Hexcel Corporation (HXL)
Q3 2012 Earnings Call
October 23, 2012 10:00 AM ET
Wayne Pensky – SVP and CFO
David Berges – Chairman and CEO
Nick Stanage – President and COO
Michael Bacal – Communications and IR Manager
Amit Mehrotra – Deutsche Bank
Richard Safran – Buckingham
Howard Rubel – Jefferies
Steve Levenson – Stifel, Nicolaus
Abhi Rajendran – Credit Suisse
Michael Lew – Needham & Co
Ken Herbert – Imperial Capital
Peter Cozzone – KeyBanc Capital Markets
Kristine Liwag – Bank of America Merrill Lynch
Noah Poponak – Goldman Sachs
Avinash Kant – DA Davidson
Good day and welcome to the Hexcel Corporation Third Quarter Earnings Conference Call. Today’s conference is being recorded.
At this time I would like to turn the conference over to Mr. Wayne Pensky, Chief Financial Officer. Please go ahead, sir.
Good morning, everyone. Welcome to Hexcel Corporation’s 2012 Third Quarter Earnings Conference Call on October 23, 2012.
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Lastly, this call is being recorded by Hexcel Corporation and is copyrighted material. It cannot be re-recorded or rebroadcast without our express permission. Your participation on this call constitutes your consent to that request.
With me today are Dave Berges, Hexcel’s Chairman and CEO; Nick Stanage, our President and COO, and Michael Bacal, our Communications and Investor Relations Manager. The purpose of the call is to review our 2012 third quarter results detailed in our press release issued yesterday. First, Dave will cover the markets, then I will cover some of the financial details, and Dave will return for some final comments.
Thanks, Wayne. Good morning everyone. We had another very good quarter with sales of $392 million, 13% better than last year on a constant currency basis. And adjusting out one-time items from last year, diluted EPS of $0.39 for the quarter was a 15% increase over 2011. Thanks to good execution and conversion on incremental sales, our $60 million operating income was 23% over last year and resulted in a margin of 15.3% of sales, a 150 basis point improvement over last year.
Commercial aerospace sales of $234 million for the quarter were up over 13% in constant currency from last year’s third quarter with the growth coming primarily from large aircraft. Revenues for new programs again increased by more than 30% for the quarter versus the prior year and now account for more than 30% of our total commercial aerospace sales. Sales for legacy platforms at Airbus and Boeing were up 9% from the third quarter of 2011 and we believe are currently in line with build schedules. Sales to other commercial aerospace, which includes regional and business aircraft, were about the same as the third quarter of the prior year, but we’re down about 10% from the robust levels of the first half.
Space and defense revenues were about $91 million up over 14% on a constant currency basis versus the third quarter of last year. Growth in both civil and military rotorcraft continue to be the primary drivers, though we’re also beginning to see the impact of the new composite rich European A400M transport.
In Industrial markets sales for the third quarter were $67 million up about 11% year-over-year on a constant currency basis. Wind sales were up significantly over last year’s third quarter but were down sequentially, almost 20%, as we begin to see the impact of the U.S. slowdown. Sales from our U.S. wind prepreg facility were down both year-on-year and sequentially and now account for less than 30% of our global wind sales.
Let me return the call to Wayne for some additional comments on the financials.
Thanks, Dave. Gross margin of $99 million for the quarter was 25.3% of sales as compared to 24.6% in the third quarter 2011, due to good leverage in the sales volume.
Our reported sales, general and administrative costs were only 1% above last year and just 3.5% over last year in constant currency. Our research and technology costs were up nearly 17% over last year in constant currency as third quarter spending levels were consistent with the first half of 2012 run rate. In total, SG&A and R&D combined grew less than our revenues and thus improved at 10% of sales versus 10.7% of sales for the third quarter of 2011.
Foreign exchange rates contributed about 30 basis points to the higher operating income percentage in the quarter as compared to last year. Our operating leverage continues to be strong and after adjusting for exchange rates we delivered 24% incremental operating income on the sales growth for the quarter and the year-to-date leverage is almost 26%. Our year-to-date effective tax rate is now 31.6%, down slightly from the first half rate of 31.8%. As a result our third quarter effective rate was 31.1%. As a reminder, 2011’s third quarter rate of 27.4% benefited from a release of $1 million of reserves for uncertain tax positions and a reduction of our estimated tax rate for 2011 to 31%.