Magellan Aerospace Corporation Annual Report 2011

Plain-text annual report

The Corporation’s results in 2011 continued to reﬂect our commitment to achieving and sustaining a position and a reputation in the industry as an efﬁcient, proﬁtable world-class supplier of aerospace and power generation products and services. Letter to Shareholders Magellan Aerospace Corporation (“Magellan” or the “Corporation”) is pleased to report results for 2011. The Corporation’s results in 2011 continued to reﬂect our commitment to achieving and sustaining a position and a reputation in the industry as an efﬁcient, prof- itable world-class supplier of aerospace and power generation products and services. Sales revenue for 2011 was lower than 2010 primarily due to delayed receipt of revenue from our Ghana Power Generation Project and the impact of the work stoppage in our Winnipeg division. In the Winnipeg situation, due to the work stoppage, the Corporation was unable to fully recover delayed revenue in 2011 and now expects full recovery by mid- 2012. The Corporation’s 2011 results continued to demonstrate improvement in key areas of gross margin performance, inventory management and debt retirement . Industry Status In 2011 Magellan beneﬁted from the continued growth in the commercial aerospace mar- ket which was fuelled predominately by the growing travel demands in the Asian market and the world-wide need to secure and operate cleaner, more cost efﬁcient aircraft. Pro- duction rates for both the single and twin aisle platforms for the major OEM’s, Boeing and Airbus, continued to increase in 2011 with peak production rates still being forecasted into 2013/2014. The introduction of the A320 NEO and the B737MAX are the main driv- ers behind the single aisle rate increases. The maturing of Boeing’s B787 into production and delivery in 2011, to be followed in late 2012 by Airbus’ A350, ﬁts well with Magellan’s invested position on these programs. While the commercial aerospace sector was robust in 2011, the defence sector remained somewhat restrained due to the continuing challenges and uncertainties in the world econ- omy. Pressure to reduce defence spending, speciﬁcally in Europe and North America, has had an impact on new programs. While U.S. budget restraint has delayed activities on this program, the F-35 Global Lightning II Program continued to report successful milestone accomplishments as the program moves into production. The Corporation continues to 1 MAGELLAN 2011 ANNUAL REPORT develop its capabilities and capacity in support of the F-35 production with ﬁve locations (Winnipeg, Kitchener, New York, Haley and Phoenix) actively involved in supporting the program. Conversely, the world market for military legacy products has gained momen- tum, which has helped to balance Magellan’s defence based businesses. The Global Space Market Magellan’s space activities are focused largely in support of Canadian programs where we are primarily engaged in the design and manufacture of three satellites for the Radarsat Constellation Mission. Launch dates are scheduled for 2015, 2016 and 2017. Power Generation In 2011 Magellan’s power generation business continued to evolve as we continued the installation of a major electrical power generation plant for the Republic of Ghana. While interest in additional and complementary business opportunities in this sector remains high, at this time the Corporation does not have any additional committed projects . Magellan Going Forward In 2011 the Corporation expanded its 3-year commitment to develop and implement Magellan Operating System™, initially consisting of a system of standardized activities and essential services to improve operational execution. As a result of successes achieved so far, the scope was expanded to ﬁnance, costing, business development, contracting and quality. These initiatives provide Magellan’s divisions with necessary tools and meth- odologies to support our efforts to achieve a premier position in the global supply chain. Our measurable success in standardizing our practices using common sense solutions has resulted in improvements in meeting our customers’ needs, reducing inventories, improv- ing our balance sheet and improving our proﬁtability in an environment which has been challenging for Canadian manufacturers and exporters. Additionally, early in 2011, the Corporation undertook a review of our brand and how we were perceived in the indus- 2 MAGELLAN 2011 ANNUAL REPORT try. As a result of this review a number of initiatives were launched to refresh our brand across all communication platforms to reﬂect the Corporation’s maturing and evolving identity which has now been ﬁrmly established within the industry. Our efforts in this area will continue into 2012. The Corporation is committed to increase shareholder value by continuing to serve our customers with performance that provides them with conﬁdence and surety of product quality and delivery. Through our improved performance, Magellan has positioned itself with its customers to maximize business opportunities that meet its customer needs and our business case parameters. Our progress in 2011 could not have been achieved with- out the continued support of our shareholders and ﬁnancial partners. A special note of thanks to the customers and Magellan employees who have supported the Corporation in adopting and implementing the Magellan Operating System™. This willingness to move away from traditional and ingrained methodologies has and will continue to have a signiﬁcant and positive impact on our ﬁnancial results. James S. Butyniec President and Chief Executive Ofﬁcer March 23, 2012 3 MAGELLAN 2011 ANNUAL REPORT MANAGEMENT’s DISCUSSION AND ANALYSIS This Management’s Discussion and Analysis (“MD&A”) of the ﬁnancial condition and results of operations of Magellan Aerospace Corporation (“Magellan” or the “Corporation”) has been prepared in accordance with International Financial Reporting Standards (“IFRS”). Accordingly, the Corporation commenced reporting on this basis in its 2011 consolidated ﬁnancial statements. The MD&A should be read in conjunc- tion with the audited consolidated ﬁnancial statements and the notes thereto for the year ended December 31, 2011 (available on SEDAR at www.sedar.com). This MD&A provides a review of the signiﬁcant developments that have impacted the Corporation’s performance during the year ended December 31, 2011 relative to the year ended December 31, 2010. The 2010 prior period comparative ﬁnancial information throughout this report has been restated to conform with current period presentation, which has been prepared in accordance with IFRS. The information contained in this report is as at March 23, 2012. All ﬁnancial references are 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 perfor- mance. 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 “Company Over- view,” “Outlook,” “Consolidated Revenues,” “2011 Updates,” “Liquidity and Capital Resources” and “Future Changes in Accounting Poli- cies.” 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 aero- space industry in 2011 and continuation of the current regulatory and tax regimes in the jurisdictions in which the Corporation operates, and necessarily involve known and unknown risks and uncertainties, including the business risks discussed in this MD&A, which may cause actual performance and ﬁnancial results in future periods to differ 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. The MD&A presents certain non-IFRS ﬁnancial measures to assist readers in understanding the Corporation’s performance. Non-IFRS ﬁnancial measures are measures that either exclude or include amounts that are not excluded or included in the most directly comparable measures calculated and presented in accordance with Generally Accepted Accounting Principles (“GAAP”). Throughout this discussion, reference is made to EBITDA (deﬁned as net income before interest, income taxes, depreciation, amortization, dividends and stock based compensation), which the Corporation considers to be an indicative measure of operating performance and a metric to evaluate proﬁtabil- ity. Reference is also made to gross proﬁt which represents revenues less direct costs and expenses. Not included in the calculation of gross proﬁt are administrative and general expenses, foreign exchange, gains or losses on the sale of assets, dividends, interest and income taxes. EBITDA and gross proﬁt are not generally accepted earnings measures and should not be considered as an alternative to net income (loss) or cash ﬂows as determined in accordance with IFRS. As there is no standardized method of calculating these measures, the Corporation’s EBITDA and gross proﬁt may not be directly comparable with similarly titled measures used by other companies. Reconciliations of EBITDA to net income (loss) reported in accordance with IFRS are included in this MD&A. 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 aero- space 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 machin- ing 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. 4 MAGELLAN 2011 ANNUAL REPORT 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 commer- cial 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 major military aircraft. Magellan’s sole product for the Power Generation Project segment is an electric power generation project in the Republic of Ghana. The Corporation’s percentages of revenues by segment are as follows: Aerospace Power Generation Project 2011 88% 12% 100% 2010 86% 14% 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. The Corporation supplies aerostructure products to an international customer base in the civil and defence markets. Components are pro- duced to aerospace tolerances using conventional and high-speed automated machining centres. Capabilities include precision 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 engine com- ponents, both static and rotating, and integrated nacelle components, ﬂow paths and engine exhaust systems for the world’s leading aero- engine 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 Corporation’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 completed in 2012. 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 2011, 67.0% of revenues were derived from the commercial markets (2010 – 64.4%, 2009 – 63.9%) while 33.0% of revenues related to defence markets (2010 – 35.6%, 2009 – 36.1%). OUTLOOK In 2011 Magellan beneﬁted from the sustained growth in demand for commercial aircraft and its continued efforts to implement and expand the Magellan Operating System™ (“MOS”) throughout the organization. The Corporations expects that the MOS initiatives will continue to have a growing and positive effect on Magellan’s future performance. It is expected that the civil airline production rates will continue to increase in 2012 with peak rates now being projected into 2013 and 2014. This growth is fueled by the pent-up and growing demand in the Asian countries and the worldwide airline demand for cleaner, more fuel efﬁcient aircraft. The Corporation has invested in and is well positioned in this sector with participation levels on many of the major Boeing and Airbus platforms including the A350, B747-8 and the B787 and new variants of the A320 and B737. In the defence sector, as expected, worldwide economic factors are negatively impacting defence budgets. Fiscal restraints are in many cases affecting the launch and ramp-up of new programs. The Corporation, having invested in the F-35 Lightning II Program, remains con- ﬁdent that its position as an active global supplier on this international program remains solid. Presently ﬁve Magellan locations (Winnipeg, New York, Kitchener, Haley and Phoenix) are manufacturing products in support of the F-35 Program. In 2011 the F-35, as it ramped up into production, completed or surpassed all scheduled project performance milestones. Partially as a result of the slower-than-anticipated emergence of the new programs, legacy work in support of 3rd and 4th generation defence aircraft is now projected to stay strong. The 5 MAGELLAN 2011 ANNUAL REPORT Corporation enjoys a direct and balancing beneﬁt from these programs, both in the aeroengine and aerostructure parts of its business. In 2012, Magellan expects to complete the facilitization of its location in Haverhill, MA home of the Corporation’s aeroengine shaft facility. Signiﬁcant effort is underway to support the investment made in this facility in support of Rolls-Royce. Additional business opportunities for the shaft center in Haverhill are in the discussion stages. The space market in the United States and Canada has stabilized for ongoing projects speciﬁcally with respect to Radarsat in Canada and the next generation weather and communication missions. Funding for these missions is expected to be sustained. Magellan’s Power Generation business has continued to evolve with its efforts in the Republic of Ghana. The Corporation is anticipating completion of the initial electric power generation plant later this year. While interest in additional and complementary business opportuni- ties in this sector remains high, at this time the Corporation does not have any additional committed projects . The Corporation remains sensitive to, and closely monitors uncertainties in the world that could destabilize and impact its market sectors. Economic challenges and political unrest continue to be the major areas of concern. Magellan has assessed a shrinking worldwide capacity in some areas of the aerospace supply chain which is currently and will in the future drive capital investment demand in the industry. Magel- lan is constantly evaluating the capacity and more importantly the utilization of capital within each of its locations in order to ensure that any investment made is prudent and matched strategically to both customer’s needs and the Corporation’s core competencies. CONVERSION TO INTERNATIONAL FINANCIAL REPORTING STANDARDS Effective January 1, 2011, the Corporation began reporting its ﬁnancial results in accordance with International Financial Reporting Stan- dards. Accordingly, these IFRS results and all future results will be reported under IFRS and prior period comparative amounts, including the opening statement of ﬁnancial position at January 1, 2010, have been conformed to reﬂect results as if the Corporation had always pre- pared its ﬁnancial statements using IFRS. Please refer to Note 30 of the Audited Consolidated Financial Statements for the years ended December 31, 2011 and 2010 for a discussion regarding the Corporation’s accounting choices with regards to IFRS and the impact of this transition on the ﬁnancial statements. 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 2011 691.4 37.4 2010 731.6 34.3 20091 686.6 26.0 2.04 0.73 661.7 260.5 1.86 0.66 638.5 98.4 1.34 0.61 680.6 132.0 1The Corporation’s IFRS transition date was January 1, 2010, comparative information for 2009 has not been restated and the 2009 results shown are in accordance with Canadian GAAP (“CGAAP”). Revenues for the year ended December 31, 2011 decreased from 2010 and increased over 2009. The decrease in revenues from 2010 is mainly due to lower revenues earned on the Corporation’s power generation project. The Corporation has not paid dividends on its com- mon shares in the past four years. During 2011, the Corporation redeemed all of the outstanding 8.0% Cumulative Redeemable First Pref- erence Shares Series A (“Preference Shares Series A”). The Corporation declared dividends thereon at an annual rate of $0.80 per share during each of 2011 and 2010. 6 MAGELLAN 2011 ANNUAL REPORT 2011 UPDATES >> >> >> >> >> >> Magellan announced on February 7, 2011 that an agreement has been reached between Airbus and Magellan Aerospace (UK) Limited securing a further work package on Airbus’ new A350 XWB. It is expected to generate revenues in excess of US$20.0 million over the next ten years. The contract requires the machining and treatment of complex machined aluminium lithium detail components, and delivery to the ﬁnal assembly line in Toulouse, France. On February 7, 2011 Magellan announced an agreement with Hindustan Aeronautics Limited (”HAL“) in Bangalore, India for a new Wire Strike Protection System® (“WSPS®”). The agreement includes the design and development of a WSPS® for the HAL Advanced Light Helicopter (”ALH“). The ALH system is comprised of an upper and lower cutter, and windshield deﬂector, designed by Magellan’s Win- nipeg facility to be integrated into the unique structure of the ALH. On March 8, 2011 Magellan announced a new agreement with Bell Helicopter for a WSPS® kit development. The helicopter to be ﬁt- ted with WSPS® will be the Bell UH-1Y. The design and production of the WSPS® will be carried out at Magellan’s Winnipeg, Manitoba location for delivery of the prototype kits in 2011. On June 30, 2011 Magellan announced that its facility in Haverhill, MA has achieved the globally recognized ISO 14001 certiﬁcation for its environmental management system. Magellan held a ceremonial ribbon cutting event on October 25, 2011 celebrating the ﬁnal stages of completion of the Corporation’s new Advanced Composite Manufacturing Centre in Winnipeg to support the Joint Strike Fighter (“JSF”) program. A year following an ofﬁcial ground breaking, the Corporation hosted this ceremony to acknowledge the support and dedicated efforts of all three levels of government, major funding partners, their customer, and all of the other stakeholders in this major new undertaking. Magellan announced on December 20, 2011 that an agreement has been reached between GKN Aerospace and Magellan Aerospace (UK) Limited securing a contract extension to deliver aluminum and titanium components from Magellan’s facilities in Bournemouth and Chalfont St Peter, UK. The components are destined to GKN’s Filton facility, which manufactures and assembles wing structures. This contract is projected to generate revenues in excess of £200.0 million through to December 2017. To support this program Magellan will make further investments in high speed 5-axis machining technology. These future investments demonstrate Magellan’s commit- ment to world class manufacturing facilities focused on core competencies. LABOUR MATTERS Labour agreements at one of the Corporation’s facilities were successfully negotiated during 2011 after a seven week labour disruption. Two labour agreements at two of the Corporation’s facilities expired December 31, 2011 and two other labour agreements at another of the Corporation’s facilities expired March 15, 2012. The Corporation is currently in negotiation on these four labour agreements. FINANCING MATTERS On April 28, 2011, the Corporation extended and restated the 11% loan payable (“Original Loan”) to Edco Capital Corporation (“Edco”), a corporation controlled by the Chairman of the Board of the Corporation. The Original Loan was amended decreasing the interest rate from 11% per annum to 7.5% per annum commencing July 1, 2011 and was extended to July 1, 2013 in consideration of the payment of a fee to Edco equal to 1% of the principal amount outstanding on July 1, 2011. The Corporation has the right to repay the Original Loan at any time without penalty. On April 29, 2011, the Corporation amended its credit 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 $125.0 million (up from $105.0 million) plus a US dollar limit of $50.0 million (down from US $70.0 million), with a maturity date of April 29, 2013. The facility is extendable for unlimited one-year renewal periods by the agreement of the Corporation and the lenders and continues to be guaran- teed by the Chairman of the Board of the Corporation. The terms of the amended operating credit facility permit the Corporation to (i) repay, in whole or in part, the Original Loan outstanding from Edco and (ii) retract all (approximately $12.0 million) of the Preference Shares Series A outstanding on or after April 30, 2011, together with accrued and unpaid dividends on the shares to be retracted provided there is no current default or event of default under the operat- ing credit facility and after the repayment of the loan and the payment of the retraction amount the Corporation has at least $25.0 million in availability under the operating credit facility. 7 MAGELLAN 2011 ANNUAL REPORT As at December 31, 2011, the Corporation had retracted all outstanding Preference Shares Series A and the outstanding principal amount of the Original Loan was $33.5 million. On December 31, 2011, the Chairman of the Board exercised his conversion rights under the debenture agreement and $38.0 million princi- pal amount of the 10% convertible secured subordinated debentures (“Convertible Debentures”) were converted into 38,000,000 common shares of the Corporation. As at December 31, 2011, $2.0 million [2010 - $40.0 million] of the Convertible Debentures were outstanding. Given that the conversion price of the Convertible Debentures is in the money, it is likely that the remaining $2.0 million Convertible Debentures will be converted into common shares of the Corporation on or before their maturity. RESULTS FROM OPERATIONS Consolidated Revenues Overall, the Corporation’s revenues decreased when compared to the prior year. While the global economy improved throughout 2011, the Corporation continued to experience customer delays in the supply of products in the support of new programs that it has been investing in over the past several years. The Corporation’s revenues by segment were as follows: Twelve-months ended December 31, expressed in thousands of dollars Aerospace Power Generation Project Total revenues 2011 609,942 81,468 691,410 2010 627,113 104,522 731,635 Change (2.7)% (22.1)% (5.5)% Consolidated revenues for the year ended December 31, 2011 decreased 5.5% to $691.4 million from $731.6 million last year, due mainly to decreased revenues earned on the Corporation’s Power Generation Project as well as reduced revenues in the aerospace segment. Rev- enues 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 2011 284,385 187,658 137,899 609,942 2010 317,342 187,555 122,216 627,113 Change (10.4)% (0.0)% 12.8% (2.7)% Aerospace revenues for the year ended December 31, 2011 were $609.9 million, a decrease of $17.2 million or 2.7% over the previous year. Revenues in Canada in 2011 decreased 10.4% in comparison to revenues earned in 2010 resulting from a work stoppage in one the Corpo- ration’s locations, reduced volumes experienced in the year for proprietary products 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 2011 when compared to 2010 as the Corporation’s volumes contin- ued to increase on several single aisle aircraft programs. Revenues in the United Kingdom increased in 2011 in comparison to 2010 revenues mainly as a result of higher customer demand in 2011 when compared to 2010. 