Avcorp Announces 2016 Third Quarter Financial Results

Q3 2016 Report
November 14, 2016

VANCOUVER: Avcorp Industries Inc. (TSX: AVP) (the “Company”, “Avcorp” or the “Avcorp Group”) today announced its financial results for the three and nine month periods ended September 30, 2016. All amounts are in Canadian currency unless otherwise stated. 

Q3 Financial and Operational Highlights
  • Revenue was $41.0 million, up 89.6% from $21.5 million for Q3 2015.
  • Including costs incurred from the Hitco acquisition that have yet to be recovered, loss from operations was $17.9 million. In Q3 2015, loss from operations was $2.0 million.
  • Awarded multiple production contracts from Boeing consisting of complex metal bond and multi-material structural assemblies.
  • Secured a US$5 million loan facility for use as working capital purposes.
  • Order backlog at September 30 was $640 million, up 62% from $395 million at June 30, 2016.
  • Signed a memorandum of understanding with the University of British Columbia to explore the creation of a Learning Factory for Advanced Composites

Highlights Subsequent to Quarter End
  • Signed a long-term production contract with the Aerospace Company of Fuji Heavy Industries Ltd. ("FHI"), a tier-one supplier to major original equipment manufacturers ("OEM") of commercial and defence aircraft around the world.
  • Announced a restructuring at the Gardena facility which will result in significant annual cost savings for the Company, net of anticipated severance costs of approximately $260,000.
  • As a subsequent event, the Company has amended and extended its existing credit facility

CEO Commentary

“Our third quarter was among our most active ever as marked by our revenue growth and the signing of a major contract award with one our longest-standing customers,” said Mr. Peter George “We are sustaining this momentum into Q4 with the signing of a long-term production contract with Fuji Heavy Industries and efforts to improve operational performance and utilization at our facilities.” 

Mr. George added, “Looking ahead, we will continue to strengthen our relationships with OEM aircraft manufacturers and their related Tier 1 suppliers through our ongoing efforts to expand our composite manufacturing capabilities. These efforts will run in parallel with initiatives to improve our profitability and market valuation.”  

Review of Financial Results

During the quarter ended September 30, 2016 Avcorp Group revenues totalled $41.0 million as compared to $21.6 million in revenue for the same quarter in the previous year. The December 18, 2015 acquisition of the US based composite Aerostructures division of Hitco, a subsidiary of Frankfurt-listed SGL has added $26.0 million to current quarter revenues. 

During the quarter ended September 30, 2016, the Avcorp Group recorded a loss from operations of $17,861,000, which includes costs incurred and yet to be recovered under the Hitco acquisition agreement, on $41.0 million in revenue; as compared to a $2.0 million operating loss on $21.6 million in revenue for the same quarter in the previous year. 

Pre-Hitco acquisition operational events although indemnified under a service agreement and asset purchase agreement with Hitco and SGL, and on which Avcorp was required to assist, further adversely impacted operations and caused excessive personnel costs, and administrative and legal expenditures at ACF Avcorp’s Gardena facility during the third quarter. These costs have yet to be recovered and are included in all the costs for 2016. 

The Company has taken decisive steps towards reducing costs at its Gardena facility by way of issuing 60 day WARN notifications on October 24, 2016, as part of a restructuring initiative at its Gardena California facility that will result in a workforce reduction of 75 permanent employees by December 31, 2016. This reduction is in addition to exiting 180 temporary workers during the last 90 days, which were added this year to support customers’ requirements arising from legacy product issues. 

Over the course of 2016 and into the first part of 2017 certain of the smaller loss making contracts, assumed with the Hitco acquisition, are being wound down thereby eliminating the associated losses. What will be the remaining significant loss making contract has been the focus of a comprehensive Company initiative within which management has commenced discussions and planning with a major customer which would provide for an orderly and protected transition of this significant loss making contract from Avcorp’s Gardena facility. Contract revisions are in process which will ultimately improve Avcorp’s financial performance. 

