Letter to Shareholders
The progress and accomplishments achieved in 2012 and reflected in Magellan
Aerospace Corporation’s (“Magellan” or the “Corporation”) 2012 results could
not have been realized without the support of our shareholders, stakeholders,
employees and customers. The results largely reflect Magellan’s commitment
to improving operational efficiencies, generating revenue from its areas of core
expertise, and developing integrated solutions for its customers. Moving forward into
2013 and beyond, the Corporation remains committed to maintaining shareholder
confidence by continuing to manage our enterprises in an efficient, responsible
and profitable manner.
Since the mid 1990’s Magellan has been acquiring capabilities in the aerospace
and power generation sectors. This evolution has not developed without a focused
effort on overcoming numerous industry and economic challenges. As previously
reported in our corporate communications we believe these results are primarily
attributable to our absolute commitment to standardizing our best practices by
aggressively designing, implementing and embracing the Magellan Operating
System™ (“MOS™”).
Moving forward into 2013 and beyond,
the Corporation remains committed to
maintaining shareholder confidence by
continuing to manage our enterprises
in an efficient, responsible and
profitable manner.
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MAGELLAN 2012 ANNUAL REPORT
Magellan has remained disciplined in the development and adoption of
MOS™ throughout the organization and has seen measurable improvements
in profitability from improved inventory management, customer delivery
management, and other key operational processes. In 2012, the Corporation
implemented the next stage of MOS™, encompassing the support functions;
of finance, business development, contracts, quality and engineering. By
adopting the MOS™ principles as the methodology for structured change,
Magellan expects to continue to improve its financial performance in support
of customers’ requirements.
The Industry
The Corporation expects that its position on new commercial aerospace
programs such as the A350 and B787 will result in continuing sales growth in
this sector of our business. As these programs mature and with global demand
expected to continue at its current levels our present mix of commercial 70%
and defence 30% has the Corporation well positioned to manage and absorb
anticipated reductions due to sequestration in the United States and a general
downturn in global defence spending. The Corporation remains committed
and invested in the Joint Strike Fighter program and continues to realize and
experience year over year growth in revenue on this project.
Integrated Customer Solutions
Going forward, Magellan will target to continue to generate revenue growth
organically through operating efficiencies, and by maximizing business
opportunities with established customers. Where there is a sound business case
to improve the alignment with the needs of a customer, Magellan will invest in
capital projects and acquisition opportunities that complement its businesses.
An example is our acquisition of Magellan Aerospace (Greyabbey) Limited,
Magellan Aerospace (Blackpool) Limited, and Magellan Aerospace Polska Sp
z.o.o (all formerly John Huddleston Engineering Limited (“JHE”) holdings) in
the third quarter of 2012 which strengthened and enhanced Magellan’s core
manufacturing capabilities and further expanded its UK operations, primarily
in the commercial aerostructures market.
Corporate Identity and Positioning
In 2012 Magellan undertook a comprehensive rebranding strategy that better
reflected the integrated strengths of Magellan’s global operations and the future
vision of the Corporation.
Magellan’s alignment with the strategic direction of its customers, integrated
with the ability to provide global supply chain solutions from core Centres
of Excellence, describes where the Corporation is going. “Magellan has an
integrated Vision of Aerospace.”
With a refined and clear positioning statement, Magellan developed a new visual
identity, and concurrently began rolling this out both internally and externally.
2
MAGELLAN 2012 ANNUAL REPORT
Commencing with a decision in the third quarter of 2012 to fully support the
Magellan brand, it was determined that all of the North American business units
would be renamed, incorporating “Magellan” in the new name. Notwithstanding
the branding acceptance that had been achieved to date, Magellan’s customers
indicated that adopting a common identity throughout the organization would
be viewed favourably. Magellan’s operations outside of North America in the
United Kingdom, India, and Poland were already named consistent with the
Magellan Aerospace naming practice, and therefore remained unchanged.
The re-naming of Magellan’s North American divisions and subsidiaries marked
an important milestone in establishing the Corporation as an integrator in
the aerospace industry, with the business practices and expertise to deliver
products and services in today’s global aerospace market. Further, it has
defined the development and alliance of the global business units and the
position that Magellan wants to fill in the international aerospace market.
Throughout the Magellan organization, the MOS™ principles of standardization
have been universally adopted to optimize efficiencies in support of future
profitable growth and development. The rebranding has facilitated the external
alignment to these internal principles.
A common identity and consistency of practices will improve Magellan’s ability to
provide fully integrated products and services to the customer base, while insuring
our contracting practices and decisions are in the best interests of our stakeholders.
Magellan looks forward to the coming year with enthusiasm and a readiness to
face the challenges of this dynamic and global industry. Let me extend a sincere
thank you to the entire Magellan team, at every location around the world, for
their contributions to the success of the Corporation, and for their willingness
to support our customers at every level in the organization.
James S. Butyniec
President and Chief Executive Officer
March 22, 2013
MAGELLAN 2012 ANNUAL REPORT
3
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”). The MD&A should be read in conjunction with the audited consolidated financial state-
ments and the notes thereto for the year ended December 31, 2012 (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, 2012 relative to the year ended December 31, 2011. The information contained in this report is as
at March 22, 2013. 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 performance. These statements relate to future events or future performance. All state-
ments other than statements of historical facts may be forward-looking statements. In particular and without limitation
there are forward looking statements under the heading “Company Overview,” “Outlook,” “Consolidated Revenues,”
“2012 Updates,” “Liquidity and Capital Resources” and “Future Changes in Accounting Policies”. In some cases, for-
ward-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 state-
ments are based on management’s assumptions relating to the production performance of Magellan’s assets and com-
petition throughout the aerospace industry in 2012 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 materi-
ally 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 perfor-
mance. 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 profitability. 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 com-
parable 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.
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MAGELLAN 2012 ANNUAL REPORT
Management’s Discussion and Analysis December 31, 2012 1. OVERVIEW
A summary of Magellan’s business and significant 2012 events
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 aeroen-
gine and aerostructure components for aerospace markets, advanced products for defence 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 in-
clude precision machining of a wide variety of aerospace material, composites, complex high technology magnesium
and aluminum alloy castings, repair and overhaul technologies and design of structures. The Corporation is now seeking
to leverage these core competencies by achieving growth in applications where these abilities are critical in meeting
customer needs.
Magellan is organized and managed as two business segments and is viewed as two operating segments by the chief
operating decision-makers, for the purpose of resource allocations, assessing performance, and strategic planning.
These two segments are: Aerospace and Power Generation Project. The Corporation supplies both the commercial
and defence sectors of the Aerospace segment. In the commercial sector, the Corporation is active in the business jet,
regional aircraft, helicopter and large commercial jet markets. On the defence 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
2012
94%
6%
100%
2011
88%
12%
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 commercial and defence
markets. Components are produced to aerospace tolerances using conventional and high-speed automated ma-
chining 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 components, both static and rotating, and integrated nacelle components, flow paths and engine exhaust
systems for the world’s leading aeroengine manufacturers. The Corporation also performs repair and overhaul services
for jet engines and related components.
The Power Generation Project segment is a specialty product complementary to the Corporation’s principal business.
The Corporation’s sole product in the Power Generation Project segment is an electric power generation project in the
Republic of Ghana that is expected to be completed in 2013. While a number of power generation project opportunities
are being considered, at this time the Corporation does not have any other committed projects.
MAGELLAN 2012 ANNUAL REPORT
5
Management’s Discussion and Analysis December 31, 2012
The Corporation serves both the commercial and defence markets. In 2012, for the Aerospace segment, 70% of rev-
enues were derived from commercial markets (2011 – 67.0%, 2010 – 64.4%) while 30% of revenues related to defence
markets (2011 – 33.0%, 2010 – 35.6%).
2012 Updates
–
On May 10, 2012 Magellan announced that it has been awarded a contract with The Boeing Company for the continu-
ation of the production of complex, hard metal structural assemblies for the Next-Generation 737, 747 – 8, 767, 777,
and the production of such assemblies for the new 787 Dreamliner airplanes. These integrated assemblies are being
manufactured and delivered from Magellan’s New York, NY and Kitchener, Ontario operating facilities beginning in
2013. This long term contract will continue Magellan’s revenues from work for Boeing beginning in the first quarter
2013 and into the next decade and provides a fundamental pillar of support to Magellan’s core commercial platform.
–
–
An agreement between Magellan Aerospace (UK) Limited and Airbus was announced on July 10, 2012 for a
contract extension to deliver aluminum and titanium structural wing components from Magellan UK operating facili-
ties located in Wrexham and Bournemouth. This contract is comprised of components for use on the A320, A330
and A380 aircraft programs and is projected to generate revenues in excess of £370 million through to December
2019. The scope of work of this contract complements the new A350 work packages that Magellan had previously
been awarded and is currently developing, thereby, securing Magellan as a supplier on every Airbus commercial
program. To maintain Magellan’s competitive position and support this long-term commitment to Airbus, Magellan
expects to invest up to £15 million in capital equipment over the term of contract extension.
Magellan completed the acquisition of John Huddleston Engineering Limited (“JHE”) on August 31, 2012. JHE
is a leading European supplier of precision machined aerospace components with facilities in Great Britain, Northern
Ireland and Poland. With the acquisition of JHE, Magellan is strengthening and enhancing its core manufacturing
capabilities and further expanding its European operations. Over the last five years, JHE has made significant in-
vestments in the latest high speed 5-axis machining equipment. In addition, JHE has been a supplier to Magellan
of precision machined structural components. JHE’s revenues for the financial year ending March 31, 2012 were
approximately $25 million, which includes approximately $3.6 million revenue from deliveries to Magellan. The ac-
quisition was funded out of Magellan’s working capital. JHE operations will be integrated and managed through
Magellan’s UK operations.
–
On December 13, 2012 Magellan announced it has completed the first F-35A Lightening II horizontal tail assem-
bly at its Winnipeg manufacturing facility. This achievement is a product of, and reflects investments made by the
Corporation over a five year period, to develop state of the art facilities and processes necessary to perform the
work. Magellan is under contract with BAE Systems to produce horizontal tail assemblies for the Conventional Take
Off and Landing variant of F-35 and is expected to produce more than 1,000 sets of the components for the program
over a 20-year period.
Labour Matters
Labour agreements at two of the Corporation’s facilities were successfully negotiated during 2012. In addition, labour
agreements for one of the Corporation’s facilities were successfully negotiated after a six week labour disruption. Three
labour agreements at three of the Corporation’s facilities expire in 2013. The Corporation will begin negotiations on these
three labour agreements in the second quarter of 2013.
Financing Matters
On December 21, 2012, the Corporation amended its operating credit agreement with its existing lenders. Under the
terms of the amended agreement, the maximum amount available under the operating credit facility was decreased to
a Canadian dollar limit of $115.0 million (down from $125.0 million) plus a US dollar limit of $35.0 million (down from US
6
MAGELLAN 2012 ANNUAL REPORT
Management’s Discussion and Analysis December 31, 2012
$50.0 million), with a maturity date of December 21, 2014. The credit agreement also includes a $50 million uncommit-
ted accordion provision which will provide Magellan with the option to increase the size of the operating credit facility to
$200 million. The facility is extendible for unlimited one year renewal periods, subject to mutual consent of the syndicate
of lenders and the Corporation. The operating credit facility continues to be fully guaranteed until December 21, 2014 by
Mr. Edwards in consideration of the continued payment by the Corporation of an annual fee, payable monthly, equal to
0.50% (down from 0.63%) of the loan amount.
On December 21, 2012, the Corporation also extended the 7.5% loan payable (“Original Loan”) to Edco Capital
Corporation (“Edco”), a corporation controlled by the Chairman of the Board of the Corporation to January 1, 2015 in
consideration of the payment of a fee to Edco equal to 0.75% of the principal amount outstanding at the time of extension.
The Corporation has the right to repay the Original Loan at any time without penalty.
The terms of the amended operating credit facility continue to permit the Corporation to repay, in whole or in part, the
Original Loan from Edco provided there is no current default or event of default under the operating credit facility and after
the repayment of the Original Loan the Corporation has at least $25.0 million in availability under the operating credit facility.
As at December 31, 2011, the Corporation had retracted all outstanding 8% Cumulative Redeemable First Preference
Shares Series A (“Preference Shares Series A”) and reduced the outstanding principal amount of the Original Loan to
$33.5 million. During 2012, the Corporation repaid an additional $3.5 million resulting in an outstanding principal amount
on the Original Loan of $30.0 million.
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 10% convertible secured subordinated debentures (“Convertible Debentures”)
were converted into 38,000,000 common shares of the Corporation. On April 30, 2012, an additional $2 million of the
Convertible Debentures were converted into 2,000,000 Common Shares of the Corporation.
2. OUTLOOK
The outlook for Magellan’s business in 2013
Over the next number of years the global commercial aerospace market is expected to reach record levels of production
based on the need to replace older aircraft with new more fuel efficient models and on passenger travel growth in Asia and
the Middle East. In contrast, the global defence market is in decline as the pressure to realize budget cuts is at the forefront
of most government agendas.
The global defence market is expected to see a decline due to decreased spending in the US and European markets.
With the US representing 50% of global defence procurement any growth in other countries is unable to effectively offset
the potential reductions. Uncertainty in the US defence market is perpetuated by the unknowns of sequestration. In the
absence of absolute directives, the US Department of Defense recently issued a memo suggesting that budgets focus
primarily on readiness and urgent operational needs. It also suggested the cutting of future units, freezing civilian hiring
and canceling certain maintenance activities. All procurement programs are expected to see reduced buys in the magni-
tude of 10 to 15%. European markets are similarly facing the challenge of reallocating expenditures as a consequence of
the current financial and budgetary crisis. As the Western defence industry reacts to the shrinking market new competi-
tive pressures will emerge as the focus shifts towards South American, Middle East and Asian markets.
In contrast to defence, the global commercial aerospace market is in a strong up cycle. Backlogs are expected to
continue growing, as airlines update their fleets with new fuel-efficient aircraft in order to stay competitive. Boeing and
Airbus delivered 601 and 588 aircraft respectively in 2012, as compared with 477 and 534 aircraft delivered in 2011.
