Hexcel Corporation — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Financial statements are unaudited. Dollar amounts are in millions except per-share data.
Business context and results
Hexcel makes advanced composite materials and engineered products for commercial aerospace, space and defense, and industrial markets. Results benefited from growth across all three markets and the January 2019 acquisition of ARC Technologies.
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Net sales | $609.0 | $547.5 | $1,218.9 | $1,087.6 |
| Gross margin | $168.8; 27.7% | $144.8; 26.4% | $336.0; 27.6% | $287.4; 26.4% |
| Operating income | $115.1; 18.9% margin | $96.5; 17.6% margin | $217.9; 17.9% margin | $178.9; 16.4% margin |
| Net income | $80.9 | $68.8 | $153.1 | $130.4 |
| Diluted EPS | $0.94 | $0.76 | $1.78 | $1.44 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $157.2 | $157.2 |
| Capital expenditures (cash basis) | Not provided for quarter | Not provided for quarter | $99.3 | $101.9 |
| Free cash flow | Not provided for quarter | Not provided for quarter | $57.9 | $55.3 |
Financial position and liquidity
- At June 30, 2019, cash was $55.4, total debt was $1,125.5, and debt net of cash was $1,070.1. Net debt was $924.1 at December 31, 2018.
- Current assets were $798.1 and current liabilities $359.7. Inventories were $339.3, up from $297.8 at year-end; accounts receivable was $313.3, up from $260.9.
- Operating cash flow was unchanged year over year for the first half, while working capital used $82.7 of cash versus $60.2 in the comparable 2018 period. Management attributed the increase to business growth.
- Investing cash use was $262.5, including $163.2 for ARC. Financing provided $128.2, largely reflecting facility borrowing. Dividends and share repurchases returned $36.7 to shareholders.
- Hexcel refinanced its revolving facility in June, increasing capacity from $700 to $1 billion and extending maturity to June 2024. Borrowings were $378; $622 was undrawn. Management said short-term liquidity needs, including capital expenditures, are expected to be met by operating cash flow, cash on hand, and the facility.
Changes and management commentary
- Q2 sales increased 11.2% reported and 12.1% in constant currency; first-half sales increased 12.1% and 13.5%, respectively. Q2 operating income rose 19.3%, net income 17.6%, and diluted EPS 23.7% versus Q2 2018.
- Commercial Aerospace sales grew 8.5% in Q2, led by the A320neo, B787, and A350. Space & Defense grew 21.9%, primarily on Joint Strike Fighter demand and including ARC sales. Industrial grew 12.1%; wind energy sales increased 37.9% as newer, higher-composite-content blade programs ramped.
- Management attributed the higher gross margin to the absence of 2018 headwinds, including acrylonitrile and wind-energy resin pricing. SG&A remained controlled as a share of sales; research and technology spending rose 9.2% in Q2 as the company continued investment in composite innovation.
- ARC was acquired for $163.2 in January. The acquisition added $82.1 of goodwill and approximately $63.0 of intangible assets, primarily in Engineered Products. Higher debt associated with the acquisition contributed to increased interest expense.
Outlook, risks, and unusual items
- Management expects 2019 accrual-basis capital expenditures of $170–$190. The underlying estimated effective tax rate is expected to remain 24%. The filing provides no specific revenue or earnings guidance.
- Management cited uncertainty related to the Boeing 737 MAX, including potential production or delivery reductions. Other forward-looking risks include aircraft production rates and program ramps, defense budgets, customer concentration, raw-material costs and supply disruptions, currency movements, trade policy, Brexit, and capacity execution.
- Environmental accruals totaled $2.6 at June 30. The company stated that accruals for estimable sites would have been approximately $16 higher if recorded at the high end of possible outcomes. Hexcel is a defendant in cost-recovery litigation concerning the Lower Passaic River; its $2.1 accrual for that matter may not reflect ultimate responsibility. Management believes pending legal matters, after insurance and recorded amounts, will not materially affect consolidated results, financial position, or cash flows.
- The revolving facility requires a minimum interest-coverage ratio of 3.50 and a maximum leverage ratio of 3.75, with a temporary increase to 4.25 permitted following a significant acquisition. Environmental exposures, derivative fair values, and forecasted customer demand are subject to estimation and uncertainty.
- Operating leases recognized under the new lease standard added approximately $67.2 of right-of-use assets and $67.6 of related liabilities at June 30. The filing also reports foreign-exchange hedge losses affecting OCI and gross margin.
Most important facts for investors to verify
- Whether aircraft production and deliveries, particularly the 737 MAX, support the reported aerospace growth and future demand.
- How much of Engineered Products’ growth and future profitability is attributable to ARC, and the acquisition’s eventual contribution relative to its purchase cost and added debt.
- Whether working-capital investment and planned capital spending remain manageable while operating cash flow is flat year over year.
- Compliance headroom under facility leverage and interest-coverage covenants as debt and interest expense rise.
- Potential changes to environmental exposure, particularly the Passaic River allocation and litigation, and the adequacy of recorded reserves.