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Magellan Aerospace Corporation Announces Financial Results

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TORONTO, August 10, 2021--(BUSINESS WIRE)--Magellan Aerospace Corporation ("Magellan" or the "Corporation") released its financial results for the second quarter of 2021. All amounts are expressed in Canadian dollars unless otherwise indicated. The results are summarized as follows:

Three month period ended
June 30

Six month period ended
June 30

Expressed in thousands of Canadian dollars, except per share amounts

2021

2020

Change

2021

2020

Change

Revenues

167,638

162,167

3.4%

343,919

400,980

(14.2%)

Gross Profit

13,636

25,343

(46.2%)

30,715

62,115

(50.6%)

Net Income

1,060

6,103

(82.6%)

4,322

26,177

(83.5%)

Net Income per Share

0.02

0.10

(80.0%)

0.07

0.45

(84.4%)

Adjusted EBITDA

15,561

25,525

(39.0%)

34,893

67,068

(48.0%)

Adjusted EBITDA per Share

0.27

0.44

(38.6%)

0.60

1.15

(47.8%)

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 risks, uncertainties and assumptions, which may cause actual results to be materially different from those expressed or implied. The Corporation assumes no future obligation to update these forward-looking statements except as required by law.

This news release presents certain non-IFRS 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 (earnings 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.

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, 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.

Impact of COVID-19
In March 2020, due to the worsening public health crisis associated with the novel coronavirus ("COVID-19"), the World Health Organization ("WHO") declared COVID-19 a global pandemic. Governments worldwide, including those countries in which Magellan operates, enacted emergency measures to combat the spread of the virus. These measures, which included the implementation of travel bans, self-imposed quarantine periods and social distancing, caused a material disruption to businesses globally resulting in an economic slowdown and decreased demand in the aerospace industry. Governments and central banks reacted with significant monetary and fiscal interventions designed to stabilize economic conditions and vaccination programs have been introduced to inoculate people against COVID-19; however, the situation continues to evolve (including the prevalence of virus variants), and the long-term success of these interventions is not yet determinable.

In the second quarter of 2021, there were positive signs of recovery in the global economy and increased demand for the Corporation’s products and services as global domestic air travel showed strong recovery. However, the COVID-19 pandemic situation remains dynamic and the ultimate duration and magnitude of the impact on the economy and the financial effect on the Corporation remains unknown at this time.

Financial impacts
The challenging economic climate may have material adverse impact on Magellan including, but not limited to, significant declines in revenue as the Corporation’s customers are concentrated in the aerospace industry; impairment charges to the Corporation’s property, plant and equipment, intangible assets and goodwill due to declines in revenue and cash flows; and restructuring charges as Magellan aligns its structure and personnel to the dynamic environment. Estimates and judgements made in the preparation of financial statements are increasingly difficult and subject to a high degree of measurement uncertainty during this volatile period.

Magellan has implemented measures to align its cost structure during the current market conditions, including headcount reductions and re-balancing work force; elimination of all non-essential travel, entertaining and other discretionary spending; and reductions to the capital expenditure plan. The carrying value of the Corporation’s long-lived assets are reviewed for indications of impairment at the end of each reporting period. At June 30, 2021, the Corporation reviewed each cash-generating unit and did not identify any indications of impairment.

Operational impacts
During this pandemic, the aerospace manufacturing industry in the jurisdictions the Corporation operates in has been classified as an "essential service". As a result, the Corporation’s operations remained open, but at reduced levels of activity during the second quarter of 2021.

To manage the additional safety risks presented by COVID-19, Magellan implemented standardized tools and methods to keep its employees safe and well informed. Magellan has implemented additional safety, sanitization and physical distancing procedures, including remote work sites where possible, and ceased all non-essential business travel. Magellan’s procedures are designed to align with recommendations from the WHO, the United States’ Centers for Disease Control and Prevention, and applicable federal, state and provincial government health authorities.

