MAGELLAN
2018
A n n u a l R e p o r t
LETTER TO SHAREHOLDERS
2018 was a year of transition with
major investments in INFORMATION
TECHNOLOGY infrastructure, SAP,
and new facilities in India, Poland
and Mississauga.
2018 was a year of transition with major investments in Information Technology infrastructure,
SAP, and new facilities in India, Poland and Mississauga. These investments, coupled with
continued acquisition of advanced manufacturing equipment, will provide us with modern
efficient facilities capable of not only maintaining our position in the market but will further
position Magellan as the supplier of choice to the global aerospace industry continuing to
provide cost effective products and services to our customers.
Aircraft deliveries continued to grow in 2018. Once again it was mostly in the single aisle
platforms of both Airbus and Boeing, and in addition we have seen significant growth in
deliveries of the Joint Strike Fighter. Airbus and Boeing jointly received orders in excess of
1,500 aircraft, resulting in a combined record backlog of over 13,500 aircraft.
This strong and growing backlog of both aircraft manufacturers’ supports the continued
confidence in commercial aircraft deliveries providing a firm basis from which Magellan can
continue to develop and grow the civil aircraft segment of the business, which accounts for
69% of the Corporation’s overall revenue.
Despite the positive overall industry trend, we also experienced a softening in wide body
programmes including the A330, A380 and Boeing 777. As well as an overall reduction in
deliveries on these platforms we encountered some volatility in the aircraft variant mix, which
resulted in disruption to production flow and the allocation of resources. Towards the end of
2018 we saw an improvement in this disruption and feel confident that these issues will not
significantly impact 2019.
We finished our year with $966.8 million in revenue and EBITDA of $162.1 million and continued
a five-year trend of maximizing cash flow and strengthening our balance sheet. These results
made it possible for us to offer an increased dividend. In order to maintain our competitiveness
we recognize that continued investment and operating cost reductions are necessary.
During 2018, Magellan embarked and completed the construction of a new 100,000 square
foot facility in Devanahalli, India. The facility will be operational in early 2019, supporting the
cost challenges of both the European and North American operations. We are working to
secure a number of new packages from the OEMs. The India facility’s lower cost structure
will provide us with an opportunity to enhance our margin whilst offering competitive solutions
to our customers. In addition, the Corporation committed funds to expanding the facility in
Mielec, Poland.
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MAGELLAN 2018 ANNUAL REPORT It is vital that investment
continues along with a
sustained drive in operational
performance.
As the industry continues to enjoy the record growth operational performance becomes even
more important in ensuring that Magellan can meet customer expectations by delivering
100% ON TIME and with ZERO DEFECTS. It is a prerequisite that Magellan constantly meets
the customer needs in delivering operational excellence at a market competitive price. We
believe this trend will continue for the rest of the decade; it is therefore vital that the investment
continues along with the sustained drive in operational performance.
As part of the drive for efficient and effective operational performance, the Corporation will
be investing heavily in 2019 in a new Enterprise Resource Planning (“ERP”) system. After
careful consideration SAP has been selected as the ERP system to take Magellan into the next
phase of growth. The new system will provide the opportunity to reduce production costs by
streamlining work flows, providing timely and detailed reporting and creating opportunities to
reduce costs across the Corporation. Our European Operations will be implementing SAP in
2019, including the new facility in India.
We continue to invest in our employees through training and modern apprenticeships providing
a safe and rewarding environment for our people to develop long and rewarding careers with
Magellan. We carried out employee surveys to better understand the views and concerns of our
team. The results of the surveys are being used to develop our policies and procedures in a
number of areas to help us retain and develop our employees. I would like to take this opportunity
to express my appreciation to our employees 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.
As we continue on this journey, focusing on delivering operational excellence in all areas of
our business, and investing in our employees, systems and advanced technologies, we will
continue to deliver strong financial performance and growth into the next decade.
Phillip C. Underwood
President and Chief Executive Officer
March 8, 2019
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MAGELLAN 2018 ANNUAL REPORT 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, 2018 and 2017 prepared in accordance with International
Financial Reporting Standards (“IFRS”), and the Annual Information Form for the year ended December 31, 2018 (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, 2018 relative to the year ended December 31, 2017. The information
contained in this report is as at March 8, 2019. 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,” “2018 and Recent Updates,” “Outlook,” “Consolidated Revenues,”
“Liquidity and Capital Resources,” “Risk Factors,” “Critical Accounting Estimates” 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 2018 and continuation of the current
regulatory and tax regimes in the jurisdictions in which the Corporation operates, and necessarily involve known and
unknown risks and uncertainties, including the business risks discussed in this MD&A, which may cause actual performance
and financial results in future periods to differ materially from any projections of future performance or results expressed or
implied by such forward-looking statements. Accordingly, readers are cautioned that events or circumstances could cause
results to differ materially from those predicted. Except as required by law, the Corporation does not undertake to update
any forward-looking information in this document whether as a result of new information, future events or otherwise.
The MD&A presents certain non-IFRS financial measures to assist readers in understanding the Corporation’s performance.
Non-IFRS financial measures are measures that either exclude or include amounts that are not excluded or included in
the most directly comparable measures calculated and presented in accordance with Generally Accepted Accounting
Principles (“GAAP”). Throughout this discussion, reference is made to EBITDA (defined as net income before interest,
income taxes, depreciation and amortization), which the Corporation considers to be an indicative measure of operating
performance and a metric to evaluate profitability. EBITDA is not a generally accepted earnings measure and should not
be considered as an alternative to net income (loss) or cash flows as determined in accordance with IFRS. As there is no
standardized method of calculating this measure, the Corporation’s EBITDA may not be directly comparable with similarly
titled measures used by other companies. Reconciliations of EBITDA to net income (loss) reported in accordance with
IFRS are included in this MD&A.
1. OVERVIEW
A summary of Magellan’s business and significant 2018 events
Magellan is a diversified supplier of components to the aerospace industry. 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 (“R&O”).
During 2018, the Corporation revised its Vision, Mission and Values statements to reflect an updated set of guiding
principles for the achievement of the Corporation’s goals and objectives. The Vision in particular, states the goal is to be
the supplier of choice to the global aerospace industry. To that end, the Corporation began a focused effort in 2018 to
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MAGELLAN 2018 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS December 31, 2018 establish a zero defect, 100% schedule compliance culture across the organization. In parallel there was a continued
emphasis on reducing inventories while increasing inventory turns and improving cash management. Achieving these
goals is vital considering that aerospace is an increasingly competitive market where success is highly dependent upon
meeting the customer’s expectations of supplier performance, including cost. Finally, the Corporation invested in a new
ERP system in 2018 which will become an important tool in the transformation of its business. When the system is fully
implemented it will aid the Corporation in delivering globally competitive, best value solutions to its customers.
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 castings, fabricated and machined
gas turbine engine components, both static and rotating, integrated nacelle components, flow path 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 2018, 69% of revenues were derived from commercial markets (2017–73%, 2016–73%) while 31% of revenues related
to defence markets (2017 – 27%, 2016 – 27%).
2018 and Recent Updates
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Magellan announced on January 22, 2018 that it had delivered the first of three Power Control Units (“PCU’s”) for a
planned space mission. In 2016, Magellan was selected by the Laboratory for Atmospheric and Space Physics at
the University of Colorado in Boulder, Colorado to provide satellite technology for a future Deep Space Interplanetary
Mission. Under the contract, Magellan’s facility in Winnipeg, Manitoba will deliver three PCU’s and subsystems for three
jointly developed Control and Data Handling (“C&DH”) units. Magellan will provide its flight-proven PCU’s and C&DH
subsystems that utilize expertise developed by Magellan for past and current Canadian Space Agency missions.
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On February 22, 2018, Magellan and Robinson Helicopter Company (“Robinson”) announced that a Wire Strike
Protection System™ (WSPS™) is now available for the Robinson R66 helicopter platform. 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 cutting blades. The R66 WSPS™ is
comprised of an upper cutter, lower cutters, and a windshield detector. Magellan’s WSPS™ R66 platform is available
as a field kit option for all R66 helicopters.
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MAGELLAN 2018 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS December 31, 2018 –
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The Corporation announced on April 19, 2018 that it had secured a 5-year agreement with Airbus to supply wing ribs
for the A330 aircraft. Magellan will manufacture ribs 2 through 5, the largest ribs in the skeletal structure of the aircraft
wing. Revenue generated from production of these wing ribs is estimated to exceed $48 million over the term of the
contract. These ribs will be produced by Magellan in the United Kingdom facility for the Airbus wing assembly.
On April 24, 2018 the Corporation announced that it had signed a 5-year agreement with an undisclosed commercial
aeroengine customer to manufacture complex magnesium and aluminium castings and finished, machined engine
shafts for gas turbine engines. The castings will be produced by Magellan’s facilities in Haley, Ontario and Glendale,
Arizona, and Magellan’s facility in Haverhill, Massachusetts will manufacture the engine shafts. The new agreement is
expected to generate approximately $53 million in revenue for Magellan through 2023.
On April 30, 2018, the Corporation announced that a number of major contract extensions and new awards were made
by The Boeing Company (“Boeing”) to Magellan. Multi-year contract renewals were agreed to for the manufacture of
titanium wing fittings for the Boeing 787 Dreamliner and the detail manufacture and assembly of the tanker door for
the Boeing 767-2C aircraft. In addition, Magellan was also awarded a new multi-year contract to manufacture winglet
components for the Boeing 737 MAX. The components and assemblies associated with these multiple contracts will
be delivered from Magellan’s facilities in New York, New York and Middletown, Ohio.
Magellan announced on May 11, 2018 the funding of $625,000 for an Industrial Research Chair in the area of satellite
development, and a further $120,000 contribution towards a second Chair for Design Engineering, both at the University
of Manitoba (“U of M”). Magellan’s Winnipeg division and the U of M have a long and established collaboration and a
shared vision to establish a world-leading space capability in Manitoba at the university. The research and development
activities of these Chairs are fully funded by industry sponsor(s), the U of M, and the Natural Sciences and Engineering
Research Council.
The Corporation announced on May 22, 2018 the signing of an agreement with Hamilton Sundstrand Corporation,
a UTC Aerospace Systems Company (“Hamilton Sundstrand”), to manufacture complex magnesium and aluminium
castings for various military and commercial aerospace platforms. The castings will be produced by Magellan’s
facilities in Haley, Ontario and Glendale, Arizona. This new long-term agreement with Hamilton Sundstrand provides
the framework for a new level of strategic alignment with Magellan; in addition to the F-15, F-16, and F-18 for Hamilton
Sundstrand’s current fighter engine platforms, the agreement also encompasses the production of castings to support
the JSF, PW1100, A320, 787 and 777 programs.
On August 13, 2018 Magellan made an announcement of the signing of a six year agreement with Pratt & Whitney to
manufacture aluminum castings for their Next Generation Product Family of engines, powering the Airbus A320neo,
Airbus A220 (formerly known as Bombardier C-Series), Embraer E2 series and Mitsubishi MRJ aircraft. The castings
will be produced at Magellan’s facilities in Haley, Ontario and Glendale, Arizona. The agreement is expected to
generate approximately $81 million in revenue for Magellan through 2023.
Magellan and Aeromet International Ltd. (“Aeromet”) announced on October 15, 2018 that Magellan’s Haley, Ontario
site has joined a global network of foundries licensed to manufacture cast parts using the advanced A20X™ aluminium
alloy. Developed and patented by Aeromet in the UK, A20X™ is the world’s strongest aluminium casting alloy and is
used in aerospace, defence, and space applications by major original equipment manufacturers (“OEMs”).
The Corporation announced on October 17, 2018 the completion of all hardware deliveries to Macdonald, Dettwiler
and Associates Ltd. (“MDA”), a Maxar Technologies company, for the RADARSAT Constellation Mission (“RCM”)
being built for the Canadian Space Agency. In late September 2018, the Multi-Layered Insulation blankets were
installed on the final satellite bus, marking the completion of this major contractual milestone. These thermal blankets
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MAGELLAN 2018 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS December 31, 2018 for the spacecraft prevent it from freezing while in space. Over the course of the RCM program Magellan has delivered
three satellite buses, three payload module structures, as well as associated software, ground support equipment,
and launch vehicle adaptors to MDA. Magellan is under contract by MDA to manufacture these assemblies for the
Canadian Space Agency’s RCM program, a three-satellite constellation that will provide around-the-clock C-band
synthetic aperture radar data to support maritime surveillance, disaster management, and ecosystem monitoring for
Canada and its surrounding Arctic, Pacific, and Atlantic maritime areas.
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On November 5, 2018 Magellan announced it had extended its agreement with Airbus for a further six years for the
manufacture of A350 XWB centre wing box and keel beam detail parts. It is estimated that revenue generated from
this work package will exceed $140 million dollars over the term of the contract. The package consists of a number of
large structural, machined components, and will be manufactured by Magellan in the United Kingdom and supplied
to the Airbus assembly facility in Nantes, France.
The Corporation announced on February 19, 2019 the opening of its new manufacturing and assembly facility in India.
The 100,000 square foot Magellan Aerospace (India) Pvt. Ltd. facility, constructed on seven acres in Hitech Defence
and Aerospace Park (Aerospace SEZ Sector) in Devanahalli, India, near the Bangalore International Airport, was
completed at the end of 2018 and the process of installing and commissioning of high speed machining centres is
underway. Magellan’s new cellular machining and assembly plant will specialize in high speed milling and turning of
aerostructure and aeroengine components produced from both aluminium and hard metal materials. Combined with
comprehensive processing and hard metal machining capabilities from Magellan’s two longstanding joint ventures in
India, API Surface Treatments and Triveni Aeronautics Pvt. Ltd. (“Triveni”), Magellan will be one of the largest suppliers
of “Make in India” manufactured commercial aircraft components.
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On February 20, 2019 Magellan announced it has increased its investment in Triveni to 75%. Triveni specializes in hard
metal machining of aeroengine and aerostructure components. Magellan’s investment in Triveni commenced in 2013
when it acquired a 49% share of the business. Since then Triveni has grown, prospered and played a major role in
Magellan’s overall strategy in India.
Labour Matters
As at December 31, 2018 the Corporation had approximately 3,800 employees. Approximately 40% of the Corporation’s
employees are unionized and covered by collective agreements. The Corporation has 13 collective agreements in place
as at December 31, 2018. During the year ended December 31, 2018 labour agreements at four of the Corporation’s
facilities were successfully re-negotiated so that they now expire on December 31, 2020. and February 28, 2021, and
March 15, 2021, respectively. Labour agreements at three of the Corporation’s facilities will expire in the third quarter and
fourth quarter of 2019; negotiations will commence in the second and third quarter of 2019. The Corporation anticipates
that all negotiations will result in an extension of the expiry dates or a mutually satisfactory agreement, as applicable.
Financing Matters
On September 13, 2018 the Corporation entered into the Bank Credit Facility Agreement with a syndicate of lenders. The
Bank Credit Facility Agreement provides for a multi-currency global operating credit facility to be available to Magellan in
a maximum aggregate amount of $75 million. The Bank Credit Facility Agreement also includes a $75 million uncommitted
accordion provision, which provides Magellan with the option to increase the size of the operating credit facility to $150
million. Under the terms of the Bank Credit Facility Agreement, the operating credit facility expires on September 13, 2020.
Extensions of the operating credit facility are subject to mutual consent of the lenders and the Corporation.
