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Back to Basics for Landing Gear Giant

Héroux-Devtek To Sell Off Other Construction Components

Aug. 20, 2012 - 01:57PM   |  
By DAVID PUGLIESE   |   Comments
  • Filed Under

VICTORIA, British Columbia — In an effort to spur further growth and boost its stock value, Canada’s Héroux-Devtek is getting out of the business of making industrial products and airframe components to concentrate on its core business — producing landing gear for military and commercial aircraft.

The firm is considered the world’s third-largest landing gear manufacturer after Goodrich and Messier-Bugatti-Dowty. Over the years it has expanded into industrial products such as off-highway vehicle and gas turbine components, as well as airframe sub assemblies.

But that expansion didn’t translate into a boost in share prices, said Héroux-Devtek’s president and CEO, Gilles Labbé. Over the past several years, the company’s shares have been below 10 Canadian dollars ($9.80).

“We did all the right things to develop the three businesses,” Labbé said. “Even though we performed in terms of delivering additional revenues and profitability and developing the business, the market has not paid attention.”

To deal with that issue, Héroux-Devtek has decided to sell off its aerostructure and industrial products operations and instead focus entirely on producing landing gear for a variety of military and civilian aircraft.

The company announced July 17 it had an agreement with Precision Castparts, which would buy the two divisions for 300 million Canadian dollars in cash.

The deal would see Portland, Ore.-based Precision Castparts acquire Héroux-Devtek’saerostructure manufacturing sites at Dorval, Quebec, Querétaro, Mexico, and Arlington, Texas, as well as its Cincinnati industrial products manufacturing site. The assets to be sold generated sales of about 130 million Canadian dollars for the fiscal year that ended March 31.

Héroux-Devtek expects net cash proceeds of approximately 230 million Canadian dollars from the sale to Precision Castparts, after related taxes and expenses are accounted for. The transaction was unanimously approved by Héroux-Devtek’s board of directors and is expected to be finalized sometime in September.

Héroux-Devtek now will concentrate on “what we know best,” Labbé said in a July 17 conference call with analysts to announce the deal. “The business that we are keeping represents two-thirds of the revenue.”

Labbé said the company is “looking at whatever is complementary to aircraft landing gear. It could be other products and services connected to what we know best.

“We feel there is very good growth still to be achieved in landing gear,” he added.

The day after the Precision Castparts deal was announced, Héroux-Devtek said it had renewed an important long-term contract with the U.S. Air Force to provide landing gear repair and overhaul services for the services’ C-130, E-3 and KC-135R aircraft through August 2016. Based on the company’s projections, the contract is valued at up to $90 million. Military sales account for 55 percent of the company’s business.

Héroux-Devtek is involved in producing landing gear components or maintaining such systems for Sikorsky’s CH-53K helicopter, Northrop Grumman’s Global Hawk UAV, Boeing’s X-45C UAV, Lockheed Martin’s F-35 fighter jet and Boeing’s Chinook helicopter.

In June 2011, the company signed a seven-year agreement with Lockheed Martin to manufacture and assemble the landing gear for C-130J aircraft as well as to provide spare parts. That deal is estimated to be worth about 70 million Canadian dollars.

On the commercial side, Héroux-Devtek builds landing gear for the Learjet 85 business jet, Embraer Legacy 450/500 business jets, Dassault Aviation’s new business aircraft and Canadair’s amphibious CL-215.

The proposed sale of the aerostructure and industrial products operations was greeted with a positive reaction on the Toronto Stock Exchange. When it was announced July 17, Héroux-Devtek shares increased 33 percent, closing at 10.45 Canadian dollars. Those have increased, and shares last week were trading at more than 11 Canadian dollars each.

The company will use the money generated by the Precision Castparts deal to provide a dividend to shareholders and reinvest in acquisitions that would support its landing gear business.

Market analysts appeared to agree with Héroux-Devtek’s strategy.

Ben Cherniavsky, an analyst with investment dealer Raymond James in Vancouver, noted that although the company reported ongoing improvement in its earnings, its stocks have languished.

“In response to this, the company’s management and board believe that the sale of its Aerostructures and Industrials business is an effective and immediate way to create shareholder value. We agree,” he wrote in a note to investors.

Cherniavsky wrote that he feels the landing gear business still holds plenty of growth for Héroux-Devtek.

Cameron Doerksen of National Bank Financial in Montreal also expects the firm to generate more revenue from future commercial aircraft landing gear programs.

“We believe that as the market digests this strategic shift by [Héroux-Devtek] that the stock will respond more favourably,” he wrote in a note to clients.

Benoit Poirier, an analyst with Desjardins Securities in Montreal, also highlighted the firm’s strong market share, adding that a potential sale of its landing gear division could fuel a further increase in its stock price. Some other analysts have also suggested that Héroux-Devtek could eventually sell its landing gear operation.

Héroux-Devtek

• Headquarters: Longueuil, Quebec

• Principal markets: Landing gear design and production. Approximately 70% of its sales are outside Canada, mainly in the U.S.

• Employees: More than 1,000

• 2011 sales: 357 million Canadian dollars ($349 million)

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