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Magellan Aerospace Corporation Announces Financial Results

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Magellan Aerospace Corporation ("Magellan" or the "Corporation") released its financial results for the first quarter of 2021. All amounts are expressed in Canadian dollars unless otherwise indicated. The results are summarized as follows:

Three month period ended

March 31

Expressed in thousands of Canadian dollars, except per share amounts

2021

2020

Change

Revenues

176,281

238,813

(26.2%)

Gross Profit

17,079

36,772

(53.6%)

Net Income

3,262

20,074

(83.8%)

Net Income per Share

0.06

0.34

(82.4%)

Adjusted EBITDA

19,332

41,543

(53.5%)

Adjusted EBITDA per Share

0.33

0.71

(53.5%)

This news release contains certain forward-looking statements that reflect the current views and/or expectations of the Corporation with respect to its performance, business and future events. Such statements are subject to a number of risks, uncertainties and assumptions, which may cause actual results to be materially different from those expressed or implied. The Corporation assumes no future obligation to update these forward-looking statements except as required by law.

This news release presents certain non-IFRS financial measures to assist readers in understanding the Corporation's performance. Non-IFRS financial measures are measures that either exclude or include amounts that are not excluded or included in the most directly comparable measures calculated and presented in accordance with Generally Accepted Accounting Principles ("GAAP"). Throughout this news release, reference is made to EBITDA (defined as net income before interest, income taxes, depreciation and amortization) and Adjusted EBITDA (earnings before interest, 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

In March 2020, due to the worsening public health crisis associated with the novel coronavirus ("COVID-19"), the World Health Organization ("WHO") declared COVID-19 a global pandemic. Governments worldwide, including those countries in which Magellan operates, enacted emergency measures to combat the spread of the virus. These measures, which included the implementation of travel bans, self-imposed quarantine periods and social distancing, caused a material disruption to businesses globally resulting in an economic slowdown and decreased demand in the aerospace industry. Governments and central banks reacted with significant monetary and fiscal interventions designed to stabilize economic conditions and vaccination programs have been introduced to inoculate people against COVID-19; however, the situation continues to evolve (including the prevalence of virus variants), and the long-term success of these interventions is not yet determinable.

In the first quarter of 2021, the disruption to air travel and commercial activities, particularly within the aerospace and commercial airline industries continued to negatively impact global supply, demand and distribution capabilities. There are some positive signs of recovery in the market, however, the COVID-19 pandemic continues to adversely affect Magellan’s customers and their demand for the Corporation’s products and services. The situation remains dynamic and the ultimate duration and magnitude of the impact on the economy and the financial effect on the Corporation remains unknown at this time.

Financial impacts

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

Magellan has implemented measures to align its cost structure during the current market conditions, including headcount reductions and re-balancing work force; elimination of all non-essential travel, entertaining and other discretionary spending; and reductions to the capital expenditure plan. The carrying value of the Corporation’s long-lived assets are reviewed for indications of impairment at the end of each reporting period. At March 31, 2021, the Corporation reviewed each cash-generating unit and did not identify indications of impairment.

Operational impacts

During this pandemic, the aerospace manufacturing industry, in the jurisdictions the Corporation operates in, has been classified as an "essential service". As a result, the Corporation’s operations remained open, but at reduced levels of activity during the first quarter of 2021.

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

Liquidity

As at March 31, 2021, the Corporation ended with a cash balance of $71.3 million and $70.5 million of available borrowing capacity under Magellan’s operating credit facility, providing the Corporation with $141.8 million of total liquidity. The credit facility agreement also includes a $75 million uncommitted accordion provision that provides the Corporation with the option to increase the size of the operating credit facility to $150 million. Magellan expects that cash provided by operations, cash on hand and its sources of financing will be sufficient to meet the Corporation’s debt obligations and fund committed and future capital expenditures.

Business Update

On March 16, 2021, Magellan Aerospace announced the signing of a five year renewal agreement with Avio Aero, a GE Aviation Company, for the supply of magnesium and aluminum castings. The castings will be produced primarily at Magellan’s Haley, Ontario facility, with several also being produced at its Glendale, Arizona facility.

