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  • 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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
  • 27. Audit Committee: for purposes of compliance with the listing requirements of the New York Stock Exchange (NYSE) and the Sarbanes-Oxley Law, applicable to foreign companies with shares listed on the North American market, Embraer made certain changes to its Fiscal Council to enable it to perform the functions of an Audit Committee. The Fiscal Council is part of the policy of transparency and good governance and its main purpose is to monitor the administrative acts and analyze the Company’s financial statements. It comprises five effective members, one of whom is a financial expert, and all of whom have an annual mandate. As a result of its good Corporate Governance practices, Embraer received the following awards in 2009: IR – Global Rankings 2009 – 11th Annual Edition: • Top 5 in Corporate Governance in Latin America; • Top 5 in Corporate Governance in Brazil; Isto É Dinheiro magazine, “As Melhores do Dinheiro” (The Best with Money); • 1st place in Financial Sustainability in the Vehicles Sector; • 1st place in Corporate Governance in the Vehicles Sector; XIII Anefac Award - Fipecafi - Serasa Experian – “Transparency Trophy 2009”: • 1st place – Public companies with billing over R$ 4 billion. Management & Excellence (M&E) strategic consulting and Latin Finance magazine: • 3rd place in the sustainability ranking of the 50 largest Latin American companies. Management model By means of the Action Plan – PA corporate management tool, covering a five-year horizon but reviewed annually, Embraer plans its short to long-term strategy, primarily considering the following factors: • Feasibility and potential of the markets in which it operates from the economic, social and environmental viewpoints; • Investigating products and services for new regions with confirmed growth potential; • Careful analysis of the operations of its main competitors; • Skills to be enhanced and weak points to be improved by the Company; • Opportunities, challenges and risks to be faced and overcome. The Action Plan is analyzed and approved annually by the Board of Directors, and the Company's Executive Board is appraised in accordance with fulfillment of the targets established. 27
  • 28. Relations with Independent Auditors Embraer’s policy towards its independent auditors, with regard to the provision of services not related to the external audit, is rooted in principles that preserve the auditor’s independence. These principles are based on the fact that auditors may not audit their own work or exercise managerial duties, or act as legal counsel for their customers. In 2009, Embraer contracted review services with these auditors in connection with funds raised in October 2009 and the analysis of IFRS, amounting to a total of R$ 895.0 thousand, or 15.9% of the total fees for external audit work provided to all the group companies worldwide. It is Embraer policy to submit for the approval of the Fiscal Council all services provided by our independent auditors that are not related to the external audits. Commitment Clauses The Company is bound by the Arbitration Regulations of the Market Arbitration Chamber, in accordance with an arbitration commitment clause in its Bylaws. Risk management Embraer reinforced its risk management position with approval by the Board of Directors and the Audit Committee of the Financial Management Policy and the Corporate Risk Methodology. It accordingly strengthened its consolidated transparency, with a view to ensuring the sustainability of its business and of the material and financial resources used in its operations. The Financial Management Policy establishes the guidelines for management of the corporate finances, related to cash flow and the Company's capital structure. A committee was set up with responsibility for monitoring indicators and reporting them to management, the Audit Committee and the Board of Directors, drawing attention to the existing risks and commenting on the progress of mitigation measures. The Corporate risk methodology is illustrated in the following figure: Strategic Critical Objectives Factors Action Plan Action Plan Corporate Risk Matrix Mitigation and e Monitoring Monthly monitoring of the Action Plan Based on this methodology, the corporate risk portfolio was updated and integrated with Embraer’s management, by means of the Action Plan. The whole process and the results were discussed with Management and submitted to the Audit Committee and Board of Directors. To cover operating risks, Embraer conducted studies to assess the controls on aviation 28
  • 29. material purchases and fuelling and removing fuel from aircraft, mainly based on the corporate procedures. PEOPLE AND ORGANIZATION A highlight of the year in relation to personnel was the marked evolution of Embraer leadership in personnel management, recognized by the employees in the annual organizational climate survey and skills appraisal - 360º. As a direct reflection of this evolution and of various in-house movements in relation to staff satisfaction, we can stress Embraer’s classification as one of the best companies to work in, according to the rankings of two renowned Brazilian publications, and as one of the 12 largest and best companies in Brazil to work in by Great Place to Work. Another highlight was the gain resulting from the improvement in operations and corporate efficiency due to implementation of the Lean Manufacturing System as one of the fronts of the Embraer Business Excellence Program – P3E, which made a significant contribution to overcoming hard times arising from the impact of the global economy on the Company's business. Recognition of the practice of Embraer values in their various dimensions and situations mobilized the whole Company, reinforcing the corporate identity and trust between its personnel: • Our people make us fly; • We are here to serve our customers; • We seek corporate excellence; • Enterprise and innovation are our hallmark; • The world is our frontier; • We are building a sustainable future The activities on the cultural front of the P3E resulted in another in-house strength, which enabled the Company to take hard decisions with great impact on its internal public, in view of the corporate situation experienced, supported by strong values and shared by all, through relations of great transparency and respect. In this respect, a wide reaching program was implemented to support the more than 4,000 employees dismissed at the beginning of the year, with a view to guiding them in the process of re-employment or analysis of ongoing career alternatives. , Embraer also undertook to give employees laid off priority in any future contracting opportunities. The Education, Training and Development measures encompassed almost all the employees, reinforcing the Company's commitment to the development and evolution of personnel. In terms of personnel development, aligned with their career prospects, Embraer set up the “Flight Plan - Career with Embraer” program, in which the leadership group was empowered to discuss with and guide people in the process of building their careers. Another highlight in 29
  • 30. this respect were the 350 positions offered to employees, enabling in-house and career development opportunities. Workforce Embraer closed 2009 with a staff of 18,628 people, allocated as follows: Embraer, including subsidiaries • Working categories: Type of work Total Brazil Abroad Operational (hourly workers) 7,683 7,640 43 Administrative 770 615 155 Technical (intermediate level) 2,440 2,160 280 Professional Engineers (*) 3,446 3,367 79 (Higher level) Other professional staff 1,536 1,315 221 Leadership 978 855 123 Total 16,853 15,952 901 (*) Including the 510 engineers in leadership positions, the total number of engineers is 3,956. Subsidiary / associated companies: Company Nº of Employees OGMA (Portugal) 1,534 HEAI (China) 241 Total 1,775 • Educational level / schooling - Embraer and subsidiaries. University 29% High School 65% Post- Graduate 4% Masters or Doctorate 2% 30
  • 31. Employee profit sharing In 2009, approximately 17,000 Embraer employees were also remunerated through the Employee Profit-Sharing Program (PLR). The Good Idea Program, another way of sharing the wealth generated, which aims to recognize and encourage the employees who suggest improvements to the working processes, routines, tools, cost reduction, work safety, ergonomics and the environment, awarded 4,645 employees in 2009. The ideas implemented generated savings of US$ 25 million for the Company. In 2009, the Good Idea Program achieved the historic number of over 11,000 ideas put forward, of which 4,600 were put into effect, making a daily average of 48 suggestions made and 20 implemented. Professional Training and Personnel Development For the eighth consecutive year, the Engineering Specialization Program (PEE) trained two new groups of aviation engineers (122 professionals), totaling 969 engineers contracted by the Company by the end of 2009. Some R$ 5 million were invested in this program in 2009, bringing the total over the years to around R$ 65 million. As a way of disseminating knowledge and recognizing employees with particular experience in their respective areas of specialization, an "In-house Instructors" program was introduced, whereby around 440 employees were trained to act as instructors in in-house courses, resulting in a total of 7,500 teaching hours in 180 different courses. Countless personnel training programs were developed during the year, requiring investments of some R$ 60 million. Benefits for employees and their family members Embraer offers a wide range of benefits to its employees, which act as an important differential in attracting and retaining talent. This was confirmed by the organizational climate survey conducted in 2009, in which 83% of the employees were in favor of the benefits offered. Over R$ 139 million was invested in benefits this year, including private pension plan, health, dental and pharmacy plan and life insurance. Life Insurance Other 2% 7% Private Pension Plan Health 15% Dental and Pharmacy Employee Plan Transportation 49% 14% Meals 13% 31
  • 32. A highlight of 2009 was the creation of a private pension plan, Embraer Prev, with the objective of achieving greater independence and transparency in equity management, in line with best market practices. The “Estar de Bem” (Well-being) Program was also launched during the year, consisting of integrated management of work health and safety, benefits, sport and leisure, providing the employees with the necessary resources and tools to invest more in their health and well- being, in physical, emotional and social terms. The objective is to have healthy, well adjusted staff, working in a more agreeable and safer environment and thereby contributing to productivity, product quality and corporate excellence. The following are among the various health enhancing programs put into practice in 2009: • “Estar de Bem sem Cigarro” (Well-being without Cigarettes): Embraer will be a tobacco- free environment by 2011. • “Estar de Bem sem Drogas” (Well-being without Drugs): this program assists employees and family members in treating addiction. • “Mapeamento de Saúde” (Health Mapping): directed towards awareness of the health and lifestyle profile of employees, in order to guide measures to promote health and quality of life. • “Estar de Bem com a Balança” (Weight Watching): a partnership with Weight Watchers , which offers employees a healthy slimming method. • “Minuto Estar de Bem” (Well-being Bulletin): weekly bulletin containing important information in relation to better health and quality of life, as well as cultural and leisure tips. OCCUPATIONAL HEALTH AND SAFETY AND ENVIRONMENT Embraer’s environmental awareness goes far beyond seeking improvements to its products: it also encompasses upgrading its industrial processes, making them cleaner, more efficient and safer, as well as responsibility towards neighboring communities. In the context of its environment, work health and safety actions, Embraer aims to maintain the ISO 14001 (international Environmental Management System certification) and OHSAS 18001 (international Occupational Health and Safety Management System certification) certifications in the units that have already achieved them, while in 2009 the ELEB unit achieved OHSAS 18001 and OGMA achieved ISO 14001. In 2009, based on the Embraer Business Excellence Program (P3E) and the Conduct Program, various areas included health, safety and environment requirements in their eligibility process, establishing targets to reduce the use of natural resources and work- related accidents. A start was made on transferring the chemical machining and stamping processes from the Faria Lima unit to the Botucatu unit, leading to the installation of new paint cabins with air 32
  • 33. pollution control technology, as well as an electrocoagulation effluent treatment plant. Embraer conducted an inventory of greenhouse gas emissions in all its Brazilian units and audited this process for the first time in 2009. The Company also promoted projects to increase the efficiency of high energy consumption processes, which are already generating positive results in terms of greenhouse gas emissions. Occupational health and safety measures are coordinated by a Health, Safety, Environment and Quality Management System, appraised and certified by an international accreditation body, the ABS-QE. We regard the physical health and well-being of all Embraer employees as a priority, and 8,600 people have received occupational health and safety training. Additionally, in the production departments, we have the Weekly Safety Discussion (DSS - Diálogo Semanal de Segurança), the objective which is to raise awareness and inform employees about the health and safety matters related to their work. In our industrial units, we aim to identify the ergonomic, physical, chemical and accident hazards that could damage the health of our employees, preparing a preventive or corrective action plan to control existing hazards. In 2009, the ergonomics program was implemented in all the Company's units in Brazil, and has already shown significant results in prevention of work-related illnesses. Between 2008 and 2009, the number of work-related accidents dropped by 52%. This result was achieved through implementation of preventive, corrective and awareness measures, including in relation to outsourced activities. The results of the occupational health and safety and environment measures confirm Embraer’s belief that it is possible to attain corporate excellence and the continuity of its business while simultaneously conserving natural resources for future generations and showing respect for people. STATEMENT OF VALUE ADDED (DVA) The DVA portrays Embraer's function based on the amount distributed to the segments of society represented by the shareholders, employees, financial institutions and government (municipal, state and federal). The value added for distribution totaled R$ 2,878.9 million, or 26.6% of the net income for 2009. 33
  • 34. Consolidated - R$ million 2008 2009 Revenue 12.300,9 11.294,1 Input material purchased from third parties 9.303,6 8.535,9 Value added 2.997,3 2.758,2 Retained 227,6 180,1 Net value added produced 2.769,7 2.578,1 Value added received in transfer 188,9 300,8 Total value added for distribution 2.958,6 2.878,9 Distribution of value added 2.958,6 2.878,9 Employees 1.526,8 1.467,6 Government (taxes, charges and contributions) 549,4 59,4 Financial institutions (interest and rentals) 434,4 432,1 Shareholders 224,2 173,7 Retained earnings 204,5 720,9 Minority interests 19,3 25,2 TAXES AND SOCIAL CONTRIBUTIONS Taxes, social contributions and municipal, state and federal charges, a partial measure of the level of Embraer's contribution to Brazilian society, amounted to R$ 618.2 million in 2009. CORPORATE SOCIAL RESPONSIBILITY The Embraer Education and Research Institute (Instituto Embraer de Educação e Pesquisa - IEEP), founded in May 2001, is one of the main instrument of the Company's social work. It maintains various educational programs in partnership with specialized entities, non- governmental organizations (NGOs) and city halls. The IEEP operates mainly in two areas: educational products, offered to pupils in the public educational system, and management process improvement projects, mainly designed for civil society organizations and schools in the public system. The Eng. Juarez Wanderley College (CEJW) is a concrete example of the work of the IEEP. Inaugurated in February 2002 and fully maintained by the IEEP, it provides good quality education at the three high school levels to 600 pupils in the towns of São José dos Campos, Jacareí, Taubaté and Caçapava, on a full-time basis. The pupils receive education, meals, transport, uniforms, life insurance and school materials, free of charge. All the students at the college are products of the public educational system and admission is by an independent selection process. Since its inauguration, the CEJW has proved itself to be a model Brazilian educational institution. The students' excellent performance in the 2008 National High School Examination 34
  • 35. (ENEM) earned the institution first place in the State of São Paulo, and eighth place in Brazil. In the 2009 university entrance exams, 100% of the pupils were accepted by at least one university, and 78% were accepted by the public universities. In addition to high quality education and the extracurricular environmental, social and cultural activities, since 2006, the Colégio Engenheiro Juarez Wanderley has offered its pupils the University Preparation Program (PPU), with the objective of bringing the working reality into the school and preparing students for the challenges they will face at university. The PPU comprises 800 classroom hours, in four semesters, and encompasses the scientific (pre- engineering), humanities (pre-humanities and management) and biomedical (pre-biomedical) areas. The curricula, largely based on laboratory experiments, were developed in partnership with the United States Occupational Research and Development Center, the Rede Pitágoras and the Teaching and Research Institute of the Sírio-Libanês Hospital. The first pre- engineering class graduated in 2008 and the first classes of the pre-biomedical and pre- humanities and management programs, who started their courses in 2007, graduated in 2009. Social Partnership Program – PPS To increase the capillarity of its actions, the IEEP maintains another arm, the Social Partnership Program (PPS), which operates on two fronts: assisting Non-Governmental Organizations (NGOs) to build up their capacity to conceive and develop projects, and to promote the development of a social culture to mobilize civil society to identify and solve its problems. To do so, it benefits from the active participation of Embraer employees, who voluntarily participate in preparing and executing projects developed by social organizations in the São José dos Campos, Botucatu and Gavião Peixoto areas. In 2009, 80 projects were submitted to the IEEP for analysis, of which it supported 13, involving total investment of R$ 340.0 thousand, and benefiting around 2,600 people. Since its creation in 2004, the PPS has supported 61 projects, which underwent an exacting evaluation process and are linked to social organizations with legitimate regional influence. These projects have already benefitted over 33,000 people in the various communities in which Embraer operates. The following table shows the evolution of these actions in the last three years: Total PPS 2007 2008 2009 (since 2004) Projects submitted 48 90 80 458 Projects approved 9 12 13 61 Beneficiaries 6,055 15,304 2,627 33,580 Investment (R$) 281,044 320,785 340,000 2,318,149 35
  • 36. School Action Program – PAE With a view to community participation in school management, in order to integrate actions with the demands of the areas in which it operates, the IEEP introduced the School Action Program (PAE). Using the methodology developed under the coordination of Unicef’s Educational Action, the United Nations Development Programme (UNDP) and the Inep-MEC, the communities of São José dos Campos, Botucatu and Gavião Peixoto and the surrounding areas are encouraged to consider the quality of school management and to propose improvements to the model adopted by public primary and high schools. In 2009, the PAE supported 14 projects, involving total investment of R$ 350.0 thousand and benefitting over 11,000 pupils. Since it was launched in 2006, 205 projects have been submitted to the Embraer Education and Research Institution, 66 of which were selected, benefitting a total of some 42,000 young people. Total PAE 2007 2008 2009 (since 2006) Projects received 47 46 46 205 Projects approved 20 18 14 66 Beneficiaries 10,000 10,677 11,171 41,848 Investment (R$) 334,214 316,952 350,270 1,201,742 Together, the two programs, PPS and PAE, have benefitted from the voluntary participation of 1,580 Embraer employees. 36
  • 37. Annual Social Responsibility Report 2009 – Parent Company 1 – Calculation Base 2009 Valor (Mil reais) 2008 Valor (Mil reais) Net revenue (NR) 9,271,506 10,706,196 Operating income (OI) 890,356 409,450 Gross payroll (FPB) 1,550,566 1,717,311 2 – Internal Social Indicators Amount (k) % of GP % of NR Amount (k) % of GP % of NR Meals 22,203 1.43% 0.24% 29,248 1.70% 0.27% Mandatory social charges 406,853 26.24% 4.39% 437,847 25.50% 4.09% Private pension plan 29,659 1.91% 0.32% 31,431 1.83% 0.29% Health 94,428 6.09% 1.02% 77,219 4.50% 0.72% Occupational health and safety 10,615 0.68% 0.11% 9,935 0.58% 0.09% Education 326 0.02% 0.00% 958 0.06% 0.01% Culture 168 0.01% 0.00% 275 0.02% 0.00% Professional training and development 15,943 1.03% 0.17% 21,035 1.22% 0.20% Child day care facilities or allowances 276 0.02% 0.00% 230 0.01% 0.00% Profit sharing 70,175 4.53% 0.76% 130,992 7.63% 1.22% Other 34,661 2.24% 0.37% 36,148 2.10% 0.34% Total – Internal social indicators 685,307 44.20% 7.39% 775,318 45.15% 7.24% 3 – External Social Indicators Valor (mil) % of OI % of NR Amount (k) % of OI % of NR Education 12,174 1.37% 0.13% 10,071 2.46% 0.09% Culture 600 0.07% 0.01% 0 0.00% 0.00% Food safety and hunger prevention programs 457 0.05% 0.00% 1,254 0.31% 0.01% Other 385 0.04% 0.00% 385 0.09% 0.00% Total contributions to society 13,616 1.53% 0.15% 11,710 2.86% 0.11% Taxes (excluding social charges) 235,433 26.44% 2.54% 249,506 60.94% 2.33% Total - External social indicators 249,049 27.97% 2.69% 261,216 63.80% 2.44% 4 - Environmental Indicators Amount (k) % of OI % of NR Amount (k) % of OI % of NR Investments related to the company's production / operation 9,017 1.01% 0.10% 10,272 2.51% 0.10% Investments in external programs and/or projects 96 0.01% 0.00% 59 0.01% 0.00% Total investments in the environment 9,113 1.02% 0.10% 10,331 2.52% 0.10% With regard to establishing “annual targets” to minimize waste, ( ) has no targets ( ) fulfils 51 to 75% ( ) has no targets ( ) fulfils 51 to 75% consumption in general in production/ operations and increase ( ) fulfils 0 to 50% ( X ) fulfils 76 to 100% ( ) fulfils 0 to 50% (x ) fulfils 76 to 100% efficient use of natural resources, the company 5 - Workforce Indicators 2009 2008 Funcional Nº employees at the end of the period 15,952 20,608 Nº de admissions during the period 201 973 Nº de of outsourced employees 2,336 2,657 Nº of trainees 32 155 Nº of employees over 45 2,492 2,617 Nº women working in the company 2,030 2,644 % of management positions held by women 8.47% 7.14% Nº people with disabilities or special needs 786 1,011 6 - Relevant information on the exercise of corporate 2009 Metas 2010 citizenship Ratio of highest to lowest remuneration in the company 57 48 Total number of work-related accidents 792 634 The social and environmental projects carried out by the company were ( x ) senior and ( ) all the ( x) senior and ( ) all the ( ) senior ( ) Senior defined by: management middle mgt employees management middle mgt employees The occupational health and safety standards were defined by: ( ) senior and ( ) all the ( x ) all + Cipa ( ) senior and ( ) all the (x ) all + Cipa middle mgt employees middle mgt employees With regard to freedom of association, the right to collective bargaining ( ) is not ( ) follows the (x ) encourages ( ) will not be ( ) will follow (x ) will encourage and internal representation of the workers, the company: involved OIT standards and follows OIT involved OIT standards and follow OIT ( ) senior and (x ) all the ( ) senior and (x ) all the The private pension plans covers: ( ) senior middle mgt employees ( ) senior middle mgt employees management management ( ) senior and (x ) all the ( ) senior and (x ) all the Profit –sharing includes: ( ) senior middle mgt employees ( ) senior middle mgt employees management management In selecting suppliers, the ethical and social responsibility standards ( ) are not ( x ) are ( ) will not be (x ) will be ( ) are required ( ) will be required followed by the company: : considered suggested considered suggested With regard to participation of employees in voluntary work programs, the ( ) is not ( x ) organizes and ( ) will not be ( x) will organize ( ) supports ( ) will support company: involved encourages involved and encourage Total value added to be distributed (in thousands of R$): In 2009: 2,407,063 In 2008: 2,555,441 -1.68% government 50,33% employees 18.94% government 47.15% employees Distribution of Value Added (DVA): 7.21% shareholders 14.36% third parties 29,78% 8,77% shareholders 17,89% third parties 7.,25% retained retained 7 - Other Information 37
  • 38. (A free translation of the original in Portuguese) Embraer - Empresa Brasileira de Aeronáutica S.A. Financial Statements at December 31, 2009 and 2008 and Report of Independent Auditors 38
  • 39. (A free translation of the original in Portuguese) Report of Independent Auditors To the Board of Directors and Stockholders Embraer – Empresa Brasileira de Aeronáutica S.A. São José dos Campos - SP 1 We have audited the accompanying balance sheets of Embraer – Empresa Brasileira de Aeronáutica S.A. (the “Company”) and the consolidated balance sheets of Embraer – Empresa Brasileira de Aeronáutica S.A. and its subsidiaries, presented in Brazilian reais, as of December 31, 2009 and 2008, and the related statements of income, of changes in stockholders’ equity, of cash flows and of value added of the Company and the related consolidated statements of income, of cash flows and of value added for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements. 2 We conducted our audits in accordance with approved Brazilian auditing standards, which require that we perform the audit to obtain reasonable assurance about whether the financial statements are fairly presented in all material respects. Accordingly, our work included, among other procedures: (a) planning our audit taking into consideration the significance of balances, the volume of transactions and the accounting and internal control systems of the Company, (b) examining, on a test basis, evidence and records supporting the amounts and disclosures in the financial statements, and (c) assessing the accounting practices used and significant estimates made by management, as well as evaluating the overall financial statement presentation. 3 In our opinion, the financial statements audited by us present fairly, in all material respects, the financial position of Embraer – Empresa Brasileira de Aeronáutica S.A. and of Embraer – Empresa Brasileira de Aeronáutica S.A. and its subsidiaries at December 31, 2009 and 2008, and the results of operations, the changes in stockholders’ equity, the cash flows and the value added to the Company’s operations, as well as the consolidated results of operations, cash flows and value added to the operations of the Company and its subsidiaries for the years then ended, in accordance with accounting practices adopted in Brazil. 39
