TORONTO, Aug. 14 /CNW/ - Magellan Aerospace Corporation (the
"Corporation" or "Magellan") is listed on the Toronto Stock Exchange under the
symbol MAL. The Corporation is a diversified supplier of components to the
aerospace industry. Through its network of facilities throughout North America
and the United Kingdom, Magellan supplies leading aircraft manufacturers,
airlines and defence agencies throughout the world.
Financial Results
-----------------
On August 14, 2005, the Corporation released its financial results for
the second quarter of 2005. The results are summarized as follows:
<<
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(Expressed in Three-months ended Six-months ended
thousands, June 30 June 30
except per -----------------------------------------------------------
share amounts) 2005 2004 Change 2005 2004 Change
-------------------------------------------------------------------------
Revenues $146,166 $157,766 -7.4% $291,106 $293,782 -0.9%
-------------------------------------------------------------------------
Net loss $ (289) $ (3,063) - $ (1,968) $ (1,705) -
-------------------------------------------------------------------------
Net loss per
share $ (0.00) $ (0.04) - $ (0.02) $ (0.04) -
-------------------------------------------------------------------------
EBITDA(x) $ 11,026 $ 7,162 54.0% $ 19,625 $ 20,827 -5.8%
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EBITDA(x) per
share $ 0.12 $ 0.09 33.3% $ 0.22 $ 0.26 -15.4%
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This quarterly statement contains certain forward-looking statements that
reflect the current views and/or expectations of the Corporation with
respect to its performance, business and future events. Such statements
are subject to a number of risks, uncertainties and assumptions which may
cause actual results to be materially different from those expressed or
implied. The Corporation assumes no future obligation to update these
forward-looking statements.
(x) The Corporation has included certain measures in this quarterly
statement, including EBITDA, the terms for which are not defined under
Canadian generally accepted accounting principles. The Corporation
defines EBITDA as earnings before interest, taxes and depreciation and
amortization. The Corporation has included these measures, including
EBITDA, because it believes this information is used by certain investors
to assess financial performance and 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 various
jurisdictions. Although the Corporation believes these measures are used
by certain investors (and the Corporation has included them for this
reason), these measures are unlikely to be comparable to similarly titled
measures used by other companies.
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Management's Discussion and Analysis
------------------------------------
Results for the second quarter of 2005 show a modest improvement over
those of the first quarter of 2005. Magellan continues to experience
increasing demand from customers as a result of planned increases in the
delivery rates of commercial aircraft, as well as increases in demand for
business jet aircraft engine components, offset by reducing demand for
regional jet components. Due to long lead times for product delivery, this
demand has not yet resulted in significantly increased revenues in the current
quarter, but the Corporation anticipates this demand will begin to be realized
in 2006. Deliveries for engine components needed to support the buoyant demand
for business jets also occurred in the quarter but this was offset by delays
in certain defence shipments.
Conditions in the commercial airline industry are improving, as passenger
load rates increase, but profitability is being severely impacted by extremely
high fuel prices. European, South American, and Asian carriers seem to be
fairing better, and as a result, the bulk of new orders have come from these
regions. Demand in the defence sector remains steady for repair and overhaul
services and spare parts although such demand is subject to funding issues
particularly by the US Department of Defence.
Opportunities for new work across both commercial and defence sectors are
being seen, as the industry adjusts to the anticipated increase in workload
expected in 2006 and 2007.
Revenues
--------
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Three-months ended Six-months ended
June 30 June 30
(Expressed in -----------------------------------------------------------
thousands) 2005 2004 Change 2005 2004 Change
-------------------------------------------------------------------------
Canada $ 71,865 $ 79,456 -9.6% $144,984 $149,053 -2.7%
United States 45,405 51,829 -12.4% 88,971 96,232 -7.5%
United Kingdom 28,896 26,481 9.1% 57,151 48,497 17.8%
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Total Revenue $146,166 $157,766 -7.4% $291,106 $293,782 -0.9%
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Consolidated revenues for the second quarter of 2005 were $146.2 million,
a decrease of $11.6 million, or 7.4%, from the second quarter of 2004.
