TORONTO, March 23 /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 March 23, 2006, the Corporation released its financial results for the
fourth quarter of 2005. The results are summarized as follows:
<<
-------------------------------------------------------------------------
(Expressed in Three-months ended Twelve-months ended
thousands, December 31 December 31
except per --------------------------------------------------------
share 2005 2004 Change 2005 2004 Change
amounts) (restated) (restated)
-------------------------------------------------------------------------
Revenues $142,764 $137,270 4.0 % $568,483 $573,779 -0.9 %
-------------------------------------------------------------------------
Net income
(loss) $ (3,494) $ (6,940) - $ (6,076) $ (8,164) -
-------------------------------------------------------------------------
Net earnings
(loss) per
share $ (0.05) $ (0.08) - $ (0.08) $ (0.10) -
-------------------------------------------------------------------------
EBITDA(x) $ 8,706 $ 3,149 173.4 % $ 37,448 $ 37,018 0.9 %
-------------------------------------------------------------------------
EBITDA(x)
per share $ 0.10 $ 0.03 200.0 % $ 0.41 $ 0.45 -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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
------------------------------------
The fourth quarter of 2005 was a challenging period for Magellan
Aerospace Corporation as operating performance was affected by the need to
meet increased delivery demands from customers, introduction of new parts into
manufacturing as well as adjusting to increased prices for strategic
materials, energy and key commodities.
Gross margins for the quarter and the year did not achieve expected
levels of improvement. Continuing challenges occurred in the casting business
as the Corporation responded to rapidly increasing production activity that
resulted in margin slippage from previously achieved levels. While still
showing positive results, UK operations did not achieve the gross margin gains
anticipated. Focused actions are underway in both the casting business and the
UK to remedy the situations.
Demand in the commercial aerospace sector remains strong following a
record year of orders for large commercial aircraft reported by both Boeing
and Airbus. Both companies are also organizing supply chains to not only cope
with increased build rates of existing single aisle models but also to
establish supply for new twin aisle designs in development, the Boeing B787
and the Airbus A350. As well as new parts being introduced, delivery rates on
Airbus A380 components are scheduled to increase in the second quarter of
2006, and deliveries of Boeing 787 components are scheduled to begin in the
fourth quarter of 2006. Once at full rates, these two contracts should
represent $25 million in annualized revenue for the Corporation.
In addition, there were increased activities in the business jet market,
and in defence, demand was strong from both new programs and spares while, at
the same time, certain mature defence program production rates began to
decrease.
While increasing demand has been the case in the aerospace sector,
components produced for OEM's in the electrical utilities markets are still at
a low as this business still suffers from lack of regulatory clarity.
Revenues
--------
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Three-months ended Twelve-months ended
December 31 December 31
(Expressed in --------------------------------------------------------
thousands) 2005 2004 Change 2005 2004 Change
-------------------------------------------------------------------------
Canada $ 70,445 $ 62,681 12.4 % $277,530 $287,613 -3.5 %
United States 48,581 49,424 -1.7 % 183,811 185,591 -1.0 %
United
Kingdom 23,738 25,165 -5.7 % 107,142 100,575 6.5 %
-------------------------------------------------------------------------
Total
Revenue $142,764 $137,270 4.0 % $568,483 $573,779 -0.9 %
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Revenues for the fourth quarter of 2005 were $142.8 million, an increase
of $5.5 million or 4.0% over the same period in 2004. Revenues in the United
States and the United Kingdom were lower in the fourth quarter of 2005
compared to the same period in 2004, due to changes in foreign exchange rates;
had foreign exchange rates remained the same as in the same period in 2004,
revenues in the United States and the United Kingdom would have risen 2.2% and
10.0% respectively. Fourth quarter revenues in Canada increased in 2005
compared to 2004, in spite of reduced sales of $5.8 million from the
Corporation's Fort Erie location, as increases were experienced on a number of
commercial aircraft and aeroengine programs. Revenues for the full year 2005
were $5.3 million lower than in 2004, with changing foreign exchange rates and
the wind down of the Corporation's Fort Erie location negatively impacting
annual year over year revenues by $36.5 million and $12.7 million,
respectively.
