Hexcel Corporation — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also reports fourth-quarter results. Hexcel develops and manufactures advanced composite materials and structures. Its two segments are Composite Materials and Engineered Products; end markets are Commercial Aerospace, Space & Defense, and Industrial.
Financial performance and position
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Net sales | $2,189.1 million | $1,973.3 million |
| Gross margin | $580.8 million; 26.5% | $551.8 million; 28.0% |
| Operating income | $371.2 million; 17.0% | $350.6 million; 17.8% |
| Net income | $276.6 million | $284.0 million |
| Diluted EPS | $3.11 | $3.09 |
| Cash from operating activities | $421.4 million | $428.7 million |
| Capital expenditures, cash basis | $184.1 million | $278.1 million |
| Free cash flow, non-GAAP | $237.3 million | $150.6 million |
- Revenue grew 10.9%. Sales by market were Commercial Aerospace $1,525.0 million (70% of sales), Space & Defense $369.9 million (17%), and Industrial $294.2 million (13%).
- At year-end, cash was $32.7 million, total debt was $956.8 million, and net debt was $924.1 million. Working capital was $349.1 million, down from $394.6 million.
- The $700 million revolving facility had $202.0 million drawn and $498.0 million available. The facility matures in June 2021; Hexcel reported compliance with debt covenants.
- Annual dividends were $0.55 per share. The company repurchased $357.7 million of stock in 2018.
Fourth-quarter results
Q4 2018 sales were $561.0 million versus $511.7 million in Q4 2017; gross margin was $150.4 million versus $142.2 million; operating income was $95.8 million versus $93.2 million; net income was $66.1 million versus $88.1 million; and diluted EPS was $0.76 versus $0.96.
Changes versus prior periods
- FY sales rose across all markets: Commercial Aerospace +8.2%, Space & Defense +7.6%, and Industrial +33.8%. Wind-energy sales increased 73%, following a weak transition year in 2017.
- Gross margin declined 1.5 percentage points, reflecting higher acrylonitrile and wind-energy resin costs, tariffs, increased depreciation, and start-up costs for a French PAN/carbon-fiber facility. Operational improvements partly offset these pressures.
- Operating income increased despite lower operating margin. Net income declined as interest expense rose to $37.7 million from $27.4 million and the effective tax rate increased to 18.8% from 13.2%. Tax benefits affected both years.
- Operating cash flow declined by $7.3 million, primarily due to greater working-capital use as sales grew. Free cash flow increased as cash capital spending fell.
- Total debt increased $146.9 million, primarily reflecting share repurchases and dividends. Shares outstanding at year-end fell to 84.8 million from 89.6 million.
Outlook, commentary, risks, and unusual items
- Management forecast 2019 capital spending of $170 million to $190 million and expected additional positive free cash flow; typical first-half cash needs were expected to be funded with available facility borrowings. The filing text does not provide a clear quantified 2019 sales or earnings forecast.
- Management cited record combined Airbus and Boeing deliveries of 1,606 aircraft in 2018 and a year-end backlog of 13,528 aircraft, more than eight years of deliveries at 2018 rates. Newer aircraft programs and increasing composite content were identified as growth drivers.
- Key exposures include dependence on commercial-aircraft production and a concentrated customer base: Airbus and its subcontractors represented about 41% of 2018 sales and Boeing and its subcontractors about 25%. The company also cited limited-source raw materials, program delays, pricing pressure, defense-budget changes, foreign-exchange movements, tariffs, operational disruptions, and cybersecurity risks.
- Hexcel recorded $7.7 million of restructuring expense related primarily to employee costs at a European facility. The filing also describes an environmental insurance recovery, an investment write-down, and an additional Lower Passaic River reserve; their combined net effect is not stated clearly in the supplied text.
- Environmental accruals were $2.7 million, estimated at the low end of possible outcomes; the company said the accrual could have been $16 million higher using the high end for estimable sites. The Lower Passaic River matter remains uncertain, with related litigation filed in 2018.
- Hexcel adopted ASC 606 in 2018; adoption increased 2018 revenue by $12.4 million and gross margin by $0.3 million versus the prior revenue standard, with no material EPS impact. On January 3, 2019, it acquired ARC Technologies for an agreed price of $160 million.
- The board authorized a $500 million 2018 share-repurchase program; $384.8 million remained available at year-end. A quarterly dividend of $0.15 per share was declared in January 2019.
Important facts for investors to verify
- Whether commercial-aircraft production rates, customer schedules, and Hexcel’s content on new programs support continued revenue growth.
- Whether margin pressure from input costs, tariffs, depreciation, and start-up or ramp-up activity eases, and whether capacity additions achieve expected utilization.
- How the ARC acquisition is funded and integrated, and its effect on leverage, cash flow, and returns.
- Debt capacity, covenant headroom, interest costs, and cash required for planned capital spending, dividends, and repurchases.
- Potential outcomes and reserve adequacy for environmental matters, particularly the Lower Passaic River, and the effect of tax examinations or other contingencies.