TORONTO, Aug. 13 /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 13, 2007, the Corporation released its financial results for the second quarter of 2007. All amounts are expressed in Canadian dollars unless otherwise indicated. The results are summarized as follows:
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Three-months ended Six-months ended
June 30 June 30
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(Expressed in
thousands,
except per
share amounts) 2007 2006 Change 2007 2006 Change
-------------------------------------------------------------------------
Revenues $ 150,283 $ 149,977 0.2% $ 294,338 $ 286,999 2.6%
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Gross Profit $ 16,213 $ 13,132 23.5% $ 31,462 $ 27,428 14.7%
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Net loss $ (1,734) $ (5,666) - $ (3,481) $ (6,324) -
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Net loss per
share $ (0.02) $ (0.07) - $ (0.05) $ (0.08) -
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EBITDA(x) $ 9,230 $ 9,595 -3.8% $ 18,743 $ 19,494 -3.9%
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EBITDA(x)
per share $ 0.10 $ 0.11 -9.1% $ 0.21 $ 0.21 0.0%
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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,
depreciation and amortization and non-cash charges. 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 may not be comparable to similarly
titled measures used by other companies.
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Management's Discussion and Analysis
------------------------------------
During the second quarter of 2007, the aerospace industry continued to expand in all major sectors. Magellan benefited from growth in the civil airliner, business jet and helicopter sectors. In the airliner sector, production rates for single aisle, and selected twin aisle aircraft, continued the strong growth of the previous quarter and this trend is expected to continue throughout 2007. Business jet and helicopter growth remains very strong, and the resulting growth in small and mid-sized turbofan engines has tested Magellan's increased capacity to support these products. The more stable defence sector is highlighted by the launch of low rate initial production of the F35 Joint Strike Fighter aircraft and associated engines.
However, Magellan was negatively impacted in the quarter by the continuing halt in A380 large aircraft program due to unresolved design and manufacturing issues. The aircraft is expected to resume deliveries by fourth quarter 2007. The value of Magellan sales delayed in the second quarter was approximately $8 million, bringing the total value to $15 million for the first half of 2007.
Operationally, Magellan continues to ramp up production for initial testing and flight units of landing gear components for the Boeing B787 aircraft, and for low rate initial production of various elements of the F35 and engines of the multi-national Joint Strike Fighter program. Demand for the B787 continues to grow rapidly, with over 600 aircraft now on firm order for deliveries commencing in 2008. The F35 is also benefiting from strong American and international political support, and the current demand for approximately 2,500 aircraft over the next 25 years appears likely to increase.
The effects of the Magellan transition from the ramp-down of mature and discontinued programs of previous years to the ramp-up of new programs over the next several reporting periods is reflected in the modest increase in revenue quarter over quarter. The return to production of the A380 aircraft, forecast to occur in the fourth quarter of 2007, and continuing growth in existing in-house programs will help to restore revenues to plan.
Revenues
--------
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Three-months ended Six-months ended
June 30 June 30
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(Expressed in
thousands) 2007 2006 Change 2007 2006 Change
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Canada $ 73,139 $ 71,937 1.7% $ 137,781 $ 137,203 0.4%
United States 47,251 49,333 (4.2)% 95,314 93,229 2.2%
United Kingdom 29,893 28,707 4.1% 61,243 56,567 8.3%
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Total Revenue $ 150,283 $ 149,977 0.2% $ 294,338 $ 286,999 2.6%
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Consolidated revenues for the second quarter of 2007 were $150.3 million, an increase of $0.3 million from the second quarter of 2006. If the average exchange rates experienced in the comparable period in 2006 remained constant in 2007, revenues for the second quarter would have been $152.4 million, an increase of $2.1 million. The decline in the value of the US dollar versus the Canadian dollar during the second quarter had a negative impact on revenue. If average exchange rates experienced in the first quarter of 2007 remained constant in the second quarter of 2007, consolidated revenues for the second quarter of 2007 would have been approximately $157.0 million, or approximately $6.7 million higher.
Gross Profit
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Three-months ended Six-months ended
June 30 June 30
-----------------------------------------------------------
(Expressed in
thousands) 2007 2006 Change 2007 2006 Change
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Gross profit $ 16,213 $ 13,132 23.5% $ 31,462 $ 27,428 14.7%
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Percentage
of revenue 10.8% 8.8% 10.7% 9.6%
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Gross profits of $16.2 million (10.8% of revenues) were reported for the second quarter of 2007 compared to $13.1 million (8.8% of revenues) during the same period in 2006. Gross profit, as a percentage of sales, has been consistent in 2007 and has improved over 2006. Benefits from the Corporation's ongoing rejuvenation of four of its facilities have started to materialize in the quarter with respect to improved efficiencies and also better control of scrap in the castings business. The decline in the value of the US dollar versus the Canadian dollar during the second quarter of 2007 also had a negative impact on gross margin. Had exchange rates remained the same as in the first quarter of 2007, gross margin would have been approximately $1.4 million higher for the second quarter of 2007.
