Hexcel Corporation — Q1 2013 Form 10-Q
Business context and period: Hexcel makes advanced composite materials and engineered products for commercial aerospace, space and defense, and industrial markets. This unaudited report covers the quarter ended March 31, 2013; comparisons are with Q1 2012 unless noted.
Financial performance
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Net sales | $416.5 million | $400.1 million |
| Gross margin | $112.0 million; 26.9% | $106.4 million; 26.6% |
| Operating income / margin | $63.0 million / 15.1% | $60.6 million / 15.1% |
| Net income | $43.6 million | $39.6 million |
| Diluted EPS | $0.43 | $0.39 |
| Operating cash flow | $33.2 million | $22.2 million |
| Capital expenditures (cash basis) | $48.1 million | $82.9 million |
| Free cash flow | Use of $15 million | Use of $61 million |
At March 31, 2013, cash was $18.3 million and total debt was $273.9 million, or $255.6 million net of cash. Borrowings under the senior secured facility were $268.5 million, with $171.8 million of undrawn availability. Total assets were $1.638 billion and stockholders’ equity was $1.010 billion.
Material changes and management commentary
- Sales rose 4.1% (3.9% in constant currency). Commercial aerospace grew 11.0%, led by nearly 20% growth in sales for new aircraft programs; space and defense rose 13.1%. Industrial sales fell 29.2%, with wind sales down more than 30% from the prior-year record levels.
- Gross margin improved to 26.9%, which management attributed to strong volume and continuing operating improvements. Operating margin remained 15.1%; higher research and technology spending partly offset performance gains.
- Interest expense declined to $1.7 million from $3.0 million, primarily due to lower average borrowing rates and higher capitalized interest. The effective tax rate fell to 29.2% from 31.9%, benefiting from U.S. R&D tax credits, tax planning, and income mix.
- Comprehensive income was $23.0 million versus $54.0 million, reflecting, among other items, a $17.0 million currency translation loss and $6.2 million in net unrealized losses on financial instruments.
- Working capital was a $31.2 million cash use. Cash declined by $14.3 million during the quarter. The company repurchased 530,730 shares for $15 million under its $50 million authorization.
Outlook, risks, and contingencies
Management expected 2013 accrual-basis capital expenditures of $180 million to $200 million. The filing gives no specific full-year revenue or earnings guidance. Management said it expected to meet near-term liquidity needs through operating cash flow, cash on hand, and, if needed, the revolving facility; it reported compliance with debt covenants and expected continued compliance.
Risks cited include aircraft production rates and program delays, customer concentration, defense spending, industrial-market weakness, manufacturing capacity and supply-chain constraints, foreign-exchange and interest-rate movements, and environmental and legal matters. Environmental accruals totaled $6.7 million; management said the high end of the estimated range would be $1.5 million higher. A proposed Lower Passaic River settlement would require a $0.3 million payment if approved; approval and Hexcel’s dismissal from the litigation remained uncertain. The filing states that other known contingent liabilities were not expected to have a material adverse effect.
Key facts for investors to verify
- Whether aerospace growth and aircraft production-rate increases continued, and whether industrial and wind demand stabilized.
- Whether the planned $180 million–$200 million capital program is completed as expected and how it affects cash generation and debt.
- Debt levels, revolving-facility availability, and ongoing compliance with credit-facility covenants.
- Approval and final terms of the Lower Passaic River settlement, and changes in environmental reserves or other contingencies.
- Whether margin performance can be sustained as research and technology spending and capacity expansion continue.