2010
ANNUAL REPORT
LetteR to shARehoLdeRs
1
Magellan Aerospace Corporation ("Magellan" or
the "Corporation") is pleased to report to you
the results for 2010, a year of lingering uncer-
tainties in the North American and European
aerospace markets during the first half of the
year, with turnaround signs in the second
half of 2010 in much of the world’s aerospace
market. This turnaround has now been muted
by the rapid rise of oil prices in 2011 and the
question it may have on civil airlines profits.
The global aerospace industry rallied in 2010, with
world airlines reporting stronger load factors, rev-
enues and profitability, and aircraft and engine manu-
facturers announcing increased production rates to
accommodate growing demand for new aircraft.
Business aircraft activity rates began to increase
more broadly, hopefully a precursor to increased
demand ahead. Production of defence aircraft,
helicopters and engines maintained current build
rates through 2010 due, to some degree, to the
natural inertia of large capital equipment schedules,
and to aftermarket support of high activity rates.
Production rate increases occurred primar-
ily in the single-aisle sector of the civil airlines
market, while regional jets, twin-aisle and large
aircraft continued to lag, especially those not yet,
or newly, in service. The in-service A380 has been
slow to reach predicted production rates due to
weaknesses in certain regional markets, while
the B787 and A350 have experienced a number
of development and certification delays beyond
those expected of a new-design aircraft. Finally,
the F-35 Joint Strike Fighter (JSF) has experienced
manufacturing and testing challenges as it moved
towards higher rates of production, particularly
for the more complex vertical landing F-35B vari-
ant. Elections in the United States also caused
delays in defense budget approvals in late 2010.
The Corporation has retained a strong position
in the single-aisle market with Airbus and Boeing,
with production rates for both having been raised in
2010 to record levels. Magellan also benefited from
increased production on certain of the current twin-
aisle aircraft of Airbus (A330) and Boeing (B777).
The Corporation has positioned itself for revenue
Magellan Aerospace 2010 Annual Report
2
on the new B787 twin-aisle from Boeing forecasted
to enter service in 2011, and the new A350 twin-
aisle from Airbus expected to enter service over
the next several years. Both aircraft have built
strong order books, and are expected to signifi-
cantly improve long range air travel world-wide.
Magellan also increased its position on the
F-35 multi-nation JSF program in 2010, assisted
by its investment in technology, knowledge, plant
and equipment. The F-35 added new custom-
ers in 2010, and the air force and navy variants
of the aircraft (F-35A and F-35C respectively) are
ahead of schedule in testing. Low rate produc-
tion of these variants will accelerate annually in
2011 and beyond, with the vertical landing variant
expected to rejoin production within two years. In
2010, Magellan continued to renew contracts for
existing manufacturing, won a landing gear pack-
age, and accessed opportunities for new pack-
ages as this large program moved forward.
The global space market is growing in segments
that include science and space exploration, de-
fence, and media, which affect earth observation,
communication, navigation, and entertainment.
Magellan has been involved in various space activi-
ties for over four decades and has more recently
established itself as a satellite developer, obtaining
a significant and growing role within the Canadian
space program over the past decade. With two
complete satellites delivered, Magellan is pres-
ently under contract to design the satellite bus for
Canada's RADARSAT Constellation Mission (RCM),
with manufacturing and assembly of the three-
satellite RCM constellation to commence in 2012.
In the United States, the NASA budget has been
stabilized at its current level as the major transition
from NASA to civilian industry support of the
International Space Station moves forward, and
NASA returns to solar system manned space travel,
targeting the mission to Mars as its major focus of
the next 25 years.
In Europe, Magellan’s Verdict Aerospace division
based in the United Kingdom manufactured preci-
sion exotic metal alloy components for two com-
munications satellites in 2010, and will participate in
an explorer/lander mission to Mercury in 2012. Its
customers include Astrium, Europe's largest space
company, Eutelsat and the European Space Agency.
Magellan Aerospace 2010 Annual Report
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Magellan/Verdict will support broadband services
that can be received by smaller, more efficient ter-
minals, and new broadcast and multicast services
in Africa, Europe and parts of the Middle East.
Magellan remains actively engaged in a number
of other upcoming Canadian, American and
European science and operational satellite
missions. Demand for other Magellan proprietary
safety and defence products remains stable
or will see growth as Magellan’s capabilities
continue to become more knowledge-based.
The power generation project sector for Magellan
represents a new initiative for Magellan with current
activities focused in the Republic of Ghana, where
Magellan is the prime contractor of a major electrical
power generation installation. Additional opportunities
in this type of infrastructure growth environment may
arise as the Ghana project is successfully completed.
Magellan’s traditional manufacturing competencies
are continuously being upgraded through introduc-
tion of increased knowledge of new material proper-
ties and manufacturing technologies. This growth
in knowledge-based activity is allowing Magellan to
compete successfully for higher complexity manu-
facturing roles in its traditional markets, which in
turn raises the value of Magellan to its key custom-
ers. This transition towards knowledge-based activ-
ity throughout its spectrum of products will be the
hallmark of Magellan’s efforts in this coming decade.
As we move forward from our accomplish-
ments over the past few years, we feel it is impor-
tant to thank our investors and financial partners
for your steadfast support. We also salute our
Magellan employees, across all of our locations
around the world, for your enthusiasm for the
future, and for the new Magellan that is emerg-
ing from the successes of the past years.
James s. Butyniec
President and Chief Executive Officer
March 23, 2011
Magellan Aerospace 2010 Annual Report
MAnAgeMent discussion And AnALysis
4
The Management Discussion and Analysis ("MD&A") of financial condition and results of operations has been prepared as
of March 23, 2011 and should be read in conjunction with the 2010 consolidated financial statements and notes thereto.
Magellan Aerospace Corporation ("Magellan" or the "Corporation") reports its audited consolidated financial statements in
accordance with Canadian generally accepted accounting principles ("GAAP"). All amounts are reported in Canadian dollars
unless otherwise noted.
The MD&A contains forward-looking information that represents the Corporation’s internal projections, expectations, estimates
or beliefs concerning, among other things, future operating results and various components thereof or the Corporation’s future
economic performance. These statements relate to future events or future performance. All statements other than statements of
historical facts may be forward-looking statements. In particular and without limitation there are forward looking statements under
the heading "Outlook," "2010 Updates," "Liquidity" and "Future Changes in Accounting Policies,". 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
2010 and continuation of the current regulatory and tax regimes in the jurisdictions in which the Corporation operates, and neces-
sarily involve known and unknown risks and uncertainties, including the business risks discussed in this MD&A, which may cause
actual performance and financial results in future periods to differ materially from any projections of future performance or results
expressed or implied by such forward-looking 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.
COMPANY OVERVIEW
Magellan is a diversified supplier of components to the aerospace industry and in certain circumstances for power generation
projects. Through its wholly owned subsidiaries, Magellan designs, engineers, and manufactures aeroengine and aerostructure
components for aerospace markets, advanced products for military and space markets, and complementary specialty products.
The Corporation also supports the aftermarket through supply of spare parts as well as performing repair and overhaul services
and supplies in certain circumstances parts and equipment for power generation projects.
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 two business segments and is viewed as two operating segments by the chief operating
decision-makers, for the purpose of resource allocations, assessing performance, and strategic planning. These two segments are:
Aerospace and Power Generation Project. The Corporation supplies both the commercial and military sectors of the Aerospace
segment. In the commercial sector, the Corporation is active in the business jet, regional aircraft, helicopter and large commercial
jet markets. On the military side, the Corporation provides parts and services for all major military aircraft. Magellan’s sole product
for the Power Generation Project segment is the electric power generation project in the Republic of Ghana.
The Corporation’s revenues by segment are as follows:
Aerospace
Power Generation Project
2010
86%
14%
100%
2009
99%
1%
100%
Within the Aerospace segment, the Corporation has two major product groupings: aerostructures and aeroengines. Aerostructure
and aeroengine products are used both in new aircraft and for spares and replacement parts.
Magellan Aerospace 2010 Annual Report
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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 pre-
cision casting of airframe-mounted components. Management believes that Magellan’s dedication to technological innovation
combined with low cost sourcing from emerging markets will position the Corporation to capture targeted complex assembly
programs.
Within the aeroengines product grouping, the Corporation manufactures complex cast, fabricated and machined gas turbine en-
gine components, both static and rotating, and integrated nacelle components, flow paths and engine exhaust systems for the
world’s leading aeroengine manufacturers. The Corporation also performs repair and overhaul services for jet engines and related
components.
The Power Generation Project segment is a specialty product complementary to the Corporation’s principal business. The Corpo-
ration’s sole product for the Power Generation Project segment is an electric power generation project in the Republic of Ghana
that is expected to be substantially completed by the end of 2011. While a number of power generation project opportunities are
being considered, at this time the Corporation does not have any other committed projects.
The Corporation serves both the commercial and defence markets. In 2010, 64.4% of revenues were derived from the commercial
markets (2009 – 63.9%, 2008 – 68.2%) while 35.6% of revenues related to defence markets (2009 - 36.1%, 2008 – 31.8%).
OUTLOOK
Over the last two years, from the depths of the economic recession in late 2008 and early 2009, the Corporation has been effective
in making the changes required to operate in today’s exchange environments, including parity between the Canadian and United
States dollars. Increasingly, dollar-based costs are being sought by European and other aerospace companies as a natural currency
hedge to improve their global competitiveness.
During this period of time the Corporation has increased the efficiencies of individual operating sites through a number of
physical enhancements to manufacturing capabilities. But over and above new equipment and facilities, the Corporation has
been able to lead change in methodologies and management techniques that have generated ongoing cost reductions and
created efficiencies.
Civil airline recovery was extensive in 2010 with the majority of airlines worldwide reporting profitable results and either operating
modern aircraft or in the process of replacing old aircraft with new, efficient aircraft. The higher cost of oil and fuel recently expe-
rienced in early 2011, whether short-lived or long-term, may damage airline profitability in 2011 and beyond, especially those with
older equipment. It should also spur the pace of replacement with fuel efficient aircraft, but new capacity is unlikely to be gener-
ated until the political climate allows. Global airfreight is also in recovery, and should continue to build in 2011 as newer aircraft
reduce operating costs.
Nevertheless, there are uncertainties being generated by the political unrest in the Middle East. These political tensions and
changes, while somewhat contained to date, represent uncertainty, oil price disruption, and higher prices for fuel, a major cost
to aviation. Should the Middle East situation continue, or materially worsen, significant global economic impacts are likely, in-
cluding in the air travel industry.
The defence sector is in the process of slowing, driven by economic factors in Europe and by both political and economic fac-
tors in the United States. Defence sales in India and other parts of Asia and the Middle East are likely to proceed more slowly.
Selected projects, such as the F35 aircraft, are most likely to return to planned growth in the second half of 2011, and continue
steadily thereafter as initial issues are corrected. The USAF KC-45A Tanker program activity is also scheduled to begin in 2011,
with the first 18 aircraft deliveries programmed for 2017.
Industrial power generation opportunities continue to emerge in less developed areas such as central Africa. In the emerging
world, China and India are growing rapidly, and need power sources to expand accordingly. These trends are expected to con-
tinue for much of this decade.
Magellan Aerospace 2010 Annual Report
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The Corporation’s positioning in civil and defence aerospace sectors has been based on active analysis of opportunity and selective
capture of new aircraft and engine opportunities. Magellan saw the opportunity in joining new programs early, applying its capa-
bilities, and delivering value for the long term. The Corporation has significant roles in the civil airliner sector, including the Boeing
B777 and B787, and the Airbus A380, and A350. Sales have been buoyed by the strength of both the B737 and the A320 single
aisle aircraft that are now being delivered at an average of over 75 aircraft a month combined. The F35 aircraft is forecast to ramp
up production, achieving a target of 32 aircraft annually by 2012.
The Corporation’s strategy of engagement with its key customers has been very effective in Magellan targeting changes that help
the customer, and the customer recognizing these changes as mutually beneficial. The level of complexity of the work being done
in the Corporation’s facilities is growing annually, and provides the means to apply the knowledge and capability of each site as
high value-added benefit to the customer. Selective off-load of less complex work continues to grow, with increasingly positive
benefits being realized.
RISK FACTORS
The Corporation’s performance may be affected by a number of risks and uncertainties. Magellan’s senior management identi-
fies key risks and has processes in place to help monitor, manage, and mitigate these risks. Additional risks and uncertainties not
presently known by the Corporation, or that the Corporation does not currently anticipate may be material and may impair the
Corporation’s performance.
The following risks and uncertainties apply to the Corporation. Additional information relating to risks and uncertainties are set forth
in the Corporation’s Annual Information Form on SEDAR at www.sedar.com.
