Principal Technologies Inc. — Interim / Quarterly Report 2020

May 6, 2020

MAGELLAN

CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2020

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MAGELLAN AEROSPACE CORPORATION CONDENSED CONSOLIDATED INTERIM STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

		Three month period	Three month period
(unaudited)		ended March 31
(expressed in thousands of Canadian dollars, except per share amounts)	Notes	2020	2019
Revenues	9	238,813	269,884
Cost of revenues		202,041	227,063
Gross profit		36,772	42,821
Administrative and general expenses		15,676	15,300
Other		(5,938)	558
Income beforeinterest andincome taxes		**27,034 **	26,963
Interest		1,200	1,068
Income before income taxes		25,834	25,895
Income taxes
Current	10	2,047	2,805
Deferred	10	3,713	2,681
		5,760	5,486
Net income		20,074	20,409
Other comprehensive income
Other comprehensive income (loss) that may be
reclassified to profit and loss in subsequent periods:
Foreign currency translation		34,178	(6,710)
Items not to be reclassified to profit and loss
in subsequent periods:
Actuarial(loss)income ondefined benefit pensionplans,net oftaxes	6	(4,759)	239
Total comprehensive income, net of taxes		49,493	13,938
Basic and diluted	7	0.34	0.35

See accompanying notes to condensed consolidated interim financial statements

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MAGELLAN AEROSPACE CORPORATION

CONDENSED CONSOLIDATED INTERIM STATEMENTS OF FINANCIAL POSITION

(unaudited)		March 31	December 31
(expressed in thousands of Canadian dollars)	Notes	2020	2019
Current assets
Cash		32,430	69,637
Restricted cash		1,315	─
Trade and other receivables		214,148	177,801
Contract assets		87,936	77,967
Inventories		217,606	196,823
Prepaid expenses and other		26,489	21,127
		579,924	543,355
Non-current assets
Property, plant and equipment		451,866	439,102
Right-of-use assets		45,688	44,692
Investment properties		2,230	2,180
Intangible assets		67,191	65,373
Goodwill		35,839	34,137
Other assets		9,409	8,770
Deferred taxassets		1,929	3,556
		**614,152 **	597,810
Total assets		1,194,076	1,141,165
Current liabilities
Accounts payable and accrued liabilities and provisions	9	153,991	151,907
Debt due within one year		46,755	48,144
		200,746	200,051
Non-current liabilities
Long-term debt		6,335	6,876
Lease liabilities		40,459	39,794
Borrowings subject to specific conditions		24,304	24,098
Other long-term liabilities and provisions	6	26,590	20,289
Deferred tax liabilities		36,385	34,181
		134,073	125,238
Equity
Share capital		254,440	254,440
Contributed surplus		2,044	2,044
Other paid in capital		13,565	13,565
Retained earnings		526,114	516,911
Accumulated othercomprehensiveincome		59,717	25,539
Equity attributable to equity holders of the Corporation		855,880	812,499
Non-controllinginterest	4	3,377	3,377
Total equity		**859,257 **	815,876
Total liabilities and equity		1,194,076	1,141,165

See accompanying notes to condensed consolidated interim financial statements

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MAGELLAN AEROSPACE CORPORATION CONSOLIDATED INTERIM STATEMENTS OF CHANGES IN EQUITY

(unaudited) (expressed in thousands of Canadian dollars)	Attributable to equityholders of the Corporation Share capital Contributed surplus Other paid in capital Retained earnings Foreign currency translation Total Non- controlling interest Total equity
December 31, 2019 Net income for the period Other comprehensive (loss) income for the period Common share dividend	254,440 2,044 13,565 516,911 25,539 812,499 3,377 815,876 ─ ─ ─ 20,074 ─ 20,074 ─ 20,074 ─ ─ ─ (4,759) 34,178 29,419 ─ 29,419 ─ ─ ─ (6,112) ─ (6,112) ─ (6,112)
March 31, 2020	254,440 2,044 13,565 526,114 59,717 855,880 3,377 859,257
December 31, 2018 Business combination Net income for the period Other comprehensive income (loss) for the period Common share dividend	254,440 2,044 13,565 473,246 44,378 787,673 ─ 787,673 ─ ─ ─ ─ ─ ─ 2,344 2,344 ─ ─ ─ 20,409 ─ 20,409 ─ 20,409 ─ ─ ─ 239 (6,710) (6,471) ─ (6,471) ─ ─ ─ (5,821) ─ (5,821) ─ (5,821)
March 31, 2019	254,440 2,044 13,565 488,073 37,668 795,790 2,344 798,134
See accompanying notes to condensed consolidated	interim financial statements

