MAGELLAN AEROSPACE CORPORATION
ANNUAL REPORT
2008
LETTER TO SHAREHOLDERS
The aerospace industry experienced a year of highs and lows
in 2008. Defence procurement of equipment and aftermarket
services continued its strong performance across much of the
western world.
The year 2008 was one of growth for Magellan Aerospace Corporation (“Magellan” or “the Corpora-
tion”). Revenues increased by more than $88 million to $686 million, and earnings grew by $24 million
resulting in $0.62 net income per share for year-ended December 31, 2008 as compared to $0.71 net
loss per share for year-ended December 31, 2007. Although 2008 showed improvements, the current
economic outlook, with announced cuts to production rates by aircraft manufacturers, will negatively
impact Magellan in 2009.
World Economy and Industry Status
The aerospace industry experienced a year of highs and lows in 2008. Defence procurement of equip-
ment and aftermarket services continued its strong performance across much of the western world.
In contrast, civil aerospace experienced a number of successes through the first half of 2008, but a
greater number of setbacks in the remainder of the year. Setbacks occurred globally in the civil air-
liner and business aircraft segments, driven largely by external influences. The lack of availability of
credit for leasing, capital investment and operating costs, the uncertainty surrounding effectiveness
of government’s stimulus packages, and the growth in unemployment characterized the impacts on
the civil aviation section.
Record high fuel prices, labour strikes, delayed deliveries of new programs, and the precipitous crash of
the global financial section battered the aerospace industry in the second half of 2008. The price of fuel
became the largest cost for aircraft operators before falling abruptly in the fourth quarter, trapping costs
in the airlines. The breadth and speed of the economic decline caused contraction in travel, reducing
load factors of civil airlines, and the use and purchase of business aircraft to unexpected lows in 2008.
All of these factors portend weaker sales through 2009 and 2010. Stability in the areas of oil prices,
availability of credit, and travel patterns will add greater certainty to the civil aerospace market.
The manufacturing sector of the aerospace industry made a number of timely adjustments to the chang-
es in the economic landscape and finished 2008 in orderly fashion, with the exception of the business
aircraft segment. While airliner production decreased moderately from record high levels, demand re-
mained stable through to the year end, and for the early months of 2009. Defence and space spending
levels are under review in many nations, but rapid change is not probable as most defence and space
development and procurement budgets are in place for 2009 and 2010.
Magellan in 2008 and Going Forward
As Magellan closed out 2008, it is well placed on both Airbus and Boeing single-aisle aircraft, the
highly successful A320 family and the B737 family. Most of the new civil production programs, which
Magellan is positioned on, are advancing toward full-scale production in spite of the delays experi-
enced in earlier development. The Corporation has a contained exposure to the business aircraft sec-
tion. It has no ongoing airframe participation, but supplies medium-sized aeroengines for new build
opportunities as well as in the aftermarket, thus retaining revenues when new sales are reduced.
MAGELLAN 2008 ANNUAL REPORT
1
Magellan closed out 2008 with its markets and
its operations in good condition. The defence sector
continues to be strong, with increased aftermarket
activity, and steady production on existing programs.
The defence sector remains stable, with increased aftermarket activity and steady production on ex-
isting programs. The Joint Strike Fighter (JSF) Program is gaining speed, while the Corporation and its
customers are moving into higher production rates. Helicopter demand in both civil and defence sectors
continues to be strong, and in the defence sector, new helicopter programs and updates appear to be
solid through the end of the next decade. Defence also provides significant aftermarket opportunity, and
Magellan participates on repair and overhaul of mid-size engines for helicopters and fighter aircraft.
In the proprietary product areas of the business, Magellan has market share in industrial power genera-
tion, space hardware, software and launch services, and defence and helicopter safety roles. The Cor-
poration continued to experience high interest and positive demand in 2008. Key programs will extend
into 2009 and beyond, with revenues and returns on investment from world-leading technologies being
developed and supplied by Magellan.
There are currently many uncertainties in the global economy, and some in local areas where access to
credit needs to improve to allow investment. Many governments are in the process of rolling out eco-
nomic stimulus packages, including Canada, the United States, and the United Kingdom. The defence
sector of the aerospace industry continues to show strength of purpose, while the civil section has
shown some strengths and weaknesses. Magellan has taken specific actions to manage cash, reduce
costs, and invest in new programs and capabilities across its facilities. The Corporation has also com-
pleted its jointly owned product treatment facility in India, which is now in operation.
Overall, Magellan has exposure to the anticipated growth sectors of the global aerospace industry. The
Corporation has captured opportunities on new civil and defence programs with key customers such as
Airbus, Boeing, Lockheed, BAE Systems, Pratt & Whitney, GE Aviation, and Rolls-Royce.
Financial Matters
Despite successes being achieved in 2008 by Magellan operationally, due to the Corporation’s current
financial position, the high level of indebtedness on its balance sheet, and well publicized challenges in
the financial markets, Magellan faces significant financial challenges in 2009 and beyond. Magellan’s
operating credit facility is due for its annual renewal in May 2009. As part of the financing initiatives ne-
gotiated in February 2009, the Corporation will attempt to renew its operating credit facility by April 30,
2009. In this regard, the Corporation has commenced discussions, but not yet engaged in any negotia-
tions, with its lenders of the operating credit facility regarding the renewal. If the Corporation is unable
to renew this facility, its ability to continue as going concern is uncertain. To address the uncertainty in
2009, efforts are being made to conserve cash through management of inventory levels, productivity
improvements through cycle time reduction, cost reduction through offload of non-core products, and
restriction of capital investments.
MAGELLAN 2008 ANNUAL REPORT
2
Magellan has taken specific actions to manage
cash, reduce costs, and invest in new programs
and capabilities across its key facilities.
Dramatic fluctuations in foreign exchange rates remain a major factor for Magellan as the Corporation
operates in several countries including Canada, the United States, and the United Kingdom. Operations
in Canada and the United Kingdom incur costs in their native currencies while some of the revenues
generated are in US dollars, which are translated into Canadian dollars for financial reporting. The US
dollar strengthened significantly relative to the Canadian dollar from the end of 2007 to the end of 2008,
however, the average US to Canadian dollar exchange rate experienced in 2008 was slightly weaker as
compared to 2007. As a result, Magellan’s financial results in 2008 versus 2007 were not significantly
impacted by foreign exchange rates .
As uncertainty continues over the recovery of the global economy, we thank you, our investors and
financial partners, for your continued support during these challenging economic times. We would also
like to extend our appreciation to Magellan’s employees for their dedication and hard work in delivering
quality products to customers.
James S. Butyniec
President and Chief Executive Officer
March 26, 2009
MAGELLAN 2008 ANNUAL REPORT
3
MANAGEMENT DISCUSSION AND ANALYSIS
The Management Discussion and Analysis (“MD&A”) of financial condition and results of operations
should be read in conjunction with the 2008 consolidated financial statements and notes. Magellan Aero-
space Corporation (“Magellan” or the “Corporation”) reports its audited consolidated financial statements
in accordance with Canadian generally accepted accounting principles (“GAAP”).
The MD&A contains forward looking information that represents the Corporation’s internal projections,
expectations, 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,” “anticipates,” and similar expressions. The projec-
tions, 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 2009 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 ex-
pressed or implied by such forward-looking statements. Accordingly, readers are cautioned that events or
circumstances could cause results to differ materially from those predicted. Except as required by law, 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 24, 2009.
COMPANY OVERVIEW
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, advanced products for military and space markets, and complementary specialty
products. The Corporation also supports the aftermarket through supply of spare parts as well as perform-
ing 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 is now seeking to leverage 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 perfor-
mance, and strategic planning.
Within the single operating segment, the Corporation has two major product groupings: aerostructures
and aeroengines. 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 de-
fence markets. Components are produced to aerospace tolerances using conventional and high-speed
automated machining centers. Capabilities include precision casting of airframe-mounted components.
MAGELLAN 2008 ANNUAL REPORT
4
Management believes that Magellan’s dedication to technological innovation combined with low cost
sourcing from emerging markets will position Magellan 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 exhaust systems for the world’s leading aeroengine manufacturers. The Corpora-
tion also performs repair and overhaul services for jet engines and related components.
The Corporation serves both the commercial and defence markets. In 2008, 68.2% of sales were derived
from the commercial markets (2007 — 65.8%, 2006 — 64%) while 31.8% of sales related to defence markets
(2007 — 34.2%, 2006 — 36%).
OUTLOOK
The positive sales trend in 2008 will be tempered in the aerospace industry in 2009. It is anticipated that
business aircraft may experience continued declines in use and orders through 2009, bringing its extended
growth period to an end. Air transportation deliveries are forecasted to be stable in 2009, with potential
downward pressure in the second half of 2009 if credit availability is not maintained, or if oil prices rise
sharply again.
Defence spending is forecasted to be stable in both new aerospace equipment and in the aftermarket.
While historically independent of the overall economy, defence spending could be pressured by high gov-
ernment stimulous spending in 2009 and 2010. However, most defence development and procurement
budgets are in place for 2009-2010, and defence sales growth should continue through 2010 as legacy
programs are replaced with new programs reaching production.
Magellan has exposure to the anticipated growth sectors of the global aerospace industry. It has captured
opportunities on new civil and defence programs, has continued to modernize its facilities and update its
capabilities, and has taken opportunities to address contingencies that may arise during the economic
uncertainty of 2009.
RISK FACTORS
The Corporation’s performance may be affected by a number of risks and uncertainties. Magellan’s senior
management 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 may be material and may impair the Corporation’s performance.
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.
The Corporation faces risks from downturns in the domestic and global economies.
Recent market events and conditions, including disruptions in the international credit markets and other
financial systems and the deterioration of global economic conditions, have caused significant volatility
to commodity prices. These conditions worsened in 2008 and are continuing in 2009, causing a loss of
confidence in the broader U.S. and global credit and financial markets and resulting in the collapse of,
and government intervention in, major banks, financial institutions and insurers and creating a climate of
greater volatility, less liquidity, widening of credit spreads, a lack of price transparency, increased credit
losses and tighter credit conditions. Notwithstanding various actions by governments, concerns about the
general condition of the capital markets, financial instruments, banks, investment banks, insurers and
MAGELLAN 2008 ANNUAL REPORT
5
other financial institutions caused the broader credit markets to further deteriorate and stock markets
to decline substantially. These factors have negatively impacted company valuations and will impact the
performance of the global economy going forward.
The Corporation cannot predict the depth or duration of downturns in the domestic and global economies
nor the effects on markets that the Corporation serves, particularly the airline industry. The Corporation’s
ability to increase or maintain its revenues and operating results may be impaired as a result of negative
general economic conditions. The current economic uncertainty renders estimates of future revenues and
expenditures even more difficult than usual to formulate. The future direction of the overall domestic and
global economies could have a significant impact on the Corporation’s overall financial performance and
impair the value of its common shares.
Weak capital markets reduce our financial flexibility and may result in less than optimal financing results.
As a result of the weakened global economic situation, the Corporation will have restricted access to
capital and increased borrowing costs. Although Magellan’s business and asset base have not changed,
the lending capacity of all financial institutions has diminished and risk premiums have increased. As
future capital expenditures will be financed out of cash generated from operations, borrowings and pos-
sible future equity sales, our ability to do so is dependent on, among other factors, the overall state of
capital markets and investor appetite for investments in the aerospace industry and Magellan’s securities
in particular.
To the extent that external sources of capital become limited or unavailable or available on onerous terms,
the Corporation’s ability to make capital investments may be impaired, and its assets, liabilities, business,
financial condition and results of operations may be materially and adversely affected as a result.
Alternatively, the Corporation may need to issue additional common shares or other convertible securities
from treasury at low prices to refinance existing debt or to finance the capital costs of significant projects
or may wish to borrow to finance significant projects to accomplish Magellan’s long-term objectives on
less than optimal terms or in excess of its optional capital structure.
Based on current funds available and expected cash flow from operating activities, management believes
that the Corporation has sufficient funds available to fund its projected capital expenditures. However, if
cash flow from operating activities is lower than expected or capital costs for these projects exceed current
estimates, or if the Corporation incurs major unanticipated expenses, it may be required to seek additional
capital to maintain its capital expenditures at planned levels. Failure to obtain any financing necessary for
the Corporation’s capital expenditure plans may affect it in a materially adverse manner.
The Corporation’s debt is significant and needs to be refinanced and such refinancing may not be available.
The Corporation and its subsidiaries have significant debt obligations. The degree to which this indebt-
edness could have consequences on the Corporation’s prospects include the effect of such debts on the
ability to obtain additional financing for working capital, capital expenditures or acquisitions, the portion
of available cash flow that will need to be dedicated to repayment of principal and interest on indebted-
ness, thereby reducing funds available for expansion and operations, and the Corporation’s vulnerability
to economic downturn and its ability to withstand competitive pressure. 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 expenditures, selling assets or seeking additional equity capital.
MAGELLAN 2008 ANNUAL REPORT
6
The Corporation amended and restated its bank credit agreement with its existing lender on June 24, 2008
(the “Bank Facility Agreement”). Under the terms of the Bank Facility Agreement, the Corporation has
an operating credit facility, expiring on May 23, 2009, and extendable for unlimited one year periods by
agreement of the Corporation and the lenders. The Corporation’s Bank Facility Agreement also requires
the Corporation to maintain specified financial ratios. The Corporation’s ability to meet the financial ra-
tios can be affected by events beyond the Corporation’s control, and there can be no assurance that the
Corporation will be able to meet the 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 23, 2009. There is no assurance that Magellan will be in com-
pliance with its bank covenant at all times during the upcoming twelve months due to unforeseen events
or circumstances, some of which are outlined in this “Risks Factors” section.
The $20.95 million principal amount of the 8.5% convertible unsecured subordinated debentures (the
“New Debentures”) are due January 31, 2010 and the Corporation will need to finance repayment of such
amount. The Corporation has borrowed $50.0 million pursuant to a loan (the “Original Loan”) which is
due July 1, 2009 unless extended to July 1, 2010 pursuant to the 2009 Financing Arrangements (as defined
in “Financing Matters”). In addition, the completion of the 2009 Financing Arrangements will result in the
Corporation being required to offer to purchase the New Debentures at 102.5% of the principal amount
plus unpaid and accured interest. There is no assurance that alternative debt or equity financing will be
available, or will be available on satisfactory terms, to the Corporation to refinance the repayment of, or
to fund the offer to purchase, the New Debentures or the Original Loan. Credit ratings and access to the
capital markets may be impacted by a number of matters and a number of external factors beyond the
Corporation’s control, and there can be no assurance that access to the capital markets will be available to
refinance, or to fund the offer to purchase, the New Debentures or the Original Loan.
