Mr. Phillip Underwood reports

MAGELLAN AEROSPACE CORPORATION ANNOUNCES FINANCIAL RESULTS

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

Overview

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 input 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.

Results of operations

A discussion of Magellan's operating results for the third quarter ended Sept. 30, 2023

The corporation reported revenue in the third quarter of 2023 of $213.0-million, a $21.9-million increase from third quarter of 2022 revenue of $191.1-million. Gross profit and net income for the third quarter of 2023 were $19.9-million and $3.7-million, respectively, in comparison with gross profit of $12.6-million and net income of $600,000 for the third quarter of 2022.

Revenue in Canada increased 5.4 per cent in the third 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 third quarter of 2023 increased by 4.1 per cent over the same period of 2022.

Revenue in the United States increased by 19.1 per cent in the third quarter of 2023 compared with the third quarter of 2022, largely due to increased volume for helicopter parts from a new contract, 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 16.0 per cent in the third quarter of 2023 over the same period in 2022.

European revenue in the third quarter of 2023 increased 13.0 per cent compared with the corresponding period in 2022 primarily driven by volume increases for single-aisle and wide-body aircraft, and net favourable transactional and translational foreign exchange impacts. On a currency neutral basis, European revenues in the third quarter of 2023 increased by 12.6 per cent when compared with the same period in 2022.

Gross profit of $19.9-million for the third quarter of 2023 was $7.3-million higher than the $12.6-million gross profit for the third quarter of 2022, and gross profit as a percentage of revenues of 9.4 per cent for the third quarter of 2023 increased from 6.6 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 6.5 per cent for the third quarter of 2023, higher than the same period of 2022 percentage of revenues of 6.3 per cent. Administrative and general expenses increased $1.8-million or 14.6 per cent to $13.9-million in the third quarter of 2023 compared with $12.1 million in the third quarter of 2022 mainly due to higher salary and benefit costs and information technology spending.

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 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 in the quarterly financial information table above, 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 pound relative to the Canadian dollar reached a high of 1.6995 in the first quarter of 2022 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 1.3485 in the fourth quarter of 2021 and hit a low of 1.1649 in the third quarter of 2022.

Revenue for the third quarter of 2023 of $213.0-million was higher than that in the third quarter of 2022. The average quarterly exchange rate of the United States dollar relative to the Canadian dollar in the third quarter of 2023 was 1.3412 versus 1.3061 in the same period of 2022. The average quarterly exchange rate of the British pound relative to the Canadian dollar increased from 1.5350 in the third quarter of 2022 to 1.6974 during the current quarter. The average quarterly exchange rate of the British pound relative to the United States dollar increased from 1.1753 in the third quarter of 2022 to 1.2658 in the current quarter. Had the foreign exchange rates remained at levels experienced in the third quarter of 2022, reported revenues in the third quarter of 2023 would have been lower by $3.0-million.

The corporation's quarterly results herein have been negatively impacted by the 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 a 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.

Dividends

During each of the first, second and third quarters of 2023, the corporation declared quarterly cash dividends of 2.5 cents per common share and has paid aggregate dividends of $4.3-million year to date.

Subsequent to Sept. 30, 2023, the corporation declared dividends to holders of common shares in the amount of 2.5 cents per common share payable on Dec. 29, 2023, to shareholders of record at the close of business on Dec. 15, 2023. The board of directors of the corporation continues to review its dividends on a quarterly basis to ensure that the dividend declared balances the return of capital to shareholders while maintaining adequate financial flexibility and investment for growth initiatives.

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 nine-month period ended Sept. 30, 2023, the corporation purchased a total of 144,311 common shares for cancellation at a volume weighted average price of $7.30 per common share at a cost of $1.1-million. During the same period in the prior year, the corporation purchased 167,424 common shares for cancellation at a volume weighted average price of $7.37 per common share at a cost of $1.2-million.

Outlook

The outlook for Magellan's business in 2023

The outlook remains positive for both commercial and defence aerospace markets despite continuing labour, economic and geopolitical challenges.

