HEXCEL CORPORATION Business Overview
We develop, manufacture, and market lightweight, high-performance structural
materials, including carbon fibers, specialty reinforcements, prepregs and other
fiber-reinforced matrix materials, honeycomb, adhesives, radio frequency /
electromagnetic interference ("RF/EMI") and microwave absorbing materials,
engineered honeycomb and composite structures, for use in Commercial Aerospace ,
Space & Defense and Industrial markets. Our products are used in a wide variety
of end applications, such as commercial and military aircraft, space launch
vehicles and satellites, wind turbine blades, automotive, recreational products
and other industrial applications.
We serve international markets through manufacturing facilities, sales offices
and representatives located in the Americas , Asia Pacific , Europe , Russia , India
and Africa . We are also a partner in a joint venture in Malaysia , which
manufactures composite structures for Commercial Aerospace applications.
We have two segments, Composite Materials and Engineered Products. The Composite
Materials segment is comprised of our carbon fiber, specialty reinforcements,
resins, prepregs and other fiber-reinforced matrix materials, honeycomb core
product lines and pultruded profiles. The Engineered Products segment is
comprised of lightweight high strength composite structures, RF/EMI and
microwave absorbing materials, engineered core and specialty machined honeycomb
products with added functionality.
On March 11, 2020 , the World Health Organization ("WHO") declared the COVID-19
outbreak a pandemic. The outbreak has resulted in governments around the world
implementing increasingly stringent measures to help control the spread of the
virus, including quarantines, "shelter in place" and "stay at home" orders,
travel restrictions, business curtailments, school closures, and other measures.
In addition, governments and central banks in several parts of the world have
enacted fiscal and monetary stimulus measures to counteract the impacts of
COVID-19.
Our company is a sole provider for many programs, including critical defense
programs. Consistent with national guidelines and with state and local orders to
date, we currently continue to operate across our footprint with some temporary
site closures. Notwithstanding our continued operations, COVID-19 has begun to
have and may have further negative impacts on our operations, supply chain,
transportation networks and customers all of which have and may continue to
compress our margins, even after the preventative and precautionary measures
that we, other businesses and governments are taking. The COVID-19 outbreak is a
widespread public health crisis that is adversely affecting the economies and
financial markets globally. The resulting economic downturn has, and could for
an extended period of time, adversely affect demand for our products and
contribute to volatile supply and demand conditions affecting prices and volumes
in the markets for our products, services and raw materials. The progression of
the pandemic could also continue to negatively impact our business or results of
operations through the temporary closure of our operating locations or those of
our customers or suppliers.
During the second quarter of 2020, our operations, margins and results were
adversely impacted by lower demand for our products due to substantial
reductions in original equipment manufacturer build rates combined with a move
to reduce inventory throughout our supply chain, particularly carbon fiber.
Since the outbreak began, we have seen the impacts of COVID-19 on our markets
and operations including significant decreases in air traffic, temporary
shutdowns of our customers' and suppliers' facilities and decreased demand from
our customers. In response, we have taken certain mitigating actions to align
our costs with the lower sales and to preserve liquidity including eliminating
approximately 30% of our labor costs, curtailing discretionary spend, and
suspending dividend payments and stock repurchases. The extent to which COVID-19
will adversely impact our business depends on future developments, which are
highly uncertain and unpredictable, including new information concerning the
effectiveness of actions globally to contain or mitigate its effects. While we
expect the pandemic to continue to negatively impact our results of operations,
cash flows and financial position, the current level of uncertainty over the
economic and operational impacts of COVID-19 means the related financial impact
to us cannot be reasonably estimated at this time.
On January 12, 2020 , we announced that we had entered into an agreement and plan
of merger (the "Merger Agreement") with Woodward, Inc. ("Woodward"), which
provided for the combination of Hexcel and Woodward in an all stock merger of
equals (the "Merger"). In response to the impact of the COVID-19 pandemic, on
April 5, 2020 , Hexcel and Woodward entered into an agreement to terminate the
Merger Agreement.
Net sales for the quarter were
19
--------------------------------------------------------------------------------
Commercial Aerospace sales of $203.9 million decreased 51.0% (51.5% in constant
currency) for the quarter as compared to the second quarter of 2019. There were
significantly lower sales across all major programs as build rates across
Commercial Aerospace have decreased significantly and rapidly in response to the
COVID-19 pandemic. Lower sales for the Airbus A350 had the largest quarterly
revenue impact compared to the second quarter of 2019. Further, initial
inventory reductions in the supply chain during the second quarter of 2020
accentuated the impact of the sales decrease.
Sales to other commercial aerospace, which includes regional and business aircraft customers, were down 25.0% for the second quarter of 2020 as compared to 2019.
