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Hexcel Reports 2011 Second Quarter Results

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 changes in commercial aerospace revenues, the estimates and expectations based on aircraft production rates made publicly available by Airbus and Boeing, the revenues we may generate from an aircraft model or program, the impact of delays in new aircraft programs, the outlook for space & defense revenues and the trend in wind energy, recreation and other industrial applications); our ability to maintain and improve margins in light of the changes in product mix, efficiency improvements, continued cost reduction efforts and the current economic environment; outcome of legal matters; and the impact of the above factors on our expectations of 2011 financial 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, increased raw material costs, competition, product mix, inability to achieve planned manufacturing improvements and cost reductions, supply chain disruptions, conditions in the financial markets and changes in currency exchange rates, interest rates, governmental and environmental regulations and tax codes. 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

June 30,

            Six Months Ended

June 30,

(In millions, except per share data)         2011     2010                 2011     2010  
Net sales $ 353.7 $ 305.1

 

$

685.3

$ 568.1
Cost of sales         266.7     226.7                 515.3     423.6  
 
Gross margin 87.0 78.4 170.0 144.5
% Gross margin 24.6 % 25.7 % 24.8 % 25.4 %
 
Selling, general and administrative expenses 29.7 29.6 62.6 61.0
Research and technology expenses 7.9 8.3 16.5 15.7
Other operating (income) expense (a)                             (5.7 )   3.5  
 
Operating income 49.4 40.5 96.6 64.3
 
Interest expense, net 2.9 7.1 7.1 13.7
Non-operating expense (b)                             4.9      
 
Income before income taxes and equity in earnings from affiliated companies 46.5 33.4 84.6 50.6
Provision for income taxes (c)         9.3     10.6                 21.5     12.1  
 
Income before equity in earnings from affiliated companies 37.2 22.8 63.1 38.5
Equity in earnings from affiliated companies         0.2     0.3                 0.7     0.4  
 
Net income       $ 37.4   $ 23.1        

 

   

$

63.8   $ 38.9  
 
 
 
Basic net income per common share:       $ 0.38   $ 0.24        

 

   

$

0.65   $ 0.40  
 
Diluted net income per common share:       $ 0.37  

$

0.23        

 

   

$

0.63   $ 0.39  
 
 
Weighted-average common shares:
 
Basic 98.6 97.5 98.4 97.4
Diluted         100.7     99.7                 100.5     99.6  
(a)       Other operating income for the six months ended June 30, 2011 is a $5.7 million benefit from the curtailment of a pension plan. For the six months ended June 30, 2010 other operating expense is for an increase in environmental reserves for remediation of a manufacturing facility sold in 1986.
(b) Non-operating expense is the accelerated amortization of deferred financing costs and expensing of the call premium from redeeming $150 million of 6.75% senior subordinated notes.
(c) Provision for income taxes for the quarter ended June 30, 2011 includes a release of $5.5 million of reserves primarily for uncertain tax positions as a result of an audit settlement. Provision for income taxes for the six months ended June 30, 2010 includes $3.5 million of New Clean Energy Manufacturing Tax Credits awarded in January 2010 for qualifying capital investments made in our U.S. wind energy facility in 2009.
Hexcel Corporation and Subsidiaries

Condensed Consolidated Balance Sheets

Unaudited
 

(In millions)

        June 30, 2011         December 31, 2010
Assets            
Current assets:
Cash and cash equivalents $ 55.9 $ 117.2
Accounts receivable, net 207.8 173.9
Inventories, net 207.9 169.9
Prepaid expenses and other current assets         50.8           36.7  
Total current assets 522.4 497.7
 
Property, plant and equipment 1,139.8 1,063.9
Less accumulated depreciation         (502.4 )         (465.6 )
Property, plant and equipment, net 637.4 598.3
 
Goodwill and other intangible assets, net 56.8 56.2
Investments in affiliated companies 21.6 19.9
Deferred tax assets 62.9 63.6
Other assets         18.3           22.4  
Total assets       $ 1,319.4         $ 1,258.1  
 