  • 40. Embraer – Empresa Brasileira de Aeronáutica S.A. 4 As mentioned in Note 2.2 c) to the financial statements, the Company altered its policy of classification of cash and cash equivalents in 2009. Consequently, the balance sheet of the Company and the consolidated balance sheet of Embraer – Empresa Brasileira de Aeronáutica S.A. and its subsidiaries at December 31, 2008 and the related statements of cash flows for the year then ended have been adjusted in relation to those presented in the prior year and are being restated in accordance with Accounting Standards and Procedures (NPC) 12 - Accounting Practices, Changes in Accounting Estimates and Correction of Errors. 5 The accounting practices adopted in Brazil differ, in certain significant aspects, from accounting principles generally accepted in the United States of America (“U.S. GAAP”). Information relating to the nature and effects of these differences is presented in Note 39 to the financial statements. São José dos Campos, April 29, 2010 PricewaterhouseCoopers Auditores Independentes CRC 2SP000160/O-5 Valdir Augusto de Assunção Contador CRC 1SP135319/O-9 40
  • 41. Embraer – Empresa Brasileira de Aeronáutica S.A. Balance Sheets at December 31, 2009 and 2008 (in thousands of Brazilian reais) Parent Company Consolidated ASSETS Note 2009 2008 2009 2008 CURRENT ASSETS Cash and cash equivalents (*) (3) 2.131.274 3.101.535 2.772.618 4.345.256 Temporary cash investments (*) (4) 808.481 520.543 1.626.337 776.829 Marketable securities (5) 759 759 34.466 22.786 Trade accounts receivable (6) 289.540 408.106 756.209 1.107.044 Accounts receivable from subsidiaries (6) 94.307 273.857 - - Customer financing (7) - - 19.572 20.123 Collateralized accounts receivable (8) - - 20.960 26.886 Provision for doubtful accounts (6) (10.693) (12.139) (64.818) (82.782) Inventories (12) 3.123.262 5.233.945 4.272.977 6.906.358 Taxes recoverable (9) 173.756 157.970 198.220 246.100 Other credits (10) 99.696 166.526 166.401 316.089 Deferred income tax and social contribution on net income (32) 218.331 373.276 256.857 404.508 Prepaid expenses (13) 33.189 70.896 40.391 76.351 6.961.902 10.295.274 10.100.190 14.165.548 NON-CURRENT ASSETS Long-term receivables Marketable securities (5) 505 473 43.339 159.633 Trade accounts receivable (6) - - 807 13.689 Customer financing (7) 53.866 77.009 72.316 264.538 Collateralized accounts receivable (8) - - 825.288 1.091.720 Inventories (12) - - 151.115 194.745 Taxes recoverable (9) 51.887 67.255 60.241 76.472 Accounts receivable from subsidiaries (14) 1.176.606 2.138.251 - - Guarantee deposits (11) 342.230 18.691 880.306 1.152.636 Other credits (10) 68.617 20.462 86.146 28.137 Deferred income tax and social contribution on net income (32) 627.569 338.237 678.820 424.559 Prepaid expenses (13) - - 8.149 16.786 Investments (14) 2.449.193 2.865.319 9 10 Property, plant and equipment (15) 958.831 1.291.557 1.777.787 2.300.207 Intangible asets (16) 1.203.166 1.531.270 1.261.129 1.610.490 6.932.470 8.348.524 5.845.452 7.333.622 TOTAL ASSETS 13.894.372 18.643.798 15.945.642 21.499.170 (*) The 2008 amounts have been reclassiffied in accordance with Notes 2.2 b) and c). The accompanying notes are an integral part of these financial statements 41
  • 42. Embraer – Empresa Brasileira de Aeronáutica S.A. Balance Sheets at December 31, 2009 and 2008 (in thousands of Brazilian reais) (continued) Parent Company Consolidated LIABILITIES AND STOCKHOLDERS' EQUITY Note 2009 2008 2009 2008 CURRENT LIABILITIES Loans and financing (17) 810.203 930.096 1.031.494 1.259.809 Recourse and non-recourse debt (8) - - 236.699 321.753 Suppliers (18) 848.140 2.212.076 1.037.949 2.520.208 Accounts payable (19) 114.890 89.830 188.194 163.503 Contributions from partners (20) - - 1.540 5.823 Accounts payable to subsidiaries 52.893 109.585 - - Advances from customers (21) 1.148.970 2.401.225 1.338.058 2.691.041 Taxes and social charges payable (22) 95.158 81.366 136.593 148.009 Other provisions (23) 316.683 802.133 410.295 891.737 Provision for contingencies (24) 17.451 20.957 18.203 22.137 Dividends (25) 208.256 188 208.256 2.002 Deferred income tax and social contribution on net income (32) 71.006 74.714 91.929 84.737 Unearned income 189.936 258.098 194.329 264.259 3.873.586 6.980.268 4.893.539 8.375.018 NON-CURRENT LIABILITIES Long-term liabilities Loans and financing (17) 2.381.164 2.696.902 2.552.489 3.039.870 Recourse and non-frecourse debt (8) - - 647.033 857.391 Accounts payable (19) 636 2.820 33.084 41.218 Contributions from partners (20) 117.911 65.484 117.911 103.453 Advances from customers (21) 682.944 1.039.978 693.201 1.049.800 Taxes and social charges payable (22) 572.811 539.696 572.928 547.027 Provision for contingencies (24) 71.396 60.049 75.424 80.114 Other provisions (23) 368.225 235.902 374.055 235.902 Deferred income tax and social contribution on net income (32) 614.539 865.627 653.114 921.430 Unearned income 7.541 7.948 7.541 7.949 Deferred income 134.437 105.880 147.234 105.973 4.951.604 5.620.286 5.874.014 6.990.127 MINORITY INTEREST - - 157.284 163.494 STOCKHOLDERS' EQUITY (26) Capital 4.789.617 4.789.617 4.789.617 4.789.617 Treasury shares (320.250) (320.250) (320.250) (320.250) Revenue reserves 2.239.478 1.578.001 2.153.391 1.487.677 Cumulative translation adjustments (1.639.663) (4.124) (1.601.953) 13.487 5.069.182 6.043.244 5.020.805 5.970.531 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 13.894.372 18.643.798 15.945.642 21.499.170 The accompanying notes are an integral part of these financial statements 42
  • 43. Embraer – Empresa Brasileira de Aeronáutica S.A. Statements of Income For the Years Ended December 31, 2009 and 2008 (in thousands of Brazilian reais, except net income per share) Parent Company Consolidated Note 2009 2008 2009 2008 GROSS SALES Domestic market 927.578 262.791 1.145.434 522.065 Foreign market 8.420.086 10.467.643 9.792.895 11.359.543 Taxes and deductions from sales (76.158) (24.238) (125.582) (134.843) NET SALES 9.271.506 10.706.196 10.812.747 11.746.765 COST OF SALES (7.672.421) (8.599.236) (8.734.086) (9.339.709) GROSS PROFIT 1.599.085 2.106.960 2.078.661 2.407.056 OPERATING INCOME (EXPENSES) Administrative (255.078) (297.122) (350.435) (396.845) Management fees (25.764) (27.507) (25.764) (28.451) Selling (505.005) (754.667) (602.767) (731.155) Other income (expenses), net (29) (305.280) (102.650) (367.811) (138.018) Equity in the earnings (loss) of subsidiaries (14) 147.191 214.026 - (91) OPERATING PROFIT BEFORE FINANCIAL INCOME (EXPENSES) 655.149 1.139.040 731.884 1.112.496 FINANCIAL INCOME (EXPENSES) Financial expenses (30) (249.700) (196.692) (286.199) (229.520) Financial income (30) 226.714 141.075 300.802 189.033 Monetary and foreign exchange variations, net (31) (94.045) (256.684) (125.754) (188.830) PROFIT BEFORE TAXATION 538.118 826.739 620.733 883.179 Current income tax and social contribution on net income (32) (25.062) (1.877) (77.525) (23.623) Deferred income tax and social contribution on net income (32) 377.301 (415.412) 376.562 (411.513) NET INCOME AFTER TAXES 890.357 409.450 919.770 448.043 MINORITY INTEREST - - (25.178) (19.293) NET INCOME FOR THE YEAR 890.357 409.450 894.592 428.750 NET INCOME PER SHARE OUTSTANDING AT THE END OF THE YEAR - R$ 1,230 0,566 The accompanying notes are an integral part of these financial statements 43
  • 44. Embraer – Empresa Brasileira de Aeronáutica S.A. Statements of Changes in Stockholders' Equity - Parent Company For the Years Ended December 31, 2009 and 2008 (in thousands of Brazilian reais, except for dividends and interest on own capital per share) Revenue reserves For investments Cumulative Investment Legal and Treasury Retained translation Capital subsidy reserve working capital shares earnings adjustments Total AT DECEMBER 31, 2007 4.789.617 - 94.890 449.838 (1.414) 847.960 (1.482.313) 4.698.578 Treasury shares (Note 29) - - - - (318.836) - - (318.836) Prescribed dividends - - - 73 - - - 73 Net income for the year - - - - - 409.450 - 409.450 Cumulative translation adjustments - - - - - - 1.478.189 1.478.189 Appropriations of net income Effects of the retroactive adoption of Law 11.638/07 - 8.094 42.398 797.468 - (847.960) - - Investment subsidy - 13.116 - - - (13.116) - - Legal reserve - - 20.472 - - (20.472) - - Interest on own capital (R$ 0.31 per share) - - - - - (224.210) - (224.210) Reserve for investments and working capital - - - 151.652 - (151.652) - - AT DECEMBER 31, 2008 4.789.617 21.210 157.760 1.399.031 (320.250) - (4.124) 6.043.244 Net income for the year - - - - - 890.357 - 890.357 Cumulative translation adjustments - - - - - - (1.635.539) (1.635.539) Appropriations of net income Proposed dividends (R$ 0.076 per share) - - - - - (55.200) - (55.200) Investment subsidy - 13.495 - - - (13.495) - - Legal reserve - - 44.518 - - (44.518) - - Interest on own capital (R$ 0.24 per share) - - - - - (173.680) - (173.680) Reserve for investments and working capital - - - 603.464 - (603.464) - - AT DECEMBER 31, 2009 4.789.617 34.705 202.278 2.002.495 (320.250) - (1.639.663) 5.069.182 The accompanying notes are an integral part of these financial statements 44
  • 45. Embraer – Empresa Brasileira de Aeronáutica S.A. Statements of Cash Flows For the Years Ended December 31, 2009 and 2008 (in thousands of Brazilian reais) Parent Company Consilidated 2009 2008 2009 2008 Operating activities Reclassified Reclassified Net income for the year 890.357 409.450 894.592 428.750 Items not affecting cash and cash equivalents Depreciation and amortization 340.113 307.476 425.536 387.216 Losses (gains) on the sale of property, plant and equipment (922) (472) 2.436 1.371 Provision for obsolescence 21.619 255 77.063 (52.797) Provision for losses (2.256) 5.667 (11) (3.287) Write-off of intangible assets - - 6.188 20.128 Deferred income tax and social contribution on net income (377.301) 415.414 (376.562) 411.513 Interest on taxes and loans payable in installments 11.391 (23.106) 39.026 (14.418) Provision for doubtful accounts 479 (280) 2.028 (5.173) Equity in the (earnings) loss of subsidiaries (147.191) (214.026) - 91 Monetary and foreign exchange variations, net 144.161 (183.930) 169.364 (216.618) Minority interest - - 25.178 19.292 Other 3 613 (1.848) 1.752 Changes in assets and liabilities (1.100.151) 2.299.509 (1.593.851) 942.890 Trade accounts receivable 649.805 684.933 145.910 (135.411) Collateralized accounts receivable - - (13.379) (1.605) Customer financing 4.027 3.698 132.144 (116.466) Prepaid expenses 29.822 (23.342) 30.807 (22.161) Inventories 705.461 (329.705) 736.759 (644.979) Other credits 55.263 (53.369) 99.348 (30.641) Unearned income 4.095 14.264 3.899 5.395 Guarantee deposits (435.219) 6.977 (25.122) (42.934) Taxes recoverable (48.052) (9.138) (9.652) (48.936) Suppliers (853.104) 231.152 (902.817) 275.856 Recourse and non-recourse debt - - 4.195 30.743 Income tax and social contribution on net income payable 5.592 740 18.569 5.897 Taxes payable 12.425 (60.304) (17.112) (52.878) Contributions from partners 200.504 198.353 179.132 21.730 Provision for contingencies 32.040 (12.414) 17.545 (14.130) Advances from customers (849.590) 716.643 (867.889) 770.695 Deferred income 57.947 11.334 70.832 (3.578) Temporary investments (426.250) 701.724 (1.046.428) 719.076 Minority interest - - 11.507 (2.628) Other provisions (242.896) 259.660 (212.184) 262.885 Accounts payable (2.021) (52.608) 50.085 (33.040) Net cash provided by (used in) operating activities (219.698) 3.016.570 (330.861) 1.920.710 Investing activities Sales of property, plant and equipment 2.894 704 49.925 3.330 Additions to property, plant and equipment (132.001) (276.992) (352.935) (482.213) Additions to intangible assets (414.291) (452.494) (435.115) (480.340) Additions to investments (178.834) (50.651) - - Marketable securities - - - 53 Dividends received - 2.671 - - Restricted cash reserved for construction of assets - - (5.466) (24.233) Net cash used in investing activities (722.232) (776.762) (743.591) (983.403) Financing activities Loans paid (2.328.526) (2.954.562) (2.946.469) (3.330.640) New loans received 2.367.839 3.368.834 2.810.316 3.777.418 Dividends and interest on own capital - (423.797) - (423.468) Treasury shares - (317.963) - (317.963) Acquisition of minority interrest - - - (3.215) Net cash provided by (used in) financing activities 39.313 (327.488) (136.153) (297.868) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (902.617) 1.912.320 (1.210.605) 639.439 EFFECTS OF FOREIGN CURRENCY TRANSLATION (67.644) 316.026 (362.032) 634.654 Cash and cash equivalents at the end of the year 2.131.274 3.101.535 2.772.618 4.345.256 Cash and cash equivalents at the beginning of the year 3.101.535 873.189 4.345.256 3.071.163 The accompanying notes are an integral part of these financial statements 45
  • 46. Embraer - Empresa Brasileira de Aeronáutica S.A. Statements of Value Added For the Years Ended December 31, 2009 and 2008 (in thousands of Brazilian reais) Parent Company Consolidated 2009 2008 2009 2008 REVENUES 9.679.222 11.173.178 11.294.104 12.300.898 Sales of goods, products and services 9.305.039 10.715.849 10.874.844 11.762.101 Provision for doubtiful accounts - reversals and new provisions (389) (72) (5.746) (3.213) Other 155.194 101.983 162.007 87.873 Revenues relating to construction of own assets 219.378 355.418 263.000 454.137 INPUT MATERIALS PURCHASED FROM THIRD PARTIES 7.495.419 8.805.469 8.535.903 9.303.689 Raw materials used 6.071.205 7.074.045 6.888.834 7.525.984 Materials, energy, outsourced services and other 1.424.214 1.731.424 1.647.068 1.777.705 GROSS VALUE ADDED 2.183.803 2.367.709 2.758.202 2.997.209 RETENTIONS 150.646 167.369 180.120 227.574 Depreciation, amortization and depletion 150.646 167.369 180.120 227.574 NET VALUE ADDED PRODUCED BY THE ENTITY 2.033.157 2.200.340 2.578.082 2.769.635 VALUE ADDED RECEIVED IN TRANSFER 373.905 355.101 300.801 188.942 Equity in the earnings (loss) of subsidiaries 147.191 214.026 - (91) Financial income 226.714 141.075 300.801 189.033 TOTAL VALUE ADDED TO BE DISTRIBUTED 2.407.062 2.555.441 2.878.883 2.958.577 DISTRIBUTION OF VALUE ADDED 2.407.063 2.555.441 2.878.884 2.958.577 Personel and charges 1.211.526 1.204.933 1.467.618 1.526.710 Taxes and contributions 336.793 68.597 435.990 137.934 Deferred income tax and social contribution on net income (377.301) 415.412 (376.562) 411.513 Interest and rentals 345.689 457.048 432.067 434.377 Interest on own capital and dividends 173.680 224.210 173.680 224.210 Retained earnings 716.676 185.241 720.913 204.540 Minority interest in retained earnings - - 25.178 19.293 The accompanying notes are an integral part of these financial statements 46
  • 47. Embraer - Empresa Brasileira de Aeronáutica S.A. Notes to the Financial Statements at December 31, 2009 and 2008 In thousands of Brazilian reais, unless otherwise indicated 1 OPERATIONS The operations of Embraer - Empresa Brasileira de Aeronáutica S.A.(Embraer or Parent Company; together with its subsidiaries, Consolidated or the Company), a corporation with its headquarters in the city of São José dos Campos, State of São Paulo, Brazil are the development, production and sale of jet and turboprop aircraft for civil and defense aviation, aircraft for agricultural use, structural components, mechanical and hydraulic systems and technical activities related to the production and maintenance of aerospace material. The consolidated financial statements have been prepared and are presented in conformity with Brazilian Corporate Law and include the accounts of the Company and of all the subsidiaries in which Embraer directly or indirectly holds a majority of the capital or of the management control, as follows: Canal Investments LLC - A wholly-owned subsidiary, domiciled in Delaware, USA, responsible for electronic commerce. The company is currently inactive. ELEB – Equipamentos Ltda. – ELEB - As from July 3, 2008, Embraer has held 99.99% of the capital of this subsidiary, located in São José dos Campos. ELEB produces and sells precision hydraulic and mechanical equipment for the aviation industry, mainly for Embraer aircraft. Its wholly-owned subsidiary, ELEB Aerospace, Inc., domiciled in Delaware, USA, with an operational base in the State of Kansas, USA, is currently closing down its operations. Embraer Aircraft Holding Inc. - EAH - A wholly-owned subsidiary, domiciled in Fort Lauderdale, USA, responsible for corporate and institutional activities. It has the following subsidiaries located in the USA: • Embraer Aircraft Customer Services, Inc. - “EACS” - sells spare parts, product support and services to customers in the USA, Canada and the Caribbean. • Embraer Aircraft Maintenance Services Inc. - EAMS - provides maintenance services for aircraft and components. • Embraer Training Services - ETS - domiciled in Delaware, USA, responsible for corporate and institutional activities and has a 51% subsidiary, Embraer CAE Training Services – ECTS, also domiciled in Delaware, USA, which provides training for pilots, mechanics and crew. • Embraer Executive Jet Services, LLC - EEJS - domicilied in Delaware, USA, provides after sales/support and maintenance services to executive aircraft. 47
  • 48. Embraer - Empresa Brasileira de Aeronáutica S.A. Notes to the Financial Statements at December 31, 2009 and 2008 In thousands of Brazilian reais, unless otherwise indicated • Embraer Services Inc. - ESI - provides support in the USA for the defense and commercial market programs. • Embraer Executive Aircraft, Inc., incorporated in 2008, is domiciled in Delaware, USA and has its operational base in Melbourne, Florida, USA. Its objective is the final assembly and delivery of the Phenom executive jet. Embraer Asia Pacific PTE. Ltd. - EAP – a wholly-owned subsidiary, domiciled in Singapore, incorporated in 2006 with the objective of providing after sales support services in Asia. Embraer Australia PTY Ltd. - EAL - a wholly-owned subsidiary, domiciled in Melbourne, Australia, with the objective of providing after sales support services to customers in the Australasian and Asian regions. The company is currently inactive. Embraer Aviation Europe SAS - EAE - a wholly-owned subsidiary, located in Villepinte, France, responsible for corporate and institutional activities and has the following subsidiaries: • Embraer Aviation International SAS – EAI - domiciled in Villepinte, France, sells parts and provides after sales support services in Europe, Africa and the Middle East. • Embraer Europe SARL – EES - domiciled in Villepinte, France, provides sales representation for the Company in Europe, Africa and the Middle East. Embraer Credit Ltd. - ECL - a wholly-owned subsidiary, domiciled in Delaware, USA, provides support for sales operations. Embraer GPX Ltda - a wholly-owned subsidiary, incorporated in 2006 and located in Gavião Peixoto, State of São Paulo, Brazil to provide specialized aircraft maintenance services. The company started operations in October 2009. Embraer Overseas Limited - a wholly-owned subsidiary, domiciled in the Cayman Islands, B.W.I., incorporated in September 2006 with the sole objective of carrying out financial transactions, including raising and investing funds, intercompany loans for Embraer companies and derivative transactions to hedge against the risks of its operations. Embraer Representation LLC - ERL- a wholly-owned subsidiary, domiciled in Delaware, USA, provides sales and institutional representation for the Company. 48
  • 49. Embraer - Empresa Brasileira de Aeronáutica S.A. Notes to the Financial Statements at December 31, 2009 and 2008 In thousands of Brazilian reais, unless otherwise indicated Embraer Spain Holding Co. SL - ESH - a wholly-owned subsidiary, domiciled in Spain. Its objective is to coordinate investments in subsidiaries abroad, including those focused on activities that support the sale of aircraft and management of assets derived from these operations. ESH's operations are carried out by its subsidiaries, as follows: • Airholding SGPS, S.A. - is domiciled in Portugal and 70% of its capital is held by ESH. Its main activity is its 65% investment in the voting capital of OGMA - Indústria Aeronáutica de Portugal S.A., a Portuguese aviation maintenance and production company. The remaining 35% of the voting capital is held by Empresa Portuguesa de Defesa – EMPORDEF. • ECC Investment Switzerland AG - domiciled in Switzerland, holds 100% of the capital of the subsidiaries ECC Insurance & Financial Co. Ltd. – ECC Insurance and Embraer Finance Ltd. - EFL. • ECC Insurance & Financial Co. Ltd. - domiciled in the Cayman Islands, is an in-house insurance company providing cover for the financial guarantees offered to customers and/or financing agents involved in structuring the sales of Embraer aircraft. • Embraer Finance Ltd. – EFL - domiciled in the Cayman Islands, assists customers in obtaining third-party financing, as well as providing support for some of the Company’s purchase and sale transactions. • ECC Leasing Co. Ltd. - domiciled in Ireland, and its objective is the lease and sale of used aircraft. • Harbin Embraer Aircraft Industry Company Ltd. - HEAI - based in Harbin, in China, its purpose is to manufacture aircraft of the ERJ 145 family in order to meet the commercial air transportation market demand in China for the 30 to 50 seat range aircraft. • Embraer CAE Training Services (UK) Ltd. - incorporated in 2009, is domiciled in London, England, and provides training for pilots, mechanics and crew. Embraer holds 51% of its capital. • Embraer Portugal - SGPS S.A. - a wholly-owned subsidiary incorporated in 2008, is domiciled in Évora, Portugal, and its objective is to coordinate investments and economic activity in its subsidiaries in Portugal. 49
  • 50. Embraer - Empresa Brasileira de Aeronáutica S.A. Notes to the Financial Statements at December 31, 2009 and 2008 In thousands of Brazilian reais, unless otherwise indicated • Embraer-Portugal Estruturas Metálicas S.A incorporated in 2008 and domiciled in Portugal, in the city of Évora, and its objective is the manufacture, assembly, maintenance and sale of parts, components and metal sets and carrying out other technical, industrial, commercial and service activities related to the metal products industry. • Embraer-Portugal Estruturas em Compósitos S.A. – incorporated in 2008, and domiciled in Portugal, in the city of Évora, its objective is the manufacture, assembly and sale of structures based on parts and sets in composite materials and carrying out other technical, industrial, commercial and service activities related to the composite, non-metal products manufacturing industry. ECC do Brasil Cia. de Seguros - a wholly-owned subsidiary, domiciled in Rio de Janeiro, State of Rio de Janeiro, Brazil, was incorporated in 2004 and approved by the Private Insurance Agency – SUSEP. Its objective is to operate solely with export credit insurance. On December 7, 2007, Embraer's Board of Directors approved the proposal to sell all of its shares in ECC do Brasil Cia de Seguros, and on April 7, 2009, Embraer signed a contract to this effect, subject to approval by the Private Insurance Agency – SUSEP, which has not yet been granted. Indústria Aeronáutica Neiva Ltda.-“Neiva” - a wholly-owned subsidiary, located in Botucatu, State of São Paulo, Brazil, which currently sells agricultural aircraft and parts and components for this model of aircraft. Special Purpose Companies - SPCs - The Company organizes some of its aircraft sale financing transactions through SPCs, in which the Company has no direct or indirect interest. Although it has no equity interests, the Company controls their operations or takes a majority share of their risks and rewards, and the SPCs are therefore consolidated in the financial statements of the parent company. The consolidated SPCs are: Barca Nine Ltd., Corcim Inc., Sampa Gold Inc., PM Limited, Refine Inc., RS Limited, River One Ltd., Fifth Feathers Ltd. and Port One Ltd. Other SPCs in which Embraer is not the primary beneficiary and has no continuous involvement were not consolidated, based on technical analyses made by management. Exclusive Investment Funds - in line with its business strategies, the Company has exclusive investment funds, which are consolidated in the financial statements. The balances of marketable securities and investments maintained through these funds are recorded in the Cash and cash equivalents or Temporary cash investments accounts, taking into consideration the original maturities of the securities and the fund investment strategies, which provide for negotiation of these securities in periods that reflect the immediate liquidity of the amounts (Note 3). 50
  • 51. Embraer - Empresa Brasileira de Aeronáutica S.A. Notes to the Financial Statements at December 31, 2009 and 2008 In thousands of Brazilian reais, unless otherwise indicated 2. PRESENTATION OF THE FINANCIAL STATEMENTS AND ACCOUNTING PRACTICES 2.1 PRESENTATION OF THE FINANCIAL STATEMENTS The financial statements were approved by the Company’s Board of Directors in a meeting held on March 11, 2010 and by shareholders’ meeting held on April 19, 2010. The financial statements (parent company and consolidated) have been prepared and are presented in accordance with Brazilian accounting practices, based on corporate legislation and the regulations of the Brazilian Securities Commission (CVM), in accordance with principles, methods and criteria consistent with those of the financial statements of the previous year. The main accounting practices followed in preparation of these financial statements correspond to the regulations and instructions in force for the year ended December 31, 2009, and are different from those that will be used in the preparation of the financial statements for the year ending December 31, 2010, as shown in Note 2.2 kk. The preparation of financial statements requires estimates to record certain assets, liabilities and other transactions. The Company’s financial statements therefore include estimates in relation to the useful lives of property, plant and equipment, provisions for contingent liabilities, determination of provisions for income taxes and similar matters. The actual results may differ from these estimates. (a) Functional currency The Company, after analyzing Embraer's operations and business, with reference to the applicability of CPC (Brazilian Accounting Pronouncements Committee) Technical Pronouncement No. 2, approved by CVM Resolution No. 534 of January 29, 2008, relating mainly to the factors involved in the determination of its functional currency, management concluded that the Company's functional currency is the US dollar. This conclusion was based on analysis of the following indicators, as set out in CPC Technical Pronouncement No. 2, approved by CVM Resolution No. 534 of January 29, 2008: • Currency with the greatest influence on the prices of goods and services; • Currency of the country whose competitive forces and regulations have the greatest influence on the determination of the selling price of the products and services; • Currency with the greatest influence on labor, materials and other costs of the supply of products or services; • Currency in which the funds for financial transactions are mainly obtained; and 51
