As filed with the Securities and Exchange Commission on April 29, 2010                                                  UN...
TABLE OF CONTENTS                                                                        Page                             ...
10I.   Subsidiary Information                                                  118ITEM 11.   QUANTITATIVE AND QUALITATIVE ...
INTRODUCTION     In this annual report, “Embraer,” “we,” “us” or “our” refer to Embraer-Empresa Brasileira de Aeronáutica ...
prepare, financial statements in accordance with Law No. 6,404 of December 15, 1976, as amended, or Brazilian Corporate La...
a down payment, for which we have reserved a place on one of our production lines. Every time we refer to our backlog in t...
The words “believe,” “may,” “will,” “forecast,” “estimate,” “plan,” “continue,” “anticipate,” “intend,” “expect” and simil...
PART IITEM 1.      IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS     Not applicable.ITEM 2.      OFFER STATISTICS ...
At and for the year ended December 31,                                                                                    ...
consequence, short-term repurchase transactions and bank certificates of deposits with high liquidity are now classified a...
At and for the year ended December 31,                                                       2009               2008      ...
Source: Central Bank.(1) Represents the average of the exchange rates on the last day of each month during the relevant pe...
2003, we have delivered 36 ERJ 145 aircraft to Mesa. As a result of our aircraft sales to Mesa and based on our risk asses...
Key suppliers. Our risk-sharing partners develop and manufacture significant portions of our aircraft, including the engin...
“cap”) and, therefore, on average, our residual value guarantee exposure is limited to 18% of the original sale price. In ...
Although the ProEx program is currently in compliance with WTO rules, other export financing programs available to ourcust...
of these cash contributions had become nonrefundable through 2009. If we cancel the production of the Phenoms 100/300 fami...
scope clauses could also lead some of our customers who have purchased options to acquire our regional and mid-capacity je...
•     liquidity of domestic capital and lending markets;     •     tax policies; and     •     other political, diplomatic...
respectively, in 2008 it increased 31.9% mainly as a result of the global economic crisis. In 2009, the real to U.S. dolla...
The Brazilian government has veto power over change of control, change of name, trademark or corporate purpose and over th...
Holders of ADSs may not be able to exercise their voting rights.      Holder of ADSs may only exercise their voting rights...
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20 f 2009 en

  1. 1. As filed with the Securities and Exchange Commission on April 29, 2010 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 20-F ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended: December 31, 2009 Commission file number 333-132289 EMBRAER-EMPRESA BRASILEIRA DE AERONÁUTICA S.A. (Exact name of Registrant as specified in its charter) EMBRAER – Brazilian Aviation Company Inc. (Translation of Registrant’s name into English) Federative Republic of Brazil (Jurisdiction of Incorporation) Avenida Brigadeiro Faria Lima, 2170 12227-901 São José dos Campos, São Paulo, Brazil (Address of principal executive offices) Securities registered or to be registered pursuant to Section 12(b) of the Act: Title of each class: Name of each exchange on which registered: Common shares, without par value (represented by, and traded only in the form of, American Depositary Shares (evidenced by American Depositary Receipts), with each American Depositary Share representing four common shares) New York Stock ExchangeUS$500,000,000 6.375% Guaranteed Notes due 2020 of Embraer Overseas Ltd. Guaranteed by Embraer- Empresa Brasileira de Aeronáutica S.A. New York Stock Exchange Securities registered or to be registered pursuant to Section 12(g) of the Act. None. Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act. Title of each class: US$500,000,000 6.375% Guaranteed Notes due 2017 of Embraer Overseas Ltd. Guaranteed by Embraer- Empresa Brasileira de Aeronáutica S.A. Number of outstanding shares of each of the issuer’s classes of capital or common stock as of December 31, 2009: 740,465,044 common shares, without par valueIndicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the SecuritiesAct. Yes ⌧ NoIf this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant toSection 13 or 15(d) of the Securities Exchange Act of 1934. Yes No ⌧Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past 90 days. Yes No ⌧Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definitionof “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. Large Accelerated Filer ⌧ Accelerated Filer Non-accelerated filerIndicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:U.S. GAAP ⌧ International Financial Reporting Standards as issued by the International Accounting StandardsBoard OtherIndicate by check mark which financial statement item the registrant has elected to follow. Item 17 Item 18 ⌧If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the ExchangeAct). Yes No ⌧
  2. 2. TABLE OF CONTENTS Page Part IITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS 5ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE 5ITEM 3. KEY INFORMATION 5 3A. Selected Financial Data 5 3B. Capitalization and Indebtedness 9 3C. Reasons for the Offer and Use of Proceeds 9 3D. Risk Factors 9ITEM 4. INFORMATION ON THE COMPANY 20 4A. History and Development of the Company 20 4B. Business Overview 23 4C. Organizational Structure 42 4D. Property, Plant and Equipment 42ITEM 4.A UNRESOLVED STAFF COMMENTS 45ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS 45 5A. Operating Results 46 5B. Liquidity and Capital Resources 63 5C. Research and Development 67 5D. Trend Information 68 5E. Off-Balance Sheet Arrangements 72 5F. Tabular Disclosure of Contractual Obligations 74ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES 75 6A. Directors and Senior Management 75 6B. Compensation 81 6C. Board Practices 82 6D. Employees 84 6E. Share Ownership 85ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS 85 7A. Major Shareholders 85 7B. Related Party Transactions 86 7C. Interests of Experts and Counsel 88ITEM 8. FINANCIAL INFORMATION 88 8A. Consolidated Statements and Other Financial Information 88 8B. Significant Changes 93ITEM 9. THE OFFER AND LISTING 93 9A. Offer and Listing Details 93 9B. Plan of Distribution 95 9C. Markets 95 9D. Selling Shareholders 98 9E. Dilution 98 9F. Expenses of the Issue 98ITEM 10. ADDITIONAL INFORMATION 98 10A. Share Capital 98 10B. Memorandum and Articles of Association 98 10C. Material Contracts 111 10D. Exchange Controls 111 10E. Taxation 112 10F. Dividends and Paying Agents 117 10G. Statements by Experts 118 10H. Documents on Display 118 i
  3. 3. 10I. Subsidiary Information 118ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 118ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES 122 12A. Debt Securities 122 12B. Warrants and Rights 122 12C. Other Securities 122 12D. American Depositary Shares 122 Part IIITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES 123ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS 123ITEM 15. CONTROLS AND PROCEDURES 128ITEM 16.A FINANCIAL EXPERT 129ITEM 16.B CODE OF ETHICS 129ITEM 16.C PRINCIPAL ACCOUNTANT FEES AND SERVICES 129ITEM 16.D EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES 130ITEM 16.E PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS 130ITEM 16.F CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT 130ITEM 16.G CORPORATE GOVERNANCE 131 Part IIIITEM 17. FINANCIAL STATEMENTS 133ITEM 18. FINANCIAL STATEMENTS 133ITEM 19. EXHIBITS 133 ii
  4. 4. INTRODUCTION In this annual report, “Embraer,” “we,” “us” or “our” refer to Embraer-Empresa Brasileira de Aeronáutica S.A., formerly knownas Rio Han Empreendimentos e Participações S.A. (as successor in interest to Embraer-Empresa Brasileira de Aeronáutica S.A., orformer Embraer, as predecessor company, as a result of the merger of former Embraer with and into Embraer pursuant to thecorporate reorganization described below), and its consolidated subsidiaries (unless the context otherwise requires). All referencesherein to the “real,” “reais” or “R$” are to the Brazilian real, the official currency of Brazil. All references to “US$,” “dollars” or“U.S. dollars” are to United States dollars. On March 31, 2006, our shareholders approved a reorganization of our corporate structure. The purpose of the reorganizationwas to, among other things, create a basis for the sustainability, growth and continuity of our businesses and activities by simplifyingour capital structure and thereby improving our access to capital markets and increasing financing resources for the development ofnew products and expansion programs. For further information on our corporate reorganization, see “Item 4A. Information on theCompany—History and Development of the Company—Corporate Reorganization.”Presentation of Financial and Other DataFinancial Data Our audited financial statements at December 31, 2008 and 2009 and for each of the years ended December 31, 2007, 2008 and2009 are included in this annual report. Our financial statements as of and for the years ended December 31, 2005 and 2006 have not been included in this annual report. Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in theUnited States of America, or U.S. GAAP. Because we export more than 90% of our production and operate in an industry that usesthe U.S. dollar as its currency of reference, our management believes that the U.S. dollar is our functional currency and the mostappropriate currency in which to present our financial statements. As a result, amounts for all periods presented have been remeasuredinto U.S. dollars in accordance with the methodology set forth in Statement of Financial Accounting Standards guidance on foreigncurrency translations. Our financial statements and financial data presented herein and prepared in accordance with U.S. GAAP donot reflect the effects of inflation. Pursuant to the accounting standard guidance on foreign currency translations as it applies to us, non-monetary assets andliabilities, including inventories, property, plant and equipment, accumulated depreciation and shareholders’ equity, are remeasured athistorical rates of exchange, while monetary assets and liabilities denominated in currencies other than U.S. dollars are remeasured atperiod-end rates. Export sales invoiced in currencies other than the U.S. dollar are remeasured at the respective exchange rate on thedate of sale. Cost of sales and services, depreciation and other expenses relating to assets remeasured at historical exchange rates arecalculated based on the U.S. dollar values of such assets and other non-U.S. dollar statement of income accounts are remeasured atthe rate prevailing on the date of the charge or credit to income. Translation gains and losses are recorded under foreign exchange(gain) loss, net in our statement of income. In our 2007, 2008 and 2009 financial statements, gains or losses resulting from the remeasurement of the financial statementsand from foreign currency transactions have been reported in the consolidated statement of income as single line items. In our Form 20-F/A filed with the U.S. Securities and Exchange Commission, or SEC, on November 26, 2007, we restated ourfinancial statements for the years ended December 31, 2004, 2005 and 2006. For certain purposes, such as providing reports to our Brazilian shareholders, filing financial statements with the Comissão deValores Mobiliários (Brazilian securities commission), or CVM, and determining dividend payments and other distributions and taxliabilities in Brazil, we have prepared, and will continue to be required to 1
  5. 5. prepare, financial statements in accordance with Law No. 6,404 of December 15, 1976, as amended, or Brazilian Corporate Law.Effective 2008, significant changes were introduced to the accounting aspects of the Brazilian Corporate Law by Law 11,638 ofDecember 28, 2007. In addition, changes to accounting principles were introduced in 2008 and other changes to the accountingpractices adopted in Brazil, or Brazilian GAAP, by the Comitê de Pronunciamentos Contábeis (Brazilian Accounting StandardsSetting Board) will become effective in 2010. These changes to the accounting aspects of the Brazilian Corporate Law and BrazilianGAAP impacted the basis of our distribution of minimum mandatory dividends. Other than that, such changes had no effect to ourfinancial statements prepared in accordance with U.S. GAAP that are included in this annual report. Our financial statements as ofand for the years ended December 31, 2007, 2008 and 2009, prepared in accordance with the Brazilian Corporate Law, which are notincluded in this annual report, are not adjusted to account for the effects of inflation. As a result of the reconciliation of amounts to the functional currency and other adjustments related to the differences inaccounting principles between U.S. GAAP and Brazilian GAAP, the amounts of net income and shareholders’ equity as reported inour audited consolidated financial statements presented herein differ from those included in our statutory accounting records. As a result of the listing of our common shares on the Novo Mercado segment of the BM&FBOVESPA S.A.-Bolsa de Valores,Mercadorias e Futuros de São Paulo, or São Paulo Stock Exchange, since January 2009 we are required to either translate intoEnglish our quarterly financial statements, including cash flow statements, prepared in accordance with the Brazilian Corporate Law,or prepare such quarterly financial statements in accordance with, or reconciled to, U.S. GAAP or International Financial ReportingStandards, or IFRS.Other Data and Backlog In this annual report: • some of the financial data reflects the effect of rounding; • aircraft ranges are indicated in nautical miles; • one nautical mile is equal to approximately 1.15 ordinary or “statute” miles, or approximately 1.85 kilometers; • aircraft speeds are indicated in nautical miles per hour, or knots, or in Mach, which is a measure of the speed of sound; • the term “regional jets” refers to narrow body jet aircraft with 30-60 passenger seats; • the term “mid-capacity jets” refers to jet aircraft with 70-120 passenger seats. All of our regional and mid-capacity jet aircraft are sold in the commercial aviation segment; • the term “commercial aircraft,” as it applies to Embraer, refers to our regional jets and mid-capacity jets; • the terms “entry-level jet” and “light jet” refer to executive jets that carry from six to eight passengers and up to nine passengers, respectively, that are designed for short take-off distances; • the term “ultra-large” refers to executive jets that have longer range and over-sized cabin space and carry, on average, 19 passengers; and • the term “executive jets,” as it applies to Embraer, refers to our aircraft sold to companies, including fractional ownership companies, charter companies and air-taxi companies and high net-worth individuals. We calculate the value of our backlog by considering all firm orders that have not yet been delivered. A firm order is a firmcommitment from a customer, represented by a signed contract and customarily accompanied by 2
  6. 6. a down payment, for which we have reserved a place on one of our production lines. Every time we refer to our backlog in this annualreport, we only make reference to firm orders and not to options. When we refer in this annual report to the number or value ofcommercial aircraft, we exclude two EMB 145s delivered to Satena Airline, a state-owned Colombian airline, in 2004. These aircrafthave been included in our defense data. In July 2005, we started to include the number of aircraft sold by the defense segment tostate-owned airlines, such as TAME and Satena, in our commercial aircraft backlog.Special Note Regarding Forward-Looking Statements This annual report includes forward-looking statements, within the meaning of Section 27A of the U.S. Securities Act of 1933,as amended, or Securities Act, and Section 21E of the U.S. Securities Exchange Act of 1934, as amended, or Exchange Act,principally in Items 3 through 5 and Item 11 of this annual report. We have based these forward-looking statements largely on ourcurrent expectations and projections about future events, industry and financial trends affecting our business. These forward-lookingstatements are subject to risks, uncertainties and assumptions, including, among other things: • general economic, political and business conditions, both in Brazil and in our markets; • the effects of the current world economic crisis on global and Brazilian economic and market conditions; • changes in competitive conditions and in the general level of demand for our products; • management’s expectations and estimates concerning our future financial performance, financing plans and programs, and the effects of competition; • the effects of customers canceling, modifying and/or rescheduling contractual orders; • the effect of changing priorities or reductions in the Brazilian government or international government defense budgets on our revenues; • continued successful development and marketing of the EMBRAER 170/190 jet family, our line of executive jets (including the Phenom 100, Phenom 300, Lineage 1000, Legacy 450 and Legacy 500) and our defense aircraft; • our level of indebtedness; • anticipated trends in our industry, including but not limited to the continuation of long-term trends in passenger traffic and revenue yields in the airline industry; • our short- and long-term outlook for the 30-120 seat commercial airline market; • our expenditure plans; • inflation and fluctuations in exchange rates; • the impact of volatile fuel prices and the airline industry’s response; • our ability to develop and deliver our products on a timely basis; • availability of sales financing for our existing and potential customers; • existing and future governmental regulation; • our relationship with our workforce; and • other risk factors as set forth under “Item 3D. Risk Factors.” 3
  7. 7. The words “believe,” “may,” “will,” “forecast,” “estimate,” “plan,” “continue,” “anticipate,” “intend,” “expect” and similarwords are intended to identify forward-looking statements. We undertake no obligation to update publicly or revise any forward-looking statements because of new information, future events or other factors. In light of these risks and uncertainties, the forward-looking events and circumstances discussed in this annual report might not occur. Our actual results and performance could differsubstantially from those anticipated in our forward-looking statements. As a result of various factors such as those risks described in“Item 3D. Risk Factors,” undue reliance should not be placed on these forward-looking statements. 4
