Magellan Aerospace Corporation announces financial results

Magellan Aerospace Corporation (“Magellan” or the “Corporation”) released its financial results for the fourth quarter of 2013.  All amounts are expressed in Canadian dollars unless otherwise indicated. The results are summarized as follows: 

Magellan is a diversified supplier of components to the aerospace industry and in certain applications for power generation projects.  Through its wholly owned subsidiaries, Magellan 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 the supply of spare parts as well as through repair and overhaul services and in certain circumstances parts and equipment for power generation projects. 

The Corporation’s strategy has been to focus on several core competencies within the aerospace industry.  These include precision machining of a wide variety of aerospace material, composites, complex high technology magnesium and aluminum alloy castings, repair and overhaul technologies and design of structures.  The Corporation is now seeking to leverage these core competencies by achieving growth in applications where these abilities are critical in meeting customer needs. 

On Oct. 16, 2013 the Corporation announced the successful installation of the first complete ship set of F-35A Lightning II horizontal tail assemblies.  This assembly is produced at Magellan’s Winnipeg facility incorporating components manufactured in the Corporation’s Kitchener and New York facilities. 

Additionally, on Nov. 8, 2013 Magellan announced a new contract award with Airbus.  This award for machined and assembled structural components on the A350 XWB program is expected to generate revenue of approximately US$45 million over the next four years. 

The Corporation remains confident in the strength of its present market position and is encouraged by the market trends observed in 2013.  Magellan’s participation on new platforms such as the A320neo and the A350, the B737 MAX and the B787 and the F-35 are providing good counterbalance to maturing legacy programs.  Ongoing efforts to secure further work on next generation aircraft platforms are achieving success, as evidenced by a recent announcement awarding Magellan additional wing ribs on the A320neo platform. 

Boeing’s single aisle aircraft production rates continue to be strong with B737 production now at 42 aircraft per month with a plan to increase to 45 aircraft per month by late 2015.  Airbus expects to maintain their A320 production rate at 42 aircraft per month through 2014 and then increase to 44 aircraft per month by March 2015.  Magellan’s participation on these platforms bodes well for the foreseeable future. 

Visibility in the U.S. defence market improved during 2013 as the U.S. government approved the 2014/2015 budget that permits the Pentagon to prioritize programs rather than have them cut indiscriminately by sequestration.  As the conflict between budget capacity and operational capability has not been eliminated, fewer orders for more highly capable platforms remain a possible outcome.  The Corporation, through a number of its divisions, continues to support some U.S. and Canadian legacy products in the defence market. 

The Corporation continues to invest in technology and resources in support of Lockheed Martin’s F-35 Strategic Fighter Program (“F-35 program”).  This past year’s successful completion of major program milestones by Lockheed and their partners is encouraging to the F-35 program’s customers and the supply base.  The Corporation will benefit from recently announced foreign military sales as they solidify the F-35 program’s backlog. The Canadian government procurement decision for the next generation fighter is still under consideration and review.  Magellan continues on track to mature its capabilities in support of the F-35 program requirements. 

The integration of new technologies into Magellan’s casting operations is proceeding with increasingly higher levels of production capability being demonstrated.  Currently installed additive manufacturing (3D sand printing) equipment is approaching full utilization as a number of customer programs are qualified for production using the process.  Other new technology applications, such as semi-automated digital radiography and digital scanning technologies are similarly being qualified as they are become integrated into production programs. 

Within Magellan’s space business, progress has been made with the RADARSAT Constellation Mission (“RCM”) Satellite project since the Phase D Contract was signed in the second quarter of 2013.  Contracts have been placed with key suppliers which hold a large part of the project value and manufacturing readiness reviews have been completed at most of their facilities.  In addition, construction has started on the new RCM integration facility where some of the cost is being shared with the University of Manitoba and Western Economic Diversification Canada. 

Finally, the Corporation continues to assess the marketplace to identify complimentary opportunities which are in line with its core competencies. 

