Hexcel Corporation — Q1 2023 Form 10-Q
Reporting period: Quarter ended March 31, 2023. Hexcel develops and manufactures advanced composite materials and engineered products, primarily for commercial aerospace, space and defense, and industrial markets. Results are unaudited and interim results are not necessarily indicative of full-year performance.
Financial results and liquidity
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net sales | $457.7 million | $390.6 million | +17.2% (+18.0% constant currency) |
| Gross margin | $127.7 million; 27.9% | $86.7 million; 22.2% | Margin +5.7 percentage points |
| Operating income | $62.8 million; 13.7% margin | $30.1 million; 7.7% margin | +108.6% |
| Net income | $42.7 million | $17.8 million | +139.9% |
| Diluted EPS | $0.50 | $0.21 | +138.1% |
| Net cash used for operating activities | $23.4 million | $19.0 million | Greater cash use |
| Free cash flow (non-GAAP) | $(41.5) million | $(39.9) million | Greater cash use |
Gross-margin improvement was attributed primarily to favorable absorption and product mix. SG&A rose 13.6% to $50.8 million, while research and technology expense rose 27.5% to $13.9 million; both increases were primarily related to employee costs, with R&T also reflecting materials and supplies.
Cash and cash equivalents were $105.7 million at March 31, 2023, versus $112.0 million at year-end 2022. Total debt was $768.7 million, up from $723.5 million. The company had $70 million drawn on its senior unsecured credit facility and $680 million of undrawn availability; it reported compliance with debt covenants. The facility matures in June 2024, and management reported no significant required debt repayments before then. Capital expenditures were $18.1 million. Working capital used $104.0 million of cash in the quarter, primarily reflecting sales growth, higher inventory and higher payments of payables.
Markets and changes versus prior year
- Commercial Aerospace: Sales rose 30.0% to $284.5 million, driven by Airbus A350 and A320neo programs and expanding business-jet demand.
- Space & Defense: Sales increased 6.8% to $126.2 million, with growth across several platforms.
- Industrial: Sales declined 12.1% to $47.0 million, mainly due to lower wind-energy sales, partly offset by growth in recreation, automotive and other industrial markets.
- Segments: Composite Materials sales grew 20.5% to $378.2 million; Engineered Products sales grew 3.5% to $79.5 million.
Management said commercial aerospace was recovering strongly as air travel and aircraft build rates increased. Consolidated operating income benefited from higher sales across markets and stronger gross margins. Interest expense increased 3.3% to $9.4 million, which management attributed to higher interest rates.
Outlook, risks and contingencies
Management described the recovery as robust but did not provide a clear numerical full-year revenue, earnings or margin guidance value in this filing. It expects to meet near-term liquidity needs through operating cash flow, cash on hand and the credit facility. The board declared a $0.125-per-share quarterly dividend on April 24, 2023, payable May 12, 2023.
Management highlighted continuing risks from supply-chain and logistics disruptions, labor constraints, inflation and energy costs, raw-material availability, aircraft production rates and program delays, changing industrial demand, foreign-exchange movements, and the Russia-Ukraine conflict. The filing states the conflict has little direct material impact on Hexcel but contributes indirectly to energy, logistics and raw-material challenges. It also identifies risks related to capacity expansion and qualification, workforce retention, cybersecurity, environmental requirements and legal matters. The company reported no material change in risk factors from its 2022 Form 10-K.
Environmental matter: Hexcel is among 84 parties named in a proposed $150 million EPA settlement concerning the Lower Passaic River. The parties collectively placed the amount in escrow; court approval remained pending, and Hexcel’s individual share is not stated clearly in the filing. Hexcel also faces a cost-recovery suit filed by Occidental Chemical relating to future costs for remedial work. Aggregate environmental accruals were $0.5 million at March 31, 2023. Management believes currently pending proceedings will not materially affect consolidated results, financial position or cash flows, while noting estimates could change.
Other unusual items include $0.2 million of restructuring charges in Q1 and $3.3 million of anticipated future restructuring cash payments. The expected sale of the closed Windsor, Colorado wind-energy prepreg facility assets was still pending and expected during 2023.
Investor verification priorities
- Whether commercial-aircraft production increases translate into sustained sales and margins, and whether supply, labor and capacity constraints limit execution.
- Whether working-capital investment and negative operating cash flow improve as sales grow.
- Facility refinancing or repayment plans ahead of its June 2024 maturity, and the effect of interest rates on borrowing costs.
- Hexcel’s potential share of the Lower Passaic River settlement and related litigation, including any change to environmental reserves.
- Industrial-market trends, especially wind energy, and exposure to raw-material, foreign-exchange and energy-price volatility.