Operating income for the period was $39.9 million, compared to $36.4 million in 2008. The 2008 operating income included $2.7 million of pension settlement expense associated with the termination of Hexcel’s US defined benefit pension plan. Adjusted net income for the first quarter of in 2008 2008 was $0.23 per share, which excludes the one-time items related to the pension plan and a $2.5 million reinstatement of deferred tax assets previously written off.
Markets
Commercial Aerospace:
Commercial aerospace sales of $153.8 million declined 19.9% (16.4% in constant currency) for the quarter as compared to the first quarter 2008. Though large aircraft line rate reductions have been minimal to date, tighter management of inventory levels by the company’s customers resulted in declines of both Airbus and Boeing related revenues. Additionally, the lingering effects of the Boeing strike are estimated to have caused about a $10 million sales decline.
Sales to other aerospace, which includes regional and business aircraft customers, while down, were aided by some non-recurring sales. This sub-segment continues to be most vulnerable in the near term and the company expect further decline for the rest of the year.
Revenues attributed to new aircraft programs (A380, A350, B787, B747-8) were about 10% of the company’s commercial aerospace sales, down from the first half of in 2008 due principally to the 787 delays. The company expects modest improvement in the quarters to come.
Space & Defense:
Space & Defense sales of $77.3 million for the quarter were up 4.0% (7.8% in constant currency) compared to the first quarter of 2008. Rotorcraft continue to be a strong contributor and were over half of the Space & Defense sales for the quarter.
Industrial:
Total Industrial sales of $76.2 million for the first quarter of 2009 were down 2.7% in actual dollars but up nearly 10% on a constant currency basis over in 2008. This increase was led by double digit real growth in wind energy.
Industrial sales excluding wind energy were essentially flat for the quarter compared to first quarter 2008 in constant currency. As expected, the company have seen sharp year over year declines in automotive and recreation markets but they were offset by sales to the American Centrifuge Project and the company’s new HexTOOL product range.
Operations:
Gross margin increased to 25.1% for the quarter compared to 23.3% for the first quarter of 2008. Favorable product mix, factory productivity initiatives, incremental improvements at the company’s new European facilities, lower commodity and freight costs combined with a stronger dollar to deliver good gains despite the lower sales. Foreign exchange rates, net of hedges, contributed about 75 basis points to improved gross margin percentage and about 100 basis points to operating income percentage.
The company’s new China facility for wind energy is now in production and the company expect it to reach full rate by the end of the second quarter of this year. Construction for the company’s new wind energy facility in Colorado progresses on schedule and the company expect to begin the qualification process in the third quarter.
Selling, general and administrative expenses in the quarter were $29.3 million versus $31.9 million in 2008 aided significantly by the weaker Euro and British pound. In constant currency, these expenses were about 2% lower than in 2008. Research and technology expenses of $7.8 million for the quarter were 8% lower than in 2008 but slightly higher on a constant currency basis.
Chief Executive Officer Comments:
Berges commented, “The company’s constant dollar revenue decline of 5.5% was disappointing, but the company are pleased that the organizational response and solid execution led to record earnings this quarter. Operational improvements at both existing and new facilities combined with good cost control helped boost margins 150 basis points at the adjusted operating income level and 180 basis points at the gross margin level despite lower sales in the company’s core commercial aerospace market. The decline in commercial aerospace is related to the 787 program delay, the rapidly declining business and regional aircraft market, the final effects of the Boeing strike, and customer inventory initiatives as the company enter a more cautious period in the aerospace market. However the company’s two other core markets – space & defense and wind energy both delivered solid sales growth this quarter which helped the company’s results.”
Berges continued, “As the clouds loomed on the horizon last fall, Hexcel shifted from growth mode and began positioning for a potential slowdown focusing on all elements of cost. Also helping the quarter was improved mix as the investments in Hexcel carbon fiber are finally beginning to pay dividends. Externally, exchange rates and energy related commodity costs which hurt us for much of in 2008, swung back in the company’s favor in the quarter. With the nature of global markets today, the company don’t assume these external tailwinds to be anything other than temporary, but they combined with a lot of hard operations work to deliver a record operating income quarter.”
As for the future, Berges said, “The company’s previous planning assumption for flat to modest growth seems too optimistic and the company are redoubling the company’s efforts to manage costs. Based on the performance demonstrated in the first quarter, the company now believe the company can still achieve a modest adjusted EPS year over year gain if the company’s revenues for the year decline 5% on a constant currency basis. Unfortunately, the company’s second half sales trend is still too difficult to project due to lack of 2010 visibility from the company’s major customers. However, a lull in the company’s five year average sales growth rate of 12% provides us the opportunity to concentrate the company’s resources on factory efficiencies and yields to both reduce cost and capital requirements going forward.”
