Magellan Aerospace Corporation Announces Financial Results and Director Resignation
TORONTO–(BUSINESS WIRE)–Magellan Aerospace Corporation (“Magellan” or the “Corporation”) released its financial results for the fourth quarter of 2020. All amounts are expressed in Canadian dollars unless otherwise indicated. The results are summarized as follows:
|
|
| Three month period ended | Twelve month period ended | |||||||||
| Expressed in thousands of Canadian dollars, except per share amounts | 2020 | 2019 | Change | 2020 | 2019 | Change | ||||||
| Revenues |
| 180,057 | 246,678 | (27.0%) | 744,414 | 1,016,219 | (26.7%) | |||||
| Gross Profit |
| 11,634 | 33,973 | (65.8%) | 96,491 | 156,958 | (38.5%) | |||||
| Net Income |
| (22,875) | 9,409 | (343.1%) | 3,313 | 67,381 | (95.1%) | |||||
| Net Income per Share |
| (0.40) | 0.16 | (350.0%) | 0.06 | 1.16 | (94.8%) | |||||
| Adjusted EBITDA |
| 11,544 | 27,928 | (58.7%) | 100,436 | 145,221 | (30.8%) | |||||
| Adjusted EBITDA per Share |
| 0.20 | 0.48 | (58.3%) | 1.73 | 2.49 | (30.5%) | |||||
| 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 expense, 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 and controlled entity, Magellan 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 the 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
On December 10, 2020, Magellan announced the delivery of the 200th set of F-35 Lightning II horizontal stabilizer assemblies under an agreement with BAE Systems. Magellan and BAE Systems have been working together to produce horizontal stabilizers for the global F-35 program since 2009. Both companies have since made significant investment in facilities, technologies and training to ensure the successful delivery of these flight-critical assemblies to the F-35 prime contractor Lockheed Martin. The horizontal stabilizers produced at Magellan are major assemblies on the Conventional Takeoff and Landing (CTOL) variant of the F-35. Magellan is targeting to produce more than 1,000 ship sets of horizontal tail assemblies over the life of the F-35 program along with various other metallic and composite components.
On January 14, 2021, the Corporation announced that Raytheon Missiles & Defense (“Raytheon”) awarded the Corporation a contract for the supply of complex missile fin components. These heat-tolerant surface control assemblies will be manufactured at Magellan’s facility in Middletown, Ohio, with deliveries starting in 2021 and continuing through 2024. The value of this agreement is approximately $61.4 million. Magellan has participated in the Standard Missile (“SM”) program for more than 20 years, supplying dorsal fins for various configurations, including the SM-3 and SM-6. These defensive missiles provide area defence to the U.S. Military against theater ballistic missiles, aircraft and cruise missiles.
On February 8, 2021, Magellan announced the signing of a Memorandum of Understanding (“MOU”) with General Electric Aviation Canada (“GE Canada”) for the purpose of exploring an arrangement whereby GE Canada would support Magellan in establishing and delivering a Canadian-based sustainment solution for the GE F414-GE-400 engine, which powers Boeing’s F/A-18 Block III Super Hornet fighter jet. This initiative is in support of Boeing’s proposal to provide the Block III Super Hornet as a solution for Canada’s Future Fighter Capability Project (“FFCP”). Under the MOU, with the selection of the Super Hornet for the FFCP, GE Canada and Magellan would develop an appropriate and competitive sustainment solution for Canada which would provide all aircraft engine sustainment services for the Royal Canadian Air Force on their F414 engine fleet. The in-country depot level sustainment support for the engines includes onsite maintenance, repair and overhaul support services, technical services, and engineering support and would be performed in Magellan’s facility in Mississauga, Ontario for the life of the program.
On March 5, 2021, the Honourable William G. Davis, P.C., C.C., Q.C., former premier of Ontario, resigned as a member of the Board of Directors of the Corporation due to personal reasons. Mr. Davis served as a member of the Board since 1989 and has made tremendous contribution to Magellan over the years. His vast experience in regulatory and governmental affairs and in community and industry relations was a great asset to the Board.
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; however, the long-term success of these interventions is not yet determinable.
In the fourth quarter of 2020, the continued disruption to air travel and commercial activities, particularly within the aerospace and commercial airline industries negatively impacted global supply, demand and distribution capabilities. In particular, the significant decrease in air travel resulting from the COVID-19 pandemic is adversely affecting Magellan’s customers and their demand for the Corporation’s products and services. The 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 current challenging economic climate may have material adverse impact on Magellan including, but not limited to significant declines in revenue in addition to what Magellan experienced in 2020 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 higher degree of measurement uncertainty during this volatile period.