Revenues increased by $2.4 million, or 9.1% in the United Kingdom ("UK"),
which reflects the impact of expanded work scope under an Airbus contract,
signed in April 2004. Revenues declined year over year by $6.4 million or
12.4% in the United States ("US") and $7.6 million or 9.6% in Canada. Revenues
were lower in Canada by $6.0 million in the current quarter due to the wind-up
of operations at Fleet Industries. Changing foreign exchange rates also
impacted consolidated revenues, as the Canadian dollar was stronger versus
both the US dollar and the Great British Pound Sterling in the second quarter
of 2005 compared to the second quarter of 2004. If exchange rates experienced
in the second quarter of 2004 had been realized in the second quarter of 2005,
revenues would have been higher by $4.2 million in the US, $4.2 million in
Canada, and $1.8 million in the UK. After adjusting for the impact of foreign
exchange and the Fort Erie wind-up, consolidated revenues reflect a year over
year increase of $4.7 million or 2.9%.
Revenues generated by commercial product sales in the second quarter of
2005 represented 64.8% (63.7% in 2004) of total revenues while defence product
sales comprised the remaining 35.2% (36.3% in 2004) of revenues.
Gross Profit
------------
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Three-months ended Six-months ended
June 30 June 30
(Expressed in -----------------------------------------------------------
thousands) 2005 2004 Change 2005 2004 Change
-------------------------------------------------------------------------
Gross profit $ 14,954 $ 15,256 -2.0% $ 29,408 $ 33,013 -10.9%
-------------------------------------------------------------------------
Percentage of
revenue 10.2% 9.7% 10.1% 11.2%
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Gross profits of $15.0 million (10.2% of revenues) were reported for the
second quarter of 2005 compared to $15.3 million (9.7% of revenues) during the
same period in 2004. The Corporation continues to adjust operations for higher
build rates on major program expected to occur in the next two years and
expects that margins will improve as volumes increase. The strength of the
Canadian dollar continues to be a challenge, and while the Corporation's
hedging program has helped to mitigate the impact of the strengthening dollar,
the effect is temporary.
Administrative and General Expenses
-----------------------------------
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Three-months ended Six-months ended
June 30 June 30
-------------------------------------------
(Expressed in thousands) 2005 2004 2005 2004
-------------------------------------------------------------------------
Administrative and general
expenses $ 11,368 $ 10,820 $ 22,010 $ 21,067
Gain on sale of capital assets (1,723) - (1,442) -
Foreign exchange loss 452 3,337 764 3,503
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Total administrative and
general expenses $ 10,097 $ 14,157 $ 21,332 $ 24,570
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Administrative and general expenses were $10.1 million, or 6.9% of
revenues in the second quarter of 2005 compared to $14.2 million, or 9.0% of
revenues in the same period of 2004. A net foreign exchange loss of
$0.5 million was recognized in the second quarter of 2005, compared to a
foreign exchange loss of $3.3 million in the second quarter of 2004. The
foreign exchange loss is lower in 2005 due to less movement in foreign
exchange rates and lower US dollar denominated liabilities. In addition, a
gain on sale of surplus real estate of $1.7 million was recorded in the second
quarter of 2005. Excluding these items, administrative and general expenses
were $11.4 million, or 7.8% of sales in the second quarter of 2005, compared
to $10.8 million, or 6.9% in the same period in 2004.
Interest Expense
----------------
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Three-months ended Six-months ended
June 30 June 30
-------------------------------------------
(Expressed in thousands) 2005 2004 2005 2004
-------------------------------------------------------------------------
Interest on bank indebtedness
and long-term debt $ 3,024 $ 3,762 $ 6,384 $ 7,013
Convertible debenture interest 1,487 1,487 2,975 2,975
Accretion charge for
convertible debt 460 410 920 820
Discount on sale of accounts
receivable 357 201 851 309
-------------------------------------------------------------------------
Total interest expense $ 5,328 $ 5,860 $ 11,130 $ 11,117
-------------------------------------------------------------------------
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Interest expense in the second quarter of 2005 was $5.3 million,
$0.5 million lower than the second quarter of 2004. Magellan's effective
interest rate has decreased due to the renewed credit agreement, which has
reduced spreads on bankers' acceptance and LIBOR instruments from 4.5% to
1.0% over base rates beginning on May 28, 2005. Discounts on sale of accounts
receivable increased due to an increase in the amount of accounts receivable
sold.
