Hexcel Corporation — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Unaudited consolidated results. Hexcel makes advanced composite materials and engineered products for Commercial Aerospace, Space & Defense, and Industrial markets.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $333.8 million | $286.9 million | $964.4 million | $1,206.6 million |
| Gross margin | $66.0 million; 19.8% | $13.5 million; 4.7% | $181.0 million; 18.8% | $209.3 million; 17.3% |
| Operating income (loss) | $22.8 million | $(37.6) million | $28.8 million | $34.5 million |
| Net income (loss) | $9.0 million | $9.7 million | $(2.8) million | $51.1 million |
| Diluted EPS | $0.11 | $0.12 | $(0.03) | $0.61 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $64.2 million | $157.0 million |
| Free cash flow (non-GAAP) | Not provided for quarter | Not provided for quarter | $49.2 million | $109.2 million |
Q3 sales rose 16.3% year over year; nine-month sales fell 20.1%. Q3 gross-margin recovery reflected favorable sales mix, particularly carbon fiber, and a lower overhead cost base. Nine-month operating income declined 16.5%. Nine-month results include $16.0 million of other operating expense, primarily restructuring, partly offset by a contingent-liability reduction benefit. Comparisons are affected by the pandemic’s differing timing and by prior-year restructuring and merger-related charges.
Markets and segments
- Commercial Aerospace: Q3 sales increased 29.8% to $167.2 million, supported by stronger narrowbody sales; nine-month sales fell 32.6% to $468.5 million.
- Space & Defense: Q3 sales increased 1.5% to $110.4 million; nine-month sales were essentially flat at $329.0 million.
- Industrial: Q3 sales increased 14.0% to $56.2 million, while nine-month sales declined 8.4% to $166.9 million. Wind-energy sales remained weak; automotive and recreation markets improved.
- Q3 operating income was $30.0 million for Composite Materials and $6.5 million for Engineered Products. Corporate and other costs were $13.7 million.
Cash, debt and liquidity
At September 30, 2021, cash was $105.8 million, total debt was $877.3 million and long-term debt was $876.4 million. Cash increased from $103.3 million at year-end 2020, while total debt declined from $926.4 million. The revolving facility had $179.0 million drawn and $571 million of undrawn availability; no letters of credit were outstanding. Current assets were $619.9 million and current liabilities were $224.9 million.
For the first nine months, operating cash flow was $64.2 million, down from $157.0 million; working capital used $46.0 million of cash, versus a $28.7 million source in 2020. Capital expenditures were $15.0 million, compared with $47.8 million. Financing activities used $44.8 million. The filing reports no significant scheduled debt maturities before the facility’s June 2024 maturity.
Outlook, commentary and risks
- Management said COVID-19 was expected to continue negatively affecting results, cash flows and financial position; the financial impact could not be reasonably estimated. The filing gives no specific revenue or earnings guidance.
- The January 2021 facility amendment requires at least $250 million of defined liquidity through March 31, 2022, in place of the maximum leverage covenant. It also restricts share repurchases, dividends and certain secured debt, and increases borrowing margins and commitment fees. Hexcel reported compliance with covenants at September 30, 2021. The filing states a public debt rating of BB+/Baa3.
- Hexcel was approved for up to $20.9 million under the Aviation Manufacturing Jobs Protection program, with approximately half expected in Q4 2021 and the remainder in 2022.
- Key risks include pandemic-related aircraft demand and production changes, customer inventory destocking, supply-chain and raw-material availability or cost, labor availability, and potential vaccination or testing requirements. The company also identifies customer concentration, aircraft build rates, defense budgets, industrial-market demand, currency, cybersecurity and regulatory risks.
- Environmental matters include the Lower Passaic River proceedings. Hexcel accrued approximately $2.1 million for that site; total environmental accruals were $2.2 million. The EPA’s estimated remediation costs for the river are not Hexcel’s allocated share. The company cautions that environmental accruals may change; at certain sites, accruing at the high end of estimated ranges would have increased reserves by $16 million.
Most important facts to verify
- Whether Commercial Aerospace recovery and aircraft production rates continued after quarter-end, and how inventory destocking affected orders.
- Whether operating cash flow and working-capital use improved, and whether the company maintained the facility’s defined liquidity minimum.
- Timing and receipt of the AMJP funds, and the use of proceeds.
- Restructuring cash payments, including the $10.3 million accrued at quarter-end, and the sustainability of the Q3 margin improvement.
- Developments in Lower Passaic River claims and other environmental matters that could change the recorded accruals.