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)
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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:
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.
Class |
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Outstanding at July 21, 2022 |
COMMON STOCK |
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HEXCEL CORPORATION AND SUBSIDIARIES
INDEX
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PART I. |
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3 |
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ITEM 1. |
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3 |
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Condensed Consolidated Balance Sheets — June 30 2022, and December 31, 2021 |
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Condensed Consolidated Statements of Cash Flows — The six months ended June 30, 2022 and 2021 |
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7 |
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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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27 |
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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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June 30, |
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December 31, |
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(In millions) |
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2022 |
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2021 |
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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, |
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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
Hexcel Corporation and Subsidiaries |
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Condensed Consolidated Statements of Operations |
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(Unaudited) |
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(Unaudited) |
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Quarter Ended June 30, |
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Six Months Ended June 30, |
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(In millions, except per share data) |
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2022 |
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2021 |
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2022 |
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2021 |
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Net sales |
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$ |
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$ |
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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 (income) expense |
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Operating income |
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Interest expense, net |
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Other income |
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Income (loss) before income taxes, and equity in earnings from affiliated companies |
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Income tax expense (benefit) |
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Income (loss) before equity in earnings from affiliated companies |
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Equity in earnings (losses) from affiliated companies |
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Net income (loss) |
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$ |
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$ |
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$ |
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$ |
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Basic net income (loss) per common share |
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$ |
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$ |
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$ |
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$ |
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Diluted net income (loss) per common share |
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$ |
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$ |
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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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(Unaudited) |
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Quarter Ended June 30, |
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Six Months Ended June 30, |
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(In millions) |
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2022 |
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2021 |
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2022 |
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2021 |
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Net income (loss) |
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$ |
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$ |
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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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( |
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Net unrealized pension and other benefit actuarial gains (losses) and prior service credits (net of tax) |
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( |
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Net unrealized gains (losses) on financial instruments (net of tax) |
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( |
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( |
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( |
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Total other comprehensive (loss) income |
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( |
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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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$ |
( |
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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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Six Months Ended June 30, |
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(In millions) |
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2022 |
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2021 |
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Cash flows from operating activities |
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Net income (loss) |
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$ |
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$ |
( |
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Reconciliation to net cash used 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) losses 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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( |
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( |
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Gain on sale of asset |
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( |
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Gain on sale of investment |
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( |
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- |
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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 in accounts payable/accrued liabilities |
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Other – net |
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( |
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Net cash provided by operating activities |
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Cash flows from investing activities |
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Capital expenditures |
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( |
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Proceeds from sale of asset |
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Proceeds from sale of investments |
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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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Borrowing from senior unsecured credit facility - 2024 |
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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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Activity under stock plans |
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Net cash used for financing activities |
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( |
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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 (Unaudited)
For the Quarter and Six Months ended June 30, 2022, and June 30, 2021
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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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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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Balance, March 31, 2021 |
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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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Change in other comprehensive income – net of tax |
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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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Balance, June 30, 2021 |
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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, 2021 |
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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 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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|||||
Balance, March 31, 2022 |
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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 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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— |
|
|
|
( |
) |
||||
Stock based compensation |
|
— |
|
|
|
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
||||||
Balance, June 30, 2022 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
||||
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, 2021 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, 2021 was derived from the audited 2021 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 2021 Annual Report on Form 10-K.
