Magellan Aerospace Corporation
Annual Report 2009

Plain-text annual report

MAGELLAN AEROSPACE CORPORATION ANNUAL REPORT 2009 Letter to Shareholders The Corporation was able, through a number of management actions to reduce costs and increase efficiencies, to maintain revenues, decrease debt, and increase profits and cash flow. Magellan Aerospace Corporation (“Magellan” or the “Corporation”) is pleased to report to you the results for 2009, a year of challenges in terms of the global econo- my, the level of air travel and air freight, the affordability of continuing defence programs, and the availability of financial support to growth programs within the aero- space industry. Despite these challenges, the Corpora- tion was able, through a number of management actions to reduce costs and increase efficiencies, to maintain revenues, decrease debt, and increase profits and cash flow. It is management’s view that these measures taken should continue to generate beneficial results in 2010 and beyond, supporting Magellan going forward. The economic outlook has begun to show some stability and some reason for confidence. There remain weak spots in this global economy, but signs of recovery are seen in many areas, including growth in air freight, passenger load factors, business travel, steadiness in key defence budgets for aerospace, and progress to market for a number of new, large aircraft and engine programs. Largest amongst these new programs, and most important to western aerospace companies, are the Airbus A380 and Boeing B787 passenger airliners and the Lockheed Martin Joint Strike Fighter program, each of which is showing increased pace in its development and delivery. In the space sector many in the world are excited about the prospects of exploring Mars, and about commercial service for space-based service, scientific activity, investigation, and even travel to earth orbit. Magellan has been involved is various space activities for over three decades, ranging from launch rockets to satellite payloads, and in 2009, re- ceived an order for the first of three satellite bus developments for the Canadian Space Agency’s requirement, RADARSAT Constellation Mission of communications and mari- time surveillance. Demand for other Magellan proprietary safety and defence products also continues to grow, as our capabilities become more knowledge-based. As the global economy grows, new opportunities arise to satisfy related support functions such as industrial power generation and aftermarket repair and overhaul (R&O) ser- vices. Magellan has traditionally delivered R&O services domestically and interna- tionally, capturing new opportunities each year in both civil and defence applications. In 2009, Magellan also captured its largest industrial power opportunity to date in the Republic of Ghana, a new power generation plant, and has identified a market for similar installations. Magellan 2009 Annual Report 1 Increasing capability to produce complex products and assemblies in house, and placing commodity parts manufacturing in an emerging market were instrumental in winning important packages. Recognizing the potential growth in the emerging demand for aerospace products in the global marketplace, and seeing the capabilities being generated in new regions of the globe, the Corporation implemented a strategy to re- focus its in-house activities. Two key elements of the new strategy are the development of supply from a more global base, and the transition in its own plants to a knowledge- based business. The in-house activity being sought is of higher complexity, uses materials of exotic alloys and composites, and manufacturing methods requiring higher technology machine tools and innovative application. Magellan has developed a supply base in India, and in 2009 completed a nearby co-owned parts finishing facility. The combination of developing increased capability to pro- duce complex products and assemblies in house, and placing commodity parts manufacturing in an emerging market, was instrumental in winning an important pack- age on the Boeing 787 Dreamliner aircraft program. This strategy, which is referred to in Magellan as 40-30-30, representing nominal targets for in-house, local supply and emerging market supply, continues to mature. It should serve a number of competitive requirements by ensuring the Corporation is focused on the most complex activity in- house, as well as assisting our customers to meet their offset requirements by placing work in emerging markets that increasingly are buying large numbers of aircraft. Activity levels remained steady throughout 2009 and the Corporation was able to make modest improvements to its balance sheet. Revenues in the current year were $686.6 million slightly higher than 2008. The Corporation reported net income in 2009 of $26.0 million, which translates into basic net income per share of $1.34 and diluted income per share of $0.61 for the year up from basic net income per share in 2008 of $0.62. Magellan has established opportunities in anticipated growth sectors of the global aerospace market. It has achieved positioning on several key programs, spanning civil and defence aircraft, respective engines, new build and aftermarket, proprietary de- fence and space products, and industrial power generation. 2 Magellan 2009 Annual Report In 2009, Magellan captured new participation in each of its areas of focus and has identified opportunities for the immediate future. Magellan has achieved this beneficial exposure through investment in the leading technologies and capabilities that meet our customers’ needs, and has continued to modernize its vision and strategies. As we reflect on what we have accomplished, we thank our investors and financial partners for your continued support over some challenging times. And we would like to congratulate our Magellan employees for their hard work and professionalism, but especially for their willingness to try new ways of succeeding. James S. Butyniec President and Chief Executive Officer March 26, 2010 Magellan 2009 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 2009 consolidated financial statements and notes. Magellan Aerospace Corporation (“Magellan” or the “Corporation”) reports its audited consolidated financial statements in accordance with Canadian generally accepted accounting principles (“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 state- ments 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 projections, estimates and beliefs contained in such forward-looking statements are based on management’s assumptions relating to the production performance of Magellan’s assets and competition throughout the aerospace industry in 2009 and continuation of the current regulatory and tax regimes in the jurisdictions 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 ma- terially from any projections of future performance or results expressed 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 26, 2010. COMPANY OVERVIEW Magellan is a diversified supplier of components to the aerospace industry. Through its wholly owned subsidiaries, Ma- gellan designs, engineers, and manufactures aeroengine and aerostructure components for aerospace markets, ad- vanced products for military and space markets, and complementary specialty products. The Corporation also supports the aftermarket through supply of spare parts as well as performing repair and overhaul services. The Corporation’s strategy has been to focus on several core competencies within the aerospace industry. These include precision machining of a wide variety of aerospace material, composites, complex high technology magnesium and aluminum alloy castings, repair and overhaul technologies and design of structures. The Corporation 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 performance, and strategic planning. Within the single operating segment, the Corporation has two major product groupings: aerostructures and aeroen- gines. Aerostructure and aeroengine products are used both in new aircraft and for spares and replacement parts. The Corporation supplies aerostructure products to an international customer base in the civil and defence markets. Components are produced to aerospace tolerances using conventional and high-speed automated machining centres. Capabilities include precision casting of airframe-mounted components. Management believes that Magellan’s dedi- cation to technological innovation combined with low cost sourcing from emerging markets will position the Corpora- tion 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 ex- haust systems for the world’s leading aeroengine manufacturers. The Corporation also performs repair and overhaul services for jet engines and related components. The Corporation serves both the commercial and defence markets. In 2009, 63.9% of sales were derived from the commercial markets (2008 — 68.2%, 2007 — 65.8%) while 36.1% of sales related to defence markets (2008 — 31.8%, 2007 — 34.2%). 4 Magellan 2009 Annual Report OUTLOOK There are a number of factors indicating that a modest recovery may occur in the global aerospace industry in 2010. Global air freight levels began to improve in the second half of 2009 and air travel is expected to grow in 2010 in step with most sectors of the global economy. Weaknesses in certain subsectors of the civil market appear to have stabilized, and are expected to show signs of recovery during 2010 and 2011. The defence sector remains stable, and is introducing large, technologically advanced aircraft programs that are expected to be deployed and supported over the next 20 years or more. The strength and sustainability of the global economic recovery will strongly influence demand for industrial power installations, especially in those emerging markets that may lack large power-distribution capabilities. For the last number of years, the Corporation has maintained a focus in its activities to concentrate key core capabilities in its own plants, while off-loading non-core activity to its local and emerging market supply bases. The air transportation market has remained stable throughout the economic downturn and higher levels of output have been forecasted for key aircraft platforms in 2010 and 2011. Large civil aircraft design and production issues appear to have been addressed during 2009, and annual production volumes are expected to increase, and workhorse single-aisle aircraft are expected to increase output in 2010 and beyond. In defence, combat aircraft and helicopter fleets are being replaced in an effort that is expected to continue for the foreseeable future. The Corporation has strong positions in civil airline aircrafts, military aircrafts and helicopters, respective aircraft engines, and aero-derivative industrial power generation sets globally in demand. Sales in 2010 will be affected by fluctuations due to temporary cash management measures at customer and supplier levels, and potential exchange rate fluctuations. For 2010, the Corporation has exposure to the anticipated growth sec- tors 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 measures to hopefully address further uncertainties that may arise during any residual economic volatility in 2010-2011. 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 uncer- tainties 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. Fluctuations in the value of foreign currencies could result in currency exchange losses. A large portion of the Corporation’s revenues and expenses are not currently denominated in Canadian dollars, and it is expected that some revenues and expenses will continue to be based in currencies other than the Canadian dollar. Therefore, fluctuations in the Canadian dollar exchange rate will impact the Corporation’s results of operations and financial condition from period to period. In addition, such fluctuations affect the translation of the Corporation’s results for purposes of its consolidated financial statements. The Corporation’s activities to manage its currency exposure may not be successful. The Corporation faces risks from downturns in the domestic and global economies Market events and conditions that occurred in 2008, including disruptions in the international credit markets and other financial systems and the deterioration of global economic conditions, have caused significant volatility in the credit and financial markets. These conditions worsened in 2008, continued into 2009, and though improved, have continued in 2010 resulting in an ongoing lack of confidence in the broader US 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 other financial institutions caused the broader credit markets to further deteriorate and stock markets to decline substantially. While global financial condi- tions and outlook have improved somewhat, these factors continue to negatively impact company valuations and im- pact the performance of the global economy going forward. Magellan 2009 Annual Report 5 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 may impact 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 possible 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 Corpora- tion’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 optimal 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 indebtedness 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 indebtedness, 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. The Corporation amended its Bank Facility Agreement with its existing lender on March 26, 2010. Under the terms of the Bank Facility Agreement, the Corporation has an operating credit facility, expiring on May 21, 2011, 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 ratios can be affected by events beyond the Corporation’s control, and there can be no assurance that the Corporation will be able to meet 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 21, 2011. There is no assur- ance that Magellan will be in compliance 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”. 6 Magellan 2009 Annual Report The $65.0 million secured subordinated loan (the “Original Loan”) has been extended to July 1, 2011 on the same terms and conditions as the prior loan except that the interest rate will be reduced from 12% per annum to 11% per annum. In addition, on December 22, 2009, Edco Capital Corporation (“Edco”) also extended an option to the Corpora- tion, exercisable on or before July 1, 2011, to renew the loan for a further one year period on payment of an extension fee of 1% of the principal amount of the loan and on the condition that the operating credit facility is renewed for an additional 364 day period beginning May 22, 2011on terms satisfactory to the Board and on the condition that there is no material change in the business, operations or capital of the Corporation. The holders of the First Preference Shares Series A issued for $20 million have the right to retract the First Preference Shares Series A for the issue price plus accrued and unpaid dividends from July 1, 2010 in the event the volume weight- ed 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. Subject to law, the Corporation will be required to retract the Preference Shares in whole or in part to the extent permitted by any instrument of indebtedness of the Corporation. The $40 million principal amount of the 10% secured subordinated debentures (“the New Convertible Debentures”) are due April 30, 2012 and the Corporation will need to finance repayment of such amount. 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 Convertible 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 Convertible Debentures or the Original Loan. 