Production rates for 2013 are forecasted to increase again to 665 and 641 respectively. The 737 program is scheduled to
MAGELLAN 2012 ANNUAL REPORT
7
Management’s Discussion and Analysis December 31, 2012
increase to 38 per month in the second quarter of 2013 and the A320 is running at 42 per month. The B787 program will
no doubt experience some delay due to the recent battery issues, however, firm orders of just under 800 aircraft should
see Boeing ramp from 5 per month to 7 per month in 2013 and then to 10 per month in 2014. Airbus has the A330 rate
planned to ramp up from 9 per month to 11 per month by the fourth quarter of 2014 and the A380 to increase from 3 per
month to 3.5 per month.
Prospects exist for regional aircraft market growth with the greatest opportunity to come from Asia/Pacific, Latin America
and the Middle East regions. In the near term, two regional segments are expected to be particularly dynamic, the first
being the 70 seat turboprop segment and the second the 90 to 120 seat jet market. The first segment has continued to
grow due to persistently high fuel prices and the need for larger aircraft to accommodate increasing passenger traffic.
Although the Bombardier Q400 is currently suffering a lower order backlog of less than one year, ATR is increasing 72
Series annual production to 80 aircraft in 2013 to satisfy an almost three year backlog. This market is better positioned
to grow considering new scope clause agreements between regional airlines and pilots unions. Regional airlines will be
replacing their older 35 to 50 seat, in-service fleet with larger turboprop or regional jet aircraft.
The 90 to 120 seat regional jet segment is somewhat limited by pilot scope clause agreements, however some predict
that the market is poised for growth as Asia/Pacific regions could overtake Europe as the second largest market for re-
gional aircraft. With the 50 seat segment disappearing, this will force airlines to replace this older in-service fleet (52% of
the total) with larger turboprops and regional jets. As well, an American/US Air merger is expected to result in additional
new orders as the airline adds seats to its regional fleet. It is expected that new fuel-efficient platforms entering this seg-
ment such as the Bombardier C-Series, the Mitsubishi MRJ, the Irkuit MS-21 will increase market competition.
Forecast International describes the current business jet market as “sluggish” and “struggling to recover from the wake
of the global and financial collapse.” The industry is frustrated that recovery has not yet happened despite that all key
indicators continue to point in the right direction. Current forecasts suggest that the market is expected to pick up some-
what in the second half of 2013 as equity markets stabilize and corporate profits continue to grow. A positive sign in the
market is that Bombardier reported net orders of 343 business jets in 2012 versus 191 in 2011. The medium to large
cabin jets continue to be more resilient than light jets during this cycle as buyers of the latter are much more sensitive to
the economic environment. China is in the process of liberalizing its air space which could lead the growth in business
jet aircraft due to the increasing number of wealthy individuals in that country. The Middle East is expected to follow the
same pattern. Overall, recovery in this market is expected to be gradual in its year-to-year growth.
Finally, the global helicopter market has experienced some contraction because its largest segment, that of defence
at 72% of the total, is being trimmed. The combination of the Iraq/Afghanistan withdrawal and US sequestration
budget cuts will cause further contraction before recovery can be expected. Prior to this reversal, the industry was
experiencing good growth and was anticipating a strong five year period to follow. Where North America dominated
the industry to date, rise in defence spending and economic growth amongst BRIC (Brazil, Russia, India & China)
nations is expected to drive future industry growth.
8
MAGELLAN 2012 ANNUAL REPORT
Management’s Discussion and Analysis December 31, 2012 3. SELECTED ANNUAL INFORMATION
A summary of selected annual financial information for 2012, 2011 and 2010
Expressed in millions of dollars except per share information1
Revenues
Net income for the year
Net income per common share – Diluted
Total assets
Total long-term liabilities
1All amounts presented have been prepared in accordance with IFRS
2012
704.6
58.3
1.00
755.8
267.2
2011
691.4
37.4
0.73
661.7
260.5
2010
731.6
34.3
0.66
638.5
98.4
Revenues for the year ended December 31, 2012 increased from 2011 levels and decreased over 2010. The increase in
revenues from 2011 is attributable to increased volume in the global commercial aerospace market. Net income increased
in 2012 from 2011 due to an after tax gain on bargain purchase of $7.4 million recognized on the purchase of JHE as the
consideration paid was lower than the fair value of the identifiable tangible assets acquired at the time of purchase and the
recognition of previously unrecognized investment tax credits (see “Results of Operations – Gross Profit”) and deferred tax
assets (see “Results of Operations – Income Taxes”). The Corporation has not paid dividends on its common shares in the
past four years. During 2011, the Corporation redeemed all of the outstanding Preference Shares Series A. The Corporation
declared dividends thereon at an annual rate of $0.80 per share during each of 2011 and 2010.
4. RESULTS OF OPERATIONS
A discussion of Magellan’s operating results for 2012 and 2011
Consolidated Revenues
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
2012
659,301
45,278
704,579
2011
609,942
81,468
691,410
Change
8.1%
(44.4)%
1.9%
Consolidated revenues for the year ended December 31, 2012 increased 1.9% to $704.6 million from $691.4 million
last year, due mainly to increased revenues earned in the Corporation’s Aerospace segment offset, in part, by reduced
revenues in the Corporation’s Power Generation Project segment. Revenues in the Aerospace segment were primarily
impacted by increased volumes experienced in the global commercial aerospace market.
Aerospace Segment
Revenues for the Aerospace segment were as follows:
Twelve-months ended December 31, expressed in thousands of dollars
Canada
United States
Europe
Total revenues
2012
292,754
199,917
166,630
659,301
2011
284,385
187,658
137,899
609,942
Change
2.9%
6.5%
20.8%
8.1%
Aerospace revenues for the year ended December 31, 2012 were $659.3 million, an increase of $49.4 million or 8.1%
over the previous year. Revenues in Canada in 2012 increased 2.9% in comparison to revenues earned in 2011 resulting
from higher volumes experienced in the year for proprietary products as well as increased demand from aircraft manu-
facturers as their production rates continued to increase over 2011 levels. The strengthening of the US dollar against the
Canadian dollar on average also contributed to the increased sales. Revenues in the United States were also impacted
MAGELLAN 2012 ANNUAL REPORT
9
Management’s Discussion and Analysis December 31, 2012
positively by the movement of the Canadian dollar in comparison to the US dollar. In native currency, revenues in the
United States were higher in 2012 when compared to 2011 as the Corporation’s volumes continued to increase on sev-
eral single aisle aircraft programs as well as on certain business jet programs. Revenues in Europe increased in 2012 in
comparison to 2011 revenues mainly as a result of higher customer demand in 2012 on both single aisle and wide body
aircraft when compared to 2011. If average exchange rates for both the US dollar and British Pound experienced in 2011
remained constant in 2012, consolidated revenues for 2012 would have been approximately $655.7 million or approxi-
mately $3.6 million lower than actually realized in 2012.
Power Generation Project Segment
Revenues for the Power Generation Project segment were as follows:
Twelve-months ended December 31, expressed in thousands of dollars
Power Generation Project
Total revenues
2012
45,278
45,278
2011
81,468
81,468
Change
(44.4)%
Revenues earned in 2012 and 2011 are from the Corporation’s 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 pri-
or year represents the Corporation’s progress made towards completion of the project during the year. Unless the
Corporation receives further contracts in this area the Corporation’s revenues from the power generation project in 2013
will decrease significantly as the current project is nearing completion.
Gross Profit
Twelve-months ended December 31, expressed in thousands of dollars
Gross Profit
Percentage of revenue
2012
100,692
14.3%
2011
97,410
14.1%
Change
3.4%
Gross profit increased by $3.3 million from 2011 levels of $97.4 million to $100.7 million in 2012. As a percentage of rev-
enues, gross profit was slightly higher in 2012 at 14.3% than 14.1% in 2011. Increased gross profit in 2012 was partially at-
tributed to the non-recurring recognition of unrecognized investment tax credits from previous fiscal years of $10.4 million in
2012 versus $5.2 million in 2011 offset somewhat by additional costs incurred in the period as a result of the work stoppage
at one location and higher start-up costs associated with new programs.
Administrative and General Expenses
Twelve-months ended December 31, expressed in thousands of dollars
Administrative and general expenses
Percentage of revenue
2012
39,203
5.6%
2011
38,264
5.5%
Change
2.5%
Administrative and general expenses increased to $39.2 million in 2012 from $38.3 million in 2011. Increased administra-
tive and general expenses were mainly attributed to acquisition costs incurred in 2012.
Other
Twelve-months ended December 31, expressed in thousands of dollars
Foreign exchange (gain) loss
Loss on disposal of property, plant and equipment
Other
2012
(623 )
363
(260 )
2011
238
198
436
10
MAGELLAN 2012 ANNUAL REPORT
Management’s Discussion and Analysis December 31, 2012
Included in other income is a foreign exchange gain of $0.6 million in 2012 versus a loss of $0.2 million in 2011, resulting
from the change in foreign exchange rates on the Corporation’s US dollar denominated working capital balances and
debt in Canada and foreign exchange contracts. In 2012 and 2011, the Corporation retired assets for a loss on disposal of
approximately $0.4 million and $0.2 million, respectively.
Gain on Bargain Purchase
Twelve-months ended December 31, expressed in thousands of dollars
Gain on bargain purchase
Gain on bargain purchase
2012
(9,597 ) –
(9,597 )
2011
–
On August 31, 2012, the Corporation purchased all of the issued and outstanding shares of the capital stock of JHE.
As a result of such purchase, the Corporation recognized a gain on bargain purchase in 2012 of $9.6 million on such
acquisition of JHE as the consideration paid for the identifiable tangible assets acquired was lower than the fair value, as
determined by an independent valuation specialist.
Interest Expense
Twelve-months ended December 31, expressed in thousands of dollars
Interest on bank indebtedness and long-term debt
Convertible debenture interest
Accretion charge on convertible debenture, long-term debt and borrowings
Discount on sale of accounts receivable
Interest expense
2012
7,982
66
541
648
9,237
2011
9,397
4,000
3,155
447
16,999
Interest costs for 2012 were $9.2 million, a decrease of $7.8 million from 2011 levels. Interest on bank indebtedness and
long-term debt in 2012 decreased as principal amounts outstanding during 2012 were lower than 2011 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 2012 when compared to 2011. Accretion costs related to the Convertible Debentures, long-term debt
and borrowings under specific conditions were $0.5 million in 2012 a decrease from $3.2 million in 2011 as the majority
of the Convertible Debentures were converted into common shares at the end of 2011. During 2012, the Corporation sold
$227.7 million of accounts receivable at an annualized interest rate of 1.83% compared to the sale of $167.1 million of
receivables in 2011 at an annualized interest rate of 1.73%.
Income Taxes
Twelve-months ended December 31, expressed in thousands of dollars
Current income tax expense
Deferred income tax expense
Income tax expense
Effective tax rate
2012
2,925
889
3,814
6.1%
2011
280
3,708
3,988
9.6%
The Corporation recorded an income tax expense in 2012 of $3.8 million on pre-tax income of $62.1 million, representing
an effective tax rate of 6.1%, compared to an income tax expense of $4.0 million on a pre-tax income of $41.4 million in
2011 for an effective tax rate of 9.6%.
During each of 2012 and 2011, the Corporation recognized investment tax credits in Canada totalling $16.4 mil-
lion and $9.2 million respectively, as a reduction of cost of revenues, as the Corporation has determined that it will be
able to benefit from these investment tax credits. In addition, the Corporation recognized in each of 2012 and 2011,
$13.0 million and $10.5 million, respectively, of deferred tax assets in Canada as a reduction of deferred income tax expense
as the benefit from previously unrecorded loss carry forwards and other deferred tax assets were assessed as recoverable.
MAGELLAN 2012 ANNUAL REPORT
11
Management’s Discussion and Analysis December 31, 2012
5. RECONCILIATION OF NET INCOME TO EBITDA
A description and reconciliation of certain non-IFRS measures used by management
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
2012
58,295
9,237
–
3,814
3
31,029
102,378
2011
37,413
16,999
310
3,988
68
32,835
91,613
EBITDA for the year ended 2012 was $102.4 million, compared to $91.6 million in 2011. Increased revenue levels in
2012 over 2011, the gain on bargain purchase of JHE of $9.6 million and the recognition of approximately $10.4 million
(approximately $5.2 million in 2011) of additional non-recurring unrecognized investment tax credits from previous fiscal
years resulted in increased EBITDA for 2012 over 2011 levels.
6. SELECTED QUARTERLY FINANCIAL INFORMATION
A summary view of Magellan’s quarterly financial performance
Expressed in millions of dollars, except per share information
2012
Revenues
Income before taxes
Net income
Net income per common share
Basic
Diluted
EBITDA
Mar 31
187.0
14.0
11.8
Jun 30
169.5
11.3
9.2
Sep 30
161.6
18.4
15.2
Dec 31 Mar 31
170.5
10.1
7.2
186.5
18.4
22.1
Jun 30
186.0
7.0
4.9
2011
Sep 30 Dec 31
173.3
13.8
16.6
161.6
10.4
8.6
0.21
0.20
23.5
0.16
0.16
21.7
0.26
0.26
28.1
0.38
0.38
29.1
0.40
0.14
22.7
0.27
0.10
18.5
0.47
0.17
20.8
0.9
0.31
29.6
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 2012 fluc-
tuated reaching a low of 0.9675 and a high of 1.0413. During 2012, the US dollar relative to the Canadian dollar moved from
an exchange rate of 1.0170 at the start of the 2012 calendar year to an exchange rate of 0.9949 by December 31, 2012. The
British Pound/Canadian dollar exchange rate in 2012 fluctuated reaching a low of 1.5515 and a high of 1.6162. During 2012,
the British Pound relative to the Canadian dollar moved from an exchange rate of 1.5799 at the start of the 2012 calendar
year to an exchange rate of 1.6178 by December 31, 2012. Had exchange rates remained at levels experienced in 2011,
reported revenues in 2012 would have been lower by $1.2 million in the first quarter, $5.6 million in the second quarter
and $3.3 million in the third quarter and $1.7 million higher in the fourth quarter.
