MTU Aero Engines : 2023 Annual Report / Compensation Report

Annual Report

MTU AERO ENGINES AG FISCAL YEAR 2023

23

01

To our Shareholders

02 Combined management report

03

Consolidated financial statements

Table of contents

04

Responsibility statement and Independent auditor's report

05 Additional information

To our shareholders4

Letter to our shareholders 5

The Executive Board 7

Report of the Supervisory Board 8

The Supervisory Board 14

The MTU share 16

Management compensation report 19

Combined management report 35

The MTU Group 36

Economic report 46

MTU AG (disclosures in accordance with the German Commercial Code [HGB]) 66

Forecast 72

Risk and opportunity report 76

Main features of the internal control and risk management system 92

Disclosures under takeover law 95

Other disclosures 99

Consolidated financial statements 134

Consolidated income statement 135

Consolidated statement of comprehensive income 136

Consolidated balance sheet 137

Consolidated statement of changes in equity 139

Consolidated cash flow statement 140

Consolidated segment report (part of the Notes to the consolidated financial statements) 142

Notes to the consolidated financial statements 145

Responsibility statement and independent auditor's report

Responsibility statement Independent auditor's report

Assurance Report of the Independent Auditor regarding the Consolidated Non-Financial Statement

Additional information

Glossary of engine terms Overview of engines Index

List of charts and tables Financial calendar and Contact

MTU AERO ENGINES AG

Annual Report 2023

239

240 241

249

252

253

255

256

257

259

Key facts and figures with year-on-year comparison

in € million (unless stated otherwise)

Revenue and earnings

Revenue thereof: commercial engine business 1) thereof: military engine business 1)

thereof: commercial maintenance business 1)

Gross profit

Earnings before interest and taxes (EBIT)

Net income

Adjusted earnings

Adjusted revenue

Adjusted earnings before interest and taxes (adjusted EBIT)

Adjusted EBIT margin (in %)

Net income

Balance sheet

Total assets

Equity

Equity ratio (in %)

Net financial debt Cash flow

Cash flow from operating activities

Cash flow from investing activities

Free cash flow

Cash flow from financing activities Number of employees at year end

Commercial and military engine business

Commercial maintenance business

Total number of employees

Share indicators

Earnings per share in €

Basic earnings per share Diluted earnings per share

1) Before consolidation

2023

2022

in %

711 1,335 -46.7

538 496 8.3

4,225 3,616 16.8

118 855 -86.2

-161 508 <-100

-97 333 <-100

6,326 5,330 18.7

818 655 24.9 12.9 12.3

594 476 24.8

10,204 9,230 10.5

2,933 3,107 -5.6 28.7 33.7

631 753 -16.2

777 728 6.8

-420 -400 -5.0

352 326 7.8

-294 -224 -31.3

7,544 6,973 8.2

4,626 4,300 7.6

12,170 11,273 8.0

-1.90 6.21 <-100

-1.90 6.06 <-100

01

To our Shareholders

02 Combined management report

03

Consolidated financial statements

To our shareholders

04

Responsibility statement and Independent auditor's report

05 Additional information

Letter to our shareholders 5

The Executive Board 7

Report of the Supervisory Board 8

The Supervisory Board 14

The MTU share 16

Management compensation report 19

MTU AERO ENGINES AG

Annual Report 2023

Letter to our shareholders

2023 was a year of contrasts at MTU Aero Engines.

Operationally, MTU remained in top form. We were very successful in our core business and generated adjusted revenue of €6.3 billion and adjusted EBIT of €818 million. The free cash flow amounted to €352 million. On an organic basis, we therefore fully achieved our targets.

All areas of the company made a key contribution to this success. Moreover, we are still on track for our goal of revenue of €8 billion and an operating profit of €1 billion by 2025, 8 - 1- 25.

