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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM 10-Q
/X/- --------------------------------------------------------------------------------
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 1999March 31, 2000
or
/ /- --------------------------------------------------------------------------------
Transition Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the transition period from to
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Commission File Number 1-8472
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HEXCEL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 94-1109521
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
Two Stamford Plaza
281 Tresser Boulevard
Stamford, Connecticut 06901-3238
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)
Registrant's telephone number, including area code: (203) 969-0666
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
---- ----
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
of reorganization confirmed by a US Bankruptcy Court.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Class Outstanding at August 11, 1999CLASS OUTSTANDING AT MAY 10, 2000
----- ---------------------------------------------------------
COMMON STOCK 36,497,509
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- --------------------------------------------------------------------------------36,650,246
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HEXCEL CORPORATION AND SUBSIDIARIES
INDEX
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements
o Condensed Consolidated Balance Sheets--
March 31, 2000 and December 31, 1999 2
o Condensed Consolidated Statements of
Operations -- The Quarters Ended
March 31, 2000 and 1999 3
o Condensed Consolidated Statements of
Cash Flows -- The Quarters Ended
March 31, 2000 and 1999 4
o Notes to Condensed Consolidated
Financial Statements 5
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 19
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K 19
SIGNATURE 20
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements
- Condensed Consolidated Balance Sheets --
June 30, 1999 and December 31, 1998 2
- Condensed Consolidated Statements of
Operations -- The Quarter and Year-to-Date Periods
Ended June 30, 1999 and 1998 3
- Condensed Consolidated Statements of
Cash Flows -- The Year-to-Date Periods
Ended June 30, 1999 and 1998 4
- Notes to Condensed Consolidated
Financial Statements 5
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 14
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 27
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders 28
ITEM 6. Exhibits and Reports on Form 8-K 28
SIGNATURE 29
1
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
HEXCEL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
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UNAUDITED
------------------------------------
JUNE 30,
MARCH 31, DECEMBER 31,
(IN THOUSANDS,MILLIONS, EXCEPT PER SHARE DATA) 2000 1999 1998
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ASSETS
Current assets:
Cash and cash equivalents $ 5,6924.8 $ 7,5040.2
Accounts receivable 191,522 188,368177.1 158.6
Inventories 200,978 213,199164.0 153.7
Prepaid expenses and other assets 5,848 10,1113.7 5.1
Deferred tax asset 21,995 19,84410.1 10.2
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Total current assets 426,035 439,026359.7 327.8
Property, plant and equipment 618,035 628,533612.2 614.5
Less accumulated depreciation (207,917) (195,960)(230.5) (222.4)
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Net property, plant and equipment 410,118 432,573381.7 392.1
Goodwill and other purchased intangibles, net of accumulated
amortization of $18,228$28.2 in 2000 and $24.9 in 1999 and $11,742 in 1998 417,786 425,405
Investment407.6 411.2
Investments in affiliated companies and other assets 115,824 107,157141.0 130.8
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Total assets $ 1,369,7631,290.0 $ 1,404,161
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current maturities of capital lease obligations $ 29,53026.4 $ 26,86734.3
Accounts payable 85,777 81,86988.7 80.3
Accrued liabilities 102,872 110,70894.8 95.9
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Total current liabilities 218,179 219,444209.9 210.5
Long-term notes payable and capital lease obligations 784,779 802,376738.3 712.5
Indebtedness to a related party 23,919 35,67524.1 24.1
Other non-current liabilities 42,698 44,26747.4 44.7
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Total liabilities 1,069,575 1,101,7621,019.7 991.8
Stockholders' equity:
Preferred stock, no par value, 20,00020.0 shares authorized,
no shares issued or outstanding in 2000 and 1999 and 1998 --- ---- -
Common stock, $0.01 par value, 100,000100.0 shares authorized, shares
issued and outstanding of 37,32137.5 in 2000 and 37.4 in 1999 and 37,176 in 1998 373 3720.4 0.4
Additional paid-in capital 272,575 271,469274.2 273.6
Retained earnings 44,378 34,89814.2 11.6
Accumulated other comprehensive income (loss) (6,485) 6,313loss (7.8) (4.8)
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310,841 313,052281.0 280.8
Less - treasury stock, at cost, 8470.8 shares in 2000 and 1999 and 1998 (10,653) (10,653)(10.7) (10.7)
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Total stockholders' equity 300,188 302,399270.3 270.1
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Total liabilities and stockholders' equity $ 1,369,7631,290.0 $ 1,404,1611,261.9
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
2
HEXCEL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
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UNAUDITED
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QUARTER ENDED JUNE 30, YEAR-TO-DATE ENDED JUNE 30,MARCH 31,
(IN THOUSANDS,MILLIONS, EXCEPT PER SHARE DATA) 2000 1999
1998 1999 1998
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Net sales $ 292,654279.8 $ 273,537 $ 608,824 $ 530,278316.2
Cost of sales 226,395 202,316 471,794 392,961217.6 245.4
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Gross margin 66,259 71,221 137,030 137,31762.2 70.8
Selling, general and administrative expenses 33,737 27,182 68,075 54,35932.9 34.4
Research and technology expenses 6,292 5,883 12,747 11,0666.3 6.5
Business acquisition and consolidation expenses 1,369 --- 4,178 ---1.2 2.8
