LETTER TO SHAREHOLDERS
Looking back on my first year as President and Chief Executive Officer of
Magellan Aerospace Corporation, (“Magellan or the Corporation”) I would like
to thank all of our stakeholders, customers, and employees for their continued
support. Without this commitment, Magellan would not have achieved our
business objectives in 2015.
In the 2014 Annual Report, I introduced the major tasks we as a corporation needed
to undertake in 2015. Among the tasks I identified was our need to determine and
develop our strategic plans to fully support a “2020” vision. Our efforts in 2015
reflected this as a primary focus of our executive and management teams.
Collectively, we have made excellent progress in defining where the Corporation
needs to be in “2020” and what actions are necessary to meet and achieve
these objectives.
The work we conducted this past year has confirmed Magellan’s need to focus
our efforts in a number of key areas, with a priority and specific emphasis on
maintaining and improving our operational execution. This continuing effort needs
to be balanced with the Corporation’s recognition that we must expand our efforts
to strategically expand our business base across all of our commodity groups.
As a direct result of this past year’s internal assessment, steps were taken to
restructure our business development process and organization. This will ensure
that we are well positioned and resourced to execute plans in support of our
strategic objectives.
I WOULD LIKE TO THANK ALL OF OUR STAKEHOLDERS,
CUSTOMERS, AND EMPLOYEES FOR THEIR CONTINUED
SUPPORT. WITHOUT THIS COMMITMENT, MAGELLAN
WOULD NOT HAVE ACHIEVED OUR BUSINESS
OBJECTIVES IN 2015.
MAGELLAN 2015 ANNUAL REPORT 1
In 2016 we will complete this organizational transition which will add skills,
resources, and capabilities within the Business Development Group. Along with
the Executive and Management teams, this organization will ensure that the
Corporation’s strategic plans are properly aligned with our customer needs as
well as the business environment. It is expected that fully developed action plans
focused on developing and capturing new business opportunities will evolve
from these efforts.
Magellan’s objectives will be delivered by utilising and deploying the following
key strategies:
>>
Drive operational excellence to ensure we maintain our position on existing
programmes, and further develop opportunities with our current customer
base
Strategic growth with new and existing customers through competitive
alignment with customers on new platforms supported by the necessary
technology investments
Growth through acquisition that either complements the Corporation’s
current core capabilities or adds capabilities aligned with customer or
industry needs
>>
>>
There is still a lot of work to be done this year to implement these plans. I am
confident that with the full input and support of all of our employees, we will be
successful. To this end, I, along with Magellan’s management team, will strive to
improve our communication with all of our stakeholders.
2016 and the years beyond will be challenging and exciting and I look forward
to continuing to lead this dedicated Magellan team in successfully meeting our
objectives.
Phillip C. Underwood
President and Chief Executive Officer
March 18, 2016
MAGELLAN 2015 ANNUAL REPORT 2
This Management’s Discussion and Analysis (“MD&A”) of the financial condition and results of operations of Magellan
Aerospace Corporation (“Magellan” or the “Corporation”) should be read in conjunction with the audited consolidated
financial statements and the notes thereto for the years ended December 31, 2015 and 2014, and the Annual Information
Form for the year ended December 31, 2015 (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, 2015
relative to the year ended December 31, 2014. The information contained in this report is as at March 18, 2016. 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 statements other than statements
of historical facts may be forward-looking statements. In particular and without limitation there are forward looking statements
under the heading “Overview,” “ 2015 and Recent Updates,” “Outlook,” “Consolidated Revenues,” “ Liquidity and Capital
Resources,” “ Risk Factors” and “Future Changes in Accounting Policies.” In some cases, forward-looking statements can
be identified by terminology such as “may,” “will,” “should,” “could,” “expects,” “forecasts,” “believes,” “projects,” “plans,”
“anticipates,” and similar expressions. The projections, estimates and beliefs contained in such forward-looking statements
are based on management’s assumptions relating to the production performance of Magellan’s assets and competition
throughout the aerospace industry in 2015 and continuation of the current regulatory and tax regimes in the jurisdictions in
which the Corporation operates, and necessarily involve known and unknown risks and uncertainties, including the business
risks discussed in this MD&A, which may cause actual performance and financial results in future periods to differ materially
from any projections of future performance or results expressed or implied by such forward-looking statements. Accordingly,
readers are cautioned that events or circumstances could cause results to differ materially from those predicted. Except as
required by law, the Corporation does not undertake to update any forward-looking information in this document whether as
a result of new information, future events or otherwise.
The MD&A presents certain non-IFRS financial measures to assist readers in understanding the Corporation's
performance. Non-IFRS financial measures are measures that either exclude or include amounts that are not excluded
or included in the most directly comparable measures calculated and presented in accordance with Generally Accepted
Accounting Principles (“GAAP”). Throughout this discussion, reference is made to EBITDA (defined as net income before
interest, income taxes, depreciation and amortization), which the Corporation considers to be an indicative measure of
operating performance and a metric to evaluate profitability. EBITDA is not a generally accepted earnings measure 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 this measure, the Corporation’s EBITDA may not be directly comparable
with similarly titled measures used by other companies. Reconciliations of EBITDA to net income (loss) reported in
accordance with IFRS are included in this MD&A.
1. OVERVIEW
A summary of Magellan’s business and significant 2015 events
Magellan is a diversified supplier of components to the aerospace industry and in certain applications for power generation
projects. Through its wholly owned subsidiaries, Magellan engineers and manufactures aeroengine and aerostructure
components for aerospace markets, including advanced products for defence and space markets and complementary
specialty products. The Corporation also supports the aftermarket through the supply of spare parts as well as through
repair and overhaul services and in certain circumstances parts and equipment for power generation projects.
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MAGELLAN 2015 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS December 31, 2015 The Corporation has focused on strengthening operations, strengthening its balance sheet and leveraging core
competencies in its strategic business development activities. During 2015, key performance indicators reflected the
continued success of the Corporation’s MOSTM program. MOSTM is the Magellan Operating System adopted in 2007
which standardizes and instills best practices in the Corporation’s facilities. This program and its policies and procedures
have been firmly imbedded in daily operations and continue to produce positive results. Through cash generation from
improved operating performance, the balance sheet has improved year over year. Management, in utilizing the positive
cash generation, continues to focus on debt retirement. Recent new program awards have confirmed the value of the
Corporation’s core competency strategy as it pursues new work opportunities.
Magellan operates substantially all of its activities in one reportable segment, Aerospace, which is viewed as one segment
by the chief operating decision-makers for the purpose of resource allocations, assessing performance and strategic
planning. The Aerospace segment includes the design, development, manufacture, repair and overhaul and sale of
systems and components for defence and civil aviation. The Corporation continues to provide services to the Power
Generation segment; however, the Corporation has removed the disclosure of this segment as the activity in relation to
these services were not material in 2015 and 2014, and at present, are not expected to be material in future periods. The
Corporation supplies both the commercial and defence sectors of the Aerospace segment. In the commercial sector, the
Corporation is active in the large commercial jet, business jet, regional aircraft, and helicopter markets. On the defence
side, the Corporation provides parts and services for major military aircraft. Magellan’s sole product for the Power
Generation Project is an electric power generation project in the Republic of Ghana.
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 machining
centres. Capabilities include precision casting of airframe-mounted components. Management believes that Magellan’s
dedication to technological innovation combined with low cost sourcing from emerging markets will position the
Corporation to capture targeted complex assembly programs.
Within the aeroengines product grouping, the Corporation manufactures complex cast, fabricated and machined gas
turbine engine 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 Corporation serves both the commercial and defence markets. In 2015, 75% of revenues were derived from commercial
markets (2014 – 77%, 2013 – 73%) while 25% of revenues related to defence markets (2014 – 23%, 2013 – 27%).
2015 and Recent Updates
–
On January 6, 2015 Magellan announced the signing of a 10-year agreement with Pratt & Whitney Canada, a United
Technologies Company, for the supply of complex magnesium and aluminum castings. The castings will be
produced primarily by Magellan’s facility in Haley, Ontario, with several being produced at its Glendale, Arizona
facility. The agreement is expected to represent approximately $250 million in revenue for Magellan from 2014
through 2023. Pratt & Whitney Canada has been a key customer of Magellan's Haley facility in Ontario for more
than 50 years.
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MAGELLAN 2015 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS December 31, 2015
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An announcement was made on March 4, 2015, that Magellan and the University of Manitoba unveiled their
new advance satellite integration facility (“ASIF”) at Magellan’s facility in Winnipeg, Manitoba. The facility will
support research, development, construction and testing of satellite systems and components. The facility
was constructed in an existing 6,000-square-foot area, large enough to accommodate up to three satellites
at various stages of assembly with sufficient ceiling height for high crane lifting requirements. The ASIF is
an ISO Class 8 cleanroom facility that will satisfy the requirements of current and future satellite programs
initiated by the Government of Canada. The facility expansion was funded by an investment of $2.4 million
from Western Economic Diversification Canada. Magellan invested $1.5 million which includes $0.6 million
for the establishment of an Industrial Research Chair in the area of satellite development within the Faculty of
Engineering at the University of Manitoba, and contributed to the construction of the facility, multi-year research
and development and educational funding.
Magellan announced on April 6, 2015 that it opened a new, advanced, precision machining facility in Mielec,
Poland. The facility will initially specialize in the production of small to medium size components for the aerospace
market, and will be further expanded to incorporate precision assembly and aeroengine machining.
On April 29, 2015 Magellan announced it was awarded an option year related to the contract for engine repair and
overhaul of the F404 engine that powers Canada’s fleet of CF-188 Hornet aircraft. The one-year, follow-on option
year commenced on April 1, 2015, and has projected value added revenue of $16 million. The work will be carried
out at Magellan’s facility in Mississauga, Ontario. Under the terms of the contract, the Corporation will provide
maintenance, engineering, material management, provision of field service representatives, and publication
support for the CF-188 F404 engine and ancillary components.
The Corporation announced on May 15, 2015 that it acquired Euravia Engineering & Supply Co. Limited (“Euravia”).
Euravia is an aviation company that provides maintenance, repair and overhaul solutions for a wide range of
aircraft and helicopter gas turbine engines. Euravia, located in Kelbrook, Lancashire, UK, has an established
international reputation for delivering high quality, cost effective engine support. Euravia holds 19 international
approvals supporting over 150 civil and defence customers in 50 different countries. The acquisition complements
Magellan’s existing repair and overhaul capability in North America.
On June 29, 2015, Euravia, a wholly-owned subsidiary of Magellan, announced it was selected to provide PT6T
and PT6C engine maintenance, repair and overhaul solutions for Petroleum Air Services. The initial contract period
expires at the end of 2016, with an option to renew for an additional two years. It is expected that this contract will
generate US$6 million over a three year period if the option is renewed.
The Corporation announced on September 15, 2015 the delivery of the first two RADARSAT Constellation
Mission (“RCM”) payload module structures to Macdonald, Dettwiler and Associates Ltd. (“MDA”). These major
assemblies will house the electronics for the radar payload being developed by MDA. They were designed
and built by Magellan’s facility in Winnipeg, Manitoba. Magellan has been contracted by MDA to deliver three
spacecraft buses, including three payload modules, for the Canadian Space Agency’s RCM mission.
Magellan also announced on September 15, 2015, that it had entered into an international partnership
agreement with the Student Spaceflight Experiment Program. This US-based programme was launched by the
National Center for Earth and Space Science Education and provides students the ability to design and propose
microgravity experiments to fly in low Earth orbit on the International Space Station. As an international partner,
Magellan increases the opportunity for more communities to participate in the Student Spaceflight Experiment
Program and sees this funding as an investment in the youth of Canada.
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MAGELLAN 2015 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS December 31, 2015
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On October 5, 2015, the Corporation announced it was awarded a follow on contract to provide nose and
main landing gear components and kitted assemblies to Messier-Bugatti-Dowty for major commercial aircraft
customers. The complex machined components are manufactured in Magellan’s facilities in New York, New York
and Kitchener, Ontario, which are Magellan's facilities geared for high velocity, hard metal machining and kitting.
The contract represents US$80 million in sales for the period of 2017 through 2021.
Magellan announced on November 16, 2015 that it, through a wholly owned subsidiary, Magellan Aerospace
Processing, Long Island, Inc., acquired substantially all the assets of Lawrence Ripak Co. Inc. and Ripak
Aerospace Processing LLC (“Ripak”), an aerospace processing facility located in Long Island, New York. For
more than 60 years Ripak has been in business providing a full range of non-destructive test services, anodizing,
plating, painting, shot peening and other processing to over four hundred customers worldwide. The acquisition
of Ripak establishes a North American capability in processing that adds capacity and is complementary to
Magellan’s existing processing facilities in the UK, Poland and India. Magellan Aerospace Processing, Long
Island, Inc. will conduct business under the trade name of Ripak Aerospace Processing.
On March 1, 2016, Magellan announced that a Wire Strike Protection System™ (WSPS™) will soon be available
for the Robinson R66 helicopter platform with the anticipated issuance of a Supplemental Type Certificate (STC) in
the first quarter of 2016. The WSPS™ is designed to provide a measure of protection for helicopters in level flight
in the event of an encounter with horizontally strung wires and cables, using the concept of guiding wires over the
fuselage into high tensile steel cutting blades. The basic WSPS™ is comprised of an upper cutter, lower cutter,
and a windshield deflector. The R66 WSPS™ kit is expected to be available for new R66 helicopters commencing
in the fall of 2016. Internal provisions for the R66 WSPS™ platform will be available as an option from Robinson on
new helicopters and will allow for easy installation of the exterior kit. A comprehensive aftermarket kit, including
the internal provisions, will be available to retrofit older R66 helicopters from Magellan’s authorized distributors.
Labour Matters
During the year ended December 31, 2015, two labour agreements at two of the Corporation’s facilities which expired
during 2015 were successfully re-negotiated with contract periods ending in 2018. One labour agreement, which
expired on December 31, 2015, is currently in negotiations. Five labour agreements at five of the Corporation’s facilities
expire in the second half of 2016.
Financing Matters
On September 30, 2014, Magellan announced the Corporation amended the Bank Facility Agreement pursuant to
which Magellan and the lenders agreed to adjust the maximum amounts available under the operating credit facility to
Cdn$95 million (down from Cdn$115 million), US$35 million and £11 million British pounds. Under the terms of the
amended credit agreement, the operating credit facility expires on September 30, 2018. The Bank Facility Agreement
also includes a Cdn$50 million uncommitted accordion provision which provides the Corporation with the option to increase
the size of the operating credit facility to $200 million. Extensions of the facility are subject to mutual consent of the syndicate
of lenders and the Corporation. Pursuant to the amendment of the Bank Facility Agreement, the guarantee of the facility
by Mr. Edwards, which had supported the Corporation since 2005, was released. The credit agreement was amended on
December 4, 2015 to include a short term bridge credit facility that increased the operating credit facility by US$10 million
($13.8 million at December 31, 2015). The bridge credit facility, which was arranged to enhance liquidity following the Ripak
acquisition, expired on March 4, 2016.
