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Magellan Aerospace Corporation Announces Financial Results

·37-min read

TORONTO, August 10, 2022--(BUSINESS WIRE)--Magellan Aerospace Corporation ("Magellan" or the "Corporation") released its financial results for the second quarter of 2022. 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

2022

2021

Change

2022

2021

Change

Revenues

192,662

167,638

14.9%

380,371

343,919

10.6%

Gross Profit

12,477

13,636

(8.5%)

23,387

30,715

(23.9%)

Net Income

540

1,060

(49.1%)

(1,485)

4,322

(134.4%)

Net Income per Share

0.01

0.02

(50.0%)

(0.03)

0.07

(142.9%)

Adjusted EBITDA

13,998

15,561

(10.0%)

25,474

34,893

(27.0%)

Adjusted EBITDA per Share

0.24

0.27

(11.1%)

0.44

0.60

(26.7%)

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 (net income before interest, income taxes, depreciation and amortization, goodwill impairment and restructuring), which the Corporation considers to be indicative measures of operating performance and a metric to evaluate profitability. EBITDA and Adjusted EBITDA are not generally accepted earnings measures and should not be considered as alternatives 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, controlled entity and joint venture, Magellan designs, engineers and manufactures aeroengine and aerostructure components for aerospace markets, including advanced products for defence and space markets, and complementary specialty products. The Corporation also supports the aftermarket through 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.

Impact of COVID-19 and Russia’s invasion of Ukraine
The COVID-19 pandemic and its variants continued to disrupt global health and impact economic conditions. Though global air travel has seen signs of recovery, Magellan’s financial results and operations continued to be impacted by the COVID-19 pandemic by way of production schedule changes, either by its customers’ build rate adjustments or due to a broader government directive which resulted in the need to modify work practices to meet appropriate health and safety standards, or by other COVID-19 related impacts on the availability of labour or to the supply chain. While governments have eased some COVID-19 restrictions, the reopening of businesses and economies in certain countries is creating a variety of new challenges, including, for example, higher prices for goods and services, limited availability of products, disruptions to supply chains and labour shortages. Magellan continues to monitor ongoing developments and mitigate risks related to the COVID-19 pandemic and the impact on Magellan’s operations, supply chain, and most importantly the health and safety of its employees.

The ongoing invasion of Ukraine by Russia continued to disrupt supply chains and caused instability in the global economy. The extent and potential magnitude of economic impacts on the aerospace industry remains uncertain. The Corporation, through certain of its customers, participates on certain commercial aircraft programs that are manufactured by Russian companies, and the Corporation indirectly supplies components for aircraft engines which are sold to Russian aircraft manufacturers. Magellan also purchases raw materials from OEM designated suppliers that are situated in Russia. The short and long-term implications of this war on the Corporation are difficult to predict at this time.

Business Update
On April 26, 2022, Magellan Aerospace announced that it had signed a long-term agreement with General Electric Aviation ("GE") for the repair and overhaul (R&O) of major components for the GE F414-GE-400 engine, which powers Boeing’s F/A-18 Block III Super Hornet fighter jet. Finished components will be delivered from Magellan’s facility in Winnipeg, Manitoba. The five-year agreement is the latest milestone in a strong and continuing relationship between the companies that dates back more than 50 years.

On May 2, 2022, Magellan Aerospace announced it had reached a five-year agreement with Safran Landing Systems ("Safran") to manufacture complex machined landing gear components. The agreement included the continued manufacture and processing of Magellan’s current work statement and additional new components, all for commercial aircraft platforms. Deliveries will take place from Magellan’s North American facilities in New York, New York and Kitchener, Ontario. Magellan and Safran have established a solid working relationship over the years, delivering quality and on-time landing systems for major customers. Magellan provides complex hard metal machining expertise and engineering design input, in supporting the Safran team on new product developments.

For additional information, please refer to the "Management’s Discussion and Analysis" section of the Corporation’s 2021 Annual Report available on www.sedar.com.

2. Results of Operations
A discussion of Magellan’s operating results for the second quarter ended June 30, 2022

The Corporation reported revenue in the second quarter of 2022 of $192.7 million, a $25.1 million increase from second quarter of 2021 revenue of $167.6 million. Gross profit and net income for the second quarter of 2022 were $12.5 million and $0.5 million, respectively, in comparison to gross profit of $13.6 million and net income of $1.1 million for the second quarter of 2021.

Consolidated Revenue

Three month period

Six month period

ended June 30

ended June 30

Expressed in thousands of dollars

2022

2021

Change

2022

2021

Change

Canada

85,650

75,820

13.0%

170,444

156,856

8.7%

United States

47,711

42,117

13.3%

92,645

87,926

5.4%

Europe

59,301

49,701

19.3%

117,282

99,137

18.3%

Total revenue

192,662

167,638

14.9%

380,371

343,919

10.6%

The Corporation’s revenue in the second quarter of 2022 improved from the second quarter of 2021 due to volume recovery as global domestic air travel has been continually increased since early 2021.

Revenue in Canada increased 13.0% in the second quarter of 2022 compared to the corresponding period in 2021, primarily impacted by volume increases for engine repairs, advanced defense and space and casting products, and favourable foreign exchange impact driven by the strengthening of the United States dollar relative to the Canadian dollar. These increases were offset in part by volume decreases for certain programs resulted from scheduling changes. On a currency neutral basis, Canadian revenues in the second quarter of 2022 increased by 11.3% over the same period of 2021.

Revenue in the United States increased by 13.3% in the second quarter of 2022 compared to the second quarter of 2021, largely due to increased volume for single aisle aircraft and spare parts as Boeing continued to ramp up production for 737 MAX and favourable foreign exchange impact due to the strengthening of the United States dollar relative to the Canadian dollar, offset in part by volume decreases for wide-body aircraft products, specifically the Boeing 787 where deliveries had been halted. On a currency neutral basis, revenues in the United States increased 9.0% in the second quarter of 2022 over the same period in 2021.

European revenue in the second quarter of 2022 increased 19.3% compared to the corresponding period in 2021 primarily driven by build rate recovery for single aisle aircraft, and the favourable foreign exchange impact resulted from the strengthening of the United States dollar relative to the British pound. On a currency neutral basis, European revenues in the second quarter of 2022 increased by 14.6% when compared to the same period in 2021.

Gross Profit

Three month period

Six month period

ended June 30

ended June 30

Expressed in thousands of dollars

2022

2021

Change

2022

2021

Change

Gross profit

12,477

13,636

(8.5%)

23,387

30,715

(23.9%)

Percentage of revenue

6.5%

8.1%

6.1%

8.9%

Gross profit of $12.5 million for the second quarter of 2022 was $1.1 million lower than the $13.6 million gross profit for the second quarter of 2021, and gross profit as a percentage of revenues of 6.5% for the second quarter of 2022 decreased from 8.1% recorded in the same period in 2021. The decrease in gross profit was primarily impacted by the $3.7 million Canada Emergency Wage Subsidy ("CEWS") recorded in the second quarter of 2021 versus no CEWS recorded in the second quarter of 2022, higher material and production costs due to supply chain disruptions, inflation and arrears recovery on certain programs, offset in part by volume increases in certain programs and favourable foreign exchange impact due to the strengthening of the United States dollar relative to the British pound.

Administrative and General Expenses

Three month period

Six month period

ended June 30

ended June 30

Expressed in thousands of dollars

2022

2021

Change

2022

2021

Change

Administrative and general expenses

12,625

10,518

20.0%

25,439

22,162

14.8%

Percentage of revenues

6.6%

6.3%

6.7%

6.4%

Administrative and general expenses as a percentage of revenues was 6.6% for the second quarter of 2022, higher than the same period of 2021 percentage of revenues of 6.3%. Administrative and general expenses increased $2.1 million or 20.0% to $12.6 million in the second quarter of 2022 compared to $10.5 million in the second quarter of 2021 mainly due to higher travel, accommodation and trade show expenses as travel restrictions were lifted, in addition to increased consulting and salary and benefit expenses.