At the same time, we faced the enormous financial consequences of the Geared Turbofan fleet management plan, which had an impact of around € 1 billion on our reported revenue and earn-ings. As a result, MTU reported negative earnings for the first time in its 90-year history. The fleet management plan was triggered by a manufacturing problem with a component produced by our program partner Pratt & Whitney. This affects us through our risk- and revenue-sharing agreement because our share of the earnings and the risks associated with the Geared Turbofan is 18%. The Geared Turbofan fleet management plan will also have a substantial impact on our cash flow in the coming years. That means we have to pay special attention to our cost structure.

These ups and downs were reflected in our share price in 2023: Thanks to our successes, our share rose to a high for the year of €244.50 in April. When the impact of the Geared Turbofan fleet management plan was announced, our shares lost a quarter of their value. They are now recovering. Nevertheless, our market capitalization is still below the actual value of our compa-ny. I assure you that we are working hard to close the gap.

At the same time, I would like to thank you, our shareholders, for supporting us through all the highs and lows in 2023 and for your continuing loyalty. Despite the difficult situation, we would like to show our appreciation by paying a dividend for 2023. At the Annual General Meeting, we will therefore be proposing a dividend of €2.00 per share. That is a sign of our reliability, even in challenging times. We want MTU to remain an attractive and future-oriented investment for you.

I can assure you: MTU's future prospects are good. Unlike the situation at the beginning of the coronavirus pandemic, we are not coming to a sudden halt - quite the contrary! Aviation is on an upswing and the sector is poised for growth. Some regions and segments have already exceeded the pre-Covid level. There is high demand for new engines and maintenance services. The Paris and Dubai airshows were good indicators of the positive outlook for the aviation sec-tor. Aircraft manufacturers booked record orders in Paris and MTU secured orders worth more than U.S.$1 billion. In Dubai, we gained orders of more than U.S.$500 million. That places us in a good starting position. We further improved this position in 2023 by investing continuously in the future of the company - both in technology and in our capacity at all locations worldwide.

For example, a new production building for disks was erected in Munich. In addition, we held the groundbreaking ceremony for our new development center. New training capacities were established at our locations in China and Canada as a sound basis for vocational and further training of skilled staff. In addition, we took a second test station into service in Zhuhai, China. In 2023, we also expanded the capacity of our on-site service network: We obtained permits in Australia for the CF34 engines for regional aircraft and in Brazil for our CFM56 engines, which are used in the classic A320 family. MTU Maintenance Dallas can now perform on-site engine tests at its new, larger premises. In 2023, it was once again clear that we are making the right investments, and that our investments during the coronavirus pandemic were also right. With-out them, we would not have the capacity for the additional upcoming shop visits resulting from the Geared Turbofan fleet management plan. We face a balancing act: positioning the company well for market requirements and, at the same time, implementing the inspection program efficiently in collaboration with our partners.

At this point, I would like to stress that, with regard to the Geared Turbofan fleet management plan, MTU is part of the solution, not part of the problem. We are doing everything within our power to remedy the situation as quickly as possible together with our partners. MTU is both a pioneer and a benchmark: Since the start of the Geared Turbofan fleet management plan, we have used our expertise to suggest improvements and to enhance the inspection process - across the entire MRO network for the Geared Turbofan. In addition, we are evaluating whether we can shift maintenance work on other engines to other MTU locations to free up capacity for the Geared Turbofan in Hanover. Furthermore, we are working on expanding Geared Turbofan maintenance capacities also at other sites such as EME Aero or MTU Maintenance Zhuhai so that we can work through this issue as quickly as possible. We are making a clear contribution to regaining airlines' trust in the Geared Turbofan.

After all, the capabilities of this engine are undisputed. This is not a fundamental or technological problem; it is a manufacturing problem. The Geared Turbofan has the right, future-oriented architecture. It is a vital component in our technology agenda as we move towards emission-free flying.

