A N N U A L R E P O R T 2 0 1 9
LETTER TO SHAREHOLDERS
we experienced growth in our military
programs including the joint strike
fighter program where we delivered
a record number of horizontal tail
assemblies during the year.
With the cancellation of the A380 program and the temporary suspension of production of
the Boeing 737 Max, 2019 was a challenging year for the aerospace sector. These significant
program issues were compounded by the lower than planned ramp up by Airbus on the A320
and A350 programs, along with a reduction in the A330 wide bodied aircraft. All of these
program disruptions adversely affected our performance during 2019. On the positive side,
we experienced growth in our military programs including the joint strike fighter program
where we delivered a record number of horizontal tail assemblies during the year.
Whilst 2019 has been impacted by these program disruptions, many industry analysts
predict that the current super cycle will continue through the end of this decade with over
44,000 aircraft deliveries forecast over the next 20 years. To ensure we are positioned to
exploit this demand Magellan continues to align its strategy with that of our major customers
and focus on optimising our operational performance in all areas of our business providing
our products and services consistently with ZERO DEFECTS and 100% ON TIME. This level
of operational performance coupled with market-competitive pricing is a prerequisite for our
continued success.
We finished the year with slightly over $1 billion in revenue and EBITDA of $145.2 million
and continued our trend of maximizing cash flow and strengthening our balance sheet.
In 2020, we will mitigate the impact of the suspension of production on the 737 Max on our
operations through continued management of cash and driving operational improvements.
Return for our shareholders remains a priority for Magellan. With this in mind, we increased
our dividend by 5% in 2019, the 6th consecutive year of dividend increases since first
issuance. Our financial situation remains solid with a strong balance sheet that enables our
future growth and allows the Company to make strategic acquisitions if they arise.
During 2019, we increased our low cost footprint, opening a new high speed machining
facility in Bangalore India. In April we were able to announce that we had secured a contract
from Boeing to produce the Leading Edge Rib assemblies for the 777X aircraft, our first major
contract for this new facility. This coupled with our increased holding in Triveni, the expansion
of our Polish facility and the acquisition of our first business in France provides us with an
opportunity to not only offer competitive solutions to our customers, but also support their
local operations and industrial participation strategies.
Another success was achieved in 2019 in securing two major munitions development programs
for our Winnipeg facility, the SeaSpider® Anti Torpedo Torpedo and the LUU-2 Illumination
flare for the RCAF. These two projects once in full production will improve the balance in our
business between commercial and defence programs.
1
MAGELLAN 2019 ANNUAL REPORT It is vital that investment
continues along with a
sustained drive in operational
performance.
Progress is being made in standardizing our operating platform. This involves putting in place
structures, systems and processes that will allow us to be more agile and efficient today and
for future growth. Accordingly, in 2020 the focus continues on our SAP system implementation
across our European operations to drive a leaner more efficient business.
Magellan’s environmental council promotes collaboration across the Company and provides
a structure to focus environmental efforts effectively for continual improvement through our
environmental management system and our overall environmental performance. We have
developed key metrics for environmental, social and governance objectives and over the past
ten years have reduced our GHG emissions in excess of 50%.
We will continue to invest in our employees through training and modern apprenticeships as
well as provide a safe and rewarding environment for our people, with a goal to provide them
with long and rewarding careers with Magellan. I would like to express my appreciation to our
employees for their continued commitment and support throughout this year.
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 6, 2020
2
MAGELLAN 2019 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, 2019 and 2018 prepared in accordance with International
Financial Reporting Standards (“IFRS”), and the Annual Information Form for the year ended December 31, 2019 (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, 2019 relative to the year ended December 31, 2018. The information
contained in this report is as at March 6, 2020. 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,” “2019 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 2019
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. In particular, the Corporation has
not adjusted or revised any forward-looking statements in this report to account for the potential disruption to its business
from the recent novel coronavirus (“coronavirus”) outbreak, the impact from which is not immediately known or quantifiable.
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 2019 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.
3
MAGELLAN 2019 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS December 31, 2019 During 2019, the Corporation advanced a number of key initiatives including the implementation of the first phase of a
corporate-wide ERP system, the strengthening of its strategic planning process, and increasing the focus on zero defects
and 100% on-time delivery. Advancing these initiatives along with other improvement plans is vital in an increasingly
competitive market.
Magellan operates substantially all of its activities in one reportable segment, Aerospace, which is viewed as one segment
by the chief operating decision-makers for the purpose of resource allocations, assessing performance and strategic
planning. The Aerospace segment includes the design, development, manufacture, repair and overhaul and sale of
systems and components for defence and civil aviation. The Corporation 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 repair and overhaul services
for jet engines and related components.
In 2019, 68% of revenues were derived from commercial markets (2018 – 69%, 2017 – 73%) while 32% of revenues related
to defence markets (2018 – 31%, 2017 – 27%).
2019 and Recent Updates
Magellan announced on March 15, 2019 three five-year agreements valued at $48 million in aggregate, with the Canadian
government to perform the licensed manufacture of LUU-2 Illumination flares for the RCAF. Magellan-produced flares will
be delivered from the Magellan’s propellant plant, located near Winnipeg, Manitoba.
On April 12, 2019 Magellan announced an agreement with Atlas Elektronik Canada for the design and development phase
of the SeaSpider® Anti Torpedo Torpedo (“ATT”) program. The initial $19 million phase of the program was launched in
January 2019 and is expected to conclude in 2023. Magellan will lead the design and development of the SeaSpider®
ATT rocket motor and warhead section of the torpedo that includes design, build, test and production qualification.
The Corporation announced on April 24, 2019 a multi-year agreement with Boeing to manufacture 777X control surface
ribs in support of Boeing’s Focused Factory initiative. Work will begin at its United Kingdom facility and later transition
to a new factory in Bangalore, India. Boeing’s Focused Factory initiative is the aggregation of products grouped by
commonality and forecasted demand. The product groups utilize similar technologies and aggregating the products
creates economies of scale that deliver lower cost, improved quality, and delivery efficiencies.
4
MAGELLAN 2019 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS December 31, 2019 On April 29, 2019 Magellan announced agreements with an undisclosed customer for the supply of complex fabricated
engine front frames for a commercial platform, to be manufactured at Magellan’s facility in Winnipeg, Manitoba, and
critical rotating engine shafts for a dual use platform to be manufactured at Magellan’s facility in Haverhill, Massachusetts.
The agreements are valued at approximately $45 million with delivery over the course of the next three years.
Magellan announced on May 14, 2019 that it will continue producing F-35 Lightning II (“F-35”) horizontal tail assemblies
under an agreement with BAE Systems. This agreement represents the continuation of contract awards for three additional
years. With the additional quantities awarded, Magellan will now produce more than double the horizontal tails produced
thus far for the global F-35 program. Annual deliveries will ramp up to 60 per year within the three year period. Magellan,
through its operations in Winnipeg, Manitoba, and BAE Systems have been working together to produce horizontal tails
for the global F-35 program for more than a decade.
The Corporation announced on November 7, 2019 that it completed the acquisition of 100% of the outstanding shares of
Service Inter Industrie (“SII”), an aerospace component supplier based in Marignane, France. SII specializes in precision
machining of critical components used in the manufacture of civil and military helicopters as well as components for the
fixed wing commercial and defense aerospace markets. SII is in close proximity to its major customers, whom it serves for
the serial production as well as maintenance, repair and overhaul services on select parts. The acquisition of SII provides
a new growth vehicle for Magellan and is its first business acquired in France, close to major Airbus operations.
Magellan announced on January 13, 2020 an agreement with Collins Aerospace Systems for the supply of nose landing
gear assemblies for the B737 aircraft. The assemblies comprised of complex machined titanium components will be
delivered through 2024 from Magellan’s facility in Kitchener, Ontario. In order to provide the best solution for Collins
Aerospace Systems, Magellan’s vertically integrated deliverable will utilize its global resources in Ontario, New York,
India, and Poland.
Labour Matters
The Corporation employs over 4,200 employees; of these, approximately 1,600 are unionized and are covered by
16 collective bargaining agreements as of December 31, 2019. The Corporation maintains constructive relationships with
its unions and strives to achieve mutually beneficially relationships while maintaining cost competiveness when negotiating
extensions of expiry dates or renewals of the collective agreements. The Corporation is currently in negotiations regarding
a number of such extensions or renewals and it expects all negotiations will result in extensions of expiry dates, renewals
of the agreements or some other 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, 2021.
Any extensions of the operating credit facility are subject to mutual consent of the lenders and the Corporation.
5
MAGELLAN 2019 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS December 31, 2019 2. OUTLOOK
The outlook for Magellan’s business in 2020
Growth in the global commercial aerospace market is expected to continue through 2020; however, forecasters are
highlighting several areas to be watched. The air traffic growth rate slowed to 4.2% in 2019 compared to an annual
average of 6.2% experienced between 2009 and 2018. Slower air traffic growth could have a tempering effect on the
current up cycle. As the single-aisle aircraft represents the largest segment within this market, the timing of Boeing’s 737
MAX return-to-service and production restart is an important factor in the overall outlook. Finally, a weakness in demand
for wide-body aircraft appears to be signaling a reset for that market segment.
Both Boeing and Airbus closed 2019 with lower order backlogs than the prior year. Boeing closed with a backlog of 5,625
aircraft, a net decrease of 326 aircraft. Airbus closed with a backlog of 7,482 aircraft, a net decrease of 95 aircraft.
The single-aisle market saw Boeing cut the 737 production rate in early second quarter of 2019 from 52 aircraft per month
to 42 per month and then in December 2019 Boeing announced that it would pause production starting in January 2020.
There are approximately 400 undelivered 737 MAX aircraft parked on the ground and another 387 delivered aircraft
that need to be returned to service once authorization has been given by the regulators. In its latest statement, Boeing
estimated that the ungrounding would begin during mid-2020.
Boeing’s competitor Airbus is currently building its single-aisle A320 aircraft at a rate of 59 aircraft per month which is
lower than the 63 aircraft per month that was planned for by the fourth quarter of 2019. The higher rate is now expected
to begin by the end of 2020.
