Business Context and Reporting Period
Company: Hexcel Corporation
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Quarter and Year-to-Date ended September 30, 1999
Business Overview: Hexcel manufactures advanced composite materials and engineered products for aerospace, electronics, and industrial markets. The period includes the integration of the Acquired Clark-Schwebel Business (acquired Sept 1998) and the announcement of a new Business Acquisition and Consolidation (BA&C) program in September 1999.
Key Financial Metrics
| Metric (in thousands) | Q3 1999 | Q3 1998 | YTD 1999 | YTD 1998 |
|---|---|---|---|---|
| Net Sales | $274,055 | $255,303 | $882,879 | $785,581 |
| Gross Margin | $51,473 (18.8%) | $61,847 (24.2%) | $188,503 (21.4%) | $199,164 (25.4%) |
| Operating Income | $2,707 | $27,563 | $54,737 | $99,455 |
| Net Income (Loss) | $(30,076) | $11,498 | $(20,588) | $48,546 |
| Diluted EPS | $(0.82) | $0.29 | $(0.56) | $1.15 |
| Adjusted EBITDA | $32,000 | $45,600 | $119,600 | $162,400 (Pro Forma) |
| Cash from Operations (YTD) | $89,135 | |||
| Total Debt (Net of Cash) | $804,300 (as of Sept 30, 1999) |
Material Changes vs. Prior Period
- Revenue: Q3 1999 sales increased 7.3% year-over-year to $274.1 million, driven by the inclusion of the Clark-Schwebel acquisition. However, on a pro forma basis (excluding acquisition impact), sales declined due to reduced commercial aerospace demand and lower carbon fiber volumes.
- Profitability: Net loss of $30.1 million in Q3 1999 compared to net income of $11.5 million in Q3 1998. This deterioration was primarily caused by a $20.0 million non-cash write-down of an investment in an affiliated company (CSI) and $13.6 million in BA&C expenses.
- Margins: Gross margin percentage contracted from 24.2% in Q3 1998 to 18.8% in Q3 1999. Drivers included unabsorbed fixed costs in carbon fiber production, price reductions in aerospace and electronics markets, and lower sales volumes.
- Debt: Total debt decreased by $52.8 million year-to-date. The company generated $28.2 million in free cash flow during the quarter.
Guidance, Outlook, and Risks
Management Commentary
- Market Conditions: Demand in commercial aerospace is softening due to Boeing's planned reduction in aircraft deliveries for 2000. Electronics markets face price pressure from Asian competition, though lightweight fabric demand remains strong.
- Consolidation Program: A new BA&C program announced in September 1999 targets the elimination of ~400 positions and 250,000 sq. ft. of floor space. Total expected costs are $30 million, with anticipated annualized savings exceeding $24 million by 2002.
- Investment Write-down: The $20 million charge related to CS-Interglas AG (CSI) resulted from the decision not to exercise a fixed-price option to increase equity ownership, citing a decline in the investment's fair market value.
Risks and Contingencies
- Covenant Compliance: The company is currently compliant with financial covenants under its Senior Credit Facility. However, management warns that if current Adjusted EBITDA trends continue, an amendment or waiver may be required early in 2000.
- Customer Concentration: Approximately 44% of pro forma 1998 sales were to Boeing, Airbus, and related subcontractors. Reduced build rates by these customers directly impact Hexcel's backlog and revenue.
- Year 2000: The company estimates total Y2K remediation costs at $4.6 million, with $3.5 million already incurred. Risks remain regarding supplier and customer readiness.
Investor Verification Checklist
- Covenant Status: Verify the company's ability to meet Senior Credit Facility covenants in 2000 given the decline in Adjusted EBITDA.
- Carbon Fiber Utilization: Assess the timeline for recovering carbon fiber facility utilization rates, currently below 60%.
- BA&C Execution: Monitor the realization of the projected $24 million in annualized savings from the September 1999 consolidation program.
- Joint Venture Exposure: Review the financial health of remaining joint ventures (CSI, Asahi-Schwebel) following the CSI write-down.
- Backlog Trends: Track the commercial aerospace backlog, which declined to $256.3 million from $397.9 million at year-end 1998.