Operating results

Increased revenues in new business and in MRO

In the financial year, MTU increased its revenues by 12.0% to €2,148.6 million, from €1,918.0 million the prior year. The commercial MRO performed particularly well, with revenues increased by 27.1 % to €732.1 million in 2005, compared to €575.9 million the year before. This growth, which outpaced the overall market growth, stems primarily from the acquisition of new customers.

In the period under review, revenues earned in the commercial engine business increased by 7.2% to €943.4 million, from €879.9 million the year before. MTU’s revenues from the manufacture of new engine modules and components rose by 26.3 %. This success was primarily driven by growing sales of the V2500 (Airbus A320 family) and CF6 (Airbus A300, A310, A330, Boeing 747 and 767, MD 11) engines, which have been in production for some time.

Revenues in the military engine business, at €491.4 million, remained virtually unchanged compared with the previous year (€495.7 million). In this business, the EJ200 engine program is a steady source of revenues as the Eurofighter is being introduced into service. On the other hand, the European air forces have begun to phase out their fleet of Tornados and RB199 engines. The helicopter engine MTR390 for the attack-escort helicopter Tiger had a positive effect on revenues.

Overview of income

 

Growth demands higher up-front expenditures

During the financial year 2005, the increasing proportion of revenues from new engines production and the accelerated growth in maintenance have led to an increase in costs of sales to €1,864.8 million, from €1,627.6 million in the prior year. Costs of sales above all include material costs, personnel expenses, scheduled depreciation and amortization, additions and disposals of inventories as well as expenditures that were charged to MTU by consortium lead partners for marketing new engines.

The company’s successful development work over the past several years has steadily increased the proportion of revenues earned through engine manufacture. Compared to spare parts production, the manufacture of new components requires more up-front expenditures, which is reflected in the cost of sales. The rapidly growing maintenance business, too, requires additional materials and outside services, which again increase the cost of sales. Therefore gross profit, at €283.8 million, was €6.6 million less than in the prior year. A decline in selling, administrative and R&D costs nonetheless led to a 60.3% improvement of EBIT, which stood at €130.0 million.

Rapid pace of development pays off

MTU has invested heavily in fundamental development work over the past years, the aim being to rejuvenate its product line. Now that the GP7000 (Airbus A380) and PW6000 (Airbus A318) have attained production maturity, growth prospects for the next several years are excellent. The total research and development (R&D) expenditure for fiscal year 2005 was €171.9 million, equally divided between self-financed and outsidefunded activities. The decline in R&D expenditures from the previous year (€232.8 million total expenditures) resulted primarily from the near-completion of the GP7000 and the PW6000 development programs. In the military engine business, development costs are typically borne by the contracting agency. In financial year 2005, these costs amounted to €88.1 million (2004: €76.9 million), spent mostly on work on the TP400-D6 for the Airbus A400M and on the MTR390 Enhanced for the Tiger combat helicopter.

In the commercial engine business, MTU finances its development work for the most part from its own funds; self-funded expenditures in financial year 2005 amounted to €83.8 million, compared with €155.9 million in 2004. Most of the money was spent on final work on the GP7000 and PW6000 engines. According to IFRS, the company is required to capitalize and depreciate these expenditures over the period in which the company expects to generate revenues from these engine programs. Depreciation begins with the delivery of the first engine.

Within the scope of purchase accounting, MTU has furthermore formed a provision (the “R&D provision”) in the amount of the present value of its development costs of €144.5 million for the GP7000 and PW6000 engine programs, effective January 1, 2004. The funds used to fulfil these liabilities are shown as a comsumption of R&D provisions. The 2005 comsumption equated to €38.1 million, compared to €98.2 million in the prior year. As of December 31, 2005, the R&D provision still amounted to €15.8 million, taking accrued interest into account, and will be used in 2006.

In its income statements for 2005, MTU listed expenditures for research and development in the amount of €45.7 million, compared to €57.7 million in 2004. This item includes MTU’s expenditures for fundamental development activities. The company participates in major research programs at both the national German and EU level, while at the same time driving its own initiatives to develop new manufacturing and maintenance processes and new materials.

Strongly improved results of operations

For the year ended December 31, 2005, MTU has reduced its overheads in sales and administration by 27.6 % to €112.8 million. While selling costs declined slightly by 0.9% to €67.4 million in 2005, general administrative costs came down to €45.4 million, which is 48.2% less than the year before. However, in 2004 this item included direct transaction costs amounting to €22.6 million as well as other indirect expenditures from the acquisition of the company. Not affecting income in 2005 were the direct expenditures to the amount of €20.3 million for going public. They were recognized in equity.

Increasing revenues and decreasing expenditures for research, development, sales, and administration have led to a significant increase in the operative result for the year ended December 31, 2005. The EBIT increased by 60.3% from €81.1 million in 2004 to €130.0 million.

Depreciation and amortization included in the items cost of sales, research and development costs, selling costs, and general administrative costs have slightly increased in the period under review. They amounted to €138.3 million after €133.0 million the year before. The financial result was improved as well in 2005. It amounted to €-71.3 million after €-74.6 million in 2004. This decrease is mainly due to the repayment of financial debt and consequently lower interest. The funds for this repayment came from the issuing proceeds as well as from operational activities. A counter effect was the higher exchange rate of the US Dollar because of the revaluation associated with it and the premium for the upfront repayment of the high yield bond. The repayments are documented in the following overview:

The significantly increased operative result and the improved financial result have led to an increase in the result from ordinary activities by €52.2 million to €58.7 million in 2005. After taxes, MTU has earned a net income of €32.9 million against €0.2 million in 2004. The reconciliation from the consolidated net income IFRS to the net income of MTU Engines Holding AG as per the German commercial code (Handelsgesetzbuch – HGB) which forms the basis for the dividend payment of €0.73 per share is presented in the Notes to the Consolidated Financial Statements.

The key performance indicator that MTU uses for its operational activities is the adjusted EBITDA. For its calculation, the EBIT of the consolidated income statements is increased by depreciation and amortization. This produces the Earnings before Interest, Taxes, Depreciation and Amortization (EBITDA). From that, the Group eliminates special effects and, in doing so, obtains the “EBITDA adjusted”. These special effects include the consumption of the R&D provision for the GP7000 and PW6000 engines as well as profits in the order backlog. Additonally, measures outside the direct business of MTU, in particular direct transaction costs from the sale of MTU and restructuring costs, are eliminated.

Improved result in both segments

Both the commercial and military engine business (OEM-business) and commercial maintenance (MRO-business) have contributed to the substantial improvement of the result for the year ended December 31, 2005. In the commercial and military engine business, MTU earned an adjusted EBITDA of €162.4 million in 2005, which is an improvement by 23.7% over the amount of €131.3 million of the previous year. The increase in this segment stems from both the growing new engine business and the high level of the spare parts business. The margin, the gross profit, in the commercial and military engine business is 14.1 %.

In its MRO-business, MTU was able to achieve an above-average increase of its adjusted EBITDA. As the revenues in this segment increased by 27.1 % to €732.1 million, the adjusted EBITDA improved by 68.9% from €42.7 million the year before to €72.1 million in 2005. Consequently, the margin in the MRO-business has almost doubled to 10.9%.