Net income in the third quarter of 2012 was higher than each of the first two quarters of 2012 as the Corporation recognized
an after tax gain on bargain purchase of $7.4 million on the acquisition of JHE as the consideration paid was lower than the fair
value of the identifiable tangible assets acquired at the time of purchase. Net income for the fourth quarter of 2011 and 2012 of
$16.6 million and $22.1 million respectively were higher than most other quarterly net income disclosed in the table above.
In the fourth quarter of 2011 the Corporation recognized a reversal of previous impairment losses against intangible assets
relating to various commercial aircraft programs and in both the fourth quarter of 2011 and 2012 the Corporation recognized
previously unrecognized investment tax credits as discussed above in “Results of Operations – Gross Profit,” and recognized
12
MAGELLAN 2012 ANNUAL REPORT
Management’s Discussion and Analysis December 31, 2012
other deferred tax assets as discussed above in “Results of Operations – Income Taxes” as the Corporation determined that
it will be able to benefit from these assets.
7. LIQUIDITY AND CAPITAL RESOURCES
A discussion of Magellan’s cash flow, liquidity, credit facilities and other disclosures
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 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 unan-
ticipated expenses, it may be required to seek additional capital in the form of debt or equity or a combination of both.
In 2012, $35.9 million of cash was generated by operations, $53.9 million was used in investing activities and $14.0 million
was generated in financing activities. Cash decreased by $4.1 million in the year from $26.5 million to $22.4 million.
Cash Flow from Operating Activities
Twelve-months ended December 31, expressed in thousands of dollars
Increase in accounts receivable
(Increase) decrease in inventories
(Increase) decrease in prepaid expenses and other
Increase (decrease) in accounts payable, accrued liabilities and provisions
Net change in non-cash working capital items
Cash provided by operating activities
2012
(20,114 )
(17,310 )
(1,792 )
13,861
(25,355 )
35,890
2011
(10,908 )
24,704
6,559
(32,881 )
(12,526 )
51,444
Operating activities for 2012 generated cash flows of $35.9 million compared to $51.4 million in the prior year. Changes in
non-cash working capital items used cash of $25.5 million as a result of increases in accounts receivable and inventories
offset in part by an increase in accounts payable, accrued liabilities and provisions. The increase in accounts receivable
during the year resulted primarily from the purchase of JHE and the movement in accrued receivables. During 2012, in-
ventory levels increased to support volume increases on a number of programs. In 2011, changes in non-cash working
capital of $12.5 million were principally a result of a decrease in accounts payable, accrued liabilities and provisions offset
by a decrease in inventory.
Cash Flow from Investing Activities
Twelve-months ended December 31, expressed in thousands of dollars
Acquisition of JHE
Purchase of property, plant and equipment
Proceeds from disposals of property, plant and equipment
(Increase) decrease in other assets
Cash used in investing activities
2012
(13,641 ) –
(33,829 )
187
(6,654 )
(53,937 )
2011
(59,260)
514
10,381
(48,365 )
On August 31, 2012, the Corporation purchased all of the issued and outstanding shares of the capital stock of JHE for
$13.6 million, net of cash of $2.0 million. The Corporation invested $33.8 million in capital assets during the year in com-
parison to $59.3 million in 2011. Capital additions were for advanced technology production equipment and information
technology systems, both designed to increase productivity, reduce cycle time and improve technology capability.
MAGELLAN 2012 ANNUAL REPORT
13
Management’s Discussion and Analysis December 31, 2012
Contractual Obligations
As at December 31, 2012, expressed in thousands of dollars
Bank indebtedness
Long-term debt1
Equipment leases
Facility leases
Other long-term liabilities
Borrowings subject to specific conditions
1 year
–
32,425
348
1,592
1,489
672
Less than
1 - 3 Years
112,666
42,167
422
3,136
1,275
1,671
4 - 5 Years
–
10,891
197
2,618
1,234
1,390
Total Contractual Obligations
1 The Corporation’s accounts receivable securitization program is included in long-term debt in the less than 1 year category
161,337
36,526
16,330
After
5 Years
–
29,030
21
5,531
3,580
17,707
Total
112,666
114,513
988
12,877
7,578
21,440
55,869
270,062
Major cash flow requirements for 2013 include the repayment of long-term debt of $32.4 million of which $26.5 million is
expected to be refinanced, payments of equipment and facility leases of $1.9 million and other long-term liabilities of $1.5
million. On December 21, 2012, the operating credit facility was extended for an additional two year period with the new
expiry date of December 21, 2014. On December 21, 2012 the Original Loan was extended to January 1, 2015.
The Corporation has made contractual commitments to purchase $11.8 million of capital assets. The Corporation also
has purchase commitments, largely for materials required for the normal course of operations, of $202.7 million. The
Corporation plans to finance all of these capital commitments with operating cash flow and the existing credit facility.
Outstanding Share 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 22, 2013, 58,209,001 common shares were outstanding. More
information on the Corporation’s share capital is provided in Note 17 of the consolidated financial statements.
8. FINANCIAL INSTRUMENTS
A summary of Magellan’s financial instruments
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 denominated financial statements of the Corporation’s subsidiar-
ies 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.
The counterparties to the foreign currency contracts are all major financial institutions with high credit ratings. The
Corporation had no foreign exchange contracts outstanding as at December 31, 2012.
Off Balance Sheet Arrangements
The Corporation does not have any off-balance sheet arrangements that have or reasonably are likely to have a mate-
rial 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.
14
MAGELLAN 2012 ANNUAL REPORT
Management’s Discussion and Analysis December 31, 2012
9. RELATED PARTY TRANSACTIONS
A summary of Magellan’s transactions with related parties
On December 21, 2012, the Original Loan was extended to January 1, 2015. During 2012, the Corporation incurred
interest of $2.3 million [2011 – $3.7 million] in relation to the Original Loan and prepaid the Original Loan by $3.5 million
[2011 – $12.5 million]. At December 31, 2012, the Corporation owed Edco interest of $0.2 million [2011 – $0.2 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 the Convertible Debentures then held
by the Chairman, were converted into 38,000,000 common shares of the Corporation. On April 30, 2012, Convertible
Debentures in the principal amount of $2.0 million held by a director of the Corporation were converted into 2,000,000
common shares of the Corporation. Interest incurred during the year ended December 31, 2012 on the Convertible
Debentures was $0.1 million [2011 – $4.0 million].
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 0.63% [2011 – 0.8%] of the guaranteed amount or $1.1 million [2011 – $1.4 million]
was paid in consideration for the guarantee.
During the year, the Corporation incurred consulting costs of $0.1 million [2011– $0.1 million] payable to a corporation
controlled by the Chairman of the Board of the Corporation.
10. RISK FACTORS
A summary of risks and uncertainties facing Magellan
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 mate-
rial 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 markets and have caused a number of countries in the European Union to focus on their respective recur-
ring yearly deficit budgeting practices, resultant aggregate debt levels and to implement austerity measures. Likewise
concerns about the national debt issue in the United States and actions taken by the government of the United States
could lead to reductions in spending, including defence spending. Sequestration, which refers to United States federal
budget cuts to certain categories of federal spending that began on March 1, 2013, is expected to cut defence spending
in the 2014–2023 period by approximately US$500 billion. In addition, the governments in Canada and other countries
have recognized the need to reduce budget deficits.
The United States is the principal purchaser under the Joint Strike Fighter (“JSF”) program which represents a signifi-
cant item in their 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 Canadian government
has also announced plans to consider other options for replacing its aging CF-18 fighter jets. In addition, other countries
who are part of the JSF program have announced plans to delay orders for the JSF aircraft.
MAGELLAN 2012 ANNUAL REPORT
15
Management’s Discussion and Analysis December 31, 2012
The Corporation relies on sales to defence customers particularly in the United States. A significant reduction in defence
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 re-
duction in government funding of a large program in which the Corporation participates, such as the JSF program, could
also materially adversely affect sales and earnings.
The Corporation faces risks from downturns in the domestic and global economies
Potential loss due to unfavourable economic conditions, such as a macroeconomic downturn in key markets, could result
in potential buyers postponing the purchase of the Corporation’s products or services, lower order intake, order cancel-
lations or deferral of deliveries, lower availability of customer financing, an increase in the Corporation’s involvement in
customer financing, downward pressure on selling prices, increased inventory levels, decreased level of customer ad-
vances, slower collection of receivables, reduction in production activities, discontinued production of certain products,
termination of employees and adverse impacts on the Corporation’s suppliers.
Market events and conditions, including disruptions in the international credit markets and other financial systems and
the American and European sovereign debt levels have caused volatility in credit and financial markets. These events
and conditions have caused a decrease in confidence in the broader United States, European and global credit and
financial markets and have created a climate of greater volatility, less liquidity, widening of credit spreads, a lack of price
transparency, increased credit losses and tighter credit conditions. While there are signs of economic recovery, these
factors have negatively impacted company valuations and are likely to continue to impact the performance of the global
economy going forward.
The Corporation cannot predict the depth or duration of downturns in the domestic and global economies nor the effects
on markets that the Corporation serves, particularly the airline industry. The Corporation’s ability to increase or maintain
its revenues and operating results may be impaired as a result of negative general economic conditions. The current
economic uncertainty renders estimates of future revenues and expenditures even more difficult than usual to formulate.
The future direction of the overall domestic and global economies could have a significant impact on the Corporation’s
overall financial performance and 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 is derived from the aerospace industry. The Corporation’s aerospace opera-
tions are focused on engineering and manufacturing aircraft components on new aircraft, selling spare parts and per-
forming 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 indus-
try, 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 capi-
tal expenditures. Constraints in the credit market may reduce the ability of airlines and others to purchase new aircraft,
negatively affecting the demand for the Corporation’s products. 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 and external to the aerospace industry might affect the aerospace industry and
may have an adverse impact on the Corporation’s results of operations. More specifically, a number of additional external
risk factors may include the financial condition of the airline industry, commercial aerospace customers and government
aerospace customers; government policies related to import and export restrictions and business acquisition; changing
priorities and possible spending cuts by government agencies; government support for export sales; world trade poli-
cies; increased competition from other businesses, including new entrants in market segments in which we compete. In
16
MAGELLAN 2012 ANNUAL REPORT
Management’s Discussion and Analysis December 31, 2012 addition, acts of terrorism, natural disasters, global health risks, political instability or the outbreak of war or continued
hostilities in certain regions of the world could result in lower orders or the rescheduling or cancellation of part of the
existing order backlog for some of the Corporation’s products.
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 Corporation’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 accomplish Magellan’s long-term objectives on less than optimal terms or in excess of its
optimal capital structure.
Based on current funds available and expected cash flow from operating activities, management believes that the
Corporation has sufficient funds available to fund its projected capital expenditures. However, if cash flow from operat-
ing 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.
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 dol-
lar. Therefore, fluctuations in the Canadian dollar exchange rate will impact the Corporation’s results of operations and
financial condition from period to period. In addition, such fluctuations affect the translation of the Corporation’s results
for purposes of its consolidated financial statements. The Corporation’s activities to manage its currency exposure may
not be successful.
11. CRITICAL ACCOUNTING ESTIMATES
A description of accounting estimates that are critical to determining Magellan’s financial results
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
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.
MAGELLAN 2012 ANNUAL REPORT
17
Management’s Discussion and Analysis December 31, 2012
The main assumptions and estimates that were used in preparing the Corporation’s interim 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
19 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 resulting 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 esti-
mates of the Corporation’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. When total contract costs are likely to exceed total contract revenue, the expected loss is
recognized 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 assumptions (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 rel-
evant 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 actuar-
ies 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.
18
MAGELLAN 2012 ANNUAL REPORT
Management’s Discussion and Analysis December 31, 2012 12. CHANGES IN ACCOUNTING POLICIES
A description of accounting standards adopted in the current year
IAS 12 – Income Taxes, Amendments Regarding Deferred Tax: Recovery of Underlying Assets
On January 1, 2012, the Corporation adopted revised IAS 12, Income Taxes. The revised standard was amended in
December 2010 to remove subjectivity in determining on which basis an entity measures the deferred tax asset relating
to an asset. The amendment introduces a presumption that an entity will assess whether the carrying value of an asset
will be recovered through the sale of the asset. The adoption of the standard did not have a material impact on the con-
solidated financial statements.
13. FUTURE CHANGES IN ACCOUNTING POLICIES
A description of new accounting standards and interpretations not yet adopted
A number of new standards, and amendments to standards and interpretations, are not yet effective for the year ended
December 31, 2012, 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 (“IASB”) and the
International Financial Reporting Interpretations Committees with effective dates relating to the annual accounting peri-
ods starting on or after the effective dates as follows:
Financial Instruments – Recognition and Measurement
In October 2010, the IASB published amendments to IFRS 9, Financial Instruments (“IFRS 9”) which provides added
guidance on the classification and measurement of financial liabilities. IFRS 9 is effective for annual periods beginning
on or after January 1, 2015, with early adoption permitted. The Corporation intends to adopt IFRS 9 in its financial state-
ments for the annual period beginning on January 1, 2015. The extent of the impact of adoption of IFRS 9 has not yet
been determined.
Financial Assets and Liabilities
In December 2011, the IASB published amendments to IAS 32, Financial Instruments: Presentation (“IAS 32”) and issued
new disclosure requirements in IFRS 7. The effective date for the amendments to IAS 32 is annual periods beginning on
or after January 1, 2014. The effective date for the amendments to IFRS 7 is annual periods beginning on or after January
1, 2013. These amendments are to be applied retrospectively.
The amendments to IAS 32 clarify when an entity has a legally enforceable right to off-set as well as clarify, when a
settlement mechanism provides for net settlement, or gross settlement that is equivalent to net settlement. The amend-
ments to IFRS 7 contain new disclosure requirements for financial assets and liabilities that are offset in the statement of
financial position or subject to master netting arrangements or similar arrangements. The Corporation intends to adopt
the amendments to IFRS 7 in its consolidated financial statements for the annual period beginning on January 1, 2013,
and the amendments to IAS 32 in its consolidated financial statements for the annual period beginning January 1, 2014.
