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Magellan Aerospace Corporation Announces Financial Results

·36 min read

Magellan Aerospace Corporation ("Magellan" or the "Corporation") released its financial results for the third quarter of 2020. All amounts are expressed in Canadian dollars unless otherwise indicated. The results are summarized as follows:

Three month period ended
September 30

Nine month period ended
September 30

Expressed in thousands of Canadian dollars, except per share amounts

2020

2019

Change

2020

2019

Change

Revenues

163,377

235,575

(30.6

%)

564,357

769,541

(26.7

%)

Gross Profit

22,742

35,074

(35.2

%)

84,857

122,985

(31.0

%)

Net Income

11

15,847

(99.9

%)

26,188

57,972

(54.8

%)

Net Income per Share

0.00

0.27

(100.0

%)

0.45

1.00

(55.0

%)

Adjusted EBITDA

21,824

34,125

(36.0

%)

88,892

117,293

(24.2

%)

Adjusted EBITDA per Share

0.38

0.59

(35.6

%)

1.53

2.02

(24.3

%)

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 expense, income taxes, depreciation and amortization, and restructuring), which the Corporation considers to be an indicative measure of operating performance and a metric to evaluate profitability. EBITDA and Adjusted EBITDA is not a generally accepted earnings measure and should not be considered as an alternative 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, Magellan designs, engineers, and manufactures aeroengine and aerostructure components for aerospace markets, 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, the World Health Organization ("WHO") declared coronavirus ("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; however, the long-term success of these interventions is not yet determinable.

In the third quarter of 2020, the continued disruption to air travel and commercial activities, particularly within the aerospace and commercial airline industries negatively impacted global supply, demand and distribution capabilities. In particular, the significant decrease in air travel resulting from the COVID-19 pandemic is adversely affecting 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 current challenging economic climate may have material adverse impact on Magellan including, but not limited to significant declines in revenue in addition to what Magellan experienced in the third quarter of 2020 as the Corporation’s customers are concentrated in the aerospace industry; impairment charges to the Corporation’s property, plant and equipment and intangible assets 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 higher degree of measurement uncertainty during this volatile period.

Magellan has implemented measures to align its cost structure and maximize cash preservation 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 2020 capital expenditure plan. The Corporation also applied and received the Canada Emergency Wage Subsidy ("CEWS") for its Canadian employees. The carrying value of the Corporation’s long-lived assets are reviewed for indications of impairment at the end of each reporting period. At September 30, 2020, the Corporation reviewed each cash-generating unit and did not identify indications of impairment.

The fourth quarter of 2020 will be challenging for Magellan’s revenue on a year over year basis as COVID-19 continues to impact aircraft production rates over the short and medium term. In response to this impact, Magellan implemented cost savings initiatives designed to reduce operating costs. Subsequent to the third quarter of 2020, a restructuring plan was approved as part of the Corporation’s strategy to reorganize its European operations resulting in the closure of its Bournemouth manufacturing facilities in the United Kingdom, which will result in the Corporation incurring a restructuring charge relating to the closure of approximately $8 million. Magellan will continue to operate its treatments center in Bournemouth. Magellan continues to actively monitor the COVID-19 situation and reassesses its operating plan as program updates become available.

Operational impacts

During this pandemic, in regions where the local authorities have ordered non-essential business closures and implemented "stay at home" orders, the aerospace manufacturing industry has been classified as an "essential service". As a result, the Corporation’s operations remained open, but at reduced levels of activity during the third quarter of 2020.

To manage the additional safety risks presented by COVID-19, Magellan implemented standardized tools and templates 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

During the third quarter of 2020, Magellan improved its overall liquidity position despite the challenges posed by COVID-19. The Corporation ended the quarter with a cash balance of $91.2 million and $70.4 million of available borrowing capacity under Magellan’s operating credit facility, providing the Corporation with $161.6 million of total liquidity as compared with $103.3 million at March 31, 2020. 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.

For additional information, please refer to the "Management’s Discussion and Analysis" section of the Corporation’s 2019 Annual Report available on www.sedar.com.

