Hexcel Eyes 2026 Rebound Despite 2025 Headwinds

Hexcel Corporation ((HXL)) has held its Q4 earnings call. Read on for the main highlights of the call.

Hexcel Balances Recovery Hopes With Near‑Term Turbulence in Earnings Call

Hexcel Corporation’s latest earnings call struck a tone of cautious optimism, as management laid out a clear roadmap to stronger growth and profitability by 2026 while acknowledging meaningful near‑term pressures. Executives emphasized margin gains in core businesses, a recovering commercial aerospace cycle and disciplined capital allocation, but also flagged headwinds from Airbus A350 schedule changes, OEM destocking, weaker 2025 cash generation and EBITDA, temporarily higher leverage after a major buyback and ongoing foreign exchange pressure. The result is a story of a company leaning into a cyclical upturn but still working through some heavy air pockets.

Solid 2025 Finish With Modest Growth and Stable Profitability

Hexcel reported full-year 2025 sales of $1.894 billion, adjusted earnings per share of $1.76 and free cash flow of $157 million. Fourth-quarter sales of roughly $491–492 million represented low single-digit growth, with management citing around 3.7% year-on-year growth including currency and 1.6% on a constant-currency basis. Profitability improved in the quarter: adjusted operating income rose to $65 million, or 13.3% of sales, up from $57 million and 12.1% a year earlier, underscoring better operational leverage even against a backdrop of mixed demand.

Commercial Aerospace Recovery Underpinned by Record Backlogs

Management leaned heavily on the strength of the commercial aerospace cycle, highlighting a global commercial aircraft backlog of more than 17,000 units and an estimated delivery shortfall of around 5,300 aircraft since the pandemic. Industry production in 2025 reached roughly 1,503 aircraft, or about 87% of the 2018 peak, and Hexcel expects a full return to pre‑pandemic build rates by 2026. Key platforms for the company include the Airbus A350 and A320 families, Boeing’s 787 Dreamliner and the 737 program, all of which are expected to provide structural demand tailwinds for Hexcel’s advanced materials as OEMs work through outsized order books.

Composite Materials Margin Surges as Core Franchise Strengthens

The crown jewel of Hexcel’s portfolio, the Composite Materials segment, accounted for roughly 80% of fourth-quarter sales and delivered standout profitability. Adjusted operating margin in this segment jumped to 20.5% in Q4 2025 from 15.3% a year earlier, a roughly 520-basis-point expansion. Management pointed to strong operating leverage, favorable product mix and continued efficiencies as evidence that the core composites franchise is not just recovering with the cycle but structurally improving, setting Hexcel up for attractive incremental margins as volumes rise further.

Operational Discipline and Capacity Readied for Next Leg Up

Hexcel underscored a disciplined operational reset during 2025, combining portfolio pruning with productivity investments. The company closed or divested certain non-core assets, reduced headcount by about 330 positions versus year-end 2024 and stepped up spending on automation, artificial intelligence and broader digitization initiatives. At the same time, Hexcel has restarted a carbon-fiber line ahead of anticipated higher A350 demand, signaling early capacity preparations to avoid bottlenecks when OEM production ramps. The message to investors: costs are being structurally tightened while capacity is being selectively added where long-term demand is most visible.

Robust Capital Returns Paired With Tight Financial Guardrails

Shareholder returns remain a central element of Hexcel’s equity story. In October 2025, the company launched a $350 million accelerated share repurchase, contributing to more than $800 million returned to shareholders through dividends and buybacks since 2024. The quarterly dividend was raised by 6% to $0.18 per share, reinforcing management’s confidence in the cash-generation outlook. At the same time, Hexcel reiterated its target leverage range of 1.5–2.0 times net debt to EBITDA and signaled that repaying its revolving credit facility in 2026 is a priority, framing capital returns within a disciplined balance-sheet strategy.

Defense and Space Markets Provide a Second Growth Engine

Beyond commercial aerospace, Hexcel highlighted defense, space and other specialty markets as another important long-term growth pillar. Management expects these areas to remain robust as global defense budgets trend higher and advanced materials content continues to grow in next-generation platforms. Over time, the company sees the combination of defense, space and business and regional jets contributing more than $200 million of additional annual sales, diversifying revenue and reducing reliance on any single commercial program.

