Iapo 2005
Iapo 2005
Iapo 2005
** EBITDA is different from EBITDA, displayed in 2004 Annual Report ($164.9 million), due
to corrections, introduced into the calculation method–adjustments for non-interest financial
expenses were made.
Important Events
Military aviation
SU-30MK
January
Irkut Corporation started realization of the Malaysian contract for the delivery of 18 Su-
30MKM multi-role fighters.
February
Irkut Corporation and Hindustan Aeronautics Ltd (HAL, India) has agreed upon
manufacturing a number of Su-30MKI assemblies, which supposed to be used in the
production of aircraft for third countries.
March
Hindustan Aeronautics Ltd with the assistance of Irkut Corporation has completed the
deliveries of licensed Su-30MKI to the Indian Air Force for 2004/2005 reporting period.
April
Another round of negotiations with Algeria on the delivery of Irkut-produced fighter jets was
held by Rosoboronexport, the Russian official arms exporter.
September
Indian party has reviewed the procurement schedule of technological kits for licensing
production in favour of greater share of kits with a higher completion level.
Rosoboronexport and Irkut Corporation started the negotiations with Indian party regarding
the prospective upgrade of Su-30MKI of the first and second batches to the specifications
of the third batch of Su-30MKI.
October
Rosoboronexport and Irkut Corporation has held a round of negotiations with India on the
delivery of 18 Su-30MKM to replace Su-30K fighters, delivered earlier.
December
The Russian and Algerian parties initialled the contract for the delivery of 28 Su-30MKA to
Algeria. The Memorandum for the delivery of 12 Su-30MKM to Thailand was signed.
Yak -130
March
The contract for the production of the first 12 Yak-130 was signed with the Russian
Defense Ministry. Under the contract the first 4 advanced combat trainers are scheduled
for 2006, and 8 for 2007.
August
The first Yak-130 prototype of the mass-production series has completed the commercial
tests.
October
The Yak-130 combat trainer was introduced to the Russian Air Force for conducting the
joint state flying tests.
December
Air shows of Yak-130 advanced combat trainer were performed at the LIMA-2005
International Aerospace and Maritime Exhibition in Malaysia. As a result, Irkut receives an
offer to compete in a trainer tender, held by the Malaysian Air Force.
The Algerian and Russian parties initialled the contract for the delivery of 16 Yak-130
combat trainers to Algeria.
Civil aviation
Be-200
January
Irkut Corporation held negotiations with the Civil Protection Department of the French
Ministry of Interior Affairs concerning a possible purchase of Be-200 amphibians.
The Russian Aviation Register MAK and EU Certification Centre signed an agreement for
Be-200 (fire-fighting modification with D-436TP engine) to undergo testing to comply with
EU standards.
April
The Be-200 amphibious aircraft was equipped with an Airborne Observation System
(AOS).
June
Russian party made several proposals to Indonesian Environmental and Forest
Management Committees of the Indonesian Parliament Lower House. The Russian
delegation came forward with a plan aimed at improving forest fire-fighting missions. The
use of a combination of the Russian Be-200 amphibious aircraft and Irkut-produced
Unmanned Aerial Vehicles (UAVs) was suggested.
Beriev Company established the unique Aviation Maintenance Base for Be-200 and Be-
103 amphibians to carry out certified line and scheduled maintenance.
July
The Civil Protection Department (Protezione Civile) of Italy leases Be-200 to be utilized in
forest-fire fighting mission by SOREM, authorized Italian firefighting service operator.
Irkut delivered the third multi-purpose Be-200ChS amphibious aircraft to the Russian
Ministry for Emergency Situations.
August
At the MAKS-2005 International Air Show in Zhukovsky, near Moscow, the Company and
European Aeronautic Defence and Space Company (EADS Company) signed the
Constituent Agreement to establish EADS Irkut Seaplane SAS joint venture with the targets
of Be-200 certification and joint marketing. Under the agreement, Irkut owns a 70% share
in the JV, EADS – 30%.
October
During the meeting of the 2nd Joint Commission for Economical, Industrial, and Technical
co-operation between Russia and Portugal, Irkut conducts a presentation of Beriev-200
amphibious aircraft. As a result of the presentation, the 2 sides decided that the intention to
start negotiations on a prospective purchase of Be-200 by Portugal should be entered into
the minutes of the meeting.
December
During Russia-ASEAN summit in Kuala Lumpur, Irkut conducted a presentation of Be-200.
Specifications for Be-200 are determined to comply with Malaysian requirements. On
LIMA-2005 Air Show Irkut presented current and prospective projects, including multi-role
Be-200 amphibious aircraft. Negotiations with South-East Asian and European
representatives were conducted with the focus on the possible use of Be-200 amphibian.
Components
June
Irkutsk plant started the execution of four contracts for the production of A320 aircraft
components, signed with Airbus at year-end 2004.
July
Pursuant to audit inspection, Irkut was included into the data base of AECMA (Association
Europeenneédes Constructeurs de Materiel Aerospatial), Association of European Aircraft
and Components Manufacturers, as the EASE (European Aerospace Supplier Evaluation)
supplier.
August
At the MAKS-2005 Air Show in Zhukovsky, near Moscow, Irkut and EADS signed a number
of agreements, including a strategic partnership agreements, and an agreement, indicating
Russia’s involvement in the development and production of the A-350 long-range jet-liner.
December
The Company signed a number of agreements with Airbus, EADS , Pfalz-Flugzeugwerke
(PFW ) for additional large work packages for the production of Airbus components. The
book of orders was scheduled for 10 years with the value of $140 million. The first
deliveries under the agreements are planned for 2007.
Prospective projects
MTA
February
In co-operation with the Indian aerospace industry, Irkut Corporation began the joint MTA
(multipurpose mid-range transport aircraft) project on the risk-sharing basis. The
agreement was reached during AeroIndia-2005 Air Show in Bangalore, India.
March
The Russian Air Force approves the R&D specifications for Multi-Purpose Transport
Aircraft (MTA).
May
Russian Air Force R&D specifications for MTA were sent to Indian Air Force
representatives in accordance with established procedures.
October
The draft of the Russia-India Intergovernmental MTA Agreement was issued.
Russia-India working group negotiated the major correction principles for MTA business
plan, concerning 2005-2006 economic situation.
December
The Indian Airforce Staff has approved the requirements for MTA, specified by the Russian
AF.
June
Within the frames of pre-contract consultations with the Russian Ministry for Emergency
Situations, the Corporation presents Irkut-2F, 2T, 20, 850 UAVs at Zhukovsky air base.
Russian delegation came forward with a series of proposals to the Indonesian
Environmental Commission regarding the effectiveness of the forest fire-fighting. The
appliance of Irkut produced aircraft complex, based on combined use of UAVs and Be-200
was suggested.
July
Russian EMERCOM completes acceptance trials of Irkut-2F, Irkut-2T, and Irkut-20
Unmanned Aerial Vehicle (UAV) prototypes.
September
Irkut Corporation signed a Letter of Intent with Austrian Diamond Aircraft Industries GmbH
to develop an unmanned aerial vehicle.
October
The Company signed a contract with the Russian EMERCOM for the production of light
monitoring, surveillance and reconnaissance UAVs.
November
Russian EMERCOM completes acceptance trials of Irkut-850 UAV prototype.
December
At LIMA-2005 Aerospace&Maritime Show, air shows of a 2 kg UAV were conducted.
Activities
on the financial markets
March
Irkut pays off A01 ruble-nominated bonds program totaled RUR600 mln and paid off last
coupon totaled 23 934 thousand rubles.
Irkut obtained a 5-year credit line worth $173 million from Sberbank.
April
Irkut signed an $83.5 million syndicated loan agreement with a group of banks, coordinated
by Moscow Narodny Bank, Singapore. The Corporation would receive the loan, secured by
the contract for the delivery of Su-30MKM to Malaysia, in two tranches. The loan maturity is
November 2008. The participants of the loan are large financial institutions from South-
East Asia.
May
Irkut paid off the 5th interest coupon payment totaled RUR119.7 million for A02 Irkut bonds
(registration number 4-02-00040-À as of 01.10.2002).
July
The Russian Federal Financial Markets Service (FFMS ) registered five-year bonds of third
issue, amounting to 3,250,000 bonds with a par value of RUR1,000 each. The state
registration number of this issue is 4-03-00040-A.
September
Irkut successfully completed the third issue of nonconvertible interest rouble coupon bonds,
totaled RUR 3.25 billion, with the interest rate of 8.74%, and maturity of 5 years. At the
date of the issuance, the issue had the longest term of maturity in the Russian market,
while the interest rate was the lowest among Irkut’s public borrowings.
October
Irkut started preparations for the issuance of credit-linked notes (CLN) on a total sum of
$100 million.
November
FFMS registered the report on the result of non-convertible interest rouble-nominated
coupon bonds issue A03 (registration number 4-03-00040-A as of July 14th, 2005). The
bonds were placed through public offering with a par value of RUR3.25 billion.
Irkut completes retirement of nominal value of the A02 2nd issue bonds (registration
number 4-02-00040-A as of 01.10.2002). The value of retirement amounted to RUR1.5
billion or RUR1,000 per bond.
Irkut and Amsterdam Trade Bank have in principal agreed upon arranging a 3-year credit
line worth $30 million.
December
Irkut received the first government compensation of interest expense for loans, obtained in
Russian banks in 2005. The compensation amounted to $7.45 million.
Activities
on the capital market
January
During the consolidation of Irkut assets, Irkut Corporation transferred 100% shares of
French Irkut Seaplane SAS to the corporate balance sheet.
February
Irkut Corporation and the European Aeronautic Defence & Space Company (EADS )
started preparations for the acquisition of 10% stake in Irkut. EADS starts due diligence on
Irkut.
May
Irkut Corporation won two awards for the best IPO program in 2004 (the awards from The
National Association of Stock Market Participants (NAUFOR) and MICEX).
June
Shareholders of Irkut Corporation decided to enlarge the authorized capital by 12% by the
issue of 120 million new shares with a par value of RUR3 each. The new issue was
specifically targeted to be privately placed to EADS .
August
The 2004 Irkut reporting prepared in accordance with IFRS is published, with record
financial results.
Irkut consolidates Beriev Company’s control stake, raising Irkut’s stake in Beriev from
39.57% to 54.2%.
Irkut completed dividend distribution for 2004 worth 87,349,963.7 at RUR0.1 per common
share.
September
registered the new issue of 120,824,363 common registered non-documentary registered
shares of Irkut Corporation. The issue was given a state registration number 1-03-00040-A-
002D. The nominal value of each share – RUR3.
December
EADS acquired a 10% stake in Irkut for €55 million ($65.3 million).
A significant milestone in the development of the cooperation with the world’s leading
aircraft manufacturers became a number of agreements signed between Irkut and EADS
(European Aeronautic Defence and Space Company), which have also resulted in
acquisition of a 10% stake in the Corporation in 2005.
We are happy to inform you that in terms of financial results, 2005 was the best year ever
in the history of Irkut Corporation. The revenue (in accordance with International Financial
Reporting Standards (“IFRS”)) set a new record of $712 million (more than a 14% increase
from 2004). The net income grew 24% and accounted for $85 million. Moreover, despite
the increase in prices for raw materials and goods, profitability is high as never: gross
margin shows a 50% level, operating margin – 21%, and net income margin – 12%. At the
same time, the Company managed to cut its financial expenses by over 36% through lower
interest payments. We are glad that improved customer relations, tight cost-savings
programs, systematically implemented by Irkut, and its intensive activity in the financial
markets give us an opportunity to provide our shareholders with one of the highest results
in the aerospace industry.
Having the largest order book in the Russian Aerospace&Defence industry (yearend 2005
order book accounted for $4 billion, while by March 31st 2006 it reached $5.2 billion) we
are optimistic that Irkut’s operating capacities will be fully loaded, while timely initiated
diversification program will ensure new customers from Europe, the Americas, South-East
Asia, and Middle East.
Among Irkut major products are famous, one of the best in the world fighters, surpassing
the competitors by quite a number of characteristics, and the unique Be-200 amphibious
aircraft with no competitors in the market. There are other successful projects being
implemented by the Company, with emphasis placed on the civil aircraft sector. The Yak-
130 combat trainer project is close to be brought to batch production, development of
unmanned aerial vehicles (UAV) advances significantly, as well as multi-purpose transport
aircraft (MTA) and a family of short- and mediumrange MS 21 aircraft.
Remaining the leading manufacturer of combat aircraft in Russia, the Company managed
to improve its financial results through the increased production of civil aircraft and other
equipment. Irkut delivered the third multi-purpose Be-200 amphibious aircraft to the
Russian Emergency Control Ministry (EMERCOM). Another Be-200 took part in staging
aerial fire fighting missions in Italy under a test operational use. A number of Western
European countries indicated their interest in the aircraft, and following the completion of
the certification process, Be-200 will be granted the entry into the European market.
A lot has been done under the Irkut-Airbus co-operation contract for the delivery of Airbus
components – the Company bought and introduced state-of-the-art equipment, significantly
upgraded the manufacturing facilities, built a galvanic shop. In 2005, the Russian
Emergency Control Ministry completed official acceptance tests of “airborne robot
complexes” prototypes (unmanned aerial vehicle program). Last but not least, our
subsidiary units made great progress this year, including the A-50 project (radar
earlywarning and guiding system) by Beriev Design Bureau, and the Mig-29 modernization
program by “Russian Avionics”.
Other significant tasks in 2005 were creating a modern production and technological
environment, as well as upgrading existing facilities to meet the internationally accepted
standards. Considerable funds are allocated for re-equipment and procurement of new
technology, an integrated logistics support and after-sales service system is being
developed.
2005 was a significant step towards one of our prior goals – a considerable increase in
capitalization of the Company. Last year showed a 48% increase in capitalization ($719
million, 35% of the industry’s capitalization*). Accordingly, Irkut remains the leading
Russian public aircraft manufacturer by the value of capitalization.
The dividend policy is another important aspect of the Company’s development. We are
striving to keep a reputation of a reliable and stable company, making regular dividend
payments. According to the dividend policy, the share of the net income allocated for
dividend payments will be increased (25% by 2009 (IFRS)). Irkut decided to link the
dividend payments to IFRS reporting, since it allows to recognize revenue on the
percentage-of-completion basis. This method is more accurate in terms of the Company’s
results, since production cycles of the main line of products exceed in 1.5 times more then
the reporting period. Meanwhile, under the Russian Accounting Standards (RAS) the
revenue can be recognized only after shipment. Therefore, results calculated according to
IFRS and RAS for the same period can differ significantly, e.g. in 2004 the revenue,
calculated in accordance with RAS exceeded the IFRS revenue, while in 2005 – vice
versa. Nonetheless, to make dividend payments, it is required to have the monetary base
or positive net income according to RAS.
In 2005, pursuant to a demand from our customer Irkut shifted delivery dates to early 2006,
which resulted in decreased revenue calculated in accordance with RAS, and this in turn
deteriorated other financial indicators, including the net income. This negatively affected
the Company’s ability to distribute dividends, as in 2005 Irkut showed negative net income
according to RAS, therefore we had no monetary base. We will do our best to show
positive income in accordance with RAS and IFRS to meet the self-imposed obligations to
our shareholders.
2005 was a milestone year for Irkut Corporation, as EADS acquired through its Russian
subsidiary the 10% stake in the major Russian aircraft manufacturer. In the frameworks of
this deal the Company initiated the new share issue. The acquisition of the stake is
strategically important for both EADS and Irkut. This deal was supported by the
governments of Russia and Germany, and will contribute to stronger relations between
Russia, Germany, and France.
For the first time in the history of the Russian defence industry, a Western company
acquired such a significant stake in a Russian Aerospase&Defence company, gaining a
strong foothold in the Russian aerospace industry. This deal marks an important milestone
in Irkut’s integration into the global aircraft-manufacturing industry. EADS , one of the
world’s leading aerospace companies, is not just a shareholder, but a partner – the
companies signed a Strategic Partnership Agreement, Irkut has achieved the status of a
preferred EADS partner and supplier in Russia. The Company is now enjoying emerging
opportunities for co-operation with the European aerospace industry in the areas of
components production, design and development. Along with a new major Western
investor in the Corporation’s equity, the share of minority shareholders has grown as well.
Back in December 2004, the aircraft manufacturer Airbus (EADS subsidiary) placed a
package of orders with Irkut for the production of A320 family aircraft components, and in
2005 the Company became the first Russian certified Airbus supplier. In the year under
consideration, a dedicated joint venture was founded to promote Be-200 amphibious
aircraft in the European market. Besides that, new opportunities for co-operation arose,
among others, a conversion of passenger planes to cargo versions. This co-operation will
focus on the conversion of A320 family passenger aircraft into freighter aircraft. The
conversion activities by Irkut will include the production of new components for freighter
aircraft. Another area of co-operation is testing equipment. The companies agreed on
working out a mutually accepted decision to meet maintenance demands, submitted by
Russian airlines.
2005 is a crucial year for the Russian aerospace industry – as Russia’s economy continues
to develop in a promising direction, the Russian aerospace industry is finally, after a long
period of negotiations, gaining new strength through restructuring and consolidation, which,
as we believe, is critically important in the process of harmonic development of Irkut
Corporation and the whole industry as well. We are optimistic about the future of the
ongoing consolidation, and fully support the decisions, concerning the United Aircraft
Corporation (UAC), taken by the Government. The Corporation plans to take an active role
in the UAC’s development on the basis of a joint market strategy, fair valuation of assets,
and integrated efforts through synergy between the most qualified designers,
manufacturers, and managers of the Russian aerospace industry.
