Source: Embraer
HIGHLIGHTS
  •   Embraer delivered five commercial jets and nine executive jets (five light / four large) in 1Q20, and the Company’s firm order backlog at the end of 1Q20 was US$ 15.9 billion;
  •  EBIT and EBITDA in 1Q20 as reported were US$ (46.9) million and US$ 9.3 million, respectively, yielding EBIT margin of -7.4% and EBITDA margin of 1.5%. This compares to EBIT of US$ (15.2) million (-1.8% EBIT margin) and EBITDA of US$ 30.9 million (3.8% EBITDA margin) in 1Q19.
  • The 1Q20 results include special items due to the impacts of COVID-19: 1) US$ 22.2 million in negative fair value changes on the Company’s stake in Republic Airways Holdings, and 2) US$ 33.4 million in bad debt provisions on accounts receivables, as the Company adopted a more conservative approach in the context of the COVID-19 pandemic;
  • Adjusted EBIT and EBITDA were US$ 8.7 million and US$ 64.9 million, respectively, yielding adjusted EBIT margin of 1.4% and adjusted EBITDA margin of 10.2%;
  • 1Q20 Net loss attributable to Embraer shareholders and Loss per ADS were US$ (292.0) million and US$ (1.59), respectively. Adjusted net loss (excluding special items and deferred income tax and social contribution) for 1Q20 was US$ (104.0) million, with Adjusted loss per ADS of US$ (0.57). The adjusted net loss in 1Q19 was US$ (61.8) million, for an adjusted loss per ADS of US$ (0.34) in the quarter;
  • Embraer reported Free cash flow of US$ (676.5) million in 1Q20, in line with free cash flow of US$ (665.3) million reported in 1Q19, which is historically negative due to seasonal working capital consumption;
  • Embraer’s liquidity remains solid as the Company finished the quarter with total cash of US$ 2,500.6 million and major debt maturities starting in 2022 onwards. Total debt at the end of 1Q20 was US$ 3,832.2 million, yielding a net debt position of US$ 1,331.6 million versus net debt of US$ 1,103.7 million in 1Q19. Embraer continues to evaluate additional financing to further enhance its cash position;
  • Due to the uncertainty related to the COVID-19 pandemic, financial and deliveries guidance for the Company’s 2020 results remains suspended at this point.

 

The Company’s operating and financial information is presented, except where otherwise stated, on a consolidated basis including continuing and discontinued operations in United States dollars (US$) in accordance with IFRS. The financial data presented in this document as of and for the quarters ended March 31, 2020 (1Q20), December 31, 2019 (4Q19) and March 31, 2019 (1Q19), are derived from the unaudited financial statements, except annual financial data and where otherwise stated. REVENUES AND GROSS MARGIN During 1Q20, Embraer delivered five commercial and nine executive aircraft (five light jets and four large jets), for a total of 14 jets delivered in the quarter. This compares to 1Q19 deliveries of 11 commercial jets and 11 executive jets (eight light jets and three large jets). Historically, Embraer seasonally has fewer deliveries during the first quarter of the year, and in 2020 in particular, commercial aircraft deliveries for the first quarter were also negatively impacted by the steps taken to effect the separation of Embraer’s Commercial Aviation division in connection with the now-terminated strategic partnership with The Boeing Company in January, a month in which no deliveries took place. Revenues in the quarter were US$ 633.8 million, representing a year-over-year decline of 23.0% compared to 1Q19, driven by lower revenues in each of the Company’s segments except for the Executive Jets segment. Despite slightly lower executive jet deliveries in 1Q20 as compared to 1Q19, the mix of deliveries were more positive as Embraer delivered more large jets in the current period relative to last year’s first quarter. The Company’s consolidated gross margin increased from 19.9% in 1Q19 to 29.0% in 1Q20. A portion of this improvement can be explained by the fact that Embraer placed most of its Brazil-based employees on paid leave during the month of January to complete the internal segregation of the commercial aviation business, and again on paid leave at the end of March as Brazilian operations were closed due to the COVID-19 pandemic. These salary expenses for employees on paid leave were treated as abnormal costs and booked in other operating expenses during those periods rather than in cost of goods sold. EBIT AND ADJUSTED EBIT EBIT and EBIT margin as reported in 1Q20 were US$ (46.9) million and -7.4%, respectively. The 1Q20 results include special items recognized largely due to the impacts of COVID-19: 1) US$ 22.2 million in negative fair value changes on the Company’s stake in Republic Airways Holdings, and 2) US$ 33.4 million in bad debt provisions on accounts receivables, largely with commercial airline customers, as the Company adopted a more conservative approach in the context of the COVID-19 pandemic. There were no special items recognized in 1Q19 operating results. Excluding the impacts of the special items, adjusted EBIT and adjusted EBIT margin in 1Q20 were US$ 8.7 million and 1.4%, respectively. This compares to EBIT of US$ (15.2) million and EBIT margin of -1.8% in 1Q19. The Company’s adjusted EBIT and EBIT margin