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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 20-F
☐ | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR
☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year endedDecember 31, 2018
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR
☐ | SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission filenumber 001-15102
EMBRAER S.A.
(Exact name of Registrant as specified in its charter)
EMBRAER Inc.
(Translation of Registrant’s name into English)
Federative Republic of Brazil
(Jurisdiction of incorporation)
Avenida Presidente Juscelino Kubitschek, 1909
14th and 15th floors – Torre Norte – São Paulo Corporate Towers
04543-907 São Paulo/SP – Brasil
(Address of principal executive offices)
Nelson Krahenbuhl Salgado
Head of Investor Relations
(55) 11 3040 9518
Investor relations department, (55) 11 3040 9518, investor.relations@embraer.com.br
(Name, Telephone,E-mail and/or facsimile number and Address of Company Contact Person)
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 Exchange | |
5.150% Notes due 2022 of Embraer S.A. | New York Stock Exchange
| |
5.050% Guaranteed Notes due 2025 of Embraer Netherlands Finance B.V.
| New York Stock Exchange
| |
5.40% Guaranteed Notes due 2027 of Embraer Netherlands Finance B.V.
| 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
6.375% Guaranteed Notes due 2020 of Embraer Overseas Ltd. Guaranteed by Embraer S.A.
Number of outstanding shares of each of the issuer’s classes of capital or common stock as of December 31, 2018:
735, 482,105 common shares, without par value
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☒ No ☐
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 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 Securities Exchange 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 ofRegulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ☐ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer” and “emerging growth company” inRule 12b-2 of the Exchange Act.
Large Accelerated Filer ☒ Accelerated Filer ☐ Non-accelerated filer ☐ Emerging growth company ☐
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. ☐
† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
Indicate 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 Standards Board | Other ☐ |
If “Other” has been checked in response to the previous question, indicate 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 inRule 12b-2 of the Exchange Act).
Yes ☐ No ☒
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Page | ||||||
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ITEM 1. | 7 | |||||
ITEM 2. | 7 | |||||
ITEM 3. | 7 | |||||
3A. | 7 | |||||
3B. | 11 | |||||
3C. | 11 | |||||
3D. | 11 | |||||
ITEM 4. | 27 | |||||
4A. | 27 | |||||
4B. | 30 | |||||
4C. | 49 | |||||
4D. | 49 | |||||
ITEM 4A. | 51 | |||||
ITEM 5. | 51 | |||||
5A. | 52 | |||||
5B. | 67 | |||||
5C. | 71 | |||||
5D. | 73 | |||||
5E. | 78 | |||||
5F. | 80 | |||||
5G. | 81 | |||||
ITEM 6. | 81 | |||||
6A. | 81 | |||||
6B. | 86 | |||||
6C. | 88 | |||||
6D. | 90 | |||||
6E. | 91 | |||||
ITEM 7. | 91 | |||||
7A. | 91 | |||||
7B. | 92 | |||||
7C. | 93 | |||||
ITEM 8. | 93 | |||||
8A. | 93 | |||||
8B. | 98 | |||||
ITEM 9. | 99 | |||||
9A. | 99 | |||||
9B. | 99 | |||||
9C. | 99 | |||||
9D. | 102 | |||||
9E. | 102 | |||||
9F. | 102 |
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ITEM 10. | 102 | |||||
10A. | 102 | |||||
10B. | 102 | |||||
10C. | 115 | |||||
10D. | 116 | |||||
10E. | 117 | |||||
10F. | 125 | |||||
10G. | 125 | |||||
10H. | 125 | |||||
10I. | 125 | |||||
ITEM 11. | 125 | |||||
ITEM 12. | 130 | |||||
12A. | 130 | |||||
12B. | 130 | |||||
12C. | 130 | |||||
12D. | 130 | |||||
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ITEM 13. | 132 | |||||
ITEM 14. | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS | 132 | ||||
ITEM 15. | 132 | |||||
ITEM 16A | 133 | |||||
ITEM 16B | 133 | |||||
ITEM 16C | 133 | |||||
ITEM 16D | 134 | |||||
ITEM 16E | PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS | 134 | ||||
ITEM 16F | 134 | |||||
ITEM 16G | 134 | |||||
ITEM 16H | 137 | |||||
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ITEM 17. | 137 | |||||
ITEM 18. | 137 | |||||
ITEM 19. | 137 |
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INTRODUCTION
In this annual report, “Embraer,” “we,” “us,” “our” or the “Company” refer to Embraer S.A. and its consolidated subsidiaries. All references herein to the “real,” “reais” or “R$” are to the Brazilianreal, the official currency of Brazil. All references to “US$,” “dollars” or “U.S. dollars” are to United States dollars. All references to the “Brazilian government” are to the federal government of Brazil.
Presentation of Financial and Other Data
Financial Data
Our audited consolidated financial statements as of December 31, 2018 and 2017 and for the years then ended (2018 audited consolidated financial statements) are included in this annual report.
In addition, our audited consolidated financial statements as of and for the year ended December 31, 2016 are also included elsewhere in this annual report.
Our consolidated financial statements have been prepared in accordance with International Financial Reporting Standards, or IFRS, as issued by the International Accounting Standards Board, or IASB.
The set of annual consolidated financial statements as of December 31, 2018, 2017 and 2016 includes the first year of adoption of standards IFRS 9—Financial Instruments and IFRS 15—Revenue from Contracts with Customers. The transition was applied retrospectively from January 1, 2016. Changes in the significant accounting practices applied as a result of the adoption, including the restatements figures for December 31, 2017 and 2016, and January 1, 2016, are described in Note 2.2.1 to the 2018 audited consolidated financial statements.
After analyzing Embraer S.A.’s operations and businesses on a standalone basis with regard to the applicability of International Accounting Standards, or IAS, 21—“The Effects of Changes in Foreign Exchange Rates,” particularly in relation to the factors involved in determining our functional currency, management concluded that Embraer S.A.’s functional currency is the U.S. dollar. This conclusion was based on an analysis of the following factors, as set forth in IAS 21: (i) the currency that most influences sales prices of goods and services; (ii) the currency of the country whose competitive forces and regulations most determine the sale prices of our goods and services; (iii) the currency that most influences the costs of providing goods and services; and (iv) the currency in which the funds for financial operations are largely obtained. Our audited consolidated financial statements included elsewhere in this annual report are presented in U.S. dollars, which is our presentation currency.
In our 2018, 2017 and 2016 consolidated financial statements, gains or losses resulting from the remeasurement of the monetary items and from foreign currency transactions have been reported in the consolidated statement of income as a single line item as foreign exchange gain (loss), net.
For certain purposes, including providing reports to our Brazilian shareholders, filing financial statements with theComissão de Valores Mobiliários (Brazilian securities commission), or CVM, and determining dividend payments and other distributions and tax liabilities in Brazil, we have prepared, and will continue to be required to prepare, financial statements in accordance with Law No. 6,404 of December 15, 1976, as amended, or the Brazilian Corporate Law.
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 jet” refers to jet aircraft with50-130 passenger seats—all of our regional jet aircraft are sold in the commercial aviation segment; |
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• | the term “commercial aircraft” as it applies to Embraer, refers to our aircraft with up to 150 seats, which includes our regional jets; |
• | the terms “entry-level jet” and “light jet” refer to executive jets that usually carry from four to eight passengers and up to nine passengers, respectively, that are designed for shorttake-off distances; |
• | the term “medium cabin jet” refers to executive jets that usually carry up to 12 passengers and can cover distances ranging from 1,700 to 3,900 nautical miles; |
• | the term “large jet” refers to executive jets that usually carry up to 19 passengers and can cover distances greater than 4,000 nautical miles; |
• | the term “ultra-large jet” refers to executive jets that usually have longer ranges andover-sized cabin spaces and can carry up to 19 passengers; and |
• | the term “executive jets,” as it applies to us, refers to our aircraft sold to companies, including fractional ownership companies, charter companies andair-taxi companies and highnet-worth individuals. |
We calculate our backlog as the sum of the contract values of all firm orders (i) for any aircraft that has not yet been delivered, (ii) for services and support contracts for all business units, including repair services and spare parts contracts for a period of more than one year, and (iii) for services and technologies contracted and not yet performed in our Defense and Security business. A firm order is a firm commitment from a customer, represented by a signed contract. Options to acquire aircraft are not considered as part of our 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 the Securities Act, and Section 21E of the U.S. Securities Exchange Act of 1934, as amended, or the Exchange Act, principally in Items 3 through 5 and Item 11 of this annual report. We have based these forward-looking statements largely on our current expectations and projections about future events and industry and financial trends affecting our business. These forward-looking statements are subject to risks, uncertainties and assumptions, including, among other things:
• | general economic, political and business conditions in Brazil and in our other markets; |
• | 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 theE-Jets family, including the development of the second generation, theE-Jets E2, our line of executive jets (including the Phenom 100EV, Phenom 300E, Lineage 1000E, Legacy 650E, Legacy 450, Legacy 500, Praetor 500 and Praetor 600) and our defense and security aircraft and services; |
• | 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 forthe 70-150 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; |
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• | our relationship with our workforce; and |
• | other risk factors, including those set forth under “Item 3D. Key Information—Risk Factors.” |
The words “believe,” “may,” “will,” “forecast,” “estimate,” “plan,” “continue,” “anticipate,” “intend,” “expect” and similar words herein 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 differ substantially from those anticipated in our forward-looking statements. As a result of various factors, including those risks described in “Item 3D. Key Information—Risk Factors,” undue reliance should not be placed on these forward-looking statements.
EXPLANATORY NOTE
Strategic Partnership with Boeing
Overview
In December 2017, Embraer and The Boeing Company, or Boeing, announced that the two companies were engaged in discussions regarding a potential strategic partnership. In July 2018, the two companies entered into a preliminary andnon-binding memorandum of understanding establishing the basic premises for a potential strategic partnership involving certain of Embraer’s businesses. In December 2018, the board of directors of Embraer approved, in principle, the terms and conditions of the strategic partnership, subject to the approval by the Brazilian government, which holds the common share of special class issued by Embraer (golden share). The Brazilian government approved the Transaction (as defined below) in early 2019.
On January 24, 2019, Embraer Boeing and certain of their subsidiaries entered into the Master Transaction Agreement (as defined below) and certain other transaction agreements, pursuant to which, subject to certain approvals and other conditions precedent, a Brazilian subsidiary of Boeing will acquire a controlling stake in Embraer’s commercial aviation business unit and Embraer and Boeing or their respective subsidiaries will form a joint venture for the promotion and development of new markets and applications for theKC-390 multi-mission aircraft.
On February 26, 2019, the shareholders of Embraer approved the terms and conditions of the Transaction at an extraordinary general shareholders’ meeting. The consummation of the Transaction remains subject to (i) approval by antitrust authorities in Brazil, the United States and other applicable jurisdictions; and (ii) the satisfaction of other customary closing conditions.
Upon consummation of the strategic partnership, Embraer expects to benefit from Boeing’s broader scale, resources and market presence, including access to Boeing’s global supply, sales, marketing and service chain, which Embraer expects will enable it to benefit from high level efficiency, improving the competitiveness of its products and services in an industry environment of increasingly growing competition.
In addition, after the closing of the Transaction, Embraer expects to significantly reduce its indebtedness, which will cause Embraer to have a significantly stronger cash position. Management expects to propose to the shareholders an extraordinary dividend distribution, which amount will be determined taking into account the Transaction costs and purchase price adjustments, as well as the operating results of Embraer until the closing of the Transaction.
Upon the implementation of the Transaction, the Company will remain a Brazilian publicly-listed company, with shares listed on theNovo Mercado special segment of B3 S.A.—Brasil, Bolsa, Balcãoand American Depositary Shares, or ADSs, listed on the New York Stock Exchange. The Brazilian government will continue to hold the rights deriving from its ownership of the common share of special class issued by the Company (golden share). Embraer will keep its business units related to executive aviation and defense and security and will continue to develop and operate them.
For risks relating to the Transaction, see “Item 3D. Risk Factors—Risks Relating to Embraer—The consummation of the strategic partnership with Boeing is subject to conditions, some or all of which may not be satisfied or completed within the expected timeframe, if at all. Failure to complete the proposed Transaction could adversely affect our business, financial condition and operating results and the trading price of our common stock and ADSs, “—Our strategic partnership with Boeing may not be implemented successfully or the implementation may be more difficult, time consuming or costly than expected,” and “—Although we expect that the strategic partnership with Boeing will result in synergies and other benefits to us, those benefits may not be realized fully or at all or may not be realized within the expected time frame.”
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The Transaction
The strategic partnership with Boeing comprises:
(i) | the separation and transfer, by Embraer, of assets, liabilities, properties, rights and obligations (subject to certain exceptions) related to the commercial aviation business unit to Yaborã Indústria Aeronáutica S.A., a Brazilian closely-held corporation that will conduct the commercial aviation business and perform services that are currently performed by Embraer (the “Commercial Aviation NewCo” or “Commercial Aviation JV”); |
(ii) | the acquisition and subscription by Boeing Brasil Serviços Técnicos Aeronáuticos Ltda, a subsidiary of Boeing in Brazil (“Boeing Brazil”) of shares representing 80% of the Commercial Aviation NewCo’s share capital, so that Embraer and Boeing Brazil will hold, respectively, 20% and 80% of the total and voting share capital of the Commercial Aviation NewCo, pursuant to the terms of a master transaction agreement executed on January 24, 2019 by and among Embraer, Boeing, Boeing Brazil and the Commercial Aviation NewCo (the “Master Transaction Agreement”), and the execution by the same parties of a shareholders’ agreement that will govern the relationship of Embraer and Boeing Brazil as shareholders of the Commercial Aviation NewCo; |
(iii) | the execution by Embraer or an affiliate thereof, Boeing or an affiliate thereof and/or the Commercial Aviation NewCo, as applicable, of operational agreements that will govern, among other matters, the provision of general and engineering services, intellectual property licensing, research and development, use and access of certain facilities, supply of certain products and components, and an agreement to maximize potential cost reduction opportunities in Embraer’s supply chain and the provision of certain support and maintenance services (the “Commercial Aviation JV Operational Agreements”); |
(iv) | the formation of another joint venture between Embraer and Boeing (or any of their respective subsidiaries) for the promotion and development of new markets and applications for the multi-mission airplaneKC-390, based on jointly identified opportunities, and development, manufacture and sales of theKC-390, in which joint venture Embraer or its subsidiary will hold the majority of the share capital (the “KC-390 NewCo” and “KC-390 JV”) and the execution by Embraer or its subsidiary and Boeing or its subsidiary, as applicable, of the Amended and Restated Limited Liability Company Agreement of theKC-390 NewCo; (the “Restated Limited Liability Company Agreement”); and |
(v) | the execution, by Embraer or an affiliate thereof, Boeing or an affiliate thereof and/or theKC-390 NewCo, as the case may be, of certain operational agreements for theKC-390 NewCo, including supply, intellectual property licensing, engineering services and other services and support agreements, which main conditions are set forth in the Contribution Agreement (as defined below) and the final terms will be negotiated by the parties until the closing of the Transaction (“KC-390 JV Operational Agreements” and, together with items (i) through (iv) above, collectively, the “Transaction”). |
Commercial Aviation JV: Master Transaction Agreement
Pursuant to the terms and conditions of the Master Transaction Agreement, Embraer will contribute certain assets and rights related to its commercial aviation business to the Commercial Aviation NewCo and the Commercial Aviation NewCo will assume certain liabilities and obligations related to Embraer’s commercial aviation business (the “Contribution”) and, in exchange for the Contribution, the Commercial Aviation NewCo will issue common shares and redeemable preferred shares to Embraer. The Commercial Aviation NewCo’s redeemable preferred shares will have a liquidation preference, receive an annual fixed cumulative dividend payable at a 3.3% rate, be redeemable after two years from the date of issuance, and have no voting rights.
Subject to the conditions in the Master Transaction Agreement, upon consummation of the Transaction, Boeing Brazil will acquire 80% of the issued and outstanding common shares and redeemable preferred shares of the Commercial Aviation NewCo, through the subscription of new shares to be issued by the Commercial Aviation NewCo and the acquisition directly from Embraer of existing shares issued by the Commercial Aviation NewCo, at an aggregate value of approximately $4.2 billion (the “Estimated Value”). The Estimated Value is subject to adjustments customary for transactions of the same nature including for net debt and net working capital of the Commercial Aviation NewCo at the closing date of the Transaction.
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Until the closing of the Transaction, both parties will conduct their respective businesses completely separate and independent of each other and Embraer will conduct its commercial aviation business in the ordinary course, consistent with past practice.
The foregoing description is only a summary of certain provisions of the Master Transaction Agreement and is qualified in its entirety by reference to the executed Master Transaction Agreement, a copy of which is filed as an exhibit to this annual report.
After the consummation of the Transaction, Commercial Aviation NewCo will be managed by a board of executive officers and a board of directors, and it will be controlled by Boeing Brazil, which will have the right to appoint all members of the management of the Commercial Aviation NewCo. Pursuant to the terms of a shareholders’ agreement to be entered into by Embraer and Boeing Brazil, Embraer will have the right to appoint an observer to participate in any meetings of the board of directors of the Commercial Aviation NewCo (or any committees formed by the board of directors) and the right to receive relevant information about the Commercial Aviation NewCo, subject to certain exceptions. In addition, Embraer will have veto rights relating to certain material matters.
The Commercial Aviation NewCo will also have an oversight committee composed of the same number of members appointed by Embraer and Boeing Brazil to discuss, review and monitor the performance of the activities governed by the Commercial Aviation JV Operational Agreements. Any changes to the guidelines of the oversight committee will only be approved with the affirmative vote of Embraer.
The shareholders’ agreement will provide for an anti-dilution policy and a mandatory minimum dividend policy. Subject to certain conditions, pursuant to the mandatory minimum dividend policy (i) until the fifth anniversary of the date of execution of the shareholders’ agreement, the Commercial Aviation NewCo shall determine the declaration and payment of dividends as set forth in its bylaws, which will provide for distribution of at least 25% of the remaining balance of adjusted net profits for the fiscal year, after the deductions provided for in Brazilian Corporate Law and amounts allocated to a contingencies reserve; and (ii) from and after the fifth anniversary of the date of the shareholders’ agreement, subject to certain exceptions, the Commercial Aviation NewCo shall declare and pay a minimum annual dividend equal to 50% of its retained earnings and net profits, adjusted as will be provided in the bylaws and subject to Brazilian Corporate Law.
For purposes of aligning the interests of the parties in the partnership resulting from the Transaction, the shareholders’ agreement will provide that, as a general rule, Embraer and Boeing Brazil will not be able to dispose of their respective shares issued by the Commercial Aviation NewCo for a period of ten years following the closing of the Transaction (“Lock-Up Period”), except for Embraer’s put option described below and the transfer of shares to companies of the same group. After theLock-Up Period, certain rules for the transfer of shares will be applicable, including a right of first offer,tag-along and drag-along rights and a right of first refusal.
In addition, the shareholders’ agreement will provide for Embraer’s put option, exercisable at any time, for the sale to Boeing Brazil of all or any portion of the shares held by Embraer in the Commercial Aviation NewCo. Subject to certain parameters set forth in the shareholders’ agreement, the exercise price of the put option will be determined based on the purchase price to be paid by Boeing Brazil on the closing date of the Transaction, if exercised during the Lock Up Period, and fair value, as determined in accordance with the methodology set forth in the shareholders’ agreement, if exercised after the Lock Up Period.
Also, to enable mutual growth and stability of the businesses, the parties involved in the Transaction will enter into the Commercial Aviation JV Operational Agreements.
KC-390 Joint Venture
TheKC-390 NewCo will be EB Defense, LLC, a Delaware limited liability company incorporated by a subsidiary of Embraer (the “Embraer Member Entity”) and in which the Embraer Member Entity is currently the sole member. Embraer or the Embraer Member Entity will hold 51% and Boeing or a subsidiary of Boeing (the “Boeing Member Entity”) will hold 49% of the membership interests of EB Defense, LLC, in accordance with the Amended and Restated Limited Liability Company Agreement, to be entered into and become effective upon the closing of the Transaction. The agreed upon form of the Amended and Restated Limited Liability Company Agreement is attached as an exhibit to the Contribution Agreement, executed by and among EB Defense, LLC, the Boeing Member Entity, Boeing, the Embraer Member Entity, and Embraer, on January 24, 2019 (the “Contribution Agreement”).
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The foregoing description is only a summary of certain provisions of the Contribution Agreement and is qualified in its entirety by reference to the copy of the executed Contribution Agreement, which is filed as an exhibit to this annual report.
The Restated Limited Liability Company Agreement will set forth the main terms that will govern the governance ofKC-390 JV, including the following: (i) theKC-390 NewCo’s board of directors will be comprised of five members and the Embraer Member Entity will have the right to appoint four members (including the chairperson; and one of the directors appointed by Embraer Member Entity will be a designee of the Brazilian Air Force – FAB), and the Boeing Member Entity will have the right to appoint one member, (ii) the chief executive officer will be appointed by the Embraer Member Entity, and the chief financial officer will be appointed by the Boeing Member Entity; and (iii) certain matters will be subject to unanimous approval by the board of directors or by the members of theKC-390 NewCo.
Boeing, or the Boeing Member Entity and Embraer or the Embraer Member Entity will make contributions to theKC-390 NewCo in cash and in assets.
Also, in order to enable the closing of theKC-390 JV, the relevant parties will enter into theKC-390 JV Operational Agreements.
Corporate Structure
As of the date of this annual report, the corporate structure (simplified) of Embraer is as follows:
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Immediately after the closing of the Transaction, the simplified corporate structure of Embraer, the Commercial Aviation NewCo and of theKC-390 NewCo will be as follows:
ITEM 1. | IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS |
Not applicable.
ITEM 2. | OFFER STATISTICS AND EXPECTED TIMETABLE |
Not applicable.
ITEM 3. | KEY INFORMATION |
3A. | Selected Financial Data and Other Data |
The following tables present a summary of our selected financial data derived from our audited consolidated financial statements prepared in accordance with IFRS as issued by IASB as of the dates and for each of the periods indicated. The selected financial data as of and for the years ended December 31, 2018 and 2017 should be read together with our audited consolidated financial statements as of December 31, 2018 and 2017 for the year then ended and related notes thereto included elsewhere in this annual report. In addition, the selected financial data as of and for the years ended December 31, 2017 and 2016 should be read together with our audited consolidated financial statements as of and for the years ended December 31, 2017 and 2016 and related notes thereto included elsewhere in this annual report. For information on our segment results, see Note 37 to our 2018 audited consolidated financial statements.
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Selected Financial Data
Year Ended December 31, | ||||||||||||||||||||
Consolidated Statements of Income Data | 2018 | 2017 | 2016 | 2015(1) | 2014(1) | |||||||||||||||
Restated | Restated | |||||||||||||||||||
(in US$ millions) | ||||||||||||||||||||
Revenue | 5,071.1 | 5,859.4 | 6,203.9 | 5,928.1 | 6,288.8 | |||||||||||||||
Cost of sales and services | (4,303.1 | ) | (4,764.1 | ) | (4.982.0 | ) | (4,816.8 | ) | (5,038.3 | ) | ||||||||||
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Gross profit | 768.0 | 1,095.3 | 1,221.9 | 1,111.3 | 1,250.5 | |||||||||||||||
Operating income (expense) | ||||||||||||||||||||
Administrative | (182.6 | ) | (179.1 | ) | (164.3 | ) | (182.0 | ) | (207.5 | ) | ||||||||||
Selling | (304.2 | ) | (315.9 | ) | (353.4 | ) | (361.6 | ) | (419.9 | ) | ||||||||||
Research | (46.1 | ) | (49.2 | ) | (47.6 | ) | (41.7 | ) | (47.1 | ) | ||||||||||
Other operating income (expense), net | (199.4 | ) | (210.4 | ) | (442.6 | ) | (194.2 | ) | (32.6 | ) | ||||||||||
Equity in income (losses) of associates | (0.4 | ) | 1.2 | (0.3 | ) | (0.3 | ) | (0.1 | ) | |||||||||||
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Operating profit before financial result | 35.3 | 341.9 | 213.7 | 331.5 | 543.3 | |||||||||||||||
Financial expense, net | (171.5 | ) | (40.6 | ) | (37.5 | ) | (22.9 | ) | (24.5 | ) | ||||||||||
Foreign exchange gain (loss), net | — | 6.6 | 4.4 | 27.6 | (14.9 | ) | ||||||||||||||
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Profit (loss) before taxes on income | (136.2 | ) | 307.9 | 180.6 | 336.2 | 503.9 | ||||||||||||||
Income tax (expense) | (35.0 | ) | (27.9 | ) | (0.3 | ) | (255.4 | ) | (156.2 | ) | ||||||||||
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Net income (loss) for the period | (171.2 | ) | 280.0 | 180.3 | 80.8 | 347.7 | ||||||||||||||
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Attributable to: | ||||||||||||||||||||
Owners of Embraer S.A. | (178.2 | ) | 264.0 | 178.6 | 69.2 | 334.7 | ||||||||||||||
Noncontrolling interests | 7.0 | 16.0 | 1.7 | 11.6 | 13.0 |
Year Ended December 31, | ||||||||||||||||||||
Earnings per Share—Basic | 2018 | 2017 | 2016 | 2015(1) | 2014(1) | |||||||||||||||
Restated | Restated | |||||||||||||||||||
(in US$, except for share data) | ||||||||||||||||||||
Net income (loss) attributable to owners of Embraer S.A. | (178.2 | ) | 264.0 | 178.6 | 69.2 | 334.7 | ||||||||||||||
Weighted average number of shares (in thousands) | 734,065 | 734,264 | 735,571 | 730,205 | 733,677 | |||||||||||||||
Basic earnings per share—U.S. dollars | (0.24 | ) | 0.36 | 0.24 | 0.09 | 0.46 |
Year Ended December 31, | ||||||||||||||||||||
Earnings per Share—Diluted | 2018 | 2017 | 2016 | 2015(1) | 2014(1) | |||||||||||||||
Restated | Restated | |||||||||||||||||||
(in US$, except for share data) | ||||||||||||||||||||
Net income attributable to owners of Embraer S.A. | (178.2 | ) | 264.0 | 178.6 | 69.2 | 334.7 | ||||||||||||||
Weighted average number of shares (in thousands) | 734,065 | 734,264 | 735,571 | 730,205 | 733,677 | |||||||||||||||
Dilution for the issuance of stock options (in thousands)(2) | — | 545 | 1,690 | 3,364 | 3,786 | |||||||||||||||
Weighted average number of shares (in thousands) diluted | 734,065 | 734,809 | 737,261 | 733,569 | 737,463 | |||||||||||||||
Diluted earnings per share | (0.24 | ) | 0.36 | 0.24 | 0.09 | 0.45 |
(1) | The consolidated financial information as of and for the years ended December 31, 2015 and 2014 has been derived from our historical financial statements but was not restated for the retrospective application of IFRS 9 and IFRS 15 as management cannot be provided this financial information without unreasonable effort or expense. |
(2) | Refers to the effect of potentially dilutive shares. |
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As of December 31, | ||||||||||||||||||||
Consolidated Statement of Financial Position Data | 2018 | 2017 | 2016 | 2015(1) | 2014(1) | |||||||||||||||
Restated | Restated | |||||||||||||||||||
(in US$ millions) | ||||||||||||||||||||
Cash and cash equivalents | 1,280.9 | 1,270.8 | 1,241.5 | 2,165.5 | 1,713.0 | |||||||||||||||
Financial investments (current) | 1,743.4 | 2,366.1 | 1,775.6 | 622.6 | 710.6 | |||||||||||||||
Inventories | 2,507.0 | 2,148.7 | 2,496.4 | 2,314.6 | 2,405.3 | |||||||||||||||
Other current assets(2) | 1,539.7 | 1,294.0 | 1,310.1 | 1,308.9 | 981.8 | |||||||||||||||
Property, plant and equipment, net | 1,964.7 | 2,104.9 | 2,154.2 | 2,027.4 | 2,025.8 | |||||||||||||||
Intangible assets, net | 1,898.8 | 1,882.4 | 1,664.6 | 1,405.4 | 1,260.9 | |||||||||||||||
Other long-term assets(3) | 358.8 | 907.7 | 1,077.4 | 1,825.1 | 1,313.6 | |||||||||||||||
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Total assets | 11,293.3 | 11,974.6 | 11,719.8 | 11,669.5 | 10,411.0 | |||||||||||||||
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Short-term loans and financing | 179.3 | 388.9 | 510.3 | 219.4 | 89.7 | |||||||||||||||
Other current liabilities(4) | 2,849.3 | 2,414.3 | 2,717.5 | 2,861.0 | 2,463.2 | |||||||||||||||
Long-term loans and financing | 3,468.4 | 3,809.6 | 3,249.6 | 3,311.1 | 2,418.4 | |||||||||||||||
Other long-term liabilities(5) | 856.2 | 1,184.3 | 1,306.0 | 1,434.3 | 1,574.9 | |||||||||||||||
Shareholders’ equity | 3,845.7 | 4,064.1 | 3,844.0 | 3,741.8 | 3,764.8 | |||||||||||||||
Noncontrolling interests | 94.4 | 113.4 | 92.4 | 101.9 | 100.0 | |||||||||||||||
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Total shareholders’ equity | 3,940.1 | 4,177.5 | 3,936.4 | 3,843.7 | 3,864.8 | |||||||||||||||
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Total liabilities and shareholders’ equity | 11,293.3 | 11,974.6 | 11,719.8 | 11,669.5 | 10,411.0 | |||||||||||||||
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(1) | The consolidated financial information as of and for the years ended December 31, 2015 and 2014 has been derived from our historical fina3ncial statements but was not restated for the retrospective application of IFRS 9 and IFRS 15 as management cannot be provided this financial information without unreasonable effort or expense. |
(2) | Other current assets consist of: trade accounts receivable, net; derivative financial instruments; customer and commercial financing; collateralized accounts receivable; income tax and social contribution; contract assets, guarantee deposits and other assets. |
(3) | Other long-term assets consist of: financial investments; derivative financial instruments; customer and commercial financing; collateralized accounts receivable; guarantee deposits; deferred income tax and social contribution; other assets and investments. |
(4) | Other current liabilities consist of: trade accounts payable;non-recourse and recourse debt; other payables; contract liabilities, derivative financial instruments; taxes and payroll charges payable; income tax and social contribution; financial guarantee and residual value; dividends payable unearned income and provisions. |
(5) | Other long-term liabilities consist of:non-recourse and recourse debt; other payables; contract liabilities; derivative financial instruments; taxes and payroll charges payable; deferred income tax and social contribution; financial guarantee and residual value; unearned income and provisions. |
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Year Ended December 31, | ||||||||||||||||||||
Other Consolidated Financial Data | 2018 | 2017 | 2016 | 2015(1) | 2014(1) | |||||||||||||||
Restated | Restated | |||||||||||||||||||
(in US$ millions) | ||||||||||||||||||||
Net cash generated (used ) by operating activities | 1,107.6 | 753.0 | (6.6 | ) | 862.5 | 482.3 | ||||||||||||||
Net cash used in investing activities | (523.1 | ) | (1,092.6 | ) | (993.5 | ) | (1,417.4 | ) | (671.5 | ) | ||||||||||
Net cash generated (used) by financing activities | (503.4 | ) | 369.5 | 8.9 | 1,224.0 | 333.3 | ||||||||||||||
Depreciation and amortization(2) | 250.0 | 315.4 | 330.1 | 316.8 | 286.3 |
(1) | The consolidated financial information as of and for the years ended December 31, 2015 and 2014 has been derived from our historical financial statements but was not restated for the retrospective application of IFRS 9 and IFRS 15 as management cannot be provided this financial information without unreasonable effort or expense. |
(2) | Consists of: depreciation of property plant and equipment, amortization of intangible assets and realization contribution from suppliers. |
The following tables present a summary of our operational data as of the dates and for the periods indicated.
Other Data
Year ended December 31, | ||||||||||||||||||||
Other Data: Aircraft delivered: | 2018 | 2017 | 2016 | 2015 | 2014 | |||||||||||||||
To the Commercial Aviation Market | 90 | 101 | 108 | 101 | 92 | |||||||||||||||
EMBRAER 170 | 1 | — | — | 2 | 1 | |||||||||||||||
EMBRAER 175 | 67 | 79 | 90 | 82 | 62 | |||||||||||||||
EMBRAER 190 | 13 | 12 | 11 | 8 | 19 | |||||||||||||||
EMBRAER 195 | 5 | 10 | 7 | 9 | 10 | |||||||||||||||
EMBRAER190-E2 | 4 | — | — | — | — | |||||||||||||||
To the Defense and Security Market | 15 | 8 | 16 | 20 | 7 | |||||||||||||||
EMB 145 AEW&C/RS/MP | 6 | 5 | 3 | 1 | — | |||||||||||||||
EMB 312Tucano/AL-X/ Super Tucano | 9 | 3 | 13 | 19 | 7 | |||||||||||||||
To the Executive Jets Market | 91 | 109 | 117 | 120 | 116 | |||||||||||||||
Legacy 600/650 | 4 | 7 | 9 | 12 | 18 | |||||||||||||||
Legacy 450/500 | 23 | 29 | 33 | 23 | 3 | |||||||||||||||
EMBRAER 145/170/190 Shuttle | — | — | — | — | — | |||||||||||||||
Phenom 100 | 11 | 18 | 10 | 12 | 19 | |||||||||||||||
Phenom 300 | 53 | 54 | 63 | 70 | 73 | |||||||||||||||
Lineage 1000 | — | 1 | 2 | 3 | 3 | |||||||||||||||
To the General Aviation Market | 18 | 16 | 2 | 19 | 38 | |||||||||||||||
Light Propeller Aircraft | 18 | 16 | 2 | 19 | 38 | |||||||||||||||
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Total delivered (in aircraft) | 214 | 234 | 243 | 260 | 253 | |||||||||||||||
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As of December 31, | ||||||||||||||||||||
Other Data: Aircraft in backlog | 2018 | 2017 | 2016 | 2015 | 2014 | |||||||||||||||
In the Commercial Aviation Market | 368 | 435 | 450 | 513 | 459 | |||||||||||||||
EMBRAER 170 | — | 1 | 3 | 3 | 5 | |||||||||||||||
EMBRAER 175 | 204 | 103 | 104 | 169 | 172 | |||||||||||||||
EMBRAER 190 | 7 | 46 | 56 | 55 | 65 | |||||||||||||||
EMBRAER 195 | 3 | 5 | 12 | 19 | 7 | |||||||||||||||
EMBRAER 175 – E2 | — | 100 | 100 | 100 | 100 | |||||||||||||||
EMBRAER 190 – E2 | 43 | 74 | 85 | 77 | 60 | |||||||||||||||
EMBRAER 195 – E2 | 111 | 106 | 90 | 90 | 50 | |||||||||||||||
In the Defense and Security Market | 76 | 73 | 64 | 74 | 65 | |||||||||||||||
EMB 145 AEW&C/RS/MP | — | — | — | — | 1 | |||||||||||||||
EMB 312 Tucano/EMB 314/EP Super Tucano | 8 | 14 | 7 | 14 | 8 | |||||||||||||||
LAS | 15 | 6 | — | 6 | 17 | |||||||||||||||
E99 | 5 | 5 | 5 | 5 | 5 | |||||||||||||||
KC-390 | 28 | 28 | 28 | 28 | 28 | |||||||||||||||
VU-Y | 3 | 4 | 4 | 6 | 6 | |||||||||||||||
MFTS | — | 1 | 5 | |||||||||||||||||
F-39 | 15 | 15 | 15 | 15 | — | |||||||||||||||
PHENOM 100 | 2 | — | — | — | — | |||||||||||||||
In the Executive Jets Market | 61 | 64 | 122 | 163 | 168 | |||||||||||||||
Legacy 450/500/600/650/Phenom 100/300/Lineage 1000/EMBRAER 170/190 Shuttle | 61 | 64 | 122 | 163 | 168 | |||||||||||||||
Total backlog (in aircraft) | 505 | 572 | 636 | 750 | 692 | |||||||||||||||
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Total backlog (in US$ millions) | 16,300.5 | 18,337.0 | 19,622.8 | 22,460.7 | 20,920.2 | |||||||||||||||
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3B. | Capitalization and Indebtedness |
Not applicable.
3C. | Reasons for the Offer and Use of Proceeds |
Not applicable.
3D. | Risk Factors |
Risks Relating to Embraer
The consummation of the strategic partnership with Boeing is subject to conditions, some or all of which may not be satisfied or completed within the expected timeframe, if at all. Failure to complete the proposed Transaction could adversely affect our business, financial condition and operating results and the trading price of our common stock and ADSs.
There can be no assurance that the Transaction will be consummated or that the consummation of the Transaction will occur in the timing estimated by Embraer. The consummation of the Transaction is subject to a number of conditions, some of which are beyond our control, including, among others, (i) approval by antitrust authorities in Brazil, the United States and other applicable jurisdictions, (ii) receipt of certain governmental authorizations and third party consents, (iii) absence of any law or order prohibiting the Transaction, and (iv) retention of certain key employees. The completion of the Transaction is also subject to various termination rights, including if the Transaction is not consummated by a certain date. There can be no assurance that the conditions to the closing of the Transaction will be satisfied or waived or, even if satisfied, that no event of termination will take place. In addition, we cannot assure that relevant antitrust authorities will approve the Transaction without imposing actions, conditions, limitations or restrictions in connection with their approval of the Transaction, which may jeopardize or delay completion of the Transaction, or allow the parties to terminate the Transaction.
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Moreover, the consummation of the Transaction has been subject to various legal proceedings and challenges seeking to suspend the continuation of the consummation of the Transaction. For instance, there are four ongoing lawsuits seeking to prevent or delay the consummation of the Transaction: (1) class actionNo. 5017611-59.2018.4.03.6100, filed by Paulo Pimenta and others before the 24th Federal Civil Court of São Paulo, (2) public interest civil actionNo. 5031433-18.2018.4.03.6100, filed by theConfederação Nacional dos Trabalhadores Metalúrgicos and others before the 24th Federal Civil Court of São Paulo, (3) public interest civil actionNo. 5000804-27.2019.4.03.6100, filed by theAssociação Brasileira de Investidores – ABRADIN before the 8th Federal Civil Court of São Paulo, and (4) public interest civil actionNo. 1000309-57.2019.4.01.3400, filed by thePartido Democrático Trabalhista – PDT before the 9th Federal Civil Court of the Federal District. Embraer has thus far been able to prevail and obtain decisions favorable to the continuation of the Transaction. However, the outcome of any such litigation is uncertain. Also, there can be no assurance that other legal proceedings will not be initiated with the purpose of suspending actions to consummate the Transaction nor that we will prevail in those proceedings. An adverse ruling in any such lawsuit could prevent or delay consummation of the Transaction and/or result in additional costs to us.
If the Transaction is not consummated, or its consummation takes longer than expected, or if certain conditions or restrictions are imposed by relevant antitrust authorities for the consummation of the Transaction, we may not realize the expected synergies and other benefits from the strategic partnership with Boeing, or our employees, suppliers or customers may lose focus on our business, cease doing business with us, or curtail their activities with us, which may materially and adversely affect our business and operations, financial condition or operating results, as well as the trading price of our common shares and ADSs. Failure to complete the Transaction for any reason could materially and adversely affect our business and the trading price of our common shares and ADSs in a number of other ways, including the following:
• | having to pay substantial costs relating to the Transaction, whether or not the Transaction is completed; |
• | experiencing negative reactions from the financial markets, rating agencies or from our key business relationships, including our customers, suppliers and employees; |
• | focusing on the Transaction instead of on pursuing other opportunities that could be beneficial, without realizing any of the benefits of having the Transaction consummated; and |
• | reputational harm due to the adverse perception of any failure to successfully consummate the Transaction. |
Our strategic partnership with Boeing may not be implemented successfully or the implementation may be more difficult, time consuming or costly than expected.
We face challenges in the implementation of the strategic partnership with Boeing that are inherent to splitting the businesses, operations and workforces of our commercial aviation and other businesses, including the potential for unforeseen difficulties in segregating operations and systems and the costs related thereto. The segregation of our commercial aviation business from our other businesses and the contribution of the relevant assets and liabilities to the Commercial Aviation JV is complex, costly and time-consuming and may deviate our management’s focus and resources from ourday-to-day operations. The difficulties of segregating the commercial aviation business from our other businesses include, among others:
• | difficulties in segregating the commercial aviation business’ operations and systems, including intellectual property and information technology assets; |
• | challenges in obtaining the required licenses and governmental and third party authorizations, consents or approvals; |
• | unforeseen costs; |
• | difficulties in segregating and retaining key personnel; |
• | challenges in keeping existing customers and suppliers; and |
• | performance shortfalls as a result of the diversion of management’s attention caused by completing the Contribution. |
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If we are not able to segregate our commercial aviation business unit according to the timing and costs originally planned and there are unforeseen difficulties in the segregation process, our business and operations as well as the trading price of our shares and ADSs may suffer a material adverse effect.
Although we expect that the strategic partnership with Boeing will result in synergies and other benefits to us, those benefits may not be realized fully or at all or may not be realized within the expected time frame.
We expect that the Commercial Aviation JV and theKC-390 JV, and the long-term Commercial Aviation JV Operational Agreements and theKC-390 JV Operational Agreements that we will enter into in connection with the Transaction, will generate synergies and other benefits to us, such as broader scale, resources and market presence, including access to Boeing’s global supply, sales, marketing and service chain, increased efficiency and competitiveness of our products and services. However, our ability to realize the anticipated benefits of the Transaction will depend, to a large extent, on the successful, timely and cost-effective implementation of these joint ventures and the performance of the Commercial Aviation JV Operational Agreements and theKC-390 JV Operational Agreements in a manner that facilitates growth opportunities and achieve the projected stand-alone cost savings and revenue growth trends identified by us. Factors that could affect this implementation include the following, among others:
• | the occurrence of unforeseen operational difficulties, especially considering the mutual operational dependency relationship that will result from the Transaction; |
• | potential disagreements with Boeing; |
• | difficulties in achieving anticipated synergies, business opportunities, and growth prospects from the strategic partnership; |
• | unexpected costs; |
• | challenges in sustaining the activities that we will conduct on a stand-alone basis; |
• | potential loss of key employees; |
• | potential changes to, or early termination of, the Commercial Aviation JV Operational Agreements; and |
• | negative perception from the financial markets and rating agencies of the business and operations of Embraer post-Transaction. |
We cannot assure you that the strategic partnership with Boeing, if consummated, will be successful and, therefore, we may not realize fully or at all or may realize over a longer period of time than initially anticipated the anticipated synergies and other benefits of the Transaction. In addition, the value of the Transaction may be reduced as a result of purchase price adjustments and post-closing indemnities. If we are unable to fully realized the anticipated benefits of the Transaction, or if the value of the Transaction is reduced for any reason, our business, results of operations and financial condition as well as the trading price of our common shares and ADSs may be materially and adversely affected.
A downturn in the commercial and executive aviation markets may reduce our sales and revenue, and, consequently, our profitability.
We expect that a substantial portion of our sales will be derived from sales of commercial aircraft and executive jets. Historically, these markets have been cyclical due to a variety of factors that are both external and internal to the air travel industry, including general economic conditions.
Economic downturns in our industry may reduce air travel demand and corporate and personal spending, which may negatively impact our Commercial Aviation and Executive Jets businesses. Downturns may also lead to a decrease in the volume of financing available to our customers for aircraft purchases, particularly in the aforementioned segments. A continued downturn in general economic conditions could result in further reductions in air travel and decreased orders for our aircraft. Our customers could also defer or cancel their purchases of our aircraft. We cannot predict the magnitude or duration of the impact that the aforementioned events would not only have on the air transport industry as a whole and on our business in particular.
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We depend on key customers.
In our Commercial Aviation business, as of December 31, 2018, approximately 90% of our firm orders in backlog for the current EMBRAER 170/190 jet family were from the airlines Republic Airlines, American Airlines, United Airlines, Horizon/Alaska and two undisclosed customers. Moreover, ourE-Jets E2 family backlog mainly comprises orders from the companies Azul, AerCap, AirCastle and Helvetic, which represent approximately 90% of ourE-Jets E2 family orders. We believe we will continue to depend on a select number of key customers, and the loss of any one of them would significantly reduce our sales and market share.
Progressively, the commercial airline industry is seeking to reduce costs and increase efficiency, and is experiencing a consolidation process through mergers and acquisitions and alliances through code-sharing arrangements. Although it is expected that those consolidations and alliances may result in the creation of more stable and competitive airlines, they may also have the effect of reducing the number of existing and potential customers and, possibly, the number of aircraft purchases, which may adversely affect us.
Financial difficulties, restructurings and bankruptcy proceedings of customer airlines can have a material adverse effect on our results of operations and financial condition. In February 2016, Republic Airways Holdings, which by that time operated a fleet of 230 Embraer Commercial Aviation aircraft (of which 50 are of the ERJ145 family and 180 are E170/E175 models), filed for a Chapter 11 bankruptcy. As a result, we have provisioned a total of US$100.9 million to account for expected expenses related to obligations from financial guarantees offered to the main financing agent of the ERJ 140/145 aircraft, acquired by and delivered to this customer. As of December 31, 2018, the remaining obligation assumed in accounts payable was US$15.1 million. For further information on these provisions, see “Item 5E.Off-Balance Sheet Arrangements.”
In addition, delays in payment cycles by significant customers may adversely affect our cash position and working capital, as occurred in the past.
In the Executive Aviation segment, we have been increasingly relied on individual orders as the share of fleet orders in the backlog has been diminishing. The broad adoption of the Legacy and Phenom jets by fleet customers has in recent years driven the growth of our sales, backlog and deliveries, but fleet renewal demand has decreased and is expected to occur at a more moderate rate over a longer period as the current fleet ages.
In our Defense and Security business, the Brazilian government is our largest customer of defense aircraft products. Revenue from sales to the Brazilian government accounted for 48.1% of segment revenue for the year ended December 31, 2018. A decrease in defense investments by the Brazilian government due to budgetary constraints or other factors that are out of our control could decrease our Defense and Security revenue. We cannot assure you that the Brazilian government will continue to acquire defense products and services from us in the future at the same rate or at the same level.
Our aircraft sales are subject to cancellation and reschedule delivery provisions that may reduce our future income, profitability, backlog and cash flow.
A portion of our aircraft firm orders is subject to significant contingencies before 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 (i) extended delays in delivering aircraft or failure to obtain certification of the aircraft or otherwise meet performance milestones and other requirements, (ii) the failure of a customer to honor its aircraft purchases or (iii) production rate shortfalls.
Our customers may also reschedule deliveries or cancel orders, particularly during an economic downturn. In 2018, we had income of US$35.4 million related to contractual fines paid by customers due to contract cancellations, compared to contractual fines income of US$2.4 million in 2017 and US$24.2 million in 2016. Material cancellations, delays or decreases in the number of aircraft delivered in any year would reduce our sales and revenue, and, consequently, our profitability, cash flow and backlog.
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Some of our aircraft sales may be subject to financial and residual value guarantees andtrade-in options that may require us to make significant cash disbursements.
For certain aircraft sales contracts, we guarantee a portion of the financial value and the residual value for aircraft that we have already delivered. Financial guarantees are provided to financing parties to support a portion of the payment obligations of purchasers of our aircraft under their financing arrangements to mitigate default-related losses. These guarantees are secured by the financed aircraft.
Residual value guarantees typically ensure that, at the exercise date (between six and 19 years after the aircraft delivery date), the relevant aircraft will have a residual market value equal to a percentage of the original sale price. Most of our residual value guarantees are subject to a limitation (a “cap”) and, therefore, on average, our residual value guarantee exposure is limited to 11% of the original sale price. In the event of an exercise by a purchaser of its residual value guarantee, we will bear the difference, if any, between the guaranteed residual value and the market value of the aircraft at the time of exercise, limited to the cap.
Assuming all customers who are supported byoff-balance sheet financial guarantees defaulted on their aircraft financing arrangements, and also assuming we were required to pay the full aggregate amount of outstanding financial and residual value guarantees and were unable to remarket any of the aircraft to offset our obligations, our maximum exposure would have been US$319.7 million (or US$182.7 million, net of provisions of financial guarantee of residual value and financial guarantee already recorded in the amount of US$137.0 million as reflected in Note 35.3 to our 2018 audited consolidated financial statements) under these guarantees as of December 31, 2018. As a result, we would be obligated to make substantial payments that may not be recoverable through proceeds from aircraft sales or leases, particularly if we are not able to remarket any of the aircraft to offset our obligations or financing defaults occur with respect to a significant portion of our aircraft. The value of the underlying aircraft is more likely to decrease and third parties are more likely to default during economic downturns. For further discussion see our exposure to these guarantees in Note 35 to our audited consolidated financial statements and “Item 5E. Off Balance Sheet Agreements.”
In addition, we sometimes providetrade-in options to our customers in purchase agreements for new aircraft. These options provide customers with the right to trade in aircraft upon the purchase and acceptance of a new aircraft. In 2018, we accepted 11 aircraft, with a total invoiced value of US$ 81.2 million, fortrade-in pursuant totrade-in options, as compared to 23 aircraft, with a total invoiced value of US$114.0 million, in 2017 and 43 aircraft, with a total invoiced value of US$365.4 million, in 2016. In the aggregate, we are currently subject totrade-in options relating to eight aircraft, as a result oftrade-ins tied to contractual obligations with customers and to their taking delivery of certain new aircraft. In addition, other aircraft may become subject totrade-in due to new sales agreements. Thetrade-in price is determined based on the new aircraft sold, as well as other factors, including a market value assessment performed by independent third party appraisers. We may be required to accepttrade-ins at prices that could result in financial loss for us when we receive the aircraft.
We continuouslyre-evaluate our risk related to financial guarantees andtrade-in obligations based on a number of factors, including the estimated future market value of our aircraft based on third-party appraisals, information on similar aircraft remarketing in the secondary market and the credit rating of the customers.
In 2018, 2017 and 2016, we recorded provisions and contract liabilities on financial guarantees and residual value guarantees of US$152.1, US$156.8 million and US$210.8 million (including provision for Chapter 11 filled by Republic Airways on US$15.1, US$ 30.8 million and US$ 41.6 million), respectively, related to exposure from financial guarantees offered to the main financing agent of the ERJ 140/145 aircraft, acquired by and delivered to this customer.
Any unexpected decrease in the market value of the aircraft covered bytrade-in rights or financial guarantees would decrease our ability to recover the amounts payable to satisfy our obligations and cause us to incur additional charges to income. If we are required to pay amounts related to the guarantees, we may not have sufficient cash or other financial resources available to do so and may need to seek financing to fund these payments. We cannot assure you that the then-prevailing market conditions would allow us to resell or lease the underlying aircraft at its anticipated fair value or in a timely manner. Consequently, honoring our financial guarantee ortrade-in obligations could require us to make significant cash disbursements in a given year, which, in turn, would reduce our cash flow in that year.
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Any decrease in Brazilian government-sponsored customer financing, or increases in government-sponsored financing that benefits our competitors, may decrease the competitiveness of our aircraft.
Traditionally, aircraft original equipment manufacturers, or OEMs, from time to time, have received support from governments through governmental export credit agencies, or ECAs, in order to offer competitive financing conditions to their customers, especially in periods of credit tightening from the traditional lending market.
Official government support may constitute unofficial subsidies causing market distortions, which may rise to disputes among governments at the World Trade Organization, or WTO. Since 2007, an agreement known as the Aircraft Sector Understanding, or ASU, developed by the Organization for EconomicCo-operation and Development, or OECD, has provided guidelines for the predictable, consistent and transparent use of government-supported export financing for the sale or lease of civil aircraft, in order to establish a “level-playing field.” ECAs from signatory countries are required to offer terms and conditions no more favorable than those contained in the ASU’s base financial agreement when financing sales of aircraft that compete with those produced by the OEMs of their respective countries. The effect of the agreement is to encourage aircraft purchasers to focus on the price and quality of aircraft products offered by OEMs rather than on the financial packages offered by their respective governments.
The Brazilian ECA, Brazilian Social and Economic Development Bank(Banco Nacional de Desenvolvimento Econômico e Social), or BNDES, together with the Brazilian National Treasury Export Guarantee Fund, offer financing and export credit insurance to our customers under terms and conditions required by the ASU. Any reduction or restriction to the Brazilian export financing program, and any increase in our customers’ financing costs for participation in this program, above those provided in the ASU’s base financial agreement, may cause the cost-competitiveness of our aircraft to decline. Other external factors may also impact our competitiveness in the market, including, but not limited to, aircraft OEMs from countries which are not signatories to the ASU agreement offering attractive financing packages, or any new government subsidies supporting any of our major competitors.
From 2004 through 2018, approximately 30% of our Commercial Aviation deliveries was subject to official export credits. In 2017 and 2018, approximately 25% and 51%, respectively, of our Commercial Aviation deliveries were supported by the Brazilian export financing program. We cannot assure that the Brazilian government, for policy reasons or otherwise, will not reduce or discontinue this type of funding for the financing of our aircraft or that other sources of funding will be available to our customers. The loss or significant reduction of funds available to our customers, without an adequate substitute, could lead to a reduction in sales of our aircraft or to an increase of eventual aircraft financing arrangements.
We may face a number of challenges resulting from the development of new products and the possible pursuit of strategic opportunities and transactions.
Our products require a high level of research, development and production expenditures. Our main ongoing project is the development of theE-Jets E2 family, comprising three new airplanes, theE175-E2,E190-E2, andE195-E2. We estimate our total investment in this project will be US$1.7 billion, net of contributions from suppliers, through 2021. In December 2016, we revised our projection of certification and entry into service of the E175 E2 jet from 2020 to 2021. This rescheduling is based on continued interest in the current generation E175 jet in the North American market and recent negotiations between the major US airlines and their respective pilot unions.
We cannot assure you that our products will be accepted by our customers and the market, and if any of our new products does not meet customer expectations or market demand, our business would be materially and adversely affected. In addition, as we continue to develop new products, we may need to reallocate existing resources and coordinate with new suppliers and risk-sharing partners. Finally, cost overruns and delays in the development and delivery of new products would materially and adversely affect us.
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We may pursue strategic opportunities and transactions, just as we have in the past, including joint ventures, partnerships, acquisitions or divestitures. We may face a number of challenges, including difficulties in identifying appropriate partners, assimilating with or adjusting to our partners’ or targets’ operations and personnel, maintaining internal standards and controls, as well as the diversion of our management’s focus from our ongoing business. We cannot assure you that we will be able to meet these challenges and that our business or the trading price of our common shares or ADSs will not face disruptions as a result of such opportunities or transactions or the markets’ perception thereof.
We may be required to refund cash contributions in connection with the production or development of our aircraft if certain milestones for our aircraft are not reached.
We have arrangements with our risk-sharing partners, pursuant to which they have contributed to us, in cash over the years, a total of US$1,365 million since the beginning of the development of the EMBRAER 170/190, Phenom 100/300, Legacy 450/500 jet families and the E2 jet family through December 31, 2018. Cash contributions would have to be refunded by us to the risk-sharing partners to the extent that we had failed to fulfill certain agreed-upon milestones. In 2018, we met all the required milestones, and as a result, the full amount of the cash contributions were nonrefundable.
Although, currently, no cash contributions from our risk-sharing partners are refundable, we may enter into similar arrangements, and if we are unable to meet certain milestones agreed upon with our risk-sharing partners, we may be required to refund cash contributions for which we have not established provisions.
We face significant international competition, which may adversely affect us.
The worldwide commercial aircraft manufacturing industry is highly competitive. Along with the large international companies Boeing, Airbus SE, or Airbus, and Bombardier Inc., or Bombardier, we are one of the world’s leading manufacturers of commercial aircraft. Additionally, Chinese, Russian and Japanese companies are developing regional jets and already have firm orders in backlog. Although we have attained a significant market share for our commercial aircraft products, we cannot assure you that we will be able to maintain our market share.
In order to remain competitive in the commercial aircraft manufacturing market in the long-term, we must continue to make technological, efficiency and performance enhancements to our aircraft. The competitive landscape has become increasingly aggressive, for example, in light of deals such as the Airbus acquisition of a majority stake in Bombardier’sC-Series Program, renamed A220s in July 2018.
In addition, as a relatively new entrant to the executive jets market, we face significant competition from companies with longer operating histories and established reputations in the industry. Some of our competitors in the executive jets market have a longer track record and a more established customer base. In addition, the level ofpre-owned aircraft for sale, although improving, continues to pressure new aircraft demand in this segment and may impact the value of the used aircraft in our portfolio. We cannot assure you that we will increase our market share in the executive jets market segment, or that we will not experience a reduction in our current market share in this segment, especially taking into account a stable market demand scenario that we expect in 2019.
Protectionist and other measures adopted by the governments of specific countries could adversely and disproportionately affect us when compared to our main competitors. Our production is spread globally, with parts manufactured in one or more countries and assembled in another, and as a result any limitations to trade, including quotas, tariffs, subsidies or local content requirements, may increase our production costs and affect our capacity to compete in equal terms in the market for our products.
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We work with a limited number of key suppliers.
We do not manufacture all of the parts and components used in the production of our aircraft. Approximately 80% of the production costs in our Commercial Aviation and Executive Jets businesses consist of materials and equipment purchased from our risk-sharing partners and other major suppliers. Risk-sharing arrangements are those in which suppliers are responsible for the design, development and manufacture of major components or systems of our aircraft. In some cases, the aircraft are designed specifically to accommodate a particular component, which cannot be substituted by another manufacturer without significant delays and expense. In addition, there exist only a limited number of suppliers of certain key components of aircraft globally. We work closely with our main suppliers in order to mitigate any potential supply chain risk, but we cannot assure you that these risks, which could negatively and adversely affect our operating and financial performance, will not materialize.
Intellectual property violations may adversely affect us.
We rely on patent, copyright, trademark and trade secret laws, and agreements with our employees, customers, suppliers and other parties, to establish and maintain our intellectual property rights in technology and products used in our operations. Despite these efforts to protect our intellectual property rights, any of our direct or indirect intellectual property rights could be challenged, invalidated or circumvented. In addition, although we believe that we lawfully comply with the intellectual property rights granted to others, we may be accused of infringement on occasion and could have claims asserted against us in the future. These claims could harm our reputation, lead to fines and penalties and prevent us from offering certain products or services. Any claims or litigation in this area, whether we ultimately win or lose, could be time-consuming and costly, hurt our reputation and/or require us to enter into licensing arrangements. We may not be able to enter into these licensing arrangements on acceptable terms. If any infringement brought against us is successful, an injunction may also be ordered against us to stop infringing the alleged rights, which could adversely affect us, our research and/or production.
Unauthorized access to, or release or violation of our, our customers’ or our business partners’ systems and data could cause a material adverse effect on our business and reputation.
We, like all business organizations in the digital world, have been subject to a broad range of cyber threats, including attacks, with varying levels of sophistication. These cyber threats are related to the confidentiality, availability and integrity of our systems and data, including our customers’ confidential, classified or personal information. In addition, because we have access to certain information technology systems of some of our customers, our systems may be subject to attacks aimed at accessing, tampering with or exposing our customers’ systems and their data.
We maintain extensive technical security controls, policy enforcement mechanisms, monitoring systems and management oversight in order to address these threats. While these measures are designed to prevent, detect and respond to unauthorized activity in our systems, certain types of attacks, including cyber-attacks, which could have a material adverse effect on our business and reputation, may occur.
Furthermore, some of our business partners, such as our suppliers, have significant access to confidential and strategic information regarding our projects and engineering data. Many of these suppliers face similar security threats and any attacks on their systems could result in unauthorized access to our systems or data.
Any unauthorized access to, or release or violation of our systems and data or those of our customers or business partners could cause a material adverse effect on our business and reputation.
We may suffer from a lack of qualified personnel.
From time to time, there is significant competition within the aviation industry for skilled personnel in general and engineers in particular. To the extent the competitionre-emerges, we may be unable to recruit and retain the necessary number of highly skilled engineers and other personnel we require. Failure to coordinate our resources in a timely manner or to attract and retain skilled personnel could slow down our development efforts and cause delays in production and deliveries of our aircraft, which would adversely affect us.
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We are subject to environmental, health and safety risks.
Our products, as well as our manufacturing and service activities, are subject to environmental laws and regulations in each of the jurisdictions in which we operate. These laws regulate product performance or content, energy use, greenhouse gas emissions, air quality, water and noise pollution, hazardous substance management, human health risks arising from the exposure to hazardous or toxic materials and the remediation of soil and groundwater contamination.
In addition, environmental regulations related to climate change, including CO2 emissions standards adopted by the International Civil Aviation Organization, or the ICAO, in March 2017, are one of the main drivers of global aerospace industry research and development investments since they may affect customer preferences. We may incur additional costs to improve or create new compliance programs to meet environmental regulatory requirements. We currently have several comprehensive programs in place to reduce the effects of our operations on the environment. For further information, see “Item 4D. Information on the Company—Property, Plant and Equipment.”
Moreover, our services and products must comply with health and safety laws and regulations, as well as substances and preparations. We strive to maintain the highest quality standards and closely follow potential and confirmed changes in laws and regulations to adapt, redesign, redevelop, recertify or eliminate our products to remain compliant with those claims. Seizures ofnon-compliant products may occur and we may incur administrative, civil or criminal penalties. In the event of an accident or other serious incident involving a product, we may be required to conduct investigations and undertake remedial activities.
We benefit from certain tax and other government-granted benefits and the suspension, cancellation ornon-renewal of those benefits would have a material adverse effect on us.
Similarly to other Brazilian companies across multiple industries, we receive certain tax and other government-granted benefits, including incentives related to our export and research and development activities. For further information, see “Item 5A. Operating and Financial Review and Prospects—Operating Results—Brazilian Economic Environment—Tax Incentives.”
We cannot assure you that these incentives will be maintained or renewed or that we will be able to obtain new incentives. We could be materially adversely affected in the event our existing benefits are cancelled or not renewed.
Investigations by government authorities under the FCPA and other applicable anti-corruption laws may result in substantial fines and other adverse effects.
On October 24, 2016 we finalized definitive agreements, or the Final Agreements, with the U.S. Department of Justice, or DOJ, and the U.S. Securities and Exchange Commission, or the SEC, for the settlement of criminal and civil violations of the U.S. Foreign Corrupt Practices Act of 1977, as amended, or FCPA. We also finalized a term of undertaking (termo de compromisso e de ajustamento de conduta), or TCAC, with the Brazilian Federal Public Prosecutor’s Office (Ministério Público Federal), or MPF, and the Brazilian Securities and Exchange Commission, or the CVM, for the resolution of violations of certain Brazilian laws.
Under these settlements, in addition to paying a total of US$205.5 million to the SEC, DOJ and a Brazilian federal fund, we agreed to an external and independent monitorship for a period of three years. The monitorship period may be extended at the DOJ’s discretion depending on our compliance with the deferred prosecution agreement, or DPA. In February 2017, the United States authorities appointed the monitor, who has been preparing annual reports containing certain observations and recommendations to further improve our anti-corruption and compliance policies and procedures. If our monitor reports we are not in compliance with his recommendations or the terms of the Final Agreements, the latter could be terminated and we could be significantly and negatively affected. Additionally, the monitoring process could divert the efforts and attention of our management team from our ordinary business operations.
In addition, under the DPA the DOJ has agreed to defer prosecution for three years of the facts acknowledged by us that occurred between 2007 and 2011, after which period the charges will be dismissed with prejudice if we do not violate the terms of the DPA. If the DOJ determines that we have breached the DPA, the DOJ may commence prosecution or extend the term of the DPA for up to one year. Similarly, if we breach our obligations under the TCAC, it may also be terminated by the MPF and the CVM in which case we would be subject to sanctions. The criminal prosecution or sanctions could have a material adverse effect on our business, financial condition, results of operations, or cash flows.
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Moreover, related proceedings and developments are ongoing and could result in additional fines and possibly other sanctions and adverse consequences, which may be substantial. We currently cannot estimate the costs, sanctions or other adverse consequences in connection with these proceedings, nor can we predict the manner in which any proceedings will be resolved. However, any costs, sanctions or other adverse consequences could be significant, and any resolution could have a material adverse effect on our business, financial condition, results of operations, or cash flows. We believe that there is no adequate basis at this time for estimating accruals or quantifying any contingency with respect to these matters.
For further information on these settlements, see “Item 8A. Financial Information—Consolidated Statements and Other Financial Information—Legal Proceedings—SEC/DOJ and Brazilian Public Prosecutor’s Investigations.”
Risks Relating to the Commercial Airline Industry
Scope clause restrictions in airline pilot contracts may limit demand for commercial aircraft in the U.S. market.
A key limiting factor in demand for regional jets is the existence of scope clauses contained in airline pilot contracts. These scope clauses are union-negotiated restrictions on the number and/or size of regional jets that a particular carrier may operate. Current scope clause restrictions, which are more prevalent in the United States, include restrictions on the weight of aircraft and number of 76 seat commercial aircraft in an airline’s fleet operated by regional carriers. As a result, our opportunities for near-term growth in the U.S. regional jets market in the 76 seat jet category may be limited. The continuation or further tightening of scope clauses could also lead some of our customers who have purchased options to acquire our commercial aircraft not to exercise those options. The next round of negotiations of scope clauses will begin on December 31, 2019, at which time restrictions may be reviewed. We cannot assure that current restrictions will be reduced, or that they will not be expanded, including by amending these scope clauses to coverlarger-sized commercial aircraft. Furthermore, although scope clauses are less prevalent outside the United States, the same uncertainty is present in other regions, like Europe.
The supply of pilots to the airline industry may be limited.
U.S. Federal Aviation Administration, or the FAA, regulations may negatively impact the supply of qualified pilot candidates eligible to be hired in the airline industry. A first officer in U.S. domestic operations must hold an airline transport pilot certificate and an aircraft type rating to fly the aircraft. An airline transport pilot certificate requires that a pilot be 23 years of age and have 1,500 hours total time as a pilot. Due to these requirements, there may be a growing scarcity of new entrant pilots who meet the experience qualifications, mainly affecting regional carriers which are the usual entry airlines for new pilots (major airlines are expected to hire many of their experienced pilots).
In order to mitigate this issue, certain airlines, for example American Airlines and Jet Blue especially in the United States, have adopted internal measures, including but not limited to creating professional pilot programs and providing financing alternatives. However, any inability to recruit, train and retain qualified pilots may materially affect our customers’ operations.
We are subject to stringent certification and regulatory requirements, which may adversely affect us.
Our civil aviation products are subject to regulation in Brazil and in each jurisdiction where our customers are located. The aviation authority in Brazil, known as the National Civil Aviation Agency (Agência Nacional de Aviação Civil – ANAC), or the Brazilian Aviation Authority, as well as authorities in other countries in which our customers are located, most notably the FAA and the European Aviation Safety Agency, or the EASA, must certify our civil aviation products before we can deliver them to our customers. We cannot assure you that we will be able to obtain certification of our aircraft on a timely basis or at all. In addition, complying with the requirements of regulatory authorities can be both expensive and time-consuming. If we fail to obtain a required certification from an aviation authority for any of our aircraft, that aviation authority can prohibit the registration of that aircraft within its jurisdiction until certification has been obtained. Changes in government regulations and certification procedures could also delay our start of production as well as entry of a new product into a new market. Despite our continuous efforts to strictly observe and comply with all aviation certification and other regulatory requirements, we cannot predict how future laws or changes in the interpretation, administration or enforcement of those laws will affect us. We may be required to incur significantly more costs to comply with these laws and/or to respond to these changes.
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Any accidents or catastrophic events involving our aircraft could adversely affect us.
We believe that our reputation and the safety record of our aircraft are important selling points for our products. However, the safe operation 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 accidents or catastrophic events involving one of our aircraft could adversely affect our reputation and future sales, as well as the market price of our common shares and the ADSs.
Risks Relating to Brazil
Brazilian political and economic conditions have a direct impact on our business and the trading price of our common shares and ADSs.
The Brazilian government has frequently intervened in the Brazilian economy and occasionally has made drastic changes in policy and regulations. The Brazilian government’s actions to control inflation and affect other policies and regulations have involved, among other measures, increases in interest rates, changes in tax policies, price controls, currency exchange and remittance controls, devaluations, capital controls and limits on imports. Our business, financial condition, results of operations and the trading price of the common shares and the ADSs may be adversely affected by changes in policy or regulations at the federal, state or municipal level involving or affecting factors, such as:
• | interest rates; |
• | currency fluctuations; |
• | monetary policies; |
• | inflation; |
• | liquidity of capital and lending markets; |
• | tax policies; |
• | labor regulations; |
• | energy and water shortages and rationing; and |
• | other political, social and economic developments in or affecting Brazil. |
Uncertainty over whether the Brazilian government will implement changes in policy, regulation or legislation creates instability in the Brazilian economy, increasing the volatility of the Brazilian securities markets. These uncertainties and other future developments in the Brazilian economy may adversely affect our activities, and consequently our operating results, and may also adversely affect the trading price of our common shares and ADSs. These factors are compounded as Brazil emerges from a prolonged recession after a period of a slow recovery, with only meager GDP growth in 2018. Additionally, the new president of Brazil, Jair Bolsonaro, took office on January 1, 2019. We cannot predict the policies or regulations that he may adopt or change during his term.
Since 2011, Brazil’s economy has been weak. The Gross Domestic Product, or GDP, growth rate was 1.1%% in 2018, 1.0% in 2017, compared to contraction rates of (3.6)% in 2016, (3.8) % in 2015, and GDP growth was 0.1% in 2014, 2.7% in 2013 and 1.8% in 2012 and 3.9% in 2011, compared to a GDP growth of 7.5% in 2010. In 2019, analysts forecast that the Brazilian GDP will grow 2.5%.
Our results of operations and financial condition have been, and will continue to be, affected by the growth rate of the Brazilian GDP. Developments in the Brazilian economy may affect Brazil’s growth rates and, consequently, the use of our products and services.
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Political instability may adversely affect our business and results of operations, the price of our common shares and our debt instruments.
Brazil’s political environment has historically influenced, and continues to influence, the performance of the country’s economy. Political crises have affected, and continue to affect, the confidence of investors and that of the public in general, resulting in economic downturn and heightened volatility of securities issued by Brazilian companies.
Brazilian markets have been experiencing heightened volatility due to uncertainties derived from the ongoingLava Jatoinvestigation, which is being conducted by the Federal Prosecutor’s Office, and its impact on the Brazilian economy and political environment. Certain members of the Brazilian government and of the legislative branch, as well as senior officers of large state-owned and private companies have been convicted of political corruption involving the acceptance of bribes by means of kickbacks on contracts granted by the government to several infrastructure, oil and gas and construction companies. Profits of these kickbacks allegedly financed the political campaigns of political parties that were unaccounted for or not publicly disclosed, and served to further the personal enrichment of the recipients of the bribery scheme. As a result, a number of senior politicians and officers of the major state-owned and private companies in Brazil, resigned or have been arrested and certain senior elected officials and other public officials are being investigated for allegations of unethical and illegal conduct identified during theLava Jato investigation.
The ultimate outcome of the investigations related to theLava Jato is uncertain, but they have already had an adverse impact on the image and reputation of the implicated companies, and on the general market perception of the Brazilian economy. We cannot predict whether the allegations will lead to further political and economic instability or whether new allegations against government officials will arise in the future. We cannot predict the outcome of any of these allegations nor their effect on the Brazilian economy. The development of those unethical conduct cases has affected and may continue to adversely affect our business, financial condition 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 to heightened volatility in the Brazilian securities markets and, consequently, may adversely affect the market value of our common shares.
Historically, Brazil has experienced high inflation rates. Inflation and certain actions taken by the Central Bank to curb it have had significant negative effects on the Brazilian economy. After the implementation of the PlanoReal in 1994, the annual rate of inflation in Brazil decreased significantly, as measured by the National Broad Consumer Price Index (Índice Nacional de Preços ao Consumidor Amplo), or IPCA. Inflation measured by the IPCA index was 3.8%, 3.0% and 6.3% in 2018, 2017 and 2016, respectively, and the tendency is stable or slightly increasing inflation for 2019.
Inflation and the Brazilian government’s measures to fight it, principally the Central Bank monetary policy, have had and may have significant effects on the Brazilian economy and us. Among the effects of such inflationary pressure is a rise in labor costs. Contracts in U.S. dollars, which represent the majority of our Executive Jets businesses, are adjusted for U.S. inflation, through the application of the U.S. Consumer Price Index for Urban Wage Earners and Clerical Workers index when delivery is not in the same year of the sale and depending upon the specific commercial terms negotiated in the contracts. While contracts in Brazilianreal represent a small portion of the Executive Jets business, the same price adjustment mechanism concept applies using national index, typically theI-GPM. Major contracts in our Defense and Security business are adjusted for Brazilian inflation. If Brazil experiences high inflation again, our operating expenses and borrowing costs may increase, our operating and net margins may decrease and, if investor confidence decreases, the price of our common shares and ADSs may fall.
Tight monetary policies with high interest rates have restricted and may restrict Brazil’s growth and the availability of credit. Conversely, more lenient government and Central Bank policies and interest rate decreases have triggered and may trigger increases in inflation, and, consequently, growth volatility and the need for sudden and significant interest rate increases, which could adversely affect us. Increases in interest rates could adversely affect our ability to incur additional debt and increase the cost of service of debt, resulting in an increase in our financial costs, which may reduce our liquidity, thereby adversely affecting our ability to meet our financial obligations. As of December 31, 2018, approximately 13% of our cash and cash equivalents were indexed to the variation of the SELIC and CDI rates. Therefore, fluctuations in Brazilian interest rates and inflation may adversely affect us. On the other hand, a significant decrease in the CDI or inflation rates may adversely affect the revenue we receive from our financial investments.
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Exchange rate volatility may adversely affect us.
The Brazilian currency has, during the last decades, experienced frequent and substantial variations in relation to the U.S. dollar and other foreign currencies. For example, thereal was valued at R$1.67 per US$1.00 in August 2008. Following the onset of the crisis in the global financial markets with consequences for our businesses, thereal depreciated 31.9% against the U.S. dollar and reached R$2.34 per US$1.00 at the end of 2008. In 2010, thereal appreciated against the U.S. dollar, reaching R$1.661 per US$1.00 at the end of 2010. Since 2011, thereal depreciated against the U.S. dollar, reaching R$3.9048 per US$1.00 at the end of 2015 with a 47.0% devaluation in 2015. In 2016, thereal appreciated against the U.S. dollar, reaching R$3.2591 per US$1.00 as of December 31, 2016. In 2017, thereal appreciated against the U.S. dollar in comparison to 2016, reaching R$3.3080 per US$1.00 as of December 31, 2017. In 2018, thereal depreciated against the U.S. dollar in comparison to December 31, 2017, reaching R$3.8748 per US$1.00 as of December 31, 2018. There can be no assurance that thereal will not depreciate further against the U.S. dollar.
Depreciation of thereal against the U.S. dollar creates inflationary pressures in Brazil and causes increases in interest rates, which negatively affects the growth of the Brazilian economy as a whole, curtails access to foreign financial markets and may prompt government intervention, including recessionary governmental policies. Depreciation of thereal against the U.S. dollar has also, including in the context of an economic slowdown, led to decreased consumer spending, deflationary pressures and reduced growth of the economy as a whole. On the other hand, appreciation of thereal relative to the U.S. dollar and other foreign currencies could lead to a deterioration of the Brazilian foreign exchange current accounts, as well as dampen export-driven growth. Depending on the circumstances, either depreciation or appreciation of thereal may materially and adversely affect us.
Although most of our revenue and debt is U.S. dollar-denominated, the relationship of thereal to the value of the U.S. dollar, and the rate of depreciation of thereal relative to the prevailing rate of inflation, may adversely affect us, mainly due to the following factors:
• | Approximately 30% of our total costs are incurred and denominated inreais. |
• | Because taxes on income are largely determined and paid inreais based on our Brazilian tax books, the income tax expense line item of our statements of income, which has the U.S. dollar as our functional currency, is significantly impacted by appreciation of thereal relative to the U.S. dollar to the extent we must record deferred taxes resulting from exchange rate fluctuations on the reported basis of our nonmonetary assets (mainly property, plant and equipment and intangible assets). If thereal had devalued or appreciated by 10% against the U.S. dollar in relation to the actual exchange rate as of December 31, 2018, the deferred income tax expense would have been higher or lower by approximately US$148.2 million. For further information on the effects of the variation of therealagainst the U.S. dollar, see Note 26 to our 2018 audited consolidated financial statements |
• | Depreciation of the real against the U.S. dollar or other currencies would reduce our real-denominated revenues from our Defense and Security business, when converted to the U.S. dollar as our functional currency. |
• | Depreciations of thereal relative to the U.S. dollar would also reduce the U.S. dollar value of distributions and dividends on our ADSs and may also reduce the market value of our common shares and ADSs. |
• | Appreciation of thereal against the U.S. dollar or other currencies increases the costs of our products when measured in U.S. dollars, and may result in a decrease in our margins. |
As a result, we may be materially and adversely affected by exchange rate variations.
Developments and the perception of risk in other countries, especially other emerging markets, may adversely affect the market price of Brazilian securities, including our ADSs, our common shares and our debt instruments.
The market value of securities of Brazilian issuers, including securities issued by us, may be affected by economic and market conditions in other countries, including the United States, European Union and Latin American countries and other emerging market countries. Although economic conditions in those countries may differ significantly from economic conditions in Brazil, investors’ reactions to developments in other countries may have an adverse effect on the market value of securities of Brazilian issuers. Crises elsewhere may diminish investor interest in securities of Brazilian issuers, including ours. This could adversely affect the trading price of our securities, and could also make it more difficult for us to access the capital markets and finance our operations in the future on acceptable terms, or at all.
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Any further downgrading of Brazil’s credit rating could adversely affect the market price of our common shares, ADSs and debt instruments.
Credit ratings affect investors’ perceptions of risk and, as a result, the yields required on debt issuances in the financial markets. Rating agencies regularly evaluate Brazil and its sovereign ratings, taking into account a number of factors including macroeconomic trends, fiscal and budgetary conditions, indebtedness and the prospect of change in these factors.
In September 2015, Standard & Poor’s lowered Brazil’s sovereign credit rating to below investment grade, fromBBB-minus toBB-plus, citing, among other reasons, general instability in the Brazilian market caused by the Brazilian government’s interference in the economy and budgetary difficulties. Standard & Poor’s again downgraded Brazil’s credit rating in February 2016, fromBB-plus to BB, and maintained its negative outlook on the rating, citing a worsening credit situation from the time of the September 2015 downgrade. In January 2018, Standard & Poor’s lowered its rating toBB-minus with a stable outlook in light of doubts regarding this year’s presidential election and pension reform efforts. In December 2015, Moody’s placed Brazil’s Baa3 ratings on review for a downgrade, citing negative macroeconomic trends and a deterioration of the government’s fiscal conditions. Subsequently, in February 2016, Moody’s downgraded Brazil’s ratings to below investment grade, to Ba2 with a negative outlook, citing the prospect for further deterioration in Brazil’s debt service in a negative or low growth environment, in addition to challenging political dynamics. Fitch also downgraded Brazil’s credit rating toBB-plus with a negative outlook in December 2015, citing the country’s rapidly expanding budget deficit and the worse-than-expected recession, and made a further downgrade in May 2016 to BB with a negative outlook, which it maintained in 2017 and downgraded toBB- in February 2018. As a result, the trading prices of debt and equity securities of Brazilian issuers were negatively affected.
Any further downgrade of Brazil’s credit ratings could heighten investors’ perception of risk and, as a result, increase the cost of debt issuance and adversely affect the trading price of our securities.
Risks Relating to Our Common Shares and ADSs
If holders of our ADSs exchange the ADSs for common shares, they risk losing the ability to remit foreign currency abroad and Brazilian tax advantages.
The Brazilian custodian for the common shares has obtained an electronic certificate of registration from the Central Bank permitting it to remit foreign currency abroad for payments of dividends and other distributions relating to the common shares or upon the disposition of the common shares. These remittances under an ADR program are subject to a specific tax treatment in Brazil that may be more favorable to a foreign investor if compared to remitting gains originated from securities directly acquired by the investor in the Brazilian regulated stock markets. Therefore, an investor who opts to surrender ADSs in exchange for the underlying common share may be subject to less favorable tax treatment on gains with respect to these investments.
Pursuant to CMN Resolution No. 4,373, in order for the investor to surrender ADSs for the purpose of withdrawing the common shares represented thereby, the investor is required to appoint a Brazilian financial institution duly authorized by the Central Bank of Brazil and CVM to act as its legal representative, who shall be responsible, among other things, for keeping and updating the investors’ certificates of registrations with the Central Bank of Brazil, which entitles registered foreign investors to buy and sell directly on the B3. These arrangements may require additional expenses from the foreign investor. Moreover, if the representatives fail to obtain or update the relevant certificates of registration, investors may incur additional expenses or be subject to operational delays which could affect their ability to receive dividends or distributions relating to the common shares or the return of their capital in a timely manner.
The custodian’s certificate of registration or any foreign capital registration directly obtained by the holders may be affected by future legislative or regulatory changes, and we cannot assure the holders that additional restrictions applicable to them, the disposition of the underlying common or preferred shares, or the repatriation of the proceeds from the process will not be imposed in the future.
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The Brazilian government has veto power over the change in our corporate control, and of our name, trademark or corporate purpose and over the creation or alteration of our Defense and Security programs, and its interests could conflict with the interests of the holders of our common shares and ADSs.
The Brazilian government holds one share of a special class of our common stock called a “golden share,” which carries veto power over our change of control, name, trademark or corporate purpose and over the creation or alteration of our Defense and Security programs (whether or not the Brazilian government participates in those programs). For example, (i) in 2010, we changed our corporate name to Embraer S.A. and altered our bylaws to allow us to enter the defense and security market, which required the approval of the Brazilian government and (ii) in 2019, the Brazilian government granted its approval for the strategic partnership between Embraer and Boeing. For further information on the Transaction, see the Explanatory Note on page 3 of this annual report. The Brazilian government may veto transactions that may be in the interest of the holders of our common shares or ADSs. We cannot assure you that we will be able to obtain approvals from the Brazilian government in the future to effect important corporate changes or transactions, or other important corporate changes that may be required.
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 small group of investors to promote the dispersed ownership of those shares. These provisions require any shareholder or group of shareholders that acquires or becomes the holder of (i) 35% or more of the total shares issued by us or (ii) other rights over shares issued by us that represent more than 35% of our capital, to submit to the Brazilian government a request for making a public tender offer to purchase all of our shares on the terms specified in our bylaws. If the request is approved, the shareholder or group of shareholders must commence the public tender offer to purchase all of our shares within 60 days of the date of approval. If the request is refused, the shareholder or group of shareholders must sell all of their shares that exceed the 35% limit within 30 days, so that the holding of this shareholder or group of shareholders falls below 35% of our capital stock. These provisions may have anti-takeover effects and may discourage, delay or prevent a merger or acquisition, including transactions in which our shareholders might otherwise receive a premium for their common shares and ADSs. These provisions can only be altered or overridden with the approval of our board of directors and our shareholders in a shareholders’ meeting convened for this purpose and with the consent of the Brazilian government, as holder of the golden share.
Our bylaws contain provisions that limit the voting rights of certain shareholders, includingnon-Brazilian shareholders.
Our bylaws contain provisions that limit the rights of a shareholder or group of shareholders, including brokers acting on behalf of one or more holders of ADSs, to exercise voting rights in respect of more than 5% of the outstanding shares of our capital stock at any 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 ofnon-Brazilian shareholders to exercise voting rights in respect of more thantwo-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 bynon-Brazilian shareholders and limit the ability ofnon-Brazilian shareholders to effect control over us. For further information on our voting rights, see “Item 10B. Additional Information—Memorandum and Articles of Association—Voting Rights of Shares—Limitation on the Voting Rights ofNon-Brazilian Shareholders.”
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The absence of a single, controlling shareholder or group of controlling shareholders may render us susceptible to shareholder disputes or other unanticipated developments.
The absence of a single, controlling shareholder or group of controlling shareholders may create difficulties for our shareholders to approve certain transactions, because, among other things, 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 abusive measures taken by other shareholders and, as a result, may not be compensated for any losses incurred. Any sudden and unexpected changes in our management, changes in our corporate policies or strategic direction, takeover attempts or any disputes among shareholders regarding their respective rights may adversely affect our business and results of operations.
Holders of ADSs may not be able to exercise their voting rights.
Holders of ADSs may only exercise their voting rights with respect to the underlying common shares in accordance with the provisions of the deposit agreement governing our ADSs. Under the deposit agreement, ADS holders must vote the common shares underlying 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 able to exercise their voting right unless they surrender the ADS for cancellation in exchange for the common shares.
Pursuant to our bylaws, the first call for a shareholders’ meeting must be published at least 30 days in advance of the meeting and the second call must be published at least 15 days in advance of the meeting. When a shareholders’ meeting is convened, holders of ADSs may not receive sufficient advance notice to surrender the ADSs in exchange for the underlying common shares to allow them to vote with respect to any specific matter. In addition, the depositary has no obligation to notify ADS holders of an upcoming vote or distribute voting cards and related materials to ADS holders, 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 proxy cards to those holders. We cannot assure you that ADS holders will receive proxy cards in time to allow them to instruct the depositary to vote the shares underlying their ADSs. In addition, the depositary and its agents are not responsible for failing to carry out voting instructions or for an untimely solicitation of voting instructions. As a result, holders of ADSs may not be able to fully exercise their voting rights.
The relative illiquidity and volatility of the Brazilian securities markets may substantially limit the ability of holders of our common shares or the ADSs to sell the common shares underlying ADSs at the price and time they desire.
Investing in securities, including our 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 securities markets in the United States and other jurisdictions, and are not as highly regulated or supervised as some other markets. The relatively small market capitalization and illiquidity of the Brazilian equity markets may substantially limit the ability of holders of our common shares or ADSs to sell the common shares or the ADSs at the price and time desired. For further information on the B3, see “Item 9C. Offer and Listing Details—Markets—Trading on the B3.”
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In addition, we cannot assure you that the Transaction, if consummated, will not have an adverse effect on the liquidity of our common shares and ADSs in the market. For further information on the Transaction, see Explanatory Note on page 3 of this annual report.
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 ADSs unless a registration statement under the Securities Act is effective with respect to those rights or an exemption from the registration requirements of the Securities Act is available. We are not obligated to file a registration statement with respect to the shares or other securities relating to these preemptive rights, and we cannot assure holders of our ADSs that we will file any registration statement. Unless we file a registration statement or an exemption from registration applies, holders of our ADSs may receive only the net proceeds from the sale of their preemptive rights by the depositary or, if the preemptive rights cannot be sold, the rights will lapse.
Judgments of Brazilian courts with respect to our common shares will be payable only inreais.
If proceedings are brought in the courts of Brazil seeking to enforce our obligations in respect of the common shares, we will not be required to discharge our obligations in a currency other thanreais. Under Brazilian exchange control limitations, an obligation in Brazil to pay amounts denominated in a currency other thanreais may only be satisfied in Brazilian currency at the exchange rate, as determined by the Central Bank, in effect on the date the judgment is obtained, and those amounts are then adjusted to reflect exchange rate variations through the effective payment date. The then prevailing exchange rate may not providenon-Brazilian investors with full compensation for any claim arising out of or related to our obligations under the common shares or the ADSs.
ITEM 4. | INFORMATION ON THE COMPANY |
4A. | History and Development of the Company |
Corporate History
Embraer S.A. is a publicly-held corporation duly incorporated under the laws of Brazil with an indefinite term of duration. Our principal executive office is located at Avenida Presidente Juscelino Kubitschek, 1909,14th and 15th floors—Torre Norte—São Paulo Corporate Towers,04543-907,São Paulo State, Brazil. Our telephone numberis 55-11-3040-9518, and our internet address is http://www.ri.embraer.com.br. Our agent for service of process in the United States is National Registered Agents, Inc., with offices at 875 Avenue of the Americas, Suite 501, New York, New York 10001.
Originally formed in 1969 by the Brazilian government, we became a publicly-held corporation in 1989 and were privatized in 1994. In the privatization process, the Brazilian government created the golden share, a special class of shares to ensure that the Brazilian government has certain veto rights, in particular regarding military programs.
In 2000, we registered with the SEC and listed our American Depositary Receipts in the New York Stock Exchange.
In 2006, we promoted a corporate restructuring process focused on simplifying our capital structure, which since then is comprised of only common shares, and we also joined a special listing segment of the B3 –Brasil, Bolsa, Balcão, or B3, known asNovo Mercado, enhancing our corporate governance standards. Since then we do not have a controlling shareholder or controlling shareholder group.
In 2010, our shareholders approved a change of our corporate name from “Embraer – Empresa Brasileira de Aeronáutica S.A.” to “Embraer S.A.,” as well as the addition of capabilities and the broadening of the scope of our defense business unit to allow this business unit to manufacture and trade equipment, materials, systems, software, accessories and components for the defense, security and energy industries, as well as to perform technical activities and services related to these areas. As a result, our bylaws were amended to reflect the addition of these activities to our corporate purposes.
In 2011 and 2012, we made acquisitions and entered into partnerships in the defense segment, including the acquisition of Atech Negócios em Tecnologias S.A. and Bradar Indústria S.A., or Bradar (which was merged into Embraer in 2018), Savis Tecnologias e Sistemas S.A. and Visiona Tecnologia Espacial S.A.
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Strategic Partnership with Boeing
On January 24, 2019, we entered into the Master Transaction Agreement and certain other transaction documents with Boeing and certain subsidiaries of Embraer or Boeing, pursuant to which a subsidiary of Boeing will acquire the controlling stake in Embraer’s commercial aviation business unit and Embraer or a subsidiary of Embraer and Boeing or a subsidiary of Boeing will form a joint venture for the promotion and development of new markets and applications for theKC-390 multi-mission aircraft. Embraer expects that the strategic partnership with Boeing will generate synergies and other benefits to Embraer. For further information on our strategic partnership with Boeing, see Explanatory Note on page 3 of this annual report.
Business Development
We have grown from a government-controlled company established to develop and produce aircraft for the Brazilian Air Force into a publicly-held company that produces aircraft for commercial and executive aviation and for defense and security purposes and related services.
As part of our evolution, we have obtained, developed and enhanced our engineering and technological capabilities through our own development of products for the Brazilian Air Force and through joint product development with foreign companies on specific projects. We have applied these capabilities that we gained from our defense business to further develop our Commercial Aviation business.
Our first regional aircraft was the Bandeirante,a 19-passenger twin-enginenon-pressurized turboprop aircraft initially designed to service the transport needs of the Brazilian Air Force. This aircraft was certified in 1973. The Bandeirante was followed by the EMB 120 Brasília, which was certified in 1985. The EMB 120 Brasília is a high performance, pressurized turboprop commercial aircraft seating up to 30 passengers and was designed to serve the longer routes and higher passenger traffic of the growing regional aircraft market. Drawing upon the design of the EMB 120 Brasília and the jet technology acquired in our development of theAM-X, a jet strike bomber for the Brazilian Air Force, we developed the ERJ 145 regional aircraft family, our first jet product for commercial use. This family comprises three aircraft, which seat up to 37, 44 and 50 passengers. The first member of the ERJ 145 family, the ERJ 145, was certified in 1996. We have expanded our jet product line with the development of the EMBRAER 170/190 jet family, which has the capacity to seat between 70 and 118 passengers and was designed to serve the aircraft market’s trend towards larger, higher volume and longer range jets. The first member of this family, the EMBRAER 170, was certified in February 2004, and its derivatives, the EMBRAER 175 and the EMBRAER 190, were certified in December 2004 and August 2005, respectively. The certification of the EMBRAER 195 was granted in June 2006. In June 2013, Embraer launched the second generation of itsE-Jets family of commercial aircraft, theE-Jets E2, comprising three new aircraft, theE175-E2,E190-E2 andE195-E2. TheE190-E2 entered into service in April 2018. TheE195-E2 is slated to enter service in 2019 and theE175-E2 in 2021. Our Commercial Aviation business is our primary business, accounting for 46.5% of our revenue for the year ended December 31, 2018.
We developed a line of executive jets throughout time, first the Legacy 600, which was discontinued in 2016 to focus on the success of its longer-range successor, the Legacy 650, followed by the Phenom 100, an entry-level jet, and the Phenom 300, a light jet, both launched in 2005. The Lineage 1000, an ultra-large jet, was added in 2006 as the largest executive jet in our executive jets portfolio and an enhanced version was introduced in 2013, the Lineage 1000E. In 2008, we launched the Legacy 450 and Legacy 500, both medium cabin jets. In 2009, we presented the Legacy 650, a large executive jet that is positioned in our portfolio between the Legacy 500 and the Lineage 1000E. The Legacy 500 and the Legacy 450 entered into service in October of 2014 and December 2015, respectively. In 2016, we launched the Phenom 100EV and the Legacy 650E. In 2017, the Phenom 100EV entered into service and we also launched the Phenom 300E, an enhanced version of our Phenom 300, with a revolutionary interior design, which entered into in service in October 2017 with a demonstration aircraft. In our latest development, we introduced the new Praetor 500 midsize and Praetor 600 super-midsize business jets in 2018, during a company event in Orlando Executive Airport. The Praetor 600 is expected to be certified and enter service in the second quarter of 2019, followed by the Praetor 500 in the third quarter of 2019. Our Executive Jets business accounted for 21.8% of our revenue for the year ended December 31, 2018.
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We are the leading supplier of defense aircraft for the Brazilian Air Force, based on number of aircraft sold, and have sold aircraft to armed forces in the U.S., Europe, Asia and Latin America. In the defense and security market, we offer a line of intelligence, surveillance and reconnaissance aircraft, services, systems and solutions, ground radar, transportation of authorities, tactical military transport and aerial refueling(KC-390), basic and advanced training and light attack and training aircraft (Super Tucano) and satellites solutions. Using our commercial aircraft platforms, we are able to offer a comprehensive range of aircraft dedicated to transportation of officials, medical evacuation and general transportation missions for the defense and security market. In the fourth quarter of 2018, we received the Type Certificate from the Brazilian Aviation Authority for the multi-mission airliftKC-390, evidencing that the project meets high standards of quality, which are the same used by the international air transport association. Additionally, in 2018, Embraer entered into a consortium with Thyssenkrupp Marine Systems, named Águas Azuis, to compete in a public bidding process for the construction of four Tamandaré class corvettes for the Brazilian Navy. In the second half of 2018, this consortium was shortlisted with three other bidders, and the result of the public bidding process is expected in the first half of 2019.
Our Defense and Security business accounted for 12.1% of our revenue for the year ended December 31, 2018. Revenues from sales to the Brazilian government accounted for 48.1% of the revenue for this segment for the year ended December 31, 2018. Moreover, we provide fuel systems, structural parts, and mechanical and hydraulic systems to Sikorsky Aircraft Corporation, or Sikorsky, a Lookheed Martin Company, for its production of helicopters. We provide to Sikorsky the services of development and manufacture of the landing gear, fuel system and fuel tanks for theS-92 andH-92 Helibus helicopters. We also act as a risk-sharing partner for Sikorsky. These contracts were renewed in 2015 and will expire in 2020. In addition, we developed Ipanema, a crop duster aircraft pursuant to specifications of the Brazilian Ministry of Agriculture. These aircraft are produced only on demand. Through December 31, 2018, we had delivered a total of 1,407 of these aircraft. Our Other Related businesses accounted for 0.3% of our revenue for the year ended December 31, 2018.