Pursuant to the 2009 Financing Arrangements, if completed, the Original Loan and the new $15.0 million
secured subordinated loan will be due on July 1, 2010. Subject to the terms of the Ontario Business Cor-
porations Act (the “OBCA”), the holders of the First Preference Shares Series A (the “Preference Shares”)
issued in 2005 for $20.0 million have the right to retract the Preference Shares for the issue price plus
accrued and unpaid dividends from July 1, 2010 in the event the volume weighted average trading price
of the common shares on the TSX for at least 20 trading days in any consecutive 30 day period ending
on the fifth trading day prior to such date is less than $12.00 per common share, or upon the occurrence
of a change of control of the Corporation involving the acquisition or voting control or direction over at
least 66 2/3% of the common shares and instruments convertible into common shares. If the 2009 Financ-
ing Arrangements are completed, subject to the terms of the OBCA, the Corporation would be required
to retract the Preference Shares in whole or in part. The Corporation does not currently believe it will be
able to retract the Preference Shares as it does not expect to have the funds to do so, and in any event, it
is prohibited from doing so by the terms of its Bank Facility Agreement, and any default in the operating
credit facility would result in the Corporation being unable to pay its liabilities as they become due and
constitute a contravention of the OBCA. There can be no assurance that the Corporation will determine to
or be able to pay future dividends on the Preference Shares.
The Corporation’s Bank Facility Agreement, the New Debentures, and the Original Loan are due within a
one-year period. If the Corporation is unable to renew or re-finance these facilities, its ability to continue
as a going concern is uncertain.
MAGELLAN 2008 ANNUAL REPORT
7
Factors that have an adverse impact on the aerospace industry may adversely affect the Corporation’s
results of operations.
The majority of the Corporation’s gross profit and operating income is derived from the aerospace in-
dustry. The Corporation’s aerospace operations are focused on engineering and manufacturing aircraft
components on new aircraft, selling spare parts and performing repair and overhaul services on existing
aircraft and aircraft components. Therefore, the Corporation’s business is directly affected by economic
factors and other trends that affect the Corporation’s customers in the aerospace industry, including a
possible decrease in outsourcing by aircraft operators and original equipment manufacturers (“OEMs”),
decreased demand for air travel or projected market growth that may not materialize or be sustainable.
When these economic and other factors adversely affect the aerospace industry, they tend to reduce the
overall customer demand for the Corporation’s products and services, which decreases the Corporation’s
operating income. Economic and other factors, both internal to the aerospace industry or general eco-
nomic factors that might affect the aerospace industry may have an adverse impact on the Corporation’s
results of operations.
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 an-
ticipation 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 locations 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 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.
SELECTED ANNUAL FINANCIAL INFORMATION
Expressed in millions of dollars except per share information
Revenues
Net income (loss) for the year
Income (loss) per common share
Basic and diluted
Total assets
Total long-term liabilities
2008
686.4
12.9
0.62
670.7
51.7
2007
597.8
(11.3)
(0.71)
649.4
108.0
The Corporation has not paid dividends on its common shares in the past four years. In 2005, the Corpo-
ration issued 2,000,000 8.0% Cumulative Redeemable First Preference Shares Series A. The Corporation
paid dividends thereon of $0.80 per share during 2008 and 2007. On March 20,2009, the Board of Directors
of the Corporation determined not to declare or pay dividends due on April 30, 2009 on the Preference
MAGELLAN 2008 ANNUAL REPORT
8
Shares as it was unable to obtain reasonable assurances that such declaration and payment would not
contravene the OBCA.
Effective January 1, 2008, the Corporation was required to adopt Canadian Institute of Chartered Ac-
countants (“CICA”) Handbook Section 3031 “Inventories”, which replaces Section 3030 “Inventories”.
The Corporation adopted this new section retrospectively, without restatement of prior periods. Learn-
ing curve balances previously classified as inventory of $43.1 million, net of a future income tax recov-
ery of $8.8 million were charged to retained earnings on adoption of Section 3031, effective January 1,
2008. This new section also prescribed that certain development costs and program tooling costs may no
longer be classified as inventory. As a result, $67.5 million of deferred development costs related to long-
term contracts have been reclassified to other assets and $10.9 million of program tooling costs have been
reclassified to capital assets, effective January 1, 2008. Cost of revenues for the year ended December 31,
2008 increased by $1.9 million, on the adoption of this new section. The reader is referred to “Changes in
Accounting Policies” for further details regarding the adoption of this standard.
On February 13, 2008, the Corporation acquired all the outstanding shares of Verdict Aerospace Compo-
nents Ltd. (“Verdict”), a company based in the United Kingdom. The acquisition has been accounted for by
the purchase method of accounting with the results of operations of Verdict included in the consolidated
financial statements from January 1, 2008, the effective date of purchase.
2008 UPDATES
•
•
•
•
•
On May 21, 2008, as approved at the Annual General and Special Meeting of the Corporation’s share-
holders held on May 13, 2008, the Corporation completed a five-for-one consolidation of its common
shares.
An agreement was made between Airbus and Magellan Aerospace (UK) Limited, an operating division,
which secured its workload through 2012 in a contract worth £300 million as part of the Airbus Power 8
cost reduction initiative and includes increasing volumes of the wing components that the Corporation
is currently producing for Airbus as well as substantial new packages of work.
GKN Aerospace awarded a contract to Magellan Aerospace (UK) Limited, an operating division, to sup-
ply metal components for retrofit winglets on the Boeing 767, supporting GKN Aerospace’s design and
development contract for these winglets with Aviation Partners Boeing (ABP). The contract calls for up
to 450 aircraft sets over the performance period of three to four years.
First deliveries of front fan frames for the F136 engine commenced in 2008 on the Corporation’s long-
term contract with GE Rolls-Royce Fighter Engine team. The F136 engine is the most advanced fighter
aircraft engine ever developed and will be available to power all variants of the Joint Strike Fighter
(“JSF”) F-35 Lightning II for the US military and with partner nations.
The Corporation was awarded a U.S. $12 million contract to build the development heat shields for the
Orion Space Shuttle replacement program by Lockheed Martin Space Systems Division. The Corporation
will develop the lightweight titanium honeycomb heat shield panels that help protect the space capsule
from the temperature extremes experienced during re-entry.
MAGELLAN 2008 ANNUAL REPORT
9
•
•
The Corporation reached an agreement with the Canadian Government’s Strategic Aerospace and De-
fense Initiative (SADI) program that will provide provide up to $43.3 million of repayable cash flow to
support the development of new manufacturing and process technology for composite and metallic
materials for the multi-national JSF F-35 Lightning II aircraft.
During the fourth quarter of 2008 the joint ownership processing facility in India was completed. This fa-
cility, at 17,500 square feet, will initially focus on processes for aluminum, titanium, and stainless steel
components for aerostructure and aeroengine components. The new facility commenced operations in
January of 2009.
MAJOR PLANT RATIONALIZATIONS
Four plant rationalization and modernization projects were completed over the past three years. The Cor-
poration’s operation in the United Kingdom 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 Corpora-
tion’s casting operations also completed upgrades to equipment and facilities, and re-allocated product
families between sites which achieved efficiency gains that increased throughput by approximately 30%.
The Corporation’s aeroengine machining operations in Massachusetts re-started operations in 2007 in a
new facility that offers room to expand production to accommodate increasing demand. Finally, the Cor-
poration’s operations in New York completed Phase I of its upgrade program, upgrading and augmenting
its production equipment, and consolidating operations to achieve greater flow and efficiency. This project
is expected to complete its final phase of upgrade in 2009 – 2010. A fifth plant upgrade and capitalization
is expected to commence in 2009 to support the JSF program.
LABOUR MATTERS
A labour agreement at one of the Corporation’s facilities expired on December 31, 2008 and two addi-
tional labour agreements expired on March 15, 2009 and management is currently in negotiations. Labour
agreements at two additional facilities will expire in 2009.
FINANCING MATTERS
On January 30, 2008, the Corporation closed a private placement of an aggregate of $21.0 million New
Debentures, due January 31, 2010 the proceeds of which were used to fund, in part, the repayment of the
$70.0 million principal amount of outstanding 8.5% unsecured subordinated debentures (the “Existing
Debentures”) which matured on January 31, 2008.
The New Debentures were redeemable by Magellan for the first six months of the term at 102.5% of
principal value and the holders had 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 $10.00 per share, which is equal to a conversion rate of 100
common shares per $1,000 principal amount of debentures or the issuance on conversion of approxi-
mately 2,095,000 common shares in total.
On January 31, 2008, in order to fund the remaining balance of approximately $50.0 million on the maturi-
ty of the Existing Debentures, Edco Capital Corporation (“Edco”), a corporation controlled by the Chairman
of the Board of the Corporation, provided 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
MAGELLAN 2008 ANNUAL REPORT
10
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 controlled by a common director. 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 operating credit facility. The Original Loan is repayable on
July 1, 2009 and the Bridge Loan was repayable on July 31, 2008. On June 24, 2008, the Bridge Loan was
repaid through an increase in the operating credit facility. In addition, in January 2008 in consideration for
the provision of additional security for the Corporation’s obligations under its existing secured operating
credit facility, the Corporation has increased the standby guarantee payable to the Chairman of the Board
from 0.1% per annum to 1.35% per annum of the principal amount guaranteed.
On June 24, 2008, the Corporation renewed the Bank Facility Agreement with its existing lenders. Under
the terms of the renewed agreement, the maximum amount available under the operating credit facility
was increased by $20.0 million to $95.0 million Canadian and $90.0 million U.S. ($204.6 million at Decem-
ber 31, 2008) with a maturity date of May 23, 2009. The facility is extendable for unlimited one-year re-
newal 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 December 2008, the Corporation’s Board of Directors established a committee consisting of three in-
dependent directors. This committee was formed to consider the financial condition of the Corporation
and to consider proposals to restructure the capital structure of the Corporation through the issuance
of debt or equity, or through the sale of assets or other alternative transaction should such transactions
be required.
The independent committee and the independent members of the Board of Directors concluded that the
Corporation is in serious financial difficulty because, even though management believes that the Corpora-
tion will generate sufficient cash through operations in order to meet its obligations as they come due, if
the Corporation is unable to renew or re-finance its operating bank facility and extend the Original Loan,
its ability to continue as a going concern is uncertain. The Corporation’s operating credit facility is due on
May 23, 2009 and the Original Loan is due on July 1, 2009.
The Corporation announced on February 4, 2009 that the independent members of its Board of Direc-
tors approved additional financing initiatives which are designed to improve the Corporation’s financial
position and are reasonable for the Corporation in the circumstances. These financial initiatives consist
of a new secured subordinated loan in the amount of $15.0 million, the extension of the maturity of the
Original Loan from Edco of $50.0 million to July 1, 2010, the issuance of up to $40.0 million principal
amount of 10% convertible secured subordinated debentures (the “Convertible Secured Subordinated
Debentures”) and the continuation of one of the Corporation’s existing securitization programs of up to
$35.0 million of Canadian based accounts receivables, declining to $20.0 million by April 30, 2009 and
to nil by December 31, 2009.
MAGELLAN 2008 ANNUAL REPORT
11
Edco and Mr. Edwards, the Chairman of the Board of the Corporation, and the Corporation agreed to the
following financing transactions:
(a) the subscription by Mr. Edwards, directly or indirectly, for the purchase of a minimum of $25.0 million
principal amount of a new issue of Convertible Secured Subordinated Debentures;
(b) the extension of the Original Loan from Edco to the Corporation in the principal amount of $50.0
million to July 1, 2010 in consideration of the payment of a one time fee to Edco equal to 1% of the
principal amount outstanding and increasing the interest rate on the loan from 10% to 12% per annum
(the “Amended Original Loan”); and
(c) an additional secured subordinated loan from Edco of $15.0 million maturing on July 1, 2010 with
an interest rate of 12% per annum, payable monthly in arrears with similar terms as the Amended
Original Loan.
(together the “2009 Financing Arrangements”)
The agreement of the Corporation, Edco and Mr. Edwards is subject to the extension of the operating
credit facility for a period of at least one year on or before April 30, 2009 on terms satisfactory to the Board
of Directors of the Corporation. In addition, the agreement of Mr. Edwards and Edco is subject to there
being no material adverse change in the business, operations or capital of the Corporation.
The acquisition of $25.0 million of Convertible Secured Subordinated Debentures would result, in the
event of conversion of the Convertible Secured Subordinated Debentures, in Mr. Edwards holding in
excess of 66 2/3% of the common shares of the Corporation on a fully diluted basis. As a result, such
holdings would constitute a change of control (as defined in the New Debentures) and the Corporation
will have an obligation to make an offer to purchase the New Debentures due January 31, 2010 and
outstanding in the principal amount of $20.95 million at a price of 102.5% of the principal amount plus
accrued and unpaid interest. In addition, subject to the terms of the OBCA, pursuant to a similar change
of control definition in the Preference Share terms, the Corporation will be required to retract its out-
standing Preference Shares at a price of $10.00 per share plus accrued and unpaid dividends. Dividends
on the Preference Shares have been fully paid to December 31, 2008.
On March 20, 2009, the Board of Directors of the Corporation determined to commence with the negotiations
with the Corporation’s lenders on the extension of its operating credit facility and instructed management to
formulate plans for the offer to purchase the outstanding New Debentures if and when required. The Board
of Directors also determined not to declare or pay dividends due on April 30, 2009 on the Preference Shares
as it was unable to obtain reasonable assurances that such declaration and payment would not contravene
the OBCA. The Corporation does not currently believe it will be able to retract the Preference Shares as it
does not expect to have the funds to do so, and in any event it is prohibited from doing so by the terms of its
operating credit facility and any default in the operating credit facility would result in the Corporation being
unable to pay its liabilities as they become due and constitute a contravention of the OBCA.
There can be no assurance that the additional financing initiatives will be completed on the terms set
forth or at all. The Corporation has commenced in initial discussions, but has not yet engaged in any ne-
gotiations, with its lenders to renew the operating credit facility. At this early stage, no assurance can be
given that the operating credit facility will be renewed on terms satisfactory to the Board of Directors of
the Corporation. As part of the refinancing, the holder of the Original Loan has already agreed to extend
the terms of the Original Loan to July 1, 2010 subject to the extension of the operating credit facility for a
period of at least one year.
MAGELLAN 2008 ANNUAL REPORT
12
RESULTS FROM OPERATIONS
Revenues
Twelve-months ended December 31
Expressed in thousands of dollars
Canada
United States
United Kingdom
Total Revenues
2008
304,124
245,455
136,857
686,436
2007
289,904
188,330
119,574
597,808
Change
4.9%
30.3%
14.5%
14.8%
Consolidated revenues for the year ended December 31, 2008 were $686.4 million, an increase of $88.6
million or 14.8% over the previous year. During 2008, the Corporation’s sales volumes increased by 7.3%
over the previous year. This increase in sales volume, over all geographical regions, was mainly due to
increases in production rates at original equipment manufacturers (“OEMs”) for aircraft and engines. The
increase in Canada is a result of increased sales in proprietary products in 2008 over 2007. Increases in the
United States sales resulted from a one-time retroactive price settlement recorded in the third quarter of
2008 totalling $4.9 million and a price increase in the current year totalling $5.5 million which had a direct
increase to both of the Corporation’s revenue and gross profit for the year. Increased sales in the United
States and the United Kingdom can be attributed to the Corporation’s increased participation on the Boe-
ing and Airbus family of parts. Increase in the United Kingdom also resulted from the purchase of Verdict
Aerospace Components, Inc. in the first quarter of 2008.
