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Magellan Aerospace Announces Financial Results

Magellan Aerospace Corporation (“Magellan” or the “Corporation”) released its financial results for the fourth quarter of 2021. 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

 

2021

 

2020

 

Change

 

2021

 

2020

 

Change

Revenues

 

178,012

 

180,057

 

(1.1%)

 

688,358

 

744,414

 

(7.5%)

Gross Profit

 

7,030

 

11,634

 

(39.6%)

 

48,330

 

96,491

 

(49.9%)

Net (Loss) Income

 

(5,757)

 

(22,875)

 

74.8%

 

(977)

 

3,313

 

(129.5%)

Net (Loss) Income per Share

 

(0.10)

 

(0.40)

 

75.0%

 

(0.02)

 

0.06

 

(133.3%)

Adjusted EBITDA

 

7,272

 

11,544

 

(37.0%)

 

58,838

 

100,436

 

(41.4%)

Adjusted EBITDA per Share

 

0.13

 

0.20

 

(35.0%)

 

1.02

 

1.73

 

(41.0%)

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 February 9, 2022, Magellan announced it had been awarded a contract from MDA Ltd. (“MDA”) to provide spacecraft avionics for their next Earth observation mission named CHORUS. The new spacecraft builds on MDA’s RADARSAT heritage and will continue the work of RADARSAT-2, which remains operational serving its worldwide customer base. The avionics subsystems for CHORUS will be developed at Magellan’s Winnipeg facility, home of western Canada’s Advanced Satellite Integration Facility. Magellan has expertise in the development of satellite buses and spacecraft avionics. For MDA’s CHORUS mission, Magellan will be responsible for the design, manufacture, test, and delivery of the bus avionics system for the C-band Synthetic Aperture Radar satellite. The bus avionics include the satellite bus power control and distribution, communications, attitude control, orbit determination, and on-board telemetry data collection. Key avionics deliverables include Magellan's Power Control Unit and Command and Data Handling Unit.

Impact of COVID-19

The COVID-19 pandemic has had and continues to have a significant impact on the global economy, our customers’ businesses and on the Corporation’s operations, financial and operating results and planning ability. To attempt to mitigate the spread of the pandemic, there have been extraordinary and wide-ranging actions taken by international, federal, provincial and local public health and governmental authorities to contain and combat the outbreak of COVID-19 around the world. These actions include quarantines and “stay-at-home” orders, social distancing measures and travel restrictions, among others. Although from time to time there has been an easing of restrictions in certain jurisdictions, some of these restrictions have been reinstated in other jurisdictions.

In addition, 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. During the later part of 2021, certain facilities of the Corporation began to experience supply chain disruptions and labour shortages, which have negatively impacted their production of goods resulting in lower absorption of manufacturing costs and, in some cases, delays in shipments to customers. We are taking actions to manage the potential impacts of these matters and we will continue to assess the actual and expected impacts and the need for further actions.

In response to the COVID-19 impacts on our businesses, the Corporation has been and continues to adjust production schedules to accommodate changes in demand. The Corporation has also been taking measures to align its cost structure including headcount reductions and re-balancing workforce, restructuring businesses, eliminating all non-essential travel, entertaining and other discretionary spending, reducing capital expenditures, and applying for government subsidies, such as Canada Emergency Wage Subsidy (“CEWS”) for its Canadian employees. Magellan continues to monitor ongoing developments and mitigate risks related to the COVID-19 pandemic and the impact on Magellan’s operations, supply chain, and most importantly the health and safety of its employees.

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

2. Results of Operations

A discussion of Magellan’s operating results for the fourth quarter ended December 31, 2021

The Corporation reported revenue in the fourth quarter of 2021 of $178.0 million, a $2.1 million decrease from the fourth quarter of 2020 revenue of $180.1 million. Gross profit and net loss for the fourth quarter of 2021 were $7.0 million and $5.8 million, respectively, in comparison to a $11.6 million gross profit and $22.9 net loss for the fourth quarter of 2020.