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 industry. 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 Corpora- tion’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 manu- facturers (“OEMs”), decreased demand for air travel or projected market growth that may not materialize or be sustain- able. 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 economic 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 anticipation of future sales of products and services. A large portion of the Corporation’s operating expenses is relatively fixed. Because several of the Corporation’s operating locations typically do not obtain long-term purchase orders or commitments from cus- tomers, 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. Magellan 2009 Annual Report 7 SELECTED ANNUAL FINANCIAL INFORMATION Expressed in millions of dollars except per share information Revenues Net income (loss) for the year Net income (loss) per common share Basic Diluted Total assets Total long term liabilities 2009 686.6 26.0 1.34 0.61 680.6 132.0 2008 686.4 12.9 0.62 0.62 670.7 51.7 2007 597.8 (11.3) (0.71) (0.71) 649.4 108.0 The Corporation has not paid dividends on its common shares in the past four years. In 2005, the Corporation is- sued 2,000,000 8.0% Cumulative Redeemable First Preference Shares Series A. The Corporation declared dividends thereon of $0.80 per share during each of 2009 and 2008. 2009 UPDATES • An agreement was made between Airbus and Magellan Aerospace (UK) Limited which secured its workload through 2012 in a contract with revenues estimated of £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. • • • • • • 8 GKN Aerospace awarded a contract to Magellan Aerospace (UK) Limited to supply metal components for retrofit win- glets 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 five to six years. Deliveries of front fan frames for the F136 engine continued through 2009 on the Corporation’s long-term con- tract 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 F-35 Joint Strike Fighter (“JSF”) aircraft for the US military and partnering nations. The Corporation announced the award to its Winnipeg-based division, Bristol Aerospace, of the RADARSAT Con- stellation Mission (RCM) satellite bus development contract with MacDonald, Dettwiler and Associates Ltd. of Vancouver. The RCM mission is being developed by the Canadian Space Agency to provide C-Band data continuity to existing RADARSAT-1 and RADARSAT-2 users. As well, the RCM mission will support maritime surveillance (ship detection, ice monitoring and oil spill detection), disaster management and ecosystem monitoring. The primary areas of coverage are Canada and its surrounding Arctic, Pacific and Atlantic maritime areas. The mission will be comprised of three spacecraft in low earth orbit, each carrying a C-band Synthetic Aperture Radar payload. The expected launch dates are 2014, 2015 and 2016. The Corporation has been awarded a contract to produce the JSF horizontal tail components in the third lot of low rate initial production. It is the initial contract awarded to Magellan by BAE Systems for JSF components and as- semblies. A total of 1,038 ship sets of horizontal tails are planned to be produced by Magellan over the life of the JSF program. The horizontal tails produced at Magellan will be used on the Conventional Takeoff and Landing variant. The Corporation announced the award of multi-year buys of complex machined titanium components for all three variants of the JSF aircraft — the Conventional Take-Off and Landing, the Short Take-Off and Vertical Landing and the Carrier Variant. This US contract with estimated revenues of $60million will be carried out at Magellan Aerospace’s Kitchener-based facility, Chicopee Manufacturing (“Chicopee”), over the period of 2009 to 2015, with annual authorizations each year. Chicopee has industry-leading expertise in titanium machining operations and world class machining capability, with an emphasis on high-speed machining of hard metals. The Corporation announced an agreement between the Ministry of Energy, Republic of Ghana, and Magellan for the provision of a turnkey electric power generation plant in Ghana, contracted through the Canadian Commercial Corporation. The contract has estimated revenues of US $185 million, and the project is scheduled to be delivered over a 24-month period by Magellan’s Mississauga operating division, Orenda Aerospace. Magellan 2009 Annual Report • During the fourth quarter of 2008, the joint ownership processing facility in India was completed. This facility, at 17,500 square feet, will initially focus on processes for aluminum, titanium, and stainless steel compo- nents for aerostructure and aeroengine components. This new facility commenced operations in the fourth quarter of 2009. LABOUR MATTERS Labour agreements at two of the Corporation’s facilities expired on December 31, 2009 and management is currently in negotiations. A labour agreement at one additional facility will expire on August 1, 2010. FINANCING MATTERS On April 30, 2009, the Corporation amended and restated the Bank Facility Agreement with its existing lenders. Under the terms of the amended agreement, the maximum amount available under the operating credit facility was reduced to $90.0 million Canadian and $85.0 million US ($179.3 million at December 31, 2009) with a maturity date of May 21, 2010. The facility is extendable for unlimited one-year renewal periods on the agreement of the lenders and the Corporation and continues to be fully guaranteed by the Chairman of the Board of the Corporation. On April 30, 2009, the Corporation completed the following previously announced financing arrangements: (a) the purchase by the Chairman of the board of directors of the Corporation, directly or indirectly, of $40.0 million principal amount of 10% Convertible Secured Subordinated Debentures (the “New Convertible Debentures”) due on April 30, 2012. Interest is due semi-annually in arrears on April 30 and October 31 in each year, the first such payment to fall due on October 31, 2009. The New Convertible Debentures are convertible, at the option of the holder at any time prior to April 30, 2012, in whole or in multiples of $1,000, into fully paid and non-assessable Common Shares of the Corporation at the conversion price of $1.00 per Common Share which is equal to the is- suance on conversion of approximately 40.0 million Common Shares in total. The New Convertible Debentures are secured obligations of the Corporation and are subordinated in right of payment to all of the Corporation’s senior indebtedness. At December 31, 2009, $38.2 million of the New Convertible Debentures, net of transaction costs, has been attributed to the debt component and $1.9 million has been attributed to the equity component of the instrument. The discount, being the difference between the carrying value and the face value of the New Convertible Debentures is amortized using the effective interest rate method through periodic charges to income included in interest expense over the life of the New Convertible Debentures; and (b) the extension and restatement of the $50.0 million loan from Edco to the Corporation [the “Original Loan”] to increase the principal amount from $50.0 million to $65.0 million and to extend the maturity date of the loan to July 1, 2010 in consideration for the payment of a one time fee to Edco equal to 1% of the principal amount of $50.0 million outstanding and an increase in the interest rate on the loan from 10% to 12% per annum payable monthly in arrears. (together the “2009 Financing Arrangements”) As a result of a requirement under a change of control provision in the previously issued 8.5% convertible unsecured debentures due January 31, 2010 (the “2008 Debentures”), the Corporation was required to make an offer to purchase the $20.95 million of the 2008 Debentures at a price of 102.5% of the principal amount plus accrued and unpaid interest utilizing the proceeds of the 2009 Financing Arrangements. During the second quarter of 2009, the 2008 Debentures were fully repurchased. Pursuant to a similar change of control definition in the Corporation’s outstanding Preference Shares’ terms, the Corporation is required to retract its outstanding Preference Shares at a price of $10.00 per share plus accrued and unpaid dividends, unless such retraction contravenes any instrument of indebtedness of the Corporation or the terms of the Ontario Business Corporations Act. As at December 31, 2009, the Corporation was not in the position to retract the Preference Shares as it is prohibited from doing so by the terms of its operating credit facility. Accordingly, the Preference Shares continue to be classified as equity instruments. Magellan 2009 Annual Report 9 On December 22, 2009, Edco provided a commitment letter that extends the due date of the Original Loan to July 1, 2011 on the same terms and conditions of the Original Loan except that the interest rate will be reduced from 12% to 11% per annum in consideration of the payment of a one time extension fee of 1% of the principal amount of $65.0 million to Edco as follows: (a) 0.20% on execution of the commitment letter for renewal and (b) 0.80% on the satisfac- tion of all conditions and closing of the renewal transaction. On March 26, 2010, the Original Loan was restated and extended in accordance with such terms. The Corporation was also granted the option to further extend the Original Loan on or before July 1, 2011, for a further period of one year maturing on July 1, 2012, on payment of an additional one time extension fee of 1% of the principal amount of the loan and on the condition the bank credit facility is re- newed, for an additional 364 day period beginning May 22, 2011 on terms satisfactory to the Board and on the condi- tion that there is no material change in the business, operations or capital of the Corporation. The Corporation has the right to prepay the Original Loan without penalty. On March 26, 2010, the Corporation amended its Bank Facility Agreement with its existing lenders. Under the terms of the amended agreement, the maximum amount available under the operating credit facility was reallocated to a Ca- nadian dollar limit of $105.0 million (up from $90.0 million) plus a US dollar limit of $70.0 million (down from US $85.0 million), with a maturity date of May 21, 2011. The facility is extendable for unlimited one-year renewal periods by the agreement of the Corporation and the lenders and continues to be guaranteed by the Chairman of the Board of the Corporation. The terms of the amended operating credit facility permit the Corporation to (i) repay the Original Loan in whole or in part and (ii) retract up to 20% ($4.0 million) of the Preference Shares on each of April 30 and October 31 (or the next business day if that day is not a business day) of each year starting with April 30, 2010, together with accrued and unpaid dividends on the shares to be retracted provided there is no current default or event of default under the operating credit facility and after the repayment of the Original Loan and the payment of the retraction amount the Corporation has at least $25.0 million in availability under the operating credit facility. Any permitted retraction amount not used on any prior date can be carried forward to future retraction dates. As a result, subject to such limi- tation under the operating credit facility and to applicable laws, the Corporation will retract on each of April 30 and October 31, beginning April 30, 2010, any Preference Shares tendered for retraction up to the permitted percentage of Preference Shares. The Preference Shares tendered for retraction will be classified as a current liability. RESULTS FROM OPERATIONS Revenues Twelve-months ended December 31 Expressed in thousands of dollars Canada United States United Kingdom Total Revenues 2009 337,765 200,525 148,324 686,614 2008 304,124 245,455 136,857 686,436 Change 11.1% (18.3)% 8.4% 0.0% Consolidated revenues for the year ended December 31, 2009 were $686.6 million, an increase of $0.2 million or 0.0% over the previous year. During 2009, the Corporation’s consolidated revenues were negatively impacted by the worldwide economic situation and were positively impacted by currency fluctuations as discussed below. Increased revenues in Canada resulted from higher volumes in the Corporation’s proprietary and specialty products. Revenues were lower in 2009 when compared to 2008 in the United States partially as a result of a one-time price adjustment totalling $10.4 million recorded in 2008 as well as reduced requirements on the A380 and A340 programs during the year as customers deferred orders out of 2009 and a reduction in revenue on the Boeing legacy programs in anticipa- tion of increased volumes on the B787 and 747-8 programs. Revenues in the United Kingdom increased over 2008 revenues despite the decline in the British Pound exchange rate versus the Canadian dollar. Revenues in the United Kingdom, in British Pounds, increased in 2009 as production volumes on the Airbus statement of work increased. Overall revenue was impacted positively by the movement of the US dollar in comparison to the Canadian dollar and was impacted negatively by the movement of the British Pound in comparison to the Canadian dollar. If average ex- change rates for both the US dollar and British Pound experienced in 2008 remained constant in 2009, consolidated revenues for 2009 would have been approximately $676.3 million or approximately $10.3 million lower. 10 Magellan 2009 Annual Report Gross Profit Twelve-months ended December 31 Expressed in thousands of dollars Gross profit Percentage of revenue 2009 82,312 12.0% 2008 77,459 11.3% Change 6.3% Gross profit in 2009 was $82.3 million, an increase of $4.9 million from 2008. As a percentage of revenue, gross profit was 12.0% of sales in 2009 compared to 11.3% of sales in 2008. Gross profit in 2009 includes a $4.7 million benefit resulting from the recognition of investment tax credits earned in the year. 2008 gross profit included a one-time retroactive price adjustment totalling $10.4 million as the Corporation concluded negotiations in respect of a long- term contract with a European customer. Gross profit, without the items listed above, was 11.2% of revenues for 2009 compared to 9.8% of revenues for 2008. Increased gross profit in 2009 when compared to 2008 can be attributed to product mix, continued operational performance improvements as well as favourable currency fluctuations. If aver- age exchange rates for both the US dollar and British Pound experienced in 2008 remained constant in 2009, consoli- dated gross profits for 2009 would have been approximately $5.0 million lower. Administrative and General Expenses Twelve-months ended December 31 Expressed in thousands of dollars Administrative and general expenses Percentage of revenues 2009 44,489 6.5% 2008 44,691 6.5% Total administrative and general expenses for 2009 were consistent with 2008 at $44.5 million and $44.7 million respectively. Other Twelve-months ended December 31 Expressed in thousands of dollars Foreign exchange gain Loss (gain) on sale of capital assets Plant and program closure (recoveries) costs Other 2009 (6,383) 272 (642) (6,753) 2008 (6,904) (1,355) 4,558 (3,701) Included in other income 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 and foreign exchange contracts, of $6.4 million in 2009 versus $6.9 million in 2008. In 2009, the Corporation retired assets for a loss on disposal of $0.3 million compared to gains recorded on the sale of capital assets of $1.4 million in 2008. Due to the decline in the financial markets in 2008, the Corporation recorded a provision for plant and program closure costs in 2008 in the amount of $3.8 million for the pension obligation on a pension plan that is in the process of being wound-up. In 2009, as a result of the market performance of the pension plan assets, the Corporation reversed a portion of the prior year pension charge in the amount of $0.9 million on a pension plan that is in the process of being wound-up. 