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 pe-
riod. In addition, such fluctuations affect the translation of the Corporation's results for purposes of its consolidated financial state-
ments. 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 2007 and 2008, including disruptions in the international credit markets and other
financial systems and the deterioration of global economic conditions, 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 U.S. and global credit and financial markets. Notwithstanding various actions by
governments, concerns about the general condition of the capital markets, financial instruments, banks, investment banks, in-
surers and other financial institutions caused the broader credit markets to further deteriorate and stock markets to decline sub-
stantially. While global financial conditions and outlook have improved somewhat, these factors continue to negatively impact
company valuations and impact the performance of the global economy going forward. Recent political unrest in the countries
of North Africa and the Middle East may create more volatility in the price of oil and may threaten the ongoing recovery of the
global economy or may have other unforeseen consequences.
The Corporation cannot predict the depth or duration of downturns in the domestic and global economies nor the effects on mar-
kets 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 do-
mestic and global economies could have a significant impact on the Corporation's overall financial performance and may impact
the value of its Common Shares.
Magellan Aerospace 2010 Annual Report
7
A reduction in defence spending by the United States or other countries could result in a decrease in revenue.
The Corporation relies on sales to military customers particularly in the United States. A significant reduction in military expendi-
tures by the United States or other countries with which the Corporation has contracts could materially adversely affect the Cor-
poration's business and financial condition. The loss or significant reduction in government funding of a large program in which the
Corporation participates could also materially adversely affect sales and earnings.
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 con-
sequences on the Corporation's prospects include the effect of such debts on the ability to obtain additional financing for work-
ing 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 Fa-
cility 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 Corpora-
tion. 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 assurance 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".
The Corporation has borrowed an amount of $65 million from Edco Capital Corporation ("Edco") pursuant to a secured subordinated
loan agreement ("Original Loan"). On March 26, 2010, the Original Loan was amended by decreasing the interest rate from 12%
to 11% per annum commencing on July 1, 2010 and extending the loan to July 1, 2011. In addition, on December 22, 2009, Edco
also extended an option to Magellan, exercisable on or before July 1, 2011, to renew the loan for a further one year period on pay-
ment 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, 2011 on terms satisfactory to the Board and on the condition that there is no
material change in the business, operations or capital of Magellan.
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 and subject to law, the Corporation is required to retract the First
Preference Shares Series A in whole or in part to the extent not restricted by any instrument of indebtedness of the Corporation.
The $40 million principal amount of the 10% convertible secured subordinated debentures ("New Convertible Debentures") is due
April 30, 2012 and the Corporation may 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, include those set forth in this Annual Information Form, 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.
Magellan Aerospace 2010 Annual Report
8
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 Corporation's business
is directly affected by economic factors and other trends that affect the Corporation's customers in the aerospace industry,
including a possible decrease in outsourcing by aircraft operators and original equipment manufacturers ("OEMs"), decreased
demand for air travel or projected market growth that may not materialize or be sustainable. When these economic and other
factors adversely affect the aerospace industry, they tend to reduce the overall customer demand for the Corporation's prod-
ucts 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 customers, the Corporation must anticipate the future
volume of orders based upon the historic purchasing patterns of customers and upon discussions with customers as to their an-
ticipated future requirements. These historic patterns may be disrupted by many factors, including changing economic conditions,
inventory adjustments, work stoppages or labour disruptions. Cancellations, reductions or delays in orders by a customer or group
of customers could have a material adverse effect on the Corporation's business, financial condition and results of operations.
SELECTED ANNUAL FINANCIAL INFORMATION
Expressed in millions of dollars except per share information
Revenues
Net income for the year
Net income per common share
Basic
Diluted
Total assets
Total long term liabilities
2010
732.5
25.4
1.37
0.51
654.3
79.4
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
Revenues for the year ended December 31, 2010 increased from 2009 and 2008 mainly due to increased revenues earned
on the Corporation's power generation project. The Corporation has not paid dividends on its common shares in the past four
years. In 2005, the Corporation issued 2,000,000 8.0% Cumulative Redeemable First Preference Shares Series A of which
1,200,013 were outstanding at December 31, 2010. The Corporation declared dividends thereon of $0.80 per share during each
of 2010 and 2009.
2010 UPDATES
•
GKN Aerospace - Filton awarded a contract to Magellan Aerospace (UK) Limited on the Airbus A380 program. The contract
contains 203 machined aluminum detail components and is expected to generate revenues in excess of US$19 million
over the next five years. Initial production will utilize existing capacity at Magellan’s facilities at Bournemouth and Chalfont
St Peter (Verdict), with further investment in high speed 5-axis machinery.
•
Magellan announced, on May 12, 2010, an agreement with Rolls-Royce Plc and Rolls-Royce Deutschland Ltd. & Co KG
to manufacture mainline shafts and stub shafts for various Rolls-Royce engine programs. The work will be performed on
these flight safety critical rotating parts at Magellan’s Middleton Aerospace facility in Haverhill, MA. It is estimated that the
Magellan Aerospace 2010 Annual Report
9
gross program revenue will be approximately US$425 million over the 15-year term of the agreement. Magellan will utilize
its existing equipment for initial production, but will expand its manufacturing footprint at the Haverhill facility to accommo-
date the new equipment and processes required to support full-scale production for the program.
On July 7, 2010, Magellan announced that an agreement has been reached between Airbus and Magellan Aerospace (UK)
Limited securing a further major work package on Airbus’ new A350 XWB that is expected to generate revenues in ex-
cess of US$60 million over the next ten years. That package consists of a number of complex machined aluminium detail
components and assemblies that form the structure of the pylon body. Magellan’s selection reconfirms Airbus’ continued
confidence in Magellan’s advanced capabilities.
Magellan announced on October 8, 2010, an expansion of its manufacturing facility at Bristol Aerospace in Winnipeg. At
a ground breaking ceremony, Magellan unveiled the JSF Advanced Composite Manufacturing Facility being constructed
in Winnipeg. The launch customer for this new facility is BAE Systems in the United Kingdom, who awarded Magellan a
contract to produce the JSF F-35 Lightning II horizontal tail components. The $22 million, 13,000 square meter facility will
be equipped with advanced technology for the manufacture of complex fabrications and assemblies.
On November 29, 2010, Magellan announced the commissioning of the first new high-velocity, hard metal machining cen-
tre to undertake F-35 opportunities of up to $212 million for various customers over the initial fifteen years of the program.
Magellan currently has firm contracts for the multi-year purchase of manufacturing packages for components of the F-35
program for approximate revenues of $26 million. The components will be manufactured in Chicopee Manufacturing, Ma-
gellan’s Centre of Excellence for high velocity, hard metal machining, in Kitchener, Ontario. In 2003, Chicopee Manufactur-
ing was the first international partner on the Joint Strike Fighter program to deliver non-U.S. manufactured components to
the program. This current investment is being supported through the Strategic Aerospace and Defence Initiative (SADI), a
Federal Government program which supports strategic industrial research and pre-competitive development projects.
On December 9, 2010 Magellan Aerospace (UK) announced an agreement with GKN Aerospace securing a work pack-
age containing structural components for the Airbus A320 and A330 aircraft. The package contains a number of major
aluminium and titanium structural components, and is expected to generate revenues in excess of £21 million over the
next five years.
•
•
•
•
LABOUR MATTERS
Labour agreements at two of the Corporation’s facilities were successfully negotiated during 2010 and renewed for two and three
year terms. One labour agreement at one of the Corporation’s facilities expires on April 1, 2011 and two others at another of the
Corporation’s facilities will expire December 31, 2011.
FINANCING MATTERS
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 Canadian 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 lend-
ers 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 Prefer-
ence 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 in both cases 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.
Magellan Aerospace 2010 Annual Report
10
RESULTS FROM OPERATIONS
Consolidated Revenues
Overall, the Corporations revenues increased when compared to last year. While the global economy improved throughout 2010,
the Corporation continued to experience delays in the new programs that it has been investing in over the past several years.
The Corporations revenues by segment were as follows:
Twelve-months ended December 31
Expressed in thousands of dollars
Aerospace
Power Generation Project
Total Revenues
2010
627,113
105,395
732,508
2009
Change
681,393
5,221
686,614
(8.0)%
1918.7 %
6.7 %
Consolidated revenues for the year ended December 31, 2010 increased 6.7% to $732.5 million from $686.6 million last year, due
mainly to increased revenues earned on the Corporation's power generation project, offset by reduced revenues in the Aerospace
segment. Revenues in the Aerospace segment were primarily impacted by the movement in the Canadian dollar against the US
dollar and British Pound.
Aerospace Segment
Revenues for the Aerospace segment were as follows:
Twelve-months ended December 31
Expressed in thousands of dollars
Canada
United States
United Kingdom
Total Revenues
2010
317,342
187,555
122,216
627,113
2009
332,544
200,525
148,324
681,393
Change
(4.6)%
(6.5)%
(17.6)%
(8.0)%
Aerospace revenues for the year ended December 31, 2010 were $627.1 million, a decrease of $54.3 million or 8.0% over the
previous year. Revenues in Canada in 2010 decreased 4.6% in comparison to revenues earned in 2009 resulting from decreased
revenues in proprietary products, delays experienced on new programs and the strengthening of the Canadian dollar against the
US dollar. Revenues in the United States were also impacted negatively by the movement of the Canadian dollar in comparison to
the US dollar. In native currency, revenues in the United States were higher in 2010 when compared to 2009 as the Corporation’s
volumes increased on several single aisle aircraft programs. Revenues in the United Kingdom decreased in 2010 in comparison to
2009 revenues mainly as a result of the decline in the British Pound in comparison to the Canadian dollar and a reduction in cus-
tomer demand in 2010 when compared to 2009. Overall Aerospace revenues were impacted negatively by the movement of the
Canadian dollar in comparison to both the US dollar and the British Pound. If average exchange rates for both the US dollar and
British Pound experienced in 2009 remained constant in 2010, consolidated revenues for 2010 would have been approximately
$682.0 million or approximately $54.9 million higher than actually realized in 2010.
Power Generation Segment
Revenues for the Power Generation Project segment were as follows:
Twelve-months ended December 31
Expressed in thousands of dollars
Power Generation Project
Total Revenues
2010
105,395
105,395
2009
5,221
5,221
Change
1918.7%
Increased revenues in 2010 over the same period in 2009 resulted from the Ghana electric power generation project. The Corpora-
tion recognizes revenue on the project on a percentage of completion basis, hence the increase over the prior year represents the
increased progress towards completion of the project made during the year.
Magellan Aerospace 2010 Annual Report
Gross Profit
Twelve-months ended December 31
Expressed in thousands of dollars
Gross profit
Percentage of revenue
11
2010
93,336
12.7%
2009
82,312
12.0%
Change
13.4%
Gross profit in 2010 was $93.3 million, an increase of $11.0 million from 2009 levels of $82.3 million. As a percentage of revenues,
gross profit was 12.7% of revenues in 2010 compared to 12.0% of revenues in 2009. Increased gross profit in 2010 when com-
pared to 2009 can be attributed to the change in revenue mix, negotiated price increases and continued operational performance
improvements. The decline in both the US dollar and British Pound against the Canadian dollar, over the exchange rates prevailing
in 2009, contributed negatively to the gross margin in 2010.
Administrative and General Expenses
Twelve-months ended December 31
Expressed in thousands of dollars
Administrative and general expenses
Percentage of revenues
2010
40,026
5.5%
2009
44,489
6.5%
Administrative and general expenses decreased from $44.5 million in 2009 to $40.0 million in 2010. The decrease in administra-
tive and general expenses reflects the ongoing efforts of the Corporation to manage expenses and the effect on translation of the
weakening US dollar and British Pound exchange rates against the Canadian dollar.
Other
Twelve-months ended December 31
Expressed in thousands of dollars
Foreign exchange loss (gain)
Loss on sale of capital assets
Plant and program closure recoveries
Other
2010
680
267
(820)
(127)
2009
(6,383)
272
(642)
(6,753)
Included in other income is a foreign exchange loss of $0.7 million in 2010 versus a foreign exchange gain of $6.4 million in
2009, 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. In 2010 and 2009, the Corporation retired assets for a loss on disposal of $0.3
million in each year.
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 relating to the pension obligation on a pension plan that was in the process of being wound-
up. In 2010 and 2009, as a result of the market performance of the pension plan assets in each year, the Corporation reversed
a portion of the 2008 pension charge in the amount of $0.9 million and $0.6 million, respectively, on this pension plan that was
wound-up in 2010.
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 and long-term debt
Discount on sale of accounts receivable
Total interest expense
2010
14,651
4,006
677
402
19,736
2009
14,614
3,810
678
1,652
20,754
Magellan Aerospace 2010 Annual Report
12
Interest costs for 2010 were $19.7 million, a decrease of $1.0 million from 2009. Interest on bank indebtedness and long-term debt
in 2010 were consistent with 2009 levels. Convertible debenture interest increased in 2010 over 2009 as the principal amount as
well as the interest rate of convertible debentures increased in the second quarter of 2009. During the year, the Corporation sold
$65.4 million of accounts receivable at an annualized interest rate of 2.35% compared to $182.5 million of receivables sold in 2009
at an annualized interest rate of 5.17%.
