Hexcel Corporation — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The filing also reports fourth-quarter results. Hexcel develops and manufactures advanced composite materials and engineered products, primarily for commercial aerospace, space and defense, and industrial markets.
Financial results and liquidity
| Metric | FY 2017 | FY 2016 | Change |
|---|---|---|---|
| Net sales | $1,973.3 million | $2,004.3 million | Down 1.5% |
| Gross margin | $551.8 million; 28.0% | $564.6 million; 28.2% | Margin down 0.2 percentage points |
| Operating income | $350.6 million; 17.8% | $360.1 million; 18.0% | Down 2.6% |
| Net income | $284.0 million | $249.8 million | Up 13.7% |
| Diluted EPS | $3.09 | $2.65 | Up 16.6% |
| Cash from operations | $428.7 million | $401.4 million | Up $27.3 million |
| Free cash flow (non-GAAP) | $150.6 million | $73.5 million | Up $77.1 million |
- FY 2017 capital expenditures were $278.1 million on a cash basis ($284.4 million accrual basis); depreciation and amortization was $104.5 million.
- Cash was $60.1 million; total debt was $809.9 million and debt net of cash was $749.8 million. Working capital was $394.6 million.
- The company had $650 million available under its $700 million revolving facility, which matures in June 2021, and reported compliance with debt covenants. Long-term notes include $300 million of 4.7% notes due 2025 and $400 million of 3.95% notes due 2027.
- FY 2017 dividends paid were $42.6 million; share repurchases were $150.3 million, with approximately $242.5 million remaining under the authorized repurchase plan at year-end.
- Fourth quarter: Sales were $511.7 million versus $483.5 million in Q4 2016; operating income was $93.2 million versus $87.0 million; net income was $88.1 million versus $59.5 million; diluted EPS was $0.96 versus $0.64.
Business mix and material changes
- Commercial Aerospace accounted for 72% of sales, Space & Defense 17%, and Industrial 11%. By segment, Composite Materials sales were $1,597.1 million and Engineered Products sales were $376.2 million.
- Commercial Aerospace sales declined 1.4%, Space & Defense sales rose 6.8%, and Industrial sales fell 13.2%. Lower legacy wide-body aircraft sales offset growth from the A350 and new narrow-body programs; wind-energy sales declined about 30%.
- Airbus and Boeing and their subcontractors together represented approximately 69% of total sales: 44% to Airbus and related subcontractors and 25% to Boeing and related subcontractors. This compares with 69% in 2016, though the customer mix shifted.
- Gross margin and operating margin eased from 2016 despite tight cost controls. Management cited about $10 million of startup and training costs for new facilities in France and Morocco and lower legacy aircraft volumes.
- Net income growth materially benefited from tax items: a $22.1 million benefit related to the U.S. Tax Cuts and Jobs Act and $15.6 million of other discrete tax benefits. Adjusted net income, excluding specified items, was $246.3 million versus $243.5 million in 2016; adjusted diluted EPS was $2.68 versus $2.58.
- Hexcel acquired Structil and aerospace and defense assets of Oxford Performance Materials, and made an additional investment in Carbon Conversions. The acquisitions contributed to $76 million of acquisition and investment cash outflows and increased goodwill and intangible assets.
Outlook, risks and contingencies
- Management expected 2018 capital spending of $170 million to $190 million and stated that Airbus and Boeing deliveries were estimated to be slightly above 2017. No explicit 2018 revenue or earnings guidance is provided in the supplied filing text.
- Management expected wind-energy sales in 2018 to exceed 2016 levels as customers transition to longer, more efficient blades. Capacity expansions, including the Roussillon, France facility, were expected to enter service or complete qualification during 2018.
- Key risks include dependence on commercial aerospace production and a small number of customers, aircraft program delays or build-rate changes, cyclical defense and industrial demand, limited-source raw materials, manufacturing and capacity execution, currency and interest-rate movements, international operations, and environmental regulation and remediation obligations.
- Environmental accruals were $2.8 million at year-end. The company cautioned that estimating its share of Lower Passaic River remediation remains uncertain; its accrual for that matter was $2.0 million. For sites where liabilities could be estimated, accruals would have been $16 million higher if measured at the high end of the possible range.
- The 2017 effective tax rate was 13.2%, versus 26.8% in 2016; excluding specified discrete items, management reported adjusted rates of 24.8% and 30.0%, respectively. The company said accounting for the new tax law was provisional and could change.
- The company expected to adopt the new revenue standard in Q1 2018, estimating about $40 million of revenue acceleration and an opening retained-earnings adjustment of less than $4 million. This is a timing change, not a stated increase in underlying demand.
Investor verification priorities
- Review the audited statements and notes for operating cash flow, capital spending, free-cash-flow reconciliation, debt balances, and the terms and covenants of credit facilities and notes.
- Assess how much of the increase in reported net income and EPS came from tax benefits, and compare GAAP results with the company’s non-GAAP adjusted measures.
- Track aircraft program production and mix, particularly legacy wide-body declines versus A350 and narrow-body ramps, and verify whether backlog translates into Hexcel orders and margins.
- Monitor the recovery assumptions for wind-energy sales, new-site qualification and startup costs, and the expected return on expansion investments.
- Follow customer concentration, raw-material availability, and developments in environmental matters, especially the uncertain allocation of Lower Passaic River remediation costs.