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 2009 14,614 3,810 678 1,652 20,754 2008 15,070 2,141 437 4,301 21,949 Interest costs for 2009 were $20.8 million, a decrease of $1.2 million from 2008. Interest on bank indebtedness was lower in 2009 when compared to 2008 as a result of lower levels of indebtedness offset by higher borrowing spreads incurred during 2009 versus 2008. Convertible debenture interest increased in 2009 over 2008 as the principal Magellan 2009 Annual Report 11 amount as well as the interest rate of convertible debentures increased in the second quarter of 2009. During the year, the Corporation sold $117.1 million of accounts receivable at a discount of $0.7 million, which represented an annualized interest rate of 2.83%. In 2008, $555.6 million of receivables were sold at a discount of $4.3 million, which represented an annualized interest rate of 6.77%. (Recovery of) Provision for Income Taxes Twelve-months ended December 31 Expressed in thousands of dollars Recovery of current income taxes Future income tax (recovery) expense Total income tax (recovery) expense Effective Tax Rate 2009 (63) (2,100) (2,163) (9.1)% 2008 (194) 1,814 1,620 11.1% The Corporation recorded an income tax recovery in 2009 of $2.2 million on pre-tax income of $23.8 million, representing an effective tax rate of (9.1)%, compared to an expense of $1.6 million on a pre-tax income of $14.5 million in 2008 for an effective tax rate of 11.1%. During 2009, the Corporation recognized additional deferred tax assets in Canada total- ling $4.4 million as the Corporation has determined that it will be able to benefit from some of its previously unrecorded future tax assets. During 2008, the Corporation recorded a non-cash charge of $3.0 million to establish a valuation al- lowance against its net future tax assets in Canada where recovery of the carry forwards or assets were not “more likely than not”. In 2009, the Corporation continues to maintain a valuation allowance against its net future assets in Canada where recovery of the loss carry forwards or other future tax assets were not “more likely than not”. Cash Flow from Operating Activities Twelve-months ended December 31 Expressed in thousands of dollars Increase in accounts receivable Decrease (increase) in inventories (Increase) decrease in prepaid expenses and other Increase in accounts payable and accrued charges Net change in non-cash working capital items Cash provided by operating activities 2009 (19,083) 22,285 (28,191) 11,857 (13,132) 36,156 2008 (22,844) (16,628) 2,176 4,475 (32,821) 23,155 Operating activities for 2009 generated cash flows of $36.2 million compared to $23.2 million in the prior year. Changes in non-cash working capital used cash of $13.1 million as a result of increases in prepaid expenses and other and accounts receivables offset by an increase in accounts payable and accrued charges and decreases in inventory. Prepaid expenses increased during the year as advance payments were made to suppliers to support the electric power generation plant in Ghana. The increase in accounts receivable during the year resulted from a net decrease in the amount of receivables drawn under the Corporation’s securitization facilities at the end of the year when compared to 2008. One of the Corpora- tion’s current securitization facilities in the amount of $20 million expired on December 31, 2009. During 2009, inventory decreased as operational efficiencies were achieved through a number of process improvements. In 2008, changes in non-cash working capital of $32.8 million were principally a result of an increase in accounts receivables and inventory offset by an increase in accounts payable and accrued charges and a decrease in prepaid expenses and other. 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 Increase in other assets Cash used in investing activities 2009 — (21,675) 339 (1,274) (22,610) 2008 (4,268) (18,769) 3,540 (3,768) (23,265) 12 Magellan 2009 Annual Report The Corporation invested $21.7 million in capital assets during the year, to upgrade its machinery and facilities, an increase of $2.9 million from 2008. In 2009 and 2008, proceeds from the sale of capital assets, totalling $0.3 million and $3.5 million, respectively, were used to fund a portion of the investment in capital assets. Capital additions were for advanced technology production equipment and information technology systems, both designed to increase pro- ductivity, reduce cycle time and improve technology capability. SELECTED QUARTERLY FINANCIAL INFORMATION Expressed in millions of dollars except per share information Revenues Net income Net income per common share Basic Diluted 2009 March 31 June 30 Sept 30 164.2 10.8 179.3 7.9 177.3 5.4 Dec 31 March 31 June 30 Sept 30 173.0 2.7 165.8 1.5 172.1 0.8 161.1 2.0 2008 Dec 31 180.2 7.4 0.41 0.41 0.27 0.12 0.57 0.20 0.09 0.05 0.09 0.09 0.02 0.02 0.12 0.12 0.39 0.39 The US$/C$ exchange rate was very volatile during 2009 as the US dollar relative to the Canadian dollar moved from an exchange rate of 1.2180 at the start of the year to 1.0510 by year’s end. Although the rate declined quarter over quarter in 2009, the average rate in 2009 of 1.1415 was greater than the 2008 average rate of 1.0671. During 2009 the British Pound relative to the Canadian dollar moved from an exchange rate of 1.7896 at the start of the year to 1.6918 by year’s end. Had exchange rates remained at levels experienced in each quarter of 2008, reported revenues in 2009 would have been lower by approximately $15.9 million in the first quarter, lower by approximately $10.5 million in the second quarter, lower by approximately $1.6 million in the third quarter and higher in the fourth quarter by $17.7 million. EBITDA In addition to the primary measures of net income and net income per share (basic and diluted) 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 these measures because it believes this information is used by certain investors to assess financial performance and EBITDA is a useful supple- mental measure as it provides an indication of the results generated by the Corporation’s principal business activities prior to consideration of how these activities are financed and how the results are taxed in the various jurisdictions. Each of the components of this measure are calculated in accordance with GAAP, but EBITDA is not a recognized measure under 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 income 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 to EBITDA. Twelve-months ended December 31 Expressed in thousands of dollars Net income Interest Taxes Stock based compensation Depreciation and amortization EBITDA 2009 25,985 20,754 (2,163) 717 35,093 80,386 2008 12,900 21,949 1,620 742 40,218 77,429 Magellan 2009 Annual Report 13 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 securitization program, and long- term debt and equity capacity. Principal uses of cash are for operational requirements and capital expenditures. Contractual Obligations As at December 31, 2009 Expressed in thousands of dollars Bank indebtedness Long-term debt Capital lease obligations Equipment leases Facility leases Other long-term liabilities Convertible debentures Total Contractual Obligations Total 140,590 73,833 2,204 2,599 7,206 11,681 40,000 278,113 Less than 1 year 1-3 Years 4-5 Years 140,590 1,381 940 1,185 1,337 1,878 — 147,311 — 69,137 1,264 1,348 2,890 7,050 40,000 121,689 — 946 — 66 1,948 103 — 3,063 After 5 Years — 2,369 — — 1,031 2,650 — 6,050 Major cash flow requirements for 2010 include the renewal of the operating credit facility, payments of equipment and facility leases of $2.5 million, and the retraction of the Preference Shares to a maximum of $8.0 million if permit- ted by the operating credit facility. On March 26, 2010, the operating credit facility was extended for an additional year with the new expiry date of May 21, 2011. On March 26, 2010 the Original Loan was extended to July 1, 2011 and as a result has been classified as a long-term payable as at December 31, 2009. The Corporation has made contractual commitments to purchase $13.7 million of capital assets. The Corporation also has purchase commitments, largely for materials, in 2010 and 2011, made through the normal course of opera- tions, of $157.8 million. The Corporation plans to finance these capital commitments with operating 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 parties at a discount. This discount typically represents approximately 1.0% to 3.0% over 60 day BA or LIBOR rates. At December 31, 2009, the amount of receivables sold to third parties that remained outstanding was $22.5 million. FINANCIAL INSTRUMENTS AND OTHER INSTRUMENTS The Corporation operates internationally, which gives rise to a risk that its income, cash flows and shareholders’ equity may be adversely impacted by fluctuations in foreign exchange 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 ex- change rates and because the non-Canadian dollar denominated financial statements of the Corporation’s subsidiaries may vary on consolidation into the reporting currency of Canadian dollars. The Corporation uses derivative financial instruments to manage foreign exchange risk with the objective of minimizing transaction exposures and the resulting volatility of the Corporation’s earnings. 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 dollars at predetermined dates and exchange rates. These contracts are matched with anticipated operational cash flows in US dollars. During 2009, the Corporation entered into a foreign exchange collar which sets a floor of $1.2350 Canadian per $1.00 US and a ceil- ing of $1.3333 Canadian per $1.00 US of which $7.0 million US will expire in 2010. The mark-to-market on these financial instruments as at December 31, 2009 was an unrealized gain of $1.3 million which has been recorded in other income in the year. 14 Magellan 2009 Annual Report RELATED PARTY TRANSACTIONS During the year, the Corporation sold receivables to a corporation, which is controlled by a common director, in the amount of $65.4 million [2008 — $405.2 million], for a discount of $0.8 million [2008 — $2.8 million] representing an annualized interest rate of 7.5% [2008 — 7.5%]. As at December 31, 2008 the Corporation recorded a reserve of $4.4 million. This securitization facility expired on December 31, 2009. On January 31, 2008, the Corporation entered into the Original Loan in the principal amount of $50.0 million 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 2009, $1.7 million of interest was paid in relation to the $50.0 million Original Loan and $nil [2008 — $0.6 million] of interest was paid in relation to the Bridge Loan. The Bridge Loan was repaid in June 2008. On April 30, 2009 the Original Loan in principal amount of $50.0 million was amended and increased to $65.0 million. In 2009, $5.3 million of interest was paid in relation to the $65.0 million Original Loan. The Chairman of the Board, who is a director, and another director of the Corporation held $18.2 million of the 2008 Debentures that were refinanced on April 30, 2009. The related cash interest paid in the year was $0.8 million [2008 — $1.4 million]. On April 30, 2009, the Chairman of the Board of the Corporation subscribed to $40.0 million of the New Convertible Deben- tures. During the period, the Corporation incurred interest of $2.7 million in relation to the New Convertible Debentures. The Chairman of the Board of the Corporation has provided a guarantee for the full amount of the Corporation’s op- erating credit facility. An annual fee of 1.35% [2008 — 1.35%] of the guaranteed amount or $2.8 million [2008 — $2.1 million] was paid in consideration for the guarantee. During the year, the Corporation incurred consulting costs of $0.1 million [2008 — $0.1 million] payable to a corpora- tion controlled by the Chairman of the Board of the Corporation. As well, the Corporation paid legal fees of $0.2 million [2008 — $0.1 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 negotia- tions are not successful or the final terms differ from what the Corporation expects, the Corporation may be required to record a loss provision on this contract. The amount of such provision, if any, cannot be reasonably estimated until such amendments are finalized. 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 un- discounted estimated future cash flows are less than the carrying value of the asset. The amount of the impairment is determined based on discounted estimated future cash flows. Future cash flows are determined based on man- agement’s estimates of future results relating to the long-lived assets. These estimates include various assumptions, which are updated on a regular basis as part of the internal planning process. The Corporation regularly reviews its investments to determine whether a permanent decline in the fair value below the carrying value has occurred. In determining whether a permanent decline has occurred, management considers a number of factors that would be indicative of a permanent decline including (i) a prolonged decrease in the fair value below the car- rying value, (ii) severe or continued losses in the investment and (iii) various other factors such as a decline or restriction in financial liquidity of an entity in which the Corporation has an investment, which may be indicative of a decline in value of the investment. The consideration of these factors requires management to make assumptions and estimates about future financial results of the investment. These assumptions and estimates are updated by management on a regular basis. Magellan 2009 Annual Report 15 Income Taxes The Corporation operates in several tax jurisdictions. As such, its income is subject to various rates and rules of taxa- tion. The breadth of the Corporation’s operations and the complexity of the taxing legislation and practices require the Corporation to apply judgment in estimating its ultimate tax liability. The final taxes paid will depend on many factors, including the Corporation’s interpretation of the legislation and the outcomes of audits by and negotiations with tax authorities. Ultimately, the final taxes may be adjusted based on the resolution of these uncertainties. The Corporation estimates future income taxes based upon temporary differences between the assets and liabilities that are reported in its consolidated financial statements and their tax basis as determined under applicable tax 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 undertake trans- actions 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 in translation method resulting from this review will be accounted for prospectively. The Corporation ac- counts for its US and UK subsidiaries as self-sustaining foreign operations. CHANGES IN ACCOUNTING POLICIES Goodwill and Intangible Assets On January 1, 2009, the Corporation adopted CICA Handbook 3064, “Goodwill and Intangible Assets”. This new sec- tion replaces the existing standards for “Goodwill and Other Intangible Assets” (CICA Handbook Section 3062) and “Research and Development Costs” (CICA Handbook Section 3450). 