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MAGELLAN 2018 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS December 31, 2018 2. OUTLOOK
The outlook for Magellan’s business in 2019
After an unprecedented 14 years of growth, the commercial aerospace market is expected to continue growing in 2019.
Industry experts suggest that subject to any significant economic factors such as a global recession, this market will
maintain its strength until at least 2022 considering current order backlogs. As of December 31, 2018, Airbus set a new
all-time order backlog record with 7,577 jets on order, representing 9.5 years at 2018 rates. Boeing set its all-time high
order backlog in August 2018 when it recorded 5,964 aircraft or 7.4 years of production at 2018 rates. Market analysts
believe the probability is high that these aircraft orders will be delivered, particularly while global airlines remain profitable.
Boeing ended 2018 with the 737 production rate at 52 aircraft per month and with plans to reach 57.7 aircraft per month in the
second half of 2019. They have been considering potentially higher rates for 2020. Airbus ended 2018 with the A320 build
rate at 56 aircraft per month and with plans to reach 63 aircraft per month by September 2019. Supply chain issues plagued
both single-aisle programs throughout 2018 which resulted in a number of incomplete aircraft being parked at the OEM’s
assembly lines. With supply issues materially resolved by the end of the year, both OEM’s met their 2018 delivery targets.
In the large commercial aircraft market, Boeing’s 787 program build rates are expected to increase from 12 aircraft per month
to 14 aircraft per month by the second quarter of 2019. The 777 program rate remains steady at 5 aircraft per month. Boeing
plans to build six 747’s in 2019. The A350XWB rate increased from 8.8 aircraft per month to 9.8 aircraft per month in late
2018. Consideration is being made to hit 13 aircraft per month in 2020. Boeing delivered 3 777X’s in 2018 and is expected to
deliver 3 in 2019. The 777X production ramp up begins in 2020. Airbus’ A330 build rate is at a stable 4.5 per month.
On February 14, 2019 Airbus announced that it will wind down the A380 program following the cancelation of 39 aircraft
orders by the program’s largest customer, Emirates. Emirates will take delivery of only 14 more aircraft over the next two
years and will instead order 40 of the A330-900 and 30 of the A350-900 twin-engine widebody aircraft. Airbus stated that
the final program deliveries will be in 2021. Airbus’ remaining order backlog for the A380 is between 17 and 20 aircraft.
The Corporation has participation in the aircraft at a shipset value of approximately $2.3 million and is currently assessing
the impact of the A380 program termination.
The competitive landscape within the commercial aircraft industry has been changing as vertical integration strategies
and mergers and acquisitions shift market advantage. With UTC’s recent acquisition of Collins Aerospace, UTC is now
capable of supplying all major aircraft systems except for the airframe. UTC could effectively compete with the OEMs by
partnering with an independent airframe supplier to build an aircraft. It is said that Boeing’s outsourcing strategy on the
787 program seeded this new type of super Tier I. Boeing is moving away from that strategy on the 777X program in favour
of in-sourcing and using non-Tier I suppliers. Boeing also made a vertical integration move by forming a joint venture
with Safran that will see them compete with UTC and Honeywell in the auxilliary power unit market. Finally, the Airbus/
Bombardier and Boeing/Embraer deals have reaffirmed the duopoly in the commercial aircraft market. These deals not
only serve to expand market share for Airbus and Boeing, but they also strengthen their ability to leverage the supply base
when competing a program.
Persistently low fuel prices have been a disruptive factor in the regional turboprop market. However, according to ATR’s
market outlook, 30% of future traffic will come from routes that do not exist today. They predict there will be 2,770 new
turboprop routes created primarily in emerging markets. ATR is the leader in this market. While Bombardier held second
place, that position was transferred to Canadian-based Viking Air (“Viking”) following Bombardier’s 2018 sale of the Dash
8 program to Viking. The transition of ownership is expected to help improve market share opportunities for the Dash 8
as it is felt that Viking can provide a renewed and undistracted focus to the program. The current build rate for the Q400
turboprop is 2 per month.
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MAGELLAN 2018 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS December 31, 2018 It has now been a decade since the business jet market peaked. For several years the industry has been predicting a market
recovery based on various leading indicators, the latest being a strong United States economy and the lowest inventory of
used jets for sale as a percentage of the total fleet in 19 years. Based on these indicators the industry is predicting several
years of growth.
In the defence market, the United States defence priorities have been focused primarily on the Middle East and
Afghanistan since 9/11. Resurging threats from Russia and China are now causing the United States to shift priorities from
ground forces to higher end capabilities. Experts are calling this an era of “Great Power Competition”. In this environment,
past underinvestment in fleet modernization is considered a liability in the United States’ ability to maintain defence
superiority, especially as technology advancements are being made by both Russia and China. The fiscal year 2020 U.S.
defence budget is expected to rise over the next two years, which will secure growth for the United States defence prime
contractors through at least 2023.
In Canada, the Future Fighter Replacement Program is progressing with four of the original five aircraft continuing in the
competition, Lockheed Martin’s F-35, Boeing’s Super Hornet, the Eurofighter Typhoon, and Saab’s Gripen. Dassault dropped
out. A draft request for proposal (“RFP”) was issued to the bidders for review and comment in 2018 with a final RFP expected
to come in the second quarter of 2019. Bid responses will be requested for the fourth quarter of 2019, with a down select
expected 2020/2021 followed by a contract award in 2022. The first aircraft delivery would be sometime in 2025.
Regarding the F-35 Lightening II program, Lockheed Martin announced that it had met its 2018 target by delivering 91 F-35
aircraft last year. This represented a 40% increase over 2017 deliveries and 100% over 2016. For 2019, Lockheed is set to
deliver over 130 planes. Lockheed also announced that it delivered targeted cost reductions across all three variants of the
aircraft. They continue to record new orders for the F-35 with Japan announcing at the end of 2018, a commitment to acquire
105 additional aircraft beyond the 42 F-35’s already approved. Singapore also announced in January 2019 a decision to
select the F-35 as a successor to their fleet of F-16’s. A final decision will not be reached until later in the year.
Magellan is performing final modifications to its facilities to accommodate increased F-35 production rates. By the end of
2019, Magellan will be capable of supporting 60 shipsets of horizontal tails per year.
The global helicopter industry expects to see some growth in 2019. The largest growth is forecasted to come from the
Emergency Medical Services (“EMS”) segment which could account for 18 to 20 percent of global demand. China in
particular is expected to generate a significant portion of this new demand for EMS helicopters. The oil and gas helicopter
market remains flat as it is still dealing with an underutilized fleet. On the defence helicopter side, the United States Army
continues its work on Future Vertical Lift (“FVL”) and Future Attack (“FA”) programs as well as the Improved Turbine Engine
Program (“ITEP”), which is meant to re-engine the Boeing AH64 and Sikorsky UH-60 helicopters. A decision is expected soon
regarding the ITEP competition between General Electric’s T901 engine and the Pratt & Whitney/Honeywell’s T900 engine.
The FVL and FA program decisions are further out in the future. Increased defence spending in other countries is not expected
to generate many orders for new helicopter platforms in the near term as most are focusing on operations, maintenance and
readiness. However, it is recognized that half of the world’s military helicopters in operation are over 20 years old, meaning that
replacement programs will be required.
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MAGELLAN 2018 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS December 31, 2018 3. SELECTED ANNUAL INFORMATION
A summary of selected annual financial information for 2018, 2017 and 2016
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 – Basic and Diluted
Total assets
Total non-current financial liabilities
2018
966.8
89.1
1.53
162.1
2.78
1,072.9
86.4
2017
(restated)
955.5
109.5
1.88
178.3
3.06
982.7
77.3
2016
1,003.8
88.6
1.52
174.3
2.99
992.9
101.5
As described in “Changes in Accounting Policies” section of this MD&A, the Corporation’s results of operations for the
year ended December 31, 2017 have been restated to reflect the impact of adoption of IFRS 15, Revenue from Contracts
with Customers.
Revenues for the year ended December 31, 2018 increased from 2017 and decreased from 2016 levels. The increase in
revenues from 2017 was primarily attributable to volume increases. Net income decreased in 2018 from 2017 mainly due
to gain on sale of the Mississauga property in 2017 and higher income taxes in 2018 (see “Results of Operations”).
During 2018 the Corporation paid quarterly dividends on common shares of $0.085 per share for the first three quarters
and $0.10 per share in the fourth quarter, amounting to $20.7 million in total for the year. During 2017, the Corporation paid
quarterly dividends on common shares of $0.065 per share in the first three quarters and $0.085 per share in the fourth
quarter, amounting to $16.3 million in total for the year.
4. RESULTS OF OPERATIONS
A discussion of Magellan’s operating results for 2018 and 2017
Consolidated Revenues
Consolidated revenues for the year ended December 31, 2018 were $966.8 million, a 1.2% increase from the $955.5 million
last year, mainly driven by volume increases.
Twelve-months ended December 31, expressed in thousand of dollars
Canada
United States
Europe
Total revenues
2018
2017 Change
(restated)
320,838
325,739
320,176
966,753
305,466
311,315
5.0%
4.6%
338,680
(5.5% )
955,461
1.2%
Consolidated revenues are impacted by the fluctuation of the United States dollar and British pound against the Canadian
dollar when the Corporation translates its foreign operations to Canadian dollars. Further, the fluctuation of the British
pound relative to the United States dollar impacts the performance of the Corporation’s European operations. If the
average exchange rates for both the United States dollar and British pound experienced in 2017 remained constant in
2018, consolidated revenues for 2018 would have been approximately $967.3 million.
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MAGELLAN 2018 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS December 31, 2018
On a currency neutral basis, in comparison to 2017, revenues in Canada in 2018 increased 5.5% primarily driven by
volume increases and higher repair and overhaul services. Revenues in the United States increased by 4.6% largely due
to volume increases. Revenues in Europe decreased 5.7% mainly due to low production build rates for wide body aircraft.
Gross Profit
Twelve-months ended December 31, expressed in thousands of dollars
Gross Profit
Percentage of revenue
2018
2017 Change
(restated)
163,275
16.9%
172,707
(5.5% )
18.1%
Gross profit was $163.3 million in 2018, $9.4 million lower than 2017 of $172.7 million. Gross profit, as a percentage of
revenues was lower than the prior year by 1.2%. Decrease in gross profit was primarily driven by volume decreases in a
number of programs and product mix.
Administrative and General Expenses
Twelve-months ended December 31, expressed in thousands of dollars
Administrative and general expenses
Percentage of revenue
2018
57,337
5.9%
2017 Change
59,549
(3.7% )
6.2%
Administrative and general expenses as a percentage of revenue were 5.9% in 2018 as compared to 6.2% in 2017.
Administrative and general expenses of $57.3 million in 2018 were $2.2 million or 3.7% lower than $59.5 million in the prior
year mainly due to lower consulting and employee expenses. In addition, $0.5 million was recorded in other income in
2018 as a result of an early termination of a rental agreement.
Other
Twelve-months ended December 31, expressed in thousands of dollars
Foreign exchange (gain) loss
Loss (gain) on disposal of property, plant and equipment
Gain on investment property
Other
Other
2018
(2,993 )
313
–
(9,676 )
(12,356 )
2017
6,034
(26,533 )
(2,183 )
4,010
(18,672 )
Included in other income is a foreign exchange gain of $3.0 million compared to a loss of $6.0 million in the prior year. The
movements in balances denominated in foreign currencies and the fluctuations of the foreign exchange rates impact the
net foreign exchange loss or gain recorded during the year. In 2018, the Corporation recognized a net gain of $9.7 million
in relation to prior acquisitions. In the prior year, the Corporation recorded a gain of $26.5 million on sale of the land and
building of the Corporation’s Mississauga facility and $4.0 million of associated sale costs. In addition, a $2.2 million gain
on disposal of an investment property was recorded.
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
2018
884
1,006
2,224
4,114
2017
2,435
611
1,665
4,711
10
MAGELLAN 2018 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS December 31, 2018
Total interest costs of $4.1 million for 2018 decreased by $0.6 million from $4.7 million in 2017, primarily driven by lower
interest on bank indebtedness and long-term debt as a result of lower principal amounts outstanding during 2018 when
compared to 2017. The Corporation sells a portion of its trade receivables through securitization and factoring programs.
Discount on sale of trade receivables was $2.2 million, an increase of $0.6 million over the prior year largely due to higher
volumes of receivables sold during the year.
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
2018
2017
(restated)
9,402
15,658
25,060
21.9%
15,557
2,074
17,631
13.9%
The Corporation recorded an income tax expense in 2018 of $25.1 million on pre-tax income of $114.2 million, representing
an effective tax rate of 21.9%, compared to an income tax expense of $17.6 million on a pre-tax income of $127.1 million
in 2017.
During 2018 and 2017, the Corporation recognized investment tax credits totalling $10.0 million and $9.0 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 21.9% in 2018 from 13.9% in 2017 is primarily attributed to the reduction
in the deferred tax liability in the prior year as a result of new legislation which lowered the United States federal corporate
income tax rate. In addition, the lower tax rate applicable to the capital gain on the sale of the Mississauga property and
the investment property in 2017 further decreased the effective tax rate. The change in mix of income across the different
jurisdictions in which the Corporation operates also impacts the change in the effective tax rate.
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
2018
2017
Net income
Interest
Taxes
Depreciation and amortization
EBITDA
11
(restated)
89,120 109,488
4,711
4,114
25,060
43,809
46,516
162,103 178,346
17,631
MAGELLAN 2018 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS December 31, 2018
EBITDA for the year ended 2018 of $162.1 million decreased by $16.2 million when compared to $178.3 million in 2017,
primarily as a result of lower net income, interest, and depreciation and amortization expenses offset by higher taxes. Net
income in 2018 included a net gain of $9.7 million in relation to prior acquisitions, and in 2017 included a $22.5 million net
gain on sale of the land and building of the Corporation’s Mississauga facility net of associated costs. Backing out the
two amounts in respective years, EBITDA in 2018 would have been $152.4 million versus $155.8 million in the prior year.
6. SELECTED QUARTERLY FINANCIAL INFORMATION
A summary view of Magellan’s quarterly financial performance
Expressed in millions of dollars except per share information
2018
Revenues
Income before taxes
Net income
Net income per common share
Mar 31
244.6
22.5
17.5
Jun 30
241.2
29.8
23.5
Sep 30
226.5
23.4
18.6
Basic and Diluted
0.30
0.40
254.5
38.5
29.5
0.51
50.7
0.32
35.5
Dec 31 Mar 312
248.2
Jun 302
2017
Sep 302 Dec 312
252.0
222.6
232.7
48.8
39.6
26.3
19.9
23.6
18.1
0.68
0.34
0.31
28.4
31.9
0.55
40.1
EBITDA1
41.8
1 EBITDA is not an IFRS financial measure. Please see the “Reconciliation of Net Income to EBITDA” section for more information
34.1
62.6
39.8
35.8
2 Restated using revenue recognition policies in accordance with IFRS 15, Revenue from Contracts with Customers
Revenues and net income reported in the table above 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 impact the Corporation’s United States dollar
exposures in its European operations. During the periods reported, the average exchange rate of United States dollar
relative to the Canadian dollar fluctuated between a high of 1.3448 in the second quarter of 2017 and a low of 1.2526 in
the third quarter of 2017. The average exchange rate of British pound relative to the Canadian dollar moved from a high of
1.7607 in the first quarter of 2018 to a low of 1.6398 in the third quarter of 2017. The average exchange rate of the British
pound relative to the United States dollar reached its high of 1.3920 in the first quarter of 2018 and hit a low of 1.2395 in
the first quarter of 2017. Had exchange rates remained at levels experienced in 2017, reported revenues in 2018 would
have been higher by $7.6 million and $9.2 million in the first and second quarters respectively; lower by $9.0 million and
$7.3 million in the third and fourth quarters, respectively.
