Hexcel Corporation — Q1 2016 Form 10-Q
Reporting period: Quarter ended March 31, 2016. Unaudited consolidated results; amounts in U.S. dollars unless noted.
Business context and results
Hexcel develops and manufactures advanced composite materials and structures, principally for commercial aerospace, space and defense, and industrial markets. Commercial aerospace accounted for 70% of year-to-date sales. The company operates Composite Materials and Engineered Products segments.
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net sales | $497.7 million | $471.8 million | +5.5% (+5.1% constant currency) |
| Gross margin | $143.0 million; 28.7% | $141.8 million; 30.1% | Margin down 1.4 percentage points |
| Operating income | $83.9 million; 16.9% margin | $82.6 million; 17.5% margin | +1.6% |
| Net income | $56.0 million | $68.1 million | -17.8% |
| Diluted EPS | $0.59 | $0.70 | Lower |
| Net interest expense | $5.6 million | $1.9 million | Higher, chiefly due to increased debt |
| Cash from operations | $10.3 million in cash flow statement | Cash use of $14.6 million | Improved |
| Capital expenditures, cash basis | $85.4 million | $95.0 million | Lower |
| Free cash flow, company-reported non-GAAP | Cash use of $75.5 million | Cash use of $109.6 million | Lower cash use |
Commercial aerospace sales rose 9.4% to $350.3 million, led by shipments for new aircraft programs, which grew more than 50% year over year. Space and defense sales fell 10.8% to $79.3 million, with rotorcraft accounting for the decline. Industrial sales rose 8.8% to $68.1 million, with growth attributed primarily to the Formax acquisition.
Financial position and notable changes
- At March 31, cash was $24.2 million, total debt was $688.9 million, and debt net of cash was $664.7 million, versus $524.7 million at December 31, 2015. Long-term debt was $688.0 million.
- Borrowings under the $700 million revolving credit facility were $391 million, with $306.9 million undrawn availability. The company reported compliance with its debt covenants and said it expected to remain compliant. No significant required debt repayments were due before the facility matures in 2019.
- Current assets were $691.9 million and current liabilities $264.2 million. Receivables and inventory increased during the quarter; management cited seasonal working-capital use and timing.
- Net cash used in investing was $94.0 million, including $85.4 million of capital expenditures and $8.6 million paid at closing for the Formax acquisition. Financing provided $54.9 million, including $111 million of credit-facility proceeds; the company also paid $9.3 million of dividends and repurchased $34.9 million of stock.
- Hexcel acquired the remaining 50% of Formax (UK) Limited on January 5, 2016, for $12 million, with $8.6 million paid at closing and the balance payable over four years. The transaction added $10.0 million of goodwill.
Management commentary, outlook, and risks
- Management attributed lower gross margin to less favorable product mix versus the prior-year quarter and start-up costs for new production lines. It noted that exchange rates benefited the operating-income percentage by about 50 basis points.
- Management expects 2016 accrual-basis capital expenditures of $280–$320 million, primarily to expand capacity for aerospace program ramps, including the A350, A320neo, and B737 MAX. The filing does not provide a clear numerical full-year revenue or earnings forecast.
- Management said new-aircraft program growth is offset by risks including aircraft delivery changes, delays in program ramp-ups, customer concentration, product mix, capacity constraints, competition, and manufacturing execution. Engineered Products margins may be volatile as mature programs wind down and new programs start up.
- Environmental contingencies include the Lower Passaic River cleanup. The EPA’s selected remedy was estimated to cost $0.97–$2.07 billion across the site; Hexcel had not determined its allocable share. The company accrued $1.9 million for this matter and $2.8 million in aggregate environmental liabilities. For certain sites, the reported accrual was at the low end of the range; accruing at the high end would have increased reserves by $16 million.
- Q1 net income comparisons were affected by unusual tax items: 2015 included $11.6 million of tax benefits, primarily from releases of uncertain-tax-position reserves; 2016 included a $1.2 million benefit from early adoption of stock-compensation accounting guidance. Excluding these items, management reported effective tax rates of 30.5% for 2016 and 30.4% for 2015.
- The company reported no material change in market risk from its 2015 Form 10-K. It stated that disclosure controls were effective and that no material change in internal control over financial reporting occurred during the quarter.
Investor verification points
- Reconcile operating cash flow and free cash flow: the cash flow statement reports $10.3 million of operating cash, while MD&A uses $9.9 million in its free-cash-flow reconciliation; reported free cash use is $75.5 million, versus $75.1 million using the cash-flow-statement figures and $85.4 million of cash capex.
- Monitor cash conversion, receivables, inventory, and planned capital spending as aerospace capacity expansions proceed.
- Track debt levels, credit-facility availability, covenant headroom, and the 2019 facility maturity.
- Assess whether aerospace program growth and Formax contributions offset continued weakness in rotorcraft and potential volatility in Engineered Products margins.
- Follow developments in the Lower Passaic River remediation and other environmental matters, including any change in Hexcel’s allocable liability beyond current accruals.