Embraer S.A. Form 6-K Summary
Business Context and Reporting Period
This Form 6-K filing by Embraer S.A. presents unaudited condensed consolidated interim financial statements for the three-month and nine-month periods ended September 30, 2017. The report was filed on November 17, 2017. The financial statements have been reviewed by PricewaterhouseCoopers Auditores Independentes, who expressed no awareness of material modifications required for conformity with IFRS. Embraer operates in Commercial Aviation, Defense and Security, and Executive Aviation segments.
Key Financial Metrics (Nine Months Ended Sept 30, 2017)
| Metric | Value (USD Millions) |
|---|---|
| Revenue | 4,106.3 |
| Gross Profit | 720.0 |
| Gross Margin | 17.5% |
| Operating Profit (Before Financial Income) | 262.6 |
| Net Income | 225.2 |
| Net Income Attributable to Owners | 211.6 |
| Earnings Per Share (Diluted) | $0.29 |
| Cash and Cash Equivalents | 772.5 |
| Total Debt (Loans and Financing) | 4,306.9 |
| Net Cash Used by Operating Activities | 35.4 |
Material Changes vs. Prior Period
- Profitability Turnaround: The Company reported a Net Income of $225.2 million for the nine months ended September 30, 2017, a significant improvement from a Net Loss of $28.0 million in the same period of 2016.
- Revenue Stability: Total revenue remained relatively flat at $4,106.3 million compared to $4,189.7 million in the prior year period.
- Operating Expenses: "Other operating income (expense), net" improved drastically from a $463.7 million expense in 2016 to a $71.2 million expense in 2017. This was primarily driven by the absence of a $200.0 million provision for penalties and a $123.3 million restructuring expense recorded in 2016.
- Cash Position: Cash and cash equivalents decreased from $1,241.5 million at year-end 2016 to $772.5 million at September 30, 2017, largely due to investing activities totaling $950.4 million used.
- Debt Levels: Total loans and financing increased to $4,306.9 million from $3,759.9 million at December 31, 2016.
Outlook, Risks, and Contingencies
- Legal and Regulatory: The Company finalized agreements in October 2016 with U.S. and Brazilian authorities regarding anti-corruption allegations. While definitive, related proceedings are ongoing, and the Company states there is no adequate basis to estimate additional fines or sanctions.
- Securities Litigation: A putative securities class action was filed in August 2016 regarding FCPA investigations. The Company filed a motion to dismiss in June 2017, which remains pending.
- Residual Value Guarantees: The Company holds financial guarantees of residual value totaling $108.4 million. Sensitivity analysis indicates that a 50% adverse variation in third-party appraisals could result in an additional provision of $86.7 million.
- Market Risks: The Company is exposed to interest rate and foreign exchange risks, primarily related to the Brazilian Real (BRL) versus the U.S. Dollar. The Company utilizes derivative instruments (swaps, options, NDFs) to hedge these exposures.
- Guidance: The filing does not contain specific forward-looking financial guidance for the full year 2017, noting that interim results are not necessarily indicative of full-year results.
Investor Verification Checklist
- One-Time Items: Verify the sustainability of the 2017 operating profit by excluding the $200M penalty provision and $123M restructuring charge that depressed 2016 results.
- Cash Flow Sustainability: Review the $950.4 million net cash used in investing activities and the $474.0 million decrease in cash balances to assess liquidity runway.
- Debt Maturity: Analyze the debt maturity schedule, noting $196.2 million due in 2018 and $163.9 million in 2019, against current cash reserves.
- Legal Exposure: Monitor the status of the pending securities class action and ongoing anti-corruption proceedings for potential future accruals.
- Segment Performance: Note the divergence in segment margins: Commercial Aviation (23.0%) vs. Defense and Security (4.5%) and Executive Aviation (11.1%).