Business Context and Reporting Period
Company: EMBRAER S.A.
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2011
Accounting Standards: International Financial Reporting Standards (IFRS)
Functional Currency: U.S. Dollar (USD)
Business Overview: Embraer is a leading manufacturer of commercial aircraft (regional and mid-capacity jets), executive jets, and defense/security aircraft. The company operates in three primary segments: Commercial Aviation (64.0% of revenue), Executive Aviation (19.2% of revenue), and Defense and Security (14.7% of revenue).
Key Financial Metrics (Year Ended Dec 31, 2011)
| Metric | 2011 (US$ Millions) | 2010 (US$ Millions) |
|---|---|---|
| Revenue | 5,803.0 | 5,364.1 |
| Gross Profit | 1,307.1 | 1,026.0 |
| Gross Margin | 22.5% | 19.1% |
| Operating Profit | 318.2 | 391.7 |
| Operating Margin | 5.5% | 7.3% |
| Net Income | 120.4 | 345.4 |
| Net Income Attributable to Owners | 111.6 | 330.2 |
| Diluted EPS (USD) | 0.1540 | 0.4562 |
| Operating Cash Flow | 480.2 | 873.8 |
| Total Debt | 1,658.1 | 1,434.8 |
| Cash and Cash Equivalents | 1,350.2 | 1,393.1 |
| Total Assets | 8,858.3 | 8,391.0 |
| Total Backlog (Aircraft) | 697 | 820 |
| Total Backlog (Value) | 15,441.2 | 15,543.2 |
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 8.2% to $5.8 billion, driven by a 14.0% increase in Commercial Aviation revenue due to higher deliveries (105 aircraft in 2011 vs. 100 in 2010) and a better product mix.
- Executive Aviation Decline: Executive Aviation revenue decreased 7.9% to $1.1 billion, reflecting a 31.3% drop in deliveries (99 aircraft vs. 144 in 2010) due to market pressures and the global economic slowdown.
- Profitability Impact: Despite a 27.4% increase in Gross Profit, Net Income plummeted 65.1% to $120.4 million. This was primarily caused by a $317.5 million non-recurring charge related to financial and residual value guarantees triggered by the Chapter 11 bankruptcy filing of AMR Corporation (American Airlines).
- Operating Expenses: Operating expenses rose 55.9% to $988.9 million. Excluding the AMR-related provisions, the increase was driven by higher real-denominated labor costs (due to the appreciation of the Brazilian Real) and investments in customer support infrastructure.
- Cash Flow: Operating cash flow decreased 45.1% to $480.2 million, largely due to lower net income and changes in financial assets.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- 2012 Deliveries: Management estimates delivering 105 commercial aircraft, 75 light executive jets, and 15 large executive jets in 2012.
- Capital Expenditures: Expected to invest approximately $650 million in 2012, with $450 million allocated to research and product development (excluding risk-sharing contributions) and $200 million to property, plant, and equipment.
- Market Trends: The company anticipates continued recovery in the commercial airline industry, particularly in emerging markets (Latin America, Asia, Middle East). The executive jet market is expected to remain flat until 2014 due to economic uncertainty and a surplus of pre-owned aircraft.
Key Risks and Contingencies
- Financial Guarantees: Significant exposure to financial and residual value guarantees. The AMR bankruptcy resulted in a $317.5 million provision. Maximum off-balance sheet exposure was $682.8 million as of year-end.
- Customer Concentration: 41% of the firm order backlog for the EMBRAER 170/190 family is held by four key customers (Flybe, JetBlue, Air Lease, and Azul).
- Government Financing: Reliance on Brazilian government-sponsored export financing (BNDES/ProEx). Changes in these programs or WTO disputes could impact competitiveness.
- Legal Proceedings: Ongoing SEC and DOJ investigation regarding potential FCPA violations; management cannot currently estimate the scope or result. Additionally, a $386.5 million provision exists for tax litigation contingencies.
- Currency Risk: Approximately 25% of costs are in Brazilian Reais. Appreciation of the Real against the USD increases costs and impacts margins.
Investor Verification Checklist
- AMR Provision Adequacy: Verify if the $317.5 million provision for American Airlines guarantees is sufficient given the restructuring process and potential secondary market impacts.
- Executive Jet Demand: Monitor order intake and cancellation rates in the executive aviation segment, which saw a significant delivery drop in 2011.
- FX Sensitivity: Assess the impact of the Brazilian Real's exchange rate volatility on future margins, given the high proportion of local labor costs.
- Legal Exposure: Track the status of the SEC/DOJ investigation and the outcome of the major tax litigation ($241.3 million accrued) pending with the Brazilian Supreme Court.
- Backlog Quality: Review the concentration of the $15.4 billion backlog among key customers and the stability of orders from emerging markets.