Table of Contents

 

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 


 

FORM 10-Q

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

For the Quarterly Period Ended June 30, 2009

 

 

or

 

 

o

Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934

 

For the transition period from                 to                

 

Commission File Number 1-8472

 


 

Hexcel Corporation

(Exact name of registrant as specified in its charter)

 

Delaware

 

94-1109521

(State of Incorporation)

 

(I.R.S. Employer Identification No.)

 

Two Stamford Plaza

281 Tresser Boulevard

Stamford, Connecticut 06901-3238

(Address of principal executive offices and zip code)

 

Registrant’s telephone number, including area code:  (203) 969-0666

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes    x   No  o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes   o    No  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   x

 

Accelerated filer   o

 

 

 

Non-accelerated filer   o

 

Smaller reporting company   o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes o   No  x

 

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

 

Class

 

Outstanding at July 23, 2009

COMMON STOCK

 

96,648,972

 

 

 



Table of Contents

 

HEXCEL CORPORATION AND SUBSIDIARIES

 

INDEX

 

 

 

Page

PART I.

FINANCIAL INFORMATION

 

 

 

 

ITEM 1.

Condensed Consolidated Financial Statements (Unaudited)

 

 

 

 

 

·  Condensed Consolidated Balance Sheets — June 30, 2009 and December 31, 2008

3

 

 

 

 

·  Condensed Consolidated Statements of Operations — The Quarters and Six Months Ended June 30, 2009 and 2008

4

 

 

 

 

·  Condensed Consolidated Statements of Cash Flows — The Six Months Ended June 30, 2009 and 2008

5

 

 

 

 

·  Notes to Condensed Consolidated Financial Statements

6

 

 

 

ITEM 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

20

 

 

 

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk

27

 

 

 

ITEM 4.

Controls and Procedures

28

 

 

 

PART II.

OTHER INFORMATION

28

 

 

 

ITEM 1.

Legal Proceedings

28

 

 

 

ITEM 1A.

Risk Factors

29

 

 

 

ITEM 4.

Submission of Matters to a Vote of Security Holders

29

 

 

 

ITEM 5.

Other Information

29

 

 

 

ITEM 6.

Exhibits and Reports on Form 8-K

30

 

 

 

SIGNATURE

31

 

2



Table of Contents

 

PART I.  FINANCIAL INFORMATION

 

ITEM 1.  Condensed Consolidated Financial Statements (Unaudited)

 

Hexcel Corporation and Subsidiaries

Condensed Consolidated Balance Sheets

 

 

 

(Unaudited)

 

(In millions, except per share data)

 

June 30,
2009

 

December 31,
2008

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

72.6

 

$

50.9

 

Accounts receivable, net

 

173.5

 

189.4

 

Inventories, net

 

171.4

 

195.3

 

Prepaid expenses and other current assets

 

38.4

 

45.1

 

Total current assets

 

455.9

 

480.7

 

 

 

 

 

 

 

Property, plant and equipment

 

1,025.8

 

971.7

 

Less accumulated depreciation

 

(441.1

)

(419.4

)

Net property, plant and equipment

 

584.7

 

552.3

 

 

 

 

 

 

 

Goodwill and intangible assets

 

56.9

 

56.0

 

Investments in affiliated companies

 

10.8

 

10.6

 

Deferred tax assets

 

80.0

 

88.3

 

Other assets

 

26.5

 

22.4

 

 

 

 

 

 

 

Total assets

 

$

1,214.8

 

$

1,210.3

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Notes payable and current maturities of capital lease obligations

 

$

13.2

 

$

2.1

 

Accounts payable

 

74.7

 

120.5

 

Accrued liabilities

 

85.1

 

101.6

 

Total current liabilities

 

173.0

 

224.2

 

 

 

 

 

 

 

Long-term notes payable and capital lease obligations

 

390.8

 

392.5

 

Other non-current liabilities

 

83.9

 

84.4

 

Total liabilities

 

647.7

 

701.1

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Common stock, $0.01 par value, 200.0 shares authorized, 98.6 and 98.3 shares issued at June 30, 2009 and December 31, 2008, respectively

 

1.0

 

1.0

 

Additional paid-in capital

 

531.9

 

526.1

 

Retained earnings

 

54.8

 

14.6

 

Accumulated other comprehensive income (loss)

 

3.9

 

(8.7

)

 

 

591.6

 

533.0

 

Less — Treasury stock, at cost, 2.0 and 1.9 shares at June 30, 2009 and December 31, 2008, respectively

 

(24.5

)

(23.8

)

Total stockholders’ equity

 

567.1

 

509.2

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

1,214.8

 

$

1,210.3

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

3



Table of Contents

 

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)

 

2009

 

2008

 

2009

 

2008

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

277.3

 

$

359.5

 

$

584.6

 

$

704.0

 

Cost of sales

 

214.2

 

283.4

 

444.5

 

547.8

 

Gross margin

 

63.1

 

76.1

 

140.1

 

156.2

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

25.3

 

30.0

 

54.6

 

62.0

 

Research and technology expenses

 

6.4

 

8.0

 

14.2

 

16.5

 

Business consolidation and restructuring expenses

 

 

1.2

 

 

1.8

 

Other operating expenses

 

1.7

 

7.6

 

1.7

 

10.2

 

Operating income

 

29.7

 

29.3

 

69.6

 

65.7

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

7.5

 

5.9

 

12.9

 

10.9

 

Income before income taxes and equity in earnings of affiliated companies

 

22.2

 

23.4

 

56.7

 

54.8

 

Provision (Benefit) for income taxes

 

5.7

 

(2.0

)

16.9

 

7.5

 

Income before equity in earnings of affiliated companies

 

16.5

 

25.4

 

39.8

 

47.3

 

Equity in earnings of affiliated companies

 

0.3

 

1.3

 

0.4

 

2.6

 

Net income

 

$

16.8

 

$

26.7

 

$

40.2

 

$

49.9

 

 

 

 

 

 

 

 

 

 

 

Basic net income per common share:

 

$

0.17

 

$

0.28

 

$

0.42

 

$

0.52

 

 

 

 

 

 

 

 

 

 

 

Diluted net income per common share:

 

$

0.17

 

$

0.27

 

$

0.41

 

$

0.51

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

96.9

 

96.2

 

96.8

 

96.2

 

Diluted

 

97.8

 

97.8

 

97.8

 

97.8

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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Table of Contents

 

Hexcel Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows

 

 

 

(Unaudited)

 

 

 

Six Months Ended June 30,

 

(In millions)

 

2009

 

2008

 

 

 

 

 

 

 

Cash flows from operating activities

 

 

 

 

 

Net income

 

$

40.2

 

$

49.9

 

Reconciliation to net cash provided by (used for) operating activities:

 

 

 

 

 

Depreciation and amortization

 

22.5

 

22.4

 

Amortization of debt discount and deferred financing costs

 

2.8

 

0.8

 

Deferred income taxes

 

12.1

 

(3.5

)

Business consolidation and restructuring expenses

 

 

1.8

 

Business consolidation and restructuring payments

 

(1.3

)

(3.2

)

Equity in earnings from affiliated companies

 

(0.4

)

(2.6

)

Stock-based compensation

 

5.5

 

6.9

 

Excess tax benefits on stock-based compensation

 

0.4

 

(1.0

)

 

 

 

 

 

 

Changes in assets and liabilities:

 

 

 

 

 

Decrease (increase) in accounts receivable

 

14.8

 

(42.9

)

Decrease (increase) in inventories

 

22.6

 

(20.9

)

(Increase) decrease in prepaid expenses and other current assets

 

(3.5

)

1.9

 

Decrease in accounts payable and accrued liabilities

 

(48.8

)

(21.9

)

Other — net

 

3.0

 

6.8

 

Net cash provided by (used for) operating activities

 

69.9

 

(5.5

)

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

Capital expenditures and deposits for capital purchases

 

(47.9

)

(86.2

)

Net cash used for investing activities

 

(47.9

)

(86.2

)

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

Borrowings from credit line - China

 

3.9

 

 

Proceeds from New Senior Secured Credit Facility —term B loan

 

171.5

 

 

Repayment of previous Senior Secured Credit Facility

 

(167.0

)

 

Issuance costs related to New Senior Secured Credit Facility

 

(10.3

)

 

Proceeds from senior secured credit facility — term C loan

 

 

79.6

 

Capital lease obligations and other debt, net

 

0.6

 

(0.2

)

Activity under stock plans

 

(0.6

)

1.8

 

Net cash (used for) provided by financing activities

 

(1.9

)

81.2

 

Effect of exchange rate changes on cash and cash equivalents

 

1.6

 

1.7

 

Net increase (decrease) in cash and cash equivalents

 

21.7

 

(8.8

)

Cash and cash equivalents at beginning of period

 

50.9

 

28.1

 

Cash and cash equivalents at end of period

 

$

72.6

 

$

19.3

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

5



Table of Contents

 

HEXCEL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1 — Significant Accounting Policies

 

In these notes, the terms “Hexcel”, “we,” “us,” or “our” mean Hexcel Corporation and subsidiary companies.  The accompanying condensed consolidated financial statements are those of Hexcel Corporation. Refer to Note 1 to the consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2008 for a discussion of our significant accounting policies.

