Heroux Devtek Inc T.HRX

TD Reaction

[retiredcf]

Have a $22.00 target. GLTA

Heroux-Devtek Inc.

(HRX-T) C$14.65

Q1/F23 First Look Event

Heroux-Devtek reported Q1/F23 adjusted EBITDA of $11.4 million, compared to our forecast/consensus of $21.4/$20.0 million. Diluted EPS of $0.03 compared to our forecast/consensus of $0.24/$0.20.
Impact: NEGATIVE

The report highlights challenges in the 'operating environment' that negatively impacted results, and while none of the factors were a surprise to us, the sequential impact and its magnitude on Q1/F23 relative to Q4/F22 was surprising. The company also announced a significant new landing gear contract with Boeing (Defense) this morning which should mitigate the downward pressure resulting from headline results. We believe that an understanding of the results during the conference call (9:00 am) will also be important for determining the short-term share price direction. Heroux-Devtek repurchased 107,835 shares under its NCIB at a weighted average price of $15.40 per share.

Commercial: Revenue decreased 6.0% y/y to $35.4 million, compared to our $42.7 million forecast. The y/y decline was due to the closure of the Wichita business in Q3/F23, partly offset by an increase in deliveries for the Embraer Praetor and Boeing 777 programs.

Defence: Revenue decreased 11.1% y/y to $78.7 million, compared to our $92.0 million forecast. The y/y decline reflects lower throughput as a result of the impact COVID-19 and supply chain constraints had on operations. This was partially offset by the ramp-up of deliveries for the F-18 program with Boeing. FX had an immaterial y/y impact. We had anticipated that delayed revenues in H2/F22 would be benefiting F2023 Defence results, although the Q2 report suggests to us that this may not be coming to fruition at this point.

Adjusted EBITDA margin decreased 590 bps y/y to 10.0%, below our 15.9% forecast, and down from 15.0% in Q4/F22. The decline reflects lower throughput, production inefficiencies from the disruptions mentioned above, and higher SG&A as a percentage of revenue.

Free Cash Flow of $4.5 million was below our forecast, driven largely by higher- than-expected capex, lower-than-expected cash earnings and lower-than-expected cash from working capital.

Balance sheet and liquidity: The company has approximately $475 million of liquidity available (including cash of $88 million) with no significant debt maturities until June 2027.