Hexcel Reports Strong 2016 First Quarter Results

STAMFORD, Conn. – Hexcel Corporation (NYSE: HXL), today reported strong first quarter results with adjusted diluted EPS of $0.59 on net sales of $497.7 million.

Chairman, CEO and President Nick Stanage commented, “This was a great start to the year for Hexcel, with solid execution leading to strong results. For the quarter, our adjusted diluted EPS of $0.59 was just above last year’s $0.58, on a constant currency sales increase of 5.1%. Even with the start-up of several new production lines for additional capacity to achieve our forecasted growth, we delivered a solid gross margin of 28.7% this quarter, as compared to the record 30.1% last year when we benefited from a favorable product mix.”

Commercial Aerospace sales, which account for 70% of our total sales, were 8.5% higher than last year in constant currency. Sales growth was led by the A350 XWB and the A320neo. Space & Defense sales account for 16% of our total sales and were 10.7% lower in constant currency than last year. Industrial sales were 10.6% higher in constant currency than last year, led by the acquisition of Formax.

Our guidance was for full year 2016 Space & Defense sales to be stable compared with last year. While our first quarter sales were in-line with our expectations, our current outlook for the rest of 2016 is that it will be challenging to achieve our full year guidance for Space & Defense sales. However additional Commercial Aerospace and Industrial sales are expected to offset any shortfall allowing us to maintain our full year sales guidance.

Looking ahead, Mr. Stanage said, “With the strong start to the year, we remain confident in achieving our 2016 guidance of adjusted diluted EPS of $2.44 to $2.56 on sales of $1.97 to $2.07 billion. The Company’s focus in 2016 remains driving manufacturing throughput, capacity expansion and superior execution to prepare for the substantial production ramp up of new programs, led by Commercial Aerospace.”

The Company is increasing its quarterly dividend 10%, from 10 cents per share to 11 cents per share. Mr. Stanage commented, “This reflects confidence in our ability to grow the business and consistently deliver strong operating performance. Our robust outlook and strong balance sheet enables us to increase dividends to our stockholders while we continue to invest in capacity to support our growth.”

Markets

Commercial Aerospace

Commercial Aerospace sales of $350.3 million increased 9.4% (8.5% in constant currency) for the quarter as compared to the first quarter of 2015. Revenues attributed to new aircraft programs (B787, A350 XWB, A320neo and B737 MAX) increased over 50% versus the same period last year, with A350 XWB shipments leading the growth. Airbus and Boeing legacy aircraft related sales for the quarter were down slightly compared to the first quarter of 2015, but above the 2015 second half run rate.

Sales to “Other Commercial Aerospace,” which include regional and business aircraft customers, were down about 15% from the strong first quarter of 2015, but more than 10% above the second half 2015 run rate.

Space & Defense

Space & Defense sales of $79.3 million were 10.8% lower (10.7% lower in constant currency) than the first quarter of 2015. Rotorcraft sales comprise just over half of Space & Defense sales and accounted for all of the decrease over last year, as sales were at the same run rate as the second half of 2015.

Industrial

Total Industrial sales of $68.1 million for the first quarter of 2016 were 8.8% higher (10.6% higher in constant currency) than the first quarter of 2015. As expected, wind energy sales (which account for more than half of the total Industrial sales) were stable compared to last year, with the growth in Industrial sales coming from the Formax acquisition.

Operations

Gross margin for the first quarter of 2016 was a solid 28.7% as compared to the record 30.1% for the first quarter of 2015. While gross margin benefited from favorable product mix last year, additional costs were incurred this year related to the start-up of several new production lines for capacity to achieve our forecasted growth. Operating income in the 2016 first quarter was $83.9 million or 16.9% of sales as compared to $82.6 million or 17.5% of sales in 2015. Depreciation and amortization was $3.9 million higher this quarter than a year ago. The 2016 operating income percentage as compared to 2015 was higher by about 50 basis points from exchange rates.

