Magellan Aerospace Corporation Announces Financial Results

Magellan Aerospace Corporation (“Magellan” or the “Corporation”) released its financial results for the second quarter of 2023. All amounts are expressed in Canadian dollars unless otherwise indicated. The results are summarized as follows:

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 (net income before interest, income taxes, depreciation and amortization, goodwill impairment and restructuring), which the Corporation considers to be indicative measures of operating performance and a metric to evaluate profitability. EBITDA and Adjusted EBITDA are not generally accepted earnings measures and should not be considered as alternatives to net income (loss) or cash flows as determined in accordance with IFRS. As there is no standardized method of calculating this measure, the Corporation’s EBITDA and Adjusted EBITDA may not be directly comparable with similarly titled measures used by other companies.

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.

The Industry, the Supply Chain and Russia’s invasion of Ukraine
Though global air travel has seen signs of recovery with revenue passenger kilometers approaching pre-COVID 19 pandemic levels, Magellan’s financial results and operations continue to be influenced by overhanging impacts from the pandemic. These impacts include customer build rate adjustments (and the impact on production scheduling), higher prices for goods and services, limited availability of products, disruptions to supply chains and labour shortages. Magellan continues to monitor these developments and strives to mitigate the impact on Magellan’s operations, supply chain, and most importantly the health and safety of its employees.

The ongoing invasion of Ukraine by Russia continues to disrupt supply chains and cause instability in the global economy. The extent and potential magnitude of the economic impacts on the aerospace industry remains uncertain.

Business Update
On May 25, 2023, Magellan renewed its normal course issuer bid (“2023 NCIB”) under which allows the Corporation to purchase for cancellation up to 2,868,106 of its common shares during the 12-month period commencing May 27, 2023 and ending May 26, 2024 through facilities of the Toronto Stock Exchange or other alternative Canadian trading systems.

On May 30, 2023, Magellan announced the signing of a contract extension with The Boeing Company (“Boeing”), providing for the continued manufacture of large and complex nacelle exhaust systems for the Boeing 767 program. The fabricated metallic assemblies will be produced and delivered from Magellan’s facility in Middletown, Ohio. The continuation of this agreement with Boeing will ensure the continued supply by Magellan of acoustic plug and nozzle exhaust assemblies for the Boeing 767 program. Magellan utilizes internally manufactured metallic honeycomb in the production process. The metallic honeycomb is manufactured utilizing materials suitable for higher temperatures and offers advantages in weight savings and acoustic attenuation.

On June 23, 2023, the Corporation extended its $75 million bank credit facility for an additional 2 year period expiring on June 30, 2025. Refer to the “Liquidity and Capital Resources” section below for more information on the credit facility.

For additional information, please refer to the “Management’s Discussion and Analysis” section of the Corporation’s 2022 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, 2023

The Corporation reported revenue in the second quarter of 2023 of $219.7 million, a $27.0 million increase from second quarter of 2022 revenue of $192.7 million. Gross profit and net income for the second quarter of 2023 were $23.0 million and $2.0 million, respectively, in comparison to gross profit of $12.5 million and net income of $0.5 million for the second quarter of 2022.

Consolidated Revenue

Revenue in Canada increased 10.4% in the second quarter of 2023 compared to the corresponding period in 2022, primarily due to higher casting product revenues and increased volume for single aisle aircraft parts. On a currency neutral basis, Canadian revenues in the second quarter of 2023 increased by 7.2% over the same period of 2022.

Revenue in the United States increased by 27.4% in the second quarter of 2023 compared to the second quarter of 2022, largely due to increased volume for single aisle aircraft as Boeing continued to ramp up production of the 737 aircraft, higher casting product revenues and favourable foreign exchange impacts due to the strengthening of the United States dollar relative to the Canadian dollar. On a currency neutral basis, revenues in the United States increased 21.2% in the second quarter of 2023 over the same period in 2022.

European revenue in the second quarter of 2023 increased 8.5% compared to the corresponding period in 2022 primarily driven by volume increases for single aisle aircraft and favourable foreign exchange impacts resulting from the strengthening of the United States dollar relative to the British pound. On a currency neutral basis, European revenues in the second quarter of 2023 increased by 3.4% when compared to the same period in 2022.

