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Brazil's Embraer delays cargo jet, loses revenue on defense cuts

Embraer KC-390.Brazilian planemaker Embraer SA said on Thursday it will delay development of a military cargo jet and forgo $300 million of revenue this year due to Brazil's weaker currency and defense spending cuts, triggering the biggest drop in its shares in nearly four years.

Embraer now plans to deliver its first KC-390 cargo aircraft to the Brazilian Air Force in the first half of 2018 rather than the end of 2016, the company said in its quarterly earnings report. The plane is the biggest Embraer has made.

Second-quarter profit fell 10 percent from a year earlier due in part to its flagging defense unit, whose contracts have been cut back and stretched out due to a government austerity push aimed at shoring up Brazil's investment-grade rating.

Domestic defense contracts are also contributing less revenue in U.S. dollars due to a 20 percent plunge by the Brazilian real this year. Embraer is listed in New York and Sao Paulo and reports earnings in dollars.

Embraer shares fell almost 8 percent in Sao Paulo, on track for their biggest daily loss since August 2011.

Chief Executive Frederico Curado said he did not expect defense revenues to rebound next year, but that there should be no "new surprises" from the government forcing Embraer to scale back contracts again this year or next.

Defense operations contributed over 23 percent of sales last year, but fell to just 14 percent of revenue last quarter.

Embraer has invested heavily in a diversified defense unit, winning contracts to develop the KC-390 cargo plane, refurbish old fighter jets, launch a Brazilian satellite and set up a border monitoring system in the Amazon rainforest.

Curado said defense cuts were concentrated on the KC-390 and the fighter jet upgrades, which would be reduced in scope.

Following a first flight in February, the KC-390 test campaign is now scheduled to start in the third quarter and last 18-24 months, with certification in the second half of 2017.

The government still owes about $370 million in accounts receivable that Embraer is working to collect, Curado said.

Embraer lowered its 2015 revenue outlook by $300 million to between $5.8 billion and $6.3 billion.

Embraer kept its targets for operating profit as a stronger dollar should boost export margins.

The company reported a quarterly net profit of $129 million, above the average forecast of $96 million in a Reuters poll of analysts.

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