In 2023, we also drove forward other technologies within our technology agenda. As part of the European Clean Sky 2 research program, we are optimizing our low-pressure turbines and high-pressure compressors. Our WET concept is making progress with funding from the Euro-pean Clean Aviation program. Clean Aviation is also providing funding for our Flying Fuel Cell. For the Flying Fuel Cell, we need absolutely reliable, high-performance electric propulsion sys-tems. To position ourselves optimally for this, in 2023, we acquired the electric motor developer eMoSys. eMoSys' drives already have the highest known power density. Furthermore, together with MT Aerospace we are developing a complete liquid hydrogen fuel system for commercial aviation. Our Flying Fuel Cell should be the first application. To sum up: Even in challenging times, we are investing in our future so that we remain a leading technology company. Our clear goal is emission-free flying. In this way, we want to play our part in solving climate change because that is one of the most urgent problems facing humanity.

In 2023, we also made good progress with future technologies for military aircraft. A four-year technology agreement was signed for the new European fighter jet system FCAS. This includes additional technology studies for the demonstration phase of the engine. Moreover, together with Safran, we want to work on an engine for the next generation of military helicopters. Rapid and efficient development should be achieved through a pan-European team.

MTU has been driving forward all of these topics with great commitment. That is only possible with a strong team. In the numerous uncertainties and crises of recent years, MTU has been demonstrating its strength. On behalf of the Executive Board, I would like to thank all employ-ees for their exceptional commitment and enormous flexibility. We are proud to have such a competent and motivated team at our side. And we are sure that together we can master the Geared Turbofan fleet management plan and use our operational strength to shape the future of the aviation sector.

We will not allow ourselves to be blown off course. We are charting a focused yet calm track through these turbulent times. We have honed our strategy and have a keen eye on our targets. MTU is a healthy, growth-oriented company with opportunities in all segments. Our long-term prospects are still strong. We still want to continue to grow profitably. Even though 2024 will be dominated by the Geared Turbofan fleet management plan, we anticipate a positive organic trend - in all business areas. In 2024, revenue is expected to rise fastest in the commercial series business. We also expect to see an increase in revenue in the spare parts business, com-mercial maintenance and the military business. Looking beyond this year, we remain confident. 8 - 1 - 25 still applies. On an adjusted basis, by 2025, we want to generate revenue of €8 billion and an operating profit of €1 billion.

In short, we intend to deliver on our promises in the future - and we will do so. I would be delighted if you would continue to put your trust in us on this journey.

01

To our Shareholders

The Executive Board

02 Combined management report

03

Consolidated financial statements

04

Responsibility statement and Independent auditor's report

05 Additional information

MTU AERO ENGINES AG

Annual Report 2023

Lars Wagner

Peter Kameritsch

Chief Financial Officer (CFO) and Chief Information Officer (CIO) born in 1969

Degree in mechanical engineering and aeronautical engineering and an MBA Appointed until December 31, 2025

Degrees in physics and business administration Appointed until December 31, 2025

Degree in mechanical engineering Appointed until January 31, 2026

Degree in mechanical engineering Appointed until June 30, 2026

Responsibilities:

Human resources, legal affairs, strategy, technology & engineering, corporate communications;

Chief Sustainability Officer (CSO)

Responsibilities: Finance, IT

Responsibilities: Purchasing, production, assembly, quality

Responsibilities:

Marketing & Sales and program management for MTU's commercial and defense programs, MTU Maintenance locations

MTU is extremely well positioned in the market and operationally it is a high performer. That is demonstrated by its strong organic growth in 2023. However, the Geared Turbofan fleet management plan weighed heavily on reported revenue and earnings in 2023. Thanks to its technological edge, balanced portfolio and broad customer base, MTU is well placed to achieve a further rise in revenue and earnings on an adjusted basis in 2024, and to go on growing beyond 2024. The following sections contain the Supervisory Board's report on its activities in fiscal year 2023. The Supervisory Board will continue its close and trustful collaboration with all stakeholders in 2024.

Activities of the Supervisory Board

In this report, the Supervisory Board provides information in accordance with Section 171 (2) of the German Stock Corporation Act (AktG) on its activities in fiscal year 2023 and the results of its review of the annual financial statements and consolidated financial statements. In 2023, the Supervisory Board carried out, fully and with due care, the duties of oversight and advice entrusted to it by law, the articles of association, and its own rules of procedure.