increased year-over-year despite lower commercial jet delivery volumes and consolidated revenues in 1Q20 due to better profitability in the Executive Jets and Defense & Security segments on improved business mix. Separation costs to further segregation of the Company’s commercial aviation business and its related services and support in connection with the now-terminated strategic partnership with The Boeing Company in January recognized in 1Q20 results was US$ 21.8 million, compared to the US$ 12.3 million in separation costs recognized in 1Q19. Administrative expenses in 1Q20 totaled US$ 32.5 million, which declined from the US$ 46.0 million reported in 1Q19, due principally to the paid leave in January for most Brazil-based employees in order to implement the internal carve-out of Embraer’s commercial aviation business in connection with the now-terminated strategic partnership with The Boeing Company, and in March as Brazilian operations were closed due to the COVID-19 pandemic. Salaries of employees on paid leave in January and March were recognized in other operating expenses rather than in administrative expenses. Selling expenses increased from US$ 70.3 million in 1Q19 to US$ 83.5 million in 1Q20 due to US$ 33.4 million in higher bad debts provisions recognized in the quarter, which reflects a more conservative approach given the uncertainties in the context of the COVID-19 pandemic and its impacts largely on our commercial airline customers. Research expense fell from US$ 9.3 million in 1Q19 to US$ 5.8 million in 1Q20, largely due to lower engineering work given the carve-out activities in January and related paid leave explained above. Other operating income (expense), net in 1Q20 was an expense of US$ 112.2 million compared to an expense of US$ 53.5 million in 1Q19. This line included the US$ 22.2 million special item for the negative fair value changes related to the Company’s stake in Republic Airways. Excluding this special item, other operating income (expense), net in 1Q20 was US$ 90.0 million. The increase in adjusted other operating expenses in 1Q20 was largely due to the recognition of abnormal costs related to employee salaries that were on paid leave during the quarter rather than booking these expenses in the cost of goods sold, administrative, selling, and research expense lines, as well the further separation costs realized in 1Q20 as compared to 1Q19. The salary expenses treated as abnormal costs totaled US$ 48.6 million in 1Q20, and the separation costs were US$ 21.8 million in the quarter. NET INCOME Net income (loss) attributable to Embraer shareholders and Earnings (Loss) per ADS for 1Q20 were US$ (292.0) million and US$ (1.59) per share, respectively, compared to US$ (42.5) million in net income (loss) attributable to Embraer shareholders and US$ (0.23) in Earnings (Loss) per ADS in 1Q19. Adjusted net income (loss), excluding deferred income tax and social contribution, was US$ (104.0) million in 1Q20, and adjusted earnings (loss) per ADS was US$ (0.57). This compares to adjusted net income (loss) of US$ (61.8) million and adjusted earnings (loss) per ADS of US$ (0.34) in 1Q19. The main drivers for the decline in adjusted net income (loss) and adjusted earnings (loss) per ADS were the aforementioned decline in operating income with higher foreign exchange losses (FX loss of US$ 24.7 million in 1Q20 vs. FX gain of US$ 9.1 million in 1Q19) given the substantial appreciation of the U.S. dollar versus the Brazilian real of 29.0% from the end of 2019 to the end of 1Q20. MONETARY BALANCE SHEET ACCOUNTS AND OTHER MEASURES Embraer finished 1Q20 with a net debt position of US$ 1,331.6 million, compared to the net debt position of US$ 1,103.7 million at the end of 1Q19. The Company’s larger net debt position is a result of the Company’s free cash flow usage during the seasonally weak 1Q20, as explained further below. At the end of 1Q20, the Company’s liquidity position remained solid, with US$ 2,500.6 in total cash and financial investments. Embraer’s total loans position at the end of 1Q20 was US$ 3,832.2 million, increasing US$ 439.9 million from the total loans position reported at the end of 2019 as the Company received US$ 600 million in additional short-term liquidity during the quarter, partially offset by payment of its 2020 note maturity in January. Adjusted net cash generated (used) by operating activities net of adjustments for financial investments was US$ (593.3) million in 1Q20 and adjusted free cash flow for the quarter was US$ (676.5) million. This compares to adjusted net cash generated (used) by operating activities net of financial investments of US$ (557.5) million and adjusted free cash flow of US$ (665.3) million in 1Q19. The principal factors explaining the lower free cash flow in 1Q20 include lower net income in the current period and additional investment in working capital (particularly higher inventories and lower contract liabilities) in 1Q20 as compared to the prior year period. Net additions to total PP&E for 1Q20 were US$ 55.4 million, versus US$ 42.6 million in net additions reported in 1Q19. Of the total 1Q20 additions to PP&E, CAPEX amounted to US$ 12.6 million and additions of pool program spare parts was US$ 42.8 million. In 1Q20, Embraer