Hexcel Reports 2007 Third Quarter Results

Hexcel Corporation (NYSE: HXL) today reported results for the third quarter of 2007. Net sales from continuing operations in the quarter were $281.1 million, 11.4% higher than the $252.3 million reported for the third quarter of 2006. Related operating income for the third quarter was $30.2 million compared to $23.9 million for the same period last year. Net income from continuing operations for the third quarter of 2007 was $18.1 million, or $0.19 per diluted share, compared to $15.2 million, or $0.16 per diluted share, in 2006. Net loss from discontinued operations was $0.8 million, which includes an after-tax loss on sale of $2.4 million. Discontinued operations primarily consist of the U.S. electronics, ballistics and general industrial reinforcement product lines ("EBGI”), which were sold to JPS Industries on August 6, 2007. Chief Executive Officer Comments Mr. Berges commented, "The third quarter saw continued strong sales to most of the commercial aerospace market. Sales to Boeing, regional aircraft builders and for engines and nacelles were up significantly for the third quarter in a row. Airbus sales were again down for the quarter, but only slightly as the impact of the A380 delay began a year ago. The first A380 has been delivered to Singapore Airlines and based on the current recovery schedule we expect favorable year-over-year sales comparisons going forward. We are encouraged that two new customers have recently committed to add the A380 to their fleet and hope to see renewed interest as this groundbreaking aircraft enters active service.” "We generated nice year-over-year improvements in both gross margin and operating margin, and we still expect to meet our margin guidance targets for the year. With new aerospace programs, higher build rates, new product qualifications, new process developments and facilities underway, these are exciting times for us. The employees of Hexcel recognize the tremendous opportunities in front of them, and are working relentlessly to turn these opportunities into a more profitable future.” Markets Commercial Aerospace Commercial aerospace sales grew for the quarter by 15.8% (13.7% in constant currency) to $152.8 million. The growth was driven by strong sales to Boeing and its subcontractors, to manufacturers of engines and nacelles and to regional aircraft producers. Sales to these customers were up over 25% year-on-year for the third quarter in a row. We do not expect the recently announced delay in the delivery of the first B787 to significantly impact us. Sales to Airbus were down less than 5%, a smaller decline than the first two quarters of the year, as year-over-year comparisons were less impacted by the A380 delay. While it remains difficult to forecast how Airbus and each of its many subcontractors work through their inventory, we do expect A380 sales will begin to show growth beginning with this year’s fourth quarter. Industrial Industrial sales for the quarter were up 1.2% (down 4.1% in constant currency) to $67.9 million. Sales of materials for the wind energy market were robust, but again offset by lower sales in the recreation and other industrial markets. After a slow start to the year, wind energy had strong double digit growth for the second quarter in a row versus last year. Global demand remains strong and capacity is being added, so we expect continued growth. Sales for recreation applications were lower than in the comparable quarter of 2006 principally because of continued weak sales of winter sports products in Europe. Other industrial sales in the Americas were lower than last year as we continue to refine our focus on selected customers and applications. We do not expect further reductions in these sub-markets on a sequential quarter basis. Space & Defense Space & Defense sales of $60.4 million for the quarter were up 13.5% over last year (11.6% in constant currency), which brings the year-to-date growth to 11.7% (9.5% in constant currency). In the quarter, global demand for rotor craft and U.S. military aircraft were the main contributors to the growth. Operations Aerospace qualification processes are underway in a number of locations including our new carbon fiber precursor line in Decatur, AL; a new prepreg facility in Stade, Germany; a new carbon fiber line in Salt Lake City, UT; and for prepreg products transferred as part of the Livermore, CA closure. We are also opening new satellite prepreg facilities in Nantes, France and Tianjin, China to be close to our customers. The training