Liquidity
As at June 30, 2021, the Corporation ended with a cash balance of $46.3 million and $70.5 million of available borrowing capacity under Magellan’s operating credit facility, providing the Corporation with $116.8 million of total liquidity. The credit facility agreement also includes a $75 million uncommitted accordion provision that provides the Corporation with the option to increase the size of the operating credit facility to $150 million. Magellan expects that cash provided by operations, cash on hand and its sources of financing will be sufficient to meet the Corporation’s debt obligations and fund committed and future capital expenditures.

Business Update
On May 27, 2021, Magellan announced that the Toronto Stock Exchange ("TSX") has accepted notice filed by Magellan to make a normal course issuer bid ("NCIB") through facilities of the TSX or other alternative Canadian trading systems. Under the NCIB Magellan may purchase for cancellation up to 2,886,455 common shares of the Corporation during the 12 month period commencing May 27, 2021 and ending May 26, 2022.

On June 21, 2021, Magellan announced a contract extension between Magellan Aerospace (UK) Limited and Airbus SAS ("Airbus") for the supply of aluminum and titanium structural wing components from Magellan’s facilities located throughout Europe and India. The contract renewal is comprised of precision machined details and assemblies for use on the A320 and A330 aircraft.

For additional information, please refer to the "Management’s Discussion and Analysis" section of the Corporation’s 2020 Annual Report available on www.sedar.com.

2. Results of Operations
A discussion of Magellan’s operating results for the second quarter ended June 30, 2021

The Corporation reported revenue in the second quarter of 2021 of $167.6 million, a $5.4 million increase from second quarter of 2020 revenue of $162.2 million. Gross profit and net income for the second quarter of 2021 were $13.6 million and $0.7 million, respectively, in comparison to gross profit of $25.3 million and net income of $6.1 million for the second quarter of 2020.

Consolidated Revenue

Three month period

Six month period

ended June 30

ended June 30

Expressed in thousands of dollars

2021

2020

Change

2021

2020

Change

Canada

75,820

83,595

(9.3%)

156,856

177,838

(11.8%)

United States

42,117

45,288

(7.0%)

87,926

110,006

(20.1%)

Europe

49,701

33,284

49.3%

99,137

113,136

(12.4%)

Total revenue

167,638

162,167

3.4%

343,919

400,980

(14.2%)

The Corporation’s revenue in the second quarter of 2021 improved from the second quarter of 2020 due to increased customer demand for the Corporation’s products and services on a number of commercial programs as global domestic air travel continues to recover to pre COVID-19 levels.

Revenue in Canada decreased 9.3% in the second quarter of 2021 compared to the corresponding period in 2020, primarily impacted by approximately $4.6 million lower revenue due to a work stoppage at the Corporation’s Haley facility. In addition, the Corporation’s revenue in the second quarter of 2021 was impacted negatively by decreased volumes for proprietary products, lower demand for repair and overhaul services, and unfavourable foreign exchange impact driven by the weakening of the United States dollar relative to the Canadian dollar. On a currency neutral basis, Canadian revenues in the second quarter of 2021 decreased by 3.0% over the same period of 2020.

Revenue in the United States decreased by 7.0% in the second quarter of 2021 compared to the second quarter of 2020, primarily due to the weakening of the United States dollar relative to the Canadian dollar, offset in part by volume increases for single aisle aircraft, specifically the Boeing 737 MAX as aircraft build rates increased. On a currency neutral basis, revenues in the United States increased 4.9% in the second quarter of 2021 over the same period in 2020.

European revenue in the second quarter of 2021 increased 49.3% compared to the corresponding period in 2020 primarily driven by build rate recovery for both single aisle and wide-body aircraft, offset partially by the weakening of the United States dollar relative to the British pound. On a currency neutral basis, European revenues in the second quarter of 2021 increased by 64.2% when compared to the same period in 2020.