Provision for (Recovery of) Income Taxes
Twelve-months ended December 31
Expressed in thousands of dollars
Recovery of current income taxes
Future income tax expense (recovery)
Total income tax expense (recovery)
Effective Tax Rate
2010
(311)
7,490
7,159
22.0%
2009
(63)
(2,100)
(2,163)
(9.1)%
The Corporation recorded an income tax expense in 2010 of $7.2 million on pre-tax income of $32.6 million, representing an
effective tax rate of 22.0%, compared to a recovery of $2.2 million on a pre-tax income of $23.8 million in 2009 for an effec-
tive tax rate of (9.1)%. In 2010, the Corporation recorded a valuation allowance of $0.6 million. During 2009, the Corporation
recognized additional deferred tax assets in Canada totalling $4.4 million as the Corporation has determined that it will be able
to benefit from some of its previously unrecorded future tax assets. In 2010, 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
(Increase) decrease in inventories
Decrease (increase) in prepaid expenses and other
(Decrease) increase in accounts payable and accrued charges
Net change in non-cash working capital items
Cash provided by operating activities
2010
(3,810)
(8,221)
26,289
(1,619)
12,639
74,760
2009
(19,083)
22,285
(28,191)
11,857
(13,132)
36,156
Operating activities for 2010 generated cash flows of $74.8 million compared to $36.2 million in the prior year. Changes in non-cash
working capital generated cash of $12.6 million as a result of decreases in prepaid expenses and other offset by a decrease in ac-
counts payable and accrued charges and increases in inventory and accounts receivable. Prepaid expenses decreased during the
year as advance payments made to suppliers to support the electric power generation project in Ghana were taken into expense
during the year. 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 2009. During 2010, inventory
increased to support the Corporation's electric power generation plant project in Ghana. In 2009, changes in non-cash working
capital of $13.1 million were principally a result of an increase in accounts receivables and prepaid expenses and other offset by an
increase in accounts payable and accrued charges and decrease in inventory.
Cash Flow from Investing Activities
Twelve-months ended December 31
Expressed in thousands of dollars
Purchase of capital assets
Proceeds from disposals of capital assets
Increase in other assets
Cash used in investing activities
Magellan Aerospace 2010 Annual Report
2010
(16,255)
206
(16,353)
(32,402)
2009
(21,675)
339
(1,274)
(22,610)
13
The Corporation invested $16.3 million in capital assets during the year, to upgrade its machinery and facilities, a decrease of $5.4
million from 2009. In addition, the Corporation advanced $20.3 million in deposits on capital assets of which $7.2 million has been
funded through government grants and loans. Capital additions were for advanced technology production equipment and informa-
tion technology systems, both designed to increase productivity, reduce cycle time and improve technology capability.
SELECTED QUARTERLY FINANCIAL INFORMATION
Expressed in millions of dollars except per share information
2010
Revenues
Net income
Net income per common share
Basic
Diluted
Mar 31
177.9
3.1
Jun 30
181.5
6.3
Sep 30
185.1
7.8
Dec 31 Mar 31
179.3
7.9
188.1
8.1
Jun 30
177.3
5.4
Sep 30
164.2
10.8
2009
Dec 31
165.8
2.0
0.15
0.06
0.35
0.13
0.43
0.16
0.45
0.16
0.41
0.41
0.27
0.12
0.57
0.20
0.09
0.05
Revenues and net income reported in the quarterly information was impacted by the fluctuations in the Canadian dollar exchange
rate in comparison to the US dollar and British Pound. The US dollar/Canadian dollar exchange rate in 2010 fluctuated reaching
a low of 0.9928 and a high of 1.0846. During 2009 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 December 31, 2009. The British Pound/Canadian dollar exchange rate in 2010 fluctu-
ated reaching a low of 1.4894 and a high of 1.7208. 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 December 31, 2009. Had exchange rates remained at levels experi-
enced in 2009, reported revenues in 2010 would have been higher by $25.6 million in the first quarter, $22.1 million in the second
quarter, $10.3 million in the third quarter and $8.0 million in the fourth quarter.
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, deprecia-
tion, amortization and certain non-cash charges). The Corporation has provided these measures because it believes this informa-
tion is used by certain investors to assess financial performance and EBITDA is a useful supplemental measure as it provides an
indication of the results generated by the Corporation’s principal business activities prior to consideration of how these activities
are financed and how the results are taxed in the various jurisdictions. Each of the components of this measure are calculated in
accordance with GAAP, but EBITDA is not a recognized measure under GAAP, and our method of calculation may not be compa-
rable with that of other companies. Accordingly, EBITDA should not be used as an alternative to net income as determined in ac-
cordance with GAAP or as an alternative to cash provided by or 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
Dividends on preference shares
Taxes
Stock based compensation
Depreciation and amortization
EBITDA
2010
25,408
19,736
880
7,159
582
35,008
88,773
2009
25,985
20,754
—
(2,163)
717
35,093
80,386
Magellan Aerospace 2010 Annual Report
14
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 ca-
pacity. Principal uses of cash are for operational requirements and capital expenditures.
Contractual Obligations
As at December 31, 2010
Expressed in thousands of dollars
Bank indebtedness
Long-term debt
Capital lease obligations
Equipment leases
Facility leases
Preference shares
Other long-term liabilities
Convertible debentures
Total Contractual Obligations
Total
117,046
64,868
1,270
2,058
13,321
12,000
9,996
40,000
260,559
Less than
1 year
117,046
47,631
807
1,745
1,417
8,000
4,560
—
181,206
1-3 Years
4-5 Years
—
6,112
463
295
3,370
4,000
2,719
40,000
56,959
—
2,108
—
18
2,090
—
148
—
4,364
After
5 Years
—
9,017
—
—
6,444
—
2,569
—
18,030
Major cash flow requirements for 2011 include the renewal of the operating credit facility, payments of equipment and facility
leases of $3.2 million and the retraction of the Preference Shares to a maximum of $8.0 million if permitted 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. The Convertible debentures become due on April 30,
2012 and are convertible, at the option of the holder at any time prior to April 30, 2012, in whole or in multiples of $1 million, into
fully paid and non-assessable common shares of the Corporation at a conversion rate of $1.00 per common share.
The Corporation has made contractual commitments to purchase $45.8 million of capital assets. The Corporation also has pur-
chase commitments, largely for materials made through the normal course of operations, of $160.7 million. The Corporation plans
to finance all of these capital commitments with operating cash flow and the 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, 2010, the amount of
receivables sold to third parties that remained outstanding was $9.7 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 receiv-
able or payable for transactions denominated in foreign currencies may vary due to changes in exchange rates and because the
non-Canadian dollar denominated financial statements of the Corporation’s subsidiaries may vary on consolidation into the report-
ing 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.
During 2010, the Corporation entered into US dollar foreign exchange collars as follows:
Maturity – less than 1 year
Maturity – less than 1 year
Maturity – less than 1 year
Magellan Aerospace 2010 Annual Report
Amount
3,500
3,500
18,000
Floor
1.02020
1.03010
1.03540
Ceiling
1.12360
1.11110
1.11110
15
In addition, the Corporation entered into forward exchange contracts to purchase British Pounds totalling $3.7 million at exchange
rates ranging from $1.53850 to $1.55550 Canadian per £1.00 British Pound expiring in 2011.
The fair values of the Corporation’s forward foreign exchange contracts are based on the current market values of similar contracts
with the same remaining duration as if the contracts had been entered into on December 31, 2010.
The mark-to-market on these financial instruments as at December 31, 2010 was an unrealized gain of $1.1 million [2009 –
$1.3 million] which has been recorded in other expenses in the year.
RELATED PARTY TRANSACTIONS
In 2009, the Corporation sold receivables to a corporation, which is controlled by a common director, in the amount of $65.4
million for a discount of $0.8 million representing an annualized interest rate of 7.5%. 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 with a
corporation, which is controlled by the Chairman of the Board of the Corporation. The loan bears interest at a rate of 10%. In 2010,
$nil [2009 - $1.7 million] of interest was paid in relation to the $50.0 million Original Loan.
On April 30, 2009 the Original Loan in principal amount of $50.0 million was amended and increased to $65.0 million. In 2010,
$5.5 million [2009 - $5.3 million] of interest and $19.0 million [2009 - $nil] of principal 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 $20.9 million
8.5% convertible unsecured subordinated debentures that were refinanced on April 30, 2009. The related cash interest paid in
the year was $nil [2009 - $0.8 million].
On April 30, 2009, the Chairman of the Board of the Corporation subscribed to $40.0 million of the New Convertible Debentures. Dur-
ing the period, the Corporation incurred interest of $4.0 million [2009 - $2.7 million] in relation to the New Convertible Debentures.
The Chairman of the Board of the Corporation provided a guarantee for the full amount of the Corporation’s operating credit
facility. An annual fee averaging 1.2% [2009 – 1.35%] of the guaranteed amount or $2.1 million [2009 - $2.8 million] was paid
in consideration for the guarantee.
During the year, the Corporation incurred consulting costs of $0.1 million [2009 - $0.1 million] payable to a corporation controlled
by the Chairman of the Board of the Corporation. As well, the Corporation paid legal fees of $0.1 million [2008 - $0.2 million] to
a law firm in which a director is a partner.
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements requires the Corporation to estimate the effect of various matters that are inherently
uncertain as of the date of the financial statements. Each of these required estimates varies with respect to the level of judg-
ment involved and the potential impact on the Corporation’s reported financial results. Estimates are deemed critical when
the Corporation’s financial condition, change in financial condition or results of operations would be materially impacted by a
different estimate or a change in estimate from period to period.
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 amend-
ments to pricing or other terms. Management’s assessment of the recoverability of amounts capitalized in inventory may be based
on judgments with respect to the outcome of these negotiations. If the negotiations are not successful or the final terms differ
from what the Corporation expects, the Corporation may be required to record a loss provision on this contract. The amount of
such provision, if any, cannot be reasonably estimated until such amendments are finalized.
Magellan Aerospace 2010 Annual Report
16
Asset Impairment
The Corporation evaluates long-lived assets for impairment when events or changes in circumstances indicate that the related
carrying amounts may not be recoverable. A long-lived asset is considered to be impaired if the total undiscounted estimated fu-
ture 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 management’s estimates of future results relating
to the long-lived assets. These estimates include various assumptions, which are updated on a regular basis as part of the
internal planning process.
The Corporation regularly reviews its investments to determine whether a permanent decline in the fair value below the carrying
value has occurred. In determining whether a permanent decline has occurred, management considers a number of factors that
would be indicative of a permanent decline including (i) a prolonged decrease in the fair value below the carrying value, (ii) severe
or continued losses in the investment and (iii) various other factors such as a decline or restriction in financial liquidity of an entity
in which the Corporation has an investment, which may be indicative of a decline in value of the investment. The consideration of
these factors requires management to make assumptions and estimates about future financial results of the investment. These
assumptions and estimates are updated by management on a regular basis.
Revenue Recognition
Revenues from certain long-term contracts are recognized on a percentage-of-completion basis. The percentage complete is cal-
culated based upon contract costs incurred to date compared with total estimated contract costs. The percentage complete is then
applied to total anticipated contract revenue to determine the period’s revenue.
Recognized revenues and margins are subject to revisions as the contract progresses to completion. The Corporation conducts
quarterly reviews, and a detailed annual review as part of the annual budget process, of the estimated costs to complete, percent-
age-of-completion estimates and revenues and margins recognized, on a contract-by-contract basis. The effect of any revision is
accounted for by way of a cumulative catch-up adjustment in the period in which the revision takes place.
If a contract review indicates a negative gross margin, the entire expected loss on the contract is recognized in the period in
which the negative gross margin is identified.
Income Taxes
The Corporation operates in several tax jurisdictions. As such, its income is subject to various rates and rules of taxation. The
breadth of the Corporation’s operations and the complexity of the taxing 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 inter-
pretation 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 Corpora-
tion 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 transactions in cur-
rencies 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 accounts for its US and UK subsidiaries as self-sustaining foreign operations.
Magellan Aerospace 2010 Annual Report
17
CHANGES IN ACCOUNTING POLICIES
On January 1, 2010, the Corporation adopted the following Canadian Institute of Chartered Accountants ("CICA") Handbook sections:
"Business Combinations," Section 1582, which replaces the previous business combinations standard. The standard requires as-
sets and liabilities acquired in a business combination, contingent consideration and certain acquired contingencies to be mea-
sured at their fair values as of the date of acquisition. In addition, acquisition related and restructuring costs are to be recognized
separately from the business combination and included in the statement of earnings. The adoption of this standard will impact the
accounting treatment of future business combinations entered into after January 1, 2010.
"Consolidated Financial Statements," Section 1601, which, together with Section 1602 below, replace the former consolidated fi-
nancial statements standard. Section 1601 establishes the requirements for the preparation of consolidated financial statements.
The adoption of this standard had no impact on the Corporation’s consolidated financial statements.
"Non-controlling Interests," Section 1602, which establishes the accounting for a non-controlling interest in a subsidiary in
consolidated financial statements subsequent to a business combination. The standard requires a non-controlling interest in a
subsidiary to be classified as a separate component of equity. In addition, net earnings and components of other comprehen-
sive income are attributed to both the parent and non-controlling interest. The adoption of this standard had no impact on the
Corporation’s consolidated financial statements.