Consolidated Revenue

 

 

Three month period

 

Twelve month period

 

 

ended December 31

 

ended December 31

Expressed in thousands of dollars

 

2021

 

2020

 

Change

 

2021

 

2020

 

Change

Canada

 

86,881

 

84,733

 

2.5%

 

315,805

 

338,883

 

(6.8%)

United States

 

40,258

 

46,181

 

(12.8%)

 

174,260

 

202,284

 

(13.9%)

Europe

 

50,873

 

49,143

 

3.5%

 

198,293

 

203,247

 

(2.4%)

Total revenue

 

178,012

 

180,057

 

(1.1%)

 

688,358

 

744,414

 

(7.5%)

Revenue in Canada increased 2.5% in the fourth quarter of 2021 compared to the corresponding period in 2020 largely due to volume increases, mainly for proprietary products, offset in part by volume decrease for wide-body aircrafts and repair and overhaul services, and unfavourable foreign exchange impact driven by the weakening of the United States dollar relative to the Canadian dollar. On a currency neutral basis, Canadian revenues in the fourth quarter of 2021 increased by 5.5% over the same period of 2020.

Revenue in the United States in the fourth quarter of 2021 decreased 12.8% from the fourth quarter of 2020 largely driven by volume decreases, mainly in wide-body aircraft, and unfavourable foreign exchange impact due to due to the weakening of the United State dollar relative to the Canadian dollar, offset in part by volume increases for single aisle aircraft, specifically the Boeing 737 MAX as aircraft build rates increased. On a currency neutral basis, revenues in the United States decreased 9.7% in the fourth quarter of 2021 over the same period in 2020.

European revenue in the fourth quarter of 2021 increased 3.5% compared to the corresponding period in 2020 primarily driven by build rate recovery for single aisle aircraft, offset partially by the weakening of the United States dollar relative to the British pound. On a currency neutral basis, European revenues in the fourth quarter of 2021 increased by 7.8% when compared to the same period in 2020.

Gross Profit

 

 

Three month period

 

Twelve month period

 

 

ended December 31

 

ended December 31

Expressed in thousands of dollars

 

2021

 

2020

 

Change

 

2021

 

2020

 

Change

Gross profit

 

7,030

 

11,634

 

(39.6%)

 

48,330

 

96,491

 

(49.9%)

Percentage of revenue

 

3.9%

 

6.5%

 

 

 

7.0%

 

13.0%

 

 

Gross profit of $7.0 million for the fourth quarter of 2021 was $4.6 million lower than the $11.6 million gross profit for the fourth quarter of 2020, and gross profit as a percentage of revenues of 3.9% for the fourth quarter of 2021 decreased from 6.5% recorded in the same period in 2020. Decrease in gross profit was primarily driven by continued lower post pandemic volumes, unfavourable product mix, higher material and manufacturing costs and unfavourable foreign exchange impact due to the weakening of the United States dollar relative to the Canadian dollar and the British pound, offset in part by volume increases and new businesses in certain programs and higher subsidies recorded mainly from Canada Emergency Wage Subsidy (“CEWS”) program. The implementation of the Corporation’s plan to restructure its European operations in the year resulted in higher operating costs as programs were transitioned within internal facilities. In addition, during the second half of 2021, certain facilities of the Corporation began to experience supply chain disruptions and labour shortages, which negatively impacted their production of goods and, thus, resulted in lower absorption of manufacturing costs.

Administrative and General Expenses

 

 

Three month period

 

Twelve month period

 

 

ended December 31

 

ended December 31

Expressed in thousands of dollars

 

2021

 

2020

 

Change

 

2021

 

2020

 

Change

Administrative and general expenses

 

11,109

 

12,371

 

(10.2%)

 

44,559

 

52,075

 

(14.4%)

Percentage of revenues

 

6.2%

 

6.9%

 

 

 

6.5%

 

7.0%

 

 

Administrative and general expenses as a percentage of revenues was 6.2% for the fourth quarter of 2021, lower than the same period of 2020 percentage of revenues of 6.9%. Administrative and general expenses were lower than the fourth quarter of 2020 mainly due to lower salary, pension and related expenses, higher CEWS subsidies recorded, and lower discretionary spending to align with current business volumes.

Restructuring

 

 

Three month period

 

Twelve month period

 

 

ended December 31

 

ended December 31

Expressed in thousands of dollars

 

2021

 

2020

 

2021

 

2020

Workforce reduction

 

 

653

 

 

6,916

Closure costs

 

773

 

3,236

 

2,182

 

3,236

Impairment of property, plant and equipment

 

 

2,385

 

 

2,385

Restructuring

 

773

 

6,274

 

2,182

 

12,537

Restructuring costs of $0.8 million incurred in the fourth quarter of 2021 as compared to $6.3 million in the fourth quarter of 2020 mainly related to the closure of the Bournemouth manufacturing facilities announced in the fourth quarter of 2020.

