Magellan Aerospace Corporation Announces Financial Results

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Aug 11, 2020 05:00 pm
TORONTO -- 

Magellan Aerospace Corporation (“Magellan” or the “Corporation”) released its financial results for the second quarter of 2020. All amounts are expressed in Canadian dollars unless otherwise indicated. The results are summarized as follows:

 

 

Three month period ended
June 30

Six month period ended
June 30

Expressed in thousands of Canadian dollars, except per share amounts

2020

2019

Change

2020

2019

Change

Revenues

 

162,167

264,082

(38.6%)

400,980

533,966

(24.9%)

Gross Profit

 

25,343

45,090

(43.8%)

62,115

87,911

(29.3%)

Net Income

 

6,103

21,716

(71.9%)

26,177

42,125

(37.9%)

Net Income per Share

 

0.10

0.37

(73.0%)

0.45

0.72

(37.5%)

Adjusted EBITDA

 

25,525

42,675

(40.2%)

67,068

83,168

(19.4%)

Adjusted EBITDA per Share

 

0.44

0.73

(39.7%)

1.15

1.43

(19.6%)

This news release 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 except as required by law.

This news release presents certain non-IFRS financial measures to assist readers in understanding the Corporation's performance. Non-IFRS financial measures are measures that either exclude or include amounts that are not excluded or included in the most directly comparable measures calculated and presented in accordance with Generally Accepted Accounting Principles (“GAAP”). Throughout this news release, reference is made to EBITDA (defined as net income before interest, income taxes, depreciation and amortization) and Adjusted EBITDA (earnings before interest expense, income taxes, depreciation and amortization, and restructuring), which the Corporation considers to be an indicative measure of operating performance and a metric to evaluate profitability. EBITDA and Adjusted EBITDA is not a generally accepted earnings measure and should not be considered as an alternative to net income (loss) or cash flows as determined in accordance with IFRS. As there is no standardized method of calculating this measure, the Corporation’s EBITDA and Adjusted EBITDA may not be directly comparable with similarly titled measures used by other companies.

1. Overview

A summary of Magellan’s business and significant updates

Magellan is a diversified supplier of components to the aerospace industry. Through its wholly owned subsidiaries, Magellan designs, engineers, and manufactures aeroengine and aerostructure components for aerospace markets, advanced products for defence and space markets, and complementary specialty products. The Corporation also supports the aftermarket through supply of spare parts as well as performing repair and overhaul services.

Magellan operates substantially all of its activities in one reportable segment, Aerospace, which is viewed as one segment by the chief operating decision-makers for the purpose of resource allocations, assessing performance and strategic planning. The Aerospace segment includes the design, development, manufacture, repair and overhaul, and sale of systems and components for defence and civil aviation.

Business Update

On May 7, 2020, Magellan announced an agreement with an undisclosed customer for the supply of complex machined rotating engine components for military aircraft platforms. The contract, valued at approximately $46.4 million, will be carried out at Magellan’s facility in Mississauga, Ontario over a five-year period commencing in 2020.

Magellan announced on May 25, 2020 that the Toronto Stock Exchange had approved its notice of intention to make a normal course issuer bid (“the Bid”) to purchase for cancellation, from time to time, as it considers advisable, up to 2,910,450 of the Corporation’s issued and outstanding common shares (the “Shares”), being 5% of the 58,209,001 Shares outstanding as of May 25, 2020. The Bid commenced on May 27, 2020 and will terminate on the earlier of May 26, 2021 or the date on which the Corporation has acquired all of the Shares sought pursuant to the Bid.

In late June 2020, Airbus decided that, due to the COVID-19 crisis, it would cancel its plan to develop its own A320neo nacelle. Magellan had been selected by Airbus in 2017 to design, develop and manufacture exhaust systems for the A320neo PW1100G-JM nacelle with the first unit scheduled to enter into service in 2022. Revenue generated from this life-of-program contract was estimated to exceed CDN $200 million over the first ten years of the contract.

Impact of COVID-19

In March 2020, the World Health Organization declared coronavirus (“COVID-19”) a global pandemic. Governments worldwide, including those countries in which Magellan operates, enacted emergency measures to combat the spread of the virus. These measures, which included the implementation of travel bans, self-imposed quarantine periods and social distancing, caused a material disruption to businesses globally resulting in an economic slowdown and decreased demand in the aerospace industry. Governments and central banks reacted with significant monetary and fiscal interventions designed to stabilize economic conditions; however, the long-term success of these interventions is not yet determinable.

In the second quarter of 2020, the continued disruption to air travel and commercial activities, particularly within the aerospace and commercial airline industries negatively impacted global supply, demand and distribution capabilities. In particular, the significant decrease in air travel resulting from the COVID-19 pandemic is adversely affecting Magellan’s customers and their demand for the Corporation’s products and services. The situation remains dynamic and the ultimate duration and magnitude of the impact on the economy and the financial effect on the Corporation remains unknown at this time.

