TORONTO, Nov. 14, 2016 /CNW/ - Magellan Aerospace Corporation ("Magellan" or the "Corporation") released its financial results for the third quarter of 2016.  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, and supplies 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. 

Business Update

On October 12, 2016, the Corporation announced that it showcased, at the Helitech 2016 helicopter show in Amsterdam, an expanded product capability as offered by Euravia Engineering and Supply Co. LTD, a Magellan Aerospace company. Euravia is now providing total engine support for the Rolls-Royce 250 engine and growing its operation through its new expansion facility, Euravia North America, located in Phoenix, Arizona.

On October 13, 2016, Magellan and the Boeing Company announced the signing of new long term contracts for the supply of complex titanium machined components for the 777X program and the signing of an extension to the existing 787 Dreamliner program statement of work. The components are to be manufactured at Magellan's Kitchener, ON and New York, NY facilities.

On October 27, 2016, Magellan announced that it will be producing F-35 Lightning II horizontal tail assemblies under an agreement with BAE Systems. The agreement is the continuation of annual contract awards made to Magellan by BAE Systems for F-35 assemblies, valued at more than CDN $70 million over a two year period.

For additional information, please refer to the "Management's Discussion and Analysis" section of the Corporation's 2015 Annual Report available on www.sedar.com.

2.  Results of Operations
A discussion of Magellan's operating results for third quarter ended September 30, 2016

The Corporation operates substantially all of its activities in one reportable segment, Aerospace, which includes the design, development, manufacture, repair and overhaul and sale of systems and components for defence and civil aviation. The Corporation continues to provide services to the Power Generation segment, however the Corporation has removed the disclosure of this segment as the activity in relation to these services was not material in the current quarter and, at present, it is not expected to be material in future periods. 

The Corporation reported revenue of $238.0 million in the third quarter of 2016 as compared to $236.2 million in the third quarter of 2015. Gross profit and net income for the third quarter of 2016 were $38.9 million and $18.8 million, respectively, decreased from the gross profit of $39.9 million and increased from the net income of $18.5 million for the third quarter of 2015. 

Consolidated revenues for the three months ended September 30, 3016 were $238.0 million, $1.8 million or 0.8% higher than $236.2 million recorded for the same period in 2015. Revenues in Canada decreased $6.3 million or 7.8% in the third quarter of 2016 as compared to the third quarter of 2015, primarily due to lower demand in aeroengine components, and lower revenues recorded in space and specialty products, partially offset by higher revenues related to the aerostructure products.

Revenues in the United States in the third quarter of 2016 were relatively consistent with the third quarter of 2015 when measured in Canadian dollars.  On a currency neutral basis, revenues in the United States were 1.1% higher than the third quarter of 2015. 

Revenues in Europe increased $7.5 million or 10.5% to $78.6 million in the third quarter of 2016 as compared to $71.2 million during the same period in 2015, primarily driven by increased production build rates and repair and overhaul services, 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 third quarter of 2016 in Europe increased by 14.2% as compared to the third quarter of 2015.

Gross profit decreased slightly by $1.0 million to $38.9 million for the third quarter of 2016 as compared to $39.9 million for the third quarter of 2015, and gross profit as a percentage of revenues declined to 16.3% for the third quarter of 2016 as compared to 16.9% for the third quarter of 2015. Decrease in gross profit was driven by an unfavourable adjustment on one of the Corporation's construction contracts. The weakening British pound in comparison to the United States dollar and the strengthening of the United States dollar in comparison to the Canadian dollar quarter over quarter, in addition to increased operational efficiencies partially offset this one-time adjustment. 

Administrative and general expenses were $14.0 million for the third quarter of 2016, slightly higher than $13.6 million for the same quarter in the prior year. Administrative and general expenses as a percentage of revenues were 5.9% for the third quarter of 2016 and 5.8% in the corresponding period of 2015.

Other income of $1.8 million for the third quarter of 2016 increased significantly from $0.1 million for the third quarter of 2015, mainly due to the foreign exchange gain of $1.8 million recorded in the third quarter of 2016 as a result of the weakening British pound and Canadian dollar relative to the United States dollar. The movements in balances denominated in the foreign currencies and the fluctuations of the foreign exchange rates impact the net foreign exchange gain or loss recorded in a quarter.

Total interest expense of $1.5 million in the third quarter of 2016 was consistent with the third quarter of 2015. On a year over year basis, interest on bank indebtedness and long-term debt of $1.0 million decreased $0.1 million or 13.0% mainly as a result of lower principal amounts outstanding on bank indebtedness and long term debt during the third quarter of 2016 compared to the third quarter of 2015. Discount on sale of accounts receivable of $0.3 million increased slightly over the prior year due to a larger volume of receivables transferred under the securitization program for the third of quarter of 2016 as compared to the same period in the prior year.  