Provision for (Recovery of) Income Taxes
----------------------------------------
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Three-months ended Six-months ended
June 30 June 30
-------------------------------------------
(Expressed in thousands) 2005 2004 2005 2004
-------------------------------------------------------------------------
Provision for current income
taxes $ 140 $ 200 $ 265 $ 258
Recovery of future income
taxes (322) (1,898) (1,351) (1,227)
-------------------------------------------------------------------------
Total recovery of income
taxes $ (182) $ (1,698) $ (1,086) $ (969)
-------------------------------------------------------------------------
Effective Tax Rate 38.6% 35.7% 35.6% 36.2%
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There was a recovery of income taxes of $0.2 million for the second
quarter of 2005, compared to an income tax recovery of $1.7 million for the
second quarter of 2004. The change in effective tax rates is a result of a
changing mix of income across the different jurisdictions in which Magellan
operates.
Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA)
-----------------------------------------------------------------------
-------------------------------------------------------------------------
Three-months ended Six-months ended
June 30 June 30
-------------------------------------------
(Expressed in thousands) 2005 2004 2005 2004
-------------------------------------------------------------------------
Net loss $ (289) $ (3,063) $ (1,968) $ (1,705)
Interest 5,328 5,860 11,130 11,117
Taxes (182) (1,698) (1,086) (969)
Depreciation and amortization 6,169 6,063 11,549 12,384
-------------------------------------------------------------------------
EBITDA $ 11,026 $ 7,162 $ 19,625 $ 20,827
-------------------------------------------------------------------------
-------------------------------------------------------------------------
EBITDA for the second quarter of 2005 was $11.0 million, an increase of
$3.9 million from the second quarter of 2004, due to an increase in pre-tax
income offset by lower interest expense and depreciation.
Liquidity and Capital Resources
-------------------------------
Cash Flow from Operations
-------------------------
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Three-months ended Six-months ended
June 30 June 30
-------------------------------------------
(Expressed in thousands) 2005 2004 2005 2004
-------------------------------------------------------------------------
(Increase) decrease in
accounts receivable $ (4,974) $ 18,827 $ (26,893) $ 12,088
Increase in inventories (3,329) (11,228) (7,608) (22,668)
Increase in prepaid expenses
and other (322) (1,882) (402) (2,674)
(Decrease) increase in
accounts payable (2,680) (7,815) (2,389) 4,617
-------------------------------------------------------------------------
Changes to non-cash working
capital balances $ (11,167) $ (2,098) $ (37,292) $ (8,637)
-------------------------------------------------------------------------
Cash (used in) provided by
operating activities $ (6,682) $ (586) $ (29,334) $ 1,635
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In the quarter ended June 30, 2005, the Corporation used $6.7 million of
cash in its operations, compared to using $0.6 million in operations in the
second quarter of 2004. This was largely due to increased accounts receivable
as a result of the timing of deliveries and receivables collections.
Inventories rose in response to increasing demand from the Corporation's
customers.
Investing Activities
--------------------
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Three-months ended Six-months ended
June 30 June 30
-------------------------------------------
(Expressed in thousands) 2005 2004 2005 2004
-------------------------------------------------------------------------
Business acquisitions $ - $ (10,439) $ - $ (10,439)
Purchase of capital assets (3,492) (5,381) (6,949) (7,658)
Proceeds of disposals of
capital assets 3,192 5 3,723 15,012
(Increase) decrease in other
assets (510) 2,295 (781) 1,339
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Cash used in investing
activities $ (810) $ (13,520) $ (4,007) $ (1,746)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
In the second quarter of 2005, the Corporation invested $3.5 million in
capital assets to upgrade its facilities and enhance its capabilities.
