Hexcel Corp 10-Q for FY2021 Q1
Hexcel Corp (HXL)
About this 10-Q
Hexcel Corp filed this 10-Q on April 19, 2021, covering the quarter ended March 31, 2021 (FY2021 Q1).
Headline figures
Quarter ended March 31, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $310.3M
- down 42.6% from $541M a year earlier
- Net loss
- $14M
- compared with net income of $42.4M a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended
or
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Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
Commission File Number
(Exact name of registrant as specified in its charter)
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(State or Other Jurisdiction of Incorporation or Organization) |
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(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:
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Title of each class |
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Trading Symbol(s) |
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Name of each exchange on which registered |
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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.
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Accelerated filer ☐ |
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Non-accelerated filer ☐ |
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Smaller reporting company |
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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.
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Outstanding at April 15, 2021 |
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COMMON STOCK |
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HEXCEL CORPORATION AND SUBSIDIARIES
INDEX
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PART I. |
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ITEM 1. |
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Condensed Consolidated Balance Sheets — March 31, 2021 and December 31, 2020 |
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Condensed Consolidated Statements of Operations — The three months ended March 31, 2021 and 2020 |
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Condensed Consolidated Statements of Cash Flows — The three months ended March 31, 2021 and 2020 |
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ITEM 2. |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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ITEM 3. |
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ITEM 4. |
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PART II. |
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ITEM 1. |
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ITEM 1A. |
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ITEM 6. |
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2
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements
Hexcel Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
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(Unaudited) |
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March 31, |
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December 31, |
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(In millions) |
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2021 |
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2020 |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
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$ |
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Accounts receivable, net |
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Inventories, net |
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Contract assets |
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Prepaid expenses and other current assets |
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Assets held for sale |
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Total current assets |
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Property, plant and equipment |
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Less accumulated depreciation |
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Net property, plant and equipment |
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Goodwill and other intangible assets, net |
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Investments in affiliated companies |
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Other assets |
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Total assets |
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$ |
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$ |
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Liabilities and Stockholders' Equity |
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Current liabilities: |
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Short-term borrowings |
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$ |
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$ |
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Accounts payable |
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Accrued compensation and benefits |
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Financial instruments |
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Accrued liabilities |
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Total current liabilities |
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Long-term debt |
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Retirement obligations |
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Deferred income taxes |
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Other non-current liabilities |
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Total liabilities |
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Stockholders' equity: |
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Common stock, $ |
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Additional paid-in capital |
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Retained earnings |
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Accumulated other comprehensive loss |
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Less – Treasury stock, at cost, at December 31, 2020, respectively. |
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Total stockholders' equity |
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Total liabilities and stockholders' equity |
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$ |
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$ |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
3
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Hexcel Corporation and Subsidiaries |
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Condensed Consolidated Statements of Operations |
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(Unaudited) |
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Quarter Ended March 31, |
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(In millions, except per share data) |
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2021 |
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2020 |
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Net sales |
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$ |
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$ |
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Cost of sales |
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Gross margin |
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Selling, general and administrative expenses |
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Research and technology expenses |
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Other operating expense |
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Operating income |
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( |
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Interest expense, net |
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(Loss) income before income taxes, and equity in earnings from affiliated companies |
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( |
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Income tax (benefit) expense |
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( |
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(Loss) income before equity in earnings from affiliated companies |
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Equity in (losses) earnings from affiliated companies |
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Net (loss) income |
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$ |
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$ |
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Basic net (loss) income per common share |
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$ |
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$ |
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Diluted net (loss) income per common share |
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$ |
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$ |
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Dividends per share |
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$ |
- |
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$ |
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Weighted-average common shares: |
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Basic |
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Diluted |
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Hexcel Corporation and Subsidiaries |
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Condensed Consolidated Statements of Comprehensive (Loss) Income |
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(Unaudited) |
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Quarter Ended March 31, |
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(In millions) |
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2021 |
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2020 |
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Net (loss) income |
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$ |
( |
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$ |
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Currency translation adjustments |
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( |
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( |
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Net unrealized pension and other benefit actuarial (losses) gains and prior service credits (net of tax) |
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( |
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Net unrealized losses on financial instruments (net of tax) |
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( |
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( |
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Total other comprehensive loss |
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( |
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( |
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Comprehensive (loss) income |
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$ |
( |
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$ |
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The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
4
Hexcel Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
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(Unaudited) |
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Quarter Ended March 31, |
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(In millions) |
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2021 |
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2020 |
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Cash flows from operating activities |
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Net (loss) income |
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$ |
( |
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$ |
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Reconciliation to net cash provided by operating activities: |
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Depreciation and amortization |
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Amortization related to financing |
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Deferred income taxes |
