MAL Magellan Aerospace Corporation

TORONTO, Nov. 7, 2017 /CNW/ - Magellan Aerospace Corporation ("Magellan" or the "Corporation") released its financial results for the third quarter of 2017.  All amounts are expressed in Canadian dollars unless otherwise indicated. The results are summarized as follows:

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, Magellan designs, engineers, and manufactures aeroengine and aerostructure components for aerospace markets, 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.

Business Update

In September 2017 Magellan announced that the Corporation was selected by Airbus to design and build exhaust systems for the A320neo Pratt & Whitney 1100G-JM engines Nacelle. The first production units will enter service in 2022 with design activities commencing in the fourth quarter of 2017. It is expected that this program will generate in excess of CDN $200 million in the first ten years of this "life of the program" contract. Magellan was successful in securing this contract based in large part on our technical expertise and our proven ability to manage the industrialization of complex assemblies.

Magellan has a long history working with Airbus suppling exhaust systems for both the A380 and A340 aircraft as well as a wide range of precision machined components and assemblies for the full range of Airbus aircraft including the A320, A330 and A350 families. This new project aligns with Magellan's strategy to invest in advanced technologies and manufacturing processes to support our customers' needs and requirements.

For additional information, please refer to the "Management's Discussion and Analysis" section of the Corporation's 2016 Annual Report available on www.sedar.com.

2.  Results of Operations
A discussion of Magellan's operating results for third quarter ended September 30, 2017

The Corporation reported revenue in the third quarter of 2017 of $232.6 million as compared to $238.0 million in the third quarter of 2016. Gross profit and net income for the third quarter of 2017 were $41.7 million and $19.3 million, respectively, increased from the gross profit of $38.9 million and net income of $18.8 million for the third quarter of 2016. 

Consolidated Revenue

Consolidated revenues for the three months ended September 30, 2017 were $232.6 million, a $5.4 million decrease from the $238.0 million recorded for the same period in 2016. Revenues in Canada increased 3.0% in the third quarter of 2017 as compared to the third quarter of 2016, primarily driven by increases in repair and overhaul services and construction contract revenues, offset by unfavourable foreign exchange impact due to the weakening of the United States dollar relative to the Canadian dollar. On a currency neutral basis, Canadian revenues in the third quarter of 2017 increased by 5.3% over the same period of 2016.

Revenues in United States declined by 12.5% in the third quarter of 2017 compared to the third quarter of 2016 when measured in Canadian dollars mainly due to volume decreases in wide body aircraft and rotorcraft market, and unfavourable foreign exchange impact due to the weakening of the United States dollar against the Canadian dollar. On a currency neutral basis, revenues in the United States decreased 8.7% in the third quarter of 2017 over the same period in 2016.

European revenues increased 3.8% in the third quarter of 2017 compared to the same period in 2016 primarily driven by increased production rates for both single and wide body aircraft offset by an unfavourable foreign exchange impact as the British pound weakened relative to the Canadian dollar. On a constant currency basis, revenues in the third quarter of 2017 in Europe went up by 8.3% compared to the same period in 2016.

Gross Profit

Gross profit of $41.3 million for the third quarter of 2017 was 6.4% higher than the $38.9 million for the third quarter of 2016, and gross profit as a percentage of revenues was 17.8% for the third quarter of 2017, an increase from 16.3% for the same quarter in 2016. The gross profit in the current quarter was driven by higher repair and overhaul revenues and production volume increases offset by the unfavourable foreign exchange due to the weakening of the United States dollar and the British pound against the Canadian dollar year over year.

Administrative and General Expenses

Administrative and general expenses as a percentage of revenues were 6.0% for the third quarter of 2017, slightly higher than 5.9% in the corresponding period of 2016. Administrative and general expenses of $14.0 million in the third quarter of 2017 were consistent with the third quarter of 2016.  

Other

Other expense of $0.6 million for the third quarter of 2017 consisted of $2.8 million foreign exchange losses compared to a $1.9 million foreign exchange gains recorded in the corresponding period of 2016. The movements in balances denominated in foreign currencies and the fluctuations of the foreign exchange rates impact the net foreign exchange loss or gain recorded in a quarter. During the third quarter of 2017, the Corporation sold one of its investment properties for $3.9 million and recorded a $2.2 million gain.

