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
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