Embraer - Empresa Brasileira de Aeronáutica
Transcript of Embraer - Empresa Brasileira de Aeronáutica
Embraer - Empresa Brasileira de Aeronáutica S.A.
Financial Statements for the Years Ended December 31, 2004 and 2003 and Independent Auditors’ Report Deloitte Touche Tohmatsu Auditores Independentes
INDEPENDENT AUDITORS’ REPORT
To the Shareholders and Management of
Embraer - Empresa Brasileira de Aeronáutica S.A.
São José dos Campos - SP
1. We have audited the accompanying consolidated balance sheets of Embraer - Empresa
Brasileira de Aeronáutica S.A. and subsidiaries as of December 31, 2004 and 2003, and the
related statements of income, changes in shareholders’ equity and changes in financial
position for the years then ended, all expressed in Brazilian reais and prepared under the
responsibility of the Company’s management. Our responsibility is to express an opinion on
these financial statements.
2. We conducted our audits in accordance with generally accepted auditing standards in Brazil
and comprised: (a) planning of the work, taking into consideration the significance of the
balances, volume of transactions, and the accounting and internal control systems of the
Company and its subsidiaries; (b) checking, on a test basis, the evidence and records that
support the amounts and accounting information disclosed; and (c) evaluating the significant
accounting practices and estimates adopted by Company’s management and its subsidiaries,
as well as the presentation of the financial statements taken as a whole.
3. In our opinion, the financial statements referred to in paragraph 1 present fairly, in all
material respects, the consolidated financial positions of Embraer - Empresa Brasileira de
Aeronáutica S.A. and subsidiaries as of December 31, 2004 and 2003, and the results of
their operations, the changes in shareholders’ equity, and the changes in their financial
positions for the years then ended, in conformity with Brazilian accounting practices.
4. The accompanying financial statements have been translated into English for the
convenience of readers outside Brazil.
São Paulo, March 10, 2005
DELOITTE TOUCHE TOHMATSU José Domingos do Prado
Auditores Independentes Accountant
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EMBRAER - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
(Amounts in thousands of Brazilian reais, unless otherwise indicated)
1. OPERATIONS
The corporate purpose of Embraer - Empresa Brasileira de Aeronáutica S.A. (“the
Company”, “Embraer” or “parent company”) is the development, production and sale of jet
and turboprop aircraft for civil and defense aviation, aircraft for agricultural use, structural
components, mechanical and hydraulic systems and, technical activities related to the
production and maintenance of aerospace material.
2. BASIS OF PRESENTATION OF FINANCIAL STATEMENTS
a) Presentation of financial statements
The financial statements were prepared in accordance with accounting practices adopted
in Brazil and additional regulations of the “Comissão de Valores Mobiliários - CVM”,
the Brazilian Securities Commission (the “CVM”), and are an English language
adaptation of the financial statements published in Brazil, for the convenience of readers
outside Brazil.
Certain accounting practices applied by the Company and its subsidiaries that conform
to accounting practices adopted in Brazil may not conform to generally accepted
accounting principles in countries where these financial statements may be used.
b) Operating activities of subsidiaries
These consolidated financial statements include the accounts of the Company and the
following subsidiaries:
Embraer Aircraft Holding Inc. - EAH
Wholly-owned subsidiary based in Fort Lauderdale, Florida, United States, responsible
for corporate and institutional activities with the following subsidiaries located in the
United States:
Embraer Services Inc. - ESI: provides support for the defense market program in the
United States.
Embraer Aircraft Customer Services, Inc. - EACS: selling spare parts, product
support and customer training in the United States, Canada, the Caribbean and the
United Kingdom.
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Embraer Marketing Corporation - EMC: responsible for sales representation,
marketing and promotion, for both commercial and corporate aviation.
Embraer Aircraft Maintenance Services Inc. - EAMS: has the activity of aircraft
maintenance services and components.
Aerochain® LLC: responsible for electronic commerce activity.
Embraer Engeneering Service Inc.: provides engineering services for Company’s
programs.
Embraer Investments Ltd.: has the purpose of the financial structuring of sales made
by the Company.
Trumpeter Inc.
This wholly-owned subsidiary, located in Wilmington, Delaware, United States, has a
25% interest in Expressprop LLC, which provides support for the sale of used EMB 120
Brasília aircraft.
Indústria Aeronáutica Neiva Ltda. - NEIVA
This wholly-owned subsidiary, located in Botucatu, São Paulo, Brazil, is engaged in the
production and sale of agricultural aircraft, as well as the production and assembly of
parts for aircraft manufactured by the Company.
ELEB - Embraer Liebherr Equipamentos do Brasil S.A.
Embraer holds 60% of the voting capital and Liebherr International AG 40% of this
Company, based at São José dos Campos, São Paulo, Brazil. Its business is to produce
and sell precision hydraulic and mechanical equipment for the aviation industry.
Embraer Aviation Europe SAS - EAE
Wholly-owned subsidiary, located in Le Bourget, France, with the following
subsidiaries:
Embraer Aviation International SAS - EAI: located at Le Bourget, France, provides
after-sales services in Europe, Africa and the Middle East.
Embraer Europe SARL - EES: located in Villepinte, north of Paris, France, provides
sales representation for the Company in Europe, Africa and the Middle East.
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Embraer Australia PTY Ltd. - EAL
This wholly-owned subsidiary, located in Melbourne, Australia, provides after-sales
support services to customers in Australasia, Asia and the region.
Embraer Credit Ltd. - ECL
This wholly-owned subsidiary, located in Wilmington, Delaware, United States,
supports sales operations.
Embraer Representation LLC - ERL
Located in Fort Lauderdale, Florida, United States, provides institutional representation
for the Company.
Embraer Spain Holding Co. SL - ESH
Located in Spain, its purpose is to coordinate investments in foreign subsidiaries,
including those focused on activities that support the sale of aircraft and management of
assets derived from these operations. The activities of ESH are operationalized by its
subsidiaries:
ECC Investment Switzerland AG: located in Switzerland, it has a 100% interest in
the capital of the subsidiaries ECC Insurance & Financial Co. Ltd. - ECC Insurance
and Embraer Finance Ltd. - EFL.
ECC Insurance & Financial Co. Ltd. - ECC Insurance: located in the Cayman
Islands, B.W.I., is a captive insurance company, that provides financial guarantees to
customers and/or financing agents involved in the structuring of aircraft sales.
Embraer Finance Ltd. - EFL: located in the Cayman Islands, B.W.I., provides
support for some of the Company’s purchase and sale operations, such as supporting
clients in obtaining third-party finance. As from December 24, 2004, it became a
wholly-owned subsidiary of ECC Investment Switzerland AG (previously a wholly-
-owned subsidiary of the Company).
ECC Leasing Co. Ltd.: located in Ireland, its objective is the lease and sale of used
aircraft.
On December 22, 2004, the subsidiary AIRHOLDINGS SGPS, S.A. was created, in
which ESH has a 99.9% interest.
On December 23, 2004, AIRHOLDING SGPS, S.A. acquired from Empresa Portuguesa
de Defesa - EMPORDEF 65% of the voting capital of OGMA - Indústria Aeronáutica
de Portugal S.A., a Portuguese aeronautical maintenance and production company. As
of December 31, 2004, this acquisition was in the process of evaluation by the European
authorities.
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All the shares acquired and the amounts paid for them will be deposited in a special
escrow deposit account opened at the depositary bank until final approval of the
operation by the European antitrust authorities.
On March 9, 2005, the European antitrust authorities approved the acquisition.
Harbin Embraer Aircraft Industry Company Ltd. - HEAI
Based in Harbin, capital of Heilongjiang province, People’s Republic of China, its
purpose is to manufacture aircraft of the ERJ 135/140/145 family, in order to meet
commercial air transportation market demand in China, for the range of 30 to 50 seats.
Embraer controls the business, with a 51% holding.
Canal Investments LLC
Wholly-owned subsidiary, based in Wilmington, Delaware, United States, is responsible
for electronic commerce assets.
ECC do Brasil Cia. de Seguros
A subsidiary in which the Company has an interest of 99.99%, based at São José dos
Campos, São Paulo, Brazil, incorporated on June 3, 2004 and approved by the Private
Insurance Agency (SUSEP) on October 13, 2004. Its purpose is to operate solely with
export credit insurance in the State of São Paulo.
The financial statements of subsidiaries based abroad are prepared according to
accounting practices compatible with those used by the parent company, and are
translated into Brazilian reais at the exchange rates in effect on the balance sheet date.
Intercompany balances, transactions and unrealized profits, net of income tax effects,
are eliminated in consolidation
Investments in affiliates in which the Company does not have control are accounted for
using the equity method.
We present below the reconciliation between the parent company’s financial statements
and the consolidated statements:
Net income for the
fiscal years ended
December 31,
Shareholder’s equity
as of December 31,
2004 2003 2004 2003
Parent company 1,278,089 646,943 4,606,560 3,898,415
Unearned income (*) (22,256) (59,290) (188,903) (166,647)
Consolidated 1,255,833 587,653 4,417,657 3,731,768
(*) The unearned income refers to sales of spare parts, aircraft and market exclusivity
rights.
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3. PRINCIPAL ACCOUNTING PRACTICES
a) Cash and cash equivalents
Temporary cash investments are reported at cost, plus income earned to the balance
sheet date or the value of quotas of investment funds.
b) Allowance for doubtful accounts
Recognized based on an individual analysis of receivables to an amount considered
sufficient to cover possible losses on receivables.
c) Inventories
Inventories, including spare parts, are stated at the lower of average production or
acquisition cost and market value. Inventories of work in progress and finished goods
are reduced, when applicable, to net realizable value after deduction for costs, taxes and
estimated selling expenses. A provision for potential losses is made when, based on
management’s estimate, the items are defined as obsolete or stocked to a quantity
exceeding that to be used in the project.
d) Other current and noncurrent assets
The other current and noncurrent assets are stated at cost or realizable value, including
income earned, where applicable.
e) Permanent assets
Investments in subsidiaries are valued using the equity method, eliminating unearned
income up to the balance sheet date. Other investments are stated at cost, monetarily
restated to December 31, 1995, net of the provision for losses necessary to adjust them
to market value, when applicable.
Translation gains or losses resulting from the effects of devaluation (or valuation) of the
Brazilian real, in the conversion of the financial statements of foreign subsidiaries to
calculate the equity gain and in the consolidation, are allocated to financial
expenses/income.
Property, plant and equipment are stated at cost, plus revaluations and monetarily
restated to December 31, 1995. Depreciation is computed using the straight-line
method, based on the estimated useful life of the assets. Improvements to existing assets
are added to property, plant and equipment and maintenance and repair costs are posted
to income, when incurred. Materials allocated to specific projects are added to fixed
assets in progress.