As discussed above, net income reported in the quarterly information was also impacted by the foreign exchange
movements. The Corporation reported its highest net income in the first quarter of 2017 mainly driven by the recognition
of the gain on the sale of the land and building of its Mississauga facility. In the third quarter of 2017, the Corporation
recorded a gain of $2.2 million on the disposition of an investment property. In the fourth quarter of 2017, the Corporation
recognized the future tax benefit attributable to a reduction in the United States federal corporate income tax as a result of
new legislation. In the fourth quarter of 2018, the Corporation recorded a net gain of $9.7 million related to prior acquisitions.
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
12
MAGELLAN 2018 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS December 31, 2018
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 2018, $100.0 million of cash was generated by operations, $47.3 million was used in investing activities and $31.8 million
was used in financing activities.
Cash Flow from Operating Activities
Twelve-months ended December 31, expressed in thousands of dollars
(Increase) decrease in trade receivables
(Increase) decrease in contract assets
Decrease in inventories
(Increase) decrease in prepaid expenses and other
Decrease in accounts payable, accrued liabilities and provisions
Net change in non-cash working capital items
Net cash from operating activities
2018
2017
(restated)
6,766
2,658
15,791
(13,224 )
(18,335 )
1,868
(5,412 )
(6,046 )
(41,149 )
4,589
99,997 129,949
(24,618 )
3,992
The Corporation generated $100.0 million in 2018 from operating activities, compared to $129.9 million in the prior year.
Changes in non-cash working capital items used cash of $41.1 million attributed to the increase in trade receivables,
contract assets, prepaid expenses and other, and the decrease in accounts payable, accrued liabilities and provisions,
partially offset by the decrease in inventories. The increase in trade receivables resulted from higher sales and change
in payment terms. Higher contract assets resulted from timing of production and billing related to products transferred
over time. Lower inventory levels in 2018 resulted from lower production rates on a number of programs and timing of
shipment. The decrease in accounts payable, accrued liabilities and provisions was due to timing of purchases and
payments. In 2017, changes in non-cash working capital items provided cash of $4.6 million as a result of a decrease in
trade receivables, contracts assets, inventories, and prepaid expenses and other, offset by decrease in accounts payable,
accrued liabilities and provisions.
Cash Flow from Investing Activities
Twelve-months ended December 31, expressed in thousands of dollars
Purchase of property, plant and equipment
Proceeds from disposal of property, plant and equipment
Proceeds on disposition of investment property
Change in restricted cash
(Increase) decrease in intangibles and other assets
Net cash used in investing activities
2018
(48,346 )
411
–
3,329
(2,728 )
(47,334 )
2017
(64,151 )
32,742
3,900
3,665
3,105
(20,739 )
The Corporation invested $48.3 million in capital assets during the year in comparison to $64.2 million in 2017. 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 the prior year, the Corporation sold the land
and building of its Mississauga facility and one investment property for proceeds of $32.7 million and $3.9 million respectively.
13
MAGELLAN 2018 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS December 31, 2018
Cash Flow from Financing Activities
Twelve-months ended December 31, expressed in thousands of dollars
Decrease in bank indebtedness
Increase (decrease) in debt due within one year
Decrease in long-term debt
(Decrease) increase in long-term liabilities and provisions
Increase in borrowings, net
Common share dividend
Net cash used in financing activities
2018
(264 )
3,892
(15,165 )
(945 )
1,302
(20,664 )
(31,844 )
2017
(43,159 )
(7,951 )
(13,520 )
1,071
3,493
(16,299 )
(76,365 )
The Corporation used $31.8 million in 2018 mainly to repay long-term debt and bank indebtedness, and to pay dividends,
which was partially offset by the proceeds of the sales of trade receivables. The Corporation received in 2018 $1.8 million
net of repayment of $1.0 million from Canadian Government agencies related to the development of its technologies and
processes as compared to $3.5 million received in 2017.
Contractual Obligations
As at December 31, 2018, expressed in thousands of dollars
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
–
41,877
–
5 Years
–
Total
41,877
2,516
593
5,283
141
917
4,773
543
6,812
494
1,368
4,320
271
720
12,329
4
1,411
6,430
17,948
36,473
351
1,196
2,182
1,580
21,562
25,427
51,327
13,990
12,952
41,430 119,699
Major cash flow requirements for 2019 include the repayment of trade receivables securitization of $41.9 million which is
expected to be refinanced, repayment of long-term debt of $2.5 million, payments of equipment and facility leases of $5.9
million and borrowings subject to specific conditions of $0.9 million.
On September 13, 2018, the Corporation amended its credit agreement with its existing lenders. The Corporation has
a multi-currency operating credit facility with a syndicate of banks, with a Canadian dollar limit of $75 million. Under the
terms of the amended credit agreement, the operating credit facility expires on September 13, 2020. Extensions of the
facility are subject to mutual consent of the syndicate of lenders and the Corporation. The credit agreement also includes
a $75 million uncommitted accordion provision which will provide the Corporation with the option to increase the size of
the operating credit facility.
As at December 31, 2018, the Corporation had made contractual commitments to purchase $6.4 million of capital assets.
In addition, the Corporation had purchase commitments, largely for materials required for the normal course of operations,
of $387.0 million as at December 31, 2018. 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 8, 2019, 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 19 of the
Corporation’s consolidated financial statements.
14
MAGELLAN 2018 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS December 31, 2018
On March 30, 2018, June 29, 2018, and September 28, 2018 the Corporation paid quarterly dividends on 58,209,001 common
shares of $0.085 per common share, representing an aggregate dividend payment of $14.8 million. On December 31, 2018 the
Corporation paid quarterly dividends on 58,209,001 common shares of $0.10 per common share, amounting to $5.8 million.
For the year ended December 31, 2017, the Corporation declared and paid dividends on common shares on March 31,
2017, June 30, 2017 and on September 30, 2017 of $0.065 per share amounting to $11.4 million and on December 29,
2017 of $0.085 per share amounting to $4.9 million.
In the first quarter of 2019, the Corporation declared cash dividends of $0.010 per common share payable on March 29,
2019 to shareholders of record at the close of business on March 22, 2019.
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. As at December 31, 2018, the Corporation had $41.0 million USD/CAD foreign
exchange contracts outstanding with a fair value liability of $0.8 million, expiring monthly until January 2020.
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 and cost recovery fees of $0.1 million [2017–$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.
15
MAGELLAN 2018 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS December 31, 2018 The following risks and uncertainties apply to the Corporation. Information relating to additional risks and uncertainties are
set forth in the Corporation’s Annual Information Form on SEDAR at www.sedar.com.
Factors that have an adverse impact on the aerospace industry may adversely affect the Corporation’s results of operations.
The Corporation’s gross profit is derived from the aerospace industry. The Corporation’s aerospace operations are
focused on engineering and manufacturing aircraft components for new manufactured aircraft, and 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 possible changes in sourcing strategies by aircraft operators and OEMs, decreased demand for air
travel or projected market growth that may not materialize or be sustainable. Although fuel prices have remained low, since
it is a significant cost factor for aircraft operators, any sizeable price increases can affect their operating margins and
reduce 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 acquisitions; 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.
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.
In situations where the Corporation is not fully hedged, 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 could affect
the translation of the Corporation’s results and profitability shown in its consolidated financial statements. The Corporation
also may not be able to manage its currency exposure on commercially reasonable terms.
Political uncertainty could result in a decrease in revenues or have other material adverse effects on the Corporation.
The United States and certain European countries have been experiencing significant political events that have cast
uncertainty on global financial and economic markets. Notable examples that occurred in 2018 included the renegotiation of
the terms of the North American Free Trade Agreement (now the United States-Mexico-Canada Agreement), which has not
yet been ratified in Canada or the United States, the withdrawal of the United States from the Trans-Pacific Partnership and
the imposition by the United States of tariffs on the importation of certain goods, such as aluminum and steel. Most recently
the United States withdrew from the Intermediate-range Nuclear Forces Treaty and then Russia also withdrew. Additionally
newly adopted tax legislation changes in the United States may affect strategies for United States corporations. The potential
introduction of laws to reduce immigration and restrict access into the United States for citizens of certain countries may
also present future challenges to non-U.S. corporations. It remains unclear exactly what actions the administration in the
United States will be successful implementing, and if implemented, how these actions may impact the aerospace industry.
16
MAGELLAN 2018 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS December 31, 2018 During 2016, the referendum by British voters to exit the European Union (“Brexit”) adversely impacted global markets
and resulted in a sharp decline in the British pound against the US dollar. In February 2017, the British Parliament voted
in favor of allowing the British government to begin the formal process of Brexit and discussions with the European Union
began in March 2017. In the short-term, volatility in the British pound could continue as the United Kingdom negotiates its
anticipated exit from the European Union, which is scheduled to occur on March 29, 2019. In the longer term, any impact
from Brexit on Magellan’s United Kingdom operations will depend, in part, on the outcome of tariff, trade, regulatory, and
other negotiations. Any of these effects of Brexit and others the Corporation cannot anticipate, may have a negative effect
and may adversely affect the Corporation’s business.
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.
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.
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 that of the Corporation and
this constitutes 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.
The aerospace and defence industry continues to experience significant consolidation through mergers and acquisitions,
and vertical integration strategies. This trend also affects the Corporation’s customers, competitors, and suppliers.
Consolidation among Magellan’s customers may result in delays in awarding new contracts and losses of existing business.
Consolidation among the Corporation’s competitors may result in larger competitors with greater resources and market
share which could adversely affect the Corporation’s ability to compete successfully. Consolidation among Magellan’s
suppliers may result in fewer sources of supply and increased costs to the Corporation.
17
MAGELLAN 2018 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS December 31, 2018 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
21 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 Corporation’s 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.
18
MAGELLAN 2018 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS December 31, 2018 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
To estimate income (loss) on completion, the Corporation takes into account factors inherent to the contract by using
historical and/or forecast data.
Repayable government grants
The forecast repayment of grants received from government authorities is based on 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 2018
The Corporation has adopted the following new and amended standards in 2018.
IFRS 15 Revenue from Contracts with Customers
IFRS 15, Revenue from Contracts with Customers (“IFRS 15”) supersedes IAS 11, Construction Contracts, IAS 18, Revenue
and related interpretations and applies to all revenue arising from contracts with customers, unless those contracts are in
the scope of other standards. The new standard establishes a five-step model to account for revenue arising from contracts
with customers. Under IFRS 15, revenue is recognized at an amount that reflects the consideration to which an entity
expects to be entitled in exchange for transferring goods or services to a customer. The standard requires entities to exercise
judgement, taking into consideration all of the relevant facts and circumstances when applying each step of the model to
contracts with their customers. The standard also specifies the accounting for the incremental costs of obtaining a contract
and the costs directly related to fulfilling a contract.
IFRS 15 was adopted effective January 1, 2018. The Corporation adopted IFRS 15 using the full retrospective method
of adoption, which requires the restatement of the Corporation’s 2017 results and an opening adjustment to equity as at
January 1, 2017. Practical expedients for completed contracts were elected upon adoption.
The Corporation reviewed its revenue contracts to evaluate the effect of the new standard on Magellan’s revenue recognition
practices. The adoption of the new standard changed the Corporation’s revenue recognition for certain performance
obligations from previously accounted for using the completed contract method to using the percentage-of-completion
method. The Corporation previously presented contract assets and liabilities related to construction contracts in accrued
receivables and deferred revenue. All contract balances, on a contract-by-contract basis, are now presented in contract
assets or contract liabilities.
19
MAGELLAN 2018 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS December 31, 2018 Impact on the statement of income and comprehensive income for the twelve months period ended December 31, 2017:
Expressed in thousands of dollars
As reported
Decrease
Restated
Revenues
Cost of revenues
Gross profit
Income taxes
Net income
Total comprehensive income
Basic and diluted net income per share
968,954
793,107
175,847
18,982
111,277
103,200
1.91
(13,493 )
(10,353 )
(3,140 )
(1,351 )
(1,789 )
(1,789 )
(0.03 )
955,461
782,754
172,707
17,631
109,488
101,411
1.88
Impact on the statement of financial position as at January 1, 2017 and December 31, 2017:
Expressed in thousands of dollars
As at January 1, 2017
As at December 31, 2017
Increase
Increase
As reported (Decrease ) Restated As reported (Decrease ) Restated
Trade and other receivables
205,609
(8,853 ) 196,756
189,867
(20,174 ) 169,693
Contract assets
Inventories
Current assets
Deferred tax assets
Non-current assets
Total assets
Accounts payable and accrued liabilities and
provisions
Current liabilities
Deferred tax liabilities
Total long-term liabilities
Retained earnings
Total liabilities and equity
–
44,426
44,426
–
46,196
46,196
208,964
(32,156 ) 176,808
197,857
(26,803 ) 171,054
447,311
3,417
450,728
445,506
(781 ) 444,725
22,007
(1,066 )
20,941
14,313
(490 )
13,823
545,591
(1,066 ) 544,525
538,426
(490 ) 537,936
992,902
2,351
995,253
983,932
(1,271 ) 982,661
178,566
(6,240 ) 172,326
161,575
(7,298 ) 154,277
229,353
(6,240 ) 223,113
213,409
(7,298 ) 206,111
36,056
1,786
37,842
156,218
1,786 158,004
26,070
76,291
1,011
27,081
1,011
77,302
310,664
6,805 317,469
405,976
5,016 410,992
992,902
2,351 995,253
983,932
(1,271 ) 982,661
While the timing of contract revenue and profit recognition is impacted, there is no change to cash flows.
IFRS 9 Financial Instruments
IFRS 9, Financial Instruments (“IFRS 9”) 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. The Corporation measures loss allowances for trade
receivables and contract assets at an amount equal to lifetime expected credit losses. The Corporation has determined that
the adoption of the standard resulted in a loss allowance of $1.0 million net of tax of $0.3 million, on trade and other receivables
as at December 31, 2017. As a result, the opening retained earnings as at January 1, 2018 decreased by $1.0 million.
Amendment to IFRS 2 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;
20
MAGELLAN 2018 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS December 31, 2018
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 adoption of the amendment did not have an impact on the Corporation’s consolidated financial statements.
IFRIC Interpretation 22 Foreign Currency Transactions and Advance Consideration
The interpretation clarifies that, in determining the spot exchange rate to use on initial recognition of the related asset,
expense or income (or part of it) on the derecognition of a non-monetary asset or non-monetary liability relating to advance
consideration, the date of the transaction is the date on which an entity initially recognizes the non-monetary asset or non-
monetary liability arising from the advance consideration. If there are multiple payments or receipts in advance, then the
entity must determine a date of the transactions for each payment or receipt of advance consideration. This adoption of
this interpretation did not have an impact on the Corporation’s consolidated financial statements.
Amendment to IAS 40 Transfer of Investment Property
The amendments clarify when an entity should transfer property, including property under construction or development
into, or out of investment property. The amendments state that a change in use occurs when the property meets, or
ceases to meet, the definition of investment property and there is evidence of the change in use. A mere change in
management’s intentions for the use of a property does not provide evidence of a change in use. These amendments did
not have an impact on the Corporation’s consolidated financial statements.
