Hexcel Corporation — Q1 2021 10-Q Summary
Reporting period: Three months ended March 31, 2021; compared with the three months ended March 31, 2020 unless otherwise noted. Hexcel makes advanced composite materials and engineered products for aerospace, defense, and industrial markets. Amounts below are in millions of dollars except per-share data and percentages.
Financial performance
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Net sales | $310.3 | $541.0 |
| Gross margin | $53.1; 17.1% | $140.9; 26.0% |
| Operating income (loss) | $(10.2); (3.3)% of sales | $65.7; 12.1% of sales |
| Net income (loss) | $(14.0) | $42.4 |
| Diluted EPS | $(0.17) | $0.50 |
| Operating cash flow | $(1.2) | $8.6 |
| Capital expenditures | $4.9 | $27.2 |
| Free cash flow (non-GAAP) | $(6.1) | $(18.6) |
Sales fell 42.6% (43.5% in constant currency). Commercial Aerospace sales declined 59.3% to $147.6; Space & Defense was essentially flat at $111.7; Industrial fell 23.3% to $51.0. Lower aircraft production rates and customer supply-chain destocking drove the aerospace decline; weaker wind-energy demand weighed on Industrial, partly offset by stronger automotive sales. Segment operating income was $7.4 for Composite Materials and $4.7 for Engineered Products; corporate and other costs were $22.3.
SG&A was $39.6, down 14.8%, and research and technology expense was $11.6, down 17.1%; both decreased amid cost controls and workforce reductions. Interest expense, net, was $10.3 versus $12.0. The reported tax benefit was $7.5, including a $3.2 discrete benefit from a favorable U.S. state tax law change. Adjusted operating income, excluding other operating expense, was $1.9; adjusted net loss was $8.4, or $0.10 per diluted share. These are non-GAAP measures.
Liquidity, debt, and balance sheet
At March 31, 2021, cash was $82.0, down from $103.3 at year-end 2020. Total debt was $912.3, versus $926.4; long-term debt was $912.0. The company had $214 of borrowings under its amended $750 revolving facility and $536 of undrawn availability. Management said short-term liquidity needs, including capital expenditures, are expected to be met from operating cash flow, cash on hand, and the facility. No significant scheduled debt maturity is expected before the facility expires in June 2024.
A January 2021 amendment replaced the maximum leverage covenant through March 31, 2022 with a requirement to maintain at least $250 of defined liquidity. It also restricts dividends, share repurchases, and certain secured debt, increases applicable margins and commitment fees, and removes access to the incremental facility. The company reported compliance with its debt covenants at quarter-end. The filing reports a BB+/Baa3 public debt rating.
Operating cash flow was affected by lower earnings and a $26.2 working-capital cash use. Q1 2020 financing included a substantial precautionary facility draw; Q1 2021 financing used $13.5. Dividends and share repurchases remained suspended.
Material changes, outlook, and risks
The quarter’s sharp year-over-year deterioration reflected pandemic-related reductions in aircraft build rates and continued customer inventory destocking. Hexcel said COVID-19 could continue to affect demand, operations, supply chains, margins, cash flows, and financial position; the ongoing financial impact could not be reasonably estimated. Management did not provide a specific numerical earnings or sales forecast in the supplied filing text. It identified aircraft production rates, inventory destocking, Boeing 737 MAX production, defense-program demand, wind-energy sales, raw-material availability and cost, and pandemic developments as important uncertainties.
Other operating expense was $12.1, primarily $11.9 of restructuring charges, chiefly severance; anticipated future cash payments for restructuring were $15.9. The prior-year $14.7 charge was primarily related to the terminated Woodward merger. The company said it had eliminated approximately 35% of global headcount and curtailed discretionary spending to align costs with lower demand.
Environmental accruals totaled $2.3 at March 31, including approximately $2.1 for the Lower Passaic River matter. Hexcel noted that ultimate responsibility is uncertain; for estimable environmental matters, accruals at the high end of possible ranges would have been $16 higher. Management believes pending legal matters, after insurance and existing accruals, will not materially affect consolidated results, financial position, or cash flows. The wind-energy prepreg facility in Windsor, Colorado, closed in November 2020; sale of assets held for sale was expected in Q2 or Q3 2021.
Important facts for investors to verify
- Whether aerospace production-rate recovery and customer destocking improve enough to restore sales and margins, especially in Commercial Aerospace.
- Whether cash generation and defined liquidity remain adequate under the amended credit-facility terms, including the $250 minimum liquidity requirement.
- How restructuring cash payments, workforce reductions, and suspended shareholder returns evolve.
- Whether the $2.3 environmental accrual, particularly the Lower Passaic River exposure, changes as litigation and remediation assessments progress.
- Whether the expected sale of the Windsor facility assets occurs on the stated timeline and at terms consistent with carrying value.
- How the $3.2 discrete tax benefit and continuing pandemic effects influence the effective tax rate in later periods.