The Corporation will include the additional disclosures required by the amendments to IFRS 7 in its 2013 consolidated
financial statements. The extent of the impact of adoption of the amendments to IAS 32 has not yet been determined.
Consolidated Financial Statements
In May 2011, the IASB issued IFRS 10, Consolidated Financial Statements (“IFRS 10”). IFRS 10 replaces portions of IAS 27,
Consolidated and Separate Financial Statements, that addresses consolidation, and supersedes SIC-12, Consolidation –
Special Purpose Entities (“SPE”), in its entirety. IFRS 10 provides a single model to be applied in the analysis of control of
all investees, including entities that currently are SPEs in the scope of SIC-12. In addition, the consolidation procedures
specified in IFRS 10 are carried forward substantially unmodified from IAS 27.
MAGELLAN 2012 ANNUAL REPORT
19
Management’s Discussion and Analysis December 31, 2012
Joint Arrangements
In May 2011, the IASB issued IFRS 11, Joint Arrangements (“IFRS 11”). IFRS 11 supersedes IAS 31, Interest in Joint
Ventures and SIC-13, Jointly Controlled Entities – Non-Monetary Contributions. Through an assessment of the rights
and obligations in an arrangement, IFRS 11 establishes principles to determine the type of joint arrangement, which are
classified as either joint operations or joint ventures, and provides guidance for financial reporting activities required by
the entities that have an interest in arrangements that are controlled jointly. Investments in joint ventures are required
to be accounted for using the equity method. As a result of the issuance of IFRS 10 and IFRS 11, IAS 28, Investments
in Associates and Joint Ventures, has been amended to correspond to the guidance provided in IFRS 10 and IFRS 11.
Disclosure of Interests in Other Entities
In May 2011, the IASB issued IFRS 12, Disclosure of Interests in Other Entities (“IFRS 12”), which contains disclosure
requirements for interests in other entities, such as joint arrangements, associates, special purpose vehicles and off bal-
ance sheet vehicles. The standard carries forward existing disclosures and also introduces significant additional disclo-
sure requirements that address the nature of, and risks associated with, an entity’s interests in other entities.
IFRS 10, IFRS 11 and IFRS 12, and the amendments to IAS 27 and IAS 28 are all effective for annual periods beginning
on or after January 1, 2013. Early adoption is permitted, so long as IFRS 10, IFRS 11 and IFRS 12, and the amendments
to IAS 27 and IAS 28 are adopted at the same time. However, entities are permitted to incorporate any of the disclosure
requirements in IFRS 12 into their financial statements without early adoption of IFRS 10, IFRS 11, amendments to IAS 27
and IAS 28. The Corporation intends to adopt IFRS 10, IFRS 11 and IFRS 12 and the amendments to IAS 27 and IAS 28
in its consolidated financial statements for the annual period beginning on January 1, 2013. The impact of the adoption
of IFRS 10, IFRS 11 and IFRS 12 and the amendments to IAS 27 and IAS 28 is not expected to be material to the financial
statements.
Fair Value Measurement
In May 2011, the IASB published IFRS 13, Fair Value Measurement (“IFRS 13”), which is effective prospectively for an-
nual periods beginning on or after January 1, 2013. IFRS 13 replaces the fair value measurement guidance contained in
individual IFRSs with a single source of fair value measurement guidance. The standard also establishes a framework for
measuring fair value and sets out disclosure requirements for fair value measurements. The Corporation intends to adopt
IFRS 13 prospectively in its financial statements for the annual period beginning on January 1, 2013. The Corporation will
provide required additional disclosures on fair valued items beginning with its first quarter 2013 consolidated financial
statements.
Presentation of Financial Statements
In June 2011, the IASB published amendments to IAS 1, Presentation of Financial Statements: Presentation of Items of
Other Comprehensive Income, which are effective for annual periods beginning on or after July 1, 2012 and are to be
applied retrospectively. Early adoption is permitted. These amendments require that a Corporation present separately
the items of other comprehensive income (“OCI”) that may be reclassified to profit or loss in the future from those that
would never be reclassified to profit or loss. The Company intends to adopt these amendments in its financial statements
for the annual period beginning on January 1, 2013.
Employee Benefits
In June 2011, the IASB published an amended version of IAS 19, Employee Benefits (“IAS 19”). Adoption of the amend-
ment is required for annual periods beginning on or after January 1, 2013, with early adoption permitted. The amendment
is generally applied retrospectively with certain exceptions. A number of amendments have been made to IAS 19, which
included eliminating the use of the “corridor” approach and requiring remeasurements to be presented in OCI and the
requirement for the calculation of expected return on plan assets to be based on the rate used to discount the defined
benefit obligation. The amendment also requires other changes and additional disclosures. As part of its transition to
20
MAGELLAN 2012 ANNUAL REPORT
Management’s Discussion and Analysis December 31, 2012 IFRS, the Corporation elected to present remeasurements in OCI. The Corporation intends to adopt the other amend-
ments in its financial statements for the annual period beginning on January 1, 2013.
14. CONTROLS AND PROCEDURES
A description of Magellan’s disclosure controls and internal controls over financial reporting
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 are required
to certify as at December 31, 2012 that they are responsible for establishing and maintaining, and have assessed the
design and operating effectiveness of disclosure controls and procedures and internal control over financial reporting.
Management does not expect disclosure controls and procedures and internal control over financial reporting to prevent
all errors, misstatements or fraud. In addition, internal control over financial reporting that management has designed
and established may be circumvented and rendered ineffective as a result of unauthorized acts of individuals through
collusion or management override. A system of control, no matter how well conceived and operated, can provide only
reasonable, but not absolute, assurance that control objectives are met. Due to the inherent limitations in a system of
control, there is no absolute assurance that all controls issues, which may result in errors, misstatements, or fraud, can
be prevented or detected. The inherent limitations include, amongst other things: (i) management’s assumptions and
judgments could ultimately prove to be incorrect under varying conditions and circumstances; (ii) the impact of isolated
errors; (iii) assumptions about the likelihood of future events.
In preparation for this certification, Magellan has dedicated resources in place to document and evaluate the design
and operating effectiveness of disclosure controls and procedures and internal control over financial reporting. As of
December 31, 2012, an evaluation was carried out, under the supervision of the President and Chief Executive Officer
and the Chief Financial Officer and Corporate Secretary, of the effectiveness of the Corporation’s disclosure controls
and internal controls over financial reporting, as those terms are defined in National Instrument 52 – 109. Based on that
evaluation, the Corporation’s management concluded that the Corporation’s design and operating disclosure controls
and procedures and internal control over financial reporting were effective as of December 31, 2012.
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.
Additional information relating to Magellan Aerospace Corporation, including the Corporation’s Annual Information Form
is on SEDAR at www.sedar.com.
MAGELLAN 2012 ANNUAL REPORT
21
Management’s Discussion and Analysis December 31, 2012
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 accounting principles generally accepted in Canada. The financial and operating information presented in this report is
consistent with that shown in the financial statements.
Management maintains a system of internal controls to provide reasonable assurance that all assets are safeguarded and to
facilitate the preparation of relevant, reliable and timely financial information. External auditors appointed by the shareholders have
examined the consolidated financial statements. The Audit Committee, consisting of non management directors, has reviewed
these consolidated financial statements with management and the auditors and has reported to the Board of Directors. The
Board of Directors approved the consolidated financial statements.
James S. Butyniec
President and Chief Executive Officer
March 22, 2013
John B. Dekker
Chief Financial Officer and
Corporate Secretary
22
MAGELLAN 2012 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 consolidated statements of financial position as at December 31, 2012 and 2011 and the consolidated statements of
income and comprehensive income, changes in equity and cash flows for the years then ended, 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 accor-
dance with International Financial Reporting Standards and for such internal control as management determines is neces-
sary 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 accordance with Canadian generally accepted auditing standards. Those standards require that we comply
with ethical requirements and plan and perform the audits to obtain reasonable assurance about whether the consolidated
financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated
financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of
material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assess-
ments, 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 appro-
priateness 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 opinions.
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, 2012 and 2011 and its financial performance and its cash flows for the years
then ended in accordance with International Financial Reporting Standards.
Chartered Accountants
Licensed Public Accountants
Toronto, Canada
March 22, 2013
MAGELLAN 2012 ANNUAL REPORT
23
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
Accounts payable, accrued liabilities and provisions
Debt due within one year
Non-current liabilities
Bank indebtedness
Long-term debt
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
Accumulated other comprehensive loss
Total liabilities and equity
See accompanying notes to the consolidated financial statements
Notes
December 31 December 31
2011
2012
4
5
6
7
8
16
10
11,19
9
11
14
15
16
17
12
25
22,431
134,361
147,382
7,879
312,053
316,441
2,875
60,701
12,697
51,040
443,754
755,807
121,644
32,425
154,069
112,666
80,024
20,768
39,003
14,761
267,222
254,440
2,044
13,565
71,826
(7,359 )
334,516
755,807
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
MAGELLAN 2012 ANNUAL REPORT
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Expressed in thousands of Canadian dollars, except per share amounts
Revenues
Cost of revenues
Gross profit
Administrative and general expenses
Other
Gain on bargain purchase
Dividends on preference shares
Interest
Income before income taxes
Income taxes
Current
Deferred
Net income
Other comprehensive (loss) income
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
21
22
23
28
3
13
24
16
16
25
16,20
17
17
Years ended December 31
2011
691,410
594,000
97,410
2012
704,579
603,887
100,692
39,203
(260 )
(9,597 )
–
71,346
9,237
62,109
2,925
889
3,814
58,295
(1,116 )
(7,361 )
49,818
38,264
436
–
310
58,400
16,999
41,401
280
3,708
3,988
37,413
4,149
(17,530 )
24,032
1.01
1.00
2.04
0.73
MAGELLAN 2012 ANNUAL REPORT
25
CONSOLIDATED STATEMENTS OF changes in equity
Share Contributed
Expressed in thousands of Canadian dollars
January 1, 2011
Net income
Other comprehensive (loss) Income
Stock-based compensation
Convertible debentures
December 31, 2011
Net income
Other comprehensive loss
Stock-based compensation
Convertible debentures
December 31, 2012
capital
214,440
–
–
–
38,000
252,440
–
–
–
2,000
254,440
See accompanying notes to the consolidated financial statements
surplus
1,973
–
–
68
–
2,041
–
–
3
–
2,044
Other
paid in
capital
13,565
–
–
–
–
13,565
–
–
–
–
13,565
Foreign
Retained
currency
Total
earnings
1,009
37,413
(17,530 )
–
–
20,892
58,295
(7,361 )
–
–
translation
–
4,149
–
–
equity
(10,392 ) 220,595
37,413
(13,381 )
68
38,000
(6,243 ) 282,695
58,295
(8,477 )
3
2,000
–
(1,116 )
–
–
71,826
(7,359 )
334,516
26
MAGELLAN 2012 ANNUAL REPORT
CONSOLIDATED STATEMENTS OF cash flow
Expressed in thousands of Canadian dollars
Cash flow from operating activities
Net income
Amortization/depreciation of intangible
assets and property, plant and equipment
Net loss on disposal of assets
Decrease in defined benefit plans
Impairment reversal, net
Gain on bargain purchase
Stock-based compensation
Accretion
Deferred taxes
Increase in non-cash working capital
Net cash from operating activities
Cash flow from investing activities
Acquisition of JHE
Purchase of property, plant and equipment
Proceeds from disposal of property, plant and equipment
(Increase) decrease in other assets
Net cash used in investing activities
Cash flow from financing activities
(Decrease) increase in bank indebtedness
Increase (decrease) in debt due within one year
Decrease in long-term debt
Increase in long-term debt
Increase in long-term liabilities and provisions
Increase in borrowings
Redemption of preference shares
Net cash generated (used) in financing activities
(Decrease) 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
Notes
Years ended December 31
2011
2012
58,295
37,413
6,8
20
8
3
18
16
27
3
6
9
11
11
13
31,029
430
(4,767 )
(270 )
(9,597 )
3
541
(14,419 )
(25,355 )
35,890
(13,641 )
(33,829 )
187
(6,654 )
(53,937 )
(7,812 )
20,604
(8,849 )
6,334
497
3,223
–
13,997
(4,050 )
26,520
(39 )
22,431
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
MAGELLAN 2012 ANNUAL REPORT
27
1. DESCRIPTION OF BUSINESS AND NATURE OF OPERATIONS
Magellan Aerospace Corporation (the “Corporation” or “Magellan”) is a publicly listed company incorporated in Ontario,
Canada under the Ontario Business Corporations Act and its shares are listed on the Toronto Stock Exchange. The reg-
istered 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 projects. Through its wholly owned subsidiaries, Magellan designs, engineers, and manufactures
aeroengine and aerostructure components for aerospace markets, advanced products for defence 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.
2. SIGNIFICANT ACCOUNTING POLICIES
(a) Statement of compliance
These consolidated financial statements are prepared under International Financial Reporting Standards (“IFRS”) as is-
sued by the International Accounting Standards Board (“IASB”).
These consolidated financial statements were authorized for issuance by the Board of Directors of the Corporation
on March 22, 2013.
(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 subsid-
iaries. 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 con-
sistently 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 pre-
sentation currency.
28
MAGELLAN 2012 ANNUAL REPORT
Notes To Consolidated Financial Statements (unless otherwise stated, all amounts are in thousands of Canadian dollars) 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 prevailing 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. Translation 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, allocating 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 in-
come before interest and income taxes.
(e) Revenue recognition
Revenue is comprised of all sales of goods and rendering of services at the fair value of consideration received or re-
ceivable after the deduction 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 con-
signment products 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 per-
centage-of-completion method, which recognizes revenue as performance of the contract progresses. The contract
progress is determined based on the percentage of costs incurred to date to total estimated cost for each contract after
giving effect to the most recent estimates of total cost. Variations 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 recognized 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
probable 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 arrange-
ments 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. This vendor specific evidence of fair value is established through prices charged for each revenue element when that
element is sold separately. The revenue recognition policies described above are then applied to each unit of accounting.