2. Results of Operations
A discussion of Magellan’s operating results for third quarter ended September 30, 2020

The Corporation reported revenue in the third quarter of 2020 of $163.4 million, a $72.2 million decrease from the third quarter of 2019 of $235.6 million. Gross profit and net income for the third quarter of 2020 were $22.7 million and breakeven, respectively, in comparison to gross profit of $35.1 million and net income of $15.8 million for the third quarter of 2019.

Consolidated Revenue

Three month period

Nine month period

ended September 30

ended September 30

Expressed in thousands of dollars

2020

2019

Change

2020

2019

Change

Canada

76,313

86,256

(11.5

%)

254,150

273,142

(7.0

%)

United States

46,097

76,616

(39.8

%)

156,103

244,563

(36.2

%)

Europe

40,967

72,703

(43.7

%)

154,104

251,836

(38.8

%)

Total revenues

163,377

235,575

(30.6

%)

564,357

769,541

(26.7

%)

Revenues in Canada decreased 11.5% in the third quarter of 2020 in comparison to the same period in 2019 primarily due to decreased volumes in proprietary and casting products, partially offset by higher volumes in a number of defence programs.

Revenues in United States decreased by 39.8% in the third quarter of 2020 when compared to the third quarter of 2019, largely due to volume decreases for both single aisle, specifically the Boeing 737 MAX, and wide-body aircraft.

European revenues decreased 43.7% in the third quarter of 2020 compared to the corresponding period in 2019 primarily driven by build rate reductions for both single aisle and wide-body aircraft.

Gross Profit

Three month period

Nine month period

ended September 30

ended September 30

Expressed in thousands of dollars

2020

2019

Change

2020

2019

Change

Gross profit

22,742

35,074

(35.2%)

84,857

122,985

(31.0%)

Percentage of revenues

13.9%

14.9%

15.0%

16.0%

Gross profit of $22.7 million for the third quarter of 2020 was $12.3 million lower than the third quarter of 2019 gross profit of $35.1 million, and gross profit as a percentage of revenues of 13.9% for the third quarter of 2020 was lower than the third quarter of 2019 of 14.9%. The lower gross profit in the current quarter when compared to the same quarter in 2019 was primarily driven by decreased volumes in a number of commercial programs, offset in part by production efficiencies realized on certain programs, and recognition of $9.7 million in subsidies from the CEWS program.

Administrative and General Expenses

Three month period

Nine month period

ended September 30

ended September 30

Expressed in thousands of dollars

2020

2019

Change

2020

2019

Change

Administrative and general expenses

11,431

15,195

(24.8%)

39,704

46,785

(15.1%)

Percentage of revenues

7.0%

6.5%

7.0%

6.1%

Administrative and general expenses as a percentage of revenues of 7.0% for the third quarter of 2020 were 0.5% higher than the same period of 2019. Administrative and general expenses decreased $3.8 million to $11.4 million in the third quarter of 2020 compared to $15.2 million in the third quarter of 2019 mainly due to lower discretionary expenses, lower salary and related expenses, subsidies of $0.7 million received from the CEWS program and cost reductions across the majority of the expense categories to align with current business volumes.

Restructuring

Three month period

Nine month period

ended September 30

ended September 30

Expressed in thousands of dollars

2020

2019

2020

2019

Restructuring

5,554

6,263

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 $5,554.

Other

Three month period

Nine month period

ended September 30

ended September 30

Expressed in thousands of dollars

2020

2019

2020

2019

Foreign exchange loss (gain)

2,508

(2,623

)

(2,271

)

(3,276

)

Gain on disposal of property, plant and equipment

(22

)

(17

)

(65

)

(67

)

Other

1,821

(172

)

2,829

Total other

2,486

(819

)

(2,508

)

(514

)

Total other for the third quarter of 2020 included a $2.5 million foreign exchange loss compared to a $2.6 million foreign exchange gain in the same period of 2019, mainly driven by the movements in balances denominated in foreign currencies and the fluctuations of the foreign exchange rates. In addition, $1.8 million of one-time relocation expenses were included in the third quarter of 2019.

