HXL

Business Context and Reporting Period

Company: Hexcel Corporation
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Quarter and Year-to-Date ended June 30, 1997
Business Overview: Hexcel manufactures advanced composite materials for commercial aerospace, space, defense, recreation, and general industrial markets. The period reflects the ongoing integration of the Acquired Ciba Business and the Acquired Hercules Business, alongside a multi-year business consolidation program.

Key Financial Metrics

Liquidity & Cash Flow: Net cash used by operating activities was $30.8M for the YTD period, driven by a $68.6M increase in working capital (receivables and inventory). Net cash provided by financing activities was $38.9M, primarily from borrowings under the Revolving Credit Facility. Capital expenditures totaled $18.1M YTD.

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 45% QoQ and 55% YTD compared to 1996. This is largely due to the inclusion of the Acquired Hercules Business and improved sales volumes in commercial aerospace (now >60% of sales).
• Profitability Turnaround: The company moved from a net loss in Q2 1996 to a net income of $15.1M in Q2 1997. This reversal is attributed to higher gross margins, improved operating leverage, and significantly lower business acquisition and consolidation expenses ($2.8M in Q2 1997 vs. $29.2M in Q2 1996).
• Working Capital: Accounts receivable increased to $196.4M and inventories to $153.1M, reflecting higher production rates and sales volumes.
• Debt Levels: Total debt increased to $341.3M from $311.0M at year-end 1996, reflecting financing for acquisitions and working capital needs.

Guidance, Outlook, and Risks

Management Commentary & Outlook

• Consolidation Program: The business consolidation program is estimated to cost $58.0M total. Approximately $48.1M has been incurred to date, with the remaining ~$10M expected in the latter half of 1997. Completion is expected by 1998.
• Capacity: Hexcel completed the first phase of its carbon fiber capacity expansion. Management believes current capacity and contracts are sufficient for 1997 aerospace requirements, though global carbon fiber availability remains tight.
• Proposed Acquisition: On April 21, 1997, Hexcel agreed to acquire selected assets of Fiberite, Inc. for approximately $300M in cash. Closing is expected in Q3 1997, subject to regulatory approval. A new bank credit facility has been committed to fund this transaction.
• Tax Position: The company maintains a deferred tax asset valuation allowance of ~$60M. Reversal of this allowance depends on generating sufficient future taxable income in the U.S. and Belgium.

Risks and Contingencies

• Carbon Fiber Supply: Insufficient global supply of carbon fiber could limit ability to meet customer demand if growth exceeds expectations.
• Consolidation Execution: Risks include failure to achieve employee reductions on time, inability to requalify products at new facilities, and changes in business conditions affecting the $58M cost estimate.
• Acquisition Completion: The Fiberite acquisition is subject to customary closing conditions and regulatory approvals.
• Currency: A strengthening U.S. dollar negatively impacted European revenues by nearly 4% in Q2 1997.

Investor Verification Checklist

• Fiberite Acquisition Status: Verify the closing of the $300M Fiberite acquisition and the terms of the new credit facility committed to fund it.
• Consolidation Cost Accuracy: Monitor the remaining $10M in estimated consolidation expenses and the timeline for facility closures and requalifications.
• Working Capital Trends: Assess if the $68.6M increase in working capital is sustainable or if it signals inventory buildup or collection issues.
• Deferred Tax Valuation: Track the company's ability to generate taxable income to reverse the $60M deferred tax asset valuation allowance.
• Carbon Fiber Capacity: Confirm the timeline and success of the second phase of carbon fiber capacity expansion to meet projected demand.