Hexcel Reports 2019 Third Quarter Results

Hexcel Corporation (NYSE: HXL):

Hexcel Corporation (NYSE: HXL) today reported third quarter 2019 results including net sales of $572.5 million and adjusted diluted EPS of $0.90.

Nick Stanage, Chairman, CEO and President said: “Hexcel delivered 90 cents of adjusted diluted EPS, or growth of 12.5% compared to the third quarter of 2018. I’m especially pleased with our teams’ performance, delivering strong leverage and a 19.2% operating margin. These strong results reflect our relentless focus on continuous improvement and Operational Excellence. Our generation of Cash from Operations continued to be strong and is now $277 million YTD. As we look forward, we see further growth in our markets, tempered by the extended uncertainty for the timing of the Boeing 737 MAX return to service, which is pushing a portion of our growth originally expected in 2019 into future periods. As a result of this, combined with the continued strong dollar FX impact, we are reducing our 2019 sales guidance while maintaining our 2019 guidance for EPS, capital expenditures and free cash flow. Despite the market uncertainty related to the 737 MAX recertification timing, we are confident on delivering earnings and cash flow in line with our annual guidance and continuing to drive strong shareholder value.”

Markets

Sales for the third quarter of 2019 were $572.5 million, an increase of 5.9% (6.6% in constant currency) compared to the third quarter of 2018.

Commercial Aerospace

• Commercial Aerospace sales of $385.9 million increased 3.4% (3.6% in constant currency) in the third quarter of 2019 as compared to the prior year period. Growth was driven by production rate increases for the Airbus A320neo and the Boeing 787. Overall, growth in the quarter was impacted by the reduced demand from the Boeing 737 MAX program, with Boeing continuing to operate at a build rate of 42 planes per month.
• Sales to “Other Commercial Aerospace” which includes regional and business aircraft were up strongly by 16.8% for the third quarter of 2019 as compared to 2018. Strong sales to certain Gulfstream programs were the primary drivers.

Space & Defense

• Space & Defense sales of $109.8 million increased 21.5% (22.7% in constant currency) for the quarter as compared to the third quarter of 2018. Growth in the F-35 Joint Strike Fighter was the primary driver in the quarter supported by other fixed-wing programs. The quarter included sales from ARC Technologies acquired in the first quarter of 2019.

Industrial

• Total Industrial sales of $76.8 million for the third quarter of 2019 were in line with the third quarter of 2018 (+2.7% in constant currency). Wind energy sales (the largest sub-market in Industrial) increased 10.2% in constant currency compared to Q3 2018. This was a slower rate of growth than recent quarters which saw a strong growth ramp up that began in the second half of 2018. Other Industrial sales, including automotive, have a tendency to fluctuate quarter to quarter and were down in the third quarter of 2019 due to program timing.

Consolidated Operations

• Gross margin for the third quarter of 2019 was 27.6% compared to 26.5% in the third quarter of 2018. The year-over-year improvement reflects strong operational execution combined with the decline in a number of operational headwinds incurred in 2018.
• Operating expenses were managed tightly in the third quarter and were in line with Company expectations. Selling, General and Administrative expenses increased 5.4% in constant currency, and Research & Technology expenses increased 4.0% in constant currency.
• Operating income in the third quarter of 2019 was $109.9 million, or 19.2% of sales, compared to $96.5 million, or 17.9% of sales, in 2018. Exchange rates, after taking hedges into account, favorably impacted the third quarter by approximately ten basis points compared to 2018.

Year-to-Date 2019 Results

Sales of $1,791.4 million for the nine months ended September 30, 2019 increased 11.2% in constant currency compared to the same period in 2018.

Commercial Aerospace (68% of YTD sales)

• Commercial Aerospace sales of $1,217.9 million increased 7.3% in constant currency compared to the first nine months of 2018. Growth was driven by the transition to the latest generation of narrowbodies that have higher composite content as well as build rate increases for the A320neo, and the Airbus A350 and Boeing 787 programs.
• Sales to “Other Commercial Aerospace,” which include regional and business aircraft customers, increased 9.9% year to date, driven by higher business jet sales, notably Gulfstream.

Space & Defense (18% of YTD sales)

• Space & Defense sales of $329.4 million increased 22.6% in constant currency compared to the first nine months of 2018. Strong sales for the F-35 Joint Strike Fighter program, other fixed-wing programs, and the acquisition of ARC Technologies drove the increase.

Industrial (14% of YTD sales)

• Total Industrial sales of $244.1 million increased 18.0% in constant currency compared to the first nine months of 2018.
• For the first nine months of 2019, wind energy sales increased almost 40% in constant currency compared to last year.

