Hexcel Reports Third Quarter Loss
STAMFORD, Conn. - Oct. 19, 1999
Hexcel Corporation (NYSE/PCX: HXL) today reported a net loss for the third quarter of 1999 of $30.1 million, or $0.82 per diluted share, compared with net income of $11.5 million, or $0.29 per diluted share, for the third quarter of 1998. Excluding business acquisition and consolidation expenses of $13.6 million and a non-recurring $20.0 million non-cash charge to write-down a joint venture investment, the net loss per diluted share for the third quarter of 1999 was $0.04. This compares to net income of $0.32 per diluted share for the same period in 1998, excluding business acquisition and consolidation expenses of $0.7 million and other acquisition related costs. Adjusted EBITDA for the quarter was $32.0 million compared with $45.6 million a year ago. For the quarter ended September 30, 1999, Hexcel generated free cash flow (measured as the change in debt net of cash) of $28.2 million. The outstanding balance of the company's debt has now been reduced by $52.8 million since the beginning of the year.
Sales for both the 1999 third quarter and 1999 year-to-date have declined by approximately 5% compared to 1998 pro forma results. The reduction primarily reflects the impact of excess manufacturing capacity in carbon fiber markets and declining Boeing build rates, partially offset by emerging growth in electronic and general industrial markets:
- Carbon Fiber - Sales of carbon fiber have been depressed throughout 1999 due to inventory adjustments in aerospace markets and greater competition in industrial applications. Significant increases in the installed capacity of the carbon fiber industry during the past year have made it difficult for the company to sell its own excess carbon fiber capacity, resulting in an operating utilization rate for the company that is now less than 60%. The company anticipates that demand for its carbon fiber products will grow as new military aircraft programs move into full scale production and the company develops new applications for its products.
- Commercial Aerospace - The supply chain impacts of Boeing's anticipated reduction in aircraft deliveries in 2000 accounted for approximately 60% of the decline in commercial aerospace sales in the quarter. (Hexcel delivers product into the Boeing supply chain on average about six months prior to aircraft delivery). The balance of the decline is attributable to 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, and to price reductions for certain commercial aerospace products made at the start of the year in response to market conditions.
- Electronics - Sales to the electronics market grew in the quarter due to increased demand for lightweight fabrics used in the construction of multi-layer printed circuit boards. Although prices remained depressed, the increased sales volumes lifted dollar margins to the same level as in the 1998 third quarter. The company continues to believe that the electronics market offers growth potential, and anticipates that demand for lightweight glass fabrics will continue to grow, fueled by consumer demand for personal electronics devices.
- General Industrial - Increased sales to general industrial markets reflect growing use of Hexcel materials in applications such as wind energy and automobiles.
Third Quarter Gross Margin and Adjusted EBITDA
Gross margin for the third quarter was $51.5 million, or $17.8 million less than for the 1998 pro forma quarter. The impact of price reductions, unabsorbed costs and inventory effects offset the reductions in costs resulting from lower sales volumes and the company's cost reduction programs. Throughout 1999, the reduced volume of carbon fiber sales and resulting unabsorbed costs in this high fixed cost product line has impacted profitability. The impact on gross margin in the third quarter is estimated to be about $10 million compared to the third quarter of 1998. Lower prices in electronics (net of raw material cost reductions) and commercial aerospace markets account for approximately $6 million of the reduction in gross margin. The margin benefit from the growth in electronics sales volumes fully offset the impact of lower electronics pricing, resulting in dollar margins being at the same level as the third quarter of 1998. Reduced sales volumes from commercial aerospace build rate and inventory reductions, together with all other changes, account for a further $8 million decline. These decrements in gross margin were partially offset by realized cost reductions from the company's previously announced business consolidation initiatives and other actions of approximately $6 million in the quarter. Such cost savings are anticipated to grow in subsequent quarters as the company's cost reduction initiatives are completed.
Adjusted EBITDA for the quarter was $13.6 million lower than for the comparable pro forma quarter in 1998. The impact of lower gross margins was partially offset by lower selling, general and administrative expenses resulting from the company's previously announced cost reduction initiatives.