On December 20, 2016, we announced the creation of Embraer Services and Support, a business unit focused on services and customer support, which brings together capabilities that were previously allocated to each business area, and is responsible for developing solutions in support of current and new products and services, as well as for managing the associated processes and resources. This represents an opportunity to obtain greater operational efficiency and recurring revenues. Currently there are approximately 2,200 Embraer commercial aircraft and over 1,300 Embraer executive jets, as well as more than 800 defense aircraft, in operation. Over the next 20 years, we expect that an estimated 6,400 new jets (up to 150 seats) will be put into service. In business aviation, certain forecasts indicate that there may be more than 7,500 new jets placed into service over the next decade, not counting the commercialization of thepre-owned fleet. During 2017, the new business unit of Embraer Services and Support consolidated the services and customer support processes previously allocated to each of our business areas to identify synergies and quantify our expertise in our Commercial Aviation, Executive Jets and Defense and Security businesses regarding services and support. Since the first quarter of 2018, we have reported the Services and Support business as a separate segment in our financial statements. For further information, see Note 37.4 to our 2018 audited consolidated financial statements. Our Services and Support business accounted for 19.3% of our revenue for the year ended December 31, 2018. For a description of our capital expenditures, see “Item 5C. Operating and Financial Review and Prospects—Research and Development, Patents and Licenses, etc.—Capital Expenditures.
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4B. | Business Overview |
We are the leading manufacturer of jets up to 150 seats aircraft in the world, based on the number of deliveries during the period from 2004 to 2018, and we have a franchise footprint represented by our global customer base. Our focus is to achieve customer satisfaction with a range of products and services addressing the commercial airline, executive jets and defense and security markets. We have grown from a government-controlled company established to develop and produce aircraft for the Brazilian Air Force into a publicly-held company that produces aircraft for commercial and executive aviation, and for defense and security purposes and related services. We also produce, market and sell executive jets in the entry-level and light, medium cabin, large and ultra-large categories: the Phenom 100/300 family, the Legacy 450/500 family, the Praetor 500/600, the Legacy 650E and the Lineage 1000E, respectively. Providing high quality customer support is a key element of our customer focus and is critical to our ability to maintain customers with whom we have a long-term relationship. For the year ended December 31, 2018, we generated revenue of US$5,071.1 million, of which approximately 94% was U.S. dollar-denominated. Of our revenue in 2018, 46.5% was from our Commercial Aviation business, 21.8% was from our Executive Jets business, 12.1% was from our Defense and Security business 19.3% was from Services and Support business and 0.3% was from our Other Related businesses. As of December 31, 2018, we had a total firm order backlog of US$16.3 billion.
Our Strengths
We believe that our primary strengths are:
Leading Commercial Aircraft Manufacturer with a Global Customer Base. Based on the number of aircraft delivered, we are the leading manufacturer of jets with up to 150 seats, with a strong global customer base. Around 170 airlines from over 80 countries are flying our commercial aircraft on five continents. Our customers include some of the largest and most significant network, regional and low cost carriers in the world.
Aircraft Design; Technology; Cost and Operating Efficiency. We conceive, develop and manufacture clean sheet design aircraft with cutting edge technology to provide our customers with reduced operating, maintenance and training costs due to the similarity and efficiency in design and the commonality of parts within a jet family. These similarities enable us to significantly reduce our design, development and production costs and pass these savings along to our customers in our competitive sales prices, reducing the development time of our aircraft. Our investment in innovative technologies, such as design for automation, enable us to increase operational efficiency by reducing engineering and production costs as well as lowering customers’ maintenance costs.
Strategic Risk-Sharing Partners. With respect to our commercial and business aircraft, we developed strategic relationships with key risk-sharing partners. These risk-sharing partners develop and manufacture significant portions of the systems and components of our aircraft with their own funds, thereby reducing our development expenses. These risk-sharing partners also fund a portion of our research and development expenses through direct contributions of cash or materials. These strategic relationships enable us to reduce our development expenses and risks, improve our operating efficiency, enhance the quality of our products and reduce the number of our suppliers, thereby providing us with flexibility of our production process.
Funded Development of Defense Products. Historically, development expenditures related to defense aircraft have been funded in large part by our customers, which in this business segment include the governments of different countries. These customers have had an important role in our engineering and industrial development. In addition, we use well-proven civil platforms as a solution for certain defense products.
Flexibility of Production to Meet Market Demands. We believe the flexibility of our production processes and our operating structure, including our risk-sharing partnerships, allow us to adjust our production in response to market demand.
Experienced and Highly Skilled Workforce. Our employees are experienced and highly skilled. As of December 31, 2018, engineers comprised approximately 31% of our workforce. Due to the high level of knowledge and skill of our employees, and our continuous training and incentive programs, we are able to efficiently pursue new programs and provide our customers with differentiated technical expertise and guidance.
High skilled engineering for Defense application. Our workforce is highly capable of understanding the customers’ requirements for our defense products and services portfolio and their operational needs, transforming it into flexible and lower lifecycle cost products with global applications. We also count with strong ability to engage with several stakeholders in partnerships, enabling the development ofstate-of-the-art of the defense and space solutions with reduced cycles.
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Business Strategies
With a view to continue growth of our business and increasing our profitability, we intend to continue to offer our customers cost-effective, high quality, and reliable aircraft and services. The key elements of our strategy are the following:
Continuing to Market Our Commercial Aircraft. We are fully committed to marketing our jets of up to 150 seats. As of December 31, 2018, we had more than 500 units in the ERJ 145 family and on almost 1,400 units in the EMBRAER 170/190 jet family in active service. We also made the first deliveries of four units190-E2 jets. We expect the195-E2 and the175-E2 jets to enter into service in 2019 and 2021, respectively. We believe that market opportunities exist for the EMBRAER 170/190 jet family and for the new E2 family of jets, especially with airlines seeking to expand their fleet, increase their penetration in higher density markets and add longer routes. We also believe that our commercial jets will have opportunities with mainline andlow-cost airlines that are right sizing their fleets to adjust capacity for low tomid-density markets and will provide us with significant opportunities to increase our competitiveness by offering a full range of jets of up to 150 seats to our customers.
Commitment to Investing in our Commercial Aviation Products. Our new generation of Commercial Aviation jets, the E2s, reinforce Embraer’s commitment to investing in its commercial aviation products as well as maintaining market leadership in the segment. The aircraft will havestate-of-the-art engines, which, combined with new aerodynamically advanced wings, fullfly-by-wire flight controls and improvements to other systems, will improve efficiency by delivering significant reductions in fuel burn, maintenance costs, emissions and external noise.
Strengthening Our Position in the Executive Jets Market. We believe that the executive jets market provides us with significant growth opportunities. We offer products in nearly all executive jet categories, from the entry-level to the ultra-large cabin class. We have developed the Phenom 100EV, an entry-level jet, the Phenom 300E, a light jet, Legacy 450 and Legacy 500, both medium cabin jets, the Legacy 650E, a large jet and the Lineage 1000E, an ultra large jet, and we are also currently developing the new Praetor 500 and Praetor 600, midsize and super-midsize jets, respectively. This portfolio represents one of the broadest in the industry. We have endeavored to understand and respond to market and customer needs, in an effort to continuously improve the product and customer support for our executive jets. In the last 13 years, we have introduced four clean sheet design aircraft to the market: Phenom 100, Phenom 300, Legacy 500 and Legacy 450. In 2018, once again, our customer support placed first in an independent, industry-leading survey, Professional Pilot, or ProPilot.
Continue to Pursue Market Niche Opportunities in the Defense and Space Market. We currently offer products for transportation, light attack, training, intelligence, surveillance and reconnaissance. With our products, we have been able to provide enhanced capabilities through a portfolio of defense-integrated solutions, meeting the needs of a wide range of governments to address their military assignments.
Continued Focus on Customer Satisfaction established and respected Services and Support. We believe that our focus on customer satisfaction is fundamental to our entrepreneurial success and our business strategy. Providing high quality customer support and services is a key element of our customer focus and it is critical to our ability to maintain long-term relationships with our customers and keep our products competitive in the market. As the number of our aircraft in operation continues to grow, and our business expands, we have further increased our commitment to providing our customers with an appropriate level of after-sale support, including technical assistance, training, maintenance, spare parts, product modifications and other related services. We own and manage several service centers, strategically located in various parts of the world. In addition, our customers can rely on several authorized third-party maintenance service centers around the world to comply with their maintenance needs. On December 20, 2016, we announced the creation of Embraer Services and Support. In 2017, the new business unit completed the consolidation of all services and customer processes previously allocated to each of our other business areas. Since the first quarter of 2018, we have reported the Services and Support business as a separate segment in our financial statements. For further information on our support and services network, see “—Business Development” and “—Services and Support.”
Continue to Motivate Our Employees and Improve Our Production Processes and Managerial Practices. We are constantly seeking to exceed our customers’ expectations. In order to achieve this goal, we must, on a daily basis, continuously seek to implement the most efficient production processes and best managerial practices. Because the success of our products and services is ultimately a combination of the contribution of our employees and the production processes we have developed over the years, we recognize that we must continue to motivate our employees and refine our production processes. To that effect, we have implemented, and intend to further develop, corporate programs based on a “lean manufacturing” philosophy, such as the Embraer Enterprise Excellence Program, or P3E.
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Evolution in Business Management – Passion for Excellence and P3E Programs
Launched in 2007, the Embraer Enterprise Excellence Program, or P3E, promotes excellence in corporate management, processes and products. P3E is comprised of four pillars: (i) the development of Embraer’s organizational culture; (ii) personnel development; (iii) continuous training; and (iv) the pursuit of excellence and efficiency in all processes.
Based on continuous improvement, P3E encompasses all of Embraer’s businesses, operating locations and processes. In addition, it generates value for stakeholders by connecting each area to value streams with resulting strategies. P3E uses the Kaizen concept as a tool to optimize processes with a particular focus on productivity gains and the elimination of waste.
In 2017, Embraer launched the Passion for Excellence Program with the goal of transforming Embraer into the best and most efficient aerospace and defense company in the world, creating value to our stakeholders. The transformation office, launched shortly thereafter, is a department that is responsible for the management of priority working areas and workstreams. The workstreams comprising this program are direct procurement, indirect procurement, design to value (DtV), inventory, engineering, manufacturing, services and support, support function,zero-based budget, organizational design, digital transformation, industrial intelligence, culture and investment forum.
In addition, our transformation office monitors project execution and adherence to expected results, while reinforcing the “lean manufacturing” and excellence concepts which have been fundamental to our Company’s management since the launch of P3E in 2007.
P3E is a valuable component of the Passion for Excellence Program, both of which are managed by our transformation office.
Commercial Aviation Business
We design, develop and manufacture a variety of commercial aircraft. Our Commercial Aviation business is our primary business, accounting for 46.5% of our revenue for the year ended December 31, 2018.
Strategic Partnership with Boeing
On January 24, 2019, we entered into the Master Transaction Agreement and certain other transaction documents with Boeing and certain subsidiaries of Embraer or Boeing, pursuant to which a subsidiary of Boeing will acquire the controlling stake in Embraer’s commercial aviation business unit and Embraer or a subsidiary of Embraer and Boeing or a subsidiary of Boeing will form a joint venture for the promotion and development of new markets and applications for theKC-390 multi-mission aircraft. For further information on our strategic partnership with Boeing, see Explanatory Note on page 3 of this annual report.
Following the consummation of the Transaction, Boeing will have control of the entity that will own the business of designing, developing, manufacturing, assembling, testing, certifying, marketing, selling, delivering, maintaining, sustaining and supporting, and providing aftermarket services for, commercial aircraft platforms and programs with structural capacity of 50 or more seats in anall-standard economy class configuration, including the ERJ, EMB 110, EMB 120, Ejet and E2 families, withend-to-end commercial aviation product development and support capability.
The consummation of the transaction remains subject to (i) approval by antitrust authorities in Brazil, the United States and other applicable jurisdictions; and (ii) the satisfaction of other conditions customary in similar transactions. For risks relating to the Transaction, see “Item 3D. Risk Factors—Risks Relating to Embraer—The consummation of the strategic partnership with Boeing is subject to conditions, some or all of which may not be satisfied or completed within the expected timeframe, if at all. Failure to complete the proposed Transaction could adversely affect our business, financial condition and operating results and the trading price of our common stock and ADSs, “—Our strategic partnership with Boeing may not be implemented successfully or the implementation may be more difficult, time consuming or costly than expected,” and “—Although we expect that the strategic partnership with Boeing will result in synergies and other benefits to us, those benefits may not be realized fully or at all or may not be realized within the expected time frame.”
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Products
We developed the ERJ 145 family,our 37-50-passenger twinjet-powered regional jet, introduced in 1996, to address the growing demand among regional airlines for medium-range,jet-powered aircraft. Until the launch of the EMBRAER 170/190 Jet Family, the ERJ 145 was our most important product, achieving great results and being responsible for consolidating our presence in the United States regional market. As of December 31, 2018, more than 500 ERJ 145 aircraft remained in service around the world.
EMBRAER 170/190 Jet Family
The EMBRAER 170/190 jet family provides our customers four aircraft models in the regional passenger jet range. The EMBRAER 170 isa 70-78 seat jet and the EMBRAER 175 isa 78-88 seat jet, while the EMBRAER 190 isa 98-114 seat jet and the EMBRAER 195 isa 108-124 seat jet. The EMBRAER 170 was certified by the Brazilian Aviation Authority, the FAA, the Joint Aviation Authority of Europe (the former advisory organization that made certification recommendations tonon-European Union national authorities), or the JAA, and the EASA in February 2004, and deliveries of the EMBRAER 170 began in March 2004. The EMBRAER 175 was certified by the Brazilian Aviation Authority in December 2004, by the EASA in January 2005 and by the FAA in August 2006. The EMBRAER 190 was certified by the Brazilian Aviation Authority in August 2005, by the FAA in September 2005 and by the EASA in June 2006. The EMBRAER 195 was certified by the Brazilian Aviation Authority in June 2006, by the EASA in July 2006 and by the FAA in June 2007.
We designed the EMBRAER 170/190 jet family to maximize the benefits of commonality. Aircraft in the family share approximately 86% of the same components. The high level of commonality in this jet family lowered our development expenses and shortened our development period. We believe that this commonality leads to significant savings to our customers in the form of easier training, less expensive parts and maintenance and lower operational costs. Due to differences in size and weight, the EMBRAER 170/190 jet family does not share the same wing design. This new regional jet family has engines fixed under its main wings—a design intended to enhance power, improve fuel economy and minimize turnaround times. All of the aircraft models of this family are powered by engines manufactured by General Electric Aircraft Engines and containstate-of-the-art avionics manufactured by Honeywell International Inc. (Aerospace).
The EMBRAER 170/190 jet family’s principal features are:
• | Performance. All four jets in the EMBRAER 170/190 jet family have a maximum cruising speed of Mach ..82. The EMBRAER 170 and the EMBRAER 175 have maximum fully loaded ranges of 1,800 and 1,700 nautical miles, respectively, and each is available in the long-range version, with maximum fully loaded ranges of 2,100 and 2,000 nautical miles, respectively. The EMBRAER 190 and EMBRAER 195 have maximum fully loaded ranges of 1,800 and 1,500 nautical miles, respectively, and each is available in the long-range version with maximum fully loaded ranges of 2,400 and 2,200 nautical miles, respectively. |
• | Ground servicing. The underwing engine design and the existence of four doors, two in the front and two in the back, provide for enhanced accessibility and efficiency of ground services. |
• | Cabin and cargo space. We have enhanced passenger safety and comfort in the EMBRAER 170/190 jet family. The aircraft’s “double-bubble” design enables a four-abreast cabin, a wide aisle, greater interior space and headroom, and a larger baggage compartment than the regional jets of our competitors, including those regional jets that are in the development stage. |
In June 2013, we launched the second generation of ourE-Jets family of commercial aircraft, named theE-Jets E2, comprising three new aircraft, theE175-E2,E190-E2, andE195-E2. TheE190-E2 entered service in April of 2018. TheE195-E2 is slated to enter service in 2019 and theE175-E2 in 2021. We estimate our total investments in the newE-Jets E2 models to be US$1.7 billion, net of contributions from suppliers, through 2021.
The launch of the E2 advances our vision of offering leading-edge commercial aircraft with a capacityright-sized for 70 to 150 seats, seamless mainline comfort and performance for flexible and efficient utilization by regional,low-cost and network carriers. Our strategy is to offer all the benefits of a new design, but with the reliability of a mature platform and commonality with current generationE-Jets. We have continually invested in theE-Jets program, so that our customers can stay competitive with aircraft that have the lowest operating costs and the highest passenger appeal.
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In a typical single-class layout, theE175-E2 was extended by one seat row, compared to the current generation E175, and will seat up to 90 passengers, while theE190-E2 is the same size as the E190, of up to 114 seats. TheE195-E2, compared to the current E195, has grown by three seat rows and will accommodate up to 132 seats in a typical single class configuration or up to 146 seats in a high-density configuration.
In June 2015, two years after the launch of the program, we began to assemble the first of theE-Jets E2 family, anE190-E2, at our factory in São José dos Campos. We have already received the firstsub-assemblies from suppliers in several countries.
In November 2015, the Pratt &Whitney PW1900G PurePower® Geared Turbofan™ (GTF) engine for the EmbraerE190-E2 andE195-E2 aircraft successfully completed its first flight initiating the engine’s flight test program.
In February 2016, in a ceremony held at our plant in São José dos Campos, we presented theE190-E2. TheE190-E2 made its first flight in May 2016. In March 2017, in a ceremony held at our plant in São José dos Campos, we presented the second model of E2 jet family, theE195-E2 that is scheduled to enter into service in 2019.
On March 9, 2017 we announced that Azul, the largest operator of the current generation E195s in the world, will be the launch operator of theE195-E2. Azul has 51 firm orders and 20 purchase rights for theE195-E2.
On February 28, 2018, in a ceremony held in São José dos Campos, we received a Type Certificate from the National Civil Aviation Agency, the FAA and EASA for theE190-E2, the first member of theE-Jets E2 family of commercial aircraft. It was the first time that an aircraft program with the level of complexity of the E2 received a type certificate from three major worldwide certification authorities simultaneously.
On April 4, 2018, in a ceremony held in São José dos Campos, we celebrated the delivery of the first aircraftE190-E2 to Widerøe, the largest regional airline of Scandinavia.
Customers
We have a diverse, global customer base, mainly in the commercial airline market in Europe, the Middle East, Africa, Asia and the Americas. Our major customers for commercial aircraft include some of the largest regional,low-cost and mainline airlines in the world. As of March 20, 2019, our largestE-Jet customers by number of aircraft in service are Republic, Skywest, JetBlue, Azul, Mesa, Aeromexico, Compass Airlines, Envoy,Tianjin-HNA and KLM Cityhopper. In addition, as of December 31, 2018, almost 90% of our firm orders in backlog for the current EMBRAER 170/190 jet family are from the airlines Republic, American, United, Skywest, Horizon, and from an undisclosed customer. Moreover, ourE-Jets E2 family backlog mainly comprises orders from the companies Azul, Aercap, Aircastle, Helvetic, and ICBC, which represent approximately 95% of ourE-Jets E2 family orders.
We generally sell our commercial aircraft pursuant to contracts with our customers on a fixed-price basis, adjusted by an escalation formula. Our contracts generally include an option for our customers to purchase additional aircraft at a fixed price option, subject to the same escalation formula. In addition, our contracts include a product support package to cover the entry into service of our aircraft, as well as a general warranty for such aircraft. Other provisions for specific aircraft performance and design requirements are negotiated with our customers. In addition, some of our contracts contain cancellation provisions andtrade-in options and financial and residual value guarantees. See “Item 3D. Key Information—Risk Factors—Risks Relating to Embraer—Some of our aircraft sales may be subject to financial and residual value guarantees andtrade-in options that may require us to make significant cash disbursements” for a more detailed discussion of these provisions.
Sales and Marketing
Our current marketing strategy is based upon our assessments of the worldwide commercial airline market and of the needs of our customers. We actively market our aircraft to international airlines and regional affiliates of major global airlines through our regional offices in the United States, Europe and Asia. Our success depends, to a significant extent, on our ability to discern our customers’ needs, including needs for customer service and product support, and to fill those needs in a timely and efficient manner while maintaining the high quality of our products. Our market and airline analysts focus on the long-term trends of the market, competitive analysis, product-enhancement planning and airline analysis. In terms of direct marketing to our customers, we rely heavily on the media, as well as participating in air shows and other cost-effective events that enhance customer awareness and brand recognition. Besides São José dos Campos in Brazil, we have regional sales offices in Amsterdam, Holland; Fort Lauderdale, Florida, U.S.A.; Beijing, China; and Singapore.
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Production, New Orders and Options
Prior to starting production or development of a new project, we secure letters of intent for future orders of a significant number of aircraft. We typically begin taking orders and building a backlog two years before we begin producing a new aircraft model, aiming to receive a significant number of orders before we deliver the initial aircraft. Once an order is taken, we reserve a place for that order on the production line, ensuring that we will maintain production sufficient to meet demand. Once a place is reserved on the production line, we are able to give customers delivery dates for their orders.
We include an order in backlog once we have received a firm commitment, represented by a signed contract. Our backlog does not include options and letters of intent for which definitive contracts have not been entered into.
Our options generally provide our customers the right to purchase an aircraft at a fixed price and on a specified delivery date, subject to escalation provisions, under a purchase agreement. Once a customer decides to exercise an option, we account for it as a firm order. Occasionally, we have extended the exercise date for our options and renegotiated the delivery schedule of firm orders, as well as allowed customers to convert their firm orders or options for one aircraft into firm orders or options for another aircraft within the same commercial aircraft family.
Services and Support
We are working on further developing our portfolio of services for our commercial aviation customers, which comprises the following areas:
• | field Support, which provides convenient, accessible,on-site or remote assistance for all operational and technical issues in order to maximize customer performance; |
• | technical Support, which serves technical needs through analytics, engineering expertise, and real-time fleet monitoring; |
• | flight Operations, which supports the efficiency and safety of airline operations through tailored solutions, consulting, supervision and training resources; |
• | aircraft Modification, which provides execution and coordination of system upgrades for improved fleet performance and cabin modifications for enhanced onboard amenities; |
• | materials, which ensures availability and economy in parts and materials management for both scheduled and unscheduled maintenance; |
• | maintenance, which provides optimized maintenance solutions based on best practices for efficiency, safety and effectiveness; |
• | training, which prepares crew, maintenance technicians and operations personnel for the highest levels of competence; and |
• | Digital Solutions, which deploys the internet as the core communication channel for 24 hours a day, seven days a week collaboration and information exchange. |
We have a worldwide presence, with five regional units strategically positioned around the globe in order to provide us with greater agility in understanding the needs and desires of our customers and respecting the cultural diversity of the different regions where our customers are based. Our regional units are located as follows:
• | Fort Lauderdale, Florida, U.S.A., which supports our customers in North America; |
• | Amsterdam, Netherlands, which supports our customers in Europe, Africa, the Middle East and Central Asia; |
• | Singapore, which supports our customers in the Asia Pacific region; |
• | Beijing, China, which supports our customers in China; and |
• | São José dos Campos, Brazil, which supports our customers in Latin America. |
All units mentioned above have the following infrastructure:
• | a spare parts distribution center; |
• | technical and material field support teams with field engineers and customer account managers; |
• | warranty and repair administration offices; and |
• | services sales managers. |
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In São José dos Campos, we also offer the following services:
• | Customer Care Center, providing an integrated solution of technical and spare parts support available 24 hours a day, seven days a week; |
• | spare parts planning and material engineering; |
• | technical support; |
• | flight operations support; |
• | maintenance support engineering; |
• | Maintenance Repair and Overhaul, or MRO, network management strategy and policy; |
• | business development support; |
• | technical publications development; and |
• | technical services, such as: maintenance training, Digital Solutions, engineering services, pilot services and aircraft modifications. |
Beyond parts fulfillment and simple rental plans, we also provide innovative programs for material planning, logistics, and acquisitions, such as our:
• | Fleet-Hour Pool Program; |
• | Parts Consignment Program; |
• | Embraer Collaborative Inventory Plan; |
• | Embraer Parts Exchange Program; and |
• | Customer Stock Optimization. |
We own and operate MRO facilities in Nashville, Tennessee, where we have the Embraer Aircraft Maintenance Services, a dedicated service center for commercial aviation, and through Indústria Aeronáutica de Portugal S.A, or OGMA, we offer dedicated maintenance services to both commercial and defense customers in Alverca, Portugal.
The Embraer MRO Network that supports our commercial aviation aircraft fleet is also expanding with our third-party maintenance service centers. As of December 31, 2018, these centers are:
• | TAP Maintenance & Engineering, in Porto Alegre, Rio Grande do Sul, Brazil; |
• | STAECO, in Jinan, China; |
• | HNA Technik, in Tianjin, China; |
• | AUSTRAL, in Buenos Aires, Argentina; |
• | Kenya Airways, in Nairobi, Kenya; |
• | SIA Engineering Company, in Singapore; and |
• | Hawker Pacific, in Singapore. |
Our strategy is to target our service and support leadership position by continuing to provide the best customer support anytime and anywhere in the world, and relying on our strong MRO Network, which satisfies customers’ expectations of quality, lead time, affordability, capability and global coverage.
We constantly monitor customer satisfaction levels and keep open communication channels with them to understand customer needs and define the most appropriate actions for the continuous improvement of our customer support. To do so, we use the following tools and forums:
• | a customer support satisfaction survey performed annually in order to identify our competitive position; |
• | specific action plans and commitments with each customer, known as Customer Integrated Action Plans; |
• | teamwork and systematic identification and integrated action plans to solve problems affecting us, our suppliers and customers; |
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• | periodic dedicated meetings at the customer’s headquarters; |
• | Embraer Operators’ Conferences, which are yearly events typically held in regions of the world where we have customer operators; |
• | Embraer MRO Conference, which is typically a yearly event held in our service centers; |
• | Maintenance Cost Workshop, which is typically a yearly event where operators share best maintenance practices and discuss cost reduction initiatives; |
• | events organized by customers, including the Operators’ Maintenance Forum and the European Customer Community Conference; |
• | interactive forums for discussions in the web portal FlyEmbraer, fostering the exchange of experiences among customers and Embraer; |
• | participation in international fairs related to maintenance, technology, customer relationship management and others; |
• | Customer Advisory Board, a biennial meeting with senior executives from our customer companies to get high level insights, visions and suggestions for our future; and |
• | an internal program, Embraer Excellence in Customer Experience, which aims to address changes in the Services and Support area of the Commercial Aviation division, in order to elevate the performance of our Commercial Aviation business, covering current and future market needs, with the purpose of obtaining the highest levels of customer satisfaction based on their experience in the commercial aviation industry. |
Competition
We generally face competition from major manufacturers in the international aircraft market. Each category of our products faces competition of a different nature and generally from different companies. Some of our competitors have greater financial, marketing and other resources than we do.
We currently face the strongest competition from the following aircraft:
• | ATR-72,a 68-seat turboprop produced by ATR Aircraft, or ATR; |
• | Q-400,a 72-seat turboprop produced by Bombardier; |
• | CRJ-700,CRJ-900 andCRJ-1000,70-seat,86-seatand 98-seat regional jets, respectively, produced by Bombardier; |
• | A220, former CSeries, 110 to150-seat jets acquired by Airbus from Bombardier, which entered into service in 2016; |
• | MRJ, a 76 to88-seat jet under development by Mitsubishi, which is expected to enter into service by 2020; |
• | ARJ21,a 90-seat regional jet produced by COMAC; |
• | SSJ100,a 103-seat regional jet produced by Sukhoi; |
• | A319, a140-seat jet produced by Airbus; |
• | A319neo, are-engined A319 jet expected to enter into service in 2018; |
• | 737-700, a126-seat jet produced by Boeing; and |
• | 737 MAX 7, are-engined and stretched737-700 jet, with138-seat, expected to entering into service in 2019. |
We are the leading manufacturer in the market for jets up to 150 seats in the world, with 29% of market share in terms of accumulated deliveries, since 2004, followed by Bombardier with 25%, Airbus with 16%, ATR with 13%, Boeing with 12% and the remaining 5% held by other competitors.
The key competitive factors in the markets in which we participate include design and technological strength, aircraft operational costs, price of aircraft, including financing costs, customer service and manufacturing efficiency. We believe that we will be able to compete favorably on the basis of our aircraft performance, efficiency, low operating costs, product development experience, global customer base, market acceptance, cabin design and aircraft price. In addition, while the competitive landscape has become increasingly aggressive, deals such as the Airbus acquisition of a majority stake in Bombardier’sC-Series Program are evidence of the opportunities in the100-150 seats market. With the Airbus sales team marketing theC-Series Program, we believe customers who would not have previously considered theC-Series will seek ourE190/E195-E2 as a comparable alternative.
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Executive Aviation Business
We refer to our business aviation segment as our “Executive Jets business.” Our current portfolio is one of the broadest in the industry, comprising the entry-level Phenom 100 EV, the light Phenom 300E, the medium cabin Legacy 450 and Legacy 500, the midsize jet Praetor 500, the super-midsize jet Praetor 600, the large cabin Legacy 650E and the ultra-large cabin Lineage 1000E.
We market our executive jets to companies, including fractional ownership companies, charter andair-taxi companies,high-net-worth individuals and to flight academies, both independent as well as those belonging to airlines and armed forces. Our Executive Jets business accounted for 21.8% of our revenue for the year ended December 31, 2018. On December 31, 2018, our firm orders in backlog for our executive jets totaled US$ 0.8 million.
In May 2005, we launched the Phenom 100 and Phenom 300, which are executive jets in the entry-level and light jet categories, respectively. The Phenom 100 jet, which carries six to eight people, received the Brazilian Aviation Authority and FAA certification in December 2008, the same month of its entry into service. The Phenom 300 carries up to ten people and has a larger fuselage and wingspan and longer range than the Phenom 100. It received the Brazilian Aviation Authority and FAA certification and entered into service one year after the Phenom 100. By the end of 2017, the Phenom 100 fleet comprised more than 360 aircraft distributed in more than 30 countries and the Phenom 300 fleet comprised over 490 jets distributed in more than 30 countries. Focused on constant improvement, we launched the Phenom 100EV and the Phenom 300E in 2016 and 2017, respectively.
In May 2006, we launched the Lineage 1000, an ultra-large executive jet based on the EMBRAER 190 commercial jet platform. The Lineage 1000 is configured to accommodate up to 19 passengers in a total cabin area of 750 square feet (70 square meters). The Lineage 1000 was certified by the Brazilian Aviation Authority in December 2008 and by the FAA in January 2009, and entered into service in the first half of 2009. By the end of 2018, the Lineage 1000 fleet comprised more than 25 units distributed in 13 countries. Continued investments in the Lineage 1000 resulted in the introduction of the Lineage 1000E, in 2013, enhancing the customer experience by extending its range capability and offering new interior amenities.
In April 2008, we formally launched two new programs in the medium cabin category, the medium cabin Legacy 450 jet, with a 2,575 nautical mile range and a capacity for up to nine passengers, and the medium cabin Legacy 500 jet, with a 3,125 nautical mile range and a capacity for up to 12 passengers. The Legacy 450/500 medium cabin jets are positioned in our executive jets portfolio between the Phenom 300 and the Legacy 650. The Legacy 500 was certified by the Brazilian Aviation Authority and the FAA in 2014, the same year that it entered into service. The Legacy 450 was certified by the Brazilian Aviation Authority and the FAA in August 2015 and by the EASA in September 2015. In November of the same year, we announced an increase of 2,900 nautical miles in the Legacy 450’s range, and it entered into service in December. In November 2017, we introduced thebest-in-class 5,800 foot cabin altitude for the Legacy 450/500 jets, which further enhanced customer experience. These two aircraft programs have helped strengthen our position in the market and establish our portfolio as one of the broadest in the executive aviation industry. By the end of 2018, the Legacy 450/500 fleet was composed of more than 100 units distributed in 18 countries.
In October 2009, we introduced the Legacy 650 jet, a large jet based on the Legacy 600 platform, with a longer range for up to 14 passengers. The Legacy 650 received the Brazilian Aviation Authority and FAA certification in October 2010 and February 2011, respectively, and entered into service in November 2010. The latest evolution of the aircraft that started our Executive Jets business is the Legacy 650E, which introduces auto-throttle and interior enhancements, in addition to aten-year warranty, which set a new industry standard for performance and reliability. By the end of 2018, the fleet of Legacy 600 and Legacy 650 comprised more than 280 jets in service in 55 countries.
In October 2018, we launched the new Praetor 500 midsize and Praetor 600, the most disruptive and technologically advanced midsize and super-midsize jets, respectively, introducing unprecedented range into their categories. The Praetor 600 is expected to be the farthest-flying super-midsize business jet, which allows nonstop flights between London and New York. The Praetor 500 will be the fastest midsize aircraft, capable of reaching Europe from the west coast of the US with a single stop. The Praetor 600 is expected to be certified and enter service in the second quarter of 2019, followed by the Praetor 500 in the third quarter of 2019.
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Competition
Phenom 100EV and Phenom 300E competitors in the entry-level and light jet categories include Textron, Bombardier, Honda and Pilatus. In the medium cabin category, the Legacy 500 and Praetor 600 competes with Textron, Bombardier, Dassault and Gulfstream aircraft, while the Legacy 450 and Praetor 500 competes largely with aircraft produced by Bombardier and Textron. The Legacy 650E competes with aircraft produced by Dassault, Bombardier and Gulfstream. Boeing and Airbus are the main competitors for the Lineage 1000E ultra-large jet.
Continuing Internationalization
In October 2014, we announced our Legacy 500 and Legacy 450 assembly complex in Melbourne, Florida, more than doubling the size of our campus at Melbourne International Airport. The new complex consists of four new buildings: a delivery center, an assembly hangar, a paint facility and a flight preparation facility, which are operational, as well as a new dedicated delivery center that began operations in the first half of 2018. As of December 31, 2018, our Melbourne campus had an area of approximately 450,000 square feet.
Services and Support
Our Executive Jets customer fleet has expanded globally and has a strong presence in major markets. We expect to continue enhancing customer support and services offered in our Executive Jets business. To this end, we have added five wholly owned service centers to our operations since 2007, in Fort Lauderdale, Florida; Mesa, Arizona; Le Bourget, France; Bradley, Connecticut and Sorocaba, São Paulo. At the end of 2018, we had 68 service centers to support our executive jets fleet. In addition, in order to ensure customer satisfaction, we implemented a new spare parts system and planning policy to generate synergies among business units. Our new planning policy will further enhance stock optimization and service levels, offering customers an availability between 92% and 98% for our spare parts items.
We have further developed our customer support and services structure to enhance our customers’ satisfaction in operating our executive jets. To measure our customers’ satisfaction, we conduct a yearly customer experience survey of executive jets customers to develop action plans that will allow us to provide effective responses to our clients. Our Customer Support Contact Center counts on a team of specialists dedicated to support all Embraer Executive Jets and offers complete and timely assistance for their operational, technical and maintenance needs. This Customer Support Contact Center operates 24 hours a day, seven days a week, and is based at Embraer’s headquarters in São José dos Campos. Its priority is to minimize downtime from the customer’s first contact to the final solution, by quickly and efficiently applying appropriate resources to critical needs, assuring that customers have expert assistance anywhere in the world.
Since 2014, our product support has beentop-ranked in industry surveys. In 2016, for the first time, we were number one in both the AIN and Pro Pilot Product Support Surveys. In 2017, AIN ranked us first for project support. In 2018, we were ranked number one in Pro Pilot Product Support Survey and number two in AIN’s Product Support Survey. The positive customer responses evidenced by these surveys demonstrate our efforts in providing excellent customer support and services which are consistent with our business strategy and demonstrate Embraer’s commitment in this regard.
In 2018, our three service centers in the United States received for the eighth time the FAA Diamond award, a certificate of excellence related to maintenance technician training.
In 2013, we selected Flight Safety International as the training provider for the Legacy 450/500 and by the end of the year the first Full Flight Simulator had already been built. It was certified in November 2014 in accordance with the aircraft’s entry to service at the end of 2014. In 2016, Flight Safety offered its inaugural class in the Legacy 500 Full Flight Simulator, in Dallas, TX, USA.
Defense and Security Business
We conceive, design, develop, manufacture and support a wide range of integrated solutions for the defense and security market. Our products include training/light attack aircraft, aerial surveillance platforms, military transport aircraft, government transport aircraft and command, control, communications, computer, intelligence, surveillance and reconnaissance systems and border surveillance and security. We offer a complete portfolio of customer services, ranging from maintenance and material solutions to complete Contractor Logistic Support programs.
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As of December 31, 2018, we had sold more than 1,300 defense aircraft, including government transport aircraft, to more than 50 armed forces and operators worldwide. We are also the leading supplier of defense aircraft to the Brazilian Air Force based on the total number of aircraft in its fleet production. Our Defense and Security business accounted for 12.1% of our revenue for the year ended December 31, 2018.
Products
MilitaryTransport—KC-390
TheKC-390 is a multirole military transport aircraft developed to set higher standards in its class. Flexible, safe and fast, theKC-390 is efficient for cargo and troop transport, aerial resupply, humanitarian missions, among other uses. Designed with modern engineering solutions, this new aircraft is an innovation in military transport aviation. Greater flexibility, strength, mobility, easy maintenance and new technology make theKC-390 the best option on the market.
In 2016, Embraer and Boeing entered into an agreement to jointly market and support theKC-390 military transport aircraft. Under the agreement, the companies will pursue new business opportunities together, both for the aircraft itself and for aircraft support and services. TheKC-390 completed a key milestone in 2017, when Embraer demonstrated its Initial Operating Certificate, or IOC, to the Brazilian Air Force. After making its debut at the Paris Airshow in France, the aircraft subsequently carried out demonstrations in several countries and covered an additional 90,000 km. The aircraft confirmed its high level of maturity, achieving 100% availability during all flights in this period. During the first semester of 2018, theKC-390 prototype serial number 001 faced an incident that led this first serial unit to be allocated to flight test campaign in order to reduce impact in the certification schedule.
In the fourth quarter of 2018, theKC-390 reached another important milestone, when it obtained a Type Certificate from the Brazilian Aviation Authority. This certificate evidences that the project meets high standards of quality, which are the same used by the international air transport association. The Final Operating Certificate (FOC) is expected to be obtained by the end of 2019.
During 2018, Embraer and Boeing started discussions to create a joint venture for theKC-390. This partnership aims to increase total market capture of theKC-390 by promoting and developing new markets and applications, joint sales efforts, local aircraft manufacturing as well as aftermarket support (the joint venture is now subjected to antitrust authorities’ approval). Sales campaigns are taking place in several countries, a memorandum of understanding has already been signed for up to 16 aircraft and a campaign for five aircrafts plus an after-sales package (spare parts, maintenance and training, among others) is in final stages of negotiation in Portugal.
KC-390 JV
As part of the Transaction, Embraer and Boeing (or their respective subsidiaries) will form a joint venture for the promotion and development of new markets and applications for theKC-390, multi-mission airplane, based on jointly identified opportunities, and development, manufacture and sales of theKC-390, in which joint venture Embraer or its subsidiary will hold the majority of the share capital. For further information on theKC-390 JV, see Explanatory Note on page 3 of this annual report.
Light Attack and Training—Super Tucano
Equipped for counter insurgency scenarios with integrated sensors, data-link, cockpit protection and multiple weapons configurations, the combat proven Super Tucano is the market benchmark in its class, as the only turboprop platform under production that was designed from its inception for close air support, precision weapons delivery, intelligence, surveillance and reconnaissance, or ISR, and electronic warfare. Due to its handling characteristics, low operational cost andstate-of-the-art avionics systems, the Super Tucano is also a full-fledged advanced trainer.
In February 2013, the U.S. Air Force awarded the Light Air Support, or LAS, contract to Sierra Nevada Corporation, or SNC, who partnered with us to supply 20 EmbraerA-29 Super Tucano aircraft as well as ground training devices, pilot and maintenance training and logistic support. The aircraft have been used to provide light air support, reconnaissance and training capabilities to two foreign countries, and the U.S. Congress approved additional support to another country’s military operations with the Super Tucano through the LAS program. In March 2013, we officially opened a40,000-square-foot facility in Jacksonville, Florida, to produce the LAS aircraft. The facility in Jacksonville performspre-equipping, mechanical assembly, structural assembly, systems installation and testing, and flight testing ofA-29 aircraftThrough the LAS program, SNC and Embraer support more than 1,400 jobs with more than 100 companies throughout the United States. Jointly with SNC, we have been participating in theOA-X assessment, the U.S. Air Force’s potential program for the acquisition of the Super TucanoA-29 category. Although the budget approval by the U.S. government is still under discussion, the capabilities assessment was concluded in 2017 and the Super TucanoA-29 has met all mandatory requirements, being classified as aTier-1 potential supplier, jointly with TextronAT-6.
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In 2017, we sold six Super Tucano aircraft to an undisclosed customer, which were delivered in 2018. The airplanes will be used for tactical and advanced training as well as light attack and ISR (intelligence, surveillance and reconnaissance) missions. In addition, six Super Tucano aircraft were sold to the Philippine Air Force. All aircraft are expected to be delivered in 2019. The Super Tucano was selected as part of the Philippine air force’s modernization plan following a public bidding process involving other manufacturers. Also in 2017, Embraer and Mali’s Air Force signed a settlement agreement to adjust the scope from six to four Super Tucano. Furthermore, in the United States air force’s LAS program, threeA-29 Super Tucano aircraft were delivered and six aircraft were purchased during 2017, which are scheduled to be delivered in the first half of 2020 to the Air Force of Nigeria. In addition, theA-29 Super Tucano aircraft was also successful in the ground and flight demonstrations conducted by the United States Air Force (USAF) for the Light Attack Aircraft (LAA) program, previously calledOA-X.
Fighter—F-X2 Project
In July 2014, Embraer Defense and Security and Saab entered into a memorandum of understanding to collaborate in a joint program management for theF-X2 Project, pursuant to the selection of the Gripen NG as Brazil’s next generation fighter jet. Under this agreement, we will perform a relevant role in the overall program performance as well as undertake an extensive share of work in systems development, integration, flight testing, final assembly and aircraft deliveries of both the single andtwo-seat versions of thestate-of-the-art Gripen NG aircraft for the Brazilian Air Force. The contract between the companies that establishes the partnership for joint development, industrialization and management of theF-X2 Project for the Brazilian Air Force, became effective in 2015. We participate in the coordination of all development and production activities in Brazil. Furthermore, we and Saab will work together in the development of thetwo-seat version of the Gripen NG.
By December 2017, a team of more than 120 Embraer engineers and technicians were in Sweden to conduct initial training in the maintenance and development work for the Gripen NG. All the technology developed by the joint team will be later transferred to Brazil. A dedicated engineering development center for this program, the Gripen Design Development Network, or the GDDN, was inaugurated at Embraer’s industrial plant in Gavião Peixoto, in the State of São Paulo, to support the Brazilian Air Force Program. In June 2017, the first Gripen E prototype flight occurred in Sweden. In October 2018, at Vidsel Test Range in the north of Sweden, the Gripen E fighter successfully completed the first tests to verify the ability to release and launch external payloads. The tests conducted by the first test aircraft consisted in discharging an external fuel tank and firing anIRIS-Tair-to-air missile.
Special Transportation Aircraft
We have three ongoing programs under the contracts relating to special transportation aircraft. The first special mission program isI-X, accomplished between Embraer and the Brazilian Air Force. The contract started in 2014 with the sale of six Legacy 500 aircraft adapted to flight inspection missions. Due to budgetary constraints of the Brazilian government, in the end of 2017, the contract was amended to reflect the sale of four, instead of six aircraft. In 2018, the third unit of them was delivered to the Special Flight Inspection Group (GEIV). The second program started in the end of 2018 with the sale of two Phenom 100 aircraft to an undisclosed customer. Their deliveries are scheduled for 2019.
The third program delivered four Phenom 100 Aircraft to the Military Flight Training System (MFTS) of the United Kingdom Ministry of Defense, in 2017. The MFTS takes United Kingdom Armed Forces aircrew from initial training through elementary, basic and advanced flying training phases preparing them for their arrival at their designated operational conversion units. During 2018, the last aircraft of five Phenom 100 units was delivered to Affinity Flying Training Services to be operated by the UKMFTS Military Flight Training System (UKMFTS).
Modernization Programs
We offer military aircraft modernization services and currently have four ongoing programs under contract, three with the Brazilian Air Force and one with the Brazilian Navy. The first program, known asF-5BR, is focused on performing structural and electronics upgrades forF-5 fighter jets. In 2012, we concluded the modernization and delivery of 46F-5 jets to the Brazilian Air Force. In 2011, a contract to modernize one additional batch of 11F-5 fighter jets was signed. During 2015, the scope of this contract was reduced from 11 to three aircraft. By the end of 2018, two aircraft were delivered.
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The second program, known as theA-1M modernization program, focuses on modernizing the AMX. From 2013 to 2014, Defense and Security delivered threeA-1M fighter jets to Brazilian Air Force. Due to Brazilian government budget constraints, the scope was adjusted from 43 to 14 aircraft at the end of 2016. In 2018, we delivered the fifth aircraft and the other deliveries are expected by 2020.
The third modernization program regards the upgrade of the 12A-4 Skyhawk(AF-1 Brazilian Navy Designation), with the goal of incorporating new technology, including new avionics, radars, power generation and autonomous oxygen generating systems. During 2018, the scope of this contract was reduced from 12 to 7 aircraft. Until 2018, two modernizedAF-1(AF-1B) fighter jets were delivered to the Brazilian Navy.
The fourth contract signed between Embraer Defense and Security and the Brazilian Air Force relates to the modernization of five EMB 145 Airborne Early Warning and Control, or AEW&C. The contract also provides for six mission planning and analysis stations, which will be employed in the training and improvement of crews. The first delivery is scheduled for 2020.
Principal Defense and Security Subsidiaries and Joint Ventures
Savis Tecnologia e Sistemas S.A. and Bradar
Savis Tecnologia e Sistemas S.A. is a company dedicated to developing, designing, certifying, industrializing, integrating and deploying systems and services in the area of border monitoring and protection of strategic structures.
Bradar is specialized in the development of electronic systems and sensors as defense radars for ground and aerial surveillance, electronic warfare and intelligence equipment, and airborne remote sensing solutions for mapping and monitoring using synthetic aperture radar (BradarSAR) that generates high-resolution precision maps on day or night and all weather conditions. In 2018, the Bradar was merged into Embraer S.A. in order to guarantee better synergy and reduce costs.
Savis, through its distinct systems integration capabilities, and Bradar, with its technological development capabilities, have joined efforts in the execution of complex projects. Together, they form the Consortium Tepro, which is responsible for implementing the Integrated Border Monitoring System, or SISFRON, in Brazil. Savis as leader of the Tepro Consortium, is the lead system integrator for Phase I of Brazilian Army’s SISFRON, which is one of the largest ongoing border surveillance projects in the world. The full scope of the SISFRON will encompass the surveillance and protection of more than 10,000 miles of Brazilian western land borders, stretching through 11 Brazilian states and 10 neighboring countries, covering 27% of Brazil’s land mass.
SISFRON’s Phase I includes the surveillance and protection of approximately 400 miles of Brazilian borders under responsibility of the Western Military Command, covering the frontiers between the Brazilian States of Mato Grosso and Mato Grosso do Sul with Paraguay and Bolivia.
In 2017, the SISFRON Program was over 2/3 implemented, delivering operational capabilities to the Brazilian Army in different technologies and areas of application, including sensors for electromagnetic signal intelligence, or COMINT, mobile and fixed ground surveillance radars, optronics, tactical and strategic communications networks, mobile and fixed command and control centers. All of this works organically as one system, backed by extensive Integrated Logistic Support.
Another important accomplishment for Savis and Bradar in 2017 was the conclusion of the development phase and production of the first two operational units of COMINT Sensors for SISFRON by Bradar, the transfer and initial operation of the SISFRON Network Operations Center in the city of Campo Grande, State of Mato Grosso do Sul, and successful completion of the S200 Radar Conformity Assessment by the Brazilian Air Force.
In 2018, more than 70.0% of the SISFRON program was delivered and operational. During this year, additional operational capabilities were made available to the Brazilian Army, among which the deployment of electronic warfare systems developed and manufactured by Embraer.
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Atech
Atech is a Brazilian company, fully owned by us since 2013, focused in complex systems for critical missions, developing products and services in the area of command and control, communications, computer and intelligence, air defense and air traffic control for the defense, security and other civil applications. Atech is responsible for the development and modernization of Brazilian Air Traffic Control Systems and has already implemented the new SAGITÁRIO system in 14 Air Traffic Centers in Brazil. In 2017, Atech also signed important contracts, including a new long term contract to continue updating and modernizing the Brazilian air traffic control systems.
In 2017, Atech successfully delivered and implemented the second phase of the Air Traffic Flow Management System (Skyflow) to the Airport Authority of India. Atech also concluded the development and started the implementation of the integrated solution(Air-Ground Surveillance, Air Traffic Control, Communication and Command and Control) in an African country as part of the contract signed in 2015.
As part of the Nucleoelectric Generation Laboratory program, or LABGENE, signed with the Brazilian Navy to develop the protection and control system of the nuclear reactor for the project, Atech concluded all system definition and the procurement phase of the project and the program has been evolving as planned.
The company also continued the technology transfer and development of the mission training and support system of the new Brazilian FX fighter program, as part of our contract with SAAB. Other relevant programs have evolved in 2017, as theH-XBR (Atech is responsible for the Tactical Mission System) with the conclusion of the qualification phase of the system in the helicopterH-225. Atech is also positioned as the strategic alternative to develop critical systems for Embraer, including the new Logistics Execution System (LES) and digital solutions.
In 2018, Atech advanced on several fronts, increasing its revenues, conquering new markets and achieving better results, such as contracting with main suppliers for the LABGENE, receiving and accomplishing several tests of acceptance for the control and monitoring subsystems as well as the inauguration of the first replica of the control room. In the area of air traffic control in Brazil, Atech completed the upgrade of the aeronautical messaging system (AMHS) and the implementation of the platform for evaluation and simulation of the new aeronautical communications network(ATN-BR). In the defense market, it also successfully concluded tests for the acceptance of the first fixed center for air traffic control and surveillance in a North African country, as well as the delivery of the first mobile air and ground surveillance centers.
In the naval helicopter for the Brazilian Navy(H-XBR) program, the final certification of the tactical naval data management system was obtained, concluding the program’s development phase with the delivery of two complete sets with the embedded console tactical and mission computers.
Visiona Tecnologia Espacial S.A.
In November 2011, Embraer and Telecomunicações Brasileiras S.A., or Telebras, formed Visiona Tecnologia Espacial S.A., or Visiona, of which Embraer holds a 51% stake and Telebras 49%.
Through this partnership between Embraer and Telebras, Visiona is the prime contractor for the Brazilian Strategic and Defense Communications Geostationary Satellite, or SGDC, with responsibility for the system integration. This is a key step for Embraer’s entry into the satellite integration business.
In November 2013, Visiona was selected by Telebras to be the integrator of the SGDC system that, once delivered, will be operated by Telebras and the Brazilian Ministry of Defense.
In December 2016, after a successful phase of environmental and functional tests, the satellite was delivered and approved. It is ready to be shipped to the launch site according to its launch slot. The ground system’s test and validation was also concluded in December 2016.
In 2017, the SGDCX-Band services (6 GHz to 8.5 GHz), which is used for strategic defense communication was launched successfully, and Telebras took over its control. Visiona has also signed a contract to support Telebras in its satellite operations.
In 2018, Visiona launched the VCUB nano-satellite program, the first satellite designed by a company in the Brazilian industry, and signed partnerships with INPE,SENAI-SC / EMBRAPII, Government of Santa Catarina, CEMADEN and EMBRAPA for technological development and evaluation of the products generated by satellite.
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Indústria Aeronáutica de Portugal S.A—OGMA
Indústria Aeronáutica de Portugal S.A, or OGMA, located in Alverca, Portugal, combines the accumulatedknow-how as an aircraft manufacturer and maintenance service provider. It offers worldwide MRO services for defense, commercial and executive aviation as well for aircraft engines and components. Furthermore, OGMA plays an important role as a major aerostructures supplier of integrated solutions to OEMs and first tier suppliers. OGMA delivers assemblies andsub-assemblies of both metallic and composite materials. Embraer owns 65% of the voting capital of OGMA and the Portuguese Defense Company (EMPORDEF) owns the remaining 35%.
During 2016, OGMA made important investments focusing on efficiency and maintenance capability improvements, including a new painting hangar, a new commercial aircraft MRO line and manufacturing capabilities (automatic riveting and 5axe machines). In 2017, OGMA proceeded in making investments in continuous MRO improvements and in its aerostructures manufacturing area, specifically in equipment and technologies and continuous training for its personnel.
OGMA celebrated its 100 years of activity in the aeronautical market in 2018. During the period, OGMA continued its investments in the areas of MRO and the manufacturing of aerostructures. We also entered into a contract for the maintenance and management of the Brazilian Air Force’sC-130 aircraft fleet, as well as a contract with two airlines, from Scandinavia and Central Asia, respectively, for the maintenance of EmbraerE-190 aircraft, strengthening OGMA’s position in this market. OGMA further extended the MRO spectrum, obtaining certification for maintenance of the Rolls-Royce AE1107 engine. In addition, we also entered into pylon manufacturing contract with one of the largest manufacturers of executive aircraft.
Services and Support
Defense and Security Services and Support provides solutions to several air forces and government entities through our comprehensive portfolio. These solutions are tailored to customer needs and may include provision of material, training, maintenance, engineering and other aspects that will enhance fleet availability and mission readiness.
Support models may range from simple transactional sales to integrated support programs. The assessment of customer capabilities and requirements supports the definition of an integrated solution that will keep the fleet operating at the most effective way.
The newerKC-390, with its multi-mission capability, count on a dedicated team to design and implement the most effective entry into service solution. Customer participates directly in the process, along with Embraer team, from strategy to details, assuring a reliable and smooth operation from the beginning.
The Super Tucano, a proven platform by several air forces, continues its legacy with existing and new customers, several of them choosing Embraer as a provider of our comprehensive Integrated Support Program.
The list of supported platforms also includes passenger carriers from several government organizations. From most recent aircraft such as Phenom 100, Phenom 300, Legacy 450, older platforms like Legacy 600,ERJ-145, and legacy aircraft such as Bandeirantes(EMB-110) and Brasília(EMB-120), all of them have their support model designed to fulfill requirements for material, maintenance, training and technical support, among others. Our solutions provides customer the flexibility for keeping their fleet readily available for many different types of missions. Some of these aircraft are modified versions of commercial or business platform, fitted with equipment and sensors capable of performing several types of missions.
Keeping older platforms flying is also one of the pillars of the business unit, since some of them are almost 40 years old. Obsolescence programs find solutions to overcome material shortages or technical difficulties. Engineering solutions bring modern technologies to the older aircraft, building a more reliable, safe and cost effective operation.
We operate where customers need, all around the world, many times together with customer teams in their own bases. For more specific activities or comprehensive maintenance solutions, we own and operate Maintenance and Repair Organizations, as follows:
• | Alverca, Portugal, which we refer to as OGMA, began to operate in March 2005 and operates for commercial and defense customers; and; |
• | Gavião Peixoto, in the State of São Paulo, Brazil, where we have a dedicated service center for defense customers. |
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These MROs are developing their capabilities for supportingKC-390 maintenance activities.
In 2018, sales efforts resulted in new contracts to support Embraer’s Defense and Security customers. We strengthened this relationship by establishing several support and services contracts in Latin America, Europe, Africa and Asia, improving the quality of service in order to meet customers’ operational requirements.
Competition
Our military aircraft faces rigorous competition from various manufacturers from different countries in each market segment. The Super Tucano competes in the light attack market with the TextronAT-6 and Scorpion. In the flight training market, it competes with the PilatusPC-21 (advanced) aircraft from Switzerland, the TextronT-6A/B from the U.S.
In the military transport segment, theKC-390 will operate in the medium airlift segment in the class of 23 tons. Hence its main competitor is theC-130J. Given the multi-mission design ofKC-390, including Medical Evacuation, Search and Rescue, Firefighting,Air-to-Air Refueling, Transport of Troops and Aerial Resupply, specific competition with other platforms is also expected.
Other Related Businesses
We provide fuel systems, structural parts, and mechanical and hydraulic systems to Sikorsky Aircraft Corporation, a Lookheed Martin Company, for its production of helicopters. We also manufacture general aviation propeller aircraft, such as crop dusters, also known as light aircraft. Our Other Related businesses accounted for 0.3% of our revenue for the year ended December 31, 2018.
We provide to Sikorsky Corporation, the development and manufacture of the landing gear, fuel system and fuel tanks for theS-92 andH-92 Helibus helicopters. We also act as a risk-sharing partner for Sikorsky. These contracts were renewed in 2015 and will expire in 2020.
We also developed Ipanema, a crop duster aircraft pursuant to specifications of the Brazilian Ministry of Agriculture. These aircraft are produced only on demand. Through December 31, 2018, we had delivered a total of 1,407 of these aircraft, including 18 in 2018.
Aircraft Operating Lease Activities
In order to provide better financial support to our commercial activities, as well as to manage and reduce financial risks related to the marketing of aircraft, we created ECC Leasing in September 2002. ECC Leasing has been able tore-market aircraft in its portfolio with conditions and at values similar to market and without any guarantee from Embraer. All sale and leasing transactions were entered into based on market rates, helping to sustain the present and future values of our products.
In January 2017 ECC Leasing merged with Embraer Netherlands, with its assets and activities incorporated under Embraer Netherlands. The mission of Embraer Netherlands, as our company responsible for aircraft operating lease activities, is to manage and remarket Embraer’s aircraft portfolio, which as a result of contractual obligations, may be acquired by us viatrade-in transactions. We also providere-marketing services to third parties looking to sell their Embraer manufactured aircraft.
We have successfully completed sales campaigns for new aircraft, where the acceptance oftrade-in aircraft as part of payment was allowed. We have also generated additional revenues through the sale and lease of aircraft received astrade-ins. Since its establishment in 2002, this activity handled 245 aircraft, of which 18 are available or under sale negotiations, and 182 were sold.
We believe the results of Embraer Netherlands will be largely dependent on market conditions, aircraft availability levels and the demand for jets in the 37 to 50 seat category.
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Markets
The following table sets forth our revenues by line of business and geographic region of end users for the periods indicated:
Year ended December 31, | ||||||||||||||||||||
2018 | 2017 | 2016 | 2015(1) | 2014(1) | ||||||||||||||||
Restated | Restated | |||||||||||||||||||
(in US$ millions) | ||||||||||||||||||||
Commercial Aviation | ||||||||||||||||||||
North America | 1,449.4 | 1,795.5 | 2,157.3 | 2,452.7 | 2,065.0 | |||||||||||||||
Latin America (except Brazil) | 11.9 | 0.5 | 63.9 | 89.8 | 64.7 | |||||||||||||||
Asia Pacific | 324.1 | 670.3 | 581.6 | 307.8 | 155.4 | |||||||||||||||
Brazil | 0.2 | 0.9 | (6.9 | ) | 145.3 | 73.9 | ||||||||||||||
Europe | 519.1 | 200.1 | 105.1 | 316.5 | 624.7 | |||||||||||||||
Others | 53.6 | 104.1 | 15.9 | 36.6 | 179.6 | |||||||||||||||
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Total | 2,358.3 | 2,771.4 | 2,916.9 | 3,348.7 | 3,163.3 | |||||||||||||||
Executive Jets | ||||||||||||||||||||
North America | 936.7 | 1,006.8 | 1,147.7 | 1,226.6 | 739.3 | |||||||||||||||
Latin America (except Brazil) | 22.5 | 0.6 | 102.3 | 38.7 | 110.7 | |||||||||||||||
Asia Pacific | 1.6 | 94.1 | 98.4 | 149.2 | 353.3 | |||||||||||||||
Brazil | 16.1 | 17.1 | 46.7 | 72.6 | 207.1 | |||||||||||||||
Europe | 127.4 | 161.7 | 158.1 | 218.3 | 168.4 | |||||||||||||||
Others | — | — | 0.1 | 13.2 | 12.7 | |||||||||||||||
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Total | 1,104.3 | 1,280.3 | 1,553.3 | 1,718.6 | 1,591.5 | |||||||||||||||
Defense and Security | ||||||||||||||||||||
North America | 145.7 | 93.3 | 166.4 | 177.2 | 199.5 | |||||||||||||||
Latin America (except Brazil) | 68.3 | 5.4 | (0.7 | ) | 21.7 | 47.3 | ||||||||||||||
Asia Pacific | 1.6 | 13.7 | 22.2 | 33.2 | 78.5 | |||||||||||||||
Brazil | 258.9 | 587.1 | 479.6 | 479.3 | 1,004.5 | |||||||||||||||
Europe | 122.8 | 133.5 | 99.3 | 84.8 | 100.0 | |||||||||||||||
Others | 14.8 | 20.7 | 58.7 | 14.9 | 26.6 | |||||||||||||||
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Total | 612.1 | 853.7 | 825.5 | 811.1 | 1,456.4 | |||||||||||||||
Service and Support | ||||||||||||||||||||
North America | 422.2 | 421.0 | 416.6 | — | — | |||||||||||||||
Latin America (except Brazil) | 47.3 | 45.1 | 45.2 | — | — | |||||||||||||||
Asia Pacific | 104.7 | 81.4 | 85.0 | — | — | |||||||||||||||
Brazil | 157.2 | 133.3 | 140.6 | — | — | |||||||||||||||
Europe | 196.7 | 196.3 | 156.0 | — | — | |||||||||||||||
Others | 52.7 | 45.1 | 38.8 | — | — | |||||||||||||||
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Total | 980.8 | 922.2 | 882.2 | |||||||||||||||||
Other Related businesses | ||||||||||||||||||||
North America | 5.0 | 21.3 | 22.7 | 30.1 | 53.6 | |||||||||||||||
Asia Pacific | — | — | — | — | 0.1 | |||||||||||||||
Brazil | 10.6 | 10.5 | 3.3 | 12.3 | 20.0 | |||||||||||||||
Europe | — | — | — | 7.3 | 3.9 | |||||||||||||||
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Total | 15.6 | 31.8 | 26.0 | 49.7 | 77.6 | |||||||||||||||
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(1) | The consolidated financial information as of and for the years ended December 31, 2015 and 2014 has been derived from our historical financial statements but was not restated for the retrospective application of IFRS 9 and IFRS 15 as management cannot be provided this financial information without unreasonable effort or expense. |
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Suppliers and Components; Risk-Sharing Arrangements
We do not manufacture all of the parts and components used in the production of our commercial and executive aircraft. Approximately 80% of the production costs in our Commercial Aviation and Executive Jets businesses consist of materials and equipment purchased from our risk-sharing partners and other major suppliers. Risk-sharing arrangements with suppliers of key components enable us to focus on our core business: design, development, manufacture and sale of aircraft and systems for the Commercial Aviation, Executive Jets, and Defense and Security businesses. Risk-sharing arrangements are those in which suppliers are responsible for the design, development and manufacture of major components or systems of our aircraft. Our risk-sharing partners, therefore, must invest their own money in development and share the risk and success of our products with us.
In our Commercial Aviation, Executive Jets and Defense and Security businesses, we rely on risk-sharing partners to supply vital components of our aircraft. We select suppliers on the basis of, among other factors, technical performance and quality of their products, production capacity, prior relationship and financial competitiveness. We have had continuing relationships with most of our major suppliers since production of the Bandeirante aircraft began in 1975.
In addition, we have entered into purchase agreements with our major suppliers, which cover our production. These contracts contain pricing formulas that take into consideration the various factors that affect the business of our suppliers, and help us mitigate the effects of price volatility (which in some cases can be significant) of the materials, parts and components that are required for our operating activities. We are not obligated to purchase a minimum amount of materials annually under any of these supply contracts. Our ongoing supplier relationships depend on cooperation, performance and the maintenance of competitive pricing. For further information on our relationship with our suppliers, see “Item 3D. Key Information—Risk Factors—Risks Relating to Embraer—We work with a limited number of key suppliers.”
EMBRAER 170/190 Jet Family
We are continuously improving the EMBRAER 170/190 jet family, together with risk-sharing partners that supply key systems for the aircraft. Our supplier arrangements for the EMBRAER 170/190 jet family differ from the supplier arrangements of ERJ 145 regional jet family, in which we use fewer suppliers. In the EMBRAER 170/190 jet family, each risk-sharing partner is responsible for the development and production of aircraft systems, including the landing gear, the hydraulic system and the flight control system, rather than individual components, and fewer components are supplied by companies that are not risk-sharing partners. The assumption of responsibility for systems by our risk-sharing partners lowers our capital expenditures, which decreases our development risks and increases our operating efficiency by reducing the number of suppliers per product and cutting production costs. It also shortens development and production time.
In addition, some of the risk-sharing partners for the EMBRAER 170/190 jet family have assumed a broader role in other aspects of the program by providing sales financing and residual guarantees, rather than simply supplying us with aircraft components.
WhenE-Jets were launched, they were one of the most advanced aircraft in operation. Thefly-by-wire system, the integrated avionics and the double-bubble cross-section brought a new level of technology and passenger comfort for the segment. The family success led to 29% of the deliveries share in the up to150 seats jet segment during 2004 to 2018. Notwithstanding, during the last ten years we have been continually improving the family. New performance packages, maintenance improvements, external noise reduction and fuel burn reduction are examples of improvements developed.
TheE-Jets E2 project is another important example of our commitment to keep our market leadership in the segment. The state of the art technology applied on the engines, wings, and avionics make the E2 family a highly efficient tool for airlines. The E2 will bring a new level of aerodynamic efficiency, as applied on the wing with one of the highest aspect ratio of the industry and advanced wing shape, it will also improve the systems and avionics, including fourth generation fullfly-by-wire flight controls, and Pratt & Whitney’s PurePowerTM Geared Turbofan highby-pass ratio engines (PW1700G on theE175-E2, PW1900G on theE190-E2 andE195-E2). We expect that all of those improvements will result in double-digit reductions of fuel burn, emissions, noise and maintenance costs. Cockpit commonality with current generationE-Jets is a key driver in the design of theE-Jets E2, in order to enable a smooth transition for theE-Jets pilots. Honeywell’s Primus Epic™ 2 advanced integrated avionics system with large landscape displays and advanced graphics capabilities, and Honeywell’s Next Generation Flight Management System (NGFMS), already in development with current-generationE-Jets, will provide exceptional pilot situational awareness and flexibility for continuous innovation on the flight deck.E-Jets E2 has the additional objective of increasing revenue opportunities, as the family is designed to provide better aircraft availability and to increase ancillary revenue for operators.
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Known for its comfortable and roomy cabins, with no middle seats, theE-Jets passenger experience will be further enhanced in the E2 generation. The U.K. design firm Priestmangoode was contracted to develop the aircraft cabin jointly with Embraer. The interiors will establish a new benchmark in cabin design, improve the passenger experience, and deliver a more comfortable and improved environment tailored to passengers’ needs, while maximizing airlines’ operational efficiency.
Other suppliers and partners for theE-Jets E2 have been announced: Liebherr (control systems for flaps and slats), Moog(fly-by-wire), Rockwell Collins (horizontal stabilizer control system), UTC Aerospace Systems (wheels, brakes, APU, electrical system), Intertechnique (engine and APU fuel feed, pressure refueling, fuel transfer, fuel tank inerting and ventilation, and fuel gauging and control), Crane Aerospace & Electronics (electronic control module for landing gear, brake control systems and proximity sensors), Triumph (fuselage segments, rudder and elevators) and Aernnova Aerospace (vertical and horizontal stabilizers).
We also announced that we have selected new IFEC’s systems suppliers for theE-Jets E2. Meggitt Polymers & Composites will design and produce a high performance radome assembly forin-flight connectivity, whilstKID-Systeme was selected by us to provide the SKYfi Club, a wireless streaming onboard platform.
Executive Jets
The risk-sharing partners for the Phenom 100EV and Phenom 300E jets are Pratt & Whitney Canada, the engines’ supplier, Garmin, the avionics systems’ supplier, and Eaton Corporation, the hydraulic systems’ supplier. The main risk-sharing partners for the Legacy 450/500 jet family, Praetor 500 and Praetor 600 are Honeywell, the engines’ supplier, Rockwell Collins, the avionics systems’ supplier, and the main risk-sharing partners for the Legacy 650 include Rolls-Royce, the engines’ supplier, and Honeywell, the avionics systems’ supplier. The risk-sharing partners for the Lineage 1000E are the same as those for our EMBRAER 170/190 jet family.
Aircraft Financing Arrangements
Commercial aircraft customers may request financing support for aircraft acquisition. This support usually includes providing assistance to customers in obtaining financing arrangements from different sources, including ECAs, leasing companies, commercial banks and capital markets. Financing support may exceptionally include providing assurance that financing will be available for the acquisition.
Additionally, customers may sometimes require short-term bridge financing prior to arranging long-term debt financing, as long-term funding may not be available for them at the time of delivery. On acase-by-case basis, we have provided interim financing, above market rates, to customers who already have their financing arrangement structured or who are in the process of negotiating such arrangements.
Government Regulation and Aircraft Certification
We are subject to regulation by regulatory aviation agencies, both in Brazil and abroad. These agencies principally regulate the aircraft design, manufacturing and operation. Besides certification in Brazil, we must obtain certification in each jurisdiction in which our aircraft is registered and operated. The certifying authority in Brazil is the National Civil Aviation Agency(Agência Nacional de Aviação Civil), or the Brazilian Aviation Authority, a special organization with the status of a regulatory agency related to the Ministry of Infrastructure of the Presidency of the Federative Republic of Brazil, which supervises and certifies aircraft, aircraft parts, manufacturers and operations. We are also subject to the regulation of aviation authorities in other countries, including the FAA in the United States and the EASA for the European Union. Once an aircraft is certified by the Brazilian National Civil Aviation Agency, and validated by the FAA and/or the EASA, some authorities, including those in Australia and Mexico, may opt to ratify the product certification instead of running a full domestic validation process. Other countries, such as Canada, require compliance with their own specific national requirements before certification. Some countries simply validate and complement original certification of the Brazilian National Civil Aviation Agency or of the FAA or the EASA, in accordance with their own rules. The Brazilian National Civil Aviation Agency has a bilateral certification agreement with several aviation authorities, including the FAA and EASA. This cooperation among regulatory authorities leads to faster certification by the foreign authority.
Aircraft certification is a continuous process. The Brazilian Aviation Authority must approve any change in the design of any of our aircraft. Significant changes to aircraft design may require a separate validation/certification by other authorities as specified in their regulations and bilateral agreements. Changes in aircraft certification requirements do not require a new certification or a new validation of a previously certified aircraft, but significant safety improvements may otherwise be required by the authorities acting through operational rules or airworthiness directives.
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Our defense products must comply with the certification guidelines defined in each contract with the customer. Unlike our civil aircraft, our defense products are not subject to regulatory obligations. Some contracts, including those for civil aircraft modified for military purposes, require civil certification (e.g. India, SIVAM, etc.). Other contracts, including those for LAS andKC-390, demand approval from the Military Certification Authority.
Seasonality
We have historically experienced seasonality in our results of operations and cash flow generation. This is mainly due to a traditionally higher number of deliveries in the fourth quarter, particularly in our Executive Jets business, which is in line with overall executive jet industry seasonality. Deliveries of executive jets in the fourth quarter generally constitute at least 35% to 45% of annual deliveries in our Executive Jets business, and we expect this trend to continue.
4C. | Organizational Structure |
Our operations are conducted by Embraer S.A. as the controlling and principal operating company. We have a number of direct and indirect subsidiaries, none of which is considered significant. A complete list of our subsidiaries is filed as Exhibit 8.1 to this annual report, and a description of our joint ventures and project subsidiaries and strategic alliances is included in the annual report in item 3 above.
4D. | Property, Plant and Equipment |
For information on our property, plant and equipment, see Notes 2.2.13 and 15 to our audited consolidated financial statements included elsewhere in this annual report.
For a discussion of our capital expenditures relating to property, plant and equipment, see “Item 5C. Research and Development, Patents and Licenses, etc.—Capital Expenditures.”
Production
The manufacture of an aircraft consists of three principal stages: production of primary parts, assembly of major components and final assembly. Primary parts include metal sheets and plates (produced fromdie-cast molds, stretch forming or various chemical treatments), parts produced using computerized andnon-computerized machines, and prefabricated parts. The primary parts are then assembled, or mated, with one another to produce the aircraft’s major components, which are in turn joined to create the aircraft’s basic structure. In the final assembly stage, the aircraft’s various operating systems (including wiring and electronics) are installed into the structure and tested.
In São José dos Campos, State of São Paulo, Brazil we have production facilities for commercial and executive aircraft. In our Defense and Security business, we have production facilities located in the Gavião Peixoto plant, which is near the city of Araraquara, located in the central region of the State of São Paulo, Brazil. For the final assembly of executive jets, Embraer also has a facility in Melbourne, Florida.
We have the flexibility to increase or decrease production as a response to adjust demand.
Commercial Jets
In July 2009, in line with our initiatives to improve production efficiency pursuant to the Business Efficiency Strategy (Frente Eficiência Empresarial), we converted the final assembly for theE-Jets E1 family to a line concept in São José dos Campos, which resulted in a significant reduction in the cycle of production time. In 2015 we started the prototype production for the newE-Jets E2 family of jets, with the first delivery and production certification in 2018.
Executive Jets
Executive jets have been produced since 2011 in São José dos Campos, and are also produced in Melbourne, in United States. The Melbourne facility is a final assembly plant with a Customer Center and an Engineering Office. In 2014, we announced an expansion plan to assemble the Legacy 450/500 in this facility, to improve our production capacity. We have increasing the amount of executive jets produced in Melbourne since 2016.
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Defense and Security
The Gavião Peixoto facility includes flight-testing capabilities for all Embraer aircraft and a final assembly line for our defense aircraft. This facility has been operational since November 2002. In May 2014, we inaugurated the final assembly line of the new military transport and aerial refueling jet, theKC-390 and in February 2015, it successfully performed its first flight. Embraer is currently conducting flight tests for theKC-390. In the fourth quarter of 2018, we received the Type Certificate from the Brazilian Aviation Authority for the multi-mission airliftKC-390.
We have a final assembly facility in Jacksonville, Florida for Defense and Security where we initiated in 2013 the final assembly line for theA-29 Super Tucano for the U.S. Air Force’s LAS Program.
In 2016, we inaugurated the GDDN in Gavião Peixoto. It is the hub for the Gripen NG technology development in Brazil for Saab and Embraer together with the Brazilian partner industries and institutions. The GDDN includes the development environment and simulators required to undertake the fighter development work. In addition, the GDDN is connected to Saab in Sweden and the industrial partners in Brazil, securing both technology transfer and efficient development.
Other
In September 2012, we opened two facilities in Évora, Portugal, one for the manufacture and assembly of metal components and one for the manufacture and assembly of composite material components. Thestart-up of these facilities went as planned, and they made their first deliveries in November 2012. In 2015 Évora’s production plan included major components for the Legacy 450/500,E-Jets,E-Jets E2 andKC-390.
We manufacture aerospace systems and components in ELEB, which is an Embraer subsidiary located in São José dos Campos, and its main products are landing gear systems, hydraulics and electro-mechanicalsub-assemblies, such as actuators, valves, accumulators and pylons.
EZ Air Interior Limited, our subsidiary for the production of interior parts for our Commercial Aviation business in Mexican factories, began production and shipping of parts to Brazil in 2013. It achieved full production capacity in January 2015.
In 2015, we completed the acquisition of a new subsidiary, Embraer Aero Seating Technologies. We progressively acquired its ownership stake in the company, headquartered in Irwindale, California, which provides luxury seating solutions for the aviation industry and for Embraer product lines. In 2016, we opened a new state of the art manufacturing facility located in Titusville, Florida.
Environmental Matters
We have all material permits required to operate our business in all Embraer sites around the world. The terms of these operating permits are reviewed every year and, as of December 31, 2018, we were in compliance with all of them. In addition, our Environmental and Occupational Health and Safety Management System was established in 2001, allowing us to maintain ISO 14001 certification since 2002. ISO 14001 is an internationally recognized standard of environmental management system efficiency for businesses and organizations, which was reviewed in 2015 and has included items concerning environmental risks and life cycle analysis. Embraer was already prepared for this new version even before it was required by the ISO. Certified environmental management systems have been progressively implemented across our manufacturing sites, with over 82% of our employees operating under an ISO 14001.
Work procedures and instructions are set up in order to ensure that the activities that cause environmental impacts are carried out in order to minimize or mitigate any environmental damage we perform studies of environmental aspects and impacts and we implement actions to eliminate or reduce them, including infrastructure works.
Embraer established a corporate procedure for performing environmental diagnoses and detailed investigations for finding the presence of contaminants in soil and water, due to past activities. This procedure is applied to the areas where Embraer has production and/or maintenance facilities, as well as to new areas being acquired. Currently, all industrial operations in Brazil and abroad have already mapped their soil and water. The evaluation results are reported to the CCRA (Committee for Environmental Risk and Control), board and shareholders.
Embraer takes into account environmental and safety requirements to enter into agreements with third parties. Embraer is committed to hire suppliers, service providers and contractors who respect the environment, health and safety through their practices and processes, and Embraer has a systematic procedure for their continual evaluation and monitoring.
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We encourage not only the environmental certification but also the development of a full life cycle orientation for products and services, as this remains the most cost-efficient and practical way to effectively reduce environmental impacts. The environmental management system attempts to create economic value by reducing environmental costs and exposure at each stage of the product life, from design to operations and to end of life. Integrated Development of Environmentally Sustainable Products, through the Design for Environment methodology, aims to incorporate environmental requirements into product development throughout the various stages of production.
The implementation of further innovative andeco-efficient technologies and processes is a key factor in ensuring our sustainability, increasing the attractiveness of our products and our overall competitiveness. We continuously pursueeco-efficiency, seeking responsible business opportunities by developing breakthrough technologies, products and services, as well as by reducing the environmental impact of our activities and products throughout their life cycle, and, more generally, by integrating environmental concerns into our daily business. We recognize that environmental requirements, such as reduction of greenhouse gas emissions, are becoming one of the main drivers of airline fleet decisions and is already influencing aircraft developments. In 2012 at the Air Transport Action Group Aviation and Environment summit, Embraer, Boeing and Airbus signed a memorandum of understanding to collaborate with development ofdrop-in, affordable aviation biofuels as an effort to reduce the aircraft industry’s greenhouse gas emissions by 50% by 2050 based on 2005 levels.
Special focus is dedicated to the European Registration, Evaluation and Authorization of Chemicals, or REACH, regulation (EU No. 2007/1906), which came into force on June 1, 2007. REACH aims to improve the protection of human health and the environment through more strict regulation of chemical use in the aviation industry; it replaces the preexisting European Union, or EU, regulatory framework on chemicals. REACH introduces a range of new obligations over a period of 11 years which are intended to reduce the risks of harm that the 30,000 most frequently used chemicals may cause. The regulation establishes progressive withdrawal of some of the substances that are considered to be of very high concern for human health and the environment.
The regulation requires that any company which produces, imports, uses or prepares chemical substances, preparations or other items on the EU market be responsible for ensuring that the item complies with REACH. We are affected by the regulation because our products can be exported, not only to the countries of the EU, but also to all countries in which compliance with REACH is required. We have a facility in Évora that must comply with all REACH requirements. As of December 31, 2018, we have not suffered any penalties in connection with REACH.
Over the past few years, we have worked to fulfill our responsibilities under REACH. We have substituted substances used in our production processes that are harmful to the environment and employee health with less harmful alternatives. Several materials have already been replaced in accordance with REACH restrictions, and we are studying the feasibility of replacing more substances widely used in the aviation industry. We also participate in working groups with other firms in the aviation industry, including the International Aerospace Environmental Group and the Aerospace Industries Association, to develop solutions for REACH compliance and other environmental laws. We are working with our supply chain on several initiatives to avoid supply chain disruptions and provide support to customers, including the REACH questionnaire on the risk assessment of suppliers.
Insurance
We maintain insurance at levels deemed to meet all risks associated with our operations and legislation. The insurance covers potential damages to our property, inventories, working process, cargo and aircraft hulls for our own fleet. In addition, we maintain a comprehensive aviation products liability policy, for claims arising out of our legal liability as manufacturers, repairers, suppliers or servicers. We also possess natural disaster and business interruption insurance.
ITEM 4A. | UNRESOLVED STAFF COMMENTS |
We have no unresolved staff comments.
ITEM 5. | OPERATING AND FINANCIAL REVIEW AND PROSPECTS |
This discussion should be read in conjunction with our audited consolidated financial statements and notes thereto and other financial information included elsewhere in this annual report. This annual report contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including, without limitation, those set forth in “Item 3D. Key Information—Risk Factors” and the matters set forth in this annual report generally.
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Except as otherwise indicated, all consolidated financial information in this annual report has been prepared in accordance with IFRS as issued by IASB and presented in U.S. dollars, while, for local purposes, our consolidated financial statements are also prepared in IFRS but are presented inreais. For certain purposes, including providing reports to our shareholders located in Brazil, filing financial statements with the CVM and determining dividend payments and other distributions and tax liabilities in Brazil, we have prepared and will continue to be required to prepare parent company financial statements in accordance with IFRS, presented inreais.
5A. Operating Results |
Current Conditions and Trends in our Industry
The following discussion is based largely upon our current expectations about future events, and trends affecting our business. Actual results for our industry and performance could differ substantially. For further information related to our forward-looking statements, see “Introduction—Special Note Regarding Forward-Looking Statements” and for a description of certain factors that could affect our industry in the future and our own future performance, see “Item 3D. Key Information—Risk Factors.”
Strategic Partnership with Boeing
On January 24, 2019, we entered into the Master Transaction Agreement and certain other transaction documents with Boeing and certain subsidiaries of Embraer or Boeing, pursuant to which a subsidiary of Boeing will acquire the controlling stake in Embraer’s commercial aviation business unit and Embraer or a subsidiary of Embraer and Boeing or a subsidiary of Boeing will form a joint venture for the promotion and development of new markets and applications for theKC-390multi-mission aircraft. For further information on our strategic partnership with Boeing, see Explanatory Note on page 3 of this annual report.
Following the consummation of the Transaction, Boeing will have control of the entity that will own the business of designing, developing, manufacturing, assembling, testing, certifying, marketing, selling, delivering, maintaining, sustaining and supporting, and providing aftermarket services for, commercial aircraft platforms and programs with structural capacity of 50 or more seats in anall-standard economy class configuration, including the ERJ, EMB 110, EMB 120, Ejet and E2 families, withend-to-end commercial aviation product development and support capability.
The consummation of the transaction remains subject to (i) approval by antitrust authorities in Brazil, the United States and other applicable jurisdictions; and (ii) the satisfaction of other conditions customary in similar transactions. For risks relating to the Transaction, see “Item 3D. Risk Factors—Risks Relating to Embraer—The consummation of the strategic partnership with Boeing is subject to conditions, some or all of which may not be satisfied or completed within the expected timeframe, if at all. Failure to complete the proposed Transaction could adversely affect our business, financial condition and operating results and the trading price of our common stock and ADSs, “—Our strategic partnership with Boeing may not be implemented successfully or the implementation may be more difficult, time consuming or costly than expected,” and “—Although we expect that the strategic partnership with Boeing will result in synergies and other benefits to us, those benefits may not be realized fully or at all or may not be realized within the expected time frame.”
Commercial Aircraft
According to Embraer Market Outlook, which is based on our forecast models, we expect that from 2018 to 2037, world air travel demand, as measured by revenue passenger kilometers, or RPK, will increase by an average of 4.5% per year. By 2037, we expect the Middle East and Asia Pacific will be the fastest growing aviation markets in the world, with an annual RPK growth rate of approximately 5.7%, followed by Latin America with 5.2%, Africa with 4.8%, the Commonwealth of Independent States (CIS) and Europe with 3.6% and 3.7%, respectively, and North America with 2.7%.
Also, based on our forecast models, we project global demand of approximately 10,500 commercial aircraft with up to 150 seats by 2037 (8,230 jets).
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Executive Aircraft
Market Overview
Several indicators suggest that the business aviation industry has a positive momentum, including macroeconomic indicators, , new againstpre-owned pricing gap improvement, nearpre-crisis level flight activity, decliningpre-owned inventory and U.S. tax reform incentives. However, aggressive price deals and increased competition continue to create a challenging environment.
In early 2019, the General Aviation Manufacturers Association reported that in 2018 the industry delivered 638 units (0.2% lower than in 2017), equivalent to US$17.5 billion (1% less than 2017). The expectation for 2019 is that deliveries will total 655 units. Looking forward, our market forecast projects that approximately 7,500 new business jets will be delivered over the next ten years, totaling US$215 billion for theten-year period with North America representing 60% of all deliveries.
Defense and Security
Overall we anticipate an increase in defense spending globally.
In light of continuous instability in the Middle East and the growing impact of actions of insurgent groups, military budgets in the region should also increase.
Regional conflict and tensions should also drive investment in defense materials in Africa and Europe.
We expect increased demand for proposals of customized solutions, creating opportunities for our Defense and Security portfolio and for those of our subsidiaries, notably in the areas of critical software, communications, sensors and platforms.
The Brazilian economic environment will be challenging for the implementation of new investment projects in the defense sector. Generally, budget restrictions may require the restructuring of the scheduled deliveries pursuant to the terms of existing contracts. We also anticipate that new opportunities will be on a smaller scale and will require the accommodation of constraints related to available resources.
Brazilian Economic Environment
The Brazilian government has frequently intervened in the Brazilian economy and occasionally made drastic changes in policy and regulations. The Brazilian government’s actions to control inflation and affect other policies and regulations have often involved, among other measures, increases in interest rates, changes in tax policies and incentives, price controls, currency devaluations, capital controls and limits on imports. Changes in Brazil’s monetary, credit, tariff and other policies could adversely affect our business, as could inflation, currency and interest-rate fluctuations, social instability and other political, economic or diplomatic developments in Brazil, as well as the Brazilian government’s response to these developments.
Rapid changes in Brazilian political and economic conditions that have occurred and may occur require continued assessment of the risks associated with our activities and the adjustment of our business and operating strategy accordingly. Developments in Brazilian government policies, including changes in the current policy and incentives adopted for financing exports of Brazilian goods, or in the Brazilian economy, over which we have no control, may have a material adverse effect on our business.
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The following table shows data for real GDP growth, inflation, interest rates and the U.S. dollar exchange rate for and as of the periods indicated.
December 31, | ||||||||||||||||||||
2018 | 2017 | 2016 | 2015 | 2014 | ||||||||||||||||
Real growth in gross domestic product | 1.1% | 1.0% | (3.6)% | (3.8)% | 0.5% | |||||||||||||||
Inflation(IGP-M)(1) | 7.6% | (0.5)% | 7.2% | 10.5% | 3.7% | |||||||||||||||
Inflation (IPCA)(2) | 3.8% | 3.0% | 6.3% | 10.7% | 6.4% | |||||||||||||||
CDI rate(3) | 6.4% | 9.9% | 14.0% | 13.2% | 10.8% | |||||||||||||||
LIBOR rate(4) | 2.8% | 1.7% | 1.0% | 0.6% | 0.3% | |||||||||||||||
Depreciation of the real vs. U.S. dollar | 17.1% | 1.5% | (16.5)% | 41.8% | 9.0% | |||||||||||||||
Period-end exchange rate—US$1.00 | R$ | 3.875 | R$ | 3.308 | R$ | 3.259 | R$ | 3.905 | R$ | 2.656 | ||||||||||
Average exchange rate—US$1.00(5) | R$ | 3.680 | R$ | 3.203 | R$ | 3.450 | R$ | 3.388 | R$ | 2.361 |
Sources: Fundação | Getúlio Vargas, or FGV, and the Central Bank and Bloomberg. |
(1) | Inflation(IGP-M) is the general market price index measured by FGV. |
(2) | Inflation (IPCA) is a board consumer price index measured by theInstituto Brasileiro de Geografia e Estatística. |
(3) | The CDI rate is average of inter-bank overnight rates in Brazil (as of the last date of the respective period). |
(4) | Three-month U.S. dollar LIBOR rate as of the last date of the period. The LIBOR rate is the London inter-bank offer rate. |
(5) | Represents the average of the exchange rates on the last day of each month during the period. |
Inflation and exchange rate variations have had, and may continue to have, substantial effects on our financial condition and results of operations. Inflation and exchange rate variations affect our monetary assets and liabilities denominated inreais. The value of these assets and liabilities as expressed in U.S. dollars declines when thereal devalues against the U.S. dollar and increases when thereal appreciates. In periods of devaluation of thereal, we report (i) a remeasurement loss onreal-denominated monetary assets and (ii) a remeasurement gain onreal-denominated monetary liabilities. For further information on the effects of exchange rate variations on our financial condition and results of operations, see “Item 11D. Quantitative and Qualitative Disclosures about Market Risk—Foreign Exchange Rate Risk.”
For further information on the impact of macro-economic factors on our financial position, see Note 26 of our 2018 audited consolidated financial statements.
Tax Incentives
Similar to other Brazilian companies across multiple industries, we benefit from certain tax and other government-granted incentives, including related to our export and research and development activities. For the effective tax reconciliation, see Note 22 of our 2018 audited consolidated financial statements.
Tax Incentives for Companies in Research and Development
Brazilian Law 11,196/05, also known asLei do Bem, grants tax benefits to entities involved in research and development activities for technological innovation.
To take advantage of the tax benefits, a beneficiary must (i) assess its income tax according to the real profit (lucro real) measurement, (ii) record taxable profits, (iii) be current with all of its fiscal obligations, which consists of being able to obtain a certification from the government demonstrating that there are no outstanding debts with tax authorities, and (iv) have investments in research and development.
Technological innovation is deemed to be the development of a new product or manufacturing procedure, as well as the addition of new features or characteristics to an existing product or manufacturing procedure, which entails incremental improvements and gains in quality or productivity, therefore resulting in greater market competitiveness.
We and other Brazilian companies across multiple industries benefit from these tax incentives with respect to the income tax (Imposto de Renda Pessoa Jurídica), or IRPJ, and the social contribution on net income tax (Contribuição Social sobre o Lucro Líquido), or CSLL. These benefits allow us to deduct from our taxable net income in an amount between 60% to 80% of our expenditures related to research and development activities for technological innovation during a fiscal year. For further information, see Note 22 of our 2018 audited consolidated financial statements.
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Tax Incentives and Payroll Exemptions for Exporting Companies
Brazilian Law 12,546/11 established the tax incentives for exporting companies, which created the Special Regime for the Reintegration of Taxes of Exporting Companies (Regime Especial de Reintegração de Valores Tributários para as Empresas Exportadoras), or REINTEGRA, to stimulate and facilitate exports. The goal of REINTEGRA is to recover, in whole or in part, the residual tax costs from the production chain of exported goods, thereby reducing the tax burden. The exporting entity may receive tax credits according to a percentage, which may vary from 0.1% to 3%, established by decree of the Brazilian Finance Ministry and applied to the revenue earned from the export of the goods abroad. As a result of decree 9,393/2018 of the Brazilian Finance Ministry, which became effective on May 31, 2018, the tax incentive percentage was lowered to 0.1%.
To take advantage of the tax benefits, (i) an exporting entity must manufacture the exported product in Brazil, (ii) the product must be codified in the TIPI, which is a list issued by Brazilian fiscal authorities under the Tax on Manufactured Products (Imposto Sobre Produtos Industrializados), or IPI; and (iii) the cost of imported materials used in the exported product may not exceed certain limits prescribed by law, expressed as a percentage of the export price.
Brazilian Law 12,546/11 also aimed to increase production through the establishment of a payroll exemption. Until September 1, 2018, we benefited from this payroll exemption with the substitution of the employer social security contribution of 20% of INSS on payroll for an alternative tax called the Social Security Contribution Over Gross Revenues (Contribuição Previdenciária Sobre a Receita Bruta) to be levied on the revenues of certain products and services, excluding revenues from exports. Payroll exemption rates varied from 2.0% to 4.5% of gross revenues, depending on the business sector. Brazilian law 13,670/2018 cancelled the payroll exemption as from September 1st, 2018, and we filed a lawsuit requesting the applicability of the payroll exemption to us for the entire year of 2018. This lawsuit is pending judgment. There will be no payroll exemption in 2019.
Brexit
In Europe, a presumed threat to our industry comes from the possibility of an economic downturn caused by the departure of the United Kingdom from the European Union, or Brexit. In the long term, we believe there will still be a gradual Eurozone economic recovery that, combined with low yields due to the highly competitive open aviation area and high regulatory costs, would keep the revenue environment under pressure.
Brexit should be effective soon. Negotiations are ongoing but the future relationships after the United Kingdom’s exit remain unclear. The United Kingdom has the largest aviation industry in Europe and a key geographical position in the network. Changes to the relationship between the United Kingdom and the European Union could potentially have considerable implications for all European carriers. Taken as a whole, the European Union is the single largest destination market from the United Kingdom, accounting for over 50% of passengers and 60% of scheduled commercial flights. Taking into account those countries that have access to the single aviation market as members of the European Common Aviation Area – ECAA, which includes Iceland, Norway and a number of Balkan countries, the importance of market access becomes even more significant.
Brexit is widely expected to present a significant negative shock to the United Kingdom’s economy and, by extension, to air travel demand as well. According to the International Air Transport Association – IATA, the direct economic impact is likely to see the United Kingdom air passenger market be 3% to 5% lower by 2020 than that compare to the scenario without Brexit.
A more fragile economic backdrop over the coming years will force airlines to be even more focused on making structural improvements to lower breakeven load factors and boost capital productivity.
Republic Airways Chapter 11 Filing
In February 2016, Republic Airways Holdings, which currently operates a fleet of 230 Embraer Commercial Aviation aircraft (of which 50 are of the ERJ145 family and 180 are E170/E175 models), filed for a Chapter 11 bankruptcy. As a result, we have provisioned a total of US$100.9 million to account for expected expenses related to obligations from financial guarantees offered to the main financing agent of the ERJ 140/145 aircraft, acquired by and delivered to this customer. In November 2016, we signed a firm sale for 24 E175 jets with United Airlines. This order represents a transfer of 24 E175 jets previously placed with Republic Airways Holdings, which were cancelled. As of December 31, 2018, the obligations assumed in accounts payable was US$ 15.1 million and US$30.8 million in December 31, 2017 and US$ 41.6 million in December 31, 2016.
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Critical Accounting Estimates
Preparation of financial statements in accordance with IFRS requires us to use estimates and assumptions that affect the reported assets and liabilities, revenues and expenses and our disclosures. In the preparation of the financial statements included in this annual report, we believe that certain variables and assumptions derived from past experience and various other factors were reasonable and relevant. These estimates and assumptions are reviewed and relevant adjustments are recorded in our audited consolidated financial statements in our ordinary course of business.
The most significant accounting policies, including the variables and assumptions used in the estimates, and the sensitivity of these assessments to the different variables and conditions are described below:
Revenue from Contract with Customers
In the Defense and Security segment, a significant portion of revenue is derived fromlong-term development contracts with the Brazilian and foreign governments, recognized over time by the cost incurred method, using the ratio of actual cumulative costs incurred divided by total estimated costs at completion for progress measurement. During the course of the contract, the Company assesses the costs incurred, adjusting total estimated costs at completion if necessary to reflect variations in costs in relation to the projection, changes in circumstances and/ or new events, such as contract modification. Any resulting increase or decrease in estimated revenues or costs at completion is recognized ascatch-up adjustment in the consolidated statements of income in the reporting period which the circumstances that give rise to the revision become known by management. Should the total estimated costs at completion of contracts in progress be 10% lower than management’s actual estimates, the revenue recognized in 2018 would increase by US$385.9 million, and if the costs were 10% higher than management’s estimates, the recognized revenue would decrease by US$425.7 million.
