Hexcel Corporation — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012; comparisons are with the corresponding 2011 periods. Hexcel develops and manufactures advanced composite materials and engineered products for commercial aerospace, space and defense, and industrial markets.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $391.6 million | $351.8 million | $1,190.9 million | $1,037.1 million |
| Gross margin | $99.2 million; 25.3% | $86.5 million; 24.6% | $311.1 million; 26.1% | $256.5 million; 24.7% |
| Operating income | $60.0 million; 15.3% margin | $46.0 million; 13.1% margin | $194.5 million; 16.3% margin | $142.6 million; 13.7% margin |
| Net income | $39.8 million | $32.2 million | $127.4 million | $96.0 million |
| Diluted EPS | $0.39 | $0.32 | $1.25 | $0.95 |
Q3 sales increased 11.3% reported and 13.4% in constant currency; nine-month sales rose 14.8% and 17.0%, respectively. Commercial aerospace was the largest market: Q3 sales rose 12.9%, with Airbus- and Boeing-related sales up almost 16%. Sales in space and defense rose 12.0%; industrial sales rose 5.4%. Management attributed improved gross margin to higher volume and cost control. Q3 adjusted operating margin was 15.3%, versus 13.8% a year earlier; adjusted operating income was $60.0 million versus $48.7 million.
Cash flow and liquidity: Nine-month operating cash flow was $150.5 million, compared with $111.0 million. Cash capital expenditures were $208.9 million versus $99.5 million, resulting in free cash flow (operating cash flow less capital expenditures) of negative $58.4 million versus positive $11.5 million. September 30 cash was $43.2 million. Total debt was $296.4 million and net debt was $253.2 million. Borrowings under the senior secured facility totaled $287.5 million; $157.8 million remained available under the revolver. Hexcel reported compliance with debt covenants and expected to remain compliant.
Total assets were $1,566.9 million, compared with $1,376.1 million at December 31, 2011. Accounts receivable rose to $242.2 million from $199.3 million and inventory to $235.7 million from $215.7 million. Property, plant and equipment, net, increased to $858.2 million from $722.1 million, reflecting investment in capacity.
Material changes and unusual items
- In June 2012, Hexcel redeemed its remaining $73.5 million of 6.75% senior subordinated notes, funding the redemption with a $75 million increase to its revolving facility. The transaction resulted in a $1.1 million pretax charge for call premium and accelerated financing costs. Long-term debt rose from $238.3 million at year-end to $279.3 million at September 30.
- Nine-month 2012 operating results included $9.6 million of insurance proceeds for a prior-year business interruption claim, a $4.9 million gain on land sale, and a $5.0 million environmental charge. Adjusted nine-month operating income, excluding these and other identified special items, was $185.0 million versus $139.6 million. Nine-month adjusted net income was $122.1 million versus $91.2 million.
- The 2011 comparison included a $5.7 million U.K. pension curtailment gain and a $2.7 million environmental charge in operating results. A $5.5 million tax-reserve release benefited 2011 nine-month net income; the 2011 effective tax rate was 26.1% versus 31.6% in 2012.
Outlook, risks and contingencies
Management reduced its 2012 accrual-basis capital expenditure outlook to $230–$250 million from $250–$275 million, citing yield and productivity improvements, faster qualification of new capacity, and updated demand assumptions, including slower growth in certain space and defense programs and the latest A350 schedule. It expected full-year free cash flow to be a use of $40–$60 million. No specific revenue or earnings guidance is provided in the filing. Management expected short-term liquidity needs, including capital expenditures, to be met through operating cash flow, cash on hand, and the revolver; the facility matures in 2015.
Key business risks identified include changes in Airbus and Boeing production or delivery rates, new aircraft program delays, defense spending and program changes, industrial and wind-market weakness, customer concentration, foreign-exchange and interest-rate movements, supply-chain disruption, capacity constraints, competition, and the ability to sustain margins while expanding capacity.
Environmental accruals totaled $6.9 million at September 30; the company stated that the estimate could be $1.5 million higher at the high end of the range for certain matters. Hexcel accrued $4.7 million for remediation at its Lodi, New Jersey site and $0.5 million for its share of a Lower Passaic River sediment project. Its ultimate liability for the broader Passaic River matters and the Omega site could not be determined. Gurit filed an October 2012 patent-infringement suit seeking damages and injunctive relief; Hexcel said it would contest the allegations, citing a 2010 license. Management said the resolution of contingent matters was not expected to have a material adverse effect, while noting uncertainty in certain environmental and legal liabilities.
Important facts for investors to verify
- Whether aircraft production rates and new-program ramps, particularly Airbus and Boeing programs, support the reported aerospace growth.
- Whether the revised capital-spending plan and capacity expansion translate into the expected production, margins, and free cash flow.
- Revolver availability, covenant compliance, and debt levels following the notes redemption and substantial capital spending.
- Potential changes to environmental reserves and the uncertain exposure from Passaic River, Omega, and other remediation matters.
- The status and potential financial impact of the Gurit patent litigation and other disclosed contingencies.