HXL 10-Q
Hexcel Corp /De/ (HXL)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For the Quarterly Period Ended
or
For the transition period from to
Commission File Number
(Exact name of registrant as specified in its charter)
|
|
|
(State or Other Jurisdiction of Incorporation or Organization) |
|
(I.R.S. Employer Identification No.) |
(Address of principal executive offices and zip code)
Registrant’s telephone number, including area code:
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
|
Trading Symbol(s) |
|
Name of each exchange on which registered |
|
|
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
|
Accelerated filer |
|
Non-accelerated filer |
|
Smaller reporting company |
|
|
Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class |
|
Outstanding at April 19, 2024 |
COMMON STOCK |
|
HEXCEL CORPORATION AND SUBSIDIARIES
INDEX
|
|
|
|
Page |
||
PART I. |
|
|
3 |
|||
|
|
|
|
|
||
ITEM 1. |
|
|
3 |
|||
|
|
|
|
|
||
|
|
• |
|
Condensed Consolidated Balance Sheets — March 31, 2024 and December 31, 2023 |
|
3 |
|
|
|
|
|
||
|
|
• |
|
Condensed Consolidated Statements of Operations — The quarters ended March 31, 2024 and 2023 |
|
4 |
|
|
|
|
|
||
|
|
• |
|
Condensed Consolidated Statements of Comprehensive Income — The quarters ended March 31, 2024 and 2023 |
|
4 |
|
|
|
|
|
||
|
|
• |
|
Condensed Consolidated Statements of Cash Flows — The quarters ended March 31, 2024 and 2023 |
|
5 |
|
|
|
|
|
||
|
|
• |
|
|
6 |
|
|
|
|
|
|
|
|
|
|
• |
|
|
7 |
|
|
|
|
|
|
||
ITEM 2. |
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
|
17 |
||
|
|
|
|
|
||
ITEM 3. |
|
|
23 |
|||
|
|
|
|
|
||
ITEM 4. |
|
|
23 |
|||
|
|
|
|
|
||
PART II. |
|
|
23 |
|||
|
|
|
|
|
||
ITEM 1. |
|
|
23 |
|||
|
|
|
|
|
||
ITEM 1A. |
|
|
23 |
|||
|
|
|
|
|
||
ITEM 2. |
|
|
23 |
|||
|
|
|
|
|
||
ITEM 6. |
|
|
25 |
|||
|
|
|
|
|
||
|
|
|
26 |
|||
2
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements
Hexcel Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
|
|
(Unaudited) |
|
|||||
|
|
March 31, |
|
|
December 31, |
|
||
(In millions) |
|
2024 |
|
|
2023 |
|
||
Assets |
|
|
|
|
|
|
||
Current assets: |
|
|
|
|
|
|
||
Cash and cash equivalents |
|
$ |
|
|
$ |
|
||
Accounts receivable, net |
|
|
|
|
|
|
||
Inventories, net |
|
|
|
|
|
|
||
Contract assets |
|
|
|
|
|
|
||
Prepaid expenses and other current assets |
|
|
|
|
|
|
||
Total current assets |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Property, plant and equipment |
|
|
|
|
|
|
||
Less accumulated depreciation |
|
|
( |
) |
|
|
( |
) |
Net property, plant and equipment |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Goodwill and other intangible assets, net |
|
|
|
|
|
|
||
Investments in affiliated companies |
|
|
|
|
|
|
||
Other assets |
|
|
|
|
|
|
||
Total assets |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
Liabilities and Stockholders' Equity |
|
|
|
|
|
|
||
Current liabilities: |
|
|
|
|
|
|
||
Short-term borrowings |
|
$ |
|
|
$ |
|
||
Accounts payable |
|
|
|
|
|
|
||
Accrued compensation and benefits |
|
|
|
|
|
|
||
Financial instruments |
|
|
|
|
|
|
||
Accrued liabilities |
|
|
|
|
|
|
||
Total current liabilities |
|
|
|
|
|
|
||
Long-term debt |
|
|
|
|
|
|
||
Retirement obligations |
|
|
|
|
|
|
||
Deferred income taxes |
|
|
|
|
|
|
||
Other non-current liabilities |
|
|
|
|
|
|
||
Total liabilities |
|
|
|
|
|
|
||
Stockholders' equity: |
|
|
|
|
|
|
||
Common stock, $ |
|
|
|
|
|
|
||
Additional paid-in capital |
|
|
|
|
|
|
||
Retained earnings |
|
|
|
|
|
|
||
Accumulated other comprehensive loss |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
||
Less – Treasury stock, at cost, |
|
|
( |
) |
|
|
( |
) |
Total stockholders' equity |
|
|
|
|
|
|
||
Total liabilities and stockholders' equity |
|
$ |
|
|
$ |
|
||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
Hexcel Corporation and Subsidiaries |
|
|
|
|
|
|
||
Condensed Consolidated Statements of Operations |
|
|
|
|
|
|
||
|
|
|
|
|||||
|
|
(Unaudited) |
|
|||||
|
|
Quarter Ended March 31, |
|
|||||
(In millions, except per share data) |
|
2024 |
|
|
2023 |
|
||
Net sales |
|
$ |
|
|
$ |
|
||
Cost of sales |
|
|
|
|
|
|
||
Gross margin |
|
|
|
|
|
|
||
Selling, general and administrative expenses |
|
|
|
|
|
|
||
Research and technology expenses |
|
|
|
|
|
|
||
Other operating expense |
|
|
|
|
|
|
||
Operating income |
|
|
|
|
|
|
||
Interest expense, net |
|
|
|
|
|
|
||
Income before income taxes, and equity in earnings from affiliated companies |
|
|
|
|
|
|
||
Income tax expense |
|
|
|
|
|
|
||
Income before equity in earnings from affiliated companies |
|
|
|
|
|
|
||
Equity in earnings from affiliated companies |
|
|
|
|
|
|
||
Net income |
|
$ |
|
|
$ |
|
||
Basic net income per common share |
|
$ |
|
|
$ |
|
||
Diluted net income per common share |
|
$ |
|
|
$ |
|
||
Weighted-average common shares: |
|
|
|
|
|
|
||
Basic |
|
|
|
|
|
|
||
Diluted |
|
|
|
|
|
|
||
Hexcel Corporation and Subsidiaries |
|
|
|
|
|
|
||
Condensed Consolidated Statements of Comprehensive Income |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
|
|
(Unaudited) |
|
|||||
|
|
Quarter Ended March 31, |
|
|||||
(In millions) |
|
2024 |
|
|
2023 |
|
||
Net income |
|
$ |
|
|
$ |
|
||
Currency translation adjustments |
|
|
( |
) |
|
|
|
|
Net unrealized pension and other benefit actuarial losses and prior service credits (net of tax) |
|
|
( |
) |
|
|
|
|
Net unrealized (loss) gain on financial instruments (net of tax) |
|
|
( |
) |
|
|
|
|
Total other comprehensive (loss) income |
|
|
( |
) |
|
|
|
|
Comprehensive income |
|
$ |
|
|
$ |
|
||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