Other

 

 

Three month period

 

Twelve month period

 

 

ended December 31

 

ended December 31

Expressed in thousands of dollars

 

2021

 

2020

 

2021

 

 

2020

 

Foreign exchange loss (gain)

 

379

 

3,409

 

(2,548

)

 

1,138

 

Loss on sale of property, plant and equipment

 

365

 

182

 

336

 

 

117

 

Gain on disposal of investment properties

 

 

 

(608

)

 

 

Other

 

132

 

 

(355

)

 

(172

)

Total Other

 

876

 

3,591

 

(3,175

)

 

1,083

 

Other for the fourth quarter of 2021 included a $0.4 million foreign exchange loss compared to a $3.4 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

 

2021

 

 

2020

 

2021

 

2020

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

 

(193

)

 

80

 

43

 

305

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

 

639

 

 

676

 

2,604

 

3,129

Discount on sale of accounts receivable

 

25

 

 

191

 

248

 

924

Total interest expense

 

471

 

 

947

 

2,895

 

4,358

Total interest expense of $0.5 million in the fourth quarter of 2021 decreased $0.5 million compared to the fourth quarter of 2020 mainly due to 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

 

Twelve month period

 

 

ended December 31

 

ended December 31

Expressed in thousands of dollars

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Current income tax expense

 

331

 

 

4,498

 

 

8,898

 

 

7,140

 

Deferred income tax (recovery) expense

 

(773

)

 

(5,218

)

 

(6,052

)

 

3,939

 

Income tax (recovery) expense

 

(442

)

 

(720

)

 

2,846

 

 

11,079

 

Effective tax rate

 

7.1%

  

3.1%

  

152.3%

  

77.0%

 

Income tax recovery for the fourth quarter ended December 31, 2021 was $0.4 million, representing an effective income tax rate of 7.1% compared to 3.1% for the same period of 2020. 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

 

 

 

  

 

 

 

 

2021

 

 

  

 

 

 

 

2020

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

 

178.0

 

 

166.4

 

167.6

 

176.3

 

180.1

 

 

163.4

 

162.2

 

238.8

(Loss) income before taxes

 

(6.2

)

 

1.3

 

1.6

 

5.2

 

(23.6

)

 

2.2

 

10.0

 

25.8

Net (loss) income

 

(5.8

)

 

0.5

 

1.1

 

3.3

 

(22.9

)

 

0.0

 

6.1

 

20.1

Net (loss) income per share

 

 

  

 

 

 

 

 

 

 

  

 

 

 

 

 

Basic and diluted

 

(0.10

)

 

0.01

 

0.02

 

0.06

 

(0.40

)

 

0.00

 

0.10

 

0.34

EBITDA1

 

6.5

 

 

16.1

 

14.9

 

19.2

 

(6.8

)

 

16.3

 

24.8

 

41.5

Adjusted EBITDA1

 

7.3

 

 

16.7

 

15.6

 

19.3

 

11.5

 

 

21.8

 

25.5

 

41.5

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

Revenues and net income in the quarter were 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 1.3859 in the second quarter of 2020 and a low of 1.2280 in the second quarter of 2021. The average quarterly exchange rate of the British pound relative to the Canadian dollar reached a high of 1.7461 in the first quarter of 2021 and hit a low of 1.6991 in the fourth quarter of 2021. 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 1.2388 in the second quarter of 2020.

Revenue for the fourth quarter of 2021 of $178.0 million was lower than that in the fourth quarter of 2020. The average quarterly exchange rate of the United States dollar relative to the Canadian dollar in the fourth quarter of 2021 was 1.2600 versus 1.3176 in the same period of 2020. The average quarterly exchange rate of the British pound relative to the Canadian dollar decreased from 1.7207 in the fourth quarter of 2020 to 1.6991 during the current quarter. The average quarterly exchange rate of the British pound relative to the United States dollar strengthened from 1.3205 in the fourth quarter of 2020 to 1.3478 in the current quarter. Had the foreign exchange rates remained at levels experienced in the fourth quarter of 2020, reported revenues in the fourth quarter of 2021 would have been higher by $6.1 million.