 

Basis of Presentation

 

The accompanying condensed consolidated financial statements have been prepared from the unaudited records of Hexcel pursuant to rules and regulations of the Securities and Exchange Commission (“SEC”) and in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information.  Certain information and footnote disclosures normally included in financial statements have been omitted pursuant to rules and regulations of the SEC.

 

In the opinion of management, the condensed consolidated financial statements include all adjustments necessary for a fair presentation of financial position, results of operations and cash flows for the interim periods presented.  The condensed consolidated balance sheet as of December 31, 2008 was derived from the audited 2008 consolidated balance sheet. Interim results are not necessarily indicative of results expected for any other interim period or for the full year.  The information included in this Form 10-Q should be read in conjunction with Management’s Discussion and Analysis and the financial statements and notes thereto included in our 2008 Annual Report on Form 10-K.

 

Recently Issued Accounting Pronouncements

 

In March 2008, the FASB issued Statement No. 161, “Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133” (“SFAS 161”).  SFAS 161 requires entities that utilize derivative instruments to provide qualitative disclosures about their objectives and strategies for using such instruments, as well as any details of credit-risk-related contingent features contained within derivatives.  SFAS 161 also requires entities to disclose additional information about the amounts and location of derivatives located within the financial statements, how the provisions of SFAS 133 have been applied, and the impact that hedges have on an entity’s financial position, financial performance, and cash flows.  We adopted the provisions of this statement effective January 1, 2009. As a result, we have expanded our disclosures regarding derivative instruments and hedging activities within Note 6.

 

In September 2006, the FASB issued Statement No. 157, “Fair Value Measurements” (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosure about fair value measurements. In February 2008, the FASB issued FASB Staff Position (“FSP”) No. FAS 157-2, “Effective Date of FASB Statement No. 157”, which provides a one year deferral of the effective date of FAS 157 for non-financial assets and non-financial liabilities, except those that are recognized or disclosed in the financial statements at fair value at least annually.  In accordance with this interpretation, as of January 1, 2009, the Company adopted the provisions of SFAS 157 with respect to its non-financial assets and liabilities that are measured at fair value within the financial statements. See Note 12.

 

In December 2008 the FASB issued FSP FAS 132 (R)-1, “Employers Disclosures about Postretirement Benefit Plan Assets”. This FSP expands the disclosure requirements set forth in SFAS No. 132 (R), “Employers Disclosures about Pensions and Other Postretirement Benefits” by adding required disclosures about (1) how investment allocation decisions are made by management, (2) major categories of plan assets and (3) significant concentrations of risk. Additionally, FSP FAS 132(R)-1 requires an employer to disclose information about the valuation of plan assets similar to that required under SFAS 157.  The standard is effective for our fiscal year ending December 31, 2009.  The principal impact from this FSP will be to require us to expand our disclosures regarding our benefit plan assets.

 

In April 2009, the FASB issued FSP FAS 107 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments”, which requires fair value disclosures for financial instruments that are not currently reflected on the balance sheet of companies at fair value. Prior to issuing the FSP, fair values for these assets and liabilities were only disclosed annually. The FSP now requires these disclosures on a quarterly basis, providing qualitative and quantitative information about fair value estimates for all those financial instruments not measured on the balance sheet at fair value.  The FSP is effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009.  The Company adopted this FSP in the second quarter of 2009.  As a result, we have expanded our disclosures regarding derivative instruments and hedging activities within Note 5.

 

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In May 2009, the FASB issued Statement No. 165, “Subsequent Events”, which established principles and requirements for subsequent events.  The statement details the period after the balance sheet date during which the Company should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which the Company should recognize events or transactions occurring after the balance sheet date in its financial statements and the required disclosures for such events.  This statement is effective for interim or annual reporting periods ending after June 15, 2009. The Company adopted this statement in the second quarter of 2009.  The Company has performed an evaluation of subsequent events through July 27, 2009, which is the date the financial statements were issued.

 

In June 2009, the FASB issued Statement No. 168, “the FASB Accounting Standards Codification” (“Codification”).  Codification will become the source of authoritative US GAAP recognized by the FASB to be applied by nongovernmental entities. Once the Codification is in effect, all of its content will carry the same level of authority.  The Codification becomes effective for interim and annual periods ending on or after September 15, 2009.  The Company will apply the Codification in the third quarter of fiscal 2009.  The adoption of the Codification will not have an effect on the Company’s financial position and results of operations. However, because the Codification completely replaces existing standards, it will affect the way U.S. GAAP is referenced within the consolidated financial statements and accounting policies.

 

In June 2009, the FASB issued SFAS 166, “Accounting for Transfers of Financial Assets an amendment of FASB Statement No. 140”, which amends the derecognition guidance in FASB Statement No. 140 and eliminates the exemption from consolidation for qualifying special-purpose entities.  This statement is effective for financial asset transfers occurring after the beginning of an entity’s first fiscal year that begins after November 15, 2009.  This statement will be effective for the Company in 2010.  The Company is still assessing the potential impact of adoption.

 

In June 2009, the FASB issued SFAS 167, “Amendments to FASB Interpretation No. 46(R)”, which amends the consolidation guidance applicable to variable interest entities.  The amendments will significantly affect the overall consolidation analysis under FASB Interpretation No. 46(R).  This statement is effective as of the beginning of the first fiscal year that begins after November 15, 2009.  This statement will be effective for the Company beginning in fiscal year 2010. The Company is still assessing the potential impact of adoption.

 

Note 2 - Inventories, net

 

(In millions)

 

June 30,
2009

 

December 31,
2008

 

Raw materials

 

$

75.8

 

$

89.2

 

Work in progress

 

39.4

 

52.0

 

Finished goods

 

78.8

 

77.3

 

Total inventories, gross

 

$

194.0

 

$

218.5

 

Inventory allowances

 

(22.6

)

(23.2

)

Total inventories, net

 

$

171.4

 

$

195.3

 

 

Note 3 — Retirement and Other Postretirement Benefit Plans

 

We maintain qualified and nonqualified defined benefit retirement plans covering certain current and former U.S. and European employees, retirement savings plans covering eligible U.S. employees and certain postretirement health care and life insurance benefit plans covering eligible U.S. retirees. We also participate in a union sponsored multi-employer pension plan covering certain U.S. employees with union affiliations.  In December 2006, our Board of Directors voted to terminate the U.S. qualified defined benefit plan as of April 1, 2008. We completed the settlement of substantially all U.S. qualified defined benefit plan pension obligations as of March 31, 2008. Refer to our 2008 Annual Report on Form 10-K for further information regarding these plans.

 

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Defined Benefit Retirement Plans

 

Net Periodic Benefit Costs

 

Net periodic benefit costs of our defined benefit retirement plans for the quarters and six months ended June 30, 2009 and 2008 were as follows:

 

 

 

Quarter Ended June 30,

 

Six Months Ended June 30,

 

(In millions)

 

2009

 

2008

 

2009

 

2008

 

U.S. Qualified and Nonqualified Defined Benefit Retirement Plans

 

 

 

 

 

 

 

 

 

Service cost

 

$

0.3

 

$

0.4

 

$

0.7

 

$

0.8

 

Interest cost

 

0.2

 

0.2

 

0.5

 

0.5

 

Expected return on plan assets

 

 

 

 

 

Net amortization and deferral

 

0.1

 

 

0.1

 

 

Sub-total

 

0.6

 

0.6

 

1.3

 

1.3

 

Curtailment and settlement loss

 

 

 

 

2.7

 

Net periodic benefit cost

 

$

0.6

 

$

0.6

 

$

1.3

 

$

4.0

 

 

 

 

 

 

 

 

 

 

 

European Defined Benefit Retirement Plans

 

 

 

 

 

 

 

 

 

Service cost

 

$

0.6

 

$

1.0

 

$

1.2

 

$

2.1

 

Interest cost

 

1.2

 

1.9

 

2.4

 

3.8

 

Expected return on plan assets

 

(1.1

)

(2.1

)

(2.2

)

(4.2

)

Net amortization and deferral

 

0.2

 

 

0.3

 

(0.1

)

Net periodic benefit cost

 

$

0.9

 

$

0.8

 

$

1.7

 

$

1.6

 

 

Contributions

 

We generally fund our U.S. non-qualified defined benefit retirement plans when benefit payments are incurred. Under the provisions of these non-qualified plans, we expect to contribute $0.3 million in 2009 to cover unfunded benefits.  We contributed $0.6 million to our U.S. non-qualified defined benefit retirement plans during the 2008 fiscal year.  Accrued benefit costs for the U.S. non-qualified defined benefit retirement plans as of June 30, 2009 were $18.1 million, of which $0.3 million is included within accrued liabilities and $17.8 million is included within other non-current liabilities.  Accrued benefit costs for the U.S. qualified and non-qualified defined benefit retirement plans as of December 31, 2008 were $17.7 million, of which $1.0 million is included within current accrued liabilities and $16.7 million is included within other non-current liabilities.

