Hexcel Corporation — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Hexcel makes advanced composite materials and engineered products for commercial aerospace, space and defense, and industrial markets. Results are unaudited; amounts below are in millions of dollars except per-share data.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $419.5 | $364.7 | $1,331.5 | $1,148.3 |
| Gross margin | $91.6; 21.8% | $81.8; 22.4% | $330.1; 24.8% | $258.0; 22.5% |
| Operating income | $43.6; 10.4% margin | $40.8; 11.2% margin | $167.7; 12.6% margin | $134.7; 11.7% margin |
| Net income | $38.7 | $26.8 | $123.9 | $89.3 |
| Diluted EPS | $0.45 | $0.31 | $1.45 | $1.05 |
| Operating cash flow | Not separately reported for quarter | Not separately reported for quarter | $98.1 | $56.4 |
| Capital expenditures | Not separately reported for quarter | Not separately reported for quarter | $94.4 | $58.3 |
| Free cash flow, non-GAAP | Not separately reported for quarter | Not separately reported for quarter | $3.7 | $(1.9) |
- Q3 sales increased 15.0% year over year, or 13.2% in constant currency. Nine-month sales rose 16.0%, or 15.3% in constant currency.
- Q3 sales growth was led by Commercial Aerospace (+20.5%) and Space & Defense (+18.6%); Industrial sales declined 17.4%. Nine-month changes were +22.1%, +15.9%, and -10.2%, respectively.
- Commercial Aerospace growth reflected the Airbus A350 and Boeing 787 programs and business jets; nine-month growth also included the A320neo. Space & Defense growth was broad-based. Industrial weakness primarily reflected lower wind-energy sales, partly offset by automotive growth.
- Q3 gross margin declined 0.6 percentage points, which management attributed primarily to lower absorption of infrastructure costs supporting higher future aircraft production. Nine-month gross margin improved 2.3 points, primarily from higher sales and favorable mix.
- Q3 operating income rose 6.9%, slower than sales growth; nine-month operating income rose 24.5%. The 2022 nine-month comparison included a $19.4 gain from the Dublin facility sale; 2023 included a $0.8 gain from the Windsor facility sale.
- Q3 net income included a $5.6 discrete tax benefit, primarily from finalizing prior-year tax returns; the comparable 2022 periods included a $1.3 discrete tax charge. The Q3 2023 tax benefit was $0.7, versus $6.8 tax expense a year earlier.
Cash, debt and liquidity
- At September 30, 2023, cash was $97.7, total debt $754.2, and stockholders’ equity $1,646.3. Cash was $112.0 and debt $723.5 at December 31, 2022.
- The $750 revolving facility refinanced in April 2023 matures in April 2028. Borrowings were $55; undrawn availability was $695, with no letters of credit outstanding. The facility’s weighted-average interest rate was 6.2% for the nine-month period. Hexcel reported compliance with debt covenants.
- The next significant scheduled debt maturity is the $300 of 4.7% senior notes due in 2025. The company said it expects to fund near-term liquidity needs, including capital expenditures, with operating cash flow, cash on hand and the revolving facility.
- Nine-month operating cash flow improved to $98.1, while working capital used $112.1 of cash. Investing cash use was $81.6, including $94.4 of capital expenditures; $38.0 of capex related to acquiring land and a building at the Amesbury facility. Financing cash use was $29.7, including $31.7 of dividends and $30.1 of share repurchases.
- The board declared a quarterly dividend of $0.125 per share on October 23, 2023. Approximately $187.0 remained available under the share-repurchase authorization at September 30.
Outlook, risks and unusual items
- The filing gives no specific quantified full-year 2023 sales, earnings, margin or cash-flow guidance. Management described continued commercial aerospace recovery and aircraft build-rate growth, while noting ongoing logistics, supply-chain, inflation and geopolitical challenges.
- Management cited inflation, elevated energy costs, constrained raw-material availability and transportation as pressures that may affect costs and operations. Forward-looking risks also include aircraft production or delivery changes, customer demand, supply disruptions, labor availability, currency movements, defense budgets, program delays, and the company’s ability to expand and qualify capacity.
- Lower Passaic River litigation and remediation remain unresolved. A proposed $150 settlement of EPA claims involving Hexcel and 83 other PRPs is funded collectively in escrow, pending court approval; the company said it cannot estimate when or whether approval will occur. Separate cost-recovery claims and remediation matters are also described. Environmental accruals totaled $0.7 at September 30.
- Hexcel stated pending legal proceedings are not expected to have a material adverse effect based on information currently available, insurance and recorded accruals. Actual liabilities could differ from estimates.
- The Windsor, Colorado facility sale closed in July 2023 for net proceeds of approximately $10.3 and a gain of approximately $0.8. The 2022 period included the $19.4 gain on the Dublin facility sale.
- Disclosure controls were assessed as effective, and the company reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether aircraft production-rate recovery translates into sustained Hexcel sales and improved absorption, particularly given the Q3 gross- and operating-margin declines.
- Whether Industrial-market weakness, especially wind energy, persists and how it affects segment results.
- Cash conversion and capital intensity: nine-month operating cash flow was $98.1 against $94.4 of capex, leaving $3.7 of non-GAAP free cash flow.
- Debt, interest costs and refinancing needs, including the 2025 senior-note maturity and variable-rate facility borrowings.
- Developments in the Lower Passaic River settlement, litigation and environmental obligations, and any change in the recorded accruals.
- The contribution of discrete tax items and asset-sale gains to reported earnings versus ongoing operating performance.