Gross Profit

Three month period

Six month period

ended June 30

ended June 30

Expressed in thousands of dollars

2021

2020

Change

2021

2020

Change

Gross profit

13,636

25,343

(46.2%)

30,715

62,115

(50.6%)

Percentage of revenue

8.1%

15.6%

8.9%

15.5%

Gross profit of $13.6 million for the second quarter of 2021 was $11.7 million lower than the $25.3 million gross profit for the second quarter of 2020, and gross profit as a percentage of revenues of 8.1% for the second quarter of 2021 decreased from 15.6% recorded in the same period in 2020. The gross profit in the current quarter was primarily impacted by the work stoppage at the Corporation’s Haley facility, volume decreases for proprietary and repair and overhaul products and services, higher production costs due to manufacturing inefficiencies related to lower revenues, and unfavourable foreign exchange impact due to the weakening of the United States dollar relative to the Canadian dollar and the British pound. The Corporation recognized $3.7 million of recoveries in the second quarter of 2021 from the Canada Emergency Wage Subsidy ("CEWS") program (second quarter 2020 $8.0 million), which mitigated a portion of the adverse impact of COVID-19.

Administrative and General Expenses

Three month period

Six month period

ended June 30

ended June 30

Expressed in thousands of dollars

2021

2020

Change

2021

2020

Change

Administrative and general expenses

10,518

12,597

(16.5%)

22,162

28,273

(21.6%)

Percentage of revenues

6.3%

7.8%

6.4%

7.1%

Administrative and general expenses as a percentage of revenues was 6.3% for the second quarter of 2021, lower than the same period of 2020 percentage of revenues of 7.8%. Administrative and general expenses decreased $2.1 million or 16.5% to $10.5 million in the second quarter of 2021 compared to $12.6 million in the second quarter of 2020 mainly due to lower salary and related expenses and lower discretionary spending to align with current business volumes, offset in part by lower CEWS program recoveries of $0.5 million.

Restructuring

Three month period

Six month period

ended June 30

ended June 30

Expressed in thousands of dollars

2021

2020

2021

2020

Restructuring

676

709

852

709

Restructuring costs of $0.7 million incurred in the second quarter of 2021 mainly related to the closure of the Bournemouth manufacturing facilities announced in the fourth quarter of 2020. The Corporation recorded $0.7 million of restructuring cost in the second quarter of 2020 related to adjustments made its cost base to address reduced levels of demand.

Other

Three month period

Six month period

ended June 30

ended June 30

Expressed in thousands of dollars

2021

2020

2021

2020

Foreign exchange loss (gain)

513

1,006

(370

)

(4,779

)

Gain on sale of capital assets

(39

)

(62

)

(12

)

(43

)

Gain on disposal of investment property

(350

)

(350

)

(172

)

Total Other

124

944

(732

)

(4,994

)

Other loss for the second quarter of 2021 included a $0.5 million foreign exchange loss compared to a $1.0 million foreign exchange loss in the second 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. In addition, a $0.4 million gain was recorded in the second quarter of 2021 relating to the disposal for proceeds of $0.7 million of an investment property.

Interest Expense

Three month period

Six month period

ended June 30

ended June 30

Expressed in thousands of dollars

2021

2020

2021

2020

Interest on bank indebtedness and long-term debt

48

79

110

145

Accretion charge for borrowings, lease liabilities and long-term debt

650

795

1,295

1,609

Discount on sale of accounts receivable

34

234

228

554

Total interest expense

732

1,108

1,633

2,308

Total interest expense of $0.7 million in the second quarter of 2021 decreased $0.4 million compared to the second quarter of 2020 mainly due to lower accretion charge on lease liabilities and long-term debt as principal amounts decreased, and lower discount on sale of accounts receivables due to lower volume of receivables sold in the current quarter.

Provision for Income Taxes

Three month period

Six month period

ended June 30

ended June 30

Expressed in thousands of dollars

2021

2020

2021

2020

Current income tax expense (recovery)

2,616

(1,152

)

5,853

895

Deferred income tax (recovery) expense

(2,090

)

5,034

(3,375

)

8,747

Income tax expense

526

3,882

2,802

9,642

Effective tax rate

33.2

%

38.9

%

36.4

%

26.9

%

Income tax expense for the three months ended June 30, 2021 was $0.5 million, representing an effective income tax rate of 33.2% compared to 38.9% for the same period of 2020. The change in the 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 and reversal of temporary differences.

