Business Context and Reporting Period
Company: Hexcel Corporation
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2008
Business Overview: Hexcel is a leading advanced composites company developing, manufacturing, and marketing lightweight, high-performance materials (carbon fibers, reinforcements, prepregs, honeycomb, matrix systems, and composite structures). The company operates in two segments: Composite Materials and Engineered Products. Major end markets include Commercial Aerospace (54% of 2008 sales), Industrial (23%), and Space & Defense (23%).
Key Financial Metrics (2008)
| Metric | 2008 (in millions) | 2007 (in millions) |
|---|---|---|
| Net Sales | $1,324.9 | $1,171.1 |
| Gross Margin | $289.2 (21.8%) | $283.0 (24.2%) |
| Operating Income | $130.9 (9.9%) | $114.9 (9.8%) |
| Net Income | $111.2 | $61.3 |
| Diluted EPS | $1.14 | $0.64 |
| Operating Cash Flow | $98.9 | $106.3 |
| Capital Expenditures | $177.3 | $120.6 |
| Total Debt | $394.6 | $315.9 |
| Cash and Equivalents | $50.9 | $28.1 |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 13.1% to $1.32 billion, driven primarily by a 14.2% increase in Commercial Aerospace sales and an 18.1% increase in Space & Defense sales. Industrial sales grew 6.5%.
- Margin Compression: Gross margin percentage declined 240 basis points to 21.8%. Management attributed this to approximately 125 basis points of incremental fixed/start-up costs from new facilities (Spain, France, Germany, China) and another 125 basis points due to volatility in exchange rates and energy costs.
- Profitability: Net income nearly doubled to $111.2 million, significantly aided by a $26.2 million tax benefit from the reversal of valuation allowances on U.S. deferred tax assets and a $12.5 million pre-tax gain from the sale of the company's interest in BHA Aero Composite Parts Co., Ltd.
- Debt Structure: Total debt increased by $78.7 million due to the borrowing of $80.0 million in Term Loan C to restore availability under the revolving credit facility.
Guidance, Outlook, and Risks
- 2009 Outlook: Management expects revenues to be flat in 2009 compared to 2008 on a constant currency basis. The company targets being cash flow positive for the full year, though it expects negative cash flow in the first half due to capital spending timing.
- Capital Expenditures: Planned capital spending for 2009 is approximately $100 million, focused on completing carbon fiber and wind energy capacity projects.
- Market Risks:
- Economic Conditions: Severe deterioration in global credit markets and economic downturns may cause customers to defer aircraft orders or reduce purchases.
- Customer Concentration: Boeing and EADS (including Airbus) and their subcontractors accounted for approximately 47% of 2008 net sales. Vestas Wind Systems accounted for nearly 11%.
- Program Delays: Delays in new aircraft programs (Boeing 787, Airbus A350) could impact growth and capacity utilization.
- Contingencies:
- Environmental: Aggregate environmental accruals increased to $9.2 million (from $3.2 million in 2007), primarily due to a $7.6 million charge for the Lodi, New Jersey site. The company is also a potentially responsible party (PRP) for the Lower Passaic River study, with estimated remediation costs ranging from $900 million to $2.3 billion, though Hexcel's specific liability is undetermined.
- Litigation: Gurit, a competitor, has sued Hexcel in Germany and Austria alleging patent infringement regarding HexFIT prepreg sold to Vestas.
Investor Verification Checklist
- Tax Benefit Sustainability: Verify the permanence of the $26.2 million tax benefit derived from the reversal of valuation allowances on U.S. net operating losses.
- Boeing Strike Impact: Assess the long-term impact of the September 2008 Boeing strike on 2009 delivery schedules and Hexcel's revenue recognition.
- Environmental Liability Exposure: Review the status of the Lower Passaic River remediation costs and the potential for Hexcel's liability to exceed current accruals.
- Capital Expenditure Discipline: Monitor the company's ability to complete capacity expansions within the $100 million 2009 budget amidst tight credit markets.
- Customer Concentration: Evaluate the risk of order deferrals from Boeing and Airbus given the global economic downturn and airline financing constraints.