Hexcel Corporation — Q1 2022 Form 10-Q
Reporting period: Quarter ended March 31, 2022. Hexcel manufactures advanced composite materials and engineered products for commercial aerospace, space and defense, and industrial markets. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Financial performance
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Net sales | $390.6 | $310.3 |
| Gross margin | $86.7; 22.2% of sales | $53.1; 17.1% of sales |
| Operating income (loss) | $30.1; 7.7% of sales | $(10.2); (3.3)% of sales |
| Net income (loss) | $17.8 | $(14.0) |
| Diluted EPS | $0.21 | $(0.17) |
| Net cash used for operating activities | $(19.0) | $(1.2) |
| Capital expenditures | $20.9 | $4.9 |
| Free cash flow (non-GAAP) | $(39.9) | $(6.1) |
Sales rose 25.9% year over year, or 27.4% in constant currency. Commercial Aerospace sales increased 48.3% to $218.9; Space & Defense increased 5.8% to $118.2; and Industrial increased 4.9% to $53.5. Composite Materials sales grew 32.3% to $313.8, while Engineered Products sales grew 5.1% to $76.8.
Management attributed the gross-margin improvement mainly to higher sales and better capacity utilization and cost absorption. Operating income also benefited from higher sales and lower restructuring costs. Interest expense declined 11.7% to $9.1, primarily due to lower average debt levels. Q1 2021 included a $3.2 tax benefit from a favorable U.S. state tax law change.
Balance sheet and liquidity
At March 31, 2022, cash and cash equivalents were $112.8, down from $127.7 at year-end 2021. Total debt was $858.2, up from $823.3; long-term debt was $857.5. The company had $160.0 drawn on its senior unsecured credit facility and $590.0 of undrawn availability. Current assets were $684.4 and current liabilities $247.1.
Operating cash use reflected a $74.3 working-capital outflow, primarily from higher receivables and inventory supporting increased sales. Cash used in investing was $20.9, including higher capital spending on the Morocco facility expansion and Salt Lake City research and technology center. Financing provided $25.9, including $35.0 of facility borrowings; the company also paid $8.5 in dividends.
The facility’s temporary liquidity covenant and related share-repurchase restrictions ended March 31, 2022. Original facility terms were reinstated effective April 1, 2022, with borrowing capacity remaining at $750 million. Hexcel reported compliance with debt covenants at March 31. It stated that no significant required debt repayments were due before the facility’s June 2024 maturity.
Outlook, risks and notable items
The filing provides no specific 2022 revenue, earnings, or margin guidance. Management said commercial aerospace recovery continued in Q1 2022, with air travel improving and customer inventory destocking largely completed. It nevertheless cautioned that pandemic effects could continue to disrupt operations, supply chains, transportation, and customers and pressure margins.
Management was monitoring the Russia-Ukraine conflict and related sanctions, export controls, energy prices, inflation, raw-material availability, and possible effects on the global economy and aerospace industry. Other disclosed risks include aircraft production-rate changes, dependence on major aerospace customers, supply-chain and labor constraints, raw-material cost and availability, currency fluctuations, and execution of capacity expansions.
Hexcel reinstated its quarterly dividend in Q1, paying $0.10 per share. The board declared another $0.10-per-share dividend on April 25, payable May 13, 2022, to shareholders of record May 6. The company expected to receive the remaining portion of up to $20.9 in approved Aviation Manufacturing Jobs Protection program funding during 2022; it had received $10.5 in 2021.
A sale of the Dublin, California facility was expected in Q2 2022, with certain research and technology personnel and equipment moving to a new Salt Lake City facility. Approximately $13.2 of assets were held for sale at quarter-end, including assets associated with the previously closed Windsor, Colorado wind-energy facility. Q1 restructuring charges were $0.8, primarily severance, with $3.8 of anticipated future cash payments remaining.
Environmental accruals were $7.2 at March 31, compared with $2.1 at year-end. Hexcel is among the parties involved in Lower Passaic River remediation litigation; the filing describes substantial estimated project costs but says the company believes its environmental liabilities will not be material. Hexcel also stated that pending legal matters, after insurance and recorded provisions, were not expected to materially affect results, financial position, or cash flows. These assessments are subject to change.
Most important facts for investors to verify
- Whether commercial aerospace recovery and sales growth persist, and whether higher volume continues to improve margins amid inflation and supply constraints.
- Whether working-capital investment and capital spending moderate and operating cash flow improves from its Q1 outflow.
- Debt, covenant compliance, and liquidity under the facility terms reinstated April 1, 2022.
- Timing and proceeds of the Dublin facility sale, relocation costs, and receipt of remaining AMJP funding.
- Developments in Lower Passaic River and other environmental matters, and any resulting changes to the $7.2 environmental accrual.
- Effects of COVID-19, Russia-Ukraine-related disruptions, aircraft production rates, and customer demand on operations and outlook.