3. Selected Quarterly Financial Information
A summary view of Magellan’s quarterly financial performance

2021

2020

2019

Expressed in millions of dollars,

except per share amounts

Jun 30

Mar 31

Dec 31

Sep 30

Jun 30

Mar 31

Dec 31

Sep 30

Revenues

167.6

176.3

180.1

163.4

162.2

238.8

246.7

235.6

Income before taxes

1.6

5.2

(23.6

)

2.2

10.0

25.8

11.7

19.6

Net Income

1.1

3.3

(22.9

)

0.0

6.1

20.1

9.4

15.8

Net Income per share

Basic and diluted

0.02

0.06

(0.40

)

0.00

0.10

0.34

0.16

0.27

EBITDA1

14.9

19.2

(6.8

)

16.3

24.8

41.5

27.9

34.1

Adjusted EBITDA1

15.6

19.3

11.5

21.8

25.5

41.5

27.9

34.1

1 EBITDA and Adjusted EBITDA are not IFRS financial measures. Please see Section 4 the "Reconciliation of Net Income to EBITDA and Adjusted EBITDA" section for more information.

Commencing in March 2020, the outbreak of the COVID-19 pandemic caused disruption to air travel and commercial activities, particularly within the commercial aerospace industry, and negatively impacted global supply, demand and distribution capabilities. As a result, there was a decrease in demand for the Corporation’s aerospace products and services that led to lower revenues and profits commencing in the second quarter of 2020. In the second quarter of 2021, the Corporation began to see a recovery as the demand for certain commercial aircraft program increased.

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, the average quarterly exchange rate of the United States dollar relative to the Canadian dollar fluctuated between a high of 1.3859 in the second quarter of 2020 and a low of 1.2280 in the current quarter. The average quarterly exchange rate of the British pound relative to the Canadian dollar reached a high of 1.7461 in the first quarter of 2021 and hit a low of 1.6280 in the third quarter of 2019. 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 1.2327 in the third quarter of 2019.

Revenue for the second quarter of 2021 of $167.6 million was higher than that in the second quarter of 2020. The average quarterly exchange rate of the United States dollar relative to the Canadian dollar in the second quarter of 2021 was 1.2280 versus 1.3859 in the same period of 2020. The average quarterly exchange rate of the British pound relative to the Canadian dollar decreased from 1.7203 in the second quarter of 2020 to 1.7170 during the current quarter. The average quarterly exchange rate of the British pound relative to the United States dollar increased from 1.2388 in the second quarter of 2020 to 1.3974 in the current quarter. Had the foreign exchange rates remained at levels experienced in the second quarter of 2020, reported revenues in the second quarter of 2021 would have been higher by $15.5 million.

As discussed above, net income reported in the quarterly information was impacted by the foreign exchange movements. Results were also negatively impacted by COVID-19 pandemic driven volume decreases in a number of commercial programs commencing in the second quarter of 2020. However, starting with the second quarter of 2021, there are some positive signs of revenue recovery as certain commercial program aircraft build rates have started to increase. The Corporation also recognized CEWS subsidy recoveries of $8.6 million, $10.4 million, $1.0 million in the second, third and fourth quarter of 2020, respectively and $3.9 million in the second quarter of 2021, and reduced the expense that the subsidy offsets. The fourth quarter of 2019 was impacted by volume decreases in Europe, production inefficiencies in certain operating divisions and an accrual recorded in relation to the wind-down of the A380 program. During the third quarter of 2020, Magellan implemented cost savings initiatives designed to reduce operating costs by re-balancing its workforce and recognized severance costs of $5.6 million. A $3.4 million cost recovery was recorded against cost of sales as a result of the cancellation of the Airbus A320neo program in the third quarter of 2020. In the fourth quarter of 2020, the Corporation committed to a plan to restructure its manufacturing divisions in Europe due to decreased demand as a result of a deterioration in economic conditions stemming from COVID-19 and recognized a $5.6 million restructuring charge, including a $2.4 million impairment loss related to assets made obsolete as a result of the plan. Further, a $12.0 million goodwill impairment charge was recorded in the fourth quarter of 2020.

4. 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 (earnings before interest, income taxes and depreciation and amortization) and Adjusted EBITDA (earnings before interest, income taxes, depreciation and amortization, goodwill impairment and restructuring) in this MD&A. 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.