FUTURE CHANGES IN ACCOUNTING POLICIES
The Corporation will adopt the following accounting standards recently issued by the CICA:
International Financial Reporting Standards
In February 2008, Canada’s Accounting Standards Board ("AcSB") confirmed that Canadian GAAP, as used by publicly account-
able enterprises, will be converged with International Financial Reporting Standards ("IFRS") effective January 1, 2011. The Cor-
poration will begin reporting under IFRS for the quarter ending March 31, 2011 including presenting an opening balance sheet at
January 1, 2010 and reporting under IFRS for comparative periods presented. The Corporation will also include its IFRS 1 note
in the March 31, 2011 interim unaudited consolidated financial statements.
The Corporation commenced its IFRS conversion efforts during 2008. The transition project consists of four elements: planning
and awareness raising; assessment; design; and implementation. The transition project addresses key areas such as accounting
policies, financial reporting, disclosure controls and procedures, information systems, education and training and other business
activities. The Corporation is tracking the changeover plan against key project milestones and will be ready to report all required
financial statement information and reconciliations for the quarter ending March 31, 2011.
Adoption of IFRS requires that the IFRS standards be applied on a retroactive basis with the exception of those specifically exempt-
ed under IFRS 1 for first-time adopters. Absent an exemption, any changes to existing standards must be applied retroactively and
reflected in the opening balance sheet of the comparative period. Noted within the summary table below are the Corporation’s
exemptions that it plans to apply upon transition. Other exemptions available under IFRS have been reviewed and are either not
applicable or are not expected to have a significant impact on the Corporation’s consolidated financial statements.
The Corporation is in the last element of the transition project, focusing on opening balance sheet adjustments and financial state-
ment presentation. The Corporation is in the process of quantifying the expected material differences between IFRS and the
current accounting treatment under Canadian GAAP. Differences with respect to recognition, measurement, presentation and
disclosure of financial information are disclosed in the tables below.
IFRS 1 (First-time adoption of IFRS)
IFRS 1 requires that an entity apply IFRSs effective at the end of its first IFRS reporting period respectively. However, IFRS does
provide certain mandatory exceptions and limited optional exemptions in specific areas of certain standards that will not require
retroactive application of IFRS. The following are the exemptions and exceptions under IFRS 1 that are significant to the Corpora-
tion and that will be applied in preparing the first financial statements under IFRS.
Magellan Aerospace 2010 Annual Report
18
AReAs oF iFRs
suMMARy oF eXeMPtions And eXcePtions
Business
combinations
Employee
benefits
IFRS 1 allows for the guidance under IFRS 3 (revised), Business Combinations, to be applied either retro-
spectively or prospectively. The Corporation has elected to adopt IFRS 3 (revised) prospectively. Accordingly,
all business combinations on or after January 1, 2010 will be accounted for in accordance with IFRS 3 (re-
vised) and prior business combinations will not be restated.
IFRS 1 provides the option of retrospectively applying either the "corridor" approach under International Ac-
counting Standard ("IAS") 19, Employee Benefits, for the recognition of actuarial gains or losses, or recognize
all cumulative gains or losses deferred under Canadian GAAP in opening retained earnings at the date of
transition. The Corporation will elect to recognize all cumulative actuarial gains or losses that existed at the
date of transition in opening retained earnings for all employee benefit plans at the operating companies.
The Corporation's opening shareholders' equity is expected to decrease.
Property, plant
and equipment
Under IAS 16, Property, Plant and Equipment, an entity is required to choose to account for each class
of property, plant and equipment, using either the cost model or the revaluation model. At date of tran-
sition, the Corporation has elected to use the depreciated historical cost to value all classes of property
and equipment.
The Corporation does not expect an impact to opening shareholders' equity upon transition to IFRS.
Cumulative
translation
differences
IAS 21, The Effects of Changes in Foreign Exchange Rates, requires an entity to determine the translation
differences in accordance with IFRS from the date on which a subsidiary was formed or acquired. IFRS 1 al-
lows cumulative translation differences for all foreign operations to be deemed zero at the date of transition
to IFRS, with future gains or losses on subsequent disposal of any foreign operations to exclude translation
differences arising from periods prior to the date of transition to IFRS. The Corporation will deem all cumula-
tive translation differences to be zero on transition to IFRS.
The Corporation expects to reclassify amounts between opening retained earnings and accumulated other
comprehensive earnings, which are both within shareholders' equity.
Borrowing costs
IAS 23, Borrowing Costs, requires an entity to capitalize the borrowing costs related to all qualifying as-
sets. The Corporation plans to adopt IAS 23 prospectively. Accordingly, borrowing costs related to qualify-
ing assets on or after January 1, 2010 will be capitalized.
The Corporation does not expect an impact to opening shareholders' equity upon transition to IFRS
Share based
payments
IFRS 2, Share Based Payments, applies to situations where an entity grants shares or share options to
employees or to other parties providing goods and services and requires these payments to be recognized
as an expense in the entity’s financial statements. The Corporation plans to not apply IFRS 2 to equity in-
struments granted on or before November 7, 2002, or granted after November 7, 2002, that vested before
January 1, 2010. For equity instruments with a cash-settlement option the Corporation plans not to apply
IFRS 2 to liabilities that were settled before January 1, 2010.
The Corporation expects to reclassify amounts between opening retained earnings and contributed surplus,
which are both within shareholders' equity.
Magellan Aerospace 2010 Annual Report
19
IFRS to Canadian GAAP difference
In addition to the exemptions and exceptions discussed above, the following discussion explains the significant accounting
policy differences between Canadian GAAP and IFRS that may result in material adjustments to the Corporation’s consolidated
financial statements.
Accounting
PoLicy AReAs
Presentation
of financial
statements
iMPAct oF PoLicy AdoPtion
Under IAS 1, Presentation of Financial Standards ("IAS 1"), a complete set of financial statements should
include a statement of financial position, a statement of comprehensive income, a statement of changes in
equity, and a statement of cash flows, accounting policies, and explanatory notes. IAS 1 prescribes various
formats and requirements for statement presentation and disclosure. The Corporation expects the adoption
of IAS 1 to result in several changes to the format of the financial statements, in expanded note disclosure,
and in different classification and presentation of line items in our consolidated statements of financial posi-
tion and consolidated statements of income.
Foreign Currency
Under IAS 21, The Effects of Changes in Exchange Rate ("IAS 21"), each entity must determine its functional
currency of the primary economic environment in which the entity operates. This assessment is made by first
evaluating primary indicators, which include: 1) currency which mainly influences sales prices; and 2) currency
which mainly influences labour material and other costs. If these indicators are mixed, and the functional cur-
rency is not obvious, secondary indicators are evaluated to determine the functional currency.
Employee
benefits
Under Canadian GAAP, functional currency for a reporting entity is determined based on a number of criteria
including: 1) currency which determines sales prices; 2) denomination of labour, materials and other costs;
and 3) funding of the entities operations. Historically, based on facts and circumstances the Corporation has
determined its functional currency under Canadian GAAP to be the Canadian dollar.
Under IAS 19, Employee Benefits ("IAS 19"), the Corporation will elect to recognize all actuarial gains
and losses immediately in a separate statement of comprehensive income without recognition to the
income statement in subsequent periods. As a result, actuarial gains and losses are not amortized to
the income statement but rather are recorded directly to comprehensive income at the end of each
reporting period. The Corporations’ operating companies will adjust their pension expense to remove
the amortization of actuarial gains or losses. The Corporation currently uses the "corridor" approach to
recognize the actuarial gains or losses that arise in calculating the present value of the defined benefit
obligation and the fair value of plan assets.
IAS 19 requires the Corporation to expense vested past service costs immediately and unvested
service costs on a straight-line basis until the benefits become vested. The Corporation currently am-
ortizes past service costs over the expected average remaining service to life to full eligibility of the
employees covered by the plan. In addition IFRIC 14, The Limit on a Defined Benefit Asset - Minimum
Funding Requirements, requires the Corporation to take into account solvency funding contributions
it currently makes to its pension plans to cover it solvency deficit when determining its pension asset
or obligation.
Magellan Aerospace 2010 Annual Report
20
Impairment
of assets
Under IAS 36, Impairment of Assets ("IAS 36"), an impairment loss is recognized if the recoverable
amount, defined as the higher of the asset’s fair value less costs to sell and its value in use, is less
than the carrying amount. Value in use is defined as being equal to the present value of future cash
flows expected to be derived from the asset in its current state. In the absence of an active market, fair
value less costs to sell may also be determined using discounted cash flows. The use of discounted
cash flows under IFRS to test and measure asset impairment differs from Canadian GAAP where un-
discounted future cash flows are used to compare against the asset’s carrying value to determine if
impairment exists. This may result in more frequent write-downs in the carrying value of assets under
IFRS. In addition, previous impairment losses may be reversed where circumstances change such that
the impairment loss has reduced.
Property, plant
and equipment
Consistent with Canadian GAAP, IAS 16, Property, Plant and Equipment ("IAS 16") requires separable
components of property, plant and equipment to be recognized initially at cost. The detailed assess-
ment showed that no changes to current component accounting are required under IFRS.
Under IAS 16, an entity is required to choose to account for each class of property, plant and equip-
ment, using either the cost model or the revaluation model. The Corporation will account for each
class of property, plant and equipment using the cost model.
IAS 16 also, provides specific guidance such that when an individual component of an item within
property, plant and equipment is replaced and capitalized, the carrying value of the replaced compo-
nent of the original asset must be derecognized even if the replacement part was not separately ac-
counted for.
Leases
When classifying capital leases (or "finance leases"), more judgment is applied and additional qualitative
indicators are used under IAS 17, Leases ("IAS 17") to determine lease classification due to the lack of
quantitative threshold as specified in Canadian GAAP. The Corporation identified certain leases with clas-
sification differences between Canadian GAAP and IFRS, which may result in certain operating leases
under Canadian GAAP being classified as capital leases under IFRS.
Provisions,
contingent
liabilities and
contingent
assets
IAS 37, Provisions, Contingent Liabilities and Contingent Assets ("IAS 37") requires an entity to recognize a
provision when a contract is determined to be onerous. A contract is onerous when the unavoidable costs
of meeting the obligations under the contract exceed the economic benefits expected to be received
under it. Canadian GAAP only requires the recognition of such a liability in certain prescribed situations.
This difference could result in the recognition of a liability under IFRS that was not previously recognized
under Canadian GAAP.
Other measurement differences under IFRS could result in the earlier recognition of provisions or the recog-
nition of a different amount than under Canadian GAAP.
IFRS also requires provisions for which payment extends beyond one year to be adjusted for time
value of money.
Magellan Aerospace 2010 Annual Report
21
Government
grants
Under IAS 20, Accounting for Government Grants and Disclosure of Government Assistance ("IAS 20"),
government grants are recognized when there is reasonable assurance that the entity will comply with the
conditions attached to them and the grants will be received. Under Canadian GAAP, government grants are
recognized when received.
In addition, IAS 20 accounts for the payment of royalties made in relation to government grants received
against capital assets as an increase in the asset value with a corresponding increase in the depreciation
charge against the asset. Under Canadian GAAP, the Corporation recognizes these royalty payments as a
cost of revenues when incurred and as a result an adjustment may be required upon transition to IFRS.
Financial
Instruments
Under IAS 39, Financial Instruments ("IAS 39"), the criterion for derecognition of receivables under IFRS is
different from Canadian GAAP as Canadian GAAP focuses mainly on surrendering control over the trans-
ferred assets while IFRS focuses on the transfer of substantive risks and rewards. A change will be required
to the Corporation’s opening balance sheet with respect to certain receivables which the company sells and
which, under IFRS, the transfer of substantive risks and rewards does not occur.
Income taxes
While IAS 12, Income Taxes ("IAS 12") is similar to the existing Canadian GAAP standard, any material adjust-
ments to balances resulting from the adoption to IFRS would have a corresponding effect on future income
tax balance.
Investment
properties
Interests in
joint ventures
Under Canadian GAAP, an entity is required to present both current and long-term future income taxes on its
balance sheet. Under IFRS, all future income taxes will be presented as long-term assets or liabilities.
Investment property as defined by IAS 40, Investment Properties ("IAS 40") requires any item of property,
plant and equipment to be presented as a separate item on the face of the balance sheet called "Investment
Property" where the property is held to earn rentals or for capital appreciation. If the cost model is chosen
for recording purposes, then fair value information is required to be disclosed in the notes to the financial
statements. The Corporation holds properties that earn rental income from third parties in addition to hold-
ings of excess land. The Corporation has determined that these properties meet the definition of investment
property under IAS 40 and therefore may be separately disclosed as investment property in the consolidated
financial statements.
