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Embraer Earnings Hit by Lower Sales

Zacks Equity Research

Brazil’s Embraer S.A. (ERJ) reported first-quarter earnings of 17 cents per American Depository Shares (ADS), down drastically by more than 98% from the year-ago profit of 58 cents per ADS. The reported figure also missed the Zacks Consensus Estimate of 43 cents by 60.5%. The decrease was mainly due to the lower number of aircraft deliveries and product mix.

Embraer delivered 29 jets in the first quarter of 2013 ending Mar 31, 2013, which fell short of the 34 deliveries made in the same period last year.

Net revenue in the quarter was $1,085.9 million, down from $1,152.1 million in the year-ago quarter due to lower commercial and executive aircrafts deliveries. Reported revenue also missed the Zacks Consensus Estimate of $1,196.0 million.

Segment Details

The company’s new reporting segments, effective from the first quarter 2013, include Commercial Aviation, Executive Aviation, Defense & Security and Others.

Commercial Aviation revenues, comprising 58.9% of total revenue, declined 15.8% year over year to $639.6 million. The lower numbers were due to deliveries of 17 jets to the commercial aviation market compared with 21 made in the year-ago period.

Executive Aviation, representing 16.1% of total quarterly revenue, delivered 12 jets (8 light jets and 4 large jets) during the reported quarter compared with 13 deliveries in the first quarter of 2012. However, segment revenues grew 15.6% in the reported quarter on a year-over-year basis.

The Defense & Security market with a series of campaigns already underway for various applications is looking good. At revenues of $251.7 million, the segment accounted for 23.2% of total first-quarter sales and increased 10.4% from the year-ago period.

The Other category accounted for 1.8% of total first quarter revenue climbing almost 52% from the first quarter of 2012.


Embraer − the largest among Brazil’s aircraft manufacturers and the world's third-largest commercial planemaker − had an order backlog of approximately $13.3 billion at the end of the quarter, which represented an $800 million increase from the year-end 2012 level. The sequential improvement was mainly attributable to higher Commercial Aviation orders as well as a continued stream of orders in the Defense & Security segment.

In terms of aircraft breakdown, this includes 97 E-190, 80 E-175, 25 E-195 and 9 E-170 jets. The first-quarter backlog includes the contract from Republic Airways Holdings Inc. for deliveries of 47 E175 jets. It also includes an order from Embraer Defense and Security for the supply of 20 A-29 Super Tucano aircraft.

Meanwhile, Embraer received an order from United Airlines, a subsidiary of United Continental Holdings, Inc. (UAL) for 30 E-175 jets, with deliveries scheduled for next year and the year after. The order is worth a combined $2.9 billion at list prices and includes options for 40 additional E-175 jets. Although the company’s quarterly earnings were hurt by rising labor costs and a fall in commercial aircraft deliveries, this latest contract will likely provide Embraer impetus for future growth.


Gross margin in the quarter was 22.2%, down 90 basis points from 23.1% in the same period last year. During the reported quarter, product mix and the boost in wages led to a lower gross margin.

The EBIT margin came to 3.6% in the quarter versus 7.4% in the first quarter of 2012. Rise in wages was the primary factor for the margin decline.

Balance Sheet

Cash and cash equivalents were $1,684.3 million at the end of the first quarter compared with $1,797.0 million at 2012 end.

At the end of the first quarter, the company's total debt increased to $2,462.5 million from $2,066.5 million at the end of 2012.

Exiting the first quarter 2013, Embraer’s net cash used in operating activities was $369.6 million versus $128.6 million in the first quarter 2012. Capital spending increased to $50.4 million in the quarter from $39.6 million in the year-ago quarter.


The company maintained its 2013 revenues as well as margin assumptions. Embraer, in February, 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 9.0% and 9.5% for the year.

Zacks Rank

Embraer currently has a Zacks Rank #3 (Hold). We would advise investors to accumulate its Zacks Rank #2 (Buy) peers Wesco Aircraft Holdings, Inc. (WAIR) and Triumph Group, Inc. (TGI).

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