The wide-body aircraft market is weak. Responding to a low order intake, Boeing will reduce its 787 aircraft build rate from
14 aircraft per month to 12 aircraft per month late in 2020. In February 2019, Airbus announced that it would wind down
the A380 program following the cancellation of orders by the program’s largest customer, Emirates. The program will
officially cease production in 2020. Several new wide-body programs experienced setbacks in 2019 including Boeing’s
777-8 aircraft, which is on hold until 2021. Their 777-9 program and Airbus’ A330neo were both delayed in 2019 due to
engine issues. Production of the A350 aircraft has dropped from 9.8 aircraft per month to 9.4 aircraft per month for the
next few years. A new threat to the wide-body market is the success of Airbus’ new A321XLR long range aircraft that was
launched in June 2019 in Paris. With the A321XLR model, airlines will be able to operate a lower-cost single-aisle aircraft
on longer and less heavily travelled routes, many of which can now only be served by larger and less efficient wide-body aircraft.
In the regional jet market, the A220 aircraft backlog has increased strongly since Airbus assumed ownership of the
program from Bombardier. Their new Alabama facility is slated to deliver up to 4 aircraft per month with Canadian facilities
having a capacity to deliver up to 10 aircraft per month. The Boeing/Embraer commercial aircraft division deal was
expected to close by the end of 2019, but due to unexpected European Union regulatory delays, completion is now
pushed into the first quarter of 2020. Embraer achieved the first flight of its new E175-E2 in December 2019. The other
two aircraft in the series, the E190-E2 and E195-E2, are both performing well with order backlogs of around 44 and 124
aircraft respectively. In 2019, Mitsubishi acquired Bombardier’s CRJ regional jet operations. Their domestic MRJ program
now rebranded as SpaceJet has been plagued with delays. The program had orders for 490 aircraft at the end of 2019.
The first delivery of the M90 is expected in 2020 with the M100 planned for 2023.
In the regional turboprop market, ATR continues to hold the strongest position with an order backlog at the end of 2019
of 486 ATR 42’s and 1,234 ATR 72’s. Comparatively, De Havilland Canada closed 2019 with a Q400 order backlog of
approximately 45 aircraft.
6
MAGELLAN 2019 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS December 31, 2019
Business jet deliveries were 10% higher in 2019 compared to 2018, a growth driven primarily by new products introduced
to stimulate demand. According to Forecast International, this market is expected to grow modestly in 2020 and then
decline in 2021 and 2022 before resuming growth in 2023.
Flight International has stated that worldwide defence spending will grow by 3% to 4% in 2020 and by 3% annually
through at least 2023 due to increasing global security concerns. In the United States, the Government’s fiscal year 2020
Defense Appropriations Bill, which was approved last December, increased spending by US$18.9 billion over fiscal
year 2019. Some key programs benefiting from this bill were F-35 and F/A-18E/F fighters, UH-60 Blackhawk and AH-64
Apache helicopters, KC-46 Tankers and C130J transport aircraft.
Lockheed Martin’s F-35 Fighter Program achieved a number of key milestones in 2019 including the delivery of
134 aircraft, 3 aircraft ahead of plan, and reduced the F-35A price to $77.9 million, which was ahead of the $80 million
goal, one year earlier than planned. In 2020 Lockheed plans to deliver 141 F-35’s while preparing to increase volume
year-over-year to reach a peak of around 170 aircraft in 2022, as demand for the aircraft remains strong for the U.S.
Department of Defense and international customers. There are currently more than 490 aircraft operating from 21 bases
in eight nations around the globe.
Canada’s Future Fighter replacement program has three competitors remaining in the $19.0 billion contest: Lockheed
Martin with its F-35; Boeing with the Super Hornet; and Saab, which is offering an updated version of its Gripen fighter.
Proposals are due to the Canadian Government by June 30, 2020. A down selection is expected in 2020 or 2021 followed
by the identification of the selected bidder in early 2022 and first aircraft delivery planned in 2025.
3. SELECTED ANNUAL INFORMATION
A summary of selected annual financial information for 2019, 2018 and 2017
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
1 Restated upon adoption of IFRS 15, Revenue from Contracts with Customers.
2019
1,016.2
67.4
1.16
145.2
2.49
1,141.2
125.2
2018
966.8
89.1
1.53
162.1
2.78
1,072.9
86.4
2017
(restated)1
955.5
109.5
1.88
178.3
3.06
982.7
77.3
Revenues for the year ended December 31, 2019 increased from both 2018 and 2017 levels. The increase in revenues from
2018 was primarily attributable to volume increases in repair and overhaul services, proprietary and casting products. Net
income decreased in 2019 from 2018 mainly due to lower gross margin as a result of lower production volumes on certain
programs, production inefficiencies in certain of our operating divisions and higher manufacturing costs, and the costs
incurred for the implementation of a new ERP program. In addition, a net gain related to prior acquisitions was recorded
in 2018 (See “Results of Operations”).
7
MAGELLAN 2019 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS December 31, 2019
During 2019 the Corporation paid quarterly dividends on common shares of $0.10 per share for the first three quarters and
$0.105 per share in the fourth quarter, amounting to $23.6 million in total for the year. During 2018, the Corporation paid
quarterly dividends on common shares of $0.085 per share in the first three quarters and $0.10 per share in the fourth
quarter, amounting to $20.7 million in total for the year.
4. RESULTS OF OPERATIONS
A discussion of Magellan’s operating results for 2019 and 2018
Consolidated Revenues
Consolidated revenues for the year ended December 31, 2019 were $1,016.2 million, a 5.1% increase from the $966.8 million
last year. Gross profit and net income were $157.0 million and $67.4 million, respectively, in comparison to gross profit of
$163.3 million and net income of $89.1 million for the year ended December 31, 2018.
Twelve-months ended December 31, expressed in thousand of dollars
Canada
United States
Europe
Total revenues
2019
2018 Change
366,565 320,838
322,970 325,739
320,176
326,684
1,016,219 966,753
14.3%
(0.9% )
2.0%
5.1%
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 2018 remained constant in
2019, consolidated revenues for 2019 would have been approximately $998.8 million.
On a currency neutral basis, in comparison to 2018, revenues in Canada in 2019 increased 12.6% primarily driven by higher
volumes in repair and overhaul services, proprietary and casting products. Revenues in the United States decreased by
3.1% largely due to volume decreases for single aisle aircraft and aeroengine programs, offset by higher spare sales.
Revenues in Europe increased slightly by 0.5% from the prior year.
Gross Profit
Twelve-months ended December 31, expressed in thousands of dollars
Gross Profit
Percentage of revenue
2019
2018 Change
156,958 163,275
16.9%
15.4%
(3.9% )
Gross profit was $157.0 million in 2019, $6.3 million lower than 2018 of $163.3 million. Gross profit, as a percentage of
revenues was lower than the prior year by 1.5%. Decrease in gross profit was primarily driven by lower production volumes
on certain programs, production inefficiencies in certain of our operating divisions, higher manufacturing costs and an
accrual recorded in relation to the wind-down of the A380 program, offset in part by higher volumes in repair and overhaul
services and proprietary products and the favourable foreign exchange due to the strengthening year over year of the
United States dollar against the Canadian dollar and the British pound.
Administrative and General Expenses
Twelve-months ended December 31, expressed in thousands of dollars
Administrative and general expenses
Percentage of revenue
2019
62,312
6.1%
2018 Change
57,337
8.7%
5.9%
8
MAGELLAN 2019 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS December 31, 2019
Administrative and general expenses as a percentage of revenue were 6.1% in 2019 as compared to 5.9% in 2018.
Administrative and general expenses of $62.3 million in 2019 were $5.0 million or 8.7% higher than $57.3 million in the prior
year mainly due to costs incurred by the Corporation for its phased implementation of a new ERP program, higher repair
and maintenance costs in its new Mississauga facility, and increased costs in relation to acquisitions in 2019. 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 loss (gain)
Loss on disposal of property, plant and equipment
Other
Other
2019
1,874
32
3,112
5,018
2018
(2,993 )
313
(9,676 )
(12,356 )
Included in other income is a foreign exchange loss of $1.9 million compared to a gain of $3.0 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 2019, $4.0 million of one-time relocation expenses were
incurred for the Corporation’s new Mississauga facility on its relocation to a new operating plant, offset by a $0.9 million
gain recorded in relation to the step acquisition of one of its joint ventures in India. In 2018, the Corporation recognized a
net gain of $9.7 million in relation to prior acquisitions.
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
Accretion charge for lease liabilities
Discount on sale of trade receivables
Interest expense
2019
101
1,091
1,387 –
2,053
4,632
2018
884
1,006
2,224
4,144
Total interest costs of $4.6 million for 2019 increased by $0.5 million from $4.1 million in 2018, primarily due to accretion
charge for lease liabilities recorded as a result of adopting IFRS 16, Leases effective January 1, 2019, offset by decreased
interest on bank indebtedness and long-term debt attributed to reduced principal amounts outstanding 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
2019
6,105
11,510
17,615
20.7%
2018
9,402
15,658
25,060
21.9%
The Corporation recorded an income tax expense in 2019 of $17.6 million on pre-tax income of $85.0 million, representing
an effective tax rate of 20.7%, compared to an income tax expense of $25.1 million on a pre-tax income of $114.2 million
in 2018.
During 2019 and 2018, the Corporation recognized investment tax credits totalling $4.8 million and $10.0 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 change in mix of income across the different jurisdictions in which the Corporation operates
also impacts the change in the effective tax rate.
9
MAGELLAN 2019 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS December 31, 2019
5. RECONCILIATION OF NET INCOME TO EBITDA
A description and reconciliation of certain non-IFRS measures used by management
In addition to the primary measures of earnings and earnings per share (basic and diluted) in accordance with IFRS, the
Corporation includes EBITDA (earnings before interest, income taxes and depreciation and amortization) in this MD&A.
The Corporation has provided this measure because it believes this information is used by certain investors to assess
financial performance and that EBITDA is a useful supplemental measure as it provides an indication of the results
generated by the Corporation’s principal business activities prior to consideration of how these activities are financed
and how the results are taxed in the various jurisdictions. Each component of this measure is calculated in accordance
with IFRS, but EBITDA is not a recognized measure under IFRS, and the Corporation’s method of calculation may not be
comparable with that of other companies. Accordingly, EBITDA should not be used as an alternative to net income as
determined in accordance with IFRS or as an alternative to cash provided by or used in operations.
