Hexcel Corporation — Q1 2017 Form 10-Q
Business context and reporting period. Hexcel develops and manufactures advanced composite materials and engineered products for commercial aerospace, space and defense, and industrial markets. This unaudited report covers the quarter ended March 31, 2017; comparisons are with Q1 2016 unless noted.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $478.8 million | $497.7 million | Down 3.8% (2.6% in constant currency) |
| Gross margin | $134.1 million; 28.0% | $143.0 million; 28.7% | Down 6.2% |
| Operating income | $78.6 million; 16.4% margin | $83.9 million; 16.9% margin | Down 6.3% |
| Net income | $64.6 million | $56.0 million | Up 15.4% |
| Diluted EPS | $0.70 | $0.59 | Up 18.6% |
| Adjusted net income (non-GAAP) | $55.5 million | $56.0 million | Down 0.9% |
| Adjusted diluted EPS (non-GAAP) | $0.60 | $0.59 | Up 1.7% |
| Operating cash flow | $54.2 million | $10.3 million | Increase of $43.9 million |
| Capital expenditures, cash basis | $85.5 million | $85.4 million | Substantially unchanged |
| Free cash flow (non-GAAP) | Use of $31.3 million | Use of $75.1 million | Improved by $43.8 million |
Net income included a $9.1 million discrete tax benefit from releasing a foreign-jurisdiction valuation allowance. Excluding this item, adjusted net income was $55.5 million. The reported effective tax rate was 11.9%; management cited 24.4% excluding the discrete benefit and said the full-year rate expectation was approximately 30%.
At March 31, cash was $82.1 million, total debt was $841.2 million, and debt net of cash was $759.1 million, versus $653.5 million at year-end 2016. The company had $614.8 million available under its $700 million revolving credit facility and reported compliance with debt covenants. Current assets were $686.8 million and current liabilities were $274.8 million.
Material changes and operating trends
- Commercial Aerospace sales were $347.2 million, down 0.9%; growth in the A350 and new narrowbody programs was offset by lower sales on legacy widebodies, including the A380, B777, and B747.
- Space & Defense sales were $76.7 million, down 3.3%. Civil rotorcraft demand remained at historically low levels.
- Industrial sales were $54.9 million, down 19.4%; wind energy sales declined more than 25%.
- Composite Materials sales fell 2.1% to $387.5 million; Engineered Products sales fell 10.4% to $91.3 million. Composite Materials operating income decreased, while Engineered Products operating income increased.
- SG&A declined $4.5 million, reflecting cost control; research and technology expense increased $0.9 million as the company continued product development investment.
- Operating cash flow improved as working-capital usage narrowed to $40 million from $91 million. Capital spending remained substantial, and accrual-basis additions to property, plant and equipment rose to $92.9 million from $73.3 million.
Outlook, risks, and unusual items
- Management expects 2017 accrual-basis capital expenditures of $270 million to $290 million, primarily for capacity supporting planned aerospace program ramps. It described sales as likely to be more evenly distributed by quarter in 2017.
- Management expects wind energy sales to be challenging in 2017, but expects 2018 wind energy sales to exceed 2016 levels as customers shift to longer, higher-efficiency blades with more composite content. These are forward-looking expectations, not guarantees.
- In February, Hexcel issued $400 million of 3.95% senior notes due 2027. Proceeds were used primarily to repay revolving-facility borrowings, with the remainder for general purposes including share repurchases. Q1 share repurchases were $63.7 million; the board also authorized a new $300 million repurchase plan.
- Environmental liabilities include the Lower Passaic River matter. The company accrued $2.0 million for that matter and reported total environmental accruals of $3.1 million. The EPA’s estimated remedy cost for the lower eight miles of the river is $0.97 billion to $2.07 billion; Hexcel’s share has not been determined. For certain sites, accruals were at the low end of estimated ranges and could have been $16 million higher if accrued at the high end.
- Other cited risks include aircraft production-rate changes, customer concentration, delays in program ramps, industrial-market weakness, foreign-exchange and interest-rate movements, supply constraints, environmental requirements, and legal or remediation outcomes. Management said there were no material changes in market risk from the 2016 Form 10-K.
Important facts for investors to verify
- Whether aerospace program growth offsets continuing declines in legacy widebody, civil rotorcraft, and industrial demand.
- Progress on the France and Morocco facilities, customer qualification and capacity ramp-ups, and whether 2017 capital spending stays within the stated range.
- Cash generation and working-capital needs alongside ongoing share repurchases, dividends, and increased debt.
- The normalized tax rate and earnings trend after the $9.1 million one-time tax benefit.
- Future estimates of Hexcel’s share of environmental remediation costs, particularly for the Lower Passaic River.