Hexcel Corporation — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; interim financial statements are unaudited. Hexcel develops and manufactures advanced composite materials and products for commercial aerospace, space and defense, and industrial markets.
Financial performance
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Net sales | $331.6 million | $263.0 million | +26.1% |
| Gross margin | $83.0 million; 25.0% | $66.1 million; 25.1% | Margin down 0.1 percentage point |
| Operating income, GAAP | $47.2 million; 14.2% | $23.8 million; 9.0% | +98.3% |
| Adjusted operating income | $41.5 million; 12.5% | $27.3 million; 10.4% | +52.0% |
| Net income | $26.4 million | $15.8 million | +67.1% |
| Diluted EPS | $0.26 | $0.16 | |
| Adjusted diluted EPS | $0.25 | $0.15 |
- Sales growth covered all end markets: commercial aerospace +30.0% to $197.6 million; space and defense +9.9% to $79.7 million; industrial +41.0% to $54.3 million. New aircraft programs more than doubled year over year and accounted for over 25% of commercial aerospace sales.
- Gross margin percentage was essentially flat: higher volume was offset partly by rising raw-material costs. Adjusted operating margin improved on sales volume and cost control. Engineered Products’ operating margin declined to 16.5% from 18.2%; Composite Materials’ rose to 18.4% from 14.6%.
- Interest expense fell to $4.2 million from $6.6 million, reflecting lower average borrowings and rates after refinancing. The 2011 effective tax rate was 32.0%; the 2010 comparison benefited from $3.5 million in clean-energy tax credits.
Cash flow, debt and liquidity
- Operating cash flow was $16.9 million, versus $2.9 million. Receivables and inventory increased by $30.1 million and $24.3 million, respectively, partly offset by higher payables and accrued liabilities.
- Investing cash outflow was $35.9 million, primarily capital expenditures; financing cash outflow was $52.9 million. Cash declined $66.6 million to $50.6 million. Management reported first-quarter free cash flow (operating cash flow less capital expenditures) as a $19 million use, versus a $10 million use in Q1 2010.
- Gross notes and capital-lease obligations totaled $279.8 million; cash net of debt was $229.2 million. Hexcel reported $196.3 million borrowed under its senior secured facility, $5.9 million drawn on a China credit line, and $183.2 million of undrawn facility availability. It was in compliance with debt covenants.
- In February, Hexcel redeemed $150 million of its 6.75% notes, funded primarily by a $135 million facility borrowing; $35 million of that borrowing was repaid during the quarter. The redemption generated a $4.9 million pretax charge for the call premium and accelerated financing-cost amortization.
- Accrual-basis capital additions were $25.2 million, versus $6.9 million. Full-year 2011 capital expenditures were expected to be $150–$175 million. Management said there were no significant required debt repayments until September 2014.
Outlook, commentary and risks
- After a strong start to the year, management raised 2011 sales guidance by $50 million to $1.275–$1.350 billion and adjusted diluted EPS guidance to $0.95–$1.05 from $0.90–$0.98.
- Management expected steady quarterly improvement in wind sales based on customer backlogs. The Japan disaster had not affected core markets or the supply chain to date, but Hexcel remained cautious about possible later impacts.
- Significant unusual items affected comparability: Q1 2011 included a $5.7 million pretax U.K. pension curtailment gain; Q1 2010 included a $3.5 million environmental reserve charge. Q1 2010 also benefited from $3.5 million of tax credits.
- Risks highlighted include aircraft production rates and program delays, customer concentration (including Airbus, Boeing and Vestas), defense procurement changes, raw-material supply constraints and costs, capacity expansion and qualification, currency and interest-rate movements, and environmental and legal outcomes.
- Environmental accruals totaled $6.1 million. Hexcel stated that ultimate liability for the Lower Passaic River matter could not be determined; the filing describes potential remediation options estimated at $900 million–$2.3 billion for the river area, not Hexcel’s estimated share. A separate product-defect lawsuit sought unspecified compensatory damages and $10 million in punitive damages, with trial scheduled for August 2011. Management believed the aggregate resolution of contingencies, after insurance and recorded provisions, would not materially affect results, financial position or cash flows.
Important facts for investors to verify
- Whether the raised 2011 sales and adjusted EPS guidance was achieved, and the assumptions behind aircraft-program, wind-market and customer demand forecasts.
- Whether sales growth translated into sustained margin improvement despite raw-material cost pressure and capacity ramp-up spending.
- Working-capital needs, capital spending against the $150–$175 million plan, and the effect on free cash flow and cash balances.
- Debt, covenant headroom and liquidity following the note redemption and use of the revolving facility.
- Developments in environmental matters, especially Lower Passaic River liability, and the outcome of the Seemann Composites litigation.