Restructuring

Three month period

Six month period

ended June 30

ended June 30

Expressed in thousands of dollars

2022

2021

2022

2021

Restructuring

17

676

82

852

Restructuring costs incurred mainly related to the closure of the Bournemouth manufacturing facilities.

Other

Three month period

Six month period

ended June 30

ended June 30

Expressed in thousands of dollars

2022

2021

2022

2021

Foreign exchange (gain) loss

(2,169)

513

(3,297)

(370)

Loss (gain) on sale of capital assets

13

(39)

(108)

(12)

Gain on disposal of investment property

(350)

(350)

Total Other

(2,156)

124

(3,405)

(732)

Other gain for the second quarter of 2022 included a $2.2 million foreign exchange gain compared to a $0.5 million foreign exchange loss in the second quarter of the prior year. The movements in balances denominated in foreign currencies and the fluctuations of the foreign exchange rates impact the net foreign exchange gain or loss recorded in a quarter. In addition, a $0.4 million gain was recorded in the second quarter of 2021 relating to the disposal for proceeds of $0.7 million of an investment property.

Interest Expense

Three month period

Six month period

ended June 30

ended June 30

Expressed in thousands of dollars

2022

2021

2022

2021

Interest on bank indebtedness and long-term debt

154

48

243

110

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

613

650

1,202

1,295

Discount on sale of accounts receivable

11

34

32

228

Total interest expense

778

732

1,477

1,633

Total interest expense of $0.8 million in the second quarter of 2022 increased $0.1 million compared to the second quarter of 2021 mainly due to higher interest on bank indebtedness and long-term debt offset in part by lower accretion charge on lease liabilities and long-term debt as principal amounts decreased.

Provision for Income Taxes

Three month period

Six month period

ended June 30

ended June 30

Expressed in thousands of dollars

2022

2021

2022

2021

Current income tax expense

2,314

2,616

4,161

5,853

Deferred income tax (recovery)

(1,641)

(2,090)

(2,882)

(3,375)

Income tax expense

673

526

1,279

2,478

Effective tax rate

55.5%

33.2%

(620.9%)

36.4%

Income tax expense for the three months ended June 30, 2022 was $0.7 million, representing an effective income tax rate of 55.5% compared to 33.2% for the same period of 2021. The change in the effective tax rate and current and deferred income tax expenses year over year was primarily due to the change in mix of income and losses across the different jurisdictions in which the Corporation operates and reversal of temporary differences.

3. Selected Quarterly Financial Information
A summary view of Magellan’s quarterly financial performance

2022

2021

2020

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

192.7

187.7

178.0

166.4

167.6

176.3

180.1

163.4

Income before taxes

1.2

(1.4)

(6.2)

1.3

1.6

5.2

(23.6)

2.2

Net Income

0.5

(2.0)

(5.8)

0.5

1.1

3.3

(22.9)

0.0

Net Income per share

Basic and diluted

0.01

(0.04)

(0.10)

0.01

0.02

0.06

(0.40)

0.00

EBITDA1

14.0

11.4

6.5

16.1

14.9

19.2

(6.8)

16.3

Adjusted EBITDA1

14.0

11.5

7.3

16.7

15.6

19.3

11.5

21.8

1 EBITDA and Adjusted EBITDA are not IFRS financial measures. Please see Section 4 the "Reconciliation of Net Income to EBITDA and Adjusted EBITDA" section for more information.

Revenues and net income in the quarter were also impacted by the movements of 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 1.3316 in the third quarter of 2020 and a low of 1.2280 in the second quarter of 2021. The average quarterly exchange rate of the British pound relative to the Canadian dollar reached a high of 1.7461 in the first quarter of 2021 and hit a low of 1.6031 in the second quarter of 2022. The average quarterly exchange rate of the British pound relative to the United States dollar reached a high of 1.3974 in the second quarter of 2021 and hit a low of 1.2601 in the current quarter.