Investments in Affiliated Companies
Assets Held for Sale
In November 2020 we closed our wind energy prepreg production facility in Windsor, Colorado and as a result, certain plant assets to be sold with a carrying value of approximately $
During the first quarter of 2022, we entered into an agreement to sell our Dublin, California facility. The sale of the facility closed during the second quarter of 2022, and we received approximately $
Note 2 — Net Income (Loss) Per Common Share
|
|
Quarter Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
(In millions, except per share data) |
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Basic net income (loss) per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net income (loss) |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|||
Weighted average common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Basic net income (loss) per common share |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Diluted net income (loss) per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net income (loss) |
|
$ |
|
|
$ |
|
|
|
|
|
|
( |
) |
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
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 (loss) per common share |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|||
7
Total common stock equivalents of
Note 3 — Inventories
|
|
|
|
|
|
|
||
(In millions) |
|
June 30, 2022 |
|
|
December 31, 2021 |
|
||
Raw materials |
|
$ |
|
|
$ |
|
||
Work in progress |
|
|
|
|
|
|
||
Finished goods |
|
|
|
|
|
|
||
Total Inventory |
|
$ |
|
|
$ |
|
||
Note 4 —
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 and six months ended June 30, 2022 and 2021 were as follows:
|
|
Quarter Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
(In millions) |
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
U.S. Nonqualified Defined Benefit Retirement Plans |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Service cost |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Interest cost |
|
|
|
|
|
|
|
|
|
|
|
|||||
Net amortization |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||
(In millions) |
|
June 30, 2022 |
|
|
December 31, 2021 |
|
||
Amounts recognized on the balance sheet for U.S. nonqualified defined benefit retirement plans: |
|
|
|
|
|
|
||
Accrued liabilities |
|
$ |
|
|
$ |
|
||
Other non-current liabilities |
|
|
|
|
|
|
||
|
$ |
|
|
$ |
|
|||
|
|
Quarter Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
(In millions) |
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
European Defined Benefit Retirement Plans |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Service cost |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Interest cost |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Expected return on plan assets |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Net amortization and deferral |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net periodic benefit cost |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
8
(In millions) |
|
June 30, 2022 |
|
|
December 31, 2021 |
|
||
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 quarter ended June 30, 2022 and 2021, amounts unrelated to service costs were a charge of $
Contributions
We generally fund our U.S. non-qualified defined benefit retirement plans when benefit payments are incurred. We contributed approximately $
We contributed $
Postretirement Health Care and Life Insurance Benefit Plans
We recorded $
(In millions) |
|
June 30, 2022 |
|
|
December 31, 2021 |
|
||
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 six months ended June 30, 2022 and 2021. We periodically fund our postretirement plans to pay covered expenses as they are incurred. We expect to contribute less than $
Note 5 –– Debt
(In millions) |
|
June 30, 2022 |
|
|
December 31, 2021 |
|
||
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 |
|
$ |
|
|
$ |
|
||
In June 2019, the Company refinanced its senior unsecured credit facility (the “Facility”), increasing borrowing capacity from $
9
financial and other covenants, including, but not limited to customary restrictions on the incurrence of debt by our subsidiaries and the granting of liens, as well as the maintenance of an interest coverage ratio and a leverage ratio.
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 June 30, 2022, total borrowings under the Facility were $
In 2017, the Company issued $
In 2015, the Company issued $
Note 6 — Derivative Financial Instruments
Interest Rate Swap and Interest Lock Agreements
At June 30, 2022 and December 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 €
10
current asset of $
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 December 2024. 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) income for the quarters and six months ended June 30, 2022 and June 30, 2021 was as follows:
|
|
Quarter Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
(In millions) |
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Unrealized (losses) gains at beginning of period, net of tax |
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||
Losses (gains) reclassified to net sales |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
||
Decrease in fair value |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
Unrealized (losses) gains 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 June 30, 2022, we had commodity swap agreements with a notional value of $
11
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). The fair value of these assets and liabilities was $
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,
Liabilities classified as Level 3 — At June 30, 2022 we had a liability for $
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.
12
We disaggregate our revenue based on market for analytical purposes.
|
|
Quarter Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
(In millions) |
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
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, 2021 |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Net revenue billed |
|
|
|
|
|
|
|
|
|
|||
Balance at March 31, 2022 |
|
|
|
|
|
|
|
|
|
|||
Net revenue billed |
|
$ |
|
|
$ |
( |
) |
|
|
( |
) |
|
Balance at June 30, 2022 |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Accounts receivable, net, includes amounts billed to customers where the right to payment is unconditional.
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.