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MAGELLAN 2015 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS December 31, 2015
2. OUTLOOK
The outlook for Magellan’s business in 2016
According to the International Air Transport Association (IATA), global passenger traffic in 2015 grew by 6.5% compared
to 2014. This was the strongest growth rate since the post-financial crisis rebound in 2010, and was well above the 10-year
average of 5.5%. Airline profitability was also reported to be the highest since 2010 and is forecast to rise further in 2016,
as low fuel prices continue to be a boost to airline’s bottom line. Notwithstanding a strong performance in 2015, industry
experts are signaling that commercial aircraft markets will flatten due to sluggish economies in China, Latin America
and emerging markets. These are regions of the world where the largest future growth rate in the commercial market is
expected to come from.
Airbus and Boeing still plan to either maintain or increase civil aircraft production rates in 2016 and 2017. Airbus’ A320 rate
increases to 44 per month in the first quarter of 2016 and then to 46 per month in the second quarter of 2016. Boeing’s 737
rate will remain at 42 per month for 2016 and is planned to go to 47 per month in 2017. The 767 rate increases to 2 per month
and 787 to 12 per month in 2016.
The regional jet market has been experiencing the same upbeat trend as large commercial airliners. The strongest segment
of the market lies in the 90 – 110 seat class where Embraer with their new E2 series of aircraft will be the dominant player.
Bombardier with its C-Series aircraft is their direct competitor. Both aircraft are powered by Pratt & Whitney’s new PW1000
geared turbofan engine upon which Magellan is seeking to secure long term market share on certain components.
Regional turboprops are not fairing as well as jets. ATR reported that their orders were down 50% in 2015 because of
slowing economies in the two regions of the world that comprise the majority of their sales, Latin America and Asia. Low
oil prices have also contributed to this decline, as the advantage of the turboprops’ lower operating cost when compared
with a jet is diminished when oil prices are low.
According to Forecast International, the business jet market in 2015 underwent a complete trend reversal between the
light/medium and large aircraft segments. Where the demand for light/medium jets had been weak, it strengthened by
the end of 2015 as improvements in the US economy began to unlock latent demand. Conversely, the stronger large
business jet market began to weaken due to economic slowdowns in China, Latin America and Russia. Honeywell’s
annual outlook stated that sluggish economic growth and political tensions are driving a more reserved approach to
purchasing new aircraft. Despite this, it is still believed that the business jet market will recover as economic conditions
improve in key geographic regions.
At the end of 2015, the entire civil helicopter market was experiencing a negative downturn. By example, Sikorsky
reported that their commercial helicopter sales fell in 2015 to just 25% of that in 2014, which was primarily due to the
decline in the energy sector. Regardless, manufacturers are still optimistic about the market and continue to develop new
programs, banking on an eventual return to strength.
In the defense market, economic constraints have put significant pressure on most defense budgets worldwide, however
countries made nervous by various global security threats, are withdrawing budget reductions to focus on immediate
defense priorities. Economics are also forcing countries to delay fleet modernization programs, which will mean extending
production on certain legacy platforms, to bridge the gap. To further unsettle the market, some new program awards have
been reversed after the successful bidder was announced, such as Poland’s withdrawal of their decision to award Airbus
Helicopters a contract for 50 new utility helicopters under their Technical Modernization Program. Finally, contractors in
the United States seeking to fill the gap left by sequestration budget cuts with foreign military sales, face a new challenge
with a strong US dollar; competing against capable platforms sold in a country’s native currency.
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MAGELLAN 2015 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS December 31, 2015 The Corporation continues to monitor the F-35 program developments closely. Aircraft are currently flying at eight
different operating locations across the United States. The US Marine Corps declared combat-ready Initial Operational
Capability (“IOC”) in July 2015, with the US Air Force and Navy intending to attain IOC mid-2016 and 2018, respectively.
The F-35 program continues to grow and accelerate. The program achieved planned deliveries of 45 aircraft in 2015.
There are 53 aircraft planned for 2016, with a total of 870 airplanes planned for delivery over the next six years. Magellan
is currently commencing activities to support increased production rates.
3. SELECTED ANNUAL INFORMATION
A summary of selected annual financial information for 2015, 2014 and 2013
Expressed in millions of dollars, except per share information
Revenues
Net income for the year
Net income per common share – Basic and Diluted
EBITDA
EBITDA per common share – Diluted
Total assets
Total non–current financial liabilities
2015
951.5
79.4
1.36
151.7
2.61
1,050.1
196.0
2014
843.0
56.6
0.97
120.3
2.07
834.6
144.1
2013
752.1
45.5
0.78
100.8
1.73
791.9
63.8
Revenues for the year ended December 31, 2015 increased from 2014 and 2013 levels. The increase in revenues from
2014 is primarily attributable to the strengthening of the US dollar and British pound in comparison to the Canadian dollar
and to production rate increases on several leading programs in the global commercial aerospace market. Net income
increased in 2015 from 2014 due to improved efficiencies resulting from increased production volumes and the favourable
movement of the Canadian dollar relative to the US dollar and British pound (see “Results of Operations – Gross Profit”).
During 2015 the Corporation paid quarterly dividends on common shares of $0.055 per share for the first three
quarters and $0.0575 per share in the fourth quarter, amounting to $13.0 million in total for the year. During 2014, the
Corporation paid quarterly dividends on common shares of $0.04 per share in the first three quarters and $0.055 per
share in the fourth quarter, amounting to $10.2 million in total for the year.
4. RESULTS OF OPERATIONS
A discussion of Magellan’s operating results for 2015 and 2014
Consolidated Revenues
Consolidated revenues for the year ended December 31, 2015 increased 12.9% to $951.5 million from $843.0 million last
year. The weakness in the Canadian dollar in combination with an increase in product shipments contributed to the year
over year increase in sales.
Twelve-months ended December 31, expressed in thousands of dollars
Canada
United States
Europe
Total revenues
2015
330,444
333,074
287,948
951,466
2014
325,218
272,646
245,172
843,036
Change
1.6%
22.2%
17.4%
12.9%
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MAGELLAN 2015 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS December 31, 2015 Revenues in Canada in 2015 increased 1.6% in comparison to revenues earned in 2014, while revenues in United States
in US dollars increased 5.6% and increased 22.2% when measured in Canadian dollars. Revenues in Europe in British
pounds increased 9.3% and increased 17.4% in 2015 in comparison to 2014 when measured in Canadian dollars. The
business acquisition of Euravia in the second quarter of 2015 also contributed to the increased revenues in Europe in
2015 when compared to the same period in 2014.
Favourable foreign exchange impacts on the translation of foreign operations to Canadian dollars resulting from a stronger
United States dollar and British pound in 2015 against the Canadian dollar contributed to higher revenues generated in
United States and Europe in 2015 when compared to 2014. If average exchange rates for both the United States dollar
and British pound experienced in 2014 remained constant in 2015, consolidated revenues for 2015 would have been
approximately $858.2 million, a 1.8% increase over 2014 revenue levels.
Gross Profit
Twelve-months ended December 31, expressed in thousands of dollars
Gross Profit
Percentage of revenue
2015
164,379
17.3%
2014
133,782
15.9%
Change
22.9%
Gross profit increased by $30.6 million from 2014 levels of $133.8 million to $164.4 million in 2015. Gross profit, as a
percentage of revenues, was higher in 2015 at 17.3% versus 15.9% in 2014. Increases in the underlying activity and the
impact of the strengthening year over year of the United States dollar and British pound against the Canadian dollar
resulted in a higher gross profit for 2015 when compared to 2014.
Administrative and General Expenses
Twelve-months ended December 31, expressed in thousands of dollars
Administrative and general expenses
Percentage of revenue
2015
56,739
6.0%
2014
48,221
5.7%
Change
17.7%
Administrative and general expenses increased to $56.7 million in 2015 from $48.2 million in 2014. The effect on translation
of the strengthening of the United States dollar and British pound exchange rates against the Canadian dollar accounted
for approximately $5.6 million of the year over year increase in administrative and general expenses. In addition, the
acquisition of businesses in 2015 increased administrative and general expenses by $3.7 million when compared to the
same period in 2014.
Other
Twelve-months ended December 31, expressed in thousands of dollars
Foreign exchange gain
Loss on disposal of property, plant and equipment
Other
2015
(977)
1,909
932
2014
(523)
1,097
574
Included in other income is a foreign exchange gain of $1.0 million in 2015 compared to a gain of $0.5 million in 2014,
resulting from the revaluation and settlement of the Corporation’s Unites States dollar denominated monetary assets
and liabilities in Canada and foreign exchange contracts. In 2015 and 2014, the Corporation retired assets for a loss on
disposal of approximately $1.9 million and $1.1 million, respectively.
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MAGELLAN 2015 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS December 31, 2015 Interest Expense
Twelve-months ended December 31, expressed in thousands of dollars
Interest on bank indebtedness and long-term debt
Accretion charge on long-term debt and borrowings
Discount on sale of trade receivables
Interest expense
2015
4,456
876
928
6,260
2014
4,586
2,531
770
7,887
Interest costs for 2015 were $6.3 million, a decrease of $1.6 million from 2014 largely due to a lower accretion charge
in 2015 when compared to 2014. Interest on bank indebtedness and long-term debt in 2015 slightly decreased as the
Corporation did not incur guarantee fees on the operating credit facility during 2015, when compared to 2014, offset
in part by, higher interest on external interest bearing debt due to higher principal amounts outstanding in 2015 when
compared to 2014. During 2015, the Corporation sold $344.1 million of trade receivables at an annualized interest rate of
1.68% compared to the sale of $287.3 million of trade receivables in 2014 at an annualized interest rate of 1.68%.
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
2015
7,363
13,662
21,025
20.9%
2014
4,991
15,537
20,528
26.6%
The Corporation recorded an income tax expense in 2015 of $21.0 million on pre-tax income of $100.4 million, representing
an effective tax rate of 20.9%, compared to an income tax expense of $20.5 million on a pre-tax income of $77.1 million
in 2014 for an effective tax rate of 26.6%.
During each of 2015 and 2014, the Corporation recognized investment tax credits in Canada totalling $4.2 million and $6.9
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. The decrease in the effective tax rate to 20.9% in 2015 when compared to 26.6% in 2014 is
primarily due to an adjustment in corporate taxation rates in the income tax jurisdictions in which the Corporation operates.
5. RECONCILIATION OF NET INCOME TO EBITDA
A description and reconciliation of certain non-IFRS measures used by management
In addition to the primary measures of earnings and earnings per share (basic and diluted) in accordance with IFRS, the
Corporation includes EBITDA (earnings before interest, income taxes and depreciation and amortization) in this MD&A.
The Corporation has provided this measure because it believes this information is used by certain investors to assess
financial performance and that EBITDA is a useful supplemental measure as it provides an indication of the results
generated by the Corporation’s principal business activities prior to consideration of how these activities are financed
and how the results are taxed in the various jurisdictions. Each component of this measure is calculated in accordance
with IFRS, but EBITDA is not a recognized measure under IFRS, and the Corporation’s method of calculation may not be
comparable with that of other companies. Accordingly, EBITDA should not be used as an alternative to net income as
determined in accordance with IFRS or as an alternative to cash provided by or used in operations.
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MAGELLAN 2015 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS December 31, 2015 Twelve-months ended December 31, expressed in thousands of dollars
Net income
Interest
Taxes
Depreciation and amortization
EBITDA
2015
79,423
6,260
21,025
45,007
2014
56,572
7,887
20,528
35,300
151,715
120,287
EBITDA for the year ended 2015 of $151.7 million increased by $31.4 million when compared to $120.3 million in 2014.
Increased revenue levels and improved margins in 2015 over 2014 were partially offset by increased administrative
and general expenses.
6. SELECTED QUARTERLY FINANCIAL INFORMATION
A summary view of Magellan’s quarterly financial performance
Expressed in millions of dollars except per share information
2015
2014
Revenues
Income before taxes
Net income
Net income per common share
Basic and Diluted
EBITDA1
Mar 31
Jun 30
Sep 30
Dec 31
Mar 31
Jun 30
Sep 30
Dec 31
228.4
234.4
236.2
252.6
210.5
221.0
202.5
208.9
26.8
19.2
0.33
37.4
21.8
16.2
0.28
33.5
24.8
18.5
0.32
37.8
27.1
25.5
0.44
43.1
16.7
12.1
0.21
27.1
18.8
13.6
0.23
30.2
17.7
13.0
0.22
28.3
23.9
17.9
0.31
34.7
1 EBITDA is not an International Financial Reporting Standards (“IFRS”) financial measure. Please see the “Reconciliation of Net Income to EBITDA”
section for more information.
The Corporation recorded its highest quarterly revenue in the fourth quarter of 2015. Revenues and net income reported
in the quarterly information were impacted favourably by the fluctuations in the Canadian dollar exchange rate in
comparison to the Unites States dollar and British pound. The United States dollar/Canadian dollar exchange rate in 2015
fluctuated reaching a low of 1.1613 and a high of 1.3955. During 2015, the Unites States dollar relative to the Canadian
dollar moved from an exchange rate of 1.1601 at the start of the 2015 calendar year to an exchange rate of 1.3840 by
December 31, 2015. The British pound/Canadian dollar exchange rate in 2015 fluctuated reaching a low of 1.7832 and a
high of 2.0938. During 2015, the British pound relative to the Canadian dollar moved from an exchange rate of 1.8071 at
the start of the 2015 calendar year to an exchange rate of 2.0407 by December 31, 2015. Had exchange rates remained
at levels experienced in 2014, reported revenues in 2015 would have been lower by $16.5 million in the first quarter; $17.1
million in the second quarter, $29.4 million in the third quarter and $28.2 million in the fourth quarter.
Net income for the first and fourth quarters of 2015 of $19.2 million and $25.5 million, respectively, was higher than all
other quarterly net income shown in the table above. In all four quarters of 2015 movements in the US dollar and British
pound in relation to the Canadian dollar favorably impacted net income. Somewhat offsetting the favourable transactional
currency movement in the second quarter of 2015, the Corporation recorded a loss on translation of its foreign currency
liabilities within Canada and Europe. In the fourth quarter of 2014 the Corporation recognized previously unrecognized
investment tax credits.
11
MAGELLAN 2015 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS December 31, 2015 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 trade receivables securitization program, and long-term
debt and equity capacity. Principal uses of cash are to fund liabilities as they become due, finance capital expenditures,
fund debt repayments, pay dividends and provide flexibility for new investment opportunities. Based on current funds
available and expected cash flow from operating activities, management believes that the Corporation has sufficient
funds available to meet its liquidity requirements at any point in time. However, if cash from operating activities is lower
than expected or capital costs for projects exceed current estimates, or if the Corporation incurs major unanticipated
expenses, it may be required to seek additional capital in the form of debt or equity or a combination of both.
In 2015, $94.5 million of cash was generated by operations, $133.9 million was used in investing activities and $40.7
million was provided by financing activities.