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 includ- ing research and development costs; and (iii) carries forward the current requirements of Section 3062 for subse- quent measurement and disclosure of intangible assets and goodwill. The adoption of this new section did not have a material impact on the Corporation’s consolidated financial statements. 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 Corporation adopted this EIC on January 20, 2009 and applied the EIC retrospectively, without restatement of prior years to all financial assets and financial liabilities measured at fair value. The adoption of this new EIC did not have a material impact on the Corpo- ration’s consolidated financial statements. Financial Instruments — Disclosures In June 2009, the CICA amended section 3862, “Financial Instruments — Disclosures”. The amendments include ad- ditional disclosure requirements about fair value measurement for financial instruments and liquidity risk disclosures. These amendments require a three-level hierarchy that reflects the significance of the inputs used in making the fair value measurements. Fair value of assets and liabilities included in Level I are determined by reference to quoted prices in active markets for identical assets and liabilities. Assets and liabilities in Level II include valuations using inputs other than the quoted prices for which all significant inputs are based on observable market data, either directly or indirectly. Level III valuations are based on inputs that are not based on observable market data. The amendment to this standard did not have any impact on the classification and measurement of our financial instruments. The new disclosures pur- suant to the new Handbook Section are included in note 18 of the 2009 audited consolidated financial statements. 16 Magellan 2009 Annual Report FUTURE CHANGES IN ACCOUNTING POLICIES The Corporation will adopt the following accounting standards recently issued by the CICA: 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 State- ments,” and 1602, “Non-controlling Interests”. Section 1582 will be converged with IFRS 3, “Business Combinations”. Section 1602 will be converged with the re- quirements of IAS 27, “Consolidated and Separate Financial Statements,” for non-controlling interests. 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 “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 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 shareholders’ 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. Multiple Deliverable Revenue Arrangements In December 2009, the CICA issued EIC-175, Multiple Deliverable Revenue Arrangements (“EIC-175”). EIC-175, which replaces EIC-142, Revenue Arrangements with Multiple Deliverables, addresses some aspects of the accounting by a vendor for arrangements under which it will perform multiple revenue-generating activities. These new standards are effective for the Corporation’s interim and annual consolidated financial statements commencing on January 1, 2011 with earlier adoption permitted as of the beginning of a fiscal year. The Corporation is assessing the impact of the 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 Janu- ary 1, 2011. The transition from Canadian GAAP to IFRS will be applicable to the Corporation for the first quarter of 2011 where current and comparative financial information will be prepared in accordance with IFRS. IFRS Transition Plan The Corporation commenced its IFRS conversion efforts during 2008. The transition project consists of four ele- ments: planning and awareness raising; assessment; design; and implementation. Resources have been deployed and project management and governance practices are being implemented to ensure a timely transition to IFRS. The progresses made to date are as follows: Planning and awareness raising — As part of planning, the Corporation completed a high level assessment of the major differences between Canadian GAAP and IFRS. Differences were identified which assisted in the development of the project plan as well as prioritization of issues that would have significant impact to the Corporation. With the assistance of external consultants, the Corporation has conducted sessions to raise awareness in its efforts to transition to IFRS. Throughout 2009, several training sessions were conducted at the business unit level in order to increase awareness and knowledge of the transition to IFRS. Training sessions will continue to be conducted throughout 2010. Magellan 2009 Annual Report 17 Assessment and design — Detailed evaluation of the differences on recognition, measurement and disclosures between Canadian GAAP and IFRS was initiated in 2009 and continues in 2010. The impact to systems, processes, controls (in- ternal control over financial reporting and disclosure controls), and other business activities have been incorporated into the detailed analysis. The design of solutions for the transition to IFRS is ongoing and the requirements are being developed. No significant changes to systems processes and controls have been identified to date. Implementation — During the implementation phase leading up to the transition date, new IFRS updates will be monitored and any changes that are relevant to the Corporation will be identified and addressed. Activities with re- spect to selecting and finalizing IFRS 1 and accounting policy choices, restating comparative information, testing, review and sign off will occur throughout 2010 and continue to the early part of 2011. Results of the Detailed GAAP Assessment While IFRS uses a conceptual framework similar to Canadian GAAP, there are significant differences on recognition, measurement and disclosures. 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 conversion date are known. Preliminary analysis to date of the impacts of transition to IFRS on specific areas is detailed below. The areas outlined below should not be considered as a complete analysis. Any remain- ing potential accounting differences not discussed below are being analyzed and will be discussed further in 2010. IFRS 1 — IFRS 1 First-Time Adoption of International Financial Reporting Standards (“IFRS 1”) provides entities adopt- ing IFRSs for the first time with a number of mandatory exceptions and optional exemptions, in certain areas, to the general requirement for full retrospective application of IFRSs. The following are the significant optional exemptions available under IFRS 1 that the Corporation expects to apply in preparing the first financial statements under IFRS. • • • Business Combinations — The Corporation expects to elect to not restate any Business Combinations that have occurred prior to January 1, 2010 Employee Benefits — The Corporation expects to elect to recognize any actuarial gains/losses as at January 1, 2010 in retained earnings Foreign Exchange — The Corporation expects to elect to reclassify cumulative translation gains or losses in accumulated other comprehensive income to retained earnings Property, plant and equipment — International Accounting Standards (“IAS”) 16 Property, Plant and Equipment (“IAS 16”) provides a choice, for each class of property, plant and equipment, in accounting for each class using either the cost model or the revaluation model. The cost model is generally consistent with Canadian GAAP where an item of property, plant and equipment is carried at its cost less any accumulated depreciation and any accu- mulated impairment losses. Under the revaluation model, an item of property, plant and equipment is carried at its revalued amount, being its fair value at the date of the revaluation less any accumulated depreciation and accu- mulated impairment losses. In addition, under IAS 16, where part of an item of property, plant and equipment has a cost that is significant in relation to the cost of the item as a whole, it must be depreciated separately from the remainder of the item. The Corporation expects to use the cost model to account for all classes of property, plant and equipment. Review of the impact in depreciating an item of property, plant and equipment separately from the remainder of the item is currently underway. Borrowing costs — IAS 23 Borrowing Costs (“IAS 23”) requires the capitalization of borrowing costs directly attributable to the acquisition, construction or production of qualifying assets as part of the cost of that asset. Under Canadian GAAP, the Corporation’s accounting policy is to expense these costs as incurred. IFRS 1 provides an election permitting the application of IAS 23 prospectively from the date of transition, January 1, 2010. The Corporation intends to apply this election and consequently, the Corporation does not expect to have an adjustment on its opening IFRS balance sheet. Provisions — IAS 37 Provisions, Contingent Liabilities and Contingent Asset (“IAS 37”) requires a provision to be recognized when: there is a present obligation as a result of a past transaction or event; it is probable that an outflow of resources will be required to settle the obligation; and a reliable estimate can be made of the obligation. “Probable” under IFRS means 18 Magellan 2009 Annual Report more likely than not. Under Canadian GAAP, the criterion for recognition in the financial statements is “likely,” which is a higher threshold than “probable”. Therefore, it is possible that there may be some contingent liabilities not recognized under Canadian GAAP which would require a provision under IAS 37. The Corporation is in the process of evaluating po- tential transactions to determine whether there is an impact of this difference on the opening balance sheet. Impairments — IAS 36 Impairment of Assets (“IAS 36”) uses a one-step approach for both testing for and measurement of impairment, with asset carrying values compared directly with the higher of fair value less costs to sell and value in use (which uses discounted future cash flows). Under Canadian GAAP, assets other than financial assets, are generally tested using a two-step approach: first comparing asset carrying values with undiscounted future cash flows to de- termine whether impairment exists; and then measuring any impairment by comparing asset carrying values with fair values. This may potentially result in more write-downs where carrying values of the assets were previously supported under Canadian GAAP on an undiscounted cash flow basis, but could not be supported on a discounted cash flow basis. In addition, the extent of any writedowns may be partially offset by the requirement under IAS 36 to reverse any previous impairment losses where circumstances have changed such that the impairments have been reduced. Canadian GAAP prohibits reversal of impairment losses. The Corporation has not yet finalized the impairment testing for the opening balance sheet under IFRS, as such the impact, if any, is unknown at this time. Government grants — IAS 20 Accounting for Government Grants and Disclosure of Government Assistance (“IAS 20”) re- quires the benefit of a government loan at a below-market rate of interest be treated as a government grant. The benefit of the below-market rate of interest shall be measured as the difference between the initial carrying value of the loan determined and the proceeds received. Under Canadian GAAP, these forms of government assistance have not been disclosed in the financial statements. However, where the benefits are significant to the operations of the enterprise, it is desirable to disclosure the relevant terms and conditions of the programs. The Corporation is reviewing the govern- ment grants and expects some minor impacts. CONTROLS AND PROCEDURES Based on the current Canadian Securities Administrators (the “CSA”) rules under National Instrument 52-109 Certi- fication 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, 2009 that they are responsible for establishing and maintaining, and have assessed the design and operating 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 reporting to pre- vent all errors, misstatements or fraud. In addition, internal control over financial reporting that management has de- signed 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 assurance that all controls issues, which may result in errors, misstatements, or fraud, can be prevented or detected. The inherent limitations include, amongst other things: (i) management’s assumptions and judgments could ultimately prove to be incorrect under varying conditions and circumstances; (ii) the impact of isolated errors; (iii) assumptions about the likelihood of future events. In preparation for this certification, Magellan has dedicated resources in place to document and evaluate the design and operating effectiveness of disclosure controls and procedures and internal control over financial reporting. As of December 31, 2009, an evaluation was carried out, under the supervision of President and Chief Executive Officer and Vice-President, Finance and Corporate Secretary, of the effectiveness of the Corporation’s disclosure controls and in- ternal controls over financial reporting, as those terms are defined in National Instrument 52-109. Based on that evalu- ation, the Corporation’s management concluded that the Corporation’s design and operating disclosure controls and procedures and internal control over financial reporting were effective as of December 31, 2009. No changes were made in the Corporation’s internal control over financial reporting during the Corporation’s most re- cent interim period, that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting. Magellan 2009 Annual Report 19 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 26, 2010, 18,209,001 common shares were outstanding and 2,000,000 Preference Shares were outstanding. Subject to law, the Corporation will be required to retract the Prefer- ence Shares in whole or in part to the extent permitted by an instrument of indebtedness of the Corporation. At December 31, 2009, the Corporation had outstanding approximately $40.0 million of 10.0% convertible secured subordinated debentures, due April 30, 2012. The convertible debentures are convertible, at the option of the holder at any time prior to April 30, 2012, in whole or in multiples of $1,000, into fully paid and non-assessable common shares of the Corporation at the conversion price of $1.00 per common share which is equal to the issuance on conversion of approximately 40,000,000 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. 