Hexcel Corporation — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. Hexcel manufactures advanced composite materials and engineered products for commercial aerospace, space and defense, and industrial markets. The results reflect the severe COVID-19-driven downturn in air travel and aircraft production.
Financial performance and liquidity
| Metric | FY2020 | FY2019 |
|---|---|---|
| Net sales | $1,502.4 million | $2,355.7 million |
| Gross margin | $239.7 million; 16.0% | $640.4 million; 27.2% |
| Operating income | $14.1 million; 0.9% | $425.2 million; 18.0% |
| Adjusted operating income (non-GAAP) | $72.0 million; 4.8% | $425.2 million; 18.0% |
| Net income and diluted EPS | $31.7 million; $0.38 | $306.6 million; $3.57 |
| Operating cash flow | $264.3 million | $491.1 million |
| Capital expenditures (cash basis) | $50.6 million | $204.1 million |
| Free cash flow (non-GAAP) | $213.7 million | $287.0 million |
| Cash and cash equivalents at year-end | $103.3 million | $64.4 million |
| Total debt | $926.4 million | $1,060.1 million |
| Working capital | $352.8 million | $382.3 million |
Revenue fell 36.2%. Commercial Aerospace sales declined 48.5% to $822.3 million; Space & Defense increased 0.9% to $448.5 million; Industrial declined 26.1% to $231.6 million. Composite Materials sales were $1,185.9 million, down 36.3%, and Engineered Products sales were $316.5 million, down 35.7%.
Cash generated from operations fell $226.8 million year over year, while free cash flow decreased to $213.7 million. Lower capital spending and working-capital reductions supported cash generation. Year-end available borrowing under the revolving facility was $772.0 million; the company reported compliance with debt covenants at December 31, 2020.
Material changes and unusual items
- Commercial aircraft deliveries by Airbus and Boeing totaled 723 in 2020, compared with 1,243 in 2019. Lower build rates and customer supply-chain inventory destocking, especially for carbon fiber, drove the sales decline.
- Gross margin contracted by 11.2 percentage points, reflecting lower demand and an unfavorable mix from lower carbon-fiber sales. Cost reductions lowered SG&A to $121.1 million from $158.7 million, but SG&A rose as a share of sales to 8.1% from 6.7%.
- Other operating expense was $57.9 million, including $42.8 million of restructuring charges and $15.1 million of costs related to the terminated Woodward merger. Restructuring included severance and impairment costs associated with closing the Windsor, Colorado wind-prepreg facility; $14.2 million of anticipated future cash payments remained at year-end.
- A $61.0 million income-tax benefit, primarily from releasing a valuation allowance in a foreign jurisdiction, helped lift net income. Adjusted net income was $20.6 million and adjusted diluted EPS was $0.25, after excluding restructuring, merger costs, and tax benefits.
- Fourth-quarter sales were $295.8 million, operating loss was $20.4 million, and net loss was $19.4 million, compared with 2019 fourth-quarter sales of $564.3 million and net income of $73.2 million.
Outlook, financing, and key risks
Management expected the pandemic to continue adversely affecting results, cash flows, and financial position, but said the continuing financial impact could not be reasonably estimated because of uncertainty around air travel, vaccine rollout, virus variants, customer production rates, and supply-chain conditions. The filing provides no clear numerical 2021 revenue or earnings guidance.
In response to lower demand, Hexcel reduced global headcount by approximately 35%, curtailed discretionary spending, suspended dividends and stock repurchases, and reduced capital spending. The dividend and repurchase suspensions began in April 2020. The January 2021 credit-facility amendment, a subsequent event, replaced the maximum leverage covenant through March 31, 2022 with a minimum liquidity requirement of $250 million, reduced revolving commitments to $750 million, and imposed restrictions on dividends, repurchases, and secured debt. It also increased pricing and fees.
- Customer concentration remains substantial: Airbus and related subcontractors represented 33% of 2020 sales; Boeing and related subcontractors represented 19%. The company is exposed to further aircraft build-rate cuts, order deferrals, or supply-chain destocking.
- About 30% of 2020 sales came from Space & Defense, and 15% from Industrial. Defense demand depends partly on government budgets; wind-energy sales faced technology shifts toward infusion and blade outsourcing.
- Some key raw materials have few qualified suppliers, creating exposure to shortages, price increases, and operational disruption. Other identified risks include workforce availability, foreign exchange, trade and Brexit-related costs, environmental liabilities, cybersecurity, and regulatory compliance.
- Environmental accruals were $2.4 million at year-end. The filing notes that accruals for certain sites were recorded at the low end of possible ranges; estimating at the high end would have added $16 million.
Investor verification priorities
- Track Airbus and Boeing production, deliveries, cancellations, and the pace of customer inventory normalization, especially for carbon fiber.
- Assess whether sales recovery can restore gross and operating margins after the 2020 decline, and distinguish GAAP results from management’s non-GAAP adjustments.
- Monitor liquidity and compliance with the amended credit agreement, including the $250 million minimum liquidity test and restrictions through March 2022.
- Evaluate the effects of the 35% headcount reduction, restructuring cash payments, and the Windsor facility closure on capacity and future cost structure.
- Review the assumptions behind the tax valuation-allowance release and the potential variability of deferred tax assets and environmental liabilities.