According to the International Air Transport Association (IATA), commercial air travel as measured by total revenue passenger kilometres (RPKs), is up 28.4 per cent over the same period in 2022 and is just 4.3 per cent below 2019 levels. Domestic travel volumes now exceed those in 2019 while international travel volumes still lag.

With increasing demand, Boeing and Airbus are ramping up production and deliveries of commercial aircraft. Boeing has been producing their 737 aircraft at a rate of 31 aircraft per month and expects to increase production to 50 aircraft per month in the 2025/2026 time frame. Boeing's September deliveries were impacted by a new 737 MAX manufacturing issue discovered in late August. Improperly drilled fastener holes were discovered in the aft pressure bulkhead on the fuselages of some 737 MAX models. Boeing reduced its 2023 delivery targets of the 737 MAX from 400 to 450 aircraft this year to 375 to 400 aircraft.

Boeing's current 787 build rate of four aircraft per month is to go to five aircraft per month by the end of 2023. The 2025/2026 target is 10 aircraft per month. The 767 program and 777 programs are each running at a rate of three aircraft per month. By the 2025/2026 time frame, Boeing expects to be delivering the latter at four aircraft per month, which reflects the previously announced delay in the 777X certification program.

Airbus is currently building A320's at a rate of 57 aircraft per month while the target for 2026 remains at 75 aircraft per month. The A220 program is now at 7.2 aircraft per month and is planned at 10 aircraft per month for the end of 2024. The A350 program is currently at 5.6 aircraft per month and will ramp up to seven aircraft per month in 2024, nine aircraft per month in 2025 and 10 aircraft per month in 2026. Airbus's A330 program is running at 2.8 aircraft per month and is planned at four aircraft per month for mid-2024.

Finally, in the commercial market, Pratt & Whitney disclosed in July, 2023, that a number of its PW1100G engines powering A320 neo aircraft, needed to inspected and partially disassembled due to potentially defective high-pressure turbine disks. Its plan is to inspect approximately 3,000 engines through 2026 and replace any defective discs. Airbus stated that it did not expect delivery targets to be affected this year, nor its plan to ramp up production of A320 aircraft.

According to a recent comment made by business consulting firm Frost & Sullivan, the defence industry is experiencing a significant shift toward strategic alliances because of escalating geopolitical tensions, but all must confront current growth constraints before they can forge ahead. The constraints they reference are the recruitment of personnel in this tight labour market and current supply chain challenges, both of which impact commercial markets as well.

From a budget perspective, most countries are increasing defence spending. Poland recently drafted a 2024 budget requesting $27.5-billion (U.S.) for defence, a 16.3-per-cent increase over 2023, representing 3 per cent of GDP (gross domestic product). This budget forms a part of Poland's long-term technical modernization plan that addresses air, land, sea and cyberspace domains. Aircraft included in the plan are 96 AH-64E Apache attack helicopters, Korean FA-50/FA-50PLN light combat aircraft and 32 Lockheed Martin F-35A Lightning II aircraft. The current United States FY2024 defence budget request is for $842-billion (U.S.) and includes F-22, F-35 and F-15EX fighters, the B-21 bomber, the KC-46A tanker, UH-60 and CH-53K helicopters, and unmanned aircraft systems, amongst others.

Briefly addressing Lockheed Martin's F-35 program, the manufacturer estimated it would deliver just 97 aircraft in 2023 due to a decision by the U.S. Department of Defense (DoD) to delay delivery acceptance of the Technical Refresh-3 configuration (TR-3) pending certification. The company delivered 80 F-35's over the first nine months of 2023 and is continuing to build F-35's at a rate of 156 aircraft per year. Certification of the TR-3 configuration is expected in H1 2024. In the meantime, the DoD will continue to accept deliveries of the TR-2 configuration. Belgium announced it would also wait for TR-3 certification prior to delivery of its first F-35 fighters.

In summary, the aerospace industry is still experiencing a degree of instability in this postpandemic period. Repeated program issues are causing production disruptions, labour shortages are creating challenges across all tiers of the industry and stretched supply chain lead times are constraining growth plans. With experts predicting that the situation will improve by the end of 2024, the industry is optimistic in being able to stabilize operations and better respond to the market growth potential in the coming years.

We seek Safe Harbor.