13
Financial information for our operating segments for the quarters and six months ended June 30, 2022 and 2021 were as follows:
|
|
(Unaudited) |
|
|||||||||||||
|
|
Composite |
|
|
Engineered |
|
|
Corporate & |
|
|
|
|
||||
(In millions) |
|
Materials |
|
|
Products |
|
|
Other (a) |
|
|
Total |
|
||||
Quarter Ended June 30, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net sales to external customers |
|
$ |
|
|
$ |
|
|
$ |
— |
|
|
$ |
|
|||
Intersegment sales |
|
|
|
|
|
|
|
|
( |
) |
|
|
— |
|
||
Total sales |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
393.0 |
|
||
Other operating (income) expense |
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
||
Operating income |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Accrual basis additions to capital expenditures |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Quarter Ended June 30, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net sales to external customers |
|
$ |
|
|
$ |
|
|
$ |
— |
|
|
$ |
|
|||
Intersegment sales |
|
|
|
|
|
|
|
|
( |
) |
|
|
— |
|
||
Total sales |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
320.3 |
|
||
Other operating (income) expense |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Operating income |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Accrual basis additions to capital expenditures |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Six Months Ended June 30, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net sales to external customers |
|
$ |
|
|
$ |
|
|
$ |
— |
|
|
$ |
|
|||
Intersegment sales |
|
|
|
|
|
|
|
|
( |
) |
|
|
— |
|
||
Total sales |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||
Other operating (income) expense |
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
||
Operating income |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Accrual basis additions to capital expenditures |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Six Months Ended June 30, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net sales to external customers |
|
$ |
|
|
$ |
|
|
$ |
— |
|
|
$ |
|
|||
Intersegment sales |
|
|
|
|
|
|
|
|
( |
) |
|
|
— |
|
||
Total sales |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||
Other operating (income) expense |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|||
Operating income |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
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, 2021 |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Amortization expense |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Currency translation adjustments |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Balance at June 30, 2022 |
|
$ |
|
|
$ |
|
|
$ |
|
|||
At June 30, 2022, the balance of goodwill and intangible assets was $
14
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, 2021 |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Other comprehensive income (loss) before reclassifications |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Amounts reclassified from accumulated other comprehensive |
|
|
|
|
|
( |
) |
|
|
|
|
( |
) |
|||
Other comprehensive income (loss) |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Balance at June 30, 2022 |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
The amount 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 income (loss) for the quarter and six months ended June 30, 2022, were as follows:
|
|
Quarter Ended June 30, 2022 |
|
|
Six Months Ended June 30, 2022 |
|
||||||||||
(In millions) |
|
Pre-tax (gain) loss |
|
|
Net of tax (gain) loss |
|
|
Pre-tax (gain) loss |
|
|
Net of tax (gain) loss |
|
||||
Defined Benefit and Postretirement Plan Costs |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Derivative Products |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Foreign currency forward exchange contracts |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Commodity swaps |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Interest rate swaps |
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
||
Total Derivative Products |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
||
Note 11 —
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
15
Investigation/Feasibility Study of environmental conditions of a
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
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 June 30, 2022 and December 31, 2021, 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 six months ended June 30, 2022, and accrued warranty cost, included in “accrued liabilities” in the Condensed Consolidated Balance Sheets at June 30, 2022 and December 31, 2021, were as follows:
|
|
Product |
|
|
(In millions) |
|
Warranties |
|
|
Balance as of December 31, 2021 |
|
$ |
|
|
Warranty expense |
|
|
|
|
Deductions and other |
|
|
( |
) |
Balance as of March 31, 2022 |
|
$ |
|
|
Warranty expense |
|
|
|
|
Deductions and other |
|
|
( |
) |
Balance as of June 30, 2022 |
|
$ |
|
|
16
Note 12 — Restructuring
We recognized restructuring charges of $
|
|
|
|
Activity for the Quarter Ended June 30, 2022 |
|
|
|
|
|||||||||||||||
|
March 31, |
|
|
Restructuring |
|
|
|
|
|
Cash |
|
|
|
|
|
June 30, |
|
||||||
(In Millions) |
2021 |
|
|
Charge |
|
|
FX Impact |
|
|
Paid |
|
|
Non-Cash |
|
|
2022 |
|
||||||
Employee termination |
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
$ |
|
||||
Impairment and other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|||||
Total |
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
|
|
|
Activity for the Six Months Ended June 30, 2022 |
|
|
|
|
|||||||||||||||
|
December 31, |
|
|
Restructuring |
|
|
|
|
|
Cash |
|
|
|
|
|
June 30, |
|
||||||
(In Millions) |
2021 |
|
|
Charge |
|
|
FX Impact |
|
|
Paid |
|
|
Non-Cash |
|
|
2022 |
|
||||||
Employee termination |
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
$ |
|
||||
Impairment and other |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|||||
Total |
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
$ |
|
||||
17
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. 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, 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 thermoplastic additive manufacturing.
The Commercial Aerospace market began to see signs of recovery from the economic impacts of the COVID-19 pandemic in the second half of 2021 which has continued into the second quarter of 2022 with further growth in air travel and customer inventory destocking now largely completed. Despite these improvements, global logistics, supply chains and inflationary pressures still remain a challenge. COVID-19 has 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 margins, even after the preventative and precautionary measures that we, other businesses, and governments are taking.
