A n n u a l
R e p o r t
L E T T E R T O S H A R E H O L D E R S
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.
In this past year 2016, the Corporation reached a major
milestone, achieving annual revenues in excess of $1 billion,
a goal which we had previously identified as one of our
primary objectives. While achieving the revenue goal was
noteworthy we continued to show improvements in our
financial performance and in executing to our customers’
needs. The Corporation’s sustaining improvements in overall
performance is a strong indicator that we are on the right
path for growth and continued success.
our industry accepts and meets the market demands for
delivering “defect free” products and achieving 100% on time
delivery performance. In order to remain successful we must
improve and sustain our performance to these expectations.
Also, it remains a key objective of ours to accelerate our
growth through acquisitions which complement and support
our strategic plans. In the coming year, we will be applying
a significant amount of management focus and energy in
fulfilling these objectives.
As we continue our transition into a highly competitive
global environment it is recognized that we must balance
our needs for continued investment internationally with a
strong commitment to maintaining our core capabilities. In
the end Magellan sells expertise developed by, and with,
our employees which we look to apply as efficiently and
as cost effectively as we can in support of our customers’
requirements. In 2017 we need to explore the means
and methods which will facilitate improvements in our
employee communications and engagement as we rely
on our employees continued commitment as a keystone
to our success.
In closing, I am optimistic and excited to lead Magellan as
we continue to capitalize on growth and improvement
opportunities. We are moving into 2017 well positioned
to continue to demonstrate sustainable profitable growth
beneficial to all our stakeholders.
Phillip C. Underwood
President and Chief Executive Officer
March 3, 2017
“ Before we move too far along in this message I would like
to take this opportunity to express my appreciation to our
employees worldwide for their continued commitment
and support. It is our employees who apply their skills in
helping us achieve the results and performance levels
that our shareholders and customers require from us in
this demanding environment.”
Throughout 2015 and 2016, we continued to develop and
evolve our strategic plans, taking the required actions to
ensure that our plans continue to stay aligned with those of our
primary customers. This process is dynamic and demanding
and one which will be an ongoing challenge as we move
forward in what is indeed a globally competitive environment.
In last year’s message I emphasized that our management
team would focus on a number of key strategies and I am
pleased to report that we are achieving success through
these initiatives.
We focused on continuing to improve our operational
performance and our strong commitment to support our
customers. We are prepared to invest in technology, capability
and capacity and this commitment together with our
performance has helped us to secure new work opportunities
and extend current contracts into long term agreements.
While we have achieved success in 2016, it will be necessary
for Magellan to continue to improve on our performance in
2017. Customers require and are rightfully demanding that
1
MAGELLAN 2016 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2016
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, 2016 and 2015 prepared in accordance with International
Financial Reporting Standards (“IFRS”), and the Annual Information Form for the year ended December 31, 2016 (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, 2016 relative to the year ended December 31, 2015. The information
contained in this report is as at March 3, 2017. 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,” “2016 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 2016 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.
2
MAGELLAN 2016 ANNUAL REPORT 1. OVERVIEW
A summary of Magellan’s business and significant 2016 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.
During 2016 the Corporation focused on reorganizing and transitioning the Business Development Organization. This
completed reorganization provides the Corporation with capable resources leading pro-active sales capture strategies
for Magellan’s key commodity groups; Aerostructures, Aeroengine, Castings, Maintenance, Repair and Overhaul (“R&O”),
and Proprietary Products. The rollout of Magellan’s sales strategy has been aligned with its customers’ needs and is fully
integrated with its site operations. Recent program award announcements are solid indicators that this realigned business
focus is helping to support Magellan’s vision of continued profitable growth. In this past year Magellan continued to rely
on the Magellan Operating System (“MOS™”) to drive continuous improvements in cash generation and profitability
highlighted by the Corporation reaching a new milestone of $1.0 billion in annual revenues.
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, R&O and sale of systems and components for
defence and civil aviation. 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.
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.
Within the aerostructures product grouping, the Corporation supplies international customers by producing components 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 R&O services for jet engines and related components.
In 2016, 73% of revenues were derived from commercial markets (2015 – 75%, 2014 – 77%) while 27% of revenues related
to defence markets (2015 – 25%, 2014 – 23%).
3
MAGELLAN 2016 ANNUAL REPORTMANAGEMENT’S DISCUSSION AND ANALYSIS December 31, 2016 2016 and Recent Updates
–
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 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,
should be available later in 2017 to retrofit older R66 helicopters through Magellan’s authorized distributors.
–
–
–
–
The Corporation announced on May 2, 2016, a contract extension between Magellan and Airbus for the supply of
aluminium and titanium structural wing components from its facilities in the United Kingdom (“UK”), Poland and its
joint ventures in India. This contract, valued at approximately $700 million, is comprised of precision machined details
and assemblies for use on the A320 Family, the A330 Family, and the A380 program. In addition to the contract
extension for the machined components, Magellan was awarded a contract to supply certain A380 wing ribs to Airbus
valued at approximately $20 million.
An announcement was made on May 10, 2016 that an agreement had been reached between Magellan and GKN
Aerospace for a contract extension to deliver precision aluminium and titanium components and assemblies to GKN
Aerospace’s Filton facility where complex wing structures are manufactured and assembled for the A320, A330 and
A380 aircraft programs. This contract extension is projected to generate revenues in excess of $130 million through to
December 2020 and the components and assemblies will be supplied from Magellan facilities located in the UK and
Poland and its joint ventures in India. Magellan was also awarded a new contract to supply A350 outboard flap precision
machine details and assemblies. This new contract is projected to generate revenues of $36 million to December 2020.
On May 26, 2016, Magellan signed a Memorandum of Understanding with ATLAS ELEKTRONIK sealing intent to
collaborate on the development of the rocket motor and warhead sections of the SeaSpider® Anti-Torpedo-Torpedo.
SeaSpider® will combine the best technology and decades of experiences on the expertise of ATLAS ELEKTRONIK
in naval systems like the SeaHake® mod4 heavyweight torpedo and the leading rocket technology of Magellan as
chosen by NASA. This pairing will leverage Canadian and German innovation and technology to develop effective
“hard-kill” torpedo defence with the world’s leading Anti-Torpedo-Torpedo. Magellan and ATLAS ELEKTRONIK
CANADA will enter the global market of naval defence with a revolutionary underwater rocket motor for SeaSpider®
that will define the world standard and support diversity in a key Canadian aerospace capability. This industrial effort
seeks to secure and create long-term Canadian employment in the naval defence space. ATLAS ELEKTRONIK
CANADA, located in Victoria, BC, will build up capability in project management, research and development and
work with Magellan’s facilities located in Winnipeg and Rockwood, Manitoba. ATLAS ELEKTRONIK Naval Weapons
Division in Wedel, Germany will provide ongoing support.
The Corporation announced on October 13, 2016 the signing of new long-term contracts for the supply of complex
titanium machined components for the 777X program with Boeing Commercial Airplanes (“Boeing”). These components
will be manufactured by Magellan’s facilities located in New York and Kitchener. In addition to the new contract
awards, Magellan and Boeing agreed to a long term contract extension on Magellan’s existing 787 Dreamliner program
statement of work, produced at its New York facilities. The new long-term 777X contracts and the 787 extension period
will take effect in 2017. In securing these agreements Magellan has met Boeing’s customer affordability goals through
the Partnering for Success program on these new long term contracts.
4
MANAGEMENT’S DISCUSSION AND ANALYSIS December 31, 2016MAGELLAN 2016 ANNUAL REPORT –
–
–
–
Magellan announced on October 27, 2016 that it will be producing F-35 Lightning II horizontal tail assemblies under
an agreement with BAE Systems. The agreement is the continuation of annual contract awards made to Magellan by
BAE Systems for F-35 assemblies, valued at more than $70 million over a two year period. Magellan and BAE Systems
have been working together to produce horizontal tails for the global F-35 program for almost a decade, signing the
original Letter of Intent for this agreement at the Farnborough Air Show in 2006. Building on that initial commitment,
both companies have since made significant investment in the facilities, technologies and training to ensure the
successful delivery of these flight-critical assemblies to the customer. The horizontal tail assemblies produced at
Magellan will be used on the Conventional Takeoff and Landing variant of the F-35. At present, Magellan plans to
produce more than 1,000 ship sets of horizontal tail assemblies over the life of the F-35 program.
An announcement was made on October 31, 2016, of the successful launch, and return to earth, of three Canadian
student space microgravity science experiments aboard Mission 8 of the U.S.-based Student Spaceflight Experiments
Program (“SSEP”). The experiments were delivered to the International Space Station (“ISS”) by the SpaceX CRS-
9 mission. The SSEP is a unique, immersive program that gives students the ability to design and propose real
microgravity experiments to fly in low earth orbit in the ISS. Two of the three participating Canadian school communities
were sponsored by Magellan at the University of Toronto, Toronto District School Board, and Ryerson University,
Toronto, Ontario. Magellan’s national SSEP partnership serves to increase the opportunity for Canadian communities
to participate in the SSEP. The program utilizes the funding provided by the Corporation to bridge funding shortfalls
for student communities that would otherwise be unable to participate. The Corporation has been a supporter of the
SSEP since it expanded into Canada in 2012. Since that time Magellan has sponsored school communities, and
engaged over 1,225 Canadian secondary school students in microgravity science experiment design and resulted in
more than 270 flight experiment proposals submitted to the SSEP.
On February 3, 2017, Magellan Aerospace announced a contract award from Public Services and Procurement
Canada for engine repair and overhaul and fleet management services on the F404 engine that powers Canada’s
fleet of CF-188 Hornet aircraft. The contract commenced in January 2017 and work will be carried out until the terms
expire at the end of March 2021. A preliminary funding amount of $45 million has been approved to launch the multi-
year agreement. The contract includes options to extend the duration of the agreement beyond 2021, based on
performance. Magellan will service the F404 engines at its facility in Mississauga, Ontario and at Royal Canadian Air
Force bases located in Bagotville, Quebec and Cold Lake, Alberta.
