HXL

Business Context and Reporting Period

Company: Hexcel Corporation
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 1997
Industry: Advanced Structural Materials (Carbon fibers, reinforcement fabrics, composite materials, and engineered products).
Key Markets: Commercial aerospace (64% of sales), Space and defense (9%), Recreation (7%), and General industrial (20%).

Hexcel is a vertically integrated manufacturer serving commercial aerospace, space, defense, recreation, and industrial markets. The 1997 fiscal year marked a significant turnaround, driven by the integration of major 1996 acquisitions (Ciba-Geigy and Hercules) and a surge in commercial aircraft build rates.

Key Financial Metrics (Year Ended Dec 31, 1997)

Debt & Liquidity: As of December 31, 1997, outstanding borrowings under the Revolving Credit Facility were $158.3 million. The company held $9.0 million in cash and cash equivalents. On March 5, 1998, the credit facility was amended to increase capacity to $355 million and extend the maturity to 2003.

Material Changes vs. Prior Period

• Revenue Growth: Sales increased 34.7% year-over-year, driven primarily by a 36.7% increase in commercial aerospace sales due to higher aircraft build rates (Boeing and Airbus deliveries rose 46% in 1997).
• Profitability Turnaround: The company moved from a net loss of $19.2 million in 1996 to a net income of $73.6 million in 1997. This was aided by a $59.9 million reversal of valuation allowance reserves against deferred tax assets.
• Acquisition Costs: Business acquisition and consolidation expenses decreased to $25.3 million in 1997 from $42.4 million in 1996. This reduction significantly boosted operating income.
• Customer Concentration: Sales to Boeing and related subcontractors increased to 36% of total sales in 1997 (from 22% in 1996). Airbus accounted for approximately 10% of sales.
• Backlog: Aerospace backlog increased 29% to $520.0 million as of December 31, 1997, reflecting strong order intake.

Guidance, Outlook, and Risks

• Outlook: Management expects sales to exceed $1 billion in 1998. The company anticipates continued growth in commercial aerospace due to increased utilization of composites on new aircraft generations.
• Consolidation Program: The business consolidation program, aimed at integrating acquisitions and eliminating excess capacity, is expected to be completed by the end of 1998. Remaining cash expenditures are estimated at $12 million. The program targets annual cost savings of $32 million starting in 1999.
• Joint Ventures: In early 1998, Hexcel agreed to form two joint ventures in China and Malaysia with Boeing to manufacture composite parts, with a total estimated commitment of $31 million through 2000.
• Risks:
  • Customer Concentration: Loss of Boeing or Airbus business could materially adversely affect sales.
  • Raw Materials: Global demand for carbon fibers exceeds supply; while Hexcel expanded capacity by 50% in 1997, further demand growth could strain supply.
  • Asian Economic Conditions: Delays or cancellations of aircraft orders from Asian airlines could negatively impact sales.
  • Legal/Environmental: Ongoing litigation regarding aluminum honeycomb delamination in rail cars and environmental remediation liabilities (e.g., Lodi, NJ site).

Investor Verification Checklist

• Customer Dependency: Verify the stability of Boeing and Airbus order books, as they represent 46% of total sales.
• Carbon Fiber Supply: Confirm the sufficiency of raw material supply chains given the reported global shortage and Hexcel's reliance on external suppliers for certain fibers.
• Consolidation Savings: Monitor the realization of the targeted $32 million in annual cost savings from the business consolidation program.
• Debt Covenants: Review the terms of the amended Revolving Credit Facility (March 1998) regarding dividend restrictions and financial covenants.
• Joint Venture Execution: Track the progress and regulatory approvals for the new China and Malaysia joint ventures.