Hexcel Corporation (HXL)

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Hexcel Corporation (HXL)

Q3 2012 Earnings Call

October 23, 2012 10:00 AM ET

Executives

Wayne Pensky – SVP and CFO

David Berges – Chairman and CEO

Nick Stanage – President and COO

Michael Bacal – Communications and IR Manager

Analysts

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

Presentation

Operator

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.

Wayne Pensky

Good morning, everyone. Welcome to Hexcel Corporation’s 2012 Third Quarter Earnings Conference Call on October 23, 2012.

Before beginning, let me cover the formalities. First, I want to remind everyone about the Safe Harbor provisions related to any forward-looking statements we may make during the course of this call. Certain statements contained in this call may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. They involve estimates, assumptions, judgments, and uncertainties caused by a variety of factors that could cause future actual results or outcomes to differ materially from our forward-looking statements today. Such factors are detailed in the company’s SEC filings, including our 2011 10-K, our Third Quarter 10-Q, and last night’s press release.

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.

David Berges

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.

Wayne Pensky

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%.

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