The Challenge for Hexcel
Commenting on Hexcel's third quarter results, Mr. John J. Lee, the Chairman and CEO observed, "As anticipated, commercial aerospace revenues declined in the quarter as the impact of Boeing's planned lower deliveries for 2000 reduced demand across their supply chain. In most of its businesses, Hexcel is now operating in a year 2000 delivery rate environment. However, this reduction was amplified during the quarter by the efforts of certain customers to lower their inventory levels and move toward shorter manufacturing cycle times. Such efforts are clearly gaining momentum in the aerospace industry, as a number of companies, including Hexcel, accelerate the adoption of lean manufacturing practices. Taken together, these factors resulted in weaker third quarter performance than we had originally anticipated."
"Hexcel is responding to these market challenges," noted Mr. Lee, "by reducing costs, increasing productivity through our business consolidation and Lean Enterprise initiatives, and by generating cash to repay debt. Actions that we have taken during the last twelve months have eliminated over 700 positions (approximately 10% of the total workforce), and reduced the company's annual operating costs by more than $25 million. In addition, those actions have significantly reduced inventory and capital expenditures, contributing to our ability to generate free cash flow and repay debt."
Mr. Lee continued, "Having completed our manufacturing capacity review in September, we announced a new business consolidation program focused on manufacturing rationalization. The objectives of this program are to eliminate excess capacity and overhead, improve manufacturing focus and yields, and create additional centers of manufacturing excellence. This new program, which is outlined in more detail in the attached business consolidation fact sheet, is expected to reduce the company's workforce by an additional 400 people, and generate additional annual cost savings of more than $23 million by 2001. The payback on the total program is expected to be achieved in less than eighteen months. Meanwhile, the previously announced closure of our Cleveland, GA facility, which was successfully completed on September 3, 1999, is expected to contribute annual cost savings of another $3.5 million, beginning in the fourth quarter of this year."
New Business Consolidation Program
Results for the third quarter of 1999 include $13.6 million of business acquisition and consolidation expenses, most of which is attributable to the new business consolidation program announced on September 27, 1999. The company anticipates that the new program will take a little more than two years to complete, and will result in total business acquisition and consolidation expenses of approximately $30 million, including $12 million of non-cash write-downs. The total cash cost of the program is estimated at $24 million, including $6 million in capital expenditures.
The 1999 third quarter results also include a previously announced $20.0 million, non-cash write-down of an investment in a joint venture, which is included in "Equity in income and write-down of an investment in affiliated companies" in the accompanying condensed consolidated statement of operations.
Hexcel's net loss for the nine months ended September 30, 1999was $20.6 million, or $0.56 per diluted share. This compares with net income of $48.5 million, or $1.15 per diluted share, for the first nine months of 1998. Excluding business acquisition and consolidation expenses of $17.8 million and a $20.0 million non-cash write-down of an investment in a joint venture during the first nine months of 1999, net income was $0.30 per diluted share. This compares to net income of $1.18 per diluted share for the same period in 1998, excluding $1.3 million of business acquisition and consolidation expenses and other related costs.
Cash Generation and Debt Reduction
Mr. Lee noted, "Hexcel has continued to make progress in generating free cash flow to repay debt. Since September 30, 1998, the company has generated $77.2 million in cash for debt reduction, prior to paying 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 compares to our goal of generating $100 million in free cash flow for the five quarter period ending December 31, 1999. As business conditions have become more difficult, we have become more aggressive in managing working capital and capital expenditures, and have successfully reduced both. Inventories have now been reduced by $41.8 million, or 19%, since September 30, 1998. Capital expenditures for the first nine months of 1999 were $26.7 million, compared to $41.7 million for the comparable 1998 period, a reduction of 36%. Although we do not expect to repeat the strength of performance we have seen in the last two quarters, we do expect to generate at least $10 million in additional free cash flow in the fourth quarter, and to continue to reduce the leverage in our balance sheet."