The Corporation announced on February 14, 2017 plans to construct a new manufacturing facility in India. The
new 140,000 sq. ft. building will be constructed on seven acres in the Aerospace Special Economic Zone near
the Bangalore International Airport. Magellan expects to break ground for the new facility in summer 2017. The
Corporation will invest more than $28 million in this state-of-the-art manufacturing and assembly plant, which will be
constructed in three phases. When the first phase is commissioned near the end of 2017, it will employ approximately
120 engineers, machinists, procurement professionals, and quality and management personnel and be equipped
with a full suite of 5-axis machining centres.
Labour Matters
During the year ended December 31, 2016, three labour agreements at three of the Corporation’s facilities which
expired during 2016 were successfully re-negotiated with contract periods ending in 2019. One labour agreement,
which expired on December 31, 2015, was successfully re-negotiated in 2016 with a contract period ending in 2017.
Two labour agreements, which expired on December 31, 2016, are currently in negotiations. One labour agreement
at one of the Corporation’s facilities expires in the first quarter of 2017, negotiations have commenced. Two labour
agreements at one of the Corporation’s facilities expire in the fourth quarter of 2017.
5
MAGELLAN 2016 ANNUAL REPORTMANAGEMENT’S DISCUSSION AND ANALYSIS December 31, 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 the Chairman of the Board of Directors of the Corporation, 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.
2. OUTLOOK
The outlook for Magellan’s business in 2017
Boeing last announced that cumulative production rates for B737 and B737 MAX programs are expected to increase from
the current 42 aircraft per month, to 47 aircraft per month in the third quarter of 2017, to 52 aircraft per month in 2018, and
then 57 aircraft per month in 2019. Airbus’ rates for the A320 and the A330 NEO are expected to reach 55 aircraft per
month by mid-2017, and will continually ramp up through 2018 to a peak rate of 60 aircraft per month in 2019. It has been
suggested for some time now that both original equipment manufacturers (“OEMs”) are monitoring these production rates
to ensure that they will remain aligned with the market.
The twin aisle market has leveled off as both Airbus and Boeing have adjusted production rates in this market. New
programs, such as the Airbus A350 and Boeing’s B777X continue to progress in line with published schedules.
While production rates have declined in the large wide body market, recent market information and sales indicate that the
Airbus A380 and Boeing’s B747-800 market will remain relatively stable at the lower rates of production.
The traditional regional aircraft market is not expected to change in 2017. Relatively low fuel prices have had a dampening
effect on demand for new regional turboprop aircraft, however there still remains a niche for them in various regions and
applications. Manufacturers were hoping an expansion of this market would come from the introduction of a new 90-seat
class, but prolonged low fuel prices have triggered them to shelve any such plans. New large regional jet entrants such as
Bombardier’s C-Series and Embraer’s E2 aircraft will on the other hand be the impetus for growth in this market.
In the business jet market, there have been occasional signs of recovery in one segment or another, however, the market is
still struggling as it faces an oversupply of both new and used aircraft. After almost a decade of downturn, manufacturers
are now looking to create new models to stimulate growth. One new concept currently being tried is one where members
pay an annual fee for aircraft service, thereby avoiding the capital outlay, a multi-year commitment, and any residual value
risk of fractional ownership. Another model being discussed is a point-to-point charter type model, where customers pay
an airfare for scheduled direct flights. The industry’s goal in the end is to add customers, and change the perception of
business jets as expensive assets for the wealthy.
6
MANAGEMENT’S DISCUSSION AND ANALYSIS December 31, 2016MAGELLAN 2016 ANNUAL REPORT
The civil rotorcraft market remains significantly depressed, but on speculation that oil prices will rise, the industry is
anticipating the start of recovery. OEM’s are also hoping to expand market applications through the commercialization of
tilt-rotorcraft and compound helicopter technologies. These have the potential in the medium to long term to broaden the
spectrum of applications across this segment.
Global defense spending rose in 2015 and again in 2016. It is as yet unknown what impact the political movement towards
nationalism in the US and UK will have, but many expect that US defense procurement spending will rise under the new
US administration. Most segments of the global defense market are forecasting growth as extended life fleets are due for
replacement and global threats are continuing to cause increasing unease.
Military fixed-wing and military rotorcraft markets are predicted to be on the upswing, both of which have suffered through a
period of significant downward budgetary pressures. An unpredictability factor exists in these segments in that worldwide
defence acquisition decisions are becoming increasingly political and highly contested. The Canadian government’s
recent decision to purchase 18 Boeing Super Hornets as an interim fleet solution and to run a five year competition to
replace the existing CF-18 fleet is just one of a number of recent examples. Magellan currently participates in both the
CF-18 and Super Hornet programs.
The largest fighter program in the world, Lockheed’s F-35 Lightening II, continues to ramp up production rates. The jet
now operates in 12 countries worldwide. The program has logged over 75,000 flight hours while training more than 380
pilots and 3,700 maintainers. On January 11, 2017 the program delivered its 200th operational jet. Lockheed anticipates
delivering 66 planes in 2017, up from the 46 delivered in 2016. The program has reported that costs are progressing
down the cost affordability curve with the price of an F-35A expected to be less than $100 million for aircraft ordered within
the 10th annual lot. The program from its inception has been built upon achieving an affordability model. Magellan, along
with other F-35 Canadian suppliers chosen to supply major components, remains confident in its continued participation
on this program.
In summary, 2017 is predicted to be a year where the aerospace industry begins to approach peak demands. Commercial
airliner production is still growing, but may be reaching the end of a “super cycle”. The commercial rotorcraft and business
jets markets remain down and are not expected to change much in 2017, while regional markets are expected to grow due
to the new larger aircraft entrants. It is expected that increasing global defense spending will partially offset any plateauing
in the civil and commercial aircraft markets.
3. SELECTED ANNUAL INFORMATION
A summary of selected annual financial information for 2016, 2015 and 2014
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
2016
1,003.8
88.6
1.52
174.3
2.99
992.9
101.5
2015
951.5
79.4
1.36
151.7
2.61
1,049.7
196.0
2014
843.0
56.6
0.97
120.3
2.07
834.6
144.1
Revenues for the year ended December 31, 2016 increased from 2015 and 2014 levels. The increase in revenues from
2015 is primarily attributable to production rate increases on several leading programs in the global commercial aerospace
market and to the strengthening of the US dollar in comparison to the Canadian dollar and British pound. Net income
7
MAGELLAN 2016 ANNUAL REPORTMANAGEMENT’S DISCUSSION AND ANALYSIS December 31, 2016
increased in 2016 from 2015 mainly due to favourable foreign exchange impact (see “Results of Operations – Gross Profit”
and “Other”), offset by higher current income taxes.
During 2016 the Corporation paid quarterly dividends on common shares of $0.0575 per share for the first three quarters
and $0.065 per share in the fourth quarter, amounting to $13.8 million in total for the year. During 2015, the Corporation
paid quarterly dividends on common shares of $0.055 per share in the first three quarters and $0.0575 per share in the
fourth quarter, amounting to $13.0 million in total for the year.
4. RESULTS OF OPERATIONS
A discussion of Magellan’s operating results for 2016 and 2015
Consolidated Revenues
Consolidated revenues for the year ended December 31, 2016 increased 5.5% to $1,003.8 million from $951.5 million last
year. The weakness in the Canadian dollar against the US 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
2016
2015 Change
341,006 330,444
338,969 333,074
323,868 287,948
951,466
1,003,843
3.2%
1.8%
12.5%
5.5%
Consolidated revenues are significantly impacted by the fluctuation of United States dollar and British pound against the
Canadian dollar mainly due to the translation of foreign operations to Canadian dollars. If average exchange rates for both
the United States dollar and British pound experienced in 2015 remained constant in 2016, consolidated revenues for
2016 would have been approximately $982.5 million, a 3.3% increase over 2015 revenue levels.
On a currency neutral basis, in comparison to 2015, revenues in Canada in 2016 increased 1.0% primarily driven by
volume increases. Revenues in the United States decreased slightly by 1.8% largely due to volume decreases and price
adjustments, offset by revenue contribution from Ripak Aerospace Processing (“Ripak”), which was acquired by the
Corporation in the fourth quarter of 2015. Revenues in Europe increased 11.7% mainly due to increased production build
rates, and the acquisition of Euravia Engineering & Supply Co. Limited (‘Euravia”), which was acquired by the Corporation
in the second quarter of 2015.
Gross Profit
Twelve-months ended December 31, expressed in thousands of dollars
Gross Profit
Percentage of revenue
2016
178,886
17.8%
2015 Change
164,379
8.8%
17.3%
Gross profit was $178.9 million in 2016, an increase of $14.5 million from 2015 of $164.4 million. Gross profit, as a percentage
of revenues, was slightly higher than the prior year. Increase in gross profit was primarily driven by the strengthening
year over year of the United States dollar against the Canadian dollar and British pound in translating the United States
dollar denominated revenues to Canadian dollars and British pound. This was partially offset by the unfavourable foreign
exchange impact due to the weakening British pound relative to Canadian dollars in 2016 as compared to 2015, and a
higher operating loss recorded in a small operating facility in the United States, which was closed down in 2016.
8
MANAGEMENT’S DISCUSSION AND ANALYSIS December 31, 2016MAGELLAN 2016 ANNUAL REPORT
Administrative and General Expenses
Twelve-months ended December 31, expressed in thousands of dollars
Administrative and general expenses
Percentage of revenue
2016
57,557
5.7%
2015 Change
56,739
1.4%
6.0%
Administrative and general expenses of $57.6 million in 2016 were slightly higher than $56.7 million in 2015. Administrative
and general expenses as a percentage of revenue were 5.7% in 2016 as compared to 6.0% in 2015.
