HXL

Business Context and Reporting Period

This Form 10-Q covers Hexcel Corporation for the quarter and year-to-date periods ended June 30, 2000. Hexcel is a global manufacturer of advanced composite materials and engineered products serving aerospace, defense, electronics, and industrial markets. The reporting period is significantly impacted by the strategic sale of the Bellingham aircraft interiors business on April 26, 2000.

Key Financial Metrics

Material Changes vs. Prior Period

• Asset Disposition: The sale of the Bellingham aircraft interiors business generated $113.3M in cash proceeds and a $68.3M pre-tax gain ($44M after-tax). This transaction is the primary driver of the significant increase in Net Income and EPS compared to 1999.
• Debt Reduction: Net proceeds from the Bellingham sale were used to repay $111.6M of term debt under the Senior Credit Facility, reducing total debt by approximately $94M since December 31, 1999.
• Revenue Decline: Reported net sales decreased 7% in Q2 and 9% YTD compared to 1999. Pro forma sales (excluding Bellingham) declined 3% in Q2 and 9% YTD, driven by reduced commercial aerospace build rates (specifically Boeing) and the conclusion of certain defense contracts.
• Working Capital: Operating cash flow was significantly lower in 2000 ($4.2M YTD vs $48.1M in 1999) due to a $20.9M increase in working capital, primarily driven by higher accounts receivable.
• Business Consolidation Reversal: Due to increased demand for lightweight electronic fabrics, Hexcel reversed $3.4M of previously accrued business consolidation expenses related to facility closures that were no longer proceeding.

Guidance, Outlook, and Risks

• Outlook: Management anticipates Q4 2000 EBITDA will be comparable to Q2 2000 results. Pro forma EBITDA for full-year 2000 is expected to be comparable to 1999 pro forma levels.
• Market Trends: Commercial aerospace deliveries (Boeing/Airbus) are expected to exceed 800 units in 2000. Growth is anticipated in electronics, wind energy, and automotive sectors, though aerospace supply chain cost pressures remain a risk.
• Capital Expenditures: Expected to range between $40M and $45M for 2000, an increase from 1999, driven by the purchase of additional looms to expand capacity for lightweight electronic fabrics.
• Liquidity: The Senior Credit Facility has approximately $187M in unused capacity as of June 30, 2000. The facility expires in 2004 (with a portion due in 2005).
• Risks: Key risks include fluctuations in aerospace delivery rates, dependence on major customers (Boeing/Airbus), foreign currency exchange rates, and the ability to manage manufacturing capacity constraints.

Investor Verification Checklist

• Gain Sustainability: Verify the one-time nature of the $68.3M gain on the Bellingham sale and its impact on reported Net Income vs. Adjusted Net Income ($6.5M).
• Working Capital Trends: Investigate the $20.9M increase in working capital usage and the specific reasons for extended customer payment terms.
• Aerospace Exposure: Confirm the impact of Boeing's reduced build rates on future revenue, noting that ~38% of 1999 sales were tied to Boeing, Airbus, and subcontractors.
• Debt Covenants: Review the amended Senior Credit Facility terms, specifically the increased interest rate margins and the requirement to provide additional security interests by September 30, 2000.
• Consolidation Savings: Assess the revised timeline and expected annual savings ($16M) from the amended September 1999 business consolidation program.