Magellan Aerospace Corporation Announces Financial Results
TORONTO–(BUSINESS WIRE)–Magellan Aerospace Corporation (“Magellan” or the “Corporation”) released its financial results for the first quarter of 2021. All amounts are expressed in Canadian dollars unless otherwise indicated. The results are summarized as follows:
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| Three month period ended | ||||||
| March 31 | |||||||||
| Expressed in thousands of Canadian dollars, except per share amounts |
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| 2021 |
| 2020 |
| Change | |
| Revenues |
|
|
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| 176,281 | 238,813 | (26.2%) | ||
| Gross Profit |
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| 17,079 | 36,772 | (53.6%) | ||
| Net Income |
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| 3,262 | 20,074 | (83.8%) | ||
| Net Income per Share |
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| 0.06 | 0.34 | (82.4%) | ||
| Adjusted EBITDA |
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| 19,332 | 41,543 | (53.5%) | ||
| Adjusted EBITDA per Share |
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| 0.33 | 0.71 | (53.5%) | ||
| This news release contains certain forward-looking statements that reflect the current views and/or expectations of the Corporation with respect to its performance, business and future events. Such statements are subject to a number of risks, uncertainties and assumptions, which may cause actual results to be materially different from those expressed or implied. The Corporation assumes no future obligation to update these forward-looking statements except as required by law. |
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| This news release presents certain non-IFRS financial measures to assist readers in understanding the Corporation’s performance. Non-IFRS financial measures are measures that either exclude or include amounts that are not excluded or included in the most directly comparable measures calculated and presented in accordance with Generally Accepted Accounting Principles (“GAAP”). Throughout this news release, reference is made to EBITDA (defined as net income before interest, income taxes, depreciation and amortization) and Adjusted EBITDA (earnings before interest, income taxes, depreciation and amortization, goodwill impairment and restructuring), which the Corporation considers to be indicative measures of operating performance and a metric to evaluate profitability. EBITDA and Adjusted EBITDA are not generally accepted earnings measures and should not be considered as alternatives to net income (loss) or cash flows as determined in accordance with IFRS. As there is no standardized method of calculating this measure, the Corporation’s EBITDA and Adjusted EBITDA may not be directly comparable with similarly titled measures used by other companies. |
1. Overview
A summary of Magellan’s business and significant updates
Magellan is a diversified supplier of components to the aerospace industry. Through its wholly owned subsidiaries, controlled entity and joint venture, Magellan designs, engineers and manufactures aeroengine and aerostructure components for aerospace markets, including advanced products for defence and space markets, and complementary specialty products. The Corporation also supports the aftermarket through supply of spare parts as well as performing repair and overhaul services.
Magellan operates substantially all of its activities in one reportable segment, Aerospace, which is viewed as one segment by the chief operating decision-makers for the purpose of resource allocations, assessing performance and strategic planning. The Aerospace segment includes the design, development, manufacture, repair and overhaul, and sale of systems and components for defence and civil aviation.
Impact of COVID-19
In March 2020, due to the worsening public health crisis associated with the novel coronavirus (“COVID-19”), the World Health Organization (“WHO”) declared COVID-19 a global pandemic. Governments worldwide, including those countries in which Magellan operates, enacted emergency measures to combat the spread of the virus. These measures, which included the implementation of travel bans, self-imposed quarantine periods and social distancing, caused a material disruption to businesses globally resulting in an economic slowdown and decreased demand in the aerospace industry. Governments and central banks reacted with significant monetary and fiscal interventions designed to stabilize economic conditions and vaccination programs have been introduced to inoculate people against COVID-19; however, the situation continues to evolve (including the prevalence of virus variants), and the long-term success of these interventions is not yet determinable.
In the first quarter of 2021, the disruption to air travel and commercial activities, particularly within the aerospace and commercial airline industries continued to negatively impact global supply, demand and distribution capabilities. There are some positive signs of recovery in the market, however, the COVID-19 pandemic continues to adversely affect Magellan’s customers and their demand for the Corporation’s products and services. The situation remains dynamic and the ultimate duration and magnitude of the impact on the economy and the financial effect on the Corporation remains unknown at this time.
Financial impacts
The challenging economic climate may have material adverse impact on Magellan including, but not limited to, significant declines in revenue as the Corporation’s customers are concentrated in the aerospace industry; impairment charges to the Corporation’s property, plant and equipment, intangible assets and goodwill due to declines in revenue and cash flows; and restructuring charges as Magellan aligns its structure and personnel to the dynamic environment. Estimates and judgements made in the preparation of financial statements are increasingly difficult and subject to a high degree of measurement uncertainty during this volatile period.