Revenue for the second quarter of 2022 of $192.7 million was higher than that in the second quarter of 2021. The average quarterly exchange rate of the United States dollar relative to the Canadian dollar in the second quarter of 2022 was 1.2765 versus 1.2280 in the same period of 2021. The average quarterly exchange rate of the British pound relative to the Canadian dollar decreased from 1.7170 in the second quarter of 2021 to 1.6031 during the current quarter. The average quarterly exchange rate of the British pound relative to the United States dollar decreased from 1.3974 in the second quarter of 2021 to 1.2601 in the current quarter. Had the foreign exchange rates remained at levels experienced in the second quarter of 2021, reported revenues in the second quarter of 2022 would have been lower by $5.4 million.

Commencing in the second quarter of 2020, the Corporation’s results were negatively impacted by COVID-19 pandemic driven volume decreases in a number of commercial programs. Starting from the second quarter of 2021, there were positive signs of revenue recovery as certain commercial program aircraft build rates had started to increase. However, Russia’s ongoing invasion of Ukraine, the supply chain disruptions and workforce shortages are slowing down the rate of recovery. The Corporation applied and recognized the CEWS subsidy of $10.4 million and $1.0 million in the third and fourth quarters of 2020, respectively, and $3.9 million and $3.8 million in the second and fourth quarters of 2021, respectively, and reduced the expense that the subsidy offsets.

During the third quarter of 2020, Magellan implemented cost savings initiatives designed to reduce operating costs by re-balancing its workforce and recognized severance costs of $5.6 million. A $3.4 million cost recovery was recorded against cost of revenues as a result of the cancellation of the Airbus A320neo program in the third quarter of 2020. In the fourth quarter of 2020, the Corporation committed to a plan to restructure its manufacturing divisions in Europe due to decreased demand as a result of a deterioration in economic conditions stemming from COVID-19 and recognized a $5.6 million restructuring charge, including a $2.4 million impairment loss related to assets made obsolete as a result of the plan. Further, a $12.0 million goodwill impairment charge was recorded in the fourth quarter of 2020. During the first and second quarters of 2022, certain facilities of the Corporation continued to experience supply chain disruptions and labour shortages, which resulted in lower absorption of manufacturing costs and higher production costs.

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 (net income before interest, income taxes and depreciation and amortization) and Adjusted EBITDA (net income before interest, income taxes, depreciation and amortization, goodwill impairment and restructuring) in this MD&A. The Corporation has provided this measure because it believes this information is used by certain investors to assess financial performance and that EBITDA 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 component of this measure 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 alternatives to net income as determined in accordance with IFRS or as alternatives 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

2022

2021

2022

2021

Net income (loss)

540

1,060

(1,485)

4,322

Add back:

Interest

778

732

1,477

1,633

Taxes

673

526

1,279

2,478

Depreciation and amortization

11,990

12,567

24,121

25,608

EBITDA

13,981

14,885

25,392

34,041

Add back:

Restructuring

17

676

82

852

Adjusted EBITDA

13,998

15,561

25,474

34,893

Adjusted EBITDA in the second quarter of 2022 decreased $1.6 million to $14.0 million in comparison to $15.6 million in the same quarter of 2021 mainly due to lower net income driven largely by $3.9 million CEWS recorded in the second quarter of 2021, higher material and manufacturing production costs due to supply chain disruption and labour shortages, and production inefficiencies, and lower depreciation and amortization expenses, and restructuring costs.