Space & Defense sales of
Total Industrial sales of$66.4 million for the second quarter of 2020 were down 17.7% (16.6% in constant currency) as compared to the 2019 period. Wind energy sales (the largest submarket in Industrial), experienced a decline of 14.6% compared to the second quarter of 2019 as customer demand softened. Gross margin for the second quarter of 2020 decreased to 14.5% as compared to 27.7% for the second quarter of 2019. The dramatic reduction in demand combined with the unfavorable mix impact of lower carbon fiber sales drove the decline in margin performance in 2020. Selling, general and administrative and research and technology expenses for the second quarter of 2020 were 34% lower than the prior year, as cost reduction actions began to take effect, including headcount reductions and minimizing discretionary spending.
Other operating expense of
Operating cash flow for the first six months of 2020 was$73.6 million compared to$157.2 million in 2019 on lower earnings partially offset by lower working capital usage. Working capital used$52.0 million in 2020 as compared to$82.7 million in 2019. For the first six months of 2020, capital expenditures were$40.4 million as compared to$99.3 million in the first six months of 2019. Free cash flow (defined as cash provided by operating activities less capital expenditures) for the six months endedJune 30, 2020 was a use of$33.2 million versus$57.9 million in the comparable period of 2019. Financial Overview Results of Operations Quarter Ended June 30, Six Months Ended June 30, (In millions, except per share 2020 2019 % Change 2020 2019 % Change data) Net sales$ 378.7 $ 609.0 (37.8 )%$ 919.7 $ 1,218.9 (24.5 )% Net sales change in constant (38.2 )% (24.6 )%
currency
Operating income$ 6.4 $ 115.1 (94.4 )%$ 72.1 $ 217.9 (66.9 )% As a percentage of net sales 1.7 % 18.9 % 7.8 % 17.9 % Net income (loss) (1.0 ) 80.9 N/M 41.4 153.1 (73.0 )% Diluted net income (loss) per$ (0.01 ) $ 0.94 N/M$ 0.49 $ 1.78 (72.5 )% common share The Company uses non-GAAP financial measures, including sales and expenses measured in constant dollars (prior year sales and expenses measured at current year exchange rates); operating income, net income and earnings per share adjusted for items included in operating expense and non-operating expenses; the effective tax rate adjusted for certain out of period items; and free cash flow. Management believes these non-GAAP measurements are meaningful to investors because they provide a view ofHexcel with respect to ongoing operating results and comparisons to prior periods. These adjustments represent significant charges or credits that we believe are important to an understanding ofHexcel's overall operating results in the periods presented. Such non-GAAP measurements are not determined in accordance with generally accepted accounting principles and should not be viewed in isolation or as an alternative to or substitutes for GAAP measures of performance. Our calculation of these measures may not be comparable to similarly titled measures used by other companies, and the measures exclude financial information that some may consider important in evaluating our performance. Reconciliations to adjusted operating income, adjusted net income, adjusted effective tax rate, adjusted diluted net income per share and free cash flow are provided below. 20 --------------------------------------------------------------------------------
Operating Income
Quarter Ended June 30, Six Months Ended June 30,
(In millions) 2020 2019 2020 2019
GAAP operating income $ 6.4 $ 115.1 $ 72.1 $ 217.9
Other operating expense (a) 13.1 - 27.8 -
Adjusted operating income (non-GAAP) $ 19.5 $ 115.1 $ 99.9 $ 217.9
(a) The quarter and six months ended June 30, 2020 includes restructuring expenses as well as costs related to the terminated merger
with Woodward.
Quarter Ended June 30, Six Months Ended June 30,
2020 2019 2020 2019
(In millions, except per Net Income Net Tax
diluted share data) (loss) Tax Rate % Income Tax Rate % Net Income Tax Rate % Net Income Rate %
GAAP $ (1.0 ) N/M $ 80.9 22.9 $ 41.4 16.5 $ 153.1 22.8
Other operating expense
(a) 10.1 - - - 21.5 - - -
Discrete tax benefit (b) (2.7 ) N/M - - (2.7 ) 5.4 - -
Adjusted (non-GAAP) $ 6.4 N/M $ 80.9 22.9 $ 60.2 21.9 $ 153.1 22.8
Adjusted diluted net
income per share
(non-GAAP) $ 0.08 $ 0.94 $ 0.72 $ 1.78 (a) The quarter and six months ended
Six Months Ended June 30,
(In millions) 2020 2019
Net cash provided by operating activities $ 73.6 $ 157.2
Less: Capital expenditures (40.4 ) (99.3 )
Free cash flow (non-GAAP) $ 33.2 $ 57.9
Net Sales
The following table summarizes net sales to third-party customers by segment and
end market for the quarters and six months ended
Quarter Ended June 30, Six Months Ended June 30,
(In millions) 2020 2019 % Change 2020 2019 % Change
Consolidated Net Sales $ 378.7 $ 609.0 (37.8 )% $ 919.7 $ 1,218.9 (24.5 )%
Commercial Aerospace 203.9 416.5 (51.0 )% 566.8 832.0 (31.9 )%
Space & Defense 108.4 111.8 (3.0 )% 220.0 219.6 0.2 %
Industrial 66.4 80.7 (17.7 )% 132.9 167.3 (20.6 )%
Composite Materials $ 306.2 $ 484.0 (36.7 )% $ 744.7 $ 971.7 (23.4 )%
Commercial Aerospace 171.8 323.7 (46.9 )% 472.0 647.1 (27.1 )%
