TORONTO, May 11 /CNW/ - Magellan Aerospace Corporation (the "Corporation"
or "Magellan") is listed on the Toronto Stock Exchange under the symbol MAL.
The Corporation is a diversified supplier of components to the aerospace
industry. Through its network of facilities throughout North America and the
United Kingdom, Magellan supplies leading aircraft manufacturers, airlines and
defence agencies throughout the world.
Financial Results
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On May 11, 2006, the Corporation released its financial results for the
first quarter of 2006. The results are summarized as follows:
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Three-months ended
March 31
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(Expressed in thousands,
except per share amounts) 2006 2005 Change
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Revenues $ 137,022 $ 144,941 -5.5%
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Net loss $ (658) $ (1,679) -
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Net loss per share $ (0.01) $ (0.02) -
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EBITDA(x) $ 9,718 $ 8,881 9.4%
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EBITDA(x) per share $ 0.11 $ 0.10 10.0%
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This quarterly statement 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.
(x) The Corporation has included certain measures in this quarterly
statement, including EBITDA, the terms for which are not defined under
Canadian generally accepted accounting principles. The Corporation
defines EBITDA as earnings before interest, taxes and depreciation and
amortization. The Corporation has included these measures, including
EBITDA, because it believes this information is used by certain investors
to assess financial performance and 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 various
jurisdictions. Although the Corporation believes these measures are used
by certain investors (and the Corporation has included them for this
reason), these measures are unlikely to be comparable to similarly titled
measures used by other companies.
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Management's Discussion and Analysis
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First quarter 2006 results for Magellan Aerospace Corporation showed a
continuing path of operational improvement, hidden to some degree by costs
associated with the intake of new work packages, and modest financial gains
under continued pressure from the high Canadian dollar. Magellan's management
focus during the first quarter of 2006 was in three key areas: supporting the
intake of new work announced in 2005; negotiating improved pricing to meet
increased material costs and restore margins; and improving operating
efficiencies at production facilities by consolidating activities and
improving technology. Results of these activities will materialize over the
course of 2006 and beyond. Concurrently, extensive activity was devoted to the
capture of additional workload for new programs, including the newest aircraft
from both Airbus and Boeing, and advanced defence programs in the United
States and Europe. Modules for the GE F414 engine, the power plant of the
Boeing F18E/F aircraft, continued with strong deliveries, increased quantities
of key parts for the Lockheed F22 aircraft were brought into production, and
work continued on the limited quantities required for the development stage of
the new Lockheed Joint Strike Fighter F35 aircraft in preparation of first
flights later in 2006. While regional jet markets remain weak, the ongoing
strong business jet market offsets to a large degree this for Magellan as it
continues to deliver components for both segments.
Revenues
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Three-months ended
March 31
--------------------------------
(Expressed in thousands) 2006 2005 Change
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Canada $ 65,266 $ 73,120 -10.7%
United States 43,896 43,566 0.8%
United Kingdom 27,860 28,255 -1.4%
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Total Revenue $ 137,022 $ 144,941 -5.5%
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Revenues for the first quarter of 2006 were $137.0 million, a decrease of
$7.9 million or 5.5% over the same period in 2005. Revenues were lower in the
first quarter of 2006 compared to the same period last year by approximately
$9.5 million because of changing foreign exchange rates and by $7.1 million
because of contracts that ended with the final shutdown of the Corporation's
Fort Erie location. After adjusting for these two factors, revenues grew by
approximately 6.4%, year over year, which is reflective of increased demand
within the aerospace industry.
Gross Profit
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Three-months ended
March 31
--------------------------------
(Expressed in thousands) 2006 2005 Change
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Gross profit $ 14,314 $ 14,455 -0.1%
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Percentage of revenue 10.4% 10.0%
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Gross profit for the first quarter of 2006 was $14.3 million or 10.4% of
revenues, compared to $14.5 million or 10.0% of revenues in the same period of
last year. Gross profit, as a percentage of sales, improved in the first
quarter of 2006 compared to the first quarter of 2005, due to improvements in
operating efficiencies, but were negatively impacted by the continued
strengthening of the Canadian dollar, as well as higher costs for raw
materials. Management expects that further improvements to efficiencies will
occur as volumes increase over the balance of 2006.