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 2010 remained constant in 2011, consolidated revenues for 2011 would have been approximately $627.5 million or approximately $17.6 million higher than actually realized in 2011. Power Generation Segment Revenues for the Power Generation segment were as follows: Twelve-months ended December 31, expressed in thousands of dollars Power Generation Project Total revenues 8 MAGELLAN 2011 ANNUAL REPORT 2011 81,468 81,468 2010 104,522 104,522 Change (22.1)% Revenues earned in 2011 and in 2010 resulted from the Ghana electric power generation project. The Corporation recognizes revenue on this project on a percentage of completion basis, hence the decrease in revenue over the prior year represents the Corporation’s progress made towards completion of the project during the year. As the Corporation moves into 2012, revenue from the power generation project will decrease on a year over year basis unless the Corporation receives further contracts in this area. Gross Proﬁt Twelve-months ended December 31, expressed in thousands of dollars Gross Proﬁt Percentage of revenue 2011 97,410 14.1% 2010 103,282 14.1% Change (5.7)% Gross proﬁt in 2011 was $97.4 million, a decrease of $5.9 million from 2010 levels of $103.3 million. As a percentage of revenues, gross proﬁt was consistent at 14.1% in 2011 and 2010. The decline in both the US dollar and British Pound against the Canadian dollar, over the exchange rates prevailing in 2010, contributed negatively to the gross margin in 2011. The negative impact of the movement in exchange rates in 2011 when compared to 2010 was offset by changes in revenue mix, negotiated price increases and continued operational performance improvements. Administrative and General Expenses Twelve-months ended December 31, expressed in thousands of dollars Administrative and general expenses Percentage of revenue 2011 38,264 5.5% 2010 39,770 5.4% Change (3.8)% Administrative and general expenses decreased from $39.8 million in 2010 to $38.3 million in 2011. The decrease in administrative and gen- eral 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 Loss on disposal of property, plant and equipment Plant and program closure recoveries Other 2011 238 198 – 436 2010 680 267 (820) 127 Included in other income is a foreign exchange loss of $0.2 million in 2011 versus a loss of $0.7 million in 2010, 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 2011 and 2010, the Corporation retired assets for a loss on disposal of approximately $0.2 million and $0.3 million respectively. 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, 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 $0.8 million 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 costs Discount on sale of accounts receivable Total interest expense 9 MAGELLAN 2011 ANNUAL REPORT 2011 9,397 4,000 3,155 447 16,999 2010 14,799 4,006 1,093 254 20,152 Interest costs for 2011 were $17.0 million, a decrease of $3.2 million from 2010. Interest on bank indebtedness and long-term debt in 2011 decreased as principal amounts outstanding during 2011 were lower than 2010 levels. A reduced interest rate on long-term debt and lower interest rate spreads on bank indebtedness also contributed to the reduction in interest expense in 2011 when compared to 2010. Accretion costs related to the Convertible Debentures, long-term provisions and borrowings under speciﬁc conditions were $3.2 million in 2011 and $1.1 million in 2010. During 2011, the Corporation sold $167.1 million of accounts receivable at an annualized interest rate of 1.73% compared to $65.4 million of receivables sold in 2010 at an annualized interest rate of 2.35%. Provision for (Recovery of) Income Taxes Twelve-months ended December 31, expressed in thousands of dollars Current income tax expense (recovery) Future income tax expense Total income tax expense Effective tax rate 2011 280 3,708 3,988 9.6% 2010 (331) 8,340 8,009 18.9% The Corporation recorded an income tax expense in 2011 of $4.0 million on pre-tax income of $41.4 million, representing an effective tax rate of 9.6%, compared to a tax expense of $8.0 million on a pre-tax income of $42.4 million in 2010 for an effective tax rate of 18.9%. During 2011 and 2010, the Corporation recognized additional deferred tax assets in Canada totalling $7.9 million and $4.4 million respec- tively, as a reduction of cost of revenues, as the Corporation has determined that it will be able to beneﬁt from a portion of its previously unrecorded future tax assets. In 2011, the Corporation continued to have unrecognized deferred tax 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) decrease in accounts receivable Decrease (increase) in inventories Decrease in prepaid expenses and other Decrease in accounts payable, accrued liabilities and provisions Net change in non-cash working capital items Cash provided by operating activities 2011 (10,908) 24,704 6,559 (32,881) (12,526) 51,444 2010 869 (8,221) 26,289 (1,396) 17,541 80,371 Operating activities for 2011 generated cash ﬂows of $51.4 million compared to $80.4 million in the prior year. Changes in non-cash working capital used cash of $12.5 million as a result of a decrease in accounts payable and accrued liabilities charges and increases accounts receiv- able offset by a decrease in inventory and prepaid expense and other. Prepaid expenses decreased during the year as advance payments made to suppliers to support the Corporation’s 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 2010. During 2011, inventory levels decreased as a result of operational efﬁ- ciencies. In 2010, changes in non-cash working capital of $17.5 million were principally a result of a decrease prepaid expenses and other offset by an increase in inventory. Cash Flow from Investing Activities Twelve-months ended December 31, expressed in thousands of dollars Purchase of property, plant and equipment Proceeds from disposals of property, plant and equipment Decrease (increase) in other assets Cash used in investing activities 2011 (59,260) 514 10,381 (48,365) 2010 (16,571) 206 (20,241) (36,606) The Corporation invested $59.3 million in capital assets during the year, of which $43.5 million represented the Corporation’s investment in an advanced composite manufacturing centre in Winnipeg, Manitoba to support the JSF program. A portion of the costs of the advanced 10 MAGELLAN 2011 ANNUAL REPORT composite manufacturing centre was ﬁnanced through a mortgage in the amount of $16.1 million. Capital additions were for advanced technology production equipment and information technology systems, both designed to increase productivity, reduce cycle time and improve technology capability. SELECTED QUARTERLY FINANCIAL INFORMATION Expressed in millions of dollars except per share information Revenues Net income Net income per common share Mar 31 170.5 7.2 Jun 30 186.0 4.9 Sep 30 161.6 8.6 Basic Diluted 0.40 0.14 0.27 0.10 0.47 0.17 2011 Dec 31 173.3 16.7 0.90 0.31 Mar 31 177.6 3.8 0.21 0.07 Jun 30 181.4 7.1 0.39 0.14 Sep 30 184.7 8.0 0.44 0.16 2010 Dec 31 187.9 15.4 0.85 0.29 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 2011 ﬂuctuated reaching a low of 0.9440 and a high of 1.0561. During 2010, the US dollar relative to the Canadian dollar moved from an exchange rate of 1.0505 at the start of the year to 0.999 by December 31, 2010. The British Pound/Canadian dollar exchange rate in 2011 ﬂuctuated reaching a low of 1.5302 and a high of 1.6354. During 2010, the British Pound relative to the Canadian dollar moved from an exchange rate of 1.6940 at the start of the year to 1.5467 by December 31, 2010. Had exchange rates remained at levels experienced in 2010, reported revenues in 2011 would have been higher by $6.7 million in the ﬁrst quarter, $5.3 million in the second quarter and $6.5 million in the third quarter and were $1.2 million lower in the fourth quarter. Net income for the fourth quarter of 2010 and 2011 of $15.4 million and $16.7 million respectively was higher than any other quarterly net income disclosed in the table above. In the fourth quarter of each year, the Corporation recognized a reversal of previous impairment losses against intangible assets relating to various civil aircraft programs and recognized a portion of previously unrecognized deferred tax asset as the Corporation determined that it will be able to beneﬁt from these assets. 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 2011 37,413 16,999 310 3,988 68 32,835 91,613 2010 34,344 20,152 880 8,009 268 34,599 98,252 EBITDA for the year ended 2011 was $91.6 million, compared to $98.3 million in 2010. As previously discussed decreased revenue levels resulted in decreased EBITDA for the year. LIQUIDITY AND CAPITAL RESOURCES 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 its credit facility and accounts receivable securitization program, and long-term debt and equity capacity. Principal uses of cash are for operational requirements and capital expenditures. Based on current funds available and expected cash ﬂow from operat- ing activities, management believes that the Corporation has sufﬁcient funds available to meet its liquidity requirements at any point in time. However, if cash from operating activities is lower than expected or capital projects exceed current estimates, or if the Corporation incurs major unanticipated expenses, it may be required to seek additional capital in the form of debt or equity or a combination of both. 11 MAGELLAN 2011 ANNUAL REPORT Contractual Obligations Less than 1 year As at December 31, 2011, expressed in thousands of dollars Bank indebtedness Long-term debt1 Finance lease obligations Equipment leases Facility leases Other long-term liabilities Borrowings subject to speciﬁc conditions Convertible debentures Total Contractual Obligations 1 The Corporation’s accounts receivable securitization program is included in long-term debt in the less than 1 year category 1-3 Years 120,674 43,791 – 249 2,693 85 1,052 – 168,544 – 10,064 463 229 1,386 1,000 601 2,000 15,743 – 10,235 – 39 2,520 83 1,279 – 14,156 4-5 Years After 5 Years – 29,739 – 3 6,541 1,354 16,516 – 54,153 Total 120,674 93,829 463 520 13,140 2,522 19,448 2,000 252,596 Major cash ﬂow requirements for 2012 include the repayment of long-term debt of $10.1 million of which $6.0 million is expected to be reﬁnanced, payments of equipment and facility leases of $1.6 million and the repayment of convertible debentures in the amount of $2.0 million. On April 29, 2011, the operating credit facility was extended for an additional two year period with the new expiry date of April 29, 2013. On April 28, 2011 the Original Loan was extended to July 1, 2013. 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 $1.0 thousand, 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 $16.6 million of capital assets. The Corporation also has purchase commit- ments, largely for materials made through the normal course of operations, of $212.3 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 does not have any off-balance sheet arrangements that have or reasonably are likely to have a material effect on its ﬁnancial condition, changes in ﬁnancial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. As a result, the Corporation is not exposed materially to any ﬁnancing, liquidity, market or credit risk that could arise if it had engaged in these arrangements. DERIVATIVE CONTRACTS The Corporation operates internationally, which gives rise to a risk that its income, cash ﬂows and shareholders’ equity may be adversely impacted by ﬂuctuations in foreign exchange rates. Currency risk arises because the amount of the local currency receivable or payable for transactions denominated in foreign currencies may vary due to changes in exchange rates and because the non-Canadian dollar denomi- nated ﬁnancial statements of the Corporation’s subsidiaries may vary on consolidation into the reporting currency of Canadian dollars. The Corporation uses derivative ﬁnancial instruments to help manage foreign exchange risk with the objective of reducing transaction exposures and the resulting volatility of the Corporation’s earnings. The Corporation does not trade in derivatives for speculative purposes. Under these contracts the Corporation is obligated to purchase speciﬁed amounts at predetermined dates and exchange rates. These contracts are matched with anticipated cash ﬂows in US dollars. As at December 31, 2011, the Corporation has foreign exchange contracts outstanding as follows: Foreign exchange collars Maturity – less than 1 year Amount 17,000 Foreign exchange forward contracts Maturity – less than 1 year – US dollar Maturity – less than 1 year – Euros 12 MAGELLAN 2011 ANNUAL REPORT Floor 1.0000 Amount 18,700 1,292 Ceiling 1.1111 FX Rate 1.0400 1.3400 The fair values of the Corporation’s foreign exchange forward 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, 2011. The mark-to-market on these ﬁnancial instruments as at December 31, 2011 was an unrealized gain of $0.5 million [2010 – $1.1 million] which has been recorded in other expenses in the year. RELATED PARTY TRANSACTIONS On April 28, 2011, the Original Loan was extended and restated. During 2011, the Corporation incurred interest of $3.7 million [2010 - $5.5 million] in relation to the Original Loan and prepaid the Original Loan by $12.5 million [2010 - $19.0 million]. At December 31, 2011, the Cor- poration owed Edco interest of $0.2 million [2010 - $1.0 million]. On April 30, 2009, the Chairman of the Board of the Corporation subscribed to $40.0 million of the Convertible Debentures. On December 31, 2011, the Chairman of the Board exercised his conversion rights under the debenture agreement and $38.0 million principal amount of the Convertible Debentures, the entire amount of Convertible Debentures then held by the Chairman, were converted into 38,000,000 common shares of the Corporation. Interest incurred during the year ended December 31, 2011 on the Convertible Debentures was $4.0 million [2010 - $4.0 million]. As at December 31, 2011, Convertible Debentures in the principal amount of $2.0 million were held by a director of the Corporation. 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 0.8% [2010 – 1.2%] of the guaranteed amount or $1.4 million [2010 - $2.1 million] was paid in consideration for the guarantee. During the year, the Corporation incurred consulting costs of $0.1 million [2010 - $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 [2010 - $0.1 million] to a law ﬁrm in which a director is a chairman emeritus. RISK FACTORS The Corporation’s performance may be affected by a number of risks and uncertainties. Magellan’s senior management identiﬁes key risks and has processes in place to 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. A reduction in defence spending by the United States or other countries could result in a decrease in revenue. Heightened sovereign debt issues in the European Union have created instability and volatility in the international credit and ﬁnancial mar- kets and has caused a number of countries in the European Union to focus on their respective recurring yearly deﬁcit budgeting practices, resultant aggregate debt levels and to implement austerity measures. Likewise the governments in the United States and Canada have recognized the need to reduce budget deﬁcits. The United States is the principal purchaser under the JSF program and the JSF program represents a signiﬁcant item in the budget. Canada is also a participant in the JSF program and has invested in an Advanced Composite Manufacturing Facility at Magellan’s Winnipeg facility, primarily in support of the JSF program. The Corporation relies on sales to military customers particularly in the United States. A signiﬁcant reduction in military expenditures by the United States or other countries with which the Corporation has material contracts such as the JSF program could materially adversely affect the Corporation’s business and ﬁnancial condition. The loss or signiﬁcant reduction in government funding of a large program such as the JSF program in which the Corporation participates could also materially adversely affect sales and earnings. 13 MAGELLAN 2011 ANNUAL REPORT 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 sys- tems and the deterioration of global economic conditions, caused signiﬁcant volatility in the credit and ﬁnancial markets. These conditions continued in 2011 and linger in 2012 resulting in a lack of conﬁdence in the broader U.S. and global credit and ﬁnancial markets. While global ﬁnancial conditions and outlook have improved, these factors continue to impact the performance of the global economy going forward. 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. Sovereign debt issues in Europe continue to create uncertainty in the marketplace. The Corporation cannot predict the depth or duration of downturns in the domestic and global economies nor the effects on markets that the Corporation serves, particularly the airline industry. The Corporation’s ability to increase or maintain its revenues and operating results may be impaired as a result of negative general economic conditions. The current economic uncertainty renders estimates of future revenues and expenditures even more difﬁcult than usual to formulate. The future direction of the overall domestic and global economies could have a signiﬁcant impact on the Corporation’s overall ﬁnancial performance and may impact the value of its Common Shares. 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. The price of fuel has increased the pressure on the operating margins of aircraft companies which will reduce their ability to ﬁnance capital expenditures. When these economic and other factors adversely affect the aerospace industry, they tend to reduce the overall customer demand for the Corporation’s products and services, which decreases the Corporation’s operating income. Economic and other factors, both internal to the aerospace industry or general economic factors that might affect the aerospace industry may have an adverse impact on the Corporation’s results of operations. Potentially volatile capital markets may reduce the Corporation’s ﬁnancial ﬂexibility and may result in less than optimal ﬁnancing results. As future capital expenditures will be ﬁnanced out of cash generated from operations, borrowings and possible future equity sales, the Cor- poration’s ability to do so is dependent on, among other factors, the overall state of capital markets and investor appetite for investments in the aerospace industry and Magellan’s securities in particular. To the extent that external sources of capital become limited or unavailable or available on onerous terms, the Corporation’s ability to make capital investments may be impaired, and its assets, liabilities, business, ﬁnancial condition and results of operations may be materially and adversely affected as a result. Alternatively, the Corporation may need to issue additional Common Shares or other convertible securities from treasury at low prices to reﬁnance existing debt or to ﬁnance the capital costs of signiﬁcant projects or may wish to borrow to ﬁnance signiﬁcant projects to accom- plish Magellan’s long-term objectives on less than optimal terms or in excess of its optimal capital structure. Based on current funds available and expected cash ﬂow from operating activities, management believes that the Corporation has suf- ﬁcient funds available to fund its projected capital expenditures. However, if cash ﬂow from operating activities is lower than expected or capital costs for these projects exceed current estimates, or if the Corporation incurs major unanticipated expenses, it may be required to seek additional capital to maintain its capital expenditures at planned levels. Failure to obtain any ﬁnancing necessary for the Corporation’s capital expenditure plans may affect it in a materially adverse manner. 14 MAGELLAN 2011 ANNUAL REPORT Fluctuations in the value of foreign currencies could result in currency exchange losses. A large portion of the Corporation’s revenues and expenses are not currently denominated in Canadian dollars, and it is expected that some revenues and expenses will continue to be based in currencies other than the Canadian dollar. Therefore, ﬂuctuations in the Canadian dollar exchange rate will impact the Corporation’s results of operations and ﬁnancial condition from period to period. In addition, such ﬂuctua- tions affect the translation of the Corporation’s results for purposes of its consolidated ﬁnancial statements. The Corporation’s activities to manage its currency exposure may not be successful. CRITICAL ACCOUNTING ESTIMATES The preparation of ﬁnancial statements requires management to make critical judgements, estimates and assumptions that affect the reported amounts of certain assets and liabilities at the date of the ﬁnancial statements and the reported amount of revenues and expenses recorded during the reporting period. The critical estimates and judgements utilized in preparing the Corporation’s ﬁnancial statements affect the assessment of net recoverable amounts, net realizable values and fair values, depreciation and amortization rates and useful lives, value of intangible assets, ability to utilize tax losses and other tax measurements, determination of functional currency, determination of the degree of control that exists in determining the corresponding accounting basis, and the selection of accounting policies. Any changes in estimates and assumptions could have a material impact on the Corporation’s future earnings and/or the amounts reported in its state- ment of ﬁnancial position. The Corporation reviews its estimates and assumptions on an ongoing basis and uses the most current informa- tion available and exercises careful judgement in making these estimates and assumptions. The main assumptions and estimates that were used in preparing the Corporation’s consolidated ﬁnancial statements relate to: Financial instruments The valuation of the Corporation’s derivative instruments and certain other ﬁnancial instruments requires estimation of the fair value of each instrument at the reporting date. Details of the basis on which fair value estimated are provided in note 18 of the audited consolidated ﬁnancial statements. Impairments The recoverable amount of intangible assets and property, plant and equipment is based on estimates and assumptions regarding the expected market outlook and cash ﬂows from each cash-generating unit. Deferred taxes Income taxes are determined based on estimates of the Corporation’s current income taxes and estimates of deferred income taxes result- ing from temporary differences. Deferred tax assets are assessed to determine the likelihood that they will be realized from future taxable income before they expire. Government assistance Investment tax credits and scientiﬁc research and experimental development tax credits are determined based on estimates of the Cor- poration’s current year expenditures on qualifying programs. The investment tax credits are assessed to determine the likelihood that they will be applied against federal income tax. Capitalization of development costs When capitalizing development costs the Corporation must assess the technical and commercial feasibility of the projects and estimate the useful lives of resulting products. Determining whether future economic beneﬁts will ﬂow from the assets and therefore the estimates and assumptions associated with these calculations are instrumental in (i) deciding whether project costs can be capitalized, and (ii) accurately calculating the useful life of the projects for the Corporation. Income (loss) on completion of contracts accounted for under the percentage-of-completion method To estimate income (loss) on completion, the Corporation takes into account factors inherent to the contract by using historical and/or forecast data, as well as contractual indexes. When total contract costs are likely to exceed total contract revenue, the expected loss is rec- ognized within losses on completion. 