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EMBRAER - Empresa Brasileira de Aeronáutica S.A.
Management Report 2009



Dear Shareholders,
In its 40th year, Embraer fa...
In line with recent years, the Company achieved the projected delivery, revenue and margin
figures for 2009, reinforcing i...
Embraer’s commitment to constructing a sustainable future is founded on all its dimensions,
financial, social and environm...
MARKETS AND PRODUCTS


Commercial Aviation Market

The jets produced by Embraer in the 30 to 60 and 61 to 120 seat ranges ...
The 61 to 120 seat jets will continue to assist airlines in improving efficiency, by adapting the
seats offered to passeng...
Note: Deliveries and firm order backlog include aircraft sold by the defense segment to
   state airlines (Satena and TAME...
Although the effects of the global crisis have restricted growth prospects in the short term, the
United States will conti...
2012, followed by the Legacy 450 in 2013.

In December 2009, the Phenom 300 was certified by the Brazilian National Civil ...
Seven transport aircraft were delivered to the defense market in 2009, as well as ten more
upgraded F-5 (F-5M), for the FA...
to 38. Another milestone in this field was signing the modernization contract for 12 Brazilian
Navy A-4 aircraft, announce...
As a result of this initiative, Embraer achieved recognition with the MAKE (Most Admired
Knowledge Enterprise) Award Brazi...
Highlights of new product development were the first flight of the Legacy 650, which is
currently undergoing certification...
SALES FINANCING
From the second half of 2008, the global financial crisis affected the availability and cost of
aircraft f...
The leasing and sale transactions were conducted in line with market values, with a view to
preserving the value of Embrae...
In Brazil, Embraer has branches in Gavião Peixoto, Botucatu, São Paulo, Eugênio de Melo
and the Technological Complex (bot...
In millions of R$                                                         2008                     2009
               Net...
The executive aviation market generated income of R$ 1,694.1 million in 2009, 4.6% up on
R$ 1,619.1 million in 2008. The a...
Employee profit sharing (PLR) totaled R$ 61.9 million, a drop of 35.0% on R$ 95.3 million the
previous year.

Administrati...
Consolidated Highlights
                                                           2008            2009
                  ...
Consolidated Indicators                    2008           2009
              Debt / Shareholders’ Equity                  ...
models, with a view to increasing its expertise and productivity.

Consolidated Statements in US GAAP
In the interests of ...
CONSOLIDATED STATEMENTS OF INCOME IN US GAAP
                                FOR THE YEARS ENDED DECEMBER 31, 2008 AND 200...
RECONCILIATION OF SHAREHOLDERS' EQUITY
                     FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2009


             ...
Performance EMBR3 - BM&FBOVESPA                                                                                           ...
Embraer’s market capitalization reached US$ 4.0 billion at the end of December 2009,
compared to the US$ 2.5 billion recor...
CORPORATE GOVERNANCE

The corporate restructuring in 2006, when the Company’s shares were merged into a single
class of co...
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  1. 1. EMBRAER - Empresa Brasileira de Aeronáutica S.A. Management Report 2009 Dear Shareholders, In its 40th year, Embraer faced an unparalleled international financial crisis involving serious consequences for the worldwide air transportation market. The large number of cancellations and postponement of orders in 2009 affected not only Embraer, but the whole global aeronautical industry chain. Confronted by such an adverse scenario, the Company took steps to adjust to the new market reality with firmness, flexibility and pragmatism, with the objective of preserving its financial health and competitive capacity. After 12 months of severe difficulties and challenges, we reached the end of the year with our most important values intact: customer relations, industrial and technological capacity development, financial well-being, staff motivation, internal and external transparency, care for the shareholders' equity, in other words, the Company's sustainability. In addition to the inevitable reduction in the workforce, carried out with transparency, consideration and respect for persons, the Company reduced its administrative and commercial expenses by 21% (US $134 million*) in relation to 2008 and postponed non- essential investments , while maintaining those related to technical development and new products. The company also pursued a course of strict financial management, which included generation of operating cash of US $135 million*, extending the indebtedness term and efficient administration of treasury operations and in balancing assets and liabilities in R$ / US$. Another noteworthy point was the significant reduction of approximately US$ 500 million* in inventories, as a result of considerable adjustment of deliveries and conditions negotiated with the chain of suppliers, as well as the production cycle gains resulting from the Embraer Business Excellence Program (Programa de Excelência Empresarial Embraer – P3E). All these measures resulted in an increase in Embraer's net cash, which topped the December 2008 position, amounting to US$ 503 million* at the end of the year. It should be noted that, unlike other business segments, maintaining a conservative cash position is essential in order for the Company to control the concentrated capital investment and the long cycles involved in the aviation market, a fact that is clearly recognized by the market and that has contributed to maintaining the Company’s investment rating. * According to United States accounting practices - US GAAP 1
  2. 2. In line with recent years, the Company achieved the projected delivery, revenue and margin figures for 2009, reinforcing its market credibility in terms of its ability to deliver the projected results. For the third consecutive time, Embraer logged a new aircraft delivery record, with a total of 244 aircraft during the year, higher than the previous target of 242 and 19.6% higher than in 2008, when it delivered 204 jets. The firm order backlog had reached US$ 16.6 billion by December 31, 2009. In spite of the increase in the number of deliveries, net income dropped 8% in relation to the previous year, mainly due to the product mix delivered, amounting to R$ 10,812.7 million in 2009. Embraer achieved almost the same operating margin as in the previous year (8.5% in 2008 and 8.0% in 2009), confirming the effectiveness of the adjustments made. However, on January 5, 2010, the US airline Mesa Air Group filed for Chapter 11. Its fleet included 36 ERJ 145 aircraft, delivered in 2000 and 2003, for which Embraer has financial guarantee obligations associated to the respective financing structures. Accordingly, Embraer recorded a provision, resulting in a reduction of its operating margin to 6.1%. In 2009, Embraer fulfilled all its product development targets, in particular, certification of the Phenom 300, on time and surpassing all the estimated performance parameters; the first flight of the Legacy 650; development and delivery of two EMBRAER 190 aircraft for the President of the Republic's office; and delivery of the first Super Tucanos to the Air Forces of Chile and the Dominican Republic, and the first flight of the A-1M prototype. Another highlight was winning the development contract for the KC-390, a product that will enable the company to expand its technical know-how, consolidating its position in the defense market in terms of quality and quantity in the next few years. P3E made significant progress in 2009, with the implementation of continuous improvement cells and execution of hundreds of Kaizen projects throughout the Company, in Brazil and abroad, the highlight being conversion of the E-jet assembly process from docks to production line, reducing the aircraft assembly cycle to just 12 days, an industry benchmark. Another highly relevant result was raising the employees' satisfaction level to 70%, confirmed in the annual organizational climate survey conducted by a specialized independent company. In line with this result, Embraer was elected one of the best Brazilian companies to work in by two of the most respected Brazilian publications. The fundamental and decisive support of the Brazilian government in financing our customers, through the Banco Nacional de Desenvolvimento Econômico e Social (BNDES) and Banco do Brasil Export Guarantee Fund (Fundo Garantidor de Exportações - FGE), was another important factor, since the international credit sources were virtually inactive during the period. 2
