Hexcel Corporation — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Unaudited consolidated results; amounts are in U.S. dollars unless noted. Hexcel develops and manufactures advanced composite materials and engineered products for commercial aerospace, space and defense, and industrial markets.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net sales | $422.6 million | $399.2 million | $839.1 million | $799.3 million |
| Gross margin | $116.8 million; 27.6% | $105.5 million; 26.4% | $228.8 million; 27.3% | $211.9 million; 26.5% |
| Operating income | $71.9 million; 17.0% | $73.9 million; 18.5% | $134.9 million; 16.1% | $134.5 million; 16.8% |
| Net income | $48.5 million | $48.0 million | $92.1 million | $87.6 million |
| Diluted earnings per share | $0.48 | $0.47 | $0.90 | $0.86 |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $108.2 million | $73.8 million |
Quarterly sales rose 5.9% (5.2% in constant currency); first-half sales rose 5.0% (4.6% in constant currency). Adjusted operating income, a non-GAAP measure, was $71.9 million for Q2 and $134.9 million for the first half, versus $64.4 million and $125.0 million, respectively, in 2012. Adjusted operating margins were 17.0% and 16.1%, versus 16.1% and 15.6%.
Interest expense was $2.1 million for Q2 and $3.8 million for the first half, down from $3.0 million and $6.0 million. Effective tax rates were 29.9% for Q2 and 29.6% for the first half, compared with 31.7% and 31.8% in 2012.
Markets, cash flow and financial position
- End markets: Q2 commercial aerospace sales increased 15.6% to $270.0 million; space and defense increased 9.8% to $96.7 million; industrial sales fell 28.0% to $55.9 million, as wind sales declined from a record prior-year quarter. First-half changes were +13.3%, +11.4%, and -28.6%, respectively.
- Cash and investment: Cash and equivalents were $56.7 million at June 30, versus $32.6 million at year-end. First-half capital expenditures were $92.0 million, compared with $144.4 million; free cash flow, defined by the company as operating cash flow less capital expenditures, was $16.2 million versus a use of $70.6 million.
- Debt and liquidity: Total debt was $314.0 million and net debt was $257.3 million at June 30. The company had $288.4 million of undrawn availability under its new revolving facility, after letters of credit, plus a $5.0 million China working-capital line. Current assets were $626.3 million and current liabilities $213.7 million.
- Equity return: Hexcel completed its $50 million share repurchase authorization in the first half, buying 1,573,588 shares. On July 22, 2013, the board authorized an additional $150 million repurchase program.
Material changes and unusual items
Q2 GAAP operating income declined 2.7%, although adjusted operating income increased 11.6%. The comparison reflects $9.6 million of business-interruption insurance proceeds and a $4.9 million land-sale gain in 2012, partly offset by a $5.0 million environmental-reserve charge that year. Q2 2013 included a $1.0 million pretax charge from accelerated financing-cost and interest-rate-swap expense associated with refinancing; the charge was less than $0.01 per diluted share after tax.
In June 2013, Hexcel replaced its prior credit agreement with a $600 million senior secured revolving facility maturing in June 2018. Management said the facility offers lower rates and greater flexibility and estimated first-year interest-cost savings of nearly $2.5 million, with payback in under a year. The company reported covenant compliance at June 30 and expected to remain compliant. The facility requires minimum interest coverage of 3.50 and maximum leverage of 3.50.
Outlook, commentary and risks
- Management expects 2013 accrual-basis capital expenditures of $180–$200 million to expand capacity. It expects an effective tax rate of about 30.5% for the rest of 2013. The filing provides no clear full-year revenue or earnings forecast.
- Management attributed improved gross margin to higher volume, cost control and favorable mix. It noted increased SG&A investment and research and technology spending to support growth and product and process development.
- Risks highlighted include aircraft production rates and program delays, dependence on major customers, changes in defense budgets, weaker industrial and wind demand, foreign-exchange and interest-rate movements, capacity execution, supply-chain constraints, competition, and changes in economic conditions.
- Environmental matters include an aggregate environmental accrual of $5.7 million at June 30; the filing says the reserve would be $1.5 million higher at the high end of applicable ranges. Hexcel committed to a proposed Lower Passaic River settlement requiring $0.3 million if approved; its ultimate liability for the broader river matter remains undetermined. Management stated that known contingencies were not expected to have a material adverse effect, while acknowledging uncertainty.
Important facts for investors to verify
- Whether commercial aerospace growth and new-aircraft-program ramp-ups continue, and whether industrial and wind sales stabilize.
- Whether capacity expansion proceeds within the stated capital-spending range and supports margins and customer demand.
- Actual borrowing costs, facility availability, covenant headroom and net-debt trends following the refinancing and additional repurchase authorization.
- Developments in environmental proceedings, particularly approval and terms of the Lower Passaic River settlement and changes to environmental reserves.
- Reconciliation of non-GAAP adjusted results to GAAP results, including the impact of prior-year special items and the 2013 refinancing charge.