Magellan has implemented measures to align its cost structure and maximize cash preservation 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 2020 capital expenditure plan. The Corporation also applied and received the Canada Emergency Wage Subsidy (“CEWS”) for its Canadian employees. The carrying value of the Corporation’s long-lived assets are reviewed for indications of impairment at the end of each reporting period. For long-lived assets that have an indefinite life such as goodwill, the Corporation performs an annual impairment test. For the year ended December 31, 2020, the Corporation recorded an impairment charge of $12.0 million.
2021 will be challenging for Magellan’s revenue on a year over year basis as COVID-19 continues to impact aircraft production rates over the short and medium term and flying hours of aircraft. In response to this impact, Magellan implemented cost savings initiatives in 2020 designed to reduce operating costs. In the fourth quarter of 2020, a restructuring plan was announced as part of the Corporation’s strategy to reorganize its European operations resulting in the closure of its Bournemouth manufacturing facilities in the United Kingdom, which will result in the Corporation incurring a restructuring charge relating to the closure of approximately $8.0 million of which $5.6 million was recorded in 2020. Magellan will continue to operate its treatments center in Bournemouth. Magellan continues to actively monitor the COVID-19 situation and reassesses its operating plan as program updates become available.
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 2020.
To manage the additional safety risks presented by COVID-19, Magellan implemented standardized tools and templates 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
During 2020, Magellan improved its overall liquidity position despite the challenges posed by COVID-19. The Corporation ended the year with a cash balance of $113.9 million and $70.5 million of available borrowing capacity under Magellan’s operating credit facility, providing the Corporation with $184.4 million of total liquidity as compared with $138.9 million at December 31, 2019. 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.
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 fourth quarter ended December 31, 2020
Consolidated revenue in the fourth quarter of 2020 was $180.1 million, a $66.6 million decrease from the fourth quarter of 2019 of $246.7 million. The Corporation reported gross profit and net loss of $11.6 million and $22.9 million for the fourth quarter of 2020 in comparison to gross profit of $34.0 million and net income of $9.4 million for the fourth quarter of 2019.
Consolidated Revenue
|
| Three month period | Twelve month period | ||||||||||
|
| ended December 31 | ended December 31 | ||||||||||
| Expressed in thousands of dollars |
| 2020 |
| 2019 | Change |
| 2020 |
| 2019 | Change | ||
| Canada |
| 84,733 |
| 93,423 | (9.3%) |
| 338,883 |
| 366,565 | (7.6%) | ||
| United States |
| 46,181 |
| 78,407 | (41.1%) |
| 202,284 |
| 322,970 | (37.4%) | ||
| Europe |
| 49,143 |
| 74,848 | (34.3%) |
| 203,247 |
| 326,684 | (37.8%) | ||
| Total revenues |
| 180,057 |
| 246,678 | (27.0%) |
| 744,414 |
| 1,016,219 | (26.7%) | ||
In the fourth quarter of 2020, the COVID-19 pandemic caused disruption to air travel and commercial activities, particularly within the aerospace and commercial airline industries, have negatively impacted global supply, demand and distribution capabilities. As a result there was a decrease to the demand for the Corporation’s aerospace products and services that led to lower revenues. Revenues in Canada decreased 9.3% in the fourth quarter of 2020 in comparison to the same period in 2019 primarily due to decreased volumes in proprietary and casting products, partially offset by higher volumes in a number of defence programs.
Revenues in United States decreased by 41.1% in the fourth quarter of 2020 when compared to the fourth quarter of 2019, largely due to volume decreases for both single aisle, specifically the Boeing 737 MAX, and wide-body aircraft.
European revenues decreased 34.3% in the third quarter of 2020 compared to the corresponding period in 2019 primarily driven by build rate reductions for both single aisle and wide-body aircraft.
Gross Profit
|
| Three month period | Twelve month period | ||||||||||
|
| ended December 31 | ended December 31 | ||||||||||
| Expressed in thousands of dollars |
| 2020 |
| 2019 | Change |
| 2020 |
| 2019 | Change | ||
| Gross profit |
| 11,634 |
| 33,973 | (65.8%) |
| 96,491 |
| 156,958 | (38.5%) | ||
| Percentage of revenues |
| 6.5% |
| 13.8% |
|
| 13.0% |
| 15.4% |
| ||
Gross profit of $11.6 million for the fourth quarter of 2020 was $22.3 million lower than the fourth quarter of 2019 gross profit of $34.0 million, and gross profit as a percentage of revenues of 6.5% for the fourth quarter of 2020 was lower than the fourth quarter of 2019 of 13.8%. The lower gross profit in the current quarter when compared to the same quarter in 2019 was primarily driven by decreased volumes in a number of commercial programs, offset in part by cost reductions and recognition of $1.0 million in subsidies from the CEWS program.
