Hexcel Reports Fourth Quarter Loss
STAMFORD, Conn. - Free Cash Flow of $33.6 million is Generated in the Fourth Quarter; 1999 Reduction in Debt Totals $86.8 million.
Hexcel Corporation (NYSE/PCX:HXL) today reported a net loss for the fourth quarter of 1999 of $2.7 million, or $0.07 per diluted share, compared with net income of $1.9 million, or $0.05 per diluted share, for the fourth quarter of 1998. Excluding pre-tax business acquisition and consolidation expenses of $2.3 million, the adjusted net loss for the fourth quarter of 1999 was $1.2 million, or $0.03 per diluted share. This compares to adjusted net income of $9.5 million or $0.25 per diluted share for the same period in 1998. Adjusted EBITDA for the 1999 fourth quarter was $30.7 million, compared with $46.1 million a year ago. Hexcel generated free cash flow (measured as the change in debt net of cash) of $33.6 million in the fourth quarter of 1999 and $86.8 million for the year, largely as a result of improved working capital management and the company's lean enterprise initiatives. This has enabled the company to repay a corresponding amount of debt, consistent with the debt reduction target reported at the beginning of 1999.For the year, the net loss was $23.3 million or $0.64 per diluted share, compared with net income of $49.5 million or $1.22 per diluted share for 1998 on a pro forma basis, giving effect to the Clark-Schwebel acquisition as if it had occurred at the beginning of 1998. Excluding pre-tax business acquisition and consolidation expenses of $20.1 million and a non-recurring $20.0 million non-cash charge to write-down a joint venture investment, 1999 adjusted net income was $9.6 million, or $0.26 per diluted share. This compares to pro forma adjusted net income of $57.6 million or $1.40 per diluted share for 1998. Adjusted EBITDA for 1999 was $150.4 million, compared with $208.4 million on a pro forma basis for 1998.
Revenue Trends
Net sales for the fourth quarter of 1999 declined by 11% compared to the fourth quarter of 1998. For the year, 1999 net sales declined by 7% relative to 1998 pro forma results. These reductions, which were concentrated in the company's commercial aerospace segment, reflect the impact of:
- Declining aircraft production rates by The Boeing Company in anticipation of lower aircraft deliveries in 2000. Hexcel delivers product into the Boeing supply chain on average about six months prior to aircraft delivery. Boeing delivered 620 aircraft in 1999, but has publicly announced that it expects to deliver about 480 aircraft in 2000.
- Inventory adjustments in excess of build rate changes by aerospace customers in the US, Europe and certain export markets, in connection with their efforts to improve working capital and reduce manufacturing cycle times. Although Boeing and some of the company's other customers have indicated that they do not anticipate further inventory adjustments in excess of build rate changes, the impact from customers seeking to reduce inventories as they improve production cycle times and productivity will continue in 2000.
- Price reductions in early 1999 for certain aerospace products and electronics fabrics, in response to market conditions.
- Significant increases in the installed capacity of the carbon
fiber industry, which have made it difficult for the company to
sell its own excess carbon fiber capacity. This factor is
expected to continue to limit the growth in sales volumes and
prices of the company's carbon fibers in 2000.
- A moderate increase in unit sales volumes to the electronics market, driven by increased demand for lightweight fabrics used in the manufacture of multi-layer printed circuit boards. The company anticipates that the demand for lightweight glass fabrics will continue to grow in 2000 and beyond, fueled by the growth of electronic infrastructure for the internet and consumer demand for personal electronics devices.
- Increased sales of aramid and specialty fabrics for ballistics applications, in response to increased demand for lightweight protective vests by police forces and the US military.
- Growth in the sales of composite materials for wind energy applications, which nearly doubled from 1998 to 1999, and are expected to continue to grow in 2000.
- Increased sales of composite materials to the automotive industry, reflecting the company's development of new product applications for automotive customers.
Gross Margin and Adjusted Operating Income
Gross margin for the fourth quarter of 1999 was $54.0 million or 20.1% of sales, compared with $72.1 million or 23.8% of sales in the same quarter of 1998. For the full year, 1999 gross margin was $242.5 million or 21.1% of sales, while the comparable pro forma figures for 1998 were $305.3 million and 24.7% of sales. The primary factors underlying both the fourth quarter and full year declines in gross margin were the reductions in sales volumes and prices discussed above and the associated reduction in the absorption of fixed factory costs. These factors were partially mitigated by reductions in labor and overhead costs, as well as negotiated reductions in the prices of certain raw materials.