Space & Defense 69.4 79.6 (12.8 )% 142.6 157.3 (9.3 )%
Industrial 65.0 80.7 (19.5 )% 130.1 167.3 (22.2 )%
Engineered Products $ 72.5 $ 125.0 (42.0 )% $ 175.0 $ 247.2 (29.2 )%
Commercial Aerospace 32.1 92.8 (65.4 )% 94.8 184.9 (48.7 )%
Space & Defense 39.0 32.2 21.1 % 77.4 62.3 24.2 %
Industrial 1.4 - N/M 2.8 - N/M
21
--------------------------------------------------------------------------------
Sales by Segment Composite Materials: Net sales of$306.2 million in the second quarter of 2020 decreased$177.8 million from the$484.0 million in sales for the prior year quarter, driven by declines across all markets. Net sales of$744.7 million for the first half of 2020 decreased 23.4% compared to the same period last year. InCommercial Aerospace there were significantly lower sales across all major programs as build rates acrossCommercial Aerospace have decreased significantly and rapidly in response to the COVID-19 pandemic. Further, initial inventory reductions in the supply chain during the second quarter of 2020 accentuated the impact of the sales decrease. The decline in Space & Defense sales primarily related to lower military helicopter and aircraft structure sales partially offset by higher space sales. The decline in Wind energy sales primarily related to softened customer demand. Engineered Products: Net sales of$72.5 million in the second quarter of 2020 decreased$52.5 million from the$125.0 million for 2019. Net sales of$175.0 million for the first half of 2020 decreased 29.2% compared to the same period last year. The declines primarily reflect lower sales for the Boeing 737 MAX as well as lower build rates acrossCommercial Aerospace in response to the COVID-19 pandemic. The increase in Space & Defense sales reflects the growth inU.S. military helicopter programs. Sales by MarketCommercial Aerospace sales of$203.9 million decreased 51.0% (51.5% in constant currency) for the quarter as compared to the second quarter of 2019. There were significantly lower sales across all major programs as build rates acrossCommercial Aerospace have decreased significantly and rapidly in response to the COVID-19 pandemic. Lower sales for the Airbus A350 had the largest quarterly revenue impact compared to the second quarter of 2019. Further, initial inventory reductions in the supply chain during the second quarter of 2020 accentuated the impact of the sales decrease. Sales of$566.8 million , for the first six months of 2020, decreased 31.9% in constant currency compared to the first six months of 2019 due to significant production cuts across the major aircraft programs during the second quarter of 2020 and only minimal sales for the Boeing 737 MAX program.
Sales to other commercial aerospace, which includes regional and business aircraft customers, were down 25.0% for the second quarter of 2020 as compared to 2019, and declined 10.6% year to date.
Space & Defense sales of$108.4 million decreased 3.0% (3.6% in constant currency) for the quarter as compared to the second quarter of 2019. The decrease was due to lower demand from a number of international space and defense programs as aggregateU.S. space and defense sales were up nominally in the second quarter of 2020 compared to the second quarter of 2019. Space & Defense sales of$220.0 million , for the first six months of 2020, were in line with the first six months of 2019.Total Industrial sales of$66.4 million for the second quarter of 2020 were down 17.7% (16.6% in constant currency) as compared to the 2019 period and decreased 20.6% for the first six months as compared to last year. Wind energy sales (the largest submarket in Industrial), experienced a decline of 14.6% compared to the second quarter of 2019 and 18.9% for the first six months of 2020 as compared to the same period in 2019 due to production disruptions caused by the pandemic and lower customer demand. Gross Margin Quarter Ended June 30, Six Months Ended June 30, (In millions) 2020 2019 % Change 2020 2019 % Change Gross margin$ 54.9 $ 168.8 (67.5 )%$ 195.8 $ 336.0 (41.7 )% Percentage of sales 14.5 % 27.7 % 21.3 % 27.6 % Gross margin for the second quarter of 2020 declined to 14.5% compared to 27.7% in the second quarter of 2019 and was 21.3% and 27.6% for the first half of 2020 and 2019. The dramatic reduction in demand combined with the unfavorable mix impact of lower carbon fiber sales drove the decline in margin performance in 2020. 22
--------------------------------------------------------------------------------
Operating Expenses
Quarter Ended June 30, Six Months Ended June 30,
(In millions) 2020 2019 % Change 2020 2019 % Change
SG&A expense $ 24.1 $ 39.5 (39.0 )% $ 70.6 $ 89.0 (20.7 )%
Percentage of sales 6.4 % 6.5 % 7.7 % 7.3 %
R&T expense$ 11.3 $ 14.2 (20.4 )%$ 25.3 $ 29.1 (13.1 )% Percentage of sales 3.0 % 2.3 % 2.8 % 2.4 % Selling, general and administrative and research and technology expenses were lower, for both the quarter and six month periods endedJune 30, 2020 , than the prior year's comparable periods, as cost reduction actions began to take effect, including headcount reductions and minimizing discretionary spending.
© Edgar Online, source
