ERJ Embraer SA

EMBRAER RELEASES THIRD quarter 2015 results

HIGHLIGHTS

Q  In 3Q15, Embraer delivered 21 commercial and 30 executive (21 light and 9 large) jets. Deliveries in the first nine months of 2015 were 68 commercial and 75 executive (57 light and 18 large) jets;

Q  During 3Q15, the Company closed 20 firm orders for the current generation of the E-Jets commercial jets, reaching a total of 146 firm orders of both the current and second generation E-Jets commercial aircraft year-to-date;

Q  The Commercial Aviation segment’s book-to-bill surpassed 2 times over the first nine months of 2015;

Q  The Company’s firm order backlog ended 3Q15 at US$ 22.8 billion. This compares to US$ 22.9 billion in backlog at the end of 2Q15 and $20.9 billion at the end of 2014;

Q  As a result of aircraft deliveries, coupled with revenues from the Company’s Defense & Security business, 3Q15 revenues were US$ 1,284.6 million, representing year-over-year growth of 3.6%;

Q  EBIT and EBITDA¹ margins were 6.6% and 12.3%, respectively, in 3Q15, improving from EBIT margin of 5.5% and EBITDA margin of 11.0% in 3Q14;

Q  3Q15 Net loss attributable to Embraer Shareholders and Loss per basic ADS totaled US$ (109.6) million and US$ (0.6013), respectively. Excluding deferred income tax and social contribution, adjusted net income was US$ 71.5 million, or US$ 0.3923 per basic ADS;

Q  The Company’s Free Cash Flow during 3Q15 was US$ (115.3) million;

Q  Embraer reiterates all aspects of the Company’s financial and delivery guidance for 2015.

Main financial indicators [2]

 

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São José dos Campos, Brazil, October 27, 2015 - (BM&FBOVESPA: EMBR3, NYSE: ERJ). The Company's operating and financial information is presented, except where otherwise stated, on a consolidated basis in United States dollars (US$) in accordance with IFRS. The financial data presented in this document as of and for the quarters ended September 30, 2014 (3Q14), June 30, 2015 (2Q15) and September 30, 2015 (3Q15), are derived from unaudited financial statements, except where otherwise stated.

REVENUES and gross margin

Embraer delivered a total of 21 commercial and 30 executive aircraft (21 light jets and 9 large jets) in 3Q15, compared to a total of 19 commercial and 15 executive aircraft (15 light jets) in 3Q14. Over the first nine months of 2015, the Company delivered 68 commercial and 75 executive aircraft (57 light jets and 18 large jets), compared to 62 commercial and 64 executive aircraft (54 light jets and 10 large jets) in the first nine months of 2014. Revenues in 3Q15 totaled US$ 1,284.6 million, representing an increase of 3.6% compared to 3Q14, driven by growth in the Commercial Aviation and Executive Jets segments, as revenues in the Defense & Security segment declined 47.5% in the quarter. Year-to-date (YTD), consolidated revenues totaled US$ 3,853.7 million, which was down 9.2% from the US$ 4,243.3 million in the same period of 2014.

Gross margin fell from 19.5% in 3Q14 to 17.5% in 3Q15, driven mainly by a cost base revision for certain contracts in the Defense & Security segment due to the negative impact of foreign exchange variation during the quarter. Gross margin in the first nine months of the year was 19.8% compared to 21.1% in the first nine months of 2014, impacted by the combination of lower revenues compared to last year, negatively affecting fixed cost dilution, and cost base revisions for contracts in the Defense & Security segment.