Financial impacts

The current challenging economic climate may have material adverse impact on Magellan including, but not limited to, significant declines in revenue similar to what Magellan experienced in the second quarter of 2020 as the Corporation’s customers are concentrated in the aerospace industry; impairment charges to our property, plant and equipment and intangible assets due to declines in revenue and cash flows; and future restructuring charges as we align our structure and personnel to the dynamic environment. Estimates and judgements made in the preparation of financial statements are increasingly difficult and subject to a higher degree of measurement uncertainty during this volatile period.

Magellan has implemented measures to align our cost structure and maximize cash preservation during the current market conditions, including headcount reductions; elimination of all non-essential travel, entertaining and other discretionary spending; and reductions to the 2020 capital expenditure plan. The Corporation also applied and received the Canada Emergency Wage Subsidy for its Canadian employees. The carrying value of the Corporation’s long-lived assets are reviewed for indications of impairment at the end of each reporting period. At June 30, 2020, the Corporation reviewed each cash-generating unit and did not identify indications of impairment.

The third quarter of 2020 will be challenging for Magellan’s revenue on a year over year basis as COVID-19 continues to impact aircraft production rates over the short and medium term. In response to this impact, in the second quarter of 2020, Magellan initiated plans to right-size our business with major restructuring charges expected to be incurred in the third quarter of 2020. Magellan continues to actively monitor the COVID-19 situation and reassesses its operating plan as program updates become available.

Operational impacts

During this pandemic, in regions where the local authorities have ordered non-essential business closures and implemented “stay at home” orders, the aerospace manufacturing industry has been classified as an “essential service”. As a result, the Corporation’s operations remained open, but at reduced levels of activity, for the majority of the second quarter of 2020.

To manage the additional safety risks presented by COVID-19, Magellan implemented standardized tools and templates to keep its employees safe and well informed. Magellan has implemented additional safety, sanitization and physical distancing procedures, including remote work sites where possible and ceased all non-essential business travel. Magellan’s procedures are in accordance with recommendations from the World Health Organization, the United States’ Centers for Disease Control and Prevention, and applicable federal, state and provincial government health authorities.

Liquidity

During the second quarter of 2020, Magellan improved its overall liquidity position despite the challenges posed by COVID-19. The Corporation ended the quarter with a cash balance of $61.7 million and $70.4 million of available borrowing capacity under Magellan’s operating credit facility, providing the Corporation with $132.1 million of total liquidity as compared with $103.3 million at March 31, 2020. The credit facility agreement also includes a $75 million uncommitted accordion provision that provides the Corporation with the option to increase the size of the operating credit facility to $150 million. Magellan expects that cash provided by operations, cash on hand and its sources of financing will be sufficient to meet the Corporation’s debt obligations and fund committed and future capital expenditures.

For additional information, please refer to the “Management’s Discussion and Analysis” section of the Corporation’s 2019 Annual Report available on www.sedar.com.

2. Results of Operations

A discussion of Magellan’s operating results for second quarter ended June 30, 2020

The Corporation reported revenue in the second quarter of 2020 of $162.2 million, a $101.9 million decrease from the second quarter of 2019 of $264.1 million. Gross profit and net income for the second quarter of 2020 were $25.3 million and $6.1 million, respectively, in comparison to gross profit of $45.1 million and net income of $21.7 million for the second quarter of 2019.

Consolidated Revenue

 

Three month period

Six month period

 

ended June 30

ended June 30

Expressed in thousands of dollars

 

2020

 

2019

Change

 

2020

 

2019

Change

Canada

 

83,595

 

96,185

(13.1%)

 

177,838

 

186,886

(4.8%)

United States

 

45,288

 

83,128

(45.5%)

 

110,006

 

167,947

(34.5%)

Europe

 

33,284

 

84,769

(60.7%)

 

113,136

 

179,133

(36.8%)

Total revenues

 

162,167

 

264,082

(38.6%)

 

400,980

 

533,966

(24.9%)

Revenues in Canada decreased 13.1% in the second quarter of 2020 in comparison to the same period in 2019 primarily due to decreased volumes across a number of programs and lower proprietary product sales, partially offset by higher repair and overhaul sales and the strengthening of the United States dollar relative to the Canadian dollar when compared to the same period in the prior year.

Revenues in United States decreased by 45.5% in the second quarter of 2020 when compared to the second quarter of 2019, largely due to volume decreases for single aisle aircraft, specifically the Boeing 737 MAX, offset in part by favourable foreign exchange impact due to the strengthening of the United States dollar against the Canadian dollar.

European revenues decreased 60.7% in the second quarter of 2020 compared to the corresponding period in 2019 primarily driven by build rate reductions for both single aisle and wide body aircrafts.

Gross Profit

 

Three month period

Six month period

 

ended June 30

ended June 30

Expressed in thousands of dollars

 

2020

 

2019

Change

 

2020

 

2019

Change

Gross profit

 

25,343

 

45,090

(43.8%)

 

62,115

 

87,911

(29.3%)

Percentage of revenues

 

15.6%

 

17.1%

 

 

15.5%

 

16.5%

 

Gross profit of $25.3 million for the second quarter of 2020 was $19.7 million lower than the second quarter of 2019 gross profit of $45.1 million, and gross profit as a percentage of revenues of 15.6% for the second quarter of 2020 was lower than the second quarter of 2019 of 17.1%. The lower gross profit in the current quarter when compared to the same quarter in 2019 was primarily driven by decreased volumes in a number of commercial programs, offset in part by production efficiencies realized on certain programs and the recognition of $7.9 million in subsidies from the Canada Emergency Wage Subsidy (“CEWS”) program.

