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 the 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 Release Agreementcollaboration agreement with authoritiesthe Attorney General’s Office of Mozambiquethe Dominican Republic in exchange for our cooperation with ongoing investigations in thethat country and under which we assume no financial obligations.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, Audit and AuditEthics Committee of the board of directors; the development of a program to monitor engagement of and payments to third parties; improvements to compliance policies, procedureprocedures 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 itsthis 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 furtheradditional information on our legal proceedings, see NoteNotes 23 and Note 26 to our 20172019 audited consolidated financial statements.
Class Action
In August, 2016, a putative securities class action was filed in a U.S. court against us and certain of our former and current executives, asserting claims in connection with allegedly false and misleading statements and omissions concerning the FCPA investigation and related matters. In October, 2016, a federal Court in New York appointed a lead plaintiff and a leading counsel for the putative class action. In December 2016, lead plaintiff filed an amended complaint. In June 2017, we filed a motion to dismiss all claims asserted in the amended complaint. At this time, the motion is pending before the court, and we believe that there is no adequate basis for estimating provisions related to this matter.
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:
any amounts allocated from the net income after taxes to a contingency reserve for anticipated losses and
or the reversion of the reserve constituted on previous fiscal years.
For furtheradditional information on amounts available for distributions, see Note 29 to our 20172019 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 forof the legal reserve equals 20% of ourpaid-in capital. 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.capital stock. Net losses, if any, may be charged against the legal reserve. We recognized a complement of US$12.0 million to our legal reserve for 2017 (0.8% ofpaid-in capital). The balance of our legal reserve was US$204.4 million, which was equal to 14.2%13.2% of ourpaid-in capital stock as of December 31, 2017.2019.
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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 infor which the anticipated loss was anticipatedforecast if the loss does not in fact occur, or written off in the event that the anticipated loss occurs. Second, if the amount of unrealized revenue exceedsfor distribution may be limited to the sum of:
The excess amount mayamounts 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.capital stock. The purpose of the investment and working capital reserve is to make investments in fixed assets or increase our working capital. ThisThe balance of the investment and working capital reserve may also be used 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 amortizeincrease our debts. 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 amount in excess ofreserved 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 balance of the investment and working capital reserve may be used:
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, 2017,2019, unappropriated retained earnings of US$2.491.91,856.7 million were recorded in our statutory parent company books under IFRS. As of December 31, 2017,2019, the amounts are net of minimum dividends and interest on shareholders’ equity paid or payable, as determined by the Brazilian Corporate Law.
For further dividendsadditional information, see Note 29 to our 20172019 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
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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.
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 distributed cumulatively orin 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 permitsallows 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 furtheradditional information on Brazilian taxes, see “Item 10E.10. Additional Information—10E. 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
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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 furtheradditional information on Brazilian taxes, see “Item 10E.10. Additional Information—10E. 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.
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 | Period in which Profits were Generated | Total Amount of Distribution | ||||||||||||||||
| (in R$ millions) | (in US$ millions)(1) | (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 | First quarter of 2015 | 29.4 | 9.2 | ||||||||||||||
June 11, 2015(2) | Second quarter of 2015 | 29.4 | 9.5 | Second quarter of 2015 | 29.4 | 9.5 | ||||||||||||||
August 06, 2015(2) | Third quarter of 2015 | 29.4 | 8.3 | Third quarter of 2015 | 29.4 | 8.3 | ||||||||||||||
December 10, 2015(2)(4) | Fourth quarter of 2015 | 29.5 | 7.6 | Fourth quarter of 2015 | 29.5 | 7.6 | ||||||||||||||
March 10, 2016(2) | First quarter of 2016 | 29.5 | 8.3 | First quarter of 2016 | 29.5 | 8.3 | ||||||||||||||
June 9, 2016(2) | Second quarter of 2016 | 29.4 | 9.2 | Second quarter of 2016 | 29.4 | 9.2 | ||||||||||||||
September 15, 2016(2) | Third quarter of 2016 | 14.7 | 4.5 | Third quarter of 2016 | 14.7 | 4.5 | ||||||||||||||
March 8, 2017(2) | First quarter of 2017 | 29.4 | 9.3 | First quarter of 2017 | 29.4 | 9.3 | ||||||||||||||
April 12, 2017(3) | Full year of 2016 | 75.0 | 23.4 | Full year of 2016 | 75.0 | 23.4 | ||||||||||||||
June 2, 2017(2) | Second quarter of 2017 | 29.4 | 8.9 | Second quarter of 2017 | 29.4 | 8.9 | ||||||||||||||
September 6, 2017(2) | Third quarter of 2017 | 29.3 | 9.2 | Third quarter of 2017 | 29.3 | 9.2 | ||||||||||||||
December 14, 2017(2)(5) | Fourth quarter of 2017 | 66.0 | 19.9 | 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. |
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No dividends nor interest on shareholders’ equity were approved for 2019. In 2019, we did not distribute interest on shareholders’ equity and interim dividends. 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. Our board of directors declared interest on shareholders’ equity with respect to profits generated during the first nine months of 2017, no interest on shareholders’ equity were approved for the fourth quarter of 2017. For furtheradditional information on mandatory distribution of dividends, see “Item 8A.8. Financial Information—8A. Dividends and Dividend Policy—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.
No significant changes or events have occurred afterCommercial Aviation Business Unit
As a result of our now-terminated strategic partnership with Boeing, on January 1, 2020, we implemented the closeinternalcarve-out of our Commercial Aviation business unit by means of the statementcontribution by Embraer to the capital stock of financial positionYaborã of the net assets comprising assets, liabilities, properties, rights and obligations (subject to certain exceptions) related to our Commercial Aviation business unit. For additional information on our now-terminated strategic partnership with Boeing, see “Item 4. Information on the Company—4A. History and Development of the Company—Termination of Strategic Partnership with Boeing.”
Credit and Guaranty Agreement
On March 10, 2020, Embraer Aviation Netherlands B.V. entered into a credit and guaranty agreement with Citibank, N.A., J.P. Morgan Chase Bank, N.A. and Banco Santander, S.A. and borrowed an aggregate principal amount of US$600.0 million on March 13, 2020, accruing interest at three-month LIBORplus 1.5% per year, maturing on December 15, 2020. On May 18, 2020, the credit and guaranty agreement was amended to, among other things, modify the maturity date to November 6, 2020.
Deregistration and Delisting of the Notes due 2022, 2025 and 2027 from the SEC and NYSE and Suspension of Yaborã’s SEC Reporting Obligations
As a result of our now-terminated strategic partnership with Boeing, on January 1, 2020, we implemented the internalcarve-out of our Commercial Aviation business unit by means of the contribution by Embraer to the capital stock of Yaborã of the net assets comprising assets, liabilities, properties, rights and obligations (subject to certain exceptions) related to our Commercial Aviation business unit. On March 17, 2020, Yaborã announced that it obtained the relevant consents of the holders of the notes due 2022, 2023, 2025 and 2027 and, accordingly, further amended the indentures under which the notes due 2022, 2023, 2025 and 2027 were issued. These amendments became effective upon satisfaction of the conditions precedent provided in the terms of the Consent Solicitation Process, which occurred on March 19, 2020. As a consequence, on March 30, 2020, a Form 25 was filed with the SEC to delist the notes due 2022, 2025 and 2027 from the NYSE (which delisting occurred on April 13, 2020), and on April 13, 2020, a Form 15 was filed in order to deregister the notes due 2022, 2025 and 2027, and to suspend Yaborã’s SEC reporting obligations that arose as a result of the substitution. With effect from April 13, 2020, Yaborã was relieved of its SEC periodic reporting requirement and, with effect from July 12, 2020, Yaborã will be relieved of all SEC reporting requirements (subject to annual testing of the relevant registered holder threshold on January 1 of each year to confirm that Yaborã continues to be eligible to suspend its SEC reporting obligations). For additional information, see “Item 5. Operating and Financial Review and Prospects—5B. Liquidity and Capital Resource—Credit Facilities and Lines of Credit.”
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Termination of the Strategic Partnership with Boeing
On April 25, 2020, Boeing provided notice to Embraer communicating its decision to terminate the Master Transaction Agreement providing for the strategic partnership. In addition, Boeing terminated the Contribution Agreement that provided for a joint venture for theC-390 Millennium multi-mission transport aircraft. Embraer strongly believes that Boeing wrongfully terminated the Master Transaction Agreement and the Contribution Agreement. We are pursuing all remedies against Boeing for the damages incurred by Embraer as a result of Boeing’s wrongful termination and violation of the MTA and the Contribution Agreement, including by means of arbitration proceedings that have commenced by both sides in connection with the termination of the MTA and/or the Contribution Agreement by Boeing. No assurance can be given as to the timing or outcome of the arbitration proceedings or any recovery that Embraer may receive or loss that Embraer may incur therefrom or with respect to the arbitration that Boeing has commenced against us. Starting on April 25, 2020 and as a result of the above, assets and liabilities previously presented as held for sale will be reclassified and measured as held for continuous use, as well as the results of operations previously reported as discontinued operations will be reported as continuing operations. For additional information on the now-terminated strategic partnership with Boeing and on the assets held for sale and discontinued operations as of December 31, 2017, other than2019, see “Item 4. Information on the events already describedCompany—4A. History and Development of the Company—Termination of Strategic Partnership with Boeing” and Notes 4 and 40 to our 2019 audited consolidated financial statements included elsewhere in this annual report.
Impairment Losses
Starting on April 25, 2020 and as a result of the unexpected and wrongful termination of the strategic partnership by Boeing on such date, assets and liabilities related to our Commercial Aviation business unit previously presented as held for sale will be reclassified and measured as held for continuous use, as well as the results of operations previously reported as discontinued operations will be reported as continuing operations.
The change in designation requires the remeasurement of the long-lived assets held for sale (fixed assets, intangibles, andrights-of-use) for the lower value between the book value and the recoverable value. The book value is adjusted according to the accumulated depreciation and amortization in the amount of US$83.5 million, not recognized while classified as held for sale, which will be recorded in the second quarter of 2020. The recoverable value, on the other hand, is determined by the highest amount between thevalue-in-use of these assets and the fair valueminus the expenses that would be incurred as a result of the sale. Since the initial designation of the Commercial Aviation business unit assets as “held for sale” until April 25, 2020, the long-lived assets held for sale were listed at the recoverable value by the lesser value between the book value and the fair value based on the purchase price set forth in the Master Transaction Agreement,minus the incremental costs incurred to close the Transaction.
According to our impairment test practices, the recoverable value of these assets will be measured based on the approach ofvalue-in-use using the discounted cash flow method, which is not substantially different from fair value under current market conditions. For information on our impairment test practices, see Note 19 to our 2019 audited consolidated financial statements included elsewhere in this annual report. The discount rate applied in this case is based on the rate of the weighted average cost of capital, reconciled with the estimated discount rate before taxes of 10.6%. That discount rate differs from the discount rate applied on the December 31, 2019 calculation due to our increased risk diversification and to our increased funding costs as a result of not concluding the Transaction.
We used our best estimate to calculate the future cash flows used in the determination of thevalue-in-use account for significant economic environment impacts resulting from theCOVID-19 pandemic on the commercial aviation market.
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As a result of the measurement of the recoverable value of the assets of the Commercial Aviation business unit (including fixed assets, intangibles andrights-of-use), we expect to recognize losses due to the impairment charges relating to these assets in the second quarter of 2020, which will impact our operating results for 2020. Based on our preliminary calculations, we estimate that these losses may vary from US$153.0 million to US$526.0 million taking into account our estimates of potential projected scenarios of future deliveries of commercial jets and market share development in the coming years following theCOVID-19 pandemic, according to currently available information. The estimated losses were calculated based on carrying amounts of CGUs and the foreign exchange rate as of March 31, 2020. The amount to be recorded as of June 30, 2020 is subject to revision and update based on certain assumptions and factors that are subject to change, including without limitation the foreign exchange rate and discount rate on June 30, 2020, and may vary materially from the estimates above. Since a substantial portion of the cost of goods sold is indexed in Brazilianreais, positive or negative fluctuations of 10% in thereal to U.S. dollar foreign exchange rate may impact themid-range of estimated impairment charges by approximately US$163.0 million and US$201.0 million, respectively.
For additional information on the impairment losses related to our Commercial Aviation business unit, see Note 40.3 to our 2019 audited consolidated financial statements included elsewhere in this annual report.
Impacts of the COVID-19 Pandemic
We have been monitoring theCOVID-19 pandemic situation and its impacts on our employees, operations, the global economy, the supply and the demand for our products and services. Our committee monitors on a daily basis the development of the pandemic situation and it has implemented contingency plans to act as quickly as necessary as the current situation continues to unfold.
As a result of theCOVID-19 pandemic, on March 17, 2020, our Brazilian corporate employees responsible for critical functions started to work from home and, on March 22, 2020, we decided to put our Brazilian employees that could not work remotely on paid leave until March 31, 2020. Until March 31, 2020, we were only carrying out essential activities at our facilities, including customer support, aircraft maintenance and manufacturing. On March 30, 2020, we further decided to put our Brazilian employees responsible fornon-critical functions on collective vacation from April 1 to April 9, 2020. During this temporary shutdown of our facilities, we implemented safety measures to adapt our facilities to the WHO guidelines. On April 10, 2020, we implemented a job preservation plan that included temporary furloughs, reduction in working hours and pay cuts to certain of our employees, as a means of guaranteeing their employment upon completion of the plan. This plan started on April 13, 2020 and will last between 60 and 90 days. On April 13, 2020, all of our Brazilian employees that could not work remotely and were not included in the job preservation plan returned to work at our adapted facilities. Our or other companies’ operations may be suspended again or remain suspended for a longer time.
Due to the uncertainty related to the spread ofCOVID-19, on March 26, 2020, we also suspended the projections relating to our expected results for 2020, dated as of November 12, 2019. We will issue updated projections for 2020 when we conclude the assessment of the effects that theCOVID-19 pandemic will cause to our business. For additional information onCOVID-19, see “Item 5. Operating and Financial Review and Prospects—5A. Operating Results—Current Conditions and Trends in ourIndustry—COVID-19.”
As of March 31, 2020, we recognized the following impacts on profit or loss as a result of theCOVID-19 pandemic:
Negative changes in the fair value of Republic Airways shares held as financial investments impacting our 2020 operating results in the amount of US$22.2 million. For additional information on our financial investments, see Note 7 to our 2019 audited consolidated financial statements included elsewhere in this annual report.
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Additional provision for expected credit losses over trade accounts receivable, contract assets and customer financing as a result of increase in credit risks of our customers during the COVID-19 pandemic in the amount of US$33.4 million.
As of March 31, 2020, we had a trigger event related to the impairment of assets in our Executive Aviation and Defense and Security business units due to the impacts of theCOVID-19 pandemic and its impact on our market capitalization devaluation in the first quarter of 2020. Based on our best estimate using certain assumptions forshort-to-medium term impacts on deliveries of the Executive Aviation and Defense and Security business units, we have not identified additional impairment charges to be recognized in addition to the impairment losses we identified and recognized in our 2019 audited consolidated financial statements. The Brazilianreal lost 29% of its value against the U.S. dollar in the same period causing a positive impact in our future cash flows on March 31, 2020, as a result of the reduction of cash outflows indexed in Brazilianreais (costs of goods sold and general expenses). However, an improvement in the currency exchange rate in the future may result in a future impairment charge. For additional information on the impairment losses we recognized in 2019, see Note 19 to our 2019 audited consolidated financial statements included elsewhere in this annual report.
For additional information on the impacts of theCOVID-19 pandemic, see Note 40.2 to our 2019 audited consolidated financial statements included elsewhere in this annual report.
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.
The reported high and low closing prices in U.S. dollars for the ADSs on the NYSE for the periods indicated are set forth in the following table. Our ADSs began trading on the NYSE on June 5, 2006, with each ADS representing four common shares issued by us.
| Price in US dollars per ADS | ||||||||
| High | Low | |||||||
2013 | ||||||||
Year | 39.22 | 26.80 | ||||||
2014 | ||||||||
Year | 39.97 | 29.86 | ||||||
2015 | ||||||||
Year | 37.04 | 24.22 | ||||||
2016 | ||||||||
First quarter | 30.34 | 24.15 | ||||||
Second quarter | 26.13 | 19.89 | ||||||
Third quarter | 22.02 | 17.25 | ||||||
Fourth quarter | 22.11 | 17.17 | ||||||
Year | 30.34 | 17.17 | ||||||
2017 | ||||||||
First quarter | 24.67 | 19.25 | ||||||
Second quarter | 22.14 | 18.02 | ||||||
Third quarter | 23.92 | 18.32 | ||||||
Fourth quarter | 25.26 | 18.48 | ||||||
Year | 25.26 | 18.02 | ||||||
Month: | ||||||||
September 2017 | 23.92 | 22.61 | ||||||
October 2017 | 22.91 | 18.83 | ||||||
November 2017 | 20.06 | 18.48 | ||||||
December 2017 | 25.26 | 18.95 | ||||||
January 2018 | 26.89 | 24.13 | ||||||
February 2018 | 27.95 | 25.38 | ||||||
March 2018 (through March 20) | 27.18 | 24.73 | ||||||
The tables below set forth, for the periods indicated, the reported high and low closing prices in nominalreais for the common shares on the B3. Our common shares began trading on theNovo Mercado segment of the B3 on June 5, 2006.
| Nominal reais per common share | ||||||||
| High | Low | |||||||
2013 | ||||||||
Year | 21.70 | 13.77 | ||||||
2014 | ||||||||
Year | 25.26 | 18.27 | ||||||
2015 | ||||||||
Year | 30.40 | 21.23 | ||||||
2016 | ||||||||
First quarter | 30.20 | 21.96 | ||||||
Second quarter | 23.42 | 17.35 | ||||||
Third quarter | 18.29 | 14.01 | ||||||
Fourth quarter | 18.26 | 14.01 | ||||||
Year | 30.20 | 14.01 | ||||||
2017 | ||||||||
First quarter | 19.18 | 16.00 | ||||||
Second quarter | 17.39 | 14.76 | ||||||
Third quarter | 18.69 | 15.20 | ||||||
Fourth quarter | 21.06 | 15.33 | ||||||
Year | 21.06 | 14.76 | ||||||
Month: | ||||||||
September 2017 | 18.69 | 17.67 | ||||||
October 2017 | 18.11 | 15.45 | ||||||
November 2017 | 16.39 | 15.33 | ||||||
December 2017 | 21.06 | 15.43 | ||||||
January 2018 | 21.80 | 19.40 | ||||||
February 2018 | 22.84 | 20.40 | ||||||
March 2018 (through March 20) | 22.20 | 20.44 | ||||||
On March 20, 2018, the closing sale price for our common shares on the B3 was R$20.44. On the same date, the closing sale price for our ADSs on the NYSE was US$24.73. 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—CBLC – 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.
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The B3 is less liquid than the NYSE and other major exchanges in the world. TheAs of December 31, 2019, the B3 had an aggregate market capitalization of approximately R$3.24.8 trillion, equivalent to US$957 billion as of December 31, 2017.1.2billion. In comparison, the NYSE had a market capitalization of approximately US$29.623.3 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, 2017,2019, we accounted for approximately 0.5%0.3% 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, 2017,2019, the ten largest companies listed on the B3 represented approximately 40%39.5% 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.
