Mr. Phillip Underwood reports

MAGELLAN AEROSPACE CORPORATION ANNOUNCES FINANCIAL RESULTS

Magellan Aerospace Corp. has released its financial results for the first quarter of 2024. All amounts are expressed in Canadian dollars unless otherwise indicated. The results are summarized in an attached table.

This news release presents certain non-IFRS (international financial reporting standards) 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 (net income 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.

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 and the supply chain

Though global air travel has seen signs of recovery with both domestic and international revenue passenger kilometres, on a combined basis, 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 manage these impacts and strives to mitigate their effect on Magellan's operations, supply chain, and most importantly the health and safety of its employees.

In the first three months of 2024, 65.1 per cent of revenues were derived from commercial markets while 34.9 per cent of revenues related to defence markets.

Business update

On Feb. 28, 2024, Magellan announced an agreement between Magellan Aerospace (U.K.) Ltd. and Airbus to continue to supply major structural wing components for Airbus's single-aisle family of aircraft. The high-strength, lightweight components will be delivered from Magellan's leading-edge long bed machining centre in the Wrexham facility from January, 2024. The agreement focuses on the production of precision-machined wing spars for use on the A320 family of aircraft. Wing spars are large, machined components that provide support and strength to the wing structure. Magellan will expand its industry-leading long bed machining capability at the Wrexham facility to ensure continued delivery of quality products that meet the expectations of the customer.

For additional information, please refer to the management's discussion and analysis section of the corporation's 2023 annual report, available on SEDAR+.

Results of operations

A discussion of Magellan's operating results for the first quarter ended March 31, 2024

The corporation reported revenue in the first quarter of 2024 of $235.2-million, an $11.8-million or 5.3-per-cent increase from the first quarter of 2023 revenue of $223.4-million. Gross profit and net income for the first quarter of 2024 were $23.8-million and $6.3-million, respectively, in comparison with gross profit of $22.3-million and net income of $3.9-million for the first quarter of 2023.

Consolidated revenue

Revenues in Canada decreased 6.3 per cent in the first quarter of 2024 compared with the corresponding period in 2023, primarily due to reduced revenues in the defence and space product portfolio.

Revenues in the United States increased by 20.5 per cent in the first quarter of 2024 compared with the first quarter of 2023, mainly due to volume increases for fighter and wide-body aircraft, higher casting product revenues, and favourable foreign exchange impacts due to the strengthening of the United States dollar relative to the Canadian dollar.

European revenues in the first quarter of 2024 increased 9.4 per cent compared with the corresponding period in 2023, primarily driven by volume increases for wide-body aircraft and favourable foreign exchange impacts as the U.S. dollar strengthened relative to the British pound.

Gross profit

Gross profit of $23.8-million for the first quarter of 2024 was $1.5-million higher than the $22.3-million gross profit for the first quarter of 2023 and gross profit as a percentage of revenues of 10.1 per cent for the first quarter of 2024 increased from the 10.0 per cent recorded in the same period in 2023. The gross profit in the current quarter increased from the same quarter in the prior year as a result of volume increases and contract rehabilitations on certain programs in addition to favourable product mix, offset in part by supply chain disruptions and material cost increases.

Administrative and general expenses

Administrative and general expenses as a percentage of revenues of 6.1 per cent for the first quarter of 2024 were lower on a nominal basis than the same period of 2023. Administrative and general expenses decreased $100,000 or 0.8 per cent to $14.2-million in the first quarter of 2024, compared with $14.3-million in the first quarter of 2023, mainly due to decreases in pension and professional services expenses, offset in part by increases in technology related expenses.

Restructuring

Restructuring in 2023 was primarily related to continuing costs associated with the closure of the Bournemouth facility and dismantling its former operations.

Other

Other for the first quarter of 2024 included a $700,000 foreign exchange gain compared with a $1.2-million foreign exchange loss 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.

Other for the first quarter of 2024 also includes a $200,000 settlement gain relating to the settlement of various pension obligations in conjunction with the purchase of group annuity contracts related to the corporation's defined benefit pension plans.

