Embraer S.A. Form 6-K Summary
Business Context and Reporting Period
This Form 6-K, filed on March 24, 2011, reports Embraer S.A.'s fourth-quarter and full-year 2010 results. This filing marks the company's first disclosure of financial information under International Financial Reporting Standards (IFRS), replacing US GAAP as the primary reporting basis. The company operates in Commercial Aviation, Executive Aviation, Defense and Security, and Aviation Services.
Key Financial Metrics (IFRS)
| Metric | 4Q 2010 | Full Year 2010 | Full Year 2009 |
|---|---|---|---|
| Net Revenues (US$ million) | 1,970.2 | 5,364.1 | 5,497.8 |
| EBIT (US$ million) | 132.4 | 391.7 | 379.4 |
| EBIT Margin | 6.7% | 7.3% | 6.9% |
| Net Income to Owners (US$ million) | 122.7 | 330.2 | 465.2 |
| Earnings per ADS (Basic) | $0.6782 | $1.8252 | $2.5714 |
| Operating Cash Flow (US$ million) | 578.1 | 873.8 | 3.6 |
| Net Cash Position (US$ million) | 691.8 | 691.8 | 487.9 |
| Total Debt (US$ million) | 1,434.8 | 1,434.8 | 2,058.3 |
Material Changes vs. Prior Period
- Deliveries: The company delivered 31 commercial and 61 executive aircraft in 4Q10, totaling 101 commercial and 145 executive aircraft for the full year 2010, surpassing annual guidance for all categories.
- Revenue: Full-year 2010 net sales of US$ 5,364.1 million exceeded the US$ 5,250 million guidance, though they were slightly lower than 2009's US$ 5,497.8 million.
- Profitability: EBIT margin improved to 7.3% in 2010 from 6.9% in 2009. However, Net Income decreased significantly year-over-year (from US$ 465.2 million to US$ 330.2 million) primarily due to a shift from a US$ 158.1 million tax credit in 2009 to a US$ 62.7 million tax expense in 2010.
- One-Time Items: 4Q10 Gross Margin was negatively impacted by US$ 62.3 million in inventory valuation charges related to pre-series aircraft. Conversely, 2009 results included a one-time US$ 103 million provision related to the Mesa Airlines bankruptcy, which improved the year-over-year comparison for "Other operating income."
- Liquidity: Net cash increased to US$ 691.8 million, driven by strong operating cash generation and a reduction in total loans by US$ 623.5 million throughout 2010.
Guidance, Outlook, and Risks
- 2011 Outlook: Embraer projects Net Sales of US$ 5.6 billion and EBIT of US$ 420 million (7.5% margin). Expected deliveries include 102 commercial jets, 100 light jets, and 18 large jets.
- Segment Mix: Commercial Aviation is expected to contribute US$ 3.1 billion, Executive Aviation US$ 1.2 billion, Defense US$ 600 million, and Services/Other US$ 700 million.
- Investments: Total investments for 2011 are projected at US$ 500 million, including US$ 90 million in research and US$ 200 million in CAPEX (which includes US$ 50 million postponed from 2010).
- Risks: Management cited political turmoil in the Middle East and the earthquake in Japan as potential risks to the recovery trend. The company also noted the impact of the Brazilian Real appreciation (11.7% in 2010) and a 10% wage increase at the end of 2010.
Investor Verification Checklist
- Verify the impact of the transition from US GAAP to IFRS on R&D capitalization and inventory valuation, noting the US$ 62.3 million charge in 4Q10.
- Confirm the sustainability of the 7.3% EBIT margin given the one-time tax benefit in 2009 and the shift to a tax expense in 2010.
- Monitor the execution of the 2011 delivery guidance (102 commercial, 100 light, 18 large jets) against the backdrop of slower recovery in the Executive jet market.
- Review the backlog of US$ 15.6 billion (equivalent to three years of revenue) for order flow stability in Commercial Aviation.
- Assess the debt profile, noting the average loan maturity of 6.3 years and the 27.9% of debt denominated in Reais.