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, (or 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), (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, common shares and 80% of the price paid per share of controlling block preferred shares, (iii) grant voting rights to holders of preferredcommon shares in connection with certain corporate restructurings and related partyrelated-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, and (ii) grantingtag-along rights for all shareholders in connectionhave at least two, or the equivalent of 20% of the board members, whichever is bigger, independent members on the board of directors, with a transferterm limited to two
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years, (iii) follow stricter disclosure policies with regards to the company’s policies, the internal rules of controlprocedures, the code of business conduct and periodic reports of the company, offeringaudit committee, and (iv) adopt stricter compliance procedures, including an audit committee, an internal audit and other risk management controls. Regarding the same price paid per shareobligation to ensure that shares of the issuer representing 25% of its total capital are effectively available for controlling block common shares.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 Commission), 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.
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. In the event that a holder of ADSs exchangesPursuant to CMN Resolution No. 4,373, in order for an investor to surrender ADSs for commonthe purpose of withdrawing the shares represented thereby, the holder willinvestor 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 entitledresponsible, among other things, for keeping and updating the investors’ certificates of registrations with the Central Bank, which entitles registered foreign investors to continue to relytrade the underlying shares directly on the depositary’s electronic certificate of registration for five business days after the exchange. Thereafter, the holder may not be able to obtain and remit U.S. dollars abroad upon the disposition of the common shares, or distributions relating to the common shares, unless the holder obtains a new electronic certificate of registration or registers its investment in the common shares under Resolution No. 4,373.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;
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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.
| 9D. |
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Not applicable.
Dilution |
Not applicable.
10B. Memorandum and Articles of Association
| 9F. | Expenses of the Issue |
Not applicable.
| Item 10. | ADDITIONAL INFORMATION |
| 10A. | Share Capital |
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,therefor, (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.
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Description of Capital Stock
General
As of December 31, 2017,2019, our capital stock consisted of a total of 740,465,044 issued common shares, without par value, including 7,423,7054,385,218 common shares held in treasury and one special class of common shareshares known as the “golden share,” held by the Brazilian government. Our bylaws authorize the board of directors to increase the capital stock up to 1,000,000,001,000,000,000 common shares, without seeking specificirrespective of any amendment to our bylaws and of shareholder approval. AllAs of ourMarch 31, 2020, we had 736,171,905 outstanding common shares, arewhich were fully paid. Our shareholders must approve at a shareholders’ meeting any capital increase that exceeds the above-referenced authorized amounts.capital stock. Our shareholders are not liable for further capital calls. Their liability is limited to the amount of any portion of our capital stock which they have subscribed but have 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 outstanding common shares outstanding.shares. The acquisition of the shares was made on the B3 and the common shares bought back will bewere kept in treasury form, and the treasury shares woulddid 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 16. Reserved—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 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.TheA total of 3,000,000 common shares were repurchased at an average price of R$20.00 per share from March 17 through June 30.30, 2016.
On June 02,2, 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. TheA total of 3,000,000 common shares were repurchased at an average price of R$16.13 per share from June 6 through August 29, 2017.
In 2018 and 2019, 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.
Changes to rights granted to common shares under our bylaws would generally require an amendment to our bylaws. Under the Brazilian Corporate Law, an amendment to our bylaws requires shareholder approval in a shareholders’ meeting. Changes to our bylaws would generally require approval by a simple majority vote of holders of common shares, except for matters that require the approval of shareholders representing at leastone-half of the issued and outstanding voting shares or for matters subject to the approval of our golden share. For additional information on qualified quorum matters and on voting rights relating to the golden share, see “—Voting Rights of Shares—Qualified Quorum Matters” and “—Voting Rights of Shares—Golden Share,” respectively.
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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;shares (except for meetings convened to amend our bylaws or to waive the public tender offer required for delisting fromNovo Mercado, which require a quorum of at leasttwo-thirds of the common shares at first call); 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 Boardboard of Directorsdirectors or Fiscal Council.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 furtheradditional information on payment of dividends on our shares, see “Item 8A.8. Financial Information—8A. 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.
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;
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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”;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 the general shareholders’ meeting. Pursuant to our bylaws and the B3 listing agreement in connection with the listing of our shares on theNovo Mercado, listing segment of B3, we cannot issue shares without voting rights or with restricted voting rights.
Qualified Quorum Matters
Under the Brazilian Corporate Law, the approval of shareholders representing at leastone-half of the issued and outstanding voting shares is required for the matters described below:
reducing the mandatory distribution of dividends;
changing our corporate purpose;
merging into or consolidating with another company, subject to the conditions set forth in the Brazilian Corporate Law;
transferring all of our shares to another company or receiving 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);
participating in a centralized group of companies as defined under the Brazilian Corporate Law and subject to the conditions set forth therein;
conducting aspin-off;
dissolving or liquidating us;
canceling any ongoing liquidation of us; or
creating preferred shares with greater privileges than the existing shares or changing a priority, preference, privilege or condition of redemption or amortization of preferred shares.
In the event of the last item described above, the approval of shareholders representing the majority of issued and outstanding shares of the affected class would also be required. Our bylaws currently provide that our capital stock shall be divided exclusively into common shares and the only special class is our golden share. For additional information on the golden share, see “—Golden Share.”
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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.
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 | Voting Rights as a Percentage of our Capital Stock | ||
1% | 1% | 1% | ||
2% | 2% | 2% | ||
3% | 3% | 3% | ||
4% | 4% | 4% | ||
5% | 5% | 5% | ||
> 5% | 5% | 5% |
LimitationLimitations 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“—Limitations on the Voting Rights of Certain Holders of Common Shares.”
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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 considered to be persons orany individuals, legal entities, investment funds or clubs and any other entitiesorganizations that are not composed ofconsidered Brazilian shareholders and that cannot evidence that they satisfy the requirements to be consideredfor registration as Brazilian shareholders.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.
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. |
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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) | % 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 | 5 | 5 | 5 | 5 | 1.00 | ||||||||||||||||||||
Brazilian B | 5 | 5 | 5 | 5 | 1.00 | 5 | 5 | 5 | 5 | 1.00 | ||||||||||||||||||||
Brazilian C | 5 | 5 | 5 | 5 | 1.00 | 5 | 5 | 5 | 5 | 1.00 | ||||||||||||||||||||
Brazilian D | 5 | 5 | 5 | 5 | 1.00 | 5 | 5 | 5 | 5 | 1.00 | ||||||||||||||||||||
Brazilian E | 5 | 5 | 5 | 5 | 1.00 | 5 | 5 | 5 | 5 | 1.00 | ||||||||||||||||||||
Brazilian F | 5 | 5 | 5 | 5 | 1.00 | 5 | 5 | 5 | 5 | 1.00 | ||||||||||||||||||||
Brazilian G | 5 | 5 | 5 | 5 | 1.00 | 5 | 5 | 5 | 5 | 1.00 | ||||||||||||||||||||
Brazilian H | 5 | 5 | 5 | 5 | 1.00 | 5 | 5 | 5 | 5 | 1.00 | ||||||||||||||||||||
Brazilian I | 5 | 5 | 5 | 5 | 1.00 | 5 | 5 | 5 | 5 | 1.00 | ||||||||||||||||||||
Brazilian J | 5 | 5 | 5 | 5 | 1.00 | 5 | 5 | 5 | 5 | 1.00 | ||||||||||||||||||||
Brazilian K | 5 | 5 | 5 | 5 | 1.00 | 5 | 5 | 5 | 5 | 1.00 | ||||||||||||||||||||
Brazilian L | 5 | 5 | 5 | 5 | 1.00 | 5 | 5 | 5 | 5 | 1.00 | ||||||||||||||||||||
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Total Brazilians | 60 | 60 | 60 | 60 | 1.00 | 60 | 60 | 60 | 60 | 1.00 | ||||||||||||||||||||
Non-Brazilians(1) | 40 | 40 | 40 | 40(2) | 1.00 | 40 | 40 | 40 | 40 | (2) | 1.00 | |||||||||||||||||||
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Total | 100 | 100 | 100 | 100 | 1.00 | 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. |
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) | % 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 | 20 | 5 | 5.0 | 8.57 | 0.25 | ||||||||||||||||||||
Brazilian B | 5 | 5 | 5.0 | 8.57 | 1.00 | 5 | 5 | 5.0 | 8.57 | 1.00 | ||||||||||||||||||||
Brazilian C | 5 | 5 | 5.0 | 8.57 | 1.00 | 5 | 5 | 5.0 | 8.57 | 1.00 | ||||||||||||||||||||
Brazilian D | 5 | 5 | 5.0 | 8.57 | 1.00 | 5 | 5 | 5.0 | 8.57 | 1.00 | ||||||||||||||||||||
Brazilian E | 5 | 5 | 5.0 | 8.57 | 1.00 | 5 | 5 | 5.0 | 8.57 | 1.00 | ||||||||||||||||||||
Brazilian F | 5 | 5 | 5.0 | 8.57 | 1.00 | 5 | 5 | 5.0 | 8.57 | 1.00 | ||||||||||||||||||||
Brazilian G | 5 | 5 | 5.0 | 8.57 | 1.00 | 5 | 5 | 5.0 | 8.57 | 1.00 | ||||||||||||||||||||
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Total Brazilians | 50 | 35 | 35.0 | 59.99 | 1.00 | 50 | 35 | 35.0 | 59.99 | 1.00 | ||||||||||||||||||||
Non-Brazilians(1) | 50 | 50 | 23.3(2) | 40.00 | 0.47 | 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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Shareholder | % Shares Attending | Effective % of Votes After 5% Vote Restriction | Effective % of Votes After Non- Brazilian Restriction | % of Valid Votes | Vote Ratio (Votes/ Share) | |||||||||||||||
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) | % 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 | 5 | 5 | 5.0 | 10.0 | 1.00 | ||||||||||||||||||||
Brazilian B | 5 | 5 | 5.0 | 10.0 | 1.00 | 5 | 5 | 5.0 | 10.0 | 1.00 | ||||||||||||||||||||
Brazilian C | 5 | 5 | 5.0 | 10.0 | 1.00 | 5 | 5 | 5.0 | 10.0 | 1.00 | ||||||||||||||||||||
Brazilian D | 5 | 5 | 5.0 | 10.0 | 1.00 | 5 | 5 | 5.0 | 10.0 | 1.00 | ||||||||||||||||||||
Brazilian E | 5 | 5 | 5.0 | 10.0 | 1.00 | 5 | 5 | 5.0 | 10.0 | 1.00 | ||||||||||||||||||||
Brazilian F | 5 | 5 | 5.0 | 10.0 | 1.00 | 5 | 5 | 5.0 | 10.0 | 1.00 | ||||||||||||||||||||
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Total Brazilians | 30 | 30 | 30.0 | 60.0 | 1.00 | 30 | 30 | 30.0 | 60.0 | 1.00 | ||||||||||||||||||||
Non-Brazilians A | 30 | 5 | 2.2(2) | 4.4 | 0.07 | 30 | 5 | 2.2 | (2) | 4.4 | 0.07 | |||||||||||||||||||
Non-Brazilians(1) | 40 | 40 | 17.8(2) | 35.6 | 0.44 | 40 | 40 | 17.8 | (2) | 35.6 | 0.44 | |||||||||||||||||||
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Total | 100 | 75 | 50.0 | 100.0 | 0.50 | 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. |
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) | % hares 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 | 30 | 5 | 5.0 | 12 | 0.17 | ||||||||||||||||||||||||||||||
Brazilian B | 25 | 5 | 5.0 | 12 | 0.20 | 25 | 5 | 5.0 | 12 | 0.20 | ||||||||||||||||||||||||||||||
Brazilian C | 5 | 5 | 5.0 | 12 | 1.00 | 5 | 5 | 5.0 | 12 | 1.00 | ||||||||||||||||||||||||||||||
Brazilian D | 5 | 5 | 5.0 | 12 | 1.00 | 5 | 5 | 5.0 | 12 | 1.00 | ||||||||||||||||||||||||||||||
Brazilian E | 5 | 5 | 5.0 | 12 | 1.00 | 5 | 5 | 5.0 | 12 | 1.00 | ||||||||||||||||||||||||||||||
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Total Brazilians | 70 | 25 | 25.0 | 60 | 1.00 | 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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Shareholder | % hares Attending | Effective % of Votes After 5% Vote Restriction | Effective % of Votes After Non- Brazilian Restriction | % of Valid Votes | Vote Ratio (Votes/ Share) | |||||||||||||||
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
In connection with the merger of former Embraer with and into Embraer approved on March 31, 2006, Cia. Bozano, PREVI and SISTEL, the former controlling shareholders of former Embraer, terminated the shareholders’ agreement governing matters relating to their equity ownership of former Embraer, and relinquished voting control over former Embraer in favor of all Embraer shareholders. As of the implementation of the merger, Cia. Bozano, PREVI and SISTEL no longer have the ability to control the outcome of matters submitted to a vote of Embraer shareholders. 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 partythird-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.
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 day30-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.
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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 enterdentered 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.
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.
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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 furtheradditional information on our board of directors, see “Item 6A.6. Directors, Senior Management and Employees—6A. Directors and Senior Management—boardBoard of directors”Directors” and “Item 6C.6. Directors, Senior Management and Employees—6C. 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, thatwhich also has tomust 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.
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.
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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 furtheradditional information on the risks related to our preemptive rights, see “Item 3D.3. Key Information—3D. 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, merger of shares (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 dissenting shareholders may exercise the right of withdrawal only in relation to the shares held on the date that is the earliest between the date of the publication of the first call notice for the shareholders’ meeting that approved the resolution giving rise to the right of withdrawal, or on the date of publication of the material fact in relation to such resolution.
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, incorporationmerger 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. According to CVM Instruction 565, the applicable general stock index is the Bovespa index, or Ibovespa, of which we are a component.
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; |
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| (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. |
“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 theNovo Mercado, our bylaws, the Brazilian Corporate Law, the rules published by the CMN, the Central Bank, the CVM, any shareholders’ agreement filed at our headquarters, 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. Chamber (“Rules”).
According to Chapter 12item 1.4 of the Rules, unless otherwise agreed by the Parties, the parties may consensually agree to use another arbitration chamber or center to resolve their disputes.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 must agreeagrees to comply with the rules of the B3 Arbitration Chamber within 30 days of the acquisition of the shares.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’“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
The
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economic value of those shares as determined in a valuation report must be prepared by a specialized and independent firmcompany of recognized experience, which will be chosen at a shareholders’ meeting from a list of three institutions presented by the shareholders representing theour 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 theany controlling shareholder or group of shareholders at the time, if any, his/her spousepartners and any dependents as described in his/her income tax statement, in caseif the controlling shareholder is an individual; treasury shares; shares held by our affiliates;affiliates and by other companies that are a part of our economic group, as well as blank votes) from a list of three institutions presented by our board of directors.. All the expenses and costs incurred in connection with the preparation of the valuation report must be borne by the offeror.
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
Our delisting from theNovo Mercado, either by voluntary or compulsory action or by virtue of corporate restructuring, shall observe the rules contained in the Regulation of theNovo Mercado. At any time, we may delist our shares from theNovo Mercado, provided that a public tender offer for the acquisition of our outstanding shares is carried out.
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 athe 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 ofpresent at meeting may determine the decision must conduct apersons responsible for carrying out the tender offer or decide to waive the tender offer.
If the public tender offer for the acquisition ofis carried out our shares.
At any time, we may delist our shares from theNovo Mercado,provided thatdelisting in conditioned to shareholders representing more than 1/3 (one third) of our outstanding shares having (i) expressly agreeagreed with the delisting decision or (ii) acceptaccepted 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 for the public tender offer 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.
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A voluntary delisting from theNovo Mercadomay occur regardless of the completion of the tender offer mentioned above in the event of a waiver approved at a general shareholders’ meeting, which must observe the rules and conditions of the Regulation of theNovo Mercado.
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.
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, Embraer and Boeing and certain of their subsidiaries entered into the MTA and certain other transaction agreements, pursuant to which, subject to certain approvals and other conditions precedent, a Brazilian subsidiary of Boeing would acquire a controlling stake in Embraer’s Commercial Aviation business unit and Embraer and Boeing or their respective subsidiaries would form a joint venture for the promotion and development of new markets and applications for theC-390 Millennium multi-mission aircraft.
None.Subject to the conditions in the MTA, upon consummation of the Transaction, Boeing Brazil would 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 US$4.2 billion, subject to adjustments customary for transactions of the same nature.
10D. Exchange ControlsOn February 26, 2019, the shareholders of Embraer approved the terms and conditions of the Transaction at an annual and special general shareholders’ meeting. On January 1, 2020, we implemented the internalcarve-out of our Commercial Aviation business unit by means of the contribution by Embraer to the capital stock of the Commercial Aviation NewCo of the net assets comprising assets, liabilities, properties, rights and obligations (subject to certain exceptions) related to our Commercial Aviation business unit. In exchange for the contribution, the Commercial Aviation NewCo issued common shares and redeemable preferred shares to Embraer. The Commercial Aviation NewCo’s redeemable preferred shares have a liquidation preference, a right to receive an annual fixed cumulative dividend payable at a 3.3% rate, a right to be redeemed after two years from the date of issuance, and no voting rights.
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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) had agreed to form a joint venture for the promotion and development of new markets and applications for the multi-mission airplaneC-390 Millennium, based on jointly identified opportunities, and development, manufacture and sales of theC-390 Millennium, in which joint venture Embraer or its subsidiary would hold the majority of the share capital.
TheC-390 Millennium NewCo would 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 would hold 51% and Boeing or the Boeing Member Entity would hold 49% of the membership interests of EB Defense, LLC, in accordance with the Amended and Restated Limited Liability Company Agreement, which would 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.
On April 25, 2020, we received a notice from Boeing communicating its decision to terminate the MTA, based on Boeing’s assertion that certain closing conditions in the MTA had not been satisfied by Embraer by the April 24, 2020 termination date in the MTA. In addition, Boeing terminated the Contribution Agreement.
We strongly believe that Boeing wrongfully terminated the MTA and the Contribution Agreement and that it had a continuing obligation to abide by the terms thereof. Embraer strongly believes that Embraer was in full compliance with its obligations under the MTA and the Contribution Agreement. We are pursuing all remedies against Boeing for the damages incurred by Embraer as a result of Boeing’s wrongful termination and violation of the MTA and the Contribution Agreement, including by means of arbitration proceedings that have commenced by both sides in connection with the termination of the MTA and/or the Contribution Agreement by Boeing. No assurance can be given as to the timing or outcome of the arbitration proceedings or any recovery that Embraer may receive or loss that Embraer may incur therefrom or with respect to the arbitration that Boeing has commenced against us.
For risks relating to the termination of the Transaction, see “Item 3. Key Information—3D. Risk Factors—Risks Relating to Embraer—Legal proceedings pertaining to the now-terminated strategic partnership with Boeing, including arbitration proceedings related to Boeing’s termination of and failure to close the MTA and/or the Contribution Agreement, may adversely impact our business, financial condition and results of operations.”
| 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.
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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.
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 furtheradditional information on Brazilian taxes, see “Item 3D.3. Key Information—3D. 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.10. Additional Information—10E. 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 whothat 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.
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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.
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.
In this context, it should be noted that Law No. 11,638 dated December 28, 2007 significantly altered the Brazilian corporate law in order to align the generally accepted Brazilian accounting standards more closely with IFRS. Nonetheless, Law No. 11,941 dated May 27, 2009 introduced the Transitory Tax Regime, or the RTT, in order to render neutral, from a tax perspective, all of the changes provided by Law 11,638. Under the RTT, for tax purposes, legal entities should observe the accounting methods and criteria as in force on December 31, 2007.
Profits determined pursuant to Law 11,638/07, or IFRS Profits, may differ from the profits calculated pursuant to the accounting methods and criteria as in force on December 31, 2007, or 2007 Profits.
While it was a general market practice to distribute exempted dividends with reference to the IFRS Profits, Normative Ruling No. 1,397, issued by the Brazilian tax authorities on September 16, 2013, has established that legal entities should observe 2007 Profits in order to determine the amount of profits that could be distributed as exempted income to its beneficiaries.
