Embraer reports third quarter performance

Eleanor Steed
By Eleanor Steed November 2, 2018 14:54

Embraer reports third quarter performance

Embraer delivered 15 commercial and 24 executive aircraft (17 light jets and 7 large jets) in the third quarter of 2018, for a total of 39 jets delivered during the quarter. This compares to the company’s total aircraft deliveries of 45 jets in 3Q17, of which 25 were commercial jets and 20 were executive jets (13 light jets and 7 large jets).

For the first nine months of 2018, Embraer delivered 57 commercial jets and 55 executive jets (40 light jets and 15 large jets), compared to deliveries of 78 commercial jets and 59 executive jets (40 light jets and 19 large jets) over the first nine months of 2017. Embraer remains confident in its 2018 guidance for 85 to 95 total commercial jet deliveries and 105 to 125 total executive jet deliveries (70-80 light jets and 35-45 large jets). The company expects the Commercial Aviation and Executive Jets segments to deliver a significant volume of aircraft during the fourth quarter of 2018.

In 3Q18, consolidated revenues were US$1,151.7 million, which represent a year-over-year decline of 11.5% compared to 3Q17, due principally to lower deliveries in the Commercial Aviation segment leading to its revenues falling 45.3% in 3Q18 compared to 3Q17, as revenues in the Defense & Security (+47.9%), Executive Jets (+43.4%), and Services & Support (+2.6%) segments all reported year-over-year revenue gains. On a year-to-date basis, Embraer consolidated revenues were US$ 3,400.2 million in the first nine months of 2018 as compared to US$ 4,125.7 million reported in the first nine months of 2017.

The company’s consolidated gross margin in 3Q18 was 18.2%, in line with the reported gross margin in 3Q17 despite the year-over-year decline in revenues. Over the first nine months of the year, Embraer’s consolidated gross margin was 15.6% compared to 17.9% over the first nine months of 2017, driven principally by gross margin declines in the Commercial Aviation and Defense & Security segments, partially offset by gross margin expansion in the Executive Jets segment over the same period.

In 3Q18, EBIT and EBIT margin were US$ 45.4 million and 3.9%, respectively, compared to EBIT of US$ 55.4 million and EBIT margin of 4.3% reported in 3Q17. The lower reported EBIT and EBIT margin relative to 3Q17 resulted in large part to the lower revenues reported in 3Q18 and its impact on fixed cost absorption. Reported EBIT and EBITDA in 3Q18 did not include any special items. In 3Q17, Embraer´s reported EBIT included the negative impact of special items totaling US$ 3.6 million, related to taxes on remittances for payments following the finalization of the FCPA investigation. Excluding this special item, 3Q17 adjusted EBIT was US$ 59.0 million and adjusted EBIT margin was 4.5%.

On a year-to-date basis, the company’s reported EBIT and EBIT margin were US$ 54.1 million and 1.6%, respectively, compared to reported EBIT of US$ 278.1 million and reported EBIT margin of 6.8% over the first nine months of 2017.

During 3Q18, administrative expenses totaled US$ 44.4 million, representing a decline from the US$ 47.8 million reported in 3Q17. In the first nine months of 2018, administrative expenses were US$ 130.1 million, equal to that reported in the first nine months of 2017. Selling expenses increased from US$ 66.5 million in 3Q17 to US$ 73.7 million in 3Q18.

Other operating income (expense), net in 3Q18 was an expense of US$ 37.7 million, compared to the US$ 52.7 million reported in 3Q17. Excluding special items, 3Q17 other operating income (expense), net was expense of US$ 50.9 million. The principal reasons for the year-over-year decline in other operating expense in 3Q18 relative to 3Q17 were lower impairments and expenses related to used commercial aircraft compared to last year’s quarter.

Net income (loss) attributable to Embraer shareholders and Earnings (Loss) per ADS for 3Q18 were US$ (21.3) million and US$ (0.12) per share, respectively, compared to US$ 103.9 million in net income (loss) attributable to Embraer shareholders and US$ 0.57 per share in Earnings (Loss) per ADS in 3Q17. Over the first nine months of 2018, net income (loss) attributable to Embraer shareholders was US$ (160.1) million and Earnings (Loss) per ADS was US$ (0.87) per share.