On March 31, 2021, Magellan Aerospace announced an agreement with Boeing Commercial Airplanes on a contract extension for the supply of landing gear kits and other complex structural components for the 737, 767, and 777 airplanes. The significant, long term contract extension will see product delivered from Magellan’s facilities in Kitchener, Ontario and New York City, New York. Magellan’s solution for Boeing Commercial Airplanes employs a vertical integration strategy utilizing global resources in Kitchener, New York City, and India. Magellan will deliver the kits and hardware direct to Boeing’s assembly facilities in Renton and Everett, Washington.

For additional information, please refer to the "Management’s Discussion and Analysis" section of the Corporation’s 2020 Annual Report available on www.sedar.com.

2. Results of Operations
A discussion of Magellan’s operating results for the first quarter ended March 31, 2021

The Corporation reported revenue in the first quarter of 2021 of $176.3 million, a $62.5 million decrease from the first quarter of 2020 revenue of $238.8 million. Gross profit and net income for the first quarter of 2021 were $17.1 million and $3.3 million, respectively, in comparison to gross profit of $36.8 million and net income of $20.1 million for the first quarter of 2020.

Consolidated Revenue

Three month period

ended March 31

Expressed in thousands of dollars

2021

2020

Change

Canada

81,036

94,243

(14.0%)

United States

45,809

64,718

(29.2%)

Europe

49,436

79,852

(38.1%)

Total revenues

176,281

238,813

(26.2%)

The COVID-19 pandemic and resulting economic contraction, including the continued disruption to air travel and commercial activities, particularly within the commercial aerospace industry, continue to have a negative impact on demand for the Corporation’s aerospace products and services.

Revenues in Canada decreased 14.0% in the first quarter of 2021 compared to the corresponding period in 2020, primarily due to decreased volumes for casting and proprietary products.

Revenues in the United States decreased by 29.2% in the first quarter of 2021 compared to the first quarter of 2020 primarily due to volume decreases for wide-body aircraft and aeroengine products.

European revenues in the first quarter of 2021 decreased 38.1% compared to the corresponding period in 2020 primarily driven by build rate reductions for both single aisle and wide-body aircraft.

Gross Profit

Three month period

ended March 31

Expressed in thousands of dollars

2021

2020

Change

Gross profit

17,079

36,772

(53.6%)

Percentage of revenues

9.7%

15.4%

Gross profit of $17.1 million for the first quarter of 2021 was $19.7 million lower than the $36.8 million gross profit for the first quarter of 2020, and gross profit as a percentage of revenues of 9.7% for the first quarter of 2021 decreased from 15.4% recorded in the same period in 2020. The gross profit in the current quarter was primarily impacted by volume decreases, higher production costs and unfavourable product mix.

Administrative and General Expenses

Three month period

ended March 31

Expressed in thousands of dollars

2021

2020

Change

Administrative and general expenses

11,644

15,676

(25.7%)

Percentage of revenues

6.6%

6.6%

Administrative and general expenses as a percentage of revenues of 6.6% for the first quarter of 2021 were consistent with the same period of 2020. Administrative and general expenses decreased $4.0 million or 25.7% to $11.6 million in the first quarter of 2021 compared to $15.7 million in the first quarter of 2020 mainly due to lower salary and related expenses and lower discretionary spending to align with current business volumes.

Restructuring

Three month period

ended March 31

Expressed in thousands of dollars

2021

2020

Restructuring

176

Restructuring cost of $176 incurred in the first quarter of 2021 mainly related to the closure of the Bournemouth manufacturing facilities announced in the fourth quarter of 2020.

Other

Three month period

ended March 31

Expressed in thousands of dollars

2021

2020

Foreign exchange gain

(849

)

(5,785

)

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

(7

)

19

Other

(172

)

Total other

(856

)

(5,938

)

Other income for the first quarter of 2021 included a $0.8 million foreign exchange gain compared to a $5.8 million foreign exchange gain in the first 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

ended March 31

Expressed in thousands of dollars

2021

2020

Interest on bank indebtedness and long-term debt

62

66

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

645

814

Discount on sale of accounts receivable

194

320

Total interest expense

901

1,200

Total interest expense of $0.9 million in the first quarter of 2021 decreased $0.3 million compared to the first quarter of 2020 mainly due to lower accretion charge on lease liabilities and long-term debt as principal amounts decreased, and lower discount on sale of accounts receivables due to lower volume of receivables sold in the current quarter.