Administrative and General Expenses
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Three-months ended
March 31
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(Expressed in thousands) 2006 2005 Change % Change
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Administrative and
general expenses $ 10,268 $ 10,923 $ (655) -6.0%
Foreign exchange
(gain) loss (282) 312 (594) -190.4%
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Total administrative
and general expenses $ 9,986 $ 11,235 $ (1,249) -11.1%
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Percentage of revenue 7.3% 7.8%
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Total administrative and general expenses were $10.0 million in the first
quarter of 2006. Included in total administration and general expenses is a
foreign exchange gain of $0.3. Without this item, administrative and general
expenses were $10.3 million (or 7.5% of revenues) in the first quarter of 2006
compared to $10.9 million (or 7.5% of revenues) in the same period in 2005.
Interest Expense
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Three-months ended
March 31
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(Expressed in thousands) 2006 2005 Change % Change
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Interest on bank
indebtedness and
long-term debt $ 2,024 $ 3,361 $ (1,337) -39.8%
Convertible
debenture interest 1,488 1,488 - -
Accretion charge
for convertible debt 573 460 113 24.6%
Discount on sale of
accounts receivable 910 494 416 84.2%
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Total interest expense $ 4,995 $ 5,803 $ (808) -13.9%
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Interest on bank indebtedness and long-term debt decreased in 2006
compared to the same period in 2005 due to lower interest rates under the
Corporation's credit facility. Discount on the sale of accounts receivable
rose as a higher amount of receivables were sold at higher discount rates.
Provision for (Recovery of) Income Taxes
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Three-months ended
March 31
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(Expressed in thousands) 2006 2005 Change % Change
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Provision for
current income taxes $ 92 $ 125 $ (33) -26.4%
(Recovery of)
future income taxes (101) (1,029) 928 90.2%
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Total (recovery of)
income taxes $ (9) $ (904) $ 895 99.0%
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Effective Tax Rate 1.4% 35.0%
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The effective rate of recovery of income taxes was 1.4% in the first
quarter of 2006, due to non-deductible, non-cash charges for stock option
expenses and non-cash interest charges on the Corporation's convertible
debentures. These non-deductible items have a large impact while Magellan
operates near breakeven levels.
Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA")
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Three-months ended
March 31
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(Expressed in thousands) 2006 2005 Change
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Net loss $ (658) $ (1,679) $ 1,021
Interest 4,995 5,803 (808)
Taxes (9) (904) 895
Depreciation and amortization 5,390 5,661 (271)
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EBITDA $ 9,718 $ 8,881 $ 837
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Cash Flow from Operating Activities
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Three-months ended
March 31
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(Expressed in thousands) 2006 2005 Change
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Increase in accounts receivable $ (4,563) $ (21,901) $ 17,338
Increase in inventories (15,957) (4,293) (11,664)
Increase in prepaid expenses and other (2,727) (84) (2,643)
Increase in accounts payable 10,710 153 10,557
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Net change in non-cash
working capital items $ (12,537) $ (26,125) $ 13,588
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Cash used in operating activities $ (7,153) $ (22,652) $ 15,499
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In the first quarter of 2006, the Corporation used $7.2 million of cash
from operations, compared to using $22.7 million of cash in the same period of
2005. Increases in accounts receivable, inventories and prepaid expenses were
partially offset by an increase in accounts payable. Inventories increased in
part due to a number of delayed shipments, as well as a general increase in
raw materials and work-in-process which reflects increased demand in the
aerospace industry. The Corporation expects to recover on delayed shipments
within the next two quarters.
Cash Flow from Investing Activities
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Three-months ended
March 31
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(Expressed in thousands) 2006 2005 Change
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Purchase of capital assets $ (3,059) $ (3,457) $ 398
Proceeds from disposals
of capital assets 96 531 (435)
Increase in other assets (878) (271) (607)
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Cash used in investing activities $ (3,841) $ (3,197) $ (644)
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The Corporation invested $3.1 million in new equipment and improvements
to its facilities to improve manufacturing capacity and enhance its
capabilities. Other assets increased due to increases in certain long-term
receivables.