Taking into consideration the fact that Irkut is a public company, having shares traded in
Russian and foreign stock markets, we are striving to make sure that interests of our
minority shareholders are protected all the way through the process of consolidation. Irkut
managers and major shareholders, being the leading experts in the consolidation, will seek
fairly exchange ratios for the Company and each group of investors, including
management, government, and the investment community, based on its cost-effectiveness
and share in the order book of the industry. Deloitte & Touche CIS has been chosen as an
appraiser of different companies, which will form the authorized capital of the United
Aircraft Manufacturing Corporation. We consider this fact as a right decision that will help
evaluate the Company equitably. The results of the audit will be verified by independent
investment banks, and the “Opinion” will guarantee the protection of the minority
shareholders’ interests. Irkut’s management (the Corporation will initially form an UAC’s
subsidiary) will seek transparency of the holding group’s documents, as well as
transparency of the subsidiary management system. Moreover, already at the initial phase
of its formation, UAC is expected to become a public company.
Following the completion of the consolidation process and switching to a single stock, the
stock will be examined to meet eligibility and listing requirements of major Russian stock
exchanges.
Accordingly, if some Irkut shareholders vote against the integration of Irkut into UAC or
don’t participate in the voting, the buyback of the shares will be offered to them, based on
fair market price for the share in accordance with accepted standards and procedures.
In general, Irkut experts are optimistic about the future of the United Aircraft Corporation,
both in terms of future UAC’s revenues and capitalization. Subsequently, the current Irkut
shareholders and future UAC shareholders will most certainly benefit from the
consolidation, becoming shareholders of an aircraft manufacturing holding, able to
generate $7-8 billion annual revenue and formed by leading Russian aerospace
companies.
*As the number of aerospace companies, which shares trade in the market, is insignificant,
the Russian aircraft-manufacturing industry usually includes helicopter – and engine-
producing companies.
The agreements signed between Irkut and EADS (European Aeronautic Defence and
Space Company), and specifically acquisition in 2005 through OOO EADS (EADS ’s
subsidiary) of a 10% stake in the Company, marked a significant milestone in the
development of the co-operation with world’s major aircraft manufacturers.
Another significant task in 2005 was to create a modern production and technological
environment, required for the Company’s further successful development.
India
India has been by right our most active partner for many years. The first contract for the
delivery of Su-30MKI fighters was signed in November 1996. As Su-30MKI was going to
become the main striking force of the Indian Air Force for the next 20 years, Irkut had to
meet some challenging requirements, specified by India.
The Su-30MKI project was a combined effort of dozens of Russian and foreign companies.
For the first time in the history of the Russian aerospace industry, we established and
tested mechanisms of legal, technological and financial co-operation in R&D.
It took several years to build Su-30MKI, that is why Indian Air Force agreed to receive Su-
30K, delivered to India on a temporary basis. Su-30K is inferior to Su-30MKI in
performance and avionics. As a result, a contract was signed for the delivery of 40 aircraft
(8 Su-30K and 32 Su-MKI with an option to buy 20 more aircraft). The contract assumed 4
stage of deliveries over 5 years, following with gradual step-by-step upgrading of the
aircraft fighting characteristics with every next batch. In 1997, the first 8 Su-30K were
delivered to India and were introduced into the inventory of the Indian Air Force (IAF) 24th
Air Squadron, based in Puna, India. On July 1st, 1997, the Su-MKI prototype, built in
accordance with the requirements specified by India, made its first flight. The fighters from
the first batch were designed to engage and defeat air targets, while Su-30MKI from the
second delivery had anti-ship warfare capabilities. The aircraft from the third delivery
conformed in full to the Indian requirements in terms of navigation and capabilities to
engage and defeat air, sea, and ground targets.
In 1997 – 1998, India received the first 8 Su-30K, followed by 10 more – India partially
realized the option, signing a contract for additional 10 Su-30K.
In 2004, Irkut delivered the last batch of Su-30MKI to India and started deliveries of semi-
knocked-down sets for the licensed production. In 2005, the parties came to an agreement
to replace outdated Su-30K, delivered to India in 1997 – 1998, for upgraded Su-30MKI.
Under the agreement, 18 obsolete Su-30K were to be bought back by Irkut. In 2005, the
Company started the production phase of the Su-MKI program, with 12 aircraft expected to
be delivered to India in 2006, and the remaining 6 in 2007.
The co-operation with India was not limited by the delivery of the aircraft. In November
1997, negotiations to start a license production of Su-30MKI in India were initiated, and in
December 2000, a package of license agreements was signed. In accordance with the
agreements, a general contract was concluded between Hindustan Aeronautics Limited
(HAL) and Irkut Corporation with the help of Rosoboronexport for the licensed production of
Su-30MKI fighter by HAL aircraft manufacturer. Irkut is the prime contractor on the project
with a number of subcontractors as Sukhoi Company, UMPO (Ufa Engine-Manufacturing
Production Association), Aerospace Equipment Corporation, Ramenskoye Instrument-
Engineering Design Bureau (RPKB), and Saturn Scientific Production Association.
Under the contract, Irkut will assist in modernization of manufacturing faclities, which were
previously employed for production of Mig-21 and Mig-27 aircraft, supply HAL with the
technological kits, necessary for production of Su-30MKI, assist in mastering of Su-30MKI
manufacturing technologies, and deliver technological semi-knocked-down (SKD) kits.
While mastering in licensed production, HAL will gain knowledge, expertise, and skills
required for manufacturing of basic Su-30MKI components, including aircraft aggregates,
and avionics. By the end of 2017, 140 Su-30MKI aircraft are supposed to be manufactured,
while the SKD kits will be delivered in accordance with four stages of licensed production.
Phase I includes complete assembly of the aircraft without flight tests. A total of 7 semi-
knocked-down (SKD) kits are planned for delivery, 4 of them have already been supplied in
2004, while the remaining 3 are to be delivered by year-end 2006.
During Phase II 5 semi-knocked-down (SKD) kits were delivered in December 2004, with
airborne equipment supplied at the beginning of 2005 according to the production cycle.
Phase II provides for the delivery of another 22 aircraft.
During Phase III in 2005, 8 semi-knocked-down (SKD) kits were supplied, with 36 more kits
to be delivered later.
The delivery of the rest of the SKD kits is Phase IV, and is subject to the aircraft production
schedule.
Predictably, the licensed production should include provisions for a maintenance, repair
and overhaul business to service aircraft, manufactured both in Russia by Irkut and in India
by HAL. Along with its subcontractors in the Su-30MKI project, the Company will conduct
necessary on-site upgrade procedures and provide needed technical assistance.
Considering the successful experience of co-operation with the Indian industry, Irkut
Corporation started the joint MTA (multi-purpose transport aircraft) project as a risk-sharing
partnership. The agreement was reached during AeroIndia-2005 Air Show in Bangalore,
India. The parties independently finance the project, collaborating closely from Phase I on
the basis of a “distributed design office”. Experts say that up to 570 aircraft of that type
(total volume of $570 billion) are expected to be sold within the next 10 years.
In 2005, on AeroIndia Irkut displayed its most recent product – Yak-130 advanced combat
trainer, which following some changes could be used as a light fighter.
During the whole range of projects, along with its Indian partners Irkut Corporation
established and tested mechanisms of legal, technical, and financial co-operation, as well
as gained invaluable experience of a joint venture to produce a high-tech product. The
result of almost 8 years of co-operation is the most modern fighter in service with the Indian
Air Force, the fighter with unsurpassed performance and combat capabilities. Su-30MKI is
powered by the AL-31FP thrust vectoring engines and has a phased array radar system.
The aircraft is able to employ TV, IR, or radar guided high-precision ammunition to engage
air, ground, and sea targets.
Table 1 presents the dynamics of the co-operation between Irkut Corporation and India.
The contracts for the delivery of aircraft (including executed contracts) totalled almost $1.9
billion, the Su-30MKI licensed production contract – $2.3 billion, while all joint projects
between Irkut and India accounted for $5 billion.
Malaysia
The co-operation with Malaysia started in May 2003, when a nearly $900 million contract
was signed for 18 Su-MKM multi-role fighters. Under the contract, the aircraft are to be
delivered in 3 batches. The first and second batches are planned scheduled for 2007, the
third – for 2008.
In 2005, Irkut experts along with experts of the Malaysian Air Force set a purchasing
schedule for equipment and materials to be used under the contract. Su-3M KM is a
modification of Su-MKI, the difference being the avionics. The development of Su-MKM is
run by Sukhoi Company and Thales, French avionics manufacturer, and a number of other
companies from Russia and other countries. Significantly, the avionics and the armament
systems have been upgraded to comply with requirements, set by the Malaysian Air Force.
Malaysia has already expressed interest in other Irkut products, which means that the co-
operation between Malaysia and the Company will most probably not be reduced to the
delivery of 18 Su-30MKM fighters. In December 2005, at LIMA-2005 Aerospace&Maritime
Show, Irkut Corporation displayed Yak-130 advanced combat trainer, Be-200 amphibious
aircraft, and unmanned aerial vehicles of different types, weighing from 2 to 850 kg. Air
show of Yak-130 trainer and 2 kg UAV were conducted. As a result, Irkut with its Yak-130
in collaboration with Rosoboronexport will supposedly compete against Aermacchi and
BAE Systems (also participants of the Show) in the 2006 tender, held by the Malaysian Air
Force.
Back in 2003, during the official visit of President Putin to Malaysia, an agreement to
establish a marketing centre to jointly promote Be-200 in the markets of the Asian Pacific
region was signed. In the past 2 years, a number of Be-200 presentations were held for
various Malaysian ministries and agencies. Specifications for Be-200 has been determined
to comply with Malaysian requirements. In case Be-200 is based in Malaysia, it can be
used for search&rescue and fire-fighting missions by the countries neighbouring Malaysia.
Thailand
In 2005, the parties signed a Memorandum of Understanding for the delivery of 12 Su-
30MKM’s. The possible total of the deliveries is estimated at $500 million. Thailand will
receive Su-30MK, similar to the Indian and Malaysian fighters, but upgraded to conform to
requirements of the Thailand Air Force. The aircraft is supposed to be delivered in 2
batches within 2 years – 6 aircraft a year.
Indonesia
In June 2005, within the frames of the Comprehensive Russian Civil Aircraft Promotion
Programme, in collaboration with the Russia-ASEAN Co-operation Foundation, headed by
Irkut Vice-President Vladimir Sautov, negotiations between the Russian delegation and
Indonesian Environmental and Forest Management Committees of the Indonesian
Parliament Lower House were held. The Russian delegation came forward with a plan
aimed at improving forest fire-fighting missions. The combined use of the Russian
Irkutproduced Be-200 amphibious aircraft and UAVs was suggested. Given the problem of
forest fires is very acute for Indonesia, the members of the Lower House expressed
interest in Irkut’s new aircraft and suggested that the negotiations concerning the
conditions on which Be-200 can be purchased be continued.
Algeria
In December 2005, the Russian (including Irkut Corporation) and Algerian parts initialled
the contract for the delivery of 28 Su-30MKA fighters and 16 Yak-130 advanced combat
trainers to Algeria. At that same time the Company started the funding procedures for the
project. The contract will be worth more than $1billion. The agreement was signed on
March 10th 2006 during the visit of President Putin to Algeria. Some projects within the
contract were started back in 2005. According to the contract, Irkut has to deliver 6 Su-
30MKA fighters in 2007, 10 aircraft in 2008, and 12 more in 2009.
Italy
On July 17th 2005, following a number of trial flights, Be-200ChS was put on the alert
mission in accordance with an order, issued by Protezione Civile and approved by the
Italian aviation authorities. July 20th the amphibian performed two major fire-fighting tasks
in Italy.
All in all, the two seasons of the Italian evaluation period (including 2004 operation)
resulted in 240 airborne hours and 700 intakes and dumps of water mixed with fire-
extinguishing chemicals (a total of 5,400 tons).
Austria
In August 2005, Irkut Corporation signed a Letter of Intent with Austrian Diamond Aircraft
Industries GmbH, under which an unmanned aerial vehicle should be developed. The UAV
will be built on the basis of DA42 Twin Star aircraft by Diamond Aircraft with the technology
provided by Irkut. The project is planned to be run on a risk-sharing basis.
Portugal
In October 2005, during the meeting of the 2nd Joint Commission for Economical,
Industrial and Technical Co-operation between Russia and Portugal, Irkut conducted a
presentation of Be-200 amphibious aircraft. As a result, the decision was made to start
negotiations about the possibility of purchasing Be-200 amphibious aircraft by Portuguese
authorities.
On June 7th, 2006 the National Fire-Fighting and Civil Protection Department of the
Portuguese Ministry of Interior Affairs and Beriev Design Bureau signed an agree-ment for
the lease of Be-200 amphibians to be used in fire-fighting in Portugal. The aircraft is leased
for July-August 2006. Following the execution of the lease contract, the Portuguese side is
to make a decision to purchase a batch of Be-200’s.
France
In January 2005, Irkut Corporation held negotiations with the Civil Protection Department of
the French Ministry of Interior Affairs concerning a possible purchase of a batch of Be-200
amphibians.
Irkut-EADS Partnership
The co-operation with the European Aeronautic Defence & Space Company (EADS )
started in May 2002, when the parties signed a Co-operation Memorandum at ILA-2002
International Aerospace Exhibition in Berlin, Germany. The memorandum envisaged Irkut’s
and EADS ’s joint marketing of Be-200 amphibious aircraft in the European market. By ILA-
2003 the sides had researched the market of amphibious aircraft, made a list of potential
customers, and on May 11th, 2004 an approximate Agreement for Strategic Co-operation
was signed. The main tasks were to locate key areas of co-operation between the 2 parties
for long-term, mutually beneficial and strong partner relations. Within the frames of the
agreement, the companies started jointly to market Be-200 amphibian and to provide
technical support for EADS Eurocopter in Russia. But that was only the beginning of the
mutually beneficial relationship between Irkut and EADS .
As soon as on July 21st, 2004 the Company and EADS signed an agreement to establish
EADS Irkut Seaplane SAS joint venture with the targets of Be-200 certification and
promotion. The parties announced their decision at Farnborough International Airshow.
The Constituent Agreement to establish the joint venture was signed in August 2005.
Under the agreement, Irkut owns a 70% share in the JV, EADS – 30%.
Within the frames of the concluded agreement, Airbus (EADS subsidiary) placed
workpackages for the production of critical components for the A320 family aircraft with
Irkut. The contract was signed on December 21st, 2004 by Gustav Humbert, President and
Chief Executive Officer of Airbus, and Valery Bezverkhny, Acting President of Irkut, in the
presence of Russian President Vladimir Putin and German Chancellor Gerhard Schroeder.
4 significant work packages were included in this contract: the nose landing gear bay, keel
beam, flap track, and a floor grid section. The first deliveries of the subassemblies to Airbus
sites were scheduled for 2006.
In accordance with the contract, a joint workgroup was established with the goal of an
extensive evaluation and preparation of Irkut production lines to undergo the certification,
as required by standard Airbus procedures. The preparation works included standards
harmonization, modernization of the manufacturing facilities, procurement and installation
of equipment, development and production of shop auxiliaries, production and testing of
test pieces, development and testing of logistics principles and techniques. In June 2005,
AECMA-EASE/Airbus auditors noted, that a lot of work had been done and confirmed that
the Corporation had met the EN 9100 international quality management and quality
assurance standards. A Certificate of Compliance #251242 was issued, on the basis of the
audit conducted. Accordingly, Irkut became the first certified supplier for Airbus in Russia
followed by its inclusion into the data base of AECMA (Association Europeenneédes
Constructeurs de Materiel Aerospatial), Association of European Aircraft and Components
Manufacturers, as the EASE (European Aerospace Supplier Evaluation) supplier. After the
completion of the audit, the Company started execution of the 4 contracts for the delivery of
A320 components, signed at the end of 2004.
At the same time, the companies continued the joint marketing of Be-200 amphibious
aircraft. In January 2005, the Russian Aviation Register MAK and EU Certification Centre
signed an agreement for Be-200 (with D-436TP power plant) fire-fighting amphibious
aircraft to undergo testing to comply with EU standards.
In September 2005, Irkut corporation and EADS Deutschland GmbH (Defence & Security
Systems) in Augsburg signed “Agreement on Quality”, which became the first agreement of
the kind, concluded by Irkut as an aircraft components supplier for European aircraft
manufacturing companies.
In November 2005, yet another area of co-operation was established – BETA Air company
(Irkut subsidiary) and EADS Test&Services (a wholly owned subsidiary of the Defence and
Security Systems Division of EADS Group) signed a Co-operation Memorandum, covering
collaboration in the field of test equipment. The companies agreed to develop a unified
testing equipment solution, based on NASKD-200 Automatic Test Equipment by BETA Air
and ATEC Series 6 General Purpose Automatic Test Equipment (GPATE) by EADS T&S.
The solution will have to meet maintenance requirements of Russian air carriers, which are
now purchasing Western aircraft in increasing amounts. The project launch is scheduled
for early 2006.
The results of the upgrading and harmonization efforts became visible as soon as 2005.
Accordingly, in addition to the contracts for the production of A320 Family components,
Airbus placed additional large work packages for A33 0, A340, and A380 Families aircraft
with Irkutsk Aviation Plant (IAP). Under the agreement, Irkut’s will produce wall panels for
the A320 Family auxiliary centre tank, A33 0/A340 Family wing ribs and flap-track roller
beams, plus other major components for narrow-body, and long-range wide-body aircraft,
as well as A380 aircraft, the largest airliner in the world. The term of the contract is 10
years with an annual volume of $14 million. The first deliveries of the sub-assemblies and
components from Irkut will begin in 2007.
The next step in the development of the partner co-operation was a round of negotiations
on a joint A320 civil freighter aircraft conversion business. The conversion activities by Irkut
will include the production of conversion kits for freighter A-320, while MiG will be
responsible for design and conversion at the MiG plant in Lukhovitsy.
Irkut Corporation and EADS have made a long way to the type of strategic cooperation that
they have established. These 4 years saw an extensive co-operation covering a wide
range of projects in three major areas.