Hexcel Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
|
|
(Unaudited) |
|
|||||
|
|
Three Months Ended March 31, |
|
|||||
(In millions) |
|
2024 |
|
|
2023 |
|
||
Cash flows from operating activities |
|
|
|
|
|
|
||
Net income |
|
$ |
|
|
$ |
|
||
Reconciliation to net cash used for operating activities: |
|
|
|
|
|
|
||
Depreciation and amortization |
|
|
|
|
|
|
||
Amortization related to financing |
|
|
|
|
|
|
||
Deferred income taxes |
|
|
( |
) |
|
|
( |
) |
Equity in earnings from affiliated companies |
|
|
|
|
|
( |
) |
|
Stock-based compensation |
|
|
|
|
|
|
||
Restructuring expenses, net of payments |
|
|
|
|
|
( |
) |
|
Impairment of assets |
|
|
|
|
|
|
||
Changes in assets and liabilities: |
|
|
|
|
|
|
||
Increase in accounts receivable |
|
|
( |
) |
|
|
( |
) |
Increase in inventories |
|
|
( |
) |
|
|
( |
) |
(Increase) decrease in prepaid expenses and other current assets |
|
|
( |
) |
|
|
|
|
Decrease in accounts payable/accrued liabilities |
|
|
( |
) |
|
|
( |
) |
Other – net |
|
|
( |
) |
|
|
( |
) |
Net cash used for operating activities |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
||
Cash flows from investing activities |
|
|
|
|
|
|
||
Capital expenditures |
|
|
( |
) |
|
|
( |
) |
Net cash used for investing activities |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
||
Cash flows from financing activities |
|
|
|
|
|
|
||
Borrowing from senior unsecured credit facility - 2024 |
|
|
|
|
|
|
||
Repayment of senior unsecured credit facility - 2024 |
|
|
|
|
|
( |
) |
|
Repurchases of common stock |
|
|
( |
) |
|
|
|
|
Repayment of finance lease obligation and other debt, net |
|
|
( |
) |
|
|
( |
) |
Dividends paid |
|
|
( |
) |
|
|
( |
) |
Activity under stock plans |
|
|
( |
) |
|
|
|
|
Net cash (used for) provided by financing activities |
|
|
( |
) |
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
( |
) |
|
|
|
|
Net decrease in cash and cash equivalents |
|
|
( |
) |
|
|
( |
) |
Cash and cash equivalents at beginning of period |
|
|
|
|
|
|
||
Cash and cash equivalents at end of period |
|
|
|
|
|
|
||
Supplemental data: |
|
|
|
|
|
|
||
Accrual basis additions to plant, property and equipment |
|
$ |
|
|
$ |
|
||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
Hexcel Corporation and Subsidiaries
Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)
For the Quarters ended March 31, 2024, and March 31, 2023
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
||||||
|
|
|
|
|
Additional |
|
|
|
|
|
Other |
|
|
|
|
|
Total |
|
||||||
|
|
|
|
|
Paid-In |
|
|
Retained |
|
|
Comprehensive |
|
|
Treasury |
|
|
Stockholders’ |
|
||||||
(In millions) |
|
Par |
|
|
Capital |
|
|
Earnings |
|
|
Loss |
|
|
Stock |
|
|
Equity |
|
||||||
Balance, December 31, 2022 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
||||
Net income |
|
— |
|
|
— |
|
|
|
|
|
— |
|
|
— |
|
|
|
|
||||||
Dividends on common stock ($ |
|
— |
|
|
— |
|
|
|
( |
) |
|
— |
|
|
— |
|
|
|
( |
) |
||||
Change in other comprehensive income (loss)– net of tax |
|
— |
|
|
— |
|
|
— |
|
|
|
|
|
— |
|
|
|
|
||||||
Stock-based activity |
|
— |
|
|
|
|
|
— |
|
|
— |
|
|
|
( |
) |
|
|
|
|||||
Balance, March 31, 2023 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
||||||
|
|
|
|
|
Additional |
|
|
|
|
|
Other |
|
|
|
|
|
Total |
|
||||||
|
|
|
|
|
Paid-In |
|
|
Retained |
|
|
Comprehensive |
|
|
Treasury |
|
|
Stockholders’ |
|
||||||
(In millions) |
|
Par |
|
|
Capital |
|
|
Earnings |
|
|
Loss |
|
|
Stock |
|
|
Equity |
|
||||||
Balance, December 31, 2023 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
||||
Net income |
|
— |
|
|
— |
|
|
|
|
|
— |
|
|
— |
|
|
|
|
||||||
Dividends on common stock ($ |
|
— |
|
|
— |
|
|
|
( |
) |
|
— |
|
|
— |
|
|
|
( |
) |
||||
Repurchases of common stock |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
||||
Change in other comprehensive (loss) income– net of tax |
|
— |
|
|
— |
|
|
— |
|
|
|
( |
) |
|
— |
|
|
|
( |
) |
||||
Stock-based activity |
|
— |
|
|
|
|
|
— |
|
|
— |
|
|
|
( |
) |
|
|
|
|||||
Balance, March 31, 2024 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
HEXCEL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 — Significant Accounting Policies
In these notes, the terms “Hexcel,” “the Company,” “we,” “us,” or “our” mean Hexcel Corporation and subsidiary companies. The accompanying condensed consolidated financial statements are those of Hexcel Corporation. Refer to Note 1 to the consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2023 for a discussion of our significant accounting policies.
Basis of Presentation
The accompanying condensed consolidated financial statements have been prepared from the unaudited accounting records of Hexcel pursuant to rules and regulations of the Securities and Exchange Commission (“SEC”) and in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information. Certain information and footnote disclosures normally included in financial statements have been omitted pursuant to rules and regulations of the SEC. In the opinion of management, the condensed consolidated financial statements include all normal recurring adjustments as well as any non-recurring adjustments necessary to present fairly the statement of financial position, results of operations, cash flows and statement of stockholders’ equity for the interim periods presented. The Condensed Consolidated Balance Sheet as of December 31, 2023 was derived from the audited 2023 consolidated balance sheet. Interim results are not necessarily indicative of results expected for any other interim period or for the full year. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our 2023 Annual Report on Form 10-K.
