Embraer Releases Third Quarter 2010 Results in US GAAP

Oct 28, 2010, 16:30 ET from Embraer

SAO JOSE DOS CAMPOS, Brazil, Oct. 28 /PRNewswire-FirstCall/ -- The Company's (NYSE: ERJ; BM&FBOVESPA: EMBR3) 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 September 30, 2009 (3Q09), June 30, 2010 (2Q10) and September 30, 2010 (3Q10), are derived from the unaudited financial statements, except where otherwise stated. For 3Q10, Embraer is also posting its selected financial information in IFRS in this earnings release.

HIGHLIGHTS:

  • Embraer's jet deliveries totaled 44 aircraft in the 3rd quarter 2010 (3Q10). As a result, Net sales for the period were US$ 1,042.6 million and, due to gains in productivity, Gross margin reached 22.1%;
  • 3Q10 EBIT(1) and EBITDA(2) margins were 6.0% and 7.7% respectively, bringing the year-to-date EBIT margin to 7.3%, above current annual guidance;
  • 3Q10 Net income attributable to Embraer and Earnings per ADS totaled US$ 98.5 million and US$ 0.5443, respectively, compared to US$ 57.7 million and US$ 0.3189 in 3Q09;
  • Firm order backlog remained stable at US$ 15.3 billion, as a result of improved order environment, mainly in commercial aviation;
  • Solid Net cash position of US$ 623.8 million, in 3Q10, compared to US$ 658.7 million in 2Q10.

MAIN FINANCIAL INDICATORS:

in millions of U.S. dollars, except % and per share data

USGAAP

2Q10

3Q09

3Q10

YTD10

Net Sales

1,354.3

1,246.0

1,042.6

3,387.1

EBIT

125.7

68.0

62.7

245.8

EBIT Margin %

9.3%

5.5%

6.0%

7.3%

EBITDA

138.6

89.9

80.1

298.6

EBITDA Margin %

10.2%

7.2%

7.7%

8.8%

Net income attributable to Embraer

70.3

57.7

98.5

204.1

Earnings per share - ADS basic (US$)

0.3884

0.3189

0.5443

1.1278

Net Cash

658.7

71.4

623.8

623.8

(1) EBIT is a non-GAAP measure and represents 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.

GUIDANCE REVISION

  • The Company is revising its 2010 EBIT and EBIT margin Guidance from US$ 340 million and 6.5% to US$ 380 million and 7.25%, respectively;
  • As a result, the Company is also revising its EBITDA and EBITDA margin projections from US$ 420 million and 8% to US$ 460 million and 8.75%, respectively.

NET SALES AND GROSS MARGIN

Embraer delivered a total of 44 aircraft in 3Q10, for an accumulated total of 154 aircraft delivered through the first nine months of 2010 (9M10). As a result, annual accumulated Net sales through 9M10 totaled US$ 3,387.1 million. The product mix of the third quarter, in addition to the Company's ongoing efforts to improve productivity and efficiency, positively impacted gross results. Along this line, Embraer's Gross margin was 22.1% for 3Q10 compared to 18.8% in 3Q09. This marks the third consecutive quarter in which the Company has achieved gross margin results above 20%. Following the certification of the Legacy 650, the majority of deliveries of Legacy aircraft is scheduled to take place during the 4th quarter (4Q10). Considering this and coupled with projected revenues from all segments, Embraer expects to meet its 2010 Net sales guidance.

EBIT

The 3Q10 EBIT and EBIT margin were US$ 62.7 million and 6.0%, respectively. Through 9M10, the accumulated Operating margin was 7.3%, which is in line with the Company's revised guidance. The Company continues to place significant focus on controlling its expenses and, as a result, year-to-date operating expenses through 9M10 were US$ 489.9 million, which is US$ 20.1 million less than for the same period in 2009, despite a stronger Real. It must be noted that a portion of the operating expenses are Real denominated and the appreciation of the Real against the US Dollar impacted those expenses. The average Real-to-Dollar exchange rate of the first three quarters of 2010 appreciated 14.4%, when compared to the average exchange rate for the same period in 2009. R&D expenses for 3Q10 totaled US$ 33.3 million, bringing total year-to-date R&D spending to US$ 95.1 million. Although Embraer has been able to control and optimize its R&D spending, it is important to note that all development programs remain on schedule. General & Administrative expenses for 3Q10 totaled US$ 52.6 million and are stable when compared to US$ 51.6 million spent in 3Q09. As the Company's worldwide fleet continues to grow, mainly in the executive aviation market, its customer support infrastructure is being scaled upwards to support such fleet growth and therefore Selling expenses reached US$ 91.0 million for 3Q10, compared to US$ 72.9 million in 3Q09.

