Hexcel Corporation — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The filing also reports fourth-quarter results; this is an annual report, not a standalone quarterly filing. Hexcel develops and manufactures advanced composite materials and engineered components, principally for aerospace, defense and industrial markets.
Financial performance and position
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Net sales | $1,861.2 million | $1,855.5 million | Up 0.3% reported; up 3.6% in constant currency |
| Gross margin | $532.8 million; 28.6% | $508.8 million; 27.4% | Margin up 1.2 percentage points |
| Operating income | $332.4 million; 17.9% | $305.8 million; 16.5% | Up 9%; 2014 included a $6.0 million environmental charge |
| Net income | $237.2 million | $209.4 million | Up 13% |
| Diluted EPS | $2.44 | $2.12 | Up 15% |
| Operating cash flow | $301.0 million | $318.0 million | Down $17.0 million |
| Free cash flow | $(4.3) million | $57.9 million | Lower, as capital spending increased |
- Fourth-quarter 2015 sales were $464.9 million versus $471.8 million in fourth-quarter 2014; net income was $53.9 million versus $52.9 million, and diluted EPS was $0.56 versus $0.54.
- Commercial Aerospace generated 69% of sales, Space & Defense 18%, and Industrial 13%. Composite Materials sales were $1,458.7 million; Engineered Products sales were $402.5 million.
- Cash at year-end was $51.8 million; working capital was $341.2 million. Total debt was $576.5 million and net debt was $524.7 million. Hexcel reported $417.9 million of borrowing availability under its credit facility.
- Debt rose $160.2 million year over year. The company issued $300 million of 4.7% senior notes due 2025 and had $280 million outstanding under its revolving credit facility, which matures in 2019. It reported compliance with debt covenants and no significant required debt repayment until 2019.
- Capital expenditures were $305.3 million on a cash basis ($289.0 million on an accrual basis). Total assets were $2,187.4 million and stockholders’ equity was $1,179.6 million.
Material changes and management commentary
- Commercial Aerospace sales increased 7.6% in constant currency, supported by new aircraft programs and higher production. Sales on the A350, B787, A320neo and B737 MAX programs rose more than 40%; legacy aircraft sales declined 5%.
- Space & Defense sales fell about 7% in constant currency, reflecting program run-offs and weaker rotorcraft demand. Engineered Products operating income declined to $55.8 million from $67.0 million, principally due to lower Space & Defense sales.
- Industrial sales were approximately flat in constant currency. Wind energy sales were stable, while other industrial sales declined about 2% in constant currency.
- Management cited higher volume and operating improvements as drivers of gross-margin expansion. Currency movements contributed favorably to 2015 operating margin; foreign exchange had an estimated 90-basis-point favorable impact.
- Hexcel repurchased $146.1 million of shares and paid $38.3 million in dividends in 2015. The board authorized a further $250 million repurchase program in October; approximately $203.9 million remained authorized at year-end.
Outlook, risks and unusual items
- Management expected Airbus and Boeing combined 2016 deliveries to be about level with 2015. It forecast 2016 capital spending of $280–$320 million and positive free cash flow of $20–$60 million, while noting typical first-quarter cash usage.
- Capacity expansion remains a major investment priority. More than 90% of $548.1 million in construction in progress related to expansion projects; a new Roussillon, France facility was expected to be operational in 2018. Hexcel also announced a planned engineered-honeycomb plant in Morocco.
- Key risks include dependence on commercial aircraft production and concentrated customers: Airbus and related subcontractors accounted for 35% of 2015 sales and Boeing-related customers 31%. Supply disruptions or price increases for specialized raw materials, program delays, foreign-exchange movements, defense spending reductions and manufacturing or capacity execution problems could affect results.
- Environmental accruals were $2.9 million. For certain sites, accruals were estimated at the low end of possible ranges; the company said accruals could have been $28 million higher using the high end. The Lower Passaic River EPA study described remediation alternatives costing $0.8–$3.25 billion for the river project, but Hexcel had no current obligation to perform that work and had not determined its allocable share.
- 2015 net income included an $11.6 million tax benefit, primarily from releasing reserves for uncertain tax positions. The company estimated unrecognized tax benefits could decrease by $11–$14 million during 2016, mainly from audits and statute expirations.
- Hexcel acquired the remaining 50% of Formax on January 5, 2016, for $12 million; $9 million was paid at closing and the balance is payable in installments. The 2015 results included its prior 50% equity-method interest.
- The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting. Management also concluded disclosure controls were effective.
Important facts for investors to verify
- Whether aircraft production and new-program ramps support the projected demand, particularly given the company’s heavy Airbus and Boeing exposure.
- Whether capacity investment converts into returns and the stated 2016 capital-spending and free-cash-flow outlook is achieved.
- How debt, interest expense and share repurchases evolve; verify covenant headroom and borrowing availability as investment spending continues.
- Whether Space & Defense weakness and Engineered Products margin pressure persist, and whether reported margin gains are sustainable excluding currency effects.
- Potential changes in environmental and tax liabilities, especially the uncertain Lower Passaic River allocation and the sensitivity of environmental accruals to higher-end estimates.