13. FUTURE CHANGES IN ACCOUNTING POLICIES
A description of new accounting standards and interpretations not yet adopted
A number of new standards, and amendments to standards and interpretations, are not yet effective for the year ended
December 31, 2018, 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 has been adopted.
The Corporation plans to apply the practical expedient to grandfather the definition of a lease on transition. This means
that existing lease contracts will not need to be reassessed.
As a lessee, the Corporation will apply IFRS 16 using a modified retrospective approach. The cumulative effect of adopting
IFRS 16 will be recognized as an adjustment to the opening balance of retained earnings as at January 1, 2019, with no
restatement of comparative information.
The Corporation will recognize right-of-use assets and lease liabilities for its facility and equipment leases with a remaining
lease term of more than 12 months as at January 1, 2019. The actual impact of applying IFRS 16 on the consolidated
financial statements in the period of initial application will depend on future economic conditions, including the Corporation’s
borrowing rate at January 1, 2019, the composition of the Corporation’s lease portfolio at that date, the Corporation’s latest
21
MAGELLAN 2018 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS December 31, 2018 assessment of whether it will exercise any lease renewal options and the extent to which the Corporation chooses to use
practical expedients and recognition exemptions.
In addition, the nature of expenses related to those leases previously classified as operating leases will now change as
IFRS 16 replaces the straight-line operating lease expense with a depreciation charge for right-of-use assets and interest
expense on lease liabilities.
The Corporation is not required to make any adjustments for leases in which it is a lessor except where it is an intermediate
lessor in a sublease.
The Corporation is on track on its implementation plan and in the process of finanlizing the transition adjustments.
The Corporation expects material increases in the assets and liabilities reported on the balance sheet. In addition, the
Corporation expects the statement of earnings to be impacted for the amortization of right-of-use assets and interest
expense, with corresponding decreases in operating and administrative expenses. Under the new standard, cash outflows
for repayment of the principal portion of the lease liability will be classified as cash flows from financing activities. The
interest portion of the lease payments will continue to be classified as cash flows from operating activities.
Uncertainty over Income Tax Treatments
In June 2017, IASB issued IFRIC Interpretation 23, Uncertainty over Income Tax Treatments (“IFRIC 23”), which clarifies
application of recognition and measurement requirements in IAS 12, Income Taxes when there is uncertainty over income
tax treatments. IFRIC 23 is effective for annual reporting periods beginning on or after January 1, 2019. Earlier application
is permitted. The Corporation is in the process of evaluating the impact that IFRIC 23 may have on the Corporation’s
consolidated financial statements.
Amendments to IAS 19 Plan Amendment, Curtailment or Settlement
In February 2018, the IASB issued amendments to IAS 19, Employee Benefits (“IAS 19”) which address the accounting for
plan amendments, curtailments or settlements during the reporting period. The amendments to IAS 19 require an entity
to use updated assumptions to determine current service cost and net interest for the remainder of the period after a plan
amendment, curtailment or settlement; and to recognize in profit or loss as part of past service cost, or a gain or loss on
settlement, any reduction in a surplus, even if that surplus was not previously recognized because of the impact of the asset
ceiling. The amendments apply to plan amendments, curtailments or settlements that occur on or after January 1, 2019, with
earlier application permitted. The amendments will have an impact on the Corporation’s consolidated financial statements
when there are plan amendments, curtailments or settlements after the effective date.
Annual Improvements to IFRS Standards 2015–2017
In December 2017, IASB issued the following amendments from the 2015-2017 annual improvement cycle.
IFRS 3 Business Combination
The amendments clarify that, when an entity obtains control of a business that is a joint operation, it applies the requirements
for a business combination achieved in stages, including remeasuring previously held interests in the assets and liabilities
of the joint operation at fair value. An entity applies those amendments to business combinations for which the acquisition
date is on or after the beginning of the first annual reporting period beginning on or after January 1, 2019. Earlier application
is permitted. These amendments will apply on business combinations of the Corporation after January 1, 2019.
IAS 12 Income Taxes
The amendments clarify that the income tax consequences of dividends are linked more directly to past transactions or
events that generated distributable profits than to distributions to owners. Therefore, an entity recognizes the income tax
consequences of dividends in profit or loss, other comprehensive income or equity according to where the entity originally
22
MAGELLAN 2018 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS December 31, 2018
recognised those past transactions or events. An entity applies those amendments for annual reporting periods beginning
on or after January 1, 2019. Earlier application is permitted. When an entity first applies those amendments, it applies them
to the income tax consequences of dividends recognised on or after the beginning of the earliest comparative period. The
Corporation does not expect these amendments will have an impact on the Corporation’s consolidated financial statements
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, 2018 that they are responsible for establishing and maintaining, and have assessed the design
and operating effectiveness of disclosure controls and procedures and internal control over financial reporting.
Management does not expect disclosure controls and procedures and internal control over financial reporting to prevent
all errors, misstatements or fraud. In addition, internal control over financial reporting that management has designed
and established may be circumvented and rendered ineffective as a result of unauthorized acts of individuals through
collusion or management override. A system of control, no matter how well conceived and operated, can provide only
reasonable, but not absolute, assurance that control objectives are met. Due to the inherent limitations in a system of
control, there is no absolute assurance that all controls issues, which may result in errors, misstatements, or fraud, can
be prevented or detected. The inherent limitations include, amongst other things: (i) management’s assumptions and
judgments could ultimately prove to be incorrect under varying conditions and circumstances; (ii) the impact of isolated
errors; (iii) assumptions about the likelihood of future events.
In preparation for this certification, Magellan has dedicated resources in place to document and evaluate the design
and operating effectiveness of disclosure controls and procedures and internal control over financial reporting. As of
December 31, 2018, an evaluation was carried out, under the supervision of the President and Chief Executive Officer
and the Chief Financial Officer 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, 2018.
No changes were made in the Corporation’s internal control over financial reporting during the year ended December 31, 2018,
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.
23
MAGELLAN 2018 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS December 31, 2018 MANAGEMENT’S REPORT
December 31, 2018
To the shareholders of Magellan Aerospace Corporation
The consolidated financial statements of Magellan Aerospace Corporation were prepared by management in accordance with
accounting principles generally accepted in Canada. The financial and operating information presented in this report is consistent
with that shown in the financial statements.
Management maintains a system of internal controls to provide reasonable assurance that all assets are safeguarded and to
facilitate the preparation of relevant, reliable and timely financial information. External auditors appointed by the shareholders
have examined the consolidated financial statements. The Audit Committee, consisting of non-management directors, has
reviewed these consolidated financial statements with management and the auditors and has reported to the Board of Directors.
The Board of Directors approved the consolidated financial statements.
Phillip C. Underwood
President and Chief Executive Officer
March 8, 2019
Elena M. Milantoni
Chief Financial Officer
24
MAGELLAN 2018 ANNUAL REPORT INDEPENDENT AUDITORS’ REPORT
December 31, 2018
To the Shareholders of Magellan Aerospace Corporation
Opinion
We have audited the consolidated financial statements of Magellan Aerospace Corporation and its subsidiaries (the Group),
which comprise the consolidated statements of financial position as at December 31, 2018, 2017 and January 1, 2017, and the
consolidated statements of income and comprehensive income, consolidated statements of changes in equity and consolidated
statements of cash flows for the years then ended December 31, 2018 and 2017, and notes to the consolidated financial
statements, including a summary of significant accounting policies.
In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated
financial position of the Group as at December 31, 2018, 2017 and January 1, 2017, and its consolidated financial performance
and its consolidated cash flows for the years ended December 31, 2018 and 2017 in accordance with International Financial
Reporting Standards (IFRS).
Basis for opinion
We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those
standards are further described in the Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements section
of our report. We are independent of the Group in accordance with the ethical requirements that are relevant to our audit of
the consolidated financial statements in Canada, and we have fulfilled our ethical responsibilities in accordance with these
requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Other information
Management is responsible for the other information. The other information comprises:
— Management’s Discussion and Analysis
— The information, other than the consolidated financial statements and our auditor’s report thereon, in the Annual Report.
Our opinion on the financial statements does not cover the other information and we do not express any form of assurance
conclusion thereon.
In connection with our audit of the consolidated financial statements, our responsibility is to read the other information, and
in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our
knowledge obtained in the audit or otherwise appears to be materially misstated.
We obtained Management’s Discussion & Analysis and the Annual Report prior to the date of this auditor’s report. If, based
on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to
report that fact in this auditor’s report. We have nothing to report in this regard.
Responsibilities of Management and Those Charged with Governance for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with
IFRS, 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.
25
MAGELLAN 2018 ANNUAL REPORT INDEPENDENT AUDITORS’ REPORT
December 31, 2018
In preparing the consolidated financial statements, management is responsible for assessing the Group’s ability to continue as
a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting
unless management either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Group’s financial reporting process.
Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements
Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free
from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable
assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally
accepted auditing standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error
and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic
decisions of users taken on the basis of these consolidated financial statements.
As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment
and maintain professional skepticism throughout the audit. We also:
— Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error,
design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate
to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for
one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override
of internal control.
— Obtain an understanding of internal control relevant to the audit 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 Group’s internal control.
— Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related
disclosures made by management.
— Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit
evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on
the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw
attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are
inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s
report. However, future events or conditions may cause the Group to cease to continue as a going concern.
— Evaluate the overall presentation, structure, and content of the consolidated financial statements, including the disclosures,
and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves
fair presentation.
— Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within
the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision
and performance of the group audit. We remain solely responsible for our audit opinion.
We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the
audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.
26
MAGELLAN 2018 ANNUAL REPORT INDEPENDENT AUDITORS’ REPORT
December 31, 2018
We also provide those charged with governance with a statement that we have complied with relevant ethical requirements
regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to
bear on our independence, and where applicable, related safeguards.
The engagement partner on the audit resulting in this independent auditor’s report is Stephanie Lamont.
Toronto, Canada
March 8, 2019
27
MAGELLAN 2018 ANNUAL REPORT CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
Expressed in thousands of Canadian dollars
Notes
December 31
December 31
January 1
2018
2017
2017
Restated
Restated
(note 2)
(note 2)
Current assets
Cash and cash equivalents
Restricted cash
Trade and other receivables
Contract assests
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
9
10
10
11, 22
18
13
14, 21
12
14
15
16, 22
18
19
27
28
63,316
–
187,897
66,436
175,082
20,058
512,789
428,878
2,305
62,745
35,104
19,666
11,393
560,091
1,072,880
154,407
44,393
198,800
–
9,064
24,510
19,668
33,165
86,407
254,440
2,044
13,565
473,246
44,378
787,673
1,072,880
40,394
3,233
169,693
46,196
171,054
14,155
444,725
7,606
7,125
196,756
44,426
176,808
18,007
450,728
401,855
389,825
2,414
61,495
33,441
24,908
13,823
537,936
982,661
154,277
51,834
206,111
–
11,202
23,866
15,153
27,081
77,302
254,440
2,044
13,565
410,992
18,207
699,248
982,661
4,377
67,443
33,797
28,142
20,941
544,525
995,253
172,326
50,787
223,113
43,314
35,364
22,867
18,617
37,842
158,004
254,440
2,044
13,565
317,469
26,618
614,136
995,253
MAGELLAN 2018 ANNUAL REPORT
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Expressed in thousands of Canadian dollars, except per share amounts
Revenues
Cost of revenues
Gross profit
Administrative and general expenses
Other
Income before interest and income taxes
Interest
Income before income taxes
Income taxes
Current
Deferred
Net income
Other comprehensive income (loss)
Other comprehensive income (loss) 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:
Notes
23
24
25
8, 9, 30
26
18
18
Years ended December 31
Restated
2018
966,753
803,478
163,275
57,337
(12,356 )
118,294
4,114
114,180
9,402
15,658
25,060
89,120
(note 2)
2017
955,461
782,754
172,707
59,549
(18,672 )
131,830
4,711
127,119
15,557
2,074
17,631
109,488
27
26,171
(8,411 )
Actuarial (loss) income on defined benefit pension plans, net of taxes
18, 22
(5,203 )
110,088
334
101,411
19
19
1.53
1.53
1.88
1.88
Comprehensive income
Net income per share
Basic
Diluted
See accompanying notes to the consolidated financial statements
29
MAGELLAN 2018 ANNUAL REPORT
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Expressed in thousands of Canadian dollars
capital
surplus capital earnings translation
equity
Other
Foreign
Share Contributed paid-in Retained currency
Total
December 31, 2016
Restated (note 2)
Net income
Other comprehensive income (loss)
Common share dividend
December 31, 2017
Adjustment on initial application of IFRS 9
(net of tax) (note 2)
January 1, 2018 Adjusted
Net income
Other comprehensive (loss) income
Common share dividend
December 31, 2018
See accompanying notes to the consolidated financial statements
254,440
2,044 13,565
317,469
26,618 614,136
–
–
–
–
–
–
–
–
–
109,488
– 109,488
334
(8,411 )
(8,077 )
(16,299 )
–
(16,299 )
254,440
2,044 13,565
410,992
18,207 699,248
–
–
–
(999 )
–
(999 )
254,440
2,044 13,565
409,993
18,207 698,249
–
–
–
–
–
–
–
–
–
89,120
–
89,120
(5,203 )
26,171
20,968
(20,664 )
–
(20,664 )
254,440
2,044 13,565
473,246
44,378 787,673
30
MAGELLAN 2018 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 (gain) on disposal of property, plant and equipment
Gain on sale of investment properties
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
Purchase of property, plant and equipment
Proceeds from disposal of property, plant and equipment
Proceeds on disposition of investment property
Change in restricted cash
(Increase) decrease in intangible and other assets
Net cash used in investing activities
Cash flow from financing activities
Decrease in bank indebtedness
Increase (decrease) in debt due within one year
Decrease in long-term debt
(Decrease) increase in long-term liabilities and provisions
Increase in borrowings, net
Common share dividend
Net cash used in financing activities
Increase in cash during the year
Cash at beginning of the year
Effect of exchange rate differences
Cash at end of the year
See accompanying notes to the consolidated financial statements
31
Years ended December 31
Restated
Notes
2018
(note 2)
2017
89,120
109,488
8, 10
43,809
8
8
9
22
26
18
11
29
8
8
9
4
12, 17
17
14, 17
17
17
19
–
313
–
(597 )
1,006
8,164
(669 )
(41,149 )
99,997
(48,346 )
411
–
3,329
(2,728 )
(47,334 )
(264 )
3,892
(15,165 )
(945 )
1,302
(20,664 )
(31,844 )
20,819
40,394
2,103
63,316
46,516
2,900
(26,533 )
(2,183 )
(2,623 )
611
(2,485 )
(331 )
4,589
129,949
(64,151 )
32,742
3,900
3,665
3,105
(20,739 )
(43,159 )
(7,951 )
(13,520 )
1,071
3,493
(16,299 )
(76,365 )
32,845
7,606
(57 )
40,394
MAGELLAN 2018 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. 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.
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 8, 2019.
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.
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MAGELLAN 2018 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars) Determination of Fair Value
Fair value is determined based on the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date. Fair value is measured using the assumptions
that market participants would use when pricing an asset or liability. Fair value is determined by using quoted prices in
active markets for identical or similar assets or liabilities. When quoted prices in active markets are not available, fair value
is determined using valuation techniques that maximize the use of observable inputs.
