Magellan Aerospace Corporation Announces Financial Results

TORONTO--()--Magellan Aerospace Corporation (“Magellan” or the “Corporation”) released its financial results for the fourth quarter of 2022. All amounts are expressed in Canadian dollars unless otherwise indicated. The results are summarized as follows:

 

 

Three month period ended

December 31

Twelve month period ended

December 31

Expressed in thousands of Canadian dollars, except per share amounts

2022

 

2021

 

Change

2022

 

2021

 

Change

Revenues

 

193,110

 

178,012

 

8.5

%

764,580

 

688,358

 

11.1

%

Gross (Loss) Profit

 

(893

)

7,030

 

(112.7

%)

35,065

 

48,330

 

(27.4

%)

Net Loss

 

(20,770

)

(5,757

)

(260.8

%)

(21,692

)

(977

)

(2,120.3

%)

Net Loss per Share

 

(0.36

)

(0.10

)

(260.0

%)

(0.38

)

(0.02

)

(1,800.0

%)

Adjusted EBITDA

 

(4,772

)

7,272

 

(165.6

%)

35,540

 

58,838

 

(39.6

%)

Adjusted EBITDA per Share

 

(0.08

)

0.13

 

(161.5

%)

0.62

 

1.02

 

(39.2

%)

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 earnings before interest, income taxes, depreciation and amortization) and Adjusted EBITDA (earnings 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.

Business Update

On October 11, 2022, Magellan announced a contract award from Sikorsky Aircraft Corporation (“Sikorsky”), a Lockheed Martin Company, for low rate initial production (“LRIP”) of assemblies to support the production of the CH-53K® LRIP configuration helicopter. The multi-year, multi-million dollar agreement will be delivered from Magellan’s New York facility commencing in 2023. The contract consists of hard metal, machined deliverables for the U.S. Marine Corps (“USMC”) for the production of the CH-53K King Stallion, the next generation heavy-lift helicopter being produced to replace the CH-53E Super Stallion. The CH-53K achieved initial operating capability in 2022 and is on track to deploy to the fleet in 2024. The Marine Corps plans to deploy the first CH-53K Marine Expeditionary Unit detachment in fiscal year 2024. The USMC’s procurement objective is 200 helicopters.

On November 22, 2022, Magellan announced the award of a multi-year contract from Lockheed Martin Corporation (“LMCO”) for complex machined titanium components for all three variants of the F-35 aircraft. This multi- million dollar contract will be carried out at Magellan Aerospace’s facility in Kitchener, Ontario over the period of 2023 to 2027. The contract is for shipsets of machined wing tie bars for the aircraft’s leading edge flap. Magellan’s Kitchener facility has industry-leading expertise in titanium machining operations and world-class machining capability, with an emphasis on high speed machining of hard metals such as titanium, Inconel and stainless steel. This latest contract is a continuation of a long-established relationship with LMCO on the global F-35 fighter aircraft program. Magellan’s Kitchener facility was the first international partner on the F-35 program to deliver parts to the program in late 2003. Prior to these deliveries, Kitchener had made significant investment in both equipment and technology that proved to be pivotal in securing its role on the program.

On December 9, 2022, Magellan announced that it will continue producing F-35 Lightning II (“F-35”) horizontal tail assemblies under an agreement with BAE Systems. This significant, multi-year agreement is the continuation of contract awards made to Magellan by BAE Systems and will further Magellan’s participation on the global program. Magellan and BAE Systems have been working together to produce horizontal tails for the global F-35 program for more than a decade, signing the original Letter of Intent for this agreement in 2006. Both companies have since made significant investment in facilities, technologies and training to ensure the successful delivery of these flight-critical assemblies to F-35 prime contractor Lockheed Martin. The horizontal tail assemblies produced at Magellan’s facility in Winnipeg, Manitoba, will be used on the Conventional Takeoff and Landing variant of the F-35. Magellan is targeting to produce more than 1,000 ship sets of horizontal tail assemblies over the life of the F-35 program.

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 attempts to mitigate the 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 cause instability in the global economy. The extent and potential magnitude of economic impacts on the aerospace industry remains uncertain.