Residual Value Guarantees
The residual value guarantees granted on aircraft sales can be exercised at the end of a financing contract between a financial agent and the customer/operator of the aircraft. The guarantee are initially measured by fair value and are revised quarterly to reflect any losses in relation to the fair value of these commitments. The residual value guarantees may be exercised if the quoted market value is lower than the future fair value guaranteed. The future fair value is estimated in accordance with third party evaluation of the aircraft, including information from sale or leasing of similar aircraft on the secondary market. For further information on the residual value guarantees, see “Item 5E. Operating and Financial Review andProspects—Off-Balance Sheet Agreements.”
Impairment
The impairment test considers our medium and long-term strategic plan cash flows, brought to present value at an appropriate discount rate compatible with the market and that reflects the shareholders’ expectations of return. In preparing or using this information, we use estimates, as follows:
a) Gross expected cash flow: management projects inflows and outflows based on past performance taking into account its business strategy and market development expectations. These projections also take into account the efficiency gains planned for the product cycle;
b) Growth rate: the growth rates were reflected in the revenue flow budgeted by us, consistent with the forecasts included in industry reports; and
c) Discount rate: an appropriate discount rate is used that reflects the expected return of investors at the time the calculation is made. This rate is also compared with the market to confirm its consistency.
Impairment of aircraft held in our property, plant and equipment available for leasing to third parties is measured at the fair value less cost to sell orvalue-in-use. Assessment of the recoverable value of that aircraft takes into account assessment of their fair value in an active market and recognition of impairment if their carrying value is higher than the fair value.
We performed an impairment analysis of the carrying amount of each cash-generating unit, or CGU, based on the value in use of the group of CGUs with goodwill allocated and for the CGUs with indicators of impairment, including CGUs with intangible assets still under development and not yet producing internally. Value in use was estimated using a discounted cash flow model for the CGUs. Estimated future cash flows were discounted using the weighted average capital cost (WACC) rate, which is reconciled to an estimated discountpre-tax rate of 11.4% and 11.9% in 2018 and 2017, respectively.
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The process of estimating the value in use involves assumptions, judgments and estimates for future cash flows, which represent the Company’s best estimate approved by management. The impairment tests resulted in the need to recognize impairment losses in 2018 of US$61.3 million for Lineage aircraft model and US$50.5 million and US$8.7 million in 2017 for Legacy 650 (Executive Jets segment) and Monitoring, Sensoring and Radars (Defense and Security segment) CGUs, respectively.
There are no other than those CGUs mentioned before at risk of impairment as of December 31, 2018.
Fair Value of Financial Instruments
The fair value of financial instruments that are not traded on an active market is determined by using valuation techniques. We use our judgment to select a variety of methods using assumptions based on market conditions at the end of each reporting period. The methods and calculations are the same as known techniques normally used by the financial market.
Income Taxes
We are subject to income taxes in multiple jurisdictions. Significant judgment is required in determining the worldwide provision for income taxes. There are many transactions and calculations for which the ultimate tax determination is uncertain. We also recognize liabilities based on estimates of whether additional taxes will be due. When the final tax outcome of these matters is different from the amounts that were initially recorded, the differences will impact the current and deferred income tax assets and liabilities in the period in which the final amount is determined.
Because our tax is largely determined in Brazilianreais and our functional currency is the U.S dollar, the income tax expense line is highly sensitive to the effects of changes in exchange rates, particularly those due to changes innon-monetary assets, composed primarily by inventory, intangibles and property, plant and equipment, which had an impact on tax reconciliation of a negative effects of US$117.4 in 2018, a negative effect of US$5.0 million in 2017 and a positive effect of US$206.1 million in 2016. For further information see our tax reconciliation in Note 22 of our 2018 audited consolidated financial statements.
If thereal had depreciated or appreciated by 10% against the U.S dollar in relation to the actual exchange rate on December 31, 2018, the deferred income tax expense would have been higher or lower by approximately US$148.2 million.
Non-current Assets Held for Sale and Discontinued Operations
A discontinued operation is a company’s business component that comprises operations and cash flows that may be clearly distinct and:
• | That represents a separate major line of business or geographic area of operations; |
• | It is part of aco-ordinated single plan for the sale of a separate major line of business or geographic area of operations; or |
• | It is a subsidiary acquired exclusively with a view to resale. |
The classification of a company’s operation as discontinued operation is achieved through its disposal, or at the time the transaction meets the criteria of IFRS 5 to have its assets and liabilities classified as held for sale, whichever occurs earlier.
An asset or group of assets and liabilities is held for sale when it is expected that its carrying amount will be recovered mainly from the sale transaction rather than continuous use. This occurs if the asset is available for immediate sale under its current conditions, subject only to customary and usual terms for the conclusion of the transaction, when the sale transaction is defined as “highly probable” under the accounting standard.
The transaction initiated by the Company and Boeing involving assets of the Commercial Aviation business segment will be classified as held for sale and discontinued operation from February 26, 2019, date of shareholders’ approval on Extraordinary General Shareholders’ Meeting when the “highly probable” criteria was met. As of December 31, 2018, the criteria to classify the operation as an asset held for sale and discontinued operation has not been reached.
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Principal Operating Data and Components of Our Statement of Income
Operating Data
Revenue
We generate revenues from the sale of aircraft and spare parts as well as from providing maintenance and repair, training and other product support services. Of total revenues in 2018, 68.3% were generated through commercial and executive aircraft deliveries. Revenue arising from the sale of commercial and executive aircraft is denominated in U.S. dollars. In 2018, total Defense and Security revenue included 74.9% of revenue denominated in foreign currency, predominantly in U.S. dollars, and 25.1 % denominated in Brazilianreais. In addition, we generate revenue from our Other Related businesses, which include single-source supply of structural parts and mechanical and hydraulic systems to other aircraft manufacturers, and general aviation propeller aircraft, including crop dusters, which are also referred to as light aircraft.
On December 20, 2016, we announced the creation of Embraer Services and Support, a business unit focused on services and customer support, which brings together capabilities that were previously allocated to each business area, and is responsible for developing solutions in support of current and new products and services, as well as for managing the associated processes and resources. This represents an opportunity to obtain greater operational efficiency and recurring revenues. Currently there are approximately 2,200 Embraer commercial aircraft and over 1,300 Embraer executive jets, as well as more than 800 defense aircraft, in operation. Over the next 20 years, we expect that an estimated 6,400 new jets (up to 150 seats) will be put into service. In business aviation, market forecasts indicate that there may be more than 7,500 new jets placed into service over the next decade, not counting the commercialization of thepre-owned fleet. In 2017, the new business unit of Embraer Services and Support consolidated the services and customer support processes previously allocated to each of our business areas, to identify synergies and quantify our expertise in our Commercial Aviation, Executive Jets and Defense and Security businesses regarding services and support. Since the first quarter of 2018, we have reported the Services and Support business as a separate segment in our financial statements. For further information see Note 37.4 to our 2018 audited consolidated financial statements.
For the sales of our commercial, executive and defense and security aircraft, we receive an initial deposit upon the execution of the purchase agreement, progress payments prior to the delivery of each aircraft and a final payment upon delivery. The final payment typically represents the majority of the sale price. The deposits and the progress payments are for the most part nonrefundable in the event orders are cancelled, except for the Defense and Security segment. Payments in advance of delivery are recorded under advances from customers as a liability on our statement of financial position and, when we deliver the aircraft, these payments are recognized as revenue and recorded against trade account receivables of the aircraft. We generally receive monetary deposits for each option to purchase an executive or commercial jet. For further information on our operating revenues, see “Item 5A.—Operating Results—Critical Accounting Estimates—Revenue from Contracts with Customers.”
Our sales contracts in U.S dollar with our Executive Jets business customers generally include adjustments for inflation as measured by U.S. Consumer Price Index for Urban Wage Earners and Clerical Workers, when deliveries are not in the same calendar year of the sale except when fixed prices arepre-determined considering the estimated inflation and strategic price positioning planning of a given aircraft model, in line with Embraer’s strategic planning. Our sales contracts with our Commercial Aviation and generally Defense and Security business customers include adjustments to the purchase price of the aircraft based on an escalation formula, which is based on a mix of index related to raw material, transportation equipment and labor costs. Specific to Defense and Security sales contracts with Brazilian customers, national index are used to adjust the prices of the relevant contract. The deposits, progress payments and advance payment are nonrefundable, a bank guarantee is issued in favor of the customer, except for a few Executive Jet Business unit sales. Once a customer decides to exercise an option, we account for it as a firm order, and we begin to receive the respective progress payments and recognize revenue upon delivery of the aircraft or the contractual milestone.
A significant part of our defense contracts, including the contracted research and development for specific programs, meet the criteria for revenue recognition by the POC method. For the contracts that do not meet the criteria for POC method we recognize revenue at a point of time, on the moment the product is delivered or the service is rendered. Certain contracts contain provisions for the redetermination of price based upon future economic conditions. Our defense customers continue to provide customer advances, which are converted into revenue as we fulfillpre-determined stages of completion of the project, including conception, development and design, and engineering, systems integration and customization. These installments are nonrefundable for the most part.
Cost of Sales and Services
Cost of sales and services consists of the cost of the aircraft, spare parts and services rendered, comprising:
• | Raw materials.Substantially all materials costs are covered by contracts with suppliers. Prices under these contracts are generally adjusted based on an escalation formula which reflects, in part, inflation in the United States. |
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• | Labor. These costs comprise salaries and related charges primarily in Brazilianreais. |
• | Depreciation. Property, plant and equipment are depreciated over their useful lives, ranging from five to 48 years, on a straight-line basis. Depreciation of aircraft under operating leases is recorded in cost of sales and services from the beginning of the lease term using the straight-line method over the estimated useful life and considering a residual value at the end of the lease term. For further information on depreciation, see Note 15 to our 2018 audited consolidated financial statements. |
• | Amortization. Internally-generated intangible assets are amortized in accordance with the estimated sales of the series of aircraft. Intangible assets acquired from third parties are amortized on straight-line bases over the estimated useful lives of the assets. |
In accordance with the accounting standard for contingencies, we accrue a liability for the obligations associated with product warranties at the aircraft delivery date, which is estimated based on historical experience and recorded in cost of sales and services.
We enter into transactions that represent multiple-element arrangements, including training, technical assistance, spare parts and other concessions. These costs are recognized when the product or service is provided to the customer.
Results of Operations
The following table presents statement of income data by business segment for the periods indicated:
2018 | 2017 | 2016 | ||||||||||
Restated | Restated | |||||||||||
Revenue | (in US$ million) | |||||||||||
Commercial aviation | 2,358.3 | 2,771.4 | 2,916.9 | |||||||||
Executive jets | 1,104.3 | 1,280.3 | 1,553.3 | |||||||||
Defense and security | 612.1 | 853.7 | 825.5 | |||||||||
Service and Support | 980.8 | 922.2 | 882.2 | |||||||||
Other | 15.6 | 31.8 | 26.0 | |||||||||
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Total | 5,071.1 | 5,859.4 | 6,203.9 | |||||||||
Cost of sales and services | ||||||||||||
Commercial aviation | (1,976.7 | ) | (2,178.1 | ) | (2,325.3 | ) | ||||||
Executive jets | (914.0 | ) | (1,126.4 | ) | (1,343.7 | ) | ||||||
Defense and security | (702.3 | ) | (792.9 | ) | (693.6 | ) | ||||||
Service and Support | (689.0 | ) | (640.3 | ) | (601.6 | ) | ||||||
Other | (21.1 | ) | (26.4 | ) | (17.8 | ) | ||||||
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Total | (4,303.1 | ) | (4,764.1 | ) | (4,982.0 | ) | ||||||
Gross profit | ||||||||||||
Commercial aviation | 381.6 | 593.3 | 591.6 | |||||||||
Executive jets | 190.3 | 153.9 | 209.6 | |||||||||
Defense and security | (90.2 | ) | 60.8 | 131.9 | ||||||||
Service and Support | 291.8 | 281.9 | 280.6 | |||||||||
Other | (5.5 | ) | 5.4 | 8.2 | ||||||||
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Total | 768.0 | 1,095.3 | 1,221.9 | |||||||||
Operating expenses | ||||||||||||
Commercial aviation | (229.1 | ) | (230.5 | ) | (210.9 | ) | ||||||
Executive jets | (235.0 | ) | (206.0 | ) | (172.9 | ) | ||||||
Defense and security | (93.0 | ) | (109.5 | ) | (87.6 | ) | ||||||
Service and Support | (168.7 | ) | (177.0 | ) | (188.5 | ) | ||||||
Other | (6.9 | ) | (13.9 | ) | (3.0 | ) | ||||||
Unallocated operating expenses(1) | — | (16.5 | ) | (345.3 | ) | |||||||
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Total | (732.7 | ) | (753.4 | ) | (1,008.2 | ) | ||||||
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Operating profit before finance income | 35.3 | 341.9 | 213.7 |
(1) | Represents expenses with the Final Agreements with the DOJ and SEC and the TCAC with the MPF and CVM and our voluntary dismissal program in 2016 and in 2017. |
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The following table sets forth statement of income information, and this information as a percentage of our revenue, for the periods indicated:
Consolidated Statements of Income | 2018 | 2017 | 2016 | |||||||||||||||||||||
Restated | Restated | |||||||||||||||||||||||
(in US$ million, except percentages presented in absolute values) | ||||||||||||||||||||||||
Revenue | 5,071.1 | 100% | 5,859.4 | 100% | 6,203.9 | 100% | ||||||||||||||||||
Cost of sales and services | (4,303.1 | ) | 84.9% | (4,764.1 | ) | 81.3% | (4,982.0 | ) | 80.3% | |||||||||||||||
Gross profit | 768.0 | 15.1% | 1,095.3 | 18.7% | 1,221.9 | 19.7% | ||||||||||||||||||
Operating income (expense) | (732.7 | ) | 14.4% | (753.4 | ) | 12.9% | (1,008.2 | ) | 16.3% | |||||||||||||||
Administrative | (182.6 | ) | 3.6% | (179.1 | ) | 3.1% | (164.3 | ) | 2.6% | |||||||||||||||
Selling | (304.2 | ) | 6.0% | (315.9 | ) | 5.4% | (353.4 | ) | 5.7% | |||||||||||||||
Research | (46.1 | ) | 0.9% | (49.2 | ) | 0.8% | (47.6 | ) | 0.8% | |||||||||||||||
Other operating income (expense), net | (199.4 | ) | 3.9% | (210.4 | ) | 3.6% | (442.6 | ) | 7.1% | |||||||||||||||
Equity in income (losses) of associates | (0.4 | ) | 0.0% | 1.2 | 0.0% | (0.3 | ) | 0.0% | ||||||||||||||||
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Operating profit before financial result | 35.3 | 0.7% | 341.9 | 5.8% | 213.7 | 3.4% | ||||||||||||||||||
Financial expenses, net | (171.5 | ) | 3.4% | (40.6 | ) | 0.7% | (37.5 | ) | 0.6% | |||||||||||||||
Foreign exchange gain (loss), net | — | 0.0% | 6.6 | 0.1% | 4.4 | 0.1% | ||||||||||||||||||
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Profit (loss) before taxes on income | (136.2 | ) | 2.7% | 307.9 | 5.3% | 180.6 | 2.9% | |||||||||||||||||
Income taxes expense | (35.0 | ) | 0.7% | (27.9 | ) | 0.5% | (0.3 | ) | 0.0% | |||||||||||||||
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Net income (loss) for the period | (171.2 | ) | 3.4% | 280.0 | 4.8% | 180.3 | 2.9% | |||||||||||||||||
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Attributable to: | ||||||||||||||||||||||||
Owners of Embraer | (178.2 | ) | 3.5% | 264.0 | 4.5% | 178.6 | 2.9% | |||||||||||||||||
Non-Controlling Interest | 7.0 | 0.1% | 16.0 | 0.3% | 1.7 | 0.0% |
2018 Compared with 2017
Revenue
Revenue decreased 13.5% to US$5,071.1 million in 2018 from US$5,859.4 million in 2017. Revenue in our Commercial Aviation business decreased 14.9% to US$2,358.3 million in 2018, from US$2,771.4 million in 2017. Executive Jets revenue decreased 13.7% to US$1,104.3 million in 2018, from US$1,280.3 million in 2017. Defense and Security revenue decreased 28.3% to US$612.1 million in 2018, from US$853.7 million in 2017. Services and Support revenue increased 6.4% to US$980.8 million in 2018, from US$922.2 million in 2017. Other Related businesses segment revenue decreased 50.9% to US$15.6 million in 2018, from US$31.8 million in 2017.
Commercial Aviation revenues decreased in 2018 primarily due to a 10.9% decrease in deliveries to 90 in 2018 from 101 in 2017. The segment’s revenues decreased at a higher rate than deliveries during the year, largely due to lower average pricing on its deliveries in 2018 as compared to 2017 given a combination of more E175 special configuration (70 seats vs. 76 seats for ordinary E175 configuration) deliveries, which have lower average prices than the ordinary configuration E175, and launch deliveries of theE190-E2 in 2018. Deliveries of E190,E190-E2, and E195 models together constituted 24.4% of total segment deliveries in 2018 compared to 21.8% of 2017 deliveries.
The decrease of 13.7% in Executive Jets revenue in 2018 was primarily due to lower jet deliveries, which declined 16.5% compared to 2017 (91 total executive jet deliveries in 2018 compared to 109 total executive jet deliveries in 2017). The decline in the segment’s revenues was lower than the decline in deliveries despite a higher percentage of light jet deliveries compared to large jet deliveries in 2018 (70.3% light deliveries in 2018 vs. 66.1% light deliveries in 2017) due principally to better average deal prices for executive jet deliveries in 2018 as compared to 2017.
A significant part of our Defense and Security business revenues are accounted for under the percentage of completion method, and we continued to execute our contracts with the Brazilian government, including theKC-390 program, SISFRON, deliveries of Special Mission Legacy 500 aircraft and others. In addition, we continued to deliver Super Tucano planes to a variety of militaries around the world. During 2018, our Defense and Security business revenues declined 28.3% to US$612.1 million in 2018, largely due to the cost base revision for theKC-390 development contract booked in the second quarter, resulting from the runway excursion incident involving prototype 001. This factor, combined with a 14.5% appreciation of the average U.S. dollar/real exchange rate from 2017 to 2018, resulted in the decrease of the value of Defense and Security revenues denominated inreais translated to dollars.
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Our Services and Support business, which was reported as a separate business unit for the first time in 2018, reported revenues of US$980.8 million in 2018, representing a 6.4% increase from US$922.2 million in 2017. The growth was driven by increased spare parts revenue and better services revenues with Commercial Aviation and Executive Jets customers.
Cost of Sales and Services
Cost of sales and services decreased 9.7% to US$4,303.1 million in 2018, from US$4,764.1 million in 2017. The decrease in cost of sales was less than the 13.5% decline in revenues in 2018, thus driving an increase in cost of sales and services as a percentage of revenue, to 84.9% in 2018 compared to 81.3% in 2017. This increase in cost of sales and services as a percentage of revenue was driven by our Commercial Aviation, Defense and Security, and Services and Support businesses.
Cost of sales and services in our Commercial Aviation business decreased 9.2% to US$1,976.7 million in 2018, from US$2,178.1 million in 2017. The decline in cost of sales and services was lower than the 14.9% decrease in revenues for 2018, primarily due to lower average pricing for the segment’s deliveries in 2018 as compared to 2017, as mentioned above. As a result, gross margin in our Commercial Aviation business decreased to 16.2% in 2018 from 21.4% in 2017.
Cost of sales and services in our Executive Jets business decreased 18.9% to US$914.0 million in 2018 from US$1,126.4 million in 2017. Cost of sales and services declined more than revenues in the segment during 2018, primarily due to a combination of higher average deal prices in 2018 as compared to 2017 and efforts to increase production efficiencies during the period. Gross margin in our Executive Jets business increased to 17.2% in 2018 from 12.0% in 2017.
Cost of sales and services in the Defense and Security segment decreased 11.4% in 2018 to US$702.3 million from US$792.9 million in 2017. The decline in cost of sales and services compared to a 28.3% decrease in revenues in the segment during the period, which is primarily due to cost base revisions on theKC-390 development contract resulting from the incident involving prototype 001 in the second quarter of 2018, devaluation of the Brazilianreal versus the U.S. dollar, and certain other cost overruns related to the development project. As a result, gross margin in the Defense and Security segment decreased from 7.1% in 2017 to-14.7% in 2018.
Cost of sales and services in our Services and Support business increased 7.6% to US$689.0 million in 2018, compared to US$640.3 million in 2017. This compares to a 6.4% increase in revenues for the segment in 2018. This slight difference is principally due to a decline in profitability of the segment’s pool parts programs in 2018. Gross margin in the Services and Support segment decreased from 30.6% in 2017 to 29.8% in 2018.
Cost of sales and services in the Other Related Businesses segment decreased 20.1% to US$21.1 million in 2017, from US$26.4 million in 2017, while revenues for this segment decreased 50.9% in 2018.
Gross Profit
As a result of the aforementioned factors, our gross profit decreased 29.9% to US$768.0 million in 2018 from US$1,095.3 million in 2017. Our gross margin fell to 15.1% in 2018 from 18.7% in 2017.
Operating Expenses
As further discussed below, total operating expenses decreased 2.7% to US$732.7 million in 2018, from US$753.4 million in 2017. Total operating expenses as a percentage of revenues increased to 14.4% in 2018 compared to 12.9% in 2017, primarily due to lower fixed cost absorption caused by lower revenues in 2018 compared to 2017. Special items recognized in 2018 operating expenses included total net provisions and expenses of US$61.3 million as compared to US$56.2 million in total net provisions and expenses recognized in 2017.
Excluding the impact of these special items recognized in our results, our total operating expenses would have been US$671.4 million in 2018 and US$697.2 million in 2017; and, as a percentage of revenues, our total operating expenses would have been 13.2% of revenues in 2018 and 11.9% of revenues in 2017.
Administrative. Administrative expenses increased 2.0% to US$182.6 million in 2018, compared to US$179.1 million in 2017. The majority of our administrative expenses are fixed and do not vary significantly according to changes in our revenues.
Selling. Selling expenses decreased 3.7% to US$304.2 million in 2018, from US$315.9 million in 2017. The decline in selling expenses was primarily due to lower bad debt provisions booked in 2018 in the Services and Support segment as compared to 2017.
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Research.Research expenses decreased 6.3% to US$46.1 million in 2018, from US$49.2 million in 2017.
Other operating (expense) income, net. Other operating (expense) income, net was an expense of US$199.4 million in 2018, compared to an expense of US$210.4 million in 2017. The decrease in other operating expenses is primarily due to lower spending on IT projects and higher other operating income from contractual fines. There were several special items recognized in other operating income (expense), net, in 2018 and 2017. The results for 2018 include an impairment charge in the Executive Jets segment of US$61.3 million, and in 2017 included expenses of US$10.1 million related to the finalization of negotiations reached and payments made related to the FCPA investigation, total provisions of US$6.4 million related to our voluntary dismissal program for employees in our Brazilian operations, US$8.7 million in impairments in the Defense and Security segment, and US$54.2 million in impairments in the Executive Jets segment, partially offset by US$23.2 million in provision reversals and other credits related to favorable developments in ongoing negotiations related to the Chapter 11 bankruptcy proceedings of Republic Airways Holdings.
The table below sets forth the special items recognized in other operating (expense) income, net for the periods indicated:
Special items | 2018 | 2017 | ||||||
(in US$ millions) | ||||||||
Provisions from voluntary dismissal program (Unallocated) | — | 6.4 | ||||||
Payments related to FCPA investigation (Unallocated) | — | 10.1 | ||||||
Special items related to Republic Airways (Commercial aviation business) | — | (23.2 | ) | |||||
Impairment loss Defense and Security business | — | 8.7 | ||||||
Impairment loss Executive Jet business | 61.3 | 54.2 | ||||||
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Total | 61.3 | 56.2 | ||||||
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Excluding the impact of these special items recognized in our results, our other operating (expense) income, net would have been US$138.1 million in 2018 and US$154.2 million in 2017, with the improvement driven by the aforementioned factors.
Equity in Income (Losses) of Associates
Equity in loss of associates was a loss of US$0.4 million in 2018 compared to income of US$1.2 million in 2017.
Operating Profit (Loss) Before Financial Income (Expense)
As a result of the aforementioned factors, our consolidated operating profit (loss) before financial income (expense) decreased 89.7% to US$35.3 million in 2018 from US$341.9 million in 2017. Our operating margin fell to 0.7% in 2018 from 5.8% in 2017.
Operating profit (loss) before financial income (expense) by segment for 2018 for the Commercial Aviation, Executive Jets, Defense and Security, Services and Support, and Other Related Businesses segments was US$152.5 million, US$(44.7) million, US$(183.2) million, US$123.1 million, and US$(12.4) million, respectively. In 2017, operating profit (loss) before financial income (expense) for these segments was US$362.8 million, US$(52.1) million, US$(48.7) million, US$104.9 million, and US$(8.5) million, respectively. See note 37 to our 2018 audited consolidated financial statements for operating profit by segment.
Excluding the aforementioned special items provisions and other expenses explained above, as well as an adjustment for the US$127.2 million cost base revision on theKC-390 development contract relating to the runway excursion incident involving prototype 001 in the second quarter of 2018, our operating profit (loss) would have been US$223.8 million in 2018 and US$398.1 million in 2017, and our operating margins would have been 4.4% in 2018 and 6.8% in 2017.
In addition, excluding the aforementioned special items provisions, other expenses, and the Defense and Security cost base revision explained above, our operating profit (loss) by segment for 2018 for the Commercial Aviation, Executive Jets, Defense and Security, Services and Support, and Other Related Businesses segments would have been US$152.5 million, US$16.6 million, US$(56.0) million, US$123.1 million, and US$(12.4) million, respectively; and in 2017, our operating profit (loss) for these segments would have been US$339.6 million, US$2.1 million, US$(40.0) million, US$104.9 million, and US$(8.5) million, respectively. In addition, there were no unallocated operating losses related to the aforementioned special items provisions and expenses explained above in 2018, compared to unallocated losses of US$16.5 million in 2017.
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Financial Income (Expense), Net
Financial expense, net increased from US$40.6 million in 2017 to US$171.5 million in 2018, primarily due to our current net debt position and lower financial income from our cash and equivalents, in addition to higher net financial expenses recognized on our residual value guarantee (RVG) portfolio.
Foreign Exchange Gain (Loss), Net
Foreign exchange gain (loss), net was zero in 2018 compared to a gain of US$6.6 million in 2017, as foreign exchange hedging with derivative instruments was more efficiently matched with the net monetary and foreign exchange variations in 2018 as compared to 2017.
Profit (Loss) Before Taxes on Income
As a result of the aforementioned factors, profit (loss) before taxes on income declined from US$307.9 million in 2017 to US$(136.2) million in 2018.
Income Tax Benefit (Expense)
Income tax expense was US$35.0 million in 2018, compared to income tax expense of US$27.9 million in 2017. Income tax expense increased primarily, despite apre-tax loss in 2018 as compared topre-tax profit in 2017, due to 1) US$23.4 million higher taxes on profits from overseas subsidiaries; 2) US$112.4 million higher taxes related to functional currency effects onnon-monetary assets; 3) US$16.1 million in lower research and development tax credits; and 4) US$45.3 million in lower fiscal credits. For further information see our tax reconciliation in Note 22 of our 2018 audited consolidated financial statements.
Our effective tax rate was 25.7% in 2018 and 9.1% in 2017.
Net Income (Loss)
As a consequence of the aforementioned factors, our consolidated net income (loss) after taxes, excludingNon-Controlling Interest, declined from US$264.0 million in 2017 to US$(178.2) million in 2018. As a percentage of revenue, net income after taxes declined to 3.4% in 2018 compared to 4.8% in 2017.
2017 Compared with 2016
Revenue
Revenue decreased 5.6% to US$5,859.4 million in 2017 from US$6,203.9 million in 2016. Revenue in our Commercial Aviation business decreased 5.0% to US$2,771.4 million in 2017, from US$2,916.9 million in 2016. Executive Jets revenue decreased 17.6% to US$1,280.3 million in 2017, from US$1,553.3 million in 2016. Defense and Security revenue increased 3.4% to US$853.7 million in 2017, from US$825.5 million in 2016. Services and Support segment revenue increased 4.5% to US$922.2 million in 2017, from US$882.2 million in 2016. Other Related businesses segment revenue increased 22.3% to US$31.8 million in 2017, from US$26.0 million in 2016.
Commercial Aviation revenues decreased in 2017 primarily due to a 6.5% decline in deliveries to 101 in 2017 from 108 in 2016. The segment’s revenues decreased at a lower rate than deliveries during the year, largely due to a more favorable mix of deliveries, consisting of a higher proportion of deliveries for larger E190 and E195 models (which generally carry higher deal prices relative to the smaller E175 model) in 2017 as compared to 2016. Deliveries of E190 and E195 models together constituted 21.8% of total segment deliveries in 2017 compared to 16.7% of 2016 deliveries.
The decrease of 17.6% in Executive Jets revenue in 2017 was partially due to lower jet deliveries, which decreased 6.8% compared to 2016. In addition, a less favorable mix of deliveries impacted our annual revenue comparison, since 2017 had a higher percentage ofentry-level and light jet deliveries at 66.1% compared to the 62.4% proportion of 2016 deliveries of executive jets. Moreover, within the light jets category, lower price point Phenom 100 jets made up 16.5% of total segment deliveries in 2017 compared to 8.5% of 2016 deliveries.
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A significant part of our Defense and Security business revenues are accounted for under the percentage of completion method, and we continued to execute our contracts with the Brazilian government, including theKC-390 development program, SISFRON, deliveries of Special Mission Legacy 500 aircraft and the SGDC program, which was launched in the second quarter of 2017. In addition, we continued to deliver Super Tucano planes to a variety of militaries around the world and customer support revenues increased during 2017. During 2017, our Defense and Security business revenues increased 3.4% to US$853.7 million in 2017, partially due to an 8.4% depreciation of the average U.S. dollar/real exchange rate from 2016 to 2017, which improved the value of Defense and Security revenues denominated inreais translated to dollars.
Our Services and Support business revenue was US$922.2 million in 2017, representing a 4.5% increase from US$882.2 million in 2016.
Cost of Sales and Services
Cost of sales and services decreased 4.4% to US$4,764.1 million in 2017, from US$4,982.0 million in 2016. The decrease in cost of sales was less than the 5.6% decrease in revenues in 2017, thus driving an increase in cost of sales and services as a percentage of revenue, to 81.3% in 2017 compared to 80.3% in 2016. This increase in cost of sales and services as a percentage of revenue is largely a result of negative cost base revisions on certain Defense and Security contracts.
Cost of sales and services in our Commercial Aviation business decreased 6.3% to US$2,178.1 million in 2017, from US$2,325.3 million in 2016. The decrease in cost of sales and services was higher than the 5.0% decrease in revenues for 2017, mainly due to the aforementioned favorable mix of deliveries combined with higher government fiscal benefits in 2017 as compared to 2016. Gross margin in our Commercial Aviation business increased to 21.4% in 2017 from 20.3% in 2016.
Cost of sales and services in our Executive Jets business fell 16.2% to US$1,126.4 million in 2017 from US$1,343.7 million in 2016. Cost of sales and services decreased less than revenues in the segment during 2017, largely due to the aforementioned less favorable mix of deliveries during the period. Gross margin in our Executive Jets business decreased to 12.0% in 2017 from 13.5% in 2016.
Cost of sales and services in the Defense and Security segment increased 14.3% in 2017 to US$792.9 million from US$693.6 million in 2016. The increase in cost of sales and services compared to a 3.4% increase in revenues in the segment during the period, and reflects cost overruns on theKC-390 development, which under percentage of completion resulted in a negative cost base revision. Gross margin in the Defense and Security segment fell to 7.1% in 2017 from 16.0% in 2016.
Cost of sales and services in the Services and Support segment increased 6.4% to US$640.3 million in 2017, from US$601.6 million in 2016, while revenues for this segment increased 4.5% in 2017. Gross margin in the Services and Support segment declined to 30.6% in 2017 from 31.8% in 2016.
Cost of sales and services in the Other Related Businesses segment increased 48.3% to US$26.4 million in 2017, from US$17.8 million in 2016, while revenues for this segment increased 22.3% in 2017.
Gross Profit
As a result of the aforementioned factors, our gross profit decreased 10.4% to US$1,095.3 million in 2017 from US$1,221.9 million in 2016. Our gross margin decreased to 18.7% in 2017 from 19.7% in 2016.
Operating Expenses
As further discussed below, operating expense decreased 25.3% to US$753.4 million in 2017, from US$1,008.2 million in 2016. Operating expense as a percentage of revenues fell to 12.9% in 2017 compared to 16.3% in 2016, primarily due to a lower amount of special items recognized in results in 2017 compared to 2016. The special items recognized in 2017 included total net provisions and expenses of US$56.2 million as compared to US$293.1 million in total net provisions and expenses recognized in 2016, as explained below. The special items recognized in operating expense in 2016 included US$117.3 million in charges related to our voluntary dismissal program (restructuring expenses), US$228.0 million in provisions and charges related to the finalization of the FCPA investigation (provision for penalties) and US$52.2 million in provision reversals related to favorable developments in the Republic Airways Chapter 11 proceedings.
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Excluding the impact of these special items recognized in our results, our operating expenses would have been US$697.2 million in 2017 and US$715.1 million in 2016; and, as a percentage of revenues, our operating expenses would have been 11.9% of revenues in 2017 and 11.5% of revenues in 2016.
Administrative. Administrative expenses increased 9.0% to US$179.1 million in 2017, compared to US$164.3 million in 2016, primarily due to the lower average U.S. dollar/real exchange rate, which was 8.4% higher as compared to the average exchange rate in 2016, as many of our administrative expenses are incurred inreais.
Selling. Selling expenses decreased 10.6% to US$315.9 million in 2017, from US$353.4 million in 2016. The decrease in selling expenses was primarily due to a combination of consolidated revenues decreasing 5.6% in 2017 and benefits from our cost control and productivity initiatives, with reductions across all of our major business units during the year.
Research.Research expenses increased 3.4% to US$49.2 million in 2017, from US$47.6 million in 2016. The increase in research expenses is primarily due to a slight increase in research expenses in connection with our Executive Jets business.
Other operating (expense) income, net. Other operating (expense) income, net was an expense of US$210.4 million in 2017, compared to an expense of US$442.6 million in 2016. The decrease in other operating (expense) income, net is primarily due to lower special items provisions and other expenses recognized in results during 2017 as compared to 2016. Total special items recognized in other operating (expense) income, net in 2017 was a net amount of US$56.2 million, consisting of: 1) US$6.4 million in provisions from our voluntary dismissal program; 2) US$10.1 million in provisions and expenses related largely to taxes on remittances for payments related to the finalization of the FCPA investigation; 3) US$8.7 million in impairments recognized in the Defense and Security business; 4) US$54.2 million in impairments recognized in our Executive Jets business; and 5) US$23.2 million in gains related to the remeasurement of claims in the Republic Airways Chapter 11 bankruptcy proceedings that were converted to equity. Total special items in 2016 were US$293.1 million, and included expenses of US$228.0 million related to the finalization of negotiations reached and payments made related to the FCPA investigation and total provisions of US$117.3 million related to our voluntary dismissal program for employees in our Brazilian operations, partially offset by US$52.2 million in provision reversals and other credits related to favorable developments in ongoing negotiations related to the Chapter 11 bankruptcy proceedings of Republic Airways Holdings.
The table below sets forth the special items recognized in other operating (expense) income, net for the periods indicated:
Special Items | 2017 | 2016 | ||||||
(in US$ millions) | ||||||||
Provisions from voluntary dismissal program (Unallocated) | 6.4 | 117.3 | ||||||
Payments related to FCPA investigation (Unallocated) | 10.1 | 228.0 | ||||||
Special items related to Republic Airways (Commercial aviation business) | (23.2 | ) | (52.2 | ) | ||||
Impairment loss Defense and Security business | 8.7 | — |
Special Items | 2017 | 2016 | ||||||
(in US$ millions) | ||||||||
Impairment loss Executive Jet business | 54.2 | — | ||||||
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Total | 56.2 | 293.1 | ||||||
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Excluding the impact of these special items recognized in our results, our other operating (expense) income, net would have been US$154.2 million in 2017 and US$149.5 million in 2016, principally caused by lower levels of impairment charges on our portfolio of used aircraft, largely ERJ145 family commercial jets, lower taxes related to remittances and the absence of expenses related to the closure of our Chinese subsidiary Harbin Aircraft Industry Co., Ltd in 2017.
Equity in Income (Losses) of Associates
Equity in loss of associates increased to a gain of US$1.2 million in 2017 from a loss of US$0.3 million in 2016.
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Operating Profit (Loss) Before Financial Income (Expense)
As a result of the aforementioned factors, our consolidated operating profit (loss) before financial income (expense) increased 60.0% to US$341.9 million in 2017 from US$213.7 million in 2016. Our operating margin improved to 5.8% in 2017 from 3.4% in 2016.
Operating profit (loss) before financial income (expense) by segment for 2017 for the Commercial Aviation, Executive Jets, Defense and Security, Services and Support, and Other Related Businesses segments was US$362.8 million, US$(52.1) million, US$(48.7) million, US$104.9 million, and US$(8.5) million, respectively. In 2016, the operating profit (loss) before financial income (expense) for these segments was US$380.7 million, US$36.7 million, US$44.3 million, US$92.1 million, and US$5.2 million, respectively.
Excluding the aforementioned special items provisions and other expenses explained above, our operating income would have been US$398.1 million in 2017 and US$506.8 million in 2016; and our operating margin would have been 6.8% in 2017 and 8.2% in 2016.
In addition, excluding the aforementioned special items provisions and other expenses explained above, our operating profit (loss) by segment for 2017 for the Commercial Aviation, Executive Jets, Defense and Security, Services and Support, and Other Related Businesses segments would have been US$339.6 million, US$2.1 million, US$(40.0) million, US$104.9 million, and US$(8.5) million, respectively; and in 2016, our operating profit (loss) for these segments would have been US$328.5 million, US$36.7 million, US$44.3 million, US$92.1 million, and US$5.2 million, respectively. In addition, unallocated operating loss related to the aforementioned special items provisions and expenses explained above was US$16.5 million in 2017, compared to unallocated losses of US$345.3 million in 2016.
Financial Income (Expense), Net
Financial expense, net increased to US$40.6 million in 2017 from US$37.5 million in 2016, largely driven by 1) an increase of US$32.6 million in interest on loans and financing expenses; and 2) a decrease of US$74.3 million in interest income on cash and cash equivalents and financial investments. These expenses were partially offset by an increase of US$25.0 million in taxes on financial income and a decrease of US$26.7 million in expenses related to residual value guarantees in 2017 as compared to 2016.
Foreign Exchange Gain (Loss), Net
Foreign exchange gain (loss), net increased to a gain of US$6.6 million in 2017 from a gain of US$4.4 million in 2016, reflecting net foreign exchange rate changes on monetary assets and liabilities denominated in other currencies which are translated into our functional currency, the U.S. dollar.
Profit Before Taxes on Income
As a result of the aforementioned factors, profit before taxes on income increased 70.5% to US$307.9 million in 2017 from US$180.6 million in 2016.
Income Tax Benefit (Expense)
Income tax expense was US$27.9 million in 2017, compared to income tax expense of US$0.3 million in 2016. Income tax expense increased due to a combination of higher profit before taxes and deferred income tax and social contribution of US$5.0 million in 2017 compared to a benefit of US$206.1 million in 2016. This was partially offset by US$7.3 million in higher research and development tax incentives, US$10.8 million in higher deductions related to payment of interest on shareholders’ equity, and US$49.7 million in higher fiscal credits in 2017 as compared to 2016.
Our effective tax rate was 9.1% in 2017 and 0.2% in 2016.
Net Income
As a consequence of the aforementioned factors, our consolidated net income after taxes, excludingNon-Controlling Interest, increased 47.8% to US$264.0 million in 2017, from US$178.6 million in 2016. As a percentage of revenue, net income after taxes increased to 4.5% in 2017 compared to 2.9% in 2016.
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Accounting Standards
Standards and amendments to existing standards mentioned in this section have been published, but implementation is not mandatory for the year ended December 31, 2018. The Company has not early adopted the IFRS 16 in the financial statements included elsewhere in this annual report.
The accounting standards presented below may be relevant to the Company in the future, for this reason adoption projects are in course for each of them. It is not possible to estimate the effects of the adoption until the projects are concluded:
• | IFRS 16 —Leases: brings new concepts from the lessee’s point of view. In the model proposed by the new standard, the lessee shall recognize all leases as part of the statements of financial position in the caption of property, plant and equipment “right of use”, against a liability account. The initial recognition must be measured as at present value, considering a discount rate that is appropriate to the local reality of each entity. In the model proposed by the new standard, there are no significant changes in the accounting recognition to be made by the lessor. In adopting the standard, the Company has used three practical expedients: (1) transactions below US$ 5,000 will be outside the scope of this standard, (2) all contracts with less than 12 months will not be considered for the purposes of IFRS 16 and (3) in order to define the discount rates, management considered adopting the practical expedient which considers grouping contracts with similar characteristics. Embraer and its subsidiaries are analyzing the new accounting standard as well as the application in existing transactions and considering whether there is an impact in the consolidated financial statements, implying an increase in assets and liabilities, a reduction in the value of operating expenses and an increase in financial expenses. The standard is applicable as of January 1, 2019 and the Company intends to apply the simplified transition approach and will not restate comparative amounts for the year prior to first adoption and the assets will be measured at the amount of the lease liability on adoption (adjusted for any prepaid or accrued lease expenses). The transition estimated effects is between0.5%-1.0% of the Company’s total assets, with no impact on retained earnings. |
• | IFRIC 23 —Uncertainty over income tax treatments: This is an interpretation of the IAS 12—Income Tax standard, which initial application will be effective as of January 1, 2019. The Company is analyzing all the circumstances covered by IFRIC 23 and does not expect relevant impacts on its adoption. According to the interpretation, there are two possible transition methods: (1) retrospective, where the application is performed without the effect of using facts or further knowledge and (2) retrospective with cumulative effect, method in which applies with all the effect of prior periods accumulated in shareholders’ equity. The Company will adopt this interpretation in compliance with method (2) mentioned. |
Other accounting standards have been amended or are in the process of amendment and will come into effect in the coming years; however these are not mentioned, as the Company does not expect them to result in significant impacts.
5B. Liquidity | and Capital Resources |
Overview
Our liquidity needs arise principally from working capital requirements, research and development, principal and interest payments on our debt, capital expenditures and distributions to shareholders. To meet these needs, we generally rely on funds provided by operations, borrowings under our credit arrangements, cash contributions from risk-sharing partners, advance payments from customers and, to a lesser extent, issuance of debt and equity securities in the capital markets. For further information on our working capital requirements and our capital sources, see “Item 4B. Information on the Company—Business Overview—Suppliers and Components; Risk-Sharing Arrangements” and “Item 4B. Information on the Company—Business Overview—Commercial Aviation Business—Production, New Orders and Options” and “—Credit Facilities and Lines of Credit.”
As of the date of this annual report, we believe that our traditional sources of funds are sufficient to meet our foreseeable working capital requirements, including to (i) continue to improve the EMBRAER 170/190 jet family, the Phenom 100EV, the Phenom 300E, the Legacy 650E, the Lineage 1000E, the Legacy 450 and the Legacy 500, (ii) the development of the E2 jet family, (iii) make other planned capital expenditures and (iv) pay dividends and interest on shareholders’ equity. Our access to liquidity sources has not been materially impacted in 2018, and we do not expect that this access will be materially impacted in the near future. However, there can be no assurance that our traditional sources of funds, or that the cost or availability of our credit facilities or future borrowing sources, will not be materially impacted by market disruptions.
Our customers may reschedule deliveries, fail to exercise options or cancel firm orders as a result of potential economic downturns or financial volatility in the commercial airline industry. In addition, our risk-sharing partners’ cash contributions are refundable under certain limited circumstances and we may need to find replacement sources of capital.
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Net Cash Generated (Used) by Operating Activities and Adjusted Working Capital
2018 Compared with 2017
In 2018, net cash generated by operating activities was US$1,107.6 million in 2018, compared to net cash generated by operating activities of US$753.0 million in 2017. The increase in cash flow from operating activities in 2018 is primarily a result of declines in financial investments and contract assets, and increases in trade accounts payable and contract liabilities, partially offset by lower net income and increases in inventories in 2018 compared to 2017.
We had adjusted working capital (defined as total current assetsless cash and equivalents and financial investmentminus total current liabilities less loans and financing) of US$1,197.4 million as of December 31, 2018 and US$1,028.4 million as of December 31, 2017. Our adjusted working capital increased in 2018 primarily as a result of higher inventories at the end of 2018 as compared to 2017.
2017 Compared with 2016
In 2017, net cash generated by operating activities was US$753.0 million in 2017, compared to net cash used by operating activities of US$6.6 million in 2016. The increase in cash flow from operating activities in 2017 is primarily a result of a decline in inventories and higher net income, partially offset by higher contract assets, lower trade payables, and lower other provisions in 2017 compared to 2016.
We had adjusted working capital (defined as total current assetsless cash and equivalents and financial investmentminus total current liabilities less loans and financing) of US$1,028.4 million as of December 31, 2017 and US$1,089.0 million as of January 1, 2017. Our adjusted working capital decreased in 2017 primarily as a result of the aforementioned factors described in the explanation for the variation in cash flow from operating activities above.
Net Cash Used in Investing Activities
2018 Compared with 2017
In 2018, net cash used in investing activities was US$523.1 million, compared to net cash used in investing activities of US$1,092.6 million in 2017.
Net cash used in investing activities in 2018 decreased primarily due to lower spending on property, plant, and equipment and intangibles in 2018 as compared to 2017, related in large part to efficiencies in theE-JetE-2 development program and the entry into service of the first jet in the family, theE90-E2, which helped to reduce total development spending. In addition, lower investments in held to maturity securities in 2018 as compared to 2017 was a factor in the lower net cash used in investing activities in 2018.
2017 Compared with 2016
In 2017, net cash used in investing activities was US$1,092.6 million, compared to net cash used in investing activities of US$993.5 million in 2016.
Net cash used in investing activities in 2017 increased primarily due to higher investments in held to maturity securities in 2017 as compared to 2016, as we invested a portion of the proceeds of the issuance of the US$750.0 million notes due 2027 in these instruments. The increase in net cash used in investing activities occurred despite lower spending on property, plant and equipment and intangibles during 2017 related in large part to efficiencies in theE-Jets E2 development program, as well as higher proceeds from sale of property, plant and equipment in 2017 as compared to 2016.
Net Cash Generated (Used) by Financing Activities and Total Debt 2018 Compared with 2017
In 2018, net cash used by financing activities was US$503.4 million, compared to net cash generated by financing activities of US$369.5 million in 2017. The use of cash in financing activities in 2018 as compared to cash generation in 2017 is primarily due to lower issuance of debt in 2018 as compared to 2017 combined with slightly higher cash outflows for debt repayment. The decrease in borrowing during 2018 was primarily due to the absence of any bond issuances during the period, as we issued US$750.0 million of10-year bonds in 2017. Additionally, we repaid US$596.3 million of borrowings during 2018 as compared to repayment of US$540.2 million in 2017. In 2018, we distributed US$40.6 million in dividends and interest on own capital compared to US$54.1 million in 2017. In 2018, we did not acquire any of own shares during the period, while in 2017 we spent US$15.0 million on share repurchases.
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On December 31, 2018, we had total debt (composed of loans and financing) of US$3,647.7 million under our financing arrangements described below, 95.1% of which was long-term debt and 4.9% of which consisted of short-term debt. In comparison, we had total debt of US$4,198.3 million as of December 31, 2017, consisting of 90.7% of long-term debt and 9.3% of short-term debt.
2017 Compared with 2016
In 2017, net cash generated by financing activities was US$369.5 million, compared to net cash generated by financing activities of US$8.9 million in 2016. The higher cash generation from financing activities in 2017 as compared to 2016 is principally due to higher debt issuance in 2017, as we raised new financing proceeds of US$972.9 million compared to new borrowing of US$576.2 million in 2016. The increase in borrowing during 2017 was largely due to a bond issuance generating proceeds of US$750.0 million. Additionally, we repaid US$540.2 million of borrowings during 2017 as compared to repayment of US$523.7 million in 2016. In 2017, we distributed US$54.1 million in dividends and interest on own capital compared to US$28.2 million in 2016. In 2017, we also spent US$15.0 million in acquisition of own shares in comparison to US$17.1 million in 2016.
On December 31, 2017, we had total debt (composed by loans and financing) of US$4,198.3 million under our financing arrangements described below, 90.7% of which was long-term debt and 9.3% of which consisted of short-term debt. In comparison, we had total debt of US$3,759.9 million as of January 1, 2017, consisting of 86.4% of long-term debt and 13.6% of which consisted of short-term debt.
Credit Facilities and Lines of Credit
Long-term Facilities
In October 2006, our wholly owned finance subsidiary, Embraer Overseas Ltd., or Embraer Overseas, issued 6.375% US$400.0 million guaranteed notes due 2017. The notes were unconditionally guaranteed by us. As described below, in September 2013, we completed an exchange offer in which US$146.4 million in principal amount of our guaranteed notes due 2017 were exchanged for our guaranteed notes due 2023.
In October 2009, Embraer Overseas issued 6.375% US$500.0 million guaranteed notes due 2020 and, as of December 31, 2018, US$164.1 million was outstanding (US$2.4 million in theshort-term), including principal and accrued interest. Interest will be paid semiannually. The notes are unconditionally guaranteed by us. As described below, in September 2013 we completed an exchange offer in which US$337.2 million in principal amount of our guaranteed notes due 2020 were exchanged for our guaranteed notes due 2023. In connection with the exchange offer, we received the requisite consents from holders of our guaranteed notes due 2020 to eliminate substantially all the restrictive covenants, certain events of default and related provisions contained in the indenture under which the notes were issued, and we delisted our guaranteed notes due 2020 from the New York Stock Exchange.
In June 2012, we issued 5.150% US$500.0 million notes due 2022 and, as of December 31, 2018, US$499.8 million was outstanding (US$1.1 million in the short-term), including principal and accrued interest. Interest is paid semiannually. The notes are our unsecured and unsubordinated obligations. The notes have been registered with the SEC and listed on the New York Stock Exchange. The indenture under which the notes were issued contains customary covenants and restrictions, including limitation on liens, consolidation, merger or transfer of assets.
In August 2013, we entered into a credit facility with FINEP in the amount of R$303.9 million, equivalent to US$78.4 million in December 31, 2018, to support the research and development expenses of the Legacy 450 aircraft. The facility bears interest at 3.5% per annum and is fully secured by a bank guarantee. The final maturity is in September 2023. As of December 31, 2018, we had US$55.6 million outstanding, of which US$12.8 million is due in theshort-term, including principal and accrued interest. FINEP credit facilities are denominated inreais, and amounts appearing in this annual report have been converted into U.S. dollars, our functional currency, for purposes of preparing our IFRS financial statements.
In September 2013, we completed an exchange offer in which US$146.4 million in principal amount of our guaranteed notes with maturity in 2017 and US$337.2 million in principal amount of our guaranteed notes with maturity in 2020 were exchanged for approximately US$540.5 million in principal amount of notes issued by Embraer Overseas, with maturity in 2023. The notes due in 2023 are unconditionally guaranteed by us and were issued pursuant to exemptions from SEC registration pursuant to Regulation S and Rule 144A under the Securities Act. The notes due in 2023 are subject to a registration rights agreement, pursuant to which we have agreed to (i) exchange the notes within 270 days of their issuance for notes with the same terms and conditions which are registered with the SEC or (ii) file a resale shelf registration statement with the SEC onForm F-3. In June 2014, we filed a resale shelf registration statement accordingly. As of December 31, 2018, a total of US$516.6 million under our notes due 2023 was outstanding, of which US$8.9 million was due in the short-term, including principal and accrued interest.
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In December 2013, we entered into a contract with BNDES to support project development in the total aggregate amount of R$1.4 billion, equivalent to US$364.3 million, in December 31, 2018. The final maturity is in January 2022. The facility bears interest of 3.5% per annum and is secured by guarantee deposits and by a bank stand by letter of credit. As of December 31, 2018, we had US$191.5 million outstanding under this credit facility, of which US$71.8 million is due in the short-term, including principal and accrued interest. This BNDES credit facility is denominated in reais.
In June 2015, Embraer Netherlands Finance issued 5.05% US$1.0 billion guaranteed notes due 2025 and, as of December 31, 2018, US$996.9 million was outstanding (US$2.1 million in the short-term), including principal and accrued interest. Interest is paid semiannually. The notes are unconditionally guaranteed by us. The notes have been registered with the SEC and listed on the New York Stock Exchange.
In December 2015, Embraer S.A. contracted loans in the amount of R$685.0 million, equivalent to US$176.8 million in December 31, 2018, at a weighted average rate of 10.96% per annum, both in the form of export credit notes in order to invest in export and production of goods to export. As of December 31, 2018, we had US$38.5 million of total export credit notes outstanding, (the total amount is due in theshort-term) including principal and accrued interest, with final maturity in July 2018. The facility bears interest at 11.0% per annum. The export credit notes are denominated in reais, and amounts have been converted into U.S. dollars, our functional currency, for purposes of preparing our IFRS financial statements.
In August 2016, Embraer Portugal S.A. entered into a credit facility in the amount of US$200.0 million with maturity in 2021 to fund acquisition of fixed assets and working capital. The facility bears interest at 3.07% per annum. As of December 31, 2018, US$201.7 million was outstanding under this facility (US$2.6 million in the short-term).
In February 2017, Embraer Netherlands Finance issued 5.40% US$750.0 million guaranteed notes due 2027 and as of December 31, 2018, US$764.3 million was outstanding (US$16.9 million in theshort-term), including principal and accrued interest. Interest is paid semiannually. The notes are unconditionally guaranteed by us. The notes have been registered with the SEC and listed on the New York Stock Exchange.
We may from time to time seek to retire or purchase our outstanding debt, including our guaranteed notes due 2020, 2022, 2023, 2025 and 2027, through cash purchases and/or exchanges for other securities, in open market purchases, privately negotiated transactions or otherwise. The repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material, and notes repurchased may be cancelled or resold, but will only be resold in compliance with applicable requirements or exemptions under the relevant securities laws.
We have various other long-term loans and credit agreements with aggregate outstanding borrowings of US$218.7 million as of December 31, 2018. For further information on these financing arrangements, see Note 19 to our 2018 audited consolidated financial statements.
Some of our long-term financing agreements include customary covenants and restrictions, including those that require us to maintain: (i) a maximum leverage ratio, calculated as net debt to earnings before interest, taxes, depreciation and amortization, or EBITDA, of 3.5:1 and (ii) a minimum net debt service coverage ratio, calculated as EBITDA to financial expenses, of 2.25:1. Other restrictions included in our long-term financings include negative pledge covenants and restrictions on significant changes of control, sales of substantially all of our assets, dividend payments during events of default and certain transactions with our affiliates. As of December 31, 2018, we were in compliance with all restrictive covenants contained in our financing agreements.
As of December 31, 2018, US$303.9 million of our total debt was secured by a combination of mortgages on certain of our real estate, liens on certain of our machinery and equipment, guarantee deposits and by a bank standby letter of credit.
For further information on our loans and financings, including currency and maturity breakdowns and breakdowns between fixed and floating rate debt, see Note 19 to our 2018 audited consolidated financial statements.
Recourse andNon-Recourse Debt
Total debt excludesnon-recourse and recourse debt associated with customer financing arrangements transacted through special purposes entities, or SPEs. In structured financings, an SPE purchases an aircraft from us, pays us the full purchase price on delivery or at the conclusion of the sales financing structure, and leases the related aircraft to the ultimate customer. A third party financial institution facilitates the financing of an aircraft purchase through an SPE, and a portion of the credit risk remains with that third party. We may provide financial guarantees and/or residual value guarantees in favor of the financial institution, as well as act as the equity participant in the financial structuring processes.
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Our 2018 audited consolidated financial statements contain balances related to recourse andnon-recourse debt associated with customer financing arrangements of US$341.4 million and collateralized accounts receivable of US$235.9 million. Of this debt, US$10.8 million isnon-recourse for which we have no obligation as a debtor or guarantor, other than potential obligations under existing financial guarantees for the financed aircraft. The remaining US$330.6 million of debt is recourse to us as a result of pending equity contributions and is partially secured by a pledge of a deposit with a financial institution. Ournon-recourse and recourse debt is collateralized by the collateralized accounts receivables and by the financed aircraft and, as a result, we do not anticipate a net cash outflow related to ournon-recourse debt in the future. These financing transactions do not materially affect our income statement and cash flow data since the terms of the leases and the loans are substantially the same.
5C. Research | and Development, Patents and Licenses, etc. |
Research and Development
Our research and development activities are driven by our corporate strategic planning in the short, medium, and long terms. We refer to research activities as technological development and to development activities as integrated product development.
Based on our work defining the Company’s product and services strategies, including innovation, growth, and business prospects, we carry out projects that include the production and commercialization of new aircraft, systems, and aerospace services.
With a focus on our internal business plans and continuous monitoring of the global technology environment, we define a technological development plan which aims to research and develop solutions to the main challenges the Company will face in the medium and long terms, in order to remain competitive in our business segments.
In an effort to reduce development risk and optimize financial results of our projects, our development strategy and teams have the essential skills to manage and execute multi-disciplinary projects, maintaining and coordinating a global network of development partners and integrating diverse groups such as universities, research and development institutes, companies, and startups. As a result, application of advanced technologies allows for the evolution of products, including lighter, quieter, more comfortable and energy efficient aircraft, in addition to improvements in design and production cycles and optimization of company resources.
Following the results of the Company’s internal technological development planning, the new product and services design phase begins. In this phase our efforts are coordinated in an integrated manner with advanced project engineering and our business units, which work in collaboration with future customers and potential partners to conclude the design of new products and services. Once the design is approved, the product development program is created. In this capital-intensive phase, our development, product, process, and services groups work together with strategic partners, suppliers, and regulatory agencies, beginning the detailed development of the product, its production, systems, and associated services, until the effective entry into service of the product.
The Company has the majority of its research and development activities concentrated in Brazil, but also maintains internal initiatives and partnerships in several locations around the world.
Capital Expenditures
We capitalize our expenditures related to product development projects asnon-current intangible assets on our statement of financial position when it is probable that the relevant projects will generate future benefits, taking into account their commercial and technological feasibility and availability of technological and financial resources and only if their cost can be reliably measured. We amortize the assets in the form of charges to cost of sales and services on our statements of income, based on the total estimated number of aircraft to be delivered for each new product development project. We also capitalize expenditures related to property, plant and equipment asnon-current assets on our statement of financial position and depreciate the assets in the form of charges to cost of sales and services on our statements of income. For further information on how we amortize our intangible assets and depreciate our property, plant and equipment, see “Item 5A. Operating and Financial Review and Prospects—Operating Results—Principal Operating Data and Components of Our Statement of Income—Cost of Sales and Services.”
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Commercial Aviation and Executive Jets
In our Commercial Aviation and Executive Jets businesses, we include our investments in development and property, plant and equipment as part of our capital expenditures. Development costs in the Commercial Aviation and Executive Jets businesses are capitalized from the date of board approval for the relevant project until the final certification.
Most of our development expenditures are associated with the development of new products either for the Commercial Aviation or Executive Jets businesses. For further information on our development expenditures, see “Item 5C. Operating and Financial Review and Prospects—Research and Development, Patents and Licenses, etc.—Research.”
Our main ongoing project is the development of theE-Jets E2 family, comprising three new aircraft, theE175-E2,E190-E2, andE195-E2.
Our disbursements in capital expenditures related to property, plant and equipment, composing our additions in the period except for the exchange pool program assets and aircraft under lease or available for lease. These investments are related mainly to (i) construction of new facilities and (ii) improvements and modifications to our plants and production facilities for the production of new aircraft models.
Our capital expenditures are generally financed by funds provided by operations, borrowings under our credit arrangements, cash contributions from risk-sharing partners, advance payments from customers and, to a lesser extent, capital increases to meet these needs. See “Item 5B. Operating and Financial Review and Prospects—Liquidity and Capital Resources—Overview” and “Item 5C. Operating and Financial Review and Prospects—Research.”
Defense and Security
We incur expenditures for defense and security programs under both development and production contracts; however, the customers of these programs, which in our case mainly consist on the Brazilian government, fund these programs. A significant part of these contracts is defined as construction contracts and the revenue associated with these contracts is recognized on a POC basis as contract milestones are achieved.
Research
We incur research expenses related to the creation of new technologies that may be applied to our aircraft. These expenses are not associated with any particular aircraft and include the implementation of quality assurance initiatives, improvements to the productivity of production lines and studies to determine the latest developments in technology and quality standards. Under IFRS, research costs are expensed as incurred in the research line item of our statement of income.
For information on our capital expenditures, comprising investments in development and property, plant and equipment, see “Item 5C. Operating and Financial Review and Prospects—Research and Development, Patents and Licenses, etc.—Capital Expenditures.”
Intellectual Property
Our intellectual property, which includes utility patents, design patents, trade secrets,know-how and trademarks, is important to our business. We hold trademarks over our name and symbol and the names of our products, some of which are registered and some of which are in the process of registration in a number of countries, including Brazil, the United States, Canada, Singapore, Hong Kong, China, the European Union and Japan. As of December 31, 2018, we had approximately 400 trademarks registered or in the process of registration. Our trademarks are generally renewed at the end of their validity period, which usually runs from ten years from the date of application for registration. We do not believe that the loss of any of our trademarks would have a material impact on our business or results of operations.
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We develop our intellectual property in our research, development and production process. Under the agreements we have with some of our suppliers and risk-sharing partners, they grant us access to information and technology necessary to better develop, manufacture and market our products. We aim to protect our intellectual property rights resulting from investments in technical research and development. We hold granted patents and patent applications relating to our technologies. Currently, we hold granted patents and patent applications from the appropriate registries in Brazil, the United States, the European Union, Russia, Japan, India and China in connection with the various technologies of our products. We require that our suppliers and risk-sharing partners respect the intellectual property rights of third parties and we believe that we have the necessary intellectual property rights to conduct our business and operations.
Considering our utility and design patent portfolios, as of December 31, 2018, we had filed 723 patent applications and had been granted 414 patents.
Innovation
We seek to remain in the technological vanguard by constantly reinventing ourselves as we search for opportunities to transform our business, products, services and markets.
We believe innovation is key to the competitiveness and sustainability of our business. For this reason, we created the position of Vice-President for Strategy, Innovation and Digital Transformation in 2017.
In 2018, we created Embraer X, in Melbourne, Florida with outpost offices in Palo Alto, California and Boston, Massachusetts as an innovation and knowledge management area to reinforce our initiatives. The Embraer X focuses on the promotion of innovative ideas aimed at the development of new businesses, products, technologies, services and processes.
Also, in 2018, we implemented the Innovation Verticals, which are the strategic priority focuses for innovation. They orchestrate and integrate the efforts across all business units, Embraer X and Technology development. The verticals are: Autonomous Flight, Electrification, Platform Based Services, Urban Air Mobility, Artificial Intelligence & Data Science, Passenger Experience, Airframe Efficiency, Advanced Design & Manufacturing, Cybersecurity.
Our Innova Program is another tool that aims to strengthen the innovation culture within Embraer in order to generate new ideas and promote employee recognition. The Innova Program manages the Green Light, Innova Challenge and Innovation People Recognition processes. The Green Light process evaluates innovative proposals presented voluntarily by employees and provides time, technical/business mentor and resources to them in order to carry out the idea until its technical and economic feasibility is proven. More than 617 ideas proposed and nine innovative projects have been implemented since the creation of this process in 2012, including the launch of FIP Aerospacial, new robots, AI among others. In 2018, 64 innovative projects were under development. The Green Light process applies to any type of innovation: process, product, technology, services, marketing, management or new business. The Innova Challenge is an internal crowdsourcing mechanism that stimulates ideas to resolve issues globally from different departments of the company, and any employee in the world may participate in this process. In 2017, we changed the focus of Innova Challenge with the goal of improving strategic issues. By 2018 we had launched 2 challenges with more than 88 ideas from different challenges for employees. Cultural events like the Innovation Day had the participation of around 3.300 employees.
Innovations developed during the last five years accounted for approximately 44% of our net revenues in 2018.
5D. Trend | Information |
Given the order activity over the last couple of years, during which we received a significant amount of orders from U.S. carriers, particularly for76-seat commercial aircraft, we can anticipate fairly correctly the production and delivery schedules for 2019 in our Commercial Aviation business. We expect deliveries of the E175 jet model to account for a greater share of total segment deliveries. In the executive jets market, despite rising corporate profits and the growth in the population of high net worth individuals the level ofpre-owned aircraft for sale, although diminishing, continues to pressure new aircraft demand and has impeded recovery in the segment. We believe, however, that new executive jet product offerings, namely the Praetor 500 midsize jet and Praetor 600 super midsize jet, and the upgrades made on the Phenom 100EV and Phenom 300E, will help us to be better positioned in the industry in 2019 as compared to 2018.
With respect to our Defense and Security business, we expect to progress in our execution of existing programs, including theKC-390, SISFRON and LABGENE programs, as well as continue to deliver the Super Tucano aircraft to various governments around the world. However, due to a portion of revenues being denominated inreais, a lower expected averagerealto U.S. dollar exchange rate is likely to pressure revenues as reported in U.S. dollars in the segment.
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Moreover, we expect 2019 to be a transition year, as we ramp up the production of the first model of theE190-E2, which entered into service in April 2018, andE195-E2, which is on track for its first delivery in 2019. We continue our investments in the E2 generation of commercial jets withE175-E2 model on schedule for entry into service in 2021. We will also be ramping up production of our medium-lift cargo and transport jet, theKC-390, with first delivery to the Brazilian Air Force expected in 2019. Also, we believe that industry-wide new executive jet deliveries in 2019 could be stable or increase in comparison with 2018, mainly due to introduction of new jet models and the potential positive effects of the recently passed Tax Reform Act in the United States, which is the largest executive jets market in the world.
For 2019, we expect to deliver between 85 and 95 commercial jets, 90 to 110 executive jets, including light and large jets, ten Super Tucano aircraft and twoKC-390 cargo aircraft. It is important to highlight that for 2019 our result of operations and financial condition may be affected by costs and expenses associated with the creation of the Commercial Aviation JV in a strategic partnership between the Company and Boeing. In addition, after the closing of the Transaction, Embraer expects to significantly reduce its indebtedness, which will cause Embraer to have a significantly stronger cash position. Management expects to propose to the shareholders an extraordinary dividend distribution, which amount will be determined taking into account transaction costs and purchase price adjustments as well as the operating results of Embraer until the closing of the Transaction.
For 2020, the first year after the expected closing of the Transaction, we will include in our results of operations 100% of the expected results of the Executive Jets and Defense and Security segments (and the results of their respective services and support businesses) and exclude expected financial results from the 20% stake Embraer will have in the Commercial Aviation JV.
For further information on the risks relating to the Transaction, see “Item 3D. Key Information—Risk Factors—The consummation of the strategic partnership with Boeing is subject to conditions, some or all of which may not be satisfied or completed within the expected timeframe, if at all. Failure to complete the proposed Transaction could adversely affect our business, financial condition and operating results and the trading price of our common stock and ADSs,” “—Our strategic partnership with Boeing may not be implemented successfully or the implementation may be more difficult, time consuming or costly than expected,” and “—Although we expect that the strategic partnership with Boeing will result in synergies and other benefits to us, those benefits may not be realized fully or at all or may not be realized within the expected time frame.”
The following table summarizes our order book for our Commercial Aviation business as of December 31, 2018:
Commercial Aviation | Firm Orders | Options | Deliveries | Firm Order Backlog | ||||||||||||
EMB 120 Brasília | 352 | — | 352 | — | ||||||||||||
ERJ 135 | 108 | — | 108 | — | ||||||||||||
ERJ 140 | 74 | — | 74 | — | ||||||||||||
ERJ 145 | 708 | — | 708 | — | ||||||||||||
EMBRAER 170 | 191 | 5 | 191 | — | ||||||||||||
EMBRAER 175 | 771 | 250 | 567 | 204 | ||||||||||||
EMBRAER 190 | 566 | 16 | 559 | 7 | ||||||||||||
EMBRAER 195 | 172 | 1 | 169 | 3 | ||||||||||||
EMBRAER 190 – E2 | 47 | 61 | 4 | 43 | ||||||||||||
EMBRAER 195 – E2 | 111 | 32 | — | 111 |
Our total firm order backlog as of December 31, 2018, was US$ 16.3 billion, of which US$ 9.7 billion was from the Commercial Aviation segment, US$ 0.8 was from the Executive Jets segment, US$ 3.9 billion was from the Defense and Security segment and US$ 1.9 billion was from the Services and Support segment.
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The following tables set forth our Commercial Aviation order book as of December 31, 2018 by aircraft type, customer and country:
EMBRAER 170:
Customer | Firm Orders | Delivered | Firm Order Backlog | |||||||||
Airnorth (Australia) | 1 | 1 | — | |||||||||
Alitalia (Italy) | 6 | 6 | — | |||||||||
BA CityFlyer (UK) | 6 | 6 | — | |||||||||
Cirrus (Germany) | 1 | 1 | — | |||||||||
ECC Leasing (Ireland) | 6 | 6 | — | |||||||||
EgyptAir (Egypt) | 12 | 12 | — | |||||||||
Finnair (Finland) | 10 | 10 | — | |||||||||
GECAS (USA) | 9 | 9 | — | |||||||||
JAL (Japan) | 18 | 18 | — | |||||||||
NAC / Jetscape (USA) | 1 | 1 | — | |||||||||
LOT Polish (Poland) | 6 | 6 | — | |||||||||
Petro Air (Libya) | 2 | 2 | — | |||||||||
Regional (France) | 10 | 10 | — | |||||||||
Republic Airlines (USA) | 48 | 48 | — | |||||||||
Satena (Colombia) | 1 | 1 | — | |||||||||
Saudi Arabian Airlines (Saudi Arabia) | 15 | 15 | — | |||||||||
Sirte Oil (Libya) | 1 | 1 | — | |||||||||
Suzuyo (Japan) | 2 | 2 | — | |||||||||
TAME (Equator) | 2 | 2 | — | |||||||||
US Airways (USA) | 28 | 28 | — | |||||||||
Virgin Australia (Australia) | 6 | 6 | — | |||||||||
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Total | 191 | 191 | — | |||||||||
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EMBRAER 175:
Customer | Firm Orders | Delivered | Firm Order Backlog | |||||||||
Air Canada (Canada) | 15 | 15 | — | |||||||||
ECC Leasing (Ireland)(1) | 1 | 1 | — | |||||||||
Air Lease (USA) | 8 | 8 | — | |||||||||
Belavia (Belarus) | 1 | 1 | — | |||||||||
NAC / Aldus (Ireland) | 2 | — | 2 | |||||||||
Alitalia (Italy) | 2 | 2 | — | |||||||||
American Airlines (USA) | 104 | 69 | 35 | |||||||||
CIT (USA) | 4 | 4 | — | |||||||||
Suzuyo (Japan) | 11 | 9 | 2 | |||||||||
Flybe (UK) | 15 | 11 | 4 | |||||||||
GECAS (USA) | 5 | 5 | — | |||||||||
Horizon Air / Alaska (USA) | 33 | 26 | 7 | |||||||||
NAC / Jetscape (USA) | 4 | 4 | — | |||||||||
KLM (The Netherlands) | 17 | 17 | — | |||||||||
Mesa (USA) | 7 | 7 | — | |||||||||
Mauritania Airlines (Mauritania) | 2 | — | 2 | |||||||||
LOT Polish (Poland) | 12 | 12 | — | |||||||||
Northwest (USA) | 36 | 36 | — | |||||||||
Oman Air (Oman) | 5 | 5 | — | |||||||||
Republic Airlines (USA) | 217 | 117 | 100 | |||||||||
Royal Jordanian (Jordan) | 2 | 2 | — | |||||||||
Skywest (USA) | 158 | 146 | 12 | |||||||||
TRIP (Brazil) | 5 | 5 | — | |||||||||
Undisclosed | 15 | — | 15 | |||||||||
United Airlines (USA) | 90 | 65 | 25 | |||||||||
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Total | 771 | 567 | 204 | |||||||||
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(1) | Aircraft delivered by ECC Leasing to Air Caraibes. |
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EMBRAER 190:
Customer | Firm Orders | Delivered | Firm Order Backlog | |||||||||
Aero Republica (Colombia) | 5 | 5 | — | |||||||||
Aeromexico (Mexico) | 12 | 12 | — | |||||||||
Air Astana (Kazakhstan) | 2 | 2 | — | |||||||||
Air Canada (Canada) | 45 | 45 | — | |||||||||
Air Caraibes (Guadalupe) | 1 | 1 | — | |||||||||
Air Lease (USA) | 23 | 23 | — | |||||||||
Air Moldova (Moldavia) | 1 | 1 | — | |||||||||
NAC / Aldus (Ireland) | 21 | 15 | 6 | |||||||||
Augsburg (Germany) | 2 | 2 | — | |||||||||
Austral (Argentina) | 22 | 22 | — | |||||||||
AZAL (Azerbaijan) | 4 | 4 | — | |||||||||
Azul (Brazil) | 5 | 5 | — | |||||||||
BA CityFlyer (UK) | 9 | 9 | — | |||||||||
BOC Aviation (Singapore) | 14 | 14 | — | |||||||||
China Southern (China) | 20 | 20 | — | |||||||||
CIT (USA) | 7 | 7 | — | |||||||||
Conviasa (Venezuela) | 16 | 16 | — | |||||||||
Copa (Panama) | 15 | 15 | — | |||||||||
Finnair (Finland) | 12 | 12 | — | |||||||||
GECAS (USA) | 27 | 27 | — | |||||||||
Guizhou / Colorful (China) | 9 | 9 | — | |||||||||
Dniproavia (Ukraine) | 5 | 5 | — | |||||||||
Hainan (China) | 50 | 50 | — | |||||||||
Hebei (China) | 7 | 6 | 1 | |||||||||
JAL (Japan) | 14 | 14 | — | |||||||||
JetBlue (USA) | 64 | 64 | — | |||||||||
ECC Leasing (Ireland) | 1 | 1 | — | |||||||||
NAC / Jetscape (USA) | 9 | 9 | — | |||||||||
Kenya Airways (Kenya) | 10 | 10 | — | |||||||||
KLM (The Netherlands) | 26 | 26 | — | |||||||||
KunPeng (China) | 5 | 5 | — | |||||||||
LAM (Mozambique) | 2 | 2 | — | |||||||||
Lufthansa (Germany) | 9 | 9 | — | |||||||||
M1 Travel (Lebanon) | 8 | 8 | — | |||||||||
NAS Air (Saudi Arabia) | 3 | 3 | — | |||||||||
NIKI (Austria) | 7 | 7 | — | |||||||||
Regional (France) | 10 | 10 | — | |||||||||
Republic (USA) | 2 | 2 | — | |||||||||
Taca (El Salvador) | 11 | 11 | — | |||||||||
TRIP (Brazil) | 3 | 3 | — | |||||||||
US Airways (USA) | 25 | 25 | — | |||||||||
Virgin Austrália (Australia) | 18 | 18 | — | |||||||||
Virgin Nigeria (Nigeria) | 2 | 2 | — | |||||||||
TAME (Ecuador) | 3 | 3 | — | |||||||||
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Total | 566 | 559 | 7 | |||||||||
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EMBRAER 195:
Customer | Firm Orders | Delivered | Firm Order Backlog | |||||||||
Arkia (Israel) | 1 | 1 | — | |||||||||
Aurigny (Guernsey) | 1 | 1 | — | |||||||||
Azul (Brazil) | 59 | 59 | — | |||||||||
Belavia (Belarus) | 4 | 4 | — | |||||||||
BOC Aviation (Singapore) | 1 | 1 | — | |||||||||
Flybe (UK) | 14 | 14 | — | |||||||||
GECAS (USA) | 12 | 12 | — | |||||||||
Globalia (Spanish) | 12 | 12 | — | |||||||||
Hainan (China) | 20 | 20 | — | |||||||||
LOT Polish (Poland) | 4 | 4 | — | |||||||||
Lufthansa (Germany) | 34 | 34 | — | |||||||||
Montenegro (Montenegro) | 1 | 1 | — | |||||||||
NAC / Jetscape (USA) | 2 | 2 | — | |||||||||
NAC / Aldus (Irlanda) | 4 | 1 | 3 | |||||||||
Royal Jordanian (Jordan) | 2 | 2 | — | |||||||||
Trip (Brazil) | 1 | 1 | — | |||||||||
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Total | 172 | 169 | 3 | |||||||||
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EMBRAER 190 – E2:
Customer | Firm Orders | Delivered | Firm Order Backlog | |||||||||
Air Kiribati (Kiribati) | 2 | — | 2 | |||||||||
Aircastle (USA) | 12 | — | 12 | |||||||||
Aercap (Ireland) | 6 | 1 | 5 | |||||||||
ICBC (China) | 10 | — | 10 | |||||||||
Hainan (China) | 2 | — | 2 | |||||||||
Helvetic (Switzerland) | 12 | — | 12 | |||||||||
Wideroe (Norway) | 3 | 3 | — | |||||||||
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Total | 47 | 4 | 43 | |||||||||
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EMBRAER 195 – E2:
Customer | Firm Orders | Delivered | Firm Order Backlog | |||||||||
Aircastle (USA) | 13 | — | 13 | |||||||||
Aercap (Ireland) | 44 | — | 44 | |||||||||
Azul (Brazil) | 51 | — | 51 | |||||||||
Binter Canarias (Spain) | 3 | — | 3 | |||||||||
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Total | 111 | — | 111 | |||||||||
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For further information on trends in our business, see “Item 4B. Information on the Company—Business Overview—Business Strategies” and “Item 5A. Operating and Financial Review and Prospects—Operating Results—Current Conditions and Trends in our Industry.” For further information on risks affecting our business, see “Item 3D. Key Information—Risk Factors.”
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Strategic Partnership with Boeing
On January 24, 2019, we entered into the Master Transaction Agreement and certain other transaction documents with Boeing and certain subsidiaries of Embraer or Boeing, pursuant to which a subsidiary of Boeing will acquire the controlling stake in Embraer’s commercial aviation business unit and Embraer or a subsidiary of Embraer and Boeing or a subsidiary of Boeing will form a joint venture for the promotion and development of new markets and application for theKC-390multi-mission aircraft. Embraer expects that the strategic partnership with Boeing will generate synergies and other benefits to Embraer. For further information on our strategic partnership with Boeing, see Explanatory Note on page 3 of this annual report and for risks relating to the Transaction, see “Item 3D. Key Information—Risk Factors—The consummation of the strategic partnership with Boeing is subject to conditions, some or all of which may not be satisfied or completed within the expected timeframe, if at all. Failure to complete the proposed Transaction could adversely affect our business, financial condition and operating results and the trading price of our common stock and ADSs, Our strategic partnership with Boeing may not be implemented successfully or the implementation may be more difficult, time consuming or costly than expected, and Although we expect that the strategic partnership with Boeing will result in synergies and other benefits to us, those benefits may not be realized fully or at all or may not be realized within the expected time frame.”
5E. Off-Balance | Sheet Arrangements |
In the normal course of our business, we enter into certainoff-balance sheet arrangements, including financial and residual value guarantees,trade-in obligations, product warranty commitments and operating leases. We also have a number of swap transactions that are described in “Item 11. Quantitative and Qualitative Disclosures about Market Risk.” For a detailed description of our derivative instruments, see Note 8 to our 2018 audited consolidated financial statements. See also Note 35 to 2018 our audited consolidated financial statements for additional information on ouroff-balance sheet arrangements. In addition, see “Item 3D. Key Information—Risk Factors—Risks Relating to Embraer— Some of our aircraft sales may be subject to financial and residual value guarantees andtrade-in options that may require us to make significant cash disbursements.”
Financial and Residual Value Guarantees
Residual value guarantees provide a third party with a specific guaranteed asset value at the end of a financing agreement and typically ensure that, at the exercise date (between six and 19 years after the aircraft delivery date), the relevant aircraft will have a residual market value of a percentage of the original sale price. Most of our residual value guarantees are subject to a limitation (a “cap”) and, therefore, on average our guaranteed residual value is 11% of the original sale price. In the event of a decrease in the market value of the underlying aircraft and an exercise by the purchaser of the residual value guarantee, we bear the difference, if any, between the guaranteed residual value and the market value of the aircraft at the time of exercise, limited to a cap. Our exposure is mitigated by the fact that the guaranteed party, in order to benefit from the guarantee, must make the aircraft meet specific return conditions.
Assuming all customers supported by financial guarantees defaulted on their aircraft financing arrangements, and also assuming we were required to pay the full aggregate amount of outstanding financial and residual value guarantees and were not able to remarket any of the aircraft to offset our obligations, our maximum unrecorded exposure under these guarantees (less provisions and liabilities) would have been US$155.8 million as of December 31, 2018. For further discussion of theseoff-balance sheet arrangements, see Note 35 to our 2018 audited consolidated financial statements.
As of December 31, 2018, we had US$25.3 million deposited in an escrow account (guarantee deposits on sales structure guarantees) as collateral for the financing of certain aircraft sold where we serve as secondary guarantor. If the initial guarantor of the debt (an unrelated third party) is required to pay the lender, the initial guarantor will be entitled to the amount in the escrow account. The amount is returned in the form of cash to us at maturity of the financing contracts (until 2021) if the aircraft purchaser does not default on the loan. The interest on the escrow account is added to the principal and recognized by us as financial income. For further information on the escrow accounts, see Note 10 to our 2018 audited consolidated financial statements.
We allocated the deposits from the escrow account to15-year structured notes with the depositary bank in order to earn a better interest rate. This yield enhancement was obtained through a credit default swap transaction, which provides the right of early redemption of the note in case of a credit event by us. Upon a credit event, the note may be redeemed by the holder at the greater of the note’s market value or its original face amount, which would result in a loss to us of all interest accrued on such note to date. Credit events include obligation and payment defaults under the terms of the guarantees above specified thresholds, events related to the restructuring of the obligations above a specified threshold, bankruptcy and a repudiation of and/or moratorium on the obligations above a specified threshold. In December 2018, the total of the structured notes in were released as collateral, and is now recorded as a financial investment. For further information on the escrow accounts, see Notes 6.1 and 10 to our 2018 audited consolidated financial statements.
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We continuouslyre-evaluate our risk under our guarantees andtrade-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 from the sale or lease of similar aircraft in the secondary market, and the credit rating of customers.
The following table provides quantitative data regarding guarantees we render to third parties. The maximum potential payments represent the worst-case scenario and do not necessarily reflect the results expected by us. Estimated proceeds from performance guarantees and underlying assets represent the anticipated values of assets we could liquidate or receive from other parties to offset our payments under guarantees.
As of December 31, | ||||||||||||
2018 | 2017 | 2016 | ||||||||||
Description | (in US$ millions) | |||||||||||
Maximum financial guarantees | 66.6 | 107.7 | 191.2 | |||||||||
Maximum residual value guarantees | 253.1 | 267.4 | 286.1 | |||||||||
Mutually exclusive exposure(1) | (26.9 | ) | (29.0 | ) | (32.1 | ) | ||||||
Provisions and liabilities recorded(2) | (137.0 | ) | (126.0 | ) | (144.9 | ) | ||||||
Off-balance sheet exposure | 155.8 | 220.1 | 300.3 | |||||||||
Estimated proceeds from performance guarantees and underlying assets | 177.6 | 266.9 | 504.4 |
(1) | When an underlying asset is covered by mutually exclusive financial and residual value guarantees, the residual value guarantee may only be exercised if the financial guarantee has expired without having been exercised. On the other hand, if the financial guarantee is exercised, the residual value guarantee is automatically terminated. After a financial guarantee expires without being exercised, there is an average three-month period in which a guaranteed party may exercise the residual value guarantee. This means that our exposure to mutually exclusive financial and residual value guarantees covering a single underlying asset cannot be cumulative. Therefore, the maximum exposure shown in this line item is not an aggregate amount of the combined value of mutually exclusive financial and residual value guarantees covering a single underlying asset. |
(2) | Represents the sum of our financial and residual value guarantees. For further information on our provisions recorded and liabilities, see Note 23 to our 2018 audited consolidated financial statements. |
As discussed in note 10 to our 2018 audited consolidated financial statements, as of December 31, 2018, 2017 and 2016, we maintained escrow deposits in the total amount of US$25.3 million, US$60.8 million and US$177.0 million, respectively, in favor of third parties for whom we have provided financial and residual value guarantees in connection with certain aircraft sales financing structures.
Because of a reorganization solicitation (Chapter 11) of the customer Republic Airways Holding, filed on February 25, 2016 with the United States of America, we made a provision of US$100.9 million, considering the best estimates on that moment based on the information contained in the reorganization filing document, to cover losses related to obligations with financial guarantees offered to the main financing agent of the ERJ 140/145 aircraft, acquired by this customer. In November 2016, we signed a firm sale for 24 E175 jets with United Airlines. This order represents a transfer of 24 E175 jets previously placed with Republic, which were cancelled. During 2016, the reorganization process developed, and we assumed the responsibility of buying back the ERJ 140/145 operated by Republic Airways until then. The provision made in 2015 was sufficient to cover Embraer’s losses with Republic Airways reorganization in a total amount of US$94.7 million related to guarantees and ERJ 140/145 aircraft repurchase. The difference between US$100.9 million provisioned in 2015 and the losses described above were reverted. Republic Airways was also subject to liquidated damages for contract settlements and accounts receivable within Embraer’s MRO business. To compensate Embraer, Republic Airways issued unsecuredpre-petition claims in a total of US$106.0 million, losses on receivables (US$7 million), liquidated damages (US$12 million) and financial guarantees (US$87 million). The values described are the face value of the unsecuredpre-petition claims, however, their market price may be lower than that, considering our best estimates. In December 31, 2018, these claims were recognized at approximately 56 cents on each US$1.00 (total of US$59.7 million recognized). As of December 31, 2018, the obligations assumed in accounts payable was US$15.1 million. For further information on the effects of this reorganization, see Notes 23 and 33 to our 2018 audited consolidated financial statements.
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Trade-in Obligations
We sometimes providetrade-in options to our customers in purchase agreements for new aircraft. These options provide customers with the right to trade in aircraft upon the purchase and acceptance of a new aircraft. Thetrade-in price for commercial aircraft is determined in the manner discussed under “Item 5A. Operating Results—Critical Accounting Estimates—Guarantees andTrade-In Rights.” In 2018, we accepted 1aircraft, with a total invoiced value of US$4.6 million, fortrade-in pursuant totrade-in options. In the aggregate, we are currently subject totrade-in options relating to eight aircraft, as a result oftrade-ins tied to contractual obligations with customers and to their taking delivery of certain new aircraft. In addition, other aircraft may become subject totrade-in due to new sales agreements. Thetrade-in price is determined based on the new aircraft sold, as well as other factors, including a market value assessment performed by independent third party appraisers. For further information on ourtrade-in options, see Note 35.1 to our 2018 audited consolidated financial statements.
We continue to monitor alltrade-in commitments to anticipate any adverse economic impact they may have on our financial condition. We may be required to accepttrade-ins at prices that are slightly above the then-market price of the aircraft, which would result in financial loss for us when we resell the aircraft. Based on our current evaluation and onthird-parties appraisals, we believe that any aircraft accepted in connection withtrade-in commitments may be sold or leased in the market without significant profits or losses. For further information on our guarantees, see “Item 5A. Operating Results—Critical Accounting Estimates—Guarantees.”
Operating Leases
Our parent company operating leases refer to telephone and computer equipment, and those relating to our subsidiaries related tonon-cancelable operating leases of land and equipment. These leases expire at various dates through 2044. Payments made under operating leases are amortized on the statement of income according to thestraight-line method over the contract period. For further information on our operating leases, see note 35.2 to our 2018 audited consolidated financial statements.
5F. Tabular Disclosure of Contractual Obligations
The following table and discussion provide additional disclosure regarding our material contractual obligations and commercial commitments as of December 31, 2018:
Total | Less than 1 year | 1 –3 years | 3 –5 years | More than 5 years | ||||||||||||||||
Contractual Obligations | (in US$ millions) | |||||||||||||||||||
Loans and financing | 4,701.3 | 321.0 | 867.3 | 1,345.7 | 2,167.3 | |||||||||||||||
Operating leases | 32.1 | 5.4 | 8.5 | 4.4 | 13.8 | |||||||||||||||
Recourse and non recourse debt | 341.4 | 324.0 | 7.6 | 6.6 | 3.2 | |||||||||||||||
Customer advances | 1,057.3 | 880.5 | 157.9 | 17.0 | 1.9 | |||||||||||||||
Suppliers | 892.1 | 892.1 | — | — | — | |||||||||||||||
Financial guarantees | 152.1 | 51.0 | 39.9 | 31.3 | 29.9 | |||||||||||||||
Other Liabilities | 227.3 | 5.4 | 92.2 | 95.3 | 34.4 | |||||||||||||||
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Total | 7,403.6 | 2,479.4 | 1,173.4 | 1,500.3 | 2,250.5 | |||||||||||||||
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The above table shows the sum of the outstanding principal and anticipated interest due at maturity date. For fixed rate loans, the interest expenses were calculated based on the rate established in each debt contract. For floating rate loans, the interest expenses were calculated based on a market forecast for each period (LIBOR 6m – 12m), dated December 31, 2018. This floating rate exposure is managed through derivatives operations. For further information on our derivative instruments, see “Item 11. Quantitative and Qualitative Disclosures About Market Risk.”
The above table does not reflect contractual commitments related totrade-in options and financial and residual value guarantees discussed in “Item 5E.Off-Balance Sheet Arrangements” above. For further information on risks related to our guarantees, see “Item 3D. Key Information—Risk Factors—Risks Relating to Embraer—Some of our aircraft sales may be subject to financial and residual value guarantees andtrade-in options that may require us to make significant cash disbursements.” Also, the table does not reflect our sponsorship in the defined contribution pension plan for our employees, participation in which is optional, and our participation, recognized as expense, is expected to be around US$20.9 million per year.
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Other liabilities include taxes and payroll charges payable in the total amount of US$126.6 million as of December 31, 2018. The above table does not reflect any information related to our derivative instruments, which are discussed more fully in “Item 11. Quantitative and Qualitative Disclosures About Market Risk.”
5G. | Safe Harbor |
See “Special Note Regarding Forward-Looking Statements.”
ITEM 6. | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES |
6A. | Directors and Senior Management |
We are managed by our board of directors (conselho de administração), composed of 11 members, and our board of executive officers (diretoria), composed of no less than four and no more than 11 members (each an executive officer). We have a permanent Fiscal Council (Conselho Fiscal), which is composed of at least three and no more than five members and an equal number of alternates.
There are no family relationships among the members of our board of directors and/or our board of executive officers.
Board of Directors
Our board of directors ordinarily meets eight times a year and extraordinarily when called by the Chairman. It has responsibility, among other things, for establishing our general business policies and for electing our executive officers and supervising their management.
Our board of directors is appointed by our shareholders for atwo-year term, reelection is permitted, and there are three reserved seats as follows: (i) one acting member to be appointed by the Brazilian government, as holder of the “golden share,” and (ii) two acting members to be appointed by our employees, Alexandre Magalhães Filho and Dejair Losnak Filho The remaining eight directors are elected in accordance with the slate voting or cumulative voting rules contained in our bylaws. For further information on the rules and procedures regarding the nomination and election of our board members, see “Item 10B. Additional Information—Memorandum and Articles of Association—Board of Directors—Election of Board of Directors.” There is no mandatory retirement age for our directors.
Under the rules of theNovo Mercado, the members of our board of directors have agreed to comply with theNovo Mercado Listing Rules and with the rules of the B3 Arbitration Chamber before taking office, and for this purpose have entered into a Statement of Consent from the Directors (Termo de Anuência dos Administradores).
Set forth below are the names, ages, positions, the year first elected and brief biographical descriptions of the members of our board of directors elected at our annual shareholders’ meeting held on April 12, 2017:
Name | Age | Position | Year First Elected to Board | |||||||
Alexandre Gonçalves Silva | 74 | Chairman of the Board of Directors | 2011 | |||||||
Sérgio Eraldo de Salles Pinto | 54 | Member of the Board of Directors | 2009 | |||||||
Alexandre Magalhães Filho | 66 | Member of the Board of Directors | 2015 | |||||||
Cecília Mendes Garcez Siqueira | 61 | Member of the Board of Directors | 2015 | (1) | ||||||
Dejair Losnak Filho | 55 | Member of the Board of Directors | 2017 | |||||||
Israel Vainboim | 74 | Member of the Board of Directors | 2009 | |||||||
João Cox Neto | 55 | Member of the Board of Directors | 2011 | |||||||
José Magno Resende de Araujo | 59 | Member of the Board of Directors | 2013 | (2) | ||||||
Maria Leticia de Freitas Costa | 58 | Member of the Board of Directors | 2017 | |||||||
Pedro Wongtschowski | 72 | Member of the Board of Directors | 2015 | |||||||
Raul Calfat | 66 | Member of the Board of Directors | 2017 |
(1) | Cecília Mendes Garcez Siqueira was also a member from April 2009 to April 2011. |
(2) | Elected as an alternate member for Mr. Antonio Franciscangelis Neto. |
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Alexandre Gonçalves Silva.Mr. Silva holds a BS in Mechanical Engineering from PUC Rio de Janeiro. In his40-year career, he has occupied positions in several areas, including 22 years as a CEO. Mr. Silva was CEO of GE in Brazil from 2001 to 2007 and since then, Mr. Silva has occupied positions on boards of directors of various companies. Mr. Silva is Chairman of the Board of Directors of Embraer and an independent board member at, Votorantim Cimentos, Ultrapar and Nitroquímica. Mr. Silva is a Pro Bono Board member of the American Chamber of Commerce since 2003. Mr. Silva is an independent member of the Board of Directors of Embraer.
Sérgio Eraldo de Salles Pinto.Mr. Salles Pinto has been CEO of Bozano Group since 2011 and he was an Executive Officer from 2000 to 2010. From 1988 to 2000, he worked at several companies of Banco Bozano, Simonsen S.A. He was originally elected to the Board of Directors of Embraer in April 2009 and he is an independent member, being a member of the Human Resources Committee and coordinator of the Audit and Risk Committee. Mr. Salles Pinto earned undergraduate degrees in Economics and Electrical Engineering from the Center of Unified Teaching of Brasília (CEUB) and the University of Brasília (UnB), respectively. He holds a Master’s degree in Economics from Fundação Getúlio Vargas—Rio de Janeiro (EPGE) and a Master’s degree in Administration from the Catholic University of Rio de Janeiro (PUC). Mr. Salles Pinto is the Chairman of the Board of Directors of Bozano Investimentos Gestora de Recursos, a member of the Board of Directors of Azul Linhas Aéreas and Vice-President of the Board of Directors ofOuro Preto Óleo e Gás.
