Embraer S.A. Third Quarter 2009 Financial Summary
Business Context and Reporting Period
This Form 6-K filing covers Embraer S.A.'s financial results for the third quarter ended September 30, 2009 (3Q09). Embraer is the world's leading manufacturer of commercial jets with up to 120 seats. The company reported results in accordance with US GAAP, with additional data provided under Brazilian GAAP. The reporting period coincides with the company's 40th anniversary.
Key Financial Metrics
- Revenue: Net sales totaled US$ 1,246.0 million in 3Q09, a 19.4% decrease from US$ 1,546.0 million in 3Q08.
- Profitability: Net income attributable to Embraer was US$ 57.7 million, matching the 3Q08 figure. Earnings per ADS (basic and diluted) were US$ 0.3188.
- Margins: Gross margin decreased to 18.8% (from 21.7% in 3Q08). Operating margin was 5.5% (down from 6.5%). Net income margin improved to 4.6% (from 3.7%).
- Cash Flow & Liquidity: Cash and cash equivalents plus temporary investments totaled US$ 2,081.2 million. The company maintained a net cash position of US$ 71.4 million.
- Debt: Total short- and long-term loans were US$ 2,009.8 million. The total debt to LTM adjusted EBITDA ratio increased to 3.20x.
- Backlog: Firm order backlog stood at US$ 18.6 billion as of September 30, 2009.
- Deliveries: Total jet deliveries were 57 units (up from 48 in 3Q08), including 29 commercial, 27 executive (22 Phenom 100s), and 1 defense aircraft.
Material Changes vs. Prior Period
- Revenue Decline: Despite a 19% increase in delivery volume, revenue fell 19.4% year-over-year due to a product mix shift toward lower-value Phenom 100 jets and fewer Legacy 600 deliveries.
- Operating Income: Income from operations dropped 32.3% to US$ 68.0 million, driven by lower gross profit.
- Expense Reduction: Operating expenses decreased 29.7% to US$ 165.7 million, aided by the P3E process optimization plan. R&D expenses fell significantly to US$ 43.4 million due to revenue booking from risk-sharing partners.
- Financial Items: Net financial income improved to US$ 14.6 million (from a US$ 102.0 million expense in 3Q08) due to lower funding costs. However, the company recorded a foreign exchange loss of US$ 35.0 million, compared to a gain of US$ 58.7 million in 3Q08.
- Capital Structure: The company issued US$ 500 million in 10-year bonds in October 2009 to extend debt maturity.
Guidance, Outlook, and Risks
- 2009 Guidance: Embraer maintains full-year 2009 net revenue guidance of US$ 5.5 billion and investment estimates of US$ 350 million.
- Delivery Forecast: Expected to deliver 115 commercial jets, 17 Legacy 600/Lineage 1000 aircraft, and approximately 100 Phenom jets for the year.
- Margin Outlook: Full-year operating margin is expected to be around 7%, impacted by the strong appreciation of the Brazilian Real against the US dollar.
- Risks: Forward-looking statements are subject to risks including general economic conditions, industry trends, capacity to deliver products on time, and governmental regulations. Currency fluctuations remain a significant variable.
Investor Verification Checklist
- Verify the impact of the product mix shift (high volume of Phenom 100s vs. fewer Legacy 600s) on future revenue recognition.
- Monitor the exchange rate exposure between the Brazilian Real and US dollar, given the company's cost structure and revenue mix.
- Review the utilization of the US$ 500 million bond proceeds and the resulting extension of debt maturity.
- Assess the sustainability of the 29.7% reduction in operating expenses and the specific contributions from the P3E optimization plan.
- Confirm the status of the US$ 18.6 billion backlog and the conversion rate of options to firm orders.