We are also continuing to monitor developments in the ongoing conflict between Russia and Ukraine including the related export controls and resulting sanctions imposed on Russia by the U.S. and other countries. Although we do not presently foresee direct material adverse effects upon our business, the global implications of the Russian/Ukraine conflict are difficult to predict at this time. Factors such as increased inflation, escalating energy costs, constrained raw material availability, and thus increasing costs, and embargos on flights from Russian airlines could impact the global economy and the aerospace industry in particular.
Financial Overview
Results of Operations
|
|
Quarter Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||||||||||
(In millions, except per share data) |
|
2022 |
|
|
2021 |
|
|
% Change |
|
|
2022 |
|
|
2021 |
|
|
% Change |
|
||||||
Net sales |
|
$ |
393.0 |
|
|
$ |
320.3 |
|
|
|
22.7 |
% |
|
$ |
783.6 |
|
|
$ |
630.6 |
|
|
|
24.3 |
% |
Net sales change in constant currency |
|
|
|
|
|
|
|
|
25.9 |
% |
|
|
|
|
|
|
|
|
26.7 |
% |
||||
Operating income |
|
$ |
63.8 |
|
|
$ |
16.2 |
|
|
|
293.8 |
% |
|
$ |
93.9 |
|
|
$ |
6.0 |
|
|
|
1,465.0 |
% |
As a percentage of net sales |
|
|
16.2 |
% |
|
|
5.1 |
% |
|
|
|
|
|
12.0 |
% |
|
|
1.0 |
% |
|
|
|
||
Net income (loss) |
|
|
44.7 |
|
|
|
2.2 |
|
|
|
1,931.8 |
% |
|
|
62.5 |
|
|
|
(11.8 |
) |
|
|
629.7 |
% |
Diluted net income (loss) per common share |
|
$ |
0.53 |
|
|
$ |
0.03 |
|
|
|
1,666.7 |
% |
|
$ |
0.74 |
|
|
$ |
(0.14 |
) |
|
|
628.6 |
% |
18
Net Sales
The following table summarizes net sales to third-party customers by segment and end market for the quarters ended June 30, 2022 and 2021:
|
|
Quarter Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||||||||||
(In millions) |
|
2022 |
|
|
2021 |
|
|
% Change |
|
|
2022 |
|
|
2021 |
|
|
% Change |
|
||||||
Consolidated Net Sales |
|
$ |
393.0 |
|
|
$ |
320.3 |
|
|
|
22.7 |
% |
|
$ |
783.6 |
|
|
$ |
630.6 |
|
|
|
24.3 |
% |
Commercial Aerospace |
|
|
227.6 |
|
|
|
153.7 |
|
|
|
48.1 |
% |
|
|
446.5 |
|
|
|
301.3 |
|
|
|
48.2 |
% |
Space & Defense |
|
|
111.9 |
|
|
|
106.9 |
|
|
|
4.7 |
% |
|
|
230.1 |
|
|
|
218.6 |
|
|
|
5.3 |
% |
Industrial |
|
|
53.5 |
|
|
|
59.7 |
|
|
|
(10.4 |
)% |
|
|
107.0 |
|
|
|
110.7 |
|
|
|
(3.3 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Composite Materials |
|
$ |
318.1 |
|
|
$ |
240.9 |
|
|
|
32.0 |
% |
|
$ |
631.9 |
|
|
$ |
478.1 |
|
|
|
32.2 |
% |
Commercial Aerospace |
|
|
192.0 |
|
|
|
116.4 |
|
|
|
64.9 |
% |
|
|
376.8 |
|
|
|
228.9 |
|
|
|
64.6 |
% |
Space & Defense |
|
|
73.9 |
|
|
|
66.0 |
|
|
|
12.0 |
% |
|
|
150.5 |
|
|
|
140.8 |
|
|
|
6.9 |
% |
Industrial |
|
|
52.2 |
|
|
|
58.5 |
|
|
|
(10.8 |
)% |
|
|
104.6 |
|
|
|
108.4 |
|
|
|
(3.5 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Engineered Products |
|
$ |
74.9 |
|
|
$ |
79.4 |
|
|
|
(5.7 |
)% |
|
$ |
151.7 |
|
|
$ |
152.5 |
|
|
|
(0.5 |
)% |
Commercial Aerospace |
|
|
35.6 |
|
|
|
37.3 |
|
|
|
(4.6 |
)% |
|
|
69.7 |
|
|
|
72.4 |
|
|
|
(3.7 |
)% |
Space & Defense |
|
|
38.0 |
|
|
|
40.9 |
|
|
|
(7.1 |
)% |
|
|
79.6 |
|
|
|
77.8 |
|
|
|
2.3 |
% |
Industrial |
|
|
1.3 |
|
|
|
1.2 |
|
|
|
8.3 |
% |
|
|
2.4 |
|
|
|
2.3 |
|
|
|
4.3 |
% |
Sales by Segment
Composite Materials: Net sales of $318.1 million in the second quarter of 2022 increased by $77.2 million or 32.0% from the prior year quarter. Commercial Aerospace sales increased $75.6 million or 64.9% in the second quarter of 2022 as compared to the prior year quarter primarily due to stronger narrowbody and A350 sales as well as business jet growth. Net sales of $631.9 million for the first six months of 2022 increased 32.2% compared to the same period last year.