  3. 3. Embraer’s commitment to constructing a sustainable future is founded on all its dimensions, financial, social and environmental. One of the results of this commitment was inclusion, for the fifth consecutive year, in the BM&FBOVESPA ISE (Business Sustainability Index) Portfolio. We maintained the high corporate governance standard followed since 2006, when we joined the BM&FBOVESPA “Novo Mercado” and reaffirmed our commitment to the United Nations Global Pact. The independence and transparency of the Ethics Committee, in the sphere of the Company's Executive Board, and the Audit Committee, in the sphere of the Board of Directors, give wide coverage to work relations, human rights and fighting corruption. The company has a complaints channel managed by an independent company, to ensure objectivity and diligence. Furthermore, the Company is upgrading its corporate risk controls, which are now evaluated every quarter, reflecting an advance in corporate governance. Embraer has an ongoing technical development program, which has achieved greater efficiency in aircraft performance, reducing consumption and emissions of greenhouse gases. We envisage a future with fewer emissions in the air transport sector and are participating in a project to develop a new-generation renewable fuel, based on sugarcane, which could be a sustainable long-term alternative. We have a positive vision of the future. Our objective is to lead the market segments in which we operate. We know that 2010 will still hold many challenges, but the Company is ready to make the most of any opportunities that may arise, with the same flexibility and determination with which it responded to the crisis. We thank our employees, shareholders, customers, suppliers, financial institutions, government and the community for supporting us throughout these years of tradition and achievement, and invite them to join us in writing our future, which is sure to do justice to the legacy we have received from thousands of people who have dedicated themselves to this enterprise over the last four decades, with singular determination and competence. The Management São José dos Campos, March 11, 2010. 3
  4. 4. MARKETS AND PRODUCTS Commercial Aviation Market The jets produced by Embraer in the 30 to 60 and 61 to 120 seat ranges have become essential to global aviation development. They contribute to increasing service quality, helping to make the system more efficient, by adjusting offer to demand, at times of both growth and crisis, and facilitating the introduction of new routes, making air transportation more accessible to a greater number of people. The 30 to 60 seat range has reached full maturity and is consolidated as an important part of the hub feed flight system in the main US and European airports. Furthermore, there have been more transactions involving regional 50 seat jets in the used aircraft market due to their use in the development of regional aviation in Russia and the Commonwealth of Independent States (CIS), Mexico, Africa and South America. In Brazil, the ERJ 145 is back in the market, operated by Passaredo Linhas Aéreas, as an essential part of the expansion plan for their regional routes. In the Ukraine, the Dniproavia airline is using the aircraft to open new markets and also to substitute larger aircraft to adjust the number of seats offered to the demand. In Mexico, the 50-seat jet is operated by AeroMexico Connect and is increasingly important as the hub feed for that company's airport bases. The company operates 37 aircraft -- the fourth largest fleet of ERJ 145 in the world. The Lifetime Programme was launched to serve the growing market for used aircraft and meet the needs of customers who require more wide-ranging services. This support package can be customized and has been critical in ensuring successful operation of the ERJ 145 in these markets. The 842 commercial ERJ 145 jets delivered by Embraer are today flying in more than 30 airlines, on five continents, having surpassed the impressive milestone of 13 million cycles and 15 million flying hours. The E-jets, in the EMBRAER 170/190 family with a seating capacity of 61 to 120, are increasingly regarded as a fundamental strategic way for airlines to protect their competitive edge in times of world crisis. As in the case of the terrorist attacks in the United States on September 11, 2001, the effects of the global financial crisis, which started in 2008 and reached a peak in 2009, forced airlines to adapt the seats offered to a reduced demand. The E-jets offered the necessary adaptability for companies to make the necessary capacity cut in their networks, while simultaneously preserving their market presence. The market is acknowledging the ability of the E-jets to operate in all business models, whether low-cost, traditional or regional airlines. This flexibility is an immediate result of the first-class comfort, low fuel consumption and low emissions, reduce operating costs and the high punctuality standards offered by this family of aircraft. 4
  5. 5. The 61 to 120 seat jets will continue to assist airlines in improving efficiency, by adapting the seats offered to passenger demand on flights operated by narrowbody aircraft with excess capacity. Furthermore, the jets in this segment tend to be used in replacement of old fleets, in developing new markets and in assisting the natural growth of regional airlines on routes with greater demand, operated by smaller jets, with a view to increasing revenues and market share. The E-jets have acquired a solid and diversified client base, 54 airlines in 37 countries on the five continents, surpassing the significant landmark of 3 million flying hours. Delivery of the 600th E-jets to the Polish airline LOT Polish, only five years after the first EMBRAER 170 started operating, was a major feat for Embraer and is a benchmark achieved by few programs in the history of world commercial aviation. In 2009, even with the market affected by the severe world crisis, Embraer announced the sale of five EMBRAER 175 to Oman Air (Oman). Fuji Dream Airlines (Japan), KLM Cityhopper (Holland) and NIKI Luftfart GmbH (Austria) also reaffirmed their confidence in Embraer products, by converting various options into firm orders. Eight new customers started operating with E-jets in 2009: Fuji Dream Airlines (Japan), TRIP Linhas Aéreas (Brazil), LAM – Linhas Aéreas Moçambique (Mozambique), the European NIKI Luftfahrt GmbH (Austria), Ausgsburg Airways and Lufthansa Cityline (Lufthansa Group– Germany), British Airways (United Kingdom), and the first operator in Central Asia, Air Astana (Kazakhstan). At December 31, 2009, the E-Jets family had recorded 862 firm orders, 722 options and delivery of 605 new jets. With the ERJ 145 and EMBRAER 170/190 families, Embraer attained a market share of 45% in the 30 to 120 seat segment. The firm order backlog for commercial aviation reached 265 units, as shown below: Firm order Aircraft Model Firm orders Options Deliveries backlog ERJ 145 family 890 - 882 8 ERJ 135 108 - 108 - ERJ 140 74 - 74 - ERJ 145 708 - 700 8 EMBRAER 170/190 family 862 722 605 257 EMBRAER 170 187 48 170 17 EMBRAER 175 140 178 125 15 EMBRAER 190 448 426 263 185 EMBRAER 195 87 70 47 40 TOTAL 1,752 722 1,487 265 5