Proceeds of $3.2 million were received in the second quarter of 2005 on the
sale of surplus real estate.
Financing Activities
--------------------
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Three-months ended Six-months ended
June 30 June 30
-------------------------------------------
(Expressed in thousands) 2005 2004 2005 2004
-------------------------------------------------------------------------
Increase in bank indebtedness $ 35,006 $ 22,401 $ 62,641 $ 16,418
Repayment of long-term debt (43,372) (4,823) (47,812) (9,028)
Decrease in long-term
liabilities (7,106) (56) (8,154) (4,386)
Issue of common shares 15 20 42 75
Issue of preferred shares 19,925 - 19,925 -
-------------------------------------------------------------------------
Cash provided by financing
activities $ 4,468 $ 17,542 $ 26,642 $ 3,079
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The Corporation renewed its bank credit agreement with its existing
lenders on May 27, 2005. Under the terms of the renewed agreement, Magellan
will have an operating credit facility, expiring on May 26, 2006, and
extendable to May 26, 2007, with a maximum credit facility of $155.0 million.
Amounts drawn under this facility bear interest at the bankers' acceptance or
LIBOR rates plus 1.0%, reduced from its previous rate of bankers' acceptance
or LIBOR rates plus 4.5%. The credit facility is fully guaranteed by N. Murray
Edwards, Chairman of the Board of Directors.
On May 27, 2005, the Corporation issued 2.0 million, 8.0% cumulative
redeemable first preference shares series A at a price of $10.00 per
preference share (the "Issue Price") for total gross proceeds of
$20.0 million. Each preference share is convertible into 3.33 common shares of
Magellan (6,666,667 common shares in aggregate) at a price of $3.00 per common
share.
Update on Closure of Fleet Industries
-------------------------------------
Operations at Fleet Industries are in a wind-up mode and no further
increases to the provision for the plant closure are expected.
Change in Accounting Policy
---------------------------
Effective January 1, 2005 the Corporation adopted the recommendation of
the CICA contained in the amended Section 3860, "Financial Instruments", which
require the Corporation to account for its convertible debentures as debt as
opposed to equity. Management has computed the impact on the Corporation's
financial statements in note 2 of the interim consolidated financial
statements.
All comments herein have incorporated the restated quarterly financial
statements resulting from the change in accounting policy as computed in
note 2.
Outlook
-------
The recent surge of orders for new commercial aircraft has confirmed
optimism in the industry that activity levels will increase in the near
future. Many of these orders are in part due to high fuel prices, which make
new fuel-efficient aircraft such as the Boeing 787 and Airbus A350 more
desirable than older models, and should eventually hasten retirement of these
older aircraft. Continued buoyancy in business jet markets is partly offset by
a reduction in the demand for regional jet aircraft. In the defence sector, it
is anticipated that demand will be stable over the next 24 months. In the
longer term, the outlook is less certain, as the US Department of Defence
reviews its airlift and fighter jet programs. While the increase in activity
bodes well for Magellan, the low value of the US dollar, longer lead times for
raw materials, and high energy and non-energy commodity costs are all
challenges which must be overcome to increase margins and profitability.