20 Magellan 2009 Annual Report Management’s Report The consolidated financial statements of Magellan Aerospace Corporation were prepared by management in accordance with accounting principles generally accepted in Canada. The financial and operating information presented in this report is consistent with that shown in the financial statements. Management maintains a system of internal controls to provide reasonable assurance that all assets are safeguarded and to facilitate the preparation of relevant, reliable and timely financial information. External auditors appointed by the shareholders have examined the consolidated financial statements. The Audit Committee, consisting of non man- agement 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, 2010 Magellan 2009 Annual Report 21 Auditors’ Report To the Shareholders of Magellan Aerospace Corporation We have audited the consolidated balance sheets of Magellan Aerospace Corporation as at December 31, 2009 and 2008 and the consolidated statements of operations and retained earnings, cash flows and comprehensive income for the years then ended. These financial statements are the responsibility of the Corporation’s management. Our respon- sibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Corporation as at December 31, 2009 and 2008 and the results of its operations and its cash flows for the years then ended in accordance with Canadian generally accepted accounting principles. Chartered Accountants Licensed Public Accountants Toronto, Canada, March 26, 2010 22 Magellan 2009 Annual Report 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 [NOTE 20[h]] 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 [NOTE 20[i]] 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 Commitments and contingencies [NOTE 22] Subsequent events [NOTE 23] See accompanying notes On behalf of the Board: N. Murray Edwards Director Magellan 2009 Annual Report William A. Dimma Director 2009 2008 $ 22,641 82,850 147,248 38,458 3,958 295,155 254,700 29,158 59,510 24,909 17,186 385,463 680,618 140,590 135,373 2,321 278,284 73,716 38,182 10,281 9,803 131,982 234,389 4,708 13,565 84,137 (66,447) 270,352 680,618 $ 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 23 Consolidated Statements of Operations and Retained Earnings Years ended December 31 [Expresses in thousands of dollars except per share information] Revenues Cost of revenues Gross profit Expenses Administrative and general expenses [NOTE 19] Other Interest [NOTES 8 AND 20[a]] Income before taxes (Recovery of) provision for income taxes [NOTE 16] Current Future Net income for the year 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 for the year Retained earnings, end of year Net income per common share [NOTE 12] Basic Diluted See accompanying notes 2009 $ 686,614 604,302 82,312 2008 $ 686,436 608,977 77,459 44,489 (6,753) 20,754 58,490 23,822 (63) (2,100) (2,163) 25,985 59,752 — 59,752 (1,600) 25,985 84,137 1.34 0.61 44,691 (3,701) 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 0.62 0.62 24 Magellan 2009 Annual Report Consolidated Statements of Cash Flows Years ended December 31 [Expresses in thousands of dollars] Operating Activities Net income Add (deduct) items not affecting cash Depreciation and amortization Net loss (gain) on sale of capital assets Write-down of assets Employee future benefits Deferred revenue Stock based compensation [NOTE 13] Accretion of convertible debentures Future income tax (recovery) expense 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 in other assets Cash used in investing activities Financing Activities (Decrease) 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 Increase (decrease) in other long-term liabilities Issuance of common shares Dividends on preference shares Cash provided by financing activities Effect of exchange rate changes on cash Net increase in cash during the year Cash, beginning of the year Cash, end of the year See accompanying notes 2009 2008 $ 25,985 $ 12,900 35,093 272 — (5,799) 466 717 678 (8,124) 49,288 (13,132) 36,156 — (21,675) 339 (1,274) (22,610) (27,454) — — (2,824) 15,000 (20,950) 39,667 2,211 8 (1,600) 4,058 (325) 17,279 5,362 22,641 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) 19,064 (15,000) 15,000 (16,841) 50,000 (69,985) 20,778 (392) 71 (1,600) 1,096 (508) 478 4,884 5,362 Magellan 2009 Annual Report 25 Consolidated Statements of Comprehensive Income Years ended December 31 [Expressed in thousands of dollars] Net income for the year Other comprehensive (loss) income: Net unrealized (loss) gain on translation of net investment in foreign operations [NOTE 14] Comprehensive income See accompanying notes 2009 25,985 $ 2008 12,900 $ (20,486) 5,499 19,518 32,418 26 Magellan 2009 Annual Report Notes To Consolidated Financial Statements [Expressed in thousands of dollars except share and per share data] 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 ac- counts of the Corporation and its wholly-owned subsidiaries. These consolidated financial statements have been prepared on the “going concern” basis which presumes that the Corporation will be able to realize its assets and discharge its liabilities in the normal course of business for the foreseeable future. Use of estimates The preparation of consolidated financial statements in conformity with Canadian GAAP requires management to make estimates and assumptions that affect: the reported amounts of assets and liabilities; the disclosure of contin- gent assets and liabilities at the date of the consolidated financial statements; and the reported amount of revenue and expenses during the reporting period. Significant estimates made by management include, but are not limited to average production costs, asset impairment, allowance for uncollectible accounts receivable, allowance for inven- tory, percentage of completion on long-term contracts, 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, collectibility is reasonably assured and upon shipment to, or receipt by, customers, depending on contractual terms, and acceptance by customers. The majority of revenue on long-term contracts is recognized using the units of delivery method as the contracts require shipments of a large number of units over an extended period of time. Revenues from certain long-term contracts are recognized on a percentage of completion basis. The percentage complete is calculated based upon contract costs incurred to date compared with total estimated contract costs. The percent- age complete is then applied to total anticipated contract revenue to determine the period’s revenue. A provision for the estimated loss is made when contract costs are expected to exceed estimated contract revenue. Inventory 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. Net realizable value is the estimated selling price in the ordinary course of business, less estimated costs of comple- tion and the estimated costs necessary to make the sale. Inventories are written down to net realizable value when the cost of inventories is estimated to be unrecoverable due to obsolescence, damage or declining selling prices. When circumstances that previously caused inventories to be written down below cost no longer exist or when there is clear evidence of an increase in selling price, the amount of the write-down previously recorded is reversed. Advances and progress billings received on long-term contracts are deducted from related costs in inventories. Advances and progress billings in excess of related costs are classified as deferred revenue. Magellan 2009 Annual Report 27 Notes To Consolidated Financial Statements [Expressed in thousands of dollars except share and per share data] 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 5-7 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 carry- ing 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 con- tract. These costs will be amortized on a unit of production basis to cost of revenues over the anticipated 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 government invest- ment in the form of investment tax credits and grants are received for research and development projects initiated by the Corporation for its own purposes, these incentives are deducted from the applicable category of expenditures, that is, either cost of revenues, capital assets or research and development costs. Development costs are capitalized when certain criteria are met for deferral and their recovery is reasonably assured. 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 programs, including investment tax credits. Government investment relating to capitalized expenditures is reflected as a reduction of the related costs of such assets. Government investment relating to operating expenses is recorded as a reduction of the related expenses as incurred. Convertible debentures Convertible debentures are classified according to their liability and equity elements using the residual approach, whereby the Corporation estimates the fair value of the liability element and assigns the residual value of the convert- ible debentures to the equity element. The liability element is classified as long-term debt and the equity element is classified as a conversion option and recorded in the contributed surplus component of shareholders’ equity. Upon conversion of debentures to common shares, a pro rata portion of the long-term debt, conversion option, unamortized discount and debt issue costs, as well as accrued but unpaid interest, will be transferred to share capital. If any convert- ible debentures mature without being converted, the remaining conversion option balance will remain in contributed surplus. The discount is amortized using the effective interest rate method over the term of the related debt. The unam- ortized discount is included in long-term debt and the amortization of the discount is included in interest expense. Foreign currency translation Monetary assets and liabilities of the Corporation denominated in foreign currencies are translated at the year-end exchange rates. Exchange gains and losses on these items are recognized in income in the current year. Revenue and expenses are translated at actual rates of exchange when the transaction occurred. 28 Magellan 2009 Annual Report Notes To Consolidated Financial Statements [Expressed in thousands of dollars except share and per share data] The Corporation’s operations outside of Canada are considered self-sustaining. Consequently, the assets and liabili- ties are translated to Canadian dollars using the year-end exchange rates and revenue and expenses are translated at the average rates during the year. Exchange gains or losses on translation of the Corporation’s net equity invest- ment 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 Corporation’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 cer- tain compensated absences) related to employees’ current service is charged to income annually. The cost is comput- ed on an actuarial basis using the projected benefit method prorated on services and management’s best estimates of investment yields, salary escalation and other factors. Pension plan assets are valued at fair value for purposes of calculating the expected return on plan assets. Past service costs resulting from plan amendments are amortized on a straight-line basis over the remaining average service life of active employees at the date of amendments. Actuarial gains (losses) arise from the difference between the actual long-term rate of return on plan assets for a period and the expected long-term rate of return on plan assets for that period or from changes in actuarial assumptions used to determine the accrued benefit obligation. The excess of the net accumulated actuarial gain (loss) which is more than 10% of the greater of the benefit obligations and the fair value of plan assets is amortized over the average remaining service period of active employees. 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 their 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. Income taxes The Corporation follows the liability method of income tax allocation. Under this method, future tax assets and li- abilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the substantively enacted tax rates and laws that will be in effect when the differences are expected to reverse. Income per common share Basic income per common share is computed by dividing the net income adjusted for preference share dividends by the weighted average number of common shares outstanding during the year. Diluted income 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 assumed to be used to purchase common shares at the average price during the year; and Magellan 2009 Annual Report 29 Notes To Consolidated Financial Statements [Expressed in thousands of dollars except share and per share data] • 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 per common share computation. Convertible debentures, preference shares and options that are anti-dilutive are not included in the computation of diluted earnings per share. 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 trading or speculative pur- poses. For the year ended December 31, 2009, 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 year 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”): [a] 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 State- ments,” and 1602, “Non-controlling Interests.” Section 1582 will be converged with IFRS 3, “Business Combinations.” Section 1602 will be converged with the re- quirements of IAS 27, “Consolidated and Separate Financial Statements,” for non-controlling interests. 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 “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 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 shareholders’ 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 assessing the impact of the new standards on its consolidated financial statements. [b] 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 Janu- ary 1, 2011. While IFRS uses a conceptual framework similar to Canadian GAAP, there are significant differences on recognition, measurement and disclosures. IFRSs have now been incorporated into the CICA Accounting Handbook effective for interim and annual financial statements relating to fiscal years beginning on or after January 1, 2011. 30 Magellan 2009 Annual Report Notes To Consolidated Financial Statements [Expressed in thousands of dollars except share and per share data] Also, in October 2009, the AcSB issued the exposure draft “Improvements to IFRSs” to incorporate into Canadian GAAP the amendments to IFRSs that result from an exposure draft issued by the International Accounting Standards Board (“IASB”). The IASB’s exposure draft deals with minor amendments and focuses on areas of inconsistency in standards or where clarification of wording is required. It is expected that the amendments will be effective January 1, 2011. 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 IASB will also continue to issue new accounting standards during the conversion period, and as a result, the final impact of IFRS on the Corpo- ration’s financial results will only be measured once all the IFRSs applicable at the conversion date are known. [c] Multiple Deliverable Revenue Arrangements In December 2009, the CICA issued EIC-175, Multiple Deliverable Revenue Arrangements (“EIC-175”). EIC-175, which replaces EIC-142, Revenue Arrangements with Multiple Deliverables, addresses some aspects of the accounting by a vendor for arrangements under which it will perform multiple revenue-generating activities. These new standards are effective for the Corporation’s interim and annual consolidated financial statements commencing on January 1, 2011 with earlier adoption permitted as of the beginning of a fiscal year. The Corporation is assessing the impact of the new standards on its consolidated financial statements. 2. CHANGES IN ACCOUNTING POLICIES On January 1, 2009, the Corporation adopted CICA Handbook 3064, “Goodwill and Intangible Assets.” This new sec- tion replaces the existing standards for “Goodwill and Other Intangible Assets” (CICA Handbook Section 3062) and “Research and Development Costs” (CICA Handbook Section 3450). 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 includ- ing research and development costs; and (iii) carries forward the current requirements of Section 3062 for subse- quent measurement and disclosure of intangible assets and goodwill. The adoption of this new section did not have a material impact on the Corporation’s consolidated financial statements. 