15 MAGELLAN 2011 ANNUAL REPORT Repayable government grants The forecast repayment of grants received from government authorities is based on income from future sales. As the forecast repayments are closely related to forecasts of future sales set out in business plans prepared by the operating divisions, the estimates and assump- tions (as regards programs and ﬂuctuations in exchange rates, particularly the US dollar) underlying these business plans are instrumental in determining the timing of these repayments. Employee beneﬁts The Corporation considers a number of factors in developing the pension assumptions, including an evaluation of relevant discount rates, expected long-term returns on plan assets, plan asset allocations, mortality, expected changes in wages and retirement beneﬁts, analysis of current market conditions, economic beneﬁts available and input from actuaries and other consultants. Costs of the programmes are based on actuarially determined amounts and are accrued over the period from the date of hire to the full eligibility date of employees who are expected to qualify for these beneﬁts. CHANGES IN ACCOUNTING POLICIES Transition to and initial adoption of IFRS Starting January 1, 2010, the Corporation is applying IFRS as issued by the International Accounting Standards Board [“IASB”]. The prepa- ration of the consolidated ﬁnancial statements for the year ended December 31, 2011 includes the initial adoption of accounting policies under IFRS which are different than the accounting policies used to prepare the most recent consolidated ﬁnancial statements prepared under Canadian generally accepted accounting principles [“Canadian GAAP”]. The accounting policies as set out in Note 2 to the audited consolidated ﬁnancial statements for the year ended December 31, 2011 have been applied consistently to all periods beginning on or after January 1, 2010 presented in these ﬁnancial statements. Comparative infor- mation for the year ended December 31, 2010 has thus been adjusted from amounts previously reported under Canadian GAAP. They also have been applied in preparing an opening IFRS balance sheet at January 1, 2010 for the purpose of the transition to IFRS, as required by IFRS 1, First-time Adoption of International Financial Reporting Standards. Details on the changes to previously reported amounts as a result of the transition to IFRS were included in Note 30 to the audited consoli- dated ﬁnancial statements for the year ended December 31, 2011. The ﬁnancial statements were ﬁled on SEDAR and are also available on Magellan’s website www.magellan.aero. Impact of IFRS on the Corporation The conversion to IFRS impacts the way the Corporation presents its ﬁnancial results. The impact of the conversion to IFRS on the accounting systems has been minimal due to limited changes in accounting policies. The internal and disclosure control processes, as currently designed, have not required signiﬁcant modiﬁcations as a result of the conversion to IFRS. The Corporation has assessed the impact of adopting IFRS on its contractual arrangements, and has not identiﬁed any material compliance issues. The Corporation has also considered the impact that the transition will have on its internal planning process and compensation arrangements and has not identiﬁed any signiﬁcant issues. FUTURE CHANGES IN ACCOUNTING POLICIES A number of new standards, and amendments to standards and interpretations, are not yet effective for the year ended December 31, 2011, and have not been applied in preparing these unaudited interim consolidated ﬁnancial statements. The following standards and interpreta- tions have been issued by the International Accounting Standards Board and the International Financial Reporting Interpretations Commit- tees with effective dates relating to the annual accounting periods starting on or after the effective dates as follows: 16 MAGELLAN 2011 ANNUAL REPORT International Accounting Standards IAS 12 – Income Taxes IFRS 7 – Financial Instruments, Disclosures IFRS 9 – Financial Instruments, Recognition and Measurement IFRS 10 – Consolidation IFRS 11 – Joint Arrangements IFRS 12 – Disclosure of Interests in Other Entities IFRS 13 – Fair Value Measurement 17 MAGELLAN 2011 ANNUAL REPORT In December 2010, IAS 12, Income Taxes was amended to introduce an exception to the existing principle for the measurement of deferred tax assets or liabilities arising on investment property measured at fair value. As a result of the amendments, SIC 21, Income taxes—recovery of reval- ued non-depreciable assets, will no longer apply to investment proper- ties carried at fair value. The amendments also incorporate into IAS 12 the remaining guidance previously contained in SIC 21, which is withdrawn. IFRS 7 has been amended to provide more extensive quantitative disclo- sures for ﬁnancial instruments that are offset in the statement of ﬁnan- cial position or that are subject to enforceable master netting or similar arrangements. In November 2009, as part of the IASB project to replace IAS 39, Financial Instruments: Recognition and Measurement, the IASB issued the ﬁrst phase of IFRS 9, that introduces new requirements for the classiﬁcation and measurement of ﬁnancial assets. The standard was revised in Octo- ber 2010 to include requirements regarding classiﬁcation and measure- ment of ﬁnancial liabilities. IFRS 10 requires an entity to consolidate an investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Under existing IFRS, consolidation is required when an entity has the power to govern the ﬁnancial and operating policies of an entity so as to obtain beneﬁts from its activities. IFRS 10 replaces SIC-12, Con- solidation—Special Purpose Entities and parts of IAS 27, Consolidated and Separate Financial Statements. IFRS 11 requires a venturer to classify its interest in a joint arrangement as a joint venture or joint operation. Joint ventures will be accounted for using the equity method of accounting whereas for a joint operation the venturer will recognize its share of the assets, liabilities, revenue and expenses of the joint operation. Under existing IFRS, entities have the choice to proportionately consolidate or equity account for interests in joint ventures. IFRS 11 supersedes IAS 31, Interests in Joint Ventures, and SIC-13, Jointly Controlled Entities—Non-monetary Contributions. IFRS 12 establishes disclosure requirements for interests in other entities, such as joint arrangements, associates, special purpose vehicles and off balance sheet vehicles. The standard carries forward existing disclosures and also introduces signiﬁcant additional disclosure requirements that address the nature of, and risks associated with, an entity’s interests in other entities. IFRS 13 is a comprehensive standard for fair value measurement and dis- closure requirements for use across all IFRS standards. The new standard clariﬁes that fair value is the price that would be received to sell an asset, or paid to transfer a liability in an orderly transaction between market participants, at the measurement date. It also establishes disclosures about fair value measurement. Under existing IFRS, guidance on measur- ing and disclosing fair value is dispersed among the speciﬁc standards requiring fair value measurements and in many cases does not reﬂect a clear measurement basis or consistent disclosures. Effective Date January 1, 2012 January 1, 2013 January 1, 2015 January 1, 2013 January 1, 2013 January 1, 2013 January 1, 2013 International Accounting Standards IAS 1 – Presentation of Financial Statements IAS 19 – Employee Beneﬁts IAS 27 – Separate Financial Statements IAS 28 – Investments in Associates and Joint Ventures IAS 32 – Financial Instruments, Presentation The IASB amended IAS 1 with a new requirement for entities to group items presented in other comprehensive income on the basis of whether they are potentially reclassiﬁable to proﬁt or loss. A number of amendments have been made to IAS 19, which included eliminating the use of the “corridor” approach and requiring remeasure- ments to be presented in OCI. The standard also includes amendments related to termination beneﬁts as well as enhanced disclosures. As a result of the issue of the new consolidation suite of standards, IAS 27 has been reissued, as the consolidation guidance will now be included in IFRS 10. IAS 27 will now only prescribe the accounting and disclosure requirements for investments in subsidiaries, joint ventures and associ- ates when an entity prepares separate ﬁnancial statements. As a consequence of the issue of IFRS 10, IFRS 11 and IFRS 12, IAS 28 has been amended and will provide the accounting guidance for invest- ments in associates and to set out the requirements for the application of the equity method when accounting for investments in associates and joint ventures. The amended IAS 28 will be applied by all entities that are investors with joint control of, or signiﬁcant inﬂuence over, an investee. In December 2011, IAS 32 was been amended to clarify the requirements for offsetting ﬁnancial assets and liabilities. The amendments clarify that the right of offset must be available on the current date and cannot be contingent on a future event. Effective Date January 1, 2013 January 1, 2013 January 1, 2013 January 1, 2013 January 1, 2014 The extent of the impact of adoption of these standards and interpretations on the consolidated ﬁnancial statements of the Corporation has not been determined. CONTROLS AND PROCEDURES Based on the current Canadian Securities Administrators (the “CSA”) rules under National Instrument 52-109 Certiﬁcation of Disclosure in Issuers’ Annual and Interim Filings, the Chief Executive Ofﬁcer and Chief Financial Ofﬁcer (or individuals performing similar functions as a chief executive ofﬁcer or chief ﬁnancial ofﬁcer) are required to certify as at December 31, 2011 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, misstate- ments or fraud. In addition, internal control over ﬁnancial reporting that management has designed and established may be circumvented and rendered ineffective as a result of unauthorized acts of individuals through collusion or management override. A system of control, no matter how well conceived and operated, can provide only reasonable, but not absolute, assurance that control objectives are met. Due to the inherent limitations in a system of control, there is no absolute assurance that all controls issues, which may result in errors, misstate- ments, or fraud, can be prevented or detected. The inherent limitations include, amongst other things: (i) management’s assumptions and judgments could ultimately prove to be incorrect under varying conditions and circumstances; (ii) the impact of isolated errors; (iii) assump- tions about the likelihood of future events. In preparation for this certiﬁcation, Magellan has dedicated resources in place to document and evaluate the design and operating effec- tiveness of disclosure controls and procedures and internal control over ﬁnancial reporting. As of December 31, 2011, an evaluation was car- ried out, under the supervision of the President and Chief Executive Ofﬁcer and the Vice-President, Finance and Corporate Secretary, of the effectiveness of the Corporation’s disclosure controls and internal controls over ﬁnancial reporting, as those terms are deﬁned in National Instrument 52-109. Based on that evaluation, the Corporation’s management concluded that the Corporation’s design and operating dis- closure controls and procedures and internal control over ﬁnancial reporting were effective as of December 31, 2011. 18 MAGELLAN 2011 ANNUAL REPORT Notes To Consolidated Financial Statements (unless otherwise stated, all amounts are in thousands of Canadian dollars) 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. OTHER INFORMATION The authorized capital of the Corporation consists of an unlimited number of Preference Shares, issuable in series, and an unlimited number of common shares. As at March 23, 2012, 56,209,001 common shares were outstanding. At December 31, 2011, the Corporation had outstanding $2.0 million of 10.0% convertible secured subordinated debentures, due April 30, 2012. The convertible debentures are convertible, at the option of the holder at any time prior to April 30, 2012, in whole or in multiples of $1.0 thou- sand, 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 2,000,000 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. 19 MAGELLAN 2011 ANNUAL REPORT Management’s report To the shareholders of Magellan Aerospace Corporation The consolidated ﬁnancial statements of Magellan Aerospace Corporation were prepared by management in accordance with account- ing principles generally accepted in Canada. The ﬁnancial and operating information presented in this report is consistent with that shown in the ﬁnancial statements. Management maintains a system of internal controls to provide reasonable assurance that all assets are safeguarded and to facilitate the preparation of relevant, reliable and timely ﬁnancial information. External auditors appointed by the shareholders have examined the con- solidated 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 consoli- dated ﬁnancial statements. James S. Butyniec President and Chief Executive Ofﬁcer March 23, 2012 John B. Dekker Vice President Finance and Corporate Secretary 20 MAGELLAN 2011 ANNUAL REPORT INDEPENDENT Auditors’ report To the shareholders of Magellan Aerospace Corporation We have audited the accompanying consolidated ﬁnancial statements of Magellan Aerospace Corporation, which comprise the consoli- dated statements of ﬁnancial position as at December 31, 2011 and 2010, and January 1, 2010, and the consolidated statements of income and comprehensive income, changes in equity and cash ﬂows for the years ended December 31, 2011 and 2010, and a summary of signiﬁ- cant 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 Inter- national Financial Reporting Standards, and for such internal control as management determines is necessary to enable 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 accor- dance 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 state- ments. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the consolidated ﬁnancial statements, whether due to fraud or error. In making those risk assessments, the auditors consider 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 effectiveness 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 consolidated ﬁnancial statements. We believe that the audit evidence we have obtained in our audits 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 Magellan Aerospace Corporation as at December 31, 2011 and 2010, and January 1, 2010, and its ﬁnancial performance and its cash ﬂows for the years ended December 31, 2011 and 2010 in accordance with International Financial Reporting Standards. Chartered Accountants Licensed Public Accountants Toronto, Canada March 26, 2012 21 MAGELLAN 2011 ANNUAL REPORT CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (Expressed in thousands of Canadian dollars) Current assets Cash Trade and other receivables Inventories Prepaid expenses and other Non-current assets Property, plant and equipment Investment properties Intangible assets Other assets Deferred tax assets Total assets Current liabilities Bank indebtedness Accounts payable, accrued liabilities and provisions Preference shares Debt due within one year Non-current liabilities Bank indebtedness Long-term debt Convertible debentures Preference shares Borrowings subject to speciﬁc conditions Other long-term liabilities and provisions Deferred tax liabilities Equity Share capital Contributed surplus Other paid in capital Retained earnings (deﬁcit) Accumulated other comprehensive loss Total liabilities and equity See accompanying notes to the consolidated ﬁnancial statements 22 MAGELLAN 2011 ANNUAL REPORT Notes December 31 2011 December 31 January 1 2010 2010 3 4 5 6 7 15 8 9 12 10 8 10 11 12 13 14 15 16 11 23 26,520 106,480 127,473 5,326 265,799 289,744 3,041 66,134 8,660 28,360 395,939 661,738 – 106,022 – 12,513 118,535 120,674 81,768 – – 18,847 29,131 10,088 260,508 252,440 2,041 13,565 20,892 (6,243) 282,695 661,738 24,952 94,222 22,641 97,553 150,798 147,248 11,838 38,458 281,810 305,900 239,119 254,256 3,192 71,949 22,593 19,836 3,369 71,840 6,732 19,861 356,689 638,499 356,058 661,958 117,046 135,887 140,590 135,637 8,000 58,541 – 17,213 319,474 293,440 – 17,843 38,901 4,000 13,372 16,353 7,961 – 74,408 38,182 – 9,096 21,904 4,781 98,430 148,371 214,440 234,389 1,973 13,565 1,009 (10,392) 1,707 13,565 (29,514) – 220,595 638,499 220,147 661,958 CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME Years ended December 31 Years ended December 31 (Expressed in thousands of Canadian dollars, except per share amounts) Revenues Cost of revenues Gross proﬁt Administrative and general expenses Other Dividends on preference shares Interest Income before income taxes Income taxes Current Deferred Net income Other comprehensive income (loss) Foreign currency translation Actuarial losses on deﬁned beneﬁt pension plans, net of tax Comprehensive income Net income per share Basic Diluted See accompanying notes to the consolidated ﬁnancial statements Notes 20 21 22 27 12 23 15 15 24 15, 19 16 16 2011 691,410 594,000 97,410 2010 731,635 628,353 103,282 38,264 436 310 58,400 16,999 41,401 39,770 127 880 62,505 20,152 42,353 280 3,708 3,988 37,413 (331) 8,340 8,009 34,344 4,149 (17,530) 24,032 (10,392) (3,421) 20,531 2.04 0.73 1.86 0.66 23 MAGELLAN 2011 ANNUAL REPORT CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY Share capital Contributed surplus Other paid in capital Retained (deﬁcit) earnings Foreign currency translation 234,389 1,707 13,565 – – 266 – – – – – – – 1,973 13,565 – – 68 – – – – – (29,514) 34,344 (3,421) – – (400) 1,009 37,413 (17,530) – – – – (10,392) – – – (10,392) – 4,149 – – Total equity 220,147 34,344 (13,813) 266 (19,949) (400) 220,595 37,413 (13,381) 68 38,000 2,041 13,565 20,892 (6,243) 282,695 (Expressed in thousands of Canadian dollars) January 1, 2010 Net income Other comprehensive loss Stock-based compensation Preference shares Dividends on preference shares December 31, 2010 Net income Other comprehensive (loss) income Stock-based compensation Convertible debentures December 31, 2011 – – – (19,949) – 214,440 – – – 38,000 252,440 See accompanying notes to the consolidated ﬁnancial statements 24 MAGELLAN 2011 ANNUAL REPORT CONSOLIDATED STATEMENTS OF CASH FLOW Years ended December 31 Years ended December 31 (Expressed in thousands of Canadian dollars) Cash ﬂow from operating activities Net income Amortization/depreciation of intangible assets and property, plant and equipment 5,7 7 17 15 26 5 8 10 10 12 12 Net loss on disposal of assets Decrease in deﬁned beneﬁt plans Impairment reversal Deferred revenue Stock-based compensation Accretion Deferred taxes (Increase) decrease in non-cash working capital Net cash from operating activities Cash ﬂow from investing activities Purchase of property, plant and equipment Proceeds from disposal of property, plant and equipment Decrease (increase) in other assets Net cash used in investing activities Cash ﬂow from ﬁnancing activities Increase (decrease) in bank indebtedness Decrease in debt due within one year Decrease in long-term debt Increase in long-term debt Increase (decrease) in long-term liabilities and provisions Increase in borrowings Dividends on preference shares Redemption of preference shares Net cash used in ﬁnancing activities Increase in cash during the year Cash at beginning of the year Effect of exchange rate differences Cash at end of the year See accompanying notes to the consolidated ﬁnancial statements 25 MAGELLAN 2011 ANNUAL REPORT Notes 2011 2010 37,413 32,835 198 (3,979) (1,847) – 68 3,155 (3,873) (12,526) 51,444 (59,260) 514 10,381 (48,365) 2,704 (3,617) (17,221) 21,011 824 6,353 – (12,000) (1,946) 1,133 24,952 435 26,520 34,344 34,599 267 (4,594) (7,395) 271 268 1,093 3,977 17,541 80,371 (16,571) 206 (20,241) (36,606) (21,128) (4,679) (21,900) 12,813 (593) 3,976 (400) (8,000) (39,911) 3,854 22,641 (1,543) 24,952 Notes To Consolidated Financial Statements (unless otherwise stated, all amounts are in thousands of Canadian dollars) 1. DESCRIPTION OF BUSINESS AND NATURE OF OPERATIONS Magellan Aerospace Corporation (the “Corporation”) is a publicly listed company incorporated in Ontario, Canada under the Ontario Busi- ness Corporations Act and its shares are listed on the Toronto Stock Exchange. The registered and head ofﬁce of the Corporation is located at 3160 Derry Road East, Mississauga, Ontario, Canada, L4T 1A9. The Corporation is a diversiﬁed supplier of components to the aerospace industry and in certain circumstances for power generation proj- ects. 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 circum- stances parts and equipment for power generation projects. 2. SIGNIFICANT ACCOUNTING POLICIES (a) Statement of compliance These consolidated ﬁnancial statements represent the Corporation’s ﬁrst annual ﬁnancial statements prepared under International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). The Corporation adopted IFRS in accor- dance with IFRS 1, First Time Adoption of IFRS as discussed in Note 30. The Corporation’s consolidated ﬁnancial statements were previously prepared in accordance with accounting principles generally accepted in Canada (“Canadian GAAP”). Canadian GAAP differs in some areas from IFRS. In preparing these consolidated ﬁnancial statements, management has amended certain accounting methods previously applied in the Canadian GAAP ﬁnancial statements to comply with IFRS. The comparative ﬁgures for 2010 were restated to reﬂect these adjustments. Note 30 contains reconciliations and descriptions of the effect of the transition from Canadian GAAP to IFRS on equity, income and comprehensive income for the year ended December 31, 2010 along with line by line reconciliations of the statement of ﬁnancial position as at January 1, 2010 and December 31, 2010. These consolidated ﬁnancial statements were authorized for issuance by the Board of Directors of the Corporation on March 23, 2012. (b) Basis of presentation The consolidated ﬁnancial statements of the Corporation include the assets and liabilities, and the results of operations and cash ﬂows, of the Corporation and its subsidiaries and the Corporation’s share of the results and net assets of a jointly controlled entity. The ﬁnancial statements of entities consolidated have a reporting date of December 31. Entities over which the Corporation has the power to govern the ﬁnancial and operating policies are accounted for as subsidiaries. Where the Corporation has the ability to exercise joint control, the entities are accounted for as jointly controlled entities. The results and assets and liabilities of jointly controlled entities are incorporated into the consolidated ﬁnancial statements using the proportionate consolidation method of accounting. Interests acquired in entities are consolidated from the date the Corporation acquires control and interests sold are de-consolidated from the date control ceases. Wholly owned operating subsidiaries of the Corporation are: >> Magellan Aerospace Limited >> Magellan Aerospace (UK) Limited >> Magellan Aerospace USA, Inc. The effects of intragroup transactions are eliminated. Accounts receivable and accounts payable as well as expenses and income between the consolidated entities are netted. Internal sales are transacted on the basis of market prices and intergroup proﬁts and losses are eliminated. The Corporation’s signiﬁcant accounting policies are set out below. These accounting policies have been applied consistently to all periods presented in these consolidated ﬁnancial statements and by all entities. (c) Foreign currency translation The consolidated ﬁnancial statements are presented in Canadian dollars, which is the Corporation’s functional and presentation currency. 