6-K 1 d39362d6k.htm 6-K 6-K
Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 6-K

 

 

Report of Foreign Private Issuer

Pursuant to Rule 13a-16 or 15d-16

under the Securities Exchange Act of 1934

For the month of September 2020

Commission File Number: 001-15102

 

 

Embraer S.A.

 

 

Av. Brigadeiro Faria Lima, 2170

12227-901 São José dos Campos, São Paulo, Brazil

(Address of principal executive office)

 

 

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F:

Form 20-F  ☒     Form 40-F  ☐

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):  ☐

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):  ☐


Table of Contents

 

Embraer S.A.

Unaudited Interim Condensed

Consolidated Financial Statements

as of June 30, 2020

 

1


Table of Contents

INDEX TO THE FINANCIAL STATEMENTS

 

 

     Page  

Index to Interim Condensed Consolidated Financial Statements

     2  

Condensed Consolidated Statements of Financial Position as of June  30, 2020 and December 31, 2019

     3  

Condensed Consolidated Statements of Income for the Three and Six-month Periods Ended June 30, 2020 and 2019

     5  

Condensed Consolidated Statements of Comprehensive Income for the Three and Six-month Periods Ended June 30, 2020 and 2019

     6  

Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Six-month Periods Ended June 30, 2020 and 2019

     7  

Condensed Consolidated Statements of Cash Flows for the Six-month Periods Ended June 30, 2020 and 2019

     8  

Notes to the Interim Condensed Consolidated Financial Statements

     9  

 

2


Table of Contents

Embraer S.A.

Condensed Consolidated Statements of Financial Position

as of June 30, 2020 and December 31, 2019

(In millions of U.S. dollar)

 

 

ASSETS

   Note    06.30.2020      12.31.2019  
          (Unaudited)         

CURRENT

        

Cash and cash equivalents

   4      1,872.8        855.2  

Financial investments

   5      125.7        409.8  

Trade accounts receivable, net

   6      230.9        149.4  

Derivative financial instruments

   7      1.0        1.4  

Customer and commercial financing

        1.0        —    

Collateralized accounts receivable

        4.1        4.0  

Contract assets

   21.b      402.8        461.9  

Inventories

   8      3,128.8        1,304.4  

Guarantee deposits

        0.2        0.1  

Income tax and social contribution

        95.1        90.5  

Other assets

        219.0        120.1  
     

 

 

    

 

 

 
        6,081.4        3,396.8  
     

 

 

    

 

 

 

Assets held for sale

   3      —          5,174.6  
     

 

 

    

 

 

 
        6,081.4        8,571.4  
     

 

 

    

 

 

 

NON-CURRENT

        

Financial investments

   5      —          14.9  

Derivative financial instruments

   7      0.4        0.7  

Customer and commercial financing

        6.6        —    

Collateralized accounts receivable

        11.7        13.6  

Guarantee deposits

        1.2        0.5  

Deferred income tax and social contribution

   14.1      160.3        0.7  

Other assets

        77.2        61.8  
     

 

 

    

 

 

 
        257.4        92.2  

Investments

        8.8        8.1  

Property, plant and equipment, net

   10      1,943.7        968.9  

Intangible assets, net

   11      1,972.4        894.1  

Right of use

        61.7        37.8  
     

 

 

    

 

 

 
        4,244.0        2,001.1  
     

 

 

    

 

 

 

TOTAL ASSETS

        10,325.4        10,572.5  
     

 

 

    

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

3


Table of Contents

Embraer S.A.

Condensed Consolidated Statements of Financial Position

as of June 30, 2020 and December 31, 2019

(In millions of U.S. dollar)

 

 

LIABILITIES

   Note    06.30.2020     12.31.2019  
     (Unaudited)  

CURRENT

       

Trade accounts payable

        787.1       358.0  

Lease liability

        9.6       5.0  

Loans and financing

   13      471.2       14.9  

Recourse and non-recourse debt

        4.1       4.0  

Other payables

        234.8       162.5  

Contract liabilities

   21.b      1,084.8       649.1  

Derivative financial instruments

   7      11.4       4.5  

Taxes and payroll charges payable

        81.2       54.9  

Income tax and social contribution

        101.8       42.6  

Financial guarantee and residual value

   15      51.7       —    

Dividends payable

        1.0       1.4  

Unearned income

        2.5       2.0  

Provision

   16.1      96.8       103.1  
     

 

 

   

 

 

 
        2,938.0       1,402.0  
     

 

 

   

 

 

 

Liabilities held for sale

   3      —         4,984.0  
     

 

 

   

 

 

 
        2,938.0       6,386.0  

NON-CURRENT

       

Lease liability

        53.3       33.6  

Loans and financing

   13      3,328.0       76.1  

Recourse and non-recourse debt

        11.7       13.6  

Other payables

        6.0       12.7  

Contract liabilities

   21.b      239.1       34.3  

Derivative financial instruments

   7      12.6       —    

Taxes and payroll charges payable

        10.6       13.4  

Deferred income tax and social contribution

   14.1      508.6       272.3  

Financial guarantee and residual value guarantees

   15      69.2       —    

Unearned income

        60.2       16.1  

Provision

   16.1      107.7       99.8  
     

 

 

   

 

 

 
        4,407.0       571.9  
     

 

 

   

 

 

 

TOTAL LIABILITIES

        7,345.0       6,957.9  
     

 

 

   

 

 

 

SHAREHOLDERS’ EQUITY

       

Capital

   18.1      1,551.6       1,551.6  

Treasury shares

   18.3      (25.7     (26.5

Revenue reserves

        2,110.7       2,110.0  

Share-based remuneration

        37.4       37.4  

Accumulated other comprehensive loss

        (184.5     (154.8

Retained earning

        (607.8     —    
     

 

 

   

 

 

 
        2,881.7       3,517.7  
     

 

 

   

 

 

 

Non-controlling interests

        98.7       96.9  
     

 

 

   

 

 

 

TOTAL SHAREHOLDERS’ EQUITY

        2,980.4       3,614.6  
     

 

 

   

 

 

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

        10,325.4       10,572.5  
     

 

 

   

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

4


Table of Contents

Embraer S.A.

Condensed Consolidated Statements of Income

Three and Six-month periods ended June 30, 2020 and 2019

(In millions of U.S. dollar)

 

 

                      (Recasted)  
     Note    Quarter ended
06.30.2020
    Six-month
period ended
06.30.2020
    Quarter
ended
06.30.2019
    Six-month
period ended
06.30.2019
 
CONTINUING OPERATIONS         (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)  

REVENUE

   21.a      537.2       1,171.0       1,378.6       2,202.0  

Cost of sales and services

        (520.7     (970.6     (1,180.0     (1,839.5
     

 

 

   

 

 

   

 

 

   

 

 

 

GROSS PROFIT

        16.5       200.4       198.6       362.5  

Operating income (expense)

           

Administrative

        (33.7     (66.3     (46.2     (92.2

Selling

        (47.5     (94.7     (76.2     (140.8

Expected credit losses over financial assets and contract assets

        (19.3     (55.6     3.3       (2.3

Research

        (6.4     (12.2     (11.8     (21.1

Other operating expense, net

   22      (251.8     (364.0     (41.0     (94.5

Equity in income of associates

        (0.1     3.1       —         —    
     

 

 

   

 

 

   

 

 

   

 

 

 

OPERATING INCOME/ (LOSS) BEFORE FINANCIAL RESULT

        (342.3     (389.3     26.7       11.6  

Financial income, net

   23      (37.4     (73.5     (30.0     (71.2

Foreign exchange gain (loss), net

        (10.4     (35.0     (3.0     6.0  
     

 

 

   

 

 

   

 

 

   

 

 

 

LOSS BEFORE INCOME TAX

        (390.1     (497.8     (6.3     (53.6

Income tax (expense) benefit

   14.2      77.5       (105.4     15.5       21.6  
     

 

 

   

 

 

   

 

 

   

 

 

 

NET INCOME (LOSS) FOR THE PERIOD

        (312.6     (603.2     9.2       (32.0
     

 

 

   

 

 

   

 

 

   

 

 

 

Attributable to :

           

Owners of Embraer

        (315.4     (607.3     7.3       (35.3

Non-controlling interests

        2.8       4.1       1.9       3.3  

Weighted average number of shares (in thousands)

           

Basic

   20      736,155       736,155       735,790       735,790  

Diluted

   20      736,155       736,155       735,790       735,790  

Earnings per share-basic in US$

   20      (0.43     (0.83     0.01       (0.05

Earnings per share-diluted in US$

   20      (0.43     (0.83     0.01       (0.05

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

5


Table of Contents

Embraer S.A.

Condensed Consolidated Statements of Comprehensive Income

Three and Six-month periods ended June 30, 2020 and 2019

(In millions of U.S. dollar)

 

 

                 (Recasted)  
     Quarter ended
06.30.2020
    Six-month
period ended
06.30.2020
    Quarter ended
06.30.2019
     Six-month
period ended
06.30.2019
 
     (Unaudited)     (Unaudited)     (Unaudited)      (Unaudited)  

NET INCOME (LOSS) FOR THE PERIOD

     (312.6     (603.2     9.2        (32.0

ITEMS THAT MAY BE SUBSEQUENTLY RECLASSIFIED TO PROFIT OR LOSS

         

Financial instruments - Cash flow hedge

     (9.7     (22.8     1.0        1.4  

Translation adjustments

     18.1       (9.2     8.0        (0.7
  

 

 

   

 

 

   

 

 

    

 

 

 

OTHER COMPREHENSIVE LOSS, NET OF TAX EFFECTS (i)

     8.4       (32.0     9.0        0.7  
  

 

 

   

 

 

   

 

 

    

 

 

 

TOTAL OF COMPREHENSIVE INCOME (LOSS)

     (304.2     (635.2     18.2        (31.3
  

 

 

   

 

 

   

 

 

    

 

 

 

Attributable to:

         

Owners of Embraer

     (307.9     (637.0     14.3        (35.4

Non-controlling interests

     3.7       1.8       3.9        4.1  
  

 

 

   

 

 

   

 

 

    

 

 

 
     (304.2     (635.2     18.2        (31.3
  

 

 

   

 

 

   

 

 

    

 

 

 

 

(i)

Items presented above are net of deferred income tax, if applicable, of US$ 0.8 and US$ 0.0 for the six-month periods ended June 30, 2020 and 2019, respectively.

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

6


Table of Contents

Embraer S.A.

Condensed Consolidated Statements of Changes in Shareholders’ Equity

Six-month periods ended June 30, 2020 and 2019

(In millions of U.S. dollar)

 

 

                         Revenue reserves            Accumulated other comprehensive (loss)                    
     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 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  

Adjustment related to accounting policy change

     —          —         —          —          —          —          1.3       —         —         —         (1.3     —         —         —    
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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  

loss for the period

     —          —         —          —          —          —          (35.2     —         —         —         —         (35.2     3.2       (32.0

Translation adjustments

     —          —         —          —          —          —          —         —         —         (1.6     —         (1.6     0.9       (0.7

Financial instruments

     —          —         —          —          —          —          —         —         —         —         1.4       1.4       —         1.4  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

     —          —         —          —          —          —          (35.2     —         —         (1.6     1.4       (35.4     4.1       (31.3

Stock options grants exercised

     —          3.2       —          —          —          —          (1.8     —         —         —         —         1.4       —         1.4  

Allocation of profits:

                                 

Government grants

     —          —         —          1.0        —          —          (1.1     —         —         —         —         (0.1     —         (0.1
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

At June 30, 2019 ( Unaudited)

     1,551.6        (28.2     37.4        48.0        204.4        2,182.3        (36.8     (4.2     (39.2     (104.3     0.6       3,811.6       98.5       3,910.1  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
                                 
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

At December 31, 2019

     1,551.6        (26.5     37.4        49.0        204.4        1,856.7        (0.0     (4.2     (39.2     (110.0     (1.5     3,517.7       96.9       3,614.6  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss for the period

     —          —         —          —          —          —          (607.4     —         —         —         —         (607.4     4.2       (603.2

Translation adjustments

     —          —         —          —          —          —          —         —         —         (6.7     —         (6.7     (2.4     (9.1

Financial instruments

     —          —         —          —          —          —          —         —         —         —         (22.9     (22.9     —         (22.9
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

     —          —         —          —          —          —          (607.4     —         —         (6.7     (22.9     (637.0     1.8       (635.2

Stock options grants exercised

     —          0.8       —          —          —          —          (0.4     —         —         —         —         0.4       —         0.4  

Reserve for investments and working capital

     —          —         —          —          —          0.6        —         —         —         —         —         0.6       —         0.6  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

At June 30, 2020 (Unaudited)

     1,551.6        (25.7     37.4        49.0        204.4        1,857.3        (607.8     (4.2     (39.2     (116.7     (24.4     2,881.7       98.7       2,980.4  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

7


Table of Contents

Embraer S.A.

