Embraer Releases First Quarter 2010 Results In US GAAP

SAO JOSE DOS CAMPOS, Brazil, April 29 /PRNewswire-FirstCall/ --

HIGHLIGHTS:

• Embraer's jet deliveries totaled 41 aircraft in the 1st quarter 2010 (1Q10): 21 commercial jets, 19 executive jets, and one for defense;
• Backlog of US$ 16.0 billion – over three times current annual revenue;
• 1Q10 Net sales reached US$ 990 million, and Gross margin improved from 18.2% in 1Q09 to 21.7% in 1Q10;
• 1Q10 EBIT(1) and EBITDA(2) margins were 5.8% and 8.1% respectively - in line with the 6% EBIT margin guidance and higher than EBITDA margin projection of 7.5%;
• Net cash(3) position remained solid at US$ 458.6 million;
• Net income attributable to Embraer totaled US$ 35.3 million in 1Q10 as opposed to a loss of US$ 23.4 million in 1Q09.

(BM&FBOVESPA: EMBR3, NYSE: ERJ) The Company's operating and financial information is presented, except where otherwise stated, on a consolidated basis in United States dollars (US$) in accordance with US GAAP. The financial data presented in this document as of and for the quarters ended March 31, 2009 (1Q09), December 31, 2009 (4Q09) and March 31, 2010 (1Q10), are derived from the unaudited financial statements, except where otherwise stated.

NET SALES AND GROSS MARGIN

As a result of a smaller number of aircraft delivered in 1Q10 compared to 1Q09, and a different mix of products, Net sales came down from US$ 1,154.1 million in 1Q09 to US$ 990.1 million in 1Q10. In terms of Gross profit, the reduction was offset by a good revenue mix, in which defense and service contributed with 33.4% of the quarter's revenue while the average participation of those segments in 2009 was 19.9%. In addition to the revenue mix, the Company's efforts to continuously enhance its productivity have also contributed to improve the Gross margins. Hence, 1Q10 Gross profit achieved US$ 215.2 million or 2.7% higher than 1Q09, and Gross margin reached 21.7% in the quarter.

EBIT

The EBIT and EBIT margin were US$ 57.4 million and 5.8% respectively. Operating income margin was higher than 1Q09; even adjusting 1Q09 margin by the one-time expenses related to the Company's restructuring costs. It is important to mention that a portion of the operating expenses are Reals denominated and the appreciation of the Real against the US dollar of 22% from 1Q09 to 1Q10 impacted those expenses. R&D expenses totaled US$ 36.6 million, which, in annualized basis, would amount US$ 146.4 million and they are in line with the Company's projections of US$ 160 million for the entire year. Selling expenses increased by 30.9% in 1Q10 compared to 1Q09, due to the increase in executive jet deliveries that required additional customer support efforts and the exchange rate effects already mentioned. The increase in the commercial activities, which reflect some improvement in the marketplace and in the demand for jets, also impacted the Company's Selling expenses. General and administrative expenses were reduced by US$ 1.9 million and amounted to US$ 35.1 million at the end of the quarter. Other operating expenses and incomes compensated each other during the quarter and had a neutral result for the period.

NET INCOME

Net income attributable to Embraer was US$ 35.3 million for the period. The Net margin achieved 3.6%, and was 5.6 points higher than the Net margin for the same period of 2009.

MONETARY BALANCE SHEET ACCOUNTS AND OTHER MEASURES

Embraer's operating cash flow was negative in the first quarter of the year, mainly, due to an increase in Trade accounts receivable. An increase in Inventory and Trade accounts receivable were partially offset by reductions in Trade account payables and increases in Advances from customers. Therefore, the Company had an Operating cash outflow of US$ 46.1 million in 1Q10.

Investments in capital expenditures totaled US$ 13.6 million in the quarter, but will tend to increase towards the end of the year, as the Company advances with the Legacy 450 and 500 programs. Therefore, the Embraer's projection for the year is maintained at US$ 140 million, although 1Q10 CAPEX is below the Company's projections on an annualized basis.

As a consequence of the foregoing, the Company's Net Cash position remained strong at US$ 458.6 million in 1Q10, and the Company's Total cash position(4) amounted to US$ 2.3 billion at the end of the quarter.

As already mentioned, cash allocation continues to be quite important within the Company's investment and hedging strategies. "One of our goals in the treasure department is to keep an adequate level of cash in Reals denominated assets, so that we can neutralize the currency and interest rate exposures on our assets and liabilities", said Luiz Carlos Aguiar, Embraer CFO. In the first quarter, 48% of the Company's total cash was denominated in Reals and the remaining portion was primarily stated in US dollars.