Administrative and General Expenses
-----------------------------------
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Three-months ended Six-months ended
June 30 June 30
-------------------------------------------
(Expressed in thousands) 2007 2006 2007 2006
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Administrative and general
expenses $ 11,007 $ 10,007 $ 22,555 $ 20,256
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Foreign exchange loss/(gain) 2,154 - 2,523 (282)
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Total administrative and
general expenses $ 13,161 $ 10,007 $ 25,078 $ 19,974
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Percentage of revenue 8.8% 6.7% 8.5% 7.0%
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Administrative and general expenses were $13.2 million, or 8.8% of revenues in the second quarter of 2007 compared to $10.0 million, or 6.7% of revenues in the same period of 2006. Included in total administration and general expenses for the second quarter of 2007, is a foreign exchange loss of $2.2 million which had a negative impact on administrative and general expenses in the quarter. Without this item, administrative and general expenses were $11.0 million (or 7.3% of revenues) in the second quarter of 2007 compared to $10.0 million (or 6.7% of revenues) in the second quarter of 2006.
Interest Expense
----------------
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Three-months ended Six-months ended
June 30 June 30
-------------------------------------------
(Expressed in thousands) 2007 2006 2007 2006
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Interest on bank indebtedness
and other long-term debt $ 3,074 $ 3,015 $ 5,862 $ 5,040
Convertible debenture interest 1,487 1,462 2,975 2,950
Accretion charge for
convertible debt 590 573 1,174 1,146
Discount on sale of accounts
receivable 1,021 1,027 1,835 1,937
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Total interest expense $ 6,172 $ 6,077 $ 11,846 $ 11,073
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Interest expense in the second quarter of 2007 was $6.2 million,
$0.1 million higher than the second quarter of 2006.
Provision for (Recovery of) Income Taxes
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Three-months ended Six-months ended
June 30 June 30
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(Expressed in thousands) 2007 2006 2007 2006
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Provision for current income
taxes $ 844 $ 90 $ 933 $ 182
Recovery of future income
taxes (2,230) (2,677) (2,914) (2,778)
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Total recovery of income
taxes $ (1,386) $ (2,587) $ (1,981) $ (2,596)
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Effective Tax Rate 44.4% 31.3% 36.3% 29.1%
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There was a recovery of income taxes of $1.4 million for the second
quarter of 2007, compared to an income tax recovery of $2.6 million for the
second quarter of 2006. 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)
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Three-months ended Six-months ended
June 30 June 30
-------------------------------------------
(Expressed in thousands) 2007 2006 2007 2006
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Net loss $ (1,734) $ (5,666) $ (3,481) $ (6,324)
Interest 6,172 6,077 11,846 11,073
Taxes (1,386) (2,587) (1,981) (2,596)
Facility rationalization
charge - 5,301 - 5,301
Stock based compensation 395 255 650 435
Depreciation and amortization 5,783 6,215 11,709 11,605
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EBITDA $ 9,230 $ 9,595 $ 18,743 $ 19,494
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EBITDA for the second quarter of 2007 was $9.2 million, a decrease of $0.4
million from the second quarter of 2006. Higher gross profit in the second
quarter of 2007 compared to 2006 was offset by the higher administrative and
general expenses.
Liquidity and Capital Resources
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Cash Flow from Operations
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Three-months ended Six-months ended
June 30 June 30
-------------------------------------------
(Expressed in thousands) 2007 2006 2007 2006
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Decrease (increase) in
accounts receivable $ 7,599 $ 5,099 $ (5,010) $ 536
Increase in inventories (5,995) (3,429) (23,335) (19,386)
(Increase) decrease in
prepaid expenses and other (7,627) 898 (8,441) (1,829)
Increase (decrease) in
accounts payable 6,307 (2,932) 3,116 8,178
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Changes to non-cash working
capital balances $ 284 $ (364) $ (33,670) $ (12,501)
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Cash provided by (used in)
operating activities $ 3,084 $ 3,637 $ (26,513) $ (3,116)
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In the quarter ended June 30, 2007, the Corporation generated $3.1 million
of cash in its operations, compared to $3.6 million in the second quarter of
2006. Cash was generated due to lower accounts receivable and higher accounts
payable, offset by increases to inventory and prepaid expenses. 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) 2007 2006 2007 2006
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Purchase of capital assets $ (3,259) $ (11,084) $ (10,345) $ (14,143)
Proceeds of disposals of
capital assets 79 239 353 335
Increase in other assets (643) (1,711) (1,665) (2,589)
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Cash used in investing
activities $ (3,823) $ (12,556) $ (11,657) $ (16,397)
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In the second quarter of 2007, the Corporation invested $3.3 million in
capital assets to upgrade and enhance its capabilities for current and future
programs. In 2006 the Corporation rationalized and modernized four of its
facilities. These programs were essentially completed by the end of 2006.