Condensed Consolidated Statements of Cash Flows

Six-month periods ended June 30, 2020 and 2019

(In millions of U.S. dollar)

 

 

     Note      06.30.2020     06.30.2019  
            (Unaudited)     (Unaudited)  

OPERATING ACTIVITIES

       

Losses for the period

        (603.2     (32.0

ADJUSTMENT TO NET INCOME FOR ITEMS NOT AFFECTING CASH

       

Depreciation of property plant and equipment

     10        109.7       55.5  

Realization of government grants

        (1.2     (1.2

Amortization of intangible assets

     11        69.6       37.8  

Realization of contribution from suppliers

     11        (1.7     (6.8

Loss (reversal) for inventory obsolescence

        (1.7     8.2  

Adjustment to market value, inventory, property plant and equipment and intangible

        108.9       22.8  

Allowance for doubtful accounts

        43.5       (2.0

Losses on fixed assets disposal

        4.3       40.3  

Deferred income tax and social contribution

        81.5       (40.4

Accrued interest

        4.2       (2.0

Interest on marketable securities, net

        (0.1     (18.7

Equity in associates gains and losses

        (3.1     —    

Foreign exchange gain (loss), net

        34.3       (3.8

Mark to market of the residual value guarantees

        (24.2     1.7  

Other

        (3.7     (2.0

CHANGES IN ASSETS

       

Financial investments

        (59.9     101.2  

Derivative financial instruments

        20.2       (0.8

Collateralized accounts receivable and accounts receivable

        (43.8     40.1  

Contract assets

        92.8       (144.7

Customer and commercial financing

        3.0       0.6  

Inventories

        (710.8     (500.0

Guarantee deposits

        (0.3     —    

Other assets

        (54.7     34.5  

CHANGES IN LIABILITIES

       

Trade accounts payable

        (29.5     32.5  

Non-recourse and recourse debt

        (1.9     (33.0

Other payables

        (86.5     (4.2

Contribution from suppliers

        —         4.5  

Contract liabilities

        (106.5     118.8  

Taxes and payroll charges payable

        33.3       (12.5

Financial guarantees

        4.8       (8.9

Other provisions

        30.2       2.7  

Unearned income

        (2.0     (3.7
     

 

 

   

 

 

 

NET CASH USED IN OPERATING ACTIVITIES

        (1,094.5     (315.5
     

 

 

   

 

 

 

INVESTING ACTIVITIES

       

Acquisition of property, plant and equipment

     10        (64.5     (115.1

Proceeds from sale of property, plant and equipment

     10        2.1       —    

Additions to intangible assets

     11        (51.5     (131.7

Additions investments in subsidiaries and affiliates

        (0.9     (2.2

Financial investments

        391.8       221.1  
     

 

 

   

 

 

 

NET CASH GENERATED (USED) IN INVESTING ACTIVITIES

        277.0       (27.9
     

 

 

   

 

 

 

FINANCING ACTIVITIES

       

Proceeds from borrowings

        777.5       309.4  

Repayment of borrowings

        (362.5     (394.9

Dividends and interest on own capital

        —         (2.0

Proceeds from stock options exercised

        0.4       1.4  

Lease payments

        (4.2     (4.0
     

 

 

   

 

 

 

NET CASH GENERATED (USED) IN FINANCING ACTIVITIES

        411.2       (90.1
     

 

 

   

 

 

 

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

        (406.3     (433.5

Effects of exchange rate changes on cash and cash equivalents

        (28.6     3.4  

Cash and cash equivalents at the beginning of the period

        2,307.7       1,280.9  
     

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD

        1,872.8       850.8  
     

 

 

   

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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Embraer S.A.

Notes to the Interim Condensed Consolidated Financial Statements

In millions of U.S. dollar, unless otherwise stated

 

 

1.

Operations

Embraer S.A. (“Embraer” or “the Company”) is a publicly held company incorporated under the laws of the Federative Republic of Brazil (“Brazil”) with headquarters in São José dos Campos, State of São Paulo. The corporate purpose of the Company is:

 

  (i)

To design, build and market aircraft and aerospace materials and related accessories, components and equipment, according to the highest standards of technology and quality.

 

  (ii)

To perform and carry out technical activities related to the manufacturing and servicing of aerospace materials.

 

  (iii)

To contribute to the training of technical personnel as necessary for the aerospace industry.

 

  (iv)

To engage in and provide services for other technological, manufacturing and business activities in connection with the aerospace industry.

 

  (v)

To design, build and trade in equipment, materials, systems, software, accessories and components for the defense, security and power industries, and to promote and carry out technical activities related to the manufacturing and servicing thereof, in accordance with the highest technological and quality standards.

 

  (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 interim condensed consolidated financial statements of the Company as of and for the period ended June 30, 2020 were approved by the Company’s Management on September 8, 2020.

 

1.1

Significant events in the current reporting period ended June 30, 2020

 

1.1.1

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.

On April 25, 2020, Embraer 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. Embraer strongly believes 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. Embraer is 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 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 such arbitration proceedings.

 

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Embraer S.A.

Notes to the Interim Condensed Consolidated Financial Statements

In millions of U.S. dollar, unless otherwise stated

 

 

Due to the unexpected and wrongful termination of the strategic partnership by Boeing on April 25, 2020, from this date forward the Company stopped designating and measuring the assets and liabilities associated with the Commercial Aviation Business and related services as “held for sale” and its generated results as “discontinued operations,” which are to be reclassified as “held for continuous use” and “continuing operations”. The main impacts over the condensed consolidated financial statements are summarized below:

 

   

The change in designation over the Company’s long-lived assets previously “held for sale” (fixed assets, intangibles, and rights-of-use) required the recognition of losses associated with accumulated depreciation and amortization not recognized while classified as “held for sale” in the amount of US$ 101.2 (US$ 17.7 related to the six-month period ended June 30, 2020 and US$ 83.5 related to the year ended December 31, 2019), recorded as other operating expenses during the period (Note 22).

 

   

The change in designation also requires the remeasurement of the long-lived assets held for sale (fixed assets, intangibles, and rights-of-use) for the lower value between the book value, adjusted for accumulated depreciation and amortization not recognized, and the recoverable value determined by the highest amount between the value-in-use of these assets and the fair value minus expenses that would be incurred by sale. During the term of designation as “held for sale”, these long-lived assets 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 MTA, minus the incremental costs incurred to close the transaction. Further details regarding with impairment test performed are disclosed in Note 12.

 

   

The consolidated statements of income for the comparative periods ended June 30, 2019 and related explanatory notes are presenting the Commercial Aviation business unit and related services as continuing operations instead of discontinued operations as previously reported (Note 2.1.3), due to the change in the classification occurred during the period ended June 30, 2020.

 

   

Unlike the statements of income, the statements of financial position balances related to the Commercial Aviation business unit and related services were not reclassified retrospectively and remained disclosed as assets and liabilities “held for sale” as of December 31, 2019, as per IFRS 5 (Note 3).

 

1.1.2

Impacts of the COVID-19 pandemic

Embraer has been monitoring the COVID-19 pandemic situation and its impacts on its employees, operations, the global economy, the supply and the demand for its products and services. The Company implements contingency plans to act as quickly as necessary as the current situation unfold.

Since the beginning of the COVID-19 pandemic, Embraer has been engaging in several initiatives supporting the health and safety of its employees. The operations were interrupted for certain period in order to adapt industrial facilities in relation to healthy and safety measures. Social distance measures were taken, as the implementation of work from home for certain group of employees. Furthermore, several measures to preserve jobs were taken, as reduction in working hours and pay cuts, collective vacation and temporary furloughs.

In addition, as a result of the COVID-19 pandemic, the Company has started three voluntary dismissal plans for specific group of employees.

Due to the uncertainty related to the spread of COVID-19, on March 26, 2020, we also suspended the projections relating to our expected results for 2020. We will issue updated projections for 2020 when we conclude the assessment of the effects that the COVID-19 pandemic will cause to our business.

We expect that 2020 will be a distinct year in terms of orders and deliveries due to the impacts of the COVID-19 pandemic. The airline business has been adversely affected due to COVID-19, and we will have to review our production chain in order to reflect the new and uncertain demand scenario.

As a result of the COVID-19, on April 6, 2020, Standard & Poor’s downgraded our rating by one notch to BBB- with a negative outlook, due to expectations that many airlines will delay new deliveries at least until the end of the third quarter of 2020. On April 28, 2020, Fitch also downgraded our rating from BBB- to BB+ as a result of the negative expectations relating to the commercial aviation industry due to the COVID-19 pandemic. On April 29, 2020, Moody’s also downgraded our rating from Ba1 to Ba2 with a negative outlook.

 

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Embraer S.A.

Notes to the Interim Condensed Consolidated Financial Statements

In millions of U.S. dollar, unless otherwise stated

 

 

Defense & Security

In the Defense and Security business unit, the programs have been hit by the COVID-19 global pandemic on its operations and supply chain. Some vendors were closed for several weeks due to the pandemic, jeopardizing their ability to delivery parts and goods. Logistics were also affected due to lower international flights availability adding longer cycles for parts shipment. It should be noted that no customers orders were canceled on Defense programs due to the pandemic. Adjustments required on committed deliveries were already negotiated with customers. The Company has taken actions to overcome the challenges imposed by the COVID-19 and to minimize its impacts on Defense deliveries.

Executive Aviation

In the Executive Jets business unit, restrictions on travel and emergency quarantine have posed some challenges for aircraft deliveries to international customers. As of the date of this report, production lines of our business aviation products are abreast for attending planed supply levels, with no major supply shortages. We are supervising the risks and controlling the supply chain and postponements in demand in order to prevent obstacles that may arise from this global crisis. As a result of COVID-19, one of our executive jets customers cancelled its firm orders and some of our executive jet customers postponed their scheduled aircraft deliveries. Although we cannot fully predict the impact of the COVID-19 outbreak in the short-to-medium term on our business, we expect that some customers will continue to postpone their scheduled aircraft deliveries and will continue to cancel their orders.

Commercial Aviation

In the Commercial Aviation business unit, due to extensive traffic disruption affecting our customer’s operations throughout the world, as a result of the COVID-19, it is reasonable to expect a material impact on our 2020 deliveries. According to Cirium, a data analytics and consulting company, as of May 2020, 60% of the global fleet has been placed into storage, and the International Air Transport Association—IATA projects a decline of 50% in commercial traffic for 2020 in year-over-year terms. As of August 31, 2020, approximately one-third of the global fleet was in storage, and IATA projects a decrease of approximately 60% in commercial air traffic (as measured by revenue passenger kilometers) in 2020, as compared to 2019 (Management’s estimates based on information provided by external consultants—not reviewed by independent auditors). As a result of COVID-19, some of our customers rescheduled their aircraft deliveries carrying them over to 2021 and beyond, which has affected our 2020 projected deliveries. As of the date of this report, no cancellation has occurred. The recovery pace is difficult to predict since this outbreak has no precedent in history. Although we cannot fully yet determine the impact of the COVID-19 outbreak in the short-to-medium term on our business, we expect that customers will continue to postpone their scheduled aircraft deliveries or request to cancel their orders.

As a result of the COVID-19 pandemic, the Company has taken measures to preserve cash flow, including (i) reductions in working hours and pay cuts; (ii) extension of payments terms relating to our suppliers; (iii) extension of tax payment deadlines; (iv) negotiation of new credit lines; and (v) adjustment of production chain.

In the six-month period ended June 30, 2020, the Company has recognized the following impacts in profit or loss as result of the COVID-19 pandemic:

 

   

Negative changes in the fair value of Republic Airways shares held as financial investments impacting the Company’s operating results of the continuing operations in the amount of US$ 15.7 (Note 5).