Any profits paid in excess of said 2007 Profits, or Excess Dividends, should, in the tax authorities’ view and in the specific case ofnon-resident beneficiaries, be subject to the following rules of taxation: (i) 15% withholding tax, or WHT, in case of case of beneficiaries domiciled abroad, but not in Low or Nil Tax Jurisdiction (as defined below), and (ii) 25% WHT, in case of beneficiaries domiciled in Low or Nil Tax Jurisdiction (as defined below).
In order to mitigate potential disputes on the subject, Law No. 12,973, dated May 13, 2014, in addition to revoking the RTT, introduced a new set of tax rules, or the New Tax Regime, including new provisions with respect to Excess Dividends. Under these new provisions: (i) Excess Dividends related to profits assessed from 2008 to 2013 will be exempt; (ii) potential disputes remain concerning the Excess Dividends related to 2014 profits, unless our company voluntarily elects to apply the New Tax Regime in 2014; and (iii) as of 2015, once the New Tax Regime is mandatory and has completely replaced the RTT, dividends should be considered fully exempt. We have not elected to apply to the New Tax Regime in 2014. 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. 4,373,4,373/14 from the Brazilian Central Bank, 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.
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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%.
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 furtheradditional information on taxation on interest on shareholders’ equity, see “Item 8A.8. Financial Information—8A. 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. TheseThis interest areis 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
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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. 11,727,9,430, of June 23, 2008.27 December, 1996. Brazilian tax authorities periodically update the list of countries/jurisdictions and regimes that shall be treated as Tax Favorable Jurisdiction and PTR.
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(the 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 mentionedabove-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%.
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However, currency exchange transactions carried out for the inflowin-flow 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-heldpublicly 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, and (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.
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;
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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 voting stock;total combined vote or value of its outstanding common shares or ADSs;
persons subject to special tax accounting rules under Section 451(b) of the Code;
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 Statestate 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.
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.
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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 receiveddividends-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 for short-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 underlyingthrough 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 2017 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 20182019 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 cannot assure you it will not be consideredbecome a PFIC for the current, or any pastin 2020 or future tax year. The potential application of the PFIC rules is further discussed below.years. See “—Passive Foreign Investment Company Rules.”
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 or are held to 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. For this purpose, passive income generally includes, among other things, dividends, interest, rents, royalties and gains from the disposition of investment assets, subject to various exceptions. If thenon-U.S. corporation owns at least 25% (by value) of the stock of another corporation, it will be treated, for purposes of the PFIC tests, as owning its proportionate share of the other corporation’s gross assets and receiving its proportionate share of the other corporation’s gross income. However, if thenon-U.S. corporation owns less than 25% (by value) of the stock of another corporation, that stock may be treated as a passive asset.
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 for 2019 or in prior years. Although Embraer is not aware that it will be a PFIC in 2020 or future years, this will depend on the nature, amount and doesvalue of Embraer’s operations, activities, assets and income as of the relevant time of determination. Accordingly, there can be no assurance that Embraer will not expect to become a PFIC for subsequent taxable years.2020 or a future year.
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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.
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 and its customers.Embraer. The Act introducesintroduced tax reform that reducesreduced the current corporate federal income tax rate from 35% to 21%, enactsenacted 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 introducesintroduced a base erosion and anti-abuse tax (the BEAT), among other provisions.
For the year ended December 31, 2019, Embraer recorded an immediatewrite-off of capital investments in the amount of US$13.3 million corresponding to qualified property placed in service in 2019. For the year ended December 31, 2018, Embraer recorded an immediatewrite-off of capital investments in the gross amount of US$21.6 million corresponding to qualified property placed in service in 2018.
Effective for tax years beginning after December 31, 2017, the CompanyAct allows domestic corporations a new tax deduction in the amount of 37.5% of foreign derived intangible income (FDII). For the years ended December 31, 2018 and 2019, Embraer’s estimated FDII deduction is approximately US$9.1 million and US$4.8 million, respectively.
For the year ended December 31, 2017, Embraer 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 CompanyEmbraer recorded a net reduction of $9.5approximately US$9.5 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’sEmbraer’s consolidated statement of income. In addition,There were no subsequent revaluations of Embraer’s deferred tax assets and liabilities due to the Company took advantage of an additional immediatewrite-off of capital investments inrate change for the amount of $4.8 million corresponding to qualified property placed in service after September 27, 2017 and beforeyear ended December 31, 2017.2019.
Effective January 1, 2018, the BEAT is applicable to domesticcertain 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 CompanyEmbraer and its subsidiaries to foreign related parties are for procurement of aircraft parts. TheseMost of these payments are recorded as a component of cost of sales and therefore are excluded from the BEAT base. WhileIn addition, the Company will require additional detailed analysis in orderAct contains significant new limitations on the ability of a taxpayer to fully assessdeduct business interest paid or accrued on debt properly allocable to a trade or business. Embraer is performing an assessment of the impact of BEAT the Company does not currently anticipate this provision to have a significant impact to its consolidated financial statements. In addition, the Company is currently analyzing the extent to which the Foreign-Derived Intangible Income deduction andas well as the interest expense limitation rules may apply toand believes that these provisions should not have a significant adverse impact on Embraer for the Company in 2018.year ended December 31, 2019.
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
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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.
| 10F. |
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,das Nações Unidas, 8501, 30th floor, Eldorado Business Tower,04543-90705425-070, Pinheiros, São Paulo, SP, Brazil.
| 10I. | Subsidiary Information |
Not required.
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.
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Interest Rate Risk
In our financial statements as of and for the year ended December 31, 2019, we recorded and presented our Commercial Aviation business unit and related services in a single line item as discontinued operations in the statements of operations, and the balances of assets and liabilities were presented as held for sale in the statement of financial position. Our 2019 audited consolidated statement of operations retroactively presented this information for the years ended 2018 and 2017 for comparative purposes to account for the aforementioned events. The below analysis considers our continuing and discontinued operations.
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 shortshort- and long-term debt obligations totaled US$4,198.53,392.3 million as of December 31, 20172019 and were denominated in U.S. dollars, Brazilianreais and Euros. Of the total amount of debt denominated in U.S. dollars (i.e., US$3,555.43,328.4 million), US$3,164.13,174.0 million was subject to fixed rates. The remaining floating rate U.S. dollar-denominated debt, or US$154.4 million, which corresponds to 4.6% of our debt denominated U.S. dollars, was indexed to LIBOR. LIBOR or SIFMA. It is likely that we will have to transition away from the LIBOR as a benchmark to our debt in 2021, since the banks’ obligations to report information used to set LIBOR will cease by then. As of the date of this annual report, we are discussing and analyzing the replacement of LIBOR with the applicable bank, and we have not reached a conclusion regarding this transition.
Of our US$629.143.4 million Brazilianreal-denominated debt as of December 31, 2017,2019, US$6.20.7 million bears interest at a variable rate based on the TJLP, and US$623.042.7 million bears interest at a fixed rate of 6.2%3.5% per annum. The TJLP was 7.0%5.57% per annum as of December 31, 2017.2019. Our Euro denominated debt totaled US$14.020.5 million as of fixed rate as of December 31, 2017.2019.
The table below provides information about our short-term debt obligations as of December 31, 2017 that2019, considering our continuing operations, which are sensitive to changes in interest rates and foreign currency exchange rates.
| Weighted Average Interest Rate 2019(1) | Total Amount Outstanding | Total Fair Value | ||||||||||||||||||||
| Weighted Average Interest Rate 2017(1) | Total Amount Outstanding | Total Fair Value | (%) | (in US$ millions) | ||||||||||||||||||
Short-Term Debt | (%) | (in US$ millions) | ||||||||||||||||||||
U.S. dollars (fixed rate) | 5.59 | 54.4 | 54.4 | |||||||||||||||||||
U.S. dollars (LIBOR indexed) | 1.45 | 23.4 | 23.4 | 2.35 | 2.1 | 3.3 | ||||||||||||||||
Euro (fixed rate) | 1.33 | 9.4 | 9.4 | |||||||||||||||||||
Reais (fixed rate) | 6.23 | 297.7 | 297.7 | 3.50 | 12.6 | 11.7 | ||||||||||||||||
Reais (TJLP indexed) | 6.81 | 4.0 | 4.0 | 5.00 | 0.2 | 0.2 | ||||||||||||||||
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| |||||||||||||||||||
Total short-term debt | 388.9 | 388.9 | 14.9 | 15.2 | ||||||||||||||||||
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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, |
The table below provides information about our long-term debt obligations as of December 31, 2017 that2019, considering our continuing operations, which are sensitive to changes in interest rates and foreign currency exchange rates:
| Weighted Average Interest Rate 2017(1) | Total Amount Outstanding | 2019 | 2020 | 2021 | 2022 | 2023 and There-after | Total Fair value | |||||||||||||||||||||||
Long-Term Debt | (%) | (in US$ millions) | ||||||||||||||||||||||||||||
U.S. dollars (fixed rate) | 5.59 | 3,109.7 | 0.5 | 161.6 | 201.3 | 498.7 | 2,247.6 | 3,381.7 | ||||||||||||||||||||||
U.S. dollars (LIBOR indexed) | 1.45 | 367.8 | 20.0 | 23.6 | 55.2 | 43.4 | 225.6 | 367.8 | ||||||||||||||||||||||
Euro (fixed rate) | 1.33 | 4.6 | 0.2 | 1.1 | 3.3 | — | — | 4.6 | ||||||||||||||||||||||
Reais (fixed rate) | 6.23 | 325.3 | 135.8 | 80.8 | 79.8 | 18.9 | 10.0 | 325.3 | ||||||||||||||||||||||
Reais (TJLP indexed) | 6.81 | 2.2 | 0.7 | 0.6 | 0.6 | 0.3 | — | 2.2 | ||||||||||||||||||||||
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Total long-term debt | 3,809.6 | 157.2 | 267.7 | 340.2 | 561.3 | 2,483.2 | 4,081.6 | |||||||||||||||||||||||
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| Weighted Average Interest Rate 2019(1) | Total Amount Outstanding | 2021 | 2022 | 2023 | 2024 | 2025 and thereafter | Total Fair value | |||||||||||||||||||||||||
| (%) | (in US$ millions) | |||||||||||||||||||||||||||||||
Long-Term Debt | ||||||||||||||||||||||||||||||||
U.S. dollars (fixed rate) | 2.35 | 45.5 | 16.5 | 0.5 | 0.3 | 0.1 | 28.1 | 43.9 | ||||||||||||||||||||||||
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| Weighted Average Interest Rate 2019(1) | Total Amount Outstanding | 2021 | 2022 | 2023 | 2024 | 2025 and thereafter | Total Fair value | |||||||||||||||||||||||||
| (%) | (in US$ millions) | |||||||||||||||||||||||||||||||
Long-Term Debt | ||||||||||||||||||||||||||||||||
Reais (fixed rate) | 3.5 | 30.2 | 11.0 | 11.0 | 8.2 | — | — | 25.6 | ||||||||||||||||||||||||
Reais (TJLP indexed) | 5.00 | 0.4 | 0.2 | 0.2 | — | — | — | 0.5 | ||||||||||||||||||||||||
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| |||||||||||||||||||
Total long-term debt | 76.1 | 27.7 | 11.7 | 8.5 | 0.1 | 28.1 | 70.0 | |||||||||||||||||||||||||
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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, |
The table below provides information about our short-term debt obligations as of December 31, 2019, considering our discontinued operations, that are sensitive to changes in interest rates and foreign currency exchange rates.
| Weighted Average Interest Rate 2019(1) | Total Amount Outstanding | Total Fair Value | ||||||||||
| (%) | (in US$ millions) | |||||||||||
Short-Term Debt | ||||||||||||
U.S. dollars (fixed rate) | 5.34 | 3,174.3 | 3,490.9 | |||||||||
U.S. dollars (LIBOR indexed) | 0.94 | 106.5 | 102.7 | |||||||||
Euro (fixed rate) | 0.00 | 20.5 | 20.5 | |||||||||
Total short-term debt | 3,301.3 | 3,614.1 | ||||||||||
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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, 2019. |
In order to manage our interest rate risk on our monetary liabilities, we have entered into a number of swaps which effectively convert US$325.342.7 million of our fixed interest rate, Brazilianreal-denominated debt into floating interest rate, Brazilianreal-denominated obligations; and convert US$102.62.2 million of our floating interest rate, U.S. dollar-denominated debt to fixed interest rate, U.S. dollar-denominated obligations.
The table below provides information about our short-term debt obligations as of December 31, 2017,2019, after taking into account the effects of the aforementioned derivative transactions:transactions, considering our continuing operations:
| Weighted Average Interest Rate 2019(1) | Total Amount Outstanding | Total Fair Value | ||||||||||||||||||||
| Weighted Average Interest Rate 2017(1) | Total Amount Outstanding | Total Fair Value | (%) | (in US$ millions) | ||||||||||||||||||
Short-Term Debt | (%) | (in US$ millions) | ||||||||||||||||||||
U.S. dollars (fixed rate) | 5.31 | 53.0 | 53.0 | 5.23 | 0.5 | 0.5 | ||||||||||||||||
U.S. dollars (LIBOR indexed) | 3.56 | 24.8 | 24.8 | 2.29 | 1.6 | 2.8 | ||||||||||||||||
Euro (fixed rate) | 1.32 | 9.4 | 9.4 | |||||||||||||||||||
Reais (fixed rate) | 3.65 | 7.7 | 7.7 | |||||||||||||||||||
Reais (CDI indexed) | 3.71 | 290.0 | 290.0 | 1.46 | 12.6 | 11.7 | ||||||||||||||||
Reais (TJLP indexed) | 6.81 | 4.0 | 4.0 | 5.00 | 0.2 | 0.2 | ||||||||||||||||
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| |||||||||||||||||||
Total short-term debt | 388.9 | 388.9 | 14.9 | 15.2 | ||||||||||||||||||
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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, |
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The table below provides information about our long-term debt obligations as of December 31, 2017,2019, after taking into account the effects of the aforementioned derivative transactions:transactions, considering our continuing operations:
| Weighted Average Interest Rate 2019(1) | Total Amount Outstanding | 2021 | 2022 | 2023 | 2024 | 2025 and There-after | Total Fair value | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Weighted Average Interest Rate 2017(1) | Total Amount Outstanding | 2019 | 2020 | 2021 | 2022 | 2023 and There-after | Total Fair value | (%) | (in US$ millions) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Long-Term Debt | (%) | (in US$ millions) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
U.S. dollars (fixed rate) | 5.31 | 3,212.3 | 0.9 | 162.1 | 201.9 | 499.2 | 2,348.2 | 3,484.4 | 5.23 | 1.4 | 0.5 | 0.5 | 0.3 | 0.1 | — | 2.0 | ||||||||||||||||||||||||||||||||||||||||||||||
U.S. dollars (LIBOR indexed) | 3.56 | 265.2 | 19.6 | 23.1 | 54.6 | 42.9 | 125.0 | 265.2 | 2.29 | 44.1 | 16.0 | — | — | — | 28.1 | 41.9 | ||||||||||||||||||||||||||||||||||||||||||||||
Euro (fixed rate) | 1.32 | 4.6 | 0.2 | 1.1 | 3.3 | — | — | 4.6 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Reais (CDI indexed) | 3.71 | 325.3 | 135.8 | 80.8 | 79.8 | 18.9 | 10.0 | 325.3 | 1.46 | 30.2 | 11.0 | 11.0 | 8.2 | — | — | 25.6 | ||||||||||||||||||||||||||||||||||||||||||||||
Reais (TJLP indexed) | 6.81 | 2.2 | 0.7 | 0.6 | 0.6 | 0.3 | — | 2.2 | 5.00 | 0.4 | 0.2 | 0.2 | — | — | — | 0.5 | ||||||||||||||||||||||||||||||||||||||||||||||
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Total long-term debt | 3,809.6 | 157.2 | 267.7 | 340.2 | 561.3 | 2,483.2 | 4,081.7 | 76.1 | 27.7 | 11.7 | 8.5 | 0.1 | 28.1 | 70.0 | ||||||||||||||||||||||||||||||||||||||||||||||||
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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, |
As of December 31, 2019, there was no effect in our debt obligations relating to our discontinued operations since no derivatives considered were classified as asset held for sale.
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 approximately11.0%approximately 9.0% of our net revenues and 30% of our total costs are denominated inreais.Having morereal denominated costs than revenues generates the exposure. For furtheradditional information on our hedges and derivatederivative instruments, see Note 89 to 20172019 audited consolidated financial statements.