Gross Profit
Twelve-months ended December 31
Expressed in thousands of dollars
Gross profit
Percentage of revenue
2008
77,459
11.3%
2007
58,914
9.9%
Change
32.4%
Gross profit in 2008 was $77.5 million, an increase of $18.5 million from 2007. As a percentage of revenue,
gross profit was 11.3% of sales in 2008 compared to 9.9% of sales in 2007. Gross profit increased over
2007 due to the Corporation concluding a one-time retroactive price adjustment totalling $4.9 million and
a price increase relating to 2008 sales totalling $5.5 million. Gross profit for 2008, excluding the impact
of these price adjustments of $10.4 million and a write-down taken in the year due to the impact of the
uncertainties of the current economic climate, would have been $70.4 million (10.3% of revenues).
During 2008, the Corporation began to realize the anticipated operational efficiencies at several of its
manufacturing facilities that were rationalized and modernized during the last few years. The impact on
gross profit from these improvements in efficiencies have yet to be fully realized and as a result the Corpo-
ration continues to take steps to improve manufacturing techniques, and implement other cost reduction
initiatives. The Corporation will continue to increase its low-cost sourcing activities in 2009 to improve the
gross profit.
MAGELLAN 2008 ANNUAL REPORT
13
Administrative and General Expenses
Twelve-months ended December 31
Expressed in thousands of dollars
Administrative and general expenses
Plant and program closure costs
Gain on sale of capital assets
Foreign exchange (gain) loss
Total administrative and general expenses
Percentage of revenues
2008
44,691
4,558
(1,355)
(6,904)
40,990
5.8%
2007
42,446
—
(1,257)
5,576
46,765
7.8%
Total administrative and general expenses for 2008 were $41.0 million, compared to $46.8 million in
2007. Included in administrative and general expenses is a foreign exchange gain, resulting from the
change in foreign exchange rates on the Corporation’s US denominated working capital balances and
debt in Canada, of $6.9 million in 2008 versus a loss of $5.6 million in 2007. In 2008 and 2007 the Cor-
poration disposed of capital assets and recorded gains on the sale of capital assets of $1.4 million and
$1.3 million, respectively.
The Corporation increased a previously recorded provision by $0.8 million in relation to the 2006 closure
of its Fleet Industries plant and also, due to the decline in the financial market, the Corporation recorded
a charge to administrative and general expenses in 2008 of $3.8 million in respect of a pension obligation
for the Fleet Industries pension plan that is in the process of being wound-up. In addition, the Corporation
recorded a provision of $1.0 million against a receivable related to the customer due to the current eco-
nomic environment. Administrative and general expenses also increased by $1 million as a result of the
acquisition of Verdict in the first quarter of 2008. Administrative and general expenses in 2007 were offset
by currency collar gains of $2.5 million that did not recur in 2008.
Write-down of Assets
In 2007, as a result of the accounting irregularities that occurred from 2003 to 2007, the Corporation suf-
fered a loss of $4.9 million ($5.7 million pre-tax), net of anticipated insurance proceeds, as the overstated
carrying values of the assets were written down to their appropriate values. A loss of $2.2 million was
recorded in 2007 ($1.6 million in cost of revenues and $0.6 million in administrative and general expenses)
and $2.7 million was recorded against 2007 opening retained earnings. The Corporation has since recov-
ered $1.5 million of the loss through its all risk insurance policy, as anticipated.
Interest Expense
Twelve-months ended December 31
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
MAGELLAN 2008 ANNUAL REPORT
2008
15,070
2,141
437
4,301
21,949
2007
12,068
5,950
2,354
4,211
24,583
14
Interest costs for 2008 were $21.9 million, a decrease of $2.6 million from 2007. Although the amount of
debt increased in 2008 when compared to 2007, the interest costs were lower in 2008 compared to 2007
as a result of lower interest rates incurred during the year. During the year, the Corporation sold $555.6
million of accounts receivable at a discount of $4.3 million, which represented an annualized interest rate
of 6.77%. In 2007, $399.6 million of receivables were sold at a discount of $4.2 million, which represented
an annualized interest rate of 6.82%.
Provision for (Recovery of) Income Taxes
Twelve-months ended December 31
Expressed in thousands of dollars
(Recovery of) provision for current income taxes
Future income tax provision (recovery)
Total income tax provision (recovery)
Effective Tax Rate
2008
(194)
1,814
1,620
11.1%
2007
207
(1,300)
(1,093)
8.8%
The Corporation recorded an income tax provision in 2008 of $1.6 million on pre-tax income of $14.5 mil-
lion, representing an effective tax rate of 11.1%, compared to a recovery of $1.1 million on a pre-tax loss
of $12.4 million in 2007 for an effective tax rate of 8.8%. During 2008, the Corporation recorded a non-cash
charge of $3.0 million to establish a valuation allowance against its net future tax assets in Canada where
recovery of the carry forwards or assets were not “more likely than not”. The valuation allowance charge
is offset by an adjustment of $3.5 million to the future tax liability as a result of rate adjustments recorded
in the United States.
Cash Flow from Operating Activities
Twelve-months ended December 31
Expressed in thousands of dollars
(Increase) decrease in accounts receivable
Increase in inventories
Decrease (increase) in prepaid expenses and other
Increase (decrease) in accounts payable and accrued charges
Net change in non-cash working capital items
Cash provided by operating activities
2008
(22,844)
(16,628)
2,176
4,475
(32,821)
23,155
2007
16,148
(16,112)
(5,064)
(1,463)
(6,491)
3,050
Operating activities for 2008 generated cash flows of $23.2 million compared to $3.0 million in the prior year.
In 2008, income from operations before changes in non-cash working capital items generated cash of $56.0
million, a $46.5 million increase compared to $9.5 million provided in 2007 due principally to higher revenue
and profitability in 2008 as a result of increased sales volumes and a significant retroactive price adjustment.
Changes in non-cash working capital used cash of $32.8 million as a result of increases in inventories and
accounts receivables offset by an increase in accounts payable and accrued charges. Inventories increased
during the year to support key programs and a result of the delay in the shipment of some programs in the
last few months of the year. Accounts receivable increased during the year as the Corporation has decreased
MAGELLAN 2008 ANNUAL REPORT
15
the amount drawn on its accounts receivable securitization facility. In 2007, changes in non-cash working
capital of $6.5 million were principally a result of an increase in inventory and prepaid expenses, decrease in
accounts payable and accrued charges offset by a decrease in accounts receivable.
Cash Flow from Investing Activities
Twelve-months ended December 31
Expressed in thousands of dollars
Acquisitions
Purchase of capital assets
Proceeds from disposals of capital assets
(Decrease) increase in other assets
Cash used in investing activities
2008
(4,268)
(18,769)
3,540
(3,768)
(23,265)
2007
—
(22,968)
2,240
1,279
(19,449)
The Corporation invested $18.8 million in capital assets during the year, to upgrade its machinery
and facilities, a decrease of $4.2 million from 2007. In 2008 and 2007, proceeds from the sale of
capital assets, totalling $3.5 million and $2.2 million, respectively, were used to fund a portion of the
investment in capital assets. Capital additions were for advanced technology production equipment
and information technology systems, both designed to increase productivity, reduce cycle time and
improve technology capability.
SELECTED QUARTERLY FINANCIAL INFORMATION
Twelve-months ended December 31
Expressed in thousands of dollars
Revenues
Net income (loss)
Income (loss) per
common share
Basic and diluted
2008
2007
March 31
June 30
Sept 30
Dec 31 March 31 June 30 Sept 30 Dec 31
161.1
2.0
172.1
0.8
173.0
2.7
180.2
7.4
144.1
(1.7)
150.3
(1.7)
147.9
(2.9)
155.5
(5.0)
0.09
0.02
0.12
0.39
(0.02)
(0.02)
(0.04)
(0.06)
The US$/C$ exchange rate was very volatile during 2008 as the US dollar appreciated from an US$/C$ ex-
change rate of 0.9913 at the start of the year to 1.2180 by year’s end. Although the US$/C$ rate appreciated
quarter over quarter in 2008, the average rate in 2008 of 1.0670 remained relatively consistent with the 2007
average rate of 1.0740. Had exchange rates remained at levels experienced in each quarter of 2007, reported
revenues in 2008 would have been higher by approximately $15.4 million in the first quarter, approximately
$8.7 in the second quarter, consistent in the third quarter and lower in the fourth quarter by $23.9 million.
EBITDA
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, depreciation, amortization and certain non-cash charges). The Corporation has provided
MAGELLAN 2008 ANNUAL REPORT
16
these measures because it believes this information is used by certain investors to assess financial perfor-
mance 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 cal-
culated in accordance with GAAP, but EBITDA is not a recognized measure under 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 (used in) operations.
The table below provides a reconciliation of net income (loss) to EBITDA.
Twelve-months ended December 31
Expressed in thousands of dollars
Net income (loss)
Interest
Taxes
Stock based compensation
Depreciation and amortization
Amortization of deferred development costs
EBITDA
2008
12,900
21,949
1,620
742
25,744
14,474
77,429
2007
(11,341)
24,583
(1,093)
1,450
22,799
—
36,398
Prior to the adoption of the CICA Handbook Section 3031, “Inventories”, the Corporation included in inven-
tory deferred development costs and the amortization of these costs were not a component within the
EBITDA calculation.
LIQUIDITY
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 securiti-
zation program, and long-term debt and equity capacity. Principal uses of cash are for operational require-
ments and capital expenditures.
Contractual Obligations
As at December 31, 2008
Expressed in thousands of dollars
Bank indebtedness
Long-term debt
Capital lease obligations
Operating leases
Other long-term liabilities
Convertible debentures
Total
Total
177,766
60,916
3,208
10,795
7,947
20,950
281,582
Less than
1 year
177,766
51,318
1,003
4,989
—
—
235,076
1-3 Years
—
4,368
2,205
3,694
4,862
20,950
36,079
4-5 Years
—
2,583
—
1,152
100
—
3,835
After
5 Years
—
2,647
—
960
2,985
—
6,592
MAGELLAN 2008 ANNUAL REPORT
17
Major cash flow requirements for 2009 include the renewal of the operating credit facility, a non-bank loan
repayment of $50.0 million and payments of operating leases of $4.9 million.
The Corporation’s operating credit facility and the Original Loan are both due within a one-year period.
The Corporation has commenced discussions but has not yet engaged in any negotiations with the lend-
ers of the operating credit facility regarding the renewal of this facility. As part of the refinancing discussed
in “Financing Matters”, the holder of the Original Loan has already agreed to extend the terms of the Origi-
nal Loan to July 1, 2010 subject to the extension of the operating credit facility for a period of one year.
While these consolidated financial statements are prepared on the assumption that these credit facilities
will be renewed, as it has done in previous years, there is no certainty that this will be the case in light of
the current credit conditions. If the Corporation is unable to renew or re-finance these facilities, its ability
to continue as a going concern is uncertain. See “Risks Factors” section.
The Corporation has made contractual commitments to purchase $11.8 million of capital assets. The Cor-
poration also has purchase commitments, largely for materials, in 2009, made through the normal course
of operations, of $172.0 million. The Corporation plans to finance these capital commitments with operat-
ing cash flow and existing credit facility.
OFF BALANCE SHEET ARRANGEMENTS
The Corporation has entered into arrangements in which it sold certain accounts receivable to third par-
ties at a discount. This discount typically represents approximately 1.0% to 3.0% over 60 day BA or LIBOR
rates. At December 31, 2008, the amount of receivables sold to third parties that remained outstanding
was $62.2 million.
A reserve of $4.4 million is included within accounts receivable that represents the maximum credit re-
course to the related party.
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. Under these contracts the Corporation is obliged to purchase or sell specific amounts of US dol-
lars at predetermined dates and exchange rates. These contracts are matched with anticipated operational
cash flows in US dollars. During 2008, the Corporation entered into a foreign exchange collar which sets a
floor of $1.0309 Canadian per $1.00 U.S. and a ceiling of $1.0970 Canadian per $1.00 U.S. of which $12.0
million U.S. will expire in 2009.
The Corporation had foreign exchange contracts outstanding at December 31, as follows:
Expressed in thousands of dollars
Maturity — less than 1 year — U.S. Dollar
Maturity — less than 1 year — U.S. Dollar
2008
Amount
Exchange rate
26,100
12,000
1.23014
1.0309 — 1.0970
These foreign exchange contracts are recorded at their fair value of $1.9 million in accrued liabilities.
MAGELLAN 2008 ANNUAL REPORT
18
RELATED PARTY TRANSACTIONS
As at December 31, 2008, the Chairman of the Board, who is also a director, and a director of the Cor-
poration held $18.15 million of the $20.95 million of the New Debentures issued in 2008. The Chairman
of the Board of the Corporation also held $15.0 million of the Existing Debentures that were repaid on
January 31, 2008. The related cash interest for the year was $1.4 million [2007 — $1.3 million].
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 $15.0 million, due July 1, 2008 bearing interest at
a rate of 9.0%. In 2008, $0.1 million of interest was paid in relation to the loan. The note was repaid on
January 31, 2008.
On January 31, 2008, the Corporation entered into a $50.0 million Original Loan due July 1, 2009 and a
$15.0 million Bridge Loan due July 31, 2008 with a corporation, which is controlled by a common direc-
tor. Both loans bear interest at a rate of 10%. In 2008, $4.6 million of interest was paid in relation to the
Original Loan and $0.6 million of interest was paid in relation to the Bridge Loan. The Bridge Loan was
repaid in June 2008.
The Chairman of the Board of the Corporation has provided a guarantee for the full amount of the Corpo-
ration’s operating credit facility and in 2008 was paid an annual fee of $2.1 million [2007 — $0.2 million],
1.35% [2007 — 0.1%] of the guaranteed amount as compensation for this guarantee.
During the year, the Corporation sold accounts receivable totaling $405.2 million to a corporation with a
common director, for a discount of $2.8 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 $0.08 million to a law firm in which a director
is a partner.
CRITICAL ACCOUNTING ESTIMATES
Inventories
Raw materials, materials in process and finished products are valued at the lower of cost and net realizable
value. Due to the long-term contractual periods of the Corporation’s contracts, the Corporation may be
in negotiation 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.
Asset Impairment
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 as-
set. The amount of the impairment is determined based on discounted estimated future cash flows. Future
cash flows are determined based on management’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.
MAGELLAN 2008 ANNUAL REPORT
19
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 invest-
ment. The consideration of these factors requires management to make assumptions and estimates about
future financial results of the investment. These assumptions and estimates are updated by management
on a regular basis.
Income Taxes
The Corporation operates in several tax jurisdictions. As such, its income is subject to various rates and
rules of taxation. The breadth of the Corporation’s operations and the complexity of the taxing legisla-
tion 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 deter-
mined under applicable tax legislation. 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.
Foreign Currency Translation
The functional currency of the Corporation is Canadian dollars. Many of the Corporation’s operations un-
dertake transactions in currencies other than the Canadian dollar. As part of its ongoing review of critical
accounting policies and estimates, 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 subsidiar-
ies as self-sustaining foreign operations.
Financial Instruments and Other Instruments
The Corporation has not utilized any financial instruments to hedge its exposure to foreign currency flows
in 2008 and 2007.
CHANGES IN ACCOUNTING POLICIES
Inventories
Effective January 1, 2008, the Corporation was required to adopt Canadian Institute of Chartered Accounts
(“CICA”) Handbook Section 3031 “Inventories”, which replaces Section 3030 “Inventories”. The Corporation
adopted this new section retrospectively, without restatement of prior periods. This new section provides
revised guidance on the determination of cost and its subsequent recognition as an expense, including any
write-down to net realizable value. It also provides revised guidance on the cost methodologies that are to
be used to assign costs to inventories and expands the disclosure requirements to increase transparency.