Alexandre Magalhães Filho.Mr. Magalhães Filho has a degree in accounting sciences, with a specialization in budget analysis. He has been an employee of Embraer since 1986, where he has held the following positions: 1986 to 2008, Budget Supervisor, Assistant Controllership Officer, and Pricing and Economic Planning Manager; 2008 to 2010, Costs Manager. His current position is Financial Process Manager, and he is in charge of cost, accounting and tax procedures, including products and services costing, accounting for 29 companies, controllership and IFRS accounting consolidation for 50 companies in the Embraer group, and tax operations. Mr. Magalhães Filho sat on the Fiscal Council of: (i) Banco do Brasil Previdência Privada (BBPREV) from 1997 to 2009; (ii) Embraer Prev – Sociedade de Previdência Complementar from 2010 to 2012, being reelected for the period 2015 to 2018; (iii) Instituto Embraer de Educação e Pesquisas, since 2001; and (iv) Cooperativa dos Empregados da Embraer (Cooperemb) from 2009 to 2011, was elected to the Board of Directors for the 2015-2017 term. Mr. Magalhães Filho was an alternate director for the representative of the Embraer Employees Investment Club (CIEMB) on the Board of Directors of Embraer from 2013 to 2015, was elected as an acting director for the 2015-2017 term and has been nominated by Embraer’s employees to be reelected for the 2017–2019 term.
Cecília Mendes Garcez Siqueira. Ms. Siqueira holds a degree in education and an MBA in General Business – Top Executives and Pension Plan Management, as well as a master’s degree in business management. She has been an employee of BB since 1979, where she has held the following positions: 1979 to 2002, various positions; 2002 to 2010, Chief Planning Officer, and Chief Administrative Officer until May 2018. Ms. Siqueira served on the Board of Directors of Neoenergia from 2002 to 2005, where she also acted as Coordinator of the HR Committee. From 2005 to 2008, Ms. Siqueira served as Vice Chairman of the Board of Directors of CPFL Energia, where she also acted as Coordinator of the HR Committee. She served as a director of Embraer from 2008 to 2011, where she also sat on the Strategies and Risk Committee. Ms. Siqueira also sat on the Board of Directors of Sauípe S.A. from 2011 to 2013. Ms. Siqueira is an independent member of the Board of Directors of Embraer.
Dejair Losnak Filho. Dejair Losnak Filho holds a Bachelor’s Degree in Law from the Universidade do Vale do Paraíba in São José dos Campos, in 2011; holds a post-graduate degree in Social Security and Labor Law, by UNISAL, in 2013; holds a post-graduate degree in Social Security Law from Faculdade Legale, in São Paulo; and a course for Members of the Board of Directors by the Instituto Brasileiro de Governança Corporativa (IBGC) in November and December 2017 Mr. Losnak was elected in 2017 a member of the Board of Directors of Embraer S.A.by representatives ofnon-shareholders, and has been Programmer of Production of the company since 2003.
Israel Vainboim. Mr. Vainboim was a member of the Board of Directors of Itaú Unibanco S.A. from 2009 to April 2015. He is a member of the Board of Directors of Cia. Iochpe-Maxion, member of the Board Council of MAM (Museu de Arte Moderna de São Paulo), member of the Board of Alfredo Volpi of Modern Art Institute, member of the Board of MASP, Vice-President of the Board of Albert Einstein Hospital in São Paulo and Chairman of the Board of the Brazilian-Israeli Chamber of Commerce. Mr. Vainboim served at Unibanco in various capacities since 1969. Mr. Vainboim was also the President of Unibanco from 1988 to 1992 and member of its Board of Directors until 2008. Mr. Vainboim was president of Unibanco Holdings S.A. from 1994 to 2007, Chairman of the Board of Directors and President of the Audit Committee of Unibanco Holdings S.A. from 2007 to February 2009. He was first elected to the Board of Directors of Embraer in April 2009 and he is an independent member. Mr. Vainboim earned an undergraduate degree in Mechanical Engineering from the Federal University of Rio de Janeiro and holds an MBA from Stanford University.
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João Cox Neto.Mr. Cox currently serves as Chairman of the board of directors of TIM Participações and TIM Brasil S.A. and also as a member of the boards of directors of Petrobras S.A., Embraer S.A., Braskem S.A. and Linx S.A. He is the founding partner and managing director of Cox Investiments & Advisory. Between 2006 and 2010. Cox served as CEO and vice-chairman of Claro. In 2005, he was the vice-chairman of the board of directors of Cellcom Israel. He served as CFO and investor relations of Telemig Celular Participações and Tele Norte Celular Participações from April 1999 to August 2004 and also CEO of Telemig Celular and Amazonia Celular from August 2002 to August 2004. In addition, Cox has served as a member of the boards of directors of certain companies in Brazil, Argentina, Holland and Israel. He served as a board member of the CRSFN—National Financial System Resources Council, ABRASCA (Brazilian Association of Publicly Held Companies) and IBRI (Brazilian Institute of Investors’ Relations). Cox holds a bachelor’s degree in economics from Universidade Federal da Bahia and attended to post graduation in economics at Université du Québec à Montreal and at the College of Petroleum Studies of Oxford University. Mr. Cox is an independent member of the Board of Directors of Embraer, also acting as a head of the Governance and Human Resources Committee and member of the Audit and Risks Committee.
José Magno Resende de Araújo. On April 8, 2016, Mr. Araújo was appointed as Airsáce Operations Cammander of the Brazilian Air Force (Comando de Operações Aerospaciais). He served as Economic and Finance Secretary of the Brazilian Air Force (Secretaria de Economia, Finanças e Administração da Aeronáutica) from April 8, 2018 through January 10, 2019; as Chief of Staff for the Brazilian Air Force command from April 20, 2012 to April 8, 2016, as Commander of the Brazilian Air Force Training and Adaptation Center (Centro de Instrução e Adaptação da Aeronáutica) from April 7, 2011 to April 12, 2012 and as head of the Brazilian Air Force Congressional Support (Assessoria Parlamentar da Aeronáutica), from July 17, 2008 to April 7, 2011. Mr. Araújo completed several academic courses, including the Official Airmen Training Course at the Brazilian Air Force Academy in Pirassununga, SP in 1980, the Improvement Course for Offices, the Command and Staff Course, the Aerospace Policy and Strategy Course and an MBA in Strategic Institutional Management in 2006.
Maria Leticia de Freitas Costa. Mrs. Costa holds a degree in Production Engineering from Polytechnical School of the University of São Paulo in 1982, and a MBA from Samuel Curtis Johnson School of Business, Cornell University, in 1986. Mrs. Costa is a partner at Prada Assessoria Empresarial Ltda., since 2010; member of the Board of Directors of Localiza S.A., since 2009; member of the Board of Directors of RBS Mídia, since 2016; member of the Board of Directors of BB Mapfre, since 2015; member of the Board of Directors of Mapfre S.A., since 2015; member of the Board of Directors of Martins S.A., since 2014; member of the Board of Directors of Totvs S.A.; member of the Audit Committee of Votorantim Cimentos, since 2015; Strategy Committee of Votorantim Cimentos since 2018; member of the Audit Committee of Votorantim Metais (VMH and CBA), from 2015 to 2017; Post graduation Director of the Insper Institute of Education and Research, from 2011 to 2015; member of the Board of Directors of Marcopolo from 2012 to 2016; member of the Board of Directors of Gafisa S.A., from 2011 to 2012; member of the Audit Committee of Votorantim Industrial, from 2012 to 2014; member of the Strategy Committee of Bematech S.A., from 2014 to 2015. Mrs. Costa is an independent member of Embraer’s Board of Directors and a member of the Human Resources and Strategy Committees.
Pedro Wongtschowski.Mr. Wongtschowski served as General Manager of Oxiteno S.A. (1992-2006). From January 2007 to December 2012, he served as President of ULTRAPAR Participações S.A., a public company doing business in the fields of fuel distribution (Ipiranga), LPG distribution (Ultragaz), bulk liquid logistics (Ultracargo), and specialty chemicals manufacturing (Oxiteno). He is a member of the Board of Directors of Ultrapar Participações S.A. Mr. Wongtschowski is an independent director of Embraer, Votorantim S.A. and Centro de Tecnologia Canavieira S.A.
Raul Calfat.Mr. Calfat holds a degree in business administration from Fundação Getúlio Vargas’ Business School. Mr. Calfat was CEO, until December 2013, and is Chairman of the Board of Directors of Votorantim S.A., since January 2014; Chairman of the Board of Directors of Aché Laboratórios Farmacêuticos., since September 2018; independent board member of Duratex S.A., since 2015; and member of the Board of Directors of theSírio-Libanês Hospital, since August 2015. Calfat is an independent member of Embraer’s Board of Directors and a member of the Strategy Committee and the Audit and Risk Committee.
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Committees
Three committees were formed to assist the board of directors in its duties and responsibilities:
• | Strategies Committee: this committee has no executive power. The members are appointed by our board of directors. The members of our board of directors and board of executive officers may serve on this committee The primary purpose of the Strategies Committee is to assist the board of directors. The members of our board of directors and board of executive officers may serve on this committee. The Strategies Committee’s responsibilities include assisting the board of directors in the performance of its duties, focused on the following subjects: (i) Strategic Plan and Action Plan of the Company, with its strategic objectives and macro-projects, and (ii) potential opportunities assessment of new business. The current members of the Strategies Committee are the following independent directors: Israel Vainboim (coordinator), Alexandre Gonçalves Silva, Maria Leticia de Freitas Costa, Pedro Wongtschowski and Raul Calfat. |
• | Audit and Risks Committee (internally called as “Audit, Risk and Ethics Committee”): See “Item 6C. Board Practices—Audit and Risks Committee” below. |
• | Human Resources Committee(internally called as the “Personnel and Governance Committee”): this committee has no executive power. The members are appointed by our board of directors. The members of our board of directors and board of executive officers may serve on this committee. The purpose of this committee is to assist the board of directors with matters related to human resources issues, which include appointing and removing executive officers from office and designating their duties as provided by the bylaws, compensation and human relations policy and transferring our resources to employee associations, charity and recreational entities, the private security fund and foundation. In addition, the committee also assists our board of directors in corporate governance matters. The current members of the Personnel and Governance Committee are the following independent directors: João Cox Neto (coordinator), Alexandre Gonçalves da Silva, Cecília Mendes Garcez Siqueira, Sérgio Eraldo de Salles Pinto and Maria Leticia de Freitas Costa. |
• | Conselho Fiscal: See “Item 6C. Board Practices—Audit and Risks Committee—Conselho Fiscal” below. |
Executive Officers
Our executive officers are responsible for ourday-to-day management. The board of executive officers has responsibilities established by our bylaws and by the board of directors.
The terms of office for our executive officers are two years and reelection is permitted.
The vote of at least seven members of our board of directors is necessary to remove an executive officer.
Our bylaws prohibit any executive officer from also serving simultaneously as a member of our board of directors.
Under the rules of theNovo Mercado, our executive officers have agreed to comply with theNovo Mercado Listing Rules and to the rules of the B3 Arbitration Chamber before taking office and for this purpose have entered into a Statement of Consent from the executive officers (Termo de Anuência dos Administradores).
Our chief executive officer’stwo-year tenure will end on April 22, 2019, the scheduled date for our annual and extraordinary general shareholders’ meetings. We expect to announce our new president and chief executive officer on or before this date.
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Set forth below are the names, ages, positions, the year first elected and brief biographical descriptions of our current executive officers as of the date of this annual report:
Name | Age | Position | Year First Elected | |||||||
Paulo Cesar de Souza e Silva | 63 | President and Chief Executive Officer | 2016 | (1) | ||||||
Fabiana Klajner Leschziner | 47 | Executive Vice President—General Counsel & Chief Compliance Officer | 2016 | |||||||
Hélio Bambini Filho | 56 | Executive Vice President—Operations | 2017 | |||||||
Jackson Medeiros de F. Schneider | 54 | Executive Vice President—Defense and Security | 2014 | |||||||
Johann Christian Jean Charles Bordais | 46 | Executive Vice President—Services and Support | 2017 | |||||||
John S. Slattery | 50 | Executive Vice President—Commercial Aviation | 2016 | |||||||
Nelson Krahenbuhl Salgado | 58 | Executive Vice President—Chief Financial and Investor Relations Officer | 2018 | |||||||
Mauro Kern Junior | 58 | Executive Vice President for Engineering | 2015 |
(1) | Elected as president and CEO in 2016 and elected as Executive Vice President—Commercial Aviation in 2010. |
Paulo Cesar de Souza e Silva.Mr. Paulo Cesar has been the CEO of Embraer S.A. since July 2016. Mr. Silva joined Embraer in 1997 as Vice President for customer financing. In 2010, he was appointed President and CEO of Embraer Commercial Aviation, position he held until June 2016. As Embraer’s representative at Aviation Working Group, an international industry organization dedicated to developing initiatives to foster and facilitate advanced aviation financing, Mr. Silva contributed to the development and implementation for the Cape Town Treaty and the Aircraft Sector Understanding (ASU), which regulates the terms and conditions for Export Credit Agencies support. Both are key instruments to the airlines gaining access to efficient aircraft financing. Mr. Silva is a member of the Conquistadores Del Cielo and Wings Club. Under his tenure, the company has expanded its footprint in commercial aviation, consolidating its leadership in the segment with up to 130 seats. For more than two decades, he worked in financial institutions in Brazil, Europe, and the United States. Prior to joining Embraer, Mr. Silva held many executive positions within the international bank industry. Mr. Silva holds a Bachelor’s degree in Economics from Mackenzie University (São Paulo, Brazil) and a Finance MBA from the University of Lausanne, in Switzerland.
Fabiana Klajner Leschziner. Mrs. Leschziner is our Executive Vice President, General Counsel & Chief Compliance Officer since June 2016. She worked at DuPont in Brazil from September 2002 to December 2015 as the Legal and Government Affairs Director for Brazil and from January 2016 to June 2016 as Legal Director for Brazil and the Andean Region, responsible for the legal aspects of all business of DuPont in Brazil, Colombia, Venezuela, Peru, Ecuador and Bolivia. Fabiana graduated from the São Paulo University School of Law, in 1993, and holds an LL.M. from Cornell Law School, Ithaca, USA. She specializes in corporate law, corporate finance, capital markets, antitrust and international trade and was an associate at Davis Polk & Wardwell office in New York from July 1998 to December 2001.
Hélio Bambini Filho. Mr. Bambini has been our executive vice president of operations since October 2017. Previously, he held several positions at Embraer, including operations planning and industrial architecture director (2006). In 2007, he began to oversee Embraer’s supply chain management. In 2011, he became senior vice president of industrial operations and managed Embraer’s operations in São José dos Campos, Eleb, Botucatu, Gavião Peixoto, Taubaté, Evora (Portugal), AST (USA) and EZ Air Interior (Mexico). He was also responsible for the final assembly of our commercial aircraft and executive jets. In 2014, he was appointed as Senior Vice President and chief operating officer of the Embraer Defense and Security Business Unit, taking on the Defense Programs and Operations in Gavião Peixoto and Jacksonville (USA), and member of the board of Embraer Defense and Security subsidiaries: Atech Negócios em Tecnologia S.A., Savis Tecnologia e Sistemas S.A., Harpia Sistemas S.A., Bradar Indústria S.A. and Embraer Defense and Security Inc. (USA). Prior to joining Embraer, Mr. Bambini was the CEO ofSanmina-SCI and Segerstrom, both companies in the contract manufacturing segments. He was also a business development manager at Motorola and senior consultant at Arthur D. Little. He started his career in managerial positions at Multitel Microeletrônica and Mannesmann (Hartmann & Braun Division).Mr. Bambini holds bachelor’s degree in electronic engineering from Faculdade de Engenharia Industrial, a specialization in finance fromPUC-Rio, a master’s degree in business administration from FGV in São Paulo and participated in a MBA exchange program at the University of Texas at Austin.
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Jackson Schneider is President of Embraer Defense and Security since January 2014. He formerly held the position of Vice President of People, Institutional Relations and Sustainability at Embraer S.A. Schneider has a Law degree from the University of Brasília (UNB) and an MBA from Business School of São Paulo. He began his career within the Ministry of Justice. In the private sector, he was the Deputy Director of Corporate Affairs at Unilever and Vice President of Human Resources, Legal Relations and Corporate Affairs ofMercedes-Benz do Brasil. In addition, Schneider was President of ANFAVEA (Brazilian Association of Vehicle Manufacturers) and ABIPLA (Brazilian Association of Manufacturers of Cleaning Products, and Related Items). He was board member of CDES (Social and Economic Development Council of the Presidency of Republic). He is also board member of organizations such as the Biennial Foundation of São Paulo, the AACD (Association to Support Disabled Children) and MASP – Assis Chateaubriand São Paulo’s Art Museum, among others.
Johann Christian Jean Charles Bordais. Mr. Bordais is the Senior Vice-President of Embraer Services and Support. From July 2013 to December 2016, he was Vice President of Services and Support in Brazil, where he managed customer support staff from a variety of different areas and oversaw the Customer Care Center in São José dos Campos, as well as Embraer’s Authorized Aircraft Service Centers worldwide. Previously, Mr. Bordais was responsible for Embraer Services and Support office in Paris for 13 years, served as the Senior Manager for Aircraft Sales Support & Contract Administration and Manager of the Customer Order Desk. Before joining Embraer, Mr. Bordais worked at Raytheon/Beechcraft’s Authorized MRO in Paris and at an aircraft engine spare parts company in Dallas. Mr. Bordais holds a bachelor’s degree in international trade and a MBA from Oklahoma University.
John S. Slattery.Mr. Slattery has been Executive Vice-President of Embraer S.A. and President and CEO of Embraer Commercial Aviation since July 2016. He joined Embraer in early 2011 asnon-executive Senior Vice President, responsible for Customer Finance; Asset & Risk Management and sales to the lessor community. The following year Mr. Slattery was appointed Chief Commercial Officer, taking on broader executive responsibilities incorporating worldwide sales of commercial aircraft and services. Prior to joining Embraer, Mr. Slattery spent fifteen years in executive and leadership roles at various commercial aerospace advisory, leasing, and banking organizations. In 2001, Mr. Slattery was aco-founder of RBS Aviation Capital (now SMBC Aviation Capital) and the firm’s Managing Director in New York, responsible for leading the bank’s commercial aircraft leasing and asset-backed financing to airline customers across the Americas. Mr. Slattery is a Fellow of The Royal Aeronautical Society, President Emeritus of The Wings Club and Director Emeritus of ORBIS International. An AMP graduate of Harvard Business School, Mr. Slattery was awarded an M.B.A. from the University of Limerick, and a BA from the University of South Wales.
Nelson Krahenbuhl Salgado. Mr. Salgado is our Executive Vice-President and Financial and Investor Relations Officer since April 2018. He has been working with Embraer since 1987, and worked for 10 years in the Engineering Department. He has held executive positions on corporate functions such as Strategic Planning, Economical and Financial Planning and Mergers and Acquisitions. From 2012-2014, he was the CEO ofVisiona Tecnologia Espacial, a joint venture company formed by Embraer andTelebras. In February 2014, Mr. Salgado rejoined Embraer as Vice President, Institutional Relations and Sustainability. In January 2016, Mr. Salgado was appointed Vice President, and Strategy and Institutional Relations Officer. He holds a Master’s degree in Engineering fromUniversidade de São Paulo—USP; a PhD in Computational Mechanics from Wesser Institute of Technology United Kingdom; an MBA, fromFundação Getulio Vargas—FGV, São Paulo. Mr. Salgado was a visiting professor at the Aeronautical Engineering Division of theInstituto Tecnológico de Aeronáutica—ITA.
Mauro Kern Junior. In September 2017, Mr. Kern was appointed Embraer’s Executive Vice-President, Engineering. He joined Embraer in 1982 as a Mechanical Systems Engineer and served the company in the following years in several technical and managerial positions. In April 2007, he was appointed Embraer’s Executive Vice-President for the Airline Market. In April 2011, Mr. Kern was appointed Embraer’s Executive Vice-President for Engineering and Technology. In 2015, he took the position of Chief Operating Officer. Mr. Kern holds a Bachelor’s degree in Engineering from the University of Rio Grande do Sul.
6B. | Compensation |
Overview
Our executive officers, board of directors and fiscal council members are entitled to fixed compensation. In addition, our executive officers are eligible to participate in our executive profit sharing plan, which provides them with variable compensation that is based on their and our performance and is limited to a percentage of our net income for the year.
For the fiscal year ended December 31, 2018, the aggregate compensation (including benefits in kind granted) that we paid to members of the board of directors, the audit and risks committee, the fiscal council and the executive officers for services in all capacities was US$11.1 million: US$ 3.2 million to members of the board of directors, US$0.2 million to members of the fiscal council and US$ 7.7 million to the executive officers.
For the fiscal year ended December 31, 2018, members of our committees of the board of directors, including our audit and risks committee, received an aggregate additional compensation of US$0.8 million, which is included in the US$11.1 million compensation mentioned above.
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In addition, in 2018, we contributed US$0.3 million for the payment of pension benefits to our executive officers. Members of our board of directors and fiscal council do not receive these benefits. The board of directors members, fiscal council members and executive officers did not receive any compensation (including benefits in kind) from any of our subsidiaries. As of December 31, 2018, none of the board of directors members, fiscal council members or executive officers had any financial or other interests in any transaction involving us which was not in the ordinary course of our business.For further information on our executive compensation, see Note 14.3 to our 2018 audited consolidated financial statements.
Stock Option Plan
At a special shareholders’ meeting held on April 19, 2010, our shareholders approved a second stock option plan for management and employees, including those of our subsidiaries, subject to their continuous employment with us for at least two years. Our board of directors may choose employees and members of management who will be eligible to receive stock options, which are to be awarded free of charge. Nevertheless, in extraordinary circumstances our board of directors may grant stock options to persons employed with us for less than two years to hire and retain strategic personnel. Our board of directors may also determine the terms of the stock option contracts. This second stock option plan has an indefinite period of duration and may be terminated at any time by our board of directors, after which no new options may be granted. However, options granted prior to the termination of the plan will not be affected and may be exercised subject to the terms and conditions of the plan and respective stock option contract. Under the terms of this second stock option plan, we are authorized to grant options to purchase of up to 1.5% of our common shares, and the options vest as follows: 20% after one year following the date the options were granted; 30% after two years following the date the options were granted; and 50% after three years following the date the options were granted. As of December 31, 2018, the options granted on January 23, 2012 and March 20, 2013 were outstanding. On January 23, 2012, 4,860,000 options at an exercise price of R$11.50 per share, representing 4,860,000 common shares, were granted at an exercise price of R$11.50 per share; and on March 20, 2013, 4,494,000 options, representing 4,494,000 common shares, were granted at an exercise price of R$15.71 per share. Out of the total 9,354,000 options that were granted, 2,275,990 were canceled and 6,141,302 were exercised, the remaining 936,708 options, representing 936,708 common shares, are outstanding and can be exercised at any time.
At a special shareholders’ meeting held on January 10, 2012, the aforementioned second stock option plan was amended to provide for a revised vesting schedule, and options granted after January 10, 2012 vest as follows: 33% after three years following the date the options were granted; 33% after four years following the date the options were granted; and 34% after five years following the date the options were granted. The exercise price of each option is to be set on the grant date as the weighted average trading price of the last 60 trading days and can be adjusted by up to 30% to counteract any speculative activity in the market. Each option holder has up to five years from the date of grant to exercise options received prior to and during 2011, and up to seven years from the date of grant to exercise options received after 2011. Option holders may only exercise options during the term of their employment with Embraer. This amendment does not affect the accounting for grants existing prior to this plan.
Phantom Shares Plan
In February 2014, we adopted a new model of long-term incentive plan aligned with our remuneration policy. The new model is based on the granting of virtual shares to officers and management and has as its objective of attracting and retaining highly qualified staff to ensure continuity of management and align the interest of officers and key personnel of the Company with that of shareholders. Participants in the plan are entitled to receive two classes of virtual shares, 50% in the form of virtual restricted shares and 50% in the form of virtual performance shares linked to performance indicator target. We pay the amount of the long-term incentive converting the virtual shares intoreais by the average price of the Company’s shares in the ten trading sessions preceding the relevant determination date and three, four and five years after the grant of the virtual shares, respectively. In August 2017, we approved a change in the criteria of virtual performance shares, the amounts payable is based on the internal cost reduction target and the payroll related to the shares granted in 2015, 2016 and 2017 will be made in 2020, while the amount of performance shares granted in 2018 will be paid in 2021.On February 25, 2014, we approved a total benefit of US$13.0 million under the plan, equivalent to 1,570,698 virtual shares with a fair value of US$1.0 million as of December 31, 2018, equivalent to 175,100 virtual shares. On March 3, 2015 we approved the second grant with a total benefit of US$10.4 million under the plan, equivalent to 1,237,090 virtual shares with a fair value of US$3.0 million as of December 31, 2018, equivalent to 546,024, virtual shares. On March 10, 2016, we approved the third grant with a total benefit of US$8.5 million under the plan, equivalent to 1,095,720 virtual shares with a fair value of US$3.0 million as of December 31, 2018, equivalent to 541,595 virtual shares. On June 9, 2016, we approved the fourth grant with a total benefit of US$0.3 million under the plan, equivalent to 55,994 virtual shares with a fair value of US$0.2 million as of December 31, 2018, equivalent to 32,674 virtual shares. On August 25, 2016, we approved the fifth grant with a total benefit of US$0.3 million under the plan, equivalent to 70,978 virtual shares with a fair value of US$0.2 million as of December 31, 2018, equivalent to 43,783 virtual shares. On August 24, 2017 we approved the sixth grant with a total benefit of US$9.7 million under the plan, equivalent to 1,930,350 virtual shares with a fair value of US$4.2 million as of December 31, 2018, equivalent to 762,782 virtual shares. In 2018, we approved the sixth grant with a total benefit of US$10.4 million under the plan, equivalent to 1,625,372 virtual shares with a fair value of US$1.9 million as of December 31, 2018, equivalent to 346,221 virtual shares. For further information on this plan, see Note 28 to our 2018 audited consolidated financial statements.
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Long-Term Incentive Plan
The objectives of our Long-Term Incentive Plan are the recruitment and retention of highly-qualified personnel and to allow those who can contribute to our performance the opportunity to participate in our profits. Incentives under the plan are intended to promote continuity among our management and alignment of the interests between our executives and shareholders. Amounts distributed are defined with reference to the market, under the conditions described in our Long-Term Incentive Plan.
Short-Term Variable Compensation Policy
Our Short-Term Variable Compensation Policy is designed to promote the retention of executives and alignment of their interests with those of shareholders. Goals with greater impact and importance for our company are given greater weight. We distribute short-term variable compensation to our eligible executives which is equal to a percentage of our operating profits.
Employee Profit Sharing Plan
We first implemented a profit sharing plan in 1998 that linked employee profit sharing to dividend payments. In December 2008, the board of directors approved changes to the methodology for calculating the employee profit sharing. The new program, as amended in 2008 by our board of directors, is now tied to our net income, calculated in accordance with IFRS, and to individual and business unit performance targets. Of the total amount reserved for the profit sharing program, 50% is distributed in equal parts to all employees, while 50% is distributed proportionally to the employee’s salary.
For the 2018, 2017, 2016, 2015 and 2014 fiscal years, we distributed US$37.7 million, US$ 21.4 million, US$23.6 million, US$37.9 million and US$47.8 million, respectively, to our employees under our profit sharing plan.
Defined Contribution Pension Plan
We sponsor a defined contribution pension plan for employees and the participation in this plan is optional. The plan is managed by EMBRAER PREV –Sociedade de Previdência Complementar. Contributions made by us to this plan in the years ended December 31, 2018, 2017, 2016, 2015 and 2014 were US$14.1, US$22.2 million, US$23.2 million, US$22.6 million and US$28.4 million, respectively. For further information on our post-retirement benefits, see note 25 to our 2018 audited consolidated financial statements.
Risk management studies are performed annually to identify the future exposure to be recorded as a provision. The provision recorded of medical benefits plan in Brazil was US$27.9 million as of December 31, 2018, US$31.8 million as of December 31, 2017 US$41.5 million as of December 31, 2016.
The actuarial methods used comply with the generally accepted actuarial methods in force, in accordance with the projected unit credit method.
D&O Insurance
We maintain directors’ and officers’ liability insurance in an amount of US$100.0 million. This insurance covers liabilities resulting from wrongful acts, including any act or omission committed or attempted by any officer or director acting in his or her capacity as officer or director or any matter claimed against an officer or director solely due to his or her serving in such capacity.
Our board of directors is appointed for atwo-year term. See “Item 6A. Directors and Senior Management—board of directors.”
The executive officers are elected by the board of directors. With the exception of Hélio Bambini Filho, who was elected on August 24, 2017, and Nelson Krahenbuhl Salgado, who was elected on April 17, 2018, our current executive officers were elected on April 12, 2017, with a term of office until the meeting of our board of directors to be held following the annual general meeting of our shareholders in April 2019 to approve our financial statements for the fiscal year ended December 31, 2018. The members of our board of directors and our executive officers have a uniformtwo-year term and are eligible for reelection. A vote of at least seven members of our board of directors is necessary to remove an executive officer. See “Item 6A. Directors and Senior Management—Executive Officers.”
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An annual and extraordinary general shareholders’ meeting is scheduled to take place on April 22, 2019, in which, among other things, our shareholders will elect new directors and new members of the fiscal council.
None of our directors is party to an employment agreement providing for benefits upon termination of term. All of our executive officers are party to a service agreement setting forth the rights and obligations of the executive officers.
Audit and Risks Committee
Our Audit and Risks Committee (internally called as “Audit, Risk and Ethics Committee”) has no executive power and may have up to five independent members. The primary purpose of the audit and risks committee is to assist the board of directors in its functions. The members of our board of directors may serve on the committee. The audit and risks committee’s responsibilities include validation and submission to the board of directors of guidelines for risk policy, verification of risk management policy compliance, supervision of activities performed by our independent auditors and monitoring the quality and integrity of internal controls and financial statements. Embraer’s statutory “audit and risks committee” is currently composed of four independent members of our board of directors.
Foreign private issuers are subject to local legislation which may prohibit the board of directors from delegating certain responsibilities to the audit committee, pursuant toRule 10A-3 of the Exchange Act. Audit committees of foreign private issuers may be granted responsibilities, including advisory powers, with respect to certain matters to the extent permitted by law. Due to certain restrictions imposed by the Brazilian Corporate Law, our Audit and Risks Committee, unlike a U.S. audit committee, only has an “advisory” role and may only make recommendations for adoption by the full board of directors, which is responsible for the ultimate vote and final decision. For example, our Audit and Risks Committee makes recommendations regarding the appointment of auditing firms, which are subject to a vote by the board of directors. Our Audit and Risks Committee complies with Brazilian legal requirements (including for “independent directors,” as defined by Brazilian law).
Set forth below are the names, ages, position and the year first elected of the members of our Audit and Risks Committee appointed at our board of directors’ meeting held on April 12, 2017:
Name | Age | Position | Year First Elected | |||||||
Sergio Eraldo de Salles Pinto | 54 | Coordinator and Effective member | 2011 | |||||||
Israel Vainboim | 74 | Effective member | 2011 | |||||||
João Cox Neto | 55 | Effective member | 2015 | (1) | ||||||
Raul Calfat | 66 | Effective member | 2017 |
(1) | João Cox Neto was also a member of this committee from April 2011 through April 2013. |
Fiscal Council (Conselho Fiscal)
Under the Brazilian Corporate Law, the fiscal council is a corporate body independent of management and a company’s external auditors. The fiscal council has not typically been equivalent to or comparable with a U.S. audit committee. The primary responsibility of the fiscal council has been to monitor management’s activities, review the financial statements, and report its findings to the shareholders. In our case, our statutory audit and risks committee, established in accordance with theNovo Mercado Listing Rules, will serve as the equivalent of a U.S. audit committee. For further information on our committees, see “Item 6A. Directors and Senior Management—Committees.”
Under the Brazilian Corporate Law, the fiscal council may not have members who are members of the board of directors or the executive committee, or who are our employees or employees of a controlled company or of a company of this group, or a spouse or relative of any member of our management. In addition, the Brazilian Corporate Law requires that fiscal council members receive a remuneration of at least 10% of the average amount paid to each executive officer. The Brazilian Corporate Law requires a fiscal council to be composed of a minimum of three and a maximum of five members and their respective alternates.
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Our fiscal council is composed of three to five members who are elected at the annual shareholders’ meeting, with terms lasting until the next annual shareholders’ meeting after their election. Under the Brazilian Corporate Law, if a company acquires control of another company, minority shareholders that in the aggregate hold at least 10% of the voting shares also have the right to elect separately one member of the fiscal council. This provision will not be applicable to us as long as we are subject to widespread control. Set forth below are the names, ages, the year first elected and positions of the members of our fiscal council and respective alternates, elected at our annual shareholders’ meeting held on April 12, 2017:
Name | Age | Position | Year First Elected | |||||||
Ivan Mendes do Carmo(1) | 56 | Effective member | 2008 | |||||||
Tarcísio Luiz Silva Fontenele | 56 | Alternate | 2001 | |||||||
José Mauro Laxe Vilela(2) | 71 | Effective member | 2011 | |||||||
Wanderley Fernandes da Silva | 45 | Alternate | 2011 | |||||||
Mauricio Rocha Alves de Carvalho | 57 | Effective member | 2016 | |||||||
Taiki Hirashima | 78 | Alternate | 2004 | |||||||
João Manoel Pinho de Mello | 45 | Effective member | 2018 | |||||||
Pedro Jucá Maciel | 38 | Alternate | 2018 | |||||||
Wilsa Figueiredo | 56 | Effective member | 2016 | |||||||
Luiz Claudio Moraes | 57 | Alternate | 2016 |
(1) | President of the Fiscal Council. |
(2) | Vice-President of the Fiscal Council. |
6D. | Employees |
The table below sets forth the number of our employees by category at the dates indicated, and includes the employees of our wholly-owned subsidiaries. The total consolidated refers to all of our subsidiaries and joint ventures, including OGMA, ECTS, and Visiona:
As of December 31, | ||||||||||||||||||||
2018 | 2017 | 2016 | 2015 | 2014 | ||||||||||||||||
Production Process | 6,645 | 6,695 | 6,613 | 6,442 | 6,181 | |||||||||||||||
Research and Development | 5,369 | 5,462 | 5,645 | 6,069 | 5,948 | |||||||||||||||
Customer Support | 2,274 | 2,178 | 2,000 | 2,209 | 2,193 | |||||||||||||||
Administrative—Production Support | 1,456 | 1,476 | 1,615 | 2,115 | 2,006 | |||||||||||||||
Administrative—Corporate | 2,776 | 2,622 | 2,633 | 2,538 | 2,839 | |||||||||||||||
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Total (including only wholly-owned subsidiaries of Embraer S.A) | 18,520 | 18,433 | 18,506 | 19,373 | 19,167 | |||||||||||||||
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Total Consolidated | 20,530 | 20,320 | 20,348 | 23,050 | 22,301 | |||||||||||||||
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Approximately 84% of our workforce is employed in Brazil. Most of our technical staff is trained at leading Brazilian engineering schools, including ITA, located in the city of São José dos Campos.
Embraer fully supports the choice of union association of its employees. In Brazil, 5.2% of the our employees are unionized, and, according to Brazilian labor laws, salary readjustments and other clauses negotiated in collective bargaining agreements extend to the entire category, resulting in 100% employees covered by clauses negotiated in these agreements.
We actively support the training and professional development of our employees. We have established a program at our facility in the city of São José dos Campos to provide newly graduated engineers with specialized training in aerospace engineering.
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6E. | Share Ownership |
As of December 31, 2018, our board members owned 1,201 of our common shares, our executive officers owned 1,010 of our common shares and each fiscal council members owned one of our common shares. None of the officers or directors individually owns more than 1% of the outstanding common shares. See “Item 6B. Compensation—Stock Option Plan” for a description of our stock option plan applicable to our management and employees, including those of our subsidiaries.
ITEM 7. | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS |
7A. | Major Shareholders |
Shareholders
We have total authorized capital of 1,000,000,000 shares, with an aggregate of 740,465,044 common shares, including one special “golden share” held by the Brazilian government, issued and outstanding. The golden share provides the Brazilian government with veto rights in certain specific circumstances. In addition,non-Brazilian shareholders may have their voting rights restricted in certain specific circumstances. For further information on the voting rights of our common shares, see “Item 10B. Additional Information—Memorandum and Articles of Association—Description of Capital Stock—Voting Rights of Shares.”
The table below sets forth information related to the amount of shares held by our significant shareholders. As of the date of this annual report, in accordance with the most recent shareholder position informed to us:
Common Shares | ||||||||
Shares(1) | (%) | |||||||
Brandes Investment Partners, L.P.(2) | 106,656,095 | 14.40 | ||||||
Mondrian Investments Partners Limited(3) | 73,587,000 | 9.94 | ||||||
BNDES Participações S.A.BNDESPAR(4) | 39,762,489 | 5.37 | ||||||
Blackrock INC(5) | 37,176,992 | 5.02 | ||||||
União Federal/Brazilian government(6) | 1 | 0.00 | ||||||
Shares in company treasury | 4,636,258 | 0.63 | ||||||
Others | 478,646,209 | 64.64 | ||||||
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Total | 740,465,044 | 100.00 | ||||||
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(1) | The amount of shares includes our ADS. |
(2) | Brandes Investment Partners, L.P. is a 100% employee-owned independent investment advisory firm founded andco-owned by Charles Howard Brandes. The firm manages the Brandes series of mutual funds in addition to other funds and caters to individual and institutions. |
(3) | Mondrian Investment Partners Limited was founded in 1990, is an independent, employee-owned, global investment manager with offices in London and Philadelphia. The firm launches and manages equity, fixed income, and balanced mutual fund and invests in the public equity and fixed income markets across the globe. |
(4) | BNDESPAR is a wholly-owned subsidiary of Banco Nacional de Desenvolvimento Econômico e Social–BNDES, the government-owned national development bank of Brazil. |
(5) | Blackrock INC. is an American global investment management corporation based in New York City. Founded in 1988, initially as a risk management and fixed income institutional asset manager, BlackRock is the world’s largest asset manager. |
(6) | The Brazilian government holds our “golden share.” |
There have been no significant changes in percentage ownership by any major shareholder in the past three years. On December 31, 2018, we had approximately 41,531 holders of common shares, including common shares in the form of ADSs. According to the most accurate information available to us, on December 31, 2018, an aggregate of 86,508,495 common shares in the form of ADSs were held by 139 record holders, including DTC in the United States.
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7B. Related Party Transactions
The Brazilian Government
The Brazilian government, through its direct and indirect stakes in us and its ownership of our “golden share,” is one of our major shareholders. The issuance of the “golden share” was a requirement of the regulations governing our privatization in 1994 and grants the Brazilian government veto rights over certain military-related programs and corporate actions (including transfers of control and changes in our name, logo and corporate purposes). For further information on the voting rights of our golden share, see “Item 10B. Additional Information—Memorandum and Articles of Association—Description of Capital Stock—Voting Rights of Shares—Golden Share.” As of December 31, 2018, in addition to the “golden share,” the Brazilian government owned an indirect 5.37% stake in us through BNDESPAR, a wholly-owned subsidiary of BNDES, which, in turn, is controlled by the Brazilian government. As a result, for the purposes of this annual report’s disclosure requirements, we consider transactions between Embraer and the Brazilian government or its agencies as falling within the definition of “related party transactions.”
The Brazilian government plays an important role in our business activities, including as:
• | a major customer of our defense products, through the Brazilian Air Force; |
• | a source for research debt financing through technology development institutions, including FINEP and BNDES; |
• | an export credit agency, through BNDES; and |
• | a source of short-term and long-term financing and a provider of asset management and commercial banking services, through Banco do Brasil. |
For further information on the role of the Brazilian government in our business activities, see “Item 5B. Operating and Financial Review and Prospects—Liquidity and Capital Resources—Credit Facilities and Lines of Credit,” “Item 4B. Information on the Company—Business Overview—Aircraft Financing Arrangements,” “Item 3D. Key Information—Risk Factors—Risks Relating to Embraer—Any decrease in Brazilian government-sponsored customer financing, or increase in government-sponsored financing that benefits our competitors, may decrease the cost competitiveness of our aircraft” and “Item 3D. Key Information—Risk Factors—Risks Relating to Embraer—Any decrease in Brazilian government-sponsored customer financing, or increases in government sponsored financing that benefits our competitors, may decrease the competitiveness of our aircraft.” For further information regarding our related party transactions, see Note 15 to our 2018 audited consolidated financial statements.
A Major Customer (Brazilian Government)
The Brazilian government, mainly through the Brazilian Air Force, has been a significant customer of Embraer since its inception. For the year ended December 31, 2018, the Brazilian government, mainly through the Brazilian Air Force, accounted for 48.1 % or US$ 346.7 million of the revenue of our Defense and Security business. In addition, as of December 31, 2018, the Brazilian Air Force owed us US$90.3 million in trade account receivables and had a credit against us of US$42.3 million in customer advances. We expect to continue to be the primary source of new aircraft and spare parts and services for the Brazilian government. For a description of our transactions with the Brazilian government, see “Item 4B. Information on the Company—Business Overview—Defense and Security Business.”
Financing Source
BNDES
We are borrowers under a number of credit facilities from BNDES, the sole parent of BNDESPAR, one of our significant direct shareholders and an affiliate of the Brazilian government. As of December 31, 2018, we had a total outstanding balance of loans borrowed from BNDES in the aggregate amount of US$ 191.5 million. For further information on the amounts, maturity dates and interest rates of the principal loans we have with BNDES, see “Item 5B. Operating and Financial Review and Prospects—Liquidity and Capital Resources—Credit Facilities and Lines of Credit.”
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FINEP
We maintain credit facilities with FINEP, which as of December 31, 2018, had a total outstanding balance of US$ 56.6 million. These loans were extended to us primarily to fund research and development expenses of the Phenom 100 and 300 aircraft and the Legacy 500 aircraft. For further information on the amounts, maturity dates and interest rates of the principal loans we have with FINEP, see “Item 5B. Operating and Financial Review and Prospects—Liquidity and Capital Resources—Credit Facilities and Lines of Credit.”
Banco do Brasil
Banco do Brasil is a publicly-listed, state-owned bank controlled by the Brazilian government. As of December 31, 2018, we maintained outstandingnon-recourse and recourse debt with Banco do Brasil in the total amount of US$314.3 million, which is recorded as anon-current liability on our statement of financial position.
Customer Financing by BNDES
The Brazilian government has been an important source of export financing for our customers through BNDES-exim program, managed by BNDES. For further information on our aircraft financing arrangements, see “Item 4B. Information on the Company—Business Overview—Aircraft Financing Arrangements”.
A Service Provider (Banco do Brasil)
As of December 31, 2018, we maintained cash and cash equivalents of US$12.3 million with Banco do Brasil and several of its affiliates. As of that date, we also had deposited with Banco do Brasil an amount of US$ 314.3 million, which served as collateral for a loan extended by Banco do Brasil to one of our subsidiaries. Banco do Brasil has been a provider of regular commercial banking and asset management services to us for many decades and is one of the banks responsible for the payment of our payroll expense. We maintained US$9.4 million deposited as collateral for a loan with BNDES. These services include maintaining our checking account.
7C. | Interests of Experts and Counsel |
Not applicable.
ITEM 8. | FINANCIAL INFORMATION |
8A. | Consolidated Statements and Other Financial Information |
See “Item 3A. Key Information—Selected Financial Data.”
Legal Proceedings
Labor Lawsuits. We are defendants in individual labor lawsuits, for which we are awaiting the decision of the Brazilian labor courts. Due to the immaterial amount involved in these legal proceedings, we do not believe that any liabilities related to these individual labor lawsuits would have a material adverse effect on our financial condition or results of operations. For a further discussion of our labor lawsuits, see notes 21 and 24to our 2018 audited consolidated financial statements.
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Tax Matters. We have challenged the constitutionality of certain Brazilian taxes and payroll charges, as well as modifications and the increases in the rates and basis of calculation of those taxes and charges and have obtainedwrits of mandamus or injunctions to avoid their payments or recover past payments.
Interest on the total amount of unpaid taxes and payroll charges accrues monthly based on the SELIC rate, the key lending rate of the Central Bank, and we make an accrual to the interest income (expenses), net line item of our statements of income. As of December 31, 2018, there was a US$58.0 million provision recorded as a liability (taxes and labor related) on our statement of financial position in connection with litigation contingencies that we classify as representing probable losses to us. For a further discussion of these challenges, see Note 24 to our 2018 audited consolidated financial statements.
SEC/DOJ and Brazilian Public Prosecutor’s Investigations.
On October 24, 2016 we entered into the Final Agreements with the DOJ and the SEC for the settlement of criminal and civil violations of the FCPA. We also finalized the TCAC with the MPF and the CVM for the resolution of violations of certain Brazilian laws.
Under the Final Agreements with the DOJ and the SEC:
• | We agreed to pay US$98.2 million to the SEC (of which US$20.0 million was due to the MPF and the CVM under the TCAC, as described below), as disgorgement of profits. |
• | We agreed to pay US$107.3 million to the DOJ, as penalty for one count of conspiracy to violate the anti-bribery and books and records provisions of the FCPA and one count of violating the internal controls provisions of the FCPA. |
• | The DOJ agreed to defer prosecution for three years for the acts acknowledged by us in a DPA, after which period the charges will be dismissed if we do not violate the terms of the DPA. |
• | We agreed to an external and independent monitorship for a period of three years. |
Simultaneously with the Final Agreements, we finalized a TCAC with the MPF and the CVM to settle any potential claims that could be brought in court (ação civil pública) or through administrative proceedings (processo administrativo sancionador) in Brazil. The TCAC has also been approved by the relevant authorities and is fully effective.
Under the TCAC, we acknowledged violations of certain Brazilian laws between 2007 and 2011 and agreed to:
• | Pay a total equivalent to US$20.0 million to a Brazilian federal fund (Fundo de Defesa dos Direitos Difusos), as disgorgement of illegal profits, damages, and as a deterrent against similar practices. The amount payable under the TCAC was deducted from the amount payable under the Final Agreements. |
• | Cooperate with the MPF and the CVM in lawsuits and administrative proceedings against individuals arising out of the acts acknowledged in the TCAC. |
Under the TCAC, the MPF and the CVM acknowledged that (i) we voluntarily conducted a broad internal investigation, which assisted in uncovering facts that were the subject of criminal and administrative investigations, and (ii) we approached the Brazilian authoritiespro-actively and in good faith, and they agreed that:
• | The MPF will not file suit (ação civil públicaandação de improbidade administrativa) against us arising out of the acts we have acknowledged and will terminate proceedings now underway. |
• | The CVM will end an ongoing administrative proceeding arising out of the acts we have acknowledged. |
• | The MPF and the CVM will inform other Brazilian federal agencies of the terms of the TCAC and cooperate with us in seeking that these agencies take the TCAC into consideration should other proceedings regarding the acknowledged acts be brought. |
On February 22, 2017, in compliance with the Final Agreements, we hired the lawyer Alexandre Herman Rene as our external independent monitor, with the approval of the DOJ and the SEC, to assess our compliance with the Final Agreements, especially regarding the effectiveness of controls and procedures to reduce the risk of any FCPA violations. The monitor has been preparing annual reports containing certain observations and recommendations to further improve our anti-corruption and compliance policies and procedures.
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The Final Agreements and the TCAC represent the conclusion of the internal investigation of allegations of noncompliance with the FCPA and certain Brazilian laws in four aircraft sales outside Brazil between 2007 and 2011.
Related proceedings and developments are ongoing and could result in additional fines, and possibly other sanctions and adverse consequences, which may be substantial. We believe that there is no adequate basis at this time for estimating accruals or quantifying any contingency with respect to these matters.
We will continue to cooperate with governmental authorities, as circumstances may require. In this regard, on February 23, 2017, we entered into an Exoneratory Agreement with Mozambican authorities for collaboration with the investigations in that country and under which there are no financial obligations for Embraer. In July 2018 we entered into a collaboration agreement with the Attorney General’s Office of the Dominican Republic in exchange for our cooperation with ongoing investigations in that country and paid US$7.0 million to the Dominican Republic.
Since the beginning of the internal investigation in 2011, we embarked on a comprehensive effort to improve and expand our compliance program worldwide. This multi-year task involved reexamining our compliance systems, and where appropriate, redesigning or adding to them. Some of the key enhancements include the creation of a Compliance Department; the appointment of a Chief Compliance Officer who is currently also our general counsel, which, for these compliance matters, reports directly to the Risk and Audit Committee of the board of directors; the development of a program to monitor engagement of and payments to third parties; improvements to compliance policies, procedure and controls; the enhancement of anonymous and other reporting channels; and the development of a comprehensive training and education program designed to maintain and reinforce a strong compliance culture at all levels of Embraer globally. We will continue to promote enhancements and update its compliance program.
Other Proceedings
In addition, we are involved in other legal proceedings, all of which are in the ordinary course of business.
Our management does not believe that any of our proceedings, if adversely determined, would materially or adversely affect our business, financial condition or results of operations. For further information on our legal proceedings, see notes 21 and 24 to our 2018 audited consolidated financial statements.
Class Action
In August 2016, a putative securities class action was filed in a U.S. court against the Company and certain of its former and current executives. On March 30, 2018, the court granted a motion to dismiss in our favor, and the plaintiffs did not appeal against this decision. Therefore, this class action was dismissed.
Dividends and Dividend Policy
Amounts Available for Distribution
At each annual shareholders’ meeting, the board of directors is required to recommend how net profits for the preceding fiscal year are to be allocated. For purposes of the Brazilian Corporate Law, net profits are defined as net income after income taxes and social contribution taxes for the fiscal year, net of any accumulated losses from prior fiscal years and any amounts allocated to employees’ and management’s participation in our profits, determined under IFRS. In accordance with the Brazilian Corporate Law and our bylaws, the amounts available for dividend distribution are the amounts determined under IFRS in our parent company financial statements. The amount for distribution is equal to our net income after taxes less (or plus):
• | any amounts allocated from the net income after taxes to the legal reserve, and |
• | any amounts allocated from the net income after taxes to a contingency reserve for anticipated losses or the reversion of the reserve constituted on previous fiscal years. |
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For further information on amounts available for distributions, see Note 27 to our 2018 audited consolidated financial statements.
We are required to maintain a legal reserve, to which we must allocate 5% of net profits for each fiscal year until the amount for the reserve equals 20% of our capital stock. However, we are not required to make any allocations to our legal reserve in respect of any fiscal year in which the legal reserve, when added to our other established capital reserves, exceeds 30% of our capital stock. Net losses, if any, may be charged against the legal reserve. The balance of our legal reserve was US$204.4 million, which was equal to 13.1% of our capital stock as of December 31, 2018.
The Brazilian Corporate Law also provides for two additional, discretionary allocations of net profits that are subject to approval by the shareholders at the annual meeting. First, a percentage of net profits may be allocated to a contingency reserve for anticipated losses that are deemed probable in future years. Any amount so allocated in a prior year must be either reversed in the fiscal year for which the anticipated loss was forecasted if the loss does not in fact occur, or written off in the event that the anticipated loss occurs. Second, the amount for distribution may be limited to the fiscal year’s net profit already realized, and the difference between the amounts shall be allocated to an unrealized revenue reserve. Under the Brazilian Corporate Law, unrealized revenue is defined as the sum of:
• | price-level restatement of statement of financial position accounts; |
• | the share of equity earnings of affiliated companies; and |
• | profits from installment sales to be received after the end of the next succeeding fiscal year. |
According to our bylaws and subject to shareholder approval, our board of directors may allocate to an investment and working capital reserve up to 75% of our parent company adjusted net income after taxes under IFRS. The reserve may not exceed 80% of our capital stock. The purpose of the investment and working capital reserve is to make investments in fixed assets or increase our working capital. The balance of the investment and working capital reserve may be used:
• | in the deduction of accumulated losses, whenever necessary; |
• | in the distribution of dividends, at any time; |
• | in the redemption, withdrawal, purchase or open market repurchase of shares, as authorized by law; and |
• | to increase our capital, including by means of an issuance of new shares. |
We may also grant a participation in our net income to our management and employees. However, the allocation to the investment and working capital reserve or the participation of our management and employees cannot reduce the mandatory distributable amount, as discussed below.
Otherwise, the reserved amounts, except for the contingency reserve and the unrealized revenue reserve that exceeds our capital stock must be used to increase our capital or be distributed as a cash dividend.
The amounts available for distribution may be further increased by a reversion of the contingency reserve for anticipated losses constituted in prior years but not realized, or further increased or reduced as a result of the allocations of revenues to or from the unrealized revenue reserve. The amounts available for distribution are determined on the basis of financial statements prepared in accordance with the Brazilian Corporate Law method. We have not established a contingency reserve.
As of December 31, 2018, unappropriated retained earnings of US$2,182.3 million were recorded in our statutory parent company books under IFRS. As of December 31, 2018, the amounts are net of minimum dividends and interest on shareholders’ equity paid or payable, as determined by the Brazilian Corporate Law.
For further dividends information, see Note 27 to our 2018 audited consolidated financial statements.
Mandatory Distribution
The Brazilian Corporate Law generally requires that the bylaws of each Brazilian corporation specify a minimum percentage of the amounts available for distribution by the corporation for each fiscal year that dividends must be distributed to shareholders, also known as the mandatory distributable amount. Under our bylaws, the mandatory distribution is based on a percentage of adjusted net income, not lower than 25%, and not on a fixed monetary amount per share. The Brazilian Corporate Law, however, permits a publicly held company to suspend the mandatory distribution of dividends if the board of directors and fiscal council report presented at the shareholders’ meeting indicate that the distribution would be inadvisable in view of Embraer’s financial condition. This suspension is subject to approval of holders of common shares. In this case, the board of directors shall file a justification for the suspension with the CVM. Profits not distributed by virtue of the suspension will be attributed to a special reserve and, if not absorbed by subsequent losses, will be paid as dividends as soon as the financial condition of the corporation permits the payments.
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Payment of Dividends
We are required by the Brazilian Corporate Law and by our bylaws to hold an annual shareholders’ meeting by the end of the fourth month after the end of each fiscal year at which, among other things, the shareholders have to decide on the payment of an annual dividend. The payment of annual dividends is based on our parent company financial statements prepared under IFRS for the relevant fiscal year. Brazilian companies, including us, are permitted to make a special distribution to shareholders referred to as interest on shareholders’ equity, which may be distributedin lieu of dividends as part of the mandatory distributable amount. Payments of interest on shareholders’ equity are treated as atax-deductible expense for IRPJ and CSLL purposes. Under the Brazilian Corporate Law, dividends generally are required to be paid within 60 days following the date the dividend was declared, unless a shareholders’ resolution sets forth another date of payment, which, in either case, must occur prior to the end of the fiscal year in which the dividend was declared. A shareholder has a three-year period from the dividend payment date to claim dividends (or payments of interest on shareholders’ equity) in respect of its shares, after which the amount of the unclaimed dividends reverts to the Company.
The Brazilian Corporate Law allows a company to pay interim dividends out of preexisting and accumulated profits determined under IFRS for the preceding fiscal year or semester, based on financial statements approved by its shareholders. According to our bylaws, the shareholders may declare, at any time, interim dividends based on the preexisting and accumulated profits, provided that the mandatory dividend has already been distributed to the shareholders. Our bylaws also permit us to prepare financial statements semiannually and for shorter periods. Our board of directors may approve the distribution of dividends calculated with reference to those financial statements, even before they have been approved by the shareholders. However, the dividends cannot exceed the amount of capital reserves.
In general, shareholders who are not residents of Brazil must register with the Central Bank to have dividends, sales proceeds or other amounts with respect to their shares eligible to be remitted outside of Brazil. The common shares underlying our ADSs will be held in Brazil by Banco Itaú S.A., also known as the custodian, as agent for the depositary, which will be the registered owner on the records of the registrar for our shares. Our current registrar is Banco Itaú Corretora de Valores S.A.. The depositary electronically registers the common shares underlying our ADSs with the Central Bank and, therefore, is able to have dividends, sales proceeds or other amounts with respect to these shares eligible to be remitted outside Brazil.
Payments of cash dividends and distributions, if any, will be made in Brazilian currency to the custodian on behalf of the depositary, which will then convert the proceeds into U.S. dollars and will cause the U.S. dollars to be delivered to the depositary for distribution to holders of ADSs. Under current Brazilian law, dividends paid to shareholders who are not Brazilian residents, including the holders of ADSs, will not be subject to Brazilian withholding income tax, except for dividends declared based on profits generated prior to December 31, 1995. For further information on Brazilian taxes, see “Item 10E. Additional Information—Taxation—Material Brazilian Tax Consequences.”
History of Dividend and Interest on Shareholders’ Equity Payments and Dividend Policy
Law No. 9,249, dated December 26, 1995, as amended, provides for distribution of interest on shareholders’ equity as an alternative form of payment to shareholders and treats those payments as a deductible expense for purposes of calculating Brazilian corporate income tax and social contribution on net profits. These distributions may be paid in cash. The interest is limited to the daily pro rata variation of the TJLP (long term interest rate) and cannot exceed the greater of:
• | 50% of net income (after the deduction of social contribution on net profits, but before taking into account the provision for corporate income tax and the amounts attributable to shareholders as net interest on shareholders’ equity) for the period in respect of which the payment is made; or |
• | 50% of the sum of retained profits and profit reserves as of the beginning of the period in respect of which the payment is made. |
Any payment of interest on shareholders’ equity to holders of ADSs or common shares, whether or not they are Brazilian residents, is subject to Brazilian withholding income tax at the rate of 15% or 25% if the beneficiary is resident in a tax haven jurisdiction, that is, a country or location that does not impose any income tax or which imposes the tax at a maximum rate of less than 20%, or in which the domestic legislation imposes restrictions on the disclosure of the shareholding composition or the ownership of the investment. For further information on Brazilian taxes, see “Item 10E. Additional Information—Taxation—Material Brazilian Tax Consequences.” The amount paid to shareholders as interest on shareholders’ equity, net of any withholding tax, may be included as part of any mandatory distributable amount.
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Under Brazilian law, we are obligated to distribute to shareholders an amount sufficient to ensure that the net amount received by them, after payment by us of applicable Brazilian withholding taxes in respect of the distribution of interest on shareholders’ equity, plus the amount of declared dividends, is at least equal to the mandatory distributable amount. When we distribute interest on shareholders’ equity, and that distribution is not accounted for as part of the mandatory distribution, Brazilian withholding tax will apply. All payments to date were accounted for as part of the mandatory distribution.
The following table sets forth the historical payments of dividends and historical payments of interest on shareholders’ equity we have made to our shareholders:
Date of Approval | Period in which Profits were Generated | Total Amount of Distribution | ||||
(in R$ millions) | (in US$ millions)(1) | |||||
April 15, 2015(3) | Full year of 2014 | 16.1 | 6.1 | |||
March 03, 2015(2) | First quarter of 2015 | 29.4 | 9.2 | |||
June 11, 2015(2) | Second quarter of 2015 | 29.4 | 9.5 | |||
August 06, 2015(2) | Third quarter of 2015 | 29.4 | 8.3 | |||
December 10, 2015(2)(4) | Fourth quarter of 2015 | 29.5 | 7.6 | |||
March 10, 2016(2) | First quarter of 2016 | 29.5 | 8.3 | |||
June 9, 2016(2) | Second quarter of 2016 | 29.4 | 9.2 | |||
September 15, 2016(2) | Third quarter of 2016 | 14.7 | 4.5 | |||
March 8, 2017(2) | First quarter of 2017 | 29.4 | 9.3 | |||
April 12, 2017(3) | Full year of 2016 | 75.0 | 23.4 | |||
June 2, 2017(2) | Second quarter of 2017 | 29.4 | 8.9 | |||
September 6, 2017(2) | Third quarter of 2017 | 29.3 | 9.2 | |||
December 14, 2017(2)(5) | Fourth quarter of 2017 | 66.0 | 19.9 | |||
March 5, 2018(2) | First quarter of 2018 | 14.7 | 4.4 | |||
June 14, 2018(2) | Second quarter of 2018 | 14.7 | 3.8 | |||
September 13, 2018(3) | Full year of 2018 | 7.3 | 1.8 | |||
December 14, 2018(3)(6) | Full year of 2018 | 7.4 | 1.9 |
(1) | Translated from nominalreais into U.S. dollars at the selling exchange rates in effect on the last date of the month in which the dividends were approved. |
(2) | Represents interest on shareholders’ equity. |
(3) | Represents dividend payments. |
(4) | Amount declared in 2015 but paid in 2016. |
(5) | Amount declared in 2017 but paid in 2018. |
(6) | Amount declared in 2018 but paid in 2019. |
In 2018, we distributed US$ 11.9 million in interest on shareholders’ equity and interim dividends approved by Statutory Board of Directors in connection with shareholders’ equity reserves. In 2017, we distributed US$47.3 million in interest on shareholders’ equity in connection with profits generated in the year ended December 31, 2017. No dividends were approved for 2016. For further information on mandatory distribution of dividends, see “Item 8A. Financial Information—Mandatory Distribution.”
We intend to declare and pay dividends and/or interest on shareholders’ equity, as required by the Brazilian Corporate Law and our bylaws. Our board of directors may approve the distribution of dividends and/or interest on shareholders’ equity, calculated based on our semiannual or quarterly financial statements. The declaration of annual dividends, including dividends in excess of the mandatory distribution, requires approval by the vote of the majority of the holders of our common shares. The amount of any distributions will depend on many factors, including our results of operations, financial condition, cash requirements, prospects and other factors deemed relevant by our board of directors and shareholders. Within the context of our tax planning, we may in the future continue to determine that it is in our benefit to distribute interest on shareholders’ equity.
8B. | Significant Changes |
No significant changes or events have occurred after the close of the statement of financial position date as of December 31, 2018, other than the events already described in this annual report.
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ITEM 9. | THE OFFER AND LISTING |
9A. | Offer and Listing Details |
Our ADSs are listed on the New York Stock Exchange, or NYSE, under the symbol “ERJ.” In addition, our common shares are traded on the B3 under the symbol “EMBR3.” Each ADS represents four common shares.
Our ADSs began trading on the NYSE on June 5, 2006, with each ADS representing four common shares issued by us. The ADSs are issued under a deposit agreement and JPMorgan Chase Bank N.A., or JP Morgan, serves as depositary under that agreement.
9B. | Plan of Distribution |
Not applicable.
9C. | Markets |
Trading on the B3
In 2000, the São Paulo Stock Exchange, currently called the B3, was reorganized through the execution of memoranda of understanding by the Brazilian stock exchanges. Under the memoranda, all securities are now traded only on the B3, with the exception of electronically traded public debt securities and privatization auctions, which are traded on the Rio de Janeiro Stock Exchange.
Our common shares are listed and traded on theNovo Mercado segment of the B3. Trades in our common shares on the B3 settle in three business days after the trade date. Delivery of and payment for shares is made through the facilities of theCBLC—Companhia Brasileira de Liquidação e Custódia (clearinghouse for the B3), which maintains accounts for member brokerage firms.
In order to better control volatility, the B3 adopted a “circuit breaker” system pursuant to which trading sessions may be suspended for a period of 30 minutes or one hour whenever the indices of this stock exchange fall below the limit of 10% and 15%, respectively, in relation to the closing value of the index registered in the previous trading session.
The B3 is less liquid than the NYSE and other major exchanges in the world. The B3 had an aggregate market capitalization of approximately R$3.6 trillion, equivalent to US$916billion as of December 31, 2018. In comparison, the NYSE had a market capitalization of approximately US$20.7 trillion on the same date. Although any of the outstanding shares of a listed company may trade on the B3, in most cases less thanone-half of the listed shares are actually available for trading by the public, the remainder being held by small groups of controlling persons, by governmental entities or by one principal shareholder. As of December 31, 2018, we accounted for approximately 0.5% of the market capitalization of all listed companies on the B3.
There is also significantly greater concentration in the Brazilian securities markets than in the NYSE or other major exchanges. During theone-year period ended December 31, 2018, the ten largest companies listed on the B3 represented approximately 46.0% of the total market capitalization of all listed companies.
Trading on the B3 bynon-residents of Brazil is subject to limitations under Brazilian foreign investment legislation.
Novo Mercado Corporate Governance Practices
In 2000, the B3 introduced three special listing segments, known as Levels 1 and 2 of Differentiated Corporate Governance Practices and theNovo Mercado, aiming at fostering a secondary market for securities issued by Brazilian companies with securities listed on the B3, by prompting these companies to follow good practices of corporate governance. The listing segments were designed for the trading of shares issued by companies voluntarily undertaking to abide by corporate governance practices and disclosure requirements in addition to those already imposed by Brazilian law. These rules generally increase shareholders’ rights and enhance the quality of information provided to shareholders.
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To become a Level 1 (Nível 1) company, in addition to the obligations imposed by current Brazilian law, an issuer must agree to (i) ensure that shares of the issuer representing 25% of its total capital are effectively available for trading, (ii) adopt offering procedures that favor widespread ownership of shares whenever making a public offering, (iii) comply with minimum quarterly disclosure standards, (iv) follow stricter disclosure policies, with regards to contracts with related parties, material contracts and transactions made by controlling shareholders, directors and officers involving securities issued by the issuer, (v) submit any existing shareholders’ agreements and stock option plans to the B3 and (vi) make a schedule of corporate events available to shareholders.
To become a Level 2 (Nível 2) company, in addition to the obligations imposed by current Brazilian law, an issuer must agree to (i) comply with all of the listing requirements for Level 1 companies, (ii) granttag-along rights for all shareholders in connection with a transfer of control of the company, offering the same price paid per share for controlling block, (iii) grant voting rights to holders of common shares in connection with certain corporate restructurings and related party transactions, including (1) any transformation of the company into another corporate form, (2) any merger, consolidation orspin-off of the company, (3) approval of any transactions between the company and its controlling shareholder, including parties related to the controlling shareholder, (4) approval of any valuation of assets to be delivered to the company in payment for shares issued in a capital increase, (5) appointment of an expert firm to ascertain the fair value of the company in connection with any deregistration and delisting tender offer, and (6) any changes to these voting rights, (iv) have a board of directors composed of at least five members, of which 20% must be independent directors, with a term limited to two years, (v) prepare annual financial statements in English, including cash flow statements, in accordance with international accounting standards, such as U.S. GAAP or IFRS, (vi) if it elects to delist from the Level 2 segment, hold a tender offer by the company’s controlling shareholder (the minimum price of the shares to be offered will be determined by an appraisal process), and (vii) adhere exclusively to the rules of the B3 Arbitration Chamber for resolution of disputes between the company and its investors.
To be listed on theNovo Mercado, an issuer must meet all of the requirements described above, in addition to (i) issuing only voting shares, (ii) have at least two, or the equivalent of 20% of the board members, whichever is bigger, independent members on the board of directors, with a term limited to two years, (iii) follow stricter disclosure policies with regards to the company’s policies, the internal rules of procedures, the code of business conduct and periodic reports of the audit committee, and (iv) adopt stricter compliance procedures, including an audit committee, an internal audit and other risk management controls. Regarding the obligation to ensure that shares of the issuer representing 25% of its total capital are effectively available for trading, for the companies listed on theNovo Mercado,the threshold might be reduced to 15% of its capital stock, provided its average daily trading volume remains equal to or greater than R$25.0 million, taking into account the trades performed during the previous 12 months. Our shares are listed on theNovo Mercado segment.
Regulation of Brazilian Securities Markets
The Brazilian securities markets are regulated by the CVM (the Brazilian Securities and Exchange Comission), which has regulatory authority over stock exchanges and the securities markets generally, and by the Central Bank, which has, among other powers, licensing authority over brokerage firms and regulates foreign investment and foreign exchange transactions.
Under the Brazilian Corporate Law, a corporation is either public (companhia aberta), like us, or closely held (companhia fechada). All public companies, including us, are registered with the CVM and are subject to reporting requirements. Our shares are listed and traded on theNovo Mercado segment of the B3 and may be traded privately subject to limitations.
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We have the option of asking for the trading of our securities on the B3 to be suspended in anticipation of a material announcement. Trading may also be suspended on the initiative of the B3 or the CVM, among other reasons, based on or due to a belief that the company has provided inadequate information regarding a material event or has provided inadequate responses to the inquiries by the CVM or the B3.
Trading on the B3 bynon-residents of Brazil is subject to limitations under Brazilian foreign investment and tax legislation. The Brazilian custodian for our common shares and the depositary for our ADSs have obtained an electronic certificate of registration from the Central Bank to remit U.S. dollars abroad for payments of dividends, any other cash distributions, or upon the disposition of the shares and sales proceeds thereto. Pursuant to CMN Resolution No. 4,373, in order for an investor to surrender ADSs for the purpose of withdrawing the shares represented thereby, the investor is required to appoint a Brazilian financial institution duly authorized by the Central Bank and the CVM to act as its legal representative, who shall be responsible, among other things, for keeping and updating the investors’ certificates of registrations with the Central Bank, which entitles registered foreign investors to trade the underlying shares directly on the B3.
Disclosure Requirements
Pursuant to CVM Rule No. 358, of January 3, 2002, the CVM revised and consolidated the requirements regarding the disclosure and use of information related to material facts and acts of publicly held companies, including the disclosure of information on the trading and acquisition of securities issued by publicly held companies.
These requirements include provisions that:
• | establish the concept of a material fact that gives rise to reporting requirements. Material facts include decisions made by the controlling shareholders, resolutions of the general meeting of shareholders and of management of the company, or any other facts related to the company’s business (whether occurring within the company or otherwise somehow related thereto) that may influence the price of its publicly traded securities, or the decision of investors to trade those securities or to exercise any of those securities’ underlying rights; |
• | specify examples of facts that are considered to be material, which include, among others, the execution of shareholders’ agreements providing for the transfer of control, the entry or withdrawal of shareholders that maintain any managing, financial, technological or administrative function with or contribution to the company, and any corporate restructuring undertaken among related companies; |
• | oblige the investor relations officer, controlling shareholders, other officers, directors, members of the audit committee and other advisory boards to disclose material facts; |
• | require simultaneous disclosure of material facts to all markets in which the corporation’s securities are admitted for trading; |
• | require the acquirer of a controlling stake in a corporation to publish material facts, including its intentions as to whether or not tode-list the corporation’s shares, within one year; |
• | establish rules regarding disclosure requirements in the acquisition and disposal of a material stockholding stake; and |
• | restrict the use of insider information. |
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9D. | Selling Shareholders |
Not applicable.
9E. | Dilution |
Not applicable.
9F. | Expenses of the Issue |
Not applicable.
ITEM 10. | ADDITIONAL INFORMATION |
Not applicable.
10B. | Memorandum and Articles of Association |
Set forth below is certain information concerning our capital stock, and a brief summary of certain significant provisions of our bylaws, the Brazilian Corporate Law, the relevant rules and regulations of the CVM, and the relevant rules of theNovo Mercado applicable to our capital stock. This description does not purport to be complete and is qualified by reference to our bylaws and to Brazilian law.
Corporate Purpose
We are a corporation duly incorporated with a principal place of business and jurisdiction in the city of São José dos Campos, São Paulo, Brazil, governed mainly by our bylaws and the Brazilian Corporate Law. According to article I of our bylaws, our corporate purpose is to (i) design, build and market aircraft and aerospace materials and related accessories, components and equipment, according to the highest standards of technology and quality, (ii) perform and carry out technical activities related to the manufacturing and servicing of aerospace materials, (iii) contribute to the training of technical personnel as necessary for the aerospace industry, (iv) engage in other technological, manufacturing and business activities in connection with the aerospace industry, and to provide services therefore, (v) design, build and trade equipment, materials, systems, software, accessories and components for the defense, security and power industries, as well as to perform and carry out technical activities related to the manufacturing and maintenance activities, according to the highest standards of technology and quality, and (vi) conduct other technological, manufacturing and trade activities and services related to the defense, security and power industries.
Description of Capital Stock
General
As of December 31, 2018, our capital stock consisted of a total of 740,465,044 common shares, without par value, including 4,977,698 common shares held in treasury and one special class of common share known as the “golden share,” held by the Brazilian government. Our bylaws authorize the board of directors to increase the capital stock up to 1,000,000,00 common shares without seeking specific shareholder approval. All of our 735, 482,105 outstanding shares are fully paid. Our shareholders must approve at a shareholders’ meeting any capital increase that exceeds the above-referenced authorized amounts. Our shareholders are not liable for further capital calls. Their liability is limited to the amount of any portion of our capital which they have subscribed but not fully paid in.
Share Buyback
Pursuant to our bylaws, our board of directors approved on December 7, 2007 a share buyback program for our common shares, in compliance withInstrução CVM No. 10/80, for the purpose of adding value to our shareholders through the management of our capital structure. We were authorized to buy back up to an aggregate of 16,800,000 common shares, representing approximately 2.3% of our outstanding capital, which totaled 740,465,044 common shares outstanding. The acquisition of the shares was made on the B3 and the common shares bought back will be kept in treasury form, and the treasury shares would not have any political or economic rights. The program was terminated on March 31, 2008. A total of 16,800,000 shares were purchased at an average price of R$19.06 per share. See “Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers.”
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On March 10, 2016, our board of directors approved a new share buyback program for our common shares, in compliance withInstrução CVM No. 10/80. We were authorized to buy back up to an aggregate of 3,000,000 common shares, representing approximately 0.4% of our outstanding capital, which totaled 737,439,054 common shares outstanding on March 10, 2016.The common shares were repurchased from March 17 through June 30.
On June 02, 2017, our board of directors approved a new share buyback program for our common shares, in compliance withInstruçãoCVM No. 10/80. We were authorized to buy back up to an aggregate of 3,000,000 common shares, representing approximately 0.4% of our outstanding capital, which totaled 735,752,704 common shares outstanding on June 2, 2017. The common shares were repurchased from June 6 through August 29, 2017.
In 2018, we did not approve a share buyback program.
Common Shares
Each common share is generally empowered with one vote at our shareholders’ meetings. Pursuant to our bylaws and the B3 listing agreement in connection with the listing of our shares on theNovo Mercado, we cannot issue shares without voting rights or with restricted voting rights.
The Brazilian Corporate Law and our bylaws require that all our shareholders’ meetings be called by publication of a notice in theDiário Oficialdo Estado de São Paulo (official government publication of the State of São Paulo), and in a newspaper of general circulation in the city where our headquarters are located, currently the O Vale in São José dos Campos, at least 30 days prior to the meeting, and in another newspaper of general circulation in São Paulo, where the São Paulo Stock Exchange is located, currently theValor Econômico. The quorum to hold shareholders’ meetings at first call is the presence of shareholders representing 25% of the common shares; and at second call the meeting can be held with the presence of any number of shareholders.
According to our bylaws, in order to attend a shareholders’ meeting, a shareholder must show the ownership of the shares it intends to vote by showing an identification document and a proof of share ownership. Our shareholders may be represented at shareholders’ meetings by a proxy, issued within aone-year period prior to the meeting to (1) one of our directors or officers, (2) a lawyer or (3) a financial institution. Notwithstanding the above, the CVM decided on November 4, 2014 that shareholders that are legal entities may be represented at shareholders’ meetings by their legal representatives or by a duly appointedattorney-in-fact, pursuant to the bylaws and related corporate instruments of the legal entities and pursuant to the Brazilian Civil Code. Investment funds must be represented by their administrator.
Alternatively, the shareholders might participate in a shareholders’ meetings through a remote voting mechanism, which is regulated by CVM Rule No. 561, as amended, and aims to facilitate the participation of shareholders in general meetings either through the vote or through the submission of proposals and candidates for the election of members of the Board of Directors or Fiscal Council. For this purpose, this regulation provided the following:
• | the creation of a remote voting bulletin through which shareholders may exercise their right to vote prior to the date the shareholders’ meeting is held; |
• | the possibility of inclusion of candidates and proposals of deliberation of minority shareholders in that bulletin, with due observance of certain percentages of equity interest, in order to facilitate shareholders’ participation in shareholders’ meetings; and |
• | the deadlines, procedures and ways of sending this bulletin, which may be forwarded by the shareholder: (a) to the custodian (if the shares held by the shareholder are kept at a centralized deposit) or; (b) to the book-entry agent of the shares issued by the company (if such shares are not kept at a centralized deposit); or (c) directly to the company. |
According to the Brazilian Corporate Law, the common shares are entitled to dividends in proportion to their share of the amount available for distribution. For further information on payment of dividends on our shares, see “Item 8A. Financial Information—Consolidated Statements and Other Financial Information—Dividends and Dividend Policy.” In addition, upon any liquidation of the company, the common shares are entitled to return of capital in proportion to their share of our shareholders’ equity.
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According to the Brazilian Corporate Law, neither our bylaws nor actions taken at a shareholders’ meeting may deprive a shareholder of the following rights:
• | the right to participate in the distribution of profits; |
• | the right to participate equally and proportionally in any remaining residual assets in the event of liquidation of the company; |
• | preemptive rights in the event of issuance of shares, convertible debentures or warrants, except in some specific circumstances under Brazilian law described in “Item 10D. Preemptive Rights”; |
• | the right to supervise our management in accordance with Article 109 of the Brazilian Corporate Law; and |
• | the right to appraisal rights in the cases specified in the Brazilian Corporate Law, which are described in “Item 10D. Redemption and Right of Withdrawal.” |
Golden Share
The golden share is held by the Federative Republic of Brazil. For a discussion of the rights to which the golden share is entitled, see “Item 10B. Voting Rights of Shares—Golden Share.”
Voting Rights of Shares
Each common share is generally empowered with one vote at general shareholders’ meeting. Pursuant to our bylaws and the B3 listing agreement in connection with the listing of our shares on theNovo Mercado, we cannot issue shares without voting rights or with restricted voting rights.
Limitations on the Voting Rights of Certain Holders of Common Shares
Our bylaws provide that, at any shareholders’ meeting, no shareholder or group of shareholders, including brokers acting on behalf of one or more holders of ADSs, may exercise votes representing more than 5% of the quantity of shares into which our capital stock is divided. Votes that exceed this 5% threshold will not be considered.
For purposes of our bylaws, two or more of our shareholders are considered to be a “group of shareholders” if:
• | they are parties to a voting agreement; |
• | one of them is, directly or indirectly, a controlling shareholder or controlling parent company of the other, or the others; |
• | they are companies directly or indirectly controlled by the same person/entity, or group of persons/entities, which may or may not be shareholders; or |
• | they are companies, associations, foundations, cooperatives and trusts, investment funds or portfolios, universalities of rights or any other forms of organization or undertaking (i) with the same administrators or managers, or further (ii) whose administrators or managers are companies that are directly or indirectly controlled by the same person/entity, or group of persons/entities, which may or may not be shareholders. |
In the case of investment funds having a common administrator, only funds with policies of investment and of exercise of voting rights at shareholders’ meetings that fall under the responsibility of the administrator on a discretionary basis will be considered to be a group of shareholders.
In addition, shareholders represented by the same proxy, administrator or representative on any account at any shareholders’ meeting will be considered to be a group of shareholders, except for holders of our ADSs when represented by the relevant depositary. All signatories to a shareholders’ agreement that addresses the exercise of voting rights will also be considered to be a group of shareholders for purposes of the foregoing limitation.
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This limitation on the voting rights of certain holders of common shares is illustrated in the following table:
Equity Interest of Shareholder or Group of Shareholders | Voting Rights as a Percentage of our Capital Stock | |
1% | 1% | |
2% | 2% | |
3% | 3% | |
4% | 4% | |
5% | 5% | |
> 5% | 5% |
Limitation on the Voting Rights ofNon-Brazilian Shareholders
In accordance with theedital (invitation to bid) issued by the Brazilian government in connection with the privatization of Embraer in 1994, voting participation ofnon-Brazilian holders of Embraer common shares was limited to 40% of Embraer common shares votes at shareholders’ meeting.
Our bylaws provide that, at any shareholders’ meeting,non-Brazilian shareholders and groups ofnon-Brazilian shareholders may not exercise voting rights representing more thantwo-thirds of the total votes of all of the Brazilian shareholders present at the meeting. The total number of votes that may be exercised by Brazilian shareholders and bynon-Brazilian shareholders will be assessed after giving effect to the 5% voting limitation described above in “Item 10B. Limitation on the Voting Rights of Certain Holders of Common Shares.” Votes ofnon-Brazilian shareholders that exceed thistwo-thirds threshold will not be considered. If the total vote ofnon-Brazilian shareholders at any shareholders’ meeting exceedstwo-thirds of the votes that may be exercised by the Brazilian shareholders present at such meeting, the number of votes of eachnon-Brazilian shareholder will be proportionately reduced so that the total vote ofnon-Brazilian shareholders does not exceedtwo-thirds of the total votes that can be exercised by Brazilian shareholders present at the shareholders’ meeting.
The fraction oftwo-thirds effectively limits the voting rights ofnon-Brazilian shareholders and groups ofnon-Brazilian shareholders to 40% of share capital represented at the shareholders’ meeting. The objective of this limitation is to ensure that Brazilian shareholders constitute a majority of the total votes cast at any shareholders’ meeting. This limitation will effectively prevent our takeover bynon-Brazilian shareholders and limit the ability ofnon-Brazilian shareholders to control us.
For purposes of our bylaws, the following are considered to be “Brazilian shareholders”:
• | Brazilian individuals, whether native or naturalized, resident in Brazil or abroad; |
• | legal private entities organized under the laws of Brazil that have their administrative head offices in Brazil and (i) do not have a foreign controlling parent company, unless the parent company meets the requirements of clause (ii) of this item, and (ii) are controlled, directly or indirectly, by one or more Brazilian individuals, whether native or naturalized, resident in Brazil or abroad; and |
• | investment funds or clubs organized under the laws of Brazil that have their administrative head office in Brazil and whose managers and/or investors holding the majority of their equity interests are persons/entities referred to above. |
A Brazilian shareholder will be required to provide evidence to us and the depositary agent for the book-entry registry that such shareholder satisfies the foregoing requirements and only after this evidence is given will the shareholder be included in the records of Brazilian shareholders.
For purposes of our bylaws,“non-Brazilian shareholders” are any individuals, legal entities, investment funds or clubs and any other organizations that are not considered Brazilian shareholders and that cannot evidence that they satisfy the requirements to for registration as Brazilian shareholders, according to our bylaws.
A “group of shareholders,” as defined above, will be considered to benon-Brazilian whenever one or more of its members is anon-Brazilian shareholder.
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The effect of this limitation on the voting rights ofnon-Brazilian shareholders (i.e., their participation) is illustrated in the following table, where the column“Non-Brazilian Shareholder Participation” indicates the maximum percentage of votes anon-Brazilian shareholder may cast:
Brazilian Shareholder Participation | Non-Brazilian Shareholder Participation | Non-Brazilian Shareholder Participation(1) | ||
(% of capital stock) | (% of capital stock) | (%) | ||
90 | 10 | 10.00 | ||
80 | 20 | 20.00 | ||
70 | 30 | 30.00 | ||
60 | 40 | 40.00 | ||
59 | 41 | 39.33 | ||
50 | 50 | 33.33 | ||
40 | 60 | 26.67 | ||
30 | 70 | 20.00 | ||
20 | 80 | 13.33 | ||
10 | 90 | 6.67 |
(1) | Number of votes calculated based ontwo-thirds of the Brazilian shareholders’ votes. |
The tables below illustrate, in different situations, the voting system that will apply at our shareholders’ meetings.
Example 1
All Brazilian shareholders hold less than 5% andnon-Brazilian shareholders hold a total of 40%, but without any individual holdings higher than 5%. This example shows a situation where the general restriction fornon-Brazilian shareholders does not affect the voting ratio.
Shareholder | % Shares Attending | Effective % of Votes After 5% Vote Restriction | Effective % of Votes After Non-Brazilian Restriction | % of Valid Votes | Vote Ratio (Votes/Share) | |||||
Brazilian A | 5 | 5 | 5 | 5 | 1.00 | |||||
Brazilian B | 5 | 5 | 5 | 5 | 1.00 | |||||
Brazilian C | 5 | 5 | 5 | 5 | 1.00 | |||||
Brazilian D | 5 | 5 | 5 | 5 | 1.00 | |||||
Brazilian E | 5 | 5 | 5 | 5 | 1.00 | |||||
Brazilian F | 5 | 5 | 5 | 5 | 1.00 | |||||
Brazilian G | 5 | 5 | 5 | 5 | 1.00 | |||||
Brazilian H | 5 | 5 | 5 | 5 | 1.00 | |||||
Brazilian I | 5 | 5 | 5 | 5 | 1.00 | |||||
Brazilian J | 5 | 5 | 5 | 5 | 1.00 | |||||
Brazilian K | 5 | 5 | 5 | 5 | 1.00 | |||||
Brazilian L | 5 | 5 | 5 | 5 | 1.00 | |||||
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Total Brazilians | 60 | 60 | 60 | 60 | 1.00 | |||||
Non-Brazilians(1) | 40 | 40 | 40 | 40(2) | 1.00 | |||||
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Total | 100 | 100 | 100 | 100 | 1.00 | |||||
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(1) | Assumes that no individualnon-Brazilian shareholder holds more than 5% of our capital. If anon-Brazilian shareholder holds more than 5% of our capital, this shareholder will also be subject to the 5% voting restriction on such holding. |
(2) | Two-thirds of 60 (total votes of the Brazilian shareholders after application of the 5% voting restriction) equals 40 votes. |
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Example 2
One Brazilian shareholder holds more than 5% of our capital, the other Brazilian shareholders hold 5% andnon-Brazilian shareholders hold a total of 50%, but without any individual holdings higher than 5%.
Shareholder | % Shares Attending | Effective % of Votes After 5% Vote Restriction | Effective % of Votes After Non-Brazilian Restriction | % of Valid Votes | Vote Ratio (Votes/Share) | |||||
Brazilian A | 20 | 5 | 5.0 | 8.57 | 0.25 | |||||
Brazilian B | 5 | 5 | 5.0 | 8.57 | 1.00 | |||||
Brazilian C | 5 | 5 | 5.0 | 8.57 | 1.00 | |||||
Brazilian D | 5 | 5 | 5.0 | 8.57 | 1.00 | |||||
Brazilian E | 5 | 5 | 5.0 | 8.57 | 1.00 | |||||
Brazilian F | 5 | 5 | 5.0 | 8.57 | 1.00 | |||||
Brazilian G | 5 | 5 | 5.0 | 8.57 | 1.00 | |||||
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Total Brazilians | 50 | 35 | 35.0 | 59.99 | 1.00 | |||||
Non-Brazilians(1) | 50 | 50 | 23.3(2) | 40.00 | 0.47 | |||||
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Total | 100 | 85 | 58.3(2) | 100.00 | 0.58 | |||||
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(1) | Assumes that no individualnon-Brazilian shareholder holds more than 5% of our capital. If anon-Brazilian shareholder holds more than 5% of our capital, this shareholder will also be subject to the 5% voting restriction on the holding. |
(2) | Two-thirds of 35 (total votes of the Brazilian shareholders after application of the 5% voting restriction) equals 23 votes. |
Example 3
No Brazilian shareholders hold more than 5% of our capital, anon-Brazilian shareholder holds 30% and othernon-Brazilian shareholders hold a total of 40%, but without any individual holdings higher than 5%.
Shareholder | % Shares Attending | Effective % of Votes After 5% Vote Restriction | Effective % of Votes After Non-Brazilian Restriction | % of Valid Votes | Vote Ratio (Votes/Share) | |||||
Brazilian A | 5 | 5 | 5.0 | 10.0 | 1.00 | |||||
Brazilian B | 5 | 5 | 5.0 | 10.0 | 1.00 | |||||
Brazilian C | 5 | 5 | 5.0 | 10.0 | 1.00 | |||||
Brazilian D | 5 | 5 | 5.0 | 10.0 | 1.00 | |||||
Brazilian E | 5 | 5 | 5.0 | 10.0 | 1.00 | |||||
Brazilian F | 5 | 5 | 5.0 | 10.0 | 1.00 | |||||
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Total Brazilians | 30 | 30 | 30.0 | 60.0 | 1.00 | |||||
Non-Brazilians A | 30 | 5 | 2.2(2) | 4.4 | 0.07 | |||||
Non-Brazilians(1) | 40 | 40 | 17.8(2) | 35.6 | 0.44 | |||||
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Total | 100 | 75 | 50.0 | 100.0 | 0.50 | |||||
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(1) | Assumes that no individualnon-Brazilian shareholder (exceptNon-Brazilian A) holds more than 5% of our capital. If anon-Brazilian shareholder holds more than 5% of our capital, this shareholder will also be subject to the 5% voting restriction on the holding. |
(2) | Two-thirds of 30 (total votes of the Brazilian shareholders after application of the 5% voting restriction) equals 20 votes, proportionally divided betweenNon-Brazilian A and the othernon-Brazilians. |
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Example 4
Two Brazilian shareholders holding more than 5% of our capital, three Brazilian shareholders holding 5% andnon-Brazilian shareholders holding a total of 30%, but without individual holdings higher than 5%.
Shareholder | % Shares Attending | Effective % of Votes After 5% Vote Restriction | Effective % of Votes After Non-Brazilian Restriction | % of Valid Votes | Vote Ratio (Votes/Share) | |||||||||||||||
Brazilian A | 30 | 5 | 5.0 | 12 | 0.17 | |||||||||||||||
Brazilian B | 25 | 5 | 5.0 | 12 | 0.20 | |||||||||||||||
Brazilian C | 5 | 5 | 5.0 | 12 | 1.00 | |||||||||||||||
Brazilian D | 5 | 5 | 5.0 | 12 | 1.00 | |||||||||||||||
Brazilian E | 5 | 5 | 5.0 | 12 | 1.00 | |||||||||||||||
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Total Brazilians | 70 | 25 | 25.0 | 60 | 1.00 | |||||||||||||||
Non-Brazilians(1) | 30 | 30 | 16.7 | (2) | 40 | 0.56 | ||||||||||||||
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Total | 100 | 55 | 41.7 | 100 | 0.42 | |||||||||||||||
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(1) | Assumes that no individualnon-Brazilian shareholder (exceptNon-Brazilian A) holds more than 5% of our capital. If anon-Brazilian shareholder holds more than 5% of our capital, this shareholder will also be subject to the 5% voting restriction on the holding. |
(2) | Two-thirds of 25 (total votes of the Brazilian shareholders after application of the 5% voting restriction) equals 16.7 votes. |
Shareholders’ Agreement
Our bylaws prohibit any shareholder or group of shareholders from exercising voting control over us.
Golden Share
The golden share is held by the Federative Republic of Brazil. The golden share is entitled to the same voting rights as the holders of common shares. In addition, the golden share entitles the holder thereof to veto rights over the following corporate actions:
• | change of our name and corporate purpose; |
• | modification and/or application of our logo; |
• | creation and/or alteration of military programs (whether or not involving Brazil); |
• | development of third party skills in technology for military programs; |
• | discontinuance of the supply of spare parts and replacement parts for military aircraft; |
• | transfer of our control; |
• | any amendments to the list of corporate actions over which the golden share carries veto rights, including the right of the Brazilian government to appoint one acting member to our board of directors and the right of our employees to appoint two acting members to our board of directors and to the rights conferred to the golden share; and |
• | changes to certain provisions of our bylaws pertaining to voting restrictions, rights of the golden share and the mandatory tender offer requirements applicable to holders of 35% or more of our outstanding shares. |
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The matters listed above are subject to prior approval by our board of directors, followed by prior notices to the Brazilian government and to the Brazilian Ministry of Finance. Within 30 days from the notice, the Brazilian government, as holder of the golden share, may exercise its veto rights. After such period or the pronouncement from the Brazilian government, the board of directors shall meet. In case of rejection of the Brazilian government, the board of directors shall reconsider the previous resolution. In case of approval or in the absence of a response from the Brazilian government within the 30 day period, the previous resolution will be ratified and will be deemed to have been approved by our board of directors. In certain cases, pursuant to our bylaws or applicable law, the matter must be subject to approval at a shareholders’ meeting, and the Brazilian government shall also be entitled to exercise its veto rights related to that matter.
Disclosure of Significant Interest
Brazilian Requirements
Brazilian law provides that all shareholders or groups of shareholders will be required to disclose, through notice to us and to the stock exchanges on which our securities are traded, the negotiation of securities that results in the shareholder surpassing or decreasing the thresholds of 5%, 10%, 15%, and so on, of participation in a certain class or type of share representative of a company’s capital stock. In addition, our bylaws provide that all shareholders or groups of shareholders will be required to disclose, through notice to us and to the stock exchanges on which our securities are traded, the acquisition of shares that, together with those already held by them, exceed 5% of our capital stock. A violation of these disclosure obligations could result in the suspension of rights, including voting rights, by a resolution of shareholders at a shareholders’ meeting.
Certain U.S. Legal Requirements
In addition, the U.S. Exchange Act imposes reporting requirements on shareholders or groups of shareholders who acquire beneficial ownership (as this term is defined underRule 13d-3 of the U.S. Exchange Act) of more than 5% of our common shares. In general, shareholders must file, within ten days after the acquisition, a report of beneficial ownership with the SEC containing the information prescribed by the regulations under the U.S. Exchange Act. This information is also required to be sent to us and to each U.S. securities exchange on which our common shares are traded. Shareholders should consult with their own legal advisor regarding their reporting obligations under the U.S. Exchange Act.
Form and Transfer
As our shares are in registered book-entry form, the transfer of shares is governed by the rules of Article 35 of the Brazilian Corporate Law. This Article provides that a transfer of shares is effected by an entry made by Banco Itaú S.A., also known as the registrar, in its books, by debiting the share account of the transferor and crediting the share account of the transferee. Banco Itaú S.A. also performs all the services of safe-keeping and transfer of shares and related services for us.
Transfers of shares by anon-Brazilian shareholder are made in the same way and entered into by that shareholder’s local agent on the shareholder’s behalf except that if the original investment was registered with the Central Bank pursuant to Resolution No. 4,373, the foreign investor must also seek amendment, if necessary, through its local agent, of the electronic registration to reflect the new ownership.
The B3 operates as a central clearing system. A holder of our shares may choose, in its discretion, to participate in this system and all shares elected to be put into this system will be deposited in the custody of the B3 (through a Brazilian institution duly authorized to operate by the Central Bank and having a clearing account with the B3). The fact that those shares are held in the custody of the B3 will be reflected in our register of shareholders. Each participating shareholder will, in turn, be registered in our register of beneficial shareholders maintained by the B3 and will be treated in the same way as registered shareholders.
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Board of Directors
According to the Brazilian Corporate Law, our officers and directors are prohibited from voting on, or acting in, matters in which their interests conflict with ours.
Our bylaws provide that the shareholders are responsible for determining the global remuneration of the members of our management bodies. Our board of directors is responsible for dividing the remuneration among the members of management. There are no specific provisions regarding the directors’ power to vote on their compensation in the absence of an independent quorum.
With respect to the borrowing powers of the board of directors, the board of directors has the power to authorize the borrowing of funds, either in the form of bonds, notes, commercial papers or other instruments of regular use in the market. Other financing arrangements, including bank loans, may be entered into by us upon the joint signatures of (i) two executive officers, (ii) one officer and oneattorney-in-fact or (iii) twoattorneys-in-fact.
There is no requirement under the Brazilian Corporate Law or our bylaws that directors retire upon reaching a certain age. In addition, our bylaws do not provide for there-election of directors at staggered intervals.
For further information on our board of directors, see “Item 6A. Directors, Senior Management and Employees—Directors and Senior Management—board of directors” and “Item 6C. Directors, Senior Management and Employees—Board Practices.”