The table below provides information about our assets and liabilities exposed to foreign currency risk as of December 31, 2017,2019, as well as the derivative transactions outstanding at the same date:date, considering our continuing operations:
| Financial instruments indexed to currencies other than the U.S. dollar Outstanding Amount by Year of Maturity | Financial instruments indexed to currencies other than the U.S. dollar Outstanding Amount by Year of Maturity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total Outstanding Amount | 2018 | 2019 | 2020 | 2021 | 2022 | There- after | Total Fair Value | Total Outstanding Amount | 2020 | 2021 | 2022 | 2023 | 2024 | There- after | Total Fair Value | |||||||||||||||||||||||||||||||||||||||||||||||||
| (in US$ millions) | (in US$ millions) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
ASSETS | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cash and cash equivalents and financial investments | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
InReais | 750.3 | 750.3 | — | — | — | — | — | 750.3 | 128.7 | 128.7 | — | — | — | — | — | 128.7 | ||||||||||||||||||||||||||||||||||||||||||||||||
In Euro | 97.5 | 97.5 | — | — | — | — | — | 97.5 | 105.8 | 105.8 | — | — | — | — | — | 105.8 | ||||||||||||||||||||||||||||||||||||||||||||||||
In other currencies | 61.2 | 61.2 | — | — | — | — | — | 61.2 | 1.4 | 1.4 | — | — | — | — | — | 1.4 | ||||||||||||||||||||||||||||||||||||||||||||||||
Trade accounts receivable | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
InReais | 138.2 | 138.2 | — | — | — | — | — | 138.2 | 6.3 | 6.3 | — | — | — | — | — | 6.3 | ||||||||||||||||||||||||||||||||||||||||||||||||
In Euro | 116.2 | 116.2 | — | — | — | — | — | 116.2 | 23.1 | 23.1 | — | — | — | — | — | 23.1 | ||||||||||||||||||||||||||||||||||||||||||||||||
In other currencies | 6.0 | 6.0 | — | — | — | — | — | 6.0 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Deferred income tax assets | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
InReais | (0.3 | ) | (0.2 | ) | — | — | — | — | (0.1 | ) | (0.3 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
In Euro | 2.0 | 0.2 | 0.2 | 0.2 | 0.2 | 0.2 | 1.0 | 2.0 | 3.6 | 3.0 | 0.1 | 0.1 | 0.1 | 0.1 | 0.2 | 3.6 | ||||||||||||||||||||||||||||||||||||||||||||||||
In other currencies | 0.8 | 0.1 | 0.1 | 0.1 | 0.1 | 0.1 | 0.3 | 0.8 | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
Other assets | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
InReais | 308.5 | 193.0 | 115.5 | — | — | — | — | 308.5 | 163.1 | 103.1 | 60.0 | — | — | — | — | 163.1 | ||||||||||||||||||||||||||||||||||||||||||||||||
In Euro | 15.6 | 13.8 | 1.8 | — | — | — | — | 15.6 | 11.6 | 10.6 | 1.0 | — | — | — | — | 11.6 | ||||||||||||||||||||||||||||||||||||||||||||||||
In other currencies | 0.6 | 0.6 | — | — | — | — | — | 0.6 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total assets in Reais | 1,197.0 | 1,081.5 | 115.5 | — | — | — | — | 1,197.0 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total assets in Euro | 231.3 | 227.7 | 2.0 | 0.2 | 0.2 | 0.2 | 1.0 | 231.3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total assets in other currencies | 68.6 | 67.9 | 0.1 | 0.1 | 0.1 | 0.1 | 0.3 | 68.6 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
LIABILITIES | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Loans | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
InReais | 629.2 | 301.7 | 136.5 | 81.4 | 80.4 | 19.2 | 10.0 | 629.2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
In Euro | 14.0 | 9.4 | 0.2 | 1.1 | 3.3 | — | — | 14.0 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
In other currencies | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Accounts payable to suppliers | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
InReais | 87.7 | 87.7 | — | — | — | — | — | 87.7 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
In Euro | 115.0 | 115.0 | — | — | — | — | — | 115.0 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
In other currencies | 1.1 | 1.1 | — | — | — | — | — | 1.1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Customer advances | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
InReais | 131.9 | 131.9 | — | — | — | — | — | 131.9 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other accounts payable & accrued liabilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
InReais | 409.0 | 288.1 | 120.9 | — | — | — | — | 409.0 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
In Euro | 30.6 | 25.4 | 5.2 | — | — | — | — | 30.6 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
In other currencies | 4.8 | 4.6 | 0.2 | — | — | — | — | 4.8 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Taxes and payroll charges payable | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
InReais | 135.2 | 65.0 | 70.2 | — | — | — | — | 135.2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
In Euro | 4.3 | 4.3 | — | — | — | — | — | 4.3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
In other currencies | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Accrued taxes on income | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
InReais | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
In Euro | (6.4 | ) | (6.4 | ) | — | — | — | — | — | (6.4 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
In other currencies | 2.8 | 2.8 | — | — | — | — | — | 2.8 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Deferred income tax liabilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
InReais | 241.4 | 22.7 | 22.7 | 22.7 | 22.7 | 22.7 | 127.9 | 241.4 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
In Euro | 5.4 | 0.5 | 0.5 | 0.5 | 0.5 | 0.5 | 2.9 | 5.4 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
In other currencies | 0.8 | 0.1 | 0.1 | 0.1 | 0.1 | 0.1 | 0.3 | 0.8 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Accrued dividends | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
InReais | 36.8 | 36.8 | — | — | — | — | — | 36.8 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Contingencies | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
InReais | 42.9 | 14.7 | 7.7 | 7.7 | 7.7 | 5.0 | 0.1 | 42.9 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
In Euro | 4.5 | — | 1.2 | 1.2 | 1.2 | 0.8 | 0.1 | 4.5 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total liabilities in Reais | 1,714.1 | 948.6 | 358.0 | 111.8 | 110.8 | 46.9 | 138.0 | 1,714.1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total liabilities in Euro | 167.4 | 148.2 | 7.1 | 2.8 | 5.0 | 1.3 | 3.0 | 167.4 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total liabilities in other currencies | 9.5 | 8.6 | 0.3 | 0.1 | 0.1 | 0.1 | 0.3 | 9.5 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total exposure in Reais | (517.1 | ) | 132.9 | (242.5 | ) | (111.8 | ) | (110.8 | ) | (46.9 | ) | (138.0 | ) | (517.1 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
Total exposure in Euro | 63.9 | 79.5 | (5.1 | ) | (2.6 | ) | (4.8 | ) | (1.1 | ) | (2.0 | ) | 63.9 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Total exposure in other currencies | 59.1 | 59.3 | (0.2 | ) | — | — | — | — | 59.1 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Financial instruments indexed to currencies other than the U.S. dollar Outstanding Amount by Year of Maturity |
| |||||||||||||||||||||||||||||||
| Total Outstanding Amount | 2020 | 2021 | 2022 | 2023 | 2024 | There- after | Total Fair Value | |||||||||||||||||||||||||
| (in US$ millions) | ||||||||||||||||||||||||||||||||
In other currencies | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
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Total assets in Reais | 297.8 | 237.9 | 60.0 | — | — | — | (0.1 | ) | 297.8 | |||||||||||||||||||||||
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Total assets in Euro | 144.1 | 142.5 | 1.1 | 0.1 | 0.1 | 0.1 | 0.2 | 144.1 | ||||||||||||||||||||||||
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Total assets in other currencies | 1.4 | 1.4 | — | — | — | — | — | 1.4 | ||||||||||||||||||||||||
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LIABILITIES | ||||||||||||||||||||||||||||||||
Loans | ||||||||||||||||||||||||||||||||
InReais | 43.4 | 12.7 | 11.3 | 11.2 | 8.2 | — | — | 43.4 | ||||||||||||||||||||||||
In Euro | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Accounts payable to suppliers | ||||||||||||||||||||||||||||||||
InReais | 73.3 | 73.3 | — | — | — | — | — | 73.3 | ||||||||||||||||||||||||
In Euro | 35.3 | 35.3 | — | — | — | — | — | 35.3 | ||||||||||||||||||||||||
In other currencies | 1.4 | 1.4 | — | — | — | — | — | 1.4 | ||||||||||||||||||||||||
Customer advances | ||||||||||||||||||||||||||||||||
InReais | 133.6 | 133.6 | — | — | — | — | — | 133.6 | ||||||||||||||||||||||||
Other accounts payable & accrued liabilities | ||||||||||||||||||||||||||||||||
InReais | 282.2 | 202.7 | 79.5 | — | — | — | — | 282.2 | ||||||||||||||||||||||||
In Euro | 22.8 | 18.7 | 4.1 | — | — | — | — | 22.8 | ||||||||||||||||||||||||
In other currencies | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Taxes and payroll charges payable | ||||||||||||||||||||||||||||||||
InReais | 62.6 | 49.3 | 13.3 | — | — | — | — | 62.6 | ||||||||||||||||||||||||
In Euro | 4.4 | 4.4 | — | — | — | — | — | 4.4 | ||||||||||||||||||||||||
In other currencies | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Accrued taxes on income | ||||||||||||||||||||||||||||||||
InReais | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
In Euro | 10.9 | 10.9 | — | — | — | — | — | 10.9 | ||||||||||||||||||||||||
In other currencies | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Deferred income tax liabilities | ||||||||||||||||||||||||||||||||
InReais | 251.0 | 211.1 | 8.0 | 8.0 | 8.0 | 8.0 | 7.9 | 251.0 | ||||||||||||||||||||||||
In Euro | 20.5 | 17.2 | 0.7 | 0.7 | 0.7 | 0.7 | 0.5 | 20.5 | ||||||||||||||||||||||||
In other currencies | 0.8 | 0.8 | — | — | — | — | — | 0.8 | ||||||||||||||||||||||||
Accrued dividends | ||||||||||||||||||||||||||||||||
InReais | 1.4 | 1.4 | — | — | — | — | — | 1.4 | ||||||||||||||||||||||||
Contingencies | ||||||||||||||||||||||||||||||||
InReais | 57.0 | 16.1 | 16.1 | 16.1 | 16.1 | 16.1 | (23.5 | ) | 57.0 | |||||||||||||||||||||||
In Euro | 4.1 | — | 1.6 | 1.6 | 1.6 | 1.6 | (2.3 | ) | 4.1 | |||||||||||||||||||||||
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Total liabilities in Reais | 904.5 | 700.2 | 128.2 | 35.3 | 32.3 | 24.1 | (15.6 | ) | 904.5 | |||||||||||||||||||||||
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Total liabilities in Euro | 98.0 | 86.5 | 6.4 | 2.3 | 2.3 | 2.3 | (1.8 | ) | 98.0 | |||||||||||||||||||||||
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Total liabilities in other currencies | 2.2 | 2.2 | — | — | — | — | — | 2.2 | ||||||||||||||||||||||||
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Total exposure in Reais | (606.7 | ) | (462.3 | ) | (68.2 | ) | (35.3 | ) | (32.3 | ) | (24.1 | ) | 15.5 | (606.7 | ) | |||||||||||||||||
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Total exposure in Euro | 46.1 | 56.0 | (5.3 | ) | (2.2 | ) | (2.2 | ) | (2.2 | ) | 2.0 | 46.1 | ||||||||||||||||||||
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Total exposure in other currencies | (0.8 | ) | (0.8 | ) | — | — | — | — | — | (0.8 | ) | |||||||||||||||||||||
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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 supplierssuppliers. 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-ratedinvestment-grade ratings 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
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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.
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
| 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 cancelledcanceled or reduced for any other reason, U.S.$US$5.00 for each 100 ADSs (or portion thereof) issued, delivered, reduced, cancelledcanceled 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, the beneficial owners of, or in, ADSs, 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.$0.02US$0.05 or less per ADS for any cash distribution made pursuant to the deposit agreement;
a fee of U.S.$US$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;
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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 |
| • | 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 laws, rules or regulations (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), including, without limitation, any amounts charged by any governmental authorities or other institutions such as the Brazilian Clearing and Depository Corporation (Companhia Brasileira de Liquidação e Custódia) or the B3 S.A. – Brasil, Bolsa, Balcão, the stock exchange on which the shares are registered for trading. |
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);
SWIFT, 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); and
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)securities.; and
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, 20172019
In 2017,According to our contractual arrangements with JPMorgan, paid US$2,4 millionin 2019, JPMorgan did not pay us in connection with investor relations related expenses of Embraer incurred in 2017 that are eligible for reimbursement from JPMorgan under our contractual arrangements with that entity.
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES |
No matters to report.
MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS |
Material Modifications to the Rights of Security Holders
Not applicable.
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Use of Proceeds
Not applicable.
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,Francisco Gomes Neto, and our executive vice-president and chief financial and investor relations officer, José Antonio de Almeida Filippo,Carlos Garcia, 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, 2017,2019, 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, 2017.2019. 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, 2017,2019, 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, 20172019 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.
Reserved |
| Item 16A. | AUDIT COMMITTEE FINANCIAL EXPERT |
Our board of directors has determined that Mr. Sergio Eraldo de Salles Pinto, an effectiveexternal member of our statutory Auditaudit, risks and Risks Committeeethics committee is an “audit committee financial expert” as defined by current SEC rules. For a discussion of the role of our Auditaudit, risks and Risks Committee,ethics committee, see “Item 6C.6. Directors, Senior Management and Employees—6C. Board Practices—Audit, Risks and RisksEthics Committee.”
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.
PRINCIPAL ACCOUNTANT FEES AND SERVICES |
The following table sets forth by category of service the total fees for services performed by KPMGPricewaterhouseCoopers Auditores Independentes during the fiscal years ended December 31, 20162019 and 20172018 and PricewaterhouseCoopersKPMG Auditores Independentes in 2017:during the fiscal year ended December 31, 2018:
Principal accountant fees and services | Year ended December 31, | Year ended December 31, | ||||||||||||||
| 2017 | 2016 | 2019 | 2018 | |||||||||||||
| (in US$ thousands) | (in US$ thousands) | |||||||||||||||
Audit Fees | 2,877.8 | 2,283.1 | 4,150.4 | 3,583.2 | ||||||||||||
Audit-Related Fees | 25.9 | 271.8 | 162.0 | 25.9 | ||||||||||||
Tax Fees | 268.1 | 51.2 | 59.5 | 44.9 | ||||||||||||
|
| |||||||||||||||
All Other Fees | 665.0 | 19.3 | 5.7 | 52.4 | ||||||||||||
|
|
|
| |||||||||||||
Total | 3,836.9 | 2,625.4 | 4,377.7 | 3,706.4 | ||||||||||||
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|
|
| |||||||||||||
| (1) | Includes fees paid to KPMG Auditores Independentes in 2018 relating to the retrospective application of IFRS 9 and IFRS 15. |
Audit Fees
Audit fees consisted of the aggregate fees in connection with (i) the audit of annual financial statements and quarterly reviewsprepared 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)and performed in accordance with the standards ofInternational Standards on Auditing and the PCAOB auditing standards, (ii) review of quarterly financial information prepared under Brazilian GAAP and (ii)IFRS as issued by the IASB in Brazil, and (iii) audit of statutory auditsfinancial statements 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.
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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.
Pre-Approval Policies and Procedures
Our board of directors approvesapproved all audit and audit-related services provided by KPMG Auditores Independentes in 20162018 and PricewaterhouseCoopers Auditores Independentes in 2017.2018 and 2019. 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 Auditaudit, risk and Risks Committeeethics 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, 2014 and 20132018, none of the fees paid to KPMG Auditores Independentes and in 20172018 and 2019, none of the fees paid to PricewaterhouseCoopers Auditores Independentes were approved pursuant to thede minimis exception.
EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES |
None.
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 Instrução 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. A total of 3,000,000 common shares were repurchased at an average price of R$20.00 per share from March 17 through June 30, 2016.
On June 2, 2017, our board of directors approved a new share buyback program for our common shares, in compliance with Instrução 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. TheA total of 3,000,000 common shares were repurchased at an average price of R$16.13 per share from June 6 through August 29, 2017.
In 2019 and 2018, we did not approve a share buyback program.
CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT |
Not applicable.
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.
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Majority of Independent Directors
The NYSE rules require that a majority of the Boardboard of directors must consist of independent Directors.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 currentThe members of our board of directors have declared that they are independent for purposes of theNovo Mercado Listing Rules.listing rules, except for the representative of the Brazilian government, as a result of the government’s ownership of the “golden share,” and the two representatives of our employees. Our directors meet the qualification requirements of the Brazilian Corporate Law, the CVM requirements and theNovo Mercado Listing Rules.
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 furtheradditional information on the election of our board of directors, see “Item 10B.10. Additional Information—10B. Memorandum and Articles of Association—Board of Directors—Election of Board of Directors.”
Executive Sessions
NYSE rules require that thenon-management directors must meet at regularly scheduled executive sessions without management. The Brazilian Corporate Law does not have a similar provision. According to the Brazilian Corporate Law, up toone-third one third of the members of the board of directors can be elected from management. The remainingnon-management directors are not expressly empoweredrequired to serve as a check on management and there is no requirementmanagement. Embraer’s board of directors’ rules of procedure provide that thosethe external members of the board of directors meet regularly without management. As a result, thenon-management directors on our board(comprising members who do not typicallyhold any commercial, employment or management relationship with Embraer) shall meet in executive sessions.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 Committeenominating/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. TheMembers of our board of directors are elected by our shareholders at a general shareholders’ meeting. Our Although we have not established a nominating/corporate governance practicescommittee, as we are adoptednot required to do so under applicable Brazilian law, our Personnel and Governance Committee, among other things, performs the same duties imposed to the nominating/corporate governance committee by the entire board.NYSE rules.
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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. WeAlthough we have not established a compensation committee, as we are not required to do so under applicable Brazilian law, our Personnel and Governance Committee, among other things, performs the same duties imposed to have a Compensation Committee. Underthe compensation committee by NYSE rules. According to 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, Risks and RisksEthics 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.
Embraer’s statutory “Audit, Risks and RisksEthics Committee” is composed, in its majority, of independent members of our board of directors.directors, and by two external members. For additional information, see “Item 6. Directors, Senior Management and Employees—Item 6C. Board Practice—Audit, Risks and Ethics Committee.” 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, Risks and RisksEthics 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, Risks and RisksEthics Committee makes recommendations regarding the appointment of auditing firms, which are subject to a vote of the board of directors. Our Audit, Risks and RisksEthics 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.
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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-heldpublicly 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“—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 56thEdition, and was approved on December 8, 2016.November 7, 2019.
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, Risks and RisksEthics 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.
MINE SAFETY DISCLOSURE |
Not applicable.
FINANCIAL STATEMENTS |
We have responded to Item 18in lieu of responding to this item.
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.
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EXHIBITS |
Exhibit | Description | |
1.1 | ||
2.1 | ||
2.2 | The registrant hereby agrees to furnish to the SEC, upon request, copies of instruments defining the rights of holders oflong-term debt of the registrant and its consolidated subsidiaries and for any of its unconsolidated subsidiaries for which financial statements are required to be filed. | |
| 2.3 | Description of the registrant’s securities registered under Section 12 of the Exchange Act.* | |
8.1 | ||
11.1 | Code of Ethics and Conduct, dated | |
12.1 | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.* | |
12.2 | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.* | |
13.1 | ||
13.2 | ||
| *
| ||
| ||
101.INS | XBRL Instance | |
101.SCH | XBRL Taxonomy Extension | |
101.CAL | XBRL Taxonomy Extension Scheme Calculation | |
101.DEF | XBRL Taxonomy Extension Scheme Definition | |
101.LAB | XBRL Taxonomy Extension Scheme Label | |
101.PRE | XBRL Taxonomy Extension Scheme Presentation |
| * | Filed herewith. |
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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/ | |||
| Name: | ||||
| Title: | President and Chief Executive Officer | |||
| By: | /s/ | |||
| Name: | ||||
| Title: | Executive | |||
Date: March 22, 2018June 1, 2020
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Embraer S.A.
Consolidated Financial Statements
atas of December 31, 20172019
and Report of Independent Registered
Public Accounting Firm
INDEX TO THE FINANCIAL STATEMENTS
| Page | ||||
| F-2 | ||||
Consolidated Statements of Financial Position as of December 31, | ||||
Consolidated Statements of Income for the Years Ended December 31, | ||||
Report of independent registered public accounting firmIndependent Registered Public Accounting Firm
To theBoard of Directors and Shareholders
of Embraer S.A.
Opinions on the financial statementsFinancial Statements and internal controlInternal Control over financial reportingFinancial Reporting
We have audited the accompanying consolidated statementstatements of financial position of Embraer S.A. and its subsidiaries (the “Company”) as of December 31, 2017, 2019 and 2018,and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows for each of the year thenthree years in the period ended December 31, 2019, including the related notes (collectively referred to as the “consolidated financial statements”). We.We also have audited the Company’s internal control over financial reporting as of December 31, 2017,2019, based on criteria established inInternal Control—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, 2017, 2019 and 2018,and the results of theirits operations and theirits cash flows for each of the year thenthree years in the period ended inDecember 31, 2019in conformity with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board.Board (IASB). Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2019, based on criteria established inInternal Control—Control - Integrated Framework (2013) issued by the COSO.
Basis for opinionsOpinions
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.Reporting appearing under Item 15. Our responsibility is to express opinions on the Company’s consolidated financialconsolidatedfinancial statements and on the Company’s internal control over financial reporting based on our audit.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 USU.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our auditaudits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the auditaudits 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.
PricewaterhouseCoopers, Rua Carlos Maria Auricchio 70, 14º, Ed.Royal Park, São José dos Campos, SP, Brasil, 12246-876,
T: +55 (12) 3519 3900,www.pwc.com.br
Embraer S.A.
Our auditaudits 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 auditaudits 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 auditaudits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit providesaudits provide a reasonable basis for our opinions.
Subsequent events
As discussed in Notes 1.1, 3.4, 4 and 40.3 to the consolidated financial statements, on April 25, 2020, Boeing provided notice to Embraer communicating its decision to terminate the Master Transaction Agreement (“MTA”). These Notes also describe the related consequences in the presentation and
measurement of the assets, liabilities and results of operations related to the Commercial Aviation segment which were presented as “Assets and liabilities held for sale” and “Discontinued operations” as of the reporting date.
Definition and limitationsLimitations of internal controlInternal Control over financial reportingFinancial 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.