 

   

Additional provision for expected credit losses over trade accounts receivable, contract assets and customer financing as result of increase in credit risks of the Company’s customers during the pandemic in the amount of US$ 49.5 (Notes6 and 17.3.2).

 

   

The Company had a trigger event related to impairment over its long-lived assets (fixed assets, intangibles, and rights-of-use) due to the impacts of the COVID-19 pandemic and its impact on market capitalization devaluation in the period. Impairment losses in the amount of US$ 91.1 were recognized in the period as further disclosed in Note 12.

 

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Embraer S.A.

Notes to the Interim Condensed Consolidated Financial Statements

In millions of U.S. dollar, unless otherwise stated

 

 

1.1.3

New working capital and export financing lines

On June 15, 2020, the Company finalized the terms of working capital and export financing agreements in an aggregate principal amount of up to US$ 615.0, with a term of up to four years. The amount of US$ 300.0 is financed by the Brazilian National Bank for Economic and Social Development (Banco Nacional de Desenvolvimento Econômico e Social – BNDES), which agreement was signed on June 26, 2020, and US$ 315.0 is financed by private and public banks (Banco do Brasil, Bradesco, Morgan Stanley, Natixis and Santander).

The Company already concluded the signing of all definitive contracts with five private and public banks. The disbursements have begun and as of September 4, 2020, the Company had received all resources from BNDES and other banks (US$ 160.0 was received and recorded as loans and financing as of June 30, 2020).

This working capital and export financing will strengthen the Company’s cash position and guarantee funding for entire operational process, from production to product shipment for the export market.

The Company continues to evaluate additional financing opportunities in order to maintain a long-term indebtedness profile that supports and is aligned with business cycle.

 

2.

Presentation of the Interim Condensed Consolidated Financial Statements

 

2.1

Presentation and preparation of the interim condensed consolidated financial statements

These interim condensed consolidated financial statements have been prepared in accordance with IAS 34 Interim Financial Reporting and should be read in conjunction with the Company’s most recent annual consolidated financial statements as of and for the year ended December 31, 2019. They do not include all the information required for a complete set of financial statements prepared in conformity with International Financial Reporting Standards (IFRS). However, selected explanatory notes are included to explain events and transactions that are significant in accordance with Management’s judgement to an understanding of the changes in the Company’s financial position and performance since the most recent annual consolidated financial statements as of and for the year ended December 31, 2019.

 

2.1.1

Basis of preparation

These interim condensed consolidated financial statements have been prepared under the historical cost convention, except when the account requires different criteria, and adjusted for assets and liabilities measured as at fair value in subsequent measurement, when applicable.

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 interim condensed consolidated financial statements include accounting estimates for certain assets, liabilities and other transactions.

The areas which involve higher degree of judgments or complexities, or assumptions and significant estimates to the interim condensed consolidated financial statements are consistent with those described in the most recent annual consolidated financial statements as of and for the year ended December 31, 2019 (not included herein).

 

2.1.2

Consolidation

These consolidated financial statements include the balances as of June 30, 2020 of the Company and all subsidiaries and special purpose entities in which the Company has control, directly or indirectly.

All accounts and balances arising from transactions between controlled entities are eliminated during the consolidation process.

There were no changes in the Company’s corporate structure and consolidated subsidiaries from those disclosed in the most recent annual consolidated financial statements as of December 31, 2019.

 

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Embraer S.A.

Notes to the Interim Condensed Consolidated Financial Statements

In millions of U.S. dollar, unless otherwise stated

 

 

2.1.3

Changes to the comparative statements of income

Due to the change occurred during 2020 in the classification of the Commercial Aviation business unit from “discontinued operations” to “continuing operations” (Note 1.1.1), the comparative statements of income for the three and six-month periods ended June 30, 2019 and related explanatory notes has been recasted to present the Commercial Aviation business unit and related services as “continuing operations”.

In addition, in order to present and identify the expected credit losses recognized over trade accounts receivable and contract assets in the statements of income, as well as due to the materiality of this transaction in the current period as a result of the COVID-19 pandemic, the Company reclassified expenses of this nature from the caption of “selling expenses” to a specific caption of “expected credit losses over financial assets and contract assets”. Previously, the Company has not disclosed such expense segregated in the statements of income due to the immateriality of amounts involved.

 

2.2

Significant accounting policies

There were no significant changes in the Company’s accounting policies from those disclosed in the most recent annual consolidated financial statements as of December 31, 2019.

New accounting standards and interpretations have been published or are in the process of being amended and will be effective in the coming years, however they were not cited, as, according to the Company’s assessment, no material impact arising from their application is expected.

 

3.

Assets held for sale

The Commercial Aviation business unit assets and liabilities were measured and presented as assets and liabilities “held for sale” as of December 31, 2019, since on that reporting period the transaction started with Boeing was classified as “highly probable” as per definitions of IFRS 5. Details regarding of the now terminated transation are disclosed in Note 1.1.1.

The segregation of assets and liabilities “held for sale” considered the terms approved by the parties in the MTA related to the Commercial Aviation business unit and related services, as well as segregation criteria of certain assets and liabilities. Further details regarding the segregation process are disclosed in Note 4 of the annual consolidated financial statements as of December 31, 2019.

In the statement of financial position and explanatory notes as of June 30, 2020, the balances designated as “held for sale” as of December 31, 2019 were reclassified to its former accounts, as presented in table below:

 

ASSETS HELD FOR SALE

   Note    12.31.2019  

Cash and cash equivalents

        1,452.5  

Financial investments

        47.5  

Trade accounts receivable, net

        144.7  

Customer and commercial financing

        10.7  

Contract assets

        33.8  

Inventories

        1,079.6  

Guarantee deposits

        0.5  

Income tax and social contribution

        2.1  

Other assets

        111.5  

Deferred income tax and social contribution

        34.3  

Property, plant and equipment

   10      1,089.7  

Intangible assets

   11      1,157.5  

Right of use

        10.2  
     

 

 

 

TOTAL

        5,174.6  
     

 

 

 

 

LIABILITIES HELD FOR SALE

   Note    12.31.2019  

Trade accounts payable

        474.7  

Lease liability

        9.4  

Loans and financing

        3,301.3  

Other payables

        132.5  

Contract liabilities

        746.1  

Taxes and payroll charges payable

        8.9  

Income tax and social contribution

        54.9  

Financial guarantee and residual value guarantee

   15      140.3  

Unearned income

        47.7  

Provisions

   16.1      39.5  

Deferred income tax and social contribution

        28.7  
     

 

 

 

TOTAL

        4,984.0  
     

 

 

 
 

 

Details of financial assets and liabilities “held for sale” as of December 31, 2019 are disclosed in Note 15.

 

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Embraer S.A.

Notes to the Interim Condensed Consolidated Financial Statements

In millions of U.S. dollar, unless otherwise stated

 

 

4.

Cash and cash equivalents

 

     06.30.2020      12.31.2019  
     (Unaudited)         

Cash and banks

     1,101.8        585.0  
  

 

 

    

 

 

 
     1,101.8        585.0  
  

 

 

    

 

 

 

Cash equivalents

     

Private securities (i)

     59.8        64.9  

Fixed deposits (ii)

     711.2        205.3  
  

 

 

    

 

 

 
     771.0        270.2  
  

 

 

    

 

 

 
     1,872.8        855.2  
  

 

 

    

 

 

 

 

(i)

Applications in Bank Deposit Certificates (CDB’s), issued by financial institutions in Brazil, available for redemption in up to 90 days without impact on contracted remuneration.

(ii)

Fixed term deposits in US Dollars with original maturities of 90 days or less.

 

5.

Financial investments

 

     06.30.2020 (Unaudited)      12.31.2019  
     Amortised cost      Fair value
through profit
or loss
     Total      Fair value
through profit
or loss
     Total  

Financial instruments

              

Structured Notes (i)

     —          15.1        15.1        358.8        358.8  

Investment funds

     —          6.5        6.5        5.3        5.3  

Fixed-Term Deposits (ii)

     59.9        —          59.9        —          —    

Others (iii)

     —          44.2        44.2        60.6        60.6  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     59.9        65.8        125.7        424.7        424.7  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Current portion

     59.9        65.8        125.7        409.8        409.8  

Non-current

     —          —          —          14.9        14.9  

 

(i)

Structured notes, the Company maintains financial investments in structured notes associated with its own credit risk in the amount of US$ 15.2 as of June 30, 2020 (US$ 14.9 as of December 31, 2019). In addition, the Company held financial investments in structured notes associated with the credit risk of financial institution issuer and the Brazilian government of US$ 222.5 and with the credit risk of two financial institutions concurrently of US$ 121.4 as of December 31, 2019. These notes were settled on its mature date during the period ended June 30, 2020.

 

  

The increase in profitability was obtained through a Credit default swap—CDS, a transaction which provides the right for early redemption of the note in case of a default event of the Company. After a default event, the note may be redeemed by the holder by the market value or original face value, which would result in a loss to the Company of all interest accrued so far.

 

  

Default events that may anticipate the maturity of the notes are, among others: (a) the insolvency or judicial recovery of the Company; and (b) delinquency or restructuring of the Company’s debts in financing agreements.

 

  

In case of default, the maturity dates of these notes will be accelerated, and the notes will be realized at market value, limited to a minimum of the initial investment. Any amount for which the market value exceeds the amount invested will be paid to the Company in the form of securities or loans of that amount.

 

(ii)

Fixed-term deposits in US Dollars issued by financial institutions, with a maturity of more than 90 days from the date of contracting.

 

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Embraer S.A.

Notes to the Interim Condensed Consolidated Financial Statements

In millions of U.S. dollar, unless otherwise stated

 

 

(iii)

It mainly relates to shares of the Republic Airways Holdings, arising from the request for the judicial reorganization of the former entity Republic Airways and received by the Company as part of the restructuring plan. Changes in the fair value of this financial investment is presented in Note 17.2.

The weighted average nominal interest rates on June 30, 2020, related to cash equivalents and financial investments made in Brazilian Reais were 1.75% p.a., equivalent to 100.3% of the CDI, and in Dollars 0.96% p.a. (5.96% p.a., equivalent to 100.14% of the CDI, and in Dollars 2.68% p.a. on December 31, 2019).

 

6.

Trade accounts receivable, net

 

     06.30.2020     12.31.2019  
     (Unaudited)        

Foreign customers

     240.9       149.6  

Brazilian Air Force

     16.9       7.0  

Domestic customers

     57.3       3.9  
  

 

 

   

 

 

 
     315.1       160.5  

Allowance for doubtful accounts

     (84.2     (11.1
  

 

 

   

 

 

 
     230.9       149.4  
  

 

 

   

 

 

 

The amounts and maturities of these trade accounts receivable are shown below:

 

     06.30.2020     12.31.2019  
     (Unaudited)        

Current

     167.5       104.2  

Up to 90 days

     62.5       25.6  

From 91 to 180 days

     19.3       10.3  

More than 180 days

     65.8       20.4  
  

 

 

   

 

 

 
     315.1       160.5  
  

 

 

   

 

 

 

% Current

     -47     -35

The increase of overdue receivables in the Company’s current position is related to impacts of the COVID-19 pandemic, mainly in the Commercial Aviation business unit (Note 1.1.2). The Company is taken necessary actions to ensure the collection of overdue amounts, including signature of agreements for renegotiations with individual customers in order to collect outstanding balances in short-term through monthly installments with interest. Due to this factor and relevant increase in customers credit risk during 2020 (Note 17.3.2), the Company increased the expected credit losses in the period as follows:

 

     06.30.2020     12.31.2019  
     (Unaudited)        

Beginning balance

     (11.1     (45.0

Additions/Reversal

     (50.1     (4.4

Write-off

     7.1       7.5  

Foreign exchange variation

     (8.0     0.8  

Assets held for sale

     (22.1     30.0  
  

 

 

   

 

 

 

Ending balance

     (84.2     (11.1
  

 

 

   

 

 

 

 

7.

Derivative financial instruments

Derivative financial instruments are contracted to protect the Company’s operations from exchange and interest rate fluctuations and are not used for speculation.

As of June 30, 2020, the Company had the following operations:

 

   

Swap operations, with the main objective of changing the debts index, from floating rates to fixed interest rates or vice versa, exchange of Dollar to Real or Euro and vice versa. The fair values of these instruments are measured by the future flow, determined by applying contractual interest rates to maturity, and discounted to present value at the date of the financial statements by the prevailing market rates.

