Story ID: 
Embraer Earnings Take Hit from Bribery Probe
By: Kerry Lynch
Caption: Embraer set aside a $200 million provision in anticipation of potential settlement in the nearly six-year-old U.S. government investigation.
Word Count: 445
Embraer’s second-quarter results were marred by a $200 million provision set aside as the Brazilian manufacturer prepares for a possible settlement in the six-year-old U.S. government investigation over potential violations of anti-corruption laws. The U.S. Securities and Exchange Commission and Department of Justice have been investigating possible non-compliance with the U.S. Foreign Corrupt Practice Act (FCPA) surrounding certain aircraft sales outside of Brazil.

Announcing the results on July 29, Embraer did not detail the investigation. According to multiple press reports, authorities have been probing the company's alleged involvement in a reported bribery case involving the sale of military and commercial aircraft in the Dominican Republic. Without commenting specifically on this case, Embraer said it had voluntarily expanded the scope of the investigation to include sales in other countries.

The Brazilian manufacturer noted in its second-quarter earnings release that “negotiations in the U.S. authorities for the settlement of allegations of non-compliance with the FCPA have significantly progressed, to the point that Embraer recognized a $200 million loss contingency in the quarter ended June 30, 2016, reflecting the likely outcome of this matter.” Embraer added that it anticipates that the final settlement could include a “deferred prosecution agreement,” under which criminal charges would be deferred and ultimately dismissed if Embraer demonstrates compliance with agreement terms.

Embraer stressed that the contingency is only in anticipation and the settlement has not been finalized. But, speaking in his inaugural quarterly earnings call as CEO on Friday, Paulo Cesar Silva told analysts, “I think it’s very important that we are getting to the end of this case. So we will turn this page, and with that we’ll be looking again to develop our business and to further develop Embraer.”

Embraer in June had made the surprise announcement that Silva was succeeding Frederico Fleury Curado as CEO.

As a result of the $200 million contingency, Embraer posted a $127.4 million loss in the second quarter, compared with a $102.2 million profit (earnings before interest and taxes) a year earlier.  This gave Embraer a margin of -9.3 percent.

Embraer’s second-quarter results also suffered from the nearly 25-percent drop in revenues from its executive jet segment, causing earnings for the quarter to slide by nearly $30 million, even without the $200 million contingency.  Margins in the executive jet unit for the quarter were -8.5 percent. Silva added that the company is “adjusting our internal costs in the unit [so] we can get to the margins we need.”

As for the possible non-compliance, the company said it has “embarked on a comprehensive effort to improve and expand our compliance program worldwide.”