São José dos Campos, March 22, 2018Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Revenue Recognition - Estimated Costs to Complete Long-term Contracts
As discussed in Notes 2.2.26 c) and 32 to the consolidated financial statements, US$399.1 million of the Company’s total revenues for the year ended December 31, 2019 was generated from long-term contracts. For the Company’s long-term contracts, control transfers over time and revenue is recognized based on the extent of progress in each period towards completion of the performance obligation. The selection of the measure of progress towards completion requires management judgment and is based on the nature of the products or services to be provided. As disclosed by management, the Company substantially uses the cost incurred method, using the ratio of actual cumulative costs incurred divided by total estimated costs at completion for progress measurement. Revenues are recognized proportionately as costs are incurred. Due to the nature of the work required to be performed on the performance obligations, management’s estimation of costs at completion is complex and requires significant judgment. Management has disclosed that there are many factors that can affect the accuracy of cost estimates, including, but not limited to, the projection, changes in circumstances and/ or new events, such as contract modification.
The principal considerations for our determination that performing procedures relating to revenue recognition - estimated costs to complete long-term contracts is a critical audit matter are there was significant judgment made by management when developing the estimated costs to complete long-term contracts especially in development projects. This in turn led to significant auditor judgment and effort in performing procedures to evaluate the estimates of the costs to complete, including the assessment of management’s judgment about the Company’s significant assumptions related to estimated expected labor and material costs.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the revenue recognition process, including controls over the determination of estimated costs to complete long-term contracts. The procedures also included, among others, evaluating and testing management’s process for determining the estimate of costs at completion for a sample of contracts, which included evaluating the reasonableness of significant assumptions, including the estimated expected labor and material costs, used by management and considering the factors that can affect the accuracy of those estimates. Evaluating the reasonableness of significant assumptions used involved assessing management’s ability to reasonably estimate costs to complete long-term contracts by (i) performing a comparison of the previous year estimated and actual costs incurred for the contracts; (ii) evaluating the timely identification of circumstances that may warrant a modification to estimated costs to complete, including actual costs in excess of estimates.
Assessment of impairment for long-livednon-financial assets
As described in Note 2.2.14 to the consolidated financial statements, the Company’s management performs, on an annual basis, impairment tests of intangible assets with indefinite useful lives, as well as evaluates impairment indicators for long-livednon-financial assets. When impairment indicators are identified, management compares the carrying value of an asset, or a cash-generating unit (CGU), with its recoverable amount, which is determined at the higher between its value in use and fair value less cost to disposal. An impairment charge is recognized when the carrying value exceeds the recoverable amount. As described in Note 19 to the consolidated financial statements, management determined the recoverable amounts of the CGUs related to the Commercial Aviation segment, later classified as discontinued operations, at their estimated fair value less cost to disposal. Additionally, the recoverable amounts of the remaining CGUs were determined by management at their estimated value in use. The process of estimating the recoverable amounts using value in use approach involves management’s significant judgments and assumptions. During 2019, the Company recorded an impairment charge of US$ 72 million related substantially to executive aviation segment.
The principal considerations for our determination that performing procedures relating to the impairment of long-livednon-financial assets is a critical audit matter are there was significant judgment by management when developing the value in use measurement for each CGU. This in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures to evaluate management’s cash flow projections and significant assumptions, including revenue growth rate, gross margin and the discount rate. In addition, the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s impairment assessment, including controls over the valuation of the Company’s CGUs. These procedures also included, among others, testing management’s process for developing the value in use estimate of the main CGUs; evaluating the appropriateness of the discounted cash flow model; testing the completeness, accuracy, and relevance of underlying data used in the model; and evaluating the significant assumptions used by management, including the revenue growth rate, projected gross margin and discount rate. Evaluating management’s assumptions related to revenue growth rate and projected gross margin involved evaluating whether the assumptions used by management were reasonable considering (i) the current and past performance of each CGU, (ii) the consistency of Company’s internally developed models which are based on external market and industry data, and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in the evaluation of the Company’s discounted cash flow model and the significant assumptions, including the discount rate.
Presentation and disclosure of Assets held for sale and Liabilities related to assets held for sale and Discontinued operation
As described in Note 4 to the consolidated financial statements, on January 24, 2019, Embraer, Boeing and certain subsidiaries of Boeing and Embraer entered into the MTA and other transaction documents, which defined the terms and conditions for the creation of a joint venture covering Embraer’s Commercial Aviation business unit with a participation of 80% of a subsidiary of Boeing and 20% of Embraer. Upon the approval of this transaction by Embraer’s shareholders, the assets and liabilities relating to the Commercial Aviation business and associated services were measured and are disclosed in the consolidated financial statements as of December 31, 2019 as Assets held for sale and Liabilities held for sale, amounting to US$ 5.2 billion and US$ 5.0 billion, respectively; and their results generated as a discontinued operation, amounting to US$ (111.8) million. The segregation of the assets and liabilities, as well as the results from the discontinued operations, related to Commercial Aviation business considered the Company’s best interpretations of the terms of the MTA, including the segregation of certain costs and expenses related to corporate areas which would be separated among Embraer and Boeing. In addition, as described in Notes 1.1, 3.4, 4 and 40.3, on April 25, 2020, Boeing provided notice to Embraer communicating its decision to terminate the MTA.
The principal considerations for our determination that performing procedures relating to the Asset and Liabilities held for sale and discontinued operation is a critical audit matter are (i) it is a significant unusual transaction disclosed in the consolidated financial statements, (ii) significant audit effort was required in evaluating the assumptions and estimates related to segregation of assets and liabilities included in within a disposal group classified as held for sale and of results of discontinued operation.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to Financial close and report process, including controls over the segregation of Assets held for sale and Liabilities related to assets held for sale and Discontinued operation. These procedures also included, among others, (i) reading the MTA, (ii) testing management’s process included evaluating the reasonableness of assumptions and estimates made by management, as well as the presentation and disclosure of assets and liabilities included in within a disposal group classified as held for sale and of results of discontinued operation in the consolidated financial statements, and (iii) assessed the appropriateness of the disclosures related to the termination of the MTA.
/s/ PricewaterhouseCoopers
Auditores Independentes
São José dos Campos, Brazil
June 1, 2020
We have served as the Company’s auditor since 2017.
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Embraer S.A.
We have audited the accompanying consolidated statement of financial position of Embraer S.A. and subsidiaries (“the Company”) as of December 31, 2016, and the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the years in thetwo-year period 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 audits.
We conducted our audits 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 audits provide 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 of December 31, 2016, and the results of its operations and its cash flows for each of the years in thetwo-year period ended December 31, 2016, in conformity with International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB).
São José dos Campos, Brazil
March 21, 2017
/s/ KPMG Auditores Independentes
Embraer S.A.
Consolidated Statements of Financial Position atas of December 31, 20172019 and 20162018
(In millions of U.S. dollar)
| Note | 12.31.2017 | 12.31.2016 | Note | 12.31.2019 | 12.31.2018 | |||||||||||||||||
ASSETS | ||||||||||||||||||||||
CURRENT | ||||||||||||||||||||||
Cash and cash equivalents | 5 | 1,270.8 | 1,241.5 | 6 | 855.2 | 1,280.9 | ||||||||||||||||
Financial investments | 6 | 2,365.6 | 1,775.5 | 7 | 409.8 | 1,743.4 | ||||||||||||||||
Trade accounts receivable, net | 7 | 717.1 | 665.4 | 8 | 149.4 | 318.0 | ||||||||||||||||
Derivative financial instruments | 8 | 29.5 | 21.0 | 9 | 1.4 | 5.4 | ||||||||||||||||
Customer and commercial financing | 9 | 2.1 | 8.5 | — | 1.2 | |||||||||||||||||
Collateralized accounts receivable | 10 | 185.6 | 142.8 | 10.1 | 4.0 | 218.5 | ||||||||||||||||
Contract assets | 32 | 461.9 | 358.0 | |||||||||||||||||||
Inventories | 12 | 2,148.7 | 2,496.4 | 12 | 1,304.4 | 2,507.0 | ||||||||||||||||
Guarantee deposits | 11 | 0.1 | 339.9 | |||||||||||||||||||
Income tax and social contribution | 76.9 | 80.7 | 90.5 | 95.3 | ||||||||||||||||||
Other assets | 13 | 255.4 | 349.9 | 13 | 120.1 | 203.4 | ||||||||||||||||
|
| |||||||||||||||||||||
| 3,396.8 | 7,071.0 | |||||||||||||||||||||
|
| |||||||||||||||||||||
Assets held for sale | 4.2 | 5,174.6 | — | |||||||||||||||||||
|
|
|
| |||||||||||||||||||
| 7,051.7 | 6,781.7 | 8,571.4 | 7,071.0 | |||||||||||||||||||
|
|
|
| |||||||||||||||||||
NON-CURRENT | ||||||||||||||||||||||
Financial investments | 6 | 251.3 | 168.2 | 7 | 14.9 | 183.5 | ||||||||||||||||
Derivative financial instruments | 8 | 4.8 | 11.1 | 9 | 0.7 | 4.1 | ||||||||||||||||
Customer and commercial financing | 9 | 14.3 | 28.9 | — | 10.5 | |||||||||||||||||
Collateralized accounts receivable | 10 | 103.1 | 180.5 | 10.1 | 13.6 | 17.4 | ||||||||||||||||
Guarantee deposits | 11 | 393.8 | 511.4 | 11 | 0.5 | 9.8 | ||||||||||||||||
Deferred income tax and social contribution | 24.1 | 2.8 | 3.4 | 24.1 | 0.7 | 21.6 | ||||||||||||||||
Other assets | 13 | 121.5 | 156.7 | 13 | 61.8 | 105.6 | ||||||||||||||||
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|
|
| |||||||||||||||||||
| 891.6 | 1,060.2 | 92.2 | 352.5 | |||||||||||||||||||
Investments | 5.6 | 3.9 | 8.1 | 6.3 | ||||||||||||||||||
Property, plant and equipment, net | 16 | 2,104.9 | 2,154.2 | 16 | 968.9 | 1,964.7 | ||||||||||||||||
Intangible assets, net | 17 | 1,882.4 | 1,664.6 | 18 | 894.1 | 1,898.8 | ||||||||||||||||
Right of use | 17 | 37.8 | — | |||||||||||||||||||
|
|
|
| |||||||||||||||||||
| 4,884.5 | 4,882.9 | 2,001.1 | 4,222.3 | |||||||||||||||||||
|
|
|
| |||||||||||||||||||
TOTAL ASSETS | 11,936.2 | 11,664.6 | 10,572.5 | 11,293.3 | ||||||||||||||||||
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|
| |||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-6F-7
Embraer S.A.
Consolidated Statements of Financial Position atas of December 31, 20172019 and 20162018
(In millions of U.S. dollar)
| Note | 12.31.2017 | 12.31.2016 | Note | 12.31.2019 | 12.31.2018 | |||||||||||||||||||
LIABILITIES | ||||||||||||||||||||||||
CURRENT | ||||||||||||||||||||||||
Trade accounts payable | 19 | 824.7 | 952.1 | 20 | 358.0 | 892.1 | ||||||||||||||||||
Lease liability | 17 | 5.0 | — | |||||||||||||||||||||
Loans and financing | 20 | 388.9 | 510.3 | 21 | 14.9 | 179.3 | ||||||||||||||||||
Non-recourse and recourse debt | 10 | 17.6 | 22.9 | |||||||||||||||||||||
Recourse andnon-recourse debt | 10.2 | 4.0 | 324.0 | |||||||||||||||||||||
Other payables | 21 | 292.2 | 379.5 | 22 | 162.5 | 288.4 | ||||||||||||||||||
Advances from customers | 22 | 799.2 | 716.4 | |||||||||||||||||||||
Contract liabilities | 32 | 649.1 | 1,045.4 | |||||||||||||||||||||
Derivative financial instruments | 8 | 8.8 | 8.4 | 9 | 4.5 | 8.1 | ||||||||||||||||||
Taxes and payroll charges payable | 23 | 70.7 | 43.6 | 23 | 54.9 | 68.4 | ||||||||||||||||||
Income tax and social contribution | 16.1 | 25.9 | 42.6 | 48.0 | ||||||||||||||||||||
Financial guarantee and residual value | 25 | 22.2 | 49.7 | 25 | — | 51.0 | ||||||||||||||||||
Dividends payable | 36.8 | 24.8 | 1.4 | 5.0 | ||||||||||||||||||||
Unearned income | 164.1 | 311.5 | 2.0 | 2.0 | ||||||||||||||||||||
Provisions | 26.1 | 141.3 | 135.8 | |||||||||||||||||||||
Provision | 26.1 | 103.1 | 116.9 | |||||||||||||||||||||
|
| |||||||||||||||||||||||
| 1,402.0 | 3,028.6 | |||||||||||||||||||||||
|
| |||||||||||||||||||||||
Liabilities held for sale | 4.2 | 4,984.0 | — | |||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
| 2,782.6 | 3,180.9 | 6,386.0 | 3,028.6 | |||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
NON-CURRENT | ||||||||||||||||||||||||
Lease liability | 17 | 33.6 | — | |||||||||||||||||||||
Loans and financing | 20 | 3,809.6 | 3,249.6 | 21 | 76.1 | 3,468.4 | ||||||||||||||||||
Non-recourse and recourse debt | 10 | 346.5 | 351.0 | |||||||||||||||||||||
Recourse andnon-recourse debt | 10.2 | 13.6 | 17.4 | |||||||||||||||||||||
Other payables | 21 | 21.5 | 16.9 | 22 | 12.7 | 28.6 | ||||||||||||||||||
Advances from customers | 22 | 104.1 | 139.8 | |||||||||||||||||||||
Derivative financial instruments | 8 | 0.1 | — | |||||||||||||||||||||
Contract liabilities | 32 | 34.3 | 198.2 | |||||||||||||||||||||
Taxes and payroll charges payable | 23 | 70.2 | 67.9 | 23 | 13.4 | 58.2 | ||||||||||||||||||
Deferred income tax and social contribution | 24.1 | 251.3 | 263.3 | 24.1 | 272.3 | 254.0 | ||||||||||||||||||
Financial guarantee and residual value | 25 | 134.6 | 161.1 | |||||||||||||||||||||
Financial guarantee and residual value guarantees | 25 | — | 101.1 | |||||||||||||||||||||
Unearned income | 97.5 | 113.9 | 16.1 | 73.2 | ||||||||||||||||||||
Provisions | 26.1 | 136.2 | 179.0 | |||||||||||||||||||||
Provision | 26.1 | 99.8 | 125.5 | |||||||||||||||||||||
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|
|
| |||||||||||||||||||||
| 4,971.6 | 4,542.5 | 571.9 | 4,324.6 | |||||||||||||||||||||
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|
|
| |||||||||||||||||||||
TOTAL LIABILITIES | 7,754.2 | 7,723.4 | 6,957.9 | 7,353.2 | ||||||||||||||||||||
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|
| |||||||||||||||||||||
SHAREHOLDERS’ EQUITY | ||||||||||||||||||||||||
Capital | 29.1 | 1,438.0 | 1,438.0 | 29.1 | 1,551.6 | 1,551.6 | ||||||||||||||||||
Treasury shares | 29.3 | (51.8 | ) | (49.1 | ) | 29.3 | (26.5 | ) | (31.4 | ) | ||||||||||||||
Revenue reserves | 2,743.2 | 2,566.1 | 2,110.0 | 2,433.7 | ||||||||||||||||||||
Share-based remuneration | 37.3 | 36.8 | 37.4 | 37.4 | ||||||||||||||||||||
Accumulated other comprehensive loss | (98.1 | ) | (143.0 | ) | (154.8 | ) | (145.6 | ) | ||||||||||||||||
|
|
|
| |||||||||||||||||||||
| 4,068.6 | 3,848.8 | 3,517.7 | 3,845.7 | |||||||||||||||||||||
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|
| |||||||||||||||||||||
Non-controlling interests | 113.4 | 92.4 | 96.9 | 94.4 | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
TOTAL SHAREHOLDERS’ EQUITY | 4,182.0 | 3,941.2 | 3,614.6 | 3,940.1 | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | 11,936.2 | 11,664.6 | 10,572.5 | 11,293.3 | ||||||||||||||||||||
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| |||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
Embraer S.A.
Consolidated Statements of Income Years Ended
(In millions of U.S. dollar)
| Note | 12.31.2019 | 12.31.2018* | 12.31.2017* | |||||||||||||||||||||||||||
CONTINUING OPERATIONS | ||||||||||||||||||||||||||||||
| Note | 12.31.2017 | 12.31.2016 | 12.31.2015 | |||||||||||||||||||||||||||
REVENUE | 5,839.3 | 6,217.5 | 5,928.1 | 2,618.1 | 2,127.7 | 2,546.5 | ||||||||||||||||||||||||
Cost of sales and services | (4,773.4 | ) | (4,980.7 | ) | (4,816.8 | ) | (2,259.9 | ) | (1,929.6 | ) | (2,248.6 | ) | ||||||||||||||||||
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| |||||||||||||||||||||||||
GROSS PROFIT | 1,065.9 | 1,236.8 | 1,111.3 | 358.2 | 198.1 | 297.9 | ||||||||||||||||||||||||
Operating Income (expense) | ||||||||||||||||||||||||||||||
Operating income (expense) | ||||||||||||||||||||||||||||||
Administrative | (179.1 | ) | (164.3 | ) | (182.0 | ) | (136.7 | ) | (136.1 | ) | (138.9 | ) | ||||||||||||||||||
Selling | (307.0 | ) | (368.6 | ) | (361.6 | ) | (148.2 | ) | (151.4 | ) | (169.9 | ) | ||||||||||||||||||
Research | (49.2 | ) | (47.6 | ) | (41.7 | ) | (19.7 | ) | (19.5 | ) | (22.2 | ) | ||||||||||||||||||
Other operating income (expense), net | 33 | (202.5 | ) | (450.0 | ) | (194.2 | ) | 34 | (215.8 | ) | (173.8 | ) | (163.9 | ) | ||||||||||||||||
Equity in income (losses) of associates | 1.2 | (0.3 | ) | (0.3 | ) | (0.2 | ) | (0.4 | ) | 1.2 | ||||||||||||||||||||
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| |||||||||||||||||||||||||
OPERATING PROFIT BEFORE FINANCIAL INCOME | 329.3 | 206.0 | 331.5 | |||||||||||||||||||||||||||
Financial income (expense), net | 34 | (47.6 | ) | (51.4 | ) | (22.9 | ) | |||||||||||||||||||||||
Foreign exchange gain (loss) , net | 35 | 6.6 | 4.5 | 27.6 | ||||||||||||||||||||||||||
OPERATING LOSS BEFORE FINANCIAL RESULT | (162.4 | ) | (283.1 | ) | (195.8 | ) | ||||||||||||||||||||||||
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| ||||||||||||||||||||||||||||
PROFIT BEFORE TAXES ON INCOME | 288.3 | 159.1 | 336.2 | |||||||||||||||||||||||||||
Financial income, net | 35 | 61.5 | 6.1 | 95.0 | ||||||||||||||||||||||||||
Foreign exchange gain (loss), net | 36 | (0.3 | ) | (5.0 | ) | 5.7 | ||||||||||||||||||||||||
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| ||||||||||||||||||||||||||||
LOSS BEFORE INCOME TAX | (101.2 | ) | (282.0 | ) | (95.1 | ) | ||||||||||||||||||||||||
Income tax expense | 24.2 | (25.5 | ) | 8.7 | (255.4 | ) | 24.2 | (103.5 | ) | 20.7 | (28.2 | ) | ||||||||||||||||||
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| |||||||||||||||||||||||||
NET INCOME FOR THE PERIOD | 262.8 | 167.8 | 80.8 | |||||||||||||||||||||||||||
LOSS OF THE CONTINUING OPERATIONS | (204.7 | ) | (261.3 | ) | (123.3 | ) | ||||||||||||||||||||||||
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Atributable to : | ||||||||||||||||||||||||||||||
Net income (loss) of the discontinued operations | 4.3 | (111.8 | ) | 90.1 | 403.3 | |||||||||||||||||||||||||
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| ||||||||||||||||||||||||||||
NET INCOME (LOSS) FOR THE PERIOD | (316.5 | ) | (171.2 | ) | 280.0 | |||||||||||||||||||||||||
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| ||||||||||||||||||||||||||||
Attributable to: | ||||||||||||||||||||||||||||||
Owners of Embraer | 246.8 | 166.1 | 69.2 | (322.3 | ) | (178.2 | ) | 264.0 | ||||||||||||||||||||||
Noncontrolling interests | 16.0 | 1.7 | 11.6 | |||||||||||||||||||||||||||
Non-controlling interests | 5.8 | 7.0 | 16.0 | |||||||||||||||||||||||||||
Earnings per share-basic in US$ | 31 | 0.34 | 0.23 | 0.09 | 31.1 | (0.44 | ) | (0.24 | ) | 0.36 | ||||||||||||||||||||
Earnings per share-diluted in US$ | 31 | 0.34 | 0.23 | 0.09 | 31.2 | (0.44 | ) | (0.24 | ) | 0.36 | ||||||||||||||||||||
| * | Consolidated statements of income for comparative years ended December 31, 2018 and 2017 were recasted to present the results of continuing operations separately from the results of the Commercial Aviation business unit and related services (discontinued operations) since the beginning of comparative periods (Note 4). |
The accompanying notes are an integral part of these consolidated financial statements.