Administrative and General Expenses
|
| Three month period | Twelve Month period | ||||||||||
|
| ended December 31 | ended December 31 | ||||||||||
| Expressed in thousands of dollars |
| 2020 |
| 2019 | Change |
| 2020 |
| 2019 | Change | ||
| Administrative and general expenses |
| 12,371 |
| 15,527 | (20.3%) |
| 52,075 |
| 62,312 | (16.4%) | ||
| Percentage of revenues |
| 6.9% |
| 6.3% |
|
| 7.0% |
| 6.1% |
| ||
Administrative and general expenses as a percentage of revenues of 6.9% for the fourth quarter of 2020 were 0.6% higher than the same period of 2019. Administrative and general expenses decreased $3.2 million to $12.4 million in the fourth quarter of 2020 compared to $15.5 million in the fourth quarter of 2019 mainly due to lower discretionary expenses, lower salary and related expenses and cost reductions across the majority of the expense categories to align with current business volumes.
Restructuring
|
| Three month period | Twelve Month period | ||||||
|
| ended December 31 | ended December 31 | ||||||
| Expressed in thousands of dollars |
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| Workforce reduction Closure costs Impairment of property, plant and equipment |
| 653 |
| ─ |
| 6,916 |
| ─ |
| Closure costs |
| 3,236 |
| ─ |
| 3,236 |
| ─ |
| Impairment of property, plant and equipment |
| 2,385 |
| ─ |
| 2,385 |
| ─ |
| Restructuring |
| 6,274 |
| ─ |
| 12,537 |
| ─ |
During the fourth quarter of 2020, Magellan announced a restructuring plan that will reorganize its European operations resulting in the closure of its Bournemouth manufacturing facilities in the United Kingdom. As a result, a total of $5.6 million was expensed during the fourth quarter of 2020.
Goodwill impairment
|
| Three month period | Twelve Month period | ||||||
|
| ended December 31 | ended December 31 | ||||||
| Expressed in thousands of dollars |
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| Goodwill impairment |
| 12,046 |
| ─ |
| 12,046 |
| ─ |
| Goodwill impairment |
| 12,046 |
| ─ |
| 12,046 |
| ─ |
COVID-19 resulted in reduced production rates implemented by commercial aircraft manufacturers and reduced flying hours by operators. Due to the projected slow recovery of the aerospace market and the resulting depressed customer demand for products and services provided by one of our CGUs, the Corporation recorded a goodwill impairment charge of $12.0 million.
Other
|
| Three month period | Twelve Month period | ||||||
|
| ended December 31 | ended December 31 | ||||||
| Expressed in thousands of dollars |
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| Foreign exchange loss |
| 3,409 |
| 5,150 |
| 1,138 |
| 1,874 |
| Loss on disposal of property, plant and equipment |
| 182 |
| 50 |
| 117 |
| 32 |
| Other |
| ─ |
| 332 |
| (172) |
| 3,112 |
| Total other |
| 3,591 |
| 5,532 |
| 1,083 |
| 5,018 |
For the fourth quarter of 2020, the Corporation recorded a $3.4 million foreign exchange loss compared to a $5.1 million foreign exchange loss in the same period of 2019, mainly driven by the movements in balances denominated in foreign currencies and the fluctuations of the foreign exchange rates.
Interest Expense
|
| Three month period | Twelve Month period | ||||||
|
| ended December 31 | ended December 31 | ||||||
| Expressed in thousands of dollars |
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| Interest on bank indebtedness and long-term debt |
| 80 |
| 55 |
| 305 |
| 101 |
| Accretion charge for borrowings, lease liabilities and long-term debt |
| 676 |
| 661 |
| 3,129 |
| 2,478 |
| Discount on sale of accounts receivable |
| 191 |
| 498 |
| 924 |
| 2,053 |
| Total interest expense |
| 947 |
| 1,214 |
| 4,358 |
| 4,632 |
Total interest expense of $0.9 million in the fourth quarter of 2020 was lower than the fourth quarter of 2019 amount of $1.2 million mainly due to lower discount on sale of accounts receivables.