MAGELLAN 2008 ANNUAL REPORT
20
As a result of these required changes in accounting policies, the Corporation was required to adopt the
unit cost method for inventory related to its long-term contracts in replacement of the long-term average
cost method. The unit cost method is the prescribed cost method under which the actual production costs
are charged to each unit produced and recognized to income as the unit is sold. The Corporation previ-
ously accounted for the cost of production inventory using the long-term average cost which reflected
higher unit costs at the early phase of a program and lower unit costs at the end of the program (the learn-
ing curve concept).
As at January 1, 2008, the effect of these accounting changes, required under Section 3031, on the Corpo-
ration’s consolidated balance sheet is as follows:
Expressed in thousands of dollars
Assets
Inventories
Capital assets
Deferred Development Costs
Liabilities
Future income tax liabilities
Shareholders’ equity
Reported, as at
December 31, 2007
Impact of
accounting changes
Restated, as at
January 1, 2008
274,011
245,727
8,143
527,881
16,799
265,927
(121,462)
10,852
67,471
(43,139)
(8,844)
(34,295)
152,549
256,579
75,614
484,742
7,955
231,632
Learning curve balances of $43.1 million, net of a future income tax recovery of $8.8 million were charged
to retained earnings on adoption of Section 3031, effective January 1, 2008. This new section also pre-
scribed that certain development costs and program tooling costs may no longer be classified as inventory.
As a result, $67.5 million of deferred development costs related to long-term contracts have been reclas-
sified to other assets and $10.9 million of program tooling costs have been reclassified to capital assets,
effective January 1, 2008.
Cost of revenue for the year ended December 31, 2008 increased by $1.9 million, on the adoption of this
new section.
Section 3031 requires inventory to be valued at the lower of cost or net realizable value (“NRV”). The new
section also allows for the reversal of previous write-downs of inventory items when the NRV of those
items subsequently recovers.
Financial Instruments — Disclosures and Financial Instruments — Presentation
Effective January 1, 2008, the Corporation also adopted two new presentation and disclosure standards
that were issued by the CICA: Handbook Section 1535, Capital Disclosures (“Section 1535”), Handbook
Section 3862, Financial Instruments — Disclosures (“Section 3862”) and Handbook Section 3863, Financial
Instruments — Presentation (“Section 3863”).
Sections 3862 and 3863 replace Handbook Section 3861, Financial Instruments — Disclosure and Presenta-
tion, revising and enhancing its disclosure requirements and carrying forward unchanged its presentation re-
quirements for financial instruments. Sections 3862 and 3863 place increased emphasis on disclosures about
the nature and extent of risks arising from financial instruments and how the entity manages those risks.
MAGELLAN 2008 ANNUAL REPORT
21
General standards of financial statement presentation
CICA Handbook Section 1400 was amended to include the requirement to assess and disclose uncertain-
ties about the Corporation’s ability to continue as a going concern. The new requirements came into effect
for the Corporation’s fiscal year beginning January 1, 2008. The new standard did not have an impact on
the valuation or classification of amounts in the Corporation’s consolidated financial statements.
Capital disclosures
On January 1, 2008, the Corporation adopted Section 1535, “Capital Disclosures”. This Section establishes
standards for disclosing information about an entity’s capital and how it is managed. Disclosures should
include the entity’s objectives, policies and procedures for managing capital as well as any externally im-
posed capital requirements and the consequences of non-compliance.
FUTURE CHANGES IN ACCOUNTING POLICIES
The Corporation will adopt the following accounting standards recently issued by the CICA:
Section 3064, Goodwill and Intangible Assets
In February 2008, the CICA issued new recommendations for accounting for “Goodwill and Intangible
Assets.” This new section will replace the existing standards for “Goodwill and Other Intangible Assets”
(CICA Handbook Section 3062) and “Research and Development Costs” (CICA Handbook Section 3450)
and will apply to Corporation’s 2009 annual and interim financial statements. The new standard (i) states
that upon their initial identification, intangible assets are to be recognized as assets only if they meet the
definition of an intangible asset and the recognition criteria; (ii) provides guidance on the recognition of
internally generated intangible assets including research and development costs; and (iii) carries forward
the current requirements of Section 3062 for subsequent measurement and disclosure of intangible assets
and goodwill. Adoption of this new section is not expected to have a material impact on the Corporation’s
consolidated financial statements.
Sections 1582, Business Combinations, 1601, Consolidated Financial Statements, and
1602, Non-controlling Interests
In January 2009, the CICA issued Sections 1582, “Business Combinations”, 1601, “Consolidated Financial
Statements”, and 1602, “Non-controlling Interests”.
Section 1582 will be converged with IFRS 3, “Business Combinations”, Section 1602 will be converged with
the requirements of IAS 27, “Consolidated and Separate Financial Statements”, for non-controlling inter-
ests. Section 1601 carries forward the requirements of Section 1600, “Consolidated Financial Statements”,
other than those relating to non-controlling interests.
Section 1582 applies to acquisitions made from January 1, 2011 in which the acquirer obtains control of
one or more businesses. The term “business” is more broadly defined than in the existing standard. Most
assets acquired and liabilities assumed, including contingent liabilities that are considered to be “improb-
able”, will be measured at fair value. Any interest in the acquiree owned prior to obtaining control will be
remeasured at fair value at the acquisition date, eliminating the need for guidance on step acquisitions. A
bargain purchase will result in recognition of a gain. Acquisition costs must be expensed.
Under Section 1602, any non-controlling interest will be recognized as a separate component of share-
MAGELLAN 2008 ANNUAL REPORT
22
holders’ equity. Net income will be calculated without deduction for the non-controlling interest. Rather,
net income will be allocated between the controlling and non-controlling interests.
The new standards will become effective in 2011. The Corporation is currently evaluating the impact of the
adoption of these new standards on its consolidated financial statements.
International Financial Reporting Standards
In February 2008, Canada’s Accounting Standards Board (“AcSB”) confirmed that Canadian GAAP, as used
by publicly accountable enterprises, will be converged with International Financial Reporting Standards
(“IFRS”) effective January 1, 2011. While IFRS uses a conceptual framework similar to Canadian GAAP,
there are significant differences on recognition, measurement and disclosures. The transition from Ca-
nadian GAAP to IFRS will be applicable to the Corporation for the first quarter of 2011 where the current
and comparative financial information will be prepared in accordance with IFRS. In the period leading up
to the changeover, the AcSB will continue to issue accounting standards that are converged with IFRS,
thus mitigating the impact of the transition to IFRS at the changeover date. The International Accounting
Standard Board will also continue to issue new accounting standards during the conversion period, and as
a result, the final impact of IFRS on the Corporation’s financial results will only be measured once all the
IFRS applicable at the conversation date are known.
The Corporation commenced its IFRS conversion efforts during 2008. The transition project consists of
four elements: planning and awareness raising; assessment; design; and implementation. With the as-
sistance of external consultants, the Corporation has conducted sessions to raise awareness in its efforts
to transition to IFRS. As part of planning, the Corporation completed a high level assessment of the major
differences between Canadian GAAP and IFRS. During 2009, work will be initiated relating to assessment
and design. This will involve detailed evaluation of the differences on recognition, measurement and
disclosures between Canadian GAAP and IFRS, and design of solutions for the conversion to IFRS. The
assessment and design will also entail establishment of issue-specific work teams to focus on generating
alternatives and making recommendations in identified areas related to IFRS recognition, measurement
and disclosures. The Corporation will establish a communications plan, develop staff training programs,
and evaluate the impacts of the IFRS transition on other business activities.
CONTROLS AND PROCEDURES
Based on the current Canadian Securities Administrators (the “CSA”) rules under National Instrument
52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings, 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, 2008 that they are responsible for establishing
and maintaining, and have assessed the effectiveness of disclosure controls and procedures and internal
control over financial reporting.
Management does not expect disclosure controls and procedures and internal control over financial re-
porting to prevent all errors, misstatements or fraud. In addition, internal control over financial reporting
that management has designed and established may be circumvented and rendered ineffective as a result
of unauthorized acts of individuals through collusion or management override. 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 as-
MAGELLAN 2008 ANNUAL REPORT
23
surance 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 judg-
ments could ultimately prove to be incorrect under varying conditions and circumstances; (ii) the impact of
isolated errors; (iii) assumptions about the likelihood of future events.
In preparation for this certification, Magellan has dedicated resources in place to document and evaluate
the effectiveness of disclosure controls and procedures and internal control over financial reporting. As of
December 31, 2008, an evaluation was carried out, under the supervision of President and Chief Execu-
tive Officer and Vice-President, Finance and Corporate Secretary, of the effectiveness of the Corporation’s
disclosure controls and internal controls over financial reporting, as those terms are defined in National
Instrument 52-109. Based on that evaluation, the Corporation’s management concluded that the Corpora-
tion’s disclosure controls and procedures and internal control over financial reporting were effective as of
December 31, 2008.
No changes were made in the Corporation’s internal control over financial reporting during the Corpora-
tion’s most recent interim period, that have materially affected, or are reasonably likely to materially af-
fect, the Corporation’s internal control over financial reporting.
OTHER INFORMATION
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 24, 2009, 18,209,001 common shares
were outstanding and 2,000,000 Preference Shares were outstanding.
At December 31, 2008, the Corporation had outstanding approximately $20.95 million of 8.5% convert-
ible unsecured subordinated debentures, due January 31, 2010. After the first six months of the term, the
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 $10.00 per share, which is equal to a conversion rate of 100 com-
mon shares per $1,000 principal amount of debentures or the issuance on conversion of approximately
2,095,000 common shares in total.
Additional information relating to Magellan Aerospace Corporation, including the Corporation’s Annual
Information Form is on SEDAR at www.sedar.com.
MAGELLAN 2008 ANNUAL REPORT
24
MANAGEMENT’S REPORT
The consolidated financial statements of Magellan Aerospace Corporation were prepared by manage-
ment 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. Exter-
nal 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 of
Directors approved the consolidated financial statements.
James S. Butyniec
President and Chief Executive Officer
John B. Dekker
Vice President Finance and Corporate Secretary
March 26, 2009
MAGELLAN 2008 ANNUAL REPORT
25
AUDITORS’ REPORT
TO THE SHAREHOLDERS OF MAGELLAN AEROSPACE CORPORATION
We have audited the consolidated balance sheets of Magellan Aerospace Corporation as at December 31, 2008
and 2007 and the consolidated statements of operations and retained earnings, cash flows and comprehensive
income (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.
We conducted our audits in accordance with Canadian generally accepted auditing standards. Those stan-
dards 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, 2008 and 2007 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 24, 2009
MAGELLAN 2008 ANNUAL REPORT
26
CONSOLIDATED BALANCE SHEETS
As at December 31
[Expressed in thousands of dollars]
Assets
Current
Cash
Accounts receivable [NOTES 18 AND 20[f]]
Inventories [NOTES 2 AND 4]
Prepaid expenses and other
Future income tax assets [NOTE 16]
Total current assets
Capital assets, net [NOTE 5]
Technology rights [NOTE 6]
Deferred development costs [NOTE 7]
Other assets [NOTE 17]
Future income tax assets [NOTE 16]
Total long-term assets
Liabilities and Shareholders’ Equity
Current
Bank indebtedness [NOTE 8]
Accounts payable and accrued charges
Convertible debentures [NOTE 10]
Current portion of long-term debt [NOTE 9]
Total current liabilities
Long-term debt [NOTE 9]
Convertible debentures [NOTE 10]
Future income tax liabilities [NOTE 16]
Other long-term liabilities [NOTE 11]
Total long-term liabilities
Shareholders’ equity
Capital stock [NOTES 12 AND 13]
Contributed surplus [NOTE 20 [g]]
Other paid in capital [NOTE 10]
Retained earnings
Accumulated other comprehensive loss [NOTE 14]
Total shareholders’ equity
Basis of presentation [NOTE 1]
Commitments and contingencies [NOTE 22]
Subsequent events [NOTE 23]
See accompanying notes
On behalf of the Board:
2008
2007
$
5,362
67,435
178,474
10,717
5,097
267,085
277,207
32,567
69,225
15,970
8,643
403,612
670,697
177,766
125,116
—
52,321
355,203
11,803
20,544
11,392
7,947
51,686
234,381
3,991
11,645
59,752
(45,961)
263,808
670,697
$
4,884
35,659
274,011
13,127
6,264
333,945
245,727
34,491
8,143
13,073
14,064
315,498
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
N. Murray Edwards
Director
MAGELLAN 2008 ANNUAL REPORT
William A. Dimma
Director
27
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
Years ended December 31
[Expressed in thousands of dollars]
Revenues
Cost of revenues
Gross profit
Expenses
Administrative and general expenses [NOTE 19]
Interest [NOTES 8 AND 20[a]]
Income (loss) before income taxes
Provision for (recovery of) income taxes [NOTE 16]
Current
Future
Net income (loss)
Retained earnings, beginning of year
Effect of change in accounting policy [NOTE 2]
Adjusted retained earnings, beginning of year
Dividends on preference shares
Net income (loss)
Retained earnings, end of year
Net income (loss) per common share [NOTE 12]
Basic and diluted
See accompanying notes
2008
$ 686,436
608,977
77,459
2007
$ 597,808
538,894
58,914
40,990
21,949
62,939
14,520
(194)
1,814
1,620
12,900
82,747
(34,295)
48,452
(1,600)
12,900
59,752
46,765
24,583
71,348
(12,434)
207
(1,300)
(1,093)
(11,341)
95,688
—
95,688
(1,600)
(11,341)
82,747
0.62
(0.71)
MAGELLAN 2008 ANNUAL REPORT
28
CONSOLIDATED STATEMENTS OF CASH FLOWS
As at December 31
[Expressed in thousands of dollars]
Operating Activities
Net income (loss)
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
Stock based compensation [NOTE 13]
Issuance of common shares to the directors
Accretion of convertible debentures
Future income tax expense (recovery)
Net change in non-cash working capital items
related to operating activities [NOTE 20[c]]
Cash provided by operating activities
Investing Activities
Acquisition of Verdict [NOTE 3]
Purchase of capital assets
Proceeds from disposal of capital assets
(Increase) decrease in other assets
Cash used in investing activities
Financing Activities
Increase in bank indebtedness
Decrease in loan payable
Increase in loan payable
Decrease in long-term debt
Increase in long-term debt
Decrease in convertible debentures
Increase in convertible debentures
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 (decrease) in cash during the year
Cash, beginning of year
Cash, end of year
See accompanying notes
MAGELLAN 2008 ANNUAL REPORT
2008
2007
$
12,900
$ (11,341)
40,218
(1,355)
2,184
(1,277)
313
742
—
437
1,814
55,976
(32,821)
23,155
(4,268)
(18,769)
3,540
(3,768)
(23,265)
19,065
(15,000)
15,000
(16,841)
50,000
(69,985)
20,778
(392)
71
(1,600)
1,096
(508)
478
4,884
5,362
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
29
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Years ended December 31
[Expressed in thousands of dollars]
Net income (loss)
Other comprehensive income (loss):
Net unrealized gain (loss) on translation of net
investment in foreign operations [NOTE 14]
Comprehensive income (loss)
2008
12,900
$
2007
$ (11,341)
19,518
32,418
(25,264)
(36,605)
MAGELLAN 2008 ANNUAL REPORT
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The consolidated financial statements have been prepared by management in accordance with Canadian
generally accepted accounting principles (“GAAP”) 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.