Provision for Income Taxes

Three month period

ended March 31

Expressed in thousands of dollars

2021

2020

Expense of current income taxes

3,237

2,047

Expense of deferred income taxes

(1,285

)

3,713

Total expense of income taxes

1,952

5,760

Effective tax rate

37.4%

22.3%

Income tax expense for the three months ended March 31, 2021 was $2.0 million, representing an effective income tax rate of 37.4% compared to 22.3% for the same period of 2020. The change in 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

2021

2020

2019

Expressed in millions of dollars,

except per share amounts

Mar 31

Dec 31

Sep 30

Jun 30

Mar 31

Dec 31

Sep 30

Jun 30

Revenues

176.3

180.1

163.4

162.2

238.8

246.7

235.6

264.1

Income before taxes

5.2

(23.6

)

2.2

10.0

25.8

11.7

19.6

27.8

Net Income

3.3

(22.9

)

0.0

6.1

20.1

9.4

15.8

21.7

Net Income per share

Basic and diluted

0.06

(0.40

)

0.00

0.10

0.34

0.16

0.27

0.37

EBITDA1

19.2

(6.8

)

16.3

24.8

41.5

27.9

34.1

42.7

Adjusted EBITDA1

19.3

11.5

21.8

25.5

41.5

27.9

34.1

42.7

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.

Commencing in March 2020, the outbreak of the COVID-19 pandemic caused disruption to air travel and commercial activities, particularly within the commercial aerospace industry, and negatively impacted global supply, demand and distribution capabilities. As a result, there was a decrease in demand for the Corporation’s aerospace products and services that led to lower revenues and profits.

Revenues and net income reported in the quarterly financial information were also impacted by the movements in the Canadian dollar relative to the United States dollar and British pound, when the Corporation translates its foreign operations to Canadian dollars. Further, the movements in the United States dollar relative to the British pound impact the Corporation’s United States dollar exposures in its European operations. During the periods reported, the average quarterly exchange rate of the United States dollar relative to the Canadian dollar fluctuated between a high of 1.3859 in the second quarter of 2020 and a low of 1.2666 in the current quarter. 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 its lowest rate of 1.6280 in the third quarter of 2019. The average quarterly exchange rate of the British pound relative to the United States dollar reached a high of 1.3788 in the first quarter of 2021 and hit a low of 1.2327 in the third quarter of 2019.

Revenue for the first quarter of 2021 of $176.3 million was lower than that in the first quarter of 2020. The average quarterly exchange rate of the United States dollar relative to the Canadian dollar in the first quarter of 2021 was 1.2666 versus 1.3442 in the same period of 2020. The average quarterly exchange rate of the British pound relative to the Canadian dollar moved from 1.7185 in the first quarter of 2020 to 1.7461 during the current quarter. The average quarterly exchange rate of the British pound relative to the United States dollar increased from 1.2805 in the first quarter of 2020 to 1.3788 in the current quarter. Had the foreign exchange rates remained at levels experienced in the first quarter of 2020, reported revenues in the first quarter of 2021 would have been higher by $6.7 million.

As discussed above, net income reported in the quarterly information was impacted by the foreign exchange movements. The fourth quarter of 2019 was impacted by volume decreases in Europe, production inefficiencies in certain operating divisions and an accrual recorded in relation to the wind-down of the A380 program. Results for the first quarter of 2021 and the second, third and fourth quarter of 2020 were impacted by volume decreases in a number of commercial programs due to COVID-19. 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 sales as a result of the cancellation of 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 a decrease in 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. The Corporation recognized $8.6 million, $10.4 million, and $1.0 million in respect of the government subsidy relating to the CEWS program in the second, third and fourth quarter of 2020 respectively, and reduced the expense that the subsidy is intended to offset.

4. Reconciliation of Net Income to EBITDA and Adjusted EBITDA
A description and reconciliation of certain non-IFRS measures used by management

In addition to the primary measures of earnings and earnings per share (basic and diluted) in accordance with IFRS, the Corporation includes EBITDA (earnings before interest, 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

ended March 31

Expressed in thousands of dollars

2021

2020

Net income

3,262

20,074

Interest

901

1,200

Taxes

1,952

5,760

Depreciation and amortization

13,041

14,509

EBITDA

19,156

41,543

Add back:

Restructuring

176

Adjusted EBITDA

19,332

41,543

EBITDA in the first quarter of 2021 decreased $22.4 million or 53.9% to $19.2 million in comparison to $41.5 million in the same quarter of 2020 mainly as a result of lower net income driven by volume reductions, taxes, depreciation and amortization expense, and interest. Adjusted EBITDA decreased $22.2 million or 53.5% as compared to $41.5 million in 2020.

