TORONTO–(BUSINESS WIRE)–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

)

Contacts

Phillip C. Underwood

President & Chief Executive Officer

T: (905) 677-1889

E: phil.underwood@magellan.aero

Elena M. Milantoni

Chief Financial Officer

T: (905) 677-1889

E: elena.milantoni@magellan.aero

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