invested a total of US$ 27.8 million in product development, principally related to the development of the E-Jets E2 commercial jet program, which continues to progress according to schedule. Development expenditures net of contributions from suppliers in the quarter were also US$ 27.8 million. The Company’s total debt increased US$ 439.9 million to US$ 3,832.2 million at the end of 1Q20 compared to US$ 3,392.3 million at the end of 2019. Short-term debt at the end of 1Q20 was US$ 663.0 million and long-term debt was US$ 3,169.2 million. The average loan maturity of the Company’s debt at the end of 1Q20 was 4.0 years. The cost of Dollar denominated loans at the end of 1Q20 was 4.77% p.a., which fell from 5.27% p.a. at the end of 2019, while the cost of real denominated loans declined to 1.18% p.a. at the end of 1Q20 compared to 1.52% at the end of 2019. Embraer’s EBITDA over the last 12 months (unadjusted EBITDA LTM) to financial expenses (gross) at the end of 1Q20 declined to 0.5 vs. 1.2 at the end of 2019. At the end of 1Q20, 0.8% 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 1Q20, 96% was denominated in US Dollars. Complementing its strategy to mitigate exchange rate risks, the Company entered into 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. Having more Real denominated costs than revenues generates this cash flow exposure. For 2020, approximately half of the Company’s Real cash flow exposure is hedged if the US Dollar depreciates below an average rate floor of R$ 3.80. For exchange rates above this level, the Company will benefit up to an average exchange rate cap of R$ 4.40. Embraer has not yet implemented any foreign exchange hedges for 2021. OPERATIONAL BALANCE SHEET ACCOUNTS As mentioned above, a contributing factor to the free cash flow usage in 1Q20 was the seasonally higher level of working capital investment in the current period. Given the seasonally low level of deliveries in the first quarter, inventories increased US$ 541.3 million to end 1Q20 at US$ 2,925.3 million. Also, contract liabilities declined US$ 27.4 million to end 1Q20 at US$ 1,402.1 million. Somewhat offsetting these working capital cash usages were a US$ 48.0 million decline in trade accounts receivable and contract assets during the quarter to finish 1Q20 at US$ 741.9 million, and a US$ 28.1 million increase in trade accounts payable to end 1Q20 at US$ 860.8 million. Property, plant and equipment declined US$ 23.1 million to US$ 2,035.5 million at the end of 1Q20, while Intangibles increased US$ 18.4 million to finish the period at US$ 2,070.1 million. TOTAL BACKLOG Considering all deliveries as well as firm orders obtained during the period, the Company’s firm order backlog ended 1Q20 at US$ 15.9 billion. SEGMENT RESULTS The Commercial Aviation segment represented 22.2% of consolidated revenues in 1Q20 versus 34.1% of revenues in 1Q19, as revenues declined 50.0% on a year-over-year basis due to lower deliveries in the current quarter. The portion of Executive Jets revenues rose from 14.2% in 1Q19 to 20.4% in 1Q20, as the segment’s revenues increased 10.4% despite lower deliveries in 1Q20 (nine in 1Q20 vs. 11 in 1Q19) on more favorable mix (four large jets delivered in 1Q20 vs. three large jets in 1Q19). The Defense & Security segment reported a 16.9% decrease in revenues in 1Q20 as compared to 1Q19, and its portion of total Company revenues rose from 21.8% in 1Q19 to 23.5% in 1Q20. Revenues for Services & Support fell 12.7% year-over-year to US$ 213.1 million in the quarter, representing 33.6% of consolidated revenues in 1Q20, compared to 29.7% in 1Q19. COMMERCIAL AVIATION In 1Q20, Embraer delivered five commercial jets, as shown in the table below: In January, Embraer and Skywest Inc signed a firm order for 20 E175 jets in a 76-seat configuration. The order has a value of US$ 972 million based on 2019 list prices and was already included in Embraer’s backlog at the end of 2019. Embraer’s relationship with SkyWest dates back to 1986, when SkyWest began operating the EMB 120 Brasilia turboprop. With this additional order for the E175, SkyWest has purchased more than 180 aircraft of this model since 2013 alone. In February, following its successful debut at the 2019 Paris Air Show, Embraer displayed the E195-E2, its newest Profit Hunter, at the Singapore Airshow. With the impressive “TechLion” livery, the Company showcased the new “King of the Skies”, which has transformed the single aisle segment with its efficiency, sustainability, and state-of-the art interior design. In March, Embraer displayed the E195-E2 TechLion at Wings India. It was the first time the aircraft was exhibited at an Air Show in the country. The E195-E2’s outstanding operating economics, with up to 25% lower trip-cost when compared to other narrowbody aircraft, makes it ideal for opening new routes and growing India’s secondary, non-metropolitan domestic markets. At the end of 1Q20, the backlog and cumulative deliveries for Commercial Aviation were as follows: EXECUTIVE JETS The Executive Jets segment delivered five light and four large jets, totaling nine aircraft in 1Q20. In the first quarter, Embraer’s Phenom 300 series was made even better with enhancements in performance, comfort and technology. The new