Effective Jan. 1, 2013, the Corporation implemented the new IFRS 11, Joint Arrangements and the amended IAS 19, Employee Benefits. Certain comparative figures provided for the year ended Dec. 31, 2012 have been restated to reflect the adoption of these accounting standards. 

The Corporation reported higher revenue in its Aerospace segment and lower revenue in its Power Generation Project segment in the fourth quarter of 2013 when compared to the fourth quarter of 2012. Gross profit and net income for the fourth quarter of 2013 were $32.7 million and $16.8 million, respectively, an increase from the fourth quarter of 2012 gross profit of $30.2 million and a decrease from net income of $21.8 million in the fourth quarter of 2012.  The decrease in net income year over year is due to the recognition, in the fourth quarter of 2012, of a one-time adjustment recognizing non-recurring deferred tax assets in Canada of $5.8 million. 

Overall, the Corporation’s consolidated revenues grew by 5.1 per cent when compared to the fourth quarter of 2012. 

Consolidated revenues of $196.0 million for the fourth quarter ended Dec. 31, 2013 were higher than revenues of $186.4 million in the fourth quarter of 2012.  Increased revenues of 10.6 per cent year over year in the Aerospace segment resulted from higher production rates on several of the Corporation’s programs somewhat offset by the fall off of revenues earned in the Power Generation Project segment. As the Corporation moved towards finalizing the project, revenues earned from the Power Generation Project were adjusted in the quarter as costs for the cost-plus portion of the contract with Ghana were finalized. 

Revenues for the Aerospace segment were as follows: 

Consolidated Aerospace revenues for the fourth quarter of 2013 of $197.2 million were 10.6 per cent higher than revenues of $178.4 million in the fourth quarter of 2012.   Revenues in Canada in the fourth quarter of 2013 increased 4.5 per cent from the same period in 2012.  Increased volumes in the Corporation’s proprietary products partially offset by the decline in volumes in repair and overhaul were the main contributing factors for the increase quarter over quarter.  Revenues increased by 16.2 per cent in the United States in the fourth quarter of 2013 in comparison to the fourth quarter of 2012 primarily due to increased volumes on several of the Corporation’s commercial aircraft programs and the movement of the stronger United States dollar in comparison to the Canadian dollar during the same periods in 2013 and 2012.  Increased volumes of production on new and existing Airbus statements of work and a favorable movement of the British pound in comparison to the Canadian dollar contributed to the 14.8 per cent quarter-over-quarter increase in revenues in Europe in the fourth quarter of 2013 over revenues in the same period in 2012. 

Revenues for the Power Generation Project segment were as follows: 

The Ghana Power Generation Project (“the Project”) was substantially completed as at March 31, 2013. As the Corporation moved towards finalizing the project, revenues earned from the Power Generation Project were adjusted in the quarter as costs for the cost plus portion of the contract with Ghana were finalized. 

During 2013, the Corporation was notified of the mechanical breakdown of the turbines in the Project.  The Corporation and Ghana have contracted with an independent arbitrator to assess the cause of the damage and are awaiting a final report of the findings.  Repairs of the equipment are currently underway.  Based on internal assessments of the cause of the failure, the Corporation has not recorded any provisions in 2013. Additional revenues may be recorded as the Corporation continues to support the commercial operation of the Project; however, revenues from the Power Generation Project segment will continue to decrease unless the Corporation receives further contracts in this area. 

Gross profit of $32.7 million (16.7 per cent of revenues) was reported for the fourth quarter of 2013 compared to $30.2 million (16.2 per cent of revenues) during the same period in 2012.  Increased gross profit in the fourth quarter of 2013 over the same period in 2012 was primarily due to increased volumes experienced at a number of the Corporation’s locations and the associated higher leverage against the Corporation’s fixed costs.  Favourable foreign exchange rates also partially contributed to improved margins as both the United States dollar and British pound in 2013 strengthened against the Canadian dollar when compared to 2012 and higher revenue was generated in U.S. and Europe in 2013. 