MAGELLAN 2012 ANNUAL REPORT
29
Notes To Consolidated Financial Statements (unless otherwise stated, all amounts are in thousands of Canadian dollars)
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.
(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 subject 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 reduc-
tion 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 assessments 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 significant 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
30
MAGELLAN 2012 ANNUAL REPORT
Notes To Consolidated Financial Statements (unless otherwise stated, all amounts are in thousands of Canadian dollars) statement with a corresponding increase in equity. The fair value is measured using an appropriate valuation model tak-
ing 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 vesting 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 recognition 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 recognized in the income statement.
(j) Taxation
The tax charge for the period is comprised of both current and deferred income tax. Taxation is recognized as a charge
or credit in the income statement 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 income tax is the expected tax payable on the taxable income for the year and any adjustment to tax pay-
able in respect of previous years.
Deferred tax assets and liabilities are established using the balance sheet liability method, providing for temporary differ-
ences 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 income 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 tax 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 common shares outstanding during the year. Diluted net income per share is calculated using the profit for the
financial year and the weighted average diluted number of shares (ignoring any potential issue of common 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 recognized to income as the unit is sold.
Net realizable value is the estimated selling price in the ordinary course of business, less estimated costs of completion
and the estimated costs necessary to make the sale. Inventories are written down to net realizable value when the cost
MAGELLAN 2012 ANNUAL REPORT
31
Notes To Consolidated Financial Statements (unless otherwise stated, all amounts are in thousands of Canadian dollars)
of inventories is estimated to be unrecoverable due to obsolescence, damage or declining selling prices. When circum-
stances 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 necessary for it to be capable of operating in the manner intended by manage-
ment, and the estimate of the present value of the costs of dismantling 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.
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 values, useful lives and depreciation methods pertaining to property, plant and equipment are regularly as-
sessed 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 asset’s carrying amount is greater than its estimated recoverable amount. These impairment losses are
recognized in the income statement. Following the recognition of an impairment 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 recognized 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 unit of production 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.
32
MAGELLAN 2012 ANNUAL REPORT
Notes To Consolidated Financial Statements (unless otherwise stated, all amounts are in thousands of Canadian dollars)
(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
CGU exceeds its recoverable amount. Recoverable amount is the higher of value in use or fair value less costs to sell, if
this is readily available. 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 CGU shall be reversed if there has been a change in estimates used to
determine the recoverable amount since the last impairment loss was recognized and is only reversed to the extent that
the asset’s 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.
(q) Leases
A lease is defined as an agreement whereby the lessor conveys to the lessee, in return for payment or a series of pay-
ments, 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 transferred to the lessee (finance lease for the lessee), the leased asset is recog-
nized 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 state-
ment 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, finan-
cial 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.
MAGELLAN 2012 ANNUAL REPORT
33
Notes To Consolidated Financial Statements (unless otherwise stated, all amounts are in thousands of Canadian dollars)
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 statement. 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 revalued 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
through 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: substantially 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.
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. Transaction 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, where-
by the Corporation estimates the fair value of the liability element and assigns the residual value of the convertible de-
bentures 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 convertible debentures mature without
34
MAGELLAN 2012 ANNUAL REPORT
Notes To Consolidated Financial Statements (unless otherwise stated, all amounts are in thousands of Canadian dollars) 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 instru-
ments. The Corporation’s policy is not to utilize derivative financial instruments for trading or speculative purposes. For
the year ended December 31, 2012, 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 provision 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 rec-
ognized as a deduction 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 esti-
mates 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.
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 19.
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.
MAGELLAN 2012 ANNUAL REPORT
35
Notes To Consolidated Financial Statements (unless otherwise stated, all amounts are in thousands of Canadian dollars)
Deferred taxes
Income taxes are determined based on estimates of the Corporation’s current income taxes and estimates of deferred
income taxes resulting 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 esti-
mates of the Corporation’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. When total contract costs are likely to exceed total contract revenue, the expected loss is
recognized 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 assumptions (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 rel-
evant 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 actuar-
ies 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) Accounting standards adopted in the current year
IAS 12 - Income Taxes, Amendments Regarding Deferred Tax: Recovery of Underlying Assets
On January 1, 2012, the Corporation adopted revised IAS 12, Income Taxes. The revised standard was amended in
December 2010 to remove subjectivity in determining on which basis an entity measures the deferred tax asset relating
to an asset. The amendment introduces a presumption that an entity will assess whether the carrying value of an asset
will be recovered through the sale of the asset. The adoption of the standard did not have a material impact on the con-
solidated financial statements.
(w) New standards and interpretations not yet adopted
Financial Instruments – Recognition and Measurement
In October 2010, the IASB published amendments to IFRS 9, Financial Instruments (“IFRS 9”) which provides added
guidance on the classification and measurement of financial liabilities. IFRS 9 is effective for annual periods beginning on
or after January 1, 2015, with early adoption permitted. The Corporation intends to adopt IFRS 9 in its financial statements
36
MAGELLAN 2012 ANNUAL REPORT
Notes To Consolidated Financial Statements (unless otherwise stated, all amounts are in thousands of Canadian dollars) for the annual period beginning on January 1, 2015. The extent of the impact of adoption of IFRS 9 has not yet been
determined.
Financial Assets and Liabilities
In December 2011, the IASB published amendments to IAS 32, Financial Instruments: Presentation (“IAS 32”) and issued
new disclosure requirements in IFRS 7. The effective date for the amendments to IAS 32 is annual periods beginning on
or after January 1, 2014. The effective date for the amendments to IFRS 7 is annual periods beginning on or after January
1, 2013. These amendments are to be applied retrospectively.
The amendments to IAS 32 clarify when an entity has a legally enforceable right to off-set as well as clarify, when a
settlement mechanism provides for net settlement, or gross settlement that is equivalent to net settlement. The amend-
ments to IFRS 7 contain new disclosure requirements for financial assets and liabilities that are offset in the statement of
financial position or subject to master netting arrangements or similar arrangements. The Corporation intends to adopt
the amendments to IFRS 7 in its consolidated financial statements for the annual period beginning on January 1, 2013,
and the amendments to IAS 32 in its consolidated financial statements for the annual period beginning January 1, 2014.
The Corporation will include the additional disclosures required by the amendments to IFRS 7 in its 2013 consolidated
financial statements. The extent of the impact of adoption of the amendments to IAS 32 has not yet been determined.
Consolidated Financial Statements
In May 2011, the IASB issued IFRS 10, Consolidated Financial Statements (“IFRS 10”). IFRS 10 replaces portions of IAS 27,
Consolidated and Separate Financial Statements, that addresses consolidation, and supersedes SIC-12, Consolidation –
Special Purpose Entities (“SPE”), in its entirety. IFRS 10 provides a single model to be applied in the analysis of control of
all investees, including entities that currently are SPEs in the scope of SIC-12. In addition, the consolidation procedures
specified in IFRS 10 are carried forward substantially unmodified from IAS 27.
Joint Arrangements
In May 2011, the IASB issued IFRS 11, Joint Arrangements (“IFRS 11”). IFRS 11 supersedes IAS 31, Interest in Joint
Ventures and SIC-13, Jointly Controlled Entities – Non-Monetary Contributions. Through an assessment of the rights
and obligations in an arrangement, IFRS 11 establishes principles to determine the type of joint arrangement, which are
classified as either joint operations or joint ventures, and provides guidance for financial reporting activities required by
the entities that have an interest in arrangements that are controlled jointly. Investments in joint ventures are required
to be accounted for using the equity method. As a result of the issuance of IFRS 10 and IFRS 11, IAS 28, Investments
in Associates and Joint Ventures, has been amended to correspond to the guidance provided in IFRS 10 and IFRS 11.
Disclosure of Interests in Other Entities
In May 2011, the IASB issued IFRS 12, Disclosure of Interests in Other Entities (“IFRS 12”), which contains disclosure
requirements for interests in other entities, such as joint arrangements, associates, special purpose vehicles and off bal-
ance sheet vehicles. The standard carries forward existing disclosures and also introduces significant additional disclo-
sure requirements that address the nature of, and risks associated with, an entity’s interests in other entities.
IFRS 10, IFRS 11 and IFRS 12, and the amendments to IAS 27 and IAS 28 are all effective for annual periods beginning on
or after January 1, 2013. Early adoption is permitted, so long as IFRS 10, IFRS 11 and IFRS 12, and the amendments to IAS
27 and IAS 28 are adopted at the same time. However, entities are permitted to incorporate any of the disclosure require-
ments in IFRS 12 into their financial statements without early adoption of IFRS 10, IFRS 11, amendments to IAS 27 and IAS
28. The Corporation intends to adopt IFRS 10, IFRS 11 and IFRS 12 and the amendments to IAS 27 and IAS 28 in its con-
solidated financial statements for the annual period beginning on January 1, 2013. The impact of the adoption of IFRS 10,
IFRS 11 and IFRS 12 and the amendments to IAS 27 and IAS 28 is not expected to be material to the financial statements.
MAGELLAN 2012 ANNUAL REPORT
37
Notes To Consolidated Financial Statements (unless otherwise stated, all amounts are in thousands of Canadian dollars)
Fair Value Measurement
In May 2011, the IASB published IFRS 13, Fair Value Measurement (“IFRS 13”), which is effective prospectively for an-
nual periods beginning on or after January 1, 2013. IFRS 13 replaces the fair value measurement guidance contained in
individual IFRSs with a single source of fair value measurement guidance. The standard also establishes a framework for
measuring fair value and sets out disclosure requirements for fair value measurements. The Corporation intends to adopt
IFRS 13 prospectively in its financial statements for the annual period beginning on January 1, 2013. The Corporation will
provide required additional disclosures on fair valued items beginning with its first quarter 2013 consolidated financial
statements.
Presentation of Financial Statements
In June 2011, the IASB published amendments to IAS 1, Presentation of Financial Statements: Presentation of Items of
Other Comprehensive Income, which are effective for annual periods beginning on or after July 1, 2012 and are to be ap-
plied retrospectively. Early adoption is permitted. These amendments require that a Corporation present separately the
items of other comprehensive income (“OCI”) that may be reclassified to profit or loss in the future from those that would
never be reclassified to profit or loss. The Corporation intends to adopt these amendments in its financial statements for
the annual period beginning on January 1, 2013.
Employee Benefits
In June 2011, the IASB published an amended version of IAS 19, Employee Benefits (“IAS 19”). Adoption of the amend-
ment is required for annual periods beginning on or after January 1, 2013, with early adoption permitted. The amendment
is generally applied retrospectively with certain exceptions. A number of amendments have been made to IAS 19, which
included eliminating the use of the “corridor” approach and requiring remeasurements to be presented in OCI and the
requirement for the calculation of expected return on plan assets to be based on the rate used to discount the defined
benefit obligation. The amendment also requires other changes and additional disclosures. As part of its transition to
IFRS, the Corporation elected to present remeasurements in OCI. The Corporation intends to adopt the other amend-
ments in its financial statements for the annual period beginning on January 1, 2013.
3. BUSINESS COMBINATION
On August 31, 2012, the Corporation purchased all of the issued and outstanding shares of the capital stock of John
Huddleston Engineering Limited (“JHE”), a European supplier of precision machined aerospace components with facili-
ties in Great Britain, Northern Ireland and Poland. The acquisition allows the Corporation to strengthen and enhance its
core manufacturing capabilities and further expand its European operations.
The total consideration paid to the seller at closing was $15,671 in cash, or $13,641 net of cash acquired of $2,030.
Accounting guidance requires that identifiable assets acquired and liabilities assumed be reported at fair value as of the
acquisition date of a business combination. During the fourth quarter of 2012, final valuations of the identifiable assets
acquired and liabilities assumed were completed. The adjustments to the preliminary purchase price allocation resulted
in a gain on bargain purchase of $7,410 (net of deferred income tax of $2,187) from the amount previously reported as
the consideration paid for the identifiable tangible assets acquired was lower than their fair value, as determined by an
independent valuation specialist. The gain on bargain purchase was due to the fact that the Corporation was one of a
limited number of purchasers well positioned to rapidly utilize the excess capacity and employ the specialized equipment
so as to preserve its significant value.
38
MAGELLAN 2012 ANNUAL REPORT
Notes To Consolidated Financial Statements (unless otherwise stated, all amounts are in thousands of Canadian dollars) The following table presents the final allocation of purchase price related to the business as of the date of the acquisition:
Current assets
Non-current assets
Current liabilities
Non-current liabilities
Deferred tax liabilities
Fair value of the net assets acquired, excluding cash position at acquisition
Gain on bargain purchase, net of deferred tax
Cash in subsidiary acquired
Total purchase consideration, settled in cash1
1 Total purchase consideration of $15,671 includes an amount of $9,212 to repay debt to a former shareholder of JHE
Final
10,757
19,412
(5,732 )
(1,120 )
(2,266 )
21,051
(7,410 )
2,030
15,671
The Corporation incurred acquisition-related costs of $428 relating to external legal fees, consulting fees and due dili-
gence costs that are included in administration and general expenses.
The fair value of trade receivables and other receivables is $7,039 and includes trade receivables with a fair value of
$6,906 which represents the gross contractual amount for trade receivables due.
The amounts of JHE’s revenue and net income included in the Corporation’s consolidated statements of income for the
year ended December 31, 2012 was $5,597 and $297, respectively. If the acquisition had occurred on January 1, 2012,
management estimates that the Corporation’s consolidated revenue would have been approximately $722,039 and con-
solidated net income would have been approximately $59,113 for the year ended December 31, 2012. In determining
these amounts, management has assumed the fair value adjustments which arose on the date of acquisition, would have
been the same as if the acquisition would have occurred on January 1, 2012. This pro forma information is for informa-
tional purposes only and is not necessarily indicative of the results of operations that actually would have been achieved
had the acquisition been consummated at that time, nor is it intended to be a projection of future results.