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, repurchase common shares 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

2022

2021

2022

2021

Increase in accounts receivable

(12,326)

(12,722)

(25,747)

(37,425)

(Increase) decrease in contract assets

(2,729)

5,770

(4,795)

(4,620)

Decrease (increase) in inventories

1,231

2,595

(5,100)

417

Increase in prepaid expenses and other

(1,273)

(264)

(1,048)

(1,852)

Increase in accounts payable, accrued liabilities and provisions

9,059

5,267

21,558

7,474

Changes in non-cash working capital balances

(6,038)

646

(15,132)

(36,006)

Cash provided by (used in) operating activities

5,340

12,849

5,292

(8,049)

For the three months ended June 30, 2022, the Corporation generated $5.3 million from operating activities, compared to $12.8 million in the second quarter of 2021. Changes in non-cash working capital items used cash of $6.0 million, $6.6 million more when compared to $0.6 million cash generation in the prior year. The quarter over quarter changes were largely attributable to increases in contract assets due to timing of production and billing related to products transferred over time, inventories largely due to change in production demand, timing of delivery and material purchases, and prepaid expenses due to timing of payments, offset in part by increases in accounts payable, accrued liabilities and provisions primarily driven by higher material purchases and accruals, and timing of payments.

Investing Activities

Three month period

Six month period

ended June 30

ended June 30

Expressed in thousands of dollars

2022

2021

2022

2021

Purchase of property, plant and equipment

(4,353)

(2,308)

(8,709)

(4,971)

Proceeds from disposal of property, plant and equipment

211

473

86

Proceeds from disposal of investment property

644

644

Increase in intangible and other assets

(281)

(809)

(1,155)

(1,812)

Cash used in investing activities

(4,423)

(2,473)

(9,391)

(6,053)

Investing activities used $4.4 million cash for the second quarter of 2022 compared to $2.5 million cash used in the same quarter of the prior year, an increase of $1.9 million primarily due to higher 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

2022

2021

2022

2021

Decrease in debt due within one year

(26,650)

(35,527)

Decrease in long-term debt

(549)

(559)

(969)

(1,017)

Lease liability payments

(1,397)

(1,695)

(2,862)

(3,372)

(Decrease) increase in long-term liabilities and provisions

(698)

27

(931)

(153)

Decrease in borrowings subject to specific conditions, net

(1,327)

(1,104)

Share repurchases

(258)

(258)

Common share dividend

(4,617)

(6,062)

(10,678)

(12,124)

Cash used in financing activities

(7,519)

(34,939)

(17,025)

(53,297)

On June 30, 2021, the Corporation extended its Bank Credit Facility Agreement ("Agreement") with a syndicate of lenders for an additional two-year period expiring on June 30, 2023. The Agreement provides for a multi-currency global operating credit facility to be available to Magellan in a maximum aggregate amount of $75 million. The 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. Extensions of the Agreement are subject to mutual consent of the syndicate of lenders and the Corporation.

The Corporation used cash of $7.5 million in the second quarter of 2022 primarily for the payment of common share dividends, lease liabilities and long-term debt.

As at June 30, 2022, the Corporation had contractual commitments to purchase $12.7 million of capital assets.

Dividends
During the first and second quarter of 2022, the Corporation declared and paid quarterly cash dividends of $0.105 and $0.08 per common share, respectively, representing an aggregating dividend payment of $10.7 million.

Subsequent to June 30, 2022, the Corporation declared dividends to holders of common shares in the amount of $0.05 per common share payable on September 29, 2022, to shareholders of record at the close of business on September 15, 2022. The ongoing COVID-19 pandemic, continued low production levels largely related to wide-body aircraft, inflation and supply chain and labour constraints negatively impacted the Corporation’s operation in the second quarter of 2022. In light of these operational challenges, the dividend level has been reduced but a dividend was still declared given the Corporation’s strong balance sheet and cash reserves. The Board of Directors of the Corporation continues to review its dividends on a quarterly basis for more visibility of recovery, and ensure that the dividend declared balances the return of capital to shareholders while maintaining adequate financial flexibility and investment in growth initiatives.