Embraer S.A.
Consolidated Statements of Comprehensive Income Years Ended
(In millions of U.S. dollar)
| 12.31.2017 | 12.31.2016 | 12.31.2015 | ||||||||||
NET INCOME FOR THE PERIOD | 262.8 | 167.8 | 80.8 | |||||||||
ITEMS THAT WILL NOT BE RECLASSIFIED FOR THE STATEMENT OF INCOME | ||||||||||||
Actuarial gain (loss) on post-employment benefit obligation | 9.2 | (7.6 | ) | 3.0 | ||||||||
ITEMS THAT MAY BE SUBSEQUENTLY RECLASSIFIED THROUGH PROFIT AND LOSS | ||||||||||||
Financial instruments for hedge accounting | — | — | 0.3 | |||||||||
Financial instruments | (10.3 | ) | 11.0 | — | ||||||||
Translation adjustments | 51.0 | (8.1 | ) | (86.8 | ) | |||||||
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OTHER COMPREHENSIVE INCOME, NET OF TAX EFFECTS (i) | 49.9 | (4.7 | ) | (83.5 | ) | |||||||
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TOTAL OF COMPREHENSIVE INCOME | 312.7 | 163.1 | (2.7 | ) | ||||||||
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| |||||||
Attributable to: | ||||||||||||
Owners of Embraer | 291.7 | 172.6 | (4.6 | ) | ||||||||
Non-controlling interests | 21.0 | (9.5 | ) | 1.9 | ||||||||
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| |||||||
| 312.7 | 163.1 | (2.7 | ) | |||||||||
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| |||||||
| 12.31.2019 | 12.31.2018 | 12.31.2017 | ||||||||||
NET INCOME (LOSS) FOR THE PERIOD | (316.5 | ) | (171.2 | ) | 280.0 | |||||||
ITEMS THAT WILL NOT BE RECLASSIFIED TO PROFIT OR LOSS | ||||||||||||
Actuarial gain on post-employment benefit obligation | — | 1.1 | 9.2 | |||||||||
ITEMS THAT MAY BE SUBSEQUENTLY RECLASSIFIED TO PROFIT OR LOSS | ||||||||||||
Financial instruments - Cash flow hedge | (0.7 | ) | 0.4 | (10.3 | ) | |||||||
Translation adjustments | (10.6 | ) | (65.4 | ) | 34.1 | |||||||
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OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX EFFECTS (i) | (11.3 | ) | (63.9 | ) | 33.0 | |||||||
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TOTAL OF COMPREHENSIVE INCOME (LOSS) | (327.8 | ) | (235.1 | ) | 313.0 | |||||||
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| |||||||
Attributable to: | ||||||||||||
Owners of Embraer | (330.3 | ) | (216.1 | ) | 292.0 | |||||||
Non-controlling interests | 2.5 | (19.0 | ) | 21.0 | ||||||||
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| |||||||
| (327.8 | ) | (235.1 | ) | 313.0 | ||||||||
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| |||||||
Total comprehensive income (loss) of | ||||||||||||
Continuing operations | (215.7 | ) | (326.1 | ) | (91.5 | ) | ||||||
Discontinued operations | (112.1 | ) | 91.0 | 404.5 | ||||||||
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| |||||||
| (327.8 | ) | (235.1 | ) | 313.0 | ||||||||
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| |||||||
| (i) | Items presented above are net of deferred income tax, if applicable, of US$ |
The accompanying notes are an integral part of these consolidated financial statements.
Embraer S.A.
Consolidated Statements of Changes in Shareholders’ Equity
Years Ended
(In millions of U.S. dollar)
| Revenue reserves | Accumulated other comprehensive (loss) | Revenue reserves | Accumulated other comprehensive (loss) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Note | Capital | Treasury shares | Share-based remuneration | Government grants | Legal Reserve | Additional proposed dividends | For investment and working capital | Retained earnings | Result in transactions with noncontrolling interest | Actuarial gain (loss) on post- employment benefit obligation | Cumulative translation adjustment | Other cumulative translation adjustments | Total shareholders’ equity | Noncontrolling interest | Total shareholders’ equity | Capital | Treasury shares | Share-based remuneration | Government grants | Legal reserve | For investment and working capital | Retained earnings | Result in transactions with non- 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 JANUARY 01, 2015 | 1,438.0 | (60.1 | ) | 33.1 | 40.7 | 180.3 | — | 2,208.5 | — | (4.2 | ) | (44.9 | ) | (25.7 | ) | (0.9 | ) | 3,764.8 | 100.0 | 3,864.8 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Net income for the year | — | — | — | — | — | — | — | 69.2 | — | — | — | — | 69.2 | 11.6 | 80.8 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Actuarial loss on post employment benefit obligation | — | — | — | — | — | — | — | — | — | 3.0 | — | — | 3.0 | — | 3.0 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Translation adjustments | — | — | — | — | — | — | — | — | — | — | (77.1 | ) | — | (77.1 | ) | (9.7 | ) | (86.8 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Financial instruments available for sale | — | — | — | — | — | — | — | — | — | — | — | 0.3 | 0.3 | — | 0.3 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Total comprehensive income | — | — | — | — | — | — | — | 69.2 | — | 3.0 | (77.1 | ) | 0.3 | (4.6 | ) | 1.9 | (2.7 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Share-based remuneration | 29.3 | — | — | 2.3 | — | — | — | — | — | — | — | — | — | 2.3 | — | 2.3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock option grants exercised | 29.3 | — | 21.7 | — | — | — | — | — | (14.5 | ) | — | — | — | — | 7.2 | — | 7.2 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Allocation of profits: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Government grants | 29.4 | — | — | — | 0.9 | — | — | — | (0.9 | ) | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Legal reserve | 29.5 | — | — | — | — | 3.1 | — | — | (3.1 | ) | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest on own capital | 29.6 | — | — | — | — | — | 6.6 | — | (34.5 | ) | — | — | — | — | (27.9 | ) | — | (27.9 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Reserve for investments and working capital | 29.7.1 | — | — | — | — | — | — | 16.2 | (16.2 | ) | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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AT JANUARY 01, 2016 | 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 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
At December 31, 2016 | 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 | — | — | — | — | — | — | — | 166.1 | — | — | — | — | 166.1 | 1.7 | 167.8 | — | — | — | — | — | — | 264.0 | — | — | — | — | 264.0 | 16.0 | 280.0 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Actuarial loss on post employment benefit obligation | — | — | — | — | — | — | — | — | — | (7.6 | ) | — | — | (7.6 | ) | — | (7.6 | ) | — | �� | — | — | — | — | — | — | — | 9.2 | — | — | 9.2 | — | 9.2 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Translation adjustments | — | — | — | — | — | — | — | — | — | — | 3.1 | — | 3.1 | (11.2 | ) | (8.1 | ) | — | — | — | — | — | — | — | — | — | 29.1 | — | 29.1 | 5.0 | 34.1 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Financial instruments | — | — | — | — | — | — | — | — | — | — | — | 11.0 | 11.0 | — | 11.0 | — | — | — | — | — | — | — | — | — | — | (10.3 | ) | (10.3 | ) | — | (10.3 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Total comprehensive income | — | — | — | — | — | — | — | 166.1 | — | (7.6 | ) | 3.1 | 11.0 | 172.6 | (9.5 | ) | 163.1 | — | — | — | — | — | — | 264.0 | — | 9.2 | 29.1 | (10.3 | ) | 292.0 | 21.0 | 313.0 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Share-based remuneration | — | — | 1.4 | — | — | — | — | — | — | — | — | — | 1.4 | — | 1.4 | — | — | 0.5 | — | — | — | — | — | — | — | — | 0.5 | — | 0.5 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock option grants exercised | 29.3 | — | 6.4 | — | — | — | — | — | (4.7 | ) | — | — | — | — | 1.7 | — | 1.7 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Acquisition of own shares | 29.3 | — | (17.1 | ) | — | — | — | — | — | — | — | — | — | — | (17.1 | ) | — | (17.1 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Allocation of profits: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends for 2015 approved in 2016 | — | — | — | — | — | (6.6 | ) | — | — | — | — | — | — | (6.6 | ) | — | (6.6 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Government grants | 29.4 | — | — | — | 1.0 | — | — | — | (1.0 | ) | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Legal reserve | 29.5 | — | — | — | — | 9.0 | — | — | (9.0 | ) | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest on own capital | 29.6 | — | — | — | — | — | — | — | (22.0 | ) | — | — | — | — | (22.0 | ) | — | (22.0 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends | 29.7 | — | — | — | — | — | — | — | (23.0 | ) | — | — | — | — | (23.0 | ) | — | (23.0 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Reserve for investments and working capital | 29.7.1 | — | — | — | — | — | — | 106.4 | (106.4 | ) | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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AT JANUARY 01, 2017 | 1,438.0 | (49.1 | ) | 36.8 | 42.6 | 192.4 | — | 2,331.1 | — | (4.2 | ) | (49.5 | ) | (99.7 | ) | 10.4 | 3,848.8 | 92.4 | 3,941.2 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Net income for the period | — | — | — | — | — | — | — | 246.8 | — | — | — | — | 246.8 | 16.0 | 262.8 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Actuarial loss on post-employment benefit obligation | — | — | — | — | — | — | — | — | — | 9.2 | — | — | 9.2 | — | 9.2 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Translation adjustments | — | — | — | — | — | — | — | — | — | — | 46.0 | — | 46.0 | 5.0 | 51.0 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Financial instruments | — | — | — | — | — | — | — | — | — | — | — | (10.3 | ) | (10.3 | ) | — | (10.3 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Total comprehensive income | — | — | — | — | — | — | — | 246.8 | — | 9.2 | 46.0 | (10.3 | ) | 291.7 | 21.0 | 312.7 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Share-based remuneration | — | — | 0.5 | — | — | — | — | — | — | — | — | — | 0.5 | — | 0.5 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock option grants exercised | 29.3 | — | 12.3 | — | — | — | — | — | (6.4 | ) | — | — | — | — | 5.9 | — | 5.9 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock options grants exercised | — | 12.3 | — | — | — | — | (6.4 | ) | — | — | — | — | 5.9 | — | 5.9 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Acquisition of own shares | 29.3 | — | (15.0 | ) | — | — | — | — | — | — | — | — | — | — | (15.0 | ) | — | (15.0 | ) | — | (15.0 | ) | — | — | — | — | — | — | — | — | — | (15.0 | ) | — | (15.0 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Allocation of profits: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Government grants | 29.4 | — | — | — | 4.3 | — | — | — | (4.3 | ) | — | — | — | — | — | — | — | — | — | — | 4.3 | — | — | (4.3 | ) | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Legal reserve | 29.5 | — | — | — | — | 12.0 | — | — | (12.0 | ) | — | — | — | — | — | — | — | — | — | — | — | 12.0 | — | (12.0 | ) | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest on own capital | 29.6 | — | — | — | — | — | — | — | (47.3 | ) | — | — | — | — | (47.3 | ) | — | (47.3 | ) | — | — | — | — | — | — | (47.3 | ) | — | — | — | — | (47.3 | ) | — | (47.3 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends | 29.7 | — | — | — | — | — | — | — | (16.0 | ) | — | — | — | — | (16.0 | ) | — | (16.0 | ) | — | — | — | — | — | — | (16.0 | ) | — | — | — | — | (16.0 | ) | — | (16.0 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Reserve for investments and working capital | 29.7.1 | — | — | — | — | — | — | 160.8 | (160.8 | ) | — | — | — | — | — | — | — | — | — | — | — | — | 160.8 | (160.8 | ) | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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AT DECEMBER 31, 2017 | 1,438.0 | (51.8 | ) | 37.3 | 46.9 | 204.4 | — | 2,491.9 | — | (4.2 | ) | (40.3 | ) | (53.7 | ) | 0.1 | 4,068.6 | 113.4 | 4,182.0 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
At December 31, 2017 | 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 income 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 | — | (4.2 | ) | (39.2 | ) | (102.7 | ) | 0.5 | 3,845.7 | 94.4 | 3,940.1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Adjustment related to accounting policy change | — | — | — | — | — | — | 1.3 | — | — | — | (1.3 | ) | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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At January 01, 2019 | 1,551.6 | (31.4 | ) | 37.4 | 47.0 | 204.4 | 2,182.3 | 1.3 | (4.2 | ) | (39.2 | ) | (102.7 | ) | (0.8 | ) | 3,845.7 | 94.4 | 3,940.1 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Net loss for the year | — | — | — | — | — | — | (322.3 | ) | — | — | — | — | (322.3 | ) | 5.8 | (316.5 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Translation adjustments | — | — | — | — | — | — | — | — | — | (7.3 | ) | — | (7.3 | ) | (3.3 | ) | (10.6 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Financial instruments | — | — | — | — | — | — | — | — | — | — | (0.7 | ) | (0.7 | ) | — | (0.7 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Total comprehensive income | — | — | — | — | — | — | (322.3 | ) | — | — | (7.3 | ) | (0.7 | ) | (330.3 | ) | 2.5 | (327.8 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock options grants exercised | — | 4.9 | — | — | — | — | (2.7 | ) | — | — | — | — | 2.2 | — | 2.2 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Government grants | — | — | — | 2.0 | — | — | (2.0 | ) | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Reserve for investments and working capital | — | — | — | — | — | (325.6 | ) | 325.7 | — | — | — | — | 0.1 | — | 0.1 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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AT DECEMBER 31, 2019 | 1,551.6 | (26.5 | ) | 37.4 | 49.0 | 204.4 | 1,856.7 | — | (4.2 | ) | (39.2 | ) | (110.0 | ) | (1.5 | ) | 3,517.7 | 96.9 | 3,614.6 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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The accompanying notes are an integral part of these consolidated financial statements.
Embraer S.A.
