EMBJ

Embraer S.A. Third Quarter 2011 Results Summary

Business Context and Reporting Period

This Form 6-K reports the unaudited financial results for Embraer S.A. for the third quarter ended September 30, 2011 (3Q11). Embraer is a global manufacturer of commercial, executive, and defense aircraft. The reporting period covers operations across Commercial Aviation, Executive Aviation, and Defense & Security segments.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Revenues increased 30.6% year-over-year to $1,363.6 million, driven by higher deliveries in Commercial Aviation (28 jets) and Executive Aviation (18 jets).
• Profitability: EBIT and EBITDA margins improved significantly to 9.1% and 13.8%, respectively, exceeding company guidance. This was achieved despite a stronger local currency and increased labor costs.
• Net Income Volatility: Reported Net Income collapsed to $1.9 million from $126.1 million in 3Q10. This was primarily due to a non-cash deferred income tax charge of $123.8 million resulting from the appreciation of the US Dollar against the Brazilian Real.
• Liquidity: Net cash position decreased by $212.9 million to $193.4 million, mainly due to increased inventory levels to support expected Q4 deliveries and investments in PP&E.
• Debt Profile: Total debt increased to $1,810.6 million. Short-term loans now represent 26% of total debt (up from 13% in 2Q11), reducing the average loan maturity to 4.5 years.

Guidance, Outlook, and Risks

• 2011 Revenue Guidance: Maintained at $5.6 billion to $5.8 billion. Management expects a stronger fourth quarter but anticipates Executive Aviation revenues will be approximately $200 million below initial segment guidance due to market challenges.
• 2011 EBIT/EBITDA Guidance: Unchanged at $465 million (EBIT) and $700 million (EBITDA). Margins are expected to remain above 8% and 12%, respectively.
• Operational Outlook: Free cash flow is expected to recover in Q4 as aircraft deliveries increase and inventory levels stabilize. Investments in spare parts pools are expected to decrease in 2012.
• Risks and Contingencies:
  • SEC Investigation: The Company is cooperating with an ongoing SEC and DOJ investigation regarding potential violations of the Foreign Corrupt Practices Act (FCPA) involving transactions in three specific countries. The duration and outcome are unpredictable.
  • Executive Aviation Market: Continued barriers from the used aircraft market and corporate profit indicators may hinder full recovery in this segment.
  • Currency Exposure: Approximately 25% of costs are denominated in Reais while only 5% of revenues are, creating exchange rate exposure partially mitigated by hedging strategies.

Key Investor Verification Points

• Deferred Tax Impact: Verify the sustainability of Adjusted Net Income ($125.7M) versus Reported Net Income ($1.9M) and the specific IFRS treatment of unrealized foreign exchange gains on non-monetary assets.
• Inventory Build-up: Confirm that the $175.8 million increase in inventories aligns with Q4 delivery schedules and does not indicate obsolescence risks.
• Executive Aviation Recovery: Monitor the impact of the used aircraft market on the ability to meet the revised $1.0 billion revenue target for the Executive segment.
• FCPA Investigation Status: Track updates on the scope and potential financial implications of the ongoing SEC/DOJ investigation.
• Debt Maturity: Assess the liquidity implications of the shift toward short-term debt (26% of total) and the associated refinancing risks.