Engineered Products: For the second quarter of 2022, net sales of $74.9 million decreased $4.5 million or 5.7% as compared to the prior year quarter. The decrease was primarily driven by slightly lower Space & Defense sales which were down $2.9 million or 7.1% in the second quarter of 2022 as compared to the same period in 2021. Net sales of $151.7 million for the first six months of 2022 were relatively flat compared to the same period last year.
Sales by Market
Commercial Aerospace sales of $227.6 million increased $73.9 million or 48.1% (49.5% in constant currency) for the second quarter of 2022 compared to the second quarter of 2021 led by growth in the A350 and A320neo programs as well as the 737 MAX program. Other Commercial Aerospace, which includes business jets and regional aircraft, increased 75.4% for the second quarter of 2022 compared to the second quarter of 2021. Sales were significantly lower in the prior year period for most programs as channel destocking was still occurring. Sales of $446.5 million for the first six months of 2022, increased 48.2% (49.3% in constant currency) compared to the first six months of 2021 due to stronger narrowbody and A350 sales whereas sales in the prior year period were impacted by channel destocking. Sales of Other Commercial Aerospace, which includes business jets and regional aircraft, increased 72.9% for the first six months of 2022 compared to the same period in 2021.
Space & Defense sales of $111.9 million increased 4.7% (7.0% in constant currency) for the second quarter of 2022 compared to the second quarter of 2021 led by growth in Space, CH-53K heavy lift helicopters and a number of overseas programs. Sales of $230.1 million for the first six months of 2022 increased 5.3% (7.0% in constant currency) compared to the first six months of 2021 due to growth in Space and the CH-53K program.
.
Total Industrial sales in the second quarter of 2022 of $53.5 million decreased 10.4% (3.5% in constant currency) compared to the second quarter of 2021 as lower wind energy sales was only partially offset by growth in automotive, recreation and other industrial sales. Total Industrial sales of $107.0 million for the six months of 2022, decreased 3.3% (2.6% increase in constant currency) compared to the first six months of 2021 despite growth in automotive, recreation and other industrial markets which was not enough to offset the negative impact of lower wind energy sales.
19
Gross Margin
|
|
Quarter Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||||||||||
(In millions) |
|
2022 |
|
|
2021 |
|
|
% Change |
|
|
2022 |
|
|
2021 |
|
|
% Change |
|
||||||
Gross margin |
|
$ |
89.5 |
|
|
$ |
61.9 |
|
|
|
44.6 |
% |
|
$ |
176.2 |
|
|
$ |
115.0 |
|
|
|
53.2 |
% |
Percentage of sales |
|
|
22.8 |
% |
|
|
19.3 |
% |
|
|
|
|
|
22.5 |
% |
|
|
18.2 |
% |
|
|
|
||
Gross margin for the second quarter of 2022 was 22.8% compared to 19.3% in the second quarter of 2021 and was 22.5% and 18.2% for the first six months of 2022 and 2021, respectively. The improvements in the gross margin for both the second quarter and first six months of 2022 compared to the same periods last year was primarily due to the higher sales and greater capacity utilization which led to improved cost absorption.