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable and current maturities of capital lease obligations $ 9.3 $ 27.6
Accounts payable 108.7 83.0
Accrued liabilities         109.1           95.3  
Total current liabilities 227.1 205.9
 
Long-term notes payable and capital lease obligations 242.1 304.6
Other non-current liabilities         73.7           88.2  
Total liabilities 542.9 598.7
 
Stockholders' equity:

Common stock, $0.01 par value, 200.0 shares authorized, 100.3 shares issued atJune 30, 2011 and 99.5 shares issued at December 31, 2010

1.0 1.0
Additional paid-in capital 573.7 552.3
Retained earnings 212.2 148.4
Accumulated other comprehensive income (loss)         14.4           (15.1 )
801.3 686.6

Less – Treasury stock, at cost, 2.0 shares and 2.2 shares at June 30, 2011 andDecember 31, 2010, respectively

 

       

(24.8

)         (27.2 )
Total stockholders' equity         776.5           659.4  
Total liabilities and stockholders' equity       $ 1,319.4         $ 1,258.1  
Hexcel Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
Unaudited
 
Year to Date Ended

June 30,

(In millions) 2011       2010
     
Cash flows from operating activities

Net income

$ 63.8 $ 38.9
 
Reconciliation to net cash provided by operating activities:
Depreciation and amortization 27.9 25.6

Amortization of debt discount and deferred financing costs and call premium expense

5.9 2.4
Deferred income taxes 6.7 4.2
Equity in earnings from affiliated companies (0.7 ) (0.4 )
Share-based compensation 8.8 8.3
Pension curtailment gain (5.7 )
Excess tax benefits on share-based compensation (3.6 ) (0.7 )
 
Changes in assets and liabilities:
Increase in accounts receivable (25.4 ) (52.3 )
Increase in inventories (31.5 ) (28.9 )
(Increase) decrease in prepaid expenses and other current assets (3.1 ) 0.4
Increase in accounts payable/accrued liabilities 36.0 36.9
Other – net   (1.8 )         (2.7 )
Net cash provided by operating activities (a)   77.3           31.7  
 
Cash flows from investing activities
Capital expenditures (b)   (67.8 )         (20.1 )
Net cash used for investing activities   (67.8 )         (20.1 )
 
Cash flows from financing activities
Borrowings from senior secured credit facility 135.0
Repayment of 6.75% senior subordinated notes (150.0 )
Repayment of senior secured credit facility (60.0 )
Call premium payment for 6.75% senior subordinated notes (3.4 )
(Repayments) borrowings from credit line (3.3 ) 1.7
Repayment of senior secured credit facility – term loan (2.5 ) (30.0 )
Repayments of capital lease obligations and other debt, net (0.2 ) (0.2 )
Activity under stock plans   7.4           0.6  
Net cash (used in) financing activities   (77.0 )         (27.9 )
 
Effect of exchange rate changes on cash and cash equivalents   6.2           (9.8 )
Net decrease in cash and cash equivalents (61.3 ) (26.1 )
Cash and cash equivalents at beginning of period   117.2           110.1  
Cash and cash equivalents at end of period $ 55.9         $ 84.0  
 
Supplemental Data:
Free cash flow (a)+(b) $ 9.5 $ 11.6
Accrual basis additions to property, plant and equipment $ 55.1 $ 13.7
Hexcel Corporation and Subsidiaries
Net Sales to Third-Party Customers by Market Segment
Quarters Ended June 30, 2011 and 2010       (Unaudited)       Table A
 
(In millions)       As Reported       Constant Currency (a)
Market Segment         2011         2010       B/(W) %         FX

Effect (b)

