Magellan Aerospace Corporation Announces Financial Results

TORONTO, May 4, 2017 /CNW/ - Magellan Aerospace Corporation ("Magellan" or the "Corporation") released its financial results for the first 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 and in certain circumstances for power generation projects. 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.

During 2016 and the first quarter of 2017 the Corporation has been focusing on reorganization of the Business Development Organization. This completed reorganization provides the Corporation with capable resources leading pro-active sales capture strategies for Magellan's key commodity groups: Aerostructures, Aeroengine, Castings, Maintenance, Repair and Overhaul ("R&O"), and Proprietary Products. The rollout of Magellan's sales strategy has been aligned with its customers' needs and is fully integrated with its site operations. Recent program awards for contract extensions and new work announcements are solid indicators that this realigned business focus is helping to support Magellan's vision of continued profitable growth. As in the past year Magellan will continue to rely on the Magellan Operating System ("MOS™") to drive continuous improvements in cash generation and profitability.

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

On March 8, 2017, Magellan announced a contract extension with Airbus to supply A350 XWB Crown Module assemblies.  The contract extension has an approximate value of CDN $140 million. In the future the Corporation intends to satisfy a portion of this contract with parts and assemblies produced in Magellan facilities located in India and Poland.

On April 3, 2017, Magellan announced the sale of the land and building of its Mississauga facility ("Mississauga Property") effective March 31, 2017.  The sale generated net cash proceeds of approximately CDN $32.7 million. The Corporation intends to lease a new facility that will be constructed on the existing site by the new buyer.

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 first quarter ended March 31, 2017

The Corporation reported revenue of $247.2 million in the first quarter of 2017 as compared to $266.1 million in the first quarter of 2016. Gross profit and net income for the first quarter of 2017 were $43.2 million and $38.7 million, respectively, in comparison to gross profit of $48.5 million and net income of $23.4 million for the first quarter of 2016. 

Consolidated Revenue

Overall, the Corporation's consolidated revenues decreased by 7.1% when compared to the first quarter of 2016. 

Consolidated revenues for the three month period ended March 31, 2017 were $247.2 million, $18.9 million or 7.1% lower than $266.1 million recorded for the same period in 2016. Revenues in Canada decreased 18.8% in the first quarter of 2017 compared to the first quarter of 2016, primarily due to lower production volume and timing of aftermarket sales as well as the weakening of the United States dollar relative to the Canadian dollar. On a currency neutral basis, Canadian revenues in the first quarter of 2017 decreased by 17.1% over the corresponding period of 2016.

Revenues in United States decreased 9.4% in the first quarter of 2017 in comparison to the first quarter of 2016 when measured in Canadian dollars mainly due to volume reduction and unfavourable foreign exchange impact due to the weakening United States dollar against the Canadian dollar. On a currency neutral basis, revenues in the United States decreased by 6.2% in the first quarter of 2017 over the first quarter of 2016. 

European revenues increased $6.8 million or 8.0% to $92.2 million in the first quarter of 2017 compared to $85.4 million during the first quarter of 2016, primarily driven by increased production build rates offset by the unfavourable foreign exchange impact due to the weakening British pound relative to the Canadian dollar. On a constant currency basis, revenues in the first quarter of 2017 in Europe were up by 14.0% compared to the same period in 2016.

Gross profit decreased $5.3 million to $43.2 million for the first quarter of 2017 compared to $48.5 million for the first quarter of 2016 and gross profit as a percentage of revenues decreased to 17.5% for the first quarter of 2017 from 18.2% recorded in the same period in 2016. Decrease in gross profit was primarily due to volume decrease and unfavourable product mix, partially offset by the favourable foreign exchange impact primarily driven by the weakening British pound in comparison to the United States dollar.  

Administrative and general expenses as a percentage of revenues were 6.1% for the first quarter of 2017, slightly higher on a percentage basis with that in the corresponding period of 2016. Administrative and general expenses were relatively flat quarter over quarter. 

