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Analyst Blog

Yesterday after market close, Embraer S.A. (ERJ - Analyst Report) reported financial results for the fourth quarter and fiscal year 2011. Loss per ADS in the quarter was 51 cents per share, down drastically from earnings per ADS of 68 cents per share in the year-ago quarter. Results missed the Zacks Consensus Estimate of earnings of 71 cents.

The reported loss may be attributable to the provision of $360.7 million due to the Chapter 11 bankruptcy of Embraer’s key client American Airlines (“AMR”), which washed out the effect of revenue growth and an improved mix of deliveries.

For fiscal 2011, earnings per ADS were 62 cents per share, down from $1.83 per share earned a year ago.

Revenue

Net revenue in the quarter was $2,025.1 million, up from $1,970.2 million in the year-ago quarter, driven by delivery of 32 commercial and 50 executive aircrafts, with a total delivery of 105 commercial and 99 executive aircrafts (83 light jets and 16 large jets) by the year end. Reported revenue beat the Zacks Consensus Estimate of $1,977 million.

Commercial Aviation revenue accounted for 53.2% of total revenue, Defense and Security Business contributed around 14.5%, Executive Aviation 29.8%, and Others 2.5%.

Embraer's firm order backlog at the end of 2011 totaled $15.4 billion, primarily driven by delivery of commercial and executive aircrafts, slightly down from $16 billion in the sequentially prior quarter.

For fiscal 2011, net revenue at $5,803.0 million rose from $5,364.1 million recorded in the prior year.

Margins

EBIT margin in the quarter was a negative 0.3% compared with gains of 6.7% in the year-ago quarter and 9.1% in the previous quarter. EBITDA in the quarter was recorded at $59.2 million, down from $197.2 million in the year-ago comparable quarter, while EBITDA margin stood at 2.9%, drastically down from 10.0% in the year-ago quarter.

In the fiscal year, gross margin grew to 22.5% from 19.1% a year ago, based on the company’s efforts to improve productivity and efficiency.

Balance Sheet

Despite significant cash generation during the final quarter of the year, the company's net cash position was $445.7 million at the end of 2011, down from $691.8 million, a year ago. Cash and cash equivalents were $1,350.2 million at the end of 2011 compared with $1,393.1 million at 2010 end.

At the end of 2011, the company's total debt decreased to $1,658.1 million from $1,810.6 million in the previous quarter.

Cash Flow

Exiting the fourth quarter, Embraer’s net cash generated from operating activities was $178.7 million, up from $161.1 million in the previous quarter.

Capital spending increased to $76.8 million in the quarter from $65.8 million in the year-ago quarter and $72.8 million in the previous quarter. Free cash flow was recorded at $276.6 million in the reported quarter versus $193.2 million in the year-ago quarter and ($11.9) million in the preceding quarter.

Brazil-based 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 a diversified global footprint offer tough competition to peers of the likes of Boeing Co. (BA - Analyst Report), Lockheed Martin Corporation (LMT - Analyst Report), and Northrop Grumman Corporation (NOC - Analyst Report).

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

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