Magellan Aerospace Corporation
Annual Report 2001

Plain-text annual report

Strength in Integration M a g e l l a n 2 0 01 A n n u a l R e p o r t 2 0 0 1 Magellan Magellan Aerospace Corporation is a leading, integrated supplier of innovative products and services to the aero- space, defence and space industries around the globe. Magellan enjoys strong relationships with Original Equipment Manufacturers (OEMs), space, civil and defence organizations and is recognized by its customers for its innovative technology, product design, quality manufac- turing and total program solutions. 1 Corporate Message 2 4 6 8 Financial Highlights Strength in Diversity of Capabilities Strength in Diversity of Products Strength in Diversity of Markets 10 Message to Shareholders 17 Management’s Discussion and Analysis 20 Management’s Report 20 Auditors’ Report 21 Consolidated Financial Statements 35 Board of Directors and Officers 36 Operating Facilities Directory IBC Shareholder Information A prime supplier of aeroengine products and services for the world’s leading commercial aeroengine manufacturers. A diversified supplier of aerostructure products and services to a broad international customer base in the civil, defence and space markets. A vital supplier of specialized products to the global space and defence markets. A key source of technically advanced solutions for the specialized requirements of customers in the aerospace, medical, power and oil & natural gas industries. Customers Products 2001 Achievements • Aircelle • Hurel-Hispano • General Electric • Honeywell • Pratt & Whitney • Rolls-Royce • DND • US DoD • Bell Helicopter • Goodrich • Boeing • Bombardier • Eurocopter • Northrup Grumman • Westland Helicopters • Southwest Airlines • Continental Airlines • Disks, Shafts, Spacers & Rings • Bypass Ducts & Nacelle Components • $60 million F404 engine R&O contract • $120 million & $36 million • Cases, Combustors, Frames & P&WC Agreements Fairings • Nozzle & Plug Assemblies • Engine Repair & Overhaul (R&O) & test • Honeywell LV100-5 engine components • Composite and metal • $15 million Northrop Grumman assemblies & components • Flap & Aileron assemblies • Wing & fuselage panels • Machined wing & landing gear components • Fan cowl doors • Aircraft bulkheads contract for F/A –18E/F structural components • Shipped first flying test bed titanium aft nozzle for Airbus A318 program • Awarded $400 million contract for Boeing 717-200 aircraft structural assemblies • CSA • NASA • Various defence organizations • Boeing • Lockheed Martin • Insys • Space & defence rocket systems • Space hardware, payloads & small satellites • Rocket engine thrust gimbals • Cryogenic seals • Awarded contract to supply dorsal fins to Raytheon for Standard Missile-2 Block IVA Navy Area Defence Missile • Siemens Westinghouse • Rolls-Royce • General Electric • Oil & natural gas drilling companies • General and Utility Aviation • Helicopter OEMs & operators • 0E600 engines & installation packages • Wire Strike Protection System (WSPS™) • Biomedical and lithography assemblies • Industrial turbine power systems & overhaul • Commissioned first OGT2500 Industrial Gas Turbine power generation unit • Agreement signed with Siemens Westinghouse to supply Compressor Diaphragms • Hongdu, China Agreement for OE600 engines • Materials technology & repair • Oil & natural gas drilling heads • FAA OE600 Certification (STC) for Air Tractor 401 1 1 0 0 2 t r o p e R l a u n n A n a l l e g a M S t r e n g t h i n I n t e g r a t i o n Magellan Aerospace Corporation designs, engineers and manufac- tures aeroengine and aerostructure assemblies for civil aerospace, and advanced products for military, space and power markets, blending operations, supplier management, marketing, and product develop- ment across all operating divisions. 2 1 0 0 2 t r o p e R l a u n n A n a l l e g a M Financial Highlights FINANCIAL HIGHLIGHTS (in thousands of dollars except per share figures) Revenues Income for the year Earnings per share EBITDA EBITDA per share Capital expenditures Shareholders' equity Cash provided by operating activities STRENGTH IN OUR BALANCE SHEET 2001 2000 $ 614,461 40,564 0.62 92,906 1.41 32,369 318,561 65,908 $ 625,393 37,913 0.59 98,237 1.52 28,044 272,260 52,959 Percentage Change -1.7% +7.0% +5.1% -5.4% -7.2% +15.4% +17.0% +24.5% $ 350,000 300,000 250,000 200,000 8 2 1 , 5 8 1 0 6 2 , 2 7 2 6 3 5 , 8 2 2 150,000 100,000 50,000 0 $ 250,000 1 6 5 , 8 1 3 3 0 2 , 9 3 2 3 0 1 , 0 2 2 200,000 4 4 0 , 1 5 1 150,000 100,000 50,000 0 60% 1 4 1 , 7 9 1 50% % 6 4 % 1 5 % 5 4 % 8 3 40% 30% 20% 10% 0% 8 9 9 1 9 9 9 1 0 0 0 2 1 0 0 2 8 9 9 1 9 9 9 1 0 0 0 2 1 0 0 2 8 9 9 1 9 9 9 1 0 0 0 2 1 0 0 2 Shareholders' Equity Total Debt Debt: Capital Financial Highlights 3 1 0 0 2 t r o p e R l a u n n A n a l l e g a M STRENGTH IN OUR INCOME STATEMENT $ 700,000 600,000 500,000 400,000 300,000 200,000 100,000 0 3 9 3 , 5 2 6 1 6 4 , 4 1 6 9 2 8 , 1 6 5 2 4 9 , 6 2 4 8 9 9 1 9 9 9 1 0 0 0 2 1 0 0 2 $ 45,000 $ 0.7 4 6 5 , 0 4 3 1 9 , 7 3 9 7 8 , 0 3 9 9 9 1 0 0 0 2 1 0 0 2 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 2 0 8 , 0 2 ) d e t a t s e r ( 8 9 9 1 2 6 . 0 9 5 . 0 9 4 . 0 9 9 9 1 0 0 0 2 1 0 0 2 0.6 0.5 0.4 0.3 0.2 0.1 0 5 3 . 0 ) d e t a t s e r ( 8 9 9 1 Revenues Net Income Earnings per Share 4 1 0 0 2 t r o p e R l a u n n A n a l l e g a M >> 5 1 0 0 2 t r o p e R l a u n n A n a l l e g a M >> Computer Numeric Control (CNC) 6-Axis Laser Drilling System for aeroengine and aerostructure products. Engineering applies design and manufacturing expertise to convert customer requirements into a manufacturing process. Automated filling of flare canisters with pyrophoric liquid in vacuum conditions. In-house processes such as vacuum furnaces for heat-treat reduce flow time and control quality and cost. Aftermarket product support provides value to our customers and diversity to our product base. Strength in Diversity of Capabilities Magellan has the size, scope and strategically located facilities to serve a diversity of specialized markets worldwide. Each of our operating facilities has developed core competencies and capabilities in machining, composite, joining and other materials technologies that are industry leading; yet all are completely integrated to gain maximum enterprise-wide leverage from our individual strengths. 6 1 0 0 2 t r o p e R l a u n n A n a l l e g a M >> 7 1 0 0 2 t r o p e R l a u n n A n a l l e g a M OGT 2500 industrial power generation unit for conventional and biofuel applications. Fan Cowl Doors designed and developed in-house for airline aftermarket applications. EH101 helicopter carbon fibre composite Engine Cowling in production. CF34-10 Fan Case with abradable surface coating for increased fan blade efficiency. Strength in Diversity of Products Magellan’s strength in product development and process control – including engines, structures, rocket systems, space systems and related products -- brings three substantial benefits. It makes us the supplier of choice for Original Equipment Manufacturers and space and defence organizations worldwide. It insulates Magellan from aerospace business fluctuations. It facilitates further diversity and new market penetration at little cost or risk. >> GyroWheel™ multi-function attitude control device for satellite applications. 