V. Segment Information

35. Obligation for segment reporting

The Group reports on two segments: business segments and geographical segments. These classifications are based on internal controls and reporting and take the various risk and earning structures of the business segments into account.

35.1. Definition of the market segments

As part of segment reporting, the activities of the company are defined in accordance with the rules of IAS 14 (segment reporting) as business segments (primary reporting format) and regions (secondary reporting format).

The activities of MTU Aero Engines Holding AG are split into the following two segments

  • OEM business
  • Commercial MRO business 
            
  • In the ‘‘OEM business segment’’, the company develops, manufactures, assembles, and delivers civil and military engines and components.
  • In the ‘‘Commercial MRO business segment’’, the company maintains, repairs, and overhauls aircraft engines. Besides complete engine repairs, engine modules are completely overhauled and special repairs are carried out. In addition to aircraft engines, the ‘‘Commercial MRO business’’ Group companies also repair and overhaul industrial gas turbines.

 

Eliminations between the market segments OEM business and Commercial MRO business, as well as business processes of the holding companies which cannot be directly allocated to a market segment, are stated in the consolidation column of the Group’s consolidated result of ordinary operations.

The €58.1 million consolidation in the financial results essentially eliminates profit and loss transfer amounts between Group companies that are classified under differing segments, whereas €663.5 million in consolidation of segment assets contain, alongside the losses from the disposal of financial assets of the holding companies, the receivables against related companies classified into differing segments. In the reconciliation of €171.6 million in segment debts, liabilities due to related companies have been eliminated.

35.2. Notes to the segment information

35.2.1. Primary business segment

  • The segment information is based on the same accounting and valuation methods as the consolidated financial statements. Receivables and liabilities, income and expenditure as well as results between the segments are eliminated as part of the reconciliation process. Internal sales are transacted on an arm’s length basis.
  • The investments are additions to property, plant and equipment, and intangible assets which will probably be used for more than one year. The investments are allocated to the registered offices of the company to which they belong.
  • The segment assets and the segment liabilities of the segments also comprise assets and liabilities which have been used for generating current business activities. The assets are allocated to the registered offices of the company to which they belong. The segment assets and the segment liabilities have been reconciled with the assets and liabilities of the company.
  • The pro rata results relating to joint ventures do not contain any ‘‘pro rata at equity results’’ of associated companies as these investments are stated at cost because they are not significant.

 

35.2.2. Secondary reporting segment (geographical segment)

  • With regard to the segment information according to regions, external sales are based on the registered offices of the customers. In line with the method used for internal control and reporting, the following regions are defined: Germany, Europe, North America, South America, Africa, Asia, others and equity capitalized financial assets.
  • Sales are allocated on the basis of the country in which the customer is domiciled.
  • The investments are additions to property, plant and equipment, and intangible assets which will probably be used for more than one year. The investments are allocated to the region where the registered offices of the companies are situated.
  • The assets are allocated to the registered offices of the company to which they belong.

 

35.3. Estimates for valuation of recoverable amounts from the segments that incorporate goodwill

The Group’s business model is exceedingly long-range. The period between start of series production to phase-out of an engine program can often stretch over more than 40 years.

Engines are maintained throughout their entire lifetimes. For this reason, the cashflow forecasts used to determine use value are initially established over a period of 5 years. Based on the long-range ongoing business model, a perpetual annuity with an annual growth rate of 1.0%, starting from the last planning year, is included for the following time period in the cashflow forecast.

These sustained planning assumptions are based on many years of experience in cooperation and risk- and revenue-sharing partnerships.

Variations in the cashflows and significant dollar-price fluctuations could influence the valuation of future cash values (recoverable amounts).

The planned free cashflows, which contain no proceeds or expenses from financing activities or income taxes, are discounted on the balance sheet date by a 12.4% weighted average cost of capital (WACC) rate.

36. Information according to business segment

The “Commercial MRO business” market segment contains €2.4 million in amortization of intangible assets and depreciation of tangible assets for MTU Maintenance Canada Ltd., Canada, which influenced annual results for the period under review (see text item 6).

37. Information according to business segment

38. Segment information according to region 2005 and 2004

Reconciliation of Group net profit to net profit of MTU Aero Engines Holding AG

Unlike the consolidated financial statement which is based on the IASB’s IFRS standards, the annual financial statements of MTU Aero Engines Holding AG are compiled according to the German Commercial Code (HGB). The IFRS regulations are also applied in the individual income statements where it is allowed and reasonable to do so. In numerous cases, the accounting and valuation principles in the annual financial statements of MTU Aero Engines Holding AG, and those of the German subsidiaries whose results according to the German Commercial Code (HGB) are paid to MTU Aero Engines Holding AG, vary from those of the consolidated financial statement.

The significant differences pertain to the amortization of goodwill, the valuation of inventories, receivables and liabilities, provisions, and the treatment of financial instruments.

The annual financial statement of MTU Aero Engines Holding AG, which was granted an unqualified audit certificate by Deloitte und Touche GmbH, Wirtschaftsprüfungsgesellschaft, Munich, is to be published in the German Federal Gazette and recorded in the commercial register of the local court of Munich (HRB 157 206). This financial statement may be requested from MTU Aero Engines Holding AG, 80995 Munich, Germany.

Recommendation for disposal of corporate profits

The annual net profit of MTU Aero Engines Holding AG amounts to €46.3 million, as compiled in the annual financial statements in accordance with the German Commercial Code (HGB). After offsetting €2.3 million in losses carried forward from the previous year and allocating €3.9 million to revenue reserves, a net profit of €40.1 million remains. At the General Meeting on May 12, 2006, the Board of Management and Supervisory Board will recommend distributing this net profit in a dividend of €0.73 per individual share certificate for the 55 million shares entitled to dividends.

The dividends will be paid out on May 15, 2006.

 

Munich, March 20, 2006

 

                             

       Udo Stark                    Bernd Kessler                    Dr. Michael Süß                   Reiner Winkler

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