Interest Expense

Three month period

Nine month period

ended September 30

ended September 30

Expressed in thousands of dollars

2020

2019

2020

2019

Interest on bank indebtedness and long-term debt

80

(80

)

225

46

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

844

644

2,453

1,817

Discount on sale of accounts receivable

179

495

733

1,555

Total interest expense

1,103

1,059

3,411

3,418

Total interest expense of $1.1 million in the third quarter of 2020 was consistent with the third quarter of 2019 amount of $1.1 million mainly due to lower discount on sale of accounts receivables offset by higher accretion charge on lease liabilities.

Provision for Income Taxes

Three month period

Nine month period

ended September 30

ended September 30

Expressed in thousands of dollars

2020

2019

2020

2019

Current income tax expense

731

1,841

2,642

7,152

Deferred income tax expense

1,426

1,951

9,157

8,172

Income tax expense

2,157

3,792

11,799

15,324

Effective tax rate

99.5%

19.3%

31.1%

20.9%

Income tax expense for the three months ended September 30, 2020 was $2.2 million, representing an effective income tax rate of 99.5% compared to 19.3% for the same period of 2019. The change in effective tax rate and current and deferred income tax expenses year over year was primarily due to change in mix of income and loss across the different jurisdictions in which the Corporation operates.

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

2020

2019

2018

Expressed in millions of dollars,

except per share amounts

Sep 30

Jun 30

Mar 31

Dec 31

Sep 30

Jun 30

Mar 31

Dec 31

Revenues

163.4

162.2

238.8

246.7

235.6

264.1

269.9

254.4

Income before taxes

2.2

10.0

25.8

11.7

19.6

27.8

25.9

38.5

Net Income

0.0

6.1

20.1

9.4

15.8

21.7

20.4

29.5

Net Income per share

Basic and diluted

0.00

0.10

0.34

0.16

0.27

0.37

0.35

0.51

EBITDA1

16.3

24.8

41.5

27.9

34.1

42.7

40.5

50.7

1

EBITDA is not an IFRS financial measure. Please see the "Reconciliation of Net Income to EBITDA" section for more information.

Revenues and net income reported in the quarterly financial information were 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 1.3200 in the fourth quarter of 2019. The average quarterly exchange rate of the British pound relative to the Canadian dollar moved from its high of 1.7315 in the first quarter of 2019 to 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 its high of 1.2887 in the third quarter of 2020 and hit a low of 1.2327 in the third quarter of 2019.

Revenue for the third quarter of 2020 of $163.4 million was lower than that in the third quarter of 2019. The average quarterly exchange rate of the United States dollar relative to the Canadian dollar in the third quarter of 2020 was 1.3316 versus 1.3206 in the same period of 2019. The average quarterly exchange rate of the British pound relative to the Canadian dollar moved from 1.6280 in the third quarter of 2019 to 1.7212 during the current quarter. The average quarterly exchange rate of the British pound relative to the United States dollar strengthened from 1.2327 in the third quarter of 2019 to 1.2887 in the current quarter. Had the foreign exchange rates remained at levels experienced in the third quarter of 2019, reported revenues in the third quarter of 2020 would have been lower by $1.2 million.

As discussed above, net income reported in the quarterly information was impacted by the foreign exchange movements. In the fourth quarter of 2018, the Corporation recorded a net gain of $9.7 million related to prior acquisitions. The fourth quarter of 2019 was impacted by volume decrease 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 second and third 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. In addition, the Corporation recognized $8.6 million and $10.4 million government subsidy relating to the CEWS program in the second and third quarter respectively, and reduced the expense that the subsidy is intended to offset. Last, a $3.4 million cost recovery was also recorded against cost of sales as a result of the cancellation of A320neo program in the third 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 expense, income taxes and depreciation and amortization) and Adjusted EBITDA (earnings before interest expense, income taxes, depreciation and amortization, and restructuring) in this quarterly statement. The Corporation has provided these measures 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 of the components of these measures 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 an alternative to net income as determined in accordance with IFRS or as an alternative to cash provided by or used in operations.

