EMBJ

Business Context and Reporting Period

Company: Embraer S.A.
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Second Quarter ended June 30, 2016 (2Q16)
Business Overview: Global manufacturer of commercial and executive aircraft, defense, and security systems. The quarter was characterized by a significant loss contingency related to FCPA investigations and a revision of 2016 guidance due to challenging market conditions in the Executive Jets segment.

Key Financial Metrics (2Q16)

Material Changes vs. Prior Period

• Revenue Decline: Consolidated revenues fell 9.7% year-over-year to US$ 1,366.4 million, driven primarily by a 27.5% revenue drop in the Executive Jets segment due to lower deliveries (26 aircraft in 2Q16 vs. 33 in 2Q15).
• FCPA Contingency: The Company recorded a US$ 200 million loss contingency in "Other operating income (expense), net" related to allegations of non-compliance with the U.S. Foreign Corrupt Practices Act (FCPA). This charge turned GAAP EBIT negative.
• Profitability: While GAAP Net Income swung to a loss of US$ 99.4 million, Adjusted Net Income (excluding the contingency and deferred tax impacts) was positive at US$ 44.1 million. Gross margin improved to 20.8% from 18.9% in 2Q15, aided by the Defense & Security segment.
• Liquidity: Net debt increased to US$ 613.3 million from US$ 219.9 million in 1Q16, reflecting seasonal cash usage and working capital investments. Free cash flow turned negative at US$ (438.9) million compared to positive US$ 72.7 million in 2Q15.

Guidance, Outlook, and Risks

Revised 2016 Guidance

Embraer lowered its 2016 outlook due to difficult conditions in the executive jets market (high used jet inventory, competition) and a challenging environment in Brazil.

• Revenue: Revised to US$ 5.8 – 6.2 billion (previously US$ 6.0 – 6.4 billion).
• Executive Jet Deliveries: Light jets lowered to 70–80 (from 75–85); Large jets lowered to 35–45 (from 40–50).
• Adjusted EBIT: Revised to US$ 405–500 million (from US$ 480–545 million); Margin 7.0–8.0% (from 8.0–8.5%).
• Adjusted EBITDA: Revised to US$ 735–840 million (from US$ 800–870 million); Margin 12.7–13.5% (from 13.3–13.7%).
• Free Cash Flow: Revised to usage of no more than US$ 400 million (previously no more than US$ 100 million).

Risks and Contingencies

• FCPA Investigation: Negotiations with U.S. authorities (SEC/DOJ) are ongoing. A final settlement is expected to include a deferred prosecution agreement and an independent monitor. The US$ 200 million accrual is an estimate and subject to change. Additional fines or sanctions in other jurisdictions remain possible.
• Market Conditions: Continued pressure on Executive Jet sales from used inventory and competitive pricing.
• Inventory Build-up: Lower expected deliveries in 2016 will result in additional finished goods inventory carried into 2017, impacting cash flow.

Investor Verification Checklist

• FCPA Settlement Terms: Verify the finality of the US$ 200 million accrual and potential for additional non-monetary sanctions or fines in other jurisdictions.
• Executive Jet Demand: Monitor the trajectory of used jet inventory levels and pricing pressure in the light and large jet markets to validate the revised delivery guidance.
• Cash Flow Management: Assess the impact of the revised Free Cash Flow usage (up to US$ 400 million) on the company's liquidity position and debt covenants.
• Inventory Levels: Track the increase in finished goods inventory (ended 2Q16 at US$ 2,719.6 million) and its effect on working capital requirements.
• E-Jets E2 Program: Confirm the progress of the E190-E2 first flight and subsequent certification milestones, as this is critical for future Commercial Aviation growth.