Twelve-months ended December 31, expressed in thousands of dollars
Net income
Interest
Taxes
Depreciation and amortization
EBITDA
2018
89,120
4,114
25,060
2019
67,381
4,632
17,615
55,593
43,809
145,221 162,103
EBITDA for the year ended 2019 of $145.2 million decreased by $16.9 million when compared to $162.1 million in 2018,
primarily as a result of lower net income due to a one-time gain recorded in 2018 and lower taxes, offset by higher interest,
and depreciation and amortization expenses mainly due to the implementation of the new lease standard.
6. SELECTED QUARTERLY FINANCIAL INFORMATION
A summary view of Magellan’s quarterly financial performance
Expressed in millions of dollars except per share information
Revenues
Income before taxes
Net income
Net income per common share
Basic and Diluted
EBITDA1
Mar 31
269.9
25.9
20.4
0.35
40.5
Jun 30
264.1
27.8
21.7
0.37
42.7
Sep 30
235.6
19.6
15.8
2019
Dec 31
246.7
11.7
9.4
0.27
34.1
0.16
27.9
2018
Mar 31
Jun 30
Sep 30 Dec 31
244.6
241.2
226.5
254.5
22.5
17.5
0.30
34.1
29.8
23.5
0.40
41.8
23.4
18.6
0.32
35.5
38.5
29.5
0.51
50.7
1 EBITDA is not an IFRS financial measure. Please see the “Reconciliation of Net Income to EBITDA” section for more information
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 the United States dollar
relative to the Canadian dollar fluctuated between a high of 1.3375 in the second quarter of 2019 and a low of 1.2648
in the first quarter of 2018. The average exchange rate of the British pound relative to the Canadian dollar moved from
a high of 1.7607 in the first quarter of 2018 to a low of 1.6280 in the third quarter of 2019. 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
10
MAGELLAN 2019 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS December 31, 2019
of 1.2327 in the third quarter of 2019. Had exchange rates remained at levels experienced in 2018, reported revenues in
2019 would have been lower by $10.3 million, $6.2 million and $1.2 million for the first three quarters respectively; higher
by $0.3 million in the fourth quarter.
As discussed above, net income reported in the quarterly information was also impacted by the foreign exchange
movements. In the fourth quarter of 2018, the Corporation recorded a net gain of $9.7 million related to prior acquisitions.
The fourth quarter of 2019 was impacted by volume decrease in Europe, production inefficiencies in certain of our
operating divisions and an accrual recorded in relation to the wind-down of the A380 program.
7. LIQUIDITY AND CAPITAL RESOURCES
A discussion of Magellan’s cash flow, liquidity, credit facilities and other disclosures
The Corporation’s liquidity needs can be met through a variety of sources including cash on hand, cash provided by
operations, short-term borrowings from its credit facility and trade receivables securitization program, and long-term debt
and equity capacity. Principal uses of cash are to fund liabilities as they become due, finance capital expenditures, fund
debt repayments, pay dividends and provide flexibility for new investment opportunities. Based on current funds available
and expected cash flow from operating activities, management believes that the Corporation has sufficient funds available
to meet its liquidity requirements at any point in time. However, if cash from operating activities is lower than expected or
capital costs for projects exceed current estimates, or if the Corporation incurs major unanticipated expenses, it may be
required to seek additional capital in the form of debt or equity or a combination of both.
In 2019, $104.2 million of cash was generated by operations, $62.3 million was used in investing activities and $34.2 million
was used in financing activities.
Cash Flow from Operating Activities
Twelve-months ended December 31, expressed in thousands of dollars
Decrease (increase) in account receivables
Increase in contract assets
(Increase) decrease in inventories
Increase in prepaid expenses and other
Decrease in accounts payable, accrued liabilities and provisions
Net change in non-cash working capital items
Net cash provided by operating activities
2019
12,183
(12,870 )
(21,096 )
(1,124 )
(3,974 )
(26,881 )
104,205
2018
(13,224 )
(18,335 )
1,868
(5,412 )
(6,046 )
(41,149 )
99,997
The Corporation generated $104.2 million in 2019 from operating activities, compared to $100.0 million in the prior year.
Changes in non-cash working capital items used cash of $26.9 million, $14.3 million lower when compared to $41.1 million
in the prior year, largely attributed to the decrease in account receivables, higher contract assets resulted from the timing
of production and billing related to products transferred over time, the increase in prepaid expenses and the decrease in
accounts payable, accrued liabilities and provisions due to timing of payment, offset by the increase in inventories related
to timing of purchase and production and to support higher production volumes in a number of programs in 2020.
11
MAGELLAN 2019 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS December 31, 2019
Cash Flow from Investing Activities
Twelve-months ended December 31, expressed in thousands of dollars
Business combinations
Purchase of property, plant and equipment
Proceeds from disposal of property, plant and equiptment
Change in restricted cash
Increase in intangibles and other assets
Net cash used in investing activities
2019
(5,519 )
(51,820 )
388
–
(5,301 )
(62,252 )
2018
–
(48,346 )
411
3,329
(2,728 )
(47,334 )
Investing activities for 2019 used $62.3 million compared to $47.3 million in the prior year, an increase of $15.0 million mainly
related to acquisitions of new businesses, higher level of investment in capital assets, and the investment in ERP system. The
Corporation invested $51.8 million in capital assets during the year in comparison to $48.3 million in 2018. 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.
Cash Flow from Financing Activities
Twelve-months ended December 31, expressed in thousands of dollars
Decrease in bank indebtedness
(Decrease) increase in debt due within one year
Decrease in long-term debt
Lease liability payments
Decrease in long-term liabilities and provisions
(Decrease) increase in borrowings, net
Common share dividend
Net cash used in financing activities
2019
–
(1,720 )
(4,124 )
(3,972 ) –
(44 )
(803 )
(23,575 )
(34,238 )
2018
(264 )
3,892
(15,165 )
(945 )
1,302
(20,664 )
(31,844 )
The Corporation used $34.2 million in 2019 mainly to repay long-term debt and debt due within one year, and pay lease
liabilities and dividends.
Contractual Obligations
As at December 31, 2019, expressed in thousands of dollars
Trade receivables securitization
Long-term debt
Lease liabilities
Other long-term liabilities
Borrowings subject to specific conditions
Total Contractual Obligations
Less than
1 year
39,399
2,473
6,649
152
1,193
1-3
Years
–
4,452
4-5
Years
–
2,880
After
5 Years
–
Total
39,399
–
9,805
11,971
10,404
30,523
59,547
509
1,565
252
888
1,801
1,608
20,925
25,291
49,866
18,497
15,144
52,336 135,843
Major cash flow requirements for 2019 include the repayment of trade receivables securitization of $39.4 million which is
expected to be refinanced, repayment of long-term debt of $2.5 million, payments of lease liabilities of $6.6 million and
borrowings subject to specific conditions of $1.2 million.
12
MAGELLAN 2019 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS December 31, 2019
The Corporation has a 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, 2021. Any extensions of the
operating credit facility are subject to mutual consent of the lenders and the Corporation.
As at December 31, 2019, the Corporation had made contractual commitments to purchase $8.5 million of capital assets.
In addition, the Corporation had purchase commitments, largely for materials required for the normal course of operations,
of $303.0 million as at December 31, 2019. The Corporation plans to fund all of these 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 6, 2020, 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 20 of the
Corporation’s consolidated financial statements.
On March 29, 2019, June 28, 2019, and September 30, 2019 the Corporation paid quarterly dividends on its
58,209,001 common shares of $0.10 per common share, representing an aggregate dividend payment of $17.5 million. On
December 31, 2019 the Corporation paid quarterly dividends on its 58,209,001 common shares of $0.105 per common
share, amounting to $6.1 million.
For the year ended December 31, 2018, the Corporation declared and paid dividends on its common shares on March
30, 2018, June 29, 2018, and September 28, 2018 of $0.085 per share amounting to $14.9 million and on December 31,
2018 of $0.10 per share amounting to $5.8 million.
In the first quarter of 2020, the Corporation declared cash dividends of $0.105 per common share payable on March 31, 2020
to shareholders of record at the close of business on March 20, 2020.
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, 2019, there were no foreign exchange contracts outstanding.
13
MAGELLAN 2019 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS December 31, 2019 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 $0.2 million [2018 – $0.1 million] payable to a
corporation controlled by the Chairman of the Board of Directors of the Corporation.
10. RISK FACTORS
A summary of risks and uncertainties facing Magellan
The Corporation’s performance may be affected by a number of risks and uncertainties. Magellan’s senior management
identifies key risks and has processes in place to help monitor, manage, and mitigate these risks. Additional risks and
uncertainties not presently known by the Corporation, or that the Corporation does not currently anticipate, may be material
and may impair the Corporation’s performance.
The following risks and uncertainties apply to the Corporation. Information relating to additional risks and uncertainties are
set forth in the Corporation’s Annual Information Form on SEDAR at www.sedar.com.
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
14
MAGELLAN 2019 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS December 31, 2019 the existing order backlog for some of the Corporation’s products. In particular, the uncertainties arising from a contagious
illnesses, such as the coronavirus currently impacting China and other geographies, could adversely impact global travel
and potentially impact aircraft delivery rates of the Corporation’s customers.
Political uncertainty could result in a decrease in revenues or have other material adverse effects on the Corporation.
Significant political events can cast uncertainty on global financial and economic markets and depending upon the
nature of the event can directly affect the aerospace market. One example is the renegotiation of the “USMCA” (United
States-Mexico-Canada Agreement, formerly NAFTA) and the potential for significant U.S. import tariffs being levied on
aerospace materials produced outside of the United States. New tax legislation or changes to existing tax laws, as well
as the potential introduction of laws to reduce immigration and restrict access into the United States for citizens of certain
countries could also present future challenges to non-U.S. corporations.