of new Spanish employees continues in order to assure a timely start-up of our fiber facility in Illescas, Spain early next year. While these projects add some burden to our near term costs, each represents a strategic positioning to support the growth we now anticipate. Gross margins increased to 23.8% in the quarter compared to 22.7% in the third quarter of 2006. Improved product sales mix and fixed cost leverage on higher volumes contributed to the increase. R&T spending was $0.9 million higher compared to the third quarter of 2006 reflecting continued expenditures related to new product development and qualification efforts for new aircraft programs, including the B787, B747-8, and the A350. A significant portion of the costs were again associated with our Engineered Products operating segment as a result of certification testing on the B787 components made from our new HexMC® system. Operating income for the quarter, excluding business consolidation and restructuring expense, was $32.8 million or 11.7% of sales, two percentage points higher than the third quarter of 2006 (see Table F). Discontinued Operations As previously disclosed, the Company completed the sale of EBGI to JPS Industries for an initial cash purchase price of $62.5 million plus up to $12.5 million of additional payments dependent upon future sales of the Ballistics product line. Any additional payments will be recorded as income when earned. Income Taxes The Company’s effective income tax rate for the third quarter 2007 was 29.5% as compared to 22.0% for the third quarter of 2006. The 2006 provision included the reversal of $3.6 million of the valuation allowance against the Company’s U.S. deferred tax assets related to capital losses. The year to date tax rate is now 38.1%. The reduction in the third quarter rate as compared to the 42.3% in the first half of 2007 primarily reflects a favorable audit settlement, including the release of $1.1 million of FIN 48 reserves. We expect our rate for the full year to be approximately 39%. Total Debt, Net of Cash Total debt, net of cash, of $293.2 million as of September 30, 2007 decreased by $93.4 million from $386.6 million as of December 31, 2006. The year-to-date results include $84.0 million of proceeds from the sale of the discontinued operations. The $15.0 million liability recorded in the second quarter for the settlement of the Zylon matter is expected to be paid in the fourth quarter. Hexcel will host a conference call at 10:00 A.M. ET, tomorrow, October 23, 2007 to discuss the third quarter results and respond to questions. The telephone number for the conference call is (913) 312-0697 and the confirmation code is 4478270. 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 structural materials, including carbon fibers, reinforcements, prepregs, honeycomb, matrix systems, adhesives and composite structures, used in commercial aerospace, space and defense 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 we serve (including growth in commercial aerospace revenues, the estimates and expectations based on aircraft production rates made publicly available by Boeing and Airbus, the revenues we may generate from a aircraft model or program, the impact of delays in new aircraft programs, the outlook for space & defense revenues including rotorcraft applications and the trend in wind, recreation and other industrial applications), our focus on maintaining and improving margins and implementing a final settlement with the DOJ in the Zylon matter. 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 our filings with the SEC. We do not undertake an obligation to update our 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)   2007     2006     2007     2006   Net sales $ 281.1 $ 252.3 $ 853.4 $ 786.6 Cost of sales   214.2     195.0     644.6     597.2     Gross margin 66.9 57.3 208.8 189.4 % Gross margin 23.8 % 22.7 % 24.5 % 24.1 %   Selling, general and administrative expenses (a) 26.4 26.1 84.8 80.1 Research and technology expenses 7.7 6.8 25.7 21.7 Business consolidation and restructuring expenses   2.6     0.5     4.1     1.7     Operating income 30.2 23.9 94.2 85.9   Interest expense, net 5.3 5.7 16.9 18.5 Non-operating expense (b)   0.5     —     1.0     —     Income from continuing operations before income taxes, equity in earnings and discontinued operations 24.4 18.2 76.3 67.4 Provision for income taxes   7.2     4.0     29.1     23.4     Income from continuing operations before equity in earnings and discontinued operations 17.2 14.2 47.2 44.0 Equity in earnings of