For additional information, please refer to the “Management’s Discussion and Analysis” section of the Corporation’s 2022 Annual Report available on www.sedar.com.

2. Results of Operations
A discussion of Magellan’s operating results for the fourth quarter ended December 31, 2022

The Corporation reported revenue in the fourth quarter of 2022 of $193.1 million, a $15.1 million increase from the fourth quarter of 2021 revenue of $178.0 million. Gross loss and net loss for the fourth quarter of 2022 were disappointing at $0.9 million and $20.8 million, respectively, in comparison to a $7.0 million gross profit and $5.8 million net loss for the fourth quarter of 2021.

Consolidated Revenue

 

Three month period

 

Twelve month period

 

ended December 31

 

ended December 31

Expressed in thousands of dollars

 

2022

 

2021

Change

 

2022

 

2021

Change

Canada

 

81,953

 

86,881

(5.7%)

 

329,638

 

315,805

4.4%

United States

 

48,932

 

40,259

21.5%

 

190,011

 

174,260

9.0%

Europe

 

62,225

 

50,872

22.3%

 

244,931

 

198,293

23.5%

Total revenue

 

193,110

 

178,012

8.5%

 

764,580

 

688,358

11.1%

Revenue in Canada decreased 5.7% in the fourth quarter of 2022 compared to the corresponding period in 2021 largely due to volume decreases, mainly for proprietary products and repair and overhaul services, offset in part by higher space revenues. On a currency neutral basis, Canadian revenues in the fourth quarter of 2022 decreased by 8.4% from the same period of 2021.

Revenue in the United States in the fourth quarter of 2022 increased 21.5% from the fourth quarter of 2021 largely driven by volume increases, mainly in single aisle aircraft specifically the Boeing 737, and favourable foreign exchange impact due to the strengthening of the United State dollar relative to the Canadian dollar. On a currency neutral basis, revenues in the United States increased 12.7% in the fourth quarter of 2022 over the same period in 2021.

European revenue in the fourth quarter of 2022 increased 22.3% compared to the corresponding period in 2021 primarily driven by build rate recovery for single aisle aircraft, specifically the Airbus 320. On a currency neutral basis, European revenues in the fourth quarter of 2022 increased by 20.8% when compared to the same period in 2021.

Gross (Loss) Profit

 

Three month period

 

Twelve month period

 

ended December 31

 

ended December 31

Expressed in thousands of dollars

 

2022

 

2021

Change

 

2022

 

2021

Change

Gross (loss) profit

 

(893)

 

7,030

(112.7%)

 

35,065

 

48,330

(27.4%)

Percentage of revenue

 

(0.5%)

 

3.9%

 

 

4.6%

 

7.0%

 

Gross loss of $0.9 million for the fourth quarter of 2022 was $7.9 million lower than the $7.0 million gross profit for the fourth quarter of 2021, and gross loss as a percentage of revenues of (0.5%) for the fourth quarter of 2022 decreased from 3.9% gross profit recorded in the same period in 2021. The decrease in profitability is mainly the result of the effect of inflation in materials, supplies, utilities and labour; and supply chain disruptions which impacted production of goods resulting in production system inefficiencies and lower absorption of manufacturing supplies.

Administrative and General Expenses

 

Three month period

 

Twelve month period

 

ended December 31

 

ended December 31

Expressed in thousands of dollars

 

2022

 

2021

Change

 

2022

 

2021

Change

Administrative and general expenses

 

11,140

 

11,109

0.3%

 

48,690

 

44,559

9.3%

Percentage of revenue

 

5.8%

 

6.2%

 

 

6.4%

 

6.5%

 

Administrative and general expenses as a percentage of revenue was 5.8% for the fourth quarter of 2022, lower than the same period of 2021 percentage of revenue of 6.2%. Administrative and general expenses were consistent with the fourth quarter of 2021.

Restructuring

 

Three month period

 

Twelve month period

 

ended December 31

 

ended December 31

Expressed in thousands of dollars

 

2022

 

 

2021

 

2022

 

2021

Workforce reduction

 

1,930

 

 

 

1,930

 

Closure costs

 

(5

)

 

773

 

199

 

2,182

Impairment of property, plant and equipment

 

1,772

 

 

 

1,772

 

Restructuring

 

3,697

 

 

773

 

3,901

 

2,182

Restructuring costs of $3.7 million incurred in the fourth quarter of 2022 as compared to $0.8 million in the fourth quarter of 2021, both mainly related to the closure of the Bournemouth treatment and manufacturing facilities. Included in the restructuring charge for the fourth quarter of 2022 is an additional $1.1 million of workforce reduction costs.

