EMBJ

Business Context and Reporting Period

Company: Embraer S.A. (NYSE: ERJ)

Reporting Period: First Quarter 2009 (ended March 31, 2009)

Filing Date: May 6, 2009 (Form 6-K)

Embraer, the world's leading manufacturer of commercial jets with up to 120 seats, reported results for 1Q09 amidst a severe worldwide economic downturn. The company faced cancellations of firm orders in executive aviation and deferrals in commercial aviation. In response to reduced demand, Embraer implemented a workforce reduction of approximately 20% in February 2009, concentrated in production and administrative areas.

Key Financial Metrics

Liquidity and Debt

• Cash and Cash Equivalents: $605.6 million (March 31, 2009).
• Temporary Cash Investments: $1,076.5 million.
• Total Debt: $1,560.1 million (down from $1,825.4 million in 4Q08).
• Net Cash Position: $122.0 million (Total loans minus cash and investments).
• Debt to Adjusted EBITDA (LTM): 2.65x (improved from 3.00x in 4Q08).

Material Changes vs. Prior Period

• Revenue Decline: Net sales dropped 13.6% primarily due to fewer aircraft deliveries (40 jets in 1Q09 vs. 45 in 1Q08).
• Segment Performance:
  • Commercial Aviation: Sales of $870.4 million (75.3% of total), down from $929.5 million in 1Q08.
  • Executive Aviation: Sales plummeted 59.6% to $70.2 million due to significantly fewer Legacy 600 deliveries (2 vs. 7 in 1Q08).
  • Defense & Government: Sales decreased to $67.8 million from $88.7 million.
• Margin Compression: Gross margin fell to 18.2% due to lower delivery volumes increasing the share of direct labor costs and learning curve effects on Phenom 100 deliveries.
• Non-Recurring Costs: Operating income was impacted by $33.3 million in "other operating expenses," primarily non-recurring layoff costs. Excluding these items, the operating margin would have been 5.2%.
• Backlog Reduction: Firm order backlog decreased 5.7% quarter-over-quarter to $19.7 billion due to cancellations and deferrals.

Guidance, Outlook, and Risks

Revised 2009 Guidance

• Revenue: Revised down to $5.5 billion (from previous guidance).
  • Commercial Aviation: $3.3 billion
  • Executive Aviation: $0.8 billion
  • Defense & Government: $0.6 billion
  • Services & Other: $0.8 billion
• Deliveries: Reduced from 270 to 242 aircraft.
  • Commercial: 115 aircraft
  • Executive: 127 aircraft (17 Legacy/Lineage + 110 Phenom)
• Investment: Total investment guidance revised to $350 million.

Management Commentary and Risks

Management cited the "unprecedented crisis affecting the global economy" as the driver for cost structure revisions and workforce reductions. The company is negotiating with its supply chain to adjust parts acquisition to new demand levels.

Key Risks:

• General economic, political, and trade conditions in Brazil and global markets.
• Capacity to develop and deliver products on agreed dates.
• Existing and future governmental regulations.

Investor Verification Checklist

• Workforce Reduction Impact: Verify the long-term cost savings realized from the 20% workforce reduction versus the immediate $33.3 million charge.
• Backlog Quality: Assess the stability of the remaining $19.7 billion backlog given the 5.7% quarterly decline and history of cancellations in the executive segment.
• Phenom 100 Ramp-up: Monitor the learning curve effects on the Phenom 100 program, which negatively impacted 1Q09 gross margins.
• Currency Exposure: Review the impact of the Brazilian Real (BRL) appreciation against the USD on future margins, as 40.3% of debt is denominated in Reais.
• Liquidity Runway: Confirm the sustainability of the $122.0 million net cash position against the revised $350 million investment guidance and operating cash flow trends.