EBIT

Embraer generated EBIT of US$ 84.4 million in 3Q15, with an EBIT margin of 6.6%, compared to the US$ 68.1 million in EBIT and 5.5% EBIT margin reported in 3Q14, given slightly higher revenues combined with cost control of operating expenses in the quarter. Administrative expenses totaled US$ 42.6 million in 3Q15, which was a decline from the US$ 51.6 million reported in 3Q14, demonstrating the Company’s ongoing efforts on cost efficiency. Selling expenses also declined relative to last year’s quarter, at US$ 78.4 million in 3Q15 compared to US$ 99.2 million in 3Q14, due largely to efficiency gains in the quarter. Research expense of US$ 8.6 million was lower than the US$ 9.7 million booked in 3Q14. Other operating income (expense), net improved from an expense of US$ 13.5 million in 3Q14 to an expense of US$ 10.6 million in 3Q15. In the first nine months of 2015, EBIT and EBIT margin were US$ 266.2 million and 6.9%, respectively, compared to EBIT of US$ 347.0 million and EBIT margin of 8.2% in the first nine months of 2014.

A more favorable exchange rate contributed to the decrease in Administrative, Selling, and Research expenses in 3Q15, considering that the average Brazilian Real to U.S. dollar exchange rate in 3Q15 at R$ 3.54 was 56% weaker compared to the average exchange rate of R$ 2.27 in 3Q14.

net RESULTS

Net loss attributable to Embraer and Loss per basic ADS for 3Q15 were US$ (109.6) million and US$ (0.6013), respectively. Net margin was -8.5% in 3Q15 compared to -0.9% in 3Q14, due to a combination of US$ 24.2 million in foreign exchange losses in 3Q15 vs. US$ 5.7 million in foreign exchange gains in 3Q14, and income tax expense of US$ 164.4 million in 3Q15 compared to income tax expense of US$ 77.1 million in 3Q14. The Real devaluation of 28% versus the U.S. dollar during the quarter explains most of the income tax variation, due to non-cash deferred income taxes on non-monetary assets.

Adjusted Net Income, excluding the deferred income tax and social contribution loss, was US$ 71.5 million in 3Q15, representing an Adjusted Net margin of 5.6% and Adjusted Earnings per basic ADS of US$ 0.3923 for the quarter.

 

 

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monetary balance sheet accounts and other measures

Embraer ended 3Q15 with a net debt position of US$ 643.9 million compared to a net debt position of US$ 464.5 million at the end of 2Q15. The increase in the net debt position during the quarter is largely a consequence of Free Cash Flow usage of US$ (115.3) million.

* Net cash (Debt) = Cash and cash equivalents + Financial investments short-term and long term - Loans short-term and long -term

Net cash generated by operating activities net of adjustments for financial investments was US$ 70.2 million in 3Q15 and Free cash flow³  for the quarter was US$ (115.3) million, compared to Net cash generated by operating activities net of adjustments for financial investments of US$ 48.6 million and Free cash flow of US$ (137.6) million in 3Q14. Accumulated Free cash flow in the first nine months of 2015 was US$ (482.2) million, improving from the US$ (691.0) million of Free cash flow in the first nine months of 2014. The Company expects positive Free cash flow generation during the fourth quarter and reiterates its Free cash flow Guidance for the year of a use of US$ 100 million or better.

The table below presents a reconciliation of the Company’s Free cash flow to its operating cash flow net of adjustments for financial investments for the periods indicated.

Net additions to total PP&E were US$ 75.7 million in 3Q15, including values related to spare parts pool programs, aircraft available for or under lease, CAPEX, and proceeds from sale of PP&E. Of the total 3Q15 PP&E additions, CAPEX amounted to US$ 58.4 million, additions of aircraft available for or under lease were US$ 4.2 million and additions of pool program spare parts totaled US$ 13.1 million.

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A portion of the reported CAPEX includes investments related to certain contracted capital expenditures on equipment and facilities, primarily in the Defense & Security segment. These expenditures are included in the terms and conditions of their respective contracts and consequently are not considered part of the Company’s CAPEX Outlook of US$ 300 million for 2015. This contracted CAPEX totaled US$ 9.8 million in 3Q15, as outlined in the table below. Excluding these expenditures, the Company’s CAPEX for 3Q15 was US$ 48.6 million, and for the first nine months of 2015 was US$ 142.7 million. Embraer´s total CAPEX investment for 2015 is tracking below the Company’s outlook, though all expansion and tooling programs remain according to plan.

