HEXCEL CORP quarterly report, Q3 FY2022

Hexcel Corporation (HXL) — Q3 2022 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 and nine months ended September 30, 2022; comparisons are with the corresponding 2021 periods.

Financial performance

• Sales rose 9.3% in Q3 and 19.1% for the nine months; at constant currency, growth was 12.2% and 21.7%, respectively.
• Commercial aerospace sales increased 25.1% in Q3 and 39.9% year to date. Space and defense sales were down 1.6% in Q3 but up 2.9% year to date. Industrial sales declined 16.4% and 7.7%, respectively.
• Management attributed stronger gross margin mainly to higher sales and capacity utilization improving cost absorption. Q3 operating income also benefited from higher sales and gross margins.
• Nine-month operating income included a $19.4m gain on the sale of the Dublin, California facility. On the company’s non-GAAP basis, adjusted operating income was $41.2m in Q3 versus $23.6m, and $117.0m year to date versus $44.8m. Adjusted nine-month net income was $75.1m versus $9.7m.

Cash flow, debt and liquidity

• Nine-month operating cash flow was $56.4m, compared with $64.2m in 2021. Working capital used $115.0m of cash, principally from higher receivables and inventory supporting increased sales.
• Capital expenditures were $58.3m versus $15.0m; reported free cash flow, a non-GAAP measure, was negative $1.9m versus positive $49.2m.
• At September 30, cash was $90.9m, total debt $797.3m, and the company reported $651m of undrawn credit-facility availability. Current assets were $685.2m and current liabilities $283.7m.
• Debt declined from $823.3m at year-end 2021. Hexcel reported compliance with its debt covenants and no significant required debt repayment before the credit facility matures in June 2024. The facility’s borrowing capacity is $750m.
• The company resumed quarterly dividends in 2022 and paid $25.3m during the first nine months. The board declared a further $0.10-per-share dividend payable in November 2022.

Changes, outlook and risks

• The commercial aerospace recovery continued, with management citing increased air travel and aircraft build rates. Growth was led by Airbus A350 and A320neo programs; year-to-date commercial aerospace sales also reflected higher narrowbody and A350 sales, partly offset by lower Boeing 787 sales.
• Management said supply-chain and logistics disruptions, inflation, energy costs, constrained raw-material availability, and workforce challenges remained pressures. The Russia-Ukraine conflict was affecting the broader economy and aerospace industry, though Hexcel reported no direct material adverse effect on its business at the time.
• The filing provides no clear quantified full-year financial guidance. Management expects short-term liquidity needs, including capital expenditures, to be met with operating cash flow, cash on hand, and the credit facility.
• Capital spending supported construction of a research and technology center in Salt Lake City and expansion of the Morocco facility. The company expected to receive the remaining amount of an approved Aviation Manufacturing Jobs Protection award during 2022.
• Other notable items include significant unfavorable currency-hedge movements and currency translation losses: nine-month other comprehensive loss was $122.6m, primarily reflecting translation and derivative-related losses. The Dublin property sale generated $21.2m net proceeds; $12.6m of assets from the closed Colorado wind-energy facility remained classified as held for sale.
• Hexcel is involved in ordinary-course legal matters, including Lower Passaic River environmental litigation. Environmental accruals were $0.9m at September 30; management stated pending proceedings were not expected to materially affect results, financial position, or cash flows, while noting estimates could change.

Most important facts for investors to verify

• Whether aircraft production-rate recovery and commercial aerospace growth continue, particularly across major customer programs.
• Whether elevated inventory and receivables convert to cash, and whether operating cash flow and free cash flow improve as capital spending continues.
• How much of reported operating-income improvement is sustainable, separating core performance from the Dublin sale gain and considering currency and hedge effects.
• Progress, cost, and timing of the Salt Lake City and Morocco projects, alongside inflation, supply availability, and capacity constraints.
• Debt-facility availability and covenant compliance, and developments in environmental and other legal contingencies.