EMBJ

Business Context and Reporting Period

Company: Embraer S.A.
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Unaudited condensed consolidated interim financial statements for the three and six-month periods ended June 30, 2017.
Filing Date: August 16, 2017
Auditor Review: PricewaterhouseCoopers Auditores Independentes performed a review (not an audit) of the interim financial information.

Key Financial Metrics (Six Months Ended June 30, 2017)

Material Changes vs. Prior Comparable Period

• Revenue Growth: Revenue increased to $2,795.9 million for the six months ended June 30, 2017, compared to $2,675.4 million in the same period in 2016.
• Profitability Turnaround: The Company reported a Net Income of $113.9 million, a significant improvement from a Net Income of only $4.5 million in the prior year period. This was driven by a shift from an Operating Loss of $41.7 million in 2016 to an Operating Profit of $197.4 million in 2017.
• Segment Performance:
  • Commercial Aviation: Revenue rose to $1,724.9 million (from $1,568.3 million) with an operating profit of $260.7 million.
  • Defense and Security: Revenue increased to $490.3 million (from $398.7 million), though the segment reported an operating loss of $20.2 million.
  • Executive Aviation: Revenue decreased to $565.5 million (from $694.5 million) with an operating loss of $33.8 million.
• One-Time Items in Prior Year: The prior year period (2016) included a significant provision for penalties of $200.0 million related to the FCPA settlement, which heavily impacted the 2016 operating results. No such provision was recorded in the 2017 period.
• Debt Levels: Total loans and financing increased to $4,212.0 million from $3,759.9 million at December 31, 2016, reflecting new borrowings including a $750 million note issuance in February 2017.

Guidance, Outlook, Risks, and Contingencies

• Outlook: The filing states that results for the interim period are not necessarily indicative of results expected for the full fiscal year ending December 31, 2017.
• Legal and Regulatory Risks:
  • FCPA Settlement: The Company finalized agreements with U.S. and Brazilian authorities in October 2016 regarding anti-corruption allegations. While the $200 million penalty was provisioned in 2016, related proceedings are ongoing, and the Company notes potential for additional fines or sanctions, though no accrual is currently estimated.
  • Securities Litigation: A putative securities class action was filed in August 2016 regarding the FCPA investigation. The Company filed a motion to dismiss in June 2017, which is pending. No provision is estimated at this time.
• Financial Guarantees: The Company holds residual value guarantees with an off-balance sheet exposure of $265.8 million. Provisions for these guarantees were $111.9 million as of June 30, 2017.
• Voluntary Redundancy Scheme: A Voluntary Redundancy Scheme (VRS) announced in 2016 is largely complete, with a remaining provision balance of only $0.4 million as of June 30, 2017.
• Related Party Transactions: The Brazilian Federal Government is a significant shareholder and customer (via the Brazilian Air Force) and a source of financing (via BNDES and Banco do Brasil).

Investor Verification Checklist

• Revenue Quality: Verify the sustainability of the revenue increase in Commercial Aviation and the continued losses in the Executive Aviation segment.
• Debt Maturity Profile: Review the maturity schedule of the $4.2 billion in debt, noting that 7.2% is short-term and the weighted average term is 6.2 years.
• FCPA Exposure: Monitor ongoing proceedings related to the FCPA settlement for any new fines or sanctions beyond the $200 million already provisioned.
• Cash Flow: Analyze the negative operating cash flow of $110.8 million despite positive net income, driven by changes in working capital (specifically financial investments and unearned income).
• Inventory Levels: Assess the $2,460.9 million inventory balance, including $136.5 million in used aircraft available for sale and provisions for obsolescence.