Héroux-Devtek reports fiscal 2014 fourth quarter and year-end results

Héroux-Devtek Inc., (“Héroux-Devtek” or the “Corporation”) a leading Canadian manufacturer of aerospace products, has reported its results for the fourth quarter and fiscal year ended March 31, 2014. Unless otherwise indicated, all amounts are in Canadian dollars. Net income from discontinued operations for the quarter and fiscal year ended March 31, 2013 includes the results of substantially all of the Corporation’s Aerostructure and Industrial Products operations sold to Precision Castparts Corp. on Aug. 31, 2012 and the gain from the sale of discontinued operations. 

“Héroux-Devtek made significant strides in regards to further enhancing its status as one of the leading landing gear designer and manufacturer in the world over the course of fiscal 2014,” said Gilles Labbé, president and CEO of Héroux-Devtek. “The fiscal year was highlighted by the award of the largest landing gear contract in our history for the supply of complete landing gear systems for the Boeing 777 and 777X aircraft and the strategic acquisition of APPH, which broadened our geographical reach and the scope of our product and service offering. We also further progressed on our landing gear design and development programs and we are on the verge of generating higher sales through initial production ramp-ups. These major achievements made Héroux-Devtek a stronger company and provided us with an expanded network and portfolio that we can leverage to create even more long-term value for all stakeholders, while maintaining a healthy financial position.” 

Consolidated sales from continuing operations amounted to $91.2 million, up from $73.8 million in the fourth quarter of fiscal 2013. This $17.4 million increase reflects mainly a $14.7 million contribution over a two-month period from APPH. 

Sales to the commercial aerospace market increased 17.9 per cent to $38.0 million reflecting commercial sales of $6.9 million from APPH over a two-month period. Excluding the latter, commercial sales declined slightly, as lower sales in the regional jet market and lower aftermarket sales on the Bombardier CL-415 program were partially offset by higher sales to the large commercial aircraft market, mainly from new actuator business on the B-777 program. Sales to the military aerospace market rose 28.0 per cent to $53.2 million mainly driven by a $7.8 million two-month contribution from APPH. On an internal basis, military sales increased 9.2 per cent due to higher spare parts requirements on the P-3 and C-130 programs and favourable currency fluctuations. 

Fluctuations in the value of the Canadian currency versus the US currency increased fourth-quarter sales by $2.4 million but had a negative effect equivalent to 0.3 per cent of sales, on gross profit compared with last year’s fourth quarter. The impact of currency movements on the Corporation’s gross profit is influenced by the use of forward foreign exchange sales contracts and the natural hedging from the purchase of materials made in U.S. dollars. 

Gross profit reached $15.4 million, or 16.9 per cent of sales, up from $12.0 million, or 16.3 per cent of sales, last year. The increase in dollars mainly reflects the acquisition of APPH, while the increase as a percentage of sales stems from a favorable military aftermarket product mix and lower non-quality costs, partially offset by a higher under-absorption of manufacturing overhead costs resulting from a slowdown in military repair and overhaul activities. 

Reflecting higher gross profit, adjusted EBITDA, which excludes acquisition-related costs of $3.6 million and restructuring charges of $1.9 million related to manufacturing capacity optimization and consolidation initiatives announced in January 2014, stood at $13.2 million, or 14.5 per cent of sales, up from $10.0 million, or 13.6 per cent of sales, a year ago. Adjusted net income from continuing operations, which excludes acquisition-related costs and restructuring charges, net of taxes, stood at $6.0 million, or $0.19 per diluted share, in the fourth quarter of fiscal 2014, versus $4.6 million, or $0.15 per diluted share in the fourth quarter of fiscal 2013. 

For the fiscal year ended March 31, 2014, consolidated sales from continuing operations reached $272.0 million, up 5.8 per cent from $257.0 million in fiscal 2013. Excluding the $14.7 million two-month contribution from APPH, sales held steady. Sales to the commercial aerospace market grew 9.7 per cent to $121.8 million, while sales to the military aerospace market rose 2.9 per cent to $150.3 million. Currency variations increased sales by $2.8 million, but reduced gross profit by $1.0 million in fiscal 2014. 

Gross profit amounted to $42.4 million, or 15.6 per cent of sales, up from $39.8 million, or 15.5 per cent of sales, in fiscal 2013 reflecting the addition of APPH. Excluding acquisition-related costs of $5.0 million and restructuring charges of $1.9 million, adjusted EBITDA from continuing operations stood at $35.8 million, or 13.2 per cent of sales, in fiscal 2014, compared with $33.0 million, or 12.8 per cent of sales, a year earlier. Adjusted net income from continuing operations totalled $15.3 million, or $0.48 per diluted share, versus $13.4 million, or $0.43 per diluted share, in the prior year. 

As at March 31, 2014, Héroux-Devtek’s balance sheet remained healthy, even after considering the acquisition of APPH. Cash and cash equivalents stood at $47.3 million, or $1.50 per share, while total debt was $150.5 million, excluding net deferred financing costs. Total debt includes $100.9 million drawn against the Corporation’s authorized Credit Facility, which was increased to $200.0 million, from $150.0 million, and extended by three years to March 2019 at the end of fiscal 2014. As a result, the Corporation’s net debt position stood at $103.1 million as at March 31, 2014, while the net-debt-to equity ratio was 0.43. 

Conditions remain favourable in the commercial aerospace market. Large commercial aircraft manufacturers are increasing production rates on certain leading programs through calendar 2017 and order backlogs remain strong, representing eight years of production at current rates. In the business jet market, key indicators continue to suggest improving market conditions and sustained growth over several years driven by a better economy and new aircraft introduction, including three models for which Héroux-Devtek developed the landing gear. The military aerospace market should remain difficult and although sequestration cuts were eliminated through the U.S. Government’s 2015 fiscal year, current funding requests beyond that horizon exceed planned budget limits, which could affect the Corporation over its ensuing fiscal years. However, as APPH reduces Héroux-Devtek’s relative exposure to the U.S. military market, a more geographically diversified military portfolio, mainly composed of leading programs, and also balanced between new component manufacturing and aftermarket products and services, should lessen any impact in this market. 

As at March 31, 2014, Héroux-Devtek’s funded (firm orders) backlog stood at $456 million, including $93 million from APPH, versus $361 million at the beginning of the fiscal year. 

“In the fiscal year ending March 31, 2015, Héroux-Devtek will benefit from a full-year contribution from APPH, while internal sales should be relatively stable compared with the year just ended. As forces driving our main markets are not expected to evolve materially, we anticipate an increase in internal sales to the commercial aerospace market to be offset by lower internal sales to the military aerospace market. Over a longer-term horizon, our performance will be driven by the initial contribution and subsequent growth of European operations, the start-up of the Boeing 777 contract, the ramp-up of our landing gear design programs, large aircraft manufacturers achieving scheduled production rate increases, a sustained recovery in the business jet market and stable military conditions beyond fiscal 2015. Given our existing contracts and key industry drivers, we believe Héroux-Devtek can achieve annual sales of approximately $500 million within the next five years, assuming no further acquisition,” concluded Labbé.