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HEXCEL CORPORATION (HXL)

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Hexcel Corp : Hexcel Reports 2006 Third Quarter Results

10/25/2006 | 05:01pm US/Eastern
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Hexcel Corporation (NYSE/PCX: HXL) today reported results for the third quarter of 2006.

Third Quarter Results

Net sales for the quarter were $289.1 million, 4.5% higher than the $276.6 million reported for the third quarter of 2005. Quarterly operating income was $25.7 million, after reflecting an accrual for environmental remediation expense of $2.0 million, stock compensation expense of $1.7 million and $1.4 million of business consolidation & restructuring expenses. The tax provision for the quarter was reduced by a $3.6 million release of valuation allowance against a portion of the Company's deferred tax assets related to capital losses. Net income for the quarter was $15.7 million or $0.16 per diluted share compared to net income of $1.1 million in the third quarter of 2005.

Chief Executive Officer Comments

Mr. Berges commented, ?This was a particularly strong quarter of growth in revenues from the commercial aerospace market. If we exclude the estimated impact of revenues from the A380 program, sales increased approximately 17% year-on-year reflecting our increased production levels across broad based positions with Boeing, Airbus, and manufacturers of engines, nacelles, and smaller aircraft. Industrial sales declined 14% year-on-year despite strong growth in sales of products for wind energy applications due to a 49% fall-off in sales to ballistic applications.?

?The recently announced delay in deliveries of the A380 was certainly a disappointment, but does not reduce the significant potential of this program for Hexcel over the coming years. The detailed production plans of Airbus and its many subcontractors have yet to fully clarify, but we expect limited contribution from the program until 2008. Nevertheless, we still project that our commercial aerospace revenues will continue to grow in 2007 on the strength of Boeing as well as the ?other aerospace? customers who represented over 30% of this segment in 2005.?

?Gross margins increased from 21.1% in the third quarter, 2005 to 21.4% this quarter excluding the accrual of $2.0 million for projected additional remediation costs at a former manufacturing site. The incremental gross margin on the year-over-year sales increase was 28.8%, in line with our average performance over the last couple of years.?

Mr. Berges concluded, ?We are moving forward with our previously announced plans for the sale of the non-composite portions of our Reinforcements business segment and to consolidate the company into a single operating unit. The result will be a new, lighter, stronger and faster Hexcel with significant competitive advantage in attractive markets.?

Third Quarter 2006 Business Highlights

Commercial Aerospace

  • Commercial aerospace sales grew by 19% in constant currency. The growth was driven by the increases in aircraft production in 2006 and 2007 by Boeing, Airbus and other aircraft manufacturers as well as the resultant growth in demand by aircraft engine and nacelle manufacturers.
  • Sales related to the A380 program declined compared to the second quarter, 2006 as the effect of the push-out in deliveries worked its way though the supply chain, but the decline was slower than originally anticipated when the delays were first announced. Sales to this program have ranged from 5-10% of Hexcel's commercial aerospace revenues in recent quarters.
  • Hexcel remains focused on the product development and selection requirements related to the new Boeing 787, Boeing 747-8 and Airbus A350 programs. The progress to date related to the Boeing 787 continues to give us confidence that this program will result in Hexcel's best Boeing aircraft as measured by revenue per plane. Hexcel's position on each of these programs will be augmented by the materials it provides for the production of engines and nacelles anticipated to be utilized on these aircraft.

Industrial

  • On a constant currency basis, industrial sales for the quarter were down 16% year-on-year due to the decline in revenues from ballistic applications partially offset by growth in other industrial applications.
  • Wind energy revenues grew 12% in constant currency compared to the prior year despite some customers reporting supply chain difficulties related to mechanical components. Major customers are building manufacturing plants in the U.S. and China to support the expanding global nature of renewable energy markets.
  • Ballistics revenues continued their decline from the surge levels of 2003 to 2005, down 49% compared to the third quarter, 2005 and 24% compared to the second quarter, 2006. With new personal protection funding recently authorized by Congress, we expect an improved outlook for the end of 2006 and 2007.

Space & Defense

  • Space & Defense sales for the quarter showed a modest decline, down 3% in constant currency compared to the third quarter, 2005. The lower revenues were principally a result of inventory corrections from certain rotorcraft customers.
  • Despite the year-on-year reductions this quarter, the outlook for rotorcraft program related demand remains robust with line rate increases projected in the coming years by many customers.

Environmental

  • The Company accrued $2.0 million related to the additional cost now projected to be required to complete the remediation of a former manufacturing plant in New Jersey.

