Hexcel(HXL) - 2021 Q4 - Annual Report

Part I Business Hexcel Corporation is a global leader in advanced lightweight composites, serving the Commercial Aerospace, Space & Defense, and Industrial markets - Hexcel is a global leader in advanced lightweight composites technology with a product range including carbon fiber, prepregs, honeycomb, and composite structures for aerospace, defense, and industrial use[12] - The company operates through two reportable segments: Composite Materials and Engineered Products[14] - The COVID-19 pandemic significantly impacted operations, with lower demand due to reduced aircraft build rates and supply chain destocking, though signs of recovery began in 2021 including increased domestic air travel[15][16] Composite Materials Segment This segment, Hexcel's largest, manufactures and sells carbon fibers, fabrics, prepregs, adhesives, and honeycomb core for various applications - This segment manufactures core products like carbon fibers (HexTow®), fabrics (HexForce®), prepregs (HexPly®), structural adhesives (HexBond®), and honeycomb (HexWeb®)[18][20][21] Composite Materials Segment Net Sales | Year | Net Sales (in millions) | % of Total Company Sales | | :--- | :--- | :--- | | 2021 | $1,019.4 | ~80% | | 2020 | $1,185.9 | ~80% | | 2019 | $1,863.1 | ~80% | - Key customers for this segment include Airbus, Boeing, General Electric, Lockheed Martin, Safran, and Vestas[31] Engineered Products Segment This segment produces composite structures, precision machined honeycomb parts, and RF/EMI absorbing materials, primarily for the aerospace industry - This segment manufactures composite structures, engineered honeycomb parts, and RF interference control materials for aerospace applications[36][37] Engineered Products Segment Net Sales | Year | Net Sales (in millions) | % of Total Company Sales | | :--- | :--- | :--- | | 2021 | $305.3 | ~20% | | 2020 | $316.5 | ~20% | | 2019 | $492.6 | ~20% | - The segment holds a 50% ownership in the Aerospace Composites Malaysia Sdn Bhd (ACM) joint venture with Boeing; as of January 1, 2022, Hexcel no longer purchases semi-finished components from ACM but continues to accrue 50% of ACM's net income[38] Markets and Customers Hexcel serves Commercial Aerospace, Space & Defense, and Industrial markets, with Airbus and Boeing as its largest customers 2021 Net Sales by Market | Market | % of 2021 Net Sales | | :--- | :--- | | Commercial Aerospace | 50% | | Space & Defense | 33% | | Industrial | 17% | Sales to Significant Customers (% of Total Net Sales) | Customer (and subcontractors) | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Airbus | 33% | 33% | 39% | | Boeing | 16% | 19% | 25% | - Demand in the wind energy sub-market declined in 2021 due to commoditization and a technology shift from prepreg to infusion processes[57] - The F-35 program is the largest in the Space & Defense market, representing less than 25% of the market's revenue[53] Operations and Strategy Hexcel maintains vertically integrated operations, focuses on research and technology, and is committed to environmental sustainability - The company is vertically integrated, producing its own PAN precursor for carbon fiber production, and in 2021, it internally consumed 55-60% of the carbon fiber it produced[60][61] - Hexcel acknowledges risks from supply disruptions and material shortages due to global transportation issues and market volatility, and is working with key suppliers to mitigate impacts[64] - The company is focused on environmental sustainability, with initiatives like solar power projects at several manufacturing sites and efforts to reduce waste and emissions[68][69] - As of December 31, 2021, the company employed 4,863 full-time employees and contract workers, an increase from 4,647 at the end of 2020[83] Risk Factors The company faces significant risks from the ongoing COVID-19 pandemic, customer concentration, supply chain disruptions, international operations, environmental regulations, and cybersecurity threats - COVID-19 Pandemic: The pandemic continues to adversely affect the business through reduced demand for commercial aircraft, supply chain disruptions, and potential workforce impacts from health measures[91][93] - Customer Concentration: A significant decline in business with Airbus or Boeing, who represented 33% and 16% of 2021 sales respectively, could materially harm operating results[101] - Supply Chain & Raw Materials: Profitability is dependent on the price and supply of raw materials like acrylonitrile and carbon fiber; the company experienced minor supply disruptions in 2021 and anticipates they may continue[112] - International Operations: With 59% of customer sales outside the U.S. in 2021, the company is exposed to risks from currency fluctuations, trade policies (tariffs), and geopolitical instability[114][115] - Environmental & ESG: The company faces risks from evolving environmental laws, climate change impacts on operations, and increasing stakeholder focus on ESG matters, which could increase costs and damage reputation if not managed effectively[118][120][125] - Cybersecurity: The company depends heavily on IT systems and faces sophisticated cyberattacks, where a breach could lead to data loss, operational stoppages, and reputational harm[123] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None[135] Properties Hexcel owns and leases manufacturing facilities and offices globally, with corporate headquarters in Stamford, Connecticut, and major manufacturing sites across the U.S. and internationally - The company's principal corporate offices are leased in Stamford, Connecticut, while