Administrative and General Expenses

 

Three month period

Six month period

 

ended June 30

ended June 30

Expressed in thousands of dollars

 

2020

 

2019

Change

 

2020

 

2019

Change

Administrative and general expenses

 

12,597

 

16,290

(22.7%)

 

28,273

 

31,590

(10.5%)

Percentage of revenues

 

7.8%

 

6.2%

 

 

7.1%

 

5.9%

 

Administrative and general expenses as a percentage of revenues of 7.8% for the second quarter of 2020 were 1.6% higher than the same period of 2019. Administrative and general expenses decreased $3.7 million to $12.6 million in the second quarter of 2020 compared to $16.3 million in the second quarter of 2019 mainly due to lower discretionary expenses, lower salary and salary related expenses, subsidies of $0.7 million received from the CEWS program and cost reductions across the majority of the expense categories to align with current business volumes.

Restructuring and Other

 

Three month period

Six month period

 

ended June 30

ended June 30

Expressed in thousands of dollars

 

2020

 

2019

 

2020

 

2019

Restructuring

 

709

 

 

709

 

Foreign exchange loss (gain)

 

1,006

 

(1,106)

 

(4,779)

 

(653)

(Gain) loss on disposal of property, plant and equipment

 

(62)

 

38

 

(43)

 

(47)

Other

 

 

815

 

(172)

 

1,005

Total restructuring and other

 

1,653

 

(253)

 

(4,285)

 

305

 

Total restructuring and other for the second quarter of 2020 included a $0.7 million restructuring cost related to one-time cost of streamlining operations, and a $1.0 million foreign exchange loss compared to a $1.1 million foreign exchange gain in the same period of 2019, mainly driven by the movements in balances denominated in foreign currencies and the fluctuations of the foreign exchange rates.

Interest Expense

 

Three month period

Six month period

 

ended June 30

ended June 30

Expressed in thousands of dollars

 

2020

 

2019

 

2020

 

2019

Interest on bank indebtedness and long-term debt

 

79

 

166

 

145

 

126

Accretion charge for borrowings, lease liabilities and long-term debt

 

795

 

628

 

1,609

 

1,173

Discount on sale of accounts receivable

 

234

 

497

 

554

 

1,060

Total interest expense

 

1,108

 

1,291

 

2,308

 

2,359

 

Total interest expense of $1.1 million in the second quarter of 2020 was $0.2 million lower than the second quarter of 2019 amount of $1.3 million mainly due to lower discount on sale of accounts receivables offset by higher accretion charge on lease liabilities.

Provision for Income Taxes

 

Three month period

Six month period

 

ended June 30

ended June 30

Expressed in thousands of dollars

 

2020

 

2019

 

2020

 

2019

Current income tax (recovery) expense

 

(1,152)

 

2,506

 

895

 

5,311

Deferred income tax expense

 

5,034

 

3,540

 

8,747

 

6,221

Income tax expense

 

3,882

 

6,046

 

9,642

 

11,532

Effective tax rate

 

38.9%

 

21.8%

 

26.9%

 

21.5%

 

Income tax expense for the three months ended June 30, 2020 was $3.9 million, representing an effective income tax rate of 38.9% compared to 21.8% for the same period of 2019. The change in effective tax rate and current and deferred income tax expenses year over year was primarily due to change in mix of income and loss across the different jurisdictions in which the Corporation operates.

3. Selected Quarterly Financial Information

A summary view of Magellan’s quarterly financial performance

 

 

2020

 

 

 

2019

 

2018

Expressed in millions of dollars,

except per share amounts

Jun 30

Mar 31

Dec 31

Sep 30

Jun 30

Mar 31

Dec 31

Sep 30

Revenues

162.2

238.8

246.7

235.6

264.1

269.9

254.4

226.5

Income before taxes

10.0

25.8

11.7

19.6

27.8

25.9

38.5

23.4

Net Income

6.1

20.1

9.4

15.8

21.7

20.4

29.5

18.6

Net Income per share

 

 

 

 

 

 

 

 

Basic and diluted

0.10

0.34

0.16

0.27

0.37

0.35

0.51

0.32

EBITDA1

24.8

41.5

27.9

34.1

42.7

40.5

50.7

35.5

1 EBITDA is not an IFRS financial measure. Please see the “Reconciliation of Net Income to EBITDA” section for more information.

