Hexcel(HXL) - 2023 Q4 - Annual Report

Part I Business Overview Hexcel Corporation is a global leader in advanced lightweight composites, operating through two segments and serving commercial aerospace, space & defense, and industrial markets, with significant revenue concentration in Airbus and Boeing, while emphasizing vertical integration and R&D - Hexcel operates as a global leader in advanced lightweight composites technology, with products including carbon fiber, prepregs, honeycomb, and engineered structures[12] - The company is organized into two reportable segments: Composite Materials and Engineered Products[14] 2023 Net Sales by Market | Market | Percentage of 2023 Net Sales | | :--- | :--- | | Commercial Aerospace | 60% | | Space & Defense | 30% | | Industrial | 10% | Significant Customer Sales Concentration (2023) | Customer (and subcontractors) | Percentage of 2023 Net Sales | | :--- | :--- | | Airbus | 39% | | Boeing | 15% | - In December 2023, Hexcel sold its 50% interest in its Malaysian joint venture, Aerospace Composites Malaysia Sdn. Bhd. (ACM), to Boeing for net proceeds of $44.7 million[34] - As of December 31, 2023, the company employed 5,590 full-time employees and contract workers, an increase from 5,328 in 2022[75][76] Composite Materials Segment The Composite Materials segment, accounting for approximately 80% of net sales, manufactures carbon fibers, prepregs, and honeycomb core for aerospace, defense, and industrial applications, with 2023 net sales of $1,474.2 million - This segment produces carbon fibers, specialty reinforcements, prepregs, structural adhesives, and honeycomb core for aerospace, defense, and industrial applications[17] Composite Materials Segment Net Sales | Year | Net Sales (in millions) | | :--- | :--- | | 2023 | $1,474.2 | | 2022 | $1,279.7 | | 2021 | $1,019.4 | - Key customers for this segment include Airbus, Boeing, Safran, Spirit Aerosystems, and Vestas[29] Engineered Products Segment The Engineered Products segment, accounting for about 20% of net sales, manufactures composite structures and precision machined honeycomb parts primarily for the aerospace industry, with 2023 net sales of $314.8 million - This segment manufactures composite structures, precision machined honeycomb parts, and advanced interference control materials, primarily for the aerospace industry[32] Engineered Products Segment Net Sales | Year | Net Sales (in millions) | | :--- | :--- | | 2023 | $314.8 | | 2022 | $298.0 | | 2021 | $305.3 | - Key customers include The Boeing Company, Lockheed Martin, Sikorsky, and Spirit Aerosystems[37] Raw Materials and Production Activities Hexcel maintains vertical integration by producing its own PAN precursor for carbon fiber, with ongoing capacity expansion and reliance on a limited number of key raw material suppliers - The company is vertically integrated, producing its own PAN precursor for carbon fiber. In 2023, it used 60-65% of its carbon fiber production internally[53][54] - Construction resumed on a new carbon fiber line in Decatur, AL, expected to be qualified for aerospace markets in late 2025 or early 2026[55] - The company completed the expansion of its Engineered Products facility in Casablanca, Morocco, doubling its size to meet growing demand[55] - Hexcel is highly dependent on a limited number of qualified suppliers for certain key raw materials, which could disrupt production if supply is interrupted[57][58] Risk Factors The company faces strategic risks from cyclical markets and customer concentration, operational risks from macroeconomic factors and supply chain, and international, regulatory, and cybersecurity risks - Strategic Risks: The business is subject to cyclical markets, particularly Commercial Aerospace, which accounted for 60% of 2023 sales. A significant decline in business with major customers Airbus (39% of 2023 sales) or Boeing (15% of 2023 sales) could materially impact results[84][87] - Operational Risks: The global macroeconomic environment, including inflation, supply chain disruptions, and labor shortages, poses a significant risk. The company's profitability is dependent on the price and supply of raw materials, some of which have limited sources[94][99] - International Operations Risk: In 2023, 50% of production and 59% of customer sales occurred outside the U.S., exposing the company to geopolitical instability, currency fluctuations (primarily U.S. dollar vs. Euro and British pound), and complex international trade laws[101][102] - Regulatory and Compliance Risks: The company must comply with extensive environmental laws, which could require significant capital expenditures. Failure to comply with U.S. government procurement and export control laws could result in fines, penalties, or debarment[90][104] - Cybersecurity Risk: The company depends heavily on IT systems and stores sensitive data, making it a target for increasingly sophisticated cyberattacks. A breach could lead to data loss, operational disruptions, and financial penalties[111][112] - Human Capital Risk: The business depends on a highly trained workforce. An inability to attract and retain qualified