Net Assets

Going public sustainably strengthens equity

The positive development of its operative business is also reflected in the balance sheet of MTU. At the same time, going public leads to a sustained boost in the equity base and to an increased equity ratio from 8.0% to 20.7 %.

On the assets side of the balance sheet, the intangible assets with limited useful lives (without goodwill) have decreased by €25 million to €561 million due to amortization. This balance sheet item basically comprises program values, program-independent technology and customer relations that were capitalized as a result of purchase accounting.

Also mainly by depreciation the book value of property, plant, and equipment decreased by €31 million to €546 million. In 2005, €42 million of depreciation is attributable to depreciation on capitalized hidden reserves as a result of purchase accounting. In contrast, MTU increased its investments for the year ended December 31, 2005, by 42% to €78 million from €55 million in the year 2004. The focus of the investing activities was on equipment for the engine programs GP7000 and PW6000 at the Munich site as well as for the CFM56 at the Hanover site. In addition, MTU completed its test stand for the TP400-D6 at Ludwigsfelde in 2005.

Financial assets increased by €1 million to €48 million in 2005. This increase mostly comes from the MTU Maintenance Zhuhai joint venture, accounted for at equity. The decrease of the long-term receivables and other assets by €39 million to €1 million is mostly due to the realization of positive fair values from foreign currency forward exchange transactions.

In 2005, the positive development led to an increase in inventories by €70 million to €518 million. Especially the upcoming series production of the GP7000 and PW6000 engines induce a corresponding build-up of inventories in the commercial engine business. In the military engine business, the increase in inventories essentially stems from the series production of the first tranche of the EJ200. Inventories are also being stocked up in commercial MRO due to the steep rise in business volume. In both the military engine business and commercial MRO, a substantial part of the inventories is financed through advance payments received.

The positive business development with increasing revenues has led to increased trade accounts receivable for the year ended December 31, 2005 – the accounts receivable went up by €24 million to €418 million in 2005. This increase was furthermore caused by the exchange rate of the US Dollar, which went up during the course of the year. The realization of positive market values from forward exchange contracts of the US Dollar and the receipt of tax refund claims led to a decrease of the short-term receivables and other assets by €145 million to €59 million in 2005.

Cash and cash equivalents amounted to €16 million as of December 31, 2005. The decrease against the cash and cash equivalents of the previous year of €28 million primarily comes from the repayment of debt. On the liabilities side of the balance sheet, equity increased to €528 million for the year ended December 31, 2005, against €217 million the year before. In the process of transforming MTU into a Aktiengesellschaft, the subscribed capital was increased by €38 million to €40 million by transfer from additional paid-in capital. Going public included an additional increase in subscribed capital of €15 million, so that the subscribed capital amounted to €55 million as of December 31, 2005.

Out of the net issue proceeds of going public, €288 million were allocated to the capital reserves after taking into account the costs of the Offering and the income taxes thereon. In contrast, especially the realization of positive market values from forward exchange contracts of the US Dollar and the impairment of the current FX contracts led to a reduction in equity by €25 million within the scope of the accumulated other equity. In 2005, the provisions for pensions increased by €19 million to €378 million due to planned allocations. The other provisions increased by €26 million to €239 million as of December 31, 2005. This increase is mainly due to the expected final tax payments for the year 2005. In addition, MTU increased the provision for price reductions, for outstanding cost on invoiced orders, and for obligations to the workforce from variable income accruals. Consumption of the provision for contractual development obligations under the GP7000 program, however, led to a decrease in the provisions created for that purpose. As with the accounts receivables, the positive development of the operative business led to an increase in the trade payables for the year ended December 31, 2005; liabilities increased by €62 million to €289 million. In the commercial engine business, this increase was especially caused by program specific payables to cooperation partners. In commercial MRO, it was the strong increase in revenue that led to higher trade payables.

The increase in the other liabilities by €147 million to €616 million in 2005 primarily comes as a result of higher advance payments in the military engine business and in commercial MRO. In addition, the payables to the workforce from vacation and flex-time credits have increased. Furthermore, the higher exchange rate of the US Dollar made for negative market values from forward exchange contracts.

The contingent liabilities for the year ended December 31, 2005, amounted to €151 million after €138 million in 2004. This increase is mainly due to the higher exchange rate of the US Dollar and significantly affects MTU’s liability for undertakings relating to riskand- revenue-sharing contracts based on US Dollars, above all for marketing concessions for engines. These include guarantees for bank borrowings and leasing payments as well as guarantees for residual values of leased airplanes. In each case, MTU is internally liable to the amount of its program share. There are also guarantees for bank borrowings to non-consolidated joint ventures. Here, the major portion goes to MTU Maintenance Zhuhai. Furthermore, there is a contingent liability which applies to MTU Aero Engines GmbH for its subsidiary MTU Maintenance Berlin-Brandenburg for the benefit of the investment bank of the state of Brandenburg (ILB). This liability only takes effect if MTU Maintenance Berlin- Brandenburg does not make proper use of sponsored assets and if the company were unable to settle possible refund claims by ILB.