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MAGELLAN AEROSPACE CORPORATION CONDENSED CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS

		Three month period	Three month period
(unaudited)		ended March 31
(expressed in thousands of Canadian dollars)	Notes	2020	2019
Cash flow from operating activities
Net income		20,074	20,409
Amortization/depreciation of intangible assets, right-of-use
assets and property, plant and equipment		14,509	13,530
Loss (Gain) on disposal of property, plant and equipment		19	(85)
Gain on disposal of joint venture investment	4	─	(881)
Increase (decrease) in defined benefit plans		116	(154)
Accretion of financial liabilities		814	545
Deferred taxes		3,062	1,818
Income on investments in joint ventures		(136)	(170)
Changes to non-cash working capital		(57,450)	(26,956)
Net cash (used in) provided by operating activities		(18,992)	8,056
Cash flow from investing activities
Business combination, net of cash acquired		─	(2,661)
Purchase of property, plant and equipment		(4,210)	(9,507)
Proceeds from disposal of property, plant and equipment		─	235
Increase in intangible and other assets		(1,728)	(6,066)
Change in restricted cash		(1,246)	─
Net cash used in investing activities		(7,184)	(17,999)
Cash flow from financing activities
Decrease in debt due within one year		(2,997)	(6,884)
Decrease in long-term debt		(592)	(647)
Lease liability payments		(1,758)	(901)
Decrease in long-term liabilities and provisions		(255)	(35)
Increase in borrowings, net		29	─
Common share dividend	7	(6,112)	(5,821)
Net cash used in financing activities		(11,685)	(14,288)
Decrease in cash during the period		(37,861)	(24,231)
Cash at beginning of the period		69,637	63,316
Effect ofexchangerate differences		**654 **	(622)
Cash at end of the period		32,430	38,463

See accompanying notes to condensed consolidated interim financial statements

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MAGELLAN AEROSPACE CORPORATION NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(Unaudited, expressed in thousands of dollars except share and per share data)

NOTE 1. DESCRIPTION OF BUSINESS AND NATURE OF OPERATIONS Magellan Aerospace Corporation (the “Corporation” or “Magellan”) is a publicly listed company incorporated in Ontario, Canada under the Ontario Business Corporations Act and its shares are listed on the Toronto Stock Exchange. The registered and head office of the Corporation is located at 3160 Derry Road East, Mississauga, Ontario, Canada, L4T 1A9.

The Corporation is a diversified supplier of components to the aerospace industry. 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.

NOTE 2. SIGNIFICANT ACCOUNTING POLICIES

These unaudited condensed consolidated interim financial statements have been prepared in accordance with International Accounting Standard (“IAS”) 34, Interim Financial Reporting as issued by the International Accounting Standards Board (“IASB”) and using the same accounting policies and methods as were used for the Corporation’s consolidated financial statements and the notes thereto for the year ended December 31, 2019, except for the new accounting pronouncements which have been adopted as disclosed in note 3.

These unaudited condensed consolidated interim financial statements do not include all the information required for full annual financial statements and should be read in conjunction with the Corporation’s annual financial statements for the year ended December 31, 2019, which are available at www.sedar.com and on the Corporation’s website at www.magellan.aero.

The timely preparation of the condensed consolidated interim financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingencies, if any, as at the date of the financial statements and the reported amounts of revenue and expenses during the period. By their nature, estimates are subject to measurement uncertainty and changes in such estimates in future years could require a material change in the condensed consolidated interim financial statements.

These condensed consolidated interim financial statements were authorized for issuance by the Board of Directors of the Corporation on May 5, 2020.

NOTE 3. ADOPTION OF NEW STANDARDS, INTERPRETATIONS AND AMENDMENTS

The Corporation has adopted the new and amended pronouncements issued by International Financial Reporting Standards (“IFRS”) and the International Financial Reporting Interpretations Committees (“IFRIC”) as listed below as at January 1, 2020, in accordance with the transitional provisions outlined in the respective standards.