Financing Activities
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Three-months ended Six-months ended
June 30 June 30
-------------------------------------------
(Expressed in thousands) 2007 2006 2007 2006
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Increase in bank indebtedness $ 1,149 $ 11,758 $ 20,957 $ 20,478
(Decrease) increase of
long-term debt (580) 4,689 13,826 4,572
(Decrease) increase in
long-term liabilities (340) (8,112) 347 (8,037)
Issue of Common Shares 21 12 39 26
Dividends on Preference Shares (400) (400) (800) (800)
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Cash (used in) provided by
financing activities $ (150) $ 7,947 $ 34,369 $ 16,239
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The Corporation renewed its operating credit facility, on March 30, 2007, with its existing lenders. Under the terms of the renewed agreement, the maximum amount available under the operating credit facility was increased by $20 million to $175 million with a maturity date of May 24, 2008. The facility is extendable for unlimited one-year renewal periods and continues to be fully guaranteed by the Chairman of the Board of the Corporation. An annual fee of 0.10% of the guaranteed amount or $175 (2006 - $155) is paid in consideration for this guarantee. Due to this guarantee, interest is charged at the bankers' acceptance or LIBOR rates, plus 0.875% compared to the rate charged prior to the guarantee of bankers' acceptance or LIBOR rates, plus 4.5%. The net annual savings to the Corporation is approximately $5.3 million assuming an average of $150 million borrowed under the operating facility.
On March 30, 2007, the Corporation borrowed $15 million by way of a secured promissory note from a corporation with a common director. This note is due July 1, 2008 and bears interest at a rate of 9% per annum, which was lower than rates provided by the Corporation's financial advisors for similar instruments. The note is collateralized and subordinated to the bank credit facility, thereby assisting the Corporation to remain in compliance with its senior debt arrangement.
The Corporation's 8.5% convertible unsecured subordinated debentures currently outstanding are due January 31, 2008. The Corporation is reviewing a number of options with respect to refinancing these debentures including replacement with another form of debt or conversion into common shares.
Outstanding Share Data
----------------------
As at August 13, 2007, the Corporation had 90,847,533 common shares outstanding and 2,000,000 outstanding First Preference Shares Series A.
Risks and Uncertainties
-----------------------
The Corporation manages a number of risks in each of its businesses in order to achieve an acceptable level of risk without hindering the ability to maximize returns. Management has procedures to identify and manage significant operational and financial risks. For a more detailed discussion of these potential business risks, readers should review the "Risk Factors" section of the 2006 Annual MD&A filed by the Corporation with the Canadian securities regulatory authorities, which are hereby incorporated by reference.
Critical Accounting Estimates
-----------------------------
The preparation of financial statements requires the Corporation to estimate the effect of various matters that are inherently uncertain as of the date of the financial statements. Each of these required estimates varies with respect to the level of judgment involved and the potential impact on the Corporation's reported financial results. Estimates are deemed critical when the Corporation's financial condition, change in financial condition or results of operations would be materially impacted by a different estimate or a change in estimate from period to period.
Cost of Sales
Average unit cost for products produced under long-term contracts is determined based on the estimated total production costs for a predetermined program quantity. Program quantities are established based on management's assessment of market conditions and foreseeable demand at the beginning of the production stage for each program, taking into consideration both customer supplied and independent data. The average unit cost is recorded to cost of sales as products are completed. Under the learning curve concept, which anticipates a predictable decrease in unit costs as tasks and production techniques become more efficient through repetition and management action, excess over-average production costs during the early stages of a program are deferred and recovered from sales of products anticipated to be produced later at lower-than-average costs.
Estimates of average unit production costs and of program quantities are an integral component of average cost accounting. Management conducts regular reviews as well as a detailed annual review in the fourth quarter, as part of its annual budget process, of its cost estimates and program quantities, and the effect of any revisions are accounted for by way of a cumulative catch-up adjustment to income in the period in which the revision takes place.
Inventories
Raw materials, materials in process and finished products are valued at the lower of cost and net realizable value, with cost determined on a moving weighted average basis. Due to the long-term contractual periods of the Corporation's contracts, the Corporation may be in negotiation with its customers over amendments to pricing or other terms. Management's assessment of the recoverability of amounts capitalized in inventory may be based on judgements with respect to the outcome of these negotiations. 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.
Asset Impairment
The Corporation evaluates long-lived assets for impairment when events or changes in circumstances indicate that the related carrying amounts may not be recoverable. A long-lived asset is considered to be impaired if the total undiscounted estimated future cash flows are less than the carrying value of the asset. The amount of the impairment is determined based on discounted estimated future cash flows. Future cash flows are determined based on management's estimates of future results relating to the long-lived assets. These estimates include various assumptions, which are updated on a regular basis as part of the internal planning process.