Revenues and net income reported in the quarterly financial information were impacted by the movements in the Canadian dollar relative to the United States dollar and British pound, when the Corporation translates its foreign operations to Canadian dollars. Further, the movements in the United States dollar relative to the British pound impact the Corporation’s United States dollar exposures in its European operations. During the periods reported, the average quarterly exchange rate of the United States dollar relative to the Canadian dollar fluctuated between a high of 1.3859 in the second quarter of 2020 and a low of 1.3069 in the third quarter of 2018. The average quarterly exchange rate of the British pound relative to the Canadian dollar moved from a high of 1.7315 in the first quarter of 2019 to a low of 1.6280 in the third quarter of 2019. The average quarterly exchange rate of the British pound relative to the United States dollar reached its high of 1.3037 in the third quarter of 2018 and hit a low of 1.2327 in the third quarter of 2019.

Revenue for the second quarter of 2020 of $162.2 million was lower than that in the second quarter of 2019. The average quarterly exchange rate of the United States dollar relative to the Canadian dollar in the second quarter of 2020 was 1.3859 versus 1.3375 in the same period of 2019. The average quarterly exchange rate of the British pound relative to the Canadian dollar moved from 1.7190 in the second quarter of 2019 to 1.7203 during the current quarter. The average quarterly exchange rate of the British pound relative to the United States dollar decreased from 1.2852 in the second quarter of 2019 to 1.2388 in the current quarter. Had the foreign exchange rates remained at levels experienced in the second quarter of 2019, reported revenues in the second quarter of 2020 would have been lower by $4.2 million.

As discussed above, net income reported in the quarterly information was impacted by the foreign exchange movements. In the fourth quarter of 2018, the Corporation recorded a net gain of $9.7 million related to prior acquisitions. The fourth quarter of 2019 was impacted by volume decrease in Europe, production inefficiencies in certain operating divisions and an accrual recorded in relation to the wind-down of the A380 program. Results for the second quarter of 2020 were impacted by volume decreases in a number of commercial programs due to COVID-19. In addition, the Corporation recognized a $8.6 million government subsidy relating to the CEWS program in order to reduce the expense that the grant is intended to offset.

4. Reconciliation of Net Income to EBITDA and Adjusted EBITDA

A description and reconciliation of certain non-IFRS measures used by management

In addition to the primary measures of earnings and earnings per share (basic and diluted) in accordance with IFRS, the Corporation includes EBITDA (earnings before interest expense, income taxes and depreciation and amortization) and Adjusted EBITDA (earnings before interest expense, income taxes, depreciation and amortization, and restructuring) in this quarterly statement. The Corporation has provided these measures because it believes this information is used by certain investors to assess financial performance and that EBITDA and Adjusted EBITDA are useful supplemental measures as they provide an indication of the results generated by the Corporation’s principal business activities prior to consideration of how these activities are financed and how the results are taxed in the various jurisdictions. Each of the components of these measures is calculated in accordance with IFRS, but EBITDA and Adjusted EBITDA are not recognized measures under IFRS, and the Corporation’s method of calculation may not be comparable with that of other companies. Accordingly, EBITDA and Adjusted EBITDA should not be used as an alternative to net income as determined in accordance with IFRS or as an alternative to cash provided by or used in operations.

 

Three month period

Six month period

 

ended June 30

ended June 30

Expressed in thousands of dollars

 

2020

 

2019

 

2020

 

2019

Net income

 

6,103

 

21,716

 

26,177

 

42,125

Add back:

 

 

 

 

 

 

 

 

Interest

 

1,108

 

1,291

 

2,308

 

2,359

Taxes

 

3,882

 

6,046

 

9,642

 

11,532

Depreciation and amortization

 

13,723

 

13,622

 

28,232

 

27,152

EBITDA

 

24,816

 

42,675

 

66,359

 

83,168

Add back:

 

 

 

 

 

 

 

 

Restructuring

 

709

 

 

709

 

Adjusted EBITDA

 

25,525

 

42,675

 

67,068

 

83,168

Adjusted EBITDA decreased $17.2 million or 40.2% to $25.5 million for the second quarter of 2020, compared to $42.7 million in the second quarter of 2019 mainly as a result of lower net income and taxes driven by volume decreases.

5. Liquidity and Capital Resources

A discussion of Magellan’s cash flow, liquidity, credit facilities and other disclosures

The Corporation’s liquidity needs can be met through a variety of sources including cash on hand, cash provided by operations, short-term borrowings from its credit facility and accounts receivable securitization program, and long-term debt and equity capacity. Principal uses of cash are for operational requirements, capital expenditures and dividend payments. Based on current funds available and expected cash flow from operating activities, management believes that the Corporation has sufficient funds available to meet its liquidity requirements at any point in time. However, if cash from operating activities is lower than expected or capital projects exceed current estimates, or if the Corporation incurs major unanticipated expenses, it may be required to seek additional capital in the form of debt or equity or a combination of both.

