Embraer S.A. First 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 first quarter of 2012 (ended March 31, 2012). Embraer is a global manufacturer of commercial jets, executive jets, and defense and security aircraft. The company operates in three primary segments: Commercial Aviation, Executive Aviation, and Defense and Security.
Key Financial Metrics
| Metric (US$ Millions) | 1Q12 | 1Q11 | 4Q11 |
|---|---|---|---|
| Revenues | 1,155.9 | 1,055.7 | 2,025.1 |
| Gross Margin | 23.2% | 24.3% | 22.5% |
| EBIT | 85.7 | 94.3 | (5.9) |
| EBIT Margin | 7.4% | 8.9% | -0.3% |
| EBITDA | 148.1 | 156.3 | 59.2 |
| EBITDA Margin | 12.8% | 14.8% | 2.9% |
| Net Income (Attributable to Embraer) | 62.7 | 105.1 | (91.8) |
| Earnings per ADS (Basic) | $0.3463 | $0.5810 | ($0.5072) |
| Net Cash Position | 301.8 | 504.9 | 445.7 |
| Total Debt | 1,988.2 | 1,513.8 | 1,658.1 |
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 9.5% year-over-year (YoY) to $1,155.9 million, driven by higher aircraft deliveries (21 commercial and 13 executive jets in 1Q12 vs. 20 commercial and 8 executive in 1Q11) and growth in the Defense and Security segment.
- Profitability Decline: Despite revenue growth, Net Income dropped 40% YoY to $62.7 million. The Net Margin contracted to 5.4% from 10.0% in 1Q11. This was primarily due to higher financial expenses and a shift from income tax income in 1Q11 to income tax expense in 1Q12 (due to the absence of tax-deductible interest on equity dividends in 1Q12).
- Operating Expenses: Selling expenses rose 15% YoY due to customer support network expansion. Administrative expenses increased due to a 10% wage settlement in Brazil, which was not fully offset by Real depreciation.
- Liquidity and Debt: Net cash decreased by $143.9 million to $301.8 million. Total debt increased to $1,988.2 million, driven by a significant rise in short-term loans (from $251.8M to $526.9M) to support working capital needs.
- Cash Flow: Operating cash flow turned negative at -$128.9 million, compared to positive $62.1 million in 1Q11, largely due to a $364.4 million increase in inventories.
Guidance, Outlook, and Risks
- Delivery Guidance: Management expects to meet its 2012 aircraft delivery guidance, which should lead to inventory reductions and improved operating cash flow in the remainder of the year.
- Investment Outlook:
- CAPEX: Expected to be in line with the $200 million outlook for 2012.
- R&D: Research expenses are expected to align with the $100 million outlook; Development investments are expected to align with the $350 million outlook.
- Program Updates: The Legacy 500 first flight is scheduled for Q3 2012. The USAF Light Air Support (LAS) contract award was canceled in February 2012 due to documentation issues; a new RFP is expected in Q2 2012 with an award expected in 2013.
- Risks and Contingencies:
- Residual Value Guarantees: A $11 million provision was recorded for residual value guarantee obligations, impacting financial results.
- Working Capital: High inventory levels are currently straining cash flow, though management anticipates improvement as deliveries ramp up.
- Exchange Rates: The company utilizes cash allocation strategies to mitigate exposure between the Brazilian Real and US Dollar.
Investor Verification Checklist
- Inventory Turnover: Verify the timeline for inventory reduction to confirm the projected improvement in operating cash flow.
- Debt Structure: Review the maturity profile of the increased short-term debt ($526.9M) and its impact on future interest expenses.
- USA LAS Program: Monitor the status of the new Request for Proposals (RFP) for the US Air Force Light Air Support program following the February cancellation.
- Tax Volatility: Assess the impact of Brazilian tax regulations regarding interest on equity dividends on future net income margins.
- Legacy 500 Timeline: Confirm the Q3 2012 first flight schedule for the Legacy 500 program to ensure no delays affect future revenue recognition.