HXL

Business Context and Reporting Period

Company: Hexcel Corporation
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Quarter and nine months ended September 30, 2002
Business Overview: Hexcel manufactures advanced composite materials and structures for aerospace, industrial, and electronics markets. The company operates three segments: Reinforcements, Composites, and Structures.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Net sales decreased 16.5% in Q3 2002 and 16.4% for the nine months ended Sept 30, 2002, compared to the prior year. This was primarily driven by a 31.1% drop in commercial aerospace sales due to reduced aircraft build rates by Boeing and Airbus, and a 30.9% decline in electronics sales due to industry downturns.
• Profitability Improvement: Despite lower sales, Operating Income increased 109% in Q3 2002 ($15.1M vs $7.2M) and 16% for the nine-month period ($47.9M vs $41.2M). This improvement was driven by significant cost reductions from restructuring programs, lower SG&A expenses, and the cessation of goodwill amortization following the adoption of FAS 142.
• Non-Recurring Items: The nine-month 2002 results included a $9.8 million litigation gain from a settlement with Hercules, Inc. and a $4.0 million non-cash write-down of an investment in an Asian electronics joint venture.
• Debt Reduction: Net debt decreased by $38.3 million year-over-year, aided by litigation proceeds, asset sales, and working capital management, despite significant cash outflows for restructuring payments and interest.

Guidance, Outlook, and Risks

• Commercial Aerospace Outlook: Management anticipates commercial aerospace revenues will decline approximately 25-30% in 2002 compared to 2001. For 2003, sales are projected to be 0% to 10% lower than 2002 levels, reflecting continued reduced build rates.
• Liquidity and Debt Maturity: The company faces a significant liquidity challenge with $46.9 million of 7% Convertible Subordinated Notes due for redemption on August 1, 2003. Management is pursuing alternatives, including equity issuance, to finance this maturity.
• Covenant Compliance: The company is currently in compliance with its Senior Credit Facility covenants, which were relaxed in January 2002. However, absent a refinancing or further amendment, the company expects to need a relaxation of quarterly financial covenants by the end of Q1 2003 to accommodate projected performance.
• Restructuring: The company has reduced its workforce by over 17% to 4,450 employees. Approximately $15.4 million in accrued restructuring liabilities remain to be paid in cash.
• Market Risks: Key risks include further declines in the macroeconomic environment, continued downturns in aerospace and electronics markets, foreign currency fluctuations (particularly the Euro and British Pound), and the ability to refinance debt on acceptable terms.

Investor Verification Checklist

• Debt Refinancing: Verify the status of plans to refinance the $46.9 million convertible notes due August 2003 and the likelihood of obtaining necessary bank consents.
• Covenant Amendments: Confirm the company's ability to secure a further amendment to its Senior Credit Facility covenants before Q1 2003 ends.
• Aerospace Build Rates: Monitor Boeing and Airbus delivery forecasts for 2003 to validate the company's revenue guidance.
• Restructuring Costs: Track the actual cash outflow for the remaining $15.4 million in restructuring liabilities against projected timelines.
• Joint Venture Exposure: Assess the ongoing impact of the Asian electronics joint venture write-down and the performance of other joint ventures in China and Malaysia.