Investments in Affiliated Companies
Note 2 — Net Income Per Common Share
|
|
Quarter Ended March 31, |
|
|||||
(In millions, except per share data) |
|
2024 |
|
|
2023 |
|
||
Basic net income per common share: |
|
|
|
|
|
|
||
Net income |
|
$ |
|
|
$ |
|
||
Weighted average common shares outstanding |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Basic net income per common share |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
Diluted net income per common share: |
|
|
|
|
|
|
||
Net income |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
Weighted average common shares outstanding — Basic |
|
|
|
|
|
|
||
Plus incremental shares from assumed conversions: |
|
|
|
|
|
|
||
Restricted stock units |
|
|
|
|
|
|
||
Stock options |
|
|
|
|
|
|
||
Weighted average common shares outstanding — Dilutive |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Diluted net income per common share |
|
$ |
|
|
$ |
|
||
Total common stock equivalents of
7
Note 3 — Inventories
|
|
|
|
|
|
|
||
(In millions) |
|
March 31, 2024 |
|
|
December 31, 2023 |
|
||
Raw materials |
|
$ |
|
|
$ |
|
||
Work in progress |
|
|
|
|
|
|
||
Finished goods |
|
|
|
|
|
|
||
Total Inventory |
|
$ |
|
|
$ |
|
||
Note 4 — Retirement and Other Postretirement Benefit Plans
We maintain qualified and nonqualified defined benefit retirement plans covering certain current and former U.S. and European employees, retirement savings plans covering eligible U.S. and U.K. employees and certain postretirement health care and life insurance benefit plans covering eligible U.S. retirees. We also participate in a union sponsored multi-employer pension plan covering certain U.S. employees with union affiliations.
Defined Benefit Retirement Plans
Net Periodic Benefit Costs
Net periodic benefit costs of our defined benefit retirement plans for the three months ended March 31, 2024 and 2023 were as follows:
|
|
Quarter Ended March 31, |
|
|||||
(In millions) |
|
2024 |
|
|
2023 |
|
||
U.S. Nonqualified Defined Benefit Retirement Plans |
|
|
|
|
|
|
||
Service cost |
|
$ |
|
|
$ |
|
||
Interest cost |
|
|
|
|
|
|
||
Net amortization |
|
|
( |
) |
|
|
|
|
|
$ |
|
|
$ |
|
|||
(In millions) |
|
March 31, 2024 |
|
|
December 31, 2023 |
|
||
Amounts recognized on the balance sheet for U.S. nonqualified defined benefit retirement plans: |
|
|
|
|
|
|
||
Accrued liabilities |
|
$ |
|
|
$ |
|
||
Other non-current liabilities |
|
|
|
|
|
|
||
|
$ |
|
|
$ |
|
|||
|
|
Quarter Ended March 31, |
|
|||||
(In millions) |
|
2024 |
|
|
2023 |
|
||
European Defined Benefit Retirement Plans |
|
|
|
|
|
|
||
Service cost |
|
$ |
|
|
$ |
|
||
Interest cost |
|
|
|
|
|
|
||
Expected return on plan assets |
|
|
|
|
|
( |
) |
|
Net amortization and deferral |
|
|
|
|
|
|
||
Net periodic benefit cost |
|
$ |
|
|
$ |
|
||
(In millions) |
|
March 31, 2024 |
|
|
December 31, 2023 |
|
||
Amounts recognized on the balance sheet for European defined benefit retirement plans: |
|
|
|
|
|
|
||
Accrued liabilities |
|
$ |
|
|
$ |
|
||
Other non-current liabilities |
|
|
|
|
|
|
||
Total accrued benefit |
|
$ |
|
|
$ |
|
||
All costs related to our pensions are included as a component of operating income in our Condensed Consolidated Statements of Operations. For the three months ended March 31, 2024 and 2023, amounts unrelated to service costs were a charge of $
8
Contributions
We generally fund our U.S. non-qualified defined benefit retirement plans when benefit payments are incurred. We contributed approximately $
Contributions to our European defined benefit retirement plans during the three months ended March 31, 2024 were not material. We plan to contribute approximately $
Postretirement Health Care and Life Insurance Benefit Plans
We recorded $
(In millions) |
|
March 31, 2024 |
|
|
December 31, 2023 |
|
||
Amounts recognized on the balance sheet: |
|
|
|
|
|
|
||
Accrued liabilities |
|
$ |
|
|
$ |
|
||
Other non-current liabilities |
|
|
|
|
|
|
||
Total accrued benefit |
|
$ |
|
|
$ |
|
||
Amounts contributed in connection with our postretirement plans were immaterial for both the three months ended March 31, 2024 and 2023. We periodically fund our postretirement plans to pay covered expenses as they are incurred. We expect to contribute approximately $
Note 5 –– Debt
(In millions) |
|
March 31, 2024 |
|
|
December 31, 2023 |
|
||
Current portion of finance lease |
|
$ |
|
|
$ |
|
||
Current portion of debt |
|
|
|
|
|
|
||
Senior unsecured credit facility |
|
|
|
|
|
|
||
|
|
|
|
|
|
|||
|
|
|
|
|
|
|||
Senior notes --- original issue discount |
|
|
( |
) |
|
|
( |
) |
Senior notes --- deferred financing costs |
|
|
( |
) |
|
|
( |
) |
Non-current portion of finance lease and other debt |
|
|
|
|
|
|
||
Long-term debt |
|
|
|
|
|
|
||
Total debt |
|
$ |
|
|
$ |
|
||
On April 25, 2023, the Company entered into a new credit agreement (the “Credit Agreement”) to refinance its senior unsecured credit facility agreement (the “Facility”). Under the terms of the Credit Agreement the borrowing capacity remained at $
As of March 31, 2024, total borrowings under the Facility were $
9
Facility was
In 2017, the Company issued $
In 2015, the Company issued $
Note 6 — Derivative Financial Instruments
The Company had treasury lock agreements to protect against unfavorable movements in the benchmark treasury rate related to the issuance of our senior unsecured notes. These hedges were designated as cash flow hedges, thus any change in fair value was recorded as a component of other comprehensive income (loss). As part of the issuance of our senior notes, we net settled these derivatives for $
Cross Currency and Interest Rate Swap Agreements
In November 2020, we entered into a cross currency and interest rate swap, which was designated as a cash flow hedge of a €
Foreign Currency Forward Exchange Contracts
A number of our European subsidiaries are exposed to the impact of exchange rate volatility between the U.S. dollar and the subsidiaries’ functional currencies, being either the Euro or the British pound sterling. We have entered into contracts to exchange U.S. dollars for Euros and British pound sterling through September 2026. The aggregate notional amount of these contracts was $
In addition, we enter into foreign exchange forward contracts which are not designated as hedges. These are used to provide an offset to transactional gains or losses arising from the remeasurement of non-functional monetary assets and liabilities such as accounts receivable. The change in the fair value of the derivatives is recorded in the Statement of Operations. There are
The change in fair value of our foreign currency forward exchange contracts under hedge designations recorded net of tax within accumulated other comprehensive loss for the quarters ended March 31, 2024 and March 31, 2023 was as follows:
10
|
|
Quarter Ended March 31, |
|
|
|||||
(In millions) |
|
2024 |
|
|
2023 |
|
|
||
Unrealized gains (losses) at beginning of period, net of tax |
|
$ |
|
|
$ |
( |
) |
|
|
Losses reclassified to net sales |
|
|
|
|
|
|
|
||
(Decrease) increase in fair value |
|
|
( |
) |
|
|
|
|
|
Unrealized gains (losses) at end of period, net of tax |
|
$ |
|
|
$ |
( |
) |
|
|
Unrealized losses of $
Commodity Swap Agreements
We use commodity swap agreements to hedge against price fluctuations of raw materials, including propylene (the principal component of acrylonitrile). As of March 31, 2024, we had commodity swap agreements with a notional value of $
The fair value of outstanding derivative financial instruments as of March 31, 2024 and December 31, 2023 were as follows:
|
|
Prepaid and Other Current Assets |
|
Other Assets |
|
Current Liabilities |
|
Non-Current Liabilities |
||||||||
(In millions) |
|
March 31, 2024 |
|
December 31, 2023 |
|
March 31, 2024 |
|
December 31, 2023 |
|
March 31, 2024 |
|
December 31, 2023 |
|
March 31, 2024 |
|
December 31, 2023 |
Derivative Products |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward exchange contracts |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
Undesignated hedges |
|
|
|
|
|
|
|
|
||||||||
Commodity swaps |
|
|
|
|
|
|
|
|
||||||||
Cross currency and interest rate swap |
|
|
|
|
|
|
|
|
||||||||
Total Derivative Products |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
Note 7 — Fair Value Measurements
The authoritative guidance for fair value measurements establishes a hierarchy for observable and unobservable inputs used to measure fair value, into three broad levels, which are described below:
In determining fair value, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as consider our own and counterparty credit risk in our assessment of fair value.
