Hexcel Reports Strong Fourth Quarter and Another Record Year

• Q4 diluted EPS of $0.64 was 14.3% higher than prior year of $0.56.
• Q4 sales of $483.5 million were up 4.0% (4.6% in constant currency).
• FY2016 diluted EPS of $2.65 was 8.6% higher than prior year of $2.44.
• Adjusted diluted EPS of $2.58 was 11.2% higher than prior year of $2.32.
• FY2016 sales of $2.0 billion were 7.7% higher than FY2015 (7.9% in constant currency) driven by 11.1% increase in commercial aerospace sales.
• FY2016 free cash flow of $73.5 million exceeded initial guidance of $20-$60 million.

Hexcel Corporation (NYSE: HXL) reported strong results for the fourth quarter of 2016 with diluted EPS of $0.64 on net sales of $483.5 million. For the full year, the Company reported record diluted EPS of $2.65 (adjusted diluted EPS of $2.58) on net sales of $2,004.3 million.

Chairman, CEO and President Nick Stanage commented, “Hexcel delivered another solid quarter to end the year with record sales, operating income, net income and EPS. We are particularly pleased with our strong double-digit adjusted EPS growth as we generated $401 million of cash from operating activities in 2016, which funded our investments and capital expenditures for capacity expansion to support our organic growth.”

Full year adjusted diluted EPS was at the high end of the Company’s latest full year 2016 guidance, with EPS for the quarter benefitting from a lower than expected tax rate by two cents. For the year, total sales increased 7.9% in constant currency, with adjusted operating income at 18.0% of sales and adjusted EPS 11.2% higher than in 2015.

Commercial aerospace sales account for 71% of our total 2016 sales and were about 11% higher than last year in constant currency, led by the ramp-up of the A350 XWB and A320neo. 

Looking ahead, Mr. Stanage said, “As previously disclosed in our 2017 guidance, we expect another record year of sales and earnings with cash flow generation of more than $100 million. We continue to focus on innovation and operational excellence as we drive manufacturing throughput, capacity expansion and technology advances to support our customers’ growth and next generation products. We remain fully aligned to deliver the increasing demand for innovative advanced composite products and solutions to support our global customers’.”

Commercial Aerospace

Commercial Aerospace sales of $349.9 million increased 7.2% (7.6% in constant currency) for the quarter as compared to the fourth quarter of 2015. Sales attributed to new aircraft programs(B787, A350 XWB, A320neo and B737 MAX) increased nearly 40% over the same period last year with the A350 XWB shipments leading the growth. For the full year 2016, commercial aerospaceaccounted for 71% of total sales and were 11.3% higher in constant currency than last year. New program sales increased more than 40% for the year, while Airbus and Boeing legacy aircraft decreased approximately 8% driven by declines in legacy wide-body production and the transition from the legacy narrowbodies to new programs (A320neo and B737 MAX).

Sales to “Other Commercial Aerospace,” which include regional and business aircraft customers, were slightly higher than the fourth quarter of 2015 in constant currency and slightly lower for the full year.

Space & Defense

Fourth quarter Space & Defense sales of $79.1 million were 4.8% lower (4.2% in constant currency) than the fourth quarter of 2015. For the year, constant currency sales were 4.6% lower than 2015 with the declines for the quarter and the year primarily driven by lower rotorcraft sales. Rotorcraft now accounts for about 50% of Space & Defense sales, with more than 85% coming from military sales as commercial rotorcraft sales have significantly declined in recent years. Space & Defense sales in 2017 are expected to be stable compared with 2016, including both commercial and military rotorcraft. Hexcel participates in a wide range of programs, in the U.S., Europe and Asia, including rotorcraft, transport, fixed wing and satellite programs.

Industrial

Total Industrial sales of $54.5 million for the fourth quarter of 2016 were 1.6% lower (flat in constant currency) than the fourth quarter of 2015 and for the full year were 6.4% higher (7.4% in constant currency) than 2015. Wind energy sales for the fourth quarter were about 10% lower in constant currency as compared to the comparable period in 2015, and the full year 2016 constant currency sales were in line with 2015. The rest of Industrial sales were about 20% higher in constant currency for both the fourth quarter and full year as compared to the prior year. The higher sales were due to the Formax acquisition at the beginning of 2016, partially offset by weakness in the recreation and other industrial submarkets. 

Operations

Gross margin for the fourth quarter of 2016 was 28.0% as compared to 27.5% in 2015. For the year, gross margin was 28.2% as compared to 28.6% in 2015, as all periods reflect strong operating performance. Selling, General and Administrative expenses for the year were $157.6 million, 1% higher than 2015. Research and Technology expenses for the year were $46.9 million as compared to $44.3 million in 2015, more than 10% higher on a constant currency basis as the Company increases its efforts on new product and process developments to support growth and productivity initiatives. Depreciation and amortization expense for 2016 was $18 million higher than 2015 on a constant currency basis.

Operating income for the fourth quarter was $87.0 million or 18.0% of sales as compared to $81.2 million or 17.5% of sales in the fourth quarter of 2015. Operating income for 2016 was $360.1 million or 18.0% of sales as compared to $332.4 million or 17.9% of sales in 2015. There was a favorable impact of about 40 basis points from exchange rates on operating income margin percentage for the full year 2016 as compared to 2015.

Cash and other

The tax provision was $22.8 million for the fourth quarter of 2016 resulting in an effective tax rate of 27.9%, as the quarter benefitted from the adjustments to the full year effective tax rate based on the final mix of income by country and reduced deferred tax liabilities due to lower enacted tax rates in certain countries. The tax rates for the full year 2016 and 2015 were 26.8% and 26.1% as results included a $6.6 million and a $11.6 million benefit, respectively, related to the release of reserves for uncertain tax positions. Excluding the impact of these and other discrete items, effective tax rates for 2016 and 2015 would have been 30.0% and 30.9%, respectively.

In 2016, Hexcel generated $73 million of free cash flow (defined as cash provided from operating activities less cash paid for capital expenditures) as compared to a use of $4 million in 2015, primarily reflecting higher earnings and lower working capital usage, partially offset by an increase in capital expenditures (cash used for capital expenditures was $328 million in 2016 as compared to $305 million in 2015). 

During the year, the Company used $111 million to repurchase shares of its common stock ($26 million in the fourth quarter) and $40 million for payment of dividends. As of December 31, 2016, there is $93 million remaining under the authorized share repurchase program. The Company made $39 million of investments and an acquisition during the year, including $5 million in the fourth quarter for the previously announced investment in Carbon Conversions Incorporated. Total debt, net of cash as of December 31, 2016, was $654 million, an increase of $129 million from December 31, 2015. 

As announced today, the Board of Directors declared a $0.11 quarterly dividend. The dividend will be payable to stockholders of record as of February 8, 2017, with a payment date of February 15, 2017.

Outlook (unchanged)

• Sales of $2.05 to $2.15 billion
• Adjusted diluted earnings per share of $2.64 to $2.76
• Free cash flow >$100 million
• Accrual basis capital expenditures of $270 to $290 million