26 MAGELLAN 2011 ANNUAL REPORT Notes To Consolidated Financial Statements (unless otherwise stated, all amounts are in thousands of Canadian dollars) At the statement of ﬁnancial position date, foreign currency denominated monetary assets and liabilities are translated at the rates of exchange at the statement of ﬁnancial position date. Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at that date, whereas non-monetary items measured at historic cost, are translated using the exchange rate pre- vailing on the transaction date. Translation gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies are recognized in income. Assets and liabilities of foreign operations that have a functional currency different from the presentation currency are translated using the closing exchange rate prevailing at the reporting date and revenues and expenses at average exchange rates during the period. Transla- tion gains and losses on currency translation are recognized as a separate component of equity in other comprehensive income and do not have any impact on the net income/loss for the year. (d) Segment reporting Management has determined the operating segments based on information regularly reviewed for the purposes of decision making, allo- cating resources and assessing performance by the Corporation’s chief operating decision makers. The Corporation evaluates the ﬁnancial performance of its operating segments primarily based on net income before interest and income taxes. (e) Revenue recognition Revenue comprises of all sales of goods and rendering of services at the fair value of consideration received or receivable after the deduc- tion of any trade discounts and excluding sales taxes. The Corporation’s revenue recognition methodology is determined on a contract- by-contract basis. Revenue is recognized when it can be measured reliably, the signiﬁcant risks and rewards of ownership are transferred to the customer, and it is probable that future economic beneﬁts will ﬂow to the Corporation. Sales of goods are recognized when the goods are dispatched or made available to the customer, except for the sale of consignment prod- ucts located at customers premises where revenue is recognized on notiﬁcation that the product has been used. Rendering of services and on certain long-term contracts for the sale of goods revenue is recognized using the percentage-of-completion method, which recognizes revenue as performance of the contract progresses. The contract progress is determined based on the percent- age of costs incurred to date to total estimated cost for each contract after giving effect to the most recent estimates of total cost. Varia- tions in contract work, claims and incentive payments are included to the extent that they have been agreed with the customer. Provided that the outcome of construction contracts can be assessed with reasonable certainty, the revenues and costs on such contracts are rec- ognized based on stage of completion and the overall contract proﬁtability. If the outcome of a contract cannot be estimated reliably, the zero-proﬁt method is applied, whereby revenues are only recognized to the extent that contract costs have been incurred and it is prob- able that those costs will be recovered. Where it is probable that total contract costs will exceed total contract revenue, the expected loss is recognized as an expense immediately. 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 arrangement 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. 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. 27 MAGELLAN 2011 ANNUAL REPORT Notes To Consolidated Financial Statements (unless otherwise stated, all amounts are in thousands of Canadian dollars) (f) Cost of revenues Cost of revenues consists of production-related manufacturing costs of products sold, development services paid, and the cost of products purchased for resale. In addition to the direct material cost and production costs, it also comprises of systematically allocated overheads, including depreciation of production-related intangible assets, write-downs on inventories and an appropriate portion of production-related administrative overheads. (g) Government grants Government grants are recognized at their fair value in the period when there is reasonable assurance that the conditions attaching to the grant will be met and that the grant will be received. Grants are recognized as income over the periods necessary to match them with the related costs that they are intended to compensate. Grants relating to expenditure on property, plant and equipment and on intangible assets are deducted from the carrying amount of the asset. The grant is therefore recognized as income over the life of the depreciable asset by way of a reduced depreciation charge. Repayable grants are treated as sources of ﬁnancing and are recognized in borrowings sub- ject to speciﬁc conditions in the consolidated statement of ﬁnancial position. Repayments made are recorded as a reduction of the liability. A revision to the estimate of amounts to be repaid results in an increase or decrease in the liability and the related asset or expense, and a cumulative adjustment to amortization is recognized immediately in income. (h) Government assistance Government assistance is comprised of investment tax credits and scientiﬁc research and experimental development tax credits. These credits are recognized when there is reasonable assurance of their recovery using the cost reduction method. Investment tax credits are subject to the customary approvals by the pertinent tax authorities. Adjustments required, if any, are reﬂected in the year when such assess- ments are received. (i) Employee beneﬁts Deﬁned beneﬁt plans The Corporation’s obligation in respect of deﬁned beneﬁt plans is determined periodically by independent actuaries using the projected unit credit method in accordance with IAS 19, Employee Beneﬁts. Actuarial gains and losses are recognized in full in the period in which they occur, and are recognized in retained earnings and included in other comprehensive income. Past service cost is recognized immediately to the extent the beneﬁts are already vested, or otherwise is recognized on a straight-line basis over the average period until the beneﬁts become vested. Curtailments due to the material reduction of the expected years of future services of current employees or the elimination of the accrual of deﬁned beneﬁts for some or all of the future services for a signiﬁcant number of employees are recognized immediately as a gain or loss in the income statement. The deﬁned beneﬁt surplus or deﬁcit represents the fair value of the plan assets less the present value of the deﬁned beneﬁt obligations. A surplus is recognized in the statement of ﬁnancial position to the extent that the Corporation has an unconditional right to the surplus, either through a refund or reduction in future contributions. A deﬁcit is recognized in full. Deﬁned contribution plans Obligations for contributions to deﬁned contribution plans are recognized as an expense in the income statement as incurred. Share-based compensation The fair value of awards made under share-based compensation plans is measured at the grant date and allocated over the vesting period, based on the best available estimate of the number of share options expected to vest, in the income statement with a corresponding increase in equity. The fair value is measured using an appropriate valuation model taking into account the terms and conditions of the individual plans. The amount recognized as an expense is adjusted to reﬂect the actual awards vesting except where any change in the awards vest- ing relates only to market-based criteria not being achieved. The cost of cash-settled transactions is measured initially at fair value at the grant date using a binomial model, taking into account the terms and conditions upon which the share awards were granted. This fair value is expensed over the period until the vesting date with recogni- tion of a corresponding liability. The liability is remeasured to fair value at each reporting date up to and including the settlement date, with changes in fair value recognised in the income statement. 28 MAGELLAN 2011 ANNUAL REPORT Notes To Consolidated Financial Statements (unless otherwise stated, all amounts are in thousands of Canadian dollars) (j) Taxation The tax charge for the period comprises of both current and deferred tax. Taxation is recognized as a charge or credit in the income state- ment except to the extent that it relates to items recognized directly to equity in which case the related tax is also recognized in equity. Current tax is the expected tax payable on the taxable income for the year and any adjustment to tax payable in respect of previous years. Deferred tax assets and liabilities are established using the balance sheet liability method, providing for temporary differences between the carrying amounts of the assets and liabilities for ﬁnancial reporting purposes and the amounts used for taxation purposes. Deferred tax liabilities are generally recognized for all taxable temporary differences and deferred tax assets are recognized to the extent that it is probable that taxable proﬁts will be available against which deductible timing differences can be utilized. Deferred tax liabilities are not recognized for temporary differences arising on investment in subsidiaries where the Corporation is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax is calculated at the enacted or substantively enacted tax rates that are expected to apply in the period when the liability is settled or the asset is realized. Deferred income assets and liabilities are only offset where they arise within the same entity and tax jurisdiction. Deferred income tax assets and liabilities are presented as non-current. (k) Net income per share Net income per share is calculated based on the proﬁt for the ﬁnancial year and the weighted average number of ordinary shares in issue during the year. Diluted net income per share is calculated using the proﬁt for the ﬁnancial year and the weighted average diluted number of share (ignoring any potential issue or ordinary shares which would be anti-dilutive) during the year. (l) Inventories Inventory is stated at the lower of average cost and 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 rec- ognized 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 unre- coverable due to obsolescence, damage or declining selling prices. When circumstances that previously caused inventories to be written down below cost no longer exist, the amount of the write-down previously recorded is reversed. (m) Property, plant and equipment Property, plant and equipment are stated at cost, less accumulated depreciation and any impairment in value. Cost includes the purchase price (after deducting trade discounts and rebates), any directly attributable costs of bringing the asset to the location and condition nec- essary for it to be capable of operating in the manner intended by management, and the estimate of the present value of the costs of dis- mantling and removing the item and restoring the site. Subsequent costs are included in the assets carrying amount or recognized as a separate asset, as appropriate, only when it is probable that future economic beneﬁts associated with the item will ﬂow to the Corporation and the cost of the item can be measured reliably. The carrying amount of the replaced part is de-recognized. The cost of the day-to-day servicing of property, plant and equipment are recognized in the income statement as incurred. Depreciation is calculated using the straight-line method to allocate the cost of property, plant and equipment to their residual values over their estimated useful lives. 29 MAGELLAN 2011 ANNUAL REPORT Notes To Consolidated Financial Statements (unless otherwise stated, all amounts are in thousands of Canadian dollars) Scheduled depreciation is based on the following useful lives: Assets Buildings Machinery and equipment Tooling Leasehold improvements in years 40 10-20 5-7 term of lease The residual value, useful lives and depreciation methods pertaining to property, plant and equipment are regularly assessed for relevance, at least at every statement of ﬁnancial position date, and adjustments are made when necessary to estimates used when compiling the ﬁnancial statements. An asset’s carrying value is written down to its recoverable amount if the assets carrying amount is greater than its estimated recoverable amount. These impairment losses are recognized in the income statement. Following the recognition of an impair- ment loss, the depreciation charge applicable to the asset is adjusted prospectively in order to systematically allocate the revised carrying amount, net of any residual value, over the remaining useful life. (n) Investment properties Investment property is property held to earn rental income and/or for capital appreciation rather than for the purpose of the Corporation’s operating activities. Investment property assets are carried at cost less accumulated depreciation and any recognised impairment in value. The depreciation policies for investment property are consistent with those described for owner-occupied property. (o) Intangible assets In accordance with IAS 38, Intangible Assets, expenditure on research activities is recognized as an expense in the period in which it is incurred. Externally acquired and internally generated intangible assets are recognized only if they meet strict criteria, relating in particular to technical feasibility, probability that a future economic beneﬁt associated with the asset will ﬂow to the entity and the cost of the asset can be measured reliably. Intangible assets with a ﬁnite useful life are stated at cost and amortized on a straight-line basis over their useful lives or on a unit of pro- duction basis. Gains or losses arising from de-recognition of an intangible asset are measured as the difference between the net disposal proceeds and the carrying amount of the asset, and are recognized in the income statement when the asset is de-recognized. (p) Impairment of non-ﬁnancial assets Impairment of non-ﬁnancial assets is considered in accordance with IAS 36, Impairment of Assets. Where the asset does not generate cash ﬂows that are independent of other assets, impairment is considered for the cash-generating unit (“CGU”) to which the asset belongs. Two types of CGUs are deﬁned within the Corporation: >> CGUs corresponding to programs, projects, or product families associated with speciﬁc assets; >> CGUs corresponding to the business units monitored by management and relating chieﬂy to the Corporation’s main subsidiaries. Intangible assets not yet available for use are tested for impairment annually. Other intangible assets and property, plant and equipment are assessed for any indications of impairment annually. If any indication of impairment is identiﬁed, an impairment test is performed to estimate the recoverable amount. An impairment loss is recognized in the income statement whenever the carrying amount of the individual asset or the cash-generating unit exceeds its recoverable amount. Recoverable amount is the higher of value in use or fair value less costs to sell, if this is readily avail- able. The value in use is the present value of future cash ﬂows using a pre-tax discount rate that reﬂects the time value of money and the risk speciﬁc to the asset. An impairment loss for an individual asset or cash-generating unit shall be reversed if there has been a change in estimates used to deter- mine the recoverable amount since the last impairment loss was recognized and is only reversed to the extent that the assets carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized. 30 MAGELLAN 2011 ANNUAL REPORT Notes To Consolidated Financial Statements (unless otherwise stated, all amounts are in thousands of Canadian dollars) (q) Leases A lease is deﬁned as an agreement whereby the lessor conveys to the lessee, in return for payment or a series of payments, the right to use a speciﬁc asset for an agreed period of time. If substantially all the risks and rewards associated with ownership of the leased asset are trans- ferred to the lessee (ﬁnance lease for the lessee), the leased asset is recognized in the lessee’s statement of ﬁnancial position. The leased asset is recognized at its fair value as measured at the date of acquisition, or at the present value of the minimum lease payments if lower. Assets held under ﬁnance leases are depreciated on a basis consistent with similar owned assets or the lease term if shorter. Payments made under ﬁnance leases are apportioned between capital repayments and interest expense charged to the income statement. If the lessor retains the substantial risks and rewards (operating lease for the lessee), the leased asset is recognized in the lessor’s statement of ﬁnancial position. Payments made under operating leases are recognized in the income statement on a straight line basis over the term of the lease. (r) Financial instruments Financial assets Financial assets include, in particular, cash and cash equivalents, trade receivables, loans and other receivables, ﬁnancial investments held to maturity, and non-derivative and derivative ﬁnancial assets held for trading. Financial assets are recognized at the contract date and initially measured in accordance with IAS 39 Financial Instruments: Recognition and Measurement. The measurement of ﬁnancial assets subsequent to initial recognition depends on whether the ﬁnancial instrument is held for trading, held to maturity, available-for-sale, or whether it falls in the loans and receivables category. The assignment of an asset to a measurement category is performed at the time of acquisition and is primarily determined by the purpose for which the ﬁnancial asset is held. Held for trading instruments are held at fair value. Changes in fair value are included in the income statement unless the instrument is included in a cash ﬂow hedge. If the instruments are included in a cash ﬂow hedging relationships, which are effective, changes in value are taken to equity. When the hedged forecast transaction occurs, amounts previously recorded in equity are recognized in the income statement. Held to maturity instruments are measured at amortized cost using the effective interest method. Available-for-sale assets are held at fair value. Changes in fair value arising from changes in exchange rates are included in the income state- ment. All other changes in fair value are taken to equity. On disposal, the accumulated changes in value recorded in equity are included in the gain or loss recorded in the income statement. Loans and receivables are held at amortized cost and not revalued (except for changes in exchange rates which are included in the income statement) unless they are included in a fair value hedge accounting relationship. Where such a relationship exists, the instruments are reval- ued in respect of the risk being hedged. If instruments held at amortized cost are hedged, generally by interest rate swaps, and the hedges are effective, the carrying values are adjusted for changes in fair value, which are included in the income statement. At each statement of ﬁnancial position date, the carrying amounts of ﬁnancial assets that are not measured at fair value though proﬁt or loss are assessed to determine whether there is any substantial objective indication of impairment. The amount of impairment loss is recognized in the income statement. If impairment is indicated for available-for-sale ﬁnancial assets, the amounts previously recognized in equity are eliminated from other comprehensive income up to the amount of the assessed impairment loss and recognized to the income statement. Derecognition of ﬁnancial assets Transfers of receivables in securitization transactions are recognized as sales when the contractual right to receive cash ﬂows from the assets has expired; or when the Corporation has transferred its contractual right to receive the cash ﬂows of the ﬁnancial assets, and either: sub- stantially all the risks and rewards of ownership have been transferred; or the Corporation has neither retained nor transferred substantially all the risks and rewards, but has not retained control. 31 MAGELLAN 2011 ANNUAL REPORT Notes To Consolidated Financial Statements (unless otherwise stated, all amounts are in thousands of Canadian dollars) Financial liabilities Financial liabilities often entitle the holder to return the instrument to the issuer in return for cash or another ﬁnancial asset. These include, in particular, debentures and other debt evidenced by certiﬁcates, trade payables, liabilities to banks, ﬁnance lease liabilities, loans and derivative ﬁnancial liabilities. Financial liabilities are measured at their fair value at the time of acquisition, which is normally equivalent to the net loan proceeds. Transac- tion costs directly attributable to the acquisition are deducted from the amount of all ﬁnancial liabilities that are not measured at fair value through proﬁt or loss subsequent to initial recognition. If a ﬁnancial liability is interest free or bears interest at below the market rate, it is recognized at an amount below the settlement price or nominal value. The ﬁnancial liability initially recognized at fair value is amortized subsequent to initial recognition using the effective interest method. Convertible debentures Convertible debentures are classiﬁed according to their liability and equity elements using the residual approach, whereby the Corpora- tion 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 equity. Upon conversion of debentures to common shares, a pro rata portion of the long-term debt, conversion option, unamortized discount and debt issue costs, as well as accrued but unpaid interest, will be transferred to share capital. If any convert- ible debentures mature without being converted, the remaining conversion option balance will remain in contributed surplus. The discount is amortized using the effective interest rate method over the term of the related debt. The unamortized discount is included in long-term debt and the amortization of the discount is included in interest expense. Derivative ﬁnancial instruments The Corporation manages its foreign currency and interest rate exposures through the use of derivative ﬁnancial instruments. The Corpora- tion’s policy is not to utilize derivative ﬁnancial instruments for trading or speculative purposes. For the year ended December 31, 2011, the Corporation’s derivative contracts were not designated as hedges and as a result are recorded on the consolidated statement of ﬁnancial position at their fair value. Any changes in fair value during the year are reported in other expenses in the consolidated statement of income. Transaction costs incurred to acquire ﬁnancial instruments are included in the underlying balance. (s) Provisions A provision is recognized when there is a present legal or constructive obligation, as a result of a past event, which is likely to result in an outﬂow of economic beneﬁts and where a reliable estimate of the amount of the obligation can be made. If the effect is material, the pro- vision is determined by discounting the expected future cash ﬂows at a pre-tax risk-free rate and, where appropriate, the risks speciﬁc to the liability. A provision for onerous contracts is recognized when the expected beneﬁts to be derived from the contracts are less than the related unavoidable costs of meeting its obligations under the contract. Such provisions are recorded as write-downs of work-in-progress for that portion of the work which has already been completed, and as liability provisions for the remainder. (t) Share capital Common shares are classiﬁed as equity. Transaction costs directly attributable to the issue of common shares are recognized as a deduc- tion from equity, net of any income tax. (u) Critical judgements and estimates The preparation of ﬁnancial statements requires management to make critical judgements, estimates and assumptions that affect the reported amounts of certain assets and liabilities at the date of the ﬁnancial statements and the reported amount of revenues and expenses recorded during the reporting period. The critical estimates and judgements utilized in preparing the Corporation’s ﬁnancial statements affect the assessment of net recoverable amounts, net realizable values and fair values, depreciation and amortization rates and useful lives, value of intangible assets, ability to utilize tax losses and other tax measurements, determination of functional currency, determination of the degree of control that exists in determining the corresponding accounting basis, and the selection of accounting policies. Any changes in estimates and assumptions could have a material impact on the Corporation’s future income and/or the amounts reported in its statement of ﬁnancial position. The Corporation reviews its estimates and assumptions on an ongoing basis and uses the most current information available and exercises careful judgement in making these estimates and assumptions. 