  • 52. Embraer - Empresa Brasileira de Aeronáutica S.A. Notes to the Financial Statements at December 31, 2009 and 2008 In thousands of Brazilian reais, unless otherwise indicated • Currency in which the amounts from operations are usually received. The amounts in Brazilian reais presented in the Company's individual and consolidated financial statements were measured using the functional dollar currency, which best reflects the economic environment in which the Company operates and the way in which the Company is effectively managed. (b) Currency for presentation of the financial statements The financial statements are presented in Brazilian reais, as permitted by CVM Resolution No. 534, translating the functional currency (US dollar) into reais at the closing rate of exchange for the year for assets and liabilities and the average quarterly rate for income statement accounts, as shown below. The stockholders' equity is maintained at its historic formation amounts. The exchange variations resulting from the translation of assets, liabilities, income and stockholders' equity are not recorded in the income statement, as the changes in the exchange rate have little or no effect on the current and future operating cash flows, and are therefore recorded in the specific stockholders’ equity account Cumulative Translation Adjustments. Average rate Annual Closing rate 1st quarter 2nd quarter 3rd quarter 4th quarter 2008 1.7379 1.6560 1.6675 2.2766 1.8375 2.3370 2009 2.3113 2.0728 1.8680 1.7387 1.9935 1.7412 The consolidated balance sheets and statements of income in functional currency (US dollar) translated into the presentation currency (Brazilian real) in accordance with accounting practices adopted in Brazil, are shown below. 52
  • 53. Embraer - Empresa Brasileira de Aeronáutica S.A. Notes to the Financial Statements at December 31, 2009 and 2008 In thousands of Brazilian reais, unless otherwise indicated BALANCE SHEETS AT DECEMBER 31, 2009 AND 2008 (in thousands of Brazilian reais and US dollars) Consolidated ASSETS 2009 2008 US$ R$ US$ R$ CURRENT ASSETS Cash and cash equivalents (*) 1.592.360 2.772.618 1.859.330 4.345.256 Temporary cash investments (*) 934.032 1.626.337 332.404 776.829 Marketable securities 19.794 34.466 9.750 22.786 Trade accounts receivable 434.303 756.209 473.703 1.107.044 Customer financing 11.241 19.572 8.610 20.123 Collateralized accounts receivable 12.038 20.960 11.504 26.886 Provision for doubtful accounts (37.226) (64.818) (35.422) (82.782) Inventories 2.454.041 4.272.977 2.955.225 6.906.358 Taxes recoverable 113.841 198.220 105.306 246.100 Other credits 95.565 166.401 135.254 316.089 Deferred income tax and social contribution on net income 147.517 256.857 173.088 404.508 Prepaid expenses 23.199 40.391 32.672 76.351 5.800.705 10.100.190 6.061.424 14.165.548 NON-CURRENT ASSETS Long-term receivables Marketable securities 24.890 43.339 68.307 159.633 Trade accounts receivable 464 807 5.857 13.689 Customer financing 41.532 72.316 113.196 264.538 Collateralized accounts receivable 473.977 825.288 467.146 1.091.720 Inventories 86.788 151.115 83.331 194.745 Taxes recoverable 34.597 60.241 32.722 76.472 Guarantee deposits 505.574 880.306 493.212 1.152.636 Other credits 49.476 86.146 12.040 28.137 Deferred income tax and social contribution on net income 389.858 678.820 181.668 424.559 Prepaid expenses 4.680 8.149 7.183 16.786 Investments 4 9 4 10 Property, plant and equipment 1.021.013 1.777.787 984.256 2.300.207 Intangible asets 724.287 1.261.129 689.128 1.610.490 3.357.140 5.845.452 3.138.050 7.333.622 TOTAL ASSETS 9.157.845 15.945.642 9.199.474 21.499.170 The 2008 amounts have been reclassified in accordance with Notes 2.2 b) and c). 53
  • 54. Embraer - Empresa Brasileira de Aeronáutica S.A. Notes to the Financial Statements at December 31, 2009 and 2008 In thousands of Brazilian reais, unless otherwise indicated (in thousands of Brazilian reais and US dollars) (continued) Consolidated LIABILITIES AND STOCKHOLDERS' EQUITY 2009 2008 US$ R$ US$ R$ CURRENT LIABILITIES Loans and financing 592.404 1.031.494 539.071 1.259.809 Recourse and non-recourse debt 135.940 236.699 137.678 321.753 Suppliers 596.112 1.037.949 1.078.395 2.520.208 Accounts payable 108.083 188.194 69.963 163.503 Contributions from partners 885 1.540 2.492 5.823 Advances from customers 768.469 1.338.058 1.151.494 2.691.041 Taxes and social charges payable 78.447 136.593 63.333 148.009 Other provisions 235.638 410.295 381.574 891.737 Provision for contingencies 10.454 18.203 9.472 22.137 Dividends 119.605 208.256 857 2.002 Deferred income tax and social contribution on net income 52.796 91.929 36.259 84.737 Unearned income 111.608 194.329 113.074 264.259 2.810.441 4.893.539 3.583.662 8.375.018 NON-CURRENT LIABILITIES Long-term liabilities Loans and financing 1.465.936 2.552.489 1.300.757 3.039.870 Recourse and non-recourse debt 371.602 647.033 366.877 857.391 Accounts payable 19.001 33.084 17.637 41.218 Contributions from partners 67.718 117.911 44.267 103.453 Advances from customers 398.117 693.201 449.208 1.049.800 Taxes and social charges payable 329.042 572.928 234.072 547.027 Provision for contingencies 43.317 75.424 34.280 80.114 Other provisions 214.826 374.055 100.943 235.902 Deferred income tax and social contribution on net income 375.094 653.114 394.279 921.430 Unearned income 4.331 7.541 3.402 7.949 Deferred income 84.560 147.234 45.347 105.973 3.373.544 5.874.014 2.991.069 6.990.127 MINORITY INTEREST 90.331 157.284 69.959 163.494 STOCKHOLDERS' EQUITY Capital 1.438.007 4.789.617 1.438.007 4.789.617 Treasury shares (183.743) (320.250) (183.743) (320.250) Revenue reserves 1.613.280 2.153.391 1.287.778 1.487.677 Cumulative translation adjustments 15.985 (1.601.953) 12.742 13.487 2.883.529 5.020.805 2.554.784 5.970.531 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 9.157.845 15.945.642 9.199.474 21.499.170 54
  • 55. Embraer - Empresa Brasileira de Aeronáutica S.A. Notes to the Financial Statements at December 31, 2009 and 2008 In thousands of Brazilian reais, unless otherwise indicated STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008 (in thousands of Brazilian reais and US dollars) Consolidated 2009 2008 US$ R$ US$ R$ GROSS SALES 5.531.145 10.938.329 6.411.756 11.881.608 Taxes and deductions from sales (64.858) (125.582) (76.517) (134.843) NET SALES 5.466.287 10.812.747 6.335.239 11.746.765 COST OF SALES (4.413.820) (8.734.086) (5.033.330) (9.339.709) GROSS PROFIT 1.052.467 2.078.661 1.301.909 2.407.056 OPERATING INCOME (EXPENSES) Administrative (173.572) (350.435) (214.880) (396.845) Management fees (17.685) (25.764) (15.956) (28.451) Selling (305.261) (602.767) (399.433) (731.155) Other income (expense ), net (194.132) (367.811) (76.577) (138.018) Equity in the earnings (loss) of subsidiaries - - 28 (91) OPERATING PROFIT BEFORE FINANCIAL INCOME (EXPENSES) 361.817 731.884 595.091 1.112.496 FINANCIAL INCOME (EXPENSES) Financial expenses (142.334) (286.199) (125.446) (229.520) Financial income 151.448 300.802 110.370 189.033 Monetary and foreign exchange variations, net (62.624) (125.754) (84.717) (188.830) PROFIT BEFORE TAXATION 308.307 620.733 495.298 883.179 Current income tax and social contribution on net income (28.733) (77.525) (12.551) (23.623) Deferred income tax and social contribution on net income 191.127 376.562 (211.611) (411.513) NET INCOME AFTER TAXES 470.701 919.770 271.136 448.043 MINORITY INTEREST (13.747) (25.178) (9.716) (19.293) NET INCOME FOR THE YEAR 456.954 894.592 261.420 428.750 55
  • 56. Embraer - Empresa Brasileira de Aeronáutica S.A. Notes to the Financial Statements at December 31, 2009 and 2008 In thousands of Brazilian reais, unless otherwise indicated (c) Consolidation and translation The Company prepares its financial statements in its functional currency and translates them into the presentation currency as described in item (b) above. The Company’s consolidated financial statements include those of its subsidiaries. Intercompany balances, transactions and unrealized profits are eliminated on consolidation, including investments, current accounts, dividends receivable, revenues and expenses between consolidated companies and unearned income. The minority stockholders’ interest in the subsidiaries has been disclosed separately in the consolidated financial statements. The reconciliation between the stockholders’ equity and the net income for the year (parent company and consolidated) is shown below: Translation adjustments as Net income for the years of Stockholders' equity at ended December 31. December 31 December 31 2009 2008 2009 2008 2009 2008 890.357 409.450 (1.635.539) 1.478.189 5.069.182 6.043.244 4.235 19.300 14.192 (31.520) (48.377) (72.713) - 894.592 428.750 (1.621.347) 1.446.669 5.020.805 5.970.531 (i) These refer mainly to unearned profits on sales of spare parts and aircraft by the parent company to the subsidiaries and related taxes, which are not eliminated in the parent company for purposes of stating the investment on the equity method of accounting, based on CVM Resolution No. 247/96. The financial statements of subsidiaries located abroad are prepared in accordance with accounting practices compatible with those adopted by the parent company. The subsidiaries’ functional currency is that of the country in which they are located, when that is not the economic environment of the parent company, and their financial statements are translated into the parent company’s functional currency in accordance with CVM Resolution No. 534 of 2008 – CPC 2 – “Effect of the Changes on Exchange Rates and Translation of Financial Statements”. Accordingly, the financial statements were translated into the parent company's functional currency at the current exchange rate method for balance sheet accounts and at the average quarterly rate for income statement accounts. Exchange variations resulting from this 56
  • 57. Embraer - Empresa Brasileira de Aeronáutica S.A. Notes to the Financial Statements at December 31, 2009 and 2008 In thousands of Brazilian reais, unless otherwise indicated translation are recorded in the stockholders' equity account Cumulative translation adjustments and are only written off to income on the sale or loss of the investment. 2.2 SIGNIFICANT ACCOUNTING PRACTICES (a) Determination of the results of operations and revenue recognition Revenues from sales of commercial, executive and agricultural aircraft, spare parts and services are generally recognized at the time of delivery or shipment, when the risks and benefits are transferred to the customer. Revenue from negotiation of aircraft sales contracts involving the supply of spare parts, training and technical representation is recognized when effectively realized. In the Defense segment, the operations consist of long-term contracts, and revenues are recognized in accordance with the percentage of completion method of accounting, in addition to the time of delivery or shipment. Certain contracts have price restatement clauses based on predefined indexes and these are recognized on the accrual basis of accounting. Adjustments of recognition of revenues from sales contracts in the defense sector are recorded when there is evidence that they will occur, based on management’s best estimates. The revenue from the exchange pool program is recognized monthly over the term of the contract and the rate is partly fixed and partly variable, relating directly to the number of flight hours of the aircraft covered by the program. The Company also recognizes revenues from aircraft rentals as operating leases, in proportion to the lease period, and records this revenue as income of other segments. The costs are recorded on the accrual basis of accounting and comprise mainly expenditure on personnel and materials. Operating expenses refer mainly to selling, administrative and other operating expenses. Financial income and expenses mainly comprise income from short-term financial investments, charges on loans, on taxes with suspended payment and contingencies, as well as exchange variations on assets and liabilities denominated in currencies other than the functional currency (US dollar), recorded on the accrual basis of accounting (Note 31). The government subsidies received for investment in research that fulfill the conditions required are recorded as a reduction of the expenditure incurred in the research. 57
  • 58. Embraer - Empresa Brasileira de Aeronáutica S.A. Notes to the Financial Statements at December 31, 2009 and 2008 In thousands of Brazilian reais, unless otherwise indicated (b) Cash and cash equivalents Cash and cash equivalents include cash on hand, bank deposits and highly liquid short-term investments, usually maturing within 90 days from the contract date, immediately convertible into a known amount of cash and subject to an insignificant risk of a change in value. This classification includes deposit repurchase agreements and Bank Deposit Certificates - CDBs with a daily liquidity index in the Clearing House for the Custody and Financial Settlement of Securities (CETIP) (c) Temporary cash investments Temporary cash investments are financial assets acquired by the Company, mainly for short- term sale or repurchase. The classification usually includes marketable securities with original maturities more than 90 days after the investment date. Change in accounting policy Until December 31, 2008, the Company classified deposit repurchase agreements and CDBs with a daily liquidity index in the CETIP as temporary cash investments. From January 1, 2009, management decided to change its accounting policy of classifying these assets and classified them as cash and cash equivalents. The objective of this change was to align the classification in the financial statements with the Company’s cash management policy. As a result of this change, the balance sheet and the consolidated cash flow statement at and for the year ended December 31, 2008, as well as the information disclosed in Notes 3 and 4, have been reclassified for purposes of comparison, as summarized below: Parent Company Consolidated 2008 2008 Originally Reclassifi- Originally Reclassifi- reported cations Reclassified reported cations Reclassified Balance sheet accounts Cash and cash equivalents 2.098.167 1.003.368 3.101.535 3.341.888 1.003.368 4.345.256 Temporary cash investiments 1.523.911 (1.003.368) 520.543 1.780.196 (1.003.368) 776.829 Cash Flow - Unrealized monetary and foreign exchange variations, net (86.029) (97.901) (183.930) (100.288) (116.330) (216.618) Changes in assets and liabilities 1.986.685 312.824 2.299.509 612.507 330.382 942.890 - Temporary cash investiments 695.150 6.574 701.724 712.565 6.510 719.076 - Reclassification of foreign exchange variations on other current assets and liabilities 1.291.535 306.250 1.597.785 (100.058) 323.872 223.814 Cash provided by operations 2.801.646 214.924 3.016.570 1.706.658 214.052 1.920.710 58
  • 59. Embraer - Empresa Brasileira de Aeronáutica S.A. Notes to the Financial Statements at December 31, 2009 and 2008 In thousands of Brazilian reais, unless otherwise indicated Moreover, the unrealized foreign exchange variations from operations and from current assets and liabilities for the year ended December 31, 2008 have been reclassified to the respective headings in the cash flow statement for better comparison between the years. (d) Financial instruments (i) Classification and valuation The Company classifies its financial assets in the following categories: measured at fair value through income, loans and receivables held to maturity and available for sale. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets when they are first recorded. Financial assets measured at fair value through income The financial assets measured at fair value through income are those maintained for active and frequent trading. Derivatives are also maintained for trading and are accordingly classified in this category, unless they have been designated as hedge instruments. The assets in this category are classified as current assets. Gains or losses from changes in the fair value of financial assets measured at fair value through income are presented in the statement of income under "Financial income" in the period in which they occur, unless the instrument has been contracted in connection with another transaction. In this case, the changes are recorded under the income heading affected by the transaction. Loans and receivables This category includes loans granted and receivables that are non-derivative financial assets with fixed or determinable payments, not quoted in an active market. They are recorded as current assets, except for those maturing more than 12 months after the balance sheet date (these are classified as non-current assets). The Company’s loans and receivables include loans to subsidiaries, trade accounts receivable, other accounts receivable and cash and cash equivalents, except for short-term financial investments. Loans and receivables are recorded at amortized cost, on the effective interest rate method. Assets held to maturity These are basically financial assets that cannot be classified as loans and receivables as they are quoted in an active market. In this case, the financial assets are acquired with the intention and financial capacity to maintain them in portfolio to maturity. They are recorded at cost plus income accrued with contra entry to income for the year, on the effective interest rate method. 59
  • 60. Embraer - Empresa Brasileira de Aeronáutica S.A. Notes to the Financial Statements at December 31, 2009 and 2008 In thousands of Brazilian reais, unless otherwise indicated Financial assets available for sale Financial assets available for sale are non-derivatives classified in this category or that are not classified in any other category. They are recorded in non-current assets, unless management intends to dispose of the investment within twelve months after the balance sheet date. Financial assets available for sale are recorded at fair value. The interest on securities available for sale, calculated on the effective interest rate method, is recorded in the statement of income as financial income. The amount corresponding to the change in fair value is recorded in stockholders' equity, in the equity adjustments account, and realized against income on settlement or when the loss is considered permanent. Fair value The fair values of publicly quoted investments are based on the current purchase prices. In the case of financial assets without an active market or not publicly quoted, the Company determines fair value by valuation techniques. These methods include the use of recent transactions with third parties, reference to other largely similar instruments, analysis of discounted cash flows and the options price fixing models that make the greatest possible use of information generated by the market and rely as little as possible on information generated by the entity's own management. At the balance sheet date, the Company assesses whether there is objective evidence that a financial asset or group of financial assets is recorded at an amount higher than its recoverable value. If there is any evidence of impairment of financial assets available for sale, the cumulative loss, measured as the difference between the purchase price and the current fair value, less any loss due to impairment of this financial asset previously recorded in income, is removed from equity and recorded in the statement of income. (ii) Derivative instruments and hedge transactions Derivatives are initially recognized at fair value and subsequently remeasured at fair value, with the changes in fair value recorded in income, except when the derivative is designated as a cash flow hedge. Although the Company uses derivatives for hedging purposes, it does not follow hedge accounting principles. The fair value of the derivatives is disclosed in Note 33. 60
  • 61. Embraer - Empresa Brasileira de Aeronáutica S.A. Notes to the Financial Statements at December 31, 2009 and 2008 In thousands of Brazilian reais, unless otherwise indicated (e) Temporary cash investments These are securities with original maturities of more than 90 days from the investment date. (f) Trade accounts receivable Trade accounts receivable are stated at the original amount and include revenues recorded on the percentage-of-completion method and not yet billed, less the provision for doubtful accounts. The present value is calculated based on the effective interest rate for credit sales. The rate is compatible with the type, term and risks of similar transactions under market conditions. At December 31, 2009, this rate corresponded to an average of 3.50% p.a. (December 31, 2008 – 3.14% p.a.). (g) Provision for doubtful accounts The provision is recorded based on an individual analysis of the receivables and in an amount considered sufficient to cover possible losses on realization of the trade accounts receivable. (h) Customer financing This is temporary financing granted on the sale of certain aircraft, stated at present value, when applicable. (i) Collateralized accounts receivable and recourse and non-recourse debt Certain of the Company’s sales are made under structured financing transactions, whereby a Special Purpose Company - SPC purchases the aircraft, pays the Company the purchase price on delivery or at the end of the structured sales financing period, and transfers the aircraft purchased to the end customer. A financial institution finances the purchase of the aircraft from the SPC, with the financial institution bearing part of the credit risk, and the Company offering financial guarantees and/or residual value guarantees in favor of the institution. The Company consolidates Special Purpose Companies in which it is liable to absorb the majority of the entity's anticipated losses, if any, and receive the majority of the entity's residual profits, if any, or both. Accordingly, SPCs acquired by third parties, in which the Company is the main beneficiary, are consolidated in the Company's financial statements. When the Company is no longer the main beneficiary, the assets and liabilities related to the aircraft are eliminated in the balance sheet. 61
  • 62. Embraer - Empresa Brasileira de Aeronáutica S.A. Notes to the Financial Statements at December 31, 2009 and 2008 In thousands of Brazilian reais, unless otherwise indicated The Company classifies the risks of this transaction as non-recourse when the financing institution bears part of the risk and as recourse when the Company bears the risk (Note 8). (j) Inventories Inventories, including spare parts, are stated at the lower of average production or purchase cost and market value. Cost is determined on the average weighted cost method. Inventories of work in process and finished goods include raw materials, direct labor, other direct costs and general related production expenses and are reduced, when applicable, to net realizable value after deduction of costs, taxes and estimated selling expenses. A provision for potential loss is recorded when management determines that items are obsolete or stocks are in excess of the quantities required for projects. Imports in transit are stated at the accumulated cost of each import. The Company maintains a spare parts pool for the exclusive use of customers who contract the Exchange Pool Program. This program establishes that customers may exchange a damaged component for one in working condition, as defined in the Program. This inventory is depreciated on the straight line method based on an estimated useful life of seven to ten years and an average residual value of 35%, which the Company believes to be the approximate utilization time. (k) Prepaid expenses Prepaid expenses include sundry expenses, mainly the costs of bank guarantees, contractual concessions to customers, deferral of insurance premiums and healthcare expenses, which are recorded in income over the effective term of the benefits produced by them. (l) Marketable securities Investments in marketable securities that the Company is able and intends to hold to maturity are classified as held to maturity and recorded at amortized cost. Securities acquired for trading are classified as marketable securities and marked to market and the effects of changes in fair value are immediately recorded in income. (m) Other current and non-current assets Other current and non-current assets are stated at cost or realizable value including accrued income, when applicable. 62
  • 63. Embraer - Empresa Brasileira de Aeronáutica S.A. Notes to the Financial Statements at December 31, 2009 and 2008 In thousands of Brazilian reais, unless otherwise indicated (n) Investments Investments in subsidiaries are recorded and valued in the parent company on the equity method of accounting and recorded in income (loss) for the year as operating income (expense). In the case of exchange variations on foreign investments in a different functional currency from the Company, variations in the value of the investment caused solely by exchange variations are recorded in the "Equity adjustment" account, in stockholders’ equity, and only transferred to income for the year when the investment is sold or written off as a loss. For purposes of calculating equity earnings or loss, gains or unrealized transactions between the Company and its subsidiaries are eliminated proportionally to the company's investment; unrealized losses are also eliminated, unless the transaction shows evidence of permanent loss (impairment) of the asset transferred. In calculating equity earnings or loss, unearned profits or losses on the parent company's sales to the subsidiaries are not eliminated. However, such profits or losses are eliminated on preparation of the consolidated financial statements (Note 14c). When necessary, the accounting practices of the subsidiaries are adjusted to bring them into line with Company’s practices. Other investments are stated at cost less a provision for loss to adjust them to market value, when applicable. (o) Property, plant and equipment Property, plant and equipment are recorded at purchase, formation or construction cost, less depreciation, which is calculated on the straight-line method in accordance with the rates disclosed in Note 15. Land is not depreciated. The costs of charges on loans to finance the construction of property, plant and equipment are capitalized during the period required to make or prepare the asset for its intended use. In 2009, capitalized financial charges totaled R$ 2,120 (2008 - R$ 4,686). Improvements to existing assets are added to property, plant and equipment and maintenance and repair costs are charged to income, when incurred. Materials allocated to specific projects are added to construction in progress and are subsequently transferred to the final property, plant and equipment accounts. The items comprising property, plant and equipment are summarized below: Land - this mainly comprises areas on which the industrial, engineering and administrative buildings are located. 63