The Embraer's finance strategy was also responsible for the improvements in results of the financial activities on the last few quarters. In 1Q10, the contribution of financial activities(5) totaled US$ 8.7 million out of the Company's pre-tax results. Financial activity performance has been continuously enhanced over the last few quarters, coming from a negative result in the first quarter of 2009 to a positive result of US$ 7.6 million in 4Q09.

As the Company continued to reshape its indebtedness profile(6) by paying its short-term debts as they mature, average tenor has increased from 4.9 years to 5 years from 4Q09 to 1Q10. As a result, long-term debt came to 74.5% of the Company's total indebtedness, and short-term debt represented 25.5% on March 31, 2010. On the debt cost side, the Company successfully managed to reduce the average cost of its Real denominated debt from 7.37% to 7.04%, and the average cost of its US dollar debts from 4.53% to 4.33%, in the last quarter.

OPERATIONAL BALANCE SHEET ACCOUNTS

Inventories were almost flat accumulating an increase of 0.8% during the quarter. On the other hand, Trade accounts payable was up by more than US$ 50 million, and more than offset the increase in Inventories. As the Company's production rate remains stable, it is expected that those two accounts will also remain relatively stable during the following quarters. Advances from customers also increased by approximately US$ 58 million, but their positive effect on the Company's working capital was offset by a larger change in Trade account receivable.

Property, plant and equipment decreased by US$ 10.8 million mainly due to the difference between Depreciation, which totaled US$ 22.5 million, and investments in CAPEX, which were smaller than the 2010 projections on an annualized basis. As mentioned in the previous section, investments in CAPEX tend to increase, in the following quarters, to match the needs of certain programs, especially the Legacy 450 and 500.

SEGMENT RESULTS

The breakdown of 1Q10 net revenue was very positive to the Embraer's results. The defense and services participation was larger than in the past quarters and totaled more than 33% out of the total revenue. Commercial aviation participation achieved 52.9% and is likely to range that figure throughout the year. On the other hand executive aviation shall contribute more towards the second half of the year as Phenom 300 production ramp up and Legacy 650 starts delivery.

COMMERCIAL AVIATION

Commercial aviation deliveries continued to be affected by the global crisis. Although, the global economy is recovering, 1Q10 deliveries totaled 21 aircraft or five aircraft less than the previous quarter. In terms of aircraft demand, the effects of the recovery can be perceived from the total number of Embraer's on-going sales campaigns, which is more than 2.5 times higher than in the last quarter of 2009.

In the beginning of April 2010, Embraer and Austral Lineas Aereas confirmed a purchase agreement and, consequently, 17 EMBRAER190s will be added to the backlog on the next quarter revision.

EXECUTIVE AVIATION

Executive aviation deliveries in 1Q10 totaled 19 aircraft, among which 16 Phenom 100s – including the delivery of the 100th Phenom 100, one Phenom 300, and two Legacy 600s. Deliveries reductions can be explained by (i) some seasonal effects, (ii) ramp-up in the production of the Phenom 300, and (iii) Legacy 650 deliveries that will start only in the second half of 2010. The sales environment continues to be weak despite a consistent, but slow, recovery of the market.  More than 850 aircraft with less than 10 years of operation are available for sale in the secondary market and more than half of those are less than five years old. In the coming months, the secondary market is expected to continue its recovery, which shall positively impact new aircraft sales.

The Legacy 450 and 500 development program continues on track. In January, the Company concluded its second Man-Machine Interface Advisory Broad in which seasoned pilots and aircraft owners from around the world were heard and the majority of the suggestions were implemented in the final aircraft project. As Luis Carlos Affonso, Embraer Executive Vice President, Executive Jets, said, "Listening to our customers has been an Embraer trade mark. I believe this is the right attitude to have when designing products that respond to market needs, and are intended to always provide customers with a remarkable ownership experience."

DEFENSE

The defense market shows a scenario that is favorable for growth, with a series of campaigns underway in terms of transportation for officials and authorities; training and light attack; intelligence, surveillance and reconnaissance systems; aircraft modernization; military transportation; and systems and services. In January, Embraer confirmed the sale of a Legacy 600 to the Panamanian government, which was delivered, already, in  January 2010. The Ecuadorian Air Force received its first four Super Tucano aircraft during the first quarter of 2010.