When observable valuation inputs are not available, significant judgment is required to determine fair value by assessing
the valuation techniques and valuation inputs. The use of alternative valuation techniques or valuation inputs may result
in a different fair value.
Foreign Currency Translation
The consolidated financial statements are presented in Canadian dollars, which is the Corporation’s functional currency.
Foreign currency denominated monetary assets and liabilities are translated at the rates of exchange at the statement of
financial position date. Foreign currency transactions are translated into the functional currency using the exchange rates
prevailing at that date, whereas non-monetary items measured at historic cost, are translated using the exchange rate
prevailing on the transaction date. Translation gains and losses resulting from the settlement of such transactions and from
the translation of monetary assets and liabilities denominated in foreign currencies are recognized in income.
Assets and liabilities of foreign operations that have a functional currency different from the presentation currency are
translated using the closing exchange rate prevailing at the reporting date and revenues and expenses at average
exchange rates during the period. Translation gains and losses on currency translation are recognized as a separate
component of equity in other comprehensive income and do not have any impact on the net income (loss) for the year.
Segment Reporting
Management has determined the operating segments based on information regularly reviewed for the purposes of
decision making, allocating resources and assessing performance by the Corporation’s chief operating decision makers.
The Corporation evaluates the financial performance of its operating segments primarily based on net income before
interest and income taxes.
Revenue Recognition
Revenue is primarily comprised of sales of goods and rendering of services and recognized when control of the goods or
services are transferred to the customer at an amount that reflects the consideration to which the Corporation expects to
be entitled in exchange for those goods or services. The Corporation’s revenue recognition methodology is determined
on a contract-by-contract basis.
Performance Obligation
A performance obligation is a contractual promise with a customer to transfer a distinct good or service and is the unit of
account for revenue recognition.
The Corporation accounts for a contract with customers when it has approval and commitment from both parties, each
party’s rights have been identified, payment terms are defined, the contract has commercial substance and collection is
probable. The Corporation is the principal in its revenue arrangements because it typically controls the goods or services
before transferring them to the customer.
A contract transaction price is allocated to each distinct performance obligation and recognized as revenue when, or
as, the performance obligation is satisfied. The transaction price includes, among other things and when applicable,
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MAGELLAN 2018 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars) an estimate of variable consideration to the extent that it is highly probable that a significant reversal in the amount of
cumulative revenue recognized will not occur at the time when the uncertainty associated with the variable consideration
is resolved. Variable consideration is usually derived from sales incentives, in the form of discounts or volume rebates.
The estimation of variable consideration is largely based on the assessment of the Corporation’s historical, current and
forecasted information that is reasonably available.
For contracts with multiple performance obligations, the contract transaction price, including variable consideration when
applicable, is allocated based on the estimated relative stand-alone price of the promised goods or services underlying
each performance obligation. The Corporation generally uses the expected cost plus a margin approach to estimate the
stand-alone selling price of each performance obligation when a stand-alone selling price is not directly observable.
The Corporation’s performance obligations are satisfied over time or at a point in time.
Revenues from sale of goods are recognized over time when the Corporation’s performance does not create an asset
with alternative use and the Corporation has an enforceable right to payment for performance completed to date. The
Corporation recognizes revenue over time using the cost-to-cost input method, which recognizes revenue as performance
of the contract progresses. Contracts that do not meet the criteria for over time recognition are recognized at a point in
time when the goods are dispatched or made available to the customer. The sale of consignment products are recognized
on notification that the product has been used.
Revenues from rendering services are recognized over time as customers simultaneously receive and consume the
benefits provided by the Corporation. The Corporation recognizes revenues for repair and overhaul services using the
cost-to-cost input method as the basis for measuring the progress on the contract.
Other revenues are recognized at a point in time or over time as performance obligations are satisfied, depending on the
nature of the contract.
The Corporation typically provides warranties for general repairs of defects that existed at the time of sale, as required
by law. These assurance-type warranties are not separate performance obligations and are accounted for under IAS 37,
Provisions, Contingent Liabilities and Contingent Assets.
Contract Balances
Contract assets include unbilled amounts when over time method of revenue recognition is utilized and revenue recognized
exceeds the amount billed to the customer, and right to payment is not just subject to the passage of time. Amounts may
not exceed their net realizable value. Contract assets are generally classified as current.
Contract liabilities consist of advance payments and deferred revenue. Contract assets and liabilities are reported in a net
position on a contract by-contract basis at the end of each reporting period. Advance payments are classified as current or
noncurrent based on the timing of when revenue is expected to be recognized. The current portion of contract liabilities is
included in accounts payable and accrued liabilities and provisions and the noncurrent portion is included in other long-term
liabilities and provisions in the consolidated statement of financial position.
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.
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MAGELLAN 2018 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars) Government Grants
Government grants are recognized at their fair value in the period when there is reasonable assurance that the conditions
attached 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
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 consolidated statements of income.
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 consolidated statements of
income 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 consolidated
statements of income 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 consolidated statements of income.
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MAGELLAN 2018 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars) 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 consolidated statements of income 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 timing of the reversal of the temporary difference and it is probable that the temporary
difference will not reverse in the foreseeable future. Deferred income tax is calculated at the enacted or substantively
enacted tax rates that are expected to apply in the period when the liability is settled or the asset is realized.
Deferred income tax assets and liabilities are only offset where they arise within the same entity and tax jurisdiction.
Deferred income tax assets and liabilities are presented as non-current.
Net Income per Share
Net income per share is calculated based on the profit for the financial year and the weighted average number of common
shares outstanding during the year. Diluted net income per share is calculated using the profit for the financial year
adjusted for the effect of any dilutive instruments and the weighted average diluted number of shares (ignoring any
potential issue of common shares which would be anti-dilutive) during the year.
Inventories
Inventory is stated at the lower of average cost and net realizable value.
The unit cost method is the prescribed cost method under which the actual production costs are charged to each unit
produced and recognized to income as the unit is sold.
Net realizable value is the estimated selling price in the ordinary course of business, less estimated costs of completion
and the estimated costs necessary to make the sale. Inventories are written down to net realizable value when the
cost of inventories is estimated to be unrecoverable due to obsolescence, damage or declining selling prices. When
circumstances that previously caused inventories to be written down below cost no longer exist, the amount of the write-
down previously recorded is reversed.
Property, Plant and Equipment
Property, plant and equipment are stated at cost, less accumulated depreciation and any impairment in value. Cost
includes the purchase price (after deducting trade discounts and rebates), any directly attributable costs of bringing the
asset to the location and condition necessary for it to be capable of operating in the manner intended by management,
and the estimate of the present value of the costs of dismantling and removing the item and restoring the site. Subsequent
costs are included in the assets carrying amount or recognized as a separate asset, as appropriate, only when it is
probable that future economic benefits associated with the item will flow to the Corporation and the cost of the item can
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MAGELLAN 2018 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars) be measured reliably. The carrying amount of the replaced part is derecognized. The cost of the day-to-day servicing of
property, plant and equipment are recognized in the consolidated statements of income 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 consolidated statements of income. Following the recognition of an impairment loss, the
depreciation charge applicable to the asset is adjusted prospectively in order to systematically allocate the revised
carrying amount, net of any residual value, over the remaining useful life.
Investment Properties
Investment property is property held to earn rental income and/or for capital appreciation rather than for the purpose of
the Corporation’s operating activities. Investment property assets are carried at cost less accumulated depreciation and
any recognized impairment in value. The depreciation policies for investment property are consistent with those described
for owner-occupied property.
Intangible Assets
In accordance with IAS 38, Intangible Assets, expenditure on research activities is recognized as an expense in the
period in which it is incurred. Externally acquired and internally generated intangible assets are recognized only if they
meet strict criteria, relating in particular to technical feasibility, probability that a future economic benefit associated with
the asset will flow to the entity and the cost of the asset can be measured reliably.
Intangible assets with a finite useful life are stated at cost and amortized on a unit of production basis. Gains or losses
arising from de-recognition of an intangible asset are measured as the difference between the net disposal proceeds
and the carrying amount of the asset, and are recognized in the consolidated statements of income 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
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MAGELLAN 2018 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars)
date of acquisition. Acquisition-related expenses and post-acquisition restructuring costs are recognized separately from
the business combination and are expensed as incurred. 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.
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 consolidated statements of
income.
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 consolidated
statements of income on a straight-line basis over the term of the lease.
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MAGELLAN 2018 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars) Financial Instruments
The Corporation recognizes financial assets and financial liabilities (“financial instruments”) on the date the Corporation
becomes a party to the contractual provisions of the instruments. A financial asset is derecognized either when the
Corporation has transferred substantially all the risks and rewards of ownership of the financial asset or when cash flows
expire. A financial liability is derecognized when the obligation specified in the contract is discharged, canceled or expired.
The Corporation’s financial instruments include cash and cash equivalents, restricted cash, trade and other receivables,
accounts payable and accrued liabilities, finance lease liabilities, bank indebtedness, long-term debt, borrowing subject
to specific conditions, and other non-derivative and derivative financial assets and liabilities.
The classifications of financial instruments are typically determined at the time of initial recognition and are recognized at
fair value, plus attributable transaction costs where applicable. Subsequent to initial recognition, financial instruments are
classified and measured as described below.
Financial assets at fair value through profit or loss
Cash and cash equivalents, restricted cash and derivatives instruments are classified as financial assets at fair value
through profit or loss and are measured at fair value. Cash equivalents are short-term investments with initial maturities
of three months or less. 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 instruments for trading or speculative
purposes. The Corporation’s derivative contracts are not designated as hedges and as a result are presented on the
consolidated statement of financial position as financial assets when the fair value is positive and as financial liabilities
when the fair value is negative. The unrealized gains or losses related to changes in fair value are reported in other
expense (income) on the consolidated statements of income. Transaction costs incurred to acquire financial instruments
are included in the underlying balance.
Financial instruments carried at amortized cost
Financial instruments in this category include trade and other receivables, accounts payable and accrued liabilities, bank
indebtedness, borrowing subject to specific conditions, finance lease liabilities and long-term debt. Financial instruments
are recorded initially at fair value and, in the case of financial assets and liabilities carried at amortized cost, adjusted for
directly attributable transaction costs. Trade and other receivables include originated non-derivative financial assets with
fixed or determined payments that are not quoted in an active market and are subsequently measured at amortized cost
and is computed using the effective interest method less any allowance for impairment. Accounts payables and accrued
liabilities, bank indebtedness, borrowing subject to specific conditions, finance lease liabilities and long-term debt are
subsequently measured at amortized cost using the effective interest rate method. Amortized cost is calculated by taking
into account any discount or premium on acquisition and fees. The effective interest rate accretion is included as finance
costs in the consolidated statements of income.
Impairment
The expected credit loss impairment model applies to financial assets carried at amortized costs. The model uses a dual
measurement approach, under which the loss allowance is measured as either 12 month expected credit losses or at the
lifetime expected credit losses. The Corporation applies the simplified approach and records lifetime expected losses on
accounts receivables and contract assets based on historical credit loss experience, adjusted for forward-looking factors
specific to the debtors and the economic environment. If in a subsequent year, the amount of the estimated impairment
loss increases or decreases due to an event occurring after the impairment was recognized, the previously recognized
impairment loss is increased or decreased by adjusting the carrying value of the financial assets. If a past write-off is later
recovered, the recovery is recognized in the consolidated statements of income.
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MAGELLAN 2018 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars) Provisions
A provision is recognized when there is a present legal or constructive obligation, as a result of a past event, which is more
likely than not to result in an outflow of economic benefits and where a reliable estimate of the amount of the obligation can
be made. If the effect is material, the provision is determined by discounting the expected future cash flows at a pre-tax
risk-free rate and, where appropriate, the risks specific to the liability. A provision for onerous contracts is recognized when
the expected benefits to be derived from the contracts are less than the related unavoidable costs of meeting its obligations
under the contract. Such provisions are recorded as write-downs of work-in-progress for that portion of the work which has
already been completed, and as liability provisions for the remainder.
Share Capital
Common shares are classified as equity. Transaction costs directly attributable to the issue of common shares are
recognized as a deduction from equity, net of any income 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
21 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 Corporation’s 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.
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MAGELLAN 2018 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars) Deferred taxes
Income taxes are determined based on estimates of the Corporation’s current income taxes and estimates of deferred
income taxes resulting from temporary differences. Deferred tax assets are assessed to determine the likelihood that they
will be realized from future taxable income before they expire.
Government assistance
Investment tax credits and scientific research and experimental development tax credits are determined based on
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
To estimate income (loss) on completion, the Corporation takes into account factors inherent to the contract by using
historical and/or forecast data.
Repayable government grants
The forecast repayment of grants received from government authorities is based on 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 REPORATING STANDARDS
New and Amended International Financial Reporting Standards Adopted in 2018
The Corporation has adopted the following new and amended standards in the current year.
IFRS 15 Revenue from Contracts with Customers
IFRS 15, Revenue from Contracts with Customers (“IFRS 15”) supersedes IAS 11, Construction Contracts, IAS 18, Revenue
and related interpretations and applies to all revenue arising from contracts with customers, unless those contracts are in the
scope of other standards. The new standard establishes a five-step model to account for revenue arising from contracts with
customers. Under IFRS 15, revenue is recognized at an amount that reflects the consideration to which an entity expects
to be entitled in exchange for transferring goods or services to a customer. The standard requires entities to exercise
judgement, taking into consideration all of the relevant facts and circumstances when applying each step of the model to
contracts with their customers. The standard also specifies the accounting for the incremental costs of obtaining a contract
and the costs directly related to fulfilling a contract.
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MAGELLAN 2018 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars) IFRS 15 was adopted effective January 1, 2018. The Corporation adopted IFRS 15 using the full retrospective method
of adoption, which requires the restatement of the Corporation’s 2017 results and an opening adjustment to equity as at
January 1, 2017. Practical expedients for completed contracts were elected upon adoption.
The Corporation reviewed its revenue contracts to evaluate the effect of the new standard on Magellan’s revenue recognition
practices. The adoption of the new standard changed the Corporation’s revenue recognition for certain performance
obligations from previously accounted for using the completed contract method to using the percentage-of-completion
method. The Corporation previously presented contract assets and liabilities related to construction contracts in accrued
receivables and deferred revenue. All contract balances, on a contract-by-contract basis, are now presented in contract
assets or contract liabilities.