32 MAGELLAN 2011 ANNUAL REPORT Notes To Consolidated Financial Statements (unless otherwise stated, all amounts are in thousands of Canadian dollars) The main assumptions and estimates that were used in preparing the Corporation’s consolidated ﬁnancial statements relate to: Financial instruments The valuation of the Corporation’s derivative instruments and certain other ﬁnancial instruments requires estimation of the fair value of each instrument at the reporting date. Details of the basis on which fair value estimated are provided in Note 18. Impairments The recoverable amount of intangible assets and property, plant and equipment is based on estimates and assumptions regarding the expected market outlook and cash ﬂows from each CGU. Deferred taxes Income taxes are determined based on estimates of the Corporation’s current income taxes and estimates of deferred income taxes result- ing from temporary differences. Deferred tax assets are assessed to determine the likelihood that they will be realized from future taxable income before they expire. Government assistance Investment tax credits and scientiﬁc research and experimental development tax credits are determined based on estimates of the Cor- poration’s current year expenditures on qualifying programs. The investment tax credits are assessed to determine the likelihood that they will be applied against federal income tax. Capitalization of development costs When capitalizing development costs the Corporation must assess the technical and commercial feasibility of the projects and estimate the useful lives of resulting products. Determining whether future economic beneﬁts will ﬂow from the assets and therefore the estimates and assumptions associated with these calculations are instrumental in (i) deciding whether project costs can be capitalized, and (ii) accurately calculating the useful life of the projects for the Corporation. Income (loss) on completion of contracts accounted for under the percentage-of-completion method To estimate income (loss) on completion, the Corporation takes into account factors inherent to the contract by using historical and/or fore- cast data, as well as contractual indexes. When total contract costs are likely to exceed total contract revenue, the expected loss is recog- nized within cost of revenues. Repayable government grants The forecast repayment of grants received from government authorities is based on income from future sales. As the forecast repayments are closely related to forecasts of future sales set out in business plans prepared by the operating divisions, the estimates and assump- tions (as regards programs and ﬂuctuations in exchange rates, particularly the US dollar) underlying these business plans are instrumental in determining the timing of these repayments. Employee beneﬁts The Corporation considers a number of factors in developing the pension assumptions, including an evaluation of relevant discount rates, expected long-term returns on plan assets, plan asset allocations, mortality, expected changes in wages and retirement beneﬁts, analysis of current market conditions, economic beneﬁts available and input from actuaries and other consultants. Costs of the programmes are based on actuarially determined amounts and are accrued over the period from the date of hire to the full eligibility date of employees who are expected to qualify for these beneﬁts. (v) New standards and interpretations A number of new standards, and amendments to standards and interpretations, are not yet effective for the year ended December 31, 2011, and have not been applied in preparing these consolidated ﬁnancial statements. The following standards and interpretations have been issued by the International Accounting Standards Board and the International Financial Reporting Interpretations Committees with effec- tive dates relating to the annual accounting periods starting on or after the effective dates as follows: 33 MAGELLAN 2011 ANNUAL REPORT Notes To Consolidated Financial Statements (unless otherwise stated, all amounts are in thousands of Canadian dollars) International Accounting Standards IAS 12 – Income Taxes IFRS 7 – Financial Instruments, Disclosures IFRS 9 – Financial Instruments, Recognition and Measurement IFRS 10 – Consolidation IFRS 11 – Joint Arrangements IFRS 12 – Disclosure of Interests in Other Entities IFRS 13 – Fair Value Measurement 34 MAGELLAN 2011 ANNUAL REPORT In December 2010, IAS 12 Income Taxes was amended to introduce an exception to the existing principle for the measurement of deferred tax assets or liabilities arising on investment property measured at fair value. As a result of the amendments, SIC 21, Income taxes—recovery of reval- ued non-depreciable assets, will no longer apply to investment proper- ties carried at fair value. The amendments also incorporate into IAS 12 the remaining guidance previously contained in SIC 21, which is withdrawn. IAS 7 has been amended to provide more extensive quantitative disclo- sures for ﬁnancial instruments that are offset in the statement of ﬁnan- cial position or that are subject to enforceable master netting or similar arrangements. In November 2009, as part of the IASB project to replace IAS 39, Financial Instruments: Recognition and Measurement, the IASB issued the ﬁrst phase of IFRS 9 that introduces new requirements for the classiﬁcation and measurement of ﬁnancial assets. The standard was revised in Octo- ber 2010 to include requirements regarding classiﬁcation and measure- ment of ﬁnancial liabilities. IFRS 10 requires an entity to consolidate an investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Under existing IFRS, consolidation is required when an entity has the power to govern the ﬁnancial and operating policies of an entity so as to obtain beneﬁts from its activities. IFRS 10 replaces SIC-12, Con- solidation—Special Purpose Entities and parts of IAS 27, Consolidated and Separate Financial Statements. IFRS 11 requires a venturer to classify its interest in a joint arrangement as a joint venture or joint operation. Joint ventures will be accounted for using the equity method of accounting whereas for a joint operation the venturer will recognize its share of the assets, liabilities, revenue and expenses of the joint operation. Under existing IFRS, entities have the choice to proportionately consolidate or equity account for interests in joint ventures. IFRS 11 supersedes IAS 31, Interests in Joint Ventures, and SIC-13, Jointly Controlled Entities—Non-monetary Contributions. IFRS 12 establishes disclosure requirements for interests in other entities, such as joint arrangements, associates, special purpose vehicles and off balance sheet vehicles. The standard carries forward existing disclosures and also introduces signiﬁcant additional disclosure requirements that address the nature of, and risks associated with, an entity’s interests in other entities. IFRS 13 is a comprehensive standard for fair value measurement and dis- closure requirements for use across all IFRS standards. The new standard clariﬁes that fair value is the price that would be received to sell an asset, or paid to transfer a liability in an orderly transaction between market participants, at the measurement date. It also establishes disclosures about fair value measurement. Under existing IFRS, guidance on measur- ing and disclosing fair value is dispersed among the speciﬁc standards requiring fair value measurements and in many cases does not reﬂect a clear measurement basis or consistent disclosures. Effective Date January 1, 2012 January 1, 2013 January 1, 2015 January 1, 2013 January 1, 2013 January 1, 2013 January 1, 2013 Notes To Consolidated Financial Statements (unless otherwise stated, all amounts are in thousands of Canadian dollars) International Accounting Standards IAS 1 – Presentation of Financial Statements IAS 19 – Employee Beneﬁts IAS 27 – Separate Financial Statements IAS 28 – Investments in Associates and Joint Ventures IAS 32 – Financial Instruments, Presentation The IASB amended IAS 1 with a new requirement for entities to group items presented in other comprehensive income on the basis of whether they are potentially reclassiﬁable to proﬁt or loss. A number of amendments have been made to IAS 19, which included eliminating the use of the “corridor” approach and requiring remeasure- ments to be presented in OCI. The standard also includes amendments related to termination beneﬁts as well as enhanced disclosures. As a result of the issue of the new consolidation suite of standards, IAS 27 has been reissued, as the consolidation guidance will now be included in IFRS 10. IAS 27 will now only prescribe the accounting and disclosure requirements for investments in subsidiaries, joint ventures and associates when an entity prepares separate ﬁnancial statements. As a consequence of the issue of IFRS 10, IFRS 11 and IFRS 12, IAS 28 has been amended and will provide the accounting guidance for invest- ments in associates and to set out the requirements for the application of the equity method when accounting for investments in associates and joint ventures. The amended IAS 28 will be applied by all entities that are investors with joint control of, or signiﬁcant inﬂuence over, an investee. In December 2011, IAS 32 was been amended to clarify the requirements for offsetting ﬁnancial assets and liabilities. The amendments clarify that the right of offset must be available on the current date and cannot be contingent on a future event. Effective Date January 1, 2013 January 1, 2013 January 1, 2013 January 1, 2013 January 1, 2014 The extent of the impact of adoption of these standards and interpretations on the consolidated ﬁnancial statements of the Corporation has not been determined. 3. TRADE AND OTHER RECEIVABLES Total trade accounts receivable Less allowance for doubtful accounts Net trade receivables Other receivables Trade and other receivables December 31 December 31 2010 83,623 1,963 81,660 12,562 94,222 2011 80,592 2,076 78,516 27,964 106,480 January 1 2010 94,393 1,782 92,611 4,942 97,553 Included in the above amounts are accured receivables for construction contracts in progress at December 31, 2011 of $11,391 [December 31, 2010 – $3,921, January 1, 2010 – $2,091]. The aging of gross trade accounts receivables at each reporting date was as follows: December 31, 2010 December 31, 2011 Less than 90 Current 76,419 74,119 days 5,593 4,780 91-181 days 231 360 182-365 More than days 18 67 365 days 1,362 1,266 Total 83,623 80,592 35 MAGELLAN 2011 ANNUAL REPORT Notes To Consolidated Financial Statements (unless otherwise stated, all amounts are in thousands of Canadian dollars) 4. INVENTORIES At January 1, 2010 At December 31,2010 At December 31, 2011 Raw materials 38,740 35,841 33,631 Work in progress 91,139 96,958 80,198 Finished goods 17,369 17,999 13,644 Total 147,248 150,798 127,473 The cost of inventories recognized as expense and included in cost of sales for the year ended December 31, 2011 amounted to $590,128 [2010 - $618,677]. During the year ended December 31, 2011, the Corporation recorded an impairment expense related to the write-down of inventory in the amount of $2,044 [December 31, 2010 - $1,783]. The Corporation also recorded reversals of previous write-down of inventory in the amount of $1,417 [December 31, 2010 - $2,444] due to the sale of inventory previously provided for. The carrying amount of inventory recorded at net realizable value was $21,530 as at December 31, 2011, with the remaining inventory recorded at cost. 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. 36 MAGELLAN 2011 ANNUAL REPORT Notes To Consolidated Financial Statements (unless otherwise stated, all amounts are in thousands of Canadian dollars) 5. PROPERTY, PLANT AND EQUIPMENT Cost At January 1, 2010 Additions Disposals and other Foreign currency translation At December 31, 2010 Additions Disposals and other Foreign currency translation At December 31, 2011 Accumulated depreciation and impairment At January 1, 2010 Depreciation Disposal and other Foreign currency translation At December 31, 2010 Depreciation Disposal and other Foreign currency translation At December 31, 2011 Net book value At January 1, 2010 At December 31, 2010 At December 31, 2011 Machinery and Land Buildings equipment Tooling Total 13,158 – – (483) 12,675 – – 156 12,831 – – – – – – – – – 86,291 746 (681) (1,724) 84,632 25,880 (235) 679 110,956 (26,040) (2,508) 560 362 (27,626) (2,221) 127 (138) (29,858) 314,235 14,443 (3,361) (11,414) 313,903 41,428 (2,536) 3,854 356,649 (148,559) (15,259) 3,143 4,581 (156,094) (15,000) 1,858 (1,870) (171,106) 41,015 1,382 (138) (1,882) 40,377 1,348 – 790 42,515 (25,844) (4,333) 84 1,345 (28,748) (2,868) – (627) (32,243) 454,699 16,571 (4,180) (15,503) 451,587 68,656 (2,771) 5,479 522,951 (200,443) (22,100) 3,787 6,288 (212,468) (20,089) 1,985 (2,635) (233,207) 13,158 12,675 12,831 60,251 57,006 81,098 165,676 157,809 185,543 15,171 11,629 10,272 254,256 239,119 289,744 As at December 31, 2011, total assets under ﬁnance leases included in property, plant and equipment have a cost of $5,710 [December 31, 2010 - $9,764, January 1, 2010 - $11,563] and a net book value of $3,362 [December 31, 2010 - $6,303, January 1, 2010 - $8,058]. Included in the above are assets under construction in the amount of $46,550 [December 31, 2010 - $3,986, January 1, 2010 - $943]. 37 MAGELLAN 2011 ANNUAL REPORT Notes To Consolidated Financial Statements (unless otherwise stated, all amounts are in thousands of Canadian dollars) 6. INVESTMENT PROPERTIES At January 1, 2010 At December 31, 2010 At December 31, 2011 Accumulated depreciation and impairment (5,937) (6,085) (6,247) Cost 9,306 9,277 9,288 Net book value 3,369 3,192 3,041 The Corporation recognized depreciation expense of $158 in 2010 and 2011 and recorded an impairment charge of $180 as at January 1, 2010. The fair value was determined based on valuations performed by independent professional valuators. At December 31, 2011, the fair value of the investment properties was $6,952. 7. INTANGIBLE ASSETS Cost At January 1, 2010 Additions Disposals Foreign currency translation At December 31, 2010 Additions Foreign currency translation At December 31, 2011 Depreciation and impairment At January 1, 2010 Depreciation Impairment reversal Foreign currency translation At December 31, 2010 Depreciation Impairment reversal Foreign currency translation At December 31, 2011 Net book value At January 1, 2010 At December 31,2010 At December 31, 2011 38 MAGELLAN 2011 ANNUAL REPORT Technology Development rights costs Total 38,990 − − (85) 38,905 − 34 38,939 (13,486) (3,057) 3,280 12 (13,251) (2,595) − (9) (15,855) 25,504 25,654 23,084 85,056 4,230 (121) (1,805) 87,360 3,266 652 91,278 (38,720) (7,367) 4,115 907 (41,065) (8,651) 1,899 (411) (48,228) 124,046 4,230 (121) (1,890) 126,265 3,266 686 130,217 (52,206) (10,424) 7,395 919 (54,316) (11,246) 1,899 (420) (64,083) 46,336 46,295 43,050 71,840 71,949 66,134 Notes To Consolidated Financial Statements (unless otherwise stated, all amounts are in thousands of Canadian dollars) 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. 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. The recoverable amount of programs, projects and product families is determined based on estimated future cash ﬂows for the term over which the program is expected to be marketed, which may span several decades. Impairments At the end of each reporting period, the Corporation assess whether there are events or circumstances indicating that an asset may be impaired. Such events or circumstances notably include material adverse changes which in the long-term impact the economic environment (commercial prospects, procurement sources, index or cost movements, etc.) or the Corporation’s assumptions or objectives (medium-term plan, proﬁtability analyses, market share, backlog, regulations, etc.). The main assumptions used to determine the recoverable amount of intangible assets relating to programs, projects and product families are as follows: >> The discounted cash ﬂow approach used to estimate the value in use of the CGU’s incorporated market participant assumptions. Expected future cash ﬂows are calculated based on the medium-term plans established for the next ﬁve years and estimated cash ﬂows for years 5 to 24 [2010 – 6 to 25 years]. >> Growth rates of nil [2010 – nil to 1%] were used to extrapolate cash ﬂow projections beyond the ﬁve year period covered by the long-term plan and did not exceed the long-term average growth rate of the industry. >> The average US exchange rate adopted is 1.00 [2010 – 1.00]. >> The pre-tax discount rates used reﬂect the current market assessment of the risks speciﬁc to each CGU. The discount rate was estimated based on the average percentage of weighted average cost of capital for the industry. A discount rate of 12.5% was applied to the cash ﬂow projections determined in the year end testing of recoverable amounts [December 31, 2010 and January 1, 2010 –12.5%]. As a result of the impairment tests performed in 2011, the Corporation recognized a reversal of previous impairment losses of $1,899 against development costs relating to a civil aircraft program as the Corporation was able to negotiate price increases. These impairment reversals were treated as reduction against recurring costs of revenues. In 2010, the Corporation recognized a reversal of previous impairment losses of $3,280 against technology rights and $4,347 against devel- opment costs relating to various civil aircraft programs as the Corporation was able to achieve reductions in costs as a result of a mix of improved efﬁciencies and reduced material costs. These impairment reversals were treated as a reduction against recurring costs of revenues. The Corporation also recognized impairment losses in 2010 of $232 against development expenditures relating to a civil aircraft program. 8. BANK INDEBTEDNESS On April 29, 2011, the Corporation amended its credit agreement with its existing lenders. The Corporation has an operating credit facility, with a syndicate of banks, with a Canadian dollar limit of $125,000 plus a US dollar limit of US$50,000 [$175,850 at December 31, 2011]. Under the terms of the amended credit agreement, the operating credit facility expires on April 29, 2013 and is extendable for unlimited one-year periods subject to mutual consent of the syndicate of lenders and the Corporation. Accordingly, the Corporation reclassiﬁed the oper- ating credit facility from a short term liability to a long term liability. Bank indebtedness as at December 31, 2011 of $120,674 [Decem- ber 31, 2010 - $117,046] bears interest at the bankers’ acceptance or LIBOR rates, plus 1.50% [2.44% at December 31, 2011 (2010 – bankers’ acceptance or LIBOR rates plus 2.75% or 3.60%)]. Included in the amount outstanding at December 31, 2011 is US$11,908 [December 31, 2010 - US$21,113]. At December 31, 2011, the Corporation had drawn $123,558 under the operating credit facility, including letters of credit totalling $2,884 such that $52,292 was unused and available. A ﬁxed and ﬂoating charge debenture on accounts receivable, inventories 39 MAGELLAN 2011 ANNUAL REPORT Notes To Consolidated Financial Statements (unless otherwise stated, all amounts are in thousands of Canadian dollars) and property, plant and equipment 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. 