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Héroux-Devtek Inc. (Héroux-Devtek), a leading international manufacturer of aerospace products, has reported its results for the fourth quarter and fiscal year ended March 31, 2017. Unless otherwise indicated, all amounts are in Canadian dollars.
“In fiscal 2017, Héroux-Devtek focused on executing its business strategy aimed at building a sustainable future for the corporation. We made initial deliveries on the largest landing gear contract in our history to supply The Boeing Company (Boeing) with complete landing gear systems for the Boeing 777 and 777X aircraft. We also widened our reach in the worldwide landing gear market by signing multi-year agreements with global original equipment manufacturers (OEMs).
“Finally, Héroux-Devtek concluded the fiscal year with a strong financial position, from which it can confidently invest in value-creating initiatives to the benefit of its shareholders,” said Gilles Labbé, president and CEO of Héroux-Devtek.
Fourth quarter results
Consolidated sales reached $120.9 million, compared with $117.5 million in the fourth quarter of fiscal 2016. This 2.9 per cent increase reflects higher sales to the commercial aerospace market, as detailed below, while year-over-year fluctuations in the value of the Canadian currency versus foreign currencies had a negative impact of $3.5 million on fourth-quarter sales.
Commercial sales rose 11.9 per cent to $60.8 million, versus $54.3 million last year. The increase is mainly attributable to the beginning of deliveries for the Boeing 777 program, partially offset by lower customer requirements for certain business jet and large commercial aircraft programs, as well as unfavourable currency fluctuations.
Defence sales declined 4.9 per cent, from $63.2 million to $60.1 million. This variation is essentially due to lower repair and overhaul sales to the U.S. Air Force, as well as unfavourable currency fluctuations, partially offset by a catch-up in sales of spare parts to the U.S. government.
Gross profit was $20.8 million, or 17.2 per cent of sales, versus $22.2 million, or 18.9 per cent of sales, last year. The decline mainly reflects a higher under-absorption of costs, including excess processing and finishing costs related to the Boeing 777 program. These excess costs are expected to normalize upon completion of the customer qualification and approval of Héroux-Devtek’s surface treatment processes.
This factor was partially offset by favourable year-over-year currency fluctuations equivalent to 1.8 per cent of sales.
As a result of the reduction in gross profit, adjusted EBITDA was $19.2 million, or 15.9 per cent of sales, compared with $20.7 million, or 17.6 per cent of sales, a year ago. This year’s adjusted EBITDA excluded restructuring charges of $3.6 million, mainly comprised of employee-related costs as part of workforce adjustments announced in February 2017.
Net income reached $8.9 million, or $0.25 per diluted share, in the fourth quarter of fiscal 2017. Excluding non-recurring items net of taxes, adjusted net income for the fourth quarter of fiscal 2017 stood at $9.1 million, or $0.25 per share, stable compared with the fourth quarter of fiscal 2016.
Adjusted net income excluded an after-tax amount of $2.5 million related to a non-cash gain resulting from the update of the estimated repayment schedule for one government authority loan.
Year-end results
For fiscal 2017, consolidated sales reached $406.5 million, essentially stable compared with $406.8 million in fiscal 2016. Year-over-year fluctuations in the value of the Canadian currency versus foreign currencies increased sales by $3.4 million. Commercial sales increased 2.1 per cent to $210.8 million, while defence sales decreased 2.3 per cent to $195.7 million.
Gross profit for fiscal 2017 amounted to $68.0 million, equivalent to 16.7 per cent of sales, compared with $74.3 million, or 18.3 per cent of sales, in fiscal 2016. Adjusted EBITDA reached $61.4 million, or 15.1 per cent of sales, versus $64.1 million, or 15.7 per cent of sales, a year earlier.
Net income was $31.8 million, or $0.88 per diluted share, in fiscal 2017, compared with $26.6 million, or $0.74 per diluted share, in fiscal 2016. Adjusted net income stood at $26.4 million, or $0.73 per share, versus $27.7 million, or $0.77 per share, last year.