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

ended March 31

Expressed in thousands of dollars

2021

2020

Increase in trade receivables

(24,703

)

(29,933

)

Increase in contract assets

(10,390

)

(6,713

)

Increase in inventories

(2,178

)

(13,549

)

Increase in prepaid expenses and other

(1,588

)

(4,421

)

Increase (decrease) in accounts payable, accrued liabilities and provisions

2,207

(2,834

)

Changes to non-cash working capital balances

(36,652

)

(57,450

)

Cash used in operating activities

(20,898

)

(18,992

)

For the three months ended March 31, 2021, the Corporation used $20.9 million from operating activities, compared to $19.0 million used in the first quarter of 2020. Changes in non-cash working capital items used cash of $36.7 million, $20.8 million lower when compared to the usage of $57.5 million in the prior year largely attributable to the favourable quarter over quarter changes in inventories driven by volume reductions and timing of material purchases; in accounts receivable from lower revenues and timing of payments; in prepaid expenses due to timing of payments; and in accounts payable, accrued liabilities and provisions primarily driven by timing of supplier payments and receipt of milestone payments. This was offset in part by higher contract assets from the timing of production and billing related to products transferred over time.

Investing Activities

Three month period

ended March 31

Expressed in thousands of dollars

2021

2020

Purchase of property, plant and equipment

(2,663

)

(4,210

)

Proceeds of disposal of property plant and equipment

86

Increase in intangible and other assets

(1,003

)

(1,728

)

Change in restricted cash

(1,246

)

Cash used in investing activities

(3,580

)

(7,184

)

Investing activities used $3.6 million cash for the first quarter of 2021 compared to $7.2 million cash used in the same quarter of the prior year, a reduction of $3.6 million primarily due to lower levels of investment in property, plant and equipment and intangibles, and timing of restricted cash.

Financing Activities

Three month period

ended March 31

Expressed in thousands of dollars

2021

2020

Decrease in debt due within one year

(8,877

)

(2,997

)

Decrease in long-term debt

(458

)

(592

)

Lease liability payments

(1,677

)

(1,758

)

Decrease in long-term liabilities and provisions

(180

)

(255

)

(Decrease)/increase in borrowings subject to specific conditions, net

(1,104

)

29

Common share dividend

(6,062

)

(6,112

)

Cash used in financing activities

(18,358

)

(11,685

)

The Corporation has a Bank Credit Facility Agreement with a syndicate of lenders, of which there were no drawings under as of March 31, 2021. The Bank Credit Facility Agreement provides for a multi-currency global operating credit facility to be available to Magellan in a maximum aggregate amount of $75 million. The Bank Credit Facility Agreement also includes a $75 million uncommitted accordion provision, which provides Magellan with the option to increase the size of the operating credit facility to $150 million. Under the terms of the Bank Credit Facility Agreement, the operating credit facility expires on September 13, 2021. Any extensions of the operating credit facility are subject to mutual consent of the lenders and the Corporation.

The Corporation used $18.4 million in the first quarter of 2021 mainly for the repayment of debt due within one year, the payment of common share dividends, lease liabilities and borrowing subject to specific conditions.

As at March 31, 2021, the Corporation had contractual commitments to purchase $5.0 million of capital assets.

Dividends

During the first quarter of 2021, the Corporation declared and paid quarterly cash dividends of $0.105 per common shares representing an aggregating dividend payment of $6.1 million.

Subsequent to March 31, 2021, the Corporation announced that its Board of Directors had declared a quarterly cash dividend on its common shares of $0.105 per common share. The dividend will be payable on June 30, 2021 to shareholders of record at the close of business on June 16, 2021.

Normal Course Issuer Bid

On May 27, 2020, the Corporation commenced a normal course issuer bid to repurchase for cancellation up to 2,910,450 of the Corporation’s issued and outstanding common shares. As of March 31, 2021, under the program the Corporation purchased for cancellation 479,895 common shares. The program will terminate on May 26, 2021, subject to renewal.