Normal Course Issuer Bid
On May 25, 2022, the Corporation’s application to commence a normal course issuer bid ("NCIB") was re-approved, which allows the Corporation to purchase up to 2,886,455 common shares, over a 12-month period commencing May 27, 2022 and ending May 26, 2023. During the three and six month periods ended June 30, 2022, the Corporation purchased a total of 34,100 common shares for cancellation at a volume weighted average price of $7.56 per common share. The Corporation did not purchase common shares for cancellation under the program during the same period in the prior year.

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 5, 2022, 57,650,494 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, 2022, foreign exchange contracts of US$17.9 million and £16.1 million were outstanding with an immaterial fair value. In addition, the Corporation had foreign exchange collar contracts outstanding in amount of $129.6 million US dollars, which extend over the period of the next three years ending in June 2025 that has resulted in negative market to market value of $0.8 million.

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 month period ended June 30, 2022, 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.

The Covid-19 pandemic continues to disrupt global health and impact economic conditions. Though global air travel has seen signs of recovery, Magellan’s financial results and operations continued to be impacted by the COVID-19 pandemic by way of production schedule changes, either by its customers’ build rate adjustments or due to a broader government directive which resulted in the need to modify work practices to meet appropriate health and safety standards, or by other COVID-19 related impacts on the availability of labour or to the supply chain. 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.

The ongoing invasion of Ukraine by Russia and the global response, including imposed economic sanctions, have disrupted supply chains and caused instability in the global economy. The short and long-term implications of the invasion are difficult to predict at this time. The extent and potential magnitude of economic impacts on the aerospace industry and on the Corporation remains uncertain and are difficult to predict at this time. The ongoing invasion could result in a greater impact related to global supply and pricing of energy, precious metals, raw materials and other commodities and components.

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, 2021 and to the information under "Risks Inherent in Magellan’s Business" in the Corporation’s Annual Information Form for the year ended December 31, 2021, which have been filed with SEDAR at www.sedar.com.

9. Outlook
The outlook for Magellan’s business in 2022

Commercial air travel has been continually increasing since early 2021, however a recent surge in travel has resulted in unprecedented stress being placed on the global aviation system, forcing airlines to reduce flight numbers. This along with the impact of Russia’s ongoing invasion of Ukraine and the lingering travel restrictions in Asia-Pacific is dampening global travel recovery. In spite of this challenging environment, airlines are maintaining a positive outlook as they see a strong pent-up demand for air travel.

Boeing released its 2022 Market Outlook, projecting a need for 41,170 new airplanes over the next 20 years, which although down from 43,610 aircraft forecast in 2021, it still represents nearly a doubling of the global airline fleet by 2041. These figures exclude the Russian market, which represents approximately 1,500 additional aircraft. The percentage of single-aisle aircraft has increased to 75% of the global aircraft demand while the percentage of wide body aircraft has dropped. Boeing also reported that it projects worldwide aviation recovery from COVID-19 by early 2024.

Supply chain disruptions and human resource shortages are delaying the timing of planned increases in commercial single-aisle build rates. Boeing planned for a 737 aircraft build rate of 31 per month by early 2022, however this was delayed and the planned rate was only achieved in June 2022. Boeing plans to increase to 38 per month in the first half of 2023, followed by another increase to 47 per month by the end of 2023.

Boeing announced in April 2022, that the first delivery of the 777X would be delayed to early 2025, due to an updated assessment of the time required to meet certification requirements. This placed a temporary pause on 777-9 model production through 2023. Boeing said it was taking advantage of the adjustment to the 777-9 production schedule by adding 777F freighter production capacity. The current 777F aircraft build rate is at 2 aircraft per month.

Also in April 2022, Boeing announced that it had completed required rework on the initial 787’s and that the company continues to work closely with the FAA on the timing of resuming deliveries. Boeing has advised airlines and suppliers that deliveries would resume in the second half of 2022. The current production rate is 2 aircraft per month, a rate which Boeing will begin to gradually increase once deliveries resume.