Phenom 300E is now the only in-production single-pilot jet to reach Mach 0.80, offering a quieter cabin and upgrades to its avionics. These include predictive windshear and a runway overrun awareness and alerting system, which are exclusive intellectual property of Embraer and the first technology of its kind to be developed and certified in business aviation. The model was already granted its Type Certificate by ANAC (National Civil Aviation Agency of Brazil), EASA (European Union Aviation Safety Agency) and the FAA (Federal Aviation Administration). Also in 1Q20, the Phenom 300E was confirmed as the most delivered light jet of 2019. This was the eighth consecutive year that the Phenom 300 achieved this mark, having accrued more than 540 deliveries since entering the market in December 2009. The information was published by the General Aviation Manufacturers Association (GAMA). During the COVID-19 crisis, Embraer is working in partnership with companies and research centers on technologies that can increase the availability of equipment and solutions for the pandemic. In addition to Embraer manufacturing parts of ventilators and development of biological air filter systems, the Company’s Embraer Aero Seating Technologies (EAST) subsidiary is manufacturing masks to support continued operations in Florida. DEFENSE & SECURITY During 1Q20, assembly work continued on a number of KC-390 Millennium aircraft on the production line, including five aircraft for the Brazilian Air Force (FAB) and one for the Portuguese Air Force. Out of the five FAB aircraft under assembly, two are to be delivered in 2020. The two KC-390 Millennium aircraft already delivered to the Brazilian Air Force continue to be used to train technicians and pilots who will operate and maintain the FAB fleet. During 1Q20, the training program moved into aero logistical supervised training, where the aircraft are operated under realistic scenarios to simulate FAB missions. Also, starting in March, both FAB aircraft have been largely employed in operations to transport supplies and medical equipment to fight the COVID-19 pandemic in Brazil. The flight test campaign accumulated significant progress during the quarter with the successful accomplishment of mission systems tests. The development of the KC-390 Millennium version for the Portuguese Air Force has also made significant progress, with the engagement of key suppliers on the joint definition phase. Regarding the Super Tucano light attack aircraft, SNC (Sierra Nevada Corporation) signed a new contract for SNC and Embraer to supply two aircraft to the Air Force Special Operations Command – AFSOC. In March, SAAB concluded the first metal cut of the Gripen two-seater F version, marking the beginning of the production of the first aircraft, establishing an important milestone in the Gripen Brazil program. Embraer participates in the Gripen F development jointly with SAAB, through the Gripen Design and Development Network (GDDN) at the Embraer plant in Gavião Peixoto, São Paulo State, Brazil.The Gripen Aircraft will be manufactured in both Brazil and Sweden. In March, the 8th A1-M aircraft modernization was finalized and delivered to the Brazilian Air Force. With respect to radars, during February and March another six M60 Radar Mock-Up units were delivered to the Brazilian Army. In January, Atech delivered the SAGITARIO air traffic management system to Paraguay. Also during the quarter, in March, Atech signed an important contract with the Brazilian Navy, together with Embraer and Thyssenkrupp, for the development of the combat management systems for the new Tamandaré class ships. Savis continued Sisfron Program implementation throughout 1Q20, delivering important milestones such as light terminals for satellite communications, equipment for tactical communications, as well as milestones related to monitoring and maintenance of the Brazilian Army strategic network (Infovia), including the comprehensive integrated logistic support (ILS) and assured availability for all systems in operation. TERMINATION OF MASTER TRANSACTION AGREEMENT WITH BOEING On April 25, 2020, Embraer informed its shareholders and the market that the Company received a notice sent by Boeing communicating its decision to terminate the Master Transaction Agreement (“MTA”), based on Boeing’s assertion that supposedly certain closing conditions in the MTA had not been satisfied by Embraer by the April 24, 2020 termination date in the MTA. In addition, Boeing terminated the Contribution Agreement that provided for a joint venture for the C-390 Millennium multi-mission transport aircraft. Embraer strongly believes that Boeing wrongfully terminated the MTA and the Contribution Agreement, that it had a continuing obligation to abide by the terms thereof. Embraer strongly believes it was in full compliance with its obligations under the MTA and the Contribution Agreement and is pursuing all remedies against Boeing for the damages incurred by Embraer as a result of Boeing’s wrongful termination and violation of the MTA and the Contribution Agreement, including by means of arbitration proceedings that have commenced by both sides in connection with the termination of the MTA and/or the Contribution Agreement by Boeing.