Three month period

Six month period

ended June 30

ended June 30

Expressed in thousands of dollars

2021

2020

2021

2020

Net income

1,060

6,103

4,322

26,177

Add back:

Interest

732

1,108

1,633

2,308

Taxes

526

3,882

2,478

9,642

Depreciation and amortization

12,567

13,723

25,608

28,232

EBITDA

14,885

24,816

34,041

66,359

Add back:

Restructuring

676

709

852

709

Adjusted EBITDA

15,561

25,525

34,893

67,068

Adjusted EBITDA in the second quarter of 2021 decreased $9.9 million or 38.8% to $15.6 million in comparison to $25.5 million in the same quarter of 2020 mainly as a result of lower net income driven by volume reductions and unfavouable foreign exchange rate movements, taxes, depreciation and amortization expense, and interest.

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, repurchase common shares 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

Three month period

Six month period

ended June 30

ended June 30

Expressed in thousands of dollars

2021

2020

2021

2020

(Increase) decrease in accounts receivable

(12,722

)

55,627

(37,425

)

25,694

Decrease (increase) in contract assets

5,770

2,508

(4,620

)

(4,205

)

Decrease (increase) in inventories

2,595

(16,278

)

417

(29,827

)

(Increase) decrease in prepaid expenses and other

(264

)

4,135

(1,852

)

(286

)

Increase (decrease) in accounts payable, accrued liabilities and provisions

5,267

(24,439

)

7,474

(27,273

)

Changes in non-cash working capital balances

646

21,553

(36,006

)

(35,897

)

Cash provided by operating activities

12,849

46,739

(8,049

)

27,747

For the three months ended June 30, 2021, the Corporation generated $12.8 million from operating activities, compared to $46.7 million in the second quarter of 2020. Changes in non-cash working capital items provided cash of $0.7 million, $20.9 million lower when compared to $21.6 million in the prior year. The quarter over quarter changes were largely attributable to increases in accounts receivables from higher revenues, timing of payments and lower volume of receivables sold and increases in prepaid expenses due to timing of payments. These increases were offset in part by decreases in inventories driven by volume reductions and timing of material purchases, increases in accounts payable, accrued liabilities and provisions primarily driven by timing of supplier payments and receipt of milestone payments, and decreases in contract assets from timing of production and billing related to products transferred over time.

Investing Activities

Three month period

Six month period

ended June 30

ended June 30

Expressed in thousands of dollars

2021

2020

2021

2020

Purchase of property, plant and equipment

(2,308

)

(2,475

)

(4,971

)

(6,685

)

Proceeds from disposal of property, plant and equipment

107

86

107

Proceeds from disposal of investment property

644

644

Increase in intangible and other assets

(809

)

(4,216

)

(1,812

)

(7,207

)

Cash used in investing activities

(2,473

)

(6,584

)

(6,053

)

(13,785

)

Investing activities used $2.5 million cash for the second quarter of 2021 compared to $6.6 million cash used in the same quarter of the prior year, a reduction of $4.1 million primarily due to lower levels of investment in intangibles and increases in pension assets as a result of better than the expected return on plan assets.

Financing Activities

Three month period

Six month period

ended June 30

ended June 30

Expressed in thousands of dollars

2021

2020

2021

2020

Decrease in debt due within one year

(26,650

)

(951

)

(35,527

)

(3,948

)

Decrease in long-term debt

(559

)

(646

)

(1,017

)

(1,238

)

Lease liability payments

(1,695

)

(1,709

)

(3,372

)

(3,467

)

Decrease in long-term liabilities and provisions

27

(547

)

(153

)

(802

)

Increase (decrease) in borrowings subject to specific conditions, net

10

(1,104

)

39

Common share repurchases

(486

)

(486

)

Common share dividend

(6,062

)

(6,110

)

(12,124

)

(12,222

)

Cash used in financing activities

(34,939

)

(10,439

)

(53,297

)

(22,124

)

On June 30, 2021, the Corporation extended its Bank Credit Facility Agreement ("Agreement") with a syndicate of lenders for an additional two-year period expiring on June 30, 2023. The Agreement provides for a multi-currency 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.