We have
For derivative assets and liabilities that utilize Level 2 inputs, we prepare estimates of future cash flows of our derivatives, which are discounted to a net present value. The estimated cash flows and the discount factors used in the valuation model are based on observable inputs, and incorporate non-performance risk (the credit standing of the counterparty when the derivative is in a net asset position, and the credit standing of Hexcel when the derivative is in a net liability position). For further information on the fair value of our derivative financial instruments see Note 6, Derivative Financial Instruments. In addition, the fair value of these derivative contracts, which are subject to a master netting arrangement under certain circumstances, is presented on a gross basis in the Condensed Consolidated Balance Sheets.
11
Below is a summary of valuation techniques for all Level 2 financial assets and liabilities:
Counterparties to the above contracts are highly rated financial institutions,
Note 8 — Revenue
Our revenue is primarily derived from the sale of inventory under long-term contracts with our customers. We have determined that individual purchase orders (“PO”), the terms and conditions of which are taken with a master agreement, create the ASC 606 contracts, which are generally short-term in nature. For those sales that are not tied to a long-term agreement, we generate a PO that is subject to our standard terms and conditions. In instances where our customers acquire our goods related to government contracts, the contracts are typically subject to terms similar, or equal to, the Federal Acquisition Regulation Part 52.249-2. This regulation contains a termination for convenience clause (“T for C”), which requires that the customer pay for the cost of both the finished and unfinished goods at the time of cancellation plus a reasonable profit.
We recognize revenue over time for those agreements that have T for C, and where the products being produced have no alternative use.
We disaggregate our revenue based on market for analytical purposes.
|
|
Quarter Ended March 31, |
|
|||||
(In millions) |
|
2024 |
|
|
2023 |
|
||
Consolidated Net Sales |
|
$ |
|
|
$ |
|
||
Commercial Aerospace |
|
|
|
|
|
|
||
Space & Defense |
|
|
|
|
|
|
||
Industrial |
|
|
|
|
|
|
||
Revenue recognized over time gives rise to contract assets, which represent revenue recognized but unbilled. Contract assets are included in our Condensed Consolidated Balance Sheets as a component of current assets.
(In millions) |
|
Composite Material |
|
|
Engineered Products |
|
|
Total |
|
|||
Balance at December 31, 2023 |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Net revenue billed |
|
|
|
|
|
|
|
|
|
|||
Balance at March 31, 2024 |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Note 9 — Segment Information
The financial results for our operating segments are prepared using a management approach, which is consistent with the basis and manner in which we internally segregate financial information for the purpose of assisting in making internal operating decisions. We evaluate the performance of our operating segments based on operating income, and generally account for intersegment sales based on arm’s length prices. Corporate and certain other expenses are not allocated to the operating segments, except to the extent that the expense can be directly attributable to the business segment.
12
Financial information for our operating segments for the three months ended March 31, 2024 and 2023 was as follows:
|
|
(Unaudited) |
|
|||||||||||||
|
|
Composite |
|
|
Engineered |
|
|
Corporate & |
|
|
|
|
||||
(In millions) |
|
Materials |
|
|
Products |
|
|
Other (a) |
|
|
Total |
|
||||
Quarter Ended March 31, 2024 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net sales to external customers |
|
$ |
|
|
$ |
|
|
$ |
— |
|
|
$ |
|
|||
Intersegment sales |
|
|
|
|
|
|
|
|
( |
) |
|
|
— |
|
||
Total sales |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||
Other operating expense |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Operating income (loss) |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Accrual basis additions to capital expenditures |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Quarter Ended March 31, 2023 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net sales to external customers |
|
$ |
|
|
$ |
|
|
$ |
— |
|
|
$ |
|
|||
Intersegment sales |
|
|
|
|
|
|
|
|
( |
) |
|
|
— |
|
||
Total sales |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||
Other operating expense |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Operating income (loss) |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Accrual basis additions to capital expenditures |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Goodwill and Intangible Assets |
|
Composite |
|
|
Engineered |
|
|
|
|
|||
(In millions) |
|
Materials |
|
|
Products |
|
|
Total |
|
|||
Balance at December 31, 2023 |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Amortization expense |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Currency translation adjustments |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
Balance at March 31, 2024 |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Note 10 — Accumulated Other Comprehensive Loss
Comprehensive loss represents net loss and other gains and losses affecting stockholders’ equity that are not reflected in the Condensed Consolidated Statements of Operations.
(In millions) |
|
Unrecognized |
|
|
Change in Fair |
|
|
Foreign |
|
|
Total |
|
||||
Balance at December 31, 2023 |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
||
Other comprehensive loss before reclassifications |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Amounts reclassified from accumulated other comprehensive |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
( |
) |
||
Other comprehensive loss |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Balance at March 31, 2024 |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
||
|
The amounts of net (gains) losses reclassified to earnings from the unrecognized net defined benefit and postretirement plan costs and derivative products components of accumulated other comprehensive loss for the three months ended March 31, 2024 and 2023 were as follows:
13
|
|
Quarter Ended March 31, 2024 |
|
|
Quarter Ended March 31, 2023 |
|
||||||||||
(In millions) |
|
Pre-tax (gain) loss |
|
|
Net of tax (gain) loss |
|
|
Pre-tax loss (gain) |
|
|
Net of tax loss (gain) |
|
||||
Defined Benefit and Postretirement Plan Costs |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Derivative Products |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Foreign currency forward exchange contracts |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Commodity swaps |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
||
Interest rate swaps |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Total Derivative Products |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
$ |
|
||
Note 11 — Commitments and Contingencies
We are involved in litigation, investigations and claims arising out of the normal conduct of our business, including those relating to commercial transactions, environmental, employment and health and safety matters. While it is impossible to predict the ultimate resolution of litigation, investigations and claims asserted against us, we believe, based upon our examination of currently available information, our experience to date, and advice from legal counsel, that, after taking into account our existing insurance coverage and amounts already provided for, the currently pending legal proceedings against us will not have a material adverse impact on our consolidated results of operations, financial position or cash flows.
