II. Notes to the Consolidated Income Statement

6. Cost of sales

On the balance sheet date, the value of MTU Maintenance Canada Ltd., Canada, was compared with its recoverable amount (cashflows), which resulted in a shortfall in the present value compared with the €2.4 million carrying amount of MTU Maintenance Canada Ltd. This amount reduces in the full amount the result for the accounting period and is primarily contained in the cost of sales. A small portion is included in administration costs due to the classification of functions.

The following asset groups were affected by the impairment of value:

The research and development costs in the amount of €57.7 million – included in the cost of sales for the previous year – were reclassified with their own position (text item 7) for the financial year 2005 in order to make comparison easier.

7. Research and development costs

See text item 6 (Cost of sales) to compare new classification.

8. Selling costs

Selling costs contain mainly expenses for marketing, advertising, and sales personnel as well as write-downs in relation to trade accounts receivable.

9. General administrative costs

General administrative costs for the previous year contained €41.8 million in transaction costs related to the acquisition of business enterprises on January 1, 2004.

10. Other operating income and expenses

11. Financial result

12. Income taxes

Tax reconciliation

Deferred tax assets and deferred tax liabilities are recognized for all temporary differences between the values reported in the tax balance sheets of the individual companies and the consolidated balance sheet using the liability method. Based on the good results in the past and the positive results to be expected, MTU Aero Engines Holding AG is confident that the future taxable income of MTU Aero Engines Holding AG and other subsidiary companies will be sufficient for realization of deferred tax assets. Up to December 31, 2005, all domestic deferred taxes were determined by temporary differences on the basis of a combined 40.4 % tax rate. In the financial year 2005, the corporate tax rate was 25% plus the solidarity surcharge of 5.5% on the corporate tax charge. This results in a effective corporate tax rate of 26.4 %. The trade tax amounts to 14% after corporate tax is taken into consideration, which means the total tax rate comes to 40.4%.

The actual tax expense is €2.1 million above the expected tax expense that would have resulted from application of the rate for tax on distributed earnings for MTU Aero Engines Holding AG. In the previous year, actual tax expense was €3.7 million higher than expected.

Purchase price distributions associated with purchases made during the previous business year resulted in an additional depreciation volume of €63.3 million, which lowered earnings but was not taken into account for taxation.

Factors that affected the rise of the total tax rate included interest from purchase financing in the amount of €37.7 million, which was added in part when determining income tax, as well as €2.9 million in valuation allowances for tax losses carried forward for MTU Maintenance Canada Ltd., Canada, and €1.5 million for those of MTU Aero Engines North America Inc., USA.

Text item 29 details the balance sheet items under which the tax accruals and deferrals are classified.

13. Earnings per share

14. Additional information relating to the income statement

14.1 Adjusted reconciliation of EBIT to EBITDA

Adjusted by the effects caused by the purchase price allocations for the acquisition of the group companies as well as the one-time special influences of the previous year, the following provisional results are produced:

14.2. Financial instruments: Comparison of valuation up to December 31, 2005

The book values of the financial instruments were matched with their respective fair values. The fair value of MTU Maintenance Zhuhai Co. Ltd., China, was determined with the discounted cashflow method and compared to the book value. The shares in other joint ventures, in associated companies, and other shares correspond to the fair value (see text item 5.8.2. and 5.8.4.). Other assets and receivables correspond to the fair value in accordance with valuation allowances and currency translation as well as financial liabilities. Derivative financial instruments are assessed at market prices.

14.3. Personnel expenses

The employer’s part of social security contribution is €69.2 million (€72.9 million in the previous year), which is included as expenses.

14.4. Statement of average number of employees

14.5. Cost of materials

14.6. Order backlog

The order backlog consists of firm purchase orders, i.e. orders the company is obliged to deliver, and the customers are obliged to accept and pay for the products or services. Order backlog is calculated as follows:

  • Order backlog includes all orders that have been made directly to the company by a customer or issued by the ultimate customer of the leading partner of a commercial maintenance or made by the customer of a military engine consortium.
  • Backlog with respect to commercial engine sales is recorded at list price and does not reflect concessions. MTU is charged these by the lead partner. They are included in the cost of sales.
  • For military programs, the customers typically commit to purchase a fixed number of aero engines at the time the production contract is signed, and the company therefore records as order backlog the entire contract value upon signing. As a result, the military business order backlog with respect to purchase orders is reduced over a long period of time, reflecting the delivery schedule agreed with the respective customer.
  • In contrast, purchase orders for commercial engines are received from time to time, and are often concentrated around the launch of a new engine or during periods of particularly intense marketing. Spare parts orders are often filled in the period in which the order is received, and therefore the order backlog generally does not include substantial amounts for spare parts.
  • Commercial maintenance backlog relates to purchase orders issued in relation to engines delivered for servicing. Not included in the order backlog are estimated future orders under non-current service agreements or ‘‘Fly-by-Hour and Powerby- the-Hour’’ contracts based on estimated flight hours for the life of the contract. As a result, the commercial maintenance order backlog is relatively low. In addition to a narrowly defined backlog of orders, the company displays the expected amount of engine repairs from the orders for ‘‘Flyby- Hour and Power-by-the-Hour’’ contracts below the fixed contracts, as well as the volume of contracts that would be expected to result.
  • Once the revenues are recognized, an equivalent amount is deducted from the order backlog.
Date: 24 05 2006