  8. 8. PART IITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS Not applicable.ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE Not applicable.ITEM 3. KEY INFORMATION3A. Selected Financial Data The following table presents our selected financial and other data at and for each of the periods indicated. Selected financial dataas of and for the years ended December 31, 2007, 2008 and 2009 have been derived from our audited U.S. GAAP financial statementsand are included elsewhere in this annual report. The selected financial data presented for all other periods have been derived fromour audited U.S. GAAP financial statements not included herein. At and for the year ended December 31, 2009 2008 2007 2006 2005 (in US$ millions)Statement of Income DataNet sales 5,466.3 6,335.2 5,245.2 3,759.5 3,789.5Cost of sales and services (4,352.2) (4,991.7) (4,093.5) (2,806.8) (2,738.9)Gross profit 1,114.1 1,343.5 1,151.7 952.7 1,050.6Operating income (expenses)Selling expenses (305.1) (393.1) (361.3) (220.6) (159.8)Research and development (144.0) (197.0) (259.7) (112.7) (93.2)General and administrative (191.5) (232.4) (234.8) (235.5) (205.2)Employee profit sharing — — — (42.7) (56.1)Other operating income (expenses), net (137.9) 16.0 78.3 1.6 (26.1)Total operating expenses (778.5) (806.5) (777.5) (609.9) (540.4)Income from operations 335.6 537.0 374.2 342.8 510.2Non-operating income (expense)Interest income (expenses), net 35.3 (171.4) 163.4 105.4 (4.1)Foreign exchange gain (loss), net (94.1) 71.7 (37.7) (4.0) (15.2)Other non-operating income (expenses), net — — — — 9.1Total non-operating income (expense) (58.8) (99.7) 125.7 101.4 (10.2)Income before income taxes 276.8 437.3 499.9 444.2 500.0Income tax (expenses) benefit (14.5) (41.1) (2.7) (44.4) (41.6)Income before equity 262.3 396.2 497.2 399.8 458.4Equity in earnings (losses) of affiliates — — 0.3 (0.1) (3.1)Net income 262.3 396.2 497.5 399.7 455.3Less: Net income attributable to the noncontrolling interests 13.8 7.5 8.2 9.6 9.6Net income attributable to Embraer 248.5 388.7 489.3 390.1 445.7 At and for the year ended December 31, 2009 2008 2007 2006 2005 (in US$)Earnings per ShareCommon share – basic(3) 0.34 0.54 0.66 0.53 0.58Preferred share – basic(3) — — — — 0.64ADS – basic(3) 1.36 2.16 2.64 2.11 2.55Common share – diluted(3) 0.34 0.54 0.66 0.53 0.58Preferred share – diluted(3) — — — — 0.63 5
  9. 9. At and for the year ended December 31, 2009 2008 2007 2006 2005 (in US$)Earnings per ShareADS – diluted(3) 1.36 2.16 2.64 2.10 2.54Dividends per ShareCommon share(1)(2)(3) 0.18164 0.32837 0.17361 0.21242 0.26080Preferred share(1)(2)(3) — — — — 0.28688ADS(1)(2)(3) 0.72656 1.31348 0.69443 0.84968 1.14752 At and for the year ended December 31, 2009 2008 2007 2006 2005 (in thousands)Weighted Average Number of Shares OutstandingCommon share – basic(3) 723,665 726,084 740,142 739,904 242,544Preferred share – basic(3) — — — — 479,288Common share – diluted(3) 723,665 726,084 741,047 742,903 242,544Preferred share – diluted(3) — — — — 482,739 At and for the year ended December 31, 2009 2008 2007 2006 2005 (in US$ millions)Balance Sheet DataCash and cash equivalents(4) 1,592.4 1,820.7 1,733.8 1,253.1 1,349.8Temporary cash investments 953.8 380.8 759.3 512.1 563.8Other current assets 3,093.6 3,715.0 3,156.6 3,026.3 2,702.0Property, plant and equipment, net 756.8 737.9 566.0 412.2 388.4Other long-term assets 2,054.9 1,989.5 1,850.2 1,894.0 1,928.4 Total assets 8,451.5 8,643.9 8,065.9 7,097.7 6,932.4Short-term loans and financing(5) 587.7 529.3 932.7 503.0 475.3Other current liabilities 2,180.0 3,016.0 2,406.7 2,492.1 2,179.1Long-term loans and financing(6) 1,455.2 1,296.1 820.3 846.1 1,078.1Other long-term liabilities 1,800.0 1,523.2 1,588.0 1,318.3 1,532.8Company shareholder’s equity 2,338.3 2,209.3 2,249.5 1,874.3 1,620.3Noncontrolling interest 90.3 70.0 68.7 63.9 46.8 Total shareholders’ equity 2,428.6 2,279.3 2,318.2 1,938.2 1,667.1 Total liabilities and shareholders’ equity 8,451.5 8,643.9 8,065.9 7,097.7 6,932.4Other Financial DataNet cash provided by operating activities 135.0 381.6 617.0 386.9 346.9Net cash provided by (used in) investing activities (506.3) 112.0 (438.2) (146.4) (39.9)Net cash provided by (used in) financing activities (27.1) (314.5) 137.0 (395.1) 24.9Depreciation and amortization 86.7 70.5 58.8 63.9 61.5(1) Includes interest on shareholders’ equity.(2) Translated from nominal reais into U.S. dollars at the selling exchange rates in effect on the last date of the month in which distributions were approved. As of April 1, 2006, each ADS represents four common shares and before such date each ADS represented four preferred shares. The dividends per ADSs reflect the underlying dividends per share multiplied by four.(3) As a result of the merger of former Embraer with and into Embraer approved on March 31, 2006, each common share and preferred share of former Embraer was exchanged for one common share of Embraer and each ADS of former Embraer was exchanged for one ADS of Embraer.(4) As discussed in Note 3(d) to our audited consolidated financial statements, through December 31, 2008, we classified short-term repurchase transactions collateralized by Brazilian government notes and bonds in accordance with the tenor of the underlying asset rather than the tenor of the repurchase transaction itself. As a consequence, short-term repurchase transactions and bank certificates of deposits were classified as temporary cash investments. Starting on January 1, 2009, we changed our classification of this class of securities and, as a 6
  10. 10. consequence, short-term repurchase transactions and bank certificates of deposits with high liquidity are now classified as cash equivalents, thereby causing us to reclassify those transactions as of December 31, 2007 and 2008 in order to provide for a same-basis comparison with transactions existing on December 31, 2009. See Note 3(d) to our audited consolidated financial statements.(5) Excludes non-recourse and recourse debt. Includes current portion of long-term debt.(6) Excludes non-recourse and recourse debt. At and for the year ended December 31, 2009 2008 2007 2006 2005Other Data:Aircraft delivered during period(1):To the Commercial Aviation MarketERJ 145 7 6 7 12 46ERJ 135 — — — — 2EMBRAER 170 22 9 11 32 / 2 46 / 1EMBRAER 175 11 55 34 11 / 1 14EMBRAER 190 62 78 / 1 68 40 12EMBRAER 195 20 14 10 3 —To the Defense MarketEMB 120 Brasília — — 1 — —Legacy 600 — 3 1 — 6Phenom 100 4EMB 145 — 1 1 — 1EMB 135 1 2 — — —EMBRAER 170 — — — 4/1 —EMBRAER 190 2 — 2 1 —EMB 145 AEW&C/RS/MP — — — — 1EMB 312 Tucano / AL-X/ Super Tucano 26 15 28 14 24To the Executive Aviation MarketLegacy 600 18 33 35 27 14EMBRAER 175 Shuttle 3 1 — — —Phenom 100 93 2 — — —Phenom 300 1 — — — —To the General Aviation MarketLight Propeller Aircraft 34 26 20 10 31Total delivered 304 245 218 154 197Aircraft in backlog at the end of period:In the Commercial Aviation MarketEMB 120 Brasília — — — 1 —ERJ 145 8 40 46 53 10ERJ 135 — — — 1 15ERJ 140 — — — — 20EMBRAER 170 17 45 31 29 104EMBRAER 175 15 20 70 74 8EMBRAER 190 185 237 282 264 178EMBRAER 195 40 84 47 43 29In the Defense MarketEMB 145 AEW&C/RS/MP 3 3 — — —EMB 312 Tucano/EMB 314/EP Super Tucano 57 80 51 80 93EMB 145 — — 1 — —EMB 135 1 1 2 — —Legacy 600 / Phenom 100 — 4 3 1 —EMBRAER 170/ EMBRAER 190 — 2 — — 3 7
  11. 11. At and for the year ended December 31, 2009 2008 2007 2006 2005Other Data:In the Executive Aviation MarketLegacy 450/500/600/Phenom 100/300/Lineage 1000/EMBRAER 170/190 Shuttle 737 978 766 384 15In the General Aviation MarketLight Propeller Aircraft — — — — 6Total backlog (in aircraft) 1,063 1,494 1,299 930 481Total backlog (in millions) US$16,634.8 US$20,935.0 US$18,827.0 US$14,806.0 US$10,383.0(1) Figures appearing after a forward slash (/) refer to aircraft delivered under operating leases.Exchange Rates Prior to March 4, 2005, there were two principal legal foreign exchange markets in Brazil: • the commercial rate exchange market, and • the floating rate exchange market. Most trade and financial foreign exchange transactions were carried out on the commercial rate exchange market. Theseincluded the purchase or sale of shares or payment of dividends or interest with respect to shares. Foreign currencies could only bepurchased in the commercial exchange market through a Brazilian bank authorized to buy and sell currency in these markets. In bothmarkets, rates were freely negotiated. Resolution No. 3,265 by the Conselho Monetário Nacional (National Monetary Council), or CMN, dated March 4, 2005,consolidated the foreign exchange markets into one single foreign exchange market, effective as of March 14, 2005. All foreignexchange transactions are now carried out through institutions authorized to operate in the consolidated market and are subject toregistration with the electronic registration system of the Central Bank of Brazil, or Central Bank. Foreign exchange rates continue tobe freely negotiated, but may be influenced by Central Bank intervention. Since 1999, the Central Bank has allowed the real/U.S. dollar exchange rate to float freely, and during that period, the real/U.S.dollar exchange rate has fluctuated considerably. At April 23, 2010, the selling exchange rate for U.S. dollars was R$1.7624 perUS$1.00. In the past, the Central Bank has intervened occasionally to control unstable movements in foreign exchange rates. Wecannot predict whether the Central Bank or the Brazilian government will continue to let the real float freely or will intervene in theexchange rate market through a currency band system or otherwise. The real may depreciate or appreciate against the U.S. dollarsubstantially in the future. See “Item 3D. —Risk Factors—Risks Relating to Brazil.” The following table sets forth the selling exchange rate, expressed in reais per U.S. dollar, for the periods indicated. Exchange Rate of Reais to US$1.00 Low High Average(1) Period-endYear ended December 31,2005 2.1633 2.7621 2.4125 2.34072006 2.0586 2.3711 2.1771 2.13802007 1.7325 2.1556 1.9500 1.77132008 1.5593 2.5004 1.8346 2.33702009 1.7024 2.4218 1.9957 1.7412 Exchange Rate of Reais to US$1.00 Low High Average(2) Period-endMonth/period endedNovember 30, 2009 1.7024 1.7588 1.7262 1.7505December 31, 2009 1.7096 1.7879 1.7503 1.7412January 31, 2010 1.7227 1.8748 1.7798 1.8748February 28, 2010 1.8046 1.8773 1.8416 1.8110March 31, 2010 1.7637 1.8231 1.7858 1.7810April 2010 (through April 23) 1.7446 1.7806 1.7605 1.7624 8
