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