Embraer S.A. First Quarter 2010 Financial Summary
Business Context and Reporting Period
This Form 6-K filing covers Embraer S.A.'s unaudited financial results for the first quarter of 2010 (ended March 31, 2010), reported in accordance with US GAAP. Embraer is a global manufacturer of commercial, executive, and defense aircraft. The reporting period reflects a recovery in profitability despite a reduction in total aircraft deliveries compared to the prior year.
Key Financial Metrics
| Metric | 1Q 2010 | 1Q 2009 | 4Q 2009 |
|---|---|---|---|
| Net Sales (US$ Million) | 990.1 | 1,154.1 | 1,609.6 |
| Gross Margin | 21.7% | 18.2% | 20.8% |
| EBIT (US$ Million) | 57.4 | 27.3 | 65.8 |
| EBIT Margin | 5.8% | 2.4% | 4.1% |
| EBITDA Margin | 8.1% | 4.1% | 5.6% |
| Net Income Attributable to Embraer (US$ Million) | 35.3 | (23.4) | 146.4 |
| Net Cash Position (US$ Million) | 458.6 | 122.0 | 503.3 |
| Operating Cash Flow (US$ Million) | (46.1) | (246.1) | 403.7 |
| Free Cash Flow (US$ Million) | (59.7) | (277.0) | 382.6 |
Operational Highlights: Total jet deliveries were 41 aircraft (21 commercial, 19 executive, 1 defense). The firm order backlog stands at US$ 16.0 billion, representing approximately 3.2 years of current annual revenue.
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 14.2% year-over-year to US$ 990.1 million, driven by fewer aircraft deliveries (41 in 1Q10 vs. 49 in 1Q09) and a different product mix.
- Margin Expansion: Despite lower sales, Gross Margin improved to 21.7% from 18.2% in 1Q09. This was achieved through a favorable revenue mix (Defense and Services contributed 33.4% of revenue vs. 19.9% in 1Q09) and productivity enhancements.
- Profitability Turnaround: The company returned to profitability with Net Income of US$ 35.3 million, reversing a loss of US$ 23.4 million in 1Q09. Net margin improved by 5.6 percentage points to 3.6%.
- Currency Impact: The appreciation of the Brazilian Real against the US dollar (22% from 1Q09 to 1Q10) negatively impacted operating expenses denominated in Reals, though this was offset by financial activity gains.
- Cash Flow: Operating cash flow was negative US$ 46.1 million, primarily due to an increase in trade accounts receivable and inventory, partially offset by higher advances from customers.
Guidance, Outlook, and Risks
- Guidance Alignment: The 5.8% EBIT margin and 8.1% EBITDA margin met or exceeded management's guidance (6% EBIT margin and 7.5% EBITDA margin projection).
- CAPEX Outlook: Capital expenditures for the quarter were US$ 13.6 million. Management maintains a full-year CAPEX projection of US$ 140 million, with spending expected to increase in later quarters to support the Legacy 450 and 500 programs.
- R&D Spending: R&D expenses were US$ 36.6 million, consistent with the annual projection of US$ 160 million.
- Accounting Transition: Embraer plans to adopt International Financial Reporting Standards (IFRS) for its 2010 annual report, with interim US GAAP statements provided for reference during the transition.
- Risks: Key risks include global economic conditions, industry trends, capacity to deliver products on schedule, and governmental regulations. The executive aviation market remains weak due to a large secondary market inventory.
Investor Verification Checklist
- Verify the sustainability of the improved Gross Margin (21.7%) given the lower volume of aircraft deliveries.
- Monitor the trend in Trade Accounts Receivable, which contributed significantly to the negative operating cash flow in 1Q10.
- Confirm the ramp-up schedule for the Phenom 300 and Legacy 650 executive jets, which are expected to drive revenue in the second half of 2010.
- Review the impact of the Brazilian Real exchange rate on future operating expenses and financial results.
- Assess the progress of the KC-390 and AEW India defense programs, which are in critical development phases.