  12. 12. Source: Central Bank.(1) Represents the average of the exchange rates on the last day of each month during the relevant periods.(2) Represents the average of the exchange rates during the relevant periods. We will pay any cash dividends and make any other cash distributions with respect to the common shares in reais. Accordingly,exchange rate fluctuations may affect the U.S. dollar amounts received by the holders of American Depositary Shares, or ADSs, uponthe conversion into U.S. dollars by the depositary of our ADS program of such distributions for payment to holders of ADSs.Fluctuations in the exchange rate between the real and the U.S. dollar may also affect the U.S. dollar equivalent of the real price ofour common shares on the São Paulo Stock Exchange.3B. Capitalization and Indebtedness Not applicable.3C. Reasons for the Offer and Use of Proceeds Not applicable.3D. Risk FactorsRisks Relating to EmbraerA downturn in commercial aviation may reduce our sales and revenue, and, consequently, our profitability, in any given year. We expect that a substantial portion of our sales in the near future will be derived from sales of commercial aircraft, particularlythe EMBRAER 170/190 jet family. Historically, the market for commercial aircraft has been cyclical due to a variety of factors thatare both external and internal to the air travel industry, including general economic conditions. The commercial airline industry has been negatively impacted by a number of factors since 2001. First, the U.S. and worldeconomies experienced an economic downturn that began in 2001 and was characterized by rapid declines in securities markets, adecline in productivity and an increase in unemployment. Second, the terrorist attacks of September 11, 2001 caused an immediatedecline in airline travel and a high level of financial uncertainty among the worldwide commercial airline industry. In addition, airline travel decreased significantly in 2003 as a result of both the commencement of military action by the UnitedStates and other countries in Iraq and the concerns over outbreaks of severe acute respiratory syndrome (SARS) in Asia and Canada.In response to these events, beginning in the fourth quarter of 2001, many airlines, including our largest customers at the time,reduced their flight schedules for the long-term and announced significant lay offs, and a number of airlines filed for bankruptcyprotection. As a result, we agreed to modify, between 2001 and 2004, certain delivery schedules to adjust to the changes in ourcustomers’ businesses and reduced scheduled commercial aircraft, executive jet and government transportation aircraft deliveries. In2004, we reduced scheduled deliveries from 160 to 145 aircraft following US Airways’ second Chapter 11 filing in September 2004.In 2003 and 2004, we also re-evaluated our risk exposure related to aircraft valuations and customer credit risk, which resulted incharges to income of US$40.6 million and US$16.0 million, respectively. Although the U.S. and world economies showed some signs of recovery starting in 2004, many airlines continued to faceincreased competition, escalating insurance costs, increased security costs, credit downgrades, liquidity concerns and bankruptcy, andlater sharply higher fuel costs. For example, on January 5, 2010, Mesa Air Group, Inc., or Mesa, one of our important customers, filedfor Chapter 11 protection from creditors. From 2000 to 9
  13. 13. 2003, we have delivered 36 ERJ 145 aircraft to Mesa. As a result of our aircraft sales to Mesa and based on our risk assessment of thisairline’s Chapter 11 filing, on December 31, 2009 we recorded a US$103.0 million charge against income, of which US$74.4 millionare represented by collateral in the form of cash deposited in escrow, in recognition of estimated losses that we classify as probablewith respect to financial guarantees extended by us in connection with sales of our aircraft to Mesa. In the second half of 2007, the economies of the U.S. and many other countries began to experience downturns which werecharacterized by, among other factors, instability in securities’ value and capital markets, instability of currencies, a widespreadreduction in demand, sharp reductions in the availability of credit and inflationary pressure. By the second half of 2008, the additional effects of the severe economic downturns in our markets included significantreductions in air travel and contractions in corporate and personal spending which, as a result, have negatively impacted our productlines. Additional impacts of such downturns on the air transport industry have included a decrease in orders of executive jets and adecrease in the volume of financing available to our customers for aircraft purchases, particularly in the commercial and executiveaviation segments (see “Item 4B. Information on the Company—Business Overview—Aircraft Financing Arrangements”). Acontinued downturn in general economic conditions could result in further reductions in air travel and decreased orders from ourcustomers for our aircraft. Our customers could also defer or cancel their purchases of our aircraft. We cannot, at this time, predict themagnitude or duration of the impact that the above events will have on the air transport industry as a whole and on our business inparticular. In February 2009, we had to lay off approximately 20% of our labor force as part of our efforts to reposition Embraer in view ofthe current global economic crisis. The cost of these layoffs was approximately US$60.4 million. In addition, we also experiencedsome cancellations of aircraft orders by our customers, including the HNA Group, a Chinese airline, which reduced its firm orders forthe ERJ 145 regional aircraft from 50 to 25, of which 18 had been delivered by March 31, 2010 (for more information on aircraftcancellations, see “Item 3D. —Our aircraft sales are subject to cancellation provisions that may reduce our cash flows”). We cannotguarantee that material cancellations will not occur in the future or that our other businesses will not be affected. Materialcancellations, delays or decreases in the number of aircraft delivered in any year in the future would likely reduce our revenue andbacklog.We depend on key customers and key suppliers, the loss of any of which could harm our business. Commercial aircraft. As of March 31, 2010, all of our firm orders in backlog for the ERJ 145 regional jet family wereattributable to a Chinese company, the HNA Group. The aircraft will be assembled by our joint venture Harbin Embraer AircraftIndustry Company Ltd., formed with Harbin Aircraft Industry (Group) Co., Ltd. and Hafei Aviation Industry Co., Ltd., subsidiaries ofChina Aviation Industry Corp., or AVIC. In addition, as of March 31, 2010, approximately 52.4% of our firm orders in backlog forthe EMBRAER 190 jet aircraft were for the HNA Group from China and JetBlue Airways from the U.S. Furthermore, as ofMarch 31, 2010, approximately 68.4% of our firm orders in backlog for the EMBRAER 195 jet aircraft were for Azul, the newBrazilian airline founded by David Neeleman. We believe that we will continue to depend on a number of key customers, and the lossof any one of which could reduce our sales and reduce our market share. Fewer sales could reduce our profitability. Increasingly, due to the current global economic crisis, the commercial airline industry is seeking to reduce costs and increaseefficiency, and experiencing a consolidation process through mergers and acquisitions and alliances through code-sharingarrangements. Although it is expected that such consolidations and alliances may result in the creation of more stable and competitiveairlines, they may also have the effect of reducing the number of existing and potential customers and, possibly, the number ofpurchases of our aircraft. Defense aircraft. The Força Aérea Brasileira, or Brazilian Air Force, is our largest customer of defense aircraft products. Salesto the Brazilian government accounted for approximately 28% of our defense sales for the year ended December 31, 2009. A decreasein defense spending by the Brazilian government due to defense spending cuts, general budgetary constraints or other factors that areout of our control could decrease our defense sales. We cannot assure you that the Brazilian government will continue to purchaseaircraft or services from us in the future at the same rate or at all. 10
  14. 14. Key suppliers. Our risk-sharing partners develop and manufacture significant portions of our aircraft, including the engines,hydraulic components, avionics, interior and parts of the fuselage and tail. Once risk-sharing partners have been selected and programdevelopment and aircraft production have begun, it is difficult to substitute these partners. In some cases, the aircraft are designedspecifically to accommodate a particular component, such as the engines, which cannot be substituted by another manufacturerwithout significant delays and expenses. This dependence makes us susceptible to the risks of performance, product quality andfinancial condition of these risk-sharing partners. We cannot assure you that we will not experience significant delays in obtaining key equipment in our manufacturing process inthe future. A large number of the equipment employed by the aircraft industry is subject to export control regulations and, as such,deliveries are dependent on suppliers having secured the applicable export licenses. In 2007, deliveries of equipment for one of ourdefense products were temporarily suspended due to export control requirements. Although we work closely with and monitor theproduction process of our risk-sharing partners and suppliers, the failure of our risk-sharing partners and other major suppliers to meetour performance specifications, quality standards or delivery schedules or to comply with regulatory requirements (including exportcontrol requirements) could affect our ability to deliver new aircraft to customers in a timely manner.Our aircraft sales are subject to cancellation provisions that may reduce our cash flows. A portion of our aircraft firm orders is subject to significant contingencies, both before and after delivery. Prior to delivery,some of our purchase contracts may be terminated, or all or a portion of a particular firm order may be canceled, for different reasons,including: • extended delays in delivering