Britain officially exited the European Union on January 31, 2020 (“Brexit”) and now faces the process of negotiating new
trade agreements with European and other countries. Until these negotiations are concluded, economic uncertainty may
drive volatility in the value of the British pound. Any long term impact from Brexit on Magellan’s United Kingdom operations
will depend, in part, on the outcome of tariff, trade, regulatory, and other negotiations. Whether or not listed above, any
effects of Brexit, 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. As 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 and
contagious illness outbreaks such as the coronavirus outbreak currently impacting a number of countries and forecasted
to spread on a global basis. 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.
15
MAGELLAN 2019 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS December 31, 2019 The aerospace and defence industry continues to experience 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 leverage,
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.
Fluctuations in the value of foreign currencies could result in currency exchange losses.
The Corporation’s financial results are reported in Canadian dollars, though a large portion of the Corporation’s revenues
and expenses are in foreign currencies, primarily US dollars or British pounds. It is expected that some revenues and
expenses will continue to be based in foreign currencies. In situations where the Corporation is not fully hedged, fluctuations
in the Canadian dollar exchange rate to foreign currencies 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.
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 22
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.
16
MAGELLAN 2019 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS December 31, 2019 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.
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.
Leases
The Corporation determines the lease term as the non-cancellable term of the lease, together with any periods covered
by an option to extend or terminate the lease. The lease term is estimated by considering the facts and circumstances that
can create an economic incentive to exercise an extension option, or not exercise the termination option. Both qualitative
and quantitative assumptions are considered when deriving the value of the economic incentive.
The Corporation makes judgments in determining whether a contract contains an identified asset. The identified asset
should be physically distinct or represent substantially all of the capacity of the asset, and should provide the Corporation
with the right to substantially all of the economic benefits from the use of the asset.
Judgments are made by the Corporation in determining the incremental borrowing rate used to measure the lease liability
for each lease contract, including an estimate of the asset-specific security impact. The incremental borrowing rate should
reflect the interest rate that the Corporation would have to pay to borrow at a similar term and with a similar security.
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.
17
MAGELLAN 2019 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS December 31, 2019 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 2019
The Corporation has adopted the following new and amended standards in 2019.
IFRS 16 Leases
Effective January 1, 2019, the Corporation adopted IFRS 16, Leases (“IFRS 16”), replacing IAS 17, Leases (“IAS 17”), IFRIC
4, Determining whether an Arrangement contains a Lease (“IFRIC 4”), SIC-15, Operating Leases-Incentives and SIC-27,
Evaluating the Substance of Transactions Involving the Legal Form of a Lease.
IFRS 16 introduced a single on-balance sheet model for lessees unless the underlying asset is of low value and the short-
term lease recognition exemption is being applied. A lessee is required to recognize, on its statement of financial position,
a right-of-use asset, representing its right to use the underlying leased asset, and a lease liability, representing its obligation
to make lease payments. As a result of adopting IFRS 16, the Corporation recognized an increase to assets and liabilities,
respectively, on the consolidated statement of financial position. Subsequent to the adoption, operating costs decrease due
to the removal of rent expense for leases, depreciation and amortization expense increases due to depreciation of right-of-
use assets, and finance costs increase due to accretion of the lease liability. The accounting treatment for lessors remains
largely the same as under IAS 17.
The Corporation adopted IFRS 16 under the modified retrospective approach and did not restate the comparatives for 2018.
At transition, the Corporation applied the practical expedient available to the Corporation that allows the continuation of the
lease assessments under IAS 17 and IFRIC 4 for existing contracts. Therefore, the definition of a lease under IFRS 16 was
applied only to contracts entered into or changed after January 1, 2019.
For leases that were classified as operating leases under IAS 17, lease liabilities at transition have been measured at the
present value of remaining lease payments, discounted at the incremental borrowing rate as at January 1, 2019. Right-of-use
assets at transition have been measured at an amount equal to the corresponding lease liabilities, adjusted for any prepaid
or accrued rent relating to that lease. The weighted average discount rate applied to the total lease liabilities recognized on
transition was 3.82%.
18
MAGELLAN 2019 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS December 31, 2019 When applying IFRS 16 to leases previously classified as operating leases, the following practical expedients were applied:
–
–
–
a single discount rate to a portfolio of leases with similar characteristics;
used hindsight in determining the lease term where the contract contains purchase, extension, or termination options;
relied upon our assessment of whether leases are onerous under the requirements of IAS 37, Provisions, contingent
liabilities and contingent assets as at December 31, 2018 as an alternative to reviewing our right-of-use assets for
impairment; and
–
excluded short-term leases or low-value leases.
There was no significant impact for contracts in which the Corporation is the lessor.
Prior to adopting IFRS 16, the total minimum operating lease commitments as at December 31, 2018 were $37.9 million.
The weighted average discount rate applied to the total lease liabilities recognized on transition was 3.82%. The difference
between the total of the minimum lease payments set out in note 21 to the 2018 annual consolidated financial statements and
the total lease liabilities recognized on transition was a result of:
–
–
the effect of discounting on the minimum lease payments;
the exclusion of lease payments related to reasonably certain termination options that had not been exercised as at
December 31, 2018; and
–
the exclusion of short-term leases.
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 adoption of IFRIC 23 has no impact 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.
19
MAGELLAN 2019 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS December 31, 2019 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
recognized 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 recognized 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.
13. 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, 2019 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, 2019, 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, 2019.
20
MAGELLAN 2019 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS December 31, 2019 No changes were made in the Corporation’s internal control over financial reporting during the year ended December 31, 2019,
that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.
Additional information relating to Magellan Aerospace Corporation, including the Corporation’s Annual Information Form is
on SEDAR at www.sedar.com.
21
MAGELLAN 2019 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS December 31, 2019 MANAGEMENT’S REPORT
December 31, 2019
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 6, 2020
Elena M. Milantoni
Chief Financial Officer
22
MAGELLAN 2019 ANNUAL REPORT INDEPENDENT AUDITORS’ REPORT
December 31, 2019
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, 2019 and 2018, 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, 2019 and 2018, 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, 2019 and 2018, and its consolidated financial performance and its consolidated cash
flows for the years ended December 31, 2019 and 2018 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.
23
MAGELLAN 2019 ANNUAL REPORT INDEPENDENT AUDITORS’ REPORT
December 31, 2019
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.
24
MAGELLAN 2019 ANNUAL REPORT INDEPENDENT AUDITORS’ REPORT
December 31, 2019
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 6, 2020
25
MAGELLAN 2019 ANNUAL REPORT CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
Expressed in thousands of Canadian dollars
Notes
December 31
December 31
2019
2018
Current assets
Cash and cash equivalent
Trade and other receivables
Contract assets
Inventories
Prepaid expenses and other
Non-current assets
Property, plant and equipment
Right-of-use assets
Investment properties
Intangible assets
Goodwill
Other assets
Deferred tax assets
Total assets
3
4
5
6
7
8
9
10
10
11, 23
19
69,637
177,801
77,967
196,823
21,127
543,355
63,316
187,897
66,436
175,082
20,058
512,789
439,102
428,878
44,692
2,180
65,373
34,137
8,770
3,556
–
2,305
62,745
35,104
19,666
11,393
597,810
1,141,165
560,091
1,072,880
Current liabilities
Accounts payable and accrued liabilities and provisions
Debt due within one year
13
14, 15, 22
151,907
48,144
200,051
154,407
44,393
198,800
Non-current liabilities
Long-term debt
Lease liabilties
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
Equity attributable to equity holders of the Corporation
Non-controlling interest
Total liabilities and equity
See accompanying notes to the consolidated financial statements
26
14
15
16
17, 23
19
20
28
6,876
39,794
24,098
20,289
34,181
125,238
254,440
2,044
13,565
516,911
25,539
812,499
3,377
9,064
–
24,510
19,668
33,165
86,407
254,440
2,044
13,565
473,246
44,378
787,673
–
1,141,165
1,072,880
MAGELLAN 2019 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 (loss) income
Other comprehensive (loss) income that may be reclassified to
profit and loss in subsequent periods:
Foreign currency translation
Items not to be reclassified to profit and loss in
subsequent periods:
Notes
24
25
26
11, 31
27
19
19
Years ended December 31
2018
2019
1,016,219
859,261
156,958
62,312
5,018
89,628
4,632
84,996
6,105
11,510
17,615
67,381
966,753
803,478
163,275
57,337
(12,356 )
118,294
4,114
114,180
9,402
15,658
25,060
89,120
28
(18,839 )
26,171
Actuarial loss on defined benefit pension plans, net of taxes
19, 23
(141 )
48,401
(5,203 )
110,088
20
20
1.16
1.16
1.53
1.53
Comprehensive income
Net income per share
Basic
Diluted
See accompanying notes to the consolidated financial statements
27
MAGELLAN 2019 ANNUAL REPORT
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Attributable to equity holders of corporation
Share
capital
Contributed
surplus
Other
paid in
captial
Retained
earnings
Foreign
currency
translation
Non-
controlling
interest
Total
equity
Total
Expressed in thousands of Canadian dollars
January 1, 2018
Net income
Other comprehensive (loss) income
Common share dividend
December 31, 2018
Business combination
Net income
Other comprehensive loss
254,440
–
–
–
254,440
–
–
–
Common share dividend
December 31, 2019
See accompanying notes to the consolidated financial statements
–
254,440
2,044
2,044
–
–
–
13,565
–
–
–
2,044
–
–
–
–
13,565
–
–
–
–
409,993
89,120
(5,203 )
(20,664 )
473,246
–
67,381
(141 )
(23,575 )
18,207
–
26,171
–
44,378
–
–
(18,839)
–
698,249
89,120
20,968
(20,664)
787,673
–
67,381
(18,980)
(23,575)
–
–
–
–
–
3,377
–
–
–
698,249
89,120
20,968
(20,664 )
787,673
3,377
67,381
(18,980 )
(23,575 )
13,565
516,911
25,539
812,499
3,377
815,876
28
MAGELLAN 2019 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, right-of-use
assets and property, plant and equipment
Loss on disposal of property, plant and equipment
Gain on disposal of joint venture investment
Decrease in defined benefit plans
Accretion of financial liabilities
Deferred taxes
Income on investments in joint ventures
Change in non-cash working capital
Net cash provided by operating activities
Cash flow from investing activities
Business combination, net of cash acquired
Purchase of property, plant and equipment
Proceeds from disposal of property, plant and equipment
Change in restricted cash
Increase in intangible and other assets
Net cash used in investing activities
Cash flow from financing activities
Decrease in bank indebtedness
(Decrease) increase in debt due within one year
Decrease in long-term debt
Lease liability payments
Decrease in long-term liabilities and provisions
(Decrease) 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
29
Notes
Years ended December 31
2018
2019
67,381
89,120
7, 8,10
55,593
43,809
7
11
23
27
19
11
30
11
7
7
12, 18
18
14,18
15, 18
17, 18
16, 18
20
32
(881 )
(68 )
2,478
7,041
(490 )
(26,881 )
104,205
(5,519 )
(51,820 )
388
–
(5,301 )
(62,252 )
–
(1,720 )
(4,124 )
(3,972 )
(44 )
(803 )
(23,575 )
(34,238 )
7,715
63,316
(1,394 )
69,637
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
MAGELLAN 2019 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 6, 2020.