Selling, general and administrative expenses were $0.7 million higher than the first quarter of 2015, while research and technology expenses were $0.8 million lower than the comparable 2015 period.

Cash and other

The tax provision was $22.7 million for the quarter, an effective rate of 29.0%. The quarter included a benefit of $1.2 million from the early adoption of Accounting Standards Update 2016-09 regarding the accounting for share-based payments. The adoption was on a prospective basis and therefore had no impact on prior years. Excluding this discrete benefit, the Company’s effective tax rate was 30.5%, in line with our full year expectations. The tax provision for the first quarter of 2015 was $12.9 million, as the quarter included benefits of $11.6 million primarily related to the release of reserves for uncertain tax positions. Excluding the $11.6 million benefit, the Company’s effective rate for the first quarter of 2015 was 30.4%.

Free cash flow for the first quarter of 2016 was a use of $75 million versus a use of $110 million in 2015, as seasonal effects cause significant working capital cash usage in the first quarter. Working capital usage in the first quarter of 2016 was $91 million versus a usage of $113 million in first quarter of 2015, primarily due to timing. Cash payments for capital expenditures primarily related to capacity expansions were $85 million in the first quarter of 2016 ($73 million on an accrual basis) as compared to $95 million in the first quarter of 2015. Free cash flow is defined as cash provided from operating activities less cash paid for capital expenditures.

Total debt, net of cash, as of March 31, 2016 was $665 million, an increase of $140 million from December 31, 2015. During the quarter, the Company used $35 million to repurchase shares of its common stock and has $169 million remaining under the authorized share repurchase program.

As announced today, the Board of Directors approved a 10% increase in the quarterly dividend from $0.10 per share to $0.11 per share. The dividend will be payable to stockholders of record as of May 4, 2016, with a payment date of May 11, 2016.

2016 Outlook (unchanged)

Sales of $1.97 to $2.07 billion.

Adjusted diluted earnings per share of $2.44 to $2.56.

Free cash flow of $20 to $60 million.

Accrual basis capital expenditures of $280 to $320 million.

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Hexcel will host a conference call at 10:00 A.M. ET, tomorrow, April 21, 2016 to discuss the first quarter results and respond to analyst questions. The telephone number for the conference call is (416) 204-9271 and the confirmation code is 6149709. The call will be simultaneously hosted on Hexcel’s web site at http://www.media-server.com/m/acs/b4ad870caa958f593c1d02efeee379dd. Replays of the call will be available on the web site for approximately three days.

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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 the startup or ramp-ups of new aircraft programs, the outlook for space & defense revenues and the trend in wind energy 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 all financial results for 2016 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 rates 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.

• See Tables A & C for reconciliations to constant currency sales and Non-GAAP operating income and net income.

(a)To assist in the analysis of our net sales trend, total net sales and sales by market for the quarter ended March 31, 2015 have been estimated using the same U.S. dollar, British pound and Euro exchange rates as applied for the respective period in 2016 and are referred to as “constant currency” sales.(b)FX effect is the estimated impact on “as reported” net sales due to changes in foreign currency exchange rates.

(a)We do not allocate corporate expenses to the operating segments.

(b)

(a)The 2015 first quarter includes benefits of $11.6 million primarily related to the release of reserves for uncertain tax positions.

Management believes that sales measured in constant dollars, EBITDA, adjusted net income, adjusted diluted net income per share and free cash flow (defined as cash provided by operating activities less cash payments for capital expenditures), which are non-GAAP measurements, are meaningful to investors because they provide a view of Hexcel with respect to ongoing operating results excluding special items. Special items represent significant charges or credits that are important to an understanding of Hexcel’s overall operating results in the periods presented. In addition, management believes that total debt, net of cash, which is also a non-GAAP measure, is an important measure of Hexcel’s liquidity. Such non-GAAP measurements are not recognized in accordance with generally accepted accounting principles and should not be viewed as an alternative to GAAP measures of performance