aircraft or failure to obtain certification of the aircraft or otherwise meet performance milestones and other requirements; • failure of a customer to receive financing, when required, with respect to any aircraft at the scheduled delivery date, in which case, subject to certain conditions (including payment of contractual break-up fees), the customer may cancel the order for the particular aircraft to be delivered or terminate the contract with respect to all undelivered aircraft; or • production rate shortfalls. Our customers may also reschedule deliveries, particularly during an economic downturn. During 2009, we experienced somecancellations of aircraft orders by our customers, including the HNA Group, a Chinese airline, which reduced its firm orders for theERJ 145 regional aircraft from 50 to 25, of which 18 had been delivered by March 31, 2010. In addition, for a variety of reasons, in2009 we experienced another 35 cancellations in our commercial aircraft orders, which may have an impact on our results ofoperations starting in 2011 assuming our backlog remains at current levels until then. This compares to no cancellations in 2008 and30 cancellations in 2007. Although these cancellations occurred in our commercial aviation business, we cannot guarantee that in thefuture we will not experience material cancellations in our other aircraft segments. Material cancellations, delays or decreases in thenumber of aircraft delivered in any year in the future would likely reduce our sales and revenue, and, consequently, our profitability,for that year. A substantial number of cancellations or extensions of delivery schedules could reduce our sales and revenue for a givenyear, which in turn would reduce our cash flow and backlog.Certain of our aircraft sales may be subject to financial and residual value guarantees and trade-in options that may require us tomake significant cash disbursements in the future. We have in the past guaranteed, and may in the future guarantee, the financial performance of a portion of the financing for, andthe residual value of, some of our aircraft that have already been delivered. Financial guarantees are provided to financing parties tosupport a portion of the payment obligations of purchasers of our aircraft under their financing arrangements to mitigate default-related losses. These guarantees are collateralized by the financed aircraft. Residual value guarantees typically ensure that, in the 15th year after delivery, the relevant aircraft will have a residual marketvalue of the original sale price. Most of our residual value guarantees are subject to a limitation (a 11
  15. 15. “cap”) and, therefore, on average, our residual value guarantee exposure is limited to 18% of the original sale price. In the event of anexercise by a purchaser of its residual value guarantee, we will bear the difference, if any, between the guaranteed residual value andthe market value of the aircraft at the time of exercise. Assuming all customers who are supported by off-balance sheet financial guarantees defaulted on their aircraft financingarrangements, and also assuming we were required to pay the full aggregate amount of outstanding financial and residual valueguarantees and were unable to remarket any of the aircraft to offset our obligations, our maximum exposure under these guarantees(less provisions and liabilities) would have been US$1,600.2 million as of December 31, 2009. As a result, we would be obligated tomake substantial payments that may not be recoverable through proceeds from aircraft sales or leases, particularly if in the future weare not able to remarket any of the aircraft to offset our obligations or financing defaults occur with respect to a significant portion ofour aircraft. The value of the underlying aircraft is more likely to decrease and third parties are more likely to default duringeconomic downturns. For further discussion of these off-balance sheet arrangements, see Note 35 to our audited consolidatedfinancial statements. In addition, in connection with the signing of purchase agreements for new aircraft, we may provide trade-in options to ourcustomers. These options provide a customer with the right to trade in existing Embraer aircraft upon the purchase and acceptance ofa new aircraft. In 2008, we were required to accept four aircraft for trade-in, and by April 2009 we were required to accept eightadditional commercial aircraft that were subject to trade-in options. Currently, we are subject to trade-in options relating to fiveaircraft, including two options entered into in 2010 as a result of new sales. In addition, other aircraft may become subject to trade-indue to new sales agreements. The trade-in price is determined in the manner discussed under “Item 5A. Operating Results—CriticalAccounting Estimates—Guarantees and Trade-In Rights” for commercial aircraft. We may be required to accept trade-ins at pricesthat are above the market price of the aircraft, which would result in financial loss for us when we remarket the aircraft. We continuously re-evaluate our risk for the financial guarantees and trade-in obligations based on a number of factors,including the estimated future market value of our aircraft based on third-party appraisals, including information developed fromsimilar aircraft remarketing in the secondary market, and the credit rating for the customers. In this regard, based on our riskassessment of Mesa’s Chapter 11 filing, on December 31, 2009 we recorded a US$103.0 million charge against income, of whichUS$74.4 million are represented by collateral in the form of cash deposited in escrow, in recognition of estimated losses that weclassify as probable with respect to financial guarantees extended by us in connection with sales of our aircraft to Mesa. Any future decrease in the market value of the aircraft covered by trade-in rights or financial guarantees would decrease ourability to recoup the amounts payable to satisfy our obligations and cause us to incur additional charges to income. If we are requiredto pay amounts related to such guarantees, we may not have sufficient cash or other financial resources available to do so and mayneed to seek financing to fund these payments. We cannot assure you that the then-prevailing market conditions would allow us toresell or lease the underlying aircraft at its anticipated fair value or in a timely manner. Consequently, honoring our financialguarantee or trade-in obligations could require us to make significant cash disbursements in a given year, which, in turn, wouldreduce our cash flow in that year.Any decrease in Brazilian government-sponsored customer financing, or increase in government-sponsored financing thatbenefits our competitors, may decrease the cost-competitiveness of our aircraft. Historically, when purchasing our aircraft, our customers have benefited from export financing incentives provided by Braziliangovernment-sponsored export programs. The most important of these government programs is a system of interest rate adjustmentscalled the Programa de Financiamento às Exportações (the Export Financing Program), or ProEx program. As a result of past disputes between the Canadian and Brazilian governments at the World Trade Organization, or WTO,regarding the granting of export subsidies relating to sales of aircraft, the Brazilian government ultimately amended the ProExprogram so that any ProEx payments would not decrease the effective interest rate below the interest rate permitted by the WTO andthe Canadian government has also made changes to their financing arrangements for sales of aircraft by Bombardier, Inc., orBombardier, a Canadian aircraft manufacturer. 12
  16. 16. Although the ProEx program is currently in compliance with WTO rules, other export financing programs available to ourcustomers may be subject to challenge in the future. If the ProEx program or another similar program is not available in the future, orif its terms are substantially reduced, our customers’ financing costs could be higher and our cost-competitiveness in the regional jetmarket could decrease. Any future government subsidies supporting any of our major competitors may cause the cost-competitiveness of our aircraft tosuffer and our sales to decline. In July 2007, Brazil and the Organization for Economic Co-operation and Development, or OECD, countries entered into anagreement to establish a “level-playing field” for official export financing support of aircraft. Export Credit Agencies, or ECAs, fromsignatory countries are required to offer the same financial terms and conditions when financing sales of competing aircraft. Theeffect of the agreement is to focus on the price and quality of aircraft products offered by aircraft manufacturers rather than on thefinancial packages offered by their respective governments. As a result of the agreement financing support by the Braziliangovernment to the potential purchasers of our aircraft will contain similar terms and conditions offered by The Boeing Company, orBoeing, Airbus S.A.S., or Airbus, and Bombardier to such purchasers. By the end of 2007, the Banco Nacional de DesenvolvimentoEconômico e Social (Brazilian Social and Economic Development Bank), or BNDES, started to offer financing to our customersunder terms and conditions required by the agreement. To the extent we do not continue to maintain the pricing advantage and qualityof our aircraft, our future sales may be negatively affected. In addition, aircraft manufacturers from countries which are notsignatories to the agreement may be able to offer financing packages which will negatively affect the cost competitiveness of ourproducts.Budgetary constraints of the Brazilian government could reduce funds available to our customers under government-sponsoredfinancing programs. From 1996 through 2009, approximately 28% of the total value of our export deliveries was subject to financing support by theBNDES and the Export Guarantee Fund (Fundo de Garantia à