 

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Embraer S.A.

Notes to the Interim Condensed Consolidated Financial Statements

In millions of U.S. dollar, unless otherwise stated

 

 

   

Purchase of sell and buy currency options, in order to protect cash flows for the parent company’s wage costs denominated in Reais, against the risk of currency fluctuations. The financial instrument used by the Company is a zero-cost collar, which consists of the purchasing of a put option and the sale of a call option, contracted with the same counterparty and with a zero-net premium. The fair value of this instrument is determined by the observable market pricing model (through market information providers) and widely used by market participants to measure similar instruments.

 

Purpose

  

Risk

   Settlement
date
     06.30.2020     12.31.2019  
                 (Unaudited)        

Derivatives designated as hedge accounting

          

Expenses in Brazilian Reais (i)

   Exchange rate      2020        (9.6     (0.1

Project development (ii)

   Interest rate      2023        1.1       1.5  

Working Capital (iii)

   Interest rate      2025        (13.6     —    

Export Financing (iv)

   Exchange rate and interest rate      2022        (0.3     —    
        

 

 

   

 

 

 

Other Derivatives

           (22.4     1.4  
        

 

 

   

 

 

 

Acquisition of property, plant and equipment (v)

   Interest rate      2024        (0.2     (0.1

Export (vi)

   Exchange rate      2020        —         0.3  

Expenses in Brazilian Reais (i)

   Exchange rate      2020        —         (4.0
        

 

 

   

 

 

 
           (0.2     (3.8
        

 

 

   

 

 

 
           (22.6     (2.4
        

 

 

   

 

 

 

 

(i)

Zero-cost collar derivative financial instruments, designated as cash flow hedge amounting to US$ 50.2 equivalent to R$ 190.4 million, with purchase of PUT at the weighted average exercise price of R$ 3.80 and sale of CALL at the weighted average exercise price of R$ 4,39.

(ii)

Derivative financial instruments (interest rate swaps), designated as fair value hedge, amounting to R$ 143.6 million, equivalent to US$ 26.2, of the Export Financing and Project Development lines subject to a weighted average fixed interest rate of 3.5% p.a. for a floating weighted average rate equivalent to 31.46% of the CDI.

(iii)

Derivative financial instruments (interest rate swaps), designated as cash flow hedge, of working capital financing lines, which converted floating interest rate of LIBOR 3 months to weighted fixed interest rate of 0.78% p.a.

(iv)

Derivative financial instruments (interest rate swaps), designated as fair value hedge, in the amount of R$ 272.3 million, equivalent to US$ 50.0, related to export financing line in Brazilian Reais with floating interest rate of 100% CDI + 3.6% p.a. converted to U.S. dollar + 5.86% p.a.

(v)

Derivative financial instruments (interest rate swaps), which converted the amount of US$ 2.5 from a floating interest rate equivalent to 65% of LIBOR 1 month + 2.4375% p.a. to a fixed weighted average interest rate of 5.23 % p.a.

(vi)

Non-deliverable forward in the amount of US$ 12.0, which exchanges Euros do U.S. dollar.

On June 30, 2020, the amount of loans and financing measured at amortized cost amounted to US$ 3,798.5, considering the mark-to-market effect of the hedged risk protected by the hedge structure US$ 3,799.2 (on December 31, 2019, US$ 89.5 and US$ 90.9, respectively).

 

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Table of Contents

Embraer S.A.

Notes to the Interim Condensed Consolidated Financial Statements

In millions of U.S. dollar, unless otherwise stated

 

 

The hedge effectiveness ratio of the fair value and cash flow hedge on the initial date was 1:1 and 1:1, respectively. Considering the changes in the discounted cash value of the instruments not yet settled since January 1 and the amount of the hedged item, the effectiveness ratio was 1:1 and 1:1.1737 (1:1 and 1:1.1737 on December 31, 2019).

On June 30, 2020, the fair value of derivative financial instruments was recognized in the Company’s assets and liabilities as follows:

 

     06.30.2020     12.31.2019  
     (Unaudited)        

Assets

    

Current portion

     1.0       1.4  

Non-current

     0.4       0.7  

Liabilities

    

Current portion

     (11.4     (4.5

Non-current

     (12.6     —    
  

 

 

   

 

 

 

Net derivative financial instruments

     (22.6     (2.4
  

 

 

   

 

 

 

 

8.

Inventories

 

     06.30.2020     12.31.2019  
     (Unaudited)        

Raw materials

     1,287.0       499.2  

Work in process

     1,065.0       439.7  

Spare parts

     523.0       224.6  

Finished goods (i)

     162.1       106.0  

Held by third parties

     68.3       50.7  

Advances to suppliers

     28.2       29.6  

Inventory in transit

     79.3       21.0  

Consumption materials

     53.4       24.2  

Used aircraft (ii)

     55.6       5.9  

Loss on adjustment to market value (iii)

     (3.8     (0.9

Loss due to obsolescence (iv)

     (189.3     (95.6
  

 

 

   

 

 

 
     3,128.8       1,304.4  
  

 

 

   

 

 

 

 

(i)

The following aircraft were held in the finished goods inventory:

   

June 30, 2020: three Phenom 100, four Phenom 300, one Praetor 500, two Praetor 600, three EMBRAER 175 and one EMBRAER 190.

   

December 31, 2019: one Legacy 650, one Phenom 100, three Phenom 300, two Praetor 500, three Praetor 600, two Ipanema.

(ii)

The following used aircraft were held in inventory as available for sale:

   

June 30, 2020: one Legacy 500, one Phenom 300, two Embraer 135, three Embraer 145 and one EMBRAER 190.

   

December 31, 2019: one Phenom 300. The inventories of used aircraft reclassified as assets held for sale was comprised of two Embraer 135 and three Embraer 145.

Of the total aircraft held in inventories as of June 30, 2020, one Phenom 100, one Phenom 300, one Legacy 500 and one Embraer 135 had been delivered until August 31, 2020.

(iii)

Provision for adjustments to market value of used aircraft is assessed on a periodic basis by comparison of each used aircraft book value and its estimated selling price in the ordinary course of business less estimated costs to sell. When the book value excesses the net realizable value, a provision is recorded to reduce the used aircraft book value to its net realizable value.

(iv)

Provision for obsolescence is recorded for items without activity for over two years and with no planned use in the production program, and to cover expected losses from excess inventories or obsolete work in progress, except for inventories of spare parts, for which the provision is based on technical obsolescence of items without activity for over two years.

 

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Table of Contents

Embraer S.A.

Notes to the Interim Condensed Consolidated Financial Statements

In millions of U.S. dollar, unless otherwise stated

 

 

9.

Related parties

 

9.1

Related party transactions

The tables below summarize balances and transactions with related parties outside the group and refers mainly to:

 

   

Assets: (i) accounts receivable for spare parts, aircraft sales and product development, under conditions agreed between the parties, considering the volumes, risks involved and corporate policies (ii) balances of financial investments; and (iv) bank deposits.

 

   

Liabilities: (i) purchase of aircraft components and spare parts, under conditions agreed between the parties, considering the volumes, risks involved and corporate policies (ii) advances received on sales contracts, according to contractual agreements; (iii) commission for sale of aircraft and spare parts (iv) financing for research and product development at market rates for this kind of financing (v) loans and financing; and (vi) export financing, and

 

   

Profit or Loss: (i) purchases and sales of aircraft, components and spare parts and development of products for the defense and security market; (ii) financial income from financial investments and expense from loans and financing, and (iii) supplementary pension plan.

 

9.2

Brazilian Federal Government

Transactions with related parties also involves transactions with the Brazilian Federal Government.

The Brazilian Federal Government, through its direct and indirect participation and ownership of a common share denominated golden share is one the main Company’s shareholders. As of June 30, 2020, the Brazilian Federal Government held an indirect stake of 5.37% in the Company’s capital through BNDESPAR, a wholly owned subsidiary of the Banco Nacional do Desenvolvimento Econômico e Social - BNDES (the Brazilian Development Bank, or “BNDES”), which, in turn, is controlled by the Brazilian Federal Government.

The Brazilian government plays a key role in the Company’s business activities, including as:

 

   

Major customer for Defense & Security products (through the Brazilian Air Force, Brazilian Army and Brazilian Navy).

 

   

Source of research and development financing through technology development institutions (FINEP and BNDES).

 

   

Export credit agency (through the BNDES), and

 

   

Source of short-term and long-term financing and a provider of asset management and commercial banking services (through Banco do Brasil).

 

9.3

Balances as of and for the period ended June 30, 2020

 

     06.30.2020 (Unaudited)  
     Current      Non-current      Financial     Operating  
     Assets      Liabilities      Assets      Liabilities      Results     Results  

Banco do Brasil S.A.

     23.9        —          —          50.0        —         —    

Brazilian Air Force

     299.7        177.6        —          —          —         (20.1

Marinha do Brasil

     0.6        14.6        —          —          —         (0.4

Embraer Prev – Sociedade de Previdência Complementar

     —          4.3        —          —          —         (6.3

Brazilian Army

     6.7        12.7        —          —          —         (0.5

Financiadora de Estudo e Projetos – FINEP

     —          8.3        —          18.2        (0.6     —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
     330.9        217.5        —          68.2        (0.6     (27.3
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

18


Table of Contents

Embraer S.A.

Notes to the Interim Condensed Consolidated Financial Statements

In millions of U.S. dollar, unless otherwise stated

 

 

9.4

Balances as of December 31, 2019

 

     12.31.2019  
     Current      Non-current  
     Assets      Liabilities      Assets      Liabilities  

Banco do Brasil S.A.

     75.3        —          —          —    

Brazilian Air Force

     364.4        226.9        —          —    

Marinha do Brasil

     0.6        4.4        —          —    

Embraer Prev – Sociedade de Previdência Complementar

     —          4.7        —          —    

Brazilian Army

     13.0        7.4        —          —    

Financiadora de Estudo e Projetos – FINEP

     —          12.7        —          30.6  
  

 

 

    

 

 

    

 

 

    

 

 

 
     453.3        256.1        —          30.6  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

9.5

Balances for the period ended June 30, 2019

 

     06.30.2019 (Unaudited)  
     Financial
Results
    Operating
Results
 

Banco do Brasil S.A.

     0.3       —    

Banco Nacional de Desenvolvimento Econômico e Social – BNDES

     (3.0     —    

Brazilian Air Force

     —         7.8  

Marinha do Brasil

     —         (1.5

Embraer Prev – Sociedade de Previdência Complementar

     —         (10.0

Brazilian Army

     —         (16.6

Financiadora de Estudo e Projetos – FINEP

     (1.1     —    
  

 

 

   

 

 

 
     (3.8     (20.3
  

 

 

   

 

 

 

 

9.6

Remuneration of key management personnel:

 

     06.30.2020     06.30.2019  
     (Unaudited)     (Unaudited)  

Short-term benefits (i)

     4.0       6.6  

Share based payment (ii)

     (6.0     0.1  

Labor contract termination

     0.3       0.5  
  

 

 

   

 

 

 

Total remuneration

     (1.7     7.2  
  

 

 

   

 

 

 

 

(i)

Includes wages, salaries, profit sharing, bonuses and indemnities.

(ii)

Share-based payment balances were reduced in the period due to the devaluation of the Company’s shares price, which is applied to measure the virtual shares (Note19).

Key Management includes members of the statutory Board of Directors and Executive Directors.

 

10

Property, plant and equipment

The annual weighted average rates by asset class are shown below. This information is based on the consolidated depreciation of the assets recognized in the year, compared, after annualization and elimination of any non-typical movement, to the net balance of the assets in the previous year:

 

     Weighted average
depreciation rate (%)
 

Class of assets

   06.30.2020     12.31.2019  

Buildings and improvements

     3.2     3.5

Installations

     4.4     8.4

Machinery and equipment

     7.4     9.1

Furniture and fixtures

     7.1     12.0

Vehicles

     18.4     32.0

Aircraft

     9.1     8.9

Computers and peripherals

     45.9     26.4

Tooling

     9.8     13.9

Other assets

     0.1     0.2

Exchange pool program assets

     3.1     2.9

 

19


Table of Contents

Embraer S.A.