Embraer finished 3Q18 with a net debt position of US$ 880.5 million, compared to the net debt position of US$ 721.2 million at the end of 2Q18.

In 3Q18, Embraer invested a total of US$ 65.0 million in product development, principally related to the development of the E-Jets E2 commercial jet program, which continues to progress according to schedule.

The Company’s total debt decreased US$ 39.7 million to US$ 4,022.6 million at the end of 3Q18 compared to US$ 4,062.3 million at the end of 2Q18. Short-term debt at the end of 3Q18 was US$ 328.1 million and long-term debt was US$ 3,694.5 million. The average loan maturity of the Company’s debt at the end of 3Q18 was 5.5 years. The cost of Dollar denominated loans at the end of 3Q18 was stable at 5.27% p.a., while the cost of real denominated loans was relatively stable at 3.45% p.a. at the end of 3Q18.

Embraer’s EBITDA over the last 12 months (unadjusted EBITDA LTM) to financial expenses (gross) for 3Q18 declined to 1.36 vs. 1.76 at the end of 2Q18. At the end of 3Q18, 11% of total debt was denominated in Reais.

Embraer’s cash allocation management strategy continues to be one of its most important tools to mitigate exchange rate risks. By balancing cash allocation in Real and Dollar assets, the Company attempts to neutralize its balance sheet exchange rate exposure. Of total cash at the end of 3Q18, 85% was denominated in US Dollars.

Complementing its strategy to mitigate exchange rate risks, the Company entered into certain financial hedges in order to reduce its cash flow exposure.

The Company’s cash flow exposure is due to the fact that approximately 10% of its net revenues are denominated in Reais while approximately 20% of total costs are denominated in Reais.

Working capital investment during 3Q18 negatively impacted free cash flow generation, principally driven by higher inventory levels. The Company’s inventories ended 3Q18 at US$ 2,790.8 million, compared to US$ 2,535.0 million at the end of 2Q18.

Considering all deliveries as well as firm orders obtained during the period, the Company’s firm order backlog ended 3Q18 at US$ 13.6 billion.

The Commercial Aviation segment represented 33.2% of consolidated revenues in 3Q18 versus 53.7% of revenues in 3Q17, as the segment’s deliveries were down on a year-over-year basis, from 25 jets to 15 jets. The portion of Executive Jets revenues increased, from 16.7% in 3Q17 to 27.1% in 3Q18, on year-over-year revenue growth of 43.4% driven by higher deliveries. The Defense & Security segment reported a 47.9% increase in revenues in 3Q18 as compared to 3Q17, and its portion of total Company revenues grew from 11.6% in 3Q17 to 19.3% in 3Q18. Revenues for Services & Support grew 2.6% year-over-year to US$ 232.5 million, representing 20.2% of the Company’s consolidated revenues in 3Q18, compared to 17.4% in 3Q17. Other segment revenues were 0.2% of consolidated revenues in 3Q18.

On July 5, 2018, Embraer announced that it entered into a preliminary and non-binding memorandum of understanding (MOU) with The Boeing Co. (Boeing), through which the parties have established the basic premises for a potential business combination of certain businesses, which will include the creation of a joint venture (JV) between the Company and Boeing. The JV will consist of the Commercial Aviation business of Embraer and its related operations, services, and engineering capabilities.

On July 31, 2018, upon the release of the second quarter results, Embraer announced that Embraer and Boeing had begun negotiations on the final documents of the transaction, which would guide in a binding manner, the structure and financial terms of the transaction on mutually satisfactory bases.

Embraer and Boeing continue to negotiate the final documents in connection with such transaction. However, there can be no assurance as to the entry into final documents or the consummation of the transaction, or the timing or terms thereof, says the company.

Eleanor Steed
By Eleanor Steed November 2, 2018 14:54