Under IAS 31, Interest in Joint Ventures ("IAS 31"), an entity may account for interest in joint ventures using
either the equity method or the proportionate consolidation method. Canadian GAAP requires the use of
proportionate consolidation method to account for joint ventures. In 2007, the IASB issued an exposure draft
to amend IAS 31, thereby prohibiting proportionate consolidation. The Corporation is not expecting the new
standard to become effective before the Corporation’s changeover date. Since proportionate consolidation
is permitted under the current IAS 31, the Corporation has decided to maintain it as the current accounting
policy choice.
The Corporation acknowledges that the above anticipated changes in accounting policy are not an exhaustive list of all possible
significant items that will occur upon the transition to IFRS. The Corporation will continue to monitor developments in and interpre-
tations of standards as well as industry practices and may change accounting policies described in the above tables.
The Corporation has completed its IFRS training for key financial staff impacted by IFRS, and further investments in training and
resources will be made throughout the transition to facilitate any changes in IFRS. The Corporation also continues to deliver it's
communication plan, informing key internal stakeholders about the anticipated effects of the IFRS transition, and to provide status
updates to the Audit Committee.
Magellan Aerospace 2010 Annual Report
22
The Corporation’s IFRS changeover plan includes the modification of internal controls over financial reporting for changes in ac-
counting policy arising from the transition to IFRS and the education of key stakeholders including the Board of Directors, manage-
ment and employees. The impact on the Corporation’s information technology, data systems and processes will be dependent
upon the magnitude of change resulting from these and other items. At this time, no significant impact on information or data
systems has been identified and the Corporation does not expect to make changes which will materially affect the internal controls
over financial reporting.
The Corporation continues to monitor the potential changes proposed by the International Accounting Standards Board (IASB) and
considers the impact changes in the standards would have on the Corporation’s operations. In November 2009, the IASB issued
IFRS 9 to amend how financial instruments are classified and measured. The standard is effective for annual periods beginning on
or after January 1, 2013. The Corporation is analyzing the impact the new standard will have on its financial assets and liabilities.
The Corporation is monitoring the potential impact of other changes to financial reporting processes, disclosure controls and pro-
cedures, and internal controls over financial reporting though the Corporation does not expect the initial adoption of IFRS will have
a considerable impact on the disclosure controls and procedures for financial reporting. The Corporation continues to capture IFRS
comparative information for fiscal 2010 to quantify the effects of the potential significant difference between IFRS and Canadian
GAAP which may or may not be material.
CONTROLS AND PROCEDURES
Based on the current Canadian Securities Administrators (the "CSA") rules under National Instrument 52-109 Certification of
Disclosure in Issuers’ Annual and Interim Filings, the Chief Executive Officer and Chief Financial Officer (or individuals perform-
ing similar functions as a chief executive officer or chief financial officer) are required to certify as at December 31, 2010 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 prevent all
errors, misstatements or fraud. In addition, internal control over financial reporting that management has designed and estab-
lished may be circumvented and rendered ineffective as a result of unauthorized acts of individuals through collusion or manage-
ment 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 limita-
tions 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 operat-
ing effectiveness of disclosure controls and procedures and internal control over financial reporting. As of December 31, 2010,
an evaluation was carried out, under the supervision of the President and Chief Executive Officer and the Vice-President, Fi-
nance and Corporate Secretary, of the effectiveness of the Corporation’s disclosure controls and internal controls over financial
reporting, as those terms are defined in National Instrument 52-109. Based on that evaluation, the Corporation’s management
concluded that the Corporation’s design and operating disclosure controls and procedures and internal control over financial
reporting were effective as of December 31, 2010.
No changes were made in the Corporation’s internal control over financial reporting during the Corporation’s most recent
interim period, that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control
over financial reporting.
Magellan Aerospace 2010 Annual Report
23
OTHER INFORMATION
The authorized capital of the Corporation consists of an unlimited number of Preference Shares, issuable in series, and an unlim-
ited number of common shares. As at March 23, 2011, 18,209,001 common shares were outstanding and 1,200,013 Preference
Shares were outstanding. 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.
At December 31, 2010, the Corporation had outstanding approximately $40.0 million of 10.0% convertible secured subordi-
nated 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.
Magellan Aerospace 2010 Annual Report
MAnAgeMent's RePoRt
24
The consolidated financial statements of Magellan Aerospace Corporation were prepared by management in accordance with ac-
counting principles generally accepted in Canada. The financial and operating information presented in this report is consistent with
that shown in the consolidated financial statements.
Management maintains a system on internal controls to provide reasonable assurance that all assets are safeguarded and to fa-
cilitate the preparation of relevant, reliable and timely financial information. External auditors appointed by the shareholders have
examined the consolidated financial statements. The Audit Committee, consisting of non management directors, has reviewed
these consolidated financial statements with management and the auditors and has reported to the Board of Directors. The Board
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 23, 2011
Magellan Aerospace 2010 Annual Report
indePendent AuditoR's RePoRt
25
To the shareholders of Magellan Aerospace Corporation
We have audited the accompanying consolidated financial statements of Magellan Aerospace Corporation, which comprise the
consolidated balance sheets as at December 31, 2010 and 2009, and the consolidated statements of operations and retained earn-
ings, cash flows and comprehensive income for the years then ended, and a summary of significant accounting policies and other
explanatory information.
Management’s Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with
Canadian generally accepted accounting principles, and for such internal control as management determines is necessary to en-
able the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our
audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical
requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements
are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial
statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material mis-
statement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor
considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order
to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the ef-
fectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and
the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consoli-
dated financial statements.
We believe that the audit evidence we have obtained in our audit is sufficient and appropriate to provide a basis for our
audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Corporation
as at December 31, 2010 and 2009, and the result of its operations and its cash flows for the years then ended in accordance with
Canadian generally accepted accounting principles.
Toronto, Canada,
March 23, 2011
Chartered Accountants
Licensed Public Accountants
Magellan Aerospace 2010 Annual Report
consoLidAted BALAnce sheets
26
2010
2009
$
24,952
84,287
151,741
11,838
3,742
276,560
239,508
25,654
54,668
39,791
18,082
377,703
654,263
117,046
135,528
8,000
48,438
309,012
17,700
38,901
4,000
13,391
5,436
79,428
214,440
5,289
13,565
109,145
(76,616)
265,823
654,263
$
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
As at December 31
(Expressed in thousands of dollars)
Assets
Current
Cash
Accounts receivable (NOTES 18 and 20 [f])
Inventories (NOTE 3)
Prepaid expenses and other (NOTE 20 [h])
Future income tax assets (NOTE 16)
Total current assets
Capital assets, net (NOTE 4)
Technology rights (NOTE 5)
Deferred development costs (NOTE 6)
Other assets (NOTES 17 AND 20 [j])
Future income tax assets (NOTE 16)
Total long-term assets
Liabilities And shareholders' equity
Current
Bank indebtedness (NOTE 7)
Accounts payable and accrued charges (NOTE 20 [i])
Preference shares (NOTE 9)
Current portion of long-term debt (NOTE 8)
Total current liabilities
Long-term debt (NOTE 8)
Convertible debentures (NOTE 10)
Preference shares (NOTE 9)
Future income tax liabilities (NOTE 16)
Other long-term liabilities (NOTE 11)
Total long-term liabilities
Shareholders’ equity
Capital stock (NOTES 9, 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)
See accompanying notes
On behalf of the Board:
n. Murray edwards
Director
William A. dimma
Director
Magellan Aerospace 2010 Annual Report
consoLidAted stAteMents oF oPeRAtion And RetAined eARnings
27
Years ended December 31
(Expressed in thousands of dollars except per share information)
Revenues
Cost of revenues
Gross profit
Expenses
Administrative and general expenses (NOTE 19)
Other (NOTE 20 [e])
Dividends on preference shares (NOTE 9)
Interest (NOTES 7 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
Dividends of preference shares (NOTE 9)
Net income for the year
Retained earnings, end of year
Net income per common share (NOTE 12)
Basic
Diluted
See accompanying notes
$
2010
732,508
639,172
93,336
$
2009
686,614
604,302
82,312
40,026
127
880
19,736
60,769
32,567
(331)
7,490
7,159
25,408
84,137
(400)
25,408
109,145
1.37
0.51
44,489
(6,753)
—
20,754
58,490
23,822
(63)
(2,100)
(2,163)
25,985
59,752
(1,600)
25,985
84,137
1.34
0.61
Magellan Aerospace 2010 Annual Report
consoLidAted stAteMents oF cAsh FLoWs
28
2010
2009
$
25,408
$
25,985
35,008
267
(3,219)
271
582
677
3,127
62,121
12,639
74,760
(16,255)
206
(16,353)
(32,402)
(21,128)
(21,900)
12,813
—
—
110
—
(8,000)
(400)
(38,505)
(1,542)
2,311
22,641
24,952
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
Years ended December 31
(Expressed in thousands of dollars)
Operating Activities
Net Income
Add (deduct) items not affecting cash
Depreciation and amortization
Net loss on sale of capital assets
Employee future benefits
Deferred revenue
Stock-based compensation (NOTE 13)
Accretion of convertible debentures
Future income tax expense (recovery)
Net change in non-cash working capital items
related to operating activities (NOTE 20 [c])
Cash provided by operating activities
Investing Activities
Purchase of capital assets
Proceeds from disposal of capital assets
Increase in other assets
Cash used in investing activities
Financing Activities
Decrease in bank indebtedness
Decrease in long-term debt
Increase in long-term debt
Decrease in convertible debentures
Increase in convertible debentures
Increase in other long-term liabilities
Issuance of common shares
Redemption of preference shares
Dividends on preference shares
Cash (used in) 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
Magellan Aerospace 2010 Annual Report
consoLidAted stAteMents oF coMPRehensive incoMe
29
Years ended December 31
(Expressed in thousands of dollars)
Net income for the year
Other comprehensive loss:
Net unrealized loss on translation of net
investment in foreign operations (NOTE 14)
Comprehensive income
See accompanying notes
2010
25,408
$
2009
25,985
$
(10,169)
15,239
(20,486)
5,499
Magellan Aerospace 2010 Annual Report
notes to consolidated Financial statements
[expressed in thousands of dollars except share and per share data]
30
1. SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The consolidated financial statements have been prepared by management in accordance with Canadian generally accepted
accounting principles ("GAAP") within the framework of the significant accounting policies summarized below. The consolidated
financial statements of Magellan Aerospace Corporation [the "Corporation"] include the accounts of the Corporation and its
wholly-owned subsidiaries.
These consolidated financial statements have been prepared on the "going concern" basis which 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.
Segment reporting
The Corporation's presentation of reportable segments is based on how management has organized the business in making oper-
ating and capital allocation decisions and assessing performances.
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 contingent assets and liabilities at
the date of the consolidated financial statements; and the reported amount of revenue and expenses during the reporting period.
Significant estimates made by management include, but are not limited to, average production costs, asset impairment, allowance
for uncollectible accounts receivable, allowance for inventory obsolescence, 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 as-
sured 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 calcu-
lated based upon contract costs incurred to date compared with total estimated contract costs. The percentage complete is then
applied to total anticipated contract revenue to determine the period’s revenue. A provision for the estimated loss is made when
contract costs are expected to exceed estimated contract revenue.
The Corporation enters into transactions that represent multiple-element arrangements. These multiple-element arrangements
are assessed to determine whether they can be separated into more than one unit of accounting or element for the purpose
of revenue recognition. When the appropriate criteria for separating revenue into more than one unit of accounting is met and
there is vendor specific objective evidence of fair value for all units of accounting or elements in an arrangement, the arrange-
ment consideration is allocated to the separate units of accounting or elements based on each unit's relative fair value. When
the fair value of a delivered element has not been established, the Corporation uses the residual method to recognize revenue
if the fair value of delivered elements is determinable. This vendor specific evidence of fair value is established through prices
charged for each revenue element when that element is sold separately. The revenue recognition policies described above are
then applied to each unit of accounting.
Magellan Aerospace 2010 Annual Report
notes to consolidated Financial statements
[expressed in thousands of dollars except share and per share data]
31
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 completion 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.
Capital assets
Capital assets are recorded at cost less related government grants and investment tax credits and are depreciated over their esti-
mated 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 carrying value of
the asset exceeds the estimated undiscounted cash flows from use of the asset, an impairment loss is recognized. Impair-
ment losses are measured as the amount by which the carrying value of an asset exceeds its fair value. Fair value is based on
discounted cash flows.
Technology rights
Included in technology rights are costs to purchase technological rights applicable to a specific long-term contract. These costs will
be amortized on a unit of production basis to cost of revenues over the 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 investment 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 unit 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 ex-
penses as incurred.
Magellan Aerospace 2010 Annual Report
notes to consolidated Financial statements
[expressed in thousands of dollars except share and per share data]
32
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 convertible 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 convertible debentures mature without being converted, the remaining conver-
sion 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 unamortized 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. The Corporation’s operations
outside of Canada are considered self-sustaining. Consequently, the assets and liabilities are translated to Canadian dollars using
the year-end exchange rates and revenue and expenses are translated at the average rates during the year. Exchange gains or
losses on translation of the Corporation’s net equity investment in these operations are deferred as a separate component of ac-
cumulated other comprehensive loss.
