Hexcel Corporation — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. 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 statements are unaudited.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $412.3 million | $391.6 million | $1,251.4 million | $1,190.9 million |
| Gross margin | $112.1 million; 27.2% | $99.2 million; 25.3% | $340.9 million; 27.2% | $311.1 million; 26.1% |
| Operating income | $69.0 million; 16.7% margin | $60.0 million; 15.3% margin | $203.9 million; 16.3% margin | $194.5 million; 16.3% margin |
| Net income | $48.7 million | $39.8 million | $140.8 million | $127.4 million |
| Diluted EPS | $0.48 | $0.39 | $1.38 | $1.25 |
- Quarterly sales rose 5.3% year over year (4.2% in constant currency); nine-month sales rose 5.1% (4.4% in constant currency, per the results table). Management’s overview gives a different nine-month constant-currency figure of 4.6%.
- Q3 commercial aerospace sales increased 11.9%, space and defense 4.2%, while industrial sales declined 16.4%. New aircraft programs grew more than 20% in the quarter; wind sales were down about 25% in constant currency.
- Management attributed stronger gross margin to higher volume, favorable mix, and cost control. SG&A and research and technology spending increased as the company invested in growth, staffing, and product and process development.
- Interest expense was $1.9 million in Q3 and $5.7 million for nine months, down from $2.2 million and $8.2 million, respectively, primarily due to lower borrowing rates after refinancing.
Cash flow, liquidity, and debt
- Nine-month operating cash flow was $195.9 million, versus $150.5 million. Capital expenditures were $133.1 million, versus $208.9 million; reported free cash flow was $62.8 million, compared with a $58.4 million use in 2012.
- Cash was $59.7 million at September 30, 2013, compared with $32.6 million at year-end 2012. Total debt was $266.8 million; debt net of cash was $207.1 million, down $16.9 million from year-end.
- In June 2013, Hexcel refinanced with a $600 million senior secured revolving facility maturing in June 2018. At quarter-end, undrawn availability was $333.6 million after letters of credit; the company also had $4.8 million drawn on a China working-capital line. Hexcel reported covenant compliance and said it expected to remain compliant.
- The company repurchased $50 million of shares under its prior authorization. A further $150 million authorization was approved in July; no repurchases under that authorization had occurred by September 30.
Outlook, risks, and unusual items
- Hexcel expected 2013 accrual-basis capital expenditures of $180 million to $200 million, with spending expected to increase from the first nine months. It said short-term liquidity needs, including capital expenditures, would be met through operating cash flow, cash, and the revolving facility. No clear full-year revenue or earnings guidance is provided in the filing text.
- The Q3 effective tax rate was 27.9%; nine-month rate was 29.0%, versus 31.1% and 31.6% in 2012. The quarter included a $1.8 million benefit from tax return adjustments and release of uncertain-tax-position reserves; 2013 also benefited from U.S. R&D tax-credit extensions.
- The 2013 refinancing resulted in a $1.0 million pretax charge in Q2 for accelerated financing-cost amortization and deferred swap expense. Prior-year comparisons include a $9.6 million insurance recovery, $4.9 million land-sale gain, and $5.0 million environmental-reserve charge; these affected 2012 operating income.
- Environmental accruals totaled $4.2 million. Hexcel had committed to a proposed Lower Passaic River settlement requiring a $0.3 million payment, accrued in Q1, subject to court approval anticipated in Q4 2013; the company’s ultimate liability for the broader matter was not determinable. Management said existing litigation and claims were not expected to materially affect results, financial position, or cash flows, while noting uncertainties in environmental and other contingencies.
- Risks highlighted include aircraft production rates and program delays, changes in defense spending, industrial and wind demand, customer concentration, foreign-exchange and interest-rate movements, supply-chain disruption, manufacturing capacity constraints, competition, and environmental matters.
Important facts for investors to verify
- Reconcile the filing’s differing nine-month constant-currency sales growth figures: 4.4% in the results table versus 4.6% in the business overview.
- Track commercial aerospace growth against aircraft production and delivery rates, and assess whether industrial and wind demand stabilizes.
- Monitor execution and returns on planned capital spending, plus utilization of the new credit facility and compliance with its leverage and interest-coverage covenants.
- Follow court approval and payment of the proposed Passaic River settlement, and any changes to environmental reserves or other contingencies.
- Assess the effects of tax benefits and the 2012 unusual operating items when comparing underlying earnings across periods.