Hexcel Corporation — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Hexcel makes advanced composite materials and engineered products serving Commercial Aerospace, Space & Defense, and Industrial markets. Results were significantly affected by the COVID-19 pandemic and lower aircraft production.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $286.9 million | $572.5 million | $1,206.6 million | $1,791.4 million |
| Gross margin | $13.5 million; 4.7% | $157.9 million; 27.6% | $209.3 million; 17.3% | $493.9 million; 27.6% |
| Operating income (loss) | $(37.6) million | $109.9 million | $34.5 million | $327.8 million |
| Net income | $9.7 million | $80.3 million | $51.1 million | $233.4 million |
| Diluted EPS | $0.12 | $0.93 | $0.61 | $2.71 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $157.0 million | $277.3 million |
| Capital expenditures | Not stated for quarter | Not stated for quarter | $47.8 million | $162.7 million |
- Q3 sales fell 49.9%; nine-month sales fell 32.6%. Commercial Aerospace sales declined 66.6% for the quarter and 42.9% year to date. Space & Defense was nearly flat year to date; Industrial sales declined 25.4% year to date.
- Lower demand and unfavorable mix, including lower carbon-fiber sales, sharply reduced gross margin. Lower volume also caused under-absorption of fixed overhead. SG&A and research and technology costs fell as cost-cutting measures took effect.
- Q3 net income included a $46.2 million tax benefit, primarily from releasing a valuation allowance. Excluding specified operating costs and discrete tax items, Hexcel reported a non-GAAP adjusted Q3 net loss of $24.3 million, or $0.29 per diluted share; nine-month adjusted net income was $35.9 million, or $0.43 per diluted share.
- Net cash from operations was $157.0 million for nine months, versus $277.3 million. The filing’s free-cash-flow reconciliation defines the measure as operating cash flow less capital expenditures and reports $109.2 million for 2020 versus $114.6 million in 2019. One narrative passage calls 2020 free cash flow a “use” of $109.2 million, which conflicts with that calculation.
Liquidity, debt, and balance sheet
- At September 30, 2020, cash was $68.0 million and total debt was $999.2 million; debt net of cash was $931.2 million, down from $995.7 million at year-end 2019.
- The $1 billion revolving credit facility had $302 million drawn and $698 million undrawn, subject to covenant compliance. The next significant scheduled debt maturity is the facility’s June 2024 expiration. Senior notes include $300 million due 2025 and $400 million due 2027.
- A September facility amendment provides covenant relief from October 1, 2020 through September 30, 2021, with stepped leverage limits. It also restricts share repurchases, limits certain secured borrowing, and may increase borrowing costs. Management said it expected to meet short-term liquidity needs with operating cash flow, cash on hand, and facility availability.
- Cash from operations was supported by $28.7 million of working-capital generation. Capital spending was substantially lower than in 2019, which included expansion spending and the ARC Technologies acquisition.
Material changes, outlook, and risks
- COVID-19 reduced air travel, aircraft build rates, customer demand, and supply-chain inventory levels. Management said the pandemic’s continuing financial impact could not be reasonably estimated and expected further adverse effects on results, cash flows, and financial position.
- Hexcel reported eliminating approximately 30% of labor costs, reducing discretionary spending, and suspending dividends and stock repurchases to align costs with lower sales and preserve liquidity. No dividend was declared for Q3; the nine-month dividend was $0.17 per share versus $0.47 in 2019.
- The company recorded $15.8 million of Q3 other operating expense, including $9.4 million of asset impairments associated with the planned Windsor, Colorado facility closure and severance. Nine-month other operating expense was $43.6 million, including restructuring and costs related to the terminated Woodward merger. Anticipated future cash payments for these items were $4.7 million at September 30.
- Hexcel and Woodward terminated their proposed all-stock merger on April 5, 2020. A stockholder rights plan adopted in April was not exercisable as of September 30 and was set to expire April 6, 2021.
- The company planned to close its Windsor wind-energy prepreg facility in early November 2020; facilities in Austria and China continued serving their respective markets. Management cited uncertainty in commercial aerospace recovery, customer build rates and inventory destocking, supply-chain disruption, defense demand, and industrial markets as key risks.
- Environmental accruals totaled $2.5 million. The company noted that the recorded amount could be approximately $16 million higher if certain estimated liabilities were accrued at the high end of possible ranges. Litigation and environmental outcomes remain uncertain; management did not expect currently pending matters to materially affect consolidated results, financial position, or cash flows.
Important facts for investors to verify
- How commercial-aircraft production rates, including Airbus and Boeing programs and the 737 MAX, and supply-chain destocking affect revenue recovery and margins.
- Whether operating cash flow and the $698 million of facility availability remain adequate as demand evolves, and whether Hexcel complies with amended leverage covenants and borrowing restrictions.
- The drivers of the large tax benefit and the difference between GAAP earnings and adjusted results; the filing says the 2020 effective tax rate is not meaningful.
- The free-cash-flow wording discrepancy: the filing’s stated definition and reconciliation yield positive free cash flow of $109.2 million, while one narrative passage calls it a use.
- Potential changes in restructuring costs, facility-closure cash payments, environmental liabilities, and the status and effect of the covenant-relief period.