Hexcel(HXL) - 2019 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents Hexcel Corporation's unaudited condensed consolidated financial statements and management's analysis for the quarter ended March 31, 2019 ITEM 1. Condensed Consolidated Financial Statements (Unaudited) This section presents Hexcel Corporation's unaudited condensed consolidated financial statements for the quarter ended March 31, 2019, including balance sheets, statements of operations, comprehensive income, cash flows, and stockholders' equity, along with detailed notes on significant accounting policies, debt, derivatives, and recent acquisition Condensed Consolidated Balance Sheets This section details Hexcel Corporation's financial position, including assets, liabilities, and equity, as of March 31, 2019, and December 31, 2018 | Metric | March 31, 2019 (Millions) | December 31, 2018 (Millions) | | :-------------------------------- | :-------------------------- | :--------------------------- | | Total Assets | $3,166.0 | $2,824.1 | | Total Liabilities | $1,793.6 | $1,502.1 | | Total Stockholders' Equity | $1,372.4 | $1,322.0 | | Goodwill and other intangible assets | $286.2 | $142.3 | | Long-term debt | $1,160.0 | $947.4 | - Total assets increased by $341.9 million, and total liabilities increased by $291.5 million from December 31, 2018, to March 31, 2019, primarily driven by the ARC acquisition and related debt[10][119] Condensed Consolidated Statements of Operations This section presents Hexcel Corporation's revenues, costs, and net income for the quarters ended March 31, 2019, and March 31, 2018 | Metric | Quarter Ended March 31, 2019 (Millions) | Quarter Ended March 31, 2018 (Millions) | YoY Change (%) | | :------------------------------------------ | :-------------------------------------- | :-------------------------------------- | :------------- | | Net sales | $609.9 | $540.1 | 12.9% | | Cost of sales | $442.7 | $397.5 | 11.4% | | Gross margin | $167.2 | $142.6 | 17.3% | | Operating income | $102.8 | $82.4 | 24.8% | | Net income | $72.2 | $61.6 | 17.2% | | Basic net income per common share | $0.85 | $0.68 | 25.0% | | Diluted net income per common share | $0.84 | $0.68 | 23.5% | | Dividends per share | $0.15 | $0.125 | 20.0% | - Gross margin improved to 27.4% in Q1 2019 from 26.4% in Q1 2018, benefiting from the new Roussillon plant and reduced headwinds from acrylonitrile and wind energy resin pricing[11][94][110] Condensed Consolidated Statements of Comprehensive Income This section outlines Hexcel Corporation's comprehensive income, including net income and other comprehensive income components, for the specified quarters | Metric | Quarter Ended March 31, 2019 (Millions) | Quarter Ended March 31, 2018 (Millions) | | :------------------------------------------------ | :-------------------------------------- | :-------------------------------------- | | Net Income | $72.2 | $61.6 | | Currency translation adjustments | $(2.8) | $31.6 | | Net unrealized pension and other benefit actuarial gains and prior service credits | $(0.4) | $(0.8) | | Net unrealized (losses) gains on financial instruments (net of tax) | $(2.7) | $4.8 | | Total other comprehensive (loss) income | $(5.9) | $35.6 | | Comprehensive income | $66.3 | $97.2 | - Total other comprehensive income shifted from a gain of $35.6 million in Q1 2018 to a loss of $5.9 million in Q1 2019, primarily due to negative currency translation adjustments and unrealized losses on financial instruments[12] Condensed Consolidated Statements of Cash Flows This section details Hexcel Corporation's cash flows from operating, investing, and financing activities for the three months ended March 31, 2019, and 2018 | Cash Flow Activity | Three Months Ended March 31, 2019 (Millions) | Three Months Ended March 31, 2018 (Millions) | | :----------------------------------- | :------------------------------------------- | :------------------------------------------- | | Net cash provided by operating activities | $45.9 | $62.6 | | Net cash used for investing activities | $(219.5) | $(59.5) | | Net cash provided by (used in) financing activities | $184.9 | $(15.5) | | Net increase (decrease) in