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Preparing for a safe landing

Last February, after reporting a strong third quarter, Héroux-Devtek predicted the commercial aerospace market will remain strong in calendar 2012, continuing through 2014.

Analysts maintain Héroux-Devtek is doing well on the civil side through its exposure (contracts) to Messier Dowty for the Airbus and Goodrich, which is more aligned with Boeing. Photo: Héroux-Devtek

The Montreal-based aerospace and industrial products maker, which counts Bombardier and Lockheed-Martin among its biggest clients for civil and military hydraulic and structural parts, also is convinced it will benefit from increased deliveries of Boeing and Airbus aircraft. And the business jet market is showing signs of a recovery, translating into higher shipments, according to company president/CEO Gilles Labbé.

Year-end results for fiscal 2012 released at the end of May proved Labbé correct. Despite a slow economic recovery, Héroux-Devtek recorded record sales of $380.3 million, up 6.4 per cent from the previous year, while net earnings rose 38.4 per cent to $26.5 million.

Aerospace accounted for $345.4 million of sales in fiscal 2012, up four per cent from $332 million in fiscal 2011. Sales of landing gear products rose 6.3 per cent to $242.3 million, including a full-year contribution (versus 11 months the previous year) from Landing Gear USA, a division of Héroux that added $4.4 million of revenue.

Despite a slow economic recovery, Héroux-Devtek recorded record sales of $380.3 million, up 6.4 per cent from the previous year, while net earnings rose 38.4 per cent to $26.5 million. Photo: Héroux-Devtek

Increased activity for business jet and large commercial aircraft programs, mainly the B-777 and the A-320, as well as higher customer requirements for military products more than offset lower customer demand in the regional aircraft and certain commercial helicopter markets as well as unfavourable currency fluctuations. Sales of aerostructure products (airframe components and subassemblies) declined 1.2 per cent to $102.2 million due to the same reasons. These factors were partially offset by higher sales to the business jet market as well as production ramp-up for the Joint Strike Fighter F-35 program and the B-429 helicopter program.

The modernization of two business aircraft, the Learjet 40 XR and 45XR, should be very positive for the company, which manufactures the landing gear and some wing components for the two aircraft. That follows a brutal 2008-09 period when six-to-eight seat business aircraft were hammered by the recession. The changes being made to the aircraft are so significant that parent Bombardier Aerospace renamed them the Learjet 70 and Learjet 75.

“We think this modernization will result in an increase of orders which is good news for us,” Labbé said following the release of the fiscal 2012 results. “The dynamics of most of our strategic markets, whether in aerospace sector or industrial products, are more and more favourable.”

In terms of aerospace, growth will come mainly from the civil side, particularly the commercial sector where the company makes several components for the Airbus A320 and Boeing 777, both seeing stronger demand. “Airbus and Boeing will deliver more aircraft in 2012 that they did last year and their order books represent around seven years worth of production,” Labbé noted.

And after seeing some lean years, Bombardier’s Q400 turboprop got a boost when WestJet Airlines announced it will place an initial order of up to 45 Q400 NextGen aircraft to launch its regional airline.

Héroux makes a number of components for the wings and frame of the Q400.

Héroux-Devtek  president/CEO Gilles Labbé says his company’s internal development will focus on leveraging the capabilities of its world-class network by increasing the proportion of the business stemming from value-added products and services. Photo: Héroux-Devtek

Labbé maintains the business aircraft market is ready to take off and was particularly confident in the new programs his company will be involved in, namely the Learjet 85, Embraer’s Legacy 450/500 and a new business aircraft from Dassault. He sees a modest increase in this sector next year, followed by a bigger gain in 2014.

While the military market will be more problematic over the next few years due to reduced military spending by several countries, Labbé noted that Héroux’s portfolio of products in the sector is well diversified. The firm is particularly strong in the spare parts market which will be less impacted by reduced military budgets. The company is also very involved in the F-35 Joint Strike Fighter program, notably in the manufacturing of structural and locking components.

“This year, we should deliver about the same number of assembled units as last year with a slight increase in 2014 and 2015 and stronger growth starting in 2016,” said Labbé. On March 31, Héroux-Devtek’s order backlog stood at $493 million, versus $502 million at the end of the previous fiscal year and remains well diversified. The company’s internal development will focus on leveraging the capabilities of its “world-class network by increasing the proportion of our business stemming from value-added products and services,” said Labbé.

