I n 2 0 0 7 , t h e a e r o s p a c e In d u s t r y c o n tIn u e d t o g r o w , e s t a b lIs hIn g
r e c o r d o r d e r s f o r cIvIl aIr c r a f t, In c r e a s e d g r o w t h In d e m a n d f o r
b u sIn e s s j e t s a n d cIvIl h e lIc o p t e r s , a n d a s t r o n g , s t e a d y s u p p l y t o
t h e g l o b a l d e f e n c e m a r k e t In a e r o s p a c e .
L e t t e r t o S h a r e h oLd e rS
magellan aerospace corporation continued to make progress through 2007 to sharpen focus on its
core capabilities, enhance its efficiency, and deliver increased value to its customers. revenue and
gross profit improved in spite of currency exchange headwinds, reflecting the increased operating
efficiencies and improved pricing in late 2007.
I n d u s t r y s t a t u s
In 2007, the aerospace industry continued to grow, establishing record orders for civil aircraft, in-
creased growth in demand for business jets and civil helicopters, and a strong, steady supply to the
global defence market in aerospace. the industry continued its globalization, with growing participa-
tion in brazil and mexico, eastern europe and russia, china, India and much of south east asia.
M a g e l l a n ae r o s p a c e
over the past few years, magellan has increasingly focused its attention on refining its core capabili-
ties, not only for current activities, but also looking forward to new products, markets, and a different
environment that will emerge over the next five to ten years. new technologies in materials, capital
equipment and manufacturing processes have been accessed. actions are being implemented to en-
sure that magellan’s core capabilities in each of its operating sites meet these emerging requirements.
close cooperation with key customers is helping to align magellan’s capabilities, both current and
future, to meet the requirements going forward.
In 2007, magellan completed the restructuring of three sites, and accomplished the first phase on a
fourth site. the restructuring pursued four goals: focus on core capabilities; upgrade of those capabili-
ties; off-load of non-core activity; and increase in value to the customers for each capability. the strategy
being followed is referred to within magellan as “40 - 30 - 30”, representing a model wherein 40% of
magellan’s production will take place within its own facilities, 30% will be with local market supplier
facilities, and 30% will be with emerging market supplier facilities.
the focus on core activity and the phase-out of non-core manufacturing to the supply base produced
benefits in late 2007 that will continue throughout 2008 and beyond. Investment in new capital equip-
ment, inventory and training is primarily focused on the core activity, reducing magellan’s overall expen-
ditures in these areas. outsourced work is being replaced by additional core work to improve efficiency
M a g e l l a n 2 0 0 7 an n u a l R e p oR t
1
I n a lIg n m e n t wIt h It s c o r e c a p a bIlItIe s , ma g e l l a n c a p t u r e d
sIg nIfIc a n t w o r k p a c k a g e s o n t h r e e m a j o r p r o g r a m s , a n d
a d dItIo n a l o p p o r t u nItIe s a r e b eIn g p u r s u e d In 2 0 0 8.
and increase value. optimized capital and training will create additional capacity, increasing return
on capital. these outcomes were visible in several areas in 2007, and will become more significant in
each of the next few years.
magellan’s outsourcing activity to emerging market supplier facilities advanced in 2007, particularly
in India. to enable the production of finished parts in India, magellan teamed with a local partner to
establish an Indian entity through which a processing facility is being built, and support to supply chain
expansion is being managed. the facility will be operational later in 2008.
In alignment with its core capabilities, magellan, in addition to key work already under contract, added
significant work packages on three major programs, and is pursuing additional opportunities in 2008.
three programs are of most significance to magellan: the large airbus a380; the twin-aisle boeing
b787; and the us-led joint strike fighter f35 military aircraft. participation is also being sought on the
twin-aisle airbus a350, with initial engineering efforts expected to commence in 2008.
during 2007, work on a380 landing gear, wing structures and engine exhaust systems restarted fol-
lowing some integration issues at airbus, and initial customer deliveries were made in december 2007.
delivery by magellan of b787 landing gear assemblies and machined wing structures commenced
during 2007. boeing has announced delays in initial deliveries which could cause delays in the overall
supply base. the first production joint strike fighter f35b short take off and vertical landing (stovl)
variant was rolled out in 2007, and will join the earlier f35a conventional take off and landing
(ctol) variant in flight tests in 2008. this major international defence program is expected to deliver in
excess of 3,000 aircraft over the next 20-30 years. magellan has secured major participation on this
program in the manufacture of aircraft machined structures, composite structures, and various engine
and auxiliary sub-assemblies.
bidding activity on the airbus a350 aircraft occurred in 2007, and magellan submitted a number of
proposals for participation utilizing its established core capabilities in the manufacture of wing structural
components, including both spars and ribs for aircraft wings. these opportunities, and others expected
to arise in 2008, could provide new, long-term engineering and production workload for magellan.
during 2007, magellan increased production on a number of products for both the airbus a320 and
the boeing b737 aircraft families to meet strong airline customer demand. magellan also continued to
deliver military aircraft engine and landing gear components and assemblies and provided aftermarket
repair and overhaul services to various customers in north america and europe. these mature programs
in the civil and defence sectors are forecast to continue for five to ten more years, bridging the time
period to achieve full production rates on the new programs outlined above.
M a g e l l a n 2 0 0 7 an n u a l R e p oR t
2
m a g e l l a n ’ s m a t u r e p r o g r a m s In t h e cIvIl a n d d e f e n c e s e c t o r s a r e
f o r e c a s t t o c o n tIn u e f o r fIv e t o t e n m o r e y e a r s , b rId gIn g t h e tIm e
p e rIo d t o a c hIe v e f u l l p r o d u c tIo n r a t e s o n t h e n e w p r o g r a m s .
In addition to the manufacture of aircraft structural parts and landing gear components, the year saw
further success in magellan’s aero engine business with additional orders for components of the f414,
production engine on the f18e/f, as well as new applications for the htf7000 engine manufactured
by honeywell. magellan is a revenue share partner on both programs while continuing to enjoy success
with more traditional supply contracts to these and other engine programs. during the year, magellan
supplied increased volumes on a number of defense products while at the same time continued existing
roles in engine repair and overhaul. all of this, along with the newer programs entering into production,
give management confidence as it looks forward to the periods ahead and provide further incentive to
achieve success in cost reduction initiatives and the pursuit of new manufacturing technologies.
FIn a n cIa l
the weakening of the us dollar relative to the canadian dollar and british pound sterling throughout
2007 has had a significant negative impact on magellan’s reported results. costs incurred in cana-
dian dollars or british pound sterling are often found in products that are sold in us dollars, thus driv-
ing reduced revenues and gross margins when these revenues are converted into canadian dollars
for financial reporting. foreign exchange issues have masked the higher volumes of production, and
the increased efficiencies and underlying productivity improvements achieved in 2007. the extreme
volatility of the aforementioned foreign exchange markets and the risk factors identified in management
discussion and analysis herein are major challenges magellan faces in 2008 and beyond as it at-
tempts to return to profitability.
the board of directors of magellan has resolved to propose a consolidation of magellan’s issued and
outstanding common shares on the basis of one new common share for each ten common shares
presently issued and outstanding.
during this period when financial markets were extremely volatile, we appreciate the continued support
shown by our shareholders and financial partners. we thank our dedicated employees for the steady
progress that continues to be made at the manufacturing plants as productivity improves, building a
stronger company.
richard a. neill
Vice Chairman
March 28, 2008
M a g e l l a n 2 0 0 7 an n u a l R e p oR t
3
james s. butyniec
President and Chief Executive Officer
m a n a g e m e n t d iSc uS Si o n a n d a n aL
y SiS
the management discussion and analysis (“md&a”) of financial condition and results of operations should be
read in conjunction with the 2007 consolidated financial statements and notes. magellan aerospace corporation
(“magellan” or the “corporation”) reports its audited consolidated financial statements in accordance with canadian
generally accepted accounting principles.
the md&a contains forward looking information that represents the corporation’s internal projections, expecta-
tions, estimates or beliefs concerning, among other things, future operating results and various components thereof
or the corporation’s future economic performance. these statements relate to future events or future performance.
all statements other than statements of historical facts may be forward-looking statements. In some cases, forward-
looking statements can be identified by terminology such as “may,” “will,” “should,” “expects,” “projects,” “plans,” “an-
ticipates,” and similar expressions. the projections, estimates and beliefs contained in such forward-looking statements
are based on management’s assumptions relating to the production performance of magellan’s assets and competition
throughout the aerospace industry in 2007 and continuation of the current regulatory and tax regimes in the jurisdiction
in which the corporation operates, and necessarily involve known and unknown risks and uncertainties, including the
business risks discussed in this md&a, which may cause actual performance and financial results in future periods to
differ materially from any projections of future performance or results expressed or implied by such forward-looking state-
ments. accordingly, readers are cautioned that events or circumstances could cause results to differ materially from those
predicted. the corporation does not undertake to update any forward-looking information in this document whether as
to new information, future events or otherwise.
The date of this MD&A is March 28, 2008.
Ve rV IeW
c oMp a n y o
magellan is a diversified supplier of components to the aerospace industry. through its wholly owned subsidiaries,
magellan designs, engineers, and manufactures aeroengine and aerostructure components for aerospace markets, ad-
vanced products for military and space markets, and complementary specialty products. the corporation also supports
the aftermarket through supply of spare parts as well as performing repair and overhaul services.
the corporation’s strategy has been to focus on several core competencies within the aerospace industry. these include
precision machining of a wide variety of aerospace material, composites, complex high technology magnesium and
aluminum alloy castings, repair and overhaul technologies and design of structures. the corporation leverages these
core competencies by achieving growth in applications where these abilities are critical in meeting customer needs.
magellan is organized and managed as a single business segment and is viewed as a single operating segment by the
chief operating decision-makers, for the purpose of resource allocations, assessing performance, and strategic planning.
within the single operating segment, the corporation has two major product groupings: aerostructures and aeroen-
gines. aerostructure and aeroengine products are used both in new aircraft, and for spares and replacement parts.
the corporation supplies aerostructures products to an international customer base in the civil and defence markets.
components are produced to aerospace tolerances using conventional and high-speed automated machining centers.
capabilities include precision casting of airframe-mounted components. management believes that magellan’s dedica-
tion to technological innovation combined with low cost sourcing from emerging markets will position magellan attrac-
tively to capture targeted complex assembly programs.
within the aeroengines product grouping, the corporation manufactures complex cast, fabricated and machined
gas turbine engine components, both static and rotating, and integrated nacelle components, flow paths and engine
M a g e l l a n 2 0 0 7 an n u a l R e p oR t
4
exhaust systems for the world’s leading aeroengines manufacturers. the corporation also performs repair and over-
haul services for jet engines and related components.
the corporation serves both the commercial and defence markets. In 2007, 65.8% of sales were derived from the
commercial markets (2006 – 64%, 2005 – 68%) while 34.2% of sales related to defence markets (2006 – 36%,
2005 – 32%).
o u t l o oK
In 2008, the civil aerospace market continues to show strong demand for new and replacement aircraft and en-
gines in the airliner, business jet and helicopter market sectors. this strength is seen globally through both orders and
deliveries. constraining factors include the high price of fuel, and fears that increased fares may temper the growth
in passenger traffic. the civil airline industry is experiencing some consolidation in the mainline airlines, and some
restructuring in the low-cost sector. these measures aim to strengthen the profitability of the carriers, enabling continued
fleet replacement with new, fuel efficient aircraft. business jets and helicopters continue to show strong sales in all
sectors in ever widening global markets. finally, defence aerospace markets remain solid, with several new programs
moving forward towards production ramp-up. the joint strike fighter f35 aircraft, a number of new military transport
aircraft, and a broad range of helicopters are amongst those programs with the most potential impact.
magellan advanced its position on targeted new programs during 2007, and hopes to see positive results in
2008 through increased production and delivery. magellan also concluded a number of initiatives in 2007 to
modernize four of its operating facilities, to further develop a robust supply chain in both domestic and emerging
markets, and to renew commercial arrangements with customers that reflect current and expected financial conditions.
the successful retooling, supply base strengthening and commercial updates put magellan in a more competitive
position in 2008.
magellan entered 2008 with current participation in both high-volume single-aisle programs (airbus a320 family
and boeing 737 family), the leading military aircraft programs in the u.s.a. and europe (f15, f18e/f, ah64d and
the eurofighter/typhoon), a broad range of engine participation on airliners, business jets, helicopters and military
aircraft. participation in the key new programs (a380, b787, f35, a350) is at various stages from in-production to
initial design and development. magellan has been able to maintain its targeted 60:40 revenue split between civil
and defence work, strong participation with both airbus and boeing, engine participation with four of five targeted
engine primes, and full access to the global helicopter market.
magellan continues to face the investment challenges associated with the launch of multiple new generation pro-
grams, competitive pressures of the global distribution of aerospace manufacturing activities, and in the short term,
the headwinds of unfavourable foreign exchange rates. these challenges are being offset to some degree by natural
hedging through u.s. dollar purchasing, the advancement to production of the a380 and b787 aircraft, and the
increased velocity of the f35 program. magellan has addressed start-up investments for the new programs over the
past three years, and has put a plan in place to meet the production ramp-up costs to be faced over the next 2-5 years.
magellan is also well advanced on achieving the cost advantages of the global emerging markets.
rIsK F a c t o r s
the corporation’s performance may be affected by a number of risks and uncertainties. magellan’s senior manage-
ment identifies key risks and has processes in place to monitor, manage, and mitigate these risks. additional risks and
uncertainties not presently known by the corporation, or that the corporation does not currently anticipate will be
material may impair the corporation’s performance.
M a g e l l a n 2 0 0 7 an n u a l R e p oR t
5
the following risks and uncertainties apply to the corporation. additional information relating to risks and uncertainties
are set forth in the corporation’s annual Information form on sedar at www.sedar.com.
Fluctuations in the value of foreign currencies could result in currency exchange losses.
fluctuations in the canadian dollar exchange rate will impact the corporation’s results of operations and financial
condition from period to period. In addition, such fluctuations affect the translation of the corporation’s results for
purposes of its consolidated financial statements. the corporation’s activities to manage its currency exposure may
not be successful.
The agreements with labour unions representing certain of the Corporation’s employees are subject to renewal.
If the corporation is unable to renew all agreements as they become subject to renegotiation from time to time, it could
result in work stoppages and other labour disturbances which could have a material adverse effect on its business.
this risk may be mitigated by the ability of the corporation to transfer work from one location to another.