Cash Flow from Operating Activities
Twelve-months ended December 31, expressed in thousands of dollars
Increase in trade receivables
Increase in inventories
(Increase) decrease in prepaid expenses and other
Decrease in accounts payable, accrued liabilities and provisions
Net change in non-cash working capital items
Net cash from operating activities
2015
(19,148)
(11,991)
(3,943)
(5,878)
(40,960)
94,534
2014
(8,438)
(10,267)
361
(4,917)
(23,261)
78,576
Operating activities for 2015 generated cash of $94.5 million compared to $78.6 million in the prior year. Changes in
non-cash working capital items used cash of $41.0 million as a result of increases in trade receivables, inventories,
prepaid expenses and other and a decrease in accounts payable, accrued liabilities and provisions. The increase in
trade receivables during the year is attributed primarily to the higher revenues. Increased inventory levels in 2015 were
to support higher production volumes on a number of programs. In 2014, changes in non-cash working capital of $23.3
million were principally a result of increases in trade receivables and inventories and a decrease in accounts payable,
accrued liabilities and provisions.
Cash Flow from Investing Activities
Twelve-months ended December 31, expressed in thousands of dollars
Investment in joint venture
Business combinations
Purchase of property, plant and equipment
Proceeds from disposals of property, plant and equipment
Change in restricted cash
Increase in other assets
Net cash used in investing activities
2015
–
(75,495)
(43,905)
621
(12,902)
(2,175)
(133,856)
2014
(326)
–
(35,481)
611
–
(5,945)
(41,141)
12
MAGELLAN 2015 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS December 31, 2015 The Corporation invested $43.9 million in capital assets during the year in comparison to $35.5 million in 2014. The
Corporation continues to invest in advanced technology production equipment and information technology systems,
both designed to increase productivity, reduce cycle time and improve technology capability. The Corporation
invested $79.1 million, net of cash acquired, in the acquisitions of Euravia in the second quarter of 2015 and Ripak
in the fourth quarter of 2015.
Contractual Obligations
As at December 31, 2015,
expressed in thousands of dollars
Bank indebtedness
Trade receivables securitization
Long-term debt
Equipment leases
Facility leases
Other long-term liabilities
Borrowings subject to specific conditions
Less
than 1 year
–
50,581
4,674
568
2,906
5,365
776
1-3 Years
135,828
4-5 Years
–
−
−
After
5 Years
–
−
10,500
11,271
20,222
710
4,832
4,072
755
227
3,911
526
2,034
84
17,835
1,402
16,962
56,505
Total
135,828
50,581
46,667
1,589
29,484
11,365
20,527
296,041
Total Contractual Obligations
64,870
156,697
17,969
Major cash flow requirements for 2016 include the repayment of trade receivables securitization of $50.6 million which
is expected to be refinanced, repayment of long-term debt of $4.7 million, payments of equipment and facility leases of
$3.5 million and other long-term liabilities of $5.4 million.
On September 30, 2014, the Corporation amended and restated its Bank Facility Agreement with its existing lenders. Under
the terms of the amended agreement, the maximum amount available under the operating credit facility was amended
to a Canadian dollar limit of $95.0 million (down from $115.0 million) plus a United States dollar limit of $35.0 million, and
the addition of a £9.0 million limit with a maturity date of September 30, 2018. The Bank Facility Agreement also includes
a Canadian $50.0 million uncommitted accordion provision which provides Magellan with the option to increase the size
of the operating credit facility to $200.0 million. Extensions of the facility are subject to mutual consent of the syndicate of
lenders and the Corporation. Pursuant to the amendment of the Bank Facility Agreement, the guarantee of the facility by
the Chairman of the Board of the Corporation, which has supported the Corporation since 2005, was released. The credit
agreement was amended on December 4, 2015 to include a short term bridge credit facility that increased the operating
credit facility by US$10 million ($13.8 million at December 31, 2015). The bridge credit facility, which was arranged to
enhance liquidity following the Ripak acquisition, expired on March 4, 2016.
As at December 31, 2015, the Corporation had made contractual commitments to purchase $16.0 million of capital
assets. In addition, the Corporation also had purchase commitments, largely for materials required for the normal course
of operations, of $407.9 million as at December 31, 2015. The Corporation plans to fund 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 18, 2016, 58,209,001 common shares were outstanding and no
preference shares were outstanding. More information on the Corporation’s share capital is provided in note 16 of the
Corporation’s consolidated financial statements.
13
MAGELLAN 2015 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS December 31, 2015 On March 31, 2015, June 30, 2015, and September 30, 2015 the Corporation paid quarterly dividends on 58,209,001
common shares of $0.055 per common share, representing an aggregate dividend payment of $9.6 million. On December
31, 2015 the Corporation paid quarterly dividends on 58,209,001 common shares of $0.0575 per common share, amounting
to $3.4 million.
For the year ended December 31, 2014, the Corporation declared and paid dividends on common shares on March 31, 2014,
June 30, 2014 and on September 30, 2014 of $0.04 per share amounting to $7.0 million and on December 31, 2014 of
$0.055 per share amounting to $3.2 million.
In the first quarter of 2016, the Corporation declared cash dividends of $0.0575 per common share payable on March 31,
2016 to shareholders of record at the close of business on March 11, 2016.
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 subsidiaries may vary
on consolidation into the reporting currency of Canadian dollars. The Corporation from time to time may use 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 United States dollars. The counterparties to the foreign
currency contracts are all major financial institutions with high credit ratings. The Corporation had no material foreign
exchange contracts outstanding at December 31, 2015.
Off-Balance Sheet Arrangements
The Corporation does not have any off-balance sheet arrangements that have or reasonably are likely to have a material
effect on its financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources. As a result, the Corporation is not exposed materially to any financing, liquidity,
market or credit risk that could arise if it had engaged in these arrangements.
9. RELATED PARTY TRANSACTIONS
A summary of Magellan’s transactions with related parties
The Chairman of the Board of Directors of the Corporation provided a guarantee for the full amount of the Corporation’s
operating credit facility until September 30, 2014 at which time the guarantee was released. An annual fee of $0.6 million
was paid in consideration for the guarantee in 2014.
During the year, the Corporation incurred consulting costs of $0.1 million [2014 - $0.1 million] payable to a corporation
controlled by the Chairman of the Board of Directors of the Corporation.
14
MAGELLAN 2015 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS December 31, 2015 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
material and may impair the Corporation’s performance.
The following risks and uncertainties apply to the Corporation. Information relating to additional risks and uncertainties
are set forth in the Corporation’s Annual Information Form on SEDAR at www.sedar.com.
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
operations are focused on engineering and manufacturing aircraft components on new aircraft, selling spare parts
and performing repair and overhaul services on existing aircraft and aircraft components. Therefore, the Corporation's
business is directly affected by economic factors and other trends that affect the Corporation's customers in the aerospace
industry, including a possible decrease in outsourcing by aircraft operators and original equipment manufacturers
("OEMs"), decreased demand for air travel or projected market growth that may not materialize or be sustainable. The
price of fuel in the past has increased the pressure on the operating margins of aircraft companies which reduces their
ability to finance capital 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
policies; increased competition from other businesses, including new entrants in market segments in which we compete.
In 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.
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 cancellations or deferral of deliveries, lower availability of customer financing, downward pressure on selling
prices, increased inventory levels, decreased level of customer advances, slower collection of receivables, reduction
in production activities, discontinued production of certain products, termination of employees and adverse impacts
on the Corporation’s suppliers.
15
MAGELLAN 2015 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS December 31, 2015 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. Economic
uncertainty renders estimates of future revenues and expenditures more difficult 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.
The Corporation may be unable to successfully achieve or maintain "key supplier" status with OEMs, and may
be required to risk capital to achieve key supplier status.
Many OEMs are moving toward developing strategic partnerships with their key suppliers. Each key supplier provides
an array of integrated services including purchasing, warehousing and assembly for OEM customers. The Corporation
has been designated as a key supplier by some OEMs and is striving to achieve a higher level of integrated supply with
other OEMS. In order to achieve key status, the Corporation may need to expand the Corporation's existing capacities or
capabilities, and there is no assurance that the Corporation will be able to do so.
Many new aircraft and aircraft engine programs require that major suppliers become risk-sharing partners, meaning that
the cost of design, development and engineering work associated with the development of the aircraft or the aircraft
engine is partially born by the supplier, usually in exchange for a life-time agreement to supply those critical parts
once the aircraft or the aircraft engine is in production. In the event that the aircraft or the aircraft engine fails to reach
the production stage, inadequate number of units is produced, or actual sales otherwise do not meet projections, the
Corporation may incur significant costs without any corresponding revenues.
A reduction in defence spending by the United States or other countries could result in a decrease in revenue.
Over the last several years, 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 recurring 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 has led to reductions in spending, including defence spending. The United States defence spending
for 2015 remained constrained consistent with the previous year’s budget. In addition, the governments in Canada and
other countries have recognized the need to reduce defence spending. Worldwide spending on defence in 2016 to date,
while restrained, has stabilized. The primary driver to defence spending in 2016 to date continues to reflect the demands
on various countries that are affected by the current turmoil in Eastern Europe and the Middle East.
The United States is the principal purchaser under the F-35 program which represents a significant item in their budget.
Canada is also a participant in the F-35 program and has invested in an Advanced Composite Manufacturing Facility at
Magellan’s Winnipeg facility, primarily in support of the F-35 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 F-35 program have announced plans to delay orders for the F-35 aircraft. This is somewhat balanced by recent
announcements of new foreign military sales.
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 F-35
program, could materially adversely affect the Corporation's business and financial condition. The loss or significant
reduction in government funding of a large program in which the Corporation participates, such as the F-35 program,
could also materially adversely affect sales and earnings.
16
MAGELLAN 2015 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS December 31, 2015 Fluctuations in the value of foreign currencies could result in currency exchange losses.
A large portion of the Corporation's revenues and expenses are not currently denominated in Canadian dollars, and it
is expected that some revenues and expenses will continue to be based in currencies other than the Canadian dollar.
Therefore, fluctuations in the Canadian dollar exchange rate will impact the Corporation's results of operations and
financial condition from period to period. In addition, such fluctuations affect the translation of the Corporation's results
for purposes of its consolidated financial statements. The Corporation's activities to manage its currency exposure
may not be successful.
Cancellations, reductions or delays in customer orders may adversely affect the Corporation's results of operations.
The Corporation's overall operating results are affected by many factors, including the timing of orders from large
customers and the timing of expenditures to manufacture parts and purchase inventory in anticipation of future sales of
products and services. A large portion of the Corporation's operating expenses is relatively fixed. Because several of the
Corporation's operating locations typically do not obtain long-term purchase orders or commitments from customers, the
Corporation must anticipate the future volume of orders based upon the historic purchasing patterns of customers and
upon discussions with customers as to their anticipated future requirements. These historic patterns may be disrupted
by many factors, including changing economic conditions, inventory adjustments, work stoppages or labour disruptions.
Cancellations, reductions or delays in orders by a customer or group of customers could have a material adverse effect
on the Corporation's business, financial condition and results of operations.
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.
The main assumptions and estimates that were used in preparing the Corporation’s consolidated financial statements relate to:
Financial instruments
The valuation of the Corporation’s derivative instruments and certain other financial instruments requires estimation of the
fair value of each instrument at the reporting date. Details of the basis on which fair value estimated are provided in note
18 of the 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.
17
MAGELLAN 2015 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS December 31, 2015 In order to estimate the fair value of indefinite-lived intangible assets and goodwill resulting from business combinations,
the Corporation typically estimates future revenue, considers market factors and estimates future cash flows. Based on
these key assumptions, judgments and estimates, the Corporation determines whether to record an impairment charge
to reduce the value of the asset carried on the balance sheet to its estimated fair value. Assumptions, judgments and
estimates about future values are complex and often subjective. They can be affected by a variety of factors, including
external factors such as industry and economic trends, and internal factors such as changes in the Corporations business
strategy or internal forecasts. Although the Corporation believes the assumptions, judgments and estimates made in the
past have been reasonable and appropriate, different assumptions, judgments and estimates could materially affect our
reported financial results.
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
estimates 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 underlying these business plans are instrumental in determining the timing
of these repayments.
Employee benefits
The Corporation considers a number of factors in developing the pension assumptions, including an evaluation of
relevant discount rates, plan asset allocations, mortality, expected changes in wages and retirement benefits, analysis
of current market conditions, economic benefits available and input from actuaries and other consultants. Costs of the
programs 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 2015 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS December 31, 2015 12. CHANGES IN ACCOUNTING POLICIES
A description of accounting standards adopted in the current year
The Corporation has adopted the following new and amended standards in the current year.
Employee Benefits
In November 2013, Defined Benefit Plans: Employee Contributions was issued to amend IAS 19, Employee Benefits.
These narrow scope amendments simplify the accounting for contributions to defined benefit plans. These amendments
are effective for annual periods beginning on or after July 1, 2014, with earlier application permitted. The adoption of this
pronouncement on January 1, 2015 did not have an impact on the consolidated financial statements of the Corporation.
Operating Segment
The Annual Improvements to IFRSs 2010-2012 included amendments to IFRS 8, Operating Segments. This standard
has been amended to require (i) disclosure of judgments made by a company’s management in aggregating segments,
and (ii) a reconciliation of segment assets to the entity’s assets when segments are reported. These amendments are
effective for annual periods beginning on or after July 1, 2014. The adoption of this pronouncement on January 1, 2015
did not have an impact on the consolidated financial statements of the Corporation.
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, 2015, 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
periods starting on or after the effective dates as follows:
Leases
In 2016, the IASB issued IFRS 16, Leases (“IFRS 16”), replacing IAS 17, Leases and related interpretations. The standard
introduces a single on-balance sheet recognition and measurement model for lessees, eliminating the distinction
between operating and finance leases. Lessors continue to classify leases as finance and operating leases. IFRS 16
becomes effective for annual periods beginning on or after January 1, 2019, and is to be applied retrospectively. Early
adoption is permitted if IFRS 15, Revenue from Contracts with Customers (“IFRS 15”) has been adopted. The Corporation
is in the process of evaluating the impact that IFRS 16 may have on the Corporation’s consolidated financial statements.
Joint Arrangements
In 2014, the IASB issued amendments to IFRS 11, Joint Arrangements (“IFRS 11”) to address the accounting for acquisitions
of interests in joint operations. The amendments address how a joint operator should account for the acquisition of an
interest in a joint operation in which the activity of the joint operation constitutes a business. IFRS 11, as amended, now
requires that such transactions shall be accounted for using the principles related to business combinations accounting
as outlined in IFRS 3, Business Combinations. The amendments are to be applied prospectively and are effective
for annual periods beginning on or after January 1, 2016, with earlier application permitted. Upon adoption, these
amendments may impact the Corporation in respect of future sale or contribution of assets with its joint ventures.