NET INCOME

Net income attributable to Embraer and Earnings per ADS, for 3Q10, were US$ 98.5 million and US$ 0.5443, respectively. The Net margin achieved 9.4%, and was significantly higher when compared to the 4.6% Net margin achieved in 3Q09. The improvement in Net margin comes mainly from stronger financial results and the Income tax benefit, both of which contributed positively to Net income during 3Q10.

MONETARY BALANCE SHEET ACCOUNTS AND OTHER MEASURES

Embraer had a negative cash generation during 3Q10, however, the Company's Net cash position remained solid, totaling US$ 623.8 million. Operating cash flow in 3Q10 was negative mainly due to adjustments in the Company's operations in preparation for the higher number of expected deliveries in the 4Q10. As a consequence, the Company's Inventories increased during 3Q10 and its effects were partially offset by an increase in Trade accounts payable and a decrease in Trade accounts receivable.

in millions of U.S. dollars

3Q09

4Q09

1Q10

2Q10

3Q10

YTD10

OPERATING CASH FLOW

39.6

403.7

(46.1)

236.4

(38.5)

151.8

   Less Additions to property, plant and equipment (CAPEX)

(33.5)

(21.1)

(13.6)

(16.5)

(18.2)

(48.4)

FREE CASH FLOW*

6.1

382.6

(59.7)

219.9

(56.7)

103.4

(*) Free cash flow is a non-GAAP measure.

Investments in capital expenditures totaled US$ 18.2 million in the 3Q10. Accumulated CAPEX investments reached US$ 48.4 million, as of 3Q10. The Company expects CAPEX for 2010 to be below the year's guidance of US$ 140 million by 30% due mainly to adjustments in the schedule of certain investments that were postponed, without affecting the overall target dates of the respective programs.

in millions of U.S. dollars

Balance Sheet Data

(1)

(1)

(1)

3Q09

2Q10

3Q10

Cash and cash equivalents

1,393.1

1,115.2

1,044.4

Temporary cash investments

688.1

1,060.6

1,007.7

Total cash position

2,081.2

2,175.8

2,052.1

Loans short-term

947.0

326.4

80.7

Loans long-term

1,062.8

1,190.7

1,347.6

Total loans position

2,009.8

1,517.1

1,428.3

Net cash *

71.4

658.7

623.8

* Net cash = Cash and cash equivalents + Temporary cash investments - Loans short-term and long-term

(1) Derived from unaudited financial information.

During 3Q10, the Company continued to manage its debt profile and reduced its total debt to US$ 1,428.3 million. In line with the Company's strategy to optimize the mix of short and long-term loans, Embraer paid off a significant portion of its short-term loans while increasing long-term loans. Short and long-term loan outstanding balances were US$ 80.7 million and US$ 1,347.6 million respectively, at the end of 3Q10.

Considering the Company's current debt profile, the average loan maturity reached 6.1 years. Consequently, the cost of Dollar denominated loans increased from 5.0% to 6.0% p.a. and the cost of Real denominated loans remained stable going from 4.2% to 4.3% p.a. The Adjusted EBITDA to interest expenses (gross) ratio improved in 3Q10, compared to 2Q10, going from 3.75 to 4.03. As of 3Q10, 28.2% of total debt was denominated in Reais.

The Company's financial strategy is consistently contributing positively to net results and during 3Q10, such contribution totaled US$ 10.6 million bringing the total year-to-date financial contribution to US$ 24.8 million.

Embraer's cash allocation management strategy continues to be the most important tool to mitigating exchange rate fluctuation risks. In other words, by balancing cash allocation in Reais and Dollar denominated assets, the Company attempts to neutralize its exchange rate exposures. Of total cash in 3Q10, 41% was denominated in Reais.

OPERATIONAL BALANCE SHEET ACCOUNTS

In order to meet the greater number of aircraft deliveries during 4Q10, total Inventories increased by US$ 337.8 million, totaling US$ 2,583.9 million in 3Q10. Trade accounts payable also grew to US$ 846.1 million in 3Q10, as a consequence of an increase in procurement activity. The increase in Trade accounts payable partially offset the negative impact of the increase in Inventories on the Company's working capital requirements. Furthermore, during 3Q10, Trade accounts receivable decreased by US$ 130.2 million, contributing to reducing working capital requirements.

in millions of U.S. dollars

Balance Sheet Data

(1)

(1)

(1)

3Q09

2Q10

3Q10

Trade accounts receivable

490.1

449.4

319.2

Customer and commercial financing

538.6

492.2

484.5

Inventories

2,722.6

2,246.1

2,583.9

Property, plant and equipment

758.4

743.9

725.3

Trade accounts payable

725.4

751.1

846.1

Advances from customers

1,424.5

1,183.7

1,177.3

Total shareholders' equity

2,400.4

2,514.9

2,603.9

(1) Derived from unaudited financial information.