 

We contributed $1.2 million and $1.4 million to our European defined benefit retirement plans in the second quarters of 2009 and 2008, respectively.  Contributions were $2.2 million for the six months ended June 30, 2009 and 2008, respectively.  Meeting governing requirements, we plan to contribute approximately $4.3 million during 2009 to our European plans.  We contributed $4.8 million to our European plans during the 2008 fiscal year.  Accrued benefit costs for the European defined benefit retirement plans as of June 30, 2009 were $27.4 million, of which $3.3 million is included within accrued liabilities and $24.1 million is included within other non-current liabilities.  Accrued benefit costs for the European defined benefit retirement plans as of December 31, 2008 were $23.2 million of which $ 1.1 million was included within current liabilities and $22.1 million was included within other non-current liabilities.

 

We contributed $0.8 million and $7.5 million to our U.S. qualified and non-qualified defined benefit retirement plans during the second quarter and first six months of 2008, respectively.  Of the total contributed during 2008, $6.4 million was for final settlement of the U.S. qualified plan’s remaining benefit obligations, bringing the total contribution for final settlement to $9.7 million.  We recorded a pre-tax loss of $2.7 million during the first quarter of 2008 on the final settlement, bringing the total U.S. qualified plan settlement costs to $12.1 million.

 

Postretirement Health Care and Life Insurance Benefit Plans

 

Net periodic benefit costs of our postretirement health care and life insurance benefit plans were $0.1 million, primarily consisting of interest costs for the second quarters of 2009 and 2008. For the six months ended June 30, 2009 and 2008, net periodic postretirement benefit costs were $0.2 million.  In connection with our postretirement plans, we contributed $0.1 million and $0.4 million during each of the second quarters of 2009 and 2008, respectively, and $0.3 million and $0.6 million during the six-month periods ended June 30, 2009 and 2008, respectively.  We periodically fund our postretirement plans to pay covered expenses as they are incurred. Under the provisions of these post retirement plans, we expect to contribute approximately $1.1 million in 2009 to cover unfunded benefits.  We contributed $0.8 million to our postretirement plans during the 2008 fiscal year. Accrued benefit costs for the postretirement plans as of June 30, 2009 were $11.0 million, of which $1.1 million is included within accrued liabilities, and $9.9

 

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million is included within other non-current liabilities. Accrued benefit costs for the postretirement plans as of December 31, 2008 were $11.3 million, of which $1.3 million were included with current liabilities, and $10.0 were included in other non-current liabilities.

 

Note 4 - Business Consolidation and Restructuring Programs

 

Reserves associated with the remaining restructuring programs include certain expected severance payments associated with prior reorganizations. Costs associated with the closure of our Livermore facility are for remediation and preparation of the property for sale, which are expensed as incurred.  The aggregate business consolidation and restructuring liabilities as of June 30, 2009 and December 31, 2008, consisted of the following:

 

(In millions)

 

Employee
Severance

 

Facility &
Equipment

 

Total

 

Balance as of December 31, 2008

 

$

2.0

 

$

0.9

 

$

2.9

 

Business consolidation and restructuring expenses

 

 

 

 

Cash expenditures

 

(0.2

)

(0.1

)

(0.3

)

Currency translation adjustments

 

(0.1

)

 

(0.1

)

Balance as of March 31, 2009

 

1.7

 

0.8

 

2.5

 

Business consolidation and restructuring expenses

 

 

 

 

Cash expenditures

 

(0.9

)

(0.1

)

(1.0

)

Currency translation adjustments

 

0.1

 

 

0.1

 

Balance as of June 30, 2009

 

$

0.9

 

$

0.7

 

$

1.6

 

 

Note 5 - Notes Payable and Capital Lease Obligations

 

(In millions)

 

June 30,
2009

 

December 31,
2008

 

Working capital line of credit — China

 

$

3.9

 

$

 

Senior secured credit facility — new term B loan due 2014

 

171.6

 

 

Senior secured credit facility - term B loan

 

 

87.4

 

Senior secured credit facility - term C loan

 

 

79.3

 

6.75% senior subordinated notes due 2015

 

225.0

 

225.0

 

Total notes payable

 

400.5

 

391.7

 

Capital lease obligations and other

 

3.5

 

2.9

 

Total notes payable and capital lease obligations

 

$

404.0

 

$

394.6

 

 

 

 

 

 

 

Notes payable and current maturities of long-term liabilities

 

$

13.2

 

$

2.1

 

Long-term notes payable and capital lease obligations, less current maturities

 

390.8

 

392.5

 

Total notes payable and capital lease obligations

 

$

404.0

 

$

394.6

 

 

Estimated Fair Values of Notes Payable

 

The approximate, aggregate fair value of our notes payable as of June 30, 2009 and December 31, 2008 were as follows:

 

(In millions)

 

2009

 

2008

 

6.75% senior subordinated notes, due 2015

 

$

205.3

 

$

171.0

 

Senior secured credit facility — New Term B loan due 2014

 

171.4

 

 

 

Senior secured credit facility - Term B loan

 

$

 

$

76.0

 

Senior secured credit facility - Term C loan

 

$

 

$

73.0

 

 

9



Table of Contents

 

The aggregate fair values of the notes payable were estimated on the basis of quoted market prices; however, trading in these securities is limited and may differ from the amount for which the security could be transferred in an active market.

 

Senior Secured Credit Facility

 

On May 21, 2009, Hexcel Corporation entered into a new $300 million senior secured credit facility (“Senior Secured Credit Facility”), consisting of a $175 million term loan and a $125 million revolving loan.  The term loan matures on May 21, 2014 and the revolving loan matures on May 21, 2013.  Hexcel has the option of selecting either a LIBOR-based (the current option used) or U.S. domestic-based interest rate for each of the term loan and the revolving loans.  Term and revolving loans borrowed as LIBOR-based loans bear interest at a rate of LIBOR plus 4%, and term and revolving loans borrowed as U.S. base rate loans bear interest at the base rate plus 3%.  There is a LIBOR floor of 2.5%, and a base rate floor of 4%.  The margin for revolving loans will decrease by 50 basis points if Hexcel’s leverage ratio decreases below 2 to 1, and will decrease an additional 25 basis points if Hexcel’s leverage ratio decreases below 1.75 to 1.  The term loan was borrowed at closing and once repaid cannot be reborrowed.  The term loan will be repaid at a rate of approximately $2.2 million per quarter starting in the third quarter of 2009 and increasing to $17.5 million in September 2013 with two final payments of $52.5 million in 2014.

 

Proceeds from the term loan, and from an initial borrowing under the revolving loan, were used to repay all amounts, and terminate all commitments, outstanding under Hexcel’s former credit agreement and to pay fees and expenses in connection with the refinancing.  The Company incurred $10.3 million in issuance costs related to the refinancing of the Senior Secured Credit Facility, which will be expensed over the life of the new facility, and included $1.7 million of interest expense related to deferred financing costs associated with the previous credit facility.    At June 30, 2009, the Company had no borrowings outstanding under the revolving loan.

 

The credit agreement contains financial and other covenants, including, but not limited to, restrictions on the incurrence of debt and the granting of liens, as well as the maintenance of an interest coverage ratio and a leverage ratio, and limitations on capital expenditures.  A violation of any of these covenants could result in a default under the credit agreement, which would permit the lenders to accelerate the payment of all borrowings and to terminate the credit agreement.  In addition, such a default could, under certain circumstances, permit the holders of other outstanding unsecured debt to accelerate the repayment of such obligations.

 

In accordance with the terms of the Senior Secured Credit Facility, we are required to maintain a minimum interest coverage ratio of 4.00 (based on the ratio of EBITDA, as defined in the credit agreement, to interest expense) and may not exceed a maximum leverage ratio of 2.75 (based on the ratio of total debt to EBITDA) throughout the term of the Senior Secured Credit Facility.  In addition, the Senior Secured Credit Facility contains other terms and conditions such as customary representations and warranties, additional covenants and customary events of default. As of June 30, 2009, we were in compliance with all debt covenants.

 

The Senior Secured Credit Facility permits us to issue letters of credit up to an aggregate amount of $40.0 million.  Any outstanding letters of credit reduce the amount available for borrowing under the revolving loan.  As of June 30, 2009, we had issued letters of credit totaling $12.5 million under the Senior Secured Credit Facility.  As we had no borrowings under the revolving loan at June 30, 2009, total undrawn availability under the Senior Secured Credit Facility as of June 30, 2009 was $112.5 million.