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Deferred charges are stated at cost, monetarily restated to December 31, 1995,
principally composed of research and development costs, including designs, engineering
projects, the construction of prototypes and machine tools, for subsequent amortization
based on the number of aircraft that the Company expects to sell. Contributions from
partners related to the development of new products are recognized in deferred charges
at the time when the contributions are no longer contingent.
f) Foreign currency transactions
Foreign currency transactions are recorded according to the exchange rate on the date of
the transaction. Foreign currency denominated assets or liabilities are translated using
the exchange rate on the balance sheet date. Exchange variations are recognized in the
statement of income as and when they occur.
g) Loans
Restated based on the monetary and exchange variations, plus the corresponding
interest charges incurred up to the balance sheet date.
h) Income and social contribution taxes
The income and social contribution taxes are calculated based on taxable income,
considering the temporary differences to the extent that realization is probable, and are
determined according to the legislation in effect and recorded on an accrual basis.
i) Product warranty
Warranty expenses related to aircraft and spare parts are recognized at the time of sale
based on the estimated amounts to be incurred. These estimates are based on historic
factors that include, among others, warranty claims and the corresponding costs of
repairs and replacements, the warranty given by the suppliers and contractual coverage
period. The warranty coverage period varies between 36 and 60 months. In some cases,
the Company is obliged to make modifications to the product due to requirements of the
aeronautical certification authorities. The costs foreseen for these modifications are
recorded at the time when the new requirements are known.
In certain situations, the Company may be obliged to make modifications to the
products after delivery due to the introduction of improvements in the performance of
aircraft. The costs related with these modifications are recorded when known.
j) Other current and long-term liabilities
Other current and long-term liabilities are stated at known or demandable amounts, plus
the respective monetary and exchange variation charges, where applicable.
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k) Sales and other operating revenues
The sales revenues of regional and corporate aircraft and spare parts are generally
recognized at the time of delivery or shipment. In the defense segment, the operations
principally consist of long-term contracts, and the revenues are recognized according to
the percentage of completion method of accounting. Some contracts contain price
restatement clauses based on predefined indices and are recognized on an accrual basis.
Provisions for losses on sales contracts in the defense segment are recorded when there
is evidence that they will occur, and also based on the best estimates of management.
l) Stock options
The granting of stock options to employees does not result in an expense to be posted.
At the time the options are exercised, the purchase of stock by employees is recognized
as a capital increase in the amount of the acquisition price.
m) Use of estimates
Preparation of the financial statements requires management to make estimates and
adopt assumptions related to the assets and liabilities reported, the disclosure of
contingent assets and liabilities on the date of the financial statements and the amounts
of revenues and expenses reported during the corresponding periods. The actual results
may differ from these estimates.
n) Operations with derivatives
In operations with derivatives, the nominal values are not reported, but the unrealized
results are reported on the accrual basis, without marking these instruments to market
(Note 32).
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4. CASH AND CASH EQUIVALENTS
2004 2003
Cash and banks:
Reais 7,943 11,833
U.S. dollar 29,664 194,663
Other 25,827 8,855
Cash in transit 147,843 -
Short-term cash investments:
In Brazilian reais-
Investment funds 1,541,008 2,569,482
In U.S. dollars:
Fixed-term deposits 314,735 58,164
Investment funds 1,327,958 -
Overnight 67,060 815,059
Other currencies 1,706 548
3,463,744 3,658,604
The average annualized interest rates related to the short-term financial investments made in
Brazilian reais and U.S. dollars in the fiscal year ended December 31, 2004 were 14.4% and
1.8% (24.3% and 1.1% in the year 2003), respectively.
The short-term financial investments mainly correspond to quotas of investment funds and
fixed-term deposits, with an immediate liquidity market and terms of 90 days or less.
5. MARKETABLE SECURITIES
2004 2003
Debentures (a) 31,827 30,866
Provision for losses (31,827) -
National Treasury Notes (b) 74,469 74,124
Security certificates (c) 120,213 -
National Treasury Bills 3,847 -
198,529 104,990
Less- Current 124,061 12,480
Long term 74,468 92,510
(a) A provision was made for losses on debentures and the amount was charged to financial
expenses.
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(b) Refer to receivables represented by National Treasury Notes acquired by the Company
from its customers, related to equalization of the interest rate payable by the Export
Financing Program (PROEX) between the 11th
and 15th
years after the sale of the
corresponding aircraft, which were recognized at present value. The interest is
recognized as financial income since the Company has the possibility, intent and ability
to hold these bonds in portfolio to maturity.
(c) Refer to investments in Enhanced Equipment Trust Certificates - EETC. The certificates
are backed by leasing receivables from Expressjet with due dates up to 2019, and with
the guarantee of aircraft sold by the Company. They are marked to market as of
December 31, 2004 and Company’s management has no intention of maintaining them
in portfolio, and is monitoring the best time to sell them on the market.
6. ACCOUNTS RECEIVABLE
2004 2003
Brazilian Air Force 117,301 73,073
Domestic customers 17,871 13,446
Foreign customers 1,617,144 953,634
1,752,316 1,040,153
Less- Current 1,400,595 1,004,582
Long term 351,721 35,571
Of the amount consolidated, approximately 84.4% (57.0% in 2003) is in the process of
structuring the financing, basically related to the Commercial Aviation segment. Of the
remaining balance, R$55,041 (R$114,464 in 2003) refers to the Defense segment.
As of September 12, 2004, the American company US Airways, which in May 2003 signed
a contract for the purchase of 85 EMBRAER 170 aircraft, made a new Chapter 11 filing.
Up to December 31, 2004, 22 EMBRAER 170 aircraft had been delivered to US Airways.
On January 25, 2005, the United States Bankruptcy Court authorized US Airways to use the
advances previously made to the Company to settle its liabilities.
The balance receivable from this client as of December 31, 2004 is R$333,870 and
management believes that it will be fully realized.
The rollforward of the provision for doubtful accounts is as follows:
2004 2003
Beginning balance 70,094 86,502
Exchange variation (4,677) (11,429)
Addition 10,893 8,788
Reversal (12,442) (12,827)
Write-offs (1,490) (940)
Ending balance 62,378 70,094
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7. RECOVERABLE TAXES
2004 2003
ICMS (State VAT) and IPI (Federal VAT) 51,048 28,776
Withholding or prepaid income and social contribution taxes 6,662 48,958
PIS and COFINS (taxes on revenue) 32,908 5,146
Other 1,488 1,889
92,106 84,769
Less- Current 87,219 80,304
Long term (*) 4,887 4,465
(*) Refers to State VAT on the purchase of fixed assets.
8. OTHER CREDITS
2004 2003
Credits with suppliers 30,503 32,232
Advances to employees 17,064 18,663
Accounts receivable - BNDES 7,169 103,923
Receivable from SPCs (*) 243,073 -
Judicial deposits 43,739 37,788
Tax incentive - FINAM 9,604 9,604
Advances against commissions 7,574 13,060
Unearned gains on derivatives 13,031 8,150
Other 14,272 22,269
386,029 245,689
Less - Current 322,558 187,874
Long term 63,471 57,815
(*) Refer to receivables from Special Purpose Companies - SPCs which are secured by
aircraft for which the financial structuring of the sales has not yet been finalized.
9. DEPOSITS IN GUARANTEE
2004 2003
Guarantees for financing (a) 600,356 746,716
Guarantees for sales structure (b) 613,303 556,598
Supply guarantees (c) 60,027 65,338
Other 16,507 -
1,290,193 1,368,652
Less- Current 616,864 746,716
Long term 673,329 621,936
(a) U.S. dollar denominated short-term financial investments linked to the sales structures,
the release of which depends on completion of the structures. These investments are
remunerated based on the variation of the six-month LIBOR rate.
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(b) Amounts in U.S. dollars deposited in an escrow account as collateral for the financing
of certain aircraft sold. If the guarantor of the debt (unrelated party) is required to pay
the lender, the guarantor will be entitled to the amount in the escrow account. The
amount deposited will be released at the time of maturity of the financing contracts
(between 2013 and 2017), if the aircraft purchaser does not default on the loan. The
interest on the escrow account is added to the balance of principal and recognized by the
Company as financial income.
Seeking to ensure profitability with the term of the guarantee, in 2004 Embraer invested
part of this balance, amounting to R$112,016 (US$42,200 thousand), in structured
notes. These notes provided an interest income of R$1,941 (US$731 thousand) in 2004,
which was incorporated into the principal and recognized as financial income for the
period. In the case of a default by Embraer, the maturity dates of these notes would be
anticipated, and the Company would be subject to realizing them under market
conditions which, if inferior to the amounts originally invested, would result in the
redemption being equal to the amount invested. Default events that could result in the
anticipated maturity of the notes, most commonly applicable in this market are, among
others: (i) insolvency of or Chapter 11 filing by Embraer; and (ii) default or
restructuring of the Embraer debt in financing contracts.
(c) Amounts deposited in an escrow account as a guarantee of supplying the object of the
sales contract.
10. INVENTORIES
2004 2003
Finished products 271,218 156,592
Work-in-process (a) 1,779,218 1,403,636
Raw materials 1,143,013 889,460
Spare parts 552,059 496,189
Spare parts pool (b) 92,419 70,336
Used aircraft for sale (c) 92,405 62,680
Supplies 2,793 2,360
Inventory in transit 291,303 175,626
Advances to suppliers 78,706 307,013
Provision for obsolescence (d) (233,559) (217,795)
4,069,575 3,346,097
Less- Current 4,017,330 3,303,411
Long term 52,245 42,686
(a) Include pre-series aircraft of the EMBRAER 170/190 and ERJ 135 programs in the
amount of R$557,598 (R$340,454 in 2003), used for testing to obtain aircraft
certification. After the certification campaigns, the Company intends to sell these
aircraft.
(b) The Company maintains a pool of spare parts for the exclusive use of clients that
contracted the Exchange Pool Program. This program envisages that the clients can
exchange a damaged component for a component in a similar state but functioning, as
defined in the Program. This stock is depreciated using the straight-line method based
on an estimated useful life between seven and ten years and an average residual value of
35%, which the Company believes to be the approximate utilization time. The accrued
depreciation value as of December 31, 2004 is R$38,009 (R$27,650 in 2003).
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The revenues from the Exchange Pool Program are recognized monthly over the term of
the contract and consist partially of a fixed rate and partially a variable rate, directly
related to the number of hours flown of the aircraft covered. These rates are recorded as
revenue of the program. During 2004 and 2003, the Company recognized R$39,867 and
R$34,545, respectively, as revenues related to the Exchange Pool Program.
(c) Refers to one Legacy aircraft, six EMB 120 and one Ipanema (three EMB 120 in 2003),
available for sale, which are recorded at the purchase cost or realization value,
whichever is lower.
(d) It was constituted for items with no movements for more than two years and without
any prospect of a defined use in the production program. Provisions were made to cover
possible losses on the stores inventory and excessive or obsolete products in progress.