Cash Flow from Financing Activities
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Three-months ended
March 31
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(Expressed in thousands) 2006 2005 Change
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Increase in bank indebtedness $ 8,720 $ 27,635 $ (18,915)
Repayment of long-term debt (117) (4,440) 4,323
Increase (decrease) in
long-term liabilities 75 (1,048) 1,123
Issue of Common Shares 14 27 (13)
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Cash provided by financing activities $ 8,692 $ 22,174 $ (13,482)
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The Corporation has an operating credit facility with a maximum credit
limit of $155.0 million. Amounts drawn under this facility bear interest at
the bankers' acceptance or LIBOR rates plus 1.0% expiring on May 26, 2006 and
extendable to May 26, 2007. On May 2, 2006, the Corporation extended the
operating credit facility with its existing lenders, and amended the agreement
to reduce interest costs to bankers' acceptance or LIBOR rates plus 0.875% as
well as providing for unlimited one-year renewal options. The credit facility
is fully guaranteed by N. Murray Edwards, Chairman of the Board of Directors.
An annual fee of $155,000 (0.1% of the maximum credit facility) is paid in
consideration for the guarantee.
Outlook
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The appreciation of the Canadian dollar, which had slowed in 2005 and the
first quarter of 2006 has increased dramatically in April and May of 2006 and
will have a significant impact on upcoming earnings if this trend does not
reverse. Management is evaluating all options including reducing Canadian
dollar denominated expenses to realign the business to operate effectively in
this new environment.
Civil aircraft orders in the first quarter of 2006, which experienced a
record year in 2005, continued at a brisk rate in the first quarter of 2006.
Airlines in the Middle East and Asia are reporting strong profits, while most
North American airlines range from profitable to readying for emergence from
bankruptcy protection. Key defence programs are progressing on schedule, with
the F18 and F22 aircraft in full-scale production, and the F35 aircraft
proceeding through development to production later this decade. High
operational activity rates for aircraft and helicopters are enabling a strong
aftermarket demand. Despite a challenging first quarter of 2006, Magellan's
performance is expected to meet or exceed our 2006 plan, which will enable the
necessary re-investment to support growth.
On behalf of the Board
(signed) (signed)
N. Murray Edwards Richard A. Neill
Chairman President and Chief Executive Officer
May 11, 2006
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MAGELLAN AEROSPACE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
AND RETAINED EARNINGS
(un-audited) Three-months ended
March 31
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(Expressed in thousands of dollars,
except per share amounts) 2006 2005
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Revenues $ 137,022 $ 144,941
Cost of revenues 122,708 130,486
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Gross profit 14,314 14,455
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Administrative and general expenses 9,986 11,235
Interest 4,995 5,803
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14,981 17,038
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Loss before income taxes (667) (2,583)
Provision for (recovery of) income taxes
- Current 92 125
- Future (101) (1,029)
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(9) (904)
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Net loss for the period (658) (1,679)
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Retained earnings, beginning of period 107,019 115,105
Net loss for the period (658) (1,679)
Retained earnings, end of period $ 106,361 $ 113,426
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Loss per share
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Basic $ (0.01) $ (0.02)
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Diluted $ (0.01) $ (0.02)
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MAGELLAN AEROSPACE CORPORATION
CONSOLIDATED BALANCE SHEETS
(un-audited) As at As at
March 31 December 31
2006 2005
(Expressed in thousands of dollars)
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ASSETS
Current
Cash $ 5,102 $ 7,426
Accounts receivable 67,784 62,862
Inventories 285,362 268,590
Prepaid expenses and other 12,153 9,343
Future income tax assets 4,066 3,518
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Total current assets 374,467 351,739
Capital assets 262,297 264,899
Other 48,242 46,467
Future income tax assets 50,187 50,752
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Total assets $ 735,193 $ 713,857
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Bank indebtedness (note 3) $ 122,969 $ 113,824
Accounts payable and accrued charges 134,144 122,978
Current portion of long-term debt 2,467 2,201
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Total current liabilities 259,580 239,003
Long-term debt 9,246 9,608
Future income tax liabilities 77,907 77,301
Convertible debentures 65,714 65,141
Other long-term liabilities 14,596 15,061