Interest Expense  

Total interest expense of $1.3 million in the third quarter of 2017 was slightly lower than the $1.5 million in the third quarter of 2016, mainly due to lower interest on bank indebtedness and long-term debt driven by lower principal amounts outstanding during the third quarter of 2017 than the same period in 2016, offset by a higher discount on sale of accounts receivables due to a larger volume of receivables sold under factoring programs for the third quarter of 2017 as compared to the same period in the prior year.    

 Provision for Income Taxes

Income tax expense for the three months ended September 30, 2017 was $6.0 million, representing an effective income tax rate of 23.8% compared to 25.3% for the same period of 2016. The effective tax rate and the changes to current and deferred income tax expenses year over year were primarily due to change in mix of income across the different jurisdictions in which the Corporation operates. In addition, the lower tax rate applicable to the capital gain on the sale of the investment property during the current quarter further decreased the effective tax rate.  

3.  Selected Quarterly Financial Information

A summary view of Magellan's quarterly financial performance

Revenues and net income reported in the table above were 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 British pound impact the Corporation's United States dollar exposures in its European operations. During the periods reported, the average exchange rate of United States dollar relative to the Canadian dollar fluctuated between a high of 1.3748 in the first quarter of 2016 and a low of 1.2526 in the third quarter of 2017. The average exchange rate of British pound relative to the Canadian dollar moved from a high of 2.0253 in the fourth quarter of 2015 to a low of 1.6398 in the third quarter of 2017. The average exchange rate of the British pound relative to the United States dollar reached its high of 1.5168 in the fourth quarter of 2015 and hit a low of 1.2395 in the first quarter of 2017.

Revenue for the third quarter of 2017 of $232.6 million was $5.4 million lower than that in the third quarter of 2016. The average exchange rate of the United States dollar relative to the Canadian dollar in the third quarter of 2017 was 1.2501 versus 1.3053 in the same period of 2016. The average exchange rate of British pound relative to the Canadian dollar moved from 1.7135 in the third quarter of 2016 to 1.6397 during the current quarter. The average exchange rate of the British pound relative to the United States dollar was consistent in the third quarter of both years. Had the foreign exchange rates remained at levels experienced in the third quarter of 2016, reported revenues in the third quarter of 2017 would have been higher by $8.6 million.

As discussed above, net income reported in the quarterly information was also impacted by the foreign exchange movements. The Corporation reported its highest net income in the first quarter of 2017 mainly driven by the recording of the gain on the sale of the land and building of its Mississauga facility. In the third quarter of 2017, the Corporation recorded a gain of $2.2 million on the disposition of an investment property. The Corporation recorded business closure costs related to the closure of a small operating facility in the United States in the second quarter of 2016, and a margin adjustment related to one of its construction contracts in the third quarter of 2016. In the fourth quarter of 2015, the Corporation recognized an adjustment in corporation taxation rates in the income tax jurisdictions in which the Corporation operates. 

4.  Reconciliation of Net Income to 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 expense, income taxes and depreciation and amortization) in this quarterly statement. The Corporation has provided this measure because it believes this information is used by certain investors to assess financial performance and that EBITDA is a useful supplemental measure as it provides 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 of the components of this measure are calculated in accordance with IFRS, but EBITDA is not a recognized measure under IFRS, and the Corporation's method of calculation may not be comparable with that of other companies. Accordingly, EBITDA should not be used as an alternative to net income as determined in accordance with IFRS or as an alternative to cash provided by or used in operations.

EBITDA decreased slightly by 2.1% to $37.6 million for the third quarter of 2017 from the $38.4 million in the third quarter of 2016 as a result of lower interest, taxes and depreciation and amortization expenses, offset by higher net income.  

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 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

The Corporation generated $41.5 million during the third quarter of 2017 from operating activities, compared to $25.5 million in the third quarter of 2016. The increase in cash flow from operations was primarily impacted by the favourable movement in non-cash working capital balances resulting from the sale of receivables under a new program during the third quarter of 2017.