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( |
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( |
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Equity in earnings from affiliated companies |
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( |
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Stock-based compensation |
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Merger and restructuring expenses, net of payments |
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Changes in assets and liabilities: |
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Increase in accounts receivable |
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( |
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( |
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Increase in inventories |
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( |
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( |
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Increase in prepaid expenses and other current assets |
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( |
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( |
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Increase (decrease) in accounts payable/accrued liabilities |
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( |
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Other – net |
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( |
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Net cash (used for) provided by operating activities |
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( |
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Cash flows from investing activities |
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Capital expenditures |
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( |
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( |
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Net cash used for investing activities |
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$ |
( |
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$ |
( |
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Cash flows from financing activities |
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Repayments of Euro term loan |
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- |
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( |
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Borrowing from senior unsecured credit facility - 2024 |
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- |
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Repayment of senior unsecured credit facility - 2024 |
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( |
) |
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( |
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Repayment of finance lease obligation and other debt, net |
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( |
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( |
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Dividends paid |
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- |
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( |
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Repurchase of stock |
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- |
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( |
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Activity under stock plans |
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( |
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Net cash (used for) provided by financing activities |
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( |
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Effect of exchange rate changes on cash and cash equivalents |
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( |
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( |
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Net (decrease) increase in cash and cash equivalents |
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( |
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Cash and cash equivalents at beginning of period |
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Cash and cash equivalents at end of period |
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$ |
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$ |
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Supplemental data: |
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Accrual basis additions to plant, property and equipment |
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$ |
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$ |
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The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
5
Hexcel Corporation and Subsidiaries
Condensed Consolidated Statements of Stockholders’ Equity
For the Quarter Ended March 31, 2021 and 2020
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Accumulated |
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Additional |
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Other |
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Total |
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Paid-In |
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Retained |
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Comprehensive |
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Treasury |
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Stockholders’ |
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(In millions) |
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Par |
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Capital |
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Earnings |
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Loss |
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Stock |
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Equity |
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Balance, December 31, 2019 |
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$ |
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$ |
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$ |
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$ |
( |
) |
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$ |
( |
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$ |
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Net income |
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— |
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— |
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— |
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— |
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Dividends paid on common stock ($ |
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— |
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— |
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( |
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— |
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— |
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( |
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Change in other comprehensive loss – net of tax |
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— |
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— |
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— |
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( |
) |
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— |
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( |
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Stock based compensation |
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— |
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— |
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— |
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( |
) |
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Acquisition of treasury stock |
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— |
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— |
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— |
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— |
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( |
) |
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( |
) |
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Balance, March 31, 2020 |
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$ |
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$ |
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$ |
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$ |
( |
) |
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$ |
( |
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$ |
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Accumulated |
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Additional |
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Other |
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Total |
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Paid-In |
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Retained |
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Comprehensive |
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Treasury |
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Stockholders’ |
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(In millions) |
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Par |
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Capital |
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Earnings |
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Loss |
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Stock |
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Equity |
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Balance, December 31, 2020 |
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$ |
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$ |
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$ |
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$ |
( |
) |
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$ |
( |
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$ |
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Net loss |
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— |
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— |
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( |
) |
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— |
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— |
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( |
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Dividends paid on common stock |
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— |
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— |
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— |
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— |
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— |
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- |
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Change in other comprehensive loss – net of tax |
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— |
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— |
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— |
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( |
) |
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— |
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( |
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Stock based compensation |
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— |
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— |
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— |
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( |
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Acquisition of treasury stock |
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— |
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— |
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— |
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— |
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— |
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- |
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|||||
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Balance, March 31, 2021 |
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$ |
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$ |