Three month period

Nine month period

ended September 30

ended September 30

Expressed in thousands of dollars

2020

2019

2020

2019

Net income

11

15,847

26,188

57,972

Add back:

Interest

1,103

1,059

3,411

3,418

Taxes

2,157

3,792

11,799

15,324

Depreciation and amortization

12,999

13,427

41,231

40,579

EBITDA

16,270

34,125

82,629

117,293

Add back:

Restructuring

5,554

6,263

Adjusted EBITDA

21,824

34,125

88,892

117,293

Adjusted EBITDA decreased $12.3 million or 36.0% to $21.8 million for the third quarter of 2020, compared to $34.1 million in the third quarter of 2019 mainly as a result of lower net income, taxes and depreciation and amortization driven by volume reductions offset by $5.6 million restructuring expenses recorded in the third quarter of 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

Nine month period

ended September 30

ended September 30

Expressed in thousands of dollars

2020

2019

2020

2019

Decrease in accounts receivable

18,287

14,456

43,981

770

Decrease (increase) in contract assets

4,978

(8,201

)

773

(26,525

)

Decrease (increase) in inventories

3,328

(9,317

)

(26,499

)

(17,341

)

Decrease (increase) in prepaid expenses and other

2,340

(511

)

2,054

(3,927

)

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

2,846

(16

)

(24,427

)

4,328

Changes in non-cash working capital balances

31,779

(3,589

)

(4,118

)

(42,695

)

Cash provided by operating activities

45,292

27,526

73,039

61,167

For the three months ended September 30, 2020 the Corporation generated $45.3 million from operating activities, compared to $27.5 million in the third quarter of 2019, mainly driven by a favourable working capital change offset by lower net income. The favourable movement of non-cash working capital balances was largely due to decreases in accounts receivable from lower revenues; lower contract assets from the timing of production and billing related to products transferred over time; decreases in inventories driven by volume reductions and reduced material purchases; increases in accounts payable, accrued liabilities and provisions primarily driven by higher advance payments received from customers partially offset by lower level of purchases and timing of payments; and lower prepaid expenses.

Investing Activities

Three month period

Nine month period

ended September 30

ended September 30

Expressed in thousands of dollars

2020

2019

2020

2019

Business combination, net of cash acquired

(2,661

)

Purchase of property, plant and equipment

(6,291

)

(16,322

)

(12,976

)

(34,668

)

Proceeds from disposal of property, plant and equipment

67

107

426

Decrease (increase) in intangible and other assets

4,511

3,102

(2,696

)

(6,127

)

Cash used in investing activities

(1,780

)

(13,153

)

(15,565

)

(43,030

)

Investing activities used $1.8 million in cash for the third quarter of 2020 compared to $13.2 million in the same quarter of the prior year, a reduction of $11.4 million primarily due to lower levels of investment in property, plant and equipment.

Financing Activities

Three month period

Nine month period

ended September 30

ended September 30

Expressed in thousands of dollars

2020

2019

2020

2019

(Decrease) increase in debt due within one year

(5,287

)

589

(9,235

)

(7,895

)

Increase in long-term debt

1,409

1,409

Decrease in long-term debt

(618

)

(612

)

(1,856

)

(2,061

)

Lease liability payments

(1,586

)

(1,073

)

(5,053

)

(2,757

)

(Decrease) increase in long-term liabilities and provisions

(84

)

23

(886

)

(156

)

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

(8

)

19

31

(803

)

Common share repurchases

(1,560

)

(2,046

)

Common share dividend

(6,095

)

(5,821

)

(18,317

)

(17,463

)

Cash used in financing activities

(13,829

)

(6,875

)

(35,953

)

(31,135

)

The Corporation has a Bank Credit Facility Agreement with a syndicate of lenders, under which there were no drawings as of September 30, 2020. 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 $13.8 million in financing activities in the third quarter of 2020 mainly to repay debt due within one year, long-term debt, and lease liabilities, repurchase common shares and pay dividends.

