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, 2019 (2Q19)
Context: Embraer is a global aerospace company with segments in Commercial Aviation, Executive Jets, Defense & Security, and Services & Support. As of February 26, 2019, the Commercial Aviation segment and related services are classified as "discontinued operations" in the financial statements due to the strategic partnership with Boeing, though management continues to present full consolidated results for guidance purposes.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: 2Q19 revenues increased 10.0% year-over-year, driven by a 43.3% increase in Executive Jets revenues and significantly higher Defense & Security revenues. Defense revenues benefited from the absence of a negative cost base revision related to the KC-390 incident that impacted 2Q18.
• Profitability: Reported EBIT improved from a loss of $20.3 million in 2Q18 to a profit of $26.6 million in 2Q19. However, on an adjusted basis (excluding the 2Q18 special item), EBIT declined due to lower profitability in Commercial Aviation and separation costs related to the Boeing partnership.
• Cash Flow: Free cash flow dropped significantly to $1.5 million in 2Q19 from $43.3 million in 2Q18, attributed to higher capital expenditures (CAPEX) and product development spending.
• Deliveries: Total jet deliveries were 51 in 2Q19 (26 commercial, 25 executive) compared to 48 in 2Q18 (28 commercial, 20 executive). Executive jet deliveries increased, while commercial deliveries decreased slightly.
• Backlog: The firm order backlog grew to $16.9 billion, up from $16.0 billion at the end of 1Q19, with book-to-bill ratios above 1x in all major business units.

Guidance, Outlook, and Risks

• 2019 Guidance: Management reaffirmed full-year 2019 guidance:
  • Revenues: $5.3 billion to $5.7 billion.
  • EBIT Margin: Approximately breakeven (including separation costs).
  • Deliveries: 85 to 95 commercial jets and 90 to 110 total executive jets.
• Outlook: The company expects free cash flow generation to improve in the second half of 2019 due to higher aircraft deliveries and cash inflows from Defense & Security contracts. Inventories are expected to fall as deliveries increase.
• Strategic Partnership: The Commercial Aviation segment is held for sale as part of the Boeing joint venture. Separation costs of $19.5 million were recognized in 2Q19.
• Risks: Key risks include exchange rate fluctuations (mitigated by hedging strategies), general economic conditions, and the ability to deliver products on schedule. Approximately 10% of net revenues are in Reais while 20% of costs are in Reais, creating cash flow exposure.

Investor Verification Checklist

• Discontinued Operations: Verify the distinction between reported consolidated results (which include Commercial Aviation) and the "discontinued operations" classification in the financial statements due to the Boeing deal.
• Adjusted Metrics: Review the reconciliation of Adjusted Net Income and Adjusted EBIT, as reported figures are heavily influenced by one-time items (e.g., the 2Q18 KC-390 cost revision and 2Q19 separation costs).
• Cash Flow Drivers: Investigate the specific components of the negative YTD free cash flow, particularly the $131.7 million invested in product development (E-Jets E2 program) and working capital increases.
• Backlog Quality: Confirm the composition of the $16.9 billion backlog, noting the mix of firm orders versus options (e.g., United Airlines and KLM Cityhopper orders).
• Debt Structure: Assess the net debt position of $1.09 billion and the average loan maturity of 5.1 years in the context of the company's liquidity strategy.