Hexcel Corporation — Q1 2014 Form 10-Q
Business context and reporting period
Unaudited results for the quarter ended March 31, 2014, compared with Q1 2013. Hexcel develops and manufactures advanced composite materials and engineered products for commercial aerospace, space and defense, and industrial markets.
Financial performance
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Net sales | $461.7 million | $416.5 million | +10.9% (+9.7% constant currency) |
| Gross margin | $129.2 million; 28.0% | $112.0 million; 26.9% | +15.4%; +1.1 percentage points |
| Operating income | $74.6 million; 16.2% margin | $63.0 million; 15.1% margin | +18.4% |
| Net income | $50.1 million | $43.6 million | +14.9% |
| Diluted EPS | $0.50 | $0.43 | Higher |
| Operating cash flow | $33.4 million | $33.2 million | Nearly flat |
| Capital expenditures, cash basis | $55.0 million | $48.1 million | Higher |
| Free cash flow | Use of $22 million | Use of $15 million | Greater cash use |
Commercial aerospace sales rose 12.8% to $303.2 million, with new aircraft program sales up more than 25%, led by A350 and B787 shipments. Industrial sales increased 21.9% to $62.9 million. Space and defense sales were nearly flat year over year at $95.6 million; softer European and Asian helicopter sales offset A400M growth. Gross margin benefited from volume and operating improvements. Research and technology expense increased $2.6 million to $13.6 million, principally for aerospace development programs.
Balance sheet, debt and liquidity
At March 31, 2014, cash was $50.0 million, down from $65.5 million at year-end 2013. Total debt was $354.8 million, versus $295.0 million; debt net of cash was $304.8 million, versus $229.5 million. Long-term borrowings under the revolving senior secured facility were $352.0 million. The $600 million facility had $246 million of undrawn availability after outstanding letters of credit. Hexcel reported compliance with its debt covenants and no significant required debt repayments before the facility matures in June 2018.
Operating cash flow was offset by $55.0 million of cash capital spending, $48.3 million of stock repurchases, and working-capital investment, including increases in receivables and inventories. Accrual-basis capital expenditures were $40.0 million. Total assets were $1.905 billion and stockholders’ equity was $1.165 billion at quarter-end.
Material changes, outlook and risks
- Management expects 2014 accrual-basis capital expenditures of $225 million to $250 million and expects Q1 research and technology spending to be the peak for 2014. The filing does not provide a clear full-year revenue or earnings forecast.
- The 2013 share repurchase authorization was $150 million; $48.3 million was spent in Q1, with $61.7 million remaining at March 31. Repurchases contributed to increased borrowing.
- The effective tax rate was 31.3%, compared with 29.2% in Q1 2013; the prior-year rate benefited from retroactive U.S. R&D tax credits.
- Environmental accruals totaled $2.8 million. Hexcel’s ultimate liability relating to the Lower Passaic River investigation and remediation cannot be determined. An EPA feasibility study proposed dredging the lower eight miles, with estimated costs exceeding $1.73 billion; Hexcel said it was not currently obligated to undertake that work.
- Other disclosed risks include aircraft production rates and program delays, customer concentration, defense-budget changes, foreign exchange, supply-chain and capacity constraints, competition, labor disruptions, environmental regulation, and legal matters. Management stated that existing litigation and claims were not expected to have a material adverse impact, based on information then available.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether aircraft program growth and commercial aerospace demand continue at expected production and delivery rates.
- Whether capital spending produces expected capacity and margin improvements, and how working capital affects cash generation.
- Borrowing levels, covenant compliance, interest-rate exposure, and remaining availability under the credit facility.
- Use of the remaining repurchase authorization and its effect on leverage and per-share results.
- Developments in Lower Passaic River and other environmental matters, including potential future costs beyond recorded reserves.