The Corporation’s debt is significant and may need to be refinanced and such refinancing may not be available.
the corporation and its subsidiaries have significant debt obligations. If the corporation is unable to meet its debt
obligations, it may need to consider refinancing or adopting alternative strategies to reduce or delay capital expen-
ditures, selling assets or seeking additional equity capital.
the corporation renewed its bank credit agreement with its existing lender on may 27, 2005, as amended from
time to time (the “bank facility agreement”). under the terms of the bank facility agreement, the corporation has an
operating credit facility, expiring on may 25, 2007, and extendable for unlimited one-year periods by agreement
of the corporation and the lenders. on march 30, 2007 the bank facility agreement was extended to may 24,
2008. the corporation’s bank facility agreement also requires the corporation to maintain specified financial ratios.
the corporation’s ability to meet these financial ratios can be affected by events beyond the corporation’s control,
and there can be no assurance that the corporation will be able to meet these ratios. there is no assurance that
the bank facility agreement will be renewed every year or that the terms of renewal will not be materially adverse
to the corporation. this credit facility is fully guaranteed by mr. edwards, a director and chairman of the board of
the corporation. there is also no assurance that mr. edward’s guarantee, if required, will be available beyond the
term of the current commitment which ends on may 25, 2008. there is no assurance that the corporation will be in
compliance with all of its bank covenants at all times during the upcoming twelve months due to unforeseen events or
circumstances, some of which are outlined in the annual Information form – “risks Inherent in magellan’s business.”
The Corporation may need additional financing for acquisitions and capital expenditures and additional financing
may not be available on acceptable terms.
the corporation’s ability to grow is dependent upon, and may be limited by, among other things, availability under
the credit facilities and by particular restrictions contained therein and the corporation’s other financing arrange-
ments. In that case, additional funding sources may be needed, and the corporation may not be able to obtain the
additional capital necessary to pursue its internal growth and acquisition strategy or, if the corporation can obtain
additional financing, the additional financing may not be on financial terms, which are satisfactory to it.
Cancellations, reductions or delays in customer orders may adversely affect the Corporation’s results of operations.
the corporation’s overall operating results are affected by many factors, including the timing of orders from large customers and
the timing of expenditures to manufacture parts and purchase inventory in anticipation of future sales of products and services.
a large portion of the corporation’s operating expenses is relatively fixed. because several of the corporation’s operating lo-
cations typically do not obtain long-term purchase orders or commitments from customers, the corporation must anticipate the
future volume of orders based upon the historic purchasing patterns of customers and upon discussions with customers as to
their anticipated future requirements. these historic patterns may be disrupted by many factors, including changing economic
M a g e l l a n 2 0 0 7 an n u a l R e p oR t
6
conditions, inventory adjustments, work stoppages or labour disruptions, cancellations, reductions or delays in orders by a
customer or group of customers could have a material adverse effect on the corporation’s business, financial condition
and results of operations.
s e l e c t e d a n n u a l F In a n cIa l InFo rMa tIo n
expressed in millions of dollars except per share information
revenues
net loss for the year
loss per common share
basic and diluted
total assets
total long term financial liabilities
2007
597.8
(11.3)
(0.14)
649.4
108.0
2006
(restated)
575.2
(8.1)
(0.11)
682.0
106.9
2005
568.5
(6.1)
(0.08)
665.1
118.4
the corporation has not paid dividends on its common shares in the past four years. In 2005, the corporation issued
2,000,000 8.0% cumulative redeemable first preference shares series a (“preference shares”). the corporation
paid dividends thereon of $0.80 per share in 2007 and 2006.
In 2004, the corporation entered into a five-year accounts receivable securitization program with a securitization
trust (the “trust”). on february 23, 2007, the trust suspended its securitization program with the corporation. the
corporation did not incur any costs to extinguish the program and is actively pursuing other opportunities for accounts
receivable securitization.
on february 5, 2007 magellan announced the formation of a 50:50 joint ownership company with Quest machin-
ing & manufacturing to launch the first independent processing facility in India to cater to the needs of the aerospace
manufacturing industry. this facility, presently planned at 15,000 square feet, will initially focus on processes for alu-
minum, titanium, and stainless steel components for aero-structure and aero-engine components. management expects
this new facility to open in 2008.
on march 30, 2007, the corporation renewed the bank facility agreement with its existing lenders. under the
terms of the amended agreement, the maximum amount available under the operating credit facility was increased
by $20.0 million to $175.0 million with a maturity date of may 24, 2008. the facility is extendable for unlimited
one-year renewal periods on the agreement of the lenders and the corporation and continues to be fully guaranteed
by the chairman of the board of the corporation.
In addition, on march 30, 2007, the corporation borrowed $15.0 million by way of a secured promissory note
from a corporation wholly-owned by a common director. this note is due july 1, 2008 and bears interest at a rate of
9% per annum. the note is collateralized and subordinated to the bank credit facility. the corporation repaid the full
amount of the note on january 31, 2008.
the corporation had a record year for orders for its proprietary products; the level of orders in 2007 surpassed $50.0
million for the year. orders in 2007 have included a number of modern rocket motor products that have been devel-
oped by magellan for use as drone booster motors, air-to-ground rockets, test firing support, various aerial targets,
and meteorological data gathering. magellan’s mac-200 small satellite bus (platform) was designed by magellan
to fill the canadian space agency’s requirement for a general bus to support a variety of missions and a wide range
of payloads to meet the needs of the scientific community, industry, and the government of canada. magellan is cur-
rently working on the cassIope bus, the first application of the mac-200, which is scheduled for launch in 2008.
M a g e l l a n 2 0 0 7 an n u a l R e p oR t
7
a significant amount of the corporation’s revenues are denominated in us dollars. the value of the corporation’s
revenues denominated in us dollars translated into canadian dollars has been negatively impacted, on a cumula-
tive basis over the last two years, by $50.6 million as the us dollar declined in value. this decline in the us dollar’s
value relative to the canadian dollar has partially offset the underlying growth of the corporation’s business. after
adjusting for the exchange impact noted above, the corporation’s revenues have increased by approximately 14%
over 2005 levels.
2 0 0 7 up d a t e s
• manufacturing license agreement with lockheed martin to manufacture composite structural items for the
f-35 aircraft low rate Initial production and full scale production phases of the u.s. led international joint strike
fighter program. production participation by the corporation commenced in 2007, and could extend to 2035.
• letter of Intent agreed with bae systems to manufacture metallic and composite structural assemblies for the f-35
aircraft low rate Initial production and full scale production phases of the u.s. led international joint strike fighter
program. production participation by the corporation is expected to commence in 2008-2009, and could extend
to 2035.
• production re-commenced in 2007 on the corporation’s existing long-term contracts with airbus and tier 1 suppliers
for major structural components of the wing, main and wing landing gear structures, and engine exhaust systems
for the airbus a380 very large aircraft. revenues to the corporation currently exceed $1 million per aircraft.
• deliveries commenced in 2007 on the corporation’s long-term contract with messier-dowty to supply main and
nose landing gear subassemblies for the boeing b787 dreamliner civil airliner.
• deliveries of various proprietary products in the space, defence and rotary wing sectors were made in
2007, or will be made during 2008, following record orders in 2007 in excess of $50 million for these
engineered products.
• numerous contracts were updated in 2007 to reflect increased production rates, higher material costs, the effects
of foreign exchange variations and efficiencies achieved by the corporation.
M a j o r p l a n t r a t I o n a l I z a t I o n s
four plant rationalizations and modernizations projects were completed or met major milestones in 2007. the
corporation’s operation in the uk completed a major re-allocation of work within its facilities, and to its supply base, to
improve efficiencies and provide capacity for increased workloads. the corporation’s casting operations also complet-
ed upgrades to equipment and facilities and re-allocation of product families between sites, resulting in major efficiency
gains to increase throughput by over 30%. the corporation’s aeroengine machining operations in massachusetts re-
started operations in new facilities that offer needed room to expand production to accommodate increasing demand.
finally, the corporation’s operations in new york completed phase I of its upgrade program, upgrading and aug-
menting its production equipment, and consolidating operations to achieve greater flow and efficiency. this project is
expected to complete its final phase of the upgrade in 2008-2010.
the corporation is experiencing significantly increased demand across all product lines due to major new opportuni-
ties reaching production over the next several years. planning is complete or in final stages, and facility re-alignment
progressed in 2007 and will continue. a new sourcing strategy is also being developed to accommodate major
production rate increases without expanding physical facilities. core production will continue within the corporation’s
facilities, while greater use of outside supply will be made for supporting production and processing.
M a g e l l a n 2 0 0 7 an n u a l R e p oR t
8
l a b o u r Ma t t e r s
a labour agreement at one of the corporation’s facilities expired on december 31, 2007, and management is cur-
rently in negotiations. labour agreements at five of its facilities will expire during 2008. management is currently in
negotiations with respect to a labour agreement that is set to expire on march 31, 2008.
F In a n cI n g Ma t t e r s
on january 30, 2008, the corporation closed a private placement of an aggregate of $20.9 million 8.5% convert-
ible unsecured subordinated debentures, due january 31, 2010 (the “new debentures”) the proceeds of which were
used to fund, in part, the repayment of the $70.0 million principal amount of outstanding 8.5% unsecured subordi-
nated debentures (the “existing debentures) which matured on january 31, 2008.
the new debentures are redeemable by magellan for the first six months of the term at 102.5% of principal value
and the holders have no conversion rights. after the first six months of the term, the new debentures are convertible, at
the option of the holder, at any time prior to maturity into common shares of magellan at a conversion price of $2.00
per share, which is equal to a conversion rate of 500 common shares per one thousand dollars of principal amount
of debentures or the issuance on conversion of approximately 10.5 million common shares in total.
on january 30, 2008, in order to fund the remaining balance of approximately $50.0 million on the maturity of the
existing debentures, a corporation controlled by the chairman of the board of the corporation, provided a loan of
$50.0 million (the “original loan”) and a $15.0 million bridge loan (the “bridge loan”) to the corporation. all of
the funds from the bridge loan and approximately $35.0 million of the funds from the original loan were used to
repay the balance of the existing debentures and the $15.0 million of additional funds from the original loan was
provided to the corporation to retire $15.0 million of subordinated debt due to a corporation with a common director,
who is also the owner of all of the shares of such lender. both the original loan and the bridge loan bear interest at
a rate of 10% per annum calculated and payable monthly, are collateralized and subordinated to the corporation’s
existing bank credit facility. the original loan is repayable on july 1, 2009 and the bridge loan is repayable on
july 31, 2008. In addition, on january 24, 2008, in consideration for the provision of additional security for the
corporation’s obligations under its existing secured bank credit facility, the corporation has increased the standby
guarantee payable to the chairman of the board of the corporation from 0.1% per annum to 1% per annum of the
principal amount guaranteed.
r e s u l t s Fr oM o p e r a tIo n s
re v e n u eS
twelve-mont hs end ed dec e mb e r 3 1
expressed in thousands of dollars
canada
united states
united kingdom
total revenues
2007
289,904
188,330
119,574
597,808
2006
273,305
186,597
115,321
575,223
change
6.1%
0.9%
3.7%
3.9%
consolidated revenues for the year ended december 31, 2007 were $597.8 million, an increase of $22.6 million
or 3.9% over the previous year. during 2007, the corporation’s sales volume increased by 7.3% over the previous
year. this increase in sales volume, over all geographical regions, was mainly due to increase in production rates at
M a g e l l a n 2 0 0 7 an n u a l R e p oR t
9
original equipment manufacturers (“oems”) for aircraft and engines and record sales of proprietary products in our
canadian operations. the strengthening of the canadian dollar against the us dollar through 2007 in comparison
to the average exchange rate in effect during the same period in 2006 has adversely reduced revenues by approxi-
mately $19.5 million.
gr oS S P r o f i t
twelve-mont hs end ed dec e mb e r 3 1
expressed in thousands of dollars
gross profit
percentage of revenue
2007
58,914
9.9%
2006
51,022
8.9%
change
15.5 %
gross profit in 2007 was $58.9 million, an increase of $7.9 million from 2006. as a percentage of revenue,
gross profit was 9.9% of sales in 2007 compared to 8.9% of sales in 2006. as mentioned above, the increasing
value of the canadian dollar as compared to the us dollar had a significant negative impact on gross margin.
the net effect of the foreign exchange rates was a reduction in gross profit of approximately $5.3 million in 2007
over 2006 levels. while the strengthening of the canadian dollar relative to the us dollar had decreased revenues,
the full benefit of a stronger canadian dollar had not yet flowed through the cost of sales for parts bought earlier in
the year using us dollars.
during the last few years, the corporation undertook a program to rationalize and modernize four of its facilities.
during the latter part of 2007, the corporation began to realize the anticipated operational efficiencies at several
of these manufacturing facilities. these improvements in efficiencies have yet to be fully realized and as a result the
corporation continues to take steps to improve manufacturing techniques, and implement other cost reduction initia-
tives. It is also increasing its low-cost sourcing activities to improve the gross profit.
ad m i n iS
t r a t i v e a n d ge n e r aL exPe nSeS
twelve-mont hs end ed dec e mb e r 3 1
expressed in thousands of dollars
administrative and general expenses
(gain) loss on sale of capital assets
foreign exchange loss (gain)
total administrative and general expenses
percentage of revenues
2007
42,446
(1,257)
5,576
46,765
7.8%
2006
41,766
238
(4,429)
37,575
6.5 %
total administrative and general expenses for 2007 were $46.8 million, compared to $37.6 million in 2006.
Included in administrative and general expenses is a foreign exchange loss, resulting from the change in foreign ex-
change rates on the corporation’s us denominated working capital balances and debt in canada, of $5.6 million
in 2007 versus a gain of $4.4 million in 2006. during the year, the corporation disposed of capital assets and
recorded gains on the sale of capital assets of $1.3 million ($0.2 million loss in 2006). excluding these gains and
losses, administrative and general expenses in 2007 were 7.1% of revenues, a decrease from the 2006 level of
7.3% of revenues.