Exportação). As a government agency, the BNDES relies on fundsallocated by the Brazilian national budget. We cannot ensure that the Brazilian government will continue to provide sufficient fundingin the national budget for the financing of our aircraft or that other sources of funding will be available to our customers. The loss orsignificant reduction of funds available to customers, without an adequate substitute, could lead to fewer deliveries and result in lowerprofitability for us.We may face a number of challenges resulting from the development of new products and the possible pursuit of strategic growthopportunities. As we continue to develop new products, we may need to reallocate existing resources and coordinate with new suppliers andrisk-sharing partners. From time to time, there is significant competition within the aviation industry for skilled personnel in generaland engineers in particular. To the extent such competition reoccurs, we may be unable to recruit the necessary number of highlyskilled engineers and other personnel we require. Failure to coordinate our resources in a timely manner or to attract and retain skilledpersonnel could slow down our development efforts and cause delays in production and deliveries of our aircraft, which would delayrecognition of revenue. We may pursue strategic growth opportunities, including joint ventures, acquisitions or other transactions, to expand ourbusiness or enhance our products and technology. We may face a number of challenges, including difficulties in identifyingappropriate candidates, assimilating their operations and personnel and maintaining internal standards and controls, as well as thediversion of our management’s focus from our ongoing business. We cannot assure you that we will be able to meet these challengesor that our business will not face disruptions.We may have to refund cash contributions in connection with the production or development of the EMBRAER 170/190 jetfamily, the Phenom 100/300 jet family and the Legacy 450/500 jet family if certain milestones for each of these aircraft are notreached. We have arrangements with our risk-sharing partners, pursuant to which they have contributed to us, in cash, a total ofUS$534.0 million through 2009. Cash contributions do not have to be returned by us to the risk-sharing partners if we fulfill certainmilestones agreed with our risk-sharing partners. An amount of US$466.3 million 13
  17. 17. of these cash contributions had become nonrefundable through 2009. If we cancel the production of the Phenoms 100/300 family orany aircraft in the EMBRAER 170/190 family, or if we cancel the development of the Legacy 450/500 family, because we are unableto obtain certification or for other nonmarket related reasons, we may be obligated to refund US$67.7 million of the total cashcontributions already received. The Legacy 500 executive jet is expected to enter into service between 2012 and 2013 and the Legacy450 is expected to enter service one year after the Legacy 500. If we require additional financing and we are unable to obtain it, we will not be able to continue to develop and market ourLegacy 450/500 aircraft family.We face significant international competition, which may adversely affect our market share. The worldwide commercial aircraft manufacturing industry is highly competitive. We are one of the leading manufacturers ofcommercial aircraft in the world, along with Boeing, Airbus and Bombardier, all of which are large international companies. Certainof these competitors have greater financial, marketing and other resources than we have. Although we have attained a significantshare of the market for our commercial aircraft products, we cannot assure you that we will be able to maintain this market share. Ourability to maintain this market share and remain competitive in the commercial aircraft manufacturing market over the long termrequires continued technological and performance enhancement to our products. Our primary competitor in the regional and mid-capacity jet markets is Bombardier Inc., a Canadian company, which has significant technological capabilities and financial andmarketing resources and, in some instances, benefits from government-sponsored export subsidies. These companies also havesignificant technological capabilities and greater financial and marketing resources. Additionally, Chinese, Russian and Japanesecompanies are developing mid-capacity jets and already have firm orders in backlog. As a relatively new entrant to the business jet market, we also face significant competition from companies with longeroperating histories and established reputations in this industry. Also, some of our competitors in the business jet market may reach themarket with their product before we do, allowing them to establish a customer base and making our efforts to gain greater marketshare more difficult. We cannot assure you that we will continue to increase our market share in the business jet market segment aswe have been able to do in the past, or that we will not experience a reduction in our current market share in this segment.We may have to make significant payments as a result of unfavorable outcomes of pending challenges to various taxes and payrollcharges. We have challenged the constitutionality of certain Brazilian taxes and payroll charges, as well as modifications and increases inthe rates and basis of calculation of such taxes and charges. Interest on the total amount of these unpaid taxes and payroll chargesaccrues monthly based on the Selic rate, the principal lending rate of the Central Bank, and we make an accrual as part of the interestincome (expenses), net item in our statements of income. As of December 31, 2009, there was a US$414.7 million provision recordedas a liability (taxes and payroll charges) on our balance sheet in connection with litigation contingencies that we classify asrepresenting probable losses to us. We are awaiting a final decision in these proceedings. We cannot assure you that we will prevail inthese proceedings or that we will not have to pay significant amounts, including interest, to the Brazilian government in the future aspayment for these liabilities. For an additional discussion of these liabilities, see Note 17 to our audited consolidated financialstatements.Risks Relating to the Commercial Airline IndustryScope clause restrictions in airline pilot contracts may limit demand for regional and mid-capacity jets in the U.S. market. A key limiting factor in demand for regional and mid-capacity jets is the existence of scope clauses contained in airline pilotcontracts. These scope clauses are union-negotiated restrictions on the number and/or size of regional and mid-capacity jets that aparticular carrier may operate. Current scope clause restrictions, which are more prevalent in the United States, include restrictions onthe number of seats, weight of aircraft and number of 50-70 seat commercial aircraft in an airline’s fleet. As a result, our opportunitiesfor near-term growth in the U.S. regional jet market in the 30-60 and 60-90 seat categories may be limited. The continuation orfurther tightening of 14
  18. 18. scope clauses could also lead some of our customers who have purchased options to acquire our regional and mid-capacity jets not toexercise those options. We cannot assure you that current restrictions will be lessened, or will not be expanded, including byamending these scope clauses to cover larger-sized commercial aircraft. Furthermore, although scope clauses are less prevalentoutside the United States, we cannot assure you that scope clauses will not become more prevalent or restrictive, or that some otherform of restriction will not take effect, in Europe or in other markets.We are subject to stringent certification requirements and regulation, which may prevent or delay our obtaining certification in atimely manner. Our products are subject to regulation in Brazil and in each jurisdiction where our customers are located. The aviationauthorities in Brazil and in other countries in which our customers are located, including the Agência Nacional de Aviação Civil, orBrazilian aviation authority, the U.S. Federal Aviation Authority, or FAA, and the European Aviation Safety Agency, or EASA, mustcertify our aircraft before we can deliver them. We cannot assure you that we will be able to obtain certification of our aircraft on atimely basis or at all. If we fail to obtain a required certification from an aviation authority for any of our aircraft, that aviationauthority can prohibit the use of that aircraft within its jurisdiction until certification has been obtained. In addition, complying withthe requirements of the certification authorities can be both expensive and time-consuming. Changes in government regulations and certification procedures could also delay our start of production as well as entry into themarket with a new product. We cannot predict how future laws or changes in the interpretation, administration or enforcement of lawswill affect us. We may be required to spend significantly more money to comply with these laws or to respond to these changes.Any catastrophic events involving our aircraft could adversely affect our reputation and future sales of our aircraft, as well as themarket price of the common shares and the ADSs. We believe that our reputation and the safety record of our aircraft are important selling points for our products. We design ouraircraft with backup systems for major functions and appropriate safety margins for structural components. However, the safeoperation of our aircraft depends to a significant degree on a number of factors largely outside our control, including our customers’proper maintenance and repair of our aircraft and pilot skill. The occurrence of one or more catastrophic events involving one of ouraircraft could adversely affect our reputation and future sales, as well as the market price of our common shares and the ADSs.Risks Relating to BrazilBrazilian political and economic conditions have a direct impact on our business and the trading price of our common shares andADSs. The Brazilian government has frequently intervened in the Brazilian economy and occasionally has made drastic changes inpolicy and regulations. The Brazilian government’s actions to control inflation and affect other policies and regulations have ofteninvolved, among other measures, increases in interest rates, changes in tax policies, price controls, currency devaluations, capitalcontrols and limits on imports. Our business, financial condition, results of operations and the trading price of the common shares andthe ADSs may be adversely affected by changes in policy or regulations at the federal, state or municipal level involving or affectingfactors such as: • interest rates; • monetary policies; • exchange controls and restrictions on remittances abroad (such as those that were imposed in 1989 and early 1990); • currency fluctuations; • inflation; 15