On behalf of the Board
(signed) (signed)
N. Murray Edwards Richard A. Neill
Chairman President and Chief Executive Officer
August 14, 2005
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MAGELLAN AEROSPACE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
AND RETAINED EARNINGS
(unaudited) Three-months ended Six-months ended
June 30 June 30
(Expressed in thousands of -------------------------------------------
dollars, except per share 2005 2004 2005 2004
amounts) (restated) (restated)
-------------------------------------------------------------------------
Revenues $ 146,166 $ 157,766 $ 291,106 $ 293,782
Cost of revenues 131,212 142,510 261,698 260,769
-------------------------------------------------------------------------
Gross profit 14,954 15,256 29,408 33,013
-------------------------------------------------------------------------
Administrative and general
expenses 10,097 14,157 21,332 24,570
Interest 5,328 5,860 11,130 11,117
-------------------------------------------------------------------------
15,425 20,017 32,462 35,687
-------------------------------------------------------------------------
Loss before income taxes (471) (4,761) (3,054) (2,674)
(Recovery of) provision for
income taxes
- Current 140 200 265 258
- Future (322) (1,898) (1,351) (1,227)
-------------------------------------------------------------------------
(182) (1,698) (1,086) (969)
-------------------------------------------------------------------------
Net loss for the period (289) (3,063) (1,968) (1,705)
-------------------------------------------------------------------------
Retained earnings, beginning
of the period 113,426 124,211 115,105 122,853
Retained earnings, end of
period $ 113,137 $ 121,148 $ 113,137 $ 121,148
-------------------------------------------------------------------------
Earnings per share
Basic $ (0.00) $ (0.04) $ (0.02) $ (0.04)
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Diluted $ (0.00) $ (0.04) $ (0.02) $ (0.04)
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MAGELLAN AEROSPACE CORPORATION
CONSOLIDATED BALANCE SHEETS
(unaudited) As at As at
June 30 December 31
2005 2004
(Expressed in thousands of dollars) (restated)
-------------------------------------------------------------------------
ASSETS
Current
Cash $ 2,149 $ 9,048
Accounts receivable 97,078 70,974
Inventories 278,549 269,735
Prepaid expenses and other 8,435 8,113
Future income tax assets 10,143 7,104
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Total current assets 396,354 364,974
Capital assets 270,987 274,724
Other 42,554 42,486
Future income tax assets 41,080 42,318
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Total assets $ 750,975 $ 724,502
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Bank indebtedness (note 4) $ 131,363 $ 68,028
Accounts payable and accrued charges 112,588 114,327
Current portion of long-term debt 3,260 48,335
-------------------------------------------------------------------------
Total current liabilities 247,211 230,690
Long-term debt 9,635 11,856
Future income tax liabilities 82,883 82,457
Convertible debentures 64,515 63,595
Other long-term liabilities 24,796 32,926
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Total liabilities 429,040 421,524
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Shareholders' equity
Capital stock (note 5) 233,929 213,962
Contributed surplus 484 234
Other paid in capital 9,505 9,505
Retained earnings 113,137 115,105
Foreign exchange translation (note 8) (35,120) (35,828)
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Total shareholders' equity 321,935 302,978
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Total liabilities and shareholders' equity $ 750,975 $ 724,502
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MAGELLAN AEROSPACE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited) Three-months ended Six-months ended
June 30 June 30
-------------------------------------------
(Expressed in thousands 2005 2004 2005 2004
of dollars) (restated) (restated)
-------------------------------------------------------------------------
OPERATING ACTIVITIES
Loss for the period $ (289) $ (3,063) $ (1,968) $ (1,705)
Add (deduct) items not
affecting cash
Depreciation and
amortization 6,169 6,063 11,549 12,384
Gain on sale of capital
assets (1,723) - (1,442) -
Stock option charge 190 - 250 -
Accretion of convertible
debentures 460 410 920 820
Future income taxes
(recoveries) (322) (1,898) (1,351) (1,227)
-------------------------------------------------------------------------
4,485 1,512 7,958 10,272
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Net change in non-cash
working capital items
relating to operating
activities (11,167) (2,098) (37,292) (8,637)
-------------------------------------------------------------------------
Cash (used in) provided by
operating activities (6,682) (586) (29,334) 1,635
-------------------------------------------------------------------------
INVESTING ACTIVITIES
Business acquisitions - (10,439) - (10,439)
Purchase of capital assets (3,492) (5,381) (6,949) (7,658)
Proceeds from disposal of
capital assets 3,192 5 3,723 15,012
(Increase) decrease in other
assets (510) 2,295 (781) 1,339
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Cash used in investing
activities (810) (13,520) (4,007) (1,746)