These consolidated financial statements have been prepared on the “going concern” basis which pre-
sumes that the Corporation will be able to realize its assets and discharge its liabilities in the normal
course of business for the foreseeable future.
The Corporation has a working capital deficiency of $88,118 as at December 31, 2008. As described in
note 8, the Corporation currently does not have a confirmed source of funds available to repay the operat-
ing facility maturing on May 23, 2009 and the $50,000 loan due on July 1, 2009 [the “Original Loan”]. The
Corporation’s management has undertaken discussions with their lenders regarding the renewal of these
facilities [Note 23 — Subsequent Events].
The Corporation’s ability to continue as a going concern is dependent upon its ability to renew or re-fi-
nance its operating credit facility and the Original Loan. The outcome of these matters cannot be predicted
at this time. However, as part of the refinancing referred to in Note 23 — Subsequent Events, the holder of
the Original Loan has already agreed to extend the terms of the Original Loan to July 1, 2010 subject to
the extension of the operating credit facility for a period of at least one year. These consolidated finan-
cial statements have been prepared on a going concern basis and do not include any adjustments to the
amounts and classifications of the assets and liabilities that might be necessary should the Corporation
be unable to renew or refinance its credit facilities.
Use of estimates
The preparation of consolidated financial statements in conformity with Canadian generally accepted
accounting principles requires management to make estimates and assumptions that affect: the reported
amounts of assets and liabilities; the disclosure of contingent assets and liabilities at the date of the con-
solidated financial statements; and the reported amount of revenue and expenses during the reporting pe-
riod. 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 consolidated financial statements are
reasonable and prudent; however, actual results could differ from these estimates.
Revenue recognition
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, col-
lectibility 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 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 per-
centage 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
MAGELLAN 2008 ANNUAL REPORT
31
Notes To Consolidated Financial Statements
DECEMBER 31, 2008 AND 2007
the period’s revenue. A provision for the estimated loss is made when contract costs are expected to
exceed estimated contract revenue.
Inventory [NOTE 2]
Inventory is stated at the lower of average cost and estimated net realizable value.
The unit cost method is the prescribed cost method under which the actual production costs are charged
to each unit produced and recognized to income as the unit is sold.
Advances and progress billings received on long-term contracts are deducted from related costs in invento-
ries. Advances and progress billings in excess of related costs are classified as deferred revenue.
Capital assets
Capital assets are recorded at cost less related government grants and investment tax credits and are
depreciated over their estimated useful lives, with a 10% residual value, as follows:
Buildings
Machinery and equipment
Tooling
40 years
20 years
3 – 7 years
Amortization of machinery and equipment commences once the asset is put into commercial production.
Impairment of long-lived assets
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 recognized. 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.
Technology rights
Included in technology rights are costs to purchase technological rights applicable to a specific long-term
contract. These costs will be amortized on a unit of production basis to cost of revenues over the antici-
pated term of the long-term contract.
Research and development
Research costs are charged to operations as incurred, due to the nature of the projects. Where govern-
ment incentives in the form of investment tax credits and grants are received for research and develop-
ment 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 reason-
ably assured. Deferred development costs are amortized on an estimated units of production basis.
Government investment
The Corporation makes periodic applications for government investment under available government pro-
grams, including investment tax credits. Government investment relating to capitalized expenditures is
reflected as a reduction of the related costs of such assets. Government investment relating to operating
expenses is recorded as a reduction of the related expenses as incurred.
MAGELLAN 2008 ANNUAL REPORT
32
Notes To Consolidated Financial Statements
DECEMBER 31, 2008 AND 2007
Convertible debentures
The amount recorded as convertible debentures includes the present value of the future interest and prin-
cipal amounts of the debentures. The amount will be accreted to the face value of the convertible deben-
tures 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 recorded as other paid in capital. The holder’s conversion option is valued using the
residual value approach.
Foreign currency translation
Monetary assets and liabilities of the Corporation denominated in foreign currencies are translated at
the year-end exchange rates. Revenue and expenses are translated at actual rates of exchange when
the transaction occurred. Exchange gains and losses on these items are recognized in income in the
current year.
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 ex-
penses 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 other
accumulated comprehensive loss.
The appropriate amounts of exchange gains or losses accumulated in other accumulated comprehensive
loss are reflected in income when there is a reduction, as a result of capital transactions, in the Corpora-
tion’s net investment in the operations that gave rise to such exchange gains or losses.
Employee benefit plans
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 as-
sets 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 differ-
ence 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.
Stock based compensation plan
Stock options granted after January 1, 2003 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. Stock options which have a cash settlement feature, as noted in note 13 are
accounted for as liability instruments, and are carried at the intrinsic value, measured as the difference
between the current stock price and the option exercise price. The intrinsic value of the liability is marked
to market each period.
MAGELLAN 2008 ANNUAL REPORT
33
Notes To Consolidated Financial Statements
DECEMBER 31, 2008 AND 2007
Income taxes
The Corporation follows the liability method of income tax allocation. Under this method, future tax as-
sets and liabilities 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.
Income (loss) per common share
Basic income (loss) per common share is computed by dividing the net income (loss) adjusted for pref-
erence 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 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 as-
sumed 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 income (loss) per common share computation.
Derivative financial instruments
The Corporation manages its foreign currency and interest rate exposures through the use of derivative
financial instruments. The Corporation’s policy is not to utilize derivative financial instruments for trad-
ing or speculative purposes. For the year ended December 31 2008, 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.
Sale of receivables
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 transferred receivables.
Future changes in accounting policies
The Corporation will adopt the following accounting standards recently issued by the Canadian Institute
of Chartered Accountants (“CICA”):
Section 3064, Goodwill and Intangible Assets
In February 2008, the CICA issued new recommendations for accounting for “Goodwill and Intan-
gible Assets”.
MAGELLAN 2008 ANNUAL REPORT
34
Notes To Consolidated Financial Statements
DECEMBER 31, 2008 AND 2007
This new section will replace the existing standards for “Goodwill and Other Intangible Assets” (CICA
Handbook Section 3062) and “Research and Development Costs” (CICA Handbook Section 3450) and
will apply to the Corporation’s 2009 annual and interim financial statements. The new standard (i) states
that upon their initial identification, intangible assets are to be recognized as assets only if they meet the
definition of an intangible asset and the recognition criteria; (ii) provides guidance on the recognition of
internally generated intangible assets including research and development costs; and (iii) carries forward
the current requirements of Section 3062 for subsequent measurement and disclosure of intangible assets
and goodwill. Adoption of this new section is not expected to have a material impact on the Corporation’s
financial statements.
Sections 1582, “Business Combinations,” 1601, “Consolidated Financial Statements,” and 1602, “Non-
controlling Interests”
In January 2009, the CICA issued Sections 1582, “Business Combinations”, 1601, “Consolidated Finan-
cial Statements”, and 1602, “Non-controlling Interests”.
Section 1582 will be converged with IFRS 3, “Business Combinations”. Section 1602 will be converged with
the requirements of IAS 27, “Consolidated and Separate Financial Statements”, for non-controlling inter-
ests. Section 1601 carries forward the requirements of Section 1600, “Consolidated Financial Statements”,
other than those relating to non-controlling interests.
Section 1582 applies to acquisitions made from January 1, 2011 in which the acquirer obtains con-
trol of one or more businesses. The term “business” is more broadly defined than in the exist-
ing standard. Most assets acquired and liabilities assumed, including contingent liabilities that are
considered to be “improbable”, will be measured at fair value. Any interest in the acquiree owned prior to
obtaining control will be remeasured at fair value at the acquisition date, eliminating the need for guid-
ance on step acquisitions. A bargain purchase will result in recognition of a gain. Acquisition costs must
be expensed.
Under Section 1602, any non-controlling interest will be recognized as a separate component of share-
holders’ equity. Net income will be calculated without deduction for the non-controlling interest. Rather,
net income will be allocated between the controlling and non-controlling interests.
The new standards will become effective in 2011. The Corporation is currently evaluating the impact of the
adoption of these new standards on its consolidated financial statements.
International Financial Reporting Standards (“IFRS”)
In February 2008, Canada’s Accounting Standards Board (“AcSB”) confirmed that Canadian GAAP, as used
by publicly accountable companies, will be converged with International Financial Reporting Standards
(“IFRS”) effective January 1, 2011. While IFRS uses a conceptual framework similar to Canadian GAAP,
there are significant differences on recognition, measurement and disclosures. The transition from Cana-
dian GAAP to IFRS will be applicable to the Corporation for the first quarter of 2011 when the current and
comparative financial information will be prepared in accordance with IFRS.
In the period leading up to the changeover, the AcSB will continue to issue accounting standards that
are converged with IFRS, thus mitigating the impact of the transition to IFRS at the changeover date. The
International Accounting Standard Board will also continue to issue new accounting standards during the
conversion period, and as a result, the financial impact of IFRS on the Corporation’s financial results will
only be measured once all the IFRS applicable at the conversion date are known.
MAGELLAN 2008 ANNUAL REPORT
35
Notes To Consolidated Financial Statements
DECEMBER 31, 2008 AND 2007
EIC - 173, Credit Risk and the Fair Value of Financial Assets and Financial Liabilities
On January 20, 2009, the Emerging Issues Committee [“EIC”] of the AcSB issued EIC Abstract 173, which
establishes that an entity’s own credit risk and the credit risk of the counterparty should be taken into
account in determining the fair value of financial assets and liabilities, including derivative instruments.
The new standard is effective for the Corporation beginning January 1, 2009 and is required to be applied
retrospectively, without restatement of prior years to all financial assets and financial liabilities measured
at fair value. The Corporation is currently assessing the impact of EIC Abstract 173 on its consolidated
financial statements.
2. CHANGES IN ACCOUNTING STANDARDS
Inventories
Effective January 1, 2008, the Corporation was required to adopt CICA: Handbook Section 3031 “Invento-
ries”, which replaces Section 3030 “Inventories”. The Corporation adopted this new section retrospectively,
without restatement of prior periods. This new section provides revised guidance on the determination of
cost and its subsequent recognition as an expense, including any write-down to net realizable value. It also
provides revised guidance on the cost methodologies that are to be used to assign costs to inventories and
expands the disclosure requirements to increase transparency.
As a result of these required changes in accounting policies, the Corporation was required to adopt the
unit cost method for inventory related to its long-term contracts in replacement of the long-term average
cost method. Under the unit cost method the actual production costs are charged to each unit produced
and recognized to income as the unit is sold. The Corporation previously accounted for the cost of produc-
tion inventory using the long-term average cost which reflected higher unit costs at the early phase of a
program and lower unit costs at the end of the program (the learning curve concept).
As at January 1, 2008, the effect of these accounting changes, required under Section 3031, on the Corpo-
ration’s consolidated balance sheet is as follows:
Assets
Inventories
Capital assets
Deferred development costs
Liabilities
Future income tax liabilities
Shareholders’ equity
Reported, as at
December 31, 2007
Impact of
accounting changes
Restated, as at
January 1, 2008
$ 274,011
245,727
8,143
527,881
16,799
265,927
$ (121,462)
10,852
67,471
(43,139)
(8,844)
(34,295)
$ 152,549
256,579
75,614
484,742
7,955
231,632
Learning curve balances of $43,139 net of future income tax recovery of $8,844 were charged to retained
earnings on adoption of Section 3031, effective January 1, 2008. This new section also prescribed that
certain development costs and program tooling costs may no longer be classified as inventory. As a result,
$67,471 of deferred development costs related to long-term contracts have been reclassified to other as-
sets and $10,852 of program tooling costs have been reclassified to capital assets, both effective January
1, 2008.
Cost of revenues for the year ended December 31, 2008 increased by $1,941, on the adoption of
this new section.
MAGELLAN 2008 ANNUAL REPORT
36
Notes To Consolidated Financial Statements
DECEMBER 31, 2008 AND 2007
Section 3031 requires inventory to be valued at the lower of cost or net realizable value. The new section
also requires the reversal of previous write-downs of inventory items when the net realizable value of
those items subsequently recovers.
Financial Instruments — Disclosures and Financial Instruments — Presentation
Effective January 1, 2008, the Corporation also adopted two new presentation and disclosure standards
that were issued by the CICA, Handbook Section 3862, Financial Instruments — Disclosures (“Section
3862”) and Handbook Section 3863, Financial Instruments — Presentation (“Section 3863”).
Sections 3862 and 3863 replace Handbook Section 3861, Financial Instruments — Disclosure and Presenta-
tion, revising and enhancing its disclosure requirements and carries forward its presentation requirements
for financial instruments. Sections 3862 and 3863 place increased emphasis on disclosures about the na-
ture and extent of risks arising from financial instruments and how the entity manages those risks.
General standards of financial statement presentation
CICA Handbook Section 1400 was amended to include the requirement to assess and disclose uncertain-
ties about the Corporation’s ability to continue as a going concern. The new requirements came into effect
for the Corporation’s fiscal year beginning January 1, 2008. The new standard did not have an impact on
the valuation or classification of amounts in the Corporation’s consolidated financial statements.
Capital disclosures
On January 1, 2008, the Corporation adopted CICA Handbook Section 1535, “Capital Disclosures”. This
Section establishes standards for disclosing information about an entity’s capital and how it is managed.
Disclosures should include the entity’s objectives, policies and procedures for managing capital as well as
any externally imposed capital requirements and the consequences of non-compliance. This information
is included in Note 15 — Management of Capital.
3. BUSINESS ACQUISITION
On February 13, 2008, the Corporation acquired all the outstanding shares of Verdict Aerospace Compo-
nents Ltd. (“Verdict”) for consideration of $4,268, including acquisition costs of $175. Verdict is based in
the United Kingdom and is a high precision manufacturer of make-to-print components and assemblies
for the global aerospace industry. The acquisition has been accounted for by the purchase method of ac-
counting with the results of operations of Verdict included in the consolidated financial statements from
January 1, 2008, the effective date of purchase.
The purchase price has been allocated to the assets acquired and liabilities assumed based on the esti-
mated fair values on the acquisition date. The value attributed to customer contracts is being amortized
on a straight-line basis over life of the contracts.
MAGELLAN 2008 ANNUAL REPORT
37
Notes To Consolidated Financial Statements
DECEMBER 31, 2008 AND 2007
The allocation of the purchase price is preliminary and may change upon completion of an appraisal cur-
rently being performed on the acquired assets and liabilities of Verdict. The effect of any such change is
not expected to be material.
The fair value of the net assets acquired and consideration paid are summarized as follows:
Net Assets Acquired
Current assets
Long-term assets
Liabilities
Future income tax liabilities
Consideration Paid
Cash
4. INVENTORIES
$ 2,600
5,312
(3,245)
(399)
4,268
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
Advances and progress billings
2008
$ 187,685
2007
$ 197,713
—
—
(9,211)
178,474
29,598
62,376
(15,676)
274,011
Inventory is valued at the lower of cost and net realizable value. The cost of raw materials is calculated on
an average cost basis. The cost of work in process and finished goods inventory also includes an allocation
of overhead for indirect manufacturing costs and direct labour expenses.
