Management Report As a result of constantly increasing production capacity, the figure of 12 regional jetsassembled in one month was achieved. In this quarter alone, 34 ERJ 145 and ERJ 135 regionaljets were produced and delivered, with an average production cycle of 5.5 months. Thisperformance enabled consolidated gross sales of R$ 1,052.2 million to be attained, of whichparent company exports were responsible for R$ 993.6 million, maintaining Embraer in theforefront of Brazilian exporters. The highlight in the commercial aviation market was the completion of negotiations with theUS company Chautauqua/Wexford, closing 35 firm orders and 45 options for the ERJ 145. Inaddition, at the Aerospace Air Show held at Singapore in February, Continental Express, whichwas the pioneer operator of the ERJ 145 in the US, increased its orders for Embraer RegionalJets to 75 aircraft, of which 50 ERJ 145 and 25 ERJ 135. With this decision, ContinentalExpress has now placed 200 orders for the ERJ 145, of which 150 firm and 50 options, plusanother 75 orders for the ERJ 135, of which 50 firm and 25 options. During this period, Crossair (Switzerland), Cirrus Airline (Germany), Brymon Airways(Great Britain), KLM Exel (Holland) and Alitalia Express (Italy) received their first ERJ 145 units. At the Singapore fair, highlighting the defense market, Embraer demonstrated an EMB-145AEW&C version aircraft, which is being analyzed by the governments of various countries, hasalready been selected by the Brazilian government to form part of the Amazon SurveillanceSystem and also by the Greek and Mexican governments. The order backlog in March totaled a balance of R$ 31.8 billion (US$ 18.2 billion, ofwhich R$ 13.4 billion (US$ 7.6 billion) in firm orders. With respect to Research and Development for new products, the following should behighlighted: completion of the joint definition phase of the ERJ 170, with investment targets,development costs, subcontracts and constitution of the investment fund in accordance with theplanned figures; the fuselage joint of the new ERJ 140 model was successfully achieved; and themaiden flight of the remote sensing aircraft EMB145-RS01, to be deployed in the SIVAMAmazon program. In March, Embraer took part in the International Aeronautical and Space Fair - FIDAEheld at Santiago, Chile - and presented the EMB145-RS and EMB 145 AS aircraft, both used inanticipated surveillance and warning systems in addition to the ERJ 135. At the same time variousdemonstration flights of the regional jet ERJ 135 were made in Argentina and Uruguay, and also inChile . Directors, technicians and pilots of the main regional aviation companies of these countriestook part, plus authorities, press and regional aviation users.
Economic-Financial Performance The accumulated gross sales for the first quarter of 2000 were R$ 1,052.2 million, 76.0%up on the same period of 1999. When compared with the prior quarter ended December 1999,gross revenues increased by 10.3%. Accumulated net income in this quarter was R$ 97.6 million,546.4% up on the same period of 1999. When compared to the prior quarter before tax credits,net income for the first quarter was 53.6% higher. The gross margin of 28.5% was lower than the 30.5% figure for the first quarter of 1999,mainly due to the devaluation of the real, which had a positive effect on the result for the period. The following figure demonstrates that the continued growth in production volume anddeliveries has enabled a better utilization of physical and human resources, making possible costreductions by the rationalization of processes, reductions in production cycles and productivitygains. This performance is reflected in the net income obtained over the last 11 consecutivequarters. Performance Indicators (accumulated, in 1st Quarter 1st Quarter 1st Quarter R$ million) of 1998 of 1999 of 2000 Gross Operating Revenues 258.6 598.0 1052.2 Gross Profit 71.2 182.1 300.4 Gross Margin 27.5% 30.5% 28.5% Net Income 21.7 15.1 97.6 EBITDA 63.2 155.9 230.2 EBITDA Margin 24.5% 26.1% 21.9% Shareholders Equity 367.4 433.0 794.3 Current Ratio 0.87 1.04 1.26 Earnings per Share 0.0045 0.0312 0.1993 The principal revenue components for the period were the invoicing of 24 ERJ 145 aircraftand 10 ERJ 135 aircraft, with total sales of R$ 951.2 million. The EBITDA - Earnings Before Interest, Taxes, Depreciation and Amortization whichreflects the performance of operational cash generation before the effect of net financial expenses,tax and depreciation and amortization deductions, for the period was R$ 230.2 million,representing a growth of 47.7% increased when compared with the same period of 1999 and48.7% compared with the prior quarter. The earnings per share of R$ 0.1993 represent a constant evolution over the periodscompared, reflecting the solidity of the fundamentals behind the Companys performance.Structuring of the capital and borrowing has resulted in a reduction in funding costs, as shown bythe following indices calculated at the end of each period indicated, eliminating exchange ratevariations.
