Hexcel Corporation — Q3 2011 Form 10-Q
Business context and period. Unaudited results cover the quarter and nine months ended September 30, 2011, compared with the same periods in 2010. Hexcel makes advanced composite materials and engineered products for commercial aerospace, space and defense, and industrial markets.
Financial performance and position
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $351.8 million | $294.5 million | $1,037.1 million | $862.6 million |
| Gross margin | $86.5 million; 24.6% | $70.5 million; 23.9% | $256.5 million; 24.7% | $215.0 million; 24.9% |
| Operating income | $46.0 million; 13.1% margin | $34.5 million; 11.7% margin | $142.6 million; 13.7% margin | $98.8 million; 11.5% margin |
| Net income | $32.2 million | $15.6 million | $96.0 million | $54.5 million |
| Diluted EPS | $0.32 | $0.16 | $0.95 | $0.55 |
- Growth drivers: Q3 commercial aerospace sales rose 31.6% to $207.4 million; space and defense rose 8.7% to $80.9 million; industrial sales rose 1.6% to $63.5 million. Q3 sales increased 17.3% in constant currency (19.5% reported). New aircraft programs A380, A350, B787 and B747-8 accounted for more than 25% of commercial aerospace sales.
- Cash flow and investment: Nine-month operating cash flow was $111.0 million, versus $68.8 million. Capital expenditures were $99.5 million in cash-flow reporting ($104.3 million on an accrual basis), versus $31.2 million and $24.1 million, respectively. Management-defined free cash flow was $11.5 million, versus $37.6 million.
- Debt and liquidity: At September 30, cash was $48.4 million and total debt was $248.8 million; net debt was $200.4 million, down $14.6 million from year-end 2010. Revolver availability was $208.8 million, and the company reported compliance with debt covenants. The next significant scheduled debt maturity was in 2014; term-loan amortization payments were due before then.
- Balance sheet: Total assets were $1,321.1 million, compared with $1,258.1 million at December 31, 2010. Current assets were $530.0 million and current liabilities $220.7 million.
Material changes versus prior period
- Nine-month sales increased 20.2% reported and 18.1% in constant currency; operating income rose 44.3% and net income rose 76.1% year over year.
- Q3 gross margin improved, while nine-month gross margin edged down to 24.7% from 24.9%. Management attributed Q3 operating-margin improvement to higher volume and cost control.
- Interest expense fell to $2.2 million in Q3 and $9.3 million for the nine months, mainly reflecting lower borrowing costs and debt following refinancing and the February 2011 redemption of $150 million of 6.75% notes.
- Capital spending accelerated to expand capacity for anticipated aerospace demand. Cash declined from $117.2 million at year-end 2010 to $48.4 million.
Outlook, commentary, risks and unusual items
- Management raised 2011 sales guidance to $1.375–$1.400 billion from $1.325–$1.375 billion and adjusted diluted EPS guidance to $1.18–$1.23 from $1.05–$1.12. These are company guidance and adjusted EPS is non-GAAP.
- Management expected 2011 capital additions at the high end of $150–$175 million and free cash flow to be slightly positive. It said 2012 capital spending could be as much as 50% above its prior $150–$200 million range; 2012 guidance was expected in December.
- Q3 included a $2.7 million environmental remediation charge, primarily related to the former Lodi, New Jersey facility. Nine-month results also included a $5.7 million U.K. pension curtailment gain and a $4.9 million pretax charge for redeeming notes. The nine-month tax rate benefited from a $5.5 million tax-reserve release; excluding stated tax benefits, management said the rate would have been 31%.
- Environmental contingencies include the Lower Passaic River litigation and other potentially responsible-party sites. Hexcel said the ultimate Passaic liability could not be determined; aggregate environmental accruals were $5.7 million at September 30. Management stated that, based on available information and existing provisions and insurance, contingent matters were not expected to have a material adverse effect.
- Key risks cited include aircraft production-rate changes or program delays, customer concentration, defense-budget changes, industrial and wind-market conditions, foreign-exchange movements, supply-chain disruptions, manufacturing capacity constraints, competition, and environmental and legal matters.
Important facts for investors to verify
- Whether aircraft build-rate increases and new-program ramps translate into the sales and EPS guidance, and whether capacity expansions are completed as planned.
- Whether planned capital spending remains within management’s updated expectations and free cash flow stays positive, given rising investment and working-capital needs.
- Debt-covenant headroom, revolver availability, and the effect of funding future investment on net debt and liquidity.
- Developments in the Lower Passaic River and other environmental matters, including potential exposure beyond accrued amounts.
- The sustainability of earnings excluding the pension gain, environmental charge, debt-redemption cost, and tax-reserve benefits.