 

6.75% Senior Subordinated Notes, due 2015

 

The senior subordinated notes are unsecured senior subordinated obligations of Hexcel Corporation. Interest accrues at the rate of 6.75% per annum and is payable semi-annually in arrears on February 1 and August 1.  The senior subordinated notes mature on February 1, 2015.  We may not redeem the senior subordinated notes prior to February 1, 2010.  We will have the option to redeem all or a portion of the senior subordinated notes at any time during the one-year period beginning February 1, 2010 at 103.375% of principal plus accrued and unpaid interest.  This percentage decreases to 102.25% for the one-year period beginning February 1, 2011, to 101.125% for the one-year period beginning February 1, 2012 and to 100.0% any time on or after February 1, 2013.  In the event of a “change of control” (as defined in the indenture), we are generally required to make an offer to all note holders to purchase all outstanding senior subordinated notes at 101% of the principal amount plus accrued and unpaid interest.

 

10



Table of Contents

 

The indenture contains various customary covenants including, but not limited to, restrictions on incurring debt, making restricted payments (including dividends), the use of proceeds from certain asset dispositions, entering into transactions with affiliates, and merging or selling all or substantially all of our assets.  The indenture also contains many other customary terms and conditions, including customary events of default, some of which are subject to grace and notice periods.

 

Note 6 - Derivative Financial Instruments

 

The Company enters into foreign currency forward contracts to reduce the risks associated with the changes in foreign exchange rates on sales and purchases denominated in other currencies.  As described below, the Company has also entered into a cross-currency interest rate swap agreement.  The Company does not use these or any other contracts for speculative or trading purposes.

 

Cross-Currency Interest Rate Swap Agreement

 

In September 2006, we entered into a cross-currency interest rate swap agreement.  It has been designated as a net investment hedge of our investment in Hexcel France SA. To the extent it is effective, gains and losses are recorded as an offset in the cumulative translation account, the same account in which translation gains and losses on the investment in Hexcel France SA are recorded.  All other changes, including any difference in current interest, are excluded from the assessment of effectiveness and are thereby included as a component of interest expense.  By excluding the interest rate component of risk in this instrument, and recognizing it in current period earnings, we have diversified our floating rate interest rate exposure to include Euro interest rates which provide a better matching with the underlying currency of operating cash flows.  The impact to interest expense for the quarter and six months ended June 30, 2009 was a net increase of $0.1 million and $0.3 million, respectively, compared to a net increase of $0.9 million and a net reduction of $0.1 million for the quarter and six months ended June 30, 2008, respectively.  This agreement has a notional value of $63.4 million, a term of five years, and is scheduled to mature on September 20, 2011.  We receive interest in U.S. dollars quarterly and pay interest in Euros on the same day. U.S. interest is based on the three month LIBOR rate.  Euro interest is based on the three month EURIBOR.  The fair value of the swap at June 30, 2009 and December 31, 2008 was a liability of $6.7 million and $7.3 million, respectively.  There were no credit contingency features in this derivative.

 

Foreign Currency Forward Exchange Contracts

 

A number of our European subsidiaries are exposed to the impact of exchange rate volatility between the U.S. dollar and the subsidiaries’ functional currencies, being either the Euro or the British pound.  We have entered into contracts to exchange U.S. dollars for Euros and British pound through 2011.  The aggregate notional amount of these contracts was $138.2 million at June 30, 2009.  The purpose of these contracts is to hedge a portion of the forecasted transactions of European subsidiaries under long-term sales contracts with certain customers.  These contracts are expected to provide us with a more balanced matching of future cash receipts and expenditures by currency, thereby reducing our exposure to fluctuations in currency exchange rates.  These forward contracts are designated as cash flow hedges of forecasted revenues per SFAS 133. The effective portion of the hedge is recorded in other comprehensive income, (“OCI”).  We exclude the forward points from the effectiveness assessment which is recorded in interest expense.  For the quarters and six months ended June 30, 2009 and 2008, hedge ineffectiveness was immaterial.

 

In addition, we enter into foreign exchange forward contracts which are not designated as hedges per SFAS 133.  These are used to provide an offset to transactional gains or losses arising from the remeasurement of non-functional monetary assets and liabilities such as accounts receivable.  The change in the fair value of the derivatives is recorded in the statement of operations.  There are no credit contingency features in these derivatives.

 

Fair values of Derivative Instruments

 

 

 

As of June 30, 2009

 

 

 

Balance Sheet
Location

 

Fair
Value

 

Asset derivatives designated as hedging instruments under SFAS 133:

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

Other assets

 

$

3.6

 

 

 

 

 

 

 

Asset derivatives not designated as hedging instruments under SFAS 133:

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

Other current assets

 

0.5

 

 

 

 

 

 

 

Total asset derivatives

 

 

 

$

4.1

 

 

11



Table of Contents

 

 

 

As of June 30, 2009

 

 

 

Balance Sheet
Location

 

Fair
Value

 

Liability derivatives designated as hedging instruments under SFAS 133:

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

Other non-current liabilities

 

$

6.7

 

Foreign exchange contracts

 

Other non-current liabilities

 

5.3

 

 

 

 

 

 

 

 

 

 

 

12.0

 

 

 

 

 

 

 

Liability derivatives not designated as hedging instruments under SFAS 133:

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

Other non-current liabilities

 

0.1

 

 

 

 

 

 

 

Total liability derivatives

 

 

 

$

12.1

 

 

The effect of derivative instruments on the Condensed Consolidated Statement of Operations for the three months ended June 30, 2009, was as follows:

 

Derivatives in SFAS 133
Cash Flow Hedging
Relationships

 

Amount of
Gain/(Loss)
Recognized in OCI
on
Derivative
(Effective Portion)

 

Location of Gain/(Loss)
Reclassified from
Accumulated OCI into
Income
(Effective Portion)

 

Amount of
Gain/(Loss)
Reclassified from
Accumulated OCI
into Income
(Effective
Portion)

 

Location of Gain/(Loss)
Recognized in Income on
Derivative (Ineffective
Portion and Amount
Excluded from
Effectiveness Testing)

 

Amount of Gain/(Loss)
Recognized in Income
on Derivative
(Ineffective Portion
and Amount Excluded
from Effectiveness
Testing)

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

$

8.0

 

Sales

 

$

(2.0

)

Interest expense

 

$

(0.5

)

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

0.3

 

Cost of sales

 

0.2

 

Interest expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives in SFAS 133 Net Investment Hedging Relationships

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate

 

(3.2

)

 

 

 

Interest expense

 

0.4

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

5.1

 

 

 

$

(1.8

)

 

 

$

(0.1

)

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives Not Designated as Hedging Instruments under SFAF 133

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

$

 

 

 

$

 

Interest expense

 

$

1.3

 

 

The effect of derivative instruments on the Condensed Consolidated Statement of Operations for the six months ended June 30, 2009, was as follows:

 

Derivatives in SFAS 133
Cash Flow Hedging
Relationships

 

Amount of
Gain/(Loss)
Recognized in OCI
on
Derivative
(Effective Portion)

 

Location of Gain/(Loss)
Reclassified from
Accumulated OCI into
Income
(Effective Portion)

 

Amount of
Gain/(Loss)
Reclassified from
Accumulated OCI
into Income
(Effective
Portion)

 

Location of Gain/(Loss)
Recognized in Income on
Derivative (Ineffective
Portion and Amount
Excluded from
Effectiveness Testing)

 

Amount of Gain/(Loss)
Recognized in Income
on Derivative
(Ineffective Portion
and Amount Excluded
from Effectiveness
Testing)

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

$

4.3

 

Sales

 

$

(4.3

)

Interest expense

 

$

0.1

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

(0.1

)

Cost of sales

 

0.3

 

Interest expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives in SFAS 133 Net Investment Hedging Relationships

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate

 

(6.4

)

 

 

 

Interest expense

 

(0.1

)

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

(2.2

)

 

 

$

(4.0

)

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives Not Designated as Hedging Instruments under SFAF 133

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

$

 

 

 

$

 

Interest expense

 

$

0.4

 

 

12



Table of Contents

 

The change in fair value of our foreign currency forward exchange contracts under hedge designations recorded net of tax within accumulated other comprehensive income for the quarters and six months ended June 30, 2009 and 2008 was as follows:

 

 

 

Quarter Ended June 30,

 

Six Months Ended June 30,

 

(In millions)

 

2009

 

2008

 

2009

 

2008

 

Unrealized gains (losses) at beginning of period, net of tax

 

$

(9.6

)

$

4.7

 

$

(8.9

)

$

3.2

 

(Gains) Losses reclassified to net sales

 

1.2

 

(0.9

)

2.4

 

(1.8

)

Increase in fair value

 

5.9

 

(0.1

)

4.0

 

2.3

 

Unrealized gains (losses) at end of period, net of tax

 

$

(2.5

)

$

3.7

 

$

(2.5

)

$

3.7

 

 

As of June 30, 2009, the total unrealized losses recorded in “accumulated other comprehensive income,” net of tax, of $2.5 million, are expected to be reclassified into earnings over the next twelve months as the hedged sales are recorded.