Gross Profit
------------
-------------------------------------------------------------------------
Three-months ended Twelve-months ended
December 31 December 31
(Expressed in --------------------------------------------------------
thousands) 2005 2004 Change 2005 2004 Change
-------------------------------------------------------------------------
Gross profit $ 13,577 $ 10,495 29.4 % $ 56,450 $ 58,960 -4.3 %
-------------------------------------------------------------------------
Percentage
of revenue 9.5 % 7.6 % 9.9 % 10.3 %
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Gross margin for the fourth quarter of 2005 was $13.6 million or 9.5% of
revenues, compared to $10.5 million or 7.6% of revenues in the same period of
last year. Results improved over the fourth quarter of 2004, but were poorer
than management expectations, due to the continued strengthening of the
Canadian dollar, higher costs for raw materials and poor efficiencies at
certain of the Corporation's manufacturing facilities. Management is focused
on improving efficiencies and is also seeking improved pricing for its
products going forward into 2006.
Administrative and General Expenses
-----------------------------------
-------------------------------------------------------------------------
Three-months ended Twelve-months ended
December 31 December 31
------------------------------------------------
(Expressed in 2005 2004 2005 2004
thousands) (restated) (restated)
-------------------------------------------------------------------------
Administrative and
general expenses $ 12,347 $ 9,053 $ 46,110 $ 46,747
Gain on sale of
capital assets - (416) (1,442) (2,026)
Foreign exchange gain (288) (361) (1,624) (3,914)
-------------------------------------------------------------------------
Total administrative
and general
expenses $ 12,059 $ 8,276 $ 43,044 $ 40,807
-------------------------------------------------------------------------
Percentage of revenue 8.5% 6.0% 7.6% 7.1%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total administrative and general expenses were $12.1 million in the
fourth quarter of 2005. Included in total administration and general expenses
are a foreign exchange gain of $0.3 million. Without these two items,
administrative and general expenses were $12.3 million in the fourth quarter
of 2005 compared to $9.1 million in the same period in 2004. The increase was
mainly due to timing of expenses, as administrative and general expenses for
the year ended December 31, 2005 were approximately the same as the year ended
December 31, 2004, after excluding gains on foreign exchange and sale of
capital assets.
Interest Expense
----------------
-------------------------------------------------------------------------
Three-months ended Twelve-months ended
December 31 December 31
------------------------------------------------
(Expressed in 2005 2004 2005 2004
thousands) (restated) (restated)
-------------------------------------------------------------------------
Interest on bank
indebtedness and
long-term debt $ 2,894 $ 3,774 $ 11,677 $ 14,635
Convertible debenture
interest 1,488 1,488 5,950 5,950
Accretion charge for
convertible debt 831 906 2,211 2,136
Discount on sale of
accounts receivable 388 186 1,696 896
-------------------------------------------------------------------------
Total interest
expense $ 5,601 $ 6,354 $ 21,534 $ 23,617
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Interest on bank indebtedness and long-term debt decreased in 2005
compared to the same period in 2004 due to lower interest rates under the
Corporation's credit facility. Discount on the sale of accounts receivable
rose as a higher amount of receivables were sold at higher discount rates.
Provision for (Recovery of) Income Taxes
-------------------------------------------------------------------------
Three-months ended Twelve-months ended
December 31 December 31
------------------------------------------------
(Expressed in 2005 2004 2005 2004
thousands) (restated) (restated)
-------------------------------------------------------------------------
Provision for
current
income taxes $ 268 $ 522 $ 688 $ 780
(Recovery of)
provision for
future income taxes (857) (3,333) (2,740) (3,696)
-------------------------------------------------------------------------
Total (recovery of)
provision for income
taxes $ (589) $ (2,811) $ (2,052) $ (2,916)
-------------------------------------------------------------------------
Effective Tax Rate 14.4 % 28.8 % 25.2 % 26.3%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
A provision for recovery of income taxes of $0.6 million (14.4% of pre-
tax income) was recorded in the fourth quarter of 2005, compared to a
provision for recovery of income taxes of $2.8 million in the same period in
2004 (28.8% of pre-tax income). The overall tax rate is a blended rate across
the three countries in which the Corporation operates. At lower levels of
income, the effective tax rate is affected more by non-deductible expenses
such as accretion on convertible debenture and stock option charges.
Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA")
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three-months ended Twelve-months ended
December 31 December 31
------------------------------------------------
(Expressed in 2005 2004 2005 2004
thousands) (restated) (restated)
-------------------------------------------------------------------------
Loss before
income taxes $ (4,083) $ (9,751) $ (8,128) $(11,080)
Interest 5,601 6,354 21,534 23,617
Depreciation and
amortization 7,188 6,546 24,042 24,481
-------------------------------------------------------------------------
EBITDA $ 8,706 $ 3,149 $ 37,448 $ 37,018
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash Flow from Operating Activities
-----------------------------------
-------------------------------------------------------------------------
Three-months ended Twelve-months ended
December 31 December 31
(Expressed in ------------------------------------------------
thousands) 2005 2004 2005 2004
-------------------------------------------------------------------------
Decrease in accounts
receivable $ 6,090 $ 21,325 $ 5,009 $ 18,323
Decrease (increase)
in inventories 4,697 17,098 (5,736) 2,750
(Increase) decrease
in prepaid expenses
and other (681) 341 (1,756) (1,145)
Increase (decrease)
in accounts payable 11,013 (18,079) 436 (9,653)
-------------------------------------------------------------------------
Net change in
non-cash working
capital items $ 21,119 $ 20,685 $ (2,047) $ 10,275
-------------------------------------------------------------------------
Cash provided by
operating
activities $ 24,967 $ 23,402 $ 14,568 $ 28,941
-------------------------------------------------------------------------
-------------------------------------------------------------------------
In the fourth quarter of 2005, the Corporation generated $25.0 million of
cash from operations, compared to $23.4 million of cash generated in the same
period of 2004. Decreases in accounts receivable and inventories and increase
in accounts payable relate mainly to timing of payments and receivables in the
short term, as the net change in non-cash working capital balances for the
year ended December 31, 2005 is small.
Cash Flow from Investing Activities
-----------------------------------
-------------------------------------------------------------------------
Three-months ended Twelve-months ended
December 31 December 31
(Expressed in ------------------------------------------------
thousands) 2005 2004 2005 2004
-------------------------------------------------------------------------
Business acquisition $ - $ - $ - $(10,440)
Purchase of capital
assets (7,597) (5,404) (19,185) (16,936)
Proceeds from
disposals of
capital assets - 432 3,746 17,089
(Increase) decrease
in other assets 1,324 766 (7,435) 15
-------------------------------------------------------------------------
Cash used in
investing
activities $ (6,273) $ (4,206) $(22,874) $(10,272)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The increase in other assets in the year to date period reflects the
follow-on contract to purchase technology rights for the manufacture of
components for the GE 414 engine under a revenue sharing partnership
agreement. The Corporation has cautiously increased the level of capital
expenditures in response to favourable conditions in the aerospace industry.
Cash Flow from Financing Activities
-----------------------------------
-------------------------------------------------------------------------
Three-months ended Twelve-months ended
December 31 December 31
(Expressed in ------------------------------------------------
thousands) 2005 2004 2005 2004
-------------------------------------------------------------------------
(Decrease)
increase in bank
indebtedness $(10,898) $(13,796) $ 50,826 $ 250
Repayment of
long-term debt (537) (3,963) (50,276) (33,687)
(Decrease) increase
in long-term
liabilities (7,225) 2,239 (12,480) (11,402)
Dividends on
Preference Shares (1,080) - (1,080) -
Issue of Common
Shares 57 44 147 31,229
Issue of Preference
Shares - - 19,949 -
-------------------------------------------------------------------------
Cash (used in)
provided by
financing
activities $(19,683) $(15,476) $ 7,086 $(13,610)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The Corporation renewed its bank credit agreement with its existing
lenders on May 27, 2005. Under the terms of the renewed agreement, Magellan
has 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. An annual fee of $0.2 million is paid in
consideration for the guarantee.