Notes to the Interim Condensed Consolidated Financial Statements

In millions of U.S. dollar, unless otherwise stated

 

 

     06.30.2020 (Unaudited)  
     Land      Buildings and
improvements
    Installations     Machinery
and
equipment
    Furniture
and
fixtures
    Vehicles     Aircraft (i)     Computers and
peripherals
    Tooling     Other
assets
    Exchange
pool
program
assets
    Construction
in progress
    Total  

Cost

                           

At December 31, 2019

     5.1        459.2       60.1       481.8       38.1       10.4       14.7       101.5       443.8       25.5       321.0       48.2       2,009.4  

Additions

     —          0.1       —         7.5       0.5       0.2       —         0.4       5.3       1.8       39.6       9.1       64.5  

Disposals

     —          (0.8     —         (1.5     (0.5     (0.2     —         (0.3     —         (0.1     (6.1     (0.5     (10.0

Impairment

     —          —         —         (23.6     —         —         (0.1     —         (9.3     —         —         —         (33.0

Reclassifications*

     —          17.2       1.5       6.9       —         —         (27.1     (0.9     34.7       —         (5.8     (59.4     (32.9

Translation adjustments

     —          (1.0     —         (0.6     (0.2     —         —         (0.9     —         (0.1     (0.3     —         (3.1

Assets held for sale

     6.3        236.5       29.8       368.0       11.1       1.8       48.2       21.3       164.5       3.8       374.9       67.7       1,333.9  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

At June 30, 2020 (Unaudited)

     11.4        711.2       91.4       838.5       49.0       12.2       35.7       121.1       639.0       30.9       723.3       65.1       3,328.8  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Accumulated depreciation

                           

At December 31, 2019

     —          (131.6     (25.6     (301.5     (21.5     (8.5     (4.1     (88.7     (352.6     (18.4     (88.0     —         (1,040.5

Depreciation

     —          (17.2     (2.6     (32.4     (1.7     (0.6     (1.0     (7.7     (24.7     —         (16.0     —         (103.9

Disposals

     —          0.8       —         1.4       0.3       0.2       —         0.2       —         —         0.9       —         3.8  

Reclassifications*

     —          —         —         —         —         —         —         —         —         —         (3.2     —         (3.2

Interest on capitalized assets

     —          (0.6     —         —         —         —         —         —         —         —         —         —         (0.6

Translation adjustments

     —          0.3       —         0.6       0.1       —         —         0.6       —         —         1.9       —         3.5  

Assets held for sale

     —          (20.5     (4.1     (70.6     (2.0     (0.2     (19.0     (8.4     (8.8     —         (110.6     —         (244.2
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

At June 30, 2020 (Unaudited)

     —          (168.8     (32.3     (402.5     (24.8     (9.1     (24.1     (104.0     (386.1     (18.4     (215.0     —         (1,385.1
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net

                           

At December 31, 2019

     5.1        327.6       34.5       180.3       16.6       1.9       10.6       12.8       91.2       7.1       233.0       48.2       968.9  

At June 30, 2020 (Unaudited)

     11.4        542.4       59.1       436.0       24.2       3.1       11.6       17.1       252.9       12.5       508.3       65.1       1,943.7  

 

20


Table of Contents

Embraer S.A.

Notes to the Interim Condensed Consolidated Financial Statements

In millions of U.S. dollar, unless otherwise stated

 

 

     12.31.2019  
     Land     Buildings and
improvements
    Installations     Machinery
and
equipment
    Furniture
and
fixtures
    Vehicles     Aircraft (i)     Computers and
peripherals
    Tooling     Other
assets
    Exchange
pool
program
assets
    Construction
in progress
    Total  

Cost

                          

At December 31, 2018

     11.0       750.1       162.4       972.4       74.2       17.3       76.2       190.0       629.1       27.6       650.8       93.7       3,654.8  

Additions

     0.4       5.3       —         43.6       5.6       0.6       31.7       5.0       28.2       10.3       91.8       62.0       284.5  

Disposals

     —         (8.3     (3.7     (60.2     (22.4     (3.0     —         (45.4     (26.1     (1.0     (19.0     (0.8     (189.9

Impairment

     —         —         —         (14.1     —         —         (4.6     —         (1.8     —         —         —         (20.5

Reclassifications*

     —         30.3       6.3       11.3       (1.4     0.1       (40.4     (6.6     7.0       (7.6     (21.8     (39.3     (62.1

Translation adjustments

     —         (0.6     (0.1     (1.9     (0.1     (0.1     —         (0.2     —         —         (6.1     0.3       (8.8

Assets held for sale

     (6.3     (317.6     (104.8     (469.3     (17.8     (4.5     (48.2     (41.3     (192.6     (3.8     (374.7     (67.7     (1,648.6
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

At December 31, 2019

     5.1       459.2       60.1       481.8       38.1       10.4       14.7       101.5       443.8       25.5       321.0       48.2       2,009.4  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Accumulated depreciation

                          

At December 31, 2018

     —         (219.4     (105.6     (518.1     (44.6     (13.8     (38.7     (154.5     (371.5     (11.4     (212.5     —         (1,690.1

Depreciation

     —         (15.2     (3.7     (32.9     (4.6     (1.0     (1.3     (7.0     (25.2     —         (12.5     —         (103.4

Disposals

     —         7.4       4.8       67.7       19.1       3.3       —         42.5       7.3       0.3       9.5       —         161.9  

Reclassifications*

     —         (2.9     2.8       5.6       —         —         16.9       1.7       —         (7.3     11.8       —         28.6  

Interest on capitalized assets

     —         (1.6     —         —         —         —         —         —         —         —         —         —         (1.6

Translation adjustments

     —         (1.5     —         1.4       (0.1     0.1       —         0.2       (0.1     —         5.2       —         5.2  

Assets held for sale

     —         101.6       76.1       174.8       8.7       2.9       19.0       28.4       36.9       —         110.5       —         558.9  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

At December 31, 2019

     —         (131.6     (25.6     (301.5     (21.5     (8.5     (4.1     (88.7     (352.6     (18.4     (88.0     —         (1,040.5
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net

                          

At December 31, 2018

     11.0       530.7       56.8       454.3       29.6       3.5       37.5       35.5       257.6       16.2       438.3       93.7       1,964.7  

At December 31, 2019

     5.1       327.6       34.5       180.3       16.6       1.9       10.6       12.8       91.2       7.1       233.0       48.2       968.9  

 

*

Non-cash transactions.

 

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Embraer S.A.

Notes to the Interim Condensed Consolidated Financial Statements

In millions of U.S. dollar, unless otherwise stated

 

 

11

Intangible assets

Internally developed intangible assets relate to expenditure incurred in developing new aircraft, including support services, production labor, materials and direct labor allocated to the construction of aircraft prototypes or significant components, and also the use of advanced technologies to make the aircraft lighter, quieter, more comfortable and energy-efficient and to reduce emissions, in addition to speeding up design and manufacture, while optimizing the use of resources.

 

     06.30.2020 (Unaudited)  
     Internally developed     Acquired from third party        
     Commercial     Executive     Defense and
Security
    Other     Development     Software     Goodwill     Other     Total  

Intangible cost

                  

At December 31, 2019

     —         1,292.3       49.3       3.6       9.4       213.7       10.0       75.0       1,653.3  

Additions

     30.0       5.7       1.2       —         0.7       2.1       —         11.8       51.5  

Impairment

     (58.1     —         —         —         —         —         —         —         (58.1

Interest on capitalized assets

     —         0.5       —         —         —         —         —         —         0.5  

Translation adjustments

     —         —         —         —         —         (0.5     (2.4     (3.5     (6.4

Assets held for sale

     1,062.7       26.5       —         —         —         82.4       —         29.2       1,200.8  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

At June 30, 2020 (Unaudited)

     1,034.6       1,325.0       50.5       3.6       10.1       297.7       7.6       112.5       2,841.6  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Acumulated amortization

                  

At December 31, 2019

     —         (550.1     (32.8     (1.3     (3.7     (165.6     —         (5.7     (759.2

Amortization

     (33.2     (6.2     (0.2     —         —         (26.5     —         (3.5     (69.6

Amortization of contribution from suppliers

     —         1.7       —         —         —         —         —         —         1.7  

Interest on capitalized assets

     —         (0.2     —         —         —         —         —         —         (0.2

Translation adjustments

     —         —         —         —         —         0.4       —         0.6       1.0  

Assets held for sale

     (13.9     (17.8     —         —         —         (8.8     —         (2.4     (42.9
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

At June 30, 2020 (Unaudited)

     (47.1     (572.6     (33.0     (1.3     (3.7     (200.5     —         (11.0     (869.2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Intangible, net

                  

At December 31, 2019

     —         742.2       16.5       2.3       5.7       48.1       10.0       69.3       894.1  

At June 30, 2020 (Unaudited)

     987.5       752.4       17.5       2.3       6.4       97.2       7.6       101.5       1,972.4  
     12.31.2019  
     Internally developed     Acquired from third party        
     Commercial     Executive     Defense and
Security
    Other     Development     Software     Goodwill     Other     Total  

Intangible cost

                  

At December 31, 2018

     1,916.3       1,341.2       43.4       3.5       6.3       350.3       10.4       68.8       3,740.2  

Additions

     188.2       31.3       5.9       0.1       3.1       19.3       —         35.4       283.3  

Contributions from suppliers

     (4.5     —         —         —         —         —         —         —         (4.5

Disposals

     —         —         —         —         —         (2.0     —         —         (2.0

Impairment

     —         (55.6     —         —         —         —         —         —         (55.6

Interest on capitalized assets

     4.9       1.9       —         —         —         —         —         —         6.8  

Translation adjustments

     —         —         —         —         —         —         (0.4     —         (0.4

Assets held for sale

     (2,104.9     (26.5     —         —         —         (153.9     —         (29.2     (2,314.5
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

At December 31, 2019

     —         1,292.3       49.3       3.6       9.4       213.7       10.0       75.0       1,653.3  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Acumulated amortization

                  

At December 31, 2018

     (1,053.6     (512.2     (32.4     (1.2     (2.9     (232.8     —         (6.3     (1,841.4

Amortization

     (3.1     (75.1     (0.4     (0.1     (0.8     (14.4     —         (2.0     (95.9

Amortization of contribution from suppliers

     1.0       21.4       —         —         —         —         —         —         22.4  

Disposals

     —         —         —         —         —         1.2       —         —         1.2  

Interest on capitalized assets

     —         (2.4     —         —         —         —         —         —         (2.4

Assets held for sale

     1,055.7       18.2       —         —         —         80.4       —         2.6       1,156.9  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

At December 31, 2019

     —         (550.1     (32.8     (1.3     (3.7     (165.6     —         (5.7     (759.2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Intangible, net

                  

At December 31, 2018

     862.7       829.0       11.0       2.3       3.4       117.5       10.4       62.5       1,898.8  

At December 31, 2019

     —         742.2       16.5       2.3       5.7       48.1       10.0       69.3       894.1  

 

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Embraer S.A.

Notes to the Interim Condensed Consolidated Financial Statements

In millions of U.S. dollar, unless otherwise stated

 

 

12

Impairment of assets

For the period ended on June 30, 2020, the Company performed impairment test over its long-lived assets (fixed assets, intangible assets and right of use assets) of the cash-generating units (“CGU”) to which goodwill and indefinite-lived assets are allocated, as well as for the additional CGUs with long-lived assets allocated, due to the following identified sources that might indicate assets devaluation:

 

   

Based on the Company’s market capitalization as of June 30, 2020, the carrying amount of the Company’s equity was higher than its market value.

 

   

The current scenario of the COVID-19 emerged a necessity to the Company reassess its strategies and the impacts on its business.

 

   

The change in the designation of long-lived assets of Commercial Aviation and related services from “held for sale” to “held for continuous use” due to the termination of the transaction with Boeing, as disclosed in Note 1.1.1, requires remeasurement of these assets at the lower of its carrying amount and its recoverable amount, which is determined by the higher amount of value-in-use and the fair value less costs to sell.