8 1 0 0 2 t r o p e R l a u n n A n a l l e g a M >> 9 1 0 0 2 t r o p e R l a u n n A n a l l e g a M Strength in Diversity of Markets Magellan is an industry leader in a diversity of markets worldwide. Our global reach and reputation for delivering products and services of the highest quality enable Magellan to fully participate in an expanding aerospace industry while mitigating the effects of short- term economic cycles. Diverse market strength brings assured financial strength – and Magellan has both. Business and Regional Jet markets for aeroengine and aerostructure products. Defence Departments worldwide for products and aftermarket services. Domestic and international Space customers for small satellites, payloads and launchers. Oil, Natural Gas, and Medical equipment industries for derivative products. >> A machined combustor assembly for an Industrial Power Generation customer. Message to Shareholders 10 1 0 0 2 t r o p e R l a u n n A n a l l e g a M N. Murray Edwards Chairman and Chief Executive Officer Richard A. Neill President and Chief Operating Officer Message to Shareholders 11 1 0 0 2 t r o p e R l a u n n A n a l l e g a M Tough year, solid performance, strong potential – six simple words that sketch Magellan’s 2001. But the complete picture is much more compelling and clearly reveals a brighter tomorrow. S t r e n g t h i n I n t e g r a t i o n Who could have predicted the appalling events of last September? Who could have predicted the consequent near-catastrophic collapse of the commercial airline industry? In last year’s message to shareholders, we reported on Magellan’s strong financial foundation, our ability to identify and integrate key aerospace manufacturing facilities, the diversity of our products, and our expanding leadership in aerospace markets around the globe. We confidently predicted that Magellan would grow with our customers in an air travel market with an expected annual growth rate of 4–5% annually for the next 20 years. And then in one sudden and terrible moment, the world changed – and everybody’s predictions became so much scrap paper. Yet, during what was arguably one of the most difficult and depressed years in the history of the aerospace industry, Magellan’s fundamental strengths insulated us from the precipitous decline in the commercial airline market and motivated a solid financial performance. These same strengths will continue to underpin our financial vigour and corporate growth in the near term and ensure Magellan retains and expands our market leadership well into the future, regardless of cycles in individual aerospace sectors or the broader economy. These predictions we can make with confidence because of Magellan’s critical strengths in six key areas. Message to Shareholders 12 1 0 0 2 t r o p e R l a u n n A n a l l e g a M 1. Strength in Our Financial Foundation Events in the commercial aerospace sector, caused by the combination of current economic conditions and the September 11th disaster, impacted the results for the quarter and year ended December 31, 2001. In the immediate term, widespread logistics and transportation problems interrupted the supply chain and added costs. From early in 2001 to year-end and extending into 2002, the general slowdown in the economy and the significant impact on air travel and the airlines has resulted in reduced demand for certain civil aviation products. The Corporation has been able to restore efficiencies and replace some of the civil aviation reductions with defence work, mitigating the impact on revenue and profits. These 2001 results, although obviously affected by the current economic slowdown, deliver bottom-line proof that Magellan is a strong, integrated organization capable of sustained corporate and financial growth, even in difficult markets. In short, Magellan has emerged from the airline industry slowdown financially strong, well positioned to continue meeting the challenges that face our industry, and with the resources to grow rapidly as market trends dictate. 2. Strength in Integration The Corporation’s strategic growth plan and our track record in identifying, acquiring and rapidly integrating key aerospace industry manufacturing facilities proved its worth during the recent crises. Integration was quite simply the right strategy at the right time. S i z e M a t t e r s New customers in Europe and Asia liked the technology and efficiency of our individual plants.At the same time, they wanted assurances of financial stability over the long term. Magellan was able to demonstrate that customers could have the benefits of both small plant efficiencies and large company financial strength in Magellan.We won the orders. With integration, the sum is greater than its parts. It brings synergies and benefits to our customers by allowing Magellan to provide a more complete package. It promotes cross- pollination of core competencies. It combines with market and product diversity to insulate Magellan from market cycles. And the integration of key activities, such as purchasing and marketing, continues to improve our gross margins. 3. Strength in Strategic Diversity and Market Leadership Strategic product diversity allows Magellan to weather expected and unexpected market cycles. For example, as the commercial airline sector diminished, the defence sector expanded. As the supplier of choice for many military-oriented products and services, Magellan’s business also expanded in this sector. And with defence budgets continuing on the upswing – Message to Shareholders 13 1 0 0 2 t r o p e R l a u n n A n a l l e g a M Commercial Defence 64% 36% especially in the U.S. – we are well positioned to enjoy increased business in this sector over the next few years. New opportunities in the defence sector will lead to the development of products and services that can be applied to the commercial sector when it rebounds. Sales in 2001 were well distributed across commercial and defence markets. Bus Jet Turboprop Reg Jet Single Aisle Twin Aisle Other Commercial Engine Parts R&O Services Rockets & Space Structural Other Defence 8% 4% 23% 39% 21% 6% 18% 27% 22% 29% 3% Our market leadership has brought with it strong relationships with the leading aerospace manufacturers. Our financial strength also allows us to balance market risk with competitive risk by entering into long-term contracts like these: • Boeing – 5 year Long Term Agreement (LTA) • Honeywell – Risk/Revenue Sharing Agreement (RSA) and LTA’s • Aircelle/Airbus – RSA, joint product development • Bombardier – RSA, joint product development • Pratt & Whitney Canada – 4–10 year LTA’s • General Electric – Licensed production • Rolls-Royce – RSA O u r C u s t o m e r s a r e O u r S a l e s m e n One of our existing clients recently recommended us to a new customer as an excellent source for specific engine components.We were praised for our reliability, quality and delivery performance.We bid the program and won on price and delivery time. 4. Strength in Global Reach Magellan has the operational scope to service customers around the globe and enhances our global reach with strong and current knowledge of individual markets. Our traditionally strong base in the United States and Canada provides a broad range of customers for our products. Increasingly, these markets are being supplemented by the development of new customers in the United Kingdom, Europe, Australasia and some emerging countries. This diversity provides a balance of economic conditions across our customer base. Message to Shareholders 14 1 0 0 2 t r o p e R l a u n n A n a l l e g a M 5. Strength in Continuous Improvement and Quality Magellan continues our active program of simplifying operations to achieve improved effectiveness, while reducing cost through Lean Operations. For Magellan, Lean encompasses the traditional shop floor Lean Manufacturing focus and much more. All aspects of our operations, including order entry, purchasing, engineering, finance and marketing, adhere powerfully to the principles of Lean – and the real business strength of our dedication to Lean Operations is increasingly evident in both our bottom line results and high levels of customer satisfaction. Lean will become even more integral to our operating efficiency and quality improvements as we move into the future. I n n o v a t i o n a n d E n v