Other

 

Three month period

 

Twelve month period

 

ended December 31

 

ended December 31

Expressed in thousands of dollars

 

2022

 

 

2021

 

2022

 

 

2021

 

Foreign exchange loss (gain)

 

3,817

 

 

379

 

(2,251

)

 

(2,548

)

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

 

322

 

 

365

 

22

 

 

336

 

Gain on disposal of investment properties

 

 

 

 

 

(608

)

Loss on pension settlement

 

631

 

 

 

631

 

 

Other

 

(162

)

 

132

 

(162

)

 

(355

)

Total Other

 

4,608

 

 

876

 

(1,760

)

 

(3,175

)

Other for the fourth quarter of 2022 included a $3.8 million foreign exchange loss compared to a $0.4 million foreign exchange loss in the fourth 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.

Interest Expense

 

Three month period

 

Twelve month period

 

ended December 31

 

ended December 31

Expressed in thousands of dollars

 

2022

 

2021

 

 

2022

 

2021

Interest expense (income) on bank indebtedness and long-term debt

 

76

 

(193

)

 

423

 

43

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

 

488

 

639

 

 

2,314

 

2,604

Discount on sale of accounts receivable

 

3

 

25

 

 

101

 

248

Total interest expense

 

567

 

471

 

 

2,838

 

2,895

Total interest expense of $0.6 million in the fourth quarter of 2022 increased $0.1 million compared to the fourth quarter of 2021 mainly due to higher interest expense, offset in part by lower accretion charge for borrowings, lease liabilities and long-term debt.

Provision for Income Taxes

 

Three month period

 

Twelve month period

 

ended December 31

 

ended December 31

Expressed in thousands of dollars

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Current income tax (recovery) expense

 

(1,166

)

 

331

 

 

5,780

 

 

8,898

 

Deferred income tax expense (recovery)

 

1,031

 

 

(773

)

 

(2,692

)

 

(6,052

)

Income tax (recovery) expense

 

(135

)

 

(442

)

 

3,088

 

 

2,846

 

Effective tax rate

 

0.6

%

 

7.1

%

 

(16.6

%)

 

152.3

%

 

Income tax recovery for the fourth quarter ended December 31, 2022 was $0.1 million, representing an effective income tax rate of 0.6% compared to 7.1% for the same period of 2021 mainly resulting from the recognition of a valuation allowance against deferred tax assets of $6.7 million. 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 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

Expressed in millions of dollars,

except per share amounts

Dec 31

Sep 30

Jun 30

Mar 31

Dec 31

Sep 30

Jun 30

Mar 31

Revenues

193.1

 

191.1

192.7

187.7

 

178.0

 

166.4

167.6

176.3

(Loss) income before taxes

(20.9

)

2.5

1.2

(1.4

)

(6.2

)

1.3

1.6

5.2

Net (loss) income

(20.8

)

0.6

0.5

(2.0

)

(5.8

)

0.5

1.1

3.3

Net (loss) income per share

 

 

 

 

 

 

 

 

Basic and diluted

(0.36

)

0.01

0.01

(0.04

)

(0.10

)

0.01

0.02

0.06

EBITDA1

(8.5

)

14.7

14.0

11.4

 

6.5

 

16.1

14.9

19.2

Adjusted EBITDA1

(4.8

)

14.8

14.0

11.5

 

7.3

 

16.7

15.6

19.3

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 loss in the quarter were 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 1.3580 in the fourth quarter of 2022 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 1.5350 in the third 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 1.1649 in the third quarter of 2022.