Interest expense

Total interest expense of $1.3-million in the first quarter of 2024 increased by $500,000 compared with the first quarter of 2023, mainly due to higher interest on bank indebtedness and long-term debt as a result of increased interest rates and higher principal amounts borrowed in the quarter as compared with the prior year.

Provision for income taxes

Income tax expense for the three months ended March 31, 2024, was $2.9-million, representing an effective income tax rate of 31.3 per cent, compared with 31.8 per cent for the same period of 2023. 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 and loss across the different jurisdictions in which the corporation operates and the reversal of temporary differences.

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 U.S. dollar and British pound, when the corporation translates its foreign operations to Canadian dollars. Further, the movements in the U.S. 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 1.3619 in the fourth quarter of 2023 and a low of 1.2663 in the second quarter of 2022. The average quarterly exchange rate of the British pound relative to the Canadian dollar reached a high of 1.7103 in the first quarter of 2024 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 U.S. dollar reached a high of 1.2680 in the first quarter of 2024 and hit a low of 1.1747 in the fourth quarter of 2022.

Revenue for the first quarter of 2024 of $235.2-million was higher than that in the first quarter of 2023. The average quarterly exchange rate of the U.S. dollar relative to the Canadian dollar in the first quarter of 2024 was 1.3488 versus 1.3518 in the same period of 2023. The average quarterly exchange rate of the British pound relative to the Canadian dollar moved from 1.6429 in the first quarter of 2023 to 1.7103 during the current quarter. The average quarterly exchange rate of the British pound relative to the U.S. dollar increased from 1.2154 in the first quarter of 2023 to 1.2680 in the current quarter.

The corporation's results throughout fiscal 2022 and 2023 were negatively impacted by the continued effects of the COVID-19 pandemic via reduced volumes and supply chain disruptions. The decrease in profitability in the fourth quarter of 2022 was mainly the result of the effect of inflation in materials, supplies, utilities and labour, and supply chain disruptions, which impacted production of goods, resulting in production system inefficiencies and lower absorption of manufacturing supplies. These impacts, although not as significant, continued to impact the results in 2023. Compared with the second quarter of 2022, the corporation has seen modest, albeit uneven, growth in quarterly revenues as global air travel continues to recover to pre-COVID-19 levels.

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 and adjusted EBITDA in this news release. 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.

Adjusted EBITDA in the first quarter of 2024 increased $3.1-million or 16.8 per cent to $21.7-million in comparison with $18.6-million in the same quarter of 2023, mainly as a result of higher net income driven largely by volume increases, contract rehabilitations and favourable product mix, higher interest and taxes, and lower depreciation and amortization expenses.

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, common share repurchases 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

For the three months ended March 31, 2024, operating activities provided $19.8-million of cash, compared with $18.4-million used in the first quarter of 2023. Changes in non-cash working capital items provided cash of $2.3-million, $34.4-million higher when compared with the usage of $32.2-million in the prior year. This increase is largely attributable to decreases in accounts receivables from timing of customer payments, increases in contract liabilities due to timing of customer deposits offset in part by increases in contract assets and inventories, and decreases in accounts payable, accrued liabilities and provisions, primarily driven by timing of material purchases and supplier payments.

Investing activities

Investing activities used $7.5-million of cash for the first quarter of 2024, compared with $4.1-million of cash used in the same quarter of the prior year, an increase of $3.4-million in investing activities due to higher spending on intangible and other assets, and higher levels of investment in property, plant and equipment.

Financing activities

Financing activities used $11.7-million of cash in the first quarter of 2024 compared with $4.9-million of cash used in the same quarter of the prior year. In the current quarter, cash usage was mainly for the repayment of bank indebtedness, the payment of common share dividends, lease liability payments and decreases in borrowings subject to specific conditions.

On June 14, 2023, the corporation extended its bank credit facility agreement with a syndicate of lenders for an additional two-year period expiring on June 30, 2025. The 2023 credit facility provides for a multicurrency global operating credit facility to be available to Magellan in a maximum aggregate amount of $75-million. The 2023 credit facility 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 2023 credit facility are subject to mutual consent of the syndicate of lenders and the corporation. At March 31, 2024, there were drawings under the 2023 credit facility of $26.9-million, including letters of credit totalling $3.6-million.

As at March 31, 2024, the corporation had contractual commitments to purchase $10.5-million of capital assets.