In addition, administrative and general expenses also contain legal and accounting fees of approximately
$3.5 million incurred by the corporation in relation to a wrongful dismissal claim by a former employee and as
M a g e l l a n 2 0 0 7 an n u a l R e p oR t
10
a result a detailed investigation of concerns raised by a former employee regarding certain accounting issues.
the concerns were thoroughly investigated by pricewaterhousecoopers (“pwc”) who, under the direction of the
corporation’s audit committee, prepared a report for the audit committee on their findings.the corporation’s legal
counsel has advised the board of directors that pwc met with the audit committee and the corporation’s external
auditors, and based on the report prepared by pwc, pwc has advised the audit committee that they had not found
anything that would undermine the integrity or accuracy of the corporation’s financial statements.
t S
a m e n d e d a n d r eS t a t e d r eSuL
accounting errors and misstatements in accounts receivable were uncovered at one of the corporation’s divisions dur-
ing the course of an ongoing process to collect outstanding accounts receivable on a timely basis. this prompted an
internal investigation that uncovered the overstatement of various assets on the balance sheet resulting from improper
accounting and also discovered unsupported and unrecorded transactions. as a result of the accounting irregularities
that occurred from 2003 to 2007, the corporation suffered a pre-tax write-down of $5.7 million, net of anticipated
insurance proceeds, as the overstated carrying values of the assets were written down to their appropriate values.
currently, the corporation is engaged in a process to recover a portion of the loss through its $1.5 million all risk
crime insurance policy. although the amounts of the restatements relating to the individual years prior to 2007 were
not likely material, the corporation has restated those periods as the cumulative effect of the accounting irregularities
was material in 2007. see note 3 of the consolidated financial statements.
f a c iLi t y ra t i o n aLi z a t i o n
during 2006, the corporation undertook major initiatives at four of its manufacturing facilities in order to streamline
production and increase capacity. significant activities took place during 2006 with respect to this program and
management expects to continue to achieve operational efficiencies at these facilities in 2008 and beyond.
as part of this rationalization program, the corporation sold portions of its surplus real estate and realized gains
on the sales. to prepare this real estate for sale, machinery and equipment was disposed of for minimal proceeds.
accordingly, a non-cash charge was recorded in the financial statements in 2006.
costs were also incurred to relocate machinery and equipment either to within the same facility or to new locations.
as these are one-time amounts, and significantly large, they have been disclosed separately in the consolidated
statements of operations.
amortization charge
equipment relocation costs
less: gain on sale of surplus real estate
Facility rationalization costs
in t e r eS
t exPe nSe
twelve-mont hs end ed dec e mb e r 3 1
expressed in thousands of dollars
Interest on bank indebtedness and long-term debt
convertible debenture interest
accretion charge on convertible debt
discount on sale of accounts receivable
total interest expense
M a g e l l a n 2 0 0 7 an n u a l R e p oR t
11
2006
$5,301
2,815
(5,661)
2,455
2006
10,442
5,950
2,289
3,693
22,374
2007
12,068
5,950
2,354
4,211
24,583
Interest costs for 2007 were $24.6 million, an increase of $2.2 million from 2006. Interest costs are higher in 2007
compared to 2006 as a result of higher interest rates and the deterioration in cash flow from operating activities,
which resulted in increased bank debt during the year. during the year, the corporation sold $399.6 million of ac-
counts receivable at a discount of $4.2 million, which represented an annualized interest rate of 6.82%. this discount
was included in interest expense. In 2006, $358.0 million of receivables were sold at a discount of $3.7 million,
which represented an annualized interest rate of 6.28%.
P r o v iSi o n f o r (re c o v e r y o f ) in c o m e t
a x eS
twelve-months ended december 31
expressed in thousands of dollars
provision for current income taxes
recovery of future income taxes
total recovery of income taxes
effective tax rate
2007
207
(1,300)
(1,093)
8.8%
2006
(restated)
264
(3,507)
(3,243)
28.5%
the corporation recorded a recovery of income taxes in 2007 of $1.1 million on a pre-tax loss of $12.4 million,
representing an effective tax rate of 8.8%, compared to a recovery of $3.2 million on a pre-tax loss of $11.4 mil-
lion in 2006 for an effective tax rate of 28.5%. during 2007, the corporation recorded a valuation allowance of
$2.7 million against its future tax assets in canada as the recovery of the future tax assets were not “more likely than
not.” In addition, the valuation allowance of $1.6 million previously recorded with respect to the tax losses in the
united kingdom was no longer required; and as such, the benefit of these tax losses was recorded in the fourth quarter
of 2007. also included in the recovery of income taxes is an adjustment of $0.4 million, which reflects the reduction
in canadian income tax rates substantially enacted in 2006.
caSh f Lo w f r o m o Pe r a t i n g a
c t i v i t i eS
twelve-mont hs end ed dec e mb e r 3 1
expressed in thousands of dollars
decrease in accounts receivable
Increase in inventories
Increase in prepaid expenses and other
decrease in accounts payable and accrued charges
net change in non-cash working capital items
cash provided by operating activities
2007
16,148
(16,112)
(5,064)
(1,463)
(6,491)
3,050
2006
(restated)
7,088
(9,991)
(606)
(10,257)
(13,766)
2,576
operating activities for 2007 generated cash flows before changes in working capital of $9.5 million compared to
$16.3 million in the prior year. In 2007, operating activities provided cash of $3.1 million, a $0.5 million increase
compared to $2.6 million provided in 2006 due principally to lower profitability and increased pension funding
offset by lower use of cash in working capital. changes in non-cash working capital used cash of $6.5 million, a
result of increases in inventories and prepaid expenses, decrease in accounts payable and accrued charges offset
by a decrease in accounts receivable. Inventory increased during the year due to investments in various programs
across substantially all of the corporation’s divisions. In 2006, changes in non-cash working capital used cash of
M a g e l l a n 2 0 0 7 an n u a l R e p oR t
12
$13.8 million was principally a result of an increase in inventory, a decrease in accounts payable and accrued
charges, offset by a decrease in accounts receivable. the corporation continues to focus on maximizing inventory
turn times and timely collection of receivables to minimize its investment in working capital.
caSh f Lo w f r o m in v eS
t i n g a c t i v i t i eS
twelve-mont hs end ed dec e mb e r 3 1
expressed in thousands of dollars
purchase of capital assets
proceeds from disposals of capital assets
Increase in other assets
cash used in investing activities
2007
(22,968)
2,240
1,279
(19,449)
2006
(30,972)
9,708
(4,063)
(25,327)
the corporation invested $23.0 million in capital assets during the year, to upgrade its machinery and facilities, a
decrease of $8 million from 2006. In 2007 and 2006, proceeds from the sale of capital assets, totalling $2.2 and
$9.7 million, respectively, were used to fund a portion of the investment in capital assets. capital additions were for
advanced technology production equipment as well as information technology systems, both designed to increase
productivity, reduce cycle time and improve technology capability.
SeLe c t e d q u a r t e rL
y f i n a n c i aL i n f o r m a t i o n
2007
2006
(restated)
March 31
june 30
sept 30
dec 31
march 31
june 30
sept 30
dec 31
144.1
(1.7)
150.3
(1.7)
147.9
(2.9)
155.5
(5.0)
137.0
150.0
143.5
144.7
(0.7)
(5.7)
0.2
(1.9)
expressed in millions of dollars
except per share information
revenues
net (loss) income
(loss) income per
common share
basic and diluted
(0.02)
(0.02)
(0.04)
(0.06)
(0.01)
(0.07)
0.00
(0.03)
the us$/c$ exchange rate was very volatile during 2007, the us dollar deteriorated by 15% against the canadian
dollar; from us$/c$ exchange rate of 1.17 at the start of the year to 0.99 by year’s end. the volatility in value
moved an unprecedented 23% during the year; from a high of us$/c$ of 1.19 in february to a low of 0.91 in
november. this extreme movement and volatility has severely impacted canadian exporters to the us as well as
canadian reporting companies that have us assets and us operations. the decline in value of the us dollar verses
the canadian dollar significantly impacted revenues on a quarterly basis.
eBi t d a
In addition to the primary measures of earnings and earnings per share in accordance with gaap, the corporation
includes certain measures in this md&a, including ebItda (earnings before interest expense, income taxes, deprecia-
tion, amortization and certain non-cash charges). the corporation has provided these measures because it believes
this information is used by certain investors to assess financial performance and ebItda is a useful supplemental
measure as it provides an indication of the results generated by the corporation’s principal business activities prior to
consideration of how these activities are financed and how the results are taxed in the various jurisdictions. each of the
components of this measure are calculated in accordance with gaap, but ebItda is not a recognized measure under
M a g e l l a n 2 0 0 7 an n u a l R e p oR t
13
gaap, and our method of calculation may not be comparable with that of other companies. accordingly, ebItda
should not be used as an alternative to net earnings as determined in accordance with gaap or as an alternative to
cash provided by or used in operations.
the table below provides a reconciliation of ebItda to net loss for the year:
twelve-mont hs end ed dec e mb e r 3 1
expressed in thousands of dollars
net loss for the year
Interest
taxes
stock based compensation
amortization charge
depreciation and amortization
ebItda
2007
(11,341)
24,583
(1,093)
1,450
-
22,799
36,398
2006
(restated)
(8,139)
22,374
(3,243)
945
5,301
22,472
39,710
L i q u i d i t y
the corporation’s liquidity needs can be met through a variety of sources including cash on hand, cash provided by
operations, short-term borrowings from our credit facilities and accounts receivable securitization program, and long-
term debt and equity capacity. principal uses of cash are for operational requirements and capital expenditures.
expressed in thousands of dollars
contractual obligations cdn $
long-term debt
capital lease obligations
operating leases
other long-term liabilities
convertible debentures
total
26,195
3,743
11,886
6,552
70,000
less than 1 year
16,063
1,036
4,665
425
70,000
1-3 years
2,523
1,498
3,681
1,020
-
payments due by period
4-5 years
2,598
1,209
1,821
3,630
-
after 5 years
5,011
-
1,719
1,477
-
total contractual obligations
118,376
92,189
8,722
9,258
8,207
major cash flow requirements for 2008 include repayments of $70.0 million convertible debentures and a
$15.0 million secured promissory note, and payments of operating leases of $4.7 million. subsequent to year end,
the corporation repaid the convertible debentures of $70.0 million and the secured promissory note of $15.0 million
through the receipt of funds from the new debentures, the original loan, and the bridge loan. In addition, the bridge
loan entered into on january 30, 2008 will be due and payable on july 31, 2008. these transactions are detailed
in note 21 of the consolidated financial statements and not reflected in the table above.
the corporation’s ability to continue as a going concern is contingent upon its ability to obtain additional sources of
funding to finance future operations. efforts will be required to obtain these additional funds, but there is no assurance
that additional financing will be available on acceptable terms, if at all. In the event that the corporation is not able
to successfully obtain additional financing as required, management will be required to re-evaluate the corporation’s
business operations and to reduce expenditures. see “risk factors.”
M a g e l l a n 2 0 0 7 an n u a l R e p oR t
14
the corporation has made contractual commitments to purchase $6.7 million of capital assets. the corporation also has
purchase commitments, largely for materials, in 2007, made through the normal course of operations, of $192.0 million.
the corporation plans to finance these capital commitments with operating cash flow and existing credit facility.
as at december 31, 2007, the corporation was not in compliance with respect to the financial covenant ratio of
current assets to current liabilities. subsequent to year end, the corporation amended the operating credit facility with
respect to this covenant.
as described in note 1, management of the corporation is evaluating the new accounting standard section 3031,
Inventories, and believes the manner in which costs are allocated to inventory will be impacted but the extent of the im-
pact will not be determined until the evaluation is complete. as a result of the application of the new standards, the cor-
poration may be unable to meet the minimum coverage levels prescribed in the financial covenants in the bank facility
agreement for the period ended march 31, 2008. If required, management will request a waiver of these covenants.
oF F b a l a n c e sHe e t a r r a n g eMe n t s
the corporation has entered into arrangements in which it sold certain accounts receivable at a discount. this discount
typically represents approximately 1.0% to 2.0% over 60 day ba or lIbor rates.at december 31, 2007, the amount
of accounts receivables sold remained outstanding was $61.8 million. a reserve of $5.9 million is included within ac-
counts receivable that represents the maximum credit recourse to the purchaser of the accounts receivable.
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 flow exposure in us dollars and
norwegian kroners. under these contracts the corporation is obliged to purchase specific amounts of us dollars and
norwegian kroners at predetermined dates and exchange rates. these contracts are matched with anticipated opera-
tional cash flows in us dollars and norwegian kroners.
the corporation had foreign exchange contracts outstanding at december 31 2007, as follows:
maturity - less than 1 year - u.s. dollar
maturity - less than 1 year - norwegian kroner
amount
$52.1 million
26.1 million
exchange rate
1.0075
0.1811
these foreign exchange contracts are recorded at their fair value of $0.8 million.
r e l a t e d p a r t y t r a n s a c tIo n s
as at december 31, 2007, the chairman of the board of the corporation held $15.0 million of the $70.0 million of
convertible debentures issued in 2003. the related cash interest for the year was $1.3 million (2006 – $1.3 million).
the convertible debentures were repaid on january 31, 2008.
on march 30, 2007, the corporation entered into secured promissary note with a corporation, which is controlled
by a common director, in the amount of $15.0 million, due july 1, 2008 bearing interest at a rate of 9.0%. In 2007,
$1.0 million of interest was paid in relation to the loan. the note was repaid on january 31, 2008.
the chairman of the board of the corporation has also guaranteed the amounts drawn under the bank operating credit
facility and in 2007 was paid an annual fee of $0.2 million (2006 – $0.2 million), 0.1% of the guaranteed amount
as compensation for this guarantee.
M a g e l l a n 2 0 0 7 an n u a l R e p oR t
15
during the year, the corporation entered into numerous financing agreements to sell accounts receivable totaling
$228.1 million to a corporation with a common director, for a discount of $2.5 million.
the corporation incurred consulting costs of $0.1 million payable to the chairman of the board of the corporation.
as well, the corporation paid legal fees of $0.05 million to a law firm in which a director is a partner.
c rItIc a l a c c o u n tIn g e s tI Ma t e s
c oS t o f S aLeS
average unit cost for products produced under long-term contracts is determined based on the estimated total
production costs for a predetermined program quantity. program quantities are established based on management’s
assessment of market conditions and foreseeable demand at the beginning of the production stage for each program,
taking into consideration both customer supplied and independent data. the average unit cost is recorded in cost of
sales as products are completed. under 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, excess
over-average production costs during the early stages of a program are deferred and recovered from sales of products
anticipated to be produced later at lower-than-average costs.
estimates of average unit costs and of program quantities are an integral component of average cost accounting.
management conducts regular reviews as well as a detailed annual review in the fourth quarter, as part of its annual
budget process, of its cost estimates and program quantities, and the effect of any revisions are accounted for by way
of a cumulative catch-up adjustment to income in the period in which the revision takes place.
in v e n t o r i eS
raw materials, materials in process and finished products are valued at the lower of average cost and net realizable
value. due to the long-term contractual periods of the corporation’s contracts, the corporation may be in negotia-
tion with its customers over amendments to pricing or other terms. management’s assessment of the recoverability
of amounts capitalized in inventory may be based on judgments with respect to the outcome of these negotiations.