The rollforward of the provision is shown below:
2004 2003
Beginning balance 217,795 217,198
Provision 78,565 49,673
Write-off (59,576) (39,262)
Effect of exchange variation (3,225) (9,814)
Ending balance 233,559 217,795
Less- Current 193,385 190,145
Long term 40,174 27,650
11. PREPAID EXPENSES
2004 2003
Insurance (a) 31,035 28,637
Credit insurance (b) 24,927 99,144
Commercial concessions (c) 26,615 22,029
Customer training (c) 10,489 9,521
Other 4,836 6,439
97,902 165,770
Less- Current 81,878 79,235
Long term 16,024 86,535
(a) Basically composed of insurance premiums for policies to cover fire, loss of profit,
third-party liability, aeronautical products and vehicles.
(b) Credit insurance related to a line of financing abroad.
(c) Commercial concessions and customer training represent credits for spare parts and the
training of pilots, engineers and cabin crew granted to clients on the sale of the aircraft.
These credits are foreseen in the sale contracts and included in the overall selling price
of the aircraft. The real delivery time of the parts and provision of these services may be
different from the aircraft delivery time. These amounts reflect the cost of these
concessions incurred before the delivery of the aircraft and will be recognized as
expenses during the term of the sales contract, simultaneously with the revenues derived
from aircraft deliveries.
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12. INVESTMENTS
a) Amounts of investments
2004 2003
In subsidiaries:
OGMA - Indústria Aeronáutica de Portugal S.A. (i) 41,219 -
41,219 -
In affiliates:
Expressprop LLC (ii) 12,729 13,855
53,948 13,855
(i) This company was not consolidated because the acquisition was in the process of
evaluation by the antitrust authorities of Portugal, Germany and Italy (Note 2).
(ii) The Company indirectly holds 25% and Continental Airlines Finance Corporation
75% of the capital of Expressprop LLC. This affiliate provides support for the sale
of used EMB 120 Brasília aircraft. The investment is carried under the equity
method of accounting. As of December 31, 2004, this affiliate did not record
income and in 2003 the income was R$584.
b) Information related with direct subsidiaries
2004 2003
Ownership
- %
Shareholders’
equity
Net income
(loss)
Shareholders’
equity
Net income
(loss)
Embraer Aircraft Holding Inc. - EAH 100.00 212,894 10,346 220,465 701
Embraer Finance Ltd. - EFL - - 52,454 (88,706) (33,617)
Trumpeter Inc. 100.00 12,167 (35) 13,282 119
Indústria Aeronáutica Neiva Ltda. -
NEIVA 100.00 38,122 6,623 31,500 8,550
ELEB - Embraer Liebherr
Equipamentos do Brasil S.A. 60.00 74,712 12,434 67,425 11,683
Embraer Aviation Europe SAS -
EAE 100.00 125,532 25,952 97,457 41,853
Embraer Europe SARL - EES - - 858 2,113 886
Embraer Australia PTY Limited -
EAL 100.00 (5,607) (8,071) 2,579 1,676
Embraer Spain Holding Co. SL -
ESH 100.00 354,335 22,147 335,041 (8,417)
Embraer Credit Ltd. - ECL 100.00 (6,071) 4,838 (11,874) (2,425)
Embraer Representation LLC - ERL 100.00 45,543 38,986 7,137 7,137
Canal Investments LLC 100.00 12,996 (4,258) - (21,024)
Harbin Embraer Aircraft Industry
Company Ltd. 51.00 66,754 7,438 18,386 (7,814)
ECC do Brasil Cia. de Seguros 99.99 3,777 177 - -
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c) Transactions with related parties are as follows:
Short term Long term
Assets Liabilities Assets Liabilities Financial result Operating profit
2004 2003 2004 2003 2004 2003 2004 2003 2004 2003 2004 2003
Air Force Command 117,301 17,522 104,883 92,998 - - - - - - 733,912 160,422
“Banco Nacional de Desenvolvimento Econômico e Social - BNDES” 1,633 97,403 853,133 29,620 5,535 6,520 15,067 22,979 (18,178) (5,140) - -
“Financiadora de Estudos e Projetos - FINEP” - - 5,045 6,366 - - 18,160 3,688 (1,848) (1,242) - -
European Aerospace and Defense Group - EADG - - 3,083 2,494 - - - - - - (10,743) (6,323)
Banco do Brasil S.A. (*) 2,217,658 2,139,136 81,485 228,620 - - 331,885 - 37,806 89,467 - -
2,336,592 2,254,061 1,047,629 360,098 5,535 6,520 365,112 26,667 17,780 83,085 723,169 154,099
(*) Previ, one of the Company’s controlling shareholders, is controlled by Banco do Brasil S.A., which is in turn controlled by the Brazilian government. As a result, the Company considers
Banco do Brasil S.A. to be a related party.
The asset values basically refer to: (i) accounts receivable for the sale of spare parts and aircraft and product development, under similar
conditions to those applied to third parties, considering the volumes, terms and risks involved; (ii) amounts withheld by the BNDES awaiting
finalization of export documentation; and (iii) balances of short-term financial investments under normal market conditions.
In liabilities, the amounts basically refer to: (i) the purchase of aircraft components and spare parts under conditions similar to those used with
third parties, considering the volumes, terms and risks involved; (ii) advances received on account of sales contracts, according to the
contractual clauses; (iii) financing for product research and development at market interest rates for this kind of financing; and (iv) loans and
financing under normal market conditions.
The income accounts are basically composed of: (i) sale of aircraft, components and replacement parts and product development for the defense
market, under similar conditions to those used with third parties, considering the volumes, terms and risks involved; (ii) financial income
derived from short-term financial investments; and (iii) interest charges on financing for product research and development, financing imports
and advances from foreign exchange contracts.
Embraer - Empresa Brasileira de Aeronáutica S.A.
21
13. PROPERTY, PLANT AND EQUIPMENT
2004 2003
Average annual
depreciation rate
(%)
Restated
cost
Accumulated
depreciation Net Net
Land - 17,060 - 17,060 17,060
Buildings and improvements to land 3.54 529,898 (159,414) 370,484 362,472
Installation 8.47 208,399 (149,539) 58,860 61,453
Machinery and equipment 9.25 414,151 (259,940) 154,211 144,292
Furniture and fixtures 9.65 41,882 (23,132) 18,750 17,231
Vehicles 14.03 10,941 (7,715) 3,226 2,835
Aircraft (*) 6.56 387,286 (61,147) 326,139 409,920
Computers and peripherals 18.29 98,024 (73,145) 24,879 27,731
Software 16.79 141,336 (71,309) 70,027 80,776
Other - 23,609 (1,799) 21,810 17,263
Advances to suppliers - 263 - 263 1,237
Construction in progress - 29,144 - 29,144 35,321
1,901,993 (807,140) 1,094,853 1,177,591
(*) These aircraft are allocated for use in testing, corporate flights and operational leasing. As of December
31, 2004, the Company possessed 7 EMB 120, 7 ERJ 145, 2 ERJ 135, 4 Legacy and 3 other models. Of
these, 17 aircraft were on lease, 1 available for leasing and 5 for testing and corporate flights.
On December 30, 1988 and April 30, 1991, the Company recorded revaluations of its
operational assets. The residual balances of these revaluations as of December 31, 2004 and
2003 were R$95,526 and R$103,354, respectively. The corresponding revaluation reserve
was used for a capital increase and, except for the portion related with real estate, was
included in the calculation of taxable income for income tax purposes. The depreciation
rates of the revalued assets were established based on the revised estimate of the useful life
of the assets, according to the technical appraisal report.
14. DEFERRED CHARGES
The balances were represented by:
2004 2003
Accumulated
Programs Cost amortization Net Net
ERJ 135/140/145 (*) 770,489 (559,310) 211,179 241,772
EMBRAER 170/190 977,165 (39,187) 937,978 929,838
Other 34,114 (5,318) 28,796 7,692
1,781,768 (603,815) 1,177,953 1,179,302
(*) Includes research and development costs of the Legacy corporate jet.
Refer to the costs incurred in developing each new aircraft, including support services,
productive labor, machine tools, material and direct labor allocated to the construction of
prototype aircraft or significant components. The costs of flight and ground testing are also
included, together with subsequent design changes.
Embraer - Empresa Brasileira de Aeronáutica S.A.
22
The deferred charges are amortized as from the time the benefits begin to be generated,
based on the number of aircraft that is estimated to be sold, according to each project, being
the amortized amounts appropriated to production cost.
In the case of projects that have been interrupted or those whose realization is considered to
be improbable, the deferred charges are written off or reduced to the net estimated recovery
value.
ERJ 135/140/145
Refers to the family of regional jets comprising the ERJ 135, ERJ 140 and ERJ 145,
certified to operate with 37, 44 and 50 seats, respectively, which have around 96% of
common parts and components.
Based on the ERJ 135 platform, a new aircraft was developed for corporate use, called the
Legacy, in the executive and shuttle versions.
As of December 31, 2004, the position of deliveries and firm orders is as follows:
Deliveries Firm orders
ERJ 135 106 17
EMB 135 12 -
ERJ 140 74 20
ERJ 145 618 66
EMB 145 4 -
Legacy 33 9
The aircraft designated as EMB 135 and EMB 145 are models that are not designed for
companies in the regional aviation market.
The EMB 145 platform was modified and developed for use by the Brazilian, Greek and
Mexican governments. The models are the EMB 145 AEW&C - Airborne Early Warning
and Control and EMB 145 MP - Marine Remote Sensing Aircraft. As of December 31,
2004, the Company had one firm order for this aircraft.
In 2004, three aircraft were delivered for use by the Greek government and three for use by
the Mexican government.
EMBRAER 170 and EMBRAER 190
This family of commercial jets is composed of the EMBRAER 170, with a capacity between
70 and 78 seats, the EMBRAER 175, between 78 and 86 seats, the EMBRAER 190 from 98
to 106 seats, and the EMBRAER 195, from 108 to 118 seats.
In February 2004, the EMBRAER 170 obtained type homologation certification from the
Brazilian, United States and European authorities. In March 2004 the first units of this
model were delivered to the operators Alitália, LOT Polish and US Airways.
Embraer - Empresa Brasileira de Aeronáutica S.A.
23
The second model is the EMBRAER 175, which made its maiden flight on June 14, 2003.
On December 23, 2004, the Aerospace Technical Center, the Brazilian authority responsible
for the certification of aircraft, issued the Type Homologation Certificate and, on January 7,
2005, the Type Certificate was issued by the European Aviation Safety Agency - EASA.
The EMBRAER 190 and EMBRAER 195 are under development, and made their maiden
flights on June 14 and December 7, 2004, respectively, beginning their testing and
certification campaigns.
As of December 31, 2004, the position of deliveries and firm orders is as follows:
Deliveries Firm orders
EMBRAER 170 46 112
EMBRAER 175 - 15
EMBRAER 190 - 155
EMBRAER 195 - 15
The consolidated costs incurred up to December 31, 2004 for research and development per
aircraft family, together with the order backlog, are presented below:
Stated in thousands of
Brazilian reais,
except for number of aircraft
ERJ
135/140/145 (*)
EMBRAER
170/190
Deferred cost 770,489 977,165
Accumulated amortization (559,310) (39,187)
Net 211,179 937,978
Number of aircraft projected for the program as of
December 31, 2004 960 920
Number of aircraft as of December 31, 2004:
Deliveries 847 46
Firm order backlog 112 297
Options with exercise date in (unaudited):
2005 100 93
2006 131 59
2007 76 58
After 33 220
Total options 340 430
Grand total 1,299 773
(*) The number of aircraft includes the order backlog for the Legacy, EMB 135 and EMB
145, but does not include the order backlog for the EMB 145 SA, EMB 145 RS and
EMB 145 MP.
