Embraer S.A. First Quarter 2013 Results Summary
Business Context and Reporting Period
This Form 6-K filing reports the unaudited financial results for Embraer S.A. for the first quarter of 2013 (ended March 31, 2013). The company operates in three primary segments: Commercial Aviation, Executive Aviation, and Defense & Security. The reporting period reflects a seasonal downturn in deliveries and the impact of a retroactive wage settlement in Brazil.
Key Financial Metrics
| Metric (in millions USD) | 1Q13 | 1Q12 | 4Q12 |
|---|---|---|---|
| Revenue | 1,085.9 | 1,152.1 | 1,897.6 |
| Gross Margin | 22.2% | 23.1% | 24.5% |
| EBIT | 39.6 | 85.6 | 227.8 |
| EBIT Margin | 3.6% | 7.4% | 12.0% |
| EBITDA | 100.4 | 148.0 | 309.7 |
| Net Income (Attributable to Embraer) | 30.0 | 104.6 | 123.2 |
| Earnings per ADS (Basic) | $0.1651 | $0.5779 | $0.6797 |
| Net Cash Position | 98.2 | 300.9 | 308.7 |
| Total Debt | 2,462.5 | 1,988.3 | 2,066.5 |
Material Changes vs. Prior Period
- Revenue Decline: Revenue decreased 5.7% year-over-year to $1,085.9 million, driven by lower aircraft deliveries (17 commercial and 12 executive jets in 1Q13 vs. 21 commercial and 13 executive jets in 1Q12).
- Margin Compression: Gross margin fell to 22.2% from 23.1% in 1Q12. This was primarily due to a non-recurring payroll expense of approximately $6 million related to a retroactive wage settlement with the labor union, partially offset by favorable exchange rates.
- Operating Profit Drop: EBIT declined to $39.6 million (3.6% margin) from $85.6 million (7.4% margin). Contributing factors included higher research expenses ($21.4 million vs. $16.0 million), a $9 million non-recurring provision for a labor lawsuit, and a $32 million swing in "Other operating income" due to lower contractual fines from customer cancellations.
- Cash Flow: Net cash used by operating activities was negative $369.6 million, compared to negative $128.6 million in 1Q12. This was driven by a $353.4 million increase in inventories to prepare for future deliveries.
- Debt Increase: Total debt rose to $2,462.5 million from $2,066.5 million in 4Q12, primarily due to an increase in long-term loans.
Guidance, Outlook, and Risks
- Guidance: Management reaffirmed its 2013 revenue and margin guidance provided in February, citing the typical seasonal nature of the first quarter.
- Backlog: The firm order backlog grew to $13.3 billion, supported by orders in Commercial Aviation and Defense & Security.
- Segment Highlights:
- Commercial: Delivered 17 jets; backlog includes 47 E175s from Republic Airways. Second-generation E-Jets development continues with a planned 2018 entry into service.
- Executive: Delivered 12 jets (8 light, 4 large). The Legacy 500 entered flight testing; the Phenom 300 set speed records.
- Defense & Security: Selected by the U.S. Air Force for the Light Air Support program (20 A-29 Super Tucano aircraft). Delivered first three A-29s to Angola. Concluded Critical Design Review for the KC-390 military transport.
- Risks and Contingencies:
- SEC/DOJ Investigation: An ongoing internal investigation regarding potential FCPA violations in five countries remains open. The company cannot estimate the duration, scope, or potential financial impact (fines/sanctions) at this time.
- Labor Lawsuit: A $9 million provision was recorded for an outstanding labor lawsuit; final outcome and timing are uncertain.
Investor Verification Checklist
- Verify the impact of the $6 million retroactive wage settlement on future quarters' gross margins.
- Monitor the status of the SEC/DOJ investigation and any potential settlement terms or fines.
- Track inventory levels and the timeline for converting the $353 million inventory increase into revenue.
- Confirm the execution of the U.S. Air Force A-29 Super Tucano contract and subsequent deliveries.
- Assess the company's ability to meet 2013 delivery guidance given the Q1 shortfall.