19
MAGELLAN 2015 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS December 31, 2015
Revenue Recognition
In 2014, the IASB issued IFRS 15, Revenue from Contracts with Customers (“IFRS 15”), which supersedes IAS 18,
Revenue, IAS 11, Construction Contracts and other interpretive guidance associated with revenue recognition. IFRS
15 provides a single, principle based five-step model to be applied to all contracts with customers, except insurance
contracts, financial instruments and lease contracts, which fall in the scope of other IFRSs. In addition to the five-step
model, the standard specifies how to account for the incremental costs of obtaining a contract and the costs directly
related to fulfilling a contract. The incremental costs of obtaining a contract must be recognized as an asset if the entity
expects to recover these costs. The standard’s requirements will also apply to the recognition and measurement of gains
and losses on the sale of some nonfinancial assets that are not an output of the entity’s ordinary activities. IFRS 15 is to
be applied on either a full or modified retrospective approach and is effective for annual periods beginning on or after
January 1, 2018, with earlier application permitted. The Corporation is in the process of evaluating the impact that IFRS
15 may have on the Corporation’s consolidated financial statements.
Property, Plant and Equipment
In 2014, the IASB issued amendments to IAS 16, Property, Plant and Equipment (“IAS 16”) and IAS 38, Intangible Assets
(“IAS 38”) to clarify acceptable methods of depreciation and amortization. The amended IAS 16 eliminates the use of
a revenue-based depreciation method for items of property, plant and equipment. Similarly, amendments to IAS 38
eliminate the use of a revenue-based amortization model for intangible assets except in certain specific circumstances.
The amendments are to be applied prospectively and are effective for annual periods beginning on or after January 1,
2016, with earlier application permitted. The Corporation does not expect the amendments to have a material impact on
the Corporation’s consolidated financial statements.
Financial Instruments – Recognition and Measurement
In 2014, the IASB issued the final amendments to IFRS 9, Financial Instruments (“IFRS 9”) which provides guidance on
the classification and measurement of financial assets and liabilities, impairment of financial assets, and general hedge
accounting. The classification and measurement portion of the standard determines how financial assets and financial
liabilities are accounted for in financial statements and, in particular, how they are measured on an ongoing basis.
The amended IFRS 9 introduced a new, expected-loss impairment model that will require more timely recognition of
expected credit losses. In addition, the amended IFRS 9 includes a substantially-reformed model for hedge accounting,
with enhanced disclosures about risk management activity. The new standard is effective for annual periods beginning
on or after January 1, 2018, with earlier adoption permitted. The Corporation is in the process of evaluating the impact of
adopting these amendments on the Corporation’s consolidated financial statements.
Consolidated Financial Statements and Investments in Associates and Joint Ventures
In 2014, the IASB issued amendments to IFRS 10, Consolidated Financial Statements (“IFRS 10”) and IAS 28, Investments in
Associates and Joint Ventures (“IAS 28”) to address an acknowledged inconsistency between the requirements in IFRS 10
and those in IAS 28, in dealing with the sale or contribution of assets between an investor and its associate or joint venture.
The main consequence of the amendments is that a full gain or loss is recognised when a transaction involves a business
(whether it is housed in a subsidiary or not). A partial gain or loss is recognised when a transaction involves assets that do
not constitute a business, even if the assets are housed in a subsidiary. Upon adoption, these amendments may impact the
Corporation in respect of future sale or contribution of assets with its joint ventures.
20
MAGELLAN 2015 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS December 31, 2015 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, 2015 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, 2015, 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, 2015.
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.
21
MAGELLAN 2015 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS December 31, 2015 MANAGEMENT’S REPORT
December 31, 2015
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.
Phillip C. Underwood
President and Chief Executive Officer
March 18, 2016
Elena M. Milantoni
Chief Financial Officer and
Corporate Secretary
22
MAGELLAN 2015 ANNUAL REPORT
INDEPENDENT AUDITOR’S REPORT
December 31, 2015
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, 2015 and 2014, and the consolidated statements of
income and comprehensive income, changes in equity and cash flow for the years then ended, and a summary of significant
accounting policies and other explanatory information.
Management’s responsibility for the consolidated financial statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance
with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable
the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditors’ responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted
our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with
ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial
statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated finan-
cial 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 assessments, the
auditors consider internal control relevant to the entity’s preparation and fair presentation of the consolidated financial state-
ments in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of account-
ing policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall
presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for
our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Magellan
Aerospace Corporation as at December 31, 2015 and 2014, and its financial performance and its cash flows for the years
then ended in accordance with International Financial Reporting Standards.
Toronto, Canada
March 18, 2016
23
MAGELLAN 2015 ANNUAL REPORT
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
Expressed in thousands of Canadian dollars
Current assets
Cash
Restricted cash
Trade and other receivables
Inventories
Prepaid expenses and other
Non-current assets
Property, plant and equipment
Investment properties
Intangible assets
Goodwill
Other assets
Deferred tax assets
Total assets
Current liabilities
Accounts payable and 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 income
Total liabilities and equity
See accompanying notes to the consolidated financial statements
24
MAGELLAN 2015 ANNUAL REPORT
Notes
December 31
2015
December 31
2014
3
4
5
6
7
8
8
9
15
11
12,18
10
12
13
14
15
16
24
5,538
12,902
207,074
215,351
17,914
458,779
405,526
4,753
87,844
39,439
23,642
30,070
591,274
1,050,053
158,490
55,255
213,745
135,828
40,402
19,751
26,047
36,935
258,963
254,440
2,044
13,565
235,701
71,595
577,345
1,050,053
2,645
–
160,989
176,870
12,396
352,900
351,057
4,370
60,588
–
23,139
42,499
481,653
834,553
136,976
40,016
176,992
81,442
43,866
18,777
26,562
27,318
197,965
254,440
2,044
13,565
166,398
23,149
459,596
834,553
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Expressed in thousands of Canadian dollars, except per share amount
Notes
December 31
2015
December 31
2014
Revenues
Cost of revenues
Gross profit
Administrative and general expenses
Other
Income before interest and income taxes
Interest
Income before income taxes
Income taxes
Current
Deferred
Net income
Other comprehensive income (loss)
Other comprehensive income that may be reclassified to
profit and loss in subsequent periods:
Foreign currency translation
Items not to be reclassified to profit and loss in
subsequent periods:
20
21
22
27
23
15
15
951,466
787,087
164,379
56,739
932
106,708
6,260
100,448
7,363
13,662
21,025
79,423
843,036
709,254
133,782
48,221
574
84,987
7,887
77,100
4,991
15,537
20,528
56,572
24
48,446
14,504
Actuarial income (loss) on defined benefit pension plans, net of tax
15,19
2,832
130,701
(9,452 )
61,624
16
16
1.36
1.36
0.97
0.97
Comprehensive income
Net income per share
Basic
Diluted
See accompanying notes to the consolidated financial statements
25
MAGELLAN 2015 ANNUAL REPORT
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Expressed in thousands of Cannadian dollars
January 1, 2014
Net income
Other comprehensive (loss) income
Common share dividend
December 31, 2014
Net income
Other comprehensive income
Common share dividend
Share
capital
Contributed
surplus
Other
paid in
capital
Retained
earnings
Foreign
currency
translation
Total
equity
254,440
2,044
13,565
129,464
8,645
408,158
–
–
–
–
–
–
–
–
–
56,572
–
(9,452 )
14,504
56,572
5,052
(10,186 )
–
(10,186 )
254,440
2,044
13,565
166,398
23,149
459,596
–
–
–
–
–
–
–
–
–
79,423
2,832
(12,952 )
–
48,446
79,423
51,278
–
(12,952 )
December 31, 2015
254,440
2,044
13,565
235,701
71,595
577,345
See accompanying notes to the consolidated financial statements
26
MAGELLAN 2015 ANNUAL REPORT
Notes
December 31
2015
December 31
2014
79,423
45,007
1,909
(1,731 )
876
10,430
(420 )
(40,960 )
94,534
–
(75,495 )
(43,905 )
621
(12,902 )
(2,175 )
(133,856 )
46,967
10,134
276
(6,112 )
1,406
977
(12,952 )
40,696
1,374
2,645
1,519
5,538
56,572
35,300
1,097
(2,512 )
2,531
9,155
(306 )
(23,261 )
78,576
(326 )
–
(35,481 )
611
–
(5,945 )
(41,141 )
(35,964 )
8,515
–
(4,972 )
161
(501 )
(10,186 )
(42,947 )
(5,512 )
7,760
397
2,645
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
6,8
19
23
15
9
26
9
3
6
3
10
12
12
16
Net loss on disposal of assets
Decrease in defined benefit plans
Accretion
Deferred taxes
Income on investments in joint ventures
Increase in non-cash working capital
Net cash from operating activities
Cash flow from investing activities
Investment in joint venture
Business combinations
Purchase of property, plant and equipment
Proceeds from disposal of property, plant and equipment
Change in restricted cash
Increase in other assets
Net cash used in investing activities
Cash flow from financing activities
Increase (decrease) in bank indebtedness
Increase in debt due within one year
Increase in long-term debt
Decrease in long-term debt
Increase in long-term liabilities and provisions
Increase (decrease) in borrowings, net
Common share dividend
Net cash used in (provided by) financing activities
Increase (decrease) 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
27
MAGELLAN 2015 ANNUAL REPORT
1. SIGNIFICANT ACCOUNTING POLICIES
Description of Business
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 registered
and head office of the Corporation is located at 3160 Derry Road East, Mississauga, Ontario, Canada, L4T 1A9.
The Corporation is a diversified supplier of components to the aerospace industry and in certain circumstances for power
generation projects. Through its wholly owned subsidiaries, Magellan engineers and manufactures aeroengine and
aerostructure components for aerospace markets, including advanced products for defence and space markets, and
complementary specialty products. The Corporation also supports the aftermarket through the supply of spare parts as well
as through repair and overhaul services and in certain circumstances parts and equipment for power generation projects.
Statement of Compliance
These consolidated financial statements are prepared under International Financial Reporting Standards (“IFRS”) as
issued 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 18, 2016.
Basis of Presentation
The consolidated financial statements have been prepared on the historical cost basis except for certain financial
instruments, which are measured at fair value. These consolidated financial statements have been prepared using IFRS
principles applicable to a going concern, which contemplate the realization of assets and settlement of liabilities in the
normal course of business as they come due. All amounts are presented in Canadian dollars, unless otherwise indicated.
The Corporation’s significant accounting policies are set out below. These accounting policies have been applied
consistently to all periods presented in these consolidated financial statements and by all entities.
Basis of Consolidation
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 interest in its joint ventures. The financial
statements of entities consolidated have a reporting date of December 31. Entities over which the Corporation has
control are accounted for as subsidiaries. Control is achieved when the Corporation is exposed, or has rights, to variable
returns from its involvement with the entity and has the ability to affect those returns through its power over the entity.
Where the Corporation has the ability to exercise joint control, the entities are accounted for as joint ventures and are
incorporated into the consolidated financial statements using the equity 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. Trade receivables 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.
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MAGELLAN 2015 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars) Determination of Fair Value
Fair value is determined based on the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date. Fair value is measured using the assumptions
that market participants would use when pricing an asset or liability. Fair value is determined by using quoted prices
in active markets for identical or similar assets or liabilities. When quoted prices in active markets are not available, fair
value is determined using valuation techniques that maximize the use of observable inputs.
When observable valuation inputs are not available, significant judgment is required to determine fair value by assessing
the valuation techniques and valuation inputs. The use of alternative valuation techniques or valuation inputs may result
in a different fair value.
Foreign Currency Translation
The consolidated financial statements are presented in Canadian dollars, which is the Corporation’s functional currency.
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.
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 income before
interest and income taxes.
Revenue Recognition
Revenue is comprised of all sales of goods and rendering of services at the fair value of consideration received or
receivable 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 consignment 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
percentage-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
29
MAGELLAN 2015 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars) 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
arrangements are assessed to determine whether they can be separated into more than one unit of accounting or
element for the purpose of revenue recognition. When the appropriate criteria for separating revenue into more than
one unit of accounting is met and there is vendor specific objective evidence of fair value for all units of accounting or
elements in an arrangement, the arrangement consideration is allocated to the separate units of accounting or elements
based on each unit’s relative fair value. This vendor specific objective evidence of fair value is established through prices
charged for each revenue element when that element is sold separately. The revenue recognition policies described
above are then applied to each unit of accounting.
Advances and progress billings received on long-term contracts are deducted from related costs in inventories. Advances
and progress billings in excess of related costs are classified as deferred revenue.
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.
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.
Government Assistance
Government assistance is comprised of investment tax credits and scientific research and experimental development
tax credits. These credits are recognized when there is reasonable assurance of their recovery using the cost reduction
method. Investment tax credits are subject to the customary approvals by the pertinent tax authorities. Adjustments
required, if any, are reflected in the year when such assessments are received.
30
MAGELLAN 2015 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars) 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 19R, Employee Benefits. Actuarial gains and losses are
recognized in full in the period in which they occur, and are recognized in other comprehensive income and immediately
transferred to retained earnings. 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 statement with a corresponding increase in equity. The fair value is measured using an appropriate
valuation model taking into account the terms and conditions of the individual plans. The amount recognized as an
expense is adjusted to reflect the actual awards vesting except where any change in the awards 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.
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 payable in
respect of previous years.
Deferred tax assets and liabilities are established using the balance sheet liability method, providing for temporary
differences between the carrying amounts of the assets and liabilities for financial reporting purposes and the amounts
used for taxation purposes. Deferred tax liabilities are generally recognized for all taxable temporary differences and
deferred tax assets are recognized to the extent that it is probable that taxable profits will be available against which
deductible timing differences can be utilized.
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MAGELLAN 2015 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars) 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.
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 adjusted for the effect of any dilutive instruments and the weighted average diluted number of shares (ignoring any
potential issue of common shares which would be anti-dilutive) during the year.
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 of inventories is
estimated to be unrecoverable due to obsolescence, damage or declining selling prices. When circumstances that previously
caused inventories to be written down below cost no longer exist, the amount of the write-down previously recorded is reversed.
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 management,
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
32
MAGELLAN 2015 ANNUAL REPORT
in years
40
10-20
5-7
term of lease
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars)
The residual values, useful lives and depreciation methods pertaining to property, plant and equipment are regularly
assessed for relevance, at least at every statement of financial position date, and adjustments are made when necessary
to estimates used when compiling the consolidated 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.
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.
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.
Business Combinations and Goodwill
The Corporation accounts for business combinations using the acquisition method, under which the acquirer measures
the cost of the business combination as the total of the fair values, at the date of exchange, of the assets transferred,
liabilities incurred and equity instruments issued by the acquirer in exchange for control of the acquiree. Goodwill is
measured as the fair value of the consideration transferred, including the recognized amount of any non-controlling
interest in the acquiree, less the net recognized amount (generally the fair value) of the identifiable assets and liabilities
assumed, measured as at the acquisition date. The primary items that generate goodwill include the value of the synergies
between the acquired company and the Corporation and the value of the acquired assembled workforce, neither of
which qualifies for recognition as an intangible asset. Goodwill is assigned to one or more cash-generating unit on the
date of acquisition. Acquisition-related expenses and post-acquisition restructuring costs are recognized separately
from the business combination and are expensed as incurred.