The Corporation used $34.9 million in the second quarter of 2021 primarily for the repayment of debt due within one year as the Corporation wound down it accounts receivable securitization program. Usage of funds also related to the payment of common share dividends, lease liabilities and long-term debt.

As at June 30, 2021, the Corporation had contractual commitments to purchase $6.7 million of capital assets.

Dividends
During the first and second quarter of 2021, the Corporation declared and paid quarterly cash dividends of $0.105 per common shares representing an aggregating dividend payment of $12.1 million.

Subsequent to June 30, 2021, the Corporation announced that its Board of Directors had declared a quarterly cash dividend on its common shares of $0.105 per common share. The dividend will be payable on September 29, 2021 to shareholders of record at the close of business on September 16, 2021.

Normal Course Issuer Bid
On May 27, 2021, the Corporation’s application was approved for a Normal Course Issuer Bid to purchase through the facilities of the Toronto Stock Exchange and alternative Canadian trading platforms up to 2,886,455 common shares, over a 12-month period commencing May 27, 2021 and ending May 26, 2022. As of June 30, 2021, under the program the Corporation had not purchased common shares for cancellation.

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 August 6, 2021, 57,729,106 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. As at June 30, 2021, foreign exchange contracts of US$3.0 million and £4.0 million were outstanding with an immaterial fair value.

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 month period ended June 30, 2021, 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.

The worldwide COVID-19 pandemic continues to cause material disruption to businesses globally. The introduction of vaccines has led to optimism; however, the situation continues to evolve (including the prevalence of virus variants). The extent and duration of the COVID-19 pandemic is unknown at this time, as is the efficacy of the government and central bank interventions, the Corporation’s business continuity plan and other mitigating measures. Any estimate of the length and severity of these developments is therefore subject to significant uncertainty and, accordingly, estimates of the extent to which the COVID-19 pandemic may materially and adversely affect the Corporation’s operations, financial results and condition in future periods are also subject to significant uncertainty.

The Corporation is susceptible to risks relating to production disruption caused by unionized employees, including work stoppages or work slowdowns. The labour strike at the Corporation’s Haley, Ontario facility which commenced at the end of the first quarter of 2021 caused work slowdowns for approximate two months, which adversely affected deliveries to the Corporation’s customers and the Corporation’s financial performance.

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, 2020 and to the information under "Risks Inherent in Magellan’s Business" in the Corporation’s Annual Information Form for the year ended December 31, 2020, which have been filed with SEDAR at www.sedar.com.

9. Outlook
The outlook for Magellan’s business in 2021

The International Air Transport Association ("IATA") reported that as of May 2021, global domestic air travel continued to strengthen and had recovered to 76% of May 2019 levels, while international travel continued to be weak at 15% of May 2019 levels due to on-going restrictions and border closures. IATA also reported that domestic travel within China and Russia had risen above that in 2019, whereas within India and Japan domestic travel was deteriorating due to the threats of new COVID-19 variants.

The first large commercial aircraft order announced since the pandemic began came from United Airlines on June 29, 2021 for an order of 200 Boeing 737 MAX aircraft (150 MAX 10’s and 50 MAX 8’s) and 70 Airbus A321neo’s. United Airlines said that it expected to begin operating both the 737 MAX 10’s and A321neo’s in early 2023.

Airbus achieved a positive net order position in the second quarter of 2021. Airbus recorded gross orders of 126 aircraft, cancelations of 27 aircraft, and deliveries of 172 aircraft in the period. Deliveries were up from 125 aircraft achieved in the first quarter of 2021. Airbus’ order backlog as of June 30, 2021 was 6,925 aircraft. Boeing also achieved a positive net order position with received gross orders of 317 aircraft, order cancellations of 143 aircraft and deliveries of 79 aircraft in the second quarter of 2021. Boeing’s order book increased to 5,084 aircraft as of June 30, 2021, excluding accounting adjustments.