As a result of impairment test performed for the reporting period June 30, 2020, the Company identified impairment losses in the CGU of E2 platform (Commercial Aviation) and recognized as other operating expenses, net in profit or loss of the period, as detailed below. In the previous year ended on December 31, 2019, impairment losses were recognized in CGU of Mid-Size / Super Mid-Size platform (Executive Aviation). There is no indicative of additional impairment losses in this period for that CGU:

 

     Losses recognized in  
     06.30.2020      12.31.2019  
     E2 Platform      Mid-Size / Super
Mid-Size Platform
 

Allocation of impairment losses recognized:

     

Fixed assets – Machinery and Equipment

     23.6        14.1  

Fixed assets – Tooling

     9.3        1.8  

Intangibles – Internally developed

     58.2        55.7  
  

 

 

    

 

 

 
     91.1        71.6  
  

 

 

    

 

 

 

Impairment losses recognized in operating segments (Note 25)

     

Commercial Aviation

     91.1        —    

Executive Aviation

     —          71.6  

 

12.1

Key assumptions of impairment test:

 

   

Impairment tests as of June 30, 2020 were prepared based on value-in-use applying the discounted cash flow method and ‘traditional’ approach as defined by IAS 36, which the Company understands that is not substantially different of the CGUs fair value less cost to sell under current market conditions. The process of estimating value-in-use involves assumptions, judgements and projections of future cash flows. Impacts of the economic environment resulting from the COVID-19 pandemic were considered in the cash flows projections based on the Company’s best estimates in the reporting period.

 

   

The Company revised the identification of its CGUs for the period ended on June 30, 2020 and, due to the reclassification of assets previously “held for sale” to “held for continuous use” (Note 1.1.1), segregated and included CGUs of Commercial Aviation (170/175, 190/195 and E2 platforms) in the impairment test for this period. As of December 31, 2019, these CGUs were considered as a single CGU (Commercial Aviation) and tested for recoverable amount based on the expected realization of the now termination transaction with Boeing (fair value less costs to sell).

 

   

Estimated future cash flows were discounted using the weighted average capital cost rate (WACC), which is reconciled to an estimate discount pre-tax rate of 11.1% and 11.3% in 06/30/2020 and 12/31/2019, respectively.

 

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Embraer S.A.

Notes to the Interim Condensed Consolidated Financial Statements

In millions of U.S. dollar, unless otherwise stated

 

 

   

The estimated future cash flows in Reais were converted into Company’s functional currency (US$) based on observable conversion rate on June 30, 2020 of R$ 5.4760. The depreciation of the Real versus the US Dollar occurred in 2020 until the present date has a positive impact on future cash flows due to the reduction of cash outflows indexed in Reais (cost of products sold and general expenses). However, the appreciation of the Real in future periods might generate impairment losses.

 

12.2

Sensitivity analysis:

Except for CGUs of E2 and Mid-Size/ Super Mid-Size platforms, for which a sensitivity analysis is demonstrated below, the remaining CGUs present headrooms falling in range of 25% to 950% when compared the recoverable amount measured by its value-in-use and its carrying amount in reporting date, therefore there are no risk of impairment loss in these CGUs, considering the assumptions applied in the sensitivity analysis of this period.

E2 Platform (Commercial Aviation)

As disclosed in Note 40.3 of the most recent annual consolidated financial statements as of December 31, 2019, the Company estimated, based on preliminary calculations, the recognition of impairment losses in this CGU in the range of US$ 153.0 to US$ 526.0, which considered estimates of the Company’s management before the conclusion of the review of the medium and long term strategic plan by the impacts of COVID-19 and also observable assumptions when the preliminary calculations were performed (discount rate pre-tax of 10.6% and exchange rate of US$/R$ of R$ 5.1987). During the second quarter of 2020, the review of strategic plan was completed by the Company’s management with the identification of new factors. The domestic and regional aviation market has shown as an opportunity in the post-crisis period, showing an early recovery compared to international routes and with larger distances, which favors the demand for commercial jets of the E2 platform. According to recent studies by the International Air Transport Association (IATA), the expectation of a resumption of passenger flow to pre-crisis levels will occur in 2024. The Company incorporated these factors in its updated projections. The increase of 5% in the US$/R$ exchange rate in the period also favored the cash flows projected by the decrease in costs indexed in Reais. As a result, the effective loss recognized in the interim condensed consolidated financial statements as of June 30, 2020 was US$ 91.1.

The table below presents the sensitivity analysis of the key assumptions in the impairment test:

 

Assumption

  Factor     Sensitivity    

Impact in impairment test

Estimated aircraft deliveries during the useful life of platform up to 23 years and keeping current market share

    —         5   Increase of impairment loss in US$ 93 if the level of aircrafts deliveries fluctuates negatively in 5%, or reduces to zero if fluctuates positively in 5%.

Discount rate

    11.1     1 percentage point     Increase of 1 pp. in discount rate would increase impairment loss in US$ 132, or a reduction of 1 pp. in discount rate would change impairment loss to zero.

Foreign exchange rate (US$/R$) – rate applied to translate cash flows generated in a different currency (R$) from the functional currency (US$)

  R$ 5.4760       10   Reduction of 10% in spot rate as of 06/30/2020 would increase impairment loss in US$ 221, or reduce to zero if spot rate increases in 10%.

Mid-Size / Super Mid-Size Platform (Executive Aviation)

Compared to the previous impairment test performed on December 31, 2019, the future cash flows of this UGC were negatively impacted in the period by the economic environment resulting from the COVID-19 pandemic (demand reduction by approximately 11%) and positively by the depreciation of the Real versus U.S. Dollar, a factor that favors the decrease in the production costs denominated in Reais, with an accumulated negative variation of 36% since December 31, 2019, when the Company recognized impairment losses of US$ 71.6 on the platform as previously mentioned.

 

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Embraer S.A.

Notes to the Interim Condensed Consolidated Financial Statements

In millions of U.S. dollar, unless otherwise stated

 

 

The table below presents the sensitivity analysis of the key assumptions in the impairment test:

 

Assumption

  Factor     Sensitivity    

Impact in impairment test

Estimated aircraft deliveries during the useful life of platform up to 30 years and keeping current market share

    —         5   Increase of impairment loss in US$ 55 if the level of aircrafts deliveries fluctuates negatively in 5%, or reduces to zero if fluctuates positively in 5%.

Discount rate

    11.1     1 percentage point     Increase of 1 pp. in discount rate would increase impairment loss in US$ 59, or a reduction of 1 pp. in discount rate would change impairment loss to zero.

Foreign exchange rate (US$/R$) – rate applied to translate cash flows generated in a different currency (R$) from the functional currency (US$)

  R$ 5.4760       10   Reduction of 10% in spot rate as of 06/30/2020 would increase impairment loss in US$ 44, or reduce to US$ 38 if spot rate increases 10%.

 

13

Loans and financing

 

     Currency     

Contractual
interest rate - %

  

Effective
interest rate - %

   Maturity     06.30.2020      12.31.2019  
                            (Unaudited)         

Other currencies:

                

Working capital

     US$      3.07% to 4.50%    3.07% to 4.50%      2030       227.8        —    
      5.05% to 5.70%    5.05% to 5.70%      2027  (i)      2,787.6        —    
      Libor 3M + 1.50%    Libor 3M + 1.50%      2020  (ii)      423.3        —    
      Libor 6M + 2.60%    Libor 6M + 2.60%      2027       101.0        —    
     Euro      0.00%    0.00%      2027       20.7        —    

Export financing

     US$      Libor 3 M and Libor 6 M + 4.80% a 5.00%    Libor 3 M and Libor 6 M + 4.80% a 5.00%      2022  (iii)      110.0        —    

Property, plant and equipment

     US$      0.13%    0.13%      2035       
      Libor 1M + 2.44%    Libor 1M + 2.44%      2037       51.8        47.9  
             

 

 

    

 

 

 
                3,722.2        47.9  
             

 

 

    

 

 

 

In local currency:

                

Project development

     R$      3.5%    3.5%      2023       27.6        43.1  
      TJLP - 1.00%    TJLP - 1.00%        

Credit Note for Exportation

     R$      100% of CDI + 3.86%    100% of CDI + 3.86%      2022  (iii)      49.4        —    
             

 

 

    

 

 

 
                77.0        43.1  
             

 

 

    

 

 

 

Total

                3,799.2        91.0  
             

 

 

    

 

 

 

Current portion

                471.2        14.9  

Non-current portion

                3,328.0        76.1  

 

  (i)

Bonds:

Between August and September 2013, through its subsidiary Embraer Overseas Limited, Embraer S.A. made an offer to exchange existing bonds maturing in 2017 (settled in January 2017) and 2020 for “New Notes” maturing in 2023. In the case of bonds maturing in 2017, the exchange offer resulted in US$ 146,399 of the aggregate principal of existing notes and US$ 337,168 of the aggregate principal of the 2020 Notes, representing approximately 54.95% of the Notes exchanged. The total of the exchange offer, taking into account the effects of the exchange price on the negotiations and the total New Notes issued closed at approximately US$ 540,518 in principal at a rate of 5.696% p.a., maturing on September 16, 2023. The operations are fully and unconditionally guaranteed by the Parent Company.

In June 15, 2012, Embraer S.A. raised funds by issuing guaranteed notes, maturing on June 15, 2022, through an overseas offer of US$ 500,000 at a rate of 5.15% p.a.

In June 2015, the Company’s wholly owned finance subsidiary Embraer Netherlands Finance B.V, which only performs financial operations, issued US$ 1,000,000 in Guaranteed Notes at 5.05% p.a., due on June 15, 2025, in an offering subsequently registered with the SEC. This operation is fully and unconditionally guaranteed by the Parent Company. Because Embraer Netherlands Finance B.V is a wholly owned subsidiary of Embraer S.A., whose objective is to perform financial operations.

 

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Embraer S.A.

Notes to the Interim Condensed Consolidated Financial Statements

In millions of U.S. dollar, unless otherwise stated

 

 

In February 2017, Embraer Netherlands Finance B.V., Embraer S.A. subsidiary, issued an offering registered with the SEC of US$ 750,000 with a nominal interest rate of 5.40% p.a. maturing February 1, 2027. The operations are fully and unconditionally guaranteed by the Parent Company. Because Embraer Netherlands Finance B.V. is a wholly owned subsidiary of Embraer S.A., whose objective is to perform financial operations.

On January 1, 2020, as a result of internal carve-out process related to assets and liabilities of the Commercial Aviation business unit (Note 3), the Company amended the indentures governing the senior unsecured notes due 2020, 2022, 2023, 2025 and 2027 in order to (i) substitute Embraer S.A. for Yaborã as the issuer of the notes due 2022; and (ii) have Yaborã substitute Embraer S.A. as guarantor of the notes due 2020, 2023, 2025 and 2027.

On March 10, 2020, Embraer S.A. and Yaborã further amended the indentures governing the notes due 2022, 2023, 2025 and 2027, without the consent of the holders of these notes, to reflect that, from such date, Embraer S.A. irrevocably and unconditionally guarantee the full and punctual payment of the principal, premium, interest, additional amounts and all other amounts that may become due and payable under the relevant notes and indentures. The terms of the supplemental indentures provide, among other things, that the Embraer S.A. guarantee shall automatically terminate on the date that the Company cease to own 100% of the share capital of Yaborã.

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.

The Bonds issued in the international capital markets were part of the disposal group (assets and related liabilities held for sale) as of December 31, 2019 (Note 3).

 

  (ii)

On March 13, 2020, Embraer Aviation Netherlands B.V., a wholly-owned subsidiary of the Company, entered into a loan credit and guarantee agreement with Citibank, N.A., J.P. Morgan Chase Bank, N.A. and Banco Santander, S.A. in the amount of US$ 600.0, accruing interest at three months LIBOR plus 1.5% per year, maturing on December 15, 2020.

 

  (iii)

On June 2020, the Company finalized the terms of working capital and export financing agreements in an aggregate principal amount of up to US$ 615.0, with a term of up to four years. The amount of US$ 300.0 is financed by the Brazilian National Bank for Economic and Social Development (Banco Nacional de Desenvolvimento Econômico e Social – BNDES), which agreement was signed on June 26, 2020, and the remaining of US$ 315.0 is financed by private and public banks (Banco do Brasil, Bradesco, Morgan Stanley, Natixis and Santander), of which US$ 305.0 were disbursed as of July 31, 2020.

On June 30, 2020 and 2019, the changes in loans and financing were as follows:

 

     06.30.2020     12.31.2019  
     (Unaudited)        

Opening balance

     91.0       3,647.6  

Principal addition

     777.5       400.5  

Interest addition

     75.1       186.3  

Principal payment

     (362.5     (645.9

Interest payment

     (72.5     (188.1

Foreing exchange

     (10.6     (8.2

Liabilities held for sale

     3,301.2       (3,301.2
  

 

 

   

 

 

 

Total

     3,799.2       91.0  
  

 

 

   

 

 

 

 

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Embraer S.A.