December 1998: Libor + 3.64% December 1999: Libor + 2.15% March 2000: Libor + 1.80% Adjustment and control of the indebtedness profile has resulted in an improvement in thecurrent ratio, which has increased constantly from 1.04 in the first quarter of 1999 to 1.26 for thecurrent period. Cash generation for the period was R$ 391.2 million, presently derived from realizingincomings on deliveries plus those from progressive payments related with new contracts signedduring the period, leading to a final cash balance of R$ 660.6 million.Sales Gross revenues on aircraft invoice plus replacement parts and services carried out by theparent company and subsidiaries in Brazil and abroad, when compared with the same periods ofthe prior financial years, have recorded the progress demonstrated in the following figure,separated for the domestic and foreign markets. 1200 GROSS REVENUES R$ million 21.1 1052,2 1000 Domestic Mar. Foreign Mar. 800 43.7 598,0 600 400 258,6 24.8 200 233.8 554.3 1,031.1 0 to Mar/98 to Mar/99 to Mar/2000 The proportion of exports on total revenues for the period was 98.4%, compared with92.7% for the same period of 1999 and 90.4% for the same period of 1998. For the parentcompany, the exports worth R$ 993.6 million corresponded to 94.7% of total sales worth R$1,052.2 million.Commercial Aviation Market In the 21 to 40-seat segment, Embraer has the 37-seat regional jet denominated ERJ 135,of which 25 aircraft were delivered. In the order book, orders from American Eagle andContinental Express should be highlighted. At the end of the period, orders totaled 321 aircraft ,of which 164 firm orders - 25 of these have already been delivered - and 157 options, as shownin the following table:
Customer Country Firm Options Deliveries Orders Order Backlog American Eagle US 95 115 12 83 City Air Sweden 1 2 1 0 Continental Express US 50 25 9 41 Proteus France 13 15 - 13 Regional Airlines France 5 0 3 2 TOTAL 164 157 25 139 In the 41 to 60 seat segment, Embraer started production of the first ERJ 140 prototype,which is an extended version of the ERJ 135 regional jet with a common component ratio with theERJ 135/145 family of more than 95%, and is planned to be concluded in due of this year. Thisnew jet will satisfy a demand of around 750 jet aircraft in this 44-seat category over the next tenyears. The ERJ 145 regional jet with capacity of 50 passengers already has a fleet of 200 aircraftin operation by 19 airlines. The highlight of the period was the completion of negotiations with Chautauqua/Wexford,resulting in the confirmation of the 20 options on the existing contract and signing of an addendumfor a further 15 firm orders and 45 options on the ERJ 145, convertible into ERJ 140 models . The backlog for the ERJ 145 now totals 734 orders, of which 438 firm and 296 options,as shown below: Customer Country Firm Options Deliveries Order Orders Backlog Alitalia Italy 6 15 - 6 American Eagle US 50 17 50 0 British Midland United Kingdom 10 10 4 6 British Regional United Kingdom 23 2 15 8 Brymon United Kingdom 7 14 2 5 Cirrus Germany 1 0 1 0 Continental US 150 50 59 91 Express Crossair Switzerland 15 25 2 13 ERA Spain 2 0 2 0 Intercanadian Canada 6 6 - 6 KLM Exel Holland 3 2 1 2 LOT Poland 6 6 3 3 Luxair Luxembourg 9 2 6 3 Mesa US 36 64 - 36 Portugália Portugal 8 0 8 0 Proteus France 10 0 2 8 Regional Airlines France 15 0 9 6 Rheintalflug Austria 2 6 1 1 Rio-Sul Brazil 15 15 15 0 Skyways AB Sweden 4 11 4 0 Trans States US 15 6 9 6 Wexford US 45 45 7 38 Total 438 296 200 238
In the 61 to 80 seat segment, Embraer products are represented by the ERJ 170, ERJ 190100 and ERJ 190-200 jet family for 70, 98 and 108 passengers respectively, which werereceived with great interest and enthusiasm by the market at the time of launching in 1999. Thejoint design definition phase was concluded at São José dos Campos - SP -in March, with theparticipation of engineers and technicians from all the partners in the programme. Thedevelopment programme for these aircraft continues to advance ahead of schedule, maintainingthe first planned deliveries of the ERJ 170 for December of 2002 and of the ERJ 190-200 for Julyof 2004. The total order for these two aircraft is shown below:ERJ 170 orders: Customer Country Firm Options Deliveries Order Orders Backlog Crossair Switzerland 30 50 - 30 Regional Airlines France 10 5 - 10 Total 40 55 - 40ERJ 190-200 orders: Customer Country Firm Options Deliveries Order Orders Backlog Crossair Switzerland 30 50 - 30 Total 30 50 - 30 In the 21 to 40-seat