 

Note 7 — Other Expense

 

During the second quarter of 2009, the company updated its estimate of costs required to remediate environmental exposures at former sites in Lodi, New Jersey and in France and accordingly increased its reserves by $1.7 million.  During the second quarter of 2008, the Company had increased its environmental accruals for the Lodi, New Jersey site by $7.6 million due to new information that more fully identified the extent of the required remediation, as further discussed in Note 14 to the condensed consolidated financial statements.  During the first quarter of 2008, in connection with the termination of our U.S. Qualified Defined Benefit Retirement Plan, as described in Note 3 to the condensed consolidated financial statements, we recorded expense of $2.7 million for the settlement of pension obligations.

 

Note 8 — Income Taxes

 

The income tax provisions for the second quarter and six months ended June 30, 2009 were $5.7 million and $16.9 million, respectively.  The effective tax rates were 25.7% and 29.8%, respectively.  The rates reflect the release of $1.1 million of reserves for uncertain tax positions as a result of an audit settlement in the second quarter.

 

The income tax provisions, for the second quarter and six months of 2008 include a benefit for the reinstatement of $14.7 million and $17.2 million, respectively, of U.S. deferred tax assets which had previously been written off.  The reinstatement of the deferred tax assets was the result of the implementation of a tax planning strategy which increased our ability to utilize certain U.S. net operating loss carryforwards previously limited under Section 382 of the Internal Revenue Code.  The amount of allowable net operating losses available was limited following a change in ownership in 2003.  The tax strategy involved a change in the Company’s approach to measuring the value of the Company for use in the calculation of limitations on the NOL’s.

 

In addition, primarily as a result of the elimination of our U.S. defined pension plan, a $3.6 million tax provision (previously included in other comprehensive income) was recognized in the second quarter of 2008.

 

Note 9 - Net Income per Common Share

 

 

 

Quarter Ended June 30,

 

Six Months Ended June 30,

 

(In millions, except per share data)

 

2009

 

2008

 

2009

 

2008

 

 

 

 

 

 

 

 

 

 

 

Basic net income per common share:

 

 

 

 

 

 

 

 

 

Net income

 

$

16.8

 

$

26.7

 

$

40.2

 

$

49.9

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

96.9

 

96.2

 

96.8

 

96.2

 

 

 

 

 

 

 

 

 

 

 

Basic net income per common share

 

$

0.17

 

$

0.28

 

$

0.42

 

$

0.52

 

 

 

 

 

 

 

 

 

 

 

Diluted net income per common share:

 

 

 

 

 

 

 

 

 

Net income

 

$

16.8

 

$

26.7

 

$

40.2

 

$

49.9

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding — Basic

 

96.9

 

96.2

 

96.8

 

96.2

 

Plus incremental shares from assumed conversions:

 

 

 

 

 

 

 

 

 

Restricted stock units

 

0.3

 

0.3

 

0.5

 

0.3

 

Stock options

 

0.6

 

1.3

 

0.5

 

1.3

 

Weighted average common shares outstanding — Dilutive

 

97.8

 

97.8

 

97.8

 

97.8

 

 

 

 

 

 

 

 

 

 

 

Diluted net income per common share

 

$

0.17

 

$

0.27

 

$

0.41

 

$

0.51

 

 

13



Table of Contents

 

Total shares underlying stock options of 2.2 million for the quarter and 3.1 million for the six months were excluded from the computation of diluted net income per share for the periods ended June 30, 2009, as they were anti-dilutive.

 

Note 10 - Comprehensive Income

 

Comprehensive income represents net income and other gains and losses affecting stockholders’ equity that are not reflected in the condensed consolidated statements of operations.  The components of comprehensive income for the quarters and six months ended June 30, 2009 and 2008 were as follows:

 

 

 

Quarter Ended June 30,

 

Six-Months Ended June 30,

 

(In millions)

 

2009

 

2008

 

2009

 

2008

 

Net income

 

$

16.8

 

$

26.7

 

$

40.2

 

$

49.9

 

Currency translation adjustments

 

18.3

 

0.6

 

8.2

 

9.8

 

Pension and other postretirement obligations

 

(1.6

)

3.7

 

(1.3

)

5.7

 

Net unrealized (losses) gains on financial instruments

 

7.1

 

(1.2

)

5.7

 

0.2

 

Comprehensive income

 

$

40.6

 

$

29.8

 

$

52.8

 

$

65.6

 

 

Note 11 — Investments in Affiliated Companies

 

Asian Composites Manufacturing Sdn. Bhd.

 

We have a 33.33% ownership interest in this joint venture located in Alor Setar, Malaysia.  In connection therewith, we have considered the accounting and disclosure requirements of FASB Interpretation No. 46R, Consolidation of Variable Interest Entities, and believe that this investment would be considered “a variable interest entity.”  However, we also believe that we are not the primary beneficiary of such entity, and therefore, are not required to consolidate this entity.  The joint venture manufactures composite parts for secondary structures for commercial aircraft.

 

BHA Aero Composite Parts Co., Ltd.

 

The Company’s former joint venture, BHA Aero Composite Parts Co., Ltd. (“BHA”), is located in Tianjin, China, and manufactures composite parts for secondary structures and interior applications for commercial aircraft.  On July 18, 2008 we sold our 40.48% interest in BHA.

 

Note 12 — Fair Value Measurements

 

Financial Accounting Standards Board (“FASB”) Statement No. 157, Fair Value Measurements (“SFAS 157”) establishes a hierarchy for observable and unobservable inputs used to measure fair value into three broad levels, which are described below:

 

·                  Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.

 

·                  Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by comparable market data.

 

·                  Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.

 

In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as considers counterparty credit risk in its assessment of fair value.

 

For derivative assets and liabilities that utilize Level 2 inputs we prepare estimates of future cash flows of our derivatives, which are discounted to a net present value.  The estimated cash flows and the discount factors used in the valuation model are based on

 

14



Table of Contents

 

observable inputs, and incorporate non-performance risk (the credit standing of the counterparty when the derivative is in a net asset position, and the credit standing of Hexcel when the derivative is in a net liability position).  Below is a summary of valuation techniques for all Level 2 financial assets and liabilities:

 

·                  Cross-Currency interest rate swap derivative liabilities — valued using LIBOR and EURIBOR yield curves at the reporting date. Counterparties to these contracts are highly rated financial institutions none of which experienced any significant downgrades in the three months ended June 30, 2009 that would reduce the receivable amount owed, if any, to the Company.

 

·                  Foreign exchange derivative assets and liabilities — valued using quoted forward foreign exchange prices at the reporting date. Counterparties to these contracts are highly rated financial institutions none of which experienced any significant downgrades in the three months ended June 30, 2009 that would reduce the receivable amount owed, if any, to the Company.

 

·                  Money market funds — considered available-for-sale, and classified as cash equivalents.

 

At June 30, 2009 assets measured at fair value include money market funds of $35.3 million and foreign currency exchange contracts of $4.1 million; liabilities measured at fair value include foreign currency exchange contracts of $5.4 million and cross-currency interest rate swaps of $6.7 million. The measurements for these assets and liabilities were based upon Level 2 inputs.

 

Note 13 - Segment Information

 

The financial results for our operating segments are prepared using a management approach, which is consistent with the basis and manner in which we internally segregate financial information for the purpose of assisting in making internal operating decisions.  We evaluate the performance of our operating segments based on operating income, and generally account for intersegment sales based on arm’s length prices.  Corporate and certain other expenses are not allocated to the operating segments, except to the extent that the expense can be directly attributable to the business segment.

 

Financial information for our business segments for the quarters and six months ended June 30, 2009 and 2008 is as follows:

 

 

 

Unaudited

 

(In millions)

 

Composite
Materials

 

Engineered
Products

 

Corporate
& Other

 

Total

 

 

 

 

 

 

 

 

 

 

 

Second Quarter 2009

 

 

 

 

 

 

 

 

 

Net sales to external customers:

 

 

 

 

 

 

 

 

 

Commercial aerospace

 

$

94.1

 

$

43.7

 

$

 

$

137.8

 

Space and defense

 

55.3

 

19.4

 

 

74.7

 

Industrial

 

64.4

 

0.4

 

 

64.8

 

Net sales to external customers

 

213.8

 

63.5

 

 

277.3

 

Intersegment sales

 

6.4

 

 

(6.4

)

 

Total sales

 

220.2

 

63.5

 

(6.4

)

277.3

 

 

 

 

 

 

 

 

 

 

 

Operating income (a)

 

30.3

 

9.9

 

(10.5

)

29.7

 

Depreciation and amortization

 

10.5

 

1.0

 

0.1

 

11.6

 

Business consolidation and restructuring expenses

 

 

 

 

 

Stock-based compensation expense

 

0.5

 

0.1

 

0.2

 

0.8

 

Capital expenditures

 

19.6

 

 

0.2

 

19.8

 

 

 

 

 

 

 

 

 

 

 

Second Quarter 2008

 

 

 

 

 

 

 

 

 

Net sales to external customers:

 

 

 

 

 

 

 

 

 

Commercial aerospace

 

$

148.1

 

$

50.6

 

$

 

$

198.7

 

Space and defense

 

59.7

 

15.3

 

 

75.0

 

Industrial

 

84.7

 

1.1

 

 

85.8

 

Net sales to external customers

 

292.5

 

67.0

 

 