9. ACCOUNTS PAYABLE, ACCRUED LIABILITIES AND PROVISIONS Accounts payables Accrued liabilities Provisions 10. LONG-TERM DEBT Property mortgages [a] Other loans [b] Related party loans [c] Obligations under capital leases [d] Less current portion December 31 December 31 2011 52,685 47,567 5,770 106,022 2010 46,200 84,363 5,324 135,887 December 31 December 31 2011 18,689 33,927 33,197 463 86,276 4,508 81,768 2010 2,793 16,411 45,664 1,926 66,794 48,951 17,843 January 1 2010 49,715 81,481 4,441 135,637 January 1 2010 3,314 5,941 64,578 3,518 77,351 2,943 74,408 [a] Property mortgages include $2,589 (£1,639) [2010 - $2,793 (£1,800)] of ﬁnancing of certain land acquired in 2006. This same land is collat- eral for this mortgage and the mortgage bears interest at bank rate plus 0.90%, which at December 31, 2011 was 1.4% [2010 - 1.4%]. During the year, the Corporation entered into a 5 year variable rate term mortgage in the amount of $16,100, under which interest is charged at a margin of 1.75% over the lender’s prime lending rate of 3.0% as at December 31, 2011. The mortgage is secured by certain land and building. [b] Other loans include loans of $19,886 [2010 - $9,844] provided by governmental authorities (“Government Loans”) that bear interest of approximately 2.0% to 3.82% [2010 - 1.2% to 2.0%] of which a loan in the amount of $1,264 provides for a ﬁve year interest free period if cer- tain job criteria has been met. During 2011 and 2010, the Corporation entered into bank loans aggregating $13,479 (US$13,253) [2010 - $5,968 (US$6,000)] (“Commercial Loan”) to ﬁnance equipment over a ten year period and leasehold improvements over a three year period. The same equipment is collateral for the Commercial Loan which bears interest at LIBOR plus 2.75%, which at December 31, 2011 was 3.01% [2010 – 3.04%]. As at December 31, 2011, the Corporation has the availability to draw an additional $8,851 against the Government Loans and $6,861 (US$6,747) against the Commercial Loan. [c] On January 31, 2008, Edco Capital Corporation (“Edco”), a corporation controlled by the Chairman of the Board of the Corporation, provided a $50,000 loan due July 1, 2009 (the “Original Loan”) to the Corporation. The Original Loan originally had an interest rate of 10% per annum calculated and payable monthly and is collateralized and subordinated to the Corporation’s existing operating credit facility. The Original Loan is secured by subordinated mortgages on two of the Corporation’s real properties. On April 30, 2009, the Original Loan from Edco in the principal amount of $50,000 was increased to $65,000; was extended to July 1, 2010 in consideration of the payment of a one-time fee to Edco equal to 1% of the principal amount outstanding of $50,000 and the interest rate on the loan was increased from 10% to 12% per annum. On 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 40 MAGELLAN 2011 ANNUAL REPORT Notes To Consolidated Financial Statements (unless otherwise stated, all amounts are in thousands of Canadian dollars) renew the Original Loan under certain conditions. The Corporation has the right to prepay the Original Loan at any time without penalty. On April 28, 2011, the Original Loan was restated and extended to July 1, 2013 on the same terms and conditions except that the interest rate was reduced from 11% to 7.5% per annum in consideration of the payment of a one time extension fee of 1% of the principal amount outstanding as of July 1, 2011 of $39,600. During the twelve month period ended December 31, 2011, the Corporation prepaid the Original Loan by $12,500 [2010 - $19,000]. As at December 31, 2011, the principal amount outstanding of $33,500 was classiﬁed as a long-term liability [2010 - $46,000 was classiﬁed as debt due within one year]. [d] Obligations under capital leases bear interest at a rate of 7.9%. Future minimum lease payments of $475 under the capital leases are due in 2012 and include $12 in interest payments. 11. CONVERTIBLE DEBENTURES On April 30, 2009, the Corporation closed a private placement in which the Chairman of the Board of the Corporation, directly or indirectly, purchased $40,000 principal amount of 10% convertible secured subordinated debentures (the “Convertible Debentures”) due on April 30, 2012. Interest is due semi-annually in arrears on April 30 and October 31 in each year. 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. The Convertible Debentures are secured obligations of the Corporation and are subordinated in right of payment to all of the Corporation’s senior indebtedness. On December 31, 2011, the Chairman of the Board of the Corporation exercised his conversion rights under the debenture agreement and $38,000 principal amount of the Convertible Debentures, the entire amount of the Convertible Debentures then held by the Chairman, were converted into 38,000,000 common shares of the Corporation. As at December 31, 2011, $2,000 [2010 - $40,000] of the Convertible Debentures were outstanding. Given that the conversion price of the convertible debentures is in the money, it is likely that these will be converted into common shares of the Corporation on or before their maturity. At December 31, 2011, $1,986 [2010 - $38,901] of the Convertible Debentures, net of transaction costs, has been attributed to the debt com- ponent and is included in the consolidated statement of ﬁnancial position under debt due within one year. The difference between the car- rying value and the face value of the Convertible Debentures will be accredited using the effective interest rate method. As explained under “Signiﬁcant Accounting Policies – Convertible Debentures,” $1,920 of the Convertible Debentures, $545 of the debentures issued in 2008 and $11,100 of debentures issued in 2003 have been attributed to the equity component of the deben- ture and are classiﬁed as other paid in capital. 12. PREFERENCE SHARES 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 Cor- poration involving the acquisition of voting control or direction over at least 66 2/3% of the common shares and instruments convertible into common shares. 41 MAGELLAN 2011 ANNUAL REPORT Notes To Consolidated Financial Statements (unless otherwise stated, all amounts are in thousands of Canadian dollars) The acquisition of the Convertible Debentures [Note 11] on April 30, 2009 resulted in the Chairman of the Board of the Corporation holding in excess of 66-2/3% of the common shares of the Corporation on a fully diluted basis, which holdings constituted a change of control as deﬁned in the Preference Shares’ terms. Pursuant to the change of control deﬁnition in the Corporation’s outstanding Preference Shares’ terms, the Corporation is required to retract its outstanding Preference Shares at a price of $10.00 per share plus accrued and unpaid divi- dends, unless such retraction contravenes any instrument of indebtedness of the Corporation or the terms of the OBCA. In 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 Cor- poration 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. During 2010, the Corporation completed the retraction of 799,987 of its 2,000,000 Preference Shares, for total consideration paid of $8,000, as was permissible under the amended operating credit facility. 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. 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. In 2011 the Corporation’s operating credit facility was further amended to permit the Corporation to retract all of the remaining Preference Shares on or after April 30, 2011, 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 retrac- tion amount the Corporation has at least $25,000 in availability under the operating credit facility. During 2011, the Corporation retracted the remaining 1,200,013 Preference Shares in the amount of $12,000 and declared and recorded dividends of $310 as an expense on the consolidated statement of income. 13. BORROWINGS SUBJECT TO SPECIFIC CONDITIONS The Corporation has received contributions related to the development of its technologies and processes from Canadian government agen- cies. The contributions have been deducted in calculating the Corporation’s investment in intangible assets, property plant and equipment or from the expense to which they relate. These amounts, plus, in certain cases, an implied return on the investment, are repayable as a per- centage of the Corporation’s revenues. The Corporation has included in borrowings subject to speciﬁc conditions the estimated amount of repayments in relation to the contributions received. 42 MAGELLAN 2011 ANNUAL REPORT Notes To Consolidated Financial Statements (unless otherwise stated, all amounts are in thousands of Canadian dollars) The Corporation received contributions from the Canadian Government’s Strategic Aerospace and Defence Initiative Program (“SADI”) and Technology Partnerships Canada Program (“TPC”) for technology and process development. The SADI participation supports the devel- opment of new manufacturing and process technology for composite and metallic materials for the multi-national Joint Strike Fighter F-35 Lightning II aircraft and under SADI, the Corporation is to receive repayable cash ﬂow support of up to $43,400. During 2011, the Corpora- tion received $7,867 [2010 - $6,635] of government contributions under SADI, of which $2,801 [2010 - $1,477] has been credited to the related assets, $333 [2010 - $373] has been credited to the related expense and $4,733 [2010 - $4,785] has been recorded in borrowings subject to speciﬁc conditions. The Corporation received contributions from TPC in years prior to 2010, and no new funding had been received in 2011 and 2010. The contributions are repayable as future royalty payments when it is probable that all or part of the amounts received will be repaid based on future estimated sales. During 2011, the Corporation repaid $934 [2010 - $715] in government contributions. As at December 31, 2011, the Corporation has recognized $18,847 as the estimated amount repayable to SADI and TPC. The Corporation is eligible for additional government contributions of $26,285 for the period from January 1, 2012 to December 31, 2014 based on approved expenditures. 14. OTHER LONG-TERM LIABILITIES AND PROVISIONS December 31 December 31 Net deﬁned beneﬁt plan deﬁcits [Note 19] Provisions Other Less current portion included in accounts payable, accrued liabilities and provisions 2011 23,678 8,196 3,027 34,901 5,770 29,131 The following table presents the movement in provisions for the years ended December 31, 2011 and 2010: At January 1, 2010 Additional provisions Amount used Unused amounts reversed Unwind of discount Foreign currency At December 31, 2010 Additional provisions Amount used Unused amounts reversed Foreign currency At December 31, 2011 Warranty Environmental 2,957 28 (336 ) – (9 ) (15 ) 2,625 346 (110 ) – 4 2,865 1,072 965 (503) 365 – (60) 1,839 846 (344) (491) 34 1,884 2010 9,637 7,403 9,197 26,237 9,884 16,353 Other provisions 2,560 915 (407 ) (16 ) – (113 ) 2,939 1,117 (535 ) (100 ) 26 3,447 January 1 2010 14,198 6,589 10,554 31,341 9,437 21,904 Total 6,589 1,908 (1,246) 349 (9) (188) 7,403 2,309 (989) (591) 64 8,196 Warranty During the normal course of its business, the Corporation assumes the cost of certain components under warranties offered on its products. This provision for a warranty is based on historical data associated with similar products and is recorded as a current liability. Nevertheless, conditions may change and a signiﬁcant amount may need to be recorded. Environment Provisions for environment liabilities have been recorded for costs related to site restoration obligations. Due to the long-term nature of the liability, the related long-term portion of the liability is included in long-term liabilities. 43 MAGELLAN 2011 ANNUAL REPORT Notes To Consolidated Financial Statements (unless otherwise stated, all amounts are in thousands of Canadian dollars) Other This category of provisions includes provisions related to legal, onerous contracts, and other contract related liabilities. The provisions are based on the Corporation’s best estimate of the amount of the expenditure required to address the matters. 15. INCOME TAXES The following are the major components of income tax expense for the year ended December 31: Current tax expense: Current tax expense for the year Adjustments of previous year’s tax expense Current income tax expense (recovery) Deferred tax expense: Origination and reversal of temporary differences Impact of tax law changes Deferred income tax expense Total income tax expense Income taxes recognized in other comprehensive income (loss) for the year ended December 31, are as follows: Actuarial losses on deﬁned beneﬁt pension plans 2011 2010 202 78 280 3,975 (267) 3,708 248 (579) (331) 8,316 24 8,340 3,988 8,009 2011 579 2010 293 The Corporation’s consolidated effective tax rate for the year ended December 31, 2011 was 9.6% [2010 – 18.9%]. The difference in the effective tax rates compared to the Corporations’ statutory income tax rates were mainly caused by the following: Income before income taxes Income taxes based on the applicable tax rate of 27.2% in 2011 and 29% in 2010 Adjustment to income taxes resulting from: Beneﬁt of previously unrecognized tax assets Adjustments in respect of prior years Permanent differences and other Higher income tax rates on income of foreign operations Changes in income tax rates Income tax expense 2011 41,401 2010 42,353 11,261 12,282 (10,483) 979 1,629 869 (267) 3,988 (2,777) (120) (781) 376 (971) 8,009 The Canadian statutory tax rate decreased to 27.2 percent in 2011 from 29.0 percent in 2010 as a result of government enacted changes in tax legislation. Changes in the deferred income tax components are adjusted through deferred tax expense except for $9,047 [2010 – 3,607] for investment tax credits which is adjusted through cost of revenues and $579 [2010 - $293] for employee future beneﬁts which is adjusted through other comprehensive income. 44 MAGELLAN 2011 ANNUAL REPORT Notes To Consolidated Financial Statements (unless otherwise stated, all amounts are in thousands of Canadian dollars) Deferred tax movement in the income statement is as follows: Operating loss carry forwards Employee future beneﬁts Property, plant and equipment and intagibles Other Deferred income tax expense Operating loss carry forwards Investment tax credits Employee future beneﬁts Property, plant and equipment and intangibles Other Deferred tax asset Presented as follows: Deferred tax assets Deferred tax liabilities 2011 (1,422) 991 4,171 (32) 3,708 December 31 December 31 2011 11,999 29,075 2,801 (43,573) 17,970 18,272 2010 11,019 25,689 3,424 (37,605) 9,348 11,875 2010 (3,834) 305 7,965 3,904 8,340 January 1 2010 6,976 22,095 3,804 (40,745) 22,950 15,080 28,360 (10,088) 19,836 (7,961) 19,861 (4,781) For the purposes of the above table, deferred income tax assets are shown net of offsetting deferred income tax liabilities where these occur in the same entity and justiﬁcation. As at December 31, 2011, the Corporation has not recognized Canadian deferred tax assets relating to non-capital losses of $104 and invest- ment tax credits of $5,896 expiring through 2031 and deferred tax assets with no expiry date of $11,458. The temporary difference associated with investments in subsidiaries, associates and joint ventures, for which a deferred tax liability has not been recognized aggregates to $131,070 [2010 - $90,220]. 16. SHARE CAPITAL The authorized capital of the Corporation consists of an unlimited number of Preference Shares, issuable in series, and an unlimited number of common shares, with no par value. Common shares Issued and fully paid: Outstanding at December 31, 2010 and 2009 Issued upon conversion of convertible debentures [Note 11] Outstanding at December 31, 2011 Number Amount 18,209,001 38,000,000 56,209,001 214,440 38,000 252,440 45 MAGELLAN 2011 ANNUAL REPORT Notes To Consolidated Financial Statements (unless otherwise stated, all amounts are in thousands of Canadian dollars) Net income per share Net income Dividends declared on preference shares Basic Effect of dilutive securities: Convertible debentures Diluted Weighted average no. of shares Amount 37,413 2011 Per share amount ($) – 37,413 18,313,000 2.04 Amount 34,344 (400) 33,944 Weighted 2010 average no. Per share of shares amount ($) 18,209,000 1.86 5,082 42,495 39,896,000 58,209,000 (1.31) 0.73 4,724 40,000,000 58,209,000 38,668 (1.20) 0.66 17. STOCK-BASED COMPENSATION PLAN The Corporation has an incentive stock option plan, which provides for the granting of options for the beneﬁt of employees and directors. No such awards were granted during the years ended December 31, 2011 and December 31, 2010. The maximum number of options for common shares that remain to be granted under this plan is 1,449,141. Options are granted at an exercise price equal to the market price of the Corporation’s common shares at the time of granting. Options normally have a life of ﬁve years with vesting at 20.0% at the end of the ﬁrst, second, third, fourth and ﬁfth years from the date of the grant. In addition, certain business unit income tests must be met in order for the option holder’s entitlement to fully vest. A summary of the plan and changes during each of 2011 and 2010 are as follows: Outstanding, beginning of year Forfeited/expired Outstanding, end of year 2011 Weighted average exercise price ($) 15.72 13.38 16.00 Shares 638,200 (210,250) 427,950 2010 Weighted average exercise price ($) 15.02 13.58 15.72 Shares 427,950 (203,750) 224,200 The following table summarizes information about options outstanding and exercisable at December 31, 2011: Options outstanding Options exercisable Number outstanding at December 31, 2011 224,200 Exercise price ($) 16.00 Weighted average remaining contractual life (in years) 1.00 Weighted average exercise price ($) 16.00 Number exercisable at December 31, 2011 178,080 Weighted average exercise price ($) 16.00 On November 7, 2008, the Corporation amended the incentive stock option plan by adding a cash option feature to all new and previously granted options outstanding. The cash option feature allows option holders to elect to receive an amount in cash equal to the intrinsic value, being the excess market price of the common share over the exercise price of the option, instead of exercising the option and acquiring the common shares. The result of such an amendment is that the outstanding share options awards largely take on the characteristics of liability instruments rather than equity instruments. All outstanding stock options are now classiﬁed as liabilities and are carried at their fair value. The fair value of the liability is marked to market each period for new awards to be granted subsequent to the amendment date. The fair 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 2010 and 2011. For the outstanding share option awards that were amended, the minimum expense recognized for them will be their grant-date fair values. Previously, all stock options were classiﬁed as equity and were measured at the estimated fair value established by the Black-Scholes model on the date of grant. Under this method, the estimated fair value was and will continue to be amortized to compensation expense 46 MAGELLAN 2011 ANNUAL REPORT Notes To Consolidated Financial Statements (unless otherwise stated, all amounts are in thousands of Canadian dollars) 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 exercise restric- tions under the Corporation’s black-out policy which would tend to reduce the fair value of the Corporation’s stock options. Changes to the subjective input assumptions used in the model can cause a signiﬁcant variation in the estimate of the fair value of the options. The Corporation has a deferred share unit plan (“DSU Plan”) for certain executive ofﬁcers (“Ofﬁcers”) which provides a structure for Ofﬁ- cers to accumulate equity-like holdings in the Corporation. The DSU Plan allows certain Ofﬁcers to participate in the growth of the Corpo- ration by providing a deferred payment based on the value of a common share at the time of redemption. Each Ofﬁcer receives deferred share units (“Units”) based on their annual management incentive compensation. The Units are issued based on the Corporation’s common share price at the time of issue. A third of the Units are paid upon issuance and the remaining Units are paid out equally on the anniversary date of issuance in the following two year period or upon retiring. The redemption value is equal to the common share price at the date of redemption, adjusted by any dividends paid on the common shares. As at December 31, 2011, 25,609 units were outstanding at a value of $78 [December 31, 2010 – nil]. The Corporation recorded compensation expense in relation to the plans during the year of $298 [2010 - $268]. 18. FINANCIAL INSTRUMENTS Categories of ﬁnancial instruments Under IFRS, ﬁnancial instruments are classiﬁed into one of the following four categories: ﬁnancial assets at fair value through proﬁt or loss, loans and receivables, ﬁnancial liabilities at fair value through proﬁt or loss, and other ﬁnancial liabilities at amortized cost. All ﬁnancial instruments, including derivatives, are included on the consolidated statement of ﬁnancial position, which are measured at fair value except for loans and receivables and other ﬁnancial liabilities, which are measured at amortized costs. Held for trading ﬁnancial investments are subsequently measured at fair value and all gains and losses are included in net income in the period in which they arise. Available-for-sale ﬁnancial instruments are subsequently measured at fair value with revaluation gains and losses included in other compre- hensive income until the instruments are derecognized or impaired. The carrying values of the Corporation’s ﬁnancial instruments are classiﬁed as follows: December 31, 2010 December 31, 2011 Fair value through proﬁt or loss: Held for trading1 26,093 27,028 Loans and receivables2 94,286 106,480 Other ﬁnancial liabilities (at amortized cost)3 395,700 342,250 Total ﬁnancial assets 120,379 133,508 Total ﬁnancial liabilities 395,700 342,250 1 Includes cash and cash equivalents and forward foreign exchange contracts included in prepaid expenses and other 2 Includes accounts receivables and loan receivables 3 Includes bank indebtedness, accounts payable and accrued liabilities, provisions, preference shares, long-term debt, borrowings subject to speciﬁc conditions, the debt component of the convertible debentures and accounts receivable securitization transactions The Corporation has exposure to the following risks from its use of ﬁnancial instruments: >> Market risk >> Credit risk >> Liquidity risk This note presents information about the Corporation’s risks to each of the above risks, its objectives, policies and processes for measuring and managing risk. 47 MAGELLAN 2011 ANNUAL REPORT Notes To Consolidated Financial Statements (unless otherwise stated, all amounts are in thousands of Canadian dollars) Market risk Market risk is the risk that changes in the market prices, such as foreign exchange rates and interest rates, will affect the Corporation’s income or the value of its holdings of ﬁnancial instruments. The Corporation’s policy is not to utilize derivative ﬁnancial instruments for trading or spec- ulative purposes. The Corporation may utilize derivative instruments in the management of its foreign currency and interest rate exposures. 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 currency risk, interest rate risk, credit risk and liquidity risk. Where material, these risks are reviewed and monitored by the Board of the Corporation. 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 rate. Currency risk arises because the amount of the local currency receivable or payable for transactions denominated in foreign currencies may vary due to changes in exchange rate (“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 net income. The most signiﬁcant transaction exposures arise in the Canadian operations where signiﬁcant portions of the revenues are transacted in U.S. dollars. As a result, the Corporation may experience transaction exposures because of the volatility in the exchange rate between the Canadian and U.S. dollar. Based on the Corporation’s current U.S. denominated net inﬂows, as of December 31, 2011, ﬂuctuations of +/- 1% would, everything else being equal, have an effect on net income and on other comprehensive income for the year ended December 31, 2011 of approximately +/- $148 and $1,300 respectively. Interest rate risk The Corporation is exposed to interest rate risk in its ﬂoating rate bank indebtedness. At December 31, 2011, $172,023 of the Corporation’s total debt portfolio is subject to movements in ﬂoating interest rates. In addition, a portion of the Corporation’s accounts receivable secu- ritization programs are exposed to interest rate ﬂuctuations. The objective of the Corporation’s interest rate management activities is to minimize the volatility of the Corporation’s income. 