Operating Expenses
|
|
Quarter Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||||||||||
(In millions) |
|
2022 |
|
|
2021 |
|
|
% Change |
|
|
2022 |
|
|
2021 |
|
|
% Change |
|
||||||
SG&A expense |
|
$ |
33.5 |
|
|
$ |
31.1 |
|
|
|
7.7 |
% |
|
$ |
78.2 |
|
|
$ |
70.7 |
|
|
|
10.6 |
% |
Percentage of sales |
|
|
8.5 |
% |
|
|
9.7 |
% |
|
|
|
|
|
10.0 |
% |
|
|
11.2 |
% |
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
R&T expense |
|
$ |
11.3 |
|
|
$ |
11.5 |
|
|
|
(1.7 |
)% |
|
$ |
22.2 |
|
|
$ |
23.1 |
|
|
|
(3.9 |
)% |
Percentage of sales |
|
|
2.9 |
% |
|
|
3.6 |
% |
|
|
|
|
|
2.8 |
% |
|
|
3.7 |
% |
|
|
|
||
Selling, general and administrative expenses were higher for the second quarter of 2022 compared to the same period in 2021, although the current quarter expenses were lower as a percentage of sales. The increase in selling, general and administrative expenses for the current quarter was primarily driven by higher employee compensation reflecting the increase in global headcount. Research and technology expenses were relatively flat compared to the prior year quarter. Selling, general and administrative expenses were higher for the first six months of 2022 compared to the same period in 2021, although lower as a percentage of sales, due to higher employee compensation reflecting the increase in global headcount. Research and technology expenses for the first six months of 2022 were slightly lower compared to the prior year due to lower depreciation expense.
Operating Income
|
|
Quarter Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||||||||||
(In millions) |
|
2022 |
|
|
2021 |
|
|
% Change |
|
|
2022 |
|
|
2021 |
|
|
% Change |
|
||||||
Consolidated operating income |
|
$ |
63.8 |
|
|
$ |
16.2 |
|
|
|
293.8 |
% |
|
$ |
93.9 |
|
|
$ |
6.0 |
|
|
|
1,465.0 |
% |
Operating margin |
|
|
16.2 |
% |
|
|
5.1 |
% |
|
|
|
|
|
12.0 |
% |
|
|
1.0 |
% |
|
|
|
||
Composite Materials |
|
|
47.2 |
|
|
|
24.5 |
|
|
|
92.7 |
% |
|
|
89.8 |
|
|
|
31.9 |
|
|
|
181.5 |
% |
Operating margin |
|
|
14.0 |
% |
|
|
9.6 |
% |
|
|
|
|
|
13.5 |
% |
|
|
6.3 |
% |
|
|
|
||
Engineered Products |
|
|
9.1 |
|
|
|
5.9 |
|
|
|
54.2 |
% |
|
|
19.7 |
|
|
|
10.6 |
|
|
|
85.8 |
% |
Operating margin |
|
|
12.0 |
% |
|
|
7.4 |
% |
|
|
|
|
|
12.9 |
% |
|
|
6.9 |
% |
|
|
|
||
Corporate & Other |
|
|
7.5 |
|
|
|
(14.2 |
) |
|
N/M |
|
|
|
(15.6 |
) |
|
|
(36.5 |
) |
|
|
57.3 |
% |
|
Operating income for the second quarters of 2022 and 2021 was $63.8 million and $16.2 million, respectively. Operating income for the first six months of 2022 was $93.9 million compared to $6.0 million for the same period last year. The increase in operating income for both the second quarter and six months of 2022 over the same periods last year was primarily driven by higher sales and strong gross margins as well as the gain on the sale of our Dublin, California facility and lower restructuring costs.
Interest Expense, Net
|
|
Quarter Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||||||||||
(In millions) |
|
2022 |
|
|
2021 |
|
|
% Change |
|
|
2022 |
|
|
2021 |
|
|
% Change |
|
||||||
Interest expense, net |
|
$ |
8.9 |
|
|
$ |
9.3 |
|
|
|
(4.3 |
)% |
|
$ |
18.0 |
|
|
$ |
19.6 |
|
|
|
(8.2 |
)% |
Interest expense for both the quarter and six months ended June 30, 2022 was lower compared to the prior year periods due to lower average debt levels, partially offset by higher interest rates.
20
Provision for Income Taxes
|
|
Quarter Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
(In millions) |
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Income tax expense (benefit) |
|
$ |
12.7 |
|
|
$ |
4.0 |
|
|
$ |
17.4 |
|
|
$ |
(3.5 |
) |
Effective tax rate |
|
|
22.9 |
% |
|
|
58.0 |
% |
|
|
22.8 |
% |
|
|
25.7 |
% |
The tax expense for the quarter ended June 30, 2022 was $12.7 million compared to $4.0 million for the second quarter of 2021. The quarter ended June, 2021 included a discrete tax charge of $2.7 million related to the remeasurement of the net deferred tax liability in a foreign tax jurisdiction as a result of an unfavorable tax rate change. Tax expense for the first six months ended June 30, 2022 was $17.4 million compared to a benefit of $3.5 million for the same period of 2021. The tax benefit for the six months ended June 30, 2021 included a discrete tax benefit related to a favorable U.S state tax law change in addition to the discrete tax charge previously mentioned.