Advances from customers remained relatively stable when compared to 2Q10 and reached US$ 1,177.3 million in 3Q10. Other accounts, including Property, plant and equipment and Customer and commercial financing remained relatively stable.

SEGMENT RESULTS

The 3Q10 Net sales mix by segment varied when compared to 3Q09, with a higher participation from the Executive aviation, Aviation Services, Defense and Others segments, representing 19.3%, 12.4%, 7.1% and 3.4% of Net sales, respectively. Consequently, the Net sales participation from the Commercial Aviation segment decreased from 66.1% in 3Q09 to 57.8% in 3Q10. The increase in revenue participation from the Executive Aviation segment is expected to continue to the year end, as the Company expects to deliver the majority of annual production of Legacy aircraft during 4Q10 and the ramp-up of Phenom 300 production continues.

Net sales

(1)

(1)

(1)

(1)

by segment

2Q10

3Q09

3Q10

YTD10

US$M

%

US$M

%

US$M

%

US$M

%

Commercial Aviation

824.7

60.9

824.1

66.1

603.0

57.8

1,951.3

57.6

Defense

176.2

13.0

70.8

5.7

73.6

7.1

438.8

13.0

Executive Aviation

195.4

14.4

200.7

16.1

201.0

19.3

512.4

15.1

Aviation Services

138.2

10.2

127.1

10.2

129.7

12.4

409.9

12.1

Others

19.8

1.5

23.3

1.9

35.3

3.4

74.7

2.2

Total

1,354.3

100.0

1,246.0

100.0

1,042.6

100.0

3,387.1

100.0

(1) Derived from unaudited financial information.

COMMERCIAL AVIATION

The Company delivered 70 commercial aircraft through 9M10 and is on target to meet its annual deliveries projection in this segment. The industry traffic demand and yields are recovering better than expected with airlines projecting the return to profitability in 2010 (as per IATA nearly US$ 9 billion). As Paulo Cesar de Souza e Silva, Embraer's Executive Vice President for Airline Market, said, "Market interest in Embraer jets are increasing as airlines improve their financial performance and search for more efficient aircraft to support growth in demand".

Deliveries

2Q10

3Q09

3Q10

YTD10

Commercial Aviation

29

29

20

70

   ERJ 145

2

1

1

4

   EMBRAER 170

4

4

1

8 (+2)*

   EMBRAER 175

3

3

1

5

   EMBRAER 190

15

17

11

38

   EMBRAER 195

5

4

6

13

*Deliveries identified by parenthesis were aircraft delivered under operating leases.

In terms of aircraft demand, 3Q10 was marked by the sale of 37 new E-Jets: Brazil's TRIP ordered two EMBRAER 190 and England's Flybe, 35 EMBRAER 175. It was also announced in July at the 47th Farnborough Airshow, in England, that Embraer and Republic Airlines, the largest E-Jets operator in the world, had signed a Letter of Intent (LOI) for the sale of 24 EMBRAER 190. Furthermore, Embraer and Air Lease Corp., a newly formed company providing aircraft leasing, purchasing and financing, signed an LOI for the sale of 15 EMBRAER 190 jets, which was recently converted to a firm contract.

In addition, Argentina's Austral also received its first EMBRAER 190 in September, and became the most recent airline to join the family of Embraer jet operators.

Commercial Aviation Backlog

Firm Orders

Options

Total

Deliveries

Firm Backlog

ERJ 145 Family

890

-

890

886

4

EMBRAER 170

191

47

238

180

11

EMBRAER 175

173

278

451

130

43

EMBRAER 190

457

356

813

301

156

EMBRAER 195

95

66

161

60

35

E-JETS Family

916

747

1,663

671

245

TOTAL

1,806

747

2,553

1,557

249

EXECUTIVE AVIATION

Executive aviation deliveries in 3Q10 totaled 24 aircraft, among which 16 Phenom 100, 6 Phenom 300 and 2 Lineage 1000. It is important to note that although the total deliveries in 3Q10 were lower compared to 2Q10, total revenues were higher due to the product mix.

Deliveries

2Q10

3Q09

3Q10

YTD10

Executive Aviation

40

27

24

83

   Phenom 100

35

22

16

67

   Phenom 300

4

-

6

11

   Legacy 600

-

5

-

2

   Lineage 1000

1

-

2

3

*Deliveries identified by parenthesis were aircraft delivered under operating leases.

2010 continues to be a year of slow recovery. In October, Embraer and NetJets, Inc., signed a Purchase Agreement for 50 Phenom 300 executive jets, plus 75 options. Such order is expected to be added to the Company's backlog in January 2011, after certain precedent conditions are met. As Frederico Fleury Curado, Embraer President and CEO, said, "This new partnership is both a gratifying achievement for Embraer and a strong endorsement of our executive jets business." 