The Corporation regularly reviews its investments to determine whether a permanent decline in the fair value below the carrying value has occurred. In determining whether a permanent decline has occurred, management considers a number of factors that would be indicative of a permanent decline including (i) a prolonged decrease in the fair value below the carrying value, (ii) severe or continued losses in the investment and (iii) various other factors such as a decline or restriction in financial liquidity of an entity in which the Corporation has an investment, which may be indicative of a decline in value of the investment. The consideration of these factors requires management to make assumptions and estimates about future financial results of the investment. These assumptions and estimates are updated by management on a regular basis.
Income Taxes
The Corporation operates in several tax jurisdictions. As such, its income is subject to various rates and rules of taxation. The breadth of the Corporation's operations and the complexity of the taxing legislation and practices require the Corporation to apply judgment in estimating its ultimate tax liability. The final taxes paid will depend on many factors, including the Corporation's interpretation of the legislation and the outcomes of audits by and negotiations with tax authorities. Ultimately, the final taxes may be adjusted based on the resolution of these uncertainties.
The Corporation estimates future income taxes based upon temporary differences between the assets and liabilities that are reported in its consolidated financial statements and their tax basis as determined under applicable tax legislation. The Corporation records a valuation allowance against its future income tax assets when it believes that it is not "more likely than not" that such assets will be realized. This valuation allowance can either be increased or decreased where, in the view of Management, such change is warranted.
Foreign Currency Translation
The functional currency of the Corporation is Canadian dollars. Many of the Corporation's business undertake transactions in currencies other than the Canadian dollar. As part of its ongoing review of critical accounting policies and estimates, the Corporation reviews the foreign currency translation method of its foreign operations to determine if there are significant changes to economic facts and circumstances that may indicate that the foreign operations are largely self-sufficient and the economic exposure is more closely tied to their respective domestic currencies. Any change, if any, in translation method resulting from this review will be accounted for prospectively. The Corporation accounts for its US and UK subsidiaries as self-sustaining foreign operations.
Changes in Accounting Policies
------------------------------
Effective January 1, 2007, the Company adopted the Canadian Institute of Chartered Accountants (CICA) Handbook Sections 1530 Comprehensive Income, Section 3855 Financial Instruments - Recognition and Measurement and Section 3865 Hedges. The adoption of these new standards resulted in changes in the accounting for financial instruments and hedges, as well as the recognition of certain transition adjustments. As provided under the standards, the comparative interim consolidated financial statements have not been restated, except for the presentation of translation gains or losses on self-sustaining foreign operations as part of comprehensive loss.
The adoption of these Sections is done retroactively without restatement of the consolidated financial statements of prior periods. The effect of these changes in accounting policies on net income for the second quarter of fiscal 2007 is not significant.
The reader is referred to Note 2 in the accompanying unaudited interim consolidated financial statements for the period ended June 30, 2007 for further details regarding the adoption of these standards.
Controls and Procedures
-----------------------
Based on the current Canadian Securities Administrators ("CSA") rules under Multilateral Instrument 52-109, the Chief Executive Officer and Chief Financial Officer (or individuals performing similar functions as a chief executive officer or chief financial officer) are required to certify as at June 30, 2007 that they are responsible for establishing and maintaining disclosure controls and procedures and internal control over financial reporting.
No changes were made in the Corporation's internal control over financial reporting during the Corporation's most recent interim period, that have materially affected, or are reasonably likely to materially affect, the Corporation's internal control over financial reporting.
Outlook
-------
Magellan continues to experience improved gross margins achieved through completed rejuvenation efforts at several operating divisions, greater pricing power, and resolution of a number of program issues with its customers. The market continues to be strong, with both Airbus and Boeing showing increased order and production growth, and the business jet and helicopter sectors also showing very robust demand. In addition, strategic sourcing initiatives with suppliers in both local and emerging markets, should continue to reduce Magellan's average costs, and attract more business to Magellan facilities from key customers.
As part of this strategic sourcing initiative, the Corporation is working closely with a partner to establish a low-cost aerospace processing facility in India. This facility will initially satisfy requirements for final processing of parts currently manufactured for the Corporation by subcontractors in India. Discussions are also underway with major customers to use this facility to provide processing for components they are sourcing in India.
The Boeing 787 is continuing its outstanding success in the marketplace. The first aircraft was rolled out in July, and production rates are scheduled to continue to ramp up over the next two years. The F35 Joint Strike Fighter program, gaining increasingly strong international political support, is projected to experience year-on-year increases in production rates through the next several years. Magellan's successful participation in landing gear, airframe and engine development and production activities on these new programs provides an opportunity to refresh and upgrade the Corporation's manufacturing technology, and generate annual increases in revenue through the foreseeable future. Concurrently, continued growth and strength in the business jet and helicopter sectors provide Magellan with increased business opportunities for components ranging from castings to engine modules, structural elements and specialty equipment.
