Heroux-Devtek lowers revenue forecast for year due to military softness

MONTREAL – Landing gear manufacturer Heroux-Devtek says a deterioration in military sales caused by budget problems in the United States means its overall sales will come in lower than its prior forecast for slight growth.

Although it expects commercial revenues will increase by 10 per cent, the company said a drop in U.S. military spending restrictions and government shutdown will offset those gains for the financial year ended March 31.

Heroux-Devtek posted $257 million in sales from continuing operations in its last financial year.

“The military spending cutback and the sequestration may also continue to affect sales beyond fiscal 2014,” CEO Gilles Labbe said Friday during a conference call.

The trends forced Heroux-Devtek to announce this week the temporary layoff of some 40 workers at its plant in Longueuil, Que., which employs about 350 workers.

“Under these circumstances, we had to reduce staffing. We had no choice,” he told analysts.

The Quebec-based company earned $2.6 million in its second quarter, a 2.3 per cent drop from last year not counting a large gain in the prior-year period from the sale of its aerostructure division.

Heroux-Devtek (TSX:HRX) earned eight cents per share from continuing operations for the period ended Sept. 30, one cent ahead of analyst expectations. That compared with a profit of $2.64 million, or nine cents per share, from continuing operations last year.

Including a large gain from the sale of the division, Heroux-Devtek earned $112.6 million or $3.64 per share last year.

Revenue from continuing operations fell to $56.4 million from $57.7 million a year ago.

Sales to the commercial aerospace market increased 8.8 per cent to $27 million on new business on the Boeing 777 and increased production rates for the large aircraft, as well as for the Airbus A320, partially offset by lower aftermarket sales on Bombardier’s CL-415 water bomber.

Military sales fell 10.6 per cent to $29.4 million due to lower demand for parts for the B-2, Global Hawk, F-15 and C-17 aircraft, partially offset by new business with Boeing on the CH-47 Chinook helicopter.

During the quarter, Heroux-Devtek signed a memorandum of agreement with Boeing to supply complete landing gear systems for the Boeing 777. A multi-year contract expected to be signed by year-end would be the company’s largest landing gear contract.

Analyst Cameron Doerksen of National Bank Financial forecasts that the company’s Boeing deal could generate $40 million to $80 million a year in incremental revenue starting in 2017. Heroux will also supply complete landing gear for Dassault’s new Falcon 5X business jet, unveiled last month, which will compete with Bombardier and Gulfstream’s larger aircraft.

He estimates military repair and overhaul business is worth about $40 million a year for the company.

“However, since repair and overhaul is not something the U.S. military can postpone indefinitely without progressively grounding aircraft, the impact will be temporary,” he wrote in a report.

On the Toronto Stock Exchange, Heroux-Devtek’s shares gained 23 cents, or 2.6 per cent, at $9.10 in Friday afternoon trading.