Embraer - Empresa Brasileira de Aeronáutica S.A.
24
15. LOANS
a) Composition
Currency
Annual interest
rate - % 2004 2003
Foreign currency:
Material acquisition US$ 4.12 to 7.50;
LIBOR +
2.00 to 5.50
988,548 791,712
JPY JIBOR + 1.05 192,478 387,483
Export financing US$ LIBOR + 1.50 - 29,497
Advances on foreign exchange
contracts
US$ 2.50 to 4.95 127,504 520,820
Project development US$ LIBOR + 3.00;
basket of
currencies BNDES
+ 3.00
11,066 23,569
Resolution No. 63 US$ 7.08;
LIBOR + 2.70
170,821 -
Working capital Euro
US$
2.00 to 6.00
3.12 to 11.93;
LIBOR + 2.15 to
2.97
16,194
1,146,657
24,763
1,055,656
Property, plant and equipment
acquisitions US$ 10.15
6,595
116,493
2,659,863 2,949,993
Local currency:
Project development TJLP + 1.00 to
6.00
51,870 61,248
Pre-shipment TJLP + 2.40 824,727 -
Working capital 115% CDI 13,498 -
Purchase of fixed assets TJLP + 3.00 to
3.90
3,744
5,131
893,839 66,379
3,553,702 3,016,372
Less- Current 1,362,546 1,493,895
Long term 2,191,156 1,522,477
Embraer - Empresa Brasileira de Aeronáutica S.A.
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b) Long-term maturities
Year 2004
2006 531,701
2007 792,098
2008 443,601
2009 351,809
2010 69,275
2011 2,672
2,191,156
c) Currency analysis
The total debt is denominated in the following currencies:
Exchange rate as of
12.31.04
(in relation to
R$1.00) 2004 2003
Brazilian real 1.00 893,839 66,379
U.S. dollar 2.6544 2,451,191 2,537,747
Euro 3.61949 16,194 24,763
Japanese yen 0.025935 192,478 387,483
3,553,702 3,016,372
The fluctuations in exchange rates in relation to the Brazilian real were the following:
Year ended
December 31,
- %
2004 2003
U.S. dollar (8.13) (18.23)
Euro (0.85) (1.37)
Japanese yen (4.00) (9.30)
The total debt in Brazilian reais is subject to interest based on the variation of the Long-
term Interest Rate (TJLP) and the Interbank Deposit Certificate (CDI).
The annualized variations of these indexes in 2004 were 9.75% and 16.17% and in 2003
were 11.00% and 23.25%, respectively.
d) Interest and guarantees
The foreign currency loans as of December 31, 2004 are subject to exchange variation
plus an average annual weighted interest rate of 5.38% per annum (4.47% in 2003); the
loans in local currency as of December 31, 2004 are subject to an average annual
weighted interest rate of 12.35% (14.66% in 2003).
Embraer - Empresa Brasileira de Aeronáutica S.A.
26
Real estate, machines, equipment, commercial pledges and bank guarantees were given
in guarantee for the loans in the amount of R$1,056,135. Of this amount, R$177,280
corresponds to second mortgages on property and R$177,280 to third mortgages. The
loans of the subsidiaries are guaranteed by the parent company to the amount of
R$157,776.
Restrictive clauses
The long-term financing agreements are subject to restrictive clauses, in line with
normal market practices, which establish that the ratio of total consolidated
indebtedness/EBITDA (Earnings Before Interest, Taxes, Depreciation and
Amortization) may not exceed 3.0:1, and also limits for debt service cover using the
EBITDA/net financial expense ratio, which must be higher than 3.0:1.
They also include the customary restrictions on the degree of financial leverage, level of
indebtedness of subsidiaries, creation of new encumbrances on assets, significant
changes in the Company’s stock control, sale of assets, payment of dividends above the
minimum compulsory dividend according to the legislation in the case of default on
financing and transactions with affiliated companies, together with maintaining an order
backlog of at least 100 firm orders for new aircraft during the effective term of the
agreement.
As of December 31, 2004, the Company was in compliance with all these clauses.
16. SUPPLIERS
2004 2003
Foreign suppliers:
Risk partners (*) 846,286 662,055
Other 581,859 466,400
Domestic suppliers 58,249 39,007
1,486,394 1,167,462
Less- Current 1,477,236 1,167,462
Long term 9,158 -
(*) The Company’s risk partners develop and produce significant components of aircraft,
including engines, hydraulic components, avionics, wings, tail section, interior, part of
the fuselage, etc. Certain contracts signed between the Company and these risk partners
are characterized as being long term and include the deferral of payments for
components and systems for a negotiated term until after delivery.
After having selected the risk partners and initiated the aircraft development and
production program, it is difficult to replace them. In some cases, like that of the
engines, the aircraft is specially designed to accommodate a given component, which
cannot be replaced by another supplier without incurring delays and significant
additional expenses. This dependence makes the Company susceptible to the
performance, quality and financial position of its risk partners.
Embraer - Empresa Brasileira de Aeronáutica S.A.
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17. ACCOUNTS PAYABLE
2004 2003
Brazilian Air Force (a) 5,599 5,860
Insurance 14,841 15,263
Materials pending 23,555 2,001
Commercial rebates (b) 34,017 11,743
Pension plan contribution 1,156 1,612
Customer credits (c) 17,509 37,835
Advance for capital increase - 18,388
Accounts payable (d) 61,145 51,169
157,822 143,871
Less- Current 129,952 95,077
Long term 27,870 48,794
(a) Represent materials for the AM-X program to be delivered.
(b) Refer to credits in spare parts given to customers as an incentive for aircraft sales.
(c) Represent amounts provisioned to compensate customers for certain financing costs.
(d) Basically represent expenses incurred up to the balance sheet date whose payments were
made in the subsequent period.
18. CONTRIBUTIONS FROM PARTNERS
2004 2003
Current 9,554 4,934
Long term 371,715 678,841
Total 381,269 683,775
The Company has agreements with certain key suppliers, here called partners, to participate
in research and development. Certain supply agreements require the supplier to contribute
cash to the Company as a compensation for its research and development. As part of this
supply agreement, the contributions are tied to compliance by the Company with certain
important stages of development, including aircraft certification, first delivery and minimum
number of aircraft delivered. The Company records these contributions when received as
long-term liabilities, which will not be claimed if the contractual objectives are achieved. As
and when the objectives are achieved, these amounts are deducted from the aircraft
development costs.
Embraer - Empresa Brasileira de Aeronáutica S.A.
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19. ADVANCES FROM CUSTOMERS
2004 2003
Local currency 37,178 94,951
Foreign currency 1,234,753 1,575,276
1,271,931 1,670,227
Less- Current 996,896 1,350,857
Long term 275,035 319,370
Advances from customers in foreign currency are subject to exchange variation based on the
U.S. dollar. The segregation between short and long term is done based on the contractual
delivery times for the corresponding aircraft, parts, components and services.
20. TAXES AND SOCIAL CHARGES PAYABLE
2004 2003
INSS (social security charge) - current 16,841 16,440
INSS - installments (*) 42,733 47,059
ICMS 36,741 1,984
FGTS (severance fund) 8,100 6,942
IRRF (withheld income tax) 11,511 19,598
Income and social contribution taxes 33,982 4,983
PIS/COFINS 1,656 3,333
Other 11,173 8,528
162,737 108,867
Less- Current 125,183 67,490
Long term 37,554 41,377
(*) Interest of 1% per month.
Long-term due dates
Year 2004
2006 4,952
2007 4,952
2008 4,952
2009 4,952
2010 4,952
2011 4,952
2012 4,952
2013 2,890
37,554
Embraer - Empresa Brasileira de Aeronáutica S.A.
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21. OTHER PROVISIONS
2004 2003
Payroll 136,855 121,066
Accrued retirement and pension benefit 7,420 7,273
Employee profit sharing 97,252 35,993
Product warranty (a) 201,973 229,843
Product improvements (a) 101,907 124,038
Technical assistance/training (b) 71,790 46,626
Unrealized losses on derivatives 54,104 164,734
Provision for financial guarantees (c) 196,788 159,911
Other 25,946 9,061
894,035 898,545
(a) Represent provisions related to products, including warranty and contractual obligations
to install improvements in aircraft delivered, for the purpose of ensuring that the
performance indicators assumed in the contract will be achieved.
(b) Refer to expenses related to the contractual obligation to supply technical assistance and
training for customers’ mechanics and crew members for aircraft already delivered and
to be delivered.
(c) Refers to the provision made by ECC Insurance & Financial Co. Ltd. to cover possible
losses with guarantees provided to customers/financial agents involved in structuring
the financing of aircraft sales (see Note 33).
22. CONTINGENCIES
2004 2003
Tax contingencies 1,215,839 906,581
Labor contingencies 41,776 38,162
Civil contingencies 5,044 3,973
1,262,659 948,716
Less- Current 237,806 872,267
Long term 1,024,853 76,449
The Company is questioning at the administrative and judicial levels the constitutionality of
the nature, calculation base, modifications in rates and expansion in the calculation bases of
certain taxes, charges and social contributions, to avoid payment or recovery of payments
made on previous periods. The Company, through administrative and legal action, obtained
means to not pay or offset the payment of taxes and charges and social contribution. The
amounts of the unpaid taxes, based on preliminary judicial rulings, are provisioned and
restated until a final ruling has been obtained. The principal cases of a tax nature in progress
are the following:
Embraer - Empresa Brasileira de Aeronáutica S.A.
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a) Social security contributions - the Company is contesting the legality of the Rural
Workers Assistance and Social Security Fund (Funrural), the collection of late
payments and increase in the rate of the National Social Security Institute (INSS)
contribution and the rate of the occupational accident insurance. These lawsuits are at
the 2nd
and 3rd
court levels, respectively. In the opinion of the legal advisers, the
probability of a successful outcome in the case questioning the increase in the INSS rate
is possible, the collection of arrears penalties is probable and the Funrural case is
considered to be remote. The amount involved in these cases is R$227,082.
b) Income tax (IR) and Social Contribution on Net Income (CSLL) - the Company is
claiming suspension of the social contribution tax on exports and the right to offset IR
and CSLL using credits for the Excise Tax (IPI) referring to the acquisition of
nontaxable or at a zero rate raw materials. The first case is at the 2nd
court level and the
second at the 1st level and the probability of successful outcomes in these cases was
considered by the legal advisers as possible and remote, respectively. The amount
involved in these cases is R$599,827.
c) Social Integration Program (PIS)/Public Service Employee Savings Program (PASEP)
and Social Contribution on Billing (COFINS) - the Company is questioning the
expansion of the calculation base of PIS/PASEP and COFINS. These lawsuits are the 1st
and 2nd
judicial levels, respectively. In the opinion of the legal advisers, success in these
cases was considered possible. The amount involved in the cases is R$348,027. During
the current fiscal year, the Company reviewed the calculation base of the PIS and
COFINS contributions, resulting in a reversal of the provision of R$44,303, as a
balancing item to the financial expenses caption.