Investing Activities

Cash used in investing activities for the third quarter of 2017 was $11.9 million compared to $10.7 million in the same quarter of 2016, an increase of $1.2 million primarily attributed to higher investment in property, plant and equipment. The Corporation continues to invest in capital expenditures to enhance its manufacturing capabilities in various geographies and to support new customer programs.  During the quarter, the Corporation sold one of its investment properties for proceeds of $3.9 million, which was placed in an escrow account as at September 30, 2016 and subsequently released from escrow in early October 2017. This was reflected as a change in restricted cash during the quarter.

Financing Activities

The Corporation has an operating credit facility, with a syndicate of banks, with a Canadian dollar limit of $95.0 million, a US dollar limit of US$35.0 million and a British pound limit of £11.0 million. Under the terms of the amended credit agreement, the operating credit facility expires on September 30, 2018. Extensions of the facility are subject to mutual consent of the syndicate of lenders and the Corporation. The credit agreement also includes a Canadian $50.0 million uncommitted accordion provision which provides the Corporation with the option to increase the size of the operating credit facility.

The Corporation used $28.0 million in the third quarter of 2017 mainly to repay bank indebtedness, debt due within one year, and long-term debt, and to pay dividends.  

As at September 30, 2017 the Corporation has made contractual commitments to purchase $25.2 million of capital assets.

Dividends
During the third quarter of 2017, the Corporation declared and paid quarterly cash dividends of $0.065 per common shares representing an aggregating dividend payment of $3.8 million.

Subsequent to September 30, 2017, the Corporation announced that its Board of Directors had declared a quarterly cash dividend on its common shares of $0.085 per common share. The dividend will be payable on December 29, 2017 to shareholders of record at the close of business on December 15, 2017.

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 November 3, 2017, 58,209,001 common shares were outstanding and no preference shares were outstanding.

6.  Financial Instruments
A summary of Magellan's financial instruments

Derivative Contracts
The Corporation operates internationally, which gives rise to a risk that its income, cash flows and shareholders' equity may be adversely impacted by fluctuations in foreign exchange rates. Currency risk arises because the amount of the local currency receivable or payable for transactions denominated in foreign currencies may vary due to changes in exchange rates and because the non-Canadian dollar denominated financial statements of the Corporation's subsidiaries may vary on consolidation into the reporting currency of Canadian dollars. The Corporation from time to time may use derivative financial instruments to help manage foreign exchange risk with the objective of reducing transaction exposures and the resulting volatility of the Corporation's earnings. The Corporation does not trade in derivatives for speculative purposes. Under these contracts the Corporation is obligated to purchase specified amounts at predetermined dates and exchange rates. These contracts are matched with anticipated cash flows in United States dollars. The counterparties to the foreign currency contracts are all major financial institutions with high credit ratings. The Corporation had no foreign exchange contracts outstanding as at September 30, 2017.

Off Balance Sheet Arrangements
The Corporation does not have any off-balance sheet arrangements that have or reasonably are likely to have a material effect on its financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. As a result, the Corporation is not exposed materially to any financing, liquidity, market or credit risk that could arise if it had engaged in these arrangements.

7.  Related Party Transactions
A summary of Magellan's transactions with related parties

For the three and nine month periods ended September 30, 2017, the Corporation had no material transactions with related parties as defined in IAS 24 - Related Party Disclosures.

8.  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 December 31, 2016 and to the information under "Risks Inherent in Magellan's Business" in the Corporation's Annual Information Form for the year ended December 31, 2016, which have been filed with SEDAR at www.sedar.com.

9.  Outlook
The outlook for Magellan's business in 2017

The commercial aircraft industry is maintaining its upward trend with more than 12,000 jetliners on order at Airbus and Boeing. It is expected that this prolonged growth will continue through to the end of the decade when forecasters predict demands will reach a peak. However, it has become evident that there is a shift taking place in the industry where Original Equipment Manufacturers ("OEMs") are attempting to increase their margins through increasing vertical integration, the repatriation of work packages in-house, including higher margin maintenance, repair and overhaul work, and by continuing to pressure suppliers to reduce prices. Tier I suppliers are reacting with similar or counter strategies to preserve their margins as in the recent announcement by UTC to acquire Rockwell Collins. Such reorganizations will challenge lower tier II and III suppliers to realign their strategies to fit into this new model. The recent award of the A320 NEO (PW1100) Exhaust system by Airbus to Magellan is a successful example of Magellan realigning its strategy with that of the OEMs. 