  6. 6. Note: Deliveries and firm order backlog include aircraft sold by the defense segment to state airlines (Satena and TAME). There was a drop of 3.1% in world air traffic in 2009, according to the preliminary results issued by the ICAO (International Civil Aviation Organization) confirming that the air transport market is still in severe crisis, a gradual recovery of the global economy being anticipated in the period 2010 to 2012. Demand is only expected to return to 2007 levels in 2011, in a climate of greater competition and lower fares due to the change in passenger profile, and is expected to expand on average 4.5% a year in the next 20 years, slightly lower than the rate foreseen before the crisis. Embraer estimates a global demand of around 6,000 jets in the 30 to 120 seating capacity range in the next 20 years, which could generate business of some US$ 200 billion in new aircraft sales. Executive Aviation Market In 2009, global deliveries of executive aviation industry jets amounted to around 850 aircraft, a drop of 26% in relation to the record year of 2008, when 1,154 executive jets were delivered. Embraer estimates the overall value of this market in the period 2010 to 2019 at US$ 190 billion, involving deliveries of over 10,000 executive jets. Since 2005, the executive aviation industry has experienced increased demand from new markets, such as Russia, the Middle East and Asia, boosted by rapid economic development and the ongoing devaluation of the US dollar. From the end of 2008, the worldwide financial crisis resulted in serious and immediate impacts on the industry and the appetite of the world’s executive aircraft markets. Factors such as corporate and individual loss of purchasing power, the marked increase in inventories of used aircraft and unfavorable and restrictive financing conditions marked 2009 as the year in which the growth trend noted in the last five years was reversed. It is anticipated that in 2010, demand for these aircraft will further decelerate as a result of a selling freeze in the last 18 months and cancellations in the industry. The market is expected to recover as from 2011 or 2012. In the course of the next 10 years, it is anticipated that Latin America, Asia-Pacific, Eastern Europe and the Middle East will continue to play an increasing role in executive jet. This will certainly call for investments to strengthen aircraft manufacturers' presence in these markets. In Latin America, lighter jets are better suited to the local necessities and have always been popular. On the other hand, the demand in the Asia-Pacific region is likely to favor larger aircraft, with international range. 6
  7. 7. Although the effects of the global crisis have restricted growth prospects in the short term, the United States will continue to be the largest and most mature market for executive aviation, in absolute figures. Current estimates indicate that the United States will be responsible for around 48% of the estimated global market revenue in the next 10 years. During 2009, Embraer continued to make steady progress in exploitation of the executive aviation market and took direct measures to solidify even further the commitment established with the market at the beginning of the decade. These measures are part of the integrated solutions offered for acquisition and operation of Embraer's executive aircraft and range from launching a new product in the Legacy family, the Legacy 650, and certification of the Phenom 300, to expansion of the network of sales representative, training, services and support for customers. In October 2009, Embraer presented the new Legacy 650 jet, during a press conference at the 62nd Convention and Annual Meeting of the United States National Business Aviation Association (NBAA), held in Orlando, Florida. Development of the large category Legacy 650 jet was based on the successful super midsize Legacy 600 platform and will offer greater range for up to 14 passengers. The Legacy 650 will fly up to 7,223 km (3,900 nautical miles) without stopovers with four passengers, or 7,038 km (3,800 nautical miles) with eight passengers, a range of 926 km (500 nautical miles) more than the Legacy 600. The large category executive jet can fly without stopovers from London (United Kingdom) to New York (USA); from Dubai (United Arab Emirates) to London or Singapore; from Miami (USA) to São Paulo (Brazil); from Singapore to Sydney (Australia); or from Mumbai (India) to Central Europe. The super medium Legacy 600 jet is starting its eighth year of production with widespread market acceptance, principally with customers in Europe and the Middle Eastern, where almost 14% of the fleet (23 aircraft) is concentrated. In December 2009, there were over 180 Legacy 600 jets in fleets in 24 countries. The Phenom 100 aircraft also received European Civil Aviation Authority (EASA) and Australian (CASA) certification in 2009, in April and June, in addition to the certification already granted by the Brazilian and United States certification bodies, ANAC and the FAA. The first two Phenom 100 aircraft were delivered in December 2008 to customers in the United States and a further 97 aircraft were delivered in 2009, 93 to the executive aviation market and four to the defense market. The new midlight and midsize Legacy 450 and Legacy 500 jets, with ranges of 2,300 and 3,000 nautical miles, respectively, were also a highlight of 2009, on completing the Joint Definition Phase (JDP), which started in July 2008 and involved over 100 engineers from key vendors, as well as around 500 Embraer employees. The aircraft category falls between the Phenom 300 and Legacy 600 and consolidates Embraer's range of executive aviation products as one of the widest currently available. Investments in development of the two products are estimated at US$ 750 million. Certification of the Legacy 500 is scheduled for 7
  8. 8. 2012, followed by the Legacy 450 in 2013. In December 2009, the Phenom 300 was certified by the Brazilian National Civil Aviation Agency (ANAC) and the Federal Aviation Administration (FAA), which granted the Type Certification. All the design targets were attained or surpassed. The maximum range of the Phenom 300, originally projected at 3,334 kilometers (1,800 nautical miles), was extended to 3,650 kilometers (1,971 nautical miles) with six occupants and NBAA IFR reserves. The runway performance is also better than the initial targets. The runway takeoff length, with the jet at the maximum take-off weight, is now 956 meters (3,138 feet), considerably better than the planned 1,127 meters (3,700 feet), while the runway distance with the maximum landing weight has been upgraded to 799 meters (2,621 feet), or 100 meters (329 feet), less than the initial target of 899 meters (2,950 feet). The first Phenom 300 was delivered in December 2009, to Executive Flight Services, a wholly-owned subsidiary of Executive AirShare, which received the aircraft on behalf of an unnamed customer. Embraer started deliveries of the Phenom 300 executive jet only one year after the first customers of the Phenom 100 received their aircraft. Embraer’s executive aviation customer training, services and support organization is ready to serve the Phenom 300 fleet. Three new certified Embraer service centers were appointed in India, United Arab Emirates (UAE) and Canada in 2009. The world-wide support and services network for Embraer executive jets currently comprises a total of six Embraer centers and more than 30 authorized centers. At the end of 2009, Embraer had an order backlog of US$ 5.6 billion for executive aircraft. Defense Market Embraer’s defense segment offers integrated solutions that combine high technological content and operational efficiency at competitive purchase and operation costs, and its main customer is the Brazilian Air Force - FAB. The product portfolio for this segment comprises aircraft for various purposes: intelligence, surveillance and reconnaissance (ISR); training and combat; and transportation of civil and military authorities. Embraer also provides support services to defense customers, as well as aircraft upgrade services for the Brazilian armed forces. Embraer plays a strategic role in the Brazilian defense system (it has already supplied a little over half of the Brazilian Air Force fleet) and is starting more aggressive expansion of its area of dominance to other regions, in addition to the 20 countries already served by its aircraft. A program is being developed for Embraer’s newest military transport aircraft, the KC-390, for cargo transport and refueling missions, to meet the needs of FAB and in full compliance with the Brazilian Government’s National Defense Strategy. The KC-390 will be capable of flying at 850 kilometers an hour and carrying 19 tons of useful load, enabling it to transport 64 parachute troops equipped for combat or 80 conventional infantry soldiers, and will allow Embraer to enter a new market segment. 8