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 May 4, 2021, 57,729,106 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 March 31, 2021, $5.5 million of foreign exchange contracts were outstanding with an immaterial fair value.

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 March 31, 2021, 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 worldwide COVID-19 pandemic continues to cause material disruption to businesses globally. The introduction of vaccines has led to optimism; however, the situation continues to evolve (including the prevalence of virus variants). The extent and duration of the COVID-19 pandemic is unknown at this time, as is the efficacy of the government and central bank interventions, the Corporation’s business continuity plan and other mitigating measures. Any estimate of the length and severity of these developments is therefore subject to significant uncertainty and, accordingly, estimates of the extent to which the COVID-19 pandemic may materially and adversely affect the Corporation’s operations, financial results and condition in future periods are also subject to significant uncertainty.

The Corporation is susceptible to risks relating to production disruption caused by unionized employees, including work stoppages or work slowdowns. The recent labour strike at the Corporation’s Haley, Ontario facility which commenced at the end of the first quarter of 2021 is causing work slowdowns. The extent and duration is uncertain. The strike could adversely affect deliveries to the Corporation’s customers and the Corporation’s financial performance.

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, 2020 and to the information under "Risks Inherent in Magellan’s Business" in the Corporation’s Annual Information Form for the year ended December 31, 2020, which have been filed with SEDAR at www.sedar.com.

9. Outlook
The outlook for Magellan’s business in 2021

Despite another wave of escalating COVID-19 cases around the world, the global airline industry is beginning to see signs of recovery within certain geographic regions. While global commercial flight cycles improved in the first quarter to 63.5% of 2019 levels compared to 61% at the end of 2020, North American and Asia-Pacific markets showed the greatest improvement, with flight cycles reaching approximately 80% compared to 2019. Europe and the Middle East lagged behind these regions with flight cycles at 36.7% and 53.9% respectively versus 2019. Considering the pent-up demand for travel, economic stimulus and access to vaccines, some forecasters now predict that the North American market will reach full recovery in 2022.

As a result of improving flight cycles, commercial aerospace original equipment manufacturers are beginning to express optimism for a possible V-shaped recovery of the market. Magellan continues to take a conservative approach towards the timing of market recovery and to manage its business accordingly. Notwithstanding this, Magellan remains ready to respond as aircraft program build rates increase back to pre-COVID levels.

Although Airbus and Boeing recorded improved new order activity in the first quarter of 2021, both manufacturers’ order backlogs dropped in the period. Airbus’ order backlog decreased from 7,184 to 6,988 aircraft and Boeing’s dropped from 4,223 to 4,054. Airbus delivered 125 aircraft, received orders for 39 aircraft and saw order cancellations totaling 100 aircraft in the quarter. Meanwhile Boeing delivered 77 aircraft and received orders for 282 aircraft in the quarter. In the first quarter of 2021, Boeing saw order cancellations of 213, of which 156 related to 737 MAX aircraft. Boeing’s revenue recognition accounting adjustments removed a further 161 aircraft from the backlog during the quarter.

Airbus is maintaining its A320 build plan which will see rates increase from 40 aircraft per month to 43 aircraft per month starting July 2021, then to 45 aircraft per month by October 2021, 49 aircraft per month by January 2022 and 55 aircraft per month by mid-2022. Airbus’ A330 build rate remains at 2 aircraft per month and A350 rate at 5 aircraft per month.

Boeing continues to face challenges as it ramps up the 737 Max aircraft production. A new electrical problem on the aircraft is currently impacting 16 airlines and nearly 100 aircraft. The company delivered 89 of 737 Max since the grounding was lifted in November 2020. It intends to deliver 225 of the 450 previously grounded aircraft in 2021 and the remainder in 2022. Boeing is planning to ramp up 737 production to 17 aircraft per month during 2021, 31 aircraft per month in 2022 with a goal to reach 52.5 aircraft per month in the latter half of 2023. Boeing also restarted 787 aircraft deliveries in March 2021 after a five-month pause due to fuselage fit-up issues. The 787 build rate is planned at 5 aircraft per month for 2021 and 2022. Meanwhile, Boeing will lower the 777 aircraft build rate from 5 aircraft per month to 2 aircraft per month in 2021. Boeing still plans to wind down 747 aircraft production in September 2022.

