Business Context and Reporting Period
Company: Embraer S.A. (NYSE: ERJ)
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Fourth Quarter and Full Fiscal Year 2009 (ended December 31, 2009)
Filing Date: March 18, 2010
Embraer reported record jet deliveries in the fourth quarter of 2009 (4Q09), totaling 91 aircraft, and finished the year with 244 deliveries, slightly surpassing its 2009 guidance. The company operates in Commercial Aviation, Executive Aviation, Defense, and Aviation Services segments.
Key Financial Metrics
| Metric (US$ Million) | 4Q 2008 | 4Q 2009 | FY 2008 | FY 2009 |
|---|---|---|---|---|
| Net Sales | 1,818.4 | 1,609.6 | 6,335.2 | 5,466.3 |
| EBIT (Non-GAAP) | 274.6 | 65.8 | 537.0 | 335.6 |
| EBIT Margin | 15.1% | 4.1% | 8.5% | 6.1% |
| Net Income (Attributable to Embraer) | 111.7 | 146.4 | 388.7 | 248.5 |
| Free Cash Flow (Non-GAAP) | 417.0 | 382.6 | 112.0 | 31.2 |
| Net Cash Position | 376.1 | 503.3 | 376.1 | 503.3 |
Liquidity and Debt: Total cash position at year-end 2009 was US$ 2,546.2 million. The company issued a US$ 500 million 10-year bond in 4Q09, extending the average debt tenor from 2.6 years to 4.9 years. Long-term debt represented 71% of total debt.
Material Changes vs. Prior Period
- Revenue Decline: Full-year 2009 net sales decreased 13.7% to US$ 5.47 billion compared to 2008, primarily due to a 20.5% drop in Commercial Aviation revenue caused by the global financial crisis and reduced deliveries.
- Profitability Impact: FY2009 EBIT margin dropped to 6.1% from 8.5% in 2008. This was significantly impacted by a US$ 103 million provision related to a subsequent event (MESA Air Group bankruptcy). Without this provision, the margin would have been 8%.
- Net Income Growth: Despite lower revenue and EBIT, 4Q09 net income attributable to Embraer increased 31.2% year-over-year to US$ 146.4 million, driven by tax benefits and lower interest expenses.
- Cost Efficiency: SG&A expenses decreased 20.6% and R&D expenditures fell 26.9% compared to 2008, outpacing the revenue decline.
- Cash Flow: 4Q09 operating cash flow was strong at US$ 403.7 million, driven by a US$ 380 million reduction in inventory levels.
Guidance, Outlook, and Risks
2010 Guidance
- Net Sales: Expected to reach US$ 5.0 billion.
- Commercial Aviation: US$ 2.6 billion
- Executive Aviation: US$ 1.1 billion
- Defense: US$ 650 million
- Services & Other: US$ 650 million
- Deliveries: 227 jets total (90 Commercial, 137 Executive).
- EBIT: Expected to be US$ 300 million with a margin of 6.0%.
- Investments: Total investments projected at US$ 300 million (US$ 160 million R&D, US$ 140 million CAPEX).
Management Commentary and Risks
- Subsequent Event: On January 5, 2010, MESA Air Group filed for Chapter 11 bankruptcy. Embraer has obligations due to financial guarantees on 36 ERJ-145 aircraft. A US$ 74.4 million cash reserve was set aside to mitigate this risk.
- Market Recovery: Management anticipates a mild recovery in 2010 with increased orders, citing improving global economic activity and passenger traffic.
- Accounting Transition: Embraer plans to adopt IFRS for its 2010 annual report, releasing US GAAP statements as a reference only during the transition period in 2010.
Investor Verification Checklist
- MESA Air Provision: Verify the impact of the US$ 103 million provision and the adequacy of the US$ 74.4 million cash reserve regarding the MESA Air bankruptcy guarantees.
- Order Backlog: Confirm the firm order backlog of US$ 16.6 billion and the conversion rate of options to firm orders in 2010.
- Commercial Aviation Recovery: Monitor new order trends in the Commercial Aviation segment, which saw a significant drop in 2009.
- IFRS Transition: Review the reconciliation between US GAAP and IFRS figures when the 2010 annual report is released to understand potential accounting differences.
- Currency Exposure: Assess the impact of currency fluctuations, noting that 48.1% of the cash position is denominated in Brazilian Reals.