  9. 9. Seven transport aircraft were delivered to the defense market in 2009, as well as ten more upgraded F-5 (F-5M), for the FAB F-5BR Program, and 20 Super Tucanos for Brazil, the Dominican Republic and Chile. 2009 was a very significant year for the whole defense segment product line. The Super Tucano continued to be one of the highlights, starting to operate in another two countries (the Dominican Republic and Chile, which received two and four aircraft, respectively, in 2009), joining Brazil and Colombia as operators of this advance training and operational missions aircraft. The Super Tucano gained a new (undisclosed) customer during the year, with an order for three aircraft, bring the total of aircraft contracted to 172. Embraer has an agreement with FAB to produce 99 Super Tucano aircraft, and in 2009, FAB received the 100th of these aircraft produced to date. The Colombian air force ordered 25 aircraft, all already delivered and operating, while the air forces of the Dominican Republic, Chile and Ecuador ordered eight, 12 and 24 aircraft, respectively. This recognition confirms its versatility, together with the good performance for training, operating missions and the low purchase, operating and maintenance costs. In 2009, the training and operational support systems (TOSS), which may include flight simulators, computer-based training (CBT) systems and mission planning stations (MPS) and Mission Debriefing Station (MDS) were also developed to support new Super Tucano customers. With regard to Intelligence, surveillance and reconnaissance (ISR) systems, the AEW India program is well-advanced, in relation to the contract with the Indian Defence Research and Development Organization (DRDO) to supply three EMB 145 AEW&C aircraft. The first delivery is scheduled for 2011. In the systems field, Embraer also formalized delivery in 2009 of the data communication protocol to be used in the data link system in the Link-BR2 for the Brazilian Air Force. Another highlight, in relation to transport aircraft for armed forces and government, was the delivery of two EMBRAER 190 PR aircraft to the GTE, the Special Transport Group of the Brazilian Air Force, specially configured to carry out missions for the President of the Republic's office. Another two ERJ 135 aircraft were sold to the Thai Armed Forces, which already operate two aircraft. Both the Thai Royal Navy and the Royal Army ordered another aircraft, increasing the number of aircraft contracted by these forces to four and showing the significant acceptance of this successful regional jet for defense customers as well. This year, the Pakistan Air Force received the four Phenom 100 aircraft contracted, becoming the first military operator of this aircraft in the world. Foremost in the modernization field are the A-1M program, in which Embraer is responsible for upgrading 43 subsonic AMX fighter planes, and the F-5BR, which encompasses a total of 46 F-5 fighter planes, 10 of which were delivered in 2009, bringing the number in operation up 9
  10. 10. to 38. Another milestone in this field was signing the modernization contract for 12 Brazilian Navy A-4 aircraft, announced during the last LAAD (Latin America Aerospace and Defense) trade show in April 2009, thereby initiating the relationship with this very important Brazilian customer. Significant customer services and support contracts were signed with defense customers in 2009. These included the ESSG (Embraer Governmental Support Solutions), to support EMBRAER 190 PR operations, and CLS (Contractor Logistic Support) involving the FAB EMB 312 Tucano and the Colombian Air Force’s Super Tucano. The advances made last year by the defense segment in terms of the Company’s business are demonstrated by the expansion of its orders portfolio, which went from US$ 1.5 billion to US$ 3.2 billion. TECHNOLOGICAL AND INDUSTRIAL MANAGEMENT Pre-Competitive R&D - Development of New Technologies Based on its business plans and monitoring the world technological scenario, Embraer establishes a technological development plan to investigate and develop solutions for the main challenges the Brazilian aviation industry is expected to face in the coming years in terms of aircraft design, development, production and commercialization. This capacity- building drive to use cutting-edge technologies will make the aircraft lighter, quieter, more comfortable and more efficient in terms of energy consumption and emissions, as well as cutting down design and manufacturing time and optimizing resources. In order to expand the range of results and minimize development risks, Embraer’s pre- competitive research and development strategy is structured as a program essentially capable, not only of managing and executing multidisciplinary projects, but also of maintaining and coordinating a network of development partners, encompassing various institutions (universities, research institutions, development institutions and companies). Embraer’s concern with legal protection of the intellectual ownership of the innovations generated by its research and development initiatives is demonstrated by the considerable increase in the number of patent applications filed in 2009, amounting to a total of 62 applications since 2003, 14 of which have been granted. Embraer has achieved significant results with innovations and new technologies, which can be seen in the aircraft already in operation and those under development. Other positive aspects are the way in which these technologies flow over into the aviation production chain and the incentive for the training, empowerment and employment of high level human resources in Brazilian universities and research institutions. The Knowledge Management process is also under implementation, promoting a structured and procedural increase in intellectual capital. Results are already noted in - greater streamlining of information sharing and generation and the promotion of technological innovation, critical to increasing the technical quality of our product. 10
  11. 11. As a result of this initiative, Embraer achieved recognition with the MAKE (Most Admired Knowledge Enterprise) Award Brazil 2009, as one of the three top Knowledge Management companies in Brazil, qualifying the Company to enter the international stage of this award. With a view to consolidating its position as one of the main players in global executive aviation, Embraer is installing a capacity-building and innovation center inside aircraft, with the objective of enabling the Company to develop and produce innovative interiors, as a competitive differential of the product, recognized for its comfort, sophistication, style, functionality and durability, within appropriate business timeframes and costs. Production Development 2009 was a challenging year marked by efforts to increase operating efficiency in all parts of the Company. Adjustments to production capacity and measures to increase productivity were required in the industrial operations, in order to adapt to the effects of the worldwide financial crisis. In spite of the harsh market conditions, Embraer had delivered 244 jets by the end of the year, a historic record. This was the result of the countless initiatives implemented by the Company, such as the Embraer Business Excellence Program (P3E), Kaizen Weeks, Continuous Improvement Cells, the 3P (Production Preparation Process) Method, etc. An important milestone in 2009 was the operational start-up of the final assembly line for the E-Jets, previously produced using a ‘dock’ system. The gains generated by the line exceeded expectations and represent for the Company, in addition to a significant financial saving , a change of aircraft production concept, through implementation of all the Lean Manufacturing and production chain management tools. The reduction in the assembly cycle, of work in progress (WIP) and the number of non-conformities are practical examples of the success of the E-Jets production line initiative. It should be stressed that these targets were achieved by making the most of existing assets and without impact on the aircraft deliveries plan. The Phenom 100 assembly line, in Gavião Peixoto (GPX) reached the full production rate, ending the year with 97 aircraft delivered. Another product was added to the executive aircraft portfolio in 2009, with the certification and entry into operation of the Phenom 300, also produced by the GPX assembly line. The production rate of this aircraft is scheduled to increase in the course of 2010. Continuing the work carried out in 2008 in the automation area, new projects were implemented in 2009 to increase productivity and operational efficiency and upgrade quality. The automatic fuselage drilling robot was added to the wing and empennage robots on the E- Jets assembly line. The expansion of production abroad followed the plans for the year, with two major projects in progress: the final assembly, finishing and customer service site for the Phenom 100/300 in Melbourne, USA is at an advanced stage of construction, while the site preparation construction work for the machined products and composite material centers of excellence in Évora, Portugal, has already been carried out and detailing of the production process and the industrial buildings is at the final approval stage. 11
