Mr. Phillip Underwood reports

MAGELLAN AEROSPACE CORPORATION ANNOUNCES FINANCIAL RESULTS

Magellan Aerospace Corp. has released its financial results for the first quarter of 2023. All amounts are expressed in Canadian dollars unless otherwise indicated. The results are summarized in the attached table.

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 after-market 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 and the Russia-Ukraine war

The COVID-19 pandemic and its variants continued to disrupt global health and impact economic conditions. Though global air travel has seen signs of recovery, Magellan's financial results and operations continued to be impacted by the COVID-19 pandemic by way of production schedule changes, either by its customers' build rate adjustments or due to broader government directives, which resulted in the need to modify work practices to meet appropriate health and safety standards, or by other COVID-19-related impacts on the availability of labour or to the supply chain. While governments have eased some COVID-19 restrictions, the reopening of businesses and economies in certain countries is creating a variety of new challenges, including, for example, higher prices for goods and services, limited availability of products, disruptions to supply chains, and labour shortages. Magellan continues to monitor continuing developments and attempts to mitigate the risks related to the COVID-19 pandemic and the impact on Magellan's operations, supply chain, and most importantly the health and safety of its employees.

The continuing invasion of Ukraine by Russia continued to disrupt supply chains and cause instability in the global economy. The extent and potential magnitude of economic impacts on the aerospace industry remain uncertain.

Business update

On Jan. 10, 2023, Magellan released a statement applauding the government of Canada's announcement that it had reached a final agreement to acquire 88 F-35 fighter jets for the Royal Canadian Air Force. By selecting the F-35, Canada is continuing a relationship that was established between the original partnering nations for the development of the F-35. The announcement secures significant benefits to the Canadian aerospace industry. To date, Canadian companies have been awarded high-value contracts as part of the F-35 global supply chain amounting to $2.7-billion (U.S.) as a result of Canada's partnership in the F-35 program. The Canadian economy is anticipated to benefit by more than $16.9-billion over the life of the program.

On March 6, 2023, Magellan announced the signing of a significant long-term agreement (LTA) extension with Collins Aerospace, a Raytheon Technologies business, to manufacture complex magnesium and aluminum castings for various military and commercial aerospace platforms. The castings will be produced by Magellan's facilities in Haley, Ont., and Glendale, Ariz. The extension of this LTA with Collins renews the framework for strategic alignment with Magellan; in addition to F-15, F-16 and F-18 castings for Collins legacy programs, the agreement also encompasses the supply of castings to support F-35 Lightning II, KC-46, A320neo, 787 and 777X programs.

On March 10, 2023, Magellan announced a contract with the government of Canada to design, build, launch and operate the Redwing microsatellite. Directed by the Department of National Defence's science and technology organization, Defence Research and Development Canada (DRDC), the $15.8-million Redwing contract represents the next generation of spacecraft technology for space domain awareness technology demonstration. When launched in 2026, Redwing will perform space object tracking to characterize an increasingly congested orbital environment, observe higher detail on space objects and provide near real-time tasking to respond to evolving space events.

For additional information, please refer to the management's discussion and analysis section of the corporation's 2022 annual report, available on SEDAR.

Results of operations

A discussion of Magellan's operating results for the first quarter ended March 31, 2023

The corporation reported revenue in the first quarter of 2023 of $223.4-million, a $35.7-million increase from the first quarter of 2022 revenue of $187.7-million. Gross profit and net income for the first quarter of 2023 were $22.3-million and $3.9-million, respectively, in comparison with gross profit of $10.9-million and net loss of $2.0-million for the first quarter of 2022.

Consolidated revenue

Revenues in Canada increased 15.7 per cent in the first quarter of 2023 compared with the corresponding period in 2022, primarily due to increased volumes for proprietary products and casting products to support growth in the single-aisle aircraft programs.

Revenues in the United States increased by 25.6 per cent in the first quarter of 2023 compared with the first quarter of 2022, mainly due to increased volume for single-aisle aircraft as Boeing continued to ramp up production for 737 MAX, price increases and favourable foreign exchange impacts as the United States dollar strengthened relative to the Canadian dollar. On a currency-neutral basis, revenues in the United States increased 17.5 per cent in the first quarter of 2023 over the same period in 2022.

European revenues in the first quarter of 2023 increased 18.7 per cent compared with the corresponding period in 2022, primarily driven by volume increases for single-aisle aircraft and favourable foreign exchange impacts as the United States dollar strengthened relative to the British pound.

Gross profit

Gross profit of $22.3-million for the first quarter of 2023 was $11.4-million higher than the $10.9-million gross profit for the first quarter of 2022, and gross profit as a percentage of revenues of 10.0 per cent for the first quarter of 2023 increased from 5.8 per cent recorded in the same period in 2022. The gross profit in the current quarter increased from the same quarter in the prior year as a result of volume and price increases on certain programs, favourable product mix and benefits from the restructuring efforts undertaken in the prior year, offset in part by supply chain disruptions and material price increases.