Other
Twelve-months ended December 31, expressed in thousands of dollars
Foreign exchange gain
Business closure costs
Loss on disposal of property, plant and equipment
Other
2016
(4,630 )
1,954 –
442
(2,234 )
2015
(977 )
1,909
932
Included in other income is a foreign exchange gain of $4.6 million in 2016 as compared to a gain of $1.0 million in
2015. The significant increase of $3.6 million mainly resulted from the revaluation and settlement of the Corporation’s
Unites States dollar denominated monetary assets and liabilities in European operations due to the strengthening United
States dollar relative to the British pound. In 2016, the Corporation recorded a $2.0 million charge related to closure of
a small operating facility in the United States. In 2016 and 2015, the Corporation retired assets for a loss on disposal of
approximately $0.4 million and $1.9 million, respectively.
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
2016
4,249
842
1,058
6,149
2015
4,456
876
928
6,260
Total interest costs of $6.1 million for 2016 were consistent with $6.3 million in 2015. Interest on bank indebtedness and
long-term debt of $4.2 million in 2016 decreased $0.2 million mainly as a result of lower principal amounts outstanding on
bank indebtedness and long term debt during 2016 when compared to 2015. The Corporation sells a portion of its trade
receivables through securitization programs or factoring transactions. Discount on sale of trade receivables was $1.1 million,
an increase of $0.2 million largely due to a higher annualized interest rate of 2.29% the Corporation has paid in 2016 as
compared to 1.68% in the prior year, offset by a lower volume of receivables sold in 2016.
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
2016
12,780
16,054
28,834
24.6%
2015
7,363
13,662
21,025
20.9%
The Corporation recorded an income tax expense in 2016 of $28.8 million on pre-tax income of $117.4 million, representing
an effective tax rate of 24.6%, compared to an income tax expense of $21.0 million on a pre-tax income of $100.4 million
in 2015 for an effective tax rate of 20.9%.
9
MAGELLAN 2016 ANNUAL REPORTMANAGEMENT’S DISCUSSION AND ANALYSIS December 31, 2016
During 2016 and 2015, the Corporation recognized investment tax credits in Canada totalling $6.8 million and $4.2 million,
respectively, as a reduction of cost of revenues, as the Corporation has determined that it will be able to benefit from these
investment tax credits. The increase in the effective tax rate to 24.6% in 2016 when compared to 20.9% in 2015 is primarily
due to 2015 adjustment in corporate taxation rates in the income tax jurisdictions in which the Corporation operates. The
increase in current income tax expense in 2016 was mainly due to higher net income before taxes and full utilization of the
net operating loss carry-forwards and certain tax credits in the United States in 2015.
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.
Twelve-months ended December 31, expressed in thousands of dollars
Net income
Interest
Taxes
Depreciation and amortization
EBITDA
2015
79,423
2016
88,580
6,149
28,834
50,713
45,007
174,276 151,715
21,025
6,260
EBITDA for the year ended 2016 of $174.3 million increased by $22.6 million when compared to $151.7 million in 2015,
primarily as a result of higher net income, taxes and depreciation and amortization expenses.
6. SELECTED QUARTERLY FINANCIAL INFORMATION
A summary view of Magellan’s quarterly financial performance
Expressed in millions of dollars except per
share information
2016
Revenues
Income before taxes
Net income
Net income per common share
Basic and Diluted
EBITDA 1
Mar 31
266.1
31.3
23.4
0.40
45.8
Jun 30 Sep 30 Dec 31 Mar 31
228.3
238.0
252.7
29.6
22.3
0.38
44.7
25.2
18.8
0.32
38.4
247.1
31.3
24.0
0.41
45.3
26.8
19.2
0.33
37.4
2015
Jun 30 Sep 30 Dec 31
234.4
236.2
252.6
21.8
16.2
0.28
33.5
24.8
18.5
0.32
37.8
27.1
25.5
0.44
43.1
1 EBITDA is not an IFRS financial measure. Please see the “Reconciliation of Net Income to EBITDA” section for more information.
10
MANAGEMENT’S DISCUSSION AND ANALYSIS December 31, 2016MAGELLAN 2016 ANNUAL REPORT
The quarterly revenues reported in the table above reached a peak of $266.1 million in the first quarter of 2016, and down
to $247.0 million in the fourth quarter of 2016. The quarterly revenues and net income reported were impacted by the
movements in the Canadian dollar relative to the United States dollar and British pound when the Corporation translates its
foreign operations to Canadian dollars. Further, the movements in the United States dollar relative to British pound impacts
the Corporation’s United States dollar denominated transactions in European operations. The average exchange rate of
United States dollar relative to the Canadian dollar fluctuated between a high of 1.3748 in the first quarter of 2016 and a low of
1.2294 in the second quarter of 2015. The average exchange rate of British pound relative to the Canadian dollar fluctuated
between a high of 2.0280 in the third quarter of 2015 and a low of 1.6564 in the fourth quarter of 2016. The average exchange
rate of the British pound relative to the United States dollar fluctuated between a high of 1.5489 in the third quarter of 2015
and a low of 1.2418 in the fourth quarter of 2016. Had exchange rates remained at levels experienced in 2015, reported
revenues in 2016 would have been lower by $17.0 million and $9.2 million in the first and the second quarter, respectively;
higher by $3.0 million and $1.9 million in the third and the fourth quarter, respectively.
Net income for the first quarter of 2016 and fourth quarter of 2015 of $23.4 million and $25.5 million, respectively, was higher
than all other quarterly net income shown in the table above. As discussed above, net income reported in the quarterly
information was also impacted by the foreign exchange movements. During 2016, the Corporation recorded higher income
taxes due to full utilization of the net operating loss carry-forwards and certain tax credits in the United States in the second
quarter of 2015. The Corporation recorded business closure costs related to the closure of a small operating facility in the
United States, and a margin adjustment related to one of its construction contracts in the second and third quarter of 2016,
respectively. In the fourth quarter of 2015, the Corporation recognized an adjustment in corporation taxation rates in the
income tax jurisdictions in which the Corporation operates. In the second quarter of 2015, the Corporation recorded a loss
on translation of its foreign currency liabilities within Canada and Europe.
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 2016, $155.0 million of cash was generated by operations, $46.6 million was used in investing activities and $105.7 million
was used in financing activities.
11
MAGELLAN 2016 ANNUAL REPORTMANAGEMENT’S DISCUSSION AND ANALYSIS December 31, 2016
Cash Flow from Operating Activities
Twelve-months ended December 31, expressed in thousands of dollars
Increase in trade receivables
Increase in inventories
Increase in prepaid expenses and other
Increase (decrease) in accounts payable, accrued liabilities and provisions
Net change in non-cash working capital items
Net cash from operating activities
2016
2015
(13,460 ) (19,263 )
(7,548 ) (11,991 )
(2,762 )
(3,943 )
30,427
(6,181 )
6,657 (41,378 )
155,001 94,115
Operating activities for 2016 generated cash of $155.0 million compared to $94.1 million in the prior year. Changes in
non-cash working capital items provided cash of $6.7 million as a result of an increase in accounts payable, accrued
liabilities and provisions offset by increases in trade receivables, inventories, prepaid expenses and other. The increase
in trade receivables during the year is attributed primarily to the higher revenues. Increased inventory levels in 2016 were
to support higher production volumes on a number of programs. The increase in accounts payable, accrued liabilities and
provisions was due to higher purchases and timing of payments. In 2015, changes in non-cash working capital items used
$41.4 million cash principally as a result of increases in trade receivables, inventories and prepaid expenses and other,
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
Business combinations
Purchase of property, plant and equipment
Proceeds from disposals of property, plant and equipment
Change in restricted cash
Increase in intangibles and other assets
Net cash used in investing activities
2016
2015
– (75,076 )
(43,905 )
(45,421 )
760
621
5,657 (12,902 )
(7,580 )
(2,175 )
(46,584 ) (133,437 )
The Corporation invested $45.4 million in capital assets during the year in comparison to $43.9 million in 2015. 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. In 2015, the Corporation invested
$75.1 million, net of cash acquired, in business acquisitions. The restricted cash relate to amounts deposited in escrow
accounts in connection with the 2015 acquisitions. In 2016, the Corporation released funds from the escrow accounts in
settlement of contingent liabilities and working capital adjustment.
Cash Flow from Financing Activities
Twelve-months ended December 31, expressed in thousands of dollars
(Decrease) increase in bank indebtedness
(Decrease) increase in debt due within one year
Increase in long-term debt
Decrease in long-term debt
(Decrease) increase in long-term liabilities and provisions
Increase in borrowings, net
Common share dividend
Net cash (used in) provided by investing activities
2016
2015
(88,873 ) 46,967
(3,718 ) 10,134
276
–
(4,526 )
(183 )
5,391
(6,112 )
1,406
977
(13,825 ) (12,952 )
(105,734 ) 40,696
The Corporation used $105.7 million in 2016 mainly to repay bank indebtedness. The Corporation also received $5.4 million
proceeds, as compared to $1.0 million in 2015, from Canadian Government agencies related to the development of its
technologies and processes.
12
MANAGEMENT’S DISCUSSION AND ANALYSIS December 31, 2016MAGELLAN 2016 ANNUAL REPORT
Contractual Obligations
As at December 31, 2016, 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
Total Contractual Obligations
Less than
After
1 year 1-3 Years 4-5 Years
–
43,314
–
5 Year
Total
– 43,314
45,960
–
–
– 45,960
4,827
10,794
9,978
15,739 41,338
613
2,910
3,825
190
869
4,812
505
1,464
479
220
2,181
4,621
21,786 34,129
494
1,332
6,156
2,093
19,310 23,057
58,325
61,758
17,665
58,387 196,135
Major cash flow requirements for 2017 include the repayment of trade receivables securitization of $46.0 million which
is expected to be refinanced, repayment of long-term debt of $4.8 million, payments of equipment and facility leases of
$3.5 million and other long-term liabilities of $3.8 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 Directors 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, 2016, the Corporation had made contractual commitments to purchase $16.4 million of capital assets.