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 ended December 31, 2011 by approximately +/- $1,746. Credit risk Credit risk arises from cash and cash equivalents held with banks and ﬁnancial institutions as well as credit exposure to clients, including outstanding accounts receivable. The maximum exposure to credit risk is equal to the carrying value of the ﬁnancial assets. The objective of managing credit risk is to prevent losses in ﬁnancial assets. The Corporation is also exposed to credit risk from the potential default by any of its counterparties on its foreign exchange forward contracts. The Corporation mitigates this credit risk by dealing with counterparties who are major ﬁnancial institutions that the Corporation anticipates will satisfy their obligations under the contracts. The Corporation, in the normal course of business, is exposed to credit risk from its customers, substantially all of which are in the aerospace industry. The Corporation sells the majority of its products to large international organizations with strong credit ratings. Therefore, the Cor- poration 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 receivable are reduced through the use of an allowance account and the amount of the loss is recognized in the income statements within administrative and general expenses. When a receivable balance is considered uncollectible, it is written off against the allowance for accounts receivable. Subsequent recoveries of amounts previously written off are credited against administra- tive and general expenses. 48 MAGELLAN 2011 ANNUAL REPORT Notes To Consolidated Financial Statements (unless otherwise stated, all amounts are in thousands of Canadian dollars) Derecognition of ﬁnancial assets The Corporation sells a portion of its accounts receivables through securitization programs or factoring transactions. During 2011, the Cor- poration sold receivables to various ﬁnancial institutions in the amount of $167,100 [2010 - $65,375] for a discount of $447 [2010 - $254] rep- resenting an annualized interest rate of 1.73% [2010 – 2.35%]. As at December 31, 2011, accounts receivables include receivables sold and ﬁnanced through securitization transactions of $6,019 [2010 - $9,591] which do not meet the IAS 39 derecognition requirements. These receivables are recognized as such in the ﬁnancial statements even though they have been legally sold; a corresponding ﬁnancial liability is recorded in the consolidated statement of ﬁnancial position under debt due within one year. 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 liquid- ity 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 opera- tions and its operating facility capacity. The primary sources of liquidity are the operating credit facility and the indebtedness provided by a company controlled by a common director, which require the continued support by the Chairman of the Board of the Corporation. Based on current funds available and expected cash ﬂow from operating activities, management believes that the Corporation has sufﬁcient funds available to meet its liquidity requirements at any point in time. However, if cash from operating activities is lower than expected or capital costs for projects exceed current estimates, or if the Corporation incurs major unanticipated expenses, it may be required to seek additional capital in the form of debt or equity or a combination of both. Contractual maturity analysis The following table summarizes the contractual maturity of the Corporation’s ﬁnancial liabilities. The table includes both interest and prin- cipal cash ﬂows. Bank indebtedness Long-term debt 1 Finance lease obligations Equipment leases Facility leases Other long-term liabilities Borrowings subject to speciﬁc conditions Convertible debentures Interest payments Total Year 1 – 10,064 463 229 1,386 1,000 601 2,000 15,743 4,186 19,929 Year 2 120,674 38,031 – 168 1,353 43 619 – 160,888 2,783 163,671 Year 3 – 5,760 – 81 1,340 42 433 – 7,656 1,313 8,969 Year 4 – 5,139 – 33 1,349 42 607 – 7,170 1,140 8,310 Year 5 – 5,096 – 6 1,171 41 672 – 6,986 997 7,983 Thereafter – 29,739 – 3 6,541 1,354 16,516 – 54,153 5,061 59,214 Total 120,674 93,829 463 520 13,140 2,522 19,448 2,000 252,596 15,480 268,076 1 The amount drawn on the Corporation’s accounts receivable securitization program is included in long-term debt in the Year 1 category. Fair values The Corporation has determined the estimated fair values of its ﬁnancial instruments based on appropriate valuation methodologies; how- ever, considerable judgement 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 as follows: Cash, accounts receivable, bank indebtedness and accounts payable and accrued liabilities Due to the short period to maturity of these instruments, the carrying values as presented in the consolidated statement of ﬁnancial posi- tions are reasonable estimates of their fair values. 49 MAGELLAN 2011 ANNUAL REPORT Notes To Consolidated Financial Statements (unless otherwise stated, all amounts are in thousands of Canadian dollars) Foreign exchange contracts The Corporation has entered into foreign exchange contracts to mitigate future cash ﬂow exposures in US dollars and Euros. Under these contracts, the Corporation is obliged to purchase speciﬁc amounts at predetermined dates and exchange rates. These contracts are matched with anticipated operational cash ﬂows in US dollars and Euros expiring in 2012. During 2011, the Corporation entered into foreign exchange contracts as follows: Foreign exchange collars Maturity – less than 1 year – US dollar Foreign exchange forward contracts Maturity – less than 1 year – US dollar Maturity – less than 1 year – Euros Amount 17,000 Floor 1.0000 Ceiling 1.1111 Amount 18,700 1,292 FX Rate 1.0400 1.3400 The fair values of the Corporation’s foreign exchange forward contracts are based on the current market values of similar contracts with the same remaining duration as if the contract had been entered into on December 31, 2011. The mark-to-market on these ﬁnancial instruments as at December 31, 2011 was an unrealized gain of $508, which has been recorded in other expense for the period. Long-term debt The fair value of the Corporation’s long-term debt, calculated by discounting the expected future cash ﬂows based on current rates for debt with similar terms and maturities, is $88,061 at December 31, 2011. 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 $2,075. Collateral As at December 31, 2011, the carrying amount of the ﬁnancial assets that the Corporation has pledged as collateral for its long-term debt facilities was $133,000. Fair value hierarchy The Corporation’s ﬁnancial assets and liabilities recorded at fair value on the consolidated statement of ﬁnancial position have been catego- rized 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 classiﬁed to the lowest level of the hierarchy for which a signiﬁcant input has been considered in measuring fair value. The following table presents the fair value of the ﬁnancial instruments that are carried at fair value classiﬁed using the fair value hierarchy described above. Financial assets Foreign exchange contracts 50 MAGELLAN 2011 ANNUAL REPORT Quoted prices in active markets (Level 1) Signiﬁcant other observable inputs (Level II) Signiﬁcant unobservable inputs (Level III) Total − 508 − 508 Notes To Consolidated Financial Statements (unless otherwise stated, all amounts are in thousands of Canadian dollars) 19. 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. Deﬁned contribution plans The Corporation’s expenses for deﬁned contribution plans for the year ended December 31, 2011 totalled $4,243 [2010 - $4,212]. Deﬁned beneﬁt plans The Corporation obtains actuarial valuations for its accrued beneﬁt obligations and the fair value of plan assets for accounting purposes under IFRS as at December 31 of each year. In addition, the Corporation estimates movements in its accrued beneﬁt liabilities at the end of each interim reporting period, based upon movements in discount rates and the rates of return on plan assets, as well as any signiﬁcant changes to the plans. Adjustments are also made for payments made and beneﬁts earned. 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. 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, 2008 and January 1, 2011. Other beneﬁt plan The Corporation has another beneﬁt plan to provide post-employment coverage for health care beneﬁts including prescribed drugs, hos- pital and other medical, dental and vision beneﬁts for eligible retired employees, their spouses and eligible dependants. Other beneﬁt plans provide for post-employment life insurance and compensated absences for eligible current employees, including vacation to be taken before retirement, if certain age and service requirements are met. Changes in beneﬁt plan assets of the Corporation’s deﬁned beneﬁt plans 2011 Other 2010 Other beneﬁt plans beneﬁt plans beneﬁt plans Pension – – – – – – – – – 106,843 4,499 (517) 8,335 303 (4,812) (32,255) (327) 82,069 – – – – – – – – – Deﬁned beneﬁt plan assets Fair market value of plan assets Beginning of year Expected return on plan assets Actuarial loss Employer contributions Employee contributions Beneﬁt payments Beneﬁt payments in relation to plan wind-up Foreign exchange gain (loss) End of year Pension beneﬁt plans 82,069 5,085 (6,121) 6,599 354 (5,483) – 124 82,627 51 MAGELLAN 2011 ANNUAL REPORT Notes To Consolidated Financial Statements (unless otherwise stated, all amounts are in thousands of Canadian dollars) Changes in the beneﬁt plan obligations of the Corporation’s deﬁned beneﬁt plans Deﬁned beneﬁt plan obligations Accured beneﬁt obligation Beginning of year Current service cost Interest cost Past service cost Employee contributions Actuarial loss Beneﬁt payments Beneﬁt payments in relation to plan wind-up Foreign exchange loss End of year Pension beneﬁt plans 2011 Other beneﬁt plans 2010 Other beneﬁt plans beneﬁt plans Pension 91,392 2,788 4,709 208 354 12,129 (5,483) – 208 106,305 734 – 628 – – 153 (584) – 18 949 110,616 2,293 5,828 – 303 9,927 (4,812) (32,255) (508) 91,392 872 – 314 – – – (408) – (44) 734 Reconciliation of funded status of beneﬁt plans to amounts recorded in the ﬁnancial statements Fair market value of plan assets Accrued beneﬁt obligation Funded status of plans – deﬁcit Effect of limit on recognition of asset Accrued beneﬁt liability Pension beneﬁt plans 82,627 (106,305) (23,678) – (23,678) 2011 Other beneﬁt plans – (949) (949) – (949) Pension 2010 Other beneﬁt plans beneﬁt plans – (734) (734) – (734) 82,069 (91,392) (9,323) (314) (9,637) The accrued beneﬁt liability related to pensions and other beneﬁt plans is included in other long-term liabilities and provisions. All deﬁned beneﬁt plans were in a deﬁcit status as at December 31, 2011 and one of the ﬁve deﬁned beneﬁt plans were in a surplus status as at December 31, 2010. During 2010, the Corporation completed the wind-up of one of its deﬁned beneﬁt plans. The Corporation expects to contribute approximately $5,752 in 2012 to all its deﬁned beneﬁt plans in accordance with normal funding policy. Because of market driven changes that the Corporation cannot predict, the Corporation could be required to make contributions in the future that differ signiﬁcantly from its estimates. 52 MAGELLAN 2011 ANNUAL REPORT Notes To Consolidated Financial Statements (unless otherwise stated, all amounts are in thousands of Canadian dollars) Components of pension costs The following tables show the before tax impact on net income and other comprehensive income of the Corporation’s pension and other deﬁned beneﬁt plans. Recognized in net income Current service cost Interest cost Expected return on plan assets1 Other Total pension cost recognized in net income Pension beneﬁt plans 2011 Other Pension beneﬁt plans beneﬁt plans 2010 Other beneﬁt plans 2,788 4,709 (5,085) 208 2,620 – 628 – – 628 2,293 5,828 (5,994) – 2,127 – 314 – – 314 1 The actual return on plan assets is a loss of $1,036 for the year ended December 31, 2011 [2010 – gain of $4,517]. Recognized in other comprehensive income Actuarial loss immediately recognized Effect of limit on recognition of asset Total pension cost recognized in other comprehensive income Pension beneﬁt plans 2011 Other Pension beneﬁt plans beneﬁt plans 2010 Other beneﬁt plans (18,270) 314 (17,956) (153) – (153) (7,126) 3,412 (3,714) – – – 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]: 2010 Other beneﬁt plans Pension beneﬁt plans beneﬁt plans Pension beneﬁt plans 2011 Other 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 year ended December 31: Discount rate Expected long-term rate of return on plan assets Rate of compensation increase 4.6% 6.0% 2.9% 4.6% 6.0% 2.9% 4.25% – – 4.25% – – 5.25% 6.0% 2.9% 5.25% 6.0% 2.9% 7.0% – – 7.0% – – The discount rate assumption used in determining the obligations for pension and other beneﬁt plans was selected based on a review of current market interest rates of high-quality, ﬁxed rate debt securities adjusted to reﬂect the duration of expected future cash outﬂows for pension beneﬁt payments. At December 31, 2011, a 1% change in the discount rate used could result in a $15,699 increase or decrease in the pension beneﬁt obligation with a corresponding beneﬁt or change recognized in other comprehensive income in the year. The expected rate of return on plan assets is reviewed annually by the Corporation. The Corporation must make assumptions about the expected long-term rate of return of plan assets, but there is no assurance that the plan will be able to earn the assumed rate of return. 53 MAGELLAN 2011 ANNUAL REPORT Notes To Consolidated Financial Statements (unless otherwise stated, all amounts are in thousands of Canadian dollars) The Corporation funds health care beneﬁt costs, shown under other beneﬁt plans, as a pay as you go basis. For measurement purposes, a 5.0% to 10.0% annual rate of increase in the per capita cost of covered health care and dental beneﬁts was assumed for 2011. 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-percent- age-point increase or decrease in the assumed health care and dental beneﬁt trend rates as at December 31, 2011 was nominal. Assets The weighted average asset allocations of the deﬁned beneﬁt plans at the measurement date, by asset category, are as follows: Equity investments Fixed income investments Other investments 2011 47.6% 45.7% 6.7% 100.0% 2010 46.7% 48.2% 5.1% 100.0% 20. SEGMENTED INFORMATION Based on the nature of the Corporation’s markets, two main operating segments were identiﬁed: Aerospace and Power Generation Proj- ect. 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. Rev- enues in the Power Generation Project segment arise solely from the power generation project in the Republic of Ghana and the revenue is included in Canada export revenue. The Corporation evaluated the performance of its operating segments primarily based on net income before interest and income tax expense. The Corporation accounts for intersegment and related party sales and transfers, if any, at the exchange amount. The Corporation’s primary sources of revenue are as follows: For the year ended December 31 Revenues Sale of goods Construction contracts Services 2011 2010 478,293 115,095 98,022 691,410 502,100 142,934 86,601 731,635 The aggregate amount of revenues recognized for construction contracts in progress at December 31, 2011 was $227,895 [December 31, 2010 - $255,400]. Advance payments received for construction contracts in progress at December 31, 2011 were $4,240 [December 31, 2010 - $27,220]. Retentions in connection with construction contracts at December 31, 2011 were $1,017 [December 31, 2010 - $995]. Advance pay- ments and retentions are included in accounts payable, accrued liabilities and provisions. 54 MAGELLAN 2011 ANNUAL REPORT Notes To Consolidated Financial Statements (unless otherwise stated, all amounts are in thousands of Canadian dollars) Segmented information consists of the following: Activity segments: Revenues Income before interest and income taxes Interest expense Income before income taxes Power Generation Aerospace 609,942 53,014 Project 81,468 5,386 2011 Power Generation Total Aerospace 627,113 54,895 691,410 58,400 16,999 41,401 Project 104,522 7,610 2010 Total 731,635 62,505 20,152 42,353 Total assets Total liabilities 638,583 369,580 23,155 9,463 661,738 379,043 595,370 382,633 43,129 35,271 638,499 417,904 Additions to property, plant and equipment Depreciation and amortization Impairment reversal 59,260 30,407 1,847 – 2,428 – 59,260 32,835 1,847 16,571 31,669 7,395 – 2,930 – 16,571 34,599 7,395 Geographic segments: United Kingdom Canada 137,899 365,853 12,064 267,089 1Export revenue is attributed to countries based on the location of the customers. United States 187,658 33,420 Revenues Export revenues1 Canada 421,864 329,948 United States 187,555 29,214 United Kingdom 122,216 9,237 2011 Total 691,410 312,523 2011 Canada United States United Kingdom Total Canada United States United Kingdom 2010 Total 731,635 368,399 2010 Total Property, plant and equipment and intangible assets 201,586 121,030 33,262 355,878 165,825 114,267 30,976 311,068 The major customers for the Corporation for the years ended December 31 are as follows: Canadian operations Number of customers Percentage of total Canadian revenues US operations Number of customers Percentage of total US revenues UK operations Number of customers Percentage of total UK revenues 55 MAGELLAN 2011 ANNUAL REPORT 2011 2010 2 33% 1 40% 1 73% 1 25% 1 38% 1 84% Notes To Consolidated Financial Statements (unless otherwise stated, all amounts are in thousands of Canadian dollars) 21. COST OF REVENUES Operating expenses Amortization Investment tax credits Impairment of inventories Impairment reversal of intangibles 22. ADMINISTRATIVE AND GENERAL EXPENSES Salaries, wages and beneﬁts Administration and ofﬁce expenses Professional services Amortization 23. INTEREST EXPENSE Interest on bank indebtedness and long-term debt [Notes 8 and 10] Interest on convertible debenture [Note 11] Accretion charge on convertible debenture, long-term debt and borrowings Discount on sale of accounts receivables 2011 573,639 30,806 (9,173) 627 (1,899) 594,000 2010 608,832 32,004 (4,427) (661) (7,395) 628,353 2011 22,725 10,714 2,796 2,029 38,264 2011 9,397 4,000 3,155 447 16,999 2010 22,762 11,756 2,657 2,595 39,770 2010 14,799 4,006 1,093 254 20,152 24. OTHER COMPREHENSIVE INCOME (LOSS) Other comprehensive income (loss) includes unrealized foreign currency translation gains and losses, which arise on the translation to Cana- dian dollars of assets and liabilities of the Corporation’s foreign operations and net actuarial losses on deﬁned beneﬁt pension plans, net of tax. The Corporation recorded unrealized currency translation gains for the year ended December 31, 2011 of $4,149 [2010 – loss of $10,392] and net actuarial losses on deﬁned beneﬁt plans of $17,530 [2010 $3,421]. These gains and losses are reﬂected in the consolidated statement of ﬁnancial position and had no impact on net income for the year. 25. RELATED PARTY DISCLOSURE Transactions with related parties On April 28, 2011, the Original Loan was extended and restated [Note 10]. During 2011, the Corporation incurred interest of $3,748 [2010 - $5,524] in relation to the Original Loan and prepaid the Original Loan by $12,500 [2010 - $19,000]. At December 31, 2011, the Corporation owed Edco interest of $214 [2010 - $995]. On April 30, 2009, the Chairman of the Board of the Corporation subscribed to $40,000 of the Convertible Debentures. On December 31, 2011, the Chairman of the Board exercised his conversion rights under the debenture agreement and $38,000 principal amount of the Con- vertible Debentures, the entire amount of the Convertible Debentures then held by the Chairman, were converted into 38,000,000 common shares of the Corporation. Interest incurred during the year ended December 31, 2011 on the Convertible Debentures was $4,000 [2010 - $4,006]. As at December 31, 2011, Convertible Debentures in the principal amount of $2,000 were held by a director of the Corporation. 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 0.8% [2010 – 1.2%] of the guaranteed amount or $1,399 [2010 - $2,127] was paid in consideration for the guarantee. 56 MAGELLAN 2011 ANNUAL REPORT Notes To Consolidated Financial Statements (unless otherwise stated, all amounts are in thousands of Canadian dollars) During the year, the Corporation incurred consulting costs of $100 [2010 - $100] payable to a corporation controlled by the Chairman of the Board of the Corporation. As well, the Corporation paid legal fees of $69 [2010 - $57] to a law ﬁrm in which a director is a chairman emeritus. Key management personnel Key management includes members of the Board of the Corporation and executive ofﬁcers, as they have the collective authority and responsibility for planning, directing and controlling the activities of the Corporation. The compensation expense for key management for services is as follows: Short-term beneﬁts Post-employment beneﬁts Share-based payments 2011 2,161 103 147 2,411 2010 2,061 101 – 2,162 Short-term beneﬁts include cash payments for base salaries, bonuses and other short-term cash payments. Post-employment beneﬁts include the Corporation’s contribution pension plan and pension adjustment for deﬁned beneﬁt plan. Share-based payments include amounts paid to executives under the DSU Plan. 26. SUPPLEMENTARY CASH FLOW INFORMATION Net change in non-cash working capital Accounts receivable Inventories Prepaid expenses and other Accounts payable, accrued liabilities and provisions Interest paid Income taxes paid 2011 2010 (10,908) 24,704 6,559 (32,881) (12,526) 14,873 1,447 869 (8,221) 26,289 (1,396) 17,541 19,924 249 27. ADDITIONAL FINANCIAL INFORMATION Included in other expenses is a foreign exchange loss of $238 [2010 - $680] on the conversion of foreign currency denominated working capital balances and debt. 28. 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 debentures. As at December 31, 2011, total managed capital was $497,650, comprised of shareholders’ equity of $282,695 and interest-bearing debt of $214,955. Included in interest bearing debt is the debt component of the convertible debentures of $1,986, where a component of the asso- ciated interest expense is a non-cash charge. The Corporation manages its capital structure and makes adjustments to it in light of economic conditions, the risk characteristics 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 the 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, including proposals on acquisitions or other major investments or divestitures, as well as capital and operating budgets. Based on current funds available and expected cash ﬂow from oper- ating activities, management believes that the Corporation has sufﬁcient funds available to meet its liquidity requirements at any point in 57 MAGELLAN 2011 ANNUAL REPORT Notes To Consolidated Financial Statements (unless otherwise stated, all amounts are in thousands of Canadian dollars) time. However, if cash from operating activities is lower than expected or capital costs for projects exceed current estimates, or if the Cor- poration incurs major unanticipated expenses, it may be required to seek additional capital in the form of debt or equity or a combination of both. 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, 2011 the Corporation was in compliance with these covenants. 