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.
30
MAGELLAN 2019 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.
31
MAGELLAN 2019 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars) 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,
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 non-current 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 non-current portion is included in other
long-term liabilities and provisions in the consolidated statement of financial position.
32
MAGELLAN 2019 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars) Cost of Revenues
Cost of revenues consists of production-related manufacturing costs of products sold, development services paid, and
the cost of products purchased for resale. In addition to the direct material cost and production costs, it also comprises
systematically allocated overheads, including depreciation of production-related property, plant and equipment, and
intangible assets, write-downs on inventories and an appropriate portion of production-related administrative overheads.
Government Grants
Government grants are recognized at their fair value in the period when there is reasonable assurance that the conditions
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.
33
MAGELLAN 2019 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars) 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.
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 common shares issued 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.
34
MAGELLAN 2019 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars) Net realizable value is the estimated selling price in the ordinary course of business, less estimated costs of completion
and the estimated costs necessary to make the sale. Inventories are written down to net realizable value when the
cost of inventories is estimated to be unrecoverable due to obsolescence, damage or declining selling prices. When
circumstances that previously caused inventories to be written down below cost no longer exist, the amount of the write-
down previously recorded is reversed.
Property, Plant and Equipment
Property, plant and equipment are stated at cost, less accumulated depreciation and any impairment in value. Cost
includes the purchase price (after deducting trade discounts and rebates), any directly attributable costs of bringing the
asset to the location and condition necessary for it to be capable of operating in the manner intended by management,
and the estimate of the present value of the costs of dismantling and removing the item and restoring the site. Subsequent
costs are included in the assets carrying amount or recognized as a separate asset, as appropriate, only when it is
probable that future economic benefits associated with the item will flow to the Corporation and the cost of the item can
be measured reliably. The carrying amount of the replaced part is 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.
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 property, plant and equipment.
Intangible Assets
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. Expenditure on research activities is recognized as an expense in the
period in which it is incurred.
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
35
MAGELLAN 2019 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars)
and the carrying amount of the asset, and are recognized in the consolidated statements of income when the asset is
de-recognized.
Leases
At inception of a contract, the Corporation assesses whether the contract is, or contains, a lease. A contract is a lease if
the contract conveys the right to control the use of an identified asset. Leases with a term of twelve months or less are not
recorded by the corporation on the consolidated statements of financial position.
Lessee accounting
The Corporation records a right-of-use asset and a lease liability at the lease commencement date based on the present
value of the future lease payments over the lease term.
The lease payments are discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined,
the Corporation’s incremental borrowing rate. After the commencement date, the lease liability shall be remeasured to
reflect changes to the lease payments. Variable lease payments that depend on an index or a rate are included in the
measurement of the lease liability when information is available. The right-of-use asset is typically depreciated on a
straight-line basis over the lease term, unless the Corporation expects to obtain ownership of the leased asset at the end
of the lease.
Certain of the Corporation’s leases contain extension or renewal options. At lease commencement, the Corporation
assesses whether it will be reasonably certain to exercise any of the extension options based on its expected economic
return from the lease. The Corporation periodically reassesses whether it will be reasonably certain to exercise the options
and accounts for any changes at the date of reassessment.
Lessor accounting
When the Corporation acts as a lessor, it assesses at lease inception whether the lease transfers to the lessee substantially
all of the risks and rewards incidental to ownership of the underlying asset. If it does, the lease is a finance lease, if not,
it is an operating lease.
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 units (“CGU”) on the
date of acquisition. Acquisition-related expenses and post-acquisition restructuring costs are recognized separately from
the business combination and are expensed as incurred.
Impairment of Non-Financial Assets
The carrying amounts of the Corporation’s non-financial assets, other than inventories and deferred tax assets, are
reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists,
then the asset or its CGUs recoverable amount is estimated. For the purpose of impairment testing, assets that cannot
be tested individually are grouped together into the smallest group of assets that generates cash inflows from continuing
use that are largely independent of the cash inflows of other assets or CGUs. Non-financial assets that have an indefinite
36
MAGELLAN 2019 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars) 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.
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, 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
37
MAGELLAN 2019 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars)
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, 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.
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
38
MAGELLAN 2019 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars) 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
22 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.
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.
Leases
The Corporation determines the lease term as the non-cancellable term of the lease, together with any periods covered
by an option to extend or terminate the lease. The lease term is estimated by considering the facts and circumstances that
can create an economic incentive to exercise an extension option, or not exercise the termination option. Both qualitative
and quantitative assumptions are considered when deriving the value of the economic incentive.
39
MAGELLAN 2019 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars) The Corporation makes judgments in determining whether a contract contains an identified asset. The identified asset
should be physically distinct or represent substantially all of the capacity of the asset, and should provide the Corporation
with the right to substantially all of the economic benefits from the use of the asset.
Judgments are made by the Corporation in determining the incremental borrowing rate used to measure the lease liability
for each lease contract, including an estimate of the asset-specific security impact. The incremental borrowing rate should
reflect the interest rate that the Corporation would have to pay to borrow at a similar term and with a similar security.
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 2019
The Corporation has adopted the following new and amended standards in the current year.
IFRS 16 Leases
Effective January 1, 2019, the Corporation adopted IFRS 16, Leases (“IFRS 16”), replacing IAS 17, Leases (“IAS 17”), IFRIC 4,
Determining whether an Arrangement contains a Lease (“IFRIC 4”), SIC-15, Operating Leases-Incentives and SIC-27,
Evaluating the Substance of Transactions Involving the Legal Form of a Lease.
IFRS 16 introduced a single on-balance sheet model for lessees unless the underlying asset is of low value and the short-
term lease recognition exemption is being applied. A lessee is required to recognize, on its statement of financial position,
a right-of-use asset, representing its right to use the underlying leased asset, and a lease liability, representing its obligation
to make lease payments. As a result of adopting IFRS 16, the Corporation recognized an increase to assets and liabilities,
respectively, on the consolidated statement of financial position. Subsequent to the adoption, operating costs decrease due
to the removal of rent expense for leases, depreciation and amortization expense increases due to depreciation of right-of-
use assets, and finance costs increase due to accretion of the lease liability. The accounting treatment for lessors remains
largely the same as under IAS 17.
The Corporation adopted IFRS 16 under the modified retrospective approach and did not restate the comparatives for 2018.
At transition, the Corporation applied the practical expedient available to the Corporation that allows the continuation of the
lease assessments under IAS 17 and IFRIC 4 for existing contracts. Therefore, the definition of a lease under IFRS 16 was
applied only to contracts entered into or changed after January 1, 2019.
40
MAGELLAN 2019 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars) For leases that were classified as operating leases under IAS 17, lease liabilities at transition have been measured at the
present value of remaining lease payments, discounted at the incremental borrowing rate as at January 1, 2019. Right-of-use
assets at transition have been measured at an amount equal to the corresponding lease liabilities, adjusted for any prepaid
or accrued rent relating to that lease. The weighted average discount rate applied to the total lease liabilities recognized on
transition was 3.82%.
When applying IFRS 16 to leases previously classified as operating leases, the following practical expedients were applied:
–
–
–
a single discount rate to a portfolio of leases with similar characteristics;
used hindsight in determining the lease term where the contract contains purchase, extension, or terminatio options;
relied upon our assessment of whether leases are onerous under the requirements of IAS 37, Provisions, contingent
liabilities and contingent assets as at December 31, 2018 as an alternative to reviewing our right-of-use assets for
impairment; and
–
excluded short-term leases or low-value leases.
There was no significant impact for contracts in which the Corporation is the lessor.
Prior to adopting IFRS 16, the total minimum operating lease commitments as at December 31, 2018 were $37.9 million.
The weighted average discount rate applied to the total lease liabilities recognized on transition was 3.82%. The difference
between the total of the minimum lease payments set out in note 21 to the 2018 annual consolidated financial statements
and the total lease liabilities recognized on transition was a result of:
–
–
the effect of discounting on the minimum lease payments;
the exclusion of lease payments related to reasonably certain termination options that had not been exercised as at
December 31, 2018; and
–
the exclusion of short-term leases.
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 adoption of IFRIC 23 has no impact 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.
41
MAGELLAN 2019 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars) 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
recognized 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 recognized 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
2019
34,108
35,529
69,637
December 31
2018
3,795
59,521
63,316
Bank balances and short-term deposits comprise of 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. TRADE AND OTHER RECEIVABLES
Trade receivables
Less allowance for doubtful accounts
Net trade receivables
Other receivables
December 31
2019
148,451
369
148,082
29,719
177,801
December 31
2018
167,267
388
166,879
21,018
187,897
42
MAGELLAN 2019 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:
Less than
90 days
10,198
December 31, 2018
Current
155,753
December 31, 2019
133,907
11,055
5. CONTRACT BALANCES
Contract assets
Contract liabilities
Net contract balances
91-181
days
654
1,304
182-365
days
645
21
More than
365 days
17
Total
167,267
2,164
148,451
December 31
2019
77,967
(10,605 )
67,362
December 31
2018
66,436
(9,029 )
57,407
Contract assets relate to the Corporation’s right to consideration for performance completed under the contract and not
invoiced. 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 when the Corporation performs under the contract. Contract liabilities are included in
accounts payable, accrued liabilities and provision on the consolidated statement of financial position.
