HXL

Business Context and Reporting Period

This Form 10-Q covers the quarter ended March 31, 1996 for Hexcel Corporation. The period is defined by a major strategic transformation: the acquisition of the worldwide composites division of Ciba-Geigy Limited (the "Acquired Business") on February 29, 1996. This transaction significantly expanded Hexcel's operations in aerospace, recreation, and general industrial markets. The financial statements reflect the Acquired Business's results for the month of March 1996 only. Additionally, the company announced a proposed acquisition of the Composite Products Division of Hercules Incorporated on April 16, 1996.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 48% to $126.4 million, driven primarily by the inclusion of the Acquired Business (approx. $27.6 million in sales for March) and improved sales in the commercial aerospace market.
• Profitability Turnaround: The company returned to profitability with $1.8 million in net income, reversing a $2.5 million loss in the prior year. This was aided by a 3.8 percentage point improvement in gross margin.
• Acquisition Costs: The quarter included $5.2 million in "business acquisition and consolidation expenses," largely due to stock option compensation ($3.6 million) and integration costs.
• Debt Structure: Total debt increased significantly to $145.1 million. This includes a new $175 million Senior Secured Credit Facility (with $69.8 million outstanding) and an obligation to issue Senior Subordinated Notes to Ciba (valued at $26.2 million).
• Share Count: Weighted average shares outstanding increased from 8.8 million in Q1 1995 to 24.7 million in Q1 1996, reflecting a 1995 rights offering and the issuance of 18 million shares to Ciba for the acquisition.

Guidance, Outlook, and Risks

• Consolidation Program: Management announced a three-year consolidation program to integrate the Acquired Business. This will result in a $32 million charge in Q2 1996, with total estimated expenses of $49 million. The program aims to reduce the workforce by approximately 8% and eliminate redundant capacity.
• Proposed Acquisition: Hexcel agreed to acquire Hercules' Composite Products Division for approximately $135 million in cash, expected to close in Q2 1996. A new $300 million credit facility has been committed to fund this deal.
• Capital Expenditures: CapEx is expected to increase significantly in the remainder of 1996 following the acquisition and consolidation activities.
• Risks: Key risks include the successful assimilation of the Acquired Business and the Hercules division, regulatory approval for the Hercules deal, and the ability to comply with financial covenants under the new credit facilities. The company also faces risks related to the aerospace industry's qualification requirements for manufacturing facilities.

Investor Verification Checklist

• Debt Covenants: Verify compliance with the financial covenants of the new $175 million Senior Secured Credit Facility and the upcoming $300 million facility.
• Consolidation Charges: Monitor the Q2 1996 earnings report for the anticipated $32 million charge related to the business consolidation program.
• Hercules Acquisition: Confirm the closing of the $135 million Hercules acquisition and the associated regulatory clearances.
• Working Capital: Review the trend in accounts receivable, which increased significantly ($66 million jump) due to strong sales and the acquisition, impacting operating cash flow.
• Subordinated Notes: Track the final valuation of the Senior Subordinated Notes owed to Ciba, which is subject to post-closing adjustments and pending asset transfers.