ERJ Revs Up, Misses Estimate

On November 2, Embraer S.A (ERJ - Analyst Report) reported financial results for the third quarter of 2011. Diluted earnings per ADS in the quarter were recorded at 1 cent, down from 70 cents in the year-ago quarter. Results missed the Zacks Consensus Estimate of 50 cents.

The reported loss may be attributable to higher taxes resulting from Brazilian currency fluctuation against dollars, which raised the value of dollar-denominated assets.

Revenue

Net revenue in the quarter was $1,363.6 million, up from $1,044.0 million in 3Q10, based on the delivery of 28 jets to the commercial aviation market and 18 to the executive aviation market (17 light jets and 1 large jet). The revenue, however, missed the Zacks Consensus Estimate of $1,444 million.

Commercial Aviation revenue accounted for 73.1% of total revenue, Defense and Security Business contributed around 13.9%, Executive Aviation 11%, and Others 2%.

Embraer's firm order backlog at the end of 3Q11 totaled $16 billion, primarily driven by sales activities in executive aviation; slightly down sequentially from $15.8 billion in the previous quarter.

Margins

Gross margin grew marginally from 20.5% in 3Q10 to 21.2% in the reported quarter, based on the company’s efforts to improve productivity and efficiency.

EBIT margin in the quarter was 9.1% compared with 6.4% in the year-ago quarter and 7.8% in the previous quarter. EBITDA in the quarter was recorded at $188.3 million, up from $130.6 million in the year-ago comparable quarter, while margin stood at 13.8%, marginally up from 12.5% in the year-ago quarter.

Balance Sheet

Exiting the third quarter, Embraer’s net cash position was recorded at $193.4 million, down compared with $406.3 million in the pervious quarter; mainly as a result of increased inventories. Cash and cash equivalents were $1,434.1 million compared with $1,350.9 million in the previous quarter.

During the reported quarter, the company's total debt increased to $1,810.6 million compared with $1,719.9 million in the previous quarter.

Cash Flow

The company’s net cash generated by operating activities reached $161.1 million in 2Q11, up from $78.3 million in the previous quarter and from $89.8 million in the year-ago quarter. Capital spending was $72.8 million, up from $39.1 million in the year-ago quarter and down from $92.9 million in the previous quarter. Free cash flow was recorded at ($111.9) million in the reported quarter versus a positive ($65.9) million in the year-ago quarter and ($37.7) million in the previous quarter.

Guidance

The company reaffirmed its 2011 revenue guidance from $5.6 billion to $5.8 billion. The EBIT and EBITDA guidance remain unchanged at $ 465 million and $ 700 million, respectively. Management expects the EBIT and EBITDA margins to settle above the current guidance of 8% and 12%, respectively.

Embraer S.A designs, manufactures and sells aircraft and aviation-related structural parts to the world’s commercial aviation, executive aviation and defense markets. The company’s product portfolio supporting strong customer orders and diversified global footprint, gives a tough competition to its peers, such as Boeing Co. (BA - Analyst Report), Lockheed Martin Corporation (LMT - Analyst Report), Northrop Grumman Corporation (NOC - Analyst Report), etc.

We currently maintain a long-term Outperform recommendation on the stock. Embraer has a Zacks #2 Rank, which translates into a short-term Buy rating (1-3 months).

Read the full analyst report on ERJ

Read the full analyst report on NOC

Read the full analyst report on BA

Read the full analyst report on LMT