Revenue for the fourth quarter of 2022 of $193.1 million was higher than that in the fourth quarter of 2021. The average quarterly exchange rate of the United States dollar relative to the Canadian dollar in the fourth quarter of 2022 was 1.3580 versus 1.2600 in the same period of 2021. The average quarterly exchange rate of the British pound relative to the Canadian dollar decreased from 1.6991 in the fourth quarter of 2021 to 1.5953 during the current quarter. The average quarterly exchange rate of the British pound relative to the United States dollar weakened from 1.3478 in the fourth quarter of 2021 to 1.1729 in the current quarter. Had the foreign exchange rates remained at levels experienced in the fourth quarter of 2021, reported revenues in the fourth quarter of 2022 would have been lower by $7.7 million.

Revenues and net income were also negatively impacted by continued effects from the COVID-19 pandemic, driving reduced volumes and supply chain disruptions. In addition, inflation on material, supplies, utilities and labour impacted the results in the current quarter. Since the third quarter of 2021, the Corporation began to see modest sequential growth in revenue as global domestic air travel continues to recover to pre COVID-19 levels.

In response to COVID-19, the Corporation applied and recognized the CEWS subsidy of $3.9 million and $3.8 million in the second and fourth quarters of 2021, and reduced the expense that the subsidy offsets (none in 2022). In the fourth quarter of 2022, the Corporation continued the restructuring efforts in Europe of a plan initiated in 2020 to lower its production cost base and recognized a $2.8 million restructuring charge, including a $1.8 million impairment loss related to assets made obsolete as a result of the plan.

4. Reconciliation of Net Income (Loss) 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, income taxes and depreciation and amortization) and Adjusted EBITDA (earnings 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

 

Twelve month period

 

 

ended December 31

 

ended December 31

 

Expressed in thousands of dollars

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Net loss

 

(20,770

)

 

(5,757

)

 

(21,692

)

 

(977

)

Add back:

 

 

 

 

 

 

 

 

Interest

 

567

 

 

471

 

 

2,838

 

 

2,895

 

Taxes

 

(135

)

 

(442

)

 

3,088

 

 

2,846

 

Depreciation and amortization

 

11,869

 

 

12,227

 

 

47,405

 

 

51,892

 

EBITDA

 

(8,469

)

 

6,499

 

 

31,639

 

 

56,656

 

Add back:

 

 

 

 

 

 

 

 

Restructuring

 

3,697

 

 

773

 

 

3,901

 

 

2,182

 

Goodwill impairment

 

 

 

 

 

 

Adjusted EBITDA

 

(4,772

)

 

7,272

 

 

35,540

 

 

58,838

 

Adjusted EBITDA in the fourth quarter of 2022 decreased $12.1 million to negative $4.8 million in comparison to $7.3 million in the same quarter of 2021 mainly as a result of higher net loss and lower depreciation and amortization, offset by higher restructuring costs. In 2022, certain facilities of the Corporation continue to experience supply chain disruptions and inflationary cost pressures which is lowering EBITDA results. In addition, lower pre-COVID production volumes has resulted in lower absorption of manufacturing costs further lowering EBITDA.

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, common share repurchases 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

 

Twelve month period

 

ended December 31

 

ended December 31

Expressed in thousands of dollars

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Decrease (increase) in accounts receivable

 

30,282

 

 

(1,658

)

 

(3,223

)

 

(50,347

)

(Increase) decrease in contract assets

 

(920

)

 

6,237

 

 

2,437

 

 

3,895

 

(Increase) decrease in inventories

 

(4,203

)

 

6,466

 

 

(15,789

)

 

3,234

 

Decrease (increase) in prepaid expenses and other

 

524

 

 

7,192

 

 

(437

)

 

2,224

 

(Decrease) increase in accounts payable, accrued

liabilities and provisions

 

(913

)

 

(5,788

)

 

28,727

 

 

7,237

 

(Decrease) increase in contract liabilities

 

(2,155

)

 

 

18,503

 

 

Changes in non-cash working capital balances

 

22,613

 

 

12,449

 

 

30,218

 

 

(33,757

)

Cash provided by operating activities

 

18,784

 

 

17,523

 

 

58,540

 

 

12,526

 

For the three months ended December 31, 2022, the Corporation generated $18.8 million from operating activities, compared to $17.5 million in the fourth quarter of 2021. Changes in non-cash working capital items generated cash of $22.6 million as compared to $12.4 million in the same quarter of the prior year. The quarter over quarter increase of $10.2 million were largely attributable to decreases in accounts receivables from timing of customer payments, offset in part by higher inventories due to timing of material purchases, lower accounts payable, accrued liabilities and provisions at the year-end primarily driven by timing of supplier and milestone payments and decreases in contract liabilities.