Airbus is currently building its A320 single-aisle family of aircraft at a rate of 49 aircraft per month, and has plans to reach 54 aircraft per month in the fourth quarter of 2022, and 66 aircraft per month by the end of 2023. Airbus continues with its plans for a rate of 75 aircraft per month in 2025. Airbus’ new A321XLR made its first flight on June 15, 2022 and is planned for entry-into-service in 2024. The A330 build rate remains at 2.2 aircraft per month and is to be 2.8 aircraft per month late in 2022, while the A350 build rate is at 4.5 aircraft per month. The A220 rate is to reach 6.6 aircraft per month in the second half of 2022, 9.8 aircraft per month in 2023, and 14 aircraft per month in the second half of 2025.

In the defence aerospace market, the Russian invasion of Ukraine is driving increased defence spending within many NATO and EU countries. Canada recently announced an investment of C$3 billion to strengthen its defensive air capabilities in the Canadian high north. The new spending is to ensure the country’s military forces can "detect, deter and defend Canadians against threats well into the future". In the United States, the House Armed Services Committee approved its version of the FY23 National Defense Authorization Act (Defense Budget), which included an amendment to increase spending by $37 billion in FY23. This included additional F/A-18E/F Super Hornets, C-130 Transports, and V-22 tiltrotor aircraft. Both announcements could provide opportunities for Magellan.

On June 27, 2022, Lockheed Martin’s Sikorsky Aircraft division announced that it had been awarded a multi-year contract for its UH-60 Blackhawk helicopter. The 5-year contract is for 120 H-60M Blackhawk helicopters, with options to reach 255 aircraft delivered to the U.S. Army and Foreign Military Sales (FMS) customers. Magellan supplies various components on the program. This is expected to be the last multi-year buy for the platform, as a competition is under way to select the UH-60’s replacement, officially known as the Future Long-Range Assault Aircraft (FLRAA). Sikorsky’s Defiant X coaxial design is a finalist in the FLRAA competition, alongside Bell’s V280 Valor tiltrotor. A decision is expected before 2022 year-end.

In March 2022, the Canadian government announced their decision to select Lockheed Martin’s F-35 as the preferred bidder for its fighter replacement program, which was positive news for Magellan. Contract negotiations are currently in progress. The strength of the defence aerospace market remains positive. Despite setbacks to global air travel recovery, pent up demand is driving a continual return to pre-pandemic levels in the commercial market. This recovery is driving single-aisle aircraft rates upwards as the segment remains the primary driver of growth in this aircraft market. Industry experts maintain that the fundamentals for long-term demand of new commercial aircraft remains intact and that the worldwide fleet will still nearly double by 2041.

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

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE (LOSS) INCOME

(unaudited)

Three month period
ended June 30

Six month period
ended June 30

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

2022

2021

2022

2021

Revenue

192,662

167,638

380,371

343,919

Cost of revenue

180,185

154,002

356,984

313,204

Gross profit

12,477

13,636

23,387

30,715

Administrative and general expenses

12,625

10,518

25,439

22,162

Restructuring

17

676

82

852

Other

(2,156)

124

(3,405)

(732)

Income before interest and income taxes

1,991

2,318

1,271

8,433

Interest expense

778

732

1,477

1,633

Income (loss) before income taxes

1,213

1,586

(206)

6,800

Income taxes

Current

2,314

2,616

4,161

5,853

Deferred

(1,641)

(2,090)

(2,882)

(3,375)

673

526

1,279

2,478

Net income (loss)

540

1,060

(1,485)

4,322

Other comprehensive (loss) income

Other comprehensive loss that may be reclassified to profit and loss in subsequent periods:

Foreign currency translation

(1,077)

(5,561)

(13,761)

(11,946)

Items not to be reclassified to profit and loss in subsequent periods:

Actuarial (loss) income on defined benefit pension plans, net of taxes

(41)

2,806

(305)

12,589

Comprehensive (loss) income

(578)

(1,695)

(15,551)