The Corporation has been modernizing its facilities in preparation for the increased technology and manufacturing capacity required to meet the demands of three major programs: the Boeing 787, the Airbus A380 and the Joint Strike Fighter. Magellan's current level of participation on these programs is approximately $500,000 per aircraft on the B787, $1,200,000 per aircraft on the A380 and $200,000 to $1,300,000 per aircraft, depending on the model, on the Joint Strike Fighter. Based on currently anticipated production rates of the various programs and models, these programs are targeted to generate additional annual revenues to the Corporation of approximately $40 million in 2008, $70 million in 2009 and $110 million in 2010. Costs to support initial efforts on these programs have been invested by Magellan over the past several years and have positioned it to be an important participant.
On behalf of the Board
(signed) (signed)
Richard A. Neill James S. Butyniec
Vice Chairman President and Chief Operating Officer
August 13, 2007
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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
amounts) 2007 2006 2007 2006
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Revenues $ 150,283 $ 149,977 $ 294,338 $ 286,999
Cost of revenues 134,070 136,845 262,876 259,571
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Gross profit 16,213 13,132 31,462 27,428
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Administrative and general
expenses 13,161 10,007 25,078 19,974
Facility rationalization
(note 3) - 5,301 - 5,301
Interest 6,172 6,077 11,846 11,073
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19,333 21,385 36,924 36,348
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Loss before income taxes (3,120) (8,253) (5,462) (8,920)
Provision for (recovery of)
income taxes
- Current 844 90 933 182
- Future (2,230) (2,677) (2,914) (2,778)
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(1,386) (2,587) (1,981) (2,596)
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Net loss for the period (1,734) (5,666) (3,481) (6,324)
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Retained earnings, beginning
of the period 95,892 105,961 98,039 107,019
Dividends (400) (400) (800) (800)
Net loss for the period (1,734) (5,666) (3,481) (6,324)
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Retained earnings, end of
period $ 93,758 $ 99,895 $ 93,758 $ 99,895
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Loss per share
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Basic $ (0.02) $ (0.07) $ (0.05) $ (0.08)
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Diluted $ (0.02) $ (0.07) $ (0.05) $ (0.08)
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MAGELLAN AEROSPACE CORPORATION
CONSOLIDATED STATEMENTS OF
COMPREHENSIVE LOSS
(unaudited) Three-months ended Six-months ended
June 30 June 30
-------------------------------------------
(Expressed in thousands of
dollars) 2007 2006 2007 2006
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Net loss $ (1,734) $ (5,666) $ (3,481) $ (6,324)
Other comprehensive loss:
Unrealized loss on
translation of financial
statements of self-sustaining
foreign operations (12,115) (5,240) (13,266) (4,370)
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Comprehensive loss $ (13,849) $ (10,906) $ (16,747) $ (10,694)
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See accompanying notes
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MAGELLAN AEROSPACE CORPORATION
CONSOLIDATED BALANCE SHEETS
June 30 December 31
(Expressed in thousands of dollars) 2007 2006
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ASSETS (note 5)
Current
Cash $ 5,419 $ 9,896
Accounts receivable 60,120 58,066
Inventories (note 4) 291,715 276,462
Prepaid expenses and other 18,079 10,396
Future income tax assets 5,745 5,914
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Total current assets 381,078 360,734
Capital assets 252,773 265,078
Other 53,813 52,680
Future income tax assets 6,985 5,829
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Total assets $ 694,649 $ 684,321
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Bank indebtedness (note 5) $ 154,794 $ 142,457
Accounts payable and accrued charges 132,127 128,066
Convertible debentures 68,604 -
Current portion of long-term debt 1,738 2,039
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Total current liabilities 357,263 272,562
Long-term debt 29,425 15,902
Future income tax liabilities 16,944 20,785
Convertible debentures - 67,430
Other long-term liabilities 2,981 2,748
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Total liabilities 406,613 379,427
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Shareholders' equity
Capital stock (note 6) 234,210 234,171
Contributed surplus 2,449 1,799
Other paid in capital 11,100 11,100
Retained earnings 93,758 98,039
Accumulated other comprehensive loss (note 9) (53,481) (40,215)
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Total shareholders' equity 288,036 304,894
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Total liabilities and shareholders' equity $ 694,649 $ 684,321
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See accompanying notes
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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
of dollars) 2007 2006 2007 2006
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OPERATING ACTIVITIES
Loss for the period $ (1,734) $ (5,666) $ (3,481) $ (6,324)
Add (deduct) items not
affecting cash
Depreciation and
amortization 5,783 6,215 11,709 11,605
(Gain) loss on sale of
capital assets (4) - 19 -
Facility rationalization
charge (note 3) - 5,301 - 5,301
Stock option charge 395 255 650 435
Accretion of convertible
debentures 590 573 1,174 1,146
Future income taxes
recoveries (2,230) (2,677) (2,914) (2,778)
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2,800 4,001 7,157 9,385