If the negotiations are not successful or the final terms differ from what the corporation expects, the corporation may
be required to record a loss provision on this contract. the amount of such provision, if any, cannot be reasonably
estimated until such amendments are finalized.
a i r m e n t
a S Se t imP
the corporation evaluates long-lived assets for impairment when events or changes in circumstances indicate that
the related carrying amounts may not be recoverable. a long-lived asset is considered to be impaired if the total
undiscounted estimated future cash flows are less than the carrying value of the asset. the amount of the impairment
is determined based on discounted estimated future cash flows. future cash flows are determined based on manage-
ment’s estimates of future results relating to the long-lived assets. these estimates include various assumptions, which
are updated on a regular basis as part of the internal planning process.
the corporation regularly reviews its investments to determine whether a permanent decline in the fair value below
the carrying value has occurred. In determining whether a permanent decline has occurred, management considers
a number of factors that would be indicative of a permanent decline including (i) a prolonged decrease in the fair
value below the carrying value, (ii) severe or continued losses in the investment and (iii) various other factors such as
a decline or restriction in financial liquidity of an entity in which the corporation has an investment, which may be
indicative of a decline in value of the investment. the consideration of these factors requires management to make as-
sumptions and estimates about future financial results of the investment. these assumptions and estimates are updated
by management on a regular basis.
M a g e l l a n 2 0 0 7 an n u a l R e p oR t
16
in c o m e t a x eS
the corporation operates in several tax jurisdictions. as such, its income is subject to various rates and rules of taxa-
tion. the breadth of the corporation’s operations and the complexity of the taxing legislation and practices require the
corporation to apply judgment in estimating its ultimate tax liability. the final taxes paid will depend on many factors,
including the corporation’s interpretation of the legislation and the outcomes of audits by and negotiations with tax
authorities. ultimately, the final taxes may be adjusted based on the resolution of these uncertainties.
the corporation estimates future income taxes based upon temporary differences between the assets and liabilities
that are reported in its consolidated financial statements and their tax basis as determined under applicable tax legisla-
tion. the corporation records a valuation allowance against its future income tax assets when it believes that it is not
‘‘more likely than not’’ that such assets will be realized. this valuation allowance can either be increased or decreased
where, in the view of management, such change is warranted.
a t i o n
fo r e i g n cu r r e n c y tr a nS L
the functional currency of the corporation is canadian dollars. many of the corporation’s business undertake transac-
tions in currencies other than the canadian dollar. as part of its ongoing review of critical accounting policies and es-
timates, the corporation reviews the foreign currency translation method of its foreign operations to determine if there
are significant changes to economic facts and circumstances that may indicate that the foreign operations are largely
self-sufficient and the economic exposure is more closely tied to their respective domestic currencies. any change, if
any, in translation method resulting from this review will be accounted for prospectively. the corporation accounts for
its us and uk subsidiaries as self-sustaining foreign operations.
fi n a n c i aL inS
the corporation has not utilized any financial instruments to hedge its exposure to foreign currency flows in 2007 and 2006.
t r u m e n t S a n d o t h e r inS
t r u m e n t S
c Ha n g e s In a c c o u n tIn g p o lIcIe s
effective january 1, 2007, the corporation adopted the canadian Institute of chartered accountants (cIca) hand-
book sections 1530, comprehensive Income, section 3855, financial Instruments – recognition and measurement
and section 3865, hedges. the adoption of these new standards resulted in changes in the accounting for financial
instruments and hedges, as well as the recognition of certain transition adjustments. as provided under the standards,
the comparative annual consolidated financial statements have not been restated, except for the presentation of trans-
lation gains or losses on self-sustaining foreign operations as part of comprehensive loss.
the adoption of these sections was done retroactively without restatement of the consolidated financial statements of
prior periods. the effect of these changes in accounting policies on net income for year ended december 31, 2007
was not significant.
the reader is referred to note 2 in the accompanying audited consolidated financial statements for the year ended
december 31, 2007 for further details regarding the adoption of these standards.
future changes in accounting policies are described in detail in note 1 of the audited consolidated financial state-
ments for the year ended december 31, 2007. the reader is referred to this note for further details regarding the
adoption of these standards.
M a g e l l a n 2 0 0 7 an n u a l R e p oR t
17
c o n t r o l s a n d pr o c e d u r e s
based on the current canadian securities administrators (“csa”) rules under multilateral Instrument 52-109, the chief
executive officer and chief financial officer (or individuals performing similar functions as a chief executive officer or
chief financial officer) are required to certify as at december 31, 2007 that they are responsible for establishing and
maintaining disclosure controls and procedures and internal control over financial reporting, and have assessed the
effectiveness of disclosure controls and procedures.
management does not expect disclosure controls and procedures to prevent all errors, misstatements or fraud.
In addition, internal control over financial reporting that management has designed and established may be circum-
vented and rendered ineffective as a result of unauthorized acts of individuals through collusion or management over-
ride. a system of control, no matter how well conceived and operated, can provide only reasonable, but not absolute,
assurance that control objectives are met. due to the inherent limitations in a system of control, there is no absolute
assurance that all controls issues, which may result in errors, misstatements, or fraud, can be prevented or detected.
the inherent limitations include, amongst other things: (i) management’s assumptions and judgments could ultimately
prove to be incorrect under varying conditions and circumstances; (ii) the impact of isolated errors; (ii) assumptions
about the likelihood of future events.
In preparation for the annual certification, the corporation had dedicated resources to document disclosure controls
and procedures and internal control over financial reporting, and evaluate the effectiveness of disclosure controls and
procedures. an evaluation was carried out, under the supervision of and with participation of management, including
the president and chief operating officer (president and chief executive officer effective as of january 28, 2008)
and vice president, finance and corporate secretary, of the effectiveness of the corporation’s disclosure controls, as
defined in the rules of the csa. based on that evaluation, management concluded that the corporation’s disclosure
controls and procedures were effective as of december 31, 2007, as the established disclosure controls and proce-
dures provide a reasonable level of assurance that information required to be disclosed by the corporation in its filings
is accumulated, communicated, and reported on a timely basis.
no changes were made in the corporation’s internal control over financial reporting during the corporation’s most
recent interim period, that have materially affected, or are reasonably likely to materially affect, the corporation’s
internal control over financial reporting.
o tHe r I nFo rMa tIo n
the authorized capital of the corporation consists of an unlimited number of preference shares, issuable in series, and
an unlimited number of common shares. as at march 28, 2008, 90,892,828 common shares were outstanding and
2,000,000 preference shares were outstanding.
the corporation had outstanding approximately $20.9 million of 8.5% convertible unsecured subordinated deben-
tures, due january 31, 2010. the debentures were convertible at any time prior to the maturity date by holders into
common shares of the corporation at a conversion price of $2.00 per common share. full conversion of the convert-
ible debentures would give rise to an additional 10,475,000 common shares.
additional information relating to magellan aerospace corporation, including the corporation’s annual Information
form is on sedar at www.sedar.com.
M a g e l l a n 2 0 0 7 an n u a l R e p oR t
18
m a n a g e m e n t ’S r ePo r t
the consolidated financial statements of ma g eL L a n ae r oS P a c e c o rPo r a t i o n 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.
james s. butyniec
john b. dekker
President and Chief Executive Officer
Vice President Finance and Corporate Secretary
march 28, 2008
M a g e l l a n 2 0 0 7 an n u a l R e p oR t
19
a u d i t o rS’ r ePo r t
t o tHe s Ha r eHo l d e r s oF M a g e l l a n ae r o s p a c e c
we have audited the consolidated balance sheets of ma g eL L a n ae r oS P a c e c o rPo r a t i o n as at december 31,
2007 and 2006 and the consolidated statements of operations, retained earnings, cash flows and comprehensive
loss 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.
o r p o r a tIo n
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, 2007 and 2006 and the results of its operations and its cash flows for the years
then ended in accordance with canadian generally accepted accounting principles.
chartered accountants
licensed public accountants
toronto, canada, march 26, 2008
M a g e l l a n 2 0 0 7 an n u a l R e p oR t
20
c o nSoLi d a t e d B aL
a n c e S h e e t S
as at december 31
[expressed in thousands of dollars]
assets
current
cash
accounts receivable [note 20(f)]
Inventories [ n ot e 5]
prepaid expenses and other
future income tax assets [n ot e 15]
total current assets
capital assets, net [n ot e 6]
other [note 1 4]
future income tax assets [n ot e 15]
liabilities and shareholders’ equity
current
bank indebtedness [n ot e 7]
accounts payable and accrued charges [n ot e 8]
convertible debentures [n ot e 10]
current portion of long-term debt [n ot e 9]
total current liabilities
long-term debt [n ot e 9]
convertible debentures [n ot e 10]
future income tax liabilities [n ot e 15]
other long-term liabilities [n ot e 8]
total long-term liabilities
shareholders’ equity
capital stock [n ot es 11 an d 12]
contributed surplus [n ot e 20 (g)]
other paid in capital [n ot e 10]
retained earnings
accumulated other comprehensive loss [n ot e 13]
total shareholders’ equity
commitments and contingencies [n ot e 22]
see accompanying notes
on behalf of the board:
n. murray edwards
director
william a. dimma
director
M a g e l l a n 2 0 0 7 an n u a l R e p oR t
21
2007
2006
(restated note 3)
$ 4,884
35,659
274,011
13,127
6,264
333,945
245,727
55,707
14,064
649,443
139,748
119,881
13,834
2,099
275,562
27,839
55,950
16,799
7,366
107,954
234,310
3,249
11,100
82,747
(65,479 )
265,927
649,443
$ 9,896
56,232
275,751
9,628
5,914
357,421
264,801
52,680
7,068
681,970
142,457
128,066
-
2,039
272,562
15,902
67,430
20,785
2,748
106,865
234,171
1,799
11,100
95,688
(40,215 )
302,543
681,970
c o n S o L i d a t e d S t a t e m e n t S o f o P e r a t i o n S a n d
2007
$ 597,808
538,894
58,914
2006
(restated note 3)
$ 575,223
524,201
51,022
46,765
-
24,583
71,348
(12,434)
207
(1,300)
(1,093)
(11,341)
95,688
(1,600)
(11,341)
82,747
37,575
2,455
22,374
62,404
(11,382)
264
(3,507)
(3,243)
(8,139)
105,427
(1,600)
(8,139)
95,688
(0.14)
(0.11)
re t a i n e d ea r n i n gS
as at december 31
[expressed in thousands of dollars except per share data]
revenues
cost of revenues [n ot e 3]
gross profit
expenses
administrative and general expenses [n ot es 3 an d 19 ]
facility rationalization [n ot e 4]
Interest [note s 7 and 2 0(a)]
loss before income taxes
provision for (recovery of) income taxes [n ot e 15]
current
future
net loss for the year
retained earnings, beginning of year [note 3]
dividends on preference shares
net loss for the year
retained earnings, end of year
loss per common share [n ot e 11]
basic and diluted
see accompanying notes
M a g e l l a n 2 0 0 7 an n u a l R e p oR t
22
c o nSoLi d a t e d S
t a t e m e n t S o f c aSh fLo wS
2007
2006
(restated note 3)
$ (11,341)
$ (8,139)
22,799
(1,257)
206
(6,977)
3,544
-
1,450
63
2,354
(1,300)
9,541
(6,491)
3,050
(22,968)
2,240
1,279
(19,449)
11,695
13,190
(9,780)
76
(1,600)
13,581
(2,194)
(5,012)
9,896
4,884
22,472
(5,423)
277
2,064
-
5,301
945
63
2,289
(3,507)
16,342
(13,766)
2,576
(30,972)
9,708
(4,063)
(25,327)
28,138
5,456
(7,895)
50
(1,600)
24,149
1,072
2,470
7,426
9,896
as at december 31
[expressed in thousands of dollars]
operating activities
net loss for the year
add (deduct) items not affecting cash
depreciation and amortization
net gain on sale of capital assets
write-down of assets
employee future benefits
deferred revenue
amortization charge [n ot e 4]
stock based compensation [n ot e 12]
Issuance of common shares to the directors
accretion of convertible debentures
future income tax recoveries
net change in non-cash working capital items
related to operating activities [n ot e 20[c]]
cash provided by operating activities
Investing activities
purchase of capital assets
proceeds from disposal of capital assets
decrease (increase) in other assets
cash used in investing activities
financing activities
Increase in bank indebtedness
Increase of long-term debt
decrease in other long-term liabilities
Issuance of common shares
dividends on preference shares
cash provided by financing activities
effect of exchange rate changes on cash
net (decrease) increase in cash during the year
cash, beginning of year
cash, end of year
see accompanying notes
M a g e l l a n 2 0 0 7 an n u a l R e p oR t
23
c o nSoLi d a t e d S
t a t e m e n t S o f c o mPr e h e nSi v e LoS S
as at december 31
[expressed in thousands of dollars]
net loss for the year
other comprehensive loss:
net unrealized gain (loss) on translation of net
investment in foreign operations [note 13]
comprehensive loss
2007
$ (11,341)
(25,264)
(36,605)
2006
(restated note 3)
$ (8,139)
5,073
(3,066)
M a g e l l a n 2 0 0 7 an n u a l R e p oR t
24
n o t eS t o c o nSoLi d a t e d f i n a n c i aL S
t a t e m e n t S
1 . s Ig nI F Ic a n t a
c c o u n tIn g po lIcIe s
B a S i S o f P r e S e n t a t i o n
the consolidated financial statements have been prepared by management in accordance with canadian gener-
ally 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.
t i m a t eS
u Se o f eS
the preparation of consolidated financial statements in conformity with canadian generally accepted accounting
principles requires management to make estimates and assumptions that affect: the reported amounts of assets and
liabilities; the disclosure of contingent assets and liabilities at the date of the consolidated financial statements; and the
reported amount of revenue and expenses during the reporting period. significant estimates made by management
include, but are not limited to average production costs, asset impairment, income taxes, stock-based compensation
assumptions and pension plan assumptions. management believes that the estimates included in preparing its consoli-
dated financial statements are reasonable and prudent; however, actual results could differ from these estimates.
re v e n u e r e c o g n i t i o n
the corporation’s revenue recognition methodology is determined on a contract-by-contract basis.
the most significant revenue recognition policies are outlined below:
revenue from the sale of manufactured units is recognized when the price is fixed or determinable, collectibility is
reasonably assured and upon shipment to, or receipt by, customers, depending on contractual terms, and acceptance
by customers.
the majority of revenue on long-term contracts is recognized using the units of delivery method to measure prog-
ress toward completion, as the contracts require shipments of a large number of units over an extended period
of time.
revenues from certain long-term contracts are recognized on a percentage of completion basis. the percentage
complete is calculated based upon contract costs incurred to date compared with total estimated contract costs. the
percentage complete is then applied to total anticipated contract revenue to determine the period’s revenue. a provi-
sion for the estimated loss is made when contract costs are expected to exceed estimated contract revenue.
c oS t o f SaLeS
the average unit costs for long-term contracts is determined based on the estimated total production costs for a
predetermined contract quantity. In the early stages of a long-term contract, a constant gross margin is achieved by
continuing to defer in inventory the excess over average production costs. this excess over estimated average produc-
tion costs is recovered from sales of units anticipated to be produced at lower-than-average costs, as a result of 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.
non-recurring costs, which are comprised of the development costs, pre-production and tooling costs related to these
contracts, are amortized based on the pre-determined contract quantity.
estimates of revenues, unit production costs and delivery periods associated with forecasted orders are an integral
component of the learning curve concept, and management’s ability to reasonably estimate these amounts is a re-
quirement for the use of the learning curve concept. management conducts quarterly reviews as well as a detailed
annual review in the fourth quarter of its assumptions as to the number of units to be produced, the estimated period
M a g e l l a n 2 0 0 7 an n u a l R e p oR t
25
notes to consolidated financial statements
december 31, 2007 an d 2006
over which the units will be delivered and the estimated future costs and revenues associated with the programs.
adjustments of estimates are accounted for prospectively with the exception of anticipated losses on specific pro-
grams, which are recognized immediately in the period when losses are identified.
in v e n t o r y
Inventory is stated at the lower of average cost and estimated net realizable value.
as the operating cycles for long-term contracts are longer than one year, inventory related to these contracts is included
in current assets and is calculated using long-term average cost which reflects higher unit costs at the early phase of a
program and lower unit costs at the end of the program (the learning curve concept). the difference between actual
and long-term average costs in the early stage of a program is included in inventory. Inventoried costs on long-term
contracts also include pre-production costs consisting primarily of engineering costs, including applicable overhead,
and other development costs.
