Hexcel Reports 2009 Second Quarter Results

Hexcel Corporation (NYSE: HXL):

Hexcel Corporation (NYSE: HXL), today reported results for the second quarter of 2009. Net sales during the quarter were $277.3 million, 22.9% lower than the $359.5 million reported for the second quarter of 2008. Operating income for the second quarter was $29.7 million, compared to $29.3 million for the same quarter last year. The 2008 period included $7.6 million of environmental reserves for remediation of a manufacturing facility sold in 1986, while the 2009 results include $1.7 million of additional environmental reserves related to this and another previously sold facility. Net income for the second quarter of 2009 was $16.8 million, or $0.17 per diluted share, compared to $26.7 million or $0.27 per diluted share in 2008. 2008 results included an $11.1 million net tax benefit primarily from the reinstatement of previously written off U.S. deferred tax assets. Excluding the after tax impact of the 2009 environmental charges, adjusted net income for the second quarter of 2009 was $0.18 per share. Excluding the 2008 environmental charge and the tax benefit, adjusted net income for the second quarter of 2008 was $0.21 per share (see Table D).

Chief Executive Officer Comments

Mr. Berges commented, "Operational improvements at our factories and good cost controls allowed us to maintain double digit adjusted operating income margins despite dramatically lower sales. The drop in commercial aerospace is related to significant supply chain inventory adjustments, the rapid decline in the regional and business aircraft market and new program delays. The wind energy market is also now experiencing lower levels of demand as financing issues facing wind generator customers have begun to delay previously announced projects.”

Mr. Berges continued, "While we have limited ability to influence short term sales, we are focused on what we can control: our own cost structure, operational efficiency and cash flow. This quarter we continued to reduce headcount, controllable costs, capital expenditures and inventories. We are particularly pleased with our cash performance this quarter. We generated $47 million in free cash for the quarter, and we are now $22 million free cash flow positive for the year as compared to $92 million of usage in the first half of 2008.”

As for the future, Mr. Berges said, "Clearly our previous planning assumption of reducing our cost structure to handle a 5% year over year volume decline is no longer appropriate We expect the third quarter to be the low point of the year as reduced commercial aerospace and wind demand combine with the normal summer seasonal slowdown. Therefore, we are aggressively reducing plant schedules to better match near term demand and improve cash flows, and we are now targeting over $40 million of free cash flow for the year. While we expect further weakness in regional and business aircraft sales, we are hopeful that thawing in credit markets, renewable energy policy and new aircraft program progress may begin to offset market softness in 2010.”

Markets

Commercial Aerospace

• Commercial aerospace sales of $137.8 million declined 30.6% (28.1% in constant currency) for the quarter as compared to the second quarter 2008. As previously planned large aircraft line rate increases give way to rate reductions, adjustments to inventory levels by our customers resulted in exaggerated sales declines to Airbus, Boeing and their subcontractors, particularly for Airbus programs.
• Sales to "other commercial aerospace”, which include regional and business aircraft customers, were down over 40% as compared to the second quarter 2008 as the impact of announced production cut-backs in this segment is now being felt. As compared to the first quarter of 2009, sales were down over 30%. This sub-segment, which represented 28% of commercial aerospace sales in 2008, continues to be vulnerable to further declines.
• Revenues attributed to new aircraft programs (A380, A350, B787, B747-8) were just above those in the first quarter of 2009, but lower than last year due principally to 787 delays.

Space & Defense

• Space & Defense sales of $74.7 million declined by 0.4% (but increased 2.8% in constant currency) compared to the second quarter of 2008. Rotorcraft sales continue to be a strong contributor and are expected to help offset the impact of the potential of a wind-down of the F22 or C17 programs.

Industrial

• Total Industrial sales of $64.8 million for the second quarter of 2009 were down 24.5% in actual dollars (15.6% in constant currency) over last year due primarily to wind energy and automotive sub-markets. Year to date wind energy sales are now flat in constant currency compared to first half of 2008. Existing and new wind turbine projects are clearly being hampered by difficult credit markets. Recent clarity in the American Recovery and Reinvestment Act of 2009 should help restart order flow in the U.S., but global financing availability remains a concern for the next few quarters. Industrial sales excluding wind energy and automotive were down slightly for the quarter compared to second quarter 2008 in constant currency but are up year-to-date thanks to sales to the American Centrifuge Project.

Operations

• Gross margin was 22.8% of net sales for the quarter as compared to 21.2% in the same period last year, though down from first quarter of 2009 due to volumes, and modest headwinds from exchange rates and energy related commodity costs. The improved gross margin percentage over last year despite the large sales decline reflects factory productivity and cost reduction initiatives, favorable product mix, and incremental improvements at our new European facilities. Foreign exchange rates, lower commodity and freight costs were also helpful versus last year, but less than we experienced in the first quarter.
• Selling, general and administrative expenses in the quarter were $25.3 million versus $30.0 million in 2008 reflecting lower spending and aided by the weaker Euro and British pound. Research and technology expenses of $6.4 million for the quarter were 10% lower than last year on a constant currency basis, primarily due to higher qualification costs last year for new commercial aerospace programs.

Tax

• The tax provision was $5.7 million for the second quarter of 2009, for an effective tax rate of 25.7%. The rate includes the release of $1.1 million of reserves for uncertain tax positions as a result of an audit settlement. Excluding this benefit, our year to date effective tax rate is 31.7%, which is in the range of our expected underlying run-rate. In the second quarter of 2008, we increased our net income by $11.1 million, or $0.11 per diluted share, primarily from the reinstatement of U.S. deferred tax assets previously written off.

Cash and other

• Total debt, net of cash as of June 30, 2009 was $331.4 million, a year to date decrease of $12.3 million. The net debt reduction was driven by the concerted efforts to reduce accounts receivable and inventories and by prudently managing capital expenditures to maintain alignment with expected demand.
• As previously announced, during the quarter we successfully entered into a new $300 million senior secured credit facility which includes a $175 million term loan and a $125 million revolver facility. The revolver expires in 2013 and the term loan in 2014. At June 30, we had no amounts outstanding on our new revolver facility. After considering the $12.5 million of outstanding letters of credit, we had $185.1 million of cash on hand and available borrowings under the revolver facility. The second quarter results include a $1.7 million pretax charge to interest expense in connection with the accelerated amortization of deferred financing costs from the old credit facility.
• Year to date free cash flow is $22.0 million, which is defined as cash provided by operating activities less capital expenditures (see Table D). The primary difference between the reduction in net debt and free cash flow was the $10.3 million of refinancing costs for the new credit facility.

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Hexcel will host a conference call at 11:00 A.M. ET, tomorrow, July 28, 2009 to discuss the second quarter results and respond to analyst questions. The telephone number for the conference call is (719) 325-2133 and the confirmation code is 9407173. 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.

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Hexcel Corporation is a leading advanced composites 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 such as wind turbine blades.

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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 Boeing and Airbus, 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 ramp-up of new facilities and the current economic environment; and the impact of the above factors on our expectations of 2009 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 competition, product mix, inability to achieve planned manufacturing improvements and cost reductions, conditions in the financial markets and changes in currency exchange rates, interest rates, 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.

(a) We do not allocate corporate expenses to the operating segments.

Management believes that adjusted operating income, adjusted net income and free cash flow, 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.