Hexcel Corporation — FY 2012 Form 10-K
Reporting period: Year ended December 31, 2012; filing dated February 8, 2013. The filing also reports unaudited fourth-quarter results. Hexcel makes advanced composite materials and engineered products, principally for commercial aerospace, space and defense, and industrial markets.
Financial performance
| Metric | 2012 | 2011 |
|---|---|---|
| Net sales | $1,578.2 million | $1,392.4 million |
| Gross margin | $406.7 million; 25.8% | $342.1 million; 24.6% |
| Operating income | $248.8 million; 15.8% | $192.0 million; 13.8% |
| Net income | $164.3 million | $135.5 million |
| Diluted EPS | $1.61 | $1.35 |
| Cash from operations | $232.4 million | $170.5 million |
| Capital expenditures and deposits | $263.7 million | $158.0 million |
| Free cash flow (company-defined) | $(31.3) million | $12.5 million |
Sales increased 13% as reported and 15% in constant currency. Commercial Aerospace supplied 60% of sales, Space & Defense 23%, and Industrial 17%. Composite Materials sales were $1,230.9 million; Engineered Products sales were $347.3 million. Operating income benefited from higher volume and cost control, but included $9.6 million of business-interruption insurance income and a $4.9 million land-sale gain, partly offset by $5.0 million of environmental charges. Adjusted operating income, excluding other income/expense, was $239.3 million (15.2% of sales), versus $189.0 million (13.6%) in 2011.
Fourth-quarter 2012 sales were $387.3 million, operating income $54.3 million, and net income $36.9 million, compared with $355.3 million, $49.4 million, and $39.5 million, respectively, in fourth-quarter 2011. Diluted EPS was $0.36 versus $0.39.
Liquidity, debt and capital allocation
Year-end cash was $32.6 million and total debt was $256.6 million, implying reported net debt of $224.0 million. Working capital was $340.4 million. The $460 million secured credit facility had $192.8 million of undrawn availability; Hexcel reported compliance with its covenants. The facility matures in July 2015, with $165.0 million outstanding on the revolver and $85.0 million on the term loan. The company redeemed its remaining $73.5 million of 6.75% subordinated notes in 2012, funding the redemption principally with additional facility borrowings.
Capital spending rose substantially to support capacity expansion, producing negative free cash flow for the year. No dividends were paid. A $50 million share-repurchase program was announced in December 2012, but no shares had been repurchased under that program by year-end. Cash on hand and available credit, along with operating cash flow, were identified as sources for liquidity needs.
Changes, outlook and commentary
- Operating margin rose to 15.8% from 13.8%; net income increased 21%. Commercial Aerospace sales grew 15% as reported, supported by aircraft production and new programs. Airbus and Boeing delivered a combined record 1,189 aircraft in 2012.
- Space & Defense sales grew 11.8% as reported. Industrial sales grew 11.1%, but excluding wind energy, other industrial sales declined about 3% in constant currency. Wind revenues rose about 30% in constant currency in 2012.
- Management forecast 2013 revenue of $1.64–$1.74 billion on a constant-currency basis, diluted EPS of $1.66–$1.78, free cash flow of $20–$60 million, and accrual-basis capital expenditures of $180–$200 million. It expected wind-energy revenue to fall 15%–20%, principally because of a weaker U.S. market.
- Management cited large customer backlogs and ongoing growth in composite content as supportive factors. Airbus and Boeing’s combined year-end backlog was 9,055 aircraft; their announced 2013 delivery outlook was above 1,200 aircraft. New-program timing, production rates and capacity qualification remain execution dependencies.
- A change in estimated useful lives of certain equipment reduced 2012 depreciation by approximately $1.25 million pretax, or about $0.01 per diluted share. The 2012 effective tax rate was 31.2%, versus 23.7% in 2011; 2011 included $11.3 million of tax benefits from valuation-allowance reversals and an audit settlement. A U.S. R&D tax credit reinstated in January 2013 was to be reflected as a catch-up in first-quarter 2013.
Risks and contingencies
- Customer and market concentration is significant: Boeing and related subcontractors accounted for 29% of 2012 sales and EADS/Airbus and related subcontractors for 28%. Commercial aerospace demand, aircraft delays, deferrals or cancellations, and customer pricing pressure could affect sales and margins.
- Raw materials with limited qualified suppliers, production interruptions, capacity expansion and qualification delays, foreign-exchange movements, and energy costs pose operating risks. The company uses hedges but states these do not eliminate exposure.
- Environmental accruals were $6.6 million at year-end, estimated at the low end of possible outcomes for certain matters; the filing gives $9.2 million as the high-end estimate. Potential Lower Passaic River liability could not be determined, and the company also disclosed other remediation matters.
- Gurit sued over alleged patent infringement involving wind-turbine preform materials, seeking unspecified damages and injunctive relief. Hexcel said it would contest the claim, including on the basis of a 2010 license.
- Unrecognized tax benefits totaled $32.6 million; the company could not reliably estimate eventual cash flows. Tax audits and the realization of deferred tax assets are subject to uncertainty.
Important facts for investors to verify
- Whether 2013 revenue, EPS and free-cash-flow guidance was achieved, particularly given the expected wind-market decline and high planned capital spending.
- Aircraft program production and ramp-up, especially A350 and B787, and Hexcel’s realized content, capacity utilization and margins.
- Customer concentration, order patterns and any changes in Boeing, Airbus/EADS or Vestas demand and sourcing.
- Cash generation, capital-spending needs, revolver availability, covenant headroom and the 2015 credit-facility maturity/refinancing plan.
- Developments in environmental claims, the Gurit litigation and tax audits, including whether recorded accruals remain adequate.