The Brazilian Civil Aviation Agency (Agencia Nacional de Aviacao Civil – ANAC) and the European Aviation Safety Agency (EASA) have granted certification for the Legacy 650 executive jet, clearing the way for deliveries of this aircraft to be made throughout the 4Q10. The Legacy 650 met all of the original specification targets,  particularly the 3,900 nm range, which allows the airplane to connect important city pairs and open new markets for Embraer.

With the production ramp-up of the Phenom 300 and initial deliveries of the Legacy 650, the Company expects to meet its 2010 guidance for the Executive aviation segment of Net Revenues of US$ 1.1 billion.

DEFENSE

The defense market continues to present a favorable scenario for growth, with a series of campaigns underway for various applications including transportation of officials & authorities; training and light attack; intelligence, surveillance and reconnaissance systems; aircraft modernization; military transportation; command and control systems and services. The segment continues to play an important and strategic role in the Company's revenue profile and, as of 3Q10, represented 13% of year-to-date Net sales.

As for the modernization programs, the test campaigns of the first prototype of the AMX, for the A-1M modernization program, are on-going. The second A-4 fighter from the Brazilian Navy Modernization Project has arrived at Embraer's facilities in Gaviao Peixoto in 3Q10 and started the modification work on schedule. The AEW India program is moving according to contract.

Eight Super Tucano aircraft were delivered to the Brazilian (2), Ecuadorian (3) and Dominican Republic (3) Air Forces during 3Q10.

The KC-390 development program is progressing; the initial definition phase has started and is running on schedule. As Embraer's Executive Vice President for Defense Market, Orlando Jose Ferreira Neto, said after the Brazilian Air Force (FAB) announced its intention to place a future order for 28 KC-390 aircraft, "This announcement reinforces Embraer's motivation and commitment to conceive a state-of-the-art product that should exceed FAB requirements and overall market expectations." In addition to Brazil, Chile, Colombia, Portugal and the Czech Republic have signed Letters of Intent for the acquisition of the 6, 12, 6 and 2 KC-390 aircraft; respectively, for total potential orders of up to 54 KC-390 aircraft.

AVIATION SERVICES

As Embraer's worldwide fleet grows with additional aircraft deliveries to the executive, commercial and defense segments, the Company continues to expand its global customer support network. Therefore, in July 2010, the Company established its first wholly owned subsidiary in China. Embraer China Aircraft Technical Services Company, Ltd. will strengthen the Company's customer support capabilities in the region, focusing on logistics and spare parts sales, as well as consulting services regarding technical issues and flight operations. Furthermore, in August 2010, Embraer certified the first full flight simulator of the Phenom 300 aircraft. The simulator is based in Dallas, Texas and is already being used by customers for Phenom 300 pilot certification.

TOTAL BACKLOG

During 3Q10, Embraer delivered a total of 44 jets, 20 of which were to the Airline Market and 24 to the Executive jets market. Considering total deliveries, as well as firm orders obtained during the period, the Company's firm order backlog remained stable and totaled US$ 15.3 billion at the end of 3Q10, equal to three years of current annual revenues.

2010 GUIDANCE REVISION

Throughout 2010 the Company has continued to make investments to improve the efficiency of all of its processes and has been able to obtain concrete results which have positively impacted the gross and operating margins. As this continues to take place through the second semester of 2010, Embraer believes it is well positioned to obtain a stronger operating margin for the year and, consequently, is revising its annual EBIT and EBIT margin Guidance to US$ 380 million and 7.25%, respectively, and its annual EBITDA and EBITDA margin projections to US$ 460 million and 8.75%, respectively.

INVESTOR RELATIONS

Andre Gaia, Caio Pinez, Claudio Massuda, Juliana Villarinho, Luciano Froes and Paulo Ferreira.

(+55 12) 3927-4404, investor.relations@embraer.com.br

CONFERENCE CALL INFORMATION

Embraer will host a conference call to present its 3Q10 Results in US GAAP on October 29, 2010. The conference call will also be broadcast live over the web at www.embraer.com/ir

(US GAAP)

Time: 13:00 (SP) / 11:00 (NY)

Telephones:

+1 800 860-2442 (North America)

+1 412 858-4600 (International)

+55 11 4688-6341(Brazil)

Code: Embraer

Replay Number: +55 11 4688-6312

Replay Code: 47757

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 September 30, 2010, Embraer had a workforce of 17,009 employees – not counting the employees of its partly owned subsidiaries – and its firm order backlog totaled US$ 15.3 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.

SOURCE Embraer



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