Cost of sales for the twelve months ended December 31, 2008 was $608,977, which included $598,015 of
costs associated with inventory. The remaining costs of $10,962 related principally to freight, commissions
and other direct costs of sales.
During the year ended December 31, 2008, the Company recognized a provision of $1,133 related to slow
moving and obsolete inventory.
Due to the long-term contractual period of the Corporation’s contracts, the Corporation may be in negotia-
tions 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 out-
come 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.
MAGELLAN 2008 ANNUAL REPORT
38
Notes To Consolidated Financial Statements
DECEMBER 31, 2008 AND 2007
5. CAPITAL ASSETS
Land
Buildings
Machinery, equipment and tooling
Land
Buildings
Machinery, equipment and tooling
$
$
Cost
14,871
101,006
366,891
482,768
Cost
14,074
93,333
299,890
407,297
Accumulated
depreciation
—
$
33,847
171,714
205,561
Accumulated
depreciation
—
$
29,456
132,114
161,570
2008
Net book value
$
14,871
67,159
195,177
277,207
2007
Net book value
$
14,074
63,877
167,776
245,727
Included in machinery and equipment are construction in progress expenditures of $3,389 [2007 — $2,195].
The above amounts include $8,032 [2007 — $8,024] of capital assets under capital leases and accumulated
depreciation of $2,703 [2007 — $1,870] related thereto. Depreciation recorded in the year related to capital
assets under capital leases totaled $440 [2007 — $397].
6. TECHNOLOGY RIGHTS
As at December 31, 2008 the Corporation’s technology rights amounted to $32,567 [2007 — $34,491], net
of accumulative amortization of $6,811 [2007 — $4,522]. Technology rights relate to an agreement signed
during 2003, which permits the Corporation to manufacture aerospace engine components and share in
the revenue generated by the final sale of the engine. A follow-on contract was signed in 2005.
7. DEFERRED DEVELOPMENT COSTS
The Corporation has certain programs that meet the criteria for deferral and amortization of development
costs. Development costs are capitalized for clearly defined, technically feasible technologies which man-
agement intends to produce and promote to an identified future market, and for which resources exist or
are expected to be available to complete the project. During the year ended December 31, 2008, devel-
opment costs of $1,438 were deferred. The costs deferred are related to development of new programs
for identified future markets. The Corporation records amortization in arriving at the carrying value of
deferred development costs once the development activities have been completed and sales of the related
product have commenced. During the year ended December 31, 2008, $14,474 was expensed as amortiza-
tion of deferred development costs. In 2007, these costs were included in inventories as engineering and
other costs [NOTES 2 AND 4].
8. BANK INDEBTEDNESS
The Corporation has an operating credit facility, with a syndicate of banks, with a Canadian limit of
$95,000 plus a U.S. limit of U.S.$90,000 ($204,620 at December 31, 2008). Bank indebtedness of $177,766
[2007 — $139,748] is payable on demand and bears interest at the bankers’ acceptance or LIBOR rates,
plus 1.0% (2.35% at December 31, 2008 [2007 — 5.7%]). Included in the amount outstanding at December
31, 2008 is U.S.$75,480 [2007 — U.S.$84,171]. At December 31, 2008, the Corporation had drawn $177,766
under the operating credit facility and had issued letters of credit totaling $1,274 such that $25,580 was un-
MAGELLAN 2008 ANNUAL REPORT
39
Notes To Consolidated Financial Statements
DECEMBER 31, 2008 AND 2007
used and available. A fixed and floating charge debenture on accounts receivable, inventories and capital
assets is pledged as collateral for the operating credit facility. The Chairman of the Board of the Corpora-
tion has provided a guarantee for the full amount of the operating credit facility.
The Corporation’s operating credit facility and the Original Loan are both due within a one-year period.
The Corporation has commenced discussions but has not yet engaged in any negotiations with the lend-
ers of the operating credit facility regarding the renewal of this facility. As part of the refinancing referred
to in Note 23 — Subsequent Events, the holder of the Original Loan has already agreed to extend the terms
of the Original Loan to July 1, 2010 subject to the extension of the operating credit facility for a period of at
least one year. While these consolidated financial statements are prepared on the assumption that these
credit facilities will be renewed, as it has done in previous years, there is no certainty that this will be the
case in light of the current credit conditions. If the Corporation is unable to renew or re-finance these facili-
ties, its ability to continue as a going concern is uncertain.
9. LONG-TERM DEBT
Property mortgage [a]
Other non-bank loans [b]
Obligations under capital leases
(bearing interest at 5.6% to 7.9%)[c]
Less current portion
$
2008
3,783
57,133
3,208
64,124
52,321
11,803
$
2007
4,361
21,834
3,743
29,938
2,099
27,839
[a] The property mortgage of $3,783 (£2,114) is comprised of financing of certain land in the United
Kingdom acquired in 2006. This same land is collateral for this mortgage and bears interest at bank
rate plus 0.90%, which at December 31, 2008 was 2.9% [2007 — 6.4%]. The fair value of this property
mortgage was not significantly different from its recorded amount.
[b] Other non-bank loans include loans of $6,373 provided by governmental authorities that bear interest
of 2.0% to 3.9%.
In March 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”). The Promissory Note was refinanced with long-term debt on January
31, 2008, as described below.
On January 31, 2008, in order to fund approximately $50,000 on the maturity of the $69,985 8.5%
convertible unsecured subordinated debentures (the “Existing Debentures”), Edco Capital Corpo-
ration (“Edco”), a corporation controlled by the Chairman of the Board of the Corporation, pro-
vided a $50,000 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 the Promissory Note. Both the
Original Loan and the Bridge Loan bear interest at a rate of 10% per annum calculated and pay-
able monthly. Both of these loans are collateralized and subordinated to the Corporation’s exist-
ing operating credit facility. The Bridge Loan was repayable on July 31, 2008 and was repaid on
June 24, 2008 through an increase in the operating credit facility. The Original Loan is repayable
on July 1, 2009 (Note 23 — Subesquent Events).
MAGELLAN 2008 ANNUAL REPORT
40
Notes To Consolidated Financial Statements
DECEMBER 31, 2008 AND 2007
[c]
Future minimum lease payments under the capital leases in effect at December 31, 2008 are
as follows:
2009
2010
2011
2012
Total minimum capital lease payments
Less capital lease payments representing interest
Principal amount of capital lease payments
$
1,182
1,024
914
476
3,596
388
3,208
The expected maturities for the next five years and thereafter for long-term debt are as follows:
2009
2010
2011
2012
2013
Thereafter
$
52,321
2,276
2,302
1,994
1,576
3,655
64,124
10. CONVERTIBLE DEBENTURES
On January 30, 2008, the Corporation closed a private placement of an aggregate of $20,950 8.5% convert-
ible unsecured subordinated debentures (the “New Debentures”), due January 31, 2010. The New Deben-
tures were redeemable by the Corporation for the first six months of the term at 102.5% of principal value
and the holders had 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 Corpora-
tion at a conversion price of $10.00 per share, which is equal to a conversion rate of 100 common shares
per $1,000 principal amount of debentures or the issuance on conversion of approximately 2,095,000
common shares in total. The New Debentures are unsecured obligations of the Corporation and are sub-
ordinated in right of payment to all of the Corporation’s existing and future senior indebtedness.
At December 31, 2008, $20,544 of the New Debentures has been attributed to the debt component. The
difference between the carrying value and the face value of the New Debentures will be accreted through
periodic charges to income included in interest expense over the life of the New Debenture.
On January 31, 2008, the Corporation repaid the Existing Debentures completed on January 7, 2003 with
proceeds from the issuance of the New Debentures and the Original Loan. Based on the terms of the
refinancing completed in January 2008, $55,950 of the Existing Debentures continued to be classified as
long-term debt at December 31, 2007, with the remaining $13,834 classified as a current liability.
As explained under “Significant Accounting Policies — Convertible Debentures,” $545 of the New Deben-
tures and $11,100 of the Existing Debentures issued in 2003 have been attributed to the equity component
of the debenture and is classified as other paid in capital.
MAGELLAN 2008 ANNUAL REPORT
41
Notes To Consolidated Financial Statements
DECEMBER 31, 2008 AND 2007
11. OTHER LONG-TERM LIABILITIES
Accrued costs related to plant and program closures [a]
Other [b]
Less current portion included in accounts payable
and accrued charges
$
2008
788
7,159
7,947
—
7,947
Amounts are due as follows:
2009
2010
2011
2012
2013
Thereafter
$
$
2007
516
7,126
7,642
276
7,366
—
50
2,825
1,987
50
3,035
7,947
[a] 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 deci-
sion and recorded total cumulative charges of $43,248. At December 31, 2008, a balance of $788
[2007 — $516] remains as a liability and a provision of $6,200 [2007 — $3,569] for the liability associ-
ated with a defined benefit pension plan that is in the process of being wound up has been recorded
in the accounts.
[b] Other long-term liabilities include $4,711 [2007 — $3,575] of deferred revenue in relation to a
long-term contract.
12. CAPITAL STOCK
The authorized capital of the Corporation consists of an unlimited number of Preference Shares, issuable
in series, and an unlimited number of common shares.
Preference Shares:
Series A
Outstanding at December 31, 2008 and 2007
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 (the “Preference Shares”) at a price of $10.00 per preference share for total gross proceeds of
$20,000. Each Preference Share is convertible at the holder’s option into 0.67 common shares of the Cor-
poration (1,333,333 common shares in aggregate) at a price of $15.00 per common share. The Preference
Shares were not redeemable by the Corporation at any time prior to July 1, 2008. Thereafter, the Prefer-
ence Shares are redeemable, under certain conditions, at the option of the Corporation at $10.00 per pref-
erence share plus accrued and unpaid dividends. In addition, subject to the terms of the Ontario Business
Corporations Act (the “OBCA”), the Preference Shares will be retractable by the holder at the issue price
plus accrued and unpaid dividends (i) from July 1, 2010 in the event that at any point after such date the
volume weighted average trading price of the common shares on the TSX for at least 20 trading days in
any consecutive 30-day period ending on the fifth trading day prior to such date is less than $12.00 per
common share; or (ii) upon the occurrence of a change of control of the Corporation involving the acquisi-
MAGELLAN 2008 ANNUAL REPORT
42
Notes To Consolidated Financial Statements
DECEMBER 31, 2008 AND 2007
tion of voting control or direction over at least 66-2/3% of the common shares and instruments convertible
into common shares. Directors and officers of the Corporation purchased directly or indirectly 1,135,000
of the Preference Shares issued.
Common shares:
Effective May 21, 2008, as approved at the Annual General and Special Meeting of the Corporation’s
shareholders held on May 13, 2008, the Corporation completed a five-for-one consolidation of its com-
mon shares. All current and comparative share and per share amounts have been retroactively adjusted to
reflect the five-for-one stock consolidation.
Number of shares
Outstanding at December 31, 2006
Issued upon conversion of convertible debentures
Stock options exercised
Issued to employees and directors
Outstanding at December 31, 2007, as previously reported
Issuance of additional shares as a result of the share consolidation
Issued to employees and directors
Outstanding at December 31, 2008
18,166,711
666
800
8,766
18,176,943
494
21,320
18,198,757
Stated capital
214,222
$
15
10
114
214,361
—
71
214,432
Under the terms of the Corporation’s Employee Share Purchase Plan (the “ESPP”), eligible employees are
able to purchase 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 a vesting period of approximately one year.
During the year, the Corporation issued common shares of 21,320 [2007 — 20,582] under the ESPP for $71
[2007 — $50] and at December 31, 2008, 20,762 common shares are reserved for issue. Subsequent to the
year-end, the Board of Directors of the Corporation discontinued the ESPP effective January 31, 2009. During
2008, the Corporation issued nil [2007 — 23,248] common shares valued at $nil [2007 — $63] to the directors
of the Corporation as partial payment for their role as directors of the Corporation.
The reconciliation of the numerator and denominator for the calculation of basic and diluted income (loss)
per common share is as follows:
Net income (loss)
Dividends on Preference Shares
Net income (loss) attributable to common shareholders
Weighted average shares outstanding
Net effect of dilutive instruments [NOTES 10 AND 13]
Diluted weighted average shares outstanding
Income (loss) per common share
Basic and diluted
$
2008
12,900
(1,600)
11,300
$
2007
(11,341)
(1,600)
(12,941)
18,184,588
—
18,184,588
18,169,851
—
18,169,851
0.62
(0.71)
For the years ended December 31, 2008 and 2007, the inclusion of the Corporation’s stock options,
convertible debentures and preference shares in the computation of diluted income (loss) per common
share would have an anti-dilutive effect on the income (loss) per common share and are, therefore,
excluded from the computation.
MAGELLAN 2008 ANNUAL REPORT
43
Notes To Consolidated Financial Statements
DECEMBER 31, 2008 AND 2007
13. STOCK-BASED COMPENSATION PLAN
The Corporation has an incentive stock option plan, which provides for the granting of options for the benefit
of employees and directors. The maximum number of options for common shares that remain to be granted
under this plan is 918,131. Options are granted at an exercise price equal to the market price of the Corpora-
tion’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.
On May 13, 2008, the incentive stock option plan was amended and restated effective immediately, to ad-
just the number of common shares available for grant thereunder to reflect the five-for-one consolidation
of the Corporation’s issued and outstanding common shares. The following tables and number of options
have been retroactively restated to reflect the change.
A summary of the plan and changes during each of 2008 and 2007 are as follows:
Outstanding, beginning of year
Granted
Exercised
Forfeited/expired
Outstanding, end of year
2008
Average
weighted
excercise price
$ 14.99
—
—
14.85
15.02
Shares
873,570
—
—
(118,360)
755,210
2007
Average
weighted
excercise price
$ 15.60
16.00
13.25
18.85
14.99
Shares
783,920
286,050
(800)
(195,600)
873,570
The following table summarizes information about options outstanding and exercisable at December
31, 2008:
Options outstanding
Options exercisable
Number
outstanding at
December 31,
2008
Weighted
average remaining
contractual
life [in years]
Weighted
average
exercise price
Number
exercisable at
December 31,
2008
Weighted
average
exercise price
184,650
570,560
755,210
2.00
3.06
2.80
$
13.25
15.40
15.02
90,930
189,400
280,330
$ 13.25
15.40
14.70
Range of
exercise prices
$
13.25
15.00 – 16.00
Compensation expense recorded during the year was $742 [2007 — $1,450].
On November 7, 2008, the Corporation amended the Incentive Stock Option Plan by adding a cash op-
tion feature to all new and previously granted options outstanding. The cash option feature allows option
holders to elect to receive an amount in cash equal to the intrinsic value, being the excess market price
of the common share over the exercise price of the option, instead of exercising the option and acquir-
ing the common shares. The result of such an amendment is that the outstanding share options awards
largely take on the characteristics of liability instruments rather than equity instruments. All outstanding
stock options are now classified as liabilities and are carried at their intrinsic value, measured as the dif-
ference between the current stock price and the option exercise price. The intrinsic value of the liability
is marked to market each period for new awards granted subsequent to amendment date. The intrinsic
value is amortized to expense over the period in which the related services are rendered, which is usually
MAGELLAN 2008 ANNUAL REPORT
44
Notes To Consolidated Financial Statements
DECEMBER 31, 2008 AND 2007
the graded vesting period or, as applicable, over the period to the date an employee is eligible to retire,
whichever is shorter. No such awards were granted in 2008. For the outstanding share option awards that
were amended the minimum expense recognized for them will be their grant-date fair values. Previously,
all stock options were classified as equity and were measured at the estimated fair value established by
the Black-Scholes model on the date of grant. Under this method, the estimated fair value was and will
continue to be amortized to compensation expense and contributed surplus over the period in which the
related services were rendered, which is usually the vesting period or, as applicable, over the period to the
date an employee was eligible to retire, whichever was shorter.