Administrative and general expenses were $11.9 million (6.1 per cent of revenues) in the fourth quarter of 2013 compared to $9.9 million (5.3 per cent of revenues) in the fourth quarter of 2012.  Higher expenses in the administration of support services and the impact on translation of the stronger United States dollar and British pound in 2013 against the Canadian dollar contributed to the increase in 2013 over the same period in 2012. 

In August 2012, the Corporation purchased all of the issued and outstanding shares of the capital stock of John Huddleston Engineering Limited (“JHE”).  As a result of such purchase, the Corporation recognized a gain on bargain purchase in the third quarter of 2012 of $9.6 million on such acquisition of JHE as the consideration paid for the identifiable tangible assets acquired was lower that the fair value, as determined by an independent valuation specialist. 

Included in other income in the fourth quarter of 2013 is a foreign exchange gain of $0.5 million in 2013 compared to a gain of $0.2 million in 2012. The Corporation reached a favourable agreement in 2013 on the settlement of its borrowings subject to specific conditions and recorded a gain of $1.0 million.  In the fourth quarter of 2013 and 2012, the Corporation retired assets for a loss on disposal of approximately $0.3 million and $0.3 million, respectively. 

Interest expense of $1.1 million in the fourth quarter of 2013 was lower than the fourth quarter of 2012 amount of $2.2 million, as interest on bank indebtedness and long-term debt decreased mainly due to lower principal amounts outstanding during the fourth quarter of 2013 than those in the fourth quarter of 2012.  Increased long-term bond rates resulted in a recovery of previously recorded accretion expense in the fourth quarter of 2013 when compared to the same quarter in the prior year. 

The Corporation recorded an income tax expense of $4.2 million in the fourth quarter of 2013 as compared to an income tax recovery of $3.8 million in the fourth quarter of 2012.  Current income taxes for the fourth quarter of 2013 consisted primarily of the tax expense in jurisdictions with current taxes payable. Deferred income taxes for the fourth quarter of 2013 consisted primarily of net deferred income tax recoveries for changes in temporary differences in various jurisdictions. The lower total income taxes in the fourth quarter of 2012 when compared to the same quarter in 2013 was due to the recognition of previously unrecognized deferred tax assets in 2012, which did not recur in the fourth quarter of 2013, offset by deferred income tax liability recorded upon the acquisition of JHE. 

The Corporation recorded its highest quarterly revenue in the fourth quarter of 2013.  Revenues and net income reported in the quarterly information was impacted favourably by the fluctuations in the Canadian dollar exchange rate in comparison to the United States dollar and British pound.  The United States dollar/Canadian dollar exchange rate in 2013 fluctuated reaching a low of 0.9837 and a high of 1.0711.  During 2013, the United States dollar relative to the Canadian dollar moved from an exchange rate of 0.9949 at the start of the 2013 calendar year to an exchange rate of 1.0636 by Dec. 31, 2013.  The British pound/Canadian dollar exchange rate in 2013 fluctuated reaching a low of 1.5291 and a high of 1.7986.  During 2013, the British pound relative to the Canadian dollar moved from an exchange rate of 1.6178 at the start of the 2013 calendar year to an exchange rate of 1.7627 by Dec. 31, 2013. Had exchange rates remained at levels experienced in 2012, reported revenues in 2013 would have been impacted minimally in the first and second quarter and would have been lower by $5.5 million in the third quarter and $9.2 million in the fourth quarter. 

Net income in the third quarter of 2012 was higher than each of the first two quarters of 2012 as the Corporation recognized an after tax gain on bargain purchase of $7.4 million on the acquisition of JHE as the consideration paid was lower than the fair value of the identifiable tangible assets acquired at the time of purchase.  Net income for the fourth quarters of 2013 and 2012 of $16.8 million and $21.8 million, respectively, was higher than all other quarterly net income shown in the table above.  In the fourth quarter of 2013 and 2012 the Corporation recognized a reversal of previous impairment losses against intangible assets relating to various commercial aircraft programs and in the fourth quarter of 2012 the Corporation recognized previously unrecognized investment tax credits and recognized other deferred tax assets as the Corporation determined that it will be able to benefit from these assets. 