Environmental Matters
We have been named as a potentially responsible party (“PRP”) with respect to the below and other hazardous waste disposal sites that we do not own or possess, which are included on, or proposed to be included on, the Superfund National Priority List of the U.S. Environmental Protection Agency (“EPA”) or on equivalent lists of various state governments. Because the Federal Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA” or “Superfund”) allows for joint and several liability in certain circumstances, we could be responsible for all remediation costs at such sites, even if we are one of many PRPs. We believe, based on the amount and nature of the hazardous waste at issue, and the number of other financially viable PRPs at each site, that our liability in connection with such environmental matters will not be material.
Lower Passaic River Study Area
Hexcel, together with approximately
In March 2016, the EPA issued a Record of Decision (“ROD”) setting forth the EPA’s selected remedy for the lower
In October 2016, pursuant to a settlement agreement with the EPA, Occidental Chemical Corporation (“OCC”), one of the PRPs, commenced performance of the remedial design required by the ROD for the lower eight miles of the Lower Passaic River, reserving its right of cost contribution from all other PRPs. In June 2018, OCC filed suit against approximately 120 parties, including Hexcel, in the U.S. District Court of the District of New Jersey seeking cost recovery and contribution under CERCLA related to the Lower Passaic River. In July 2019, the court granted in part and denied in part the defendants’ motion to dismiss. In August 2020, the court granted defendants’ motion for summary judgement for certain claims. Discovery for the remaining claims has been stayed indefinitely based on agreement of the parties. On February 24, 2021, Hexcel and certain other defendants filed a third-party complaint against the Passaic Valley Sewerage Commission and certain New Jersey municipalities seeking recovery of Passaic-related cleanup costs incurred by defendants, as well as contribution for any cleanup costs incurred by OCC for which the court deems the defendants liable. In March 2023, the EPA issued a Unilateral Administrative Order (“UAO”) to OCC ordering OCC to commence remedial design work for the interim remedy for the cleanup of the upper nine miles of the Lower Passaic River. On March 24, 2023, OCC filed suit against Hexcel and approximately
14
On December 16, 2022, the EPA lodged a Consent Decree with the U.S. District Court for the District of New Jersey requesting court approval of a $
Summary of Environmental Reserves
Our estimate of liability as a PRP and our remaining costs associated with our responsibility to remediate the Lower Passaic River and other sites are accrued in the Consolidated Balance Sheets. As of March 31, 2024 and December 31, 2023, our aggregate were $
These accruals can change significantly from period to period due to such factors as additional information on the nature or extent of contamination, the methods of remediation required, changes in the apportionment of costs among responsible parties and other actions by governmental agencies or private parties, or the impact, if any, of being named in a new matter.
Product Warranty
We provide standard assurance-type warranties for our products, which cannot be purchased separately and do not meet the criteria to be considered a performance obligation. Warranty expense for the three months ended March 31, 2024, and accrued warranty cost, included in “accrued liabilities” in the Condensed Consolidated Balance Sheets at March 31, 2024 and December 31, 2023, were as follows:
|
|
Product |
|
|
(In millions) |
|
Warranties |
|
|
Balance as of December 31, 2023 |
|
$ |
|
|
Warranty expense |
|
|
|
|
Deductions and other |
|
|
( |
) |
Balance as of March 31, 2024 |
|
$ |
|
|
15
Note 12 — Restructuring
We recognized restructuring charges of $
|
|
|
|
Activity for the Quarter Ended March 31, 2024 |
|
|
|
|
|||||||||||||||
|
December 31, |
|
|
Restructuring |
|
|
|
|
|
Cash |
|
|
|
|
|
March 31, |
|
||||||
(In Millions) |
2023 |
|
|
Charge |
|
|
FX Impact |
|
|
Paid |
|
|
Non-Cash |
|
|
2024 |
|
||||||
Employee termination |
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
$ |
|
||||
Total |
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Note 13 — Capital Stock
Under the share repurchase plan adopted by the Board of Directors of the Company (the "Board") in May 2018 (the “2018 Repurchase Plan"), the Board authorized $
During the three months ended March 31, 2024, the Company repurchased
16
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Business Overview
We develop, manufacture, and market lightweight, high-performance structural materials, including carbon fiber, specialty reinforcements, prepregs and other fiber-reinforced matrix materials, honeycomb, resins, engineered core and composite structures, for use in Commercial Aerospace, Space & Defense, and Industrial markets. We propel the future of flight, energy generation, transportation, and recreation through excellence in providing innovative high-performance material solutions that are lighter, stronger and tougher, helping to create a better world for us all.
We serve international markets through manufacturing facilities, sales offices and representatives located in the Americas, Europe, Asia Pacific, India, and Africa.
We are a manufacturer of products within a single industry: Advanced Composites. We have two reportable segments: Composite Materials and Engineered Products. The Composite Materials segment is comprised of our carbon fiber, specialty reinforcements, resin systems, prepregs and other fiber-reinforced matrix materials, and honeycomb core product lines and pultruded profiles. The Engineered Products segment is comprised of lightweight high strength composite structures, radio frequency/electromagnetic interference (“RF/EMI”) and microwave absorbing materials, engineered core and specialty machined honeycomb products with added functionality and thermoplastic additive manufacturing.
The Commercial Aerospace market has recovered strongly following the severe negative economic impacts on this industry resulting from the COVID-19 pandemic that began in 2020. Our business is continuing to recover driven by growth in air travel and an increase in aircraft build rates. The recovery has created many challenges across the markets Hexcel operates in, related to global logistics, supply chains, inflationary pressures and has also been impacted by the effects of geopolitical issues and conflicts. These challenges have had and may continue to have further negative impacts on our operations, supply chain, transportation networks and customers, all of which have and may continue to compress our financial results.
