2005* Embraer Day Financial Presentation (DisponíVel Apenas Em InglêS)

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2005* Embraer Day Financial Presentation (DisponíVel Apenas Em InglêS)

  1. 1. Corporate Governance
  2. 2. Embraer Voting Capital Ordinary Shares: 242,544,448 (34.0%) Bovespa 19.2% Brazilian Govt.* 0.8% Controlling Shareholders European Group 60% 20% 0.8% Brazilian Govt.* 20% European Group 60% Controlling Shareholders Dassault Aviation 5.67% PREVI (Banco do Brasil Pension Fund) 20% Thales 5.67% SISTEL (Former Telebrás Pension Fund) 20% 19.2% Bovespa EADS 5.67% Bozano Group 20% Snecma 3% * Includes one golden share October, 2005
  3. 3. Embraer Preferred Shares Preferred Shares: 478,290,684 (66.0%) BNDES 9.0% Bovespa 31.2% NYSE 59.8% October, 2005
  4. 4. Corporate Governance • Active Board of Directors & Permanent Fiscal Board acting as an Audit Commitee. • Board of Directors Composition: Six representatives indicated by the Controlling Shareholders, plus the CEO; Two representatives indicated by the Employees; Two representatives of the minority shareholders; Two governament representatives.
  5. 5. Corporate Governance Audit Comitee – Conselho Fiscal • Composed of five independent members including one financial expert • Elected in a annual general shareholders’ meeting • Makes financial reporting recommendations to management and the board • Responsible for handling whistleblower complains • Oversees the relationship between managers and external auditors
  6. 6. Corporate Governance QCorporate Governance Actions Trading policy Disclosure Policy Risk management Code of Ethics & Conduct Disclosure Comitee Accountability Brazilian Gaap & US Gaap Simultaneously
  7. 7. Dividends 54% US$ Million 50% 47% 47% 204 139 104 68 2002 2003 2004 9M05 Dividends Pay-Out Ratio Yield (Gross) 5.47 4.58 3.79 4.00
  8. 8. Differences between Brazilian GAAP & US GAAP
  9. 9. Revenue Recognition – BR Gaap & US Gaap Commercial Airline & Corporate Segments Revenues are generally recognized as deliveries are made Defense Defense segment operates in a business environment that differs from the Airline and Business Jet market segments. The main differences are: • Long-term contracts • Products are customized according to customer needs • Quantities and selling prices are generally fixed at the beginning of the program • Revenues are recognized under percentage-of- completion method.
  10. 10. Cost Recognition – BR Gaap & US Gaap Commercial Aircraft & Executive Aircraft Segments BR GAAP R&D capitalized as a deferred asset Amortization based on total serial production US GAAP No program accounting Cost as incurred
  11. 11. Defense Revenue and Costs Defense contract accounting Long-term contract accounting requires management to estimate the total contract cost. These costs consist of designing, engineering, manufacturing and entry into service. Total estimated contract costs include: Raw material Supplier components Direct Labor, including engineering Manufacturing overhead Estimated total Revenue to percent of complete x price = be recognized to date Revenue to be - Revenue recognized = Current period Recognized to date in prior periods revenue
  12. 12. Defense Revenue and Costs Defense contract accounting Contract monitoring and related adjustments: Review is made on a quartely basis As part of these reviews, additional revenues arising from change order requests and additional cost from over spending are identified and reflected in a revised contract margin. The effect of any revision is accounted for by way of a cumulative catch-up adjustment to margin Physical progress Percent of complete = Costs incurred to date Most recent estimate of total cost
  13. 13. Translation Effects (R$ x US$) BR GAAP ü Non monetary items no longer indexed by the UFIR (adjusted to current purchasing power) ü There is no functional currency concept US GAAP ü Functional Currency is the US$ (SFAS 52) ü Non Monetary items (Assets and Liabilities) are accounted in historical US$ values