The fair value of stock options granted in 2007 was 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%
The weighted average fair value of stock options granted in 2007 was $7.87.
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.
14. ACCUMULATED OTHER COMPREHENSIVE LOSS
Accumulated other comprehensive loss consists solely of the net unrealized gain (loss) on the translation
of the Corporation’s net investment in self-sustaining foreign operations. The following is a continuity
schedule of accumulated other comprehensive loss.
Balance, beginning of year
Net unrealized gain (loss) on translation of
net investment in foreign operations
Total accumulated other comprehensive loss
2008
$ (65,479)
19,518
(45,961)
2007
$ (40,215)
(25,264
)
(65,479)
15. MANAGEMENT OF CAPITAL
The Corporation’s objective is to maintain a capital base sufficient to maintain investor, creditor and mar-
ket confidence and to sustain future development of the business. Management defines capital as the
Corporation’s shareholders’ equity and interest bearing debt, including the debt and equity components
of the convertible debenture.
As at December 31, 2008, total managed capital was $526,242, comprised of shareholders’ equity of $263,808
and interest-bearing debt of $262,434. Included in interest-bearing debt is the debt component of the convert-
ible debentures of $20,544, where a component of the associated interest expense is a non-cash charge.
The Corporation manages its capital structure and makes adjustments to it in light of general economic
conditions, the risk characteristics of the underlying assets and the Corporation’s working capital require-
MAGELLAN 2008 ANNUAL REPORT
45
Notes To Consolidated Financial Statements
DECEMBER 31, 2008 AND 2007
ments. In order to maintain or adjust its capital structure, the Corporation, upon approval from its Board
of Directors, may issue or repay long-term debt, issue shares, repurchase shares through a normal course
issuer bid, pay dividends or undertake other activities as deemed appropriate under the specific circum-
stances. The Board of Directors reviews and approves any material transactions out of the ordinary course
of business, including proposals on acquisitions or other major investments or divestitures, as well as
capital and operating budgets. There were no changes in the Corporation’s approach to capital manage-
ment during the year.
The Corporation must adhere to covenants in its operating credit facility. As at December 31, 2008, the
Corporation was in compliance with these covenants.
16. INCOME TAXES
The following is a reconciliation of the expected tax expense (recovery) obtained by applying the com-
bined corporate tax rates to income (loss) before income taxes:
Corporate tax rate for manufacturing companies
2008
31.1%
2007
34.8%
Expected tax expense (recovery)
$ 4,519
$ (4,327)
Non deductible accretion and stock option charges
Losses not previously benefited
Change in valuation allowances
Permanent differences
Changes in income tax rates
407
(3,354)
3,052
185
(3,189)
1,620
1,447
—
1,158
229
400
(1,093)
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
Valuation allowance
Accounting provisions not currently deductible for tax purposes
Future income tax liabilities — long-term
Tax depreciation in excess of book depreciation
Deferred employee future benefits
MAGELLAN 2008 ANNUAL REPORT
2008
2007
$
3,180
$
5,116
10,045
17,367
(5,800)
15,340
36,952
24,703
3,606
28,309
9,512
17,617
(2,748)
15,827
40,208
23,959
3,724
27,683
46
Notes To Consolidated Financial Statements
DECEMBER 31, 2008 AND 2007
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
Future income tax liabilities — long-term
Tax depreciation in excess of book depreciation
2008
2007
$
1,917
$
1,148
20,895
400
21,295
9,119
494
9,613
31,920
26,412
—
767
1,539
—
During the fourth quarter of 2008, the Corporation recorded a non-cash charge of $3,052 [2007 — $2,748]
to establish a valuation allowance against its net future tax assets in Canada where recovery of the loss
carryforwards or other future tax assets were not “more likely than not.”
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 and other tax filings and in connection with such reviews, disputes can arise with the
taxing authorities over the interpretation or application of certain tax rules and regulations to the Corpora-
tion’s business conducted with the country involved. The Corporation is not aware of any pending review of
its filing positions for which adequate reserves have not been provided in these financial statements.
17. EMPLOYEE FUTURE BENEFITS
The Corporation has a number of defined benefit and defined contribution plans providing pension, other
retirement and post-employment benefits to substantially all of its employees.
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 ben-
efits plan was $12,625 [2007 — $15,188].
Defined contribution plans
The Corporation’s expenses for defined contribution plans for the year ended December 31, 2008 was
$4,340 [2007 — $4,240].
Defined benefit plans
The Corporation’s defined benefit plans cover payments for pensions, and other benefit plans described
as follows:
MAGELLAN 2008 ANNUAL REPORT
47
Notes To Consolidated Financial Statements
DECEMBER 31, 2008 AND 2007
Pensions 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, 2005 for one of the plans and as at December 31, 2006 for the other two plans.
Other benefit plans
In one acquired division, the Corporation has another benefit plan to provide post-employment cover-
age for health care benefits including prescribed drugs, hospital and other medical, dental and vision
benefits for eligible retired employees, their spouses and eligible dependants. Other benefit plans pro-
vide 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.
The following table summarizes the changes in benefit obligation and plan assets of the Corporation’s
defined benefit plans, in aggregate:
2008
Pension
2007
Other benefit plans
2007
2008
Change in benefit obligation
Benefit obligation, beginning of year
Additional pension plan included
Member contributions during the year
Current service cost (employer)
Interest cost
Plan amendments
Benefits paid
Actuarial gain
Foreign exchange gain (loss)
Benefit obligation, end of year
$
$ 103,966
2,437
304
2,019
6,307
276
(8,241)
(11,583)
2,079
97,564
$ 105,203
—
303
1,868
6,280
1,147
(7,652)
(1,792)
(1,391)
103,966
Change in plan assets
Market value of plan assets, beginning of year
Additional pension plan included
Actual return on plan assets
Member contributions during the year
Employer contributions
Benefits paid
Foreign exchange gain (loss)
Market value of plan assets, end of year
Reconciliation of funded status
Funded status—deficit
Unamortized past service costs
Unamortized net actuarial loss
Accrued benefit asset (liability)
MAGELLAN 2008 ANNUAL REPORT
103,048
2,663
(11,789)
304
7,973
(8,241)
1,283
95,241
(2,323)
1,053
12,301
11,031
99,214
—
1,850
303
10,547
(7,652)
(1,214)
103,048
(918)
1,120
9,166
9,368
762
—
—
—
350
—
(312)
—
180
980
—
—
—
—
—
—
—
—
(980)
—
—
(980)
$
999
—
—
—
306
—
(401)
—
(142)
762
—
—
—
—
—
—
—
—
(762)
—
—
(762)
48
Notes To Consolidated Financial Statements
DECEMBER 31, 2008 AND 2007
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.
Four of the seven defined benefit plans were in a surplus status as at December 31, 2008 and all defined
benefit plans were in a deficit status as at December 31, 2007.
Net benefit plan costs
The components of the Corporation’s net benefit costs are as follows:
Current service cost
Interest cost
Actual return on plan assets
Actuarial gain
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 the employee future benefits:
$
2008
2,019
6,307
11,789
(11,583)
276
Pension
2007
$ 1,868
6,280
(1,850)
(1,792)
1,147
$
$
Other benefit plans
2007
2008
—
—
306
350
—
—
—
—
—
—
8,808
5,653
350
306
Difference between expected return and
actual return on plan assets for the year
)
(19,213
)
(5,224
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
14,078
2,493
67
3,740
)
(781
2,141
—
—
—
350
—
—
—
306
MAGELLAN 2008 ANNUAL REPORT
49
Notes To Consolidated Financial Statements
DECEMBER 31, 2008 AND 2007
Significant assumptions and sensitivity analysis
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]:
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
2008
7.0%
6.5%
3.0%
6.0%
7.0%
3.0%
Pension
2007
Other benefit plans
2007
2008
6.0%
7.0%
3.0%
6.0%
7.0%
3.0%
7.0%
7.0%
—
—
—
—
7.0%
7.0%
—
—
—
—
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 2008. 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, 2008 was nominal.
Plan assets
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
Percentage of plan assets
Equities
Fixed income
Cash and short-term investments
Total
2008
44.3%
45.4%
10.3%
100.0%
2007
48.7%
41.7%
9.6%
100.0%
At December 31, the market value of the plan assets directly invested in common shares of the Corpora-
tion was as follows:
Defined benefit plans
2008
14
$
2007
121
$
MAGELLAN 2008 ANNUAL REPORT
50
Notes To Consolidated Financial Statements
DECEMBER 31, 2008 AND 2007
18. FINANCIAL INSTRUMENTS
The Corporation’s policy is not to utilize derivative financials instruments for trading or speculative pur-
poses. The Corporation may utilize derivative instruments in the management of its foreign currency and
interest rate exposures.
Categories of financial assets and liabilities
Under Canadian GAAP, financial instruments are classified into one of the following five categories: held
for trading, 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
balance sheet, which are measured at fair value except for loans and receivables, held-to-maturity invest-
ments 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
is derecognized or impaired.
The carrying value of the Corporation’s financial instruments are classified as follows:
Held for trading1
Loans and receivables2
Financial liabilities3
Derivatives not accounted for as hedges4
1 Includes cash and investments, which are classified as other assets
2 Includes accounts receivables
$
December 31, 2008
5,418
68,652
385,697
1,853
$
December 31, 2007
5,246
35,659
358,534
817
3 Includes bank indebtedness, accounts payable and accrued charges, long-term debt, and the debt component of the convertible debentures
4 Included in accounts payable and accured charges
The Corporation has determined the estimated fair values of its financial instruments based on appropri-
ate valuation methodologies, however, considerable judgment is required to develop these estimates. Ac-
cordingly, 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, 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 consoli-
dated balance sheets are reasonable estimates of their fair values.
Long-term debt
The fair value of the Corporation’s long-term debt, which includes the current portion, calculated by dis-
counting the expected future cash flows based on current rates for debt with similar terms and maturities,
is $62,979 at December 31, 2008.
Convertible Debentures
The fair market value of the Corporation’s Convertible Debentures, calculated by discounting the expected
future cash flows at prevailing interest rates, is estimated at $19,669.
As at December 31, 2008, the carrying amount of the financial assets (consisting of cash and accounts
receivable) that the Corporation has pledged as collateral for its long-term debt facilities was $64,124.
MAGELLAN 2008 ANNUAL REPORT
51
Notes To Consolidated Financial Statements
DECEMBER 31, 2008 AND 2007
Forward foreign exchange contracts
The Corporation has entered into forward foreign exchange contracts to mitigate future cash flow expo-
sures in U.S. dollars. Under these contracts the Corporation is obliged to purchase specific amounts of
U.S. dollars at predetermined dates and exchange rates. These contracts are matched with anticipated
operational cash flows in U.S. dollars.
During 2008, the Corporation entered into a foreign exchange collar which sets a floor of $1.0309 Cana-
dian per $1.00 U.S. and a ceiling of $1.0970 Canadian per $1.00 U.S. of which $12,000 U.S. will expire in
2009.
The Corporation has foreign exchange contracts outstanding at December 31, 2008 as follows:
Maturity — less than 1 year — U.S. Dollar
Maturity — less than 1 year — U.S. Dollar
$
Amount
26,050
12,000
Exchange rate
1.23014
1.0309 — 1.0970
The mark-to-market on these financial instruments as at December 31, 2008 was an unrealized loss of
$1,853, which has been recorded in administrative and general expenses in the year.
Risks arising from financial instruments and risk management
The Corporation thoroughly examines the various financial instrument risks to which it is exposed
and assesses the impact and likelihood of those risks. These risks may include credit risk, liquidity
risk, currency risk and interest rate risk. Where material, these risks are reviewed and monitored by
the Board of Directors.
Credit Risk
Credit risk arises from cash and cash equivalents held with banks and financial institutions as well as
credit exposure to clients, including outstanding accounts receivable. The maximum exposure to credit
risk is equal to the carrying value of the financial assets. The objective of managing credit risk is to prevent
losses in financial assets. The Corporation is also exposed to credit risk from the potential default by any
of its counterparties on its foreign exchange forward contracts. The Corporation mitigates this credit risk
by dealing with counterparties who are major financial institutions that the Corporation anticipates will
satisfy their obligations under the contracts.
The Corporation, in the normal course of business, is exposed to credit risk from its customers, substan-
tially all of which are in the aerospace industry. The Corporation sells the majority of its products to large
international organizations with strong credit ratings. Therefore, the Corporation is not exposed to signifi-
cant credit risk and overall the Corporation’s credit risk has not changed significantly from the prior year.
The carrying amount of accounts receivables are reduced through the use of an allowance account and
the amount of the loss is recognized in administrative and general expenses. When a receivable balance is
considered uncollectible, it is written off against the allowance for accounts receivable. Subsequent recov-
eries of amounts previously written off are credited against administrative and general expenses.
MAGELLAN 2008 ANNUAL REPORT
52
2008
2007
$
$
Defined benefit plans
14
121
Notes To Consolidated Financial Statements
DECEMBER 31, 2008 AND 2007
The following table sets forth details of the age of the trade accounts receivable as at December 31, 2008:
Total trade accounts receivable
Less: Allowance for doubtful accounts
Total trade accounts receivable, net
Of which:
Not overdue
Past due for more than one day but not more than three months
Past due for more than three months but not more than six months
Past due for more than six months but not more than one year
Past due for more than one year
Less: Allowance for doubtful accounts
Total trade accounts receivable, net
$
51,782
(577)
51,205
40,571
8,968
1,581
121
541
(577)
51,205
Liquidity risk
The Corporation’s objective in managing liquidity risk is to ensure that there are sufficient committed
loan facilities in order to meet its liquidity requirements at any point in time. The Corporation has in
place a planning and budgeting process to help determine the funds required to support the Corpora-
tion’s normal operating requirements on an ongoing basis, taking into account its anticipated cash
flows from operations and its operating credit facility capacity. The primary sources of liquidity are the
operating credit facility and the indebtedness provided by a corporation controlled by the Chairman of
the Board of the Corporation.
The following table summaries the Corporation’s contractual maturity of its financial liabilities. The
table includes both interest and principal cash flows.
Bank indebtedness
Long-term debt
Capital lease obligations
Operating leases
Other long-term liabilities
Convertible debentures
Total
Due less
than 1 year
Due between
1 and 3 years
Due between
4 and 5 years
Due after
5 years
Total
$ 177,766
51,318
1,182
4,989
—
—
235,255
$
$
—
4,368
2,414
3,694
4,862
22,882
38,220
—
2,583
—
1,152
100
—
3,835
$
— $ 177,766
60,916
3,596
10,795
2,647
—
960
2,985
—
6,592
7,947
22,882
283,902
As at December 31, 2008, the Corporation had undrawn lines of credit available to it of $25,580. The
Corporation’s operating credit facility and the Original Loan, are both due within a one-year period. The
Corporation has commenced discussions but has not yet engaged in any negotiations with the lenders of
the operating credit facility regarding the renewal of this facility. As part of the refinancing referred to in
Note 23 — Subsequent Events, the holder of the Original Loan has already agreed to extend the terms of
the Original Loan to July 1, 2010 subject to the extension of the operating credit facility for a period of at
least one year. While these consolidated financial statements are prepared on the assumption that these
credit facilities will be renewed, as it has done in previous years, there is no certainty that this will be the
case in light of the current credit conditions. If the Corporation is unable to renew or re-finance these facili-
ties, its ability to continue as a going concern is uncertain.