Almost right after the Strategic Partnership Agreement was signed, the two sides began
discussing a prospect acquisition of a 10% stake in Irkut Corporation by EADS.
The important step toward that goal was the acquisition bid for the 10% stake, filed by
EADS to the Russian Government on September 21st, 2004. As soon as 26th of
November, the Government approved the deal, and in February 2005 Irkut and EADS
initiated necessary procedures to finalize the acquisition of the share in Irkut Corporation.
On June 24th, 2005, the Annual Shareholders Meeting approved the EADS deal. It was
decided, that the authorized capital be increased by 12.09% in favour of EADS by the issue
of 120,824,363 new shares at the face value of 3 roubles per share through the closed
subscription. The deal envisaged that the shares, left after the realization of the preemptive
rights of the current shareholders would be bought by EADS . The list of shareholders,
possessing the preemptive right to buy newlyissued shares was made at the date of the
Annual Shareholders Meeting. The shareholders, who voted against the new issue of
shares or shareholders, who did not participate in the vote secured the option to buy the
new shares.
On August 16th, 2005, at the MAKS-2005 Air Show in Zhukovsky, near Moscow, Oleg
Demchenko, President of Irkut, and Stefan Zoller, CEO of the Defence and Security
Systems Division and member of the Management Committee of EADS, signed an
agreement confirming the intention of the strategic investment in Irkut Corporation through
the prospective acquisition of newly-issued shares, representing up to 10% of Irkut’s
outstanding capital. The Company continued the procedure of the new share issue, as was
envisaged by the agreement. That same day, the Board of Directors of Irkut Corporation
approved the Decision on the New Share Issue, as well as the Securities Issue
Prospectus. The procedure of due diligence was started, following which the final share
price was established and a contract of purchase was concluded.
On 29th of September, the Russian Federal Financial Markets Service (FFMS ) registered
the new issue of common registered nondocumentary closedsubscription shares of OAO
“Irkut Corporation”. The issue was given identification number of state registration 1-03-
00040-A-002D. The quantity of the new issue shares accounted for 120,824,363 shares,
the face value of each share of the new issue – RR3.
On 5th of October, 2005, an Extraordinary Shareholders Meeting was held. The Meeting
approved the amendments to the Charter of the Corporation. The amendments included
improved rights of minority shareholders to influence strategic decisions. So, if earlier only
the simple majority was needed to start liquidation or bankrupt procedures for the
Corporation and its subsidiaries, or to conclude an agreement of strategic partnership, after
the amendments were introduced such decisions will have to be supported by 90% of the
Board of Directors. It is noteworthy that the initiative to amend the Charter was launched by
EADS and was supported by 99% of the shareholders, who took part in the voting.
On October 14th 2005, the Board of Directors of Irkut Corporation approved the share price
of the new share issue (12.09% of the authorized capital) at the level of RUR19.13 in
favour of ÎÎÎ EADS (Russian subsidiary of EADS ) and those shareholders who had a
preemptive rights to acquire shares. Shareholders were able to realize the preemptive
rights in the period from 15th of October to 28th of November 2005. Some part of Irkut’s
shareholders realized the right and bought out 1,371,922 shares of the new issue for the
total amount of around $1 million.
On December 16th 2005, Irkut Corporation and EADS closed the deal for the purchase of
the 10% stake in Irkut by signing a Purchase Contract for 97,813,162 shares worth $65.3
million. Following the closure of the deal, a decision was made to elect CEO of OOO EADS
to the Irkut’s Board of Directors and an Agreement on the Principles of Further Co-
operation was signed. The deal between Irkut and EADS was of paramount significance as
for the first time in the history of the Russian defence & military industry, one of the world’s
premier concerns acquired a stake in a Russian aircraft manufacturing company. The
EADS deal was another evidence that Irkut is on the path of stable and prospective
development.
The shareholders structure changed as a result of the deal. Pursuant to the inclusion of the
shareholder with the 10% stake (OOO EADS ), the shares of Irkut’s management and
Sukhoi Company decreased. The share of institutional and private investors grew to some
extent, as some shareholders realized the option for the new issue shares. The
introduction of an EADS representative into Irkut’s Board of Directors was the final stage in
the deal. On March 15, 2006, the Extraordinary Shareholders Meeting elected the new
Board of Directors, which included CEO of OOO EADS Vadim Vlasov.
The stock market comprehended the news about the deal with EADS optimistically. So, at
late November, prior to the deal, the liquidity of Irkut’s shares (daily trade volumes on
Russian stock exchanges divided by number of shares in free-float) reached the record
level of 6.2%. Immediately after the closure of the EADS deal the stock started growing,
and as soon as in December 2005 for the first time hit the level of USD 0.7 per share.
Given the situation on the market, the closure of the Irkut-EADS deal, and the agreements
concluded, including the additional work packages, placed by Airbus for the production of
A320/33 0/340/380 aircraft components, by March the stock was up at USD 1.06 per
share.
In 2005, as well as in the first 3 months of 2006, the Company achieved a high level of
geographical diversification, which is demonstrated in Table 3 below and on the diagram of
the geographical and product diversification of the order book:
Table 3. Dynamics of Irkut’s Order Book (decreasing by cash inflows), USD mln
as of as of as of
Country Contract
31.03.06 31.12.05 31.12.04
Su-30МКА delivery 848 0 0
Algeria Yak-130 delivery 216 0 0
Equipment delivery 135 0 0
Germany/France Production of components for Airbus 332 332 192
Su-30МКI delivery 60 60 80
India Licensed production 1,979 1,979 1,944
Replacement of Su-30К 648 598 598
Malaysia Su-30МКМ delivery 373 373 455
Be-200 delivery for Russian MES 88 88 115
Project А-50 150 150 150
Russia Yak-130 delivery for Russian AF 5 94 94
MiG upgrade 30 30 0
Other 40 40 40
Su-27UBK upgrade and repair 50 50 50
CIS
Su-30К upgrade and delivery 216 216 216
Total 5,171 4,010 3,934
But the indicated level of geographical diversification is insufficient for a stable operation of
the Company, if we talk about a scenario when a buying country severs intergovernmental
relations. Therefore, Irkut is actively involved in marketing of its products in other countries,
in the regions where the Russian (Soviet that is) armament and aircraft are traditionally
popular – Middle East, North Africa, Central and South-East Asia (Table 2).
The Irkut’s strategy calls for a widely diversified product niche, given developments in the
prospective markets and volatile geopolitical situation.
• In June of 2005, the Company and the Russian Federal Industrial Agency signed a
contract for the development of the MS -21 family of short- and medium-range
commercial aircraft. Under the contract Irkut received the funds for the development
of a preliminary design.
• In August of 2005, the first serial-production Yak-130 prototype completed in full the
production tests. In October 2005, the aircraft was presented to representatives of
the Russian AF for joint official tests. Preliminary results of the trainer trials are
expected after 160 test flights. In March 2006, the Corporation signed a contract
with Algeria for the delivery of 16 Yak-130. This contract is unique, since only
aircraft already introduced into the fleet of the producing country are usually
considered for purchase by potential customers. Irkut expects a lot from the Yak-130
advanced combat trainer project. Now the Company is involved in the extensive
marketing of the aircraft, aiming by 2010 at forming an order book, which hopefully
will generate up to 40% of Irkut's revenue beginning in 2012.
• In October, the Company signed a contract with the Russian Ministry for Emergency
Situations for the production of a light monitoring, surveillance, and reconnaissance
UAV.
• In December, the design specifications for Multi-Purpose Transport Aircraft (MTA)
were approved, and a draft of a Russia-India MTA Agreement was issued, on the
basis of which the General Staff of the Indian AF specified the requirements for
MTA.
• The year under consideration saw Irkut's marketing efforts to promote Be-200
amphibious aircraft and its UAVs of various types. Specifically, in December 2005,
the Company displayed the products at the LIMA-2005 International Aerospace and
Maritime Exhibition in Malaysia. In June Irkut place an offer with the Lower House of
the Malaysian Parliament for an “aerial complex”, comprising one Be-200 amphibian
and several UAVs. In October, the Company conducted a presentation of Be-200 in
Portugal, while in January carried out a round of negotiations with the Civil
Protection Department of the French Ministry of Internal Affairs about a prospective
purchase of a batch of Be-200.
Back in the 1990s, the Russian aerospace&defence industry was going through extensive
restructuring. That is when an idea to unite the Russian aviation industry into one and
single holding occurred. But it wasn’t until 2004 that the first specific steps were taken. That
year, the Russian Ministry for Industry and Energy developed The Concept of a United
Aircraft Company, later approved by the Prime Minister.
Historical Overview
The Soviet and then Russian space and aircraft industry has traditionally been among
world’s leaders in the field. Some Soviet designers have contributed significantly into the
development of the global aviation. Predictably, the Soviet industry mainly focused on the
military aircraft – our fighters were second to none in terms of some performance
characteristics and combat capabilities, and sometimes were a generation ahead of their
Western competitors. The Soviet aerodynamical developments are being used even today
and are competitive and at times more preferable, in terms of manoeuverability, for
example. To illustrate this fact, we can turn to the Indian-US series of mock battles, where
the Indian pilots on Russian-made Su-30 racked up a record of 28-2 against U.S. F-15 and
F-16 fighters. Such a success was based on extensive funding and intensive development
– the Soviet aerospace&defence industry used up to 50% of the country’s resources.
However, the collapse of the Soviet Union and the gravity of the economic crisis that
followed resulted in scarce funding of the industry and its further slowed development. The
Russian designers and developers had to somehow continue working, utilizing what had
been done in the 1970s-80s. At the same time their foreign counterparts advanced greatly
in the development of new aircraft, including the fifth generation fighter. Western aircraft
design houses have managed not only to catch up, but to leave the former leaders behind.
The current manufacturing facilities of many former Soviet aircraft producers are obsolete,
the manpower of the industry is characterized by the lack of qualified personnel and
deteriorating age indicators. The industry is characterized by alarmingly low utilization of
information of enterprises is more than questionable.
Great number of design bureaus, numerous production lines, and aviation production
associations within either integrated or independent companies are typical characteristics
of the modern state of the industry. The overcapacity, meant to cover orders for hundreds
of aircraft in the Soviet times, is combined with the lack of modern market infrastructure.
The idea behind such a structure was to avoid dominance of one of the manufacturers,
encourage competition for state orders with the ultimate goal of ever-increasing quality of
products produced. Most impressively, the Soviet industry was effective and efficient,
complying with all requirements set by the Soviet Government.
However, now the companies almost exclusively focus on the domestic competition,
struggling for state orders and competing with fellow Russian manufacturers in the
international market. But such a situation leads to nothing but extensive consumption of
scarce resources and undermines the country’s competitiveness in the global aircraft-
manufacturing market. To be internationally successful, there has to be a national
company, which is sound, dynamical, efficient, strategically focused, a company that is
relishing the organized support of the government. The consolidation of the industry and
elimination of the domestic competition will centre. Besides, the experience of the
industry’s global leaders indicates that we are on the right path.
In 2005, the Government of the Russian Federation made a decisive step towards the
revival of the Russian aircraft manufacturing industry. Following a period of waiting and
anticipation, and several preparatory phases, the Decree on the Establishment of the
United Aircraft Company (UAC) has been issued. UAC is meant to consolidate intellectual,
organizational, and material resources into a united aircraft-manufacturing industry. The
backbone of the consolidation process, which is expected to be over by the end of 2007, is
a phased integration of the operational aircraft-building enterprises (as Irkut/Yakovlev,
Sukhoi, MiG, Ilyushin, and Tupolev) into an unified holding and corporate structure.
Accordingly, the Russian aircraftmanufacturing industry is at the threshold of new era in its
development, with new prospects and opportunities ahead.
Irkut Corporation, as the most progressive company of the industry, plays one of the major
roles in the process. Irkut presents a 20% share of the Russian military export, it has the
largest order book ($5.2 billion) and the biggest backlog to revenue ratio. During the last
five years, the Company has been in the Jane’s Defence Top-100 – rating of the global
military&defence industry. Plus, Irkut Corporation is the only public company of the Russian
MD industry, which shares trade on Russian and international floors.
Irkut management are known as experienced managers and considered as highly qualified
professionals by many experts. It can be illustrated by the following facts: First, in October
of 2004, Alexey Fedorov, Irkut President and its biggest private shareholder, was assigned
by the Russian Government as CEO of MiG with the tasks to stabilize the financial situation
of the company and prepare MiG transfer into a JSC. Second, within the frames of the
consolidation process, the Russian Government established the United Aircraft Consortium
– a non-commercial partnership. From the very first day of its establishment, Valery
Bezverkhniy, Irkut’s First Vice-President, headed the Consortium. Valery Bezverkhniy is
also a member of Irkut’s Board of Directors.
Deloitte & Touche CIS has been chosen as an appraiser of different companies, which will
form the authorized capital of the United Aircraft Manufacturing Corporation. We consider
this fact as a right decision that will help evaluate the Company equitably. The results of
the audit will be verified by independent investment banks, and the “Opinion” will guarantee
the protection of the minority shareholders’ interests. Irkut’s management (the Corporation
will initially form an UAC’s subsidiary) will seek transparency of the holding group’s
documents, as well as transparency of the subsidiary management system. Moreover,
already at the initial phase of its formation, UAC is expected to become a public company.
Following the completion of the consolidation process and switching to a single stock, the
stock will be examined to meet eligibility and listing requirements of major Russian stock
exchanges.
Accordingly, if some Irkut shareholders vote against the integration of Irkut into UAC or
don’t participate in the voting, the buyback of the shares will be offered to them, based on
fair market price for the share in accordance with accepted standards and procedures.
In general, Irkut experts are optimistic about the future of the United Aircraft Corporation,
both in terms of future UAC’s revenues and capitalization. Subsequently, the current Irkut
shareholders and future UAC shareholders will most certainly benefit from the
consolidation, becoming shareholders of an aircraft manufacturing holding, able to
generate $7 – 8 billion annual revenue and formed by leading Russian aerospace
companies.
Corporate Governance
Corporate governance
Irkut Corporation not only strictly complies with all applicable Russian and international
laws and regulations, but assumes obligations to conform high business ethics and
integrity standards. On the path of our development, we are striving to comply with
accepted international rules and standards of corporate governance, while systematically
conducting programs, aimed at improving those standards.
In May 2002, to increase transparency and guarantee rights of shareholders and investors,
the Code of Corporate Ethics, later amended and improved, was adopted at a
shareholders’ meeting. The current Code is a set of rules and ethical standards, which
cover all aspects of activities and relationships related to management and corporate
governance. The Code is aimed at protecting interests and rights of Irkut’s shareholders,
increasing confidence in the Company of current shareholders and potential investors, and
ultimately enhancing Irkut’s investment attractiveness. The protection of shareholders
interests is one of the Company’s key priorities. That is why Irkut is focused on increasing
the Company’s capitalization and regular dividend payments. In addition to these steps, we
are committed to Irkut shares greater liquidity in the Russian and international stock
markets.
The Board of Directors comprises the governing body of the Corporation and exercises
general control over the Company and reports to the Meeting of Shareholders. We believe
that the major task of the Board is to bring prosperity to the Corporation on the basis of
safeguarded interests of all those involved in the corporate relationships. Other important
tasks, facing the Company, are to generate maximum income and enlarge assets, defend
the rights and legitimate interests of the shareholders, efficiently supervise the executive
bodies, ensure full, authentic and reliable public information about the Company.
To maintain objectivity of the decisions made and to keep a healthy balance of interests,
independent directors representing the executive bodies and various groups of
shareholders were introduced into the Board. Significantly, representatives of the executive
bodies of the Corporation must form not more than 25% of the total members of the Board.
The same rule applies to the percentage of independent directors.
In order to increase the effectiveness in the decision, the compensation of the Board's
members depends, among other criteria, on the annual increase in the Company's
capitalization (increase in net assets).
To assist the Board of Directors, special committees were established. The committees are
in charge of recommendations on critical issues, forming a direct communication link
between the Board and executive bodies:
In June of 2006, the Meeting of Shareholders elected the new Board of Directors. In
accordance with the internationally accepted practices, one independent Director and one
Director, representative of Irkut’s minority investors, became members of the new Board.
In 2005, the Board of Directors made a number of important decisions, aiming at adjusting
Irkut’s corporate governance to internationally accepted standards. Significantly, in 2005 an
EADS representative joined the Board.
There were 14 meetings of the Board of Directors in 2005, either in a form of a full meeting
or via interview, making it possible to take into consideration opinions of each member of
the Board. The Management Committee took over some functions of the Board, thus
allowing the members of the Board of Director to focus on issues within the Board’s
competence.
Last year, the Board of Directors placed a special emphasis on the strategic development
of the Corporation, finance and economic planning and supervising, corporative risks
analysis and management. In addition, the Board discussed the issue of Irkut’s
informational policy.
Due to the Board’s intensive work in 2005, the Corporation managed to advance towards
its strategic goals, greatly improving the level of international cooperation and partnership.
In 2005, for the first time in the history of the Corporation, a collegiate executive body –
Management Committee – was established (Table 4). The Committee supervises the
Corporation’s activities within its competence in compliance with corresponding Russian
laws, the Charter of the Corporation, and other corporate rules and regulations.
The Committee worked in accordance with the schedule, approved by the Board of
Directors. The schedule included the areas of responsibility of the Committee for 2005,
strategic and current issues, schedules of the issues’ consideration, and responsible
executives concerned. The schedules mentioned included a wide range of issues critical to
the Company’s development: corporate governance policy, product&marketing strategy,
financial, budget, and informational policies, assets restructuring. The schedules also
included issues of budget monitoring, progress of major projects, and areas of the
Corporation’s development.