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Total liabilities 427,043 406,114
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Shareholders' equity
Capital stock (note 4) 234,073 234,058
Contributed surplus 1,034 854
Other paid-in capital 11,100 11,100
Retained earnings 106,361 107,019
Foreign exchange translation (note 7) (44,418) (45,288)
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Total shareholders' equity 308,150 307,743
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Total liabilities and shareholders' equity $ 735,193 $ 713,857
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MAGELLAN AEROSPACE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(un-audited) Three-months ended
March 31
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(Expressed in thousands of dollars) 2006 2005
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OPERATING ACTIVITIES
Loss for the period $ (658) $ (1,679)
Add (deduct) items not affecting cash
Depreciation and amortization 5,390 5,661
Stock option charge 180 60
Accretion of convertible debentures 573 460
Future income taxes recoveries (101) (1,029)
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5,384 3,473
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Net change in non-cash working capital
items relating to operating activities (12,537) (26,125)
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Cash used by operating activities (7,153) (22,652)
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INVESTING ACTIVITIES
Purchase of capital assets (3,059) (3,457)
Proceeds from disposal of capital assets 96 531
Increase in other assets (878) (271)
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Cash used in investing activities (3,841) (3,197)
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FINANCING ACTIVITIES
Increase in bank indebtedness 8,720 27,635
Repayment of long-term debt (117) (4,440)
Increase (decrease) in long-term liabilities 75 (1,048)
Issue of Common Shares 14 27
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Cash provided by financing activities 8,692 22,174
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Effect of exchange rate changes on cash (22) (178)
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Decrease in cash (2,324) (3,853)
Cash, beginning of period 7,426 9,048
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Cash, end of period $ 5,102 $ 5,195
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NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands of dollars except share and per share data)
1. ACCOUNTING POLICIES
Basis of presentation
The accompanying un-audited consolidated financial statements have been
prepared by the Corporation in accordance with accounting principles
generally accepted in Canada on a basis consistent with those followed in
the most recent audited consolidated financial statements. These
un-audited consolidated financial statements do not include all the
information and footnotes required by generally accepted accounting
principles for annual financial statements and therefore should be read
in conjunction with the audited consolidated financial statements and
notes included in the Corporation's Annual Report for the year ended
December 31, 2005. The Corporation's external auditors have not reviewed
these financial statements.
2. INVENTORIES
The Corporation is in negotiations with one of its customers over
amendments to pricing with respect to an existing long-term contract.
While it is probable that the Corporation will be successful in its
negotiations, the final result is not determinable at the present time.
If the negotiations are not successful or the final terms differ from
what the Corporation expects, the Corporation may be required to record a
loss provision on this contract. The amount of such provision, if any,
cannot be reasonably estimated until such amendments are finalized.
3. BANK INDEBTEDNESS
Bank indebtedness of $122,969 (December 31, 2005 - $113,824) is payable
on demand and bears interest at the bankers' acceptance or LIBOR rates,
plus 1.0% (5.1% at March 31, 2006). Included in the amount outstanding at
March 31, 2006 is US$75,108 (December 31, 2005 - US$71,000). At March 31,
2006, the Corporation had drawn $122,969 under the operating credit and
had issued letters of credit totalling $2,018 such that $30,013 was
unused and available. A fixed and floating charge debenture on accounts
receivable, inventories and capital assets is pledged as collateral for
the operating loan and the term bank loan. The credit facility is fully
guaranteed by the Chairman of the Board of Directors. An annual fee of
$155 is paid in consideration for the guarantee.
4. CAPITAL STOCK
The following table summarizes information on share capital and related
matters as at March 31, 2006:
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Outstanding Exercisable
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Common Shares 90,797,288
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Common Share stock options 4,449,400 214,200
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Preference Shares 2,000,000
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The weighted average number of Common Shares outstanding during the
three-month period ended March 31, 2006 was 90,794,805.