Magellan has implemented measures to align its cost structure during the current market conditions, including headcount reductions and re-balancing work force; elimination of all non-essential travel, entertaining and other discretionary spending; and reductions to the capital expenditure plan. The carrying value of the Corporation’s long-lived assets are reviewed for indications of impairment at the end of each reporting period. At March 31, 2021, the Corporation reviewed each cash-generating unit and did not identify indications of impairment.
Operational impacts
During this pandemic, the aerospace manufacturing industry, in the jurisdictions the Corporation operates in, has been classified as an “essential service”. As a result, the Corporation’s operations remained open, but at reduced levels of activity during the first quarter of 2021.
To manage the additional safety risks presented by COVID-19, Magellan implemented standardized tools and methods to keep its employees safe and well informed. Magellan has implemented additional safety, sanitization and physical distancing procedures, including remote work sites where possible, and ceased all non-essential business travel. Magellan’s procedures are designed to align with recommendations from the WHO, the United States’ Centers for Disease Control and Prevention, and applicable federal, state and provincial government health authorities.
Liquidity
As at March 31, 2021, the Corporation ended with a cash balance of $71.3 million and $70.5 million of available borrowing capacity under Magellan’s operating credit facility, providing the Corporation with $141.8 million of total liquidity. The credit facility agreement also includes a $75 million uncommitted accordion provision that provides the Corporation with the option to increase the size of the operating credit facility to $150 million. Magellan expects that cash provided by operations, cash on hand and its sources of financing will be sufficient to meet the Corporation’s debt obligations and fund committed and future capital expenditures.
Business Update
On March 16, 2021, Magellan Aerospace announced the signing of a five year renewal agreement with Avio Aero, a GE Aviation Company, for the supply of magnesium and aluminum castings. The castings will be produced primarily at Magellan’s Haley, Ontario facility, with several also being produced at its Glendale, Arizona facility.
On March 31, 2021, Magellan Aerospace announced an agreement with Boeing Commercial Airplanes on a contract extension for the supply of landing gear kits and other complex structural components for the 737, 767, and 777 airplanes. The significant, long term contract extension will see product delivered from Magellan’s facilities in Kitchener, Ontario and New York City, New York. Magellan’s solution for Boeing Commercial Airplanes employs a vertical integration strategy utilizing global resources in Kitchener, New York City, and India. Magellan will deliver the kits and hardware direct to Boeing’s assembly facilities in Renton and Everett, Washington.
For additional information, please refer to the “Management’s Discussion and Analysis” section of the Corporation’s 2020 Annual Report available on www.sedar.com.
2. Results of Operations
A discussion of Magellan’s operating results for the first quarter ended March 31, 2021
The Corporation reported revenue in the first quarter of 2021 of $176.3 million, a $62.5 million decrease from the first quarter of 2020 revenue of $238.8 million. Gross profit and net income for the first quarter of 2021 were $17.1 million and $3.3 million, respectively, in comparison to gross profit of $36.8 million and net income of $20.1 million for the first quarter of 2020.
Consolidated Revenue
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| Three month period | |||||
|
| ended March 31 | |||||
| Expressed in thousands of dollars |
| 2021 |
| 2020 |
| Change |
| Canada |
| 81,036 |
| 94,243 | (14.0%) | |
| United States |
| 45,809 |
| 64,718 | (29.2%) | |
| Europe |
| 49,436 |
| 79,852 | (38.1%) | |
| Total revenues |
| 176,281 |
| 238,813 | (26.2%) | |
The COVID-19 pandemic and resulting economic contraction, including the continued disruption to air travel and commercial activities, particularly within the commercial aerospace industry, continue to have a negative impact on demand for the Corporation’s aerospace products and services.
Revenues in Canada decreased 14.0% in the first quarter of 2021 compared to the corresponding period in 2020, primarily due to decreased volumes for casting and proprietary products.
Revenues in the United States decreased by 29.2% in the first quarter of 2021 compared to the first quarter of 2020 primarily due to volume decreases for wide-body aircraft and aeroengine products.
European revenues in the first quarter of 2021 decreased 38.1% compared to the corresponding period in 2020 primarily driven by build rate reductions for both single aisle and wide-body aircraft.