  • 64. Embraer - Empresa Brasileira de Aeronáutica S.A. Notes to the Financial Statements at December 31, 2009 and 2008 In thousands of Brazilian reais, unless otherwise indicated Buildings and land improvements – buildings are mainly plants, engineering departments and offices, and land improvements include parking lots, road systems and water and sewage networks. Installations – comprise auxiliary industrial installations that directly or indirectly support the Company’s industrial operations, as well as installations of the engineering and administrative departments. Machinery and equipment – comprise mainly the machinery and other equipment directly or indirectly used in the manufacturing process. Furniture and fixtures – comprise mainly furniture and fixtures used in the production, engineering and adminstrative departments. Vehicles – comprise mainly industrial vehicles and automobiles. Aircraft – comprise mainly aircraft leased to airlines, and those used by the parent company to assist in testing new projects. Computers and peripherals – comprise information technology equipment mainly used in the production process, engineering and administration. Construction in progress – comprises mainly construction projects to expand the manufacturing plants and aircraft maintenance centers. (p) Intangible assets Research and development Research costs are recorded as expenses when they are incurred. Expenditure on project development, comprising mainly costs for product development, including drawings, engineering designs and construction of prototypes, are recorded as intangible assets when it is likely that the projects will be successful, taking into account their commercial and technological feasibility, and only if the cost can be reliably measured. Capitalized development costs are amortized from the time when the benefits are first generated, based on the estimated number of aircraft sales for each project, and the amortized amounts are appropriated to production cost. 64
  • 65. Embraer - Empresa Brasileira de Aeronáutica S.A. Notes to the Financial Statements at December 31, 2009 and 2008 In thousands of Brazilian reais, unless otherwise indicated These estimates are reviewed as required. In the event of inactive projects or those that are unlikely to be completed, the deferred costs are written off or reduced to the estimated net recovery value. Computer programs (software) Software licenses are capitalized and amortized over their estimated useful lives. Software development or maintenance costs are recorded as expenses as incurred. Expenditure directly associated with identifiable and unique software, controlled by Company and that are expected to generate greater benefits than costs for more than one year, are recorded in intangible assets. (q) Reduction to the recoverable value of assets Property, plant and equipment and other non-current assets, including goodwill and intangible assets, are reviewed annually to identify evidence of impairment, or whenever events or changed circumstances indicate that the book value may not be recoverable. In such cases, the recoverable value is calculated to check for impairment. In the event of impairment, it is recorded at the amount by which the book value of the asset exceeds its recoverable value, which is the higher of the net selling price and the book value of an asset. For evaluation purposes, assets are grouped at the lowest level for which there are separately identifiable cash flows. In the case of intangible assets in the process of development, the impairment tests are carried out irrespective of evidence of loss. (r) Leases For the leaseholder, leases of property, plant and equipment in which the Company assumes substantially all the risks and benefits of ownership are classified as financial leases. Financial leases are recorded in the same way as a financed purchase, initially recognizing a capital asset and a financing liability (lease). Property, plant or equipment acquired under financial leases is depreciated at the rates mentioned in Note 15. Leases in which a significant portion of the risks and benefits of ownership is assumed by the lessor are classified as operating leases. Payments made for operating leases are appropriated to income on the straight-line method over the lease period. 65
  • 66. Embraer - Empresa Brasileira de Aeronáutica S.A. Notes to the Financial Statements at December 31, 2009 and 2008 In thousands of Brazilian reais, unless otherwise indicated Aircraft leased under operating leases are maintained in the Company's balance sheet as property, plant and equipment, and depreciated over their estimated useful lives. The rental income (net of any subsidy granted to the lessee) is recorded on the straight-line method over the lease period. (s) Foreign currency transactions The Company records foreign currency transactions at the exchange rate ruling on the transaction date. Foreign currency assets or liabilities are translated at the exchange rate ruling on the balance sheet date and exchange variations are recognized in the income statement as and when they occur. Any transaction in a currency other than the Company’s functional currency (US dollar) is regarded as a foreign currency transaction (Note 2.1a). (t) Loans Loans obtained are initially recorded at fair value on receipt of the funds, net of the transaction costs incurred. Subsequently, the loans are stated at amortized cost, including accrued charges and interest on a pro rata basis, less the fund raising costs, restated in accordance with the monetary and exchange variations, when applicable. (u) Advances from customers Advances received prior to delivery of the aircraft. (v) Income tax and social contribution on net income These are calculated in accordance with the standard rates of each country which, in the case of the Brazilian operations, total 34% (income tax at 25% and social contribution on net income at 9%). Deferred tax assets are recorded on income tax and social contribution losses, and on temporary differences between the book and tax bases of assets and liabilities, when it is probable that future taxable income will be sufficient to absorb these tax credits. This assessment is based on projections of future results of operations prepared and supported by internal assumptions and on future economic scenarios which are, accordingly, subject to change. There is no prescription of the accumulated losses of the Brazilian operations, however, their offset is limited to 30% of the taxable income of each year. 66
  • 67. Embraer - Empresa Brasileira de Aeronáutica S.A. Notes to the Financial Statements at December 31, 2009 and 2008 In thousands of Brazilian reais, unless otherwise indicated (w) Product warranty Warranty expenses relating to aircraft and spare parts are recognized at the time of delivery, based on the estimated amounts to be incurred. These estimates are based on historical factors that include warranty claims and the corresponding repair and replacement costs, the warranty given by the suppliers and the contractual coverage period. The warranty coverage period varies between 36 and 60 months. In some cases, the Company is required by the aviation certification authorities to modify the product. The estimated costs of these modifications are recorded when the new requirements are known. Under certain circumstances, the Company may be obliged to make modifications to the products after delivery due to the introduction of improvements or to aircraft performance. The costs related with these modifications are recorded when known. (x) Financial guarantees The provision for guarantees is based on statistical information or appraisals by third parties that take into consideration, among other factors, the credit risk of each customer, the probability of the customer not honoring the commitments assumed, the future values of the aircraft at the date of the events and the limits guaranteed by the Company. The provision is recorded to cover the risk of loss on these guarantees, and the estimates are reviewed annually, or on the occurrence of events that justify such reviews (Note 34.b and 39). (y) Unearned income This refers to commitments to supply spare parts, training and a technical representative and other commitments established in sales contracts for aircraft already delivered, the revenue from which will be appropriated when it is effectively earned. (z) Deferred income The deferred income balance refers to certain aircraft sales which, in accordance with contractual commitments, are recorded as operating leases and the revenue is appropriated as the commitments are fulfilled. In the consolidated financial statements, negative goodwill recorded on the acquisition of investments in subsidiaries, without any economic substance, is also classified under this heading. 67
  • 68. Embraer - Empresa Brasileira de Aeronáutica S.A. Notes to the Financial Statements at December 31, 2009 and 2008 In thousands of Brazilian reais, unless otherwise indicated (aa) Employee profit sharing program. The employee profit sharing program, approved by the Board of Directors in December 2008, is linked to the Company’s net income determined in accordance with US GAAP (USA Generally Accepted Accounting Principles), and to individual and sector performance targets. (bb) Contingent assets and liabilities and legal obligations and judicial deposits. Contingent assets and liabilities and legal obligations are recognized, measured and disclosed in accordance with CVM Resolution No. 489/05.. Contingent assets – these are not recognized in the accounts, except when management concludes that the gain is practically certain or in the case of secured guarantees or favorable legal decisions against which no further appeals can be made Contingent liabilities – these are recorded taking into account the opinion of the Company’s legal counsel, the nature of the lawsuits, similarity with previous cases, complexity and court interpretations, whenever the loss is considered probable and would result in a probable disbursement of funds to discharge the obligations, and also when the amounts involved can be calculated with a reasonable degree of certainty. Contingent liabilities classified as possible losses are not recorded in the accounts, but merely disclosed in the financial statements, and where the probability of loss is classified as remote, neither provision nor disclosure is required. Legal obligations - these arise from tax liabilities being contested on the grounds of legality or constitutionality, and are recorded in full in the financial statements, irrespective of the evaluation of the chances of success. Judicial deposits – these are restated and recorded as deductions from the value of the corresponding liability when there is no possibility of redemption of the deposits, except in the event of a favorable outcome of the question for the Company. (cc) Provisions Provisions are recorded when the Company has a present, legal or unformalized liability, as a result of past events, and when it is probable that an outflow of funds will be required to settle the liability and a reliable estimate of the amount can be made. 68
  • 69. Embraer - Empresa Brasileira de Aeronáutica S.A. Notes to the Financial Statements at December 31, 2009 and 2008 In thousands of Brazilian reais, unless otherwise indicated (dd) Other current and non-current liabilities These are stated at known or estimated amounts including, when applicable, accrued charges and monetary and foreign exchange variations. (ee) Interest on own capital Interest on own capital paid or provided is recorded in the accounts as a financial expense for tax purposes. However, as permitted by the CVM for purposes of presentation of the financial statements, it is reclassified directly as a deduction from stockholders’ equity. (ff) Earnings per share Earnings per share is calculated based on the number of shares of the Parent Company outstanding at the balance sheet date, net of treasury shares. (gg) Cash flows The statements of cash flows were prepared on the indirect method, based on the accounting information, in accordance with CVM Resolution No. 547 of August 13, 2008, which approved CPC Technical Pronouncement 3, which refers to the Statement of Cash Flows. (hh) Transition tax regime The Transition Tax Regime (RTT) will be effective until a law regulating the tax effects of the new accounting methods comes into force, aiming for tax neutrality. The regime is optional for calendar years 2008 and 2009, while complying with the following: (i) application to the two-year period 2008-2009, not to a single calendar year; and (ii) statement of the option on filing the Corporate Income Tax Return (DIPJ). The Company opted to adopt the RTT in 2008. Consequently, for purposes of determination of the income tax and social contribution on net income liabilities for the years ended 2009 and 2008, the Company took advantage of the prerrogatives established in the RTT. 69
  • 70. Embraer - Empresa Brasileira de Aeronáutica S.A. Notes to the Financial Statements at December 31, 2009 and 2008 In thousands of Brazilian reais, unless otherwise indicated (ii) Possible losses not provided in the balance sheet The Company is not party to any tax, civil and labor lawsuits in which management classifies the risk of loss as possible, based on the opinion of legal counsel, for which no provision has been recorded. (jj) Subsidies These are investment subsidies received from FINEP (Projects and Studies Financing Agency) for joint development of technical innovation projects, in accordance with Law No. 10.973/04, relating to subsidies for technological research and development. These amounts are recorded as a reduction of the costs as the funds are invested and the contractual clauses are complied with. (kk) Standards and interpretation of standards that are not yet in force The standards and interpretations of standards listed below were published and are mandatory for years beginning on or after January 1, 2010. Also, other standards and interpretations were published that change Brazilian accounting practices, as part of the process of convergence with international standards. The following standards are only those that may (or are expected to) have a more significant impact on the Company’s financial statements. Pursuant to these new standards, the amounts for 2009, presented here, will have to be re-presented for purposes of comparison. The Company has not opted for early adoption of these standards for the year ended December 31, 2009. Among the standards published and pertinent to the Company, the following could have a significant impact on the financial statements: CPC 27 – Property, plant and equipment – Establishes the accounting treatment for property, plant and equipment, as well as disclosure of changes and information to assist in understanding and analysis of this group of accounts. The main points to be considered in accounting for property, plant and equipment are recording the assets, determining their book and depreciation values and losses due to impairment to be recognized in relation to the assets. The Company is calculating the impacts in relation to the useful lives of the assets. 70
  • 71. Embraer - Empresa Brasileira de Aeronáutica S.A. Notes to the Financial Statements at December 31, 2009 and 2008 In thousands of Brazilian reais, unless otherwise indicated CPC 38, 39 and 40 - Financial instruments – recognition and measurement, presentation and disclosure - Establishes principles for recognizing and measuring financial assets and liabilities and certain purchase and sale contracts for non-financial items. They also establish requirements for segregation of embedded derivatives, rules for recognition of a financial liability and for accounting for hedge transactions. The Company is analyzing the potential impacts on the financial statements of application of these pronouncements with regard to presentation of the financial instruments and the effects of recording the financial guarantees for the sale financing structures described in Note 34. 3 CASH AND CASH EQUIVALENTS Parent Company Consolidated 2009 2008 2009 2008 Cash and banks US dollars 15.105 928 71.514 31.068 Brazilian reais 1.737 254.841 8.348 258.737 Euros 33 89 64.768 88.906 Other 1.385 1.169 32.264 26.542 Cash in transit 13.158 252.464 13.159 252.463 31.418 509.491 190.053 657.716 Financial investments In reais: Exclusive investment funds (FIEs) Government securities (i) 25 1.468 25 1.720 Repurchase agreements (ii) 1.353.028 1.189.872 1.353.028 1.190.022 Private securities (iii) 146.633 44.609 154.362 45.667 1.499.686 1.235.949 1.507.415 1.237.409 In US dollars Fixed-term deposits (i) 34.875 149.444 259.385 285.062 Investment funds (ii) 565.295 1.197.186 808.455 2.098.146 Overnight - 9.465 1.033 55.948 Other currencies Overnight - - 6.277 10.975 600.170 1.356.095 1.075.150 2.450.131 2.131.274 3.101.535 2.772.618 4.345.256 T he interest rates for the year ended December 31, 2009 on the financial investments in Brazilian reais and US dollars were 10.16% and 3.06%, respectively (12.30% and -1.20% a year in 2008). 71
  • 72. Embraer - Empresa Brasileira de Aeronáutica S.A. Notes to the Financial Statements at December 31, 2009 and 2008 In thousands of Brazilian reais, unless otherwise indicated The financial investments in reais are mainly investment fund quotas, with immediate liquidity. At December 31, 2009 and 2008, the portfolios of the Exclusive Investment Funds (EIFs) comprised mainly highly-liquid Brazilian Federal Government securities, recorded at realizable values. As of these dates, the EIFs had no significant obligations to third parties, these being limited to asset management fees and other services inherent to the operations of the funds, which have already been deducted from the profitability recorded. (i) Securities issued by the Brazilian Government, comprising National Treasury Bills - LTN, Financial Treasury Bills - LFT and National Treasury Notes – NTN. (ii) These refer to purchases of assets, mainly government securities, with the commitment to repurchase at a rate previously established by the parties, generally with a one-day term. (iii) These refer mainly to Bank Deposit Certificates - CDBs, issued by Brazilian financial institutions. At December 31, 2009 and 2008, the dollar-denominated cash equivalents comprised: (i) Fixed-term deposits with premier financial institutions with terms of less than 90 days; and (ii) Money Market Funds with daily liquidity whose portfolios comprise government and private securities issued by institutions abroad with a low level of risk; 72
  • 73. Embraer - Empresa Brasileira de Aeronáutica S.A. Notes to the Financial Statements at December 31, 2009 and 2008 In thousands of Brazilian reais, unless otherwise indicated 4 TEMPORARY CASH INVESTMENTS Parent Company Consolidated 2009 2008 2009 2008 In Brazilian reais: Exclusive investment funds (FIEs) Government securities 606.381 300.416 606.381 300.416 Private securities 8.853 30.440 8.853 30.440 615.234 330.856 615.234 330.856 In US dollars: Government securities - - 61.961 - Fixed-term deposits 193.247 189.687 417.368 189.687 Inverstment funds - - 531.774 256.286 193.247 189.687 1.011.103 445.973 808.481 520.543 1.626.337 776.829 (i) Brazilian government foreign debt bonds In accordance with CPC 14, temporary cash investments are classified as for trading. 73
  • 74. Embraer - Empresa Brasileira de Aeronáutica S.A. Notes to the Financial Statements at December 31, 2009 and 2008 In thousands of Brazilian reais, unless otherwise indicated 5 MARKETABLE SECURITIES Parent Company 2009 2008 For Held to For Held to trading maturity Total trading maturity Total Shares 759 - 759 759 - 759 Government securities (i) 505 - 505 473 - 473 1.264 1.232 - 1.232 Current assets 759 - 759 759 - 759 Non-current 505 - 505 473 - 473 Consolidated 2009 2008 For Held to For Held to trading maturity Total trading maturity Total Shares 759 - 759 759 - 759 Government securities (i) 505 75.624 76.129 82.092 98.145 180.237 Other 917 - 917 1.423 - 1.423 2.181 75.624 77.805 84.274 98.145 182.419 Less - Current 759 33.707 34.466 759 22.027 22.786 Non-current 1.422 41.917 43.339 83.515 76.118 159.633 (i) In the consolidated statements, these refer mainly to receivables represented by NTNs acquired by the Company from its customers, as an adjustment of the interest rates payable by the Export Financing Program (PROEX) between the 11th and 15th year after the sale of the respective aircraft, recorded at present value. These securities are classified as being held to maturity and the interest is recorded as financial income, since the Company intends and has the ability to hold these securities in portfolio to maturity. 74
  • 75. Embraer - Empresa Brasileira de Aeronáutica S.A. Notes to the Financial Statements at December 31, 2009 and 2008 In thousands of Brazilian reais, unless otherwise indicated 6 TRADE ACCOUNTS RECEIVABLE Parent Company Consolidated 2009 2008 2009 2008 Overseas customers 187.334 284.965 513.892 884.879 Brazilian Air Force 83.502 114.939 216.979 223.004 Domestic customers 18.704 8.202 26.145 12.850 Subsidiaries 94.307 273.857 - - 383.847 681.963 757.016 1.120.733 Provision for doubtful accounts (10.693) (12.139) (64.818) (82.782) 373.154 669.824 692.198 1.037.951 Less - Current 373.154 669.824 691.391 1.024.262 Non-current - - 807 13.689 The changes in the provision for doubtful accounts are as follows: Parent Company Consolidated 2009 2008 2009 2008 Opening balance 12.139 10.903 82.782 67.520 Foreign exchange variations (1.925) 1.519 (19.992) 17.473 Additions 539 79 8.979 12.765 Reversals (38) (51) (4.339) (9.553) Write-offs (22) (311) (2.612) (5.423) Closing balance 10.693 12.139 64.818 82.782 75
  • 76. Embraer - Empresa Brasileira de Aeronáutica S.A. Notes to the Financial Statements at December 31, 2009 and 2008 In thousands of Brazilian reais, unless otherwise indicated 7 CUSTOMER FINANCING This account refers to the partial financing of certain sales of new and used aircraft by the Company, at average annual interest rates at December 31, 2009 of 5.94% (2008 – 5.46%) plus exchange variations of the US dollar, recorded on the accrual basis of accounting and secured by the aircraft covered by the financing, at present value, when applicable. The maturities of this financing are monthly, quarterly and half-yearly, classified as follows: Parent Company Consolidated 2009 2008 2009 2008 Current assets - - 19.572 20.123 Non-current assets 53.866 77.009 72.316 264.538 Total 53.866 77.009 91.888 284.661 At December 31, 2009, the long-term maturities of the financing of accounts receivable are as follows: Parent Company Consolidated 2011 7.020 17.073 2012 3.510 10.285 2013 3.510 5.132 2014 3.510 3.510 2015 11.254 11.254 After 2015 25.062 25.062 53.866 72.316 8 COLLATERALIZED ACCOUNTS RECEIVABLE AND NON-RECOURSE AND RECOURSE DEBT Certain of the Company’s sales are made under structured financing, whereby a Special Purpose Company - SPC purchases the aircraft, pays the Company the purchase price on delivery or at the end of the structured sales financing transactions, and transfers the aircraft purchased to the end customer. A financial institution finances the purchase of the aircraft from the SPC, with the financial institution bearing part of the credit risk, and the Company offers financial guarantees and/or residual value guarantees in favor of the institution. 76
  • 77. Embraer - Empresa Brasileira de Aeronáutica S.A. Notes to the Financial Statements at December 31, 2009 and 2008 In thousands of Brazilian reais, unless otherwise indicated These transactions are denominated in US dollars and subject to normal market rates. There were no significant changes in the average interest rates on the assets and liabilities in the years ended December 31, 2009 and 2008. (a) Collateralized accounts receivable 2009 2008 Minimum lease payments receivable 713.165 1.082.748 Estimated residual value of leased aircraft 806.565 1.082.553 Unearned income - future interest (673.482) (1.046.695) Net amount receivable 846.248 1.118.606 Less - Current 20.960 26.886 Non-current 825.288 1.091.720 At December 31, 2009, the maturities of the amounts classified as non-current are as follows: Consolidated Year 2009 2011 19.293 2012 24.385 2013 26.739 2014 20.231 2015 18.375 After 2015 716.265 825.288 77
  • 78. Embraer - Empresa Brasileira de Aeronáutica S.A. Notes to the Financial Statements at December 31, 2009 and 2008 In thousands of Brazilian reais, unless otherwise indicated (b) Debts of the SPCs Consolidated 2009 2008 With right of recourse 793.526 1.042.454 Without right of recourse 90.206 136.690 883.732 1.179.144 Less - Current 236.699 321.753 Non-current 647.033 857.391 At December 31, 2009, the maturities of the amounts classified as non-current liabilities are as follows: Consolidated Year 2009 2011 18.507 2012 19.447 2013 369.049 2014 18.782 2015 18.375 After 2015 202.873 647.033 9 TAXES RECOVERABLE Parent Company Consolidated 2009 2008 2009 2008 Income tax and social contribution on net income withheld 134.597 87.507 149.959 122.358 ICMS and IPI 55.415 73.778 68.001 122.184 PIS and COFINS 31.453 60.488 32.596 69.061 Other 4.178 3.452 7.905 8.969 225.643 225.225 258.461 322.572 Less - Current 173.756 157.970 198.220 246.100 Non-current 51.887 67.255 60.241 76.472 78
  • 79. Embraer - Empresa Brasileira de Aeronáutica S.A. Notes to the Financial Statements at December 31, 2009 and 2008 In thousands of Brazilian reais, unless otherwise indicated ICMS – Value-Added Tax on Sales and Services IPI – Excise Tax PIS – Social Integration Program COFINS – Social Contribution on Revenues 10 OTHER CREDITS Parent Company Consolidated 2009 2008 2009 2008 Judicial deposits (i) 46.644 8.663 47.563 9.859 Unearned gains on derivatives 10.247 2.569 42.828 69.960 Banks - restricted account (ii) - - 35.838 64.782 Credit with suppliers (iii) 34.396 41.493 35.311 41.846 Advances to employees 22.891 22.429 24.205 23.421 Insurance receivable 15.031 21.944 14.846 21.921 Tax incentive - Amazon Investment Fund - FINAM (net) 9.604 9.604 9.604 9.604 Advances of commissions 1.413 134 7.404 7.434 Collateral pledge 879 2.195 7.003 6.994 Advances for services rendered 6.579 12.124 6.579 12.124 Benefits receivable 2.711 2.429 2.711 2.429 Compulsory loan - - 1.296 1.681 Partners' contributions receivable - 46.740 - 46.740 Dividends receivable 2.721 1.820 - - Advance for future capital increase 11.491 - - - Other 3.706 14.844 17.359 25.431 168.313 186.988 252.547 344.226 Less - Current 99.696 166.526 166.401 316.089 Non-current 68.617 20.462 86.146 28.137 11. Refers mainly to deposits in relation to tax lawsuits for which no provision has been recorded, either due to payment of the suits by joining the REFIS program in 2009 or because the loss is not considered probable. 12. Refers to restricted cash tied to non-recourse financing. 13. Refers to reworking of products supplied by third parties, to be reimbursed by the third parties in accordance with the contracts. 79
