II. Notes to the Consolidated Income Statement
6. REVENUES
Revenues have developed as follows:
A more detailed presentation of revenues, showing external and intersegment revenues, their derivation from products and services and their attribution to major customers, is provided under ‘Segment reporting’. Additional information can be found in Section 3.1. (Operating results) of the group management report.
7. COST OF SALES
Cost of sales includes an increase of € 9.0 million (2009: € 11.5 million) in write-downs on inventories, in order to account for them at their net realizable value. Further explanatory comments on write-downs on inventories are provided in Note 22. (Inventories).
8. RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses, defined as company-funded research and development expenditure less capitalized development costs, have developed as follows:
9. SELLING EXPENSES
Selling expenses comprise expenses for advertising and marketing, expenses in connection with air shows, trade fairs and exhibitions, media relations expenses, and valuation allowances and write-downs on trade receivables.
10. GENERAL ADMINISTRATIVE EXPENSES
General administrative expenses are expenses incurred in connection with administrative activities unrelated to development, production or sales activities.
11. OTHER OPERATING INCOME AND EXPENSES
The MTU group does not hold any investment property. An insignificant part of the buildings recognized under property, plant and equipment is rented out to external third parties.
In 2010, as in the previous year, other operating income did not include any government grants.
Under an asset purchase agreement dated May 18, 2009, MTU disposed of a group of assets and associated liabilities deriving from its interest in MTU Aero Engines North America Inc., Newington, USA. The disposal group mainly comprised property, plant and equipment, trade receivables, inventories, trade payables, and other liabilities and formed an operation of a cash-generating unit (the OEM segment). Consequently, the share of goodwill amounting to € 1.3 million attributed to the discontinued operation was recycled from assets to the income statement, where it was recognized as an expense. In total, the disposal of these assets and liabilities resulted in a net loss of € 4.4 million. This loss is recognized under sundry other operating expenses. The amount received in payment from the acquirer of the group of assets is included in cash flow from investing activities.
12. INTEREST RESULT
Interest income on financial instruments which are not within the scope of either IFRS 7 or IAS 39 amounted to € 1.4 million (2009: € 0.8 million) and related to cash and cash equivalents.
13. PROFIT/LOSS OF COMPANIES ACCOUNTED FOR USING THE EQUITY METHOD
Profit/loss of companies accounted for using the equity method comprises the operating loss of the joint venture Pratt & Whitney Canada Customer Service Centre Europe GmbH, Ludwigsfelde. In the financial year 2010, the company generated an operating loss of € 3.8 million (2009: € 1.5 million). At December 31, 2010, the carrying amount of the joint venture was compared with its recoverable amount. The recoverable amount was found to be below the carrying amount of the joint venture. As a result, the carrying amount was written down to its residual value and a valuation allowance on receivables of € 2.1 million (2009: € 0.0) was recognized in the income statement.
14. FINANCIAL RESULT ON OTHER ITEMS
The financial result on other items deteriorated slightly in the financial year 2010, with the net expense increasing by € 0.3 million to € -25.1 million (2009: € -24.8 million). This was above all attributable to fair value losses on derivative financial instruments amounting to € -8.2 million (2009: fair value gains of € 7.5 million) and losses on the revaluation of contingent liabilities totaling € -1.3 million (2009: gains totaling € 8.2 million). These expenses were largely offset by gains on currency translation amounting to € 11.1 million (2009: losses of € -11.3 million).
Financial result on other items groups together the profit/loss of related companies accounted for at cost, totaling € 1.5 million (2009: € 1.7 million) with all other income and expense items, including interest income and expenses on financial instruments classified as ‘held for trading’ in accordance with IAS 39.
FAIR VALUE GAINS/LOSSES ON DERIVATIVES
Fair value losses on derivative financial instruments amounting to € -11.5 million (2009: fair value gains of € 2.9 million) combined with fair value gains on forward commodity sales contracts for nickel amounting to € 3.3 million (2009: € 4.6 million) reduced the net gain/loss on derivatives by € 15.7 million (2009: increased by € 20.5 million).
At December 31, 2010, MTU held contractual obligations arising from one interest-rate cap with a nominal value of € 10 million and a maturity date of June 5, 2014, which fixes a ceiling of 4% on floating-rate loans on which interest is payable at the 6-month Euribor rate.