Cash Flow from Operations

 

Three month period

Six month period

 

ended June 30

ended June 30

Expressed in thousands of dollars

 

2020

 

2019

 

2020

 

2019

Decrease (increase) in accounts receivable

 

55,627

 

9,020

 

25,694

 

(13,686)

Decrease (increase) in contract assets

 

2,508

 

(6,588)

 

(4,205)

 

(18,324)

Increase in inventories

 

(16,278)

 

(5,962)

 

(29,827)

 

(8,024)

Decrease (increase) in prepaid expenses and other

 

4,135

 

(590)

 

(286)

 

(3,416)

(Decrease) increase in accounts payable, accrued liabilities and provisions

 

(24,439)

 

(8,030)

 

(27,273)

 

4,344

Changes in non-cash working capital balances

 

21,553

 

(12,150)

 

(35,897)

 

(39,106)

Cash provided by operating activities

 

46,739

 

25,585

 

27,747

 

33,641

For the three months ended June 30, 2020 the Corporation generated $46.7 million from operating activities, compared to $25.6 million in the second quarter of 2019, mainly driven by a favourable working capital change offset by lower net income. The favourable movement of non-cash working capital balances was largely due to decreases in accounts receivable from lower revenues, lower contract assets from the timing of production and billing related to products transferred over time, and lower prepaid expenses. This was in part offset by an increase in inventories driven by production delays, and decreases in accounts payable, accrued liabilities and provisions mainly due to the reduced level of purchases and timing of payments.

Investing Activities

 

Three month period

Six month period

 

ended June 30

ended June 30

Expressed in thousands of dollars

 

2020

 

2019

 

2020

 

2019

Business combination, net of cash acquired

 

 

 

 

(2,661)

Purchase of property, plant and equipment

 

(2,475)

 

(8,839)

 

(6,685)

 

(18,346)

Proceeds from disposal of property, plant and equipment

 

107

 

124

 

107

 

359

Increase in intangible and other assets

 

(4,216)

 

(3,163)

 

(7,207)

 

(9,229)

Cash used in investing activities

 

(6,584)

 

(11,878)

 

(13,785)

 

(29,877)

Investing activities used $6.6 million in cash for the second quarter of 2020 compared to $11.9 million in the same quarter of the prior year, a reduction of $5.3 million primarily due to lower levels of investment in property, plant and equipment.

Financing Activities

 

Three month period

Six month period

 

ended June 30

ended June 30

Expressed in thousands of dollars

 

2020

 

2019

 

2020

 

2019

Decrease in debt due within one year

 

(951)

 

(1,600)

 

(3,948)

 

(8,484)

Decrease in long-term debt

 

(646)

 

(802)

 

(1,238)

 

(1,449)

Lease liability payments

 

(1,709)

 

(783)

 

(3,467)

 

(1,684)

Decrease in long-term liabilities and provisions

 

(547)

 

(144)

 

(802)

 

(179)

Increase (decrease) in borrowings subject to specific conditions, net

 

10

 

(822)

 

39

 

(822)

Common share repurchases

 

(486)

 

 

(486)

 

Common share dividend

 

(6,110)

 

(5,821)

 

(12,222)

 

(11,642)

Cash used in financing activities

 

(10,439)

 

(9,972)

 

(22,124)

 

(24,260)

The Corporation has a Bank Credit Facility Agreement with a syndicate of lenders, under which there were no drawings as of June 30, 2020. The Bank Credit Facility Agreement provides for a multi-currency global operating credit facility to be available to Magellan in a maximum aggregate amount of $75 million. The Bank Credit Facility Agreement also includes a $75 million uncommitted accordion provision, which provides Magellan with the option to increase the size of the operating credit facility to $150 million. Under the terms of the Bank Credit Facility Agreement, the operating credit facility expires on September 13, 2021. Any extensions of the operating credit facility are subject to mutual consent of the lenders and the Corporation.

The Corporation used $10.4 million in financing activities in the second quarter of 2020 mainly to repay debt due within one year, long-term debt, lease liabilities, and the payment of dividends.

As at June 30, 2020, the Corporation had made contractual commitments to purchase $14.1 million of capital assets.

Dividends

During the first and second quarter of 2020, the Corporation declared and paid quarterly cash dividends of $0.105 per common shares representing an aggregating dividend payment of $12.2 million.

Subsequent to June 30, 2020, the Corporation announced that its Board of Directors had declared a quarterly cash dividend on its common shares of $0.105 per common share. The dividend will be payable on September 30, 2020 to shareholders of record at the close of business on September 16, 2020.

Normal Course Issuer Bid

On May 25, 2020, the Toronto Stock Exchange (“TSX”) accepted the Corporation’s intention to commence a normal course issuer bid (“NCIB”) which allows the Corporation to repurchase up to 2,910,450 of the Corporation’s issued and outstanding common shares in the open market or otherwise permitted by the TSX. Common shares purchased by the Corporation are cancelled. The program commenced on May 27, 2020 and will terminate on May 26, 2021, or on such earlier date as the Corporation completes its purchase pursuant to the NCIB. During the three-month period ended June 30, 2020, 78,160 common shares were purchased for cancellation for $0.5 million at a volume weighted average price paid of $6.21 per share.

Outstanding Share Information

The authorized capital of the Corporation consists of an unlimited number of Preference Shares, issuable in series, and an unlimited number of common shares. As at August 7, 2020, 58,130,841 common shares were outstanding and no preference shares were outstanding.