  • 80. Embraer - Empresa Brasileira de Aeronáutica S.A. Notes to the Financial Statements at December 31, 2009 and 2008 In thousands of Brazilian reais, unless otherwise indicated 11 GUARANTEE DEPOSITS Parent Company Consolidated 2009 2008 2009 2008 Sales structure guarantees (i) - - 537.788 700.518 Sales financing guarantees (ii) 338.913 - 338.913 433.232 Other 3.317 18.691 3.605 18.886 342.230 18.691 880.306 1.152.636 Less - Current - - - - Non-current 342.230 18.691 880.306 1.152.636 (i) US dollar amounts deposited in an escrow account as collateral for the financing of certain aircraft sold. If the guarantor of the debt (unrelated party) is required to pay the lender, the guarantor will be entitled to the amount in the escrow account. The amount deposited will be released at the time of maturity of the financing contracts (between 2013 and 2021) if the aircraft purchaser does not default on the loan. The interest on the escrow account is added to the principal and recognized by the Company as financial income. Seeking to ensure profitability compatible with the term of the guarantee, in 2004 Embraer invested US$ 123,400 thousand in structured notes, equivalent, at December 31, 2009, to the principal of R$ 214,864. These notes earned interest of US$ 7,581 thousand, equivalent to R$ 13,201, in 2009 (US$ 7,603 thousand, equivalent to R$ 17,767, in 2008), which was added to the principal and recognized as financial income for the year. In the event of default by Embraer, the maturity dates of these notes would be brought forward and they would be realized at market value, limited to a minimum of the amounts originally invested. Any amount by which the market value exceeds the amount invested will be paid to the Company in the form of bonds, or loans of that amount. Events of default that could result in early maturity of the notes include: (i) insolvency of Embraer or filing for a “Creditors’ Agreement”; and (ii) default or restructuring of the Embraer debt in financing agreements. The balance of these notes was US$ 161,419 thousand, equivalent to R$ 281,063, in 2009 (US$ 153,838 thousand, equivalent to R$ 359,518, in 2008). (ii) Financial investments denominated in US dollars, linked to the sales structures, whose release depends on completion of the structures. These investments earn interest at the annual LIBOR rate. 80
  • 81. Embraer - Empresa Brasileira de Aeronáutica S.A. Notes to the Financial Statements at December 31, 2009 and 2008 In thousands of Brazilian reais, unless otherwise indicated 12 INVENTORIES Parent Company Consolidated 2009 2008 2009 2008 Finished products (i) 477.608 400.543 477.817 400.543 Work in process (ii) 1.045.427 2.065.101 1.232.471 2.501.909 Raw materials 1.270.136 1.945.820 1.563.142 2.343.954 Spare parts 160.224 200.451 581.267 722.586 Spare parts pool (iii) - - 230.793 266.999 Used aircraft for sale (iv) - - 261.228 348.110 Consumables 34.436 42.183 35.502 43.621 Goods in transit 246.432 687.520 377.192 852.207 Advances to suppliers 43.118 74.723 92.978 82.859 Provision for obsolescence (v) (154.119) (182.396) (368.747) (396.123) Provision for adjustment to market value (vi) - - (59.551) (65.562) 3.123.262 5.233.945 4.424.092 7.101.103 Less - Current 3.123.262 5.233.945 4.272.977 6.906.358 Non-current - - 151.115 194.745 (i) In 2009, refers to two Legacy 600, five EMBRAER 170, one EMBRAER 175, two EMBRAER 190, one EMBRAER 195 and twelve Phenom 100 (one Legacy 600, two EMBRAER 170, four EMBRAER 190 and one EMBRAER 195 in 2008). Of these, one Legacy 600, one EMBRAER 170, one EMBFRAER 175, two EMBRAER 190 and three Phenom 100 were delivered in 2010. (ii) Includes pre-series aircraft of the Phenom 100 and 300 programs, totaling R$50,356 (R$ 31.810 in 2008), used for testing to obtain aircraft certification. After the certification campaigns, the Company intends to sell these aircraft. (iii) These refer to spare parts for the Exchange Pool Program whose realization is estimated to be in excess of 12 months. (iv) Comprises one EMB 120, two EMBRAER 170, one EMBRAER 175, three EMBRAER 190 and one Legacy 600 (in 2008, one EMB 120, two EMBRAER 170, one EMBRAER 175, three EMBRAER 190 and one Legacy 600) available for sale, recorded at the lower of purchase cost and realizable value. 81
  • 82. Embraer - Empresa Brasileira de Aeronáutica S.A. Notes to the Financial Statements at December 31, 2009 and 2008 In thousands of Brazilian reais, unless otherwise indicated (v) A provision is recorded for items without movement for over two years, with no planned use in the production program, and also to cover possible losses on stores inventories and excessive or obsolete work in process, except for inventories of spare parts for which the provision is based on technical obsolescence of items without movement for over six years. (vi) Refers to the provision recorded to adjust the value of used aircraft to realizable values. At December 31, 2009, inventories totaling approximately R$ 22,257 million had been pledged in guarantee of loans and financing Changes in the provision for obsolescence: Parent Company Consolidated 2009 2008 2009 2008 Opening balance 182.396 124.130 396.123 279.323 Provisions 21.619 3.288 82.539 39.330 Write-offs - - (2.125) (26.875) Foreign exchange variations (49.896) 54.978 (107.790) 104.345 Closing balance 154.119 182.396 368.745 396.123 Less - Current 154.119 182.396 269.906 297.296 Non-current - - 98.841 98.827 82
  • 83. Embraer - Empresa Brasileira de Aeronáutica S.A. Notes to the Financial Statements at December 31, 2009 and 2008 In thousands of Brazilian reais, unless otherwise indicated 13 PREPAID EXPENSES Parent Company Consolidated 2009 2008 2009 2008 Insurance premiums 18.069 26.955 19.049 27.728 Financial expenses 7.344 5.199 8.760 6.075 Sales commisions - - 7.806 16.128 Healthcare 5.624 7.293 5.624 7.293 Rents - - 865 2.545 Commercial concessions - 30.064 - 30.064 Other 2.152 1.385 6.436 3.304 33.189 70.896 48.540 93.137 Less- Current 33.189 70.896 40.391 76.351 Non-current - - 8.149 16.786 14 INVESTMENTS (a) Investments Parent Company Consolidated 2009 2008 2009 2008 In subsidiaries ECC do Brasil Cia. de Seguros 4.017 4.468 - - ELEB - Equipamentos Ltda. (Note 1 ) 57.213 87.261 - - Embraer Australia PTY Ltd 812 1.270 - - Embraer Aircraft Holding Inc. – EAH 354.946 219.981 - - Embraer Ásia Pacific PTE Ltd. 18.984 24.577 - - Embraer Aviation Europe SAS – EAE 177.413 174.865 - - Embraer Credit Ltd. – ECL 5.205 5.329 - - Embraer GPX Ltda 318 1 - - Embraer Overseas Limited 15.676 9.699 - - Embraer Representation LLC – ERL 253.597 304.340 - - Embraer Spain Holding Co. SL – ESH 1.561.012 2.032.382 - - Indústria Aeronáutica Neiva Ltda – NEIVA - 1.146 - - 2.449.193 2.865.319 - - Other - - 9 10 2.449.193 2.865.319 9 10 (b) Changes in investments of the parent company: 83
  • 84. Embraer - Empresa Brasileira de Aeronáutica S.A. Notes to the Financial Statements at December 31, 2009 and 2008 In thousands of Brazilian reais, unless otherwise indicated Offset against Equity in the Cumulative provision for Balance at earnings translation net capital Balance at 12.31.2009 (loss) adjustment Dividends Additions deficiency 12.31.2009 ECC do Brasil Cia. de Seguros 4.468 (35) (258) (158) - - 4.017 ELEB - Equipamentos Ltda.(note 1) 87.261 (7.406) (22.647) 2 - - 57.210 Embraer Aircraft Holding Inc. – EAH 219.981 13.470 (57.339) - 178.835 - 354.947 Embraer Ásia Pacific PTE Ltd. 24.577 1.571 (7.164) - - - 18.984 Embraer Austrália PTY Ltd. – EAL 1.270 (398) (61) - - - 811 Embraer Aviation Europe SAS - EAE 174.865 48.696 (46.147) - - - 177.414 Embraer Credit Ltd. – ECL 5.329 1.416 (1.539) - - - 5.206 Embraer GPX Ltda 1 314 3 - - - 318 Embraer Overseas Limited 9.699 11.651 (5.673) - - - 15.677 Embraer Representation LLC – ERL 304.340 33.261 (84.004) - - - 253.597 Embraer Spain Holding Co. SL - ESH 2.032.382 47.255 (518.625) - - - 1.561.012 Indústria Aeronáutica Neiva Ltda – NEIVA. 1.146 (2.604) (797) - - 2.255 - 2.865.319 147.191 (744.251) (156) 178.835 2.255 2.449.193 (c) Information on the direct subsidiaries 2009 2008 Net income Net income Holding Stockholders' (loss) Stockholder (loss) Capital % equity for the year equity for the year Canal Investments LLC 11.020 100,00 - - - - ECC do Brasil Cia. de Seguros 4.113 99,99 4.120 (33) 3.386 67 ELEB - Equipamentos Ltda.(i) 43.052 99,99 59.725 (8.128) 69.039 7.488 Embraer Aircraft Holding Inc. - EAH 265.118 100,00 358.175 9.226 172.779 4.384 Embraer Ásia Pacific PTE Ltd. 18.784 100,00 18.984 672 18.628 673 Embraer Austrália PTY Ltd. - EAL 6.793 100,00 812 (348) 963 4.838 Embraer Aviation Europe SAS - EAE 72.031 100,00 179.371 40.884 134.675 24.275 Embraer Credit Ltd. – ECL - 100,00 5.205 1.233 4.039 1.510 Embraer GPX Ltda 1 99,99 318 314 1 - Embraer Overseas Limited 87 100,00 15.676 8.438 7.351 4.319 Embraer Representation LLC - ERL - 100,00 253.597 26.807 230.671 49.155 Embraer Spain Holding Co. SL - ESH 282.452 100,00 1.561.012 44.664 1.540.419 122.999 Indústria Aeronáutica Neiva Ltda – NEIVA 1.000 99,99 (1.207) (1.706) 1.210 (860) 122.023 218.848 84
  • 85. Embraer - Empresa Brasileira de Aeronáutica S.A. Notes to the Financial Statements at December 31, 2009 and 2008 In thousands of Brazilian reais, unless otherwise indicated Unrealized profits of subsidiaries in transactions with the parent company were eliminated in the equity accounting adjustments. The parent company recorded a provision of R$1,379 in 2009, corresponding to the net capital deficiency of its subsidiaries recorded in the account Provision for loss on investments in subsidiaries. The contra entries of the provisions were recorded as equity losses. (d) Related party transactions (d.1) Parent Company– 2009 Current Non-current Financial Operating income income Assets Liabilities Assets Liabilities (expenses) (expenses) 2009 2009 2009 2009 2009 2009 Banco do Brasil S.A. (i) 211.152 - 338.913 - 1.242 - Banco Nacional de Desenvolvimento Econômico e Social – BNDES 726 (765.528) - (300.000) 87.547 - Brazilian Air Force 83.502 (121.334) - - - (275.360) ECC Leasing Co. Ltd 61 - 55.614 - (4.274) 9.200 ELEB - Equipamentos Ltda 3.274 (13.162) 16.485 - (93) 121.353 Embraer Aircraft Customer Services, Inc. – EACS 34.219 (7.317) - - - (58.941) Embraer Aircraft Holding Inc. - EAH 495 - 69.714 - (3.144) - Embraer Aircraft Maintenance Services Inc.- EAMS 1.547 (607) - - - (345) Embraer Ásia Pacific PTE Ltd. - EAP 11.727 (5.495) 100.956 - (1.535) 266 Embraer Aviation International SAS – EAI 18.369 (27.650) - - - (16.699) Indústria Aeronáutica Neiva Ltda. – NEIVA 4.611 (113) 11.491 - - (868) Embraer Australia PTY Ltd. - EAL 98 - - - - - Embraer CAE Training Services-ECTS 5.159 (1.537) - - - (3.558) Embraer Credit Ltd. – ECL - - 37.163 - - - Embraer Executive Jet Services-EEJS 34 (41) - - - (50) Embraer Finance Ltd. – EFL - (497) 868.332 - (7.066) 1.493 Embraer GPX Ltda 4.555 (1.925) 1.180 - (15) 1.644 Embraer Overseas Limited Embraer Representation LLC - ERL - (53.305) - - - 392.084 Embraer Services Inc. – ESI 170 (3.182) - - - 31.921 Embraer Spain Holding Co. SL - ESH - (1.216) 27.056 - (1.277) - Financiadora de Estudo e Projetos - FINEP - (23.930) - (86.053) 1.258 - Harbin Embraer Aircraft Industry Company Ltd.- HEAI 14.045 (6.832) - - - (11.688) OGMA – Indústria Aeronáutica de Portugal SA. 14 (1.129) - - - 4.836 393.758 (1.034.800) 1.526.905 (386.053) 72.643 195.288 85
  • 86. Embraer - Empresa Brasileira de Aeronáutica S.A. Notes to the Financial Statements at December 31, 2009 and 2008 In thousands of Brazilian reais, unless otherwise indicated (d.2) Parent Company – 2008 Current Non-current Financial Operating Assets Liabilities Assets Liabilities income income (expenses) (expenses) 2008 2008 2008 2008 2008 2008 Banco do Brasil S.A. (i) 125,348 540,275 - - (3,657) - Banco Nacional de Desenvolvimento Econômico e Social – BNDES 1,671 444 - 1,248,463 (59,902) - Brazilian Air Force 114,939 32,524 - - - 232,257 ECC do Brasil Cia. de Seguros 187 - - - - - ECC Leasing Co. Ltd 1,101 - 71,052 - 952 (4,170) ELEB – Equipamentos Ltda 4,836 2,356 - - - (125,943) Embraer Aircraft Customer Services, Inc. – EACS 184,784 18,339 - - 53,516 Embraer Aircraft Holding Inc. - EAH 658 - 92,345 - 3,542 627 Embraer Aircraft Maintenance Services Inc.- EAMS 5,286 3,841 - - - 3,809 Embraer Ásia Pacific PTE Ltd. 14,251 4,426 - - - 3,509 Embraer Aviation International SAS – EAI 22,350 19,834 - - - 18,239 Indústria Aeronáutica Neiva Ltda. – NEIVA 1,100 179 - - - 15,457 Embraer Credit Ltd. – ECL - - 54,401 - - - Embraer Finance Ltd. – EFL - 19,378 1,874,720 - 3,897 255,740 Embraer Representation LLC - ERL - 123,312 - - - (284,341) Embraer Services Inc. – ESI 9,433 13,023 - - - (103,694) Embraer Spain Holding Co. SL - ESH - - 45,733 - 2,629 - Financiadora de Estudo e Projetos - FINEP - 19,323 - 109,805 (960) - Harbin Embraer Aircraft Industry Company Ltd.-HEAI 58,241 5 - - - 106,406 OGMA – Indústria Aeronáutica de Portugal SA. 876 833 - - - (930) 545,061 798,092 2,138,251 1,358,268 (53,499) 170.482 86
  • 87. Embraer - Empresa Brasileira de Aeronáutica S.A. Notes to the Financial Statements at December 31, 2009 and 2008 In thousands of Brazilian reais, unless otherwise indicated (d.3) Consolidated – 2009 Current Non-current Financial Operating income income Assets Liabilities Assets Liabilities (expenses) (expenses) 2009 2009 2009 2009 2009 2009 Banco do Brasil S.A. (i) 707.016 (227.469) 338.913 (356.177) (20.185) - Banco Nacional de Desenvolvimento Econômico e Social – BNDES 726 (785.934) - (326.223) 91.740 - Brazilian Air Force 216.979 (231.784) - - - (403.767) Empresa Portuguesa de Defesa – EMPORDEF - - - (14.636) - - Financiadora de Estudo e Projetos – FINEP - (27.576) - (89.067) 1.661 - 924.721 (1.272.762) 338.913 (786.103) 73.216 (403.767) (d.4) Consolidated – 2008 Financial Opersting Current Non-current income income Assets Liabilities Assets Liabilities (expenses) (expenses)l Banco do Brasil S.A. (i) 1,028,349 861,564 - 442,362 24,256 - Banco Nacional de Desenvolvimento Econômico e Social – BNDES - 9,630 - 1,295,243 (63,609) - Brazilian Air Force 223,004 102,440 - - - 481,263 Empresa Portuguesa de Defesa – EMPORDEF - - - 18.949 - - Financiadora de Estudo e Projetos – FINEP - 22,977 - 116,427 (1,538) - 1,251,353 996,611 - 1,872,981 (40,891) 481,263 The assets mainly comprise: (i) accounts receivable from subsidiaries for spare parts and aircraft sales and product development, under similar conditions to those with third parties, considering the volumes, terms and risks involved; (ii) intercompany loans with overseas subsidiaries at interest rates incurred by the Company in raising funds in foreign currency; (iii) amounts received on behalf of Embraer by the subsidiary Embraer Finance Ltd. - EFL, without interest; (iv) balances of financial investments (v) bank current account balances. 87
  • 88. Embraer - Empresa Brasileira de Aeronáutica S.A. Notes to the Financial Statements at December 31, 2009 and 2008 In thousands of Brazilian reais, unless otherwise indicated In liabilities, the amounts basically refer to: (i) purchases of aircraft components and spare parts under conditions similar to those with third parties, considering the volumes, terms and risks involved; (ii) advances received on account of sales contracts, in accordance with the contract; (iii) commissions on sales of aircraft and spare parts under similar conditions to those with third parties; (iv) financing for research and product development at market rates for this type of financing; (v) loans and financing under normal market conditions; (vi) intercompany loans with overseas subsidiaries at interest rates normally incurred by the Company in raising funds in foreign currency, and (vii) export financing. The statement of income accounts basically comprise: (i) purchases and sales of aircraft, components and spare parts and development of products for the Defense market; (ii) financial income from intercompany loans and financial investments; (iii) interest on financing for research and product development, import and export financing and advances on exchange contracts; and (v) sales commissions on aircraft and spare parts. (d.5) Remuneration of key management personnel 2009 2008 Short-term benefits (i) 33,966 39,595 (i) Include salaries and social security contributions, profit sharing, bonuses and severance pay. During 2009 and 2008, no remuneration was paid in relation to post-employment, work contract rescission or other long-term benefits, or share based remuneration. 88
  • 89. Embraer - Empresa Brasileira de Aeronáutica S.A. Notes to the Financial Statements at December 31, 2009 and 2008 In thousands of Brazilian reais, unless otherwise indicated (d.6) Guarantees granted to subsidiaries The guarantees granted by the Company in favor of subsidiaries at December 31, 2009 totaled R$ 181,633. 15 PROPERTY, PLANT AND EQUIPMENT (a) Parent Company Average annual 2009 2008 depreciation Restated Accumulated Restated Accumulated rate(%) cost depreciation Net cost depreciation Net Land - 17.763 - 17.763 21.573 - 21.573 Buildings and land improvements 3,62 490.925 (144.347) 346.578 594.029 (169.812) 424.217 Installations 8,85 203.295 (134.750) 68.545 229.409 (164.073) 65.336 Machinery and equipment 9,60 470.522 (270.679) 199.843 561.312 (329.781) 231.531 Furniture and fixtures 10,06 51.395 (26.378) 25.017 66.360 (31.418) 34.942 Vehicles 16,44 12.278 (9.161) 3.117 16.338 (11.817) 4.521 Aircraft 19,73 1.511 (1.511) - 2.075 (2.047) 28 Computers and peripherals 19,77 153.257 (134.404) 18.853 202.913 (170.907) 32.006 Tooling 10,00 456.552 (186.706) 269.846 588.709 (211.651) 377.058 Other assets - 3.622 (1.940) 1.682 4.947 (2.604) 2.343 Construction in progress - 7.587 - 7.587 98.002 - 98.002 1.868.707 (909.876) 958.831 2.385.667 (1.094.110) 1.291.557 Changes in property, plant and equipment: 2009 2008 Accumulated Accumulated Restated cost depreciation Restated cost depreciation At January 1 2,385,667 (1,094,110) 1,541.236 (758,708) Additions 132,001 (130,888) 276,992 (80,835) Disposals (12,336) 10,364 (230) - Exchange translation adjusttment (636,625) 304,758 567,669 (254,567) At December 31 1,868,707 (909,876) 2,385,667 (1,094,110) 89
  • 90. Embraer - Empresa Brasileira de Aeronáutica S.A. Notes to the Financial Statements at December 31, 2009 and 2008 In thousands of Brazilian reais, unless otherwise indicated (b) Consolidated Average annual 2009 2008 depreciation Restated Accumulated Restated Accumulated rate(%) cost depreciation Net cost depreciation Net Land - 19,361 - 19,361 21,573 - 21,573 Buildings and land improvements 3.62 678,726 (189,190) 489,536 784,769 (219,554) 565,215 Installations 8.85 212,944 (139,924) 73,020 239,462 (170,117) 69,345 Machinery and equipment 9.60 799,534 (490,012) 309,522 952,912 (604,231) 348,681 Furniture and fixtures 10.06 76,404 (44,711) 31,693 97,762 (54,775) 42,987 Vehicles 16.44 23,010 (17,939) 5,071 29,493 (22,728) 6,765 Aircraft (i) 5.25 654,414 (132,773) 521,641 789,983 (140,827) 649,156 Computers and peripherals 19.77 189,321 (162,551) 26,770 246,947 (205,644) 41,303 Tooling 10.00 460,006 (189,403) 270,603 593,345 (215,041) 378,304 Other assets - 4,325 (1,940) 2,385 5,603 (2,604) 2,999 Construction in progress (ii) - 28,185 - 28,185 173,879 - 173,879 3,146,230 (1,368,443) 1,777,787 3,935,728 (1,635,521) 2,300,207 Changes in property, plant and equipment: 2009 2008 Accumulated Accumulated Restated cost depreciation Restated cost depreciation At January 1 3,935,728 (1,635,521) 2,546,229 (1,148,785) Additions 352,935 (201,730) 482,213 (147,607) Disposals (81,966) 27,986 (4,699) - Exchange translation adjustment (1,060,478) 440,822 865,745 (339,129) Provisions for losses 11 - 3,287 - (0) Transfer to inventories - - 42,953 - At December 31 3,146,230 (1,368,443) 3,935,728 (1,635,521) (i) These aircraft are for use in testing, corporate flights and operating leases and are adjusted to realizable value, when applicable. At December 31, 2009, the Company had 38 aircraft, comprising five EMB 120, 26 ERJ 145, four EMBRAER 170, one EMBRAER 190 and two other models of aircraft. Of these, thirty aircraft were for operating leases, two for testing and one for corporate flights. 90
  • 91. Embraer - Empresa Brasileira de Aeronáutica S.A. Notes to the Financial Statements at December 31, 2009 and 2008 In thousands of Brazilian reais, unless otherwise indicated At December 31, 2009, property, plant and equipment totaling R$ 80,374 had been pledged in guarantee of loans and financing and labor contingencies. (ii) Refers mainly to projects to expand the installed capacity for manufacturing of new products. (b) Review and adjustment of estimated useful lives In compliance with ICPC Technical Interpretation 10 of the Brazilian Accounting Standards Committee, approved by CVM Decision No. 619/09, the Company will complete in 2010 the first of the periodic analyses to review and adjust the estimated useful economic lives in order to calculate depreciation and to determine the residual value of property, plant and equipment. For analysis purposes, internal specialists issued a Valuation Report. In preparing the report, the specialists considered the Company’s operational planning for the coming years, in-house background information, such as levels of maintenance and use of the items, external comparison factors, such as available technology, manufacturers’ recommendations and manuals and aging of the assets. With the exception of aircraft, the residual value of other property, plant and equipment will be taken to be equal to zero, as the Company does not dispose of these assets, except as scrap. 16 INTANGIBLE ASSETS These refer to the costs incurred in developing programs for each new aircraft, including support services, production labor, materials and direct labor allocated to the construction of prototype aircraft or significant components. The costs of flight and ground testing and subsequent design changes are also included. 91
  • 92. Embraer - Empresa Brasileira de Aeronáutica S.A. Notes to the Financial Statements at December 31, 2009 and 2008 In thousands of Brazilian reais, unless otherwise indicated (a) Parent Company 2009 2008 Accumulated Accumulated Cost amortization Net Cost amortization Net Research and development Commercial 1,627,180 (1,142,134) 485,046 2,184,104 (1,453,558) 730,546 Executive 839,752 (166,983) 672,769 920,588 (176,810) 743,778 Defense 40,579 (34,224) 6,355 53,643 (44,895) 8,748 Other 1,725 (877) 848 6,963 (676) 6,287 2,509,236 (1,344,218) 1,165,018 3,165,298 (1,675,939) 1,489,359 Software 149,563 (111,415) 38,148 175,681 (133,770) 41,911 2,658,799 (1,455,633) 1,203,166 3,340,979 (1,809,709) 1,531,270 Changes in intangible assets: 2009 2008 Accumulated Accumulated Cost amortization Cost amortization At January 1 3,340,979 (1,809,709) 2,256,357 (1,197,157) Additions 414,291 (209,226) 452,494 (226,641) Trasnfer of contributions from partners (i) (124,164) - (177,717) - Exchange translation adjustment (972,307) 563,302 809,845 (385,911) At December 31 2,658,799 (1,455,633) 3,340,979 (1,809,709) (i) Refers to transfers from non-current liabilities of contributions from partners in the Phenom 300 and Legacy 500 Programs after compliance with the contract, when the return is no longer payable (Note 20). 92
  • 93. Embraer - Empresa Brasileira de Aeronáutica S.A. Notes to the Financial Statements at December 31, 2009 and 2008 In thousands of Brazilian reais, unless otherwise indicated (b) Consolidated 2009 2008 Accumulated Accumulated Cost amortization Net Cost amortization Net Research and development Commercial 1,638,015 (1,148,377) 489,638 2,194,326 (1,453,558) 740,768 Executive 862,723 (168,501) 694,222 962,765 (177,133) 785,632 Defense 41,808 (34,823) 6,985 55,514 (46,068) 9,446 Other 89,450 (59,476) 29,974 68,037 (44,923) 23,114 2,631,996 (1,411,177) 1,220,819 3,280,642 (1,721,682) 1,558,960 Software 155,110 (114,800) 40,310 251,210 (199,680) 51,530 2,787,106 (1,525,977) 1,261,129 3,531,852 (1,921,362) 1,610,490 Changes in intangible assets: 2009 2008 Cost Accumulated Cost Accumulated At January 1 3,531,852 (1,921,362) 2,372,232 (1,253,763) Additions 435,115 (223,807) 480,340 (239,609) Write-offs (12,572) 6,383 (20,127) (274) Transfer of contributions from partners (i) (124,164) - (177,719) - Exchange translation adjustment (1,043,125) 612,809 877,126 (427,716) At December 31 2,787,106 (1,525,977) 3,531,852 (1,921,362) 93
  • 94. Embraer - Empresa Brasileira de Aeronáutica S.A. Notes to the Financial Statements at December 31, 2009 and 2008 In thousands of Brazilian reais, unless otherwise indicated 17 LOANS AND FINANCING (a) Parent Company Contractual interest Effective interest Matu- Currency rate - % p.a. rate - % p.a. rity 2.009 2.008 Working capital US$ 6,375% 6,375% 2017 1.558.542 952.373 LIBOR + 0,875% to LIBOR + 2,652% to Project development US$ - 311.762 1,75% 3,635% 2016 (-) Funding cost US$ - (5.969) Purchases of materials US$ 6,840% 6,840% 2012 454.217 84.847 LIBOR 6M + 0,45% to LIBOR 6M + 0,45% to 1,10% 1,10% Export financing US$ 7,81% 7,81% 2010 - 118.827 Advances on exchange US$ 5,26 to 6,00% 5,26 to 6,00% - 778.088 contracts Finance leasing US$ 5,98% to 7,24% 5,98% to 7,24% 2012 3.097 9.029 2.015.856 2.248.957 Pre-shipment R$ 4,50% 4,50% TJLP + 2,09% to TJLP + 2,09% to 2012 1.065.527 1.248.911 2,10% 2,10% Project development R$ TJLP + 5,0% TJLP + 5,0% 2015 109.984 129.130 1.175.511 1.378.041 3.191.367 3.626.998 Less- Current 810.203 930.096 Non-current 2.381.164 2.696.902 94
  • 95. Embraer - Empresa Brasileira de Aeronáutica S.A. Notes to the Financial Statements at December 31, 2009 and 2008 In thousands of Brazilian reais, unless otherwise indicated (b) Consolidated Contractual Effective Currency interest rate % p.a. interest rate % p.a. Maturity 2.009 2.008 Working capital Euribor + 0.75% to Euro Euribor + 0.75 to 1.50% 2017 64.996 108.758 1.50% 1,00% 1,00% US$ 1.00% to 6.375% 1.00% to 6.716% 1.763.797 1.280.493 LIBOR 6M+ 0.50% to US$ LIBOR 6M+ 0.50% to 1.10% 1.10% (-) Funding cost (17.453) (9.820) Other 4,78% 4,78% - 51.539 LIBOR + 2.652% to Project develepment US$ LIBOR + 0.875% to 1.75% 2016 2.857 315.483 3.635% (-) Amortization cost US$ - (5.969) Purchases of materials US$ 5,75% 5,75% 2012 LIBOR 6M + 0.45 to LIBOR 6M + 0.45 to 1.10% 455.107 86.292 1.10% Export financing US$ 6,30% 6,30% 2010 - 130.565 Advance on exchange contracts US$ 4.20% to 8.50% 4.20% to 8.50% 2009 - 797.455 Purchases of property, plant and US$ 3.53% to 5.35% 3.53% to 5.35% 2035 55.999 60.122 equipment Finance leases US$ 5.98% to 8.45% 5.98% to 8.45% 2014 6.560 14.379 LIBOR + 2.54% to LIBOR + 2.54% to 3.40% 3.40% 2.331.863 2.829.297 Pre-shipment R$ 4,50% 4,50% 2012 1.081.866 1.274.073 TJLP + 2.25% to TJLP + 2.25% to 2.80% 2.80% Project develepment R$ TJLP + 5.0% TJLP + 5.0% 2015 143.749 166.500 R$ CDI + 0.49% to 2.46% CDI + 0.49% to 2.46% 2015 Finance leases 26.504 29.809 1.252.119 1.470.382 3.583.982 4.299.679 Less - Current 1.031.494 1.259.809 Non-current 2.552.488 3.039.870 The Company has a standby syndicated credit line of up to US$ 500 million whose maintenance costs are included in financial expenses. At December 31, 2009, the Company had used US$ 250 million of this line, recorded under “purchases of materials”, leaving a balance of US$ 250 million. 95
  • 96. Embraer - Empresa Brasileira de Aeronáutica S.A. Notes to the Financial Statements at December 31, 2009 and 2008 In thousands of Brazilian reais, unless otherwise indicated (c) Long-term maturities: Parent Company Consolidated Year 2.009 2.009 2011 460.373 528.414 2012 323.955 388.815 2013 23.882 36.233 2014 8.233 18.576 After 2014 1.564.721 1.580.451 2.381.164 2.552.489 (d) Currency analysis The total debt is denominated in the following currencies: Parent Company Consolidated 2.009 2.008 2.009 2.008 Brazilian real 1.175.511 1.378.041 1.252.120 1.470.382 US dollar 2.015.856 2.248.957 2.266.867 2.668.999 Euro - - 64.996 108.758 Other - - - 51.540 3.191.367 3.626.998 3.583.983 4.299.679 (e) Interest and guarantees The total debt in Brazilian reais is subject to interest based on the variation of the Long-term Interest Rate (TJLP) and the Interbank Deposit Certificate (CDI). The variations of these indexes in 2009 were 6.00% and 8.55%, respectively (6.00% and 13.62% in 2008, respectively). The foreign currency loans at December 31, 2009 are subject to exchange variations plus an average annual weighted interest of LIBOR plus 1.64% a year (LIBOR plus 3.73% in 2008) and the local currency loans are subject to an average annual weighted interest rate of 7.19% (8.94% in 2008). 96