Notes to the Consolidated Statements of Cash Flows Years Ended
(In millions of U.S. dollar)
| Note | 12.31.2017 | 12.31.2016 | 12.31.2015 | Note | 12.31.2019 | 12.31.2018 | 12.31.2017 | |||||||||||||||||||||||
OPERATING ACTIVITIES | ||||||||||||||||||||||||||||||
Net income for the period | 262.8 | 167.8 | 80.8 | |||||||||||||||||||||||||||
Net income (loss) for the period, including discontinued operations | (316.5 | ) | (171.2 | ) | 280.0 | |||||||||||||||||||||||||
ADJUSTMENT TO NET INCOME FOR ITEMS NOT AFFECTING CASH | ||||||||||||||||||||||||||||||
Depreciation of property plant and equipment | 16 | 196.5 | 194.5 | 161.9 | 16 | 113.8 | 159.2 | 196.5 | ||||||||||||||||||||||
Amortization of government grants | (3.3 | ) | (3.1 | ) | — | |||||||||||||||||||||||||
Realization of government grants | (2.1 | ) | (3.6 | ) | (3.3 | ) | ||||||||||||||||||||||||
Amortization of intangible assets | 17 | 146.2 | 173.9 | 154.9 | 18 | 95.9 | 112.8 | 146.2 | ||||||||||||||||||||||
Amortization contribution from suppliers | (27.3 | ) | (38.3 | ) | (33.8 | ) | ||||||||||||||||||||||||
Allowance (reversal) for inventory obsolescence | 11.7 | (23.9 | ) | 7.6 | ||||||||||||||||||||||||||
Provision for adjustment to market value, inventory, property plant and equipment and intangible | 110.2 | 82.8 | 21.5 | |||||||||||||||||||||||||||
Realization of contribution from suppliers | 18 | (22.4 | ) | (22.0 | ) | (27.3 | ) | |||||||||||||||||||||||
Loss (reversal) for inventory obsolescence | 20.5 | 18.3 | 11.7 | |||||||||||||||||||||||||||
Adjustment to market value, inventory, property plant and equipment and intangible | 102.3 | 99.5 | 110.2 | |||||||||||||||||||||||||||
Allowance for doubtful accounts | 4.1 | 11.4 | 7.4 | (3.1 | ) | (7.8 | ) | 8.1 | ||||||||||||||||||||||
Loss on fixed assets disposal | 18.6 | 19.6 | 49.6 | |||||||||||||||||||||||||||
Losses on fixed assets disposal | 16 | 28.6 | 19.8 | 18.6 | ||||||||||||||||||||||||||
Deferred income tax and social contribution | (15.3 | ) | (146.5 | ) | 136.2 | 24.2 | 33.2 | (21.2 | ) | (12.9 | ) | |||||||||||||||||||
Accrued interest | 24.2 | (29.0 | ) | (13.1 | ) | 32.4 | 1.5 | (6.4 | ) | (29.0 | ) | |||||||||||||||||||
Interest on marketable securities | (23.6 | ) | (52.5 | ) | (7.6 | ) | ||||||||||||||||||||||||
Interest on marketable securities, net | (30.9 | ) | (33.6 | ) | (23.6 | ) | ||||||||||||||||||||||||
Equity in associates gains and losses | (1.2 | ) | 0.3 | 0.3 | 0.2 | 0.4 | (1.2 | ) | ||||||||||||||||||||||
Share-based remuneration | 0.5 | 1.4 | 2.3 | — | 0.1 | 0.5 | ||||||||||||||||||||||||
Foreign exchange gain (loss), net | 35 | 6.0 | (12.7 | ) | (31.3 | ) | (10.3 | ) | 20.7 | 6.0 | ||||||||||||||||||||
Residual value guarantee | 25 | (13.3 | ) | 27.5 | 0.3 | |||||||||||||||||||||||||
Provision for penalties | — | 58.6 | — | |||||||||||||||||||||||||||
Mark to market of the residual value guarantees | 25 | 4.2 | 16.5 | (13.3 | ) | |||||||||||||||||||||||||
Provision for voluntary redundancy scheme | 6.4 | 28.2 | — | — | — | 6.4 | ||||||||||||||||||||||||
Other | (4.3 | ) | (1.1 | ) | (2.7 | ) | (3.9 | ) | (7.2 | ) | (4.3 | ) | ||||||||||||||||||
CHANGES IN ASSETS | ||||||||||||||||||||||||||||||
Financial investments | (244.6 | ) | (307.7 | ) | (70.4 | ) | 507.8 | 790.8 | (244.6 | ) | ||||||||||||||||||||
Derivative financial instruments | (1.7 | ) | (21.6 | ) | 0.4 | 4.0 | 23.9 | (1.7 | ) | |||||||||||||||||||||
Collateralized accounts receivable and accounts receivable | (82.9 | ) | 156.0 | (100.5 | ) | 205.3 | (16.0 | ) | 4.6 | |||||||||||||||||||||
Contract assets | (152.3 | ) | 104.1 | (76.9 | ) | |||||||||||||||||||||||||
Customer and commercial financing | 21.0 | 18.8 | 12.4 | 1.1 | 4.6 | 21.0 | ||||||||||||||||||||||||
Inventories | 404.9 | (136.9 | ) | 137.2 | 147.3 | (281.9 | ) | 404.9 | ||||||||||||||||||||||
Guarantee deposits | 348.6 | — | — | |||||||||||||||||||||||||||
Other assets | 249.4 | 103.7 | (208.9 | ) | 13.2 | 43.5 | 249.4 | |||||||||||||||||||||||
CHANGES IN LIABILITIES | ||||||||||||||||||||||||||||||
Trade accounts payable | (127.3 | ) | (93.8 | ) | 72.1 | (44.6 | ) | 70.1 | (127.3 | ) | ||||||||||||||||||||
Non-recourse and recourse debt | (9.9 | ) | (10.9 | ) | (15.2 | ) | (323.7 | ) | (22.6 | ) | (9.9 | ) | ||||||||||||||||||
Other payables | (19.6 | ) | (30.3 | ) | (71.1 | ) | (28.7 | ) | (16.3 | ) | (36.6 | ) | ||||||||||||||||||
Contribution from suppliers | 10 | 86.0 | 123.9 | 140.0 | 4.5 | 125.5 | 86.0 | |||||||||||||||||||||||
Advances from customers | 65.2 | (97.9 | ) | 136.1 | ||||||||||||||||||||||||||
Contract liabilities | 200.6 | 101.2 | (99.9 | ) | ||||||||||||||||||||||||||
Taxes and payroll charges payable | 21.1 | (153.1 | ) | 63.0 | 2.6 | 30.7 | 21.1 | |||||||||||||||||||||||
Financial guarantees | (40.7 | ) | (87.6 | ) | 54.8 | (16.0 | ) | (21.2 | ) | (40.7 | ) | |||||||||||||||||||
Other payables | (48.7 | ) | 51.1 | 24.1 | ||||||||||||||||||||||||||
Other provisions | 20.4 | 9.8 | (53.9 | ) | ||||||||||||||||||||||||||
Unearned income | (160.6 | ) | (9.0 | ) | 108.7 | (7.3 | ) | (12.9 | ) | (11.8 | ) | |||||||||||||||||||
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NET CASH GENERATED (USED) BY OPERATING ACTIVITIES | 757.3 | (20.5 | ) | 862.5 | ||||||||||||||||||||||||||
NET CASH GENERATED BY OPERATING ACTIVITIES | 893.8 | 1,107.6 | 753.0 | |||||||||||||||||||||||||||
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INVESTING ACTIVITIES | ||||||||||||||||||||||||||||||
Acquisition of property, plant and equipment | 16 | (237.7 | ) | (392.5 | ) | (341.5 | ) | 16 | (284.5 | ) | (154.3 | ) | (237.7 | ) | ||||||||||||||||
Proceeds from sale of property, plant and equipment | 19.1 | 2.9 | 51.6 | 16 | 0.1 | 0.3 | 19.1 | |||||||||||||||||||||||
Additions to intangible assets | 17 | (470.5 | ) | (505.0 | ) | (427.6 | ) | 18 | (283.3 | ) | (290.3 | ) | (470.5 | ) | ||||||||||||||||
Investments in associates | (0.6 | ) | (2.6 | ) | (1.3 | ) | ||||||||||||||||||||||||
Financial instruments held to maturity | (408.4 | ) | (74.3 | ) | (702.8 | ) | ||||||||||||||||||||||||
Loans | — | (12.3 | ) | — | ||||||||||||||||||||||||||
Additions investments in subsidiaries and affiliates | (2.5 | ) | (2.4 | ) | (0.6 | ) | ||||||||||||||||||||||||
Financial investments | 977.8 | (76.5 | ) | (404.0 | ) | |||||||||||||||||||||||||
Dividends received | 0.1 | 0.1 | — | 0.1 | 0.1 | 0.1 | ||||||||||||||||||||||||
Restricted cash reserved for construction of assets | 1.0 | 4.1 | 4.2 | — | — | 1.0 | ||||||||||||||||||||||||
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NET CASH USED BY INVESTING ACTIVITIES | (1,097.0 | ) | (979.6 | ) | (1,417.4 | ) | ||||||||||||||||||||||||
NET CASH GENERATED (USED) IN INVESTING ACTIVITIES | 407.7 | (523.1 | ) | (1,092.6 | ) | |||||||||||||||||||||||||
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FINANCING ACTIVITIES | ||||||||||||||||||||||||||||||
Proceeds from borrowings | 972.9 | 576.2 | 1,696.9 | 400.5 | 124.0 | 972.9 | ||||||||||||||||||||||||
Repayment of borrowings | (540.2 | ) | (523.7 | ) | (419.2 | ) | (645.9 | ) | (596.3 | ) | (540.2 | ) | ||||||||||||||||||
Dividends and interest on own capital | (54.0 | ) | (28.2 | ) | (60.9 | ) | (2.0 | ) | (40.6 | ) | (54.1 | ) | ||||||||||||||||||
Proceeds from stock options exercised | 5.9 | 1.7 | 7.2 | 2.2 | 9.5 | 5.9 | ||||||||||||||||||||||||
Acquisition of own shares | (15.0 | ) | (17.1 | ) | — | — | — | (15.0 | ) | |||||||||||||||||||||
Lease payments | (11.8 | ) | — | — | ||||||||||||||||||||||||||
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NET CASH GENERATED BY FINANCING ACTIVITIES | 369.6 | 8.9 | 1,224.0 | |||||||||||||||||||||||||||
NET CASH GENERATED (USED) BY FINANCING ACTIVITIES | (257.0 | ) | (503.4 | ) | 369.5 | |||||||||||||||||||||||||
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INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 29.9 | (991.2 | ) | 669.1 | 1,044.5 | 81.1 | 29.9 | |||||||||||||||||||||||
Effects of exchange rate changes on cash and cash equivalents | (0.6 | ) | 67.2 | (216.6 | ) | (17.7 | ) | (71.0 | ) | (0.6 | ) | |||||||||||||||||||
Cash and cash equivalents at the beginning of the period | 1,241.5 | 2,165.5 | 1,713.0 | 1,280.9 | 1,270.8 | 1,241.5 | ||||||||||||||||||||||||
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CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD | 1,270.8 | 1,241.5 | 2,165.5 | 2,307.7 | 1,280.9 | 1,270.8 | ||||||||||||||||||||||||
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Included in cash and cash equivalents per the statements of financial position | 855.2 | 1,280.9 | 1,270.8 | |||||||||||||||||||||||||||
Included in assets held for sale – Commercial Aviation business unit | 4.2 | 1,452.5 | — | — | ||||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
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-heldpublicly 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 |
| (ii) | To perform and carry out technical activities related to the manufacturing and servicing of aerospace |
| (iii) | To contribute to the training of technical personnel as necessary for the aerospace |
| (iv) | To engage in and provide services for other technological, manufacturing and business activities in connection with the aerospace |
| (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 |
| (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 Company has no controlling group and its capital is comprised entirely of common shares.
TheseIn accordance with the Company’s by-laws, the consolidated financial statements of the Company as of and for the year ended December 31, 2019 were approved by the Company’s Board of Directors and were published on March 05, 2018.26, 2020, and the Form 20-F, which these financial statements are a part of, have been approved by the Company’s executives and reviewed by the Audit, Risk and Ethics Committee of the Company.
| 1.1 | Transaction between Embraer S.A. and The Boeing Company (“Boeing”) |
On January 24, 2019, Embraer, Boeing and certain subsidiaries of Boeing and Embraer entered into the Master Transaction Agreement (“MTA”) and other transaction documents, which defined the terms and conditions for the creation of a joint venture covering Embraer’s Commercial Aviation business unit with a participation of 80% of a subsidiary of Boeing and 20% of Embraer, as well as the creation of a joint venture to promote and develop new markets and applications for the C-390 Millennium multi-mission transport aircraft, with a participation of 51% of a subsidiary of Embraer and 49% of a subsidiary of Boeing (collectively “Transaction”). Until April 25, 2020, Embraer and Boeing continued to be obligated to perform their respective obligations under the MTA with respect to the consummation of the Transaction, and therefore, Embraer maintained the classification of the assets of the Commercial Aviation business and related services as “held for sale” and “discontinued operations” as of December 31, 2019. However, on April 25, 2020, Boeing provided notice to Embraer communicating its decision to terminate the MTA. In addition, Boeing terminated the Contribution Agreement that provided for a joint venture for theC-390 Millennium multi-mission transport aircraft.
While Embraer strongly believes that Boeing wrongfully terminated the MTA and the Contribution Agreement, the accounting impacts resulting from Boeing’s notice that it was terminating the strategic partnership will be recognized by the Company starting on April 25, 2020 the date on which Boeing provided the notice to Embraer. Additional information regarding the expected impacts and details regarding the balance of “assets held for sale” and “discontinued operations” as of December 31, 2019 are disclosed on Notes 3.4, 4 and 40.
| 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,.
All informations presented in the Standing Interpretations Committee (“SIC”).consolidated financial statements are those considered relevant in the context of Company’s activities and for management purposes.
EmbraerS.A.
Notes to the Consolidated FinancialStatements
In millions of U.S. dollar, unless otherwise stated
| 2.1.1 | Basis of preparation |
These consolidated financial statements have been prepared under the historical cost convention, modified byavailable-for-sale financial assets, otherexcept when the account requires different criteria, and adjusted for assets and financial instruments (including derivative instruments).liabilities measured as at fair value in subsequent measurement, when applicable.
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 a higherhigh degree of judgmentjudgments or complexity,complexities, or assumptions and significant estimates significant to the consolidated financial statements, are disclosed in Note 3.
Embraer S.A.
Notes to the Consolidated Financial Statements
In millions of U.S. dollar, unless otherwise stated
| 2.1.2 | Consolidation |
TheThese consolidated financial statements include the balances as of the December 31, 2017 financial statements2019 of the Company and all subsidiaries directly or indirectly controlled by Embraer,and special purpose entities (SPEs) controlled byin which the Company exclusive investment funds (FIE) and corporate venture capital investment funds (FIP). Jointly controlled entities (joint ventures) are not consolidated and are presented as Investments and accounted for by the equity method. The Company recognizes the assets, liabilities, revenues and expenses of joint operations in proportion to its share in the joint operation.has control, directly or indirectly.
All accounts and balances arising from transactions between consolidatedcontrolled entities are eliminated.eliminated during the consolidation process.
| a) | Subsidiaries |
Subsidiaries are entities (including Special Purpose Entities - SPEs) over which the Company has control.control, which means exposure and rights to variable returns, ability to use its power over these entities to affect those returns and ability to manage its relevant activities. The terms controlled entitycontrol assessment considers, in addition to held majority of voting rights, the shareholders agreement in place between the Company 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 beothernon-controlling shareholders. Subsidiaries are all entities whose significant financialshareholders with voting rights, any rights arising from other contractual agreements and operational policies may be directed by the Company. This analysis takes into consideration other factors, such as the existence of potential voting rights.power. Subsidiaries are fully consolidated from the date on which control is transferredacquired until the date in which the Company losses control.
Balances associated to the Company.non-controlling shareholders with remaining interest over subsidiaries are presented asnon-controlling interest in the Company’s statements of income and shareholders’ equity.
The accounting policies of the subsidiaries are consistent with the policies adopted by the Company.
| b) | Special Purpose Entities (SPE) |
The Company held certain financing structures for aircraft sales through SPEs in which it has control even without direct or indirect interest. As of December 31, 2019, and 2018, the only SPE with ongoing activities and consolidated in the financial statements is Refine, Inc.
| c) | Consortia |
A consortium is a legal entity set up to meet a specific purpose and is subject to mandatory accounting controlslaws and rules under specific regulations. As of December 31, 2019, the Company along with wholly owned subsidiary hold interest in consortium structure established by both entities solely. The Company’s subsidiaries that participate in atransactions of this consortium account for the consortium transactions in relation to its interestsare fully recorded and presented in the consortium. This has reflects in the Consolidated Financial Statements.consolidated financial statements.
EmbraerS.A.
Notes to the Consolidated FinancialStatements
In millions of U.S. dollar, unless otherwise stated
| 2.1.3 | Corporate structure |
Below are informationsis presented information regarding the Company’s consolidated subsdiaries and joint controlled entities:subsidiaries as at December 31, 2019:
Entity | Participation Embraer Group | Country | Core activities | |||||
Airholding S.A. | 100 | % | Portugal | Coordinates investments in subsidiaries in Portugal | ||||
OGMA - Indústria Aeronáutica de Portugal S.A. | 65 | % | Portugal | Aviation maintenance and production | ||||
Yaborã Indústria Aeronáutica S.A. | 100 | % | Brazil | Future commercial aviation joint venture with Boeing | ||||
Embraer Commercial Aviation LLC | 100 | % | EUA | Future company related to the Commercial Aviation segment | ||||
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 Aviation France - EAF | 100 | % | France | Future company related to the Commercial Aviation segment | ||||
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 |
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| 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) | ||||
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Embraer CAE Training Services LLC | 51 | % | EUA | Pilot, mechanic and crew training | ||||
| 100 | % | Future joint venture with Boeing for the sale and promotion ofC-390 Millennium | |||||
| 100 | % | EUA | Sale of spare parts and support services for the Executive Aviation | ||||
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 | ||||
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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) | ||||
SAVIS Tecnologia e Sistemas S.A. | 100 | % | Brazil | Operates in Defense and Security with the Brazilian Government | ||||
Embraer GPX Ltda | 100 | % | Brazil |
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Embraer Netherlands Finance B.V. | 100 | % | Holland | Financial operations raising and investing funds of the Embraer Group | ||||
Embraer Aviation Netherlands B.V. | 100 | % | Holland | Future company responsible for Embraer’s commercial activities in Europe | ||||
Embraer Netherlands B.V. | 100 | % | Holland | Concentrates corporate activities abroad, leasing and selling used aircraft | ||||
Embraer Asia Pacific PTE. Ltd. | 100 | % | Singapore | After sale services and support in Asia | ||||
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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 | ||||
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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 | ||||
| 100 | % |
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| 100 | % | Brazil |
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Embraer S.A.
EmbraerS.A.
Notes to the Consolidated FinancialStatements
In millions of U.S. dollar, unless otherwise stated
Specific purpose entities (SPEs)Tepro Consortium - 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. The consolidated SPEs in which the Company has no control are: PM Limited, Refine Inc., RS Limited, River One Ltd. and Table Inc. Other SPEs in which Embraer has no control are not consolidated, based on technical analysesEntity constituted by Management. Except for the aforementioned consolidated SPEs, the Company has no significant risks attributed to other structured operations involving SPEs.
Consortium Tepro – a consortium formed by SavisSAVIS Tecnologia e Sistemas S.A. and Bradar Indústria S.A., companiesS.A, a company controlled by Embraer Defesa e& Segurança, Participações S.A., to assistand Embraer S.A, with the objective of assisting the Brazilian Army in the first phase of implementation of the Integrated Frontier Monitoring System (Sistema Integrado de Monitoramento de Fronteiras - Sisfron).(“Sisfron”) for the development of certain activities. Located in the city of Campinas, – SP, the consortium isState of São Paulo, Brazil, it represents a direct ownership stake of 93.5% owned by Savisfrom SAVIS and 6.5% by Bradar.of Embraer S.A.
Fundo Aeroespacial - Equity investment fund (FIP) – An Embraer initiative in conjunctionconnection 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 transactionfund is not consolidated in the Company’s financial statements, but its results are recorded using the equity method and presented as part of the operating income based in the Company’s equity line.interest (34%).
| 2.1.4 | Changes to the comparative consolidated financial statements |
Disclosure of contingent liabilities on income tax matters (Note 26.2)
With the adoption of the IFRIC 23 interpretation, which seeks to clarify how to apply the recognition and measurement requirements of IAS 12 - Income taxes when there are uncertainties about treatments applied in the calculation of the respective taxes (income tax and social contribution on net income), the Company started a review of all its legal demands and the internal processes for identification, recognition, measurement and disclosure criteria applied in previous periods in relation to these matters.
This review involved a joint work with legal advisors that advocate the causes and an evaluation of the aspects related to uncertain tax treatments that resulted in a general review of the legal demands, its risk classification and disclosure criteria, where was noted that some legal demands classified as possible risk of loss were not disclosed because they were in initial stage of judgment in Brazil, still in the administrative instance. Also, the uniqueness of the themes, the specificities of the aeronautical segment in Brazil and the scarcity of jurisprudence were evaluated.
Management is providing disclosure of such contingent liabilities on income tax matters not disclosed before in Note 26.2 considering its historical values as of December 31, 2019 and 2018.
Classification of the Commercial Aviation business unit as discontinued operations (Note 4)
The consolidated statements of income for the comparative years ended December 31, 2018 and 2017 are being recasted due to the classification of Commercial Aviation business unit and related services as discontinued operations (Note 4).
| 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. The Company uses
This set of annual consolidated financial statements includes the first year of adoption of the following new standards and interpretations:
IFRS 16 - Leases (Note 2.2.1.1).
Interpretation IFRIC 23 - Uncertainty over income tax treatments (Note 2.2.1.2).
In addition, at January 1, 2019 the Company changes its accounting policies:policy choice for hedge accounting structures to adopt the requirements of IFRS 9 - Financial Instruments, as per Note 2.2.1.3.
EmbraerS.A.
Notes to the Consolidated FinancialStatements
In millions of U.S. dollar, unless otherwise stated
| 2.2.1 | Changes due to adoption of new accounting standards, interpretations and policies |
| 2.2.1.1 | IFRS 16 - Leases |
IFRS 16 establishes the principles for the recognition, measurement, and disclosure of leases and requires lessees to recognize a single accounting model in the statements of financial position. The lessor’s accounting in IFRS 16 remains substantially unchanged in relation to IAS 17. Lessors will continue to classify between operating or finance leases, using principles similar to the former standard and, therefore, IFRS 16 has no impact on leases where the Company is the lessor.
From the lessee’s standpoint, lease contracts previously recognized as expenses in the statement of income for the year on a straight-line basis, start to be recognized in the statements of financial position asright-of-use asset for the existing right of using the assets underlying the contract as a contra entry to a lease liability arising from the obligation to make contractual payments assumed.
The Company adopted IFRS 16 using the modified retrospective model with the adoption date on January 1, 2019. Under this approach, the financial information comparative to prior periods are not being restated and remain as previously reported in accordance with IAS 17.
The Company used the following practical expedients permitted by the standard of: (i) not recording operating lease contracts, that on the beginning date, have lease term equal to or below 12 months or less (“short-term leases”) and (ii) not recording contracts for which the individual underlying asset is lower than US$ 5 thousand(“low-value leases”).
The details on and impacts from the changes in accounting policies are disclosed below:
| a) | Accounting impact from the adoption of IFRS 16: |
As part of the adoption process, the Company has examined its lease transactions to determine whether each effective contract is or contains a lease based on the new definition. Under IFRS 16, a contract is or contains a lease if it transfers the right to control the use of an identified asset over a period of time in exchange for consideration.