i r o n m e n t a l S t e w a r d s h i p Magellan received the Corporate Innovation Award for 2001 from the Canada Council of the American Society for Materials (ASM) International, presented in Indianapolis in November 2001. Magellan was also a finalist in the Flight International Aerospace Industry Awards for Innovation, Propulsion category, presented in Paris in June 2001. Magellan also earned an award from Canada’s National Action Program on Climate Change for the monitoring and reduction of green house gases. Ongoing environmental efforts include programs to monitor and restore ground water quality, development of engines capable of running on biofuel, deployment of energy efficient co-generation industrial power sets, contribution to the development of low-emission industrial power engines, and development of environmentally friendly coating technologies for turbine engines. Magellan’s operating divisions are renowned for their product quality and with the Six Sigma program of proven quality principles and cost reduction techniques, we strive to consistently raise the accuracy of our manufacturing and transactional processes to achieve and maintain total customer satisfaction. Six Sigma and Lean Operations are only two elements in our strong investment in training, education and continuous improvement. To date, over 200 of our employees have achieved Six Sigma green/black belt status or Lean Operations training. On the management side, 43 of our management group have taken advantage of the Rothman’s School of Business executive MBA program (University of Toronto) or the Canadian Institute of Management program (University of Manitoba). Magellan continues to invest to enhance the manufacturing capabilities of our plants. In 2001, we: • Invested $30 million in plant and equipment and $15 million in new programs. • Invested in new program development in Aerostructure and Specialty Products. • Undertook customer-funded and co-funded program developments in Aeroengine and Rockets and Space. Message to Shareholders 15 1 0 0 2 t r o p e R l a u n n A n a l l e g a M e t u n i M r e p t e e F e c a f r u S 2500 2000 1500 1000 500 0 m u i n a t i T l e e t S 0 4 3 4 X y o l l e t s a H s s e l n i a t S 0 0 4 Materials High Speed Conventional S p e e d E q u a l s S u c c e s s A new program to produce landing gear components was won in 2001 because of our rapid response to the customer’s requirement, our willingness to meet tight delivery dates, and our ability to handle all technical information electronically. Capital investment, product development, technical development and personnel training and education, plus a firm commitment to prudent financial resource management, keep us competitive in all our markets and set the stage for growth in returns as the economic recovery broadens. 6. Strength in Core Competencies Magellan has developed core competencies that are industry leading and have enabled us to create a breadth of products and services much in demand by our aerospace customers. During 2001, we continued to leverage these core competencies in some very innovative ways: • High Velocity Machining (HVM) – a multi-year research and development program, in conjunction with Technology Partnerships Canada, focussed on the implementation of high velocity cutting techniques for hard metals such as titanium, stainless steels and super alloys. • Latest metal processing – Computer Numeric Control (CNC) 6-axis laser drilling and welding, electronic discharge machining (EDM), metallurgic laboratories for test, and research and development of metallic coatings. • Composite – CNC laser ply locating, CNC ply and core cutting, CNC 5-axis trimming and ultra-sonic inspection. C u t t i n g C o s t s a n d T i m e Our High Velocity Machining (HVM) program has achieved impressive results in increasing the cutting velocity, condensing the overall machining cycle, and developing high velocity cutting techniques for thin wall monolithic structures for hard metals – thus reducing production costs and manufacturing time while delivering a superior product. Our core competencies have also allowed us to diversify and penetrate new markets at little cost or risk yet with the potential for strong and continuing financial returns – for example: • Industrial Power/Co-generation. • Oil and natural gas equipment. • Space hardware. 16 1 0 0 2 t r o p e R l a u n n A n a l l e g a M Message to Shareholders Strength for a Brighter Tomorrow Even through the recent challenging times faced by the aerospace sector, Magellan stayed the course to achieve our mission: To deliver assured, long-term growth and returns to our shareholders and other stakeholders. Because of our essential financial strength, we were able to sustain our growth and development in ways that enhance our position as one of the world’s leading aerospace suppliers: • We are continuing to invest in new technologies such as high velocity machining, composite structures, exotic materials processing, and environmentally friendly product improvements. • We are continuing the implementation of state of the art plant equipment and new information technology. • Several new product development programs are either underway, or will be launched in 2002. Our strategy of constant product and service diversification protects the Corporation against aerospace business fluctuations. The commercial airline sector is returning to normal at a faster than expected pace – led by the robust regional and value airlines that are already placing orders for additional aircraft. Older generation aircraft will be replaced by new generation aircraft. As this sector emerges from the downturn, we intend to grow with our customers in the provision of new and replacement aircraft assemblies, engines and related services. In 2001, we maintained a conservative financial strategy that further strengthened our balance sheet. As a consequence, Magellan is well positioned to seek strategic acquisitions that complement and extend our integrated offerings in niche markets – and we will do so in the near future. We will also continue to grow organically by leveraging our core competencies to develop a wider range of products and services for the markets we know intimately. There’s no doubt that 2001 was a tough year. But, even in the face of adversity, Magellan achieved solid performance and made significant strides toward a brighter tomorrow. We thank Magellan’s employees for their dedication, professionalism and quality of production. Individually and collectively they are Magellan’s first in rank strength and the true foundation of our success. N. Murray Edwards Richard A. Neill Chairman and Chief Executive Officer President and Chief Operating Officer March 28, 2002 17 1 0 0 2 t r o p e R l a u n n A n a l l e g a M MD&A and Financial Statements 18 Management’s Discussion and Analysis 20 Management’s Report 20 Auditors’ Report 21 Consolidated Financial Statements 35 Board of Directors and Officers 36 Operating Facilities Directory IBC Shareholder Information 18 1 0 0 2 t r o p e R l a u n n A n a l l e g a M MANAGEMENT’S DISCUSSION AND ANALYSIS Magellan Aerospace Corporation (“Magellan”) is a diversified supplier of components to the aerospace industry. Through its network of facilities throughout North America, Magellan supplies the leading aircraft manufacturers, airlines and defence agencies throughout the world. Magellan’s performance in 2001 showed growth in earnings and shareholders’ equity, strengthening its ability to serve the world aviation market. Year ended December 31, 2001 compared with the year ended December 31, 2000 Consolidated revenue for the year ended December 31, 2001 was $614.5 million, a decrease of $10.9 million or 1.7% from 2000 levels. The decrease resulted from a combination of current economic conditions