Heroux-Devtek looks for acquisitions to beef up proprietary products

MONTREAL – Aerospace manufacturer Heroux-Devtek wants to continue its transformation from a repair and overhaul business by developing proprietary landing gear products that will generate high stable margins and allow it to better control its destiny.

The Montreal-area company said it is on the hunt for several “tuck-in” acquisitions that will continue its makeover into the world’s third-largest manufacturer of aircraft landing gear.

“This is an evolution and we’re going all the way transforming the business from what it was to what it is, and we still have some steps to conclude,” CEO Gilles Labbe said Friday after releasing weaker third-quarter results.

Heroux-Devtek (TSX:HRX) took a hit due to soft military sales as governments sought to trim deficits, but the company expects its commercial customers will provide a strong finish to the fiscal year.

Including a one-time gain from the sale of its aerostructure and industrial segment, it earned $4.6 million, or 15 cents per share in period ended Dec. 31. That’s down from $6.9 million or 23 cents per share a year earlier.

Net income from continuing operations decreased nearly 27 per cent to $3.3 million or 11 cents per share, compared to $4.5 million or 15 cents per share in the prior year.

Revenues from continuing operations were almost flat at $61.7 million.

Analysts had forecast 14 cents per share in adjusted income on $64 million of sales.

The company expects a traditionally strong fourth-quarter will allow its full-year sales to increase by up to five per cent, based on growing demand for landing gear for large airplanes and business jets.

Labbe said the longer-term goal is to grow its business by investing heavily in research and development to design the next generation of landing gear systems that are environmentally friendly and lighter.

He said the company has the financial flexibility to fund its capital investment programs and complete strategic acquisitions that enhance it product portfolio and provide new technologies.

“We looking at anything related to landing gear,” he said, pointing to similar types of work in actuation systems and hydraulics.

Becoming a more proprietary product company would allow it to better control its destiny by developing aftermarket products where margins are better and it can control pricing on spares, he told analysts.

Heroux wants to boost the contribution of such products from 10 per cent to at least one quarter of all sales in three to five years.

Chief financial officer Real Belanger added that such products also bring more sustainability to long-term sales.

The timing of acquisitions is difficult but Labbe said it is actively looking at up to five opportunities that could materialize in the next 12 months.

In the meantime, it expects conditions will remain favourable in the commercial aerospace market where Boeing and Airbus are increasing their rates of production, and work on business jets programs for Embraer, Bombardier (TSX:BBD.B) and Dassault are ramping up over the coming few years.

Labbe said the military aerospace market remains uncertain but the company’s exposure to defence budget cuts should be reduced by its balance between component manufacturing and aftermarket products and services.

Heroux-Devtek said a 22 per cent increase in commercial sales to $27.6 million in the third quarter offset a 13 per cent decrease to $34.1 million in military sales.

Although some military orders were delayed in the third quarter, the company continued to win important awards, including a multi-year contract from Boeing to manufacture the landing gear for all H-47 Chinook helicopters aircraft destined to the U.S. Army, beginning in the first half of 2014.

“I think at the end of the next quarter we should see some improvement but it all depends on the discussions we have with some commercial customers and also the decisions that the Pentagon will take,” he added.

Cameron Doerksen of National Bank Financial raised his target price for Heroux-Devtek by $1 to $11 per share considering its operating earnings and the potential for a “meaningful strategic acquisition.”

With $31 million of net cash and $128 million of available credit, he said the company is well-positioned to complete a deal this year that will be a catalyst for its stock price.

“We also believe that the company is pursuing new business that could be substantial, but may require an up-front investment,” he wrote in a report.

On the Toronto Stock Exchange, Heroux-Devtek’s shares closed down nine cents to $9.40 in Friday trading.

Note to readers: This is a corrected story. An earlier version said it was Heroux-Devtek’s fourth quarter, rather than its third quarter.