employees, or work stoppages due to failure in negotiating collective bargaining agreements, could adversely affect operations[95][96] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None[128] Cybersecurity Hexcel's cybersecurity program, managed by the CIO with board oversight, uses a NIST-based risk management approach, including third-party testing and an incident response team - The cybersecurity program is led by the Chief Information Officer (CIO) and receives regular oversight from the board of directors and its audit committee[129][130] - The company's risk management approach is based on the National Institute of Standards and Technology (NIST) framework and includes periodic intrusion and penetration testing by third parties[131][132] - An Executive Cyber Response Team, including the CIO, General Counsel, and Chief Accounting Officer, manages incident response and regularly practices through tabletop exercises[133] - As of the report date, the company is not aware of any cybersecurity risks that have materially affected or are reasonably likely to materially affect the business[134] Properties Hexcel operates numerous owned and leased manufacturing facilities and offices globally, including major sites in the U.S. and Europe, supporting its composite material and engineered product segments Major Manufacturing Facilities | Location | Segment | Principal Products | Total Square Footage | | :--- | :--- | :--- | :--- | | Salt Lake City, Utah | Composite Materials | Carbon Fibers; Prepregs | 1,194,070 | | Decatur, Alabama | Composite Materials | PAN Precursor | 819,863 | | Kent, Washington | Engineered Products | Composite structures | 486,400 | | Les Avenières, France | Composite Materials | Fabrics; Specialty Reinforcements | 490,000 | | Duxford, England | Composite Materials | Prepregs; Adhesives; Honeycomb | 417,109 | | Casablanca, Morocco | Engineered Products | Engineered Honeycomb Parts | 260,875 | Legal Proceedings The company is involved in various legal proceedings, notably the Lower Passaic River environmental cleanup, with a $150 million settlement pending court approval and $0.7 million in environmental accruals - Hexcel is a Potentially Responsible Party (PRP) in the environmental remediation of the Lower Passaic River in New Jersey[401] - In December 2022, the EPA lodged a Consent Decree for a $150 million settlement involving Hexcel and 83 other PRPs for cleanup costs. The settlement is pending court approval[404] - Aggregate environmental related accruals were $0.7 million as of December 31, 2023, down from $0.8 million in 2022[406] Mine Safety Disclosures This item is not applicable to the company - Not applicable[139] Part II Common Stock Market and Shareholder Matters Hexcel's common stock trades on the NYSE under HXL, with 423,292 shares repurchased for $30.1 million in 2023, leaving $187 million available for future repurchases - Hexcel common stock is traded on the NYSE under the symbol HXL[141] - During 2023, the company repurchased 423,292 shares of common stock for a total cost of $30.1 million[142] - Approximately $187 million remained available for repurchases under the 2018 Share Repurchase Plan at the end of 2023[142] Management's Discussion and Analysis (MD&A) Hexcel's 2023 net sales increased to $1,789.0 million driven by aerospace growth, while net income decreased to $105.7 million due to a $70.5 million UK pension plan settlement charge, generating $148.9 million in free cash flow Key Financial Results (2023 vs. 2022) | Metric (in millions) | 2023 | 2022 | | :--- | :--- | :--- | | Net Sales | $1,789.0 | $1,577.7 | | Gross Margin % | 24.2% | 22.6% | | Operating Income | $215.3 | $175.2 | | Operating Income % | 12.0% | 11.1% | | Net Income | $105.7 | $126.3 | - The increase in 2023 sales was driven by a 17.2% rise in Commercial Aerospace and a 17.1% increase in Space & Defense, while Industrial sales decreased by 12.3%[179][180][181] - Net income in 2023 was significantly impacted by a non-cash settlement charge of $70.5 million related to the buy-out of the UK pension plan[195][198] - The company generated $257.1 million in cash from operations and had free cash flow of $148.9 million in 2023[199] - In April 2023, the company refinanced its credit facility, maintaining a borrowing capacity of $750 million, which matures in April 2028[202] Market Risk Disclosures Hexcel manages market risks from foreign currency, interest rates, and commodity prices using derivative instruments, with a hypothetical 10% adverse currency movement impacting 2023 operating income by $26.1 million without hedges - The company's primary market risks are fluctuations in currency exchange rates (USD vs. EUR/GBP), interest rates, and certain commodity prices[232] - To mitigate risks, Hexcel uses financial instruments including foreign currency forward contracts, commodity swaps, and interest rate agreements for hedging purposes, not for speculation[233] - As of December 31, 2023, the company had foreign currency forward exchange contracts with an aggregate notional amount of $393.3 million to hedge forecasted transactions through June 2026[240][392] - A