There was a total of 9 meetings of the Committee. The main issues considered fall into 5
categories:
Alexey Fedorov
Chairman of the Board
In 1997 – 1998, Alexey Fedorov was CEO of Sukhoi Company, in
1998 he joined Rosvooruzhenie as Adviser to CEO, since 1998 –
President of OAO IAPO, from 2002 to 2005 – President of OAO
“Irkut Scientific and Production Corporation”. In 2004, Alexey
Fedorov was appointed CEO and Designer General of MiG
“Russian Aircraft Corporation”. Member of Irkut Board of Directors
since 1998. Since 2005 – Chairman of the Boards of Directors of
Irkut Corporation, Beriev Design Bureau, and Yakovlev Design
Bureau.
Valery Bezverkhniy
Deputy Chairman of the Board
From 1998 to 2001 Valery Bezverkhniy was President of ZAO “FTK
Company”. From 2001 to 2002 – Vice-President of OAO IAPO.
Valery Bezverkhniy is currently First Vice-President of OAO “Irkut
Scientific and Production Corporation” and President of the United
Aircraft Consortium. In 1998 – 2003 he was Chairman of Irkut
Board of Directors.
Oleg Demchenko
In 1992 – 1994 Oleg Demchenko was First Deputy General
Designer of Yakovlev Design Bureau. From 1994 to 2001 –
President/General Designer of Yakovlev Design Bureau, since 2001
– President and Chairman of Yakovlev Board of Directors. Member
of Irkut Board of Directors since 2003, in 2004 he was elected as
Chairman of the Board of Directors. Since 2005 – President and
Chief Executive Officer of OAO “Irkut Scientific and Production
Corporation”.
Vladimir Kovalkov
In 1997 – 2003 Vladimir Kovalkov was CEO/Senior Vice-President
(Production) of OAO “Irkut Scientific and Production Corporation”.
Since 2003 – CEO of IAP – main production site of Irkut
Corporation. In 2004, Vladimir Kovalkov was elected as a member
of Irkut’s Management Committee and in 2005 – member of Irkut’s
Board of Directors.
Mikhail Pogosyan
Since 1998 – CEO OAO “Sukhoi Company”, since 1999 – CEO
OAO “Sukhoi OKB”. Member of Irkut’s Board of Directors since
2004. Also member of the Boards of Directors of OAO “Sukhoi
Company” and OAO “KnAAPO”.
Maxim Poletayev
In 1995 – 1999 Poletayev Maxim was Director, Reserves
Department, Yaroslavl branch of Sberbank of Russia. In 1999 –
2002 – Vice-President of the Executive Board of the Northern Bank,
Sberbank of Russia. Member of Irkut Board of Directors since 2004.
Alexey Ponomarev
In 1998 – 1999 Alexey Ponomarev was First Vice-President of
Tupolev Company (“Tupolev Aviation Scientific-Technical
Complex”). In 1992, he was appointed Director of the Interagency
Analytical Centre, in 2000 – Research Director of the Institute of
Advanced Training for Defence&Military Industry, the Higher School
of Economics. Member of Irkut Board of Directors since 2003.
Sergei Tsivilev
In 1998 – 2000 Sergei Tsivilev was Vice-President, and in 2000 –
2001 – First Vice-President of ZAO “FTK Company”. In 2001, he
joined Irkut Corporation as Vice-President, Corporate Economics
and Finance, in 2003 – 2004 – Senior Vice-President, Corporate
Economics and Finance. Since 2004 Sergei Tsivilev is First Vice-
President/General Designer of MiG Company. Member of Irkut
Board of Directors in 2003 – 2004 and since 2005.
Sergei Chemezov
In 1996 – 1999 Sergei Chemezov was Director, Foreign Economic
Relations Department, Administration of the President of the
Russian Federation, in 1999 – 2000 – CEO Promexport. In 2000,
he was assigned First Vice-President, and in 2004 – President of
Rosoboronexport. Sergei Chemezov was elected as a member of
Irkut Board of Directors in 2004.
HR Policy
When we say “Irkut Corporation”, we mean the people, who work here. We believe that
one of the major keys to success for the Corporation is the prosperity of its employees. To
achieve this goal, we improve remuneration programs including pay increase, targeted
welfare programs, better social infrastructure, and other social issues, including housing of
Irkut’s employees.
In 2005, Irkut Corporation continued the policy of cost reduction and personnel
restructuring of the Irkutsk Aviation Plant (IAP). As a result, the average number of stuff
decreased 15%, and accounted for 10,583 employees as of December 31st, 2005. This
allowed the Corporation to increase significantly the average salary, making IAP the leader
of the Irkutsk Region in this field. The percentage of the indirect labour decreased from
3.5% to 1.7%, accordingly increasing the percentage of the direct labour.
At the same time, the consolidated workforce of the Corporation increased by 10% and
accounted for 15,424 employees compared to 14,022 in 2004. The increase in the
workforce was due to last year’s bigger share in Beriev Design Bureau and integration of
the Beriev’s financials into the Corporation reporting. The tables below and diagram 2 set
out the overall workforce of Irkut Corporation:
The implementation of the HR policies resulted in the reduced average payroll and
restructured workforce and focused on the increased percentage of direct production
labour (its proportion increased by 1.75%).
The age analysis of the Corporation’s workforce shows that while the average age of
workers remains stable, there is a tendency toward a great number of the retirement and
preretirement age workers. Accordingly, one of the demanding HR missions is to attract,
develop, and retain a younger generation of employees, as well as to develop
systematically the existing workforce potential to be adequately prepared for a wider range
and a more complicated nature of tasks.
Diagram 2. Distribution of the Irkut Corporation Enployees in 2005
One of the Corporation’s key HR functions is, on a regular basis, to conduct advanced and
vocational training of the personnel, with major emphasis being placed on the development
of the younger generation of employees. To this purpose, the Corporation concluded long-
term training and co-operation agreements with such educational establishments as Irkutsk
State Technical University, Irkutsk State University, Baikal State University of Economics
and Law, Irkutsk Aviation Secondary Technical School, Vocational School #2. On-the-job
training is also a major priority for the Corporation, accomplished by the Personnel Training
Office, one of the Corporation’s departments (Table 5, 6).
To further develop the Corporation’s workforce, various advanced training programs were
adopted, covering the following areas: quality management, information systems, health
and safety in the workplace.
In the year under consideration, 2,446 workers completed various specialized programs,
444 employees went through advanced training, 57 workers obtained the second diploma.
In addition, 2,349 executives and engineers took programs in the IAP educational network,
which is a 49% increase over the scheduled parameter.
Targeted social programs should become the backbone of the Company’s social policy.
The employees have a right to choose social programs, benefits, and bonuses they need.
The compensation package depends on performance of each individual worker with the
access to social services, listed in his/her compensation package.
• full employment,
• adequate level of salary,
• improvement of the social support system,
• development of the personnel potential,
• greater level of social satisfaction of employees.
Last year, the younger portion of the workforce received partial pecuniary compensation to
cover food and rent expenditures and various housing programs, including home
construction activities and subsidized housing. Among key priorities are recreation, culture
development, sport, health in the workplace, sanatoria and health resorts. In 2005, over
4,000 employees visited the Corporation’s sanatoria. There are kindergartens and summer
camps, supported by Irkut no to forget about the little members of the employees’ families
(1,200 children visited the summer camps in 2005).
The Corporation regularly adjusts the level of salary to the inflation and other parameters.
The salaries were paid in accordance with the Collective Agreement. The Company is
currently developing an incentive plans, based on graduated estimates of professional
competence and performance.
The construction of the waste-disposal facilities on the main production site in Irkutsk was
the major environment-protection project of 2005. The Corporation complies with all limits,
set by the Russian Environmental Legislation concerning the production, disposal, and
treatment of waste materials, discharges to surface and sub-surface water, and emissions
into the environment. In 2006, a new electroplating shop is planned to be launched.
In 2005, the Environmental Department of Irkut Corporation monitored and supervised the
harmonious exploitation of the natural resources, exercising of the technological discipline,
fulfilment of programs aimed at reducing pollution, proper sewage disposal and purification.
An analysis of sewage and industrial water, workplace air and environment were done in
accordance with approved schedules. The total emissions into the environment in 2005
decreased by 180.282 tons compared to 2004.
Decrease in emissions:
Results of Operations
2005 was the best year ever in the history of Irkut Corporation in terms of revenue, which
increased by 14.5% from 2004 to record $711.7 million (Table 7).
* EBITDA for 2004 is different from EBITDA, displayed in 2004 Annual Report ($164.9
million), due to corrections, introduced into the calculation method – adjustments for non-
interest financial expenses were made
Moreover, the growth in revenue was conditioned by the increased value of work,
conducted by Irkut subsidiaries, as well as by consolidation of assets, acquired by the
Corporation in 2005. Specifically, Beriev Aircraft Company revenue were $53.5 million,
while Russian Avionics – $23 million under the MiG upgrade programe.
At the same time, the cost of sales grew only by 8.1% in 2005 and amounted to $357.8
million compared to $33 0.9 million in 2004. The insignificant increase in the cost of sales is
due to the fact that Irkut aims at long-term contracts with fixed prices, this way trying to
ensure oneself against considerable growth in direct costs – materials, components and
other production-related expenses. Second, the costs of the Indian fighters replacement
were restructured, and the Corporation reported a less direct costs and more overheads.
Due to the fact that the increase in revenue outrun the increase in the cost of sales, the
Corporation reached a record level of gross revenue – $354 million (a 21% growth as
compared to 2004). This, in its turn, further improved the gross margin, which increased
from 46% (it is anyway the highest margin in the industry) to 50% in 2005.
At the same time, the considerable increase in the gross revenue was partially balanced by
the growth in the operating expenses, which increased by 43.5% to $204.4 million, as
compared to 2004. The operating expenses went up generally due to an increased share
of administrative costs and higher distribution costs. The reasons for the changes will be
addressed in more detail below.
Thus, the increased operating expenses evened the beneficial effect of the decreased cost
of sales and the operating profit practically stayed the same (at year-end 2005 it reached
$149.5 million, which is $0.98 million more, than in 2004).
In addition, Irkut Corporation reduced the financial expenses by more than 36.6% to $38.5
million ($61.0 million in 2004).
EBIT (Earnings Before Interest and Taxes) grew by 8.6% (or 12.6$ million) to $158.15
million. The depreciation and amortization amounted to $20.4 million, thus increasing
EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) by 10.2% to
$178.5 million, while the EBITDA margin accounted for 25%. The profit tax went up
proportionally with the increase in profits before taxes – the effective tax rate was 23.1% in
2004 and 24.6% in 2005.
The considerable growth in revenue, efficient cost-savings programe and reduced financial
expenses led to a record level of net income worth $84.8 million, representing an increase
of 24.1% compared to the last year ($68.4 million). The net income margin grew to 11.9%.
This ratio is among the highest in the global aerospace industry and in the Russian
machinery sector as well.
The Cost of Goods Sold (COGS) Structure
This expenses item grows proportionally with revenue, as the Company has long-term
fixed-price contracts with the majority of suppliers. The price can be increased only with
rates specified and stated in the contracts, or by the so called “escalation ratio”, calculated
through a special methodology. Thus the Company reduces the risk of increased materials-
related prices and subsequent increase in the cost of sales.
The general contracts include a number of contracts with suppliers, relating to various
aspects of the components life cycle: delivery of high-priced purchased inventory materials,
maintenance, repair and overhaul services, upgrading etc. This way the Company
optimizes price risks, improves economic and financial planning for medium and for the
year.
Specifically, the Corporation agreed on fixed prices for 2006 – 2008 with the following
suppliers of high-priced purchased inventory materials:
Due to efficiently established relations with suppliers, the Corporation managed to keep the
rise in prices for high-priced purchased inventory materials at 0 – 1.5% level in 2003 –
2005.
Sukhoi Corporation
Design and
development of JSC Tupolev; Tupolev Design Joint DB
aircraft Bureau
JSC llyushin
Airborne communications
Polet Scientific Production systems
Association Equipment of automatic data
interchange systems
Aerospase Eguipment
Avionics
Corporation
Personnel Expenses
Personnel expenses form about 11% of the overall cost of sales. In 2005 they grew by
3.1% to $40.36 million (compared to $39.1 million in 2004).
2005 2004
Depreciation of property, plant, and equipment 19,639 15,728
Buildings 3,119 2,569
Plant and equipment 16,520 13,159
Amortization of intangible assets 729 657
Development costs 218 219
Other intangible assets 511 438
Depreciation and amortization total: 20,368 16,385
The major part of the charged depreciation and amortization cost is the depreciation of
property, plant, and equipment. The amortization of intangible assets amounts for not more
than 4%, as a significant part of the Company’s capitalized intangible assets is not yet
amortized. The Be-200 and Yak-130 project, which R&D are capitalized on the balance,
are close to the final phase, but have not generated any profit so far, and the amortization
of corresponding assets will be charged only with the beginning of the mass production,
scheduled for 2006 – 2025.
R&D in the cost of sales are those expenditures which are necessary to carry out the on-
going contracts of the Company. They mainly include the R&D for the Su-30MKI project –
replacement contract and licensing agreement. The smaller part of R&D includes Be-200
and upgrade of Su-30K fighters, to be delivered to CIS countries.
In 2005 R&D in the cost of sales amounted to $7.63 million, which is a 78.8% ($28.3
million) decrease from $35.9 million in 2004.
The reduction in R&D costs in 2005 was due to the fact that the majority of Irkut projects
reached their final stages, as well as to the completion of works done for third parties. In
2005, the costs of self-initiated R&D accounted for $2.3 million, for third parties – $5.3
million.
Other expenses
The value of Expenses, recognized as “other expenses” in the cost of sales increased in
2005 almost by 50% ($25.4 million) to $43.3 million. Respectively, the percentage of this
type of expenses in the structure of the cost of sales grew from 5.4% in 2004 to 12% in
2005. The other expenses include such costs as energy and utilities expenses ($6.11
million), warranty services ($1.3 million), and other products and services ($35.87 million),
covering all direct costs, incurred in the year under consideration and not mentioned in the
articles above. The expenses on other products and services usually include services of
outside companies delivered to the Corporation and necessary to maintain a stable
manufacturing process (Table 8, Diagram 3).
In 2005, the operating expenses grew by 43.5% ($62 million) and amounted to $204.4
million as compared to $142.4 million in 2004 (Table 10, Diagram 4).
Distribution Expenses
Distribution expenses form the major part of the expenses, representing over 42% in the
structure of the operating expenses. The distribution expenses include export agent
commission, collected from Irkut, as advance payments are made by foreign customers; as
well as expenditures on acceptance and delivery of aircraft. In 2005, the distribution
expenses increased by 38.6% to $86.2 million, which was conditioned by changes in the
structures of expenses: increase in advance payments from customers and simultaneous
increase in the payments to export agents.
Administrative Expenses
Administrative expenses form the second largest part (31.5% in 2005) in the structure of
the Company’s operating expenses. As compared to 2004, the administrative expenses
grew by 49.57% ($21.3 million) to $64.4 million. The growth is due to the increased
management costs, as well as to the losses, caused by the fluctuations in RUR/USD
exchange rates. At the same time, the share of this item in the structure of operation
expenses has not changed significantly, remaining on the level of 30%. The administrative
expenses grew through the increase in the cost of production-related services, increase in
indirect labour costs, foreign exchange differences, and a number of other reasons.
This item also includes expenses on outside consulting. Irkut Corporation is constantly
striving to improve its corporate governance and financial flows management, we monitor
the quality and accuracy of reporting. For this purpose, we use not only our internal
sources, but often we resort to the services of outside consultants. In 2005, with the
assistance of outside tax consultants, the Company has won a suit against tax authorities
and asserted its rights in a court.
Research and Development Expenses
The expenses on fundamental research, incurred in the reporting year, which have not
been recognized as a part of the cost of sales and which have not been capitalized, are
reflected in the operating expenses. The fundamental research include MTA and MS 21
projects, as well as R&D expenses on services to other companies of the Group – Beriev
Design Bureau, Russian Avionics, Yakovlev Design Bureau.
In 2005, R&D in operating expenses decreased by 30% ($3.55 million) to $8.2 million. The
decrease is determined by the fact that Yak-130 and Be-200 are brought to the final phase,
as well as by the capitalization of R&D expenses on the balance sheet.
The social costs in 2005 accounted for over $7 million. At the same time, the share of this
item in the structure of operating expenses decreased from 5.5% to 3.5%. This trend
reflects the Corporation’s policy of restructuring and withdrawal of social-oriented entities
from the Company’s structure. In 2005, some of the corporate social units in Irkutsk were
passed to the local municipal government. The excess of the fair value of the net
identifiable assets of Beriev Design Bureau which was consolidated in the Corporation
financial statements in the reporting year over the cost of acquisition gave additional
income totalled $3.1 mln.
Net Financing Costs
Net financing costs comprise interest expense on borrowings, the accretion of interest on
provisions, interest income on funds invested, dividend income, foreign exchange gains
and losses, and gains and losses on the revaluation and disposal of investments held for
trading and available-for-sale.
All interest and other costs incurred in connection with borrowings are expensed as
incurred as part of net financing costs and aren’t capitalized on the balance as a part of
initial cost of an asset.
In 2005, net financing costs amounted to $38.5 million, which represents a 36.6% decrease
($22.2 million), as compared to 2004. The financing costs of the Corporation declined
pursuant to several considerations. First, the interest expenses on borrowings was down
owing to the government compensation of interest rates ($7.5 million). The rules for the
government compensation of interest rates for Russian exporters of industrial products
were approved by the Russian Government on June 8th, 2005. In addition, the Company
reduced the interest expenses on borrowings by paying part of the debt and restructuring
the credit portfolio by $2.4 million, at the same time the interest gains grew more than $1
million. As a result, the net interest expenses were cut down almost by $11 million. In
contrast to the previous years, in 2005 foreign exchange rates have had a positive impact
on the financial results – the Company received the foreign exchange gain of over $8
million. In the year under consideration, Irkut’s net interest expenses on borrowings
exceeded net financing expenses (Table 12, Graph 2).
