Mr. Phillip Underwood reports

MAGELLAN AEROSPACE CORPORATION ANNOUNCES FINANCIAL RESULTS

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

The industry, the supply chain and Russia's invasion of Ukraine

Though global air travel has seen signs of recovery with revenue passenger kilometres approaching pre-COVID 19 pandemic levels, Magellan's financial results and operations continue to be influenced by overhanging impacts from the pandemic. These impacts include customer build rate adjustments (and the impact on production scheduling), higher prices for goods and services, limited availability of products, disruptions to supply chains, and labour shortages. Magellan continues to monitor these developments and strives to mitigate 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 continues to disrupt supply chains and cause instability in the global economy. The extent and potential magnitude of the economic impacts on the aerospace industry remains uncertain.

Business update

On May 25, 2023, Magellan renewed its normal course issuer bid (2023 NCIB) under which allows the corporation to purchase for cancellation up to 2,868,106 of its common shares during the 12-month period commencing May 27, 2023, and ending May 26, 2024, through facilities of the Toronto Stock Exchange or other alternative Canadian trading systems.

On May 30, 2023, Magellan announced the signing of a contract extension with The Boeing Company (Boeing), providing for the continued manufacture of large and complex nacelle exhaust systems for the Boeing 767 program. The fabricated metallic assemblies will be produced and delivered from Magellan's facility in Middletown, Ohio. The continuation of this agreement with Boeing will ensure the continued supply by Magellan of acoustic plug and nozzle exhaust assemblies for the Boeing 767 program. Magellan utilizes internally manufactured metallic honeycomb in the production process. The metallic honeycomb is manufactured utilizing materials suitable for higher temperatures and offers advantages in weight savings and acoustic attenuation.

On June 23, 2023, the corporation extended its $75-million bank credit facility for an additional two-year period expiring on June 30, 2025.

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 second quarter ended June 30, 2023

The corporation reported revenue in the second quarter of 2023 of $219.7-million, a $27.0-million increase from second quarter of 2022 revenue of $192.7-million. Gross profit and net income for the second quarter of 2023 were $23.0-million and $2.0-million, respectively, in comparison with gross profit of $12.5-million and net income of $500,000 for the second quarter of 2022.

Revenue in Canada increased 10.4 per cent in the second quarter of 2023 compared with the corresponding period in 2022, primarily due to higher casting product revenues and increased volume for single aisle aircraft parts. On a currency neutral basis, Canadian revenues in the second quarter of 2023 increased by 7.2 per cent over the same period of 2022.

Revenue in the United States increased by 27.4 per cent in the second quarter of 2023 compared with the second quarter of 2022, largely due to increased volume for single aisle aircraft as Boeing continued to ramp up production of the 737 aircraft, higher casting product revenues and favourable foreign exchange impacts due to the strengthening of the United States dollar relative to the Canadian dollar. On a currency neutral basis, revenues in the United States increased 21.2 per cent in the second quarter of 2023 over the same period in 2022.

European revenue in the second quarter of 2023 increased 8.5 per cent compared with the corresponding period in 2022 primarily driven by volume increases for single aisle aircraft and favourable foreign exchange impacts resulting from the strengthening of the United States dollar relative to the British sterling pound. On a currency neutral basis, European revenues in the second quarter of 2023 increased by 3.4 per cent when compared with the same period in 2022.

Gross profit of $23.0-million for the second quarter of 2023 was $10.5-million higher than the $12.5-million gross profit for the second quarter of 2022, and gross profit as a percentage of revenues of 10.5 per cent for the second quarter of 2023 increased from 6.5 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 and favourable product mix, offset in part by supply chain disruptions and price increases of purchased materials and supplies.

Administrative and general expenses as a percentage of revenues was 6.4 per cent for the second quarter of 2023, lower than the same period of 2022 percentage of revenues of 6.6 per cent. Administrative and general expenses increased $1.5-million or 11.7 per cent to $14.1-million in the second quarter of 2023 compared with $12.6-million in the second quarter of 2022 mainly due to higher salary and benefit costs, and short-term compensation accruals.