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$ |
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$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
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, 2020 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 stockholder’s equity for the interim periods presented. The Condensed Consolidated Balance Sheet as of December 31, 2020 was derived from the audited 2020 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 2020 Annual Report on Form 10-K.
Investments in Affiliated Companies
We have a
Asset Held for sale
In early November 2020 we closed our wind energy prepeg production facility in Windsor, Colorado and as a result, certain plant assets to be sold have been recorded in “Assets held for sale” in the Condensed Consolidated Balance Sheets at both March 31, 2021 and December 31, 2020. The sale of these assets is expected to occur in the second or third quarter of 2021.
Recently Adopted Accounting Pronouncements
In August 2018, the FASB issued Accounting Standards Update No. 2018-14 (ASU 2018-14), Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20), which amends the current disclosure requirements regarding defined benefit pensions and other post retirement plans, and allows for the removal of certain disclosures, while adding certain new disclosure requirements. This standard is effective for fiscal years beginning after December 15, 2020. Adoption of this new standard did not have a significant impact to our disclosures.
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes which amends and aims to simplify accounting disclosure requirements regarding a number of topics including: intraperiod tax allocation, accounting for deferred taxes when there are changes in consolidation of certain investments, tax basis step up in an acquisition and the application of effective rate changes during interim periods, amongst other improvements. This standard is effective for fiscal years beginning after December 15, 2020. Adoption of this new standard did not have a material impact on the Company.
7
Note 2 — Net (Loss) Income per Common Share
|
|
|
Quarter Ended March 31, |
|
|||||
|
(In millions, except per share data) |
|
2021 |
|
|
2020 |
|
||
|
Basic net (loss) income per common share: |
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|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
( |
) |
|
$ |
|
|
|
Weighted average common shares outstanding |
|
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|
|
|
|
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|
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|
|
Basic net (loss) income per common share |
|
$ |
( |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net (loss) income per common share: |
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
|
( |
) |
|
|
|
|
|
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|
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|
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|
Weighted average common shares outstanding — Basic |
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|
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|
Plus incremental shares from assumed conversions: |
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|
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|
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|
|
Restricted stock units |
|
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- |
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|
Stock options |
|
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- |
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|
Weighted average common shares outstanding — Dilutive |
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|
Diluted net (loss) income per common share |
|
$ |
( |
) |
|
$ |
|
|
Total common stock equivalents of,
Note 3 — Inventories
|
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|
|
|
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(In millions) |
|
March 31, 2021 |
|
|
December 31, 2020 |
|
||
|
Raw materials |
|
$ |
|
|
|
$ |
|
|
|
Work in progress |
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|
|
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|
|
|
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|
Finished goods |
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|
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|
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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, 2021 and 2020 were as follows:
|
|
|
Quarter Ended March 31, |
|
|||||
|
(In millions) |
|
2021 |
|
|
2020 |
|
||
|
U.S. Nonqualified Defined Benefit Retirement Plans |
|
|
|
|
|
|
|
|
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Service cost |
|
$ |
|
|
|
$ |
|
|
|
Interest cost |
|
|
|
|
|
|
|
|
|
Net amortization |
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|
|
|
|
|
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Net periodic benefit cost |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
8
|
(In millions) |
|
March 31, 2021 |
|
|
December 31, 2020 |
|
||
|
Amounts recognized on the balance sheet for U.S. nonqualified defined benefit retirement plans: |
|
|
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|
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|
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Accrued liabilities |
|
|
|
|
|
$ |
|
|
|
Other non-current liabilities |
|
|
|
|
|
|
|
|
|
Total accrued benefit |
|
$ |
|
|
|
$ |
|
|
|
|
|
Quarter Ended March 31, |
|
|||||
|
(In millions) |
|
2021 |
|
|
2020 |
|
||
|
European Defined Benefit Retirement Plans |
|
|
|
|
|
|
|
|
|
Service cost |
|
$ |
|
|
|
$ |
|
|
|
Interest cost |
|
|
|
|
|
|
|
|
|
Expected return on plan assets |
|
|
( |
) |
|
|
( |
) |
|
Net amortization and deferral |
|
|
|
|
|
|
|
|
|
Net periodic benefit cost (credit) |
|
$ |
|
|
|
$ |
( |
) |
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
March 31, 2021 |
|
|
December 31, 2020 |
|
||
|
Amounts recognized on the balance sheet for European defined benefit retirement plans: |
|
|
|
|
|
|
|
|
|
Other assets |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
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-month periods ended March 31, 2021 and 2020, amounts unrelated to service costs were an expense of $
Contributions
We generally fund our U.S. non-qualified defined benefit retirement plans when benefit payments are incurred. We have contributed approximately $
We contributed $
Postretirement Health Care and Life Insurance Benefit Plans
We recorded $
|
(In millions) |
|
March 31, 2021 |
|
|
December 31, 2020 |
|
||
|
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, 2021 and March 31, 2020. We periodically fund our postretirement plans to pay covered expenses as they are incurred. We expect to contribute approximately $
9
Note 5 –– Debt
|
(In millions) |
|
March 31, 2021 |
|
|
December 31, 2020 |
|
||
|
Current portion of finance lease |
|
$ |
|
|
|
$ |
|
|
|
Current portion of debt |
|
|
|
|
|
|
|
|
|
Senior unsecured credit facility |
|
|
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|
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|
|
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|
|
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|
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|
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|
|
Senior notes --- original issue discount |
|
|
( |
) |
|
|
( |
) |
|
Senior notes --- deferred financing costs |
|
|
( |
) |
|
|
( |
) |
|
Non-current portion of finance lease and other debt |
|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
|
|
|
|
|
|
|
Total debt |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
In June 2019, the Company refinanced its senior unsecured credit facility (the “Facility”), increasing borrowing capacity from $
In September 2020, we amended the Facility to allow for relief from certain terms, including adjusting the maximum leverage ratio covenant for a defined period.
As of March 31, 2021, total borrowings under the Facility were $
In 2017, the Company issued $
In 2015, the Company issued $
10
Note 6 — Derivative Financial Instruments
Interest Rate Swap and Interest Lock Agreements
Prior to January 2020, we had interest rate swaps that swap the EURIBOR on our European term loan for a fixed rate. We terminated these swaps in January 2020 when we repaid the European term loan. These interest rate swaps were designated as cash flow hedges to floating rate bank loans. The Euro swaps had final maturities dates between June 2023 and June 2024, in annual installments. The fair value of interest rate swap agreements was recorded in other assets or as a liability with a corresponding amount to other comprehensive (loss) income. At March 31, 2021, we had
The Company had treasury lock agreements to protect against unfavorable movements in the benchmark treasury rate related to the issuance of our
Cross Currency and Interest Rate Swap Agreements
In November 2020 we entered into a cross currency and interest rate swap, which is 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 entered into contracts to exchange U.S. dollars for Euros and British pound sterling through September 2023. 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
11
The change in fair value of our foreign currency forward exchange contracts under hedge designations recorded net of tax within accumulated other comprehensive (loss) income for the quarters ended March 31, 2021 and March 31, 2020 was as follows:
|
|
|
Quarter Ended March 31, |
|
|||||
|
(In millions) |
|
2021 |
|
|
2020 |
|
||
|
Unrealized gains (losses) at beginning of period, net of tax |
|
$ |
|
|
|
$ |
( |
) |
|
Losses reclassified to net sales |
|
|
( |
) |
|
|
|
|
|
Decrease in fair value |
|
|
( |
) |
|
|
( |
) |
|
Unrealized gains (losses) at end of period, net of tax |
|
$ |
|
|
|
$ |
( |
) |
Unrealized gains of $
Commodity Swap Agreements
On occasion we enter into commodity swap agreements to hedge against price fluctuations of raw materials, including propylene (the principal component of acrylonitrile). As of March 31, 2021 we had commodity swap agreements with a notional value of $
Note 7 — Income Taxes
The effective tax rate for the first quarter of 2021 was a
Note 8 — 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:
|
|
● |
Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs. |
|
|
● |
Level 2: Observable prices that are based on inputs not quoted on active markets but corroborated by market data. |
|
|
● |
Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs. |
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 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). The fair value of these assets and liabilities was approximately $
12
Below is a summary of valuation techniques for all Level 2 financial assets and liabilities:
|
● |
Cross Currency and Interest Rate Swap Agreements — valued using the USD Secured Overnight Financing Rate curves and quoted forward foreign exchange prices at the reporting date. The fair value of the assets and liabilities were $ |
|
● |
Foreign exchange derivative assets and liabilities — valued using quoted forward prices at the reporting date. Fair value of assets and liabilities at March 31, 2021 was $ |
|
● |
Commodity swap agreements — valued using quoted forward commodity prices at the reporting date. Fair value of the assets and liabilities at March 31, 2021 was $ |
Counterparties to the above contracts are highly rated financial institutions,
Liabilities classified as Level 3 — At March 31, 2021 we have a liability for $
Note 9 — Revenue
Our revenue is primarily derived from the sale of inventory under long-term agreements with our customers. We have determined that individual purchase orders (“PO”), whose terms and conditions taken with a master agreement, create the ASC 606 contracts which are generally short-term in nature. For those sales which 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) |
|
2021 |
|
|
2020 |
|
||
|
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, 2020 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Net revenue billed |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
Balance at March 31, 2021 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Accounts receivable, net includes amounts billed to customers where the right to payment is unconditional.