In addition, the Corporation had purchase commitments, largely for materials required for the normal course of operations,
of $314.0 million as at December 31, 2016. 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 3, 2017, 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.
On March 31, 2016, June 30, 2016, and September 30, 2016 the Corporation paid quarterly dividends on 58,209,001
common shares of $0.0575 per common share, representing an aggregate dividend payment of $10.0 million. On
December 30, 2016 the Corporation paid quarterly dividends on 58,209,001 common shares of $0.065 per common
share, amounting to $3.8 million. The Corporation’s dividend per Common Share has more than doubled over the past
three years since it first implemented a dividend policy in 2013.
For the year ended December 31, 2015, the Corporation declared and paid dividends on common shares on March 31, 2015,
June 30, 2015 and on September 30, 2015 of $0.055 per share amounting to $9.6 million and on December 31, 2015 of
$0.0575 per share amounting to $3.4 million.
13
MAGELLAN 2016 ANNUAL REPORTMANAGEMENT’S DISCUSSION AND ANALYSIS December 31, 2016
In the first quarter of 2017, the Corporation declared cash dividends of $0.065 per common share payable on March 31,
2017 to shareholders of record at the close of business on March 10, 2017.
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 foreign
exchange contracts outstanding at December 31, 2016.
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
During the year, the Corporation incurred consulting costs of $0.1 million [2015 - $0.1 million] payable to a corporation
controlled by the Chairman of the Board of Directors of the Corporation.
10. RISK FACTORS
A summary of risks and uncertainties facing Magellan
The Corporation’s performance may be affected by a number of risks and uncertainties. Magellan’s senior management
identifies key risks and has processes in place to help monitor, manage, and mitigate these risks. Additional risks and
uncertainties not presently known by the Corporation, or that the Corporation does not currently anticipate, may be 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.
14
MANAGEMENT’S DISCUSSION AND ANALYSIS December 31, 2016MAGELLAN 2016 ANNUAL REPORT Factors that have an adverse impact on the aerospace industry may adversely affect the Corporation’s results
of operations.
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 the Corporation
competes. 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.
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.
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.
15
MAGELLAN 2016 ANNUAL REPORTMANAGEMENT’S DISCUSSION AND ANALYSIS December 31, 2016 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.
Political uncertainty could result in a decrease in revenues or have other material adverse effects on the Corporation.
In the last several years, the United States and certain European countries have experienced significant political events that
have cast uncertainty on global financial and economic markets. During the recent United States presidential campaign
a number of election promises were made and the new American administration has begun taking steps to implement
certain of these promises. Included in the actions that the administration has discussed are the renegotiation of the
terms of the North American Free Trade Agreement, withdrawal of the United States from the Trans-Pacific Partnership,
imposition of a tax on the importation of goods into the United States, reduction of regulation and taxation in the United
States, and introduction of laws to reduce immigration and restrict access into the United States for citizens of certain
countries. It is presently unclear exactly what actions the new administration in the United States will implement, and if
implemented, how these actions may impact the aerospace industry.
In addition to the political disruption in the United States, the citizens of the United Kingdom recently voted to withdraw from
the European Union and the Government of the United Kingdom has begun taken steps to implement such withdrawal.
Some European countries have also experienced the rise of anti-establishment political parties and public protests held
against open-door immigration policies, trade and globalization. To the extent that certain political actions taken in North
America, Europe and elsewhere in the world result in a marked decrease in free trade, access to personnel and freedom
of movement it could have an adverse effect on the Corporation’s ability to market its products and services internationally,
increase costs for goods and services required for the Corporation’s operations, reduce access to skilled labour and
negatively impact the Corporation’s business, operations, financial conditions and the market value of its Common Shares.
Competitive pressures may adversely affect the Corporation.
The Corporation competes in the aerospace industry primarily in support of OEMs and the manufacturers that supply them,
some of which are divisions or subsidiaries of OEMs, and other large companies that manufacture aircraft components
and subassemblies. Competition for the repair and overhaul of aerospace components comes from three primary sources:
OEMs, major commercial airlines and other independent repair and overhaul companies. Some of the competitors’ financial
and other resources and name recognition are substantially greater than the Corporation’s and constitute significant
competitive advantages. There can be no assurance that Magellan will be able to compete successfully against current
and future competitors or that the competitive pressures that Magellan faces will not adversely affect the Corporation’s
operating revenues and, in turn, the Corporation’s business and financial condition.
16
MANAGEMENT’S DISCUSSION AND ANALYSIS December 31, 2016MAGELLAN 2016 ANNUAL REPORT 11. CRITICAL ACCOUNTING ESTIMATES
A description of accounting estimates that are critical to determining Magellan’s financial results
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 is estimated are provided in note 18 to
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 (“CGU”) or group of CGUs.
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 consolidated statements of financial position 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 the Corporation’s 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 taxes.
17
MAGELLAN 2016 ANNUAL REPORTMANAGEMENT’S DISCUSSION AND ANALYSIS December 31, 2016 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.
12. CHANGES IN ACCOUNTING POLICIES
A description of accounting standards adopted in 2016
The Corporation has adopted the following new and amended standards in 2016.
Property, Plant and Equipment and Intangibles Assets
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.
As at January 1, 2016, the Corporation adopted the amendments and there was no material impact 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. As at January 1, 2016, the Corporation adopted the amendments and there
was no impact on the Corporation’s consolidated financial statements.
18
MANAGEMENT’S DISCUSSION AND ANALYSIS December 31, 2016MAGELLAN 2016 ANNUAL REPORT 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, 2016, 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 (“IFRIC”) 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.
Revenue Recognition
In 2014, the IASB issued 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 IFRS. 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 non-financial 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 will apply a
full retrospective approach in adopting the standards and is in the process of evaluating the impact that IFRS 15 may have
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.
Disclosure Initiative
In 2016, the IASB issued amendments to IAS 7, Statement of Cash Flows (“IAS 7”). The amendments are intended to clarify
IAS 7 to improve information provided to users of financial statements about an entity’s financing activities. They are effective
for annual periods beginning on or after January 1, 2017, with earlier adoption permitted. The adoption of IAS 7 amendments
will require additional disclosure in the Corporation’s consolidated financial statements.
19
MAGELLAN 2016 ANNUAL REPORTMANAGEMENT’S DISCUSSION AND ANALYSIS December 31, 2016 Classification and Measurement of Share-based Payment Transactions
In 2016, the IASB issued the final amendments to IFRS 2, Share-based Payments (“IFRS 2”) that clarify the classification and
measurement of share-based transactions, consisting of: accounting for cash-settled share-based payment transactions
that include a performance condition; classification of share-based payment transactions with net settlement features;
accounting for modifications of share-based payment transactions from cash-settled to equity-settled. The amendments
are effective for annual periods beginning on or after January 1, 2018, with earlier adoption permitted. The amendments
are to be applied prospectively. However, retrospective application is allowed if this is possible without the use of
hindsight. The Corporation is in the process of evaluating the impact of adopting these amendments on the Corporation’s
consolidated financial statements.
Foreign Currency Transactions and Advance Consideration
In 2016, the IASB issued IFRIC Interpretation 22, Foreign Currency Transactions and Advance Consideration (“IFRIC
22”), which provides requirements about which exchange rate to use in reporting foreign currency transactions (such as
revenue transactions) when payment is made or received in advance. IFRIC 22 is effective for annual periods beginning
on or after January 1, 2018, with earlier adoption permitted. On initial application, entities have the option to apply either
retrospectively or prospectively. The Corporation is in the process of evaluating the impact of adopting these amendments
on the Corporation’s consolidated financial statements.
Transfer of Investment Property
In 2016, the IASB issued the narrow scope amendments to IAS 40, Investment Property (“IAS 40”) to reinforce the principle
for transfers into, or out of, investment property in IAS 40 to specify that: a transfer into, or out of investment property
should be made only when there has been a change in use of the property; and such a change in use would involve
an assessment of whether the property qualifies as an investment property. That change in use should be supported
by evidence. The new amendments are effective for annual periods beginning on or after January 1, 2018, with earlier
adoption permitted. The amendments will have an impact on the Corporation’s consolidated financial statements only
when there is a change in use of the Corporation’s investment properties.
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, 2016 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.
20
MANAGEMENT’S DISCUSSION AND ANALYSIS December 31, 2016MAGELLAN 2016 ANNUAL REPORT 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, 2016, 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, 2016.
No changes were made in the Corporation’s internal control over financial reporting during the year ended December 31, 2016,
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 2016 ANNUAL REPORTMANAGEMENT’S DISCUSSION AND ANALYSIS December 31, 2016 MANAGEMENT’S REPORT
December 31, 2016
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 facil-
itate 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 3, 2017
Elena M. Milantoni
Chief Financial Officer and
Corporate Secretary
22
MAGELLAN 2016 ANNUAL REPORT INDEPENDENT AUDITORS’ REPORT
December 31, 2016
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, 2016 and 2015, 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 financial
statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material
misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the
auditors consider internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements
in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies
used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of
the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Magellan
Aerospace Corporation as at December 31, 2016 and 2015, and its financial performance and its cash flows for the years then
ended in accordance with International Financial Reporting Standards.