Commercial aircraft build rates remain largely unchanged from the second quarter of 2017. Boeing's 737 build rate is currently at 47 aircraft ("A/C") per month, with 52 A/C per month planned for 2018 and 58 A/C per month in 2019. Although production mix changes between Airbus' A320ceo and A320neo were required in 2017, the overall program build rate remains at 55 A/C per month with expectations that this production rate will peak at 60 A/C per month in 2019. There remains some supply chain challenges that both Boeing and Airbus are managing as they continue to ramp up production rates.

In the wide body market, Boeing's 777 build rate has reduced to 5 A/C per month from 7 A/C per month.  The 787 build rate is holding at 12 A/C per month and the 747-8 freighter is at 0.5 A/C per month. Boeing's 767 build rate has stepped up to 2.5 A/C per month from 2 A/C per month in support of the KC-46 tanker program. Airbus announced the A380 build rate will drop in the fourth quarter of 2017 from 1.06 A/C per month to 0.71 A/C per month, which is slightly lower than previously forecasted. A330 rates are holding at 7 A/C per month as the A350XWB continues its production ramp-up to 13 A/C per month by 2020. 

There have been no significant changes in the regional turboprop market and the current view is that the market is not large enough for three manufacturers to maintain volume production. Additional market dilution is a possibility with the new entrants from Russia and China. ATR and Bombardier currently dominate this comparatively small market. 

The business jet market is forecasting to remain flat until 2019 as a generous supply of used aircraft continues to limit demand for new aircraft. The market has not appreciably recovered since the 2008 recession. Traditional market trend indicators such as increased corporate profits, no longer seem to have the same influence as they did prior to the recession. Magellan supports the turboprop and business jet market predominately through its castings and aerostructure commodity groups.

There are indications that the global rotorcraft market is starting to recover partially fueled by the development of new commercial products as OEM's attempt to stimulate the market. A number of new helicopters such as the Airbus' H160, Bell's 525 Relentless, 505 Jet Ranger X, and Leonardo's AW189 and AW609 are a few of the new products. There are also new market entrants such as Turkey's TAI T625 and the Marenco Swisshelicopter SH09. Additionally the market is seeing strong indications that major defence procurement initiatives are now anticipated in the defence sector which will have a positive effect on existing legacy programs and new program variants which are planned for the mid 2020's.

In the defense market, of specific interest to Magellan, over 240 Lockheed Martin F-35 Lightening II aircraft have been delivered since the start of the program, with 150 aircraft currently in the production flow. Lockheed is expecting to exceed 60 aircraft delivered in 2017 as rates continue to increase year over year. Integral to the program's affordability agenda, the next procurement tranche is being planned around anticipated cost efficiencies associated with combining a three year buy of approximately 440 aircraft. The U.S. Government budgeting process has progressed beyond the Armed Services Committees with both the Senate and House committees adding more aircraft to the Bill. Increased levels of potential program sales have also been anticipated from countries where fighter replacement programs have been announced or are imminent.

In summary, except for the continued strength of the commercial aircraft market, other aerospace markets remain stable but relatively flat.  Defence markets anticipate future opportunities from a number of current platform replacement programs that are on the horizon. In today's market, one of the key growth strategies for Magellan is to insure that we stay in constant alignment with our customer's procurement strategies.

Additional Information
Additional information relating to Magellan Aerospace Corporation, including the Corporation's annual information form, can be found on the SEDAR web site at www.sedar.com.

Forward Looking Statements 
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 uncertainties and assumptions, which may cause actual results to be materially different from those expressed or implied. These forward looking statements can be identified by the words such as "anticipate", "continue", "estimate", "forecast", "expect", "may", "project", "could", "plan", "intend", "should", "believe" and similar words suggesting future events or future performance. In particular there are forward looking statements contained under the heading "Overview" which outlines certain expectations for future operations. These statements assume the continuation of the current regulatory and legal environment; the continuation of trends for passenger airliner and defence production and are subject to the risks contained herein and outlined in our annual information form.  The Corporation assumes no future obligation to update these forward-looking statements except as required by law.

SOURCE Magellan Aerospace Corporation