-------------------------------------------------------------------------
FINANCING ACTIVITIES
Increase in bank indebtedness 35,006 22,401 62,641 16,418
Repayment of long-term debt (43,372) (4,823) (47,812) (9,028)
Decrease in long-term
liabilities (7,106) (56) (8,154) (4,386)
Issue of common shares 15 20 42 75
Issue of preference shares 19,925 - 19,925 -
-------------------------------------------------------------------------
Cash provided by financing
activities 4,468 17,542 26,642 3,079
-------------------------------------------------------------------------
Effect of exchange rate
changes on cash (22) 615 (200) 1,085
-------------------------------------------------------------------------
(Decrease) increase in cash (3,046) 4,051 (6,899) 4,053
Cash, beginning of period 5,195 3,890 9,048 3,888
-------------------------------------------------------------------------
Cash, end of period $ 2,149 $ 7,941 $ 2,149 $ 7,941
-------------------------------------------------------------------------
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NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands of dollars except share and per share data)
1. ACCOUNTING POLICIES
Basis of presentation
The accompanying unaudited consolidated financial statements have been
prepared by the Corporation in accordance with accounting principles
generally accepted in Canada on a basis consistent with those followed in
the most recent audited consolidated financial statements except for the
changes identified in note 2, Change in Accounting Policy, below. These
unaudited consolidated financial statements do not include all the
information and footnotes required by generally accepted accounting
principles for annual financial statements and therefore should be read
in conjunction with the audited consolidated financial statements and
notes included in the Corporation's Annual Report for the year ended
December 31, 2004. The Corporation's external auditors have not reviewed
these financial statements.
2. CHANGE IN ACCOUNTING POLICY
The principal amount of the Corporation's outstanding convertible
debentures of $70 million due on January 31, 2008 was previously
classified as an equity instrument due to the Corporation's ability to
settle principal and interest payments by the issuance of common shares.
In accordance with the amended standard under CICA 3860, the Corporation
has presented the liability component of its convertible debentures as
long-term debt and the equity component as other paid in capital. The
liability represents the present value of the principal payment of the
debentures and the equity component represents the fair value of the
holder's conversion feature. The stated interest payments and accretion
expense from adjusting the time value of the principal of the debentures
over time are recorded as interest expense in the statement of
operations.
The following table represents the changes to the Corporation's
consolidated statements of operations and retained earnings for the
three-month and six-month periods ended June 30, 2004 by applying the
recommendation retroactively:
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CONSOLIDATED STATEMENTS OF OPERATIONS
AND RETAINED EARNINGS
Three-months ended Six-months ended
June 30, 2004 June 30, 2004
-------------------------------------------
Originally As Originally As
Reported Restated Reported Restated
-------------------------------------------------------------------------
Administrative and general
expenses $ 14,055 $ 14,157 $ 24,366 $ 24,570
-------------------------------------------------------------------------
Interest 3,963 5,860 7,323 11,117
-------------------------------------------------------------------------
(Loss) income before income
taxes $ (2,762) $ (4,761) $ 1,324 $ (2,674)
(Recovery of) provision for
income taxes (975) (1,698) 476 (969)
-------------------------------------------------------------------------
Net (loss) income for the
period (1,787) (3,063) 848 (1,705)
Retained earnings, beginning
of the period 124,211 124,211 122,853 122,853
Interest and accretion (1,276) - (2,553) -
-------------------------------------------------------------------------
Retained earnings, end of
period $ 121,148 $ 121,148 $ 121,148 $ 121,148
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The following table represents the changes to the Corporation's balance
sheet as at December 31, 2004 by applying the recommendation
retroactively:
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CONSOLIDATED BALANCE SHEET
As at December 31, 2004
Originally As
Reported Restated
-------------------------------------------------------------------------
Other assets $ 41,254 $ 42,486
-------------------------------------------------------------------------
Future tax liabilities 82,345 82,457
-------------------------------------------------------------------------
Convertible debentures as debt - 63,595
-------------------------------------------------------------------------
Other paid in capital - 9,505
-------------------------------------------------------------------------
Convertible debentures as equity $ 71,980 $ -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The following table represents the impact to the Corporation's
consolidated statements of operations and retained earnings for the
three-month and six-month periods ended June 30, 2005.