29. CONTINGENT LIABILITES AND COMMITMENTS In the ordinary course of business activities, the Corporation may be contingently liable for litigation and claims with, among other, custom- ers, 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 pro- vide no assurance, that the ultimate resolution of such contingencies would not have a material adverse effect on the ﬁnancial position of the Corporation. At December 31, 2011, capital commitments in respect of purchase of property, plant and equipment totalled $16,569, all of which had been ordered. There were no other material capital commitments at the end of the year. 30. ADOPTION OF INTERNATION FINANCIAL REPORTING STANDARDS The Corporation has adopted IFRS effective January 1, 2011. Prior to the adoption of IFRS the Corporation prepared its ﬁnancial statements in accordance with Canadian GAAP. The Corporation’s ﬁnancial statements for the year ended December 31, 2011 will be the ﬁrst annual ﬁnancial statements that comply with IFRS. The Corporation’s transition date is January 1, 2010 and the Corporation has prepared its open- ing IFRS statement of ﬁnancial position at that date. These ﬁnancial statements have been prepared in accordance with the accounting poli- cies described in Note 2, including the application of IFRS 1, First-time Adoption of International Financial Reporting Standards (“IFRS 1”). The following tables reconcile the ﬁnancial statements previously reported under Canadian GAAP to the ﬁnancial statements prepared in accordance with IFRS. Explanations of the effect of the transition to IFRS follow the reconciliations. 58 MAGELLAN 2011 ANNUAL REPORT Notes To Consolidated Financial Statements (unless otherwise stated, all amounts are in thousands of Canadian dollars) Reconciliation of equity at January 1, 2010 The following is a reconciliation of the Corporation’s equity reported in accordance with Canadian GAAP to its equity in accordance with IFRS at the transition date: Notes (xiv) (xv) (vi), (x) (xvi), (vii) (viii), (xiii) (iii), (ix) (xv) (xii) (xii) (xi),(xiv) (xi) (xv) (xii) (xiii) (iii) (v) (iv) Effect of Canadian transition to IFRS − 14,703 − − (3,958) (444) 3,369 (16,828) (18,177) 2,675 (18,660) − (4,177) 4,441 14,892 692 − (5,500) 2,148 9,096 9,953 31,545 − (3,001) − (113,651) 66,447 (50,205) (18,660) GAAP 22,641 82,850 147,248 38,458 3,958 254,700 − 88,668 24,909 17,186 680,618 140,590 135,373 − 2,321 73,716 38,182 10,281 − − 9,803 410,266 234,389 4,708 13,565 84,137 (66,447) 270,352 680,618 IFRS 22,641 97,553 147,248 38,458 − 254,256 3,369 71,840 6,732 19,861 661,958 140,590 131,196 4,441 17,213 74,408 38,182 4,781 2,148 9,096 19,756 441,811 234,389 1,707 13,565 (29,514) − 220,147 661,958 Cash Trade and other receivables Inventories Prepaid expenses and other Deferred tax assets - current Property, plant and equipment Investment properties Intangible assets Other assets Deferred tax assets Total assets Bank indebtedness Accounts payable and accrued liabilities Provisions - current Debt due within one year Long-term debt Convertible debentures Deferred tax liabilities Provisions Borrowings subject to speciﬁc conditions Other long-term liabilities Total liabilities Share Capital Contributed surplus Other paid in capital Retained earnings Accumulated other comprehensive loss Total equity Total liabilities and equity 59 MAGELLAN 2011 ANNUAL REPORT Notes To Consolidated Financial Statements (unless otherwise stated, all amounts are in thousands of Canadian dollars) Reconciliation of equity at December 31, 2010 The following is a reconciliation of the Corporation’s equity reported in accordance with Canadian GAAP to its equity in accordance with IFRS at the transition date: Notes (xiv) (xviii) (xv) (vi), (x) (xvi) (viii) (iii), (ix) (xv) (xii) (xii) (xi),(xiv) (xi) (xv) (xii) (xiii) (iii) (v) (iv) Effect of Canadian transition to GAAP 24,952 84,287 151,741 11,838 3,742 239,508 − 80,322 39,791 18,082 654,263 117,046 135,528 − 8,000 48,438 17,700 38,901 13,391 4,000 − − 5,436 388,440 214,440 5,289 13,565 109,145 (76,616) 265,823 654,263 IFRS − 9,935 (943) − (3,742) (389) 3,192 (8,373) (17,198) 1,754 (15,764) − (4,965) 5,324 − 10,103 143 − (5,430) − 2,079 13,372 8,838 29,464 − (3,316) − (108,136) 66,224 (45,228) (15,764) IFRS 24,952 94,222 150,798 11,838 − 239,119 3,192 71,949 22,593 19,836 638,499 117,046 130,563 5,324 8,000 58,541 17,843 38,901 7,961 4,000 2,079 13,372 14,274 417,904 214,440 1,973 13,565 1,009 (10,392) 220,595 638,499 Cash Trade and other receivable Inventories Prepaid expenses and other Deferred tax assets – current Property, plant and equipment Investment properties Intangible assets Other assets Deferred tax assets Total assets Bank indebtedness Accounts payable and accrued liabilities Provisions – current Preference shares – current Debt due within one year Long-term debt Convertible debentures Deferred tax liabilities Preference shares Provisions Borrowings subject to speciﬁc conditions Other long-term liabilities Total liabilities Share capital Contributed surplus Other paid in capital Retained earnings Accumulated other comprehensive loss Total equity Total liabilities and equity 60 MAGELLAN 2011 ANNUAL REPORT Notes To Consolidated Financial Statements (unless otherwise stated, all amounts are in thousands of Canadian dollars) Reconciliation of net income for the year ended December 31, 2010 Revenues Cost of revenues Gross proﬁt Administrative and general expenses Other Dividends on preference shares Net income before interest and income taxes Interest Income taxes Net income Foreign currency translation Actuarial loss on deﬁned beneﬁt plans Comprehensive income Notes (xvii) (iii), (viii), (x) (v) (xi) (xv) Effect of Canadian transition to IFRS GAAP 732,508 639,172 93,336 40,026 127 880 52,303 19,736 7,159 25,408 (10,169) – 15,239 (873) (10,819) 9,946 (256) − − 10,202 416 850 8,936 (223) (3,421) 5,292 IFRS 731,635 628,353 103,282 39,770 127 880 62,505 20,152 8,009 34,344 (10,392) (3,421) 20,531 Explanations of the effects of the transition to IFRS The following explanations accompany the preceding reconciliations and describe the effect of the transition to IFRS, including manda- tory exceptions and optional exemptions from retrospective application of IFRS under IFRS 1 and items requiring retrospective application. Mandatory exceptions from retrospective application IFRS 1 requires certain mandatory exceptions from full retrospective application of all accounting standards effective at the transition date. The following mandatory exceptions were applicable to the Corporation at the transition date. (i) Estimates In accordance with IFRS 1, an entity’s estimates under IFRS at the date of transition to IFRS must be consistent with estimates made for the same date under previous GAAP, unless there is objective evidence that those estimated were in error. The Corporation’s IFRS estimates as of January 1, 2010 are consistent with its Canadian GAAP estimates for the same date. Optional IFRS 1 exemptions from retrospective application In general, IFRS requires an entity to comply with all of the accounting standards effective at the end of the ﬁrst reporting period after adopting IFRS. This means restating accounting transactions as if the standards had been in place when the transactions occurred. IFRS 1 provides optional exemptions from retrospectively applying the standards. The Corporation has applied the following signiﬁcant optional exemptions to its opening statement of ﬁnancial position prepared as at the date of transition. (ii) Business combinations The Corporation has elected to adopt IFRS 3, Business Combinations (“IFRS 3”) prospectively. Accordingly, all business combinations on or after January 1, 2010 will be accounted for in accordance with IFRS 3 and prior business combinations will not be restated. (iii) Employee beneﬁts The Corporation has elected to recognize all cumulative actuarial gains and losses of $25,583 that were deferred previously under Canadian GAAP immediately in opening retained earnings at the date of transition for all of its employee beneﬁt plans. 61 MAGELLAN 2011 ANNUAL REPORT Notes To Consolidated Financial Statements (unless otherwise stated, all amounts are in thousands of Canadian dollars) (iv) Cumulative translation difference IAS 21, The Effect of Changes in Foreign Exchange Rates (“IAS 21”) requires cumulative translation differences to be reported as a sepa- rate component of equity and, on disposal of foreign operation, the cumulative translation difference related to that operation forms part of the gain or loss on disposal. The Corporation has elected to set previously accumulated cumulative translation differences, which was included in other comprehensive loss, to zero at January 1, 2010 and absorbed into retained earnings. This exemption has been applied to all subsidiaries. The aggregate amount at January 1, 2010 was $66,447. (v) Share-based payment transactions IFRS 2, Share Based Payment (“IFRS 2”) 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 Corpo- ration has elected to apply IFRS 2 to equity instruments granted after November 7, 2002 which had not vested at January 1, 2010. For equity instruments with a cash-settlement option the Corporation has not applied IFRS 2 to liabilities that were settled before January 1, 2010. In addition IFRS 1, allows for the reversal of cumulative expense previously recognized on options vested at the transition date. At January 1, 2010, this change in accounting policy reduced contributed surplus and increased opening retained earnings by $3,001. There is no impact on the assets of the Corporation as the charge to the income statement is matched by an equal credit through equity. (vi) Deemed cost IFRS 1 provides the option to measure property, plant and equipment, investment properties and intangible assets at deemed cost being the fair value of the asset at the date of transition. The Corporation has elected to measure items of property, plant and equipment, invest- ment properties and intangible assets at depreciated historical cost. (vii) Borrowing costs IFRS 1 provides the option to apply IAS 23, Borrowing Costs (“IAS 23”) retrospectively or prospectively from the date of transition. The Cor- poration has elected to apply IAS 23 on a prospective basis. Explanation of reconciling items from Canadian GAAP to IFRS (viii) Impairment of assets IAS 36, Impairment of Assets (“IAS 36”), requires a one-step approach to determine the recoverable amount of a CGU. Canadian GAAP’s two step approach required the application of discounted cash ﬂow techniques to measure the impairment amount, but only after the use of undiscounted cash analysis indicates the existence of impairment. The adoption of IAS 36 is expected to result in more frequent write- downs since the carrying amount of the assets which are supported by undiscounted cash ﬂows may be determined impaired when the future cash ﬂows are discounted in accordance with the IFRS requirements. Under IFRS, except for impairment losses attributed to goodwill, previous impairment losses may be reversed or reduced if circumstances lead to a change in the impairment amount. In accordance with IAS 36, the Corporation assessed whether there are events or circumstances indicating that an asset may be impaired both at the date of transition to IFRS and as at December 31, 2010. Recoverable amounts were calculated on value in use, using discounted cash ﬂow models based on the Corporation’s long-term planning model. The key assumptions used in those reviews are disclosed in Note 7. As a result of the review of recoverable amounts it was determined that certain of the Corporation’s CGUs were impaired. The total impact on the statement of ﬁnancial position shows a reduction in investment property of $180 at January 1, 2010 [$170 at December 31, 2010] and a reduction in intangible assets of $19,103 at January 1, 2010 [$11,372 at December 31, 2010]. In addition, the operating expense reﬂects the impact on depreciation/amortization as a result of the recognition of an impairment loss on transition to IFRS. (ix) Employee beneﬁts Under IAS 19, Employee Beneﬁts (“IAS 19”), the Corporation has elected to recognize all actuarial gains and losses immediately in opening retained earnings without recognition to the income statement in subsequent periods. As a result, actuarial gains and losses are not amor- tized to the income statement but rather are recorded directly to retained earnings at the end of each reporting period. The Corporations’ operating companies have adjusted their pension expense to remove the amortization of actuarial gains or losses. 62 MAGELLAN 2011 ANNUAL REPORT Notes To Consolidated Financial Statements (unless otherwise stated, all amounts are in thousands of Canadian dollars) 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 amortizes past service costs over the expected average remaining service life to full eligibility of the employees covered by the plan. In addition IFRIC 14, The Limit on a Deﬁned Beneﬁt Asset - Minimum Funding Require- ments, requires the Corporation to take into account solvency funding contributions it currently makes to its pension plans to cover it sol- vency deﬁcit when determining its pension asset or obligation. The Corporation has recorded an additional liability as a result of IFRIC 14. The statement of ﬁnancial position shows a total IAS 19 pension deﬁcit of $10,698 at January 1, 2010 [$9,637 at December 31, 2010] which compares with an asset of $16,059 at January 1, 2010 [$22,616 at December 31, 2010] reported previously under Canadian GAAP. In addition, the operating expense through the 2010 income statement reduced by $1,328. (x) 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. As a result of the detailed componentization assessment, the total impact on the state- ment of ﬁnancial position shows a reduction in property, plant and equipment of $744 at January 1, 2010 [$775 at December 31, 2010]. In addition, the operating expense reﬂects a reduction on depreciation and amortization as a result of derecognizing certain assets on transition to IFRS. (xi) 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 has reclassiﬁed certain leases previously accounted for as operating leases under Canadian GAAP as ﬁnance leases under IFRS. This affects the statement of ﬁnancial position at January 1, 2010 by increases in property, plant and equipment of $3,786 [$3,369 at December 31, 2010]; long-term debt by $1,314 [$656 at December 31, 2010] and opening retained earnings of $2,472 [$2,857 at December 31, 2010]. (xii) Provisions IAS 37, Provisions, Contingent Liabilities and Contingent Assets (“IAS 37”) require 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 resulted in the recognition of a liability under IFRS that was not previously recognized under Canadian GAAP. Other measurement differences under IFRS also resulted in the earlier recognition of provisions. The total impact on the statement of ﬁnancial position shows an increase in current and long-term provisions of $6,589 at January 1, 2010 [$7,403 at December 31, 2010]. In addition, the operating expense reﬂects the impact on operating expense as a result of the recognition of the additional provisions on transition to IFRS. Under IFRS, current and long-term provisions are accounted for and disclosed separately from accounts payable and accrued liabilities and other liabilities. Provisions were reclassiﬁed from accounts payable and accrued liabilities and other liabilities to current and long-term provisions. (xiii) Government grants Under Canadian GAAP, government grants received are deducted from the related asset or expense and any repayments are recorded as an expense in cost of revenues. 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. In addition, a liability is recognized for future royalty payments when it is probable that all or part of the amounts received will be repaid based on future estimated sales. Repayments made are recorded as a reduction of the liability. A revision to the estimate of amounts to be repaid results in an increase or decrease in the liability and the related asset or expense, and a cumulative adjustment to amortization is recognized immediately in income. Upon transition to IFRS, the Corporation has recorded a liability based on management’s best estimate of the expected amount of government grants that may become repayable. 63 MAGELLAN 2011 ANNUAL REPORT Notes To Consolidated Financial Statements (unless otherwise stated, all amounts are in thousands of Canadian dollars) This affects the statement of ﬁnancial position at January 1, 2010 by increasing other assets by $679 [$5,007 at December 31, 2010], intangible assets by $2,276 [$2,492 at December 31, 2010], property, plant and equipment by $63 [$379 at December 31, 2010], borrowings by $9,096 [$13,372 at December 31, 2010] and a reduction in accounts payable and accrued liabilities by $719 [increased by $45 at December 31, 2010] and opening retained earnings of $5,359 [$5,178 at December 31, 2010]. (xiv) Financial instruments Under IAS 39, Financial Instruments (“IAS 39”), the criterion for derecognizing of receivables under IFRS is different from Canadian GAAP as Canadian GAAP focuses mainly on surrendering control over the transferred assets while IFRS focuses on the transfer of substantive risks and rewards. Certain receivables in which the Corporation sells but does not transfer substantially all the risks and rewards will need to be recognized on the statement of ﬁnancial position. This affects the statement of ﬁnancial position at January 1, 2010 by increasing trade and other receivables and debt due within one year by $14,270 [$9,591 at December 31, 2010]. (xv) Income taxes While IAS 12, Income Taxes (“IAS 12”) is similar to the existing Canadian GAAP standard, any material adjustments to balances resulting from the adoption to IFRS would have a corresponding effect on deferred tax balances. Under Canadian GAAP, an entity is required to present both current and long-term future income taxes on its statement of ﬁnancial posi- tion. Under IFRS, all future income taxes will be presented as long-term assets or liabilities. The total impact on the statement of ﬁnancial position at January 1, 2010 is an increase in the net deferred tax asset by $4,217 [$3,442 at December 31, 2010] compared with that previously reported under Canadian GAAP. (xvi) Investment properties Investment property as deﬁned by IAS 40, Investment Properties (“IAS 40”) requires a separate line presentation called “Investment Prop- erties” on the statement of ﬁnancial position for property that is held to earn rental income 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 Corpora- tion holds properties that earn rental income from third parties in addition to holdings of excess land. The Corporation has determined that these properties meet the deﬁnition of investment property under IAS 40 and has disclosed as at Janu- ary 1, 2010 investment properties of $3,369 [$3,192 at December 31, 2010] as a separate line item in the consolidated ﬁnancial statements. (xvii) Functional currency Under IAS 21, each entity, division or branch in a group must be analyzed, through application of primary and secondary factors, to deter- mine its functional currency. Based on this assessment, the functional currency of each of the Canadian entities in the group is the Cana- dian dollar, with the exception of a branch which has a US dollar functional currency. Under Canadian GAAP the functional currency of the branch was assessed as part of the integral operations of a Canadian entity of the Corporation, hence the branch had a Canadian dollar functional currency. (xviii) Share-based payment transactions Under IFRS, the Corporation moved from straight-line to graded vesting as well as to estimating forfeitures for the recognition of share- based compensation expense. The graded vesting requires a greater portion of expense to be recorded in the initial periods compared to distributing the expense equally over all vesting periods under the straight-line method. 64 MAGELLAN 2011 ANNUAL REPORT Notes To Consolidated Financial Statements (unless otherwise stated, all amounts are in thousands of Canadian dollars) The expense under IFRS is $314 lower for the year ended December 31, 2010 than under Canadian GAAP. There is no impact on the assets of the Corporation as the charge to the income statement is matched by an equal credit through equity. (xix) Cash ﬂows The Corporation’s cash ﬂows under IFRS are unchanged from those under Canadian GAAP. All of the IFRS accounting adjustments net out within cash generated from operations except for the recording of borrowings in relation to the repayable government grants which have increased the net cash generated from ﬁnancing activities with an offsetting increase in cash used in investing activities by $3,976, and the recognition of accounts receivables and debt due within one year under the securitization program which increased the net cash gener- ated from ﬁnancing activities by $4,679. 65 MAGELLAN 2011 ANNUAL REPORT Board of Directors and Officers Corporate Ofﬁcers Board Of Directors Committees Of The Board (1) (2) (3) (4) Audit Committee Chairman: William A. Dimma Governance and Nominating Committee Chairman: Bruce W. Gowan Human Resources and Compensation Committee Chairman: William G. Davis Environmental and Health & Safety Committee Chairman: Donald C. Lowe N. Murray Edwards Chairman Richard A. Neill Vice Chairman James S. Butyniec President and Chief Executive Ofﬁcer John B. Dekker Vice President, Finance and Corporate Secretary Daniel R. Zanatta Vice president, Business Development, Marketing and Contracts Larry A. Winegarden Vice President, Corporate Strategy Konrad B. Hahnelt Vice President, Strategic Global Sourcing Jo-Ann C. Ball Vice President, Human Resources N. Murray Edwards Chairman Magellan Aerospace Corporation President Edco Financial Holdings Ltd. Calgary, Alberta Richard A. Neill (4) Vice Chairman Magellan Aerospace Corporation Mississauga, Ontario James S. Butyniec President and Chief Executive Ofﬁcer Magellan Aerospace Corporation Mississauga, Ontario Hon. William G. Davis P.C., C.C., Q.C. (3) Counsel Davis Webb LLP Brampton, Ontario William A. Dimma C.M., O. Ont. (1, 2) Chairman Decision Dynamics Technology Calgary, Alberta Bruce W. Gowan (1, 2, 3) Corporate Director Huntsville, Ontario Donald C. Lowe (1, 4) Corporate Director Toronto, Ontario Larry G. Moeller (4) President Kimball Capital Corporation Calgary, Alberta James S. Palmer, C.M., Q.C., (2, 3) Chairman Emeritus Burnet, Duckworth & Palmer LLP Calgary, Alberta 66 MAGELLAN 2011 ANNUAL REPORT Operating Facilities Directory and Shareholder Information Canada United Kingdom Corporate Ofﬁce Davy Way, Llay Industrial Estate, Llay, Wrexham LL12 0PG Tel: 01978 856600 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 7/8 Lyon Road, Wallisdown, Poole, Dorset BH12 5HF Tel: 01202 535536 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 9th, 2012 at 2:00 p.m. at The Living Arts Centre, 4141 Living Arts Drive, Mississauga, Ontario L5B 4B8 660 Berry Street, Winnipeg, Manitoba R3H 0S5 Tel: 204 775 8331 3160 Derry Road East, Mississauga, Ontario L4T 1A9 Tel: 905 673 3250 634 Magnesium Road, Haley, Ontario K0J 1Y0 Tel: 613 432 8841 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 67 MAGELLAN 2011 ANNUAL REPORT

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