  14. 14. PP&E BR GAAP ü Assets revaluation at market value is allowed ü Since 1996 interest capitalization is not accounted US GAAP ü Interest capitalization over Long-term assets construction (SFAS 34) ü Capitalization of assets acquired through capital leases (SFAS 13)
  15. 15. Deferred Assets BR GAAP üCapitalization of expenses will be amortized over future fiscal years üDeferral of pre-operation costs US GAAP üR&D expense accounted as incurred in the income statement üPre-operation costs are not deferred
  16. 16. Operating Lease for capital goods BR GAAP üOperating leases are accounted as rent US GAAP üOperating lease concept explained by SFAS 13
  17. 17. Derivatives BR GAAP ü No CVM or IBRACON specific rule ü Accounted by the accrual method US GAAP ü SFAS 133 in use since 2001 ü Gains and losses recognized during the period ü Fair value of derivatives is mandatory
  18. 18. Effective Tax Rate BR GAAP ü Differences between accounting and fiscal records US GAAP ü All BR GAAP and US GAAP accounting diferences are considered to calculate the deferred income tax Effective Tax Rates 2000 2001 2002 2003 2004 9M05 BR GAAP 24.2% 30.6% 26.6% 29.8% 20.8% 27.4% US GAAP 26.8% 40.3% 45.6% 25.8% 22.7% 13.8%
  19. 19. Effective Tax Rate – BR GAAP R$ thousands 9M05 Income before taxes 685,828 Nominal expense 34% tax rate 233,182 Permanent additions 64,879 Permanent exclusions (1,526) Interest on Shareholders Equity (34%) (112,817) Other items 3,863 Total expenses 187,581 Effective tax rate 27,4%
  20. 20. Effective Tax Rate – US GAAP US$ thousands 9M05 Income before taxes 344,678 Nominal expense 34% tax rate 117,191 Permanent additions 1,660 Permanent exclusions (1,123) Interest on Shareholders Equity (34%) (47,362) Other items (22,836) Total expenses 47,530 Effective tax rate 13,8%
  21. 21. Reconciliation between BR & USGAAP Shareholders Equity (09/30/05) US$ Million Period end exchange rate 2,500 2,069 -18 - 200 2,000 -456 1,508 1,500 155 12 -10 -29 -15 1,000 500 - BR GAAP Translation Inventories Deferred Assets Derivatives fair Fin 45 Operacional Deferred Income Others USGAAP Effects (R&D) Value Lease Taxes Adjusments
  22. 22. Reconciliation between BR & USGAAP Net Income (9M05) US$ Million Average exchange rate 400 392 -36 350 - 134 300 -94 -12 1 1 290 250 196 200 - 150 100 50 - BR GAAP Exchanges rate Translation Inventories Deferred Assets Derivatives fair Deferred Income Others USGAAP effect Effects (R&D) Value Taxes
  23. 23. Financial Guarantees BR GAAP ü No specific rule applies ü Disclosure under notes to consolidated financial statements is mandatory US GAAP ü Since 01/01/2003 guarantees given to third parties are measured at fair value and recognized on income (FIN 45) ü In both Gaaps, IBNR (incurred but not reported) accounts for problable losses through the ECC Insurance
  24. 24. SPEs Consolidation Some of the sales transactions are structured financings through which an SPE purchases the aircraft, pays the full purchase price on delivery or at the conclusion of the sales financing structure, and leases the related aircraft to the ultimate customer. BR GAAP •New CVM 408/2004 rule to be applied in 2004 • Standartization towards IASB international rules and FIN 46 •US GAAP •Accounted as collateralized accounts receivable and non-recourse and recourse debt •Starting in 2004 FIN 46 and FIN 46R becomes effective and basic consolidation conditions were maintained •Before 2004 other rules were used for SPE consolidation Source: 20 F note 8
  25. 25. Off-Balance Sheet Exposure