-------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
AND RETAINED EARNINGS
Three-months ended Six-months ended
June 30, 2005 June 30, 2005
-------------------------------------------
Without Without
Change in Change in
As Accounting As Accounting
Reported Policy Reported Policy
-------------------------------------------------------------------------
Administrative and general
expenses $ 10,097 $ 9,995 $ 21,332 $ 21,128
-------------------------------------------------------------------------
Interest 5,328 3,380 11,130 7,235
-------------------------------------------------------------------------
(Loss) income before income
taxes $ (471) $ 1,579 $ (3,054) $ 1,045
(Recovery of) provision for
income taxes (182) 382 (1,086) 43
-------------------------------------------------------------------------
Net (loss) income for the
period (289) 1,197 (1,968) 1,002
Retained earnings, beginning
of the period 113,426 113,426 115,105 115,105
Interest and accretion - (1,486) - (2,970)
-------------------------------------------------------------------------
Retained earnings, end of
period $ 113,137 $ 113,137 $ 113,137 $ 113,137
-------------------------------------------------------------------------
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3. INVENTORIES
The Corporation is currently negotiating with one of its customers over
amendments to pricing with respect to an existing long-term contract.
While it is probable that the Corporation will be successful in
negotiating a favourable outcome, the final result is not determinable at
the present time. If the Corporation does not successfully negotiate a
pricing increase or the final terms vary from what the Corporation
expects, the Corporation may be required to record a loss provision on
this contract. The amount of such a provision, if any, cannot be
reasonably estimated until the negotiating process is complete and
amendments are finalized.
4. BANK INDEBTEDNESS
Bank indebtedness as at June 30, 2005 of $131,363 (December 31, 2004 -
$68,028) is payable on demand and bears interest at the bankers'
acceptance or LIBOR rates, plus 1.0%. Included in the amount outstanding
at June 30, 2005 is US$74,076 (December 31, 2004 - US$52,537). The total
amount of the operating credit available to the Corporation is $155,000.
A fixed and floating charge debenture on certain of the Corporation's
assets is pledged as collateral for the operating loan. The credit
facility is fully guaranteed by the Chairman of the Board of Directors.
5. CAPITAL STOCK
The following table summarizes information on share capital and related
matters as at June 30, 2005:
-------------------------------------------------------------------------
Outstanding Exercisable
-------------------------------------------------------------------------
Common shares 90,755,227
-------------------------------------------------------------------------
Common shares stock options 4,071,500 1,359,400
-------------------------------------------------------------------------
Preferred shares 2,000,000
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The weighted average number of common shares outstanding during the
three-month and six-month periods ended June 30, 2005 was 90,752,359 and
90,748,122 respectively.
On May 27, 2005, the Corporation issued 2,000,000, 8.0% cumulative
redeemable first preference shares series A at a price of $10.00 per
preference share for total gross proceeds of $20,000. Each preference
share is convertible into 3.33 common shares of Magellan
(6,666,667 common shares in aggregate) at a price of $3.00 per common
share.
6. 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
maximum number of options for common shares that remain to be granted
under this plan is 1,279,203. Options are granted at an exercise price
that will be 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.
The Corporation accounts for stock options issued after January 1, 2003
using the fair value method. Compensation expense recorded during the
three-month and six-month periods ended June 30, 2005 was $60 and
$190 respectively (2004 - $nil and $78 respectively). In the three-month
period ended June 30, 2005, there were 1,537,500 stock options issued at
an exercise price of $2.65. The fair value of these options was $0.96.
The fair value of stock options is estimated at the date of grant using
the Black-Scholes pricing model with the following weighted average
assumptions:
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Risk-free interest rate 3.1%
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Expected volatility 35.0%
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Expected average life of options 4 years
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Expected dividend yield 0.0%
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The Black-Scholes option pricing model used by the Corporation to
determine fair values was developed for use in estimating the fair value
of freely traded options, which are fully transferable and have no
vesting restrictions. The Corporation's employee stock options are not
transferable, cannot be traded and are subject to vesting restrictions
and exercise restrictions under the Corporation's black-out policy which
would tend to reduce the fair value of the Corporation's stock options.
