Embraer S.A. Third Quarter 2012 Financial Summary
Business Context and Reporting Period
This Form 6-K filing reports the unaudited financial results for Embraer S.A. for the third quarter ended September 30, 2012 (3Q12), and the year-to-date period (9M12). Embraer is a global manufacturer of commercial, executive, and defense aircraft. The company operates in Brazil, China, France, Portugal, Singapore, and the U.S.
Key Financial Metrics
| Metric (in millions USD) | 3Q12 | 3Q11 | 9M12 YTD |
|---|---|---|---|
| Revenues | 1,404.5 | 1,363.6 | 4,277.7 |
| Gross Margin | 25.3% | 21.2% | 24.0% |
| EBIT | 100.9 | 124.2 | 384.1 |
| EBIT Margin | 7.2% | 9.1% | 9.0% |
| EBITDA | 166.0 | 188.3 | 579.4 |
| EBITDA Margin | 11.8% | 13.8% | 13.5% |
| Net Income (Attributable to Shareholders) | 65.2 | 1.9 | 224.6 |
| Earnings per ADS (Basic) | $0.3594 | $0.0103 | $1.2380 |
| Net Cash Position | 123.2 | 193.4 | 123.2 |
| Total Debt | 2,085.2 | 1,810.6 | 2,085.2 |
Material Changes and Operational Highlights
- Deliveries: Embraer delivered 27 commercial jets and 13 executive jets (11 light, 2 large) in 3Q12. Year-to-date deliveries totaled 83 commercial and 46 executive aircraft.
- Segment Mix: Defense and Security revenues increased to 18.4% of total revenue in 3Q12, up from 13.9% in 3Q11, driven by strong growth in this segment. Commercial Aviation represented 68.1% and Executive Aviation 11.9%.
- Margin Drivers: Gross margin improved to 25.3% due to a favorable product mix, Brazilian stimulus packages reducing payroll costs, and the depreciation of the Brazilian Real against the US dollar.
- Non-Recurring Items: Reported EBIT and EBITDA margins were impacted by a $41.9 million charge related to the restructuring of financing arrangements with Chautauqua Airlines Inc. Excluding this item, EBIT and EBITDA margins would have been 10.2% and 14.8%, respectively.
- Cash Flow: Net cash decreased by $167 million to $123.2 million, primarily due to increased inventories, investments in PP&E, and a $49.5 million payment related to financial guarantees for American Airlines' Chapter 11 restructuring.
Guidance, Outlook, and Risks
- Guidance: Management believes the company is in line to meet its 2012 revenue and operating margin guidance, citing a strong expected mix of revenues and products in the fourth quarter.
- Cash Flow Outlook: Free cash flow is expected to recover in 4Q12 as aircraft deliveries, particularly in executive aviation, increase, driving a reduction in inventories.
- Regulatory Risks: The company is cooperating with ongoing investigations by the U.S. Securities and Exchange Commission (SEC) and the Department of Justice (DOJ) regarding potential non-compliance with the Foreign Corrupt Practices Act (FCPA). Management states it is not possible to estimate the duration, scope, or results of these investigations or to quantify potential fines.
- Strategic Updates: Embraer opened two new Centers of Excellence in Évora, Portugal, and was listed on the Dow Jones Sustainability Index for the third consecutive year.
Investor Verification Checklist
- Verify the impact of the $41.9 million Chautauqua Airlines restructuring charge on future quarters and the likelihood of similar non-recurring items.
- Monitor the progress of the SEC and DOJ FCPA investigations and any potential financial penalties or sanctions.
- Assess the sustainability of the 25.3% gross margin given the specific mix of Defense and Security revenues and the volatility of the Brazilian Real.
- Review the trajectory of inventory levels and free cash flow recovery in 4Q12 as projected by management.
- Confirm the status of the American Airlines financial guarantee payments and any remaining exposure.