Labor contingencies
The labor contingencies are characterized by claims brought by unions representing the
employees or individual suits in which former employees individually claim overtime,
productivity, reinstatement, allowances, losses and damages, occupational sicknesses,
backdating of salary increases and readjustments.
The principal claims pending were filed by the union in June 1991 in the name of all the
employees employed by the Company in November 1990. This suit seeks to apply a salary
increase given by the Company in January and February 1991 backdated to November and
December 1990. Up to December 31, 2004, approximately 97% of the employees and
former employees had made settlements with the Company and the remainder are
negotiating. Another suit claims the monetary restatement of the Verão and Collor economic
plans on the 40% penalty on the Government Severance Indemnity Fund for Employees
(FGTS) paid to employees dismissed between December 1988 and April 1990.
The total exposure of these cases is estimated to be approximately R$55,000. The
proceedings are at various levels awaiting judgment. Based on the opinions issued by the
Company’s legal advisers and the success of certain judgments and negotiations that are
expected to occur, the amount provisioned is considered adequate by management.
Embraer - Empresa Brasileira de Aeronáutica S.A.
31
Civil
Suit filed by Gaplan Administradora de Bens S/C Ltda. against the subsidiary Indústria
Aeronáutica Neiva Ltda. - NEIVA, related to the “Guarantee to Supply Aircraft and Pool
Purchase” agreement signed with Embraer for the period from 1988 to 1997, in which it
undertook to supply a given number of aircraft within the stipulated period, according to a
standardized series configuration at the time of manufacture, directly to the pool purchasing
members. The plaintiff alleges late delivery of the aircraft, which led to termination by the
pool purchasing members, who demanded the return of the installments paid, financial
losses in detriment to the increase in the term of the pool purchase and price alterations, in
addition to a reduction in the administration fee. The maximum exposure of the case is
approximately R$10,088.
According to the opinion of the legal advisers, the possibility of the loss of part of the
amount claimed is probable and the parent company made a provision in the amount of
R$5,044 in the financial statements as of December 31, 2004.
In addition, the Company is involved in other litigation, in addition to the cases mentioned
previously, all as a result of the normal course of business. In the opinion of management,
none of these cases is expected to have a material effect on the Company’s financial
position or results of operations.
For certain cases the Company maintains judicial deposits recorded under noncurrent assets
(see Note 8).
23. DIVIDENDS AND INTEREST ON CAPITAL
Under the terms of the bylaws, shareholders holding shares of any kind are entitled to a
dividend of at least 25% of net income for the year. The preferred shares do not have voting
rights, but do have priority in the reimbursement of capital and are entitled to dividends
10% higher than those allocated to the holders of common shares.
Embraer’s Board of Directors, subject to approval by the General Shareholders’ Meeting
that will analyze the accounts and financial statements for the 2004 fiscal year, approved the
following amounts to be distributed related with interest on capital, as an interim dividend:
Date of Amount per share Date of
approval Base Period Amount Common Preferred payment
03/12/04 1st quarter of 2004 100,998 0.13223 0.14545 04/08/04
06/25/04 2nd
quarter of 2004 160,002 0.20923 0.23015 07/15/04
09/20/04 3rd
quarter of 2004 160,058 0.20913 0.23005 10/15/04
12/17/04 4th
quarter of 2004 164,115 0.21427 0.23570 01/14/05
585,173
Embraer - Empresa Brasileira de Aeronáutica S.A.
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The dividends were calculated as follows:
2004 2003
Net income for the fiscal year (see Note 2) 1,278,089 646,943
Statutory reserve (63,905) (32,347)
Net income after statutory reserve 1,214,184 614,596
Minimum compulsory dividend (25%) 303,546 153,649
Proposed dividend:
Interest on capital 585,173 195,200
Withholding income tax on interest on capital (82,012) (21,479)
Total shareholder remuneration 503,161 173,721
Interim payments (357,428) (68,279)
Interest on capital payable 145,733 105,442
Dividends payable from prior years 149 191
Total of dividends and interest on capital payable 145,882 105,633
Amount of dividend per share:
Common stock - R$ 0.76486 0.2561
Preferred stock - R$ 0.84135 0.2817
24. SHAREHOLDERS’ EQUITY
a) Capital
The authorized capital is divided into 500,000,000 common shares and 1,000,000,000
preferred shares.
The Company’s capital, subscribed and paid up as of December 31, 2004, is
represented by:
Shares Number R$
Common 242,544,447 1,061,700
Special common 1 -
Preferred 475,797,420 2,082,728
Total 718,341,868 3,144,428
b) Special common share (golden share)
The Federal Government holds one special common share. As the holder of this share, it
has the same voting rights as the other holders of common shares. In addition, the
special class share has a power of veto on the following matters:
i. Change of Company’s name and corporate purpose.
Embraer - Empresa Brasileira de Aeronáutica S.A.
33
ii. Alteration and/or application of the Company’s logo.
iii. Creation and/or alteration of military programs, involving or not the Federal
Republic of Brazil.
iv. Training third parties in technology for military programs.
v. Interruption to the supply of maintenance and spare parts for military aircraft.
vi. Transfer of stock control.
vii. Any changes in the powers and rights of the special class share and the structure
and composition of the Board of Directors.
c) Stockholdings
Number Percentage of
Common Preferred total capital - %
Shareholders 12.31.04 12.31.03 12.31.04 12.31.03 12.31.04 12.31.03
Caixa de Previdência dos
Funcionários do Banco
do Brasil - Previ 57,335,379 57,594,480 59,240,778 60,872,078 16.23 16.54
Fundação SISTEL de
Seguridade Social 48,508,890 48,508,890 1,762,316 2,175,725 7.00 7.08
Cia. Bozano 48,509,220 48,509,220 18,786,588 18,786,588 9.37 9.40
Bozano Holdings, Ltd. - - 8,896,920 8,896,920 1.24 1.24
BNDES Participações
S.A. - BNDESPAR 3,488,893 3,734,893 45,831,196 46,929,918 6.87 7.08
Dassault Aviation 13,744,186 13,744,186 1,953,132 1,953,132 2.19 2.19
Thomson CSF/Thales 13,744,186 13,744,186 1,953,132 1,953,132 2.19 2.19
EADS 13,744,186 13,744,186 1,953,132 1,953,132 2.19 2.19
SNECMA 7,276,332 7,276,332 1,034,010 1,034,010 1.16 1.16
Federal Union 1,850,495 1,850,495 499,415 499,415 0.33 0.33
Other 34,342,681 33,837,580 333,886,801 328,447,085 51.23 50.60
242,544,448 242,544,448 475,797,420 473,501,135 100.00 100.00
The board members and statutory directors, as a group, hold 19 common shares and
3,653,690 preferred shares.
Granting of Embraer stock options
The Extraordinary Shareholders’ Meeting held on April 17, 1998 approved the
“Embraer Stock Options Plan” for officers and employees, including employees of
subsidiaries. This plan is subject to restrictions based on continuous employment with
the Company or the subsidiaries for at least two years. The Plan Management
Committee, created on the same date by the Board of Directors, is responsible for
defining the rules and administering the plan.
Under the terms of the plan, 25,000,000 preferred shares are authorized to be granted.
At the end of the third and fourth years subsequent to granting the options, the
participants will be entitled to exercise 30% of the options, and the remaining 40% at
the end of the fifth year, provided that the beneficiaries are still employed by the
Company on each date.
Embraer - Empresa Brasileira de Aeronáutica S.A.
34
Up to December 31, 2004, the Plan Management Committee had made seven grants,
equivalent to 400 lots of 50,000 shares each, making a total amount granted of
19,525,000 preferred shares, net of the 475,000 shares corresponding to awards to
individuals that no longer have an employment relationship with the Company.
Under item 11.1 of the “Embraer Stock Options Plan”, which established the end of the
grants after five years from the first grant, the granting period ended in May 2003 with a
balance of 5,000,000 shares, which were canceled.
Shares
Available for granting as of April 17, 1998 25,000,000
End of grants as of May 31, 2003, under item 11.1. of the “Embraer Stock
Options Plan” (5,000,000)
Total granted 20,000,000
Granted:
1998 7,210,000
1999 5,265,000
2000 5,200,000
2001 1,850,000
Canceled grants 475,000
Due to the 14.21% stock dividend on preferred shares, approved at the Extraordinary
Shareholders’ Meeting on March 1, 2002, the Plan Management Committee authorized
an additional 25,576 preferred shares for the participants who already held acquisition
rights on the date of the meeting, under the same conditions approved by the meeting.
For the other participants, an option to the 14.21% in preferred shares dividend has been
given priced at R$14.99 per share, with the participation of all grantees totaling 637,318
preferred shares.
We show below the changes in options, considering the incorporation of the stock
dividends:
2004 2003
Options
Average price
granted - R$ Options
Average price
granted - R$
Outstanding at beginning of
year 9,985,353 - 13,131,581 8.98
Exercised (2,296,285) 4.15 (3,056,228) 3.77
Canceled or expired (50,000) 23.00 (90,000) 13.51
Position at end of year 7,639,068 12.37 9,985,353 10.55
Exercisable at end of year 3,946,473 10.22 2,031,660 6.78
Embraer - Empresa Brasileira de Aeronáutica S.A.
35
Options are granted with an exercise price equal to the weighted average price of the
Company’s preferred stock traded on the São Paulo Stock Exchange (BOVESPA) in the
60-trading days prior to the grant date. The price may be increased or decreased by
30%, as defined in the Management Committee Plan. This percentage is used to correct
unusual fluctuations in the market price during this 60-day period.
No amounts have been charged to expense for the options. The accumulated effect on
shareholders’ equity as of December 31, 2004, if the expenses were to be recorded,
would be R$12,098. Information regarding options granted to management and
employees is shown in the following table:
Total number of shares with options, incorporating the stock dividend - December 31, 2004 position
Date of grant Exercise date Maturity
Exercise
price
in R$
Number of
shares
granted
November 1998 November 2001 November 2005 - 3
May 1999 May 2002 May 2006 1.65 15,000
November 1998 and 1999 November 2002 November 2005 and 2006 6.02 130,657
May 1998, 1999 and 2000 May 2003 May 2005, 2006 and 2007 6.62 824,843
November 1998, 1999 and 2000 November 2003 November 2005, 2006 and 2007 11.41 360,501
May 1999, 2000 and 2001 May 2004 May 2006, 2007 and 2008 12.96 1,634,365
November 1999 and 2000 November 2004 November 2006 and 2007 8.94 981,104
May 2000 and 2001 May 2005 May 2007 and 2008 12.17 2,282,073
November 2000 November 2005 November 2007 13.85 565,367
May 2001 May 2006 May 2008 22.00 845,155
Total options exercisable 7,639,068
The exercise prices in the table above include the effect of the 14.21% stock dividend
on March 1, 2002.