Impairment of Non-Financial Assets
The carrying amounts of the Corporation’s non-financial assets, other than inventories and deferred tax assets, are
reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists,
then the asset or its CGUs recoverable amount is estimated. For the purpose of impairment testing, assets that cannot
be tested individually are grouped together into the smallest group of assets that generates cash inflows from continuing
use that are largely independent of the cash inflows of other assets or CGUs. Non-financial assets that have an indefinite
useful life such as goodwill and certain intangible assets, are not subject to amortization and are therefore tested annually
for impairment or more frequently if events or changes in circumstances indicate that the asset might be impaired.
33
MAGELLAN 2015 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars) An impairment loss is recognized if the carrying amount of an asset or its CGU exceeds its estimated recoverable
amount. The recoverable amount of an asset or CGU is the greater of its value in use and its fair value less costs to sell.
In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount
rate that reflects current market assessments of the time value of money and the risks specific to the asset or CGU. For
the purposes of goodwill impairment testing, goodwill acquired in a business combination is allocated to the CGU, or
the group of CGUs, that is expected to benefit from the synergies of the combination. Each CGU or group of CGUs to
which goodwill is allocated must represent the lowest level at which the goodwill is monitored for internal management
purposes and must not be, before allocating the goodwill, larger than an operating segment.
The Corporation’s corporate assets do not generate separate cash inflows and are utilized by more than one CGU.
Corporate assets are allocated to CGUs on a reasonable and consistent basis and tested for impairment as part of the
testing of the CGU to which the corporate asset is allocated.
Impairment losses are recognized in net income. Impairment losses recognized in respect of CGUs are allocated first to
reduce the carrying amount of any goodwill allocated to the CGUs, and then to reduce the carrying amounts of the other
assets in the CGU or group of CGUs on a pro rata basis of the carrying amount of each asset of the CGU that is subject
to the impairment test.
An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses recognized in
prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An
impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An
impairment loss is reversed only 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.
Leases
A lease is defined as an agreement whereby the lessor conveys to the lessee, in return for payment or a series of payments,
the right to use a specific asset for an agreed period of time. If substantially all the risks and rewards associated with
ownership of the leased asset are transferred to the lessee (finance lease for the lessee), the leased asset is recognized
in the lessee’s statement of financial position. The leased asset is recognized at its fair value as measured at the date
of acquisition, or at the present value of the minimum lease payments if lower. Assets held under finance leases are
depreciated on a basis consistent with similar owned assets or the lease term if shorter. Payments made under finance
leases are apportioned between capital repayments and interest expense charged to the income statement.
If the lessor retains the substantial risks and rewards (operating lease for the lessee), the leased asset is recognized
in the lessor’s statement of financial position. Payments made under operating leases are recognized in the income
statement on a straight-line basis over the term of the lease.
Financial Instruments
Financial assets
Financial assets include, in particular, cash and cash equivalents, trade receivables, loans and other receivables,
financial investments held to maturity, and non-derivative and derivative financial assets held for trading.
34
MAGELLAN 2015 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars) Financial assets are recognized at the contract date and initially measured in accordance with IAS 39, Financial
Instruments: Recognition and Measurement. The measurement of financial assets subsequent to initial recognition
depends on whether the financial instrument is held for trading, held to maturity, available-for-sale, or whether it falls in
the loans and receivables category. The assignment of an asset to a measurement category is performed at the time of
acquisition and is primarily determined by the purpose for which the financial asset is held.
Held for trading instruments are held at fair value. Changes in fair value are included in the income statement unless the
instrument is included in a cash flow hedge. If the instruments are included in a cash flow hedging relationships, which
are effective, changes in value are taken to equity. When the hedged forecast transaction occurs, amounts previously
recorded in equity are recognized in the income statement.
Held to maturity instruments are measured at amortized cost using the effective interest method.
Available-for-sale assets are held at fair value. Changes in fair value arising from changes in exchange rates are included
in the income 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 in 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.
35
MAGELLAN 2015 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars) Derivative financial instruments
The Corporation manages its foreign currency and interest rate exposures through the use of derivative financial instruments.
The Corporation’s policy is not to utilize derivative financial instruments for trading or speculative purposes. The Corporation’s
derivative contracts are 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.
Provisions
A provision is recognized when there is a present legal or constructive obligation, as a result of a past event, which
is more likely than not 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.
Share Capital
Common shares are classified as equity. Transaction costs directly attributable to the issue of common shares are
recognized as a deduction from equity, net of any income tax.
Estimates, Assumptions and Judgements
The preparation of consolidated 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 consolidated 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 consolidated financial statements affect the assessment
of net recoverable amounts, net realizable values and fair values, depreciation and amortization rates and useful lives,
value of intangible assets, ability to utilize tax losses and other tax measurements, determination of functional currency,
determination of the degree of control that exists in determining the corresponding accounting basis, and the selection
of accounting policies. Any changes in estimates and assumptions could have a material impact on the Corporation’s
future income and/or the amounts reported in its statement of financial position. The Corporation reviews its estimates
and assumptions on an ongoing basis and uses the most current information available and exercises careful judgement
in making these estimates and assumptions.
The main assumptions and estimates that were used in preparing the Corporation’s consolidated financial statements relate to:
Financial instruments
The valuation of the Corporation’s derivative instruments and certain other financial instruments requires estimation of the
fair value of each instrument at the reporting date. Details of the basis on which fair value estimated are provided in note 18 .
Impairments
The recoverable amount of intangible assets and property, plant and equipment is based on estimates and assumptions
regarding the expected market outlook and cash flows from each CGU or group of CGUs.
36
MAGELLAN 2015 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars) In order to estimate the fair value of indefinite-lived intangible assets and goodwill resulting from business combinations,
the Corporation typically estimates future revenue, considers market factors and estimates future cash flows. Based on
these key assumptions, judgments and estimates, the Corporation determines whether to record an impairment charge
to reduce the value of the asset carried on the balance sheet to its estimated fair value. Assumptions, judgments and
estimates about future values are complex and often subjective. They can be affected by a variety of factors, including
external factors such as industry and economic trends, and internal factors such as changes in the Corporations business
strategy or internal forecasts. Although the Corporation believes the assumptions, judgments and estimates made in the
past have been reasonable and appropriate, different assumptions, judgments and estimates could materially affect our
reported financial results.
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
estimates 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 underlying these business plans are instrumental in determining the timing of these repayments.
Employee benefits
The Corporation considers a number of factors in developing the pension assumptions, including an evaluation of
relevant discount rates, plan asset allocations, mortality, expected changes in wages and retirement benefits, analysis
of current market conditions, economic benefits available and input from actuaries and other consultants. Costs of the
programs 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.
37
MAGELLAN 2015 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars) 2. NEW AND AMENDED INTERNATIONAL FINANCIAL REPORATING STANDARDS
New and Amended International Financial Reporting Standards Adopted in 2015
The Corporation has adopted the following new and amended standards in the current year.
Employee Benefits
In November 2013, Defined Benefit Plans: Employee Contributions was issued to amend IAS 19, Employee Benefits.
These narrow scope amendments simplify the accounting for contributions to defined benefit plans. These amendments
are effective for annual periods beginning on or after July 1, 2014, with earlier application permitted. The adoption of this
pronouncement on January 1, 2015 did not have an impact on the consolidated financial statements of the Corporation.
Operating Segments
The Annual Improvements to IFRSs 2010-2012 included amendments to IFRS 8, Operating Segments. This standard
has been amended to require (i) disclosure of judgments made by a company’s management in aggregating segments,
and (ii) a reconciliation of segment assets to the entity’s assets when segments are reported. These amendments are
effective for annual periods beginning on or after July 1, 2014. The adoption of this pronouncement on January 1, 2015
did not have an impact on the consolidated financial statements of the Corporation.
New and Amended International Financial Reporting Standards to be Adopted in 2016 or Later
The following new standards and amendments to existing standards were issued by the IASB and are expected to be
adopted by the Corporation in 2016 or later.
Leases
In 2016, the IASB issued IFRS 16, Leases (“IFRS 16”), replacing IAS 17, Leases and related interpretations. The standard
introduces a single on-balance sheet recognition and measurement model for lessees, eliminating the distinction
between operating and finance leases. Lessors continue to classify leases as finance and operating leases. IFRS 16
becomes effective for annual periods beginning on or after January 1, 2019, and is to be applied retrospectively. Early
adoption is permitted if IFRS 15, Revenue from Contracts with Customers (“IFRS 15”) has been adopted. The Corporation
is in the process of evaluating the impact that IFRS 16 may have on the Corporation’s consolidated financial statements.
Joint Arrangements
In 2014, the IASB issued amendments to IFRS 11, Joint Arrangements (“IFRS 11”) to address the accounting for acquisitions
of interests in joint operations. The amendments address how a joint operator should account for the acquisition of an
interest in a joint operation in which the activity of the joint operation constitutes a business. IFRS 11, as amended, now
requires that such transactions shall be accounted for using the principles related to business combinations accounting
as outlined in IFRS 3, Business Combinations. The amendments are to be applied prospectively and are effective
for annual periods beginning on or after January 1, 2016, with earlier application permitted. Upon adoption, these
amendments may impact the Corporation in respect of future sale or contribution of assets with its joint ventures.
Revenue Recognition
In 2014, the IASB issued IFRS 15, Revenue from Contracts with Customers (“IFRS 15”), which supersedes IAS 18,
Revenue, IAS 11, Construction Contracts and other interpretive guidance associated with revenue recognition. IFRS
15 provides a single, principle based five-step model to be applied to all contracts with customers, except insurance
contracts, financial instruments and lease contracts, which fall in the scope of other IFRSs. In addition to the five-step
model, the standard specifies how to account for the incremental costs of obtaining a contract and the costs directly
38
MAGELLAN 2015 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars)
related to fulfilling a contract. The incremental costs of obtaining a contract must be recognized as an asset if the entity
expects to recover these costs. The standard’s requirements will also apply to the recognition and measurement of gains
and losses on the sale of some nonfinancial assets that are not an output of the entity’s ordinary activities. IFRS 15 is to
be applied on either a full or modified retrospective approach and is effective for annual periods beginning on or after
January 1, 2018, with earlier application permitted. The Corporation is in the process of evaluating the impact that IFRS
15 may have on the Corporation’s consolidated financial statements.
Property, Plant and Equipment
In 2014, the IASB issued amendments to IAS 16, Property, Plant and Equipment (“IAS 16”) and IAS 38, Intangible Assets (“IAS
38”) to clarify acceptable methods of depreciation and amortization. The amended IAS 16 eliminates the use of a revenue-
based depreciation method for items of property, plant and equipment. Similarly, amendments to IAS 38 eliminate the use of
a revenue-based amortization model for intangible assets except in certain specific circumstances. The amendments are to
be applied prospectively and are effective for annual periods beginning on or after January 1, 2016, with earlier application
permitted. The Corporation does not expect the amendments to have a material impact on the Corporation’s consolidated
financial statements.
Financial Instruments – Recognition and Measurement
In 2014, the IASB issued the final amendments to IFRS 9, Financial Instruments (“IFRS 9”) which provides guidance on
the classification and measurement of financial assets and liabilities, impairment of financial assets, and general hedge
accounting. The classification and measurement portion of the standard determines how financial assets and financial
liabilities are accounted for in financial statements and, in particular, how they are measured on an ongoing basis.
The amended IFRS 9 introduced a new, expected-loss impairment model that will require more timely recognition of
expected credit losses. In addition, the amended IFRS 9 includes a substantially-reformed model for hedge accounting,
with enhanced disclosures about risk management activity. The new standard is effective for annual periods beginning
on or after January 1, 2018, with earlier adoption permitted.The Corporation is in the process of evaluating the impact of
adopting these amendments on the Corporation’s consolidated financial statements
Consolidated Financial Statements and Investments in Associates and Joint Ventures
In 2014, the IASB issued amendments to IFRS 10, Consolidated Financial Statements (“IFRS 10”) and IAS 28, Investments in
Associates and Joint Ventures (“IAS 28”) to address an acknowledged inconsistency between the requirements in IFRS 10
and those in IAS 28, in dealing with the sale or contribution of assets between an investor and its associate or joint venture.
The main consequence of the amendments is that a full gain or loss is recognised when a transaction involves a business
(whether it is housed in a subsidiary or not). A partial gain or loss is recognised when a transaction involves assets that do
not constitute a business, even if the assets are housed in a subsidiary. Upon adoption, these amendments may impact
the Corporation in respect of future sale or contribution of assets with its joint ventures.
3. BUSINESS COMBINATIONS
Euravia
On May 15, 2015, the Corporation purchased all of the issued and outstanding shares of the capital stock of Euravia
Engineering & Supply Co. Limited (“Euravia”), an aviation company that provides maintenance, repair and overhaul
solutions for a wide range of aircraft and helicopter gas turbine engines. This acquisition in the United Kingdom
complements the Corporation’s existing repair and overhaul capabilities in North America.
39
MAGELLAN 2015 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars) The total consideration payable to the seller at closing was $67,467 in cash, or $56,404 net of cash acquired of $11,063.
Included in the cash consideration paid on the acquisition date, is an estimated contingent consideration payable of $6,256
to the seller of which $3,128 has been recorded in accounts payable and accrued liabilities and provisions and $3,128 has
been recorded in other long-term liabilities and provisions. The estimated contingent consideration payable is based on the
annual adjusted profit before interest and taxes of Euravia over a two year period, starting January 1, 2015.
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 2015, final valuations of the identifiable assets
acquired and liabilities assumed were completed.
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
Intangible assets
Goodwill
Current liabilities
Deferred tax liabilities
Cash in subsidiary acquired
Total purchase consideration1
1Includes amount of $6,256 deposited in an escrow account in connection with the acquisition
Amount
17,647
1,556
23,066
23,661
(4,818 )
( 4,708 )
56,404
11,063
67,467
The Corporation incurred acquisition-related costs of $523 relating to external legal fees, consulting fees and due
diligence costs that are included in administration and general expenses.
The goodwill recognized as part of the purchase is not deductible for tax purposes. The goodwill arising from the
acquisition is attributable to expected future income and cash-flow projections and synergies the Corporation expects to
achieve in combining the acquisition into its operations.
From the date of acquisition through December 31, 2015, the acquired business had total revenues of $19,359, and
net income of $2,313. If the transaction had occurred at the beginning of the year, consolidated revenues would have
been $962,252 and consolidated net income would have been $80,021. This pro forma information is for informational
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.
Ripak
Effective November 13, 2015, the Corporation acquired substantially all the assets of Lawrence Ripak Co. Inc. and Ripak
Aerospace Processing LLC (“Ripak”), an aerospace processing facility located in Long Island, New York, providing a full
range of non-destructive test (NDT) services, anodizing, plating, painting, shot peening and other processing services.
The total consideration paid by the Corporation was $30,216 in cash. Included in the cash consideration paid on the
acquisition date, is an estimated contingent consideration payable of $629, recorded in accounts payable and accrued
liabilities and provisions. The estimated consideration is subject to the achievement of a specific revenue objective over
the 12 month period following the close of the transaction.