Revenue recognized in the period from:
Amounts included in contract liabilities at the beginning of the year
2019
9,029
2018
6,602
6. INVENTORIES
At December 31, 2018
At December 31, 2019
Raw
materials
68,006
Work in
progress
84,871
Finished
goods
22,205
Total
175,082
74,674
92,354
29,795
196,823
The cost of inventories recognized as expense and included in cost of sales for the year ended December 31, 2019
amounted to $842,184 [2018 – $792,040].
During the year ended December 31, 2019, the Corporation recorded an impairment expense related to the write-down
of inventory in the amount of $2,083 [2018 – $1,078]. The Corporation also recorded reversals of previous write-downs of
inventory in the amount of $1,626 [2018 – $1,807] due to the sale of inventory previously provided for. The carrying amount
of inventory recorded at net realizable value was $22,277 as at December 31, 2019 [2018 – $22,276], with the remaining
inventory recorded at cost.
43
MAGELLAN 2019 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars)
7. PROPERTY, PLANT, AND EQUIPTMENT
Cost
At December 31, 2017
Additions
Disposals and other
Foreign currency translation
At December 31, 2018
Additions
Acquisitions
Disposals and other
Foreign currency translation
At December 31, 2019
Accumulated depreciation and impairment
At December 31, 2017
Depreciation
Disposal and other
Foreign currency translation
At December 31, 2018
Depreciation
Disposal and other
Foreign currency translation
At December 31, 2019
Net book value
At December 31, 2018
At December 31, 2019
Land
Buildings
Machinery &
Equipment
Tooling
Total
17,927
126,733
600,653
48,789
794,102
389
–
610
7,953
(38 )
4,041
37,327
(5,856 )
26,325
1,193
46,862
(525 )
(6,419 )
3,627
34,603
18,926
138,689
658,449
53,084 869,148
42
2,921
–
(456 )
6,611
1,460
–
(2,863 )
40,861
2,280
(4,909 )
(17,040 )
4,241
51,755
–
–
6,661
(4,909 )
(2,202 )
(22,561 )
21,433
143,897
679,641
55,123 900,094
–
–
–
–
–
–
–
–
–
(51,960 )
(3,757 )
2
(1,576 )
(57,291 )
(4,384 )
–
1,032
(60,643 )
(297,198 )
(43,089 )
(392,247 )
(28,681 )
4,769
(2,175 )
(34,613 )
462
5,233
(13,841 )
(3,226 )
(18,643 )
(334,951 )
(30,878 )
4,489
8,911
(1,880 )
(48,028 ) (440,270 )
(37,142 )
4,489
11,931
1,988
–
(352,429 )
(47,920 ) (460,992 )
18,926
21,433
81,398
83,254
323,498
327,212
5,056
428,878
7,203
439,102
As at December 31, 2018 and 2019, the Corporation did not have any assets under finance lease.
Included in the above are assets under construction in the amount of $14,168 [December 31, 2018 – $21,527], which as at
December 31, 2019 are not amortized.
8. RIGHT-OF-USE ASSETS
At January 1, 2019
Addition
Depreciation, disposal and other
Foreign currency translation
At December 31, 2019
Buildings
23,549
24,605
(3,775 )
(773 )
43,606
Machinery,
equipment
and others
955
562
(401 )
(30 )
Total
24,504
25,167
(4,176 )
(803 )
1,086
44,692
44
MAGELLAN 2019 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars)
9. INVESTMENT PROPERTIES
At December 31, 2018
At December 31, 2019
Accumulated
depreciation,
disposal
and impairment
(7,048 )
(7,133 )
Cost
9,353
9,313
Net
book value
2,305
2,180
The Corporation’s investment properties consist of land and building. Depreciation expense recognized in relation to the
buildings in 2019 was $96 [2018 - $158]. The Corporation recorded rental income from investment properties of $467 in
2019 [2018 - $600].
The fair value of the Corporation’s investment properties was $19,363 at December 31, 2019. 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 2019, the Corporation obtained opinions from external valuators, with experience in
the real estate market, on $18,500 of the total fair values of the Corporation’s investment properties.
10. INTANGIBLE ASSETS AND GOODWILL
Cost
At December 31, 2017
Additions
Foreign currency translation
At December 31, 2018
Additions
Foreign currency translation
Technology Development
costs
rights
Other
intangibles
Total
intangible
Total
intangible
assets
assets Goodwill and goodwill
45,106
121,136
26,839
193,081
33,441
226,522
–
164
3,839
3,791
45,270
128,766
–
(98 )
4,563
(2,270 )
4,835
1,117
32,791
12,997
(784 )
8,674
5,072
–
1,663
8,674
6,735
206,827
35,104
241,931
17,560
(3,152 )
–
(967 )
17,560
(4,119 )
At December 31, 2019
45,172
131,059
45,004
221,235
34,137
255,372
Depreciation and impairement
At December 31, 2017
Depreciation
Foreign currency translation
At December 31, 2018
Depreciation
Foreign currency translation
(31,472 )
(1,779 )
(111 )
(33,362 )
(1,796 )
69
(93,034 )
(4,178 )
(3,291 )
(7,080 )
(2,847 )
(290 )
(131,586 )
(8,804 )
(3,692 )
(100,503 )
(10,217 )
(144,082 )
(8,903 )
1,919
(3,251 )
(13,950 )
182
2,170
At December 31, 2019
(35,089 )
(107,487 )
(13,286 )
(155,852 )
–
–
–
–
–
–
–
(131,586 )
(8,804 )
(3,692 )
(144,082 )
(13,950 )
2,170
(155,862 )
Net book value
At December 31, 2018
At December 31, 2019
11,908
10,083
28,263
23,572
22,574
31,718
62,745
65,373
35,104
34,137
97,849
99,510
45
MAGELLAN 2019 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars)
Technology rights relate to an agreement which permits the Corporation to manufacture aerospace engine components
and share in the revenue generated by the final sale of the engine.
The Corporation has certain programs that meet the criteria for deferral and amortization of development costs.
Development costs are capitalized for clearly defined, technically feasible technologies which management intends to
produce and promote to an identified future market, and for which resources exist or are expected to be available to
complete the project. The Corporation records amortization in arriving at the carrying value of deferred development
costs once the development activities have been completed and sales of the related product have commenced. The
Corporation estimates the intangible assets to be amortized over a period up 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 $8,975 (£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, 2019 and determined there was
no impairment. The results of the annual impairment test indicate that the fair values of the reporting units are in excess
of their carrying values.
In the assessment of impairment, management used industry guidance, historical data and past experience as the key
assumptions in the determination of the recoverable amount of the 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 11.0% and 9.0% 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, 2019 and December 31, 2018.
Balance, beginning of the year
Disposal of joint venture investment
Share of total comprehensive income
Balance, end of the year
46
December 31
2019
7,484
(5,498 )
490
2,476
December 31
2018
6,815
–
669
7,484
MAGELLAN 2019 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars)
In line with the Corporation’s low cost sourcing strategy, an additional 26% of the issued and outstanding shares of the
capital stock of Triveni Aeronautics Private Limited (“Triveni”) was acquired in the first quarter of 2019 for $3,780 to obtain
a 75% controlling interest.
Prior to the effective date February 28, 2019, the Corporation accounted for it’s previously held 49% interest in Triveni as a
joint venture using the equity method with a carrying value of $5,498. As at February 28, 2019, the Corporation remeasured
its previously held equity interest at fair value and recognized the resulting gain of $881 in Other in the consolidated
statement of income.
At February 28, 2019, the Corporation recognized $4,765 current assets, $5,610 non-current assets, $6,142 intangible
assets, $596 current liabilities, $2,385 non-current liabilities, and $3,377 non-controlling interest based on the fair value of
the identifiable assets and liabilities. The net income recorded in the year ended December 31, 2019 includes an immaterial
amount attributable to the non-controlling interest.
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. 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, 2019, the Corporation was debt-free under its credit facility. Bank indebtedness
bears interest at the bankers’ acceptance or LIBOR rates plus 1.00%. At December 31, 2019, the Corporation had letters
of credit outstanding totalling $5,770 such that $69,230 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. On October 28, 2019 the Corporation extended the credit agreement to September 13, 2021.
13. ACCOUNTS PAYABLE, ACCRUED LIABILITIES AND PROVISIONS
Accounts payables
Accrued liabilities
Contract liabilities [note 5]
Provisions [note 17]
December 31
2019
85,581
53,159
10,605
2,562
151,907
December 31
2018
86,754
55,981
9,029
2,643
154,407
47
MAGELLAN 2019 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars)
14. LONG-TERM DEBT
Property mortage [a]
Other loans [b]
Less current portion
December 31
2019
447
8,904
9,351
2,475
6,876
December 31
2018
769
10,811
11,580
2,516
9,064
[a] Property mortgage includes $447 (£260) [2018 – $769 (£441)] of financing relating to 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, 2019
was 1.4% [2018 – 1.4%]. The property mortgage requires scheduled monthly repayments of accrued interest and principal
and matures in June 2021.
[b] Other loans include loans of $8,904 [2018 – $10,811] provided by governmental authorities (“Government Loans”) that
bear interest of approximately 2.38% [2018 – 2.38%]. The Government Loans mature in April 2024 with accrued interest
and principal repayable monthly.
15. LEASE LIABILITIES
The majority of the Corporation’s leases relate to the rental of land and buildings. The Corporation has included the
renewal options in the measurement when it is reasonably certain to exercise the renewal option.