Administrative and general expenses

Administrative and general expenses as a percentage of revenues of 6.4 per cent for the first quarter of 2023 were higher on a nominal basis than the same period of 2022. Administrative and general expenses increased $1.5-million or 12.0 per cent to $14.3-million in the first quarter of 2023, compared with $12.8-million in the first quarter of 2022, mainly due to increases in salary and related expenses due to inflation and head count changes and travel related expenses.

Restructuring

Restructuring is primarily related to continuing costs associated with the closure of the Bournemouth facility and dismantling its former manufacturing operations.

Other

Other for the first quarter of 2023 included a $1.2-million foreign exchange loss compared with a $1.1-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

Total interest expense of $800,000 in the first quarter of 2023 increased $100,000 compared with the first quarter of 2022, mainly due to higher interest on bank indebtedness and long-term debt as a result of increased interest rates in the quarter as compared with the prior year.

Provision for income taxes

Income tax expense for the three months ended March 31, 2023, was $1.8-million, representing an effective income tax rate of 31.8 per cent compared with negative 42.7 per cent for the same period of 2022. 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, the reversal of temporary differences and the corporation no longer recognizing deferred tax assets for operating losses incurred by its United Kingdom subsidiary.

Selected quarterly financial information

A summary view of Magellan's quarterly financial performance

Revenues and net income in the quarter were impacted by the movements of the Canadian dollar relative to the United States dollar and British pound, when the corporation translates its foreign operations to Canadian dollars. Further, the movements in the United States dollar relative to the British pound impact the corporation's U.S.-dollar exposures in its European operations. During the periods reported, the average quarterly exchange rate of the U.S. dollar relative to the Canadian dollar fluctuated between a high of 1.3580 in the fourth quarter of 2022 and a low of 1.2280 in the second quarter of 2021. The average quarterly exchange rate of the British pound relative to the Canadian dollar reached a high of 1.7367 in the third quarter of 2021 and hit a low of 1.5350 in the third quarter of 2022. The average quarterly exchange rate of the British pound relative to the United States dollar reached a high of 1.3974 in the second quarter of 2021 and hit a low of 1.1649 in the third quarter of 2022.

Revenue for the first quarter of 2023 of $223.4-million was higher than that in the first quarter of 2022. The average quarterly exchange rate of the United States dollar relative to the Canadian dollar in the first quarter of 2023 was 1.3518 versus 1.2663 in the same period of 2022. The average quarterly exchange rate of the British pound relative to the Canadian dollar moved from 1.6995 in the first quarter of 2022 to 1.6429 during the current quarter. The average quarterly exchange rate of the British pound relative to the United States dollar decreased from 1.3419 in the first quarter of 2022 to 1.2154 in the current quarter. Had the foreign exchange rates remained at levels experienced in the first quarter of 2022, reported revenues in the first quarter of 2023 would have been lower by $8.4-million.

The corporation's results have been negatively impacted by the continued effects of the COVID-19 pandemic via reduced volumes and supply chain disruptions. In addition, continued high inflation on material, supplies, utilities and labour has impacted the results. Since the third quarter of 2021, the corporation began to see modest sequential growth in revenue as global domestic air travel continues to recover to pre-COVID-19 levels.

In response to COVID-19, the corporation applied and recognized the CEWS (Canadian emergency wage subsidy) of $3.9-million and $3.8-million in the second and fourth quarters of 2021, and reduced the expense that the subsidy offsets (none in 2022 or 2023). In the fourth quarter of 2022, the corporation continued the restructuring efforts in Europe of a plan initiated in 2020 to lower its production cost base and recognized a $2.8-million restructuring charge, including a $1.8-million impairment loss related to assets made obsolete as a result of the plan.

Investing activities

Investing activities used $4.1-million cash for the first quarter of 2023, compared with $5.0-million cash used in the same quarter of the prior year, a decrease of $900,000 primarily due to lower levels of investment in property, plant and equipment.

Financing activities

On June 30, 2021, the corporation extended its bank credit facility agreement with a syndicate of lenders for an additional two-year period expiring on June 30, 2023. The agreement provides for a multicurrency global operating credit facility to be available to Magellan in a maximum aggregate amount of $75-million. The agreement also includes a $75-million uncommitted accordion provision, which provides Magellan with the option to increase the size of the operating credit facility to $150-million. Extensions of the agreement are subject to mutual consent of the syndicate of lenders and the corporation. At March 31, 2023, there were no drawings under the agreement.

