Tax Woes Cut ERJ Profit

Embraer S.A.’s ( ERJ - Analyst Report ) second quarter of 2012 earnings per ADS (diluted) came in at 30 cents, missing the Zacks Consensus Estimate of 58 cents. This also compared unfavorably with earnings of 53 cents in the year-ago quarter.

The tapered earnings primarily resulted from deferred income taxes generated by the appreciation of the US Dollar, which negatively impacted net income.

Revenue

Net revenue in the quarter was $1717.3 million, up 26.4% year over year, driven by the delivery of 35 jets to the commercial aviation market and 20 to the executive aviation market (17 light jets and 3 large jets). Revenue surpassed the Zacks Consensus Estimate of $1487.0 million.

Commercial Aviation revenue accounted for 68.5% of total revenue, Defense and Security Business contributed around 15.5%, Executive Aviation 15.2%, and Others 0.8%.

Embraer's firm order backlog at the end of the second quarter of 2012 totaled $12.9 billion, down from $15.8 billion at the end of second quarter of 2011.

Margins

EBIT margin in the quarter was 11.5% compared with 7.8% in the year-ago quarter and 7.4% in the previous quarter. EBITDA in the quarter was recorded at $265.2 million, up 73.1% year over year, while EBITDA margin stood at 15.4%, rising from 11.3% in the year-ago quarter.

Balance Sheet

The company's net cash position was $290.2 million at the end of the reported quarter, down from $301.8 million at the end of the previous quarter. The drop in net cash position is an outcome of an increase in the company’s Trade accounts receivable and PP&E, as well as decrease in Advances from customers. The impacts were partially offset by increase in Trade accounts payable and a decrease in Inventories.

Cash and cash equivalents were $1685.5 million compared with $1436.6 million at the end of the prior quarter.

The company's total debt increased to $2155.8 million, up 8.4% year over year.

Cash Flow

Exiting the second quarter, Embraer’s net cash generated by operating activities was $189.1 million compared with $78.3 million in the previous year quarter.

Additions to property, plant and equipment came in at $75.5 million in the quarter compared with $92.9 million in the year-ago quarter and $39.6 million in the previous quarter. Free cash flow was recorded at 24.7 million versus negative $37.7 million in the year-ago quarter and negative $173.9 million in the previous quarter.

Brazil-based Embraer’s product portfolio supports strong customer orders worldwide. The company’s diversified global footprint offers tough competition to industry players 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. Furthermore, Embraer has a Zacks # 3 Rank, which translates into a short-term (1-3 months) ‘Hold’ rating.