Gross Profit
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| Three month period | |||||
|
| ended March 31 | |||||
| Expressed in thousands of dollars |
| 2021 |
| 2020 | Change | |
| Gross profit |
| 17,079 |
| 36,772 | (53.6%) | |
| Percentage of revenues |
| 9.7% |
| 15.4% |
| |
Gross profit of $17.1 million for the first quarter of 2021 was $19.7 million lower than the $36.8 million gross profit for the first quarter of 2020, and gross profit as a percentage of revenues of 9.7% for the first quarter of 2021 decreased from 15.4% recorded in the same period in 2020. The gross profit in the current quarter was primarily impacted by volume decreases, higher production costs and unfavourable product mix.
Administrative and General Expenses
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| Three month period | |||||
|
| ended March 31 | |||||
| Expressed in thousands of dollars |
| 2021 |
| 2020 | Change | |
| Administrative and general expenses |
| 11,644 |
| 15,676 | (25.7%) | |
| Percentage of revenues |
| 6.6% |
| 6.6% |
| |
Administrative and general expenses as a percentage of revenues of 6.6% for the first quarter of 2021 were consistent with the same period of 2020. Administrative and general expenses decreased $4.0 million or 25.7% to $11.6 million in the first quarter of 2021 compared to $15.7 million in the first quarter of 2020 mainly due to lower salary and related expenses and lower discretionary spending to align with current business volumes.
Restructuring
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| Three month period | |||
|
| ended March 31 | |||
| Expressed in thousands of dollars |
| 2021 |
| 2020 |
| Restructuring |
| 176 |
| ─ |
Restructuring cost of $176 incurred in the first quarter of 2021 mainly related to the closure of the Bournemouth manufacturing facilities announced in the fourth quarter of 2020.
Other
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| Three month period | |||||
|
| ended March 31 | |||||
| Expressed in thousands of dollars |
| 2021 |
| 2020 | ||
| Foreign exchange gain |
| (849 | ) |
| (5,785 | ) |
| (Gain) loss on disposal of property, plant and equipment |
| (7 | ) |
| 19 |
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| Other |
| ─ |
| (172 | ) | |
| Total other |
| (856 | ) |
| (5,938 | ) |
Other income for the first quarter of 2021 included a $0.8 million foreign exchange gain compared to a $5.8 million foreign exchange gain in the first quarter of the prior year. The movements in balances denominated in foreign currencies and the fluctuations of the foreign exchange rates impact the net foreign exchange gain or loss recorded in a quarter.
Interest Expense
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| Three month period | |||
|
| ended March 31 | |||
| Expressed in thousands of dollars |
| 2021 |
| 2020 |
| Interest on bank indebtedness and long-term debt |
| 62 |
| 66 |
| Accretion charge for borrowings, lease liabilities and long-term debt |
| 645 |
| 814 |
| Discount on sale of accounts receivable |
| 194 |
| 320 |
| Total interest expense |
| 901 |
| 1,200 |
Total interest expense of $0.9 million in the first quarter of 2021 decreased $0.3 million compared to the first quarter of 2020 mainly due to lower accretion charge on lease liabilities and long-term debt as principal amounts decreased, and lower discount on sale of accounts receivables due to lower volume of receivables sold in the current quarter.
Provision for Income Taxes
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| Three month period | |||
|
| ended March 31 | |||
| Expressed in thousands of dollars |
| 2021 |
| 2020 |
| Expense of current income taxes |
| 3,237 |
| 2,047 |
| Expense of deferred income taxes |
| (1,285 | ) | 3,713 |
| Total expense of income taxes |
| 1,952 |
| 5,760 |
| Effective tax rate |
| 37.4% |
| 22.3% |
Income tax expense for the three months ended March 31, 2021 was $2.0 million, representing an effective income tax rate of 37.4% compared to 22.3% for the same period of 2020. The change in effective tax rate and current and deferred income tax expenses year over year was primarily due to the change in mix of income across the different jurisdictions in which the Corporation operates and reversal of temporary differences.
3. Selected Quarterly Financial Information
A summary view of Magellan’s quarterly financial performance
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| 2021 |
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| 2020 |
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| 2019 | ||
| Expressed in millions of dollars, except per share amounts | Mar 31 |
| Dec 31 |
| Sep 30 |
| Jun 30 |
| Mar 31 |
| Dec 31 |
| Sep 30 |
| Jun 30 | ||
| Revenues | 176.3 | 180.1 |
| 163.4 | 162.2 | 238.8 | 246.7 | 235.6 | 264.1 | ||||||||
| Income before taxes | 5.2 | (23.6 | ) | 2.2 | 10.0 | 25.8 | 11.7 | 19.6 | 27.8 | ||||||||
| Net Income | 3.3 | (22.9 | ) | 0.0 | 6.1 | 20.1 | 9.4 | 15.8 | 21.7 | ||||||||
| Net Income per share |
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| Basic and diluted | 0.06 | (0.40 | ) | 0.00 | 0.10 | 0.34 | 0.16 | 0.27 | 0.37 | ||||||||
| EBITDA1 | 19.2 | (6.8 | ) | 16.3 | 24.8 | 41.5 | 27.9 | 34.1 | 42.7 | ||||||||
| Adjusted EBITDA1 | 19.3 | 11.5 |
| 21.8 | 25.5 | 41.5 | 27.9 | 34.1 | 42.7 | ||||||||
1 EBITDA and Adjusted EBITDA are not IFRS financial measures. Please see Section 4 the “Reconciliation of Net Income to EBITDA and Adjusted EBITDA” section for more information.
