Hexcel's Earnings Drop from Weak Demand, Excess Capacity
STAMFORD, Conn. - Hexcel Corporation (NYSE/PCX:HXL) today reported net income for the second quarter of 1999 of $4.3 million, or $0.12 per diluted share, compared with $20.0 million, or $0.46 per diluted share, for the second quarter of 1998. Excluding business acquisition and consolidation expenses of $1.4 million ($0.9 million after tax) incurred in the second quarter of 1999, diluted earnings per share were $0.14. For the quarter ended June 30, 1999, Hexcel generated free cash flow (change in debt net of cash) of $24 million, which exceeded preliminary estimates. The generation of free cash flow was used to repay Hexcel's debt.
Net sales for the second quarter of 1999 increased 7% to $292.7 million, compared with $273.5 million for the second quarter of 1998. Pro forma sales for the second quarter of 1998, which gives effect to the September 1998 acquisition of Clark Schwebel as if the transaction had occurred at the beginning of 1998, were $324.8 million. Changes in foreign exchange rates did not have any significant effect on these comparisons. Hexcel's gross margin for the second quarter of 1999 was 22.6% of sales, compared with 26.0% for the second quarter of 1998. Pro forma second quarter 1998 gross margin was 25.5%.
The decreases in sales and gross margin percentage compared to 1998 pro forma results reflect reduced sales volume to the commercial aerospace market as a result of the supply chain impacts of Boeing's planned reduction in deliveries in 2000, lower prices in the global electronics market because of intensified competition from Asia, and lower production and sales of carbon fiber products. These impacts have been partially offset by various cost savings initiatives. The global electronics market conditions also affected the performance of the company's joint ventures in Europe and Japan, reducing the amount of equity income that the company recognized.
Adjusted EBITDA (earnings before business acquisition and consolidation expenses, interest, taxes, depreciation, amortization, and equity in earnings of affiliated companies) for the second quarter of 1999 was $42.0 million, compared with $48.0 million for the comparable 1998 period. Pro forma second quarter 1998 Adjusted EBITDA was $59.2 million. Second quarter 1999 results were impacted by the factors noted above.
Commenting on Hexcel's second quarter results, John J. Lee, the company's chairman and chief executive officer said "Compared to the first quarter, the company's sales of composite materials to the commercial aerospace market were lower by about $20 million mainly due to efforts by Boeing and its subcontractors to adjust inventories and procurement in anticipation of lower aircraft production in 2000. In addition, excess supply in the carbon fiber industry made it difficult for the company to sell its surplus capacity. On a positive note, the prices for our electronic products have been relatively stable during the quarter after the reductions seen in the first quarter of 1999. Nevertheless, taken together, these factors have resulted in weaker performance this quarter than we originally estimated."
"In these current market conditions," Mr. Lee continued, "Hexcel remains committed to improving performance by continuing to reduce costs and increase productivity through our business consolidation, global procurement and Lean Enterprise initiatives." In the second quarter, Hexcel recorded $1.4 million of business acquisition and consolidation expenses, primarily for employee severance costs for administrative positions. The company also expects to record a further charge of $1.2 million relating to the closing of its Cleveland, Georgia plant, which is expected to be completed in the third quarter of 1999. Benefits from these initiatives are helping to offset some of the impact of lower prices and sales volumes.
Commenting on Hexcel's progress in repaying debt, Mr. Lee said, "Despite our current market conditions, we are making good progress in generating cash to repay debt through better management of working capital and capital expenditures. Our free cash flow for the quarter enabled us to repay $24 million of debt, or $4 million greater than the high end of our earlier second quarter estimates. Our primary areas of short term focus continue to be the reduction of costs and the generation of free cash flow to repay debt over the balance of 1999."
Commenting on the medium term outlook, Mr. Lee concluded, "While Hexcel today continues to contend with the cyclical impact of the Asian economic crisis on its commercial aerospace and electronics businesses, we remain confident of the longer term potential of these markets. The reported improvements in the non-Japanese Asian economies establish the foundation for a future upturn in demand as these global industries return to growth. Meanwhile, a number of new US and European military aircraft programs continue to move towards full scale production starting as early as late 2000."
Hexcel's net income for the six months ended June 30, 1999 was $9.5 million, or $0.26 per diluted share. This compares with net income of $37.0 million, or $0.86 per diluted share for the first half of 1998. Excluding business acquisition and consolidation expenses of $4.2 million, net income for the first half of 1999 was $0.33 per diluted share. Net sales and gross margin for the first half of 1999 were $608.9 million and 22.5% of sales, respectively, compared with $530.3 million and 25.9% of sales, respectively, for the comparable 1998 period. Changes in foreign exchange rates did not have any significant effect on these comparisons. Adjusted EBITDA for the first half of 1999 was $87.6 million, compared with $91.8 million for the same period last year. Pro forma net sales and gross margin for the comparable 1998 period were $642.0 million and 25.5%, respectively, and pro forma Adjusted EBITDA was $116.7 million. The reduction in 1999 year-to-date results were caused by the same factors as those described earlier for the second quarter results.
Hexcel Corporation is the world's leading advanced structural materials company. It develops, manufactures and markets lightweight, high-performance reinforcement products, composite materials and engineered products for use in commercial aerospace, space and defense, electronics, general industrial and recreational applications.
Disclaimer on Forward Looking Statements
This press release contains statements that are forward looking, including statements relating to market conditions, sales, gross margin percentage, free cash flow, currency, build rates and government defense procurement budgets. These statements are not projections or assured results. 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, particularly in Asia, increased competition, product mix, currency and government procurement. 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 or circumstances.