and the aftermath of the September 11th disaster. Cost of revenues was $502.7 million for the year ended December 31, 2001, for a gross profit of $111.8 million or 18.2%. This compares to the gross profit of $115.7 million or 18.5% recorded in 2000. Lower sales, uncertain shipping schedules, and the Corporation’s manpower levels decreasing at a slower rate than sales contributed to lower margins. Administrative and general expenses were $39.4 million or 6.4% of revenues for the year ended December 31, 2001, compared to $35.5 million or 5.7% of revenues in 2000. Management continues to focus on minimizing these costs, however, intensified marketing efforts and increased employee costs have contributed to the increase in administrative and general expenses over the comparable period in the prior year. Interest expense of $11.3 million for the year ended December 31, 2001 was $8.4 million or 42.8% lower than 2000 levels. Interest expense was lower in 2001 as Magellan benefited from the significant reductions in borrowing rates and lower debt levels. Income tax expense was $19.5 million in 2001, on income before income taxes of $60.0 million for an effective tax rate of 32.4%. This rate includes an adjustment of $2.5 million recorded in the second quarter to reflect the effect of lower Canadian tax rates on the Corporation’s net future tax liabilities. In 2000, income tax expense was $21.7 million on pre- tax income of $59.6 million for an effective rate of 36.4%. Year ended December 31, 2000 compared with the year ended December 31, 1999 Consolidated revenue for the year ended December 31, 2000 was $625.4 million, an increase of 11.3% or $63.6 million over 1999 levels. The increase resulted from the inclusion of a full year of sales from Ellanef Manufacturing Corporation, which was acquired in the second quarter of 1999, and organic growth throughout the balance of the Corporation. Cost of revenues was $509.7 million for the year ended December 31, 2000, for a gross profit of $115.7 million or 18.5%. This compares favourably to the gross profit of $102.2 million or 18.2% recorded in 1999 and reflects the impact of “Six Sigma” and lean manufacturing techniques initiated throughout the Corporation. 19 1 0 0 2 t r o p e R l a u n n A n a l l e g a M MANAGEMENT’S DISCUSSION AND ANALYSIS Administrative and general expenses were $35.5 million for the year ended December 31, 2000, compared to $36.6 million in 1999. Management’s focus on minimizing these costs has resulted in a slight decline, in spite of overall business levels increasing. Interest expense was $19.7 million, which was an increase of 29.6% or $4.5 million over 1999 levels. The interest expense was higher in 2000 as this was the first full year of inclusion of the debt associated with the purchase of Ellanef, as well as the impact of higher interest rates. Income tax expense was $21.7 million in 2000, on income before income taxes of $59.6 million for an effective tax rate of 36.4%. In 1999, income tax expense was $19.1 million on pre-tax income of $50.0 million for an effective rate of 38.2%. The income tax rate decreased during 2000 because of reduction of provincial income tax rates as well as the use of capital loss carry-forwards applied to capital gains realized on the disposition of other assets. Liquidity and Capital Resources In 2001, the Corporation continued to generate an increasing amount of cash from operating activities when compared to 2000. Cash flow from operations was $65.9 million for the year, an increase of $12.9 million from the previous year. During the year ended December 31, 2001, the Corporation invested $32.4 million in new production equipment to modernize current facilities and to enhance its capabilities. The Corporation also used a total of $36.3 million of funds generated to reduce long-term debt. Management believes that adequate cash is available through internally generated liquidity and undrawn lines of credit to meet the Corporation’s working capital, program and capital investment, and debt servicing requirements. 20 1 0 0 2 t r o p e R l a u n n A n a l l e g a M MANAGEMENT’S REPORT The consolidated financial statements of Magellan Aerospace Corporation were prepared by management in accordance with accounting principles generally accepted in Canada. The financial and operating information presented in this report is consistent with that shown in the financial statements. Management maintains a system of internal controls to provide reasonable assurance that all assets are safeguarded and to facilitate the preparation of relevant, reliable and timely financial information. External auditors appointed by the shareholders have examined the consolidated financial statements. The Audit Committee, consisting of non-management directors, has reviewed these consolidated financial statements with management and the auditors and has reported to the Board of Directors. The Board approved the consolidated financial statements. Richard A. Neill (signed) President and Chief Operating Officer March 8, 2002 John B. Dekker (signed) Vice President Finance and Corporate Secretary AUDITORS’ REPORT To the Shareholders of Magellan Aerospace Corporation We have audited the consolidated balance sheets of Magellan Aerospace Corporation as at December 31, 2001 and 2000 and the consolidated statements of income and retained earnings and cash flows for the years then ended. These financial statements are the responsibility of the Corporation’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Corporation as at December 31, 2001 and 2000 and the results of its operations and its cash flows for the years then ended in accordance with Canadian generally accepted accounting principles. Mississauga, Canada, March 7, 2002 Ernst & Young (signed) Chartered Accountants 21 1 0 0 2 t r o p e R l a u n n A n a l l e g a M CONSOLIDATED BALANCE SHEETS As at December 31 (Expressed in thousands of dollars) Assets Current Cash and cash equivalents Accounts receivable Inventories (note 2) Prepaid expenses and other Future income tax assets (note 11) Total current assets Capital assets (note 3) Goodwill Other Future income tax assets (note 11) Liabilities and Shareholders’ Equity Current Bank indebtedness (note 4) Accounts payable and accrued charges (note 6) Deferred revenue Current portion of long-term debt (note 5) Total current liabilities Long-term debt (note 5) Future income tax liabilities (note 11) Other long-term liabilities (note 6) Shareholders’ equity Capital stock (notes 7 and 8) Retained earnings Foreign exchange translation (note 9) Total shareholders’ equity See accompanying notes On behalf of the Board: 2001 2000 $ 3,638 89,800 230,943 8,218 3,643 336,242 347,801 13,421 11,167 11,265 $ 719,896 $ 57,431 92,067 2,779 41,108 193,385 102,240 95,225 10,485 147,350 166,700 4,511 318,561 $ 719,896 $ 5,684 110,372 204,555 6,771 6,279 333,661 325,442 13,194 12,512 9,542 $ 694,351 $ 53,114 89,194 2,602 32,078 176,988 140,595 90,670 13,838 146,557 126,136 (433) 272,260 $ 694,351 N. Murray Edwards (signed) Director Bruce W. Gowan (signed) Director 22 1 0 0 2 t r o p e R l a u n n A n a l l e g a M CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS Years ended December 31 (Expressed in thousands of dollars except per share data) Revenues Cost of revenues Gross profit Administrative and general expenses Research and development Interest (note 10a) Income before income taxes Income taxes (note 11) Current Future Net income for the year Retained earnings, beginning of year Retained earnings, end of year Income per common share (note 7) Basic Diluted See accompanying notes 2001 2000 $ 614,461 502,701 111,760 $ 625,393 509,669 115,724 39,400 1,066 11,251 51,717 60,043 17,110 2,369 19,479 40,564 35,467 977 19,668 56,112 59,612 15,122 6,577 21,699 37,913 126,136 $ 166,700 88,223 $ 126,136 $ $ 0.62 0.61 $ $ 0.59 0.58 23 1 0 0 2 t r o p e R l a u n n A n a l l e g a M CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31 (Expressed in thousands of dollars) Operating Activities Net income for the year Add items not affecting cash Depreciation and amortization Future income taxes Net change in non-cash working capital balances relating to operating activities (note 10c) Cash provided by operating activities Investing Activities Purchase of capital assets Decrease (increase) in other assets Cash used in investing activities Financing Activities Increase (decrease) in bank indebtedness Repayment of long-term debt Issuance of common shares Decrease in other long-term liabilities Cash used by financing activities Effect of exchange rate changes on cash 2001 2000 $ 40,564 $ 37,913 21,612 2,369 64,545 1,363 65,908 (32,369) 1,081 (31,288) 2,100 (36,272) 793 (3,502) (36,881) 215 18,957 6,577 63,447 (10,488) 52,959 (28,044) (1,785) (29,829) (1,978) (23,751) 2,789 (934) (23,874) 131 (613) 6,297 5,684 Net decrease in cash and cash equivalents during the year Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year (2,046) 5,684 3,638 $ $ See accompanying notes 24 1 0 0 2 t r o p e R l a u n n A n a l l e g a M NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001 and 2000 (Expressed in thousands of dollars except share and per share data) 1. ACCOUNTING POLICIES Basis of consolidation The consolidated financial statements have been prepared by management in accordance with Canadian generally accepted accounting principles within the framework of the significant accounting policies summarized below. The consolidated financial statements of Magellan Aerospace Corporation (the “Corporation”) include the accounts of the Corporation and its wholly-owned subsidiaries. Management’s estimates The preparation of consolidated financial statements in conformity with Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Management believes that the estimates utilized in preparing its consolidated financial statements are reasonable and prudent; however, actual results could differ from those estimates. Revenue recognition Revenue includes sales from units delivered during the year and estimates of revenue earned on long-term contracts using the percentage of completion method. Where it is expected that a loss will be incurred on completion of a contract, a provision is made for the total estimated loss. Cash and cash equivalents Cash and cash equivalents includes cash on deposit and term deposits with remaining maturities at the date of acquisition of less than three months. Inventories Inventories are stated at the lower of cost and estimated net realizable value. Inventories are primarily attributable to long-term contracts on which the related operating cycles are longer than one year. In accordance with industry practice, these inventories are included in current assets. Inventoried costs on long-term contracts include pre-production costs consisting primarily of tooling production costs, including applicable finance and overhead and other development costs provided that their recovery can be regarded as reasonably assured. Inventoried costs are charged to cost of revenues by the estimated average cost of deliveries under contracts using the learning curve concept, which anticipates a predictable decrease in unit costs as tasks and production techniques become more efficient through repetition and management action. Advances and progress billings received on long-term contracts are deducted from related costs in inventories. Advances and progress billings in excess of related costs are classified as deferred revenue. Capital assets Capital assets are recorded at cost less related government grants and investment tax credits and are depreciated over their estimated useful lives (with 10% residual value) as follows: Buildings Machinery and equipment 40 years 20 years 25 1 0 0 2 t r o p e R l a u n n A n a l l e g a M NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Research and development Research and development costs are charged to operations as incurred, due to the nature of the projects. Where government incentives in the form of investment tax credits and grants are received for research and development projects initiated by the Corporation for its own purposes, these incentives are deducted from the research and development costs. Government investment The Corporation makes periodic applications for government investment under available government programs, including investment tax credits. Government investment relating to capitalized expenditures is reflected as a reduction of the related costs of such assets. Government investment relating to operating expenses is recorded as a reduction of the related expenses as incurred. Goodwill Goodwill is recorded at cost and amortized to income on a straight-line basis over 40 years. On an ongoing basis, management reviews the valuation and amortization of goodwill, taking into consideration any events or circumstances, which might have impaired the carrying value. The amount of goodwill impairment, if any, is measured based on undiscounted projected future cash flows. In June 2001, The Canadian Institute of Chartered Accountants issued new recommendations with respect to Business Combinations and Goodwill and Intangible Assets, effective for fiscal years beginning on or after January 1, 2002. Under the new recommendations, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the new recommendations. Other intangible assets will continue to be amortized over their useful lives. The Corporation will apply the new recommendations on accounting for goodwill and other intangible assets beginning in its first quarter of 2002. Application of the non-amortization provisions of the new recommendations is expected to result in an increase in net income of $576 per year. During 2002, the Corporation will perform the first of the required impairment tests of goodwill as of January 1, 2002 and has not yet determined what the effect of this test will be on the income and financial position of the Corporation. Foreign exchange translation Monetary assets and liabilities of the Corporation denominated in foreign currencies are translated at the year-end exchange rates. Revenue and expenses are translated at actual rates of exchange when the transaction occurred. Exchange gains and losses on these items are recognized in income in the current year except for gains or losses on monetary assets or liabilities with fixed or ascertainable lives extending beyond one year which are deferred and amortized over the remaining life of the monetary item. The Corporation’s operations outside of Canada are considered self-sustaining. Consequently, the assets and liabilities are translated to Canadian dollars using the year-end exchange rates and revenue and expenses are translated at the average rates during the year. Exchange gains or losses on translation of the Corporation’s net investment in these operations are deferred as a separate component of shareholders’ equity. The appropriate amounts of exchange gains or losses accumulated in the separate component of shareholders’ equity are reflected in income when there is a reduction in the Corporation’s net investment in the operations that gave rise to such exchange gains or losses. 