EMBJ

Business Context and Reporting Period

Company: Embraer S.A.
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Third Quarter ended September 30, 2015 (3Q15)
Business Overview: Embraer is a global manufacturer of commercial jets, executive jets, and defense/security systems. The company operates in three primary segments: Commercial Aviation, Executive Jets, and Defense & Security.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: 3Q15 revenue increased 3.6% year-over-year to $1,284.6 million, driven by higher deliveries in Commercial Aviation and Executive Jets. However, YTD revenue declined 9.2% compared to 2014.
• Profitability: EBIT margin improved to 6.6% from 5.5% in 3Q14 due to cost controls in administrative and selling expenses. Gross margin declined to 17.5% from 19.5%, impacted by cost base revisions in the Defense & Security segment and foreign exchange variations.
• Net Loss: The company reported a net loss of $109.6 million, compared to a loss of $10.7 million in 3Q14. This deterioration was primarily caused by a $24.2 million foreign exchange loss and a significant increase in income tax expense ($164.4 million vs. $77.1 million) due to non-cash deferred taxes on non-monetary assets resulting from Real devaluation.
• Adjusted Performance: Excluding deferred income tax and social contribution impacts, Adjusted Net Income was $71.5 million, or $0.3923 per ADS.
• Liquidity: Net debt increased to $643.9 million from $464.5 million in 2Q15, driven by negative free cash flow of $115.3 million in the quarter.

Guidance, Outlook, and Risks

• Guidance: Embraer reiterated all aspects of its 2015 financial and delivery guidance. The company expects positive free cash flow generation in Q4 and maintains a full-year free cash flow guidance of a use of $100 million or better.
• Operational Outlook:
  • Commercial Aviation: Maintains leadership in the 70-130 seat market. The E2 family development is on schedule, with the E190-E2 first flight expected in 2016 and entry into service in H1 2018.
  • Executive Jets: Deliveries doubled compared to 3Q14. The Legacy 450 received EASA certification and is expected to enter service in Q4 2015.
  • Defense & Security: Revenues declined 47.5% in the quarter. The F-X2 project with Saab became effective, and the KC-390 flight test campaign was expected to resume in October 2015.
• Risks and Contingencies:
  • FCPA Investigation: The company is under investigation by the SEC and DOJ regarding potential violations of the Foreign Corrupt Practices Act. Discussions for a resolution are ongoing. The company cannot currently estimate the financial impact but anticipates potential substantial fines and sanctions.
  • Foreign Exchange: The devaluation of the Brazilian Real against the US Dollar significantly impacted tax expenses and operating costs. The company has hedged approximately 55% of its Real cash flow exposure for 2015.

Investor Verification Checklist

• Deferred Tax Impact: Verify the magnitude of the $181.1 million deferred income tax charge in 3Q15 and its non-cash nature relative to the reported net loss.
• Defense Segment Volatility: Monitor the Defense & Security segment's revenue trajectory, which dropped 47.5% in 3Q15, and the impact of cost base revisions.
• FCPA Resolution: Track updates on the SEC/DOJ investigation to assess potential future fines or sanctions that could materially affect financial results.
• Cash Flow Trajectory: Confirm Q4 free cash flow generation to validate the full-year guidance of a $100 million use or better.
• Backlog Stability: Review the firm order backlog of $22.8 billion to ensure it remains sufficient to support future revenue recognition despite current delivery fluctuations.