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Net change in non-cash working
capital items relating to
operating activities 284 (364) (33,670) (12,501)
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Cash provided by (used in)
operating activities 3,084 3,637 (26,513) (3,116)
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INVESTING ACTIVITIES
Purchase of capital assets (3,259) (11,084) (10,345) (14,143)
Proceeds from disposal of
capital assets 79 239 353 335
Increase in other assets (643) (1,711) (1,665) (2,589)
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Cash used in investing
activities (3,823) (12,556) (11,657) (16,397)
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FINANCING ACTIVITIES
Increase in bank indebtedness 1,149 11,758 20,957 20,478
(Decrease) increase of
long-term debt (580) 4,689 13,826 4,572
(Decrease) increase in
long-term liabilities (340) (8,112) 347 (8,037)
Issue of Common Shares 21 12 39 26
Dividends on Preference Shares (400) (400) (800) (800)
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Cash (used in) provided by
financing activities (150) 7,947 34,369 16,239
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Effect of exchange rate
changes on cash (907) (337) (676) (359)
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Net decrease in cash (1,796) (1,309) (4,477) (3,633)
Cash, beginning of period 7,215 5,102 9,896 7,426
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Cash, end of period $ 5,419 $ 3,793 $ 5,419 $ 3,793
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See accompanying notes
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 interim consolidated financial statements have
been prepared by the Corporation in accordance with generally accepted
accounting principles in Canada with respect to preparation of interim
financial statements on a basis consistent with those followed in the
most recent audited consolidated financial statements. Accordingly, these
unaudited interim 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, 2006.
In the opinion of management, the unaudited interim consolidated
financial statements reflect all adjustments, which consist only of
normal and recurring adjustments, necessary to present fairly the
financial position at June 30, 2007 and the results of operations and
cash flows for the three and six month periods ended June 30, 2007 and
2006.
2. CHANGE IN ACCOUNTING POLICY
The Corporation adopted the Canadian Institute of Chartered Accountants
(CICA) Handbook Section 3855, Financial instruments - Recognition and
Measurement: Section 3865, Hedges: Section 1530, Comprehensive Income and
Section 3861, Financial Instruments - Disclosure and Presentation on
January 1, 2007. The adoption of these new standards resulted in changes
in the accounting for financial instruments and hedges. The comparative
interim consolidated financial statements have not been restated, except
for the presentation of translation gains or losses on self-sustaining
foreign operations. The principal changes in the accounting for financial
instruments and hedges due to the adoption of these accounting standards
are described below.
a) Comprehensive Income
Comprehensive income includes the Company's net income and other
comprehensive income. Other comprehensive income includes unrealized
exchange gains and losses on translation of self-sustaining foreign
operations.
b) Financial Assets and Financial Liabilities
Under the new standards, all financial instruments are classified into
one of the following five categories: held for trading, held-to-maturity
investments, loans and receivables, available-for-sale financial assets
or other financial liabilities. All financial instruments, including
derivatives, are included on the consolidated statement of financial
position and are measured at fair value except for loans and receivables,
held-to-maturity investments and other financial liabilities, which are
measured at amortized cost. Held for trading financial investments are
subsequently measured at fair value and all gains and losses are included
in net income in the period in which they arise. Available-for-sale
financial instruments are subsequently measured at fair value with
revaluation gains and losses included in other comprehensive income until
the instrument is derecognized or impaired.
As a result of the adoption of these standards, the Company has
classified its cash and cash equivalents as held-for-trading. Accounts
receivable are classified as loans and receivables. Accounts payable and
long-term debt have been classified as other financial liabilities, all
of which are measured at amortized cost.
c) Derivatives and Hedges
Derivatives
-----------
All derivative instruments, including embedded derivatives, are recorded
in the statement of financial position at fair value unless exempted from
derivative treatment as a normal purchase and sale. All changes in their
fair value are recorded in income unless cash flow hedge accounting is
used, in which case changes in fair value are recorded in other
comprehensive income. The impact of the change in the accounting policy
related to embedded derivatives was not material, as at January 1, 2007.
Hedge Accounting
----------------
At the inception of a hedging relationship, the Company documents the
relationship between the hedging instrument and the hedged item, as well
as the risk management objectives and strategy for undertaking various
hedge transactions. This process includes linking all derivatives to
specific assets and liabilities on the consolidated statement of
financial position or to specific firm commitments or forecasted
transactions. The Company also assesses, both at the inception of the
hedge and on an ongoing basis, whether the derivatives that are used are
effective in offsetting changes in fair values or cash flows of hedged
items.