Airbus confirmed that A320 production rates will increase from a current rate of 43 aircraft to 45 aircraft per month by October 2021, 49 aircraft per month by January 2022 and 55 aircraft per month by mid-2022. In 2023, the rate is to increase from 61 aircraft to 67 aircraft per month. Airbus is also investigating rates as high as 75 aircraft per month by 2025. The A330 build rate remains at 2 aircraft per month, while the A350 build rate continues at 5 aircraft per month until the latter part of 2022 when 6 aircraft per month is planned.

Boeing is planning to ramp up 737 production rates from 17 aircraft to 24 aircraft per month by January 2022, then 31 aircraft per month by July 2022, and 52 aircraft per month in the second half of 2023. The 787 build rate was planned to increase from 5 aircraft per month in 2021 and 2022, to 7 aircraft per month early 2023 and then 8.7 aircraft per month late 2023. The 2021 plan will be revised since Boeing announced in July 2021 it would slow down 787 production due to issues discovered with the forward pressure bulkhead. Meanwhile, Boeing’s 777 aircraft build rate of 2 aircraft per month is planned to increase to 3 aircraft per month by 2023.

In defence aerospace markets, industry experts are confident that most major defense spending nations will remain committed to strengthening their military presence, despite the pandemic’s economic impact on fiscal deficits. In the U.S., the White House announced that in its fiscal year 2022 budget request, the Pentagon will seek US$715 billion, reflecting an increase of 1.6 percent over the fiscal year 2021 enacted level of US$703.7 billion.

In the fighter market, the Canadian government confirmed that despite COVID-19 challenges, it was on track with its Future Fighter Replacement Program to complete the bid evaluation phase in 2021 and to award a contract in 2022. Delivery of the first aircraft is expected as early as 2025. On June 30, 2021, Switzerland announced that it had chosen Lockheed Martin's F-35A Lightning II ("F-35A") as its next-generation fighter jet and confirmed a buy of 36 F-35A’s after its evaluation that F-35A had "the highest overall benefit at the lowest overall cost". Lockheed Martin delivered 120 F-35 aircraft last year to the U.S. military and international customers, short of the planned 141 aircraft. Lockheed Martin officials currently expect to deliver between 133 and 139 F-35’s in 2021, as the supply chain returns to "more of a normal operation" after dealing with COVID-19-induced delays and closures.

Positive indicators of market recovery such as recovering domestic air travel and announcements of new large aircraft orders are encouraging signs for the aerospace industry. Commercial aircraft OEM’s are responding with plans for increasing aircraft build rates over the next several years. These plans remain conditional upon various factors related to the pandemic and therefore Magellan remains cautious on the timing of recovery of its business volumes.

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.

MAGELLAN AEROSPACE CORPORATION

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(unaudited)

Three month period
ended June 30

Six month period
ended June 30

(expressed in thousands of Canadian dollars, except per share amounts)

2021

2020

2021

2020

Revenue

167,638

162,167

343,919

400,980

Cost of revenue

154,002

136,824

313,204

338,865

Gross profit

13,636

25,343

30,715

62,115

Administrative and general expenses

10,518

12,597

22,162

28,273

Restructuring

676

709

852

709

Other

124

944

(732

)

(4,994

)

Income before interest and income taxes

2,318

11,093

8,433

38,127

Interest expense

732

1,108

1,633

2,308

Income before income taxes

1,586

9,985

6,800

35,819

Income taxes

Current

2,616

(1,152

)

5,853

895

Deferred

(2,090

)

5,034

(3,375

)

8,747

526

3,882

2,478

9,642

Net income

1,060

6,103

4,322

26,177

Other comprehensive income

Other comprehensive (loss) income that may be reclassified to profit and loss in subsequent periods:

Foreign currency translation

(5,561

)

(24,947

)

(11,946

)

9,231

Items not to be reclassified to profit and loss in subsequent periods:

Actuarial income (loss) on defined benefit pension plans, net of taxes

2,806

(3,007

)

12,589

(7,766

)

Comprehensive (loss) income

(1,695

)

(21,851

)

4,965

27,642

Net income per share

Basic and diluted

0.02

0.10

0.07

0.45

MAGELLAN AEROSPACE CORPORATION

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

(unaudited)

June 30

December 31

(expressed in thousands of Canadian dollars)

