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 are currently operating across our footprint with some temporary site
closures. Notwithstanding our continued operations, COVID-19 has had 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 third 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
continues to 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
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Commercial Aerospace sales of $128.8 million decreased 66.6% (66.3% in constant
currency) for the quarter as compared to the third quarter of 2019. Sales across
all major programs were down substantially with the largest impact related to
the A350. Boeing 737 MAX sales continue to be at a very low level. Build rate
reductions driven by the COVID-19 pandemic combined with significant inventory
destocking led to the reduced sales levels. Additional build rate reductions
publicly announced at the end of July 2020 by two significant customers is
further extending the destocking.
Sales to other commercial aerospace, which includes regional and business aircraft customers, were down 49.6% for the third quarter of 2020 as compared to 2019 as demand was negatively impacted by the global pandemic, particularly business jets.
Space & Defense sales of$108.8 million decreased 0.9% (0.5% in constant currency) for the quarter as compared to the third quarter of 2019. The decrease was due to lower demand from a number of European space & defense programs as aggregateU.S. space & defense sales were up moderately in the third quarter of 2020 compared to the third quarter of 2019.Total Industrial sales of$49.3 million for the third quarter of 2020 were down 35.8% (37.5% in constant currency) as compared to the 2019 period. Wind energy sales (the largest submarket in Industrial), experienced a decline of 40.4% compared to the third quarter of 2019. This reduction reflects a customer demand shift in the U.S. market. As a result of this demand change,Hexcel will close its wind energy prepreg production facility inWindsor, Colorado in earlyNovember 2020 that served the U.S. market. TheHexcel wind material prepreg production facility inAustria that serves the European market and the wind material facility inChina , that serves the Asian market, continue to operate to produce materials for our wind energy customers. Gross margin for the third quarter of 2020 decreased to 4.7% as compared to 27.6% for the third quarter of 2019. The deterioration reflects the under absorption of fixed overhead from lower sales levels magnified by the temporary idling of select production facilities during the period to align production with demand. Selling, general and administrative and research and technology expenses for the third quarter of 2020 were 26% lower than the prior year as on-going realignment actions and headcount reductions reduce the cost structure. Other operating expense of$15.8 million , for the third quarter of 2020, primarily included the restructuring charge for theWindsor facility closure and additional severance costs across a number of facilities. Operating cash flow for the first nine months of 2020 was$157.0 million compared to$277.3 million in 2019 on lower earnings partially offset by favorable working capital usage. For the first nine months of 2020, capital expenditures were$47.8 million as compared to$162.7 million in the first nine months of 2019. Free cash flow (defined as cash provided by operating activities less capital expenditures) for the nine months endedSeptember 30, 2020 was a use of$109.2 million versus$114.6 million in the comparable period of 2019. Financial Overview Results of Operations Quarter Ended September 30, Nine Months Ended September 30, (In millions, except per share 2020 2019 % Change 2020 2019 % Change
data)
Net sales$ 286.9 $ 572.5 (49.9 )%$ 1,206.6 $ 1,791.4 (32.6 )% Net sales change in constant (49.7 )% (32.6 )%
currency
Operating income (loss)$ (37.6 ) $ 109.9 (134.2 )%$ 34.5 $ 327.8 (89.5 )% As a percentage of net sales (13.1 )% 19.2 % 2.9 % 18.3 % Net income 9.7 80.3 N/M 51.1 233.4 (78.1 )% Diluted net income per common$ 0.12 $ 0.93 N/M$ 0.61 $ 2.71 (77.5 )% 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 (loss), net income (loss) and earnings (loss) per share adjusted for items included in operating expense and non-operating expenses; 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 (loss), adjusted net income (loss), adjusted diluted net income (loss) per share and free cash flow are provided below. 20
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Operating Income (Loss)
Quarter Ended September 30, Nine Months Ended September 30,
(In millions) 2020 2019 2020 2019
GAAP operating income (loss) $ (37.6 ) $ 109.9 $ 34.5 $ 327.8
Other operating expense (a) 15.8 - 43.6 -
Adjusted operating income (loss) $ (21.8 ) $ 109.9
(non-GAAP)$ 78.1 $ 327.8
(a) The quarter and nine months ended
Quarter Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
(In millions, except per Net Income
diluted share data) (Loss) EPS Net Income EPS Net Income EPS Net Income EPS
GAAP $ 9.7 $ 0.12 $ 80.3 $ 0.93 $ 51.1 $ 0.61 $ 233.4 $ 2.71
Other operating expense
(a) 12.2 0.14 - - 33.7 0.40 - -
Discrete tax benefit (b) (46.2 ) (0.55 ) (3.0 ) (0.03 ) (48.9 ) (0.58 ) (3.0 ) (0.03 )
Adjusted (non-GAAP) $ (24.3 ) $ (0.29 ) $ 77.3 $ 0.90 $ 35.9 $ 0.43 $ 230.4 $ 2.68
(a) The quarter and nine months ended September 30, 2020 included restructuring expenses as well as costs related to the terminated merger with
Woodward.
(b) The quarter and nine months ended September 30, 2020 included a tax benefit primarily due to the release of a valuation allowance in a foreign
jurisdiction.