Election of Board of Directors
The election of members of our board of directors, absent a request to adopt a cumulative voting system, will be conducted under a system of slate voting whereby voting will be based on a slate of directors and no voting will be allowed on individual candidates. Our board of directors is appointed by our shareholders for atwo-year term and three reserved seats as follows: (i) one acting member (and his or her alternate) to be appointed by the Brazilian government, as holder of the “golden share” and (ii) two acting members (and his or her alternate) to be appointed by our employees. The remaining eight acting directors are elected in accordance with the slate voting or cumulative voting rules contained in our bylaws. A person may participate in two or more different slates. Each shareholder may only vote on one slate and the slate that receives the highest number of votes shall be declared elected.
Any shareholder or group of shareholders has a right to propose and submit a slate of members for election to the board of directors different than the slate provided according to our bylaws (i.e. proposed by the board of directors). The same shareholder or group of shareholders may not submit more than one slate. Our bylaws also contain a provision whereby a shareholder that intends to appoint an alternative slate must send written notice at least ten days prior to the general meeting at which the members of the board of directors will be elected, providing us with the name and other particulars and professional resume of the candidates. In case we receive this notice, we must publish a press release to our shareholders, that also has to be available on our website, within at least eight days before the date of the general meeting, informing shareholders how to obtain a copy of the proposed slate.
Alternatively, the election of members of the board of directors may be conducted under a system of cumulative voting. According to the regulations of the CVM and to our bylaws, adoption of a resolution for cumulative voting depends on a written request by shareholders representing at least 5% of our capital stock, submitted at least 48 hours in advance of the time for which the general shareholders’ meeting has been called. Under the cumulative voting system, each share is entitled to the same number of votes as the number of board members to be elected (subject to the restriction on shareholders holding greater than 5% of the common shares and restrictions onnon-Brazilian shareholders as per ourby-laws), and each shareholder is entitled to concentrate votes in just one member or to distribute the votes among more than one or all of the members. Any vacant offices not filled due to a tie in the voting will be subject to a new vote, under the same process.
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Preemptive Rights
Each of our shareholders has a general preemptive right to subscribe for shares in the event of any capital increase, or securities convertible into shares, in proportion to its shareholding, except in the event of the grant and exercise of any option to acquire shares of our capital stock. A period of at least 30 days following the publication of notice of the issuance of shares or securities convertible into shares is allowed for exercise of the right, and the right is negotiable. According to the Brazilian Corporate Law and our bylaws, the board of directors may, in its discretion, eliminate the preemptive rights of the shareholders in the event that we issue shares, debentures convertible into shares, or subscription warrants that will be offered either through a stock exchange or in a public offering, or through an exchange of shares in a public offering, the purpose of which is to acquire control of another company, as established by law.
In the event of a capital increase by means of the issuance of new shares, holders of ADSs, or of common shares, would, except under the circumstances described above, have preemptive rights to subscribe to any class of our newly issued shares. However, a holder may not be able to exercise the preemptive rights relating to the common shares underlying the ADSs unless a registration statement under the Securities Act is effective with respect to those shares to which the rights relate or an exemption from the registration requirements of the Securities Act is available. For further information on the risks related to our preemptive rights, see “Item 3D. Key Information—Risk Factors—Risks Relating to Our Common Shares and ADSs—Holders of our ADSs might be unable to exercise preemptive rights with respect to the common shares.
Redemption and Right of Withdrawal
The Brazilian Corporate Law provides that, under limited circumstances, a shareholder has the right to withdraw from the company and to receive payment for his shares. This right of withdrawal may be exercised by dissenting shareholders if at least half of voting shares outstanding authorize us to:
• | reduce the mandatory distribution of dividends; |
• | change our corporate purpose; |
• | merge into or consolidate with another company, subject to the conditions set forth in the Brazilian Corporate Law; |
• | transfer all of our shares to another company or receive shares of another company in order to make the company whose shares were transferred a wholly owned subsidiary of the other company, known as a merger of shares (incorporação de ações); |
• | acquire control of another company at a price which exceeds the limits set forth in the Brazilian Corporate Law; |
• | participate in a centralized group of companies as defined under the Brazilian Corporate Law and subject to the conditions set forth therein; or |
• | conduct aspin-off that results in (i) a change of our corporate purposes, except if the assets and liabilities of thespun-off company are contributed to a company that is engaged in substantially the same activities, (ii) a reduction in the mandatory dividend or (iii) any participation in a centralized group of companies, as defined under the Brazilian Corporate Law. |
In addition, if the entity resulting from a merger,incorporação de ações, as described above, or a consolidation or aspin-off of a listed company fails to become a listed company within 120 days of the shareholders’ meeting at which this decision was taken, the dissenting shareholders may also exercise their right of withdrawal.
The Brazilian Corporate Law contains provisions that restrict withdrawal rights and allow companies to redeem their shares at their economic value, subject to certain requirements. As our bylaws currently do not provide that our shares would be redeemable at their economic value, our shares would be redeemable at their book value, determined on the basis of the last statement of financial position approved by the shareholders. If the shareholders’ meeting giving rise to withdrawal rights occurs more than 60 days after the date of the last approved statement of financial position, a shareholder may demand that its shares be valued on the basis of a new statement of financial position that is as of a date within 60 days of such shareholders’ meeting.
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According to the Brazilian Corporate Law, in events of consolidation, merger, incorporation of shares (incorporação de ações), participation in a group of companies, and acquisition of control of another company, the right to withdraw does not apply if the shares in question meet certain tests relating to market liquidity and float. Shareholders would not be entitled to withdraw their shares if the shares are a component of a general stock index in Brazil or abroad and shares held by persons unaffiliated with the controlling shareholder represent more than half of the outstanding shares of the relevant type or class.
Mechanism to Promote Dispersed Ownership of Our Shares
Our bylaws contain provisions that have the effect of avoiding concentration of our shares in the hands of an investor or a small group of investors, in order to promote more dispersed ownership of our shares. To this end, these provisions place certain obligations on a shareholder or group of shareholders that becomes a holder of 35% or more of our total capital stock, or an Acquiring Shareholder. Not later than 15 days after a shareholder becomes an Acquiring Shareholder, this shareholder must submit a request to the Brazilian government, through the Ministry of Finance, to make a public tender offer to acquire all of our capital stock. The Brazilian government will have full discretion to accept or deny this request. The Acquiring Shareholder may not purchase any additional shares until the Brazilian government provides its opinion on the public offer. If the request is accepted by the Brazilian government, the Acquiring Shareholder must make a public offer for all shares within 60 days of acceptance. The offer must be made in accordance with the CVM and the B3 regulations and the provisions of our bylaws. If the request is denied by the Brazilian government, the Acquiring Shareholder must sell all shares the Acquiring Shareholder owns in excess of 35% of our total capital stock within 30 days. Failure to comply with these provisions will subject the Acquiring Shareholder to the potential suspension of all voting rights inherent to the shares the Acquiring Shareholder holds, if a resolution to this effect is approved at a general meeting of our shareholders called by our management. These provisions are not applicable to shareholders who become holders of 35% or more of our total capital stock in certain transactions specified in our bylaws as, for example, cancellation of our common shares held in treasury.
The public tender offer must be (i) directed to all of our shareholders, (ii) made through an auction to take place on the B3, (iii) launched at a set price calculated in accordance with the procedure set forth below, (iv) paid upfront, inreais, (v) made so as to assure equal treatment to all shareholders, (vi) irrevocable and not subject to any changes after publication of the bidding offer and (vii) based on a valuation report to be prepared in accordance with the rules set forth in our bylaws and in applicable CVM rules and regulations.
The price to be offered for the shares in the public tender offer will be calculated as follows:
• | Tender Offer Price = Value of the Share + Premium, |
where:
• | “Tender Offer Price” corresponds to the acquisition price for each share issued by us in the public offering of shares provided hereunder. |
• | “Value of the Share” corresponds to the greater of: |
(i) | the highest unit quotation obtained for the shares issued by us during the12-month period prior to the tender offer among values recorded on any stock exchange on which the shares were traded; |
(ii) | the highest price paid by the Acquiring Shareholder, during the36-month period prior to the tender offer, for a share or tranche of shares issued by us; |
(iii) | the amount equivalent to 14.5 times our Consolidated Average EBITDA, as defined below, reduced by our net consolidated indebtedness, divided by the total number of shares issued by us; or |
(iv) | the amount equivalent to 0.6 times the amount of our firm backlog orders, according to the last information disclosed by the latter, reduced by our net consolidated indebtedness, divided by the total number of shares issued by us. |
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• | “Premium” corresponds to 50% of the Value of the Share. |
• | “Consolidated EBITDA” is our consolidated operating profit before net financial expenses, income tax and social contribution, depreciation, depletion and amortization, as assessed based on the audited statements for our most recent complete fiscal year. |
• | “Average Consolidated EBITDA” is the arithmetic average of our consolidated EBITDA for the two most recent complete fiscal years. |
The launch of a public tender offer does not preclude us or any of our shareholders from launching a competing public tender offer, in accordance with applicable regulations.
Arbitration
Any disputes or controversies relating to the regulations of the Novo Mercado, our bylaws, the Brazilian Corporate Law, the rules published by the CMN, the Central Bank, the CVM, and other rules applicable to the Brazilian capital markets in general, must be submitted to arbitration conducted in accordance with the rules of the B3 Arbitration Chamber (“Rules”).
According to item 1.4 of the Rules, unless otherwise agreed by the Parties, the parties should be bound by the Rules in force on the date of the request for arbitration. Any shareholder that becomes a holder of shares representing our control agrees to comply with the rules of the B3 Arbitration Chamber. These provisions will not apply however, in the event of a dispute or controversy related to our golden share.”
Going Private Process
If our shareholders determine to take us private and at that time we are controlled by a shareholder, or a group of shareholders, the controlling shareholder or group of shareholders is responsible for conducting a public tender offer for the acquisition of our shares. If our shareholders determine to take us private and at that time we are subject to widespread control, we must conduct the public tender offer, within the limits imposed by applicable law. In this case, we may only purchase shares from shareholders that have voted in favor of our Company becoming a private company after purchasing all shares from the other shareholders that did not vote in favor of the “going private” decision and that have accepted the public tender offer.
Thus, we may become a private company only if we or our controlling shareholders, as the case may be, conduct a public tender offer to acquire all of our outstanding shares (taking into account, for this purpose, the shares held by the shareholders that expressly agree with the ‘going private’ decision or sign up for the public tender offer), subject to prior approval of the public tender offer by the Brazilian government, as holder of the golden share, and in accordance with the rules and regulations of Brazilian Corporate Law and the CVM regulations and rules of theNovo Mercado, as applicable.
The public tender offer must be made at a fair price based on a valuation report of the Company, which means that the offer for the purchase of the totality of shares must be equivalent to at least the value of the Company as appraised. According to our bylaws, the price per share shall be equivalent to, at least, the economic value of those shares as determined in a valuation report prepared by a specialized and independent company of recognized experience, which will be chosen at a shareholders’ meeting from a list of three institutions presented by our board of directors, by an absolute majority of the votes of the shareholders of our outstanding shares present at the meeting (excluding, for this purpose, the shares held by any controlling shareholder or group of shareholders at the time, if any, his/her partners and dependents as described in his/her income tax statement, if the controlling shareholder is an individual; treasury shares; shares held by our affiliates and by other companies that are a part of our economic group, as well as blank votes). All the expenses and costs incurred in connection with the preparation of the valuation report must be borne by the offeror.
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Shareholders holding at least 10% of our outstanding shares (taking into account, for this purpose, all the Company’s shares, except for the shares held by the controlling shareholder; shares held by our affiliates and by other companies that are a part of our economic group; shares held by our officers and directors; and treasury shares) may require our management to call a special shareholders’ meeting to determine whether to perform another valuation using the same or a different valuation method. This request must be made within 15 days following the disclosure of the price to be paid for the shares in the public tender offer. The shareholders who make the request, as well as those who vote in its favor, must reimburse us for any costs involved in preparing the new valuation, if the new valuation price is not higher than the original valuation price. If the new valuation price is higher than the original valuation price, the public tender offer must be made at the higher price.
Delisting from theNovo Mercado
If we are controlled by a shareholder, or a group of shareholders, at the time of our delisting from theNovo Mercado, either for our shares to be traded outside theNovo Mercado or as a result of a corporate reorganization, the controlling shareholder or group of shareholders is responsible for conducting a public tender offer for the acquisition of our shares. If we are subject to widespread control at the time of our delisting from theNovo Mercado, either for our shares to be traded outside theNovo Mercado or as a result of a corporate reorganization, the shareholders that voted in favor of the decision must conduct a public tender offer for the acquisition of our shares.
At any time, we may delist our shares from theNovo Mercado,provided that shareholders representing more than 1/3 (one third) of our outstanding shares (i) expressly agree with the delisting decision or (ii) accept the public tender offer (taking into account, for this purpose, the shares held by the shareholders that expressly agree with the delisting decision or sign up for the public tender offer). The decision of the shareholders must specify if the delisting will occur because the securities will no longer be traded on theNovo Mercado, or because we are going private. Our delisting from theNovo Mercado will not result in the loss of our registration as a public company on the São Paulo Stock Exchange.
If we delist from theNovo Mercado, by decision taken at a shareholders’ meeting, any controlling shareholder or group of controlling shareholders at the time, if any, must conduct a public tender offer for the acquisition of our outstanding shares (taking into account, for this purpose, the shares held by the shareholders that expressly agree with the delisting decision or sign up for the public tender offer). According to our bylaws, the price per share shall be equivalent to, at least, the economic value of those shares as determined in a valuation report prepared by a specialized and independent company of recognized experience, which will be chosen at a shareholders’ meeting from a list of three institutions presented by our board of directors, by an absolute majority of the votes of the shareholders of our outstanding shares present at the meeting (excluding, for this purpose, the shares held by any controlling shareholder or group of shareholders at the time, if any, his/her partners and dependents as described in his/her income tax statement, if the controlling shareholder is an individual; treasury shares; shares held by our affiliates and by other companies that are a part of our economic group, as well as blank votes). In addition, theNovo Mercado regulation establishes that the offer for the purchase of the totality of shares must be equivalent to at least the fair value of the Company as appraised. All the expenses and costs incurred in connection with the preparation of the valuation report must be paid by the offeror.
Pursuant to our bylaws, we may also be delisted if the São Paulo Stock Exchange decides to suspend trading of our shares on theNovo Mercado due to ournon-compliance with theNovo Mercado regulations. In this case, the chairman of the board of directors must call a shareholders’ meeting, within two days of the determination by the São Paulo Stock Exchange, in order to replace all members of our board of directors. If the chairman of the board of directors does not call the shareholders’ meeting, any shareholder may do so. The new board of directors will be responsible for the compliance with the requirements that resulted in the delisting.
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Additionally, if we are delisted from theNovo Mercado (1) because a decision taken at a general shareholders’ meeting resulted innon-compliance with theNovo Mercado regulations, the public tender offer must be conducted by the shareholders that voted in favor of the decision, or (2) as a result of ournon-compliance with theNovo Mercado regulations resulting from acts of our management, we must conduct the public tender offer in order to become a private company, within the limits imposed by law, if the Company is not controlled by a controlling shareholder or group of shareholders. Otherwise, the controlling shareholder or group of shareholders is responsible for conducting a public tender offer for the acquisition of the shares.
According to theNovo Mercado regulations, in the event of a transfer of our shareholding control within 12 months following our delisting from theNovo Mercado, the selling controlling shareholders and the acquirer must offer to acquire the remaining shares for the same price and terms offered to the selling controlling shareholders, adjusted for inflation, or the surplus, if there is any, between the price per share offered at the public tender offer, adjusted for inflation, and the price per share received by the selling controlling shareholders due to the transfer of control.
Sarbanes Oxley Act of 2002
We maintain controls and procedures designed to ensure that we are able to collect the information required to disclose in the report we file with the SEC, and to process, summarize and disclose the information within the periods specified in the rules of the SEC. We have filed the relevant officer certifications under Section 404 of the U.S. Sarbanes Oxley Act of 2002 regarding internal controls over financial reporting as Exhibits 12.1 and 12.2 to this annual report.
10C. | Material Contracts |
On January 24, 2019, we entered into the Master Transaction Agreement and certain other transaction documents with Boeing and certain subsidiaries of Embraer or Boeing, pursuant to which a subsidiary of Boeing will acquire the controlling stake in Embraer’s commercial aviation business unit and Embraer or a subsidiary of Embraer and Boeing or a subsidiary of Boeing will form a joint venture for the promotion and development of new markets and applications for theKC-390 multi-mission aircraft.
Pursuant to the terms and conditions of the Master Transaction Agreement, Embraer will contribute certain assets and rights related to its commercial aviation business to the Commercial Aviation NewCo and the Commercial Aviation NewCo will assume certain liabilities and obligations related to Embraer’s commercial aviation business and, in exchange for it, the Commercial Aviation NewCo will issue common shares and redeemable preferred shares to Embraer. The Commercial Aviation NewCo’s redeemable preferred shares will have a liquidation preference, receive an annual fixed cumulative dividend payable at a 3.3% rate, be redeemable after two years from the date of issuance, and have no voting rights.
Subject to the conditions in the Master Transaction Agreement, upon consummation of the Transaction, Boeing Brazil will acquire 80.0% of the issued and outstanding common shares and redeemable preferred shares of the Commercial Aviation NewCo, through the subscription of new shares to be issued by the Commercial Aviation NewCo and the acquisition directly from Embraer of existing shares issued by the Commercial Aviation NewCo to Embraer, at the Estimated Value. The Estimated Value is subject to adjustments customary for transactions of the same nature including for net debt and net working capital of the Commercial Aviation NewCo at the closing date of the Transaction.
Until the effective implementation of the Transaction, both parties will conduct their respective businesses completely separate and independent of each other and Embraer will conduct its commercial aviation business in the ordinary course, consistent with past practice.
The foregoing description is only a summary of certain provisions of the Master Transaction Agreement and is qualified in its entirety by reference to the copy of the executed Master Transaction Agreement which is filed as an exhibit to this annual report.
In addition, as part of the Transaction, Embraer and Boeing (or any of their respective subsidiaries) will form a joint venture for the promotion and development of new markets and applications for the multi-mission airplaneKC-390, based on jointly identified opportunities, and development, manufacture and sales of theKC-390, in which joint venture Embraer or its subsidiary will hold the majority of the share capital.
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TheKC-390 NewCo will be EB Defense, LLC, a Delaware limited liability company incorporated by the Embraer Member Entity and in which the Embraer Member Entity is currently the sole member. Embraer or Embraer Member Entity will hold 51% and Boeing or the Boeing Member Entity will hold 49% of the membership interests of EB Defense, LLC, in accordance with the Amended and Restated Limited Liability Company Agreement, to be entered into and become effective upon the closing of the Transaction.
The foregoing description is only a summary of certain provisions of the Contribution Agreement and is qualified in its entirety by reference to the copy of the executed Contribution Agreement which is filed as an exhibit to this annual report.
Embraer expects that the strategic partnership with Boeing will generate synergies and other benefits to Embraer. For further information on our strategic partnership with Boeing, see Explanatory Note on page 3 of this annual report. The consummation of the Transaction remains subject to (i) approval by antitrust authorities in Brazil, the United States and other applicable jurisdictions; and (ii) the satisfaction of other conditions customary in similar transactions. For risks relating to the Transaction, see “Item 3D. Risk Factors—Risks Relating to Embraer—The consummation of the strategic partnership with Boeing is subject to conditions, some or all of which may not be satisfied or completed within the expected timeframe, if at all. Failure to complete the proposed Transaction could adversely affect our business, financial condition and operating results and the trading price of our common stock and ADSs, “—Our strategic partnership with Boeing may not be implemented successfully or the implementation may be more difficult, time consuming or costly than expected,” and “—Although we expect that the strategic partnership with Boeing will result in synergies and other benefits to us, those benefits may not be realized fully or at all or may not be realized within the expected time frame.”
10D. | Exchange Controls |
There are no restrictions on ownership of our common shares by individuals or legal entities domiciled or headquartered outside Brazil. However, the registration of this investment with the Brazilian Central Bank is required and the right to convert dividend payments and proceeds from the sale of common shares into foreign currency and to remit such amounts outside Brazil is subject to restrictions under foreign investment legislation.
Pursuant to Brazilian law, investors may invest in common shares under Resolution No. 4,373, of September 29, 2014, issued by the CVM, governmental authority responsible for formulating the Brazilian monetary and credit policies. The rules of Resolution No. 4,373 allow foreign investors to invest in almost all financial assets and to engage in almost all transactions available in the Brazilian financial and capital markets, provided that certain requirements are fulfilled. In accordance with Resolution No. 4,373, the definition of foreign investor includes individuals, legal entities, mutual funds and other collective investment entities domiciled or headquartered abroad.
Pursuant to the Resolution No. 4,373, foreign investors must: (i) appoint at least one representative in Brazil with powers to perform actions related to the foreign investment; (ii) provide all required information that shall be sent by the representative to CVM through CVM’s website; (iii) be registered as a foreign investor with the CVM and the Brazilian tax authorities; and (iv) register the foreign investment with the Central Bank.
Securities and other financial assets held by foreign investors pursuant to Resolution No. 4,373 must be registered or maintained in deposit accounts or under the custody of an entity duly licensed by the Brazilian Central Bank or the CVM. In addition, securities trading for these investors is restricted to transactions carried out in the stock exchanges or organizedover-the-counter markets licensed by the CVM.
Under Resolution No. 4,373, foreign investors registered with the CVM may buy and sell securities on Brazilian stock exchanges or organizedover-the-counter markets without obtaining a separate certificate of registration for each transaction. Investors under these regulations are also generally entitled to favorable tax treatment.
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Annex II to Resolution No. 4,373 provides for the issuance of depositary receipts in foreign markets in respect of Brazilian issuers’ securities.
In connection with equity offerings of our common shares, an electronic registration was issued in the name of the depositary with respect to the ADSs and is maintained by the custodian on behalf of the depositary. This electronic registration was carried out through the Brazilian Central Bank Information System. Pursuant to the registration, the custodian and the depositary are able to convert dividends and other distributions with respect to the common shares represented by ADSs into foreign currency and remit the proceeds outside Brazil, to the holder of ADSs. In the event that a holder of ADSs exchanges the ADSs for common shares, the custodian must update the registry of the investment with the Brazilian Central Bank within five business days after the exchange. In order to receive the common shares the investor must have a registration with the Central Bank and the CVM pursuant to Resolution 4,373. Until this registration has been obtained, the holder will not be able to receive the common shares.
In addition, if the foreign investor resides in a “tax haven” jurisdiction or is not an investor registered under Resolution No. 4,373, the investor will be subject to less favorable Brazilian tax treatment than a holder of ADSs.
For further information on Brazilian taxes, see “Item 3D. Key Information—Risk Factors—Risks Relating to our Common Shares and ADSs—If holders of our ADSs exchange the ADSs for common shares, they risk losing the ability to remit foreign currency abroad and Brazilian tax advantages” and “Item 10E. Additional Information—Taxation—Material Brazilian Tax Consequences.”
10E. | Taxation |
The following discussion, subject to the limitations set forth below, summarizes certain Brazilian and United States tax considerations relating to the ownership of our common shares or ADSs. This discussion does not purport to be a complete analysis of all tax considerations in those countries and does not address tax treatment of shareholders under the laws of other countries. Shareholders who are resident in countries other than Brazil and the United States, along with shareholders that are resident in those two countries, are urged to consult with their own tax advisors as to which countries’ tax laws could be relevant to them. This summary is based upon the tax laws of Brazil and the United States as in effect on the date of this annual report, which are subject to change, possibly with retroactive effect, and to differing interpretations. Any change in the law may change the consequences described below.
Although there presently is no income tax treaty between Brazil and the United States, the tax authorities of the two countries have had discussions that may result in this treaty. No assurance can be given, however, as to if or when a treaty will enter into force or how it will affect the U.S. holders of common shares or ADSs.
Material Brazilian Tax Consequences
General.The following discussion summarizes the principal Brazilian tax consequences of the acquisition, ownership and disposition of common shares or ADSs, as the case may be, by a holder that is not considered domiciled in Brazil, or aNon-Brazilian Holder, for purposes of Brazilian taxation.
This discussion is not a comprehensive discussion of all the tax considerations that may be relevant to a decision to purchase our common shares or ADSs and is not applicable to all categories of investors, some of which may be subject to special rules, and does not specifically address all of the Brazilian federal income tax considerations applicable to any particular holder. It is based on the tax laws of Brazil in effect on the date of this report, which are subject to change, possibly with retroactive effect, and to differing interpretations. Each prospective purchaser is urged to consult his own tax advisor about the particular Brazilian federal income tax consequences of an investment in our common shares or ADSs.
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Taxation of Dividends. Dividends, including stock dividends and other dividends paid in kind, paid by us to the depositary in respect of the ADSs, or to aNon-Brazilian Holder in respect of the common shares, are currently not subject to withholding tax, provided that they are paid out of profits generated as of January 1, 1996. Dividends paid from profits generated before January 1, 1996 may be subject to Brazilian withholding income tax at variable rates, according to the tax legislation applicable to each corresponding year. There could be a question regarding a potential taxation on dividends supported by profits earned in the 2014 calendar-year, due to the new rules introduced in Brazil in order to aligning the Brazilian tax system with the International Financial Reporting Standards, or IFRS, as of January 1, 2015. However, any withholding tax related to 2014 profits will be borne by us, if due.
Taxation of Gains. According to Law No. 10,833, enacted on December 29, 2003, capital gains realized on the sale or disposition of assets located in Brazil by aNon-Brazilian Holder, regardless of whether the sale or the disposition is made to anothernon-Brazilian resident or to a Brazilian resident, is subject to taxation in Brazil. Accordingly, on the disposition of the common shares, which are considered assets located in Brazil, theNon-Brazilian Holder will be subject to income tax on the gains assessed, following the rules described below, regardless of whether the transactions are conducted in Brazil or abroad and with a Brazilian resident or not. Regarding the ADSs, although the matter is not free from doubt, arguably the gains realized by aNon-Brazilian Holder on the disposition of ADSs are not taxed in Brazil, based on the argument that ADSs would not constitute assets located in Brazil for purposes of Law No. 10,833/03. However, we cannot assure how Brazilian courts would interpret the definition of assets located in Brazil in connection with the taxation of gains realized by aNon-Brazilian Holder on the disposition of ADSs. Thus, the gain on a disposition of ADSs by aNon-Brazilian Holder may be subject to income tax in Brazil according to the rules described below for ADSs or those applicable to the disposition of common shares, when applicable.It is important to clarify that, for purposes of Brazilian taxation, the income tax rules on gains related to disposition of common shares or ADSs can vary depending on the domicile of theNon-Brazilian Holder, the form by which theNon-Brazilian holder has registered its investment with the Central Bank and/or how the disposition is carried out, as described below.
The deposit of common shares in exchange for ADSs may be subject to Brazilian income tax on capital gains at rates ranging from 15% to 22.5%, or 25% in case of aNon-Brazilian Holder located in a Low or Nil Tax Jurisdiction (as defined below), if the acquisition cost of the common shares is lower than (i) the average price per common share on a Brazilian stock exchange on which the greatest number of these shares were sold on the day of deposit or (ii) if no common shares were sold on that day, the average price on the Brazilian stock exchange on which the greatest number of common shares were sold in the 15 trading sessions immediately preceding such deposit. In this case, the positive difference between the average price of the common shares, calculated as above, and the corresponding acquisition cost, may be considered a capital gain. In some circumstances, there may be arguments to support that such tax treatment is not applicable in case ofNon-Brazilian Holders registered under Resolution No. 4,373, or the 4,373 Holder, that are not resident in a Low or Nil Tax Jurisdiction (as defined below). Prospective holders of common shares should consult their own tax advisors as to the tax consequences of the deposit in exchange for ADSs The withdrawal of ADSs in exchange for common shares should not be considered as giving rise to a capital gain subject to Brazilian income tax, as far as the regulatory rules in respect to the registration of the investment before the Central Bank are duly observed.
Gains assessed on the disposition of common shares carried out on the Brazilian stock exchange (which includes the transactions carried out on the organizedover-the-counter market) are:
• | exempt from income tax when assessed by aNon-Brazilian Holder that (i) is a 4,373 Holder and (ii) is not resident in a Low or Nil Tax Jurisdiction (as defined below); or |
• | subject to income tax at a rate of up to 25% in any other case, including the gains assessed by aNon-Brazilian Holder that (i) is not a 4,373 Holder and/or or (ii) is a 4,373 Holder resident in a Low or Nil Tax Jurisdiction (as defined below). In these cases, a withholding income tax of 0.005% of the sale value shall be applicable and can be later offset with the eventual income tax due on the capital gain. Day trade transactions are subject to the rate of 1%. |
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Any other gains assessed on a disposition of the common shares that is not carried out on Brazilian stock exchanges are subject to income tax at rates of up to 22.5%, except for a resident of a Low or Nil Tax Jurisdiction (as defined below) which, in this case, is subject to income tax at a rate of up to 25%. In case the gains are related to transactions conducted on the Braziliannon-organizedover-the-counter market with intermediation, the withholding income tax of 0.005% on the sale value shall also be applicable and can be offset with the eventual income tax due on the capital gain. In the case of a redemption of common shares or ADSs or a capital reduction by a Brazilian corporation, the positive difference between the amount effectively received by theNon-Brazilian Holder and the proportional acquisition cost of the common shares or ADSs redeemed is treated as capital gain derived from sale or exchange of common shares not carried out in a Brazilian stock exchange market and is therefore subject to income tax at rates of up to 25%, as the case may be. As a general rule, the gains realized as a result of a disposition transaction of common shares or ADSs are determined by the difference between the amount realized on the sale or exchange of the shares or ADSs and their acquisition cost.
There can be no assurance that the current preferential tax treatment forNon-Brazilian Holders of ADSs and 4,373 Holder of common shares will continue.
Any exercise of preemptive rights relating to the common shares or ADSs will not be subject to Brazilian income tax. Any gain on the sale or assignment of preemptive rights relating to our common shares or the ADSs by aNon-Brazilian Holder of common shares will be subject to Brazilian income taxation according to the same rules applicable to the sale or disposition of these shares.
Taxation on Interest on Shareholders’ Equity. For further information on taxation on interest on shareholders’ equity, see “Item 8A. Financial Information—Consolidated Statements and Other Financial Information—Dividends and Dividend Policy—History of Dividend and Interest on Shareholders’ Equity Payments and Dividend Policy.”
In accordance with Law No. 9,249, dated December 26, 1995, as amended, Brazilian corporations may make payments to shareholders characterized as distributions of interest on the company’s shareholders’ equity on top of or as an alternative to making dividend distributions. These interest are calculated by multiplying the TJLP as determined by the Central Bank from time to time by the sum of determined Brazilian company’s net equity accounts. Interest on Shareholders’ Equity are deductible for purposes of calculating the Brazilian corporate income tax and social contribution on net profits, as long as the following limits are observed:
• | 50% of net profits (after the social contribution on net profits but before taking such distribution and the provision for corporate income tax into account) related to the period for which the payment is made; and |
• | 50% of the sum of retained profits and profit reserves as of the date of the beginning of the period for which the payment is made. |
The Brazilian Corporate Law establishes that interest attributed to shareholders’ equity in respect of the common shares paid to shareholders who areNon-Brazilian holders, includingNon-Brazilian holders of ADSs, are subject to Brazilian withholding income tax at the rate of 15%, 25% in case of a resident of a Low or Nil Tax Jurisdiction (as defined below) or where applicable local laws impose restrictions on the disclosure of the shareholding composition or the ownership of investments or the ultimate beneficiary of the income derived from transactions carried out and attributable to aNon-Brazilian holder. The distribution of interest on shareholders’ equity may be determined by our board of directors. We cannot assure you that our board of directors will not determine that future distributions of profits may be made by means of interest on shareholders’ equity instead of by means of dividends.
The amounts paid as distribution of interest on shareholders’ equity to aNon-Resident Holder located in a country that has a tax treaty with Brazil may be classified as (i) interest, (ii) dividends or (iii) other revenues. The classification will depend on the actual wording of the treaty.
Low or Nil Taxation Jurisdictions.On June 4, 2010, Brazilian tax authorities enacted Normative Ruling No. 1,037 listing (i) the countries and jurisdictions considered as Low or Nil Taxation Jurisdiction or where the local legislation does not allow access to information related to the shareholding composition of legal entities, to their ownership or to the identity of the effective beneficiary of the income attributed tonon-residents (Tax Favorable Jurisdictions) and (ii) the privileged tax regimes, or PTR, which definition is provided by Law No. 11,727, of June 23, 2008. Brazilian tax authorities periodically update the list of countries/jurisdictions and regimes that shall be treated as Tax Favorable Jurisdiction and PTR.
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The concept of PTR, encompasses the countries and jurisdictions that: (i) do not tax income or tax it at a maximum rate lower than 20%; (ii) grant tax benefits tonon-residents (1) with no requirement to carry out substantial economic activity within the territory or (2) on the condition that they do not carry out substantial economic activity within the territory; (iii) do not tax income from outside its territory, or taxes it at less than 20%; or (iv) do not disclose certain information on the ownership and beneficial ownership of assets or on transactions within its territory, or imposes restrictions on disclosure of that information.
On November 28, 2014 the Brazilian Revenue Service issued Rule 488 reducing the concept of Tax Favorable Jurisdictions and of PTR to those that tax the income below the rate of 17% (previous concept adopted a 20% maximum rate for that purpose), which will probably result in an amendment to the list provided under Normative Ruling No. 1,037.
We believe that the best interpretation of the current tax legislation leads to the conclusion that the above mentioned PTR concept should apply solely for purposes of Brazilian transfer pricing and thin capitalization rules. Currently, the understanding of the Brazilian tax authorities is in the sense that payment of interest to beneficiaries resident in PTRs are not subject to the same treatment applicable to beneficiaries in Tax Favorable Jurisdictions (Answer to Advance Tax Ruling Request COSIT n. 575, of December 20, 2017). Nevertheless, we cannot assure you that subsequent legislation or interpretations by the Brazilian tax authorities regarding the definition of a PTR provided by Law No. 9,430, of December 27, 1996 altered by Law No. 11,727 will also apply to aNon-Brazilian Holder on payments of interest on shareholders’ equity. Notwithstanding the above, we recommend that you consult your own tax advisors regarding the consequences of the implementation of Law No. 11,727, Normative Ruling No. 1,037 and Rule 488.
Taxation on Foreign Exchange Transactions, or IOF/Exchange. Pursuant to Decree No. 6,306/07, the conversion into foreign currency or the conversion into Brazilian currency of the proceeds received or remitted by a Brazilian entity from a foreign investment in the Brazilian securities market, including those in connection with the investment by aNon-Brazilian Holder in the common shares and ADSs may be subject to the Tax on Foreign Exchange Transactions, or IOF/Exchange. Currently applicable rate for most foreign currency exchange transactions is 0.38%.
However, currency exchange transactions carried out for the inflow of resources into Brazil by a 4,373 Holder are subject to IOF/Exchange at (i) 0% rate in case of variable income transactions carried out on the Brazilian stock, futures and commodities exchanges, as well as in the acquisitions of shares of Brazilian publicly-held companies in public offerings or subscription of shares related to capital contributions, provided that the issuer company has registered its shares for trading in the stock exchange (ii) 0% for the outflow of resources from Brazil related to these type of investments, including payments of dividends and interest on shareholders’ equity and the repatriation of funds invested in the Brazilian market. Furthermore, the IOF/Exchange is currently levied at a 0% rate on the withdrawal of ADSs into shares.
In any case, the Brazilian government may increase the rate at any time, up to 25.0%. However, any increase in rates may only apply to future transactions.
Tax on Transactions Involving Bonds and Securities, or IOF/Bonds.” Pursuant to Decree 6,306/07 the IOF/Bonds may be imposed on any transactions involving bonds and securities, even if the transactions are carried out on a Brazilian stock exchange. The rate of IOF/Bonds applicable to transactions involving common shares and ADS is currently zero. In particular, the IOF/Bond also levies at a zero percent rate on the transfer of shares traded on the Brazilian stock exchange with the purpose of the issuance of depositary receipts to be traded outside Brazil. The Brazilian government may increase the rate of the IOF/Bonds at any time by up to 1.5% per day of the transaction amount, but only in respect of future transactions.
Other Brazilian Taxes. There are no Brazilian federal inheritance, gift or succession taxes applicable to the ownership, transfer or disposition of common shares or ADSs by aNon-Brazilian Holder. Gift and inheritance taxes, however, may be levied by some states of Brazil on gifts made or inheritances bestowed byNon-Brazilian Holders to individuals or entities resident or domiciled within those states in Brazil. There are no Brazilian stamp, issue, registration or similar taxes or duties payable by holders of common shares or ADSs.
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Material U.S. Federal Income Tax Consequences
The following discussion, subject to the limitations and conditions set forth herein, summarizes certain U.S. federal income tax consequences of the purchase, ownership and disposition of Embraer common shares and ADSs. This discussion only applies to beneficial owners of Embraer common shares or ADSs that are “U.S. Holders” (as defined below) that hold common shares or ADSs of Embraer as capital assets (generally for investment purposes). This discussion does not address all aspects of U.S. federal income taxation that may be applicable to a U.S. Holder, including, gift, estate, alternative minimum and Medicare contribution tax consequences, or the tax consequences to U.S. Holders subject to special treatment under U.S. federal income tax law, including:
• | partnerships and other entities classified as partnerships for U.S. federal income tax purposes; |
• | tax-exempt entities; |
• | dealers and traders in securities or foreign currencies; |
• | insurance companies; |
• | certain financial institutions; |
• | persons who own Embraer common shares or ADSs as part of an integrated investment, including a straddle, hedging or conversion transaction, comprising the Embraer common shares or ADSs and one or more other positions for tax purposes; |
• | certain taxpayers who file applicable financial statements required to recognize income for U.S. federal income tax purposes no later than when the associated revenue is reflected on such financial statements; |
• | U.S. Holders whose functional currency is not the U.S. dollar for U.S. federal income tax purposes; |
• | persons who actually or constructively own 10% or more of Embraer’s total combined vote or value of its outstanding common shares or ADSs; |
• | persons who acquired Embraer common shares or ADSs pursuant to the exercise of any employee stock option or otherwise as compensation; and |
• | persons holding Embraer common shares or ADSs in connection with a trade or business conducted outside the United States. |
In addition, there is no discussion of state, local, ornon-U.S. tax considerations of the purchase, ownership and disposition of Embraer common shares or ADSs. The discussion is based upon the provisions of the Internal Revenue Code of 1986, as amended, or Code, its legislative history, existing final, temporary, and proposed U.S. Treasury regulations, rulings and other pronouncements of the U.S. Internal Revenue Service, or IRS, and judicial decisions as of the date of this annual report. Such authorities may be repealed, revoked or modified (with possible retroactive effect) so as to result in U.S. federal income tax consequences different from those discussed below.
This discussion is also based in part on the representations of the depositary and the assumption that each obligation in the deposit agreement and any related agreement will be performed in accordance with its terms.
Shareholders are urged to consult their own independent tax advisors concerning the U.S. federal income tax consequences of the ownership of Embraer common shares and ADSs in light of their particular situations, as well as any consequences arising under the laws of any other taxing jurisdiction.
As used herein, the term “U.S. Holder” means a beneficial owner of Embraer common shares or ADSs representing Embraer common shares that is (i) an individual who is a citizen or resident of the United States, (ii) a corporation, or other entity taxable as a corporation, created or organized in or under the laws of the United States, any State or the District of Columbia, (iii) an estate the income of which is subject to U.S. federal income taxation regardless of its source or (iv) a trust (1) that is subject to the supervision of a court within the United States and the control of one or more U.S. persons as described in Section 7701(a)(30) of the Code or (2) that has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person. Except where specifically described below, this discussion assumes that we are not a controlled foreign corporation or a passive foreign investment company, or PFIC, in either case, for U.S. federal income tax purposes.
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If a partnership (or an entity treated as a partnership for U.S. federal income tax purposes) holds Embraer common shares or ADSs, the tax treatment of such partnership and each partner will generally depend upon the status of the partner in such partnership and upon the activities of the partnership. Partnerships that hold Embraer common shares or ADSs, and partners of a partnership holding such common shares or ADSs, are urged to consult their own tax advisors regarding the consequences of the purchase, ownership and disposition of Embraer common shares or ADSs.
In general, for U.S. federal income tax purposes, a U.S. Holder who is a beneficial owner of an ADS will be treated as the owner of the underlying Embraer common shares that are represented by such ADS. The U.S. Treasury has expressed concerns that parties to whom ADSs arepre-released before shares are delivered to the depositary, or intermediaries in the chain of ownership between holders of ADSs and the issuer of the security underlying the ADSs, may be taking actions that are inconsistent with the claiming of foreign tax credits by holders of ADSs. Accordingly, the creditability of any Brazilian taxes could be affected by actions taken by such parties or intermediaries. Deposits or withdrawals of underlying common shares by U.S. Holders for ADSs will not be subject to U.S. federal income tax.
Distributions on Embraer Common Shares or ADSs
For U.S. federal income tax purposes, the gross amount of any distributions (including distributions of notional interest charges attributed to shareholders’ equity) paid to U.S. Holders of Embraer common shares or ADSs (including Brazilian withholding taxes imposed on such distributions) will be treated as a dividend, to the extent paid out of current or accumulated earnings and profits of Embraer as determined under U.S. federal income tax principles. Such a dividend will be includable in the gross income of a U.S. Holder as ordinary income on the date received or accrued by the U.S. Holder. To the extent that the amount of any distribution exceeds Embraer’s current and accumulated earnings and profits for a taxable year (as determined under U.S. federal income tax principles), the distribution will first be treated as atax-free return of capital to the extent of a U.S. Holder’s adjusted tax basis in the Embraer common shares or ADSs, and thereafter as capital gain. We do not expect to maintain calculations of earnings and profits in accordance with U.S. federal income tax principles, and unless and until such calculations are made, U.S. Holders should assume that a distribution is paid out of earnings and profits and will be treated as a dividend for U.S. federal income tax purposes.
Dividends paid by Embraer will not be eligible for the dividends received deduction allowed to domestic corporations under the Code.
The amount of any cash distribution paid inreais will be included in a U.S. Holder’s gross income in an amount equal to the U.S. dollar value of thereais calculated by reference to the exchange rate in effect on the date the dividend is received or accrued by the U.S. Holder, in the case of Embraer common shares, and by the depositary, in the case of ADSs, regardless of whether thereais are converted into U.S. dollars. If thereais received as a dividend are not converted into U.S. dollars on the date of receipt, a U.S. Holder will have a tax basis in thereais equal to their U.S. dollar value on the date of receipt. Any gain or loss realized on a subsequent conversion or other disposition of thereais will be treated as U.S. source ordinary income or loss for U.S. federal income tax purposes.
Subject to the discussion above regarding concerns expressed by the U.S. Treasury and a number of other complex limitations and conditions (including a limit on credits that may be claimed with respect to qualified dividend income (as defined below)), a U.S. Holder will generally be entitled to claim a U.S. foreign tax credit in respect of any Brazilian withholding taxes imposed on dividends received on Embraer’s common shares or ADSs. U.S. Holders who do not elect to claim a credit for foreign taxes may instead claim a deduction in respect of such Brazilian withholding taxes. Dividends received with respect to the Embraer common shares or ADSs will be treated as foreign source income for U.S. federal income tax purposes, and will be “passive category income” for purposes of calculating foreign tax credits in most cases, subject to various limitations. The rules relating to computing foreign tax credits or deducting foreign income taxes are extremely complex, and U.S. Holders are urged to consult their own independent tax advisors regarding the availability of foreign tax credits with respect to any Brazilian withholding taxes in regards of dividends paid on Embraer’s common shares or ADSs.
Subject to certain exceptions forshort-term and hedged positions, the amount of dividends received by certainnon-corporate U.S. holders (including individuals) with respect to the Embraer common shares or ADSs may be eligible for a reduced rate of taxation if the dividends represent “qualified dividend income.” Dividends paid on the Embraer common shares or ADSs will be treated as qualified dividend income if (i) the Embraer common shares or ADSs are readily tradable on an established securities market in the United States, (ii) the U.S. Holder meets the holding period requirement for the common shares or ADSs (generally more than 60 days during the121-day period that begins 60 days before theex-dividend date) and (iii) Embraer was not in the year prior to the year in which the dividend was paid (with respect to a U.S. Holder that held Embraer common shares or ADSs), and is not in the year in which the dividend is paid, a PFIC. Under guidance issued by the IRS, the ADSs of Embraer should qualify as readily tradable on an established securities market in the United States so long as they are listed on the NYSE. In the case of Embraer common shares held directly by U.S. Holders and not underlying an ADS, it is not clear whether dividends paid with respect to such shares will represent “qualified dividend income.” U.S. Holders holding Embraer common shares directly and not through an ADS are urged to consult their own independent tax advisors.
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Based on its audited financial statements as well as relevant market and shareholder data, Embraer believes that it was not a PFIC for U.S. federal income tax purposes with respect to its 2018 taxable year. In addition, based on Embraer’s audited or projected financial statements and current expectations regarding the value and nature of its assets, the sources and nature of its income, and relevant market and shareholder data, Embraer does not anticipate becoming a PFIC for its 2019 taxable year. However, because this determination is based on the nature of Embraer’s income and assets from time to time, involves the application of complex tax rules, and since Embraer’s view is not binding in the courts or the IRS, no assurances can be provided that Embraer will not be considered a PFIC for the current, or any past or future tax year. The potential application of the PFIC rules is further discussed below.
Sale, Exchange or Other Taxable Disposition of Embraer Common Shares or ADSs
A U.S. Holder will recognize a taxable gain or loss on any sale, exchange or other taxable disposition of Embraer common shares or ADSs in an amount equal to the difference between the amount realized on the sale, exchange or other taxable disposition and the U.S. Holder’s adjusted tax basis (determined in U.S. dollars) in the Embraer common shares or ADSs. Such gain or loss will generally be capital gain or loss and will be long-term capital gain or loss if the Embraer common shares or ADSs have a holding period of more than one year. Certainnon-corporate U.S. Holders (including individuals) may be eligible for preferential rates of U.S. federal income tax in respect of long-term capital gains. The deductibility of capital losses is subject to limitations under the Code.
Any gain or loss recognized by a U.S. Holder from the sale, exchange or taxable disposition of Embraer common shares or ADSs generally will be gain or loss from U.S. sources for U.S. foreign tax credit purposes. Consequently, if a Brazilian withholding tax or capital gains tax is imposed pursuant to a sale of Embraer common shares or ADSs, U.S. Holders who do not have sufficient foreign source income might not be able to derive effective U.S. foreign tax credit benefit in respect of such Brazilian withholding tax or capital gains tax. The rules relating to foreign tax credits, including the amount of foreign income taxes that may be claimed as a credit in any given year, are extremely complex and subject to limitations. U.S. Holders are urged to consult their own independent tax advisor regarding the application of the foreign tax credit rules to their particular circumstances.
Deposits and withdrawals of Embraer common shares in exchange for ADSs will not result in the realization of gain or loss for U.S. federal income tax purposes.
Passive Foreign Investment Company Rules
If, during any taxable year of anon-U.S. corporation, 75% or more of the corporation’s gross income consists of certain types of “passive” income, or the average value during a taxable year of the “passive assets” of the corporation (generally assets that generate passive income) is 50% or more of the average value of all the corporation’s assets, the corporation will be treated as a PFIC under U.S. federal income tax law. If a corporation is treated as a PFIC, a U.S. Holder may be subject to increased tax liability upon the sale of its stock, or upon the receipt of certain dividends, unless such U.S. Holder makes an election to be taxed currently on itspro rata portion of the corporation’s income, whether or not such income is distributed in the form of dividends, or otherwise makes a“mark-to-market” election with respect to the corporation’s stock as permitted by the Code. Currently, a U.S. Holder who owns common shares or ADSs in any year that Embraer is a PFIC in excess of certainde minimis amounts and fails to qualify for certain other exemptions would be required to file IRS Form 8621 to report such holdings. In addition, as discussed above, a U.S. Holder would not be entitled to (if otherwise eligible for) the preferential reduced rate of tax payable on certain dividend income. As stated above, although no assurances can be given, based on Embraer’s operations, projections and business plans and the other items discussed above, Embraer does not believe that it (or its predecessor) was or currently is a PFIC, and does not expect to become a PFIC for subsequent taxable years.
U.S. Holders are urged to consult their own independent tax advisors regarding the potential application of the PFIC rules and related reporting requirements to the common shares or ADSs and the availability and advisability of making an election to avoid the adverse tax consequences of the PFIC rules should Embraer be considered a PFIC for any taxable year.
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U.S. Tax Reform – Tax Cuts and Jobs Act of 2017
On December 22, 2017 Public Law115-97, informally referred to as the Tax Cuts and Jobs Act (the Act), was enacted and includes several provisions that affect the Company. The Act introduced tax reform that reduced the current corporate federal income tax rate from 35% to 21%, enacted a more restrictive policy in terms of the deductibility of interest, allows full expensing of certain qualified property including short-lived capital investments for five years and introduced a base erosion and anti-abuse tax (the BEAT), among other provisions.
For the year ended December 31, 2018, the Company recorded an immediatewrite-off of capital investments in the amount of $21.6 million corresponding to qualified property placed in service in 2018. For the year ended December 31, 2017, the Company recorded an immediatewrite-off of capital investments in the gross amount of $4.8 million corresponding to qualified property placed in service after September 27, 2017 and before December 31, 2017.
Effective for tax years beginning after December 31, 2017, the Act allows domestic corporations a new tax deduction in the amount of 37.5% of foreign derived intangible income (FDII). For the year ended December 31, 2018, the Company’s estimated FDII deduction is approximately $2.9 million. However, for the year ended December 31, 2018 the Company was no longer eligible to deduct the domestic production activities deduction (DPAD), which was repealed by the Act and was equal to 9% of the lesser of the taxpayer’s qualified production activities income or the taxpayer’s taxable income for the tax year. For the year ended December 31, 2017, the Company‘s DPAD deduction was approximately $8.7 million.
For the year ended December 31, 2017, the Company determined that the Act required a revaluation of its deferred tax assets and liabilities considering that these are measured using the enacted tax rates expected to apply to taxable income in years in which the related temporary differences are expected to be recovered or settled. For the year ended December 31, 2017, the Company recorded a net reduction of approximately $9.0 million in the value of its deferred tax liabilities that is affected by the rate change, which was recorded as a reduction to income tax expense in the Company’s consolidated statement of income. There were no subsequent revaluations of the Company’s deferred tax assets and liabilities due to the rate change for the year ended December 31, 2018.
Effective January 1, 2018, the BEAT is applicable to certain corporate taxpayers that make payments to foreign related parties for which a deduction is otherwise allowable, or for payments made in connection with acquisition of depreciable property. Payments for items which are a component of cost of sales are treated as a reduction of gross receipts and are excluded from the scope of the provision. The vast majority of payments made by the Company and its subsidiaries to foreign related parties are for procurement of aircraft parts. Most of these payments are recorded as a component of cost of sales and therefore are excluded from the BEAT base In addition, the Act contains significant new limitations on the ability of a taxpayer to deduct business interest paid or accrued on debt properly allocable to a trade or business. The Company has performed an assessment of the impact of BEAT as well as the interest expense limitation rules and concluded that these provisions are not applicable to the Company for the year ended December 31, 2018.
Information Reporting and Backup Withholding
In general, payments of dividends on Embraer common shares or ADSs, and payments of the proceeds of the sale, exchange or other disposition of Embraer common shares or ADSs, paid within the United States or through certain U.S.-related financial intermediaries to a U.S. Holder are subject to information reporting and may be subject to backup withholding at a current maximum rate of 24% unless the U.S. Holder (i) is a corporation or other exempt recipient or (ii) in the case of backup withholding, provides an accurate taxpayer identification number and certifies that no loss of exemption from backup withholding has occurred. Backup withholding is not an additional tax. The amount of any backup withholding from a payment to a U.S. Holder will be allowed as a credit against the U.S. Holder’s U.S. federal income tax liability, provided the required information is timely provided to the IRS. A U.S. Holder generally may obtain a refund of any amounts withheld under the backup withholding rules that exceed its U.S. federal income tax liability by filing a timely refund claim with the IRS.
In addition, certain U.S. Holders are required to report to the IRS information relating to an interest in the common shares or ADSs, subject to exceptions (including an exception for common shares or ADSs held in accounts maintained by certain financial institutions), by attaching a complete IRS Form 8938, Statement of Specified Foreign Financial Assets, with their tax returns for each year in which they held an interest in the common shares or ADSs. U.S. Holders are urged to consult their own tax advisors regarding the effect, if any, of this information reporting requirement on their acquisition, ownership and disposition of the common shares or ADSs.
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10F. | Dividends and Paying Agents |
Not applicable.
10G. | Statements by Experts |
Not applicable.
10H. | Documents on Display |
We are subject to the periodic reporting and other informational requirements of the Exchange Act. Accordingly, we are required to file reports and other information with the SEC. You may inspect and obtain copies, at prescribed rates, of reports and other information filed by us with the SEC at its Public Reference Room maintained at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC in the United Statesat 1-800-SEC-0330. You may also inspect and copy this material at the offices of the New York Stock Exchange, Inc., 20 Broad Street, New York, New York 10005.
We file our annual report onForm 20-F, including our financial statements, and other reports, including our reports onForm 6-K, electronically with the SEC. These filings are available at www.sec.gov. We also file financial statements and other periodic reports electronically with the CVM at its website, www.cvm.gov.br. Copies of our annual reports onForm 20-F and documents referred to in this annual report and our bylaws will be available for inspection upon request at our headquarters at Avenida Presidente Juscelino Kubitschek, 1909, 14th and 15th floors—Torre Norte—São Paulo Corporate Towers,04543-907 São Paulo, SP, Brazil.
10I. | Subsidiary Information |
Not required.
ITEM 11. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
We are exposed to various market risks, primarily related to potential loss arising from adverse changes in interest rates and foreign currency exchange rates. We have established policies and procedures to manage sensitivity to interest rate and foreign currency exchange rate risk. These procedures include the monitoring of our levels of exposure to each market risk, including an analysis based on forecast of future cash flows, the funding of variable rate assets with variable rate liabilities, and limiting the amount of fixed rate assets which may be funded with floating rate liabilities. We may also use derivative financial instruments to mitigate the effects of interest rate fluctuations and to reduce our exposure to exchange rate risk. The following sections address the significant market risks associated with our financial activities.
Interest Rate Risk
Our exposure to market risk for interest rate fluctuations principally relates to changes in the market interest rates of our U.S. dollar-denominated andreal-denominated monetary assets and liabilities, principally our short- and long-term debt obligations. Increases and decreases in prevailing interest rates generally translate into increases and decreases in interest expense. Additionally, the fair values of interest rate-sensitive instruments are also affected by general market conditions.
Our short and long-term debt obligations totaled US$3,647.7 million as of December 31, 2018 and were denominated in U.S. dollars, Brazilianreais and Euros. Of the total amount of debt denominated in U.S. dollars (i.e., US$ 3,341.4 million), US$3,172.1 million was subject to fixed rates. The remaining floating rate U.S. dollar-denominated debt, or US$169.4 million, which corresponds to 5.1% of our debt denominated U.S. dollars, was indexed to LIBOR. It is likely that we will have to transition away from the LIBOR as a benchmark to our debt in 2021, as the banks’ obligations to report information used to set LIBOR will cease by then. We have not yet analyzed the effects of this transition.
Of our US$286.6 million Brazilianreal-denominated debt as of December 31, 2018, US$1.9 million bears interest at a variable rate based on the TJLP, and US$284.7 million bears interest at a fixed rate of 4.5% per annum. The TJLP was 7.0% per annum as of December 31, 2018. Our Euro denominated debt totaled US$19.6 million as of fixed rate as of December 31, 2018.
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The table below provides information about our short-term debt obligations as of December 31, 2018 that are sensitive to changes in interest rates and foreign currency exchange rates.
Weighted Average Interest Rate 2018(1) | Total Amount Outstanding | Total Fair Value | ||||||||||
(%) | (in US$ millions) | |||||||||||
Short-Term Debt | ||||||||||||
U.S. dollars (fixed rate) | 5.33 | 34.3 | 34.5 | |||||||||
U.S. dollars (LIBOR indexed) | 4.19 | 21.6 | 26.8 | |||||||||
Euro (fixed rate) | 0.00 | 0 | 0 | |||||||||
Reais (fixed rate) | 4.51 | 122.8 | 124.1 | |||||||||
Reais (TJLP indexed) | 5.50 | 0.6 | 0.6 | |||||||||
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Total short-term debt | 179.3 | 186.0 | ||||||||||
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(1) | The interest rate refers exclusively to the weighted average of our indebtedness (short-term and long-term). It does not represent the indexed rates as of December 31, 2018. |
The table below provides information about our long-term debt obligations as of December 31, 2018 that are sensitive to changes in interest rates and foreign currency exchange rates:
Weighted Average Interest Rate 2018(1) | TotalAmount Outstanding | 2020 | 2021 | 2022 | 2023 | 2024 and There-after | Total Fair value | |||||||||||||||||||||||||
(%) | (in US$ millions) | |||||||||||||||||||||||||||||||
Long-Term Debt | ||||||||||||||||||||||||||||||||
U.S. dollars (fixed rate) | 5.33 | 3,137.8 | 162.2 | 199.5 | 499.1 | 508.2 | 1,768.8 | 3,274.5 | ||||||||||||||||||||||||
U.S. dollars (LIBOR indexed) | 4.19 | 147.8 | 2.1 | 16.6 | 0.5 | 0.6 | 128.0 | 148.2 | ||||||||||||||||||||||||
Euro (fixed rate) | 0.00 | 19.6 | 3.1 | 2.8 | 3.5 | 3.5 | 6.7 | 19.6 | ||||||||||||||||||||||||
Reais (fixed rate) | 4.51 | 161.9 | 69.0 | 68.2 | 16.1 | 8.6 | — | 127.1 | ||||||||||||||||||||||||
Reais (TJLP indexed) | 5.50 | 1.3 | 0.6 | 0.5 | 0.2 | — | — | 1.1 | ||||||||||||||||||||||||
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Total long-term debt | 3,468.4 | 237.0 | 287.6 | 519.4 | 520.9 | 1,903.5 | 3,570.5 | |||||||||||||||||||||||||
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(1) | The interest rate refers exclusively to the weighted average of our indebtedness (short-term and long-term). It does not represent the indexed rates as of December 31, 2018. |
In order to manage our interest rate risk on our monetary liabilities, we have entered into a number of swaps, which effectively convert US$284.7 million of our fixed interest rate, Brazilianreal-denominated debt into floating interest rate, Brazilianreal-denominated obligations; and convert US$102.6 million of our floating interest rate, U.S. dollar-denominated debt to fixed interest rate, U.S. dollar-denominated obligations.
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The table below provides information about our short-term debt obligations as of December 31, 2018, after taking into account the effects of the aforementioned derivative transactions:
Weighted Average Interest Rate 2018(1) | Total Amount Outstanding | Total Fair Value | ||||||||||
(%) | (in US$ millions) | |||||||||||
Short-Term Debt | ||||||||||||
U.S. dollars (fixed rate) | 5.32 | 36.2 | 40.1 | |||||||||
U.S. dollars (LIBOR indexed) | 2.98 | 19.8 | 21.2 | |||||||||
Euro (fixed rate) | 0.00 | 0 | 0 | |||||||||
Reais (fixed rate) | 0.00 | 0 | 0 | |||||||||
Reais (CDI indexed) | 2.45 | 122.7 | 124.1 | |||||||||
Reais (TJLP indexed) | 5.50 | 0.6 | 0.6 | |||||||||
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| |||||||||
Total short-term debt | 179.3 | 186.0 | �� | |||||||||
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(1) | The interest rate refers exclusively to the weighted average of our indebtedness (short-term and long-term). It does not represent the indexed rates as of December 31, 2018. |
The table below provides information about our long-term debt obligations as of December 31, 2018, after taking into account the effects of the aforementioned derivative transactions:
Weighted Average Interest Rate 2018(1) | Total Amount Outstanding | 2020 | 2021 | 2022 | 2023 | 2024 and There-after | Total Fair value | |||||||||||||||||||||||||
(%) | (in US$ millions) | |||||||||||||||||||||||||||||||
Long-Term Debt | ||||||||||||||||||||||||||||||||
U.S. dollars (fixed rate) | 5.32 | 3,239.9 | 162.6 | 200.0 | 499.7 | 508.7 | 1,868.9 | 3,377.7 | ||||||||||||||||||||||||
U.S. dollars (LIBOR indexed) | 2.98 | 45.7 | 1.7 | 16.1 | — | — | 27.9 | 45.0 | ||||||||||||||||||||||||
Euro (fixed rate) | 0.00 | 19.6 | 3.1 | 2.8 | 3.5 | 3.5 | 6.7 | 19.6 | ||||||||||||||||||||||||
Reais (CDI indexed) | 2.45 | 161.9 | 69.0 | 68.2 | 16.1 | 8.6 | — | 127.1 | ||||||||||||||||||||||||
Reais (TJLP indexed) | 5.55 | 1.3 | 0.6 | 0.5 | 0.2 | — | — | 1.1 | ||||||||||||||||||||||||
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Total long-term debt | 3,468.4 | 237.0 | 287.6 | 519.5 | 520.8 | 1,903.5 | 3,570.5 | |||||||||||||||||||||||||
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(1) | The interest rate refers exclusively to the weighted average of our indebtedness (short-term and long-term). It does not represent the indexed rates as of December 31, 2018. |
Foreign Exchange Rate Risk
In managing our foreign currency risk, we focus on balancing ournon-U.S. dollar-denominated assets against ournon-U.S. dollar-denominated liabilities plus shareholders’ equity in relation to our forecasts of future cash flows. Beyond the foreign currency exposure related to our debt obligations as summarized above, we also have other assets and liabilities denominated in currencies other than the U.S. dollar. These monetary assets and liabilities are primarily cash and cash equivalents, financial assets, accounts receivable and payable, deferred income taxes, dividends and certain other assets and liabilities and are primarily denominated in Brazilianreais. The effects on these assets and liabilities of the appreciation or devaluation of other foreign currencies against the U.S. dollar result in foreign exchange gains (losses) recognized as interest income (expense), net. The translation gains and losses arising from the remeasurement of our financial statements to U.S. dollars are recognized on our statement of income as foreign exchange gain (loss), net.
Our cash flow exposure comes as a result of the fact that approximately 6.0% of our net revenues and 30% of our total costs are denominated inreais.Having morereal denominated costs than revenues generates the exposure. For further information on our hedges and derivate instruments, see Note 8 to 2018 audited consolidated financial statements.
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The table below provides information about our assets and liabilities exposed to foreign currency risk as of December 31, 2018, as well as the derivative transactions outstanding at the same date:
Financial instruments indexed to currencies other than the U.S. dollar Outstanding Amount by Year of Maturity | ||||||||||||||||||||||||||||||||
Total Outstanding Amount | 2019 | 2020 | 2021 | 2022 | 2023 | There- after | Total Fair Value | |||||||||||||||||||||||||
(in US$ millions) | ||||||||||||||||||||||||||||||||
ASSETS | ||||||||||||||||||||||||||||||||
Cash and cash equivalents and financial investments | ||||||||||||||||||||||||||||||||
InReais | 406.5 | 406.5 | —�� | — | — | — | — | 406.5 | ||||||||||||||||||||||||
In Euro | 47.7 | 47.7 | — | — | — | — | — | 47.7 | ||||||||||||||||||||||||
In other currencies | 6.8 | 6.8 | — | — | — | — | 6.8 | |||||||||||||||||||||||||
Trade accounts receivable | ||||||||||||||||||||||||||||||||
InReais | 10.7 | 10.7 | — | — | — | — | — | 10.7 | ||||||||||||||||||||||||
In Euro | 33.1 | 33.1 | — | — | — | — | — | 33.1 | ||||||||||||||||||||||||
Deferred income tax assets | ||||||||||||||||||||||||||||||||
InReais | 17.9 | 12.6 | 1.1 | 1.1 | 1.1 | 1.1 | 0.9 | 17.9 | ||||||||||||||||||||||||
In Euro | 2.8 | 2.0 | 0.2 | 0.2 | 0.2 | 0.2 | — | 2.8 | ||||||||||||||||||||||||
In other currencies | 0.9 | 0.6 | 0.1 | 0.1 | 0.1 | — | — | 0.9 | ||||||||||||||||||||||||
Other assets | ||||||||||||||||||||||||||||||||
InReais | 265.8 | 182.1 | 83.7 | — | — | — | — | 265.8 | ||||||||||||||||||||||||
In Euro | 11.5 | 10.3 | 1.2 | — | — | — | — | 11.5 | ||||||||||||||||||||||||
In other currencies | 0.6 | 0.6 | — | — | — | — | — | 0.6 | ||||||||||||||||||||||||
Total assets in Reais | 700.9 | 611.9 | 84.8 | 1.1 | 1.1 | 1.1 | 0.9 | 700.9 | ||||||||||||||||||||||||
Total assets in Euro | 95.1 | 93.1 | 1.4 | 0.2 | 0.2 | 0.2 | — | 95.1 | ||||||||||||||||||||||||
Total assets in other currencies | 8.3 | 8.0 | 0.1 | 0.1 | 0.1 | — | — | 8.3 | ||||||||||||||||||||||||
LIABILITIES | ||||||||||||||||||||||||||||||||
Loans | ||||||||||||||||||||||||||||||||
InReais | 286.6 | 123.4 | 69.6 | 68.7 | 16.3 | 8.6 | — | 286.6 | ||||||||||||||||||||||||
In Euro | 19.6 | — | 3.1 | 2.8 | 3.5 | 3.5 | 6.7 | 19.6 | ||||||||||||||||||||||||
Accounts payable to suppliers | ||||||||||||||||||||||||||||||||
InReais | 77.1 | 77.1 | — | — | — | — | — | 77.1 | ||||||||||||||||||||||||
In Euro | 27.2 | 27.2 | — | — | — | — | — | 27.2 | ||||||||||||||||||||||||
In other currencies | 72.2 | 72.2 | — | — | — | — | — | 72.2 | ||||||||||||||||||||||||
Customer advances | ||||||||||||||||||||||||||||||||
InReais | 159.7 | 159.7 | — | — | — | — | — | 159.7 | ||||||||||||||||||||||||
Other accounts payable & accrued liabilities | ||||||||||||||||||||||||||||||||
InReais | 377.7 | 261.3 | 116.4 | — | — | — | — | 377.7 | ||||||||||||||||||||||||
In Euro | 18.9 | 14.6 | 4.3 | — | — | — | — | 18.9 | ||||||||||||||||||||||||
In other currencies | 3.9 | 3.6 | 0.3 | — | — | — | — | 3.9 | ||||||||||||||||||||||||
Taxes and payroll charges payable | ||||||||||||||||||||||||||||||||
InReais | 120.3 | 62.0 | 58.3 | — | — | — | — | 120.3 | ||||||||||||||||||||||||
In Euro | 4.5 | 4.5 | — | — | — | — | — | 4.5 | ||||||||||||||||||||||||
Accrued taxes on income | ||||||||||||||||||||||||||||||||
InReais | 32.3 | 32.3 | — | — | — | — | 32.3 | |||||||||||||||||||||||||
In Euro | (4.4 | ) | (4.4 | ) | — | — | — | — | — | (4.4 | ) | |||||||||||||||||||||
In other currencies | 2.9 | 2.9 | — | — | — | — | — | 2.9 | ||||||||||||||||||||||||
Deferred income tax liabilities | ||||||||||||||||||||||||||||||||
InReais | 224.7 | 158.0 | 13.5 | 13.3 | 13.3 | 13.3 | 13.3 | 224.7 | ||||||||||||||||||||||||
In Euro | 11.2 | 7.9 | 0.7 | 0.7 | 0.7 | 0.7 | 0.5 | 11.2 | ||||||||||||||||||||||||
In other currencies | 0.8 | 0.8 | — | — | — | — | — | 0.8 | ||||||||||||||||||||||||
Accrued dividends | ||||||||||||||||||||||||||||||||
InReais | 5.0 | 5.0 | — | — | — | — | — | 5.0 | ||||||||||||||||||||||||
Contingencies | ||||||||||||||||||||||||||||||||
InReais | 48.8 | 15.4 | 14.0 | 14.0 | 14.0 | 14.0 | (22.6 | ) | 48.8 | |||||||||||||||||||||||
In Euro | 4.3 | — | 1.8 | 1.8 | 1.8 | 1.8 | (2.9 | ) | 4.3 | |||||||||||||||||||||||
Total liabilities in Reais | 1,332.2 | 894.2 | 271.8 | 96.0 | 43.6 | 35.9 | (9.3 | ) | 1,332.2 | |||||||||||||||||||||||
Total liabilities in Euro | 81.3 | 49.8 | 9.9 | 5.3 | 6.0 | 6.0 | 4.3 | 81.3 | ||||||||||||||||||||||||
Total liabilities in other currencies | 79.8 | 79.5 | 0.3 | — | — | — | — | 79.8 | ||||||||||||||||||||||||
Total exposure in Reais | (631.3 | ) | (282.3 | ) | (187.0 | ) | (94.9 | ) | (42.5 | ) | (34.8 | ) | 10.2 | (631.3 | ) | |||||||||||||||||
Total exposure in Euro | 13.8 | 43.3 | (8.5 | ) | (5.1 | ) | (5.8 | ) | (5.8 | ) | (4.3 | ) | 13.8 | |||||||||||||||||||
Total exposure in other currencies | (71.5 | ) | (71.5 | ) | (0.2 | ) | 0.1 | 0.1 | — | — | (71.5 | ) |
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Credit Risk
We may incur losses if counterparties to our various contracts do not pay amounts that are owed to us. In that regard, our primary credit risk derives from the sales of aircraft, spare parts and related services to customers, including the financial obligations related to those sales in the cases where we provide guarantees for the benefit of the providers of finance to the aircraft purchases of our customers. We are also exposed to the credit risk of the counterparties to our financial instruments.
Financial instruments which may potentially subject us to credit risk concentration include (i) financial investments and other financial instruments, (ii) trade accounts receivable, (iii) customer commercial financing and (iv) advances to suppliers We seek to limit our credit risk associated with cash and cash equivalents by placing the investments we make with those instruments with investment grade-rated following the guidelines of financial management policy. With respect to trade accounts receivable and customer commercial financing, we seek to limit our credit risk by performing ongoing credit evaluations. All these customers are currently meeting their commitments with us, are operating within the established credit limits that we assign to them and are considered by management to represent an acceptable credit risk level to us. Advances to suppliers are made only to select, long-standing suppliers. We analyze the financial condition of those suppliers on an ongoing basis with a view to limiting credit risk.
We may also have credit risk related to the sale of aircraft during the period in which their purchasers are finalizing the financing arrangements for their aircraft purchases from us. In order to try to minimize these risks, we continuously monitor customer credit analyses and work closely with financial institutions to facilitate customer aircraft financing.
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ITEM 12. | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES |
12A. | Debt Securities |
Not applicable.
12B. | Warrants and Rights |
Not applicable.
12C. | Other Securities |
Not applicable.
12D. | American Depositary Shares |
Depositary Fees and Charges
The depositary may charge, and collect from, (i) each person to whom ADSs are issued, including, without limitation, issuances against deposits of shares, issuances in respect to share distributions, rights and other distributions, issuances pursuant to a stock dividend or stock split declared by us, or issuances pursuant to a merger, exchange of securities or any other transaction or event affecting the ADSs or the deposited securities, and (ii) each person surrendering ADSs for withdrawal of deposited securities or whose ADSs are cancelled or reduced for any other reason, U.S.$5.00 for each 100 ADSs (or portion thereof) issued, delivered, reduced, cancelled or surrendered (as the case may be) plus any additional fees charged by any governmental authorities or other institutions, including the Companhia Brasileira de Liquidação e Custódia (the Brazilian Clearing and Depositary Corporation) or the B3 –Brasil, Bolsa, Balcão, the stock exchange on which the shares are registered for trading. The depositary may sell (by public or private sale) sufficient securities and property received in respect of share distributions, rights and other distributions prior to the deposit to pay the charge.
The following additional charges shall be incurred by ADS Holders, by any party depositing or withdrawing shares or by any party surrendering ADSs, to whom ADSs are issued (including, without limitation, issuances pursuant to a stock dividend or stock split declared by us or an exchange of stock regarding the ADSs or the deposited securities or a distribution of ADSs pursuant to section 10 of the deposit agreement, whichever is applicable:
• | a fee of U.S.$0.02 or less per ADS for any cash distribution made pursuant to the deposit agreement; |
• | a fee of U.S.$1.50 per ADS or ADSs or transfers made pursuant to section 3 of the deposit agreement; |
• | a fee for the distribution or sale of securities pursuant to section 10 of the deposit agreement, this fee being in an amount equal to the fee for the execution and delivery of ADSs, referred to above which would have been charged as a result of the deposit of the securities (for purposes of section 7 of the deposit agreement treating all such securities as if they were shares) but which securities or the net cash proceeds from the sale thereof are instead distributed by the depositary to ADS holders entitled thereto; |
• | any other charge payable by any of the depositary, any of the depositary’s agents, including, without limitation, the custodian, or the agents of the depositary’s agents in connection with the servicing of our common shares or other deposited securities (which charge shall be assessed against registered holders of our ADSs as of the record date or dates set by the depositary and shall be payable at the sole discretion of the depositary by billing such registered holders or by deducting such charge from one or more cash dividends or other cash distributions); |
• | an aggregate fee of U.S.$0.02 per ADS per calendar year (or portion thereof) for the services performed by the depositary in administering the ADSs (which fee may be charged on a periodic basis during each calendar year and shall be assessed against holders as of the record date or record dates set by the depositary during each calendar year and shall be payable at the sole discretion of the depositary by billing such holders or by deducing such charge from one or more cash dividends or other cash distributions); and |
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• | a fee for the reimbursement of those fees, charges and expenses as are incurred by the depositary and/or any of its agents (including, without limitation, the custodian and expenses incurred on behalf of holders in connection with compliance with foreign exchange control regulations or any law or regulation relating to foreign investment) in connection with the servicing of the shares or other deposited securities, the sale of securities (including, without limitation, deposited securities), the delivery of deposited securities or otherwise in connection with the depositary’s or its custodian’s compliance with applicable law, rule or regulation (which fees and charges shall be assessed on a proportionate basis against holders as of the record date or dates set by the depositary and shall be payable at the sole discretion of the depositary by billing such holders or by deducting such charge from one or more cash dividends or other cash distributions). |
We will pay all other charges and expenses of the depositary and any agent of the depositary (except the custodian) pursuant to agreements from time to time between us and the depositary, except:
• | stock transfer or other taxes and other governmental charges (which are payable by holders or persons depositing shares); |
• | cable, telex and facsimile transmission and delivery charges incurred at the request of persons depositing, or holders delivering shares, ADSs or deposited securities (which are payable by such persons or holders); |
• | transfer or registration fees for the registration or transfer of deposited securities on any applicable register in connection with the deposit or withdrawal of deposited securities (which are payable by persons depositing shares or holders withdrawing deposited securities; there are no fees in respect of the shares as of the date of the deposit agreement); and |
• | in connection with the conversion of foreign currency into U.S. dollars, JPMorgan shall deduct out of such foreign currency the fees, expenses and other charges charged by it and/or its agent (which may be a division, branch or affiliate) so appointed in connection with this conversion, JPMorgan and/or its agent may act as principal for such conversion of foreign currency. |
These charges may at any time and from time to time be changed by agreement between us and the depositary.
Depositary Payments for the Year December 31, 2018
In 2018, JPMorgan paid US$2.4 million in connection with investor relations related expenses of Embraer incurred in 2018 that are eligible for reimbursement from JPMorgan under our contractual arrangements with that entity.
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ITEM 13. | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES |
No matters to report.
ITEM 14. | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS |
Material Modifications to the Rights of Security Holders
Not applicable.
Use of Proceeds
Not applicable.
ITEM 15. | CONTROLS AND PROCEDURES |
Disclosure Controls and Procedures
Disclosure controls and procedures refers to the controls and other procedures adopted by us that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosures.
Our President and CEO, Paulo Cesar de Souza e Silva, and our executive vice-president and chief financial and investor relations officer, Nelson Krahenbuhl Salgado, after evaluating, together with management, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange ActRules 13a-15(e)and 15d-15(e)) as of December 31, 2018, the end of the period covered by this annual report, concluded that, as of this date, our disclosure control and procedures were effective to ensure information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and were effective in ensuring that such information is accumulated and communicated to our management, including our CEO and chief financial officer, as appropriate to allow timely decisions regarding required disclosures.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined inRules 13a-15(f)and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is a process designed to provide reasonable assurance to our management and board of directors regarding the reliability of financial reporting and the preparation of our financial statements for external purposes in accordance with generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Effective internal control over financial reporting cannot, and does not, provide absolute assurance of achieving our control objectives. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2018. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control—Integrated Framework 2013. Based on this assessment, our management concluded that, as of December 31, 2018, our internal control over financial reporting was effective based on those criteria.
Attestation Report of the Registered Public Accounting Firm
The effectiveness of our internal control over financial reporting as of December 31, 2018 has been audited by PricewaterhouseCoopers Auditores Independentes, an independent registered public accounting firm, as stated in their report which appears herein on pageF-3.
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Changes in Internal Control over Financial Reporting
Our risks and internal controls department periodically evaluates our internal controls for the main cycles, documenting the processes used in each cycle, identifying opportunities and suggesting improvements for the existing control mechanisms. There was no change in our internal controls over financial reporting that occurred during the period covered by this annual report that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
ITEM 16A | AUDIT COMMITTEE FINANCIAL EXPERT |
Our board of directors has determined that Mr. Sergio Eraldo de Salles Pinto, an effective member of our statutory audit and risks committee is an “audit committee financial expert” as defined by current SEC rules. For a discussion of the role of our audit and risks committee, see “Item 6C. Directors, Senior Management and Employees—Board Practices—Audit and Risks Committee.”
ITEM 16B | CODE OF ETHICS |
Our board of directors has adopted a Code of Ethics and Conduct applicable to our directors, officers and employees worldwide, including our principal executive officer, principal financial officer and controller. A copy of our Code of Ethics and Conduct has been filed as Exhibit 11.1 to this annual report.
ITEM 16C | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
The following table sets forth by category of service the total fees for services performed by KPMG Auditores Independentes during the fiscal year ended December 31, 2017 and PricewaterhouseCoopers Auditores Independentes during the fiscal years ended December 31, 2017 and 2018:
Principal accountant fees and services | Year ended December 31, | |||||||
2018 | 2017 | |||||||
(in US$ thousands) | ||||||||
Audit Fees | 3,583.2 | 2,877.8 | ||||||
Audit-Related Fees | 25.9 | 25.9 | ||||||
Tax Fees | 44.9 | 268.1 | ||||||
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| |||||
All Other Fees | 52.4 | 665.0 | ||||||
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|
|
| |||||
Total | 3,706.4 | 3,836.9 | ||||||
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|
Audit Fees
Audit fees consisted of the aggregate fees in connection with (i) the audit of annual financial statements and quarterly reviews under Brazilian GAAP and IFRS as issued by the IASB, which are published in Brazil and United States (filed with the SEC onForm 6-K) performed in accordance with the standards of the PCAOB and (ii) statutory audits of subsidiaries.
Audit-Related Fees
Audit-related fees consisted mainly of the aggregate fees in connection with compliance services provided to the Company and some of our subsidiaries related to documents filed with regulatory and government agencies and issuance of comfort letter related to the Company’s issuance of Notes.
Tax Fees
Tax fees consisted of the aggregate fees in connection with tax compliance services for some of our subsidiaries.
All Other Fees
All other fees consisted refer to miscellaneous permitted compliance services rendered in 2017 for some subsidiaries and services related to IT diagnosis.
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Pre-Approval Policies and Procedures
Our board of directors approves all audit and audit-related services provided by KPMG Auditores Independentes in 2016 and PricewaterhouseCoopers Auditores Independentes in 2017 and 2018. Any services provided by KPMG Auditores Independentes and PricewaterhouseCoopers Auditores Independentes that are not specifically included within the scope of the audit must bepre-approved by our audit and risks committee in advance of any engagement. Pursuant toRule 2-01 ofRegulation S-X, audit committees are permitted to approve certain fees for audit-related services, tax services and other services pursuant to ade minimis exception prior to the completion of an audit engagement. In 2016, 2015 and 2014 none of the fees paid to KPMG Auditores Independentes and in 2017 and 2018 none of the fees paid to PricewaterhouseCoopers Auditores Independentes were approved pursuant to thede minimis exception.
ITEM 16D | EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES |
None.
ITEM 16E | PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS |
On March 10, 2016, our board of directors approved a new share buyback program for our common shares, in compliance with CVM Instruction No. 10/80. We were authorized to buy back up to an aggregate of 3,000,000 common shares, representing approximately 0.4% of our outstanding capital, which totaled 737,439,054 common shares outstanding on March 10, 2016.
On June 2, 2017, our board of directors approved a new share buyback program for our common shares, in compliance with CVM Instruction No. 10/80. We were authorized to buy back up to an aggregate of 3,000,000 common shares, representing approximately 0.4% of our outstanding capital, which totaled 735,752,704 common shares outstanding on June 2, 2017. The common shares were repurchased from June 6 through August 29, 2017.
In 2018, we did not approve a share buyback program.
ITEM 16F | CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT |
Not applicable.
ITEM 16G | CORPORATE GOVERNANCE |
We are subject to NYSE corporate governance listing standards. As a foreign private issuer, the standards applicable to us are considerably different than the standards applied to U.S. listed companies. Under the NYSE rules, we are required only to: (i) have an audit committee or audit board, pursuant to an applicable exemption available to foreign private issuers, that meets certain requirements, as discussed below, (ii) provide prompt certification by our CEO of any materialnon-compliance with any corporate governance rules and (iii) provide a brief description of the significant differences between our corporate governance practices and the NYSE corporate governance practice required to be followed by U.S. listed companies. The discussion of the significant differences between our corporate governance practices and those required of U.S. listed companies follows below.
Majority of Independent Directors
The NYSE rules require that a majority of the Board must consist of independent Directors. Independence is defined by various criteria, including the absence of a material relationship between the director and the listed company, which independence must be affirmatively determined by the board of directors. Likewise, theNovo MercadoListing Rules require that at least 20%, or at least two, whichever is bigger, of the members of the board of directors of a company listed on theNovo Mercado segment of the B3 be independent. Independence of Board members in accordance with theNovo Mercado Listing Rules is defined by criteria similar to those set forth in the NYSE rules.
With the exception of Mr. José Magno Resende de Araújo (the representative of the Brazilian government, through the government’s ownership of the “golden share”), Mr. Alexandre Magalhães Filho and Dejair Losnak Filho (both representatives of our employees), all the current members of our board of directors have declared that they are independent for purposes of theNovo Mercado Listing Rules. Our directors meet the qualification requirements of the Brazilian Corporate Law, the CVM requirements and theNovo Mercado Listing Rules.
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The Brazilian Corporate Law and our bylaws require that our directors be elected by our shareholders at a general shareholders’ meeting. The election of members of our board of directors, absent a request to adopt a cumulative voting system, will be conducted under a system of slate voting whereby voting will be based on a slate of Directors and no voting will be allowed on individual candidates. According to our bylaws, the board of directors will nominate a slate for the subsequent term of office. Our board of directors is appointed by our shareholders for atwo-year term, having three reserved seats as follows: (i) one acting member (and his/her alternate) to be appointed by the Brazilian government, as holder of the “golden share” and (ii) two acting members (and his/her alternate) to be appointed by our employees. The remaining eight acting Directors are elected in accordance with the slate voting or cumulative voting rules contained in our bylaws. A person may participate in two or more different slates. Each shareholder may only vote on one slate and the slate that receives the highest number of votes shall be declared elected. For further information on the election of our board of directors, see “Item 10B. Additional Information—Memorandum and Articles of Association—Board of Directors—Election of Board of Directors.”
Executive Sessions
NYSE rules require that the non-management directors must meet at regularly scheduled executive sessions without management. Brazilian Corporate Law does not have a similar provision. According to Brazilian Corporate Law, up to one third of the members of the board of directors can be elected from management. The remaining non-management directors are not expressly required to check on management. Embraer’s board of directors’ rules of procedure provide that the external members of the board of directors (who are comprised of members who do not hold any commercial, employment or management relationship with Embraer) shall meet on exclusive sessions to be held on the same day of and prior to the board of directors meetings to discuss the agenda of the meeting.
Nominating/Corporate Governance Committee
NYSE rules require that listed companies have a Nominating/Corporate Governance Committee composed entirely of independent directors and governed by a written charter addressing the committee’s required purpose and detailing its required responsibilities, which include, among other things, identifying and selecting qualified board member nominees and developing a set of corporate governance principles applicable to the company. We are not required under applicable Brazilian law to have a Nominating Committee/Corporate Governance Committee, and accordingly, to date, have not established this committee. Members of our board of directors are elected by our shareholders at a general shareholders’ meeting.
Compensation Committee
NYSE rules require that listed companies have a compensation committee composed entirely of independent directors and governed by a written charter addressing the committee’s required purpose and detailing its required responsibilities, which include, among other things, reviewing corporate goals relevant to CEO compensation, evaluating CEO performance and approving CEO compensation levels and recommending to the boardnon-CEO compensation, incentive-compensation and equity-based plans. We are not required under applicable Brazilian law to have a Compensation Committee. Under the Brazilian Corporate Law, the total amount available for compensation of our directors and executive officers and for profit-sharing payments to our executive officers is established by our shareholders at the annual general meeting. The board of directors is then responsible for determining the individual compensation and profit sharing of each executive officer, as well as the compensation of our board and committee members. In making these determinations, the board reviews the performance of the executive officers, including the performance of our CEO.
Audit Committee
NYSE rules require that listed companies have an audit committee that (i) is composed of a minimum of three independent directors who are all financially literate, (ii) complies with the SEC rules regarding audit committees for listed companies, (iii) has at least one member who has accounting or financial management expertise and (iv) is governed by a written charter addressing the committee’s required purpose and detailing its required responsibilities. We have an Audit and Risks Committee which meets the requirements ofRule 10A-3 under the U.S. Securities Exchange Act of 1934. We do not claim an exemption from the listing standards for audit committees.
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Embraer’s statutory “Audit and Risks Committee” is composed of independent members of our board of directors. Because foreign private issuers are subject to local legislation which may prohibit the full board of directors from delegating certain responsibilities to the audit committee, pursuant toRule 10A-3, audit committees of foreign private issuers may be granted responsibilities, which may include advisory powers, with respect to such matters to the extent permitted by law. Due to certain restrictions imposed by the Brazilian Corporate Law, our Audit and Risks Committee, unlike a U.S. audit committee, only has an “advisory” role and may only make recommendations for adoption by the full board of directors, which is responsible for the ultimate vote and final decision. For example, our Audit and Risks Committee makes recommendations regarding the appointment of auditing firms, which are subject to a vote of the board of directors. Our Audit and Risks Committee complies with Brazilian legal requirements (including “independent directors,” as defined by Brazilian law).
Shareholder Approval of Equity Compensation Plans
NYSE rules require that shareholders be given the opportunity to vote on all equity compensation plans and material revisions thereto, with limited exceptions. Under the Brazilian Corporate Law, shareholders must approve all stock option plans. In addition, any issuance of new shares that exceeds our authorized share capital is subject to shareholder approval.
Corporate Governance Guidelines
NYSE rules require that listed companies adopt and disclose corporate governance guidelines. In addition to being subject to theNovo Mercado regulations that include rules on corporate governance, we have not adopted any formal corporate governance guidelines. We have adopted and observe, our Policy on Trading in Company Securities and Disclosure of Material Information and Preservation of Confidentiality that requires the public disclosure of all relevant information pursuant to guidelines set forth by the CVM, as well as insider trading rules, which, among other things, establishesblack-out periods and requires insiders to inform management of all transactions involving our securities.
In November 2016, after the contribution and comments made by the CVM, the Brazilian Corporate Governance Code, which provides for corporate governance practices guidelines for publicly-held companies in Brazil, was released by an institution formed by several market entities, such as the Brazilian Pension System, the Brazilian Association of Publicly-Held Companies, the Brazilian Financial and Capital Markets Association, the Brazilian Private Equity & Venture Capital Association, the Brazilian Association of Capital Markets Investors, the Association of Capital Markets Investment Analysts and Professionals, B3, BRAIN – Brazil Investments and Business, the Brazilian Institute of Corporate Governance, the Brazilian Investor Relations Institute and the Brazilian Capital Markets Institute.
In June 2017, the CVM approved a new rule, CVM Rule No. 586, which establishes that companies must inform whether they will implement the provisions set forth in the Brazilian Corporate Governance Code, or otherwise justify the reasons fornon-compliance with those practices. Additionally, the B3 and the Brazilian Institute of Corporate Governance have issued guidelines for corporate governance best practices in Brazil.
Code of Business Conduct and Ethics
NYSE rules require that listed companies adopt and disclose a code of business conduct and ethics for directors, officers and employees, and promptly disclose any waivers of the code for directors or executive officers. Applicable Brazilian law does not have a similar requirement. However, we adopted a Code of Ethics and Conduct applicable to our officers, directors and employees worldwide, including at the subsidiary level. We believe this code substantially addresses the matters required to be addressed pursuant to the NYSE rules. A copy of our Code of Ethics and Conduct has been filed as Exhibit 11.1 to this annual report. For a further discussion of our Code of Ethics and Conduct, see “Item 16B. Code of Ethics.” We usually review our Code of Ethics every two years. The latest version of the Code of Ethics is the 5thEdition, and was approved on December 8, 2016.
Internal Audit Function
NYSE rules require that listed companies maintain an internal audit function to provide management and the audit committee with ongoing assessments of the company’s risk management processes and system of internal control. Our internal audit reports to the Audit and Risks Committee, and risk management and internal control report to the Chief Financial Officer, respectively, assuring the necessary independence and competence to assess the design of our internal control over financial reporting, as well as to test its effectiveness as required by Section 404 of the Sarbanes-Oxley Act of 2002.
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ITEM 16H | MINE SAFETY DISCLOSURE |
Not applicable.
ITEM 17. | FINANCIAL STATEMENTS |
We have responded to Item 18 in lieu of responding to this item.
ITEM 18. | FINANCIAL STATEMENTS |
Our audited consolidated financial statements, together with the report of the Independent Registered Public Accounting Firm thereon, are filed as part of this annual report and are located following the signature page hereof.
ITEM 19. | EXHIBITS |
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SIGNATURES
The Registrant hereby certifies that it meets all of the requirements for filing onForm 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
EMBRAER S.A. | ||
By : | /s/ PAULO CESAR DE SOUZA E SILVA | |
Name: | Paulo Cesar de Souza e Silva | |
Title: | President and Chief Executive Officer | |
By: | /s/ NELSON KRAHENBUHL SALGADO | |
Name: | Nelson Krahenbuhl Salgado | |
Title: | Executive Vice-President and Chief Financial and Investor Relations Officer |
Date: March 29, 2019
Table of Contents
Embraer S.A.
Consolidated Financial Statements
as of December 31, 2018
and Report of Independent Registered
Public Accounting Firm
F-1
Table of Contents
INDEX TO THE FINANCIAL STATEMENTS
F-2
Table of Contents
Report of Independent Registered Public Accounting Firm
To theBoard of Directors and Shareholders of Embraer S.A.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated statements of financial position of Embraer S.A. and its subsidiaries (“the Company”) as of December 31, 2018 and 2017, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows for each of the two years in the period ended December 31, 2018, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2018 in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Change in Accounting Principle
As discussed in Note 2.2.1 to the consolidated financial statements, the Company changed the manner in which it accounts for revenues from contracts with customers and financial instruments in 2018.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
F-3
Table of Contents
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers
Auditores Independentes
São José dos Campos, Brazil
March 29, 2019
We have served as the Company’s auditor since 2017.
F-4
Table of Contents
The Board of Directors and Shareholders
Embraer S.A.
We have audited the consolidated statement of financial position of Embraer S.A. and subsidiaries as at January 1, 2017, and the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for the year ended December 31, 2016. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Embraer S.A. and subsidiaries as at January 1, 2017, and the results of its operations and its cash flows for the year ended December 31, 2016, in conformity with International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB).
As discussed in note 2.2.1 to the consolidated financial statements, the Company has changed its method of accounting for financial instruments and revenue due to the adoption of IFRS 9Financial Instruments and IFRS 15Revenue from Contracts with Customers.
/s/ KPMG Auditores Independentes
São José dos Campos, Brazil
March 21, 2017, except as to the retrospective adjustments described in note 2.2.1 to the consolidated financial statements, which is as of March 29, 2019.
F-5
Table of Contents
Embraer S.A.
Consolidated Statements of Financial Position as of December 31, 2018, 2017 and January 01, 2017
(In millions of U.S. dollar)
ASSETS | Note | 12.31.2018 | 12.31.2017 | 01.01.2017 | ||||||||||||
(Restated)* | (Restated)* | |||||||||||||||
CURRENT | ||||||||||||||||
Cash and cash equivalents | 5 | 1,280.9 | 1,270.8 | 1,241.5 | ||||||||||||
Financial investments | 6 | 1,743.4 | 2,366.1 | 1,775.6 | ||||||||||||
Trade accounts receivable, net | 7 | 318.0 | 297.0 | 336.8 | ||||||||||||
Derivative financial instruments | 8 | 5.4 | 29.5 | 21.0 | ||||||||||||
Customer and commercial financing | 1.2 | 2.1 | 8.5 | |||||||||||||
Collateralized accounts receivable | 9.1 | 218.5 | 185.6 | 142.8 | ||||||||||||
Contract assets | 30 | 358.0 | 447.5 | 370.6 | ||||||||||||
Inventories | 11 | 2,507.0 | 2,148.7 | 2,496.4 | ||||||||||||
Guarantee deposits | 10 | 339.9 | 0.1 | — | ||||||||||||
Income tax and social contribution | 95.3 | 76.9 | 80.7 | |||||||||||||
Other assets | 12 | 203.4 | 255.3 | 349.7 | ||||||||||||
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7,071.0 | 7,079.6 | 6,823.6 | ||||||||||||||
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NON-CURRENT | ||||||||||||||||
Financial investments | 6 | 183.5 | 251.2 | 173.1 | ||||||||||||
Derivative financial instruments | 8 | 4.1 | 4.8 | 11.1 | ||||||||||||
Customer and commercial financing | 10.5 | 14.3 | 28.9 | |||||||||||||
Collateralized accounts receivable | 9.1 | 17.4 | 103.1 | 180.5 | ||||||||||||
Guarantee deposits | 10 | 9.8 | 393.8 | 511.4 | ||||||||||||
Deferred income tax and social contribution | 22.1 | 21.6 | 13.4 | 11.6 | ||||||||||||
Other assets | 12 | 105.6 | 121.5 | 156.9 | ||||||||||||
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352.5 | 902.1 | 1,073.5 | ||||||||||||||
Investments | 6.3 | 5.6 | 3.9 | |||||||||||||
Property, plant and equipment, net | 15 | 1,964.7 | 2,104.9 | 2,154.2 | ||||||||||||
Intangible assets, net | 16 | 1,898.8 | 1,882.4 | 1,664.6 | ||||||||||||
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4,222.3 | 4,895.0 | 4,896.2 | ||||||||||||||
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TOTAL ASSETS | 11,293.3 | 11,974.6 | 11,719.8 | |||||||||||||
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* | See Note 2.2.1 for the discussion relating to the adjustments. |
The accompanying notes are an integral part of these consolidated financial statements.
F-6
Table of Contents
Embraer S.A.