40
MAGELLAN 2015 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars)
The purchase price allocation for the acquisition as set forth in the table below reflects various preliminary fair value estimates
and analyses, including preliminary work performed by third-party valuation specialists, which are subject to change within
the measurement period as valuations are finalized. The primary areas of the preliminary purchase price allocation that are
not yet finalized relate to the fair values of certain tangible assets and liabilities acquired, the valuation of intangible assets
acquired and residual goodwill. The Corporation expects to continue to obtain information to assist it in determining the fair
value of the net assets acquired at the acquisition date during the measurement period. Measurement period adjustments
that the Corporation determines to be material will be applied retrospectively to the period of acquisition.
Current assets
Non-current assets
Intangible assets
Goodwill
Current liabilities
Total purchase consideration1
1Includes amount of $3,723 deposited in an escrow account in connection with the acquisition
Amount
2,695
8,730
6,103
13,299
( 611)
30,216
The Corporation incurred acquisition-related costs of $218 relating to external legal fees, consulting fees and due
diligence costs that are included in administration and general expenses.
The goodwill recognized as part of the purchase is deductible for tax purposes. The goodwill arising from the acquisition
is attributable to expected future income and cash-flow projections and synergies the Corporation expects to achieve in
combining the acquisition into its operations.
From the date of acquisition through December 31, 2015, the acquired business had total revenues of $2,313 and
net income of $112. If the transaction had occurred at the beginning of the year, consolidated revenues would have
been $967,261 and consolidated net income would have been $79,392. This pro forma information is for informational
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
Trade receivables
Less allowance for doubtful accounts
Net trade receivables
Other receivables
December 31 December 31
2015 2014
164,069 124,566
884 276
163,185 124,290
43,889 36,699
207,074 160,989
Included in the above amounts are accrued receivables for construction contracts in progress at December 31, 2015 of
$13,322 [December 31, 2014 – $11,218].
41
MAGELLAN 2015 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars)
The following table presents the aging of gross trade receivables:
December 31, 2014
December 31, 2015
5. INVENTORIES
At December 31, 2014
At December 31, 2015
Less than
91-181
182-365
More than
Current
117,081
146,538
90 days
6,700
13,751
days
648
2,122
days
126
1,136
365 days
11
522
Total
124,566
164,069
Raw
materials
47,210
Work in
progress
111,097
Finished
goods
18,563
70,419
123,004
21,928
Total
176,870
215,351
The cost of inventories recognized as expense and included in cost of sales for the year ended December 31, 2015
amounted to $762,256 [2014 – $696,956].
During the year ended December 31, 2015, the Corporation recorded an impairment expense related to the write-down
of inventory in the amount of $1,844 [2014 – $306]. The Corporation also recorded reversals of previous write-downs of
inventory in the amount of $736 [2014 – $1,851] due to the sale of inventory previously provided for. The carrying amount
of inventory recorded at net realizable value was $22,587 as at December 31, 2015 [2014 – $18,441], with the remaining
inventory recorded at cost.
42
MAGELLAN 2015 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
Machinery
and
equipment
Tooling
Total
Cost
At December 31, 2013
Additions
Disposals and other
Foreign currency translation
At December 31, 2014
Additions
Acquisitions [Note 3]
Disposals and other
Foreign currency translation
At December 31, 2015
13,316
–
–
564
13,880
287
–
–
1,493
15,660
Accumulated depreciation and impairment
–
At December 31, 2013
Depreciation
Disposal and other
Foreign currency translation
At December 31, 2014
Depreciation
Disposal and other
Foreign currency translation
At December 31, 2015
Net book value
At December 31, 2014
At December 31, 2015
–
–
–
–
–
–
–
–
115,691
3,289
(19 )
3,378
122,339
6,321
–
(822 )
7,784
135,622
(35,743 )
(3,770 )
7
(1,319 )
(40,825 )
(4,043 )
318
(2,364 )
(46,914 )
435,174
30,307
(4,396 )
18,495
479,580
36,364
9,810
(10,263 )
53,248
568,739
(205,866 )
(20,240 )
2,485
(8,985 )
(232,606 )
(24,897 )
6,438
(24,385 )
(275,450 )
48,142
1,439
(10,260 )
3,150
42,471
1,619
–
(126 )
6,839
612,323
35,035
(14,675 )
25,587
658,270
44,591
9,810
(11,211 )
69,364
50,803
770,824
(38,774 )
(280,383 )
(2,595 )
10,188
(2,601 )
(33,782 )
(3,715 )
121
( 5,558 )
(42,934 )
(26,605 )
12,680
(12,905 )
(307,213 )
(32,655 )
6,877
(32,307 )
(365,298 )
13,880
15,660
81,514
88,708
246,974
293,289
8,689
7,869
351,057
405,526
As at December 31, 2014 and 2015, the Corporation did not have any assets under finance lease.
Included in the above are assets under construction in the amount of $10,528 [December 31, 2014 – $10,123], which as
at December 31, 2015 are not amortized.
43
MAGELLAN 2015 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars) 7. INVESTMENT PROPERTIES
At December 31, 2014
At December 31, 2015
Accumulated
depreciation
and
impairment
(6,775 )
Net
book value
4,370
(7,016 )
4,753
Cost
11,145
11,769
The Corporation’s investment properties consist of land and building. Depreciation expense recognized in relation to the
buildings in 2015 was $175 [2014 – $175].
The fair value of the Corporation’s investment properties was $15,673 at December 31, 2015 [December 31, 2014 - $12,000].
The fair value was determined through the use of the market comparable approach and discounted cash flows approach
which are categorized as a Level 3 in the fair value hierarchy. In 2015, the Corporation obtained opinions from
external valuators, with experience in the real estate market, on the fair value of $14,700 of the total fair values of the
Corporation’s investment properties.
44
MAGELLAN 2015 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars)
8. INTANGIBLE ASSETS AND GOODWILL
Technology
rights
Development
costs
Other
intangibles
Total
intangible
assets
Goodwill
Total
intangible
assets and
goodwill
Cost
At December 31, 2013
Additions
Disposals
Foreign currency translation
39,008
–
–
145
99,557
7,087
(92)
2,880
At December 31, 2014
39,153
109,432
Additions
Acquisitions [Note 3]
Disposals
Foreign currency translation
–
–
–
336
4,789
–
(287)
9,114
At December 31, 2015
39,489
123,048
Depreciation and impairment
At December 31, 2013
Depreciation
Foreign currency translation
At December 31, 2014
Depreciation
Disposals
Foreign currency translation
(21,724)
(2,346)
(69)
(24,139)
(2,961)
–
(181)
(56,476)
(5,368)
(2,014)
(63,858)
(7,091)
90
(6,020)
–
–
–
–
–
–
29,164
–
2,147
31,311
–
–
–
–
(1,767 )
–
(77 )
138,565
7,087
(92)
3,025
148,585
4,789
29,164
(287)
11,597
193,848
(78,200)
(7,714)
(2,083)
(87,997)
(11,819)
90
(6,278)
At December 31, 2015
(27,281)
(76,879)
(1,844 )
(106,004)
Net book value
At December 31, 2014
At December 31, 2015
15,014
12,208
45,574
46,169
–
29,467
60,588
87,844
–
–
–
–
–
–
36,960
–
2,479
39,439
–
–
–
–
–
–
–
–
–
138,565
7,087
(92)
3,025
148,585
4,789
66,124
(287)
14,076
233,287
(78,200)
(7,714)
(2,083)
(87,997)
(11,819)
90
(6,278)
(106,004)
60,588
39,439
127,283
Technology rights relate to an agreement which permits the Corporation to manufacture aerospace engine components
and share in the revenue generated by the final sale of the engine.
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 estimates the intangible assets to be amortized over a period of 1 to 21 years based on units of production.
Other intangibles relate to customer lists, brands and technical processes. Customer lists will be amortized over a 5 year
period and technical processes will be amortized over a 15 year period. Brands of $10,665 with indefinite useful lives
assets are not subject to amortization.
45
MAGELLAN 2015 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars)
As described in Note 1, the carrying values of goodwill and intangible assets with indefinite lives are tested for impairment
annually. The Corporation’s impairment test for goodwill and intangible assets with indefinite useful lives was based on
the recoverable amount determined on its value in use. The key assumptions used to determine the recoverable amount
are discussed below. The Corporation has not identified any indicators of impairment at any other date and as such has
not completed an additional impairment calculation.
In the assessment of impairment, management used industry guidance, historical data and past experience as the key
assumptions in the determination of the recoverable amount of the CGUs. The value in use was determined based on
the present value of the estimated free cash flows for the Euravia CGU. The cash flow projections, covering a five year
period plus a terminal year, were based on financial projections approved by management using assumptions that
reflect the Corporation’s most likely planned course of action, given management’s judgment of the most probable set
of economic conditions. A discount rate of 15.0% per annum was used, based on management’s best estimate of the
Corporation’s weighted average cost of capital adjusted for the risks facing the CGU. Annual growth rate of 2% was
used in the terminal year given the businesses’ anticipated growth. The recoverable amount was determined to be
higher than the carrying value including the goodwill.
9. INVESTMENTS IN JOINT VENTURES
The Corporation has interests in a number of individually immaterial joint ventures. The Corporation's joint ventures
are private entities that are not listed on any public exchange. All operations are continuing. To support the activities
of certain joint ventures, the Corporation and the other investors in the joint ventures have agreed to make additional
contributions, in proportion to their interests, to make up any losses, if required. In addition, profits of the joint ventures
are not distributed until the parties to the arrangement provide consent for distribution. The Corporation has no share of
any contingent liabilities or capital commitments in its joint ventures as at December 31, 2015 and December 31, 2014.
Balance, beginning of the year
Equity contribution
Share of total comprehensive income
Balance, end of the year
10. BANK INDEBTEDNESS
December 31
2015
5,328
–
421
5,749
December 31
2014
4,696
326
306
5,328
On September 30, 2014, 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 $95,000, a US dollar limit of
US$35,000 and a British Pound limit of £11,000 [$165,888 at December 31, 2015]. Under the terms of the amended
credit agreement, the operating credit facility expires on September 30, 2018. Extensions of the facility are subject
to mutual consent of the syndicate of lenders and the Corporation. The credit agreement also includes a Canadian
$50,000 uncommitted accordion provision which provides the Corporation with the option to increase the size of the
operating credit facility. The credit agreement was amended on December 4, 2015 to include a short term bridge
credit facility that increased the operating credit facility by a US dollar limit US$10,000 [$13,840 at December 31,
2015]. The bridge credit facility, which was arranged to enhance liquidity following the Ripak acquisition, expires
46
MAGELLAN 2015 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars) on March 4, 2016. Bank indebtedness as at December 31, 2015 of $135,828 [December 31, 2014 – $81,442] bears
interest at the bankers' acceptance or LIBOR rates plus 1.875% [2.53% at December 31, 2015 (2014 – bankers'
acceptance or LIBOR rates plus 2.0% or 2.87%)]. Included in the amount outstanding at December 31, 2015 is
US$32,524 [December 31, 2014 – US$15,946]. At December 31, 2015, the Corporation had drawn $139,366 under
the operating credit facility, including letters of credit totalling $3,538 such that $40,362 was unused and available. A
fixed and floating charge debenture on trade receivables, inventories and property, plant and equipment is pledged as
collateral for the operating credit facility.
11. ACCOUNTS PAYABLE, ACCRUED LIABILITIES AND PROVISIONS
Accounts payables
Accrued liabilities
Provisions [Note 14]
12. LONG-TERM DEBT
Property mortgages [a]
Other loans [b]
Less current portion
December 31
2015
December 31
2014
73,147
82,908
2,363
158,490
64,160
71,029
1,787
136,976
December 31
2015
15,962
29,114
45,076
4,674
40,402
December 31
2014
16,629
31,128
47,757
3,891
43,866
[a] Property mortgages include $1,975 (£968) [2014 – $2,061 (£1,141)] 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, 2015 was 1.4% [2014 – 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 fixed rate term mortgage, under which interest is charged at a 4.49% as at December 31,
2015. The mortgage is due in February 2018, with accrued interest and principal paid monthly. The mortgage is secured
by certain land and building. The principal amount outstanding at December 31, 2015 was $13,987 [2014 – $14,568].
47
MAGELLAN 2015 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars)
[b] Other loans include loans of $15,112 [2014 – $17,353] provided by governmental authorities (“Government Loans”)
that bear interest of approximately 1.25% to 2.00% [2014 – 1.75% to 3.82%]. The Government Loans mature during the
period of September 2016 and April 2024 with accrued interest and principal repayable monthly.
Included in other loans are bank loans aggregating $14,004 (US$10,118) [2014 – $13,690 (US$11,801)] (“Commercial Loans”)
to finance equipment over a ten year period maturing between December 2020 and December 2022. The Commercial 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, 2015 was 3.18% [2014 – 2.92%].
As at December 31, 2015, the Corporation has the availability to draw an additional $3,520 against the Government Loans.
13. BORROWINGS SUBJECT TO SPECIFIC CONDITIONS
The Corporation has received proceeds 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
return on the investment, are repayable as a percentage of the Corporation’s revenues. The Corporation has included in
borrowings subject to specific conditions the estimated amount of repayments in relation to the contributions received.
During 2015, the Corporation received $1,217 [2014 – $1,702] of government proceeds, of which $412 [2014 – $374] has
been credited to the related assets, $205 [2014 – $343] has been credited to the related expense and $600 [2014 – $985]
has been recorded in borrowings subject to specific conditions.
The proceeds are repayable as future royalty payments; a liability is recorded for the amounts received that will be repaid
based on future estimated sales. During 2015, the Corporation repaid $2,651 [2014 – $2,234]. As at December 31, 2015, the
Corporation has recognized $20,527 [2014- $21,320] as the amount repayable to government agencies. The Corporation
is eligible for additional government proceeds of $18,615 for the period from January 1, 2016 to March 31, 2018 based on
approved expenditures.
14. OTHER LONG-TERM LIABILITIES AND PROVISIONS
Net defined benefit plan deficits [Note 19]
Provisions
Other
Less current portion included in accounts payable, accrued
liabilities and provisions
December 31
2015
11,522
5,005
11,883
28,410
2,363
26,047
December 31
2014
16,285
4,279
7,785
28,349
1,787
26,562
48
MAGELLAN 2015 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars) The following table presents the movement in provisions:
At December 31, 2013
Additional provisions
Amount used
Unused amounts reversed
Unwind of discount
Foreign currency
At December 31, 2014
Additional provisions
Amount used
Unused amounts reversed
Unwind of discount
Foreign currency
At December 31, 2015
Warranty Environmental
2,696
1,244
Other
provisions
376
637
(636 )
(267 )
–
216
1,194
1,616
(447 )
(933 )
–
401
1,831
3
(5 )
(11 )
181
2
2,866
–
(65 )
–
116
8
2,925
126
(176 )
(126 )
–
19
219
186
–
(186 )
–
30
249
Total
4,316
766
(817 )
(404 )
181
237
4,279
1,802
(512 )
(1,119 )
116
439
5,005
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.