Strong free cash flow generation and solid financial position
In fiscal 2017, Héroux-Devtek generated a solid free cash flow of $33.0 million, as opposed to negative $66.3 million in fiscal 2016. This significant increase stems from higher cash flows related to operating activities attributable to improved working capital, as well as from a reduction in capital investments following the completion, in fiscal 2016, of the corporation’s comprehensive investment plan related to the Boeing 777 and 777X contract. The working capital improvement was mainly realized in the fourth quarter, resulting in a strong free cash flow of $22.8 million during the period.
Reflecting this free cash flow generation, Héroux-Devtek’s financial position further improved as at March 31, 2017, with cash and cash equivalents of $42.5 million, while total long-term debt was $134.8 million, including the current portion, but excluding net deferred financing costs. Long-term debt includes $55.9 million drawn against the corporation’s authorized credit facility of $200 million. As a result, the net debt position was $92.3 million at the end of fiscal 2017, down sharply from $128.0 million at the end of fiscal 2016.
The net-debt-to equity ratio stood at 0.26:1 as at March 31, 2017, versus 0.39:1 12 months earlier.
Three-year extension of the authorized credit facility
Héroux-Devtek has reached an agreement with a syndicate of banks to amend and restate its existing credit facility. Under the terms of the agreement, the credit facility has been extended for a three-year period with a new maturity date set for May 2022. The authorized amount remains $200 million, while the additional amount that could be borrowed, subject to lenders’ consent, has been increased from $75 million to $100 million.
The credit facility will be used for working capital, capital expenditures and other general corporate purposes of Héroux-Devtek and its subsidiaries, including acquisitions. It is secured by all assets of the corporation and its subsidiaries, and is subject to certain restrictive covenants and corporate guarantees granted by the Corporation and its subsidiaries.
Update on B-777 and B-777X contract
During the fourth quarter of fiscal 2017, Héroux-Devtek continued to ramp-up production of complete landing gear systems for this program. The corporation delivered 21 complete systems in fiscal 2017 and continues to meet production requirements.
Also during the fourth quarter, Héroux-Devtek received customer approval for a second main surface treatment process required under this contract in order to produce the most critical components internally. Customer qualification and approval is progressing for the remaining surface treatment processes. Management expects this phase to be completed in fiscal 2018.
Outlook
In the large commercial aircraft sector, Boeing and Airbus are adjusting production rates ahead of introducing certain more fuel efficient aircraft variants on several leading programs through calendar 2020. Their backlogs remain healthy despite a reduction in new firm orders since calendar 2016.
The reduction has been more important for twin-aisle aircraft, including the Boeing 777 program. In the business jet sector, aircraft shipments declined 7.9 per cent in calendar 2016 reflecting an economic contraction in certain emerging markets, notably Brazil and Russia. The corporation remains well positioned in this market given the current and future ramp-up of certain models for which it has designed the landing gear.
In the defence aerospace market, the new U.S. administration indicated its intention to increase funding, which could be positive for certain programs. In this regard, greater defence funding was proposed for the 2018 U.S. government’s fiscal year.
The corporation’s U.K. operations provide a more geographically diversified defence portfolio, which reduces its relative exposure to the U.S. market and creates more international opportunities. The balance between new component manufacturing and aftermarket products and services in the corporation’s defence portfolio and its leading program content also promote more stability.
As at March 31, 2017, Héroux-Devtek’s funded (firm orders) backlog stood at $405 million, versus $424 million three months earlier.
“Héroux-Devtek is dedicated to building a sustainable future. Our state-of-the-art facilities, talented employees, important content on leading programs, as well as solid relationships with leading aerospace OEMs are essential attributes in achieving success,” said Labbé. “In the short-term, results will reflect reduced production rates announced by some OEMs for certain aircraft programs, including the Boeing 777. As a result, we expect a low single-digit decrease in sales for the fiscal year ending March 31, 2018, when compared to the fiscal year just ended.
“Following this transition year, we expect sales growth to gradually resume, driven by the ramp-up of new programs, to reach between $480 and $520 million in fiscal 2021,” he continued. “Meanwhile, our solid financial position enables us to continue looking for new business opportunities and for strategic acquisitions that would complement current activities and create further value for shareholders.”