affiliated companies   0.9     1.0     3.2     3.2     Net income from continuing operations 18.1 15.2 50.4 47.2 Income (loss) from discontinued operations, net of tax (c) 1.6 0.5 (5.3 ) 0.6 (Loss) gain on sale of discontinued operations, net of tax   (2.4 )   —     4.4     —   Net income $ 17.3   $ 15.7   $ 49.5   $ 47.8     Basic net income (loss) per common share:   Continuing operations $ 0.19 $ 0.16 $ 0.53 $ 0.50 Discontinued operations (0.01 ) 0.01   (0.01 ) 0.01   Net income per common share $ 0.18 $ 0.17 $ 0.52 $ 0.51 Diluted net income (loss) per common share:   Continuing operations $ 0.19 $ 0.16 $ 0.52 $ 0.50 Discontinued operations (0.01 ) —   (0.01 ) —   Net income per common share $ 0.18 $ 0.16 $ 0.51 $ 0.50 Weighted-average common shares:   Basic 94.9 93.7 94.4 93.3 Diluted   96.7     95.2     96.2     95.4   (a) Includes an accrual of $2.0 million for environmental remediation costs for the quarter and nine-months ended September 30, 2006, previously classified as cost of sales. (b) Non-operating expense is the accelerated amortization of deferred financing costs as a result of prepayments of the Company’s bank term loan with the net proceeds from asset sales. (c) Included in the nine-month period ended September 30, 2007 is an after-tax charge of $9.7 million related to the establishment of a reserve for previously disclosed litigation. Hexcel Corporation and Subsidiaries Condensed Consolidated Balance Sheets Unaudited (In millions, except per share data)   September 30, 2007   June 30, 2007   December 31, 2006 Assets Current assets: Cash and cash equivalents $ 31.4 $ 36.0 $ 25.7 Accounts receivable, net 185.0 192.0 169.8 Inventories, net 179.0 166.7 150.8 Prepaid expenses and other current assets 39.1 32.1 35.4 Assets of discontinued operations   —     39.7     44.1   Total current assets 434.5 466.5 425.8   Property, plant and equipment 805.3 783.7 750.3 Less accumulated depreciation   (405.5 )   (404.9 )   (403.8 ) Net property, plant and equipment 399.8 378.8 346.5   Goodwill and other intangible assets, net 59.3 58.9 58.5 Investments in affiliated companies 16.6 15.7 11.1 Deferred tax assets 94.1 96.4 103.0 Other assets 16.0 17.1 22.3 Assets of discontinued operations   —     40.0     47.4   Total assets $ 1,020.3   $ 1,073.4   $ 1,014.5     Liabilities and Stockholders' Equity Current liabilities: Notes payable and current maturities of capital lease obligations $ 1.8 $ 2.0 $ 2.5 Accounts payable 103.4 100.6 96.0 Accrued liabilities 126.1 131.1 105.6 Liabilities of discontinued operations   —     12.4     15.2   Total current liabilities 231.3 246.1 219.3   Long-term notes payable and capital lease obligations 322.8 401.9 409.8 Other non-current liabilities 81.9 73.1 80.8 Liabilities of discontinued operations   —     1.8     3.0   Total liabilities 636.0 722.9 712.9   Stockholders' equity: Preferred stock, no par value, 20.0 shares authorized, no shares issued or outstanding — — — Common stock, $0.01 par value, 200.0 shares authorized, 97.0 shares issued at September 30, 2007, 96.4 shares issued at June 30, 2007 and 95.4 shares issued at December 31, 2006   1.0 1.0 1.0 Additional paid-in capital 506.8 495.8 479.3 Accumulated deficit (109.2 ) (126.5 ) (157.1 ) Accumulated other comprehensive income (loss)   7.5     1.8     (1.8 ) 406.1 372.1 321.4 Less – Treasury stock, at cost, 1.8 shares at September 30, 2007, 1.8 at June 30, 2007 and 1.7 shares at December 31, 2006   (21.8 )   (21.6 )   (19.8 ) Total stockholders' equity   384.3     350.5     301.6   Total liabilities and stockholders' equity $ 1,020.3   $ 1,073.4   $ 1,014.5   Hexcel Corporation and Subsidiaries Condensed Consolidated Statements of Cash Flows   Unaudited Year to Date Ended September 30, (In millions) 2007   2006     Cash flows from operating activities Net income $ 49.5 $ 47.8 (Loss) gain from discontinued operations, net of tax (0.9 ) 0.6   Net income from continuing operations 50.4 47.2   Reconciliation to net cash provided by (used for) operating activities: Depreciation and amortization 29.8 27.5 Amortization of debt discount and deferred financing costs 1.4 1.3 Deferred income taxes 20.5 12.9 Business consolidation and restructuring expenses 4.1 1.7 Business consolidation and restructuring payments (11.2 ) (2.3 ) Equity in earnings of affiliated companies (3.2 ) (3.2 ) Dividends from affiliated companies — 1.3 Stock-based compensation 8.1 6.9 Excess tax benefits on stock-based compensation (6.3 ) (6.2 ) Loss on early retirement of debt 1.0 —   Changes in assets and liabilities: Increase in accounts