Business Context and Reporting Period
Company: Embraer S.A.
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2013
Accounting Standards: International Financial Reporting Standards (IFRS)
Functional Currency: U.S. Dollar (USD)
Business Overview: Embraer is a leading global manufacturer of commercial aircraft (regional and mid-capacity jets), executive jets, and defense/security aircraft. The company operates three primary segments: Commercial Aviation (53% of 2013 revenue), Executive Jets (26.4%), and Defense & Security (19.2%).
Key Financial Metrics (Year Ended Dec 31, 2013)
| Metric | 2013 (US$ Millions) | 2012 (US$ Millions) |
|---|---|---|
| Revenue | 6,235.0 | 6,167.0 |
| Cost of Sales and Services | (4,818.9) | (4,676.6) |
| Gross Profit | 1,416.1 | 1,490.4 |
| Gross Margin | 22.7% | 24.2% |
| Operating Profit | 713.4 | 611.9 |
| Operating Margin | 11.4% | 9.9% |
| Net Income | 346.0 | 348.6 |
| Net Income Attributable to Owners | 342.0 | 347.8 |
| Diluted EPS (USD) | 0.4661 | 0.4780 |
| Operating Cash Flow | 564.6 | 693.0 |
| Total Debt | 2,194.3 | 2,066.5 |
| Cash and Cash Equivalents | 1,683.7 | 1,797.0 |
| Total Assets | 10,142.5 | 9,480.9 |
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 1.1% to $6.235 billion. This was driven by a 27.3% increase in Executive Jets revenue and a 14.5% increase in Defense & Security revenue, partially offset by an 11.9% decline in Commercial Aviation revenue due to lower delivery volumes (90 aircraft in 2013 vs. 106 in 2012).
- Profitability: Operating profit increased 16.6% to $713.4 million, primarily due to a $180.7 million positive impact in "Other operating income" related to the reversal of provisions for financial guarantees associated with the American Airlines (AMR) bankruptcy resolution. However, gross margin declined from 24.2% to 22.7% due to a less favorable product mix and inflation in labor costs.
- Financial Expenses: Net financial expenses surged from $6.8 million in 2012 to $96.4 million in 2013. This increase included non-recurring expenses related to residual value guarantees and interest accruals on tax obligations under Brazil's Fiscal Recovery Program (Refis).
- Backlog: Total firm order backlog increased significantly to $18.2 billion (675 aircraft) from $12.5 billion (476 aircraft) in 2012, driven largely by new orders for the E-Jets E2 family and Executive Jets.
Guidance, Outlook, and Risks
Outlook and Guidance
- 2014 Deliveries: Management estimates delivering 92 to 97 commercial aircraft, 80 to 90 light executive jets, and 25 to 30 large executive jets in 2014.
- Capital Expenditures: Expected to invest approximately $650 million in 2014, with $400 million allocated to research and product development (excluding risk-sharing contributions) and $250 million to property, plant, and equipment.
- Product Launches: The Legacy 500 executive jet is expected to enter service in the first half of 2014. The E-Jets E2 family (E175-E2, E190-E2, E195-E2) is in development, with the E190-E2 expected to enter service in 2018.
Key Risks and Contingencies
- FCPA Investigation: The company is subject to an ongoing investigation by the U.S. SEC and DOJ regarding potential non-compliance with the Foreign Corrupt Practices Act (FCPA). The duration and outcome remain uncertain, with potential for substantial fines.
- Financial Guarantees: Embraer maintains off-balance sheet exposure related to financial and residual value guarantees. As of Dec 31, 2013, the net exposure (after provisions) was $655.4 million. A significant portion of this relates to the AMR bankruptcy, which was largely resolved in 2013.
- Customer Concentration: 88% of the E-Jets backlog is held by a select group of airlines and leasing companies. The Brazilian federal government accounts for over 71% of Defense & Security revenue.
- Exchange Rate Volatility: While revenue is largely USD-denominated, approximately 25% of costs are in Brazilian Reais. Depreciation of the Real against the USD can increase costs and impact tax provisions.
Investor Verification Checklist
- AMR Bankruptcy Resolution: Verify the finality of the American Airlines bankruptcy settlement and confirm no remaining contingent liabilities related to the $317.5 million provision made in 2011.
- FCPA Investigation Status: Monitor updates regarding the SEC/DOJ investigation into foreign sales operations to assess potential future fines or sanctions.
- E-Jets E2 Certification: Track the certification timeline for the E-Jets E2 family, as delays could impact future revenue recognition and backlog conversion.
- Defense Contract Execution: Review the progress of the KC-390 military transport program and the Sisfron border surveillance system, which are critical to the Defense & Security segment's growth.
- FX Sensitivity: Assess the impact of the Brazilian Real's depreciation (14.6% in 2013) on future cost structures and deferred tax liabilities.