On May 27, 2005, the Corporation issued 2.0 million, 8.0% Cumulative
Redeemable First Preference Shares Series A ("Preference Shares") by private
placement at a price of $10.00 per Preference Share 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 Ltd.
------------------------------------------
In early 2006, the Corporation sold the manufacturing assets and leased
the manufacturing facilities formerly operated at Fleet Industries Ltd. While
various costs remain to be fully settled, management believes that the
provision for closure previously recorded will be adequate to cover the
remaining closure costs.
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
-------
Magellan is looking to the future with confidence. Burgeoning order books
from aircraft operators, especially from customers with good financial
resources, create a market demand that indicates current activity levels
should increase and continue at high rates for the foreseeable future. Despite
higher fuel prices, all sectors of the aircraft sector continue to exhibit
buoyancy that has not been seen since 2002.
Excess manufacturing capacity in North America is shrinking and as a
result conditions for aerospace component manufacturers to improve their
operating profitability has improved. Management continues to focus on
improving margins and profitability in 2006 and beyond by ensuring that
operations are re-organized to take advantage of the current market
opportunity and by off-setting the impact of foreign exchange rate changes
through efficiency improvements and contract amendments.
On behalf of the Board
N. Murray Edwards Richard A. Neill
Chairman President and Chief Executive Officer
-------------------------------------------------------------------------
MAGELLAN AEROSPACE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(un-audited)
(Expressed in Three-months ended Twelve-months ended
thousands of dollars, December 31 December 31
except per ------------------------------------------------
share 2005 2004 2005 2004
amounts) (restated) (restated)
-------------------------------------------------------------------------
Revenues $142,764 $137,270 $568,483 $573,779
Cost of revenues 129,187 126,775 512,033 514,819
-------------------------------------------------------------------------
Gross profit 13,577 10,495 56,450 58,960
-------------------------------------------------------------------------
Administrative and
general expenses 12,059 8,276 43,044 40,807
Interest
Unusual item 5,601 6,354 21,534 23,617
- 5,616 - 5,616
-------------------------------------------------------------------------
17,660 20,246 64,578 70,040
-------------------------------------------------------------------------
Loss before income
taxes (4,083) (9,751) (8,128) (11,080)
Provision for
(recovery of)
income taxes
- Current 268 522 688 780
- Future (857) (3,333) (2,740) (3,696)
-------------------------------------------------------------------------
(589) (2,811) (2,052) (2,916)
-------------------------------------------------------------------------
Net loss for
the period (3,494) (6,940) (6,076) (8,164)
-------------------------------------------------------------------------
Retained earnings,
beginning of period 111,593 121,115 114,175 122,339
Dividends on
Preference Shares (1,080) - (1,080) -
Net loss for the
period (3,494) (6,940) (6,076) (8,164)
Retained earnings,
end of period $107,019 $114,175 $107,019 $114,175
-------------------------------------------------------------------------
Loss per share
-------------------------------------------------------------------------
Basic $ (0.05) $ (0.08) $ (0.08) $ (0.10)
-------------------------------------------------------------------------
Diluted $ (0.05) $ (0.08) $ (0.08) $ (0.10)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
MAGELLAN AEROSPACE CORPORATION
CONSOLIDATED BALANCE SHEETS
(un-audited)
As at As at
December 31 December 31
2005 2004
(Expressed in thousands of dollars) (restated)
-------------------------------------------------------------------------
ASSETS
Current
Cash $ 7,426 $ 9,048
Accounts receivable 62,862 70,974
Inventories 268,590 269,735
Prepaid expenses and other 9,343 8,113
Future income tax assets 3,518 7,104
-------------------------------------------------------------------------
Total current assets 351,739 364,974
Capital assets 264,899 274,724
Other 46,467 42,486
Future income tax assets 50,752 42,318
-------------------------------------------------------------------------
Total assets $ 713,857 $ 724,502
-------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Bank indebtedness (note 4) $ 113,824 $ 68,028
Accounts payable and accrued charges 122,978 114,327
Current portion of long-term debt 2,201 48,335
-------------------------------------------------------------------------
Total current liabilities 239,003 230,690
Long-term debt 9,608 11,856