6. Financial Instruments

A summary of Magellan’s financial instruments

Derivative Contracts

The Corporation operates internationally, which gives rise to a risk that its income, cash flows and shareholders’ equity may be adversely impacted by fluctuations in foreign exchange rates. Currency risk arises because the amount of the local currency receivable or payable for transactions denominated in foreign currencies may vary due to changes in exchange rates and because the non-Canadian dollar denominated financial statements of the Corporation’s subsidiaries may vary on consolidation into the reporting currency of Canadian dollars. The Corporation from time to time may use derivative financial instruments to help manage foreign exchange risk with the objective of reducing transaction exposures and the resulting volatility of the Corporation’s earnings. The Corporation does not trade in derivatives for speculative purposes. Under these contracts the Corporation is obligated to purchase specified amounts at predetermined dates and exchange rates. These contracts are matched with anticipated cash flows in United States dollars. The counterparties to the foreign currency contracts are all major financial institutions with high credit ratings. As at June 30, 2020, there were no foreign exchange contracts outstanding.

Off Balance Sheet Arrangements

The Corporation does not have any off-balance sheet arrangements that have or reasonably are likely to have a material effect on its financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. As a result, the Corporation is not exposed materially to any financing, liquidity, market or credit risk that could arise if it had engaged in these arrangements.

7. Related Party Transactions

A summary of Magellan’s transactions with related parties

For the three and six month periods ended June 30, 2020, the Corporation had no material transactions with related parties as defined in IAS 24 Related Party Disclosures.

8. Risk Factors

A summary of risks and uncertainties facing Magellan

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 help identify and manage significant operational and financial risks.

In March 2020 the World Health Organization declared coronavirus COVID-19 a global pandemic. This contagious disease outbreak, which has continued to spread, has resulted in governments worldwide enacting emergency measures to combat the spread of the virus. These measures, which include travel bans, self-imposed quarantine periods and social distancing, have caused material disruption to businesses globally resulting in an economic slowdown.

As an emerging risk, the duration and full financial effect of the COVID-19 pandemic is unknown at this time, as is the efficacy of the government and central bank interventions, the Corporation’s business continuity plan and other mitigating measures. Any estimate of the length and severity of these developments is therefore subject to significant uncertainty, and accordingly estimates of the extent to which the COVID-19 pandemic may materially and adversely affect the Corporation’s operations, financial results and condition in future periods are also subject to significant uncertainty. Therefore, uncertainty about judgments, estimates and assumptions made by management during the preparation of the Corporation’s consolidated financial statements related to potential impacts of the COVID-19 outbreak on revenue, expenses, assets, liabilities, and note disclosures could result in a material adjustment to the carrying value of the asset or liability affected.

The Corporation’s customers and supply chain in the commercial aerospace sector were negatively affected in the second quarter. The Corporation will continue to closely monitor the COVID-19 situation and should the duration, spread or intensity of the pandemic further develop in 2020, the supply chain and customer demand will likely be further affected. These factors may further impact the Corporation’s operating plan, its liquidity and cash flows.

For more information in relation to the risks inherent in Magellan’s business, reference is made to the information under “Risk Factors” in the Corporation’s Management’s Discussion and Analysis for the year ended December 31, 2019 and to the information under “Risks Inherent in Magellan’s Business” in the Corporation’s Annual Information Form for the year ended December 31, 2019, which have been filed with SEDAR at www.sedar.com.

9. Outlook

The outlook for Magellan’s business in 2020

The current extreme economic uncertainty resulting from the ongoing COVID-19 pandemic renders it difficult to issue a specific outlook concerning industry and market conditions over the next 12 months and as such, the following market information is subject to a high degree of risk.

According to the International Air Transport Association (“IATA”), the number of daily commercial flights worldwide hit a low point in April 2020 at just below 20% of pre-pandemic levels. By June 2020, the numbers improved by 10% with Asia Pacific and North America leading a slow rebound. Forecasters have published various scenarios for market recovery suggesting that 2019 traffic volumes may not be experienced again until 2024 or 2025 and they speculate that some permanent downward adjustment in demand for new aircraft might occur. Considering the drastic drop in air travel, airlines are cutting their workforces, downsizing fleets, and cancelling and deferring new aircraft orders. According to media reports, commercial aircraft order deferrals in the second half of 2020 ranged from just under one year to almost 3.5 years depending upon the aircraft.

Airbus’ order backlog increased in the first half of 2020 from 7,482 to 7,584 aircraft following deliveries of 196 aircraft and net orders of 298 aircraft. Order cancellations in the period totaled 67 aircraft. Boeing’s order backlog decreased in the first half of 2020 from 5,625 to 5,232 aircraft following deliveries of 70 aircraft and net order cancellations of 323 aircraft. A total of 382 Boeing orders were cancelled in the period, of which 373 cancellations were for 737 MAX.