It regularly advised the Executive Board on the running of the company, continually supported and monitored the management of the business activities and assured itself that the Executive Board's dealings were proper and lawful. The Supervisory Board was informed and consulted in a direct and timely manner on all decisions of consequence for the company. The Executive Board provided the members of the Supervisory Board with regular, prompt and comprehensive information on the company's situation. The Supervisory Board received written monthly reports on the company's net assets, financial position and results of operations. At its meetings, the Supervisory Board also discussed the business performance of all of MTU's affiliated companies.

The Supervisory Board discussed the strategy and all important projects with the Executive Board. After examination and careful deliberation, the Supervisory Board endorsed the com-pany's strategic orientation with its focus on sustainable and profitable organic growth. The Supervisory Board passed resolutions on all transactions for which its approval was required in accordance with the law, the company's articles of association or the Executive Board's rules of procedure after reviewing and discussing them with the Executive Board. Preparatory meetings can also take place without the Executive Board as necessary. Moreover, the Supervisory Board regularly schedules meetings without the Executive Board.

In 2023, as in previous years, the Supervisory Board examined and oversaw the internal control mechanism at MTU, especially the risk management system, internal auditing and legally com-pliant corporate governance. It examined these systems with the support of the Audit Committee

In view of the legal requirements for stock corporations, which impose an obligation to obtain the consent of the Supervisory Board for certain related party transactions, the Supervisory Board adopted an internal procedure to comply with these requirements in 2020. In the report-ing period, there were no transactions requiring consent or disclosure.

Meetings of the Supervisory Board

The Supervisory Board held five regular in-person meetings in 2023. It also held one extraordi-nary meeting using the hybrid format, i.e., some members attended in person while others took part via a video conference. The members took part in all meetings. Attendance was therefore 100%. In addition, one workshop was organized for the Supervisory Board with external support and the Executive Board and Supervisory Board held a joint strategy workshop.

Supervisory Board members Gordon Riske (Chairman)

Josef Mailer (Deputy Chairman) Dr. Christine Bortenlänger Thomas Dautl (until May 11, 2023) Kai Eisenblätter (since May 11, 2023) Daniele Frijia

Dr.Ing. Jürgen M. Geißinger (until May 11, 2023) Dr.-Ing. Marc Haltrich (since May 11, 2023) Anita Heimerl

Heike Madan (until May 11, 2023) Dr. Rainer Martens

Dr. Joachim Rauhut

Claudia Sowa-Frank (since May 11, 2023) Univ.-Prof. Dr. Marion A. Weissenberger-Eibl Michael Winkelmann (until May 11, 2023) Ute Wolf (since May 11, 2023)

Average attendance rate

committee meetings)

Meetings attended in %

12 / 12 100%

17 / 17 100%

13 / 13 100%

1 / 1 100%

5 / 5 100%

10 / 10 100%

3 / 3 100%

5 / 5 100%

6 / 6 100%

4 / 4 100%

6 / 6 100%

17 / 17 100%

9 / 9 100%

6 / 6 100%

1 / 1 100%

5 / 5 100%

0 100%

At its meeting on March 21, 2023, the Supervisory Board discussed MTU's financial statements. The Supervisory Board adopted the annual financial statements and the consolidated financial statements and approved the combined management report for the company and the Group for fiscal 2022. In addition, it looked in detail at MTU's Annual Report and the allocation of the net profit for 2022 available for distribution and approved the Executive Board's profit distri-bution proposal. A dividend payment of €3.20 per share eligible for the dividend was therefore proposed to the Annual General Meeting on May 11, 2023. The Supervisory Board approved the non-financial statement for the MTU Group and the company for fiscal 2022. Other issues examined by the Supervisory Board were the short-term incentive (STI) payable to the members of the Executive Board for 2022 and the definition of financial and non-financial targets for the

award of STI payments to Executive Board members for 2023. The report of the Supervisory Board to the Annual General Meeting and the agenda for the meeting were also agreed on. Furthermore, the Supervisory Board approved the management compensation report and the corporate governance statement. The Executive Board reported on the company's situation, including information on supply chain problems across the sector and the implementation of an IT security roadmap.