        2010      

B/(W) %

Commercial Aerospace       $ 207.8       $ 161.0       29.1       $ 3.0       $ 164.0       26.7
Space & Defense 81.7 79.4 2.9 2.1 81.5 0.2
Industrial         64.2         64.7       (0.8 )         5.8         70.5       (8.9 )
Consolidated Total       $ 353.7       $ 305.1       15.9         $ 10.9       $ 316.0       11.9  
Consolidated % of Net Sales        

%

        %                           %        
Commercial Aerospace 58.7 52.8 51.9
Space & Defense 23.1 26.0 25.8
Industrial         18.2         21.2                           22.3        
Consolidated Total         100.0         100.0                           100.0        
Six Months Ended June 30, 2011 and 2010       (Unaudited) Table A
 
(In millions)       As Reported       Constant Currency (a)
Market Segment         2011         2010       B/(W) %         FX

Effect (b)

       

2010

     

B/(W) %

Commercial Aerospace       $ 405.4       $ 313.0       29.5       $ 3.1       $ 316.1       28.3
Space & Defense 161.4 151.9 6.3 2.0 153.9 4.9
Industrial         118.5         103.2       14.8         5.5         108.7       9.0
Consolidated Total       $ 685.3       $ 568.1       20.6       $ 10.6       $ 578.7       18.4
Consolidated % of Net Sales         %         %                           %        
Commercial Aerospace 59.1 55.1 54.6
Space & Defense 23.6 26.7 26.6
Industrial         17.3         18.2                           18.8        
Consolidated Total         100.0         100.0                           100.0        
(a) To assist in the analysis of our net sales trend, total net sales and sales by market for the quarter and six months ended June 30, 2010 have been estimated using the same U.S. dollar, British pound and Euro exchange rates as applied for the respective period in 2011 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 B
 
(In millions)        

Composite Materials

(b)

        Engineered Products        

Corporate & Other

(a)(b)

 

        Total
Second Quarter 2011

Net sales to external customers

      $ 276.8       $ 76.9      

$

 

$

 

353.7

Intersegment sales         13.9         0.2         (14.1)        
Total sales 290.7 77.1 (14.1) 353.7
Operating income (loss) 48.5 11.9 (11.0) 49.4
% Operating margin 16.7% 15.4% 14.0%
     
Depreciation and amortization 12.8 1.0 13.8
Stock-based compensation expense 0.9 0.1 1.4 2.4
Accrual based additions to capital expenditures         28.4         1.5                 29.9
Second Quarter 2010                                          
Net sales to external customers $ 238.9 $ 66.2 $

 

$

305.1
Intersegment sales         11.5         0.3         (11.8)        
Total sales 250.4 66.5 (11.8) 305.1
Operating income (loss) (b) 42.8 10.7 (13.0) 40.5
% Operating margin 17.1% 16.1% 13.3%
 
Depreciation and amortization 12.7 0.9 13.6
Stock-based compensation expense 1.1 0.2 1.3 2.6
Accrual based additions to capital expenditures         6.2         0.5         0.1         6.8
First Six Months 2011
 
Net sales to external customers       $ 533.1       $ 152.2       $       $ 685.3
Intersegment sales         27.8           0.5           (28.3 )          
Total sales 560.9 152.7 (28.3 ) 685.3
Operating income (loss) (b) 98.3 24.4 (26.1 ) 96.6
% Operating margin 17.5 % 16.0 % 14.1 %
 
Other operating income 5.7 5.7
Depreciation and amortization 25.7 2.1 0.1 27.9
Stock-based compensation expense 2.5 0.4 5.9 8.8
Accrual based additions to capital expenditures         52.7           2.4                     55.1  
First Six Months 2010                              
Net sales to external customers $ 439.3 $ 128.8 $ $ 568.1
Intersegment sales         20.4           0.3           (20.7 )          
Total sales 459.7 129.1 (20.7 ) 568.1
Operating income (loss) (b) 73.3 22.1 (31.1 ) 64.3
% Operating margin 15.9 % 17.1 % 11.3 %
 
