Moody's affirms Embraer

Moody's Investors Service said it affirmed Empresa Brasileira de Aeronautica SA's (Embraer) Baa3 long-term rating following the company's release of interim financial results.

The outlook is stable.

In the agency's opinion, Embraer's actions to address production problems, its maintenance of a high backlog and its excellent liquidity position offset the negative financial impact of the announced declines in aircraft deliveries, earnings and cash flow for the first quarter of 2007.

Embraer has been struggling to increase aircraft production in light of supplier problems, delivering only 25 E-Jets in the quarter, and the decline in deliveries and the addition of 2,000 staff as part of the effort to ramp up production resulted in increased costs, declining profitability and cash flow, Moody's said.

However, the agency attributed the situation, in part, to the under absorption of costs related to new workers as they are trained and said it expects a recovery in production rates and operating efficiency in the next three quarters as the full potential for the headcount additions is realized, leading to improved profitability and cash flow.

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