13
Note 10 — 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.
Financial information for our operating segments for the three months ended March 31, 2021 and 2020 were as follows:
|
|
|
(Unaudited) |
|
|||||||||||||
|
|
|
Composite |
|
|
Engineered |
|
|
Corporate & |
|
|
|
|
|
|||
|
(In millions) |
|
Materials |
|
|
Products |
|
|
Other (a) |
|
|
Total |
|
||||
|
Quarter Ended March 31, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales to external customers |
|
$ |
|
|
|
$ |
|
|
|
$ |
— |
|
|
$ |
|
|
|
Intersegment sales |
|
|
|
|
|
|
|
|
|
|
(13.8 |
) |
|
|
— |
|
|
Total sales |
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
310.3 |
|
|
Other operating expense |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
Operating income |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrual basis additions to capital expenditures |
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended March 31, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales to external customers |
|
$ |
|
|
|
$ |
|
|
|
$ |
— |
|
|
$ |
|
|
|
Intersegment sales |
|
|
|
|
|
|
|
|
|
|
(25.3 |
) |
|
|
— |
|
|
Total sales |
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
541.0 |
|
|
Other operating expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
||
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrual basis additions to capital expenditures |
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
(a) |
We do not allocate corporate expenses to the operating segments. |
|
Goodwill and Intangible Assets |
|
Composite |
|
|
Engineered |
|
|
|
|
|
||
|
(In millions) |
|
Materials |
|
|
Products |
|
|
Total |
|
|||
|
Balance at December 31, 2020 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Amortization Expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency translation adjustments |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Balance at March 31, 2021 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
At March 31, 2021, the balance of goodwill and intangible assets was $
14
Note 11 — Accumulated Other Comprehensive Loss
Comprehensive (loss) income represents net (loss) income and other gains and losses affecting stockholders’ equity that are not reflected in the Condensed Consolidated Statements of Operations.
|
(In millions) |
|
Unrecognized Net Defined Benefit and Postretirement Plan Costs |
|
|
Change in Fair Value of Derivatives Products (1) |
|
|
Foreign Currency Translation |
|
|
Total |
|
||||
|
Balance at December 31, 2020 |
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
( |
) |
|
Other comprehensive loss before reclassifications |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
Amounts reclassified from accumulated other comprehensive loss |
|
|
|
|
|
|
( |
) |
|
|
- |
|
|
|
( |
) |
|
Other comprehensive loss |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Balance at March 31, 2021 |
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
( |
) |
|
|
|
|
(1) |
|
The amounts of net gains reclassified to earnings from the unrecognized net defined benefit and postretirement plan costs component of accumulated other comprehensive loss for the three months ended March 31, 2021, were $
Note 12 — 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 our waste, and the number of other financially viable PRPs, 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 miles of the Lower Passaic River at an expected cost ranging from $
15
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, reserving its right of cost contribution from all other PRPs. In June 2018, OCC filed suit against approximately
The accrual related to the Lower Passaic River site was approximately $
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 Condensed Consolidated Balance Sheets. As of March 31, 2021 and December 31, 2020, our aggregate environmental related accruals 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 quarter ended March 31, 2021, and accrued warranty cost, included in accrued liabilities in the Condensed Consolidated Balance Sheets at March 31, 2021 and December 31, 2020, were as follows:
|
|
|
Product |
|
|
|
(In millions) |
|
Warranties |
|
|
|
Balance as of December 31, 2020 |
|
$ |
|
|
|
Warranty expense |
|
|
|
|
|
Deductions and other |
|
|
( |
) |
|
Balance as of March 31, 2021 |
|
$ |
|
|
Note 13 — Other Operating Expense
We had restructuring charges of $
|
|
|
|
|
|
Activity for the Quarter Ended March 31, 2021 |
|
|
|
|
|
|||||||||||||
|
|
December 31, |
|
|
Restructuring |
|
|
|
|
|
|
Cash |
|
|
|
|
|
|
March 31, |
|
||||
|
(In Millions) |
2020 |
|
|
Charge |
|
|
FX Impact |
|
|
Paid |
|
|
Non-Cash |
|
|
2021 |
|
||||||
|
Employee termination |
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
— |
|
|
$ |
|
|
|
Impairment and other |
|
— |
|
|
|
|
|
|
|
— |
|
|
|
( |
) |
|
|
|
|
|
|
- |
|
|
Total |
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
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 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, India, and Africa. We also have a presence in Malaysia where we are a partner in a joint venture which manufactures composite structures for Commercial Aerospace applications.
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, RF/EMI and microwave absorbing materials, engineered core and specialty machined honeycomb products with added functionality and 3D thermoplastic printing.
On March 11, 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. The pandemic 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. 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 may continue to compress our margins, even after the preventative and precautionary measures that we, other businesses and governments are taking. The COVID-19 pandemic is a widespread public health crisis that is adversely affecting the economies and financial markets globally. The resulting economic downturn has adversely affected demand for our products and contributed to volatile supply and demand conditions affecting prices and volumes in the markets for our products, services and raw materials, which could continue for an extended period of time. 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.