  26. 26. Off Balance Sheet Exposure The maximum potential payments represent the “worst-case scenario,” and do not necessarily reflect the expected results by the Company. Estimated proceeds from performance guarantees and underlying assets represent the anticipated values of assets the Company could liquidate or receive from other parties to offset its payments under guarantees. Source: 20 F note 34 US$ million 2003 2004 Maximum Financial Guarantees 1,230 1,710 RVGs 627 836 Mutually Exclusive Exposure* (392) (418) Provisions & Liabilities Recorded (67) (98) Off Balance Sheet Exposure 1,397 2,030 Estimated proceeds from performance 1,650 2,038 guarantees and underlying assets *The residual value guarantees can only be exercised if the financial guarantees have expired without having been triggered and therefore have not been combined to calculate the maximum exposure
  27. 27. Off Balance Sheet Exposure Repurchase Options (Put Options) • Provide the customer with the right to sell the aircraft back to the Company in the future according to defined pricing rules. • These put options may become exercisable at various times • Can be exercised at the customer’s sole discretion. • The put price per aircraft is less than the original sales price of the aircraft and less than management’s estimation for the future market value of the aircraft during the exercise period as assessed at the date of sale. Put obligations: As of December 2003 US$ 500 million As of September 30, 2005 US$ 0 million
  28. 28. Off Balance Sheet Exposure Trade-in options Provide a customer with the right to trade-in existing aircraft upon the purchase of a new aircraft. The trade in price per aircraft is less than the original sales price of the aircraft and less than management’s estimation for the future market value of the relevant aircraft. 6 Commercial jets are subject to trade-in § Of the total 898 firm orders and 228 options signed for the ERJ 145 family since 1996, only 7 were trade-ins of EMB 120s (Brasilia). § Of the total 412 firm orders and 373 options signed for the EMBRAER 170/190 family since 1999, only 6 included trade-in options.
  29. 29. Financial Guarantees & RVGs Provisioning of financial guarantees and RVGs In order to cover the exposure related to financial guarantees, a provision is recorded at the time of the delivery. Use of sophisticated models to measure the provision: • External appraisals of expected aircraft value • Credit ratings of the airlines companies • Current and future market outlook • Aircraft expected availability level in the market
  30. 30. Sales Finance
  31. 31. Aircraft Financing A Complex and Time Consuming Operation Deposits Down-payment Financing ä 5%$ 5%$ 5%$ $ $ $ $ ... + + + + + + + Time ã 18m 12m 6m Q1 ... Firm Order Delivery <---------- 20 months --------> <-------------- 6 years (average) ------------> § Airlines order aircraft in advance and take deliveries over several years. § Option Contract: Customer has the right to exercise option and is not required to purchase aircraft. Options may be exercised up to 18 months prior to delivery.
  32. 32. Financing Source (1995 – 3Q 2005) Amount Exported: US$ 17.79 billion Amount Financed by BNDES: US$ 7.67 billion Regional Aircraft Delivered: 1039* BNDES 43% Market 57% * Including Executive and Defense Market: • EMB 120: 55 • ERJ 145 Family: 832 • Legacy 600: 49 • Defense: 12 • EMBRAER 170/190 Family: 91
  33. 33. Financing Methods Total Regional Aircraft Delivered: 1039 (up to 3Q 2005) Finance Lease Bridge At Sight 5% 2% 6% Operating Lease Tax Lease 5% 46% Straight Finance 36%
  34. 34. Type of financing Ø Operating Lease (True Lease): • It is a rental for a pre-settled period of time • Purchase Option must be at market value at the end of the lease term • It is an off-balance sheet transaction to Lessee Commonly used by start-up and/or weak credit companies. Ø Finance Lease (Capital Lease): • It is a finance transaction (full pay-out structure) • The purchase option is a guaranteed residual value • It is an on-balance sheet transaction to Lessee (USGAAP) Ø Straight Loan: • Financing provided by the lender direct to the airline
