Hexcel Corporation — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Financial amounts are in U.S. dollars; figures are in millions except per-share data. Hexcel makes advanced composite materials and engineered products for commercial aerospace, space and defense, and industrial markets.
Financial performance and position
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $393.0 | $320.3 | $783.6 | $630.6 |
| Gross margin | $89.5; 22.8% | $61.9; 19.3% | $176.2; 22.5% | $115.0; 18.2% |
| Operating income | $63.8; 16.2% | $16.2; 5.1% | $93.9; 12.0% | $6.0; 1.0% |
| Net income (loss) | $44.7 | $2.2 | $62.5 | $(11.8) |
| Diluted EPS | $0.53 | $0.03 | $0.74 | $(0.14) |
- Q2 sales rose 22.7% year over year, or 25.9% in constant currency; first-half sales rose 24.3%, or 26.7% in constant currency. Higher sales and capacity utilization lifted gross margins.
- Commercial Aerospace sales rose 48.1% in Q2 and 48.2% in the first half; Space & Defense rose 4.7% and 5.3%, respectively. Industrial sales declined 10.4% in Q2 and 3.3% in the first half.
- Composite Materials Q2 sales increased 32.0%; Engineered Products sales fell 5.7%. Segment operating income was $47.2 and $9.1, respectively.
- Reported operating income includes a $19.4 gain on the sale of the Dublin, California facility. Management’s non-GAAP adjusted operating income was $44.7 in Q2 versus $19.3 a year earlier; adjusted net income was $28.1, or $0.33 per diluted share, versus $7.1, or $0.08.
- Six-month operating cash flow was $18.3, down from $38.9. Capital expenditures were $37.9 versus $9.2, resulting in non-GAAP free cash flow of negative $19.6 versus positive $29.7. Working capital consumed $95.1, principally reflecting higher receivables and inventory supporting increased sales.
- At June 30, cash was $99.2, total debt was $812.5, and the revolving facility had $636 of undrawn availability. Current assets were $691.9 and current liabilities $271.2. The company reported compliance with debt covenants; the next significant scheduled debt maturity is the facility in June 2024.
Material changes, outlook and risks
- Commercial aerospace recovery continued, air travel improved, and customer inventory destocking was described as largely complete. Growth reflected stronger narrowbody, A350 and business-jet sales, with growth also in the 737 MAX program.
- Management cited persistent logistics and supply-chain constraints, inflation, energy costs, raw-material availability and labor challenges. COVID-19 effects and the Russia-Ukraine conflict could affect operations, customers, suppliers, costs and aerospace demand. Management said it did not then foresee a direct material adverse effect from the conflict, while noting broader impacts were difficult to predict.
- The filing does not provide a clear numerical full-year revenue or earnings forecast. It identifies aircraft production rates, customer demand, margins, working capital, raw-material costs and capacity expansions as important uncertainties.
- The Dublin facility sale generated $21.2 of net proceeds and a $19.4 gain; certain research and technology personnel and equipment are to move to a new Salt Lake City facility. Capital spending also supports an expansion in Morocco.
- The company expects to receive the remaining funds under an approved Aviation Manufacturing Jobs Protection award in 2022; it had received $10.5 of the approved amount of up to $20.9 by year-end 2021. The board declared a $0.10-per-share quarterly dividend on July 25, payable August 12, 2022.
- Environmental accruals increased to $7.1 from $2.1 at year-end. Hexcel is among parties involved in Lower Passaic River cleanup litigation; the company says pending proceedings and environmental matters are not expected to have a material adverse effect, but actual costs could differ from estimates. It also reported $2.8 of anticipated future restructuring cash payments.
Important facts for investors to verify
- How much of reported earnings growth is recurring: the Dublin gain materially increased GAAP operating income and profit.
- Whether commercial-aerospace growth and improved capacity utilization continue, and whether Engineered Products and industrial-market weakness persists.
- Whether working-capital investment converts into operating cash flow and free cash flow as sales grow; first-half free cash flow was negative.
- Exposure to inflation, supply constraints, currency movements and aircraft-production changes, including the effects on margins and customer programs.
- Debt-facility terms and covenant compliance, environmental liabilities and the timing and amount of remaining AMJP funding.