Hexcel Corporation — FY 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. Although the request identifies 2011 Q4, this is an annual filing; selected fourth-quarter results are included below. Hexcel develops and manufactures advanced composite materials and engineered components for commercial aerospace, space and defense, and industrial markets.
Financial performance
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Net sales | $1,392.4 million | $1,173.6 million |
| Gross margin | $342.1 million; 24.6% | $282.6 million; 24.1% |
| Operating income | $192.0 million; 13.8% | $129.8 million; 11.1% |
| Net income | $135.5 million | $77.4 million |
| Diluted EPS | $1.35 | $0.77 |
| Cash from operations | $170.5 million | $126.5 million |
| Capital expenditures and deposits | $158.0 million cash outflow | $48.8 million cash outflow |
| Free cash flow | $12.5 million | $77.7 million |
Sales increased 18.6%, with higher commercial aerospace volume, new aircraft programs, production increases, productivity and favorable product mix supporting earnings and margin growth. Commercial aerospace represented 59% of sales, space and defense 23%, and industrial 18%. Composite Materials generated $1,074.5 million of third-party sales; Engineered Products generated $317.9 million.
At year-end, cash was $49.5 million, total debt was $250.9 million and debt net of cash was $201.4 million. Working capital was $276.8 million. Hexcel had $204.8 million of undrawn availability under its senior credit facility and reported compliance with debt covenants. Total assets were $1,376.1 million and stockholders’ equity was $802.2 million.
Fourth quarter: Sales were $355.3 million, operating income $49.4 million, net income $39.5 million and diluted EPS $0.39, versus $311.0 million, $31.0 million, $22.9 million and $0.23, respectively, in Q4 2010.
Material changes and unusual items
- Commercial aerospace sales rose 27.7% to $823.5 million; space and defense sales increased 2.9% to $319.4 million; industrial sales increased 14.2% to $249.5 million. The filing also reports industrial growth of 9.4% on a constant-currency basis.
- Capital spending accelerated: cash capital expenditures and deposits were $158.0 million, while accrual-basis additions to property, plant and equipment were $184.5 million. Net property, plant and equipment rose to $722.1 million from $598.3 million.
- Hexcel redeemed $150 million of its 6.75% senior subordinated notes, paying a 2.25% call premium, and used additional senior-credit-facility borrowing and cash. The redemption produced a $4.9 million pretax non-operating charge; total debt declined $81.3 million year over year.
- A $5.7 million pension curtailment gain followed termination of the U.K. defined-benefit plan. The tax provision included benefits from valuation-allowance reversals and a favorable audit settlement; the company’s non-GAAP adjusted net income was $124.9 million versus GAAP net income of $135.5 million.
Outlook, risks and contingencies
Management forecast 2012 revenue of $1.5–$1.6 billion on a constant-currency basis, diluted EPS of $1.33–$1.45, and capital expenditures of $250–$275 million, funded by operating cash flow, cash on hand and available borrowings. Management cited strong commercial aerospace and wind-customer backlogs. Airbus and Boeing deliveries were expected to exceed 1,150 aircraft in 2012; their year-end combined backlog was 8,208 aircraft.
- Business is exposed to aircraft production rates, program delays, airline financing and economic cycles. Boeing and related subcontractors accounted for about 30% of 2011 sales and EADS/Airbus and related subcontractors about 27%; customer concentration is material.
- Supply interruptions or price increases for specialized raw materials, foreign-exchange movements, international operating conditions, defense-spending reductions, and manufacturing disruptions could affect results and margins.
- Environmental remediation accruals were $5.0 million, estimated at the low end of possible outcomes; the filing states the high-end estimate would be $6.8 million. The Lodi remediation was delayed by flooding and expected to extend into the first half of 2012. Hexcel’s ultimate potential liability in the Lower Passaic River matter could not be determined.
- Environmental compliance operating costs were $10.3 million in 2011. The company cautioned that environmental obligations, pension assumptions, tax matters, currency and market conditions may change or create additional costs.
The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded controls were effective. Hexcel paid no dividends and said it did not expect to pay them in the foreseeable future.
Important facts for investors to verify
- Whether 2012 revenue, EPS and capital-spending guidance was achieved, and how capacity expansion affected cash generation and margins.
- Aircraft build rates, program ramp-ups and delays, particularly for the A350, B787 and other newer aircraft, and the company’s realized content per aircraft.
- Customer concentration and sales exposure to Boeing, EADS/Airbus and wind-energy customers.
- Debt repayment schedule, credit-facility availability and covenant headroom; note that $201.4 million of net debt coexisted with substantial planned capital spending.
- Potential changes to environmental liabilities, especially the Lower Passaic River exposure, for which the ultimate liability was undetermined.
- The sustainability of earnings excluding pension, tax and financing-related unusual items; compare GAAP results with management’s non-GAAP measures.