Business Context and Reporting Period
Company: Hexcel Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2009
Business Overview: Hexcel is a leading advanced composites company manufacturing lightweight, high-performance materials for commercial aerospace, space and defense, and industrial applications (including wind energy). The company operates two segments: Composite Materials and Engineered Products.
Key Financial Metrics
| Metric (in millions) | Q2 2009 | Q2 2008 | 6 Months 2009 | 6 Months 2008 |
|---|---|---|---|---|
| Net Sales | $277.3 | $359.5 | $584.6 | $704.0 |
| Gross Margin | $63.1 (22.8%) | $76.1 (21.2%) | $140.1 (24.0%) | $156.2 (22.2%) |
| Operating Income | $29.7 (10.7%) | $29.3 (8.2%) | $69.6 (11.9%) | $65.7 (9.3%) |
| Net Income | $16.8 | $26.7 | $40.2 | $49.9 |
| Diluted EPS | $0.17 | $0.27 | $0.41 | $0.51 |
| Cash from Operations (6mo) | $69.9 (vs. -$5.5 use in 2008) | |||
| Free Cash Flow (6mo) | $22.0 (vs. -$92.0 use in 2008) | |||
| Cash & Equivalents | $72.6 (as of June 30, 2009) | |||
| Total Debt | $404.0 (as of June 30, 2009) |
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 22.9% in Q2 and 17.0% for the six months ended June 30, 2009, compared to the prior year. On a constant currency basis, the declines were 18.7% and 12.3%, respectively. The drop is attributed to supply chain inventory adjustments, a rapid decline in the regional and business aircraft markets, and delays in new aircraft programs.
- Margin Expansion: Despite lower sales volumes, operating margins improved significantly (from 8.2% to 10.7% in Q2). This was driven by cost reduction initiatives, headcount reductions (12% lower than the previous summer peak), favorable product mix, and a stronger U.S. Dollar against the Euro and British Pound.
- Net Income: Net income decreased 37.1% in Q2 and 19.4% for the six-month period, primarily due to the revenue decline, partially offset by the margin improvements.
- Working Capital: Significant cash generation from working capital occurred, with $37.4 million generated from reductions in accounts receivable and inventories, contrasting with a $63.8 million cash use in the same period of 2008.
Guidance, Outlook, and Risks
- Outlook: Management expects the third quarter to be the low point of the year due to reduced commercial aerospace and wind demand combined with seasonal slowdowns. The company is aggressively reducing plant schedules to match demand.
- Capital Expenditures: Capital spending plans have been moderated. The company expects to spend less than $100 million in 2009 and less than $125 million in 2010. Capital expenditures for the first six months of 2009 were $47.9 million.
- Free Cash Flow Target: The company is targeting over $40 million of free cash flow for the full year 2009.
- Debt Refinancing: On May 21, 2009, Hexcel entered a new $300 million Senior Secured Credit Facility ($175 million term loan, $125 million revolving). This refinanced the previous facility. As of June 30, 2009, undrawn availability was $112.5 million.
- Risks and Contingencies:
- Market Risks: Uncertainty regarding 2010 aircraft build rates and the financial ability of airline operators to acquire backlog aircraft due to the credit environment.
- Wind Energy: Demand is flat due to financing issues facing wind generator customers, though policy changes (American Recovery and Reinvestment Act) may help restart order flow.
- Environmental: Accrued liabilities for environmental remediation (Lodi, NJ; Kent, WA; etc.) totaled $9.4 million. The company faces potential liability in the Lower Passaic River study, though ultimate liability cannot be determined.
- Legal: Ongoing patent infringement litigation with Gurit regarding HexFIT prepreg in the wind energy market.
Investor Verification Checklist
- Debt Covenants: Verify continued compliance with the new Senior Secured Credit Facility covenants (minimum interest coverage ratio of 4.00 and maximum leverage ratio of 2.75).
- Aircraft Backlog: Monitor Airbus and Boeing delivery schedules and backlog deferrals, as Hexcel ships approximately six months in advance of aircraft delivery.
- Wind Energy Financing: Track the impact of U.S. government tax credits and cash grants on the restart of wind energy project funding.
- Environmental Accruals: Review updates on the Lodi, NJ remediation costs and the Lower Passaic River study, as these could result in additional charges.
- Cost Structure: Assess the sustainability of the improved operating margins given the significant headcount reductions and the potential for further volume declines in the business jet sector.