Financial Condition
Liquidity: Cash on hand at June 30, 2022 was $99.2 million as compared to $127.7 million at December 31, 2021. As of June 30, 2022, total debt was $812.5 million as compared to $823.3 million at December 31, 2021.
In September 2020, we amended our Facility to allow for relief from certain terms, including adjusting the maximum leverage ratio covenant for a defined period. On January 28, 2021, we entered into the Second Amendment, which further amended the Facility agreement to provide that, from January 28, 2021 through and including March 31, 2022, we would not be subject to a maximum leverage ratio covenant but instead be required to maintain Liquidity (as defined in the Facility agreement) of at least $250 million. Effective April 1, 2022, the original terms and conditions to the Facility agreement were reinstated except the borrowing capacity which will remain at $750 million. As a result, share repurchases restrictions that had been in effect per the Second Amendment expired on March 31, 2022. The remaining authorization under the share repurchase program at June 30, 2022 was $217 million.
As of June 30, 2022, total borrowings under the Facility were $114 million, which approximated 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 June 30, 2022, there were no issued letters of credit under the Facility, resulting in undrawn availability under the Facility of $636 million. The weighted average interest rate for the Facility was 4.2% for the six months ended June 30, 2022.
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 June 30, 2022, 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.
In 2021, the Company applied for the Aviation Manufacturing Jobs Protection ("AMJP") program, created under the American Rescue Plan Act of 2021, which provides funding to eligible businesses to pay up to half of their compensation costs for certain categories of employees, for up to six months. To qualify for funding, eligible companies must have involuntarily furloughed or laid off at least 10% of its U.S. workforce or have experienced at least a 15% decline in 2020 global operating revenue. In September 2021, the U.S. Department of Transportation announced that it had approved for the Company to receive up to $20.9 million under the AMJP program. The Company received $10.5 million of the offered funds in the fourth quarter of 2021 and anticipates receiving the remaining funds in 2022.
On July 25, 2022, our Board of Directors declared a quarterly dividend of $0.10 per share payable to stockholders of record as of August 5, 2022, with a payment date of August 12, 2022.
Operating Activities: Net cash provided by operating activities for the first six months of 2022 was $18.3 million compared to $38.9 million for the same period last year. Working capital was a cash use of $95.1 million for the first six months of 2022 compared to a use of $19.6 million in the same period in 2021 primarily driven by higher inventory and accounts receivable to support higher sales.
Investing Activities: Net cash used for investing activities was $16.2 million and $9.2 million in the first six months of 2022 and 2021, respectively. The first six months of 2022 included net proceeds of approximately $21.2 million from the sale of our Dublin, California facility. Capital expenditures for the first six months of 2022 were $37.9 million compared to $9.2 million in the same period in 2021. The increase in capital expenditures is primarily driven by two ongoing construction projects for the previously announced construction of a research and technology innovation center in Salt Lake City, Utah. and the expansion of Hexcel’s facility in Morocco.
21
Financing Activities: Net cash used for financing activities was $26.6 million for first six months of 2022 compared to $16.6 million in the same period in 2021. Borrowings under the Facility during the first six months of 2022 was $35.0 million, while repayments were $46.0 million compared to $21.0 million in the prior year. In the first quarter of 2022, we reinstated our quarterly dividend payment, which had previously been suspended as of early 2020. $16.8 million in dividend payments were made to shareholders during the first six months of 2022.
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 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, 2021.