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

Selected quarterly financial information

A summary view of Magellan's quarterly financial performance

Revenues and net income in the quarter were also impacted by the movements of the Canadian dollar relative to the United States dollar and British sterling pound, when the corporation translates its foreign operations to Canadian dollars. Further, the movements in the United States dollar relative to the British sterling pound impact the corporation's United States dollar exposures in its European operations. During the periods reported in the quarterly financial information attached table, the average quarterly exchange rate of the United States dollar relative to the Canadian dollar fluctuated between a high of 1.3580 in the fourth quarter of 2022 and a low of 1.2600 in the fourth quarter of 2021. The average quarterly exchange rate of the British sterling 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 sterling pound relative to the United States dollar reached a high of 1.3782 in the third quarter of 2021 and hit a low of 1.1649 in the third quarter of 2022.

Revenue for the second quarter of 2023 of $219.7-million was higher than that in the second quarter of 2022. The average quarterly exchange rate of the United States dollar relative to the Canadian dollar in the second quarter of 2023 was 1.3431 versus 1.2765 in the same period of 2022. The average quarterly exchange rate of the British sterling pound relative to the Canadian dollar increased from 1.6031 in the second quarter of 2022 to 1.6814 during the current quarter. The average quarterly exchange rate of the British sterling pound relative to the United States dollar decreased from 1.2601 in the second quarter of 2022 to 1.2520 in the current quarter. Had the foreign exchange rates remained at levels experienced in the second quarter of 2022, reported revenues in the second quarter of 2023 would have been lower by $8.7-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 results. Compared with the third quarter of 2021, the corporation has seen modest, albeit uneven, growth in quarterly revenues as global domestic air travel continues to recover to pre COVID-19 levels.

In response to COVID-19, the corporation applied and recognized the CEWS subsidy of $3.8-million in the fourth quarter 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.

Normal course issuer bid

On May 25, 2023, the corporation's application to extend its normal course issuer bid was approved and the 2023 NCIB allows the corporation to purchase up to 2,868,106 common shares, over a 12-month period commencing May 27, 2023, and ending May 26, 2024. During the six-month period ended June 30, 2023, the corporation purchased a total of 86,618 common shares for cancellation at a volume weighted average price of $7.23 per common share at a cost of $600,000. During the same period in the prior year, the corporation purchased 34,100 common shares for cancellation at a volume weighted average price of $7.56 per common share at a cost of $300,000.

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 Aug. 4, 2023, 57,359,516 common shares were outstanding and no preference shares were outstanding.

Outlook

The outlook for Magellan's business in 2023

Magellan Aerospace exhibited at the 2023 Paris Air Show in Le Bourget France from June 19 to June 22. The air show returns for the first time after the COVID-19 pandemic, making it four years since the last one took place in 2019. Show officials reported that 2,498 exhibitors representing 48 countries were in attendance. Record-breaking commercial aircraft orders were announced at the show with the largest single airline order in aviation history coming from India's IndiGo for 500 Airbus A320 aircraft. Another large order announcement was from Air India where they firmed up orders for 470 Airbus and Boeing, single aisle and wide body aircraft. Such large orders confirm the industry is returning to a period of strong demand for new commercial aircraft.

Boeing released it latest 20-year commercial aircraft market outlook which forecasts global demand for 42,595 new passenger and freighter aircraft (1,810 regionals; 32,420 narrow bodies; 7,440 wide bodies; 925 freighters) worth $8-trillion (U.S.) over the next 20 years. Approximately 50 per cent of the new aircraft demand is expected to replace the current fleet while the other 50 per cent is expected to satisfy growth. The forecast assumes a 4-per-cent annual passenger traffic growth rate.

The International Air Transport Association (IATA) noted in their semi-annual report that industry-wide revenue passenger kilometres reached 88 per cent of prepandemic levels in the first quarter of 2023. IATA also reported that the airline industry is returning to profitability, three years after a historic loss of $140-billion (U.S.) in 2020.