In 2020 and into the first quarter of 2021, 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 35% of our global headcount, curtailing discretionary spend, and suspending dividend payments and stock repurchases. In addition, our board of directors adopted a stockholder rights plan in April 2020 in response to the extraordinary business and market dislocations resulting from the COVID-19 pandemic and the actions taken to contain it. The rights plan expired April 6, 2021 and the rights are no longer outstanding. The extent to which COVID-19 continues to adversely impact our business depends on future developments, including the timing of the global rollout of the COVID-19 vaccines, as well as any other new information concerning the effectiveness of actions taken globally to contain or mitigate its effects and the emergence and impact of new variants of COVID-19. 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 continuing financial impact to us cannot be reasonably estimated at this time.
Net sales for the first three months of 2021 were $310.3 million, 42.6% lower (43.5% in constant currency) than the $541.0 million reported for the first three months of 2020. Declines in demand in the Commercial Aerospace and Industrial markets drove the decrease in sales for the quarter ended March 31, 2021.
Commercial Aerospace sales of $147.6 million decreased 59.3% (59.7% in constant currency) for the quarter ended March 31, 2021 as compared to the first quarter of 2020 Sales were down significantly across all the major platforms reflecting pandemic-induced build rate reductions by the aircraft OEMs and continued supply chain destocking.
17
Sales to “Other Commercial Aerospace,” which includes regional and business aircraft, decreased 48.0% in the first quarter of 2021 as compared to the same period in 2020, as the global pandemic negatively impacted demand across this market sector, particularly business jets.
Space & Defense sales of $111.7 million for the quarter ended March 31, 2021 were unchanged compared to the first quarter of 2020 (decrease of 1.0% in constant currency). Strength in rotorcraft, including the CH-53K, as well as the F-35 joint strike fighter, was offset by the collective impact of a softer quarter for a number of smaller U.S. defense and space programs.
Total Industrial sales of $51.0 million for the quarter ended March 31, 2021 were down 23.3% (27.1% in constant currency) compared to the first quarter of 2020. Lower wind energy sales drove the decrease, partially offset by stronger automotive sales. Wind energy sales (the largest submarket in Industrial) experienced a decline of 42.5% in constant currency in the first quarter of 2021 compared to the first quarter of 2020.
Gross margin for the first quarter of 2021 decreased to 17.1% as compared to 26.0% for the first quarter of 2020 primarily related to the sales volume declines described above.
Selling, general and administrative and research and technology expenses for the first quarter of 2021 decreased 15.4% compared to the prior year period due primarily to global realignment actions and headcount reductions undertaken to lower our cost structure.
Other operating expense of $12.1 million for the first quarter of 2021 was primarily related to severance. Other operating expenses of $14.7 million for the first quarter of 2020 was primarily related to professional fees incurred in connection with the proposed merger with Woodward, Inc. that was subsequently terminated in April 2020.
Operating cash flow for the first quarter of 2021 was a use of $1.2 million compared to cash provided of $8.6 million in the same period in 2020 due to lower earnings partially offset by lower use of working capital. For the first quarter of 2021, capital expenditures were $4.9 million as compared to $27.2 million in the first quarter of 2020. Free cash flow (defined as cash provided by operating activities less capital expenditures) for the quarter ended March 31, 2021 was ($6.1) million compared to ($18.6) million in the comparable period of 2020.
Accrual basis additions to capital expenditures were $4.0 million and $21.9 million for the first three months of 2021 and 2020, respectively.
Financial Overview
Results of Operations
|
|
|
Quarter Ended March 31, |
|
|||||||||
|
(In millions, except per share data) |
|
2021 |
|
|
2020 |
|
|
% Change |
|
|||
|
Net sales |
|
$ |
310.3 |
|
|
$ |
541.0 |
|
|
|
(42.6 |
)% |
|
Net sales change in constant currency |
|
|
|
|
|
|
|
|
|
|
(43.5 |
)% |
|
Operating (loss) income |
|
$ |
(10.2 |
) |
|
$ |
65.7 |
|
|
|
(115.4 |
)% |
|
As a percentage of net sales |
|
|
(3.3 |
)% |
|
|
12.1 |
% |
|
|
|
|
|
Net (loss) income |
|
|
(14.0 |
) |
|
42.4 |
|
|
|
(132.9 |
)% |
|
|
Diluted net (loss) income per common share |
|
$ |
(0.17 |
) |
|
$ |
0.50 |
|
|
|
(133.2 |
)% |
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 measurements 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 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 diluted net income per share and free cash flow are provided below.