Full Year Outlook
Commenting on the outlook for the rest of the year, Mr. Lee said, "Hexcel will continue to confront challenging conditions in its carbon fiber business and in commercial aerospace markets, as well as ongoing demands from customers in a variety of markets to reduce costs, shorten lead times and improve service. Not only are we committed to meeting and exceeding our customers' expectations, but we are committed to doing so in a manner that will enhance the long-term profitability of Hexcel. As a result, we are continuously evaluating ways to deliver our products and services more quickly and more efficiently. However, it will take some time for our business consolidation and Lean Enterprise initiatives to generate the full amount of the expected benefits. As we look to the last quarter of this year, we expect only nominal improvement in our operating margins as a percentage of sales, and anticipate that net income will remain close to breakeven before business consolidation expenses."
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 (including commercial aircraft build rates, military aircraft build rates, competition and industry capacity), sales volumes, sales prices, customer inventory reductions, cost reductions, business consolidation plans and activities (including estimated cash costs, expenses, savings, personnel reductions, and program timing), operating margins, net income, free cash flows and debt reduction. 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.
Hexcel Corporation and Subsidiaries
September 1999 Business Consolidation Program
Improve both the company's responsiveness to customer needs and its profitability through rationalization of certain product manufacturing operations to:
- Eliminate excess manufacturing capacity.
- Continue to focus manufacturing into centers of manufacturing excellence based on product technologies or specific customers.
- Improve manufacturing quality, productivity & cycle times.
- Reduce manufacturing fixed cost overhead.
- Total cash cost of $24 million, including capital expenditures of $6 million.
- Total business consolidation expenses of $30 million, of which $12 million is for non-cash write-downs of existing assets.
- Annualized operating cost savings of more than $23 million by 2001.
- Net payback on the cash investment in approximately 18 months.
- Total net workforce reduction of 400 people.
- Total reduction in occupied floor space of over 250,000 square feet.
Significant Program Actions:
The business consolidation program consists of a number of initiatives, the most significant of which are:
- Reinforcement Products - The consolidation of the production of US glass and aramid fabrics used in industrial and recreational applications into the Anderson, SC facility. Going forward, the Seguin, TX facility will focus on being the US center of excellence for aerospace and carbon fabrics.
- Composite Materials - The Livermore, CA facility will be the center of excellence for prepregs manufactured by the solvent impregnation process. Production of certain solvent impregnation products at the Lancaster, OH facility will be transferred to Livermore, and Lancaster will focus on the production of prepreg substrates used in Hexcel's manufacture of honeycomb materials and parts.
- The Salt Lake City, UT facility will be the center of excellence for prepregs manufactured by the hot-melt impregnation process. Production of hot-melt impregnation products at the Livermore facility will be transferred to Salt Lake City. US marketing, research and technology, and administrative functions will be consolidated into one location.
- Engineered Products - The production of engineered structures and OEM aircraft interiors will be consolidated into the Kent, WA facilities, and the Bellingham, WA facility will focus on the design and manufacture of retrofit components for the aircraft interior aftermarket.
Other Business Consolidation Programs:
During 1999 Hexcel has also been working to complete prior business consolidation initiatives:
- Completion of the reductions in selling, general and administrative activities in connection with the globalization of the Composite Materials business and the consolidation of the Clark-Schwebel acquisition with Hexcel's existing reinforcement product activities to create a global business unit.
- Closure of the Cleveland, GA fabrics facility, which was completed on September 3, 1999 and is anticipated to generate $3.5 million in annualized savings beginning in the fourth quarter, 1999.
- The sale of a small Italian engineered products business, which was completed in the second quarter, 1999.
- September 1999 year-to-date cash costs associated with these business consolidation activities have been $7.8 million. $4.3 million of this amount ($2.3 million non-cash) has been expensed.
- Personnel reductions associated with these activities have totaled more than 700 people (about 10% of Hexcel's workforce) since September 1998.
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995: Statements in this press release regarding Hexcel Corporation's business which are not historical facts are "forward-looking statements" that involve risks and uncertainties. For a discussion of such risks and uncertainties, which could cause actual results to differ from those contained in the forward-looking statements, see "Risk Factors" in the Company's Annual Report or Form 10-K for the most recently ended fiscal year.