Investing Activities

 

Three month period

 

Twelve month period

 

ended December 31

 

ended December 31

Expressed in thousands of dollars

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Purchase of property, plant and equipment

 

(8,691

)

 

(9,127

)

 

(23,494

)

 

(17,675

)

Proceeds from disposal of property, plant and equipment

 

117

 

 

163

 

 

607

 

 

509

 

Proceeds from disposal of investment property

 

 

 

 

1,000

 

Increase in intangibles and other assets

 

(588

)

 

(2,124

)

 

(969

)

 

(4,638

)

Cash used in investing activities

 

(9,162

)

 

(11,088

)

 

(23,856

)

 

(20,804

)

 

Investing activities used $9.2 million of cash for the fourth quarter of 2022 compared to $11.1 million of cash used in the same quarter of the prior year, a decrease of $1.9 million primarily due to lower long-term receivables and deposits recorded in other assets and lower level of property, plant and equipment investment in the current quarter when compared to the same quarter of 2021.

Financing Activities

 

Three month period

 

Twelve month period

 

 

ended December 31

 

ended December 31

 

Expressed in thousands of dollars

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Decrease in debt due within one year

 

 

(17

)

 

 

(39,441

)

Decrease in long-term debt

 

(539

)

 

(151

)

 

(2,047

)

 

(1,516

)

Lease liability payments

 

(1,376

)

 

(1,816

)

 

(5,619

)

 

(6,707

)

Increase (decrease) in long-term liabilities and provisions

 

401

 

 

273

 

 

(225

)

 

6

 

Decrease in borrowings subject to specific conditions, net

 

 

 

(1,327

)

 

(1,104

)

Common share repurchases

 

(828

)

 

 

(2,062

)

 

Common share dividend

 

(1,437

)

 

(6,062

)

 

(14,994

)

 

(24,247

)

Cash used in financing activities

 

(3,779

)

 

(7,773

)

 

(26,274

)

 

(73,009

)

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 $3.8 million of cash for financing activities in the fourth quarter of 2022 primarily for the payment of common share dividends, lease liabilities, common share repurchases and long-term debt repayments.

As at December 31, 2022, the Corporation had contractual commitments to purchase $6.7 million of capital assets.

Dividends

During each of the four quarters of 2022, the Corporation declared and paid quarterly cash dividends of $0.105, $0.08, $0.05 and $0.025 per common share representing aggregate dividend payments of $15.0 million. Of this amount, $1.4 million was declared and paid in the fourth quarter.

Subsequent to December 31, 2022, the Corporation announced that its Board of Directors had declared a quarterly cash dividend on its common shares of $0.025 per common share. The dividend will be payable on March 31, 2023 to shareholders of record at the close of business on March 17, 2023. The ongoing impacts from the COVID-19 pandemic, low production levels largely related to wide-body aircraft, inflation, and supply chain and labour constraints continued to negatively impact the Corporation’s operation in the fourth quarter of 2022. 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 was approved for a Normal Course Issuer Bid to purchase through the facilities of the Toronto Stock Exchange and alternative Canadian trading platforms up to 2,886,455 common shares, over a 12-month period commencing May 27, 2022 and ending May 26, 2023. As of December 31, 2022, under the program, the Corporation purchased 282,972 common shares for cancellation for $2.1 million.