During the quarter ended September 30, 2016, cash flows from operating activities, excluding the impact of changes in non-cash working capital, utilized $17.4 million of cash as compared to utilizing $0.4 million of cash during the quarter ended September 30, 2015. Cash flows from operating activities were most significantly impacted as a result of operating losses incurred from the integration and productionization costs expended for the newly acquired Hitco operations, losses arising from unfavourable customer contracts assumed, and operational, administrative, and legal expenditures, incurred at Avcorp’s Gardena facility as a direct result of pre-Hitco acquisition operational events. 

The order backlog as at September 30, 2016 is $640.0 million, in consideration of attaining full award values; compared to $395.0 million as at June 30, 2016. The primary factor underlying the change in order backlog is an approximately $277.0 million increase in order backlog due to increases in production rates, contract renewals for various existing programs, and new contract awards.

The Company’s complete interim financial statements and management's discussion and analysis for the three and nine month periods ended September 30, 2016 can be found at www.avcorp.com or at www.sedar.com. 

About Avcorp
The Avcorp Group designs and builds major airframe structures for some of the world’s leading aircraft companies, including BAE Systems, Boeing, Bombardier, Fuji Heavy Industries and Lockheed Martin. The Avcorp Group has more than 50 years of experience, over 800 skilled employees and 636,000 square feet of facilities. Avcorp Structures & Integration located in Delta British Columbia, Canada is dedicated to metallic and composite aerostructures assembly and integration; Avcorp Engineered Composites located in Burlington Ontario, Canada is dedicated to design and manufacture of composite aerostructures, and Avcorp Composite Fabrication located in Gardena California, USA has advanced composite aerostructures fabrication capabilities for composite aerostructures. The Avcorp Group offers integrated composite and metallic aircraft structures to aircraft manufacturers, a distinct advantage in the pursuit of contracts for new aircraft designs, which require lower-cost, light-weight, strong, reliable structures. Comtek Advanced Structures Ltd., at our Burlington, Ontario, Canada location also provides aircraft operators with aircraft structural component repair services for commercial aircraft.

Avcorp Composite Fabrication Inc. is wholly owned by Avcorp US Holdings Inc. Both companies are incorporated in The State of Delaware, USA, and are wholly owned subsidiaries of Avcorp Industries Inc. 

Comtek Advanced Structures Ltd., incorporated in the Province of Ontario, Canada, is a wholly owned subsidiary of Avcorp Industries Inc.

Avcorp Industries Inc. is a federally incorporated reporting company in Canada and traded on the Toronto Stock Exchange (TSX:AVP).

Sandi DiPrimo, Investor Relations Contact | 604-587-4938
Forward-Looking Statements
This release should be read in conjunction with the Company’s unaudited financial statements contained in the Company’s Annual Report and with the quarterly financial statements and accompanying notes filed with Sedar (www.sedar.com). Certain statements in this release and other oral and written statements made by the Company from time to time are forward-looking statements, including those that discuss strategies, goals, outlook or other non-historical matters; or projected revenues, income, returns or other financial measures. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those contained in the statements, including the following: (a) changes in worldwide economic and political conditions that impact interest and foreign exchange rates; (b) the occurrence of work stoppages and strikes at key facilities of the Corporation or the Corporation’s customers or suppliers; (c) government funding and program approvals affecting products being developed or sold under government programs; (d) cost and delivery performance under various program and development contracts; (e) the adequacy of cost estimates for various customer care programs including servicing warranties; (f) the ability to control costs and successful implementation of various cost reduction programs; (g) the timing of certifications of new aircraft products; (h) the occurrence of downturns in customer markets to which the Corporation products are sold or supplied or where the Corporation offers financing; (i) changes in aircraft delivery schedules or cancellation of orders; (j) the Corporation’s ability to offset, through cost reductions, raw material price increases and pricing pressure brought by original equipment manufacturer customers; (k) the availability and cost of insurance; (l) the Corporation’s ability to maintain portfolio credit quality; (m) the Corporation’s access to debt financing at competitive rates; (n) uncertainty in estimating contingent liabilities and establishing reserves tailored to address such contingencies; and (o) integration of newly acquired operations and associated expenses may adversely affect profitability.

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