Brazilian aero major Embraer (ERJ, Financial) reported its fourth quarter and fiscal 2014 numbers recently. The recent quarter proved to be an important one for the company in several ways – it delivered its 1,100th E-Jet to Aeromexico Airlines, it delivered the first three Legacy 500 business jets, and many more. However, when it came to financial performance, the company failed to live up to the market’s expectations and the stock took a beating and dropped 8.1%. But, was it all bad? Let’s check out the latest set of financials of the company to get a better insight.
Embraer 1-year stock price movement
Why the stock took a beating?
For the three month period, Embraer reported revenues of $2.05 billion, down 11.1% from prior year period’s $2.30 billion, and net income dropped by a mind boggling 65%, from $264.5 million in fourth quarter last year to $91.4 million. Automatically earnings per share were impacted which dropped to $0.50 a share from previous year’s $1.45 a share. Even the full year earnings per share was down marginally at $1.83 a share. Free cash flow for the year came to a negative $403.6 million compared to a positive free cash flow of $212.6 million in 2013. The drop was primarily because of lower cash generated from operations, increase in trade receivables and lower advances from customers.
Net Revenues. Source: Embraer
The silver linings
So that’s surely a lot of negatives. But there’s a lot more to the company’s numbers than what has been mentioned above. Looking sequentially, net revenue of $2.05 billion improved a lot actually – up 65% from 2014 third quarter’s $1.24 billion, and net income improved from a net loss of $10.7 million. Even the annual net revenue showed an improvement over last year’s $6.24 billion. The points that investors should feel encouraged about are:
- Despite poor performance in the first three quarters of the year, Embraer was able to deliver a better fourth quarter and this helped to deliver better revenues for the full year
- Embraer’s business segments apart from commercial aviation are growing and have started contributing better to consolidated revenues
- On the back of lower fuel prices and an improving economy, Embraer’s business jets offerings are performing well. Its contribution to total revenue has increased to 26% from 21% in 2012
- Even on the back of shrinking defense budget, Embraer’s Defense and Security division has booked better revenues and accounted for 23% of total revenues, up from 17% in 2012
Revenue breakdown. Source: Embraer - The performance of the various business segments have also been strong. For the full year, the company sold and received commitments for 258 E-Jets, and this brings the total commitment figure for E-Jet E2 to 590 jets. All this helped the company to expand its customer base – now it has total orders for 1,549 jets from 65 airlines across 45 countries, and again emerged as a leader in commercial jets with seating capacity between 70 and 130 passengers.
- Embraer delivered a total of 92 E-Jets and 119 business jets. Deliveries improved compared to the previous year, but still hasn’t crossed the 100 jets mark for commercial jets. However, for business jets, overall deliveries plunged as deliveries of business jets were down more than 17%. The impact of this decline was partially set off by the improvement in business jet deliveries. In fact, Embraer posted the best business jet delivery figure since 2011. The following image gives a detailed break up of commercial and business jet deliveries.
Commercial and business aircraft deliveries. Source: Embraer - Even backlog figure looked strong. As of fourth quarter, Embraer’s firm order backlog was worth $20.9 billion, of which 65% was attributable to commercial jets, 9% to business jets, and remaining 26% to Defense and Security. This also shows that the Defense and Security division is gaining good amount of traction
- The jet maker’s total inventory at 2014 end was worth $2.4 billion. The company can use these in 2015 to book better revenues and cash flows
Parting thoughts
Embraer posted a mixed bag of numbers. At first look one can spot the major negatives. But if one digs deeper, one can find the underlying strengths. One bad year shouldn’t be enough for an investor to move away from the company. Over the years Embraer’s revenue has increased many folds. Embraer management is optimistic about the company’s future and expected to deliver revenues ranging between $6.1 billion and $6.6 billion in 2015, 52% of which is expected to come from commercial aviation, 28% from business jets and 18% from Defense & Security. Industry experts expects the global aviation market to grow in the coming years. Just as a rising tide lifts all boats, growing aviation market is sure to benefit Embraer in years to come.