  35. 35. Type of financing Ø Leveraged Lease (Tax Lease) • Involves at least three parties: Lessor, Lessee, Lender • Non-recourse debt against lessor • Equity investor contributes 20% of a/c value • Transfer of fiscal benefits to the lessee, resulting in lower monthly payments • Equity Investor benefits from 100% accelerated depreciation and deduction of interest expense
  36. 36. Type of financing – Capital Markets EETC – Enhanced Equipment Trust Certificate • Type of financing used by airlines to capture resources by issuing bonds backed by the aircraft • Bonds are issued in tranches (A, B, C...); • Each tranche has a specific Loan to value, and different liquidation guarantees (aircraft) in case of default • Tranches B, C...have higher interest rates and carry on more risk • Bonds are backed by the aircraft • EETC’s give airlines with lower credit rates an opportunity to capture resources at lower cost • EETC’s can be optmimized and combined with other financing structures such as leveraged leases
  37. 37. EETC – Annual volume of new issues (1994~2005) Amount US$ Billion 10,37 US Airlines Non-US Airlines 8,13 5,01 3,25 3,72 3,28 2,69 1,31 1,28 1,61 0,76 0,99 0,75 0,51 0,47 0,49 0,31 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005F EETC issuance increased steadily from the first transaction in 1994 through the peak in 2001 before dropping off in 2002 & 2003 Source: Citigroup FONTE: Citigroup
  38. 38. Risk Management
  39. 39. EMBRAER Capital (ECC) - Structure EMBRAER S.A. (Brazil) Manufacturer Embraer Spain Holding Co. SL (Spain) Holding ECC Leasing Co. Ltd. ECC Investiment Switzerland, AG (Ireland) (Switzerland) Leasing Holding ECC Insurance & Financial Co. Ltd. EFL – Embraer Financial Limited. (Cayman Islands) (Cayman Islands) Captive Insurance
  40. 40. ECC Insurance Company ECC Insurance & Financial Co. Ltd. EMBRAER S.A. (Cayman Islands) (Brazil) Captive Insurance Manufacturer Mission: Embraer Spain Holding Co. SL • Assures the payment of contingent losses that Embraer (Spain) may face related to Embraer’s financial guarantees; Holding Insurance Outline: ECC Leasing Co. Ltd. ECC Investiment Switzerland, AG • IRB transaction approval: (Ireland) (Switzerland) Holding • $ 406 MM premium payments over the next five Leasing years covering all financial guarantees associated with deliveries within such period ECC Insurance & Financial Co. Ltd. (Cayman Islands) • Regulated by Cayman Islands Monetary Authority Captive Insurance • Initial Capital in Insurance $ 2,6 MM • Insurance policy issued associated with aircraft deliveries up to Sept.05: • $ 168.5 MM premium payments for obligations • $ 70,5 MM in IBNR losses • New declarations and endorsements quarterly (new premiums)
  41. 41. ECC Leasing Company ECC Leasing Co. Ltd. (Ireland) EMBRAER S.A. (Brazil) Leasing Manufacturer Mission: Embraer Spain Holding Co. SL • Manage and remarket a portfolio of aircraft that (Spain) Embraer acquires through trade-ins and Holding exercised put options; • Remarketing service provider for third-parties in ECC Leasing Co. Ltd. ECC Investiment Switzerland, AG connection with sales campaign. (Ireland) (Switzerland) Leasing Holding • Embraer is NOT allowed to lease NEW aircraft without specific Board approval for such transactions; ECC Insurance & Financial Co. Ltd. (Cayman Islands) • Business sense: any transaction has to Captive Insurance accomplish a set of tests and rules, as follows: • Gross margin test; • Net margin test • Cash flow test; and • Title transfer rule.
  42. 42. ECC Leasing involvement in Embraer’s transactions • All new sale that may involve a TRADE-IN transaction in the Commercial and Executive Aviation sectors shall be driven through ECC Leasing/DAA for negotiations purposes. • Prospective customers shall be jointly approached by Sales Team and ECC Leasing/DAA in order to construct a trustful relationship with Embraer and ECC Leasing.