Other operating expense 3.5 3.5
Depreciation and amortization 23.6 1.9 0.1 25.6
Stock-based compensation expense 2.7 0.5 5.1 8.3
Accrual based additions to capital expenditures         13.0           0.6           0.1           13.7  
(a) We do not allocate corporate expenses to the operating segments.
(b) The first six months 2011 Composite Materials operating income includes a $5.7 million benefit from the curtailment of a pension plan. The first six months 2010 Corporate and Other includes a $3.5 million charge to the environmental reserves primarily for remediation at a manufacturing facility sold in 1986.
Hexcel Corporation and Subsidiaries
Reconciliation of GAAP and Non-GAAP Operating Income and Net Income       Table C
 
        Unaudited
      Quarter Ended

June 30,

      Six Months Ended

June 30,

(In millions)         2011           2010           2011           2010  
             
GAAP operating income $ 49.4 40.5 $ 96.6 $ 64.3
- Other operating (income) expense (a)                             (5.7 )         3.5  
Adjusted Operating Income $ 49.4 40.5 $ 90.9 $ 67.8
% of Net Sales 14.0 % 13.3 % 13.3 % 11.9 %
- Stock Compensation Expense $ 2.4 2.6 $ 8.8 $ 8.3
- Depreciation and Amortization         13.8           13.6           27.9           25.6  
Adjusted EBITDA       $ 65.6           56.7         $ 127.6         $ 101.7  
      Unaudited
 
Quarter Ended June 30,
2011         2010  
(In millions, except per diluted share data)       As Reported       EPS       As Reported       EPS
                 
GAAP net income $ 37.4 $ 0.37 $ 23.1 $ 0.23
- Benefit from tax audit settlement (c)         (5.5 )         (0.05 )                    
Adjusted net income       $ 31.9         $ 0.32         $ 23.1         $ 0.23  
Unaudited
 
Six Months Ended June 30,
2011         2010  
(In millions, except per diluted share data)       As Reported       EPS       As Reported       EPS
 
GAAP net income $ 63.8 $ 0.63 $ 38.9 $ 0.39
- Other operating (income) expense (net of tax) (a) (4.1 ) (0.04 ) 2.2 0.02
- Non-operating expense (net of tax) (b) 3.0 0.03
- Benefit from tax audit settlement (c) (5.5 ) (0.05 )
- Tax credits for capital investments in wind energy facility (d)                             (3.5 )         (0.04 )
Adjusted net income       $ 57.2         $ 0.57         $ 37.6         $ 0.38  
(a) Other operating expense for the six months ended June 30, 2011 is a benefit from the curtailment of a pension plan. In 2010, other operating expense is the increase in environmental reserves primarily for remediation of a manufacturing facility sold in 1986.
(b) Non-operating expense is the accelerated amortization of deferred financing costs and expensing of the call premium from redeeming $150 million of 6.75% senior subordinated notes.
(c) Tax benefit from the release of $5.5 million of reserves primarily for uncertain tax positions as a result of an audit settlement.
(d) New Clean Energy Manufacturing Tax Credits included in the six month period of 2010 were for qualifying capital investments made in our U.S. wind energy facility in 2009.
Management believes that adjusted operating income, adjusted EBITDA, adjusted net income and free cash flow (defined as cash provided by operating activities less cash payments for capital expenditures), which are non-GAAP measurements, are meaningful to investors because they provide a view of Hexcel with respect to ongoing operating results excluding special items. 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 and Subsidiaries
Schedule of Total Debt, Net of Cash       Table D
 
      Unaudited
June 30, 2011      

March 31, 2011

      December 31, 2010
(In millions)                  
 
Notes payable and current maturities of capital lease obligations $ 9.3 $ 11.4 $ 27.6
Long-term notes payable and capital lease obligations         242.1         268.4         304.6
Total Debt 251.4 279.8 332.2
Less: Cash and cash equivalents         (55.9)         (50.6)         (117.2)
Total debt, net of cash       $ 195.5       $ 229.2       $ 215.0




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