MAGELLAN 2008 ANNUAL REPORT
53
Notes To Consolidated Financial Statements
DECEMBER 31, 2008 AND 2007
Currency risk
The Corporation operates internationally, which gives rise to a risk that its income, cash flows and share-
holders’ equity may be adversely impacted by fluctuations in foreign exchange rates. Currency risk arises
because the amount of the local currency receivable or payable for transactions denominated in foreign
currencies may vary due to changes in exchange rates (“transaction exposures”) and because the non-
Canadian dollar denominated financial statements of the Corporation’s subsidiaries may vary on con-
solidation into the reporting currency of Canadian dollars (“translation exposures”). The Corporation uses
derivative financial instruments to manage foreign exchange risk with the objective of minimizing transac-
tion exposures and the resulting volatility of the Corporation’s earnings.
The most significant transaction exposures arise in the Canadian operations where significant portions
of the revenues are transacted in U.S. dollars. As a result, the Corporation may experience transaction
exposures because of the volatility in the exchange rate between the Canadian and U.S. dollar. Based on
the Corporation’s current U.S. denominated net inflows, as of December 31, 2008, fluctuations of +/- 1%
would, everything else being equal, have an effect on net earnings and on other comprehensive income
for the year ended December 31, 2008 of approximately +/- $55 and $1,300 respectively.
Interest rate risk
The Corporation is exposed to interest rate risk in its floating rate bank indebtedness. At December 31,
2008, $186,578 of the Corporation’s total debt portfolio is subject to movements in floating interest rates.
In addition, a portion of the Corporation’s accounts receivable securitization programs are exposed to
interest rate fluctuations. The objective of the Corporation’s interest rate management activities is to mini-
mize the volatility of the Corporation’s earnings. The Corporation monitors its exposure to interest rates
and has not entered into any derivative contracts to manage this risk. A fluctuation in interest rates of 100
basis points (1 percent) would have impacted the amount of interest charged to net earnings during the
year by approximately +/- $1,700.
19. RELATED PARTY TRANSACTIONS
During the year, the Corporation sold receivables to a corporation, which is controlled by a common direc-
tor, in the amount of $405,178 [2007 — $228,143], for a discount of $2,803 [2007 — $2,484] representing
an annualized interest rate of 7.5% [2007 — 7.5%]. Included in this balance, as at December 31, 2008, is a
reserve of $4,429 [2007 — $5,924].
On March 30, 2007, the Corporation entered into a Promissory Note with a corporation, which is con-
trolled by a common director, in the amount of $15,000, due July 1, 2008 bearing interest at a rate of 9.0%.
In 2008, $112 [2007 — $1,025] of interest was paid in relation to this loan. This loan was repaid on January
31, 2008.
On January 31, 2008, the Corporation entered into the Original Loan due July 1, 2009 and the Bridge Loan
due July 31, 2008 with a corporation, which is controlled by the Chairman of the Board of the Corporation.
Both loans bear interest at a rate of 10%. In 2008, $4,645 of interest was paid in relation to the Original Loan
and $594 of interest was paid in relation to the Bridge Loan. The Bridge Loan was repaid in June 2008.
The Chairman of the Board of the Corporation held $15,000 of the Existing Debentures that were repaid on
January 31, 2008. On January 30, 2008 the Chairman of the Board, who is also a director, and a director of
the Corporation subscribed to $18,150 of the $20,950 New Debentures that were issued and outstanding
as at December 31, 2008. The related cash interest paid in the year was $1,432 [2007 — $1,275].
MAGELLAN 2008 ANNUAL REPORT
54
Notes To Consolidated Financial Statements
DECEMBER 31, 2008 AND 2007
The Chairman of the Board of the Corporation has provided a guarantee for the full amount of the Corpora-
tion’s operating credit facility. An annual fee of 1.35% [2007 — 0.1%] of the guaranteed amount or $2,055
[2007 — $168] was paid in consideration for the guarantee.
During the year, the Corporation incurred consulting costs of $100 [2007 — $100] payable to a corporation
controlled by the Chairman of the Board of the Corporation. As well, the Corporation paid legal fees of $80
[2007 — $52] to a law firm in which a director is a partner.
20. SUPPLEMENTARY INFORMATION
[a] Interest expense on long-term debt in 2008 was $8,401 [2007 — $10,066]. Interest on capital leases in
2008 was $324 [2007 — $300].
[b] During 2008, the Corporation received $218 [2007 — $nil] of government assistance, which has been
credited to the related assets. The Corporation is eligible for an additional $43,174 for the period from
January 1, 2009 to December 31, 2014 based on approved expenditures. The assistance is repayable
as royalties ranging from 0.1% to 4.0% of certain future revenue.
[c]
Details of changes in non-cash working capital balances related to operating activities are as follows:
Accounts receivable
Inventories
Prepaid expenses and other
Accounts payable and accrued charges
2008
$ (22,844)
(16,628)
2,176
4,475
(32,821)
$
2007
16,148
(16,112)
(5,064)
(1,463)
(6,491)
[d] Interest paid during 2008 amounted to $22,638 [2007 — $21,231] and income taxes paid during 2008
amounted to $30 [2007 — refund of $817].
[e] During the year, the Corporation realized a foreign exchange gain on the translation of foreign cur-
rency denominated working capital balances and debt of $6,904 [2007 — loss of $5,576].
[f]
In the 2004 fiscal year, the Corporation entered into a five-year accounts receivable securitization pro-
gram permitting it to sell on an on-going basis, certain of its trade accounts receivable to a securitiza-
tion trust (the “Trust”) to a maximum of $46,000. On February 23, 2007, this program was suspended
by the counter-party. The total amount transferred to the Trust in 2007 amounted to $24,063 for a
discount of $248 representing an annualized interest rate of 6.26%. During 2007 the reserve earned
investment income of $125, 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.
During the year, the Corporation sold receivables to various financial institutions in the amount of
$150,434 [2007 — $147,389], for a discount of $1,359 [2007 — $1,479] representing an annualized in-
terest rate of 5.19% [2007 — 5.87%].
[g] Contributed surplus arises solely from the recording of stock based compensation expense.
MAGELLAN 2008 ANNUAL REPORT
55
Notes To Consolidated Financial Statements
DECEMBER 31, 2008 AND 2007
21. SEGMENTED INFORMATION
The Corporation is organized and managed as a single business segment, being aerospace, and the Cor-
poration 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.
2008
Total
Canada
U.S.
U.K.
2007
Total
Revenues
Domestic
Export
Total revenues
$ 115,281 $189,060 $122,302 $ 426,643 $ 94,269 $160,191 $ 113,829 $368,289
229,519
597,808
28,139
188,330
5,745
119,574
195,635
289,904
188,842
304,123
14,556
136,858
259,793
686,436
56,395
245,455
Capital assets, net 118,917
135,691
22,599
277,207
117,945
107,254
20,528
245,727
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.
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
2008
2007
3
36%
2
50%
1
75%
3
37%
1
39%
1
81%
22. COMMITMENTS AND CONTINGENCIES
[a] Operating lease commitments
The Corporation has lease commitments related to properties, equipment and other items. At December
31, 2008, future minimum annual lease payments are as follows:
2009
2010
2011
2012
2013
Thereafter
$
4,989
1,530
1,390
774
576
1,536
10,795
MAGELLAN 2008 ANNUAL REPORT
56
Notes To Consolidated Financial Statements
DECEMBER 31, 2008 AND 2007
[b] Contingencies
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 ad-
equate provisions have been recorded in the accounts where required. Although, it is not possible to accu-
rately estimate the extent of the potential costs and losses, if any, management believes, but can provide
no assurance, that the ultimate resolution of such contingencies would not have a material adverse effect
on the financial position of the Corporation.
23. SUBSEQUENT EVENTS
[a] Preference Shares
On March 20, 2009, the Board of Directors of the Corporation determined not to declare or pay dividends
due on April 30, 2009 on the Preference Shares as it was unable to obtain reasonable assurances that such
declaration and payment would not contravene the OBCA.
[b] Refinancing
In December 2008, the Corporation’s Board of Directors established a committee consisting of three
independent directors. This committee was formed to consider the financial condition of the Corpo-
ration and to consider proposals to restructure the capital structure of the Corporation through the
issuance of debt or equity, or through the sale of assets or other alternative transactions should such
transactions be required.
The independent committee and the independent members of the Board of Directors concluded that the
Corporation is in serious financial difficulty because, even though management believes that the Corpora-
tion will generate sufficient cash through operations in order to meet its obligations as they come due, if
the Corporation is unable to renew or re-finance its operating credit facility and extend or re-finance the
Original Loan, its ability to continue as a going concern is uncertain. The Corporation’s operating credit
facility is due on May 23, 2009 and the Original Loan is on due on July 1, 2009.
The Corporation announced on February 4, 2009 that the independent members of its Board of Directors
have approved additional financing initiatives for the Corporation consisting of a new secured subordinat-
ed loan in the amount of $15,000, the extension of the maturity of the Original Loan from Edco of $50,000
to July 1, 2010, the issuance of up to $40,000 principal amount of 10% convertible secured subordinated
debentures (the “Convertible Secured Subordinated Debentures”) and the continuation of one of the Cor-
poration’s existing securitization programs of up to $35,000 of Canadian based accounts receivables, de-
clining to $20,000 by April 30, 2009 and to nil by December 31, 2009.
Edco and Mr. Edwards and the Corporation agreed to the following financing transactions:
(a) the subscription by Mr. Edwards, directly or indirectly, for the purchase of a minimum of $25,000
principal amount of a new issue of Convertible Secured Subordinated Debentures;
(b) the extension of the Original Loan from Edco to the Corporation in the principal amount of $50,000
to July 1, 2010 in consideration of the payment of a one time fee to Edco equal to 1% of the principal
amount outstanding and increasing the interest rate on the loan from 10% to 12% per annum (the
“Amended Original Loan”); and
(c)
an additional secured subordinated loan from Edco of $15,000 maturing on July 1, 2010 with an interest
rate of 12% per annum, payable monthly in arrears with similar terms as the Amended Original Loan.
(together the “2009 Financing Arrangements”)
MAGELLAN 2008 ANNUAL REPORT
57
Notes To Consolidated Financial Statements
DECEMBER 31, 2008 AND 2007
The agreement of the Corporation, Edco and Mr. Edwards is subject to the extension of the operating
credit facility for a period of at least one year on or before April 30, 2009 on terms satisfactory to the Board
of Directors of the Corporation. In addition, the agreement of Mr. Edwards and Edco is subject to there
being no material adverse change in the business, operations or capital of the Corporation.
The acquisition of a minimum of $25,000 of the Convertible Secured Subordinated Debentures would
result, in the event of conversion of the Convertible Secured Subordinated Debentures, in Mr. Edwards
holding in excess of 66 2/3% of the common shares of the Corporation on a fully diluted basis. As a result,
such holdings would constitute a change of control (as defined in the New Debentures) and the Corpora-
tion will have an obligation to make an offer to purchase the New Debentures due January 31, 2010 and
outstanding in the principal amount of $20,950 at a price of 102.5% of the principal amount plus accrued
and unpaid interest. In addition, subject to the terms of the OBCA, pursuant to a similar change of control
definition in the Preference Shares’ terms, the Corporation will be required to retract its outstanding Prefer-
ence Shares at a price of $10.00 per share plus accrued and unpaid dividends. Dividends declared on the
Preference Shares have been fully paid to December 31, 2008.
On March 20, 2009, the Board of Directors of the Corporation determined to commence negotiations with
the Corporation’s lenders on the extension of the Corporation’s operating credit facility and instructed
management to formulate plans for the offer to purchase the outstanding New Debentures if and when
required. The Corporation does not currently believe it will be able to retract the Preference Shares as it
does not expect to have the funds to do so, and in any event it is prohibited from doing so by the terms of
its operating credit facility and any default in the operating credit facility would result in the Corporation
being unable to pay its liabilities as they become due and constitute a contravention of the OBCA.
There can be no assurance that the additional financing initiatives will be completed on the terms set
forth or at all. The Corporation has commenced in initial discussions, but has not yet engaged in any ne-
gotiations, with its lenders to renew the operating credit facility. At this early stage, no assurance can be
given that the operating credit facility will be renewed on terms satisfactory to the Board of Directors of
the Corporation. As part of the refinancing, the holder of the Original Loan has already agreed to extend
the terms of the Original Loan to July 1, 2010 subject to the extension of the operating credit facility for a
period of at least one year.
24. COMPARATIVE CONSOLIDATED FINANCIAL STATEMENTS
The comparative consolidated financial statements have been reclassified from statements previously
presented to conform to the presentation of the 2008 consolidated financial statements.
MAGELLAN 2008 ANNUAL REPORT
58
BOARD OF DIRECTORS AND OFFICERS
Corporate Officers
Board Of Directors
Committees Of The Board
(1)
(2)
(3)
Audit Committee Chairman:
William A. Dimma
Governance and Nominating
Committee Chairman:
Bruce W. Gowan
Human Resources and
Compensation Committee
Chairman:
William G. Davis
(4)
Health, Environmental and
Safety Committee Chairman:
Donald C. Lowe
Note
(A)
Nominated as a director at the Annual
and Special Meeting of the Shareholders
on May 13th, 2008
N. Murray Edwards
Chairman
Richard A. Neill
Vice Chairman
James S. Butyniec
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
N. Murray Edwards
Chairman,
Magellan Aerospace Corporation
President,
Edco Financial Holdings Ltd.
Calgary, Alberta
Richard A. Neill (4)
Vice Chairman,
Magellan Aerospace Corporation
Mississauga, Ontario
James S. Butyniec (A)
President and Chief Executive Officer
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
Decision Dynamics Technology
Calgary, Alberta
Bruce W. Gowan (1, 2, 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
MAGELLAN 2008 ANNUAL REPORT
59
OPERATING FACILITIES DIRECTORY AND
SHAREHOLDER INFORMATION
Canada
United Kingdom
Corporate Office
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
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
21330 56th Avenue, Bldg #46
Langley, British Columbia V2Y 0E5
Tel: 604 539 2440
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,
Bradely Stoke, Bristol BS32 4QG
Tel: 01454 453550
Chiltern Hill, Chalfont St Peter,
Buckinghamshire SL9 9YZ
Tel: 01753 890922
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
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 Meeting of the
Shareholders of Magellan Aerospace
Corporation will be held on
Tuesday, May 12th, 2009 at
2:00 p.m. at The Living Arts Centre,
4141 Living Arts Drive,
Mississauga, Ontario L5B 4B8
MAGELLAN 2008 ANNUAL REPORT
60
MAGELLAN AEROSPACE CORPORATION 3160 DERRY ROAD EAST, MISSISSAUGA, ONTARIO, CANADA L4T 1A9 WWW.MAGELLAN.AERO