The World According to GAAP

Embraer reported in second quarter 2003 net sales of US$ 567.0 million and net income of US$ 4.9 million. The order backlog as of June 30, 2003 totaled US$ 27.1 billion, including US$ 10.3 billion in firm orders and US$ 16.8 billion in options.

Exchange rates wouldn't settle down.

Beginning in third quarter 2002 the real experienced vigorous exchange rate volatility against the U.S. dollar, which only began to decrease in intensity in first quarter 2003.

Stating financials in a comprehensible way, according to US accounting, led to more headaches, on the way to enlightenment. The company said, "In addition, we have entered into a number of swaps intended to balance our non-U.S. dollar-denominated assets against our non-U.S. dollar-denominated liabilities plus shareholders' equity in relation to our forecasts of future cash flows. These swaps primarily effectively convert our fixed and floating rate U.S. dollar-denominated debt and fixed and floating rate yen-denominated debt into CDI-based reais-denominated obligations. Because these swaps are not accounted for as hedging transactions under U.S. GAAP, these swaps are recorded at fair value on our balance sheet with unrealized gains and losses reflected as a component of interest expense. ...Embraer had higher U.S. dollar denominated trade accounts receivable and lower real-denominated cash and cash equivalents than it had expected, causing a net financial transaction loss of US$ 9.4 million. The combined effects of the unrealized loss and the net financial transaction loss resulted in a substantial decrease in net income. Net income decreased from US$ 36.9 million to US$ 4.9 million."

Q203 Highlights

• A total of 28 jets were delivered during the quarter, two less than the 30 jets delivered in second quarter 2002 (2Q02).
• Net Sales totaled US$ 567.0 million, 3.8% less than reported for 2Q02.
• Income from operations totaled US$ 69.7 million, as compared to the US$ 119.5 million reached in 2Q02.
• Net income was US$ 4.9 million, compared to US$ 36.9 million for the same period in 2002.
• Three important aircraft sales agreements were entered into regarding the EMBRAER 170/190 jet family with JetBlue, US Airways and LOT, further evidencing the support for this aircraft family in the U.S. and European commercial airline markets.
• During the first half of 2003 Embraer had a net increase of 126 aircraft in orders for the EMBRAER 170/190 jet family.
• On June 2, 2003 Embraer announced its intention of establishing an industrial facility in Jacksonville, Florida, USA, with a view to supplying aircraft for the US defense and national security markets.
• EMBRAER 175's first flight took place successfully in June.
• On June 15, 2003, Embraer revised the total number of jets to be delivered in 2003, from 132 to 110 units, and increased its aircraft delivery estimates for 2004, from 136 to 160 units.
• Embraer cancelled the Indigo contract for 23 Legagy shuttles on July 15, 2003.

Big inventory a drag on liquidity; but there's justification for that:

Embraer is carrying over a billion dollars in inventory, and that level has risen by $8 million since the end of March. The company says it is "...mainly due to three factors:

1. the development of the new EMBRAER 170/190 jet family maintains six prototypes as part of the certification process. Moreover, production of the EMBRAER 170 for delivery began in 2Q03;
2. the Legacy corporate jets require more production time, primarily for assembly of the interior; and
3. the development of several defense programs, which require higher inventory levels due to a longer production time."

FMI: www.embraer.com