Business Consolidation & Restructuring

  • Business consolidation & restructuring expenses in the quarter of $1.4 million primarily related to the planned closure of the Company's Washington, Georgia plant to be completed before the end of 2006. They also reflected expenses related to the planned closure of the Company's Livermore, California plant targeted to occur in the first quarter, 2007. Upon closure, the Company will then demolish the Livermore facility in preparation for the sale of the property.

Tax

  • Following the reversal of the majority of the Company's valuation allowance against its U.S. deferred tax assets as of December 31, 2005, the Company provided a full tax provision of $4.2 million of reported pre-tax income in the third quarter, 2006. Cash taxes for the quarter were $1.7 million.
  • The provision includes the reversal of $3.6 million of the valuation allowance against the Company's U.S. deferred tax assets related to capital losses. The reversal has been made as the probable sale of an asset associated with our portfolio realignment will result in a gain that is expected to utilize this capital loss.

Total Debt, Net of Cash

  • Total debt, net of cash remained constant over the last quarter despite higher capital spending related to our carbon fiber expansion. The U.S. elements of the project are now ahead of schedule and the Spanish plant is on schedule. Production trials at the U.S. carbon fiber facilities are now expected to commence before the end of 2006. Hexcel expects to continue its pace of capital investment to support its growth outlook.

Portfolio Review Update

  • As previously announced in July, Hexcel is exploring strategic alternatives for portions of its Reinforcement business segment including the ballistic, electronic and architectural product lines. The Company has retained Merrill Lynch & Co. as the Company's financial advisor to assist with the potential disposition of certain of these non-core assets. The process is underway and should be completed within the next six months.
  • Revenues from Ballistics, Electronics, Architectural and General Industrial weaving applications, the portions of the Reinforcements business segment that we anticipate divesting were $38.8 million for the third quarter, 2006 compared to $52.7 million for the third quarter, 2005. On same basis, revenues for the nine months ended September 30, 2006 were $134.5 million compared to $171.0 million in the third quarter, 2005. In the course of undertaking the potential disposition, revenues associated with the divestiture may change based on the final structure of the transaction(s).
  • In the event of a sale of some or all of these businesses, the net proceeds will be used to repay debt, strengthening the Company's balance sheet and providing financial flexibility to fund growth investments in advanced composites products.
  • The Company will incur certain business consolidation and restructuring expenses in the course of consolidating its existing business segments. While progress is being made in developing these actions, they are not yet at a stage where the Company can fully estimate their aggregate cost and benefits.
  • Later in the fourth quarter, after the completion of the annual planning cycle, Hexcel anticipates providing its 2007 outlook post divestiture as well as details related to any restructuring actions.

Hexcel will host a conference call at 12:00 P.M. EDT, tomorrow, October 26, 2006 to discuss the portfolio review and the third quarter results, responding to questions. The telephone number for the conference call is (347) 284-6930 and the confirmation code is 6416827. The call will be simultaneously hosted on Hexcel's web site at www.hexcel.com/investors/index.html. Replays of the call will be available on the web site for approximately three days.

Hexcel Corporation is a leading advanced structural materials company. It develops, manufactures and markets lightweight, high-performance reinforcement products, composite materials and composite structures for use in commercial aerospace, space and defense, electronics, and industrial applications.

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 market segments the Company serves (including growth in commercial aerospace revenues, the impact of the push-out in initial A380 deliveries, the outlook for revenues from rotorcraft applications and the trend in revenues from military soft body armor applications), the Company's focus on maintaining and improving margins and the timing of potential divestitures. 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 changing market conditions, increased competition, product mix, inability to achieve planned manufacturing improvements and cost reductions, conditions in the financial markets and changes in currency exchange rates. Additional risk factors are described in the Company's filings with the SEC. The Company does not undertake an obligation to update its forward-looking statements to reflect future events.

Hexcel Corporation and Subsidiaries
Condensed Consolidated Statements of Operations
Unaudited
Quarter Ended

September 30,

Nine Months Ended

September 30,

(In millions, except per share data) 2006  2005  2006  2005 
Net sales $ 289.1  $ 276.6  $ 912.1  $ 878.5 
Cost of sales   229.1    218.2      709.3    683.7 
 
Gross margin (a) 60.0  58.4  202.8  194.8 

% Gross Margin

20.8% 21.1% 22.2% 22.2%
 
Selling, general and administrative expenses (b) 26.6  26.9  86.1  79.9 
Research and technology expenses 6.3  6.0  21.4  19.5 
Business consolidation and restructuring expenses 1.4  1.0  5.5  1.8 
Other expense, net (c)   -    15.8      -    15.1 
 
