Hexcel Corporation — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Unaudited consolidated results. Hexcel makes advanced composite materials and engineered products for commercial aerospace, space and defense, and industrial markets.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $320.3 million | $378.7 million | $630.6 million | $919.7 million |
| Gross margin | $61.9 million; 19.3% | $54.9 million; 14.5% | $115.0 million; 18.2% | $195.8 million; 21.3% |
| Operating income | $16.2 million | $6.4 million | $6.0 million | $72.1 million |
| Net income (loss) | $2.2 million | ($1.0 million) | ($11.8 million) | $41.4 million |
| Diluted EPS | $0.03 | ($0.01) | ($0.14) | $0.49 |
| Operating cash flow | Not separately reported by quarter | $38.9 million | $73.6 million | |
| Free cash flow (non-GAAP) | Not separately reported by quarter | $29.7 million | $33.2 million |
- Q2 sales fell 15.4%; first-half sales fell 31.4%. Commercial aerospace was the largest drag: down 24.6% in Q2 and 46.8% year to date. Space and defense sales were broadly stable; engineered products rose 9.5% in Q2 but fell 12.9% for the first half.
- Q2 gross margin and operating income improved year over year despite lower sales. Management attributed the gross-margin improvement to increased carbon-fiber production and sales, a favorable mix, and a lower operating cost base. First-half operating income was sharply lower amid reduced demand and restructuring costs.
- Management’s non-GAAP adjusted operating income was $19.3 million in Q2 versus $19.5 million a year earlier, and $21.2 million for the first half versus $99.9 million. These measures exclude other operating expenses and should be considered alongside GAAP results.
- Cash and equivalents were $115.3 million at June 30, 2021, versus $103.3 million at December 31, 2020. Total debt was $905.4 million, down from $926.4 million. Current assets were $619.3 million and current liabilities $235.6 million.
- Cash from operations decreased year over year, primarily due to lower earnings; working-capital cash use improved to $19.6 million from $52.0 million. Capital expenditures were $9.2 million versus $40.4 million.
Outlook, risks, and unusual items
- The filing provides no specific quantitative revenue or earnings guidance. Management expected COVID-19 to continue weighing on results, cash flows, and financial position, but said its ongoing financial impact could not be reasonably estimated.
- Management reported that commercial-aerospace supply-chain destocking affecting Hexcel was largely complete, with a small amount related to widebody aircraft expected to remain. Narrowbody demand was recovering, and Q2 commercial-aerospace sales reached their highest level since Q1 2020. Wind-energy sales remained weak, including the cessation of North American sales.
- COVID-19-related risks include uncertain air travel and aircraft production, customer and supplier disruptions, demand and inventory shifts, and pressure on margins. Other cited risks include customer concentration, raw-material availability and cost, supply-chain disruption, currency movements, workforce challenges, and legal or environmental matters.
- The credit facility amendment waives the maximum leverage covenant through March 31, 2022, substituting a minimum $250 million liquidity requirement. It also limits dividends, share repurchases, and secured debt subject to exceptions; increases applicable pricing; and reduces revolving commitments to $750 million. At June 30, Hexcel reported $543 million of undrawn facility availability and compliance with covenants. The next significant scheduled debt maturity is in 2024.
- First-half restructuring charges were $17.5 million, primarily severance and asset impairments; anticipated future cash payments were $12.5 million. Q2 included a $2.7 million discrete tax charge related to a foreign tax-rate change; first-half taxes also included a $3.2 million discrete benefit from a U.S. state tax-law change.
- Environmental reserves totaled $2.3 million. The Lower Passaic River accrual was about $2.1 million; the company cautioned that ultimate responsibility is uncertain and that estimated reserves for certain sites could be $16 million higher if accrued at the high end of possible outcomes. Hexcel believes pending proceedings will not materially affect results, financial position, or cash flows, but outcomes remain uncertain.
- After quarter-end, on July 26, 2021, the board amended the CEO’s supplemental retirement agreement, extending the period used to identify his highest-paid 36 months from his final 60 months of employment to his final 120 months. The board said the change was intended to support retention.
Most important facts for investors to verify
- Whether commercial-aerospace production rates and demand recovery translate into sustained sales and improved margins, particularly for widebody programs.
- Whether Hexcel maintains the facility’s $250 million minimum liquidity requirement and covenant compliance through March 2022, including the effect of restricted capital returns.
- How restructuring cash payments, working-capital needs, and capital spending affect cash generation as sales recover.
- The ultimate impact of the Lower Passaic River litigation and other environmental matters relative to recorded reserves.
- The assumptions and potential cost implications of the CEO retirement-agreement amendment.