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 Corporation adopted this EIC on January 20, 2009 and applied the EIC retrospectively, without restatement of prior years to all financial assets and financial liabilities measured at fair value. The adoption of this new EIC did not have a material impact on the Corpo- ration’s consolidated financial statements. In June 2009, the CICA amended section 3862, “Financial Instruments — Disclosures.” The amendments to include ad- ditional disclosure requirements about fair value measurement for financial instruments and liquidity risk disclosures. These amendments require a three-level hierarchy that reflects the significance of the inputs used in making the fair value measurements. Fair value of assets and liabilities included in Level I are determined by reference to quoted prices in active markets for identical assets and liabilities. Assets and liabilities in Level II include valuations using inputs other than the quoted prices for which all significant inputs are based on observable market data, either directly or indirectly. Level III valuations are based on inputs that are not based on observable market data. The amendment to this standard did not have any impact on the classification and measurement of our financial instruments. The new disclosures pur- suant to the new Handbook Section are included in Note 18 of the 2009 audited consolidated financial statements. 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 de- termination 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. 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 previously accounted for the cost of production inventory using the long-term average cost which Magellan 2009 Annual Report 31 Notes To Consolidated Financial Statements [Expressed in thousands of dollars except share and per share data] 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 the accounting changes resulted in a decrease in inventories of $121,462, an increase in capital assets of $10,852, an increase in deferred development costs of $67,471, a decrease in future income tax liabilities of $8,844 and a decrease in opening retained earnings in the amount of $34,295. 3. BUSINESS ACQUISITION On February 13, 2008, the Corporation acquired all the outstanding shares of Verdict Aerospace Components 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 indus- try. 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. The purchase price has been allocated to the assets acquired and liabilities assumed based on the estimated 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. 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 Production costs of contract currently in process Advances and progress billings 2009 $ 156,460 (9,212) 147,248 $ 2,600 6,222 (3,245) (1,309) 4,268 2008 $ 187,685 (9,211) 178,474 Inventory is valued at the lower of cost and net realizable value. The cost of raw materials is calculated on an aver- age 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 year ended December 31, 2009 was $604,302 [2008 — $608,977] which included $593,396 [2008 — $598,015] of costs associated with inventory. The remaining costs of $10,906 [2008 — $10,962] related princi- pally to freight, commissions and other direct costs of sales. During the year ended December 31, 2009, the Company recognized a provision of $2,337 [2008 — $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 negotiations with its customers over amendments to pricing or other terms. Management’s assessment of the recoverability of amounts capitalized in inventory may be based on judgments with respect to the outcome of these negotiations. If the negotia- tions are not successful or the final terms differ from what the Corporation expects, the Corporation may be required to record a loss provision on this contract. The amount of such provision, if any, cannot be reasonably estimated until such amendments are finalized. 32 Magellan 2009 Annual Report Notes To Consolidated Financial Statements [Expressed in thousands of dollars except share and per share data] 5. CAPITAL ASSETS Land Buildings Machinery, equipment and tooling Land Buildings Machinery, equipment and tooling $ $ Cost 15,014 95,476 351,646 462,136 Cost 14,871 101,006 366,891 482,768 Accumulated depreciation $ — 33,533 173,903 207,436 Accumulated depreciation $ — 33,847 171,714 205,561 2009 Net book value $ 15,014 61,943 177,743 254,700 2008 Net book value $ 14,871 67,159 195,177 277,207 Included in machinery and equipment are construction in progress expenditures of $738 [2008—$3,389]. The above amounts include $6,580 [2008—$8,032] of capital assets under capital leases and accumulated depre- ciation of $2,308 [2008 — $2,703] related thereto. Depreciation recorded in the year related to capital assets under capital leases totaled $352 [2008 — $440]. 6. TECHNOLOGY RIGHTS As at December 31, 2009 the Corporation’s technology rights amounted to $29,158 [2008 — $32,567] net of accu- mulative amortization of $9,832 [2008 — $6,673]. Technology rights relate to an agreement signed in 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 As at December 31, 2009, the Corporation’s deferred development costs amounted to $59,510 [2008 — $69,225] net of accumulative amortization of $23,175 [2008 — $17,143]. 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 management intends to produce and promote to an identified future mar- ket, and for which resources exist or are expected to be available to complete the project. 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, 2009, $7,360 [2008 — $14,474] was expensed as amortization of deferred development costs. Magellan 2009 Annual Report 33 Notes To Consolidated Financial Statements [Expressed in thousands of dollars except share and per share data] 8. BANK INDEBTEDNESS The Corporation has an operating credit facility, with a syndicate of banks, with a Canadian limit of $90,000 plus a US limit of US $85,000 ($179,335 at December 31, 2009). Bank indebtedness of $140,590 [2008 — $177,766] is payable on demand and bears interest at the bankers’ acceptance or LIBOR rates, plus 3.25% (3.51% at December 31, 2009 [2008 —bankers’ acceptance or LIBOR rates, plus 1.0% or 2.35%]). Included in the amount outstanding at December 31, 2009 is US $43,630 [2008 — US $75,480]. At December 31, 2009, the Corporation had drawn $142,824 under the operating credit facility, in- cluding issued letters of credit totaling $2,234 such that $36,511 was unused 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 Corporation has provided a guarantee for the full amount of the operating credit facility. Subsequent to the year end the operating credit facility was amended and renewed with an expiry date of May 21, 2011. [Subsequent Events Note—23] 9. LONG-TERM DEBT Property mortgage [a] Other non-bank loans [b] Related party loans [c] Obligations under capital leases [d] Less current portion $ 2009 3,314 5,941 64,578 2,204 76,037 2,321 73,716 $ 2008 3,783 7,133 50,000 3,208 64,124 52,321 11,803 [a] The property mortgage of $3,314 (£1,959) is comprised of financing of certain land in the United Kingdom ac- quired in 2006. This same land is collateral for this mortgage and the mortgage bears interest at bank rate plus 0.90%, which at December 31, 2009 was 1.4% [2008 — 2.9%]. The fair value of this property mortgage was not significantly different from its recorded amount. [b] Other non-bank loans include loans of $5,050 [2008 — $6,373] provided by governmental authorities that bear interest of approximately 2.0% [2008 — 2.0% to 3.9%]. [c] On January 31, 2008, Edco Capital Corporation [“Edco”], a corporation controlled by the Chairman of the Board of the Corporation, provided a $50,000 loan due July 1, 2009 [the “Original Loan”] to the Corporation. The Origi- nal Loan bears interest at a rate of 10% per annum calculated and payable monthly and is collateralized and subordinated to the Corporation’s existing operating credit facility. The Original Loan is secured by subordinated mortgages on two of the Corporation’s real properties. On April 30, 2009, the Original Loan from Edco in the principal amount of $50,000 was increased to $65,000; was extended to July 1, 2010 in consideration of the payment of a one time fee to Edco equal to 1% of the principal amount outstanding of $50,000 and the interest rate on the loan was increased from 10% to 12% per annum. On December 22, 2009, Edco provided a commitment letter that extends the due date of the Original Loan to July 1, 2011 on the same terms and conditions of the Original Loan except that the interest rate will be reduced from 12% to 11% per annum in consideration of the payment of a one time extension fee of 1% of the principal amount of $65,000 to Edco as follows: (a) 0.20% on execution of the commitment letter for renewal and (b) 0.80% on the satisfaction of all conditions and closing of the renewal transaction. The Corporation was also granted the op- tion, exercisable on or before July 1, 2011, to renew the Original Loan for a further one year period on a payment of an additional one time extension fee of 1% of the principal amount of the loan and on the condition the bank credit facility is renewed, for an additional 364 day period beginning May 22, 2011 on terms satisfactory to the Board and on the condition that there is no material change in the business, operations or capital of the Corpora- tion. The Corporation has the right to prepay the Original Loan at any time without penalty. 34 Magellan 2009 Annual Report Notes To Consolidated Financial Statements [Expressed in thousands of dollars except share and per share data] Subsequent to year end the Original Loan was restated and extended to July 1, 2011. Accordingly, the Original Loan has been classified as non-current. [Subsequent Events — Note 23] [d] Obligations under capital lease bear interest at a rate of 7.9% to 14.3%. Future minimum lease payments under the capital leases in effect at December 31, 2009 are as follows: 2010 2011 2012 Total minimum capital lease payments Less capital lease payments representing interest Principal amount of capital lease payments The expected maturities for the next five years and thereafter for long-term debt are as follows: 2010 2011 2012 2013 2014 Thereafter $ $ 1,094 876 476 2,446 242 2,204 2,321 66,849 1,989 1,563 946 2,369 76,037 10. CONVERTIBLE DEBENTURES On January 30, 2008, the Corporation closed a private placement of an aggregate of $20,950 8.5% convertible unsecured subordinated debentures [the “2008 Debentures”], due January 31, 2010. The 2008 Debentures were redeemable by the Corporation for the first six months of the term at 102.5% of principal value and the holders had no conver- sion rights. After the first six months of the term, the 2008 Debentures were 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. The 2008 Debentures were unsecured obligations of the Corporation and were subordinated in right of payment to all of the Corporation’s existing and future senior indebtedness. As a result of the a requirement under a change of control provision in the 2008 Debentures, the Corporation was required to make an offer to purchase the $20,950 of the 2008 Debentures at a price of 102.5% of the principal amount plus accrued and unpaid interest. During the second quarter of 2009, the 2008 Debentures were fully repurchased. On April 30, 2009, the Corporation closed a private placement in which the Chairman of the Board of the Corporation, directly or indirectly, purchased $40,000 principal amount of 10% Convertible Secured Subordinated Debentures (the “New Convertible Debentures”) due on April 30, 2012. Interest is due semi-annually in arrears on April 30 and October 31 in each year. The New Convertible Debentures are convertible, at the option of the holder at any time prior to April 30, 2012, in whole or in multiples of $1,000, into fully paid and non-assessable Common Shares of the Corporation at the conver- sion price of $1.00 per Common Share which is equal to the issuance on conversion of approximately 40,000,000 Common Shares in total. The New Convertible Debentures are secured obligations of the Corporation and are subordinated in right of payment to all of the Corporation’s senior indebtedness. At December 31, 2009, $38,182 of the New Convertible Debentures, net of transaction costs, has been attributed to the debt component and $1,920 has been attributed to the equity component of the instrument. The difference be- tween the carrying value and the face value of the New Convertible Debentures will be accredited using the effective interest rate method. As explained under “Significant Accounting Policies—Convertible Debentures,” $1,920 of the New Convertible Deben- tures; $545 of the 2008 Debentures issued in 2008 and $11,100 of debentures issued in 2003 have been attributed to the equity component of the debenture and are classified as other paid in capital. Magellan 2009 Annual Report 35 Notes To Consolidated Financial Statements [Expressed in thousands of dollars except share and per share data] 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 Amounts are due as follows: $ 2009 766 10,915 11,681 1,878 9,803 2010 2011 2012 2013 2014 Thereafter $ 2008 788 7,159 7,947 — 7,947 $ 1,878 4,721 2,218 111 103 2,650 11,681 [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 decision and recorded total cumulative charges of $42,606. At December 31, 2009, a balance of $766 [2008 — $788] remains as a liability and a provision of $3,118 [2008 — $6,200] for the liability associated with a defined benefit pension plan that is in the process of being wound up has been recorded in accounts payable and accured charges. [b] Other long-term liabilities include $5,576 [2008 — $4,711] of deferred revenue in relation to a long-term pro- duction 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, 2009 and 2008 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 Prefer- ence Share is convertible at the holder’s option into 0.67 common shares of the Corporation (1,333,333 common shares in aggregate) at a price of $15.00 per common share. Directors and officers of the Corporation purchased directly or indirectly 1,135,000 of the Preference Shares issued. The Preference Shares were not redeemable by the Corporation at any time prior to July 1, 2008. Thereafter, the Pref- erence Shares are redeemable, under certain conditions, at the option of the Corporation at $10.00 per preference share plus accrued and unpaid dividends. In addition, 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 divi- dends (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 acquisition of voting control or direction over at least 66 2/3% of the common shares and instruments convertible into common shares. 36 Magellan 2009 Annual Report Notes To Consolidated Financial Statements [Expressed in thousands of dollars except share and per share data] The acquisition of the New Convertible Debentures on April 30, 2009 resulted in Mr. Edwards holding in excess of 66-2/3% of the common shares of the Corporation on a fully diluted basis, which holdings constituted a change of control as defined in the Preference Shares’ terms. Pursuant to the change of control definition in the Corporation’s outstanding Preference Shares’ terms, the Corporation is required to retract its outstanding Preference Shares at a price of $10.00 per share plus accrued and unpaid dividends, unless such retraction contravenes any instrument of indebtedness of the Corporation or the terms of the OBCA. As at December 31, 2009, the Corporation was not in the position to retract the Preference Shares as it was prohibited from doing so by the terms of its operating credit facility. Accordingly, the Preference Shares continue to be classified as equity instruments. On March 26, 2010, the Corporation’s operating credit facility was amended to provide the Corporation with the ability to retract on each of April 30 and October 31, beginning April 30, 2010, any Preference Shares tendered for retraction up to the permitted percentage of Preference Shares. [Subsequent Events — Note 23] As at December 31, 2009, the Corporation accrued the cumulative $1,600 dividends declared on December 22, 2009. 