receivable (7.2 ) (20.0 ) Increase in inventories (22.3 ) (9.4 ) Increase in prepaid expenses and other current assets (1.3 ) (0.5 ) Decrease in accounts payable/accrued liabilities (8.4 ) (10.7 ) Other - net   2.1     4.4   Net cash provided by operating activities   57.5     50.9     Cash flows from investing activities Capital expenditures and deposits for property purchases (71.5 ) (81.8 ) Net proceeds from sale of discontinued operations 84.0 — Investment in affiliated companies   (2.0 )   —   Net cash provided by (used for) investing activities   10.5     (81.8 )   Cash flows from financing activities Proceeds from senior secured credit facility - revolver, net — 11.5 Repayments of senior secured credit facility – term B loan (87.9 ) (0.9 ) Repayments of capital lease obligations and other debt, net (0.1 ) 0.9 Activity under stock plans, including excess tax benefits on stock-based compensation   17.1     10.7   Net cash provided by (used for) financing activities   (70.9 )   22.2   Net cash provided by operating activities, discontinued operations 7.9 1.5 Net cash used for investing activities, discontinued operations (1.8 ) (0.5 ) Effect of exchange rate changes on cash and cash equivalents   2.5     (0.4 ) Net increase (decrease) in cash and cash equivalents 5.7 (8.0 ) Cash and cash equivalents at beginning of period   25.7     21.0   Cash and cash equivalents at end of period $ 31.4   $ 13.0   Hexcel Corporation and Subsidiaries     Net Sales to Third-Party Customers by Market Segment Quarters Ended September 30, 2007 and 2006   (Unaudited)   Table A (In millions) As Reported   Constant Currency (a) Market Segment   2007     2006   B/(W) %     FX Effect (b)     2006   B/(W) % Commercial Aerospace $ 152.8   $ 132.0   15.8 $ 2.4   $ 134.4 13.7 Industrial 67.9 67.1 1.2 3.7 70.8 (4.1 ) Space & Defense   60.4     53.2   13.5     0.9     54.1   11.6   Consolidated Total $ 281.1   $ 252.3   11.4   $ 7.0   $ 259.3   8.4   Consolidated % of Net Sales   %     %               %     Commercial Aerospace 54.4 52.3 51.8 Industrial 24.1 26.6 27.3 Space & Defense   21.5     21.1               20.9     Consolidated Total   100.0     100.0               100.0     Nine Months Ended September 30, 2007 and 2006   (Unaudited)   Table B (In millions) As Reported   Constant Currency (a) Market Segment   2007     2006   B/(W) %     FX Effect (b)     2006   B/(W) % Commercial Aerospace $ 451.5   $ 410.5   10.0   $ 7.3   $ 417.8   8.1 Industrial 217.8 211.3 3.1 12.2 223.5 (2.6 ) Space & Defense   184.1     164.8   11.7     3.3     168.1   9.5   Consolidated Total $ 853.4   $ 786.6   8.5   $ 22.8   $ 809.4   5.4   Consolidated % of Net Sales   %     %               %     Commercial Aerospace 52.9 52.2 51.6 Industrial 25.5 26.9 27.6 Space & Defense   21.6     20.9               20.8     Consolidated Total   100.0     100.0               100.0     (a) To assist in the interpretation of our net sales trend, total net sales and sales by market for the quarter and nine-months ended September 30, 2006 have been estimated using the same U.S. dollar, British pound and Euro exchange rates as applied for the respective period in 2007 and are referred to as "constant currency” sales. (b) FX effect is the estimated impact on "as reported” net sales due to changes in foreign currency exchange rates. Hexcel Corporation and Subsidiaries Segment Information (Unaudited)   Table C Third Quarter 2007       (In millions)   Composite Materials   Engineered Products   Corporate & Other (a)   Total Net sales to external customers $ 224.0 $ 57.1 $ — $ 281.1 Intersegment sales   7.6     0.4     (8.0 )   —   Total sales 231.6 57.5 (8.0 ) 281.1   Operating income (loss) 33.9 4.9 (8.6 ) 30.2 % Operating margin 14.6 % 8.6 % 10.7 %   Depreciation and amortization 9.2 1.0 — 10.2 Business consolidation and restructuring expenses 1.9 0.7 — 2.6 Stock-based compensation expense 0.6 0.2 0.6 1.4 Capital expenditures and deposits (b)   23.5     1.5     0.3     25.3     Third Quarter 2006               Net sales to external customers $ 204.6 $ 47.7 $ — $ 252.3 Intersegment sales   7.2     0.3     (7.5 )   —   Total sales 211.8 48.0 (7.5 ) 252.3   Operating income (loss) 29.6 4.7 (10.4 ) 23.9 % Operating margin 14.0 % 9.8 % 9.5 % Depreciation and amortization 8.1 0.9 — 9.0 Business consolidation and restructuring expenses 0.5 — — 0.5 Stock-based compensation expense 0.5 0.1 1.0 1.6 Capital expenditures and deposits (b)   28.9     1.9     0.7     31.5     Nine Months Ended 2007                 Net sales to external customers $ 686.0 $ 167.4 $ — $ 853.4 