359.5

 

Intersegment sales

 

10.8

 

 

(10.8

)

 

Total sales

 

303.3

 

67.0

 

(10.8

)

359.5

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

39.7

 

8.0

 

(18.4

)

29.3

 

Depreciation and amortization

 

10.3

 

1.1

 

 

11.4

 

Business consolidation and restructuring expenses

 

1.2

 

 

 

1.2

 

Stock-based compensation expense

 

0.6

 

0.1

 

1.0

 

1.7

 

Capital expenditures

 

40.9

 

0.7

 

0.7

 

42.3

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2009

 

 

 

 

 

 

 

 

 

Net sales to external customers:

 

 

 

 

 

 

 

 

 

Commercial aerospace

 

$

203.4

 

$

88.2

 

$

 

$

291.6

 

Space and defense

 

114.7

 

37.3

 

 

152.0

 

Industrial

 

140.1

 

0.9

 

 

141.0

 

Net sales to external customers

 

458.2

 

126.4

 

 

584.6

 

Intersegment sales

 

15.5

 

 

(15.5

)

 

Total sales

 

473.7

 

126.4

 

(15.5

)

584.6

 

 

 

 

 

 

 

 

 

 

 

Operating income (a)

 

75.3

 

18.7

 

(24.4

)

69.6

 

Depreciation and amortization

 

20.3

 

2.0

 

0.2

 

22.5

 

Business consolidation and restructuring expenses

 

 

 

 

 

Stock-based compensation expense

 

1.8

 

0.4

 

3.3

 

5.5

 

Capital expenditures

 

47.0

 

0.2

 

0.7

 

47.9

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2008

 

 

 

 

 

 

 

 

 

Net sales to external customers:

 

 

 

 

 

 

 

 

 

Commercial aerospace

 

$

291.7

 

$

98.9

 

$

 

$

390.6

 

Space and defense

 

117.0

 

32.3

 

 

149.3

 

Industrial

 

161.7

 

2.4

 

 

164.1

 

Net sales to external customers

 

570.4

 

133.6

 

 

704.0

 

Intersegment sales

 

21.9

 

0.3

 

(22.2

)

 

Total sales

 

592.3

 

133.9

 

(22.2

)

704.0

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

84.1

 

16.1

 

(34.5

)

65.7

 

Depreciation and amortization

 

20.2

 

2.1

 

0.1

 

22.4

 

Business consolidation and restructuring expenses

 

1.8

 

 

 

1.8

 

Stock-based compensation expense

 

1.7

 

0.3

 

4.9

 

6.9

 

Capital expenditures

 

83.2

 

1.3

 

1.7

 

86.2

 

 

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(a)          Operating income for the quarters and six months ended June 30, 2009 and 2008 within the corporate and other segment includes expenses of $1.7 million and $7.6 million, respectively, related to the increase in environmental remediation liabilities. Operating income for the six months ended June 30, 2008 within the corporate and other segment also includes $2.7 million of other expense as described within Note 7 to the condensed consolidated financial statements.

 

Goodwill and Intangible Assets

 

The carrying amount of goodwill and intangible assets by segment is as follows:

 

(In millions)

 

June 30,
2009

 

December 31,
2008

 

Composite Materials

 

$

40.9

 

$

39.9

 

Engineered Products

 

16.0

 

16.1

 

Goodwill and intangible assets

 

$

56.9

 

$

56.0

 

 

Note 14 — Commitments and Contingencies

 

We are involved in litigation, investigations and claims arising out of the normal conduct of our business, including those relating to commercial transactions, environmental, employment, and health and safety matters.  We estimate and accrue our liabilities when a loss becomes probable and estimable.  These judgments take into consideration a variety of factors, including the stage of the proceeding; potential settlement value; assessments by internal and external counsel; and assessments by environmental engineers and

 

16



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consultants of potential environmental liabilities and remediation costs.  Such estimates are not discounted to reflect the time value of money due to the uncertainty in estimating the timing of the expenditures, which may extend over several years.

 

While it is impossible to ascertain the ultimate legal and financial liability with respect to certain contingent liabilities and claims, we believe, based upon our examination of currently available information, our experience to date, and advice from legal counsel, that the individual and aggregate liabilities resulting from the ultimate resolution of these contingent matters, after taking into consideration our existing insurance coverage and amounts already provided for, will not have a material adverse impact on our consolidated results of operations, financial position or cash flows.

 

Environmental Matters

 

We are subject to various U.S. and international federal, state and local environmental, and health and safety laws and regulations.  We are also subject to liabilities arising under the Federal Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA” or “Superfund”), the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act, and similar state and international laws and regulations that impose responsibility for the control, remediation and abatement of air, water and soil pollutants and the manufacturing, storage, handling and disposal of hazardous substances and waste.

 

We have been named as a potentially responsible party (“PRP”) with respect to several hazardous waste disposal sites that we do not own or possess, which are included on, or proposed to be included on, the Superfund National Priority List of the U.S. Environmental Protection Agency (“EPA”) or on equivalent lists of various state governments.  Because CERCLA allows for joint and several liability in certain circumstances, we could be responsible for all remediation costs at such sites, even if we are one of many PRPs.  We believe, based on the amount and the nature of our waste, and the number of other financially viable PRPs, that our liability in connection with such matters will not be material.

 

Lodi, New Jersey Site

 

Pursuant to the New Jersey Industrial Site Recovery Act, we entered into a Remediation Agreement to pay for the environmental remediation of a manufacturing facility we own and formerly operated in Lodi, New Jersey.  We have commenced remediation of this site in accordance with an approved plan; however, the ultimate cost of remediating the Lodi site will depend on developing circumstances.  The total accrued liability related to this matter was $6.9 million as of June 30, 2009.

 

Lower Passaic River Study Area

 

In October 2003, we received, along with 66 other entities, a directive from the New Jersey Department of Environmental Protection (“NJDEP”) that requires the entities to assess whether operations at various New Jersey sites, including our former manufacturing site in Lodi, New Jersey, caused damage to natural resources in the Lower Passaic River watershed. In May, 2005, the NJDEP dismissed us from the Directive. In February 2004, 42 entities, including Hexcel, received a general notice letter from the EPA which requested that the entities consider helping to finance an estimated $10 million towards an EPA study of environmental conditions in the Lower Passaic River watershed.  In May 2005, we signed onto an agreement with EPA to participate (bringing the total number of participating entities to 43) in financing such a study up to $10 million, in the aggregate. Since May, 2005, a number of additional PRPs have joined into the agreement with EPA.  In October 2005, we along with the other EPA notice recipients were advised by the EPA that the notice recipients’ share of the costs of the EPA study was expected to significantly exceed the earlier EPA estimate.  While we and the other recipients were not obligated by our agreement to share in such excess, a Group of notice recipients (73 companies including Hexcel) negotiated an agreement with EPA to assume responsibility for the study pursuant to an Administrative Order on Consent.  Work on the study is ongoing.  We believe we have viable defenses to the EPA claims and expect that other as yet unnamed parties also will receive notices from the EPA.  In June 2007, EPA issued a draft Focused Feasibility Study (“FFS”) that considers six interim remedial options for the lower eight miles of the river, in addition to a “no action” option.  The estimated costs for the six “action” options range from $900 million to $2.3 billion.  The PRP Group provided comments to EPA on the FFS; EPA has not yet taken further action.  The Administrative Order on Consent regarding the study does not cover work contemplated by the FFS.  Furthermore, the Federal Trustees for natural resources have indicated their intent to perform a natural resources damage assessment on the river and invited the PRPs to participate in the development and performance of this assessment.  The PRP Group, including Hexcel, has not agreed to participate in the assessment at this time. Finally, on February 4, 2009, Tierra Solutions (“Tierra”) and Maxus Energy Corporation (“Maxus”) filed a third party complaint in New Jersey Superior Court against us and over 300 other entities in an action brought against Tierra and Maxus (and other entities) by the State of New Jersey.  New Jersey’s suit against Tierra and Maxus relates to alleged discharges of contaminants by Tierra and Maxus to the Passaic River and seeks payment of all past and future costs the State has and will incur regarding cleanup and removal of contaminants, investigation of the Passaic River and related water bodies, assessment of natural resource injuries and other specified injuries.  The third party complaint seeks contribution from us for all or part of the damages that Tierra and Maxus may owe to the State.  We have not yet responded to the complaint; our response is due October 15, 2009.  Our ultimate liability for investigatory costs, remedial costs and/or natural resource damages in connection with the Lower Passaic River cannot be determined at this time.