In 3Q15, Embraer invested a total of US$ 109.8 million in product development, which was partially offset by contributions from suppliers of US$ 30.4 million. These investments are primarily related to the development of the E-Jets E2 program in the Commercial Aviation segment. In the first nine months of 2015, Embraer invested US$ 298.4 million in product development, and received US$ 134.6 million in contributions from suppliers, yielding net development investments of US$ 163.8 million. The Company’s total Development investment net of supplier contributions in 2015 is running below the current Outlook, largely due to the impact of the devaluation of the Real on Brazil-based development costs. Embraer’s current development programs remain on schedule. The following tables outline PP&E and R&D investments for the periods indicated.

 

The Company’s total debt at the end of 3Q15 was US$ 3,389.4 million, with average debt maturity constant at 6.5 years. The cost of Dollar denominated loans remained stable during the quarter, and ended 3Q15 at 5.26%. The cost of Realdenominated loans increased from 6.24% to 6.99% per year at the end of 3Q15, due to the general rise in interest rates in the Brazilian economy. The Company’s EBITDA over the last 12 months (EBITDA LTM) to financial expenses (gross) through 3Q15 was 4.7 compared to 5.2 at the end of 2Q15. At the end of 3Q15, 17% of total debt was denominated in Reais. Embraer’s cash allocation strategy is an important tool to mitigate exchange rate risks. By balancing Real and Dollar denominated assets and liabilities, the Company attempts to reduce its balance sheet exchange rate exposure. Of total cash and equivalents at the end of 3Q15, 64% was denominated in US Dollars.

 

 

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Complementing its strategy to mitigate exchange rate risks, the Company entered into certain financial hedges in order to reduce its 2015 cash flow exposure. The Company’s cash flow exposure is due to the fact that approximately 15% of its net revenues are denominated in Reals while approximately 25% of total costs are denominated in Reals. Having more Real denominated costs than revenues generates this cash flow exposure. For 2015, around 55% of the Company’s Real cash flow exposure is hedged if the US Dollar depreciates below an average rate floor of R$ 2.30. For exchange rates above this level, the Company will benefit up to an average exchange rate cap of R$ 3.39. Given the devaluation of the Real versus the US dollar to levels that have surpassed the average exchange rate cap of R$ 3.39, Embraer does not benefit from the impact of further devaluation on its Real-denominated salaries and employee benefits. The Company already started to implement its 2016 hedging program during this quarter.

operational balance sheet accounts 

Trade accounts receivable decreased US$ 22.7 million from US$ 852.9 million at the end of 2Q15 to US$ 830.2 million at the end of 3Q15. The Company’s inventories increased US$ 123.0 million from the end of 2Q15 to US$ 2,762.8 million at the end of 3Q15, in anticipation of a larger number of commercial and executive jet deliveries planned for the fourth quarter. With respect to liabilities, trade accounts payable increased US$ 15.2 million to end 3Q15 at US$ 983.6 million, and advances from customers grew US$ 17.7 million to US$ 856.4 million.

Intangibles increased by US$ 51.8 million from the end of 2Q15 to US$ 1,348.5 million at the end of 3Q15 as a consequence of investments in product development, combined with the receipt of contributions from suppliers to the Company’s ongoing development programs as well as amortization in the period. Property, plant and equipment decreased by US$ 2.2 million to US$ 2,024.0 million at the end of 3Q15.

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Total Backlog

During 3Q15, Embraer delivered a total of 21 commercial and 30 executive aircraft. Considering all deliveries and firm orders obtained during the period, the Company’s firm order backlog remained largely stable at US$ 22.8 billion at the end of 3Q15. The following chart presents the Company’s backlog evolution, in billions of dollars.

segment Results

The Commercial Aviation segment represented 53.6% of consolidated revenues in 3Q15, stable compared to the same period last year. The portion of Executive Jets increased meaningfully from 17.2% in 3Q14 to 31.3% in 3Q15 due to the higher deliveries in the quarter. The share of Defense & Security revenues fell from 27.9% in 3Q14 to 14.1% in 3Q15 in response to the weaker Real and cost base revisions on certain contracts in the segment. Others segment revenues as a percentage of total 3Q15 revenues were 1.0% versus 1.5% in the prior year period.

