Business Context and Reporting Period
Company: Hexcel Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 1999
Business Overview: Hexcel manufactures advanced composite materials and reinforcement fabrics for commercial aerospace, space/defense, electronics, and industrial markets. The reporting period includes the integration of the Acquired Clark-Schwebel Business (acquired September 1998), which added fiberglass fabric capabilities for electronics and specialty applications.
Key Financial Metrics
| Metric | Q2 1999 | Q2 1998 | YTD 1999 | YTD 1998 |
|---|---|---|---|---|
| Net Sales | $292.7 million | $273.5 million | $608.8 million | $530.3 million |
| Gross Margin | $66.3 million (22.6%) | $71.2 million (26.0%) | $137.0 million (22.5%) | $137.3 million (25.9%) |
| Operating Income | $24.9 million | $38.2 million | $52.0 million | $71.9 million |
| Net Income | $4.3 million | $20.0 million | $9.5 million | $37.0 million |
| Diluted EPS | $0.12 | $0.46 | $0.26 | $0.86 |
| Adjusted EBITDA | $42.0 million | $48.0 million | $87.6 million | $91.8 million |
| Cash & Equivalents | $5.7 million | $7.5 million (Dec '98) | N/A | |
| Total Debt | $838.2 million | $864.9 million (Dec '98) | N/A |
Note: Q2 1998 figures are reported as actuals. Pro forma figures (including Clark-Schwebel acquisition) show Q2 1998 sales of $324.8 million and Net Income of $20.1 million.
Material Changes vs. Prior Period
- Revenue Decline vs. Pro Forma: While reported sales increased year-over-year due to the Clark-Schwebel acquisition, sales decreased 10% compared to pro forma 1998 results. This was driven by reduced commercial aerospace volume (Boeing supply chain adjustments) and lower pricing in the electronics market due to Asian competition.
- Margin Compression: Gross margin percentage dropped from 26.0% (Q2 1998) to 22.6% (Q2 1999). Factors include lower sales volume, price reductions in aerospace and electronics, and weaker carbon fiber sales mix.
- Increased Interest Expense: Interest expense surged to $18.4 million in Q2 1999 from $6.7 million in Q2 1998, primarily due to debt incurred to finance the Clark-Schwebel acquisition and the issuance of $240 million in Senior Subordinated Notes in January 1999.
- Consolidation Expenses: The company recorded $1.4 million in Business Acquisition and Consolidation (BA&C) expenses in Q2 1999, related to facility closures (Cleveland, GA) and workforce reductions.
Guidance, Outlook, and Risks
Management Commentary & Guidance
- Full Year 1999 Outlook: Management expects Adjusted diluted earnings per share for the full year to be in the range of $0.60 to $0.70.
- Capital Expenditures: Anticipated 1999 capital expenditures are $40–$45 million, a significant reduction from the pro forma 1998 level of $70 million, reflecting a commitment to debt reduction.
- Cost Initiatives: The company is pursuing "Lean Enterprise" and global procurement initiatives to offset margin pressure. Estimated annual savings from recent consolidation actions are approximately $15 million.
Risks and Contingencies
- CS-Interglas Investment: Hexcel holds a 43.6% stake in CS-Interglas with an option to increase to 84%. Management intends to let this option expire as the strike price exceeds fair market value. The investment is currently under evaluation for impairment under SFAS 121.
- Year 2000 Compliance: Estimated total costs to address Y2K issues are $4.6 million. While 90% of repairs are complete, risks remain regarding supplier and customer readiness, which could disrupt operations.
- Market Volatility: Significant exposure to Boeing and Airbus production rates. Anticipated decline in aircraft deliveries in 2000 is already impacting procurement cycles.
Investor Verification Checklist
- Debt Servicing Capacity: Verify the sustainability of operations given the high interest expense ($37.5 million YTD) relative to operating income ($52.0 million YTD).
- Impairment Charges: Monitor the outcome of the SFAS 121 evaluation for the CS-Interglas investment, which could result in significant non-cash charges.
- Consolidation Savings: Confirm that the projected $15 million in annual savings from BA&C programs materializes to offset margin erosion.
- Boeing/Airbus Orders: Track commercial aerospace backlog trends, as the current backlog ($307.1 million) has decreased from year-end 1998 levels ($397.9 million).
- Year 2000 Execution: Assess the status of supplier and customer Y2K readiness, as Hexcel's operations depend on their compliance.