Changes to the subjective input assumptions used in the model can cause a
significant variation in the estimate of the fair value of the options
For the stock options issued prior to January 1, 2003 the Corporation
follows the intrinsic value method, which does not give rise to
compensation expense. Under Canadian generally accepted accounting
principles, the Corporation is required to disclose compensation expense
as if the Corporation had elected to follow the fair value method for
such options.
For purposes of pro-forma disclosures, The Corporation's net loss
attributable to its common shares and basic and diluted loss per common
share would have been:
-------------------------------------------------------------------------
Three-months ended Six-months ended
June 30 June 30
-------------------------------------------
2005 2004 2005 2004
-------------------------------------------------------------------------
Net loss $ (289) $ (3,063) $ (1,968) $ (1,705)
Less: Pro forma compensation
expense (62) (62) (138) (138)
-------------------------------------------------------------------------
Pro forma net loss $ (351) $ (3,125) $ (2,106) $ (1,843)
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Pro forma loss per common
share
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- Basic $ (0.00) $ (0.04) $ (0.02) $ (0.02)
-------------------------------------------------------------------------
- Diluted $ (0.00) $ (0.04) $ (0.02) $ (0.02)
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7. SEGMENTED INFORMATION
The Corporation is organized and managed as a single business segment
being aerospace and the chief operating decision maker, for the purposes
of resource allocations and assessing performance, views the Corporation
as a single operating segment.
Capital assets are based on the country in which they are located.
Domestic and foreign capital assets consist of:
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As at June 30, 2005
-------------------------------------------
Canada US UK Total
-------------------------------------------
Capital assets $ 124,740 $ 134,718 $ 11,529 $ 270,987
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As at December 31, 2004
-------------------------------------------
Canada US UK Total
-------------------------------------------
Capital assets $ 128,446 $ 136,334 $ 9,944 $ 274,724
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Revenue is attributable to countries based on the location of the
customers. Domestic and foreign revenues consist of:
-------------------------------------------------------------------------
Six-months ended June 30
-------------------------------------------
2005
-------------------------------------------
Canada US UK Total
-------------------------------------------
Revenue
Domestic $ 51,064 $ 71,582 $ 54,377 $ 177,023
Export 93,920 17,389 2,774 $ 114,083
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Total revenue $ 144,984 $ 88,971 $ 57,151 $ 291,106
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Six-months ended June 30
-------------------------------------------
2004
-------------------------------------------
Canada US UK Total
-------------------------------------------
Revenue
Domestic $ 53,375 $ 75,691 $ 46,087 $ 175,153
Export 95,678 20,541 2,410 118,629
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Total revenue $ 149,053 $ 96,232 $ 48,497 $ 293,782
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The major customers for the Corporation for the three-month and six-month
periods ended June 30, 2005 are as follows:
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Three-months ended Six-months ended
June 30 June 30
-------------------------------------------
2005 2004 2005 2004
-------------------------------------------------------------------------
Major Customers
Canadian operations
- Number of customers 2 2 2 2
- Percentage of total
Canadian revenue 25.1% 23.4% 23.8% 22.7%
US operations
- Number of customers 3 4 3 3
- Percentage of total
US revenue 59.8% 79.6% 57.6% 51.7%
UK operations
- Number of customers 1 1 1 1
- Percentage of total
UK revenue 77.2% 59.8% 61.7% 54.4%
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8. FOREIGN EXCHANGE TRANSLATION
Unrealized translation adjustments, which arise on the translation to
Canadian dollars of assets and liabilities of the Corporation's
self-sustaining foreign operations, resulted in unrealized currency
translation gains of $493 and $708 for the three-month and six-month
periods ended June 30, 2005 respectively (2004 - $5,011 and $7,321),
which is reflected as foreign exchange translation on the consolidated
balance sheets and has no impact on net income.
9. SUPPLEMENTARY INFORMATION
Foreign exchange loss on the conversion of foreign currency denominated
working capital balances and debt for the three-month and six-month
periods ended June 30, 2005 was $452 and $764 respectively.
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