Business Context and Reporting Period
Company: Embraer S.A. (NYSE: ERJ; BM&F BOVESPA: EMBR3)
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Second Quarter 2009 (Ended June 30, 2009)
Release Date: July 30, 2009
Embraer, the world's leading manufacturer of commercial jets with up to 120 seats, reported its Q2 2009 results in accordance with US GAAP. The quarter included the delivery of 56 jets across commercial, executive, and defense segments. Notable operational milestones included the launch of the KC-390 military transport program, the first delivery of the Lineage 1000 executive jet, and the certification of the Phenom 100 by EASA.
Key Financial Metrics
| Metric (US$ Millions) | Q2 2009 | Q2 2008 |
|---|---|---|
| Net Sales | 1,456.6 | 1,635.0 |
| Gross Profit | 336.5 | 358.1 |
| Gross Margin | 23.1% | 21.9% |
| Operating Income | 174.6 | 113.2 |
| Operating Margin | 12.0% | 6.9% |
| Net Income | 67.8 | 134.4 |
| Net Margin | 4.7% | 8.2% |
| Diluted EPS (ADS) | $0.3750 | $0.7378 |
Liquidity and Debt:
- Cash & Equivalents: $1,869.5 million (including temporary investments).
- Total Debt: $1,817.2 million.
- Net Cash Position: $52.3 million.
- Debt to Adjusted EBITDA (LTM): 2.77x.
- Interest Coverage (LTM): 6.56x.
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 10.9% year-over-year despite a 7.7% increase in jet deliveries (56 vs. 52). The decline was driven by a shift in product mix, specifically the inclusion of 15 lower-value Phenom 100 jets and fewer high-value Legacy 600 deliveries.
- Margin Expansion: Gross margin improved to 23.1% from 21.9%, and operating margin rose significantly to 12.0% from 6.9%. These gains were attributed to the P3E productivity program and strict cost controls.
- Expense Reduction: Operating expenses fell 33.9% to $161.9 million. Selling expenses dropped 30.1%, and R&D expenses decreased 46.7% due to revenue booking agreements with risk-sharing partners.
- Net Income Drop: Despite higher operating income, net income fell 49.6% to $67.8 million. This was primarily due to a significant foreign exchange loss of $49.8 million (vs. $32.3 million in Q2 2008) and higher income tax expenses ($63.4 million vs. $9.0 million).
Outlook, Risks, and Management Commentary
Backlog and Orders: The firm order backlog remained stable at $19.8 billion. The E-Jet family backlog includes 882 firm orders and 794 options. New contracts were signed with the Brazilian Air Force (KC-390), Brazilian Navy (AF-1 modernization), KLM Cityhopper (7 E190 options), and Fuji Dream Airlines (1 E175).
Management Commentary: Management highlighted the success of the P3E program in driving productivity and cost reductions. The company noted that the decrease in net income was largely due to non-operating items (foreign exchange and taxes) rather than core operational performance.
Risks and Contingencies: The filing includes standard forward-looking statement disclaimers regarding economic conditions, industry trends, and regulatory changes. Specific risks mentioned include currency fluctuations (significant FX loss recorded) and the ability to deliver products on agreed dates.
Investor Verification Checklist
- Product Mix Impact: Verify the revenue contribution of the Phenom 100 versus larger commercial jets to understand the revenue-per-delivery trend.
- Foreign Exchange Exposure: Assess the sensitivity of future earnings to USD/BRL fluctuations given the $49.8 million FX loss in Q2.
- Debt Servicing: Review the weighted average interest rates (7.99% for Real-indexed debt; Libor + 1.8% for USD debt) and the impact of rising rates on the $1.8 billion debt load.
- Inventory Levels: Monitor the reduction in inventory ($2.87 billion) to ensure it aligns with production schedules and does not indicate supply chain bottlenecks.
- Backlog Conversion: Track the conversion rate of the 819 options in the backlog into firm orders to gauge future revenue visibility.