Hexcel Corporation — Q1 2015 10-Q
Reporting period: Quarter ended March 31, 2015; comparative period is Q1 2014. Hexcel develops and manufactures composite materials and engineered products, principally for aerospace, defense and industrial markets. Figures are in U.S. dollars; financial statements are unaudited.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change / context |
|---|---|---|---|
| Net sales | $471.8 million | $461.7 million | +2.2%; +6.1% in constant currency |
| Gross profit / margin | $141.8 million / 30.1% | $129.2 million / 28.0% | Margin +2.1 percentage points |
| Operating income / margin | $82.6 million / 17.5% | $74.6 million / 16.2% | Income +10.7%; margin +1.3 points |
| Net income | $68.1 million | $50.1 million | +35.9%; 2015 benefited from discrete tax items |
| Diluted EPS | $0.70 | $0.50 | |
| Operating cash flow | $(14.6) million | $33.4 million | Working-capital use, primarily timing-related |
| Capital expenditures, cash basis | $95.0 million | $55.0 million | Free cash flow was $(109.6) million versus $(21.6) million |
| Cash and cash equivalents | $22.7 million | $70.9 million at Dec. 31, 2014 | |
| Total debt | $480.2 million | $416.3 million at Dec. 31, 2014 | Net debt increased to $457.5 million from $345.4 million |
Gross-margin improvement reflected volume, operating performance and product mix; currency contributed about 100 basis points. SG&A rose $5.7 million to $46.7 million, with over half of the increase attributed to timing of stock-compensation expense. Research and technology expense declined to $12.5 million from $13.6 million.
Markets and segments
- Commercial Aerospace: Sales of $320.3 million, up 5.6% reported and 8.3% in constant currency. Sales from new aircraft programs (B787, A350, A320neo and B737 MAX) rose more than 25%, led by A350 shipments.
- Space & Defense: Sales of $88.9 million, down 7.0% reported and 3.6% in constant currency. The expected end of C-17 sales accounted for most of the constant-currency decline.
- Industrial: Sales of $62.6 million, essentially flat reported and up 10.6% in constant currency, driven in part by approximately 15% growth in wind-energy sales.
- Composite Materials: Sales rose 3.1% to $367.4 million; operating income increased to $89.2 million from $75.9 million.
- Engineered Products: Sales declined 0.9% to $104.4 million; operating income fell to $14.7 million from $16.4 million.
Liquidity, outlook and notable items
- Cash use and higher capital spending drove increased borrowing. At quarter-end, $480 million was drawn on the $700 million senior unsecured revolving facility; $218.3 million remained available after letters of credit. The facility matures in 2019, with no significant required debt repayments before then.
- Management said the company was in compliance with debt covenants and expected to remain compliant. It expected to meet short-term liquidity needs through operating cash flow, cash on hand and the facility.
- Management maintained a 2015 accrual-basis capital expenditure expectation of $260–$290 million, primarily for capacity expansions. No specific full-year revenue or earnings guidance is provided in the filing text.
- The Q1 tax provision was $12.9 million and the effective rate was 16.0%, including $11.6 million of benefits, primarily from releasing uncertain-tax-position reserves. Excluding those items, the effective rate was 30.4% (versus 31.3% in Q1 2014).
- Foreign-exchange effects were significant: non-designated FX contracts generated net losses of $16.6 million versus $0.2 million a year earlier; designated currency hedges recorded losses in OCI. The filing expects $15.5 million of unrealized hedge losses to be reclassified into earnings over the next 12 months as hedged sales are recorded.
- Environmental accruals totaled $3.9 million. For certain sites, accruals were at the low end of possible outcomes; the company estimated that accruals would be $28 million higher at the high end where liability could be estimated. The Lower Passaic River EPA study considered remedies costing $0.8–$3.25 billion in total, but Hexcel had not determined its share; the recorded amount was $2.0 million.
- The board’s $150 million share-repurchase authorization had $100 million remaining at March 31, 2015; no shares were repurchased in Q1 2015.
Investor verification priorities
- Assess how much of earnings growth reflects operating improvement versus the $11.6 million discrete tax benefit and favorable currency effects on margins.
- Monitor working-capital conversion, cash generation and the pace and returns of capacity-expansion spending.
- Track facility borrowing, covenant headroom and the effect of interest-rate and currency movements, including hedge-related losses entering earnings.
- Evaluate aerospace program ramps and the C-17 phase-out, alongside customer production rates, defense demand and industrial-market growth.
- Review the uncertainty around environmental remediation costs, particularly the Lower Passaic River allocation and the potential gap between recorded reserves and higher-end estimates.