAP) | $(28.9) million | $84.4 million | $(70.6) million |
| Adjusted EBIT | $94.7 million | $84.4 million | $253.0 million |
| Adjusted EBIT Margin | 6.3% | 6.6% | 6.0% |
| Net Loss (Attributable to Shareholders) | $(33.7) million | $(109.6) million | $(29.2) million |
| Adjusted Net Income | $79.1 million | $71.5 million | $121.5 million |
| Free Cash Flow | $(37.5) million | $(115.3) million | $(692.7) million |
| Net Debt | $652.7 million | $643.9 million | $652.7 million |
| Firm Order Backlog | $21.4 billion | $22.8 billion | N/A |
Material Changes vs. Prior Period
- Revenue Growth: Consolidated revenue increased 17.9% year-over-year to $1,514.3 million, driven by a 34.7% increase in Commercial Aviation revenues and an 18.6% increase in Defense & Security revenues. Executive Jets revenues declined 8.8%.
- Profitability: Reported EBIT turned negative at $(28.9) million compared to $84.4 million in 3Q15, primarily due to non-recurring charges. However, Adjusted EBIT improved to $94.7 million (6.3% margin) from $84.4 million (6.6% margin) in 3Q15.
- Deliveries: Total deliveries were 54 aircraft (29 commercial, 25 executive), compared to 51 in 3Q15. Commercial deliveries rose from 21 to 29, while executive deliveries fell from 30 to 25.
- Backlog: The firm order backlog decreased to $21.4 billion from $21.9 billion in 2Q16 and $22.8 billion in 3Q15.
- Debt: Net debt increased to $652.7 million from $613.3 million in 2Q16 due to an increase in long-term loans.
Guidance, Outlook, and Material Events
FCPA Settlement and Contingencies
On October 24, 2016, Embraer finalized agreements to resolve investigations with U.S. (DOJ, SEC) and Brazilian (MPF, CVM) authorities regarding the Foreign Corrupt Practices Act (FCPA). The company agreed to pay a total of $205.5 million. Of this, $200 million was booked in 2Q16 and an additional $5.5 million was booked in 3Q16. The settlement ensures no charges will be brought against the company if terms are honored.
Voluntary Dismissal Program
The company recorded a $118.1 million provision in 3Q16 related to a voluntary dismissal program involving 1,463 employees. Cash payments are expected in 4Q16 and 1Q17.
Guidance and Outlook
- 2016 Guidance: Management reiterated its formal deliveries and financial guidance for 2016.
- CAPEX: Total CAPEX for 3Q16 was $73.6 million (excluding contracted CAPEX of $12.5 million, it was $61.1 million). The company expects total development investment net of supplier contributions to be in line with its $325 million outlook for 2016.
- Product Milestones: The E190-E2 prototype made its international debut at Farnborough. The E190-E2 is scheduled to enter service in the first half of 2018. The KC-390 certification is expected by the end of 2017.
Risks and Contingencies
While the FCPA settlement resolves U.S. and Brazilian proceedings, related proceedings in other countries are ongoing and could result in additional fines. Additionally, several putative securities class action complaints were filed in August 2016; the company is defending itself but cannot currently assess the claims.
Investor Verification Checklist
- Non-GAAP Reconciliations: Verify the adjustments made to reach Adjusted EBIT and Adjusted Net Income, specifically the $118.1 million voluntary dismissal provision and the $5.5 million FCPA contingency.
- Cash Flow vs. Net Income: Analyze the divergence between positive Adjusted Net Income ($79.1 million) and negative Free Cash Flow ($(37.5) million), driven by high CAPEX and R&D spending.
- Backlog Trends: Monitor the decline in the firm order backlog ($21.4 billion) against delivery rates to assess future revenue visibility.
- FCPA Settlement Impact: Confirm the total cash outflow of $205.5 million and the status of the external monitorship required for three years.
- Executive Jet Segment: Investigate the 8.8% revenue decline and 5 aircraft delivery drop in the Executive Jets segment compared to the prior year.