Provision for Income Taxes
|
| Three month period | Twelve Month period | ||||||
|
| ended December 31 | ended December 31 | ||||||
| Expressed in thousands of dollars |
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| Current income tax expense |
| 4,498 |
| (1,047) |
| 7,140 |
| 6,105 |
| Deferred income tax expense |
| (5,218) |
| 3,338 |
| 3,939 |
| 11,510 |
| Income tax (recovery) expense |
| (720) |
| 2,291 |
| 11,079 |
| 17,615 |
| Effective tax rate |
| 3.1% |
| 19.6% |
| 77.0% |
| 20.7% |
Income tax recovery for the three months ended December 31, 2020 was $0.7 million, representing an effective income tax rate of 3.1% compared to 19.6% for the same period of 2019. The change in effective tax rate and current and deferred income tax expenses year over year was primarily due to an unfavourable impact of the prior year reversal of certain tax assets due to changes in estimates and changes in mix of income and loss across the different jurisdictions in which the Corporation operates.
3. Selected Quarterly Financial Information
A summary view of Magellan’s quarterly financial performance
|
|
|
|
| 2020 |
|
|
| 2019 | ||||||||
| Expressed in millions of dollars, except per share amounts | Dec 31 | Sep 30 | Jun 30 | Mar 31 | Dec 31 | Sep 30 | Jun 30 | Mar 31 | ||||||||
| Revenues | 180.1 | 163.4 | 162.2 | 238.8 | 246.7 | 235.6 | 264.1 | 269.9 | ||||||||
| Income before taxes | (23.6) | 2.2 | 10.0 | 25.8 | 11.7 | 19.6 | 27.8 | 25.9 | ||||||||
| Net Income | (22.9) | 0.0 | 6.1 | 20.1 | 9.4 | 15.8 | 21.7 | 20.4 | ||||||||
| Net Income per share |
|
|
|
|
|
|
|
| ||||||||
| Basic and diluted | (0.40) | 0.00 | 0.10 | 0.34 | 0.16 | 0.27 | 0.37 | 0.35 | ||||||||
| EBITDA1 | (6.8) | 16.3 | 24.8 | 41.5 | 27.9 | 34.1 | 42.7 | 40.5 | ||||||||
| Adjusted EBITDA1 | 11.5 | 21.8 | 25.5 | 41.5 | 27.9 | 34.1 | 42.7 | 40.5 |
1 EBITDA and Adjusted EBITDA are not IFRS financial measures. Please see the “Reconciliation of Net Income to EBITDA and Adjusted EBITDA” section for more information.
Revenues and net income reported in the quarterly financial 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 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 1.3176 in the fourth quarter of 2020. The average quarterly exchange rate of the British pound relative to the Canadian dollar moved from its high of 1.7315 in the first quarter of 2019 to its lowest rate of 1.6280 in the fourth quarter of 2019. The average quarterly exchange rate of the British pound relative to the United States dollar reached its high of 1.3205 in the fourth quarter of 2020 and hit a low of 1.2327 in the third quarter of 2019.
Revenue for the fourth quarter of 2020 of $180.1 million was lower than that in the fourth quarter of 2019. The average quarterly exchange rate of the United States dollar relative to the Canadian dollar in the fourth quarter of 2020 was 1.3176 versus 1.3200 in the same period of 2019. The average quarterly exchange rate of the British pound relative to the Canadian dollar moved from 1.7004 in the fourth quarter of 2019 to 1.7207 during the current quarter. The average quarterly exchange rate of the British pound relative to the United States dollar strengthened from 1.2882 in the fourth quarter of 2019 to 1.3205 in the current quarter. Had the foreign exchange rates remained at levels experienced in the fourth quarter of 2019, reported revenues in the fourth quarter of 2020 would have been higher by $1.1 million.
As discussed above, net income reported in the quarterly information was impacted by the foreign exchange movements. 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. Results for the second, third and fourth quarter of 2020 were impacted by volume decreases in a number of commercial programs due to COVID-19. 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 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 a decrease in demand as a result of a deterioration in economic conditions stemming from COVID-19, and recognized $5.6 million restructuring charge including a $2.4 million impairment cost 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. The Corporation recognized $8.6 million, $10.4 million and $1.0 million in respect of the government subsidy relating to the CEWS program in the second, third and fourth quarter respectively, and reduced the expense that the subsidy is intended to offset.
Contacts
Phillip C. Underwood
President & Chief Executive Officer
T: (905) 677-1889
E: [email protected]
Elena M. Milantoni
Chief Financial Officer
T: (905) 677-1889
E: [email protected]