 

Kent, Washington Site

 

We were party to a cost-sharing agreement regarding the operation of certain environmental remediation systems necessary to

 

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satisfy a post-closure care permit issued to a previous owner of the our Kent, Washington, site by the EPA. Under the terms of the cost-sharing agreement, we were obligated to reimburse the previous owner for a portion of the cost of the required remediation activities.  Management has determined that the cost-sharing agreement terminated in December 1998; however, the other party disputes this determination.  The Washington Department of Ecology (“Ecology”) has issued a unilateral Enforcement Order to us requiring us to (a) maintain the interim remedial system and to perform system separation, (b) to conduct a focused remedial investigation and (c) to conduct a focused feasibility study to develop recommended long term remedial measures.  We asserted defenses against performance of the order, particularly objecting to the remediation plan proposed by the previous owner, who still owns the adjacent contaminated site.  However, we are currently complying with the order, with one exception, without withdrawing our defenses.  As a result of a dispute resolution procedure, Hexcel and Ecology have reached an agreement to extend certain deadlines, which we believe remove current and potential compliance issues.

 

Omega Chemical Corporation Superfund Site, Whittier, CA

 

We are a PRP at a former chemical waste site in Whittier, CA. The PRPs at Omega have established a PRP Group, the “Omega PRP Group”, and are currently investigating and remediating soil and groundwater at the site pursuant to a Consent Decree with the EPA, entered into in March 2000.  Hexcel contributed approximately 1.07% of the waste tonnage sent to the site during its operations.    The EPA has recently sent a Special Notice letter to 155 PRPs, including the Company, requiring the Group to remediate on-site soils and to begin good faith negotiations with EPA regarding $10 million in Agency over-site expenses.  In addition to the Omega site specifically, there is regional groundwater contamination in the area as well. EPA has not determined who it will identify as PRPs to investigate and, as necessary, remediate the regional groundwater contamination.  Although it is likely that Hexcel will incur costs associated with the regional investigation and remediation as a member of the Omega Group, our ultimate liability, if any, in connection with this matter cannot be determined at this time.

 

Environmental Summary

 

Our estimate of liability as a PRP and our remaining costs associated with our responsibility to remediate the Lodi, New Jersey; Kent, Washington; and other sites are accrued in the consolidated balance sheets.  As of June 30, 2009, our aggregate environmental related accruals were $9.4 million, of which $4.5 million was included in accrued liabilities with the remainder included in non-current liabilities.  As related to certain environmental matters, the accrual was estimated at the low end of a range of possible outcomes since no amount within the range is a better estimate than any other amount.  If we had accrued for these matters at the high end of the range of possible outcomes, our accrual would have been $4.5 million higher.  These accruals can change significantly from period to period due to such factors as additional information on the nature or extent of contamination, the methods of remediation required, changes in the apportionment of costs among responsible parties and other actions by governmental agencies or private parties, or the impact, if any, of being named in a new matter.

 

Environmental remediation spending charged directly to our reserve balance was $0.8 million and $0.9 million for the quarters ended June 30, 2009 and 2008, respectively, and $1.4 million and $1.5 million for the six months ended June 30, 2009 and 2008, respectively.  In addition, our operating costs relating to environmental compliance charged directly to expense were $2.6 million and $2.8 million for the quarters ended June 30, 2009 and 2008, respectively, and $5.0 million and $5.5 million for the six months ended June 30, 2009 and 2008, respectively.  Capital expenditures for environmental matters were $1.1 million and $1.9 million for the quarters ended June 30, 2009 and 2008, respectively, and $2.0 million and $2.3 million for the six months ended June 30, 2009 and 2008, respectively.

 

Litigation

 

Gurit Infringement Claim

 

Our Austrian subsidiary has been sued in Germany and Austria by Gurit, a European competitor of prepreg materials sold into the wind energy market. Gurit alleges that the Company’s HexFIT® prepreg made in Austria and sold in Germany to Vestas infringes a Gurit EU patent.  Gurit also has had its counsel issue a “cease and desist” letter with respect to our sales to a minor wind energy customer in Denmark. Vestas is our largest wind energy customer and in Europe manufactures blades for wind turbines in Germany, Denmark and Spain.  The suits seek an injunction to prevent the Company from making or selling HexFIT® in Germany and Austria and also seek damages for past infringement.  Regarding the Gurit patent itself, we are appealing a decision of the European patent office (EPO) which upheld the validity of the patent in an opposition proceeding. In our appeal we generally assert that the patent is not valid based on prior art, particularly prior art not previously considered by the EPO when it granted and later upheld the patent.  At a hearing in May 2009, the German court deferred making a final ruling and instead ordered that a technical expert be appointed to assist it in reaching a decision on whether there is infringement.  The expert has not yet been selected. The EPO appeal will be heard in November 2009. We believe that HexFIT® does not infringe the patent and we intend to vigorously defend the suits and prosecute the appeal in the EPO.

 

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Table of Contents

 

Product Warranty

 

We provide for an estimated amount of product warranty expense at the time revenue is recognized.  This estimated amount is provided by product and based on historical warranty experience.  In addition, we periodically review our warranty accrual and record any adjustments as deemed appropriate.  Warranty expense for the quarter and six months ended June 30, 2009, and accrued warranty cost, included in “accrued liabilities” in the condensed consolidated balance sheets at June 30, 2009 and December 31, 2008, was as follows:

 

(In millions)

 

Product
Warranties

 

Balance as of December 31, 2008

 

$

3.8

 

Warranty expense

 

1.1

 

Deductions and other

 

(0.5

)

Balance as of March 31, 2009

 

4.4

 

Warranty expense

 

1.4

 

Deductions and other

 

(1.4

)

Balance as of June 30, 2009

 

$

4.4

 

 

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Table of Contents

 

ITEM 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Business Overview

 

Hexcel Corporation and its subsidiaries, is a leading advanced composites company.  We develop, manufacture, and market lightweight, high-performance composites, including carbon fibers, reinforcements, prepregs, honeycomb, matrix systems, adhesives and composite structures, for use in commercial aerospace, space and defense and industrial applications.  Our products are used in a wide variety of end applications, such as commercial and military aircraft, space launch vehicles and satellites, wind turbine blades, automotive and a wide variety of recreational equipment.

 

We serve international markets through manufacturing facilities and sales offices located in the United States, Europe and Asia, and through sales representation offices located in Asia, Australia and South America.  We also hold a 33.33% interest in Asian Composites Manufacturing Sdn. Bhd., located in Malaysia, which manufactures composite structures for commercial aerospace.

 

Hexcel has two segments, Composite Materials and Engineered Products.  The Composite Materials segment manufactures and markets carbon fibers, fabrics and specialty reinforcements, prepregs, structural adhesives, honeycomb, composite panels, molding compounds, polyurethane systems and laminates that are incorporated into many applications, including military and commercial aircraft, rotorcraft, wind turbine blades and recreational products.  The Engineered Products segment manufactures and markets composite structures and precision machined honeycomb parts for use primarily in the aerospace industry. Composite structures are manufactured from a variety of composite and other materials, including prepregs, honeycomb, structural adhesives and advanced molding materials, using such manufacturing processes as autoclave processing, multi-axis numerically controlled machining, heat forming, compression molding and other composite manufacturing techniques.

 

The global economic downturn and availability of credit for end customers has affected demand from commercial aircraft customers and for wind energy programs.  Though there are short term uncertainties, the focus on increasing alternative energy sources continues to promise a bright future for wind energy.  More importantly, the compelling economics of new, lightweight, wide body aircraft that have become critical to end user demand remain intact.  Although this translates into a favorable demand mix that includes a higher percentage of composite rich models, current economic conditions and new program delays lead us to be cautious in the near term regarding projected build-rates and wind energy project funding.

 

Net sales for the quarter were $277.3 million, 22.9% lower (18.7% lower in constant currency) than the $359.5 million reported for the second quarter of 2008.  Year to date, net sales are 12.3% lower than last year in constant currency.   The drop in sales 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.

 

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. 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.

 

We have also prudently moderated the pace of our capital spending plans to maintain alignment with changes to prior growth assumptions for us and our customers.  We expect to spend less than $100 million on capital expenditures in 2009, and currently expect to spend less than $125 million in 2010.  As anticipated, we had cash usage in the first quarter, but after generating $47 million of free cash flow (cash provided by operating activities less capital expenditures) in the second quarter, we achieved $22 million of positive free cash flow for the first six months of 2009, as compared to negative free cash flow of $92 million for the first half of 2008. There were significant working capital changes as the lower sales volumes combined with concerted efforts to reduce accounts receivable and inventories resulted in $37.4 million of cash from lower receivables and inventories in 2009 as compared to a $63.8 million use of cash in the first half of 2008.  These sources of cash were partially offset by additional usage of cash for accounts payable and accruals of $26.9 million in the first half of 2009 as compared to the first half of 2008.  We are now targeting over $40 million of free cash flow for the full year period.  Capital expenditures were $47.9 million in the first six months of 2009, as compared to $86.2 million during the first six months of 2008.