A350 Schedule Changes and Destocking Pressure Near-Term Revenue

The bright outlook for 2026 and beyond contrasts with notable disruptions in 2025. Airbus-driven schedule revisions on the A350 program, along with OEM channel destocking, materially weighed on Hexcel’s performance. A350 sales were notably lower during 2025, and destocking effects were still visible in the fourth quarter, reducing both revenue and near-term visibility on that marquee program. Management framed these issues as timing-related rather than structural, but they underscore the near-term volatility investors must be prepared to tolerate as the supply chain rebalances.

Weaker 2025 Cash Flow and EBITDA Highlight Transition Year

Despite stable sales and margin progress in key segments, Hexcel’s cash and earnings power stepped back in 2025. Free cash flow fell to $157 million from $203 million in 2024, a decline of roughly 23%. Adjusted EBITDA slid to $346 million from $382 million, down about 9%, while net cash from operations dropped to $231 million from $290 million, or just over 20%. These metrics reinforce the idea that 2025 was a transition year, with mix, program timing and destocking all compressing near-term financial performance even as the company invests for the next upcycle.

Leverage Temporarily High After Aggressive Buyback

The sizable accelerated share repurchase was financed in part by revolver borrowings, leaving Hexcel’s year-end 2025 leverage at about 2.7 times net debt to last-12-months adjusted EBITDA, above its 1.5–2.0 times comfort zone. Management was clear that deleveraging will be a key focus in 2026, with improved free cash flow and curtailed revolver balances expected to bring leverage back in line with targets. For equity investors, the move reflects a willingness to be opportunistic on buybacks, but it also introduces some short-term balance sheet risk that will need to be managed carefully.

FX and Divestitures Weigh on Growth Comparisons

Foreign exchange added another layer of complexity to 2025 results. In the fourth quarter, FX reduced operating margin by around 110 basis points, and management expects currency to remain a headwind into 2026 versus 2025, with conservative assumptions already embedded in guidance. Additionally, recent portfolio divestitures are trimming reported sales: the sale of an Austrian industrial business removed roughly $30 million of 2025 revenue from the base, while the Leicester U.K. operation cut another approximately $15 million. These moves lower growth comparables and slightly dilute 2026 growth rates, but they align with Hexcel’s strategy to focus on higher-margin, strategically aligned businesses.

Gross Margin Movement Masked by Mix and One-Time Items

Headline profitability metrics in the quarter also reflected mix and timing noise. Fourth-quarter 2025 gross margin slipped to 24.6% from 25.0% a year earlier, a modest 40-basis-point decline largely attributed to changes in sales mix. Management noted that Q4 results included compensation accrual reversals and other year-end true-ups that affect comparability, contributing to some of the margin volatility. Investors will likely look through these one-off factors and focus more on underlying segment margins, particularly the strong expansion in Composite Materials.

Guidance Points to 2026 Rebound and Strong Multi-Year Cash Generation

Looking ahead, Hexcel’s 2026 guidance and multi-year outlook form the backbone of its cautious optimism. For 2026, the company projects sales of $2.0–$2.1 billion, implying around 8% growth at the midpoint versus 2025, adjusted EPS between $2.10 and $2.30, representing approximately 19–31% growth, and free cash flow above $195 million, up from $157 million. Management expects cumulative free cash flow of more than $1 billion from 2026 through 2029, supported by increasing aircraft build rates. Hexcel estimates about $500 million of incremental annual sales once OEMs reach peak production across key platforms, while defense, space and business and regional jets could add more than $200 million over time. Underpinning the guide are assumptions of roughly 80 A350 deliveries in 2026, A320 family output in the low-to-mid 700s, 737 MAX production in the mid-400s and about 90–100 787s. The company targets an effective tax rate near 20% and anticipates 2026 interest expense of $50–55 million, with deleveraging via revolver repayment a central plank in its financial plan.

Hexcel’s earnings call painted a nuanced picture: a business with powerful structural tailwinds from commercial aerospace and defense, improving core margins and a clear path to higher earnings and cash, but also facing a transition year marked by program resets, weaker free cash flow, FX drag and temporarily elevated leverage. For investors, the story hinges on confidence that aircraft build rates will normalize as expected and that Hexcel can translate that volume into sustained margin expansion and deleveraging. If management executes on its 2026 roadmap, the turbulence of 2025 could look like a brief pause before a stronger climb.