Revenues and net income were also negatively impacted by COVID-19 pandemic driven volume decreases in a number of commercial programs. 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 commencing in the second quarter of 2020. Since the second quarter of 2021, the Corporation began to see modest sequential growth 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 $8.6 million, $10.4 million and $1.0 million in the second, third and fourth quarter of 2020, respectively, and $3.9 million and $3.8 million in the second and fourth quarters of 2021, and reduced the expense that the subsidy offsets. During the third quarter of 2020, Magellan implemented cost savings initiatives designed to reduce operating costs by re-balancing its workforce and recognized severance costs of $5.6 million. A $3.4 million cost recovery was recorded against cost of revenues as a result of the cancellation of the Airbus A320neo program in the third quarter of 2020. In the fourth quarter of 2020, the Corporation committed to a plan to restructure its manufacturing divisions in Europe due to decreased demand as a result of a deterioration in economic conditions stemming from COVID-19 and recognized a $5.6 million restructuring charge, including a $2.4 million impairment loss related to assets made obsolete as a result of the plan. Further, a $12.0 million goodwill impairment charge was recorded in the fourth quarter of 2020.

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

 

Twelve month period

 

 

ended December 31

 

ended December 31

Expressed in thousands of dollars

 

 

2021

 

 

2020

 

 

 

2021

 

 

2020

Net (loss) income

 

 

(5,757

)

 

(22,875

)

 

 

(977

)

 

3,313

Add back:

 

 

 

 

 

 

 

 

 

 

 

 

Interest

 

 

471

 

 

947

 

 

 

2,895

 

 

4,358

Taxes

 

 

(442

)

 

(720

)

 

 

2,846

 

 

11,079

Depreciation and amortization

 

 

12,227

 

 

15,872

 

 

 

51,892

 

 

57,103

EBITDA

 

 

6,499

 

 

(6,776

)

 

 

56,656

 

 

75,853

Add back:

 

 

 

 

 

 

 

 

 

 

 

 

Restructuring

 

 

773

 

 

6,274

 

 

 

2,182

 

 

12,537

Goodwill impairment

 

 

 

 

12,046

 

 

 

 

 

12,046

Adjusted EBITDA

 

 

7,272

 

 

11,544

 

 

 

58,838

 

 

100,436

Adjusted EBITDA in the fourth quarter of 2021 decreased $4.2 million or 36.5% to $7.3 million in comparison to $11.5 million in the same quarter of 2020 mainly as a result of nil goodwill impairment recorded in the quarter, lower restructuring costs, depreciation and amortization expense, and interest, offset by higher taxes and lower net loss. In addition, during the second half of 2021, certain facilities of the Corporation began to experience supply chain disruptions and labour shortages, which negatively impacted their production of goods and, thus, resulted in lower absorption of manufacturing costs leading to lower 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, 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

 

Twelve month period

 

 

ended December 31

 

ended December 31

Expressed in thousands of dollars

 

2021

 

 

2020

 

 

2021

 

 

2020

 

(Increase) decrease in accounts receivable

 

(1,658

)

 

20,417

 

 

(50,347

)

 

64,398

 

Decrease in contract assets

 

6,237

 

 

6,563

 

 

3,895

 

 

7,336

 

Decrease (increase) in inventories

 

6,466

 

 

9,696

 

 

3,234

 

 

(16,803

)

Decrease in prepaid expenses and other

 

7,192

 

 

6,245

 

 

2,224

 

 

8,299

 

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

 

(5,788

)

 

(17,048

)

 

7,237

 

 

(41,475

)

Changes in non-cash working capital balances

 

12,449

 

 

25,873

 

 

(33,757

)

 

21,755

 

Cash provided by operating activities

 

17,523

 

 

32,931

 

 

12,526

 

 

105,970

 

For the three months ended December 31, 2021, the Corporation generated $17.5 million from operating activities, compared to $32.9 million in the fourth quarter of 2020. Changes in non-cash working capital items generated cash of $12.4 million as compared to $25.9 million in the same quarter of the prior year. The quarter over quarter decreases of $13.4 million were largely attributable to increases in accounts receivables from lower volume of receivables sold and timing of customer payments, and slower burn down inventories due to production delay and timing of material purchases, offset in part by higher accounts payable, accrued liabilities and provisions at the year-end primarily driven by timing of material purchases and supplier and milestone payments and decreases in prepaid expenses due to timing of payments.