• Amendments to IAS 1, Presentation of Financial Statements and IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors , clarifying the definition of “material”.

• Amendments to IFRS 3, Business Combination, to help entities determine whether an acquired set of activities and assets is a business or not.

The IASB has issued new standards and amendments to existing standards. These changes are not yet adopted by the Corporation and could have an impact on future periods.

• Amendments to IAS 1, Classification of Liabilities as Current or Non-current

On January 23, 2020, the IASB issued amendments to IAS 1 Presentation of Financial Statements (the “amendments”) to clarify the requirements for classifying liabilities as current or non-current. More specifically, the amendments specify that the conditions which exist at the end of the reporting period are those which will be used to determine if a right to defer settlement of a liability exists; management expectations about events after the balance sheet date, for example on whether a covenant will be breached, or whether early settlement will take place, are not relevant; and the amendments clarify the situations that are considered settlement of a liability. The new guidance will be effective for annual periods starting on or after January 1, 2022.

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NOTE 4. BUSINESS COMBINATION

In line with the Corporation’s low cost sourcing strategy, an additional 26% of the issued and outstanding shares of the capital stock of Triveni Aeronautics Private Limited (“Triveni”) was acquired in the first quarter of 2019 for $3,780 to obtain a 75% controlling interest.

Prior to the effective date February 28, 2019, the Corporation accounted for it’s previously held 49% interest in Triveni as a joint venture using the equity method with a carrying value of $5,498. As at February 28, 2019, the Corporation remeasured its previously held equity interest at fair value and recognized the resulting gain of $881 in Other in the consolidated statement of income.

At February 28, 2019, the Corporation recognized $4,765 current assets, $5,610 non-current assets, $6,142 intangible assets, $596 current liabilities, $2,385 non-current liabilities, and $3,377 non-controlling interest based on the fair value of the identifiable assets and liabilities. The net income recorded in the three month period ended March 31, 2020 includes an immaterial amount attributable to the non-controlling interest.

NOTE 5. BANK INDEBTEDNESS

The Corporation has a multi-currency operating credit facility with a syndicate of banks, with a Canadian dollar limit of $75,000. Extensions of the facility are subject to mutual consent of the syndicate of lenders and the Corporation. The credit agreement also includes a $75,000 uncommitted accordion provision which will provide the Corporation with the option to increase the size of the operating credit facility. On October 28, 2019 the Corporation extended the credit agreement to September 13, 2021. As at March 31, 2020, the Corporation was debt-free under its credit facility. Bank indebtedness bears interest at the bankers' acceptance or LIBOR rates plus 1.00%. At March 31, 2020, the Corporation had letters of credit outstanding totalling $4,078 such that $70,922 was unused and available. A fixed and floating charge debenture on accounts receivable, inventories and property, plant and equipment is pledged as collateral for the operating credit facility.

NOTE 6. EMPLOYEE FUTURE BENEFITS

The Corporation has a number of defined benefit and defined contribution plans providing pension, other retirement and post-employment benefits to substantially all of its employees.

The employee benefit obligation reflected in the condensed consolidated interim statement of financial position is as follows:

	March 31	December 31
	2020	2019
Pension Benefit Plans	18,495	12,000
Other BenefitPlan	1,112	1,009
	19,607	13,009

The discount rate assumption used in determining the obligation for pension and other benefit plans is selected based on a review of current market interest rates of high-quality, fixed rate debt securities adjusted to reflect the duration of the expected future cash outflows for pension benefit payments. As a result of changes in the market interest rates of high-quality, fixed rate debt securities, the Corporation increased the assumed discount rate for the Canadian pension plans to 3.7% as at March 31, 2020 from the 3.1% rates used in calculating the pension obligation as at December 31, 2019. The assumed discount rate remained at 3.1% for the U.S. pension plan as at March 31, 2020 and December 31, 2019. In addition, the return on plan assets underperformed against the expected return during the three month period ended March 31, 2020. The change in the discount rate assumptions and the difference between the actual and expected rate of return on the plan assets resulted in an actuarial loss of $4,759, net of taxes of $1,650 recorded in other comprehensive income in the first quarter of 2020.

