Business Context and Reporting Period
Company: Embraer S.A.
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: First Quarter ended March 31, 2018 (1Q18)
Context: Embraer is a global aerospace manufacturer with segments in Commercial Aviation, Executive Jets, Defense & Security, and a newly separated Services & Support segment. The filing includes restated prior period results due to the adoption of IFRS 15 and IFRS 9.
Key Financial Metrics
| Metric (in millions USD) | 1Q18 | 1Q17 (Restated) |
|---|---|---|
| Revenue | 992.0 | 1,042.4 |
| EBIT | 26.4 | 40.6 |
| EBIT Margin | 2.7% | 3.9% |
| EBITDA | 89.5 | 113.0 |
| EBITDA Margin | 9.0% | 10.8% |
| Net Loss (Attributable to Shareholders) | (12.3) | 53.2 (Income) |
| Adjusted Net Loss | (24.6) | 40.4 (Income) |
| Loss per ADS (Basic) | (0.07) | 0.29 (Earnings) |
| Adjusted Free Cash Flow | (430.9) | (199.2) |
| Total Cash Position | 3,428.4 | 3,482.0 |
| Total Debt | 4,187.0 | 4,287.8 |
| Net Debt | 758.6 | 805.8 |
Material Changes vs. Prior Period
- Deliveries: Total jet deliveries declined to 25 in 1Q18 (14 commercial, 11 executive) compared to 33 in 1Q17 (18 commercial, 15 executive).
- Revenue: Consolidated revenue decreased 4.8% year-over-year to $992.0 million. This was driven by lower aircraft deliveries in Commercial Aviation (-20.9%) and Executive Jets (-27.1%), partially offset by significant growth in Defense & Security (+62.9%) and Services & Support (+4.0%).
- Profitability: EBIT dropped to $26.4 million from $40.6 million, primarily due to lower delivery volumes impacting fixed cost dilution. Gross margin improved from 16.7% to 18.3%.
- Cash Flow: Adjusted Free Cash Flow usage increased significantly to $(430.9) million from $(199.2) million, driven by higher working capital investment (inventories and receivables) and the reported net loss.
- Balance Sheet: Net debt improved to $758.6 million from $805.8 million in 1Q17, despite negative free cash flow, due to a stronger cash position relative to debt levels compared to the prior year quarter.
Guidance, Outlook, and Risks
- Guidance Reaffirmed: Management reaffirmed 2018 financial and delivery guidance: 85-95 commercial jet deliveries and 105-125 executive jet deliveries. Services & Support revenue guidance is set at $900 million to $1 billion for 2018.
- Program Milestones: The E190-E2 received type certification from ANAC, FAA, and EASA simultaneously in February 2018. The Phenom 300E was also certified and delivered.
- Boeing Discussions: Ongoing discussions with Boeing regarding a potential business combination, potentially involving a joint entity for the Commercial Aviation segment. No assurance of materialization is provided.
- Risks and Contingencies:
- Legal: A securities class action regarding FCPA investigation statements was dismissed by a U.S. court in March 2018, but the decision is subject to appeal.
- FX Exposure: Approximately 10% of net revenues are in Reais while 20% of costs are in Reais. The company hedges 45% of this exposure with a floor of R$ 3.32 and a cap of R$ 3.75.
- Working Capital: Inventories increased by $331.7 million and trade receivables by $134.2 million, reflecting seasonal build-up and extended payment cycles.
Investor Verification Checklist
- Verify the impact of the new Services & Support segment reporting on backlog and revenue recognition.
- Monitor the progress of the Boeing combination talks and potential regulatory approvals required.
- Track the ramp-up of E-Jets E2 deliveries following certification to assess revenue recovery in the Commercial Aviation segment.
- Review the status of the dismissed class action lawsuit for potential appeals.
- Assess the sustainability of working capital levels (inventories and receivables) as delivery volumes increase in subsequent quarters.