MANAGEMENT'S DISCUSSION AND ANALYSIS
Second quarter ended September 30, 2022
TABLE OF CONTENTS | |
OVERVIEW................................................................................................................................................................................. | |
Forward-lookingStatements....................................................................................................................................................... | |
Highlights ................................................................................................................................................................................. | |
OPERATING RESULTS............................................................................................................................................................... | |
Non-IFRSFinancial Measures .................................................................................................................................................... | 8 |
LIQUIDITY AND CAPITAL RESOURCES...................................................................................................................................... | 10 |
Credit Facilities and Net Debt Position......................................................................................................................................... | 10 |
Variations in Cash ..................................................................................................................................................................... | 10 |
Normal Course Issuer Bid .......................................................................................................................................................... | 13 |
Free Cash flow.......................................................................................................................................................................... | 13 |
FINANCIAL POSITION ................................................................................................................................................................ | 14 |
Consolidated Balance Sheets..................................................................................................................................................... | 14 |
ADDITIONAL INFORMATION ...................................................................................................................................................... | 15 |
Foreign Exchange ..................................................................................................................................................................... | 15 |
Derivatives................................................................................................................................................................................ | 15 |
Internal Controls and Procedures................................................................................................................................................ | 16 |
Selected Quarterly Financial Information ..................................................................................................................................... | 16 |
Risks and Uncertainties ............................................................................................................................................................. | 16 |
Shareholder Information............................................................................................................................................................. | 17 |
2
OVERVIEW
The purpose of this management discussion and analysis (''MD&A'') is to provide the reader with an overview of how the financial position of Héroux-Devtek Inc. and its subsidiaries (''Héroux-Devtek'', the ''Corporation'' or "Management") evolved between March 31, 2022 and September 30, 2022. It also compares the operating results and cash flows for the quarter and six-month period ended September 30, 2022 to those of the same periods of the prior fiscal year.
This MD&A is based on the unaudited interim condensed consolidated financial statements for the quarter ended September 30, 2022, and should be read in conjunction with them as well as with the audited consolidated financial statements and MD&A for the fiscal year ended March 31, 2022, all of which are available on the Corporation's website at www.herouxdevtek.com and on SEDAR at www.sedar.com. All amounts in this MD&A are in thousands of Canadian dollars unless otherwise indicated. This MD&A was approved by the Audit Committee and Board of Directors of the Corporation on November 10, 2022.
IFRS and non-IFRS financial measures
This MD&A contains both IFRS and non-IFRS financial measures. Non-IFRS financial measures are defined and reconciled to the most comparable IFRS measures in the Non-IFRSFinancial Measures section under Operating Results.
Materiality for disclosures
Management determines whether information is material based on whether they believe a reasonable investor's decision to buy, sell or hold securities of the Corporation would likely be influenced or changed should the information be omitted or misstated, and discloses material information accordingly.
FORWARD-LOOKING STATEMENTS
Certain statements in this MD&A are forward-looking statements subject to risks, uncertainties and other important factors that could cause the Corporation's actual performance to differ materially from those expressed in or implied by such statements. These statements are provided for the purpose of assisting the reader in understanding the Corporation's financial performance and prospects and to present management's assessment of future plans and operations. The reader is cautioned that such statements may not be appropriate for other purposes.
They may be impacted by factors including, but not limited to: the effect of the ongoing COVID-19 pandemic on Héroux-Devtek's operations, customers, supply chain, the aerospace industry and the economy in general; the impact of other worldwide geopolitical and general economic conditions; the war in Ukraine; industry conditions including changes in laws and regulations; increased competition; the lack of availability of qualified personnel or management; availability of commodities and fluctuations in commodity prices; financial and operational performance of suppliers and customers; foreign exchange or interest rate fluctuations; and the impact of accounting policies issued by international standard setters. For further details, please see the Risk Management section of the Corporation's MD&A for the fiscal year ended March 31, 2022. Readers are cautioned that the foregoing list of factors that may affect future growth, results and performance is not exhaustive, and undue reliance should not be placed on forward-looking statements.