  12. 12. Highlights of new product development were the first flight of the Legacy 650, which is currently undergoing certification tests, and the preparation for production (3P) of the new family of executive aircraft, the Legacy 450/500 and of the KC-390 military cargo plane. Significant advances were also achieved in supply chain management, enabling a reduction in inventory levels, with a positive effect on the results for the period. GLOBAL PRESENCE France Villepinte Le Bourget Portugal USA Alverca Nashville Évora* Fort Lauderdale China Melbourne* Beijing Harbin Singapore Brazil Singapore São José dos Campos Gavião Peixoto Botucatu Taubaté * Under construction Countries of Operation Factories Offices Service Centers Contracted/ Planned Authorized Network Embraer maintains its engineering, development and manufacturing operations in Brazil, with five industrial units, in São José dos Campos, Eugênio de Melo, Botucatu and Gavião Peixoto, as well as a logistics center in Taubaté, all in the State of São Paulo. It is also installing two new industrial units in the town of Évora, in Portugal, and one in Melbourne – Florida, USA. As support for its post-sales operations, Embraer has its own service and replacement parts sales centers in São José dos Campos (SP), Fort Lauderdale (Florida), Mesa (Arizona) and Nashville (Tennessee), in the USA, in Villepinte (close to the Roissy – Charles de Gaulle airport), France and in Singapore, as well as the worldwide authorized network. Embraer also has replacement parts distribution centers and specialized technical teams in China to provide customer service. Support for commercialization, marketing and advertising is provided by the São José dos Campos, Fort Lauderdale and Villepinte offices, as well as the offices in Singapore and in Beijing, China. Through an association with EADS, in which it holds a 70% interest, Embraer controls 65% of the capital of OGMA - Indústria Aeronáutica de Portugal S.A., an aviation maintenance and production company. It also has a plant in Harbin, China, in association with the Chinese state company, AVIC. 12
  13. 13. SALES FINANCING From the second half of 2008, the global financial crisis affected the availability and cost of aircraft financing. In the course of 2009, many analysts predicted a financing deficit of some US$ 15 billion, which would certainly lead to cancellation or postponement of many deliveries and manufacturers using their own resources to finance customers. This scenario did not totally materialize. Airlines managed to structure financing for their deliveries and the Export Credit Agencies provided full support to manufacturers in one of the gravest liquidity crises ever. After the necessary adjustment of the production plan at the beginning of the year, Embraer succeeded in structuring financing for all the commercial aircraft delivered in 2009. Diversification of the customer base for E-Jets and their versatility in relation to the various business models contributed towards positive perception of the asset as a risk mitigator, and consequently, the projected book values have performed well, given the sharp depreciation that affected the great majority of assets. The success in structuring financing for Embraer’s customers, in recent years, is proof of the high rating of the E-Jets in the financial market. The EMBRAER 170/190 family was mainly financed by European financial institutions and leasing companies. The support provided by the Brazilian export financing system, comprising the BNDES, SBCE and the Finance Ministry, accounted for 35% of the total deliveries for 2009 and may be even more significant in 2010. European commercial banks still face serious restrictions and are unlikely to allocate more resources than last year. The fund-raising costs for financial institutions remained high and the banks will continue to be selective in granting credit, applying more restrictive financial conditions, especially in respect of the amounts financed and transaction timeframes. On the other hand, there are signs of a gradual improvement in financing through the capital market, which will inject greater liquidity into the sector to meet the total financing needs, estimated at US$ 62 billion for commercial aviation. ASSET MANAGEMENT AND FINANCIAL GUARANTEES To provide better financial support for sales and reduce certain financial risks relating to aircraft sales, Embraer set up the subsidiaries ECC Leasing Co. Ltd. and ECC Insurance & Financial Co. Ltd. in 2002. ECC Leasing Co. Ltd.'s mission is to manage and commercialize the portfolio of aircraft which, by contract, may be purchased by Embraer in trade-in or repurchase transactions. The company also provides re-commercialization services to third parties in connection with the sales campaigns. After the inauguration of ECC Leasing Co Ltd., several new aircraft sales were facilitated through receipt of used aircraft as part payment by trade-in, which also generated income through sale or leasing transactions. To date, ECC Leasing has managed 79 aircraft, of which 34 have been sold, 25 are under operating lease, 11 aircraft are available for placing on the market and nine are being used for testing by Embraer. 13
  14. 14. The leasing and sale transactions were conducted in line with market values, with a view to preserving the value of Embraer products. CORPORATE STRUCTURE To support its operations, Embraer has a corporate structure designed to meet the requirements and particularities of each of the countries in which it operates, as well as improving, organizing and optimizing management of the group companies with a view to integration of all the operations and customer satisfaction. EMBRAER EMBRAER (Parent Company) (Controladora) (Controladora) Embraer Spain Holding Co., SL Embraer Spain Holding Co., SL (subsidiary) (subsidiária) (subsidiária) Indústria Aeronáutica Indústria Aeronáutica Embraer Aircraft Holding, Inc. Embraer Aircraft Holding, Inc. Embraer Aviation Europe SAS Embraer Aviation Europe SAS -- Neiva Ltda. – Botucatu Neiva Ltda. – Botucatu Holding (subsidiária) Holding (subsidiary) (subsidiária) (subsidiary) (subsidiária) (subsidiária) ECC Investment Switzerland ,, (subsidiary) (subsidiária) (subsidiária) ECC Investment Switzerland AG AG Embraer Aviation Embraer Aviation ECC do Brasil Cia de ECC do Brasil Cia de Embraer Services, Inc. Embraer Services, Inc. International SAS International SAS Seguros ECC Insurance & ECC Insurance & Seguros Financial Company Ltd .. (subsidiary) (subsidiária) Financial Company Ltd (subsidiária) Embraer Aircraft Embraer Aircraft Embraer Europe SARL Embraer Europe SARL Customer Services, Inc. Customer Services, Inc. Embraer Finance Ltd .. Embraer Finance Ltd Embraer GPX Ltda. Embraer GPX Ltda. (subsidiary) (subsidiária) (subsidiária) Embraer Aircraft Embraer Europe ’s Embraer Europe ’s Embraer Aircraft Embraer Merco S.A. Maintenance Service, Inc. Representative Office Representative Office Embraer Merco S.A. Maintenance Service, Inc. Dubai Dubai ELEB Equipamentos ELEB Equipamentos Ltda. Ltda. Embraer Executive Jet Embraer Executive Jet ECC Leasing Company Ltd .. ECC Leasing Company Ltd (subsidiary) (subsidiária) (subsidiária) Service, LLC Service, LLC Embraer Australia Pty Limited Embraer Australia Pty Limited (subsidiary) (subsidiária) (subsidiária) Escritório