Intersegment sales   25.9     2.1     (28.0 )   —   Total sales 711.9 169.5 (28.0 ) 853.4   Operating income (loss) 109.0 14.9 (29.7 ) 94.2 % Operating margin 15.3 % 8.8 % 11.0 % Depreciation and amortization 26.9 2.8 0.1 29.8 Business consolidation and restructuring expenses 3.1 1.0 — 4.1 Stock-based compensation expense 3.2 0.6 4.3 8.1 Capital expenditures and deposits (b)   66.8     2.8     1.9     71.5     Nine Months Ended 2006                 Net sales to external customers $ 645.4 $ 141.2 $ — $ 786.6 Intersegment sales   21.6     0.5     (22.1 )   —   Total sales 667.0 141.7 (22.1 ) 786.6   Operating income (loss) 99.0 16.3 (29.4 ) 85.9 % Operating margin 14.8 % 11.5 % 10.9 % Depreciation and amortization 24.8 2.6 0.1 27.5 Business consolidation and restructuring expenses 1.6 0.2 (0.1 ) 1.7 Stock-based compensation expense 2.2 0.4 4.3 6.9 Capital expenditures and deposits (b)   76.3     3.0     2.5     81.8   (a) We do not allocate corporate expenses to the operating segments. (b) Includes deposits for capital purchases. Hexcel Corporation and Subsidiaries Table D Schedule of Net Income from Continuing Operations Per Common Share Unaudited Quarter Ended September 30,   Nine Months Ended September 30, (In millions, except per share data) 2007   2006     2007   2006     Basic net income from continuing operations per common share: Net income from continuing operations $ 18.1 $ 15.2 $ 50.4 $ 47.2 Weighted average common shares outstanding   94.9     93.7       94.4     93.3   Basic net income from continuing operations per common share $ 0.19   $ 0.16     $ 0.53   $ 0.50   Diluted net income from continuing operations per common share: Net income from continuing operations $ 18.1 $ 15.2 $ 50.4 $ 47.2 Weighted average common shares outstanding – Basic 94.9 93.7 94.4 93.3   Plus incremental shares from assumed conversions: Restricted stock units 0.3 0.2 0.4 0.4 Stock Options   1.5     1.3       1.4     1.7 Weighted average common shares outstanding–Dilutive   96.7     95.2       96.2     95.4   Diluted net income from continuing operations per common share $ 0.19   $ 0.16     $ 0.52   $ 0.50 Hexcel Corporation and Subsidiaries Table E Schedule of Interest Expense   Unaudited Quarter Ended September 30, Nine Months Ended September 30, (In millions) 2007   2006     2007   2006     Interest on debt instruments $ 5.5 $ 6.2 $ 16.4 $ 18.7 Capitalized interest (a) (0.8 ) (1.1 ) (1.9 ) (2.3 ) Banking, commitment and other fees (b) 0.2 0.2 1.1 0.8 Amortization of financing costs and discounts (non-cash)   0.4     0.4       1.3     1.3   Interest Expense $ 5.3   $ 5.7     $ 16.9   $ 18.5   (a) Interest expense capitalized in connection with our carbon fiber expansion program. (b) Includes interest expense of $0.1 million and $0.5 million related to uncertain tax positions for the three- and nine-month periods ended September 30, 2007, respectively. Hexcel Corporation and Subsidiaries Reconciliation of GAAP and Non-GAAP Measures   Table F Unaudited Quarter Ended September 30,   Nine Months Ended September 30, (In millions)   2007     2006     2007     2006     GAAP operating income $ 30.2 $ 23.9 $ 94.2 $ 85.9 - Business Consolidation & Restructuring Expense 2.6 0.5 4.1 1.7 - Secondary offering transaction costs   —     —     —     1.2 Non-GAAP Operating Income $ 32.8   $ 24.4   $ 98.3   $ 88.8 Includes: - Stock Compensation Expense $ 1.4   $ 1.6   $ 8.1   $ 6.9 Management believes that operating income and net income before special items, which are non-GAAP measurements, are meaningful to investors because they provide a view of Hexcel with respect to ongoing operating results. Special items represent significant charges or credits that are important to an understanding of Hexcel’s overall operating results in the periods presented. In addition, management believes that total debt, net of cash, which is also a non-GAAP measure, is an important measure of Hexcel’s liquidity. Such non-GAAP measurements are not recognized in accordance with generally accepted accounting principles and should not be viewed as an alternative to GAAP measures of performance. Hexcel Corporation     Schedule of Total Debt, Net of Cash Table G Unaudited September 30, June 30, December 31, (In millions) 2007   2007   2006   Notes payable and current maturities of capital lease obligations $ 1.8 $ 2.0 $ 2.5 Long-term notes payable and capital lease obligations   322.8       401.9       409.8   Total Debt 324.6 403.9 412.3 Less: Cash and cash equivalents   (31.4 )     (36.0 )     (25.7 ) Total debt, net of cash $ 293.2     $ 367.9     $ 386.6