Financial Overview
Results of Operations
|
|
Quarter Ended March 31, |
|
|||||||||
(In millions, except per share data) |
|
2024 |
|
|
2023 |
|
|
% Change |
|
|||
Net sales |
|
$ |
472.3 |
|
|
$ |
457.7 |
|
|
|
3.2 |
% |
Net sales change in constant currency |
|
|
|
|
|
|
|
|
3.1 |
% |
||
Operating income |
|
$ |
52.9 |
|
|
$ |
62.8 |
|
|
|
(15.8 |
)% |
As a percentage of net sales |
|
|
11.2 |
% |
|
|
13.7 |
% |
|
|
|
|
Net income |
|
$ |
36.5 |
|
|
$ |
42.7 |
|
|
|
(14.5 |
)% |
Diluted net income per common share |
|
$ |
0.43 |
|
|
$ |
0.50 |
|
|
|
(14.0 |
)% |
17
Net Sales
The following table summarizes net sales to third-party customers by segment and end market for the quarters ended March 31, 2024 and 2023:
|
|
Quarter Ended March 31, |
|
|||||||||
(In millions) |
|
2024 |
|
|
2023 |
|
|
% Change |
|
|||
Consolidated Net Sales |
|
$ |
472.3 |
|
|
$ |
457.7 |
|
|
|
3.2 |
% |
Commercial Aerospace |
|
|
299.3 |
|
|
|
284.5 |
|
|
|
5.2 |
% |
Space & Defense |
|
|
139.1 |
|
|
|
126.2 |
|
|
|
10.2 |
% |
Industrial |
|
|
33.9 |
|
|
|
47.0 |
|
|
|
(27.9 |
)% |
|
|
|
|
|
|
|
|
|
|
|||
Composite Materials |
|
$ |
379.5 |
|
|
$ |
378.2 |
|
|
|
0.3 |
% |
Commercial Aerospace |
|
|
251.5 |
|
|
|
243.2 |
|
|
|
3.4 |
% |
Space & Defense |
|
|
94.7 |
|
|
|
88.8 |
|
|
|
6.6 |
% |
Industrial |
|
|
33.3 |
|
|
|
46.2 |
|
|
|
(27.9 |
)% |
|
|
|
|
|
|
|
|
|
|
|||
Engineered Products |
|
$ |
92.8 |
|
|
$ |
79.5 |
|
|
|
16.7 |
% |
Commercial Aerospace |
|
|
47.8 |
|
|
|
41.3 |
|
|
|
15.7 |
% |
Space & Defense |
|
|
44.4 |
|
|
|
37.4 |
|
|
|
18.7 |
% |
Industrial |
|
|
0.6 |
|
|
|
0.8 |
|
|
|
(25.0 |
)% |
Sales by Segment
Composite Materials: Net sales of $379.5 million in the first quarter of 2024 increased by $1.3 million or 0.3% from the prior year quarter. Commercial Aerospace sales increased $8.3 million or 3.4% in the first quarter of 2024 and Space & Defense sales increased $5.9 million or 6.6% as compared to the prior year quarter. These increases were partially offset by a decrease in Industrial sales of $12.9 million or 27.9% compared to the prior year quarter.
Engineered Products: For the first quarter of 2024, net sales of $92.8 million increased $13.3 million or 16.7% as compared to the prior year quarter. The increase was driven by higher Commercial Aerospace sales, which were up $6.5 million or 15.7% in the first quarter of 2024 as compared to the same period in 2023, as well as higher Space & Defense sales of $7.0 million, or 18.7%.
Sales by Market
Commercial Aerospace sales of $299.3 million increased 5.2% (5.2% in constant currency) for the first quarter of 2024 compared to the first quarter of 2023 driven by strong Boeing 787 sales. Other Commercial Aerospace sales of $55.1 million decreased 6.3% for the first quarter of 2024 compared to the first quarter of 2023 due to softer business jet sales.
Space & Defense sales of $139.1 million increased 10.2% (10.0% in constant currency) for the quarter as compared to the first quarter of 2023 with strong fixed wing aircraft programs, including the Lockheed F-35 and Airbus A400M, as well as classified programs.
Total Industrial sales of $33.9 million in the first quarter of 2024 decreased 27.9% (28.5% in constant currency) compared to the first quarter of 2023, due to lower sales across all industrial sub-markets.
Gross Margin
|
|
Quarter Ended March 31, |
|
|
|||||||||
(In millions) |
|
2024 |
|
|
2023 |
|
|
% Change |
|
|
|||
Gross margin |
|
$ |
118.2 |
|
|
$ |
127.7 |
|
|
|
(7.4 |
)% |
|
Percentage of sales |
|
|
25.0 |
% |
|
|
27.9 |
% |
|
|
|
|
|
Gross margin for the first quarters of 2024 and 2023 was 25.0% and 27.9%, respectively. The higher prior year gross margin benefited from favorable sales mix and absorption.
18
Operating Expenses
|
|
Quarter Ended March 31, |
|
|
|||||||||
(In millions) |
|
2024 |
|
|
2023 |
|
|
% Change |
|
|
|||
SG&A expense |
|
$ |
49.0 |
|
|
$ |
50.8 |
|
|
|
(3.5 |
)% |
|
Percentage of sales |
|
|
10.4 |
% |
|
|
11.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
R&T expense |
|
$ |
15.1 |
|
|
$ |
13.9 |
|
|
|
8.6 |
% |
|
Percentage of sales |
|
|
3.2 |
% |
|
|
3.0 |
% |
|
|
|
|
|
Selling, general and administrative expenses were lower for the three months ended March 31, 2024 compared to the same period in 2023 due to lower employee-related expenses. Research and technology expenses for the quarter ended March 31, 2024 were higher than the prior year period primarily due to increases in materials, depreciation and employee-related expenses.
Operating Income
|
|
Quarter Ended March 31, |
|
|||||||||
(In millions) |
|
2024 |
|
|
2023 |
|
|
% Change |
|
|||
Consolidated operating income |
|
$ |
52.9 |
|
|
$ |
62.8 |
|
|
|
(15.8 |
)% |
Operating margin |
|
|
11.2 |
% |
|
|
13.7 |
% |
|
|
|
|
Composite Materials |
|
|
63.7 |
|
|
|
73.2 |
|
|
|
(13.0 |
)% |
Operating margin |
|
|
15.8 |
% |
|
|
18.4 |
% |
|
|
|
|
Engineered Products |
|
|
12.9 |
|
|
|
12.0 |
|
|
|
7.5 |
% |
Operating margin |
|
|
13.9 |
% |
|
|
14.9 |
% |
|
|
|
|
Corporate & Other |
|
|
(23.7 |
) |
|
|
(22.4 |
) |
|
|
(5.8 |
)% |
Operating income for the first quarter of 2024 and 2023 was $52.9 million and $62.8 million, respectively. The decrease in operating income for the first quarter of 2024 compared to the same period last year was primarily driven by the lower gross margin.
Interest Expense, Net
|
|
Quarter Ended March 31, |
|
|||||||||
(In millions) |
|
2024 |
|
|
2023 |
|
|
% Change |
|
|||
Interest expense, net |
|
$ |
6.5 |
|
|
$ |
9.4 |
|
|
|
(30.9 |
)% |
Net interest expense for the first quarter ended March 31, 2024 was lower compared to the first quarter of 2023 due to lower average borrowings and higher interest income.
Provision for Income Taxes
|
|
Quarter Ended March 31, |
|
|||||
(In millions) |
|
2024 |
|
|
2023 |
|
||
Income tax expense |
|
$ |
9.9 |
|
|
$ |
11.7 |
|
Effective tax rate |
|
|
21.3 |
% |
|
|
21.9 |
% |
The tax expense for the quarter ended March 31, 2024 was $9.9 million compared to a tax expense of $11.7 million for the quarter ended March 31, 2023.
