Embraer SA :ERJ-US: Earnings Analysis: Q4, 2016 By the Numbers : March 20, 2017

Embraer SA reports financial results for the quarter ended December 31, 2016.

We analyze the earnings along side the following peers of Embraer SA – Boeing Company, Spirit AeroSystems Holdings, Inc. Class A, Textron Inc., United Technologies Corporation, General Dynamics Corporation, Lockheed Martin Corporation, Northrop Grumman Corporation and Bombardier Inc. Class A (BA-US, SPR-US, TXT-US, UTX-US, GD-US, LMT-US, NOC-US and BBD.A-CA) that have also reported for this period.

Highlights

  • Summary numbers: Revenues of USD 2,052.55 million, Net Earnings of USD 198.54 million.
  • Gross margins widened from 16.88% to 20.06% compared to the same period last year, operating (EBITDA) margins now 17.52% from 7.76%.
  • Year-on-year change in operating cash flow of -74.19% is about the same as the change in earnings, likely no significant movement in accruals or reserves.
  • Earnings growth from operating margin improvements as well as one-time items.

The table below shows the preliminary results and recent trends for key metrics such as revenues and net income growth:

2016-12-31 2016-09-30 2016-06-30 2016-03-31 2015-12-31
Relevant Numbers (Quarterly)
Revenues (mil) 2052.55 1517.25 1398.93 1316.4 2046.97
Revenue Growth (%YOY) 0.27 21.44 -7.05 24.34 -0.22
Earnings (mil) 198.54 -34.37 -98.87 100.57 109.03
Earnings Growth (%YOY) 82.1 67.53 -176.63 248.61 15.37
Net Margin (%) 9.67 -2.27 -7.07 7.64 5.33
EPS 1.08 -0.19 -0.54 0.55 0.59
Return on Equity (%) 20.69 -3.64 -10.22 10.43 11.61
Return on Assets (%) 6.65 -1.14 -3.32 3.44 3.83

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Market Share Versus Profits

Revenues History
Earnings History

ERJ-US‘s change in revenue this period compared to the same period last year of 0.27% is almost the same as its change in earnings, and is about average among the announced results thus far in its peer group, suggesting that ERJ-US is holding onto its market share. Also, for comparison purposes, revenues changed by 35.28% and earnings by 677.72% compared to the immediate last period.

Revenues Growth Versus Earnings Growth

Quadrant label definitions. Hover to know more

Leader, Earnings Focus, Laggard, Revenues Focus

Earnings Growth Analysis

The company’s earnings growth was influenced by year-on-year improvement in gross margins from 16.88% to 20.06% as well as better cost controls. As a result, operating margins (EBITDA margins) rose from 7.76% to 17.52% compared to the same period last year. For comparison, gross margins were 18.79% and EBITDA margins were 15.11% in the last reporting period.

Gross Margin Versus EBITDA Margin

Quadrant label definitions. Hover to know more

Differentiated; Low Cost, Commodity; Low Cost, Commodity; High Cost, Differentiated; High Cost

Gross Margin Trend

Companies sometimes sacrifice improvements in revenues and margins in order to extend friendlier terms to customers and vendors. Capital Cube probes for such activity by comparing the changes in gross margins with any changes in working capital. If the gross margins improved without a worsening of working capital, it is possible that the company’s performance is a result of truly delivering in the marketplace and not simply an accounting prop-up using the balance sheet.

Gross Margin History
Working Capital Days History

ERJ-US‘s improvement in gross margin has been accompanied by an improvement in its balance sheet as well. This suggests that gross margin improvements are likely from operating decisions and not accounting gimmicks. Its working capital days have declined to 150.12 days from 152.61 days for the same period last year.

Gross Margin Versus Working Capital Days

Quadrant label definitions. Hover to know more

Customer Financed, Cash Starved, Supplier Financed, Cash Rich

Cash Versus Earnings – Sustainable Performance?

It is important to examine a company�s cash versus earnings numbers to gauge whether its performance is sustainable.

ERJ-US‘s change in operating cash flow of -74.19% compared to the same period last year is about the same as its change in earnings this period. Additionally, this change in operating cash flow is about average among its peer group. This suggests that the company did not use accruals or reserves to manage earnings this period, and that, all else being equal, the earnings number is sustainable.

Operating Cash Flow Growth Versus Earnings Growth

Quadrant label definitions. Hover to know more

Cash Flow based Earnings, Likely Non-cash Earnings, Low Cash Flow Base, Likely Undeclared Earnings

Margins

The company’s earnings growth has also been influenced by the following factors: (1) Improvements in operating (EBIT) margins from 3.03% to 11.87% and (2) one-time items. The company’s pretax margins are now 12.49% compared to 3.14% for the same period last year.

EBIT Margin Versus PreTax Margin

Quadrant label definitions. Hover to know more

Operation driven Earnings, One-time Favorables, Low Earnings Base, One-time Unfavorables
EBIT Margin History
PreTax Margin History

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Company Profile

Embraer SA designs, manufactures and sells aircraft and its parts for commercial, defense and executive aviation sectors. It operates through the following segments: Commercial Aviation, Defense & Security, Executive Aviation, and Other. The Commercial Aviation business involves the development, production, sale, and lease of commercial jets as well as the provision of aviation support services. The Defense & Security segment includes research, development, production, modification, and support for military defense aircraft, and related products and services. The Executive Aviation Market segment covers the development, production, and sale of executive jets, and support services. The Other segment is composed of structural parts, mechanical and hydraulic systems, production of agricultural crop-spraying aircraft, and customer training. The company was founded by Ozires Silva on August 19, 1969 and is headquartered in Sao Jose dos Campos, Brazil.

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