Business Context and Reporting Period
Company: Embraer S.A.
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2012
Accounting Standards: International Financial Reporting Standards (IFRS)
Functional Currency: U.S. Dollar (USD)
Embraer is a leading global manufacturer of commercial aircraft (regional and mid-capacity jets), executive jets, and defense and security aircraft. The company operates three primary business segments: Commercial Aviation (60.8% of 2012 revenue), Executive Jets (20.9%), and Defense and Security (17.1%). The company is incorporated in Brazil, with its principal executive offices in São José dos Campos.
Key Financial Metrics (Year Ended Dec 31, 2012)
| Metric | 2012 (US$ Millions) | 2011 (US$ Millions) |
|---|---|---|
| Revenue | 6,177.9 | 5,803.0 |
| Gross Profit | 1,494.9 | 1,307.1 |
| Gross Margin | 24.2% | 22.5% |
| Operating Profit | 612.1 | 318.2 |
| Operating Margin | 9.9% | 5.5% |
| Net Income | 348.6 | 120.4 |
| Net Income Attributable to Owners | 347.8 | 111.6 |
| Diluted EPS (USD) | 0.4780 | 0.1540 |
| Operating Cash Flow | 694.8 | 480.2 |
| Total Debt | 2,066.5 | 1,658.1 |
| Cash and Cash Equivalents | 1,801.2 | 1,350.2 |
| Total Assets | 9,490.4 | 8,858.3 |
| Shareholders' Equity | 3,350.3 | 3,117.8 |
Backlog: Total firm order backlog was US$12.46 billion (476 aircraft) as of December 31, 2012, down from US$15.44 billion in 2011.
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 6.5% to US$6.18 billion, driven primarily by a 24.0% increase in Defense and Security revenue and a 15.5% increase in Executive Jets revenue. Commercial Aviation revenue remained relatively flat (+0.1%).
- Profitability Surge: Net income increased 189.5% to US$348.6 million. This significant improvement was largely due to the absence of non-recurring charges recorded in 2011 related to the American Airlines (AMR) Chapter 11 bankruptcy filing.
- Operating Expenses: Operating expenses decreased 10.7% to US$882.8 million. "Other operating expense, net" improved significantly from a US$221.5 million expense in 2011 to US$42.8 million in 2012, reflecting lower provisions for financial guarantees.
- Debt Levels: Total debt increased to US$2.07 billion, primarily due to the issuance of US$500 million in 5.150% notes due 2022 in June 2012.
- Backlog Reduction: The backlog decreased by approximately 19% in value, reflecting deliveries outpacing new orders in certain segments, particularly Executive Jets.
Guidance, Outlook, Risks, and Contingencies
Outlook and Guidance
- 2013 Deliveries: Management estimates delivering 90-95 commercial aircraft, 80-90 light executive jets, and 25-30 large executive jets in 2013.
- Capital Expenditures: Expected to invest approximately US$580 million in 2013 (US$400 million in R&D and US$180 million in property, plant, and equipment).
- Market Trends: The company anticipates continued growth in emerging markets (Latin America, Asia, Middle East) while mature markets (North America, Europe) show slower growth. The executive jet market is expected to recover in the fourth quarter of 2013.
Key Risks and Contingencies
- Legal Proceedings (FCPA): An ongoing investigation by the SEC and U.S. Department of Justice regarding potential violations of the Foreign Corrupt Practices Act (FCPA). The company cannot estimate the duration, scope, or potential fines/sanctions.
- Tax Litigation: A US$364.7 million provision is recorded for probable losses related to challenges against Brazilian taxes and payroll charges. A major lawsuit regarding social contribution tax on export sales (US$224.8 million accrued) is pending before the Brazilian Supreme Court.
- Financial Guarantees: Off-balance sheet exposure for financial and residual value guarantees is US$517.9 million (net of provisions). The company remains exposed to customer defaults, though the American Airlines restructuring has reduced some specific risks.
- Customer Concentration: 49% of the EMBRAER 170/190 backlog is held by four customers (JetBlue, Flybe, Azul, BOC Aviation). The Brazilian Air Force accounts for over 60% of Defense and Security revenue.
- Exchange Rate: Approximately 25% of costs are in Brazilian Reais. Appreciation of the Real against the USD increases costs and reduces margins. The Real depreciated 8.5% against the USD in 2012.
Investor Verification Checklist
- FCPA Investigation Status: Verify any updates on the SEC/DOJ investigation and potential settlement terms or fines.
- Tax Litigation Outcome: Monitor the Brazilian Supreme Court's decision on the social contribution tax challenge, which could impact the US$224.8 million provision.
- Backlog Conversion: Assess the rate at which the US$12.5 billion backlog is being converted into revenue, noting the decline in backlog value year-over-year.
- Executive Jet Recovery: Validate the projected recovery of the executive jet market in late 2013 against actual order intake.
- Guarantee Exposure: Review Note 37 of the financial statements for details on the US$517.9 million off-balance sheet guarantee exposure and any new provisions.
- Capital Allocation: Confirm the execution of the US$580 million capital expenditure plan for 2013, specifically regarding the Legacy 450/500 development.