Dividends

During the first quarter of 2024, 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, 2024, 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 28, 2024, to shareholders of record at the close of business on June 14, 2024. 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 funds available for growth initiatives.

Normal course issuer bid

On May 25, 2023, the corporation's application to extend its normal course issuer bid (2023 NCIB) was approved, which allows the corporation to purchase up to 2,868,106 common shares between May 27, 2023, and May 26, 2024. During the first quarter of 2024, the corporation purchased 49,456 common shares for cancellation at a volume weighted average price of $7.76 per common share at a cost of $400,000.

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 April 30, 2024, 57,163,773 common shares were outstanding and no preference shares were outstanding.

Risk factors

A summary of risks and uncertainties facing Magellan

The corporation manages a number of risks in each of its businesses in order to achieve an acceptable level of risk without hindering the ability to maximize returns. Management has procedures to help identify and manage significant operational and financial risks.

For more information in relation to the risks inherent in Magellan's business, reference is made to the information under risk factors in the corporation's management's discussion and analysis for the year ended Dec. 31, 2023, and to the information under risks inherent in Magellan's business in the corporation's annual information form for the year ended Dec. 31, 2023, which have been filed on SEDAR+.

Outlook

The outlook for Magellan's business in 2024

Airbus delivered 142 aircraft in Q1 2024, received net orders of 170 aircraft and closed the quarter with an order backlog of 8,626 aircraft. Comparatively, Boeing delivered 83 aircraft, received net orders of 125 aircraft and closed the quarter with an order backlog of 6,259 aircraft.

Airbus's A320 program build rate is currently at 56 aircraft per month, and is planned to reach 62 aircraft per month by the end of 2024 and then 75 aircraft per month by 2026. The A330 build rate is currently at 3.3 aircraft per month, with plans to go to four aircraft per month in Q3 2024, while the A350 is at six aircraft per month, with plans to go to 10 aircraft per month in 2026. The A220 build rate is at 7.5 aircraft per month and is planned at 14 aircraft per month in 2026.

When the 737MAX door plug incident occurred, Boeing was transitioning 737 aircraft production from 31 to 38 aircraft per month. The FAA has capped the rate at 38 aircraft, although media reports suggest actual build rates in Q1 2024 were significantly lower. Boeing has stated that it is maintaining the supply chain at 38 aircraft per month. There were no deliveries of the 777 in Q1 2024 due to a shortage of engines. The engine manufacturer, General Electric, is co-ordinating engine production and delivery schedules with Boeing and airline customers. Boeing's 767 production continues at a rate of three aircraft per month, while the 787 build rate is transitioning to five aircraft per month.

Both Boeing and Airbus have healthy aircraft order backlogs, which reflect the strong market demand for new commercial aircraft.

In the defence market, U.S. Congress passed the fiscal year 2024 budget, which provides funding of $43.6-billion (U.S.) for aircraft procurement, including a $3-billion (U.S.) boost over the original request. Programs benefiting are Boeing's P8 Maritime Patrol aircraft and CH47 Chinook helicopter, Sikorsky's H-60 helicopter, Bell-Boeing's V22 Tiltrotor aircraft and Lockheed's C130J Tactical Transport aircraft. Boeing also secured a production contract from the U.S. Navy for a final F/A-18E/F Super Hornet fighter buy. This order will allow Boeing to extend F/A-18 production into 2027, which is two years beyond the previously announced 2025 production end.

Pratt & Whitney received full funding for its engine core upgrade program, which is to provide capability enhancements for its F135 engine and which ends a long-running debate over the future of the F-35 propulsion with an entirely new engine. This budget also includes funding for further development of a sixth-generation fighter under the U.S. Air Force (USAF) program known as Next Generation Air Dominance (NGAD).

The downside of this budget revealed USAF plans to purchase fewer total Boeing F-15EXs, and slow the pace of Lockheed Martin F-35 and Boeing T-7A trainer acquisitions. According to the USAF, this budget request sustains the modernization momentum of operational imperatives while taking a measured risk in the near term. Funds are redirected toward the USAF's sixth-generation fighter development initiative and the associated effort to build autonomous combat fighters.

Additional information

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

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