Although management believes the expectations conveyed by these statements, and while they are based on information available on the date such statements were made, there can be no assurance that such expectations will prove to be correct and readers are advised that actual results may differ from expected results. All subsequent forward-looking statements, whether written or orally attributable to the Corporation or persons acting on its behalf, are expressly qualified in their entirety by these cautionary statements. Unless otherwise required by applicable securities laws, the Corporation expressly disclaims any intention, and assumes no obligation to update or revise any forward- looking statements whether as a result of new information, future events or otherwise.
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HIGHLIGHTS
Three months ended | Six months ended | |||||||
September 30, | September 30, | |||||||
2022 | 2021 | 2022 | 2021 | |||||
Sales | $ | 132,680 | $ | 131,293 | $ | 246,769 | $ | 257,481 |
Operating income | 8,562 | 11,953 | 11,208 | 22,750 | ||||
Adjusted operating income(1) | 7,343 | 11,953 | 9,989 | 22,750 | ||||
Adjusted EBITDA(1) | 16,216 | 21,157 | 27,642 | 41,206 | ||||
Net income | 4,799 | 7,510 | 5,764 | 14,213 | ||||
Adjusted net income(1) | 3,580 | 7,510 | 4,545 | 14,213 | ||||
Cash flows related to operating activities | 8,264 | 17,467 | 20,305 | 35,652 | ||||
Free cash flow(1) | 699 | 11,212 | 5,229 | 25,595 | ||||
In dollars per share | ||||||||
Earnings per share - basic and diluted | $ | 0.14 | $ | 0.21 | $ | 0.17 | $ | 0.40 |
Adjusted EPS(1) | 0.10 | 0.21 | 0.13 | 0.40 |
- Non-IFRSfinancial measure. Refer to the Non-IFRS financial measures section under Operating Results for definitions and reconciliations to the most comparable IFRS measures.
Operating Environment
Héroux-Devtek's throughput in the second quarter improved significantly compared to the first, with sales reaching $132.7 million compared to $114.1 million in the first quarter despite planned shutdowns and summer vacation. As a result, operating income and Adjusted EBITDA respectively improved to $8.6 million and $16.2 million from $2.6 million and $11.4 million. In order to stabilize the Corporation's production system and prepare for the second half of the fiscal year, inventory was increased by a further $13.3 million since June 30, 2022 ($30.3 million since March 31, 2022), driving a reduction in cash flows related to operating activities and free cash flow when compared to last year.
The operating environment remains unstable and several factors are still rendering the consistent generation of throughput challenging:
- COVID-19continues to cause higher absenteeism compared to last year;
- The Corporation's supply chain is also impacted by the COVID-related absenteeism and the labour shortages observed in the Aerospace industry;
- Lead times for the procurement of raw material continue to increase and Russia's invasion of Ukraine limits the supply of certain material; and,
- Inflation continues to be high and central banks are still responding by raising base interest rates, therefore increasing financing costs and putting pressure on financially fragile companies.
The Corporation's order book remains strong, and has in fact recently been bolstered by aftermarket and business jet orders. Héroux- Devtek's teams are committed to coping with the challenges in order to increase throughput and satisfy customer demand.
Events of the Quarter
- The Corporation generated consolidated sales of $132.7 million, on par with $131.3 million a year earlier, in spite of a more complex operating environment than last year.
- Operating income decreased to $8.6 million from $12.0 million last fiscal year, and Adjusted EBITDA decreased to $16.2 million, or 12.2% of sales compared to $21.2 million or 16.1% last year. The decrease in profitability is mainly the result of production system inefficiencies driven by the challenging environment described above and a less favourable product mix, while last year's COVID-19 disruptions were compensated for by the Canadian Emergency Wage Subsidy (none this year, representing an impact of 1.7% of sales).
- Subsequent to the end of the quarter, in November 2022, the Corporation announced a contract with Embraer to design, develop and manufacture the main deck cargo door actuation system for the E190F and E195 Freighter conversion program. The agreement will be fulfilled by Héroux-Devtek's team in Spain and includes the delivery of spare parts and aftermarket services for the life of the program.