principal research and technology labs are located in California, Utah, England, and France[137] - Hexcel operates numerous manufacturing facilities in the U.S. and internationally, including sites in Arizona, Alabama, Utah, France, England, Spain, Germany, and China[140] - The wind energy prepreg production facility in Windsor, Colorado was closed in November 2020 and is currently held for sale[140] Legal Proceedings Hexcel is involved in various legal proceedings, primarily environmental matters, including the Lower Passaic River Superfund site, with an environmental remediation accrual of $2.1 million as of December 31, 2021 - The company is named as a Potentially Responsible Party (PRP) for the Lower Passaic River Superfund site in New Jersey due to a former manufacturing site[399] - In June 2018, Occidental Chemical Corporation (OCC) filed a suit against Hexcel and ~120 other parties for cost recovery related to the Lower Passaic River cleanup[402] Environmental Remediation Reserve Activity (in millions) | Year | Beginning Balance | Cash Expenditures | Ending Balance | | :--- | :--- | :--- | :--- | | 2021 | $2.4 | $(0.3) | $2.1 | | 2020 | $2.5 | $(0.1) | $2.4 | | 2019 | $2.7 | $(0.2) | $2.5 | Mine Safety Disclosures This item is not applicable to the company - Not applicable[142] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Hexcel's common stock trades on the NYSE under HXL, with dividends and stock repurchases suspended in April 2020 due to the pandemic but dividends reinstated in January 2022 - Common stock is traded on the NYSE under the symbol HXL[144] - Dividend payments and stock repurchases were suspended in April 2020 in response to the COVID-19 pandemic, with the dividend reinstated commencing with the first quarter of 2022[145] - As of January 31, 2022, there were 449 holders of record of the company's common stock[146] Management's Discussion and Analysis of Financial Condition and Results of Operations In 2021, Hexcel's net sales decreased to $1,324.7 million due to the pandemic, but operating income and gross margin improved, with the company generating $123.8 million in free cash flow Financial Highlights (GAAP) | Metric (in millions) | 2021 | 2020 | | :--- | :--- | :--- | | Net Sales | $1,324.7 | $1,502.4 | | Gross Margin % | 18.9% | 16.0% | | Operating Income | $51.8 | $14.1 | | Net Income | $16.1 | $31.7 | Non-GAAP Financial Measures | Metric (in millions) | 2021 | 2020 | | :--- | :--- | :--- | | Adjusted Operating Income | $70.0 | $72.0 | | Adjusted Net Income | $23.2 | $20.6 | | Free Cash Flow | $123.8 | $213.7 | - The company received $10.5 million in 2021 under the Aviation Manufacturing Jobs Protection (AMJP) program and anticipates receiving the remaining approved funds of up to $20.9 million in 2022[177][206] Results of Operations Consolidated net sales for 2021 decreased 11.8% to $1,324.7 million, with declines across all markets, yet gross margin improved to 18.9% due to favorable sales mix and cost reductions 2021 vs 2020 Sales Change by Market (Constant Currency) | Market | % Change | | :--- | :--- | | Commercial Aerospace | (19.1%) | | Space & Defense | (3.4%) | | Industrial | (7.3%) | - Gross margin improved to 18.9% in 2021 from 16.0% in 2020, attributed to a favorable sales mix towards carbon fiber and benefits from cost reduction actions[191] - SG&A expenses increased to $135.0 million (10.2% of sales) in 2021 from $121.1 million (8.1% of sales) in 2020, mainly due to higher employee-related costs as temporary pandemic cost reductions ended[192] - Other operating expenses decreased to $18.2 million in 2021 from $57.9 million in 2020, as 2020 included higher restructuring costs and expenses from the terminated merger with Woodward Inc[194] Financial Condition and Liquidity Hexcel maintained a solid liquidity position in 2021 with $127.7 million in cash and $625 million undrawn credit, reducing total debt to $823.3 million and complying with amended credit facility covenants Key Balance Sheet & Cash Flow Items (in millions) | Metric | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Cash and cash equivalents | $127.7 | $103.3 | | Total Debt | $823.3 | $926.4 | | Net Cash from Operating Activities (2021 vs 2020) | $151.7 | $264.3 | - The company amended its credit facility in January 2021, temporarily replacing the maximum leverage ratio with a minimum liquidity requirement of $250 million through Q1 2022 and reducing revolving commitments to $750 million[202][312] - Financing activities in 2021 included a $103 million repayment of the senior unsecured credit facility[209] Critical Accounting Policies and Estimates Management identifies critical accounting policies requiring significant judgment, including income taxes, retirement benefits, and impairment testing of long-lived assets and goodwill - Income Taxes: Involves significant estimates for deferred tax asset realizability, requiring a valuation allowance when recovery is not more likely than not; as of Dec 31, 2021, the company had uncertain tax positions related to returns from 2013 onward[215][216][217] - Retirement Benefits: Accounting for pension and postretirement plans requires actuarial models with key assumptions for discount rates, expected return on assets, and compensation growth, which are set annually[219][221] - Long-Lived Assets and Goodwill: Assets are reviewed for impairment when events indicate the carrying amount may not be recoverable, with this assessment requiring estimates of future undiscounted cash flows and fair value[227][228] Quantitative and Qualitative Disclosures About Market Risk Hexcel is exposed to market risks from