Business Context and Reporting Period
Company: Hexcel Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2009
Business Overview: Hexcel is a leading advanced composites company manufacturing lightweight, high-performance materials for commercial aerospace, space and defense, and industrial applications (including wind energy). The company operates through two segments: Composite Materials and Engineered Products.
Key Financial Metrics
| Metric (in millions) | Q3 2009 | Q3 2008 | 9 Months 2009 | 9 Months 2008 |
|---|---|---|---|---|
| Net Sales | $257.1 | $331.4 | $841.7 | $1,035.4 |
| Gross Margin | $52.1 (20.3%) | $71.1 (21.5%) | $192.2 (22.8%) | $227.3 (22.0%) |
| Operating Income | $19.6 (7.6%) | $35.9 (10.8%) | $89.2 (10.6%) | $101.6 (9.8%) |
| Net Income | $10.4 | $33.0 | $50.6 | $82.9 |
| Diluted EPS | $0.11 | $0.34 | $0.52 | $0.85 |
| Cash from Operations (9mo) | $140.0 (vs $48.6 in 2008) | |||
| Free Cash Flow (9mo) | $58.0 positive (vs $82.0 usage in 2008) | |||
| Cash & Equivalents | $94.7 (as of Sept 30, 2009) | |||
| Total Debt | $392.3 (as of Sept 30, 2009) |
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 22.4% in Q3 and 18.7% for the nine months ended Sept 30, 2009, compared to the prior year. This was driven by significant supply chain inventory adjustments, a sharp decline in the regional and business aircraft markets, and delays in new programs.
- Segment Performance:
- Commercial Aerospace: Sales dropped 27.8% in Q3 and 26.1% year-to-date due to inventory destocking by customers (Airbus/Boeing) and reduced orders.
- Industrial: Sales fell 30.5% in Q3, heavily impacted by the wind energy sector where financing issues delayed projects.
- Space & Defense: Sales remained relatively flat (down 1.5% in Q3, up 0.8% year-to-date), supported by rotorcraft and satellite programs.
- Profitability: Operating income declined 45.4% in Q3 and 12.2% year-to-date. While cost controls and headcount reductions (15% lower than June 2008 peak) helped, they were insufficient to offset the volume decline.
- Working Capital: Significant improvement in cash flow from working capital ($30 million generated in Q3 vs. $75 million used in Q3 2008) due to concerted efforts to reduce accounts receivable and inventories.
- Debt Refinancing: In May 2009, the company entered a new $300 million Senior Secured Credit Facility ($175M term loan, $125M revolver) to replace the previous facility. This resulted in $1.7 million in write-off costs for deferred financing.
Guidance, Outlook, and Risks
- Outlook: Management remains cautious regarding near-term projected build-rates and wind energy funding due to the global credit environment. However, they note that the economics of new, lightweight wide-body aircraft (Boeing 787, 747-8, Airbus A380, A350) remain intact and will drive future demand.
- Cost Actions: The company continues to reduce headcount, controllable costs, and capital expenditures to align with current demand. Capital expenditures for the first nine months of 2009 were $65.8 million, down significantly from $125.8 million in the same period of 2008.
- Liquidity: The company generated $36 million in free cash flow for the quarter. Undrawn availability under the new credit facility was $113.2 million as of September 30, 2009.
- Risks and Contingencies:
- Legal/Environmental: Ongoing litigation regarding patent infringement (Gurit) and environmental remediation liabilities (Lodi, NJ; Lower Passaic River; Kent, WA). Aggregate environmental accruals were $9.0 million.
- Market Risk: Exposure to foreign currency fluctuations (Euro/GBP vs. USD) and interest rate changes on floating-rate debt.
- Customer Concentration: Significant reliance on Airbus and Boeing for commercial aerospace sales.
Investor Verification Checklist
- Inventory Levels: Verify the extent of inventory destocking in the supply chain and whether the $158.0 million inventory balance is appropriate for current demand.
- Wind Energy Recovery: Assess the impact of the American Recovery and Reinvestment Act on restarting wind turbine order flow and the financial stability of key wind customers.
- Debt Covenants: Confirm continued compliance with the new Senior Secured Credit Facility covenants (interest coverage ratio of 4.00 and leverage ratio of 2.75).
- Environmental Liabilities: Monitor the status of the Lower Passaic River study and the Lodi, NJ remediation costs, as estimates could change significantly.
- New Program Ramp-up: Track the production ramp-up of the Boeing 787 and Airbus A350/A380 to validate the long-term revenue recovery thesis.