EMBJ

Embraer S.A. Form 6-K Summary

Business Context and Reporting Period

Company: Embraer S.A.
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Nine months ended September 30, 2014 (Interim)
Business Overview: Embraer is a Brazilian aerospace manufacturer developing, producing, and selling jet and turboprop aircraft for civil and defense aviation, executive jets, and defense systems. The company operates globally with significant exposure to the Brazilian government as a customer and financing source.

Key Financial Metrics (Nine Months Ended Sept 30, 2014)

Material Changes vs. Prior Period

• Revenue Growth: Revenue increased 7.9% to $4,243.3 million from $3,931.0 million in the prior year period, driven by higher deliveries in Commercial and Defense segments.
• Profitability Surge: Net income attributable to owners rose significantly to $243.3 million from $77.5 million year-over-year. This was aided by a reduction in income tax expense (from $141.3M to $101.3M) due to foreign exchange effects and R&D incentives.
• Cash Flow Deterioration: Operating cash flow turned negative at $(138.5) million, compared to positive $243.5 million in the prior year. This was primarily due to a $468.1 million increase in inventory and a $227.7 million increase in accounts receivable.
• Liquidity Shift: Cash and cash equivalents decreased by $507.7 million to $1,176.0 million. Consequently, the company moved from a net cash position in 2013 to a net debt position of $326.5 million in 2014.
• Segment Performance:
  • Commercial Aviation: Revenue flat ($2,188.0M vs $2,187.4M), but operating profit declined to $173.2M from $203.7M.
  • Defense and Security: Revenue grew 32.6% to $1,097.5M, with operating profit surging to $153.0M from $57.6M.
  • Executive Aviation: Revenue increased 4.8% to $901.2M, though operating profit turned negative at $(4.9)M compared to $(24.3)M loss previously.

Guidance, Outlook, Risks, and Contingencies

Outlook and Commentary: Management notes that results for the nine-month period are not necessarily indicative of full-year results. The company continues to focus on the E170/190 family, executive jets (Phenom, Legacy), and defense aircraft. The effective tax rate for the period was negative 28.6%, influenced by the depreciation of the Brazilian Real.

Key Risks and Contingencies:

• SEC/DOJ Investigation: The company is cooperating with ongoing inquiries by the U.S. SEC and Department of Justice regarding potential violations of the Foreign Corrupt Practices Act (FCPA) related to aircraft sales outside Brazil. The company states there is no adequate basis to estimate accruals or quantify the contingency at this time.
• Foreign Exchange: Significant exposure to the Brazilian Real (BRL) vs. US Dollar. Fluctuations impact the tax basis of assets and liabilities, creating deferred tax expenses or benefits.
• Government Dependence: The Brazilian Federal Government is a major customer (Defense) and a primary source of financing (BNDES, FINEP). Changes in defense budgets or financing terms pose a risk.
• Legal Provisions: Significant provisions exist for labor, tax, and civil contingencies totaling $62.6 million, including disputes over PIS/COFINS, social security, and import taxes.

Investor Verification Checklist

• Inventory Build-up: Verify the rationale behind the $468 million increase in inventory and the associated cash flow impact.
• FCPA Investigation Status: Monitor updates on the SEC/DOJ investigation and potential fines or sanctions.
• Defense Contract Execution: Confirm the sustainability of the revenue growth in the Defense segment, which is heavily reliant on Brazilian government contracts.
• Debt Maturity Profile: Review the $2.37 billion debt schedule, noting that $491.3 million matures in 2016 and $372.0 million in 2017.
• Foreign Exchange Sensitivity: Assess the impact of further BRL depreciation on future tax provisions and operating margins.