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.
caPi t aL aS Se t
capital assets are recorded at cost less related government grants and investment tax credits and are depreciated
over their estimated useful lives, with a 10% residual value, as follows:
S
buildings
machinery and equipment
40 years
20 years
amortization of machinery and equipment commences once the asset is put into commercial production.
imP a i r m e n t o f Lo n g -Li v e d aS Se t
the corporation assesses long-lived assets for recoverability whenever indicators of impairment exist. If the carrying
value of the asset exceeds the estimated undiscounted cash flows from use of the asset, an impairment loss is recog-
nized. Impairment losses are measured as the amount by which the carrying value of an asset exceeds its fair value.
fair value is based on discounted cash flows.
S
S
te c h n oLo g y r i g h t
Included in other assets are the costs to purchase technological rights applicable to a specific long-term contract.
these costs will be amortized on a units of production basis to cost of goods sold over the anticipated term of the
long-term contract.
reSe a r c h a n d d e v eLoPm e n t
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 applicable category
of expenditures, that is, either cost of revenues, capital assets or research and development costs.
development costs are capitalized when certain criteria are met for deferral and their recovery is reasonably assured.
capitalized development costs are included in other assets.
t m e n t
go v e r n m e n t i n v eS
the corporation makes periodic applications for government investment under available government programs, in-
cluding 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.
M a g e l l a n 2 0 0 7 an n u a l R e p oR t
26
notes to consolidated financial statements
december 31, 2007 an d 2006
c o n v e r t iB Le d eBe n t u r eS
the amount recorded as convertible debentures includes the present value of the future interest and principal amounts
of the debentures. the amount will be accreted to the face value of the convertible debentures over the term to maturity
through periodic charges to the consolidated statement of operations.
the value of the holder’s option to convert the convertible debentures into common shares of the corporation is re-
corded as other paid in capital. the holder’s conversion option is valued using the residual value approach.
fo r e i g n e x c h a n g e t r a nS L a t i o n
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.
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 equity investment in
these operations are deferred as a separate component of accumulated other comprehensive loss.
the appropriate amounts of exchange gains or losses accumulated in accumulated other comprehensive loss are
reflected in income when there is a reduction, as a result of capital transactions, in the corporation’s net investment in
the operations that gave rise to such exchange gains or losses.
a nS
emP Lo y e e Be n e f i t P L
the cost of pension and post-employment benefits (including medical benefits, dental care, life insurance and certain
compensated absences) 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 on a
straight-line basis over the remaining average service life of active employees at the date of amendments. actuarial
gains (losses) arise from the difference between the actual long-term rate of return on plan assets for a period and
the expected long-term rate of return on plan assets for that period or from changes in actuarial assumptions used to
determine the accrued benefit obligation. the excess of the net accumulated actuarial gain (loss) which is more than
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.
S t o c k BaSe d c o mPe nSa t i o n P L
stock options granted are accounted for under the fair value method. under this method, compensation expense is
measured at fair value at the grant date using the black-scholes option pricing model and recognized over the vesting
period with a corresponding credit to contributed surplus. on the exercise of stock options, consideration received
and the accumulated contributed surplus amount is credited to capital stock.
a n
in c o m e t a x eS
the corporation follows the liability method of income tax allocation. under this method, future tax assets and li-
abilities are determined based on differences between the financial reporting and tax bases of assets and liabilities
and are measured using the substantively enacted tax rates and laws that will be in effect when the differences are
expected to reverse.
M a g e l l a n 2 0 0 7 an n u a l R e p oR t
27
notes to consolidated financial statements
december 31, 2007 an d 2006
L oS S Pe r c o m m o n Sh a r e
basic loss per common share is computed by dividing the total of net loss plus preference share dividends by the
weighted average number of common shares outstanding during the year. diluted loss per common share reflects the
assumed conversion of all dilutive securities using the “if converted” method for convertible debentures and preference
shares and the “treasury stock” method for options.
under the “if converted” method:
• the convertible subordinated debentures and preference shares are assumed to be converted at the beginning of the
year or at the date of issuance, if later.
under the “treasury stock” method:
• the exercise of options is assumed to be at the beginning of the year or at the time of issuance, if later;
• the proceeds from the exercise, plus future period compensation expense on options granted are assumed to be used
to purchase common shares at the average price during the year; and
• the incremental number of common shares, which is the difference between the number of shares assumed issued
and the number of shares assumed purchased, is included in the denominator of the diluted loss per common share
computation.
t r u m e n t S
de r i v a t i v e f i n a n c i aL i nS
the corporation manages its foreign currency through the use of derivative financial instruments. the corpora-
tion’s policy is not to utilize derivative financial instruments for trading or speculative purposes. for the year ended
december 31, 2007, the corporation’s derivative contracts were not designated as hedges and as a result are
recorded on the consolidated balance sheets at their fair value. any changes in fair value during the period are
reported in foreign exchange in the consolidated statement of operations. transaction costs incurred to acquire
financial instruments are included in the underlying balance.
S aLe o f r e c e i v aB LeS
transfers of receivables in securitization transactions are recognized as sales when the corporation is deemed to
have surrendered control over the transferred receivables and consideration in the transferred receivables has been
received. the corporation continues to service the accounts receivables but does not retain any interest in the trans-
ferred receivables.
fu t u r e c h a n g eS i n a c c o u n t i n g PoLi c i eS
effective january 1, 2008, except as noted in section 3064, the corporation will adopt the following accounting
standards recently issued by the canadian Institute of chartered accountants (cIca):
[a] section 3031, Inventories
this section of the cIca handbook provides guidance on the determination of cost and its subsequent recog-
nition as an expense, including any write-down to net realizable value. It also provides guidance on the cost
formulas that are used to assign costs to inventories and expands the disclosure requirements to increase trans-
parency. this section applies to interim and annual financial statements for fiscal years beginning on or after
january 1, 2008. management of the corporation is evaluating the new standards and believes the method it
uses to allocate costs to inventory will be impacted and will lead to a reduction in the amount of costs that can
be included in inventory.
[b] section 1535, capital disclosures
section 1535, “capital disclosures”, establishes guidelines for the disclosure of information on an entity’s
M a g e l l a n 2 0 0 7 an n u a l R e p oR t
28
notes to consolidated financial statements
december 31, 2007 an d 2006
capital and how it is managed. effective for fiscal periods beginning on or after october 1, 2007, this en-
hanced disclosure enables users to evaluate the entity’s objectives policies and processes for managing capital.
this new requirement is for disclosure only and will not impact the financial results of the corporation.
[c] section 3862, financial Instruments – disclosure and presentation
In december 2006, the cIca issued section 3862, “financial Instruments – disclosure”, and section 3863,
“financial Instruments – presentation” to replace the existing section 3861 “financial Instruments – disclosure
and presentation.” section 3862 requires enhanced disclosure on the nature and extent of financial instrument
risks and how an entity manages those risks. section 3863 carries forward the existing presentation require-
ments and provides additional guidance for the classification of financial instruments. these sections are effec-
tive for fiscal periods beginning on or after october 1, 2007. this new requirement is for disclosure only and
will not impact the financial results of the corporation.
[d] section 3064, goodwill and Intangible assets
the cIca issued the new accounting standard section 3064, “goodwill and Intangible assets” which will
replace section 3062, “goodwill and other Intangible assets”. this new standard will be effective for fiscal
years beginning on or after october 1, 2008 and the corporation will adopt it on january 1, 2009. It estab-
lishes standards for the recognition, measurement, presentation and disclosure of goodwill subsequent to its
initial recognitions and of intangible assets by profit oriented enterprises. standards concerning goodwill are
unchanged from the standards included in the previous section 3062. the corporation is currently evaluating
the impact of the adoption of this new section on its financial statements.
2 . a c c o u n tIn g c
Ha n g e s
t r u m e n t S
fi n a n c i aL i nS
on january 1, 2007, the company adopted the cIca handbook sections 3855, financial Instruments – recogni-
tion and measurement, 3865, hedges, 1530, comprehensive Income and 3861, financial Instruments – disclosure
and presentation. all derivative instruments, including embedded derivatives, are recorded in the statement of financial
position at fair value unless exempted from derivative treatment as a normal purchase and sale. all changes in their
fair value are recorded in income unless cash flow hedge accounting is used, in which case changes in fair value are
recorded in other comprehensive income.
embedded derivatives are required to be separated and measured at fair values if certain criteria are met. embedded
derivatives include elements of contracts whose cash flows move independently from the host contract.
the impact of the change in the accounting policy related to embedded derivatives was not material, as at
january 1, 2007.
section 3855, financial Instruments – recognition and measurement
under the new standards, all financial instruments are classified into one of the following five categories: held for trad-
ing, held to maturity investments, loans and receivables, available-for-sale financial assets, or other financial liabilities.
all financial instruments, including derivatives, are included on the consolidated statement of financial liabilities, which
are measured at fair value except for loans and receivables, held-to-maturity investments and other financial liabilities
which are measured at amortized costs. held for trading financial investments are subsequently measured at fair value
and all gains and losses are included in net income in the period in which they arise. available-for-sale financial
instruments are subsequently measured at fair value with revaluation gains and losses included in other comprehensive
income until the instruments are derecognized or impaired.
M a g e l l a n 2 0 0 7 an n u a l R e p oR t
29
notes to consolidated financial statements
december 31, 2007 an d 2006
the corporation has classified its cash and cash equivalents and investments, which are classified as other assets, as
held for trading. accounts receivable are classified as loans and receivables. accounts payable and long-term debt
have been classified as other financial liabilities, all of which are measured at amortized cost.
section 3865, hedges
under the previous standards, derivatives that met the requirements for hedge accounting were generally accounted
for on an accrual basis. under the new standards, in a cash flow hedge relationship, the effective portion of the
change in the fair value of the hedging derivative is recognized in accumulated other comprehensive income. the
ineffective portion is recognized in net income.
as at january 1, 2007, the corporation’s derivative contracts were not designated as hedges and as a result are
recorded on the consolidated balance sheets at their fair value. any change in the fair value during the period are
reported in foreign exchange in the consolidated statement of operations.
section 1530, comprehensive Income
accumulated other comprehensive income is included on the consolidated balance sheets as a separate component
of shareholders’ equity (net of tax), and includes unrealized foreign currency translation gains and losses on self-sus-
taining foreign operations net of the gains or losses on related hedges. the corporation now presents a consolidated
statement of comprehensive income as part of the consolidated financial statements. as required, comparative consoli-
dated financial statements provided for earlier periods relating to foreign currency translation of self-sustaining foreign
operations have been restated to reflect application of this section. all other changes resulting from the adoption of the
new standards are recorded on january 1, 2007 without restatement of comparative figures.
3 . aMe n d e d a n d r e s t a t e d r e s u l t s
accounting errors and misstatements in accounts receivable were uncovered at one of the corporation’s divisions dur-
ing the course of an ongoing process to collect outstanding accounts receivable on a timely basis. this prompted an
internal investigation that uncovered the overstatement of various assets on the balance sheet resulting from improper
accounting and also discovered unsupported and unrecorded transactions. as a result of the accounting irregulari-
ties that occurred from 2003 to 2007, the corporation recorded a loss of $5,748, net of anticipated insurance
proceeds, as the overstated carrying values of the assets were written down to their appropriate values. currently,
the corporation is engaged in a process to recover a portion of the loss through its $1,500 all risk crime insurance
policy. although the amounts of the restatements relating to the individual years prior to 2007 were not likely material,
the corporation has restated those periods as the cumulative effect of the accounting irregularities was material in
2007. a loss of $2,158 was recorded in 2007 (2006 – loss of $1,159) in relation to the accounting irregularities.
the impacts on the statements of operations for 2007 and 2006 were an increase of cost of revenues by $1,588
and $249, respectively, and an increase of administrative and general expenses by $570 and $910, respectively.