Boeing and Airbus production and delivery rates are increasing. Boeing plans to increase 737 production rates to 38 aircraft per month in August, 2023, then to 42 aircraft per month later this year and ramp up to 52 aircraft per month by 2025. Despite their various setbacks with the 737 program, Boeing still expects to deliver 400 to 450 aircraft in 2023. Boeing raised their 787 production rates to three aircraft per month this year and has plans to ramp up to five aircraft per month in late 2023, and 10 aircraft per month in the 2025/2026 timeframe. Deliveries of the 787 aircraft were paused again in early June as a new quality issue was discovered with horizontal stabilizer fittings. Reports indicated that 90 aircraft in Boeing's inventory would require fixes. Meanwhile, the 767 program is running at a rate of three aircraft per month, which is a mix of KC-46 tankers (based on the 767-2C) and 767-300 freighters. With a few orders remaining for 777-300ER aircraft, Boeing's 777 production line is outputting primarily freighters at a rate of between two and three aircraft per month. Considering the delay in the 777X certification program Boeing does not expect to begin delivering a combined rate of four aircraft per month until 2025.

Airbus is targeting 720 commercial aircraft deliveries in 2023. Airbus continues to ramp up the A320 production toward a monthly rate of 65 aircraft by the end of 2024. Airbus recently announced a decision to add a second final assembly line (FAL) in Tianjin, China, that will result in 10 FAL's globally for the A320 family, supporting Airbus's plans to produce 75 aircraft per month in 2026. The flight test program for the A321XLR is progressing, with entry-into-service expected to take place in the second quarter of 2024. The ramp-up on the A220 program continues to step toward a monthly production rate of 14 aircraft by the middle of the decade. Airbus announced that it was exploring a stretched version of the A220. On the A350 program, Airbus is targeting a move from five aircraft per month to six aircraft per month by 2024 and nine aircraft per month by the end of 2025.

In the defence market, the Pentagon's latest fiscal year 2024 budget request seeks $842-billion (U.S.), an increase of $26-billion (U.S.) (or 3.2 per cent) over the fiscal year 2023 enacted base budget. In addition, the president is expected to make an emergency supplemental funding request to Congress to address growing national security concerns including more funding in the fiscal year 2024 budget for the support of Ukraine.

Geopolitical factors such as the Russian invasion of Ukraine and rising tensions in the Asia/Pacific region are expected to buoy defence aircraft production levels, which in the rotorcraft market will translate into continuing production of legacy platforms through this decade. By the end of the decade however, the segment will begin to undergo considerable change with production of new generation military rotorcraft ramping up. The U.S. Army's Future Attack Reconnaissance Aircraft (FARA) program and Future Long Range Assault Aircraft (FLRAA) program, the NATO Next Generation Rotorcraft program, and possibly other new rotorcraft designed to meet various U.S. and international military requirements will begin replacing legacy rotorcraft. Some of these programs such as FLRAA and FARA have the potential for significant production volumes in the future.

In the defence fixed wing segment, the F-35 fighter program is targeting to complete its 1,000th fighter by the end of 2023. While production output is set to level out at 156 aircraft per year, according to Defense Daily, the U.S. Department of Defence is emphasizing preparedness for potential surge production should the need arise. There are currently 18 countries that participate in the F-35 program after the Czech Republic became the most recent to be approved by Washington to acquire the fighter.

Finally, while the defence aerospace segment is strong, confidence is also being restored in the long-term outlook for the commercial aerospace segment. With global air travel volumes approaching prepandemic levels, record-breaking commercial aircraft orders announced in Paris and aircraft OEM's ramping up aircraft production rates, the commercial aerospace segment is showing signs of strengthening.

Additional information

Additional information relating to Magellan Aerospace corporation, including the corporation's annual information form, can be found on the SEDAR website.

We seek Safe Harbor.