As at September 30, 2020, the Corporation had made contractual commitments to purchase $7.8 million of capital assets.

Dividends

During the first, second and third quarter of 2020, the Corporation declared and paid quarterly cash dividends of $0.105 per common shares representing an aggregating dividend payment of $18.3 million.

Subsequent to September 30, 2020, 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 December 31, 2020 to shareholders of record at the close of business on December 17, 2020.

Normal Course Issuer Bid

On May 25, 2020, the Toronto Stock Exchange ("TSX") accepted the Corporation’s intention to commence a normal course issuer bid ("NCIB") which allows the Corporation to repurchase up to 2,910,450 of the Corporation’s issued and outstanding common shares in the open market or otherwise permitted by the TSX. Common shares purchased by the Corporation are cancelled. The program commenced on May 27, 2020 and will terminate on May 26, 2021, or on such earlier date as the Corporation completes its purchase pursuant to the NCIB. During the three-month period ended September 30, 2020, 211,385 common shares were purchased for cancellation for $1.6 million at a volume weighted average price paid of $7.36 per share.

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 November 6, 2020, 57,789,416 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 September 30, 2020, there were no foreign exchange contracts outstanding.

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 and nine month periods ended September 30, 2020, 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.

In March 2020, the WHO declared coronavirus COVID-19 a global pandemic. This contagious disease outbreak, which has continued to spread, has resulted in governments worldwide enacting emergency measures to combat the spread of the virus. These measures, which include travel bans, self-imposed quarantine periods and social distancing, have caused material disruption to businesses globally resulting in an economic slowdown. Governments and central banks reacted with significant monetary and fiscal interventions designed to stabilize economic conditions.

The duration and full financial effect of the COVID-19 pandemic is unknown at this time, as is the efficacy of the government and central bank interventions, the Corporation’s business continuity plan and other mitigating measures. 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. Therefore, uncertainty about judgments, estimates and assumptions made by management during the preparation of the Corporation’s consolidated financial statements related to potential impacts of the COVID-19 outbreak on revenue, expenses, assets, liabilities, and note disclosures could result in a material adjustment to the carrying value of the asset or liability affected.

The Corporation’s customers and supply chain in the commercial aerospace sector were negatively affected in the third quarter of 2020. The Corporation will continue to closely monitor the COVID-19 situation and should the duration, spread or intensity of the pandemic further develop in 2020 or beyond, the supply chain and customer demand will likely be further negatively affected. These factors may further impact the Corporation’s operating plan, its liquidity and cash flows.

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, 2019 and to the information under "Risks Inherent in Magellan’s Business" in the Corporation’s Annual Information Form for the year ended December 31, 2019, which have been filed with SEDAR at www.sedar.com.

9. Outlook
The outlook for Magellan’s business in 2020

The current extreme economic uncertainty resulting from the ongoing COVID-19 pandemic renders it difficult to issue a specific outlook concerning industry and market conditions over the next 12 months and as such, the following market information is subject to a high degree of risk.

Stalled air travel recovery in August and September forced the International Air Transport Association ("IATA") to downgrade its air travel forecast for the balance of 2020. IATA had previously forecasted global air travel in revenue passenger kilometres ("RPK") to improve to 45% of pre-pandemic levels by the end of 2020 however, IATA has since lowered the forecast to 32%. The RPK rebounded by 10% in the second quarter of 2020, but rising COVID-19 cases in the third quarter of 2020 stopped further progress.

Commercial airlines are struggling to align with current and future demand under these unpredictable market conditions. IATA warns that airlines are using cash at such a rate that without continued government support programs, there could be "large swathes of the industry" approaching bankruptcy. An average of 35% of the global commercial fleet remains parked, with wide body aircraft ranking the highest at 50% to 95% parked depending upon the model. New aircraft deliveries have been low, forcing aircraft manufacturers to implement deep cost cutting measures to protect their businesses while the entire industry attempts to manage through this crisis.