Included in the impact of administrative and general expenses is a write-down of fixed assets of $206 and $277, in
2007 and 2006 respectively. the 2006 opening retained earnings balance was also reduced by $1,592.
the effects of all the resulting adjustments required to the originally issued 2006 annual consolidated financial state-
ments are set out in the following tables in financial statement format:
M a g e l l a n 2 0 0 7 an n u a l R e p oR t
30
notes to consolidated financial statements
december 31, 2007 an d 2006
as at december 31, 2006
B aL a n c e Sh e e t
assets
current
cash
accounts receivable
Inventories
prepaid expenses and other
future income tax assets
total current assets
capital assets, net
other
future income tax assets
liabilities and shareholders’ equity
current
bank indebtedness
accounts payable and accrued charges
current portion of long-term debt
total current liabilities
long-term debt
convertible debentures
future income tax liabilities
other long-term liabilities
total long-term liabilities
shareholders' equity
capital stock
contributed surplus
other paid in capital
retained earnings
accumulated other comprehensive loss
total shareholders' equity
M a g e l l a n 2 0 0 7 an n u a l R e p oR t
31
restated
originally reported
$ 9,896
$ 9,896
56,232
275,751
9,628
5,914
357,421
264,801
52,680
7,068
681,970
58,066
276,462
10,396
5,914
360,734
265,078
52,680
5,829
684,321
$ 142,457
$ 142,457
128,066
2,039
272,562
15,902
67,430
20,785
2,748
106,865
234,171
1,799
11,100
95,688
(40,215)
302,543
681,970
128,066
2,039
272,562
15,902
67,430
20,785
2,748
106,865
234,171
1,799
11,100
98,039
(40,215)
304,894
684,321
restated
originally reported
$ 575,223
$ 575,223
524,201
51,022
37,575
2,455
22,374
62,404
(11,382)
264
(3,507)
(3,243)
(8,139)
105,427
(1,600)
(8,139)
95,688
523,952
51,271
36,665
2,455
22,374
61,494
(10,223)
264
(3,107)
(2,843)
(7,380)
107,019
(1,600)
(7,380)
98,039
(0.11)
(0.10)
notes to consolidated financial statements
december 31, 2007 an d 2006
year ended december 31, 2006
i n c o m e S t a t e m e n t
revenues
cost of revenues
gross profit
expenses
administrative and general expenses
facility rationalization
Interest
loss before income taxes
provision for (recovery of) income taxes
current
future
net loss for the year
retained earnings, beginning of year
dividends on preference shares
net loss for the year
retained earnings, end of year
loss per common share
basic and diluted
M a g e l l a n 2 0 0 7 an n u a l R e p oR t
32
notes to consolidated financial statements
december 31, 2007 an d 2006
year ended december 31, 2006
c o n S o L i d a t e d S t a t e m e n t o f c a S h f L o w S
operating activities
net loss for the year
add (deduct) items not affecting cash
depreciation and amortization
net gain on sale of capital assets
write-down of assets
employee future benefits
amortization charge
stock based compensation
Issuance of common shares to the directors
accretion of convertible debentures
future income tax recoveries
net change in non-cash working capital items
related to operating activities
cash provided by operating activities
Investing activities
purchase of capital assets
proceeds from disposal of capital assets
Increase in other assets
cash used in investing activities
financing activities
Increase in bank indebtedness
Increase of long-term debt
decrease in other long-term liabilities
Issuance of common shares
dividends on preference shares
cash provided by financing activities
effect of exchange rate changes on cash
net increase in cash during the year
cash, beginning of year
cash, end of year
M a g e l l a n 2 0 0 7 an n u a l R e p oR t
33
restated
originally reported
$ (8,139)
$ (7,380)
22,472
(5,423)
277
2,064
5,301
945
63
2,289
(3,507)
16,342
(13,766)
2,576
(30,972)
9,708
(4,063)
(25,327)
28,138
5,456
(7,895)
50
(1,600)
24,149
1,072
2,470
7,426
9,896
22,472
(5,423)
-
-
5,301
945
63
2,289
(3,107)
15,160
(12,561)
2,599
(30,972)
9,708
(1,999)
(23,263)
28,138
5,456
(9,982)
50
(1,600)
22,062
1,072
2,470
7,426
9,896
notes to consolidated financial statements
december 31, 2007 an d 2006
the restated 2006 cash flow statement has also been adjusted to reflect the payments of certain other long-term
liabilities as an operating activity ($2,087 use of cash) which had previously been reported as a financing activity.
In addition, cash flow from operating activities has also been adjusted to reflect the impact of employee future benefits
as an operating item ($2,064 source of cash) which had previously been reflected as an investing activity.
4 . F a cIlIt y r a tIo n a lIz a tIo n
during 2006, the corporation undertook a program to rationalize and modernize four of its facilities. as part of this
rationalization program, the corporation sold a portion of its surplus real estate and realized a gain on the sale. In
order to prepare this real estate for sale, machinery and equipment was disposed of for minimal proceeds. accord-
ingly, a non-cash amortization charge was recorded in the consolidated financial statements.
costs were also incurred to relocate machinery and equipment either within the same facility or to new locations.
as these are one-time and are significantly large they have been disclosed separately in the consolidated statements
of operations.
amortization charge
equipment relocation costs
less: gain on sale of surplus real estate
Facility rationalization costs
5 . InVe n t o rIe s
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]
engineering and other costs
less: advances and progress payments
2006
$ 5,301
2,815
(5,661)
2,455
2007
$ 197,713
2006
(restated note 3)
$ 194,235
29,598
62,376
289,687
15,676
274,011
30,237
66,306
290,778
15,027
275,751
learning curve costs involve measurement uncertainty, and accordingly, the carrying amounts could be materially dif-
ferent from the amounts recovered.
due to the long-term contractual period of the corporation’s contracts, the corporation may be in negotiations with
its customers over amendments to pricing or other terms. management’s assessment of the recoverability of amounts
capitalized in inventory may be based on judgments with respect to the outcome of these negotiations. If the negotia-
tions are not successful or the final terms differ from what the corporation expects, the corporation may be required
to record a loss provision on this contract. the amount of such provision, if any, cannot be reasonably estimated until
such amendments are finalized.
M a g e l l a n 2 0 0 7 an n u a l R e p oR t
34
notes to consolidated financial statements
december 31, 2007 an d 2006
6 . c a pIt a l a s s e t s
land
buildings
Machinery and equipment
land
buildings
machinery and equipment
cost accumulated depreciation
net book value
$ 14,074
$ -
$ 14,074
2007
93,333
299,890
407,297
29,456
132,114
161,570
63,877
167,776
245,727
2006
(restated note 3)
cost
accumulated depreciation
net book value
$ 15,580
$ -
$ 15,580
94,313
309,399
419,292
27,832
126,659
154,491
66,481
182,740
264,801
Included in machinery and equipment are construction in progress expenditures of $2,195 [2006 – $2,684].
the above amounts include $8,024 [2006 – $8,455] of capital assets under capital leases and accumulated
depreciation of $1,870 [2006 – $1,418] related thereto. depreciation recorded in the year related to capital assets
under capital leases totaled $397 [2006 – $277].
7 . b a nK In d e b t e d n e s s
the corporation has an operating credit facility, with a syndicate of banks, with a canadian limit of $75,000
plus a us limit of us$90,000 ($164,217 at december 31, 2007). bank indebtedness of $139,748
[2006 – $142,457] is payable on demand and bears interest at the bankers’ acceptance or lIbor rates, plus
0.875% (5.7% at december 31, 2007 [2006 – 5.9%]). Included in the amount outstanding at december 31, 2007 is
us$84,171 [2006 – us$82,325]. at december 31, 2007, the corporation had drawn $139,748 under the
operating credit and had issued letters of credit totaling $1,912 such that $22,557 was unused and available. a fixed
and floating charge debenture on accounts receivable, inventories and capital assets is pledged as collateral for the
operating loans. the chairman of the board of the corporation has provided a guarantee for the full amount of the
credit facility.
as at december 31, 2007, the corporation was not in compliance with respect to the financial covenant ratio of
current assets to current liabilities. subsequent to the year end, the corporation amended the operating credit facility
agreement with respect to this covenant.
as described in note 1, management of the corporation is evaluating the new accounting standard section 3031,
Inventories, and believes the manner in which costs are allocated to inventory will be impacted but the extent of the im-
pact will not be determined until the evaluation is complete. as a result of the application of the new standard, the cor-
poration may be unable to meet the minimum coverage levels prescribed in the financial covenants in the bank facility
agreement for the period ended march 31, 2008. If required, management will request a waiver of these covenants.
M a g e l l a n 2 0 0 7 an n u a l R e p oR t
35
notes to consolidated financial statements
december 31, 2007 an d 2006
8 . o tHe r l o n g-
t e rM lIa bIlItIe s
non-interest bearing amounts owed to third parties [a]
accrued costs related to plant and program closures [b]
other [c]
less current portion included in accounts payable and accrued charges
2007
$ -
516
7,126
7,642
276
7,366
amounts are due as follows:
2008
2009
2010
2011
2012
thereafter
2006
$ 10,029
4,681
2,630
17,340
14,592
2,748
$ 276
830
43
2,301
1,329
2,863
7,642
[a] the non-interest bearing amounts at december 31, 2006, were net of an unamortized discount of $148 based
on an average imputed interest rate of 6.5%.
[b] during 2003, the corporation announced its decision to cease operations at its fleet Industries plant in fort
erie, ontario. management estimated the potential costs and losses resulting from this decision and recorded
total charges in 2003 and 2004 of $38,889. at december 31, 2007, a balance of $516 [2006 – $4,681]
remains as a liability. the corporation expects to settle this liability over the next five years and accordingly,
has included $129 [2006 – $4,170] in accounts payable and accrued charges while the remaining $387
[2006 – $511] is recorded in other long-term liabilities.
[c] other long-term liabilities include $3,575 [2006 -$nil] of deferred revenue in relation to a long-term contract.
9 . l o n g-
t e rM d e b t
property mortgage [a]
other non-bank loans [b]
obligations under capital leases (bearing interest at 5.6% to 7.9%) [c]
less current portion
2007
$ 4,361
21,834
3,743
29,938
2,099
27,839
2006
$ 5,343
7,705
4,893
17,941
2,039
15,902
[a] the property mortgage of $4,361 (£2,225) is comprised of financing of certain land in the united kingdom ac-
quired in 2006. this same land is collateral for this mortgage and bears interest at bank rate plus 0.90%, which at
december 31, 2007 was 6.4% [2006 – 5.9%]. the fair value of this property mortgage was not significantly
different from its recorded amount.
M a g e l l a n 2 0 0 7 an n u a l R e p oR t
36
notes to consolidated financial statements
december 31, 2007 an d 2006
[b] other non-bank loans include loans provided by governmental authorities that bear interest of 2.0% to 9.25%.
during 2007, the corporation entered into a secured promissory note with a corporation, which is controlled
by a common director, in the amount of $15,000, due july 1, 2008 bearing interest at a rate of 9.0%. the
promissory note was refinanced with long-term debt on january 31, 2008, and as a result, the promissory note
has been classified as long-term debt. [note 21 - subsequent events]
[c] future minimum lease payments under the capital leases in effect at december 31, 2007, are as follows:
2008
2009
2010
2011
2012
thereafter
total minimum lease payments
less capital lease payments representing interest
principal amount of capital lease payments
the expected maturities for the next five years and thereafter for long-term debt are as follows:
2008
2009
2010
2011
2012
thereafter
$ 1,279
985
813
813
475
-
4,365
622
3,743
$ 2,099
17,060
1,961
2,035
1,772
5,011
29,938
1 0 . c o nVe r tIb l e d e b e n t u r e s
on january 7, 2003, the corporation completed an offering of $70,000 of 8.5% convertible unsecured subordi-
nated debentures, due january 31, 2008 [note 21 – subsequent events]. the debentures pay interest on a semi-
annual basis on january 31 and july 31 in each year commencing july 31, 2003. the debentures are convertible,
at any time prior to the maturity date, by the holders into common shares of the corporation, at a conversion price of
$4.50 per common share. during the year, $15 convertible debentures were converted into common shares. the
debentures are redeemable by the corporation between january 31, 2006 and january 31, 2007 at a price equal
to the principal amount, plus accrued and unpaid interest, if any, provided that the current market price is not less
than 125% of the conversion price, and after january 31, 2007 and prior to the maturity date at a price equal to the
principal amount, plus accrued and unpaid interest, if any. on redemption or maturity, the corporation will have the
option of retiring the convertible debentures with common shares in which case the number of common shares issuable
is based on 95% of the weighted average trading price of the corporation’s common shares for the 20 consecutive
trading days prior to the date fixed for redemption or maturity. In addition, the corporation may elect from time to
time to issue and deliver freely tradeable common shares to a trustee in order to raise funds to satisfy the obligation to
M a g e l l a n 2 0 0 7 an n u a l R e p oR t
37
notes to consolidated financial statements
december 31, 2007 an d 2006
pay interest on the convertible debentures. the debentures are unsecured obligations of the corporation and will be
subordinated in right of payment to all of the corporation’s existing and future senior indebtedness.
as a result of these terms and as explained under “significant accounting policies – convertible debentures”, $11,100
has been attributed to the equity component of the debenture and is classified as other paid in capital. at
december 31, 2007, $69,784 [2006 – $67,430] has been attributed to the debt component. based on the terms
of the refinancing completed in january 2008, $55,950 of the convertible debentures continued to be classified as
long term, with the remaining $13,834 classified as current liability. the difference between the carrying value and
the face value of the debentures will be accreted through periodic charges to income included in interest expense
over the life of the debenture.
1 1 . c a pIt a l s t o c
K
the authorized capital of the corporation consists of an unlimited number of preference shares, issuable in series, and
an unlimited number of common shares.
series a
outstanding at december 31, 2007 and 2006
number of shares
2,000,000
stated capital
$ 19,949
on may 27, 2005, the corporation issued 2,000,000 8.0% cumulative redeemable first preference shares series
a (“preference shares”) at a price of $10.00 per preference share for total gross proceeds of $20,000. each prefer-
ence share is convertible at the holder’s option into 3.33 common shares of magellan (6,666,667 common shares
in aggregate) at a price of $3.00 per common share. the preference shares will not be redeemable by the corpora-
tion at any time prior to july 1, 2008. thereafter, the preference shares are redeemable, under certain conditions,
at the option of the corporation at $10.00 per preference share plus accrued and unpaid dividends. In addition,
on or after july 1, 2010, under certain circumstances the holder has the right to require the corporation redeem the
shares at $10.00 per preference share plus accrued and unpaid dividends. directors and officers of the corporation
purchased directly or indirectly 1,135,000 of the preference shares issued.
common shares:
outstanding at december 31, 2005
Issued to employees and directors
outstanding at december 31, 2006
Issued upon conversion of convertible debentures
stock options exercised
Issued to employees and directors
outstanding at december 31, 2007
number of shares
90,792,410
41,146
90,833,556
3,333
4,000
43,830
stated capital
$ 214,109
113
214,222
15
10
114
90,884,719
214,361
under the terms of the corporation’s employee share purchase plan (“espp”), eligible employees are able to pur-
chase common shares at 100% of the average market price for the period preceding the purchase. the corporation
matches purchased shares on a 50% basis after an approximately one year vesting period. during the year, the
corporation issued common shares 20,582 [2006 – 18,882] under the espp for $50 [2006 – $50] and at
M a g e l l a n 2 0 0 7 an n u a l R e p oR t
38
notes to consolidated financial statements
december 31, 2007 an d 2006
december 31, 2007, 210,408 common shares are reserved for issue. during 2007, the corporation issued
23,248 [2006 – 22,264] common shares valued at $63 [2006 – $63] to the directors of the corporation for
services rendered by the directors of the corporation.
the reconciliation of the numerator and denominator for the calculation of basic and diluted loss per common share
is as follows:
net loss
dividends on preference shares
loss attributable to common shareholders
weighted average shares outstanding
net effect of dilutive instruments [n ot es 10 an d 12]
diluted weighted average shares outstanding
loss per common share - basic and diluted
2007
$ (11,341)
(1,600)
(12,941)
2006
(restated note 3)
$ (8,139)
(1,600)
(9,739)
90,849,253
90,803,403
--
90,849,253
(0.14)
--
90,803,403
(0.11)
as a result of the net losses for the years ended december 31, 2007 and 2006, there is no dilutive effect of the stock
options, convertible debentures and preference shares.