The net income hit the record levels for the Company in 2005 – $84.8 million, which is a
24.1% increase from last year ($68.4 million). At the same time, the net income profitability
has grown to 12%, which is among the highest results not only in the Russian aerospace
industry, but also in the Russian machine-building industry (Graph 3).
Military Aviation
In 2005, the revenue from military aviation segment amounted to $474.2 million, which is a
2.3% increase from 2004. Significantly, the sales of military aircraft generated 66.6% of the
consolidated revenue of the Corporation in 2005, compared to 74.6% in 2004. At year-end
2005, the consolidated order book for the military products was $1.571 billion (excluding
the licensed production contract). The order book does not include the Algerian contract,
as it was officially signed only in March 2006, after the balance sheet date. The order book
for licensed production at year-end 2005 was estimated at $1.978 billion. The military
segment includes the following aircraft: Su-30MK (Su-30MKI for India, Su-30MKM for
Malaysia, and Su-30MKA for Algeria), Yak-130 advanced combat trainer, as well as the
modernization of A-50E airborne early warning and control system (Table 13, Graph 4).
January
Irkut Corporation started the execution of the Malaysian contract for the delivery of 18 Su-
30MKM multi-role fighters.
February
Irkut Corporation and Hindustan Aeronautics Ltd (HAL, India) had agreed upon
manufacturing a number of Su-30MKI assemblies, which supposed to be used in the
production of aircraft for third countries.
March
Hindustan Aeronautics Ltd with the assistance of Irkut Corporation had completed the
deliveries of licensed Su-30MKI to the Indian Air Force for 2004/2005 reporting period.
April
Another round of negotiations with Algeria on the delivery of Irkut-produced fighter jets was
held by Rosoboronexport, the Russian official arms exporter.
September
Indian party had reviewed the procurement schedule of technological kits for licensing
production in favour of greater share of kits with a higher completion level.
Rosoboronexport and Irkut Corporation started the negotiations with the Indian party
regarding the prospective upgrade of Su-30MKI of the first and second batches to the
specifications of the third batch of Su-30MKI.
October
Rosoboronexport and Irkut Corporation had held a round of negotiations with India on the
delivery of 18 Su-30MKI to replace Su-30K fighters, delivered earlier.
December
The Russian and Algerian parties initialled the contract for the delivery of 28 Su-MKA to
Algeria.
The Memorandum for the delivery of 12 Su-30MKM to Thailand was signed.
Currently an active work is underway at IAP to prepare for the mass production of Yak-130,
including digitization of major components and assemblies of the aircraft with the help of
the NX (Unigraphics). As a result, all individual components, units, and assemblies of the
aircraft will be available not only in blueprints, but also in the 3D format. The 3D modelling
is used to develop the Yak-130 serial production lines, as well as its subassemblies. In
addition, the rotary machining of individual parts is modelled to provide engineers with
capabilities to programme any turning machine for a specific part. Widely used by world’s
leading aerospace manufacturers, the technology is a new and important milestone in the
development of the Russian industry, making IAP the only Russian aircraft plant, which
uses computer technology to such an extent. Of course, the initial introduction of modern
technologies requires significant time and financing. Nonetheless, the expenses on the
technology development and upgrade, incurred at the initial phase of the product life-cycle
will subsequently benefit the Corporation by better quality, more efficient and reliable
production, increased profits, and reduced costs.
August
The first Yak-130 prototype of the mass-production series had completed the commercial
tests.
October
Yak-130 combat trainer was introduced to the Russian Air Force for conducting the joint
state flying tests.
December
Air shows of Yak-130 advanced combat trainer were performed at the LIMA-2005
International Aerospace and Maritime Exhibition in Malaysia. As a result, Irkut received an
offer to compete in a trainer tender, held by the Malaysian Air Force.
The Algerian and Russian parties initialled the contract for the delivery of 16 Yak-130
combat trainers to Algeria.
Civil Aviation
In 2005, revenue from the civil aviation segment increased by 70% to $37.9 million. There
are several civil projects in the segment, but the majority of them are only prospective,
while revenue are generated solely by Be-200 amphibious aircraft. The current civil order
book of $88 million includes entirely Be-200.
Be-200
Be-200 is the first and largest civil project by Irkut Corporation. The amphibian has been
designed by Beriev Company, famous for its amphibious aircraft. The prototypes, as well
as the mass-produced Be-200 are manufactured by IAP production site in Irkutsk.
Be-200 in 2005:
January
Irkut Corporation held negotiations with the Civil Protection Department of the French
Ministry of Interior Affairs concerning a possible purchase of Be-200 amphibians.
The Russian Aviation Register MAK and EU Certification Centre signed an agreement for
Be-200 (fire-fighting modification with D-436TP engine) to undergo testing to comply with
EU standards.
April
The Be-200 amphibian aircraft was equipped with an Airborne Observation System (AOS).
June
Russian party made several proposals to Indonesian Environmental and Forest
Management Committees of the Indonesian Parliament Lower House. The Russian
delegation came forward with a series of proposals to the Indonesian Environmental
Commission regarding the effectiveness of the forest fire-fighting. The appliance of Irkut
produced aircraft complex, based on combined use of UAVs and Be-200 was suggested.
Beriev Company established the unique Aviation Maintenance Base for Be-200 and Be-
103 amphibians to carry out certified line and scheduled maintenance.
July
The Civil Protection Department (Protezione Civile) of Italy leased Be-200 to be utilized in
forest-fire fighting mission by SOREM, authorized Italian firefighting service operator.
Irkut delivered the third multi-purpose Be-200ChS amphibious aircraft to the Russian
Ministry for Emergency Situations.
August
At the MAKS-2005 International Air Show in Zhukovsky, near Moscow, the Company and
EADS signed the Constituent Agreement to establish EADS Irkut Seaplane SAS joint
venture with the targets of Be-200 certification and joint marketing. Under the agreement,
Irkut owns a 70% share in the JV, EADS – 30%.
October
During the meeting of the 2nd Joint Commission for Economical, Industrial, and technical
co-operation between Russia and Portugal, Irkut conducted a presentation of Beriev-200
amphibious aircraft. As a result of the presentation, the 2 sides decided that the intention to
start negotiations on a prospective purchase of Be-200 by Portugal should be entered into
the minutes of the meeting.
December
During Russia-ASEAN summit in Kuala Lumpur, Irkut conducted a presentation of Be-200.
Specifications for Be-200 were determined to comply with Malaysian requirements. On
LIMA-2005 Air show Irkut presented current and prospective projects, including multi-role
Be-200 amphibious aircraft. Negotiations with South-East Asian and European
representatives were conducted with the focus on the possible use of Be-200 amphibian.
MTA
The multi-purpose transport aircraft (MTA) is a joint project by Irkut Corporation, Indian
aircraft manufacturer Hindustan Aeronautics Limited (HAL), Russia’s leading cargo-aircraft
design house Ilyushin, and Russian arms exporter Rosoboronexport. MTA is a military mid-
capacity multi-purpose cargo aircraft. The project is currently at the predesign stage. In
2005, a separate management department was established, and the requirements
specifications set by Russia and India were harmonized. The signature of the
intergovernmental agreement relating the MTA production is scheduled for 2006. In
addition, MTA was included in the Russian government arms procurement programe.
MTA in 2005:
February
In co-operation with the Indian aerospace industry, Irkut Corporation began the joint MTA
(multi-purpose mid-range transport aircraft) project on the risk-sharing basis. The
agreement was reached during AeroIndia-2005 Air Show in Bangalore, India.
March
The Russian Air Force approved the R&D specifications for multi-purpose transport aircraft
(MTA).
May
Russian Air Force R&D specifications for MTA were sent to Indian Air Force
representatives in accordance with established procedures.
October
The draft of the Russia-India Intergovernmental MTA Agreement was issued.
Russia-India working group negotiated the major correction principles for MTA business
plan, concerning 2005 – 2006 economic situation.
December
The Indian Airforce Staff has approved the requirements for MTA, specified by the Russian
AF.
MS 21
June
The Company and the Russian Federal Industrial Agency signed a contract for the
development of the MS 21 family of short- and medium-range commercial aircraft. Under
the contract Irkut received the funds for the development of a preliminary design.
Irkut’s UAV programs were initiated in 1999. The Corporation is currently entering upon
mass production of multi-functional complexes, which includes UAVs. They are built to
meet the requirements of Russian EMERCOM and other relative.
June
Within the frames of pre-contract consultations with the Russian Ministry for Emergency
Situations, the Corporation presented Irkut-2F, 2T, 20, 850 UAVs at Zhukovsky air base.
Russian delegation came forward with a series of proposals to the Indonesian
Environmental Commission regarding the effectiveness of the forest fire-fighting. The
appliance of Irkut produced aircraft complex, based on combined use of UAVs and Be-200
was suggested.
July
Russian EMERCOM completed acceptance trials of Irkut-2F, Irkut-2T, and Irkut-20 UAV
prototypes.
August
Irkut Corporation signed a Letter of Intent with Austrian Diamond Aircraft Industries GmbH
to develop an unmanned aerial vehicle.
October
The Company signed a contract with the Russian EMERCOM for the production of a light
monitoring, surveillance, and reconnaissance UAVs.
November
Russian EMERCOM completed acceptance trials of Irkut-850 UAV prototype.
December
At LIMA-2005 Aerospace&Maritime Show, air shows of a 2 kg UAV were conducted.
A-002 Gyroplane
A-002 gyroplane is an independent Irkut project, developed after Irkut Corporation has
received a Light Aerial Vehicle Developer License in 1996. A-002 has no competitors in the
Russian aerospace industry, Irkut has entered upon serial production of the gyroplanes in
2002.
April 2005
A contract for the delivery of A-002 by IAP to Irkutskenergo – one of the Russia’s utilities
was signed. Irkutskenergo will use the gyroplane to carry out maintenance of electricity
networks and to get engineers to Irkutskenergo’s facilities.
Components production
In 2005, the value of components and equipment deliveries grew by 13% to $125.8 million
as compared to $111.3 million in 2004. The increase is primarily due to the switch over the
second phase of licensing agreement with India which proposes extended components
production. Under the Airbus components contract, Irkut is involved in an extensive
upgrade of its production lines at Irkut’s main production site – IAP. New workshops are
close to the introduction into Irkut’s manufacturing facilities – galvanic and machine-shop.
Both of the shops comply with accepted European standards, while the electroplating shop
is considered to be one of the best in class in Europe. To start the manufacturing of Airbus
components, the procedure of certification is to be completed. This will allow the
Corporation to become Airbus strategic partner and sign new contracts to expand the
components production programe. Irkut is planning to manufacture 8 types of components
for Airbus, with a current order book amounted to $33 2 million.
June
Irkutsk plant started the execution of four contracts for the production of A320 aircraft
components, signed with Airbus at year-end 2004.
July
Pursuant to audit inspection, Irkut was included into the data base of AECMA (Association
Européene des Constructéurs de Materiel Aerospatial), Association of European Aircraft
and Components Manufacturers, as the EASE (European Aerospace Supplier Evaluation)
supplier.
August
At the MAKS-2005 Air Show in Zhukovsky near Moscow, Irkut and EADS signed a number
of agreements, including an strategically partnership agreement and an agreement,
indicating Russia’s involvement in the development and production of the A-350 long-range
jet-liner.
December
The Company signed a number of agreements with Airbus, EADS , Pfalz-Flugzeugwerke
(PFW ) for additional large work packages for the production of Airbus components. The
order book is scheduled for 10 years with the value of $140 million. The first deliveries
under the agreements are planned for 2007 (Table 14).
In 2005, other business segments of Irkut generated $75.7 million – more than a three
times increase as compared to $24.5 million in 2004. Such a significant growth is due to
better performance of Irkut subsidiaries, with profits made by non-core companies also
included. In the year under consideration, Irkut has been realizing the restructuring
program which also includes withdrawing of non-core assets. Nonetheless, these
enterprises showed positive performance in 2005, and their revenue were consolidated into
financial reporting. At year-end 2005, the order book of other business segments was
estimated at approximately $40 million.
Financial Stability,
Liquidity and Cash Flow Analysis
In 2005, Irkut Corporation enters upon the execution of new agreements, including the
Malaysian contract, and starts work on financing the Algerian contract. As a result, the
Corporation has an extensive demand for the working capital investments. However, the
standard terms of delivery contracts envisage 30 – 40% advanced payments, made before
the production starts. Therefore, the advanced payments and the Company’s own funds
are not sufficient to cover all necessary expenditures. That is why, to finance its operating
activity Irkut resorts to the external market financing.
In 2005 the volume of the current assets has increased significantly due to extended
production activity. At the same time, the Company has deeply optimized the structure of
financing recourses, as shown at the graph 5.
The last three years saw a constant growth in non-current, as well as current assets, as
demonstrated by the structure and dynamics of the assets in use (Graph 6).
The total assets grew by 63% in the last three years, with 33 % in 2005 and 22.3% in 2004.
In absolute terms, in 2005 the Company’s assets increased by $303.6 million to $1,219.85
million. The growth was related, in the first place, to the considerable increase in current
assets of the Company.
In 2005, the share of the current assets was 71.3%, as compared to 66.7% in 2004, while
in absolute terms the current assets have grown to $259 million (42%). As a result, the
value of the current assets reached $870.3 million. The non-current assets grew by 14%
($44.4 million) in 2005 and amounted to $349.5 million.
The structure of the current and non-current assets and the dynamics of the assets are
considered below.
Non-Current Assets
The structure of the non-current assets is dominated by “Property, Plant, and Equipment”
(fixed assets) – 57.8%. At the same time, the constant growth in intangible assets should
be noted – 16.3% in 2003, in 2004 – 30.4%, and in 2005 – 37%. The increase is due to the
acquirement and consolidation of Yakovlev and then Beriev Company, as well as Yak-130
and Be-200 R&D capitalization. The total share of other articles, such as investments in
associates, deferred income tax and other represented not more than 5 – 6% in 2005
(Table 15, Graph 7).
The growth in fixed assets in 2005 was due to the procurement of new equipment and
other capital investments, made by the Company, as well as to the acquisition and
consolidation of Beriev Company (Table 16).
Due to the procurements of new production equipment and remodelling of shops, plant and
equipment share in the fixed assets increased in 2005 to 44.3% (38.4% in 2004) and
exceeded the land and buildings, which amounted to 41.6%. The remaining 14% –
construction in progress (Diagram 5).
Diagram 5. Fixed Assets Structure in 2004 and 2005, ‘000 USD and %
Intangible Assets
In 2005, the intangible assets of the Company grew by
more than 40% ($36 million) to $128.85 million. The increase, as in the case with the fixed
assets, was due to the integration of acquired Beriev Aircraft Company, as well as capital
investments, made by Irkut.
The consolidation resulted in a $37.21 million growth in the intangible assets. The capital
investments into the intangible assets amounted to $20.01 in 2005. The major part of the
investments was into development, $19.06 million in absolute terms.
At the same time, in 2005 the Group revised its plans regarding future production of assets
under development and ceased the development projects. As a result of this revision, the
carrying amount of the capitalized development expenditure was written down by $17.06
million. The revision is caused by commencement of new development projects, which will
replace the current products.
The accumulated amortization of intangible assets at year-end 2005 accounted for $2.82
million, which is only about 2% of their total value. This is due to the fact that the Be-200
and Yak-130 development projects are not yet completed and therefore the related
intangible assets are not amortized. The amortization will commence with the beginning of
mass production of the assets which is planned for 2006 – 2025 (Table 17).
Investments in Associates
The investments in associates, made by Irkut Corporation in 2005, are not represented in
the balance, since Irkut’s share in Beriev Company was reported as an associate last year,
exceeded 50% at year-end 2005, and therefore is consolidated into Group’s financial
statement.
Other Investments and Non-Current Financial Assets
In 2005, other investments and non-current financial assets amounted to $14.2 million,
represening a 31.8% decrease as compared with 2004.
Table 18. Other Investments and Non-Current Financial Assets, ‘000 USD
Deferred tax
Deferred tax is provided using the balance sheet liability method, providing for temporary
differences between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for taxation purposes. The deferred income tax is
recognized in respect to any taxable time limits. In 2005, the deferred tax accounted for
$4.5 million.
Current Assets
The current assets grew significantly in 2005, as compared with 2004 and amounted to
$870,3 million. It is noteworthy that the volume of inventories accounted for $540.4 million,
which is a more than twofold increase from last year. The value of current investments
grew as well. As a result, despite decreased receivables and funds, the 2005 increase in
current assets was over 42% ($259 million) in absolute terms.
Displayed below are an analysis of the increase in the current assets, and structure of the
current assets. See also Table 19.
Inventories
In 2005, the inventories grew almost twofold ($281 million), amounting to $540.4 million at
year-end 2005. Such an increase was due to the duration of the production cycle and to
the fact that pursuant to customer request, the delivery dates were rescheduled for 2006
and there were no deliveries of main products in the period under consideration. Therefore,
the Company did not receive funds to cover expenses and carried out the operating
activity, using borrowed funds. Nonetheless, the volume of contract works done is
demonstrated by the increased value of “Amounts due from customers for contract work”
(Table 21).
The amounts due from customers for contract work reflect the volume of work in progress
and increase as percentage of products ready for delivery rises.
It is amortized only after the delivery has been loaded and invoice made out. The
production activities of the Corporation for the year resulted in considerable growth in the
amounts due from customers for contract work, increasing by 2.6 times ($340 million) from
$213.4 million in 2004 to $553.4 million in 2005. The same tendency is demonstrated in
respect to all other components of the inventory. The advance payments to suppliers grew
more than threefold and amounted to $74.7 million at year-end 2005.