Consolidated Statements of Financial Position as of December 31, 2018, 2017 and January 01, 2017
(In millions of U.S. dollar)
LIABILITIES | Note | 12.31.2018 | 12.31.2017 | 01.01.2017 | ||||||||||||
(Restated)* | (Restated)* | |||||||||||||||
CURRENT | ||||||||||||||||
Trade accounts payable | 18 | 892.1 | 824.7 | 952.1 | ||||||||||||
Loans and financing | 19 | 179.3 | 388.9 | 510.3 | ||||||||||||
Recourse andnon-recourse debt | 9.2 | 324.0 | 17.6 | 22.9 | ||||||||||||
Other payables | 20 | 288.4 | 292.2 | 379.5 | ||||||||||||
Contract liabilities | 30 | 1,045.4 | 1,001.1 | 1,086.8 | ||||||||||||
Derivative financial instruments | 8 | 8.1 | 8.8 | 8.4 | ||||||||||||
Taxes and payroll charges payable | 21 | 68.4 | 70.7 | 43.6 | ||||||||||||
Income tax and social contribution | 48.0 | 16.1 | 25.9 | |||||||||||||
Financial guarantee and residual value | 23 | 51.0 | 22.2 | 49.7 | ||||||||||||
Dividends payable | 5.0 | 36.8 | 24.8 | |||||||||||||
Unearned income | 2.0 | — | — | |||||||||||||
Provision | 24.1 | 116.9 | 124.1 | 123.8 | ||||||||||||
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3,028.6 | 2,803.2 | 3,227.8 | ||||||||||||||
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NON-CURRENT | ||||||||||||||||
Loans and financing | 19 | 3,468.4 | 3,809.6 | 3,249.6 | ||||||||||||
Recourse andnon-recourse debt | 9.2 | 17.4 | 346.5 | 351.0 | ||||||||||||
Other payables | 20 | 28.6 | 21.5 | 16.9 | ||||||||||||
Contract liabilities | 30 | 198.2 | 125.5 | 158.0 | ||||||||||||
Derivative financial instruments | 8 | — | 0.1 | — | ||||||||||||
Taxes and payroll charges payable | 21 | 58.2 | 70.2 | 67.9 | ||||||||||||
Deferred income tax and social contribution | 22.1 | 254.0 | 258.0 | 265.2 | ||||||||||||
Financial guarantee and residual value guarantees | 23 | 101.1 | 134.6 | 161.1 | ||||||||||||
Unearned income | 73.2 | 91.7 | 106.9 | |||||||||||||
Provision | 24.1 | 125.5 | 136.2 | 179.0 | ||||||||||||
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4,324.6 | 4,993.9 | 4,555.6 | ||||||||||||||
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TOTAL LIABILITIES | 7,353.2 | 7,797.1 | 7,783.4 | |||||||||||||
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SHAREHOLDERS’ EQUITY | ||||||||||||||||
Capital | 27.1 | 1,551.6 | 1,438.0 | 1,438.0 | ||||||||||||
Treasury shares | 27.3 | (31.4 | ) | (51.8 | ) | (49.1 | ) | |||||||||
Revenue reserves | 2,433.7 | 2,743.2 | 2,566.1 | |||||||||||||
Share-based remuneration | 37.4 | 37.3 | 36.8 | |||||||||||||
Accumulated other comprehensive loss | (145.6 | ) | (107.7 | ) | (135.7 | ) | ||||||||||
Retained earning | — | 5.1 | (12.1 | ) | ||||||||||||
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3,845.7 | 4,064.1 | 3,844.0 | ||||||||||||||
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Non-controlling interests | 94.4 | 113.4 | 92.4 | |||||||||||||
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TOTAL SHAREHOLDERS’ EQUITY | 3,940.1 | 4,177.5 | 3,936.4 | |||||||||||||
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TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | 11,293.3 | 11,974.6 | 11,719.8 | |||||||||||||
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* | See Note 2.2.1 for the discussion relating to the adjustments. |
The accompanying notes are an integral part of these consolidated financial statements.
F-7
Table of Contents
Embraer S.A.
Consolidated Statements of Income Years Ended
(In millions of U.S. dollar)
Note | 12.31.2018 | 12.31.2017 | 12.31.2016 | |||||||||||
(Restated)* | (Restated)* | |||||||||||||
REVENUE | 5,071.1 | 5,859.4 | 6,203.9 | |||||||||||
Cost of sales and services | (4,303.1 | ) | (4,764.1 | ) | (4,982.0 | ) | ||||||||
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GROSS PROFIT | 768.0 | 1,095.3 | 1,221.9 | |||||||||||
Operating Income (expense) | ||||||||||||||
Administrative | (182.6 | ) | (179.1 | ) | (164.3 | ) | ||||||||
Selling | (304.2 | ) | (315.9 | ) | (353.4 | ) | ||||||||
Research | (46.1 | ) | (49.2 | ) | (47.6 | ) | ||||||||
Other operating income (expense), net | 32 | (199.4 | ) | (210.4 | ) | (442.6 | ) | |||||||
Equity in income (losses) of associates | (0.4 | ) | 1.2 | (0.3 | ) | |||||||||
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OPERATING PROFIT BEFORE FINANCIAL RESULT | 35.3 | 341.9 | 213.7 | |||||||||||
Financial income (expense), net | 33 | (171.5 | ) | (40.6 | ) | (37.5 | ) | |||||||
Foreign exchange gain (loss), net | 34 | — | 6.6 | 4.4 | ||||||||||
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PROFIT (LOSS) BEFORE TAXES ON INCOME | (136.2 | ) | 307.9 | 180.6 | ||||||||||
Income tax expense | 22.2 | (35.0 | ) | (27.9 | ) | (0.3 | ) | |||||||
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NET INCOME (LOSS) FOR THE PERIOD | (171.2 | ) | 280.0 | 180.3 | ||||||||||
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Atributable to : | ||||||||||||||
Owners of Embraer | (178.2 | ) | 264.0 | 178.6 | ||||||||||
Non-controlling interests | 7.0 | 16.0 | 1.7 | |||||||||||
Earnings per share-basic in US$ | 29.1 | (0.24 | ) | 0.36 | 0.24 | |||||||||
Earnings per share-diluted in US$ | 29.2 | (0.24 | ) | 0.36 | 0.24 |
* | See Note 2.2.1 for the discussion relating to the adjustments. |
The accompanying notes are an integral part of these consolidated financial statements.
F-8
Table of Contents
Embraer S.A.
Consolidated Statements of Comprehensive Income Years Ended
(In millions of U.S. dollar)
12.31.2018 | 12.31.2017 | 12.31.2016 | ||||||||||
(Restated)* | (Restated)* | |||||||||||
NET INCOME (LOSS) FOR THE PERIOD | (171.2 | ) | 280.0 | 180.3 | ||||||||
ITEMS THAT WILL NOT BE RECLASSIFIED FOR THE STATEMENT OF INCOME | ||||||||||||
Actuarial gain (loss) on post-employment benefit obligation | 1.1 | 9.2 | (7.6 | ) | ||||||||
ITEMS THAT MAY BE SUBSEQUENTLY RECLASSIFIED THROUGH PROFIT AND LOSS | ||||||||||||
Financial instruments, net | 0.4 | (10.3 | ) | 11.0 | ||||||||
Translation adjustments | (65.4 | ) | 34.1 | (0.8 | ) | |||||||
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OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX EFFECTS (i) | (63.9 | ) | 33.0 | 2.6 | ||||||||
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TOTAL OF COMPREHENSIVE INCOME | (235.1 | ) | 313.0 | 182.9 | ||||||||
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Attributable to: | ||||||||||||
Owners of Embraer | (216.1 | ) | 292.0 | 192.4 | ||||||||
Non-controlling interests | (19.0 | ) | 21.0 | (9.5 | ) | |||||||
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(235.1 | ) | 313.0 | 182.9 | |||||||||
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(i) | Items presented above are net of deferred income tax, if applicable, of US$ (2.8), US$ (3.8) and US$ 5.1 for the year ended December 31, 2018, 2017 and 2016, respectivelly. |
* | See Note 2.2.1 for the discussion relating to the adjustments. |
The accompanying notes are an integral part of these consolidated financial statements.
F-9
Table of Contents
Embraer S.A.
Consolidated Statements of Changes in Shareholders’ Equity Years Ended
(In millions of U.S. dollar)
Revenue reserves | Accumulated other comprehensive (loss) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Capital | Treasury shares | Share-based remuneration | Government grants | Legal Reserve | Additional proposed dividends | For investment and working capital | Retained earnings | Result in transactions withnon-controlling interest | Actuarial gain (loss) on post- employment benefit obligation | Cumulative translation adjustment | Financial instruments | Total shareholders’ equity | Non-controlling interest | Total shareholders’ equity | ||||||||||||||||||||||||||||||||||||||||||||||
At December 31, 2015 | 1,438.0 | (38.4 | ) | 35.4 | 41.6 | 183.4 | 6.6 | 2,224.7 | — | (4.2 | ) | (41.9 | ) | (102.8 | ) | (0.6 | ) | 3,741.8 | 101.9 | 3,843.7 | ||||||||||||||||||||||||||||||||||||||||
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Adjustment related to accounting pratice change * | — | — | — | — | — | — | — | (24.6 | ) | — | — | — | — | (24.6 | ) | — | (24.6 | ) | ||||||||||||||||||||||||||||||||||||||||||
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At January 01, 2016 (Restated) | 1,438.0 | (38.4 | ) | 35.4 | 41.6 | 183.4 | 6.6 | 2,224.7 | (24.6 | ) | (4.2 | ) | (41.9 | ) | (102.8 | ) | (0.6 | ) | 3,717.2 | 101.9 | 3,819.1 | |||||||||||||||||||||||||||||||||||||||
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Net income for the year | — | — | — | — | — | — | — | 178.6 | — | — | — | — | 178.6 | 1.7 | 180.3 | |||||||||||||||||||||||||||||||||||||||||||||
Actuarial loss on post employment benefit obligation | — | — | — | — | — | — | — | — | — | (7.6 | ) | — | — | (7.6 | ) | — | (7.6 | ) | ||||||||||||||||||||||||||||||||||||||||||
Translation adjustments | — | — | — | — | — | — | — | — | — | — | 10.4 | — | 10.4 | (11.2 | ) | (0.8 | ) | |||||||||||||||||||||||||||||||||||||||||||
Financial instruments | — | — | — | — | — | — | — | — | — | — | — | 11.0 | 11.0 | — | 11.0 | |||||||||||||||||||||||||||||||||||||||||||||
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Total comprehensive income | — | — | — | — | — | — | — | 178.6 | — | (7.6 | ) | 10.4 | 11.0 | 192.4 | (9.5 | ) | 182.9 | |||||||||||||||||||||||||||||||||||||||||||
Share-based remuneration | — | — | 1.4 | — | — | — | — | — | — | — | — | — | 1.4 | — | 1.4 | |||||||||||||||||||||||||||||||||||||||||||||
Stock options grants exercised | — | 6.4 | — | — | — | — | — | (4.7 | ) | — | — | — | — | 1.7 | — | 1.7 | ||||||||||||||||||||||||||||||||||||||||||||
Acquisition of own shares | — | (17.1 | ) | — | — | — | — | — | — | — | — | — | — | (17.1 | ) | — | (17.1 | ) | ||||||||||||||||||||||||||||||||||||||||||
Allocation of profits: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends from 2015 approved in 2016 | — | — | — | — | — | (6.6 | ) | — | — | — | — | — | — | (6.6 | ) | — | (6.6 | ) | ||||||||||||||||||||||||||||||||||||||||||
Investment in subsidy | — | — | — | 1.0 | — | — | — | (1.0 | ) | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
Legal reserve | — | — | — | — | 9.0 | — | — | (9.0 | ) | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
Interest on own capital | — | — | — | — | — | — | — | (22.0 | ) | — | — | — | — | (22.0 | ) | — | (22.0 | ) | ||||||||||||||||||||||||||||||||||||||||||
Dividends | — | — | — | — | — | — | — | (23.0 | ) | — | — | — | — | (23.0 | ) | — | (23.0 | ) | ||||||||||||||||||||||||||||||||||||||||||
Reserve for investments and working capital | — | — | — | — | — | — | 106.4 | (106.4 | ) | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
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At December 31, 2016 (Restated) | 1,438.0 | (49.1 | ) | 36.8 | 42.6 | 192.4 | — | 2,331.1 | (12.1 | ) | (4.2 | ) | (49.5 | ) | (92.4 | ) | 10.4 | 3,844.0 | 92.4 | 3,936.4 | ||||||||||||||||||||||||||||||||||||||||
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Net income for the year | — | — | — | — | — | — | — | 264.0 | — | — | — | — | 264.0 | 16.0 | 280.0 | |||||||||||||||||||||||||||||||||||||||||||||
Actuarial loss on post employment benefit obligation | — | — | — | — | — | — | — | — | — | 9.2 | — | — | 9.2 | — | 9.2 | |||||||||||||||||||||||||||||||||||||||||||||
Translation adjustments | — | — | — | — | — | — | — | — | — | — | 29.1 | — | 29.1 | 5.0 | 34.1 | |||||||||||||||||||||||||||||||||||||||||||||
Financial instruments | — | — | — | — | — | — | — | — | — | — | — | (10.3 | ) | (10.3 | ) | — | (10.3 | ) | ||||||||||||||||||||||||||||||||||||||||||
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Total comprehensive income | — | — | — | — | — | — | — | 264.0 | — | 9.2 | 29.1 | (10.3 | ) | 292.0 | 21.0 | 313.0 | ||||||||||||||||||||||||||||||||||||||||||||
Share-based remuneration | — | — | 0.5 | — | — | — | — | — | — | — | — | — | 0.5 | — | 0.5 | |||||||||||||||||||||||||||||||||||||||||||||
Stock options grants exercised | — | 12.3 | — | — | — | — | — | (6.4 | ) | — | — | — | — | 5.9 | — | 5.9 | ||||||||||||||||||||||||||||||||||||||||||||
Acquisition of own shares | — | (15.0 | ) | — | — | — | — | — | — | — | — | — | — | (15.0 | ) | — | (15.0 | ) | ||||||||||||||||||||||||||||||||||||||||||
Allocation of profits: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Government grants | — | — | — | 4.3 | — | — | — | (4.3 | ) | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
Legal reserve | — | — | — | — | 12.0 | — | — | (12.0 | ) | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
Interest on own capital | — | — | — | — | — | — | — | (47.3 | ) | — | — | — | — | (47.3 | ) | — | (47.3 | ) | ||||||||||||||||||||||||||||||||||||||||||
Dividends | — | — | — | — | — | — | — | (16.0 | ) | — | — | — | — | (16.0 | ) | — | (16.0 | ) | ||||||||||||||||||||||||||||||||||||||||||
Reserve for investments and working capital | — | — | — | — | — | — | 160.8 | (160.8 | ) | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
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At December 31, 2017 (Restated) | 1,438.0 | (51.8 | ) | 37.3 | 46.9 | 204.4 | — | 2,491.9 | 5.1 | (4.2 | ) | (40.3 | ) | (63.3 | ) | 0.1 | 4,064.1 | 113.4 | 4,177.5 | |||||||||||||||||||||||||||||||||||||||||
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Net loss for the year | — | — | — | — | — | — | — | (178.2 | ) | — | — | — | — | (178.2 | ) | 7.0 | (171.2 | ) | ||||||||||||||||||||||||||||||||||||||||||
Actuarial loss on post employment benefit obligation | — | — | — | — | — | — | — | — | — | 1.1 | — | — | 1.1 | — | 1.1 | |||||||||||||||||||||||||||||||||||||||||||||
Translation adjustments | — | — | — | — | — | — | — | — | — | — | (39.4 | ) | — | (39.4 | ) | (26.0 | ) | (65.4 | ) | |||||||||||||||||||||||||||||||||||||||||
Financial instruments | — | — | — | — | — | — | — | — | — | — | — | 0.4 | 0.4 | — | 0.4 | |||||||||||||||||||||||||||||||||||||||||||||
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Total comprehensive income | — | — | — | — | — | — | — | (178.2 | ) | — | 1.1 | (39.4 | ) | 0.4 | (216.1 | ) | (19.0 | ) | (235.1 | ) | ||||||||||||||||||||||||||||||||||||||||
Share-based remuneration | — | — | 0.1 | — | — | — | — | — | — | — | — | — | 0.1 | — | 0.1 | |||||||||||||||||||||||||||||||||||||||||||||
Stock options grants exercised | — | 20.4 | — | — | — | — | — | (10.9 | ) | — | — | — | — | 9.5 | — | 9.5 | ||||||||||||||||||||||||||||||||||||||||||||
Allocation of profits: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Government grants | — | — | — | 0.1 | — | — | — | (0.1 | ) | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
Interest on own capital | — | — | — | — | — | — | (8.2 | ) | — | — | — | — | — | (8.2 | ) | — | (8.2 | ) | ||||||||||||||||||||||||||||||||||||||||||
Dividends | — | — | — | — | — | — | (3.7 | ) | — | — | — | — | — | (3.7 | ) | — | (3.7 | ) | ||||||||||||||||||||||||||||||||||||||||||
Increase in share capital | 113.6 | — | — | — | — | — | (113.6 | ) | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
Reserve for investments and working capital | — | — | — | — | — | — | (184.1 | ) | 184.1 | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
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AT DECEMBER 31, 2018 | 1,551.6 | (31.4 | ) | 37.4 | 47.0 | 204.4 | — | 2,182.3 | (0.0 | ) | (4.2 | ) | (39.2 | ) | (102.7 | ) | 0.5 | 3,845.7 | 94.4 | 3,940.1 | ||||||||||||||||||||||||||||||||||||||||
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* | See Note 2.2.1 for the discussion relating to the adjustments. |
The accompanying notes are an integral part of these consolidated financial statements.
F-10
Table of Contents
Embraer S.A.
Consolidated Statements of Cash Flows Years Ended
(In millions of U.S. dollar)
Note | 12.31.2018 | 12.31.2017 | 12.31.2016 | |||||||||||
(Restated) | (Restated) | |||||||||||||
OPERATING ACTIVITIES | ||||||||||||||
Net income (loss) for the period | (171.2 | ) | 280.0 | 180.3 | ||||||||||
ADJUSTMENT TO NET INCOME FOR ITEMS NOT AFFECTING CASH | ||||||||||||||
Depreciation of property plant and equipment | 15 | 159.2 | 196.5 | 194.5 | ||||||||||
Realization of government grants | (3.6 | ) | (3.3 | ) | (3.1 | ) | ||||||||
Amortization of intangible assets | 16 | 112.8 | 146.2 | 173.9 | ||||||||||
Realization of contribution from suppliers | 16 | (22.0 | ) | (27.3 | ) | (38.3 | ) | |||||||
Loss (reversal) for inventory obsolescence | 18.3 | 11.7 | (23.9 | ) | ||||||||||
Adjustment to market value, inventory, property plant and equipment and intangible | 99.5 | 110.2 | 82.8 | |||||||||||
Allowance for doubtful accounts | (7.8 | ) | 8.1 | 3.5 | ||||||||||
Losses on fixed assets disposal | 15 | 19.8 | 18.6 | 19.6 | ||||||||||
Deferred income tax and social contribution | 22.2 | (21.2 | ) | (12.9 | ) | (137.5 | ) | |||||||
Accrued interest | (6.4 | ) | (29.0 | ) | (13.1 | ) | ||||||||
Interest on marketable securities, net | (33.6 | ) | (23.6 | ) | (52.5 | ) | ||||||||
Equity in associates gains and losses | 0.4 | (1.2 | ) | 0.3 | ||||||||||
Share-based remuneration | 0.1 | 0.5 | 1.4 | |||||||||||
Foreign exchange gain (loss), net | 34 | 20.7 | 6.0 | (12.6 | ) | |||||||||
Mark to market of the residual value guarantees | 23 | 16.5 | (13.3 | ) | 27.5 | |||||||||
Provision for penalties | — | — | 58.6 | |||||||||||
Provision for voluntary redundancy scheme | — | 6.4 | 28.2 | |||||||||||
Other | (7.2 | ) | (4.3 | ) | (0.8 | ) | ||||||||
CHANGES IN ASSETS | ||||||||||||||
Financial investments | 790.8 | (244.6 | ) | (307.7 | ) | |||||||||
Derivative financial instruments | 23.9 | (1.7 | ) | (21.6 | ) | |||||||||
Collateralized accounts receivable and accounts receivable | (16.0 | ) | 4.6 | 140.7 | ||||||||||
Contract assets | 104.1 | (76.9 | ) | 17.1 | ||||||||||
Customer and commercial financing | 4.6 | 21.0 | 18.8 | |||||||||||
Inventories | (281.9 | ) | 404.9 | (136.9 | ) | |||||||||
Other assets | 43.5 | 249.4 | 103.7 | |||||||||||
CHANGES IN LIABILITIES | ||||||||||||||
Trade accounts payable | 70.1 | (127.3 | ) | (93.8 | ) | |||||||||
Non-recourse and recourse debt | (22.6 | ) | (9.9 | ) | (10.9 | ) | ||||||||
Other payables | (16.3 | ) | (36.6 | ) | (23.0 | ) | ||||||||
Contribution from suppliers | 125.5 | 86.0 | 123.9 | |||||||||||
Contract liabilities | 101.2 | (99.9 | ) | (110.5 | ) | |||||||||
Taxes and payroll charges payable | 30.7 | 21.1 | (153.1 | ) | ||||||||||
Financial guarantees | (21.2 | ) | (40.7 | ) | (87.7 | ) | ||||||||
Other provisions | 9.8 | (53.9 | ) | 45.1 | ||||||||||
Unearned income | (12.9 | ) | (11.8 | ) | 0.5 | |||||||||
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NET CASH GENERATED (USED) BY OPERATING ACTIVITIES | 1,107.6 | 753.0 | (6.6 | ) | ||||||||||
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INVESTING ACTIVITIES | ||||||||||||||
Acquisition of property, plant and equipment | 15 | (154.3 | ) | (237.7 | ) | (392.5 | ) | |||||||
Proceeds from sale of property, plant and equipment | 15 | 0.3 | 19.1 | 2.9 | ||||||||||
Additions to intangible assets | 16 | (290.3 | ) | (470.5 | ) | (505.0 | ) | |||||||
Additions investments in subsidiaries and affiliates | (2.4 | ) | (0.6 | ) | (2.6 | ) | ||||||||
Investments measured at amortized cost | (76.5 | ) | (404.0 | ) | (88.2 | ) | ||||||||
Loans granted to jointly controlled entity | — | — | (12.3 | ) | ||||||||||
Dividends received | 0.1 | 0.1 | 0.1 | |||||||||||
Restricted cash reserved for construction of assets | — | 1.0 | 4.1 | |||||||||||
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NET CASH USED IN INVESTING ACTIVITIES | (523.1 | ) | (1,092.6 | ) | (993.5 | ) | ||||||||
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FINANCING ACTIVITIES | ||||||||||||||
Proceeds from borrowings | 124.0 | 972.9 | 576.2 | |||||||||||
Repayment of borrowings | (596.3 | ) | (540.2 | ) | (523.7 | ) | ||||||||
Dividends and interest on own capital | (40.6 | ) | (54.1 | ) | (28.2 | ) | ||||||||
Proceeds from stock options exercised | 9.5 | 5.9 | 1.7 | |||||||||||
Acquisition of own shares | — | (15.0 | ) | (17.1 | ) | |||||||||
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NET CASH GENERATED (USED) BY FINANCING ACTIVITIES | (503.4 | ) | 369.5 | 8.9 | ||||||||||
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INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 81.1 | 29.9 | (991.2 | ) | ||||||||||
Effects of exchange rate changes on cash and cash equivalents | (71.0 | ) | (0.6 | ) | 67.2 | |||||||||
Cash and cash equivalents at the beginning of the period | 1,270.8 | 1,241.5 | 2,165.5 | |||||||||||
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CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD | 1,280.9 | 1,270.8 | 1,241.5 | |||||||||||
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The accompanying notes are an integral part of these consolidated financial statements.
F-11
Table of Contents
Embraer S.A.
Notes to the Consolidated Financial Statements
In millions of U.S. dollar, unless otherwise stated
1. | Operations |
Embraer S.A. (“Embraer” or “the Company”) is a publicly-held company incorporated under the laws of the Federative Republic of Brazil (“Brazil”) with headquarters in São José dos Campos, State of São Paulo. The corporate purpose of the Company is:
(i) | To design, build and market aircraft and aerospace materials and related accessories, components and equipment, according to the highest standards of technology and quality; |
(ii) | To perform and carry out technical activities related to the manufacturing and servicing of aerospace materials; |
(iii) | To contribute to the training of technical personnel as necessary for the aerospace industry; |
(iv) | To engage in and provide services for other technological, manufacturing and business activities in connection with the aerospace industry; |
(v) | To design, build and trade in equipment, materials, systems, software, accessories and components for the defense, security and power industries, and to promote and carry out technical activities related to the manufacturing and servicing thereof, in accordance with the highest technological and quality standards; and |
(vi) | To conduct other technological, manufacturing, trading and services activities related to the defense, security and power industries. |
The Company’s shares [B3: EMBR3, NYSE: ERJ] are listed in the enhanced corporate governance segment of the Stock Exchange in Brazil (“B3”), known as the New Market (“Novo Mercado”). Embraer S.A. also holds American Depositary Shares (evidenced by American Depositary Receipts—ADRs) which are registered with the Securities and Exchange Commission (“SEC”) and listed on the New York Stock Exchange (“NYSE”).
The explanatory notes to subsequent events contain clarifications on Embraer and The Boeing Company (NYSE: BA) strategic partnership. The terms approved define the creation of a joint venture involving Embraer’s commercial aviation assets and associated services, in which Boeing will hold an 80% ownership stake and Embraer the remaining 20%, as well as the creation of a joint venture to promote and develop new markets and applications for the multi-mission aircraftKC-390, with ownership of 51% for Embraer and 49% for Boeing.
Additional information about the transaction is disclosed in Notes 3.6 and 38.1.
These consolidated financial statements were approved by the Company’s Board of Directors on March 12, 2019.
2. | Presentation of the Financial Statements and Accounting Practices |
2.1 | Presentation and preparation of the financial statements |
The consolidated financial statements have been prepared in conformity with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) which include (i) IFRS, (ii) the International Accounting Standard (“IAS”), and (iii) the International Financial Reporting Interpretations Committee (“IFRIC”) or its predecessor, the Standing Interpretations Committee (“SIC”).
All informations presented in the consolidated financial statements are those considered relevant in the context of Company’s activities and for management purposes.
2.1.1 | Basis of preparation |
These consolidated financial statements have been prepared under the historical cost convention, except when the account requires different criteria, and adjusted for assets and liabilities measured as at fair value in subsequent measurement, when applicable.
F-12
Table of Contents
Embraer S.A.
Notes to the Consolidated Financial Statements
In millions of U.S. dollar, unless otherwise stated
The preparation of financial statements requires the use of certain critical accounting estimates. It also requires management of the Company to exercise judgment in the process of applying the Company’s accounting policies. These consolidated financial statements include accounting estimates for certain assets, liabilities and other transactions.
The areas which involve high degree of judgments or complexities, or assumptions and significant estimates to the consolidated financial statements, are disclosed in Note 3.
2.1.2 | Consolidation |
The consolidated financial statements include the balances of the December 31, 2018 financial statements of the Company and all subsidiaries directly or indirectly controlled by Embraer, special purpose entities (SPEs) controlled by the Company, as well as corporate venture capital investment funds (FIP), which is an associate accounted for by the equity method. The Company recognizes the assets, liabilities, revenues and expenses of jointly controlled entities in proportion to its shares in the joint operation.
All accounts and balances arising from transactions between consolidated entities are eliminated.
a) | Subsidiaries |
Subsidiaries are entities (including Special Purpose Entities—SPEs) over which the Company has control. The terms controlled entity and subsidiary are synonymous. The Company may have control through a 100% interest in an investee, or less than that, in which case there will also benon-controlling shareholders. Subsidiaries are all entities whose significant financial and operational policies may be directed by the Company. This analysis takes into consideration other factors, such as the existence of potential voting rights. Subsidiaries are fully consolidated from the date on which control is transferred to the Company.
The accounting policies of the subsidiaries are consistent with the policies adopted by the Company.
b) | Consortia |
A consortium is a legal entity set up to meet a specific purpose and is subject to mandatory accounting controls under specific regulations. The Company’s subsidiaries that participate in a consortium account for the consortium transactions in relation to its interests in the consortium. This has reflects in the consolidated financial statements.
F-13
Table of Contents
Embraer S.A.
Notes to the Consolidated Financial Statements
In millions of U.S. dollar, unless otherwise stated
2.1.3 | Corporate structure |
Below are informations regarding the Company’s consolidated subsidiaries and joint operations:
Entity | Participation Embraer Group | Country | Core activities | |||
ELEB – Equipamentos Ltda. | 100% | Brazil | Sale of hydraulic and mechanical equipment for the aviation industry | |||
Embraer Aircraft Holding Inc. | 100% | EUA | Concentrates corporate activities in the USA | |||
Embraer Aircraft Customer Services, Inc. | 100% | EUA | Sale of spare parts and support services in North America and the Caribbean | |||
Embraer Aircraft Maintenance Services Inc. | 100% | EUA | Maintenance of aircraft and components | |||
Embraer Business Innovation Center, Inc. | 100% | EUA | Develops technological innovation research in aviation and related areas | |||
Embraer Executive Jet Services, LLC | 100% | EUA | After sale support and aircraft maintenance | |||
Embraer Executive Aircraft, Inc. | 100% | EUA | Final assembly and delivery of executive jets | |||
Embraer Engineering & Technology Center USA, Inc. | 100% | EUA | Engineering services related to aircraft research and development | |||
Embraer Aero Seating Technologies, LLC | 100% | EUA | Production and maintenance of aircraft seats | |||
Embraer Defense and Security Inc. | 100% | EUA | Supply of Super Tucano aircraft to the American Air Force (LAS) | |||
Embraer CAE Training Services LLC | 51% | EUA | Pilot, mechanic and crew training | |||
Embraer Aviation Europe - EAE | 100% | France | Concentrates corporate activities abroad, specifically Europe | |||
Embraer Aviation International - EAI | 100% | France | Sale of parts and after sale services in Europe, Africa and the Middle East | |||
Embraer Europe SARL | 100% | France | Commercial representation of the Company in Europe, Africa and the Middle East | |||
Embraer Defesa & Segurança Participações S.A. | 100% | Brazil | Coordinates investments in the Defense & Security segments | |||
Atech - Negócios em Tecnologias S.A. | 100% | Brazil | Development and control, communications, computer and intelligence services | |||
Visiona Tecnologia Espacial S.A. | 51% | Brazil | Supply of the Brazilian Government’s Geostationary Defense and Strategic Communications Satellite System (SGDC) | |||
Visiona Internacional B.V. | 100% | Holanda | Integration and supply of the Brazilian Government’s (SGDC) System . | |||
SAVIS Tecnologia e Sistemas S.A. | 100% | Brazil | Operates in Defense and Security with the Brazilian Government | |||
Embraer GPX Ltda | 100% | Brazil | Aircraft maintenance services | |||
Embraer Netherlands Finance B.V. | 100% | Holland | Financial operations raising and investing funds of the Embraer Group | |||
Embraer Netherlands B.V. | 100% | Holland | Concentrates corporate activities abroad | |||
Embraer Asia Pacific PTE. Ltd. | 100% | Singapore | After sale services and support in Asia | |||
Airholding SGPS S.A. | 100% | Portugal | Coordinates investments in subsidiaries in Portugal | |||
OGMA - Indústria Aeronáutica de Portugal S.A. | 65% | Portugal | Aviation maintenance and production | |||
Embraer CAE Training Services (UK) Limited | 51% | United Kingdom | No operations | |||
Embraer Portugal S.A. | 100% | Portugal | Coordinates investments and economic activities in subsidiaries in Portugal | |||
Embraer - Portugal Estruturas Metálicas S.A | 100% | Portugal | Fabrication of steel parts and products for the aviation industry | |||
Embraer - Portugal Estruturas em Compósitos S.A. | 100% | Portugal | Fabrication of composite parts and products for the aviation industry | |||
Embraer (China) Aircraft Technical Services Co. Ltd. | 100% | China | Sales and maintenance for after sales support in China | |||
EZ Air Interior Limited | 50% | Ireland | Fabrication of interiors for commercial aircraft | |||
Embraer Overseas Ltd. | 100% | Cayman Islands | Financial operations raising and investing funds of the Embraer Group | |||
Embraer Spain Holding Co. SL | 100% | Spain | Concentrates corporate activities abroad | |||
ECC Investment Switzerland AG | 100% | Switzerland | Coordinates investments in subsidiaries abroad | |||
ECC Insurance & Financial Company Limited. | 100% | Cayman Islands | Covers financial guarantees offered in aircraft sale structuring | |||
Embraer Finance Ltd. | 100% | Cayman Islands | Support to the Company in structuring specific operations | |||
Embraer Merco S.A. | 100% | Uruguay | No operations-in the process of settlement |
F-14
Table of Contents
Embraer S.A.
Notes to the Consolidated Financial Statements
In millions of U.S. dollar, unless otherwise stated
Specific purpose entities (SPEs) - the Company organizes some of its aircraft sale financing transactions through SPEs and although it has no direct or indirect interest, it controls their operations or takes a majority share of their risks and rewards. Currently the only EPE that presents balance and therefore is consolidated is Refine, Inc. The EPEs in which Embraer is not a controlling shareholder are not consolidated based on fundamentals and technical analysis performed by Management. Except for the aforementioned consolidated SPEs, the Company does not have significant risks attributed to other structured operations involving SPEs.
Tepro Consortium - Entity constituted by SAVIS Tecnologia e Sistemas S.A, a company controlled by Embraer Defesa & Segurança, and Bradar Indústria S.A, a wholly-owned subsidiary newly incorporated by Embraer S.A, with the objective of assisting the Brazilian Army in the first phase of implementation of the Integrated Monitoring System (“Sisfron”) for the development of certain activities. Located in the city of Campinas, State of São Paulo, Brazil, it represents a direct ownership stake of 93.5% from SAVIS and 6.5% of Embraer S.A. (after the incorporation of Bradar Indústria S.A. in 2018).
Equity investment fund (FIP) - An Embraer initiative in conjunction with BNDES, FINEP andDesenvolve SP, created with the aim of strengthening the aerospace, aviation, defense and security supply chain and promoting integration of systems related to these sectors through support for small and medium enterprises. The transaction is not consolidated in the Company’s financial statements, but its results are presented in the equity income of associates in the consolidated statements of income.
Embraer Ventures Equity Investment Fund - Exclusive fund created to provide technological and finance support through investment to small and medium businesses focused on disruptive innovation in the aerospace segment. This fund is consolidated in the Company’s financial statements as Embraer has the control over it.
2.2 | Summary of significant accounting policies |
We present below the significant accounting policies adopted in the preparation of these consolidated financial statements. Description of the significant accounting policies adopted by the Company contributes towards the correct interpretation of the consolidated financial statements, whether on account of the existence of more than one treatment option under the international accounting standards, or due to the complexity of the operation.
This set of annual consolidated financial statements includes the first year of adoption of standards IFRS 9 - Financial Instruments and IFRS 15 - Revenue from Contracts with Customers, and interpretation IFRIC 22 – Foreign currency transactions and advance considerations. Changes in the significant accounting policies applied as a result of this adoption are described in the following topic.
2.2.1 | Changes in accounting policies - adoption of IFRS 9, IFRS 15 and IFRIC 22 |
As a result of the full retrospective adoption of accounting standards IFRS 9 and IFRS 15 and changes in the Company’s accounting policies, the consolidated financial statements for the prior year were restated.
The following tables present the impacts of the adoption adjustments for each item from the consolidated financial statements. Items that were not affected and restated by the changes were not included. As a result, the reported subtotals and totals cannot be recalculated from the numbers provided. The adjustments are explained in more detail in the topics below:
F-15
Table of Contents
Embraer S.A.
Notes to the Consolidated Financial Statements
In millions of U.S. dollar, unless otherwise stated
Consolidated Statements of Financial Position
As of December 31, 2017 | Published | IFRS 15 Adjustments | IFRS 9 Adjustments | Restated | ||||||||||||
Financial investments | 2,365.6 | — | 0.5 | 2,366.1 | ||||||||||||
Trade accounts receivables, net | 717.2 | (432.8 | ) | 12.6 | 297.0 | |||||||||||
Contract assets | — | 447.5 | — | 447.5 | ||||||||||||
Other current assets | 3,969.0 | — | — | 3,969.0 | ||||||||||||
Total Current Assets | 7,051.8 | 14.7 | 13.1 | 7,079.6 | ||||||||||||
Financial investments | 251.3 | — | (0.1 | ) | 251.2 | |||||||||||
Deferred income tax and social contribution | 2.9 | 13.0 | (2.5 | ) | 13.4 | |||||||||||
Investments | 5.6 | — | — | 5.6 | ||||||||||||
Othernon-current assets | 4,624.8 | — | — | 4,624.8 | ||||||||||||
TotalNon-Current Assets | 4,884.6 | 13.0 | (2.6 | ) | 4,895.0 | |||||||||||
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TOTAL ASSETS | 11,936.4 | 27.7 | 10.5 | 11,974.6 | ||||||||||||
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Contract liabilities | — | 1,001.1 | — | 1,001.1 | ||||||||||||
Advances from customers | 799.2 | (799.2 | ) | — | — | |||||||||||
Provisions | 141.4 | (17.3 | ) | — | 124.1 | |||||||||||
Unearned income | 164.1 | (164.1 | ) | — | — | |||||||||||
Other current liabilities | 1,678.0 | — | — | 1,678.0 | ||||||||||||
Total Current Liabilities | 2,782.7 | 20.5 | — | 2,803.2 | ||||||||||||
Contract liabilities | — | 125.5 | — | 125.5 | ||||||||||||
Advances from customers | 104.1 | (104.1 | ) | — | — | |||||||||||
Deferred income tax and social contribution | 251.4 | 4.6 | 2.0 | 258.0 | ||||||||||||
Unearned income | 97.5 | (5.8 | ) | — | 91.7 | |||||||||||
Othernon-current liabilities | 4,518.7 | — | — | 4,518.7 | ||||||||||||
TotalNon-Current Liabilities | 4,971.7 | 20.2 | 2.0 | 4,993.9 | ||||||||||||
Equity | 4,182.0 | (13.0 | ) | 8.5 | 4,177.5 | |||||||||||
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TOTAL LIABILITIES | 11,936.4 | 27.7 | 10.5 | 11,974.6 | ||||||||||||
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F-16
Table of Contents
Embraer S.A.
Notes to the Consolidated Financial Statements
In millions of U.S. dollar, unless otherwise stated
As of December 31, 2016 | Published | IFRS 15 Adjustments | IFRS 9 Adjustments | Restated | ||||||||||||
Financial investments | 1,775.5 | — | 0.1 | 1,775.6 | ||||||||||||
Trade accounts receivables, net | 665.3 | (345.1 | ) | 16.6 | 336.8 | |||||||||||
Contract assets | — | 370.6 | — | 370.6 | ||||||||||||
Other current assets | 4,340.6 | — | — | 4,340.6 | ||||||||||||
Total Current Assets | 6,781.4 | 25.5 | 16.7 | 6,823.6 | ||||||||||||
Financial investments | 168.3 | — | 4.8 | 173.1 | ||||||||||||
Deferred income tax and social contribution | 3.6 | 10.7 | (2.7 | ) | 11.6 | |||||||||||
Othernon-current assets | 4,711.5 | — | — | 4,711.5 | ||||||||||||
TotalNon-Current Assets | 4,883.4 | 10.7 | 2.1 | 4,896.2 | ||||||||||||
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TOTAL ASSETS | 11,664.8 | 36.2 | 18.8 | 11,719.8 | ||||||||||||
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Contract liabilities | — | 1,086.8 | — | 1,086.8 | ||||||||||||
Advances from customers | 716.4 | (716.4 | ) | — | — | |||||||||||
Provisions | 135.8 | (11.9 | ) | — | 123.9 | |||||||||||
Unearned income | 311.5 | (311.5 | ) | — | — | |||||||||||
Other current liabilities | 2,017.2 | — | — | 2,017.2 | ||||||||||||
Total Current Liabilities | 3,180.9 | 47.0 | — | 3,227.9 | ||||||||||||
Contract liabilities | — | 157.9 | — | 157.9 | ||||||||||||
Advances from customers | 139.8 | (139.8 | ) | — | — | |||||||||||
Deferred income tax and social contribution | 263.5 | (1.3 | ) | 3.0 | 265.2 | |||||||||||
Unearned income | 113.9 | (7.0 | ) | — | 106.9 | |||||||||||
Othernon-current liabilities | 4,025.5 | — | — | 4,025.5 | ||||||||||||
TotalNon-Current Liabilities | 4,542.7 | 9.8 | 3.0 | 4,555.5 | ||||||||||||
Equity | 3,941.2 | (20.6 | ) | 15.8 | 3,936.4 | |||||||||||
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TOTAL LIABILITIES | 11,664.8 | 36.2 | 18.8 | 11,719.8 | ||||||||||||
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As of January 1, 2016 | Published | IFRS 15 Adjustments | IFRS 9 Adjustments | Restated | ||||||||||||
Trade accounts receivables, net | 781.9 | (360.6 | ) | 8.9 | 430.2 | |||||||||||
Contract assets | — | 387.7 | — | 387.7 | ||||||||||||
Other current assets | 5,629.7 | — | — | 5,629.7 | ||||||||||||
Total Current Assets | 6,411.6 | 27.1 | 8.9 | 6,447.6 | ||||||||||||
Financial investments | 749.6 | — | (9.0 | ) | 740.6 | |||||||||||
Deferred income tax and social contribution | 4.5 | 14.2 | (3.0 | ) | 15.7 | |||||||||||
Othernon-current assets | 4,503.8 | — | — | 4,503.8 | ||||||||||||
TotalNon-Current Assets | 5,257.9 | 14.2 | (12.0 | ) | 5,260.1 | |||||||||||
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TOTAL ASSETS | 11,669.5 | 41.3 | (3.1 | ) | 11,707.7 | |||||||||||
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Contract liabilities | — | 1,136.8 | — | 1,136.8 | ||||||||||||
Advances from customers | 743.8 | (743.8 | ) | — | — | |||||||||||
Provisions | 95.7 | (6.0 | ) | — | 89.7 | |||||||||||
Unearned income | 320.0 | (320.0 | ) | — | — | |||||||||||
Other current liabilities | 1,920.9 | — | — | 1,920.9 | ||||||||||||
Total Current Liabilities | 3,080.4 | 67.0 | — | 3,147.4 | ||||||||||||
Contract liabilities | — | — | — | — | ||||||||||||
Advances from customers | 164.1 | (164.1 | ) | — | — | |||||||||||
Deferred income tax and social contribution | 417.3 | (2.2 | ) | (2.0 | ) | 413.1 | ||||||||||
Unearned income | 62.8 | 164.1 | — | 226.9 | ||||||||||||
Othernon-current liabilities | 4,101.2 | — | — | 4,101.2 | ||||||||||||
TotalNon-Current Liabilities | 4,745.4 | (2.2 | ) | (2.0 | ) | 4,741.2 | ||||||||||
Equity | 3,843.7 | (23.5 | ) | (1.1 | ) | 3,819.1 | ||||||||||
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TOTAL LIABILITIES | 11,669.5 | 41.3 | (3.1 | ) | 11,707.7 | |||||||||||
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F-17
Table of Contents
Embraer S.A.
Notes to the Consolidated Financial Statements
In millions of U.S. dollar, unless otherwise stated
Consolidated Statements of Income
Year ended December 31, 2017 | Published | IFRS 15 Adjustments | IFRS 9 Adjustments | Restated | ||||||||||||
Revenue | 5,839.3 | 20.1 | — | 5,859.4 | ||||||||||||
Cost of sales and services | (4,773.3 | ) | 9.2 | — | (4,764.1 | ) | ||||||||||
Gross Profit | 1,066.0 | 29.3 | — | 1,095.3 | ||||||||||||
Operating income (expense) | (736.7 | ) | (12.7 | ) | (4.0 | ) | (753.4 | ) | ||||||||
Operating profit | 329.3 | 16.6 | (4.0 | ) | 341.9 | |||||||||||
Financial result | (41.0 | ) | — | 7.0 | (34.0 | ) | ||||||||||
Profit before taxes on income | 288.3 | 16.6 | 3.0 | 307.9 | ||||||||||||
Income tax expense (income) | (25.5 | ) | (3.6 | ) | 1.2 | (27.9 | ) | |||||||||
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Net income | 262.8 | 13.0 | 4.2 | 280.0 | ||||||||||||
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Atributable to: | ||||||||||||||||
Owners of Embraer | 246.8 | 13.0 | 4.2 | 264.0 | ||||||||||||
Noncontrolling interest | 16.0 | — | — | 16.0 | ||||||||||||
Earnings per share-basic in US$ | 0.34 | 0.36 | ||||||||||||||
Earnings per share-diluted in US$ | 0.34 | 0.36 | ||||||||||||||
Year ended December 31, 2016 | Published | IFRS 15 Adjustments | IFRS 9 Adjustments | Restated | ||||||||||||
Revenue | 6,217.5 | (13.6 | ) | — | 6,203.9 | |||||||||||
Cost of sales and services | (4,980.7 | ) | (1.3 | ) | — | (4,982.0 | ) | |||||||||
Gross Profit | 1,236.8 | (14.9 | ) | — | 1,221.9 | |||||||||||
Operating income (expense) | (1,030.8 | ) | 14.9 | 7.7 | (1,008.2 | ) | ||||||||||
Operating profit | 206.0 | — | 7.7 | 213.7 | ||||||||||||
Financial result | (47.0 | ) | — | 13.9 | (33.1 | ) | ||||||||||
Profit before taxes on income | 159.0 | — | 21.6 | 180.6 | ||||||||||||
Income tax expense (income) | 8.7 | (4.4 | ) | (4.6 | ) | (0.3 | ) | |||||||||
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Net income | 167.7 | (4.4 | ) | 17.0 | 180.3 | |||||||||||
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Atributable to: | ||||||||||||||||
Owners of Embraer | 166.1 | (4.4 | ) | 17.0 | 178.7 | |||||||||||
Noncontrolling interest | 1.7 | — | — | 1.7 | ||||||||||||
Earnings per share-basic in US$ | 0.23 | 0.24 | ||||||||||||||
Earnings per share-diluted in US$ | 0.23 | 0.24 |
F-18
Table of Contents
Embraer S.A.
Notes to the Consolidated Financial Statements
In millions of U.S. dollar, unless otherwise stated
Reconciliation of restated Consolidated Statements of Changes in Shareholders’ Equity
Note | 2018 | 2017 | 2016 | |||||||||||||
As of December 31 of the previous year - originally published | 4,182.0 | 3,941.2 | 3,843.7 | |||||||||||||
IFRS 9 Adjustment | ||||||||||||||||
Decrease of accounts receivable impairment allowance | 2.2.1.a)(ii | ) | 12.6 | 16.6 | 8.9 | |||||||||||
Adjustment to fair value due to change in classification | 2.2.1.a) (i | ) | 0.4 | 4.9 | (9.0 | ) | ||||||||||
Financial asset reclassification from available for sale to fair value through P&L | ||||||||||||||||
- from Other cumulative translation adjustments (OCI) | (11.5 | ) | — | — | ||||||||||||
- to Retained earnings | 11.5 | — | — | |||||||||||||
Effect of deferred income tax over the adjustments | (4.5 | ) | (5.7 | ) | (1.0 | ) | ||||||||||
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8.5 | 15.8 | (1.1 | ) | |||||||||||||
IFRS 15 Adjustment | ||||||||||||||||
Increase (decrease) of development contracts results due to contracts | 2.2.1.b) (i), (ii) | |||||||||||||||
combinations and modifications | (2.5 | ) | (7.8 | ) | (16.1 | ) | ||||||||||
Increase (decrease) of development contracts results due to changes in | 2.2.1.b) (iii) | |||||||||||||||
performance obligations identification | (20.8 | ) | (32.1 | ) | (23.8 | ) | ||||||||||
Effect of foreign currency transactions in CTA | 1.9 | 7.3 | — | |||||||||||||
Effect of deferred income tax over the adjustments | 8.4 | 12.0 | 16.4 | |||||||||||||
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(13.0 | ) | (20.6 | ) | (23.5 | ) | |||||||||||
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As of January 1 - restated | 4,177.5 | 3,936.4 | 3,819.1 | |||||||||||||
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a) | IFRS 9 - Financial Instruments |
The Company adopted IFRS 9 - Financial Instruments as a basis for recognition, measurement and classification of financial instruments. This standard replaces IAS 39 - Financial Instruments: Recognition and Measurement.
The adoption effects are presented retrospectively as of January 1, 2016 for the comparative periods presented in the consolidated financial statements. The changes made by the Company in its accounting practices resulting from the adoption of this new standard are detailed as follows:
(i) Classification and measurement of financial assets and liabilities
The Company reviewed the classification of its financial assets within the categories existing in IFRS 9 by evaluating the business model in which the financial assets are managed and the contractual cash flow characteristics.
Certain financial investments in structured notes were reclassified from held to maturity category to financial assets measured as at fair value through profit or loss because their cash flows do not represent solely payments of principal and interest.
For financial liabilities, there were no changes in their categories in the transition of standards. IFRS 9 mainly retains the IAS 39 requirements for classification and measurement of financial liabilities.
The following table sets forth the financial assets and liabilities in the original measurement categories by IAS 39 as previously disclosed on December 31, 2017 and January 1, 2017, and the new measurement categories by adopting of IFRS 9:
F-19
Table of Contents
Embraer S.A.
Notes to the Consolidated Financial Statements
In millions of U.S. dollar, unless otherwise stated
Financial instruments | Note | 12.31.2017 | Category IAS 39 | Categoya IFRS 9 | ||||||||
(Restated) | ||||||||||||
Assets | ||||||||||||
Cash and cash equivalents | 4 | 1,270.8 | Loans and receivables | Amortized cost | ||||||||
Financial investments | 5 | 2,617.3 | ||||||||||
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1,307.6 | Loans and receivables (iv) | Fair value through other comprehensive income | ||||||||||
1,199.5 | Held to maturity (iv) | Fair value through profit or loss | ||||||||||
50.5 | Held to maturity (iv) | Amortized cost | ||||||||||
58.8 | Available for sale | Fair value through profit or loss | ||||||||||
0.9 | Fair value through profit or loss | Fair value through profit or loss | ||||||||||
Guarantee deposits | 10 | 393.9 | Loans and receivables | Amortized cost | ||||||||
Collateralized accounts receivable | 8 | 288.7 | Loans and receivables | Amortized cost | ||||||||
Contract assets | 30 | 447.5 | Loans and receivables | Amortized cost | ||||||||
Trade accounts receivable, net | 6 | 297.0 | Loans and receivables | Amortized cost | ||||||||
Customer and commercial financing | 8 | 16.4 | Loans and receivables | Amortized cost | ||||||||
Derivative financial instruments | 7 | 34.3 | Fair value through profit or loss | Fair value through profit or loss | ||||||||
Other assets (i) | 12 | 82.2 | Loans and receivables | Amortized cost | ||||||||
Liabilities | ||||||||||||
Loans and financing | 19 | 4,198.5 | ||||||||||
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1,264.3 | Liabilities measured at amortized cost and other liabilities (iv) | Amortized cost | ||||||||||
2,934.2 | Liabilities measured at amortized cost and other liabilities | Amortized cost | ||||||||||
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Trade accounts payable and others liabilities (ii) | 1,502.5 | Liabilities measured at amortized cost and other liabilities | Amortized cost | |||||||||
Financial guarantee and residual value (iii) | 23 | 139.6 | ||||||||||
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108.8 | Fair value through profit or loss | Fair value through profit or loss | ||||||||||
30.8 | Liabilities measured at amortized cost and other liabilities | Amortized cost | ||||||||||
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Derivative financial instruments | 7 | 8.9 | Fair value through profit or loss | Fair value through profit or loss |
(i) | Comprises amounts of court-mandated escrow deposits and loans with jointly controlled entity. |
(i) | Comprises amounts of trade accounts payable, other payables andnon-recourse and recourse debt. |
(iii) | Comprises amounts of residual value guarantees and accounts payable of financial guarantee (Note 23). |
(iv) | In Note 28.1 to the Company’s annual financial statements as of December 31, 2017, certain financial instruments measured as at amortized cost (held to maturity and loans and receivables) were incorrectly disclosed in the explanatory notes as measured at fair value through profit or loss. This correction does not affect the measurement of amounts previously disclosed considering that, despite the incorrect classification in said Note, the instruments were correctly valued according to their nature. |
F-20
Table of Contents
Embraer S.A.
Notes to the Consolidated Financial Statements
In millions of U.S. dollar, unless otherwise stated
Financial instruments | Note | 01.01.2017 | Category IAS 39 | Categoya IFRS 9 | ||||||||
(Restated) | ||||||||||||
Assets | ||||||||||||
Cash and cash equivalents | 4 | 1,241.5 | Loans and receivables | Amortized cost | ||||||||
Financial investments | 5 | 1,948.7 | ||||||||||
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1,067.9 | Loans and receivables (iv) | Fair value through other comprehensive income | ||||||||||
620.9 | Held to maturity (iv) | Fair value through other comprehensive income | ||||||||||
173.8 | Held to maturity (iv) | Fair value through profit or loss | ||||||||||
51.1 | Held to maturity (iv) | Amortized cost | ||||||||||
35.0 | Available for sale | Fair value through profit or loss | ||||||||||
Guarantee deposits | 10 | 511.4 | Loans and receivables | Amortized cost | ||||||||
Collateralized accounts receivable | 8 | 323.3 | Loans and receivables | Amortized cost | ||||||||
Contract assets | 30 | 370.6 | Loans and receivables | Amortized cost | ||||||||
Trade accounts receivable, net | 6 | 336.8 | Loans and receivables | Amortized cost | ||||||||
Customer and commercial financing | 8 | 37.4 | Loans and receivables | Amortized cost | ||||||||
Derivative financial instruments | 7 | 32.1 | Fair value through profit or loss | Fair value through profit or loss | ||||||||
Other assets (i) | 12 | 79.4 | Loans and receivables | Amortized cost | ||||||||
Liabilities | ||||||||||||
Loans and financing | 19 | 3,759.9 | ||||||||||
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1,357.4 | Liabilities measured at amortized cost and other liabilities (iv) | Amortized cost | ||||||||||
2,402.5 | Liabilities measured at amortized cost and other liabilities | Amortized cost | ||||||||||
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Trade accounts payable and others liabilities (ii) | 1,722.4 | Liabilities measured at amortized cost and other liabilities | Amortized cost | |||||||||
Financial guarantee and residual value (iii) | 23 | 188.0 | ||||||||||
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122.2 | Fair value through profit or loss | Fair value through profit or loss | ||||||||||
65.8 | Liabilities measured at amortized cost and other liabilities | Amortized cost | ||||||||||
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Derivative financial instruments | 7 | 8.4 | Fair value through profit or loss | Fair value through profit or loss |
(i) | Comprises amounts of court-mandated escrow deposits and loans with jointly controlled entity. |
(i) | Comprises amounts of trade accounts payable, other payables andnon-recourse and recourse debt. |
(iii) | Comprises amounts of residual value guarantees and accounts payable of financial guarantee (Note 23). |
(iv) | In Note 28.1 to the Company’s annual financial statements as of December 31, 2017, certain financial instruments measured as at amortized cost (held to maturity and loans and receivables) were incorrectly disclosed in the explanatory notes as measured at fair value through profit or loss. This correction does not affect the measurement of amounts previously disclosed considering that, despite the incorrect classification in said Note, the instruments were correctly valued according to their nature. |
The accounting policies for classification, initial and subsequent measurement of financial assets and liabilities is disclosed in Note 2.2.4.
(ii)Impairment of financial assets
The Company changed the method of measuring expected losses in financial assets as a result of the adoption of the new standard, which is no longer based on incurred loss (by default) and is based on historical data, as well as expectations of future loss.
F-21
Table of Contents
Embraer S.A.
Notes to the Consolidated Financial Statements
In millions of U.S. dollar, unless otherwise stated
The Company applied the simplified approach under IFRS 9 to measure expected credit losses, which uses a provision for expected losses for all receivables and contract assets.
Expected credit losses of other financial assets measured at amortized cost and fair value through other comprehensive income are monitored periodically by the Company and no losses were identified as of December 31, 2017 and January 1, 2017.
(iii) Hedge Accounting
The Company decided to keep the IAS 39 standard requirements regarding hedge accounting until the IASB concludes the macro-hedge project.
b) | IFRS 15 - Revenue from Contracts with Customers |
The Company adopted IFRS 15 as a basis for revenue recognition and measurement of certain assets, liabilities and cost of sales, replacing the standards IAS 18—Revenue and IAS 11—Construction Contracts, as well as related interpretations.
The transiton method is the full retrospective as of January 1, 2016 with the use of certain practical expedients. Consequently, all affected financial statements items (revenues, costs of sales, assets, liabilities and operating expenses) were adjusted retrospectively.
The Company opted to use the practical expedients provided by the IFRS 15.C5 (a)(ii) and C5(d), which are transcribed below:
“IFRS 15.C5. An entity may use one or more of the following practical expedients when applying this standard retrospectively in accordance with paragraph C3(a):
(a) | for completed contracts, an entity need not restate contracts that: |
(i) | begin and end within the same annual reporting period; or |
(ii) | are completed contracts at the beginning of the earliest period presented. |
(d) for all periods presented before the date of initial application, an entity need not disclose the amount of the transaction price allocated to the remaining performance obligations, nor an explanation of when it expects to recognize that amount as revenue.”
The following adjustments and reclassifications were made to the consolidated financial statements for the prior year (December 31, 2017) and the beginning of earliest period presented (January 1, 2016) as a result of the change in accounting practices:
(i) Combining contracts
The Company has certain contracts negotiated with the same customer whose goods and/ or services are a single deliverable (commercial objective) and were entered by more the one entity of Embraer S.A. group, previously measured separately by each legal entity/ subsidiary. The adoption of IFRS 15 identified the need to combine these contracts for revenue recognition. Consequently, there was a need to determine the combined margin of the single performance obligation and to allocate the price, which adjusted the revenue recognition of these combined performance obligations, including provision for onerous contracts, in order to reflect the margin ascertained by the combination of the contracts.
(ii) Contract modifications
Development contracts signed by subsidiaries other than the Company in subsequent periods to the original agreement with the same customer and which constitute a single commercial objective under IFRS 15 were treated as contractual modifications and recognized jointly with the original agreement on a cumulative basis.
F-22
Table of Contents
Embraer S.A.
Notes to the Consolidated Financial Statements
In millions of U.S. dollar, unless otherwise stated
(iii) Identifying performance obligations
As part of the process of identifying performance obligations under the requirements of IFRS 15, there was a change in the performance obligations in certain contracts. This impact brought the need to redistribute the price of the transaction between the performance obligations of these contracts. Revenue redistribution followed the guidelines provided by the standard on the estimation of an individual selling price (stand alone), using cost plus margin method to price and discount allocation. The determination of individual sales price was made on the basis of observable data or, when not available, based on historical data or projections approved by Management.
(iv) Variable consideration
IFRS 15 determines that variable consideration changes the allocated price of transaction and affects revenue recognition. Previously, some variable considerations, such as fines and contractual penalties, were recognized as operating income (expenses) instead of decrease revenue, being reclassified in the respective lines for presentation of the consolidated statements of income. The methods for measuring the variable considerations, as well as the restrictions over it have not changed.
(v) Costs to obtain a contract
Incremental costs incurred by the Company to obtain a contract, such as sales commissions and bank guarantees, were previously recognized as operating income (expenses) because it did not meet the criteria for recognition as assets under previously accounting standards. With the adoption of IFRS 15, these incremental costs incurred exclusively to obtain a contract are capitalized as other assets and amortized when (or as that) revenue is recognized as cost of sales and services, because the Company expects to recover these costs. The impact of this topic in the trasition was reclassification of such costs from operating income (expenses) to the line of cost of sales and services in 2017 and 2016.
(vi) Presentation of contract assets and liabilities
The Company has reclassified certain assets and liabilities in its consolidated financial statements in order to comply with the terminology set forth in IFRS 15 of assets and liabilities of contracts with customers, being:
• | Contract assets of US$ 447.5 and US$ 370.6 as of December 31, 2017 and January 1, 2017, respectively, were previously presented as trade accounts receivable; |
• | Contract liabilities of US$ 1,126.6 and US$ 1,244.8 as of December 31, 2017 and January 1, 2017, respectively, were previously presented as customer advances and deferred revenue. |
IFRS 15 adoption did not bring changes in the judgments made by the Company regarding the period in which the revenues from its sales contracts are recognized.
c) | IFRIC 22 - Foreign Currency Transactions and Advance Consideration |
This accounting interpretation came into effect as of January 1, 2018 and provides clarification on the transaction date to be considered for the translation of advances made or received in foreign currency transactions. According to the interpretation, the transaction date of advances paid or received is the effective date on which the entity initially recognizes the advance payment to the supplier or advance received from a customer.
The Company decided to adopt the interpretation prospectively, that is, the balances of advances, including the principal amount and their respective accumulated exchange variation, as of December 31, 2017 will be considered as the initial balances of the advances to suppliers and customer advances, and the date of December 31, 2017 as the date of the transaction.
F-23
Table of Contents
Embraer S.A.
Notes to the Consolidated Financial Statements
In millions of U.S. dollar, unless otherwise stated
2.2.2 | Functional and presentation currency |
A Company’s functional currency is the currency of the primary economic environment in which it operates and should be the currency that best reflects company’s business and operations. Based on this analysis, management has concluded that the US Dollar (“US$” or “Dollar”) is its functional currency, based on analysis of the following indicators:
• | Currency that most influences the prices of goods and services; this is the currency in which the sales price of its goods and services are expressed and settled; |
• | Currency of the country whose competitive forces and regulations most influence the Company’s business; |
• | Currency that most influences the costs of providing goods or services, i.e., the currency in which the Company’s costs are normally expressed and settled; and |
• | Currency in which the Company largely obtains funds for financial operations and in which it normally receives for its sales and accumulates cash. |
2.2.3 | Transactions in foreign currencies |
Transactions in other currencies (other than the functional currency) are translated into the functional currency at the foreign exchange rates in force on the transaction dates. The amounts are updated at the exchange rates of the reporting dates. Foreign exchange gains and losses resulting from this translation (in relation to monetary assets and liabilities indexed in currencies other than the functional currency) are recognized in the consolidated statements of income as foreign exchange gain (loss), net. Customer advances and advances to suppliers for goods and/ or services in foreign currencies are translated to the Company’s functional currency in the transaction date and no subsequent translation is recognized.
2.2.4 | Financial Instruments |
a) | Financial assets |
a.1) | Recognition and measurement |
Financial assets are recognized when the Company becomes part of the instrument’s contractual arrangements. It is initially measured at fair value, plus transaction costs attributable to their acquisition or issuance, except for instruments measured at fair value through profit or loss (FVTPL), for which these costs are recognized immediately in the consolidated statements of income.
The Company classifies its financial assets under the following categories: (i) measured as at amortized cost, (ii) measured as at fair value through other comprehensive income (FVOCI) and (iii) measured at fair value through profit or loss (FVTPL).
Financial assets are not reclassified subsequent to initial recognition, unless the Company modifies the business model for the management of these financial assets, in which case all affected assets are reclassified on the first day of the new business model.
Financial assets are derecognised when the contractual rights to receive cash flows from the asset expires or are transferred in a transaction in which substantially all the risks and benefits of ownership of the financial asset are transferred by the Company.
a.2) | Classification and subsequent measurement |
The Company classifies financial assets as measured at amortized cost only if both criteria are met:
• | The asset is held within a business model whose objective is to collect the contractual cash flows; and |
• | The contractual terms give rise to cash flows, at specific dates, which relate only to the payments of principal and interest. |
Financial assets measured as at amortized cost by the Company includes: cash and cash equivalents, certain financial investments, trade accounts receivable, contract assets, collateralized accounts receivable, customer financing, guarantee deposits and other financial assets.
F-24
Table of Contents
Embraer S.A.
Notes to the Consolidated Financial Statements
In millions of U.S. dollar, unless otherwise stated
Financial assets measured as at fair value through other comprehensive income (FVOCI) are assets held within a business model whose purpose is achieved both through the receipt of contractual cash flows and the sale of financial assets, as well as their contractual terms generate, on specific dates, cash flows that are related only to payments of principal and interest.
Changes in fair value of FVOCI financial assets are recognized in accumulated other comprehensive (income) loss in the consolidated changes in shareholders’ equity. Gains or losses due to impairment and exchange variation, including interest calculated using the effective interest method, are recognized in the consolidated statements of income as financial income (expense), net, except for the exchange variation recognized as foreign exchange gain (loss), net. In the derecognition of these financial assets, any amounts accumulated in the consolidated statements of other comprehensive income are reclassified to the consolidated statements of income.
All financial assets not classified by the Company as measured at amortized cost or as FVOCI are classified as at fair value through profit or loss (FVTPL). These assets include financial assets held for active and frequent trading and derivative financial instruments.
(i) Business model evaluation
The Company evaluates the business model objective for the management of financial assets as part of the accounting classification of the instruments. The factors considered in this evaluation are:
• | The current financial policy and the objectives set for portfolio management, which includes assessing whether the strategy focuses on contractual interest income, maintaining a determined interest rate profile, the relationship between the duration of the financial assets and related liabilities, expected cash outflows, or the collection of cash flows through the sale of underlying financial assets; |
• | How portfolio performance is assessed and reported to Management; |
• | Risks that affect the performance of the business model and how they are managed; |
• | The frequency, volume and timing of assets sales in prior periods, the reasons for such transactions and future expectations. |
(ii) Evaluation if contractual cash flows are only principal and interest payments
To assess whether contractual cash flows are only principal and interest payments, the principal is defined as the fair value of the financial asset at the initial recognition, and interest as a consideration for the time value of money, the credit risk associated with value of principal outstanding during contractual terms, other risks and general costs of loans, as well as a profit margin in the transaction.
This evaluation is made by considering the contractual terms of the financial assets, which includes, in addition to evaluating whether the contractual cash flows are only principal and interest payments, the existence of terms that could change the timing or value of the contractual cash flows which would not meet the definition, including: contingent events, terms that can adjust contractual rates, prepayment and extension of due dates, and terms that limit access to cash flows of specific assets.
b) | Financial liabilities |
The Company classifies its financial liabilities in the following categories: (i) measured as at amortized cost and (ii) fair value through profit or loss. A financial liability is measured at fair value through profit or loss if it is held for trading or is a derivative financial instrument, and its changes, including interest, is recognized in the consolidated statements of income. Changes in other financial liabilities measured as at amortized cost, including interest and exchange variation, are recognized in the consolidated statements of income under financial income (expenses), net caption, except for the exchange variation recognized as foreign exchange gain (loss), net.
F-25
Table of Contents
Embraer S.A.
Notes to the Consolidated Financial Statements
In millions of U.S. dollar, unless otherwise stated
Financial liabilities are derecognised when contractual obligations are withdrawn, canceled or expired. The difference between the extinct book value and the consideration paid (including transferred assets or assumed liabilities) is recognized in the consolidated statements of income.
2.2.5 | Cash and cash equivalents and financial investments |
Cash and cash equivalents include cash in hand, cash in transit (amounts paid by our customers or debtors that are pending release by the intervening bank at the reporting date), bank deposits and highly liquid short-term investments, usually maturing within 90 days of the investment date, readily convertible into a known amount of cash and subject to an insignificant risk of change in value.
Amounts related to cash and cash equivalents, which are however not available for use by the Company, are presented within other assets in the consolidated financial statements. Other financial investments with maturities of more than 90 days from the acquisition date are presented as financial investments.
2.2.6 | Trade accounts receivable, net |
When making a sale, the Company evaluates its payment terms. If the sale amount is not due/ receipt immediately, which is the case of aircraft sales, it will be recognized in the trade accounts receivable. The amount receivable when the payment is deferred by the customer is adjusted to present value if applicable, identifying an interest rate compatible with the market at the time of sale and applying it to the amount receivable according to the transaction payment terms. The Company does not have trade accounts receivable from customers with a significant financing component.
Expected credit losses are recognized using actual credit loss experiences from the last 10 years andfollow-up of prospective trends in the markets and segments that the Company operates. The identified factor is applied to the measurement of expected credit losses and recognition of impairment losses in the consolidated statements of income. The methodology data will be reviewed and updated periodically.
2.2.7 | Derivative financial instruments and hedge operations |
The Company uses derivative instruments to hedge its operations against the risk of fluctuations in foreign exchange and interest rates; they are not used for speculative purposes.
Gains and losses on derivative transactions are recorded monthly in consolidated statements of income, taking into account the realizable value of these instruments (market value). The unearned gains and losses is recognized in the consolidated statements of financial position under derivative financial instruments, and the counterpart in consolidated statements of income under financial income (expense), net, (Note 33), except for operations to hedge exposure to changes in exchange rate or designated as hedge accounting, which is recognized as accumulated other comprehensive income (loss) in shareholders’ equity.
2.2.8 | Hedge accounting |
Specific derivative transactions contracted to hedge the Company against financial risks are designated to hedge accounting. Different techniques are used in accounting for these derivatives, seeking to eliminate the effects of the volatility caused by such risks.
On initial designation of the hedge, the Company formally documents the relationship between hedging instruments and hedged items, including the risk management objectives and the strategy for conducting the transaction, together with the methods used to evaluate the effectiveness of the relationship. The Company continually assesses the contract to conclude whether the instrument is “highly effective” in offsetting changes in fair value of the hedged items during the period for which the hedge is designated, and whether the actual results of each hedge are within an effectiveness range of 80% to 125%.
F-26
Table of Contents
Embraer S.A.
Notes to the Consolidated Financial Statements
In millions of U.S. dollar, unless otherwise stated
The Company has derivative financial instruments designated as fair value hedges and cash flow hedges, as follows:
a) | Fair value hedges |
Changes in the fair value of derivatives designated as fair value hedges are recorded in the consolidated statements of income, in financial income (expenses), net, together with any changes in the fair value of the hedged asset or liability attributable to the hedged risk. The Company only uses fair value hedge accounting to hedge fixed interest risk on borrowings.
If the hedge no longer meets the hedge accounting criteria, the fair value of the instrument continues to be recognized in the consolidated statements of income in a specific separate account and the fair value of the hedged item is treated as if it were not hedged and amortized to the consolidated statements of income over the period to maturity.
b) | Cash flow hedges |
The Company uses hedge accounting for cash flow hedges in order to hedge itself from cash flow variations attributed to exchange rate variation risk related to a transaction that is likely to affect the Company’s results.
The effective portion of changes in the fair value of derivatives designated as cash flow hedges is recognized in the consolidated shareholders’ equity under other comprehensive income (OCI), line of financial instruments. The gain or loss related to the ineffective portion is recognized in the consolidated statements of income as financial income (expense), net.
Amounts accumulated in OCI are reclassified to the consolidated statements of income in the periods in which the hedged item affects income or loss for the period.
When a cash flow hedge instrument is settled, or no longer meets the criteria for hedge accounting, any cumulative gain or loss in other comprehensive income at that time is realized against income or loss for the period (in the same line as the hedged item) in line with realization of the hedged operation against income or loss for the period. When the hedged transaction is no longer expected to occur, the gain or loss accumulated in OCI is immediately transferred to the consolidated statements of income under financial income (expense), net caption.
2.2.9 | Collateralized accounts receivable and recourse andnon-recourse debt |
In structured sales operations, the Company established a Specific Purpose Entity (SPE), which obtained funds from a financial institution, bought aircraft and paid the Company. In turn, this SPE structured financing for the end customer. In view of the right to receive from the end customer for the structured financing, the debt in relation to the funds obtained from the financial institution by the SPE is registered in liabilities asnon-recourse and recourse debt and the corresponding anticipated financial flow as collateralized accounts receivable. The financing structure used gives the SPE the right to receive the aircraft at the end of the financing, accordingly the residual value of the aircraft is also presented in the collateralized accounts receivable. An aircraft devaluation estimate is recognized on a straight-line basis, in such a way that the cost of the aircraft to be received at the end of the structured financing represents its recoverable amount.
In certain other transactions, the customer financed the purchase of an aircraft through a financing agent and the Company provided guarantees for such financing. The Company therefore recognized the asset and liability flow for such transactions. The financial guarantee is eliminated in line with repayment of the financing.
2.2.10 | Inventories |
The Company’s inventories are largely comprised of raw material, work in progress, spare parts and finished goods. Inventories of raw materials are recognized at acquisition cost. Inventories of work in process comprise raw materials, direct labor, other direct costs and general production costs attributable to the cost of the inventories. Once the products have been completed, they are recognized as finished products.
Inventories of raw material and spare parts are recognized as at the weighted average cost. Manufactured aircrafts (finished goods) and work in progress are measured at its individual production cost, which is recognized as cost of sales and services in the consolidated statements of income when aircraft is delivered to the customer.
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Notes to the Consolidated Financial Statements
In millions of U.S. dollar, unless otherwise stated
Inventories are assessed periodically to determine whether the net realizable value is higher than its cost and impairment loss is recognized if the book value is higher.
The Company periodically assesses the consumption and demand for its inventories and in accordance with established policy, records an expense for estimated losses due to obsolescence in the case of items without activity and for which there is no demand for subsequent periods. Calculation of the probable loss takes into account inventory movement in accordance with the production program and estimated demand and also covers expected losses from excess inventories or obsolete work in process. Probable losses on inventories of spare parts are recognized based on technical obsolescence or items without activity for over two years and for which there is no future demand.
The Company holds used aircraft for resale, usually received intrade-in transactions to facilitate new aircraft sales. The book value of these assets is compared periodicially with its net realizable value, which is the assets estimated selling price in the ordinary course of business less estimated costs to sell. Any loss identified is recognized as other operating income (expense), net in the consolidated statements of income. The estimated selling price of used aircraft is based in the assessment of third party appraisals.
2.2.11 | Income tax and social contribution |
Tax expenses for the year comprise current and deferred income tax. Income tax is recognized in the consolidated statements of income, except the portion of deferred income tax related to items recognized directly in the consolidated shareholders’ equity in other comprehensive income.
The current income tax is calculated at the nominal rates of each country, wherein 34% in Brazil, composed of 25% income tax and 9% social contribution on net income.
Deferred income tax is recognized on temporary differences arising between the tax and accounting basis of assets and liabilities.
2.2.12 | Investments |
Investments in associates are recorded and valued in the consolidated financial statements using the equity method of accounting. In the case of exchange variations on foreign investments that use a functional currency other than that used by the Company, such exchange variations are recognized in cumulative translation adjustments on equity, and are only recognized in the consolidated statements of income when the investment is sold or expensed.
Unrealized profits on transactions with subsidiaries are completely eliminated in equity calculations, on both sales from the subsidiary to the Company and sales between subsidiaries. Unrealized profits between the Company and its subsidiaries are eliminated in the Company’s consolidated statements of income on sales and cost of sales accounts.
Investments in associated entities over which the Company has significant influence are accounted for using the equity method.
2.2.13 | Property, plant and equipment, net |
Property, plant and equipment are recognized by the acquisition, formation or construction cost, less accumulated depreciation and impairment losses.
Depreciation is calculated by the straight-line method based on the asset’s estimated useful life (Note 15). Land is not depreciated. The estimated useful lives are reviewed and adjusted, if appropriated, at the end of each fiscal year.
Subsequent costs are included in the asset’s carrying amount or recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Company.
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Notes to the Consolidated Financial Statements
In millions of U.S. dollar, unless otherwise stated
The Company estimates the residual value for certain aircraft spare parts included in the Exchange Pool Program, which is reviewed by Management, and if necessary adjusted, at the end of each reporting period. The Company does not attribute residual values to other assets as assets are not usually sold and in the event of a sale, the amount is not significant.
The items comprising property, plant and equipment are summarized below:
a) | Land- mainly comprises areas on which the industrial, engineering and administrative buildings are located. |
b) | Buildings and land improvements-mainly plants, engineering departments and offices, and land improvements include parking lots, road systems and water and sewage networks. |
c) | Facilities -comprise auxiliary industrial facilities that directly or indirectly support the Company’s industrial operations, as well as facilities of the engineering and administrative departments. |
d) | Machinery and equipment-machinery and other equipment directly or indirectly used in the manufacturing process. |
e) | Furniture and fixtures - furniture and fixtures used in the production, engineering and administrative departments. |
f) | Vehicles -mainly industrial vehicles and automobiles. |
g) | Aircraft -mainly aircraft leased to airlines, and those used to assist in testing new projects. |
h) | Computers and peripherals-informationtechnology equipment used mainly in the production process, engineering and administration. |
i) | Tooling- tools used in the Company’s production process. |
j) | Property, plant and equipment in progress- construction works to expand the manufacturing plants and aircraft maintenance centers. |
k) | Exchange pool program - the exchange Pool program is an operation in which the customer contracts the availability of spare parts for aircraft maintenance. In this program, when it is necessary to change a damaged part, the customer delivers the damaged part to the Company and the Company provides the customer with a part in working order. The damaged part is in turn reconditioned and added to the Pool. |
2.2.14 | Intangible assets, net |
a) | Development |
Research costs are recorded as an expense when they are incurred. Project costs, comprised mainly of expenditure on product development, including drawings, engineering designs and construction of prototypes, are recorded as intangible assets when it is probable that the projects will generate future benefits, taking into account their commercial and technological feasibility, availability of technological and financial resources, and only if the cost can be reliably measured.
Capitalized development costs are amortized from the time at which benefits begin to accrue (units produced), based on estimated aircraft sales, and the amortized amounts are appropriated to production cost. These estimates are reviewed on an annual basis.
The Company has agreements with certain key suppliers, hereby denominated partners, who participate in the Company’s research and development projects by contributing cash. The Company records such contributions as liabilities on receipt and as the milestones are completed and the amounts are consequently no longer subject to return, they are recorded as a reduction of development expenditure, capitalized in intangible assets and amortized on the aircraft production series.
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Notes to the Consolidated Financial Statements
In millions of U.S. dollar, unless otherwise stated
b) | Computer software |
Software licenses are capitalized and amortized over their estimated useful lives.
Costs associated with maintaining computer software programs are recognized as expense as incurred. Development costs directly attributable to identifiable and unique software, controlled by the Company and that is expected to generate benefits greater than the costs for more than one year, are recorded in intangible assets.
2.2.15 | Impairment of long-lived assets |
At the end of each fiscal year, the Company performs impairment test for all cash-generating units (CGUs) with goodwill generated from business combination allocated and for CGUs with intangible assets still under development and not yet producing (undefined useful life).
CGUs with definite-lived assets (property, plant and equipament, and intangibles) allocated are analyzed, at each quarter, whether there is any indication it might be impaired to perform the impairment test.
Assets are grouped in CGUs taking into consideration the Company’s business model and its monitoring of cash flows. In general, the CGUs are defined in accordance with the families/ platforms of aircrafts or other goods and services produced by the Company, irrespective of its geographic location.
The Company applies the value in use concept, using discounted cash flow projections, discounted at an appropriate rate which reflects the investors’ expectations of return. The cash flow projections for the CGUs take into consideration the Company’s medium and long-term strategic plan, based on the characteristics and expectations of the business.
Any impairment losses of a CGU are recognized in the consolidated statements of income in the line of other operating income (expense), net and allocated to relevant assets of the impaired CGU.
The exception to this concept is aircrafts that the Company held in its property, plant and equipment for operating leases purposes. In this case, the aircraft is tested individually using the higher of its value in use and its market value to determine its recoverable amount. For impairment test purposes, the market value is estimated with the assistance of assessment prepared by third party appraisals and the value in use is determined by the discounted cash flow of lease agreement associated with each aircraft tested, when applicable.
2.2.16 | Leases |
The classification of whether an agreement is or contains a lease is based on the essence of the agreement and whether the agreement transfers the risks and rewards or merely assigns the right to use the asset.
a) | Aircraft leases |
Aircraft available for leasing or leased under operating leases are recorded as property, plant and equipment and depreciated over their estimated useful lives. The rental income is recorded by the straight-line method over the lease period.
b) | Other leases |
Other leases in which the Company holds substantially all the risks and rewards of ownership are classified as finance leases. Finance leases are recorded as a financed purchase, initially by recording a fixed asset and a financial liability (lease). Property, plant and equipment assets purchased as finance leases are depreciated at the rates disclosed in Note 15.
Other leases in which a significant part of the risks and rewards of ownership are assumed by the lessor are classified as operating leases. Payments made for operating leases are appropriated to the consolidated statements of income by the straight-line method over the lease period.
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Notes to the Consolidated Financial Statements
In millions of U.S. dollar, unless otherwise stated
2.2.17 | Loans and financing |
Loans are recognized initially at fair value, net of transaction costs, and subsequently carried at amortized cost (plus charges and interest on a pro rata basis), taking into account the effective interest rate on each transaction.
Loans are classified as current ornon-current liabilities based on contractual terms.
2.2.18 | Borrowing costs |
When a substantial period of time is required for construction or production of an asset before it is ready for use, the borrowing costs are capitalized as part of the cost of such assets. The costs are allocated based on the average rate for all active loans, weighted in accordance with additions in the period. Borrowing costs are interest and other costs incurred by the Company in obtaining funding.
2.2.19 | Financial guarantees and residual value guarantees |
In certain cases, the Company grants financial or residual value guarantees on delivery of its aircraft, as part of the aircraft financing structure.
The residual amount is guaranteed to the lender based on the expected future value of the aircraft at the end of the funding, subject to a maximum limit, agreed by contract.
Financial guarantees are calculated at the time of delivery of the aircraft and recognized as a reduction in sales revenue against contract liabilities. The income is realized in the consolidated statements of income over the aircraft financing period and all deferred income is recognized by the end of that period.
To cover the risk of losses on such guarantees, the Company may record an additional provision in the event of significant circumstances, such as a request for judicial reorganization of a client, based on the best estimate of potential losses (Note 23).
In some cases, the Company holds guarantees in the form of deposits in favor of third parties to whom financial and residual value guarantees have been provided as part of aircraft financing structures (Note 10).
2.2.20 | Dividends and interest on own capital |
Under the Company’s bylaws, shareholders are entitled to dividends or interest on own capital equivalent to 25% of net income for the year, adjusted in accordance with the bylaws. The calculation takes into account the interest on own capital net of withholding tax.
Proposed distributions of dividends to shareholders are recorded as a liability in the consolidated financial statements at the end of the year. Any amount over and above the minimum mandatory dividend is recognized in a specific account as additional dividends proposed in the revenue reserve in consolidated shareholders’ equity, until it is approved by the shareholders, at which point the reserve is reversed against a liability in the consolidated financial statements.
Interest on own capital paid or provisioned is recorded as a financial expense for tax purposes. However, for purposes of these consolidated financial statements, the amount is recorded as dividend distribution of net income for the year, and the gross amount is reclassified to consolidated shareholders’ equity.
2.2.21 | Unearned income |
Unearned income comprises government grants received by the Company and its subsidiaries.
Government grants are recognized against the expenses in which the resources were used. When government grants are received in advance for research investments they are recorded as unearned income and recognized in the consolidated statements of income to the extent that the resources are invested and contractual milestones are met, as reduction of research expenses.
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Notes to the Consolidated Financial Statements
In millions of U.S. dollar, unless otherwise stated
Government grants for the acquisition of property, plant and equipment are recognized as debt (loans and financing) in liabilities until the milestones determined by the granting entity are met. Once the milestones are completed, the grant is recognized as unearned income. This unearned income is recognized in the consolidated statements of income as a reduction of the depreciation expense of the underlying asset it is proposed to subsidize in proportion with the recognition of the expense.
Income earned withnon-distributable government grants is allocated from the income of the year to the government grants reserve in shareholders’ equity.
2.2.22 | Provisions, contingent assets and liabilities, legal obligations and court-mandated escrow deposit |
Provisions – provisions are recognized based on the judgment of the Company’s Management and its legal counsel, the nature of the lawsuits, legal precedent, complexity and court interpretations, whenever the loss is considered probable, when such loss would result in a probable outflow of resources to settle the obligations and when the amounts involved can be measured with a reasonable degree of certainty, the provision is recognized. The provision for labor claims is recognized based on the Company’s historical percentage of cash outflows of each demand. The amounts provided represent the Company’s best estimate of the anticipated outflow of resources.
Contingent liabilities – amounts for which disbursement is classified as possible are disclosed but not recorded in the consolidated financial statements. Where the probability of loss is classified as remote, neither provision nor disclosure are required.
Legal obligations – arise from tax liabilities for which the legality or constitutionality is under appeal. The related amounts are fully recognized as provisions in the consolidated financial statements.
Court-mandated escrow deposits – recorded as other assets and periodically updated for monetary correction.
2.2.23 | Post-retirement benefits |
a) | Defined contribution |
The Company provides defined contribution pension plans for its employees. For the companies incorporated in Brazil, these are managed by EMBRAER PREV – Sociedade de Previdência Complementar.
b) | Post-retirement healthcare benefits |
The Company and some of its subsidiaries provide healthcare benefits to retired employees.
The planned costs of offering post-retirement healthcare benefits and coverage for dependents are recorded as a provision during the period of employment based on actuarial studies conducted to identify future exposure, based on the following main premises:
i) | Discount rate - brings future benefit flows to present value and is defined based on the ratio of Brazilian government securities; |
ii) | Increase of medical costs rate - represents the increase in the value of medical care and is not applied linearly, as the companies historically tend to take measures to reduce the cost, or even change health plan providers; |
iii) | Morbidity rate (aging factor) - measures the increased use of health plans in light of the aging population; |
iv) | Mortality rate - uses theRP-2000 generational table provided by Society of Actuaries (SOA), which shows the rate by age and sex; |
v) | Probability of Retirement - estimates the probability of retirement by age group; |
vi) | Churn rate - uses theT-3 Table Service available from the Society of Actuaries (SOA), which shows the average rate of termination of employees by age. |
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Notes to the Consolidated Financial Statements
In millions of U.S. dollar, unless otherwise stated
The Company recognizes changes in the provision for the plan against other comprehensive income in consolidated shareholders’ equity, net of taxes, to the extent that there are changes in the assumptions and against consolidated statements of income if there are changes in the costs of the current benefit plan or in the plan’s contractual characteristics.
This provision is reviewed at least annually.
2.2.24 | Product warranties |
Warranty expenditure on aircraft is estimated on delivery of these products. The estimates are based on historical data that includes, among others, warranty claims and related repair/ replacement costs, warranties given by the suppliers, contractual coverage period and warranty patterns for new aircrafts, for which the Company expects higher warranty costs in the launch of new models until the production process matures and increases the platform in service period. The coverage period varies from 3 to 6 years.
The Company may be obliged to modify the product to meet the requirements of the certification authorities, or after delivery, due to improvements or to the aircraft’s performance. The costs of such modifications are provisioned when the new requirements or improvements are requested and known.
Management reviews the assumptions and the evolution of warranty relates costs periodically, and if appropriated, adjustements to the provision is recorded.
The product warranties balances are presented in the provisions caption in the consolidated statements of financial position (Note 24.1).
2.2.25 | Share- based payment |
The Executive Remuneration Policy (PRE) determines that the remuneration of the Company’s management shall be granted as a Long Term Incentive (ILP in Portuguese) with the objective of retaining and attracting qualified personnel who will make an effective contribution to the Company’s performance. The Company provides two types of share-based remuneration in the form of LTIs:
i) | Stock options plan (capital instruments based on the Company’s share issues). In this modality, in return for the services provided, the program participants receive stock options, the fair value of which is calculated based on the Black & Scholes pricing model and recognized on a linear basis in the consolidated statements of income during the vesting period, which is the period during which the acquisition criteria are met; |
ii) | Cash-settled phantom shares plan, in which the amounts attributed to the services provided by the participants are converted into virtual share units based on the market value of the Company’s shares. At the end of the acquisition period the participant receives the quantity of virtual shares converted into reais, at the shares’ current market value. The company recognizes the obligation during the acquisition period (quantity of virtual shares proportional to the period) in the same group as the participant’s normal remuneration. This obligation is presented as an account payable to employees and the fair value is calculated based on the market price of the shares and registered as financial income (expense) in the consolidated statements of income. |
The phantom shares plan is acash-settled share-based payment transaction and therefore has no impact on the calculation of diluted earnings per share.
2.2.26 | Earnings per share |
Basic earnings per common share are computed by dividing net income attributable to Embraer shareholders by the weighted average number of common shares outstanding during the period.
Diluted earnings per share are computed by adjusting the number of shares outstanding to include the number of additional shares that would have been outstanding had the potentially dilutive shares attributable to stock options been put into circulation during the respective periods.
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Notes to the Consolidated Financial Statements
In millions of U.S. dollar, unless otherwise stated
2.2.27 | Revenue recognition of contract with customers |
Revenue comprises the fair value of the consideration received or to be received for the sale of products and services in the ordinary course of business. Revenue is presented net of taxes, returns, reductions and discounts, and in the consolidated financial statements, after eliminating intercompany sales.
a) | Revenue from sales of aircraft and spare parts |
Revenues from aircraft and spare parts sales are recognized when the control, as per IFRS 15, is transferred to the customer, that is, when all recognition conditions are met. Revenues from commercial, executive and agricultural aircraft and spare parts are generally recognized upon delivery or shipment to the customer.
In aircraft sales contracts, the Company normally receives customer advances before the product control is transferred. The Company understands that there is no significant financing component in this operation.
For the spare parts sale contracts, the client makes the payment after the transfer of control, with average payment term of 30 days.
In sales of aircraft contracts, other performance obligations, such as supply of spare parts, training services, technical assistance and other obligations may be presented, which may or may not be delivered simultaneously to the aircraft delivery. For the Commercial and Executive Aviation contracts, the individual selling price is allocated for these additional performance obligations, and the variable considerations (as discounts), are allocated using the cost plus margin method. In the Defense & Security aircraft sales, there is no stand-alone price basis considering its high customization, the price is allocated in the performance obligation considering the cost plus margin method.
For these performance obligations, the revenue is recognized when the control of related product or service is transferred to the customer.
b) | Revenue from sale of services |
Services sale revenues are recognized at the time of control transfer to the customer, that is, to the extent that services are rendered over time. The performance obligations of such contracts are satisfied and recognized in the consolidated statements of income over time.
In the Defense & Security segment, some services, such as modernization services, the client’s payment schedule follow a schedule agreed between the parties.
In maintenance service contracts, the Company receives from the clients in an average term of 30 days.
Exchange Pool and EEC (Embraer Executive Care) programs revenues are recognized monthly during the contract period, because there is no customer use pattern that can be reliably projected, and consist of a fixed rate and part of a variable rate directly related to the hours actually flown by the aircraft covered in these programs. The payment term usually is 30 days.
c) | Revenue from development contracts |
In the Defense & Security segment, there are some operations characterized by the development of products or technologies whose transfer of control occurs over time. In such contracts, their revenues are recognized over time at amounts equal to the ratio of actual cumulative costs incurred at the end of reporting period divided by total estimated costs at completion, multiplied by the allocated price less the cumulative revenue recognized in prior reporting period.
Some contracts contain clauses for price adjustment based onpre-established indexes and these are recognized in the accounting period. The adequacy of revenue recognition related to development contracts in the Defense & Security segment is based on Management’s best estimates of total estimated costs at completion, as they become evident.
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Notes to the Consolidated Financial Statements
In millions of U.S. dollar, unless otherwise stated
The Company understanding is that the cost incurred method provides the most reliable basis for estimating the progress of contracts whose revenues are recognized over time.
In these contracts, there is also a schedule of payments agreed between the Company and the customers, which vary from contract to contract. After analysis, the Company has concluded that there are no significant financing components in the Defense & Security segment contracts since there is no willingness on either side to finance the other and there are factors that are not under the control of any party which may affect the payment dates.
d) | Contract assets and liabilities |
The contract assets relate to the Company’s rights to the consideration for the work completed and not billed at the date of the consolidated financial statements, mainly of development contracts that are measured through POC method and net of customer advances received and expected credit losses recognized. Contract assets are transferred to trade accounts receivable when the rights become unconditional.
Contract liabilities refer to advance payments received by the Company prior to the delivery of the aircraft, as well as to the supply of spare parts, training, technical assistance and other obligations included in aircraft sales contracts. They also refer to advances of consideration received from customers related to the acceptance of managerial stages/ tasks under development contracts (Defense & Security).
e) | Costs to obtain a contract |
Refers to incremental costs incurred by the Company solely to obtain contracts with customers that will be recovered in the fulfillment of these contracts, such as costs incurred with sales commissions and bank guarantees granted in Defense & Security contracts. Assets for obtaining contracts are capitalized as other assets and amortized when (or as) the related contract revenue is recognized.
2.2.28 | Cost of sales and services |
Cost of sales and services consists of the cost of the aircraft, spare parts and services rendered, comprising:
a) | Material-Materials used in the production process, substantially acquired from foreign suppliers. |
b) | Labor -comprises salaries and related charges, primarily in Brazilian reais. |
c) | Depreciation -The Company’s fixed assets are depreciated using the straight-line basis over their useful lives. |
d) | Amortization- Internally generated intangible assets are amortized in accordance with the estimated sales of the series of aircraft. Intangible assets acquired from third parties are amortized on straight-line bases over their estimated useful lives. |
e) | Product warranties- The Company estimates and records a liability for guarantee obligations related to its products on the date of delivery of the aircraft, based on historical experience and recorded as cost of goods sold. |
f) | Multiple-element arrangements - The Company enters into transactions that represent multiple-element arrangements, such as for providing training, technical assistance, spare parts and other concessions. These costs are recognized when the product or service is delivered or provided to the customer. |
2.2.29 | Employee profit sharing plan |
The Company provides a profit sharing plan for its employees, which is linked to performance targets established in action plans set and agreed at the beginning of each year. The profit sharing approved policy is equivalent to 12.5% of net income for the period, may be adjusted annually by Management based on circumnstances. Provisions are recognized monthly by applying the agreed percentage to the payroll of the company, recognized in the consolidated statements of income accounts related to the job performed by each employee.
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Notes to the Consolidated Financial Statements
In millions of U.S. dollar, unless otherwise stated
Of the total amount of profit sharing, 50% is divided equally among all the employees and the other 50% in proportion to each employee’s salary.
2.2.30 | Financial income (expenses), net and foreign exchange gains (losses), net |
Financial income (expenses), net and foreign exchange gains (losses), net principally comprise interest income on cash and cash equivalents and financial investments measured as at amortized cost and FVOCI, financial charges on loans, tax updates and foreign exchange gains (losses) on assets and liabilities expressed in currencies other than the functional currency (US dollars), on an accrual basis. Gains or losses on fair value changes of FVTPL financial instruments are also recognized as financial income (expenses), net.
Changes in the fair value of the residual value guarantees and income or loss on the provision and implementation of derivative financial instruments capitalized are also recorded as financial income (expense), net in the consolidated statements of income.
Financial income and expense exclude borrowing costs attributable to acquisitions, buildings or the contribution of qualifying assets that require a substantial period of time to be ready for use or sale.
2.2.31 | Statement of cash flows |
The statement of cash flows was prepared using the indirect method.
2.2.32 | Segment reporting |
Operating segment information is presented in a manner consistent with the internal reports provided to the chief operating decision-maker. The chief operating decision-maker, who is responsible for allocating resources among and assessing the performance of the operating segments and for making strategic decisions, is the chief executive officer.
Generally, balances and transactions that are not directly allocated to a specific operating segment are appropriatedpro-rata, based on the amount of revenue recognized by segment.