1 2 . s t o c K -b a s e d c oMp e n s a tIo n p l a n
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 options for common shares that remain to be granted under this
plan is 3,998,853. options are granted at an exercise price equal to the market price of the corporation’s common
shares at the time of granting. options normally have a life of five years with vesting at 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 for the optionholder’s entitlement to fully vest.
a summary of the plan and changes during each of 2007 and 2006 are as follows:
outstanding, beginning of year
granted
exercised
forfeited/expired
outstanding, end of year
2007
Weighted
average
exercise price
$ 3.12
3.20
2.65
3.77
3.00
shares
3,919,600
1,430,250
(4,000)
(978,000)
4,367,850
2006
weighted
average
exercise price
$ 3.47
3.08
-
4.34
3.12
shares
3,299,800
1,514,000
-
(894,200)
3,919,600
M a g e l l a n 2 0 0 7 an n u a l R e p oR t
39
notes to consolidated financial statements
december 31, 2007 an d 2006
the following table summarizes information about options outstanding and exercisable at december 31, 2007:
options outstanding
options exercisable
range of
exercise prices
number
outstanding
$ 2.65
1,080,500
3.00 – 3.20
3,287,350
4,367,850
Weighted
average
remaining
contractual life
[in years]
3.00
4.02
3.77
Weighted
average
exercise price
$ 2.65
3.11
3.00
number
exercisable
Weighted
average exercise
price
340,100
559,350
899,450
$ 2.65
3.04
2.89
the corporation accounts for stock options granted after january 1, 2003 under the fair value method. compensation
expense recorded during the year was $1,450 [2006 – $945].
the fair value of stock options is estimated at the date of grant using the black-scholes’ option pricing model with the
following weighted average assumptions:
risk-free interest rate
expected volatility
expected life of the options
expected dividend yield
2007
4.08%
46%
5 years
0%
2006
4.00%
46%
5 years
0%
the weighted average fair value of stock options granted in 2007 was $1.57 [2006 – $1.40].
the black-scholes option pricing model used by the corporation to determine fair values was developed for use in
estimating the fair value of freely traded options, which are fully transferable and have no vesting restrictions. the
corporation’s employee stock options are not transferable, cannot be traded and are subject to vesting restrictions
and exercise restrictions under the corporation’s black-out policy which would tend to reduce the fair value of the
corporation’s stock options. changes to the subjective input assumptions used in the model can cause a significant
variation in the estimate of the fair value of the options.
M a g e l l a n 2 0 0 7 an n u a l R e p oR t
40
notes to consolidated financial statements
december 31, 2007 an d 2006
1 3 . a c c uMu l a t e d o tHe r c oMp r eHe n sI Ve l o s s
accumulated other comprehensive loss consists solely of the net unrealized loss on the translation of the corporation’s
net investment self-sustaining foreign operations. the following is a continuity schedule of accumulated other compre-
hensive income.
balance, beginning of period
net unrealized gain (loss) on translation of net
investment in foreign operations
total accumulated other comprehensive income
2007
$ (40,215)
2006
$ (45,288)
(25,264)
(65,479)
5,073
(40,215)
the unrealized loss in 2007 resulted primarily from the strengthening of the canadian dollar against the us dollar.
1 4 . o tHe r a s s e t s
technology rights, net of accumulative amortization
of $4,522 [2006 - $2,275]
pension benefit asset [note 16]
development costs
advances and note receivable
other
2007
2006
$ 34,491
$ 37,117
9,368
8,143
1,341
2,364
55,707
2,391
8,088
2,242
2,842
52,680
technology rights relate to an agreement signed during 2003, which permits the corporation to manufacture aero-
space engine components and share in the revenue generated by the final sale of the engine. a follow-on contract
was signed in 2005.
development costs relate to costs that were incurred for the development of new programs by the corporation for
which future revenues are reasonably assured.
1 5 . In c oMe t aXe s
the following is a reconciliation of the expected tax recovery obtained by applying the combined corporate tax rates
to loss before income taxes:
corporate tax rate for manufacturing companies
expected tax recovery
non deductible accretion and stock option charges
change in valuation allowance
permanent differences
change in income tax rates
M a g e l l a n 2 0 0 7 an n u a l R e p oR t
41
2007
34.8%
$ (4,327)
1,447
1,158
229
400
(1,093)
2006
37.8%
$ (4,302)
1,299
-
285
(525)
(3,243)
notes to consolidated financial statements
december 31, 2007 an d 2006
components of future income tax assets and liabilities by jurisdiction are summarized as follows:
canada
future income tax asset - current
accounting provisions not currently deductible for tax purposes
future income tax assets - long-term
operating loss carryforwards
Investment tax credits
accounting provisions not currently deductible for tax purposes
valuation allowance
future income tax liabilities - long-term
tax depreciation in excess of book depreciation
deferred employee future benefits
united states
future income tax asset - current
accounting provisions not currently deductible for tax purposes
future income tax assets - long-term
operating loss carryforwards and investment tax credits
accrued employee future benefits
future income tax liability – long-term
tax depreciation in excess of book depreciation
united Kingdom
future income tax asset – long-term
operating loss carryforwards and investment tax credits
accounting provisions not currently deductible for tax purposes
2007
2006
$ 5,116
$ 3,942
9,512
17,617
15,827
(2,748)
40,208
23,959
3,724
27,683
5,557
13,772
16,351
-
35,680
28,549
2,345
30,894
$ 1,148
$ 1,972
9,119
494
9,613
26,412
1,539
-
9,986
894
10,880
31,665
-
2,282
during the fourth quarter of 2007, the corporation recorded a valuation allowance of $2,748 against its future tax
assets in canada as the recovery of the future tax assets were not “more likely than not”. In addition, the valuation al-
lowance of $1,590 previously recorded with respect to the tax losses in the united kingdom was no longer required;
and as such, the benefit of these tax losses was recorded in the fourth quarter of 2007.
the corporation has operating loss carryforwards in canada that expire in 2027 of approximately $7,965
[2006 – $nil] for which no benefit has been recognized in the consolidated financial statements.
the corporation operates in different jurisdictions and accordingly is subject to income and other taxes under the
various tax regimes in the countries in which it operates. the tax rules and regulations in many countries are highly
complex and subject to interpretation. the corporation may be subject in the future to a review of its historical income
M a g e l l a n 2 0 0 7 an n u a l R e p oR t
42
notes to consolidated financial statements
december 31, 2007 an d 2006
and other tax filings and in connection with such reviews, disputes can arise with the taxing authorities over the inter-
pretation or application of certain tax rules and regulations to the corporation’s business conducted with the country
involved. the corporation is not aware of any pending review of its filing positions for which adequate provisions
have not been recorded in these consolidated financial statements.
1 6 . eMp l o y e e Fu t u r e b e n eF It s
the corporation has a number of defined benefit and defined contribution plans providing pension, other retirement
and post-employment benefits to substantially all of its employees.
consolidated cash payments contributed by the corporation for employee future benefits related to its defined benefit
and defined contribution pension plans and payments directly to beneficiaries for its unfunded other benefits plan was
$15,188 [2006 - $12,395].
[a] defined contribution plans
the corporation’s expenses for defined contribution plans for the year ended december 31, 2007 was $4,240
(2006 - $6,187).
[b] defined benefit plans
the corporation’s defined benefit plans cover payments for pensions, and other benefit plans described
as follows:
pension plans:
the corporation’s pension plans provide eligible employees with pension benefits based on a number of criteria
including earnings, years of service, retirement age, and specified benefit levels, and include both final average
earnings formulae and minimum benefit formulae.
the corporation measures its accrued benefit obligations and the fair value of plan assets for accounting
purposes as at december 31 for each year. actuarial valuations for funding purposes are prepared and filed
with the appropriate regulatory authorities at least tri-annually. the last actuarial valuation was completed as at
december 31, 2006 for two of the plans and as at december 31, 2005 for the others.
other benefit plans:
In one acquired division, the corporation has another benefit plan to provide post-employment coverage for
health care benefits including prescribed drugs, hospital and other medical, dental and vision benefits for eligi-
ble retired employees, their spouses and eligible dependants. other benefit plans provide for post-employment
life insurance and compensated absences for eligible current employees, including vacation to be taken before
retirement, if certain age and service requirements are met.
M a g e l l a n 2 0 0 7 an n u a l R e p oR t
43
notes to consolidated financial statements
december 31, 2007 an d 2006
the following table summarizes the changes in benefit obligation and plan assets of the corporation’s defined benefit
plans, in aggregate:
change in benefit obligation
benefit obligation, beginning of year
member contributions during the year
current service cost (employer)
Interest cost
plan amendments
benefits paid
actuarial gain
foreign exchange (loss) gain
benefit obligation, end of year
change in plan assets
market value of plan assets - beginning of year
actual return on plan assets
member contributions during the year
employer contributions
benefits paid
foreign exchange (loss) gain
pension plans
2007
other benefit plans
2006
2007
2006
$ 105,203
$ 107,506
$ 999
$ 1,093
303
1,868
6,280
1,147
(7,652)
(1,792)
(1,391)
260
2,310
6,454
-
(7,644)
(3,694)
11
103,966
105,203
99,214
1,850
303
10,547
(7,652)
(1,214)
92,775
8,001
260
5,726
(7,572)
24
99,214
(5,989)
339
8,041
2,391
-
-
306
-
(401)
-
(142)
762
-
-
-
-
-
-
-
-
-
423
-
(482)
-
(35)
999
-
-
-
-
-
-
-
(762)
(999)
-
-
-
-
(762)
(999)
Market value of plan assets - end of year
103,048
reconciliation of funded status
funded status - deficit
unamortized past service costs
unamortized net actuarial loss
accrued benefit asset (liability)
(918)
1,120
9,166
9,368
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.
all defined benefit plans were in a deficit as at december 31, 2007 and 2006.
M a g e l l a n 2 0 0 7 an n u a l R e p oR t
44
notes to consolidated financial statements
december 31, 2007 an d 2006
ne t Be n e f i t P L
the components of the corporation’s net benefit costs are as follows:
a n c oS t S:
current service cost
Interest cost
actual return on plan assets
actuarial (gain) loss
plan amendments
elements of employee future benefits costs before
adjustments to recognize the long-term nature of
employee future benefits
adjustments to recognize the long-term nature of
employee future benefit costs:
difference between expected return and actual
return on plan assets for the year
differences between actuarial loss recognized
for the year and actual actuarial losses on
accrued benefit obligation for the year
difference between amortization of past service
costs for the year and actual plan amendments
for the year
net benefit cost recognized
pension plans
other benefit plans
2007
2006
$ 1,868
$ 2,310
6,280
(1,850)
(1,792)
1,147
6,454
(8,001)
(3,694)
-
2007
$ -
306
2006
$ -
423
-
-
-
-
-
-
5,653
(2,931)
306
423
(5,224)
1,447
2,493
4,796
(781)
2,141
281
3,593
-
-
-
306
-
-
-
423
S i g n i f i c a n t aS Su mPt i o nS a n d Se nSi t i v i t y a n aL
the significant actuarial assumptions adopted in measuring the corporation’s accrued benefit obligations represent
management’s best estimates reflecting the long-term nature of employee future benefits and are as follows [weighted-
average assumptions as at december 31]:
y SiS:
pension plans
other benefit plans
2007
2006
2007
2006
6.0%
7.0%
3.0%
6.0%
7.0%
3.0%
6.0%
7.0%
3.0%
6.0%
7.0%
3.0%
7.0%
7.0%
-
-
-
-
7.0%
7.0%
-
-
-
-
accrued benefit obligation at december 31
discount rate
expected long-term rate of return on plan assets
rate of compensation increase
benefit costs for the years ended december 31
discount rate
expected long-term rate of return on plan assets
rate of compensation increase
M a g e l l a n 2 0 0 7 an n u a l R e p oR t
45
notes to consolidated financial statements
december 31, 2007 an d 2006
for measurement purposes, a 5.0% to 10.0% annual rate of increase in the per capita cost of covered health care
and dental benefits was assumed for 2007. the rate was assumed to decrease gradually over the next 10 years to
3.0% and to remain at that level thereafter.
the impact of applying a one-percentage-point increase and decrease in the assumed health care and dental benefit
trend rates as at december 31, 2007 was nominal.
S:
PL a n aS Se t
the percentage of the fair value of total pension plan assets held at the measurement date of december 31 of each
year were as follows:
asset category
equities
fixed income
cash and short-term investments
total
percentage of plan assets
2007
48.7%
41.7%
9.6%
100.0%
2006
55.0%
38.7%
6.3%
100.0 %
at december 31, the market value of the plan assets directly invested in common shares of the corporation was as
follows:
defined benefit plans
1 7 . s e gMe n t e d InFo rMa tIo n
2007
$ 121
2006
$ 267
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
u.s.
u.K.
2007
total
canada
u.s.
u.k.
total
2006
(restated note 3)
revenues
domestic
export
$ 94,269 $ 160,191 $ 113,829 $ 368,289
$ 96,496 $ 153,176 $ 109,998 $ 359,670
195,635
28,139
5,745
229,519
176,809
33,421
5,323
215,553
total revenues
289,904
188,330
119,574
597,808
273,305
186,597
115,321
575,223
capital assets, net
117,945
107,254
20,528
245,727
121,805
120,553
22,443
264,801
revenue is attributed to countries based on the location of the customers and the capital assets are based on the
country in which they are located.