The appropriate amounts of exchange gains or losses accumulated in other accumulated comprehensive loss are reflected in in-
come 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 certain compen-
sated absences) related to employees’ current service is charged to income annually. The cost is computed on an actuarial basis
using the projected benefit method prorated on services and management’s best estimates of investment yields, salary escala-
tion 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 accu-
mulated contributed surplus amount is credited to capital stock. Stock options which have a cash settlement feature 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 liabilities are de-
termined 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.
Magellan Aerospace 2010 Annual Report
notes to consolidated Financial statements
[expressed in thousands of dollars except share and per share data]
33
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 conver-
sion 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
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 net in-
come per common 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 purposes. For the year ended Decem-
ber 31, 2010, the Corporation’s derivative contracts were not designated as hedges and as a result are recorded on the consolidat-
ed 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 con-
tinues 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] International Financial Reporting Standards
In February 2008, Canada’s Accounting Standards Board ("AcSB") confirmed that Canadian GAAP, as used by publicly accountable
enterprises, will be converged with International Financial Reporting Standards ("IFRS") effective January 1, 2011. While IFRS uses
a conceptual framework similar to Canadian GAAP, there are significant differences on recognition, measurement and disclosures.
IFRSs have now been incorporated into the CICA Accounting Handbook effective for interim and annual financial statements relat-
ing to fiscal years beginning on or after January 1, 2011.
The Corporation will prepare financial statements in accordance with IFRS starting with the interim financial statements for the
quarter ended March 31, 2011. These statements will require 2010 comparatives in accordance with IFRS. As a result, the financial
statements that have been prepared under Canadian GAAP for 2010 will need to be restated to conform to IFRS for comparative
purposes. The Corporation’s transition date is January 1, 2010.
Magellan Aerospace 2010 Annual Report
notes to consolidated Financial statements
[expressed in thousands of dollars except share and per share data]
34
2. CHANGES IN ACCOUNTING POLICIES
On January 1, 2010, the Corporation adopted the following Canadian Institute of Chartered Accountants ("CICA") Handbook
sections:
"Business Combinations," Section 1582, which replaces the previous business combinations standard. The standard requires as-
sets and liabilities acquired in a business combination, contingent consideration and certain acquired contingencies to be mea-
sured at their fair values as of the date of acquisition. In addition, acquisition related and restructuring costs are to be recognized
separately from the business combination and included in the statement of earnings. The adoption of this standard will impact the
accounting treatment of future business combinations entered into after January 1, 2010.
"Consolidated Financial Statements," Section 1601, which, together with Section 1602 below, replace the former consolidated fi-
nancial statements standard. Section 1601 establishes the requirements for the preparation of consolidated financial statements.
The adoption of this standard had no impact on the Corporation’s consolidated financial statements.
"Non-controlling Interests," Section 1602, which establishes the accounting for a non-controlling interest in a subsidiary in consoli-
dated financial statements subsequent to a business combination. The standard requires a non-controlling interest in a subsidiary
to be classified as a separate component of equity. In addition, net earnings and components of other comprehensive income are
attributed to both the parent and non-controlling interest. The adoption of this standard had no impact on the Corporation’s con-
solidated financial statements.
3. INVENTORIES
Production costs of contracts currently in process
Advances and progress billings
$
2010
154,441
(2,700)
151,741
$
2009
156,460
(9,212)
147,248
Inventory is valued at the lower of cost and net realizable value. The cost of raw materials is calculated on an average cost basis.
The cost of work in process and finished goods inventory also includes an allocation of overhead for indirect manufacturing costs
and direct labour expenses.
Cost of sales for the year ended December 31, 2010 was $639,172 [2009 - $604,302] which included $621,426 [2009 - $593,396]
of costs associated with inventory. The remaining costs of $17,746 [2009 - $10,906] related principally to freight, commissions and
other direct costs of revenues.
During the year ended December 31, 2010, the Corporation recorded a net reduction in the provision of $661 [2009 – recognized
a provision of $2,337] related to slow moving and obsolete inventory. The net reduction in the provision is due to the expected
recovery of inventory previously provided for.
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 negotiations are not successful or the final
terms differ from what the Corporation expects, the Corporation may be required to record a loss provision on this contract. The
amount of such provision, if any, cannot be reasonably estimated until such amendments are finalized.
Magellan Aerospace 2010 Annual Report
notes to consolidated Financial statements
[expressed in thousands of dollars except share and per share data]
4. CAPITAL ASSETS
Land
Buildings
Machinery, equipment and tooling
Land
Buildings
Machinery, equipment and tooling
35
2010
Net book value
$
14,504
58,538
166,466
239,508
2009
Net book value
$
15,014
61,943
177,743
254,700
$
$
Cost
14,504
93,817
350,809
459,130
Cost
15,014
95,476
351,646
462,136
Accumulated
depreciation
$
—
35,279
184,343
219,622
Accumulated
depreciation
$
—
33,533
173,903
207,436
Included in machinery, equipment and tooling are construction in progress expenditures of $4,423 [2009 - $738].
The above amounts include $6,507 [2009 - $6,580] of capital assets under capital leases and accumulated depreciation of
$2,624 [2009 - $2,308] related thereto. Depreciation recorded in the year related to capital assets under capital leases totaled
$339 [2009 - $352].
5. TECHNOLOGY RIGHTS
As at December 31, 2010, the Corporation’s technology rights amounted to $25,654 [2009 - $29,158] net of accumulative amor-
tization of $13,251 [2009 - $9,832]. 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.
6. DEFERRED DEVELOPMENT COSTS
As at December 31, 2010, the Corporation’s deferred development costs amounted to $54,668 [2009 - $59,510] net of accu-
mulative amortization of $30,418 [2009 - $23,175]. 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 market, 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, 2010, $7,701 [2009 - $7,360] was expensed as amortization of deferred development costs.
7. BANK INDEBTEDNESS
The Corporation has an operating credit facility, with a syndicate of banks, with a Canadian limit of $105,000 plus a US limit of
$70,000 ($174,622 at December 31, 2010). Bank indebtedness of $117,046 [2009 - $140,590] is payable on demand and bears
interest at the bankers’ acceptance or LIBOR rates, plus 2.75% (3.60% at December 31, 2010 [2009 – bankers’ acceptance or LI-
BOR rates, plus 3.25% or 3.51%]). Included in the amount outstanding at December 31, 2010 is US $21,113 [2009 – US $43,630].
At December 31, 2010, the Corporation had drawn $119,838 under the operating credit facility, including issued letters of credit
totaling $2,792 such that $54,784 was unused and available. The operating credit facility expires on May 21, 2011 and is extend-
able for unlimited one-year periods subject to mutual consent of the syndicate leaders and the Corporation. 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.
Magellan Aerospace 2010 Annual Report
notes to consolidated Financial statements
[expressed in thousands of dollars except share and per share data]
8. LONG-TERM DEBT
Property mortgage [a]
Other loans [b]
Related party loans [c]
Obligations under capital leases [d]
Less current portion
36
2009
3,314
5,941
64,578
2,204
76,037
2,321
73,716
$
$
2010
2,793
16,411
45,664
1,270
66,138
48,438
17,700
[a]
The property mortgage of $2,793 (£1,800) is comprised of financing of certain land in the United Kingdom acquired 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, 2010 was 1.4% [2009 – 1.4%]. The fair value of this property mortgage was not significantly different
from its recorded amount.
[b] Other loans include loans of $9,844 [2009 - $5,050] provided by governmental authorities ["Government Loans"] that bear
interest of approximately 1.2% to 2.0% [2009 – 2.0%] and a $5,968 (US$6,000) 10 year bank loan ["Commercial Loan"]
entered into during 2010 by the Corporation to finance equipment and leasehold improvements. The same equipment is
collateral for the Commercial Loan which bears interest at LIBOR plus 2.75%, which at December 31, 2010 was 3.04%.
At December 31, 2010, the Corporation has the availability to draw an additional $13,264 against the Government Loans
and $13,924 (US$14,000) against the Commercial Loan.
[c] On January 31, 2008, Edco Capital Corporation ["Edco"], a corporation controlled by the Chairman of the Board of the Corpora-
tion, provided a $50,000 loan due July 1, 2009 [the "Original Loan"] to the Corporation. The Original Loan bears interest at a rate
of 10% per annum calculated and payable monthly and is collateralized and subordinated to the Corporation’s existing operat-
ing 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 March 26, 2010, the Original Loan was further extended and restated. 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 payment
of an aggregate fee to Edco equal to 1% of the principal amount. The Corporation was also granted the option, exercisable
on or before July 1, 2011, to renew the Original Loan for a further one year period on payment of a an additional one time
extension fee of 1% of the principal amount of the loan and on the condition the operating 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 Corporation. The Corporation has the right to prepay the Original
loan at anytime without penalty and during 2010 the Corporation prepaid $19,000 of the principal amount. As at December
31, 2010 the principal amount outstanding was $46,000.
[d] Obligations under capital leases bear interest at a rate of 7.9% to 14.3%. Future minimum lease payments under the capital
leases in effect at December 31, 2010 are as follows:
2011
2012
Total minimum capital lease payments
Less capital lease payments representing interest
Principal amount of capital lease payments
Magellan Aerospace 2010 Annual Report
$
895
476
1,371
101
1,270
notes to consolidated Financial statements
[expressed in thousands of dollars except share and per share data]
The expected maturities for the next five years and thereafter for long-term debt are as follows:
2011
2012
2013
2014
2015
Thereafter
9. PREFERENCE SHARES
Outstanding at December 31, 2009 and 2008
Retraction
Outstanding at December 31, 2010
Number of
Shares
2,000,000
799,987
1,200,013
$
37
48,438
2,256
2,124
2,195
2,108
9,017
66,138
Stated
Capital
19,949
7,949
12,000
On May 27, 2005, the Corporation issued 2,000,000 8.0% Cumulative Redeemable First Preference Shares Series A (the
"Preference Shares") at a price of $10.00 per Preference Share for total gross proceeds of $20,000. Each Preference Share is
convertible at the holder’s option into 0.67 common shares of the 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 Preference
Shares are redeemable, under certain conditions, at the option of the Corporation at $10.00 per Preference Share plus accrued and
unpaid dividends. In addition, subject to the terms of the Ontario Business Corporations Act (the "OBCA"), the Preference Shares
will be retractable by the holder at the issue price plus accrued and unpaid dividends: i) from July 1, 2010 in the event that at any
point after such date the volume weighted average trading price of the common shares on the TSX for at least 20 trading days in
any consecutive 30-day period ending on the fifth trading day prior to such date is less than $12.00 per common share; or (ii) upon
the occurrence of a change of control of the Corporation involving the acquisition of voting control or direction over at least 66-2/3%
of the common shares and instruments convertible into common shares.
The acquisition of the New Convertible Debentures on April 30, 2009 [Note 10] 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 un-
paid 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.
On March 26, 2010 the Corporation’s operating credit facility was amended to permit the Corporation to retract up to 20% ($4,000)
of the Corporation’s 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 $25,000 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.
Magellan Aerospace 2010 Annual Report
notes to consolidated Financial statements
[expressed in thousands of dollars except share and per share data]
38
On April 30, 2010 and October 31, 2010, the Corporation completed the retraction of 399,994 and 399,993 respectively of its
2,000,000 Preference Shares, for total consideration paid of $8,000, as was permissible under the amended operating credit facil-
ity. Effective as of the Retraction Date, the holders of these Preference Shares ceased to be holders of these Preference Shares
and were entitled to receive the retraction price of $10.00 for each Preference Share held plus accrued and unpaid dividends on
the shares to be retracted.
As at December 31, 2010, 1,200,013 Preference Shares were outstanding of which Preference Shares with a face value of $8,000
have been reclassified from shareholders’ equity to a current liability and a further $4,000 of Preference Shares have been reclas-
sified from shareholders’ equity to a long-term liability.
During 2010, the Corporation declared dividends of $1,280 on its Preference Shares and has reclassified $880 of the dividends
from a charge to retained earnings to an expense on the income statement. As at December 31, 2009, the Corporation accrued
the cumulative $1,600 dividends declared and paid subsequent to the year end.
10. CONVERTIBLE DEBENTURES
On January 30, 2008, the Corporation closed a private placement of an aggregate of $20,950 8.5% convertible unsecured subordi-
nated 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 conversion 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
requirement under a change of control provision in the 2008 Debentures, the Corporation was required to make an offer to pur-
chase 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 in-
directly, purchased $40,000 principal amount of 10% convertible secured subordinated debentures (the "New Convertible Deben-
tures") 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 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. 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, 2010, $38,901 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 between 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 Debentures, $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 Aerospace 2010 Annual Report
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:
2011
2012
2013
2014
2015
Thereafter
$
2010
790
9,206
9,996
4,560
5,436
$
$
39
2009
3,884
10,915
14,799
4,996
9,803
4,560
2,410
157
152
148
2,569
9,996
[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 $41,996. At December 31, 2010, a balance of $790 [2009 - $766] remains as a liability. During 2010 the Corporation com-
pleted the wind-up of its defined benefit plan in relation to these operations and has settled all pension related liabilities
[2009 - $3,118 provision recorded in accounts payable and accrued charges].