Under the previous standards, derivatives that met the requirements for
hedge accounting were generally accounted for on an accrual basis. Under
the new standards, all derivatives are recorded at fair value.
As at January 1, 2007 the Corporation's derivative contracts were not
designated as hedges and as a result are recorded on the Consolidated
Balance Sheets at their fair value. Any change in the fair value during
the period are reported in foreign exchange in the Consolidated Statement
of Operations.
The adoption of these new standards was done retroactively without
restatement of the consolidated financial statements of prior periods.
The effect of these changes in accounting policies on during 2007 was not
significant.
3. FACILITY RATIONALIZATION
During 2006, the Corporation undertook a program to rationalize and
modernize four of its facilities. As part of this rationalization
program, the Corporation sold portions of its surplus real estate in the
third and fourth quarter of 2006 and realized gains of $5.7 million on
the sales. To prepare this real estate for sale, machinery and equipment
was disposed of for minimal proceeds. Accordingly, a non-cash charge of
$5.3 million ($0.04 per share on an after tax basis) was recorded in the
financial statements in the second quarter of 2006.
4. INVENTORIES
Due to the long-term contractual periods of the Corporation's contracts,
the Corporation may be in negotiation with its customers over amendments
to pricing or other terms. Management's assessment of the recoverability
of amounts capitalized in inventory may be based on judgements with
respect to the outcome of these negotiations. 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.
5. BANK INDEBTEDNESS
The Corporation has an operating credit facility, with a syndicate of
banks, with a Canadian limit of $75,000 plus a US limit of US$90,000
($170,886 at June 30, 2007). Bank indebtedness as at June 30, 2007 of
$154,794 (December 31, 2006 - $142,457) is payable on demand and bears
interest at the bankers' acceptance or LIBOR rates, plus 0.875% (5.8% at
June 30, 2007). Included in the amount outstanding at June 30, 2007 is
US$87,764 (December 31, 2006 - US$82,325). At June 30, 2007, the
Corporation had drawn $154,794 under the operating credit and had issued
letters of credit totalling $1,925 such that $18,281 was unused and
available. A fixed and floating charge debenture on certain of the
Corporation's assets is pledged as collateral for the operating loan. The
Chairman of the Board has provided a guarantee for the full amount of the
credit facility. An annual fee of 0.10% of the guaranteed amount or $175
(2006 - $155) is paid in consideration for the guarantee.
6. CAPITAL STOCK
The following table summarizes information on share capital and related
matters as at June 30, 2007:
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Outstanding Exercisable
-------------------------------------------------------------------------
Common shares 90,846,405
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Common shares stock options 5,004,050 1,497,010
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Preferred shares 2,000,000
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The weighted average number of common shares outstanding during the
three-month and six-month periods ended June 30, 2007 was 90,844,495 and
90,840,493 respectively.
7. 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 3,342,653. 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.
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, 2007 was $395 and $650
respectively (June 30, 2006 - $255 and $435). In the six-month period
ended June 30, 2007, there were 1,430,000 stock options issued at an
exercise price of $3.20. The fair value of these options was $1.57.
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 4.0%
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Expected volatility 46.0%
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Expected average life of options 5 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.
8. 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, 2007
--------------------------------------------
Canada US UK Total
--------------------------------------------
Capital assets $ 119,127 $ 112,998 $ 20,648 $ 252,773
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-------------------------------------------------------------------------
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As at December 31, 2006
--------------------------------------------
Canada US UK Total
--------------------------------------------
Capital assets $ 122,082 $ 120,553 $ 22,443 $ 265,078
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-------------------------------------------------------------------------
Revenue is attributable to countries based on the location of the
customers. Domestic and foreign revenues consist of:
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three-months ended June 30
--------------------------------------------
2007
--------------------------------------------
Canada US UK Total
--------------------------------------------
Revenue
Domestic $ 23,626 $ 41,367 $ 29,261 $ 94,254
Export 49,513 5,884 632 56,029
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Total revenue $ 73,139 $ 47,251 $ 29,893 $ 150,283
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Three-months ended June 30
--------------------------------------------
2006
--------------------------------------------
Canada US UK Total
--------------------------------------------
Revenue
Domestic $ 26,002 $ 40,705 $ 26,126 $ 92,833
Export 45,935 8,628 2,581 57,144
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Total revenue $ 71,937 $ 49,333 $ 28,707 $ 149,977
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Six-months ended June 30
--------------------------------------------
2007
--------------------------------------------
Canada US UK Total
--------------------------------------------
Revenue
Domestic $ 47,073 $ 83,199 $ 60,016 $ 190,288
Export 90,708 12,115 1,227 104,050
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Total revenue $ 137,781 $ 95,314 $ 61,243 $ 294,338
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Six-months ended June 30
--------------------------------------------
2006
--------------------------------------------
Canada US UK Total
--------------------------------------------
Revenue
Domestic $ 49,335 $ 75,985 $ 52,921 $ 178,241
Export 87,868 17,244 3,646 108,758
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Total revenue $ 137,203 $ 93,229 $ 56,567 $ 286,999
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The major customers for the Corporation for the three-month and six-month
periods ended June 30, 2007 are as follows:
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three-months ended Six-months ended
June 30 June 30
-------------------------------------------
2007 2006 2007 2006
-------------------------------------------------------------------------
Major Customers
Canadian operations
- Number of customers 3 3 3 4
- Percentage of total
Canadian revenue 36% 36% 35% 45%
US operations
- Number of customers 2 3 2 3
- Percentage of total
US revenue 51% 56% 51% 59%
UK operations
- Number of customers 1 1 1 1
- Percentage of total
UK revenue 89% 67% 84% 76%
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9. ACCUMULATED OTHER COMPREHENSIVE LOSS
Other comprehensive loss includes foreign currency translation gains and
losses, which arise on the translation to Canadian dollars of assets and
liabilities of the Corporation's self-sustaining foreign operations. The
unrealized currency translation loss for the three-month and six-month
periods ended June 30, 2007 was $12,115 and $13,266 respectively (2006 -
losses of $5,240 and $4,370). This is reflected in the consolidated
balance sheets and has no impact on net loss.