sensitivity analysis showed that a hypothetical 10% adverse movement in foreign currency exchange rates would have reduced 2023 operating income by approximately $26.1 million if no hedges were in place[239] Financial Statements and Supplementary Data This section presents Hexcel's audited consolidated financial statements for 2023, including balance sheets, income statements, cash flows, and notes detailing segment performance, debt, and pension obligations Note 6: Debt As of December 31, 2023, Hexcel's total debt was $699.5 million, comprising senior notes and an undrawn $750 million credit facility, with the company in compliance with all covenants Total Debt Composition as of Dec 31, 2023 | Debt Instrument | Amount (in millions) | | :--- | :--- | | 4.7% senior notes due 2025 | $300.0 | | 3.95% senior notes due 2027 | $400.0 | | Other (finance leases, discounts, etc.) | ($0.5) | | Total Debt | $699.5 | - In April 2023, the company entered into a new credit agreement, refinancing its facility with a borrowing capacity of $750 million, maturing in April 2028[312][313] - As of December 31, 2023, there were no outstanding borrowings under the $750 million facility, and the company was in compliance with all debt covenants[315][316] Note 8: Retirement and Benefit Plans Hexcel finalized a buy-out of its U.K. pension plan in 2023, resulting in a $70.5 million non-cash settlement charge, with total net periodic pension expense at $27.3 million - In the fourth quarter of 2023, the company finalized a buy-out of its U.K. pension plan, transferring all obligations to an insurer[336] - The U.K. plan buy-out resulted in a pre-tax non-cash settlement charge of approximately $70.5 million and a gain of $1.9 million from reverted excess assets[336] Total Net Periodic Pension Expense | (In millions) | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Defined benefit retirement plans | $5.7 | $5.7 | $2.6 | | Union sponsored multi-employer plan | $1.5 | $1.3 | $1.8 | | Retirement savings plans (matching & profit sharing) | $20.1 | $14.9 | $13.4 | | Total Net Periodic Expense | $27.3 | $21.9 | $17.8 | Note 18: Segment Information In 2023, Composite Materials generated $1,474.2 million in sales and Engineered Products $314.8 million, with 50% of total net sales from international locations and significant concentration in Airbus and Boeing Segment Financial Performance (2023) | (In millions) | Composite Materials | Engineered Products | Corporate & Other | Total | | :--- | :--- | :--- | :--- | :--- | | Third-party sales | $1,474.2 | $314.8 | $— | $1,789.0 | | Operating income (loss) | $237.9 | $32.8 | $(55.4) | $215.3 | | Segment assets | $2,309.3 | $543.1 | $66.1 | $2,918.5 | Net Sales by Geography (Manufacturing Location, 2023) | Geography | Net Sales (in millions) | % of Total | | :--- | :--- | :--- | | United States | $888.2 | 49.7% | | International | $900.8 | 50.3% | | Total | $1,789.0 | 100.0% | - Sales to Airbus and its subcontractors were 39% of net sales in 2023, while sales to Boeing and its subcontractors were 15%[419] Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of December 31, 2023, with no material changes to internal control over financial reporting - Management, including the CEO and CFO, concluded that as of December 31, 2023, the company's disclosure controls and procedures were effective[148] - No material changes to internal control over financial reporting were identified in the fourth quarter of 2023[149] Part III Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance will be incorporated by reference from the company's definitive proxy statement - Information is incorporated by reference from the company's definitive proxy statement[157] Executive Compensation Information regarding executive compensation will be incorporated by reference from the company's definitive proxy statement - Information is incorporated by reference from the company's definitive proxy statement[158] Security Ownership and Related Stockholder Matters Information regarding security ownership will be incorporated by reference from the company's definitive proxy statement - Information is incorporated by reference from the company's definitive proxy statement[159] Certain Relationships, Related Transactions, and Director Independence Information regarding related party transactions and director independence will be incorporated by reference from the company's definitive proxy statement - Information is incorporated by reference from the company's definitive proxy statement[160] Principal Accountant Fees and Services Information regarding principal accountant fees and services will be incorporated by reference from the company's definitive proxy statement - Information is incorporated by reference from the company's definitive proxy statement[161] Part IV Exhibits and Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed as part of the Annual Report on Form 10-K, including corporate governance and debt agreements - This section lists all financial statements and exhibits filed with the Form 10-K[162] Form 10-K Summary The company did not provide a summary for this item - None[168]