Toronto, Canada
March 3, 2017
23
MAGELLAN 2016 ANNUAL REPORT CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
Expressed in thousands of Canadian dollars
Notes
December 31 December 31
2015
2016
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
3
4
5
6
7
8
3, 8
9, 19
15
11
12, 18
10
12
13
14, 19
15
16
24
24
7,606
7,125
205,609
208,964
18,007
447,311
389,825
4,377
67,443
33,797
28,142
22,007
545,591
992,902
178,566
50,787
229,353
43,314
35,364
22,867
18,617
36,056
156,218
254,440
2,044
13,565
310,664
26,618
607,331
992,902
5,538
12,902
207,189
215,351
17,914
458,894
405,526
4,753
87,844
39,020
23,642
30,070
590,855
1,049,749
158,186
55,255
213,441
135,828
40,402
19,751
26,047
36,935
258,963
254,440
2,044
13,565
235,701
71,595
577,345
1,049,749
MAGELLAN 2016 ANNUAL REPORT
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Expressed in thousands of Canadian dollars, except per share amounts
Notes
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
20
21
22
27
23
15
15
Years ended December 31
2015
2016
1,003,843
824,957
178,886
57,557
(2,234 )
123,563
951,466
787,087
164,379
56,739
932
106,708
6,149
117,414
6,260
100,448
12,780
16,054
28,834
88,580
7,363
13,662
21,025
79,423
Other comprehensive income (loss)
Other comprehensive (loss) 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:
24
(44,977 )
48,446
Actuarial income on defined benefit pension plans, net of taxes
15, 19
208
43,811
2,832
130,701
Comprehensive income
Net income per share
Basic
Diluted
See accompanying notes to the consolidated financial statements
16
16
1.52
1.52
1.36
1.36
25
MAGELLAN 2016 ANNUAL REPORT
Foreign
Retained
currency
Total
earnings
166,398
translation
23,149
–
(12,952 )
equity
459,596
79,423
51,278
577,345
88,580
(44,769 )
(13,825 )
–
48,446
71,595
–
–
26,618
607,331
79,423
2,832
(12,952 )
235,701
88,580
(13,825 )
310,664
208
(44,977 )
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Share Contributed
Expressed in thousands of Canadian dollars capital
254,440
January 1, 2015
surplus
2,044
Net income
Other comprehensive income
Common share dividend
–
–
–
–
–
–
Other
paid-in
capital
13,565
–
–
–
December 31, 2015
254,440
2,044
13,565
Net income
Other comprehensive income (loss)
Common share dividend
–
–
–
–
–
–
December 31, 2016
See accompanying notes to the consolidated financial statements
254,440
2,044
–
–
–
13,565
26
MAGELLAN 2016 ANNUAL REPORT
CONSOLIDATED STATEMENTS OF CASH FLOWS
Expressed in thousands of Canadian dollars
Cash flow from operating activities
Net income
Amortization/depreciation of intangible assets and
property, plant and equipment
Impairment of property, plant and equipment
Loss on disposal of property, plant and equipment
Decrease in defined benefit plans
Accretion
Deferred taxes
Income on investments in joint ventures
Change in non-cash working capital
Net cash provided by operating activities
Cash flow from investing activities
Business combinations
Purchase of property, plant and equipment
Proceeds from disposal of property, plant and equipment
Change in restricted cash
Increase in intangible and other assets
Net cash used in investing activities
Cash flow from financing activities
(Decrease) increase in bank indebtedness
(Decrease) increase in debt due within one year
Increase in long-term debt
Decrease in long-term debt
(Decrease) increase in long-term liabilities and provisions
Increase in borrowings, net
Common share dividend
Net cash (used in) provided by financing activities
Increase in cash during the year
Cash at beginning of the year
Effect of exchange rate differences
Cash at end of the year
See accompanying notes to the consolidated financial statements
Notes
6, 8
6
19
23
15
9
26
3
6
3
10
12
12
16
27
Years ended December 31
2015
2016
88,580
79,423
50,713
923
442
(1,923 )
842
9,502
(735 )
6,657
155,001
–
(45,421 )
760
5,657
(7,580 )
(46,584 )
(88,873 )
(3,718 )
–
(4,526 )
(183 )
5,391
(13,825 )
(105,734 )
2,683
5,538
(615 )
7,606
45,007
–
1,909
(1,731 )
876
10,430
(421 )
(41,378 )
94,115
(75,076 )
(43,905 )
621
(12,902 )
(2,175 )
(133,437 )
46,967
10,134
276
(6,112 )
1,406
977
(12,952 )
40,696
1,374
2,645
1,519
5,538
MAGELLAN 2016 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 3, 2017.
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 intragroup profits
and losses are eliminated.
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars)MAGELLAN 2016 ANNUAL REPORT 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 comprises 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 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
29
MAGELLAN 2016 ANNUAL REPORTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars)
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 systematically allocated overheads, including depreciation of production-related property, plant and
equipment, and 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 statements 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.
Employee Benefits
Defined benefit plans
The Corporation’s obligation in respect of defined benefit plans is determined periodically by independent actuaries using
the projected unit credit method in accordance with IAS 19, Employee Benefits. Actuarial gains and losses are recognized
in full in the period in which they occur, and are recognized in 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
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars)MAGELLAN 2016 ANNUAL REPORT 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 consists 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.
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.
31
MAGELLAN 2016 ANNUAL REPORTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars) 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
in years
40
10-20
5-7
term of lease
The residual values, useful lives and depreciation methods pertaining to property, plant and equipment are regularly
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.
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars)MAGELLAN 2016 ANNUAL REPORT
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 (“CGU”) 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.
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.
33
MAGELLAN 2016 ANNUAL REPORTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars) 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.
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.
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars)MAGELLAN 2016 ANNUAL REPORT 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.
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 statements 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
35
MAGELLAN 2016 ANNUAL REPORTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars) 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 taxes.
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 is estimated are provided in note 18 to
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 CGU or group of CGUs.
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 consolidated statements of financial position 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 the Corporation’s 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.
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars)MAGELLAN 2016 ANNUAL REPORT 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 taxes.
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.
2. NEW AND AMENDED INTERNATIONAL FINANCIAL REPORTING STANDARDS
New and Amended International Financial Reporting Standards Adopted in 2016
The Corporation has adopted the following new and amended standards in the current year.
Property, Plant and Equipment and Intangibles Assets
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.
As at January 1, 2016, the Corporation adopted the amendments and there was no material impact 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
37
MAGELLAN 2016 ANNUAL REPORTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars)
as outlined in IFRS 3, Business Combinations. As at January 1, 2016, the Corporation adopted the amendments and there
was no impact on the Corporation’s consolidated financial statements.
New and Amended International Financial Reporting Standards to Be Adopted in 2017 or Later
The following new standards and amendments to existing standards were issued by the IASB and the International Financial
Reporting Interpretations Committees (“IFRIC”), and are expected to be adopted by the Corporation in 2017 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.
Revenue Recognition
In 2014, the IASB issued 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 will apply a
full retrospective approach in adopting the standards and is in the process of evaluating the impact that IFRS 15 may have
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.
Disclosure Initiative
In 2016, the IASB issued amendments to IAS 7, Statement of Cash Flows (“IAS 7”). The amendments are intended to clarify
IAS 7 to improve information provided to users of financial statements about an entity’s financing activities. They are effective
for annual periods beginning on or after January 1, 2017, with earlier adoption permitted. The adoption of IAS 7 amendments
will require additional disclosure in the Corporation’s consolidated financial statements.
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars)MAGELLAN 2016 ANNUAL REPORT Classification and Measurement of Share-based Payment Transactions
In 2016, the IASB issued the final amendments to IFRS 2, Share-based Payments (“IFRS 2”) that clarify the classification and
measurement of share-based transactions, consisting of: accounting for cash-settled share-based payment transactions
that include a performance condition; classification of share-based payment transactions with net settlement features;
accounting for modifications of share-based payment transactions from cash-settled to equity-settled. The amendments
are effective for annual periods beginning on or after January 1, 2018, with earlier adoption permitted. The amendments
are to be applied prospectively. However, retrospective application is allowed if this is possible without the use of
hindsight. The Corporation is in the process of evaluating the impact of adopting these amendments on the Corporation’s
consolidated financial statements.
Foreign Currency Transactions and Advance Consideration
In 2016, the IASB issued IFRIC Interpretation 22, Foreign Currency Transactions and Advance Consideration (“IFRIC 22”),
which provides requirements about which exchange rate to use in reporting foreign currency transactions (such as revenue
transactions) when payment is made or received in advance. IFRIC 22 is effective for annual periods beginning on or after
January 1, 2018, with earlier adoption permitted. On initial application, entities have the option to apply either retrospectively or
prospectively. The Corporation is in the process of evaluating the impact of adopting these amendments on the Corporation’s
consolidated financial statements.
Transfer of Investment Property
In 2016, the IASB issued the narrow scope amendments to IAS 40, Investment Property (“IAS 40”) to reinforce the principle
for transfers into, or out of, investment property in IAS 40 to specify that: a transfer into, or out of investment property
should be made only when there has been a change in use of the property; and such a change in use would involve
an assessment of whether the property qualifies as an investment property. That change in use should be supported
by evidence. The new amendments are effective for annual periods beginning on or after January 1, 2018, with earlier
adoption permitted. The amendments will have an impact on the Corporation’s consolidated financial statements only
when there is a change in use of the Corporation’s investment properties.
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.
The total consideration payable to the seller 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,
which was estimated to be paid based on the annual adjusted profit before interest and taxes of Euravia over a two-year
period, starting January 1, 2015. As at December 31, 2016, $2,748 was recorded in accounts payable and accrued liabilities
and provisions.
39
MAGELLAN 2016 ANNUAL REPORTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars) The following table presents the final allocation of purchase price related to the business as of the date of the acquisition.
Current assets
Non-current assets
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 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.