Investing Activities

 

 

Three month period

  

Twelve month period

 

 

ended December 31

  

ended December 31

Expressed in thousands of dollars

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Purchase of property, plant and equipment

 

(9,127

)

 

(11,599

)

 

(17,675

)

 

(24,575

)

Proceeds from disposal of property, plant and equipment

 

163

 

 

70

 

 

509

 

 

177

 

Proceeds from disposal of investment property

 

  

  

1,000

 

 

 

(Increase) decrease in intangible and other assets

 

(2,124

)

 

1,279

 

 

(4,638

)

 

(1,417

)

Cash used in investing activities

 

(11,088

)

 

(10,250

)

 

(20,804

)

 

(25,815

)

Investing activities used $11.1 million of cash for the fourth quarter of 2021 compared to $10.3 million of cash used in the same quarter of the prior year, an increase of $0.8 million primarily due to increases in long-term receivables and deposits recorded in other assets offset in part by lower level of property, plant and equipment investment in the current quarter when compared to the same quarter of 2020.

Financing Activities

 

 

Three month period

 

Twelve month period

 

 

ended December 31

 

ended December 31

Expressed in thousands of dollars

 

2021

 

 

2020

 

 

2021

 

 

2020

 

(Decrease) increase in debt due within one year

 

(17

)

 

9,520

 

 

(39,441

)

 

285

 

(Decrease) increase in long-term debt

 

(151

)

 

(307

)

 

(1,516

)

 

(754

)

Lease liability payments

 

(1,816

)

 

(1,917

)

 

(6,707

)

 

(6,970

)

Increase (decrease) in long-term liabilities and provisions

 

273

 

 

341

 

 

6

 

 

(545

)

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

 

  

6

 

 

(1,104

)

 

37

 

Common share repurchases

 

  

(1,361

)

 

  

(3,407

)

Common share dividend

 

(6,062

)

 

(6,055

)

 

(24,247

)

 

(24,372

)

Cash used in financing activities

 

(7,773

)

 

227

 

 

(73,009

)

 

(35,726

)

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 $7.8 million in the fourth quarter of 2021 primarily for the payment of common share dividends, lease liabilities and long-term debt repayments.

As at December 31, 2021, the Corporation had contractual commitments to purchase $4.9 million of capital assets.

Dividends

During each of the four quarters of 2021, the Corporation declared and paid quarterly cash dividends of $0.105 per common shares representing an aggregating dividend payment of $24.2 million.

Subsequent to December 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 March 31, 2022 to shareholders of record at the close of business on March 29, 2022. Although the impacts of the COVID-19 pandemic continued to impact the Corporation in the fourth quarter of 2021, the Corporation’s liquidity and strong balance sheet has allowed the Corporation to continue its quarterly dividend payment for the current quarter. The follow on impacts of COVID-19 and the ongoing invasion of Ukraine are expected to impact world economic markets and particular areas of the aerospace industry. These and other relevant factors will be considered by the Board of Directors of the Corporation, on a quarterly basis when future dividends are reviewed to ensure that any dividends declared balance the return of capital to shareholders while maintaining adequate financial flexibility as the Corporation recovers from these impacts and invests in growth initiatives.

Normal Course Issuer Bid

On May 27, 2021, 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, 2021 and ending May 26, 2022. As of December 31, 2021, under the program the Corporation had not purchased common shares for cancellation.

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 17, 2022, 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 December 31, 2021, foreign exchange contracts of US$6.7 million and £9.5 million 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 December 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 disrupt global health and the economy in 2021. 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 recent escalation in conflict between Russia and Ukraine (“Conflict”) and the resulting imposition of sanctions and counter sanctions have disrupted supply chains and caused instability in the global economy. The short and long-term implications of the conflict are difficult to predict at this time. The ongoing conflict could result in the imposition of future economic sanctions, which may have a greater adverse effect on economic markets and could result in an even greater impact related to global supply and pricing of electricity and materials.

For more information in relation to the risks inherent in Magellan’s business, reference is made to the information under “Risk Factors” in the Corporation’s Management’s Discussion and Analysis for the year ended December 31, 2021 and to the information under “Risks Inherent in Magellan’s Business” in the Corporation’s Annual Information Form for the year ended December 31, 2021, which have been filed with SEDAR at www.sedar.com.

