Embraer S.A. Second Quarter 2013 Financial Summary
Business Context and Reporting Period
This Form 6-K filing covers Embraer S.A.'s financial results for the second quarter of 2013 (ended June 30, 2013) and the first half of 2013. Embraer is a global manufacturer of commercial jets, executive aircraft, and defense systems. The reporting period highlights the launch of the E-Jets E2 program at the Paris Air Show and continued growth in the Defense & Security and Executive Aviation segments.
Key Financial Metrics
| Metric | 2Q13 | 2Q12 | YTD 2013 |
|---|---|---|---|
| Revenue | $1,557.0 million | $1,714.9 million | $2,642.9 million |
| Gross Margin | 23.1% | 23.6% | 22.7% |
| EBIT | $135.3 million | $197.4 million | $174.8 million |
| EBIT Margin | 8.7% | 11.5% | 6.6% |
| EBITDA | $203.7 million | $265.2 million | $304.0 million |
| Net Income (Loss) | ($5.3) million | $54.6 million | $24.6 million |
| Adjusted Net Income | $91.8 million | $158.9 million | $125.9 million |
| EPS (ADS Basic) | ($0.0291) | $0.3011 | $0.1353 |
| Operating Cash Flow | $412.8 million | $190.5 million | $43.2 million |
| Free Cash Flow | $1.8 million | $26.2 million | ($198.7) million |
| Total Debt | $2,224.2 million | $2,155.9 million | N/A |
| Net Cash Position | $58.0 million | $289.8 million | $58.0 million |
| Firm Order Backlog | $17.1 billion | N/A | N/A |
Material Changes vs. Prior Period
- Revenue Decline: 2Q13 revenue decreased 9.2% year-over-year, driven by a lower mix of E-Jet deliveries (22 commercial vs. 35 in 2Q12). However, Defense & Security revenue grew 17.1% and Executive Aviation revenue grew 41.7%.
- Net Loss: The company reported a net loss of $5.3 million, a significant swing from the $54.6 million profit in 2Q12. This was primarily caused by a $97.1 million non-cash deferred income tax charge resulting from the 10% appreciation of the US Dollar against the Brazilian Real.
- Adjusted Performance: Excluding deferred taxes, Adjusted Net Income was $91.8 million, reflecting underlying operational profitability despite the currency headwinds.
- Backlog Growth: The firm order backlog reached a record high of $17.1 billion, the highest level since Q3 2009, bolstered by significant orders in Commercial Aviation, including the E-Jets E2 launch.
- Debt Reduction: Total debt decreased to $2.22 billion, primarily due to a reduction in short-term loans from $370.3 million to $126.6 million.
Guidance, Outlook, and Risks
- Guidance: Management believes the company is on track to meet its 2013 delivery and revenue guidance, expecting revenue to increase in the second half of the year due to the normal business cycle.
- CAPEX Outlook: Capital expenditures are expected to be concentrated in the first half of the year (totaling $117.8 million YTD) due to ramp-up in Evora, Portugal. Full-year CAPEX is expected to align with the $180 million outlook.
- Research & Development: Research expenses increased to $30.2 million in 2Q13 due to the E-Jets E2 program. The company expects total research investment for the year to remain in line with the $100 million outlook.
- Regulatory Risks: The company is under ongoing investigation by the SEC and the U.S. Department of Justice regarding potential violations of the Foreign Corrupt Practices Act (FCPA) related to aircraft sales abroad. The company states it cannot currently estimate the duration, scope, or financial impact of this investigation.
- Currency Exposure: Approximately 25% of costs are denominated in Reals while only 10% of revenues are. The company utilizes financial hedges to protect 60% of its 2014 Real exposure if the USD depreciates below R$ 2.00.
Investor Verification Checklist
- Deferred Tax Impact: Verify the sustainability of Adjusted Net Income versus GAAP Net Income given the volatility of the USD/BRL exchange rate and its impact on non-monetary assets.
- Free Cash Flow Reversal: Monitor the company's ability to reverse the negative YTD Free Cash Flow of $198.7 million as projected, dependent on inventory reduction and delivery ramp-up.
- FCPA Investigation: Track updates on the SEC/DOJ investigation for potential material fines or sanctions that could impact future earnings.
- E-Jets E2 Conversion: Assess the conversion rate of the 365 commitments (firm orders and LOIs) for the E-Jets E2 program into firm orders and subsequent revenue recognition.
- Debt Maturity Profile: Review the average loan maturity of 5.4 years and the cost of debt (6.05% for USD loans) to ensure liquidity remains adequate for the projected CAPEX and R&D spend.