  • 97. Embraer - Empresa Brasileira de Aeronáutica S.A. Notes to the Financial Statements at December 31, 2009 and 2008 In thousands of Brazilian reais, unless otherwise indicated Taking into account the effects of the analysis of the effective rates on the foreign currency financing, which include the financial structuring costs incurred and already paid, the average effective weighted rates are equivalent to LIBOR plus 1.65% a year in 2009 (LIBOR plus 4.05% a year in 2008). Properties, machinery, equipment, commercial pledges and bank guarantees totaling R$ 186,323 were pledged as collateral for the loans. The loans of the subsidiaries guaranteed by the Parent Company total R$ 218,258 at December 31, 2009 (2008 – R$ 241,072). (f) Restrictive clauses The long-term financing agreements are subject to restrictive clauses, in line with normal market practices, which establish control over the degree of leverage through the net indebtedness/EBITDA (“Earnings Before Interest, Taxes, Depreciation and Amortization”) ratio, and also limits for debt service cover using the EBITDA/net financial expense ratio. There is also a clause that establishes a minimum amount for the Company's net equity. They also include the customary restrictions on the creation of new encumbrances on assets, significant changes in the Company’s ownership, sales of assets, payment of dividends above the minimum mandatory dividend in the event of default on the financing and on transactions with affiliated companies. At December 31, 2009, the parent company and subsidiaries were in compliance with all the restrictive clauses. In October 2009, the Company concluded a transaction to raise funds through an offer of guaranteed notes, maturing on January 15, 2020, made overseas by its subsidiary Embraer Overseas Limited. The Company raised the amount of US$ 500 million, at an interest rate of 6.375% p.a., which is included in the previous table under Working capital. The interest will be paid half-yearly, on April 8 and October 8 of each year, from 2010. 97
  • 98. Embraer - Empresa Brasileira de Aeronáutica S.A. Notes to the Financial Statements at December 31, 2009 and 2008 In thousands of Brazilian reais, unless otherwise indicated 18 SUPPLIERS Parent Company Consolidated 2009 2008 2009 2008 Overseas suppliers: Risk partners (i) 372.946 1.117.271 372.946 1.117.271 Other 378.417 928.907 590.622 1.293.155 Brazilian suppliers 42.715 69.968 74.381 109.782 Subsidiaries (ii) 54.062 95.930 - - 848.140 2.212.076 1.037.949 2.520.208 Less - Current 848.140 2.212.076 1.037.949 2.520.208 Non-current - - - - (i) The Company’s risk partners develop and produce significant aircraft components, including engines, hydraulic components, avionics, wings, tail sections, the interior, parts of the fuselage, etc. Certain contracts between the Company and these risk partners are long term and include deferral of payments for components and systems until a negotiated term after delivery. Once the risk partners have been selected and the aircraft development and production program has started, it is difficult to change them. In certain instances, such as engines, the aircraft is specially designed to accommodate a given component, which cannot be replaced by another supplier without incurring delays and significant additional expense. This dependence makes the Company vulnerable to the performance, quality and financial position of its risk partners. (ii) Of the total amount at December 31, 2009, R$2,826 is denominated in Brazilian reais and R$51,236 in other currencies (2008 – R$ 2,531 and R$ 93,399, respectively). 98
  • 99. Embraer - Empresa Brasileira de Aeronáutica S.A. Notes to the Financial Statements at December 31, 2009 and 2008 In thousands of Brazilian reais, unless otherwise indicated 19 ACCOUNTS PAYABLE Parent Company Consolidated 2009 2008 2009 2008 Contractual obligations (i) - - 50.502 49.987 Commercial rebates 21.285 17.383 21.285 17.383 Brazilian Air Force 17.713 - 17.713 - Related parties (ii) - - 17.238 20.132 Insurance 13.601 9.627 13.667 9.890 Bond - - 9.957 9.051 Materials pending (iii) 7.225 8.885 7.225 8.885 Financial credits (iv) - - 4.483 7.630 Accounts payable (v) 55.702 56.755 79.208 81.763 115.526 92.650 221.278 204.721 Less - current 114.890 89.830 188.194 163.503 Non-current 636 2.820 33.084 41.218 (i) Mainly amounts provided to cover the maintenance costs of aircraft rented under lease contracts. (ii) Refers mainly to the intercompany loan between OGMA and EMPORDEF, an OGMA shareholder. (iii) Accessories or components to be installed in aircraft already delivered, in accordance with the contracts. (iv) Amounts provided to compensate customers for certain financing costs. (v) Expenses incurred in December, for payment in the following month. 19 CONTRIBUTIONS FROM PARTNERS Parent Company Consolidated 2009 2008 2009 2008 Current - - 1.540 5.823 Non-current 117.911 65.484 117.911 103.453 117.911 65.484 119.451 109.276 99
  • 100. Embraer - Empresa Brasileira de Aeronáutica S.A. Notes to the Financial Statements at December 31, 2009 and 2008 In thousands of Brazilian reais, unless otherwise indicated The Company has agreements with certain key suppliers, referred to as partners, to participate in research and development. Certain supply agreements require the supplier to contribute cash to the Company as compensation for its research and development. As part of this supply agreement, the contributions are tied to compliance by the Company with certain important stages of development, including aircraft certification, first delivery and minimum number of aircraft delivered. The Company records these contributions when received as non-current liabilities, which will not be claimed if the contractual objectives are achieved. As and when the objectives are achieved, and these amounts are therefore no longer subject to return, they are deducted from the aircraft development costs, recorded in the Intangible assets account in non-current assets. 21 ADVANCES FROM CUSTOMERS Parent Company Consolidated 2009 2008 2009 2008 In Brazilian reais 184.649 103.289 193.796 113.042 Other currencies 1.647.265 3.337.914 1.837.463 3.627.799 1.831.914 3.441.203 2.031.259 3.740.841 Less - Current 1.148.970 2.401.225 1.338.058 2.691.041 Non-current 682.944 1.039.978 693.201 1.049.800 22 TAXES AND SOCIAL CHARGES PAYABLE Parent Company Consolidated 2009 2008 2009 2008 Income tax and social contribution on net income (i) 317.807 315.560 340.637 335.088 INSS (National Institute of Social Security) (ii) 188.032 174.813 191.345 179.151 PIS and COFINS (iii) 84.378 62.878 84.383 62.884 INSS - Installment payments 20.087 25.670 20.087 34.836 IRRF (Income tax withheld at source) 44.067 26.914 45.379 28.891 FGTS (Government Employee Severance Indemnity Fund) 10.387 12.439 10.779 12.787 Other 3.211 2.788 16.911 41.399 667.969 621.062 709.521 695.036 Less - Current 95.158 81.366 136.593 148.009 Non-current 572.811 539.696 572.928 547.027 100
  • 101. Embraer - Empresa Brasileira de Aeronáutica S.A. Notes to the Financial Statements at December 31, 2009 and 2008 In thousands of Brazilian reais, unless otherwise indicated Taxes and social charges with suspended payment, based on court or administrative measures (see items i, ii and iii) are stated in the financial statements net of the related judicial deposits in accordance with CVM Resolution 489/05, as shown below: Parent company and consolidated: 2009 2008 Judicial Judicial Provisions deposits Net Provisions deposits Net Income tax and social contribution (i) 488.452 (170.645) 317.807 487.927 (172.367) 315.560 INSS (ii) 153.126 - 153.126 153.369 (11.265) 142.104 PIS/PASEP/COFINS (iii) 84.049 (9.069) 74.980 134.649 (72.224) 62.425 The Company is challenging the constitutionality of the introduction, the calculation base and expansion of the calculation base in the administrative and judicial spheres, as well as the increases in the rates of certain taxes, charges and social contributions, in order to ensure non-payment or recovery of payments made in prior years. Through administrative and court cases, the Company has obtained injunctions and similar measures enabling it not to pay or to offset payments of taxes, charges and social contributions. The amounts not paid, based on preliminary decisions, are provided and updated based on the variation in the SELIC (Special System for Settlement and Custody) interest rate until a final and definite ruling has been obtained, and relate to the following matters: (i) the Company is claiming the recognition of constitutional immunity from the social contribution tax on exports and the right to IPI (Excise Tax) credits on purchases of materials exempt from tax, not taxed or taxed at a zero rate. The lawsuit in relation to social contribution on exports is in the Federal Supreme Court, awaiting judgment of the Extraordinary Appeal, in which a suspensive effect was awarded in the Company’s favor. The amount involved is R$475,784, net of deposits, parent company and consolidated. In relation to the IPI credits, the Company agreed to the financing terms introduced by Provisional Measure 470/09. The requirements for obtaining the financing were fulfilled within the legal timeframe, that is, by November 30, 2009. (ii) This refers to the increase in the work-related accident insurance (SAT) rate. The Company is challenging the legality and absence of technical criteria for fixing the rates of these contributions since 1995, whose payment has been suspended due to a lower court decision in a civil suit. The amount involved in this case is R$ 153,126, parent company and consolidated, and the remaining balance of R$ 29,164, relates to the current liabilities. 101
  • 102. Embraer - Empresa Brasileira de Aeronáutica S.A. Notes to the Financial Statements at December 31, 2009 and 2008 In thousands of Brazilian reais, unless otherwise indicated In September 2009, the Company received a writ of mandamus ruling of legitimacy in the lower court, authorizing withdrawal of the SAT appeal deposits, made during the term of effectiveness of the obligation to guarantee 30% (thirty percent) of the amount of the debts as a prerequisite for access to the higher court, in administrative suits, equivalent to an amount of R$ 11,265 in 2008. On February 18, 2009, the Company also filed a suit contesting the payment of social contributions on paid notice of dismissal. As a result of lower court decision, the amounts relating to paid notice were excluded from the calculation base for the employer’s social security contribution and were provided, pending a final successful outcome of the court case. The case is awaiting filing with the Federal Regional Court, 3rd Region, for analysis of the voluntary appeal. The amount involved in this case at December 31, 2009 is R$ 8,942 (parent company) and R$ 9,055 (consolidated). (iii) Refers to the contributions to the Social Integration Program (PIS) and Public Service Employee Savings Program (PASEP), where the Company is challenging the charges in certain periods. The legal right of this case was finally recognized by the Federal Regional Court, 3rd Region, and the dispute continues at the third court level only in respect of the prescription of part of the credit. The other dispute, involving the basis of calculation of the non-cumulative system, was included in the provisions of Law 11,941/09, resulting in withdrawal of the suit. The amount involved in the first case is R$84,049, parent company and consolidated. The remaining balance of R$1,982, parent company, refers to current contributions, and consolidated, refers to current contributions and installment payments. With the request for installment payments introduced by Provisional Measure 470/09 and Law 11,941/09, for the taxes mentioned in items (i) and (iii) above, provisions for charges amounting to R$33,457 were reversed, R$ 23,193 under "financial expenses" and R$ 10,264 under "operating expenses". Also, pursuant to the terms of Provisional Measure 470/09, the subsidiary ELEB settled tax debts of R$ 8,675 against deferred tax credits on tax loss carryforwards. The remaining provisions for the above cases will be maintained pending a final unappealable judgment. 102
  • 103. Embraer - Empresa Brasileira de Aeronáutica S.A. Notes to the Financial Statements at December 31, 2009 and 2008 In thousands of Brazilian reais, unless otherwise indicated 23 OTHER PROVISIONS Parent Company Consolidated 2009 2008 2009 2008 Payroll 190.686 243.344 232.360 292.150 Provision for financial guarantees (i) 223.064 63.963 223.064 63.963 Product warranty (ii) 175.875 214.924 186.100 224.474 Employee profit sharing program 56.916 63.924 66.531 71.201 Product improvements (ii) 26.618 50.290 26.618 50.290 Accrued retirement and pension benefits - - 8.801 11.537 Unrealized losses with derivatives 837 389.072 8.091 389.072 Provision for loss of investments in subsidiaries 1.379 - - - Other 9.533 12.518 32.785 24.952 684.908 1.038.035 784.350 1.127.639 Less - Current 316.683 802.133 410.295 891.737 Non-current 368.225 235.902 374.055 235.902 (i) Provision recorded to cover any losses on guarantees offered to customers/financing agents involved in structuring aircraft sales financing (Note 34b). At December 31, 2009, the Company recorded a provision of R$ 179,340 in relation to the Mesa Air Group, as mentioned in Note 40. (ii) Provisions recorded to cover products costs, including warranties and contractual obligations to make improvements to aircraft delivered, in order to ensure that the performance targets are met. 103
  • 104. Embraer - Empresa Brasileira de Aeronáutica S.A. Notes to the Financial Statements at December 31, 2009 and 2008 In thousands of Brazilian reais, unless otherwise indicated 24 PROVISION FOR CONTINGENCIES (a) On the dates of the financial statements, the Company's liabilities in relation to contingencies, net of the corresponding judicial deposits, were as follows: Parent Company Consolidated 2009 2008 2009 2008 Labor 54.602 48.018 57.320 52.091 Tax 34.245 32.988 36.307 36.030 Civil - 14.130 88.847 81.006 93.627 102.251 Less - Current 17.451 20.957 18.203 22.137 Non-current 71.396 60.049 75.424 80.114 Changes in the provisions: a) Parent Company Translation 12.31.2008 Additions Interest Transfers Write-offs adjustments At 12.31.2009 Labor 48.018 13.248 6.191 - (13.182) 327 54.602 Tax 32.988 - 1.041 (399) 615 - 34.245 81.006 13.248 7.232 (399) (12.567) 327 88.847 b) Consolidated Exchange monetary Translation At 12.31.2008 Additions Interest variations Transfers Write-offs adjustments 12.31.2009 Labor 52.091 13.651 5.669 277 - (14.643) 275 57.320 Tax 36.030 - 1.302 - - (1.233) 208 36.307 Civil 14.130 - - - - (13.998) (132) - 102.251 13.651 6.971 277 - (29.874) 351 93.627 T he Company is party to labor, civil and tax lawsuits, which are supported by judicial deposits, when applicable, and is contesting these cases at both the administrative and judicial levels. The provisions for probable loss in these lawsuits are estimated and updated by management, based on the opinion of its external legal counsel. 104
  • 105. Embraer - Empresa Brasileira de Aeronáutica S.A. Notes to the Financial Statements at December 31, 2009 and 2008 In thousands of Brazilian reais, unless otherwise indicated (b) The nature of the obligations is summarized below: Labor contingencies The labor contingencies relate to claims brought by Unions representing the employees or individual claims in which former employees claim overtime, productivity, reinstatement, allowances, FGTS penalty, backdating of salary increases and adjustments. The principal claims pending were filed by the union in 1991, and aim to backdate a salary increase given by the Company in January and February 1991 to November and December 1990. By December 31, 2009, approximately 97% of the employees and former employees had made settlements with the Company. Another lawsuit claims price-level restatement of the Verão and Collor 1 economic plans on the 40% FGTS penalty paid to employees employed by the Company between February 1989 and April 1990 and dismissed between 1989 and June 2003. In September 2007, the Union and the Company signed an agreement that provided for payments to begin in October 2007. By December 31, 2009, the Company had made payments to 80% of the former employees. There was an increase in the number of individual claims filed in 2009 due to the large number of dismissals during the year. The total exposure in these lawsuits is estimated at approximately R$76,000. They are in various courts, awaiting judgment. Based on the opinion of the Company’s legal cousel and the success of certain judgments and negotiations that are expected to occur, the amount provided is considered adequate to cover probable losses in these cases. Tax The principal tax cases in progress are as follows: (i) Social security contributions - the Company was notified by the authorities for not withholding social security contributions from service providers. These lawsuits are at the 2nd court level. The Company was also notified to pay additional allowances for environmental work risks. This lawsuit is also at the 2nd court level. The amount involved in these lawsuits, for which a full provision has been recorded, is R$ 21,984. The amounts are net of the judicial deposits made, of R$7,206 at December 31, 2009. 105
  • 106. Embraer - Empresa Brasileira de Aeronáutica S.A. Notes to the Financial Statements at December 31, 2009 and 2008 In thousands of Brazilian reais, unless otherwise indicated (ii) FUNDAF - Special Fund for Development and Improvement of Inspection Activities (FUNDAF) - in March 2005, an Assessment and Penalty Notice (AIIM) was filed against the Company, demanding payment of the contribution. As a result of the assessment, the Company filed a tax debt annulment suit at the first court level, which is awaiting judgment. The amount involved in this case at December 31, 2009 is R$ 10,413, for which a full provision has been recorded. (iii) Import duty – Refers to an AIIM filed as a result of an alleged breach of the maximum period for complying with the drawback requirements and disputes concerning product tax classifications. These lawsuits are at the 2nd and 1st court levels, respectively. The amount involved in these lawsuits, for which a full provision has been recorded, is R$4.999 at December 31, 2009. This amount is net of the judicial deposits of the same amount. (iv) CIDE – Between January and September 2002, the Company paid the Economic Domain Intervention Contribution (CIDE) on royalties, technical services and technical assistance, without having adjusted the calculation base. After a first inspection of this period and a favorable ruling at the administrative level with regard to the facts contested, the Federal Revenue Secretariat notified the Company to pay the difference on the calculation base charged in the above period. The Company filed a defense to the administrative lawsuit, which is currently at the Federal Revenue Judgment Office awaiting a hearing at the 1st level. The amount involved and provided is R$4,752 at December 31, 2009. Civil Lawsuit filed by Gaplan Administradora de Bens S/C Ltda. against Neiva, relating to the “Guarantee to Supply Aircraft and Consortium Purchase” agreement signed with Embraer for the period 1988 to 1997, in which it undertook to supply a given number of aircraft within a stipulated period, in accordance with the standard series configuration at the time of manufacture, directly to the consortium members. The plaintiff alleges late delivery of the aircraft, which led to termination by some of the consortium purchasing members, who demanded the return of the installments paid, financial losses caused by the increase in the term of the pool purchase and price alterations, in addition to a reduction in the management fee. In February 2009, the parties to the case signed an agreement for the amount of R$14,120. Of this amount, R$ 11,210 had been paid by December 31, 2009, and the remaining balance is recorded under accounts payable. 106
  • 107. Embraer - Empresa Brasileira de Aeronáutica S.A. Notes to the Financial Statements at December 31, 2009 and 2008 In thousands of Brazilian reais, unless otherwise indicated 25 INTEREST ON OWN CAPITAL AND DIVIDENDS PROPOSED (a) Interest on own capital On December 11, 2009, the Board of Directors approved the distribution of interest on own capital, attributing it to the amount of the minimum mandatory dividend. In accordance with tax legislation, the interest on own capital, of R$ 173,680 (corresponding to R$ 0.21 per share, net of withholding tax), was recorded as a financial expense. However, for purposes of these financial statements, the amount is considered as distribution of the net income for the year, and reclassified to stockholders’ equity, at its gross amount as the resulting tax benefits are included the net income for the year. The payment will be made in two equal installments of R$ 86,840, on July 20 and December 20, 2010. (b) Proposed dividends The proposed dividends stated in the Company’s financial statements, subject to the approval of the stockholders at the Annual General Meeting, and calculated in accordance with Brazilian Company Law, are shown below (see Note 40): 2009 2008 Net income for the year 890,357 409,450 Subsidies (13,495) (13,116) Legal reserve (44,518) (20,472) 832,344 375,862 Minimum mandatory dividend (25%) 208,086 93,965 Dividends: Interest on own capital, net of tax 152,886 197,111 Proposed dividends - complement 55,200 - Total stockholder remuneration 208,086 197,111 Additional distribution - 103,146 Dividend per share: Common shares outstanding - R$ 0.29 0.31 107
  • 108. Embraer - Empresa Brasileira de Aeronáutica S.A. Notes to the Financial Statements at December 31, 2009 and 2008 In thousands of Brazilian reais, unless otherwise indicated 26 STOCKHOLDERS’ EQUITY (a) Capital The authorized capital is divided into 1,000,000,000 common shares. The Company’s subscribed and paid up capital at December 31, 2008 is R$ 4,789,617 and comprises 740,465,044 common shares, without par value, of which 16,800,000 shares are held in Treasury. (b) Special common share The Federal Government holds one special common share with the same voting rights as other holders of common shares, however, with special rights established in article 9 of the bylaws. The special class share grants the Federal Government the power of veto on the following matters: I - Change of the Company’s name or its corporate objective; II - Alteration and/or use of the Company’s logo; III - Creation and/or alteration of military programs, whether or not the Federal Republic of Brazil is involved; IV - Training third parties in technology for military programs; V - Interruption of the supply of maintenance and spare parts for military aircraft; VI - Transfer of the Company's ownership; VII - Any changes in: (i) the provisions of article 9, or of article 4, the main clause of art. 10, arts. 11, 14 and 15, sub-item III of art. 18, paragraphs 1 and 2 of art. 27, sub-item X of art. 33, sub-item XII of art. 39 or Chapter VII; or (ii) the rights attributed by the bylaws to the special class share. 108
  • 109. Embraer - Empresa Brasileira de Aeronáutica S.A. Notes to the Financial Statements at December 31, 2009 and 2008 In thousands of Brazilian reais, unless otherwise indicated (c) Stockholdings Number of common % of shares total capital Stockholders 2009 2008 2009 2008 Caixa de Previdência dos Funcionários do Banco do Brasil – Previ 101,787,901 103,082,901 13.75 13.92 Cia. Bozano 45,632,189 58,136,689 6.16 7.85 Janus Capital Management(NYSE) - 75,807,944 - 10.24 Franklin Resources (NYSE) 47,647,852 - 6.43 - Oppenheimer Fund’s (NYSE) 50,171,337 44,721,636 6.78 6.04 Thornburg Investment Management’s(NYSE) 43,289,188 37,726,280 5.85 5.09 BNDES Participações S.A. - BNDESPAR 39,762,489 37,412,579 5.37 5.05 Hotchkis & Wiley Capital (NYSE) 38,163,308 - 5.15 - BLACKROCK 43,608,599 - 5.89 - Treasury shares 16,800,000 16,800,000 2.27 2.27 Federal Government 1 2,349,911 - 0.32 Other 313.,602.,180 364.,427.,104 42,.35 49,.22 740.,465.,044 740.,465.044 100,.00 100,00 (d) Granting of Embraer stock options 2009 2008 Average Average grant grant Options price - R$ Options price - R$ At the beginning of the year - - 1,353,391 22.00 Exercised - - - - Canceled or expired - - (1,353,391) 22.00 At the end of the year - - - - (e) Legal reserve The legal reserve is recorded annually as an appropriation of 5% of the net income for the year. The reserve may not exceed 20% of capital, or 30% together with the capital reserves. 109
  • 110. Embraer - Empresa Brasileira de Aeronáutica S.A. Notes to the Financial Statements at December 31, 2009 and 2008 In thousands of Brazilian reais, unless otherwise indicated (f) Investment subsidy reserve Recorded in accordance with the terms of article 195-A of Brazilian Company Law (as amended by Law 11,638, of 2008), this reserve corresponds to the appropriation of that part of the retained earnings derived from government subsidies received for investments in research by the Company, recorded in income for the year. These subsidies are not included in the calculation base for the mandatory dividends. (g) Reserve for investments and working capital The purpose of this reserve is to: (i) guarantee funds for investments in property, plant and equipment, without detriment to retained earnings, pursuant to art. 196 of Law 6.404/76; and (ii) reinforce working capital; it may also be used (iii) to redeem, reimburse or purchase shares in the Company. (h) Treasury shares These comprise 16,800,000 common shares acquired up to April 4, 2008, amounting to R$320,250, using funds from the reserve for investments and working capital. This transaction was carried out in accordance with the guidelines approved by the Board of Directors in a meeting held on December 7, 2007. The shares purchased will be held in Treasury during which period they will lose their political and economic rights. (i) Cumulative translation adjustments. These refer to the exchange differences resulting from translation of the balance sheet and statement of income for the year from the functional currency of the Company and its subsidiaries (mainly the US dollar) into the currency of presentation of the financial statements (Brazilian real). 110