9. Outlook

The outlook for Magellan’s business in 2022

The COVID-19 pandemic has made it extremely challenging for airlines to forecast near or medium-term commercial air travel demand. At the end of 2021, the rapidly spreading Omicron variant triggered a new series of government restrictions around the globe and caused widespread disruptions for most major airlines. Notwithstanding the added impact of significant weather events, airlines were forced to cancel flights due to shortages of pilots and employees who became sick or were quarantined due to the virus. Despite a discouraging end to the year for airlines, commercial air travel still showed improvement over the previous 2020 year.

The International Air Transport Association (“IATA”) reported that despite Omicron disruptions, global revenue passenger kilometers (“RPK’s”) reached 55% of December 2019 levels by the end of 2021. For reference, RPK’s were at 38% of 2019 levels at December 2020. IATA’s 2021 data indicated that domestic air travel reached 78% of pre-COVID levels in 2021, while international travel reached only 42%. Industry experts currently predict that global domestic air travel will return to pre-pandemic levels in 2023, while international air travel will follow by approximately twelve to fifteen months.

Aircraft manufacturers are already increasing single aisle aircraft build rates in response to improving commercial air travel volumes. These build rates are expected to return to pre-pandemic levels late in 2023. Considering the impact of the pandemic on what was already a softening wide body market, forecasters predict a marginal recovery in corresponding build rates through 2030.

Airbus and Boeing delivered 611 aircraft and 340 aircraft, respectively in 2021. Airbus’ gross order intake totaled 773 aircraft and with cancellations of 264 aircraft, they ended the year with net orders of 509 aircraft. Boeing booked 909 gross aircraft orders and received cancellations for 430 aircraft, resulting in netted 479 aircraft orders in 2021. Airbus ended 2021 with total unfilled orders of 7,082 aircraft versus 7,184 aircraft at December 31, 2020, while Boeing ended with 5,136 aircraft unfilled orders in 2021 compared to 4,997 aircraft in 2020.

Airbus increased A320 build rates from 40 aircraft per month to 45 aircraft per month in 2021. Airbus began 2022 at a rate of 49 aircraft per month with a plan to reach 54 aircraft per month in the fourth quarter of 2022. Airbus expects to ramp up from 59 aircraft to 66 aircraft per month in 2023, which is delayed by three years from their original pre-pandemic forecast. At the close of 2021, the A330 build rate was at 2.2 aircraft per month and is forecasted to reach 2.8 aircraft per month late in 2022. The A350 build rate plan continues at 5 aircraft per month until the latter part of 2022 when 6 aircraft per month is planned. Airbus’ A220 rate is planned to reach 5.4 to 6.6 aircraft per month in 2022, 6.6 to 9.8 aircraft in 2023, and ramp up to 14 aircraft per month by mid of 2025, which advances this rate by 6 months from previous forecasts.

In a fourth quarter 2021 report, Boeing stated that they were engaged in discussions with the Federal Aviation Administration regarding actions required to resume deliveries of their 787 aircraft after a series of quality issues forced them to pause deliveries. Boeing disclosed that they had an inventory of 110 undelivered 787 aircraft at the end of 2021, and that they would continue building at 2 aircraft per month until deliveries resume. Boeing’s 737 build rate increased from 17 aircraft per month in 2021 to 24 aircraft per month beginning January 2022. Boeing is planning 31 aircraft per month by the second half of 2022 and 52 aircraft per month by the second half of 2023. Boeing’s 777 aircraft build rate is expected to remain at 2 aircraft per month and is planned to increase to 3 aircraft per month by 2023, and then 3.5 aircraft per month by 2024. The launch of the 777-8 freighter version is expected to further delay the entry-into-service of the 777X passenger variant and correspondingly impact build rates.

The defence industry remains considerably more insulated from the global impact of COVID-19 than the commercial aerospace industry. Experts are confident that most major defense spending nations will remain committed to strengthening their military budgets, despite the pandemic’s economic impact on fiscal deficits. Certain European countries including the United Kingdom have recommitted or increased defence spending during the COVID-19 crisis, further removing a degree of near-term budget uncertainty. In the U.S., the President’s budget proposal requested a fiscal year 2022 budget for national defense that was up 2% year over year.