Impact on the statement of income and comprehensive income for the twelve months period ended December 31, 2017:
As reported Decrease Restated
Revenues
Cost of revenues
Gross profit
Income taxes
Net income
Total comprehensive income
Basic and diluted net income per share
968,954
(13,493 ) 955,461
793,107
(10,353 ) 782,754
175,847
(3,140 ) 172,707
18,982
(1,351 )
17,631
111,277
(1,789 ) 109,488
103,200
(1,789 ) 101,411
1.91
(0.03 )
1.88
Impact on the statement of financial position as at January 1, 2017 and December 31, 2017:
Trade and other receivables
205,609
(8,853 ) 196,756
189,867
(20,174 ) 169,693
As at January 1, 2017
As at December 31, 2017
Increase
Increase
As reported (Decrease ) Restated As reported (Decrease ) Restated
Contract assets
Inventories
Current assets
Deferred tax assets
Non-current assets
Total assets
Accounts payable and accrued liabilities and
provisions
Current liabilities
Deferred tax liabilities
Total long-term liabilities
Retained earnings
Total liabilities and equity
–
44,426
44,426
–
46,196
46,196
208,964
(32,156 ) 176,808
197,857
(26,803 ) 171,054
447,311
3,417
450,728
445,506
(781 ) 444,725
22,007
(1,066 )
20,941
14,313
(490 )
13,823
545,591
(1,066 ) 544,525
538,426
(490 ) 537,936
992,902
2,351
995,253
983,932
(1,271 ) 982,661
178,566
(6,240 ) 172,326
161,575
(7,298 ) 154,277
229,353
(6,240 ) 223,113
213,409
(7,298 ) 206,111
36,056
1,786
37,842
156,218
1,786 158,004
26,070
76,291
1,011
27,081
1,011
77,302
310,664
6,805 317,469
405,976
5,016 410,992
992,902
2,351 995,253
983,932
(1,271 ) 982,661
While the timing of contract revenue and profit recognition is impacted, there is no change to cash flows.
IFRS 9 Financial Instruments
IFRS 9, Financial Instruments (“IFRS 9”) 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
42
MAGELLAN 2018 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars)
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. The Corporation measures loss allowances for trade
receivables and contract assets at an amount equal to lifetime expected credit losses. The Corporation has determined that
the adoption of the standard resulted in a loss allowance of $999 net of tax of $348, on trade and other receivables as at
December 31, 2017. As a result, the opening retained earnings as at January 1, 2018 decreased by $999.
Amendment to IFRS 2 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 adoption of the amendment did not have an impact on the Corporation’s consolidated financial statements.
IFRIC Interpretation 22 Foreign Currency Transactions and Advance Consideration
The interpretation clarifies that, in determining the spot exchange rate to use on initial recognition of the related asset,
expense or income (or part of it) on the derecognition of a non-monetary asset or non-monetary liability relating to advance
consideration, the date of the transaction is the date on which an entity initially recognizes the non-monetary asset or non-
monetary liability arising from the advance consideration. If there are multiple payments or receipts in advance, then the
entity must determine a date of the transactions for each payment or receipt of advance consideration. This adoption of
this interpretation did not have an impact on the Corporation’s consolidated financial statements.
Amendment to IAS 40 Transfer of Investment Property
The amendments clarify when an entity should transfer property, including property under construction or development
into, or out of investment property. The amendments state that a change in use occurs when the property meets, or
ceases to meet, the definition of investment property and there is evidence of the change in use. A mere change in
management’s intentions for the use of a property does not provide evidence of a change in use. These amendments did
not have an impact on the Corporation’s consolidated financial statements.
New and Amended International Financial Reporting Standards to be Adopted in 2019 or Later
The following new standards and amendments to existing standards were issued by the IASB and are expected to be
adopted by the Corporation in 2019 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 has been adopted.
The Corporation plans to apply the practical expedient to grandfather the definition of a lease on transition. This means
that existing lease contracts will not need to be reassessed.
43
MAGELLAN 2018 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars) As a lessee, the Corporation will apply IFRS 16 using a modified retrospective approach. The cumulative effect of adopting
IFRS 16 will be recognized as an adjustment to the opening balance of retained earnings as at January 1, 2019, with no
restatement of comparative information.
The Corporation will recognize right-of-use assets and lease liabilities for its facility and equipment leases with a remaining
lease term of more than 12 months as at January 1, 2019. The actual impact of applying IFRS 16 on the consolidated
financial statements in the period of initial application will depend on future economic conditions, including the Corporation’s
borrowing rate at January 1, 2019, the composition of the Corporation’s lease portfolio at that date, the Corporation’s latest
assessment of whether it will exercise any lease renewal options and the extent to which the Corporation chooses to use
practical expedients and recognition exemptions.
In addition, the nature of expenses related to those leases previously classified as operating leases will now change as
IFRS 16 replaces the straight-line operating lease expense with a depreciation charge for right-of-use assets and interest
expense on lease liabilities.
The Corporation is not required to make any adjustments for leases in which it is a lessor except where it is an intermediate
lessor in a sublease.
The Corporation is on track on its implementation plan and in the process of finalizing the transition adjustments. The
Corporation expects material increases in the assets and liabilities reported on the balance sheet. In addition, the Corporation
expects the statement of earnings to be impacted for the amortization of right-of-use assets and interest expense, with
corresponding decreases in operating and administrative expenses. Under the new standard, cash outflows for repayment
of the principal portion of the lease liability will be classified as cash flows from financing activities. The interest portion of
the lease payments will continue to be classified as cash flows from operating activities.
Uncertainty over Income Tax Treatments
In June 2017, IASB issued IFRIC Interpretation 23, Uncertainty over Income Tax Treatments (“IFRIC 23”), which clarifies
application of recognition and measurement requirements in IAS 12, Income Taxes when there is uncertainty over income
tax treatments. IFRIC 23 is effective for annual reporting periods beginning on or after January 1, 2019. Earlier application
is permitted. The Corporation is in the process of evaluating the impact that IFRIC 23 may have on the Corporation’s
consolidated financial statements.
Amendments to IAS 19 Plan Amendment, Curtailment or Settlement
In February 2018, the IASB issued amendments to IAS 19, Employee Benefits (“IAS 19”) which address the accounting for
plan amendments, curtailments or settlements during the reporting period. The amendments to IAS 19 require an entity
to use updated assumptions to determine current service cost and net interest for the remainder of the period after a plan
amendment, curtailment or settlement; and to recognize in profit or loss as part of past service cost, or a gain or loss on
settlement, any reduction in a surplus, even if that surplus was not previously recognized because of the impact of the asset
ceiling. The amendments apply to plan amendments, curtailments or settlements that occur on or after January 1, 2019, with
earlier application permitted. The amendments will have an impact on the Corporation’s consolidated financial statements
when there are plan amendments, curtailments or settlements after the effective date.
Annual Improvements to IFRS Standards 2015 – 2017
In December 2017, IASB issued the following amendments from the 2015-2017 annual improvement cycle.
IFRS 3 Business Combination
The amendments clarify that, when an entity obtains control of a business that is a joint operation, it applies the requirements
for a business combination achieved in stages, including remeasuring previously held interests in the assets and liabilities
44
MAGELLAN 2018 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars) of the joint operation at fair value. An entity applies those amendments to business combinations for which the acquisition
date is on or after the beginning of the first annual reporting period beginning on or after January 1, 2019. Earlier application
is permitted. These amendments will apply on business combinations of the Corporation after January 1, 2019.
IAS 12 Income Taxes
The amendments clarify that the income tax consequences of dividends are linked more directly to past transactions or
events that generated distributable profits than to distributions to owners. Therefore, an entity recognizes the income tax
consequences of dividends in profit or loss, other comprehensive income or equity according to where the entity originally
recognised those past transactions or events. An entity applies those amendments for annual reporting periods beginning
on or after January 1, 2019. Earlier application is permitted. When an entity first applies those amendments, it applies them
to the income tax consequences of dividends recognised on or after the beginning of the earliest comparative period. The
Corporation does not expect these amendments will have an impact on the Corporation’s consolidated financial statements.
3. CASH AND CASH EQUIVALENTS
Cash on hand
Short-term deposits
December 31 December 31
2017
2018
3,795
59,521
63,316
14,625
25,769
40,394
Bank balances and short-term deposits comprise cash held by the Corporation on a short-term basis with original maturity
of one month or less. The carrying amount of these assets approximates their fair value.
4. RESTRICTED CASH
Restricted cash was nil as at December 31, 2018. The balance of $3,233 as of December 31, 2017 relates to amounts
deposited in escrow accounts in connection with the acquisitions completed in 2015.
5. TRADE AND OTHER RECEIVABLES
Trade receivables
Less allowance for doubtful accounts
Net trade receivables
Other receivables
December 31 December 31
2017
Restated
2018
167,267
388
166,879
21,018
187,897
(note 2)
154,409
725
153,684
16,009
169,693
45
MAGELLAN 2018 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars)
The following table presents the aging of gross trade receivables:
December 31, 2017
December 31, 2018
6. CONTRACT BALANCES
Contract assets
Contract liabilities
Net contract balances
Less than
91-181
182-365
More than
Current
146,261
155,753
90 days
7,140
10,198
days
703
654
days
132
645
365 days
173
17
Total
154,409
167,267
December 31 December 31
2017
46,196
2018
66,436
(9,029 )
57,407
(7,273 )
38,923
January 1
2017
44,426
(8,918 )
35,508
Contract assets relate to the Corporation’s right to consideration for performance completed under the contract and
not billed. The contract assets are transferred to trade and other receivables when the right to consideration becomes
unconditional. Contract liabilities relate to payments received in advance of performance under the contract. Contract
liabilities are recognized as revenue as (or when) the Corporation performs under the contract. Contract liabilities are
included in the accounts payable, accrued liabilities and provision line on the consolidated statement of financial position.
Revenue recognized in the period from:
Amounts included in contract liabilities at the beginning of the year
2018
6,602
2017
7,833
7. INVENTORIES
At December 31, 2017 Restated (note 2)
At December 31, 2018
Work in
Finished
Raw
materials
60,721
progress
80,047
68,006
84,871
goods
30,286
22,205
Total
171,054
175,082
The cost of inventories recognized as expense and included in cost of sales for the year ended December 31, 2018
amounted to $792,040 [2017 – $756,470].
During the year ended December 31, 2018, the Corporation recorded an impairment expense related to the write-down
of inventory in the amount of $1,078 [2017 – $1,856]. The Corporation also recorded reversals of previous write-downs of
inventory in the amount of $1,807 [2017 – $2,275] due to the sale of inventory previously provided for. The carrying amount
of inventory recorded at net realizable value was $22,276 as at December 31, 2018 [2017 – $26,529], with the remaining
inventory recorded at cost.
46
MAGELLAN 2018 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars)
8. PROPERTY, PLANT AND EQUIPMENT
Cost
At December 31, 2016
Additions
Disposals and other
Foreign currency translation
At December 31, 2017
Additions
Disposals and other
Foreign currency translation
At December 31, 2018
Accumulated depreciation and impairment
At December 31, 2016
Depreciation
Disposal and other
Foreign currency translation
At December 31, 2017
Depreciation
Disposal and other
Foreign currency translation
At December 31, 2018
Net book value
At December 31, 2017
At December 31, 2018
Machinery
and
Land
Buildings
equipment
Tooling
Total
14,863
4,215
(518 )
(633 )
133,360
566,156
3,840
(8,416 )
(2,051 )
51,439
(3,081 )
(13,861 )
17,927
126,733
600,653
389
–
610
7,953
(38 )
4,041
37,327
(5,856 )
26,325
49,274
2,310
–
(2,795 )
48,789
1,193
(525 )
3,627
763,653
61,804
(12,015 )
(19,340 )
794,102
46,862
(6,419 )
34,603
18,926
138,689
658,449
53,084
869,148
–
–
–
–
–
–
–
–
–
(50,527 )
(280,127 )
(3,445 )
943
1,069
(27,405 )
1,880
8,454
(43,174 )
(2,354 )
–
2,439
(373,828 )
(33,204 )
2,823
11,962
(51,960 )
(297,198 )
(43,089 )
(392,247 )
(3,757 )
(28,681 )
2
(1,576 )
4,769
(13,841 )
(2,175 )
462
(3,226 )
(34,613 )
5,233
(18,643 )
(57,291 )
(334,951 )
(48,028 )
(440,270 )
17,927
18,926
74,773
303,455
81,398
323,498
5,700
5,056
401,855
428,878
As at December 31, 2017 and 2018, the Corporation did not have any assets under finance lease.
Included in the above are assets under construction in the amount of $21,527 [December 31, 2017–$13,343], which as at
December 31, 2018 are not amortized.
In 2017, the Corporation sold land and building (the “Property”) located at 3160 Derry Road, Mississauga, Ontario, Canada
to a third party and entered into a contract to lease the building for a two-year period. The Corporation has also agreed
to lease a new facility for a 12-year period, with three renewal periods of five years each, which will be constructed by the
buyer on the existing site. The facility rationalization was driven by the need to improve the Corporation’s manufacturing
efficiencies, operational performance, profit margins and cash flow. The sale generated net cash proceeds of approximately
$32,662 and resulted in a gain of $26,593 on sale of the Property recognized by the Corporation.
47
MAGELLAN 2018 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars)
Costs associated with the sale are summarized below:
Disposal of non-current assets
Severance and other
8,968
990
9,958
Disposal of non-current assets consists of the derecognition of the Property of $6,068 and equipment impairment charges
of $2,900 that reduced the carrying amount of the equipment to the recoverable amount, which is based on their fair value
less costs of disposal. The fair value less costs of disposal was determined by using inputs based on observable market
data for identical assets and liabilities, and therefore, was categorized within Level 2 of the fair value hierarchy.
Severance relates to severance and other termination benefits that are calculated based on long-standing benefit
practices, local statutory requirement and, in certain cases, voluntary termination arrangements. Other relates to costs of
dismantling equipment that is no longer intended for use. Severance and other costs have been recorded as long-term
liabilities on the consolidated statements of financial position.
9. INVESTMENT PROPERTIES
At December 31, 2017
At December 31, 2018
Accumulated
depreciation,
disposal and
Net
Cost
9,286
9,353
impairment book value
2,414
(6,872 )
(7,048 )
2,305
The Corporation’s investment properties consist of land and building. Depreciation expense recognized in relation to the
buildings in 2018 was $158 [2017 – $258]. The Corporation recorded rental income of $600 in 2018 [2017 – $864]
The fair value of the Corporation’s investment properties was $15,892 at December 31, 2018. 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 2018, the Corporation obtained opinions from external valuators, with experience in
the real estate market, on the fair value of $15,000 of the total fair values of the Corporation’s investment properties.
On September 29, 2017, the Corporation sold one of its investment properties located in Winnipeg, Manitoba for proceeds
of $3,900 and recorded a gain of $2,183 on disposal of the asset.
48
MAGELLAN 2018 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars)
10. INTANGIBLE ASSETS AND GOODWILL
Technology Development
Other
intangible
Total
Total
intangible
assets and
rights
costs
intangibles
assets
Goodwill
goodwill
39,427
121,728
26,781
187,936
33,797
221,733
5,811
(132)
1,617
(2,209 )
–
58
7,428
(2,283 )
–
(356 )
7,428
(2,639 )
45,106
121,136
26,839
193,081
33,441
226,522
–
164
3,839
3,791
4,835
1,117
8,674
5,072
–
1,663
8,674
6,735
Cost
At December 31, 2016
Additions
Foreign currency translation
At December 31, 2017
Additions
Foreign currency translation
At December 31, 2018
45,270
128,766
32,791
206,827
35,104
241,931
Depreciation and impairment
At December 31, 2016
Depreciation
Foreign currency translation
At December 31, 2017
Depreciation
Foreign currency translation
(29,952 )
(86,308 )
(1,604 )
84
(31,472 )
(1,779 )
(111 )
(8,637 )
1,911
(93,034 )
(4,178 )
(3,291 )
(4,233 )
(2,766 )
(81 )
(7,080 )
(2,847 )
(290 )
(120,493 )
(13,007 )
1,914
(131,586 )
(8,804 )
(3,692 )
At December 31, 2018
(33,362 )
(100,503 )
(10,217 )
(144,082 )
–
–
–
–
–
–
–
(120,493 )
(13,007 )
1,914
(131,586 )
(8,804 )
(3,692 )
(144,082 )
Net book value
At December 31, 2017
At December 31, 2018
13,634
11,908
28,102
28,263
19,759
22,574
61,495
62,745
33,441
35,104
94,936
97,849
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 application software, customer lists, brands and technical processes. Application software will
be amortized over a 10 year period, customer lists will be amortized over a 5 year period and technical processes will be
amortized over a 15 year period. Brands of $9,114 (£5,226) 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, 2018 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.
