What's Behind Embraer SA's Huge Profit and Rising Backlog?

Brazilian jet maker Embraer SA reported its first-quarter earnings on April 30, thrashing analyst estimates with an incredible profit figure that more than tripled. The jet maker cleared investor doubts regarding its stability as the quarter portrayed its persistent effort to achieve higher growth. Let's explore the key drivers and takeaways from the quarter.

Revenue and milestones
The company reported revenue of $1.24 billion in the quarter, up 14.4% from $1.09 billion in the year-ago period. The company delivered 34 aircraft, up 17% from last year's same period. This was entirely driven by the business jets, which recorded 20 deliveries, substantially up from last year's 12 -- thanks to Embraer's Phenom 300 jet.

During the quarter the commercial aviation business crossed some important milestones. The E-Jet family celebrated the 10th anniversary of its first delivery, and its deliveries came to account for 50% of all sales and 60% of all deliveries in the 70- to 130-seat global aircraft market.

However, Embraer is still feeling the effects of the 2012 downturn it saw in the commercial aircraft business that had pushed orders to rock-bottom. Commercial deliveries in the quarter hit a five-year low, falling 17% to just 14 jets,and commercial revenue slumped 13.2% to $555.3 million against the year-ago period.

Thankfully Embraer has been diversifying its business, which saved it from a sales hit in the first quarter. The executive jets and defense & security businesses saw their revenues grow more than 50% on the back of strong deliveries.

Quarterly amounts in $M; Source: Embraer

Embraer's sales outlook for the full year remains unchanged at $6 billion to $6.5 billion. While, the Brazilian jet maker expects the proportion of defense and executive segments in total revenue to increase in 2014, the welcome news for investors is that orders for E-Jets have also picked up.

In February, Embraer won a $2.94-billion deal from an Indian start-up airline, Air Costa, that placed orders for 50 E2 Jets. This gave a boost to the plane maker's firm order backlog that grew 5.5% sequentially to $19.2 billion, the highest since the second quarter of 2009. At the moment, Embraer has total orders for 464 aircraft.

Even better news is that Embraer's backlog could increase in the future as demand for 70- to 130-seat aircraft is estimated to grow -- most of this would come from the emerging markets. Embraer chief executive Frederico Curado said that U.S. airlines may replace around 800 50-seat jets with bigger fuel-saving planes, which could translate into greater demand for the E2 Jets.

Source: Embraer

The best part of Embraer's results was its net income of $110.6 million that beat Reuters' estimates of $48 million. The figure was up by an astounding 268% against last year's net income of $30 million. Net margin improved to 8.9% compared with 2.8% registered a year earlier. Though there was an income tax credit of $17.7 million in the quarter against an income tax expense of $2.3 million in the same period last year, Embraer did an excellent job in keeping costs low.

Embraer's operating profit improved substantially compared with the previous year. It recorded earnings before interest and tax, or EBIT, of $92.1 million and an EBIT margin of 7.4% compared with last year's EBIT and EBIT margin of $39.6 million and 3.6%, respectively.

Two things stand out from Embraer's cost structure. First, since the company has a higher proportion of fixed costs, increase in revenue during the quarter gave it higher operating leverage and greater profitability. Second, Embraer has a risk-based supplier model, wherein suppliers provide component parts to the company at their own cost and share the risk and success of the deliveries. They get paid only after the final deliveries are made. 

Cash position
The company recorded net cash of $52.7 million at the end of the quarter compared with $98.2 million a year earlier, and $429.3 million in the year ended 2013. The dip in cash balance was because of rise in inventories and accounts receivable, which is typical of this quarter.

The earnings before interest, taxes, depreciation and amortization, or the cash flow of the company, increased 50% over last year to $151 million, topping Reuters' average expectation of $133 million. Irregular free cash flow remains a bit of a concern for the company. In the quarter, Embraer reported negative free cash flow of $403.9 million, but it could stabilize with the advent of the E2 Jets.

Foolish bottom line
Embraer has risen from the ashes and is working hard for a better tomorrow. Investment in the E2 Jets is bearing fruit through more orders, and the company has done a good job with its diversification strategy and cost control measures. Embraer's journey ahead looks promising as it prepares to turnaround.

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The article What's Behind Embraer SA's Huge Profit and Rising Backlog? originally appeared on Fool.com.

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