segment, Embraer has the EMB 120 Brasilia 30-seat turbopropaircraft, with a total of 350 aircraft produced and operating successfully with 34 regional aviationcompanies in 14 countries.Defense Market The EMB145-SA remote sensing aircraft and the EMB145-SA air surveillance modelordered by the Brazilian government to operate as part of the Amazon Surveillance System(SIVAM), continue in the development, fabrication and preparation of the systems integration andtesting phase. Under this contract, 3 EMB 145-SA and 5 EMB 145-RS aircraft will beproduced. Both variants are known as Airborne Early Warning and Control (AEW&C) and werealso selected by the Greek government, which ordered 4 units, and the Mexican government forthe supply of 7 units, of which 4 are for Maritime patrol duties. An EMB145-RS aircraft was demonstrated at the Singapore Air Show held in February. The program for the AMX-T aircraft, which is a derivative of the AM-X with modernizedavionics and is manufactured under an industrial cooperation agreement between Brazil and Italy,was selected by the Venezuelan Air Force. The contract is under negotiation. The EMB 314 Super Tucano aircraft in the ALX (Light Attack Aircraft) configuration,powered by a 1600 SHP engine and equipped with advanced avionics, in the single-seater andtwin-seater versions, was developed to satisfy the requirements of the Brazilian Air Force and twoprototypes are ready in operation.Executive Aviation Market
Embraer is concluding commercial and economic -financial feasibility studies to launchproducts for the Executive Aviation Market, named the ECJ 135 and ECJ 170, based on the ERJ135 and ERJ 170 jet platforms respectively. This initiative is a result of the recognition of marketpotential due to the fact that multinational corporations are opting to use executive aircraft totransport staff between branches and worksites, for visits by employees and managers tocustomers, and also for transporting customers. Embraer hopes to win a market share of between 10 and 15% of this segment through asuitable strategy and product structuring and for this purpose has created a Vice-Presidencyexclusively dedicated to the Corporate Aviation Market ventureCustomer Service Market In order to understand, anticipate and satisfy customer requirements more effectively, aCustomer Service Vice-Presidency was also created at the beginning of this year. Throughoperating units located in South America, North America, Europe in Australia, Embraer has madeteams equipped with the necessary resources available within a priority initiative to ensurecustomers maximum efficiency in aircraft availability, both for commercial and military applications. The Company is investing in the formation of decentralized stocks in order to reduce servicecycles to customers. As a compliment to this strategy, a replacement parts program operatingthrough a pool, in which part utilization is shared between a group of operators, has beensuccessfully offered to companies operating our aircraft.Subcontract and General Aviation Under contract to United Technologies Sikorsky Corporation (USA), Embraer isproceeding with engineering development and processes for the subsequent fabrication of tankstructures and landing gear systems for the S-92 Helibus, a medium-sized twin-turbine helicopterwith a capacity for 19 passengers in the civil version. The General Aviation business is managed by Neiva, a wholly-owned Embraer subsidiary.This unit produces small aircraft for executive use and the Ipanema, used for crop spraying.Neivas holding in the Embraer group has been increased by contracting the supply of parts acomponents for aircraft manufactured by Embraer.Sales Financing With respect to the dispute at the World Trade Organization - WTO involving the Braziliangovernment with respect to the Brazilian Export Credits Program - PROEX and the Canadiangovernment, regarding the subsidies offered to the Canadian aeronautical industry, on November19, 1999, the respective governments submitted to the WTOs dispute settlement mechanism themodifications made by each country and the programs to comply with the organization’s decision. Both countries declared that the modifications made by the other were unsatisfactory anddid not comply with the rules imposed by the WTO. As a result, a new panel was set up todetermine whether the WTO decisions were or were not implemented. The Brazilian governmenthas reinforced its intention on various occasions to honor the financing contracts assumed withEmbraer customers.