26 1 0 0 2 t r o p e R l a u n n A n a l l e g a M NOTES TO CONSOLIDATED FINANCIAL STATEMENTS During the year, The Canadian Institute of Chartered Accountants amended its recommendations with respect to Accounting for Foreign Exchange. Under the revised recommendations, effective for fiscal years commencing on or after January 1, 2002, foreign exchange gains or losses on long-term monetary assets and liabilities with fixed and ascertainable lives are no longer to be deferred and amortized over the period to maturity. The Corporation will apply the revised recommendations, on a retroactive basis, effective January 1, 2002. Accordingly, the balance of the deferred foreign exchange of $2,331 will be charged to opening retained earnings. Employee benefit plans The cost of pension and post-employment benefits (including medical benefits and dental care) related to employees’ current service is charged to income annually. The cost is computed on an actuarial basis using the projected benefit method prorated on services and management’s best estimates of investment yields, salary escalation and other factors. Pension plan assets are valued at fair value for purposes of calculating the expected return on plan assets. Past service costs resulting from plan amendments are amortized over the remaining average service life of active employees. The excess of the net actuarial gain (loss) over 10% of the greater of the benefit obligations and the fair value of plan assets is amortized over the average remaining service period of active employees. Stock based compensation plan The Corporation has an incentive stock option plan as more fully described in note 8. No compensation expense is recognized for this plan when stock or stock options are issued. Any consideration paid on the exercise of stock options is credited to share capital. In December 2001, The Canadian Institute of Chartered Accountants issued new recommendations with respect to stock based compensation, effective for fiscal years beginning on or after January 1, 2002. Under the recommendations, companies are required to account for all issuances of stock or stock options to non-employees in exchange for goods or services and direct awards of stock in exchange for employee services to be accounted for at fair value (using an option pricing model for stock options). Companies will be permitted to account for all other employee stock based compensation plans using either the fair value approach (which will give rise to compensation expense) or the intrinsic value approach which does not. The Corporation does not expect that the new recommendations will have any impact on its income or financial position. Income taxes The Corporation follows the liability method of income tax allocation. Under this method, future tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the substantially enacted tax rates and laws that will be in effect when the differences are expected to reverse. Income per common share Basic income per common share is computed by dividing net income by the weighted average number of common shares outstanding during the year. Diluted income per share reflects the assumed conversion of all dilutive securities using the treasury stock method. 27 1 0 0 2 t r o p e R l a u n n A n a l l e g a M NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. INVENTORIES Production costs of contracts currently in process Excess of production cost of delivered units over the estimated average of all units expected to be produced (learning curve costs) Initial tooling and other costs Less advances and progress payments 3. CAPITAL ASSETS Land Buildings Machinery and equipment Land Buildings Machinery and equipment Cost $ 17,030 85,037 340,044 $ 442,111 Cost $ 16,325 74,023 308,435 $ 398,783 2001 2000 $ 175,685 $ 181,668 4,606 55,530 235,821 (4,878) $ 230,943 Accumulated depreciation $ $ – 16,872 77,438 94,310 Accumulated depreciation $ $ – 13,768 59,573 73,341 4,007 35,304 220,979 (16,424) $ 204,555 2001 Net book value $ 17,030 68,165 262,606 $ 347,801 2000 Net book value $ 16,325 60,255 248,862 $ 325,442 Included in machinery and equipment are construction in progress expenditures of $19,197 (2000 – $17,750). 4. BANK INDEBTEDNESS Bank indebtedness of $57,431 (2000 – $53,114) is payable on demand and bears interest at the bankers’ acceptance or LIBOR rates, plus 1.25% to 1.65%. A fixed and floating charge debenture on certain of the Corporation’s assets is pledged as collateral for the operating loans and the term bank loan (note 5). 5. LONG-TERM DEBT Term bank loan Other non-bank loans Less current portion 2001 $ 135,100 8,248 143,348 41,108 $ 102,240 2000 $ 161,912 10,761 172,673 32,078 $ 140,595 The term bank loan bears interest at bankers’ acceptance or LIBOR rates, plus 0.80% to 1.25%. Included in the term bank loan are amounts due in U.S. dollars of $71,315 (2000 – $91,318). 28 1 0 0 2 t r o p e R l a u n n A n a l l e g a M NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Under the Corporation’s bank facilities, the Corporation has three financial covenants, namely the ratio of income before interest, income taxes, depreciation and amortization to debt; minimum tangible net worth; and fixed charge coverage. Each of the covenants were met throughout 2001. During 2002, the Corporation expects that each covenant will be met with the possible exception of the fixed charge coverage covenant. Due to increased repayments of the term bank loan in 2002, the minimum coverage level prescribed in this covenant may not be met. Management is anticipating either a waiver of this covenant or the renegotiation of the terms of the facility if required. If this is not achieved, the term debt would be classified as current and related deferred financing costs would be charged to income. Management believes that a renegotiated facility will be obtained if required. Long-term debt maturities for the next four years are as follows: 2002 2003 2004 2005 6. OTHER LONG-TERM LIABILITIES Non-interest bearing amounts owed to third parties Other Less current portion included in accounts payable and accrued charges Other long-term liabilities 2001 12,029 3,274 15,303 4,818 10,485 $ $ Amounts owed to third parties for the next five years and thereafter are as follows: 2002 2003 2004 2005 2006 and thereafter 7. CAPITAL STOCK $ $ $ $ 41,108 60,165 41,161 914 2000 13,954 3,565 17,519 3,681 13,838 4,818 6,893 145 681 2,766 The authorized capital of the Corporation consists of an unlimited number of preference shares, issuable in series, and an unlimited number of common shares. Common shares: Outstanding at December 31, 1999 Issued upon exercise of warrants Issued upon exercise of options Issued to employees and directors Outstanding at December 31, 2000 Issued upon exercise of options Issued to employees and directors Outstanding at December 31, 2001 Number of shares 64,546,068 240,000 1,003,000 45,121 65,834,189 112,500 56,605 66,003,294 Stated capital $ 143,768 516 2,009 264 $ 146,557 459 334 $ 147,350 29 1 0 0 2 t r o p e R l a u n n A n a l l e g a M NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The reconciliation of the numerator and denominator for the calculation of basic and diluted income per share is as follows: Net income Weighted average shares outstanding Net effect of dilutive stock options Diluted weighted average shares outstanding Income per share Basic Diluted 2001 2000 $ 40,564 $ 37,913 65,936,087 401,735 $ 66,337,822 64,777,388 818,068 $ 65,595,456 $ $ 0.62 0.61 $ $ 0.59 0.58 For the year ended December 31, 2001 options to purchase 459,400 common shares (2000 – 471,400 common shares) were not included in the computation of the diluted income per share because the option exercise prices were greater than the average price of the common shares. 