EMBJ

Business Context and Reporting Period

Company: Embraer S.A.
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Nine months ended September 30, 2015 (Interim)
Filing Date: November 13, 2015
Business Overview: Embraer designs, builds, and markets aircraft and aerospace materials across Commercial Aviation, Defense and Security, and Executive Aviation segments. The company is incorporated in Brazil with shares listed on the NYSE and BM&FBOVESPA.

Key Financial Metrics (Nine Months Ended Sept 30, 2015)

Material Changes vs. Prior Period

• Revenue Decline: Revenue decreased to $3,853.7 million from $4,243.3 million in the same period of 2014, a drop of approximately 9.2%.
• Profitability Shift: The company reported a net loss of $33.2 million, a significant reversal from the net income of $252.8 million in the prior year period.
• Segment Performance:
  • Commercial Aviation: Revenue increased slightly to $2,233.3 million (from $2,188.0M), with gross margin improving to 23.4% (from 20.1%).
  • Defense and Security: Revenue plummeted to $611.4 million from $1,097.5 million, resulting in a near-zero gross margin of 0.4% (down from 23.9%).
  • Executive Aviation: Revenue grew to $972.6 million (from $901.2M) with a gross margin of 22.1%.
• Tax Impact: The effective tax rate surged to 112.3% compared to 28.6% in the prior year, driven largely by a $291.6 million deferred tax expense related to the difference between the tax basis (Brazilian Real) and functional currency (US Dollar).
• Debt Increase: Total loans and financing increased to $3,389.4 million from $2,508.1 million, primarily due to new borrowings including a $1 billion note issuance in June 2015.

Outlook, Risks, and Contingencies

• Forward-Looking Risks: Management highlights risks related to cash flow sufficiency for debt service, general economic conditions in Brazil, competitive pressures, and potential customer order cancellations or rescheduling.
• Foreign Corrupt Practices Act (FCPA): The company is under ongoing investigation by the SEC and U.S. Department of Justice regarding potential non-compliance with the FCPA related to aircraft sales outside Brazil. The company has expanded its internal investigation and compliance program but cannot quantify potential fines or sanctions at this time.
• Financial Guarantees: Off-balance sheet exposure for financial and residual value guarantees totals $434.9 million.
• Liquidity: As of September 30, 2015, cash and cash equivalents were lower than financial indebtedness by $910.9 million, compared to a surplus of $84.5 million at the end of 2014.
• Government Relations: The Brazilian Federal Government holds a "golden share" with veto rights over specific strategic decisions, including changes to military programs and transfer of control.

Investor Verification Checklist

• Defense Segment Volatility: Verify the reasons for the sharp 44% revenue decline in the Defense and Security segment and the sustainability of the 0.4% gross margin.
• Tax Provision Impact: Confirm the sustainability of the effective tax rate and the specific impact of currency fluctuations on deferred tax liabilities.
• Debt Service Capacity: Assess the company's ability to service the increased debt load ($3.4B) given the shift from a cash surplus to a cash deficit relative to debt.
• FCPA Investigation Status: Monitor updates on the SEC/DOJ investigation for potential material fines or operational restrictions.
• Inventory Levels: Review the $2.76 billion inventory balance, particularly the composition of finished goods and work-in-process, to assess potential obsolescence risks.