cash and cash equivalents | $11.0 | $(10.3) | - Net cash used for investing activities significantly increased in Q1 2019 to $219.5 million, primarily due to the $158.4 million acquisition of ARC Technologies LLC[14][123] - Financing activities provided $184.9 million in Q1 2019, a substantial increase from a $15.5 million use in Q1 2018, mainly driven by borrowings from the senior unsecured credit facility to fund the ARC acquisition[14][124] Condensed Consolidated Statements of Stockholders' Equity This section presents changes in Hexcel Corporation's stockholders' equity, including net income, dividends, and treasury stock, for the specified periods | Metric | Balance, March 31, 2019 (Millions) | Balance, March 31, 2018 (Millions) | | :--------------------------------------- | :--------------------------------- | :--------------------------------- | | Total Stockholders' Equity | $1,372.4 | $1,562.5 | | Net income | $72.2 | $61.6 | | Dividends paid on common stock | $(12.7) | $(11.2) | | Change in other comprehensive income – net of tax | $(5.9) | $35.6 | | Acquisition of treasury stock | $(11.2) | $(30.1) | - Stockholders' equity decreased from $1,562.5 million at March 31, 2018, to $1,372.4 million at March 31, 2019, influenced by net income, dividends, and a negative change in other comprehensive income[16] Notes to Condensed Consolidated Financial Statements This section provides detailed explanations of significant accounting policies, debt, acquisitions, and other financial statement items - The company adopted ASC 842, Leases, on January 1, 2019, recognizing approximately $50 million of right-of-use assets and related liabilities for existing operating leases[18][21] Inventory Category | Inventory Category | March 31, 2019 (Millions) | December 31, 2018 (Millions) | | :----------------- | :------------------------ | :--------------------------- | | Raw materials | $170.3 | $131.4 | | Work in progress | $40.8 | $43.6 | | Finished goods | $123.4 | $122.8 | | Total Inventory | $334.5 | $297.8 | - Total debt increased to $1,169.7 million at March 31, 2019, from $956.8 million at December 31, 2018, primarily due to increased borrowings under the senior unsecured credit facility to fund the ARC acquisition[40][119] - The company acquired ARC Technologies LLC for approximately $158.4 million in cash, recognizing $82.8 million of goodwill and $63.0 million of intangible assets within the Engineered Products segment[71][72] - Aggregate environmental related accruals were $2.6 million as of March 31, 2019, with a potential high-end liability of $16 million higher for sites where liability can be estimated[80][129] ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's discussion and analysis highlights strong sales growth across all markets, particularly in Commercial Aerospace and Industrial (wind energy), driven by increased production rates and the ARC Technologies acquisition. Profitability improved with higher gross margins and operating income, while operating cash flow decreased due to working capital increases and significant investment in the ARC acquisition - Hexcel acquired ARC Technologies, LLC on January 3, 2019, enhancing its advanced materials portfolio in structural composites and thermoplastics[87] Net Sales by Market Segment | Market Segment | Q1 2019 Net Sales (Millions) | Q1 2018 Net Sales (Millions) | YoY Change (%) | YoY Change (Constant Currency %) | | :--------------- | :--------------------------- | :--------------------------- | :------------- | :------------------------------- | | Consolidated Net Sales | $609.9 | $540.1 | 12.9% | 14.9% | | Commercial Aerospace | $415.5 | $382.7 | 8.6% | 9.6% | | Space & Defense | $107.8 | $90.1 | 19.6% | 21.8% | | Industrial | $86.6 | $67.3 | 28.7% | 36.8% | - Commercial Aerospace sales were driven by strong performance in A320neo, 737 MAX, 787, and A350 programs, along with strengthening business jet sales[90][91][105][106] - Wind energy sales within the Industrial segment improved by 66.6% (78.0% in constant currency) due to the transition to new generation composite blades[93][108] Profitability Metrics | Metric | Q1 2019 | Q1 2018 | YoY Change (%) | | :-------------------------- | :------ | :------ | :------------- | | Gross margin (%) | 27.4% | 26.4% | +1.0 pp | | Operating income (Millions) | $102.8 | $82.4 | 24.8% | | Operating margin (%) | 16.9% | 15.3% | +1.6 pp | | R&T expense (Millions) | $14.9 | $13.8 | 8.0% | | SG&A expense (% of sales) | 8.1% | 8.6% | -0.5 pp | Cash Flow and Debt Metrics | Cash Flow Metric | Q1 2019 (Millions) | Q1 2018 (Millions) | | :-------------------------------- | :----------------- | :----------------- | | Net cash provided by operating activities | $45.9 | $62.6 | | Capital expenditures | $(61.1) | $(59.5) | | Free cash flow (Non-GAAP) | $(15.2) | $3.1 | | Total debt, net of cash | $1,126.0 | $924.1 | | Undrawn credit facility availability | $286.0 | N/A | ITEM 3. Quantitative and Qualitative Disclosures About Market Risk The company reported no material changes in market risk from the information previously disclosed in its 2018 Annual Report on Form 10-K - No material changes in market risk from the Company's 2018 Annual Report on Form 10-K[135] ITEM 4. Controls and Procedures The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of March 31, 2019, and there were no material changes in internal control over financial reporting during the quarter - Disclosure controls and procedures were evaluated and deemed effective as of March 31, 2019[136] - No material changes in internal control over financial reporting occurred during the three months ended March 31, 2019[137] PART II. OTHER INFORMATION This section covers legal proceedings, risk factors, equity security sales, and exhibits for Hexcel Corporation ITEM 1. Legal Proceedings Information regarding legal proceedings, including environmental matters such as the Lower Passaic River Study Area and Omega Chemical Corporation Superfund Site, is incorporated by reference from Note 13 of the financial statements - Legal proceedings information is incorporated by reference from Note 13 on pages 15-16 of this Form 10-Q[138] - Aggregate environmental related accruals were $2.6 million as of March 31, 2019, with a potential high-end liability of $16 million higher for estimable sites[80][129] ITEM 1A. Risk Factors The company reported no material changes to its risk factors from the 2018 Annual Report on Form 10-K, except for the addition of a new risk factor concerning non-compliance with government procurement laws and regulations - No material changes in risk factors from the 2018 Annual Report on Form 10-K, with the exception of a new risk factor[139] - A new risk factor highlights that failure to comply with government procurement laws and regulations could lead to business loss, penalties, or sanctions[140] ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased 193,603 shares of common stock in January 2019 at an average price of $57.75 per share, with approximately $373.6 million remaining under the authorized share repurchase program as of March 31, 2019 Share Repurchase Activity | Period | Total Number of Shares Purchased | Average Price Paid per Share | | :------------------------ | :----------------------------- | :--------------------------- | | January 1 – January 31, 2019 | 193,603 | $57.75 | | February 1 – February 28, 2019 | — | — | | March 1 – March 31, 2019 | — | — | | Total | 193,603 | $57.75 | - As of March 31, 2019, $373,594,906 remained available under the $500 million share repurchase authorization announced on May 7, 2018[141] ITEM 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including executive severance agreements, certifications from the CEO and CFO, and the XBRL-formatted financial statements - Key exhibits include Form of Executive Severance Agreement (10.1*), Certifications of Chief Executive Officer and Chief Financial Officer (31.1, 31.2, 32), and XBRL Financial Statements (101)[143][146] SIGNATURE The report was formally signed on behalf of Hexcel Corporation by Kimberly Hendricks, Senior Vice President, Corporate Controller and Chief Accounting Officer, on April 23, 2019 - The report was signed by Kimberly Hendricks, Senior Vice President, Corporate Controller and Chief Accounting Officer, on April 23, 2019[149]