Hexcel reports 2022 fourth quarter and full year results

Chairman, CEO and President Nick Stanage said, “We delivered the strongest sales quarter of the year as we managed to drive higher production levels to support the continuing robust recovery in the commercial aerospace market and as our business benefits from broad global strength in our space and defense markets. We delivered double-digit adjusted operating margins for the fourth quarter and for fiscal year 2022 as we focus on throughput and operational efficiencies. Based on our growth outlook, we have re-commenced construction to complete a new carbon fiber line at our Decatur, Alabama facility, which we paused at the beginning of 2020. The new line should be aerospace qualified in 2025 and will provide needed capacity based on forecasted growth.”

Mr. Stanage continued, “Our markets are recovering strongly, and we are gaining new business as demand grows for lightweight composites that support enhanced performance while improving fuel efficiency and reducing emissions. Our 2023 financial guidance forecasts double-digit growth in both sales and adjusted earnings per share. Our cash generation profile remains compelling, and we are forecasting free cash flow above $140 million in 2023. Across our global footprint, the Hexcel team is focused on innovation and operational excellence to continue to drive shareholder value.”

Markets:
Sales in the fourth quarter of 2022 were $429.4 million compared to $360.3 million in the fourth quarter of 2022.

Commercial Aerospace
Commercial Aerospace sales of $256.2 million increased 28.3% (28.9% in constant currency) for the fourth quarter of 2022 compared to the fourth quarter of 2021 with growth in all the major platforms including the Airbus A350 and A320neo and the Boeing 787 and 737 MAX. Other Commercial Aerospace increased 44.6% for the fourth quarter of 2022 compared to the fourth quarter of 2021. Within Other Commercial Aerospace, business jet sales grew strongly along with growth in regional jets.

Space & Defense
Space & Defense sales of $126.5 million increased 19.5% (22.0% in constant currency) for the quarter compared to the fourth quarter of 2021 with broad global strength across the entire sector.

Industrial
Total Industrial sales of $46.7 million in the fourth quarter of 2022 decreased 14.6% (7.0% in constant currency) compared to the fourth quarter of 2021 as a result of lower wind energy sales.

Consolidated Operations
Gross margin for the fourth quarter of 2022 was 23.1% compared to 19.2% in the fourth quarter of 2021 as higher sales volume drove favorable operating leverage. As a percentage of sales, selling, general and administrative and R&T expenses for the fourth quarter of 2022 were 12.3% compared to 12.2% for the fourth quarter of 2021. Adjusted operating income in the fourth quarter of 2022 was $46.3 million or 10.8% of sales, compared to $25.2 million, or 7.0% of sales in 2021. Other operating expense for both the fourth quarter of 2022 and 2021 included restructuring costs. The impact of exchange rates on operating income as a percent of sales was favorable by approximately 40 basis points in the fourth quarter of 2022 compared to the fourth quarter of 2021.

FY 2022 Results
Sales for the full year of 2022 were $1,577.7 million compared to $1,324.7 million for 2021.

Commercial Aerospace (58% of sales)
Commercial Aerospace sales of $911.8 million increased 36.5% (37.4% in constant currency) for 2022 compared to 2021 led by growth from the Airbus A350 and A320neo programs. Other Commercial Aerospace increased 62.9% for 2022 compared to 2021 due to strong growth in business jets.

Space & Defense (29% of sales)
Space & Defense sales of $465.2 million increased 7.0% (8.9% in constant currency) for 2022 as compared to 2021, reflecting strength with fixed-wing aircraft globally, space, Sikorsky CH-53K, and civil helicopters, particularly in Europe. Lower legacy military rotorcraft sales partially offset the sales growth.

Industrial (13% of sales)
Total Industrial sales of $200.7 million decreased 9.4% (2.5% in constant currency) compared to 2021 as growth in recreation and other industrial markets was offset by lower wind energy sales.

Consolidated Operations
Gross margin for 2022 was 22.6% compared to 18.9% in the prior year strengthening on improved cost absorption from higher sales volume, partially offset by inflationary cost impacts. As a percentage of sales, selling, general and administrative and R&T expenses for 2022 were 12.3% compared to 13.6% for 2021. Adjusted operating income for 2022 was $163.3 million or 10.4% of sales, compared to $70.0 million, or 5.3% of sales in 2021. Other operating income for 2022 included a pre-tax net gain of $19.4 million from the previously announced sale of a facility in Dublin, California, partially offset by restructuring costs. Other operating expenses for 2021 included expenses primarily related to severance and restructuring. The impact of exchange rates on operating income as a percent of sales was favorable by approximately 30 basis points for 2022 compared to 2021.

Cash and other
The fourth quarter and full year tax expense for 2022 was $7.4 million and $31.6 million, respectively. The fourth quarter income tax expense included a tax benefit of $1.1 million resulting from a change in the jurisdictional mix of income compared to what was previously projected. The 2022 full year tax expense included a net discrete tax charge of $1.0 million primarily resulting from a true up of a deferred tax item partially offset by a discrete tax benefit from the adjustment to a provision based on the finalization of prior year tax returns. The fourth quarter and full year 2021 income tax expense was $4.3 million and $5.9 million, respectively. The 2021 full year tax expense included a net discrete charge primarily resulting from the revaluation of U.S. and foreign deferred tax liabilities.

Net cash provided by operating activities for 2022 was $173.1 million, compared to $151.7 million for 2021. Working capital was a cash use of $72.7 million for 2022 compared to $18.3 million for 2021. The increase in working capital is principally driven by our decision to hold higher raw material inventory buffer or safety stock to compensate for supply chain disruptions, in order to protect our customers and support their strong demand. The higher level of sales in the quarter also led to an increase in receivables. Capital expenditures on a cash basis were $76.3 million for 2022 compared to $27.9 million for 2021 with the increase reflecting two previously announced ongoing construction projects, including a new research and technology innovation center in Salt Lake City, Utah and the expansion of Hexcel’s engineered core operations in Morocco. Net cash used for investing activities for 2022, included the net proceeds of $21.2 million received from the sale of a facility in Dublin, California. Free cash flow was $96.8 million for 2022 compared to $123.8 million for 2021. Free cash flow is defined as cash generated from operating activities less cash paid for capital expenditures. Capital expenditures on an accrual basis were $69.8 million for 2022 compared to $41.4 million in 2021.

The Company did not repurchase any common stock during 2022. The remaining authorization under the share repurchase program on December 31, 2022, was $217 million.

As announced today, the Board of Directors declared a quarterly dividend of $0.125 per share payable to stockholders of record as of February 10, 2023, with a payment date of February 17, 2023.

2023 Guidance

• Sales of $1.725 billion to $1.825 billion
• Adjusted diluted earnings per share of $1.70 to $1.90
• Free cash flow of greater than $140 million
• Accrual basis capital expenditures of approximately $90 million
• Underlying effective tax rate is estimated to be 23%