Commencing in March 2020, the outbreak of the COVID-19 pandemic caused disruption to air travel and commercial activities, particularly within the commercial aerospace industry, and negatively impacted global supply, demand and distribution capabilities. As a result, there was a decrease in demand for the Corporation’s aerospace products and services that led to lower revenues and profits.
Revenues and net income reported in the quarterly financial information were also impacted by the movements in the Canadian dollar relative to the United States dollar and British pound, when the Corporation translates its foreign operations to Canadian dollars. Further, the movements in the United States dollar relative to the British pound impact the Corporation’s United States dollar exposures in its European operations. During the periods reported, the average quarterly exchange rate of the United States dollar relative to the Canadian dollar fluctuated between a high of 1.3859 in the second quarter of 2020 and a low of 1.2666 in the current quarter. The average quarterly exchange rate of the British pound relative to the Canadian dollar reached a high of 1.7461 in the first quarter of 2021 and hit its lowest rate of 1.6280 in the third quarter of 2019. The average quarterly exchange rate of the British pound relative to the United States dollar reached a high of 1.3788 in the first quarter of 2021 and hit a low of 1.2327 in the third quarter of 2019.
Revenue for the first quarter of 2021 of $176.3 million was lower than that in the first quarter of 2020. The average quarterly exchange rate of the United States dollar relative to the Canadian dollar in the first quarter of 2021 was 1.2666 versus 1.3442 in the same period of 2020. The average quarterly exchange rate of the British pound relative to the Canadian dollar moved from 1.7185 in the first quarter of 2020 to 1.7461 during the current quarter. The average quarterly exchange rate of the British pound relative to the United States dollar increased from 1.2805 in the first quarter of 2020 to 1.3788 in the current quarter. Had the foreign exchange rates remained at levels experienced in the first quarter of 2020, reported revenues in the first quarter of 2021 would have been higher by $6.7 million.
As discussed above, net income reported in the quarterly information was impacted by the foreign exchange movements. The fourth quarter of 2019 was impacted by volume decreases in Europe, production inefficiencies in certain operating divisions and an accrual recorded in relation to the wind-down of the A380 program. Results for the first quarter of 2021 and the second, third and fourth quarter of 2020 were impacted by volume decreases in a number of commercial programs due to COVID-19. During the third quarter of 2020, Magellan implemented cost savings initiatives designed to reduce operating costs by re-balancing its workforce and recognized severance costs of $5.6 million. A $3.4 million cost recovery was recorded against cost of sales as a result of the cancellation of A320neo program in the third quarter of 2020. In the fourth quarter of 2020, the Corporation committed to a plan to restructure its manufacturing divisions in Europe due to a decrease in demand as a result of a deterioration in economic conditions stemming from COVID-19 and recognized a $5.6 million restructuring charge including a $2.4 million impairment loss related to assets made obsolete as a result of the plan. Further, a $12.0 million goodwill impairment charge was recorded in the fourth quarter of 2020. The Corporation recognized $8.6 million, $10.4 million, and $1.0 million in respect of the government subsidy relating to the CEWS program in the second, third and fourth quarter of 2020 respectively, and reduced the expense that the subsidy is intended to offset.