49
MAGELLAN 2018 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars)
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 two CGUs. The value in use was determined based
on the present value of the estimated free cash flows for the two 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 12.3% and 11.0% per annum was used for the two CGUs, respectively, 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 CGUs is
increased by 1%, the recoverable amount for both CGUs would be less than the carrying value.
11. INVESTMENTS IN JOINT VENTURES
The Corporation has interests in a number of individually non-material 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, 2018 and December 31, 2017.
Balance, beginning of the year
Share of total comprehensive income
Balance, end of the year
December 31 December 31
2017
2018
6,815
669
7,484
6,484
331
6,815
Subsequent to the year end, the Corporation acquired an additional 26% of the issued and outstanding shares of the capital
stock of Triveni Aeronautics Private Limited to obtain a 75% ownership.
12. BANK INDEBTEDNESS
On September 13, 2018, the Corporation amended its credit agreement with its existing lenders. The Corporation has a multi-
currency operating credit facility with a syndicate of banks, with a Canadian dollar limit of $75,000. Under the terms of the
amended credit agreement, the operating credit facility expires on September 13, 2020. Extensions of the facility are subject to
mutual consent of the syndicate of lenders and the Corporation. The credit agreement also includes a $75,000 uncommitted
accordion provision which will provide the Corporation with the option to increase the size of the operating credit facility. As at
December 31, 2018, the Corporation was debt-free under its credit facility. Bank indebtedness bears interest at the bankers’
acceptance or LIBOR rates plus 1.20%. At December 31, 2018, the Corporation had letters of credit outstanding totalling $3,912
such that $71,088 was unused and available. A fixed and floating charge debenture on accounts receivable, inventories and
property, plant and equipment is pledged as collateral for the operating credit facility.
50
MAGELLAN 2018 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars)
13. ACCOUNTS PAYABLE, ACCRUED LIABILITIES AND PROVISIONS
Accounts payables
Accrued liabilities
Contract liabilities [note 6]
Provisions [note 16]
14. LONG-TERM DEBT
Property mortgages [a]
Other loans [b]
Less current portion
December 31 December 31
2017
2018
Restated
(note 2)
84,677
60,202
7,273
2,125
154,277
86,754
55,981
9,029
2,643
154,407
December 31 December 31
2017
2018
769
10,811
11,580
2,516
9,064
13,789
12,572
26,361
15,159
11,202
[a] Property mortgages include $769 (£441) [2017 – $1,050 (£619)] 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, 2018
was 1.4% [2017 – 1.4%]. The property mortgage requires scheduled monthly repayments of accrued interest and principal
and matures in June 2021.
The Corporation had a five year fixed rate term mortgage, with accrued interest and principal paid monthly. The mortgage
is secured by certain land and building. The principal amount outstanding at December 31, 2017 was $12,739 and was
repaid on February 1, 2018.
[b] Other loans include loans of $10,811 [2017 – $12,572] provided by governmental authorities (“Government Loans”) that
bear interest of approximately 2.38% [2017 – 1.38%]. The Government Loans mature April 2024 with accrued interest and
principal repayable monthly.
Included in other loans were bank loans (“Commercial Loans”) used to finance equipment over a ten year period maturing
between December 2020 and December 2022. The Commercial Loans required scheduled monthly repayments of
accrued interest and principal and were repaid in August 2017.
15. 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.
51
MAGELLAN 2018 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars)
During 2018, the Corporation received $2,847 [2017 – $3,638] of government proceeds, of which $1,486 [2017 – $2,023] has
been credited to the related assets, $190 [2017 – $66] has been credited to the related expense and $1,171 [2017 – $1,549]
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 2018, the Corporation repaid $1,021 [2017 – $190]. As at December 31, 2018,
the Corporation recognized $25,427 [2017 – $25,162] as the amount repayable. The Corporation is eligible for additional
government proceeds of $6,476 for the period from January 1, 2019 to March 31, 2020 based on approved expenditures.
16. OTHER LONG-TERM LIABILITIES AND PROVISIONS
Net defined benefit plan deficits [note 22]
Provisions
Other
Less current portion included in accounts payable, accrued
liabilities and provisions
The following table presents the movement in provisions:
At December 31, 2016
Additional provisions
Amount used
Unused amounts reversed
Unwind of discount
Foreign currency translation
At December 31, 2017
Additional provisions
Amount used
Unused amounts reversed
Unwind of discount
Foreign currency translation
At December 31, 2018
December 31 December 31
2017
2018
12,012
5,507
4,792
22,311
2,643
19,668
Other
5,958
5,601
5,719
17,278
2,125
15,153
Total
5,658
2,175
(1,402 )
(702 )
(34 )
(94 )
5,601
1,045
(1,067 )
(297 )
149
76
Warranty Environmental
2,807
1,898
provisions
953
850
(873 )
(652 )
–
(47 )
1,176
606
(588 )
(157 )
–
48
–
(20 )
(50 )
(34 )
–
2,703
–
–
(32 )
149
–
1,325
(509 )
–
–
(47 )
1,722
439
(479 )
(108 )
–
28
1,085
2,820
1,602
5,507
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.
52
MAGELLAN 2018 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars)
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.
17. CHANGES IN LIABILITIES ARISING FROM FINANCING ACTIVITIES
December 31
Foreign
2017
Cash flows
exchange
December 31
2018
Other
Bank indebtedness
Debt due within one year
Long-term debt
Long-term liabilities and provisions
–
51,834
11,202
15,153
Borrowing subject to specific conditions – Non-current
23,866
Borrowing subject to specific conditions – Current
Total
1,296
103,351
(264 )
3,892
(15,165 )
(945 )
2,088
(786 )
–
1,312
25
299
–
–
(11,180 )
1,636
264
(12,645 )
13,002
5,161
(1,444 )
407
4,745
–
44,393
9,064
19,668
24,510
917
98,552
The “Other” column includes the effect of reclassification of non-current portion of interest bearing loans, borrowings and
deferred revenues, allocation of borrowing subject to specific conditions to the related assets and expenses, changes in
defined benefit plans, and the effect of interest accretion on interest bearing loans and borrowings.
18. INCOME TAXES
The following are the major components of income tax expense:
Current income tax expense
Current tax expense for the year
Deferred income tax expense
Origination and reversal of temporary differences
Impact of tax law changes
Total income tax expense
53
2018
9,402
9,402
15,709
(51 )
15,658
2017
Restated
(note 2)
15,557
15,557
11,910
(9,836 )
2,074
25,060
17,631
MAGELLAN 2018 ANNUAL REPORT NOTES 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, 2018 was 21.9% [2017 – 13.9%]. 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
2018
114,180
2017
Restated
(note 2)
127,119
Income taxes based on the applicable tax rate of 25.8% in 2018 and 2017
29,458
32,797
Adjustment to income taxes resulting from:
Adjustments in respect of prior years
Permanent differences and other
Non-taxable portion of capital gains
Income tax rates differentials on income of foreign operations
Changes in income tax rates
Income tax expense
393
(153 )
–
(4,582 )
(56 )
25,060
59
(732 )
(3,252 )
(1,269 )
(9,972 )
17,631
The increase in the effective corporate tax rate from 2017 is primarily attributable to a significant reduction in the United States
Federal corporate income tax rate from 35% to 21% necessitated by the Tax Cuts and Jobs Act being signed into legislation in
December 2017. As a result of the re-measurement of the Corporation’s deferred tax assets and liabilities in the United States,
the Corporation recorded a tax benefit of approximately $9,972. Additionally, a portion of the capital gains realized on the sale
of property during 2017 was not taxable resulting in a reduction of the current tax expense by approximately $3,252.
Changes in the deferred tax components are adjusted through deferred income tax expense except for $10,048 [2017–$8,958]
of investment tax credits which is adjusted through cost of revenues and $1,857 [2017 – $183] 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 carry forwards
Investment tax credits
Employee future benefits
Property, plant and equipment and intangibles
Other
Deferred tax liabilities
December 31 December 31
2017
2018
Restated
(note 2)
3,808
26,465
2,036
(46,546 )
979
(13,258 )
(47 )
23,630
3,596
(51,510 )
2,559
(21,772 )
54
MAGELLAN 2018 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars)
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
2017
2018
Restated
(note 2)
13,823
(27,081 )
11,393
(33,165 )
The temporary difference associated with investments in subsidiaries and joint ventures, for which a deferred tax liability
has not been recognized aggregates to $665,193 [2017 – $572,030].
19. 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:
Outstanding at December 31, 2018 and December 31, 2017
Net income per share
Net Income
Weighted average number of shares
Basic and diluted net income per share
Number
Amount
58,209,001
254,440
2018
89,120
58,209,001
1.53
2017
109,488
58,209,001
1.88
Dividends declared
On March 30, 2018, June 29, 2018, and September 28, 2018 the Corporation paid quarterly dividends on 58,209,001 common
shares of $0.085 per common share, amounting to $14,843. On December 31, 2018 the Corporation paid quarterly dividends
on 58,209,001 common shares of $0.10 per common share, amounting to $5,821.
For the year ended December 31, 2017, the Corporation declared and paid dividends on common shares on March 31, 2017,
June 30, 2017 and on September 30, 2017 of $0.065 per share amounting to $11,351 and on December 29, 2017 of $0.085 per
share amounting to $4,948.
Subsequent to December 31, 2018, the Corporation declared dividends to holders of common shares in the amount of $0.10 per
common share payable on March 29, 2019, for shareholders of record at the close of business on March 22, 2019.
20. 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,
55
MAGELLAN 2018 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars)
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, 2018
and December 31, 2017, there were no options granted and outstanding. The maximum number of options for common
shares that is available to be granted under this plan is 1,673,341.
The Corporation has a deferred share unit plan (“DSU Plan”) for certain executive officers (“Officers”) which provides
a structure for Officers to accumulate equity-like holdings in the Corporation. The DSU Plan allows certain Officers to
participate in the growth of the Corporation by providing a deferred payment based on the value of a common share at
the time of redemption. Each Officer receives deferred share units (“Units”) based on their annual management incentive
compensation. The Units are issued based on the Corporation’s common share price at the time of issue. A third of the
Units are vested and paid upon issuance and the remaining Units are vested and paid out equally on the anniversary
date of issuance in the following two year 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. For Units granted subsequent to May
1, 2016 a Total Shareholder Return (“TSR”) performance element was introduced to reinforce the connection between
remuneration and the interests of Shareholders, by motivating and rewarding participants for improving the long-term
value of the Corporation. One third of the cash payment of the Units awarded for calendar 2016 and calendar years
thereafter is made May 1 of the first calendar year following the date of the grant of the Units, another one third of cash
payment is made May 1 of the second calendar year following the date of grant of the Units, and the remaining one third
cash payment is made May 1 of the third calendar year following the date of grant of the Units. The number of Units that
will actually vest ranges from 0% to 200% of the award remuneration granted and will be determined by the Corporation’s
three year TSR relative to a comparator group. The value each Officer ultimately receives would be determined by the
number of Units earned, multiplied by the fair market value of the common share at the end of the performance period.
As at December 31, 2018, 65,744 Units were outstanding at an accrued value of $584 [December 31, 2017 – $523]. The
Corporation recorded compensation expense in relation to the plans during the year of $168 [2017 – $433].
21. FINANCIAL INSTRUMENTS
Categories of financial instruments
Under IFRS, financial instruments are classified into one of the following categories: financial assets/financial liabilities at
fair value through profit or loss, and financial assets/financial liabilities at amortized costs.
All financial instruments, including derivatives, are included on the consolidated statement of financial position, which are
measured at fair value except for financial assets and liabilities measured at amortized costs.
56
MAGELLAN 2018 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars) The carrying values of the Corporation’s financial instruments are classified as follows:
Financial
assets at
fair value
through
Financial
liabilities at
Financial
fair value
Financial
assets at Total financial
through
liabilities at Total financial
December 31, 2017
December 31, 2018
profit or loss1 amortized cost2
169,693
187,897
43,627
63,316
assets profit of loss3 amortized cost4
213,320
231,781
251,213
–
849
219,853
liabilities
231,781
220,702
1 Includes cash and cash equivalents and restricted cash
2 Includes trade receivables and other receivables
3 Includes derivatives contracts financial liabilities
4 Includes bank indebtedness, accounts payable and accrued liabilities, long-term debt, borrowings subject to specific conditions and trade
receivables securitization transactions
The Corporation has exposure to the following risks from its use of financial instruments:
– Market risk
– Credit risk
–
Liquidity risk
This note presents information about the Corporation’s risks to each of the above risks, its objectives, policies and processes
for measuring and managing risk.
Market risk
Market risk is the risk that changes in the market prices, such as foreign exchange rates and interest rates, will affect
the Corporation’s income or the value of its holdings of financial instruments. The Corporation’s policy is not to utilize
derivative financial instruments for trading or speculative purposes. The Corporation may utilize derivative instruments in
the management of its foreign currency and interest rate exposures.
The Corporation thoroughly examines the various financial instrument risks to which it is exposed and assesses the
impact and likelihood of those risks. These risks may include currency risk, interest rate risk, credit risk and liquidity risk.
Where material, these risks are reviewed and monitored by the Board of Directors of the Corporation.
Currency risk
The Corporation operates internationally, which gives rise to a risk that its income, cash flows and shareholders’ equity
may be adversely impacted by fluctuations in foreign exchange 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 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, 2018, fluctuations of +/- 1% would, everything else being equal, have an effect on net income for
the year ended December 31, 2018 of approximately +/- $23. 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 $5,169.
57
MAGELLAN 2018 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars)
Interest rate risk
The Corporation is exposed to interest rate risk in its floating rate bank indebtedness. As at December 31, 2018, $11,580
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, 2018 by approximately +/- $586.
Credit risk
Credit risk arises from cash and cash equivalents held with banks and financial institutions as well as credit exposure to
clients, including outstanding trade receivables. The maximum exposure to credit risk is equal to the carrying value of
the financial assets. The objective of managing credit risk is to prevent losses in financial assets. The Corporation is also
exposed to credit risk from the potential default by any of its counterparties on its foreign exchange forward contracts.
The Corporation mitigates this credit risk by dealing with counterparties who are major financial institutions that the
Corporation anticipates will satisfy their obligations under the contracts.
The Corporation, in the normal course of business, is exposed to credit risk from its customers, substantially all of which
are in the aerospace industry. The Corporation sells the majority of its products to large international organizations with
strong credit ratings. Therefore, the Corporation is not exposed to significant credit risk and overall the Corporation’s credit
risk has not changed significantly from the prior year.
The carrying amount of trade receivables is reduced through the use of an allowance account and the amount of the loss
is recognized in the consolidated statements of income within administrative and general expenses. When a receivable
balance is considered uncollectible, it is written off against the allowance for doubtful accounts. Subsequent recoveries
of amounts previously written off are credited against administrative and general expenses.