On March 31, 2017, the Corporation sold the Mississauga Property and recorded a gain of $26.6 million. In addition, the Corporation recorded $4.0 million of costs associated with the sale which was partially offset by $0.9 million foreign exchange loss recognized in the first quarter of 2017.  Other expense of $0.2 million in the first quarter of 2016 consisted of foreign exchange loss and losses on the retirement and disposal of property, plant and equipment.

Interest expense of $1.4 million in the first quarter of 2017 was $0.4 million lower than the first quarter of 2016 amount of $1.8 million, mainly due to lower interest on bank indebtedness and long-term debt. Lower principal amounts outstanding on bank indebtedness and long term debt during the first quarter of 2017 than the first quarter of 2016 contributed to the decrease in interest expenses quarter over quarter. 

Income tax expense for the first quarter ended March 31, 2017 was $9.1 million, representing an effective income tax rate of 18.7% compared to 25.1% for the first quarter of 2016. The decrease in effective tax rate quarter over quarter was primarily due to the lower tax rate applicable to the capital gain on the sale of Mississauga Property in the current quarter. The increase in both current and deferred income taxes expense during the quarter was mainly attributed to higher taxable income in the first quarter of 2017 compared to the same quarter in the prior year.  

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

The quarterly revenues reported in the table above reached a peak of $266.1 million in the first quarter of 2016 as compared to $247.2 million in the first quarter of 2017. Revenues and net income reported in the quarterly information 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. The average exchange rate of the United States dollar relative to the Canadian dollar in the first quarter of 2017 was 1.3237 versus 1.3703 in the same period of 2016. The average exchange rate of British pound relative to the Canadian dollar moved from 1.9594 in the first quarter of 2016 to 1.6414 during the current quarter. The average exchange rate of the British pound relative to the United States dollar decreased from 1.4299 in the first quarter of 2016 to 1.2409 in the current quarter. Had the foreign exchange rates remained at levels experienced in the first quarter of 2016, reported revenues in the first quarter of 2017 would have been higher by $9.4 million.

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 Mississauga Property. As discussed above, net income reported in the quarterly information was also impacted by the foreign exchange movements. The Corporation fully utilized its net operating loss carry-forwards and certain tax credits in the United States in the second quarter of 2015, which resulted in higher income taxes thereon. 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, respectively. 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. In the second quarter of 2015, the Corporation recorded a loss on translation of its foreign currency liabilities within Canada and Europe.

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 increased $16.5 million or 35.9% to $62.3 million for the first quarter of 2017, compared to $45.8 million in the first quarter of 2016 primarily as a result of higher net income and income taxes expenses offset by lower interest and depreciation and amortization expenses.  

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.

For the first quarter ended March 31, 2017, the Corporation used $10.8 million in operations, compared to $25.4 million cash generated from operations in the first quarter of 2016. The decrease in cash generation from operating activities was primarily driven by lower net income, adjusted for the impact of disposal of the Mississauga Property, and the unfavourable changes in non-cash working capital balances, largely as a result of increases in accounts receivables resulting from changes in payment terms and inventories and decreases in accounts payables, accrued liabilities and provisions.

The Corporation's capital expenditures for the first quarter of 2017 were $16.6 million compared to $3.6 million in the first quarter of 2016. The Corporation continues to invest in capital expenditures to enhance its manufacturing capabilities in various geographies and to support new customer programs. The Corporation also sold its Mississauga Property and generated net cash proceeds of $32.7 million in the quarter. The decrease in intangibles and other assets in the first quarter of 2017 is a result of deposits made on capital equipment in the prior periods being capitalized.

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 will provide the Corporation with the option to increase the size of the operating credit facility. The credit agreement was amended on December 4, 2015 to include a short term bridge credit facility that increased the operating credit facility by a US dollar limit US$10,000, which expired on March 4, 2016.

The Corporation used $11.0 million in the first quarter of 2017 mainly to repay bank indebtedness and pay dividends which was partially offset by the financing of trade receivables.  