Capitalization of reserves
The Extraordinary Shareholders’ Meeting held on April 26, 2004 approved an increase
in capital of R$814,853 using the balance of the reserve for investments and working
capital made in the 2002 fiscal year, without issuing new shares and in the benefit of all
shareholders.
Legal reserve
Brazilian corporations are required to allocate a minimum of 5% of annual net income
to a legal reserve until that reserve equals 20% of paid-up share capital, or the reserve
plus capital reserves equals 30% of paid-up share capital. Thereafter, allocations to this
reserve are not compulsory. This reserve can only be used to increase share capital or to
offset accumulated deficits.
Capital reserve
Refers to premiums on share subscriptions and income tax incentives related to:
Industrial Technology Development Program (PDTI); cultural and artistic activities;
Teenager and Child Rights Fund and Amazon Investment Fund (FINAM); and
audiovisual activities. In the 2004 fiscal year, R$5,672 was allocated to this reserve.
Embraer - Empresa Brasileira de Aeronáutica S.A.
36
Allocation of net income
Management will propose to the Annual Shareholders’ Meeting the retention of net
income for the year, after allocation to the legal reserve and the dividend distribution,
amounting to R$629,044, as a reserve for investments and working capital for research
and development of the EMBRAER 170/190 family, new technologies, processes and
management models in order to improve the Company’s results, capabilities and
productivity, and for investments in subsidiaries.
25. SUPPLEMENTARY PENSION PLAN
a) Defined contribution
The Company and its subsidiaries sponsor a private defined contribution plan for
employees. For the companies based in Brazil, the plan is administered by Banco do
Brasil S.A. The consolidated contributions to the plan in 2004 and 2003 were R$21,943
and R$17,612, respectively.
b) Defined benefit
Embraer Aircraft Holding Inc. - EAH sponsored a defined benefit pension plan for
certain employees and a post-retirement medical plan, for which the expected costs of
the plans for the beneficiary employees and their dependents were accrued based on
actuarial valuations.
By means of an amendment, all the benefits were frozen as of December 31, 2003 and
the prorated benefit was fully accrued. As a result, the liability for future obligations
under the plan was reduced by R$22,327.
For employees hired as from October 1, 2001, the supplementary pension plan is a
defined contribution plan and those hired prior to that date were also transferred to the
defined contribution plan.
Changes in benefit liabilities for the years ended December 31, 2004 and 2003 are as
follows:
Defined benefit Post-retirement
pension plan benefits
2004 2003 2004 2003
Beginning of year 23,010 57,365 14,194 16,785
Exchange variation (1,869) (10,457) (1,153) (3,061)
Service cost - 5,837 1,835 1,661
Interest cost 1,271 2,758 960 971
Supplement to the plan - 16 - (1,997)
Plan restructuring - (22,327) - -
Actuarial loss (gain) 307 (3,558) 3,436 194
Benefits paid to participants (2,237) (6,624) (395) (394)
Participants’ contributions - - 21 35
End of year 20,482 23,010 18,898 14,194
Embraer - Empresa Brasileira de Aeronáutica S.A.
37
Changes in plan assets for the years ended December 31, 2004 and 2003 are as follows:
Defined benefit Post-retirement
pension plan benefits
2004 2003 2004 2003
Fair value at the beginning of year 24,768 29,134 5,570 6,355
Exchange variation (2,013) (5,311) (452) (1,158)
Employer contributions 2,212 3,523 - -
Return on plan’s assets 1,736 4,045 479 733
Participants’ contributions - - 21 35
Benefits paid to participants (2,237) (6,623) (395) (395)
Fair value at the end of year 24,466 24,768 5,223 5,570
The components of accrued benefit costs at December 31, 2004 and 2003 are as
follows:
Defined pension Post-retirement
benefit medical benefits
2004 2003 2004 2003
Accumulated surplus (deficit) 3,984 1,757 (13,675) (8,624)
Unrecognized transition obligation - - (1,654) (1,933)
Unrecognized actuarial net gain (loss) (165) - 4,587 1,558
Accrued benefit cost 3,819 1,757 (10,742) (8,999)
The actuarial weighted average assumptions at December 31, 2004 and 2003 are as
follows:
%
Defined pension Post-retirement
benefit medical benefits
2004 2003 2004 2003
Discount rate 6.00 6.25 6.00 6.50
Expected return on plan assets 7.75 7.75 7.75 7.75
Rate of compensation increase - 5.50 5.50 5.50
Embraer - Empresa Brasileira de Aeronáutica S.A.
38
The components of net periodic benefit costs for 2004 and 2003 are as follows:
Defined pension Post-retirement
benefit medical benefits
2004 2003 2004 2003
Service cost - 5,837 1,835 1,660
Interest cost 1,271 2,758 960 971
Expected return on plan assets (1,740) (1,937) (382) (387)
Amortization of unrecognized transition
obligation - 108 - -
Amortization of unrecognized past-service
cost - 126 (121) (132)
Amortization of actuarial losses - 892 - -
Restructuring effect - (8,250) 182 119
Net periodic benefit cost (469) (466) 2,474 2,231
26. EMPLOYEE PROFIT SHARING
The Company, based on the variable remuneration policy approved by the Board of
Directors in April 1996 and renewed on March 24, 2000, has a Profit Sharing Plan (PLR)
for employees, which is linked with an action plan, the payment of dividends to
shareholders and achieving specific goals, which are established and agreed at the beginning
of each year. The PLR is equivalent to 25% of dividends and interest on capital credited to
shareholders. Of this amount, 30% is distributed in equal parts to all employees and 70%
proportional to salary. The Company recorded a consolidated expense for the PLR in the
amounts of R$175,522 and R$58,937 in 2004 and 2003, respectively.
27. OTHER OPERATING INCOME (EXPENSES), NET
2004 2003
Provision for contingencies (822) (31,240)
Cost on Gavião Peixoto implementation (90) (2,536)
Professional training and development (10,363) (39,636)
Tax penalties (57,667) -
Insurance recovery 6,089 1,932
Contractual fines 4,087 51,195
Reimbursement of expenses 7,038 7,009
Feasibility study costs (70,473) (71,510)
Provision for market value (9,461) (28,677)
Reversal of contingency - FUNDAF 10,736 -
Other sales 11,565 8,197
Other (3,500) (9,768)
(112,861) (115,034)
Embraer - Empresa Brasileira de Aeronáutica S.A.
39
28. FINANCIAL INCOME (EXPENSE)
2004 2003
Financial expense:
Interest and commissions on loans (161,922) (149,786)
Interest on taxes, social charges and contributions (91,136) (130,822)
CPMF (tax on bank account transactions) (40,451) (37,365)
Credit insurance (71,268) (13,527)
PIS/COFINS on interest income and exchange variations (32,308) (43,224)
Provision for losses on securities (*) (52,296) -
Other (26,281) (14,886)
(475,662) (389,610)
Financial income:
Short-term cash investments 321,438 292,130
Interest 34,815 28,456
Other 34,241 23,576
390,494 344,162
(*) The provision includes losses on debentures in the amount of R$31,827 and losses on
marking short-term financial investments to market in the amount of R$20,469.
Embraer - Empresa Brasileira de Aeronáutica S.A.
40
29. MONETARY AND EXCHANGE VARIATIONS, NET
2004 2003
Exchange variations:
Assets:
Accounts receivable (593,003) (1,063,043)
Advances to suppliers 1,415 (69,114)
Translation gain (loss) on foreign investments (18,650) (32,223)
(610,238) (1,164,380)
Liabilities:
Advances from customers 92,658 289,709
Loans 267,467 367,485
Suppliers 162,324 233,941
Accounts payable 46,591 203,254
Derivative transactions (18,309) (289,570)
Other accounts 1,896 49,407
552,627 854,226
Exchange variations, net (57,611) (310,154)
Monetary variations:
Assets:
Tax credits 5,573 1,764
Accounts receivable 1,103 141
6,676 1,905
Liabilities:
Loans (1,542) (3,174)
Labor claims (4,179) (430)
Other (340) (199)
(6,061) (3,803)
Monetary variations, net 615 (1,898)
Monetary and exchange variations, net (56,996) (312,052)
30. NONOPERATING EXPENSES, NET
2004 2003
Write-off of property (1,762) (696)
Rental of property items 933 2,394
Contract cancellation expenses (*) - (49,440)
Other 180 1,613
(649) (46,129)
(*) Expense incurred with the repossession of aircraft related with cancellation of the
contract with Índigo.
Embraer - Empresa Brasileira de Aeronáutica S.A.
41
31. INCOME AND SOCIAL CONTRIBUTION TAX CREDITS
Calculated based on the provisions of the legislation in effect at the applicable rates.
Deferred tax assets and liabilities are recognized on tax losses, negative social contribution
basis and temporary differences to the extent that their realization is probable.
The Company adopts the criterion of recognizing deferred tax assets on tax losses and
negative social contribution basis when realization is probable based on internal studies and
projections. With respect to credits corresponding to temporary differences related with
nondeductible provisions, composed principally of labor contingencies and tax litigation,
they will be realized as the corresponding proceedings are completed.
As of December 31, 2004, the balances of tax losses and negative social contribution basis
for which there is no statute of limitation were composed as follows:
Income tax 157,384
Social contribution 10,134
The components of deferred tax assets and liabilities as of December 31, 2004 and 2003 are
shown below:
2004 2003
Deferred tax assets on:
Tax loss carryforwards 39,346 42,976
Negative social contribution basis 912 17,179
Unrecognized credits (33,248) (35,133)
Tax loss carryforwards 7,010 25,022
Deferred tax assets on temporary differences:
Provision for tax contingencies except for income tax and social
contribution on net income 187,938 145,105
Provision for labor and civil contingencies 16,614 15,220
Provision for inventories 57,874 45,923
Provision for product warranties 67,864 79,194
Provision for losses on investments 5,259 35,485
Provision for nonrealization of tax credits 12,266 9,543
Provision for losses on contracts 94 1,488
Provision for technical assistance/training 23,767 16,029
Provision for product improvement 34,649 42,443
Provision for losses - debentures 17,781 -
Private pension accrual 2,344 2,444
Allowance for doubtful accounts 3,785 1,967
Accrual for payroll 5,442 6,373
Provision for unearned income 57,523 50,498
Other 69,933 38,844
563,133 490,556
Total assets 570,143 515,578
Deferred tax liabilities on temporary differences:
Revaluation of property, plant and equipment (16,853) (18,621)
Special monetary restatement reserve - IPC (6,098) (8,254)
Research and development (349,143) (279,638)
Government contracts (1,700) (1,167)
Accelerated depreciation (9,982) (7,415)
Others (2,388) (3,806)
Total liabilities (386,164) (318,901)
Net deferred tax asset 183,979 196,677
Embraer - Empresa Brasileira de Aeronáutica S.A.