18
|
|
|
Operating Income |
|
|||||||
|
|
|
Quarter Ended March 31, |
|
|||||||
|
(In millions) |
|
2021 |
|
|
2020 |
|
||||
|
GAAP operating (loss) income |
|
|
$ |
(10.2 |
) |
|
|
$ |
65.7 |
|
|
Other operating expense (a) |
|
|
|
12.1 |
|
|
|
|
14.7 |
|
|
Adjusted operating income (non-GAAP) |
|
|
$ |
1.9 |
|
|
|
$ |
80.4 |
|
|
|
|
Quarter Ended March 31, |
|
|
|||||||||||||||
|
|
|
2021 |
|
|
2020 |
|
|
||||||||||||
|
(In millions, except per diluted share data) |
|
Net (Loss) Income |
|
|
Diluted Net (Loss) Income Per Share |
|
|
Net Income |
|
|
Diluted Net Income Per Share |
||||||||
|
GAAP |
|
|
$ |
(14.0 |
) |
|
|
$ |
(0.17 |
) |
|
$ |
42.4 |
|
|
$ |
0.50 |
|
|
|
Other operating expense (a) |
|
|
|
8.8 |
|
|
|
|
0.11 |
|
|
|
11.4 |
|
|
|
0.14 |
|
|
|
Tax benefit (b) |
|
|
|
(3.2 |
) |
|
|
|
(0.04 |
) |
|
|
- |
|
|
|
- |
|
|
|
Adjusted (non-GAAP) |
|
|
$ |
(8.4 |
) |
|
|
$ |
(0.10 |
) |
|
$ |
53.8 |
|
|
$ |
0.6 |
|
|
|
|
(a) |
The quarter ended March 31, 2021 includes restructuring costs primarily related to severance. The quarter ended March 31, 2020 includes costs related to the terminated merger with Woodward, Inc. |
|
|
(b) |
The quarter ended March 31, 2021 includes a discrete tax benefit of $3.2 million from the revaluation of our deferred tax liabilities related to a favorable U.S. state tax law change. |
|
|
|
Quarter Ended March 31, |
|
|||||
|
(In millions) |
|
2021 |
|
|
2020 |
|
||
|
Net cash provided by operating activities |
|
$ |
(1.2 |
) |
|
$ |
8.6 |
|
|
Less: Capital expenditures |
|
|
(4.9 |
) |
|
|
(27.2 |
) |
|
Free cash flow (non-GAAP) |
|
$ |
(6.1 |
) |
|
$ |
(18.6 |
) |
Net Sales
The following table summarizes net sales to third-party customers by segment and end market for the three months ended March 31, 2021 and 2020:
|
|
|
Quarter Ended March 31, |
|
|||||||||
|
(In millions) |
|
2021 |
|
|
2020 |
|
|
% Change |
|
|||
|
Consolidated Net Sales |
|
$ |
310.3 |
|
|
$ |
541.0 |
|
|
|
(42.6 |
)% |
|
Commercial Aerospace |
|
|
147.6 |
|
|
|
362.9 |
|
|
|
(59.3 |
)% |
|
Space & Defense |
|
|
111.7 |
|
|
|
111.6 |
|
|
|
0.1 |
% |
|
Industrial |
|
|
51.0 |
|
|
|
66.5 |
|
|
|
(23.3 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Composite Materials |
|
$ |
237.2 |
|
|
$ |
438.5 |
|
|
|
(45.9 |
)% |
|
Commercial Aerospace |
|
|
112.5 |
|
|
|
300.2 |
|
|
|
(62.5 |
)% |
|
Space & Defense |
|
|
74.8 |
|
|
|
73.2 |
|
|
|
2.2 |
% |
|
Industrial |
|
|
49.9 |
|
|
|
65.1 |
|
|
|
(23.3 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Engineered Products |
|
$ |
73.1 |
|
|
$ |
102.5 |
|
|
|
(28.7 |
)% |
|
Commercial Aerospace |
|
|
35.1 |
|
|
62.7 |
|
|
|
(44.0 |
)% |
|
|
Space & Defense |
|
|
36.9 |
|
|
|
38.4 |
|
|
|
(3.9 |
)% |
|
Industrial |
|
|
1.1 |
|
|
|
1.4 |
|
|
N/M |
|
|
Sales by Segment
Composite Materials: Net sales of $237.2 million in the first quarter of 2021 decreased $201.3 million from the $438.5 million in sales for the prior year quarter. Commercial Aerospace sales decreases reflect pandemic-induced build rate reductions by the aircraft OEMs and continued supply chain destocking. Space & Defense sales reflect strength in rotorcraft, including the CH-53K, as well as the F-35 joint strike fighter, offset by the collective impact of a softer quarter for a number of smaller U.S. defense and space programs. The decline in Wind energy sales was due to general lower demand and the cessation of sales in North America following a previously reported customer demand shift.
19
Engineered Products: Net sales of $73.1 million in the first quarter of 2021 decreased $29.4 million from the $102.5 million for the first quarter of 2020, primarily reflects pandemic-induced build rate reductions by the aircraft OEMs and continued supply chain destocking.
Sales by Market
Commercial Aerospace sales of $147.6 million decreased 59.3% (59.7% in constant currency) for the first quarter of 2021 as compared to the first quarter of 2020. Sales were down significantly across all the major platforms reflecting pandemic-induced build rate reductions by the aircraft OEMs and continued supply chain destocking. Boeing 737 MAX sales continue to be at a low level.
Sales to “Other Commercial Aerospace,” which include regional and business aircraft, decreased 48.0% in the first quarter of 2021 as compared to the same period in 2020, as the global pandemic negatively impacted demand across this market sector, particularly business jets.
Space & Defense sales of $111.7 million were relatively flat (down 1.0% in constant currency) for the first quarter of 2021 as compared to the first quarter of 2020. Strength in rotorcraft, including the CH-53K, as well as the F-35 joint strike fighter was offset by the collective impact of a softer quarter for a number of smaller U.S. defense and space programs.
Total Industrial sales of $51.0 million for the first quarter of 2021 were down 23.3% (27.1% in constant currency) as compared to the 2020 period. Wind energy sales were down 39.9% (42.5% in constant currency) in the first quarter of 2021 as compared to the prior year period primarily due to general lower demand and the cessation of sales in North America following a previously reported customer demand shift.
Gross Margin
|
|
|
Quarter Ended March 31, |
|
|||||||||
|
(In millions) |
|
2021 |
|
|
2020 |
|
|
% Change |
|
|||
|
Gross margin |
|
$ |
53.1 |
|
|
$ |
140.9 |
|
|
|
(62.3 |
)% |
|
Percentage of sales |
|
|
17.1 |
% |
|
|
26.0 |
% |
|
|
|
|
Gross margin for the first quarter of 2021 declined to 17.1% compared to 26.0% in the first quarter of 2020, as we experienced volume declines in the Commercial Aerospace and Industrial markets.
Operating Expenses
|
|
|
Quarter Ended March 31, |
|
|||||||||
|
(In millions) |
|
2021 |
|
|
2020 |
|
|
% Change |
|
|||
|
SG&A expense |
|
$ |
39.6 |
|
|
$ |
46.5 |
|
|
|
(14.8 |
)% |
|
Percentage of sales |
|
|
12.8 |
% |
|
|
8.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
R&T expense |
|
$ |
11.6 |
|
|
$ |
14.0 |
|
|
|
(17.1 |
)% |
|
Percentage of sales |
|
|
3.7 |
% |
|
|
2.6 |
% |
|
|
|
|
Selling, general and administrative and research and technology expenses for the first quarter of 2021 were lower than the prior year period, reflecting tight cost control.