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 news release. 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 for the fourth quarter of 2013 was $31.0 million, compared to $28.9 million in the fourth quarter of 2012, an increase of 7.4 per cent on a year-over-year basis. 

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 and capital expenditures.  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. 

In the quarter ended Dec. 31, 2013, the Corporation generated $38.1 million in cash in its operations, compared to $25.2 million generated in the fourth quarter of 2012.  The increase in cash generated from operations was primarily due to favorable changes to the Corporation’s working capital requirements and increases in non-cash expenses in the fourth quarter of 2013 compared to the same period in 2012. With respect to working capital, compared to the fourth quarter of 2012, the change in accounts receivable reflects primarily changes in customer mix, the change in accounts payable and accrued liabilities was primarily driven by the timing of purchases and payments, and the change in inventories reflects increased inventory levels primarily to support new customer programs and increased customer forecasts. 

The Corporation’s capital expenditures for the fourth quarter of 2013 were $17.8 million compared to $11.2 million in the fourth quarter of 2012. The capital expenditures were incurred primarily to enhance the Corporation’s manufacturing capabilities in various geographies and to support new customer programs. 

On Dec. 21, 2012, the Corporation amended its credit agreement with its existing lenders. Under the terms of the amended agreement, the maximum amount available under the operating credit facility was decreased to a Canadian dollar limit of $115.0 million (down from $125.0 million) plus a U.S. dollar limit of $35.0 million (down from US $50.0 million), with a maturity date of Dec. 21, 2014. The credit agreement also includes a Cdn$50.0 million uncommitted accordion provision which provides the Corporation with the option to increase the size of the operating credit facility to $200.0 million.  The facility is extendible for unlimited future one year renewal periods, subject to mutual consent of the syndicate of lenders and the Corporation. The operating credit facility continues to be fully guaranteed until Dec. 21, 2014 by the Chairman of the Board of the Corporation in consideration of the continued payment by the Corporation of an annual fee, payable monthly, equal to 0.50 per cent (down from 0.63 per cent) of the loan amount. 

On Dec. 21, 2012, the Corporation also extended the 7.5 per cent loan payable (“Original Loan”) to Edco Capital Corporation (“Edco”), a corporation controlled by the chairman of the board of the Corporation to Jan. 1, 2015 in consideration of the payment of a fee to Edco equal to 0.75 per cent of the principal amount outstanding at the time of extension.  During 2013, the Corporation repaid the full amount of the Original Loan. 

The Corporation has made contractual commitments to purchase $11.9 million of capital assets.  The Corporation also has purchase commitments, largely for materials required for the normal course of operations, of $299.3 million.  The Corporation plans to fund all of these capital commitments with operating cash flow and the existing credit facility. 

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 March 21, 2014, 58,209,001 common shares were outstanding. More information on the Corporation’s share capital is provided in Note 16 of the consolidated financial statements. 

In each of the third and fourth quarter of 2013, the Corporation declared and paid quarterly cash dividends of $0.03 per common share representing an aggregate dividend payment of $3.5 million (2012 – $nil). 

In the first quarter of 2014, the Corporation declared cash dividends of $0.04 per common share payable on March 31, 2014 to shareholders of record at the close of business on March 14, 2014.

 

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. 

As at Dec. 31, 2013 the Corporation had not entered into any foreign exchange contracts. 

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. 

During the three month period ended Dec. 31, 2013, the Corporation paid guarantee fees in the amount of $0.2 million to the chairman of the board of the Corporation.  During the three month period ended Dec. 31, 2013, the Corporation incurred interest of $0.4 million in relation to the Original Loan due to Edco, a corporation which is controlled by the chairman of the board of the Corporation which is due on Jan. 1, 2015.  During the three month period ended Dec. 31, 2013, the Corporation fully repaid the balance of the Original Loan in the amount of $27.5 million. 

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 Dec. 31, 2013 and to the information under “Risks Inherent in Magellan’s Business” in the Corporation’s Annual Information Form for the year ended Dec. 31, 2013, which have been filed with SEDAR at www.sedar.com.