Annual report 2008

The group reports financial information by line of business and by geographical area. Segmentation is based on classifications used in the internal organizational structure and reporting system, and takes into account the risks and returns to which the segments are subject.

The group identifies its reportable segments in accordance with IAS 14 (Segment Reporting), and has determined that business segments (delineated by line of business) are to be used as the primary reporting format, and geographical segments (delineated by geographical area) as the secondary reporting format.

MTU Aero Engines Holding AG classifies its activities according to two business segments:

• Commercial and military engine business (OEM)
• Commercial maintenance business (MRO)

• In the commercial and military engine business, the group develops, manufactures, assembles and delivers commercial and military engines and components. Maintenance, repair and overhaul of military engines is also included in this segment.
   
• In the commercial maintenance business, the group maintains, repairs and overhauls commercial aircraft engines. Activities encompass full engine maintenance and repair, and the complete overhaul of engine modules and special repairs. In addition to aircraft engines, group companies in this business sector also repair and overhaul industrial gas turbines.

In the table showing segment information by business segment, the amount in the earnings before tax (EBT) line of the consolidation/reconciliation column represents, on the one hand, the amounts applied to eliminate intersegment sales between the two business segments and, on the other hand, transactions by the holding companies which cannot be directly allocated to a business segment.

The negative consolidation/reconciliation amount of € 39.6 million in the “Net interest expense and financial result on other items” line includes interest expenses attributable to the holding company and eliminates profit and loss transfers between group companies allocated to different segments. The negative consolidation/reconciliation amount of € 486.1 million in the segment assets line relates to the consolidation of the fair value of subsidiaries (financial assets) and of accounts receivable from inter-segment sales. The reconciliation amount of € 90.3 million in the segment liabilities line reconciles financial liabilities attributable to the holding company to internal liabilities attributable to the group companies.

• The segment information is based on the same accounting policies as the consolidated financial statements. Receivables and liabilities, income and expenses, and revenues from inter-segment sales are reconciled between the segments. Intra-group sales are transacted on an arm’s length basis.
   
• Capital expenditure relates to additions to property, plant and equipment and intangible assets which will probably be in use for more than one year. This capital expenditure is allocated on the basis of the registered office of the company to which the acquired assets belong.
   
• Segment assets and the segment liabilities also include assets and liabilities which have been used for generating current business activities. These assets are allocated on the basis of the registered office of the company to which they belong. Segment assets and segment liabilities have been reconciled to group assets and group liabilities.
   
• Significant non-cash expenses relate to change in provisions, write-downs on inventories, discounts applied to contract production receivables, and the interest expense on pension obligations.
   

• In the segment information reported by geographical area, external sales are allo-cated on the basis of the registered office of the customers. In line with the method used for internal control and reporting, the following geographical areas (regions) are defined: Germany, Europe, North America, South America, Africa, Asia, others, and financial assets accounted for at equity.
• Revenues are allocated on the basis of the country in which the customer is domiciled.
• Capital expenditure relates to additions to property, plant and equipment and intangible assets which will probably be in use for more than one year. This capital expenditure is allocated on the basis of the registered office of the company to which the acquired assets belong, which in turn defines the geographical segment.
• Segment assets are allocated on the basis of the registered office of the company to which they belong.

Earnings before interest and tax (EBIT) are determined by adding back certain items (depreciation/amortization, write-downs on assets, and the effects of the purchase price allocation arising from the company’s acquisition by Kohlberg Kravis Roberts & Co. (KKR) from DaimlerChrysler AG) to earnings before interest, tax, depreciation and amortization (EBITDA adjusted).

EBITDA (adjusted) for the OEM business increased from € 305.7 million to € 330.3 million, and the adjusted EBITDA margin improved from 19.1% to 20.1 %. The reconciliation of EBIT to adjusted EBITDA is given in Note 17.1.

The impairment losses on intangible assets, totaling € 35.2 million, comprise impairment losses on the carrying amount of old GE engine programs amounting to € 34.3 million and on old military engine programs amounting to € 0.9 million. In each case, the carrying amount was compared with the recoverable amount. The recoverable amount was found to be below the carrying amount, and hence an impairment loss was recognized to match the carrying amount to the recoverable amount. Refer to Note 7. for a summary of the distribution of impairment losses on assets and on the business segments.

Impairment losses attributable to the commercial and military engines business in 2006 amounted to € 5.7 million, of which € 2.4 million was attributable to the investment in the TP400-D6 engine program for the A400M military transporter. A further impairment loss of € 3.3 million was necessitated on property, plant and equipment at MTU Aero Engines North America Inc., USA, as the carrying amount no longer adequately reflected the recoverable amount.

Earnings before interest, tax, depreciation and amortization (EBITDA) were reduced by € 9.0 million to € 78.9 million as a result of the additional costs incurred in conjunction with the introduction of new logistics and planning systems in Hannover. The adjusted EBITDA margin fell accordingly to 7.1 % (2007: 8.7 %). The reconciliation of EBIT to adjusted EBITDA is given in Note 17.1.

There was no impairment loss recognized in respect of the commercial maintenance business in the financial year 2008. The impairment loss on intangible assets in the financial year 2007 amounting to € 14.7 million related to the carrying amount of a license for CF34 repair techniques, which was compared with its recoverable amount. The recoverable amount was found to be below the carrying amount. Hence an impairment loss of € 14.7 million, representing the full carrying amount of the CF34 license, was recognized in costs of sales and thus reduced the net profit of the commercial maintenance business. Refer to Note 7. for a summary of the distribution of impairment losses on assets and on the business segments.

The calculated impairment loss on intangible assets and on property, plant and equipment in the financial year 2006, totaling € 0.6 million, relates to the carrying amount of MTU Maintenance Canada Ltd., Canada, which no longer adequately reflected its recoverable amount.

Group segment reporting according to business segments is described on pages 134 to 137.