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 common shares. All current and com- parative share and per share amounts have been retroactively adjusted to reflect the five-for-one stock consolidation. Outstanding at December 31, 2007, as previously reported Issuance of additional shares as a result of the share consolidation Issued to employees Outstanding at December 31, 2008 Issued to employees Outstanding at December 31, 2009 Number of Shares 18,176,943 494 21,320 18,198,757 10,244 18,209,001 Stated Capital $ 214,361 — 71 214,432 8 214,440 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 Corpora- tion matches purchased shares on a 50% basis after a vesting period of approximately one year. During the year, the Corporation issued common shares of 10,244 [2008 — 21,320] under the ESPP for $8 [2008 — $71]. The Board of Directors of the Corporation discontinued the ESPP effective January 31, 2009. The reconciliation of the numerator and denominator for the calculation of basic and diluted income per common share is as follows: Net income Dividends on Preference Shares Net income attributable to common shareholders Weighted average shares outstanding Net effect of dilutive instruments [NOTES 10 and 13] Diluted weighted average shares outstanding Net income per common share Basic Diluted $ 2009 25,985 (1,600) 24,385 18,207,853 26,849,000 45,056,853 2008 12,900 $ (1,600) 11,300 7,947 18,184,588 — 18,184,588 1.34 0.61 0.62 0.62 For the year ended December 31, 2008, the inclusion of the Corporation’s stock options, convertible debentures and preference shares in the computation of diluted net income per common share would have an anti-dilutive effect on the net income per common share and are, therefore, excluded from the computation. Magellan 2009 Annual Report 37 Notes To Consolidated Financial Statements [Expressed in thousands of dollars except share and per share data] 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 1,035,141. Options are granted at an exercise price equal to the market price of the Corporation’s common shares at the time of granting. Options normally have a life of five years with vesting at 20% at the end of the first, second, third, fourth and fifth years from the date of the grant. In addition, certain business unit income tests must be met in order for the option holder’s entitlement to fully vest. On May 13, 2008, the incentive stock option plan was amended and restated effective immediately, to adjust the number of common shares available for grant there under to reflect the five-for-one consolidation of the Corporation’s issued and out- standing 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 2009 and 2008 are as follows: Outstanding, beginning of year Forfeited/expired Outstanding, end of year 2009 Weighted average exercise price $ 15.02 15.01 15.02 Shares 755,210 (117,010) 638,200 2008 Weighted average exercise price $ 14.99 14.85 15.02 Shares 873,570 (118,360) 755,210 The following table summarizes information about options outstanding and exercisable at December 31, 2009: Options outstanding Options exercisable Range of exercise prices $ 13.25 15.00 – 16.00 Number outstanding at December 31, 2009 Weighted average remaining contractual life [in years] 182,050 456,150 638,200 1.00 2.54 2.10 Weighted average exercise price $ 13.25 15.72 15.02 Number exercisable at December 31, 2009 135,510 209,010 344,520 Weighted average exercise price $ 13.25 15.68 14.72 Compensation expense recorded during the year was $717 [2008 — $742]. On November 7, 2008, the Corporation amended the Incentive Stock Option Plan by adding a cash option 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 acquiring 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, mea- sured 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 for new awards to be granted subsequent to the amendment date. The intrinsic value is amortized to expense over the period in which the related services are rendered, which is usually 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 and 2009. 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. 38 Magellan 2009 Annual Report Notes To Consolidated Financial Statements [Expressed in thousands of dollars except share and per share data] 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 (loss) gain on the translation of the Cor- poration’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 (loss) gain on translation of net investment in foreign operations Total accumulated other comprehensive loss 2009 $ (45,961) 2008 $ (65,479) (20,486) (66,447) 19,518 (45,961) 15. MANAGEMENT OF CAPITAL The Corporation’s objective is to maintain a capital base sufficient to maintain investor, creditor and market 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, 2009, total managed capital was $525,161, comprised of shareholders’ equity of $270,352 and interest-bearing debt of $254,809. Included in interest-bearing debt is the debt component of the convertible deben- tures of $38,182, where a component of the associated interest expense includes 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 requirements. In order to main- tain 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 circumstances. The Board of Directors reviews and ap- proves 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 Corpora- tion’s approach to capital management during the year. The Corporation must adhere to covenants in its operating credit facility. As at December 31, 2009, the Corporation was in compliance with these covenants. Magellan 2009 Annual Report 39 Notes To Consolidated Financial Statements [Expressed in thousands of dollars except share and per share data] 16. INCOME TAXES The following is a reconciliation of the expected tax (recovery) expense obtained by applying the combined corporate tax rates to income before income taxes: Corporate tax rate for manufacturing companies 2009 28.3% 2008 31.1% Expected tax expense $ 6,746 $ 4,519 Non deductible accretion and stock option charges Losses not previously benefited Change in valuation allowances Permanent differences Changes in income tax rates 460 (5,194) (4,395) 365 (145) (2,163) 407 (3,354) 3,052 185 (3,189) 1,620 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 $ 2,675 $ 3,180 2009 2008 Future income tax assets — long-term Operating loss carryforwards Investment tax credits Accounting provisions not currently deductible for tax purposes Valuation allowance Future income tax liabilities — long-term Tax depreciation in excess of book depreciation Deferred employee future benefits Net future income tax asset—long-term United Kingdom Future income tax asset—long-term Operating loss carry forwards and investment tax credits Future income tax liabilities — long-term Tax depreciation in excess of book depreciation Net future income tax liabilities—long-term 2,994 26,596 24,322 53,912 (12,280) 41,632 19,479 4,967 24,446 17,186 965 2,067 1,102 10,402 20,341 20,367 51,110 (16,675) 34,435 21,057 4,735 25,792 8,643 — 767 767 40 Magellan 2009 Annual Report Notes To Consolidated Financial Statements [Expressed in thousands of dollars except share and per share data] United States Future income tax asset — current Accounting provisions not currently deductible for tax purposes $ 1,283 $ 1,917 2009 2008 Future income tax assets — long-term Operating loss carry forwards and investment tax credits Accrued employee benefits Future income tax liabilities — long-term Tax depreciation in excess of book depreciation Net future income tax liabilities—long-term 14,580 232 14,812 23,991 9,179 20,895 400 21,295 31,920 10,625 The valuation allowance primarily relates to loss carry forward benefits in Canada where realization is not likely due to a history of losses and the uncertainty of sufficient taxable earnings in the future. In 2009, $4,395 [2008 – a charge of $3,052] of the valuation allowance balance was reversed on the assessment of the Corporation that it is more likely than not that the future income tax benefits will be realized. 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 Corporation’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 de- fined contribution pension plans and payments directly to beneficiaries for its unfunded other benefits plan totaled $12,828 [2008—$12,625]. [a] Defined contribution plans The Corporation’s expenses for defined contribution plans for the year ended December 31, 2009 totaled $4,663 [2008 — $4,340]. [b] Defined benefit plans The Corporation’s defined benefit plans cover payments for pensions, and other benefit plans described as follows: 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, 2007 for two of the plans and as at December 31, 2008 for two other plans. The last actuarial valuation was completed as at July 25, 2005 for one of the plans as this particular plan is in the process of being wound up. Magellan 2009 Annual Report 41 Notes To Consolidated Financial Statements [Expressed in thousands of dollars except share and per share data] Other benefit plan The Corporation has another benefit plan to provide post-employment coverage for health care benefits includ- ing prescribed drugs, hospital and other medical, dental and vision benefits for eligible retired employees, their spouses and eligible dependants. Other benefit plans provide for post-employment life insurance and compen- sated 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: Change in benefit obligation Benefit obligation, beginning of year Additional pension plan included Current service cost (employer) Member contributions during the year Interest cost Plan amendments Benefits paid Actuarial loss (gain) Foreign exchange (gain) loss Benefit obligation, end of year 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) 2009 $ 97,564 — 1,635 297 6,524 — (7,586) 13,757 (1,575) 110,616 95,241 — 11,611 297 8,165 (7,586) (885) 106,843 (3,773) 768 19,446 16,441 Pension 2008 Other benefit plan 2009 2008 $ 103,966 2,437 2,019 304 6,307 276 (8,241) (11,583) 2,079 97,564 $ 980 — — — 337 — (308) — (137) 872 103,048 2,663 (11,789) 304 7,973 (8,241) 1,283 95,241 (2,323) 1,053 12,301 11,031 — — — — — — — — (872) — — (872) $ 762 — — — 350 — (312) — 180 980 — — — — — — — — (980) — — (980) The accrued benefit asset related to pensions is included in other assets and the accrued benefit liability related to pensions and other benefit plans is included in accounts payable and accrued charges and other long-term liabilities, respectively. Two of the six defined benefit plans were in a surplus status as at December 31, 2009 and four of the six defined benefit plans were in a surplus status as at December 31, 2008. 42 Magellan 2009 Annual Report Notes To Consolidated Financial Statements [Expressed in thousands of dollars except share and per share data] Net benefit plan costs The components of the Corporation’s net benefit costs are as follows: Change in benefit obligation Current service cost Interest cost Actual return on plan assets Actuarial loss (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 employee future benefit costs: Difference between expected return and actual return on plan assets for the year Differences between actuarial loss recognized for the year and actual actuarial losses on accrued benefit obligation for the year Difference between amortization of past service costs for the year and actual plan amendments for the year Net benefit cost recognized 2009 $ 1,635 6,524 (11,611) 13,757 — Pension 2008 Other benefit plans 2009 2008 $ 2,019 6,307 11,789 (11,583) 276 $ — 357 — — — $ — 350 — — — 10,305 8,808 357 350 (12,371) (19,213) — — 5,345 14,078 — — 242 3,521 67 3,740 — 357 — 350 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 [weight- ed-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 2009 5.75% 6.5% 2.9% 5.75% 6.5% 2.9% Pension 2008 Other benefit plans 2009 2008 7.0% 6.5% 3.0% 7.0% 6.5% 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 2009. 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 or decrease in the assumed health care and dental benefit trend rates as at December 31, 2009 was nominal. Magellan 2009 Annual Report 43 Notes To Consolidated Financial Statements [Expressed in thousands of dollars except share and per share data] 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: Equities Fixed income Cash and short-term investments Total Percentage of plan assets 2009 43.2% 47.2% 9.6% 100.0% 2008 44.3% 45.4% 10.3% 100.0% At December 31, the market value of the plan assets directly invested in common shares of the Corporation was as follows: Defined benefit plans 2009 37 $ 2008 14 $ 18. FINANCIAL INSTRUMENTS The Corporation’s policy is not to utilize derivative financials instruments for trading or speculative purposes. The Cor- poration may utilize derivative instruments in the management of its foreign currency and interest rate exposures. [a] 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 investments and other financial liabilities, which are measured at amortized costs. Held for trading financial investments are subsequently measured at fair value and all gains and losses are included in net income in the period in which they arise. Available-for-sale financial instruments are subsequently measured at fair value with revaluation gains and losses included in other comprehensive income until the instrument is derecognized or impaired. The carrying values 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 3 Includes bank indebtedness, accounts payable and accrued charges, long-term debt, and the debt component of the convertible debentures 4 Included in other assets in 2009 and in accounts payable and accrued charges in 2008 $ 2009 22,641 83,282 390,182 1,286 $ 2008 5,418 68,652 385,697 1,853 [b] Fair values The Corporation has determined the estimated fair values of its financial instruments based on appropriate valuation methodologies, however, considerable judgment is required to develop these estimates. Accordingly, these estimated fair values are not necessarily indicative of the amounts the Corporation could realize in a current market exchange. The estimated fair value amounts can be materially affected by the use of different assumptions or methodologies. The methods and assumptions used to estimate the fair value of financial instruments are described below: 44 Magellan 2009 Annual Report Notes To Consolidated Financial Statements [Expressed in thousands of dollars except share and per share data] 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 consolidated balance sheets are reasonable estimates of their fair values. Forward exchange contracts The Corporation has entered into forward foreign exchange contracts to mitigate future cash flow exposures in US dol- lars. Under these contracts the Corporation is obliged to purchase specific amounts of US dollars at predetermined dates and exchange rates. These contracts are matched with anticipated operational cash flows in U.S. dollars. During 2009, the Corporation entered into a foreign exchange collar which sets a floor of $1.2350 Canadian per $1.00 US and a ceiling of $1.3333 Canadian per $1.00 US of which $7,000 US are outstanding at year end and will expire in 2010. The fair values of the Corporation’s forward foreign exchange contracts are based on the current market values of simi- lar contracts with the same remaining duration as if the contracts had been entered into on December 31, 2009. The mark-to-market on these financial instruments as at December 31, 2009 was an unrealized gain of $1,286 [2008 — unrealized loss of $1,853] which has been recorded in administrative and general expenses in the year. Long-term debt The fair value of the Corporation’s long-term debt, which includes the current portion, calculated by discounting the expected future cash flows based on current rates for debt with similar terms and maturities, is $74,622 at December 31, 2009. 