The inventories of raw materials, goods, and aircraft components, as well as other
production in progress grew as well. Such a significant growth was due to the fact that
along with the execution of the Indian contracts, the Corporation started purchasing
necessary materials and components for the contracts, signed in the year under
consideration. For example, at year-end 2005, Irkut started execution of the Algerian
contract for the delivery of Su-30MKA jet fighters (Table 21, Graph 8).
Table 21. Inventories, ‘000 USD
Profitability reflects the influence, caused by liquidity, assets, and debt management on the
Company’s results (Table 22).
The analysis of these indicators show considerable decrease, but it should not be taken as
negative, since it was caused by the significant growth in equity capital, which has
strengthen the financial stability of the Company, but not by a decrease in its general
profitability. The net income grew by 24%, the equity capital increased more than twofold –
106.4%.
As a result, the Return on equity (ROE) in 2005 amounted to 23.8% compared to 39.7% in
2004.
The return on assets (ROA) declined in 2005 to 7%, compared to 7.5% in 2004. This
decrease is not as significant as the drop in the equity capital profitability, since the assets
grew 33 %.
The return on invested capital (ROIC), which shows the profitability of funds, amounted to
13.4% in 2005, compared to 16.1% in 2005. The decline was due to the outrunning growth
in capital gained in 2005 as compared the net income growth.
Despite some decrease in numbers, the profitability ratios of the Corporation remain
among the highest in the global aerospace industry.
The structure of sources used to finance the operational activities of the Company reflect
an extensive employment of borrowings. The strategy is conditioned by the fact that the
high-tech production requires not only sufficient time, but extended financing likewise –
R&D, materials, purchasing of expensive components, etc. A standard aircraft production
contract supposes not more than a 30 – 40% advance payment, received before the start
of the production cycle. Accordingly, advanced payments, made by customer, combined
with the Company’s own funds do not allow us to meet in full the production needs, leading
to various outside borrowings. Moreover, the outside financing is economically sound, in
the case the weighted average cost of capital is lower, than the return on invested capital.
In 2005, in addition to the contract for the replacement of 18 Indian Su-30MKI, Irkut
Corporation started execution of new ones, the biggest among them being the Malaysian
contract. The financing stage of the Algerian contract was also started. Accordingly, the
Company’s need for current assets increased. In 2005, the net cash outflow for
investments in the working capital amounted to over $240 million, while capital investments
accounted for $46 million.
Considering the risks, involved by dependence on borrowed capital, Irkut Corp. intends to
reduce the share of financial obligations in future aiming at striking a healthy balance
between the financial risks and the high financial leverage as a mean of generating more
profit.
In 2005, the Corporation attracted capital resources, using both debt financing and new
share issue. Significantly, the equity capital grew by 106.4%, while the increase in long-
and short-term debt amounted to 16% only. As a result, in the year under consideration the
share of borrowed capital in the financing sources structure decreased to 70.8% from
81.2% in the previous year. Accordingly, the debt to equity ratio has fallen from 2.65 to
1.57. In 2004, the equity capital share amounted to18.8% as compared to 4.5% in 2003.
Equity Capital
As of January 1st, 2005 the share capital of Irkut Corporation was divided into 878,946,528
registered ordinary shares of nominal value of RUR 3 each. On June 24th, 2005 the
General Meeting of Shareholders came to a decision to increase the share capital of the
Corporation by a new issue of 120,824,363 privately offered ordinary registered shares of
nominal value of RUR 3 each (Table 23, Graph 9).
Table 23. Equity, ‘000 USD
99,185,084 new shares have been privately placed to EADS at RUR 19.13 (approximately
$0.67) each, with a small percentage of the new shares was purchased by a group of
current Irkut shareholders, who executed their pre emptive rights for newly issued shares.
The new issue of shares resulted in share premium of $66.14 million, while the share
capital of the Corporation grew by 11% ($10.37 million) to $103.8 million as compared to
$93.44 million in 2004.
The difference between the nominal value and actual price of the new shares was
recognized in the income statement as share premium of $55.77 million. As a result, the
carrying value of the share capital grew almost twofold to $316.3 million from $153.8 in
2004. At year-end 2005, the share capital consisted of 978,131,612 ordinary shares. All
ordinary shares have a nominal value of Russian roubles 3 each.
January
During the consolidation of Irkut assets, Irkut Corporation consolidated 100% shares of
French Irkut Seaplane SAS.
February
Irkut Corporation and the European Aeronautic Defence & Space Company (EADS ) start
preparations for the acquisition of newly-issued shares, representing up to 10% stake in
Irkut’s shareholders capital. EADS launched due diligence on Irkut.
May
The National Association of Stock Market Participants (NAUFOR) announced the winners
of the “Elite of the Securities Market 2004” national contest. Irkut Corporation was
nominated and won the “Best IPO 2004” award.
The Moscow Interbank Currency Exchange (MICEX) celebrated the 8th anniversary of the
stock market on MICEX. During the ceremony, the results of 2004 stock markets were
discussed, and active participants of the market were awarded. Irkut Corporation won the
“Equity Offering on MICEX” nomination.
June
Shareholders of Irkut Corporation decided to enlarge the authorized capital by 12% by the
issue of 120 million new shares with a nominal cost of RUR3 each. The new issue was
specifically targeted to be privately placed to EADS .
August
Irkut reported best ever published 2004 IFRS results.
Irkut consolidated Beriev Company’s control stake, raising Irkut’s stake in Beriev from
39.57% to 54.2%.
The distribution of 2004 dividends was completed with the value of RUR 87,349,963.7
(RUR0.1 per ordinary share), or $3.07 according to IFRS.
At the MAKS-2005 Air Show in Zhukovsky, near Moscow, Irkut and EADS signed an
agreement confirming the intention for the strategic investment in the Russian plane
manufacturer through the prospective acquisition of newly-issued shares, representing up
to 10% of Irkut’s outstanding capital.
September
The Russian Federal Financial Markets Service (FFMS ) registered the new issue of
common registered nondocumentary nominal shares of Irkut Corporation. The issue was
given identification number of state registration 1-03-00040-A-002D. The quantity of the
new issue shares accounted for 120,824,363 shares, the nominal value of each share –
RUR3.
December
Irkut and EADS closed the deal for the acquisition of a 10% stake in Irkut at 55 million
($65.3 million).
Financial Obligations
• the widening of the investors base by diversifying the financing instruments and
marketing the Corporation on foreign capital markets;
• the maintenance and widening of existing credit limits;
• the optimization of the credits portfolio structure aiming at reducing interest risks
(increasing borrowings with fixed interest rate and early repayment);
• the improvement of the credit financing methods in accordance with the principle of
specified purpose use, which enabled us to participate in the programe of
government compensation of interest expense (Graph 10).
March
Irkut completed RUR600 million bond redemption of the first A01 issue (registration
number 4-01-00040-À as of 13.03.2002), with the payment of the last coupon of
RUR23,934 thousand.
Irkut obtained a credit line worth $173 million from Sberbank payable in 5 years.
April
Irkut signed a $83.5 million syndicated loan agreement with a group of banks, headed by
Moscow Narodny Bank, Singapore. The Corporation will receive the loan, secured by the
contract for the delivery of Su-30MKM to Malaysia, in two tranches. The loan expires
November 2008. The group of banks include financial establishments from South-East
Asia.
May
Irkut paid the 5th interest coupon payment worth RUR119.7 million for A02 Irkut bonds
(registration number 4-02-00040-À as of 01.10.2002).
July
The Russian Federal Financial Markets Service (FFMS ) registered the third issue of five-
year bonds, amounting to 3,250,000 bonds with the nominal value of RUR1,000 each. The
issue was given identification number of state registration 4-03-00040-À.
September
Irkut successfully completed the third issue of non-convertible registered roublenominated
coupon bonds, totalling RUR3.25 billion, with the yield of 8.74% and maturity of 5 years. At
the date of the placement, the issue had the longest term of maturity in the Russian
market, while the interest rate was the lowest for Irkut public borrowings.
October
Irkut started preparation procedures for the issuance of credit-linked bonds (CLN) worth
more than $100 million: development of the deal’s structure, negotiations on the
contractual base, investor relations, and preparations for the road show. The credit notes
worth $125 million were placed in March 2006. The interest rate, one of the lowest in the
market, was 8.25%.
November
FFMS registers the report on the result of non-convertible registered roublenominated
coupon bonds issue A03 (registration number 4-03-00040-A as of July 14th, 2005). The
bonds were placed through public offering with the value of RUR3.25 billion at nominal
value.
Irkut completed retirement of nominal value of the A02 second issue bonds (registration
number 4-02-00040-A as of 01.10.2002). The value of retirement amounted to RUR1.5
billion, or RUR1,000 per bond.
Irkut and Amsterdam Trade Bank have in principal agreed upon arranging a 3-year credit
line worth $30 million.
December
Irkut received the first government compensation of interest expense for loans, obtained in
Russian banks in 2005. The grant amounted to RUR210,864,249, or $7.45 million (as it is
indicated in IFRS results).
Net debt
The net debt is calculated as the difference between the total debt liabilities of the
Company and the cash & cash equivalents and current investments. In 2005, the net debt
amounted to $474.8 million, which is a 16.7% increase ($68 million), compared to 2004
(Table 24).
In 2005, the credit portfolio grew by more than 30% to exceed $600 million. The extending
of the investor base and the range of financial instruments allowed the Company to
improve the parameters of the credit portfolio. The average borrowing term grew to 3
years. Significantly, the risk premium to base rate (margin to base rate) has decreased.
The margin to base rate declined by 30% to annual 4.36% as compared to 6.15% at the
beginning of the year. The decrease compensated for the adverse conjuncture in the
borrowings market (the LIBOR rate increased).
At the same time, the Corporation continued considerable restructuring of its credit
portfolio. First, Irkut plans to switch to a single currency of settlements with customers,
suppliers, and creditors. As USD export contracts form 90% of revenue, Irkut intends to
increase the share of USD borrowings. In 2005, the share of USD borrowings accounted
for 75% of the total credit portfolio, as compared to 68% as at year-end 2004. The
Company continues the geographical diversification and diversification by the type of
borrowings. For example, the share of public borrowings grew by 21%, as compared to
12% at year-end 2004 (Table 24, 25, 26, Diagram 7).
Graph 11.Payment Schedule, in millions of USD
Maturity
In RUR In USD
date
Public borrowings: in millions in millions –
Notes 400 141 03.10.2006
À03 issue bonds 3,250 1131 16.09.2010
Bank loans: – – –
Sberbank 452 161 30.06.2006
1
Sberbank 270 9 12.01.2007
Sberbank – 60 24.12.2007
Sberbank – 101 27.09.2007
Sberbank – 13 29.12.2008
Sberbank – 115 29.12.2009
Sberbank – 45 29.12.2008
Mosnarbank (Singapore) – 64 20.11.2008
Mosnarbank (Singapore) – 20 20.11.2008
VTB – 10 11.09.2006
VTB – 10 20.12.2006
IMB – 10 31.01.2006
IMB – 10 21.03.2007
Total 4,372 609
1
Sum of loans and borrowings in RUR transferred into USD equivalent at exchange rate
on December 31, 2005
Non-Current Liabilities
In 2005, the Company’s non-current liabilities grew by 117% ($321.4 million). The increase
is due to the debt restructuring. In 2005, Irkut received bank loans worth $305.9 million and
issued $112,9 million longterm bonds (Table 27).
Bond issue
The bond issue of OAO Irkut Corporation are in Russia’s top ten most liquid bond issues
(Table 28).
Current liabilities
In 2005, the current liabilities of the Corporation decreased by 43% ($201.3 million) in
absolute terms and amounted to $267.1 million. The decline in total value of current
liabilities was due to the restructuring of the credit portfolio and considerable reduction in
the short-term loans, both in share and absolute terms. As a result, the structure of the
current liabilities has changed. In 2004, the share of short-term borrowings in the structure
of current liabilities of the Company amounted to 40%, while trade liabilities – about 58%.
In 2005, this correlation changed dramatically – the share of short-term loans dropped to
28%, while trade liabilities went up to 68%. The reserves formed the remaining 3% (Table
29).
Short-term borrowings
The value of short-term borrowings decreased from $272.2 to $75.9 million. Such a
considerable drop is due to the restructuring of the liabilities in favour of longterm loans, as
well as to the fact that in 2005, Irkut paid off some bank loans and redeemed two bond
issues, recognized in the 2004 balance sheet as short-term borrowings and loans as the
“Current part of long-term liabilities” of the Company.
Provisions
The Group provides product warranties in conjunction with certain product sales.
Generally, aircraft sales are accompanied by a twelve to eighteen month warranty period
that covers systems, accessories, equipment, parts, and software manufactured by the
Group to certain contractual specifications. Warranty coverage includes non-conformance
to specifications and defects in material and workmanship. The warranty liability recorded
at each balance sheet date reflects the estimated number of months of warranty coverage
outstanding for products produced times the expected monthly warranty payments, as well
as additional amounts, if necessary, for certain major warranty issues that exceed a normal
claims level. In 2004, the provisions were significantly reduced – from $9.8 million in 2004
to $8.8 million in 2005.
As a result of significant investments into the working capital, in 2005 the current assets of
the Company rose to $870.3 million, which represents a 42% increase from 2004.
At the same time, Irkut’s current liabilities decreased almost twofold to $267.1 million.
As a result, the current ratio, which is the arithmetic ratio of current assets to current
liabilities, increased from 1.3 in 2004 to 3.26 in 2005. The ratio is mainly used to give an
idea of the Company’s ability to pay back its short-term liabilities (debt and payables) with
its short-term assets (cash, inventory, receivables). The higher the current ratio, the more
capable the company is of paying its obligations. The current ratio 3.26 represents Irkut’s
great short-term creditor protection.
The analysis of other types of liquidity ratios also shows considerable improvement:
Table 30. Dynamics of Current Assets and Short-Term Liabilities, ‘000 USD
Solvency
Despite considerable level of debt financing, the Company demonstrates strong ability to
pay corresponding debt service.
The “debt to revenue” ratio did not change from 2004. It amounted to 0.7, while the “debt to
shareholders’ equity” significantly decreased to 1.6, and compared to 2.6 in 2004.
Operating activities
In 2005, Irkut Corporation generated negative cash flow from operating activities worth
($99.5 million). Cash flow before changes in working capital and provisions amounted to
$194.13 million, which is a $13 million increase from the previous year. However, in 2005
the Company invested considerable funds in the working capital, and the growth in
provisions amounted to almost $280 million, while there were no deliveries made, because
pursuant to a request from a customer, dates of delivery were rescheduled for 2006. As a
result, the cash flow from operating activities before interest and taxes amounted to
negative $30.6 million, while less interest payments and taxes – $99.5 million.
In 2005, Irkut generated negative free cash flow as well – $135.3 million, indicating that in
the year under consideration the Company invested significant financial resources in the
working capital, purchased materials and components, and made capital investment. In
future, the Corporation intends to synchronize the production schedule with shipments in
order to avoid high volatility of cash flows, as well as the need to finance huge values of
current assets (Graph 12).
Graph 12. Dynamics of Cash Flow from Operating Activities, ‘000 USD
Investing activities
The cash flow from investing activities reduced the Company’s funds by $33 .5 million.
At the same time, capital expenditure amounted to $46.1 million, from which investments in
the fixed capital – $26.1 million, investments in the intangible assets – $20 million. The
acquisition of Beriev Company reduced the cash flow by $5.3 million. The positive financial
flows were received from the disposal of some fixed assets, as well as the disposal of JSC
“NII Izmerenia”.
Financing activities
In 2005, the increased need in working capital resulted in considerable financial borrowing.
Financing activities of Irkut in 2005 were directed at attracting funds to support production
and meeting current contractual obligations, working capital financing, and purchasing
materials and components to provide for works on new contracts. In 2005, the Corporation
realized new issue of shares, redeemed 2 bond issues, restructured the credit portfolio to
increase the share of long-term loans and borrowings, and diversified the creditors
structure and financing methods.
Risk Analysis
As any other business, Irkut Corporation is subject to political, economical, market, and
other risks, which may affect its financial performance. Taking into consideration the nature
of the area, in which the Company operates, we single out the following risks.
Political Risks
The defence industry is subject to strict government regulation and control, and not only by
the supplying or importing country, but also by international organizations. Thus, the
signing of delivery contracts for military products directly depends on the diplomatic
relations between the Russian Federation and countries – prospective customers, as well
as the geopolitical situation in the world.
Our current customers for the most part are Asian countries and developing countries. The
deterioration of political situation in any of this regions may involve various adverse
consequences, right up to applying international sanctions (for example in the form of
embargo on sales of military equipment to certain countries), which, in its turn, may
negatively affect the company’s ability to fulfill its contractual obligations. This risk is
extending by the small range of customers.
To minimize the foreign policy risk, Irkut continues the diversification of its order book by
customers and regions, focusing not only on the traditional markets of South-East Asia, but
on new regions, including North Africa and developing countries. The Indian share in the
order book amounted to approximately 65% at year-end 2004, but thanks to the Algerian
contract this share decreased almost by the quarter.
The government military expenses policy may also affect the Company’s financial
performance. Unlike the majority of international aircraft-constructing companies, Irkut
Corporation generates the bulk of the revenue from export-related contracts. Besides this,
the absence of the Su-30 MKI in the fleet of the Russian Air Force is viewed by many
prospective customers as an obstacle for considering it in a tender, and this reduces the
export potential of this jet fighter.
To minimize the risks, related to the government control and regulation in military aircraft
production and selling, Irkut follows a strategy of product diversification, actively develops
the civil and dual-purpose products and aims at extending the share of civil products in the
Company’s revenue.
The Yak-130 advanced combat trainer, which was introduced in 2005, is a milestone in the
diversification of Irkut’s product line. In March of 2005, the Russian Ministry of Defence
placed an order for 12 Yak-130, and in December of 2005, Irkut initialled the contract for
the delivery of 16 trainers to Algeria.