Operating income 25.7  8.7  89.8  78.5 
% Operating Margin 8.9% 3.1% 9.8% 8.9%
 
 
Interest expense, net (d) 6.8  7.4  21.7  26.7 
Non-operating expense (e)   -    -      -    40.9 
 
Income before income taxes 18.9  1.3  68.1  10.9 
Provision for income taxes   4.2    1.4      23.5    8.6 
 
Income (loss) before equity in earnings 14.7  (0.1) 44.6  2.3 
Equity in earnings of affiliated companies   1.0    1.2      3.2    2.6 
 
Net income 15.7  1.1  47.8  4.9 
Deemed preferred dividends and accretion (f)   -    (11.8)     -    (16.4)
Net income (loss) available to common shareholders $ 15.7  $ (10.7)   $ 47.8  $ (11.5)
 
Net income (loss) per common share (g):
 
Basic $ 0.17  $ (0.17) $ 0.51  $ (0.20)
Diluted $ 0.16  $ (0.17) $ 0.50  $ (0.20)
 
Weighted-average common shares (g):
 
Basic 93.7  62.4  93.3  56.9 

Diluted

  95.2    62.4      95.4    56.9 

(a) Gross margin includes in the third quarter and first nine months of 2006 an accrual for environmental remediation cost of $2.0 million.

(b) Includes transaction costs of $1.2 million associated with the first quarter 2006 secondary offering. Includes in the third quarter of 2005, $1.9 million of legal fees and expenses associated with the two litigation matters and $1.0 million of transaction costs related to the secondary offering of common shares.

(c) Relates to an accrual of $15.8 million during the third quarter of 2005 for the settlement of litigation matters. September year-to-date includes an accrual of $16.5 million for the settlement of litigation matters partially offset by a $1.4 million gain on an asset sale.

(d) The reduction in interest expense reflects the benefits of lower interest rates as a result of the Company's debt refinancing which occurred during the first quarter of 2005. Included in the first quarter of 2005, was an additional expense of $1.0 million, net of interest income, due to the lag between the issuance on February 1, 2005 of the 6.75% senior subordinated notes due 2015 and the partial redemption of the 9.75% senior subordinated notes on March 3, 2005. (Refer to Table F)

(e) During the first quarter of 2005, we refinanced substantially all of our debt, and as a result recorded a $40.3 million loss on early retirement of debt. This charge consists of tender offer and call premiums of $25.2 million, the write-off of unamortized deferred financing costs and original issuance discounts of $10.3 million, a loss of $3.6 million related to the cancellation of interest rate swap agreements and $1.2 million in transaction costs in connection with the refinancing.

(f) Includes in the third quarter of 2005, a $10.1 million charge arising from the conversion of mandatorily redeemable convertible preferred stock in connection with the Company's secondary offering of its common stock in August 2005.

(g) Due to the special items charged during the third quarter of 2005 (see notes (b), (c) and (f) above), the impact of the conversion of the mandatorily redeemable convertible preferred stock, restricted stock units and stock options into shares of common stock in the computation of diluted earnings per share were anti-dilutive for the quarter ended September 30, 2005 and, as such, the basic weighted average common share count of 62.4 million was used in the diluted earnings per share computation. Refer to Table E for further information relating to basic and diluted net income (loss) per share.

Hexcel Corporation and Subsidiaries

Condensed Consolidated Balance Sheets

 
Unaudited

(In millions, except per share data)

September 30,

2006

June 30,

2006

December 31,

2005

Assets
Current assets:
Cash and cash equivalents $ 13.0  $ 8.8  $ 21.0 
Accounts receivable, net (a) 187.8  196.1  155.9 
Inventories, net 166.6  160.6  150.4 
Prepaid expenses and other current assets   34.7    35.1    43.0 
Total current assets 402.1  400.6  370.3 
 
Property, plant and equipment 755.1  721.4  726.0 
Less accumulated depreciation   (414.5)   (405.2)   (440.8)
Net property, plant and equipment 340.6  316.2  285.2 
 
Goodwill and other intangible assets 75.7  75.3  74.7 
Investments in affiliated companies 16.5  15.5  14.3 
Deferred tax assets 110.2  111.2  107.8 
Other assets   30.6    32.7    28.3 

Total assets

$

975.7 

$

951.5 

$

880.6 

 
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable and current maturities of capital lease obligations $ 5.0  $ 5.1  $ 3.0 
Accounts payable (b) 92.2  95.6  94.5 
Accrued liabilities   93.8    94.0    98.3 
Total current liabilities 191.0  194.7  195.8 
 
Long-term notes payable and capital lease obligations 426.8  422.5 

© Business Wire 2006
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