de Escritório de Embraer Executive Representação Comercial Embraer Executive Air Holding SG PS S.A. Air Holding SG PS S.A. Representação Comercial Aircraft, Inc. Aircraft, Inc. Beijing Beijing Embraer Training OGMA OGMA Embraer Embraer Embraer Training Representations ,, LLC Services Services Representations LLC (subsidiary) (subsidiária) (subsidiária) Embraer CAE Training Embraer CAE Training Embraer CAE Training Services (UK) Ltd .. Services (UK) Ltd Embraer CAE Training Embraer Credit Limited ,, Embraer Credit Limited Services Services ECL, LLC (subsidiária) ECL, LLC(subsidiary) (subsidiária) Harbin Embraer Aircraft Harbin Embraer Aircraft Embraer Overseas Limited Industry Company Ltd .. Industry Company Ltd Canal Investments ,, LLC Embraer Overseas Limited Canal Investments LLC (subsidiary) (subsidiária) (JV Embraer – AVIC II) (JV Embraer – AVIC II) (subsidiária) (subsidiary) (subsidiária) (subsidiária) Embraer Asia Pacific Pte .. Embraer Portugal --SGPS Embraer Portugal SGPS Embraer Asia Pacific Pte S.A. Limited Limited S.A. (subsidiary) (subsidiária) (subsidiária) Embraer Portugal Embraer Portugal Estruturas Metálicas S.A. Estruturas Metálicas S.A. Embraer Portugal Embraer Portugal Estruturas em Estruturas em Compósitos S.A. Compósitos S.A. 14
  15. 15. In Brazil, Embraer has branches in Gavião Peixoto, Botucatu, São Paulo, Eugênio de Melo and the Technological Complex (both in São José dos Campos), Taubaté and Campinas. FINANCIAL PERFORMANCE (BRAZILIAN CORPORATE LAW) Embraer’s financial statements were prepared in accordance with Law 11,638/07. In compliance with CPC Technical Pronouncement 02, concerning definition of the functional currency for purposes of preparation of the financial statements as from fiscal year 2008, it has been established that Embraer’s functional currency is the US dollar, as it is the currency that best reflects the economic environment in which the Company operates and the way in which the company is effectively managed. However, the Company keeps books in Brazilian Reais in order to comply with the fiscal requirements of Brazilian legislation; in disclosure of the Company’s financial statements, amounts in US dollars are translated into Reais for presentation purposes. The balance sheet accounts are therefore directly influenced by the appreciation or devaluation of the dollar (accounting base) against other currencies, particularly the Real (base fiscal and presentation currency), with reflexes on a specific equity account, the “Accrued translation adjustments” account. Income for the year is also affected in respect of differed taxes, which are mainly calculated on the differences between the accounting and tax bases of non-monetary assets. In 2009, Embraer recorded net income of R$ 10,812.7 million, 8.0% less than the R$ 11,746.8 million recorded in 2008, in spite of the increase in the number of deliveries, from 204 in 2008 to 244 in 2009. The drop in revenue was mainly due to the change in the product mix, as the 98 Phenom delivered have a lower unit value that the other aircraft produced by Embraer. The gross margin in 2009 was 19.2%, down on the 20.5% recorded the previous year, since the start of serial manufacture of the new executive jets, the Phenom 100 and Lineage 1000, called for improvements to and development of the production process, which was achieved in the course of the year, but had an impact on the gross margin of these products. Embraer’s exports for the year totaled US$ 4,053.3 million, a drop of 29.3% in relation to 2008, but the Company is still the fourth largest Brazilian exporter, with a 2.65% share of the Brazilian trade balance. 15
  16. 16. In millions of R$ 2008 2009 Net Income 11.746,8 10.812,7 Selling Cost 9.339,7 8.734,0 Gross Profit 2.407,1 2.078,7 Gross Margin 20,5% 19,2% Operating Expense 1.294,7 1.346,8 Operating Income before Interest and Tax 1.112,4 731,9 Operating Margin 9,5% 6,8% Depreciation and Amortization 387,2 425,5 Adjusted EBITDA (1) 1.499,6 1.157,4 Adjusted EBITDA Margin 12,8% 10,7% Net Income 428,8 894,6 Net Margin 3,6% 8,3% Profit per Share 0,59 1,24 Number of Shares(2) 723.665.044 723.665.044 (1) Adjusted EBITDA, in accordance with CVM Circular no.1/2005 represents the net income plus net financial income (expense), income tax and social contribution , depreciation and amortization, non-operating income (expense), minority interests and equity (2) Does not include 16.8 million shares held in Treasury. In 2009, a total of 244 jets were delivered, 122 to the commercial aviation market (115 aircraft in the EMBRAER 170/190 family and seven in the ERJ 145 family), and 115 jets to the executive aviation market, including 18 Legacy 600, three Lineage 1000, one Phenom 300 and 93 Phenom 100. Additionally, seven transport aircraft were delivered to the defense market, as well as ten upgraded F-5 for FAB’s F-5BR Program and 20 Super Tucanos to Brazil, the Dominican Republic and Chile. Aircraft Deliveries by Segment 2008 2009 Commercial 162 122 ERJ 145 6 7 EMBRAER 170 9 22 EMBRAER 175 55 11 EMBRAER 190 78(1) 62 EMBRAER 195 14 20 Executive 36 115 Phenom 100 2 93 Phenom 300 - 1 Legacy 600 33 18 Lineage 1000 - 3 EMBRAER 175 1 - Defense* 6 7 ERJ 135 2 1 ERJ 145 1 - Phenom 100 - 4 Legacy 600 3 - EMBRAER 190 - 2 TOTAL JETS 204 244 * Only includes deliveries of executive jets configured for transport of authorities and aircraft for state airlines * Deliveries identified by brackets were recorded as operational leasing Net income from the commercial aviation market dropped 13.5% in relation to the R$ 7,838.5 million recorded in 2008, amounting to R$ 6,780.7 million, due to the smaller number of deliveries in the period. 16
  17. 17. The executive aviation market generated income of R$ 1,694.1 million in 2009, 4.6% up on R$ 1,619.1 million in 2008. The aviation services segment recorded revenue of R$ 1,166.4 million in 2009, an increase of 4.9% on the R$ 1,111.9 million in the previous year. Net income of R$ 948.9 million was recorded for the defense market in 2009, remaining stable in relation to R$ 953.8 in 2008. In 2009, the commercial aviation and executive aviation segments accounted for 62% and 16%, respectively, of the total net income, compared with 67% and 14% in 2008. The aviation services, defense and other segments represented 11%, 9% and 2% of total net income, respectively, compared with 9%, 8% and 2% in 2008. Other Aviation 2% Other Services. 6% 11% Asia- North America Executive Pacific 23% Aviation 16% Commercial 21% Aviation 62% Brazil Defense 9% 11% Euroea Latin 32% America 7% It should be stressed that Brazil’s participation in the Company’s net income increased from 4% in 2008 to 11% in 2009, mainly as a result of the deliveries to Azul Linhas Aéreas Brasileiras and Trip Linhas Aéreas. The new customers for the Phenom 100 and the two presidential aircraft also contributed. Additionally, North America’s participation dropped from 46% of net income in 2008 to 23% in 2009, due to delivery scheduling for the period and the natural fulfillment of contracts. Operating expense totaled R$ 1,346.8 million in 2009, a small increase of 4.0% in relation to the R$ 1,294.7 million recorded in the previous year. This was mainly due to the costs of adjusting the workforce at the beginning of the period and a subsequent and extraordinary event that caused the Company to record a provision of R$ 179.3 million, when the Mesa Air Group, an operator of 36 ERJ 145 aircraft in the United States, filed for Chapter 11, on January 5, 2010. Although Embraer has no direct exposure in relation to Mesa, it issued financial guarantees in favor of the financial institutions that participated in the aircraft financing structures. Commercial expense dropped by 17.6% in 2009, against R$ 731.2 million the previous year, totaling R$ 602.8 million, 5.6% of the net sales revenue, compared with 6.2% in 2008. This was a result of strict control of expenses and the lower number of aircraft delivered. 17