4. TRADE AND OTHER RECEIVABLES
Total trade accounts receivable
Less allowance for doubtful accounts
Net trade receivables
Other receivables
December 31
2012
97,310
1,924
95,386
38,975
134,361
December 31
2011
80,592
2,076
78,516
27,964
106,480
Included in the above amounts are accrued receivables for construction contracts in progress at December 31, 2012 of
$12,560 [December 31, 2011– $11,391].
The following table presents the aging of gross trade accounts receivable:
Less than
91 – 181
182 – 365
More than
December 31, 2011
Current
74,119
December 31, 2012
86,961
90 days
4,780
7,185
days
360
2,194
days
67
166
365 days
1,266
804
Total
80,592
97,310
MAGELLAN 2012 ANNUAL REPORT
39
Notes To Consolidated Financial Statements (unless otherwise stated, all amounts are in thousands of Canadian dollars)
5. INVENTORIES
At December 31, 2011
At December 31, 2012
Raw
Work in
Finished
materials
33,631
progress
80,198
37,685
94,429
goods
13,644
15,268
Total
127,473
147,382
The cost of inventories recognized as expense and included in cost of sales for the year ended December 31, 2012
amounted to $610,378 [2011 – $590,128].
During the year ended December 31, 2012, the Corporation recorded an impairment expense related to the write-down
of inventory in the amount of $473 [December 31, 2011 – $2,044]. The Corporation also recorded reversals of previous
write-down of inventory in the amount of $624 [December 31, 2011 – $1,417] due to the sale of inventory previously
provided for. The carrying amount of inventory recorded at net realizable value was $21,165 as at December 31, 2012
[December 31, 2011 – $21,530], 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 capi-
talized 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 amend-
ments are finalized.
40
MAGELLAN 2012 ANNUAL REPORT
Notes To Consolidated Financial Statements (unless otherwise stated, all amounts are in thousands of Canadian dollars)
6. PROPERTY, PLANT AND EQUIPMENT
Land
Buildings
equipment
Tooling
Total
Machinery
and
Cost
At December 31, 2010
Additions
Disposals and other
Foreign currency translation
At December 31, 2011
Additions
Acquisition of JHE [Note 3]
Disposals and other
Foreign currency translation
At December 31, 2012
12,675
–
–
156
12,831
–
–
–
(66 )
12,765
Accumulated depreciation and impairment
At December 31, 2010
Depreciation
Disposal and other
Foreign currency translation
At December 31, 2011
Depreciation
Disposal and other
Foreign currency translation
At December 31, 2012
Net book value
At December 31, 2011
At December 31, 2012
–
–
–
–
–
–
–
–
–
84,632
26,331
(235 )
679
111,407
1,280
3,264
(42 )
(394 )
115,515
(27,626 )
(2,221 )
127
(138 )
(29,858 )
(3,266 )
7
133
(32,984 )
313,903
40,977
(2,536 )
3,854
356,198
27,861
16,148
(2,227 )
(1,698 )
396,282
(156,094 )
(15,000 )
1,858
(1,870 )
(171,106 )
(16,332 )
1,492
1,430
(184,516 )
40,377
1,348
–
790
42,515
1,881
–
–
(780 )
43,616
(28,748 )
(2,868 )
–
(627 )
(32,243 )
(2,610 )
–
616
(34,237 )
451,587
68,656
(2,771 )
5,479
522,951
31,022
19,412
(2,269 )
(2,938 )
568,178
(212,468 )
(20,089 )
1,985
(2,635 )
(233,207 )
(22,208 )
1,499
2,179
(251,737 )
12,831
12,765
81,549
82,531
185,092
211,766
10,272
9,379
289,744
316,441
As at December 31, 2011, total assets under finance leases included in property, plant and equipment have a cost of $5,710
and a net book value of $3,362. As at December 31, 2012, the Corporation did not have any assets under finance lease.
Included in the above are assets under construction in the amount of $6,364 [December 31, 2011 – $46,550], which as
at December 31, 2012 are not amortized.
MAGELLAN 2012 ANNUAL REPORT
41
Notes To Consolidated Financial Statements (unless otherwise stated, all amounts are in thousands of Canadian dollars)
7. INVESTMENT PROPERTIES
At December 31, 2011
At December 31, 2012
Accumulated
depreciation
and
impairment
(6,247 )
(6,402 )
Cost
9,288
9,277
Net
book
value
3,041
2,875
The Corporation’s investment properties consist of land and building. In 2011 and 2012, depreciation expense of $158
was recognized in relation to the building.
The fair value was determined based on valuations performed by independent professional valuators. At December 31,
2012, the fair value of the investment properties was $6,945.
8. INTANGIBLE ASSETS
Cost
At December 31, 2010
Additions
Foreign currency translation
At December 31, 2011
Additions
Disposals
Foreign currency translation
At December 31, 2012
Depreciation and impairment
At December 31, 2010
Depreciation
Impairment reversal
Foreign currency translation
At December 31, 2011
Depreciation
Disposals
Impairment reversal
Foreign currency translation
At December 31, 2012
Net book value
At December 31, 2011
At December 31, 2012
Technology Development
costs
rights
38,905
–
34
38,939
–
–
(34 )
38,905
(13,251 )
(2,595 )
–
(9 )
(15,855 )
(3,153 )
–
–
10
(18,998 )
87,360
3,266
652
91,278
2,220
(1,324 )
(503 )
91,671
(41,065 )
(8,651 )
1,899
(411 )
(48,228 )
(4,645 )
1,393
270
333
(50,877 )
Total
126,265
3,266
686
130,217
2,220
(1,324 )
(537 )
130,576
(54,316 )
(11,246 )
1,899
(420 )
(64,083 )
(7,798 )
1,393
270
343
(69,875 )
23,084
19,907
43,050
40,794
66,134
60,701
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.
42
MAGELLAN 2012 ANNUAL REPORT
Notes To Consolidated Financial Statements (unless otherwise stated, all amounts are in thousands of Canadian dollars)
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
Corporation estimated the intangible assets to be amortized over a period of 5 to 13 years based on units of production.
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 assesses 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 23 [2011 – years 5 to 24].
– Growth rates of nil [2011 – nil] 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 0.98 [2011 – 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
[2011 – 12.5%].
In 2012, the Corporation recognized a reversal of previous impairment losses of $2,138 against development costs relat-
ing to a commercial aircraft program as the Corporation was able to obtain an offer with more favourable contract terms.
In addition, the Corporation recognized impairment losses of $1,868 against development costs relating to a separate
commercial aircraft program as the Corporation has revised its estimated number of units due to changes in the market
outlook for the program. The impairment reversal and charge were recorded against recurring costs of revenues.
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 commercial aircraft program as the Corporation was able to
negotiate price increases. These impairment reversals were treated as a reduction against recurring costs of revenues.
9. BANK INDEBTEDNESS
On December 21, 2012, 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 $115,000 plus a US dollar limit
of US$35,000 [$149,822 at December 31, 2012]. Under the terms of the amended credit agreement, the operating
credit facility expires on December 21, 2014 and is extendable for unlimited one-year periods subject to mutual con-
sent of the syndicate of lenders and the Corporation. The credit agreement also includes a $50,000 uncommitted ac-
cordion provision which will provide the Corporation with the option to increase the size of the operating credit facility
MAGELLAN 2012 ANNUAL REPORT
43
Notes To Consolidated Financial Statements (unless otherwise stated, all amounts are in thousands of Canadian dollars)
to $200,000. Bank indebtedness as at December 31, 2012 of $112,666 [December 31, 2011– $120,674] bears interest
at the bankers’ acceptance or LIBOR rates, plus 1.20% [2.35% at December 31, 2012 (2011 – bankers’ acceptance or
LIBOR rates plus 1.50% or 2.44%)]. Included in the amount outstanding at December 31, 2012 is US$18,358 [December
31, 2011 – US$11,908]. At December 31, 2012, the Corporation had drawn $115,425 under the operating credit facility,
including letters of credit totalling $2,759 such that $34,397 was unused and available. A fixed and floating charge de-
benture on accounts receivable, inventories 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.
10. ACCOUNTS PAYABLE, ACCRUED LIABILITIES AND PROVISIONS
Accounts payables
Accrued liabilities
Provisions [Note 15]
11. 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
2012
58,422
60,663
2,559
121,644
December 31 December 31
2011
18,689
33,927
33,197
463
86,276
4,508
81,768
2012
18,036
38,222
29,670
–
85,928
5,904
80,024
[a] Property mortgages include $2,387 (£1,475) [2011 – $2,589 (£1,639)] of financing of certain land acquired in 2006. This
same land is collateral for this mortgage and the mortgage bears interest at bank rate plus 0.90%, which at December
31, 2012 was 1.4% [2011 – 1.4%]. The property mortgage requires scheduled monthly repayments of accrued interest
and principal and matures in June 2021.
The Corporation has a five year variable rate term mortgage, 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, 2012. The mortgage is due in July 2016, with accrued interest
and principal paid monthly. The mortgage is secured by certain land and building. The principal amount outstanding at
December 31, 2012 was $15,649 [2011 – $16,100].
[b] Other loans include loans of $19,191 [2011 – $19,886] provided by governmental authorities (“Government Loans”)
that bear interest of approximately 1.75% to 3.82% [2011 – 2.0% to 3.82%] of which a loan in the amount of $1,650 pro-
vides for a five year interest free period if certain job criteria has been met. The Government Loans mature during the
period of March 2014 and January 2022 with accrued interest and principal repayable monthly.
During 2012 and 2011, the Corporation entered into bank loans aggregating $17,081 (US$17,169) [2011 – $13,479
(US$13,253)] (“Commercial Loans”) to finance equipment over a ten year period maturing between December 2020
and December 2022 and leasehold improvements over a three year period maturing December 2014. The Commercial
MAGELLAN 2012 ANNUAL REPORT
44
Notes To Consolidated Financial Statements (unless otherwise stated, all amounts are in thousands of Canadian dollars)
Loans require scheduled monthly repayments of accrued interest and principal. The same equipment is collateral for the
Commercial Loans which bears interest at LIBOR plus 2.75%, which at December 31, 2012 was 2.96% [2011 – 3.01%].
As at December 31, 2012, the Corporation has the availability to draw an additional $8,444 against the Government Loans.
[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, 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 outstanding. The Corporation was also granted
the option, exercisable on or before July 1, 2011, to 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. On December 21, 2012, the Original Loan was extended to January 1, 2015 on the same terms
and conditions in consideration of the payment of a one time extension fee of 0.75% of the principal amount outstanding
as of December 21, 2012 of $30,000.
During the twelve month period ended December 31, 2012, the Corporation prepaid the Original Loan by $3,500
[2011 – $12,500]. As at December 31, 2012, the $30,000 principal amount outstanding was classified as a long-term
liability [2011 – $33,500].
[d] As at December 31, 2011, the Corporation had obligations under capital leases that bear interest at a rate of 7.9%.
12. 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 with interest 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,
$1,986 of the Convertible Debentures, net of transaction costs, has been attributed to the debt component and is included
in the consolidated statements of financial position under debt due within one year. The difference between the carry-
ing value and the face value will be accredited using the effective interest rate method. On April 30, 2012, the remaining
$2,000 Convertible Debentures were converted into 2,000,000 common shares of the Corporation.
MAGELLAN 2012 ANNUAL REPORT
45
Notes To Consolidated Financial Statements (unless otherwise stated, all amounts are in thousands of Canadian dollars)
As explained under “Significant Accounting Policies – Convertible Debentures”, $1,920 of the Convertible Debentures,
$545 of the 2008 debentures issued in 2008 and $11,100 of debentures issued in 2003 have been attributed to the equity
component of the debenture and are classified as other paid in capital.
13. 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 indi-
rectly, 1,135,000 of the Preference Shares issued.
The Preference Shares were not redeemable by the Corporation at any time prior to July 1, 2008. Thereafter, the
Preference Shares are redeemable, under certain conditions, at the option of the Corporation at $10.00 per Preference
Share plus accrued and unpaid dividends. In addition, subject to the terms of the Ontario Business Corporations Act (the
“OBCA”), the Preference Shares will be retractable by the holder at the issue price plus accrued and unpaid dividends: i)
from July 1, 2010 in the event that at any point after such date the volume weighted average trading price of the common
shares on the TSX for at least 20 trading days in any consecutive 30-day period ending on the fifth trading day prior to
such date is less than $12.00 per common share; or (ii) upon the occurrence of a change of control of the Corporation
involving the acquisition of voting control or direction over at least 66 2/3% of the common shares and instruments con-
vertible into common shares.
The acquisition of the Convertible Debentures [Note 12] 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 dividends, unless such retraction contravenes any instrument of in-
debtedness of the Corporation or the terms of the OBCA. The Corporation’s operating credit facility restricted the Corporation
to the retraction of up to 20% ($4,000) of the Corporation’s Preference Shares on each of April 30 and October 31 (or the next
business day if that day is not a business day) of each year starting with April 30, 2010, together with accrued and unpaid
dividends on the shares to be retracted provided there is no current default or event of default under the operating credit facility
and after the repayment of the Original Loan and the payment of the retraction amount the Corporation has at least $25,000 in
availability under the operating credit facility.
In 2011 the Corporation’s operating credit facility was amended to permit the Corporation to retract the 1,200,013 re-
maining 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 repay-
ment of the Original Loan and the payment of the retraction amount the Corporation has at least $25,000 in availability
under the operating credit facility.
During 2011, the Corporation retracted the remaining 1,200,013 Preference Shares in the amount of $12,000 and de-
clared and recorded dividends of $310 as an expense on the consolidated statement of income.
14. BORROWINGS SUBJECT TO SPECIFIC CONDITIONS
The Corporation has received contributions related to the development of its technologies and processes from Canadian
government agencies. 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
46
MAGELLAN 2012 ANNUAL REPORT
Notes To Consolidated Financial Statements (unless otherwise stated, all amounts are in thousands of Canadian dollars) return on the investment, are repayable as a percentage of the Corporation’s revenues. The Corporation has included in bor-
rowings subject to specific conditions the estimated amount of repayments in relation to the contributions received.
