Magellan Aerospace Corporation Announces Financial Results

TORONTO–(BUSINESS WIRE)–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:

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

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

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

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

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

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

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

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

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.

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

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

Contacts

For additional information:
Phillip C. Underwood

President & Chief Executive Officer

T: (905) 677-1889

E: [email protected]

Elena M. Milantoni

Chief Financial Officer

T: (905) 677-1889

E: [email protected]

Read full story here