  43. 43. ECC Leasing main goal Asset Management (DAA) is responsible for all administration and technical issues related to Embraer’s portfolio of pre-owned aircraft. ECC Leasing Company Ltd (ECC Leasing) was incorporated in Dublin (Ireland) on September 19th, 2002. Main goal : • Manage the asset of Embraer pre-owned aircraft. • Acquire pre-owned aircraft in trade-in to support the new aircraft sales. • Repossess pre-owned aircraft in events of default by Lessee. • Manage remarketing obligations assumed by Embraer before lenders or leasing companies. • Search for potential airlines on the market to acquire or lease the aircraft from ECC Leasing portfolio. • Manage activities of appraisal, acquisition, leasing and remarketing of pre-owned aircraft.
  44. 44. General Directives from ECC Leasing Board • The purchase price of a pre-owned aircraft (“trade-in”) shall not be higher than the gross margin amount of the new aircraft sold by Embraer. ü If there is any positive difference, it shall be carried by the new aircraft sales as an additional concession. ü It is prohibited cash flow shortage. • New aircraft shall only be purchased by ECC Leasing/DAA if there is a substantive, specific and unanimous Board approval for such purchase or if such purchase is done through a third party company partnership. • ECC Leasing/DAA can purchase “pre-series” aircraft, model EMBRAER 170, 175, 190 and 195 from Embraer for 70% its market price.
  45. 45. Asset Management Remarketing Activities 7 ex-RioSul EMB 120 2 ex-Bral ERJ 145 4 Legacy 600 sold to FAB leased to TSA leased to Flight Options based on FMV in 2004/05 based on FMV in 2003 Based on FMV in 2003 4 ex-RioSul ERJ 145 2 ex-INDIGO ERJ 135 sold to FAB based converted into 37pax and leased to on FMV in 2004 Chautauqua based on FMV in 2004
  46. 46. Asset Management Remarketing Activities 2 ex-LOT ERJ 145 2 EMBRAER 170 Pre-Series 2 ERJ 145 Pre-Series leased to FlyAir leased to Paramount leased to TSA based on FMV in 2005 based on FMV in 2005 based on FMV in 2004 2 ex-RioSul ERJ 145 1 ex-LOT ERJ 145 On-going negotiations Advanced negotiations with potential customers
  47. 47. Asset Management Remarketing Activities 5 ex-RioSul ERJ 145 3 ex-RioSul ERJ 145 1 ex-RioSul ERJ 145 Leased to Aerolitoral sold to FAB sold to DPF based on FMV in 2005 based on FMV in 2005 based on FMV in 2005
  48. 48. Financial Results
  49. 49. Jet Deliveries 40 42 41 30 30 3Q04 4Q04 1Q05 2Q05 3Q05
  50. 50. Net Revenue by Segment 9M05 9M04 Customer Customer Services and Services and Business Jet Others 10% Others 7% Market 4% Business Jet Market 6% Defense Aviation Defense Aviation 11% 12% Airline Market Airline Market 72% 78%
  51. 51. Net Revenues and Gross Margin – US GAAP US$ million 40% 39% 37.6% 35.1% 32% 38% 33.2% 31.4% 32.0% 28.1% 34% 28.2% 31% 1,064 3,441 937 954 2,927 2,640 763 812 2,762 2,526 2,144 1837.3 1,353.5 3Q04 4Q04 1Q05 2Q05 3Q05 1998 1999 2000 2001 2002 2003 2004 9M05
  52. 52. Net Revenues and Gross Margin – BR GAAP R$ million 32.2% 33.5% 30.8% 10,231 44.6% 41.6% 24.5% 7,748 35.8% 33.3% 18.6% 31.1%6,891 6,571 6,406 28.3% 28.6% 2,734 2,647 5,099 24.2% 2,434 3,347 2,036 1,935 1,570 1998 1999 2000 2001 2002 2003 2004 9M05 3Q04 4Q04 1Q05 2Q05 3Q05