Airbus has published A320 build rates of 40 aircraft per month effective through the balance of 2020, which compares to a rate of 60 to 64 aircraft per month pre-pandemic. Their A330 rates are down to 2 aircraft per month from 4 aircraft per month and A350 rates down to 6 aircraft per month from 9 aircraft per month. Boeing resumed production of its 737 aircraft in May 2020. The build rate is currently planned at 7 aircraft per month through the end of 2020. The rate is expected to reach 10 aircraft per month by early 2021, then 17 per month by mid-2021 and 28 per month by early 2022. The Federal Aviation Administration and Boeing completed the first 737 MAX recertification flight tests in early July 2020. The aircraft return-to-service date is not expected to be earlier than September 2020. Meanwhile, Boeing is building its 777 aircraft at 5 aircraft per month, down from 7 aircraft per month and is expected to reduce it to 2 aircraft per month in 2021 and return to 3.5 per month mid-2022. The 787 rate is down from 14 to 10 aircraft per month, and will drop to 6 aircraft per month in 2021. There remains a high degree of risk that build rates will change given the difficulties airlines face in resizing their businesses to align with uncertain levels of air travel and given the difficulties in predicting the timing of market recovery.

Defence markets have been mostly unaffected by the pandemic to date as spending was advanced on various programs to help support vulnerable supply chains through the crisis. While this has been positive for the aerospace market, as time goes on, growing fiscal deficits will likely necessitate a re-prioritization of government funds to other areas.

Supply chain and logistics disruptions due to the pandemic have affected Lockheed Martin’s F-35 program. Lockheed anticipates delivering 18 to 24 jets short of the 141 scheduled for delivery in 2020 and aims to accelerate production again as soon as possible.

The bid response deadline for Canada’s Future Fighter replacement program with its three remaining competitors was delayed to the end of July 2020. A down selection is expected in 2020 or 2021 followed by the identification of the selected bidder, which is expected in early 2022. The first aircraft delivery is planned to be in 2025.

The third quarter of 2020 will be challenging for Magellan’s revenue on a year over year basis as COVID-19 continues to impact aircraft production rates over the short and medium term. In response to this impact, in the second quarter of 2020, Magellan initiated plans to right-size our business with major restructuring charges expected in the third quarter of 2020.

Limited market visibility continues to be problematic during this very dynamic period. Any estimate of the length and severity of market impact is subject to significant uncertainty. The Corporation continues to closely monitor the COVID-19 situation and reassess its operating plan as program updates become available.

Additional Information

Additional information relating to Magellan Aerospace Corporation, including the Corporation’s annual information form, can be found on the SEDAR web site at www.sedar.com.

Forward Looking Statements

This news release 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 uncertainties and assumptions, which may cause actual results to be materially different from those expressed or implied. These forward looking statements can be identified by the words such as "anticipate", "continue", "estimate", "forecast", “expect”, "may", "project", "could", "plan", "intend", "should", "believe" and similar words suggesting future events or future performance. In particular there are forward looking statements contained under the heading "Overview" which outlines certain expectations for future operations. These statements assume the continuation of the current regulatory and legal environment; the continuation of trends for passenger airliner and defence production and are subject to the risks contained herein and outlined in our annual information form. The Corporation assumes no future obligation to update these forward-looking statements except as required by law.

MAGELLAN AEROSPACE CORPORATION

CONDENSED CONSOLIDATED INTERIM STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

 

(unaudited)

 

Three month period

ended June 30

Six month period

ended June 30

(expressed in thousands of Canadian dollars, except per share amounts)

 

2020

2019

2020

2019

 

 

 

 

 

 

Revenues

 

162,167

264,082

400,980

533,966

Cost of revenues

 

136,824

218,992

338,865

446,055

Gross profit

 

25,343

45,090

62,115

87,911

 

 

 

 

 

 

Administrative and general expenses

 

12,597

16,290

28,273

31,590

Restructuring

 

709

709

Other

 

944

(253)

(4,994)

305

Income before interest and income taxes

 

11,093

29,053

38,127

56,016

 

 

 

 

 

 

Interest expense

 

1,108

1,291

2,308

2,359

Income before income taxes

 

9,985

27,762

35,819

53,657

 

 

 

 

 

 

Income taxes

 

 

 

 

 

Current

 

(1,152)

2,506

895

5,311

Deferred

 

5,034

3,540

8,747

6,221

 

 

3,882

6,046

9,642

11,532

Net income

 

6,103

21,716

26,177

42,125

 

 

 

 

 

 

Other comprehensive income

 

 

 

 

 

Other comprehensive (loss) income that may be

 

 

 

 

 

reclassified to profit and loss in subsequent periods:

 

 

 

 

 

Foreign currency translation

 

(24,947)

(16,334)

9,231

(23,044)

Items not to be reclassified to profit and loss

 

 

 

 

 

in subsequent periods:

 

 

 

 

 

Actuarial loss on defined benefit pension plans, net of taxes

(3,007)

(3,340)

(7,766)

(3,101)

Total comprehensive (loss) income, net of taxes

 

(21,851)

2,042

27,642

15,980

 

 

 

 

 

 

Net income per share

 

 

 

 

 

Basic and diluted

 

0.10

0.37

0.45

0.72

MAGELLAN AEROSPACE CORPORATION

 

 

 

 

 

 

CONDENSED CONSOLIDATED INTERIM STATEMENTS OF FINANCIAL POSITION

 

 

 

 

 

 

 

(unaudited)