The following table presents lease obligations for the Corporation:
Current
Non-current
Below is a summary of the activity related to the Corporation’s lease liabilities:
At January 1, 2019
Additions
Interests on lease liabilities
Payments
Foreign exchange and other
At December 31, 2019
Less current portion
December 31
2019
6,270
39,794
46,064
Lease liabilities
24,338
25,167
1,387
(3,972 )
(856 )
46,064
6,270
39,794
48
MAGELLAN 2019 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars)
The following table presents the contractual undiscounted cash flows for lease obligations as of December 31, 2019:
Less than one year
One to five years
Over five years
December 31
2019
6,649
22,375
30,523
59,547
Expenses for short-term leases and leases of low-dollar value items are not material. There are no variable lease payments
which are not included in the measurement of lease obligations. All extension options have been considered in the
measurement of lease obligations.
16. BORROWING SUBJECT TO SPECIFIC CONDITIONS
The Corporation has received proceeds related to the development of its technologies and processes from Canadian
government agencies. The contributions have been deducted in calculating the Corporation’s investment in intangible
assets, property plant and equipment or from the expense to which they relate. These amounts, plus, in certain cases, an
implied return on the investment, are repayable as a percentage of the Corporation’s revenues. The Corporation has included
in borrowings subject to specific conditions the estimated amount of repayments in relation to the contributions received.
During 2019, the Corporation received $179 [2018 – $2,847] of government proceeds, of which $65 [2018 - $1,486] has
been credited to the related assets, $21 [2018 – $190] has been credited to the related expense and $93 [2018 - $1,171]
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 2019, the Corporation repaid $960 [2018 – $1,021]. As at December 31, 2019,
the Corporation recognized $25,291 [2018 – $25,427] as the amount repayable. The Corporation is eligible for additional
government proceeds of $6,297 for the period from January 1, 2020 to March 31, 2020 based on approved expenditures.
17. OTHER LONG-TERM LIABILITIES AND PROVISIONS
Net defined benefit plan deficits [note 23]
Provisions
Other
Less current portion included in accounts payable, accured liabilities and provisions
December 31
2019
12,739
5,299
4,813
22,851
2,562
20,289
December 31
2018
12,012
5,507
4,792
22,311
2,643
19,668
49
MAGELLAN 2019 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars)
The following table presents the movement in provisions:
At December 31, 2017
Additional provisions
Amount used
Unused amount reversed
Unwind of discount
Foreign currency translation
At December 31, 2018
Additional provisions
Amount used
Unused amount reversed
Unwind of discount
Foreign currency translation
At December 31, 2019
Warranty Environmental
2,703
1,176
Other
provisions
1,722
606
(588 )
(157 )
–
48
1,085
465
(480 )
(8 )
–
(26 )
–
–
(32 )
149
–
2,820
–
–
(221 )
58
–
439
(479 )
(108 )
–
28
1,602
1,787
(939 )
(843 )
–
(1 )
Total
5,601
1,045
(1,067 )
(297 )
149
76
5,507
2,252
(1,419 )
(1,072 )
58
(27 )
1,036
2,657
1,606
5,299
Warranty
During the normal course of its business, the Corporation assumes the cost of certain components under warranties
offered on its products. This provision for a warranty is based on historical data associated with similar products and is
recorded as a current liability. Nevertheless, conditions may change and a significant amount may need to be recorded.
Environmental
Provisions for environment liabilities have been recorded for costs related to site restoration obligations. Due to the long-
term nature of the liability, the related long-term portion of the liability is included in long-term liabilities.
Other
This category of provisions includes provisions related to legal, onerous contracts, and other liabilities. The provisions are
based on the Corporation’s best estimate of the amount of the expenditure required to address the matters.
18. CHANGES IN LIABILITIES ARISING FROM FINANCING ACTIVITIES
Debt due within one year
Long-term debt
Long-term liabilities and provisions
Borrowing subject to specific conditions
Lease liabilities
Total
December 31
2018
44,393
9,064
19,668
25,427
–
98,552
Cash
flows
(1,720 )
(4,124 )
(44 )
(803 )
(3,972 )
(10,663 )
Foreign
exchange
(717 )
(18 )
(430 )
–
–
(1,165 )
Other
6,188
1,954
1,095
667
43,766
53,670
December 31
2019
48,144
6,876
20,289
25,291
39,794
140,394
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, and lease liabilities.
50
MAGELLAN 2019 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars)
19. 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 difference
Impact of tax law changes
Total income expense
2019
2018
6,105
6,105
9,402
9,402
11,565
(55 )
11,510
15,709
(51 )
15,658
17,615
25,060
The Corporation’s consolidated effective tax rate for the year ended December 31, 2019 was 20.7% [2018 – 21.9%]. 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
Income taxes based on the applicable tax rate of 25.8% in 2019 and 2018
Adjustment to income taxes resulting from:
Adjustments in respect of prior years
Permanent differences and other
Income tax rates differentials on income of foreign operations
Changes in income tax rates
Unrecognized tax losses and temporary differences
Income tax expense
2019
2018
84,996 114,180
21,929
29,458
(1,463 )
(11 )
(3,236 )
(52 )
448
17,615
393
(153 )
(4,582 )
(56 )
–
25,060
Changes in the deferred tax components are adjusted through deferred income tax expense except for $5,181 [2018 – $10,048]
of investment tax credits which is adjusted through cost of revenues and $54 [2018 – $1,857] for employee future benefits
which is adjusted through other comprehensive income.
51
MAGELLAN 2019 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars)
The following are the major components of deferred tax assets and liabilities:
Operating loss carry forwards
Investment tax credits
Employee future benefits
Property, plant and equiptment and intangibles
Other
Deferred tax liabilities
December 31
2019
447
16,017
3,628
(53,657 )
2,940
(30,625 )
December 31
2018
(47 )
23,630
3,596
(51,510 )
2,559
(21,772 )
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
2019
3,556
(34,181 )
December 31
2018
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 $737,968 [2018 – $665,193].
20. SHARE CAPITAL
The authorized capital of the Corporation consists of an unlimited number of preference shares, issuable in series of which
none are outstanding, and an unlimited number of common shares, with no par value.
Common shares
Issued and fully paid:
Number
Amount
Outstanding at December 31, 2019 and December 31, 2018
58,209,001
254,440
Net income per share
Net income
Weighted average number of shares
Basic and diluted net income per share
2019
67,381
58,209,001
2018
89,120
58,209,001
1.16
1.53
Dividends declared
On March 29, 2019, June 28, 2019, and September 30, 2019 the Corporation paid quarterly dividends on its 58,209,001
common shares of $0.10 per common share, amounting to $17,463. On December 31, 2019 the Corporation paid quarterly
dividends on its 58,209,001 common shares of $0.105 per common share, amounting to $6,112.
For the year ended December 31, 2018, the Corporation declared and paid dividends on its common shares on March 30, 2018,
June 29, 2018 and on September 28, 2018 of $0.085 per share amounting to $14,843 and on December 31, 2018 of $0.10
per share amounting to $5,821.
52
MAGELLAN 2019 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars)
Subsequent to December 31, 2019, the Corporation declared dividends to holders of its common shares in the amount of
$0.105 per common share payable on March 31, 2020, for shareholders of record at the close of business on March 20, 2020.
21. STOCK-BASED COMPENSATION PLAN
The Corporation has an incentive stock option plan, which provides for the granting of options for the benefit of employees
and directors. The options include a cash option feature that allows option holders to elect to receive an amount in cash
equal to the intrinsic value, being the excess market price of the common share over the exercise price of the option,
instead of exercising the option and acquiring the common shares. Options are granted at an exercise price equal to the
market price of the Corporation’s common shares at the time of granting. Options normally have a life of five years with
vesting at 20.0% at the end of the first, second, third, fourth and fifth years from the date of the grant. In addition, certain
business unit income tests must be met in order for the option holder’s entitlement to fully vest. As at December 31, 2019
and December 31, 2018, 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, 2019, 62,580 Units were outstanding at an accrued value of $661 [December 31, 2018 – $584]. The
Corporation recorded compensation expense in relation to the DSU Plan during the year of $314 [2018 – $168].
22. FINANCIAL INSTRUMENTS
Categories of financial instruments
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.
53
MAGELLAN 2019 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 profit
or loss1
63,316
Financial
assets at
amortized
cost2
187,897
Total
financial
assets
251,213
Financial
liabilities at
fair value
through
profit of loss3
849
Financial
liabilities at
amortized
cost4
219,853
Total
financial
liabilities
220,702
December 31, 2018
December 31, 2019
69,637
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, lease liabilities, borrowings subject to specific conditions
and trade receivables securitization financial liabilities
270,819
247,438
177,801
–
270,819
The Corporation has exposure to the following risks from its use of financial instruments:
– Market risk
– Credit risk
–
Liquidity 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, 2019, fluctuations of +/- 1% would, everything else being equal, have an immaterial effect on net income
for the year ended December 31, 2019. 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 $5,403.
54
MAGELLAN 2019 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, 2019, $9,351
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, 2019 by approximately +/- $616.
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
2019, the Corporation sold receivables to various financial institutions in the amount of $314,936 [2018 – $314,117] for a
discount of $2,053 [2018 – $2,224] representing an annualized interest rate of 2.76% [2018 – 3.21%].
As at December 31, 2019, trade receivables include receivables sold and financed through securitization transactions of
$39,399 [2018 – $41,877] which do not meet the IFRS 9 derecognition requirements as the Corporation continues to be
exposed to credit risk. These receivables are recognized in the consolidated statement of financial position even though
they have been legally sold with a corresponding financial liability recorded in 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.
55
MAGELLAN 2019 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
Other long-term liabilities
Borrowing subject to specific conditions
Interest payments
Total
Year 1
41,872
152
1,193
43,217
203
43,420
Year 2
2,292
256
779
3,327
147
3,474
Year 3
2,160
253
786
3,199
96
3,295
Year 4
2,160
130
790
3,080
45
3,125
Year 5
720
122
818
1,660
4
1,664
Thereafter
Total
– 49,204
888
1,801
20,925 25,291
21,813 76,296
495
–
21,813 76,791
1 The amount drawn of $39,399 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.
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. There were no
outstanding forward foreign exchange contracts as at December 31, 2019.
Long-term debt
The carrying amount of the Corporation’s long-term debt of $9,351 approximates its fair value at December 31, 2019.
Borrowings subject to specific conditions
The Corporation has recognized $25,291 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.
Collateral
As at December 31, 2019, the carrying amount of all of the financial assets that the Corporation has pledged as collateral
for its long-term debt facilities was $48,748.