INTEREST PORTION INCLUDED IN MEASUREMENT OF ASSETS AND LIABILITIES
The reversal of the discount on pension obligations amounting to € 24.4 million in 2010 remained at the previous year’s level due to a higher basis, despite the reduced forecast discount rate changes. Due to this reversal, and the effect of changes in the discount rate for contingent liabilities arising from business combinations, an expense was recognized to the amount of € 1.3 million (2009: income recognized to the amount of € 8.2 million). A total expense of € 3.7 million (2009: € 6.5 million) was recognized for the discounting of receivables accounted for at amortized cost, other provisions, advance payments from customers and the expected return on plan assets for pension obligations.
15. INCOME TAXES
Recognized income taxes comprise current income taxes paid or payable in the countries in which the group operates, and deferred tax income or expense.
The tax expense incurred in prior periods related to corporation and municipal trade tax arising from an external tax audit at MTU Maintenance Hannover. The tax expense incurred in prior periods for the previous year amounting to € 1.0 million related to corporation and municipal trade tax arising from past tax pooling arrangements, which was paid in the course of completion of the tax field audit at MTU Aero Engines GmbH.
A more detailed presentation of the deferred tax expense and income is provided in Note 38. (Deferred taxes).
TAX RECONCILIATION
For the financial year 2010, all deferred tax assets and liabilities of German entities relating to temporary differences were measured on the basis of the expected tax rate of 32.6%. This rate comprises corporation tax at a rate of 15.0% plus a solidarity surcharge of 5.5% on the calculated corporation tax expense, and municipal trade tax on earnings with an average factor of 480%, producing a municipal trade tax rate of 16.8%. For 2009, the combined income tax rate was also 32.6%. Deferred taxes arise on temporary differences between the tax bases of assets and liabilities of the individual group companies and their carrying amounts in the consolidated balance sheet. Reference is made to Note 38. (Deferred taxes) for changes in deferred tax assets and liabilities.
IMPACT OF TAX FIELD AUDIT
The tax field audit for MTU Maintenance Hannover GmbH covering the period 2004 to 2007 was completed during the financial year 2010. The tax audit resulted in additional tax expenses totaling € 9.6 million. This also includes tax reversal effects for the period from the financial year 2008. Some of the tax audit findings relate to items that will result in lower taxable profits in subsequent years. Adjusted to eliminate the impact of the additional tax expense arising from the tax audit and the withholding tax on distributed profits of MTU Maintenance Zhuhai Co. Ltd., China, the effective group tax rate would have been 32.0%.
16. EARNINGS PER SHARE
In the financial year 2010, the potential issues of common stock in connection with the Share Matching Plan (SMP) for the Board of Management approved in 2010, the convertible bond issued in 2007 and the Matching Stock Program (MSP) launched on June 6, 2005 all had a dilutive effect on earnings per share.
The table below shows earnings per share together with the dilutive effect of the potential issue of common stock in connection with the convertible bond, the Matching Stock Program, and the Share Matching Plan.
17. ADDITIONAL DISCLOSURES RELATING TO THE INCOME STATEMENT
After adjustments to eliminate the effects of purchase price allocation in connection with the acquisition of the group companies, and non-recurring items, and the addition of scheduled depre-ciation/amortization and impairment losses, the following intermediate results are obtained:
Costs by function include the following personnel expenses items:
Pension benefits account for € 14.1 million (2009: € 17.6 million) of these expenses. The employer’s share of social security contributions, which is recognized as an expense, amounted to € 73.3 million (2009: € 69.8 million).
The average number of persons employed during the financial year 2010 breaks down as follows:
Costs by function include the following cost of materials items:
The total fees calculated in the financial year 2010 pursuant to Section 314 (1) no. 9 of the German Commercial Code (HGB) for the accounting firm Deloitte & Touche GmbH, Wirtschaftsprüfungsgesellschaft, the auditor of the consolidated financial statements, amounted to € 1.1 million (2009: € 1.0 million).
The expense item ‘Financial statement auditing services’ comprises all fees paid to the external group auditor for the auditing of the financial statements of all MTU companies.