Héroux-Devtek reports fiscal 2014 third quarter results

Héroux-Devtek Inc., (“Héroux-Devtek” or the “Corporation”), a leading Canadian manufacturer of aerospace products, has reported its results for the third quarter of fiscal 2014 ended Dec. 31, 2013. Unless otherwise indicated, all amounts are in Canadian dollars. Net income from discontinued operations for the three- and nine-month periods ended Dec. 31, 2012 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 generated a higher operating profitability during the third quarter as a result of a more favourable product mix compared with last year. As witnessed since the beginning of the current fiscal year, the strength of the large commercial aircraft market continues to be the main revenue driver, while the military aerospace market remains affected by U.S. budgetary constraints,” said Gilles Labbé, president and CEO of Héroux-Devtek. 

Consolidated sales from continuing operations amounted to $61.4 million, stable compared with $61.7 million in the third quarter of fiscal 2013. Sales to the commercial aerospace market increased 3.2 per cent to $28.5 million resulting from new actuator business and production rate increase on the B-777 program, partially offset by lower volume to the regional jet market. Sales to the military aerospace market declined 3.4 per cent to $33.0 million due to a slowdown in repair and overhaul activity, lower spare parts requirements, mainly on the B-2 and F-15 programs, and reduced electronic enclosure and cabinet sales at Magtron resulting from lower customer demand. These factors were partially offset by new business with Boeing on the CH-47 Chinook helicopter program. Lower military sales also reflect a weak U.S. military market due to reduced base defense budget funding and sequestration. 

Fluctuations in the value of the Canadian currency versus the US currency increased third-quarter sales by $0.2 million but had a negative effect of $0.8 million, or 1.3 per cent of sales, on gross profit compared with last year’s third 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 $10.0 million, or 16.3 per cent of sales, up from $9.4 million, or 15.1 per cent of sales, last year. This increase reflects a favourable military aftermarket product mix, partially offset by a higher under-absorption of manufacturing overhead costs resulting from reduced repair and overhaul activity and lower spare parts volume. Excluding acquisition-related costs of $1.1 million before income taxes, equivalent to $0.04 per diluted share net of income taxes, adjusted EBITDA from continuing operations totalled $8.3 million, or 13.5% of sales, compared with $7.7 million, or 12.4 per cent of sales, last year. 

Net income from continuing operations was $2.6 million, or $0.08 per diluted share, in the third quarter of fiscal 2014, versus $3.2 million, or $0.10 per diluted share, in the third quarter of fiscal 2013. Excluding acquisition-related costs net of taxes, earnings per share stood at $0.12 per diluted share in the third quarter of fiscal 2014. 

As at Dec. 31, 2013, Héroux-Devtek’s balance sheet was healthy with cash and cash equivalents of $98.2 million, or $3.11 per share. At that same date, total debt was $69.7 million, including $23.4 million drawn against the Corporation’s authorized Credit Facility of $150.0 million, but excluding net deferred financing costs. As a result, the Corporation’s net cash position stood at $28.6 million as at Dec. 31, 2013. 

For the first nine months of fiscal 2014, consolidated sales from continuing operations reached $180.8 million, versus $183.2 million a year earlier. Currency variations increased sales by $0.4 million, but reduced gross profit by $1.2 million in the first nine months of fiscal 2014. Excluding acquisition-related costs of $1.4 million before income taxes, equivalent to $0.04 per diluted share net of income taxes, adjusted EBITDA from continuing operations stood at $22.6 million, or 12.5 per cent of sales, compared with $22.9 million, or 12.5 per cent of sales, a year earlier. 

Net income from continuing operations totalled $8.0 million, or $0.25 per diluted share, versus $8.8 million, or $0.29 per diluted share, in the prior year. Excluding acquisition-related costs net of taxes, earnings per share stood at $0.29 per diluted share in the first nine months of fiscal 2014. 

Subsequent to the end of the quarter, Héroux-Devtek announced the acquisition of U.K.-based APPH Limited and U.S.-based APPH Wichita, Inc. (together “APPH”). APPH is an integrated provider of landing gear and hydraulic systems and assemblies for original equipment manufacturer (“OEM”) and aftermarket applications. Héroux-Devtek is acquiring four plants in the United Kingdom and one plant in Wichita, Kansas. These plants have a combined workforce of approximately 400 employees, including a design engineering department staffed with 40 professionals. For the 12-month period ended Dec. 31, 2013, APPH generated revenues of approximately US$77 million and an adjusted EBITDA of approximately US$12.5 million. The purchase price, net of about US$4 million of cash acquired, is approximately US$124 million. The transaction is being financed with the Corporation’s available cash and existing credit facilities. 

Conditions remain favourable in the commercial aerospace market. Large commercial aircraft manufacturers achieved record deliveries in calendar 2013 and, reflecting robust new orders, their backlogs remain strong, representing eight years of production at current rates. In the business jet market, key indicators indicate a recovery to be sustained over the next few years driven by a better economy and the introduction of several new aircraft, including three models for which Héroux-Devtek is currently developing the landing gear. The military aerospace market is expected to remain difficult. Although a recent U.S. budgetary agreement may partially alleviate cutbacks imposed by sequestration, conditions remain challenging and the situation could affect the Corporation beyond the current fiscal year, despite having a diversified military portfolio, balanced between new component manufacturing and aftermarket products and services, that should lessen this impact. 

As at Dec. 31, 2013, Héroux-Devtek’s funded (firm orders) backlog stood at $368 million, versus $361 million at the beginning of the fiscal year and remains well diversified. This variation reflects initial orders for the long-term contract to supply complete landing gear systems for the B-777 program, partially offset by a lower backlog on certain military programs. On a pro forma basis, the backlog reaches $448 million. 

“Looking ahead, the fourth quarter has historically been our strongest period and this fiscal year should be no exception, but we anticipate that consolidated sales for the fiscal year ending March 31, 2014 will be slightly lower than last year, excluding the impact of the APPH acquisition. For the next fiscal year ending March 31, 2015, Héroux-Devtek will continue to benefit from the sustained strength of the commercial aerospace market and will increasingly gain from the contribution of its design and development programs. These factors should offset persistent weakness in the military aerospace sector, resulting in sales that are expected to remain relatively stable, excluding the impact of the APPH acquisition. More importantly, the significant and immediate strategic benefits stemming from the acquisition of APPH will strengthen our competitive position in the global landing gear market and create further value for our shareholders,” concluded Labbé.