Business Context and Reporting Period
Embraer S.A. reported its unaudited financial results for the second quarter ended June 30, 2020 (2Q20). The company operates in Commercial Aviation, Executive Jets, Defense & Security, and Services & Support segments. Operations were significantly impacted by the global COVID-19 pandemic and the termination of a strategic partnership with The Boeing Company, leading to a pause in Commercial Aviation deliveries early in the year.
Key Financial Metrics
- Revenue: US$ 537.2 million for 2Q20, a 61.0% year-over-year decline.
- Profitability: Reported EBIT was US$ (342.4) million (-63.7% margin). Adjusted EBIT (excluding special items) was US$ (140.5) million (-26.2% margin). Adjusted EBITDA was US$ (120.4) million (-22.4% margin).
- Net Income: Net loss attributable to shareholders was US$ (315.3) million (US$ (1.71) per ADS). Adjusted net loss was US$ (198.8) million (US$ (1.08) per ADS).
- Cash Flow: Free cash flow usage was US$ (476.2) million, an improvement from US$ (676.5) million in 1Q20.
- Liquidity and Debt: Total cash and financial investments stood at US$ 1,998.5 million. Total debt was US$ 3,799.2 million, resulting in a net debt position of US$ 1,800.7 million. Major debt maturities begin in 2022.
- Backlog: Firm order backlog totaled US$ 15.4 billion at the end of 2Q20.
- Deliveries: 17 total jets delivered (4 commercial, 13 executive).
Material Changes vs. Prior Period
- Revenue Decline: Consolidated revenues dropped 61.0% compared to 2Q19, driven primarily by an 84.6% decline in commercial jet deliveries and lower activity across all segments.
- Margin Compression: Consolidated gross margin fell to 3.1% from 14.4% in 2Q19. This was due to lower deliveries impacting fixed cost absorption and US$ 29.3 million in expenses for excess idle capacity.
- Special Items: The quarter included US$ 202 million in net negative non-cash special items, including a US$ 91.1 million impairment loss on Commercial Aviation and US$ 101.2 million in recognized prior-period depreciation.
- Cost Reductions: Administrative and selling expenses decreased significantly year-over-year due to furloughs, salary reductions, and reduced marketing spend.
Guidance, Outlook, and Risks
- Guidance: Financial and delivery guidance for 2020 remains suspended due to continued uncertainty related to the COVID-19 pandemic.
- Program Updates: The start of operations for the E175-E2 jet has been rescheduled to 2023. The company continues development on this revised timeline.
- Liquidity Strategy: Embraer finalized contracts for up to US$ 700 million in working capital and export financing, with disbursements expected in 3Q20 to reinforce cash positions through 2021.
- Risks: Key risks include the duration and severity of the pandemic's impact on the aerospace industry, exchange rate fluctuations (hedged partially for 2020), and the ability to absorb fixed costs amidst low delivery volumes.
Investor Verification Checklist
- Verify the sustainability of the US$ 2.0 billion cash position against the US$ 476.2 million quarterly free cash flow burn rate.
- Confirm the timeline and cost implications of the E175-E2 program delay to 2023.
- Monitor the execution of the US$ 700 million new financing lines and their impact on liquidity in 3Q20.
- Assess the trajectory of Commercial Aviation deliveries and their ability to absorb fixed costs as the market recovers.
- Review the impact of the US$ 202 million in non-cash special items on future balance sheet valuations and tax positions.