Airbus’ order backlog decreased to 7,441 as of September 30, 2020 compared to 7,584 at June 30, 2020, and 7,482 at the close of 2019. Airbus delivered 341 aircraft and received net orders for 300 aircraft year to date as of September 30, 2020. Order cancellations in the period totaled 70 aircraft. Boeing’s order backlog decreased by 1,300 aircraft in 2020 net of shipments and order cancellations, including 821 aircraft removed due to revenue recognition accounting adjustments. The 737 MAX order backlog fell by 1,006 aircraft. Only 98 Boeing aircraft were delivered year to date as of September 30, 2020. Boeing’s total aircraft order backlog at the end of third quarter of 2020 was 4,325 compared to 5,625 at the close of 2019.

Airbus confirmed targeted A320 build rates of 40 aircraft per month into 2021. The targeted A330 rates are down to 2 aircraft per month and are anticipated to drop to 1 aircraft per month in 2021. A350 targeted rates are being adjusted to between 4.5 aircraft per month to 5 aircraft per month.

Boeing’s targeted 737 build rate is at 7 aircraft per month with targeted planned increases in 2021 reaching up to 17 aircraft per month. The 737 MAX recertification process continues with a number of milestones remaining before the aircraft’s return-to-service. Boeing expects that regulators will certify the MAX in time for deliveries to resume in the fourth quarter of 2020. Meanwhile, Boeing is currently building the 777 aircraft at 5 aircraft per month and is expected to reduce it to 2 aircraft per month in 2021. The 787 rate is currently at 10 aircraft per month and will drop to 6 aircraft per month in 2021.

Defence markets have been mostly unaffected by the pandemic to date as spending was advanced on various programs to help support vulnerable supply chains through the crisis. While this has been positive for the aerospace market, concerns still remain that growing fiscal deficits may necessitate a re-prioritization of government funds to other areas at some point in the future.

The Canadian government received bid responses from Boeing, Saab and Lockheed Martin for Canada’s Future Fighter replacement program. An initial evaluation is expected by spring 2021 followed by the identification of the selected bidder in early 2022. The first aircraft delivery is planned to be in 2025.

The fourth quarter of 2020 will be challenging for Magellan’s revenue on a year over year basis as COVID-19 continues to impact aircraft production rates over the short and medium term. In response to this impact, Magellan has implemented cost savings initiatives designed to reduce operating costs by re-balancing its workforce. Subsequent to the third quarter of 2020, a restructuring plan was approved as part of the Corporation’s strategy to reorganize its European operations resulting in the closure of its Bournemouth manufacturing facilities in the United Kingdom. Magellan will continue to operate its treatments center in Bournemouth. Management estimates the restructuring costs relating to the closure to be approximately $8 million, which will be finalized and provided for in the fourth quarter.

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

CONDENSED CONSOLIDATED INTERIM STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(unaudited)

Three month period
ended September 30

Nine month period
ended September 30

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

2020

2019

2020

2019

Revenues

163,377

235,575

564,357

769,541

Cost of revenues

140,635

200,501

479,500

646,556

Gross profit

22,742

35,074

84,857

122,985

Administrative and general expenses

11,431

15,195

39,704

46,785

Restructuring

5,554

6,263

Other

2,486

(819

)

(2,508

)

(514

)

Income before interest and income taxes

3,271

20,698

41,398

76,714

Interest expense

1,103

1,059

3,411

3,418

Income before income taxes

2,168

19,639

37,987

73,296

Income taxes

Current

731

1,841

2,642

7,152

Deferred

1,426

1,951

9,157

8,172

2,157

3,792

11,799

15,324

Net income

11

15,847

26,188

57,972

Other comprehensive income

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

Foreign currency translation

(807

)

(3,805

)

8,424

(26,849

)

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

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

871

(1,234

)

(6,895

)

(4,335

)

Total comprehensive income, net of taxes

75

10,808

27,717

26,788

Net income per share

Basic and diluted

0.00

0.27

0.45

1.00

MAGELLAN AEROSPACE CORPORATION

CONDENSED CONSOLIDATED INTERIM STATEMENTS OF FINANCIAL POSITION

(unaudited)