Notes to the Interim Condensed Consolidated Financial Statements

In millions of U.S. dollar, unless otherwise stated

 

 

As of June 30, 2020, the maturity schedules of the long-term financing are:

 

Year

      

2021

     220.2  

2022

     670.2  

2023

     527.4  

2024

     12.9  

2025

     1,004.3  

After 2025

     893.0  
  

 

 

 
     3,328.0  
  

 

 

 

 

13.1

Interest and guarantees

On June 30, 2020, loans denominated in US dollars (97.4% of the total) are mainly subject to floating interest rates. The weighted average rate was 4.89% p.a. (2.43% p.a. on December 31, 2019).

On June 30, 2020, loans denominated in Reais (2.0% of the total) are subject to interest rate based on the Brazilian Long-term Interest Rate (“TJLP”) and CDI. The weighted average rate was 0.85% p.a. (1.52% p.a. on December 31, 2019).

On June 30, 2020, loans denominated in Euros (0.6% of the total) had an interest rate of zero percent.

Bank guarantees in the amount of US$ 449.0 (US$ 127.2 as of December 31, 2019) were provided as collateral for certain loans and financing of the Parent Company. In addition, the Parent Company provided guarantees in the amount of US$ 3,792.3 (US$ 63.1 as of December 31, 2019) for loans and financing of its subsidiaries.

 

13.2

Restrictive clauses

Loans and financing contracts are subject to restrictive clauses, consistent with usual market practices, such as control over the Company’s current liquidity ratio and the degree of leverage through the ratio of total consolidated indebtedness/EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization, as defined). It also includes normal restrictions on the creation of new liens on assets, significant changes in the Company’s share control, sale of assets and payment of dividends in excess the minimum required by law in cases of default in financing and in transactions with controlled entities.

As of June 30, 2020, the Company and its subsidiaries were in compliance with all the restrictive clauses, according with contracts clauses, including for loans and financing recorded as liabilities held for sale.

 

14

Income taxes

As the tax basis for the majority of the Company’s assets and liabilities is maintained in Brazilian Reais and the accounting basis is measured in U.S. dollar (functional currency), the fluctuations in the exchange rate significantly impacted the tax basis and, in turn, the deferred income tax expense (benefit).

Credits relating to temporary differences on non-deductible provisions, represented by labor contingencies, provisions and disputed taxes will be realized as such proceedings are concluded.

 

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Embraer S.A.

Notes to the Interim Condensed Consolidated Financial Statements

In millions of U.S. dollar, unless otherwise stated

 

 

14.1

Deferred income tax and social contribution

The components of deferred tax assets and liabilities are as follows:

 

     06.30.2020     12.31.2019  
     (Unaudited)        

Temporarily non-deductible provisions *

     245.6       65.2  

Tax loss carryforwards

     8.6       0.2  

Functional currency effect of the non monetary assets

     (647.3     (297.4

Gains not realized from sales of the Company to subsidiairies

     19.8       23.1  

Effect of differences by fixed asset

     25.8       (12.0

Differences between basis: account x tax

     (0.8     (50.7
  

 

 

   

 

 

 

Deferred tax assets (liabilities), net

     (348.3     (271.6
  

 

 

   

 

 

 

Total deferred tax asset

     160.3       0.7  

Total deferred tax liability

     (508.6     (272.3

 

*

Expenses and income temporarily non-deductible include accounting provisions, foreign exchange rate gains or losses included in income tax calculation when cash settled and other differences which will be included or excluded in income tax calculation when realized for fiscal purposes.

Changes in deferred income tax that affected profit or loss were as follows:

 

     From the
statement of
income
    Other
comprehensive
income
    Total  

At December 31, 2018

     (258.2     25.8       (232.4
  

 

 

   

 

 

   

 

 

 

Temporarily non-deductible provisions

     14.3       —         14.3  

Tax loss carryforwards

     1.1       —         1.1  

Functional currency effect of the non monetary assets

     16.5       —         16.5  

Gains not realized from sales of Parent Company to subsidiairies

     0.4       —         0.4  

Effect of differences by fixed asset

     (47.7     —         (47.7

Differences between basis: account x tax

     (70.3     (1.1     (71.4

Discontinued operation

     19.8       27.8       47.6  
  

 

 

   

 

 

   

 

 

 

At December 31, 2019

     (324.1     52.5       (271.6
  

 

 

   

 

 

   

 

 

 

Temporarily non-deductible provisions

     162.9       —         162.9  

Tax loss carryforwards

     7.0       —         7.0  

Functional currency effect of the non monetary assets

     (340.5     —         (340.5

Gains not realized from sales of Parent Company to subsidiairies

     (3.3     —         (3.3

Effect of differences by fixed asset

     41.7       —         41.7  

Differences between basis: account x tax

     50.7       4.8       55.5  
  

 

 

   

 

 

   

 

 

 

At June 30, 2020 (Unaudited)

     (405.6     57.3       (348.3
  

 

 

   

 

 

   

 

 

 

 

14.2

Reconciliation of income tax expense

 

     06.30.2020     06.30.2019  
     (Unaudited)     (Unaudited)  

Loss before income tax

     (497.8     (53.6
  

 

 

   

 

 

 

Income tax and social contribution at the nominal Brazilian enacted tax rate - 34%

     169.3       18.2  
  

 

 

   

 

 

 

Functional currency effect of the non monetary assets

     (618.7     33.9  

Research and development tax incentives

     0.1       —    

Equity in the earnings of subsidiaries

     1.5       —    

Fiscal credits (recognized and non recognized)

     (27.6     (12.8

Tax rate diference

     1.1       3.7  

Other difference between IFRS and fiscal basis *

     368.9       (21.4
  

 

 

   

 

 

 
     (274.7     3.4  
  

 

 

   

 

 

 

Income tax and social contribution income (expense) benefit as reported

     (105.4     21.6  
  

 

 

   

 

 

 

Current income tax and social contribution expense as reported

     (23.9     (18.8

Deferred income tax and social contribution income (expense) benefit as reported

     (81.5     40.4  

 

*

Others and differences between accounting and fiscal basis mainly refer to: permanent additions and exclusions, realization of foreign exchange gain or loss, transfer pricing adjustments and differences between accounting basis and

 

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Embraer S.A.

Notes to the Interim Condensed Consolidated Financial Statements

In millions of U.S. dollar, unless otherwise stated

 

 

  fiscal treatments in the income tax calculation (depreciation of fixed assets, provision for inventory losses, among others). It also includes tax impacts of the internal carve-out process concluded as of January 1, 2020, in relation to provisions transferred as part of the capital contribution by Embraer to Yaborã (Note 3) and added in the taxable income for the period according to the Brazilian tax rules.

 

14.3

Uncertainty over income tax treatments

The Company and its subsidiaries held certain discussions with Brazilian tax authorities over administrative and judicial matters related to uncertain treatments adopted when calculating income tax and social contribution on net income, whose prognostic assessment was that the opted tax positions will probably be accepted by the authorities, based on internal and external evaluation by legal advisors. A summary of these processes, related contingent liabilities and their potential effects is presented in Notes 16.3 (iii), (iv) and (v).

 

15

Financial guarantees and residual value guarantees

 

     06.30.2020      12.31.2019  

Financial guarantee of residual value

     105.4        —    

Financial guarantee

     9.6        —    

Additional provision

     5.9        —    
  

 

 

    

 

 

 
     120.9        —    
  

 

 

    

 

 

 

Current portion

     51.7        —    

Non-current portion

     69.2        —    

The movement on the financial guarantees and residual guarantees is shown below:

 

     Financial
guarantee
    Financial
guarantee of
residual value
    Accounts
payable
    Additional
provision
     Total  

At December 31, 2018

     11.6       125.4       15.1       —          152.1  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Interest Additions

     —         —         0.6       —          0.6  

Disposals

     —         —         (15.7     —          (15.7

Market value

     —         4.2       —         —          4.2  

Guarantee amortization

     (0.9     —         —         —          (0.9

Liabilities held for sale

     (10.7     (129.6     —         —          (140.3
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

At December 31, 2019

     —         —         —         —          —    
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Additions

     —         —         —         5.9        5.9  

Market value

     —         (24.2     —         —          (24.2

Guarantee amortization

     (1.1     —         —         —          (1.1

Liabilities held for sale

     10.7       129.6       —         —          140.3  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

At June 30, 2020 (Unaudited)

     9.6       105.4       —         5.9        120.9  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

15.1

Commitments (maximum exposure with financial guarantees)

The table below provides quantitative data on the financial guarantees provided by the Company to third parties in the Commercial Aviation business unit. The maximum potential payments (off balance sheet exposure) represent the worst-case scenario and do not necessarily reflect the results expected by the Company. Estimated proceeds from performance guarantees and underlying assets represent the anticipated values of assets the Company could liquidate or receive from other parties to offset its payments under guarantees.

 

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Embraer S.A.

Notes to the Interim Condensed Consolidated Financial Statements

In millions of U.S. dollar, unless otherwise stated

 

 

     06.30.2020     12.31.2019  
     (Unaudited)        

Maximum financial guarantees

     18.5       35.9  

Maximum residual value guarantees

     194.2       204.3  

Mutually exclusive exposure (i)

     (4.5     (12.5

Provisions and liabilities recorded

     (115.0     (140.3
  

 

 

   

 

 

 

Off-balance sheet exposure

     93.2       87.4  
  

 

 

   

 

 

 

Estimated proceeds from financial guarantees and underlying assets

     86.6       86.9  

 

(i)

When an underlying asset is covered by mutually exclusive financial and residual value guarantees, the residual value guarantee may only be exercised if the financial guarantee has expired without having been exercised. On the other hand, if the financial guarantee is exercised, the residual value guarantee is automatically terminated.

This exposure is reduced by the fact that, to benefit from the guarantee, the counterparty must ensure that the aircraft complies with rigid conditions for its return.

 

16

Provisions and contingent liabilities

 

16.1

Provisions

 

     06.30.2020      12.31.2019  
     (Unaudited)         

Product warranties (i)

     72.9        67.1  

Provisions for labor, taxes and civil (ii)

     53.4        66.4  

Taxes

     30.7        41.7  

Post retirement benefits

     24.6        11.7  

Environmental provision

     1.9        0.3  

Other

     21.0        15.7  
  

 

 

    

 

 

 
     204.5        202.9  
  

 

 

    

 

 

 

Current portion

     96.8        103.1  

Non-current portion

     107.7        99.8  

 

(i)

Recorded to cover product-related expenditure, including warranties and contractual obligations to implement improvements to aircraft delivered in order to meet performance targets.

(ii)

Provisions for labor, tax or civil contingencies, as shown in the table below (Note 16.2).

Changes in provision:

 

     Product
warranties
    Provisions
labor,
taxes and
civil
    Post
retirement
benefits
    Taxes     Environment
provision
    Other     Total  

At December 31, 2018

     98.0       58.4       31.7       31.4       2.4       20.5       242.4  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Additions

     54.2       23.8       —         63.9       2.3       —         144.2  

Interest

     —         5.2       2.2       —         —         —         7.4  

Used/payments

     (29.7     (7.1     —         (54.0     (1.7     (0.4     (92.9

Reversals

     (43.2     (10.6     (1.8     —         —         —         (55.6

Translation adjustments

     (0.2     (1.9     (0.7     0.4       (0.1     (0.6     (3.1

Liabilities held for sale

     (12.0     (1.4     (19.7     —         (2.6     (3.8     (39.5
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

At December 31, 2019

     67.1       66.4       11.7       41.7       0.3       15.7       202.9  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Additions

     0.7       5.6       —         19.1       0.4       1.3       27.1  

Interest

     —         2.5       0.8       —         —         —         3.3  

Used/payments

     (8.7     (1.4     (0.3     (30.2     (0.2     —         (40.8

Reversals

     (3.7     (4.8     —         —         (0.1     —         (8.6

Translation adjustments

     5.5       (16.4     (7.3     0.1       (1.1     0.2       (19.0

Liabilities held for sale

     12.0       1.5       19.7       —         2.6       3.8       39.6  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

At June 30, 2020 (Unaudited)

     72.9       53.4       24.6       30.7       1.9       21.0       204.5  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Embraer S.A.