NOTE 7. SHARE CAPITAL

Net income per share

NOTE 7. SHARE CAPITAL Net incomeper share
	Three month period
	ended March 31
	2020	2019
Net income	20,074	20,409
Weighted average number of shares	58,209	58,209
Basic and dilutednetincome pershare	0.34	0.35

Dividends

On March 31, 2020, the Corporation paid quarterly dividends on 58,209,001 common shares of $0.105 per common share, amounting to $6,112 in the aggregate.

Subsequent to March 31, 2020, the Corporation declared dividends to holders of common shares in the amount of $0.105 per common share payable on June 30, 2020, for shareholders of record at the close of business on June 16, 2020.

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NOTE 8. FINANCIAL INSTRUMENTS

Fair value hierarchy

The Corporation’s financial assets and liabilities recorded at fair value on the condensed consolidated interim statement of financial position have been categorized into three categories based on a fair value hierarchy. Fair value of assets and liabilities included in Level 1 are determined by reference to quoted prices in active markets for identical assets and liabilities. Assets and liabilities in Level 2 include valuations using inputs other than the quoted prices for which all significant inputs are based on observable market data, either directly or indirectly. Level 3 valuations are based on inputs that are not based on observable market data.

The fair value hierarchy requires the use of observable market inputs whenever such inputs exist. A financial instrument is classified to the lowest level of the hierarchy for which a significant input has been considered in measuring fair value.

Fair values

The Corporation has determined the estimated fair values of its financial instruments based on appropriate valuation methodologies; however, considerable judgement is required to develop these estimates. Accordingly, these estimated fair values are not necessarily indicative of the amounts the Corporation could realize in a current market exchange. The estimated fair value amounts can be materially affected by the use of different assumptions or methodologies. The methods and assumptions used to estimate the fair value of financial instruments are described as follows:

Cash, trade and other receivables, bank indebtedness and accounts payable and accrued liabilities

Due to the short period to maturity of these instruments, the carrying values as presented in the condensed consolidated interim statement of financial positions approximate their fair values.

Foreign exchange contracts

The Corporation enters into foreign forward exchange contracts to mitigate future cash flow exposures in United States dollars. Under these contracts the Corporation is obliged to purchase specific amounts at predetermined dates and exchange rates. These contracts are matched with anticipated operational cash flows in United States dollars. There were no outstanding forward foreign exchange contracts as at March 31, 2020.

Long-term debt

The carrying amount of the Corporation's long-term debt of $8,819 would approximate its fair value as at March 31, 2020.

Borrowings subject to specific conditions

As at March 31, 2020, the Corporation has recognized $25,329 as the amount repayable to Canadian government agencies. The contributions are repayable as future royalty payments; a liability is recorded for the amounts received that will be repaid based on future estimated sales.

Collateral

As at March 31, 2020, the carrying amount of the financial assets that the Corporation has pledged as collateral for its long-term debt facilities was $46,309.

NOTE 9. SEGMENTED INFORMATION

Operating segments are defined as components of the Corporation for which separate financial information is available that is evaluated regularly by the chief operating decision maker in allocating resources and assessing performance. The chief operating decision maker of the Corporation is the President and Chief Executive Officer. 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’s primary sources of revenue are as follows:

	Three month period ended	Three month period ended
		March 31
	2020	2019
Sale of goods	201,218	229,271
Services	37,595	40,613
	238,813	269,884
Timingof revenue recognition based on transfer of control is as follows:
	Three month period ended
		March 31
	2020	2019
At a point of time	152,942	173,059
Overtime	85,871	96,825
	238,813	269,884

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Advance payments received for contracts in progress in excess of revenue recognized were recorded as contract liabilities and included in accounts payable, accrued liabilities and provisions on the condensed consolidated interim statement of financial position. As at March 31, 2020 contract liabilities were $10,832 [December 31, 2019 - $10,605].

Revenues from the Corporation’s two largest customers accounted for 36.3% of total sales for the three month period ended March 31, 2020 [March 31, 2019 – two largest customers accounted for 42.0% of total sales for the three month period ended].