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 development 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 2012, the Corporation received $3,688 [2011 – $7,867]
of government contributions under SADI, of which $795 [2011– $2,801] has been credited to the related assets, $562
[2011– $333] has been credited to the related expense and $2,331 [2011– $4,733] has been recorded in borrowings
subject to specific conditions. 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 2012, the Corporation repaid
$1,049 [2011– $934] in government contributions.
As at December 31, 2012, the Corporation has recognized $20,768 as the estimated amount repayable to SADI and
TPC. The Corporation is eligible for additional government contributions of $22,596 for the period from January 1, 2013
to December 31, 2014 based on approved expenditures.
15. OTHER LONG-TERM LIABILITIES AND PROVISIONS
Net defined benefit plan deficits [Note 20]
Provisions
Other
Less current portion included in accounts payable, accrued liabilities and provisions
The following table presents the movement in provisions:
December 31 December 31
2011
23,678
8,196
3,027
34,901
5,770
29,131
2012
28,739
5,219
7,604
41,562
2,559
39,003
At December 31, 2010
Additional provisions
Amount used
Unused amounts reversed
Foreign currency
At December 31, 2011
Additional provisions
Amount used
Unused amounts reversed
Unwind of discount
Foreign currency
At December 31, 2012
MAGELLAN 2012 ANNUAL REPORT
Warranty
1,839
846
(344 )
(491 )
34
1,884
260
(311 )
(125 )
–
(44 )
1,664
Environmental
2,625
346
(110 )
–
4
2,865
276
(15 )
–
14
(1 )
Other
provisions
2,939
1,117
(535 )
(100 )
26
3,447
590
(1,573 )
(2,054 )
–
6
3,139
416
Total
7,403
2,309
(989 )
(591 )
64
8,196
1,126
(1,899 )
(2,179 )
14
(39 )
5,219
47
Notes To Consolidated Financial Statements (unless otherwise stated, all amounts are in thousands of Canadian dollars)
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.
Environmental
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.
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.
16. INCOME TAXES
The following are the major components of income tax expense:
Current income tax expense
Current tax expense for the year
Adjustments of previous year’s tax expense
Deferred income tax expense
Origination and reversal of temporary differences
Impact of tax law changes
Total income tax expense
Income taxes recognized in other comprehensive income (loss) are as follows:
Actuarial losses on defined benefit pension plans
2012
2011
2,925
–
2,925
1,113
(224 )
889
202
78
280
3,975
(267 )
3,708
3,814
3,988
2012
2,560
2011
579
The Corporation’s consolidated effective tax rate for the year ended December 31, 2012 was 6.1% [2011 – 9.6%]. 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 25.8% in 2012 and 27.2% in 2011
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
2012
62,109
2011
41,401
16,036
11,261
(12,956 )
149
86
723
(224 )
3,814
(10,483 )
979
1,629
869
(267 )
3,988
48
MAGELLAN 2012 ANNUAL REPORT
Notes To Consolidated Financial Statements (unless otherwise stated, all amounts are in thousands of Canadian dollars)
The Canadian statutory tax rate decreased to 25.8% in 2012 from 27.2% in 2011 as a result of government enacted
changes in tax legislation.
Changes in the deferred tax components are adjusted through deferred income tax expense except for $16,395 [2011 –
$9,173] of investment tax credits which is adjusted through cost of revenues and $2,560 [2011 – $579] for employee future
benefits which is adjusted through other comprehensive income.
Deferred tax movement in the income statement is as follows:
Operating loss carry forwards
Employee future benefits
Property, plant and equipment and intangibles
Other
Deferred income tax expense
The following are the major components of deferred tax assets and liabilities:
Operating loss carry forwards
Investment tax credits
Employee future benefits
Property, plant and equipment and intangibles
Other
Deferred tax assets
2012
(1,296 )
255
(901 )
2,831
889
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
2012
12,712
42,093
5,967
(43,383 )
18,890
36,279
For the purposes of the above table, deferred tax assets are shown net of offsetting deferred tax liabilities where these
occur in the same entity and jurisdiction as follows:
Deferred tax assets
Deferred tax liabilities
December 31 December 31
2011
28,360
(10,088 )
2012
51,040
(14,761 )
The temporary difference associated with investments in subsidiaries and joint ventures, for which a deferred tax liability
has not been recognized aggregates to $180,825 [2011 – $131,070].
17. SHARE CAPITAL
The authorized capital of the Corporation consists of an unlimited number of Preference Shares, issuable in series, and
an unlimited number of common shares, with no par value.
Common shares
Issued and fully paid:
Outstanding at December 31, 2010
Issued upon conversion of convertible debentures [Note 12]
Outstanding at December 31, 2011
Issued upon conversion of convertible debentures [Note 12]
Outstanding at December 31, 2012
Number
Amount
18,209,001
38,000,000
56,209,001
2,000,000
58,209,001
214,440
38,000
252,440
2,000
254,440
MAGELLAN 2012 ANNUAL REPORT
49
Notes To Consolidated Financial Statements (unless otherwise stated, all amounts are in thousands of Canadian dollars)
Net income per share
Net income
Dividends declared on
preference shares
Basic
Effect of dilutive securities:
Convertible debentures
Diluted, net
Amount
58,295
–
58,295
Weighted
average no.
of shares
2012
Per share
amount ($ )
57,553,263
80
58,375
655,738
58,209,001
1.01
(0.01 )
1.00
2011
Weighted
average no.
Per share
of shares
amount ($ )
18,313,001
2.04
Amount
37,413
–
37,413
5,082
42,495
39,896,000
58,209,001
(1.31 )
0.73
18. STOCK-BASED COMPENSATION PLAN
The Corporation has an incentive stock option plan, which provides for the granting of options for the benefit of employ-
ees and directors. No such awards were granted during the years ended December 31, 2012 and December 31, 2011.
The maximum number of options for common shares that remain to be granted under this plan is 1,673,341. 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 2012 and 2011 are as follows:
2012
Weighted
average
exercise
price($ )
16.00
16.00
–
Outstanding, beginning of year
Forfeited/expired
Outstanding, end of year
Shares
224,200
(224,200 )
–
2011
Weighted
average
exercise
price ($ )
15.72
13.38
16.00
Shares
427,950
(203,750 )
224,200
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 amend-
ment 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 2011 and 2012. 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 clas-
sified as equity and were measured at the estimated fair value established by the Black-Scholes model on the date of
grant. Under this method, the estimated fair value was and will continue to be amortized to compensation expense and
contributed surplus over the period in which the related services were rendered, which is usually the vesting period or,
as applicable, over the period to the date an employee was eligible to retire, whichever was shorter.
50
MAGELLAN 2012 ANNUAL REPORT
Notes To Consolidated Financial Statements (unless otherwise stated, all amounts are in thousands of Canadian dollars)
The Corporation’s employee stock options are not transferable, cannot be traded and are subject to vesting restric-
tions and exercise restrictions under the Corporation’s black-out policy which would tend to reduce the fair value of the
Corporation’s stock options. Changes to the subjective input assumptions used in the model can cause a significant
variation in the estimate of the fair value of the options.
The Corporation has a deferred share unit plan (“DSU Plan”) for certain executive officers (“Officers”) which provides
a structure for Officers to accumulate equity-like holdings in the Corporation. The DSU Plan allows certain Officers to
participate in the growth of the Corporation 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 issu-
ance in the following two year period or upon retiring. The cash 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, 2012, 116,067 Units were
outstanding at a value of $250 [December 31, 2011 – $78].
The Corporation recorded compensation expense in relation to the plans during the year of $171 [2011– $298].
19. 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 am-
ortized costs. Held for trading financial investments are subsequently measured at fair value and all gains and losses
are included in net income in the period in which they arise. Available-for-sale financial instruments are subsequently
measured at fair value with revaluation gains and losses included in other comprehensive income until the instruments
are derecognized or impaired.
The carrying values of the Corporation’s financial instruments are classified as follows:
Fair value
through profit
or loss: Held
for trading1
27,028
Loans and
receivables2
106,480
22,431
134,361
December 31, 2011
December 31, 2012
Other
financial
Total
liabilities (at
financial
assets
133,508
156,792
amortized
cost)3
334,055
364,968
Total
financial
liabilities
334,055
364,968
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, 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
MAGELLAN 2012 ANNUAL REPORT
51
Notes To Consolidated Financial Statements (unless otherwise stated, all amounts are in thousands of Canadian dollars)
This note presents information about the Corporation’s risks to each of the above risks, its objectives, policies and pro-
cesses for measuring and managing risk.
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 deriva-
tive financial instruments for trading or speculative 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 volatil-
ity in the exchange rate between the Canadian and U.S. dollar. Based on the Corporation’s current U.S. denominated
net inflows, as of December 31, 2012, 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, 2012 of approximately +/- $20 and $1,242
respectively.
Interest rate risk
The Corporation is exposed to interest rate risk in its floating rate bank indebtedness. At December 31, 2012, $165,660
of the Corporation’s total debt portfolio is subject to movements in floating interest rates. In addition, a portion of the
Corporation’s accounts receivable securitization programs are exposed to interest rate fluctuations. The objective of the
Corporation’s interest rate management activities is to minimize the volatility of the Corporation’s 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, 2012 by approximately +/- $1,416.
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 con-
tracts. 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
52
MAGELLAN 2012 ANNUAL REPORT
Notes To Consolidated Financial Statements (unless otherwise stated, all amounts are in thousands of Canadian dollars) strong credit ratings. Therefore, the Corporation is not exposed to significant credit risk and overall the Corporation’s
credit risk has not changed significantly from the prior year.
The carrying amount of accounts receivable is 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 administrative and general expenses.
Derecognition of financial assets
The Corporation sells a portion of its accounts receivables through securitization programs or factoring transactions.
During 2012, the Corporation sold receivables to various financial institutions in the amount of $227,699 [2011 – $167,100]
for a discount of $648 [2011– $447] representing an annualized interest rate of 1.83% [2011 – 1.73%].
As at December 31, 2012, accounts receivables include receivables sold and financed through securitization transac-
tions of $26,521 [2011– $6,019] which do not meet the IAS 39 derecognition requirements. These receivables are recog-
nized 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 liquidity requirements at any point in time. The Corporation has in place a planning and budgeting
process to help determine the funds required to support the Corporation’s normal operating requirements on an ongo-
ing basis, taking into account its anticipated cash flows from operations and its operating facility capacity. The primary
sources of liquidity are the operating credit facility, accounts receivable securitization program 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, manage-
ment 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 principal cash flows.
Bank indebtedness
Long-term debt1
Equipment leases
Facility leases
Other long-term liabilities
Borrowings subject
to specific conditions
Interest payments
Total
Year 1
–
32,425
348
1,592
1,489
672
36,526
3,904
40,430
Year 2
112,666
6,531
234
1,586
627
939
122,583
3,690
126,273
Year 3
–
35,636
188
1,550
648
732
38,754
1,263
40,017
Year 4
–
5,509
129
1,385
647
653
8,323
1,123
9,446
Year 5 Thereafter
–
29,030
21
5,531
3,580
–
5,382
68
1,233
587
Total
112,666
114,513
988
12,877
7,578
737
8,007
994
9,001
17,707
55,869
5,625
61,494
21,440
270,062
16,599
286,661
1 The amount drawn on the Corporation’s accounts receivable securitization program is included in long-term debt in the Year 1 category
MAGELLAN 2012 ANNUAL REPORT
53
Notes To Consolidated Financial Statements (unless otherwise stated, all amounts are in thousands of Canadian dollars)
Fair values
The Corporation has determined the estimated fair values of its financial instruments based on appropriate valuation
methodologies; however, 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 meth-
ods 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 statements
of financial position are reasonable estimates of their fair values.
Foreign exchange contracts
The Corporation enters into forward 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. The
Corporation does not have any forward foreign exchange contracts outstanding as at December 31, 2012.
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 $85,826 at December 31, 2012.
Collateral
As at December 31, 2012, the carrying amount of all of the financial assets that the Corporation has pledged as collateral
for its long-term debt facilities was $156,792.
Fair value hierarchy
The Corporation’s financial assets and liabilities recorded at fair value on the consolidated statement of financial posi-
tion have been categorized into three categories based on a fair value hierarchy. Fair value of assets and liabilities
included in Level I are determined by reference to quoted prices in active markets for identical assets and liabilities.
Assets and liabilities in Level II include valuations using inputs other than the quoted prices for which all significant
inputs are based on observable market data, either directly or indirectly. Level III valuations are based on inputs that
are not based on observable market data.
The fair value hierarchy requires the use of observable market inputs whenever such inputs exist. A financial instrument
is classified to the lowest level of the hierarchy for which a significant input has been considered in measuring fair value.
The Corporation does not have any financial assets carried at fair value as at December 31, 2012.
20. 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, 2012 totalled $3,887 [2011 – $4,243].
54
MAGELLAN 2012 ANNUAL REPORT
Notes To Consolidated Financial Statements (unless otherwise stated, all amounts are in thousands of Canadian dollars) Defined benefit plans
The Corporation obtains actuarial valuations for its accrued benefit obligations and the fair value of plan assets for ac-
counting 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 includ-
ing 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,
2009 and January 1, 2012.