42
In accordance with CVM Instruction No. 371/02, the expectation of realization of the tax
credits derived from temporary differences and tax losses as of December 31, 2004 is as
follows:
2005 277,162
2006 192,627
2007 40,680
2008 18,386
2009 15,310
2010 and 2011 12,810
2012 and 2013 9,551
After 2013 3,617
Total 570,143
The deferred net tax assets presented previously are reflected in the financial statements as
follows:
2004 2003
Deferred tax assets:
Current 277,161 333,397
Long term 292,982 182,181
570,143 515,578
Deferred tax liabilities:
Current (39,809) (36,582)
Long term (346,355) (282,319)
(386,164) (318,901)
183,979 196,677
We show below the composition of income and social contribution taxes expense:
2004 2003
Deferred tax asset:
On tax losses:
Tax losses offset in the year (19,897) -
Recognized current tax losses - 19,311
Increase in unrecognized credits 1,885 (74)
(18,012) 19,237
Temporary differences:
Additions 5,313 -
Reversals - (235,645)
5,313 (235,645)
Provision for current income and social contribution taxes (320,251) (33,418)
Total income and social contribution tax expenses (332,950) (249,826)
Embraer - Empresa Brasileira de Aeronáutica S.A.
43
We show below the reconciliation of the income and social contribution tax expenses:
2004 2003
Income before provision for income and social contribution taxes 1,012,228 643,123
Income and social contribution tax expenses at official rates - 34% 344,158 218,662
Permanent additions:
Translation loss on foreign investments 30,586 22,904
Income from subsidiaries - 5,133
Other 5,853 7,533
36,439 35,570
Permanent exclusions:
Translation gain on foreign investments (23,918) (11,705)
(23,918) (11,705)
Other items:
Reversal of income and social contribution taxes on earnings not
made available abroad (25,075) -
Other 1,346 7,299
(23,729) 7,299
Income and social contribution tax expenses recorded in the
statement of income 332,950 249,826
32. FINANCIAL INSTRUMENTS
Fair value of financial instruments
The estimated fair values of the Company’s financial assets and liabilities have been
determined using available market information and appropriate valuation methodologies.
However, considerable judgment was required in interpreting market data to produce the
estimated fair values. Accordingly, the estimates presented below are not necessarily
indicative of the amounts that could be realized in a current market exchange. The use of
different market assumptions and/or estimation methodologies could have a material effect
on the estimated realization values.
As of December 31, 2004, the Company had the following financial instruments:
1) Cash and banks, short-term cash investments, accounts receivable, other current assets
and accounts payable:
The book values approximate the realizable values.
2) Investments:
Principally consist of subsidiaries and affiliates recorded using the equity method or at
restated cost, which have a strategic interest in the Company’s operations. Market value
considerations are not applicable.
Embraer - Empresa Brasileira de Aeronáutica S.A.
44
3) Financing:
Subject to interest at normal market rates, as described in Note 15. The estimated
market value was calculated based on the present value of future cash payments using
interest rates that are currently available to the Company for the issue of debt with
similar terms and maturities. The estimated market value of the loans, including short-
-term installments, is as follows:
2004 2003
Book value 3,553,702 3,016,372
Market value 3,447,399 2,991,304
a) Interest rate risk:
This risk is derived from the possibility that the Company incur in losses on account
of interest rate fluctuations that increase financial expenses of loans and financing
raised in the market. The Company has derivative contracts to hedge against this
risk in certain operations and, in addition, continuously monitors market interest
rates to evaluate the possible need to contract new derivative transactions to protect
against the risk of volatility in these rates.
As of December 31, 2001, the Company had R$3,553,702 in loans and financing,
the rates of which are described below:
In foreign currency:
Fixed interest 1,341,338 1,623,537
Floating rates (i) 1,318,525 1,326,456
2,659,863 2,949,993
In local currency:
Floating rates (ii) 893,839 66,379
(i) LIBOR for U.S. dollar and JIBOR for Japanese yen.
(ii) TJLP.
In July 2002, the Company introduced, as an interest rate fluctuation risk
management policy, related to asset operations, a system of market risk
measurement associated with financial investments called the value-at-risk (VAR)
method, which consists of an analysis of a variety of risk factors that may affect the
profitability of the investments.
b) Exchange rate risk:
This risk is related to the possibility that the Company may incur losses due to
fluctuations in exchange rates, leading to a reduction in nominal amounts billed or
an increase in loan values.
However, since approximately 97% of net sales for the year were denominated in
U.S. dollars and this situation should continue for the next few years, the principal
strategy is to consider the sales in the foreign market as a natural hedge against
foreign currency denominated liabilities.
Embraer - Empresa Brasileira de Aeronáutica S.A.
45
The analysis of the amounts subject to exchange rate risk is based on a forecast of
cash flows; any unmatched cases are managed individually and the funding in
foreign currencies is contracted as derivate transactions, as described in item c)
below.
The following table shows the consolidated exposure by currency as of December
31, 2004 and 2003, based on the book value of loans and financing, trade accounts
payable, cash and cash equivalents and trade accounts receivable with and without
the effects of derivative transactions.
Without the effect of
derivative operations
With the effect of
derivative operations
2004 2003 2004 2003
Loans:
Brazilian real 893,839 66,379 1,046,381 732,042
U.S. dollar 2,451,191 2,537,747 2,491,127 2,259,567
Euro 16,194 24,763 16,194 24,763
Japanese yen 192,478 387,483 - -
3,553,702 3,016,372 3,553,702 3,016,372
Trade accounts payable:
Brazilian real 58,249 39,007 58,249 39,007
U.S. dollar 1,381,336 1,102,240 1,381,336 1,102,240
Euro 23,480 15,884 23,480 15,884
Other currencies 23,329 10,331 23,329 10,331
1,486,394 1,167,462 1,486,394 1,167,462
Total (1) 5,040,096 4,183,834 5,040,096 4,183,834
Cash and cash equivalents:
Brazilian real 1,548,951 2,581,319 1,548,951 2,581,319
U.S. dollar 1,887,260 1,067,882 1,887,260 1,067,882
Euro 4,114 5,658 4,114 5,658
Other currencies 23,419 3,745 23,419 3,745
3,463,744 3,658,604 3,463,744 3,658,604
Trade accounts receivable:
Brazilian real 50,951 31,285 50,951 31,285
U.S. dollar 1,614,088 961,664 1,614,088 961,664
Euro 82,829 45,500 82,829 45,500
Other currencies 4,448 1,704 4,448 1,704
1,752,316 1,040,153 1,752,316 1,040,153
Total (2) 5,216,060 4,698,757 5,216,060 4,698,757
Net exposure (1 - 2):
Brazilian real (647,814) (2,507,218) (495,272) (1,841,555)
U.S. dollar 331,179 1,610,441 371,115 1,332,261
Japanese yen 192,478 387,483 - -
Euro (47,269) (10,511) (47,269) (10,511)
Other currencies (4,538) 4,882 (4,538) 4,882
Embraer - Empresa Brasileira de Aeronáutica S.A.
46
c) Derivatives:
The purpose of the derivative instruments contracted by the Company is to protect
operations from exchange rate risks and interest rate fluctuations; they are not
utilized for speculative purposes. As of December 31, 2004 the derivatives consist
of foreign currency swaps, as shown in the following table.
Gain (loss)
Original Actual Amount of Average rate
Carrying
value
Market
value
Purpose Type currency currency hedge agreed 2004 2004
Import finance -
FINIMP Swap US$ R$ 167,568
66.21% of
CDI (51,881) (38,744)
Working capital/
FINIMP Swap US$ US$ (*) 1,098,274 7.78% p.a. (2,221) (10,937)
Import finance -
FINIMP Swap JPY US$ 189,900 4.31% p.a. 13,001 14,904
Total (41,101) (34,777)
(*) This swap only fixes the LIBOR rate, protecting the Company against a possible rise in interest
rates.
Gain (loss)
Original Actual Amount of Average rate
Carrying
value
Market
value
Purpose Type currency currency hedge agreed 2003 2003
Import finance Swap JPY R$ 71,930 86.17% of CDI (16,690) (20,917)
Import finance Swap US$ R$ 641,739 75.07% of CDI (148,044) (129,771)
Import finance Swap JPY US$ 311,559 4.44% p.a. 8,150 6,635
Total (156,584) (144,053)
d) Credit risk:
The Company may incur losses related to the sales of spare parts and services. To
reduce this risk, customer credit analyses are made continuously. In relation to
accounts receivable from sales of aircraft, the Company may have credit risks until
the financing structure has been completed. To minimize this risk, the Company
works with the financial institutions, to facilitate structuring of the financing.
To provide for possible losses, the Company recognized an allowance for doubtful
accounts, considered sufficient by management to cover losses on realization.
Embraer - Empresa Brasileira de Aeronáutica S.A.
47
33. COOBLIGATION, RESPONSIBILITIES AND COMMITMENTS
The Company is contingently liable for repurchasing a number of aircraft sold under sales
contracts that provide the customer with the right to sell the aircraft back to the Company in
the future, according to defined price rules. These put options become exercisable at various
times from 2004 to 2006 and can be made at the customer’s sole discretion. The put price
per aircraft under the repurchase option is less than the original sales price of the aircraft
and less than management’s estimate for the future market value of the aircraft during the
exercise period as assessed on the date of sale. If the Company is required to repurchase all
of the aircraft under the Company’s repurchase obligations, the Company may be required
to pay up to approximately US$120 million for these aircraft. Based on the Company’s
current estimates and third-party appraisals related to the forecast fair values of the aircraft,
management believes that any repurchased aircraft could be sold in the market without
material gain or loss.
The Company is also subject to trade-in options for six aircraft. These options provide that
the repurchase price can be applied to the price of an upgraded Company model. The trade-
-in price is based on a percentage of the original aircraft purchase price. The Company
continues to monitor all trade-in commitments to anticipate adverse situations. Based on the
Company’s current estimates and third-party appraisals, management believes that any
repurchased aircraft could be sold in the market without significant gain or loss.
Financial guarantees are triggered if customers do not meet their obligations to pay the debt
during the term of the financing under the related financing arrangements. Financial
guarantees provide credit support to the guaranteed party to mitigate default-related losses.
The related aircraft collateralize these guarantees. The value of the aircraft may be adversely
affected by an economic downturn. In an event of default, the Company usually acts as an
agent for the guaranteed party for the refurbishment and resale of the related aircraft. The
Company may be entitled to a fee for such resale services. Typically, a claim under the
guarantee should be made only upon surrender of the related aircraft for resale.