M a g e l l a n 2 0 0 7 an n u a l R e p oR t
46
notes to consolidated financial statements
december 31, 2007 an d 2006
Major customers
canadian operations
number of customers
percentage of total canadian revenue
u.s. operations
number of customers
percentage of total u.s. revenue
u.k. operations
number of customers
percentage of total u.k. revenue
1 8 . F In a n cIa l In s t r uMe n t s
[a] fair value
2007
2006
3
37%
1
39%
1
81%
3
35%
3
58%
1
80%
fair value is the estimated amount for which a financial instrument could be exchanged between willing par-
ties, based on the current market for instruments with the same risk, principal and maturity. the corporation has
determined the estimated fair values of its financial instruments based on appropriate valuation methodologies;
however, with the exception of the convertible debentures, 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, accounts receivable, investments, bank indebtedness and accounts payable and accrued charges
due to the short period to maturity of these instruments, the carrying values as presented in the consolidated
balance sheets are reasonable estimates of their fair values.
Long-term debt
the fair value of the corporation’s long-term debt is $28,579 and is estimated using discounted cash flow
analysis based on the corporation’s current incremental borrowing rates for similar types of arrangements.
the fair values are not necessarily indicative of the amounts that the corporation may incur at actual market
transactions.
Convertible Debentures
the fair market value of the corporation’s convertible debentures, calculated based on available market data
at december 31, 2007 was $69,649.
[b] credit risk
the corporation’s financial assets that are exposed to credit risk consist primarily of cash and accounts receivable.
for 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.
[c]
Interest rate risk
the corporation is exposed to significant interest rate cash flow risk in its bank indebtedness as any market
change will have an immediate, or almost immediate, impact in the interest paid.
M a g e l l a n 2 0 0 7 an n u a l R e p oR t
47
notes to consolidated financial statements
december 31, 2007 an d 2006
[d] foreign exchange risk
the corporation operates internationally, which gives rise to a risk that its income, cash flows and shareholders’
equity may be adversely impacted by fluctuations in foreign exchange rate. the corporation uses derivative
financial instruments to manage foreign exchange risk. the corporation does not trade in derivatives for specu-
lative purposes.
the corporation has entered into forward foreign exchange contracts to mitigate future cash flow exposures
in u.s. dollars and norwegian kroners. under these contracts the corporation is obliged to purchase specific
amounts of u.s. dollars and norwegian kroners at predetermined dates and exchange rates. these contracts
are matched with anticipated operational cash flows in u.s. dollars and norwegian kroners.
the corporation has foreign exchange contracts outstanding at december 31, as follows:
maturity – less than 1 year – u.s. dollar
maturity – less than 1 year – norwegian kroner
amount
exchange rate
$ 52,100
26,096
1.0075
0.1811
these foreign exchange contracts are recorded in other liabilities at their fair value of $817.
1 9 . r e l a t e d p a r t y t r a n s a c tIo n s
during the year, the corporation entered into numerous financing agreements to sell receivables to a corporation
wholly-owned by a common director in the amount of $228,143 [2006 – $62,455], for a discount of $2,484
[2006 – $580] representing an annualized interest rate of 7.5% [2006 – 8.10%]. Included in this balance, as at
december 31, 2007, is a reserve of $5,924 [2006 – $895].
on march 30, 2007, the corporation entered into a secured promissory note with a corporation, which is controlled
by a common director, in the amount of $15,000, due july 1, 2008 bearing interest at a rate of 9.0%. In 2007,
$1,025 of interest was paid in relation to the loan.
the chairman of the board of the corporation holds $15,000 of the 8.5% convertible debentures issued and out-
standing as at december 31, 2007. the related cash interest paid in the year was $1,275 [2006 – $1,275].
the chairman of the board of the corporation has provided a guarantee for the full amount of the corporation’s credit facility.
an annual fee of 0.10% of the guaranteed amount or $168 [2006 – $155] is paid in consideration for the guarantee.
during the year, the corporation incurred consulting costs of $100 [2006 – $50] payable to a company con-
trolled by the chairman of the board of the corporation in 2007. as well, the corporation paid legal fees of $52
[2006 - $21] to a law firm in which a director is a partner.
2 0 . s u p p l eMe n t a r y InFo rMa tIo n
[a]
Interest expense on long-term debt in 2007 was $10,066 [2006 – $8,646]. Interest on capital leases in
2007 was $300 [2006 – $411].
[b] during 2007, the corporation received $nil [2006 – $2,225] of government assistance, which has been
credited to the related assets. the corporation is eligible for an additional $2,074 for the period from
january 1, 2008 to december 31, 2008 based on approved expenditures. the assistance is repayable as
royalties ranging from 1% to 3% of certain future revenue.
M a g e l l a n 2 0 0 7 an n u a l R e p oR t
48
notes to consolidated financial statements
december 31, 2007 an d 2006
[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
2007
$ 16,148
(16,112)
(5,064)
(1,463)
(6,491)
2006
(restated note 3)
$ 7,088
(9,991)
(606)
(10,257)
(13,766)
[d]
Interest paid during 2007 amounted to $21,231 [2006 – $19,321] and income taxes refunded during 2007
amounted to $817 [2006 – payment of $157].
[e] during the year, the corporation realized a foreign exchange loss on the conversion of foreign currency denomi-
nated working capital balances and debt of $5,576 [2006 – gain of $4,429].
[f]
In the 2004 fiscal year, the corporation entered into a five-year accounts receivable securitization program
permitting it to sell on an on-going basis, certain of its trade accounts receivable to a securitization trust (the
“trust”) to a maximum of $46,000. the total amount transferred to the trust during the year amounted to
$24,063 [2006 – $210,922] for a discount of $248 [2006 – $2,186] representing an annualized inter-
est rate of 6.26% [2006 – 6.51%]. the discount has been included in interest expense in the consolidated
statements of operations. Included in accounts receivable as at december 31, 2007, is a cash reserve of $nil
[2006 – $6,635], which the trust has invested in trust for the corporation. the reserve represents the portion
of the consideration, which is withheld from the corporation until payments are received by the trust. during
the year, the reserve earned investment income of $125 [2006 – $302], which is included in interest income.
the trust and its investors have no recourse on the corporation’s other assets for failure of the debtors to pay
when due, other than the retained interest in the trust. on february 23, 2007, this program was suspended
by the counter-party.
during the year, the corporation sold receivables to various financial institutions in the amount of $147,389
[2006 – $84,584], for a discount of $1,479 [2006 – $927] representing an annualized interest rate of
5.87% [2006 – 6.03%].
[g] contributed surplus arises solely from the recording of stock based compensation expense.
2 1 . s u b s eQu e n t eVe n t s
[a] new financing
on january 30, 2008 the corporation closed a private placement of an aggregate of $20,950 8.5% convert-
ible unsecured subordinated debentures, due january 31, 2010 (the “new debentures”) the proceeds of which
were used to fund, in part, the repayment of the $69,985 principal amount of outstanding 8.5% unsecured
subordinated debentures (the “existing debentures) which matured on january 31, 2008.
the new debentures are redeemable by the corporation for the first six months of the term at 102.5% of prin-
cipal value and the holders have no conversion rights. after the first six months of the term, the new debentures
are convertible, at the option of the holder, at any time prior to maturity into common shares of the corporation
at a conversion price of $2.00 per share, which is equal to a conversion rate of 500 common shares per
$1,000 principal amount of debentures or the issuance on conversion of approximately 10,475,000 common
shares in total.
M a g e l l a n 2 0 0 7 an n u a l R e p oR t
49
notes to consolidated financial statements
december 31, 2007 an d 2006
on january 30, 2008, in order to fund the remaining balance of approximately $50,000 on the maturity of the
existing debentures, a corporation controlled by the chairman of the board of the corporation, provided a loan
of $50,000 (the “original loan”) and a $15,000 bridge loan (the “bridge loan”) to the corporation. all of the
funds from the bridge loan and approximately $35,000 of the funds from the original loan were used to repay
the balance of the existing debentures and the $15,000 additional funds from the original loan was provided
to the corporation to retire $15,000 of subordinated debt due to a corporation with a common director, who is
also the owner of all of the shares of such lender. both the original loan and the bridge loan, bear interest at a
rate of 10% per annum calculated and payable monthly, are collateralized and subordinated to the corporation’s
existing bank credit facility. the original loan is repayable on july 1, 2009 and the bridge loan is repayable
on july 31, 2008. In addition, on january 24, 2008, in consideration for the provision of additional security for
the corporation’s obligations under its existing secured credit facility, the corporation has increased the standby
guarantee payable to the chairman of the board of the corporation from 0.1% per annum to 1% per annum of
the principal amount guaranteed.
[b] new acquisition
on february 13, 2008, the corporation acquired 100% of the outstanding common shares of verdict aerospace
components ltd. (“verdict”), a corporation in the united kingdom, for a cash purchase price of $4,240. the results
of operations will be included in the consolidated financial statements as of january 1, 2008, the effective date of
the purchase. verdict is a high precision manufacturer of make to print components and assemblies for the global
aerospace industry. verdict specializes in precision airframe components and assemblies for aerostructures, orbit
payloads and missile seeker systems. management is in the process of finalizing the purchase price allocation.
2 2 . c o M M I t M e n t s a n d c o n t I n g e n c I e s
[a] operating lease commitments
the company has lease commitments related to properties, equipment and other items. at december 31, 2007,
future minimum annual lease payments are as follows:
2008
2009
2010
2011
2012
thereafter
[b] contingencies
$ 4,665
2,468
1,213
1,107
714
1,719
11,886
In the ordinary course of business activities, the corporation may be contingently liable for litigation and claims
with, among other, customers, suppliers and former employees. management believes that adequate provisions
have been recorded in the accounts where required. although it is not possible to accurately estimate the extent of
the potential costs and losses, if any, management believes, but can provide no assurance, that the ultimate resolu-
tion of such contingencies would not have a material adverse effect on the financial position of the corporation.
2 3 . c oMp a r a tI Ve c o n s o lId a t e d F In a n cIa l s t a t eMe n t s
the comparative consolidated financial statements have been reclassified from statements previously presented to
conform to the presentation of the 2007 consolidated financial statements.
M a g e l l a n 2 0 0 7 an n u a l R e p oR t
50
Bo a r d o f d i r e c t o rS a n d o f f i c e rS
corporate officers
n. Murray edwards
Chairman
richard a. neill
Vice Chairman
james s. butyniec (a)
President and Chief Executive Officer
john b. dekker
Vice President
Finance and Corporate Secretary
William a. Matthews
Vice President, Marketing
jo-ann c. ball
Vice President, Human Resources
larry a. Winegarden
Vice President, Corporate Strategy
Konrad b. Hahnelt
Vice President,
Strategic Global Sourcing
board of directors
committees of the board
(1) Audit Committee Chairman:
William a. dimma
(2) Governance and Nominating
committee chairman:
M. douglas young
(3) Human Resources and
Compensation Committee
Chairman:
William g. davis
(4) Environmental and
Safety Committee Chairman:
donald c. lowe
notes
(a) President and Chief Operating Officer
until January 27, 2008 and President
and Chief Executive Officer effective
January 28, 2008
(b) Not nominated to the Board of Directors
for the ensuing year
n. Murray edwards
Chairman,
magellan aerospace corporation
President,
edco financial holdings ltd.,
calgary, alberta
richard a. neill
vice Chairman,
magellan aerospace corporation,
mississauga, ontario
Hon. William g. davis
p.c., c.c., Q.c. (3)
Counsel,
torys llp,
toronto, ontario
William a. dimma, c.M., o. ont. (1, 2)
Chairman,
home capital group,
toronto, ontario
bruce W. gowan (1, 3)
Corporate Director,
huntsville, ontario
donald c. lowe (1, 4)
Corporate Director,
toronto, ontario
larry g. Moeller (4)
President,
kimball capital corporation,
calgary, alberta
james s. palmer, c.M., Q.c. (2, 3)
Chairman,
burnet, duckworth & palmer llp,
calgary, alberta
Hon. M. douglas young, p.c. (2, 4, b)
Chairman,
summa strategies canada Inc.,
ottawa, ontario
M a g e l l a n 2 0 0 7 an n u a l R e p oR t
51
o P e r a t i n g f a c i L i t i e S d i r e c t o r y a n d
Sh a r e h oLd e r i n f o r m a t i o n
canada
united Kingdom
corporate office
davy way, llay Industrial estate,
llay, wrexham ll12 0pg
tel: 01978 856600
27/29 high street,
biggleswade, bedfordshire
sg18 0je
tel: 01767 601280
7/8 lyon road, wallisdown,
poole, dorset bh12 5hf
tel: 01202 535536
miners road, llay Industrial estate,
llay, wrexham ll12 0pj
tel: 01978 856798
rackery lane,
llay, wrexham ll12 0pb
tel: 01978 852101
510 wallisdown road,
bournemouth, dorset bh11 8Qn
tel: 01202 512405
1 west point row,
great park road,
bradley stoke, bristol bs32 4Qg
tel: 01454 453550
magellan aerospace corporation
3160 derry road east,
mississauga, ontario, canada l4t 1a9
tel: 905 677 1889
fax: 905 677 5658
www.magellan.aero
for investor information:
ir@magellan.aero
auditors
ernst & young llp
toronto, ontario
transfer agent
computershare Investor services Inc.
toronto, ontario
tel: 1 800 564 6253
e-mail: service@computershare.com
www.computershare.com
stock listing
toronto stock exchange – tsX
common shares – mal
annual Meeting
the annual and special meeting of
the shareholders of magellan aerospace
corporation will be held on
tuesday, may 13th, 2008 at
2:00 p.m. at the living arts centre,
4141 living arts drive,
mississauga, ontario l5b 4b8
660 berry street,
winnipeg, manitoba r3h 0s5
tel: 204 775 8331
3160 derry road east,
mississauga, ontario l4t 1a9
tel: 905 673 3250
634 magnesium road,
haley, ontario k0j 1y0
tel: 613 432 8841
1340 tower street, bldg. 3,
abbotsford, british columbia v2t 6h5
tel: 604 870 3700
975 wilson avenue,
kitchener, ontario n2c 1j1
tel: 519 893 7575
united states
97–11 50th avenue,
new york, new york 11368
tel: 718 699 4000
25 aero road,
bohemia, new york 11716
tel: 631 589 2440
159 grassy plain street, route 53,
bethel, connecticut 06801
tel: 203 798 9373
20 computer drive,
haverhill, massachusetts 01832
tel: 978 774 6000
2320 wedekind drive,
middletown, ohio 45042
tel: 513 422 2751
5170 west bethany road,
glendale, arizona 85301
tel: 623 931 0010
5401 west luke avenue,
glendale, arizona 85311
tel: 623 939 9441
M a g e l l a n 2 0 0 7 an n u a l R e p oR t
52
magellan aerospace corporation 3160 derry road east, mississauga, ontario, canada l4t 1a9 www.magellan.aero