Business Context and Reporting Period
Company: Embraer S.A.
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Six months ended June 30, 2016 (Interim)
Business Overview: Embraer designs, builds, and markets aircraft and aerospace materials for commercial, executive, and defense sectors. The company is incorporated in Brazil and lists American Depositary Receipts (ADRs) on the NYSE.
Key Financial Metrics (Six Months Ended June 30, 2016)
| Metric | Value (USD Millions) |
|---|---|
| Revenue | 2,675.4 |
| Gross Profit | 545.1 |
| Gross Margin | 20.4% |
| Operating Profit (Before Financial Income) | (41.7) |
| Net Income | 4.5 |
| Net Income Attributable to Owners | 4.5 |
| Earnings Per Share (Diluted) | $0.0062 |
| Cash and Cash Equivalents | 1,223.2 |
| Total Debt (Loans and Financing) | 3,669.3 |
| Net Cash Used in Operating Activities | (521.3) |
Material Changes vs. Prior Comparable Period
- Revenue: Increased 4.1% to $2,675.4 million from $2,569.1 million in the prior year period.
- Profitability: Net income dropped significantly to $4.5 million from $72.2 million in the prior year. This decline was driven by a $200.0 million provision for penalties related to FCPA settlement negotiations and a $282.1 million "Other operating expense" (compared to $60.9 million in the prior year).
- Operating Profit: Turned negative at $(41.7) million, compared to a profit of $181.8 million in the prior year.
- Cash Position: Cash and cash equivalents decreased by $942.3 million (from $2,165.5 million to $1,223.2 million) due to significant operating cash outflows and investing activities.
- Inventory: Increased to $2,719.6 million from $2,314.6 million, reflecting higher work-in-process and finished goods.
Guidance, Outlook, Risks, and Unusual Items
- FCPA Settlement (Unusual Item): The company recognized a $200.0 million loss contingency in the quarter ended June 30, 2016, reflecting the likely outcome of negotiations with U.S. authorities (DOJ and SEC) regarding alleged non-compliance with the Foreign Corrupt Practices Act. A final settlement is expected to include a deferred prosecution agreement and an independent monitor.
- Republic Airways Bankruptcy: Following the Chapter 11 filing of client Republic Airways Holding in February 2016, the company recorded a provision of $100.9 million in 2015. Negotiations resulted in the acquisition of assets worth $48.7 million, with an additional provision of $13.9 million recorded for the remaining exposure.
- Harbin Joint Venture: Embraer and its non-controlling partners confirmed the phase-out of Harbin Embraer Aircraft Industry Co., Ltd. (HEAI) after 13 years. The last Legacy 650 delivery occurred in March 2016.
- Liquidity Risk: As of June 30, 2016, cash and cash equivalents were lower than financial indebtedness by $613.3 million, a reversal from the prior year where cash exceeded debt. The company maintains compliance with all restrictive debt covenants.
- Outlook: Management states that interim results are not necessarily indicative of full-year results. The company continues to cooperate with governmental authorities regarding the FCPA matter.
Investor Verification Checklist
- FCPA Settlement Terms: Verify the final terms of the settlement with the DOJ and SEC, including the total monetary penalty and the duration of the independent monitor.
- Cash Flow Sustainability: Monitor the company's ability to generate positive operating cash flow given the significant outflow of $521.3 million in the first half of 2016.
- Inventory Levels: Assess the trend in inventory growth ($405 million increase) and potential obsolescence risks, particularly in the commercial aviation segment.
- Debt Maturity Profile: Review the maturity schedule of the $3.67 billion debt, noting that $158.7 million is due in 2017 and $298.6 million in 2018.
- Segment Performance: Analyze the divergence between Commercial Aviation (profitable) and Defense/Security (loss-making) segments to understand the impact of government contract timing.