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 March 3, 2023, 57,446,134 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. The Corporation has applied IFRS 9 on a prospective basis for hedge accounting. The Corporation’s qualifying hedging relationships as at December 31, 2022 qualified for hedge accounting in accordance with IFRS 9 and were therefore regarded as continuing hedging relationships. As the critical terms of the hedging instruments match those of their corresponding hedges items, all hedging relationships continue to be effective under IFRS 9’s effectiveness assessment requirements. As at December 31, 2022, the Corporation entered into forward foreign exchange contracts to purchase US dollars of $14.4 million and British Pounds of £23.5 million over a period of one month commencing December of 2022 at an exchange rate of $1.3559 and $1.6311 Cdn respectively. Under these contracts the Corporation is obliged to purchase specific amounts at predetermined dates and exchange rates. These contracts are matched with anticipated operational cash flows in US dollars, and British pounds. The Corporation conversely entered into foreign currency collar contracts as follows:

Maturity

Notional amount

Floor

Ceiling

Carrying value

Line item in the statement of financial position

June 2025

US$54.0 million

1.2500

1.3245

$2.2 million

Accounts payable, accrued liabilities and provisions

June 2025

US$54.0 million

1.2500

1.3300

$2.0 million

Accounts payable, accrued liabilities and provisions

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 December 31, 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.

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, 2022 and to the information under “Risks Inherent in Magellan’s Business” in the Corporation’s Annual Information Form for the year ended December 31, 2022, which have been filed with SEDAR at www.sedar.com.

9. Outlook
The outlook for Magellan’s business in 2023

The single aisle market remains to be the primary driver of commercial aircraft industry growth. Boeing and Airbus both increased build rates and aircraft deliveries in 2022 while recording increased order backlogs. Build rates could potentially be higher, however ongoing staff shortages, logistical challenges and supply chain issues have become significant impediments to ramping up rates. The industry is also coping with cost pressures caused by soaring economic inflation.

Boeing planned to increase 737 single aisle build rates to 38 aircraft per month in the first half 2023 however they were forced to delay those plans due to the supply chain constraints. Their fourth quarter earnings release stated that the 737 program is stabilizing at a production rate of 31 aircraft per month with plans to ramp production to approximately 50 aircraft per month in the 2025/2026 timeframe. Boeing’s new 737 MAX-7 and MAX-10 aircraft faced potentially significant certification delays due to a 2022 year-end deadline, beyond which new aircraft must comply with new standards issued following the two MAX aircraft accidents. Fortunately for Boeing and the industry, the US Senate granted an exemption allowing them to continue working with the FAA on certifying the MAX-7 and MAX-10 conditional upon making changes to the engine and crew alerting systems.

Boeing pushed out the certification date of their 777X aircraft to 2025 due to an updated assessment of the time required to meet its requirements. Meanwhile, they are building the freighter version at 2 aircraft per month. Boeing continues building their 787 aircraft at a low production rate of 2 aircraft per month and is expected to go to 5 aircraft per month in late 2023, and then 10 aircraft per month in the 2025/2026 timeframe.

By the close of 2022, Airbus reached a build rate of 48 aircraft per month on their single aisle A320 aircraft. Production is expected to continue increasing in 2023 and reach a monthly rate of 65 aircraft by late 2024, which was pushed back from mid-2023 due to supply chain challenges. Airbus also confirmed 75 aircraft per month in 2026. Airbus ended 2022 with A330 production at 3 aircraft per month and is moving to 4 aircraft per month in 2024. A350 production will go from 6 aircraft per month to 9 aircraft per month by the end of 2025. The A220 is currently being produced at 6 aircraft per month.

The defence industry has not been immune to the challenges faced by commercial aerospace. Defence OEM’s have been similarly forced to limit build rate increases due to supply chain constraints. Meanwhile, global defence spending increased by almost 5% annually over the last few years and is expected to continue to increase from 3% to 5% annually over the next five years.

Late in 2022, the US Army announced a major decision under its Future Vertical Lift program to purchase Bell Helicopter’s (“Bell”) V-280 Valor tiltrotor aircraft as a replacement to UH-60 Black Hawk helicopters built by Sikorsky. This was a significant win for Bell as the US Army currently operates approximately 2,300 UH-60 Blackhawk’s. Sikorsky entered the competition with their SB-1 Defiant helicopter, built jointly with partner Boeing Defense.

The F-35 program celebrated key wins in 2022 with Switzerland and Finland announcing their new contracts, Canada committing to purchase 88 fighters, and NATO allies Greece and the Czech Republic indicating their desire to purchase the fighter. Lockheed is suggesting that a steady annual production rate of 156 aircraft will start in the 2024 time frame based on anticipated supply chain recovery. Lockheed delivered 141 aircraft in 2022.

