Embraer S.A. Second Quarter 2011 Financial Summary
Business Context and Reporting Period
This Form 6-K filing covers Embraer S.A.'s unaudited financial results for the second quarter of 2011 (ended June 30, 2011) and the first half of 2011. The company operates in three primary segments: Commercial Aviation, Executive Aviation, and Defense and Security. The reporting period reflects a recovery in the commercial aviation market and continued growth in executive and defense sectors.
Key Financial Metrics
| Metric (US$ Millions) | 2Q11 | 2Q10 | YTD 2011 |
|---|---|---|---|
| Revenues | 1,358.6 | 1,357.9 | 2,414.3 |
| Gross Margin | 22.4% | 20.2% | 23.2% |
| EBIT | 105.6 | 121.9 | 199.9 |
| EBIT Margin | 7.8% | 9.0% | 8.3% |
| EBITDA | 153.1 | 166.1 | 309.4 |
| EBITDA Margin | 11.3% | 12.2% | 12.8% |
| Net Income (Attributable) | 96.4 | 57.4 | 201.5 |
| EPS - ADS Basic | $0.5328 | $0.3173 | $1.1138 |
| Net Cash Position | 406.3 | 652.4 | 406.3 |
| Total Debt | 1,719.9 | 1,523.4 | 1,719.9 |
Material Changes vs. Prior Period
- Deliveries: Total deliveries in 2Q11 were 48 aircraft (25 Commercial, 23 Executive), compared to 69 in 2Q10. Commercial deliveries decreased from 29 to 25, while Executive deliveries decreased from 40 to 23.
- Profitability: Net income attributable to shareholders increased 68% year-over-year to $96.4 million, driven primarily by a significant reduction in income tax expense ($32.3M in 2Q11 vs. $66.5M in 2Q10) due to exchange rate effects.
- Margins: Gross margin improved to 22.4% from 20.2% in the prior year quarter, aided by productivity gains and product mix, partially offsetting the impact of the Brazilian Real's appreciation.
- Liquidity: Net cash decreased by $98.6 million to $406.3 million. This was driven by increased working capital requirements (inventories and receivables) and investments in Orbisat and Atech.
- Debt: Total debt increased to $1.72 billion to support working capital needs. The average loan maturity decreased to 5 years.
Guidance, Outlook, and Management Commentary
- Guidance Revision: Management revised 2011 full-year guidance upward:
- Revenue: Increased from $5.6 billion to $5.8 billion.
- EBIT: Increased from $420 million to $465 million (Margin: 7.5% to 8%).
- EBITDA: Revised to $700 million (Margin: 12%).
- Development Investment: Reduced from $210 million to $160 million.
- Commercial Aviation: The E-Jets order book reached a milestone of 1,000 firm orders. The company booked 62 firm orders in 1H11 and signed agreements for an additional 42 E-Jets expected to be added to the backlog.
- Executive Aviation: Market recovery is in early stages. Notable developments include a contract for three Legacy 650s and a Memorandum of Understanding for up to 20 executive jets with a Chinese financial leasing company.
- Defense and Security: Progress continues on the KC-390 program (first flight expected 2014) and modernization of F-5 and A-4 fleets. Deliveries of Super Tucano to Indonesia are scheduled to begin in 2012.
- Cash Flow Outlook: Free cash flow was negative $163.3 million year-to-date. Management expects this to reverse in the second half of 2011 as inventory levels decrease with recovering deliveries.
Investor Verification Checklist
- Backlog Conversion: Verify the conversion rate of the 42 signed agreements for E-Jets into firm orders to confirm the revised revenue guidance.
- Working Capital Trends: Monitor inventory levels and trade receivables in 3Q11 to confirm the projected reversal of negative free cash flow.
- Exchange Rate Sensitivity: Assess the impact of the Brazilian Real's volatility on future operating expenses and tax provisions, given the significant tax benefit realized in 2Q11.
- Development Costs: Confirm that the reduction in development investment to $160 million does not delay the Legacy 450/500 or KC-390 programs.
- Debt Profile: Review the maturity profile of the increased debt load ($1.72B) and the cost of Real-denominated loans, which rose to 6% p.a.