Financial Condition
Liquidity: Cash on hand at March 31, 2024 was $85.9 million as compared to $227.0 million at December 31, 2023. As of March 31, 2024, total debt was $714.7 million as compared to $699.5 million at December 31, 2023.
Under the senior unsecured credit facility (the "Facility"), total borrowings at March 31, 2024 were $15.0 million, which approximated fair value. The Facility agreement permits us to issue letters of credit up to an aggregate amount of $50.0 million. As of March 31, 2024, there were no issued letters of credit under the Facility, resulting in undrawn availability under the Facility of $735.0 million. The weighted average interest rate for the Facility was 8.6% for the three months ended March 31, 2024. For further information regarding our Facility, see Note 5, Debt, to the accompanying condensed consolidated financial statements of this Form 10-Q.
19
We expect to meet our short-term liquidity requirements (including capital expenditures) through net cash from operating activities, cash on hand and the Facility. As of March 31, 2024, long-term liquidity requirements consisted primarily of obligations under our long-term debt obligations. We do not have any significant required debt repayments until August 2025 when our 4.7% Senior Unsecured Notes are due.
The remaining authorization under the Share Repurchase Program at March 31, 2024 was $386.4 million. On April 22, 2024, our Board of Directors declared a quarterly dividend of $0.15 per share payable to stockholders of record as of May 3, 2024, with a payment date of May 10, 2024.
Operating Activities: Net cash used for operating activities for the first three months of 2024 was $7.0 million compared to $23.4 million for the same period last year. Working capital was a cash use of $84.5 million for the first three months of 2024 compared to a use of $104.0 million in the same period in 2023. The improvement in the current year was primarily driven by lower payments of payables and lower increases in inventory levels.
Investing Activities: Net cash used for investing activities was $28.7 million and $18.1 million in the first three months of 2024 and 2023, respectively, reflecting an increase in capital expenditures.
Financing Activities: Net cash used for financing activities was $104.3 million for first three months of 2024 compared to net cash provided of $34.8 million in the same period in 2023. Borrowings under the Facility during the first quarter of 2024 were $15.0 million compared to $65.0 million in borrowings and repayments of $20.0 million for the same period in the prior year. Quarterly dividend payments to shareholders were $12.6 million during the first quarter of 2024 compared to $10.5 million in the first quarter of 2023. During the three months ended March 31, 2024, repurchases of common stock totaled $100.7 million.
Financial Obligations and Commitments: The next significant scheduled debt maturity will not occur until 2025, when the 4.7% Senior Unsecured Notes mature. Certain sales and administrative offices, data processing equipment, vehicles and manufacturing equipment, and facilities are leased under operating leases.
20
Critical Accounting Estimates
Our Condensed Consolidated Financial Statements are prepared in accordance with U.S. GAAP. In connection with the preparation of our financial statements, we are required to make assumptions and estimates about future events, and apply judgments that affect reported amounts of assets, liabilities, revenues, expenses and related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends and other factors management believes to be relevant at the time our Condensed Consolidated Financial Statements are prepared. On a regular basis, management reviews accounting policies, assumptions, estimates and judgments to ensure our financial statements are presented fairly and in accordance with U.S. GAAP. However, because future events and their effects cannot be determined with certainty, actual results may differ from our assumptions and estimates, and such differences could be material.
We describe our significant accounting policies and critical accounting estimates in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023.
Commitments and Contingencies
We are involved in litigation, investigations and claims arising out of the normal conduct of our business, including those relating to commercial transactions, environmental, employment and health and safety matters. We estimate and accrue our liabilities resulting from such matters based upon a variety of factors, including the stage of the proceeding; potential settlement value; assessments by internal and external counsel; and assessments by environmental engineers and consultants of potential environmental liabilities and remediation costs. We believe we have adequately accrued for these potential liabilities; however, facts and circumstances may change, such as new developments, or a change in approach, including a change in settlement strategy or in an environmental remediation plan, or in our existing insurance coverage, that could cause the actual liability to exceed the estimates, or may require adjustments to the recorded liability balances in the future. For further discussion, see Note 11, Commitments and Contingencies, to the accompanying Condensed Consolidated Financial Statements of this Form 10-Q.
Non-GAAP Financial Measures
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; and free cash flow. Management believes these non-GAAP measures are meaningful to investors because they provide a view of Hexcel with respect to ongoing operating results and comparisons to prior periods. These adjustments can represent significant charges or credits that we believe are important to an understanding of Hexcel’s overall operating results in the periods presented. Such non-GAAP measures 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 diluted net income per share and free cash flow are provided below.
|
|
Operating Income |
|
||||||
|
Quarter Ended March 31, |
|
|||||||
(In millions) |
2024 |
|
|
2023 |
|
||||
GAAP operating income |
|
$ |
52.9 |
|
|
|
$ |
62.8 |
|
Other operating expense (a) |
|
|
1.2 |
|
|
|
|
0.2 |
|
Adjusted operating income (non-GAAP) |
|
$ |
54.1 |
|
|
|
$ |
63.0 |
|
|
|
Quarter Ended March 31, |
|
||||||||||||||||
|
|
2024 |
|
|
2023 |
|
|||||||||||||
(In millions, except per diluted share data) |
|
Net Income |
|
|
Diluted Net Income Per Share |
|
|
Net Income |
|
Diluted Net Income Per Share |
|
||||||||
GAAP net income |
|
|
$ |
36.5 |
|
|
|
$ |
0.43 |
|
|
$ |
42.7 |
|
|
|
$ |
0.50 |
|
Other operating expense, net of tax (a) |
|
|
|
0.9 |
|
|
|
|
0.01 |
|
|
|
0.2 |
|
|
|
|
- |
|
Adjusted net income (non-GAAP) |
|
|
$ |
37.4 |
|
|
|
$ |
0.44 |
|
|
$ |
42.9 |
|
|
|
$ |
0.50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
21
|
|
Quarter Ended March 31, |
|
|||||
(In millions) |
|
2024 |
|
|
2023 |
|
||
Net cash used for operating activities |
|
$ |
(7.0 |
) |
|
$ |
(23.4 |
) |
Less: Capital expenditures |
|
|
(28.7 |
) |
|
|
(18.1 |
) |
Free cash flow (non-GAAP) |
|
$ |
(35.7 |
) |
|
$ |
(41.5 |
) |
Forward-Looking Statements
This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to analyses and other information that are based on forecasts of future results and estimates of amounts not yet determinable. These statements also relate to future prospects, developments and business strategies. These forward-looking statements are identified by their use of terms and phrases such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “seek,” “target,” “would,” “will” and similar terms and phrases, including references to assumptions. Such statements are based on current expectations, are inherently uncertain and are subject to changing assumptions.
