Up in the Air at Embraer

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Brazilian-based Embraer (NYSE: ERJ), the world's largest manufacturer of commercial jets up to 120 seats, announced mixed fourth-quarter and fiscal-year results after yesterday's close. Shares were up slightly in today's afternoon session.

Here are some key points from the call:

• Operating income for the year was up 33% to $455.7 million.
• FY07 net revenue increased 39.5% to $5.2 billion.
• The firm's order backlog increased 9.3% to $18.8 billion.
• Gross margins dipped to 22.5% from 25.3% in FY06.

While the order backlog shows strong demand for Embraer's products, it also hurt this year's cash flow statement. For example, the company received $441 million in advance payments from customers, which represents the bulk of Embraer's' negative cash flow from operations. This marks the second year of negative free cash flow for Embraer, which was previously a consistent free cash flow producer.

Days in inventory will be a crucial metric for Embraer going forward as it measures how efficiently the company is responding to the glut of new orders. This has been a weak point in recent years, as this figure increased from 204 days in 2005 to 243 days in September 2007. The fewer days it takes Embraer to build planes, the more efficiently it can manage its cash flows and create shareholder value.

The company has smartly hired an additional 4,500 employees and implemented extended overtime operations to deal with the backlog. So far, it seems to be working -- Embraer delivered a company-record 169 jets in 2007.

With competitors like Boeing (NYSE: BA), and now, apparently, Toyota (NYSE: TM), which recently entered into a venture with Mitsubishi Heavy Industries to produce regional commercial aircrafts, it's more important than ever for Embraer to prove to its customers that it's the place to buy small commercial jets.

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