Since the aerospace industry, and the military aviation in particular, is strategically
important for the state defence capability, information related to this industry could be
viewed as a subject to the state secret legislation. Thus limited access to the specific
information could have influence on investment policy. Nevertheless, Irkut is the most
transparent company of the Russian aerospace&defence industry. The Company is
committed to maximum disclosure of critical information for its investors and shareholders.
The military aircraft manufacturing industry has always been exclusively within the state
jurisdiction. However, due to extensive political and economical reforms in Russia, the
situation has changed. Several big state-run enterprises of the industry had been
incorporated. At the same time, the restructuring process of the Russian aerospace
industry has not been finished yet, and we cannot exclude the risks of strengthening of
government control and even direct state interference in business of entities of this industry
and in the business of Irkut Corporation in particular.
Currently, the Decree on the establishment of the United Aircraft Corporation (UAC) has
been signed. By the end of 2007, the structure of UAC is expected to be formed.
However, granting the scale of the project, it is difficult to predict exact dates of forming the
structure. No doubt that this consolidation process will save Russian aviation industry
position in the international market. At the same time, the uncertainties regarding timing
and mechanisms of Irkut integration into UAC, regarding product line and management of
the United corporation and swap-ratios conditions, raise lots of questions, including the
question, concerning rights of minority shareholders.
Realizing that Irkut is a public company, which holds the status of a respected and reliable
company on the financial market, the Corporation is fully committed to the protection the
minority shareholders’ rights throughout the whole procedure of consolidation. Thus, Irkut’s
management take an active role in the process of the industry’s consolidation, including the
development of the consolidation strategy and mechanisms. Irkut managers and major
shareholders will seek equitable exchange ratios for the Company, and for each group of
investors as well, including management, government, and the investment community
based on its profitability and its share in the order book of the UAC.
The management of Irkut Corporation, which will be a UAC’s subsidiary on the first stage of
consolidation, will seek transparency of the whole holding group’s documents, as well as
corporate governance transparency of other subsidiaries.
In general, Irkut experts are optimistic about the future of the United Aircraft Corporation,
both in terms of future revenue and capitalization of the Corporation. Subsequently, the
current Irkut shareholders which will make a decision to become UAC shareholders, will
most certainly benefit from the consolidation, having become shareholders of an aircraft
manufacturing holding, able to generate $7 – 8 billion of annual revenue and which will be
formed by Russia’s leading aerospace companies.
Market Risks
Irkut’s market risks could appear in three different forms: interest ratio risk, foreign currency
risk, and price risk.
Irkut has a considerably high financial leverage, as compared to other companies of the
industry. Thus, higher financing expenses may lead to more severe competition.
To reduce this risk, we are diversifying the credit portfolio: arrange loans, denominated in
various currencies, seek wider co-operation with Russian and foreign banks, use other
ways of financing, including bond issues and other forms of public borrowings.
• maintain the optimal balance between the foreign currency assets and liabilities;
• form liabilities in foreign currency (settlements with suppliers of materials and goods,
as well as debt payments are effected in RUR linked to USD exchange rate);
• currency clause (in case the exchange rate abruptly fluctuates, the contract amount
will be reconsidered);
• replacement of short-term debt by the long-term loans and borrowings;
• diversification of liabilities by currency and debt instruments.
Industry-related risk
The development of the 5th generation fighter peculiarly affects the long-term
competitiveness of Russian aerospace industry and Irkut in particular on the global
markets. The situation, which is not in favour of the Russian aircraft makers, as foreign
companies have advanced developments in the 5th generation fighter program, may
worsen for the Russian companies.
The development stage for the 5G fighter may take from 10 to 15 years, and while the
Russian industry is at the very beginning of the process, USA has already built and started
trials of 5G prototypes. Thus, Russia may lose external markets, as demand for 4+
generation fighters, delivered by Irkut, may subside. At the same time, the Company’s
product line features 10 – 15 years price edge over the 5G jets, which may be a critical
consideration for Irkut traditional and potential customers.
The long-term strategy of Irkut includes improvement of balanced production of military and
civil aircraft, greater development of civil projects, and product line diversification.
The strategy may also pose some risks – considerable capital investments and allocation
of significant funds may lead to reduced profits. The civil aviation market is saturated,
which makes the entry into this market an uphill task for new participants, as there is
already formed pool of well-known companies which compete rigorously. Despite the fact
that the Company took some decisive steps towards reducing this type of risk, we cannot
say that adverse impact of the industryrelated risk is entirely impossible.
Production-based risks implies risk of falldown at the scheduled value of works, and/or risk
of increase of expenses, shortfalls of production planning, which lead to boosted current
costs.
In aerospace and defence sector contracts are usually guaranteed by third parties, in the
case of military aviation the contracts are usually secured by the government. Irkut’s
contracts are guaranteed by Rosoboronexport, state-run entity which controls all arms
exports, and this resents Russia as a trustworthy country and reliable partner.
Rosoboronexport carefully audits the company before placing the order.
On the other hand, all the companies operating in Russian aerospace and defence sector
do not generate enough cash to complete the contracts in forcemajor. In this case
Rosoboronexport performs as a guarantor not for customers but for producers and
guarantees their operations while they face obstacles.
The third-party risk also falls under the category of production-based risks. Supply
shortfalls may lead to the Company’s inability to meet contractual obligations. Many
materials and components are produced only by one supplier which accounts for
production-based risks. On the other hand, Irkut is the only customer of a range of such
materials, while relations with some suppliers are years long. All these things considered
and supported with the fact that Irkut does not use import materials and goods, this third-
party risk is minimal.
Default risk
The production cycle for some products is over 15 months. The advance payments do not
cover all the production expenses, and the Company uses not only advance payments, but
a wide range of loans and borrowings, which are paid off from contractual proceeds. Irkut’s
activities are based on sufficient level of debt financing maintenance.
Irkut has a high level of debt and a high financial leverage. The situation, when the
Company will be declared on default on all loans and borrowings may lead to financial
difficulties.
Credit risk
Credit risk implies a risk of the failure to execute contractual obligations by Irkut’s debtors
and customers – risk on recovering on default. The orders for the production of the military
aircraft – the bulk of the orders portfolio – are placed by defence ministries of foreign
countries, which means that the governments of the corresponding countries will act as
guarantors of the contracts. Thus the credit risk, posed by customers is minimal.
However, the credit risk may be posed by third parties’s debts, since the Company acts as
guarantor of a number of affiliates. The value of this type of obligations is insignificant and
cannot considerably impact the Company’s financial performance.
Legal risk
The production of aircraft and associated equipment, as Corporate’s main activity, is
subject to licensing. Irkut was granted with 5-year license dated January 17th, 2003 –
January 17th, 2008. The Company complies with all respective requirements and is
confident that in 2007 the 5-year license will be prolonged. The Company’s extensive
experience in the field of licensing enables us to believe that the requirements for the
license will not be significantly changed.
Consolidated Financial
2005 2004
Note
’000 USD ’000 USD
Revenues 5 711,692 621,852
Cost of sales (357,774) (330,894)
Gross profit 353,918 290,958
Research and development costs (8,179) (11,731)
Distribution expenses (86,190) (62,191)
Administrative expenses (64,404) (43,058)
Taxes, other than on profit (3,255) (2,767)
Other operating expenses 7 (42,389) (22,691)
Profit from operations 149,501 148,520
Net financing costs 8 (38,529) (60,749)
Loss from associates 12 – (260)
Profit before tax 110,972 87,511
Income tax expense 9 (27,295) (20,243)
Net profit for the year 83,677 67,268
Attributable to:
Shareholders of the parent company 84,826 68,370
Minority interest (1,149) (1,102)
83,677 67,268
Basic and diluted earnings per share (USD ) 18 0.095 0.080
The consolidated financial statements were authorized for issuance on 23 May 2005:
The consolidated income statement is to be read in conjunction with the notes to and
forming part of the consolidated financial statements set out on pages 141 – 159.
Consolidated Balance Sheet as at 31 December 2005
2005 2004
Note
’000 USD ’000 USD
ASSETS
Non-current assets
Property, plant, and equipment 10 201,922 182,565
Intangible assets 11 128,852 92,775
Investments in associates – 8,976
Other investments and non-current financial assets 12 14,230 20,858
Deferred tax assets 13 4,523 –
349,527 305,174
Current assets
Investments 12 21,837 438
Inventories 14 540,367 259,540
Trade and other receivables 15 189,400 236,142
Cash and cash equivalents 16 108,335 114,975
859,939 611,095
Non-current assets held for sale 10,387 –
870,326 611,095
Total assets 1 219,853 916,269
EQUITY AND LIABILITIES
Equity 17
Share capital 103,811 93,438
Share premium 97,532 41,767
Revaluation reserve 17,741 –
Foreign currency translation reserve (773) 2,479
Retained earnings 97,918 16,163
Total equity attributable to shareholders of the parent
316,229 153,847
company
Minority interest 39,640 18,547
Total equity 355,869 172,394
Non-current liabilities
Loans and borrowings 19 529,144 249,949
Deferred tax liabilities 13 67,734 25,509
596,878 275,458
Current liabilities
Loans and borrowings 19 75,881 272,231
Trade and other payables 20 182,392 186,356
Provisions 21 8,833 9,830
267,106 468,417
Total equity and liabilities 1 219,853 916,269
The consolidated balance sheet is to be read in conjunction with the notes to and forming
part of the consolidated financial statements set out on pages 141 – 159.
Consolidated Statement of Cash Flows for the year ended 31 December 2005
2005 2004
’000 USD ’000 USD
OPERATING ACTIVITIES
Profit before tax 110,972 87,511
Adjustments for:
Depreciation and amortization 20,368 16,385
Unrealized foreign exchange losses 481 10,904
Impairment of capitalized development costs 17,063 –
Excess of net assets acquired over the consideration given (3,135) –
Impairment of loans and bad debts (446) 3,917
Loss on disposal of property, plant, and equipment 2,235 3,792
Loss from associates – 260
Income from investments (578) (122)
Interest expense 57,630 60,037
Government grant related to compensation of interest
(7,448) –
expense
Interest income (3,006) (1,961)
Operating profit before changes in working capital and
194,136 180,723
provisions
Increase in inventories (279,913) (57,695)
Decrease in trade and other receivables 54,207 19,435
(Decrease)/Increase in trade and other payables 1,950 46,209
(Decrease)/Increase in provisions (997) 2,896
Cash flows from operations before income taxes and interest
(30,617) 191,568
paid
Income taxes paid (18,709) (354)
Interest paid, net of grant received (50,134) (59,689)
Cash flows from operating activities (99,460) 131,525
INVESTING ACTIVITIES
Proceeds from disposal of property, plant, and equipment 10,304 20,843
Proceeds from disposal of subsidiary 9,541 –
Acquisition of property, plant, and equipment (26,119) (19,368)
Acquisition of intangible assets (20,007) (6,172)
Acquisition of subsidiaries and associates, net of cash
(5,304) (54,048)
acquired
Loans repaid by related parties 3,200 19,899
Net cash to acquisition/(from disposal) of investments (8,118) 29,461
Interest received 3,006 1,961
Dividends received – 42
Cash flows from investing activities (33,497) (7,382)
FINANCING ACTIVITIES
Proceeds from borrowings 894,878 466,619
Repayment of borrowings (830,672) (539,975)
Proceeds from issue of share capital 66,138 51,022
Dividends paid (3,071) (1,076)
Cash flows from financing activities 127,273 (23,410)
Net decrease in cash and cash equivalents (5,684) 100,733
Cash and cash equivalents at beginning of year 114,975 13,146
Effect of exchange rates fluctuations on cash and cash
(956) 1,096
equivalents
Cash and cash equivalents at end of year (note 16) 108,335 114,975
The consolidated statement of cash flows is to be read in conjunction with the notes to and
forming part of the consolidated financial statements set out on pages 141 – 159.
Consolidated Statement of Changes in Equity for the Year Ended 31 December 2005
Foreign Retained
Share Share Revaluation curency earnings/ Minority
’000 USD Total Total
capital premium reserve translation Accumulated interest
reserve losses)
Balance at
1 January 84,183 – – 574 (51,117) 33,640 25 33,665
2004
Net profit for
– – – – 68,370 68,370 (1,102) 67,268
the period
Foreign
exchange – – – 1,905 – 1,905 444 2,349
differences
Total
recognized
70,275 (658) 69,617
gains and
losses
Shares
9,255 41,767 – – – 51,022 – 51,022
issued
Acquisition
of
– – – – – – 19,180 19,180
subsidiaries
(Note 4)
Dividends to
– – – – (1,090) (1,090) – (1,090)
shareholders
Balance at
31
93,438 41,767 – 2,479 16,163 153,847 18,547 172,394
December
2004
Net profit for
– – – – 84,826 84,826 (1,149) 83,677
the period
Foreign
exchange – – – (3,252) – (3,252) (1,472) (4,724)
differences
Total
recognized
81,574 (2,621) 78,953
gains and
losses
Shares
10,373 55,765 – – – 66,138 – 66,138
issued
Acquisition
of
– – 17,741 – – 17,741 23,714 41,455
subsidiaries
(Note 4)
Dividends to
– – – – (3,071) (3,071) – (3,071)
shareholders
Balance at
31
103,811 97,532 17,741 (773) 97,918 316,229 39,640 355,869
December
2005
The consolidated statement of changes in equity is to be read in conjunction with the notes
to and forming part of the consolidated financial statements set out on pages 141 – 159.
1 Background
2 Basis of Preparation
The RUR is not a readily convertible currency outside the Russian Federation and,
accordingly, any conversion of RUR to USD should not be construed as a representation
that the RUR amounts have been, could be, or will be in the future, convertible into USD at
the exchange rate disclosed, or at any other exchange rate.
• Note 5 – Revenues;
• Note 11 – Intangible assets;
• Note 21 – Provisions;
• Note 24 – Contingencies.
The following significant accounting policies have been applied in the preparation of the
consolidated financial statements. These accounting policies have been consistently
applied except for changes in accounting policy described in note 3(t).
Where necessary, the assets and liabilities of foreign entities are translated into USD at the
exchange rate at the end of the year. Revenues and expenses are translated into USD
using rates approximating exchange rates at the dates of the transactions. The resulting
exchange difference is recorded directly in equity in the foreign currency translation
reserve.
Where an item of property, plant, and equipment comprises major components having
different useful lives, they are accounted for as separate items of property, plant, and
equipment.
(iii) D epreciation
Depreciation is charged to the income statement on a straight-line basis over the estimated
useful lives of the individual assets. Depreciation commences on the date of acquisition or,
in respect of internally constructed assets, from the time an asset is completed and ready
for use. Land is not depreciated.
• Buildings 40 – 50 years,
• Plant and equipment 5 – 20 years.
(ii) Goodwill
Goodwill arising on an acquisition represents the excess of the cost of the acquisition over
the fair value of the net identifiable assets acquired. In respect of associates, the carrying
amount of goodwill is included in the carrying amount of the investment in the associate.
Goodwill is not amortized but is instead tested for impairment at least annually.
(f) Investments
Investments are recognized (derecognized) when the Group obtains (loses) control over
the contractual rights inherent in that asset.
• Investments held for trading are stated at fair value, with any resultant gain or loss
recognized in the income statement.
• Investments designated at fair value through profit and loss are stated at fair value,
with any resultant gain or loss recognized in the income statement.
• Investments held-to-maturity are stated initially at cost. Subsequent to initial
recognition they are stated at amortized cost with any difference between cost and
redemption value being recognized in the income statement over the period to
maturity on an effective interest basis.
• Other investments are classified as available-for-sale and are stated at fair value,
with any resultant gain or loss being recognized directly in equity.
The fair value of investments held for trading, designated at fair value through profit and
loss and available-for-sale is their quoted bid price at the balance sheet date. Investments
in equity securities that are not quoted on a stock exchange, and where fair value cannot
be estimated on a reasonable basis by other means, are stated at cost less impairment
losses.
(g) Inventories
Construction work in progress is stated at cost plus profit recognized to date less a
provision for foreseeable losses and less progress billings. Cost includes all expenditures
related directly to specific projects and an allocation of fixed and variable overheads
incurred in the Group’s contract activities based on normal operating capacity.
Other inventories are stated at the lower of cost and net realizable value. Net realizable
value is the estimated selling price in the ordinary course of business, less the estimated
costs of completion and selling expenses.
The cost of inventories is based on the average cost principle and includes expenditure
incurred in acquiring the inventories and bringing them to their existing location and
condition. In the case of manufactured inventories and work in progress, cost includes an
appropriate share of overheads based on normal operating capacity.
Inventories are presented in the balance sheet net of advance payments received for
construction contracts.
(j) Impairment
The carrying amount of goodwill and intangible assets not yet in use is tested for
impairment annually. The carrying amounts of the Group’s other assets, other than
inventories and deferred tax assets, are reviewed at each balance sheet date to determine
whether there is any indication of impairment. If any such indication exists, the assets’
recoverable amounts are estimated. An impairment loss is recognized when the carrying
amount of an asset exceeds its recoverable amount. Impairment losses are recognized in
the income statement.
The recoverable amount of other assets is the greater of their net selling price and value in
use. In assessing value in use, the estimated future cash flows are discounted to their
present value using a pre-tax discount rate that reflects current market assessments of the
time value of money and the risks specific to the asset. For an asset that does not generate
cash inflows largely independent of those from other assets, the recoverable amount is
determined for the cash-generating unit to which the asset belongs.
(k) Dividends
Dividends are recognized as a liability in the period in which they are declared.
(n) Provisions
A provision is recognized in the balance sheet when the Group has a legal or constructive
obligation as a result of a past event, and it is probable that an outflow of economic
benefits will be required to settle the obligation. If the effect is material, provisions are
determined by discounting the expected future cash flows at a pre-tax rate that reflects
current market assessments of the time value of money and, where appropriate, the risks
specific to the liability.