Financing activities used $4.9-million in the first quarter of 2023 mainly for the payment of common share dividends, lease liability payments and decreases in borrowings subject to specific conditions.

As at March 31, 2023, the corporation had contractual commitments to purchase $4.9-million of capital assets.

Dividends

During the first quarter of 2023, the corporation declared and paid a quarterly cash dividend of 2.5 cents per common share, representing an aggregating dividend payment of $1.4-million.

Subsequent to March 31, 2023, the corporation announced that its board of directors had declared a quarterly cash dividend on its common shares of 2.5 cents per common share. The dividend will be payable on June 30, 2023, to shareholders of record at the close of business on June 16, 2023. The board of directors of the corporation continues to review its dividends on a quarterly basis for more visibility of recovery, and ensure that the dividend declared balances the return of capital to shareholders while maintaining adequate financial flexibility and investment in growth initiatives.

Normal course issuer bid

On May 25, 2022, the corporation's application to commence a normal course issuer bid (2022 NCIB) was reapproved, which allowed the corporation to purchase up to 2,886,455 common shares, over a 12-month period commencing May 27, 2022, and ending May 26, 2023. During the first quarter of 2023, the corporation purchased 29,700 common shares for cancellation. In aggregate, up to the end of March 31, 2023, the company has purchased 312,672 common shares for cancellation under the 2022 NCIB program.

Outstanding share information

The authorized capital of the corporation consists of an unlimited number of preference shares, issuable in series, and an unlimited number of common shares. As at May 2, 2023, 57,416,434 common shares were outstanding and no preference shares were outstanding.

Outlook

The outlook for Magellan's business in 2023

During the first quarter of 2023, total combined aircraft deliveries by Boeing and Airbus were ahead of those for the same period in 2022. Boeing delivered 130 aircraft and Airbus delivered 127 aircraft, compared with 95 aircraft and 142 aircraft, respectively.

By the end of Q1 2023, Boeing was on track to achieve its goal of delivering 400 to 450 aircraft in 2023. However, in April, Boeing announced that it had to pause deliveries of 737 MAX and P-8 surveillance aircraft due to the discovery of a new quality problem. All models of 737 MAX except for MAX 9's are impacted. Boeing's CEO stated that the issue is not a safety-of-flight concern but is expected to delay deliveries of 45 to 50 MAX aircraft. Despite this, Boeing currently intends to support the planned 737 MAX production ramp-up to 38 aircraft per month in June and 42 aircraft per month in January, 2024.

Boeing restarted deliveries of its 787 aircraft in March, 2023. Its delivery target for the year is 70 to 80 aircraft. With a sustained demand for 10 aircraft per month, Boeing will increase the rate from the current three aircraft per month to reach the target by March, 2025. It is working through final testing on its 777X program with 25 aircraft built to date and plans for a production start later this year. The first delivery is expected mid-2025. Meanwhile it is building the 777Fs at three aircraft per month.

Airbus's first quarter deliveries were below those in Q1 2022, which is causing some concern in the industry that the annual target of 720 aircraft will be challenging. The A320 build rate reached 48 aircraft per month in 2022 and is forecast to reach 65 aircraft per month late in 2024 and 75 aircraft per month in 2026. A350 rates are forecast to go from six aircraft per month to nine aircraft per month by the end of 2025, while A330 is forecast to go from three to four aircraft per month in 2024. The A220 is currently being produced at six aircraft per month with nine aircraft per month forecast in 2025.

As a final comment on the commercial market, recent order activity for wide-body aircraft is offering new hope that this segment may be beginning to rebound. Across the entire market, both single aisle and wide body, confidence is building as the air travel industry continues its recovery and aircraft manufacturers work through supply chain issues that have been impeding the ramp-up of build rates.

The potential for defence market growth appears relatively certain. In the face of emerging threats to security, nations are solidifying modernization plans and considering strategies to advance procurement of equipment and munitions. Gap assessments of defence readiness help to highlight opportunities to strengthen a country's defence systems. As an example, Canada is investing in the modernization of North American defence command to strengthen Canada's and North America's defensive capabilities. The current environment is also reportedly having a positive impact on the largest defence program, which is the F-35 fighter program. There have been over 900 aircraft delivered to date against 3,000-plus planned in the program of record. Lockheed plans to deliver 153 aircraft in 2023 and reach a steady-state delivery rate of 156 aircraft annually from 2024 onward.

One other specific program note is that in February, Boeing announced it will end production of its F/A-18E/F Super Hornet fighter in 2025, after approximately 30 years since the first flight. This was an inevitable decision as next-generation fighters begin to take the place of F/A-18 within modernized fleets.

Finally, as defence requirements increase in parallel with the commercial aerospace ramp-up, there are competing demands for what is currently a constrained supply chain, which experts continue to predict will be resolved by 2024.

We seek Safe Harbor.