3. | Critical accounting estimates and significant judgements |
Preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and adopt assumptions that affect the reported amounts of assets and liabilities, revenue and expense and their disclosure. Therefore, variables and assumptions derived from past experience and other factors deemed relevant were used in preparing accompanying consolidated financial statements included in this report. These estimates and assumptions are reviewed on an ongoing basis and the changes to accounting estimates are recognized in the period in which the estimates are revised on a prospective basis.
The significant accounting policies, including the variables and assumptions used in the estimates, and the relevant sensitivity of those judgments to different scenarios and conditions are described below:
3.1. | Revenue from contract with customers |
In the Defense & Security segment, a significant portion of revenue is derived from long-term development contracts with the Brazilian and foreign governments, recognized over time by the cost incurred method (Note 2.2.27), using the ratio of actual cumulative costs incurred divided by total estimated costs at completion for progress measurement.
During the course of the contract, the Company assesses the costs incurred, adjusting total estimated costs at completion if necessary to reflect variations in costs in relation to the projection, changes in circumnstances and/ or new events, such as contract modification. Any resulting increase or decrease in estimated revenues or costs at completion is recognized ascatch-up adjustment in the consolidated statements of income in the reporting period which the circumnstances that give rise to the revision become known by Management.
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Notes to the Consolidated Financial Statements
In millions of U.S. dollar, unless otherwise stated
During the first half of 2018, in the development contract ofKC-390 aircraft, the prototype 001 faced an incident that led the 1st serial unit to be allocated to flight test campaign in order to reduce impact in the certification schedule. Thisnon-recurring event in the year negatively impacted the contract estimated costs at completion and revenue recognition, with a negativecatch-up adjustment recognized of US$ 127.2 in gross profit of the consolidated statements of income.
Should the total estimated costs at completion of contracts in progress be 10% lower than Management’s actual estimates, the revenue recognized in 2018 would increase by US$ 385.9, and if the costs were 10% higher than Management’s estimates, the recognized revenue would decrease by US$ 425.7.
3.2. | Residual value guarantees |
The residual value guarantees granted on aircraft sales may be exercised at the end of a financing contract between a financial agent and the customer/operator of these aircraft. The guarantees are initially measured at fair value and are revised quarterly to reflect changes in relation to the fair value of these commitments. The residual value guarantees may be exercised if the quoted market value is lower than the future fair value guaranteed. The future fair value is estimated in accordance with third party evaluation of the aircraft, including information from sale or leasing of similar aircraft in the secondary market. Refer to Note 26.4.5 for a sensitivity analysis of residual value guarantees.
3.3. | Impairment of long-lived assets |
The impairment test considers the Company’s medium and long-term strategic plan cash flows, brought to present value at an appropriate discount rate compatible with the market and that reflects the shareholders’ expectations of return. In preparing or using this information, the Company uses estimates, as follows:
a) | Gross expected cash flow- the Management projected inflows and outflows based on past performance considering its business strategy and market development expectations. These projections also consider the efficiency gains planned for the product cycle; |
b) | Growth rates- the growth rates were reflected in the revenue flow budgeted by the Company, consistent with the forecasts included in industry reports; |
c) | Discount rates- an appropriate discount rate is used that reflects the expected return of investors at the time the calculation is made. This rate is also compared with the market to confirm its consistency. |
Impairment of aircraft held in the Company’s property, plant and equipment available for leasing to third parties is measured at fair value less cost to sell or value in use. The assessment of the recoverable amount of such aircraft considers assessment of their fair value in an active market and recognition of impairment if their carrying value is higher than the fair value.
If the estimated discountpre-tax rate applied to the discounted cash flows be 1% higher than the Company’s estimates, it would not generate additional losses as of December 31, 2018.
3.4. | Fair value of financial instruments |
The fair value of financial instruments that are not traded in an active market is determined by using valuation techniques. The Company uses its judgment to select a variety of methods, using assumptions based on market conditions at the end of each reporting period. The methods and calculations are the same as known valuation techniques normally used by the financial market. Refer to Note 26.4 for sensitivity analysis of financial instruments.
F-37
Table of Contents
Embraer S.A.
Notes to the Consolidated Financial Statements
In millions of U.S. dollar, unless otherwise stated
3.5. | Income taxes |
The Company is subject to income taxes in multiple jurisdictions. Significant judgment is required in determining the worldwide provision for income taxes in each jurisdiction the Company operates. There are many transactions and calculations for which the ultimate tax determination is uncertain. The Company also recognizes provisions based on estimates of whether additional taxes will be due. When the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the current and deferred income tax assets and liabilities in the period in which the final amount is determined.
Because the Company’s tax is largely determined in Brazilian reais and its functional currency is the dollar, the income tax expense line is highly sensitive to the effects of changes in exchange rates, particularly those due to changes innon-monetary assets.
If the real had devalued or appreciated by 10% against the dollar in relation to the actual exchange rate at December 31, 2018, the deferred income tax expense would have been higher or lower by approximately US$ 148.2.
3.6. | Non-current assets held for sale and discontinued operations |
A discontinued operation is a Company’s business component which comprises operations and cash flows that may be clearly distinct and:
• | Represents a separate major line of business or geographic area of operations; |
• | It is part of aco-ordinated single plan for the sale of a separate major line of business or geographic area of operations; or |
• | It is a subsidiary acquired exclusively with a view to resale. |
The classification of a Company’s operation as discontinued operation is achieved through its disposal, or at the time the transaction meets the criteria of IFRS 5 to have its assets and liabilities classified as held for sale, whichever occurs earlier.
An asset or group of assets and liabilities is held for sale when it is expected that its carrying amount will be recovered mainly from the sale transaction rather than continuous use. This occurs if the asset is available for immediate sale under its current conditions, subject only to customary and usual terms for the conclusion of the transaction, when the sale transaction is defined as ‘highly probable’ under the accounting standard.
The transaction initiated by the Company and The Boeing Company involving assets of commercial aviation segment will be classified as held for sale and discontinued operation from February 26, 2019, date of shareholders approval on Extraordinary General Shareholders’ Meeting when the ‘highly probable’ criteria was met.
As of December 31, 2018, the criteria to classify the operation as an asset held for sale and discontinued operation has not been reached.
4. | Accounting standards not yet adopted |
Standards and amendments to existing accounting standards mentioned in this section have been published, but implementation is not mandatory for the year ended December 31, 2018, and the Company has not early adopted the amendments in these consolidated financial statements.
The accounting standards presented below may be relevant to the Company in the future, for this reason adoption projects are in course for each of them. It is not possible to estimate the effects of the adoption until such projects are concluded:
• | IFRS 16- Leases: brings new concepts from the lessee’s point of view. In the model proposed by the new standard, the lessee shall recognize all leases as part of the consolidated statements of financial position in the caption of property, plant and equipment “right of use”, against a liability account. The initial recognition must be measured as at present value, considering a discount rate |
F-38
Table of Contents
Embraer S.A.
Notes to the Consolidated Financial Statements
In millions of U.S. dollar, unless otherwise stated
that is appropriate to the local reality of each entity. In the model proposed by the new standard there are no significant changes in the accounting recognition to be made by the lessor. In adopting the standard, the Company used three practical expedients: (1) transactions below US$ 5,000 will be outside the scope of this standard, (2) all contracts with less than 12 months will not be considered for the purposes of IFRS 16 and (3) in order to define the discount rates, Management considered adopting the practical expedient which considers grouping contracts with similar characteristics. Embraer and its subsidiaries are analyzing the new accounting standard as well as the application in existing transactions and consider that there is an impact in the consolidated financial statements, implying an increase in assets and liabilities, a reduction in the value of operating expenses and an increase in financial expenses. The standard is applicable as of January 1, 2019 and the Company intends to apply the simplified transition approach and will not restate comparative amounts for the year prior to first adoption and the assets will be measured at the amount of the lease liability on adoption (adjusted for any prepaid or accrued lease expenses). The estimated effect on transition is between0.5%-1.0% of the Company’s total assets, without impact in Shareholders’ equity. |
• | IFRIC 23 -Uncertainty over income tax treatments: This is an interpretation of the IAS 12 - Income Tax standard, whose initial application will be effective as of January 1, 2019. The Company is surveying all the circumstances covered by IFRIC 23 and does not expect relevant impacts on its adoption. According to the interpretation, there are two possible transition methods: (1) retrospective, where the application is performed without the effect of using facts or further knowledge and (2) retrospective with cumulative effect, method in which applies with all the effect of prior periods accumulated in Shareholders’ equity. The Company will adopt this interpretation in compliance with method (2) mentioned. |
Other accounting standards have been amended or are in the process of amendment and will come into effect in the coming years; however these are not mentioned, as the Company does not expect them to result in significant impacts.
5. | Cash and cash equivalents |
12.31.2018 | 12.31.2017 | |||||||
Cash and banks | 125.4 | 383.4 | ||||||
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125.4 | 383.4 | |||||||
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Cash equivalents | ||||||||
Private securities (i) | 352.6 | 219.4 | ||||||
Fixed deposits (ii) | 802.9 | 668.0 | ||||||
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1,155.5 | 887.4 | |||||||
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1,280.9 | 1,270.8 |
(i) | Applications in Bank Deposit Certificates (CDB’s), issued by financial institutions in Brazil, available for redemption in up to 90 days without impact on contracted remuneration; |
(ii) | Fixed term deposits in US Dollars with original maturities of 90 days or less. |
6. | Financial investments |
12.31.2018 | 12.31.2017 (Restated) | |||||||||||||||||||||||||||||||
Amortised cost | Fair value through other comprehensive income | Fair value through profit or loss | Total | Amortised cost | Fair value through other comprehensive income | Fair value through profit or loss | Total | |||||||||||||||||||||||||
Financial instruments | ||||||||||||||||||||||||||||||||
Private securities (i) | — | 50.4 | — | 50.4 | — | 516.0 | 0.6 | 516.6 | ||||||||||||||||||||||||
Structured Notes (ii) | 48.8 | — | 1,308.0 | 1,356.8 | 50.5 | — | 1,199.6 | 1,250.1 | ||||||||||||||||||||||||
Fixed Deposits (iii) | — | 457.3 | 0.1 | 457.4 | — | 791.6 | — | 791.6 | ||||||||||||||||||||||||
Investment funds | — | — | 2.4 | 2.4 | — | — | — | — | ||||||||||||||||||||||||
Other (iv) | — | — | 59.9 | 59.9 | — | — | 59.0 | 59.0 | ||||||||||||||||||||||||
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48.8 | 507.7 | 1,370.4 | 1,926.9 | 50.5 | 1,307.6 | 1,259.2 | 2,617.3 | |||||||||||||||||||||||||
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Current portion | 1.1 | 507.7 | 1,234.6 | 1,743.4 | 1.3 | 1,307.6 | 1,057.2 | 2,366.1 | ||||||||||||||||||||||||
Non-current | 47.7 | — | 135.8 | 183.5 | 49.2 | — | 202.0 | 251.2 |
(i) | Private securities, being: investments in Financial Bills, investments in Bank Deposit Certificates and Committed Transactions issued by Brazilian financial institutions, issued with maturities of more than 90 days. |
F-39
Table of Contents
Embraer S.A.
Notes to the Consolidated Financial Statements
In millions of U.S. dollar, unless otherwise stated
(ii) | Structured notes, mainly comprised of: |
• | Amount of US$ 1,103.7 (US$ 855.1 as of December 31, 2017), with credit risk of the issuing financial institution and the Brazilian government. |
• | Amount of US$ 83.2 (US$ 222.2 as of December 31, 2017). In 2004, seeking to ensure profitability compatible with the term of guarantee deposit, the Company invested principal of US$ 123.4 in15-year structured notes. In the inception, the transaction was recognized as restricted cash in the guarantee deposit line, however, due to negotiations between the parties at the end of 2016 and beginning of 2017, the restriction was waived, and then the amount was reclassified to financial investments line in the consolidated statements of financial position. |
This yield enhancement was obtained through a credit default swap (CDS), a transaction which provides the right of early redemption of the note in the case of default by the Company. Upon such default, the note may be redeemed by the holder at its market value or its original face value, which would result in a loss to the Company of all interest accrued to that date.
Default events that can bring forward the due date for the notes includes: (a) bankruptcy or insolvency of the Company and (b) failure to pay or restructuring of Company debts in financing contracts.
In the event of default, the maturity dates of these notes will be brought forward and the notes will be realized at market value, limited to a minimum of the amounts originally invested. Any amount by which the market value exceeds the amount invested will be paid to the Company in the form of bonds, or loans of that amount.
(iii) | Fixed-term deposits in US dollars issued by financial institutions, with maturities of more than 90 days from the contract date. |
(iv) | Refers to the shares of newly created Republic Airways Holdings, as a result of Republic Airways’ request for bankruptcy. These shares were received by the Company as part of the entity restructuring plan (see Note 23—Financial Guarantees). |
The weighted average interest rate as of December 31, 2018 related to cash equivalents and financial investments in Brazilian Reais were of 6.56% p.a. and in US Dollars 2.40% p.a. (10.18% and 1.70% p.a. respectively as of December 31, 2017).
7. | Trade accounts receivable, net |
12.31.2018 | 12.31.2017 | 01.01.2017 | ||||||||||
(Restated) | (Restated) | |||||||||||
Foreign customers | 325.7 | 306.3 | 305.0 | |||||||||
Brazilian Air Force | 21.8 | 14.4 | 9.1 | |||||||||
Domestic customers | 15.5 | 29.2 | 64.3 | |||||||||
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363.0 | 349.9 | 378.4 | ||||||||||
Allowance for doubtful accounts | (45.0 | ) | (52.9 | ) | (41.6 | ) | ||||||
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318.0 | 297.0 | 336.8 | ||||||||||
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F-40
Table of Contents
Embraer S.A.
Notes to the Consolidated Financial Statements
In millions of U.S. dollar, unless otherwise stated
The amounts and maturities of these trade accounts receivable are shown below:
12.31.2018 | 12.31.2017 | 01.01.2017 | ||||||||||
(Restated) | (Restated) | |||||||||||
Current | 217.0 | 223.6 | 279.6 | |||||||||
Up to 90 days | 52.6 | 48.6 | 49.6 | |||||||||
From 91 to 180 days | 13.6 | 15.7 | 19.5 | |||||||||
More than 180 days | 79.8 | 62.0 | 29.7 | |||||||||
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363.0 | 349.9 | 378.4 | ||||||||||
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Changes in estimated credit losses year over year are shown below:
12.31.2018 | 12.31.2017 | 01.01.2017 | ||||||||||
(Restated) | (Restated) | |||||||||||
Beginning balance | (52.9 | ) | (41.6 | ) | (38.4 | ) | ||||||
Additions | (5.8 | ) | (22.1 | ) | (36.0 | ) | ||||||
Reversal | 17.7 | 9.9 | 12.5 | |||||||||
Write-off | 3.6 | 5.2 | 10.3 | |||||||||
Foreign exchange variation | (7.6 | ) | (4.3 | ) | 10.0 | |||||||
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Ending balance | (45.0 | ) | (52.9 | ) | (41.6 | ) | ||||||
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8. | Derivative financial instruments |
Derivative financial instruments are contracted to protect the Company’s operations from exchange and interest rate fluctuation risks and are not used for speculation.
As of December 31, 2018, the Company had the following instruments:
• | Non-deliverable forward (NDF), with the purpose of protecting the Company against the risks of exchange rate fluctuations. The fair value is determined by the observable market pricing model. |
• | Swap operations, with the main objective of changing the debts index, from floating rates to fixed interest rates or vice versa, exchange of Dollar to Real or Euro and vice versa. The fair values of these instruments are measured by the future flow, determined by applying contractual interest rates to maturity, and discounted to present value at the date of the consolidated financial statements by the prevailing market rates. |
• | Transactions with purchase options and currency sale, in order to protect cash flows of wage costs denominated in Reais, against the risk of currency fluctuations. The financial instrument used by the Company iszero-cost collar, which consists of the purchasing of a put option and the sale of a call option, contracted with the same counterparty and with a zero net premium. The fair value of this instrument is determined by the observable market pricing model (through market information providers) and widely used by market participants to measure similar instruments. |
F-41
Table of Contents
Embraer S.A.
Notes to the Consolidated Financial Statements
In millions of U.S. dollar, unless otherwise stated
Purpose | Risk | Counterparty | Settlement date | 12.31.2018 | 12.31.2017 | |||||||||||
Derivatives designated as hedge accounting | ||||||||||||||||
Expenses in Brazilian Reais (i) | Exchange rate | Citibank BofaMLynch Santander BNP Paribas Bradesco Itau BBA | | 2019 — 2019 2019 2019 2019 | | | (1.9) — (1.2) (1.2) (1.9) (1.3) | | | 0.8 0.3 1.4 1.3 — — | | |||||
Export financing (ii) | Interest rate | Bradesco BofaMLynch Santander | | — — 2019 | | | — — 0.9 | | | 3.7 4.5 5.0 | | |||||
Project development (ii) | Interest rate | Itau BBA Votorantim BofaMLynch Santander HSBC Société Générale Safra Morgan Stanley S/A Bradesco | | 2023 2022 2022 2022 2022 2022 2022 2022 2022 | | | 0.3 0.3 0.5 1.7 0.3 0.2 0.1 1.7 0.4 | | | 0.3 0.5 0.7 2.7 0.4 0.2 0.2 3.0 0.7 | | |||||
Investments | Interest rate | Bradesco Santander BNP Paribas | | — — — | | | — — — | | | (1.1) (0.1) (0.1) | | |||||
Export | Exchange rate and Interest rate | Santander | — | — | (0.1) | |||||||||||
Export (iii) | Interest rate | Itau BBA | 2027 | 2.3 | 0.5 | |||||||||||
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Other Derivatives | 1.2 | 24.8 | ||||||||||||||
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Recourse andnon-recourse debt (iv) | Interest rate | Natixis | 2022 | 0.3 | 1.0 | |||||||||||
Acquisition of property, plant and equipment (v) | Interest rate | Compass Bank | 2024 | (0.1) | (0.2) | |||||||||||
Export (vi) | Exchange rate | Santander Totta Natixis BNP Paribas | | 2019 — — | | | — — — | | | — (0.3) 0.1 | | |||||
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0.2 | 0.6 | |||||||||||||||
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1.4 | 25.4 | |||||||||||||||
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(i) | Zero-cost collar financial instruments, designated as cash flow hedge, in the total amount of US$ 296.7, through purchase of a put option at the weighted average exercise price of R$ 3.43 and through the sale of a call option at the weighted average exercise price of R$ 4.10 for the year of 2019. |
(ii) | Interest rate swap, designated as fair value hedge, of US$ 277.6 related to the Export and Project Development debt lines, subject to a weighted average fixed interest rate of 4.51% p.a. to a weighted average floating rate equivalent to 34.49% p.a. of CDI index (Interbank Deposit Certificate). |
(iii) | Interest rate swap, designated as cash flow hedge, which converted6-month LIBOR interest rate to a fixed interest rate of 2.37% p.a., related to US$ 100.0 debt. |
(iv) | Interest rate swap, which converted the amount of US$ 7.3 of recourse andnon-recourse debt from a weighted average fixed rate of 8.4% p.a. to a floating rate equivalent to LIBOR 6 months + 1.15% p.a. |
(v) | Interest rate swap, related to operation in the amount of US$ 3.2, which converted a floating interest rate of LIBOR 1 month + 2.44% p.a. for fixed rate of 5.23% p.a. |
(vi) | Non-deliverable forward instruments in the amount of US$ 2.5 for exchange of US Dollars to Euro. |
F-42
Table of Contents
Embraer S.A.
Notes to the Consolidated Financial Statements
In millions of U.S. dollar, unless otherwise stated
As of December 31, 2018, loans and financing measured as at amortized cost amounted to US$ 3,647.6, and US$ 3,648.4 considering the effect of fair value of hedged risks by the hedge structures (As of December 31, 2017 US$ 4,198.3 and US$ 4,198.5, respectively).
The hedge effectiveness determined for the fair value and cash flow hedges in the inception date was 1:1 and 1:1, respectively. Considering changes in the discounted value of hedge instruments not yet liquidated since January 1stand in the value of hedged risk applied to determine the effectiveness relationship, the hedge effectiveness was 1:1.0056 and 1:1.1521 (1:1.0008 and 1:1.0303 as of December 31, 2017).
As of December 31, 2018 and 2017, the fair value of the derivative financial instruments was recorded in the consolidated statements of financial position as follows:
12.31.2018 | 12.31.2017 | |||||||
Assets | ||||||||
Current portion | 5.4 | 29.5 | ||||||
Non-current | 4.1 | 4.8 | ||||||
Liabilities | ||||||||
Current portion | (8.1 | ) | (8.8 | ) | ||||
Non-current | — | (0.1 | ) | |||||
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Net derivative financial instruments | 1.4 | 25.4 |
9. | Collateralized accounts receivable and recourse andnon-recourse debt |
Refers to structured transactions in which the amount receivable comprises financial inflows to be received over time and residual values of aircraft under specified return conditions to be received at the end of the contract. The residual value of aircraft is monitored with the objective of recognizing its fair value in the accounts. These structured transactions (Note 2.2.9) were financed by a third party and the amounts were recognized as recourse andnon-recourse debt.
The cash inflow of certain structured transactions was sold to third parties, to whom financial guarantees were granted. In such cases the Company maintained the cash inflow in collateralized accounts receivable and recognized the corresponding liabilities in recourse andnon-recourse debt.
9.1 | Collateralized accounts receivable |
12.31.2018 | 12.31.2017 | |||||||
Estimated residual value of leased assets | 215.8 | 215.6 | ||||||
Minimum lease payments receivable | 122.6 | 127.6 | ||||||
Guaranteed operation (cash inflow) | 27.0 | 42.7 | ||||||
Impairment (i) | (129.5 | ) | (97.2 | ) | ||||
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Investment in sales-type lease | 235.9 | 288.7 | ||||||
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Current portion | 218.5 | 185.6 | ||||||
Non-current portion | 17.4 | 103.1 |
(i) | The amount recognized relates to the devaluation of assets linked to structured financing. |
F-43
Table of Contents
Embraer S.A.
Notes to the Consolidated Financial Statements
In millions of U.S. dollar, unless otherwise stated
As of December 31, 2018, the maturities of the amounts classified asnon-current assets are as follows:
Year | ||||
2019 | 3.7 | |||
2020 | 3.9 | |||
2021 | 4.0 | |||
2022 | 2.6 | |||
Thereafter 2022 | 3.2 | |||
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17.4 | ||||
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9.2 | Recourse andnon-recourse debt |
12.31.2018 | 12.31.2017 | |||||||
Recourse debt | 330.6 | 347.0 | ||||||
Non-recourse debt | 10.8 | 17.1 | ||||||
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341.4 | 364.1 | |||||||
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Current portion | 324.0 | 17.6 | ||||||
Non-current portion | 17.4 | 346.5 |
As of December 31, 2018, the maturities of the amounts classified asnon-current liabilities were as follows:
Year | ||||
2019 | 3.7 | |||
2020 | 3.9 | |||
2021 | 4.0 | |||
2022 | 2.6 | |||
Thereafter 2022 | 3.2 | |||
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17.4 | ||||
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10. | Guarantee deposits |
12.31.2018 | 12.31.2017 | |||||||
Sales financing guarantees (i) | 314.4 | 321.4 | ||||||
Sales structure guarantees (ii) | 25.3 | 60.8 | ||||||
Other | 10.0 | 11.7 | ||||||
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349.7 | 393.9 | |||||||
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Current portion | 339.9 | 0.1 | ||||||
Non-current | 9.8 | 393.8 |
(i) | Dollar-denominated financial investments linked to sales structures until the completion of these structures and settlement of the recourse andnon-recourse debt. |
(ii) | US dollar amounts deposited in an escrow account as collateral for the financing of certain aircraft sold where Embraer serves as secondary guarantor. If the initial guarantor of the debt (unrelated party) is required to pay the lender, the initial guarantor will be entitled to the amount in the escrow account in proportion to their guarantee. The amount is returned in the form of cash to the Company at maturity of the financing contracts if the aircraft purchaser does not default on the loan. The interest on the escrow account is added to the principal and recognized by the Company as financial income. |
As of 31 December 2018 the guarantor to whom the guarantees are linked was in compliance.
F-44
Table of Contents
Embraer S.A.
Notes to the Consolidated Financial Statements
In millions of U.S. dollar, unless otherwise stated
11. | Inventories |
12.31.2018 | 12.31.2017 | |||||||
Raw materials | 897.6 | 865.6 | ||||||
Work in process | 891.6 | 612.4 | ||||||
Spare parts | 424.3 | 405.2 | ||||||
Finished goods (i) | 146.4 | 89.9 | ||||||
Held by third parties | 108.7 | 82.3 | ||||||
Inventory in transit | 91.1 | 85.2 | ||||||
Consumption materials | 48.3 | 47.6 | ||||||
Used aircraft (ii) | 46.0 | 102.0 | ||||||
Advances to suppliers | 31.4 | 28.9 | ||||||
Loss on adjustment to market value (iii) | (7.7 | ) | (17.2 | ) | ||||
Loss due to obsolescence (iv) | (170.7 | ) | (153.2 | ) | ||||
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2,507.0 | 2,148.7 | |||||||
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(i) | The following aircraft were held in the finished products inventory: |
• | December 31, 2018: two Legacy 450, four Legacy 500, one Phenom 100; three Phenom 300, one Lineage and two Ipanemas. |
• | December 31, 2017: one Legacy 450, one Phenom 100, one Phenom 300, two Legacy 500, one Lineage and two Ipanemas. |
Of the total aircraft held in inventories as of December 31, 2018, one Ipanema and one Phenom 300 had been delivered by until March 25, 2019.
(ii) | The following used aircraft were held in inventory as available for sale: |
• | December 31, 2018: one Legacy 450, one Lineage, one Phenom 300; |
• | December 31, 2017: three ERJ 140, two Lineage and one Boeing BBJ 737 |
(iii) | Refers to the provision recorded for adjustments to the realizable value of used aircraft, as follows: |
12.31.2018 | 12.31.2017 | 12.31.2016 | ||||||||||
Beginning balance | (17.2 | ) | (19.9 | ) | (25.4 | ) | ||||||
Additions | (8.8 | ) | (8.2 | ) | (14.0 | ) | ||||||
Disposals | 18.3 | 10.9 | 19.5 | |||||||||
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Ending balance | (7.7 | ) | (17.2 | ) | (19.9 | ) | ||||||
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(iv) | A provision was recorded for items without activity for over two years and with no planned use in the production program, and to cover expected losses from excess inventories or obsolete work in progress, except for inventories of spare parts, for which the provision is based on technical obsolescence of items without activity for over two years. Changes in the provision for obsolescence were as follows: |
12.31.2018 | 12.31.2017 | 12.31.2016 | ||||||||||
Beginning balance | (153.2 | ) | (138.1 | ) | (161.2 | ) | ||||||
Additions | (59.8 | ) | (48.7 | ) | (59.8 | ) | ||||||
Disposals | 41.5 | 37.0 | 83.7 | |||||||||
Foreign exchange loss | 0.8 | (3.4 | ) | (0.8 | ) | |||||||
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Ending balance | (170.7 | ) | (153.2 | ) | (138.1 | ) | ||||||
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F-45
Table of Contents
Embraer S.A.
Notes to the Consolidated Financial Statements
In millions of U.S. dollar, unless otherwise stated
12. | Other assets |
12.31.2018 | 12.31.2017 | |||||||
Taxes recoverable (i) | 132.2 | 171.0 | ||||||
Other debtors (ii) | 61.6 | 53.5 | ||||||
Court-mandated escrow deposits (iii) | 43.0 | 62.5 | ||||||
Prepaid expenses | 24.3 | 22.4 | ||||||
Loan with a joint operation (iv) | 23.2 | 19.7 | ||||||
Advances to employees | 8.5 | 12.5 | ||||||
Advances for services to be rendered | 3.2 | 11.5 | ||||||
Other | 13.0 | 23.7 | ||||||
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309.0 | 376.8 | |||||||
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Current portion | 203.4 | 255.3 | ||||||
Non-current portion | 105.6 | 121.5 |
(i) | Taxes recoverable |
12.31.2018 | 12.31.2017 | |||||||
ICMS (State Value-added Tax) and IPI (Excise Tax) | 85.5 | 96.3 | ||||||
PIS (Social Integration Program) and COFINS | ||||||||
(Contribution for Social Security) | 24.5 | 51.1 | ||||||
Income tax and social security on net income withheld | 7.7 | 8.8 | ||||||
ISS (Service tax) | 5.9 | 6.3 | ||||||
Other | 8.6 | 8.5 | ||||||
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132.2 | 171.0 | |||||||
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Current portion | 93.7 | 120.4 | ||||||
Non-current portion | 38.5 | 50.6 |
(ii) | Corresponds mainly to rework done on products supplied by third parties, which will be reimbursed according to the contractual terms and credits negotiated with certain suppliers that will be consumed over time from other receivables from suppliers. |
(iii) | Refers to deposits arising from lawsuits, substantially to federal taxes and contributions (Note 22). |
(iv) | Corresponds to the jointly controlled operation of the Embraer group (Note 2.1.2), where only assets and liabilities under the Company’s liability are consolidated. In this way, the amount presented, refers to the balance of loan receivable from the other partner of EZ Air Interior Limited. |
13. | Interest in entities |
(i) | Wholly owned subsidiaries and special purpose entities |
Wholly-owned subsidiaries and special purpose entities (SPEs) controlled directly or indirectly by the Company and jointly controlled entities are described in notes 2.1.2 and 2.1.3 and are consolidated into the Embraer group.
There are no contractual or legal restrictions on the Company’s access to assets or settlement of liabilities of the wholly owned subsidiaries of the group.
There are inherent risks to the operations of these entities, the most significant of which are described below:
• | Economic Risks: potential losses from fluctuations in market conditions (price of products, exchange rate and interest); |
• | Operational risk: potential losses resulting from the emergence of new technologies or failure of current processes; |
F-46
Table of Contents
Embraer S.A.
Notes to the Consolidated Financial Statements
In millions of U.S. dollar, unless otherwise stated
• | Credit risk: potential losses that might occur if a third party (customer) becomes unable to meet its obligations; and |
• | Liquidity risk: financial inability to meet financial obligations. |
(ii) | Subsidiaries with participation ofnon-controlling shareholders |
Non-controllingshareholders have interests in the group entities listed below, however, based on contractual agreements and analysis of the applicable accounting standards, the Company has control and therefore has the right to consolidate the following entities:
Entity | Country | Participation Embraer Group | Participation noncontrolling | |||||||
OGMA - Indústria Aeronática de Portugal S.A. | Portugal | 65.0 | % | 35.0 | % | |||||
Embraer CAE Training Services Ltd. | United Kingdom | 51.0 | % | 49.0 | % | |||||
Visiona Tecnologia Espacial S.A. | Brazil | 51.0 | % | 49.0 | % | |||||
Embraer CAE Training Services | United States of America | 51.0 | % | 49.0 | % |
Embraer group holds 51.0% of the entities Embraer CAE Training Services Ltd., Visiona Tecnologia Espacial S.A. and Embraer CAE Training Services. The powers described in the contractual agreements show that the Board of Directors is mainly comprised of Embraer representatives and the Embraer Group directs the principal operating activities of the entity.
The financial position of the most significant entity of the group withnon-controlling interests is summarized below, which is OGMA—Indústria Aeronáutica de Portugal S.A. Other entities combined represent less than 5% of consolidated profit before taxes on income.
12.31.2018 | 12.31.2017 | 01.01.2017 | ||||||||||
Cash and cash equivalents | 12.9 | 11.1 | 23.7 | |||||||||
Current assets | 168.9 | 207.9 | 155.1 | |||||||||
Non current assets | 61.0 | 66.0 | 55.4 | |||||||||
Current liabilities | 74.5 | 117.4 | 76.5 | |||||||||
Non current liabilities | 0.1 | 0.9 | 7.3 | |||||||||
Noncontrolling interest | 54.3 | 54.4 | 44.2 | |||||||||
12.31.2018 | 12.31.2017 | 12.31.2016 | ||||||||||
(Restated) | (Restated) | |||||||||||
Revenue | 240.5 | 222.1 | 216.3 | |||||||||
Net income for the year | 9.6 | 12.3 | 11.2 |
Group subsidiaries withnon-controlling interests are subject to the same risks as the wholly owned subsidiaries.
(iii) | Jointly controlled entity |
EZ Air Interior Limited is a joint operation between the Embraer group and Zodiac Aerospace and shares with the other members’ joint management of the entities’ relevant activities.
The Company accounts for the assets, liabilities, revenues and expenses relating to its involvement in the joint operations in accordance with the rights and obligations assigned to Embraer.
12.31.2018 | 12.31.2017 | 01.01.2017 | ||||||||||
Cash and cash equivalents | 1.3 | 1.2 | 1.4 | |||||||||
Current assets | 24.5 | 28.8 | 27.7 | |||||||||
Non current assets | 8.0 | 7.1 | 5.4 | |||||||||
Current liabilities | 13.1 | 48.2 | 24.6 | |||||||||
Non current liabilities | 41.5 | 4.4 | 25.4 | |||||||||
12.31.2018 | 12.31.2017 | 12.31.2016 | ||||||||||
(Restated) | (Restated) | |||||||||||
Revenue | 48.4 | 42.0 | 47.4 | |||||||||
Net income (loss) for the year | (5.4 | ) | 0.1 | (9.3 | ) |
F-47
Table of Contents
Embraer S.A.
Notes to the Consolidated Financial Statements
In millions of U.S. dollar, unless otherwise stated
14. | Related parties |
14.1 | Related party transactions |
The table below summarizes balances and transactions with related parties outside the group and refers mainly to:
• | assets: (i) accounts receivable for spare parts, aircraft sales and product development, under conditions agreed between the parties, considering the volumes, risks involved and corporate policies (ii) mutual loans to subsidiaries abroad with interest rates compatible with those used by the Company on acquiring resources in foreign currencies (iii) balances of financial investments; and (iv) bank deposits; |
• | liabilities: (i) purchase of aircraft components and spare parts, under conditions agreed between the parties, considering the volumes, risks involved and corporate policies (ii) advances received on accountofsales contracts, according to contractual agreements; (iii) commission for sale of aircraft and spare parts (iv) financing for research and product development at market rates for this kind of financing (v) loans and financing; and (vi) mutual loan contracts with the subsidiaries abroad with interest rates equivalent to those used by the Company to acquire similar funding (vii) export financing; and |
• | Amounts in the consolidated statements of income: (i) purchases and sales of aircraft, components and spare parts and development of products for the defense and security market; (ii) financial income from financial investments and mutual loans; (iii) supplementary pension plan. |
14.1.1 | December 31, 2018 |
Current | Non-current | Financial | Operating | |||||||||||||||||||||
Assets | Liabilities | Assets | Liabilities | Results | Results | |||||||||||||||||||
Banco do Brasil S.A. | 326.2 | 314.3 | 9.4 | — | (4.2 | ) | — | |||||||||||||||||
Banco Nacional de Desenvolvimento Econômico e Social – BNDES | — | 71.8 | — | 119.7 | (8.3 | ) | — | |||||||||||||||||
Caixa Econômica Federal | — | — | — | — | 0.2 | — | ||||||||||||||||||
Brazilian Air Force | 42.3 | 90.3 | — | — | — | (176.2 | ) | |||||||||||||||||
Marinha do Brasil | 0.9 | — | — | — | — | (12.6 | ) | |||||||||||||||||
Embraer Prev – Sociedade de Previdência Complementar | — | 0.2 | — | — | — | (14.4 | ) | |||||||||||||||||
Brazilian Army | — | 4.3 | — | — | — | — | ||||||||||||||||||
Financiadora de Estudo e Projetos – FINEP | — | 13.0 | — | 43.5 | (2.3 | ) | — | |||||||||||||||||
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369.4 | 493.9 | 9.4 | 163.2 | (14.6 | ) | (203.2 | ) | |||||||||||||||||
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14.1.2 | December 31, 2017 |
Current | Non-current | Financial | Operating | |||||||||||||||||||||
Assets | Liabilities | Assets | Liabilities | Results | Results | |||||||||||||||||||
Banco do Brasil S.A. | 227.2 | 92.9 | 330.8 | 319.5 | (0.5 | ) | — | |||||||||||||||||
Banco Nacional de Desenvolvimento Econômico e Social – BNDES | — | 88.4 | — | 219.0 | (14.7 | ) | — | |||||||||||||||||
Brazilian Air Force | 314.1 | 90.3 | — | — | — | (23.7 | ) | |||||||||||||||||
Marinha do Brasil | 6.6 | — | — | — | — | (6.2 | ) | |||||||||||||||||
Caixa Econômica Federal | 9.8 | — | — | — | — | — | ||||||||||||||||||
Embraer Prev - Sociedade de Previdência Complementar | — | 0.2 | — | — | — | (22.9 | ) | |||||||||||||||||
Brazilian Army | — | 11.1 | — | — | — | (1.2 | ) | |||||||||||||||||
Financiadora de Estudo e Projetos – FINEP | — | 15.7 | — | 64.6 | (2.9 | ) | — | |||||||||||||||||
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557.7 | 298.6 | 330.8 | 603.1 | (18.1 | ) | (54.0 | ) | |||||||||||||||||
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F-48
Table of Contents
Embraer S.A.
Notes to the Consolidated Financial Statements
In millions of U.S. dollar, unless otherwise stated
14.1.3 | December 31, 2016 |
12.31.2016 | ||||||||
Financial Results | Operating Results | |||||||
Banco do Brasil S.A. | (2.8 | ) | — | |||||
Banco Nacional de Desenvolvimento Econômico e Social – BNDES | (18.6 | ) | — | |||||
Brazilian Air Force | — | 25.6 | ||||||
Marinha do Brasil | — | (2.7 | ) | |||||
Caixa Econômica Federal | 28.5 | — | ||||||
Embraer Prev – Sociedade de Previdência Complementar | — | (23.2 | ) | |||||
Brazilian Army | — | 5.0 | ||||||
Financiadora de Estudo e Projetos – FINEP | (2.9 | ) | — | |||||
Telecomunicações Brasileiras S.A. - Telebrás | — | (2.1 | ) | |||||
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4.2 | 2.6 | |||||||
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14.2 | Brazilian Federal Government – relationship |
Through its direct and indirect participation and ownership of a common share, denominated “golden share”, the Brazilian Federal Government is a significant shareholder. As of December 31, 2018, in addition to its “golden share”, the Brazilian Federal Government held an indirect stake of 5.37% in the Company’s capital through BNDESPAR, a wholly-owned subsidiary of the Banco Nacional do Desenvolvimento Econômico e Social – BNDES (the Brazilian Development Bank, or “BNDES”), which, in turn, is controlled by the Brazilian Federal Government.
The Brazilian government plays a key role in the Company’s business activities, including as:
• | a major customer for defense products (through the Brazilian Air Force, Army and Navy); |
• | a source of research and development financing through technology development institutions such as FINEP and the BNDES; |
• | an export credit agency (through the BNDES); and |
• | a source of short-term and long-term financing and a provider of asset management and commercial banking services (through Banco do Brasil). |
14.3 | Remuneration of key management personnel: |
12.31.2018 | 12.31.2017 | |||||||
Short-term benefits (i) | 10.0 | 10.1 | ||||||
Share based payment | 3.3 | 2.4 | ||||||
Labor contract termination | 1.0 | 1.1 | ||||||
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14.3 | 13.6 | |||||||
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(i) | Includes wages, salaries, profit sharing, bonuses and indemnities. |
Key Management includes members of the statutory Board of Directors and Executive Directors.
15. | Property, plant and equipment |
The annual weighted average rates by asset class are shown below. This information is based on the consolidated depreciation of the assets recognized in the year, compared, after annualization and elimination of anynon-typical movement, to the net balance of the assets in the previous year:
Class of assets | Weighted average depreciation rate (%) | |||||||
12.31.2018 | 12.31.2017 | |||||||
Buildings and improvements | 3.8 | % | 4.6 | % | ||||
Installations | 4.9 | % | 5.5 | % | ||||
Machinery and equipment | 10.0 | % | 13.0 | % | ||||
Furniture and fixtures | 9.3 | % | 11.8 | % | ||||
Vehicles | 22.7 | % | 27.7 | % | ||||
Aircraft | 11.0 | % | 8.0 | % | ||||
Computers and peripherals | 27.6 | % | 28.2 | % | ||||
Tooling | 16.5 | % | 16.4 | % | ||||
Other assets | 0.1 | % | 0.7 | % | ||||
Exchange pool program assets | 3.7 | % | 3.8 | % |
F-49
Table of Contents
Embraer S.A.
Notes to the Consolidated Financial Statements
In millions of U.S. dollar, unless otherwise stated
12.31.2018 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Land | Buildings and improvements | Installations | Machinery and equipment | Furniture and fixtures | Vehicles | Aircraft (i) | Computers and peripherals | Tooling | Other assets | Exchange pool program assets | Construction in progress | Total | ||||||||||||||||||||||||||||||||||||||||
Cost | ||||||||||||||||||||||||||||||||||||||||||||||||||||
At December 31, 2017 | 11.0 | 741.8 | 161.4 | 971.8 | 74.9 | 17.5 | 193.2 | 190.3 | 620.9 | 26.0 | 672.5 | 76.5 | 3,757.8 | |||||||||||||||||||||||||||||||||||||||
Additions | — | 1.3 | — | 28.5 | 1.9 | 0.5 | 10.2 | 6.3 | 16.6 | 1.4 | 46.3 | 41.3 | 154.3 | |||||||||||||||||||||||||||||||||||||||
Disposals | — | (10.9 | ) | (0.9 | ) | (36.5 | ) | (2.1 | ) | (0.5 | ) | (0.3 | ) | (6.4 | ) | (1.7 | ) | — | (20.2 | ) | (0.7 | ) | (80.2 | ) | ||||||||||||||||||||||||||||
Impairment(ii) | — | — | — | (0.3 | ) | — | — | (6.0 | ) | — | (2.5 | ) | — | — | — | (8.8 | ) | |||||||||||||||||||||||||||||||||||
Reclassifications* | — | 19.3 | 2.1 | 8.8 | (0.1 | ) | — | (120.8 | ) | 0.9 | 0.5 | 0.2 | (31.8 | ) | (26.7 | ) | (147.6 | ) | ||||||||||||||||||||||||||||||||||
Interest on capitalized assets | — | — | — | — | — | — | — | — | — | — | — | 4.8 | 4.8 | |||||||||||||||||||||||||||||||||||||||
Translation adjustments | — | (1.4 | ) | (0.2 | ) | 0.1 | (0.4 | ) | (0.2 | ) | (0.1 | ) | (1.1 | ) | (4.7 | ) | — | (16.0 | ) | (1.5 | ) | (25.5 | ) | |||||||||||||||||||||||||||||
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At December 31, 2018 | 11.0 | 750.1 | 162.4 | 972.4 | 74.2 | 17.3 | 76.2 | 190.0 | 629.1 | 27.6 | 650.8 | 93.7 | 3,654.8 | |||||||||||||||||||||||||||||||||||||||
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Accumulated depreciation | ||||||||||||||||||||||||||||||||||||||||||||||||||||
At December 31, 2017 | — | (208.9 | ) | (104.1 | ) | (506.6 | ) | (43.4 | ) | (13.4 | ) | (81.3 | ) | (148.4 | ) | (329.7 | ) | (9.9 | ) | (207.2 | ) | — | (1,652.9 | ) | ||||||||||||||||||||||||||||
Depreciation | — | (20.2 | ) | (2.8 | ) | (46.4 | ) | (2.9 | ) | (1.0 | ) | (9.1 | ) | (11.5 | ) | (48.1 | ) | — | (17.2 | ) | — | (159.2 | ) | |||||||||||||||||||||||||||||
Disposals | — | 10.7 | 0.9 | 33.5 | 1.5 | 0.4 | 0.3 | 6.3 | 0.7 | — | 6.9 | — | 61.2 | |||||||||||||||||||||||||||||||||||||||
Reclassifications* | — | 0.1 | 0.3 | 2.8 | — | — | 51.4 | (1.7 | ) | — | (1.5 | ) | — | — | 51.4 | |||||||||||||||||||||||||||||||||||||
Interest on capitalized assets | — | (1.5 | ) | — | — | — | — | — | — | — | — | — | — | (1.5 | ) | |||||||||||||||||||||||||||||||||||||
Translation adjustments | — | 0.4 | 0.1 | (1.4 | ) | 0.2 | 0.2 | — | 0.8 | 5.6 | — | 5.0 | — | 10.9 | ||||||||||||||||||||||||||||||||||||||
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At December 31, 2018 | — | (219.4 | ) | (105.6 | ) | (518.1 | ) | (44.6 | ) | (13.8 | ) | (38.7 | ) | (154.5 | ) | (371.5 | ) | (11.4 | ) | (212.5 | ) | — | (1,690.1 | ) | ||||||||||||||||||||||||||||
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Net | ||||||||||||||||||||||||||||||||||||||||||||||||||||
At December 31, 2017 | 11.0 | 532.9 | 57.3 | 465.2 | 31.5 | 4.1 | 111.9 | 41.9 | 291.2 | 16.1 | 465.3 | 76.5 | 2,104.9 | |||||||||||||||||||||||||||||||||||||||
At December 31, 2018 | 11.0 | 530.7 | 56.8 | 454.3 | 29.6 | 3.5 | 37.5 | 35.5 | 257.6 | 16.2 | 438.3 | 93.7 | 1,964.7 |
12.31.2017 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Land | Buildings and improvements | Installations | Machinery and equipment | Furniture and fixtures | Vehicles | Aircraft (i) | Computers and peripherals | Tooling | Other assets | Exchange pool program assets | Construction in progress | Total | ||||||||||||||||||||||||||||||||||||||||
Cost | ||||||||||||||||||||||||||||||||||||||||||||||||||||
At December 31, 2016 | 11.0 | 657.1 | 156.1 | 909.8 | 74.1 | 16.8 | 316.7 | 179.3 | 587.8 | 29.4 | 669.7 | 116.4 | 3,724.2 | |||||||||||||||||||||||||||||||||||||||
Additions | — | 4.1 | — | 40.3 | 3.6 | 0.4 | 14.4 | 11.4 | 30.8 | 8.6 | 43.6 | 80.5 | 237.7 | |||||||||||||||||||||||||||||||||||||||
Disposals | — | (8.1 | ) | — | (10.1 | ) | (1.9 | ) | (0.7 | ) | (8.1 | ) | (0.8 | ) | (1.0 | ) | — | (33.5 | ) | (1.1 | ) | (65.3 | ) | |||||||||||||||||||||||||||||
Impairment(ii) | — | — | — | (2.2 | ) | — | — | (25.8 | ) | — | (2.1 | ) | — | — | — | (30.1 | ) | |||||||||||||||||||||||||||||||||||
Reclassifications* | — | 85.5 | 4.8 | 22.5 | (1.4 | ) | 0.5 | (104.0 | ) | (0.7 | ) | 5.1 | (12.0 | ) | (22.2 | ) | (142.0 | ) | (163.9 | ) | ||||||||||||||||||||||||||||||||
Interest on capitalized assets | — | — | — | — | — | — | — | — | — | — | — | 22.1 | 22.1 | |||||||||||||||||||||||||||||||||||||||
Translation adjustments | — | 3.2 | 0.5 | 11.5 | 0.5 | 0.5 | — | 1.1 | 0.3 | — | 14.9 | 0.6 | 33.1 | |||||||||||||||||||||||||||||||||||||||
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At December 31, 2017 | 11.0 | 741.8 | 161.4 | 971.8 | 74.9 | 17.5 | 193.2 | 190.3 | 620.9 | 26.0 | 672.5 | 76.5 | 3,757.8 | |||||||||||||||||||||||||||||||||||||||
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Accumulated depreciation | ||||||||||||||||||||||||||||||||||||||||||||||||||||
At December 31, 2016 | — | (191.3 | ) | (101.4 | ) | (445.1 | ) | (40.0 | ) | (12.7 | ) | (153.9 | ) | (136.2 | ) | (278.9 | ) | (9.4 | ) | (201.1 | ) | — | (1,570.0 | ) | ||||||||||||||||||||||||||||
Depreciation | — | (21.3 | ) | (3.0 | ) | (60.3 | ) | (4.0 | ) | (1.2 | ) | (25.6 | ) | (12.1 | ) | (50.8 | ) | (0.2 | ) | (18.0 | ) | — | (196.5 | ) | ||||||||||||||||||||||||||||
Disposals | — | 4.1 | — | 7.5 | 1.0 | 0.6 | 6.9 | 0.6 | 0.3 | — | 8.8 | — | 29.8 | |||||||||||||||||||||||||||||||||||||||
Reclassifications* | — | 0.6 | 0.4 | — | — | 0.3 | 91.3 | — | — | (0.3 | ) | — | — | 92.3 | ||||||||||||||||||||||||||||||||||||||
Translation adjustments | — | (1.0 | ) | (0.1 | ) | (8.7 | ) | (0.4 | ) | (0.4 | ) | — | (0.7 | ) | (0.3 | ) | — | 3.1 | — | (8.5 | ) | |||||||||||||||||||||||||||||||
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At December 31, 2017 | — | (208.9 | ) | (104.1 | ) | (506.6 | ) | (43.4 | ) | (13.4 | ) | (81.3 | ) | (148.4 | ) | (329.7 | ) | (9.9 | ) | (207.2 | ) | — | (1,652.9 | ) | ||||||||||||||||||||||||||||
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Net | ||||||||||||||||||||||||||||||||||||||||||||||||||||
At December 31, 2016 | 11.0 | 465.8 | 54.7 | 464.7 | 34.1 | 4.1 | 162.8 | 43.1 | 308.9 | 20.0 | 468.6 | 116.4 | 2,154.2 | |||||||||||||||||||||||||||||||||||||||
At December 31, 2017 | 11.0 | 532.9 | 57.3 | 465.2 | 31.5 | 4.1 | 111.9 | 41.9 | 291.2 | 16.1 | 465.3 | 76.5 | 2,104.9 |
F-50
Table of Contents
Embraer S.A.
Notes to the Consolidated Financial Statements
In millions of U.S. dollar, unless otherwise stated
12.31.2016 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Land | Buildings and improvements | Installations | Machinery and equipment | Furniture and fixtures | Vehicles | Aircraft (i) | Computers and peripherals | Tooling | Other assets | Exchange pool program assets | Construction in progress | Total | ||||||||||||||||||||||||||||||||||||||||
Cost | ||||||||||||||||||||||||||||||||||||||||||||||||||||
At December 31, 2015 | 11.0 | 616.5 | 151.8 | 853.3 | 70.5 | 17.0 | 323.5 | 163.2 | 533.5 | 22.8 | 622.6 | 75.8 | 3,461.5 | |||||||||||||||||||||||||||||||||||||||
Additions | — | 0.6 | — | 54.8 | 4.0 | 0.7 | 137.4 | 17.3 | 54.6 | 8.6 | 65.5 | 91.7 | 435.2 | |||||||||||||||||||||||||||||||||||||||
Disposals | — | (9.3 | ) | (0.2 | ) | (7.6 | ) | (2.3 | ) | (0.9 | ) | (17.8 | ) | (3.0 | ) | (0.9 | ) | — | (15.1 | ) | (7.1 | ) | (64.2 | ) | ||||||||||||||||||||||||||||
Impairment | — | — | — | — | — | — | (27.0 | ) | — | — | — | — | — | (27.0 | ) | |||||||||||||||||||||||||||||||||||||
Impairment (iii) | — | — | — | — | — | — | (64.9 | ) | — | — | — | — | — | (64.9 | ) | |||||||||||||||||||||||||||||||||||||
Reclassifications* | — | 49.9 | 4.4 | 10.2 | 1.9 | 0.2 | (34.7 | ) | 1.7 | 0.9 | (2.0 | ) | 1.2 | (59.8 | ) | (26.1 | ) | |||||||||||||||||||||||||||||||||||
Interest on capitalized assets | — | — | — | — | — | — | — | — | — | — | — | 16.1 | 16.1 | |||||||||||||||||||||||||||||||||||||||
Translation adjustments | — | (0.6 | ) | 0.1 | (0.9 | ) | — | (0.2 | ) | 0.2 | 0.1 | (0.3 | ) | — | (4.5 | ) | (0.3 | ) | (6.4 | ) | ||||||||||||||||||||||||||||||||
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At December 31, 2016 | 11.0 | 657.1 | 156.1 | 909.8 | 74.1 | 16.8 | 316.7 | 179.3 | 587.8 | 29.4 | 669.7 | 116.4 | 3,724.2 | |||||||||||||||||||||||||||||||||||||||
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Accumulated depreciation | ||||||||||||||||||||||||||||||||||||||||||||||||||||
At December 31, 2015 | — | (180.8 | ) | (97.2 | ) | (389.5 | ) | (37.9 | ) | (12.5 | ) | (156.4 | ) | (128.7 | ) | (233.4 | ) | (9.4 | ) | (188.3 | ) | — | (1,434.1 | ) | ||||||||||||||||||||||||||||
Depreciation | (20.0 | ) | (4.2 | ) | (62.7 | ) | (4.1 | ) | (1.1 | ) | (25.4 | ) | (10.4 | ) | (44.7 | ) | — | (21.9 | ) | (194.5 | ) | |||||||||||||||||||||||||||||||
Disposals | — | 9.2 | — | 4.9 | 1.9 | 0.8 | 15.5 | 2.9 | 0.5 | — | 6.0 | — | 41.7 | |||||||||||||||||||||||||||||||||||||||
Reclassifications* | — | — | — | 1.8 | — | — | 8.6 | (0.1 | ) | (1.6 | ) | — | — | — | 8.7 | |||||||||||||||||||||||||||||||||||||
Translation adjustments | — | 0.3 | — | 0.4 | 0.1 | 0.1 | 3.8 | 0.1 | 0.3 | — | 3.1 | — | 8.2 | |||||||||||||||||||||||||||||||||||||||
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At December 31, 2016 | — | (191.3 | ) | (101.4 | ) | (445.1 | ) | (40.0 | ) | (12.7 | ) | (153.9 | ) | (136.2 | ) | (278.9 | ) | (9.4 | ) | (201.1 | ) | — | (1,570.0 | ) | ||||||||||||||||||||||||||||
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Net | 11.0 | 435.7 | 54.6 | 463.8 | 32.6 | 4.5 | 167.1 | 34.5 | 300.1 | 13.4 | 434.3 | 75.8 | 2,027.4 | |||||||||||||||||||||||||||||||||||||||
At December 31, 2015 | 11.0 | 465.8 | 54.7 | 464.7 | 34.1 | 4.1 | 162.8 | 43.1 | 308.9 | 20.0 | 468.6 | 116.4 | 2,154.2 |
* | On December 31, 2018, 2017 and 2016, reclassification of “Aircraft” and “Exchange pool program assets” classes refers to aircraft and items transferred to the inventory for sale purposes. In addition, in September 2017, 17 ERJ 145 aircraft were transferred to inventory in order to be disassembled and sold as parts(part-out procedures). |
(i) | The aircraft are used for testing, shuttle and operating leases and are adjusted to fair value, if applicable. The following aircraft are held: |
• | December 31, 2018: three ERJ 135, 15 ERJ 145, one EMBRAER 190, one EMBRAER 120, one Legacy 450, one 690B; and |
• | December 31, 2017: nine ERJ 135, 26 ERJ 145, four EMBRAER 170, one EMBRAER 190, one EMBRAER 120, one Legacy 450, one Legacy 500, one Phenom 300, one 690B. |
(ii) | Impairment losses recognized as discussed in Note 17. |
As of December 31, 2018, property, plant and equipment of US$ 114.5 were pledged as collateral for loans, financing and labor contingencies (December 31, 2017, US$ 134.1).
The average rate for capitalization of borrowing costs is 5.5% p.a. for the year ended December 31, 2018 (5.4% p.a. for year ended December 31, 2017).
16. | Intangible assets |
Internally developed intangible assets relate to expenditure incurred in developing new aircraft, including support services, production labor, materials and direct labor allocated to the construction of aircraft prototypes or significant components, and also the use of advanced technologies to make the aircraft lighter, quieter, more comfortable and energy-efficient and to reduce emissions, in addition to speeding up design and manufacture, while optimizing the use of resources.
12.31.2018 | ||||||||||||||||||||||||||||||||||||
Internally developed | Acquired from third party | |||||||||||||||||||||||||||||||||||
Commercial | Executive | Defense and Security | Other | Development | Software | Goodwill | Other | Total | ||||||||||||||||||||||||||||
Intangible cost | ||||||||||||||||||||||||||||||||||||
At December 31, 2017 | 1,825.2 | 1,355.7 | 33.5 | 5.8 | 13.9 | 343.3 | 12.0 | 45.6 | 3,635.0 | |||||||||||||||||||||||||||
Additions | 209.3 | 41.3 | 4.0 | 0.1 | 2.5 | 8.0 | — | 25.1 | 290.3 | |||||||||||||||||||||||||||
Contributions from suppliers | (125.5 | ) | — | — | — | — | — | — | — | (125.5 | ) | |||||||||||||||||||||||||
Disposals | — | — | — | — | — | (3.4 | ) | — | — | (3.4 | ) | |||||||||||||||||||||||||
Reclassifications | — | — | 5.9 | (2.4 | ) | (10.1 | ) | 2.4 | — | (1.9 | ) | (6.1 | ) | |||||||||||||||||||||||
Impairment | — | (58.5 | ) | — | — | — | — | — | — | (58.5 | ) | |||||||||||||||||||||||||
Interest on capitalized assets | 7.3 | 2.7 | — | — | — | — | — | — | 10.0 | |||||||||||||||||||||||||||
Translation adjustments | — | — | — | — | — | — | (1.6 | ) | — | (1.6 | ) | |||||||||||||||||||||||||
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At December 31, 2018 | 1,916.3 | 1,341.2 | 43.4 | 3.5 | 6.3 | 350.3 | 10.4 | 68.8 | 3,740.2 | |||||||||||||||||||||||||||
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Acumulated amortization | ||||||||||||||||||||||||||||||||||||
At December 31, 2017 | (1,031.8 | ) | (473.7 | ) | (27.9 | ) | (1.1 | ) | (6.8 | ) | (206.9 | ) | — | (4.4) | (1,752.6 | ) | ||||||||||||||||||||
Amortization | (29.6 | ) | (51.1 | ) | (1.8 | ) | (0.1 | ) | (0.9 | ) | (28.1 | ) | — | (1.2 | ) | (112.8 | ) | |||||||||||||||||||
Amortization of contribution from suppliers | 8.0 | 14.0 | — | — | — | — | — | — | 22.0 | |||||||||||||||||||||||||||
Disposals | — | — | — | — | — | 2.2 | — | — | 2.2 | |||||||||||||||||||||||||||
Reclassifications | — | — | (2.7 | ) | — | 4.8 | — | — | (0.7 | ) | 1.4 | |||||||||||||||||||||||||
Interest on capitalized assets | (0.2 | ) | (1.4 | ) | — | — | — | — | — | — | (1.6 | ) | ||||||||||||||||||||||||
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At December 31, 2018 | (1,053.6 | ) | (512.2 | ) | (32.4 | ) | (1.2 | ) | (2.9 | ) | (232.8 | ) | — | (6.3) | (1,841.4 | ) | ||||||||||||||||||||
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Intangible, net | ||||||||||||||||||||||||||||||||||||
At December 31, 2017 | 793.4 | 882.0 | 5.6 | 4.7 | 7.1 | 136.4 | 12.0 | 41.2 | 1,882.4 | |||||||||||||||||||||||||||
At December 31, 2018 | 862.7 | 829.0 | 11.0 | 2.3 | 3.4 | 117.5 | 10.4 | 62.5 | 1,898.8 |
F-51
Table of Contents
Embraer S.A.
Notes to the Consolidated Financial Statements
In millions of U.S. dollar, unless otherwise stated
12.31.2017 | ||||||||||||||||||||||||||||||||||||
Internally developed | Acquired from third party | |||||||||||||||||||||||||||||||||||
Commercial | Executive | Defense and Security | Other | Development | Software | Goodwill | Other | Total | ||||||||||||||||||||||||||||
Intangible cost | ||||||||||||||||||||||||||||||||||||
At December 31, 2016 | 1,515.1 | 1,320.3 | 30.8 | 51.8 | 13.5 | 311.4 | 21.0 | 32.8 | 3,296.7 | |||||||||||||||||||||||||||
Additions | 313.8 | 76.9 | 3.0 | 2.5 | 1.9 | 56.3 | — | 16.1 | 470.5 | |||||||||||||||||||||||||||
Contributions from suppliers | (86.0 | ) | — | — | — | — | — | — | — | (86.0 | ) | |||||||||||||||||||||||||
Disposals | — | — | — | — | (1.5 | ) | — | — | — | (1.5 | ) | |||||||||||||||||||||||||
Reclassifications | 71.3 | 3.6 | (0.3 | ) | (48.5 | ) | — | (24.4 | ) | — | (1.7 | ) | — | |||||||||||||||||||||||
Impairment | — | (49.9 | ) | — | — | — | — | (8.7 | ) | (1.9 | ) | (60.5 | ) | |||||||||||||||||||||||
Interest on capitalized assets | 11.0 | 4.8 | — | — | — | — | — | — | 15.8 | |||||||||||||||||||||||||||
Translation adjustments | — | — | — | — | — | — | (0.3 | ) | 0.3 | — | ||||||||||||||||||||||||||
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At December 31, 2017 | 1,825.2 | 1,355.7 | 33.5 | 5.8 | 13.9 | 343.3 | 12.0 | 45.6 | 3,635.0 | |||||||||||||||||||||||||||
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Acumulated amortization | ||||||||||||||||||||||||||||||||||||
At December 31, 2016 | (992.4 | ) | (424.9 | ) | (25.6 | ) | — | (5.7 | ) | (179.8 | ) | — | (3.7) | (1,632.1 | ) | |||||||||||||||||||||
Amortization | (57.4 | ) | (56.7 | ) | (2.6 | ) | (0.1 | ) | (1.1 | ) | (27.1 | ) | — | (1.2 | ) | (146.2 | ) | |||||||||||||||||||
Amortization of contribution from suppliers | 13.5 | 13.8 | — | — | — | — | — | — | 27.3 | |||||||||||||||||||||||||||
Reclassifications | 4.5 | (4.3 | ) | 0.3 | (1.0 | ) | — | — | — | 0.5 | — | |||||||||||||||||||||||||
Interest on capitalized assets | — | (1.6 | ) | — | — | — | — | — | — | (1.6 | ) | |||||||||||||||||||||||||
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At December 31, 2017 | (1,031.8 | ) | (473.7 | ) | (27.9 | ) | (1.1 | ) | (6.8 | ) | (206.9 | ) | — | (4.4) | (1,752.6 | ) | ||||||||||||||||||||
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Intangible, net | ||||||||||||||||||||||||||||||||||||
At December 31, 2016 | 522.7 | 895.4 | 5.2 | 51.8 | 7.8 | 131.6 | 21.0 | 29.1 | 1,664.6 | |||||||||||||||||||||||||||
At December 31, 2017 | 793.4 | 882.0 | 5.6 | 4.7 | 7.1 | 136.4 | 12.0 | 41.2 | 1,882.4 |
12.31.2016 | ||||||||||||||||||||||||||||||||||||
Internally developed | Acquired from third party | |||||||||||||||||||||||||||||||||||
Commercial | Executive | Defense and Security | Other | Development | Software | Goodwill | Other | Total | ||||||||||||||||||||||||||||
Intangible cost | ||||||||||||||||||||||||||||||||||||
At December 31, 2015 | 1,276.1 | 1,248.9 | 25.6 | 36.1 | 10.1 | 263.3 | 16.4 | 24.0 | 2,900.5 | |||||||||||||||||||||||||||
Additions | 351.1 | 65.4 | 5.2 | 15.7 | 10.7 | 48.1 | — | 8.8 | 505.0 | |||||||||||||||||||||||||||
Contributions from suppliers | (123.9 | ) | — | — | — | — | — | — | — | (123.9 | ) | |||||||||||||||||||||||||
Reclassifications | — | — | — | — | (7.3 | ) | — | — | — | (7.3 | ) | |||||||||||||||||||||||||
Interest on capitalized assets | 11.8 | 6.0 | — | — | — | — | — | — | 17.8 | |||||||||||||||||||||||||||
Translation adjustments | — | — | — | — | — | — | 4.6 | — | 4.6 | |||||||||||||||||||||||||||
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At December 31, 2016 | 1,515.1 | 1,320.3 | 30.8 | 51.8 | 13.5 | 311.4 | 21.0 | 32.8 | 3,296.7 | |||||||||||||||||||||||||||
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Acumulated amortization | ||||||||||||||||||||||||||||||||||||
At December 31, 2015 | (923.6 | ) | (377.1 | ) | (25.6 | ) | — | (4.6 | ) | (160.9 | ) | — | (3.3) | (1,495.1 | ) | |||||||||||||||||||||
Amortization | (92.0 | ) | (61.5 | ) | — | — | (1.1 | ) | (18.9 | ) | — | (0.4 | ) | (173.9 | ) | |||||||||||||||||||||
Amortization of contribution from suppliers | 23.2 | 15.1 | — | — | — | — | — | — | 38.3 | |||||||||||||||||||||||||||
Interest on capitalized assets | — | (1.4 | ) | — | — | — | — | — | — | (1.4 | ) | |||||||||||||||||||||||||
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At December 31, 2016 | (992.4 | ) | (424.9 | ) | (25.6 | ) | — | (5.7 | ) | (179.8 | ) | — | (3.7) | (1,632.1 | ) | |||||||||||||||||||||
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Intangible, net | ||||||||||||||||||||||||||||||||||||
At December 31, 2015 | 352.5 | 871.8 | — | 36.1 | 5.5 | 102.4 | 16.4 | 20.7 | 1,405.4 | |||||||||||||||||||||||||||
At December 31, 2016 | 522.7 | 895.4 | 5.2 | 51.8 | 7.8 | 131.6 | 21.0 | 29.1 | 1,664.6 |
F-52
Table of Contents
Embraer S.A.
Notes to the Consolidated Financial Statements
In millions of U.S. dollar, unless otherwise stated
17. | Impairment test |
As of December 31, 2018, the Company performed its annual impairment test of the CGUs to which goodwill and indefinite-lived assets are allocated, as well as for those CGUs which presented indicators the carrying amount may not be recoverable generate by new events or change in circumstances.
The Company performed impairment tests of the carrying amount of each applicable CGUs based in the value in use approach. Value in use was estimated using the discounted cash flow method for each applicable CGU. The process of estimating the value in use involves assumptions, judgments and estimates for future cash flows which represent the Management’s best estimate approved by the Board of Directors.
As of December 31, 2018, no impairment losses were identified, except for losses of US$ 61.3 in relation to the full remaining internally developed assets of Lineage 1000 aircraft model (Segment of Executive Aviation), for which US$ 58.5 was allocated in intangible assets and US$ 2.8 as losses on property, plant and equipament, related to sales forecast review of this aircraft model.
As of December 31, 2017, losses of US$ 50.5 and US$ 8.7 were recognized in CGUs of Legacy 650 aircraft (Segment of Executive Aviation) and of Monitoring, Sensoring and Radars, respectively. Losses were allocated in intangible assets and property, plant and equipment, and in the case of Monitoring, Sensoring and Radars CGU, the loss was also allocated in the goodwill recognized.
Impairment losses identified and recognized are consequences of changes in market conditions, analysis of potential customers and changes in industry forecasts of each impaired aircraft model.
(i)Key assumptions of impairment test
Management determined the gross margin based on its expectations of market development, forecast and conditions for each CGU. The weighted average growth rates used are consistent with the forecasts included in industry reports and in the Company’s strategic business plan approved by the Board of Directors.
Estimated future cash flows were discounted using the weighted average capital cost rate (WACC), which is reconciled to an estimated discountpre-tax rate of 11.4% and 11.9% in 2018 and 2017, respectively, which reflects the return expected by the investors.
There are no other CGUs at risk of impairment losses on December 31, 2018 and 2017, except for those mentioned before.
18. | Trade accounts payable |
12.31.2018 | 12.31.2017 | |||||||
Foreign suppliers | 574.0 | 545.4 | ||||||
Risk partners (i) | 200.2 | 162.0 | ||||||
Domestic suppliers | 117.9 | 117.3 | ||||||
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892.1 | 824.7 | |||||||
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(i) The Company’s risk-sharing suppliers/partners develop and produce significant aircraft components, including engines, hydraulic components, avionics, wings, tail sections, interior components and fuselage parts. Certain contracts between the Company and these risk-sharing suppliers/partners are long-term and include deferral of payments for components and systems for a negotiated term after delivery. Once the risk-sharing suppliers/partners have been selected and the aircraft development and production program has commenced, changing suppliers is more challenging. For example, in the case of engines, the aircraft is specially designed to accommodate a given component, which cannot be easily replaced by another supplier without incurring delays and significant additional expense. This dependence makes the Company vulnerable to the performance, quality and financial position of its risk-sharing suppliers/partners.
F-53
Table of Contents
Embraer S.A.
Notes to the Consolidated Financial Statements
In millions of U.S. dollar, unless otherwise stated
19. | Loans and financing |
Currency | Contractual interest rate - % | Effective interest rate - % | Maturity | 12.31.2018 | 12.31.2017 | |||||||||||||||||||
Other currencies: | ||||||||||||||||||||||||
5.05% to 6.38% | 5.05% to 7.42% | 2027 (i) | 2,941.8 | 2,934.1 | ||||||||||||||||||||
0.63% to 5.37% | 0.63% to 5.37% | 2021 | 124.1 | 220.6 | ||||||||||||||||||||
Working capital | US$ | Libor 6M + 1.35% to 2.60% | Libor 6M + 1.35% to 2.60% | 2027 | 219.8 | 119.1 | ||||||||||||||||||
Libor 3M + 2.25% | Libor 3M + 2.25% | 2026 | — | 220.20 | ||||||||||||||||||||
Euro | 1.00% to 3.37% | 1.00% to 3.37% | 2026 | 19.6 | 14.0 | |||||||||||||||||||
Advances on foreign exchange contracts | US$ | 4.65% | 4.65% | 2018 | — | 3.1 | ||||||||||||||||||
1.04% to 1.10% | 1.04% to 1.10% | 2035 | ||||||||||||||||||||||
Property, plant and equipment | US$ | Libor 1M + 2.44% to 2.50% | Libor 1M + 2.44% to 2.50% | 2037 | 55.8 | 58.1 | ||||||||||||||||||
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3,361.1 | 3,569.2 | |||||||||||||||||||||||
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In local currency: | 3.50% to 4.50% | 3.50% to 4.50% | 2023 | |||||||||||||||||||||
Project development | R$ | TJLP + 1.92% to 5.00% | TJLP + 1.92% to 5.00% | 2022 | 248.0 | 396.0 | ||||||||||||||||||
Export Credit Note | R$ | 10.85% a 11.00% | 10.85% a 11.00% | 2019 | 38.5 | 233.1 | ||||||||||||||||||
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286.5 | 629.1 | |||||||||||||||||||||||
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Total | 3,647.6 | 4,198.3 | ||||||||||||||||||||||
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Current portion | 179.3 | 388.9 | ||||||||||||||||||||||
Non-current portion | 3,468.4 | 3,809.6 |
(i) | Bonus Issue Guaranteed - Bonds |
In October 2009, Embraer Overseas Limited issued US$ 500.0 thousand in guaranteed notes at 6.375% p.a., due on January 15, 2020. The operations are fully and unconditionally guaranteed by the Parent Company. Because Embraer Overseas Limited is a wholly owned subsidiary of Embraer S.A., whose objective is to perform financial operations.
Between August and September 2013, through its subsidiary Embraer Overseas Limited, Embraer S.A. made an offer to exchange existing bonds maturing in 2017 (settled in January 2017) and 2020 for “New Notes” maturing in 2023. In the case of bonds maturing in 2017 the exchange offer resulted in US$ 146.4 of the aggregate principal of existing notes and US$ 337.2 of the aggregate principal of the 2020 Notes, representing approximately 54.95% of the Notes exchanged. The total of the exchange offer, taking into account the effects of the exchange price on the negotiations and the total New Notes issued closed at approximately US$ 540.5 in principal at a rate of 5.696% p.a., maturing on September 16, 2023. The operations are fully and unconditionally guaranteed by the Parent Company.
In June 15, 2012, Embraer S.A. raised funds by issuing guaranteed notes, maturing on June 15, 2022, through an overseas offer of US$ 500.0 at a rate of 5.15% p.a.
In June 2015, the Company´s wholly-owned finance subsidiary Embraer Netherlands Finance B.V, which only performs financial operations, issued US$ 1,000 in Guaranteed Notes at 5.05% p.a., due on June 15, 2025, in an offering subsequently registered with the SEC. This operation is fully and unconditionally guaranteed by the Parent Company. Because Embraer Netherlands Finance B.V is a wholly owned subsidiary of Embraer S.A., whose objective is to perform financial operations, the transactions made by it are presented as third party transactions in the Parent Company Financial Statements.
In February 2017, Embraer Netherlands Finance B.V., Embraer S.A. subsidiary, issued a offering registered with the SEC of US$ 750.0 with an nominal interest rate of 5.40% p.a. maturing February 1, 2017. This operation is fully and unconditionally guaranteed by the Parent Company. Because Embraer Netherlands Finance B.V. is a wholly owned subsidiary of Embraer S.A., whose objective is to perform financial operations, the transactions made by it are presented as third party transactions in the Parent Company Financial Statements.
F-54
Table of Contents
Embraer S.A.
Notes to the Consolidated Financial Statements
In millions of U.S. dollar, unless otherwise stated
As of December 31, 2018, the movement and maturities of the long-term financing agreements are as follows:
12.31.2018 | 12.31.2017 | 12.31.2016 | ||||||||||
Opening balance | 3,584.4 | 3,704.4 | 4,229.9 | |||||||||
Principal addition | 124.0 | 940.0 | 620.5 | |||||||||
Interest addition | 218.0 | 192.7 | 195.7 | |||||||||
Principal payment | (596.3 | ) | (521.3 | ) | (559.7 | ) | ||||||
Interest payment | (212.7 | ) | (186.4 | ) | (175.0 | ) | ||||||
Foreing exchange | 530.2 | 68.9 | (551.5 | ) | ||||||||
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Total | 3,647.6 | 4,198.3 | 3,759.9 | |||||||||
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As of December 31, 2018, the maturity schedules of the long-term financing are:
Year | ||||
2020 | 237.0 | |||
2021 | 287.5 | |||
2022 | 519.5 | |||
2023 | 520.8 | |||
After 2023 | 1,903.6 | |||
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3,468.4 | ||||
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19.1 | Interest and guarantees |
As of December 31, 2018, loans denominated in US dollars (91,6% of the total) are mainly subject to fixed interest rates. The weighted average rate was 5.27% p.a. (5,18% p.a. at December 31, 2017).
As of December 31, 2018, loans denominated in Reais (7,9% of the total) are subject to fixed interest rates or interest based on the Brazilian Long-term Interest Rate (“TJLP”) and CDI (Interbank Deposit Certificate). The weighted average rate at December 31, 2018 was 2.47% p.a. (3.72% p.a. at December 31, 2017).
As of December 31, 2018, financing in Euros (0.5% of the total) had a rate of 1.32% on December 31, 2017.
Real estate, machinery, equipment, commercial pledges and bank guarantees totaling US$ 339.4 as of December 31, 2018 (US$ 441.1 as of December 31, 2017) were provided as collateral for loans.
19.2 | Restrictive clauses |
The long-term financing agreements are subject to restrictive clauses, consistent with normal market practices, which establish control over the degree of leverage through the ratio of total consolidated indebtedness x EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization, as defined), as well as limits for debt service cover based on EBITDA x net financial expense. Agreements also include customary restrictions on the creation of new encumbrances on assets, significant changes in control of the Company, sale of assets.
As of December 31, 2018, the Company was in compliance with all the restrictive clauses.
20. | Other payables |
12.31.2018 | 12.31.2017 | |||||||
Other accounts payable (i) | 114.6 | 112.0 | ||||||
Provisions related to payroll (ii) | 92.8 | 108.6 | ||||||
Provision for employee profit sharing | 34.3 | 29.8 | ||||||
Mutual with jointly controlled operation | 23.2 | 19.7 | ||||||
Contractual obligations (iii) | 17.5 | 16.9 | ||||||
Long-term incentive (iv) | 16.9 | 9.9 | ||||||
Commission payable | 10.9 | 10.6 | ||||||
Insurance | 6.2 | 5.0 | ||||||
Brazilian air force | 0.6 | 1.2 | ||||||
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317.0 | 313.7 | |||||||
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Current portion | 288.4 | 292.2 | ||||||
Non-current portion | 28.6 | 21.5 |
(i) | Represents a provision for expenses already incurred as of the date of the balance sheet and for which payments are made during the following month. |
(ii) | Refers to employee related obligations recorded in the financial statements; |
(iii) | Substantially represents amounts recorded regarding maintenance costs of aircraft leased through operating leases and contractually agreed upon commitments for the sale of new aircraft or the expiration of residual financial guarantees; |
(iv) | Refers to the Long-Term Incentive (ILP) granted to Company employees in the form of phantom shares, as described in Note 28—Share-based Remuneration. |
F-55
Table of Contents
Embraer S.A.
Notes to the Consolidated Financial Statements
In millions of U.S. dollar, unless otherwise stated
21. | Taxes and payroll charges payable |
12.31.2018 | 12.31.2017 | |||||||
INSS (social security contribution) (i) | 105.2 | 84.0 | ||||||
IRRF (withholding tax) | 11.8 | 24.2 | ||||||
PIS and COFINS (ii) | 1.6 | 4.2 | ||||||
Taxes refinancing program | 1.1 | 15.0 | ||||||
IPI (manufacturing tax) | 0.3 | 1.1 | ||||||
FGTS (government employee severance indemnity fund) | 0.2 | 5.6 | ||||||
Others | 6.4 | 6.8 | ||||||
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126.6 | 140.9 | |||||||
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Current portion | 68.4 | 70.7 | ||||||
Non-current portion | 58.2 | 70.2 |
The Company is challenging, through both administrative and judicial proceedings, the constitutionality of the tax calculation base and its expansion, as well as the rate increase of certain taxes, social contributions and charges, with the aim of ensuring its right to withhold payment or recover amounts paid in previous years.
By means of such administrative and judicial proceedings, the Company has obtained injunctions and similar measures to suspend payment or offset payment of taxes and social contributions and charges. Provisions have been recorded for taxes not paid, as a result of preliminary legal decisions, and are updated based on the SELIC interest rate, pending a final and definitive decision. In some cases the Company maintains judicial deposit for the continuity of the judicial proceedings.
(i) | Corresponds substantially to: |
• | The increase in the work-related accident insurance (“SAT”) rate. The Company is challenging the legality of the levy and absence of technical criteria for such rate since 1995. The amount involved is US$ 47.7 as of December 31, 2018 (US$ 54.6 as of December 31, 2017). |
• | Additionally, in February, 2009, the Company filed a suit contesting the payment of social security on paid notice of dismissal and other indemnity payments. In October 2015 the Company obtained partial success in the dispute in relation to the employer’s portion of the Social Security on the paid notice, and therefore reduced the amount of the provision by US$ 2.5. Currently the remaining amount involved in the dispute in respect of the notice established in the collective agreement is US$ 10.0 as of December 31, 2018 and US$ 11.4 at December 31, 2017. |
• | The Company obtained an injunction guaranteeing the right to not collect social security contributions according to the system established by Law 13,670 / 2018 in 2018 (maintenance of the Social Security Contribution on Gross Revenue—CPRB until 12/31/2018). The amount involved in the discussion is US$ 31.6 as of December 31, 2018. |
(ii) | Refers to: |
• | Contributions to the PIS/PASEP fund (Social Integration Program / Public Servant Fund). The dispute involving the calculation base for thenon-cumulative system, was included under the terms of Law 11,941/09, and the suit was withdrawn. The Company continues to contest criteria for application of the benefits of refinancing in the ambit of the legal dispute. |
• | Another lawsuit discusses the inclusion of the exchange rate variation in the PIS / PASEP calculation basis and was judged favorably, which is why the provision in question was written off and the process will no longer be informed (US$ 3.3 as of December 31, 2017). |
With respect to the legal discussions mentioned above for certain taxes exposures, the liabilities will be recognized until there is a final outcome and no further appeals can be made.
F-56
Table of Contents
Embraer S.A.
Notes to the Consolidated Financial Statements
In millions of U.S. dollar, unless otherwise stated
22. | Income taxes |
As the tax basis for the majority of the Company’s assets and liabilities is maintained in reais and the accounting basis is measured in US dollars (functional currency), the fluctuations in the exchange rate significantly impacted the tax basis and, in turn, the deferred income tax expense (benefit).
Based on the expectation of future taxable income, the Company recorded deferred tax assets based on tax losses carryforwards.
Credits relating to temporary differences onnon-deductible provisions, represented by labor contingencies, provisions and disputed taxes will be realized as such proceedings are concluded.
22.1 | Deferred income tax and social contribution |
The components of deferred tax assets and liabilities are as follows:
12.31.2018 | 12.31.2017 | 01.01.2017 | ||||||||||
(Restated) | (Restated) | |||||||||||
Temporarilynon-deductible provisions | 39.7 | (76.1 | ) | (102.7 | ) | |||||||
Tax loss carryforwards | 0.5 | 4.5 | 28.3 | |||||||||
Functional currency effect of the non monetary assets | (323.4 | ) | (206.0 | ) | (201.0 | ) | ||||||
Gains not realized from sales of the Company to subsidiairies | 22.7 | 15.4 | 16.4 | |||||||||
Effect of differences by fixed asset | 7.5 | (8.1 | ) | (31.2 | ) | |||||||
Differences between basis: account x tax | 20.6 | 25.7 | 36.6 | |||||||||
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Deferred tax assets (liabilities), net | (232.4 | ) | (244.6 | ) | (253.6 | ) | ||||||
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Total deferred tax asset | 21.6 | 13.4 | 11.6 | |||||||||
Total deferred tax liability | (254.0 | ) | (258.0 | ) | (265.2 | ) |
Changes in deferred income tax that affected profit and loss were as follows:
From the statement of income | Other comprehensive income | Total | ||||||||||
At January 01, 2016 (Restated) | (429.9 | ) | 32.5 | (397.4 | ) | |||||||
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Temporarilynon-deductible provisions | (99.9 | ) | — | (99.9 | ) | |||||||
Tax loss carryforwards | 7.8 | — | 7.8 | |||||||||
Functional currency effect of the non monetary assets | 206.1 | — | 206.1 | |||||||||
Provision Gain not realized at sales from Controlling company to subsidiairies | (3.5 | ) | — | (3.5 | ) | |||||||
Effect of differences by fixed asset | 4.9 | — | 4.9 | |||||||||
Differences between basis: account x tax | 22.1 | 6.3 | 28.4 | |||||||||
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At December 31, 2016 (Restated) | (292.4 | ) | 38.8 | (253.6 | ) | |||||||
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Temporarilynon-deductible provisions | 26.6 | — | �� | 26.6 | ||||||||
Tax loss carryforwards | (23.8 | ) | — | (23.8 | ) | |||||||
Functional currency effect of the non monetary assets | (5.0 | ) | — | (5.0 | ) | |||||||
Provision Gain not realized at sales from Controlling company to subsidiairies | (1.0 | ) | — | (1.0 | ) | |||||||
Effect of differences by fixed asset | 23.0 | — | 23.0 | |||||||||
Differences between basis: account x tax | (6.9 | ) | (3.9 | ) | (10.8 | ) | ||||||
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At December 31, 2017 (Restated) | (279.5 | ) | 34.9 | (244.6 | ) | |||||||
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Temporarilynon-deductible provisions | 115.8 | — | 115.8 | |||||||||
Tax loss carryforwards | (4.0 | ) | — | (4.0 | ) | |||||||
Functional currency effect of the non monetary assets | (117.4 | ) | — | (117.4 | ) | |||||||
Gains not realized from sales of Parent Company to subsidiairies | 7.3 | — | 7.3 | |||||||||
Effect of differences by fixed asset | 15.6 | — | 15.6 | |||||||||
Differences between basis: account x tax | 3.9 | (9.0 | ) | (5.1 | ) | |||||||
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At December 31, 2018 | (258.3 | ) | 25.9 | (232.4 | ) | |||||||
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F-57
Table of Contents
Embraer S.A.
Notes to the Consolidated Financial Statements
In millions of U.S. dollar, unless otherwise stated
22.2 | Reconciliation of income tax expense |
12.31.2018 | 12.31.2017 | 12.31.2016 | ||||||||||
(Restated) | (Restated) | |||||||||||
Profit (loss) before taxation | (136.2 | ) | 307.9 | 180.6 | ||||||||
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Income tax and social contribution expense at the nominal Brazilian enacted tax rate—34% | 46.3 | (104.7 | ) | (61.4 | ) | |||||||
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Tax on profits of overseas subsidiaries | (33.2 | ) | (9.8 | ) | (4.0 | ) | ||||||
Functional currency effect of the non monetary assets | (117.4 | ) | (5.0 | ) | 206.1 | |||||||
Research and development tax incentives | 27.7 | 43.8 | 36.5 | |||||||||
Interest on own capital | 3.0 | 16.9 | 6.1 | |||||||||
Fiscal credits (recognized and non recognized) | (26.0 | ) | 19.3 | (30.4 | ) | |||||||
Tax rate diference | 30.9 | 5.3 | (0.7 | ) | ||||||||
Other difference between IFRS and fiscal basis | 41.4 | 3.3 | (90.9 | ) | ||||||||
Other | (7.7 | ) | 3.0 | (61.6 | ) | |||||||
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(81.3 | ) | 76.8 | 61.1 | |||||||||
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Income tax and social contribution income (expense) benefit as reported | (35.0 | ) | (27.9 | ) | (0.3 | ) | ||||||
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Current income tax and social contribution (expense) benefit as reported | (56.2 | ) | (40.8 | ) | (137.8 | ) | ||||||
Deferred income tax and social contribution income (expense) benefit as reported | 21.2 | 12.9 | 137.5 |
The effective average income tax benefit (expense) rate for the year ended December 31, 2018 was 25.7% (9.1% as of December 31, 2017). The deviation between the effective rate year over year refers to the effect of difference between tax basis (Brazilian Reais) and accounting basis ofnon-monetary assets recorded in the Company’s functional currency (US Dollars).
23. | Financial Guarantees and Residual Value Guarantees |
12.31.2018 | 12.31.2017 | |||||||
Financial guarantee of residual value | 125.4 | 108.9 | ||||||
Accounts payable (i) | 15.1 | 30.8 | ||||||
Financial guarantee | 11.6 | 17.1 | ||||||
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152.1 | 156.8 | |||||||
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Current portion | 51.0 | 22.2 | ||||||
Non-current portion | 101.1 | 134.6 |
The movement on the financial guarantees and residual guarantees is shown below:
Financial guarantee | Financial guarantee of residual value | Accounts payable (i) | Additional provision (i) | Total | ||||||||||||||||
At January 01, 2016 | 40.1 | 94.7 | 57.4 | 100.9 | 293.1 | |||||||||||||||
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Additions | 0.1 | — | 11.9 | — | 12.0 | |||||||||||||||
Interest Additions | — | — | 1.7 | — | 1.7 | |||||||||||||||
Disposals | (6.6 | ) | — | (95.6 | ) | — | (102.2 | ) | ||||||||||||
Reversals | — | — | — | (10.4 | ) | (10.4 | ) | |||||||||||||
Reclassifications | — | — | 90.5 | (90.5 | ) | — | ||||||||||||||
Market value | — | 27.5 | — | — | 27.5 | |||||||||||||||
Guarantee amortization | (10.9 | ) | — | — | — | (10.9 | ) | |||||||||||||
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At December 31, 2016 | 22.7 | 122.2 | 65.9 | — | 210.8 | |||||||||||||||
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Additions | 1,2 | — | 3.7 | — | 4.9 | |||||||||||||||
Interest Additions | — | — | 2.0 | — | 2.0 | |||||||||||||||
Disposals | — | — | (40.8 | ) | — | (40.8 | ) | |||||||||||||
Market value | — | (13.3 | ) | — | — | (13.3 | ) | |||||||||||||
Guarantee amortization | (6.8 | ) | — | — | — | (6.8 | ) | |||||||||||||
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At December 31, 2017 | 17.1 | 108.9 | 30.8 | — | 156.8 | |||||||||||||||
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Interest Additions | — | — | 1.5 | — | 1.5 | |||||||||||||||
Disposals | — | — | (17.2 | ) | — | (17.2 | ) | |||||||||||||
Market value | — | 16.5 | — | — | 16.5 | |||||||||||||||
Guarantee amortization | (5.5 | ) | — | — | — | (5.5 | ) | |||||||||||||
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At December 31, 2018 | 11.6 | 125.4 | 15.1 | — | 152.1 | |||||||||||||||
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F-58
Table of Contents
Embraer S.A.
Notes to the Consolidated Financial Statements
In millions of U.S. dollar, unless otherwise stated
(i) | Accounts payable and additional provision: |
• | Republic Airways Holdings—Refer to liabilities assumed as part of financial guarantees granted to the customer as a result of his filing for bankruptcy (Chapter 11) on February, 2016, which is partially concluded as of December 31, 2018. |
24. | Provisions and contingent liabilities |
24.1 | Provisions |
12.31.2018 | 12.31.2017 | 01.01.2017 | ||||||||||
(Restated) | (Restated) | |||||||||||
Product warranties (i) | 98.0 | 101.1 | 94.1 | |||||||||
Provisions for labor, taxes and civil (ii) | 58.4 | 54.2 | 93.1 | |||||||||
Taxes | 31.4 | 41.8 | 28.5 | |||||||||
Post retirement benefits | 31.7 | 36.1 | 46.0 | |||||||||
Environmental provision | 2.4 | 1.8 | 1.0 | |||||||||
Voluntary redundancy scheme | — | — | 25.3 | |||||||||
Other | 20.5 | 25.3 | 14.8 | |||||||||
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242.4 | 260.3 | 302.8 | ||||||||||
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Current portion | 116.9 | 124.1 | 123.8 | |||||||||
Non-current portion | 125.5 | 136.2 | 179.0 |
(i) | Recorded to cover product-related expenditure, including warranties and contractual obligations to implement improvements to aircraft delivered in order to meet performance targets. |
(ii) | Provisions for labor, tax or civil contingencies, as shown in the table below Note 24.1.1. |
Change in provision:
Product warranties | Provisions labor, taxes and civil | Post retirement benefits | Taxes | Voluntary redundancy scheme | Environment provision | Other | Total | |||||||||||||||||||||||||
At January 01, 2016 (Restated) | 95.7 | 49.9 | 26.8 | 16.9 | — | 1.7 | 7.7 | 198.7 | ||||||||||||||||||||||||
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Additions | 51.9 | 43.3 | 11.2 | 12.0 | 118.0 | 1.0 | 17.0 | 254.4 | ||||||||||||||||||||||||
Interest | — | 4.3 | 3.3 | — | — | — | — | 7.6 | ||||||||||||||||||||||||
Used/payments | (31.7 | ) | (2.7 | ) | — | — | (77.0 | ) | — | (8.1 | ) | (119.5 | ) | |||||||||||||||||||
Reversals | (20.6 | ) | (5.5 | ) | — | — | (15.0 | ) | (2.0 | ) | — | (43.1 | ) | |||||||||||||||||||
Translation adjustments | (1.2 | ) | 3.8 | 4.7 | (0.4 | ) | (0.7 | ) | 0.3 | (1.8 | ) | 4.7 | ||||||||||||||||||||
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At December 31, 2016 (Restated) | 94.1 | 93.10 | 46.0 | 28.5 | 25.3 | 1.0 | 14.8 | 302.8 | ||||||||||||||||||||||||
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Additions | 42.5 | 12.7 | 3.2 | 14.0 | 7.0 | 3.0 | 7.1 | 89.5 | ||||||||||||||||||||||||
Interest | — | 12.5 | 4.4 | — | — | — | — | 16.9 | ||||||||||||||||||||||||
Used/payments | (26.8 | ) | (61.1 | ) | (15.3 | ) | — | (31.0 | ) | — | — | (134.2 | ) | |||||||||||||||||||
Reversals | (8.8 | ) | (2.3 | ) | (1.4 | ) | — | (1.0 | ) | (2.0 | ) | — | (15.5 | ) | ||||||||||||||||||
Translation adjustments | 0.1 | (0.7 | ) | (0.8 | ) | (0.7 | ) | (0.3 | ) | (0.2 | ) | 3.4 | 0.8 | |||||||||||||||||||
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At December 31, 2017 (Restated) | 101.1 | 54.2 | 36.1 | 41.8 | — | 1.8 | 25.3 | 260.3 | ||||||||||||||||||||||||
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Additions | 38.1 | 24.6 | 0.6 | 0.8 | — | 2.0 | 8.0 | 74.1 | ||||||||||||||||||||||||
Interest | — | 5.1 | 2.9 | — | — | — | — | 8.0 | ||||||||||||||||||||||||
Used/payments | (24.9 | ) | (6.4 | ) | (3.3 | ) | (11.2 | ) | — | — | — | (45.8 | ) | |||||||||||||||||||
Reversals | (16.2 | ) | (11.8 | ) | (0.2 | ) | — | — | (1.0 | ) | — | (29.2 | ) | |||||||||||||||||||
Translation adjustments | (0.1 | ) | (7.3 | ) | (4.4 | ) | — | — | (0.4 | ) | (12.8 | ) | (25.0 | ) | ||||||||||||||||||
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At December 31, 2018 | 98.0 | 58.4 | 31.7 | 31.4 | — | 2.4 | 20.5 | 242.4 | ||||||||||||||||||||||||
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F-59
Table of Contents
Embraer S.A.
Notes to the Consolidated Financial Statements
In millions of U.S. dollar, unless otherwise stated
24.1.1 | Labor, tax and civil provisions |
12.31.2018 | 12.31.2017 | |||||||
Tax related | ||||||||
IRPJ (i) | 9.2 | 10.1 | ||||||
PIS and COFINS | 5.3 | 6.8 | ||||||
Social security contributions (ii) | 2.4 | 2.8 | ||||||
Import taxes (iii) | 0.8 | 0.9 | ||||||
FUNDAF | 0.1 | — | ||||||
Others | 0.2 | 0.4 | ||||||
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18.0 | 21.0 | |||||||
Labor related | ||||||||
Plurimas 461/1379 (iv) | 10.0 | 11.3 | ||||||
Reintegration (v) | 7.0 | 5.1 | ||||||
Overtime (vi) | 6.0 | 1.7 | ||||||
Dangerousness (vii) | 1.0 | 0.1 | ||||||
Indemnity (viii) | 3.1 | 2.3 | ||||||
Third parties | 0.5 | 0.9 | ||||||
Others | 12.4 | 11.6 | ||||||
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40.0 | 33.0 | |||||||
Civil related | ||||||||
Indemnity (ix) | 0.4 | 0.2 | ||||||
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0.4 | 0.2 | |||||||
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58.4 | 54.2 | |||||||
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Current portion | 20.7 | 21.5 | ||||||
Non-current portion | 37.7 | 32.7 |
(i) | The Company has obtained injunction to suspend collection of withholding tax related to values transferred overseas. |
(ii) | The Company was notified by the authorities for failing to withhold social security contributions from service providers. These lawsuits are at the second court level. |
(iii) | Deficiency and Penalty Notices issued against the Company involving the drawback regime, disputing possible differences in relation to the tax classification of certain products and is at the analysis stage in the Federal Supreme Court—STJ (Supremo Tribunal de Justiça). |
(iv) | Refers to claims for backdated salary increases and productivity payments, brought by former employees. |
(v) | Suits brought by former employees claiming reinstatement with the Company for various reasons. |
(vi) | Refer to requirements for payment of alleged differences in relation to overtime. |
(vii) | Are requirements that seek the recognition of activity in hazardous condition. |
(viii) | Indemnity claims in connection with alleged work-related accidents, pain and suffering, etc. |
(ix) | Other indemnity claims brought by parties that had some kind of legal relationship with the Company. |
The tax, labor and civil provisions are recorded in accordance with the Company’s accounting policy and the amounts shown here represent the estimated amounts that the Company’s legal department and its external counsel expect the Company to have to disburse to settle the lawsuits.