Income tax expense for the three months ended September 30, 2016 was $6.4 million, representing an effective income tax rate of 25.3% as compared to 25.2% for the same quarter of 2015. The effective tax rate is impacted by changes in corporation taxation rates in the income tax jurisdictions in which the Corporation operates. The increase in current income taxes expense during the current quarter was due to increased taxable income resulting mainly from improved business results. The decrease in deferred tax expense was due to the utilization of deferred tax assets in the third quarter of 2015 which did not recur in the third quarter of 2016.

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

The quarterly revenues reported in the table above have been increasing steadily, reaching a peak in the first quarter of 2016 and then decreasing in the second and third quarter of 2016, partially due to the foreign exchange impact driven by the movements of the United States dollar and British pound against the Canadian dollar. The average exchange rate of United States dollar relative to the Canadian dollar fluctuated between a high of 1.3748 in the first quarter of 2016 and a low of 1.1357 in the fourth quarter of 2014. The average exchange rate of British pound relative to the Canadian dollar fluctuated between a high of 2.0280 in the third quarter of 2015 and a low of 1.7126 in the third quarter of 2016.

Revenue for the third quarter of 2016 of $238.0 million was slightly higher by $1.8 million than the third quarter in 2015. Had the foreign exchange rates remained at the same level experienced in the third quarter of 2015, revenue for the third quarter of 2016 would have been higher by $3.0 million. 

Net income for the first quarter of 2016 and fourth quarter of 2015 of $23.4 million and $25.5 million, respectively, was higher than all other quarterly net income shown in the table above. As discussed above, net income reported in the quarterly information was also impacted by the foreign exchange movements. During the three quarters of 2016, the Corporation recorded higher income taxes due to full utilization of the net operating loss carry-forwards and certain tax credits in the United States in the second quarter of 2015. In the third quarter of 2016, the Corporation recorded a margin adjustment related to one of its construction contracts. In the second quarter of 2015, the Corporation recorded a loss on translation of its foreign currency liabilities within Canada and Europe. In the fourth quarter of 2014, the Corporation recognized previously unrecognized investment tax credits.

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 $0.6 million or 1.7% to $38.4 million for the third quarter of 2016, compared to $37.8 million in the third quarter of 2015 primarily as a result of higher net income, taxes 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 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.

For the three months ended September 30, 2016, the Corporation generated $25.5 million from operating activities, compared to $22.4 million in the third quarter of 2015, an increase of $3.1 million mainly driven by the favourable changes in non-cash working capital balances, offset by the lower deferred income taxes recorded in the third quarter of 2016.  

Cash used in investing activities for the third quarter of 2016 was $10.7 million compared to $12.3 million in the same quarter of 2015, a decrease of $1.6 million primarily due to less development costs incurred. The Corporation continues to invest in capital expenditures to enhance its manufacturing capabilities in various geographies and to support new customer programs. Total capital expenditures for the three month period ended September 30, 2016 were $9.0 million, $1.1 million higher than those invested in the same period of the prior year. 

The Corporation has an operating credit facility, with a syndicate of banks, with a Canadian dollar limit of $95,000, a US dollar limit of US$35,000 and a British pound limit of £11,000. Under the terms of the 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 $50,000 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 $16.6 million in financing activities in the third quarter of 2016 mainly due to the repayment of bank indebtedness and long-term debt, offset by the receipt of $2.0 million government funding.  

As at September 30, 2016 the Corporation has made contractual commitments to purchase $22.6 million of capital assets.

Dividends
During the third quarter of 2016, the Corporation declared and paid quarterly cash dividends of $0.0575 per common share representing an aggregating dividend payment of $3.3 million.

Subsequent to September 30, 2016 the Corporation announced that its Board of Directors had declared a quarterly dividend payment for the fourth quarter of 2016 in the amount of $0.065 per share on the Corporation's common stock.  This represents a 13.0% increase in the rate of the Corporation's current quarterly dividend.   Magellan's dividend has more than doubled over the past three years, and today's announcement marks the 4th consecutive year of dividend increases by the Corporation since it first implemented a dividend in the third quarter of 2013. The dividend will be payable on December 30, 2016 to shareholders of record at the close of business on December 9, 2016.

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 November 10, 2016, 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 September 30, 2016.

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 and nine month periods ended September 30, 2016, 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, 2015 and to the information under "Risks Inherent in Magellan's Business" in the Corporation's Annual Information Form for the year ended December 31, 2015, which have been filed with SEDAR at www.sedar.com.

9. Outlook
The outlook for Magellan's business in 2016

Magellan management, supported by industry analysts, are projecting that civil and commercial aircraft demand are approaching peak levels. It is anticipated that there will be a general levelling out of demand beyond the anticipated peak period. The Corporation expects single aisle production rates will continue to increase with some contraction in the twin aisle market as legacy programs wind up and new platforms ramp up i.e. the B777 and the A330 giving way to the B777X and the A330neo.

Magellan is anticipating future growth in defense spending for domestic, United States and foreign military sales. It appears that defense spending in general bottomed out in 2015/2016.