  53. 53. Income from Operations- US GAAP US$ Million 16.3% 15.7% 14.9% 13.6% 22% 12.2% 19% 17% 16% 15% 167 12% 142 651 127 125 99 462 470 544 390 265 3Q04 4Q04 1Q05 2Q05 3Q05 2000 2001 2002 2003 2004 9M05
  54. 54. Income from Operations – BR GAAP R$ million 28.0% 28.0% 17.6% 16.9% 16.1% 20.1% 18.9% 18.7% 17.0% 15.7% 462 465 7.5% 7.3% 2,167 10.1% 328 1,928 1,740 183 1,243 141 1,027 625 652 247 3Q04 4Q04 1Q05 2Q05 3Q05 1998 1999 2000 2001 2002 2003 2004 9M05
  55. 55. Income Statement - Currency Breakdown In US$ Millions 9M05 % of Sales % in US$* Net Sales 2,640 ~92% COGS 1,817 69% ~85% Gross Profit 822 45% Selling Expenses 178 22% ~80% SG&A 139 78% ~20% R&D 62 45% ~20% Other 18 29% ~20% * Approximate amounts
  56. 56. Exchange Rate Impact – BR GAAP BR GAAP The 21.3% Brazilian real appreciation against the U.S. dolar YoY impacted revenues and costs of goods sold as 95% of net revenues and 85% of COGS are denominated in U.S. dolars. (R$ MM) 2T05 Average 3T04 Average 3T05 Average US$/R$ US$/R$ US$/R$ NET REVENUE 1,935 2.46 2,734 2.94 2,434 2.32 COGS (1.423) 2.65 (1,791) 2.97 (1,980) 2;64 GROSS PROFIT 511 943 454 US$ DIFFERENCE (0.19) (0.03) (0,32) GROSS MARGIN 26,4% 34,6% 18.4% US GAAP As only 15% of our COGS are denominated in reais and our functional currency is the US dolar, the impact of exchange rate fluctuations is much smaller.
  57. 57. Net Income – US GAAP US$ Million 17% 12.1% 12.6% 10.2% 10.4% 11% 11% 11% 8.7% 9% 380 114 110 328 97 321 6% 290 83 83 223 136 3Q04 4Q04 1Q05 2Q05 3Q05 2000 2001 2002 2003 2004 9M05
  58. 58. Net Income – BR GAAP R$ million 14.5% 16.0% 12.6% 15.2% 11.5% 12.3% 10.7% 12.3% 8.6% 8.9% 7.6% 397 8.40% 282 235 3.7% 167 1,101 1,179 1.256 89 132 645 587 412 402 3Q04 4Q04 1Q05 2Q05 3Q05 1998 1999 2000 2001 2002 2003 2004 9M05
  59. 59. Balance Sheet
  60. 60. Accounts Receivable Breakdown US GAAP BR GAAP US$ Million R$ million 607 654 488 514 529 1,477 1,584 1,451 1,182 1,444 250 251 302 695 189 157 575 554 615 246 3Q04 4Q04 1Q05 2Q05 3Q05 3Q04 4Q04 1Q05 2Q05 3Q05 Outros Mercado de Aviação Comercial Others Commercial Airline Market
  61. 61. Inventories US GAAP BR GAAP US$ Million R$ Million 1,736 4,588 1,570 1,601 1,390 1,428 4,373 4,155 4,070 4,053 3Q04 4Q04 1Q05 2Q05 3Q05 3Q04 4Q04 1Q05 2Q05 3Q05
  62. 62. Net Cash (Debt) Position US GAAP BR GAAP US$ Million R$ Million 220 629 97 22 180 34 -457 -552 -167 -229 3Q04 4Q04 1Q05 2Q05 3Q05 3Q04 4Q04 1Q05 2Q05 3Q05
  63. 63. Loans Total Debt of US$ 1,700.6 Million Brazilian Currency Long Term 11% 66% Short Term Foreign 34% Currency 89% • Average cost in R$ = 12.3%p/a Long-Term Loan Average Maturity: • Average cost in US$ =5.5% p/a 3 years and 3 months
  64. 64. Loans Maturity US$ million 577 68 1,700 340 279 203 127 108 Total Short Term 2006 2007 2008 2009 2010 Beyond 2010
  65. 65. IFC Syndicated Loan US$ 180 million Syndicated Loan Proceeds to complete the end-stage launch program of the EMBRAER 170/190 family. A Loan: US$35 million Final Maturity: 12 years Tranche B1: US$ 60 million Final Maturity: 10 years Tranche B2: US$ 85 million Final Maturity: 8 years Total B Loan: US$ 145 million 5 years and 5 months average maturity 6M libor + 2.9% weighted interest rate