At its meeting on May 11, 2023, the Supervisory Board considered, among other things, the acquisition of the Starnberg-based electric motor developer eMoSys GmbH, the signature of a memorandum of understanding with Safran on the joint development of a helicopter engine, and the start-up of the test station at MTU Maintenance Zhuhai's new, second facility in Jinwan. It also looked in detail at the achievement of the first milestone in the NEFE project. The Executive Board reported to the Supervisory Board on the quarterly figures for the first quarter.

At the meeting on July 25, 2023, the Supervisory Board was given a report on the status of implementation of the CSRD (Corporate Sustainability Reporting Directive). There was also information on the celebration to market the 40th anniversary of IAE and the V2500 program. Another important topic was the successful presentation of technologies for climate-neutral aviation at the Paris Air Show. Furthermore, there was an update on the profitability of the PW1100G-JM Geared Turbofan program. In addition, the Executive Board reported on progress with MTU's geothermal project. An exploratory drill was scheduled for October / November. Start-up is expected for winter 2024 / 2025. MTU expects this to reduce CO2 emissions at the Munich location by 80%.

At the extraordinary meeting on September 22, 2023, the Supervisory Board was given an update on the PW1100G-JM fleet management plan and the resulting aircraft on ground (AOG) times for airlines. Moreover, it was given extensive information on this issue and its impact on the company at all subsequent meetings. In addition, regular and timely reports on the latest developments were provided by the Executive Board to a Supervisory Board working group. Another item was the proposal for a new compensation system for the Executive Board and its components.

At the meeting on October 24, 2023, the Executive Board reported on the groundbreaking ceremony for the new development center at the Munich location, the Geared Turbofan fleet management plan, the ongoing recovery of air traffic and MTU's continued growth, supported by all market segments. Further, it reported on global deliveries of passenger aircraft, MTU'sproduction strategy 4.0, the supply situation of suppliers in Israel, and the quality and occupa-tional safety situation, which are at a high level. The Supervisory Board looked intensively at technology development in the commercial and military areas and MTU's future propulsion con-cepts, with improvements in climate impact and energy consumption. The Supervisory Board was also given information on the ongoing development of the technology for the Flying Fuel Cell, digitalization paths for all core processes at MTU, the MRO segment, where revenue was above the pre-Covid level, planned capacity expansions, the continued ramp-up of the EME Aero joint venture in Poland and the new site in Serbia, and on the Zhuhai location in China, with its new training center. Moreover, it adopted a resolution on the new compensation system for the Executive Board, which will be submitted to the Annual General Meeting 2024 for approval.

At the meeting on December 11, 2023, the Supervisory Board examined the company's situa-tion and held a detailed discussion of the operational business plans and the budget for 2024. The meeting also included a detailed review and confirmation of the management's compliance with the German Corporate Governance Code. Further items at this meeting were the compen-sation of the Executive Board, especially the status of achievement of the ESG targets for 2023 and proposals for the ESG targets and strategic multipliers for 2024. The Supervisory Board thanked the Executive Board for waiving a considerable portion of its variable compensation in view of the anticipated financial burden on the company as a result of the Geared Turbofan fleet management plan, which was initiated in 2023. The results of the review of the efficiency of the Supervisory Board were also presented. The Supervisory Board voted on the appointment of one shareholder representative to the Supervisory Board of MTU Maintenance Hannover GmbH. In addition, it discussed the competitive situation in China.

At its meetings, the Supervisory Board also discussed the legal requirements and the recom-mendations of the German Corporate Governance Code regarding Executive Board compensa-tion. The compensation system takes account of sustainability targets and provides for appropri-ate and motivating compensation.

Between official meetings, the Chairman of the Supervisory Board was regularly briefed on the company's current situation, significant business transactions and important pending decisions. This entailed regular meetings with the Executive Board, including consulting on strategy, the status of planning, the progress of business, the company's risk situation, the risk management system and compliance.

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MTU Aero Engines AG published this content on 25 March 2024 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 25 March 2024 08:46:06 UTC.