Hexcel(HXL) - 2022 Q4 - Annual Report

Part I Business Overview Hexcel leads in advanced lightweight composites for aerospace and industrial markets, operating in two segments, facing supply chain and inflation issues - Hexcel Corporation is a global leader in advanced lightweight composites technology, serving commercial aerospace, space & defense, and industrial markets[16] - The company operates with two reportable segments: Composite Materials and Engineered Products[18] - Commercial Aerospace market showed signs of recovery in H2 2021 and continued through 2022, despite ongoing challenges from global logistics, supply chains, and inflationary pressures[19] Composite Materials Segment This segment manufactures carbon fibers, prepregs, and other advanced materials for aerospace and industrial applications, contributing $1,279.7 million (80% of total) to 2022 net sales - The Composite Materials segment manufactures and markets carbon fibers, fabrics, specialty reinforcements, prepregs, structural adhesives, honeycomb, and pultruded profiles[22] Composite Materials Net Sales to Third-Party Customers | Year | Net Sales (Millions USD) | % of Total Net Sales | | :--- | :--- | :--- | | 2022 | $1,279.7 | ~80% | | 2021 | $1,019.4 | ~80% | | 2020 | $1,185.9 | ~80% | Engineered Products Segment This segment manufactures composite structures and precision machined honeycomb parts, primarily for aerospace, generating $298.0 million (20% of total) in 2022 net sales - The Engineered Products segment manufactures and markets composite structures and precision machined honeycomb parts, including 3D printed parts and RF/EMI materials, primarily for the aerospace industry[40] Engineered Products Net Sales to Third-Party Customers | Year | Net Sales (Millions USD) | % of Total Net Sales | | :--- | :--- | :--- | | 2022 | $298.0 | ~20% | | 2021 | $305.3 | ~20% | | 2020 | $316.5 | ~20% | - The segment holds a 50% ownership interest in a Malaysian joint venture, Aerospace Composites Malaysia Sdn. Bhd. (ACM), with Boeing Worldwide Operations Limited[42] Significant Customers Hexcel's sales are concentrated with major aerospace customers, with Airbus and its subcontractors accounting for 38% of 2022 net sales Net Sales to Significant Customers | Customer | 2022 Net Sales (%) | 2021 Net Sales (%) | 2020 Net Sales (%) | | :--- | :--- | :--- | :--- | | Airbus & subcontractors | 38% | 33% | 33% | | Boeing & subcontractors | 14% | 16% | 19% | Markets Hexcel serves Commercial Aerospace (58% of 2022 net sales), Space & Defense (29%), and Industrial (13%), with Commercial Aerospace being the largest and Industrial declining due to wind energy Net Sales by Market (2022) | Market | % of 2022 Net Sales | | :--- | :--- | | Commercial Aerospace | 58% | | Space & Defense | 29% | | Industrial | 13% | - Commercial Aerospace demand is driven by airline passenger traffic and aircraft replacement rates, with each new generation of aircraft and engines utilizing increasing quantities of advanced composites[48][52][54] - Space & Defense market demand is primarily a function of military aircraft procurement and space programs, with the F-35 Lightning and CH-53K being significant programs[57][59] - Industrial market sales declined in 2022, primarily due to lower wind energy sales, despite growth in recreation and other industrial applications; the company closed its Tianjin, China wind facility in 2022[61] Backlog Hexcel's twelve-month order backlog is not a meaningful trend indicator due to multi-year contracts specifying requirements rather than specific quantities or delivery dates - Twelve-month order backlog is not a meaningful trend indicator as multi-year contracts with major customers specify proportions of requirements and terms, not specific quantities or delivery dates[62] Raw Materials and Production Activities Hexcel's vertically integrated operations produce carbon fiber, but reliance on limited raw material suppliers led to supply disruptions and cost increases in 2021 and 2022 - Hexcel's manufacturing operations are vertically integrated, producing carbon fiber from polyacrylonitrile precursor (PAN) for internal use and external sales[63][64] - The company is highly dependent on a limited number of suppliers for key raw materials, leading to supply disruptions and cost increases in 2021 and 2022 due to global transportation issues, the COVID-19 pandemic, and market volatility[67][68] Research and Technology; Patents and Know-How Hexcel maintains global Research and Technology (R&T) centers, including a new facility in Salt Lake City, Utah, to develop next-generation composite technology, protected by patents and expertise - Hexcel operates global Research and Technology (R&T) centers, with a new, largest center recently completed in Salt Lake City, Utah, to support next-generation composite technology development[69][70] - The company's products rely on expertise in materials science, textiles, process engineering, and polymer chemistry, protected by patents and know-how, which are actively enforced[71] Environmental Matters Hexcel is committed to reducing its environmental impact through operational efficiency and renewable power, while complying with U.S. and international environmental laws - Hexcel is committed to reducing its environmental impact, including carbon footprint, air and water emissions, and waste, through operational efficiency and increasing use of renewable power (e.g., on-site solar projects)[72][73] - The company is subject to U.S. and international environmental and health and safety laws, with increasing global emphasis on emissions reduction supporting demand for its advanced composite light weighting solutions[74][75] Other Regulatory Matters Hexcel must comply with U.S. government regulations and numerous international laws, including export controls and trade restrictions, which can impose compliance costs and affect competitiveness - Hexcel must comply with U.S. government Federal Acquisition Regulations, export controls, and security requirements, with non-compliance potentially leading to fines, penalties, and business loss[77] - Significant international operations expose the company to numerous global laws and regulations, including export controls, sanctions, customs, and local trade rules, which can impose compliance costs and impact competitiveness[78] Sales and Marketing Hexcel sells and markets its products globally through a dedicated staff, independent distributors, and various sales representation offices - Hexcel sells and markets its products globally through a staff of salaried marketing managers, product managers, and sales personnel, as well as independent authorized distributors and sales offices[79] Competition Hexcel competes globally in advanced composites based on technology, performance, and price, benefiting from significant barriers to entry like intellectual property and specialized expertise - Hexcel competes globally in advanced composites against other companies and substitute materials (metal, structural foam, wood), with competition based on technology, product performance, delivery, service, price, and customer preference[80] - Significant barriers to entry in Hexcel's markets include intellectual property, specialized expertise, extensive qualification databases, global manufacturing capacity, and long-term customer relationships[81] Human Capital Hexcel prioritizes attracting, developing, and retaining skilled employees, fostering a values-aligned culture, and ensuring health and safety for its 5,328 global employees, many of whom are unionized - Hexcel focuses on attracting, developing, and retaining skilled talent, guided by corporate values, and invests in training, professional development, and performance management[82] - Employee health and safety is a top priority, with a global safety culture, regular training, robust systems, and ISO14001:2015 and ISO 45001:2018 certifications[83] - As of December 31, 2022, Hexcel employed 5,328 full-time employees and contract workers globally, with approximately 22% of U.S. employees and the majority in Europe represented by unions or works' councils[85] Other Information Hexcel's website provides free access to SEC filings, but this information is not incorporated by reference into the Annual Report on Form 10-K - Hexcel's website (www.hexcel.com) provides free access to SEC filings (10-Ks, 10-Qs, 8-Ks), but website content is not incorporated by reference into the Annual Report on Form 10-K[86] Forward-Looking Statements This report contains forward-looking statements based on uncertain forecasts