  • 111. Embraer - Empresa Brasileira de Aeronáutica S.A. Notes to the Financial Statements at December 31, 2009 and 2008 In thousands of Brazilian reais, unless otherwise indicated 27 SUPPLEMENTARY PENSION PLAN (a) Defined contribution The Company and its subsidiaries sponsor a private defined contribution plan for employees. For the companies based in Brazil, the plan, previously managed by Banco do Brasil S.A. – BB Previdência, is now managed by EMBRAER PREV – Sociedade de Previdência Complementar. The Company’s contributions to the plan in 2009 and 2008 were R$29,645 and R$31,456 (R$31,615 and R$33,138, consolidated), respectively) (b) Defined benefit EAH used to sponsor a defined benefit pension plan for certain employees, as well as a post- retirement medical plan, for which the estimated pension and post-retirement medical care for the benefited employees and their dependents were accrued based on actuarial valuations. The defined benefit plan was liquidated in 2006. By means of an addendum, all the benefits were frozen as of December 31, 2003 and a provision was recorded for the full proportional benefit. The supplementary pension plan for employees admitted as from October 1, 2001 is a defined contribution plan and those admitted prior to that date were also transferred to the defined contribution plan. The changes in benefit liabilities at December 31, 2009 and 2008 are as follows: Post-retirement benefits 2009 2008 Opening balance 10,176 6,946 Foreign exchange variations (3,000) 2,219 Current service cost 75 92 Interest cost 420 561 Actuarial gain 79 832 Benefits paid to participants (388) (474) Closing balance of accrued obligations 7,362 10,176 111
  • 112. Embraer - Empresa Brasileira de Aeronáutica S.A. Notes to the Financial Statements at December 31, 2009 and 2008 In thousands of Brazilian reais, unless otherwise indicated The changes in plan assets at December 31, 2009 and 2008 are as follows: Post-retirement benefits 2009 2008 Fair value of plan assets at the beginning of the year 3,092 3,364 Foreign exchange variations (727) 1,075 Return on assets 418 - Employer’s contributions - (873) Benefits paid to participants (388) (474) Fair value of plan assets at the end of the year 2,395 3,092 The provisions for benefit costs at December 31, 2009 and 2008 are as follows: Post-retirement Medical benefits 2009 2008 Accumulated deficit (4,967) (7,084) The main actuarial assumptions at the balance sheet date (expressed as weighted averages) are as follows: Post-retirement Medical benefits 2009 2008 Discount rate 6.25 5.75 Estimated return on plan assets 7.75 7.75 Future salary increases 5.50 5.50 112
  • 113. Embraer - Empresa Brasileira de Aeronáutica S.A. Notes to the Financial Statements at December 31, 2009 and 2008 In thousands of Brazilian reais, unless otherwise indicated The net costs of benefits at December 31, 2009 and 2008 are as follows: Post-retirement Medical benefits 2009 2008 Service cost 75 92 Interest cost 420 561 Estimated return on plan assets (165) (340) Amortization of unrecognized past service cost (216) (294) Net cost of benefits 114 19 28 EMPLOYEE PROFIT SHARING Based on the variable remuneration policy approved by the Board of Directors in April 1996 and renewed in November 2005, the Company has an Employee Profit Sharing Plan which is linked to an action plan, the payment of dividends to stockholders and to achieving specific goals which are established and agreed at the beginning of each year. The profit sharing is equivalent to 12.5% of net income for the year, determined in accordance with US GAAP. Of this amount, 30% is distributed in equal parts to all employees and 70% proportional to salary. The Company recorded profit sharing expense of R$ 58,339 and R$ 91,073 in 2009 and 2008, respectively (R$ 61,929 in 2009 and R$ 95,252 in 2008, consolidated). 113
  • 114. Embraer - Empresa Brasileira de Aeronáutica S.A. Notes to the Financial Statements at December 31, 2009 and 2008 In thousands of Brazilian reais, unless otherwise indicated 29 OTHER OPERATING INCOME (EXPENSES), NET Parent Company Consolidated 2009 2008 2009 2008 Financial guarantee - MESA (179.344) - (179.344) - Restructuring expense (i) (119.905) - (137.321) - Contractual fines (ii) 128.513 21.695 122.267 23.297 Studies for projects (110.757) (154.385) (110.855) (154.315) Aircraft maintenance and flight costs - fleet (15.262) (13.636) (47.986) (15.925) Recovery of expenses 14.582 17.054 16.115 17.320 Taxes on other revenues (12.729) (7.299) (15.083) (9.349) Royalties 21.374 24.544 11.581 18.354 Product modifications (9.733) (19.717) (9.733) (18.692) Other sales 7.462 17.351 7.750 17.858 Expense of programs (6.648) (11) (6.648) (11) Flight safety standards (5.653) (5.314) (5.653) (5.314) Maintenance of third-party aircraft (4.331) (2.993) (4.331) (2.993) Result of finance restructuring, net - - 1.985 (4.376) Provision for contingencies (1.017) (396) (102) (1.011) Tax fines (10) (246) (14) (534) Income tax contingency - 11.044 - 11.044 Other (11.822) 9.659 (10.439) (13.371) (305.280) (102.650) (367.811) (138.018) (i) Costs incurred as a result of the review of the cost base and personnel numbers, adjusting them to the reality of demand for commercial and executive aircraft (Note 37). (ii) Mainly fines charged to customers for cancelation of sales contracts, in accordance with the contracts. 114
  • 115. Embraer - Empresa Brasileira de Aeronáutica S.A. Notes to the Financial Statements at December 31, 2009 and 2008 In thousands of Brazilian reais, unless otherwise indicated 30 FINANCIAL INCOME (EXPENSES) Parent Company Consolidated 2009 2008 2009 2008 Financial expenses: Interest and commissions on loans and financing (207.564) (158.955) (232.692) (185.448) Interest on taxes, social charges and contributions (Nota 22 ) (21.207) (19.352) (22.092) (20.294) Tax on bank account outflows - CPMF - - - (462) Financial restructuring costs (1.529) (1.293) (27) (2.918) IOF tax on financial transactions (5.010) (1.411) (5.347) (5.179) Other (14.390) (15.681) (26.041) (15.219) (249.700) (196.692) (286.199) (229.520) Financial income: Financial investments 170.369 90.673 196.222 99.760 Interest on receivables 55.989 48.002 90.978 85.892 Financial structuring income - - 1.739 206 Other 356 2.400 11.863 3.175 226.714 141.075 300.802 189.033 115
  • 116. Embraer - Empresa Brasileira de Aeronáutica S.A. Notes to the Financial Statements at December 31, 2009 and 2008 In thousands of Brazilian reais, unless otherwise indicated 31 MONETARY AND FOREIGN EXCHANGE VARIATIONS, NET Parent Company Consolidated 2009 2008 2009 2008 Monetary and foreign exchange variations Income: Trade accounts receivable 54.566 (64.530) 74.222 (71.575) Derivative transactions 48.608 (386.207) 27.394 (318.604) Advances to suppliers - - 623 (10.164) Financial investments 477.602 (208.669) 477.604 (205.201) Tax credits 51.902 (26.090) 55.061 (28.127) Other 36.553 2.600 33.477 (5.484) 669.231 (682.896) 668.381 (639.155) Expenses: Advances from customers (60.460) 31.997 (59.697) 30.868 Loans and financing (410.220) 88.067 (436.138) 102.805 Suppliers (10.579) 25.108 (10.401) 28.039 Accounts payable (13.445) 22.397 (15.615) 26.053 Losses on translation of investments abroad - - - 2.945 Translation of balance sheets of subsidiaries abroad - - - (898) Taxes and charges payable (189.629) 185.315 (191.313) 185.599 Deferred taxes (70) (37.754) (70) (37.754) Provisions (70.513) 97.498 (72.613) 99.287 Contingencies (8.052) 10.141 (8.096) 11.145 Other (308) 3.443 (192) 2.236 (763.276) 426.212 (794.135) 450.325 Net monetary and foreign exchange variations (94.045) (256.684) (125.754) (188.830) 32 INCOME TAX AND SOCIAL CONTRIBUTION ON NET INCOME CREDITS (a) The Company records deferred tax credits on income tax and social contribution on net income losses when realization is probable, based on internal studies. Credits on temporary differences relating to non-deductible provisions, mainly labor contingencies, provisions and tax litigation, will be realized as and when the corresponding lawsuits are concluded. In accordance with generally accepted accounting practices, deferred taxes were also recorded in income for the year on the temporary difference between the tax and book bases of assets and liabilities, in view of adoption of the balance sheet (or liability) method. As the Parent Company’s tax basis is in historical Brazilian reais and the accounting basis is in US dollars (functional currency), variations in the exchange rate have a significant impact on the tax basis and, consequently, on the deferred income tax expense/income (see item “e” below).. 116
  • 117. Embraer - Empresa Brasileira de Aeronáutica S.A. Notes to the Financial Statements at December 31, 2009 and 2008 In thousands of Brazilian reais, unless otherwise indicated At December 31, 2009, the balances of income tax and social contribution losses, which do not prescribe, are as follows: Controladora Consolidado Income tax 48.088 98.862 Social contribution - 31.356 (b) The analysis of the deferred tax assets and liabilities at December 31, 2009 and 2008 is as follows: Parent Company Consolidated 2009 2008 2009 2008 Deferred tax assets on: Income tax losses 12.022 28.831 24.715 47.662 Social contribution losses - - 2.822 3.255 Unrecognized credits - - (9.416) (5.076) Tax losses to offset 12.022 28.831 18.121 45.841 Deferred tax assets on temporary differences: Temporarily non-deductible provisions 537.811 632.178 624.514 731.468 Effect of Law 11.638/07 296.067 50.504 293.042 51.758 833.878 682.682 917.556 783.226 Total assets 845.900 711.513 935.677 829.067 Defeered tax liabilities on temporary differences: Deferred research and development costs (602.733) (535.553) (615.338) (548.055) Revaluations of property, plant and equipment (13.589) (14.194) (13.589) (14.194) Special monetary restatement reserve (4.012) (4.359) (4.012) (4.359) Effect of Law 11.638/07 (59.570) (370.379) (51.814) (381.281) Other (5.641) (15.856) (60.290) (58.278) Total liabilities (685.545) (940.341) (745.043) (1.006.167) Based on the expectation of generation of taxable income, the Company recorded in its financial statements the deferred tax credits on the income tax and social contribution losses shown above. 117
  • 118. Embraer - Empresa Brasileira de Aeronáutica S.A. Notes to the Financial Statements at December 31, 2009 and 2008 In thousands of Brazilian reais, unless otherwise indicated The realization of the deferred tax assets at December 31, 2009 is estimated as follows: Parent Company Consolidated 2010 343.035 381.561 2011 246.767 266.846 2012 171.400 185.607 2013 and 2014 80.943 93.551 After 3.755 8.112 Total 845.900 935.677 The estimated realization of the deferred income and social contribution taxes on contingencies and taxes with suspended payment as a result of administrative or legal measures is based on the opinion of the external tax attorneys and internal management studies. (c) The deferred net tax assets presented above are shown in the financial statements as follows: Parent Company Consolidated 2009 2008 2009 2008 Deferred tax credits Current 218.331 373.276 256.857 404.508 Non-current 627.569 338.237 678.820 424.559 845.900 711.513 935.677 829.067 Deferred tax liabilities Current (71.006) (74.714) (91.929) (84.737) Non-current (614.539) (865.627) (653.114) (921.430) (685.545) (940.341) (745.043) (1.006.167) Deferred tax credits, net 160.355 (228.828) 190.634 (177.100) 118
  • 119. Embraer - Empresa Brasileira de Aeronáutica S.A. Notes to the Financial Statements at December 31, 2009 and 2008 In thousands of Brazilian reais, unless otherwise indicated (d) The analysis of the current and deferred income tax and social contribution income (expense) is as follows: Parent Company Consolidated 2009 2008 2009 2008 Deferred taxes On tax losses: Recording of tax losses (16.809) - (14.705) 6.706 Increase (decrease) in unrecognized credits - - (4.340) 1.115 (16.809) - (19.045) 7.821 Effect of reversals of temporary differences 405.991 (429.259) 395.453 (409.387) Effect of the funcional currency (11.881) 13.847 154 (9.947) 394.110 (415.412) 395.607 (419.334) Deferred income tax benefit (expense) 377.301 (415.412) 376.562 (411.513) Income tax expense for the year (25.062) (1.877) (77.525) (23.623) Total income tax and social contribution benefit (expense) 352.239 (417.289) 299.037 (435.136) (e) The reconciliation of the income tax and social contribution benefit and (expense) is as follows: Parent Company Consolidated 2009 2008 2009 2008 Profit before taxation 538.118 826.739 620.733 883.179 Income tax and social contribution expense at the standard rates - 34% 182.960 281.091 211.049 300.281 Non-deductible expenses: Tax on profits of overseas subsidiaries 13.393 131.399 - - Other 8.369 8.795 8.671 8.812 21.762 140.194 8.671 8.812 Income not taxable and/or tax incentives Equity in the earnings of subsidiaries (38.472) (111.522) - - Expenditure on research and development (art. 19 of Law 11196/05) (118.999) (87.945) (118.999) (87.945) Interest on own capital (59.051) (76.231) (59.051) (76.231) Difference between the tax and accounting bases of non-monetary (341.103) 226.010 (350.594) 214.134 items (see item "a" above) Effect of translation of income tax and social contribution expense 25.830 50.034 17.119 50.034 Other (25.166) (4.342) (7.232) 26.051 (556.961) (3.996) (518.757) 126.043 Income tax and social contribution expense (benefit) recorded in the statement of income (352.239) 417.289 (299.037) 435.136 119
  • 120. Embraer - Empresa Brasileira de Aeronáutica S.A. Notes to the Financial Statements at December 31, 2009 and 2008 In thousands of Brazilian reais, unless otherwise indicated The Company recorded deferred tax income of R$ 573,173 in 2009 and expense of R$ 600,029 in 2008, relating to the difference between the book and tax bases of assets and liabilities. As mentioned in Note 32.a, recognition of the above amounts, as well as the other adjustments arising from the application of Law 11.638/07 to current and deferred income taxes, resulted in an effective tax rate of 27.4% (benefit) in 2009 and 49.3% (expense) in 2008. The deferred income tax benefit generated in 2009, compared with the expense generated in 2008, is a result of the appreciation of the Brazilian real in 2009 against the US dollar, with a consequent increase in the tax basis as it is denominated in reais. In 2008, the deferred income tax expense is mainly a reflection of the devaluation of the Brazilian real against the US dollar. (f) Transition Tax Regime The Transition Tax Regime (RTT) will be effective until a law regulating the tax effects of the new accounting methods comes into force, aiming for tax neutrality. The regime is optional in calendar years 2008 and 2009, while complying with the following: (i) application to the two-year period 2008-2009, not to a single calendar year; and (ii) statement of the option on filing the Corporate Income Tax Return (DIPJ). The Company opted to adopt the RTT in 2008. Consequently, for purposes of determination of the income tax and social contribution on net income liabilities for the years ended 2009 and 2008, the Company used the prerrogatives established in the RTT. 32 FINANCIAL INSTRUMENTS Fair value of financial instruments The fair values of the Company’s financial assets and liabilities were determined using available market information and appropriate valuation methodologies. However, considerable judgment is required in interpreting market data to produce the most adequate estimates of the fair values. Accordingly, the estimates presented below are not necessarily indicative of the amounts that might be realized in a current market exchange. The use of different assumptions and/or methodologies could have a material effect on the estimated realizable values. At December 31, 2009, the Company had the following financial instruments: 120
  • 121. Embraer - Empresa Brasileira de Aeronáutica S.A. Notes to the Financial Statements at December 31, 2009 and 2008 In thousands of Brazilian reais, unless otherwise indicated (i) Cash and banks, financial investments, accounts receivable, other current assets and accounts payable. The book values approximate the realizable values. (ii) Investments These are mainly subsidiaries which are of strategic interest for the Company's operations, recorded on the equity method of accounting. Market value considerations do not apply. (iii) Loans and financing These are subject to interest at normal market rates, as mentioned in Note 17. The estimated market value was calculated based on the present value of future cash disbursements using interest rates that are currently available to the Company for issuing debt with similar terms and maturities. The estimated market value of the loans and financing, including short-term installments, is as follows: Consolidated 2.009 2.008 Book value 3.583.982 4.299.679 Market value 4.062.066 3.966.167 Financial risk management policy The Company has and follows a risk management policy to direct transactions, which involves the diversification of transactions and counterparties. This policy provides for regular monitoring and management of the nature and general situation of the financial risks in order to assess the results and the financial impact on cash flows. The credit limits and risk rating of the counterparties are also reviewed periodically. The Company's risk management policy was established by the Executive Board and aproved by the Board of Directors, and provides for the existence of a Financial Management Committee. Under this policy, the market risks are protected when there is no counterparty in the Company's transactions and when it is considered necessary to support the corporate strategy. The Company's internal control procedures provide for a consolidated monitoring and supervision of the financial results and of the impact on cash flows. 121
  • 122. Embraer - Empresa Brasileira de Aeronáutica S.A. Notes to the Financial Statements at December 31, 2009 and 2008 In thousands of Brazilian reais, unless otherwise indicated The Financial Management Committee assists the Financial Department in examining and reviewing information in relation to the economic scenario and its potential impact on the Company's operations, including risk management policies, procedures and practices. Under the terms of the financial management policy, the Company uses derivative financial instruments to manage certain risks, in order to hedge its operations against the risks of variations in interest and foreign exchange rates. The use of this type of instrument for speculative purposes is prohibited. (a) Credit risk The Company can incur losses on amounts receivable for sales of spare parts and services. To reduce this risk, customer credit analyses are made continuously. In relation to accounts receivable from aircraft sales, the Company may have credit risks until the financing structure has been completed. To minimize this credit risk, the Company operates with financial institutions to facilitate structuring of the financing. To cover possible losses on doubtful accounts, the Company has recorded a provision in an amount considered sufficient by management to cover losses on realization of the receivables. The financial management policy establishes that assets in the investment portfolios in Brazil and overseas should have a minimum risk classification in proportion to the investment grade, and also establishes a maximum exposure level of 15% of the stockholders' equity of the issuing financial institution and, in the case of a non-financial institution, a maximum of 5% of the total amount of the issue. Counterparty risks in derivative transactions are managed by contracting transactions through premier financial institutions and registration with the Clearing House for the Custody and Financial Settlement of Securities (CETIP). (b) Liquidity risk This is the risk of the Company not having sufficient liquid funds to honor its financial commitments as a result of a mismatch of terms or volumes of estimated receipts and payments. Assumptions for future disbursements and receipts are determined in order to manage cash liquidity in Brazilian reais and US dollars, and these are monitored daily by the Treasury department. 122
  • 123. Embraer - Empresa Brasileira de Aeronáutica S.A. Notes to the Financial Statements at December 31, 2009 and 2008 In thousands of Brazilian reais, unless otherwise indicated (c) Market risk (i) Interest rate risk This risk arises from the possibility that the Company might incur losses on account of interest rate fluctuations that increase the financial expense of loans and financing raised in the market or reduce the return on financial investments. Financial investments – Company policy for managing the risk of fluctuations in interest rates on financial investments is to measure market risk by the Value-At-Risk - VAR methodology, analyzing a variety of risk factors that might affect the return on the investments. The financial income determined in the year already reflects the effects of marking the assets in the Brazilian and foreign investment portfolios to market. Loans and financing – the Company uses derivative contracts to hedge against the risk of fluctuations in interest rates on certain transactions, and also continuously monitors market interest rates to evaluate the potential need to contract new derivative transactions to protect against the risk of volatility in these rates. At December 31, 2009, the consolidated financial investments and loans and financing, without taking into consideration the effects of the current swaps, are indexed as follows: Pre-fixed Post-fixed Amount % Amount % Financial investments 864.735 19,66% 3.534.219 80,34% In reais - - 2.130.997 48,44% In US dollars 761.426 17,31% 1.403.222 31,90% In other currencies 103.309 2,35% - 0,00% Loans 2.050.938 57,23% 1.533.044 42,77% In reais 301.656 8,42% 950.464 26,52% In US dollars 1.716.040 47,88% 550.826 15,37% In other currencies 33.242 0,93% 31.754 0,89% AFTER DERIVATIVES Pre-fixed Post-fixed Amount % Amount % Financial investments 864.735 19,66% 3.534.219 80,34% In reais - - 2.130.997 48,44% In US dollars 761.426 17,31% 1.403.222 31,90% In other currencies 103.309 2,35% - 0,00% Loans 2.055.971 57,23% 1.528.011 42,77% In reais 100.553 8,42% 945.431 26,52% In US dollars 1.922.176 47,88% 550.826 15,37% In other currencies 33.242 0,93% 31.754 0,89% 123
  • 124. Embraer - Empresa Brasileira de Aeronáutica S.A. Notes to the Financial Statements at December 31, 2009 and 2008 In thousands of Brazilian reais, unless otherwise indicated Post-fixed operations by exposure factor Without derivative effect With derivative effect Amount % Amount % Financial investments 3.534.219 100,00% 3.534.219 100,00% CDI 2.130.997 60,30% 2.130.997 60,30% LIBOR 1.403.222 39,70% 1.403.222 39,70% Loans 1.533.044 100,00% 1.528.011 100,00% TJLP 923.960 60,27% 813.976 53,27% LIBOR 550.826 35,93% 550.826 36,05% CDI 26.504 1,73% 131.455 8,60% (ii) Foreign exchange rate risk In accordance with the provisions of CVM Resolution No. 534 of January 29, 2008, the Company uses the US dollar as its functional currency. (Note 2.1a). Consequently, the Company's operations most exposed to exchange variation risks are those denominated in reais (labor costs, local expenses in Brazil, financial investments and loans and financing denominated in reais) as well as investments in subsidiaries in currencies other than the US dollar. Company policy for protection against foreign exchange risks is mainly based on seeking to maintain a balance between assets and liabilities indexed in each currency and daily management of foreign currency purchases and sales to ensure that, on realization of the transactions contracted, this natural hedge will actually occur. Rights and obligations denominated in currencies other than the functional currency may require derivative transactions, such as swap and Non-Deliverable Forward (“NDF”) transactions, to balance the portion of the Company's rights and obligations denominated in reais. The objective of such transactions is solely to hedge against exposure to equity and cash flow risks and they are not used for leverage or for speculative purposes. The appreciation of the Brazilian real against the US dollar can result in gains on current derivative transactions, which could be offset by a reduction in the equivalent amount of income in reais from sales to the foreign market, as exports in US dollars account for approximately 90% of the Company's revenues. 124
  • 125. Embraer - Empresa Brasileira de Aeronáutica S.A. Notes to the Financial Statements at December 31, 2009 and 2008 In thousands of Brazilian reais, unless otherwise indicated At December 31, 2009 and 2008, the Company's assets and liabilities, denominated by currency, were as follows: Consolidated Without the effect of With the effect of derivative transactions derivatives transactions 2009 2008 2009 2008 Loans and financing: Brazilian real 1.252.120 1.470.382 1.045.984 1.470.382 US dollar 2.266.867 2.668.999 2.473.003 2.668.999 Euro 64.996 108.758 64.996 108.758 Other currencies - 51.540 - 51.540 3.583.983 4.299.679 3.583.983 4.299.679 Suppliers: Brazilian real 43.234 73.508 43.234 73.508 US dollar 934.399 2.350.523 934.399 2.350.523 Euro 50.551 91.422 50.551 91.422 Other currencies 9.765 4.755 9.765 4.755 1.037.949 2.520.208 1.037.949 2.520.208 Total (1) 4.621.932 6.819.887 4.621.932 6.819.887 Cash and cash equivalents and financial investments: Brazilian real 2.130.997 1.827.002 2.130.997 1.827.002 US dollar 2.170.925 3.179.635 2.170.925 3.179.635 Euro 64.768 88.906 64.768 88.906 Other currencies 32.265 26.542 32.265 26.542 4.398.955 5.122.085 4.398.955 5.122.085 Trade accounts receivables: (*) Brazilian real 193.927 127.874 193.927 127.874 US dollar 417.335 765.074 417.335 765.074 Euro 145.207 227.481 145.207 227.481 Other currencies 547 304 547 304 757.016 1.120.733 757.016 1.120.733 Total (2) 5.155.971 6.242.818 5.155.971 6.242.818 Nex exposure (1 - 2): Brazilian real (1.029.569) (410.986) (1.235.705) (410.986) US dollar 613.006 1.074.813 819.142 1.074.813 Euro (94.428) (116.207) (94.428) (116.207) Other currencies (23.047) 29.449 (23.047) 29.449 (*) Without the effect of the provision for doubtful accounts 125
  • 126. Embraer - Empresa Brasileira de Aeronáutica S.A. Notes to the Financial Statements at December 31, 2009 and 2008 In thousands of Brazilian reais, unless otherwise indicated (iii) Derivatives The Company uses derivatives to protect its operations against the risk of fluctuations in foreign exchange and interest rates; they are not used for speculative purposes. Gains and losses on derivative transactions are recorded monthly in income, taking into account the realizable value of these instruments. The provision for unearned gains and losses is recorded in the balance sheet under Other provisions (in the case of losses) or Other credits (in the case of gains), and the contra item under Exchange variation income (expense). Interest swap contracts These are contracted with the main objective of exchanging the debt at floating rates for fixed interest rates, and exchanging US dollars for Brazilian reais or vice-versa, as applicable. At December 31, 2009, the Company had no contracts subject to margin calls. At December 31, 2009, the Company had swap contracts by which it effectively converted liabilities of R$ 309,221 with and without recourse from a fixed interest rate of 5.97% p.a. to a floating rate of LIBOR + 1.21% p.a. The Company also contracted swaps of R$ 104,000 converting financing transactions subject to fixed interest of 4.50% p.a. to an average weighted rate of 42.33% of the CDI p.a. 126
