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Embraer Q3 Earnings Disappoint

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Embraer SA’s (ERJ - Free Report) third-quarter earnings of 20 cents per American Depository Shares (ADS) plummeted 48.7% year over year from the year-ago profit of 39 cents per ADS. The reported figure also missed the Zacks Consensus Estimate of 47 cents by 57.4%. The weak performance reflects lower commercial aviation deliveries during the quarter.

Shares of the Brazilian jet maker Embraer dropped 2.6% to $29.39 on Oct 31 in the wake of weak third quarter 2013 results.

Operational Highlights

Net revenue in the quarter was $1,288.2 million, down from $1,402.4 million in the year-ago quarter. Reported revenue also fell short of the Zacks Consensus Estimate of $1,424.0 million.

In the quarter ending Sep 30, the plane maker delivered a total of 44 jets, which fell short of the 51 deliveries made in the last quarter.

However, the quarterly deliveries exceeded the year-ago level of 40. Of the total deliveries this quarter, 19 jets were made to the commercial aviation market including 9 of E-190, 9 E-175 and 1 E-170, while the remaining 25 jets were delivered to executive aviation inclusive of 21 Light and 4 Large jets. The company noted that though its backlog includes demand for its defense and security business, it does not report quarterly deliveries of military aircraft.

With growing demand for regional aircraft, Embraer’s firm order backlog totaled $17.8 billion, reflecting an increase of 4.1% from the last reported quarter. This marked a four-year high in the company’s backlog history. In terms of aircraft breakdown, Embraer’s order backlog comprises 140 E-175, 100 E-175-E2, 78 E-190, 25 E-195-E2, 25 E-190-E2, 22 E-195 and 6 E-170 jets.

Segment Details

Commercial Aviation revenues, comprising 53.4% of total revenue, declined 28.1% year over year to $687.4 million.

Executive Aviation, representing 24.4% of total quarterly revenue, delivered 19 jets compared with 27 in the third quarter of 2012. Segment revenues grew 88.1% year over year to $314.8 million.

Defense & Security generated revenues of $266.8 million that accounted for 20.7% of total third-quarter sales and increased 4.0% from the year-ago period.

The Other category accounted for 1.5% of total second quarter revenue, declining almost 13.1% year over year to $19.2 million.

Balance Sheet

Cash and cash equivalents were $1,630.3 million at the end of the reported quarter compared with $1,647.4 million at the end of the second quarter of 2013.

As of Sep 30, 2013, the company's total debt was $2,186.5 million, down from $2,224.2 million as of Jun 30, 2013. Exiting the third quarter 2013, Embraer’s net cash from operating activities was $200.5 million versus $109.8 million in third quarter 2012. Capital expenditure was $106.2 million, up from $50.2 million in the third quarter of 2012.


The company reaffirmed its 2013 guidance and expects to meet the lower end of its delivery target. It expects Defense & Security and Executive Aviation segments to represent a larger portion of the total revenue in 2013 compared with 2012.

In February, Embraer had projected total revenue in the range of $5.9 billion to $6.4 billion for 2013. It also expects to deliver 90 to 95 commercial jets, 80 to 90 light executive jets and 25 to 30 large executive jets this year.

The company also expects to realize an EBIT margin between 13% and 14% for the year.

Capital expenditure is expected at around $ 180 million for 2013.

Our Take

Embraer is the world's third largest commercial aircraft manufacturer following The Boeing Co. (BA - Free Report) and Europe's Airbus. The company demonstrated weak performances during the third quarter, and maintained its outlook for 2013. Although deliveries were higher year over year in the third quarter, it was not up to expectations. A poor mix reflecting more of executive jets and smaller aircraft cut into profit margins. Again, it had earlier projected delivery of 90 to 95 commercial jets, 80 to 90 light executive jets and 25 to 30 large executive jets this year. Hence, Embraer will have to deliver 32 to 37 jets in the fourth quarter to meet its guidance of 90 to 95 commercial jets for the year, which indeed is a steep climb.

Embraer SA has a Zacks Rank #5 (Strong Sell). However, there are other stocks in the space that are performing well, with a favorable Zacks Rank. These are Lockheed Martin Corp. (LMT - Free Report) and Northrop Grumman Corp. (NOC - Free Report) , each with a Zacks Ranks #2 (Buy).

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