8. STOCK BASED COMPENSATION PLAN The Corporation has an incentive stock option plan, which provides for the granting of options for the benefit of employees and directors. The maximum number of common shares that may be issued under this plan is 5.2 million. Options are granted at an exercise price that will be the market price of the Corporation’s common shares at the time of granting. Options normally have a life of 5 years with vesting of 20% at the end of the first, second, third, fourth and fifth years from the date of the grant. In addition, certain business unit income tests must be met in order the for the optionholder’s entitlement to fully vest. A summary of the plan and changes during each of 2001 and 2000 are as follows: Outstanding, beginning of year Granted Exercised/cancelled Outstanding, end of year Shares 1,711,702 746,500 (200,502) 2,257,700 2001 Weighted average exercise price $ $ 5.42 5.85 4.71 5.63 2000 Weighted average exercise price $ $ 4.28 5.50 3.27 5.42 Shares 2,540,302 500,000 (1,328,600) 1,711,702 The following table summarizes information about options outstanding and exercisable: Options outstanding Options exercisable Number outstanding at December 31, 2001 540,100 1,258,200 459,400 2,257,700 Weighted average remaining contractual life Weighted Number average exercisable at December 31, exercise 2001 price 1.0 4.3 2.6 3.2 $ $ 3.25 5.76 8.07 5.63 432,080 167,460 218,720 818,260 Weighted average exercise price $ $ 3.25 5.87 8.13 5.09 Range of exercise prices $ 3.25 $ 5.50–6.30 $ 7.35–10.05 30 1 0 0 2 t r o p e R l a u n n A n a l l e g a M NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9. FOREIGN EXCHANGE TRANSLATION Unrealized translation adjustments, which arise on the translation to Canadian dollars of assets and liabilities of the Corporation’s self-sustaining foreign operations, resulted in an unrealized currency translation gain of $4,944 for the year ended December 31, 2001 (2000 – $2,266), which is reflected as foreign exchange translation on the consolidated balance sheets and had no impact on net income. The unrealized gain resulted from the strengthening of the U.S. dollar against the Canadian dollar. 10. SUPPLEMENTARY INFORMATION (a) Interest expense on long-term debt in 2001 was $8,388 (2000 – $14,059). (b) During 2001, the Corporation received $2,618 (2000 – $3,475) of a government investment, which has been credited to the related assets. The Corporation is eligible for an additional $9,954 for the period from January 1, 2002 to December 31, 2006 based on approved expenditures. The investment is repayable as royalties ranging from 1% to 3% of certain future revenue. (c) Details of changes in non-cash working capital balances related to operating activities are as follows: Accounts receivable Inventories Prepaid expenses and other Accounts payable and accrued charges Deferred revenue 2001 22,418 (20,421) (1,344) 533 177 1,363 $ $ 2000 (18,276) 7,955 (1,170) 3,133 (2,130) (10,488) $ $ (d) Cash interest paid during 2001 amounted to $11,208 (2000 – $18,746) and cash income taxes paid during 2001 amounted to $10,009 (2000 – $2,673). 31 1 0 0 2 t r o p e R l a u n n A n a l l e g a M NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11. INCOME TAXES The following is a reconciliation of the expected tax expense obtained by applying the combined corporate tax rates to income before income taxes: Corporate tax rate for manufacturing companies Expected tax expense Benefit of capital loss carryforwards Permanent differences and other Large Corporations Tax Adjustments for rate changes Components of future income taxes by jurisdiction are summarized as follows: 2001 37.8% 22,696 (379) (464) 60 (2,434) 19,479 $ $ 2000 37.4% 22,296 (655) 135 250 (327) 21,699 $ $ 2001 2000 Canada Future income tax asset – current Accounting provisions not currently deductible for tax purposes $ 3,159 $ 3,642 Future income tax assets – long-term Operating loss carryforwards Accounting provisions not currently deductible for tax purposes Future income tax liabilities – long-term Tax depreciation in excess of book depreciation Deferred employee future benefits 3,611 4,985 8,596 4,051 3,300 7,351 36,453 2,335 38,788 $ 35,652 2,663 38,315 $ 2001 2000 United States Future income tax asset – current Accounting provisions not currently deductible for tax purposes $ 484 $ 2,637 Future income tax assets – long-term Operating loss carryforwards Accrued employee future benefits Future income tax liabilities – long term Tax depreciation in excess of book depreciation 1,423 1,246 2,669 1,202 989 2,191 $ 56,437 $ 52,355 32 1 0 0 2 t r o p e R l a u n n A n a l l e g a M NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 12. EMPLOYEE FUTURE BENEFITS The Corporation has a number of defined benefit and defined contribution plans providing pension, other retirement and post-employment benefits to substantially all of the employees. Information about the Corporation’s defined benefit plans, in aggregate, is as follows: Change in benefit obligation Benefit obligation, beginning of year Member contributions for the year Current service cost Interest cost Benefits paid Actuarial loss Foreign exchange Actuarial obligation, end of year Change in plan assets Market value of plan assets, beginning of year Actual return of plan assets Member contributions during the year Employer contributions Benefits paid Actual plan expenses Foreign exchange Market value of plan assets, $ $ $ 2001 73,861 464 1,465 5,423 (6,094) (221) 1,247 76,145 2001 79,144 (1,195) 493 486 (6,094) (139) 1,256 $ $ $ $ $ $ Pension 2000 72,495 – 1,498 5,314 (5,536) 90 – 73,861 Pension 2000 81,638 2,263 433 540 (5,536) (194) – end of year $ 73,951 $ 79,144 $ Other benefit plans 2000 2,369 – – (448) – – – 1,921 $ $ 2001 1,921 – – 451 (747) – 111 1,736 Other benefit plans 2001 2000 – – – – – – – – $ $ – – – – – – – – 2001 Pension 2000 Other benefit plans 2001 2000 Reconciliation of funded status Funded status, surplus (deficit) Employer contributions after measurement date Member contributions after measurement date Unamortized net actuarial loss Accrued benefit asset (liability) Valuation allowance Accrued benefit asset (liability) net of valuation allowance $ (2,194) $ 5,283 $ (1,736) $ (1,921) 19 35 10,776 8,636 (2,211) – 65 4,064 9,412 (2,082) – – – (1,736) – – – – (1,921) – $ 6,425 $ 7,330 $ (1,736) $ (1,921) The accrued benefit asset related to pensions is included in other assets and the accrued benefit liability related to other benefit plans is included in other long-term liabilities. 33 1 0 0 2 t r o p e R l a u n n A n a l l e g a M NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Plan assets include common shares of the Corporation having a market value of $243 at December 31, 2001 (2000 – $284). The significant actuarial assumptions adopted in measuring the Corporation’s accrued benefit obligations are as follows (weighted-average assumptions as of December 31): Discount rate Expected long-term rate of return on plan assets Rate of compensation increase The Corporation’s net benefit plan expense is as follows: Components of defined benefit plan expense Current service cost Interest cost Expected return on plan assets (income) Net expense Pension 2001 7.40% 7.40% 3.70% Pension 2001 $ $ 1,465 5,423 (5,810) 1,078 Other benefit plans 2001 – – – $ $ Other benefit plans 2001 451 – – 451 $ $ The total expense for the Corporation’s defined contribution pension plans was $2,831 (2000 – $2,732). 