 

 

 

June 30

December 31

(expressed in thousands of Canadian dollars)

 

 

 

2020

2019

 

 

 

 

 

 

Current assets

 

 

 

 

 

Cash

 

 

 

61,730

69,637

Trade and other receivables

 

 

 

154,306

177,801

Contract assets

 

 

 

83,682

77,967

Inventories

 

 

 

228,009

196,823

Prepaid expenses and other

 

 

 

21,343

21,127

 

 

 

 

549,070

543,355

Non-current assets

 

 

 

 

 

Property, plant and equipment

 

 

 

430,848

439,102

Right-of-use assets

 

 

 

43,384

44,692

Investment properties

 

 

 

2,190

2,180

Intangible assets

 

 

 

66,209

65,373

Goodwill

 

 

 

34,328

34,137

Other assets

 

 

 

9,499

8,770

Deferred tax assets

 

 

 

427

3,556

 

 

 

 

586,885

597,810

Total assets

 

 

 

1,135,955

1,141,165

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

Accounts payable and accrued liabilities and provisions

 

 

 

125,310

151,907

Debt due within one year

 

 

 

44,883

48,144

 

 

 

 

170,193

200,051

Non-current liabilities

 

 

 

 

 

Long-term debt

 

 

 

5,772

6,876

Lease liabilities

 

 

 

38,771

39,794

Borrowings subject to specific conditions

 

 

 

23,122

24,098

Other long-term liabilities and provisions

 

 

 

30,543

20,289

Deferred tax liabilities

 

 

 

36,744

34,181

 

 

 

 

134,952

125,238

 

 

 

 

 

 

Equity

 

 

 

 

 

Share capital

 

 

 

254,098

254,440

Contributed surplus

 

 

 

2,044

2,044

Other paid in capital

 

 

 

13,565

13,565

Retained earnings

 

 

 

522,956

516,911

Accumulated other comprehensive income

 

 

 

34,770

25,539

Equity attributable to equity holders of the Corporation

 

 

 

827,433

812,499

Non-controlling interest

 

 

 

3,377

3,377

Total equity

 

 

 

830,810

815,876

Total liabilities and equity

 

 

 

1,135,955

1,141,165

MAGELLAN AEROSPACE CORPORATION

 

 

 

 

CONDENSED CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS

(unaudited)

 

Three month period

ended June 30

Six month period

ended June 30

(expressed in thousands of Canadian dollars)

 

2020

2019

2020

2019

 

 

 

 

 

 

Cash flow from operating activities

 

 

 

 

 

Net income

 

6,103

21,716

26,177

42,125

Amortization/depreciation of intangible assets, right-of-use assets and property, plant and equipment

 

13,723

13,622

28,232

27,152

(Gain) loss on disposal of property, plant and equipment

 

(62)

38

(43)

(47)

Gain on disposal of joint venture investment

 

(881)

Increase in defined benefit plans

 

232

287

348

133

Accretion

 

795

628

1,609

1,173

Deferred taxes

 

4,365

1,555

7,427

3,373

Loss (income) on investments in joint ventures

 

30

(111)

(106)

(281)

Changes to non-cash working capital

 

21,553

(12,150)

(35,897)

(39,106)

Net cash provided by operating activities

 

46,739

25,585

27,747

33,641

 

 

 

 

 

 

Cash flow from investing activities

 

 

 

 

 

Business combination, net of cash acquired

 

(2,661)

Purchase of property, plant and equipment

 

(2,475)

(8,839)

(6,685)

(18,346)

Proceeds from disposal of property, plant and equipment

 

107

124

107

359

Increase in intangible and other assets

 

(4,216)

(3,163)

(7,207)

(9,229)

Net cash used in investing activities

 

(6,584)

(11,878)

(13,785)

(29,877)

 

 

 

 

 

 

Cash flow from financing activities

 

 

 

 

 

Decrease in debt due within one year

 

(951)

(1,600)

(3,948)

(8,484)

Decrease in long-term debt

 

(646)

(802)

(1,238)

(1,449)

Lease liability payments

 

(1,709)

(783)

(3,467)

(1,684)

Decrease in long-term liabilities and provisions

 

(547)

(144)

(802)

(179)

Increase (decrease) in borrowings subject to specific conditions, net

 

10

(822)

39

(822)

Common share repurchases

 

(486)

(486)

Common share dividend

 

(6,110)

(5,821)

(12,222)

(11,642)

Net cash used in financing activities

 

(10,439)

(9,972)

(22,124)

(24,260)

 

 

 

 

 

 

Increase (decrease) in cash during the period

 

29,716

3,735

(8,162)

(20,496)

Cash at beginning of the period

 

32,430

38,463

69,637

63,316

Effect of exchange rate differences

 

(416)

(825)

255

(1,447)

Cash at end of the period

 

61,730

41,373

61,730

41,373

 

Phillip C. Underwood
President & Chief Executive Officer
T: (905) 677-1889
E: phil.underwood@magellan.aero

Elena M. Milantoni
Chief Financial Officer
T: (905) 677-1889
E: elena.milantoni@magellan.aero

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