  18. 18. Employee profit sharing (PLR) totaled R$ 61.9 million, a drop of 35.0% on R$ 95.3 million the previous year. Administrative expenses amounted to R$ 376.2 million in 2009, down 11.5% on the R$ 425.3 million recorded in the previous year, mainly due to the positive results of P3E and the adjustments made to the Company’s cost structure. Expense of R$ 367.8 million was recorded in the “Other operating income (expense), net” in 2009, significantly higher than the expense of R$ 138.0 million in 2008, mainly due to the event mentioned above in relation to the Mesa Air Group. Operating income before interest and taxes totaled R$ 731.9 million in 2009, 34.2% down on the R$ 1,112.4 million recorded the previous year, generating operating margins of 6.8% and 9.5%, respectively, due to the above-mentioned factors. As a result, generation of operating cash, measured by EBITDA, amounted to R$ 1,157.4 million in 2009, 22.8% less than the R$ 1.499.6 million recorded the previous year. Similarly, the EBITDA margin in 2009 was 10.7%, down on 12.8% in 2008. During 2009, Embraer recorded net financial revenue of R$ 14.6 million, compared with net financial expense of R$ 40.5 million in 2008, largely due to the reduction in the indebtedness cost and improved management of financial assets and exchange risk exposure. Embraer accordingly recorded net income of R$ 894.6 million in 2009, up 108.7% on the R$ 428.7 million obtained in 2008. The Company's net margin was 8.3% in 2009, up on the 3.6% recorded in 2008. The significant increase in net income was mainly due to the effects of the appreciation of the Real in relation to the dollar and the resulting positive tax effects on the variations in non- monetary assets, particularly inventories. Equity Indicators The following table shows Embraer's main equity indicators, comparing the last two years: 18
  19. 19. Consolidated Highlights 2008 2009 In millions of R$ Cash and cash equivalents (*) 5,144.9 4,433.4 Accounts Receivable 1,038.0 692.2 Customer Financing 284.7 91.9 Inventories 7,101.1 4,424.1 Permanent assets (**) 3,910.7 3,038.9 Suppliers 2,520.2 1,038.0 Indebtedness – Short-Term 1,259.8 1,031.5 Indebtedness – Long-Term 3,039.9 2,552.5 Shareholders’ Equity 5,970.5 5,020.8 (*) Includes Cash and Cash Equivalents, Temporary Investments and Marketable Securities (**) Includes Investments, Fixed and Intangible Assets The Company's liquidity position, in terms of Cash and Cash Equivalents (in dollars), and net cash (cash and cash equivalents less total indebtedness), remained stable in relation to the 2008 year-end, closing 2009 with net cash of R$ 849.4 million. Embraer therefore ended the year with total indebtedness of R$ 3,584.0 million, down 16.6% on R$ 4,299.7 million the previous year. Of the total indebtedness, 71.2% relates to long-term credit lines. The indebtedness comprises R$ 2,331.9 million (65.1%) in credit lines mainly denominated in dollars, with the remaining R$ 1,252.1million (34.9%) denominated in Reais. Embraer’s average indebtedness term is 4 years and 9 months. The reduction in accounts receivable and customer financing reflects the good financial management in relation to customers. At the close of the year, Embraer’s inventory position was R$ 4,424.1 million, 37.7% down on December 2008. This was the result of strict supplier management, increased operating efficiency, which has reduced the production cycles, the drop in production rate in 2009 and the appreciation of the Real against the dollar. 19
  20. 20. Consolidated Indicators 2008 2009 Debt / Shareholders’ Equity 0.7 0.7 Inventory Turnover 1.6 1.6 Asset Turnover 0.6 0.7 ROA 2.3% 4.8% ROE 8.1% 16.3% ROCE* 17.1% 9.9% * calculated in USGAAP Economic Value Added (EVA) On account of the deferred income tax and social contribution recorded in relation to the difference between the book value of the assets and liabilities and the tax base for fiscal purposes and the increase in interest payable on investments, Embraer reported an improvement in yield, in terms of economic value added (VEA). In millions of R$ 2008 2009 Total Assets 21,499 15,946 Voluntary Financing Liabilities 11,229 7,341 Interest on Liabilities 10,270 8,605 Third Party Capital 4,300 3,584 Equity 5,970 5,021 Interest payable on investments 10,270 8,605 Net Operating Revenue 11,747 10,813 Operating Costs and Expense (10,823) (10,207) Operating Income 924 606 Income Tax and Social Contribution (435) 299 Cost of Third Party Capital (230) (286) Adjusted Net Income 259 619 Cost of Capital (740) (666) Value Added (481) (47) VA / Interest payable on investments -4.7% -0.5% Note: Calculation of EVA excludes special purpose companies (SPCs) Allocation of Income – Parent Company Management will propose to the Annual General Meeting, after recording the legal reserve and distribution of interest on capital and dividends, allocation of R$ 603.5 million of the net income for the year to the investment reserve and working capital, in order to cover investments in the new family of executive jets, new technology, processes and management 20
  21. 21. models, with a view to increasing its expertise and productivity. Consolidated Statements in US GAAP In the interests of transparency and as its shares (ADSs) are traded on the New York Stock Exchange (NYSE), Embraer presents below a summary of the main consolidated financial statements, in accordance with US GAAP. CONSOLIDATE BALANCE SHEETS AS OF DECEMBER 31, IN US GAAP (In thousands of dollars) ASSETS 2008 (1) 2009 (2) CURRENT ASSETS Cash and equivalents 1.820.710 1.592.360 Temporary Investments 380.774 953.827 Accounts receivable 438.083 396.880 Sales financing 8.610 11.241 Inventories 2.829.043 2.333.868 Deferred taxes 154.285 106.593 Other 284.981 245.071 5.916.486 5.639.840 NONCURRENT ASSETS Accounts receivable 5.857 464 Sales financing 510.403 456.363 Taxes 173.218 288.859 Other 1.217.436 1.269.429 Property, plant and equipment 751.786 771.296 Investments 68.729 25.264 2.727.429 2.811.675 TOTAL ASSETS 8.643.915 8.451.515 (1) Taken from the audited Financial Statements (2) Taken from the unaudited Financial Statements P LIABILITIES AND SHAREHOLDERS’ EQUITY 2008 (1) 2009 (2) CURRENT LIABILITIES Financing 529.342 587.652 Suppliers 1.078.104 595.822 Advances from customers 1.151.494 768.469 Other 786.389 815.755 3.545.329 2.767.698 LONG-TERM LIABILITIES Financing 1.296.065 1.455.212 Advances from customers 449.208 398.116 Contributions from partners 44.267 67.718 Other accounts payable 1.029.807 1.334.138 2.819.347 3.255.184 Shareholders’ equity 2.209.277 2.338.302 Minority interests 69.962 90.331 TOTAL SHAREHOLDERS’ EQUITY 2.279.239 2.428.633 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY 8.643.915 8.451.515 (1) Taken from the audited Financial Statements (2) Taken from the UNaudited Financial Statements 21
  22. 22. CONSOLIDATED STATEMENTS OF INCOME IN US GAAP FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2009 (In thousands of dollars) 2008 (1) 2009 (2) NET SALES REVENUE 6,335,239 5,466,287 Selling cost (4,991,707) (4,352,178) GROSS REVENUE 1,343,532 1,114,109 OPERATING EXPENSE General and administrative (232,448) (191,457) Commerciail (393,067) (305,128) Research and development (196,968) (143,990) Other operating income (expense), net 16,001 (137,900) OPERATING INCOME 537,050 335,634 Financial income (expense), net (171,404) 35,291 Gain / Loss on accrued translation adjustments, net 71,653 (94,127) INCOME BEFORE INCOME TAX 437,299 276,798 Income tax (41,065) (14,534) INCOME BEFORE SHAREHOLDERS' EQUITY 396,234 262,264 Shareholders' equity 29 - NET INCOME 396,263 262,264 Minority interests (7,533) (13,746) NET INCOME THE EMBRAER GROUP 388,730 248,518 (1) Taken from the audited Financial Statements (2) Taken from the unaudited Financial Statements CONSOLIDATED STATEMENTS OF CASH FLOW FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2009 (In thousands of dollars) 2008 (1) 2009 (2) CASH FLOW - OPERATIONS Income profit 396,262 262,264 Adjustments to reconcile the net profit to the net cash generated by operations: Depreciation and amortization 70,488 86,670 Impostos 29,494 (9,220) Gains / losses on accrued translation adjustments, net (71,653) 94,128 Outros (9,136) 3,269 415,455 437,111 Changes in assets and liabilities: (33,776) (302,127) Cash generated by operation s 381,679 134,984 FLUXO DE CAIXA - ATIVIDADES DE INVESTIMENTO Acquisition of property, plant and equipment (234,987) (103,813) Other 346,982 (402,521) Cash generated by (used for) investments 111,995 (506,334) CASH FLOW - FINANCIAL TRANSACTIONS Loan payments (1,770,464) (1,483,001) Loans 1,886,210 1,461,804 Dividends and interest paid on capital (242,679) - Other (187,527) (5,913) Cash generated by (used in) financial operations (314,460) (27,110) Effect of exchange variations on cash (92,322) 170,110 Increase in cash and cash equivalents 86,892 (228,350) Cash and cash equivalents at the beginning of the year 22 1,733,818 1,820,710 Cash and cash equivalents at the end of the year 1,820,710 1,592,360 (1) Taken from the audited Financial Statements