Despite the contraction in the world economy during 2020 due to COVID-19, global defense spending is expected to rise by 2.7 percent in 2021, according to Forecast International. Forecast International predicts slower growth in defense spending in 2022 and 2023 as countries cope with the after-effects of the pandemic. Its latest report forecasts that global defense spending will grow at a compounded average annual rate of 2.4% through 2025.

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

Additional Information

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

Forward Looking Statements

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

MAGELLAN AEROSPACE CORPORATION

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(unaudited)

Three month period
ended March 31

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

2021

2020

Revenues

176,281

238,813

Cost of revenues

159,202

202,041

Gross profit

17,079

36,772

Administrative and general expenses

11,644

15,676

Restructuring

176

Other

(856

)

(5,938

)

Income before interest and income taxes

6,115

27,034

Interest

901

1,200

Income before income taxes

5,214

25,834

Income taxes

Current

3,237

2,047

Deferred

(1,285

)

3,713

1,952

5,760

Net income

3,262

20,074

Other comprehensive income

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

Foreign currency translation

(6,385

)

34,178

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

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

9,783

(4,759

)

Comprehensive income

6,660

49,493

Net income per share

Basic and diluted

0.06

0.34

MAGELLAN AEROSPACE CORPORATION

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

(unaudited)

March 31

December 31

(expressed in thousands of Canadian dollars)

2021

2020

Current assets

Cash

71,310

113,938

Trade and other receivables

138,466

114,404

Contract assets

80,476

70,388

Inventories

214,230

213,120

Prepaid expenses and other

14,424

12,915

518,906

524,765

Non-current assets

Property, plant and equipment

410,293

420,340

Right-of-use assets

38,301

40,098

Investment properties

2,120

2,127

Intangible assets

53,569

55,155

Goodwill

21,806

21,982

Other assets

7,142

7,301

Deferred tax assets

995

834

534,226

547,837

Total assets

1,053,132

1,072,602

Current liabilities

Accounts payable and accrued liabilities and provisions

118,231

114,706

Debt due within one year

40,856

50,098

159,087

164,804

Non-current liabilities

Long-term debt

4,350

4,865

Lease liabilities

33,840

35,222

Borrowings subject to specific conditions

24,065

24,984

Other long-term liabilities and provisions

8,216

21,539

Deferred tax liabilities

37,097

35,309

107,568

121,919

Equity

Share capital

252,342

252,342

Contributed surplus

2,044

2,044

Other paid in capital

13,565

13,565

Retained earnings

499,664

492,681

Accumulated other comprehensive income

15,485

21,870

Equity attributable to equity holders of the Corporation

783,100

782,502

Non-controlling interest

3,377

3,377

786,477

785,879

Total liabilities and equity

1,053,132

1,072,602

MAGELLAN AEROSPACE CORPORATION

CONDENSED CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS

(unaudited)

Three month period
ended March 31

(expressed in thousands of Canadian dollars)

2021

2020

Cash flow from operating activities

Net income

3,262

20,074

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

13,041

14,509

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

(7

)

19

Increase in defined benefit plans

120

116

Accretion of financial liabilities

650

814

Deferred taxes

(1,377

)

3,062

Loss (income) on investments in joint ventures

65

(136

)

Changes to non-cash working capital

(36,652

)

(57,450

)

Net cash used in operating activities

(20,898

)

(18,992

)

Cash flow from investing activities

Purchase of property, plant and equipment

(2,663

)

(4,210

)

Proceeds from disposal of property, plant and equipment

86

Increase in intangible and other assets

(1,003

)

(1,728

)

Change in restricted cash

(1,246

)

Net cash used in investing activities

(3,580

)

(7,184

)

Cash flow from financing activities

Decrease in debt due within one year

(8,877

)

(2,997

)

Decrease in long-term debt

(458

)

(592

)

Lease liability payments

(1,677

)

(1,758

)

Decrease in long-term liabilities and provisions

(180

)

(255

)

(Decrease) increase in borrowings, net

(1,104

)

29

Common share dividend

(6,062

)

(6,112

)

Net cash used in financing activities

(18,358

)

(11,685

)

Decrease in cash during the period

(42,836

)

(37,861

)

Cash at beginning of the period

113,938

69,637

Effect of exchange rate differences

208

654

Cash at end of the period

71,310

32,430

View source version on businesswire.com: https://www.businesswire.com/news/home/20210506006174/en/

Contacts

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

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

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