Geographic segments:

Geographic segments:
						Three month	period ended	March 31
				2020				2019
		United				United
	Canada	States	Europe	Total	Canada	States	Europe	Total
Revenue	94,243	64,718	79,852	238,813	90,701	84,819	94,364	269,884
Exportrevenue1	65,241	13,002	25,570	103,813	62,655	17,212	31,395	111,262
1Export revenue is attributed to countries	based on the location of the customers
			March	31,2020			December	31,2019
		United				United
	Canada	States	Europe	Total	Canada	States	Europe	Total
Property, plant and equipment,
right-of-use assets, intangible
assets and goodwill	197,435	207,573	195,576	600,584	200,484	191,411	191,409	583,304

NOTE 10. TAXATION

The Corporation’s tax expense is calculated by using the rates applicable in each of the tax jurisdictions that the Corporation operates in, adjusted for the main permanent differences identified. The effective tax rate for the three month period ended March 31, 2020 was 22.3% [21.2% for the three month period ended March 31, 2019]. The difference between the effective tax rate and the standard tax rate is primarily attributable to the change in mix of income across the different jurisdictions in which the Corporation operates.

NOTE 11. MANAGEMENT OF CAPITAL

The Corporation’s objective is to maintain a capital base sufficient to maintain investor, creditor and market confidence and to sustain future development of the business. Management defines capital as the Corporation’s shareholders’ equity and interest bearing debt, including the debt and equity components of the convertible debentures.

Total managed capital as at March 31, 2020 of $902,189 is comprised of shareholders’ equity attributable to equity holders of the Corporation of $855,880 and interest-bearing debt of $46,309.

The Corporation manages its capital structure and makes adjustments to it in light of economic conditions, the risk characteristics of the underlying assets and the Corporation’s working capital requirements. In order to maintain or adjust its capital structure, the Corporation, upon approval from its Board of Directors, may issue or repay long-term debt, issue shares, repurchase shares through the normal course issuer bid, pay dividends or undertake other activities as deemed appropriate under the specific circumstances. The Board of Directors reviews and approves any material transactions out of the ordinary course of business, including proposals on acquisitions or other major investments or divestitures, as well as capital and operating budgets. There were no changes in the Corporation’s approach to capital management during the period.

NOTE 12. CONTINGENT LIABILITES AND COMMITMENTS

In the ordinary course of business activities, the Corporation may be contingently liable for litigation and claims with, among others, customers, suppliers and former employees. Management believes that adequate provisions have been recorded in the accounts where required. Although, it is not possible to accurately estimate the extent of the potential costs and losses, if any, management believes, but can provide no assurance, that the ultimate resolution of such contingencies would not have a material adverse effect on the financial position of the Corporation.

At March 31, 2020 capital commitments in respect of purchase of property, plant and equipment totalled $6,786, all of which had been ordered. There were no other material capital commitments at the end of the period.

NOTE 13. SUBSEQUENT EVENTS

In March 2020 the World Health Organization declared coronavirus COVID-19 a global pandemic. This contagious disease outbreak, which has continued to spread, has resulted in governments worldwide enacting emergency measures to combat the spread of the virus. These measures, which include travel bans, self-imposed quarantine periods and social distancing, have caused material disruption to businesses globally resulting in an economic slowdown.

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As an emerging risk, the duration and full financial effect of the COVID-19 pandemic is unknown at this time, as is the efficacy of the government and central bank interventions, the Corporation’s business continuity plan and other mitigating measures. Any estimate of the length and severity of these developments is therefore subject to significant uncertainty, and accordingly estimates of the extent to which the COVID-19 pandemic may materially and adversely affect the Corporation’s operations, financial results and condition in future periods are also subject to significant uncertainty. Therefore, uncertainty about judgments, estimates and assumptions made by management during the preparation of the Corporation’s consolidated financial statements related to potential impacts of the COVID-19 outbreak on revenue, expenses, assets, liabilities, and note disclosures could result in a material adjustment to the carrying value of the asset or liability affected.

The Corporation will continue to closely monitor the COVID-19 situation and should the duration, spread or intensity of the pandemic further develop in 2020, the supply chain and customer demand will likely be further affected. These factors may further impact the Corporation’s operating plan, its liquidity and cash flows.

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