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 June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||||
(In millions) |
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||||
GAAP operating income |
|
$ |
63.8 |
|
|
|
$ |
16.2 |
|
|
$ |
93.9 |
|
|
$ |
6.0 |
|
Other operating (income) expense (a) |
|
|
(19.1 |
) |
|
|
|
3.1 |
|
|
|
(18.1 |
) |
|
|
15.2 |
|
Adjusted operating income (non-GAAP) |
|
$ |
44.7 |
|
|
|
$ |
19.3 |
|
|
$ |
75.8 |
|
|
$ |
21.2 |
|
22
|
|
Quarter Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||||||||||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||||||||||||||||||
(In millions, except per diluted share data) |
|
Net Income |
|
|
Diluted Net Income Per Share |
|
|
Net income |
|
|
Diluted Net Income Per Share |
|
|
Net Income |
|
|
Diluted Net Income Per Share |
|
|
Net (Loss) Income |
|
|
Diluted Net (Loss) Income Per Share |
|
||||||||
GAAP net income (loss) |
|
$ |
44.7 |
|
|
$ |
0.53 |
|
|
$ |
2.2 |
|
|
$ |
0.03 |
|
|
$ |
62.5 |
|
|
$ |
0.74 |
|
|
$ |
(11.8 |
) |
|
$ |
(0.14 |
) |
Other operating (income) expense, net of tax (a) |
|
|
(16.3 |
) |
|
|
(0.20 |
) |
|
|
2.2 |
|
|
|
0.02 |
|
|
|
(15.5 |
) |
|
|
(0.19 |
) |
|
|
11.0 |
|
|
|
0.13 |
|
Other income |
|
$ |
(0.3 |
) |
|
|
|
|
|
|
|
|
|
|
$ |
(0.3 |
) |
|
|
|
|
|
|
|
|
|
||||||
Tax benefit (b) |
|
|
— |
|
|
|
- |
|
|
|
2.7 |
|
|
|
0.03 |
|
|
|
— |
|
|
|
— |
|
|
|
(0.5 |
) |
|
|
(0.01 |
) |
Adjusted net income (loss) (non-GAAP) |
|
$ |
28.1 |
|
|
$ |
0.33 |
|
|
$ |
7.1 |
|
|
$ |
0.08 |
|
|
$ |
46.7 |
|
|
$ |
0.55 |
|
|
$ |
(1.3 |
) |
|
$ |
(0.02 |
) |
|
|
Six Months Ended June 30, |
|
|||||
(In millions) |
|
2022 |
|
|
2021 |
|
||
Net cash used for operating activities |
|
$ |
18.3 |
|
|
$ |
38.9 |
|
Less: Capital expenditures |
|
|
(37.9 |
) |
|
|
(9.2 |
) |
Free cash flow (non-GAAP) |
|
$ |
(19.6 |
) |
|
$ |
29.7 |
|
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; (b) the revenues we may generate from an aircraft model or program; (c) the impact of the 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 regulatory clearances or the build rate of the Boeing 737 MAX or Boeing 787 and the related impact on our revenues; (e) expectations with regard to raw material cost and availability; (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 capacity expansions and qualification of new products; (k) expectations regarding our ability to improve or maintain margins; (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 and the impact of the conflict between Russia and Ukraine on worldwide air travel and aircraft programs, as well as on our customers and suppliers and, in turn, on our operations and financial results; (o) expectations regarding our strategic initiatives and other goals, including, but not limited to, our sustainability goals; (p) expectations regarding the sale of certain of our assets; and (q) the anticipated impact of the above factors and various market risks on our expectations of financial results for 2022 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 and supply chains, ongoing restrictions on movement and travel, employee
23
absenteeism and labor shortages, 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 related to the timing of pending regulatory clearances for the Boeing 737 MAX and the Boeing 787, 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; our ability to effectively motivate, retain and hire the necessary workforce; our ability to successfully implement or realize our business strategies, plans, goals and objectives of management, including our sustainability goals and any restructuring or alignment activities in which we may engage; the impact of any government mandated COVID-19 precautions, including mandatory vaccination; changes in sales mix; changes in current pricing and cost levels, including cost inflation, as well as increasing energy prices resulting from the conflict between Russia and Ukraine; 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, including the impact of supply shortages and inflation; supply chain disruptions, which may be exacerbated by the conflict between Russia and Ukraine; inability 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, but not limited to, the effect of change in global trade policies, such as sanctions imposed as a result of the conflict between Russia and Ukraine; 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, which may be worsened by the impact of climate change, and other severe catastrophic events; the potential impact of environmental, social and governance matters; 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, 2021. 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 and the Russian/Ukraine conflict on 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, 2021.
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 June 30, 2022, 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 June 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
24
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
The information required by Item 1 is contained within Note 11 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, 2021, 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.
ITEMS 2, 3, 4, and 5 are not applicable, and therefore have been omitted.
25
ITEM 6. Exhibits
EXHIBIT INDEX
Exhibit No. |
|
Description |
10.1* |
|
|
10.2* |
|
|
10.3* |
|
|
10.4* |
|
|
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 June 30 31, 2022, formatted in Inline XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statements of Comprehensive (Loss) 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
26
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 |
|
|
|
July 25, 2022 |
|
/s/ Amy S. Evans |
(Date) |
|
Amy S. Evans |
|
|
Senior Vice President, |
|
|
Chief Accounting Officer |
27