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 $38,315. As at December 31, 2009, 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 $76,037. [c] Fair value hierarchy The Corporation’s financial assets and liabilities recorded at fair value on the consolidated balance sheet have been categorized into three categories based on a fair value hierarchy. Fair value of assets and liabilities included in Level I are determined by reference to quoted prices in active markets for identical assets and liabilities. Assets and liabili- ties in Level II include valuations using inputs other than the quoted prices for which all significant inputs are based on observable market data, either directly or indirectly. Level III valuations are based on inputs that are not based on observable market data. The fair-value hierarchy requires the use of observable market inputs whenever such inputs exist. A financial in- strument is classified to the lowest level of the hierarchy for which a significant input has been considered in measuring fair value. The following table presents the fair value of the financial instruments that are carried at fair value classified using the fair value hierarchy described above: Quoted Prices in Active Markets (Level I) Significant Other Observable Inputs (Level II) Significant Unobservable Inputs (Level III) Total Financial Assets Forward foreign exchange contracts $ Total — — $ 1,286 1,286 $ — — $ 1,286 1,286 Magellan 2009 Annual Report 45 Notes To Consolidated Financial Statements [Expressed in thousands of dollars except share and per share data] [d] 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 ex- posure 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, substantially all of which are in the aerospace industry. The Corporation sells the majority of its products to large international organi- zations with strong credit ratings. Therefore, the Corporation is not exposed to significant 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 the income statements within administrative and general expenses. When a receivable balance is considered uncollectible, it is written off against the allowance for accounts receivable. Subsequent re- coveries of amounts previously written off are credited against administrative and general expenses. The following table sets forth details of the age of the trade accounts receivable as at December 31, 2009: 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 $ 80,123 (1,782) 78,341 74,412 4,803 266 278 364 (1,782) 78,341 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 budget- ing process to help determine the funds required to support the Corporation’s normal operating requirements on an ongoing basis, taking into account its anticipated cash flows from operations and its operating credit facility capac- ity. 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. 46 Magellan 2009 Annual Report Notes To Consolidated Financial Statements [Expressed in thousands of dollars except share and per share data] 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 Equipment leases Facility 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 $ 140,590 8,919 1,095 1,185 1,337 1,878 4,000 159,004 $ — 72,333 1,351 1,348 2,890 7,050 46,000 130,972 $ — 986 — 66 1,948 103 — 3,103 $ — 2,429 — — 1,031 2,650 — 6,110 Total $ 140,590 84,667 2,446 2,599 7,206 11,681 50,000 299,189 As at December 31, 2009, the Corporation had undrawn lines of credit available to it of $36,511. The Corporation’s operating credit facility is due within a one-year period. On March 26, 2010, the Corporation extended its operating credit facility [Note 23 — Subsequent Events]. On March 26, 2010, Edco extended the due date of the Original Loan to July 1, 2011. In addition, the Corporation has an option, exercisable on or before July 1, 2011, to renew the loan for a further one year period on the condition the operat- ing credit facility is renewed, for an additional 364 day period beginning May 22, 2011. [Long-Term Debt — Note 9 and Subsequent Events — Note 23]. Currency risk The Corporation operates internationally, which gives rise to a risk that its income, cash flows and shareholders’ eq- uity 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 consolidation into the reporting currency of Canadian dollars (“trans- lation exposures”). The Corporation uses derivative financial instruments to manage foreign exchange risk with the objective of minimizing transaction 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 volatil- ity 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, 2009, fluctuations of +/- 1% would, everything else being equal, have an effect on net income and on other comprehensive income for year ended December 31, 2009 of approximately +/- $80 and $1,300 respectively. Interest rate risk The Corporation is exposed to interest rate risk in its floating rate bank indebtedness. At December 31, 2009, $148,253 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 minimize 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 +/- $1,400. 19. RELATED PARTY TRANSACTIONS During the year, the Corporation sold receivables to a corporation, which is controlled by a common director, in the amount of $65,448 [2008 — $405,178], for a discount of $832 [2008 — $2,803] representing an annualized interest rate of 7.5% [2008 — 7.5%]. As at December 31, 2008 the Corporation recorded a reserve of $4,429. This securitization facility expired on December 31, 2009. Magellan 2009 Annual Report 47 Notes To Consolidated Financial Statements [Expressed in thousands of dollars except share and per share data] On January 31, 2008, the Corporation entered into the Original Loan in principal amount of $50,000 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 2009, $1,665 of interest was paid in relation to the $50,000 Original Loan and $nil [2008 — $594] of interest was paid in relation to the Bridge Loan. The Bridge Loan was repaid in June 2008. On April 30, 2009 the Original Loan in principal amount of $50,000 was amended and increased to $65,000 [Note 9]. In 2009, $5,280 of interest was paid in relation to the $65,000 Original Loan. The Chairman of the Board, who is a director, and another director of the Corporation held $18,150 of the $20,950 2008 De- bentures that were refinanced on April 30, 2009. The related cash interest paid in the year was $832 [2008 — $1,432]. On April 30, 2009, the Chairman of the Board of the Corporation subscribed to $40,000 of the New Convertible Deben- tures. During the period the Corporation incurred interest of $2,667 in relation to the New Convertible Debentures. The Chairman of the Board of the Corporation has provided a guarantee for the full amount of the Corporation’s oper- ating credit facility. An annual fee of 1.35% [2008 — 1.35%] of the guaranteed amount or $2,801 [2008 — $2,055] was paid in consideration for the guarantee. During the year, the Corporation incurred consulting costs of $100 [2008 — $100] payable to a corporation controlled by the Chairman of the Board of the Corporation. As well, the Corporation paid legal fees of $215 [2008 — $80] to a law firm in which a director is a partner. 20. SUPPLEMENTARY INFORMATION [a] Interest expense on long-term debt in 2009 was $11,622 [2008 — $8,401]. Interest on capital leases in 2009 was $237 [2008 — $324]. [b] During 2009, the Corporation received $2,183 [2008 — $2,181] of government assistance, which has been cred- ited to the related assets. The Corporation is eligible for an additional $40,991 for the period from January 1, 2010 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 2009 $ (19,083) 22,285 (28,191) 11,857 (13,132) $ 2008 (22,844) (16,628) 2,176 4,475 (32,821) [d] Interest paid during 2009 amounted to $19,698 [2008 — $22,638] and income taxes paid during 2009 amounted to $678 [2008 — $30]. [e] During the year, the Corporation realized a foreign exchange gain on the translation of foreign currency denomi- nated working capital balances and debt of $6,383 [2008 — $6,904]. [f] During 2009, the Corporation sold receivables to various financial institutions in the amount of $117,105 [2008 — $150,434], for a discount of $672 [2008 — $1,359] representing an annualized interest rate of 2.83% [2008 — 5.19%]. [g] Contributed surplus arises solely from the recording of stock based compensation expense. [h] Prepaid expenses and other include advance payments to suppliers and subcontractors in the amount of $31,321 [2008 — $2,045]. [i] 48 Accounts payable and accrued charges include advance payments received from customers in the amount of $50,197 [2008—$6,907]. Magellan 2009 Annual Report Notes To Consolidated Financial Statements [Expressed in thousands of dollars except share and per share data] 21. SEGMENTED INFORMATION The Corporation is organized and managed as a single business segment, being aerospace, and the Corporation is viewed as a single operating segment by the chief operating decision makers for the purposes of resource allocations and assessing performance. Domestic and foreign operations consist of the following: Revenues Domestic Export Total revenues Revenues Domestic Export Total revenues 2009 2008 Canada United States United Kingdom 2009 Total $ 113,586 224,179 337,765 $ 169,720 30,805 200,525 $ 130,894 17,430 148,324 $ 414,200 272,414 686,614 Canada United States United Kingdom 2008 Total $ 115,281 188,842 304,123 $ 189,060 56,395 245,455 $ 122,302 14,556 136,858 $ 426,643 259,793 686,436 Canada $ 115,116 118,917 United States $ 110,054 135,691 United Kingdom 29,530 22,599 $ Capital assets Total 254,700 277,207 $ 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 Customer Canadian operations Number of customers Percentage of total Canadian revenue United States operations Number of customers Percentage of total United States revenue United Kingdom operations Number of customers Percentage of total United Kingdom revenue Magellan 2009 Annual Report 2009 2008 2 25% 1 35% 2 80% 3 36% 2 50% 1 75% 49 Notes To Consolidated Financial Statements [Expressed in thousands of dollars except share and per share data] 22. COMMITMENTS AND CONTINGENCIES [a] Operating lease commitments The Corporation has lease commitments related to properties, equipment and other items. At December 31, 2009, future minimum annual lease payments are as follows: 2010 2011 2012 2013 2014 Thereafter $ 2,522 1,866 1,290 1,082 1,035 2,010 9,805 [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 adequate provisions have been recorded in the accounts where required. Although, it is not possible to accurately estimate the extent of the potential costs and losses, if any, management believes, but can provide no assurance, that the ultimate resolution of such contingencies would not have a material adverse effect on the financial position of the Corporation. 23. SUBSEQUENT EVENTS On March 26, 2010, the Corporation amended its operating credit facility with its existing lenders. Under the terms of the amended agreement, the maximum amount ava ilable under the operating credit facility was reallocated to a Canadian dollar limit of $105,000 plus a U.S. dollar limit of $70,000, with a maturity date of May 21, 2011. The facility is extendable for unlimited one-year renewal periods by the agreement of the Corporation and the lenders and con- tinues to be guaranteed by the Chairman of the Board of the Corporation. The terms of the amended operating credit facility permit the Corporation to (i) repay the Original Loan in whole or in part and (ii) retract up to 20% ($4,000) of the Preference Shares on each of April 30 and October 31 (or the next business day if that day is not a business day) of each year starting with April 30, 2010, together with accrued and unpaid dividends on the shares to be retracted pro- vided there is no current default or event of default under the operating credit facility and after the repayment of the Original Loan and the payment of the retraction amount the Corporation has at least $25,000 in availability under the operating credit facility. Any permitted retraction amount not used on any prior date can be carried forward to future retraction dates. As a result, subject to such limitation under the operating credit facility and to applicable laws, the Corporation will retract on each of April 30 and October 31, beginning April 30, 2010, any Preference Shares tendered for retraction up to the permitted percentage of Preference Shares. The Preference Shares tendered for retraction will be classified as a current liability. In addition, on March 26, 2010, the extension and restatement of the Original Loan from Edco to the Corporation was completed. The interest rate was decreased from 12% per annum to 11% per annum commencing July 1, 2010 and the loan extended to July 1, 2011 in consideration of the payments of an aggregate fee to Edco equal to 1% of the principal amount. 24. COMPARATIVE CONSOLIDATED FINANCIAL STATEMENTS The comparative consolidated financial statements have been reclassified from statements previously presented to conform to the presentation of the 2009 consolidated financial statements. 50 Magellan 2009 Annual Report Board of Directors and Officers Corporate Officers Board Of Directors Committees Of The Board (1) (2) (3) (4) Audit Committee Chairman: William A. Dimma Governance and Nominating Committee Chairman: Bruce W. Gowan Human Resources and Compensation Committee Chairman: William G. Davis Health, Environmental and Safety Committee Chairman: Donald C. Lowe 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 President and Chief Executive Officer Magellan Aerospace Corporation Mississauga, Ontario Hon. William G. Davis P.C., C.C., Q.C. (3) Counsel, Davis Webb LLP Brampton, 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 2009 Annual Report 51 Operating Facilities Directory and Shareholder Information Canada United Kingdom Corporate Office 660 Berry Street, Winnipeg, Manitoba R3H 0S5 Tel: 204 775 8331 Davy Way, Llay Industrial Estate, Llay, Wrexham LL12 0PG Tel: 01978 856600 3160 Derry Road East, Mississauga, Ontario L4T 1A9 Tel: 905 673 3250 27/29 High Street, Biggleswade, Bedfordshire SG18 0JE Tel: 01767 601280 634 Magnesium Road, Haley, Ontario K0J 1Y0 Tel: 613 432 8841 7/8 Lyon Road, Wallisdown, Poole, Dorset BH12 5HF Tel: 01202 535536 975 Wilson Avenue, Kitchener, Ontario N2C 1J1 Tel: 519 893 7575 Miners Road, Llay Industrial Estate, Llay, Wrexham LL12 0PJ Tel: 01978 856798 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 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 India Nandana, 108/7 1st Main Road Widia Layout, Vijaya Nagar Bangalore 560 040 Tel: 905 677 1889 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 Friday, May 14th, 2010 at 2:00 p.m. at The Living Arts Centre, 4141 Living Arts Drive, Mississauga, Ontario L5B 4B8 52 Magellan 2009 Annual Report MAGELLAN AEROSPACE CORPORATION 3160 DERRY ROAD EAST, MISSISSAUGA, ONTARIO, CANADA L4T 1A9 WWW.MAGELLAN.AERO 

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