Operating (Loss) Income
|
|
|
Quarter Ended March 31 |
|
|||||||||
|
(In millions) |
|
2021 |
|
|
2020 |
|
|
% Change |
|
|||
|
Consolidated operating (loss) income |
|
$ |
(10.2 |
) |
|
$ |
65.7 |
|
|
|
(115.4 |
)% |
|
Operating margin |
|
|
(3.3 |
)% |
|
|
12.1 |
% |
|
|
|
|
|
Composite Materials |
|
|
7.4 |
|
|
|
91.5 |
|
|
|
(91.9 |
)% |
|
Operating margin |
|
|
3.0 |
% |
|
|
19.7 |
% |
|
|
|
|
|
Engineered Products |
|
|
4.7 |
|
|
6.5 |
|
|
|
(27.7 |
)% |
|
|
Operating margin |
|
|
6.4 |
% |
|
|
6.3 |
% |
|
|
|
|
|
Corporate & Other |
|
|
(22.3 |
) |
|
|
(32.3 |
) |
|
|
(31.0 |
)% |
Operating (loss) income for the first quarters of 2021 and 2020 was $(10.2) million and $65.7 million, respectively. The decrease was driven by lower volumes in the Commercial Aerospace and Industrial markets. The quarter ended March 31, 2021 included
20
restructuring costs of $11.9 million primarily related to severance, and the quarter ended March 31, 2020 included costs of $14.7 million primarily related to the terminated merger with Woodward, Inc.
Interest Expense, Net
|
|
|
Quarter Ended March 31 |
|
|||||||||
|
(In millions) |
|
2021 |
|
|
2020 |
|
|
% Change |
|
|||
|
Interest expense, net |
|
$ |
10.3 |
|
|
$ |
12.0 |
|
|
|
(14.4) |
% |
Interest expense for the first quarter ended March 31, 2021 was lower than the prior year primarily due to lower average debt levels.
Provision for Income Taxes
|
|
|
Quarter Ended March 31 |
|
|||||
|
(In millions) |
|
2021 |
|
|
2020 |
|
||
|
Income tax (benefit) expense |
|
$ |
(7.5 |
) |
|
$ |
11.8 |
|
|
Effective tax rate |
|
|
36.8 |
% |
|
|
21.9 |
% |
The effective tax rate for the quarter ended March 31, 2021 was a 36.8% benefit compared to a 21.9% charge for the quarter ended March 31, 2020. The quarter ended March 31,2021 included a discrete tax benefit of $3.2 million from the revaluation of our deferred tax liabilities related to a favorable U.S. state tax law change. The prior period benefited from deductions associated with share-based compensation payments. The resulting economic downturn has adversely affected demand for our products and contributed to volatile supply and demand conditions affecting prices and volumes in the markets for our products, services and raw materials, which could continue for an extended period of time.
Financial Condition
Liquidity: Cash on hand at March 31, 2021 was $82.0 million as compared to $103.3 million at December 31, 2020. As of March 31, 2021, total debt was $912.3 million, as compared to $926.4 million at December 31, 2020.
In September 2020, we amended the Facility to allow for relief from certain terms, including adjusting the maximum leverage ratio covenant for a defined period. On January 28, 2021, we further amended the Facility agreement (the “Second Amendment”), to provide that, from January 28, 2021 through and including March 31, 2022, we will not be subject to a maximum leverage ratio covenant but will instead be required to maintain Liquidity (as defined in the Facility Agreement) of at least $250 million. Additionally, during such period, the Company will be subject to limitations on share repurchases, cash dividends, and its ability to incur secured debt, in each case subject to certain exceptions; the applicable margin and commitment fees are increased; the incremental facility will not be available; and if the Company’s public debt rating is downgraded to (i) BB or lower by Standard & Poor’s and (ii) Ba2 or lower by Moody’s, we will be required to grant liens on certain of our assets, which liens will be released upon the Company’s public debt rating being upgraded to BB+ or higher by Standard & Poor’s or Ba1 or higher by Moody’s. The Company’s debt rating as of March 31, 2021 is BB+/Baa3. In addition, the Second Amendment provides that the Company will not be subject to an interest coverage ratio covenant until the test period ending December 31, 2021 and revolving commitments under the Facility were reduced to $750 million. As of March 31, 2021, we were in compliance with all debt covenants.
As of March 31, 2021, total borrowings under the Facility were $214 million, which approximates fair value. The Facility agreement permits us to issue letters of credit up to an aggregate amount of $50 million. Outstanding letters of credit reduce the amount available for borrowing under the Facility. As of March 31, 2021, there were no issued letters of credit under the Facility, resulting in undrawn availability under the Facility of $536 million. The weighted average interest rate for the Facility was 3.99% for the three months ended March 31, 2021.
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, 2021, long-term liquidity requirements consist primarily of obligations under our long-term debt obligations. We do not have any significant required debt repayments until June 2024 when the Facility expires.
Operating Activities: Net cash used for operating activities was $1.2 million for the first quarter of 2021 as compared to net cash provided of $8.6 million for the comparable 2020 period on lower earnings partially offset by a decrease in cash used in working capital. Working capital for the three months ended March 31, 2021 was a cash use of $26.2 million compared to a use of $94.8 million in the same period in 2020.
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Investing Activities: Net cash used for investing activities was $4.9 million and $27.2 million for the first quarter of 2021 and 2020, respectively, due to lower capital expenditures in the first quarter of 2021 as compared to the same period in 2020.