currency exchange rates, interest rates, and commodity prices, using derivatives to hedge these exposures - The company is exposed to market risks from foreign currency exchange rates (primarily Euro and British pound), interest rates, and commodity prices[230] - A sensitivity analysis showed a hypothetical 10% adverse movement in FX rates would impact 2021 operating income by ~$3.7 million with hedges in place, versus ~$21.9 million without hedges[237] - As of December 31, 2021, the company had foreign currency forward exchange contracts with an aggregate notional amount of $316.4 million to hedge forecasted transactions through June 2023[393] - The company held commodity swap agreements with a notional value of $18.9 million as of Dec 31, 2021, to hedge against price fluctuations in raw materials like propylene[396] Financial Statements and Supplementary Data This section presents Hexcel's audited consolidated financial statements for 2021, including balance sheets, statements of operations, comprehensive income, stockholders' equity, and cash flows, along with notes and an unqualified audit opinion Consolidated Financial Statements The consolidated financial statements present Hexcel's financial position and results of operations, showing total assets of $2,819.4 million and net income of $16.1 million for 2021 Consolidated Balance Sheet Highlights (in millions) | Account | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Total Current Assets | $616.3 | $535.9 | | Total Assets | $2,819.4 | $2,917.8 | | Total Current Liabilities | $247.6 | $183.1 | | Total Liabilities | $1,333.9 | $1,407.6 | | Total Stockholders' Equity | $1,485.5 | $1,510.2 | Consolidated Statement of Operations Highlights (in millions) | Account | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Net Sales | $1,324.7 | $1,502.4 | $2,355.7 | | Gross Margin | $250.1 | $239.7 | $640.4 | | Operating Income | $51.8 | $14.1 | $425.2 | | Net Income | $16.1 | $31.7 | $306.6 | | Diluted EPS | $0.19 | $0.38 | $3.57 | Notes to the Consolidated Financial Statements The notes provide detailed disclosures on Hexcel's accounting policies and financial data, covering debt, retirement plans, income taxes, revenue recognition, restructuring, stock-based compensation, contingencies, and segment information - Debt (Note 6): Total debt as of Dec 31, 2021 was $823.3 million, consisting primarily of a $125 million balance on the senior unsecured credit facility, $300 million of 4.7% senior notes due 2025, and $400 million of 3.95% senior notes due 2027[310] - Retirement Plans (Note 8): The company maintains various defined benefit and defined contribution plans, with net periodic pension expense of $17.8 million in 2021, and European and U.S. defined benefit plans having deficits of $9.1 million and $24.0 million, respectively[337][339] - Segment Information (Note 18): In 2021, the Composite Materials segment had operating income of $88.1 million on $1,019.4 million in sales, while the Engineered Products segment had operating income of $20.2 million on $305.3 million in sales[414] - Geographic Data (Note 18): In 2021, 52% of net sales were generated from manufacturing facilities in the United States, with the remaining 48% from international locations, and 59% of sales delivered to international customers[415][114] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[150] Controls and Procedures The CEO and CFO concluded that disclosure controls and procedures were effective as of December 31, 2021, with no material changes in internal control over financial reporting during Q4 2021 - The CEO and CFO concluded that disclosure controls and procedures were effective as of December 31, 2021[151] - No material changes to internal control over financial reporting occurred during the fourth quarter of 2021[152] Part III Directors, Executive Officers and Corporate Governance Information for this item will be incorporated by reference from the company's definitive proxy statement - Information is incorporated by reference from the forthcoming definitive proxy statement[157] Executive Compensation Information for this item will be incorporated by reference from the company's definitive proxy statement - Information is incorporated by reference from the forthcoming definitive proxy statement[158] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information for this item will be incorporated by reference from the company's definitive proxy statement - Information is incorporated by reference from the forthcoming definitive proxy statement[159] Certain Relationships and Related Transactions, and Director Independence Information for this item will be incorporated by reference from the company's definitive proxy statement - Information is incorporated by reference from the forthcoming definitive proxy statement[160] Principal Accountant Fees and Services Information for this item will be incorporated by reference from the company's definitive proxy statement - Information is incorporated by reference from the forthcoming definitive proxy statement[161] Part IV Exhibits, Financial Statement Schedules This section lists the financial statements, financial statement schedules, and exhibits filed as part of the Annual Report on Form 10-K - This section provides a list of all financial statements, schedules, and exhibits filed with the Form 10-K[163] - Key exhibits listed include the Credit Agreement (10.1), various incentive stock and compensation plans (10.5, 10.7), and certifications by the CEO and CFO (31.1, 31.2)[165][167] Form 10-K Summary The company indicates that no Form 10-K summary is provided - None[168]