Notes to the Interim Condensed Consolidated Financial Statements

In millions of U.S. dollar, unless otherwise stated

 

 

16.2

Labor, tax and civil provisions

 

     06.30.2020     12.31.2019  

Tax related

     (Unaudited  

IRPJ (i)

     10.2       13.6  

PIS and COFINS

     3.9       5.3  

Social security contributions (ii)

     1.7       2.4  

Import taxes (iii)

     0.6       0.8  

Others

     0.2       —    
  

 

 

   

 

 

 
     16.6       22.1  

Labor related

    

Plurimas 461/1379 (iv)

     5.7       9.6  

Reintegration (v)

     5.3       6.0  

Overtime (vi)

     6.4       7.6  

Dangerousness (vii)

     1.1       1.4  

Indemnity (viii)

     4.7       4.9  

Third parties

     1.4       1.5  

Others

     12.0       12.9  
  

 

 

   

 

 

 
     36.6       43.9  

Civil related

    

Indemnity (ix)

     0.2       0.4  
  

 

 

   

 

 

 
     0.2       0.4  
  

 

 

   

 

 

 
     53.4       66.4  
  

 

 

   

 

 

 

Current portion

     15.6       21.4  

Non-current portion

     37.8       45.0  

 

(i)

The Company has obtained an injunction to suspend collection of withholding tax related to values transferred overseas.

(ii)

On September 2, 2020, the Company was notified by the authorities for failing to withhold social security contributions from service providers. These lawsuits are at the second court level.

(iii)

Deficiency and Penalty Notices issued against the Company involving the drawback regime, disputing possible differences in relation to the tax classification of certain products and is at the analysis stage in the Federal Supreme Court—STJ (Supremo Tribunal de Justiça).

(iv)

Refers to claims for backdated salary increases and productivity payments, brought by former employees.

(v)

Suits brought by former employees claiming reinstatement with the Company for various reasons.

(vi)

Requests for payment of alleged differences in relation to overtime.

(vii)

Requests that seek recognition of hazardous activity.

(viii)

Indemnity claims in connection with alleged work-related accidents, pain and suffering, etc.

(ix)

Other indemnity claims brought by parties that had some kind of legal relationship with the Company.

The tax, labor and civil provisions are recorded in accordance with the Company’s accounting policy and the amounts shown here represent the estimated amounts that the Company’s legal department and its external counsel expect the Company to have to disburse to settle the lawsuits.

 

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Table of Contents

Embraer S.A.

Notes to the Interim Condensed Consolidated Financial Statements

In millions of U.S. dollar, unless otherwise stated

 

 

16.3

Contingent liabilities

Contingent liabilities are amounts classified as possible losses, in accordance with the Company’s accounting policy, in the opinion of the Company’s legal department, supported by its external counsel. When the contingent liability arises from the same set of circumstances as an existing provision, the type of the corresponding provision is indicated at the end of the description. The Company’s main contingent liabilities are listed below:

 

  (i)

The Company had a legal discussion related to the ISSQN rate in the amount of US$ 47.5 on March 31, 2020 (US$ 60.0 on December 31, 2019). Final court decision was reached with favorable outcome to the Company as of June 1, 2020, therefore the contingent liability previously under legal discussion were extinguised.

 

  (ii)

The Company has a legal dispute over AIIM on SAT / Agentes Nocivos from 2003 in the amount of US$ 5.7 on June 30, 2020 (US$ 7.7 on December 31, 2019).

 

  (iii)

The Company has a dispute about the transfer price calculation from the year 2009 in the amount of US$ 6.7 on June 30, 2020 (US$ 9.0 on December 31, 2019).

 

  (iv)

The Company is involved in a legal dispute related to tax credits paid by its subsidiaries abroad amounting to US$ 73.8 on June 30, 2020 (US$ 99.6 on December 31, 2019).

 

  (v)

The Company has a dispute on the 2007 Tax Assessment Notice regarding the validity of the provisions contained in the Normative Instruction No. 213/02, which determined the taxation of profits from abroad through the application of Brazilian rules. The dispute involves transfer pricing in loans between associates, equity method, among others. On September 1, 2010, decadence had been accepted to exclude the requirements of the first three quarters of 2002, and it was determined to carry out diligence to collect information requested by the National Treasury Attorney (Procuradoria da Fazenda Nacional—PNF). In April 2019 the judge trial was converted into diligence. The amount is US$ 119.1 on June 30, 2020 (US$ 161.0 on December 31, 2019).

 

  (vi)

The Company has a discussion on the disallowance of credits launched in several PERDCOMPs (electronic request for reimbursement or refund and tax offset statement program in Brazil) in the amount of US$ 53.7 on June 30, 2020 (US$ 51.0 on December 31, 2019). On June 30, 2020, the Company received notice on a new disallowance of US$ 15.9 regarding credits of PIS and COFINS derived from import processes.

 

  (vii)

Other tax lawsuits in the amount of US$ 0.5 as of June 30, 2020 (US$ 0.6 as of December 31, 2019).

 

  (viii)

The Company has contingent liabilities amounting to US$ 14.7 on June 30, 2020 related to several labor claims (US$ 20.9 on December 31, 2019).

 

16.4

SEC/DOJ and Brazilian public prosecutor’s investigations

In October 2016, the Company entered into definitive agreements with the United States and Brazilian authorities for the resolution of criminal and civil violations of the U.S. Foreign Corrupt Practices Act of 1977, as amended, or FCPA and for the resolution of violations of certain Brazilian laws.

Under the final agreements with the DOJ (U.S. Department of Justice) and the SEC (U.S. Securities and Exchange Commission):

 

   

The Company agreed to pay approximately US$ 98.2 to the SEC (of which US$20.0 million or R$64.0 million was due to the Brazilian Securities and Exchange Commission (CVM or Comissão de Valores Mobiliários) and the Brazilian Federal Public Prosecutor’s Office (MPF or Ministério Público Federal) under the term of undertaking (TCAC or Termo de Compromisso e de Ajustamento de Conduta), in the form of disgorgement of profits and pre-judgement interest.

 

   

The Company agreed to pay approximately US$ 107.3 to the DOJ, as penalty for one count of conspiracy to violate the anti-bribery and books and records provisions of the FCPA (U.S. Foreign Corrupt Practices Act) and one count of violating the internal controls provisions of the FCPA.

 

   

In a deferred prosecution agreement (DPA), the DOJ agreed to defer prosecution of the charges for three years, after which period the charges will be dismissed if the Company complied with the terms of the DPA.

 

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Table of Contents

Embraer S.A.

Notes to the Interim Condensed Consolidated Financial Statements

In millions of U.S. dollar, unless otherwise stated

 

 

   

The Company agreed with the DOJ and the SEC to retain an external and independent anti-corruption monitorship for a period of approximately three years. In February 2020, the Company agreed to extend the term of the external and independent monitorship for an additional 90 days in order to allow the monitor to complete his work.

 

   

On April 13, 2020, the monitor delivered his final report to the DOJ and to the SEC, finding that Embraer’s compliance program is reasonably designed and implemented to detect and prevent violations of the anti-corruption laws. On May 22, 2020, the monitorship term expired. Under both the DPA and the SEC Consent, there remain certain additional steps that the Company must take to complete the requirements of the DPA and the SEC Consent.

The Final Agreements and the TCAC represent the conclusion of the internal investigation of allegations of noncompliance with the FCPA and certain Brazilian laws in four aircraft sales outside Brazil between 2007 and 2011.

Related proceedings and developments are ongoing and could result in additional fines and possibly other sanctions and adverse consequences, which may be substantial. The Company believes that there is no adequate basis at this time for estimating accruals or quantifying any contingency with respect to these matters.

The Company will continue to cooperate with governmental authorities, as circumstances may require. In this regard, on February 23, 2017 the Company 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, the Company entered into a collaboration agreement with the Attorney General’s Office of the Dominican Republic in exchange for our cooperation with ongoing investigations in that country and paid US$ 7.0 to the Dominican Republic.

 

17

Financial instruments

 

17.1

Financial instruments by category

 

     06.30.2020 (Unaudited)  
     Note      Amortised
cost
     Fair value through
other
comprehensive
income
     Fair value through
profit or loss
     Total  

Assets

              

Cash and cash equivalents

     4        1,872.8        —          —          1,872.8  

Financial investments

     5        59.8        —          65.9        125.7  

Guarantee Deposits

        1.4        —          —          1.4  

Collateralized accounts receivable

        15.8        —          —          15.8  

Contract assets

     21        402.8        —          —          402.8  

Trade accounts receivable, net

     6        230.9        —          —          230.9  

Customer and commercial financing

        7.7        —          —          7.7  

Derivative financial instruments

     7        —          —          1.4        1.4  

Other Assets

        48.7        —          —          48.7  
     

 

 

    

 

 

    

 

 

    

 

 

 
        2,639.9        —          67.3        2,707.2  
     

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

              

Loans and financing

     13        3,799.2        —          —          3,799.2  

Trade accounts payable and others liabilities

        1,043.7        —          —          1,043.7  

Capital Lease

        62.9        —          —          62.9  

Financial guarantee and of residual value

     15        —          —          105.4        105.4  

Derivative financial instruments

     7        —          —          24.1        24.1  

Other liabilities

        186.6        —          —          186.6  
     

 

 

    

 

 

    

 

 

    

 

 

 
        5,092.4        —          129.5        5,221.9  
     

 

 

    

 

 

    

 

 

    

 

 

 

 

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Embraer S.A.

Notes to the Interim Condensed Consolidated Financial Statements

In millions of U.S. dollar, unless otherwise stated

 

 

     12.31.2019  
     Note      Amortised
cost
     Fair value through
other
comprehensive
income
     Fair value through
profit or loss
     Total  

Assets

              

Cash and cash equivalents

     4        855.2        —          —          855.2  

Financial investments

     5        —          —          424.7        424.7  

Guarantee Deposits

        0.6        —          —          0.6  

Collateralized accounts receivable

        17.6        —          —          17.6  

Contract assets

     21        461.9        —          —          461.9  

Trade accounts receivable, net

     6        149.4        —          —          149.4  

Derivative financial instruments

     7        —          —          2.1        2.1  

Other Assets

        34.5        —          —          34.5  
     

 

 

    

 

 

    

 

 

    

 

 

 
        1,519.2        —          426.8        1,946.0  
     

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

              

Loans and financing

     13        91.0        —          —          91.0  

Trade accounts payable and others liabilities

        550.8        —          —          550.8  

Capital Lease

        38.6        —          —          38.6  

Derivative financial instruments

     7        —          —          4.5        4.5  

Other liabilities

        128.7        —          —          128.7  
     

 

 

    

 

 

    

 

 

    

 

 

 
        809.1        —          4.5        813.6  
     

 

 

    

 

 

    

 

 

    

 

 

 

As of December 31, 2019, the following financial assets and liabilities were included in the group of assets and liabilities held for sale (Note 3):

 

     Classification and measurement      Carrying amounts and
fair value comparison
 
     Amortized cost      Fair value
throguh
profit or loss
     Fair value
hierarchy
     Book value      Fair value  

Financial assets

              

Cash and cash equivalents

     1,452.5        —             1,452.5        1,452.5  

Financial investments

     47.5        —             47.5        —    
  

 

 

    

 

 

       

 

 

    

 

 

 

Corporate bonds - 2.4% p.a. maturing on 2022

     47.5        —             47.5        —    

Trade accounts receivable, net of expected credit losses of US$ 30.0

     144.6        —             144.6        144.6  

Customer and commercial financing

     10.7        —             10.7        10.7  

Guarantee deposits

     0.5        —             0.5        0.5  

Other assets

     111.6        —             111.6        111.6  

Financial liabilities

              

Loans and financing

     3,301.3        —             3,301.3        3,614.1  
  

 

 

    

 

 

       

 

 

    

 

 

 

Bonds – US$, maturing on 2020 to 2027

     2,949.9        —             2,949.9        3,264.5  

Working capital – US$, maturing on 2021 to 2030

     325.4        —             325.4        323.4  

Working capital – EUR, maturing on 2023 to 2026

     20.6        —             20.6        20.6  

Bonds – US$, maturing on 2030

     5.4        —             5.4        5.6  

Lease liability

     9.4        —             9.4        9.4  

Trade accounts payable

     474.7        —             474.7        474.7