In 2021, Lockheed Martin delivered 142 F-35 aircraft, which was up from 123 aircraft in 2020 and which exceeded their plan to deliver between 133 and 139 aircraft. Lockheed Martin’s production plans include 151 to 153 aircraft delivered in 2022, and a peak rate of 156 aircraft delivered annually from 2023 onward. During 2021, the F-35 gained two new customers as it was chosen by Switzerland and Finland in their respective fighter competitions. The F-35 remains in contention for Canada’s Future Fighter program along with Saab’s Grippen. In December 2021, an announcement was made that Boeing’s F/A-18 Super Hornet was eliminated from the competition. Canada’s final selection is expected in 2022.

The Corporation believes there will be no immediate impact on defence aircraft procurement as a result of the recent conflict between Ukraine and Russia. With the conflict being in early stages, the extent and potential magnitude of impact on global defence markets is still being assessed by the industry.

Aerospace and defence manufacturers have undergone a challenging period since the global pandemic began in early 2020. As commercial passenger air travel volumes recover, there is improving confidence in the near to medium term outlook for the industry. Experts are hopeful the horizon is becoming clearer and that aerospace and defence manufacturers can look forward to switching from mitigation plans to growth management.

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)

 

2021

 

 

2020

 

 

2021

 

 

2020

 

 

 

 

 

 

 

 

 

 

Revenue

 

178,012

 

 

180,057

 

 

688,358

 

 

744,414

 

Cost of revenue

 

170,982

 

 

168,423

 

 

640,028

 

 

647,923

 

Gross profit

 

7,030

 

 

11,634

 

 

48,330

 

 

96,491

 

 

 

 

 

 

 

 

 

 

Administrative and general expenses

 

11,109

 

 

12,371

 

 

44,559

 

 

52,075

 

Restructuring

 

773

 

 

6,274

 

 

2,182

 

 

12,537

 

Goodwill impairment

 

 

12,046

 

 

 

12,046

 

Other

 

876

 

 

3,591

 

 

(3,175

)

 

1,083

 

Income before interest and income taxes

 

(5,728

)

 

(22,648

)

 

4,764

 

 

18,750

 

 

 

 

 

 

 

 

 

 

Interest expense

 

471

 

 

947

 

 

2,895

 

 

4,358

 

Income before income taxes

 

(6,199

)

 

(23,595

)

 

1,869

 

 

14,392

 

 

 

 

 

 

 

 

 

 

Income taxes

 

 

 

 

 

 

 

 

Current

 

331

 

 

4,498

 

 

8,898

 

 

7,140

 

Deferred

 

(773

)

 

(5,218

)

 

(6,052

)

 

3,939

 

 

 

(442

)

 

(720

)

 

2,846

 

 

11,079

 

Net (loss) income

 

(5,757

)

 

(22,875

)

 

(977

)

 

3,313

 

 

 

 

 

 

 

 

 

 

Other comprehensive (loss) income

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

Foreign currency translation

 

(2,229

)

 

(12,093

)

 

(7,339

)

 

(3,669

)

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

 

 

 

 

 

 

 

 

Re-measurements on defined benefit pension and other post-employment benefit plans, net of taxes

 

1,456

 

 

5,033

 

 

12,508

 

 

(1,862

)

Comprehensive (loss) income

 

(6,530

)

 

(29,935

)

 

4,192

 

 

(2,218

)

 

 

 

 

 

 

 

 

 

Net (loss) income per share

 

 

 

 

 

 

 

 

Basic and diluted

 

(0.10

)

 

(0.40

)

 

(0.02

)

 

0.06

 

MAGELLAN AEROSPACE CORPORATION

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

 

 

 

 

 

(unaudited)

 

December 31

 

December 31

(expressed in thousands of Canadian dollars)

 

2021

 

2020

 

 

 

 

 

Current assets

 

 

 

 

Cash

 

32,482

 

113,938

Trade and other receivables

 

164,234

 

114,404

Contract assets

 

66,337

 

70,388

Inventories

 

208,577

 

213,120

Prepaid expenses and other

 

9,664

 

12,915

 

 

481,294

 

524,765

Non-current assets

 

 

 

 

Property, plant and equipment

 

396,845

 

420,340

Right-of-use assets

 

34,389

 

40,098

Investment properties

 

1,659

 

2,127

Intangible assets

 

47,772

 

55,155

Goodwill

 

21,792

 

21,982

Other assets

 

11,587

 

7,301

Deferred tax assets

 

8,480

 

834

 

 

522,524

 

547,837

Total assets

 