[b] Other long-term liabilities include $5,596 [2009 – $5,576] of deferred revenue in relation to long-term production contracts.
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.
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 comparative share and per
share amounts have been retroactively adjusted to reflect the five-for-one stock consolidation.
Outstanding at December 31, 2008
Issued to employees
Outstanding at December 31, 2009
Issued to employees
Outstanding at December 31, 2010
Number of
Shares
18,198,757
10,244
18,209,001
—
18,209,001
$
Stated
Capital
214,432
8
214,440
—
214,440
Under the terms of the Corporation’s Employee Share Purchase Plan (the "ESPP"), eligible employees were able to purchase
common shares at 100% of the average market price for the period preceding the purchase. The Corporation then matched
purchased shares on a 50% basis after a vesting period of approximately one year. During the year, the Corporation did not is-
sue common shares under the ESPP [2009 - 10,244 for $8]. The Board of Directors of the Corporation discontinued the ESPP
effective January 31, 2009.
Magellan Aerospace 2010 Annual Report
notes to consolidated Financial statements
[expressed in thousands of dollars except share and per share data]
40
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 (NOTE 10 AND 13)
Diluted weighted average shares outstanding
Net income per common share
Basic
Diluted
$
2010
25,408
(400)
25,008
$
18,209,001
40,000,000
58,209,001
2009
25,985
(1,600)
24,385
18,207,853
26,849,000
45,056,853
1.37
0.51
1.34
0.61
For the years ended December 31, 2010 and 2009, the inclusion of the Corporation’s stock options 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.
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 1,245,391. 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.
A summary of the plan and changes during each of 2010 and 2009 are as follows:
Outstanding, beginning of year
Forfeited/expired
Outstanding, end of year
2010
Weighted
average
exercise price
15.02
13.58
15.72
Shares
638,200
(210,250)
427,950
$
2009
Weighted
average
exercise price
15.02
15.01
15.02
Shares
755,210
(117,010)
638,200
$
The following table summarizes information about options outstanding and exercisable at December 31, 2010:
Range of
exercise prices
15.40 – 16.00
$
Number
outstanding at
December 31,
2010
427,950
Weighted
average remaining
contractual life
(in years)
1.54
Weighted
average
exercise price
15.72
$
Number
exercisable at
December 31,
2010
286,690
Weighted
average
exercise price
15.68
$
Options outstanding
Options exercisable
Compensation expense recorded during the year was $582 [2009 - $717].
Magellan Aerospace 2010 Annual Report
notes to consolidated Financial statements
[expressed in thousands of dollars except share and per share data]
41
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 op-
tions awards largely take on the characteristics of liability instruments rather than equity instruments. All outstanding stock options
are now classified as liabilities and are carried at their intrinsic value, measured as the 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 2009 and 2010. 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 classi-
fied as equity and were measured at the estimated fair value established by the Black-Scholes model on the date of grant. Under
this method, the estimated fair value was and will continue to be amortized to compensation expense and contributed surplus over
the period in which the related services were rendered, which is usually the vesting period or, as applicable, over the period to the
date an employee was eligible to retire, whichever was shorter.
The Corporation’s employee stock options are not transferable, cannot be traded and are subject to vesting restrictions and exer-
cise restrictions under the Corporation’s black-out policy which would tend to reduce the fair value of the Corporation’s stock op-
tions. 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 on the translation of the Corporation’s net invest-
ment in self-sustaining foreign operations. The following is a continuity schedule of accumulated other comprehensive loss.
Balance, beginning of year
Net unrealized loss on translation of net
investment in foreign operations
Total accumulated other comprehensive loss
2010
2009
$
(66,447)
$
(45,961)
(10,169)
(76,616)
(20,486)
(66,447)
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, 2010, total managed capital was $499,908, comprised of shareholders’ equity of $265,823 and interest-
bearing debt of $234,085. Included in interest-bearing debt are the Preference Shares of $12,000 and the debt component of the
convertible debentures of $38,901, 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 char-
acteristics of the underlying assets and the Corporation’s working capital requirements. In order to maintain or adjust its capital
structure, the Corporation, upon approval from its Board of Directors, may issue or repay long-term debt, issue shares, repurchase
shares through a normal course issuer bid, pay dividends or undertake other activities as deemed appropriate under the specific
circumstances. The Board of Directors reviews and approves any material transactions out of the ordinary course of business, in-
cluding proposals on acquisitions or other major investments or divestitures, as well as capital and operating budgets. There were
no changes in the Corporation’s approach to capital management during the year.
The Corporation must adhere to covenants in its operating credit facility. As at December 31, 2010, the Corporation was in compli-
ance with these covenants.
Magellan Aerospace 2010 Annual Report
notes to consolidated Financial statements
[expressed in thousands of dollars except share and per share data]
42
16. INCOME TAXES
The following is a reconciliation of the expected tax expense (recovery) obtained by applying the combined corporate tax rates to
income before income taxes:
Corporate tax rate for manufacturing companies
Expected tax expense
Benfit of previously unrecognized tax assets
Change in valuation allowances
Adjustments in respect of prior years
Permanent differences
Changes in income tax rates
$
2010
29.6%
9,644
(1,460)
613
(120)
(795)
(723)
7,159
$
2009
28.3%
6,746
(5,194)
(4,395)
—
825
(145)
(2,163)
Components of future income tax assets and liabilities by jurisdiction are summarized as follows:
Canada
Future income tax asset - current
Accounting provisions not currently deductible for tax purposes
Future income tax assets - long-term
Operating loss carryforwards
Investment tax credits
Accounting provisions not currently deductible for tax purposes
Valuation allowance
Future income tax liabilities - long-term
Tax depreciation in excess of book depreciation
Deferred employee future benefits
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
Magellan Aerospace 2010 Annual Report
2010
2009
$
1,754
$
2,675
750
31,509
19,062
51,321
(12,893)
38,428
14,785
5,561
20,346
18,082
2,994
26,596
24,322
53,912
(12,280)
41,632
19,479
4,967
24,446
17,186
2010
2009
$
986
$
965
3,055
2,069
2,067
1,102
notes to consolidated Financial statements
[expressed in thousands of dollars except share and per share data]
43
United States
Future income tax asset - current
Accounting provisions not currently deductible for tax purposes
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
2010
2009
$
1,988
$
1,283
11,247
59
11,306
22,628
11,322
14,580
232
14,812
23,991
9,179
The valuation allowance primarily relates to unrecognized tax assets in Canada where realization is not likely due to a history of
losses and the uncertainty of sufficient taxable earnings in the future. In 2010, the Corporation recorded a valuation allowance
of $613 [2009 – reversal of $4,395] as the Corporation has assessed that it is more likely than not that certain future income tax
benefits will not be realized.
During the year the Corporation estimated that there is reasonable assurance that a portion of the investment tax credits earned
in the period will be realized and has recognized during the year investment tax credits of $3,608 [2009 - $3,828] as a reduction to
cost of revenues.
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 connec-
tion 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 defined contribution
pension plans and payments directly to beneficiaries for its unfunded other benefits plan totaled $13,282 [2009 - $13,136].
[a] Defined contribution plans
The Corporation’s expenses for defined contribution plans for the year ended December 31, 2010 totaled $4,212 [2009 -
$4,663].
[b] Defined benefit plans
The Corporation’s defined benefit plans cover payments for pensions, and other benefit plans described as follows:
Pension plans
The Corporation’s pension plans provide eligible employees with pension benefits based on a number of criteria including
earnings, years of service, retirement age, and specified benefit levels, and include both final average earnings formulae
and minimum benefit formulae.
Magellan Aerospace 2010 Annual Report
notes to consolidated Financial statements
[expressed in thousands of dollars except share and per share data]
44
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 most recent actuarial valuations for the various pension plans were completed between
December 31, 2007 and December 31, 2009.
Other benefit plan
The Corporation has another benefit plan to provide post-employment coverage for health care benefits including pre-
scribed drugs, hospital and other medical, dental and vision benefits for eligible retired employees, their spouses and eli-
gible dependants. Other benefit plans provide for post-employment life insurance and compensated absences for eligible
current employees, including vacation to be taken before retirement, if certain age and service requirements are met.
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
Current service cost (employer)
Member contributions during the year
Interest cost
Benefits paid
Benefits paid in relation to plan wind-up
Actuarial loss
Foreign exchange gain
Benefit obligation, end of year
Change in plan assets
Market value of plan assets, beginning of year
Actual return of plan assets
Member contributions during the year
Employer contributions
Benefits paid
Benefits paid in relation to plan wind-up
Foreign exchange 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)
2010
$ 110,616
2,293
303
5,828
(4,812)
(32,255)
9,927
(508)
91,392
106,843
3,982
303
8,662
(4,812)
(32,255)
(327)
82,396
(8,996)
483
31,129
22,616
Pension
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
Other benefit plan
2010
2009
$
872
—
—
314
(408)
—
—
(44)
734
—
—
—
—
—
—
—
—
(734)
—
—
(734)
$
980
—
—
337
(308)
—
—
(137)
872
—
—
—
—
—
—
—
—
(872)
—
—
(872)
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.
One of the five defined benefit plans was in a surplus status as at December 31, 2010 and two of the six defined benefit
plans were in a surplus status as at December 31, 2009. During 2010 the Corporation completed the wind-up of one of its
defined benefit plans.
Magellan Aerospace 2010 Annual Report
notes to consolidated Financial statements
[expressed in thousands of dollars except share and per share data]
45
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
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
Difference between actuarial loss
recognized for the year and actual
actuarial losses on accrued benefit
obligation for the year
Difference between amortization of past
service costs for the year and actual plan
amendments for the year
Net benefit cost recognized
Pension
Other benefit plan
2010
2009
2010
2009
$
2,293
5,828
(3,982)
9,927
$
1,635
6,524
(11,611)
13,757
$ —
314
—
—
$ —
357
—
—
14,066
10,305
314
357
(2,360)
(12,371)
(8,423)
5,345
242
3,525
242
3,521
—
—
—
314
—
—
—
357
Significant assumptions and sensitivity analysis
The significant actuarial assumptions adopted in measuring the Corporation’s accrued benefit obligations represent management’s
best estimates reflecting the long-term nature of employee future benefits and are as follows [weighted-average assumptions as
at December 31]:
Accrued Benefit Obligation at December 31
Discount rate
Expected long-term rate of return on plan assets
Rate of compensation increase
Benefit costs for the years ended December 31
Discount rate
Expected long-term rate of return on plan assets
Rate of compensation increase
2010
5.25%
6.0%
2.9%
5.25%
6.0%
2.9%
Pension
2009
5.75%
6.5%
2.9%
5.75%
6.5%
2.9%
Other benefit plan
2010
7.0%
—
—
7.0%
—
—
2009
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 ben-
efits was assumed for 2010. 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, 2010 was nominal.
Magellan Aerospace 2010 Annual Report
notes to consolidated Financial statements
[expressed in thousands of dollars except share and per share data]
46
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
2010
46.7%
48.2%
5.1%
100.0%
2009
43.2%
47.2%
9.6%
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
2010
55
$
2009
37
$
18. FINANCIAL INSTRUMENTS
The Corporation’s policy is not to utilize derivative financials instruments for trading or speculative purposes. The Corporation 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 ma-
turity 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 receiv-
ables, 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
accumulated 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
2 Includes accounts receivable
3 Includes bank indebtedness, accounts payable and accrued charges, long-term debt, and the debt component of the convertible debentures
4 Included in prepaid expenses and other
$
2010
24,952
84,351
369,613
1,141
$
2009
22,641
83,282
390,182
1,286
[b] Fair values
The Corporation has determined the estimated fair values of its financial instruments based on appropriate valuation methodolo-
gies, however, considerable judgment is required to develop these estimates. Accordingly, these estimated fair values are not
necessarily indicative of the amounts the Corporation could realize in a current market exchange. The estimated fair value amounts
can be materially affected by the use of different assumptions or methodologies. The methods and assumptions used to estimate
the fair value of financial instruments are described below:
Cash, 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.
Magellan Aerospace 2010 Annual Report
notes to consolidated Financial statements
[expressed in thousands of dollars except share and per share data]
47
Forward exchange contracts
The Corporation has entered into forward foreign exchange contracts to mitigate future cash flow exposures in US dollars
and British Pounds. Under these contracts the Corporation is obliged to purchase specific amounts of foreign currencies at
predetermined dates and exchange rates. These contracts are matched with anticipated operational cash flows in US dollars
and British Pounds expiring in 2011.
During 2010, the Corporation entered into US dollar foreign exchange collars as follows:
Maturity – less than 1 year
Maturity – less than 1 year
Maturity – less than 1 year
$
Amount
3,500
3,500
18,000
Floor
1.02020
1.03010
1.03540
Ceiling
1.12360
1.11110
1.11110
In addition, the Corporation entered into forward exchange contracts to purchase British Pounds totaling $3,667 at exchange rates
ranging from $1.53850 to $1.55550 Canadian per £1.00 British Pound expiring in 2011.
