Héroux-Devtek reports fiscal 2015 first quarter results

LONGUEUIL, QC, Aug. 7, 2014 /CNW Telbec/ – Héroux-Devtek Inc. (TSX: HRX), (“Héroux-Devtek” or the “Corporation”), a leading Canadian manufacturer of aerospace products, today reported its results for the first quarter of fiscal 2015 ended June 30, 2014. Results include the contribution of APPH Limited and APPH Wichita Inc. (collectively “APPH”), acquired on February 3, 2014. Unless otherwise indicated, all amounts are in Canadian dollars.

“Héroux-Devtek’s sales and adjusted EBITDA growth in the first quarter of fiscal 2015 was driven by a solid performance from APPH,” said Gilles Labbé, President and CEO of Héroux-Devtek. “As anticipated, on a comparable basis, sales remained essentially stable, as the strength of the large commercial aircraft market and initial production sales for the Legacy 450/500 business jet program were offset by softness in the military market. Our financial position remains healthy, as we are proceeding with capital investments in preparation for the B-777 and B-777X contract in line with our comprehensive plan.”

Consolidated sales grew 37.2% to $86.4 million, up from $63.0 million in the first quarter of fiscal 2014. This $23.4 million increase is essentially attributable to a $24.2 million contribution from APPH. On a comparable basis, sales decreased slightly. Year-over-year fluctuations in the value of the Canadian currency versus the US currency increased first-quarter sales by $2.0 million.

Sales to the commercial aerospace market increased 53.4% to $43.3 million reflecting commercial sales of $10.2 million from APPH. Excluding the latter, commercial sales rose 17.2% as a result of higher production rates for certain large commercial aircraft programs and higher sales to the business jet market reflecting the entry into production of the Embraer Legacy 450/500 program. Sales to the military aerospace market reached $43.1 million, up 24.0% from a year ago driven by a $14.0 million contribution from APPH. Excluding APPH, military sales decreased 16.2% due to a slowdown in repair and overhaul activities, lower spare requirements, mainly on the C-5 program from the U.S. government, and lower electronic enclosures and cabinet sales at Magtron as a result of lower customer requirements. These factors were partially offset by higher sales volume with The Boeing Company (“Boeing”) on the CH-47 helicopter program.

Gross profit was $14.2 million, or 16.4% of sales, up from $9.2 million, or 14.5% of sales, last year. The increase in dollars and as a percentage of sales reflects the acquisition of APPH, including its more favourable product mix during the quarter. Excluding APPH, gross profit as a percentage of sales was relatively stable, as a higher under-absorption of manufacturing overhead costs at the Longueuil facility resulting from a slowdown in military repair and overhaul activities was offset by improved efficiency and lower non-recurring costs related to the development of a new landing gear system, when compared to last year. Currency variation had a negative effect equivalent to 0.4% of sales, on gross profit compared with last year’s first 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.

Reflecting higher gross profit, adjusted EBITDA, which excludes restructuring charges of $0.4 million related to manufacturing capacity optimization and consolidation initiatives announced in January 2014, stood at $10.4 million, or 12.0% of sales, up from $7.7 million, or 12.3% of sales, a year ago. The decrease in adjusted EBITDA as a percentage of sales is due to a loss on currency translation of net monetary items denominated in foreign currencies of $0.4 million this year, as opposed to a $0.5 million gain last year. These contrary variations had a combined year-over-year effect of $0.02 per share, after taxes, on adjusted net income.

Adjusted net income, which excludes restructuring charges of $0.3 million, net of taxes, stood at $3.8 million, or $0.12 per diluted share, in the first quarter of fiscal 2015, versus $2.8 million, or $0.09 per diluted share in the first quarter of fiscal 2014.

FINANCIAL POSITION
As at June 30, 2014, Héroux-Devtek’s balance sheet remained healthy with cash and cash equivalents of $43.5 million, or $1.21 per share, while total long-term debt was $100.6 million, including the current portion, but excluding net deferred financing costs. Long-term debt includes $50.3 million drawn against the Corporation’s authorized Credit Facility of $200.0 million. As a result, the Corporation’s net debt position stood at $57.1 million as at June 30, 2014, while the net-debt-to equity ratio was 0.19:1.

During the quarter, the Corporation proceeded with the issuance of 4,255,871 common shares pursuant to a public offering and concurrent private placements. Net proceeds of $47.9 million were used to repay indebtedness under the Credit Facility.

RECENT EVENT
Earlier today, Héroux-Devtek announced that it has been awarded a multi-year contract by Boeing to manufacture torque tubes for the 787 Dreamliner aircraft. Under the terms of the agreement, which represents new business for Héroux-Devtek, shipments are scheduled to begin in early calendar year 2015. The contract is an initial co-production agreement that further strengthens the Corporation’s business relationship with Boeing. Production of the 787 Dreamliner is ramping up from the current rate of 10 aircraft per month to 12 aircraft in 2016 and to 14 aircraft by the end of the decade. As of July 31, 2014, Boeing’s order backlog for the B-787 program stood at 869 aircraft.

OUTLOOK
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. The business jet market continues to improve with higher aircraft shipments and this growth should be sustained 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 this impact.

As at June 30, 2014, Héroux-Devtek’s funded (firm orders) backlog stood at $447 million, versus $456 million at the beginning of the fiscal year.

“For fiscal 2015, Héroux-Devtek will benefit from APPH’s additional contribution, while internal sales are expected to remain relatively stable compared with last fiscal year, as an increase in internal sales to the commercial aerospace market should be offset by lower internal sales to the military aerospace market. With respect to the second quarter, it is important to remember that it has traditionally been a relatively slower period owing to seasonal factors, such as plant shutdowns and summer vacations. Over the long-term, we are confident to reach our objective of achieving annual sales of approximately $500 million within the next five years, assuming no other acquisitions, as most of our markets are exhibiting robust growth. These favourable conditions should present Héroux-Devtek with further opportunities to demonstrate its world-class capabilities in providing value-added products and services to the global landing gear market,” concluded Mr. Labbé.