1,003,818

 

1,072,602

 

 

 

 

 

Current liabilities

 

 

 

 

Accounts payable and accrued liabilities and provisions

 

123,382

 

114,706

Debt due within one year

 

10,266

 

50,098

 

 

133,648

 

164,804

Non-current liabilities

 

 

 

 

Long-term debt

 

2,755

 

4,865

Lease liabilities

 

30,644

 

35,222

Borrowings subject to specific conditions

 

24,101

 

24,984

Other long-term liabilities and provisions

 

7,223

 

21,539

Deferred tax liabilities

 

39,623

 

35,309

 

 

104,346

 

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

 

479,965

 

492,681

Accumulated other comprehensive income

 

14,531

 

21,870

Equity attributable to equity holders of the Corporation

 

762,447

 

782,502

Non-controlling interest

 

3,377

 

3,377

Total equity

 

765,824

 

785,879

Total liabilities and equity

 

1,003,818

 

1,072,602

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)

 

2021

 

 

2020

 

 

2021

 

 

2020

 

 

 

 

 

 

 

 

 

 

Cash flow from operating activities

 

 

 

 

 

 

 

 

Net (loss) income

 

(5,757

)

 

(22,875

)

 

(977

)

 

3,313

 

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

 

12,227

 

 

15,872

 

 

51,892

 

 

57,103

 

Restructuring

 

 

5,227

 

 

 

5,227

 

Impairment of goodwill

 

 

12,046

 

 

 

12,046

 

Loss on disposal of property, plant and equipment

 

365

 

 

182

 

 

336

 

 

117

 

Gain on disposal of investment properties

 

 

 

(608

)

 

(Decrease) increase in defined benefit plans

 

(300

)

 

(272

)

 

585

 

 

(282

)

Accretion

 

626

 

 

676

 

 

2,604

 

 

3,129

 

Deferred taxes

 

(2,024

)

 

(3,899

)

 

(7,555

)

 

3,545

 

(Income) loss on investments in joint venture

 

(63

)

 

101

 

 

6

 

 

17

 

Changes to non-cash working capital

 

12,449

 

 

25,873

 

 

(33,757

)

 

21,755

 

Net cash provided by operating activities

 

17,523

 

 

32,931

 

 

12,526

 

 

105,970

 

 

 

 

 

 

 

 

 

 

Cash flow from investing activities

 

 

 

 

 

 

 

 

Purchase of property, plant and equipment

 

(9,127

)

 

(11,599

)

 

(17,675

)

 

(24,575

)

Proceeds from disposal of property, plant and equipment

 

163

 

 

70

 

 

509

 

 

177

 

Proceeds from disposal of investment properties

 

 

 

1,000

 

 

(Increase) decrease in intangible and other assets

 

(2,124

)

 

1,279

 

 

(4,638

)

 

(1,417

)

Net cash used in investing activities

 

(11,088

)

 

(10,250

)

 

(20,804

)

 

(25,815

)

 

 

 

 

 

 

 

 

 

Cash flow from financing activities

 

 

 

 

 

 

 

 

(Decrease) increase in debt due within one year

 

(17

)

 

9,520

 

 

(39,441

)

 

285

 

(Decrease) increase in long-term debt

 

(151

)

 

(307

)

 

(1,516

)

 

(754

)

Lease liability payments

 

(1,816

)

 

(1,917

)

 

(6,707

)

 

(6,970

)

Increase (decrease) in long-term liabilities and provisions

 

273

 

 

341

 

 

6

 

 

(545

)

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

 

 

6

 

 

(1,104

)

 

37

 

Common share repurchases

 

 

(1,361

)

 

 

(3,407

)

Common share dividend

 

(6,062

)

 

(6,055

)

 

(24,247

)

 

(24,372

)

Net cash (used in) provided by financing activities

 

(7,773

)

 

227

 

 

(73,009

)

 

(35,726

)

 

 

 

 

 

 

 

 

 

(Decrease) increase in cash during the period

 

(1,338

)

 

22,908

 

 

(81,287

)

 

44,429

 

Cash at beginning of the period

 

33,960

 

 

91,200

 

 

113,938

 

 

69,637

 

Effect of exchange rate differences

 

(140

)

 

(170

)

 

(169

)

 

(128

)

Cash at end of the period

 

32,482

 

 

113,938

 

 

32,482

 

 

113,938

 

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