13. SEGMENTED INFORMATION The Corporation is organized and managed as a single business segment being aerospace and the Corporation is viewed as a single operating segment by the chief operating decision maker for the purposes of resource allocations and assessing performance. Domestic and foreign operations consist of the following: Canada United States 2001 Total Canada United States 2000 Total $ 159,284 215,855 $ 375,139 $ 215,223 24,099 $ 239,322 $ 374,507 239,954 $ 614,461 $ 148,677 257,768 $ 406,445 $ 199,881 19,067 $ 218,948 $ 348,558 276,835 $ 625,393 Revenue Domestic Export Total revenue Capital assets and goodwill $ 162,415 $ 198,807 $ 361,222 $ 155,275 $ 183,361 $ 338,636 Revenue is attributed to countries based on the location of the customers and the capital assets and goodwill are based on the country in which they are located. Major Customers Canadian operations Number of customers Percentage of total Canadian revenue U.S. operations Number of customers Percentage of total U.S. revenue 2001 2000 2 46% 3 70% 2 34% 3 69% 34 1 0 0 2 t r o p e R l a u n n A n a l l e g a M NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 14. FINANCIAL INSTRUMENTS (a) Fair value The Corporation has determined the estimated fair values of its financial instruments based on appropriate valuation methodologies, however considerable judgment is required to develop these estimates. Accordingly, these estimated fair values are not necessarily indicative of the amounts the Corporation could realize in a current market exchange. The estimated fair value amounts can be materially affected by the use of different assumptions or methodologies. The methods and assumptions used to estimate the fair value of financial instruments are described below: Cash and cash equivalents, accounts receivable, bank indebtedness and accounts payable and accrued liabilities Due to the short period to maturity of these instruments, the carrying values as presented in the consolidated balance sheets are reasonable estimates of fair value. Long-term debt The fair value of the Corporation’s long-term debt, based on current rates for debt with similar terms and maturities, is not materially different from its carrying value. (b) Credit risk The Corporation’s financial assets that are exposed to credit risk consist primarily of cash and cash equivalents and accounts receivable. The Corporation, in the normal course of business, is exposed to credit risk from its customers substantially all of which are in the aerospace industry. These accounts receivable are subject to normal industry credit risks. Cash and cash equivalents, which consist of short-term investments, including commercial paper, are only invested in entities with an investment grade credit rating. Credit risk is further reduced by limiting the amount which is invested in any one government or corporation. (c) Interest rate risk The Corporation is not exposed to significant interest rate risk due to the short-term maturity of its monetary current assets and current liabilities and its long-term debt balances being at variable rates. (d) Foreign exchange contracts The Corporation occasionally uses derivative financial instruments to manage foreign exchange risk. The Corporation does not trade in derivatives for speculative purposes. The Corporation has entered into foreign exchange contracts to hedge future cash flows in U.S. dollars. Under these contracts the Corporation may be obliged to sell specific amounts of US. dollars at predetermined dates and exchange rates. These contracts are matched with anticipated operational cash flows in U.S. dollars. The Corporation has U.S. dollar exchange contracts outstanding at December 31, as follows: 2001 2000 Amount Exchange rate Amount Exchange rate Maturity – less than 1 year $ 32,000 1.54–1.61 $ 12,000 1.48–1.51 35 1 0 0 2 t r o p e R l a u n n A n a l l e g a M BOARD OF DIRECTORS AND OFFICERS Corporate Officers Board of Directors Committees of the Board N. Murray Edwards Chairman and Chief Executive Officer Richard A. Neill President and Chief Operating Officer John B. Dekker Vice President Finance and Corporate Secretary William A. Matthews Vice President Marketing Jo-Ann C. Ball Vice President Human Resources Borys Chartchenko Corporate Controller Steven P. Groot Treasurer N. Murray Edwards (1, 3) Chairman and Chief Executive Officer Magellan Aerospace Corporation Mississauga, Ontario President Edco Financial Holdings Ltd. Calgary, Alberta Richard A. Neill (1,4) President and Chief Operating Officer Magellan Aerospace Corporation Mississauga, Ontario 1 2 3 4 Executive Committee Chairman: N. Murray Edwards Audit Committee Chairman: William A. Dimma Human Resources and Nominating Committee Chairman: William G. Davis Environment and Safety Committee Chairman: Donald C. Lowe Hon. William G. Davis (1, 2, 3) P.C., C.C., Q.C. Counsel TORYS Toronto, Ontario William A. Dimma (1, 2, 3) Corporate Director Toronto, Ontario Bruce W. Gowan (2) Corporate Director Huntsville, Ontario Donald C. Lowe (4) Corporate Director Toronto, Ontario Larry G. Moeller (4) Vice President Finance Edco Financial Holdings Ltd. Calgary, Alberta James S. Palmer (2) C.M., Q.C. Chairman Burnet, Duckworth & Palmer Calgary, Alberta Hon. M. Douglas Young (4) P.C. Chairman Summa Strategies Canada Inc. Ottawa, Ontario 36 1 0 0 2 t r o p e R l a u n n A n a l l e g a M Langley Aerospace 6510 Federal Boulevard Lemon Grove, California USA 91945 Robert Poteet General Manage t: 619 229 2222 Middleton Aerospace Corporation Middleton Plant 206 South Main Street Middleton, Massachusetts USA 01949 Peabody Plant 4 – 5th Street Peabody, Massachusetts USA 01960 Robert A. Segal Vice President and General Manager t: 978 774 6000 OPERATING FACILITIES DIRECTORY Canada Bristol Aerospace Limited 660 Berry Street Winnipeg, Manitoba Canada R3H 0S5 James S. Butyniec Vice President and General Manager t: 204 775 8331 Chicopee Manufacturing Limited 975 Wilson Avenue Kitchener, Ontario Canada N2C 1J1 Konrad Hahnelt Vice President and General Manager t: 519 893 7575 Fleet Industries Ltd. 1011 Gilmore Road Fort Erie, Ontario Canada L2A 5M4 Daniel Zanatta Director, Fleet Industries Operations t: 905 871 2100 Orenda Aerospace Corporation Orenda Plant 3160 Derry Road East Mississauga, Ontario Canada L4T 1A9 AeroTech 1491 Tower Street Abbotsford, British Columbia Canada V2T 6H5 Orenda National 5170 West Bethany Home Road Glendale, Arizona USA 85301 Frank Button General Manager, Orenda Turbines David McIntosh General Manager, Engine Components t: 905 673 3250 Orenda Recip Inc. Air Industrial Park P.O. Box 130 Debert, Nova Scotia Canada B0M 1G0 Peter Jackson General Manager t: 902 662 2006 United States Magellan Aerospace USA, Inc. 206 South Main Street Middleton, Massachusetts USA 01949 J. Stephen Tosi President t: 978 977 6001 Aeronca, Inc. 1712 Germantown Road Middletown, Ohio USA 45042 James O. Stine Vice President and General Manager t: 513 422 2751 Ambel Precision Manufacturing Corporation 159 Grassy Plain Street Route 53 Bethel, Connecticut USA 06801 Joe Lombardo Vice President and General Manager t: 203 798 9373 Ellanef Manufacturing Corporation Corona Plant 97 – 11 50th Avenue New York, New York USA 11368 Bohemia Plant 25 Aero Road Bohemia, New York USA 11716 Henry David Vice President and General Manager t: 718 699 4000 SHAREHOLDER INFORMATION Corporate Office Auditors Magellan Aerospace Corporation 3160 Derry Road East Mississauga, Ontario Canada L4T 1A9 t: 905 677 1889 f: 905 677 5658 www.magellanaerospace.com for investor information: info@magellanaerospace.com Ernst & Young LLP Mississauga, Ontario Transfer Agent Computershare Toronto, Ontario t: 1 800 663 9097 email: caregistryinfo@computershare.com www.computershare.com Stock Listing Toronto Stock Exchange Common Shares – MAL Annual Meeting The Annual and Special Meeting of the Shareholders of Magellan Aerospace Corporation will be held on Wednesday, May 15, 2002 at 2:00 p.m. at the Toronto Board of Trade, 1 First Canadian Place, Toronto, Ontario, Canada. a d a n a C n i d e t n i r P s n o i t a c i n u m m o C N I L E V A J N O T T U S y b d e c u d o r P d n a d e n g i s e D This annual report contains certain forward-looking statements that reflect the current views and/or expectations of the Corporation with respect to its performance, business and future events. Such statements are subject to a number of risks, uncertainties and assumptions, which may cause actual results to be materially different from those expressed or implied. The Corporation assumes no future obligation to update these forward-looking statements. 3160 Derry Road East, Mississauga, Ontario Canada L4T 1A9 

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