As for the modernization programs, the test campaigns of the first prototype of the AMX, for the A-1M modernization program, started at the beginning of the year, and in January 2010 Embraer received the first A-4 fighter, at Gaviao Peixoto, from the Brazilian Navy for its modernization project.

The KC-390 development program is now in the final phase of preliminary studies, and both the technical and contractual aspects, as well structuring partnerships and seeking suppliers are on schedule. Wind tunnel tests that have already been performed have confirmed the project's premises, and ground tests with real payloads are expected to begin using a full-size mock-up of the cargo area. The AEW India program is moving ahead as planned and, in March, the fuselage joining was performed for the first of three aircraft purchased.

AVIATION SERVICES AND OTHER BUSINESSES

During the first quarter, Embraer continued expanding its services infrastructure to better support its customers in all market segments. Embraer and Flight Safety signed an agreement for training pilots of all mid-size and large jets, including the Legacy 450 and 500 and all commercial jets. Two new service centers were authorized, one in the US and the other in Australia. In addition, Embraer's service centers in the US were granted the FAA Diamond Award in April 2010, which certainly demonstrates Embraer's commitment to customer's satisfaction.

TOTAL BACKLOG

Embraer's firm order backlog totaled US$ 16.0 billion, or 3.2 years of current annual revenue.

ADOPTION OF IFRS

As mentioned in the previous earnings release, the Brazilian accounting standard is changing and IFRS will become Brazil's new accounting standard. Due to these changes, all Brazilian companies must post their 2010 annual report in compliance with this new accounting standard. Embraer, as a Brazilian Company, is planning to post its financial statements in IFRS, along with the USGAAP financial statements in the second and third quarter of 2010. Embraer's 2010 annual report will be posted in IFRS in US dollars, and the unaudited US GAAP statements will be released as a reference only. After this transition period, Embraer intends to adopt one single practice and its financial statements will only be released in IFRS in US dollar. The Company believes that this procedure will help investors and the financial community to better understand the differences in practices between the two standards and will facilitate the transition to IFRS without disrupting the understanding of the Company's operations and financial position.

CONFERENCE CALL INFORMATION

Embraer will host a conference call to present its 1Q10 Results in US GAAP on April 30, 2010. The conference call will also be broadcast live over the web at www.embraer.com/ir

ABOUT EMBRAER

Embraer (Empresa Brasileira de Aeronautica S.A. -NYSE: ERJ; BM&FBovespa: EMBR3) is the world's largest manufacturer of commercial jets up to 120 seats, and one of Brazil's leading exporters. Embraer's headquarters are located in Sao Jose dos Campos, Sao Paulo, and it has offices, industrial operations and customer service facilities in Brazil, China, France, Portugal, Singapore, and the United States. Founded in 1969, the company designs, develops, manufactures and sells aircraft for the commercial aviation, executive aviation, and defense segments. The Company also provides after sales support and services to customers worldwide. On March 31, 2010, Embraer had a workforce of 16,792 employees – not counting the employees of its partly owned subsidiaries – and its firm order backlog totaled US$ 16 billion.

This document may contain projections, statements and estimates regarding circumstances or events yet to take place. Those projections and estimates are based largely on current expectations, forecasts on future events and financial tendencies that affect Embraer's businesses. Those estimates are subject to risks, uncertainties and suppositions that include, among others: general economic, political and trade conditions in Brazil and in those markets where Embraer does business; expectations on industry trends; the company's investment plans; its capacity to develop and deliver products on the dates previously agreed upon, and existing and future governmental regulations. The words "believe", "may", "is able", "will be able", "intend", "continue", "anticipate", "expect" and other similar terms are supposed to identify potentialities. Embraer does not feel compelled to publish updates nor to revise any estimates due to new information, future events or any other facts. In view of the inherent risks and uncertainties, such estimates, events and circumstances may not take place. The actual results can therefore differ substantially from those previously published as Embraer expectations.

(1) EBIT is a non-GAAP measure and is equal to the income from operations as presented in Embraer's Income Statement and EBIT margin is equal to EBIT divided by Net Sales

(2) EBITDA is a non-GAAP measure. For a more detailed information please refer to page 12.

(3) Net cash is equal to Cash and cash equivalents plus Temporary cash investments minus Loans short-term and long-term.

(4) Total cash position is equal to the sum of Cash and cash equivalent and Temporary cash investments.

(5) Contribution of the financial activities corresponds to the sum of interest income (expense), net and Foreign exchange gain (loss), net.

(6) Some financial ratios have changed due to the changes in the debt profile and are presented on page 12.

SOURCE Embraer-Empresa Brasileira de Aeronautica S.A.