  • 127. Embraer - Empresa Brasileira de Aeronáutica S.A. Notes to the Financial Statements at December 31, 2009 and 2008 In thousands of Brazilian reais, unless otherwise indicated These swap transactions are shown in the following table: Gain (loss) December 31, 2009 December 31, 2008 Average Notional rate Original Present amount(in agreed - Book Market Book Market Purpose Type currency currency thousands) % value value value value Project development Libor + 310.304 US$ US$ 0,875 to - - (24.181) (24.181) Company asset "Swap" 1,75%a.a. Company liability "Swap" 310.304 5,92% a.a. Counterparty Citibank - - (16.087) (16.087) - - (8.094) (8.094) Santander Recourse and non-recourse debt 309.221 Company asset "Swap" 5,97%a.a. US$ US$ 25.327 25.327 67.391 67.391 309.221 Libor + Company liability "Swap" 1,21%a.a. Counterparty Natixis 25.327 25.327 67.391 67.391 Export financing 4,50% 104.000 Company asset "Swap" a.a. R$ R$ (837) (837) 2.569 2.569 42,33% 104.000 Company liability "Swap" CDI a.a. Counterparty ItauBBA (837) (837) Banco do Brasil - - 2.569 2.569 Total 24.490 24.490 45.779 45.779 Swaps – these are valued at present value, at the market rate on the base date, of the future flows determined by applying the contractual rates up to maturity and discounting to present value on the date of the financial statements at the current market rates. 127
  • 128. Embraer - Empresa Brasileira de Aeronáutica S.A. Notes to the Financial Statements at December 31, 2009 and 2008 In thousands of Brazilian reais, unless otherwise indicated Foreign exchange swaps The Company contracted swaps amounting to a total of R$ 205,560 (equivalent to US$ 110,373) converting a portion of the financing transactions subject to interest at the Long-term interest rate - TJLP (R$ 109,935) and certain transactions subject to a fixed interest rate of 4.5% p.a. (R$ 95,625) into U.S. dollars with a fixed weighted interest rate equivalent to -2.07% p.a, as shown below: Gain (loss) December 31, 2009 December 31, 2008 Notional Original Present amount(in Average rate Book Market Market Purpose Type currency currency thousands) agreed - % value value Book value value Export financing Company asset "Swap" 95.625 4,5% a.a. R$ US$ 4.921 4.921 - - 95.625 Company liability "Swap" USD -1,85% a.a. Counterparty Citibank 4.921 4.921 - - Project development URTJLP + 5,00% 109.935 Company asset "Swap" a.a. TJLP US$ 5.326 5.326 - - 109.935 Company liability "Swap" USD -2,25% a.a. Counterparty 5.326 5.326 - - Santander Total 10.247 10.247 - - Sensitivity analysis As determined by the CVM Resolution No. 475/08, in order to present a positive and negative variation of 25% and 50% in the risk variable considered, a sensitivity analysis of the financial instruments is presented below, including derivatives, describing the effects on the monetary and exchange variations and on the financial income and expense determined on the balances recorded at December 31, 2009, in the event of the occurrence of such variations in the risk component. However, statistical simplifications were made in isolating the variability of the risk factor in question. Consequently, the following estimates do not necessarily represent the amounts that might be determined in future financial statements. The use of different hypotheses and/or methodologies could have a material effect on the estimates presented below. 128
  • 129. Embraer - Empresa Brasileira de Aeronáutica S.A. Notes to the Financial Statements at December 31, 2009 and 2008 In thousands of Brazilian reais, unless otherwise indicated Methodology used: Based on the balances shown in the tables in item (c) above, and assuming that these remain constant, we calculated the interest and exchange variation differential for each of the projected scenarios. In the valuation of amounts exposed to foreign exchange risk, we took into consideration only the risks in relation to the financial statements, without including transactions subject to pre- fixed interest. The probable scenario is based on the Company’s estimates for each of the variables indicated, and positive and negative variations of 25% and 50% were applied on the rates in force on the date of the financial statements. In the sensitivity analysis of derivative contracts, positive and negative variations of 25% and 50% were applied on the market curve (BM&F) on the date of the financial statements. (a) Interest risk factor Additional variations in book balances (*) Amounts Probable Risk factor exposed at -50% -25% 25% 50% scenario 12.31.2009 Financial investments CDI 2.130.997 (91.100) (45.550) 1.492 45.550 91.100 Loans CDI 26.504 1.133 567 (19) (567) (1.133) Net impact CDI 2.104.492 (89.967) (44.983) 1.473 44.983 89.967 Financial investments LIBOR 1.403.222 (3.015) (1.507) 1.548 1.507 3.015 Loans LIBOR 550.826 1.183 592 (608) (592) (1.183) Net impact LIBOR 852.396 (1.832) (915) 940 915 1.832 Financial investments TJLP - - - - - - Loans TJLP 923.960 27.719 13.859 - (13.859) (27.719) Net impact TJLP (923.960) 27.719 13.859 - (13.859) (27.719) Rate considered CDI 8,55% 4,28% 6,41% 8,62% 10,69% 12,83% Rate considered LIBOR 0,43% 0,21% 0,32% 0,54% 0,54% 0,64% Rate considered TJLP 6,00% 3,00% 4,50% 6,00% 7,50% 9,00% 129
  • 130. Embraer - Empresa Brasileira de Aeronáutica S.A. Notes to the Financial Statements at December 31, 2009 and 2008 In thousands of Brazilian reais, unless otherwise indicated (b) Foreign exchange risk factor Additional variations in book balances (*) Amounts Risk exposed at Probable factor 12.31.2009 -50% -25% scenario 25% 50% Assets 2.586.979 1.293.489 646.745 (87.361) (646.745) (1.293.489) Financial investments Reais 2.130.997 1.065.498 532.749 (71.963) (532.749) (1.065.498) Other assets Reais 455.982 227.991 113.996 (15.398) (113.996) (227.991) Liabilities 2.646.808 (1.323.404) (661.702) 89.382 661.702 1.323.404 Loans and financing Reais 1.252.120 (626.060) (313.030) 42.284 313.030 626.060 Other liabilities Reais 1.394.688 (697.344) (348.672) 47.098 348.672 697.344 Total-net (59.829) (29.915) (14.957) 2.021 14.957 29.915 Exchange rate considered 1,7412 0,8706 1,3059 1,8000 2,1765 2,6118 (c) Derivative contracts Additional variations in book balances (*) Market Probable Risk factor value at -50% -25% 25% 50% scenario 12.31.2009 Interest Swap LIBOR 25,327 35,278 17,028 (7,600) (15,959) (30,979) Interest Swap CDI (837) 5,699 2,509 (458) (2,972) (5,334) Exchange rate swap Reais/US$ 10,247 81,177 41,851 (2,829) (36,906) (76,342) Total 34,737 122,154 61,388 (10,887) (55,837) (112,655) LIBOR rate considered - % 0.43% 0.21% 0.32% 0.54% 0.54% 0.64% CDI rate considered - % 8.55% 4.28% 6.41% 8.62% 10.69% 12.83% Exchange rate considered 1.7412 0.8706 1.3059 1.8000 2.1765 2.6118 (*) The positive and negative variations of 25% and 50% were applied on the rates in effect at 12.31.2009. Investment Funds The Company maintains a structure of exclusive funds, which are consolidated in the financial statements, in accordance with CVM Instruction No. 408/04. 130
  • 131. Embraer - Empresa Brasileira de Aeronáutica S.A. Notes to the Financial Statements at December 31, 2009 and 2008 In thousands of Brazilian reais, unless otherwise indicated These funds were set up with the objective of outsourcing management of the Company’s short-term financial investments and the managers contracted have discretion, while respecting the restrictions established in the investment policy, to select the assets that will comprise the investment portfolio. All the funds are classified as multimarket and may hold derivatives in their portfolio as a means of attaining the proposed profit objective. These derivatives relate exclusively to the positions taken by the funds themselves and are in no way connected with the derivatives contracted by the Company as a hedge against the cash and balance sheet risks of its operations. The following tables show the derivatives held by the funds in the year ended December 31, 2009, and the sensitivity analysis of the main risk factor to which the instruments are exposed. Statistical simplifications were made in isolating the risk variable in question and consequently, the following estimates do not necessarily represent the amounts that might be determined in future financial statements. The use of different hypotheses and/or methodologies could have a material effect on the estimates presented below. (a) Description of the contracts Reference No. of Unit market value at Type contracts Due date price 12.31.2009 Sales - DI futures 25 Jul. 2010 95,751 2,394 Sales - DI futures 44 Jan. 2011 90,491 3,982 Sales - DI futures 1,794 Jul.2011 85,171 152,797 Sales - DI futures 121 Jan. 2012 79,945 9,673 Sales - US dollar futures 19 Jan. 2010 1.7412 1,654 Total 170,500 (b) Sensitivity analysis - Additional variations in the return of the fund Additional variations in the return of the fund Risk factor Reference value Probable 12.31.2009 -50% -25% Scenario 25% 50% CDI 168,846 (14,245) (7,162) (319) 5,699 11,551 US dollar 1,654 827 414 (54) (414) (827) Total 170,500 (13,418) (6,748) (373) 5,285 10,724 Rates used CDI 8.55% 4.28% 6.41% 8.62% 10.69% 12.83% Exchange rate 1.7412 0.8706 1.3059 1.8000 2.1765 2.6118 131
  • 132. Embraer - Empresa Brasileira de Aeronáutica S.A. Notes to the Financial Statements at December 31, 2009 and 2008 In thousands of Brazilian reais, unless otherwise indicated 34 JOINT LIABILITIES, RESPONSIBILITIES AND COMMITMENTS (a) The Company is subject to trade-in options for 15 aircraft. The right to exercise the option was used for 12 aircraft up to March 31, 2008, and these aircraft were received by the Company by April 30, 2009. Exercising the option for the remaining three aircraft is tied to compliance with contractual clauses on the part of the customer. These options establish that the price of the asset given in payment may be put towards the purchase price of a new and more up-to-date model produced by the Company. The trade-in price is based on a percentage of the original purchase price of the aircraft. The Company continues to monitor all trade-in commitments in order to anticipate adverse situations. Based on the Company’s current estimates and third- party appraisals, management believes that it will be possible to sell any aircraft accepted as a trade-in on the market without material gains or losses. (b) Financial guarantees Financial guarantees may be triggered if customers do not meet their obligations during the financing term established in the respective agreements. The financial guarantees support the guaranteed parties to mitigate any losses due to default. The corresponding aircraft are attached as collateral for the financing agreements. The value of the tied aircraft may be adversely affected by market conditions. In the event of default, the Company normally acts as an agent for the guaranteed party for the refurbishment and resale of the aircraft. The Company may be entitled to a fee for such resale services. Typically, a claim under the guarantee should be made only upon surrender of the tied aircraft for resale. Residual value guarantees normally complement the function of financial guarantees in sales financing structures, providing third parties with a specific guaranteed asset value, generally at the end of the financing agreement. In the event of a decrease in market value of the underlying asset, the Company will bear the difference between the specific guaranteed amount and the fair market value. The Company’s exposure is reduced by the fact that, in order to benefit from the guarantee, the guaranteed party has to return the tied asset under specific conditions of use. Residual value guarantees typically guarantee that, on average 15 years after delivery of the aircraft, there will be a residual market value of a percentage of the original sale price. The majority of residual value guarantees are capped and, consequently, the guarantee exposure is limited on average to 18% of the original sale price. Currently, based on third-party valuations, management is of the opinion that certain agreed residual values may exceed the valuation amount for certain aircraft already delivered. Accordingly, based on statistical information, the Company recorded a provision to cover financial guarantees in relation to aircraft delivered by December 31, 2009, totaling R$ 223,064 (R$ 63,963 at December 31, 2008). In 2009 the Company recorded a provision of R$ 179,340 in relation to the Mesa Air Group, as mentioned in Note 40. 132
  • 133. Embraer - Empresa Brasileira de Aeronáutica S.A. Notes to the Financial Statements at December 31, 2009 and 2008 In thousands of Brazilian reais, unless otherwise indicated Certain sales contracts contain clauses guaranteeing minimum aircraft performance levels subsequent to delivery, based on predetermined operating targets. If the aircraft subject to such guarantees do not achieve the minimum performance indices after delivery, the Company may be obliged to reimburse its customers for the increase in operating costs and services incurred, based on formulae defined in the agreements. Losses relating to such performance guarantees are recognized when known or when, in management's estimation, circumstances indicate that the aircraft will not meet the minimum performance requirement. The provisions recorded are considered sufficient to cover the estimates of the Company’s potential losses. (c) Leases The subsidiary EAH is responsible for non-cancelable operating leases of land and equipment. These leases expire at various dates up to 2020. The facilities of the subsidiary Embraer Aircraft Customer Services, Inc. - EACS are located on land leased under a contract that expires in 2020. The Company has lease agreements for land, IT equipment and vehicles, with payments scheduled as follows: Year Parent Company Consolidated 2010 5.755 10.558 2011 1.958 6.407 2012 209 4.667 2013 - 4.361 2014 - 3.269 After 2015 - 19.815 Total 7.922 49.077 133
  • 134. Embraer - Empresa Brasileira de Aeronáutica S.A. Notes to the Financial Statements at December 31, 2009 and 2008 In thousands of Brazilian reais, unless otherwise indicated 35 INSURANCE At December 31, 2009, the insurance cover for property, plant and equipment and inventories taken out with third parties amounted to R$ 14,840,198, and the amounts are considered to be sufficient to cover the risks involved. This amount does not include the insurance of vehicles, which are covered at market value. . Line Amount insured Fire of the facilities 9,612,760 Aviation 5,227,438 14,840,198 In addition to the above cover, the Company maintains civil liability policies for products, general civil liability and directors’ liability (D&O) at amounts that management regards as adequate. 36 ADDITIONAL CASH FLOW INFORMATION Parent Company Consolidated 2009 2008 2009 2008 Payments during the year Income tax and social contribution on net income - 324 31,416 34,186 Interest 160,776 149,506 171,664 153,898 Transactions not involving cash disbursements Additions to property, plant and equipment through capitalization of interest 2,121 3,573 2,121 3,573 Payment of taxes with suspended liability with judicial deposits 59,954 - 59,954 - 134
  • 135. Embraer - Empresa Brasileira de Aeronáutica S.A. Notes to the Financial Statements at December 31, 2009 and 2008 In thousands of Brazilian reais, unless otherwise indicated 37 REVIEW OF COST BASE AND PERSONNEL As a result of the unprecedented crisis that affected the world economy, and the air transport sector in particular, Embraer was obliged to review its cost base and its personnel, adjusting them to the new circumstances of demand for commercial and executive aircraft. The personnel reductions, representing around 20% of the Company's staff of 21,362 employees at January 31, 2009, excluding Harbin Embraer Aircraft Industry Company Ltd. and Ogma – Indústria Aeronáutica de Portugal S.A, were concentrated on the operating, administrative and management personnel, including elimination of a hierarchical level of its management structure. The total cost of these dismissals is recorded under “Other operating income and expense” (Note 30). 38 SEGMENT INFORMATION - CONSOLIDATED I - Commercial Aviation Market The Commercial Aviation market operations mainly involve the development, production and sale of commercial jets and supplying support services, particularly in the regional aviation segment. • The ERJ 145 family, comprising the ERJ 135, ERJ 140 and ERJ 145 jets, certified to operate with 37, 44 and 50 seats, respectively. At December 31, 2009, the Company had 8 firm orders for this aircraft family (number unaudited). • The EMBRAER 170/190 family, comprising the EMBRAER 170, with 70 seats, EMBRAER 175, with 76 seats, EMBRAER 190, with 100 seats and the EMBRAER 195, with 108 seats. The EMBRAER 170 model has been operating commercially since 2004, the EMBRAER 175 and EMBRAER 190 models started commercial operations in 2006, and the EMBRAER 195 model in 2007. As of December 31, 2009, the Company had 257 firm orders for this family of aircraft (number unaudited). II - Defense Market The Defense market operations mainly involve research, development, production, modification and support for military defense aircraft, and related products and systems. The Company’s principal customer is the Brazilian Defense Ministry and, in particular, the Brazilian Air Force. 135
  • 136. Embraer - Empresa Brasileira de Aeronáutica S.A. Notes to the Financial Statements at December 31, 2009 and 2008 In thousands of Brazilian reais, unless otherwise indicated • Super Tucano - a light attack aircraft, specially developed to operate in severe climates, subject to extremes of temperature and humidity, and equipped with sophisticated navigation and attack, training and flight simulation systems. • AMX - an advanced ground attack jet, developed and produced through a cooperation agreement between Brazil and Italy. Embraer was contracted by the Brazilian Air Force to modernize these aircraft. • F-5BR Program - modernization of the F-5 jet fighters. • The ISR family (Intelligence, Surveillance and Reconnaissance), based on the ERJ 145 platform, includes the EMB 145 AEW&C - Airborne Early Warning and Control, EMB 145 AGS - Remote Sensing and Air to Ground Surveillance and P-99 - Maritime Patrol and Anti-submarine Warfare models. Originally developed for the SIVAM program, different versions were ordered by the Greek and Mexican governments. • KC-390 – The scope of the KC-390 Program is to develop and produce two prototype aircraft for military transport and in-flight refuelling. • 190PR – Based on the EMBRAER 170/190 platform, this jet is intended for transportion of the President of the Republic of Brazil and members of his entourage. III - Executive Aviation Market The Executive Aviation market operations mainly involve the development, production and sale of executive jets and providing support services for this market segment. • Legacy 600 - executive jet in the Super Mid Size category using the ERJ 135 regional jet platform. • Legacy 500 and Legacy 450– executive jets in the Mid Size and Midlight categories, respectively, launched in April 2008. • Phenom - executive jets in the Very Light Jet, Entry and Light Jet categories, comprising the Phenom 100 model, the first deliveries of which were made in the third quarter of 2008, and the Phenom 300, deliveries of which started in 2009. 136
  • 137. Embraer - Empresa Brasileira de Aeronáutica S.A. Notes to the Financial Statements at December 31, 2009 and 2008 In thousands of Brazilian reais, unless otherwise indicated • Lineage – An ultra-large executive jet based on the EMBRAER 190 commercial aircraft platform. Deliveries of this model started in 2009. IV- Aviation Services The Aviation Services segment, introduced in 2007, relates mainly to: (i) after sales support services to customers, including maintenance and training; (ii) sale of spare parts for the aircraft manufactured by the Company; and (iii) provision of aircraft maintenance services and components. V - Other Operations in this segment relate to operating leases of aircraft, supply of structural parts and mechanical and hydraulic systems, and production of agricultural crop-spraying aircraft. For a better presentation of the financial statements, the Company reallocated the amounts previously presented as “unallocated” in accordance with the percentage share of each segment. Moreover, in view of the expansion of new markets and to improve its business management, the Company made changes in the segregation of the markets in which it operates. 137
  • 138. Embraer - Empresa Brasileira de Aeronáutica S.A. Notes to the Financial Statements at December 31, 2009 and 2008 In thousands of Brazilian reais, unless otherwise indicated In millions of reais Net sales per geographic area 2009 2008 Reclassified North America Commercial aviation 1.215,6 4.129,4 Defense 17,5 50,2 Executive aviation 573,5 758,4 Aviation services 598,4 426,9 Other 61,2 93,4 2.466,2 5.458,2 Europe Commercial aviation 2.760,0 1.097,3 Defense 20,8 31,6 Executive aviation 330,9 405,0 Aviation services 356,4 464,0 Other 26,4 14,5 3.494,5 2.012,4 Asia Pacific Commercial aviation 1.539,5 1.963,8 Defense 143,4 19,8 Executive aviation 464,4 270,5 Aviation services 101,2 105,1 Other 3,1 7,4 2.251,6 2.366,6 Latin America, except Brazil Commercial aviation 319,3 497,7 Defense 331,0 445,2 Executive aviation 85,2 171,1 Aviation services 11,1 18,8 Other 6,5 9,4 753,1 1.142,2 Brazil Commercial aviation 488,7 - Defense 426,9 395,5 Executive aviation 136,5 - Aviation services 30,3 27,2 Other 63,1 98,9 1.145,5 521,7 Other Commercial aviation 457,5 150,2 Defense 9,4 11,4 Executive aviation 103,6 14,2 Aviation services 68,9 69,9 Other 62,3 - 701,8 245,7 Total 10.812,7 11.746,8 138
  • 139. Embraer - Empresa Brasileira de Aeronáutica S.A. Notes to the Financial Statements at December 31, 2009 and 2008 In thousands of Brazilian reais, unless otherwise indicated In millions of reais 2009 2008 Gross profit per segment Reclassified Net sales Commercial aviation 6.780,7 7.838,5 Defense 948,9 953,8 Executive aviation 1.694,1 1.619,1 Aviation services 1.166,4 1.111,9 Other 222,6 223,5 10.812,7 11.746,8 Cost of sales Commercial aviation (5.648,6) (6.664,3) Defense (737,8) (719,0) Executive aviation (1.393,3) (1.151,5) Aviation services (818,4) (604,3) Other (136,0) (200,6) (8.734,1) (9.339,7) Gross profit Commercial aviation 1.132,1 1.174,2 Defense 211,1 234,8 Executive aviation 300,8 467,6 Aviation services 348,0 507,6 Other 86,5 22,9 2.078,5 2.407,1 Operating expenses Commercial aviation (881,9) (682,9) Defense (114,4) (124,2) Executive aviation (119,5) (314,9) Aviation services (162,4) (163,5) Other (68,4) (9,1) (1.346,8) (1.294,6) Operating profit before financial income (expenses) 731,7 1.112,5 Property, plant and equipment Commercial aviation 770,8 1.060,9 Defense 46,6 43,5 Executive aviation 186,2 224,6 Aviation services 235,9 286,6 Other 538,3 684,6 1.777,8 2.300,2 Advances from customers Commercial aviation 777,2 1.733,3 Defense 539,0 584,4 Executive aviation 662,3 1.228,8 Aviation services 44,5 187,6 Other 8,3 6,7 2.031,3 3.740,8 139
  • 140. Embraer - Empresa Brasileira de Aeronáutica S.A. Notes to the Financial Statements at December 31, 2009 and 2008 In thousands of Brazilian reais, unless otherwise indicated Trade accounts receivable Commercial aviation 6,1 - Defense 220,0 231,1 Executive aviation 0,6 - Aviation services 396,8 662,8 Other 68,8 144,0 692,2 1.037,9 39 RECONCILIATION OF THE DIFFERENCES BETWEEN NET INCOME FOR THE YEAR AND STOCKHOLDERS’ EQUITY IN ACCORDANCE WITH ACCOUNTING PRACTICES ADOPTED IN BRAZIL (BR GAAP) AND GENERALLY ACCEPTED ACCOUNTING PRACTICES IN THE USA OF AMERICA (US GAAP), IN BOTH US DOLLARS AND BRAZILIAN REAIS THOUSANDS. Stockholders’ equity 2009 2008 US$ R$ US$ R$ Stockholders’ equity in BR GAAP 2,883,531 5,020,805 2,554,784 5,970,531 Intangible assets – product development costs (i) (695,244) (1,210,559) (665,523) (1,555,327) Deferred income tax and social contribution on net income (ii) 127,668 222,296 303,714 709,780 Other 112,678 196,194 86,264 201,598 Stockholders’ equity in US GAAP 2,428,633 4,228,736 2,279,239 5,326,582 Net income 2009 2008 US$ R$ US$ R$ Net income for the year in BR GAAP 456,953 894,592 261,420 428,750 Product development costs (i) (26,182) (66,268) (58,014) (47,669) Deferred income tax and social contribution on net income (ii) (176,926) (369,773) 182,117 332,344 Other (5,327) (9,727) 3,207 7,245 Net income for the year in US GAAP 248,518 448,824 388,730 720,670 140
  • 141. Embraer - Empresa Brasileira de Aeronáutica S.A. Notes to the Financial Statements at December 31, 2009 and 2008 In thousands of Brazilian reais, unless otherwise indicated The financial statements in US GAAP are prepared and presented only in US dollars, and the amounts presented in Brazilian reais were translated from US dollars based on the criteria mentioned in Note 2 (i), with the sole objective of providing additional information for analysis. Accordingly, these amounts in Brazilian reais should not be interpreted as financial statements prepared by the Company in US GAAP and presented in Brazilian reais. i) Intangible assets – product development costs Costs incurred in product development are recorded for BR GAAP purposes in intangible assets and subsequently charged to income through amortization of the intangible asset, in accordance with the number of aircraft delivered. For US GAAP purposes, these costs are appropriated directly to income as incurred. (ii) Deferred income tax and social contribution on net income These are calculated on the differences in accounting practices between BR GAAP and US GAAP, mainly on product development costs and on the effects of foreign exchange gains and losses on the book values of non-monetary assets, whose tax effects are only recorded for US GAAP purposes as these assets are realized. 40 SUBSEQUENT EVENTS a) MESA Air Group On January 5, 2010, the Embraer customer MESA Air Group filed for Chapter 11 in the Southern District Court of the city of New York, in the USA of America. This company, whose fleet includes 36 ERJ 145 aircraft, purchased from the Company under structured financing agreements, with the Company providing a financial guarantee to the financing agent, advised that it will shortly be presenting an economic restructuring plan and that it intends to maintain its operations and the operating agreements with other airlines. Consequently, at December 31, 2009, the Company recorded a provision of R$ 179,340, based on the best current estimates, to cover losses on these financial guarantees (Note 23). At December 31, 2009, the Company had US$ 74.4 million in guarantee deposits in relation to these transactions (Note 11). 141
  • 142. Embraer - Empresa Brasileira de Aeronáutica S.A. Notes to the Financial Statements at December 31, 2009 and 2008 In thousands of Brazilian reais, unless otherwise indicated b) Dividends and Stock option plan At an ordinary and extraordinary shareholders’ meeting held on April 19, 2010, our shareholders approved a dividend distribution totaling R$ 55,201 (Note 25), corresponding to R$ 0,076279 per share, which initial date for the payments is June 17, 2010, bearing no interests. At this same date, the shareholders approved a stock option plan for management and employees, including those of our subsidiaries. A continuous employment of at least two years with us would be necessary in order to be eligible to participate in this plan. Under the terms of the plan, we were authorized to grant options up to 1.5% of common shares over an indefinite period. The options granted to each employee will vest as follows: 20% after one year from the date granted, an additional 30% after two years and the remaining 50% after three years; the options vested during the first two years can be exercised until the third year. * * * * 142
  • 143. 143