Gross Profit

Gross profit of $23.0 million for the second quarter of 2023 was $10.5 million higher than the $12.5 million gross profit for the second quarter of 2022, and gross profit as a percentage of revenues of 10.5% for the second quarter of 2023 increased from 6.5% recorded in the same period in 2022. The gross profit in the current quarter increased from the same quarter in the prior year as a result of volume and price increases on certain programs and favourable product mix, offset in part by supply chain disruptions and price increases of purchased materials and supplies.

Administrative and General Expenses

Administrative and general expenses as a percentage of revenues was 6.4% for the second quarter of 2023, lower than the same period of 2022 percentage of revenues of 6.6%. Administrative and general expenses increased $1.5 million or 11.7% to $14.1 million in the second quarter of 2023 compared to $12.6 million in the second quarter of 2022 mainly due to higher salary and benefit costs, and short-term compensation accruals.

Restructuring

Restructuring is primarily related to ongoing costs associated with the closure of the Bournemouth facility in the United Kingdom and dismantling its former manufacturing operations.

Other

Other for the second quarter of 2023 included a $1.5 million foreign exchange loss compared to a $2.2 million foreign exchange gain 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.

Interest Expense

Total interest expense of $0.8 million in the second quarter of 2023 is slightly higher than the second quarter of 2022 due to higher interest on bank indebtedness and long-term debt and higher accretion interest.

Provision for Income Taxes

Income tax expense for the three months ended June 30, 2023 was $4.2 million, representing an effective income tax rate of 67.8% compared to 55.5% for the same period of 2022. 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 and losses across the different jurisdictions in which the Corporation operates, the reversal of temporary differences and the Corporation no longer recognizing deferred tax assets for operating losses incurred in certain jurisdictions.

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

Revenues and net income in the quarter were also impacted by the movements of the Canadian dollar relative to the United States dollar and British pound, when the Corporation translates its foreign operations to Canadian dollars. Further, the movements in the United States dollar relative to the British pound impact the Corporation’s United States dollar exposures in its European operations. During the periods reported in the quarterly financial information table above, the average quarterly exchange rate of the United States dollar relative to the Canadian dollar fluctuated between a high of 1.3580 in the fourth quarter of 2022 and a low of 1.2600 in the fourth quarter of 2021. The average quarterly exchange rate of the British pound relative to the Canadian dollar reached a high of 1.7367 in the third quarter of 2021 and hit a low of 1.5350 in the third quarter of 2022. The average quarterly exchange rate of the British pound relative to the United States dollar reached a high of 1.3782 in the third quarter of 2021 and hit a low of 1.1649 in the third quarter of 2022.

Revenue for the second quarter of 2023 of $219.7 million was higher than that in the second quarter of 2022. The average quarterly exchange rate of the United States dollar relative to the Canadian dollar in the second quarter of 2023 was 1.3431 versus 1.2765 in the same period of 2022. The average quarterly exchange rate of the British pound relative to the Canadian dollar increased from 1.6031 in the second quarter of 2022 to 1.6814 during the current quarter. The average quarterly exchange rate of the British pound relative to the United States dollar decreased from 1.2601 in the second quarter of 2022 to 1.2520 in the current quarter. Had the foreign exchange rates remained at levels experienced in the second quarter of 2022, reported revenues in the second quarter of 2023 would have been lower by $8.7 million.

The Corporation’s results have been negatively impacted by the continued effects of the COVID-19 pandemic via reduced volumes and supply chain disruptions. In addition, continued high inflation on material, supplies, utilities and labour has impacted results. Compared to the third quarter of 2021, the Corporation has seen modest, albeit uneven, growth in quarterly revenues as global domestic air travel continues to recover to pre COVID-19 levels.

In response to COVID-19, the Corporation applied and recognized the CEWS subsidy of $3.8 million in the fourth quarter of 2021, and reduced the expense that the subsidy offsets (none in 2022 or 2023). In the fourth quarter of 2022, the Corporation continued the restructuring efforts in Europe of a plan initiated in 2020 to lower its production cost base and recognized a $2.8 million restructuring charge, including a $1.8 million impairment loss related to assets made obsolete as a result of the plan.

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 (net income before interest, income taxes and depreciation and amortization) and Adjusted EBITDA (net income before interest, income taxes, depreciation and amortization, goodwill impairment and restructuring) in this MD&A. The Corporation has provided these measures 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 these measures 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.