September 30

December 31

(expressed in thousands of Canadian dollars)

2020

2019

Current assets

Cash

91,200

69,637

Trade and other receivables

136,130

177,801

Contract assets

78,118

77,967

Inventories

224,987

196,823

Prepaid expenses and other

19,211

21,127

549,646

543,355

Non-current assets

Property, plant and equipment

427,445

439,102

Right-of-use assets

42,395

44,692

Investment properties

2,188

2,180

Intangible assets

60,483

65,373

Goodwill

34,509

34,137

Other assets

9,028

8,770

Deferred tax assets

411

3,556

576,459

597,810

Total assets

1,126,105

1,141,165

Current liabilities

Accounts payable and accrued liabilities and provisions

128,932

151,907

Debt due within one year

39,241

48,144

168,173

200,051

Non-current liabilities

Long-term debt

6,764

6,876

Lease liabilities

37,686

39,794

Borrowings subject to specific conditions

24,768

24,098

Other long-term liabilities and provisions

28,636

20,289

Deferred tax liabilities

36,848

34,181

134,702

125,238

Equity

Share capital

253,175

254,440

Contributed surplus

2,044

2,044

Other paid in capital

13,565

13,565

Retained earnings

517,106

516,911

Accumulated other comprehensive income

33,963

25,539

Equity attributable to equity holders of the Corporation

819,853

812,499

Non-controlling interest

3,377

3,377

Total equity

823,230

815,876

Total liabilities and equity

1,126,105

1,141,165

MAGELLAN AEROSPACE CORPORATION

CONDENSED CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS

(unaudited)

Three month period
ended September 30

Nine month period
ended September 30

(expressed in thousands of Canadian dollars)

2020

2019

2020

2019

Cash flow from operating activities

Net income

11

15,847

26,188

57,972

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

12,999

13,427

41,231

40,579

Gain on disposal of property, plant and equipment

(22

)

(9

)

(65

)

(56

)

Gain on disposal of joint venture investment

(881

)

(Decrease) increase in defined benefit plans

(358

)

25

(10

)

158

Accretion

844

644

2,453

1,817

Deferred taxes

17

1,279

7,444

4,652

Loss (income) on investments in joint ventures

22

(98

)

(84

)

(379

)

Changes to non-cash working capital

31,779

(3,589

)

(4,118

)

(42,695

)

Net cash provided by operating activities

45,292

27,526

73,039

61,167

Cash flow from investing activities

Business combination, net of cash acquired

(2,661

)

Purchase of property, plant and equipment

(6,291

)

(16,322

)

(12,976

)

(34,668

)

Proceeds from disposal of property, plant and equipment

67

107

426

Decrease (increase) in intangible and other assets

4,511

3,102

(2,696

)

(6,127

)

Net cash used in investing activities

(1,780

)

(13,153

)

(15,565

)

(43,030

)

Cash flow from financing activities

(Decrease) increase in debt due within one year

(5,287

)

589

(9,235

)

(7,895

)

Increase in long-term debt

1,409

1,409

Decrease in long-term debt

(618

)

(612

)

(1,856

)

(2,061

)

Lease liability payments

(1,586

)

(1,073

)

(5,053

)

(2,757

)

(Decrease) increase in long-term liabilities and provisions

(84

)

23

(886

)

(156

)

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

(8

)

19

31

(803

)

Common share repurchases

(1,560

)

(2,046

)

Common share dividend

(6,095

)

(5,821

)

(18,317

)

(17,463

)

Net cash used in financing activities

(13,829

)

(6,875

)

(35,953

)

(31,135

)

Increase (decrease) in cash during the period

29,683

7,498

21,521

(12,998

)

Cash at beginning of the period

61,730

41,373

69,637

63,316

Effect of exchange rate differences

(213

)

(643

)

42

(2,090

)

Cash at end of the period

91,200

48,228

91,200

48,228

View source version on businesswire.com: https://www.businesswire.com/news/home/20201110006200/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