10. FINANCIAL INSTRUMENTS
The Corporation's policy is not to utilize derivative financials
instruments for trading or speculative purposes. The Corporation may
utilize derivative instruments in the management of its foreign currency
and interest rate exposures.
(a) Fair Value
The Corporation has determined the estimated fair values of its financial
instruments based on appropriate valuation methodologies, however, with
the exception of the convertible debentures, considerable judgment 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 below:
Cash, accounts receivable, bank indebtedness and accounts payable and
accrued charges
Due to the short period to maturity of these instruments, the carrying
values as presented in the consolidated balance sheets are reasonable
estimates of their fair values.
Long-term debt
The fair value of the Corporation's long-term debt, based on current
rates for debt with similar terms and maturities, is $29,351 at June 30,
2007.
Convertible Debentures
The fair market value of the Corporation's Convertible Debentures,
calculated based on available market data at June 30, 2007 was $69,839.
(b) Credit risk
The Corporation's financial assets that are exposed to credit risk
consist primarily of cash and accounts receivable.
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. These accounts receivable are subject to normal industry credit
risks.
(c) Interest rate risk
The Corporation is exposed to significant interest rate risk due to its
bank indebtedness being at variable rates. For the six months ended
June 30, 2007, the Company made interest payments on long-term debt and
convertible debentures of $3,319 (2006 - $2,950).
(d) Forward foreign exchange contracts
The Corporation has entered into forward foreign exchange contracts to
mitigate future cash flow exposures in U.S. dollars and Great Britain
Pound Sterling. Under these contracts the Corporation is obliged to
purchase specific amounts of U.S. dollars and Great Britain Pound
Sterling at predetermined dates and exchange rates. These contracts are
matched with anticipated operational cash flows in U.S. dollars and Great
Britain Pound Sterling.
The Corporation has foreign exchange contracts outstanding at June 30,
2007 as follows:
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Amount Exchange rate
-------------------------------------------------------------------------
Maturity - less than 1 year - U.S. Dollar $42,300 1.06943
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-------------------------------------------------------------------------
The fair value of these foreign exchange contracts is $170 favourable as
at June 30, 2007.
11. EMPLOYEE FUTURE BENEFITS
The total benefit cost in the registered plans for the three-month and
six-month periods ended June 30 includes the following components:
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three-months ended Six-months ended
June 30 June 30
-------------------------------------------
(Expressed in thousands) 2007 2006 2007 2006
-------------------------------------------------------------------------
Current service cost $ 467 $ 578 $ 934 $ 1,155
Interest cost on projected
benefit obligations 1,577 1,614 3,154 3,227
Expected returns on plan
assets (1,771) (1,363) (3,541) (2,726)
Amortization of net
actuarial loss 148 - 297 -
Amortization of past
service costs 120 70 240 141
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Net benefit cost recognized $ 541 $ 899 $ 1,084 $ 1,797
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12. RELATED PARTY TRANSACTIONS
During the three-month and six-month periods ended June 30, 2007, the
Corporation sold receivables to a corporation with a common director in
the amount of $48,555 and $74,572 respectively (June 30, 2006 - $18,268
and $34,663), for a discount of $682 and $943 respectively (June 30, 2006
- $156 and $301) representing an annualized interest rate of 7.5% and
7.5% respectively (June 30, 2006 - 8.5% and 8.3%). Included in this
balance, as at June 30, 2007, is a reserve of $4,281 (2006 - $591).
13. 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, 2007 was $2,154 and $2,523 respectively (June 30,
2006 - gain of nil and $282).