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 services, anodizing, plating, painting, shot peening and other processing services.
The total consideration paid by the Corporation was $30,216 in cash on the acquisition date. 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, which was estimated to be paid based on achievement of a specific
revenue objective over the 12-month period following the close of the transaction. During the year, $403 was released
from the escrow account in connection with the acquisition as a result of working capital and contingent consideration
adjustments, leaving $477 of contingent liabilities recorded in accounts payable and accrued liabilities and provisions
as at December 31, 2016. This also reduced the goodwill recognized.
The final purchase price allocation for the acquisition as set forth in the table below reflects various fair value estimates
and analysis, including the final work performed related to the fair values of certain tangible assets and liabilities acquired,
the valuation of intangible assets acquired and residual goodwill.
Final
Preliminary
Amount
Amount
Current assets
Non-current assets
Intangible assets
Goodwill
2,695
8,730
6,103
12,896
Current liabilities
Total purchase consideration1
1Includes amount of $3,723 deposited in an escrow account in connection with the acquisition on the acquisition date.
(611 )
29,813
2,695
8,730
6,103
13,299
(611 )
30,216
The Corporation incurred acquisition-related costs of $218 in the year ended December 31, 2015 relating to external legal
fees, consulting fees and due diligence costs that are included in administration and general expenses.
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars)MAGELLAN 2016 ANNUAL REPORT
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.
Restricted cash totalling $7,125 [December 31, 2015 – $12,902] relate to amounts deposited in escrow accounts in connection
with the acquisitions completed in 2015.
4. TRADE AND OTHER RECEIVABLES
Trade receivables
Less allowance for doubtful accounts
Net trade receivables
Other receivables
December 31 December 31
2015
2016
173,464
553
172,911
32,698
205,609
164,069
884
163,185
44,004
207,189
Included in the above amounts are accrued receivables for construction contracts in progress as at December 31, 2016
of $5,174 [December 31, 2015 – $13,322].
The following table presents the aging of gross trade receivables:
December 31, 2015
December 31, 2016
5. INVENTORIES
At December 31, 2015
At December 31, 2016
Less than
91-181
182-365
More than
Current
146,538
165,390
90 days
13,751
5,802
days
2,122
600
days
1,136
1,430
365 days
522
Total
164,069
242
173,464
Raw
Work in
Finished
materials
70,419
progress
123,004
62,708
115,102
goods
21,928
31,154
Total
215,351
208,964
The cost of inventories recognized as expense and included in cost of sales for the year ended December 31, 2016
amounted to $795,420 [2015 – $762,256].
During the year ended December 31, 2016, the Corporation recorded an impairment expense related to the write-down
of inventory in the amount of $2,314 [2015 – $1,844]. The Corporation also recorded reversals of previous write-downs of
inventory in the amount of $3,295 [2015 – $736] due to the sale of inventory previously provided for. The carrying amount
of inventory recorded at net realizable value was $30,198 as at December 31, 2016 [2015 – $22,587], with the remaining
inventory recorded at cost.
41
MAGELLAN 2016 ANNUAL REPORTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars)
6. PROPERTY, PLANT AND EQUIPMENT
Cost
At December 31, 2014
Additions
Acquisitions [Note 3]
Disposals and other
Foreign currency translation
At December 31, 2015
Additions
Disposals and other
Foreign currency translation
At December 31, 2016
Accumulated depreciation and impairment
At December 31, 2014
Depreciation
Disposal and other
Foreign currency translation
At December 31, 2015
Depreciation
Disposal and other
Foreign currency translation
At December 31, 2016
Net book value
At December 31, 2015
At December 31, 2016
Machinery
and
Land
Buildings
equipment
Tooling
Total
13,880
122,339
479,580
287
–
–
1,493
15,660
–
–
(797 )
6,321
–
(822 )
7,784
135,622
4,262
(21 )
(3,718 )
14,863
136,145
(40,825 )
(4,043 )
318
(2,364 )
(46,914 )
(4,137 )
(36 )
560
–
–
–
–
–
–
–
–
–
36,364
9,810
(10,263 )
53,248
568,739
36,782
(13,853 )
(28,297 )
563,371
(232,606 )
(24,897 )
6,438
(24,385 )
(275,450 )
(26,211 )
11,985
9,549
42,471
1,619
–
(126 )
6,839
50,803
1,255
(1,493 )
(1,291 )
658,270
44,591
9,810
(11,211 )
69,364
770,824
42,299
(15,367 )
(34,103 )
49,274
763,653
(33,782 )
(307,213 )
(3,715 )
121
(5,558 )
(32,655 )
6,877
(32,307 )
(42,934 )
(365,298 )
(2,529 )
1,217
1,072
(32,877 )
13,166
11,181
(50,527 )
(280,127 )
(43,174 )
(373,828 )
15,660
14,863
88,708
85,618
293,289
283,244
7,869
6,100
405,526
389,825
As at December 31, 2015 and 2016, the Corporation did not have any assets under finance lease.
Included in the above are assets under construction in the amount of $17,226 [December 31, 2015 – $10,528], which as
at December 31, 2016 are not amortized.
During 2016, the Corporation determined to close an operating facility in the United States in order to lower operating
costs, increase efficiencies and better align the Corporation’s workforce with the needs of the business. This resulted in an
impairment charge of $923 to property, plant and equipment to bring them to the lower of carrying value and recoverable
amount, which is based on their fair value less costs of disposal. The fair value less costs of disposal was determined by
reference to quoted prices in active markets for identical assets and liabilities, and therefore, was categorized within Level
1 of the fair value hierarchy.
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars)MAGELLAN 2016 ANNUAL REPORT
7. INVESTMENT PROPERTIES
At December 31, 2015
At December 31, 2016
Accumulated
depreciation
Cost
11,769
11,652
and
Net
impairment book value
4,753
(7,016 )
(7,275 )
4,377
The Corporation’s investment properties consist of land and building. Depreciation expense recognized in relation to the
buildings in 2016 was $265 [2015 – $175]. The Corporation recorded rental income of $992 in 2016 [2015 – $768]
The fair value of the Corporation’s investment properties was $17,282 as at December 31, 2016. 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 2016, the Corporation obtained opinions from external valuators, with experience in the
real estate market, on the fair value of $16,100 of the total fair values of the Corporation’s investment properties.
8. INTANGIBLE ASSETS AND GOODWILL
Technology Development
Other
intangible
Total
Total
intangible
assets and
rights
costs
intangibles
assets
Goodwill
goodwill
Cost
At December 31, 2014
Additions
Acquisitions [Note 3]
Disposals
Foreign currency translation
At December 31, 2015
Additions
Foreign currency translation
39,153
–
–
–
336
39,489
–
(62 )
109,432
4,789
–
(287 )
9,114
123,048
3,137
(4,457 )
At December 31, 2016
39,427
121,728
Depreciation and impairment
At December 31, 2014
Depreciation
Disposals
Foreign currency translation
At December 31, 2015
Depreciation
Foreign currency translation
At December 31, 2016
Net book value
At December 31, 2015
At December 31, 2016
(24,139 )
(2,961 )
–
(181 )
(27,281 )
(2,706 )
35
(29,952 )
(63,858 )
(7,091 )
90
(6,020 )
(76,879 )
(11,663 )
2,234
(86,308 )
–
–
29,164
–
2,147
31,311
356
(4,886 )
26,781
–
(1,767 )
–
(77 )
(1,844 )
(2,920 )
531
148,585
4,789
29,164
(287 )
11,597
193,848
3,493
(9,405 )
187,936
(87,997 )
(11,819 )
90
(6,278 )
(106,004 )
(17,289 )
2,800
(4,233 )
(120,493 )
–
–
36,557
148,585
4,789
65,721
–
(287 )
2,463
39,020
–
(5,223 )
33,797
14,060
232,868
3,493
(14,628 )
221,733
–
–
–
–
–
–
–
–
(87,997 )
(11,819 )
90
(6,278 )
(106,004 )
(17,289 )
2,800
(120,493 )
12,208
9,475
46,169
35,420
29,467
22,548
87,844
67,443
39,020
33,797
126,864
101,240
43
MAGELLAN 2016 ANNUAL REPORTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars)
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 20 years based on units of production.
Other intangibles relate to customer lists, brands and technical processes. Customer lists will be amortized over a five-year
period and technical processes will be amortized over a 15-year period. Brands of $8,656 with indefinite useful lives assets
are not subject to amortization.
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 completed the annual impairment test on October 1, 2016 and determined there was
no impairment. The results of the annual impairment test indicate that the fair values of the reporting units are in excess
of their carrying values.
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 and Ripak CGUs. 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 10.5% and 10% 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% and 3% 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. If the discount rate for the Euravia CGU is increased by 1%, the recoverable amount would still
exceed the carrying value. If the discount rate for the Ripak CGU is increased by 1%, the recoverable amount will be less than
the carrying value.
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, 2016 and December 31, 2015.
Balance, beginning of the year
Share of total comprehensive income
Balance, end of the year
44
December 31 December 31
2015
2016
5,749
735
6,484
5,328
421
5,749
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars)MAGELLAN 2016 ANNUAL REPORT
10. BANK INDEBTEDNESS
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 [$160,215 as at December 31, 2016]. 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 as at December 31, 2015]. The bridge credit facility expired on March 4, 2016. Bank
indebtedness as at December 31, 2016 of $43,314 [December 31, 2015 – $135,828] bears interest at the bankers’ acceptance
or LIBOR rates plus 1.875% [2.61% as at December 31, 2016 (2015 – bankers’ acceptance or LIBOR rates plus 1.875%
or 2.53%)]. Included in the amount outstanding as at December 31, 2016 is US$10,030 [December 31, 2015 – US$32,524].
