Hexcel Corporation — Q1 2012 Form 10-Q
Reporting period: Quarter ended March 31, 2012. Hexcel develops and manufactures composite materials and engineered products for commercial aerospace, space and defense, and industrial markets. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Net sales | $400.1 | $331.6 | +20.7% (+22.0% constant currency) |
| Gross margin | $106.4; 26.6% | $83.0; 25.0% | Margin +1.6 percentage points |
| Operating income | $60.6; 15.1% margin | $47.2; 14.2% margin | +28.4% |
| Net income | $39.6 | $26.4 | +50.0% |
| Diluted EPS | $0.39 | $0.26 | |
| Operating cash flow | $22.2 | $16.9 | |
| Capital expenditures, cash basis | $82.9 | $35.9 | |
| Free cash flow | Use of approximately $61 | Use of approximately $19 |
Management said Q1 2012 sales, adjusted operating income, adjusted operating margin, and adjusted net income were company records. Gross-margin improvement reflected higher volume and cost control; foreign exchange contributed about 50 basis points. SG&A and research and technology expenses together rose 10.4%, partly due to variable compensation and added capacity-support infrastructure. Engineered Products operating margin declined to 14.0% from 16.5%, reflecting product mix and new-program learning-curve costs.
Markets and material changes
- Commercial aerospace: Sales of $242.3, up 22.6%. Airbus- and Boeing-related sales rose more than 20%; new aircraft programs represented more than 25% of this market’s sales.
- Space and defense: Sales of $84.9, up 6.5%, supported by rotorcraft growth.
- Industrial: Sales of $72.9, up 34.3%; wind sales had grown sequentially for five quarters.
- Composite Materials sales increased 23.4% to $316.2; Engineered Products sales increased 11.4% to $83.9.
- Q1 2011 comparisons included a $5.7 pension-plan curtailment gain and a $4.9 pretax charge from redeeming senior subordinated notes. Excluding those special items, adjusted operating income was $41.5 and adjusted net income was $25.3 in Q1 2011, versus $60.6 and $39.6, respectively, in Q1 2012.
Liquidity, debt, and investment
- Cash was $48.7 at March 31, 2012. Total debt and capital lease obligations were $309.3; debt net of cash was $260.6, up $59.2 from year-end 2011.
- Borrowings under the senior secured facility were $228.3, with $145.8 of undrawn availability after letters of credit. The China credit line had $5.5 outstanding.
- Current assets were $584.8 and current liabilities $220.8. Accounts receivable rose to $251.0 from $199.3 and inventories to $232.0 from $215.7.
- Operating cash flow was more than offset by capital spending; working capital used $41.5 in Q1. The company said seasonal working-capital needs and annual benefit and variable-compensation payments typically affect the first quarter.
- Accrual-basis capital additions were $44.7, versus $25.2 a year earlier. The company expected 2012 capital expenditures of $250–$275.
- Hexcel reported compliance with debt covenants and expected continued compliance. It said it expected to meet short-term liquidity needs through operating cash flow, cash on hand, and its revolver. No significant required debt repayments were expected until September 2014; the secured facility and subordinated notes mature in 2015.
Outlook, risks, and contingencies
- Following Q1 results and its market outlook, Hexcel raised 2012 sales guidance to $1.55–$1.65 billion from $1.5–$1.6 billion, and adjusted diluted EPS guidance to $1.45–$1.55 from $1.33–$1.45.
- Management forecast 2012 free cash flow of a $50–$75 million use, reflecting the planned capacity expansion and capital spending.
- Forward-looking risks include aircraft production and delivery rates, delays or changes to new aircraft programs, reliance on major customers including Airbus and Boeing, defense-budget and program changes, wind and other industrial demand, foreign exchange, supply-chain constraints, manufacturing capacity, competition, and the company’s ability to sustain margins while expanding capacity.
- Environmental accruals totaled $3.4 at quarter-end; management said the accrual could be $1.5 higher using the high end of certain estimated ranges. The company cited unresolved potential liability relating to the Lower Passaic River and Omega Superfund site. It stated that currently assessed contingent liabilities were not expected to materially adversely affect consolidated results, financial position, or cash flows, but ultimate liability for some matters could not be determined.
- Disclosure controls were judged effective, and the company reported no material Q1 change in internal control over financial reporting. Management reported no material change in market risk from its 2011 annual report.
Important facts for investors to verify
- Whether aerospace production rates and new-program ramps support the raised sales and adjusted EPS guidance.
- Whether planned capital spending of $250–$275 million and the forecast free-cash-flow use remain on track.
- How working-capital growth, receivables, and inventory affect cash conversion in subsequent quarters.
- Debt levels, revolver availability, and continued compliance with financial covenants during capacity expansion.
- Developments in environmental matters, particularly the Lower Passaic River litigation and potential remediation exposure.
- The effect of foreign exchange, customer concentration, product mix, and Engineered Products program costs on margins.