Heroux-Devtek considering return to Mexico to supply Boeing landing gear contract
Sep 18, 2013 / 10:48 am
MONTREAL - Heroux-Devtek could return to Mexico as it evaluates where in North America to build landing gear for Boeing after signing a deal it expects will lead to a long-term contract for the 777 and 777X aircraft.
Chief operating officer Real Belanger says the Quebec-based company is analysing different sites in Canada, the U.S. and Mexico, but the final decision on how much work will be done in each area will depend on several factors, including available government incentives.
"There are different sites in the U.S. and Mexico that could be of interest for us, but it will depend on different things, including what are the incentives we can get and we're looking at different scenarios that could be of interest for us," he said in an interview.
Belanger wouldn't say how many jobs could be added to Heroux-Devtek's (TSX:HRX) current workforce of 1,050, including nearly 650 in Quebec, 200 in Ontario and 200 in the United States.
"We're planning to have jobs for the majority of our sites that we have already, but this depends on certain conditions. We're trying to optimize the scenarios because we have target cost objectives and we will be deciding where we're going to be allocating the jobs."
Heroux left Mexico with last year's sale of its aerostructure and industrial products division to Precision Castparts Corp. (NYSE:PCP) for $300 million.
Its HDI Landing Gear USA subsidiary signed a memorandum of agreement Monday that it expects to translate into a firm contract by year-end.
The contract would expand its relationship with the American aircraft giant by supplying complete landing gear systems, including the main and nose landing gear, and the nose landing gear drag strut. It would also manufacture parts for Boeing to sell in the aftermarket.
Deliveries would begin in early 2017 and, with an option, could extend the deal to 2028.
"This memorandum of agreement is a landmark achievement for Heroux-Devtek as the long-term contract with Boeing would represent the largest contract ever awarded to our landing gear operations," president and CEO Gilles Labbe said.
Expanding its content on a larger commercial aircraft program "significantly enhances Heroux-Devtekâ€™s reputation and competitive position in the aerospace industry," he added.
Heroux didn't provide the value of the contract, but Cameron Doerksen of National Bank Financial said it could represent $40 million to $80 million in incremental annual revenues for 100 planes, or a 15 to 30 per cent boost from current levels.
In getting the agreement, Heroux beat out Goodrich, a division of UTC Aerospace Systems, to which it provided some content on the current program. Doerksen estimates Heroux generates about $400,000 per shipset from its current relationship with Boeing.
The analyst called the contract "transformational" for the company and raised his target price for Heroux-Devtek's shares to $11, up $1.
"(It) vaults Heroux-Devtek into the same league with the big boys," he wrote in a report, referring to UTC and Safran.
He said the required capital expenditures will be significant, but with $97 million in cash and lots of available credit, acquisitions remain likely.
On the Toronto Stock Exchange, Heroux-Devtek's shares closed down eight cents at $9.04 on Tuesday.
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