Derecognition of financial assets
The Corporation sells a portion of its trade receivables through securitization programs or factoring transactions. During
2018, the Corporation sold receivables to various financial institutions in the amount of $314,117 [2017 – $310,037] for a
discount of $2,224 [2017 – $1,665] representing an annualized interest rate of 3.21% [2017 – 2.30%].
As at December 31, 2018, trade receivables include receivables sold and financed through securitization transactions of
$41,877 [2017 – $36,675] which do not meet the IAS 39 derecognition requirements as the Corporation continues to be
exposed to credit risk. These receivables are recognized as such in the consolidated financial statements even though
they have been legally sold; a corresponding financial liability is recorded in the consolidated statement of financial
position under debt due within one year.
Liquidity risk
The Corporation’s objective in managing liquidity risk is to ensure that there are sufficient committed loan facilities in order
to meet its liquidity requirements at any point in time. The Corporation has in place a planning and budgeting process to
help determine the funds required to support the Corporation’s normal operating requirements on an ongoing basis, taking
into account its anticipated cash flows from operations and its operating facility capacity. The primary sources of liquidity
are the operating credit facility, trade receivables securitization program and cash provided by 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.
58
MAGELLAN 2018 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars) 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.
Long-term debt1
Equipment leases
Facility leases
Year 1
44,393
593
5,283
Other long-term liabilities
141
Borrowings subject to
specific conditions
Interest payments
Total
917
51,327
259
51,586
Year 2
2,479
292
3,412
260
603
7,046
202
7,248
Year 3
2,294
251
3,400
234
765
6,944
147
7,091
Year 4
2,160
197
3,203
208
788
6,556
96
6,652
Year 5
2,160
Thereafter
720
74
3,227
143
792
6,396
45
6,441
4
17,948
1,196
21,562
41,430
4
Total
54,206
1,411
36,473
2,182
25,427
119,699
753
41,434
120,452
1 The amount drawn $41,877 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:
Cash and cash equivalents, 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
Company had forward foreign exchange contracts outstanding as at December 31, 2018 as follows:
Maturity – 1 to 2 years – US dollar
Amount
41,000
Floor
1.2850
Ceiling
1.3263
As at December 31, 2018, the fair value of the outstanding foreign exchange contracts financial liabilities was $849, which
was categorized within Level 2 of the fair value hierarchy. The corresponding unrealized loss was recorded in Other in the
consolidated statement of income.
Long-term debt
The carrying amount of the Corporation’s long-term debt of $11,580 would approximate its fair value at December 31, 2018.
Borrowings subject to specific conditions
The Corporation has recognized $24,510 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.
59
MAGELLAN 2018 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars)
Collateral
As at December 31, 2018, the carrying amount of all of the financial assets that the Corporation has pledged as collateral
for its long-term debt facilities was $53,457.
Fair value hierarchy
The Corporation’s financial assets and liabilities recorded at fair value on the consolidated statement of financial position
have been categorized into three categories based on a fair value hierarchy. Fair value of assets and liabilities included
in Level 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.
22. EMPLOYEE FUTURE BENEFITS
The Corporation provides retirement benefits through a variety of arrangements comprised principally of defined benefit
and defined contribution plans that cover a substantial portion of employees in accordance with local regulations and
practices. The most significant plans in terms of the benefits accrued to date by participants are career average and final
average earnings plans and around 100% of the obligations accrued to date come from defined benefit plans in Canada.
Defined Benefit Plans
Canada
The Canadian defined benefit plans comprise of both career average and final average earnings plans which provide
benefits to members in the form of a guaranteed level of pension payable for life. A majority of the plans are currently
closed to new entrants. The level of pensions in the defined benefit plans depends on the member’s length of service
and salary at retirement age for final average earnings plans and salary during employment for career average plans. The
defined benefit pension plans require 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 as at December 31, 2017.
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.
Effective January 1, 2014, three pension plans were merged. On July 7, 2017, the Financial Services Commission of
Ontario (“FSCO”) approved the transfer of the assets and the asset transfer was completed on August 31, 2017. The net
impact of the asset transfer on the consolidated results for all plans is nil.
60
MAGELLAN 2018 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars) 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
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.
61
MAGELLAN 2018 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars) 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 $6,247 for the year ended December 31, 2018
[2017 – $5,883].
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 on net defined benefit liability
Other
Total defined benefit cost recognized in net income
2018
Other
2017
Defined
Defined
Other
benefit plans benefit plan benefit plans benefit plan
–
–
107
–
107
2,471
119
475
225
430
3,415
192
–
192
3,065
2,760
The re-measurement components recognized in the statement of other comprehensive income for the Corporation’s
defined benefit plans comprise the following:
62
MAGELLAN 2018 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars)
Defined
Other
benefit plans benefit plan benefit plans benefit plan
Defined
2018
Other
2017
Actuarial losses (gains)
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 loss (income) recognized in the statement of other
comprehensive income
14,112
(6,477 )
(575 )
7,060
–
–
–
–
(6,592 )
5,991
84
(517 )
–
–
–
–
The following tables show the changes in the fair value of plan assets and the defined benefit obligation as recognized in
the consolidated financial statements for the Corporation’s benefit plans:
Changes in benefit plan assets of the Corporation’s benefit plans
Fair value, beginning of year
Interest income on plan assets
Actual return on assets (excluding interest income on plan assets)
Employer contributions
Employee contributions
Benefit payments
Administration costs
Exchange differences
End of year
Changes in the benefit plan obligations of the Corporation’s benefit plans
Beginning of year
Current service cost
Interest cost
Employee contributions
Actuarial losses (gains) in other comprehensive income from:
Changes in demographic assumptions
Changes in financial assumptions
Experience adjustments
Benefit payments
Exchange difference
End of year
2018
Other
2017
4,610
4,361
(14,112 )
121,776
Defined
129,806
Defined
Other
benefit plans benefit plan benefit plans benefit plan
–
–
–
–
310
–
(310 )
–
–
–
129,806
115,339
(8,827 )
(8,155 )
5,959
6,592
3,745
(704 )
(580 )
(675 )
250
820
279
161
–
–
–
–
–
–
(161 )
Defined
Other
benefit plans benefit plan benefit plans benefit plan
1,139
130,367
Defined
135,295
2017
2018
Other
1,094
–
107
–
–
–
–
(310 )
85
976
2,760
4,835
279
(553 )
6,394
84
(8,155 )
(716 )
135,295
–
192
–
–
–
–
(161 )
(76 )
1,094
2,471
4,480
250
(308 )
(6,398 )
(575 )
(8,827 )
801
127,189
63
MAGELLAN 2018 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars)
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
2018
Other
2017
Defined
115,339
Defined
Other
benefit plans benefit plan benefit plans benefit plan
–
–
(976 )
(976 )
(976 )
–
(135,295 )
(127,189 )
129,806
(12,012 )
(11,850 )
(5,958 )
(5,489 )
(1,094)
(1,094)
(1,094)
469
162
–
The Corporation expects to contribute approximately $3,496 in 2019 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.
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
Canadian defined benefit plans
2018
Defined Other benefit
2017
Defined Other benefit
benefit plans
3.8%
2.0%/3.0%
plan benefit plans
4.1%
3.4%
–
2.0%/3.0%
plan
3.4%
–
Club Vita Canada’s 2016
Club Vita Canada’s 2016
VitaCurves, projected with
VitaCurves, projected with
improvement scale CPM-B
improvement scale CPM-B
US defined benefit and other benefit plans
MP-2014 mortality tables
MP-2014 mortality tables with
with MP-2018 projections
MP-2017 projections
Other benefit plan
MP-2014 mortality
MP-2014 mortality tables with
tables with MP-2018
MP-2017 projections (with
projections (with blue
blue collar adjustment)
collar 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, 2018, a 1.0% decrease in the discount rate
used (all other assumptions remaining unchanged) could result in a $16,566 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 6.0% annual rate of increase in the per capita cost of covered health care and dental benefits
was assumed for 2018. 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, 2018 was nominal.
64
MAGELLAN 2018 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars)
Assets
The weighted average asset allocations of the defined benefit plans at the measurement date, by asset category, are as follows:
Equity investments
Fixed income investments
Other investments
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
23. SEGMENTED INFORMATION
2018
81%
16%
3%
100%
2017
84%
14%
2%
100%
Total
7,249
28,715
39,567
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,
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
Services
Timing of revenue recognition based on transfer of control is as follows:
At a point of time
Over time
2018
825,110
141,643
966,753
2017
Restated
(note 2)
833,519
121,942
955,461
2018
604,871
361,882
966,753
2017
Restated
(note 2)
622,068
333,393
955,461
The following table presents the aggregate amount of the revenues expected to be realized in the future from partially
or fully unsatisfied performance obligations as at December 31, 2018 as we perform under contracts at delivery or
recognized over time. The amounts disclosed below represent the value of firm orders only. Such orders may be subject
65
MAGELLAN 2018 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars)
to future modifications that might impact the amount and/or timing of revenue recognition. The amounts disclosed below
do not include constrained variable consideration, unexercised options or letters of intent.
Revenues expected to be recognized in:
Less than 24 months
20181
605,821
Thereafter
40,483
1As permitted under the transactional provision in IFRS 15, the transaction price allocated to (partially) unsatisfied performance obligations as
of December 31, 2017 is not disclosed.
Geographic segments:
United
Canada
States
Europe
Revenues
Export revenues1
1Export revenue is attributed to countries based on the location of the customers
320,838
233,649
106,878
325,739
320,176
73,198
2018
2017 Restated (note 2)
Canada
United
States
305,466
311,315
210,361
72,799
Europe
338,680
108,484
Total
955,461
391,644
Total
966,753
413,725
United
2018
Canada
States
Europe
Total
Canada
2017
United
States
Europe
Total
Property, plant and
equipment, intangible
assets and goodwill
189,294
185,032
152,401
526,727
181,539
174,281
140,971
496,791
24. COST OF REVENUES
Operating expenses
Amortization
Investment tax credits
(Reversal) impairment of inventories
25. ADMINISTRATIVE AND GENERAL EXPENSES
Salaries, wages and benefits
Administration and office expenses
Professional services
Amortization
66
2018
2017
Restated
772,151
42,104
(10,048)
(729)
803,478
2018
35,736
16,717
3,179
1,705
57,337
(note 2)
746,987
44,858
(8,671)
(420)
782,754
2017
36,575
18,487
2,829
1,658
59,549
MAGELLAN 2018 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars)
26. INTEREST EXPENSE
Interest on bank indebtedness and long-term debt [Notes 12 and 14]
Accretion charge on long-term debt and borrowings
Discount on sale of trade receivables
2018
884
1,006
2,224
4,114
2017
2,435
611
1,665
4,711
27. 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 gain for the year
ended December 31, 2018 of $26,171 [2017 – unrealized currency translation losses of $8,411] and net actuarial loss
on defined benefit plans of $5,203 [2017 – net actuarial gains of $334]. These gains and losses are reflected in the
consolidated statement of financial position and had no impact on net income for the year.
28. RELATED PARTY DISCLOSURE
Transactions with related parties
During the year, the Corporation incurred consulting, and cost recovery fees of $100 [2017 – $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
2018
3,185
160
242
3,587
2017
2,863
133
144
3,140
Short-term benefits include cash payments for base salaries, bonuses and other short-term cash payments. Post-
employment benefits include the Corporation’s contribution pension plan and pension adjustment for defined benefit
plan. Share-based payments include amounts paid to Officers under the DSU Plan.
67
MAGELLAN 2018 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars)
29. SUPPLEMENTARY CASH FLOW INFORMATION
Net change in non-cash working capital
Trade receivables
Contract assets
Inventories
Prepaid expenses and other
Accounts payable, accrued liabilities and provisions
Interest paid
Income taxes paid
30. ADDITIONAL FINANCIAL INFORMATION
2018
2017
Restated
(note 2)
(13,224 )
(18,335 )
1,868
(5,412 )
(6,046 )
(41,149 )
3,089
7,699
6,766
15,791
2,658
3,992
(24,618 )
4,589
3,930
11,903
Included in other expenses is a foreign exchange gain of $2,993 [2017 – $6,034 loss] on the conversion of foreign currency
denominated working capital balances and debt.
In 2018, the Corporation recognized a gain of $10,651 million in relation to a prior acquisition.
31. 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, 2018, total managed capital was $841,130, comprised of shareholders’ equity of $787,673 and interest-
bearing debt of $53,457.
The Corporation manages its capital structure and makes adjustments to it in light of economic conditions, the risk
characteristics of the underlying assets and the Corporation’s working capital requirements. In order to maintain or adjust
its capital structure, the Corporation, upon approval from its Board of Directors, may issue or repay long-term debt, issue
shares, repurchase shares through the normal course issuer bid, pay dividends or undertake other activities as deemed
appropriate under the specific circumstances. The Board of Directors reviews and approves any material transactions out
of the ordinary course of business, including proposals on acquisitions or other major investments or divestitures, as well
as capital and operating budgets. Based on current funds available and expected cash flow from operating activities,
management believes that the Corporation has sufficient funds available to meet its liquidity requirements at any point
in time. However, if cash from operating activities is lower than expected or capital costs for projects exceed current
estimates, or if the Corporation incurs major unanticipated expenses, it may be required to seek additional capital in the
form of debt. There were no changes in the Corporation’s approach to capital management during the year.
The Corporation must adhere to covenants in its operating credit facility. As at December 31, 2018 the Corporation was in
compliance with these covenants.
68
MAGELLAN 2018 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars)
32. 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.
As at December 31, 2018, capital commitments in respect of purchase of property, plant and equipment totalled $6,350,
all of which had been ordered. There were no other material capital commitments at the end of the year.
69
MAGELLAN 2018 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars) BOARD OF DIRECTORS AND EXECUTIVE OFFICERS
EXECUTIVE OFFICERS
BOARD OF DIRECTORS
COMMITTEES OF THE BOARD
N. Murray Edwards
Chairman
Phillip C. Underwood
President and
Chief Executive Officer
Elena M. Milantoni
Chief Financial Officer
Hyden R. Martin
Vice President,
Business Development,
Marketing and Contracts
Jim G. Powell
Vice President,
Mergers and Acquisitions
Jo-Ann C. Ball
Vice President,
Human Resources
Karen Yoshiki-Gravelsins
Vice President,
Corporate Stewardship and
Operational Excellence
Mark Allcock
Vice President,
Information Technology, and
Transformation
Craig A. Vaughan
Corporate Secretary
N. Murray Edwards (5)
Chairman
Magellan Aerospace Corporation
Mississauga, Ontario
Phillip C. Underwood
President and Chief Executive Officer
Magellan Aerospace Corporation
Mississauga, Ontario
Beth M. Budd Bandler (1, 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)
Corporate Director
Toronto, Ontario
(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
Bruce W. Gowan (1, 2, 3, 5)
Corporate Director
Huntsville, Ontario
Larry G. Moeller (4)
President
Kimball Capital Corporation
Calgary, Alberta
Steven Somerville (1, 2, 3, 4, 5)
President
Kerr Industries Limited
Oshawa, Ontario
70
MAGELLAN 2018 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 7th, 2019 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
Plot No. 69 to 81 of Aerospace
SEZ Sector
Hitech Defence and Aerospace Park
Devanahalli
Bengaluru 562 110
71
MAGELLAN 2018 ANNUAL REPORT Magellan Aerospace
3160 Derry Road East
Mississauga, ON Canada L4T 1A9
www.magellan.aero