Such forward-looking statements include, but are not limited to: (a) the estimates and expectations based on aircraft production rates provided by Airbus, Boeing and others and the revenues we may generate from an aircraft model or program; (b) expectations with regard to the impact of regulatory activity related to the Boeing 737 MAX or Boeing 787 on our revenues; (c) expectations with regard to raw material cost and availability; (d) expectations of composite content on new commercial aircraft programs and our share of those requirements; (e) expectations regarding revenues from space and defense applications, including whether certain programs might be curtailed or discontinued; (f) expectations regarding sales for industrial applications; (g) expectations regarding cash generation, working capital trends, and inventory levels; (h) expectations as to the level of capital expenditures, capacity, including the timing of completion of capacity expansions, and qualification of new products; (i) expectations regarding our ability to improve or maintain margins; (j) expectations regarding our ability to attract, motivate, and retain the workforce necessary to execute our business strategy; (k) projections regarding our tax rate; (l) expectations with regard to the continued impact of macroeconomic factors or geopolitical issues or conflicts; (m) expectations regarding our strategic initiatives, including our sustainability goals; (n) expectations with regard to the effectiveness of cybersecurity measures; (o) expectations regarding the outcome of legal matters or the impact of changes in laws or regulations; and (p) our expectations of financial results for 2024 and beyond.
Such forward-looking statements involve known and unknown risks, uncertainties and other factors, some of which are beyond our control, that may cause actual results to be materially different. Such factors include, but are not limited to, the following: the extent of the impact of macroeconomic factors or geopolitical issues or conflicts; reductions in sales to any significant customers, particularly Airbus or Boeing, including related to regulatory activity or public scrutiny impacting the Boeing 737 MAX or the Boeing 787; our ability to effectively adjust production and inventory levels to align with customer demand; our ability to effectively motivate, retain and hire the necessary workforce; the availability and cost of raw materials, including the impact of supply disruptions and inflation; our ability to successfully implement or realize our strategic initiatives, including our sustainability goals and any restructuring or alignment activities in which we may engage; changes in sales mix; changes in current pricing due to cost levels; changes in aerospace delivery rates; changes in government defense procurement budgets; timely new product development or introduction; our ability to install, staff and qualify necessary capacity or complete capacity expansions to meet customer demand; cybersecurity-related risks, including the potential impact of breaches or intrusions; currency exchange rate fluctuations; changes in political, social and economic conditions, including the effect of change in global trade policies, such as sanctions; work stoppages or other labor disruptions; our ability to successfully complete any strategic acquisitions, investments or dispositions; compliance with environmental, health, safety and other related laws and regulations, including those related to climate change; the effects of natural disasters or other severe weather events, which may be worsened by the impact of climate change, and other severe catastrophic events, including any public health crisis; and the unexpected outcome of legal matters or impact of changes in laws or regulations.
Although we believe that these forward-looking statements are based on reasonable assumptions, you should be aware that many factors could affect our actual results of operations and could cause actual results to differ materially from those expressed in the forward-looking statements. As a result, the foregoing factors should not be construed as exhaustive and should be read together with other cautionary statements included in this and other reports we file with the SEC. For additional information regarding certain factors that may cause our actual results to differ from those expected or anticipated, see the information under the caption “Risk Factors,” which is located in Item 1A of Part I of our Annual Report on Form 10-K for the fiscal year ended December 31. 2023. We do not undertake any obligation to update our forward-looking statements or risk factors to reflect future events or circumstances, except as otherwise required by law.
22
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes in our market risk from the information provided in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.
ITEM 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer have evaluated our disclosure controls and procedures as of March 31, 2024, and with the participation of the Company's management have concluded that these disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. These disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file or submit is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
Our Chief Executive Officer and Chief Financial Officer have concluded that there have not been any changes in our internal control over financial reporting during the three months ended March 31, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
The information required by Item 1 is contained within Note 11 on pages 14 through 15 of this Form 10-Q and is incorporated herein by reference.
ITEM 1A. Risk Factors
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2023, which could materially affect our business, financial condition or future results. There have been no material changes in the Company's risk factors from the aforementioned Form 10-K.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
Under the share repurchase plan adopted by the Board of Directors of the Company (the "Board") in May 2018 (the “2018 Repurchase Plan"), the Board authorized $500 million for the repurchase of the Company's common stock of which $86.4 million remained as of March 31, 2024. On February 19, 2024, the Board approved a $300 million share repurchase plan (the “2024 Share Repurchase Plan”) which is in addition to the amount that remained available for repurchases under the 2018 Repurchase Plan. The repurchase of the Company’s common stock under the 2018 Repurchase Plan and the 2024 Share Repurchase Plan (together the "Share Repurchase Program") are anticipated to be made in open market transactions, block transactions, privately negotiated purchase transactions or other purchase techniques at the discretion of management based upon consideration of market, business, legal, accounting, and other factors.
During the three months ended March 31, 2024, we repurchased 1,397,755 shares of common stock on the open market under the Share Repurchase Program at an average price of $71.54 per share and at a cost of $100.7 million, including commissions and excise tax, leaving approximately $386.4 million available for additional repurchases under the Share Repurchase Program. The acquisition of these shares was accounted for under the treasury method.
The following is a summary of share repurchase activity during the fiscal quarter ended March 31, 2024:
23
Period |
|
(a) |
|
(b) |
|
(c) |
|
(d) |
February 1 — February 29, 2024 |
|
1,233,912 |
|
$71.10 |
|
1,233,912 |
|
$398.6 |
March 1 — March 31, 2024 |
|
163,843 |
|
$74.86 |
|
163,843 |
|
$386.4 |
Total |
|
1,397,755 |
|
$71.54 |
|
1,397,755 |
|
$386.4 |
ITEMS 3, 4 and 5 are not applicable, and therefore have been omitted.
24
ITEM 6. Exhibits
EXHIBIT INDEX
Exhibit No. |
|
Description |
10.1* |
|
Transition Letter Agreement, dated April 9, 2024, between Hexcel Corporation and Nick L. Stanage. |
10.2* |
|
|
10.3* |
|
|
31.1 |
|
Certification of Chief Executive Officer, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
31.2 |
|
Certification of Chief Financial Officer, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
32 |
|
|
101
|
|
The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2024, formatted in Inline XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statements of Comprehensive Income, (iv) Condensed Consolidated Statements of Cash Flows, (v) Condensed Consolidated Statements of Stockholders’ Equity, and (vi) Notes to Condensed Consolidated Financial Statements.
|
104 |
|
Cover Page Interactive Data File: the cover page XBRL tags are embedded within the Inline XBRL document and are contained within Exhibit 101. |
* Indicates management contract or compensatory plan or arrangement
25
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
Hexcel Corporation |
|
|
|
April 22, 2024 |
|
/s/ Amy S. Evans |
(Date) |
|
Amy S. Evans |
|
|
Senior Vice President, |
|
|
Chief Accounting Officer |
26