Hexcel Corporation — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; filed February 18, 2020. This is an annual report, not a standalone Q4 filing. Hexcel develops and manufactures advanced composite materials and structures for Commercial Aerospace, Space & Defense, and Industrial markets.
Financial performance
| Metric | FY 2019 | FY 2018 | Change |
|---|---|---|---|
| Net sales | $2,355.7 million | $2,189.1 million | +7.6% (+8.6% constant currency) |
| Gross margin | $640.4 million; 27.2% | $580.8 million; 26.5% | Margin +0.7 percentage points |
| Operating income | $425.2 million; 18.0% of sales | $371.2 million; 17.0% of sales | +14.5% |
| Net income | $306.6 million | $276.6 million | +10.8% |
| Diluted EPS | $3.57 | $3.11 | +14.8% |
| Operating cash flow | $491.1 million | $421.4 million | +$69.7 million |
| Capital expenditures, cash basis | $204.1 million | $184.1 million | +$20.0 million |
| Free cash flow (non-GAAP) | $287.0 million | $237.3 million | +$49.7 million |
At year-end, cash was $64.4 million, total debt was $1,060.1 million, and net debt was $995.7 million. Working capital was $382.3 million. The $1.0 billion revolving facility had $687.0 million available; Hexcel reported compliance with its debt covenants. Interest expense rose to $45.5 million from $37.7 million.
Fourth-quarter results: sales were $564.3 million versus $561.0 million; operating income was $97.4 million versus $95.8 million; net income was $73.2 million versus $66.1 million; diluted EPS was $0.86 versus $0.76. The filing does not provide a separate fourth-quarter cash-flow figure.
Business and material changes
- Commercial Aerospace represented 68% of FY 2019 sales, Space & Defense 19%, and Industrial 13%. Airbus and Boeing and their subcontractors together accounted for approximately 64% of consolidated sales.
- Commercial Aerospace sales grew 4.8%; Space & Defense grew 20.2%, largely reflecting the ARC acquisition and broad program growth; Industrial grew 6.5%, including 20.1% growth in wind energy.
- Composite Materials sales were $1,863.1 million, up 5.2%; Engineered Products sales were $492.6 million, up $74.0 million. Segment operating income rose to $411.3 million and $72.0 million, respectively.
- Hexcel acquired ARC Technologies for $163.2 million in January 2019, expanding its RF/EMI and microwave-absorbing materials business. The acquisition contributed to higher goodwill and intangible assets.
- Capital spending was $204.1 million in cash; accrual-basis capital expenditures were $191.0 million. The company repurchased $143.0 million of shares and paid $54.2 million in dividends during 2019.
Outlook, risks and unusual items
- The filing gives no specific numerical 2020 revenue or earnings guidance. Management cited aircraft production rates, new-program ramps, capacity expansion, margins, working capital, and capital expenditures as key uncertainties.
- The Boeing 737 MAX grounding reduced aircraft deliveries; Boeing suspended production in January 2020. A prolonged production interruption or delayed return to service could materially affect Hexcel. Airbus and Boeing’s combined year-end backlog was 13,107 aircraft, but backlog does not guarantee delivery timing or Hexcel sales.
- Other major risks include customer concentration, cyclical aerospace demand, dependence on limited-source raw materials, supply disruptions, pricing and margin pressure, foreign exchange, international trade and regulatory changes, cybersecurity, and environmental requirements. The filing also identified the coronavirus outbreak in China as a potential risk.
- On January 12, 2020, Hexcel agreed to an all-stock merger of equals with Woodward. Hexcel shareholders would receive 0.625 Woodward shares per Hexcel share; anticipated ownership was approximately 45% for Hexcel shareholders and 55% for Woodward shareholders. Closing was expected in Q3 2020, subject to shareholder, regulatory, and other approvals. Certain termination circumstances could require a $250 million fee.
- Environmental accruals totaled $2.5 million; management said accruals could have been $16 million higher using the high end of estimable ranges. The company accrued $2.0 million for the Lower Passaic River matter, whose site-wide EPA remedy estimate for the lower eight miles was $0.97–$2.07 billion; Hexcel’s ultimate share remains uncertain.
- FY 2018 included a $7.7 million restructuring charge and tax benefits that affect comparisons. The 2019 effective tax rate was 20.2% (21.0% excluding identified discrete items), versus 18.8% in 2018 (22.0% adjusted).
Investor verification points
- Track the 737 MAX production and return-to-service schedule, aircraft build rates, and resulting Hexcel orders and sales.
- Review merger approval, closing conditions, integration costs, expected benefits, and any developments affecting the Woodward transaction.
- Assess whether operating cash flow and free cash flow can sustain planned capital investment, dividends, buybacks, and debt reduction.
- Monitor Airbus/Boeing concentration, ARC integration and returns, and Engineered Products program ramp-up margins.
- Check environmental remediation developments and tax-audit outcomes, including whether recorded reserves remain adequate.
Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting.