Hexcel Reports Strong 2014 Second Quarter Results and Raises FY2014 Guidance

Regulatory News:

Hexcel Corporation (NYSE:HXL)(Paris:HXL), today reported results for the second quarter of 2014. Net sales during the quarter were $470.1 million, 11.2% higher than the $422.6 million reported for the second quarter of 2013. Operating income for the period was $75.1 million ($81.1 million adjusted operating income, see Table C), compared to $71.9 million last year. Operating income for the quarter includes a $6 million charge to increase environmental reserves related to a manufacturing facility sold in 1986. Net income for the second quarter of 2014 was $50.6 million, or $0.51 per diluted share ($0.55 per share as adjusted, see Table C), compared to $48.5 million or $0.48 per diluted share in 2013.

Chief Executive Officer Comments

Mr. Stanage commented, "This was another strong quarter for Hexcel, as solid execution combined with continued strong Commercial Aerospace sales enabled us to deliver excellent results. For the quarter, our adjusted diluted EPS of $0.55 was 15% higher than last year, on a 10% increase in constant currency sales. Our Commercial Aerospace sales were up nearly 14% in constant currency and our Industrial sales increased 21% in constant currency sales as compared to the second quarter of 2013.”

Looking ahead, Mr. Stanage said, "We continue to deliver strong year-over-year quarterly performance as we build for the future. Based on our customers’ forecasted buildrates, we remain on-track to achieve our mid-term goal of $2.5 billion in sales by the end of 2017. Consequently, we continue to support our customers by investing in technology, capacity expansion, manufacturing innovations and our people, while staying focused on delivering our 23% operating income leverage target.”

Markets

Commercial Aerospace

• Commercial Aerospace sales of $308.2 million increased 14.1% (13.6% in constant currency) for the quarter as compared to the second quarter of 2013. Revenues attributed to new aircraft programs (A380, B747-8, B787, A350, A320neo and B737 MAX) increased nearly 20% versus the same period last year, with the A350 and B787 shipments leading the growth. Airbus and Boeing legacy aircraft related sales for the quarter were up about 9% compared to 2013 and were about the same level as the first quarter.
• Sales to "Other Commercial Aerospace,” which include regional and business aircraft customers, were over 20% higher compared to the second quarter of 2013, and about the same level as the last two quarters.

Space & Defense

• Space & Defense sales of $92.1 million decreased 4.8% (5.8% in constant currency) for the quarter as compared to second quarter of 2013. The first half sales are down 3.6% in constant currency. Our top 15 programs account for about two-thirds of our Space & Defense sales and these programs in aggregate are just above the first half of 2013, as the growth in new programs has offset the reductions from programs that are winding down or reducing in build rates. In total we are on over 100 programs and the decline in sales has come from the rest of these programs which have historically had less predictable ordering patterns. We now expect Space & Defense sales for the full year 2014 to be about the same as 2013.

Industrial

• Total Industrial sales of $69.8 million for the second quarter of 2014 were 24.9% higher (21.2% in constant currency) than the second quarter of 2013. Sales for the first half of 2014 were up 20.0% in constant currency over the weak first half of 2013. The increases were across the board, including wind energy sales which for the first half of 2014 were up over 20% in constant currency as compared to the comparable period in 2013. We expect sales for the second half of 2014 to continue to show year-over-year improvement but to be modestly lower than the first half.

Operations

• Gross margin for the second quarter was 27.5% as compared to 27.6% in the second quarter of 2013, as both periods reflect strong operating performance. The second quarter of 2014 was unfavorably impacted from exchange rates by about 30 basis points as compared to 2013. Selling, general and administrative expenses were 6.6% higher than the second quarter of 2013 (4.0% in constant currency). Research and technology expenses in the second quarter of 2014 of $10.9 million were $0.8 million higher than the comparable 2013 period.
• Adjusted operating income in the 2014 second quarter was $81.1 million or 17.3% of sales as compared to $71.9 million or 17.0% of sales in 2013. For the first half of 2014, adjusted operating income leverage was 25% on the incremental sales after adjusting for the impact of exchange rates. Depreciation expense for the first half of 2014 was $6.7 million higher than for the same period in 2013.

Cash and other

• Our effective tax rate for the quarter was 31.3% as compared to 30.0% in 2013. Our year to date tax rate is also 31.3% and that is the rate we are currently estimating for full year 2014.
• Free cash flow for the first half of 2014 was a use of $9 million versus a source of $16 million in 2013, as cash used for capital expenditures was $119 million in the first half of 2014 compared to $92 million in the 2013 period. Free cash flow is defined as cash provided from operating activities less cash paid for capital expenditures.
• During the quarter, as previously reported, the Company completed the $150 million share repurchase program authorized in July 2013. In June 2014, the Board of Directors authorized an additional $150 million share repurchase. The Company invested $66.2 million and bought back 1,613,358 shares during the quarter. There is now $145 million remaining under its authorized share repurchase program.
• Total debt, net of cash as of June 30, 2014 was $354.0 million, an increase of $124.5 million from December 31, 2013. Share repurchases in the first half of 2014 were $114.5 million. As of June 30, 2014 we had $247 million in available borrowing capacity and cash on hand.

2014 Outlook

Our 2014 outlook:

• Sales of $1,810 million to $1,860 million (previously was $1,800 million to $1,880 million) as lower expected Space & Defense sales should be offset by higher Industrial sales.
• Adjusted diluted earnings per share of $2.06 to $2.14 (previously was $2.00 to $2.12)
• Free cash flow of $25 million to $75 million for the year with accrued capital expenditures of $225 million to $250 million

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Hexcel will host a conference call at 10:00 A.M. ET, tomorrow, July 22, 2014 to discuss the second quarter results and respond to analyst questions. The telephone number for the conference call is (719) 325-2402 and the confirmation code is 7503707. The call will be simultaneously hosted on Hexcel’s web site at www.hexcel.com/investors/index.html. Replays of the call will be available on the web site for approximately three days.

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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, reinforcements, prepregs, honeycomb, matrix systems, adhesives and composite structures, used in commercial aerospace, space and defense and industrial applications such as wind turbine blades.

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Disclaimer on Forward Looking Statements

This press release contains statements that are forward looking, including statements relating to anticipated trends in constant currency for the markets we serve (including changes in commercial aerospace revenues, the estimates and expectations based on aircraft production rates provided or publicly available by Airbus, Boeing and others, the revenues we may generate from an aircraft model or program, the impact of delays in new aircraft programs, the outlook for space & defense revenues and the trend in wind energy, recreation and other industrial applications, including whether certain programs might be curtailed or discontinued or customers’ inventory levels reduced); our ability to maintain and improve margins in light of the current economic environment; the success of particular applications as well as the general overall economy; our ability to manage cash from operating activities and capital spending in relation to future sales levels such that the company funds its capital spending plans from cash flows from operating activities, but, if necessary, maintains adequate borrowings under its credit facilities to cover any shortfalls; and the impact of the above factors on our expectations of financial results for 2014 and beyond. The loss of, or significant reduction in purchases by Airbus, Boeing, Vestas, or any of our other significant customers could materially impair our business, operating results, prospects and financial condition. 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 changes in currency exchange rates, changing market conditions, increased competition, inability to install, staff and qualify necessary capacity or achievement of planned manufacturing improvements, conditions in the financial markets, product mix, achieving expected pricing and manufacturing costs, availability and cost of raw materials, supply chain disruptions, work stoppages or other labor disruptions and changes in or unexpected issues related to environmental regulations, legal matters, interest expense and tax codes. Additional risk factors are described in our filings with the SEC. We do not undertake an obligation to update our forward-looking statements to reflect future events.