F-60
Table of Contents
Embraer S.A.
Notes to the Consolidated Financial Statements
In millions of U.S. dollar, unless otherwise stated
24.2 | Contingent liabilities |
Contingent liabilities are amounts classified as possible losses, in accordance with the Company’s accounting policy, in the opinion of the Company’s legal department, supported by its external counsel. When the contingent liability arises from the same set of circumstances as an existing provision, the type of the corresponding provision is indicated at the end of the description. The Company’s main contingent liabilities are listed below:
• | The Company has a legal dispute related to the ISSQN rate in the amount of US$ 55.9 on December 31, 2018. |
• | The Company is involved in a legal dispute related to tax credits paid by its subsidiaries abroad amounting to US$ 15.5 as of December 31, 2018 (US$ 6.6 as of December 31, 2017). |
• | The Company has contingent liabilities amounting to US$ 36.4 as of December 31, 2018 related to labor claims (US$ 28.0 as of December 31, 2017). |
24.3 | SEC/DOJ and Brazilian public prosecutor’s investigations |
• | In October 2016, the Company finalized definitive agreements with the United States and Brazilian authorities for the settlement of allegations fornon-compliance with anti-corruption laws in the US and certain Brazilian laws. |
Under the final agreements with the DOJ (Department of Justice) and the SEC (Securities and Exchange Commission), the Company assumed the following main obligations:
• | Payment of US$ 98.2 to the SEC (of which US$ 20.0 or R$ 64.0 due to the Brazilian Securities and Exchange Commission (CVM orComissão de Valores Mobiliários) and the Brazilian Federal Public Prosecutor’s Office (MPF orMinistério Público Federal) under the term of undertaking (TCAC orTermo de Compromisso de Ajuste de Conduta), as disgorgement of profits. |
• | Payment of US$ 107.3 to the DOJ as a penalty for one count of conspiracy to violate the anti-bribery and books and records provisions of the FCPA (Foreign Corrupt Practices Act) and one count of violating the internal controls provisions of the FCPA. |
• | Under an agreement with the DOJ on conditional deferral of the Deferred Prosecution Agreement (“DPA”) against the Company, it agreed that liability for the recognized facts will be deferred for 03 (three) years, after which period the charges will be dismissed if the Company does not violate the terms of the DPA.; and |
• | To contract external and independent monitoring for a period of 03 (three) years. |
In February 2017, the United States authorities appointed a monitor as required under the above-mentioned definitive agreements with the United States authorities. As expected, the monitor annually presents reports containing certain observations and recommendations to further improve the Company’s compliance program, including the review or creation of anti-corruption and compliance related policies and procedures.
As a consequence of the definitive agreements with the United States and Brazilian authorities, Embraer and the Attorney General’s Office of the Dominican Republic executed a collaboration agreement on July 28, 2018. Under the terms of the agreement, the Company undertook to cooperate with the investigation of facts related to the transaction occurred in that country and paid US$ 7.04 to the Dominican State.
Related proceedings and other developments are ongoing and could result in additional fines that may be substantial and possibly other sanctions and adverse consequences, which may be substantial. The Company believes that there is no adequate basis for estimating accruals or quantifying possible contingencies related to these matters.
• | Class Action: In August 2016, a putative securities class action was filed in a US court against the Company and certain of its former and current executives. In March 30, 2018, the court judged the motion to dismiss in favor of the Company and there was no appeal against this decision, thus the lawsuit was closed. |
F-61
Table of Contents
Embraer S.A.
Notes to the Consolidated Financial Statements
In millions of U.S. dollar, unless otherwise stated
25. | Post-retirement benefits |
12.31.2018 | 12.31.2017 | |||||||
Medical benefits plan Brazil | 27.9 | 31.8 | ||||||
Medical benefits plan subsidiaries abroad | 3.8 | 4.3 | ||||||
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Post-retirement benefits | 31.7 | 36.1 | ||||||
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25.1 | Post-retirement healthcare benefits provided by the Company in Brazil |
The Company provided healthcare plan for employees, which based on its conditions, is classified as a post-employment benefit. Under this healthcare plan, employees who retire from the Company have the option of remaining in the plan, contributing the full amount charged by the insurance company. However, due to certain rules for increases under Brazilian law, there could be times the contribution made by the retired employees is insufficient to cover the medical plan costs, which would represent exposure for the Company.
25.2 | Post-retirement healthcare benefits provided by subsidiaries abroad |
Embraer Aircraft Holding sponsors a post-retirement healthcare plan for employees hired up to 2007. The expected costs of pension and provision of post-employment medical benefit for the individual employees and their dependents are provided on an accrual basis based on actuarial studies and the calculation is reviewed annually.
25.3 | Defined contribution pension plan |
The Company and certain subsidiaries sponsor a defined contribution pension plan for their employees, participation in which is optional. The Company’s contributions to the plan for the years ended December 31, 2018 and 2017 were US$ 14.1 and US$ 22.2 respectively.
26. | Financial Instruments |
26.1 | Financial instruments by category |
12.31.2018 | ||||||||||||||||||||
Note | Amortised cost | Fair value through other comprehensive income | Fair value through profit or loss | Total | ||||||||||||||||
Assets | ||||||||||||||||||||
Cash and cash equivalents | 5 | 1,280.9 | — | — | 1,280.9 | |||||||||||||||
Financial investments | 6 | 48.8 | 507.8 | 1,370.3 | 1,926.9 | |||||||||||||||
Guarantee Deposits | 10 | 349.7 | — | — | 349.7 | |||||||||||||||
Collateralized accounts receivable | 9 | 235.9 | — | — | 235.9 | |||||||||||||||
Contract assets | 358.0 | — | — | 358.0 | ||||||||||||||||
Trade accounts receivable, net | 7 | 318.0 | — | — | 318.0 | |||||||||||||||
Customer and commercial financing | 11.7 | — | — | 11.7 | ||||||||||||||||
Derivative financial instruments | 8 | — | — | 9.5 | 9.5 | |||||||||||||||
Other Assets | 66.2 | — | — | 66.2 | ||||||||||||||||
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2,669.2 | 507.8 | 1,379.8 | 4,556.8 | |||||||||||||||||
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Liabilities | ||||||||||||||||||||
Loans and financing | 19 | 3,647.7 | — | — | 3,647.7 | |||||||||||||||
Trade accounts payable and others liabilities | 1,550.5 | — | — | 1,550.5 | ||||||||||||||||
Financial guarantee and of residual value | 23 | 15.0 | — | 125.4 | 140.4 | |||||||||||||||
Derivative financial instruments | 8 | — | — | 8.1 | 8.1 | |||||||||||||||
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5,213.2 | — | 133.5 | 5,346.7 | |||||||||||||||||
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F-62
Table of Contents
Embraer S.A.
Notes to the Consolidated Financial Statements
In millions of U.S. dollar, unless otherwise stated
12.31.2017 (Restated) | ||||||||||||||||||||
Note | Amortised cost | Fair value through other comprehensive income | Fair value through profit or loss | Total | ||||||||||||||||
Assets | ||||||||||||||||||||
Cash and cash equivalents | 5 | 1,270.8 | — | — | 1,270.8 | |||||||||||||||
Financial investments | 6 | 50.5 | 1,307.6 | 1,259.2 | 2,617.3 | |||||||||||||||
Guarantee Deposits | 10 | 393.9 | — | — | 393.9 | |||||||||||||||
Collateralized accounts receivable | 9 | 288.7 | — | — | 288.7 | |||||||||||||||
Contract assets | 447.5 | — | — | 447.5 | ||||||||||||||||
Trade accounts receivable, net | 7 | 297.0 | — | — | 297.0 | |||||||||||||||
Customer and commercial financing | 16.4 | — | — | 16.4 | ||||||||||||||||
Derivative financial instruments | 8 | — | — | 34.3 | 34.3 | |||||||||||||||
Other Assets | 82.2 | — | — | 82.2 | ||||||||||||||||
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2,847.0 | 1,307.6 | 1,293.5 | 5,448.1 | |||||||||||||||||
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Liabilities | ||||||||||||||||||||
Loans and financing | 19 | 4,198.5 | — | — | 4,198.5 | |||||||||||||||
Trade accounts payable and others liabilities | 1,502.5 | — | — | 1,502.5 | ||||||||||||||||
Financial guarantee and residual value | 23 | 30.7 | — | 108.9 | 139.6 | |||||||||||||||
Derivative financial instruments | 8 | — | — | 8.9 | 8.9 | |||||||||||||||
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5,731.7 | — | 117.8 | 5,849.5 | |||||||||||||||||
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26.2 | Fair value of financial instruments |
The fair value of the Company’s financial assets and liabilities was determined using available market information and appropriate valuation methodologies. However, considerable judgment is required in interpreting market data to generate estimates of fair values. Consequently, the estimates presented below are not necessarily indicative of the amounts that might be realized in a current market exchange. The use of different assumptions and/or methodologies could have a material effect on the estimated realizable values.
The carrying amounts of cash and cash equivalents, trade accounts receivable, other financial assets and financial liabilities, except for loans and financing, are approximately their fair values. The following methods were used to estimate the fair value of each further category of financial instrument for which it is possible to estimate the fair value.
Financial investments – The fair value of securities is estimated by the discounted cash flow methodology. For private securities (corporate bonds), it is applied the market’s unit price of latest trade date at the end of reporting period multiplied by the quantity acquiried by the Company.
Loans and financing – The fair value of guaranteed notes (bonds) is the market’s unit price of latest trade date at the end of reporting period multiplied by the quantity issued. For the other loans and financing, the fair value is based on the value of the contractual cash flows. The discount rate used is based in the market interest rate to contract a new transaction in similar terms, or in its absence, in the future market yield curve for the cash flows of each liability.
The Company considers “fair value” to be the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. The Company primarily applies the market approach for recurring fair value measurements and endeavors to utilize the best available information. Accordingly, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. The Company is able to classify fair value balances based on the observable inputs. A fair value hierarchy is used to prioritize the inputs used to measure fair value. The three Levels of the fair value hierarchy are as follows:
• | Level 1—quoted prices are available in active markets for identical assets or liabilities at the reporting period. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. Level 1 primarily consists of financial instruments such as exchange-traded derivatives and listed equities. |
F-63
Table of Contents
Embraer S.A.
Notes to the Consolidated Financial Statements
In millions of U.S. dollar, unless otherwise stated
• | Level 2—pricing inputs are other than quoted prices in active markets included in level 1, which are either directly or indirectly observable as of the reported date. However, they may be directly or indirectly observable at the consolidated statements of financial position date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. Instruments in this category includenon-exchange traded derivatives such as swaps orover-the-counter forwards and options. |
• | Level 3—pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in Management’s best estimate of fair value. At each balance sheet date, the Company performs an analysis of all instruments and includes in Level 3 all of those whose fair value is based on significant unobservable inputs. |
The following table lists the Company’s financial assets and liabilities by level within the fair value hierarchy. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels. In 2018 there was no change in the methods used to assess the fair value of financial instruments, as well as there were no changes or transfers of instruments level.
12.31.2018 | ||||||||||||||||||||||||||||
Note | Level 2 | Level 3 | Total | Fair value of the other financial instruments | Fair value | Book value | ||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||
Cash and cash equivalents | 5 | — | — | — | 1,280.9 | 1,280.9 | 1,280.9 | |||||||||||||||||||||
Financial investments | 6 | 1,818.2 | 59.9 | 1,878.1 | 48.8 | 1,926.1 | 1,926.9 | |||||||||||||||||||||
Guarantee Deposits | 10 | — | — | — | 349.7 | 349.7 | 349.7 | |||||||||||||||||||||
Collateralized accounts receivable | — | — | — | 235.9 | 235.9 | 235.9 | ||||||||||||||||||||||
Contract assets | — | — | — | 358.0 | 358.0 | 358.0 | ||||||||||||||||||||||
Trade accounts receivable, net | 7 | — | — | — | 318.0 | 318.0 | 318.0 | |||||||||||||||||||||
Customer and commercial financing | — | — | — | 11.7 | 11.7 | 11.7 | ||||||||||||||||||||||
Derivative financial instruments | 8 | 9.5 | — | 9.5 | — | 9.5 | 9.5 | |||||||||||||||||||||
Other Assets | — | — | — | 66.2 | 66.2 | 66.2 | ||||||||||||||||||||||
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1,827.7 | 59.9 | 1,887.6 | 2,669.2 | 4,556.0 | 4,556.8 | |||||||||||||||||||||||
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Liabilities | ||||||||||||||||||||||||||||
Loans and financing | — | — | — | 3,647.7 | 3,756.8 | 3,647.7 | ||||||||||||||||||||||
Trade accounts payable and others liabilities | 19 | — | — | — | 1,550.5 | 1,550.5 | 1,550.5 | |||||||||||||||||||||
Financial guarantee and of residual value | — | 125.4 | 125.4 | 15.0 | 140.4 | 140.4 | ||||||||||||||||||||||
Derivative financial instruments | 19 | 8.1 | — | 8.1 | — | 8.1 | 8.1 | |||||||||||||||||||||
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8.1 | 125.4 | 133.5 | 5,213.2 | 5,455.8 | 5,346.7 | |||||||||||||||||||||||
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12.31.2017 (Restated) | ||||||||||||||||||||||||||||
Note | Level 2 | Level 3 | Total | Fair value of the other financial instruments | Fair value | Book value | ||||||||||||||||||||||
Assets | �� | |||||||||||||||||||||||||||
Cash and cash equivalents | 5 | — | — | — | 1,270.8 | 1,270.8 | 1,270.8 | |||||||||||||||||||||
Financial investments | 6 | 2,507.2 | 59.6 | 2,566.8 | 50.4 | 2,617.3 | 2,617.3 | |||||||||||||||||||||
Guarantee Deposits | 10 | — | — | — | 393.9 | 393.9 | 393.9 | |||||||||||||||||||||
Collateralized accounts receivable | — | — | — | 288.7 | 288.7 | 288.7 | ||||||||||||||||||||||
Contract assets | — | — | — | 447.5 | 447.5 | 447.5 | ||||||||||||||||||||||
Trade accounts receivable, net | 7 | — | — | — | 297.0 | 297.0 | 297.0 | |||||||||||||||||||||
Customer and commercial financing | — | — | — | 16.4 | 16.4 | 16.4 | ||||||||||||||||||||||
Derivative financial instruments | 8 | 34.3 | — | 34.3 | — | 34.3 | 34.3 | |||||||||||||||||||||
Other Assets | — | — | — | 82.2 | 82.2 | 82.2 | ||||||||||||||||||||||
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2,541.5 | 59.6 | 2,601.1 | 2,846.9 | 5,448.1 | 5,448.1 | |||||||||||||||||||||||
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Liabilities | ||||||||||||||||||||||||||||
Loans and financing | 19 | — | — | — | 4,198.5 | 4,408.6 | 4,198.5 | |||||||||||||||||||||
Trade accounts payable and others liabilities | — | — | — | 1,502.5 | 1,502.5 | 1,502.5 | ||||||||||||||||||||||
Financial guarantee and of residual value | 23 | — | 108.9 | 108.9 | 30.7 | 139.6 | 139.6 | |||||||||||||||||||||
Derivative financial instruments | 8 | 8.9 | — | 8.9 | — | 8.9 | 8.9 | |||||||||||||||||||||
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8.9 | 108.9 | 117.8 | 5,731.7 | 6,059.6 | 5,849.5 | |||||||||||||||||||||||
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F-64
Table of Contents
Embraer S.A.
Notes to the Consolidated Financial Statements
In millions of U.S. dollar, unless otherwise stated
Fair value of financial instruments using significant unobservable inputs (level 3) | ||||||||
Assets | Liabilities | |||||||
At 12.31.2016 (Restated) | 35.0 | 122.2 | ||||||
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Adding Shares | 58.8 | — | ||||||
Disposal Claim | (34.8 | ) | — | |||||
Market value | 0.6 | (13.3 | ) | |||||
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At 12.31.2017 (Restated) | 59.6 | 108.9 | ||||||
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Market value | 0.3 | 16.5 | ||||||
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At 12.31.2018 | 59.9 | 125.4 | ||||||
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Changes in Level 3 financial instruments are recognized in the consolidated statements of income under the caption of financial income (expense), net.
26.3 | Financial risk management policy |
The Company has and follows a risk management policy, which involves the diversification of transactions and counterparties, with the objective of mapping the risks related to the financial transactions, as well as the operational directives related to these financial transactions. The policy provides for regular monitoring and management of the nature and general situation of the financial risks in order to assess the results and the financial impact on cash flows. The credit limits and risk rating of the counterparties are also reviewed periodically.
The Company’s risk management policy is part of the financial management policy established by the Executive Directors and approved by to the Board of Directors, and provides for monitoring by a Financial Management Committee. Under this policy, the market risks are mitigated when there is no counterparty in the Company’s operations and when it is considered necessary to support the corporate strategy. The Company’s internal control procedures provide for consolidated monitoring and supervision of the financial results and of the impact on cash flows.
The Financial Management Committee assists the Financial Department in examining and reviewing information in relation to the economic scenario and its potential impact on the Company’s operations, including significant risk management policies, procedures and practices.
The financial risk management policy includes the use of derivative financial instruments to mitigate the effects of interest rate fluctuations and to reduce the exposure to exchange rate risk. The use of these instruments for speculative purposes is forbidden.
26.3.1 | Capital risk management |
The Company uses capital management to ensure the continuity of its investment program and offer a return to its shareholders and benefits to its stakeholders and also to maintain an optimized capital structure in order to reduce financial costs.
The Company may review its dividends payment policy, pay back capital to the shareholders, issue new shares or sell assets in order to maintain or adjust its capital structure (to reduce indebtedness, for instance).
Liquidity and the leverage level are constantly monitored in order to mitigate refinance risk and maximize the return to the shareholders. The ratio between liquidity and the return to the shareholders may be changed pursuant to the assessment of the Board of Directors.
The Company’s capital management may be modified to adjust to changes in the economic scenario or strategic repositioning of the Company.
As of December 31, 2018, cash and cash equivalents and financial investments were US$ 439.2 lower than the Company’s financial indebtedness (US$ 310.8 lower as of December 31, 2017).
F-65
Table of Contents
Embraer S.A.
Notes to the Consolidated Financial Statements
In millions of U.S. dollar, unless otherwise stated
Of the total financial indebtedness as of December 31, 2018, 4.9% was short-term (9.3% as of December 31, 2017) and the weighted average term was equivalent to 5.5 years as of December 31, 2018 (6.0 years as of December 31, 2017).
26.3.2 | Credit risk |
Credit risk is the risk of a transaction negotiated between counterparties not meeting an obligation established in a financial instrument, or in negotiation of sales to customers, leading to a financial loss. The Company is exposed to credit risk in its operational activities, cash held in banks and other investments in financial instruments held in financial institutions.
• | Cash and cash equivalents and financial investments |
The credit risk of cash and cash equivalents and financial investments is managed by the Company’s Financial Department in compliance with the financial and risk management policy. The counterparty credit limit is reviewed on a daily basis in order to minimize concentration of risks and mitigate financial losses due to the bankruptcy of a counterparty, as well as the transactions are performed with counterparties rated as investment grade by rating agencies (Fitch, Moody’s and Standard and Poor’s). The Financial Management Committee assists the Financial Department in examining and reviewing transactions with counterparties.
As of December 31, 2018 and 2017, all financial investments measured as at amortized cost and as at FVOCI are considered low credit risk and are in compliance with the Company’s financial and risk management policy.
The result of applying the expected credit losses model of IFRS 9 for cash and cash equivalents and financial investments was immaterial.
• | Trade accounts receivable and contract assets with customers |
The Company may incur losses on amounts receivable from sales of spare parts and services to customers. To reduce the risk, Management performs an internal credit risk analysis which takes into account qualitative factors, such as past experiences, and quantitative factors, when applicable, related to external financial information. If the risk increases and/ or the customer present overdue amounts, the supply of spare parts and services can be stopped by the Company, which impacts its fleet operations.
The Company applies IFRS 9 simplified approach to the measurement of expected credit losses on trade accounts receivable balances (Note 2.2.6).
In order to calculate the expected credit losses, receivables are grouped by the period the items are outstanding, and an expected loss factor is applied based on actual credit loss experiences of each past period, which gradually increases as long as the receivable remains outstanding in portfolio. For receivables not overdue, the expected credit loss is calculated using past 10 years’ experience of losses and monitoring of forward trends. As of December 31, 2018, the initial expected loss factor under the methodology is 1.9% (1.8% as of December 31, 2017).
Contract assets refer to contracts in progress that have not been billed, mainly related to development contracts recognized over time in the Defense & Security segment.
The credit risk characteristic of the Company’s customers is different for the Defense & Security segment, since the counterparties refer only to government entities and agencies. The risk in this case is associated with the sovereign risk of each country, especially Brazil, as well as with the continuity of strategic projects under development, for which the Company usually has the enforceable right to receive for the performance completed to date. The Company historically has not presented losses in the trade accounts receivable and contract assets balances with these counterparties.
F-66
Table of Contents
Embraer S.A.
Notes to the Consolidated Financial Statements
In millions of U.S. dollar, unless otherwise stated
Trade accounts receivable and contract assets are written off when there is no reasonable expectation of recovery. Indications include, among others, the inability of the debtor to participate in a plan to renegotiate its debt or possible legal actions have been exhausted.
• | Other financial assets |
Other financial assets measured as at amortized cost includes: guarantee deposits, collateralized accounts receivable, customer financing, court-mandated escrow deposits and loan with joint operation. The result of the expected credit losses model set forth in IFRS 9 for other financial assets was immaterial. In addition, the Company has guarantees, such as guarantee deposits in financial institutions rated as investment grade, pledge assets or other contractual guarantees, which also mitigates the risk of financial loss in these assets.
26.3.3 | Liquidity risk |
This is the risk of the Company not having sufficient funds to honor its financial commitments as a result of a mismatch of terms or volumes of estimated receipts and payments.
Projections and assumptions are established to manage the liquidity of cash in U.S. dollars and reais, in accordance with the financial management policy, based on contracts for future disbursements and receipts, and monitored periodically by the Company. Accordingly, possible mismatches are detected well in advance allowing the Company to adopt mitigation measures to reduce risks and financial cost.
The following table provides additional information related to undiscounted contractual obligations and commercial commitments and their respective maturities:
Cash Flow | Less than one year | One to three years | Three to five years | More than five years | ||||||||||||||||
At December 31, 2018 | ||||||||||||||||||||
Loans and financing | 4,701.3 | 321.0 | 867.3 | 1,345.7 | 2,167.3 | |||||||||||||||
Trade accounts payable | 892.1 | 892.1 | — | — | — | |||||||||||||||
Recourse and non recourse debt | 341.4 | 324.0 | 7.6 | 6.6 | 3.2 | |||||||||||||||
Financial guarantees | 152.1 | 51.0 | 39.9 | 31.3 | 29.9 | |||||||||||||||
Other liabilities | 227.3 | 5.4 | 92.2 | 95.3 | 34.4 | |||||||||||||||
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| |||||||||||
Total | 6,314.2 | 1,593.5 | 1,007.0 | 1,478.9 | 2,234.8 | |||||||||||||||
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| |||||||||||
At December 31, 2017 (Restated) | ||||||||||||||||||||
Loans and financing | 5,400.7 | 491.6 | 784.9 | 1,220.2 | 2,904.0 | |||||||||||||||
Trade accounts payable | 824.7 | 824.7 | — | — | — | |||||||||||||||
Recourse and non recourse debt | 364.1 | 17.6 | 332.7 | 8.0 | 5.8 | |||||||||||||||
Financial guarantees | 156.8 | 22.2 | 52.5 | 31.1 | 51.0 | |||||||||||||||
Other liabilities | 249.4 | 11.4 | 46.1 | 92.3 | 99.6 | |||||||||||||||
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| |||||||||||
Total | 6,995.7 | 1,367.5 | 1,216.2 | 1,351.6 | 3,060.4 | |||||||||||||||
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The table above shows the outstanding principal and interest if applicable at the maturity dates. In the case of the fixed rate liabilities, interest expense was calculated based on the rate established in each debt contract. Interest expense on floating rate liabilities was calculated based on a market forecast for each period (e.g. LIBOR 6m - 12m).
F-67
Table of Contents
Embraer S.A.
Notes to the Consolidated Financial Statements
In millions of U.S. dollar, unless otherwise stated
26.3.4 | Market risk |
a) | Interest rate risk |
This risk arises from the possibility of the Company incurring losses on the fluctuation of floating interest rates, which might increase financial expenses of financial liabilities, and/ or decrease financial income of financial assets, as well as negatively impacting the fair value of financial assets measured as at fair value. The lines of the Consolidated Financial Statements most affected by interest rate risks are:
• | Cash, cash equivalents and financial investments – the Company policy for managing the risk of fluctuations in interest rates on financial investments is to measure market risk by theValue-At-Risk—VAR methodology, which consists of an aggregate analysis of variety of risk factors that might affect the return of those investments. |
• | Loans and financing – the Company monitors financial markets with the purpose of evaluate hedge structures (derivative transactions) in compliance with the financial and risk management policy to protect its exposure risks of volatility in foreign currency and interest rates. |
At December 31, 2018, the Company’s cash, cash equivalents, financial investments and loans and financing were indexed as follows:
Without derivative effect | Pre-fixed | Post-fixed | Total | |||||||||||||||||||||
Amount | % | Amount | % | Amount | % | |||||||||||||||||||
Cash, cash equivalents and financial investments | 2,742.3 | 85.49 | % | 465.5 | 14.51 | % | 3,207.8 | 100.00 | % | |||||||||||||||
Loans and financing | 3,577.7 | 98.09 | % | 69.8 | 1.91 | % | 3,647.5 | 100.00 | % | |||||||||||||||
With derivative effect | Pre-fixed | Post-fixed | Total | |||||||||||||||||||||
Amount | % | Amount | % | Amount | % | |||||||||||||||||||
Cash, cash equivalents and financial investments | 2,742.3 | 85.49 | % | 465.5 | 14.51 | % | 3,207.8 | 100.00 | % | |||||||||||||||
Loans and financing | 3,194.3 | 87.57 | % | 453.3 | 12.43 | % | 3,647.6 | 100.00 | % |
At December 31, 2018, the Company’s cash equivalents and post -fixed financing were indexed as follows:
Without derivative effect | With derivative effect | |||||||||||||||
Amount | % | Amount | % | |||||||||||||
Cash equivalents and financial investments | 465.4 | 100.00 | % | 465.5 | 100.00 | % | ||||||||||
CDI | 403.1 | 86.61 | % | 403.2 | 86.62 | % | ||||||||||
Libor | 62.3 | 13.39 | % | 62.3 | 13.38 | % | ||||||||||
Loans and financing | 69.9 | 100.00 | % | 453.4 | 100.00 | % | ||||||||||
TJLP | 1.9 | 2.72 | % | 1.9 | 0.42 | % | ||||||||||
Libor | 68.0 | 97.28 | % | 65.4 | 14.42 | % | ||||||||||
CDI | — | 0.00 | % | 386.1 | 85.16 | % |
b) | Foreign exchange rate risk |
The functional currency of the Company and the majority of its subsidiaries is the US dollar (Nota 2.2.1).
Consequently, the Company’s operations most exposed to foreign exchange gains/losses are those denominated in reais (labor costs, tax issues, local expenses, financial investments and loans and financing) as well as investments in subsidiaries in currencies other than the US dollar.
Company policy for protection against foreign exchange risks on assets and liabilities is mainly based on seeking to maintain a balance between assets and liabilities indexed in each currency and management of foreign currency purchases and sales to ensure that, on realization of the transactions contracted, this natural hedge will occur. This policy minimizes the effect of exchange rate changes on assets and liabilities already contracted, but do not protect against the risk of fluctuations in future results due to appreciation or depreciation of the real that can, when measured in dollars, result in an increase or reduction in the portion of costs denominated in reais.
Under certain market conditions, the Company may protect itself against potential future mismatches of expenses and revenues denominated in foreign currency, to minimize the effects of future exchange variations on the Company’s consolidated statements of income.
Efforts to minimize the foreign exchange risk for rights and liabilities denominated in currencies other than the functional currency may involve transactions with derivatives, such as swaps, exchange options andNon-Deliverable Forwards (“NDF”) (Note 8).
F-68
Table of Contents
Embraer S.A.
Notes to the Consolidated Financial Statements
In millions of U.S. dollar, unless otherwise stated
At December 31, 2018, the Company had the following amounts of financial assets and liabilities denominated in several currencies:
12.31.2018 | 12.31.2017 | 12.31.2016 | ||||||||||
(Restated) | (Restated) | |||||||||||
Loans and financing | ||||||||||||
Brazilian reais | 286.5 | 629.0 | 832.9 | |||||||||
U.S. dollars | 3,341.6 | 3,555.5 | 2,910.7 | |||||||||
Euro | 19.6 | 14.0 | 16.3 | |||||||||
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3,647.7 | 4,198.5 | 3,759.9 | ||||||||||
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Trade accounts payable | ||||||||||||
Brazilian reais | 77.1 | 87.6 | 91.9 | |||||||||
U.S. dollars | 715.6 | 621.0 | 783.2 | |||||||||
Euro | 27.2 | 115.0 | 75.3 | |||||||||
Other currencies | 72.2 | 1.1 | 1.7 | |||||||||
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892.1 | 824.7 | 952.1 | ||||||||||
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Total (1) | 4,539.8 | 5,023.2 | 4,712.0 | |||||||||
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Cash and cash equivalents and financial investments | ||||||||||||
Brazilian reais | 406.5 | 750.2 | 1,180.0 | |||||||||
U.S. dollars | 2,746.9 | 2,979.2 | 1,838.3 | |||||||||
Euro | 47.7 | 97.5 | 127.1 | |||||||||
Other currencies | 6.8 | 61.2 | 44.8 | |||||||||
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3,207.9 | 3,888.1 | 3,190.2 | ||||||||||
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Trade accounts receivable: | ||||||||||||
Brazilian reais | 10.7 | 30.8 | 143.4 | |||||||||
U.S. dollars | 274.2 | 154.1 | 187.7 | |||||||||
Euro | 33.1 | 106.1 | 5.6 | |||||||||
Other currencies | — | 6.0 | 0.1 | |||||||||
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| |||||||
318.0 | 297.0 | 336.8 | ||||||||||
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Total (2) | 3,525.9 | 4,185.1 | 3,527.0 | |||||||||
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Net exposure (1 - 2): | ||||||||||||
Brazilian reais | (53.6 | ) | (64.4 | ) | (398.6 | ) | ||||||
U.S. dollars | 1,036.1 | 1,043.2 | 1,667.9 | |||||||||
Euro | (34.0 | ) | (74.6 | ) | (41.1 | ) | ||||||
Other currencies | 65.4 | (66.1 | ) | (43.2 | ) |
The Company has other financial assets and liabilities that are also influenced by foreign exchange variations that are not included in the table above. These are used to minimize exposure in the currencies presented.
26.4 | Sensitivity analysis |
In order to present positive and negative variations of 25% and 50% in the risk variable considered, a sensitivity analysis of the financial instruments, including derivatives, is presented below describing the effects on the monetary and foreign exchange variations on the financial income and expense, as well as in the consolidated shareholders’ equity, determined on the balances recorded at December 31, 2018, in the event of such variations in the risk component.
However, statistical simplifications were made in isolating the variability of the risk factors in question. Consequently, the following estimates do not necessarily represent the amounts that might be determined in future consolidated financial statements. The use of different hypotheses and/or methodologies could have a material effect on the estimates presented below.
26.4.1 | Methodology |
Assuming that the balances remain constant, the Company calculates the interest and exchange variation differential for each of the projected scenarios.
Evaluation of the amounts exposed to interest rate risk considers only the risks for the financial statement. Operations subject to prefixed interest rates were not included. The probable scenario is based on the possible change for each of the variables indicated, and positive and negative variations of 25% and 50% were applied to the rates in force as of the reporting date.
F-69
Table of Contents
Embraer S.A.
Notes to the Consolidated Financial Statements
In millions of U.S. dollar, unless otherwise stated
In the sensitivity analysis of derivative contracts, positive and negative variations of 25% and 50% were applied to the market yield curve (B3) as of the reporting date.
26.4.2 | Interest risk factor |
Additional variations in book balances (*) | ||||||||||||||||||||||||||
Risk factor | Amounts exposed at 12.31.2018 | -50% | -25% | Probable scenario | +25% | +50% | ||||||||||||||||||||
Cash equivalents and financial investments | CDI | 403.1 | (12.6 | ) | (6.0 | ) | 0.6 | 7.2 | 13.8 | |||||||||||||||||
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Net impact | CDI | 403.1 | (12.6 | ) | (6.0 | ) | 0.6 | 7.2 | 13.8 | |||||||||||||||||
Cash equivalents and financial investments | LIBOR | 62.3 | (0.9 | ) | (0.5 | ) | — | 0.4 | 0.9 | |||||||||||||||||
Loans and financing | LIBOR | (68.0 | ) | 1.0 | 0.5 | — | (0.5 | ) | (1.0 | ) | ||||||||||||||||
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Net impact | LIBOR | (5.7 | ) | 0.1 | — | — | (0.1 | ) | (0.1 | ) | ||||||||||||||||
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Loans and financing | TJLP | (1.9 | ) | 0.1 | — | — | — | (0.1 | ) | |||||||||||||||||
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Net impact | TJLP | (1.9 | ) | 0.1 | — | — | — | (0.1 | ) | |||||||||||||||||
Rates considered | CDI | 6.40 | % | 3.28 | % | 4.91 | % | 6.55 | % | 8.19 | % | 9.83 | % | |||||||||||||
Rates considered | LIBOR | 2.87 | % | 1.43 | % | 2.14 | % | 2.86 | % | 3.57 | % | 4.29 | % | |||||||||||||
Rates considered | TJLP | 6.56 | % | 3.49 | % | 5.24 | % | 6.98 | % | 8.73 | % | 10.47 | % |
(*) | The positive and negative variations of 25% and 50% were applied on the rates |
26.4.3 | Foreign exchange risk factor |
Additional variations in book balances (*) | ||||||||||||||||||||||||||||
Risk factor | Amounts exposed at 12.31.2018 | -50% | -25% | Probable scenario | +25% | +50% | ||||||||||||||||||||||
Assets | 745.3 | 378.9 | 195.7 | 12.4 | (170.8 | ) | (354.0 | ) | ||||||||||||||||||||
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Cash, cash equivalents and financial investments | R$ | 528.4 | 268.6 | 138.7 | 8.8 | (121.1 | ) | (251.0 | ) | |||||||||||||||||||
Other assets | R$ | 216.9 | 110.3 | 57.0 | 3.6 | (49.7 | ) | (103.0 | ) | |||||||||||||||||||
Liabilities | (79.7 | ) | (40.6 | ) | (20.9 | ) | (1.3 | ) | 18.2 | 37.9 | ||||||||||||||||||
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| |||||||||||||||||
Loans and financing | R$ | (286.5 | ) | (145.7 | ) | (75.2 | ) | (4.8 | ) | 65.6 | 136.1 | |||||||||||||||||
Other liabilities | R$ | 206.8 | 105.1 | 54.3 | 3.5 | (47.4 | ) | (98.2 | ) | |||||||||||||||||||
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| |||||||||||||||||
Net impact | 825.0 | 338.3 | 174.8 | 11.1 | (152.6 | ) | (316.1 | ) | ||||||||||||||||||||
Exchange rate considered | 3.8748 | 1.9050 | 2.8575 | 3.8100 | 4.7625 | 5.7150 |
(*) | The positive and negative variations of 25% and 50% were applied on the rates |
26.4.4 | Derivative contracts |
Additional variations in book balances (*) | ||||||||||||||||||||||||||||
Risk factor | Amounts exposed at 12.31.2018 | -50% | -25% | Probable scenario | +25% | +50% | ||||||||||||||||||||||
Derivative Designated as Hedge Accounting | ||||||||||||||||||||||||||||
Interest swap—fair value hedge | CDI | 6.5 | 4.1 | 1.8 | (0.5 | ) | (2.4 | ) | (4.3 | ) | ||||||||||||||||||
Hedge destinated as cash flow | US$/R$ | (7.4 | ) | 13.5 | 9.9 | 7.3 | 4.7 | 1.3 | ||||||||||||||||||||
Hedge desifnated as cash flow | LIBOR | 2.3 | — | — | — | — | — | |||||||||||||||||||||
Other derivatives | ||||||||||||||||||||||||||||
Interest swap | LIBOR | 0.2 | — | — | — | — | 0.1 | |||||||||||||||||||||
Foreign Exchange option | EUR/US$ | — | (0.6 | ) | (0.2 | ) | — | 0.2 | 0.3 | |||||||||||||||||||
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| |||||||||||||||||
Total | 1.6 | 17.0 | 11.5 | 6.8 | 2.5 | (2.6 | ) | |||||||||||||||||||||
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| |||||||||||||||||
Rate considered | LIBOR | 2.87 | % | 1.43 | % | 2.14 | % | 2.86 | % | 3.57 | % | 4.29 | % | |||||||||||||||
Rate considered | CDI | 6.40 | % | 3.28 | % | 4.91 | % | 6.55 | % | 8.19 | % | 9.83 | % | |||||||||||||||
Rate considered | US$/R$ | 3.8748 | 1.9050 | 2.8575 | 3.8100 | 4.7625 | 5.7150 | |||||||||||||||||||||
Rate considered | LIBOR | 1.1467 | 0.5750 | 0.8625 | 1.1500 | 1.4375 | 1.7250 |
(*) | The positive and negative variations of 25% and 50% were applied on the rates |
F-70
Table of Contents
Embraer S.A.
Notes to the Consolidated Financial Statements
In millions of U.S. dollar, unless otherwise stated
26.4.5 | Residual Value Guarantees |
The residual value guarantees are reported in a manner similar to financial derivative instruments.
Based on residual value guarantee contracts in force, the Company ascertains any changes in values based on third party appraisals. The probable scenario is based on the Company’s expectation of recording the provisions on a statistical basis, and the positive and negative variations of 25% and 50% have been applied to the third party appraisals at the balance sheet date.
Additional variations in book balances | ||||||||||||||||||||||||
Amounts exposed at 12.31.2018 | -50% | -25% | Probable scenario | +25% | +50% | |||||||||||||||||||
Financial guarantee of residual value | 125.4 | (104.5 | ) | (90.0 | ) | (1.0 | ) | 94.8 | 106.0 | |||||||||||||||
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| |||||||||||||
Total | 125.4 | (104.5 | ) | (90.0 | ) | (1.0 | ) | 94.8 | 106.0 | |||||||||||||||
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If a provision is considered insufficient to cover the probable execution of the guarantees, it is increased to adjust it to the Company’s exposure at the reporting period.
27. | Shareholders’ equity |
27.1. | Capital |
The authorized capital is divided into 1,000,000,000 common shares. The Company’s subscribed and paid up capital as of December 31, 2018 was US$ 1,551.6 and was comprised of 740,465,044 common shares, without par value, of which 4,977,698 shares were held in treasury.
The capital is comprised entirely of common shares. As per Article 14 of the Company’s bylaws, each common share generally empowered with one vote at general shareholders’ meeting, considering that no shareholder or group of shareholders, may exercise votes representing more than 5% of the quantity of shared into which our capital stock is divided. Votes that exceed this 5% threshold will not be considered.
As of December 31, 2018, the equity reserve of investment and working capital exceeded the percentage of 80% of the capital stock as set forth in the bylaws (Article 50) and additionally the revenue reserves (excluding the government grant reserve) exceeded the legal limit of the capital stock as provided in Article 99 of Brazilian Law 6,404/76 for listed entities. As a result, a capital increase of US$ 113.6 was approved at a meeting of the Board of Directors held on March 5, 2018. This increase was reflected in the first quarter of 2018.
27.2. | Brazilian Government Golden Share |
The Federal Government holds one ”golden share” with the same voting rights as other holders of common shares but which grants it certain additional rights as established in article 9 of the Embraer’s bylaws.
27.3. | Treasury Shares |
Common shares acquired with resources from the investments and working capital reserve. This operation occurred in accordance with rules approved by the Statutory Board of Directors in a meeting held on December 7, 2007 and corresponds to 4,977,698 common shares and US$ 31.4 as of December 31, 2018. These shares lose voting and economic rights during the period in which they are held in Treasury. The movement is shown below:
USD | Quantity | Share value (USD) | Net income of uses | |||||||||||||
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| |||||||||
At the beggining of the year | 51.8 | 7,423,705 | 7.0 | — | ||||||||||||
Used for stock options plan(i) | (20.4 | ) | (2,446,007 | ) | 8.3 | 10.9 | ||||||||||
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At December 31, 2018 | 31.4 | 4,977,698 | 6.3 | 10.9 | ||||||||||||
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(i) | The beneficiaries of the shares used in the share-based compensation plan include the Statutory Board of Directors, Executive Directors and certain employees. Refer to Note 28. |
At December 31, 2018, the market value of the shares held in Treasury was US$ 27.5 (December 31, 2017—US$ 44.4).
F-71
Table of Contents
Embraer S.A.
Notes to the Consolidated Financial Statements
In millions of U.S. dollar, unless otherwise stated
27.4. | Investment subsidy reserve |
This reserve was formed as allowed by article195-A of Brazilian Corporate Law (as amended by Law 11.638, of 2007) and corresponds to the appropriation of the portion of retained earnings derived from government grants received by the Company, which cannot be distributed to shareholders in the form of dividends. It is recognized in the consolidated statements of income in the same expense line to which the subsidy refers.
These subsidies are not included in the calculation of the minimum mandatory dividends.
27.5. | Legal reserve |
The statutory reserve is a revenue reserve recorded annually as an appropriation of 5% of the net income for the year. The reserve may not exceed 20% of capital, or 30% of capital and capital reserves.
The reserve limit was not exceeded as of December 31, 2018 and 2017.
27.6. | Investment and working capital reserve |
The purpose of this revenue reserve is to shield funds which might otherwise be subject to distribution and are earmarked for: (i) investments in property, plant and equipment, without detriment to retained earnings, pursuant to art. 196 of Law 6.404/76; and (ii) the Company’s working capital (iii) redeem, reimburse or purchase shares of the Company and (iv) be distributed to the shareholders.
27.7. | Interest on own capital and dividends |
Interest on own capital and interim dividends approved by the Statutory Board of Directors and distributed to the shareholders in 2018 are presented as follows:
• | In meeting held on March 5, 2018, the Statutory Board of Directors approved the distribution of interest on own capital for the first quarter of 2018 in the amount of US$ 4.4, corresponding to US$ 0.01 per share. Payment of interest on own capital is subject to withholding tax at 15%. The payment was made on April 11, 2018, without remuneration. |
• | In meeting held on June 14, 2018, the Statutory Board of Directors approved the distribution of interest on own capital for the second quarter of 2018 in the amount of US$ 3.8, corresponding to US$ 0.01 per share. Payment of interest on own capital is subject to withholding tax at 15%. The payment was made on July 20, 2018, without remuneration. |
• | In meeting held on September 13, 2018, Statutory Board of Directors approved the payment of interim dividends in the amount of US$ 1.8, corresponding to US$ 0.01 per common share. Payment was made from October 11, 2018, without any remuneration. |
• | In a meeting held on December 14 2018, Statutory Board of Directors approved the payment of interim dividends in the amount of US$ 1.9, corresponding to US$ 0.01 per common share. Payment was made from January 10, 2019, without any remuneration. |
27.8. | Other Comprehensive Income |
Consists of the following adjustments:
• | Cumulative translation adjustment: foreign exchange gains/losses resulting from translation of the consolidated financial statements in the functional currency to the presentation currency (Real) and foreign exchange gains/losses resulting from translation of the foreign subsidiaries’ financial statements measured in other functional currencies to the Company’s functional currency (dollar); and |
• | Other comprehensive income: unrealized actuarial gains (losses) resulting from the healthcare plans sponsored by the Company and the fair value variation of financial instruments available for sale. |
F-72
Table of Contents
Embraer S.A.
Notes to the Consolidated Financial Statements
In millions of U.S. dollar, unless otherwise stated
28. | Share-based compensation |
In February 2014, the Board of Directors approved the revision of the Executive Remuneration Policy (ERP), applicable to all executive officers and other Company executives. The elements of executive compensation include the Long Term Incentives (LTI), the main objectives of which are to (i) maintain and attract highly qualified personnel for the Company, (ii) assure those who are able to contribute to improving the Company’s performance of the right to participate in the results of their contribution, and (iii) also to ensure the continuity of the Company’s management by aligning the interests of executives with those of shareholders. The Company currently has two LTI modes: stock options and virtual shares.
28.1. | Stock Option |
Program for the granting of stock options, for the executives of the Company or its subsidiaries, who may exercise their right, is as follows: I) 33% after 3 years, II) 33% after 4 years and III) 34% after 5 years, all in relation to the grant date of each option.
The exercise price of each option is set on the grant date at the weighted average stock option price of the last sixty trading days, and may be adjusted by up to 30% to offset any speculation. The participant will have a maximum exercise period of seven years, starting from the grant date.
The grants awarded are summarized below:
in thousands of options | ||||||||||||||||||||
Grants | Exercised | Canceled (i) | Outstanding | Exercible | ||||||||||||||||
Grants on January 23, 2012 | 4,860,000 | (3,732,000 | ) | (1,009,100 | ) | 118,900 | 11.5 | |||||||||||||
Grants on March 20, 2013 | 4,494,000 | (2,409,302 | ) | (1,266,890 | ) | 817,808 | 15.7 | |||||||||||||
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At December 31, 2018 | 9,354,000 | (6,141,302 | ) | (2,275,990 | ) | 936,708 | 27.2 |
(i) | The cancellations refer to shares granted to executives or employees who no longer work for the Company. Additionally, on April 16, 2014, there was a cancellation of the grants awarded to members of the Board of Directors, with payment of compensation to plan participants. |
28.2. | Phantom shares plan |
The plan is based on the granting of virtual shares to directors and managers and the main objective is to attract and keep highly qualified staff in the Company and its subsidiaries to ensure continuity of management and align the interests of directors and key personnel of the Company and controlled entities to those of the Company’s shareholders.
The value of the long-term incentives (“LTI”) will be converted at the average price of the Company’s shares in the last 30 trading days by determining the quantity of virtual shares allocated to each participant, divided into two classes, with 50% in the form of restricted virtual shares and 50% in the form of virtual performance shares.
The Company will pay the LTI by converting the quantity of virtual shares into reais at the average quoted price (weighted by trading volume) of the Company’s shares in the last 10 trading days, as follows:
• | restricted virtual shares: (i) 33% on the third anniversary of the grant date; (ii) 33% on the fourth anniversary of the grant date, and (iii) 34% on the fifth anniversary of the grant date; and |
• | A change in the virtual performance share calculation was approved in August 2017. Virtual performance shares granted in 2015, 2016 and 2017 will be paid in 2020, while those granted in 2018 will be paid in 2021. The amounts payable will now be based on the internal cost reduction target and not on the Economic Value Added indicator. |
F-73
Table of Contents
Embraer S.A.
Notes to the Consolidated Financial Statements
In millions of U.S. dollar, unless otherwise stated
The amounts resulting from conversion of virtual shares will be added to the amounts equivalent to dividends and interest on own capital effectively paid by the Company during the vesting period.
The fair value of virtual shares is determined based on the average price (weighted by trading volume) of the Company’s shares(EMBR3-R$) for the last 10 trading days prior to the close of the period, applied to the number of virtual shares assigned to each participant in proportion to the vesting period.
Amount of virtual stock | Grant value | Amount of virtual stock(i) | Fair value of shares (R$) | |||||||||||||
Grants on February 25, 2014 | 1,570,698 | 30.4 | 175,100 | 3.7 | ||||||||||||
Grants on March 03, 2015 | 1,237,090 | 30.2 | 546,024 | 11.5 | ||||||||||||
Grants on March 10, 2016 | 1,095,720 | 31.1 | 541,595 | 11.4 | ||||||||||||
Grants on June 09, 2016 | 55,994 | 1.1 | 32,674 | 0.7 | ||||||||||||
Grants on August 25, 2016 | 70,978 | 1.1 | 43,783 | 0.9 | ||||||||||||
Grants on August 24, 2017 | 1,930,350 | 30.5 | 762,782 | 16.1 | ||||||||||||
Grants on April 12, 2018 | 1,625,372 | 35.2 | 346,221 | 7.3 | ||||||||||||
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At December 31, 2018 | 7,586,202 | 159.6 | 2,448,179 | 51.6 | ||||||||||||
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(i) | Virtual shares until December 31, 2018 considering the plan’s vesting period. |
29. | Earnings per share |
29.1. | Basic |
Basic earnings per common share is computed by dividing net income for the year by the weighted average number of shares outstanding during the period, excluding shares acquired by the Company and held in Treasury.
12.31.2018 | 12.31.2017 | 12.31.2016 | ||||||||||
(Restated) | (Restated) | |||||||||||
Net income attributable to owners of Embraer | (178.2 | ) | 264.0 | 178.6 | ||||||||
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(178.2 | ) | 264.0 | 178.6 | |||||||||
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Weighted average number of shares (in thousands) | 734,065 | 734,264 | 735,571 | |||||||||
Basic earnings per share—U.S. dollars | (0.24 | ) | 0.36 | 0.24 |
29.2. | Diluted |
Diluted earnings per share are calculated by adjusting the weighted average number of common shares outstanding to assume conversion of all potentially dilutive shares. The Company has only one category of potentially dilutive shares, namely share purchase options. A calculation is made in respect of these share purchase options to determine the number of shares that could be acquired at fair value (determined as the average market price of the Company’s share), based on the monetary value of subscription rights tied to the share purchase options in circulation. The number of shares calculated as described above is compared with the number of shares issued, assuming the exercise of share purchase options.
12.31.2018 | 12.31.2017 | 12.31.2016 | ||||||||||
(Restated) | (Restated) | |||||||||||
Net income attributable to owners of Embraer | (178.2 | ) | 264.0 | 178.6 | ||||||||
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(178.2 | ) | 264.0 | 178.6 | |||||||||
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Weighted average number of shares (in thousands) | 734,065 | 734,264 | 735,571 | |||||||||
Dilution for the issuance of stock options (in thousands) (i) | — | 545 | 1,690 | |||||||||
Weighted average number of shares (in thousands)—diluted | 734,065 | 734,809 | 737,261 | |||||||||
Diluted earnings per share—U.S. dollars | (0.24 | ) | 0.36 | 0.24 |
(i) | Refers to the effect of potentially dilutive shares for December 31, 2018. |
F-74
Table of Contents
Embraer S.A.
Notes to the Consolidated Financial Statements
In millions of U.S. dollar, unless otherwise stated
At December 31, 2018, there were no anti-dilutive effects.
30. | Revenue from contracts with customers |
a) | Revenue disaggregation: |
The revenue amounts by category, including main product and service lines and main geographic areas are presented below, including the reconciliation of revenue’s analytical composition with the reportable segments of the Company:
Revenue by category at December 31, 2018:
Commercial Aviation | Defense and Security | Executive Jets | Service and Support | Other | Total | |||||||||||||||||||
Aircraft | 2,276.2 | 92.5 | 997.4 | — | 6.9 | 3,373.0 | ||||||||||||||||||
Aircraft/Development (Defense BU) | — | 267.0 | — | — | — | 267.0 | ||||||||||||||||||
Others | 82.1 | 2.0 | 107.0 | — | — | 191.1 | ||||||||||||||||||
Service | — | 183.2 | — | 622.7 | 0.1 | 806.0 | ||||||||||||||||||
Spare Parts | — | 67.4 | — | 358.1 | 8.5 | 434.0 | ||||||||||||||||||
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Total | 2,358.3 | 612.1 | 1,104.4 | 980.8 | 15.5 | 5,071.1 | ||||||||||||||||||
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North America | Latin America | Asia Pacific | Brazil | Europe | Other | Total | ||||||||||||||||||||||
Aircraft | 2,253.8 | 87.0 | 318.2 | 40.3 | 644.5 | 29.2 | 3,373.0 | |||||||||||||||||||||
Aircraft/Development (Defense BU) | 1.9 | 0.1 | 0.7 | 243.3 | 12.6 | 8.4 | 267.0 | |||||||||||||||||||||
Others | 66.6 | 11.9 | 5.2 | 74.7 | 8.9 | 23.8 | 191.1 | |||||||||||||||||||||
Service | 353.7 | 42.2 | 92.3 | 42.4 | 230.3 | 45.1 | 806.0 | |||||||||||||||||||||
Spare Parts | 283.0 | 8.8 | 15.6 | 42.3 | 69.7 | 14.6 | 434.0 | |||||||||||||||||||||
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Total | 2,959.0 | 150.0 | 432.0 | 443.0 | 966.0 | 121.1 | 5,071.1 | |||||||||||||||||||||
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Revenue by category at December 31, 2017 (Restated):
Commercial Aviation | Defense and Security | Executive Jets | Service and Support | Other | Total | |||||||||||||||||||
Aircraft | 2,691.8 | — | 1,175.0 | — | 7.1 | 3,873.9 | ||||||||||||||||||
Aircraft/Development (Defense BU) | — | 651.8 | — | — | — | 651.8 | ||||||||||||||||||
Others | 79.6 | 7.2 | 105.3 | 0.3 | — | 192.4 | ||||||||||||||||||
Service | — | 177.8 | — | 622.2 | 1.0 | 801.0 | ||||||||||||||||||
Spare Parts | — | 16.9 | — | 299.7 | 23.7 | 340.3 | ||||||||||||||||||
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Total | 2,771.4 | 853.7 | 1,280.3 | 922.2 | 31.8 | 5,859.4 | ||||||||||||||||||
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North America | Latin America | Asia Pacific | Brazil | Europe | Other | Total | ||||||||||||||||||||||
Aircraft | 2,711.5 | 0.2 | 754.0 | 20.0 | 359.3 | 29.0 | 3,874.0 | |||||||||||||||||||||
Aircraft/Development (Defense BU) | 38.0 | 1.3 | 9.8 | 558.4 | 33.7 | 10.6 | 651.8 | |||||||||||||||||||||
Others | 104.1 | 0.2 | 1.7 | 11.9 | 0.3 | 74.1 | 192.3 | |||||||||||||||||||||
Service | 304.1 | 36.9 | 75.4 | 109.4 | 231.5 | 43.6 | 800.9 | |||||||||||||||||||||
Spare Parts | 180.2 | 13.0 | 18.6 | 49.2 | 66.8 | 12.6 | 340.4 | |||||||||||||||||||||
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Total | 3,337.9 | 51.6 | 859.5 | 748.9 | 691.6 | 169.9 | 5,859.4 | |||||||||||||||||||||
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Revenue by category at December 31, 2016 (Restated):
Commercial Aviation | Defense and Security | Executive Jets | Service and Support | Other | Total | |||||||||||||||||||
Aircraft | 2,868.6 | 42.2 | 1,402.9 | — | 0.1 | 4,313.8 | ||||||||||||||||||
Aircraft/Development (Defense BU) | — | 578.4 | — | — | (0.3 | ) | 578.1 | |||||||||||||||||
Others | 48.7 | (6.2 | ) | 150.4 | 1.5 | — | 194.4 | |||||||||||||||||
Service | (0.3 | ) | 194.4 | — | 596.9 | 1.8 | 792.8 | |||||||||||||||||
Spare Parts | (0.1 | ) | 16.7 | — | 283.8 | 24.4 | 324.8 | |||||||||||||||||
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Total | 2,916.9 | 825.5 | 1,553.3 | 882.2 | 26.0 | 6,203.9 | ||||||||||||||||||
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F-75
Table of Contents
Embraer S.A.
Notes to the Consolidated Financial Statements
In millions of U.S. dollar, unless otherwise stated
North America | Latin America | Asia Pacific | Brazil | Europe | Other | Total | ||||||||||||||||||||||
Aircraft | 3,150.6 | 164.7 | 664.2 | 41.2 | 250.9 | 42.2 | 4,313.8 | |||||||||||||||||||||
Aircraft/Development (Defense BU) | 112.1 | (1.3 | ) | 14.2 | 445.5 | 3.8 | 3.8 | 578.1 | ||||||||||||||||||||
Others | 157.3 | 1.4 | 17.3 | (10.6 | ) | 12.1 | 16.8 | 194.3 | ||||||||||||||||||||
Service | 318.4 | 35.4 | 68.6 | 132.5 | 193.4 | 44.5 | 792.8 | |||||||||||||||||||||
Spare Parts | 172.3 | 10.5 | 22.9 | 54.7 | 58.3 | 6.2 | 324.9 | |||||||||||||||||||||
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Total | 3,910.7 | 210.7 | 787.2 | 663.3 | 518.5 | 113.5 | 6,203.9 | |||||||||||||||||||||
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The contracts are grouped in the categories above as they have are affected similarly by economic factors.
b) | Contract balances, including contract costs: |
Note | 12.31.2018 | 12.31.2017 | 12.31.2016 | |||||||||||||
(Restated) | (Restated) | |||||||||||||||
Contract assets | 358.0 | 447.5 | 370.6 | |||||||||||||
Contract costs (Other assets) | 9.1 | 7.6 | 6.5 | |||||||||||||
Contract liabilities | 1,243.6 | 1,126.6 | 1,244.8 | |||||||||||||
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Customer advances | 1,057.4 | 938.1 | 911.3 | |||||||||||||
Deferred revenue | 186.2 | 188.5 | 333.5 | |||||||||||||
Financial guarantee | 23 | 11.6 | 17.1 | 22.7 |
As of December 31, 2018 and December 31, 2017 there were no losses recognized for contract assets. Losses recognized on trade accounts receivable balances are presented in Note 7.
Of the total revenues recognized as of December 31, 2018, US$ 785.9 were included in the balance of contract liabilities at the beginning of the period, US$ 652.7 for the year ended December 31, 2017 and US$ 678.7 for the year ended December 31, 2016.
The amount of revenue recognized as of December 31, 2018 related to performance obligations achieved in prior years (or partially achieved) is US$ 13.8, which refers mainly to change orders approved in the year without changes in goods or services to be delivered
The Company had the following amounts in other assets related to costs to obtain contracts:
Sales commissions | Bank guarantee | Off Set Costs | Total | |||||||||||||
At January 01, 2016 (Restated) | — | 9.3 | — | 9.3 | ||||||||||||
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Additions | 5.9 | 2.6 | 0.1 | 8.6 | ||||||||||||
Disposals | (5.9 | ) | (5.4 | ) | (0.1 | ) | (11.4 | ) | ||||||||
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At December 31, 2016 (Restated) | — | 6.5 | — | 6.5 | ||||||||||||
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Additions | (10.2 | ) | 1.5 | 5.6 | (3.1 | ) | ||||||||||
Disposals | 10.2 | (0.4 | ) | (5.6 | ) | 4.2 | ||||||||||
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At December 31, 2017 (Restated) | — | 7.6 | — | 7.6 | ||||||||||||
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Additions | 1.5 | 1.4 | 0.8 | 3.7 | ||||||||||||
Disposals | (0.9 | ) | (0.5 | ) | (0.8 | ) | (2.2 | ) | ||||||||
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At December 31, 2018 | 0.6 | 8.4 | — | 9.0 | ||||||||||||
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There were no impairment losses recognized for costs to obtain contracts.
Assets for obtaining contracts are amortized when (or as and when) the revenue is recognized.
As permitted by the standard, the tables above do not include values of short-term contracts (one year or less). In addition, there were no figures included in the tables above referring to variable consideration of contracts that currently have some restriction, according to the pratical expedient.
F-76
Table of Contents
Embraer S.A.
Notes to the Consolidated Financial Statements
In millions of U.S. dollar, unless otherwise stated
c) | Performance obligations: |
The Company has a portfolio of firm orders, whose performance obligations are unsatisfied or partially satisfied. The amount of revenue allocated to performance obligations not yet satisfied (or partially satisfied) as of December 31, 2018 is US$ 16.3 billion, of which US$ 12.8 billion is expected to be satisfied in the next 5 years, as estimated by the Company.
31. | Revenue (expenses) by type |
The Company opted to present the consolidated statements of income by function. The table below shows the detailed costs and expenses by nature:
12.31.2018 | 12.31.2017 | 12.31.2016 | ||||||||||
(Restated) | (Restated) | |||||||||||
As presented as statements of Income: | ||||||||||||
Revenue | 5,071.1 | 5,859.4 | 6,203.9 | |||||||||
Cost of sales and services | (4,303.1 | ) | (4,764.1 | ) | (4,982.0 | ) | ||||||
Administrative | (182.6 | ) | (179.1 | ) | (164.3 | ) | ||||||
Selling | (304.2 | ) | (315.9 | ) | (353.4 | ) | ||||||
Research | (46.1 | ) | (49.2 | ) | (47.6 | ) | ||||||
Other income (expenses), net | (199.4 | ) | (210.4 | ) | (442.6 | ) | ||||||
Equity in losses on associates | (0.4 | ) | 1,2 | (0.3 | ) | |||||||
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Operating profit before financial income | 35.3 | 341.9 | 213.7 | |||||||||
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Revenue (expenses) by nature: | ||||||||||||
Revenue from sales of goods | 4,450.5 | 5,023.6 | 5,404.7 | |||||||||
Revenue from sales of services | 676.5 | 920.6 | 880.8 | |||||||||
Sales deductions and tax on revenue (i) | (55.9 | ) | (84.8 | ) | (81.6 | ) | ||||||
General manufacturing costs (ii) | (4,031.1 | ) | (4,421.4 | ) | (4,613.6 | ) | ||||||
Depreciation | (159.2 | ) | (196.5 | ) | (194.5 | ) | ||||||
Amortization | (112.8 | ) | (146.2 | ) | (173.9 | ) | ||||||
Personnel expenses | (245.8 | ) | (245.4 | ) | (261.6 | ) | ||||||
Selling expenses | (42.7 | ) | (53.8 | ) | (83.6 | ) | ||||||
Provision for penalties | — | (10.1 | ) | (228.0 | ) | |||||||
Restructuring expenses | — | (6.4 | ) | (117.3 | ) | |||||||
Miscellaneous | (444.2 | ) | (437.7 | ) | (317.7 | ) | ||||||
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Operating profit before financial income | 35.3 | 341.9 | 213.7 | |||||||||
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(i) | Refers to sales taxes and other deductions. |
(ii) | Refers to costs of materials, direct labor and general manufacturing expenses. |
F-77
Table of Contents
Embraer S.A.
Notes to the Consolidated Financial Statements
In millions of U.S. dollar, unless otherwise stated
32. | Other operating income (expense), net |
12.31.2018 | 12.31.2017 | 12.31.2016 | ||||||||||
(Restated) | (Restated) | |||||||||||
Assets devaluation (i) | (99.5 | ) | (109.1 | ) | (77.3 | ) | ||||||
Corporate projects (ii) | (83.4 | ) | (33.0 | ) | (21.4 | ) | ||||||
Taxes on other outputs | (27.5 | ) | (25.1 | ) | (36.7 | ) | ||||||
Expenses system project | (19.7 | ) | (27.7 | ) | (16.4 | ) | ||||||
Provision for contingencies | (12.0 | ) | (8.0 | ) | (1.3 | ) | ||||||
Training and development | (8.7 | ) | (10.0 | ) | (10.9 | ) | ||||||
Flight safety standards | (4.4 | ) | (4.8 | ) | (4.6 | ) | ||||||
Aircraft maintenance and flights costs - fleet | (3.3 | ) | (2.4 | ) | (3.4 | ) | ||||||
Contractual fines (iii) | (2.9 | ) | 6.6 | (7.7 | ) | |||||||
Extemporaneous credits | — | 10.8 | 16.0 | |||||||||
Financial guarantee | — | 9.6 | 8.5 | |||||||||
Restructuring expenses | — | (6.4 | ) | (117.3 | ) | |||||||
Accounts payable for penalties | — | (10.1 | ) | (228.0 | ) | |||||||
Other sales | 8.8 | 13.3 | 11.3 | |||||||||
Recovery of expenses | 11.7 | 6.4 | 7.9 | |||||||||
Royalties | 15.3 | 11.9 | 11.9 | |||||||||
Contractual fines revenue (iv) | 35.4 | 2.4 | 24.2 | |||||||||
Others | (9.2 | ) | (34.8 | ) | 2.6 | |||||||
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(199.4 | ) | (210.4 | ) | (442.6 | ) | |||||||
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(i) | Impairment losses recognized in the year, including US$ 61.3 of Lineage aircraft model (Note 17), US$ 6.0 of aircraft held in property, plant and equipment (Note 15) and US$ 32.2 of residual value devaluation related to assets attached to structured operations recorded in collateralized accounts receivable (Note 9); |
(ii) | Refers to projects focused on system and process improvements and special projects of the Company; |
(iii) | Refers to contractual fines to be paid to suppliers due tonon-compliance with contractual clauses; |
(iv) | Substantially fines charged to customers for cancellation of sales contracts, mainly in the Segment of Executive Aviation, in accordance with the contract terms. |
33. | Financial income (expense), net |
12.31.2018 | 12.31.2017 | 12.31.2016 | ||||||||||
(Restated) | (Restated) | |||||||||||
Financial income: | ||||||||||||
Interest on cash and cash equivalents and financial investments | 93.0 | 127.5 | 201.8 | |||||||||
Interest on receivables | 33.1 | 37.5 | 34.3 | |||||||||
Residual value guarantee | — | 9.5 | — | |||||||||
Taxes over financial revenue | (9.0 | ) | 8.0 | (17.0 | ) | |||||||
Other | 0.1 | 0.3 | 2.4 | |||||||||
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Total financial income | 117.2 | 182.8 | 221.5 | |||||||||
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Financial expenses: | ||||||||||||
Financial restructuring costs | (0.9 | ) | (1.5 | ) | (0.5 | ) | ||||||
IOF - (tax on financial transactions) | (1.4 | ) | (3.7 | ) | (2.9 | ) | ||||||
Interest on taxes, social charges and contributions | (3.7 | ) | (2.2 | ) | (21.0 | ) | ||||||
Residual value guarantee | (22.3 | ) | — | (26.7 | ) | |||||||
Interest on loans and financing | (226.3 | ) | (215.2 | ) | (182.6 | ) | ||||||
Other | (18.7 | ) | (8.6 | ) | (17.0 | ) | ||||||
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Total financial expenses | (273.3 | ) | (231.2 | ) | (250.7 | ) | ||||||
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Derivative instruments | (15.4 | ) | 7.8 | (8.3 | ) | |||||||
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Financial income (expenses), net | (171.5 | ) | (40.6 | ) | (37.5 | ) | ||||||
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F-78
Table of Contents
Embraer S.A.
Notes to the Consolidated Financial Statements
In millions of U.S. dollar, unless otherwise stated
34. | Foreign exchange gains (losses), net |
12.31.2018 | 12.31.2017 | 12.31.2016 | ||||||||||
(Restated) | (Restated) | |||||||||||
Monetary and foreign exchange variations Assets: | ||||||||||||
Advances to suppliers* | — | (1.3 | ) | — | ||||||||
Tax credits | (30.9 | ) | (2.2 | ) | 28.5 | |||||||
Trade accounts receivable and contract assets | (24.6 | ) | (38.8 | ) | 14.6 | |||||||
Cash and cash equivalents and financial investments | (80.8 | ) | (4.0 | ) | 204.2 | |||||||
Other | (25.6 | ) | (0.4 | ) | 47.5 | |||||||
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(161.9 | ) | (46.7 | ) | 294.8 | ||||||||
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Liabilities: | ||||||||||||
Loans and financing | 82.7 | 6.0 | (153.3 | ) | ||||||||
Advances from customers* | — | 25.1 | (46.3 | ) | ||||||||
Provisions | 24.3 | 3.8 | (27.6 | ) | ||||||||
Taxes and charges payable | 13.0 | 1.6 | (21.2 | ) | ||||||||
Accounts payable | 17.4 | 6.8 | (18.8 | ) | ||||||||
Suppliers | 2.7 | 0.1 | (11.7 | ) | ||||||||
Provisions for contingencies | 3.3 | (1.3 | ) | (3.2 | ) | |||||||
Deferred taxes | (1.3 | ) | (1.4 | ) | 0.4 | |||||||
Other | (0.9 | ) | — | (0.5 | ) | |||||||
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141.2 | 40.7 | (282.2 | ) | |||||||||
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Net monetary and foreign exchange variations | (20.7 | ) | (6.0 | ) | 12.6 | |||||||
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Derivative instruments | 20.7 | 12.6 | (8.2 | ) | ||||||||
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Foreign exchange gain (loss), net | — | 6.6 | 4.4 | |||||||||
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* | See note to 2.2.1(c) for IFRIC 22 adoption discussions. |
35. | Responsibilities and Commitments |
35.1. | Trade-ins |
The Company has offered 8 aircrafttrade-in options.Trade-in transactions are directly tied to contractual obligations with the customer and the purchase of new aircraft. Exercise of thetrade-in option is tied to compliance by the customer with all the contractual clauses. These options establish that the price of the asset given in payment may be put towards the purchase price of a new and moreup-to-date aircraft model produced by the Company. The Company continuously monitors alltrade-in commitments in order to anticipate any adverse economic impact.
35.2. | Leases |
Operating leases refer to buildings, machinery, vehicles and computer equipment. At December 31, 2018 the amounts recognized totaled US$ 7.3, at December 31, 2017 US$ 11.0 and at December 31, 2016 US$ 15.6. These leases expire at various dates through 2044.
The following table shows the payment schedule for the Company’s operating leases at December 31, 2018:
Year | ||||
2019 | 5.4 | |||
2020 | 4.5 | |||
2021 | 4.0 | |||
2022 | 3.5 | |||
After 2022 | 14.7 | |||
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| |||
Total | 32.1 | |||
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|
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Embraer S.A.
Notes to the Consolidated Financial Statements
In millions of U.S. dollar, unless otherwise stated
35.3. | Financial Guarantees |
The table below provides quantitative data on the financial guarantees provided by the Company to third parties. The maximum potential payments (off balance sheet exposure) represent the worst-case scenario and do not necessarily reflect the results expected 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.
12.31.2018 | 12.31.2017 | |||||||
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| |||||
Maximum financial guarantees | 66.6 | 107.7 | ||||||
Maximum residual value guarantees | 253.1 | 267.4 | ||||||
Mutually exclusive exposure (i) | (26.9 | ) | (29.0 | ) | ||||
Provisions and liabilities recorded | (137.0 | ) | (126.0 | ) | ||||
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|
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| |||||
Off-balance sheet exposure | 155.8 | 220.1 | ||||||
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| |||||
Estimated proceeds from financial guarantees and underlying assets | 177.6 | 266.9 | ||||||
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|
(i) | When an underlying asset is covered by mutually exclusive financial and residual value guarantees, the residual value guarantee may only be exercised if the financial guarantee has expired without having been exercised. On the other hand, if the financial guarantee is exercised, the residual value guarantee is automatically terminated. |
This exposure is reduced by the fact that, to benefit from the guarantee, the counterparty must ensure that the aircraft complies with rigid conditions for its return.
35.4. | Insurance cover |
The Company contracts different types of insurance policies to protect assets in the event of any accident that might cause significant losses. Policies are also contracted for risks subject to compulsory insurance, either legally or contractually.
The Company and its subsidiaries have civil liability insurance for their operations in Brazil and abroad, with coverage and conditions that management considers appropriate to the risks involved.
To cover substantial damage to assets and loss of earnings of its operations in Brazil and abroad, the Company has insured an amount of US$ 7.7 billion.
36. | Supplemental Cash Flow information |
36.1 | Payments made during the year and transactions not affecting cash and cash equivalents |
12.31.2018 | 12.31.2017 | 12.31.2016 | ||||||||||
Payments made during the period: | ||||||||||||
Interest | 212.7 | 186.4 | 175.0 | |||||||||
Income tax and social contribution | 23.3 | 28.6 | 153.9 | |||||||||
Non-cash financing and investing transactions | ||||||||||||
Property, plant and equipment, transfer to pool parts inventory | (29.5 | ) | (21.6 | ) | 2.5 | |||||||
Property, plant and equipment, transfer to financial guarantees | — | — | 45.7 | |||||||||
Property, plant and equipment, transfer from intangible assets | — | — | 7.5 | |||||||||
Property, plant and equipment, transfer for providing for the sale of inventory | (112.7 | ) | (100.8 | ) | (34.8 | ) | ||||||
Impairment of assets | (55.2 | ) | (58.4 | ) | — | |||||||
Government grants | — | (4.3 | ) | (51.5 | ) |
37. | Segment information |
Management defined the Company’s operating segments based on the reports used for strategic decision making, reviewed by the chief operating decision-maker.
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Embraer S.A.
Notes to the Consolidated Financial Statements
In millions of U.S. dollar, unless otherwise stated
The chief operating decision-maker analyzed the business, dividing it geographically and in terms of markets for specific products. From a geographic perspective, Management considers the performance of the operations in Brazil, North America, Latin America, Asia Pacific, Europe and Others.
During the year, as a result of a change in corporate internal structure and the way in which the chief-operating decision-maker allocates resources and reviews businesses performance, the segment of Services & Support was established. Therefore, the segment information is restated as required by IFRS 8 for retrospective disclosure of the new segment.
From a product perspective, the analysis considers the following market segments:
37.1 | Commercial aviation business |
The Commercial Aviation business mainly involves the development, production and sale of commercial jets and aircraft leases.
• | ERJ 145 family, comprising the ERJ 135, ERJ 140 and ERJ 145 jets, certified to operate with 37, 44 and 50 seats, respectively. |
• | EMBRAER 170/190 family, comprising the EMBRAER 170, a70-seat jet, EMBRAER 175, a76-seat jet, EMBRAER 190, a100-seat jet and the EMBRAER 195, a108-seat jet. The EMBRAER 170 model has been operating commercially since 2004, the EMBRAER 175 and EMBRAER 190 models started commercial operations in 2006, and the EMBRAER 195 model in 2007. |
• | E-Jets E2, the second generation of theE-Jets family of commercial aircraft, consists of three newaircraft—E175-E2 with capacity of up to 88 seats,E190-E2 with up to 106 seats andE195-E2, with up to 132 seats in a typical single-class configuration. TheE190-E2 started commercial operations inn the first half of 2018. TheE195-E2 is scheduled to enter service in 2019 and theE175-E2 in 2021. |
37.2 | Defense and security business |
The defense and security business operations mainly involve research, development, production, modification and support for military defense and security aircraft, as well as a wide range of products and integrated solutions that include radars, special space systems (satellites) and advanced information and communications systems, such as Command, Control, Communications, Computer, Intelligence, Surveillance and Reconnaissance, or C4ISR systems.
The expansion and diversification of the portfolio, previously focused on military aircraft, was facilitated by a strategy of partnerships, acquisitions and organic growth.
The Company’s principal customer is currently the Brazilian Defense Ministry and, in particular, the Brazilian Air Force, although the diversification of the portfolio has resulted in a corresponding diversification of customers: the Brazilian Army and Navy and the Communications Ministry, as well as a growing international presence of our products and solutions.
The main products of the Defense and Security portfolio are as follows
• | Light Attack and Advanced Training Aircraft (Super Tucano) – the Super Tucano is a military turboprop that combines training and operational capacities with low acquisition and operating costs. The Super Tucano has the operational capacities for frontier surveillance, proximity aerial support and counter insurgence missions (COIN). |
• | Aircraft Modernization – The Company offers aircraft upgrade services and currently operates four contracted programs. The first, known asF-5BR, is focused on the structural and electronic upgrading of the Brazilian Air Force’sF-5 jet. The second,A-1M, concerns upgrading of the AMX, an advanced ground attack jet, for the Brazilian Air Force. The third program, contracted by the Brazilian Navy, is for the revitalization and incorporation of new technologies to theA-4 Skyhawk aircraft (denominatedAF-1 by the customer). In the fourth program, with the Brazilian Air Force, the Company was contracted to upgrade the EMB 145 AEW&C aircraft. |
• | The ISR family (Intelligence, Surveillance and Reconnaissance), based on the ERJ 145 platform, includes the EMB 145 AEW&C – Anticipated Aerial Alert and Control, EMB 145 Multi Intel – Remote Sensing andAir-Ground Surveillance and EMB 145 MP – Sea Patrol and Anti Submarine War models. Originally developed to serve the SIVAM program, versions have been ordered by the Greek, Mexican and Indian governments. |
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Embraer S.A.
Notes to the Consolidated Financial Statements
In millions of U.S. dollar, unless otherwise stated
• | KC-390 is a joint project between the Brazilian Air Force and Embraer to develop and produce tactical military transportation and aerial refueling and represents a significant advance in terms of technology and innovation for the airspace industry. The aircraft is designed to establish new standards in its category, with lower operating costs and the flexibility to execute a variety of missions, including troop carriage and transportation, air delivery, aerial refueling, search and rescue and aerial fire-fighting and combat. |
• | Transportation of Authorities and Special Missions – Derived from the commercial and executive aircraft platforms, these are aircraft used to transport government authorities or to carry out special missions. |
• | Radars – solutions offered through Bradar, a technology-based industry specialized in developing and producing radars for Remote Sensing and Defense, include radar for anti-aircraft artillery, surveillance of terrestrial activity, military and civil air traffic control, a communications intelligence system and synthetic aperture radar for cartography and precision monitoring services. |
• | Software and Systems Development – combining the expertise of Atech – Negócios em Tecnologia S.A. and investments by Embraer in system development and integration, provides specialized engineering services for the development, installation, revitalization and maintenance of critical control, defense and monitoring systems, as well as the machinery and equipment required for the services. |
• | Frontier monitoring and protection of strategic structures – Based on its experience in systems integration, and through its wholly owned subsidiary Savis, Embraer is dedicated to developing, designing, certifying, producing, integrating and implementing systems and services in the field of frontier monitoring and control and protection of critical infra-structures. |
• | Satellites - Visiona Space Technology, a joint venture between Embraer and Telebrás, was hired to provide and integrate the Brazilian Geostationary Defense and Communications Satellite system (SGDC), to meet the satellite communications requirements of the Brazilian government, including the National Broadband Program and a wide range of strategic defense transmissions, as well as the assimilation of technologies, marking Embraer’s presence in this market. Also provides services of supply and analysis of satellite images with the objective of developing major sensing projects in Brazil and neighboring countries. |
37.3 | Executive Jet business |
Executive Jets market operations comprise the development, production and sale of executive jets and the provision of support services, and leases of the following product lines:
• | Legacy 600 and Legacy 650 - executive jets in the super midsize and large categories, deliveries of which started in 2002 and 2010, respectively. |
• | Legacy 450 and Legacy500- executive jets in the Midlight and Midsize categories, deliveries of which started in 2014 and 2015, respectively. |
• | Phenom family - executive jets in the Entry Jet and Light Jet categories, respectively. The first deliveries of the Phenom 100 were made in 2008, and deliveries of the Phenom 300 started in 2009. |
• | Lineage 1000 - an ultra-large executive jet. Deliveries of this model started in 2009. |
• | Praetor 500 and Praetor 600 - most disruptive executive jets in the Midsize and Super Midsize categories, introduced in Q4 2018 with deliveries starting in 2nd half 2019. |
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Embraer S.A.
Notes to the Consolidated Financial Statements
In millions of U.S. dollar, unless otherwise stated
37.4 | Service & Support |
Segment created to strengthen Embraer’sknow-how and provide the best after-service solutions and support to its customers through a comprehensive portfolio of innovative and competitive solutions to ensure operational efficiency of products manufactured by Embraer and by other aircraft manufacturers, extending the useful life of commercial, executive and defense aircraft.
In addition to its experience in proposing support solutions to customers, OGMA (Embraer’s subsidiary in Portugal) offers MRO (Maintenance, Repair and Overhaul) services for a wide range of commercial, executive and defense aircraft, aircraft components and engines and also it is a significant supplier of steel and composite aviation structures to several aircraft manufacturers.
The services and support segment consists of 6 macro processes:
• | Capture customer needs and develop integrated support and services solutions: To develop integrated and competitive support solutions, technical services, materials, or MRO activities that meet the needs and expectations of Embraer customers. |
• | Sell and administrate support and services solution: To sell integrated and competitive technical support, service solutions, materials, or MRO activities, and administer support and service contracts. |
• | Deliver Material Solutions: To provide parts to customers, by direct sale or availability through special programs, manage component repair, provide inventory management services and advice on inventory formation, etc. |
• | Deliver Technical Solutions: To provide technical, operational and maintenance support to customers fleets with services such as providing training for pilots and commissioners, aircraft modification and enhancement projects, review of technical, operational and maintenance publications, and sustaining digital solutions. |
• | Deliver MRO Solutions: To provide maintenance services for aircraft, engines and landing gear (scheduled and unscheduled), aircraft modernization and component repair. |
• | Monitor and ensure operational excellence and customer relationship excellence: |
To guarantee the operational excellence of Materials, Technique and MRO Solutions, through maintaining accountability of the operational leadership and the support areas, consistent monitoring of operational KPIs, reviewing customer satisfaction through MFA practices, maintaining customer relationships with CRM and operational areas that directly interface with the customers.
37.5 | Other |
Operations in this segment relate to the supply of structural parts and mechanical and hydraulic systems, and production of agricultural crop-spraying aircraft.
Consolidated statements of income data by operating segment – year ended December 31, 2018:
Commercial Aviation | Defense and Security (i) | Executive Jets | Service and Support | Other | Total reportable Segments | Unallocated | Total | |||||||||||||||||||||||||
Revenue | 2,358.3 | 612.1 | 1,104.3 | 980.8 | 15.6 | 5,071.1 | — | 5,0711 | ||||||||||||||||||||||||
Cost of sales and services | (1,976.7 | ) | (702.3 | ) | (914.0 | ) | (689.0 | ) | (21.1 | ) | (4,303.1 | ) | — | (4,303.1 | ) | |||||||||||||||||
Gross profit | 381.6 | (90.2 | ) | 190.3 | 291.8 | (5.5 | ) | 768.0 | — | 768.0 | ||||||||||||||||||||||
Gross profit % | 16.2 | % | -14.7 | % | 17.2 | % | 29.8 | % | -35.3 | % | 15.1 | % | 15.1 | % | ||||||||||||||||||
Operating income (expense) | (229.1 | ) | (93.0 | ) | (235.0 | ) | (168.7 | ) | (6.9 | ) | (732.7 | ) | — | (732.7 | ) | |||||||||||||||||
Operating profit before financial income (expense) | 152.5 | (183.2 | ) | (44.7 | ) | 123.1 | (12.4 | ) | 35.3 | — | 35.3 | |||||||||||||||||||||
Financial income (expense), net | (171.5 | ) | (171.5 | ) | ||||||||||||||||||||||||||||
Foreign exchange gain (loss), net | — | — | ||||||||||||||||||||||||||||||
Profit before taxes on income | (136.2 | ) | ||||||||||||||||||||||||||||||
Income tax expense | (35.0 | ) | (35.0 | ) | ||||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Net income | (171.2 | ) | ||||||||||||||||||||||||||||||
|
|
(i) | The results of the Defense and Security segment include the negative impact of specialnon-recurring items of US$ 127.2 as described in Note 3.1. |
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Embraer S.A.
Notes to the Consolidated Financial Statements
In millions of U.S. dollar, unless otherwise stated
In the Commercial Aviation segment, one customer individually contributed a 17,9% share of net revenue in 2018 with an approximate value of US$ 907.2
Revenue by geographic area – year ended December 31, 2018:
Commercial Aviation | Defense and Security | Executive Jets | Service and Support | Other | Total | |||||||||||||||||||
North America | 1,449.4 | 145.7 | 936.7 | 422.2 | 5.0 | 2,959.0 | ||||||||||||||||||
Europe | 519.1 | 122.8 | 127.4 | 196.7 | — | 966.0 | ||||||||||||||||||
Asia Pacific | 324.1 | 1.6 | 1.6 | 104.7 | — | 432.0 | ||||||||||||||||||
Latin America, except Brazil | 11.9 | 68.3 | 22.5 | 47.3 | — | 150.0 | ||||||||||||||||||
Brazil | 0.2 | 258.9 | 16.1 | 157.2 | 10.6 | 443.0 | ||||||||||||||||||
Other | 53.6 | 14.8 | — | 52.7 | — | 121.1 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total | 2,358.3 | 612.1 | 1,104.3 | 980.8 | 15.6 | 5,071.1 | ||||||||||||||||||
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|
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|
|
|
|
|
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|
|
Assets by operating segment - year ended December 31, 2018:
Commercial Aviation | Defense and Security | Executive Jets | Service and Support | Other | Total reportable Segments | Unallocated | Total | |||||||||||||||||||||||||
Trade accounts receivable | 5.8 | 111.2 | 1.3 | 192.2 | 7.5 | 318.0 | — | 318.0 | ||||||||||||||||||||||||
Property, plant and equipment | 688.8 | 295.6 | 544.0 | 435.6 | 0.7 | 1,964.7 | — | 1,964.7 | ||||||||||||||||||||||||
Intangible assets | 862.5 | 11.0 | 829.0 | — | 78.4 | 1,780.9 | 117.9 | 1,898.8 | ||||||||||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Total | 1,557.1 | 417.8 | 1,374.3 | 627.8 | 86.6 | 4,063.6 | 117.9 | 4,181.5 | ||||||||||||||||||||||||
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|
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|
|
|
|
|
|
|
Assets by geographic area - year ended December 31, 2018:
North America | Europe | Asia Pacific | Brazil | Total | ||||||||||||||||
Trade accounts receivable | 83.9 | 106.4 | 8.8 | 118.9 | 318.0 | |||||||||||||||
Property, plant and equipment | 351.1 | 501.6 | 57.1 | 1,054.9 | 1,964.7 | |||||||||||||||
Intangible assets | 53.6 | 5.7 | — | 1,839.5 | 1,898.8 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | 488.6 | 613.7 | 65.9 | 3,013.3 | 4,181.5 | |||||||||||||||
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|
|
|
|
|
|
|
|
|
Consolidated statements of income data by operating segment – year ended December 31, 2017 Restated):
Commercial Aviation | Defense and Security | Executive Jets | Service and Support | Other | Total reportable Segments | Unallocated | Total | |||||||||||||||||||||||||
Revenue | 2,771.4 | 853.7 | 1,280.3 | 922.2 | 31.8 | 5,859.4 | — | 5,859.4 | ||||||||||||||||||||||||
Cost of sales and services | (2,178.1 | ) | (792.9 | ) | (1,126.4 | ) | (640.3 | ) | (26.4 | ) | (4,764.1 | ) | — | (4,764.1 | ) | |||||||||||||||||
Gross profit | 593.3 | 60.8 | 153.9 | 281.9 | 5.4 | 1,095.3 | — | 1,095.3 | ||||||||||||||||||||||||
Gross profit % | 21.4 | % | 7.1 | % | 12.0 | % | 30.6 | % | 17.0 | % | 18.7 | % | 18.7 | % | ||||||||||||||||||
Operating income (expense) | (230.5 | ) | (109.5 | ) | (206.0 | ) | (177.0 | ) | (13.9 | ) | (736.9 | ) | (16.5 | ) | (753.4 | ) | ||||||||||||||||
Operating profit before financial income (expense) | 362.8 | (48.7 | ) | (52.1 | ) | 104.9 | (8.5 | ) | 358.4 | (16.5 | ) | 341.9 | ||||||||||||||||||||
Financial income (expense), net | (40.6 | ) | (40.6 | ) | ||||||||||||||||||||||||||||
Foreign exchange gain (loss), net | 6.6 | 6.6 | ||||||||||||||||||||||||||||||
Loss before taxes on income | 307.9 | |||||||||||||||||||||||||||||||
Income tax expense | (27.9 | ) | (27.9 | ) | ||||||||||||||||||||||||||||
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| |||||||||||||||||||||||||||||
Net income | 280.0 | |||||||||||||||||||||||||||||||
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Embraer S.A.
Notes to the Consolidated Financial Statements
In millions of U.S. dollar, unless otherwise stated
Revenue by geographic area – year ended December 31, 2017 (Restated):
Commercial Aviation | Defense and Security | Executive Jets | Service and Support | Other | Total | |||||||||||||||||||
North America | 1,795.5 | 93.3 | 1,006.8 | 421.0 | 21.3 | 3,337.9 | ||||||||||||||||||
Europe | 200.1 | 133.5 | 161.7 | 196.3 | — | 691.6 | ||||||||||||||||||
Asia Pacific | 670.3 | 13.7 | 94.1 | 81.4 | — | 859.5 | ||||||||||||||||||
Latin America, except Brazil | 0.5 | 5.4 | 0.6 | 45.1 | — | 51.6 | ||||||||||||||||||
Brazil | 0.9 | 587.1 | 17.1 | 133.3 | 10.5 | 748.9 | ||||||||||||||||||
Other | 104.1 | 20.7 | — | 45.1 | — | 169.9 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total | 2,771.4 | 853.7 | 1,280.3 | 922.2 | 31.8 | 5,859.4 | ||||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
Assets by operating segment - year ended December 31, 2017 (Restated):
Commercial Aviation | Defense and Security | Executive Jets | Service and Support | Other | Total reportable Segments | Unallocated | Total | |||||||||||||||||||||||||
Trade accounts receivable | 2.7 | 22.9 | 6.8 | 256.3 | 8.2 | 296.9 | — | 297.0 | ||||||||||||||||||||||||
Property, plant and equipment | 781.3 | 578.4 | 298.7 | 445.8 | 0.7 | 2,104.9 | — | 2,104.9 | ||||||||||||||||||||||||
Intangible assets | 793.1 | 5.7 | 881.9 | — | 64.9 | 1,745.6 | 136.8 | 1,882.4 | ||||||||||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Total | 1,577.1 | 607.0 | 1,187.4 | 702.1 | 73.8 | 4,147.4 | 136.8 | 4,284.3 | ||||||||||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets by geographic area - year ended December 31, 2017 (Restated):
North America | Europe | Asia Pacific | Brazil | Total | ||||||||||||||||
Trade accounts receivable | 36.8 | 45.0 | 3.5 | 211.7 | 297.0 | |||||||||||||||
Property, plant and equipment | 378.0 | 555.4 | 56.3 | 1,115.2 | 2,104.9 | |||||||||||||||
Intangible assets | 31.2 | 6.8 | — | 1,844.4 | 1,882.4 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | 446.0 | 607.2 | 59.8 | 3,171.3 | 4,284.3 | |||||||||||||||
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|
|
|
|
|
|
|
|
|
Consolidated statements of income data by operating segment – year ended December 31, 2016 (Restated):
Commercial Aviation | Defense and Security | Executive Jets | Service and Support | Other | Total reportable Segments | Unallocated | Total | |||||||||||||||||||||||||
Revenue | 2,916.9 | 825.5 | 1,553.3 | 882.2 | 26.0 | 6,203.9 | — | 6,203.9 | ||||||||||||||||||||||||
Cost of sales and services | (2,325.3 | ) | (693.6 | ) | (1,343.7 | ) | (601.6 | ) | (17.8 | ) | (4,982.0 | ) | — | (4,982.0 | ) | |||||||||||||||||
Gross profit | 591.6 | 131.9 | 209.6 | 280.6 | 8.2 | 1,221.9 | — | 1,221.9 | ||||||||||||||||||||||||
Gross profit % | 20.3 | % | 16.0 | % | 13.5 | % | 31.8 | % | 31.5 | % | 19.7 | % | 0.0 | % | 19.7 | % | ||||||||||||||||
Operating income (expense) | (210.9 | ) | (87.6 | ) | (172.9 | ) | (188.5 | ) | (3.0 | ) | (662.9 | ) | (345.3 | ) | (1,008.2 | ) | ||||||||||||||||
Operating profit before financial income (expense) | 380.7 | 44.3 | 36.7 | 92.1 | 5.2 | 559.0 | (345.3 | ) | 213.7 | |||||||||||||||||||||||
Financial income (expense), net | (37.5 | ) | (37.5 | ) | ||||||||||||||||||||||||||||
Foreign exchange gain (loss), net | 4.4 | 4.4 | ||||||||||||||||||||||||||||||
Profit before taxes on income | 180.6 | |||||||||||||||||||||||||||||||
Income tax expense | (0.3 | ) | (0.3 | ) | ||||||||||||||||||||||||||||
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| |||||||||||||||||||||||||||||
Net income | 180.3 | |||||||||||||||||||||||||||||||
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Embraer S.A.
Notes to the Consolidated Financial Statements
In millions of U.S. dollar, unless otherwise stated
Revenue by geographic area – year ended December 31, 2016 (Restated):
Commercial Aviation | Defense and Security | Executive Jets | Service and Support | Other | Total | |||||||||||||||||||
North America | 2,157.3 | 166.4 | 1,147.7 | 416.6 | 22.7 | 3,910.7 | ||||||||||||||||||
Europe | 105.1 | 99.3 | 158.1 | 156.0 | — | 518.5 | ||||||||||||||||||
Asia Pacific | 581.6 | 22.2 | 98.4 | 85.0 | — | 787.2 | ||||||||||||||||||
Latin America, except Brazil | 63.9 | (0.7 | ) | 102.3 | 45.2 | — | 210.7 | |||||||||||||||||
Brazil | (6.9 | ) | 479.6 | 46.7 | 140.6 | 3.3 | 663.3 | |||||||||||||||||
Other | 15.9 | 58.7 | 0.1 | 38.8 | — | 113.5 | ||||||||||||||||||
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|
|
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|
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|
| |||||||||||||
Total | 2,916.9 | 825.5 | 1,553.3 | 882.2 | 26.0 | 6,203.9 | ||||||||||||||||||
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38. | SUBSEQUENT EVENT |
38.1 | Approval of the transaction between Embraer and The Boeing Company |
On January 10, 2019 the Brazilian Federal Government informed that it would not exercise the veto right on the strategic partnership between Embraer and The Boeing Co., under the terms mentioned in item 1 (Operations). Thereafter, on January 11, 2019 the Company’s Board of Directors decided (i) to ratify the resolution of December 17, 2018 that approved the Transaction; (ii) to authorize the execution of the Master Transaction Agreement, which provides the terms and conditions for the consummation of the strategic partnership in connection with the commercial aviation, the Contribution Agreement, which provides the terms and conditions for the creation of a joint venture for the promotion and development of new markets and applications for the multi-mission airplaneKC-390, as well as of the other agreements and documents necessary or convenient for the consummation of the Transaction; and (iii) to authorize, after the approval of the Transaction by Embraer’s shareholders, the executive officers to perform any act necessary for the consummation of the Transaction, including the transfer to the new company of the net equity comprised by assets, debts, properties, rights and obligations related to the commercial aviation business unit.
On January 24, 2019 Embraer and The Boeing Company entered into the Master Transaction Agreement and the Contribution Agreement and on February 26, 2019 the shareholders of the Company approved, with 96.8% of valid votes, the strategic partnership with The Boeing Company, as stated in the Management’s Proposal disclosed on January 24, 2019.
The consummation of the Transaction will be subject to (i) approval by antitrust authorities in Brazil, in the United States and other applicable jurisdictions; and (ii) the satisfaction of other conditions customary in similar transactions.
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