As at December 31, 2016, the Corporation had drawn $47,240 under the operating credit facility, including letters of credit
totalling $3,926 such that $112,975 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 [Note 3]
Provisions [Note 14]
12. LONG-TERM DEBT
Property mortgages [a]
Other loans [b]
Less current portion
December 31 December 31
2015
2016
90,369
85,305
2,892
178,566
73,147
82,676
2,363
158,186
December 31 December 31
2015
2016
14,694
25,497
40,191
4,827
35,364
15,962
29,114
45,076
4,674
40,402
[a] Property mortgages include $1,317 (£795) [2015 – $1,975 (£968)] 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, 2016 was
1.4% [2015 – 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, 2016.
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 as at December 31, 2016 was $13,377 [2015 – $13,987].
45
MAGELLAN 2016 ANNUAL REPORTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars)
[b] Other loans include loans of $14,172 [2015 – $15,112] provided by governmental authorities (“Government Loans”)
that bear interest of approximately 1.5% [2015 – 1.25% to 2.00%]. The Government Loans mature in April 2024 with
accrued interest and principal repayable monthly.
Included in other loans are bank loans aggregating $11,325 (US$8,434) [2015 – $14,004 (US$10,118)] (“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 bear interest at LIBOR plus 2.75%, which as at December 31, 2016 was 3.52%
[2015 – 3.18%].
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 2016, the Corporation received $5,653 [2015 – $1,217] of government proceeds, of which $2,729 [2015 – $412]
has been credited to the related assets, $218 [2015 – $205] has been credited to the related expense and $2,706
[2015 – $600] 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 2016, the Corporation repaid $455 [2015 – $2,651]. As at December 31, 2016, the
Corporation has recognized $23,057 [2015- $20,527] as the amount repayable. The Corporation is eligible for additional
government proceeds of $12,961 for the period from January 1, 2017 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 and accrued
liabilities and provisions
46
December 31 December 31
2015
2016
9,297
5,658
6,554
21,509
2,892
18,617
11,522
5,005
11,883
28,410
2,363
26,047
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars)MAGELLAN 2016 ANNUAL REPORT
The following table presents the movement in provisions:
At December 31, 2014
Additional provisions
Amounts used
Unused amounts reversed
Unwind of discount
Foreign currency
At December 31, 2015
Additional provisions
Amounts used
Unused amounts
Unwind of discount
Foreign currency
At December 31, 2016
Warranty Environmental
2,866
1,194
provisions
219
Other
1,616
(447 )
(933 )
–
401
1,831
1,191
(1,160 )
96
–
(60 )
–
(65 )
–
116
8
2,925
–
(36 )
–
(73 )
(9 )
186
–
(186 )
–
30
249
701
–
–
–
3
Total
4,279
1,802
(512 )
(1,119 )
116
439
5,005
1,892
(1,196 )
96
(73 )
(66 )
1,898
2,807
953
5,658
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.
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
Total income tax expense
47
2016
2015
12,780
– –
12,780
7,363
7,363
16,240
(186 )
16,054
16,494
(2,832 )
13,662
28,834
21,025
MAGELLAN 2016 ANNUAL REPORTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars)
The Corporation’s consolidated effective tax rate for the year ended December 31, 2016 was 24.6% [2015 – 20.9%].
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
2016
117,414
2015
100,448
Income taxes based on the applicable tax rate of 25.8% in 2016 and 2015
30,293
25,935
Adjustment to income taxes resulting from:
Adjustments in respect of prior years
Permanent differences and other
Income tax rates differentials on income of foreign operations
Changes in income tax rates
Income tax expense
(77 )
66
(1,021 )
(427 )
28,834
(328 )
(769 )
755
(4,568 )
21,025
Changes in the deferred tax components are adjusted through deferred income tax expense except for $7,015 [2015 –
$4,208] of investment tax credits which is adjusted through cost of revenues and $51 [2015 – $1,020] for employee future
benefits which is adjusted through other comprehensive income.
The following are the major components of deferred tax assets and liabilities:
Operating loss carryforwards
Investment tax credits
Employee future benefits
Property, plant and equipment and intangibles
Other
Deferred tax (liabilities) assets
December 31 December 31
2015
2016
5,002
34,026
3,151
(58,548 )
2,320
(14,049 )
7,153
36,511
3,906
(63,658 )
9,223
(6,865 )
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
2016
22,007
(36,056 )
30,070
(36,935 )
The temporary difference associated with investments in subsidiaries and joint ventures, for which a deferred tax liability
has not been recognized aggregates to $457,304 [2015 – $366,804].
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars)MAGELLAN 2016 ANNUAL REPORT
16. SHARE CAPITAL
The authorized capital of the Corporation consists of an unlimited number of preference shares, issuable in series, of which
none are outstanding, and an unlimited number of common shares, with no par value.
Common shares
Issued and fully paid:
Number
Amount
Outstanding as at December 31, 2015 and December 31, 2016
58,209,001
254,440
Net income per share
Net income
Weighted average number of shares
Basic and diluted net income per share
2016
88,580
58,209,001
1.52
2015
79,423
58,209,001
1.36
Dividends declared
On March 31, 2016, June 30, 2016, and September 30, 2016 the Corporation paid quarterly dividends on 58,209,001 common
shares of $0.0575 per common share, amounting to $10,041. On December 30, 2016 the Corporation paid quarterly dividends
on 58,209,001 common shares of $0.065 per common share, amounting to $3,784.
For the year ended December 31, 2015, the Corporation declared and paid dividends on common shares on March 31,
2015, June 30, 2015 and on September 30, 2015 of $0.055 per share amounting to $9,605 and on December 31, 2015 of
$0.0575 per share amounting to $3,347.
Subsequent to December 31, 2016, the Corporation declared dividends to holders of common shares in the amount
of $0.065 per common share payable on March 31, 2017, for shareholders of record at the close of business on
March 10, 2017.
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, 2016
and December 31, 2015, 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
49
MAGELLAN 2016 ANNUAL REPORTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars)
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 periods 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, 2016, 28,226 Units were
outstanding at an accrued value of $269 [December 31, 2015 – $360].
The Corporation recorded compensation expense in relation to the plans during the year of $ 384 [2015 – $368].
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.
The carrying values of the Corporation’s financial instruments are classified as follows:
December 31, 2015
Fair value
through profit
or loss: Held for
trading1
18,440
Other financial
liabilities
Loans and Total financial (at amortized Total financial
receivables2
207,189
assets
225,629
cost)3
409,422
liabilities
409,422
December 31, 2016
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
receivables securitization transactions
220,340
330,898
205,609
14,731
330,898
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.
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars)MAGELLAN 2016 ANNUAL REPORT
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, 2016, fluctuations of +/- 1% would, everything else being equal, have an effect on net income for
the year ended December 31, 2016 of approximately +/- $59. 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 $3,925.
Interest rate risk
The Corporation is exposed to interest rate risk in its floating rate bank indebtedness. At December 31, 2016, $83,506
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%) would have impacted the amount of interest charged to net income during the
year ended December 31, 2016 by approximately +/- $909.
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.
51
MAGELLAN 2016 ANNUAL REPORTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars)
Derecognition of financial assets
The Corporation sells a portion of its trade receivables through securitization programs or factoring transactions. During
2016, the Corporation sold receivables to various financial institutions in the amount of $284,891 [2015 – $344,104] for a
discount of $1,058 [2015 – $976] representing an annualized interest rate of 2.29% [2015 – 1.68%].
As at December 31, 2016, trade receivables include receivables sold and financed through securitization transactions of
$45,960 [2015 – $50,581], 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 statements 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 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
Total
Year 1
–
50,787
613
2,910
3,825
190
58,325
1,183
59,508
Year 2
43,314
5,339
502
2,508
257
671
52,591
1,042
53,633
Year 3
–
5,455
367
2,304
248
793
9,167
894
Year 4
–
5,447
252
2,299
247
1,052
9,297
746
10,061
10,043
Year 5 Thereafter
–
–
Total
43,314
87,298
2,181
15,739
220
21,786
34,129
1,332
6,156
19,310
23,057
58,387
196,135
2,507
6,980
60,894
203,115
4,531
227
2,322
247
1,041
8,368
608
8,976
1 The amount drawn on the Corporation’s trade receivables securitization program is included in long-term debt in the Year 1 category
Fair values
The Corporation has determined the estimated fair values of its financial instruments based on appropriate valuation
methodologies; 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:
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars)MAGELLAN 2016 ANNUAL REPORT
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, 2016.
Long-term debt
The carrying amount of the Corporation’s long-term debt of $40,191 would approximate its fair value as at December 31,
2016.
Borrowings subject to specific conditions
The Corporation has recognized $22,867 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 $3,225 at December 31, 2016 [2015 – $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, 2016, the carrying amount of all of the financial assets that the Corporation has pledged as collateral
for its long-term debt facilities was $129,465.
Fair value hierarchy
The Corporation’s financial assets and liabilities recorded at fair value on the consolidated statements of financial position
have been categorized into three categories based on a fair value hierarchy. Fair value of assets and liabilities included
in Level 1 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, 2016.
53
MAGELLAN 2016 ANNUAL REPORTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars) 19. EMPLOYEE FUTURE BENEFITS
The Corporation provides retirement benefits through a variety of arrangements composed 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 82% of the obligations accrued to date come from defined benefit plans in Canada.
Defined Benefit Plans
Canada
The Canadian defined benefit plans consist 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
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, 2015.
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 are in place that 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 5% in cash, 20% in fixed income instruments, 60% in equity and 15% in alternative assets for the US defined
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars)MAGELLAN 2016 ANNUAL REPORT 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.
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 $5,906 for the year ended December 31, 2016
[2015 – $5,342].
55
MAGELLAN 2016 ANNUAL REPORTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars) 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 beneficiaries 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.
