Hexcel Corporation — FY2010 Form 10-K
Business context and reporting period. This annual report covers the year ended December 31, 2010; fourth-quarter figures are also summarized below. Hexcel makes advanced composite materials and engineered composite products for Commercial Aerospace, Space & Defense, and Industrial markets. Commercial Aerospace was 55% of 2010 sales, Space & Defense 26%, and Industrial 19%.
Financial performance and position
| Metric | 2010 | 2009 |
|---|---|---|
| Net sales | $1,173.6 million | $1,108.3 million |
| Gross margin | $282.6 million; 24.1% | $248.5 million; 22.4% |
| Operating income | $129.8 million; 11.1% | $103.7 million; 9.4% |
| Net income | $77.4 million | $56.3 million |
| Diluted EPS | $0.77 | $0.57 |
| Cash from operations | $126.5 million | $172.8 million |
| Cash capital expenditures | $48.8 million | $98.4 million |
Management reported free cash flow of $77.7 million in 2010, defined as operating cash flow less cash capital expenditures. Accrual-basis capital expenditures were $60.7 million. Sales rose 6% year over year (7% in constant currency); operating margin improved 170 basis points. The gross-margin improvement reflected higher volume, productivity, cost reductions, favorable mix, and about 40 basis points of currency benefit.
At year-end, cash was $117.2 million, working capital $291.8 million, total debt $332.2 million, and stockholders’ equity $659.4 million. Management cited net debt of approximately $215 million. Total debt fell $60.1 million from 2009. The company reported $147.9 million of undrawn facility availability before the December 2010 $135 million facility add-on; pro forma cash and availability after the subsequent note redemption were approximately $247 million. It was in compliance with debt covenants at year-end.
Fourth quarter: Sales were $311.0 million, operating income $31.0 million, and net income $22.9 million, versus $266.6 million, $14.5 million, and $5.7 million, respectively, in fourth-quarter 2009. Diluted EPS was $0.23, compared with $0.06.
Material changes and drivers
- Commercial Aerospace sales increased 15.9% to $644.7 million, driven largely by new aircraft programs and higher Boeing and Airbus-related production. Airbus and Boeing deliveries totaled 972 aircraft in 2010.
- Space & Defense sales increased 3.7% to $310.5 million; Industrial sales declined 13.6% to $218.4 million. Wind sales were pressured by Vestas inventory adjustments and European plant closures.
- Composite Materials segment sales were $904.5 million and operating income was $139.6 million; Engineered Products sales were $269.1 million and operating income was $45.7 million.
- Cash from operations declined as higher sales and working-capital needs used cash: receivables and inventories used $39.2 million, compared with a $70.2 million source in 2009.
- The company refinanced its senior secured facility in July 2010 and recorded a $6.8 million non-operating charge for accelerated amortization and write-off of prior financing costs. In February 2011, it redeemed $150 million of 6.75% notes, partly funded by the facility add-on, and expected a $4.9 million pretax charge in first-quarter 2011 for the call premium and financing costs.
Outlook, commentary, risks, and contingencies
Management forecast 2011 revenue of $1.225–$1.300 billion on a constant-currency basis, diluted EPS of $0.90–$0.98, capital expenditures of $150–$175 million, and free cash flow targeted to reach break-even by year-end. It expected double-digit wind-energy sales growth beginning in first-quarter 2011 and cited improved customer orders and aircraft production plans. These are forward-looking estimates, not reported results.
- Customer and market concentration: Boeing and related subcontractors represented 31% of 2010 sales; EADS/Airbus and related subcontractors represented 24%. Vestas was less than 10%. Demand is exposed to aircraft production changes, program delays, airline financing, defense budgets, and wind-market inventory cycles.
- Environmental exposure: Environmental accruals were $7.3 million, estimated at the low end of a range; the high-end estimate was $8.8 million. Hexcel’s potential liability for the Lower Passaic River matter cannot be determined; EPA study options were estimated at $900 million to $2.3 billion, but that is not Hexcel’s stated share. The company also disclosed Lodi and Kent remediation matters.
- Other litigation: Seemann Composites sought unspecified compensatory damages and $10 million punitive damages; Hexcel said the ultimate liability could not be determined. Management stated it did not expect aggregate contingent matters, after insurance and recorded provisions, to materially affect results, financial position, or cash flows.
- Operating and financial risks: Some key raw materials have limited qualified suppliers; interruptions or cost increases could hurt margins. International operations, currency movements, energy prices, pension assumptions, and customer cost-reduction demands are additional risks. Hedging mitigates but does not eliminate currency and interest-rate exposures.
- Unusual tax items: 2010 tax provision included $2.9 million from reversal of U.S. deferred-tax valuation allowances and $3.5 million of clean-energy tax credits. The reported effective tax rate was 22.9%, versus 29.4% excluding those items. The 2008 comparison included $26.2 million of net tax benefits and a gain on sale of an affiliated-company investment.
Hexcel paid no dividends in 2010, 2009, or 2008 and said it did not intend to pay dividends in the foreseeable future. The independent auditor reported that the financial statements were fairly presented under U.S. GAAP and that internal control over financial reporting was effective.
Key facts investors should verify
- Whether 2011 revenue, EPS, capital-spending, and break-even free-cash-flow targets were achieved; note that revenue guidance was stated on a constant-currency basis.
- Aircraft-program schedules and production rates, especially the 787 and A350 ramps, and Hexcel’s realized content and sales per aircraft.
- Recovery in wind-energy demand and the effect of Vestas’ inventory and production changes.
- Post-redemption debt, interest expense, liquidity, covenant headroom, and the effect of shifting borrowing from subordinated notes to secured facilities.
- Developments in Passaic River and other remediation matters, including whether environmental accruals remain adequate.
- Customer concentration, qualified raw-material supply availability, and the effect of foreign-exchange movements on margins and cash flow.