  66. 66. Hedging Strategy • Firm backlog of US$10.4 billion • 92% revenues in US$ • 80% of R&D and PP&E investments in R$ • 37% of total cash disbursements in R$ Main Objective of the Hedging Strategy Optimize the Natural Hedge of the Cash Flow
  67. 67. Balance Sheet US GAAP 82% 78% 82% 85% 84% 81% 86% 81% 18% 22% 18% 15% 16% 19% 14% 19% Assets Liabilities Assets Liabilities Assets Liabilities Assets Liabilities 12/31/2004 03/31/2005 06/30/2005 09/30/2005 R$ US$
  68. 68. Balance Sheet US GAAP Includes Derivatives 82% 78% 82% 85% 84% 82% 86% 81% 18% 22% 18% 15% 16% 18% 14% 19% Assets Liabilities Assets Liabilities Assets Liabilities Assets Liabilities 12/31/2004 03/31/2005 06/30/2005 09/30/2005 R$ Other Currencies
  69. 69. Investments
  70. 70. Investment Forecast In US$ Millions 2005E 2006E 2007E New Previous New Previous New R&D Total 140 119 194 66 188 Commercial Aviation 96 89 88 37 54 Executive Aviation 15 11 70 12 87 Others 29 19 36 17 47 Defense 31 88 18 38 21 Productivity and PP&E 59 77 72 59 62 Defense investments are funded by their contracts and are not included in R&D expenses but in Cost of Sales and Services.
  71. 71. PP&E and R&D – Cash Flow US$ Million 194 188 173 158 153 143 140 114 111 100 70 64 72 59 62 50 2000 2001 2002 2003 2004 2005E 2006E 2007E PP&E R&D Gross R&D amounts
  72. 72. Contributions from Risk Sharing Partners US$ million 246 14 1 108 - 70 23 19 11 Total 2001 2002 2003 2004 2005E 2006E 2007E 2008/2010E
  73. 73. Attachments
  74. 74. Financial Guarantees • Provided in the form of guarantees of lease payments, to mitigate default-related losses. • Mainly issued for the benefit of the customers financing agent. • Exercised when customers do not meet their payment obligations during the term of the financing. • Collateralized by the aircraft. Upon an event of default, the Company usually is the agent for the guaranteed party for the refurbishment and remarketing of the underlying aircraft. The Company may be entitled to a fee for such remarketing services. Typically a claim under the guarantee shall be made only upon surrender of the underlying aircraft for remarketing
  75. 75. Financial Guarantee A/C VALUE / Remaining Balance Debt or forecasted loss Risk Exposure Aircraft Value (1 - % FLD) x Remaining Balance BACK
  76. 76. Financial Guarantees & RVGs Residual Value Guarantees (RVGs) Provide a third party with a specific guaranteed asset value at the end of the financing agreement In the event of a decrease in market value of the aircraft, the Company shall bear the difference between the specific guaranteed amount and the actual fair market value In order to benefit from the guarantee, the guaranteed party has to make the aircraft meet tight specific return conditions Financial Guarantees & RVGs In the event both guarantees are issued for the same aircraft, the residual value guarantees can only be exercised if the financial guarantees have expired without having been triggered, and therefore, are mutually exclusive.
  77. 77. RVG Risk Aircraft Market Value Aircraft Value RVG Exposure % RVG x Aircraft Value Exercise Time window

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