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Commercial Aviation

During 3Q15, Embraer delivered 21 commercial aircraft, as follows:  

During the third quarter of 2015, Embraer announced that it signed a firm order with SkyWest, Inc. for 18 E175 jets. The order, which was included in Embraer’s 2015 third-quarter backlog, has an estimated value of US$ 800.0 million, based on current list prices. The aircraft will be operated by SkyWest Airlines, under an amendment to an existing Capacity Purchase Agreement (CPA) with United Airlines. With this new 18 aircraft purchase, the total number of SkyWest E175 firm orders reached 73 units of this model.

The development program of the E2 family of E-Jets continued to progress as expected during the quarter. The Company expects roll-out and first flight of the E190-E2 jet in 2016, with entry into service expected in the first half of 2018.

In the segment of commercial jets with 70 to 130 seats, Embraer maintains its leadership with more than 50% of the sales and 60% of the deliveries on the world market.

Executive Jets

The Executive Jets segment delivered 21 light jets and 9 large jets, totaling 30 aircraft in 3Q15. This number is twice the amount delivered during the same period of 2014.

In July, Embraer delivered the first Phenom 300 to Luxaviation, the second largest business jet operator in the world. In the same month, the Legacy 500 received its certification from the Mexican and Chinese authorities. The first Legacy 500 delivery to the Mexican market took place in the month of August.

 

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Embraer attended the Latin American Business Aviation Conference and Exhibition (LABACE), held in São Paulo, Brazil. During LABACE, the Brazilian Civil Aviation Agency (ANAC) granted type certification for the Legacy 450. The Company was pleased to announce that the aircraft met or exceeded all of its design requirements.

Also in August, the Legacy 450 business jet received certification from the United States Federal Aviation Administration (FAA). The entry into service of the Legacy 450 is expected in the fourth quarter of 2015.

Embraer achieved first place in the global executive jets industry ranking, according to the annual customer support and services satisfaction survey published by the North American magazine Professional Pilot.

In September, following the ANAC and FAA certifications, the Legacy 450 earned its European Aviation Safety Agency (EASA) type certification, enabling its operation in the Member States of the European Union as well as in EASA’s associated countries.

Embraer announced Atlas Air Service as its new Authorized Sales Representative (ASR) in Europe. The Germany-based company will cover Austria, Switzerland and Germany.

Also in September, Embraer announced the first delivery of a Legacy 500 aircraft to the Dallas-based fractional ownership services provider, Flexjet Inc.

During 3Q15, Embraer delivered the 200^th executive jet to the Latin American market.

Defense & security

Embraer Defense & Security is the leading aerospace and defense company in Latin America. In addition to the A-29 Super Tucano light attack and advanced trainer and the multi-mission KC-390 military airlifter, it provides a full line of integrated solutions and applications such as C4I, radars, ISR (Intelligence, Surveillance & Reconnaissance) and space solutions. This also includes integrated systems for information, communications, border monitoring and surveillance as well as aircraft for transport of authorities and for special missions. With a growing presence in the global market, Embraer Defense & Security products and solutions are present in more than 60 countries.

Following the signing of the financing agreement between the Brazilian government and the Swedish Export Credit Corporation (SEK), the contract between Embraer and Saab for joint management of the F-X2 Project for the Brazilian Air Force became effective in September 2015. Under this agreement, Embraer will be responsible for a considerable amount of work in systems development, integration, flight testing, final assembly and aircraft deliveries. The Company will also participate in the coordination of all development and production activities in Brazil and both companies will be responsible for the full development of the two-seat version of the Gripen NG. In October 2015, the Company will send the first group of Brazilian engineers to Sweden to mark the beginning of the technology transfer process, and has already started work under the Gripen Design and Development Network (GDDN) in the industrial plant of Gavião Peixoto, in São Paulo.