One of the most robust areas of the aerospace market, new single-aisle aircraft production, has experienced a temporary setback as engine supply chain issues forced Airbus to adjust the A320 CEO/NEO transition plan. Airbus has indicated that it has changed approximately 70 A320 NEO builds for A320 CEO builds in 2017. The consolidated NEO/CEO build rate remains unchanged as it increases from 48 aircraft per month to 55 aircraft per month in late 2017. Pratt & Whitney's PW1100 engine build rate was reset to reflect a reduction in 2016 and 2017 deliveries. Boeing's 737 MAX and CFM's LEAP engine schedules have not yet reached the steep ramp period. CFM will build approximately 100 LEAP engines in 2016 and plans to build over 2,000 per year by 2020 to support new single aisle platforms. The current consolidated 737 build rate is planned to go from 42 aircraft per month to 47 aircraft per month by the third quarter of 2017, then 52 aircraft per month in 2018. On the wide body side, Airbus' new A350XWB production steps up from 5.6 aircraft per month to 8.6 aircraft per month in 2017. Their A330NEO begins initial production in 2017 with first entry into service expected in the fourth quarter of 2017. A380 production will drop from 25 aircraft in 2016 to 16 aircraft in 2017 which is reflecting the current slowing order pace. Boeing's 787 build rate remains at 12 aircraft per month and the B777 build rate drops from 8.3 aircraft to 7 aircraft per month.

In the regional market segment, both Bombardier and Embraer are aggressively promoting their new platforms, the Bombardier C Series and Embraer E190-E2 and E2-195.This jet segment, within which these aircraft participate, remains the strongest in the regional market. The turboprop segment however is expected to weaken overall due to lower oil prices, which allows regional airlines to retain less fuel-efficient jets in service. Forecast International predicts that demand will be hurt in the near term by used aircraft hitting the market from Republic Airways' bankruptcy and Alaskan Airlines divesting of their Q400's.   Magellan supports this market through our casting commodity groups.

According to industry analysts, business aircraft and civil rotorcraft markets currently have much in common in that both are weakening, largely due to the decline in energy prices. The General Aviation Manufacturers Association reported that civil rotorcraft deliveries in the first half of 2016 fell by 18.3% in units from the first half of 2015, with more expensive models used by the oil and gas industry declining more rapidly. Similarly, large cabin business jets fell by 4.5% over the same period, again with higher priced jets leading the decline. While OEM's are talking market stabilization, industry analysts state that both markets are difficult to forecast and will remain unpredictable while they remain influenced by oil prices rather than their usual economic indicators.

The defence helicopter segment has seen little change within the last period, other than recent news that Poland's army appears to have reversed a previous decision to modernize their fleet with Airbus helicopters. Instead they have indicated that they will buy Blackhawk's from Lockheed's Sikorsky division. Sikorsky plans to build the 50 Blackhawks at their facility in Mielec Poland.

Regarding the defence fighter market, it was reported at the recent Farnborough Air Show that over the next decade Europe's air arms will be reequipped or will be in the process of being reequipped with new fighters. In spite of the economic constraints that many countries face, defence budgets in Europe are generally thought to be on the way up.  According to Aerospace media reports, "Russia's aggressive activities in Ukraine and the recapitalization of its armed forces have given European countries a new impetus to upgrade the capabilities of their combat aircraft." There are five primary contenders vying for a win in Europe; the Lockheed F-35 Lightening II, Boeing F-18 Super Hornet, the Eurofighter Typhoon, Dassault Rafale and the Saab JAS 39 Grippen. Over the last five years, Lockheed's F-35 has been the big winner, having been selected by Denmark, the Netherlands and the UK. However, fighter procurements can be very political; they are about joining a wider community of operators and taking advantage of industrial offsets. Moreover, fighter awards are hotly contested, particularly as programs fight to remain in production such as the Eurofighter and the Boeing Super Hornet. Magellan currently supports the F-35 Lightening II, the Boeing F-18 and the Saab JAS 39 Grippen programs.

In Canada, the same five contenders as in Europe are awaiting a Canadian government announcement to move forward in selecting the fighter replacement required in Canada. This decision is not expected until the government has reviewed the results of their industrial consultation process, which sought input from the aerospace industry about the aircraft that might serve as a potential replacement for Canada's aging CF-18's.

Meanwhile, the F-35 continues to pass significant milestones on its path to full deployment. On September 19^th 2016, the F-35 Joint Strike Fighter program received a significant endorsement as NATO air chiefs "advocated the jet as a vital component of Allied air capability in Europe, including to deter Russian aggression."  This news came one month after Luke Air Force Base announced the delivery of the 100^th F-35 Joint Strike Fighter. Additionally, Norway's defence department announced to its parliament that it plans to purchase 12 jets in 2019 and 2020, making them the first international partner to confirm a multi-year block buy. 

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