“Externally, our healthy financial position allows us to consider strategic acquisitions that would add to our product portfolio and provide new technology. Assuming the Canadian dollar remains at parity versus the U.S. currency and considering forward foreign exchange contracts, we anticipate an internal sales growth of approximately five per cent for the fiscal year ending March 31, 2013, compared to the year ended March 31, 2012.”

Analysts liked what they saw in the fiscal year-end results and are bullish on the company going forward.

“Our favourable view . . . is driven by the fact that its key commercial aerospace end markets remain very strong. We expect increased production rates at Airbus and Boeing, as well as at Bombardier, to drive continued growth for (the company)” analyst Cameron Doerksen at National Bank Financial wrote in a report.

After seeing some lean years, Bombardier’s Q400 turboprop got a boost when WestJet Airlines announced it will place an initial order of up to 45 Q400 NextGen aircraft to launch its regional airline. Photo: Bombardier

While Doerksen was expecting eight per cent revenue growth in fiscal 2013 versus Labbé’s projected five per cent, the analyst said new programs ramping up could push growth past the lower number. He noted Héroux exceeded the same five per cent growth forecast for fiscal 2012 on a 6.4 per cent revenue growth.

Fourth quarter landing gear sales were in line with his forecast, but aerostructure sales were below forecast which Doerksen attributed to lower production rates on the Q400 program and reduced work on the F-16 program. And although the order backlog of $493 million was down from $515 million at the end of the third quarter, it remains at a “healthy level.”

“There is strong visibility for (the company’s) key programs and we therefore expect backlog to remain stable or grow in the coming quarters. (Héroux-Devtek) also indicates that it expects several contract renewals as well as new contract wins to boost the backlog in the coming quarters.”

Doerksen agreed with Labbé’s projection that business aircraft activity should pick up in fiscal 2014, especially since the complete landing gear programs for the Learjet 85 and Legacy 450/500 will only ramp up in fiscal 2014.

Doerksen wouldn’t be surprised if there’s an acquisition in the works, noting that at the end of the fourth quarter, Héroux had $62 million in cash and up to $165 million in available credit, putting the company in a good position to make a “strategic” acquisitionto accelerate growth.

“We believe that the company is actively searching for suitable companies to buy, although we caution that management is typically very conservative so a deal may take longer to manifest than expected,” he said.

While the commercial outlook remains favourable, Doerksen was concerned about Héroux’s exposure to the F-35 program which accounts for 10 per cent of its sales. Deliveries of the aircraft are expected to remain flat until ramping up “significantly” in fiscal 2016. But he also noted that the rest of the company’s military exposure is largely related to the less volatile repairs, overhaul and spare parts aftermarket.

“The company is doing well on the civil side through its exposure (contracts) to Messier Dowty for the Airbus and Goodrich which is more aligned with Boeing,” said analyst David Newman of Cormack Securities, Toronto. “They’re also developing their own in-house platforms for Embraer.”

On the military side, Newman said Héroux is less impacted from cutbacks since it’s mainly involved in maintenance, repair and overhaul and a lot of military aircraft returning from overseas missions have to be repaired. There is also work from the F-35, he added.

“It’s a fantastic company,” said another analyst who requested anonymity. “They’ve delivered strong earnings for six consecutive quarters. And despite the fact they are working with a strong Canadian dollar which puts pressure on their competitive position, they continue to win major orders from a number of companies like Lockheed Martin, Embraer and Dassault. They have enough back orders to keep them busy for at least two more years.”

The only downside the analyst could see was if the price of oil climbs back over $110 a barrel which could cool aircraft demand or if Europe goes into a deep recession which would put pressure on some manufacturers such as Airbus, another important client for the company.

Headquartered in Montreal, Héroux-Devtek has 1,500 employees at 11 facilities throughout North America, including Longueuil, Dorval, Laval and St-Hubert in the Montreal area, Kitchener, Scarborough, Arlington, Tex., Springfield, Cleveland and Cincinnati, Ohio, as well as Querétaro, Mexico which opened last December.

The Kitchener operation is a 100,000 square foot facility for the machining of medium- to large-size landing gear components, while Scarborough is involved in the machining and assembly of complex precision parts, structural components and electrical chassis with integral heat exchangers. Approximately 70 per cent of the company’s sales are in the U.S.