Hexcel Corporation — FY 2014 Form 10-K
Business context and reporting period: Hexcel develops and manufactures advanced composite materials and engineered products for commercial aerospace, space and defense, and industrial markets. This annual filing covers the fiscal year ended December 31, 2014; fourth-quarter figures are also reported. Commercial aerospace represented 66% of annual sales. Boeing and its subcontractors and Airbus Group and its subcontractors together accounted for approximately 63% of total sales.
Financial performance and position
| Metric | FY 2014 | FY 2013 |
|---|---|---|
| Net sales | $1,855.5 million | $1,678.2 million |
| Gross margin | $508.8 million; 27.4% | $454.0 million; 27.1% |
| Operating income | $305.8 million; 16.5% of sales | $270.9 million; 16.1% of sales |
| Net income | $209.4 million | $187.9 million |
| Diluted EPS | $2.12 | $1.84 |
| Cash from operating activities | $318.0 million | $272.9 million |
| Capital expenditures and deposits | $260.1 million | $194.9 million |
| Free cash flow (non-GAAP) | $57.9 million | $78.0 million |
Sales increased 10.6% reported and 10.5% in constant currency. Fourth-quarter 2014 sales were $471.8 million, operating income $77.1 million, net income $52.9 million, and diluted EPS $0.54; fourth-quarter 2013 sales were $426.8 million, net income $47.1 million, and diluted EPS $0.46. Management attributed the annual earnings improvement primarily to higher volume, particularly in commercial aerospace, and improved operating performance and cost control.
At year-end, cash was $70.9 million, total debt $416.3 million, and net debt $345.4 million. The company reported $283.3 million of available borrowing capacity and working capital of $371.1 million, down from $387.7 million. Total assets were $2,036.4 million and stockholders’ equity $1,149.9 million. Capital spending on an accrual basis was $270.2 million. Debt maturities were principally $415.0 million in 2019; the company reported covenant compliance.
Material changes versus the prior period
- Commercial aerospace sales increased 12.1% to $1,215.3 million; new Airbus and Boeing program sales rose more than 35%. Commercial aircraft deliveries by Airbus and Boeing reached a record 1,352.
- Industrial sales rose 21.4% to $264.4 million, led by wind energy, which increased more than 25% from a weak prior year. Space and defense sales were essentially flat at $375.8 million.
- Composite Materials sales grew to $1,420.9 million from $1,286.9 million; Engineered Products sales rose to $434.6 million from $391.3 million.
- Operating income included a $6.0 million environmental-reserve charge. Excluding this item, management said operating income increased 15% versus 2013.
- Net cash from operations increased, but free cash flow declined as capital spending rose. The company repurchased $160 million of shares during 2014; year-end shares outstanding were 95.5 million versus 98.9 million a year earlier.
- Hexcel acquired a 50% interest in UK composites-reinforcement manufacturer Formax for $10.3 million. It also refinanced its credit facility with a $700 million unsecured revolver maturing in 2019.
Outlook, commentary, risks, and unusual items
- Management expected 2015 Airbus and Boeing deliveries to exceed 2014 levels. Their combined year-end aircraft backlog was 12,175 planes, approximately nine years of production at 2014 delivery rates.
- Management forecast 2015 capital spending of $260 million to $290 million and positive free cash flow of $10 million to $60 million. Capacity expansions were expected to enter service largely during 2015 and 2016.
- Management estimated A350 material content at approximately $5 million per aircraft and projected annual Hexcel sales of approximately $600 million when Airbus reached its anticipated production rate of 120 aircraft annually. These are forward-looking estimates, not guaranteed results.
- Key risks include dependence on Airbus and Boeing and their subcontractors, commercial-aircraft production or program delays, defense-budget changes, wind-energy demand, customer pricing pressure, limited-source raw materials, manufacturing capacity and execution, foreign exchange, and international operating exposure.
- Environmental reserves were $5.0 million at year-end, estimated at the low end of ranges for certain sites. The company disclosed that the reserve could have been $28 million higher if estimated at the high end of applicable ranges. Its potential share of Lower Passaic River cleanup costs remains uncertain; the EPA’s proposed alternatives ranged from $0.8 billion to $3.25 billion for the river project, and Hexcel had not determined its allocable share.
- Product-warranty expense rose to $10.3 million from $1.2 million in 2013, and the accrued warranty balance increased to $11.3 million from $4.5 million. The filing does not provide a clear explanation of the specific claims driving this change.
- Foreign-exchange forward contracts not designated as hedges produced a $16.3 million loss in 2014, compared with gains in 2013 and 2012. A 10% adverse currency movement was estimated to affect 2014 operating income by about $5 million with existing hedges.
- The board declared a first quarterly dividend since 1992: $0.10 per share, payable in February 2015. The filing also reported $100 million remaining under the share-repurchase authorization.
- PwC issued an unqualified audit opinion and concluded internal control over financial reporting was effective as of year-end. The company said it was evaluating the impact of the new revenue-recognition standard, effective in 2017.
Important facts for investors to verify
- Actual aircraft production rates, program ramp-ups, and Hexcel’s awarded content and share on new aircraft programs.
- Whether planned capacity additions are completed and qualified on schedule, and whether projected 2015 capital spending and free cash flow are achieved.
- The development of warranty claims and expenses underlying the sharp 2014 increase.
- Environmental remediation outcomes and Hexcel’s eventual allocation of Lower Passaic River costs, including whether reserves require material increases.
- Debt usage, covenant headroom, and the effect of share repurchases and the new dividend on liquidity and per-share results.
- Currency exposure and hedge performance, as well as the availability and cost of key raw materials.