Organizational Development During this period, Embraer implemented the first phase of the new corporate managementsystem using the SAP software at São José dos Campos. The system will be implemented in thesubsidiary companies abroad by August and at Neiva by November. Improvements to thesupplies, manufacturing and finance processes continue, in order to support the increased volumeproduction and provide modern management tools. During the period, the consolidated headcount increased by 626 employees and in Marchtotaled 2,886 indirect employees (nonproductive activities) and 6,042 direct employees, totaling8,928 overall.Investments in R&D and Productivity During the period, research and development on new programs, plus maintenance andimprovement of existing programs, received investments of R$ 40.1 million. The total investmentsmade on improving capacity and modernizing industrial processes, engineering and managementsupport was R$ 27.0 million. With this increase, expenditure on investments (R&D andProductivity) totaled R$ 67.0 million. The Virtual Reality Center (CRV) was officially introduced in February, which is a moderninteractive system to increase productivity in the development of new aircraft. The system iscurrently being used to develop the ERJ 170 and ERJ 190 jets. Approximately R$ 2.9 million hasbeen invested in the project, which will substantially reduce development costs and lead times fornew projects.Investors Relations The company shares performed well in stock market. During this quarter, the preferredstock appreciated by approximately 2.3% with a daily trading volume of R$ 1.37 million. Thecommon stock appreciated by 9.6%, with a daily volume of R$ 4.12 million. Over the sameperiod of analysis, the Ibovespa index appreciated by 4.2%. As a result of increasing liquidity, as from May 2000 the Embraer preferred stock alsobecame part of the Bovespa index with a weight of 0.69%. These shares had already beenincluded in the preview of the Ibovespa theoretical portfolio as from January 2000. The weightingof the common shares, which have formed part of the index since 1999, was revised upwardsfrom 1.5% to 1.84%. During this quarter, 8,335,000 preferred shares were issued as a result of exercising833,500 subscription warrants, which are coupledwith the 4th. issue of debentures. With theconversion of the subscription warrants, Embraers subscribed and paid-up capital is now madeup of 242,544,448 common shares, including the golden share, and 247,008,426 preferredshares, totaling 489,552,874 shares. Dividends were paid during the period relating to the income of the second half of 1999 toan amount of R$ 86.6 million and the Board of Directors also approved the payment of interest onown capital related to the first quarter of 2000 in the amount of R$ 19.6 million, paid from April14, 2000.Outlook
The credibility won by Embraer and analyses carried out on market and customer needs haveopened the way for the development of new products. This has occurred with the ERJ-170regional jet in the 61 to 80-seat segment and with the 44-seat ERJ-140, and will shortly occurwith products for the executive aviation segment. We therefore see Embraer as an economically,financially and commercially strong company, ready to continue its mission of offering customersoperationally economic, safe and comfortable products, generating jobs wherever it operates andoffering a satisfactory return to its employees, customers, suppliers, shareholders and society. São José dos Campos, May 15, 2000 The Management
R$ thousandsLIABILITIES AND SHAREHOLDERS’ EQUITY 12/31/1999 03/31/2000CURRENT LIABILITIES 2,074,054 2,124,394 Loans 994,102 885,519 Suppliers 358,227 415,376 Accounts payable 52,649 106,742 Customers’ advances 390,401 439,059 Taxes and social charges payable 42,311 95,732 Accrued taxes on income 26,170 51,600 Dealers and sales agents 355 1,004 Accrued liabilities 121,217 118,373 Dividends 86,796 8,451 Debentures 1,826 2,538LONG-TERM LIABILITIES 689,369 671,445 Loans 144,111 137,617 Suppliers - - Accounts payable 38,579 59,938 Debentures 180,504 167,172 Customers’ advances 201,514 211,463 Long-term portion of refinanced taxes 86,376 54,394 Accrued liabilities 38,285 40,681 Deferred income tax - -DEFERRED INCOME 386 374SHAREHOLDERS’ EQUITY 697,106 794,266 Capital 354,619 367,453 Capital reserve 159 6,565 Legal reserve 28,766 28,766 Income reserve 313,562 313,562 Retained earnings (deficit) - 77,920TOTAL LIABILITIES AND 3,460,915 3,590,479SHAREHOLDERS’ EQUITY
Consolidated Statement of Income R$ thousands 03/31/1999 03/31/2000SALES: Gross sales- Domestic market 43,672 21,149 Foreign market 554,297 1,031,091 Sales taxes (3,036) (19,752)Net sales 594,933 1,032,488COST OF SALES (409,925) (732,091)Gross profit 185,008 300,397OPERATING EXPENSES: Administrative (14,073) (30,000) Selling (40,751) (66,140) Other income (expenses), net (1,150) (22,486) Equity in unconsolidated subsidiary - 123Income from operations before financial expenses 129,034 181,894FINANCIAL INCOME (EXPENSES): Interest expenses (37,214) (51,048) Interest income 23,342 21,568 Monetary and exchange variations, net (98,171) (2,311)Income from operations after financial income 16,991 150,103(expenses)NONOPERATING INCOME (EXPENSE), NET (159) 281INCOME BEFORE INCOME TAX 16,832 150,384INCOME TAX (PROVISION) (1,706) (55,814)INCOME TAX AND SOCIAL CONTRIBUTION ON - (10,757) RECOVERABLE TAXESINCOME BEFORE EMPLOYEE PROFIT SHARING 15,126 83,813EMPLOYEE PROFIT SHARING - (5,894)
REVERSION OF INTEREST ON OWN CAPITAL - 19,640NET INCOME 15,126 97,559