Other benefit plan
The Corporation has another benefit plan to provide post-employment coverage for health care benefits including prescribed
drugs, hospital and other medical, dental and vision benefits for eligible retired employees, their spouses and eligible depen-
dants. The other benefit plan provides 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
Pension
benefit plan
2012
Other benefit
plan
Pension
benefit plan
2011
Other benefit
plan
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
Foreign exchange gain (loss)
End of year
82,627
5,064
(556 )
6,797
342
(6,668 )
(126 )
87,480
–
–
–
–
–
–
–
–
82,069
5,085
(6,121 )
6,599
354
(5,483 )
124
82,627
MAGELLAN 2012 ANNUAL REPORT
–
–
–
–
–
–
–
–
55
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
Accrued benefit obligation
Beginning of year
Current service cost
Interest cost
Past service cost
Employee contributions
Actuarial loss
Benefit payments
Plan amendments and curtailments
Foreign exchange loss
End of year
Pension
benefit plan
2012
Other benefit
plan
Pension
benefit plan
2011
Other benefit
plan
106,305
2,816
4,639
–
342
9,426
(6,668 )
(422 )
(219 )
116,219
949
–
483
–
–
–
(532 )
–
(20 )
880
91,392
2,788
4,709
208
354
12,129
(5,483 )
–
208
106,305
734
–
628
–
–
153
(584 )
–
18
949
Reconciliation of funded status of benefit plans to amounts recorded in the financial statements
Fair market value of plan assets
Accrued benefit obligation
Accrued benefit liability
Pension
benefit plan
87,480
(116,219 )
(28,739 )
2012
Other benefit
plan
–
(880 )
(880 )
Pension
benefit plan
82,627
(106,305 )
(23,678 )
2011
Other benefit
plan
–
(949 )
(949 )
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, 2012 and December 31, 2011.
The Corporation expects to contribute approximately $4,816 in 2013 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.
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 plan:
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
2012
Other benefit
plan
2011
Pension Other benefit
benefit plans
plan
2,816
4,639
(5,003 )
(422 )
2,030
–
483
–
–
483
2,788
4,709
(5,085 )
208
2,620
–
628
–
–
628
1The actual return on plan assets is a gain of $4,508 for the year ended December 31, 2012 [2011 – loss of $1,036]
56
MAGELLAN 2012 ANNUAL REPORT
Notes To Consolidated Financial Statements (unless otherwise stated, all amounts are in thousands of Canadian dollars)
Pension
benefit plans
2012
Other benefit
plan
2011
Pension Other benefit
benefit plans
plan
Recognized in other comprehensive income
Actuarial loss immediately recognized
Effect of limit on recognition of asset
Total pension cost recognized
in other comprehensive income
(9,922 )
–
(9,922 )
Significant assumptions and sensitivity analysis
–
–
–
(18,270 )
314
(17,956 )
(153 )
–
(153 )
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]:
Pension
benefit plans
2012
Other benefit
plan
2011
Pension Other benefit
benefit plans
plan
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
4.0%
6.0%
2.9%
4.0%
6.0%
2.9%
3.5%
–
–
3.5%
–
–
4.6%
6.0%
2.9%
4.6%
6.0%
2.9%
4.25%
–
–
4.25%
–
–
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, 2012, a 1.0% change in the discount
rate used could result in a $18,326 increase or decrease in the pension benefit obligation with a corresponding benefit
or charge 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 assump-
tions 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. In determining the long-term rate of return assumption, the Corporation considers histori-
cal returns and input from its actuary’s simulation model of expected long-term rates of return assuming the Corporation’s
targeted investment portfolio mix.
The Corporation funds health care benefit costs, shown under other benefit plan, as a pay as you go basis. For measure-
ment 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 2012. The rate was assumed to decrease gradually over the next 10 years to 3.0% and to remain at that
level thereafter. The impact of applying a one-percentage-point increase or decrease in the assumed health care and
dental benefit trend rates as at December 31, 2012 was nominal.
MAGELLAN 2012 ANNUAL REPORT
57
Notes To Consolidated Financial Statements (unless otherwise stated, all amounts are in thousands of Canadian dollars)
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
21. SEGMENTED INFORMATION
2012
62.5%
30.0%
7.5%
100.0%
2011
47.6%
45.7%
6.7%
100.0%
Based on the nature of the Corporation’s markets, two main operating segments were identified: Aerospace and Power
Generation Project. The aerospace segment includes the design, development, manufacture, repair and overhaul and
sale of systems and components for defence and commercial aviation, while the power generation project segment in-
cludes the supply of gas turbine power generation units. Revenues in the power generation project segment arise solely
from the power generation project in 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:
Revenues
Sale of goods
Construction contracts
Services
2012
2011
541,136
59,449
103,994
704,579
478,293
115,095
98,022
691,410
The aggregate amount of revenues recognized for construction contracts in progress at December 31, 2012 was $269,800
[December 31, 2011 – $227,895]. Advance payments received for construction contracts in progress at December 31,
2012 were $11,663 [December 31, 2011 – $4,240]. Retentions in connection with construction contracts at December
31, 2012 were $995 [December 31, 2011– $1,017]. Advance payments and retentions are included in accounts payable,
accrued liabilities and provisions.
58
MAGELLAN 2012 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
Project
Aerospace
659,301
45,278
2012
2011
Power
Generation
Total Aerospace
609,942
704,579
Project
81,468
Total
691,410
71,426
(80 )
71,346
9,237
62,109
53,014
5,386
58,400
16,999
41,401
Total assets
Total liabilities
725,348
404,226
30,459
17,065
755,807
421,291
638,583
369,580
23,155
9,463
661,738
379,043
Additions to property,
plant and equipment
Depreciation and amortization
Impairment reversal, net
Geographic segments:
33,829
31,029
270
–
–
–
33,829
31,029
270
59,260
30,407
1,847
–
2,428
–
59,260
32,835
1,847
Canada
338,032
United
States
199,917
Europe
166,630
Total
704,579
Canada
365,853
2012
2011
United
States
187,658
Europe
137,899
Total
691,410
246,518
46,921
13,806
307,245
267,089
33,420
12,064
312,573
Revenues
Export
revenues1
1Export revenue is attributed to countries based on the location of the customers
Canada
United
States
Europe
Total
Canada
2012
2011
United
States
Europe
Total
Property, plant
and equipment
and intangible
assets
196,336
118,945
61,861
377,142
201,586
121,030
33,262
355,878
MAGELLAN 2012 ANNUAL REPORT
59
Notes To Consolidated Financial Statements (unless otherwise stated, all amounts are in thousands of Canadian dollars)
The major customers for the Corporation are as follows:
Canadian operations
Number of customers
Percentage of total Canadian revenues
US operations
Number of customers
Percentage of total US revenues
European operations
Number of customers
Percentage of total European revenues
22. COST OF REVENUES
Operating expenses
Amortization
Investment tax credits
Impairment (reversal) of inventories
Impairment reversal, net [Note 8]
23. ADMINISTRATIVE AND GENERAL EXPENSES
Salaries, wages and benefits
Administration and office expenses
Professional services
Amortization
24. INTEREST EXPENSE
Interest on bank indebtedness and long-term debt [Notes 9 and 11]
Interest on convertible debenture [Note 12]
Accretion charge on convertible debenture, long-term debt and borrowings
Discount on sale of accounts receivables
25. OTHER COMPREHENSIVE (LOSS) INCOME
2012
3
38%
1 1
39%
2 1
88%
2011
2
33%
40%
73%
2012
591,184
29,519
(16,395 )
(151 )
(270 )
603,887
2011
573,587
30,806
(9,173 )
627
(1,847 )
594,000
2012
25,680
9,941
2,072
1,510
39,203
2012
7,982
66
541
648
9,237
2011
22,725
10,714
2,796
2,029
38,264
2011
9,397
4,000
3,155
447
16,999
Other comprehensive income (loss) includes unrealized foreign currency translation gains and losses, which arise on the
translation to Canadian 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 losses for the year
ended December 31, 2012 of $1,116 [2011 – gains of $4,149] and net actuarial losses on defined benefit plans of $7,361
[2011 – $17,530]. These gains and losses are reflected in the consolidated statement of financial position and had no
impact on net income for the year.
60
MAGELLAN 2012 ANNUAL REPORT
Notes To Consolidated Financial Statements (unless otherwise stated, all amounts are in thousands of Canadian dollars)
26. RELATED PARTY DISCLOSURE
Transactions with related parties
On December 21, 2012, the Original Loan was extended [Note 11]. During 2012, the Corporation incurred interest of
$2,325 [2011– $3,748] in relation to the Original Loan and prepaid the Original Loan by $3,500 [2011– $12,500]. At
December 31, 2012, the Corporation owed Edco interest of $191 [2011– $214].
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 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. On April 30, 2012, Convertible
Debentures in the principal amount of $2,000 held by a director of the Corporation were converted into common shares
of the Corporation. Interest incurred during the year ended December 31, 2012 on the Convertible Debentures was $66
[2011 – $4,000].
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 0.63% [2011 – 0.8%] of the guaranteed amount or $1,102 [2011– $1,399] was paid
in consideration for the guarantee.
During the year, the Corporation incurred consulting costs of $100 [2011 – $100] payable to a corporation controlled by
the Chairman of the Board of the Corporation.
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
2012
2,294
122
138
2,554
2011
2,161
103
147
2,411
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.
27. 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 (refund) paid
MAGELLAN 2012 ANNUAL REPORT
2012
2011
(20,114 )
(17,310 )
(1,792 )
13,861
(25,355 )
9,605
(1,069 )
(10,908 )
24,704
6,559
(32,881 )
(12,526 )
14,873
1,447
61
Notes To Consolidated Financial Statements (unless otherwise stated, all amounts are in thousands of Canadian dollars)
28. ADDITIONAL FINANCIAL INFORMATION
Included in other expenses is a foreign exchange gain of $623 [2011 – loss of $238] on the conversion of foreign currency
denominated working capital balances and debt.
29. 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’ eq-
uity and interest bearing debt.
As at December 31, 2012, total managed capital was $559,631, comprised of shareholders’ equity of $334,516 and
interest-bearing debt of $225,115.
The Corporation manages its capital structure and makes adjustments to it in light of economic conditions, the risk char-
acteristics of the underlying assets and the Corporation’s working capital requirements. In order to maintain or adjust its
capital structure, the Corporation, upon approval from its Board of Directors, may issue or repay long-term debt, issue
shares, repurchase shares through 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 operating activi-
ties, 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. 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, 2012 the Corporation was
in compliance with these covenants.
30. CONTINGENT LIABILITIES AND COMMITMENTS
In the ordinary course of business activities, the Corporation may be contingently liable for litigation and claims with,
among other, customers, suppliers and former employees. Management believes that adequate provisions have been
recorded in the accounts where required. Although, it is not possible to accurately estimate the extent of the potential
costs and losses, if any, management believes, but can provide no assurance, that the ultimate resolution of such con-
tingencies would not have a material adverse effect on the financial position of the Corporation.
At December 31, 2012, capital commitments in respect of purchase of property, plant and equipment totalled $11,822,
all of which had been ordered. There were no other material capital commitments at the end of the year.
62
MAGELLAN 2012 ANNUAL REPORT
Notes To Consolidated Financial Statements (unless otherwise stated, all amounts are in thousands of Canadian dollars) Board of Directors and executive Officers
Executive Officers
Board Of Directors
Committees Of The Board
N. Murray Edwards
Chairman
Richard A. Neill
Vice Chairman
James S. Butyniec
President and
Chief Executive Officer
John B. Dekker
Chief Financial Officer 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,
North American Operations
Jo-Ann C. Ball
Vice President,
Human Resources
(1) Audit Committee
Chairman:
William A. Dimma
(2) Governance and
Nominating Committee
Chairman:
Bruce W. Gowan
(3) Human Resources and
Compensation Committee
Chairman:
William G. Davis
(4) Environmental and Health &
Safety Committee
Chairman:
Donald C. Lowe
N. Murray Edwards
Chairman
Magellan Aerospace Corporation
President
Edco Financial Holdings Ltd.
Calgary, Alberta
Richard A. Neill (4)
Vice Chairman
Magellan Aerospace Corporation
Mississauga, Ontario
James S. Butyniec
President and Chief Executive Officer
Magellan Aerospace Corporation
Mississauga, Ontario
Hon. William G. Davis P.C., C.C., Q.C. (3)
Counsel
Davis Webb LLP
Brampton, Ontario
William A. Dimma C.M., O. Ont. (1, 2)
Chairman Emeritus
Home Capital Group Inc.
Toronto, Ontario
Bruce W. Gowan (1, 2, 3)
Corporate Director
Huntsville, Ontario
Donald C. Lowe (1, 4)
Corporate Director
Toronto, Ontario
Larry G. Moeller (4)
President
Kimball Capital Corporation
Calgary, Alberta
James S. Palmer C.M., Q.C., (2, 3)
Chairman Emeritus
Burnet, Duckworth & Palmer LLP
Calgary, Alberta
63
MAGELLAN 2012 ANNUAL REPORT
Operating Facilities Directory and Shareholder Information
Canada
United Kingdom
Corporate Office
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 8th, 2013 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
Davy Way, Llay Industrial Estate,
Llay, Wrexham LL12 0PG
Tel: 01978 856600
3160 Derry Road East,
Mississauga, Ontario L4T 1A9
Tel: 905 673 3250
Miners Road, Llay Industrial Estate,
Llay, Wrexham LL12 0PJ
Tel: 01978 856798
634 Magnesium Road,
Haley, Ontario K0J 1Y0
Tel: 613 432 8841
Rackery Lane,
Llay, Wrexham LL12 0PB
Tel: 01978 852101
975 Wilson Avenue,
Kitchener, Ontario N2C 1J1
Tel: 519 893 7575
510 Wallisdown Road,
Bournemouth, Dorset BH11 8QN
Tel: 01202 512405
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
7/8 Lyon Road, Wallisdown,
Poole, Dorset BH12 5HF
Tel: 01202 535536
Chiltern Hill, Chalfont St Peter,
Buckinghamshire SL9 9YZ
Tel: 01753 890922
11 Tullykevin Road
Greyabbey, County Down
BT22 2QE
Tel: 02842 758231
Amy Johnson Way
Blackpool Business Park, Blackpool
FY4 2RP
Tel: 01253 345466
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
Poland
Wojska Polskiego 3
39–300 Mielec
Tel: 017 773 8970
India
Unit No. 201, Oxford Towers
No. 139, Kodihalli, Old Airport Road
Bangalore 560 008
Tel: 91 80 2520 3191
MAGELLAN 2012 ANNUAL REPORT
64
Magellan Aerospace
3160 Derry Road East
Mississauga, ON Canada L4T 1A9
www.magellan.aero