Embraer S.A. 4Q and Full Year 2011 Results Summary
Business Context and Reporting Period
This Form 6-K filing, dated March 20, 2012, reports the fourth quarter (4Q11) and full fiscal year 2011 results for Embraer S.A., a leading manufacturer of commercial, executive, and defense aircraft. The financial data is presented in U.S. dollars in accordance with IFRS. The reporting period covers operations from January 1, 2011, through December 31, 2011.
Key Financial Metrics
| Metric | 4Q11 | Full Year 2011 | Full Year 2010 |
|---|---|---|---|
| Revenues | $2,025.1 million | $5,803.0 million | $5,364.1 million |
| EBIT | ($5.9) million | $318.2 million | $391.7 million |
| EBIT Margin | -0.3% | 5.5% | 7.3% |
| Net Income (Attributable to Shareholders) | ($91.8) million | $111.6 million | $330.2 million |
| Earnings per ADS (Basic) | ($0.5072) | $0.6169 | $1.8252 |
| Net Cash Position | $445.7 million | $445.7 million | $691.8 million |
| Operating Cash Flow | $178.7 million | $480.2 million | $874.0 million |
| Total Debt | $1,658.1 million | $1,658.1 million | $1,434.8 million |
Operational Highlights: In 2011, Embraer delivered 105 commercial aircraft and 99 executive aircraft. Gross margin for the full year improved to 22.5% from 19.1% in 2010.
Material Changes and Unusual Items
The primary driver of the decline in 4Q11 and full-year profitability was a significant provision related to the Chapter 11 bankruptcy filing of American Airlines (AMR).
- AMR Provisions: The company recorded a total net provision of $360.7 million in 4Q11 related to financial guarantees and residual value guarantees (RVG) for 216 ERJ 145 family aircraft operated by American Eagle. Of this, $253.3 million impacted operating results (EBIT), while $107.4 million was recorded as a financial expense.
- Other Provisions: Additional revisions to existing provisions related to financial guarantees and RVG obligations, including those related to the MESA Air Group bankruptcy, resulted in a further negative impact of $43.2 million.
- Adjusted Performance: Management states that excluding these extraordinary events (totaling approximately $293 million in net impact), the 2011 EBIT margin would have been 8.7% and Net Income would have been $305.3 million.
- Cost Increases: Administrative, Selling, and Research expenses increased to $767.1 million in 2011 (from $643.7 million in 2010), driven by a 5% appreciation of the Brazilian Real against the U.S. Dollar and a 10% increase in labor costs.
Outlook, Guidance, and Risks
Guidance Achievement: Full-year 2011 revenues of $5.803 billion met the upper end of the company's guidance range ($5.6 - $5.8 billion). The company also met its revised revenue guidance for the Executive Aviation segment ($1 billion).
2012 Outlook and Strategy:
- Investments: Investments in Pool program spare parts are expected to decrease in 2012 compared to 2011 levels.
- Hedging: Approximately 45% of the company's Real exposure for 2012 is protected if the U.S. Dollar depreciates below $1.75 to the Real, with upside protection capped at an average rate of $2.44.
- Product Milestones: The Legacy 500 first flight is scheduled for the third quarter of 2012. The Phenom 100 production has begun in the U.S.
Risks and Contingencies:
- AMR Restructuring: The final decision on how AMR will manage its fleet is ongoing; the current provision is an estimate based on the current scenario.
- Executive Aviation Market: The segment faces a challenging environment due to a large supply of young used aircraft and stringent financing options.
- Defense Contracts: The U.S. Air Force set aside the contract award for the Light Air Support (LAS) program in February 2012; Embraer is awaiting clarification.
Investor Verification Checklist
- AMR Provision Accuracy: Verify the assumptions used for the $317.5 million provision regarding the 216 ERJ 145 aircraft, including the third-party appraisals and discount factors applied.
- Cash Flow Sustainability: Confirm the trajectory of operating cash flow given the reduction in inventory levels and the expected decrease in spare parts investments for 2012.
- FX Exposure: Assess the effectiveness of the hedging strategy given the volatility of the Brazilian Real and the company's cost structure (25% of costs denominated in Reais vs. 10% of revenues).
- Defense Segment Backlog: Monitor the status of the U.S. Air Force LAS program and the KC-390 development schedule, as these are critical to the Defense and Security segment's growth.
- Executive Aviation Demand: Evaluate the impact of the used aircraft market on new jet sales and the company's ability to maintain the $1 billion revenue target in a recessionary environment.