HXL

Business Context and Reporting Period

This Form 10-Q covers the quarter ended March 30, 1997, for Hexcel Corporation, a manufacturer of advanced composite materials. The reporting period reflects the full integration of the "Acquired Ciba Business" and the "Acquired Hercules Business," which were purchased in 1996. The company is currently executing a three-year business consolidation program to integrate these acquisitions and eliminate excess capacity.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 69% year-over-year, driven primarily by the inclusion of the Ciba and Hercules acquisitions. On a pro forma basis (assuming acquisitions occurred Jan 1, 1996), sales grew 7.6%, attributed to higher commercial aerospace demand and increased aircraft production rates.
• Profitability: Operating income more than doubled to $16.4 million. Gross margin percentage improved slightly to 21.9% due to higher volume and productivity gains from consolidation, offsetting a 4% negative impact from currency translation.
• Cash Flow: Operating cash flow turned negative at $(26.3) million, compared to a positive $0.1 million in Q1 1996. This was caused by a significant increase in working capital (accounts receivable and inventory) required to support higher sales volumes.
• Debt Levels: Total indebtedness increased to $325.4 million to finance acquisitions and operations. The Revolving Credit Facility had $128.8 million in outstanding borrowings and letters of credit as of March 30, 1997.

Guidance, Outlook, and Risks

• Acquisition Activity: On April 21, 1997, Hexcel announced an agreement to acquire selected assets of Fiberite, Inc. for approximately $300 million. A new bank credit facility has been committed to fund this deal and refinance existing debt.
• Consolidation Program: The company expects to incur approximately $13 million of the remaining $58 million total consolidation cost in 1997. The program aims to integrate operations and is expected to conclude by the end of 1998.
• Capacity Constraints: Management notes that carbon fiber availability is currently insufficient to meet worldwide demand. While contracts have been secured for 1997 requirements, capacity expansion is scheduled for the second half of 1997.
• Outlook: Management expects gross margins to show modest improvement and SG&A expenses to remain at approximately 13% of sales for the remainder of 1997. Capital expenditures for the full year are projected to approximate $60 million.
• Risks: Key risks include the successful assimilation of acquired businesses, compliance with aerospace qualification requirements for consolidated facilities, and potential changes in customer demand or raw material availability.

Investor Verification Checklist

• Fiberite Acquisition: Verify the closing status and regulatory approval of the proposed $300 million Fiberite acquisition announced in April 1997.
• Liquidity Position: Monitor the cash balance, which dropped to $0.4 million, and the reliance on the Revolving Credit Facility ($128.8 million utilized) to fund operations and the new acquisition.
• Consolidation Costs: Track the actual execution of the $58 million consolidation program against the estimated $13 million remaining expense for 1997.
• Carbon Fiber Supply: Assess the impact of raw material shortages on the ability to fulfill the $449.6 million order backlog.
• Working Capital Trends: Review future quarters for the sustainability of the working capital build-up that drove negative operating cash flow in Q1 1997.