 

Commercial aerospace sales declined, in constant currency, 28.1% for the quarter and 22.4% for the six month period and were down across all sectors as our customers tightened inventory management as we enter a more cautious period.  After a three year period of record orders from 2005 to 2007, followed by a robust year of orders in 2008, Airbus and Boeing combined only had 69 net orders and a number of deferrals for the first half of 2009.  This however, still leaves nearly 7,000 planes in backlog, and their combined total deliveries for the first half of 2009 was 500.  Based on estimates from Airbus and Boeing, they expect to deliver about

 

20



Table of Contents

 

960 aircraft in 2009, and if this happens it would exceed the previous highest number of deliveries of 914 in 1999.  Nonetheless, there is uncertainty surrounding 2010 build rates, which would affect Hexcel’s 2009 second half sales as the company generally ships six months in advance of the airplanes’ delivery.  The current poor global credit environment leads to significant concerns about the demand, timing and financial ability of airline operators to acquire new aircraft in backlog.  As a result, there remains significant uncertainty and a wide range of views regarding new aircraft build schedules in 2010 and beyond.  Offsetting this negative outlook to some extent, new aircraft such as the Boeing 787 and 747-8 as well as Airbus A380 and A350 will add incremental sales as they come into production and ramp-up to full production rates because of significant increased Hexcel content per plane.

 

In 2008, other commercial aerospace sales, which include regional and business aircraft, comprised about 28% of our commercial aerospace sales.  These markets, particularly the business jet market, have been hit hard this year by rapidly falling demand and tighter inventory management.  This quarter our sales declined over 40% from the second quarter of 2008, and this sub-segment continues to be vulnerable to further declines.

 

Space and Defense sales, in constant currency, were up 2.8% for the quarter and 5.3% for the six month period.  We continue to benefit from our extensive qualifications to supply composite materials and, in some cases, composite structures to a broad range of rotorcraft, transport, and fixed wing attack and satellite programs around the world. No one program represents more than 10% of our revenue in this market, but the C17 and F22 are among our important programs and could be curtailed in the near future.  On the other hand, sales from rotorcraft, including the V22 tilt rotor program, have seen strong growth and now represent more than half of our sales in this market.

 

Industrial sales, in constant currency, were down 15.6% for the second quarter and 3.7% for the six months over last year.  Wind energy comprises over half of the industrial market and these sales are now flat for the first half of 2009 as compared to the first half of 2008.  The growth for the wind energy market will be, in part, dependent upon public policy, including establishing and achieving renewable energy targets, and availability of project financing for the developers of wind farms.  Our wind energy business had been a European business, but with the start of sales from our China facility in the fourth quarter of 2008 and the scheduled qualified production of our Colorado facility in the fourth quarter of this year, we will serve a much wider market.  The American Recovery and Reinvestment Act of 2009 (“Act”) extends the production tax credit through 2012 and provides a 30% investment tax credit for qualified new wind equipment.  In July, the availability of cash grants under the Act was clarified, which should also help restart the order flow in the U.S.  Recreation, automotive and other industrial applications comprise the rest of industrial sales.  For the most part, these sales reflect both weak markets and selective portfolio pruning in recent years.  Demand for our products in these markets is driven by both the success of particular applications as well as the general overall economy.  Our general industrial sub-segment also includes our sales to the American Centrifuge Project which began in December 2008, and partly offset declines in the other industrial markets.

 

Despite the much lower sales volume, we improved our operating margins for the quarter and six months ended June 30, 2009 over the prior year primarily reflecting good product mix, factory productivity initiatives, incremental improvements at our new European facilities, lower commodity and freight costs, overall good cost control and the benefits from a stronger Dollar.  The strengthening of the Dollar against the Euro and the British pound over the last year creates mixed effects on our results.  The Dollar movement against the two currencies resulted in a decrease in sales of $18.3 million in the quarter and $37.6 million in the six month period on a year over year basis.  However, the operating income line was slightly favorably impacted by these same currency movements for the first half of 2009 as compared to same period in 2008 as many European commercial aerospace sales are generally in US Dollars with related costs in Euros and British pound.

 

Second Quarter and Six-Months Results

 

 

 

Quarter Ended June 30,

 

 

 

Six-Months Ended June 30,

 

 

 

(In millions, except per share data)

 

2009

 

2008

 

% Change

 

2009

 

2008

 

% Change

 

Net sales

 

$

277.3

 

$

359.5

 

(22.9

)%

$

584.6

 

$

704.0

 

(17.0

)%

Operating income

 

29.7

 

29.3

 

1.4

%

69.6

 

65.7

 

5.9

%

Net income

 

16.8

 

26.7

 

(37.1

)%

40.2

 

49.9

 

(19.4

)%

Diluted net income per common share

 

$

0.17

 

$

0.27

 

 

 

$

0.41

 

$

0.51

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-GAAP measures:

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted operating income

 

$

31.4

 

$

38.1

 

(17.6

)%

$

71.3

 

$

77.8

 

(8.4

)%

As a percentage of net sales

 

11.3

%

10.6

%

 

 

12.2

%

11.1

%

 

 

Adjusted net income

 

$

17.9

 

$

20.3

 

(11.8

)%

$

41.3

 

$

42.7

 

(3.3

)%

Adjusted diluted earnings per share

 

$

0.18

 

$

0.21

 

 

 

$

0.42

 

$

0.44

 

 

 

 

The Company’s performance measurements include operating income adjusted for non-recurring operating expenses and business consolidation and restructuring expenses, and net income adjusted for non-recurring expenses, both of which are non-GAAP

 

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measures.  Management believes these non-GAAP measurements are meaningful to investors because they provide a view of Hexcel with respect to ongoing operating results and comparisons to prior periods.  Non-recurring items represent significant charges or credits that are important to an understanding of Hexcel’s overall operating results in the periods presented.  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.  The following is a reconciliation from GAAP to non-GAAP amounts.

 

 

 

Quarter Ended June 30,

 

Six-Months Ended June 30,

 

(In millions, except per share data)

 

2009

 

2008

 

2009

 

2008

 

Operating income

 

$

29.7

 

$

29.3

 

$

69.6

 

$

65.7

 

Environmental Expense (a)

 

1.7

 

7.6

 

1.7

 

7.6

 

Business consolidation & restructuring expense

 

 

1.2

 

 

1.8

 

Pension Settlement Expense

 

 

 

 

2.7

 

Adjusted operating income

 

$

31.4

 

$

38.1

 

$

71.3

 

$

77.8

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

16.8

 

$

26.7

 

$

40.2

 

$

49.9

 

Environmental Expense (net of tax) (a)

 

1.1

 

4.7

 

1.1

 

4.7

 

Pension Settlement Expense (net of tax)

 

 

 

 

1.7

 

Tax adjustments (b)

 

 

(11.1

)

 

(13.6

)

Adjusted net income

 

$

17.9

 

$

20.3

 

$

41.3

 

$

42.7

 

 


(a) The second quarter of 2009 Environmental Expense adjustments relate to an increase to the estimated remediation costs for the Lodi, New Jersey site, a former fine chemical business sold in 1986 and another previously sold facility in France (sold in 2007). The second quarter and six-month period Environmental Expense relates to an increase to the estimated remediation costs for the Lodi site.

 

(b) The second quarter of 2008 tax adjustments include $11.1 million in net benefit primarily related to the reinstatement of U.S. deferred tax assets which had been previously written off.  The six months ended June 30, 2008 includes a total of $13.6 million.

 

Net Sales

 

Net sales decreased for the quarter and six months ended June 30, 2009 over the same periods in 2008, reflecting lower sales volume in Commercial Aerospace and Industrial markets.  On a constant currency basis, sales for the quarter ended June 30, 2009 were 18.7% lower than the same quarter in 2008 (22.9% decrease at actual rates) and sales for the six months ended June 30, 2009 were 12.3% lower than the six months ended June 30, 2008 (17.0% decrease at actual rates).

 

The following table summarizes net sales to third-party customers by segment and end market for the quarters and six months ended June 30, 2009 and 2008:

 

 

 

Quarter Ended June 30,

 

 

 

Six-Months Ended June 30,

 

 

 

(In millions)

 

2009

 

2008

 

% Change

 

2009

 

2008

 

% Change

 

Consolidated Net Sales

 

$

277.3

 

$

359.5

 

(22.9

)%

$

584.6

 

$

704.0

 

(17.0

)%

Commercial Aerospace

 

137.8

 

198.7

 

(30.6

)%

291.6

 

390.6

 

(25.3

)%

Space & Defense

 

74.7

 

75.0

 

(0.4

)%

152.0

 

149.3

 

1.8

%

Industrial

 

64.8

 

85.8

 

(24.5

)%

141.0

 

164.1

 

(14.1

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Composite Materials

 

$

213.8

 

$

292.5

 

(26.9

)%

$

458.2

 

$

570.4

 

(19.7

)%

Commercial Aerospace

 

94.1

 

148.1

 

(36.5

)%

203.4

 

291.7

 

(30.3

)%

Space & Defense

 

55.3

 

59.7

 

(7.4

)%

114.7

 

117.0

 

(2.0

)%

Industrial

 

64.4

 

84.7

 

(24.0

)%

140.1

 

161.7

 

(13.4

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Engineered Products

 

$

63.5

 

$

67.0

 

(5.2

)%

$

126.4

 

$

133.6

 

(5.4

)%

Commercial Aerospace

 

43.7

 

50.6

 

(13.6

)%

88.2

 

98.9

 

(10.8

)%

Space & Defense