49
MAGELLAN 2015 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars)
15. 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
2015
7,363
–
7,363
16,494
( 2,832 )
13,662
2014
4,886
105
4,991
14,877
660
15,537
Total income tax expense
21,025
20,528
The Corporation’s consolidated effective tax rate for the year ended December 31, 2015 was 20.7% [2014 – 26.6%].
The difference in the effective tax rates compared to the Corporation’s statutory income tax rates were mainly
caused by the following:
Income before income taxes
2015
100,448
2014
77,100
Income taxes based on the applicable tax rate of 25.8% in 2015 and 2014
25,935
19,902
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
–
(328 )
(769 )
755
(4,568 )
21,025
(14 )
(234 )
196
714
(36 )
20,528
Changes in the deferred tax components are adjusted through deferred income tax expense except for $4,208
[2014 – $6,870] of investment tax credits which is adjusted through cost of revenues and $1,020 [2014 – $3,348] for
employee future benefits which is adjusted through other comprehensive income.
50
MAGELLAN 2015 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars) 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 (liabilities) assets
December 31
December 31
2015
7,153
36,511
3,906
(63,658 )
9,223
(6,865 )
2014
6,841
39,809
5,199
(55,575 )
18,907
15,181
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
2015
30,070
(36,935 )
2014
42,499
(27,318 )
The temporary difference associated with investments in subsidiaries and joint ventures, for which a deferred tax liability
has not been recognized aggregates to $366,804 [2014 – $283,328].
16. SHARE CAPITAL
The authorized capital of the Corporation consists of an unlimited number of preference shares, issuable in series, and
an unlimited number of common shares, with no par value.
Common shares
Issued and fully paid:
Number
Amount
Outstanding at December 31, 2014 and December 31, 2015
58,209,001
254,440
Net income per share
Net Income
Weighted average number of shares
Basic and diluted net income per share
2015
79,423
2014
56,572
58,209,001
58,209,001
1.36
0.97
Dividends declared
On March 31, 2015, June 30, 2015, and September 30, 2015 the Corporation paid quarterly dividends on 58,209,001
common shares of $0.055 per common share, amounting to $9,605. On December 31, 2015 the Corporation paid
quarterly dividends on 58,209,001 common shares of $0.0575 per common share, amounting to $3,347.
51
MAGELLAN 2015 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars) For the year ended December 31, 2014, the Corporation declared and paid dividends on common shares on March 31, 2014,
June 30, 2014 and on September 30, 2014 of $0.04 per share amounting to $6,985 and on December 31, 2014 of $0.055 per
share amounting to $3,201.
Subsequent to December 31, 2015, the Corporation declared dividends to holders of common shares in the amount of
$0.0575 per common share payable on March 31, 2016, for shareholders of record at the close of business on March 11, 2016.
17. STOCK-BASED COMPENSATION PLAN
The Corporation has an incentive stock option plan, which provides for the granting of options for the benefit of employees
and directors. The options include a cash option feature that 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. 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. As at December 31, 2015
and December 31, 2014, there were no options granted and outstanding. The maximum number of options for common
shares that is available to be granted under this plan is 1,673,341.
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 vested and paid upon issuance and the remaining Units are vested and paid out equally on the anniversary
date of issuance 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, 2015, 32,021 Units
were outstanding at an accrued value of $360 [December 31, 2014 – $582].
The Corporation recorded compensation expense in relation to the plans during the year of $368 [2014 – $440].
18. FINANCIAL INSTRUMENTS
Categories of financial instruments
Under IFRS, financial instruments are classified into one of the following categories: financial assets at fair value through
profit or loss, loans and receivables, available for sale financial assets, financial assets and liabilities held for trading,
financial liabilities at fair value through profit or loss, and other financial liabilities at amortized cost.
All financial instruments, including derivatives, are included on the consolidated statement of financial position,
which are measured at fair value except for loans and receivables and other financial liabilities, which are measured
at amortized costs. Held for trading financial investments are subsequently measured at fair value and all gains
and losses are included in net income in the period in which they arise. Available-for-sale financial instruments are
subsequently measured at fair value with revaluation gains and losses included in other comprehensive income until
the instruments are derecognized or impaired.
52
MAGELLAN 2015 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars) The carrying values of the Corporation’s financial instruments are classified as follows:
Fair value
through profit
or loss: Held for
trading1
2,645
Loans and
receivables2
160,989
Total financial
assets
163,634
Other financial
liabilities
(at amortize
cost)3
319,290
Total financial
liabilities
319,290
December 31, 2014
December 31, 2015
1 Includes cash and cash equivalents and forward foreign exchange contracts included in prepaid expenses and other
2 Includes trade receivables and loan receivables
3 Includes bank indebtedness, accounts payable and accrued liabilities, long-term debt, borrowings subject to specific conditions and trade receivable
409,727
409,727
225,514
207,074
18,440
securitization transactions
The Corporation has exposure to the following risks from its use of financial instruments:
- Market risk
- Credit risk
- Liquidity risk
This note presents information about the Corporation’s risks to each of the above risks, its objectives, policies and
processes for measuring and managing risk.
Market risk
Market risk is the risk that changes in the market prices, such as foreign exchange rates and interest rates, will affect
the Corporation’s income or the value of its holdings of financial instruments. The Corporation’s policy is not to utilize
derivative financial instruments for trading or 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 Directors 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 US dollars. As a result, the Corporation may experience transaction exposures because of the volatility
in the exchange rate between the Canadian and US dollar. Based on the Corporation’s current US denominated net
inflows as of December 31, 2015, fluctuations of +/- 1% would, everything else being equal, have an effect on net income
for the year ended December 31, 2015 of approximately +/- $78. The Corporation may experience translation exposures
on the consolidation of its US and European subsidiaries. Fluctuations of +/- 1% in the US dollar and British pound would,
everything else being equal, have an effect on other comprehensive income of approximately $3,991.
53
MAGELLAN 2015 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars) Interest rate risk
The Corporation is exposed to interest rate risk in its floating rate bank indebtedness. At December 31, 2015, $180,905
of the Corporation’s total debt portfolio is subject to movements in floating interest rates. In addition, a portion of the
Corporation’s trade receivables 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, 2015 by approximately +/- $1,683.
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 trade receivables. The maximum exposure to credit risk is equal to the carrying value of
the financial assets. The objective of managing credit risk is to prevent losses in financial assets. The Corporation is also
exposed to credit risk from the potential default by any of its counterparties on its foreign exchange forward contracts.
The Corporation mitigates this credit risk by dealing with counterparties who are major financial institutions that the
Corporation anticipates will satisfy their obligations under the contracts.
The Corporation, in the normal course of business, is exposed to credit risk from its customers, substantially all of which
are in the aerospace industry. The Corporation sells the majority of its products to large international organizations with
strong credit ratings. Therefore, the 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 trade receivables is reduced through the use of an allowance account and the amount of the loss
is recognized in the consolidated statements of income within administrative and general expenses. When a receivable
balance is considered uncollectible, it is written off against the allowance for doubtful accounts. 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 trade receivables through securitization programs or factoring transactions. During
2015, the Corporation sold receivables to various financial institutions in the amount of $344,104 [2014 – $287,282] for a
discount of $976 [2014 – $770] representing an annualized interest rate of 1.68% [2014 – 1.68%].
As at December 31, 2015, trade receivables include receivables sold and financed through securitization transactions of
$50,581 [2014 – $36,125] which do not meet the IAS 39 derecognition requirements as the Corporation continues to be
exposed to credit risk. These receivables are recognized as such in the consolidated 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 ongoing
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, trade receivables securitization program and cash provided by
54
MAGELLAN 2015 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars) operations. Based on current funds available and expected cash flow from operating activities, management believes
that the Corporation has sufficient funds available to meet its liquidity requirements at any point in time. However, if
cash from operating activities is lower than expected or capital costs for projects exceed current estimates, or if the
Corporation incurs major unanticipated expenses, it may be required to seek additional capital in the form of debt or
equity or a combination of both.
Contractual maturity analysis
The following table summarizes the contractual maturity of the Corporation’s financial liabilities. The table includes both
interest and principal cash flows.
Bank indebtedness
Long-term debt1
Equipment leases
Facility leases
Other long-term liabilities
Borrowings subject to
specific conditions
Interest payments
Year 1
–
55,255
568
2,906
5,365
776
64,870
1,227
Year 2
–
4,988
426
2,618
3,782
Year 3
135,828
5,512
284
2,214
290
69
686
11,883
144,814
1,105
977
Year 4
–
5,639
140
1,955
264
898
8,896
845
Year 5 Thereafter
–
–
Total
135,828
5,632
20,222
87
1,956
262
1,136
9,073
711
84
17,835
1,402
16,962
56,505
3,081
97,248
1,589
29,484
11,365
20,527
296,041
7,946
303,987
59,586
Total
1 The amount drawn on the Corporation’s trade receivables securitization program is included in long-term debt in the Year 1 category
145,791
66,097
12,988
9,784
9,741
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
methods and assumptions used to estimate the fair value of financial instruments are described as follows:
Cash, trade receivables, 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 had no material foreign exchange contracts outstanding at December 31, 2015.
55
MAGELLAN 2015 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars) Long-term debt
The fair value of the Corporation's long-term debt is $45,069 at December 31, 2015. The fair value was determined by
discounting the expected future cash flows based on current rates for debt with similar terms and maturities which is
categorized as a Level 2 in the fair value hierarchy.
Borrowings subject to specific conditions
The Corporation has recognized $19,751 as the amount repayable to Canadian government agencies. The contributions
are repayable as future royalty payments; a liability is recorded for the amounts received that will be repaid based on
future estimated sales.
Contingent considerations
The Corporation has recognized contingent considerations of $7,425 representing future amounts the Corporation
may be required to pay in conjunction with various business combinations. The ultimate amount of future payments
is based on specified future criteria, such as sales and earnings metrics. The Corporation estimates the fair value
of the contingent consideration liabilities related to the achievement of these metrics by assigning an achievement
probability to each potential milestone.
Collateral
As at December 31, 2015, the carrying amount of all of the financial assets that the Corporation has pledged as collateral
for its long-term debt facilities was $225,514.
Fair value hierarchy
The Corporation’s financial assets and liabilities recorded at fair value on the consolidated statement of financial position
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 2 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 3 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, 2015.
19. EMPLOYEE FUTURE BENEFITS
The Corporation provides retirement benefits through a variety of arrangements comprised principally of defined benefit
and defined contribution plans that cover a substantial portion of employees in accordance with local regulations and
practices. The most significant plans in terms of the benefits accrued to date by participants are career average and final
average earnings plans and around 78% of the obligations accrued to date come from defined benefit plans in Canada.
Defined Benefit Plans
Canada
The Canadian defined benefit plans comprise of both career average and final average earnings plans which provide
benefits to members in the form of a guaranteed level of pension payable for life. A majority of the plans are currently
closed to new entrants. The level of pensions in the defined benefit plans depends on the member’s length of service
56
MAGELLAN 2015 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars) and salary at retirement age for final average earnings plans and salary during employment for career average plans.
The defined benefit pension plans requires contributions to be made to a separate trustee-administered fund which
is governed by the Corporation. The Corporation is responsible for the administration of the plans assets and for the
definition of the investment strategy. The Corporation reviews the level of funding in the defined benefit pension plans on
an annual basis as required by local government legislation. Such review includes the asset-liability matching strategy
and investment risk management policy. Actuarial valuations are required at least every three years. Depending on the
jurisdiction and the funded status of the plan, actuarial valuations may be required annually. The most recent actuarial
valuations for the various pension plans were completed between December 31, 2013 and December 31, 2014.
Contributions are determined by the appointed actuary and cover the going-concern normal costs and deficits
(established under the assumption that the plan will continue to be in force) or solvency deficits (established under the
assumption that the plan stops its operations and is being liquidated), as prescribed by laws and actuarial practices. Under
the laws in effect, minimum contributions are required to amortize the going-concern deficits over a period of fifteen years
and solvency deficits over a period of five years. Temporary solvency relief measures put in place to mitigate the adverse
effects of the 2008 financial crisis allow for the amortization of solvency deficits over a period of up to ten years.
US
The US defined benefit plan provides benefits to members in the form of a guaranteed level of pension payable for life
at retirement, and is currently closed to future accrual of benefits. The benefit payments are from a trustee-administered
fund and plan assets held in trusts are governed by Internal Revenue Service (“IRS”) regulations. Responsibility for
governance of the plan, including investment decisions and contribution schedules, is also governed by IRS Regulations
and lies with the Corporation. Actuarial valuations are required annually. Contributions are determined by appointed
actuaries and cover normal cost and deficits as prescribed by law. Funding deficits are generally amortized over a
period of seven years.
Investment Policy
The overall investment policy and strategy for the defined benefit pension plans is guided by the objective of achieving
an investment return which, together with contributions, ensures that there will be sufficient assets to pay pension benefits
as they fall due while also mitigating the risks of the plans. See below for more information about the Corporation’s risk
management initiatives.
The target asset allocation is determined based on expected economic and market conditions, the maturity profile
of the plans’ liabilities, the funded status of the respective plans and the plan stakeholders’ tolerance to risk. Generally, the
Corporation aims to have a portfolio mix of a combined 5% in money market securities, 20% in non-traditional equities, 30%
in fixed income instruments and 45% in equity for the Canadian defined benefit plans and a portfolio mix of a combined
20% in cash, 35 % in fixed income instruments and 45% in equity for the US defined benefit plan. As the plans mature and
the funded status improves through cash contributions and anticipated excess equity returns, the Corporation intends to
reduce the level of investment risk by investing in more fixed-income assets that better match the liabilities.
Risk Management
The Corporation’s pension plans are exposed to various risks, including equity, interest rate, inflation, liquidity and
longevity risks. Several risk strategies and policies have been put in place to mitigate the impact these risks could have
on the funded status of defined benefit plans and on the future level of contributions by the Corporation. The following is
a description of key risks together with the mitigation measures in place to address them.
57
MAGELLAN 2015 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars) Equity risk
Equity risk is the risk that results from fluctuations in equity prices. This risk is managed by maintaining diversification of
portfolios across geographies, industry sectors and investment strategies.
Interest rate risk
Interest rate risk is the risk that results from fluctuations in the fair value of plan assets and liabilities due to movements
in interest rates. This risk is managed by reducing the mismatch between the duration of plan assets and the
duration of pension obligation.
This is accomplished by having a portion of the portfolio invested in long-term bonds. A decrease in corporate and/
or government bond yields will increase plan liabilities, which will be partially offset by an increase in the value of
the plans’ bond holdings.
Liquidity risk
Liquidity risk is the risk stemming from holding assets which cannot be readily converted to cash when needed for the
payment of benefits or to rebalance the portfolios. Liquidity risk is managed through investment in government bonds
and equity futures.