Future income tax liabilities 77,301 82,345
Convertible debentures 65,141 63,042
Other long-term liabilities 15,061 32,926
-------------------------------------------------------------------------
Total liabilities 406,114 420,859
-------------------------------------------------------------------------
Shareholders' equity
Capital stock (note 5) 234,058 213,962
Contributed surplus 854 234
Other paid-in capital 11,100 11,100
Retained earnings 107,019 114,175
Foreign exchange translation (note 8) (45,288) (35,828)
-------------------------------------------------------------------------
Total shareholders' equity 307,743 303,643
-------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 713,857 $ 724,502
-------------------------------------------------------------------------
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MAGELLAN AEROSPACE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(un-audited)
Three-months ended Twelve-months ended
December 31 December 31
(Expressed in ------------------------------------------------
thousands 2005 2004 2005 2004
of dollars) (restated) (restated)
-------------------------------------------------------------------------
OPERATING ACTIVITIES
Loss for the period $ (3,494) $ (6,940) $ (6,076) $ (8,164)
Add (deduct) items
not affecting cash
Depreciation and
amortization 7,188 6,546 24,042 24,481
Gain on sale of
capital assets - (416) (1,442) (2,026)
Stock option charge 180 78 620 234
Accretion of
convertible
debentures 831 906 2,211 2,136
Unusual items - 5,616 - 5,616
Future income taxes
recoveries (857) (3,073) (2,740) (3,611)
-------------------------------------------------------------------------
3,848 2,717 16,615 18,666
-------------------------------------------------------------------------
Net change in non-cash
working capital items
relating to operating
activities 21,119 20,685 (2,047) 10,275
-------------------------------------------------------------------------
Cash provided by
operating activities 24,967 23,402 14,568 28,941
-------------------------------------------------------------------------
INVESTING ACTIVITIES
Business acquisition - - - (10,440)
Purchase of capital
assets (7,597) (5,404) (19,185) (16,936)
Proceeds from disposal
of capital assets - 432 3,746 17,089
Decrease (increase)
in other assets 1,324 766 (7,435) 15
-------------------------------------------------------------------------
Cash used in investing
activities (6,273) (4,206) (22,874) (10,272)
-------------------------------------------------------------------------
FINANCING ACTIVITIES
(Decrease) increase
in bank indebtedness (10,898) (13,796) 50,826 250
Repayment of long-term
debt (537) (3,963) (50,276) (33,687)
(Decrease) increase
in long-term
liabilities (7,225) 2,239 (12,480) (11,402)
Dividends on
Preference Shares (1,080) - (1,080) -
Issue of Common Shares 57 44 147 31,229
Issue of Preference
Shares - - 19,949 -
-------------------------------------------------------------------------
Cash (used in)
provided by financing
activities (19,680) (15,476) 7,086 (13,610)
-------------------------------------------------------------------------
Effect of exchange
rate changes on
cash (197) (569) (402) 101
-------------------------------------------------------------------------
(Decrease) increase
in cash (1,186) 3,151 (1,622) 5,160
Cash, beginning of
period 8,612 5,897 9,048 3,888
-------------------------------------------------------------------------
Cash, end of period $ 7,426 $ 9,048 $ 7,426 $ 9,048
-------------------------------------------------------------------------
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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 un-audited 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
un-audited 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 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 and interest
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 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 twelve-month periods ended December 31, 2004 by applying
the recommendation retroactively:
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CONSOLIDATED STATEMENTS OF OPERATIONS
AND RETAINED EARNINGS
Three-months ended Twelve-months ended
December 31, 2004 December 31, 2004
------------------------------------------------------
Originally As Originally As
Reported Restated Reported Restated
-------------------------------------------------------------------------
Administrative
and general
expenses $ 8,171 $ 8,276 $ 40,396 $ 40,807
-------------------------------------------------------------------------
Interest 3,960 6,354 15,531 23,617
-------------------------------------------------------------------------
Loss before income
taxes $ (7,253) $ (9,751) $ (2,583) $(11,080)
Recovery of income
taxes (2,415) (2,811) (749) (2,916)