  23. 23. RECONCILIATION OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2009 2008 (1) 2009 (2) USD R$ USD R$ Shareholders' equity in BR GAAP 2.554.784 5.970.531 2.883.531 5.020.805 Intangible - product development cost (665.523) (1.555.327) (695.244) (1.210.559) Deferred income tax and social contribution 303.714 709.780 127.668 222.296 Dividends and interest on capital not paid - - Other 86.264 201.598 112.678 196.194 Shareholders' equity in US GAAP 2.279.239 5.326.582 2.428.633 4.228.736 (1) Taken from the audited Financial Statements (2) Taken from the unaudited Financial Statements RECONCILIATION OF INCOME FOR THE YEAR FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2009 2008 (1) 2009 (2) USD R$ USD R$ Net income for the year in BR GAAP 261.422 428.750 456.953 894.592 Product development cost (58.014) (47.669) (26.182) (66.268) Deferred income in tax and social contribution 182.117 332.344 (176.926) (369.773) Other 3.204 7.245 (5.327) (9.727) Net income for the year in US GAAP 388.729 720.670 248.518 448.824 (1) Taken from the audited Financial Statements (2) Taken from the unaudited Financial Statements CAPITAL MARKET Embraer’s relations with the financial community and its investors are regulated by transparent and fair disclosure of information, characterized by deep respect for legal and ethical principles, with the objective of consolidating and maintaining its reputation for leadership and innovation in the capital market, in accordance with the regulations of the BM&FBOVESPA New Market, the highest level of Corporate Governance in Brazil. Its shares have been listed on the São Paulo Stock Exchange (BM&FBOVESPA) since 1989 and on the New York Stock Exchange (NYSE) since July 2000, through a level III ADR (American Depositary Receipts) program. Embraer’s capital comprises common shares, traded on the BM&FBOVESPA as EMBR3, which registered appreciation of 7.95% in 2009 and were quoted at R$ 9.51 at the end of the year. In turn, the BM&FBOVESPA index appreciated by 82.66 % in the same period. The Company's ADSs (American Depositary Shares), listed on the NYSE as ERJ, were quoted at US$ 22.11 in the last trading session of the year, appreciation of 36.40% in 2009, against appreciation of 18.82% of the Dow Jones index. 23
  24. 24. Performance EMBR3 - BM&FBOVESPA Performance ERJ - NYSE 07/21/2000 = 100 07/21/2000 = 100 450 250 400 350 200 300 150 250 200 100 150 100 50 50 0 0 jul-00 jan-01 jul-01 jan-02 jul-02 jan-03 jul-03 jan-04 jul-04 jan-05 jul-05 jan-06 jul-06 jan-07 jul-07 jan-08 jul-08 jan-09 jul-09 jan-10 jul-00 jan-01 jul-01 jan-02 jul-02 jan-03 jul-03 jan-04 jul-04 jan-05 jul-05 jan-06 jul-06 jan-07 jul-07 jan-08 jul-08 jan-09 jul-09 jan-10 EMBR3 Bovespa ERJ Dow Jones As of December 31, 2009, Embraer’s capital comprised 740,465,044 common shares (ON), of which 16,800,000 shares are held in Treasury and have no political or economic value. The Brazilian Government holds one special common share, a Golden Share, with the right to veto on certain matters. Of Embraer's total shares, 53.4% are allocated for trading on BM&FBOVESPA, and 46.6% are traded as American Depositary Shares (ADS) on the New York Stock Exchange (NYSE). 723,665,044 Common Shares* HOTCHKIS & WILEY CAPI 5.3% FRANKLIN RESOURCES IN 6.6% BOVESPA OTHERS THORNBURG 26.4% INVESTMENT 6.0% BOVESPA BNDESPAR NYSE OPPENHEIMER 5.5% 53.4% FUND'S 46.6% 6.9% PREVI 14.1% BLACKROCK NYSE OTHERS 6.0% 15.8% GRUPO BOZANO 7.4% * Does not include 16.8 million shares held in Treasury In 2009, a portion of the liquidity of the common shares was on the U.S. market, and a daily average of 1, 036 thousand ADSs was traded on the NYSE, equivalent to an average daily volume US$ 19.1 million. An average of 2,493 thousand common shares was traded on the Brazilian stock exchange, representing a daily average of R$ 22.8 million. In 2008, the average daily volume was 1,386 thousand common shares, equivalent to R$ 18.9 million. 24
  25. 25. Embraer’s market capitalization reached US$ 4.0 billion at the end of December 2009, compared to the US$ 2.5 billion recorded as of December 31, 2008. Market Value (US$ billion) 4.0 2.5 2008 2009 Shareholder Remuneration In 2009, based on the consolidated net income of R$ 894.6 million, Embraer distributed R$ 228.8 million to the shareholders, as interest on capital (JCP) and dividends, equivalent to R$ 0.316279 per common share. The distribution of interest on capital to the shareholders was approved by the Board of Directors on December 11, 2009 and will be paid into equal installments, the first on July 20, 2010 and the second on December 20, 2010. The proposal to distribute additional dividends that will be submitted for the approval of the Annual General Meeting was approved by the Board of Directors on March 11, 2010, for payment on June 17, 2010. The profit distributed in the year represented 25.6% of the Company’s consolidated net income. Dividends Distributed - R$ Million 68.3% 62.7% 53.4% 52.2% 25.6% 444 449 327 224 229 2005 2006 2007 2008 2009 Dividends Pay Out 25
  26. 26. CORPORATE GOVERNANCE The corporate restructuring in 2006, when the Company’s shares were merged into a single class of common shares, with no controlling group or majority shareholder, extending voting rights to all its shareholders, enabled Embraer to join the BM&FBOVESPA New Market, the highest level of corporate governance in Brazil. The corporate restructuring also strengthened Management by means of the control instruments generated by the new governance structure, while also preserving the strategic rights of the Federal Government, which maintained its special class golden share, with right of veto on the following matters: change of the Company’s name or its corporate objective; alteration and/or use of the Company’s logo; creation and/or alteration of military programs, whether or not the Federal Republic of Brazil is involved; training third parties in technology for military programs; interruption of the supply of maintenance and spare parts for military aircraft; transfer of the Company’s stock control. The Bylaws include mechanisms to protect pulverization of the share control, and also to ensure that the majority of votes on decisions of the general meeting are exercised by Brazilian shareholders, in accordance with the principle established when the Company was privatized. The main mechanisms are as follows: • No shareholder or group of shareholders, Brazilian or foreign, may exercise more votes in each General Meeting than the equivalent of 5% of the number of capital shares; • The total number of votes allowed to foreign shareholders in any general meeting, whether individually or as a group, will be restricted to 40% of the total valid votes on any subject; • No shareholder, or group of shareholders, may hold 35% or more of Embraer’s capital without the express authorization of the Brazilian Federal Government, as holder of the Golden Share, and subject to holding of a Public Offer (Oferta Pública de Aquisição - OPA); • Disclosure of the share ownership position is mandatory whenever: (i) a shareholding amounts to 5% of more of the Company’s capital; and (ii) the interest of any shareholder increases by 5% or more of the Company’s capital. The Board of Directors comprises 11 members and their deputies, seven members being independent. Three committees have been set up to assist the Board Of Directors in its duties and sphere of authority: Executive Committee: a permanent committee, comprising four members, appointed by the Board of Directors and chosen from among its effective or deputy members, set up to assist the Board of Directors, particularly in relation to strategic management. Human Relations Committee: comprises four members, appointed by the Board of Directors and chosen from among its effective or deputy members or the Company’s Executive Board, and was set up to assist the Board of Directors on matters relating to human resources. 26

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