Delayed Boeing Deal Hits Embraer Results
The prolonged delay in closing Embraer’s sale of 80% of its commercial aircraft business to Boeing is eating into the Brazilian aerospace company’s finances in more ways than one, Embraer executives acknowledged Nov. 12 as they released their latest quarterly earnings.
Embraer is lowering the amount of the special dividend it will give its shareholders once the Boeing acquisition closes, from $1.6 billion previously now to a range of $1.3-1.6 billion. Similarly, the company now expects free cash outflow—as in used—of $100-300 million for all of 2019, compared with an earlier projection of about $1 billion retained. Growing costs from the delayed closure of about $100 million are partly to blame.
“Of course, the carveout has affected our results in 2019, but we are confident that after the conclusion of this partnership with Boeing, Embraer will be much stronger,” Embraer CEO and President Francisco Gomes Neto said.
Financial analysts lamented the financial update. “Investors are likely to be disappointed with Embraer’s third-quarter results (sales, earnings per share, and free cashflow missed), and updated 2019-20 guide,” Cowen and Co. analysts said.
Net loss attributable to Embraer shareholders and their loss per U.S.-traded share were $77.2 million and $0.42, respectively, compared with a $112.4 million loss at $0.61 per share the year before. Latest quarterly revenue was $1.176 billion, representing year-over-year growth of 1.4%.
Revenue improved principally as a result of higher deliveries in the Commercial Aviation and Executive Jets segments, along with 2.5% growth in the Services and Support segment, although it was offset by a 28.7% year-over decline in Defense and Security revenue in the latest quarter. Embraer said defense revenue was hurt by cost-base revisions related to the KC-390 development contract.
In the recent quarter, Embraer delivered 17 commercial and 27 executive (15 light and 12 large) jets, compared with 15 commercial jets and 24 executive (17 light and 7 large) jets in the same period last year. For full-year 2019, Embraer reaffirmed expectations that it will sell 85–95 commercial jets, 90–110 executive jets, and two KC-390s. But it now expects just five Super Tucano deliveries by year’s end, with five more seen selling in the beginning of 2020.
Embraer still will separate its commercial business internally by the end of the year, but its acquisition by Boeing now is not expected until around March 2020 since EU competition regulators punted their review into Phase 2. When it was announced in Dec. 17, 2018, the deal was expected to have closed by now. Then it was seen closing by the end of 2019. But with the Trump administration ratcheting up its trade war with Europe, including World Trade Organization penalties over subsidies for large commercial aircraft, observers see the Boeing-Embraer deal delay as collateral damage.
Recently, EU regulators requested more information from the two companies, and they said they essentially “stopped the clock” on the deal until they received the information. Neto said the companies are working “very hard to deliver this information as soon as possible,” but it should not affect the current March milestone. “We do not see this as any change in the normal course of this process and don’t expect big delays,” he said.