Financing Activities: Financing activities were a use of cash of $13.5 million in the first three months of 2021 compared to cash provided of $284.8 million in the same period in 2020. In response to the impacts of the COVID-19 pandemic we announced in the early part of 2020 that we had suspended our dividend payments and stock repurchases. Borrowings under our Facility were higher in 2020 as we chose to draw down an additional $250 million in late March as a precautionary measure in anticipation of the impacts of the COVID-19 pandemic on our operations. In January 2020, the Company used $49.9 million to repay and terminate its European term loan. In the first quarter 2020, we also returned $38.8 million to stockholders from stock repurchases and dividends.
Financial Obligations and Commitments: The next significant scheduled debt maturity will not occur until 2024, when the Facility matures. Certain sales and administrative offices, data processing equipment and manufacturing facilities are leased under operating leases.
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 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, 2020.
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, 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 12, Commitments and Contingencies, to the accompanying Condensed Consolidated Financial Statements of this Form 10-Q.
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,” “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; (b) the revenues we may generate from an aircraft model or program; (c) the impact of the possible push-out in deliveries of the Airbus and Boeing backlog and the impact of delays in the startup or ramp-up of new aircraft programs or the final Hexcel composite material content once the design and material selection have been completed; (d) expectations with regard to the build rate of the Boeing 737 MAX following its return to service and the related impact on our revenues; (e) expectations with regard to the timing of inventory destocking resulting from the pandemic-induced decrease in customer demand; (f) expectations of composite content on new commercial aircraft programs and our share of those requirements; (g) expectations regarding revenues from space and defense applications, including whether certain programs might be curtailed or discontinued; (h) expectations regarding sales for wind energy, recreation, automotive and other industrial applications; (i) expectations regarding working capital trends and expenditures and inventory levels; (j) expectations as to the level of capital expenditures and completion of
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capacity expansions and qualification of new products; (k) expectations regarding our ability to maintain and improve margins in view of the pandemic-induced economic environment; (l) expectations regarding the outcome of legal matters or the impact of changes in laws or regulations or government policies; (m) our projections regarding our tax rate; (n) expectations with regard to the continued impact of the COVID-19 pandemic on worldwide air travel and aircraft programs, as well as on our customers and suppliers and, in turn, on our operations and financial results; and (o) the anticipated impact of the above factors and various market risks on our expectations of financial results for 2021 and beyond.
Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results to be materially different. Such factors include, but are not limited to, the following: the impact of the COVID-19 pandemic (including continued disruption in global financial markets, ongoing restrictions on movement and travel, employee absenteeism and reduced demand for air travel) on the operations, business and financial condition of Hexcel and its customers and suppliers; reductions in sales to any significant customers, particularly Airbus or Boeing, including reduction in revenue related to the timing of ramp-up of production of the Boeing 737 MAX, as well as due to the impact of the COVID-19 pandemic; our ability to effectively adjust production and inventory levels to align with customer demand; inability to effectively motivate, retain and hire necessary workforce; our ability to successfully implement or realize our business strategies, plans and objectives of management, including any restructuring or alignment activities in which we may engage; timing of inventory destocking caused by the COVID-19 pandemic; changes in sales mix; changes in current pricing and cost levels; changes in aerospace delivery rates; changes in government defense procurement budgets; changes in military aerospace program technology; timely new product development or introduction; industry capacity; increased competition; availability and cost of raw materials; supply chain disruptions; our ability to install, staff and qualify necessary capacity or complete capacity expansions to meet customer demand; cybersecurity breaches or intrusions; currency exchange rate fluctuations; changes in political, social and economic conditions, including, but not limited to, the effect of change in global trade policies and the impact of the exit of the U.K. from the European Union; 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; 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, 2020, as well as in Item 1A. “Risk Factors” of this Form 10-Q. 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.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
Except for the continued broad effects of COVID-19, there have been no material changes in market risk from the information provided in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.
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, 2021, 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, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
The information required by Item 1 is contained within Note 12 on pages 15 through 16 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, 2020, 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, except that our stockholder rights plan expired on April 6, 2021 and, accordingly, the risk factor entitled “The short-term rights agreement that we entered into in 2020 could discourage third parties from seeking strategic transactions with us that could be beneficial to our stockholders.” is no longer applicable.
ITEMS 2, 3, 4 and 5 are not applicable, and therefore have been omitted.
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ITEM 6. Exhibits
EXHIBIT INDEX
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Exhibit No. |
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Description |
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10.1 |
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10.2 |
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10.3 |
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10.4 |
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10.5 |
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10.6 |
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10.7 |
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10.8 |
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10.9 |
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31.1 |
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Certification of Chief Executive Officer, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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31.2 |
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Certification of Chief Financial Officer, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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32 |
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101.INS
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Inline XBRL Instance Document: The XBRL Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
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101.SCH
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Inline XBRL Taxonomy Extension Schema
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101.CAL
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Inline XBRL Taxonomy Extension Calculation Linkbase
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101.DEF
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Inline XBRL Taxonomy Extension Definition Linkbase
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101.LAB
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Inline XBRL Taxonomy Extension Label Linkbase
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101.PRE
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Inline XBRL Taxonomy Extension Presentation Linkbase
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104 |
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Cover Page Interactive Data File: the cover page XBRL tags are embedded within the Inline XBRL document and are contained within Exhibit 101. |
*Schedules and exhibits have been omitted pursuant to Regulation S-K, Item 601(a)(5). The Company will provide a copy of any omitted schedule or exhibit to the Securities and Exchange Commission or its staff upon request.
** Indicates management contract or compensatory plan or arrangement
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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.
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Hexcel Corporation |
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April 19, 2021 |
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/s/ Amy S. Evans |
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(Date) |
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Amy S. Evans |
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Senior Vice President, |
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Chief Accounting Officer |
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