4. Reconciliation of Net Income to EBITDA and Adjusted EBITDA
A description and reconciliation of certain non-IFRS measures used by management
In addition to the primary measures of earnings and earnings per share (basic and diluted) in accordance with IFRS, the Corporation includes EBITDA (earnings before interest, income taxes and depreciation and amortization) and Adjusted EBITDA (earnings before interest, income taxes, depreciation and amortization, goodwill impairment and restructuring) in this MD&A. The Corporation has provided this measure because it believes this information is used by certain investors to assess financial performance and that EBITDA and Adjusted EBITDA are useful supplemental measures as they provide an indication of the results generated by the Corporation’s principal business activities prior to consideration of how these activities are financed and how the results are taxed in the various jurisdictions. Each component of this measure is calculated in accordance with IFRS, but EBITDA and Adjusted EBITDA are not recognized measures under IFRS, and the Corporation’s method of calculation may not be comparable with that of other companies. Accordingly, EBITDA and Adjusted EBITDA should not be used as alternatives to net income as determined in accordance with IFRS or as alternatives to cash provided by or used in operations.
|
| Three month period | |||
|
| ended March 31 | |||
| Expressed in thousands of dollars |
| 2021 |
| 2020 |
| Net income |
| 3,262 |
| 20,074 |
| Interest |
| 901 |
| 1,200 |
| Taxes |
| 1,952 |
| 5,760 |
| Depreciation and amortization |
| 13,041 |
| 14,509 |
| EBITDA |
| 19,156 |
| 41,543 |
| Add back: |
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| Restructuring |
| 176 |
| ─ |
| Adjusted EBITDA |
| 19,332 |
| 41,543 |
EBITDA in the first quarter of 2021 decreased $22.4 million or 53.9% to $19.2 million in comparison to $41.5 million in the same quarter of 2020 mainly as a result of lower net income driven by volume reductions, taxes, depreciation and amortization expense, and interest. Adjusted EBITDA decreased $22.2 million or 53.5% as compared to $41.5 million in 2020.
5. Liquidity and Capital Resources
A discussion of Magellan’s cash flow, liquidity, credit facilities and other disclosures
The Corporation’s liquidity needs can be met through a variety of sources including cash on hand, cash provided by operations, short-term borrowings from its credit facility and accounts receivable securitization program, and long-term debt and equity capacity. Principal uses of cash are for operational requirements, capital expenditures, repurchase common shares and dividend payments. Based on current funds available and expected cash flow from operating activities, management believes that the Corporation has sufficient funds available to meet its liquidity requirements at any point in time. However, if cash from operating activities is lower than expected or capital projects exceed current estimates, or if the Corporation incurs major unanticipated expenses, it may be required to seek additional capital in the form of debt or equity or a combination of both.
Cash Flow from Operations
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| Three month period | |||||
|
| ended March 31 | |||||
| Expressed in thousands of dollars |
| 2021 |
| 2020 | ||
| Increase in trade receivables |
| (24,703 | ) |
| (29,933 | ) |
| Increase in contract assets |
| (10,390 | ) |
| (6,713 | ) |
| Increase in inventories |
| (2,178 | ) |
| (13,549 | ) |
| Increase in prepaid expenses and other |
| (1,588 | ) |
| (4,421 | ) |
| Increase (decrease) in accounts payable, accrued liabilities and provisions |
| 2,207 |
|
| (2,834 | ) |
| Changes to non-cash working capital balances |
| (36,652 | ) |
| (57,450 | ) |
| Cash used in operating activities |
| (20,898 | ) |
| (18,992 | ) |
For the three months ended March 31, 2021, the Corporation used $20.9 million from operating activities, compared to $19.0 million used in the first quarter of 2020. Changes in non-cash working capital items used cash of $36.7 million, $20.8 million lower when compared to the usage of $57.5 million in the prior year largely attributable to the favourable quarter over quarter changes in inventories driven by volume reductions and timing of material purchases; in accounts receivable from lower revenues and timing of payments; in prepaid expenses due to timing of payments; and in accounts payable, accrued liabilities and provisions primarily driven by timing of supplier payments and receipt of milestone payments. This was offset in part by higher contract assets from the timing of production and billing related to products transferred over time.
Investing Activities
|
| Three month period | |||||
|
| ended March 31 | |||||
| Expressed in thousands of dollars |
| 2021 |
| 2020 | ||
| Purchase of property, plant and equipment |
| (2,663 | ) |
| (4,210 | ) |
| Proceeds of disposal of property plant and equipment |
| 86 |
|
| ─ | |
| Increase in intangible and other assets |
| (1,003 | ) |
| (1,728 | ) |
| Change in restricted cash |
| ─ |
| (1,246 | ) | |
| Cash used in investing activities |
| (3,580 | ) |
| (7,184 | ) |
Investing activities used $3.6 million cash for the first quarter of 2021 compared to $7.2 million cash used in the same quarter of the prior year, a reduction of $3.
Contacts
Phillip C. Underwood
President & Chief Executive Officer
T: (905) 677-1889
E: [email protected]
Elena M. Milantoni
Chief Financial Officer
T: (905) 677-1889
E: [email protected]