  19. 19. • liquidity of domestic capital and lending markets; • tax policies; and • other political, diplomatic, social and economic developments in or affecting Brazil. Uncertainty over whether the Brazilian government will implement changes in policy or regulation affecting these or otherfactors in the future may contribute to economic uncertainty in Brazil and to heightened volatility in the Brazilian securities marketsand securities issued abroad by Brazilian companies. Historically, the political scenario in Brazil has influenced the performance of the Brazilian economy. In particular, politicalcrises have affected the confidence of investors and the public in general, which adversely affected the economic development inBrazil. In addition, 2010 is an election year in Brazil and a new president, along with state governors and congressmen, will beelected. Although the transition of power in the last decade has been less disruptive to the overall Brazilian economic scenario than inprior periods, we cannot ensure that a new administration would not implement new government policies that would not be disruptiveto Brazil’s relative economic stability that has prevailed in recent years. These and other future developments in the Brazilian economy and governmental policies may adversely affect us and ourbusiness and results of operations and may adversely affect the trading price of our common shares and ADSs.Inflation and government efforts to combat inflation may contribute significantly to economic uncertainty in Brazil and toheightened volatility in the Brazilian securities markets and, consequently, may adversely affect the market value of the commonshares and ADSs. Brazil experienced extremely high rates of inflation in the past. More recently, Brazil’s annual rate of inflation was 3.8% in2006, 7.7% in 2007 and 9.8% in 2008 as measured by the Índice Geral de Preços ao Mercado (General Market Price Index), or IGP-M Although Brazil experienced deflation of 1.7% in 2009, as measured by the IGP-M, inflation rates in Brazil were on the rise inearly 2010. Inflation, and certain government actions taken to combat inflation, have in the past had significant negative effects on theBrazilian economy. Actions taken to combat inflation, coupled with public speculation about possible future governmental actions,have contributed to economic uncertainty in Brazil and heightened volatility in the Brazilian securities markets. Future Brazilian government actions, including interest rate decreases, intervention in the foreign exchange market and actionsto adjust or fix the value of the real may trigger increases in inflation. If Brazil experiences high inflation again in the future, ouroperating expenses and borrowing costs may increase, our operating and net margins may decrease and, if investor confidencedecreases, the price of our common shares and ADSs may fall.Exchange rate instability may adversely affect our financial condition and results of operations and the market price of thecommon shares and ADSs. Although most of our net sales and debt are U.S. dollar-denominated, the relationship of the real to the value of the U.S. dollar,and the rate of depreciation of the real relative to the prevailing rate of inflation, may adversely affect us. As a result of inflationary pressures, among other factors, the Brazilian currency has devalued periodically during the last fourdecades. Throughout this period, the Brazilian government has implemented various economic plans and utilized a number ofexchange rate policies, including sudden devaluations, periodic mini-devaluations during which the frequency of adjustments hasranged from daily to monthly, floating exchange rate systems, exchange controls and dual exchange rate markets. Although over longperiods depreciation of the Brazilian currency generally has correlated with the rate of inflation in Brazil, devaluation over shorterperiods has resulted in significant fluctuations in the exchange rate between the Brazilian currency and the U.S. dollar and othercurrencies. For example, in 2002, the real to U.S. dollar exchange rate increased 52.3% due in part to political uncertainty surrounding theBrazilian presidential elections and the global economic slowdown. Although the R$ to US$ exchange rate decreased 18.2%, 8.1%,11.8%, 8.7%, and 17.2% in 2003, 2004, 2005, 2006, and 2007, 16
  20. 20. respectively, in 2008 it increased 31.9% mainly as a result of the global economic crisis. In 2009, the real to U.S. dollar exchange ratedecreased 25.5% mainly as the effects of the global economic crisis on the Brazilian economy appeared to be less severe than in otherparts of the world. No assurance can be given that the real will not appreciate or depreciate significantly against the U.S. dollar in thefuture. Historically, depreciations in the real relative to the U.S. dollar have also created additional inflationary pressures in Brazil bygenerally increasing the price of imported products and requiring recessionary government policies to curb aggregate demand. On theother hand, appreciation of the real against the U.S. dollar may lead to a deterioration of the current account and the balance ofpayments, as well as dampen export-driven growth. Depreciations generally curtail access to foreign financial markets and mayprompt government intervention, including recessionary governmental policies. Depreciations of the real relative to the U.S. dollarwould also reduce the U.S. dollar value of distributions and dividends on our ADSs and may also reduce the market value of ourcommon shares and ADSs. Appreciation of the real against the U.S. dollar may also have an adverse impact on the competitiveness of our products asapproximately 13% of our production inputs, including labor costs, are incurred and denominated in reais. Therefore, appreciations ofthe real against the U.S. dollar or other currencies increases the costs of our products when measured in U.S dollars, and may result ina decrease in our margins.Economic developments and investor perceptions of risk in other countries, including both in developed or emerging marketeconomies, may adversely affect the trading price of Brazilian securities, including our common shares and ADSs. The market value of securities of Brazilian issuers is affected in varying degrees by economic and market conditions in othercountries, including in developed countries, such as the United States, and in emerging market countries. Although economicconditions in such countries may differ significantly from economic conditions in Brazil, the reaction of investors to developments inthese other countries may have an adverse effect on the market value of securities of Brazilian issuers. For example, the 2008 globaleconomic crisis has had an impact on many economies and capital markets around the world. Such crisis was evidenced by instabilityin the value of securities and capital markets, stock and credit market volatility, instability of most currencies, unavailability of credit,higher interest rates, a widespread reduction in demand, a general economic slowdown and other factors that could adversely affectour financial condition and diminish investors’ interest in securities of Brazilian issuers, including ours. Future crises in othercountries could adversely affect the trading price of our common shares and ADSs, diminish investor interest in securities of Brazilianissuers, including our common shares and ADSs, and make it more difficult for us to access the capital markets and finance ouroperations on acceptable terms or at all.Risks Relating to our Common Shares and ADSsIf holders of ADSs exchange the ADSs for common shares, they risk losing the ability to remit foreign currency abroad andBrazilian tax advantages. The Brazilian custodian for the common shares has obtained an electronic certificate of registration from the Central Bankpermitting it to remit foreign currency abroad for payments of dividends and other distributions relating to the common shares orupon the disposition of the common shares. If holders of ADSs decide to exchange their ADSs for the underlying common shares,they will be entitled to continue to rely on the custodian’s electronic certificate of registration for five business days from the date ofexchange. Thereafter, such holders of ADSs may not be able to obtain and remit foreign currency abroad upon the disposition of, ordistributions relating to, the common shares unless they obtain their own electronic certificate of registration or register theirinvestment in the common shares pursuant to Resolution No. 2,689, which entitles certain foreign investors to buy and sell securitieson the São Paulo Stock Exchange. Holders who do not qualify under Resolution No. 2,689 will generally be subject to less favorabletax treatment on gains with respect to the common shares. If holders of ADSs attempt to obtain their own electronic certificate ofregistration, they may incur expenses or suffer delays in the application process, which could delay their ability to receive dividendsor distributions relating to the common shares or delay the return of their capital in a timely manner. In addition, we cannot assureyou that the custodian’s electronic certificate of registration or any certificate of foreign capital registration obtained by a holder ofADSs will not be affected by future legislative or other regulatory changes, or that additional restrictions applicable to such holder, tothe disposition of the underlying common shares or to the repatriation of the proceeds from such disposition will not be imposed inthe future. 17