-------------------------------------------------------------------------
Net loss for the
period (4,838) (6,940) (1,834) (8,164)
Retained earnings,
beginning of period 121,630 121,115 122,853 122,339
Interest and
accretion (1,687) - (5,914) -
-------------------------------------------------------------------------
Retained earnings,
end of period $115,105 $114,175 $115,105 $114,175
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The following table represents the changes to the Corporation's balance
sheet as at December 31, 2004 by applying the recommendation
retroactively:
-------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET
As at December 31, 2004
Originally As
Reported Restated
-------------------------------------------------------------------------
Other assets $ 41,254 $ 42,486
-------------------------------------------------------------------------
Convertible debentures as debt - 63,042
-------------------------------------------------------------------------
Other paid-in capital - 11,100
-------------------------------------------------------------------------
Convertible debentures as equity 71,980 -
-------------------------------------------------------------------------
Retained Earnings 115,105 114,175
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The following table represents the impact to the Corporation's
consolidated statements of operations and retained earnings for the
three-month and twelve-month periods ended December 31, 2005.
-------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
AND RETAINED EARNINGS
Three-months ended Twelve-months ended
December 31, 2005 December 31, 2005
------------------------------------------------------
Without Without
Change in Change in
As Accounting As Accounting
Reported Policy Reported Policy
-------------------------------------------------------------------------
Administrative
and general
expenses $ 12,059 $ 11,958 $ 43,044 $ 42,634
-------------------------------------------------------------------------
Interest 5,601 3,284 21,534 13,373
-------------------------------------------------------------------------
(Loss) income
before income
taxes $ (4,083) $ (1,664) $ (8,128) $ 443
(Recovery of)
provision for
income taxes (589) (521) (2,052) 238
-------------------------------------------------------------------------
Net (loss) income
for the period (3,494) (1,143) (6,076) 205
Retained earnings,
beginning of period 111,593 111,593 114,175 114,175
Dividends on
Preference Shares (1,080) (1,080) (1,080) (1,080)
Interest and
accretion, net of
income taxes - (2,089) - (6,019)
-------------------------------------------------------------------------
Retained earnings,
end of period $107,019 $107,281 $107,019 $107,281
-------------------------------------------------------------------------
-------------------------------------------------------------------------
3. INVENTORIES
The Corporation is in negotiations 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 its
negotiations, the final result is not determinable at the present time.
If the negotiations are not successful or the final terms differ from
what the Corporation expects, the Corporation may be required to record a
loss provision on this contract. The amount of such provision, if any,
cannot be reasonably estimated until such amendments are finalized.
4. BANK INDEBTEDNESS
Bank indebtedness of $113,824 (2004 - $68,028) is payable on demand and
bears interest at the bankers' acceptance or LIBOR rates, plus 1.0% (4.9%
at December 31, 2005). Included in the amount outstanding at
December 31, 2005 is US$71,000 (2004 - US$52,537). At December 31, 2005,
the Corporation had drawn $113,824 under the operating credit and had
issued letters of credit totalling $2,017 such that $30,871 was unused
and available. A fixed and floating charge debenture on accounts
receivable, inventories and capital assets is pledged as collateral for
the operating loan and the term bank loan. The credit facility is fully
guaranteed by the Chairman of the Board of Directors. An annual fee of
$155 is paid in consideration for the guarantee.
5. CAPITAL STOCK
The following table summarizes information on share capital and related
matters as at December 31, 2005:
-------------------------------------------------------------------------
Outstanding Exercisable
-------------------------------------------------------------------------
Common Shares 90,792,410
-------------------------------------------------------------------------
Common Share stock options 3,299,800 521,100
-------------------------------------------------------------------------
Preference Shares 2,000,000
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The weighted average number of Common Shares outstanding during the
three-month and twelve-month periods ended December 31, 2005 was
90,762,690 and 90,753,746 respectively.
