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Heroux-Devtek optimistic despite military uncertainty

Nov. 7, 2011, Montreal - Heroux-Devtek believes its revenues are still on the runway for growth despite expected cuts to the U.S. defence budget.


November 7, 2011
By The Canadian Press

Halfway through its fiscal year, the maker of aerospace and industrial products still expects overall revenues will increase by five per cent for the year.

The Montreal area company believes growth can accelerate because of increased production of large Boeing and Airbus planes on which it a supplier, the ramp up of several military aircraft and production of new business jets.

"The future is very promising for Heroux and we believe we have the key elements and a world class organization to be a leading player in our strategic market segments,'' CEO Gilles Labbe said in a conference call Friday.

Its net profit nearly doubled in the latest quarter on higher revenues and more efficient manufacturing.

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Heroux-Devtek earned $4.8 million, or 16 cents a share, in the three months ended Sept. 30, the second quarter of its 2012 fiscal year.

That compared with net earnings of $2.7 million, or nine cents, a year ago.

Revenues for the period increased 3.4 per cent to $86 million from $83.2 million.

Heroux-Devtek's industrial segment reported a nearly 31 per cent operating margin on a 34 per cent revenue boost with key customer GE Power and Caterpillar having increased backlogs.

The overall results beat the forecasts of analysts who had expected 13 cents per share earnings on $87 million of revenue.

Excluding the unexpectedly low tax rate, EPS would have been 14 cents. Construction of its new facility in Mexico negatively impacted earnings by one cent per share.

Labbe said the Mexican facility, which will be completed this month and begin shipping product early next year, will provide greater flexibility to capture additional business from global aerospace manufacturers which have nearby sites.

"It will also enhance our global competitiveness by further specializing each of our manufacturing sites thus ensuring we provide customers with value-added products and services at the most optimal costs.''

Despite uncertainty over military spending in the U.S., Labbe said he doesn't expect sales will drop as it continues to ramp up production of the Joint Strike Fighter and works on projects such as the C130J Super Hercules and Bell 429 helicopter.

"We're expecting some growth, of course not to the same degree that we see on the commercial side, but I think we have a very solid business model in that arena,'' he told analysts.

Labbe said Heroux is ramping up its work on the F35 Joint Strike Fighter, which currently generates about $35 million of revenue per year. It expects the delivery of landing gear will increase to 42 shipsets this fiscal year despite the two-year probation on the STOVL variant.

Production will eventually peak at 100 shipsets, although he's not yet sure what next year's shipments will be.

Cameron Doerksen of National Bank Financial said that while the program is an important part of Heroux's long-term growth, it currently represents less than 10 per cent of annual revenue.

"It is our belief that U.S. budgetary issues may see the ramp up in this program slowed, but an outright cancellation is very unlikely, in our opinion,'' he wrote in a report.

Doerksen said the U.S. military has an aging fighter force with no viable alternative to the F-35. A number of key U.S. allies, including Canada, have committed to purchasing the plane and have invested in its development.

Heroux-Devtek continues to be on the prowl for acquisitions ranging between $50 million and $100 million in value. But Labbe said the recent US$16.4 billion acquisition of Goodrich Corp. by United Technologies Corp. has raised the pricing expectations of
other would-be sellers.

"We have seen some bump up in valuations (but) I don't think we're looking at companies with these type of multiples.''

Analysts believe the company is undervalued and may become a takeover target.

Heroux-Devtek supplies landing gears and other parts to makers of commercial and military aircraft and provides industrial customers with large components for power generation equipment.

The company is based in Longueuil, Que. and has plants in the Montreal area, Kitchener, Ont., Toronto, U.S. plants in Arlington, Tex/.; Springfield, Cleveland and Cincinnati, in Ohio, as well as Queretaro, Mexico.

About 70 per cent of Heroux-Devtek's sales are outside Canada.