  21. 21. The Brazilian government has veto power over change of control, change of name, trademark or corporate purpose and over thecreation or alteration of our defense programs, and its interests could conflict with the interests of the holders of our commonshares or ADSs. The Brazilian government holds one share of a special class of our common stock called a “golden share,” which carries vetopower over change of control, change of our name, trademark or corporate purpose and over the creation or alteration of our defenseprograms (whether or not the Brazilian government participates in such programs). The Brazilian government may have an interest invetoing transactions that may be in the interests of the holders of our common shares or ADSs.Our bylaws contain provisions that could discourage our acquisition or prevent or delay transactions that you may favor. Our bylaws contain provisions that have the effect of avoiding the concentration of our common shares in the hands of a smallgroup of investors so as to promote the dispersed ownership of such shares. These provisions require any shareholder or group ofshareholders that acquires or becomes the holder of (1) 35% or more of the total shares issued by us or (2) other rights over sharesissued by us that represent more than 35% of our capital, to make a public tender offer to purchase all of our shares on the termsspecified in our bylaws, or to sell all of such shareholders’ shares that exceed the 35% limit, in either case, as required by theBrazilian government. If the request is approved, such shareholder or group of shareholders must commence the public tender offerwithin 60 days of the date of approval. If the request is refused, such shareholder or group of shareholders must sell such number ofcommon shares within 30 days so that the holding of such shareholder or group of shareholders is less than 35% of our capital stock.These provisions may have anti-takeover effects and may discourage, delay or prevent a merger or acquisition, including transactionsin which our shareholders might otherwise receive a premium for their common shares and ADSs. These provisions can only bealtered or overridden with the approval of our Board of Directors and our shareholders in a shareholders’ meeting convened for thispurpose, and with the consent of the Brazilian government, as holder of the golden share.The absence of a single, controlling shareholder or group of controlling shareholders may render us susceptible to shareholderdisputes or other unanticipated developments. The absence of a single, controlling shareholder or group of controlling shareholders may create difficulties for our shareholdersto approve certain transactions, because the minimum quorum required by law for the approval of certain matters may not be reached.We and our shareholders may not be afforded the same protections provided by the Brazilian Corporate Law against abusivemeasures taken by other shareholders and, as a result, may not be compensated for any losses incurred. Any sudden and unexpectedchanges in our management team, changes in our corporate policies or strategic direction, takeover attempts or any disputes amongshareholders regarding their respective rights may adversely affect our business and results of operations.Our bylaws contain provisions that limit the voting rights of certain shareholders including non-Brazilian shareholders. Our bylaws contain provisions that limit the right of a shareholder or group of shareholders, including brokers acting on behalfof one or more holders of ADSs, to exercise voting rights in respect of more than 5% of the outstanding shares of our capital stock atany general meeting of shareholders. See “Item 10B. Additional Information—Memorandum and Articles of Association—Description of Capital Stock—Voting Rights of Shares—Limitations on the Voting Rights of Certain Holders of Common Shares.” Our bylaws also contain provisions that limit the right of non-Brazilian shareholders to exercise voting rights in respect of morethan two-thirds of the voting rights that may be exercised by Brazilian shareholders present at any general meeting of shareholders.This limitation will effectively prevent our takeover by non-Brazilian shareholders and limit the ability of non-Brazilian shareholdersto effect control over us. See “ Item 10B. Additional Information—Memorandum and Articles of Association—Description of CapitalStock—Voting Rights of Shares—Limitations on the Voting Rights of Non-Brazilian Shareholders.” 18
  22. 22. Holders of ADSs may not be able to exercise their voting rights. Holder of ADSs may only exercise their voting rights with respect to the underlying common shares in accordance with theprovisions of the deposit agreement governing our ADS. Under the deposit agreement, ADS holders must vote the common sharesunderlying their ADSs by giving voting instructions to the depositary. Upon receipt of the voting instructions from the ADS holder,the depositary will vote the underlying common shares in accordance with these instructions. Otherwise, ADS holders will not be ableto exercise their right to vote unless they surrender the ADS for cancellation in exchange for the common shares. Pursuant to ourbylaws, the first call for a shareholders’ meeting must be published at least 30 days in advance of the meeting, the second call must bepublished at least 15 days in advance of the meeting, and the third call, if necessary, must be published at least eight days in advanceof the meeting. When a shareholders’ meeting is convened, holders of ADSs may not receive sufficient advance notice to surrenderthe ADS in exchange for the underlying common shares to allow them to vote with respect to any specific matter. In addition, thedepositary has no obligation to notify ADS holders of an upcoming vote or distribute voting cards and related materials to ADSholders, unless we specifically instruct the depositary to do so. If we ask the depositary to seek voting instructions from ADS holders,the depositary will notify ADS holders of the upcoming vote and will arrange to deliver a proxy card to such holders. We cannotensure that ADS holders will receive the proxy card in time to allow them to instruct the depositary to vote the shares underlying theirADSs. In addition, the depositary and its agents are not responsible for failing to carry out voting instructions or for an untimelysolicitation of voting instructions. As a result, holders of ADSs may not be able to fully exercise their voting rights.The relative volatility and illiquidity of the Brazilian securities markets may substantially limit the ability of holders of ourcommon shares or the ADSs to sell the common shares underlying ADSs at the price and time they desire. Investing in securities, such as the common shares or the ADSs, of issuers from emerging market countries, including Brazil,involves a higher degree of risk than investing in securities of issuers from more developed countries. The Brazilian securities markets are substantially smaller, less liquid, more concentrated and more volatile than major securitiesmarkets in the United States and other jurisdictions, and are not as highly regulated or supervised as some of these other markets. Therelatively small market capitalization and illiquidity of the Brazilian equity markets may substantially limit the ability of holders ofour common shares or ADSs to sell the common shares or the ADSs at the price and time desired. There is also significantly greater concentration in the Brazilian securities markets than in major securities markets in the UnitedStates. See “Item 9C. The Offer and Listing—Markets—Trading on the São Paulo Stock Exchange.”The sale of a substantial number of common shares, or the belief that this may occur, could decrease the trading price of thecommon shares and the ADSs; holders of our common shares and/or ADSs may not be able to sell their securities at or above theprice they paid for them. Sales of a substantial number of common shares, or the belief that this may occur, could decrease the trading price of ourcommon shares and ADSs. As a consequence of sales by existing shareholders, the market price of the common shares and, byextension, the ADSs may decrease significantly. As a result, the holders of the ADSs and/or common shares may not be able to selltheir securities at or above the price they paid for them.Holders of our ADSs might be unable to exercise preemptive rights with respect to the common shares. Holders of our ADSs may not be able to exercise the preemptive rights relating to the common shares underlying their ADSsunless a registration statement under the Securities Act is effective with respect to those rights or an exemption from the registrationrequirements of the Securities Act is available. We are not obligated to file a registration statement with respect to the shares or othersecurities relating to these preemptive rights and we cannot assure holders of our ADSs that we will file any such registrationstatement. Unless we file a registration statement or an exemption from registration applies, holders of our ADSs may receive onlythe net proceeds from the sale of their preemptive rights by the depositary or, if the preemptive rights cannot be sold, the rights will beallowed to lapse. 19

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