Longevity risk
Longevity risk is the risk that increasing life expectancy results in longer-than-expected benefit payments resulting in an
increase in the plans’ liabilities. This risk is mitigated by using the most recent mortality tables to set the level of contributions.
The Corporation obtains actuarial valuations for its accrued benefit obligations and the fair value of plan assets for
accounting purposes under IFRS as at December 31 of each year. In addition, the Corporation estimates movements
in its accrued benefit liabilities at the end of each interim reporting period, based upon movements in discount rates
and the rates of return on plan assets, as well as any significant changes to the plans. Adjustments are also made for
payments made and benefits earned.
Defined Contribution Plans
The Corporation's management, administrative and certain unionized employees may participate in defined contribution
pension plans. The Corporation contributes an amount expressed as a percentage of employees’ contributions with such
percentage varying by group.
The Corporation’s expenses for defined contribution plans amounted to $5,342 for the year ended December 31, 2015
[2014 – $4,718].
Other Benefit Plan
The Corporation has another benefit plan in the US which includes retiree medical benefits that contribute to the health
care coverage of certain employees and their beneficiates after retirement. The other benefit plan is currently closed
to new entrants. The post-retirement benefits cover all types of medical expenses including, but not limited to, cost of
doctor visits, hospitalization, surgery and pharmaceuticals. The other benefit plan also 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. The retirees contribute to the costs of the post-retirement medical
benefits. The plan is not pre-funded and costs are incurred as amounts are paid.
58
MAGELLAN 2015 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars)
The Corporation recognized total defined benefit costs related to its defined and other benefit plans as follows:
Current service cost
Net interest cost (benefit) on net
defined benefit liability (asset)
Past service cost
Other
Total defined benefit cost (benefit)
recognized in net income
2015
Defined
benefit plans
Other
benefit plan
2,552
524
119
430
3,625
–
(136 )
—
—
(136 )
Defined
benefit plans
2,160
2014
Other
benefit plan
–
131
–
532
2,823
635
–
–
635
The re-measurement components recognized in the statement of other comprehensive income for the Corporation’s
defined benefit plans comprise the following:
Actuarial (gains) losses
Return on pension assets (excluding amounts
in net interest on defined benefit schemes)
Based on adjustment of liability assumptions
Due to liability experience adjustment
Total defined benefit (income) cost
recognized in the statement of other
comprehensive income
Defined
benefit plans
(2,202 )
(495 )
(1,004 )
(3,701 )
2015
2014
Other
benefit plan
–
Defined
benefit plans
(4,706 )
Other
benefit plan
–
–
–
–
14,566
2,940
12,800
–
–
–
The following tables show the changes in the fair value of plan assets and the defined benefit obligation as recognized
in the consolidated financial statements for the Corporation’s benefit plans:
Changes in benefit plan assets of the Corporation’s benefit plans
Fair value, beginning of year
Interest income on plan assets
Actual return on assets (excluding interest
income on plan assets)
Employer contributions
Employee contributions
Benefit payments
Administration costs
Exchange differences
End of year
Defined
benefit plans
108,313
4,244
2,255
5,356
303
(6,660 )
(548 )
1,495
114,758
2015
Other
benefit plan
–
Defined
benefit plans
99,635
2014
Other
benefit plan
–
–
–
–
–
–
–
–
4,726
4,715
5,310
312
(6,175 )
(848 )
638
108,313
–
–
–
–
–
–
–
59
MAGELLAN 2015 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars)
Changes in the benefit plan obligations of the Corporation’s benefit plans
Beginning of year
Current service cost
Interest cost (income)
Employee contributions
Actuarial losses (gains) in
other comprehensive income from:
Changes in demographic assumptions
Changes in financial assumptions
Experience adjustments
Benefit payments
Plan amendments and curtailments
Exchange difference
End of year
2015
2014
Defined
benefit plans
Other
benefit plan
Defined
benefit plans
Other
benefit plan
124,302
2,552
4,768
303
(48 )
(1,115 )
(495 )
(6,660 )
119
1,886
125,612
1,346
–
(136 )
–
–
–
–
(181 )
–
234
1,263
105,148
2,160
4,857
312
1,301
12,934
2,940
(6,175 )
–
825
124,302
966
–
635
–
–
–
–
(356 )
–
101
1,346
Reconciliation of funded status of benefit plans to amounts recorded in the consolidated financial statements
Fair value of plan assets
Accrued benefit obligation
Net defined benefit liability
Included in other long-term
liabilities and provisions
Included in other assets
2015
Defined
benefit plans
114,758
Other
benefit plan
–
Defined
benefit plans
108,313
(125,612 )
(10,854 )
(11,523 )
(1,263 )
(1,263 )
(1,263 )
(124,302 )
(15,989 )
(16,285 )
2014
Other
benefit plan
–
(1,346 )
(1,346 )
(1,346 )
669
–
296
–
The Corporation expects to contribute approximately $5,620 in 2016 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.
60
MAGELLAN 2015 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars) Significant assumptions and sensitivity analysis
The significant actuarial assumptions adopted in measuring the Corporation's accrued benefit obligations represent
management’s best estimates reflecting the long-term nature of employee future benefits and are as follows
[weighted-average assumptions as at December 31]:
Discount rate
Rate of compensation increase
Mortality Table
2015
Defined
benefit plans
Other
benefit plan
4.0%
4.0%
Defined
benefit plans
3.9%
2014
Other
benefit plan
3.9%
2.9%
–
2014 CPM Private Sector Mortality
Table projection with CPM Scale B
(with size adjustment)
2.9%
–
2014 CPM Private Sector Mortality
Table projection with CPM Scale B
(with size adjustment)
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, 2015, a 1.0% decrease in the discount
rate used (all other assumptions remaining unchanged) could result in a $19,466 increase in the pension benefit obligation
with a corresponding charge recognized in other comprehensive income in the year.
The Corporation funds health care benefit costs, shown under other benefit plan, as a pay as you go basis. For
measurement purposes, a 5.0% to 10.0% annual rate of increase in the per capita cost of covered health care and
dental benefits was assumed for 2015. 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, 2015 was nominal.
Assets
The weighted average asset allocations of the defined benefit plans at the measurement date, by asset category, are as follows:
Equity investments
Fixed income investments
Other investments
Defined benefit pension liability term
Defined benefits schedule for disbursement within 12 months
Defined benefits schedule for disbursement within 2-5 years
Defined benefits schedule for disbursement after 5 years or more
2015
81%
15%
4%
100%
2014
80%
16%
4%
100%
Amount
5,527
18,248
44,390
61
MAGELLAN 2015 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars) 20. SEGMENTED INFORMATION
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 includes 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:
Sale of goods
Construction contracts
Services
2015
808,552
35,713
107,201
951,466
2014
711,984
61,374
69,678
843,036
At December 31, 2015, aggregate costs incurred under open construction contracts and recognized profits,
net of recognized losses, amounted to $351,672 [December 31, 2014 – $335,440]. Advance payments received for
construction contracts in progress at December 31, 2015 were $3,439 [December 31, 2014 – $2,521]. Retentions
in connection with construction contracts at December 31, 2015 were $29 [December 31, 2014 – $1,160]. Advance
payments and retentions are included in accounts payable, accrued liabilities and provisions.
Revenues from the Corporation’s two largest customers accounted for 37.1% of total sales for the year ended December
31, 2015 [December 31, 2014 – two largest customers accounted for 34.6% of total sales].
Geographic segments:
Revenues
Export revenues1
2015
2014
Canada
330,444
United
States
333,074
Europe
287,948
Total Canada
325,218
951,466
United
States
272,646
Europe
Total
245,172 843,036
242,715
81,223
65,092 389,030 203,448
68,199
23,382 295,029
1Export revenue is attributed to countries based on the location of the customers
Canada
United
States
Europe
Total Canada
United
States
Europe
Total
2015
2014
Property, plant and equipment,
intangible assets and goodwill
169,853
208,516
157,581 535,950
179,881
146,722
85,042
411,645
62
MAGELLAN 2015 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars) 21. COST OF REVENUES
Operating expenses
Amortization
Investment tax credits
Impairment (reversal) of inventories
22. ADMINISTRATIVE AND GENERAL EXPENSES
Salaries, wages and benefits
Administration and office expenses
Professional services
Amortization
23. INTEREST EXPENSE
Interest on bank indebtedness and long-term debt [Notes 10 and 12]
Accretion charge on long-term debt and borrowings
Discount on sale of trade receivables
2015
748,337
41,849
(4,206 )
1,107
787,087
2014
690,294
27,315
(6,810 )
(1,545 )
709,254
2015
35,260
16,192
3,497
1,790
56,739
2015
4,456
876
928
6,260
2014
30,588
13,831
2,255
1,547
48,221
2014
4,586
2,531
770
7,887
63
MAGELLAN 2015 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars)
24. OTHER COMPREHENSIVE INCOME (LOSS)
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 gains
for the year ended December 31, 2015 of $48,446 [2014 – $14,504] and net actuarial gains on defined benefit plans of
$2,832 [2014 – loss of $9,452]. These gains and losses are reflected in the consolidated statement of financial position
and had no impact on net income for the year.
25. RELATED PARTY DISCLOSURE
Transactions with related parties
The Chairman of the Board of Directors of the Corporation provided a guarantee for the full amount of the Corporation’s
operating credit facility until September 30, 2014 at which time the guarantee was released. An annual fee of $575 was
paid in consideration for the guarantee in 2014.
During the year, the Corporation incurred consulting costs of $100 [2014 – $100] payable to a corporation controlled by
the Chairman of the Board of Directors of the Corporation.
Key management personnel
Key management includes members of the Board of Directors 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
2015
3,213
299
225
3,737
2014
3,136
226
352
3,714
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.
64
MAGELLAN 2015 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars) 26. SUPPLEMENTARY CASH FLOW INFORMATION
Net change in non-cash working capital
Trade receivables
Inventories
Prepaid expenses and other
Accounts payable, accrued liabilities and provisions
Interest paid
Income taxes paid
27. ADDITIONAL FINANCIAL INFORMATION
2015
2014
(19,148 )
(11,991 )
(3,943 )
(5,878 )
(40,960 )
5,406
5,634
(8,438 )
(10,267 )
361
(4,917 )
(23,261 )
5,443
3,295
Included in other expenses is a foreign exchange gain of $977 [2014 – $523] on the conversion of foreign currency
denominated working capital balances and debt.
28. MANAGEMENT OF CAPITAL
The Corporation’s objective is to maintain a capital base sufficient to maintain investor, creditor and market confidence
and to sustain future development of the business. Management defines capital as the Corporation’s shareholders’
equity and interest bearing debt.
As at December 31, 2015, total managed capital was $808,830, comprised of shareholders’ equity of $577,345 and
interest-bearing debt of $231,485.
The Corporation manages its capital structure and makes adjustments to it in light of economic conditions, the risk
characteristics of the underlying assets and the Corporation’s working capital requirements. In order to maintain or adjust
its capital structure, the Corporation, upon approval from its Board of Directors, may issue or repay long-term debt, issue
shares, repurchase shares through the normal course issuer bid, pay dividends or undertake other activities as deemed
appropriate under the specific circumstances. The Board of Directors reviews and approves any material transactions
out of the ordinary course of business, including proposals on acquisitions or other major investments or divestitures,
as well as capital and operating budgets. Based on current funds available and expected cash flow from operating
activities, management believes that the Corporation has sufficient funds available to meet its liquidity requirements at
any point in time. However, if cash from operating activities is lower than expected or capital costs for projects exceed
current estimates, or if the Corporation incurs major unanticipated expenses, it may be required to seek additional capital
in the form of debt. 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, 2015 the Corporation was
in compliance with these covenants.
65
MAGELLAN 2015 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(unless otherwise stated, all amounts are in thousands of Canadian dollars) 29. 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
contingencies would not have a material adverse effect on the financial position of the Corporation.
At December 31, 2015, capital commitments in respect of purchase of property, plant and equipment totalled $16,018,
all of which had been ordered. There were no other material capital commitments at the end of the year.
66
MAGELLAN 2015 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(unless otherwise stated, all amounts are in thousands of Canadian dollars) BOARD OF DIRECTORS AND EXECUTIVE OFFICERS
December 31, 2015
EXECUTIVE OFFICERS
BOARD OF DIRECTORS
COMMITTEES OF THE BOARD
(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:
Larry G. Moeller
(5) Pension Committee
Chairman:
Bruce W. Gowan
N. Murray Edwards
Chairman
James S. Butyniec
Vice Chairman
Phillip C. Underwood
President and
Chief Executive Officer
Elena M. Milantoni
Chief Financial Officer and
Corporate Secretary
Daniel R. Zanatta
Vice President,
Business Development,
Marketing and Contracts
Larry A. Winegarden
Vice President,
Corporate Strategy
Jo-Ann C. Ball
Vice President,
Human Resources
Karen Yoshiki-Gravelsins
Vice President,
Corporate Stewardship and
Operational Excellence
Mark Allcock
Vice President,
Information Technology
N. Murray Edwards (5)
Chairman
Magellan Aerospace Corporation
Mississauga, Ontario
James S. Butyniec
Vice Chairman
Magellan Aerospace Corporation
Mississauga, Ontario
Phillip C. Underwood
President and Chief Executive Officer
Magellan Aerospace Corporation
Mississauga, Ontario
Beth M. Budd Bandler (2, 4)
President
Beth Bandler Professional Corporation
Toronto, 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)
Corporate Director
Toronto, Ontario
Bruce W. Gowan (1, 2, 3, 5)
Corporate Director
Huntsville, Ontario
Larry G. Moeller (4)
President
Kimball Capital Corporation
Calgary, Alberta
Steven Somerville (1, 3, 4, 5)
President
Kerr Industries Limited
Oshawa, Ontario
67
MAGELLAN 2015 ANNUAL REPORT
OPERATING FACILITIES DIRECTORY & SHAREHOLDER INFORMATION
December 31, 2015
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
Tuesday, May 10th, 2016 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
165 Field Street,
West Babylon, New York 11704
Tel: 631 694 1818
7/8 Lyon Road, Wallisdown,
Poole, Dorset BH12 5HF
Tel: 01202 535536
11 Tullykevin Road
Greyabbey, County Down
BT22 2QE
Tel: 02842 758231
Amy Johnson Way
Blackpool Business Park,
Blackpool, FY4 2RP
Tel: 01253 345466
159 Grassy Plain Street, Route 53,
Bethel, Connecticut 06801
Tel: 203 798 9373
Colne Road, Kelbrook
Lancashire, BB18 6SN
Tel: 01282 844480
20 Computer Drive,
Haverhill, Massachusetts 01832
Tel: 978 774 6000
2320 Wedekind Drive,
Middletown, Ohio 45042
Tel: 513 422 2751
5170 West Bethany Road,
Glendale, Arizona 85301
Tel: 623 931 0010
5401 West Luke Avenue,
Glendale, Arizona 85311
Tel: 623 939 9441
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
68
MAGELLAN 2015 ANNUAL REPORT
Magellan Aerospace
3160 Derry Road East
Mississauga, ON Canada L4T 1A9
www.magellan.aero