Hexcel Corporation — Q3 2014 Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2014. Hexcel develops and manufactures advanced composite materials and engineered products for commercial aerospace, space and defense, and industrial markets. Financial statements are unaudited.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $451.9M | $412.3M | $1,383.7M | $1,251.4M |
| Gross margin | $122.0M; 27.0% | $112.1M; 27.2% | $380.3M; 27.5% | $340.9M; 27.2% |
| Operating income | $79.0M; 17.5% | $69.0M; 16.7% | $228.7M; 16.5% | $203.9M; 16.3% |
| Net income | $55.8M | $48.7M | $156.5M | $140.8M |
| Diluted EPS | $0.57 | $0.48 | $1.58 | $1.38 |
| Operating cash flow | — | — | $191.8M | $195.9M |
| Capital expenditures (cash basis) | — | — | $194.4M | $133.1M |
| Free cash flow | — | — | $(2.6)M | $62.8M |
Q3 sales increased 9.6% year over year (9.5% in constant currency); nine-month sales rose 10.6% (9.8% in constant currency). Higher volume and cost control supported nine-month gross-margin improvement, while Q3 gross margin was slightly lower year over year. Nine-month operating income included a $6.0M environmental-reserve charge; adjusted operating income was $234.7M, versus $203.9M a year earlier. Adjusted net income was $160.7M versus $141.4M.
Markets and material changes
- Commercial aerospace: Q3 sales increased 13.2% to $296.5M; nine-month sales rose 13.4% to $907.9M. New aircraft programs grew about 20%, led by A350 and B787 shipments. Legacy Airbus and Boeing sales rose about 8% in Q3 but ran about 5% below first-half pace.
- Space and defense: Q3 sales fell 6.3% to $88.5M; nine-month sales declined 3.8% to $276.2M. Rotorcraft sales were weaker, including the expected V-22 decline; some orders shifted to Q4.
- Industrial: Q3 sales rose 19.7% to $66.9M; nine-month sales rose 22.2% to $199.6M. Wind-energy sales increased more than 25% for the nine-month period.
- Q3 operating income increased 14.5%; nine-month reported operating income increased 12.2%. SG&A was flat in Q3, while nine-month R&T expense increased 10.5% as spending on product and process development grew.
Cash, debt and liquidity
- At September 30, cash was $37.7M, total debt $432.8M, and net debt $395.1M. Net debt was $229.5M at December 31, 2013; the increase primarily reflected stock repurchases.
- Hexcel refinanced into a $700M senior unsecured revolving facility due September 2019, replacing its prior secured facility. Initial borrowing cost was LIBOR plus 1.25%. Borrowings were $430M, with $268.3M available after letters of credit.
- The company reported compliance with debt covenants and expected to remain compliant. The facility requires minimum interest coverage of 3.50 and maximum leverage of 3.50. Management said near-term liquidity needs, including capital expenditures, would be funded by operating cash flow, cash on hand and facility availability.
- Cash operating flow was nearly flat year over year, as higher earnings were offset by working-capital investment, particularly receivables and inventories. Capital spending rose substantially, producing negative nine-month free cash flow.
- Hexcel spent $160M repurchasing shares in the first nine months and had $100M remaining under its 2014 repurchase authorization at quarter-end.
Outlook, risks and unusual items
- Management expected 2014 accrual-basis capital expenditures at the high end of its $225M–$250M range to expand capacity for customer needs. No specific full-year revenue or earnings guidance is stated in the provided filing text.
- Environmental reserves increased by $6.0M for the nine months, primarily relating to the former Lodi, New Jersey facility. Aggregate environmental accruals were reported as $6.9M; the filing says accruals for certain sites were at the low end of estimated ranges and could be $28M higher at the high end.
- The Lower Passaic River EPA proposal included remediation alternatives estimated at $0.8B–$3.25B for the lower eight miles. Hexcel had not determined its allocable share; the filing describes substantial uncertainty.
- Currency volatility affected comprehensive income: nine-month other comprehensive loss was $45.9M, including currency translation and financial-instrument losses. Derivatives hedge some currency and interest-rate exposure.
- Other risks cited include aircraft production rates and program ramp-ups, customer concentration, defense-budget changes, industrial demand, capacity execution, supply-chain constraints, foreign exchange, and environmental and regulatory matters. Management reported effective disclosure controls and no material Q3 change in internal control over financial reporting.
Investor verification points
- Confirm the pace and returns of capacity investment, including whether 2014 capital spending reaches the high end of the stated range and how spending converts into operating cash flow.
- Track commercial-aircraft program growth and legacy-aircraft production rates, alongside weakness in space and defense and the sustainability of industrial demand.
- Review environmental exposure as the Lodi cleanup and Lower Passaic River process develop; the ultimate liability may differ materially from recorded reserves.
- Verify debt levels, covenant headroom, borrowing costs and continued liquidity following the refinancing and repurchases.
- Resolve filing inconsistencies: the stock-repurchase note reports 3,993,401 shares bought in the first nine months, while MD&A reports 3,933,401; environmental accrued-liability current portions are reported as both $5.0M and $5.2M in different sections.