The fair values of the Corporation’s forward foreign exchange contracts are based on the current market values of similar contracts
with the same remaining duration as if the contracts had been entered into on December 31, 2010.
The mark-to-market on these financial instruments as at December 31, 2010 was an unrealized gain of $1,141 [2009 – $1,286]
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 fu-
ture cash flows based on current rates for debt with similar terms and maturities, is $65,183 at December 31, 2010.
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 $38,936.
Preference Shares
The fair market value of the Corporation’s Preference Shares, calculated by discounting the expected future cash flows at prevail-
ing interest rates, is estimated at $12,133.
As at December 31, 2010, the carrying amount of the financial assets (consisting of cash and accounts receivable) that the Corpo-
ration has pledged as collateral for its long-term debt facilities was $66,138.
[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 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 fair value hierarchy requires the use of observable market inputs whenever such inputs exist. A financial instrument is classi-
fied 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:
Magellan Aerospace 2010 Annual Report
notes to consolidated Financial statements
[expressed in thousands of dollars except share and per share data]
Financial Assets
Forward foreign exchange contracts
Financial Liabilities
Long-term debt
Quoted Prices in
Active Markets
(Level I)
Significant Other
Observable
Inputs (Level II)
Significant
Unobservable
Inputs (Level III)
$
$
—
—
$
$
1,141
5,904
$
$
—
—
48
Total
1,141
5,904
$
$
[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 exposure to clients, in-
cluding 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 organizations with strong credit rat-
ings. 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 uncol-
lectible, it is written off against the allowance for accounts receivable. Subsequent recoveries 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, 2010:
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
Magellan Aerospace 2010 Annual Report
$
74,032
(1,963)
72,069
66,828
5,593
231
18
1,362
(1,963)
72,069
notes to consolidated Financial statements
[expressed in thousands of dollars except share and per share data]
49
Liquidity risk
The Corporation’s objective in managing liquidity risk is to ensure that there are sufficient committed loan facilities in order to meet
its liquidity requirements at any point in time. The Corporation has in place a planning and budgeting process to help determine the
funds required to support the Corporation’s normal operating requirements on an ongoing basis, taking into account its anticipated
cash flows from operations and its operating credit facility capacity. The primary sources of liquidity are the operating credit facility
and the indebtedness provided by a corporation controlled by the Chairman of the Board of the Corporation.
The following table summaries the Corporation’s contractual maturity of its financial liabilities. The table includes both interest and
principal cash flows.
Bank indebtedness
Long-term debt
Capital lease obligations
Equipment leases
Facility leases
Preference shares
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
$ 117,046
50,981
895
1,745
1,417
8,800
4,560
4,000
189,444
$
—
6,975
476
295
3,370
4,160
2,719
42,000
59,995
$
—
2,308
—
18
2,090
—
148
—
4,564
$
—
9,441
—
—
6,444
—
2,569
—
18,454
Total
$ 117,046
69,705
1,371
2,058
13,321
12,960
9,996
46,000
272,457
As at December 31, 2010, the Corporation had undrawn lines of credit available to it of $54,784. The Corporation’s operating credit
facility is due within a one-year period.
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 operating credit facility
is renewed, for an additional 364 day period beginning May 22, 2011 [Long-Term Debt − Note 8].
Currency risk
The Corporation operates internationally, which gives rise to a risk that its income, cash flows and shareholders’ equity may be
adversely impacted by fluctuations in foreign exchange rates. Currency risk arises because the amount of the local currency re-
ceivable 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 ("translation 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 trans-
acted in US dollars. As a result, the Corporation may experience transaction exposures because of the volatility in the exchange
rate between the Canadian and US dollar. Based on the Corporation’s current US denominated net inflows, as of December 31,
2010, fluctuations of +/- 1% would, everything else being equal, have an effect on net income and on other comprehensive income
for year ended December 31, 2010 of approximately +/- $110 and $1,300 respectively.
Magellan Aerospace 2010 Annual Report
notes to consolidated Financial statements
[expressed in thousands of dollars except share and per share data]
50
Interest rate risk
The Corporation is exposed to interest rate risk in its floating rate bank indebtedness. At December 31, 2010, $134,953 of the Cor-
poration’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 man-
agement 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 income during the year by approximately +/- $1,300.
19. RELATED PARTY TRANSACTIONS
In 2009, the Corporation sold receivables to a corporation, which is controlled by a common director, in the amount of $65,448 for
a discount of $832 representing an annualized interest rate of 7.5%. This securitization facility expired on December 31, 2009.
On January 31, 2008, the Corporation entered into the Original Loan in principal amount of $50,000 due July 1, 2009 with a
corporation, which is controlled by the Chairman of the Board of the Corporation. The loan bears interest at a rate of 10%. In
2010, $nil [2009 - $1,665] of interest was paid in relation to the $50,000 Original Loan.
On April 30, 2009 the Original Loan in principal amount of $50,000 was amended and increased to $65,000 [Note 8]. In 2010,
$5,524 [2009 - $5,280] of interest and $19,000 [2009 - $nil] of principal 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 Deben-
tures that were refinanced on April 30, 2009. The related cash interest paid in the year was $nil [2009 - $832].
On April 30, 2009, the Chairman of the Board of the Corporation subscribed to $40,000 of the New Convertible Debentures.
During the period, the Corporation incurred interest of $4,006 [2009 - $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 operating
credit facility. An annual fee averaging 1.2% [2009 – 1.35%] of the guaranteed amount or $2,127 [2009 - $2,801] was paid in
consideration for the guarantee.
During the year, the Corporation incurred consulting costs of $100 [2009 - $100] payable to a corporation controlled by the
Chairman of the Board of the Corporation. As well, the Corporation paid legal fees of $57 [2009 - $215] to a law firm in which
a director is a partner.
Magellan Aerospace 2010 Annual Report
notes to consolidated Financial statements
[expressed in thousands of dollars except share and per share data]
51
20. SUPPLEMENTARY INFORMATION
[a]
Interest expense on long-term debt in 2010 was $12,093 [2009 - $11,622]. Interest on capital leases in 2010 was $146
[2009 - $237].
[b]
During 2010, the Corporation received $6,635 [2009 - $2,183] of government assistance, of which $5,296 [2009- $2,183]
has been credited to the related assets and $1,339 [2009 - $nil] has been credited to the related expense. The Corporation
is eligible for an additional government assistance of $35,419 for the period from January 1, 2010 to December 31, 2014
based on approved expenditures. The assistance is repayable as royalties on 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
$
2010
(3,810)
(8,221)
26,289
(1,619)
12,639
$
2009
(19,083)
22,285
(28,191)
11,857
(13,132)
[d]
Interest paid during 2010 amounted to $19,924 [2009 - $19,698] and income taxes paid during 2010 amounted to $249
[2009 - $678].
[e]
During the year, the Corporation realized a foreign exchange loss on the translation of foreign currency denominated work-
ing capital balances and debt of $680 [2009 – gain of $6,383] which is included in other expenses.
[f]
During 2010, the Corporation sold receivables to various financial institutions in the amount of $65,375 [2009 - $117,105],
for a discount of $254 [2009 - $672] representing an annualized interest rate of 2.35% [2009 – 2.83%].
[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 $5,218
[2009 − $31,321].
[i]
Accounts payable and accrued charges include advance payments received from customers in the amount of $29,636
[2009 − $50,197].
[j] Other assets include advances to contractors in the amount of $15,185 [2009 - $1,626].
Magellan Aerospace 2010 Annual Report
notes to consolidated Financial statements
[expressed in thousands of dollars except share and per share data]
52
21. SEGMENTED INFORMATION
Based on the nature of the Corporation’s markets, two main operating segments were identified: Aerospace and Power Genera-
tion Project. The Aerospace segment includes the design, development, manufacture, repair and overhaul and sale of systems
and components for military and civil aviation, while the Power Generation Project segment includes the supply of gas turbine
power generation units. Revenues in the Power Generation Project segment arise solely from the power generation project in
Ghana and the revenue is included in Canada export revenue.
The Corporation evaluated the performance of its operating segments primarily based on income before interest expense and
income tax expense.
The Corporation accounts for intersegment and related party sales and transfers, if any, at the exchange amount.
The accounting policies used to account for the operating segments are the same as those described in the summary of the Cor-
poration’s significant accounting policies.
Segmented information consists of the following:
Activity Segments
Power
Generation
Project
Aerospace
Total
Aerospace
Power
Generation
Project
2010
2009
Total
Revenues
$
627,113
$
105,395
$
732,508
$
681,393
$
5,221
$
686,614
Income before interest and
income tax expense
Interest expense
Income before taxes
44,711
—
—
7,592
—
—
52,303
19,736
32,567
44,002
—
—
574
—
—
44,576
20,754
23,822
Total Assets
Additions to capital assets
Depreciation and
amortization
Geographic segments
Revenue
Capital assets
610,347
16,255
43,916
—
654,263
16,255
636,408
21,675
44,210
—
680,618
16,255
32,078
2,930
35,008
35,093
—
35,093
Canada
United
States
United
Kingdom
Total
Canada
United
States
United
Kingdom
2010
2009
Total
$ 422,737 $ 187,555 $ 122,216 $ 732,508 $ 337,765 $ 200,525 $ 148,324 $ 686,614
254,700
110,054
115,116
239,508
112,471
27,878
29,530
99,159
Export revenue1
1 Export revenue is attributed to countries based on the location of the customers.
330,821
29,214
9,237
369,272
224,179
30,805
17,430
272,414
Magellan Aerospace 2010 Annual Report
notes to consolidated Financial statements
[expressed in thousands of dollars except share and per share data]
53
Major Customers
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
2010
2009
1
25%
1
38%
1
84%
2
25%
1
35%
2
80%
22. COMMITMENTS AND CONTINGENCIES
[a] Operating lease commitments
The Corporation has lease commitments related to properties, equipment and other items. At December 31, 2010, future mini-
mum annual lease payments are as follows:
2011
2012
2013
2014
2015
Thereafter
$ 3,162
1,290
1,215
1,160
1,107
7,445
15,379
[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.
Magellan Aerospace 2010 Annual Report
BoARd oF diRectoRs And oFFiceRs
54
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
Environmental and Health
and Safety Committee
Chairman:
Donald C. Lowe
Corporate Officers
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
Daniel R. Zanatta
Vice President,
North American Operations
Jo-Ann C. Ball
Vice President,
Human Resources
Larry A. Winegarden
Vice President,
Corporate Strategy
Konrad B. Hahnelt
Vice President,
Strategic Global Sourcing
Board Of Directors
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 Emeritus,
Home Capital Group
Toronto, Ontario
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 Aerospace 2010 Annual Report
oPeRAting FAciLities diRectoRy And shARehoLdeR inFoRMAtion
55
Canada
United Kingdom
Corporate Office
660 Berry Street,
Winnipeg, Manitoba R3H 0S5
Tel: 204 775 8331
3160 Derry Road East,
Mississauga, Ontario L4T 1A9
Tel: 905 673 3250
634 Magnesium Road,
Haley, Ontario K0J 1Y0
Tel: 613 432 8841
975 Wilson Avenue,
Kitchener, Ontario N2C 1J1
Tel: 519 893 7575
United States
97–11 50th Avenue,
New York, New York 11368
Tel: 718 699 4000
25 Aero Road,
Bohemia, New York 11716
Tel: 631 589 2440
159 Grassy Plain Street, Route 53,
Bethel, Connecticut 06801
Tel: 203 798 9373
20 Computer Drive,
Haverhill, Massachusetts 01832
Tel: 978 774 6000
2320 Wedekind Drive,
Middletown, Ohio 45042
Tel: 513 422 2751
5170 West Bethany Road,
Glendale, Arizona 85301
Tel: 623 931 0010
5401 West Luke Avenue,
Glendale, Arizona 85311
Tel: 623 939 9441
Davy Way, Llay Industrial Estate,
Llay, Wrexham LL12 0PG
Tel: 01978 856600
27/29 High Street,
Biggleswade, Bedfordshire SG18 0JE
Tel: 01767 601280
7/8 Lyon Road, Wallisdown,
Poole, Dorset BH12 5HF
Tel: 01202 535536
Miners Road, Llay Industrial Estate,
Llay, Wrexham LL12 0PJ
Tel: 01978 856798
Rackery Lane,
Llay, Wrexham LL12 0PB
Tel: 01978 852101
510 Wallisdown Road,
Bournemouth, Dorset BH11 8QN
Tel: 01202 512405
1 West Point Row,
Great Park Road,
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
Wednesday, May 11th, 2011 at
2:00 p.m. at The Living Arts Centre,
4141 Living Arts Drive,
Mississauga, Ontario L5B 4B8
Magellan Aerospace 2010 Annual Report
MAGELLAN AEROSPACE CORPORATION 3160 DERRY ROAD EAST, MISSISSAUGA, ONTARIO, CANADA L4T 1A9 WWW.MAGELLAN.AERO