Business Context and Reporting Period
Company: Embraer S.A.
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Date: January 18, 2017
Reporting Period: Unaudited condensed consolidated financial statements for the nine-month period ended September 30, 2016. This filing also incorporates revised tables and certain changes to the 2015 Form 20-F.
Key Financial Metrics (Nine Months Ended Sept 30, 2016)
| Metric | Value (USD Millions) |
|---|---|
| Revenue | 4,189.7 |
| Gross Profit | 829.6 |
| Operating Profit (Loss) | (70.6) |
| Net Loss | (28.0) |
| Net Loss Attributable to Owners | (29.2) |
| Diluted Loss Per Share | (0.0399) |
| Cash and Cash Equivalents | 1,455.5 |
| Total Debt (Short + Long Term) | 3,823.1 |
| Net Cash Used in Operating Activities | (219.6) |
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased to $4,189.7 million from $3,853.7 million in the same period of 2015.
- Profitability Decline: The company reported a net loss of $28.0 million compared to a net loss of $33.2 million in the prior year period. However, operating profit turned negative at $(70.6) million, a significant deterioration from an operating profit of $266.2 million in the prior year.
- Segment Performance:
- Commercial Aviation: Revenue rose to $2,495.2 million (from $2,233.3 million) with an operating profit of $279.9 million.
- Defense and Security: Revenue remained relatively flat at $614.2 million (from $611.4 million) but operating profit collapsed to $9.1 million from a loss of $(82.4) million in the prior year, though still significantly lower than historical performance.
- Executive Aviation: Revenue increased to $1,061.1 million (from $972.6 million) but reported an operating loss of $(38.1) million compared to a profit of $54.6 million previously.
- Unallocated Expenses: A significant portion of the operating loss is driven by unallocated expenses totaling $(323.5) million, primarily due to restructuring and penalties.
Guidance, Risks, and Unusual Items
- FCPA Settlement: The company recorded a provision of $200.0 million for penalties related to the US Foreign Corrupt Practices Act (FCPA). In October 2016, definitive agreements were reached with the DOJ and SEC, requiring a total payment of $205.5 million ($107.3 million to DOJ and $98.2 million to SEC, net of Brazilian payments).
- Restructuring: The company announced a Voluntary Redundancy Scheme (VRS) in August 2016, with a provision of $118.0 million recognized in the period. A second phase was announced in October 2016.
- Republic Airways: Following the Chapter 11 filing of Republic Airways Holding, the company recorded provisions related to financial guarantees. Negotiations resulted in the company acquiring assets to offset obligations.
- Liquidity: Cash and cash equivalents decreased from $2,165.5 million at year-end 2015 to $1,455.5 million at September 30, 2016. Total debt increased to $3,823.1 million.
- Dividends: Interest on own capital was distributed for the first three quarters of 2016, totaling approximately $22.0 million.
Investor Verification Checklist
- FCPA Settlement Impact: Verify the final cash outflow timing for the $205.5 million settlement and any potential additional fines from other jurisdictions.
- Restructuring Costs: Monitor the execution of the Voluntary Redundancy Scheme and the associated cash outflows scheduled through April 2017.
- Defense Segment Volatility: Assess the sustainability of the Defense and Security segment's revenue and margin given the heavy reliance on the Brazilian Federal Government.
- Liquidity Position: Review the company's ability to service its $3.8 billion debt load given the negative operating cash flow of $(219.6) million for the nine-month period.
- Executive Jet Backlog: Investigate the drivers behind the Executive Aviation segment's shift from profit to loss despite revenue growth.