5. STOCK-BASED COMPENSATION PLAN
The Corporation has an incentive stock option plan, which provides for
the granting of options for the benefit of employees and directors. The
maximum number of options for Common Shares that remain to be granted
under this plan is 901,303. Options are granted at an exercise price that
will be the market price of the Corporation's Common Shares at the time
of granting. Options normally have a life of five years with vesting at
20% at the end of the first, second, third, fourth and fifth years from
the date of the grant. In addition, certain business unit income tests
must be met in order for the option holder's entitlement to fully vest.
The Corporation accounts for stock options issued after January 1, 2003
using the fair value method. Compensation expense recorded during the
three-month period ended March 31, 2006 was $180 (March 31, 2005 - $60).
In the three-month period ended March 31, 2006, there were 1,514,000
stock options granted at an exercise price of $3.08. The fair value of
these options was $1.13.
The fair value of stock options is estimated at the date of grant using
the Black-Scholes pricing model with the following weighted average
assumptions:
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Risk-free interest rate 4.0%
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Expected volatility 30%
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Expected average life of options 4 years
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Expected dividend yield 0%
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The Black-Scholes option pricing model used by the Corporation to
determine fair values was developed for use in estimating the fair value
of freely traded options, which are fully transferable and have no
vesting restrictions. The Corporation's employee stock options are not
transferable, cannot be traded and are subject to vesting restrictions
and exercise restrictions under the Corporation's blackout policy, which
would tend to reduce the fair value of the Corporation's stock options.
Changes to the subjective input assumptions used in the model can cause a
significant variation in the estimate of the fair value of the options.
6. SEGMENTED INFORMATION
The Corporation is organized and managed as a single business segment,
being aerospace, and the Corporation is viewed as a single operating
segment by the chief operating decision maker for the purposes of
resource allocations and assessing performance.
Capital assets are based on the country in which they are located.
Domestic and foreign capital assets consist of:
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As at March 31, 2006
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Canada US UK Total
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Capital assets $ 123,949 $ 125,068 $ 13,280 $ 262,297
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As at December 31, 2005
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Canada US UK Total
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Capital assets $ 126,181 $ 125,783 $ 12,935 $ 264,899
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Revenue is attributable to countries based on the location of the
customers. Domestic and foreign revenues consist of:
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Three months ended March 31
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2006
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Canada US UK Total
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Revenue
Domestic $ 23,333 $ 35,280 $ 26,795 $ 85,408
Export 41,933 8,616 1,065 $ 51,614
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Total revenue $ 65,266 $ 43,896 $ 27,860 $ 137,022
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Three months ended March 31
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2005
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Canada US UK Total
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Revenue
Domestic $ 25,357 $ 34,987 $ 26,715 $ 87,059
Export 47,763 8,579 1,540 57,882
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Total revenue $ 73,120 $ 43,566 $ 28,255 $ 144,941
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The major customers for the Corporation for the three-month period ended
March 31 are as follows:
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Three-months ended
March 31
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2006 2005
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Major Customers
Canadian operations
- Number of customers 4 3
- Percentage of total Canadian revenue 47% 32%
US operations
- Number of customers 3 3
- Percentage of total US revenue 60% 55%
UK operations
- Number of customers 1 1
- Percentage of total UK revenue 85% 77%
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7. FOREIGN EXCHANGE TRANSLATION
Unrealized translation adjustments, which arise on the translation to
Canadian dollars of assets and liabilities of the Corporation's
self-sustaining foreign operations, resulted in unrealized currency
translation gain of $870 for the three-month period ended March 31, 2006
(March 31, 2005 - $215), which is reflected as foreign exchange
translation on the consolidated balance sheets and has no impact on net
income.
8. SUPPLEMENTARY INFORMATION
Foreign exchange gain on the conversion of foreign currency denominated
working capital balances and debt for the three-month period ended
March 31, 2006 was $282 (March 31, 2005 - loss of $312).
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