As at March 31, 2017 the Corporation has made contractual commitments to purchase $10.7 million of capital assets.

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

Subsequent to March 31, 2017 the Corporation announced that its Board of Directors had declared a quarterly cash dividend on its common shares of $0.065 per common share. The dividend will be payable on June 30, 2017 to shareholders of record at the close of business on June 9, 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 May 2, 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 material foreign exchange contracts outstanding as at March 31, 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 month period ended March 31, 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

Both Boeing and Airbus continue to support growth projections in the single aisle market place. Production rates for B737 and B737 MAX programs are expected to increase from the current 42 aircraft per month to 47 aircraft per month in the third quarter of 2017, 52 aircraft per month in 2018, and then 57 aircraft per month in 2019. Airbus' rates for the A320 and the A330 NEO are expected to reach 55 aircraft per month by mid-2017 and will continually ramp up through 2018 to a peak rate of 60 aircraft per month in 2019. Both OEMs are monitoring these production rates to ensure that they will remain aligned with market demands. 

The twin aisle market has leveled off as both Airbus and Boeing have adjusted production rates in this market. New programs, such as the Airbus A350 and Boeing's B777X continue to progress in line with published schedules.

While production rates have declined in the large wide body market, recent market information and sales indicate that the Airbus A380 and Boeing's B747-800 market will remain relatively stable at the lower rates of production.

The traditional regional aircraft market is not expected to change in 2017. Manufacturers were hoping an expansion of this market would come from the introduction of a new 90-seat class, but prolonged low fuel prices have triggered them to shelve any such plans. New large regional jet entrants such as Bombardier's C-Series and Embraer's E2 aircraft will on the other hand be the impetus for growth in this market.

In the business jet market, there have been occasional signs of recovery in one segment or another, however, the market is still struggling as it faces an oversupply of both new and used aircraft. The civil rotorcraft market remains significantly depressed, but on speculation that oil prices will rise, the industry is anticipating the start of recovery. OEM's are also hoping to expand market applications through the commercialization of tilt-rotorcraft and compound helicopter technologies. These have the potential in the medium to long term to broaden the spectrum of applications across this segment.

Global defense spending rose in 2016 and it is expected to grow again in 2017. It is as yet unknown what impact the political movement towards nationalism in the United States and United Kingdom will have, but it is expected that United States defense procurement spending will rise under the new United States administration; as well most segments of the global defense market are forecasting growth. 

Military fixed-wing and military rotorcraft markets are predicted to be on the upswing, both of which have suffered through a period of significant downward budgetary pressures. An unpredictability factor exists in these segments in that worldwide defence acquisition decisions are becoming increasingly political and highly contested. The Canadian government's recent decision to purchase 18 Boeing Super Hornets as an interim fleet solution and to run a five year competition to replace the existing CF-18 fleet is just one of a number of recent examples. Magellan currently participates in both the CF-18 and Super Hornet programs. 

The largest fighter program in the world, Lockheed's F-35 Lightning II, continues to ramp up production rates. The jet now operates in 12 countries worldwide. The program has logged over 75,000 flight hours while training more than 380 pilots and 3,700 maintainers. On January 11, 2017, the program delivered its 200th operational jet. Lockheed anticipates delivering 66 planes in 2017, up from the 46 delivered in 2016. The program has reported that costs are progressing down the cost affordability curve with the price of an F-35A expected to be less than $100 million for aircraft ordered within the 10th annual lot. The program from its inception has been built upon achieving an affordability model. Magellan, along with other F-35 Canadian suppliers chosen to supply major components, remains confident in its continued participation on this program.

In summary, 2017 is predicted to be a year where the aerospace industry begins to approach peak demands. Commercial airliner production is still growing, but may be reaching the end of a "super cycle". The commercial rotorcraft and business jets markets remain down and are not expected to change much in 2017, while regional markets are expected to grow due to the new larger aircraft entrants. It is expected that increasing global defense spending will partially offset any plateauing in the civil and commercial aircraft markets.

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

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