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
2016
Other
2015
Defined
benefit plans
2,544
Other
benefit plan benefit plans benefit plan
–
Defined
2,552
–
314
154
430
3,442
210
–
–
210
524
119
430
(136 )
–
–
3,625
(136 )
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
Other
benefit plan benefit plans benefit plan
Defined
2016
Other
2015
(3,945 )
(163 )
3,849
(259 )
–
–
–
–
(2,202 )
(495 )
(1,004 )
(3,701 )
–
–
–
–
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:
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars)MAGELLAN 2016 ANNUAL REPORT
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
114,758
4,584
3,945
5,365
291
(6,445 )
(454 )
(268 )
121,776
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
Defined
benefit plans
125,612
2,544
4,897
291
421
3,404
(163 )
(6,445 )
154
(348 )
130,367
2015
Other
benefit plan benefit plans benefit plan
–
Defined
108,313
Other
benefit plan benefit plans benefit plan
1,346
Defined
124,302
4,244
2,255
5,356
303
(6,660 )
(548 )
1,495
114,758
–
–
181
–
(181 )
–
–
–
2015
2,552
4,768
303
(48 )
(1,115 )
(495 )
(6,660 )
119
1,886
125,612
–
(136 )
–
–
–
–
(181 )
–
234
1,263
2015
2016
Other
–
–
–
295
–
(295 )
–
–
–
2016
Other
1,263
–
210
–
–
–
–
(295 )
–
(39 )
1,139
2016
Other
–
(1,139 )
(1,139 )
(1,139 )
–
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
Defined
benefit plans
121,776
(130,367 )
(8,591 )
(9,297 )
706
Other
benefit plan benefit plans benefit plan
–
Defined
114,758
(125,612 )
(10,854 )
(11,523 )
669
(1,263 )
(1,263 )
(1,263 )
–
The Corporation expects to contribute approximately $5,200 in 2017 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.
57
MAGELLAN 2016 ANNUAL REPORTNOTES 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
2016
Other
2015
Defined
benefit plans
3.8%
Other
benefit plan benefit plans benefit plan
4.0%
Defined
4.0%
2.9%
–
3.9%
–
2014 CPM Private Sector
2.8%
2014 CPM Private Sector
Mortality Table projection with Mortality Table projection with
CPM Scale B (with size
CPM Scale B (with size
adjustment)
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, 2016, a 1.0% decrease in the discount rate
used (all other assumptions remaining unchanged) could result in a $20,240 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, on a pay as you go basis. For measurement
purposes, a 7.0% annual rate of increase in the per capita cost of covered health care and dental benefits was assumed
for 2016. 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, 2016 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
20. SEGMENTED INFORMATION
2016
83%
14%
3%
100%
2015
81%
15%
4%
100%
Total
5,826
19,182
44,133
Operating segments are defined as components of the Corporation for which separate financial information is available
that is evaluated regularly by the chief operating decision maker in allocating resources and assessing performance.
The chief operating decision maker of the Corporation is the President and Chief Executive Officer. The Corporation
operates substantially all of its activities in one reportable segment, Aerospace, which include the design, development,
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars)MAGELLAN 2016 ANNUAL REPORT
manufacture, repair and overhaul, and sale of systems and components for defence and civil aviation. 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
2016
850,841
32,229
120,773
1,003,843
2015
808,552
35,713
107,201
951,466
At December 31, 2016, aggregate costs incurred under open construction contracts and recognized profits, net of
recognized losses, amounted to $374,917 [December 31, 2015 – $351,672]. Advance payments received for construction
contracts in progress at December 31, 2016 were $6,115 [December 31, 2015 – $3,439]. Retentions in connection with
construction contracts at December 31, 2016 were $303 [December 31, 2015 – $29]. Advance payments and retentions
are included in accounts payable and accrued liabilities and provisions.
Revenues from the Corporation’s two largest customers accounted for 38.3% of total sales for the year ended December
31, 2016 [December 31, 2015 – two largest customers accounted for 37.1% of total sales].
Geographic segments:
Canada
Revenues
Export revenues1
1Export revenue is attributed to countries based on the location of the customers
259,145
341,006
United
United
2016
2015
States Europe
Total
338,969 323,868 1,003,843 330,444 333,074 287,948 951,466
65,092 389,030
84,425 100,252 443,822 242,715
Total Canada
Europe
81,223
States
United
United
Canada
States Europe
Total Canada
States
Europe
Total
2016
2015
Property, plant and equipment,
intangible assets and goodwill
173,724
188,828 128,513 491,065 169,853 204,956 157,581 532,390
21. COST OF REVENUES
Operating expenses
Amortization
Investment tax credits
(Reversal) impairment of inventories
2016
783,620
49,096
(6,778 )
(981 )
824,957
2015
748,337
41,849
(4,206 )
1,107
787,087
59
MAGELLAN 2016 ANNUAL REPORTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars)
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
2016
35,933
16,851
2,971
1,802
57,557
2016
4,249
842
1,058
6,149
2015
35,260
16,192
3,497
1,790
56,739
2015
4,456
876
928
6,260
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 losses for the
year ended December 31, 2016 of $44,977 [2015 – unrealized currency translation gains of $48,446] and net actuarial
gains on defined benefit plans of $208 [2015 – net actuarial gains of $2,832]. These gains and losses are reflected in the
consolidated statements of financial position and had no impact on net income for the year.
25. RELATED PARTY DISCLOSURE
Transactions with related parties
During the year, the Corporation incurred consulting costs of $100 [2015 – $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-employments benefits
Share-based payments
2016
2,959
304
187
3,450
2015
3,213
299
225
3,737
60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars)MAGELLAN 2016 ANNUAL REPORT
Short-term benefits include cash payments for base salaries, bonuses and other short-term cash payments. Post-employment
benefits include the Corporation’s defined contribution pension plan and pension adjustment for defined benefit plan. Share-
based payments include amounts paid to executives under the DSU Plan.
26. SUPPLEMENTARY CASH FLOW INFORMATION
Net change in non-cash working capital
Trade receivables
Inventories
Prepaid expenses and other
Accounts payable and accrued liabilities and provisions
Interest paid
Income taxes paid
27. ADDITIONAL FINANCIAL INFORMATION
2016
2015
(13,460 )
(7,548 )
(2,762 )
30,427
6,657
5,171
7,047
(19,263 )
(11,991 )
(3,943 )
(6,181 )
(41,378 )
5,406
5,634
Included in other expenses is a foreign exchange gain of $4,630 [2015 – $977] 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, 2016, total managed capital was $736,796, comprising of shareholders’ equity of $607,331 and
interest-bearing debt of $129,465.
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 flows 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.
61
MAGELLAN 2016 ANNUAL REPORTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars)
The Corporation must adhere to covenants in its operating credit facility. As at December 31, 2016 the Corporation was in
compliance with these covenants.
29. CONTINGENT LIABILITIES AND COMMITMENTS
In the ordinary course of business activities, the Corporation may be contingently liable for litigation and claims with,
among others, 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, 2016, capital commitments in respect of purchase of property, plant and equipment totalled $16,393, all
of which had been ordered. There were no other material capital commitments at the end of the year.
62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars)MAGELLAN 2016 ANNUAL REPORT BOARD OF DIRECTORS AND EXECUTIVE OFFICERS
EXECUTIVE OFFICERS
BOARD OF DIRECTORS
COMMITTEES OF THE BOARD
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
(1) Audit Committee
Chairman:
Bruce W. Gowan
(2) Governance and
Nominating Committee
Chairman:
Bruce W. Gowan
(3) Human Resources and
Compensation Committee
Chairman:
Steven Somerville
(4) Environmental and Health &
Safety Committee
Chairman:
Beth M. Budd Bandler
(5) Pension Committee
Chairman:
Steven Somerville
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
63
MAGELLAN 2016 ANNUAL REPORT 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 2nd, 2017 at
2:00 p.m. at The Living Arts Centre,
4141 Living Arts Drive,
Mississauga, Ontario L5B 4B8
OPERATING FACILITIES DIRECTORY & SHAREHOLDER INFORMATION
CANADA
660 Berry Street,
Winnipeg, Manitoba R3H 0S5
Tel: 204 775 8331
3160 Derry Road East,
Mississauga, Ontario L4T 1A9
Tel: 905 673 3250
634 Magnesium Road,
Haley, Ontario K0J 1Y0
Tel: 613 432 8841
975 Wilson Avenue,
Kitchener, Ontario N2C 1J1
Tel: 519 893 7575
UNITED STATES
97–11 50th Avenue,
New York, New York 11368
Tel: 718 699 4000
25 Aero Road,
Bohemia, New York 11716
Tel: 631 589 2440
165 Field Street,
West Babylon, New York 11704
Tel: 631 694 1818
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
UNITED KINGDOM
Davy Way, Llay Industrial Estate,
Llay, Wrexham LL12 0PG
Tel: 01978 856600
Miners Road, Llay Industrial Estate,
Llay, Wrexham LL12 0PJ
Tel: 01978 856798
Rackery Lane,
Llay, Wrexham LL12 0PB
Tel: 01978 852101
510 Wallisdown Road,
Bournemouth, Dorset BH11 8QN
Tel: 01202 512405
7/8 Lyon Road, Wallisdown,
Poole, Dorset BH12 5HF
Tel: 01202 535536
11 Tullykevin Road
Greyabbey, County Down
BT22 2QE
Tel: 02842 758231
Amy Johnson Way
Blackpool Business Park,
Blackpool, FY4 2RP
Tel: 01253 345466
Colne Road, Kelbrook
Lancashire, BB18 6SN
Tel: 01282 844480
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
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MAGELLAN 2016 ANNUAL REPORT Magellan Aerospace
3160 Derry Road East
Mississauga, ON Canada L4T 1A9
www.magellan.aero