Business Context and Reporting Period
Company: Hexcel Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2003
Business Overview: Hexcel manufactures composite materials and structures for aerospace, industrial, and electronics markets. The reporting period covers the third quarter and the first nine months of fiscal year 2003.
Key Financial Metrics
| Metric (in millions) | Q3 2003 | Q3 2002 | 9 Months 2003 | 9 Months 2002 |
|---|---|---|---|---|
| Net Sales | $212.8 | $201.0 | $675.5 | $644.3 |
| Gross Margin | $39.6 (18.6%) | $37.3 (18.6%) | $133.2 (19.7%) | $121.7 (18.9%) |
| Operating Income | $11.1 (5.2%) | $15.1 (7.5%) | $47.1 (7.0%) | $47.9 (7.4%) |
| Net Loss | $(3.0) | $(3.6) | $(1.4) | $(7.5) |
| Net Loss Available to Common Shareholders | $(6.1) | $(3.6) | $(8.0) | $(7.5) |
| Diluted EPS | $(0.16) | $(0.09) | $(0.21) | $(0.19) |
| Cash and Cash Equivalents | $28.9 | $8.2 (Dec 31, 2002) | $28.9 | $16.2 (Sep 30, 2002) |
| Operating Cash Flow (9 Months) | $27.2 | $35.4 | $27.2 | $35.4 |
| Total Debt (Notes & Leases) | $487.3 | $621.7 (Dec 31, 2002) | $487.3 | $621.7 (Dec 31, 2002) |
Note: Net loss available to common shareholders includes "Deemed preferred dividends and accretion" of $3.1 million for Q3 and $6.6 million for the nine months ended Sep 30, 2003, related to mandatorily redeemable convertible preferred stock issued in March 2003.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 5.9% in Q3 2003 and 4.8% for the nine-month period compared to 2002. A significant portion of this increase is attributed to favorable foreign currency exchange rates (strengthening Euro and British Pound). On a constant currency basis, sales growth was more modest.
- Operating Income Decline: Despite higher gross margins, operating income decreased in Q3 2003 ($11.1M vs $15.1M) due to increased Selling, General, and Administrative (SG&A) expenses, Research and Technology (R&T) spending, and business consolidation costs.
- Capital Structure Refinancing: In March 2003, the company completed a major refinancing. This included issuing $125.0 million in mandatorily redeemable convertible preferred stock and $125.0 million in 9 7/8% senior secured notes. Proceeds were used to redeem $46.9 million of 7% convertible subordinated notes and reduce senior credit facility debt. Consequently, total debt decreased significantly from $621.7 million (Dec 31, 2002) to $487.3 million (Sep 30, 2003).
- Asset Sales: The company generated $23.0 million in cash from the sale of its remaining interest in the Asahi-Schwebel joint venture and $5.7 million from the sale of Structures business assets.
Guidance, Outlook, and Risks
- Market Outlook:
- Commercial Aerospace: Build rates appear to have leveled off after a sharp downturn. Recovery depends on aircraft order rates and mix (twin-aisle vs. narrow-body).
- Space & Defense: Strong growth (24% increase in Q3) driven by higher military aircraft production and development programs.
- Industrial: Mixed results; growth in soft body armor and recreational composites offset by declines in wind energy (due to tax credit delays) and other applications.
- Electronics: Remains depressed, consistent with trends since 2001.
- Liquidity: The company has $28.9 million in cash and $49.8 million in undrawn availability under its new Senior Secured Credit Facility. Management believes it has adequate liquidity to finance operations beyond December 31, 2003.
- Risks and Contingencies:
- Currency Risk: Significant exposure to Euro and British Pound fluctuations, partially hedged with forward contracts.
- Customer Concentration: Reliance on major aerospace customers (Boeing, Airbus) and government defense budgets.
- Joint Ventures: Ongoing losses in Asian joint ventures (BHA Aero, Asian Composites) as they ramp up production.
- Tax: U.S. net operating loss carryforwards are subject to limitations under IRC Section 382 due to the ownership change from the preferred stock issuance.
Investor Verification Checklist
- Refinancing Terms: Verify the specific covenants and interest rates of the new $115M credit facility and $125M senior secured notes issued in March 2003.
- Preferred Stock Impact: Confirm the treatment of "Deemed preferred dividends and accretion" ($6.6M for 9 months) and its effect on net income available to common shareholders.
- Constant Currency Sales: Analyze organic sales growth by stripping out the favorable foreign currency impact (approx. $6.7M in Q3 and $30.3M for 9 months).
- Joint Venture Performance: Monitor the ramp-up status and loss trajectory of the BHA Aero (China) and Asian Composites (Malaysia) joint ventures.
- Restructuring Costs: Track the remaining liability ($5.9M) and future cash expenditures for the November 2001 and September 1999 restructuring programs.