2021

2020

Current assets

Cash

46,283

113,938

Trade and other receivables

150,313

114,404

Contract assets

74,354

70,388

Inventories

210,118

213,120

Prepaid expenses and other

13,685

12,915

494,753

524,765

Non-current assets

Property, plant and equipment

400,806

420,340

Right-of-use assets

36,750

40,098

Investment properties

1,781

2,127

Intangible assets

51,729

55,155

Goodwill

21,513

21,982

Other assets

9,056

7,301

Deferred tax assets

1,624

834

523,259

547,837

Total assets

1,018,012

1,072,602

Current liabilities

Accounts payable and accrued liabilities and provisions

121,853

114,706

Debt due within one year

13,773

50,098

135,626

164,804

Non-current liabilities

Long-term debt

3,782

4,865

Lease liabilities

32,586

35,222

Borrowings subject to specific conditions

24,253

24,984

Other long-term liabilities and provisions

6,778

21,539

Deferred tax liabilities

36,267

35,309

103,666

121,919

Equity

Share capital

252,342

252,342

Contributed surplus

2,044

2,044

Other paid in capital

13,565

13,565

Retained earnings

497,468

492,681

Accumulated other comprehensive income

9,924

21,870

Equity attributable to equity holders of the Corporation

775,343

782,502

Non-controlling interest

3,377

3,377

Total equity

778,720

785,879

Total liabilities and equity

1,018,012

1,072,602

MAGELLAN AEROSPACE CORPORATION

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

Three month period
ended June 30

Six month period
ended June 30

(expressed in thousands of Canadian dollars)

2021

2020

2021

2020

Cash flow from operating activities

Net income

1,060

6,103

4,322

26,177

Amortization/depreciation of intangible assets, right-of-use assets and property, plant and equipment

12,567

13,723

25,608

28,232

Gain on disposal of property, plant and equipment

(39

)

(62

)

(46

)

(43

)

Gain on disposal of investment property

(350

)

(350

)

Increase in defined benefit plans

449

232

569

348

Accretion

654

795

1,304

1,609

Deferred taxes

(2,169

)

4,365

(3,546

)

7,427

Loss (income) on investments in joint ventures

31

30

96

(106

)

Changes to non-cash working capital

646

21,553

(36,006

)

(35,897

)

Net cash provided by (used in) operating activities

12,849

46,739

(8,049

)

27,747

Cash flow from investing activities

Purchase of property, plant and equipment

(2,308

)

(2,475

)

(4,971

)

(6,685

)

Proceeds from disposal of property, plant and equipment

107

86

107

Proceeds from disposal of investment property

644

644

Increase in intangible and other assets

(809

)

(4,216

)

(1,812

)

(7,207

)

Net cash used in investing activities

(2,473

)

(6,584

)

(6,053

)

(13,785

)

Cash flow from financing activities

Decrease in debt due within one year

(26,650

)

(951

)

(35,527

)

(3,948

)

Decrease in long-term debt

(559

)

(646

)

(1,017

)

(1,238

)

Lease liability payments

(1,695

)

(1,709

)

(3,372

)

(3,467

)

Increase (decrease) in long-term liabilities and provisions

27

(547

)

(153

)

(802

)

Increase (decrease) in borrowings subject to specific conditions, net

10

(1,104

)

39

Common share repurchases

(486

)

(486

)

Common share dividend

(6,062

)

(6,110

)

(12,124

)

(12,222

)

Net cash used in financing activities

(34,939

)

(10,439

)

(53,297

)

(22,124

)

(Decrease) increase in cash during the period

(24,563

)

29,716

(67,399

)

(8,162

)

Cash at beginning of the period

71,310

32,430

113,938

69,637

Effect of exchange rate differences

(464

)

(416

)

(256

)

255

Cash at end of the period

46,283

61,730

46,283

61,730

View source version on businesswire.com: https://www.businesswire.com/news/home/20210810006004/en/

Contacts

Phillip C. Underwood
President & Chief Executive Officer
(905) 677-1889
phil.underwood@magellan.aero

Elena M. Milantoni
Chief Financial Officer
(905) 677-1889
elena.milantoni@magellan.aero

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