Héroux-Devtek reports fiscal 2015 second quarter results

LONGUEUIL, QC, Nov. 14, 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 second quarter of fiscal 2015 ended September 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 generated strong operating results during the second quarter, a period that is normally seasonally weaker due to plant shutdowns and summer vacations. In addition to solid sales and gross profit contributions from APPH, existing operations recorded higher sales to both the commercial and military aerospace markets driven by increased volume on several existing programs and the ramp up of the new Legacy 450/500 business jet program. This greater business activity, combined with enhanced manufacturing efficiency and a more favourable product mix, resulted in margin improvements and solid increases in adjusted EBITDA and adjusted net income,” said Gilles Labbé, President and CEO of Héroux-Devtek.

Consolidated sales grew 49.1% to $84.1 million, up from $56.4 million in the second quarter of fiscal 2014. This $27.7 million increase is essentially attributable to a $23.5 million contribution from APPH, while year-over-year fluctuations in the value of the Canadian currency versus the US currency increased second-quarter sales by $1.5 million. Excluding these elements, sales increased $2.7 million, or 4.8%, on a comparable basis.

Sales to the commercial aerospace market increased 38.8% to $37.5 million reflecting commercial sales of $7.9 million from APPH. Excluding the latter, commercial sales rose 9.4% due to higher production rates for certain large commercial aircraft programs, mainly the B-777 and B-787 aircraft, 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 $46.6 million, up 58.6% from a year ago driven by a $15.5 million contribution from APPH. Excluding APPH, military sales increased 5.7% as a result of higher sales volume on the F-35 program and on the CH-47 helicopter program with The Boeing Company (“Boeing”), partially offset by a slowdown in repair and overhaul activities and lower electronic enclosures and cabinet sales due to lower customer requirements.

Gross profit reached $13.1 million, or 15.6% of sales, up from $7.9 million, or 14.0% 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 period. Excluding APPH, gross profit as a percentage of sales improved by 0.8%, reflecting increased efficiency and a better product mix in the military aftermarket. Currency variation had a negative effect equivalent to 1.0% of sales on gross profit compared with last year’s second 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 US dollars.

Reflecting higher gross profit, adjusted EBITDA, which excludes restructuring charges of $0.8 million related to manufacturing capacity optimization and consolidation initiatives announced in January 2014, as well as certain charges related to the integration of APPH’s operations, stood at $10.0 million, or 11.9% of sales, up from $6.5 million, or 11.6% of sales, a year ago. Last year’s adjusted EBITDA excluded acquisition-related costs of $0.3 million.

Adjusted net income, which excludes restructuring charges of $0.6 million, net of taxes, stood at $3.8 million, or $0.11 per diluted share, in the second quarter of fiscal 2015, versus $2.8 million, or $0.09 per diluted share, in the second quarter of fiscal 2014, excluding acquisition-related costs of $0.2 million, net of taxes. Last year, the Corporation recorded a favourable adjustment of deferred income tax liabilities amounting to $0.9 million or $0.03 per diluted share.

SIX MONTHS RESULTS
For the first six months of fiscal 2015, consolidated sales amounted to $170.5 million, up from $119.4 million a year earlier. This variation reflects a $47.7 million contribution from APPH and a $3.7 million increase resulting from year-over-year currency fluctuations. Excluding these elements, comparable sales were essentially stable.

Reflecting the acquisition of APPH and its more favourable product mix during the period, gross profit reached $27.3 million, or 16.0% of sales, compared with $17.0 million, or 14.3% of sales, last year. Adjusted EBITDA totalled $20.3 million, or 11.9% of sales, up from $14.3 million, or 11.9% of sales, in the prior year. Finally, adjusted net income was $7.6 million, or $0.22 per diluted share, versus $5.6 million, or $0.18 per diluted share, a year ago.

FINANCIAL POSITION
As at September 30, 2014, Héroux-Devtek’s balance sheet remained healthy with cash and cash equivalents of $50.9 million, or $1.42 per share, while total long-term debt was $103.7 million, including the current portion, but excluding net deferred financing costs. Long-term debt includes $52.0 million drawn against the Corporation’s authorized Credit Facility of $200.0 million. As a result, the Corporation’s net debt position stood at $52.8 million as at September 30, 2014, while the net-debt-to equity ratio was 0.18:1.

RECENT EVENT
On November 13, 2014, the shareholders’ agreement between the Caisse de dépôt et placement du Québec (the “Caisse”), Gilles Labbé and the Corporation was replaced by an investors’ rights agreement between the Caisse and the Corporation and by a shareholders’ agreement between the Caisse and a company controlled by Gilles Labbé in order to reflect the current financial reality, corporate governance standards and market practices. The shareholders’ agreement was initially signed in 1989 and amended in 1994.

OUTLOOK
Conditions remain favourable in the commercial aerospace market. Large commercial aircraft manufacturers are increasing production rates on certain leading programs through calendar 2018 and order backlogs represent eight years of production at current rates. The business jet market continues to improve with higher aircraft shipments and 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 September 30, 2014, Héroux-Devtek’s funded (firm orders) backlog stood at $450 million, versus $447 million at the end of the previous quarter.

“In the short-term, our priorities are the integration of APPH and the execution of our $90 million capital investment plan in preparation for our multi-year contract with Boeing to supply complete landing gear systems for the B-777 and B-777X aircraft. At this moment, all major elements of the plan are progressing on-schedule and within budget and we are eager to demonstrate our world-class capabilities in executing a large-scale, value-added mandate. These two priorities are key constituents of Héroux-Devtek’s longer-term objective of achieving annual sales of approximately $500 million within the next five years, based on existing contracts and assuming no other acquisitions. As for fiscal 2015, we continue to anticipate a solid contribution from APPH and relatively stable internal sales compared with last fiscal year, as an increase in sales to the commercial aerospace market should be offset by lower sales to the military aerospace market,” concluded Mr. Labbé.