Residual value guarantees provide a third party with a specific guaranteed asset value,
typically at the end of the financing agreement. In the event of a decrease in market value of
the underlying asset, the Company shall bear the difference between the specific guaranteed
amount and the actual fair market value. The Company’s exposure is mitigated by the fact
that, in order to benefit from the guarantee, the guaranteed party has to make the underlying
assets meet specific return conditions. The value of the guarantee typically ranges from 18%
to 25% of the sales price from the 10th
to the 15th
year after delivery. Based on the
Company’s current estimates and third-party appraisals, the present minimum residual value
may exceed the assessed value of certain aircraft already delivered. However, management
believes that, considering the potential for recovery in the market and an improvement in
financing conditions for 15 to 16-year periods, no significant losses will be incurred.
The Company makes premium payments to its captive insurance affiliate, ECC Insurance &
Financial Co. Ltd., to assume such liabilities. The premium is considered to be sufficient to
cover the Company’s estimate of future payments it may incur as part of fulfilling its
guarantee obligations.
Embraer - Empresa Brasileira de Aeronáutica S.A.
48
Considering the volatility of the air transport industry and its impact on the current
assumptions of future market value of the aircraft and airline companies’ credit risk, the
Company has recognized a provision of R$196,788 at ECC Insurance & Financial Co. Ltd.
in order to cover financial guarantees related to aircraft delivered to December 31, 2004
(R$158,830 in 2003).
Certain sales contracts contain provisions for guarantees of certain minimum levels of
aircraft performance subsequent to delivery based on predetermined operating targets. If the
aircraft subject to such guarantees do not achieve the minimum performance indices after
delivery, the Company may be obligated to reimburse its customers for the implied
incremental operating and service costs incurred based on formula defined in the related
agreements. Losses related to such performance guarantees are recognized when known or
when circumstances indicate that the aircraft is not expected to meet the minimum
performance requirement, based on management’s estimate.
Embraer Aircraft Holding Inc. - EAH is responsible for noncancelable operating leases for
land and equipment. These leases expire at various dates to 2020.
The facilities of Embraer Aircraft Customer Services, Inc. - EACS are located on leased
land under a contract which expires in 2020.
The Company has lease obligations for land, IT equipment and vehicles, with annual
payments as follows:
Year 2004
2005 13,715
2006 7,021
2007 2,382
2008 1,395
2009 1,350
After 9,540
Total 35,403
34. INSURANCE
As of December 31, 2004, the insurance policies taken out with third parties amounted to
R$7,798,146, and the amounts are considered to be sufficient to cover the risks involved.
This amount does not include the insurance of vehicles, which are covered to market value.
Line Amount insured
Fire 1,677,164
Aeronautical 2,659,645
Third-party liability 3,620,602
Embraer - Empresa Brasileira de Aeronáutica S.A.
49
35. STATEMENTS OF CASH FLOW
The statements of cash flow were prepared using the indirect method based on accounting
information, in accordance with instructions of NPC 20 issued by IBRACON - Brazilian
Institute of Independent Auditors, considering the principal operations that influenced cash
and cash equivalents.
2004 2003
OPERATING ACTIVITIES
Net income for the year 1,255,833 587,653
Items that do not affect cash flow:
Equity in unconsolidated subsidiary - (146)
Translation losses on foreign investments 19,613 32,938
Minority interests 8,618 1,697
Depreciation and amortization 221,554 160,499
Write-off of deferred charges - 2,765
Losses on the disposal of permanent assets 317 696
Interest on tax refinancing, debentures, financing and other 137,287 116,525
Monetary and exchange variations, net (278,442) (246,515)
Provision for losses 34,269 33,032
Provision for obsolescence 18,989 10,411
Provision for market value reduction - (5,157)
Deferred income and social contribution taxes 12,697 216,408
Provision for losses on the bonds and securities 31,827 -
Provision for contingencies 57,930 13,820
Reversal for doubtful accounts (7,716) (16,408)
1,512,776 908,218
CHANGES IN ASSETS AND LIABILITIES
Accounts receivable (712,163) 1,413,012
Inventories (718,940) (513,587)
Prepaid expenses 67,869 (16,230)
Recoverable taxes (7,337) (39,818)
Other receivables (141,492) 370,869
Compulsory deposits and loans 71,406 (723,576)
Trade payables 318,932 25,843
Taxes payable 24,871 4,837
Other provisions (21,079) 72,074
Contributions from partners 14,940 (153,058)
Advances from customers (398,296) (131,073)
Contingencies 256,013 223,948
Income and social contribution taxes payable 28,999 (168,919)
Other accounts payable 48,519 (27,567)
(1,167,758) 336,755
CASH GENERATED BY OPERATING ACTIVITIES 345,018 1,244,973
INVESTMENT ACTIVITIES
Sale of property, plant and equipment 482 7,915
Bonds and securities (125,367) (30,866)
Additions to property, plant and equipment (109,656) (443,002)
Additions to deferred charges (415,954) (506,267)
Additions to investments (41,219) -
Tax incentives 5,672 551
CASH USED IN INVESTMENT ACTIVITIES (686,042) (971,669)
Embraer - Empresa Brasileira de Aeronáutica S.A.
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2004 2003
FINANCING ACTIVITIES
Loans repaid (3,779,313) (1,467,310)
New loans obtained 4,459,617 2,737,828
Dividends and interest on capital (543,664) (217,419)
Capital increase 9,524 11,533
CASH GENERATED BY FINANCING ACTIVITIES 146,164 1,064,632
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (194,860) 1,337,936
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 3,658,604 2,320,668
CASH AND CASH EQUIVALENTS - END OF YEAR 3,463,744 3,658,604
36. INFORMATION PER SEGMENT
Commercial Aviation Segment
The operation to construct regional aircraft principally involves the development,
production and marketing of commercial jets and the supply of related supporting services,
principally to the global regional airline business. The Company’s products in the regional
aircraft segment are organized by product family, including the ERJ 135/140/145 family and
the EMBRAER 170/190 family.
The ERJ 145 family is composed of the ERJ 135, ERJ 140 and ERJ 145 jets, certified to
operate with 37, 44 and 50 seats, respectively. These aircraft types have approximately 96%
common parts and components. The Company has a limited number of customers for a
substantial portion of its total net sales.
The Company is developing a new group of commercial jets comprising the EMBRAER
170 for 78 passengers, EMBRAER 175 for 86 passengers, EMBRAER 190 for 106
passengers and the EMBRAER 195 for 118 passengers. As of December 31, 2004, the
Company had 297 firm orders for this aircraft group. The first model to reach full
development was the EMBRAER 170 followed by the EMBRAER 175.
The EMB 120 Brasília is a 30-seat turboprop aircraft that has been in operation since 1995.
Up to December 31, 2004, 352 of these aircraft had been delivered.
Defense market segment
The defense aircraft segment principally involves research, development, production,
modification and support for military defense aircraft, and related products and systems.
Although some military defense aircraft are contracted on the commercial market, the
Company’s principal client is the Air Force Command. In the defense segment, the
Company has the following products:
EMB-312, on two platforms, the Tucano Básico and the Super Tucano - EMB-314. The
Super Tucano is also being used as a platform for the AL-X, an aircraft developed for the
Air Force Command.
Embraer - Empresa Brasileira de Aeronáutica S.A.
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AM-X, an advanced ground attack jet, developed and produced through a cooperation
agreement between Brazil and Italy.
Modified platforms of the ERJ 145 (EMB 145 AEW&C - Airborne Early Warning and
Control, EMB 145 RS - Remote Sensing Aircraft and EMB 145 MP - Marine Remote
Sensing Aircraft) for use by the Brazilian, Mexican and Greek authorities.
Corporate jet segment
The Company has developed a line of corporate jets based on the ERJ 135 regional jet. The
Legacy, as the corporate jet is called, is marketed in two versions - executive and corporate.
Other related business
The other related business segment is principally related with: (i) after-sales support
services to customers, including maintenance and training; (ii) operationally leased aircraft;
and (iii) production and sale of spare parts for the Company’s aircraft. In addition, Embraer
supplies structural parts and mechanical and hydraulic systems to certain specific clients.
The Company also produces agricultural crop spraying aircraft.
In millions of
Brazilian reais
2004 2003
Net sales per region
Americas, except Brazil:
Regional 6,617.6 4.564.0
Defense 270.9 342.3
Corporate 580.3 419.0
Other business 340.4 268.1
7,809.2 5.593.4
Europe:
Regional 924.9 201.6
Defense 62.9 161.6
Corporate - 106.2
Other business 159.1 207.6
1,146.9 677.0
Other:
Regional 247.8 -
Defense 19.4 2.1
Corporate 122.1 -
Other business 40.1 2.6
429.4 4.7
Brazil:
Defense 702.8 240.1
Other business 142.9 55.4
845.7 295.5
Total 10,231.1 6,570.6
Embraer - Empresa Brasileira de Aeronáutica S.A.
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In millions of
Brazilian reais
2004 2003
Gross profit per segment
Net sales:
Regional 7,790.3 4,765.6
Defense 1,056.0 746.1
Corporate 702.4 525.3
Other business 682.5 533.6
10,231.2 6,570.6
Sales costs:
Regional (4,936.2) (2,963.2)
Defense (828.1) (607.0)
Corporate (575.6) (436.5)
Other business (483.0) (213.1)
(6,822.9) (4,219.8)
Gross margin:
Regional 2,854.1 1,802.4
Defense 227.9 139.1
Corporate 126.8 88.8
Other business 199.5 320.5
3,408.3 2,350.8
37. INFORMATION ON SPECIAL PURPOSE COMPANIES - SPCs
The Company structures some of its sales financing transactions through SPCs, which may
be subject to risks and/or residual benefits, even though it does not have corporate interests
in them. According to CVM Instruction No. 408, dated August 18, 2004, the Company
should consider this type of entity as a direct or indirect subsidiary for consolidation
purposes as from 2005.
We present below a summary of these transactions with SPCs, their purposes and balances
and related transactions as of December 31, 2004:
a) For the purpose of improving the quality of guarantees to finance the sale of EMB 120
aircraft by Embraer to an end customer in Latin America, the transaction was structured
by means of an SPC. The value of its assets is US$17 million, of its liabilities is US$15
million and of its shareholders’ equity is US$2 million
b) In order to temporarily structure leasing operations in the United States (US Leverage
Lease) of ERJ 145 aircraft for a customer, an SPC is being used until the final funding
structure is concluded. The value of its assets and liabilities is US$893 million. The
Company maintains a guarantee in the amount of US$226 million, according to Note
9.(a), and acts as a resale agent and guarantor for US$52 million of the financing
provided by third parties, the guarantees being covered by the full value of the aircraft.
Embraer - Empresa Brasileira de Aeronáutica S.A.
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c) Certain entities were used to structure the financing of leasing sales of ERJ 145 aircraft
to clients in Europe and Latin America. The total value of their assets and liabilities is
US$247 million and the Company acts as a resale agent and guarantor for US$71 million
of the financing provided by third parties, the guarantees being covered by the full value
of the aircraft.
The remaining entities used to date do not have material assets and liabilities, and were
created to make certain sales possible and to securitize receivables from end customers. On
this date, the existence of these entities can be explained by the obligation to pay the
expenses of structuring the securitization throughout the terms of the financing.
RE0004*.*