A provision for estimated standard warranty costs is recognized in the period in which the
related product sales occur. An accrual for warranty costs is recognized based on the
Group’s historical experience on previous deliveries of aircrafts. Estimates are adjusted as
necessary based on subsequent experience.
Current tax expense is the expected tax payable on the taxable income for the year, using
tax rates enacted or substantively enacted at the balance sheet date, and any adjustment
to tax payable in respect of previous years.
Deferred tax is provided using the balance sheet liability method, providing for temporary
differences between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for taxation purposes. The following temporary differences
are not provided for: goodwill; initial recognition of assets or liabilities that affect neither
accounting nor taxable profit; and investments in subsidiaries where the Parent Company
is able to control the timing of the reversal of the temporary difference and it is probable
that the temporary difference will not reverse in the foreseeable future. The amount of
deferred tax provided is based on the expected manner of realization or settlement of the
carrying amount of assets and liabilities, using tax rates enacted or substantively enacted
at the balance sheet date.
A deferred tax asset is recognized only to the extent that it is probable that future taxable
profits will be available against which the asset can be utilized. Deferred tax assets are
reduced to the extent that it is no longer probable that the related tax benefit will be
realized.
(q) Revenues
The operations of the Group principally consist of building aircraft under fixed-price
contracts. Revenues under such contracts are recognized on a percentage of completion
basis, measured by the ratio of total direct materials, labour, and design and development
costs incurred to date relative to the total estimated respective costs on the contract. This
method is used as the management of the Group considers this to be the best available
measure of progress on the contracts. Marketing costs that are incurred for a specific
contract may be included in contract costs, but only if these costs can be directly
associated with a specific contract and if their recoverability from that contract is probable.
Provisions for estimated losses on uncompleted contracts, if any, are made in the period in
which such losses are determined. Changes in job performance, contract conditions, and
estimated profitability, including those arising from contract penalty provisions, if any, and
final contract settlements may result in revisions to costs and income and are recognized in
the period in which the revisions are determined.
Revenue from the sale of goods is recognized in the income statement when the significant
risks and rewards of ownership have been transferred to the buyer.
(s) Expenses
(i) Operating leases
Payments made under operating leases are recognized in the income statement on a
straight-line basis over the term of the lease. Lease incentives received are recognized in
the income statement as an integral part of the total lease payments made.
Interest income is recognized as it accrues, taking into account the effective yield on the
asset. For investments in associates, dividend income is included in the determination of
the carrying amounts of the investments in associates. For investments in other
companies, dividend income is recognized on the date that the dividend is declared.
• In the income statement, the minority interest share in the results of subsidiaries is
no longer added or subtracted in arriving at the Group’s net profit (loss) for the
period. Instead it is presented as an allocation of the Group’s net profit (loss) for the
period.
• In the balance sheet, minority interests are presented as a separate component of
equity rather than being presented between equity and liabilities. As a result, the
statement of changes in equity shows the movement in minority interests during the
period.
• Comparatives were restated to reflect these changes.
(ii) Investments
In accordance with revised IAS 3 9 Financial Instruments: Recognition and Measurement
comparatives have been restated to reflect the revised classification, but there has been no
affect on the Group’s financial position or results of operations. In accordance with the
specific transitional provisions in IAS 3 9, there was no requirement for the Group to have
designated such investments as at fair value through profit and loss at the date of initial
recognition.
The acquisition of the subsidiary had the following effect on the Group’s assets and
liabilities at the date of acquisition:
Pre-
acquisition
Recognized
carying Fair value
fair value on
amount on a adjustment
acquisition
comparable ’000 USD
’000 USD
IFRS basis
’000 USD
Property, plant, and equipment 32,369 16,572 48,941
Intangible assets 943 36,262 37,205
Investments 609 – 609
Inventories 914 – 914
Trade and other receivables 15,110 – 15,110
Cash and cash equivalents 219 – 219
Loans and borrowings (18,591) – (18,591)
Deferred tax liabilities (3,913) (12,680) (16,593)
Trade and other payables (9,626) – (9,626)
Net identifiable assets, liabilities, and contingent
18,034 40,154 58,188
liabilities
Minority interest (23,714)
Revaluation reserve (17,741)
Investment in associate (8,075)
Excess of net assets acquired over cost (3,135)
Consideration paid 5,523
Cash acquired (219)
Net cash outflow 5,304
In allocating the cost of acquisition to the underlying assets, liabilities, and contingent
liabilities of the subsidiary, it was not possible to measure reliably the fair value of the
contingency in relation to taxation – see note 24 (c).
(b) Disposal of OAO “NII Izmerenia”
In 2005, the Group disposed of all 98% shares in OAO “NII Izmerenia” to a related party.
The proceeds from disposal approximated the carrying value of the company’s net assets,
which were mainly represented by a building with the carrying value of USD 10,791
thousand and a deferred tax liability of USD 1,250 thousand.
5 Revenues
2005 2004
’000 USD ’000 USD
Revenue earned on military aircraft construction contracts 474,226 463,678
Revenue earned on civil aircraft construction contracts 37,931 22,345
Revenue on sales of aircraft components and related products 125,835 111,339
Other revenues 73,700 24,490
711,692 621,852
The Group’s manufacturing activities are in Russia and substantially all of its revenues are
derived from export to one market. Therefore no geographical segment information is
presented.
6 Personnel Expenses
2005 2004
’000 USD ’000 USD
Wages and salaries 81,477 59,361
Compulsory social security contributions 20,501 17,944
101,978 77,305
2005 2004
’000 USD ’000 USD
Impairment of capitalized development costs (note 11(a)) 17,063 –
Social costs 7,054 7,919
Loss on disposal of property, plant, and equipment 2,235 3,917
Excess of net assets acquired over the consideration given
(3,135)
(note 4(a))
Impairment of loans given and bad debts (446) 3,917
Other operating income and expenses, net 19,618 7,063
42,389 22,691
2005 2004
’000 USD ’000 USD
Interest income (3,006) (1,961)
Government grant related to compensation of interest expense (7,448) –
Interest expense 57,630 60,037
Foreign exchange loss (8,069) 2,795
Income from investments (578) (122)
38,529 60,749
2005 2004
’000 USD ’000 USD
Current tax expense
Current year 3,495 13,812
Deferred tax benefit
Origination and reversal of temporary differences 27,888 10,005
Change in recognized deferred tax assets (4,088) (3,574)
23,800 6,431
27,295 20,243
The Group’s applicable tax rate is the corporate income tax rate of 24% (2004: 24%).
2005 2004
% %
’000 USD ’000 USD
Profit before tax 110,972 100 87,511 100
Income tax at applicable tax rate 26,633 24 21,003 24
Non-deductible/non-taxable items, net 4,750 5 2,814 3
Change in recognized deferred tax assets (4,088) (4) (3,574) (4)
27,295 25 (20,243) 23
(a) Security
Property, plant, and equipment with a carrying amount of USD 20,462 thousand (31
December 2004: USD 12,876 thousand) is pledged as collateral for secured loans (see
note 19).
11 Intangible Assets
Development Other
’000 USD Total
costs intangibles
Cost
At 1 January 2004 36,974 2,762 39,736
Additions through business combinations 47,493 184 47,677
Other additions 5,485 687 6,172
Disposals – (42) (42)
Foreign exchange differences 1,317 5 1,322
At 31 December 2004 91,269 3,596 94,865
Additions through business combinations 36,262 943 37,205
Other additions 19,060 947 20,007
Disposals – (275) (275)
Impairment (17,063) – (17,063)
Foreign exchange differences (3,027) (42) (3,069)
At 31 December 2005 126,501 5,169 131,670
Amortization
At 1 January 2004 (219) (1,213) (1,432)
Amortization charge (219) (438) (657)
Foreign exchange differences – (1) (1)
At 31 December 2004 (438) (1,652) (2,090)
Amortization charge (218) (511) (729)
Foreign exchange differences – 1 1
At 31 December 2005 (656) (2,162) (2,818)
Net book value
At 31 December 2004 90,831 1,944 92,775
At 31 December 2005 125,845 3,007 128,852
Be-200 and Yak-130 development projects are not yet completed and therefore the related
intangibls assets are not amortized. The amortization will commence when the Group will
start production of the assets which is planned for 2006 – 2025.
(a) Impairment
In 2005, the Group revised its plans in relation to the future production of assets under
development and ceased the development projects. As a result of this revision, the carrying
amount of the capitalized development expenditure was written down by USD 17,063
thousand. The revision is caused by commencement of new development projects, which
will replace the current products. The new development projects not yet satisfy the
capitalization criteria in IAS 3 8 Intangible assets.
2005 2004
’000 USD ’000 USD
Non-current
Available-for-sale investments, stated at cost 13,936 20,553
Other non-current financial assets 294 305
14,230 20,858
Current
Investments designated at fair value through profit and loss 21,837 438
In December 2005, the Group disposed of 5,000,000 shares of OAO “AKB Rosbank”
(“Rosbank”) for USD 4,946 thousand to a related party. The carrying value of Rosbank’s
shares was USD 5,648 thousand. The loss on disposal of the shares was recognized in the
income statement for the year ended 31 December 2005.
14 Inventories
2005 2004
’000 USD ’000 USD
Advance payments to suppliers 74,728 32,808
Raw materials and other supplies 40,116 33,431
Aircraft components 47,550 28,613
Amounts due from customers for contract work 553,361 213,400
Other work in progress 22,297 11,016
738,052 319,268
Advance payments received (197,685) (59,728)
540,367 259,540
2005 2004
’000 USD ’000 USD
Accounts receivable – trade 51,752 91,919
Allowance for doubtful accounts (686) (644)
51,066 91,275
VAT recoverable 113,720 99,940
Due from tax authorities (refer to note 24 (b)) 7,737 23,827
Prepaid taxes 871 1,047
Other receivables and originated loans 16,006 20,053
189,400 236,142
2005 2004
’000 USD ’000 USD
Bank balances, Russian roubles 64,224 86,431
Bank balances, US Dollars 44,111 28,544
108,335 114,975
17 Equity
At 31 D ecember 2005 authorized, issued, and fully paid capital stock consisted of
978,131,612 ordinary shares. All ordinary shares have a nominal value of Russian roubles
3 each.
Due to the fact that the Parent Company had a loss in the statutory financial statements
prepared in accordance with the laws of the Russian Federation for the year ended 31
December 2005, the Board of Directors proposed not to distribute any dividends for 2005.
The following dividends for 2004 and 2003 have been declared at the Company’s annual
shareholders’ meetings:
24 June 26 June
2005 2004
Amount per share, RUR 0.10 0.04
Amount per share, USD 0.0035 0.0014
Total amount, ‘000 USD 3,071 1,090
The calculation of earnings per share is the net profit for the year divided by the weighted
average number of ordinary shares (see note 17 (a)) outstanding during the year,
calculated as shown below. The Group has no dilutive potential ordinary shares.
Number of shares 2005 2004
Issued ordinary shares at 1 January 878,946,528 791,051,875
Effect of ordinary shares issued in November (2004: March) 16,530,847 65,920,990
Weighted average number of ordinary shares at 31 D ecember 895,477,375 856,972,865
This note provides information about the contractual terms of the Group’s loans and
borrowings.
2005 2004
’000 USD ’000 USD
Non-current
Secured bank loans 355,304 249,949
Unsecured bank loans 59,514 –
Unsecured bond issue 114,326 –
529,144 249,949
Current
Secured bank loans 9,820 24,412
Unsecured bank loans 24,058 10,797
Current portion of non-current secured bank loans 16,000 178,123
Current portion of non-current unsecured bank loans 23,512 –
Current portion of unsecured bond issue – 57,209
Other loans 2,491 1,690
75,881 272,231
(a) Security
The loans are secured over Property, plant, and equipment with a carrying amount of
USD 20,462 thousand (31 December 2004: USD 12,876 thousand) and the right to receive
future revenues under an agreement with a foreign government.
Under 1 1–5
’000 USD Total
year years
Secured bank loans:
RUR – fixed at 9 – 11% 19,468 9,820 9,648
USD – fixed at 9 – 11% 189,008 16,000 173,008
USD – variable at 6 – 8% 172,648 – 172,648
Unsecured bank loans:
USD – variable at 10% 83,026 23,512 59,514
USD – fixed at 10% 24,058 24,058 –
Unsecured bond issues:
RUR – fixed at 9% 114,326 – 114,326
Other loans 2,491 2,491 –
605,025 75,881 529,144
For more information about the Group’s exposure to interest rate and foreign currency risk
see note 22.
2005 2004
’ ’000 USD ’000 USD
Accounts payable – trade 126,873 134,133
Income and other taxes payable 10,144 35,572
Accrued expenses 20,982 6,646
Advances from customers 16,869 2,900
Other payables 7,524 7,105
182,392 186,356
21 Provisions
2005 2004
’000 USD ’000 USD
Balance at 1 January 2005 9,830 6,933
Provisions made during the year 3,906 6,611
Provisions used during the year (2,311) (3,084)
Provisions reversed during the year (2,592) (630)
Balance at 31 December 2005 8,833 9,830
The Group provides product warranties in conjunction with certain product sales.
Generally, aircraft sales are accompanied by a twelve to eighteen month warranty period
that covers systems, accessories, equipment, parts, and software manufactured by the
Group to certain contractual specifications. Warranty coverage includes non-conformance
to specifications and defects in material and workmanship.
The warranty liability recorded at each balance sheet date reflects the estimated number of
months of warranty coverage outstanding for products produced times the expected
monthly warranty payments, as well as additional amounts, if necessary, for certain major
warranty issues that exceed a normal claims level.
22 Financial Instruments
Exposure to credit, interest rate, and currency risk arises in the normal course of the
Group’s business.
The maximum exposure to credit risk is represented by the carrying amount of each
financial asset in the balance sheet.
In other cases fair value has been determined either by reference to the market value at
the balance sheet date or by discounting the relevant cash flows using market interest
rates for similar instruments. As a result of this exercise management believes that the fair
value of its financial assets and liabilities approximate their carrying amount except in the
following instance:
Carying Carying
Fair Fair
’000 USD amount amount
value 2005 value 2004
2005 2004
Unsecured bond issues (note 19) 114,326 112,916 57,209 59,312
23 Commitments
24 Contingencies
(a) Insurance
The insurance industry in the Russian Federation is in a developing state and many forms
of insurance protection common in other parts of the world are not yet generally available.
The Group does not have full coverage for its plant facilities, business interruption, or third
party liability in respect of property or environmental damage arising from accidents on
Group property or relating to Group operations. Until the Group obtains adequate
insurance coverage, there is a risk that the loss or destruction of certain assets could have
a material adverse effect on the Group’s operations and financial position.
(b) Litigation
The Group is involved in a number of disputes with tax authorities. Based on results of the
tax audits for 2000 – 2002 tax authorities claimed additional tax payments and deducted
the amount from the Company’s bank account. The Company successfully defended its
position in court and certain tax claims have been dismissed. However, the tax authorities
appealed and, until the case is finally resolved, the tax authorities do not return cash to the
Company’s bank account. As of 31 December 2005 the amount due from the tax
authorities, included in the line “Trade and other receivables” of the consolidated balance
sheet, was USD 7,737 thousand (2004: USD 23,827 thousand).
These circumstances may create tax risks in the Russian Federation that are substantially
more significant than in other countries. Management believes that it has provided
adequately for tax liabilities based on its interpretations of applicable Russian tax
legislation, official pronouncements, and court decisions. However, the interpretations of
the relevant authorities could differ and the effect on these consolidated financial
statements, if the authorities were successful in enforcing their interpretations, could be
significant.
Based on results of the tax audits for 2003 – 2004, tax authorities claimed additional tax
payments of USD 10,320 thousand. Management believes that the probability of the
outflow of economic resources as a result of these claims is less than probable. In addition,
the tax authorities rejected to refund input VAT of USD 51,180 thousand related to export
deliveries on the basis that the Group did not submit full set of the required documentation.
The amount is recorded included in the line “Trade and other receivables” of the
consolidated balance sheet. Subsequent to the balance sheet date, management of the
Group submitted outstanding documents and, therefore, believes that the refund will be
accepted.
The majority of the Parent Company’s shares are controlled by certain representatives of
the Group’s key management. However, none of them is the ultimate controlling party.
2005 2004
’000 USD ’000 USD
Wages and salaries 1,405 818
Compulsory social security contributions 78 58
1,483 876
Outstanding Outstanding
Transaction Transaction
’000 USD balance balance
value 2005 value 2004
2005 2004
Acquisition of capitalized
1,182
development costs
Sales of test planes 11,869
Sales of development services 17,682 5,745
Acquisition of design and
(3,292) (18,196) (35,905) (39,398)
development
Accounts receivable – trade 6,078
Other receivables and originated
4,167 7,367
loans
Other payables (1,282)
26 Significant Subsidiaries
In addition, the Group has other subsidiaries, which are not material to the Group, either
individually or in aggregate.
In March 2006, the Group issued USD 125 million credit linked notes, maturing in 2009.
The Group will make semi-annual interest coupon payments at 8.25% interest rate.
Contacts
Investor Relations:
Tel./Fax: +7 (495) 777 2101
E-mail: [email protected]
Public Relations:
Tel./Fax: +7 (495) 777 2101
E-mail: [email protected]
Registrar:
OJSC «Registrator «R.O.S.T.»
18/13 Stromynka st., Moscow, 107996, Russia
Tel.: +7 (495) 771 7333
Independent Auditors:
KPMG Limited
11 Gogolevsky Boulevard, Moscow 119019, Russia
Tel.: +7 (495) 937 4477
Fax: +7 (495) 937 4400
For further information about Irkut Corporation, please, see corporate web-site
www.irkut.com. To order additional copies of this Annual Report and other corporate or
financial documents, please, contact Investor Relations Department at +7 (495) 777 2101