Despite a growing demand for new commercial and defence aircraft, build rates are being paced by ongoing supply chain shortages of labour and materials with some suggesting this situation will not be fully resolved until 2024. Also the economy is a concern as inflation is putting pressure on cost structures already strained by the pandemic. Viewing all from a positive perspective however, pent up growth potential is available to be exploited as the industry emerges from this volatile period of time.

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 (LOSS) INCOME AND COMPREHENSIVE (LOSS) INCOME

 

(unaudited)

 

Three month period

ended December 31

Twelve month period

ended December 31

 

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

 

2022

 

2021

 

2022

 

2021

 

 

 

 

 

 

 

 

 

Revenue

 

193,110

 

178,012

 

764,580

 

688,358

 

 

Cost of revenue

 

194,003

 

170,982

 

729,515

 

640,028

 

 

Gross (loss) profit

 

(893

)

7,030

 

35,065

 

48,330

 

 

 

 

 

 

 

 

 

Administrative and general expenses

 

11,140

 

11,109

 

48,690

 

44,559

 

 

Restructuring

 

3,697

 

773

 

3,901

 

2,182

 

 

Other

 

4,608

 

876

 

(1,760

)

(3,175

)

 

(Loss) income before interest and income taxes

 

(20,338

)

(5,728

)

(15,766

)

4,764

 

 

 

 

 

 

 

 

 

Interest expense

 

567

 

471

 

2,838

 

2,895

 

 

(Loss) income before income taxes

 

(20,905

)

(6,199

)

(18,604

)

1,869

 

 

 

 

 

 

 

 

 

Income taxes

 

 

 

 

 

 

Current

 

(1,166

)

331

 

5,780

 

8,898

 

 

Deferred

 

1,031

 

(773

)

(2,692

)

(6,052

)

 

 

 

(135

)

(442

)

3,088

 

2,846

 

 

Net loss

 

(20,770

)

(5,757

)

(21,692

)

(977

)

 

 

 

 

 

 

 

 

Other comprehensive income (loss)

 

 

 

 

 

 

Other comprehensive income (loss) that may be

 

 

 

 

 

 

reclassified to profit and loss in subsequent periods:

 

 

 

 

 

 

Foreign currency translation

 

14,429

 

(2,229

)

7,385

 

(7,339

)

 

Unrealized gain (loss) on foreign exchange hedges

 

2,899

 

-

 

(3,255

)

-

 

 

Items not to be reclassified to profit and loss

 

 

 

 

 

 

In subsequent periods:

 

 

 

 

 

 

Actuarial income on defined benefit plans, net of taxes

 

1,763

 

1,456

 

1,402

 

12,508

 

 

Comprehensive (loss) income

 

(1,679

)

(6,530

)

(16,160

)

4,192

 

 

 

 

 

 

 

 

 

Net (loss) income per share

 

 

 

 

 

 

Basic and diluted

 

(0.36

)

(0.10

)

(0.38

)

(0.02

)

 

MAGELLAN AEROSPACE CORPORATION

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

 

 

 

 

 

 

 

(unaudited)

 

 

 

December 31

December 31

(expressed in thousands of Canadian dollars)

 

 

 

2022

2021

 

 

 

 

 

 

Current assets

 

 

 

 

 

Cash

 

 

 

40,940

32,482

Trade and other receivables

 

 

 

169,562

164,234

Contract assets

 

 

 

65,456

66,337

Inventories

 

 

 

226,359

208,577

Prepaid expenses and other

 

 

 

9,967

9,664

 

 

 

 

512,284

481,294

Non-current assets

 

 

 

 

 

Property, plant and equipment

 

 

 

384,084

396,845

Right-of-use assets

 

 

 

30,825

34,389

Investment properties

 

 

 

1,621

1,659

Intangible assets

 

 

 

41,423

47,772

Goodwill

 

 

 

22,181

21,792

Other assets

 

 

 

9,745

11,587

Deferred tax assets

 

 

 

8,731

8,480

 

 

 

 

498,610

522,524

Total assets

 

 

 

1,010,894

1,003,818

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

Accounts payable and accrued liabilities and provisions

 

 

 

135,153

105,678

Contract liabilities

 

 

 

36,096

17,704

Debt due within one year

 

