Business Context and Reporting Period
Company: Hexcel Corporation
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2009
Business Overview: Hexcel is a leading advanced composites company developing lightweight, high-performance materials (carbon fibers, honeycomb, prepregs) for Commercial Aerospace, Space and Defense, and Industrial applications. The company operates two segments: Composite Materials and Engineered Products. In 2007, the company divested its U.S. electronics, ballistics, and general industrial (EBGI) lines and European Architectural business, which are reported as discontinued operations.
Key Financial Metrics (2009)
| Metric | 2009 | 2008 | 2007 |
|---|---|---|---|
| Net Sales | $1,108.3 million | $1,324.9 million | $1,171.1 million |
| Gross Margin | $248.5 million (22.4%) | $289.2 million (21.8%) | $283.0 million (24.2%) |
| Operating Income | $103.7 million (9.4%) | $130.9 million (9.9%) | $114.9 million (9.8%) |
| Net Income | $56.3 million | $111.2 million | $61.3 million |
| Diluted EPS | $0.57 | $1.14 | $0.64 |
| Operating Cash Flow | $172.8 million | $97.5 million | $100.9 million |
| Total Debt | $392.3 million | $394.6 million | N/A |
| Cash and Equivalents | $110.1 million | $50.9 million | $28.1 million |
| Working Capital | $259.4 million | $256.5 million | $190.7 million |
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 16.3% to $1,108.3 million in 2009 compared to 2008. In constant currency, the decline was 14.4%.
- Commercial Aerospace: Sales dropped 22% (20% in constant currency) due to customer inventory destocking and a >40% decline in the business/regional jet market.
- Industrial: Sales fell 19% (15% in constant currency), driven by weak credit markets affecting wind energy funding and reduced demand in recreation/transportation.
- Space & Defense: Sales remained essentially flat compared to 2008.
- Profitability: Despite the revenue drop, gross margin percentage improved to 22.4% from 21.8% due to operational improvements, lower input costs, and cost controls. Operating income declined 20.8% to $103.7 million.
- One-Time Charges: "Other expense, net" included a $7.5 million charge in Q4 2009 for a patent litigation settlement (Gurit). This was a significant increase from 2008 expenses which included environmental and pension settlement charges.
- Cash Flow: Operating cash flow increased significantly to $172.8 million (up $75.3 million from 2008), primarily driven by working capital efficiencies (decreases in accounts receivable and inventory).
Guidance, Outlook, and Risks
- 2010 Outlook: Management expects total revenues for 2010 to be flat to slightly declining compared to 2009 on a constant currency basis. Capital expenditures are expected to be less than $75 million.
- Market Drivers:
- Aerospace: Boeing and Airbus deliveries hit record highs in 2009, but Hexcel benefited more in 2008. Future growth is tied to the ramp-up of new high-composite aircraft (Boeing 787, Airbus A350, A380). The B787 maiden flight occurred in Dec 2009, with service entry projected for Q4 2010.
- Wind Energy: Anticipates a significant inventory correction and reduced sales in the near term due to difficult credit markets.
- Key Risks:
- Customer Concentration: Boeing (27% of 2009 sales) and EADS/Airbus (22% of 2009 sales) are critical. Vestas Wind Systems accounted for 12% of sales.
- Raw Materials: Reliance on limited sources for key materials (carbon fiber, aramid, epoxy) creates supply and cost risks.
- Environmental: Significant potential liability regarding the Lower Passaic River study area (estimated costs $900M - $2.3B for the group, Hexcel's share undetermined) and the Lodi, NJ site ($5.7M accrued).
- Legal: Pending litigation with Seemann Composites, Inc. seeking up to $10M in punitive damages.
Investor Verification Checklist
- Customer Concentration: Verify the stability of Boeing and Airbus production schedules and the impact of the Boeing 787 and Airbus A350 ramp-up rates on Hexcel's order book.
- Wind Energy Exposure: Assess the duration of the inventory correction in the wind energy sector and the financial health of major customers like Vestas.
- Environmental Liabilities: Review the status of the Lower Passaic River litigation and the potential for Hexcel's liability to exceed the current $8.3 million accrual.
- Debt Covenants: Confirm continued compliance with the Senior Secured Credit Facility covenants (Interest Coverage Ratio > 4.00; Leverage Ratio < 2.75), especially given the mandatory prepayment requirements based on cash flow.
- Raw Material Costs: Monitor pricing trends for carbon fiber and resin precursors, as Hexcel consumes ~60% of its own carbon fiber production but also purchases significant quantities externally.