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
56
MAGELLAN 2019 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars)
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.
23. 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 January 1, 2018 and 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.
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.
During 2019, the Corporation undertook steps to wind up the US defined benefit plan, which will be fully completed in 2020.
57
MAGELLAN 2019 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars)
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.
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.
58
MAGELLAN 2019 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars) 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 $7,145 for the year ended December 31, 2019
[2018 – $6,247].
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 plan as follows:
Current service cost
Net interest cost on net benefit liabitlity
Other
Total defined benefit cost recognized in net income
Defined benefit
plans
2,091
390
425
2,906
2019
Other benefit
plan
–
340
–
340
Defined benefit
plans
Other benefit
plan
2018
2,471
119
475
3,065
–
107
–
107
The re-measurement components recognized in the statement of other comprehensive income for the Corporation’s
defined benefit plans comprise the following:
Defined benefit
plans
2019
Other benefit
plan
Defined benefit
plans
Other benefit
plan
2018
Acturial 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 recognized in the
statement of other comprehensive income
(12,495 )
12,571
119
195
–
–
–
–
14,112
(6,477 )
(575 )
7,060
–
–
–
–
59
MAGELLAN 2019 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars)
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
Plan settlement
Administration costs
Exchange differences
End of year
Defined benefit
plans
115,339
4,061
2019
Other benefit
plan
–
–
12,495
2,966
219
(6,705 )
(8,313 )
(448 )
(298 )
119,316
–
258
–
(258 )
–
–
–
–
Changes in the benefit plan obligations of the Corporation’s benefit plans
Defined benefit
plans
127,189
2,091
4,451
219
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
Plan settlement
Exchange difference
End of year
65
12,483
121
(6,705 )
(8,313 )
(285 )
131,316
2019
Other benefit
plan
976
–
341
–
–
–
–
(259 )
–
(49 )
1,009
Fair value of plan assets
Accrued benefit obligation
Net defined benefit liability
– Included in other long term liabilities
and provisions
– Included in other assets
Defined benefit
plans
119,316
(131,316 )
(12,000 )
(12,739 )
739
2019
Other benefit
plan
–
(1,009 )
(1,009 )
(1,009 )
–
60
Defined benefit
plans
Other benefit
plan
2018
129,806
4,361
(14,112 )
3,745
250
(8,827 )
–
(704 )
820
115,339
–
–
–
310
–
(310 )
–
–
–
–
2018
Defined benefit
plans
Other benefit
plan
135,295
2,471
4,480
250
(308 )
(6,398 )
(575 )
(8,827 )
–
801
127,189
1,094
–
107
–
–
–
–
(310 )
–
85
976
2018
Defined benefit
plans
Other benefit
plan
115,339
(127,189 )
(11,850 )
(12,012 )
162
–
(976 )
(976 )
(976 )
–
Reconciliation of funded status of benefit plans to amounts recorded in the consolidated financial statements
MAGELLAN 2019 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars)
The Corporation expects to contribute approximately $2,446 in 2020 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 benfits plans
US defined benefit plan
Other benefits plan
Defined benefit
plans
3.1%
2.0%/3.0%
2019
Other benefit
plan
3.0%
–
Defined benefit
plans
3.8%
2.0%/3.0%
2018
Other benefit
plan
4.1%
–
Club Vita Canada’s 2016 VitaCurves,
projected with improvement scale CPM-B
MP-2014 mortality tables with
MP-2019 projections
MP-2014 mortality tables with MP-2019
projections (with blue collar adjustment)
Club Vita Canada’s 2016 VitaCurves,
projected with improvement scale CPM-B
MP-2014 mortality tables with
MP-2018 projections
MP-2014 mortality tables with MP-2018
projections (with blue 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, 2019, a 1.0% decrease in the discount rate
used (all other assumptions remaining unchanged) could result in a $18,225 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
2019. 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, 2019 was nominal.
Assets
The weighted average asset allocations of the defined benefit plans at the measurement date, by asset category, are as follows:
Equity investments
Fixed income investments
Other investments
2019
84 %
15 %
1 %
100 %
2018
81 %
16 %
3 %
100 %
61
MAGELLAN 2019 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars)
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
24. SEGMENTED INFORMATION
Total
6,220
28,314
36,910
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
2019
867,686
148,533
1,016,219
2018
825,110
141,643
966,753
2019
628,132
388,087
1,016,219
2018
604,871
361,882
966,753
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, 2019 and 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
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
Thereafter
2019
704,529
43,531
2018
605,821
40,483
Revenues from the Corporation’s two largest customers accounted for 39.1% of total sales for the year ended December 31, 2019
[December 31, 2018 – two largest customers accounted for 40.2% of total sales].
62
MAGELLAN 2019 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars)
Geographic segments:
2019
United
Canada States
Revenues
Export revenues1
1 Export revenue is attributed to countries based on the location of the customers
366,565 322,970
237,379
63,929
Total
Europe
326,684 1,016,219
410,417
109,109
Canada
United
States Europe
2018
Total
320,838
325,739 320,176 966,753
233,649
73,198 106,878 413,735
United
Canada States
Europe
Total
Canada
United
States Europe
2019
2018
Total
200,484 191,411
191,409
583,304
189,294
185,032 152,401 526,727
Property, plant and
equiptment, right-of-use
assets, intangible assets
and goodwill
25. COST REVENUES
Operating expenses
Amortization
Investment tax credits
Impairement (reversal) of inventories
26. ADMINISTRATIVE AND GENERAL EXPENSES
Salaries, wages and benefits
Administration and office expenses
Professional services
Amortization
27. INTEREST EXPENSE
Interest on bank indebtedness and long-term debt [notes 12 and 14]
Accretion charge on long-term debt and borrowings
Accretion on lease liabilities
Discount on sale of trade receivables
63
2019
810,156
53,482
(4,834 )
457
2018
772,151
42,104
(10,048 )
(729 )
859,261 803,478
2019
36,299
20,618
3,130
2,265
62,312
2018
35,736
16,717
3,179
1,705
57,337
2019
101
1,091
1,387
2,053
4,632
2018
884
1,006
–
2,224
4,114
MAGELLAN 2019 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars)
28. OTHER COMPREHENSIVE INCOME
Other comprehensive income 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 loss for the year
ended December 31, 2019 of $18,839 [2018 – unrealized currency translation gain of $26,171] and net actuarial loss on
defined benefit plans of $141 [2018 – net actuarial loss of $5,203]. These gains and losses are reflected in the consolidated
statement of financial position and had no impact on net income for the year.
29. RELATED PARTY DISCLOSURE
Transactions with related parties
During the year, the Corporation incurred consulting and cost recovery fees of $200 [2018 – $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
2019
2,931
132
170
2018
3,185
160
242
3,233
3,587
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.
30. 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
64
2019
2018
12,183
(12,870 )
(21,096 )
(1,124 )
(3,974 )
(26,881 )
(13,224 )
(18,335 )
1,868
(5,412 )
(6,046 )
(41,149 )
1,874
6,885
3,089
7,699
MAGELLAN 2019 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unless otherwise stated, all amounts are in thousands of Canadian dollars)
31. ADDITIONAL FINANCIAL INFORMATION
Included in other expenses is a foreign exchange loss of $1,874 [2018 – $2,993 gain] on the conversion of foreign currency
denominated working capital balances and debt.
In 2019 the Corporation remeasured its previously held equity interest in a joint venture at fair value and recognized a gain
of $881. In 2018 the Corporation recognized a gain of $10,651 in relation to a prior acquisition.
32. 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, 2019, total managed capital was $861,247, comprised of shareholders’ equity attributable to equity
holders of the Corporation of $812,499 and interest-bearing debt of $48,748.
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 or equity or a combination of both. There were no changes in the Corporation’s approach to capital
management during the year.
The Corporation must adhere to covenants in its operating credit facility. As at December 31, 2019, the Corporation was
in compliance with these covenants.
33. 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, 2019, capital commitments in respect of purchase of property, plant and equipment totalled $8,482,
all of which had been ordered. There were no other material capital commitments at the end of the year.
65
MAGELLAN 2019 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
(1) Audit Committee
Chairman:
Bruce W. Gowan
(2) Governance and
Nominating Committee
Chairman:
Bruce W. Gowan
(3) Human Resources and
Compensation Committee
Chairman:
Steven Somerville
(4) Environmental and Health &
Safety Committee
Chairman:
Beth M. Budd Bandler
(5) Pension Committee
Chairman:
Steven Somerville
N. Murray Edwards
Chairman
Phillip C. Underwood
President and
Chief Executive Officer
Elena M. Milantoni
Chief Financial Officer
Haydn R. Martin
Vice President,
Business Development,
Marketing and Contracts
Jim G. Powell
Vice President,
Mergers and Acquisitions,
and North American Operations
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., O.C., Q.C.(3)
Counsel
Davis Webb LLP
Brampton, Ontario
Bruce W. Gowan (1, 2, 3, 5)
Corporate Director
Huntsville, Ontario
Larry G. Moeller (4)
President
Kimball Capital Corporation
Calgary, Alberta
Steven Somerville (1, 2, 3, 4, 5)
President
Kerr Industries Limited
Oshawa, Ontario
66
MAGELLAN 2019 ANNUAL REPORT 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
INDIA
Plot #69 to 81, of Aerospace
SEZ Sector
Hitcch Defence and Aerospace Park
Devanahaili
Bengaluru 562110
Tel: 91 080 68281200
Plot #120, Antharasanahalli
2nd Phase
KIADB Industrial Area, Tumkuru
Karnataka 572106, INDIA
Tel: 91 081 62212132
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 5th, 2020 at
2:00 p.m. at The Living Arts Centre,
4141 Living Arts Drive,
Mississauga, Ontario L5B 4B8
FRANCE
ZAC des Florides
Boulevard Jean-Loup Chrétien
13700 MARIGNANE
Tel: 33 4 42 10 80 80
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
67
MAGELLAN 2019 ANNUAL REPORT
Magellan Aerospace
3160 Derry Road East
Mississauga, ON Canada L4T 1A9
www.magellan.aero