4,965

Net income (loss) per share

Basic and diluted

0.01

0.02

(0.03)

0.07

MAGELLAN AEROSPACE CORPORATION

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

(unaudited)

June 30

December 31

(expressed in thousands of Canadian dollars)

2022

2021

Current assets

Cash

11,210

32,482

Trade and other receivables

190,312

164,234

Contract assets

71,230

66,337

Inventories

210,228

208,577

Prepaid expenses and other

10,163

9,664

493,143

481,294

Non-current assets

Property, plant and equipment

379,915

396,845

Right-of-use assets

31,940

34,389

Investment properties

1,611

1,659

Intangible assets

43,934

47,772

Goodwill

21,181

21,792

Other assets

10,041

11,587

Deferred tax assets

9,543

8,480

498,165

522,524

Total assets

991,308

1,003,818

Current liabilities

Accounts payable and accrued liabilities and provisions

143,730

123,382

Debt due within one year

10,086

10,266

153,816

133,648

Non-current liabilities

Long-term debt

1,765

2,755

Lease liabilities

28,843

30,644

Borrowings subject to specific conditions

23,126

24,101

Other long-term liabilities and provisions

6,962

7,223

Deferred tax liabilities

38,337

39,623

99,033

104,346

Equity

Share capital

252,193

252,342

Contributed surplus

2,044

2,044

Other paid in capital

13,565

13,565

Retained earnings

466,510

479,965

Accumulated other comprehensive income

770

14,531

Equity attributable to equity holders of the Corporation

735,082

762,447

Non-controlling interest

3,377

3,377

Total equity

738,459

765,824

Total liabilities and equity

991,308

1,003,818

MAGELLAN AEROSPACE CORPORATION

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

Three month period
ended June 30

Six month period
ended June 30

(expressed in thousands of Canadian dollars)

2022

2021

2022

2021

Cash flow from operating activities

Net income (loss)

540

1,060

(1,485)

4,322

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

11,990

12,567

24,121

25,608

Loss (gain) on disposal of property, plant and equipment

13

(39)

(108)

(46)

Gain on disposal of investment property

(350)

(350)

Increase (decrease) in defined benefit plans

189

449

(120)

569

Accretion

613

654

1,200

1,304

Deferred taxes

(1,899)

(2,169)

(3,072)

(3,546)

(Income) loss on investments in joint ventures

(68)

31

(112)

96

Changes to non-cash working capital

(6,038)

646

(15,132)

(36,006)

Net cash provided by (used in) operating activities

5,340

12,849

5,292

(8,049)

Cash flow from investing activities

Purchase of property, plant and equipment

(4,353)

(2,308)

(8,709)

(4,971)

Proceeds from disposal of property, plant and equipment

211

473

86

Proceeds from disposal of investment property

644

644

Increase in intangible and other assets

(281)

(809)

(1,155)

(1,812)

Net cash used in investing activities

(4,423)

(2,473)

(9,391)

(6,053)

Cash flow from financing activities

Decrease in debt due within one year

(26,650)

(35,527)

Decrease in long-term debt

(549)

(559)

(969)

(1,017)

Lease liability payments

(1,397)

(1,695)

(2,862)

(3,372)

(Decrease) increase in long-term liabilities and provisions

(698)

27

(931)

(153)

Decrease in borrowings subject to specific conditions, net

(1,327)

(1,104)

Share repurchases

(258)

(258)

Common share dividend

(4,617)

(6,062)

(10,678)

(12,124)

Net cash used in financing activities

(7,519)

(34,939)

(17,025)

(53,297)

Decrease in cash during the period

(6,602)

(24,563)

(21,124)

(67,399)

Cash at beginning of the period

18,050

71,310

32,482

113,938

Effect of exchange rate differences

(238)

(464)

(148)

(256)

Cash at end of the period

11,210

46,283

11,210

46,283

View source version on businesswire.com: https://www.businesswire.com/news/home/20220809006120/en/

Contacts

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

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