With respect to the KC-390 program, the prototype underwent ground tests in preparation for its flight test campaign, which was expected to resume in October 2015.

Under the Light Air Support program (LAS), the United States Air Force received two A-29 Super Tucano aircraft in the third quarter, bringing the total to 10 aircraft already delivered under this contract.

The Brazilian Geostationary Defense and Communication Satellite Program (SGDC) execution is progressing as planned, with the foundations of the project antennas in Brasilia and Rio de Janeiro constructed, and the first shipment of the ground segment equipment of SGDC received in Brazil.

Moreover, in July 2015, the Consortium “Águas Brasileiras”, formed by Embraer, Bradar and Savis for the SisGAAz (Blue Amazon Management System) Competition, met with the Brazilian Navy to detail its proposal and answer questions from the project's Evaluation Committee.

 

 

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Reconciliation OF IFRS and “non gaap” information

We define Free cash flow as operating cash flow net of financial investments adjustment, less Net additions to property, plant and equipment, Additions to intangible assets, and Other assets. Free cash flow is not an accounting measure under IFRS. Free cash flow is presented because it is used internally as a measure for evaluating certain aspects of our business. The Company also believes that some investors find it to be a useful tool for measuring Embraer's cash position. Free cash flow should not be considered as a measure of the Company's liquidity or as a measure of its cash flow as reported under IFRS. In addition, Free cash flow should not be interpreted as a measure of residual cash flow available to the Company for discretionary expenditures, since the Company may have mandatory debt service requirements or other nondiscretionary expenditures that are not deducted from this measure.  Other companies in the industry may calculate Free cash flow differently from Embraer for purposes of their earnings releases, thus limiting its usefulness for comparing Embraer to other companies in the industry.

EBITDA LTM represents earnings before interest, taxation, depreciation and amortization accumulated over a period of the last 12 months. It is not a financial measure of the Company’s financial performance under IFRS. EBIT as mentioned in this press release refers to earnings before interest and taxes, and for purposes of reporting is the same as that reported on the Income Statement as Operating Profit before Financial Income.

EBIT and EBITDA are presented because they are used internally as measures to evaluate certain aspects of the business. The Company also believes that some investors find them to be useful tools for measuring a Company’s financial performance. EBIT and EBITDA should not be considered as alternatives to, in isolation from, or as substitutes for, analysis of the Company’s financial condition or results of operations, as reported under IFRS. Other companies in the industry may calculate EBIT and EBITDA differently from Embraer for the purposes of their earnings releases, limiting EBIT and EBITDA’s usefulness as comparative measures.

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Adjusted Net Income is a non-GAAP measure, calculated by adding Net Income attributable to Embraer Shareholders plus Deferred Income tax and social contribution for the period. Furthermore, under IFRS for purposes of calculating Embraer’s Income Tax benefits (expenses), the Company is required to record taxes resulting from gains or losses due to the impact of the changes in the Real to the US Dollar exchange rate over non-monetary assets (primarily Inventories, Intangibles, and PP&E). It is important to note that taxes resulting from gains or losses over non-monetary assets are considered deferred taxes and are accounted for in the Company’s consolidated Cash Flow statement, under Deferred income tax and social contribution.

Some Financial Ratios based on “non GAAP” information

  (i) Total debt represents short and long-term loans and financing.

(ii) Net cash represents cash and cash equivalents, plus financial investments, minus short and long-term loans and financing.

(iii) Total capitalization represents short and long-term loans and financing, plus shareholders equity.

(iv) Financial expense (gross) includes only interest and commissions on loans.

(v) The table at the end of this release sets forth the reconciliation of Net income to adjusted EBITDA, calculated on the basis of financial information prepared with IFRS data, for the indicated periods.

(vi) Interest expense (gross) includes only interest and commissions on loans, which are included in Interest income (expense), net presented in the Company’s consolidated Income Statement.

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FINANCial statements