The Company identified applicable contracts within the scope of IFRS 16 for leases of land and buildings, facilities, machinery, vehicles and other equipment, subject to the practical expedients applied. For the contracts identified, the Company recognized:
A lease liability in the total amount of US$ 57.6 related to the lease payments according to the cash flows of each contract, discounted to present value at the incremental borrowing rate. The incremental weighted average borrowing nominal rate applied to lease liability on January 1, 2019 was 6.3%.
Theright-of-use assets representing the right to use the underlying assets of these contracts were measured in an amount corresponding to the lease liability.
Lease commitments as at December 31, 2018 | 78.1 | |||
- (Less): short-term leases recognized on a straight-line basis as expense | (1.9 | ) | ||
- (Less):low-value leases recognized on a straight-line basis as expense | (3.3 | ) | ||
- Discounted using the incremental borrowinig rate | (15.3 | ) | ||
Lease liability as at January 1, 2019 | 57.6 | |||
| 2.2.1.2 | IFRIC 23 - Uncertainty over income tax treatments |
The Interpretation IFRIC23 clarifies how to apply the recognition and measurement requirements of IAS12 - Income Taxes when there are uncertainties over treatments applied in the calculation of the respective taxes (income tax and social contribution on net income).
EmbraerS.A.
Notes to the Consolidated FinancialStatements
In millions of U.S. dollar, unless otherwise stated
The interpretation was effective as from January 1, 2019. In the opinion of the Company’s management, there were no significant impacts arising from this interpretation, as all procedures adopted for calculation and payment of income taxes are supported by the prevailing legislation and case law of Administrative and Judicial Courts. Contingent liabilities of this nature are presented in Note 26.2.
| 2.2.1.3 | Hedge accounting - Adoption of IFRS 9 |
The Company changed the accounting policy previously disclosed in Note 2.2.1(a) to the consolidated financial statements as of December 31, 2018 to adopt the requirements of IFRS 9 - Financial Instruments, to supersede IAS 39 – Financial Instruments: Recognition and Measurement, for hedge instruments designated for hedge accounting beginning on January 1, 2019.
| (i) | Fair value hedge: |
The Company applies the fair value hedge accounting to hedge against the risk of changes in borrowing and financing interest rates by contracting swaps. Interest rate swaps existing on January 1, 2019 qualify as fair value hedge for purposes of IFRS 9. The Company’s risk management strategies and hedge documentation are aligned with the requirements of IFRS 9 for designation of transactions.
Changes in the fair value of derivatives designated and qualified as fair value hedge continue to be recorded in statements of income for the year as financial income (expense), net, including the changes in the fair value of hedged asset or liability (hedged item) attributable to the hedged risk. There were no changes with the adoption of IFRS 9.
| (ii) | Cash flow hedge: |
The Company applies the cash flow hedge accounting to hedge against the cash flow volatility attributable to a risk of foreign exchange and interest rate fluctuation associated with highly probable forecast transactions that will affect income or loss for the year.
For instruments designated as cash flow hedge, the Company started to account for changes in the fair value of the time value of the instruments (options), previously recognized in financial income (expense), net according to IAS 39, in accumulated other comprehensive income as hedge cost in the cash flow hedge reserve line. Hedge costs are reclassified to the statements of income together with the intrinsic value of the options by adjusting the initial value of the hedge item.
As at January 1, 2019, the amount of US$ 1.3 was reclassified from retained earnings to the financial instrument reserve in accumulated other comprehensive income (loss) in shareholders’ equity related to the time value of the options. The Company did not reclassify the time value of outstanding options as at January 1, 2018, because these transactions were settled or expired before the transition date to IFRS 9.
The Company’s risk management strategies and hedge documentation are aligned with the requirements of IFRS 9 for designation of transactions as cash flow hedge.
| 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;settled.
Currency of the country whose competitive forces and regulations most influence the Company’s business;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; andsettled.
EmbraerS.A.
Notes to the Consolidated FinancialStatements
In millions of U.S. dollar, unless otherwise stated
Currency in which the Company largely obtains funds for financial operations and in which it normally receives for its sales and accumulates cash.
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 conversiontranslation (in relation to monetary assets and liabilities indexed in currencies other than the functional currency) are recognized in the consolidated statements of income statement as monetaryforeign exchange gain (loss), net. Customer advances and exchange variations, net.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.
Financial Instruments |
Transactions
| 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, 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 currencies (other thancomprehensive income and (iii) measured at fair value through profit or loss.
Financial assets are not reclassified subsequent to initial recognition, unless the functional currency)Company modifies the business model for the management of these financial assets, in which case all affected assets are translated into the functional currency at the foreign exchange rates in forcereclassified on the transaction dates and subsequently updated at the exchange ratesfirst day of the reportingnew 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, guarantee deposits and other financial assets.
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 case of subsequent measurement. Foreignconsolidated changes in shareholders’ equity. Gains or losses due to impairment and exchange gains and losses resulting from this conversion (in relation to monetary assets and liabilities indexed in currencies other thanvariation, including interest calculated using the functional currency)effective interest method, are recognized in the consolidated statements of income statement as monetary andfinancial income (expense), net, except for the exchange variations,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.
EmbraerS.A.
Notes to the Consolidated FinancialStatements
In millions of U.S. dollar, unless otherwise stated
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.
Financial |
liabilities
The Company classifies its financial assetsliabilities 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 including assetsif it is held for trading (ii) availableor 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 sale, (iii) held to maturity, and (iv) loans and receivables. The classification depends on the purpose for which the financial assets were acquired. Management decides on the classification of its financial assets at initial recognition.exchange variation recognized as foreign exchange gain (loss), net.
Financial assetsliabilities are initially recognized at fair value plus transaction costs. Financial assets carried at fair value through profitderecognised when contractual obligations are withdrawn, canceled or loss are initially recognized at fairexpired. The difference between the extinct book value and the respective transaction costs are expensed in the statement of income.
Financialconsideration paid (including transferred assets are derecognized when the rights to receive cash flows have expired or have been transferred. Derecognition occurs if the Company has transferred substantially all risks and rewards of the asset ownership.
Financial assets measured at fair value through profit or loss are those held for active and frequent trading. Gains and losses resulting from differences in the fair value are presented in the statement of income in financial income in the period in which they occur.
The fair values of publicly quoted investments are based on the current purchase and sale prices. In the case of financial assets without an active market or not publicly quoted, the Company uses valuation techniques to calculate the fair value. These methods include comparison with recent transactions with third parties, reference to other substantially similar instruments, analysis of discounted cash flows and options pricing models that prioritize market information and minimize information generated by Management.
Financial assets available for sale arenon-derivative instruments measured at fair value that the Company intends to sell. They are included innon-current assets, unless Management intends to dispose of the investment within 12 months after the statement of financial position date.
Investments innon-derivative instruments that the Company has the ability and intention to hold until maturity are classified as investments held to maturity and are measured initially at fair value, including the transaction cost, and subsequently at amortized cost, using the effective interest method.
This category includes loans granted and receivables that are non derivative financial assets with determined or fixed payments, not traded in an active market.
The Company’s loans and receivables include trade accounts receivable, financing of customers and other receivables and are not subject to the use of fair value. Interest on loans and receivablesassumed liabilities) is calculated by the effective interest rate method and recognized in the income statement as financial income (expense), net.
The Company evaluates if there is objective evidence at the balance sheet date that a financial asset or financial group is recognized at an amount higher than its recoverable amount. If applicable, a provision is recognized for impairmentconsolidated statements of the asset.
Embraer S.A.
Notes to the Consolidated Financial Statements
In millions of U.S. dollar, unless otherwise stated
| 2.2.5 | Cash and cash equivalents and |
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.
EmbraerS.A.
Notes to the Consolidated FinancialStatements
In millions of U.S. dollar, unless otherwise stated
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 |
AmountsWhen 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 from installment sales arewhen the payment is deferred by the customer is adjusted to present value if applicable, atidentifying an interest rate compatible with the market at the time of sale and applying it to the sale,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 receivablemeasurement of expected credit losses and recognition of impairment losses in accordance with the term for receipt.
When the Company has objective evidence that it will be unable to recover the amountconsolidated statements of a trade receivable, due to client’s financial difficulties, bankruptcy or reorganization procedures of the debtor, or due to the fact that the amount receivable has been outstanding for a term that leads the Company to conclude that receiptincome. The methodology data is doubtful, a reduction is recognized in receivables for doubtful accounts. The amount recognized as a reduction in accounts receivable is the difference between the carrying amountreviewed and the estimated recoverable amount.
Trade accounts receivable also include outstanding amounts of revenues from construction contracts, recognized under the percentage of completion method, by the cost incurred or physical progress of the contracts, recognized at the net amount of advances received from customers and estimated probably losses to doubtful debts.updated periodically.
| 2.2.7 | Derivative financial instruments |
The Company uses derivative instruments to protecthedge 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 profit or loss, taking into accountconsolidated statements of income, considering the realizablefair value of these instruments (market value).instruments. The provision for unearned gains and losses is recognized in the statementconsolidated statements of financial position under derivative financial instruments, and the counterpart in profit and lossconsolidated statements of income under financial income (expense), net, (Note 34)35), except for operations to hedge exposure to changes in exchange rate or designated as cash flow hedge, accounting.
Embedded derivatives are separated from their host contracts and are measured at their fair values provided they meet the definition of a derivative.which is recognized as accumulated other comprehensive income (loss) in shareholders’ equity.
| 2.2.8 | Hedge accounting |
SpecificThe Company uses hedge accounting to book certain derivative financial instruments applied to hedge risks of fluctuations in foreign exchange and interest rates in transactions contracted to protect the Company against financial risks. Different techniques are used in accounting for these derivatives, seeking to eliminate the effects of the volatility caused by such risks.associated with firm commitments and highly probable forecast transactions.
On hedge initial designation, of the hedge, the Company formally documents the relationship between hedginghedge 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 thehedge 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%.
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 hedge accounting is presented in Note 9. Changes in fair value hedgesof hedge instruments and cash flow hedges, as follows:hedge costs booked in accumulated other comprehensive income (loss) in shareholders’ equity are presented in Note 9.
| a) | Fair value |
Fair value hedge is applied for derivative financial instruments that hedge the Company against risk of fluctuations in interest rates (hedged risk) of loans and financing.
Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the statement of income in financial income (expenses), net,or loss, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. The Company only uses fair value hedge accountinggain or loss relating to hedge fixedthe effective portion of interest risk on borrowings.
If the hedge no longer meets the hedge accounting criteria, the fair value of the instrument continues to berate swaps is recognized in the statement 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 profit or loss overas financial income (expense), net. The gain or loss relating to the period to maturity.ineffective portion is recognized in income or loss within financial income (expense), net.
| b) | Cash flow |
Cash flow hedge is applied for hedging risks associated with the volatility of cash flows in foreign currency associated with highly probable forecast transaction that will impact income or loss, in this case the payroll expenses of personnel in Brazil settled in Brazilian Reais.
EmbraerS.A.
Notes to the Consolidated FinancialStatements
In millions of U.S. dollar, unless otherwise stated
The Company uses hedge accounting fordesignates as cash flow hedges in order to protect itself from cash flow variations attributed to exchange rate variation risk related to a transaction that is likely to affect the Company’s results.
intrinsic value of hedge instruments (put and call options of foreign currency). The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognized in the cash flow hedge reserve within shareholders’ equity underequity. The time value of put and call options is recognized as hedge costs in accumulated other comprehensive income.income (loss) within shareholders’ equity. The gain or loss relatedrelating to the ineffective portion is recognized immediately in profitincome or loss, aswithin financial income (expense)., net.
Amounts accumulated in shareholders’ equity are reclassified to the statement of income in the periods in whichwhen the hedged item affects profitincome or loss. However, when the forecasted transaction that is hedged results in the recognition of anon-financial asset, the gains and losses previously deferred in equity are transferred from equity and included in the initial measurement of the cost of the asset.
When a cash flowhedging instrument expires, or is sold or terminated, or when a hedge instrument is settled, or no longer meets the criteria for hedge accounting, any cumulative deferred gain or loss and deferred costs of hedging in shareholders’ equity at that time remains in shareholders’ equity until the highly probable forecast transaction occurs, when it is realized against profitreclassified to income or loss (inalong with the same line as the hedged item) in line with realizationgain or loss of the hedged operation against profit and loss.forecast transaction. When the hedgedforecast transaction is no longer expected to occur, the cumulative gain or loss and deferred costs of hedging that were reported in shareholders’ equity isare immediately transferredreclassified to profitincome or loss forwithin financial income (expense), net.
| c) | Effectiveness of hedge accounting |
Hedge effectiveness is determined at the inception of the hedge relationship, and through periodic prospective effectiveness assessments, to ensure that an economic relationship exists between the hedged item and hedging instrument.
For fair value hedges, the Company enters into interest rate swaps where the critical terms of the hedging instrument match exactly with the terms of the hedged item, as notional value, payment term and cash outflow dates. Since all critical terms matched during the year underthe hedge relationship was 100% effective.
In the case of cash flow hedges designated to hedge the volatility of payroll expenses settled in Brazilian Reais, the Company enters intozero-cost collar financial instruments by buying put options and selling call options of foreign currency with the same counterparty and risk premium zero. The critical terms of financial instruments matched with the terms of hedged risk - the put and call options notional value hedges the risk 1:1 (forecast of payroll cash flows in Brazilian Reais for fiscal year) and its due date is within the forecast dates of cash outflows throughout the year. The Company asses on a qualitative and prospective basis the cash flow hedge effectiveness. If relevant changes in circumstances affect the terms of the hedged item, as changes in the forecast value of hedged cash outflows in Brazilian Reais in comparison to the effective value, the Company performs on a prospective basis the balance of hedge relationship and any ineffective portion is recognized in income or loss within financial income (expense)., net.
| 2.2.9 |
These relate to financing granted to customers on the sale of certain aircraft and are measured at the amortized cost, by the effective interest rate method.
Inventories
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 as recourse and non-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 market value.
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.
The Company’s inventories are largely comprised of raw material, work in progress, spare parts and finished products.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.
Embraer S.A.
Notes to the Consolidated Financial Statements
In millionsInventories of U.S. dollar, unless otherwise stated
Inventoriesraw material and spare parts are written offrecognized as at the weighted average cost, except for aircraft, whichcost. Manufactured aircrafts (finished goods) and work in progress are recognized against profit and lossmeasured at theirits individual production cost. cost, which is recognized as cost of sales and services in the consolidated statements of income when aircraft is delivered to the customer.
Inventories are assessed periodically to determine whether the net realizable value is higher than theits cost and impairment loss is recognized if the acquisitionbook value is higher as cost is higher.
The Company has used aircraft for resale, usually received intrade-in transactions to facilitate new aircraft sales.of goods sold and services rendered.
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 movementperiods, in accordance with established policy:
Provision for obsolescence is recorded for items without activity for over two years and with no planned use in the production program, and estimated demand and also coversto cover expected losses from excess inventories or obsolete work in process. Probable losses onprogress, except for inventories of spare parts, are recognizedfor which the provision is based on technical obsolescence orof items without activity for over two years andyears.
EmbraerS.A.
Notes to the Consolidated FinancialStatements
In millions of U.S. dollar, unless otherwise stated
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 periodically with its net realizable value, which there is no future demand.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 as other operating expenses. The estimated selling price of used aircraft is based in the assessment of third party.
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, totalingwherein 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 basesbasis of assets and liabilities.
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 Parent Company, such exchange variations are recognized in Currency Translation Adjustments oncumulative translation adjustments within shareholders’ equity, and are only recognized in Profit and Lossthe 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 Parent Company and sales between subsidiaries. Unrealized profits between the Parent Company and its subsidiaries are eliminated in the Parent Company’s Statement 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.
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 16).Note 16. 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 entity and the cost of the item can be measured reliably.Company.
The Company estimates the residual value for certain aircraft and spare parts included in the Exchange Pool Program.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.
Embraer S.A.
Notes to the Consolidated Financial Statements
In millions of U.S. dollar, unless otherwise stated
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. |
EmbraerS.A.
Notes to the Consolidated FinancialStatements
In millions of U.S. dollar, unless otherwise stated
| 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 |
| h) | Computers and peripherals |
| 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 |
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.Revision of the sales estimate related to the amortization quota is made at least annually.
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.
Embraer S.A.
NotesThe Company records these contributions when received as a liability and as the development stages and contractual events signed with the supplier are met, therefore, no longer subject to return, these values are slaughtered for aircraft development costs recorded in intangible, and amortized in conjunction with development expenses following 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.
Identified intangible assets acquired in business combinations are recognized at fair value at the acquisition date. This group includes:
EmbraerS.A. |
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.
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.
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 16.
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 profit or loss by the straight-line method over the lease period.
Noncurrent assets, plant and equipment and intangible assets are initially measured at acquisition or construction cost. However, if there are indications that the value of such assets will not be recoverable in the future, they are tested for impairment.
The indicators are analyzed every quarter and tested if there are indications of impairment. At the end of the year, the Company calculates impairment for all CGUs whose intangible assets originated from product development and goodwill for future profitability originated on the acquisition of new business, whether or not there are indications of impairment.
Embraer S.A.
Notes to the Consolidated FinancialStatements
In millions of U.S. dollar, unless otherwise stated
| 2.2.14 | 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 equipment, 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 cash-generating units (CGU)CGUs taking into consideration the company’sCompany’s business model and its monitoring of cash flows. In general, the CGUs are defined in accordance with the families/platforms of the aircraftaircrafts or other goods and services produced by a Group company,the Company, irrespective of its geographic location.
The Company applies the value in use concept, using discounted cash flow projections, before income tax and social contribution, discounted at the WACCan 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.
When the impairment test is performed, Management compares the carrying amounts of the Company’s CGUs with its recoverable amounts, which is determined at the higher between its value in use and fair value less cost to sell. An impairment charge is recognized when the carrying amount exceeds the recoverable amount.
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 areis aircraft that the Company maintainsheld in its property, plant and equipment for lease purposes.operating leases purposes, in which the Company acts as lessor. In this case, the aircraft is tested individually using the higher of itsvalue-in-use value in use and its market value to determine its recoverable value.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.
AnyAssets held for sale are tested for impairment losses of a CGU are recognized in Other Operating Expense and allocated to relevant assets of the impaired CGU.accordance with practice described in Note 4.
Leases |
| a) | Right-of-use assets |
The Company recognizesright-of-use assets on the lease inception date (that is, the date in which the asset is available for use). Theright-of-use assets are measured at cost, less any depreciation or impairment losses and are adjusted for any revaluation of lease liabilities. The cost ofright-of-use assets includes the amount of the recognized lease liability, the initial direct costs incurred less any lease incentives received. Theright-of-use assets are depreciated on a straight-line basis considering the lease term and the Company’s intention in renewal options, based on the best estimate on each reporting date.Right-of-use assets are subject to impairment test if there is evidence that their carrying amount may be higher than the recoverable amount.
Expenses on the depreciation of theright-of-use asset are recognized as operating expenses in the statements of income for the year.
| b) | Lease liabilities |
On the lease inception date, the Company recognizes lease liabilities measured at the present value of lease payments to be made during the lease term, which is measured based on the contract term and renewal options. Lease payments include fixed payments less any lease incentives received. Variable lease payments not depending on an index or rate are recognized as expenses in the period in which the event or condition that triggers the payment occurs.
When calculating the present value of lease payments, the Company uses the incremental borrowing rate. After the inception date, the amount of the lease liability is increased to reflect the increase of interest, adjustments of installments and reduced for lease payments made. Moreover, the carrying amount of the lease liability is remeasured in case of any modification, a change in the lease term, a change in fixed lease payments or a change in valuation to acquire the underlying asset. Interest is recognized as financial income (expense), net in the statements of income for the year.