Embraer S.A. First Quarter 2014 Financial Summary
Business Context and Reporting Period
This Form 6-K reports the unaudited financial results for Embraer S.A. for the quarter ended March 31, 2014 (1Q14). Embraer is a global manufacturer of commercial, executive, and defense aircraft. The reporting period reflects the company's diversification strategy, with significant growth in the Defense & Security and Executive Jets segments offsetting a decline in the Commercial Aviation segment's revenue share.
Key Financial Metrics
| Metric (US$ Millions) | 1Q14 | 1Q13 | 4Q13 |
|---|---|---|---|
| Revenue | 1,242.3 | 1,085.9 | 2,304.0 |
| EBIT | 92.1 | 39.6 | 462.9 |
| EBIT Margin | 7.4% | 3.6% | 20.1% |
| EBITDA | 151.0 | 100.4 | 543.6 |
| EBITDA Margin | 12.2% | 9.2% | 23.6% |
| Net Income (Shareholders) | 110.6 | 30.0 | 264.5 |
| EPS (Basic ADS) | $0.6044 | $0.1651 | $1.4513 |
| Net Cash Position | 52.7 | 98.2 | 429.3 |
| Total Debt | 2,217.8 | 2,462.5 | 2,194.3 |
| Free Cash Flow | (403.9) | (200.8) | 496.2 |
Material Changes vs. Prior Period
- Revenue Growth: Consolidated revenue increased 14.4% year-over-year (YoY) to $1,242.3 million, driven by a 56.7% increase in Defense & Security revenues and a 52.5% increase in Executive Jets revenues.
- Profitability Improvement: EBIT rose to $92.1 million (7.4% margin) from $39.6 million (3.6% margin) in 1Q13. This improvement occurred despite a slight decline in gross margin (21.6% vs. 22.2%) due to product mix shifts in Commercial Aviation.
- Cost Efficiency: Administrative expenses declined 10.9% and Selling expenses declined 14.5% YoY. Research expenses dropped significantly to $9.3 million from $21.4 million as E-Jets E2 program costs were capitalized.
- Liquidity Shift: Net cash decreased to $52.7 million from $429.3 million at year-end 2013. This $376.6 million decline was primarily due to seasonal increases in inventories ($255.0 million) and accounts receivable ($127.3 million).
- Backlog Expansion: The firm order backlog reached a record high of $19.2 billion, the highest level since Q2 2009, bolstered by a $2.94 billion order from Air Costa for 50 E-Jets E2 aircraft.
Guidance, Outlook, and Risks
- Outlook: Management expects Research expenses to increase throughout 2014, targeting $80 million for the year. Total Development investment is expected to align with the $320 million outlook. CAPEX is expected to ramp up, with total investment for 2014 projected at $250 million (excluding contracted CAPEX).
- Segment Mix: Defense & Security and Executive Jets are expected to represent a slightly larger portion of total revenues in 2014 compared to 2013.
- Regulatory Risks: The company is subject to ongoing investigations by the SEC and U.S. Department of Justice regarding potential violations of the Foreign Corrupt Practices Act (FCPA) related to aircraft sales abroad. The company states it is not possible to estimate the duration, scope, or financial impact of these inquiries at this time.
- Exchange Rate Exposure: Approximately 60% of the company's Real exposure is hedged if the USD depreciates below R$ 2.00. The company utilizes a cash allocation strategy to mitigate balance sheet exchange rate risks.
Investor Verification Checklist
- Verify the sustainability of the 56.7% revenue growth in the Defense & Security segment and its impact on future margins.
- Monitor the progression of the SEC/DOJ investigations and any potential accruals for fines or sanctions.
- Assess the impact of the $376.6 million decline in net cash on liquidity, given the negative free cash flow of $403.9 million.
- Confirm the timeline for the ramp-up of E-Jets E2 deliveries and the associated capitalization of development costs.
- Review the backlog composition to ensure the $19.2 billion figure reflects firm orders rather than options.