On May 27, 2005, the Corporation issued 2,000,000, 8.0% Cumulative
Redeemable First Preference Shares Series A ("Preference Shares") 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 2,050,903. 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% 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 twelve-month periods ended December 31, 2005 was $180 and
$620 respectively (2004 - $78 and $234 respectively). In the twelve-month
period ended December 31, 2005, there were 1,545,000 stock options issued
at an exercise price of $2.65. The fair value of these options was $1.02.
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 3.14 %
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Expected volatility 35 %
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Expected average life of options 4 years
-------------------------------------------------------------------------
Expected dividend yield 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 blackout 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 for options granted prior to January 1, 2003 would have been as
follows:
-------------------------------------------------------------------------
Three-months ended Twelve-months ended
December 31 December 31
------------------------------------------------
2005 2004 2005 2004
-------------------------------------------------------------------------
Net loss $ (3,494) $ (6,940) $ (6,076) $ (8,164)
Less: Pro forma
compensation
expense (30) (62) (216) (248)
-------------------------------------------------------------------------
Pro forma net loss $ (3,524) $ (7,002) $ (6,292) $ (8,412)
Dividends on
Preference Shares (1,080) - (1,080) -
-------------------------------------------------------------------------
Loss attributable
to common
shareholders (4,604) (7,002) (7,372) (8,412)
-------------------------------------------------------------------------
Pro forma net loss
per common share
-------------------------------------------------------------------------
- Basic $ (0.05) $ (0.08) $ (0.08) $ (0.10)
-------------------------------------------------------------------------
- Diluted $ (0.05) $ (0.08) $ (0.08) $ (0.10)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
7. SEGMENTED INFORMATION
The Corporation is organized and managed as a single business segment,
being aerospace, and the Corporation is viewed as a single operating
segment by the chief operating decision maker for the purposes of
resource allocations and assessing performance.
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 December 31, 2005
-------------------------------------------------------------------------
Canada US UK Total
-------------------------------------------------------------------------
Capital
assets $126,181 $125,783 $ 12,935 $264,899
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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:
-------------------------------------------------------------------------
Twelve-months ended December 31
-------------------------------------------------------------------------
2005
-------------------------------------------------------------------------
Canada US UK Total
-------------------------------------------------------------------------
Revenue
Domestic $ 96,100 $148,693 $101,493 $346,286
Export 181,430 35,118 5,649 $222,197
-------------------------------------------------------------------------
Total revenue $277,530 $183,811 $107,142 $568,483
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Twelve-months ended December 31
-------------------------------------------------------------------------
2004
-------------------------------------------------------------------------
Canada US UK Total
-------------------------------------------------------------------------
Revenue
Domestic $102,977 $156,004 $ 93,923 $352,904
Export 184,636 29,587 6,652 220,875
-------------------------------------------------------------------------
Total revenue $287,613 $185,591 $100,575 $573,779
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The major customers for the Corporation for the three-month and twelve-
month periods ended December 31 are as follows:
-------------------------------------------------------------------------
Three-months ended Twelve-months ended
December 31 December 31
-------------------------------------------------
2005 2004 2005 2004
-------------------------------------------------------------------------
Major Customers
Canadian operations
- Number of customers 4 4 4 2
- Percentage of total
Canadian revenue 46 % 45 % 41 % 25 %
US operations
- Number of customers 3 4 3 4
- Percentage of total
US revenue 57 % 70 % 57 % 65 %
UK operations
- Number of customers 1 1 1 1
- Percentage of total
UK revenue 84 % 65 % 80 % 65 %
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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 losses of $1,338 and $9,460 for the three-month and twelve-
month periods ended December 31, 2005 respectively (2004 - $8,125 and
$12,156), which is reflected as foreign exchange translation on the
consolidated balance sheets and has no impact on net income.
9. SUPPLEMENTARY INFORMATION
Foreign exchange gain on the conversion of foreign currency denominated
working capital balances and debt for the three-month and twelve-month
periods ended December 31, 2005 was $288 and $1,624 respectively (2004 -
gain of $361 and $3,914).
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