 

 

10,310

10,266

 

 

 

 

181,559

133,648

Non-current liabilities

 

 

 

 

 

Long-term debt

 

 

 

634

2,755

Lease liabilities

 

 

 

27,761

30,644

Borrowings subject to specific conditions

 

 

 

23,300

24,101

Other long-term liabilities and provisions

 

 

 

7,203

7,223

Deferred tax liabilities

 

 

 

38,707

39,623

 

 

 

 

97,605

104,346

 

 

 

 

 

 

Equity

 

 

 

 

 

Share capital

 

 

 

251,104

252,342

Contributed surplus

 

 

 

2,044

2,044

Other paid in capital

 

 

 

13,565

13,565

Retained earnings

 

 

 

442,979

479,965

Accumulated other comprehensive income

 

 

 

18,661

14,531

Equity attributable to equity holders of the Corporation

 

 

 

728,353

762,447

Non-controlling interest

 

 

 

3,377

3,377

Total equity

 

 

 

731,730

765,824

Total liabilities and equity

 

 

 

1,010,894

1,003,818

 

MAGELLAN AEROSPACE CORPORATION

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(unaudited)

 

Three month period

ended December 31

Twelve month period

ended December 31

(expressed in thousands of Canadian dollars)

 

2022

 

2021

 

2022

 

2021

 

 

 

 

 

 

 

Cash flow from operating activities

 

 

 

 

 

Net loss

 

(20,770

)

(5,757

)

(21,692

)

(977

)

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

 

11,869

 

12,227

 

47,405

 

51,892

 

Impairment of intangibles

 

711

 

711

 

Impairment of property, plant and equipment

 

1,772

 

1,772

 

Loss on disposal of property, plant and equipment

 

322

 

365

 

22

 

336

 

Gain on disposal of investment properties

 

 

 

(608

)

(Decrease) increase in defined benefit plans

 

994

 

(300

)

1,249

 

585

 

Accretion

 

324

 

626

 

2,146

 

2,604

 

Deferred taxes

 

1,042

 

(2,024

)

(3,022

)

(7,555

)

(Income) loss on investments in joint venture

 

(93

)

(63

)

(269

)

6

 

Changes to non-cash working capital

 

22,613

 

12,449

 

30,218

 

(33,757

)

Net cash provided by operating activities

 

18,784

 

17,523

 

58,540

 

12,526

 

 

 

 

 

 

 

Cash flow from investing activities

 

 

 

 

 

Purchase of property, plant and equipment

 

(8,691

)

(9,127

)

(23,494

)

(17,675

)

Proceeds from disposal of property, plant and equipment

 

117

 

163

 

607

 

509

 

Proceeds from disposal of investment properties

 

 

 

1,000

 

(Increase) decrease in intangible and other assets

 

(588

)

(2,124

)

(969

)

(4,638

)

Net cash used in investing activities

 

(9,162

)

(11,088

)

(23,856

)

(20,804

)

 

 

 

 

 

 

Cash flow from financing activities

 

 

 

 

 

(Decrease) increase in debt due within one year

 

 

(17

)

 

(39,441

)

(Decrease) increase in long-term debt

 

(539

)

(151

)

(2,047

)

(1,516

)

Lease liability payments

 

(1,376

)

(1,816

)

(5,619

)

(6,707

)

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

 

 

(1,327

)

(1,104

)

Increase (decrease) in long-term liabilities and provisions

 

401

 

273

 

(225 

)

6

 

Common share repurchases

 

(828

)

(2,062

)

Common share dividend

 

(1,437

)

(6,062

)

(14,994

)

(24,247

)

Net cash used in financing activities

 

(3,779

)

(7,773

)

(26,274

)

(73,009

)

 

 

 

 

 

 

(Decrease) increase in cash during the period

 

5,843

 

(1,338

)

8,410

 

(81,287

)

Cash at beginning of the period

 

34,395

 

33,960

 

32,482

 

113,938

 

Effect of exchange rate differences

 

702

 

(140

)

48

 

(169

)

Cash at end of the period

 

40,940

 

32,482

 

40,940

 

32,482

 

 

Contacts

For additional information:
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

Contacts

For additional information:
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