Hexcel Corporation — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. Financial statements are unaudited. Hexcel develops and manufactures advanced composite materials and engineered products, reported through Composite Materials and Engineered Products segments.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net sales | $399.2 million | $353.7 million | $799.3 million | $685.3 million |
| Operating income, GAAP | $73.9 million | $49.4 million | $134.5 million | $96.6 million |
| Net income | $48.0 million | $37.4 million | $87.6 million | $63.8 million |
| Diluted EPS | $0.47 | $0.37 | $0.86 | $0.63 |
| Gross margin | 26.4% | 24.6% | 26.5% | 24.8% |
- Quarterly sales rose 12.9% reported and 15.7% in constant currency; six-month sales rose 16.6% and 18.8%, respectively. Q2 adjusted operating income was $64.4 million, or 16.1% of sales, versus $49.4 million, or 14.0%, a year earlier. Adjusted net income was $42.7 million and adjusted diluted EPS was $0.42.
- Q2 end-market sales: Commercial Aerospace $233.5 million (+12.4%); Space & Defense $88.1 million (+7.8%); Industrial $77.6 million (+20.9%). Growth reflected new aircraft programs, rotorcraft and wind demand. Commercial Aerospace represented nearly 60% of sales.
- Six-month operating cash flow was $73.8 million versus $77.3 million. Capital expenditure cash outflow was $144.4 million versus $67.8 million; free cash flow, defined by the company as operating cash flow less capital expenditures, was a $70.6 million use of cash versus a $9.5 million source.
- At June 30, cash was $32.6 million. Total debt was $299.9 million and net debt was $267.3 million. Revolver availability was $158.8 million after $2.2 million of letters of credit. Current assets were $591.6 million and current liabilities $241.4 million.
Changes, unusual items and management commentary
- Reported Q2 operating income included a $9.6 million business-interruption insurance settlement and a $4.9 million land-sale gain, partly offset by a $5.0 million environmental-reserve charge. These netted to $9.5 million of operating income; adjusted results exclude these items. The 2011 six-month comparison included a $5.7 million U.K. pension curtailment gain.
- Q2 income tax expense was $22.1 million and the effective tax rate was 31.7%, versus 20.0% a year earlier. The prior-year quarter benefited from a $5.5 million release of tax reserves; excluding it, the 2011 rate was 31.8%.
- In June, Hexcel redeemed its remaining $73.5 million of 6.75% senior subordinated notes, funding the redemption and related costs through a $75 million revolving-facility add-on. A $1.1 million pretax charge resulted from the call premium and accelerated financing-cost amortization. Long-term debt increased to $280.7 million from $238.3 million at year-end 2011.
- Management expected 2012 accrual-basis capital expenditures of $250–$275 million and full-year free cash flow to be a use of $50–$75 million. It expected to fund near-term liquidity needs with operating cash flow, cash and the revolver. Industrial guidance assumed second-half 2012 sales similar to second-half 2011 because of economic uncertainty.
- Management cited capacity expansion and staffing to support growth. It reported compliance with debt covenants and expected continued compliance; minimum interest coverage is 4.00 and maximum leverage is 3.00. No significant required debt repayments were expected until September 2014, apart from scheduled term-loan amortization.
Risks and contingencies
- Risks include aircraft production or program delays, reduced demand from significant customers, defense-budget changes, industrial-market uncertainty, foreign-exchange and interest-rate movements, supply-chain disruption, capacity constraints, competition and the ability to execute expansions and maintain margins.
- Environmental accruals totaled $7.7 million. Hexcel accrued $4.4 million for additional Lodi remediation during Q2; the Lodi accrual was $5.3 million at June 30. For the Lower Passaic River, Hexcel accrued $0.5 million for its expected share of a sediment-removal project estimated at approximately $20 million for participating PRPs. Ultimate liability in that matter and certain other sites remains uncertain. Management stated that known contingent matters were not expected to have a material adverse effect, after insurance and amounts accrued.
- Management said disclosure controls were effective and there were no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether aircraft-program production, customer inventory adjustments and industrial demand support the reported sales growth and management’s outlook.
- Progress, spending and returns from the planned capacity expansion, including whether full-year capital spending and free-cash-flow expectations were met.
- Underlying operating performance excluding the insurance recovery, land-sale gain and environmental charge, and the sustainability of margin improvement.
- Debt, revolver availability and covenant headroom as borrowings fund investment and working-capital needs.
- Changes in environmental remediation estimates, particularly at Lodi and the Lower Passaic River, where ultimate exposure is uncertain.