Consolidated Operations

• Gross margin for the first nine months of 2019 was 27.6% compared to 26.5% for the first nine months of 2018. Sustained strong operational performance drove the margin improvement year over year . Depreciation expense increased $16.3 million over the first nine months of 2018, due to continued investment for expected future growth.
• Selling, general and administrative expenses for the first nine months of 2019 were approximately 9.9% higher in constant currency than the prior year to support general growth and the acquisition of ARC Technologies. Research and technology expenses for the first nine months of 2019 increased approximately 9.1% in constant currency compared to the prior 2018 period, reflecting continued investment in innovative composite products and solutions to support customers and next-generation applications.
• Operating income in the first nine months of 2019 was $327.8 million, or 18.3% of sales, compared to $275.4 million, or 16.9% of sales, in 2018. The year-over-year impact of exchange rates was favorable by approximately 35 basis points.

Cash and Other

• The tax provision was $18.2 million for the third quarter of 2019, reflecting an effective tax rate of 18.4%, compared to 9.1% in 2018. The third quarter of 2018 was significantly impacted by transition adjustments related to U.S. tax reform. The third quarter of 2019 benefitted primarily from tax credits identified during the quarter of $3.0 million. Excluding these benefits, the adjusted effective tax rate was 21.4% compared to 20.3% in 2018. Both periods benefited from deductions associated with share-based compensation payments. The underlying effective tax rate is expected to be 24% for the final quarter of the year.
• Net cash generated from operating activities for the first nine months of 2019 was $277.3 million, compared to $278.4 million in the first nine months of the prior year. Capital expenditures were $162.7 million for the first nine months of 2019, compared to $150.2 million for the first nine months of 2018. Free cash flow was $114.6 million for the first nine months of 2019, compared to $128.2 million for the same period of the prior year. Free cash flow is defined as cash provided from operating activities less cash paid for capital expenditures. Working capital use YTD is $83.7 million compared to a use of $64.6 million 2018.
• The Company used $55.7 million to repurchase shares of its common stock during the third quarter of 2019 and used $66.9 million for share repurchases in the first nine months of 2019. The Company has $318 million remaining under the authorized share repurchase program.
• As announced today, the Board of Directors declared a quarterly dividend of $0.17 per share. The dividend is payable to stockholders of record as of November 1, 2019, with a payment date of November 8, 2019.

2019 Guidance

• Sales of $2.340 billion to $2.400 billion (previously $2.375 billion to $2.475 billion)
• Adjusted diluted earnings per share of $3.43 to $3.53 (unchanged)
• Free cash flow greater than $250 million (unchanged)
• Accrual basis capital expenditures of $170 million to $190 million (unchanged)

* The Company is not providing a quantitative reconciliation of our non-GAAP guidance to the corresponding GAAP information because the GAAP measures that we exclude from our non-GAAP guidance are difficult to predict and are primarily dependent on future uncertainties.

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Hexcel will host a conference call at 10:00 a.m. ET, on October 22, 2019 to discuss the third quarter 2019 results. The event will be webcast via the Investor Relations webpage at www.Hexcel.com. The event can also be accessed by dialing +1 (647) 689-5685 and the conference ID is 1749595. Replays of the call will be available on the website.

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Hexcel Corporation is a leading advanced composites company. It develops, manufactures and markets lightweight, high-performance structural materials, including carbon fibers, specialty reinforcements, prepregs and other fiber-reinforced matrix materials, honeycomb, adhesives, engineered core and composite structures, used in commercial aerospace, space and defense and industrial applications. Learn more at www.Hexcel.com.

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Disclaimer on Forward Looking Statements

This news release contains statements that are forward looking within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, including statements relating to the estimates and expectations based on aircraft production rates made publicly available by Airbus, Boeing and others; the revenues we may generate from an aircraft model or program; 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; expectations of composite content on new commercial aircraft programs and our share of those requirements; expectations of growth in revenues from space and defense applications, including whether certain programs might be curtailed or discontinued; expectations regarding growth in sales for wind energy, recreation, automotive and other industrial applications; expectations regarding working capital trends and expenditures; expectations as to the level of capital expenditures and when we will complete the construction of capacity expansions and qualification of new products; expectations regarding our ability to maintain and improve margins as we add new facilities and in view of the current economic environment; projections regarding our tax rate; and the anticipated impact of the above factors and various market risks on our expectations of financial results for 2019 and beyond. Actual results may differ materially from the results anticipated in the forward looking statements due to a variety of factors, including but not limited to reductions in sales to any significant customers, particularly Airbus, Boeing or Vestas, including any reduction in sales to Boeing related to a decrease in production volume of the 737 MAX; 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; inability to install, staff and qualify necessary capacity or achievement of planned manufacturing improvements; 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 exit of the U.K. from the European Union; work stoppages or other labor disruptions; unexpected outcome of legal matters or impact of changes in laws or regulations. Additional risk factors are described in our filings with the Securities and Exchange Commission. We do not undertake an obligation to update our forward-looking statements to reflect future events.