Adjusted operating income for the 1999 fourth quarter was $13.1 million lower than for the 1998 quarter, and adjusted operating income for the year was $58.2 million lower than the comparable 1998 pro forma results. The impact of lower gross margins was partially offset by reductions in selling, general and administrative expenses resulting from personnel reductions and the reorganization of certain selling and administrative functions in connection with previously announced business consolidation initiatives.
Chairman's Comments
Commenting on Hexcel's fourth quarter and 1999 results, Mr. John J. Lee, Chairman and CEO said, "As anticipated, commercial aerospace revenues declined below 1998 levels, as the impact of Boeing's planned reduction in aircraft deliveries reduced demand across their supply chain. This reduction was amplified by the efforts of many of our customers, including Boeing, to lower their inventory levels and move toward shorter manufacturing cycle times. Although our customers will continue to seek such improvements in 2000, it appears that demand for commercial aerospace products has begun to stabilize. Airbus Industrie has projected a modest increase in aircraft deliveries in 2000, and Boeing has indicated that it may be able to sustain production at the current rate of 480 aircraft per year. In addition, increased demand for regional and business aircraft are creating new opportunities for Hexcel."
Mr. Lee continued, "1999 results also suffered from weak pricing for electronics fabrics. However, during the second half of the year, demand for electronics fabrics improved, and additional volume growth is expected in 2000."
"At the same time," Mr. Lee noted, "we reduced our workforce by 811 people in 1999, including 208 in the fourth quarter. As a result, the total reduction in labor and overhead costs during 1999 was approximately $25 million, and the estimated annualized benefit of these actions is in excess of $35 million. Cost reductions and productivity improvements will continue to drive performance improvements in 2000. As the year progresses, we will continue to benefit from the actions taken in 1999 and start to accrue the benefits of the new business consolidation program announced this past September, which is scheduled to be completed by mid 2001."
"In terms of our balance sheet, we have done an excellent job of reducing our working capital requirements and controlling capital expenditures. As a result, the company generated $110.8 million in cash for debt reduction since September 1998, excluding the final installment on the Clark-Schwebel transaction in December 1998 ($19.0 million) and the cost of issuing our senior subordinated notes in January 1999 ($9.5 million). This exceeds our goal of generating $100 million in free cash flow for the five quarter period ended December 31, 1999. Although it is unrealistic to expect free cash flow of this magnitude in 2000, our lean enterprise initiatives are expected to generate ongoing incremental improvements in our use of both working capital and capital assets."
"In December, we announced that we had engaged Credit Suisse First Boston to assist the company in a review of the strategic alternatives for its Engineered Products business, including a possible sale. The review, which is ongoing, is part of our ongoing efforts to build the optimal business portfolio for Hexcel as the world's leading advanced structural materials company."
Mr. Lee concluded: "Looking forward to 2000, we expect less volatility in customer demand and to continue to realize the benefit of our cost reduction actions. We anticipate that quarterly EBITDA will start to trend up from the depressed levels seen in the third and fourth quarter of 1999. This trend should result in Adjusted EBITDA for the full year of 2000 being comparable to that earned in 1999. Capital expenditures for the year will be less than $40 million. We remain focused on generating cash to repay debt. Due to the timing of some of our expenditures, we expect to use cash in the first quarter, but then anticipate generating cash over the balance of the year. Our focus in 2000 on cost reduction and productivity will position the company to benefit in 2001 from the anticipated growth in revenue as military aircraft programs ramp up, the demand from electrical markets continues to grow, and the continued economic recovery in Asia prompts increases in wide-body commercial aircraft production."
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, and industrial and recreation applications.
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Disclaimer on Forward Looking Statements
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This press release contains statements that are forward looking, including statements relating to market conditions (including commercial aircraft build rates, military aircraft build rates, demand for electronics, competition and industry capacity), sales volumes, sales prices, customer inventory reductions, cost reductions, production efficiencies, productivity improvements, lean enterprise initiatives, business consolidation activities, cash flows, Adjusted EBITDA, capital expenditures and the plans to review the strategic alternatives for the engineered products business. 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, inability to re-qualify manufacturing sites or products, and currency exchange rate changes. 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.
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