Hexcel Corporation — FY2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing also reports fourth-quarter results. Hexcel develops and manufactures advanced composite materials and structures, primarily for commercial aerospace, space and defense, and industrial markets.
Financial performance and position
- Revenue: $2.004 billion, up 7.7% from $1.861 billion in 2015 (7.9% in constant currency). Commercial Aerospace accounted for 71% of sales, Space & Defense 16%, and Industrial 13%.
- Profitability: Gross margin was $564.6 million, or 28.2% of sales, versus $532.8 million, or 28.6%, in 2015. Operating income was $360.1 million, up from $332.4 million; operating margin increased to 18.0% from 17.9%. Net income was $249.8 million versus $237.2 million; diluted EPS was $2.65 versus $2.44.
- Fourth quarter: Sales were $483.5 million versus $464.9 million in Q4 2015; operating income was $87.0 million versus $81.2 million; net income was $59.5 million versus $53.9 million; diluted EPS was $0.64 versus $0.56.
- Cash flow and investment: Operating cash flow was $401.4 million, compared with $301.0 million. Capital expenditures were $327.9 million; company-defined free cash flow was $73.5 million, versus negative $4.3 million in 2015. Accrual-basis capital expenditures were $320.2 million.
- Debt and liquidity: Total debt was $688.7 million, up from $576.5 million; cash was $35.2 million, leaving net debt of $653.5 million. Working capital was $335.1 million. The company had $332.9 million available under its $700 million revolving facility, which matures in June 2021. It reported compliance with debt covenants.
- Capital returns: Hexcel repurchased $111.1 million of stock and paid $39.8 million in dividends in 2016. The board authorized an additional $300 million repurchase program in February 2017.
Material changes versus 2015
- Commercial Aerospace sales rose 11.1% (11.3% in constant currency), led by ramping A350 and A320neo programs. New-program sales to Airbus and Boeing and their subcontractors increased more than 40%, while legacy aircraft sales declined 8%.
- Space & Defense sales declined 4.6% in constant currency, primarily reflecting lower rotorcraft sales. Industrial sales rose 6.4% reported and 7.4% in constant currency, with Formax acquisition benefits partly offset by weakness in recreation and other industrial markets.
- Composite Materials sales increased to $1.610 billion from $1.459 billion; Engineered Products sales decreased to $394.3 million from $402.5 million. Engineered Products operating income fell to $50.0 million from $55.8 million.
- Interest expense increased to $22.1 million from $14.2 million, reflecting debt levels and the 2015 issuance of $300 million of 4.7% senior notes due 2025. Debt also rose amid share repurchases, dividends, investments, and the Formax acquisition.
- Operating cash flow improved by $100.4 million, with management citing higher earnings and lower working-capital usage. Capital spending continued to rise as Hexcel expanded manufacturing capacity.
Outlook, commentary, risks and unusual items
- Management expected 2017 capital spending of $270 million to $290 million and positive free cash flow above $100 million. It expected first-half cash needs to be funded by available borrowings. Airbus and Boeing projected combined 2017 deliveries just above 2016 levels; the filing does not provide a specific company revenue or EPS guidance figure.
- Capacity expansion includes the Roussillon, France carbon-fiber facility, expected to be completed in 2017 and qualified in 2018, and a Casablanca, Morocco engineered-honeycomb plant expected to be operational in the second half of 2017.
- Customer concentration is significant: Airbus and its subcontractors represented 41% of 2016 sales and Boeing and its subcontractors 28%. Commercial Aerospace demand, aircraft production schedules, program ramp-ups, and customer pricing pressure are key sensitivities.
- Other risks include reliance on limited or sole-source qualified raw-material suppliers; manufacturing and qualification delays; foreign-exchange exposure; potential reductions in defense spending; and environmental, safety, and international operating risks.
- Environmental accruals were $3.2 million. Hexcel’s allocation of Lower Passaic River remediation costs remains uncertain; the EPA estimated the selected remedy for the lower eight miles at $0.97 billion to $2.07 billion, excluding the upper river. The company noted that its recorded environmental accrual could be $16 million higher if estimated at the high end of certain ranges.
- 2016 included $6.6 million of tax benefits, primarily from releases of uncertain-tax-position reserves; the adjusted effective tax rate excluding discrete items was 30.0%. The company also acquired the remaining Formax interest and invested $30 million in affiliates, including Oxford Performance Materials, Luminati Aerospace, and Carbon Conversions. An additional $10 million OPM investment was made in January 2017.
- Management reported effective disclosure controls and internal control over financial reporting; the auditors issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether commercial aircraft production and new-program ramps support the expected sales and margin trajectory, particularly given dependence on Airbus and Boeing.
- Whether large capacity investments convert to qualified production on schedule, and how capital spending affects free cash flow and debt.
- How the decline in Space & Defense and lower Engineered Products profitability develop, including program transitions and rotorcraft exposure.
- The ultimate cost and timing of environmental obligations, especially the Lower Passaic River matter, relative to the recorded accrual.
- How tax benefits, foreign exchange, raw-material availability and pricing, and continued repurchases affect recurring earnings and liquidity.