Nine Months Ended September 30,
(In millions) 2020 2019Net cash provided by operating activities $ 157.0 $
277.3
Less: Capital expenditures (47.8 ) (162.7 )
Free cash flow (non-GAAP) $ 109.2 $ 114.6
Net Sales
The following table summarizes net sales to third-party customers by segment and
end market for the quarters and nine months ended
Quarter Ended September 30, Nine Months Ended September 30,
(In millions) 2020 2019 % Change 2020 2019 % Change
Consolidated Net Sales $ 286.9 $ 572.5 (49.9 )% $ 1,206.6 $ 1,791.4 (32.6 )%
Commercial Aerospace 128.8 385.9 (66.6 )% 695.6 1,217.9 (42.9 )%
Space & Defense 108.8 109.8 (0.9 )% 328.8 329.4 (0.2 )%
Industrial 49.3 76.8 (35.8 )% 182.2 244.1 (25.4 )%
Composite Materials $ 215.7 $ 448.0 (51.9 )% $ 960.4 $ 1,419.7 (32.4 )%
Commercial Aerospace 95.6 294.5 (67.5 )% 567.6 941.6 (39.7 )%
Space & Defense 71.9 78.9 (8.9 )% 214.5 236.2 (9.2 )%
Industrial 48.2 74.6 (35.4 )% 178.3 241.9 (26.3 )%
Engineered Products $ 71.2 $ 124.5 (42.8 )% $ 246.2 $ 371.7 (33.8 )%
Commercial Aerospace 33.2 91.4 (63.7 )% 128.0 276.3 (53.7 )%
Space & Defense 36.9 30.9 19.4 % 114.3 93.2 22.6 %
Industrial 1.1 2.2 (50.0 )% 3.9 2.2 77.3 %
Sales by Segment
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-------------------------------------------------------------------------------- Composite Materials: Net sales of$215.7 million in the third quarter of 2020 decreased$232.3 million from the$448.0 million in sales for the prior year quarter, driven by declines inCommercial Aerospace and Industrial. Net sales of$960.4 million for the first nine months of 2020 decreased 32.4% 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 compounded by extensive supply chain adjustments. The decline in Space & Defense sales was primarily related to lower military aircraft structure sales outside of theAmericas . The decline in Wind energy sales was primarily related to a shift in the type of product our customer demands in the U.S. market. As a result of this demand change,Hexcel will close its wind energy prepreg production facility inWindsor, Colorado in earlyNovember 2020 that served the U.S. market. Engineered Products: Net sales of$71.2 million in the third quarter of 2020 decreased$53.3 million from the$124.5 million for 2019. Net sales of$246.2 million for the first nine months of 2020 decreased 33.8% 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$128.8 million decreased 66.6% (66.3% in constant currency) for the quarter as compared to the third quarter of 2019. Sales across all major programs were down substantially with the largest impact related to the A350. Boeing 737 MAX sales continue to be at a very low level. Build rate reductions driven by the COVID-19 pandemic combined with significant inventory destocking led to the reduced sales levels. Additional build rate reductions publicly announced at the end ofJuly 2020 by two significant customers is further extending the destocking. Sales of$695.6 million , for the first nine months of 2020, decreased 42.9% compared to the first nine months of 2019 due to significant production cuts across the major aircraft programs announced during the second and third quarters of 2020 and only limited sales for the Boeing 737 MAX program. The decline was compounded by significant destocking in the supply chain, which is amplified as build rates have moved even lower. Sales toOther Commercial Aerospace , which includes regional and business aircraft customers, were down 49.6% for the third quarter of 2020 as compared to 2019 due to significantly lower business jet demand and have declined 23.5% year to date. Space & Defense sales of$108.8 million decreased 0.9% (0.5% in constant currency) for the quarter as compared to the third quarter of 2019. The decrease was due to lower demand from a number of European space & defense programs as aggregateU.S. space & defense sales were up moderately in the third quarter of 2020 compared to the third quarter of 2019. Space & Defense sales of$328.8 million , for the first nine months of 2020, were in line with the first nine months of 2019.Total Industrial sales of$49.3 million for the third quarter of 2020 were down 35.8% (37.5% in constant currency) as compared to the 2019 period and decreased 25.4% for the first nine months as compared to last year. Wind energy sales (the largest submarket in Industrial) experienced a decline of 40.4% compared to the third quarter of 2019. The reduction reflects a customer demand shift in the U.S. market. As a result of this demand change,Hexcel will close its wind energy prepreg production facility inWindsor, Colorado in earlyNovember 2020 that served the U.S. market. TheHexcel wind material prepreg production facility inAustria that serves the European market and the wind material facility inChina that serves the Asian market continue to operate to produce materials for our wind energy customers. Wind energy sales experienced a decline of 25.8% for the first nine months of 2020 as compared to the same period in 2019 due to production disruptions caused by the pandemic and lower customer demand, specifically in theU.S. Gross Margin Quarter EndedSeptember 30 , Nine Months EndedSeptember 30 ,
(In millions) 2020 2019 % Change 2020 2019 % Change Gross margin$ 13.5 $ 157.9 (91.5 )%$ 209.3 $ 493.9 (57.6 )% Percentage of sales 4.7 % 27.6 % 17.3 % 27.6 % Gross margin for the third quarter of 2020 declined to 4.7% compared to 27.6% in the third quarter of 2019 and was 17.3% and 27.6% for the first nine months of 2020 and 2019, respectively. 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
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Operating Expenses
Quarter Ended September 30, Nine Months Ended September 30,
(In millions) 2020 2019 % Change 2020 2019 % Change
SG&A expense $ 24.6 $ 33.8 (27.2 )% $ 95.2 $ 122.8 (22.5 )%
Percentage of sales 8.6 % 5.9 % 7.9 % 6.9 %
R&T expense $ 10.7 $ 14.2 (24.6 )% $ 36.0 $ 43.3 (16.9 )%
Percentage of sales 3.7 % 2.5 % 3.0 % 2.4 %
Selling, general and administrative and research and technology expenses were
lower, for both the quarter and nine month periods ended September 30, 2020 ,
than the prior year's comparable periods, as cost reduction actions began to
take effect, including headcount reductions and minimizing discretionary
spending.
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