4
OPERATING RESULTS
Three months ended September 30, | Six months ended September 30, | ||||||||||||
2022 | 2021 | Variance | 2022 | 2021 | Variance | ||||||||
Sales | $ | 132,680 | $ | 131,293 | $ | 1,387 | $ | 246,769 | $ | 257,481 | $ | (10,712) | |
Gross profit | 18,367 | 22,217 | (3,850) | 30,878 | 43,857 | (12,979) | |||||||
Selling and administrative expenses | 11,024 | 10,264 | 760 | 20,889 | 21,107 | (218) | |||||||
Adjusted operating income(1) | 7,343 | 11,953 | (4,610) | 9,989 | 22,750 | (12,761) | |||||||
Non-recurring items | (1,219) | - | (1,219) | (1,219) | - | (1,219) | |||||||
Operating income | 8,562 | 11,953 | (3,391) | 11,208 | 22,750 | (11,542) | |||||||
Net financial expenses | 2,228 | 1,913 | 315 | 3,604 | 3,806 | (202) | |||||||
Income tax expense | 1,535 | 2,530 | (995) | 1,840 | 4,731 | (2,891) | |||||||
Net income | $ | 4,799 | $ | 7,510 | $ | (2,711) | $ | 5,764 | $ | 14,213 | $ | (8,449) | |
Adjusted net income(1) | $ | 3,580 | $ | 7,510 | $ | (3,930) | $ | 4,545 | $ | 14,213 | $ | (9,668) | |
As a percentage of sales | |||||||||||||
Gross profit | 13.8% | 16.9% | -310 bps | 12.5% | 17.0% | -450 bps | |||||||
Selling and administrative expenses | 8.3% | 7.8% | 50 bps | 8.5% | 8.2% | 30 bps | |||||||
Operating income | 6.5% | 9.1% | -260 bps | 4.5% | 8.8% | -430 bps | |||||||
Adjusted operating income(1) | 5.5% | 9.1% | -360 bps | 4.0% | 8.8% | -480 bps | |||||||
In dollars per share | |||||||||||||
Earnings per share - basic and diluted | $ | 0.14 | $ | 0.21 | $ | (0.07) | $ | 0.17 | $ | 0.40 | $ | (0.23) | |
Adjusted EPS(1) | $ | 0.10 | $ | 0.21 | $ | (0.11) | $ | 0.13 | $ | 0.40 | $ | (0.27) |
- Non-IFRSfinancial measure. Refer to the Non-IFRS financial measures section under Operating Results for definitions and reconciliations to the most comparable IFRS measures.
Sales
Sales by sector were as follows:
Three months ended September 30,
2022 | 2021 | FX impact | Net variance | ||||||
Defence(1) | $ | 91,406 | $ | 94,006 | $ | (349) | $ | (2,251) | (2.4)% |
Civil | 41,274 | 37,287 | (162) | 4,149 | 11.1 % | ||||
Total | $ | 132,680 | $ | 131,293 | $ | (511) | $ | 1,898 | 1.4 % |
Six months | ended September 30, | ||||||||
2022 | 2021 | FX impact | Net variance | ||||||
Defence(1) | $ | 170,097 | $ | 182,555 | $ | (347) | $ | (12,111) | (6.6)% |
Civil | 76,672 | 74,926 | (157) | 1,903 | 2.5 % | ||||
Total | $ | 246,769 | $ | 257,481 | $ | (504) | $ | (10,208) | (4.0)% |
- Includes defence sales to civil customers and governments
The following analysis excludes the impact of foreign exchange described above:
Defence
The respective 2.4% and 6.6% decreases in defence sales for the quarter and six month period were mainly related to the challenges of the current operating environment as described in the Highlights section under Overview. These elements were partly offset by the ramp-up of deliveries for the Boeing F-18 program.
5
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Heroux-Devtek Inc. published this content on 11 November 2022 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 11 November 2022 12:31:03 UTC.