Hexcel Corporation — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Hexcel manufactures advanced composite materials and engineered products for commercial aerospace, space and defense, and industrial markets. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $454.3M | $393.0M | $912.0M | $783.6M |
| Gross margin | $110.8M; 24.4% | $89.5M; 22.8% | $238.5M; 26.2% | $176.2M; 22.5% |
| Operating income | $61.3M; 13.5% | $63.8M; 16.2% | $124.1M; 13.6% | $93.9M; 12.0% |
| Net income | $42.5M | $44.7M | $85.2M | $62.5M |
| Diluted EPS | $0.50 | $0.53 | $1.00 | $0.74 |
| Operating cash flow | Not presented separately for the quarter | $30.1M | $18.3M | |
| Free cash flow (non-GAAP) | Not presented separately for the quarter | $(44.7)M | $(19.6)M |
- Q2 sales rose 15.6% year over year (14.7% in constant currency); six-month sales rose 16.4%.
- Commercial Aerospace sales grew 16.1% in Q2 and 22.9% for the first half; Space & Defense grew 22.9% and 14.6%, respectively. Industrial sales declined 1.9% in Q2 and 7.0% for the first half.
- Management attributed higher gross margins mainly to increased sales and favorable product mix. Composite Materials drove much of the growth; Engineered Products Q2 operating income fell to $6.8M from $9.1M.
- Q2 GAAP operating income and net income declined from the prior year. Q2 2022 included a $19.4M gain on sale of the Dublin facility. Excluding specified other operating items, adjusted operating income was $61.8M versus $44.7M in Q2 2022; adjusted net income was $42.8M versus $28.1M (non-GAAP).
Financial position and liquidity
- At June 30, 2023, cash was $104.2M, total debt $779.1M, and stockholders’ equity $1,666.1M. Cash was $112.0M and debt $723.5M at December 31, 2022.
- Current assets were $810.1M and current liabilities $276.1M. Inventory increased to $360.9M from $319.3M at year-end.
- Six-month capital expenditures were $74.8M, including $38.0M for land and a building at the Amesbury, Massachusetts facility. Working capital used $113.9M of cash, mainly reflecting lower accounts payable, partly offset by accounts receivable movements.
- The refinanced revolving facility has $750M of capacity and matures in April 2028. Borrowings were $80M, with $670M undrawn availability and no letters of credit at quarter-end. Hexcel reported compliance with debt covenants. The next significant scheduled debt maturity is the $300M 4.7% notes due in 2025.
Outlook, risks and notable items
- The filing provides no specific numerical full-year 2023 guidance. Management describes continued commercial aerospace recovery and higher aircraft build rates, while noting that supply-chain, logistics, inflation, labor and geopolitical pressures remain challenging.
- Risks highlighted include aircraft production and delivery changes, customer concentration, raw-material availability and cost, capacity expansion and qualification, industrial-market demand, currency movements, labor, cybersecurity, and the Russia-Ukraine conflict’s broader effects. Management said it was not experiencing direct material adverse effects from that conflict at the time of filing.
- Six-month free cash flow was negative as capital spending exceeded operating cash flow. Investing cash outflow increased versus 2022, when proceeds included the Dublin facility sale.
- The Windsor, Colorado facility was sold for approximately $11M on July 10, 2023; the gain or loss was to be recorded in Q3 2023.
- Environmental proceedings include the Lower Passaic River matter. Hexcel’s environmental accruals were $0.6M at June 30, 2023. The filing says the ultimate approval and timing of a proposed $150M settlement involving Hexcel and other parties were uncertain; Hexcel could not estimate its resolution. Management believes currently pending proceedings, after insurance and recorded reserves, will not materially affect consolidated results, financial position or cash flows.
- The board declared a $0.125 per-share quarterly dividend payable August 11, 2023. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported for the quarter.
Investor verification points
- Track aerospace customer production rates and whether sales growth converts into sustained operating-margin improvement.
- Monitor working-capital needs, inventory, capital spending and the path from negative free cash flow toward cash generation.
- Verify debt-facility availability, borrowing costs and covenant compliance as rates and leverage change.
- Follow the 2025 note maturity and the outcome of the Lower Passaic River settlement and related cost-allocation proceedings.
- Check Q3 accounting for the Windsor sale and subsequent updates to full-year outlook, which is not numerically specified in this filing.