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Operating income 24,861 38,156 52,030 71,89221.8 27.1
Interest expense 18,421 6,744 37,527 13,71118.4 19.1
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Income before income taxes 6,440 31,412 14,503 58,1813.4 8.0
Provision for income taxes 2,261 11,434 5,100 21,1331.2 2.8
Equity in earningsincome of affiliated companies 101 --- 85 ---(0.4) -
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Net income $ 4,2802.6 $ 19,978 $ 9,488 $ 37,0485.2
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Net income per share:
Basic $ 0.120.07 $ 0.54 $ 0.26 $ 1.000.14
Diluted 0.12 0.46 0.26 0.860.07 0.14
Weighted average shares:
Basic 36,452 36,885 36,410 36,86736.6 36.4
Diluted 36,602 46,478 36,511 46,41936.8 36.5
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
3
HEXCEL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
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UNAUDITED
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YEAR-TO-DATE ENDED JUNE 30,
(IN THOUSANDS) 1999 1998
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QUARTER ENDED MARCH 31,
(IN MILLIONS) 2000 1999
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CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 9,4882.6 $ 37,0485.2
Reconciliation to net cash provided (used) by (used for) operations:
Depreciation and amortization 31,480 19,84815.0 15.6
Deferred income taxes (1,928) 7,276(4.5) (1.2)
Accrued business acquisition and consolidation expenses 4,178 ---1.2 2.8
Business acquisition and consolidation payments (6,636) (3,147)(2.0) (2.2)
Equity in earningsincome of affiliated companies (85) ---(0.4) -
Working capital changes and other 11,596 (38,207)(18.0) (2.9)
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Net cash provided by (used for) operating activities 48,093 22,818(6.1) 17.3
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CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (17,958) (27,391)
Advances to(4.4) (9.4)
Investments in affiliated companies --- (750)(3.4) -
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Net cash used byfor investing activities (17,958) (28,141)(7.8) (9.4)
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CASH FLOWS FROM FINANCING ACTIVITIES
Repayments ofProceeds from (repayments of) the senior credit facilities,facility, net (247,328) (1,304)26.5 (229.3)
Proceeds from (repayments of) long-term debt and capital lease obligations, net 224,782 2,439(7.9) 225.7
Debt issuance costs (9,515) (1,164)(0.9) (9.0)
Activity under stock plans 746 2,3720.1 0.2
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Net cash provided (used) by (used for) financing activities (31,315) 2,34317.8 (12.4)
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Effect of exchange rate changes on cash and cash equivalents (632) 9160.7 (0.5)
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Net decrease in cash and cash equivalents (1,812) (2,064)4.6 (5.0)
Cash and cash equivalents at beginning of year 7,504 9,0330.2 7.5
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Cash and cash equivalents at end of period $ 5,6924.8 $ 6,969
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2.5
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
4
HEXCEL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS,MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 1 -- BASIS OF ACCOUNTING
The accompanying condensed consolidated financial statements have been
prepared from the unaudited records of Hexcel Corporation and subsidiaries
("Hexcel" or the "Company") in accordance with generally accepted accounting
principles, and, in the opinion of management, include all adjustments necessary
to present fairly the balance sheet of the Company as of June 30, 1999,March 31, 2000, and the
results of operations for the quarter and year-to-date periods ended June 30,
1999 and 1998, and the cash flows for the year-to-date periodsquarters ended June 30,
1999March 31, 2000 and
1998.1999. The condensed consolidated balance sheet of the Company as of December 31,
19981999 was derived from the audited 19981999 consolidated balance sheet. Certain
information and footnote disclosures normally included in financial statements
have been omitted pursuant to rules and regulations of the Securities and
Exchange Commission. Certain prior periodquarter amounts in the condensed consolidated
financial statements and notes have been reclassified to conform to the 19992000 presentation.
These condensed consolidated financial statements should be read in conjunction
with the consolidated financial statements and notes thereto included in the
Company's 19981999 Annual Report on Form 10-K.
As discussed in Note 2, Hexcel acquired from Clark-Schwebel, Inc. and its
subsidiaries ("C-S") certain assets and assumed certain operating liabilities of
its industrial fabrics business (the "Acquired Clark-Schwebel Business") on
September 15, 1998. Accordingly, the condensed consolidated balance sheets,
statements of operations and cash flows include the financial position, results
of operations and cash flows of the Acquired Clark-Schwebel Business as of such
date and for such periods that the business was owned by the Company.
NOTE 2 -- BUSINESS ACQUISITION
On September 15, 1998, the Company acquired certain assets and assumed
certain operating liabilities from C-S. The Acquired Clark-Schwebel Business is
engaged in the manufacture and sale of high-quality fiberglass fabrics, which
are used to make printed circuit boards for electronic equipment such as
computers, cellular telephones, televisions and automobiles. The Acquired
Clark-Schwebel Business also produces high performance specialty products for
use in insulation, filtration, wall and facade claddings, soft body armor and
reinforcements for composite materials. At the date of acquisition, the Acquired
Clark-Schwebel Business operated four manufacturing facilities in the
southeastern U.S. and had approximately 1,300 full time employees.
As part of this acquisition, Hexcel also acquired C-S's equity ownership
interests in the following three joint ventures:
- - a 43.6% share in CS-Interglas AG ("CS-Interglas") headquartered in Germany,
together with a fixed-price option to increase this equity interest to
84.0%. The fixed-price option expires on December 31, 1999. Hexcel's
acquisition of the CS-Interglas equity interest and related option was
completed on December 23, 1998;
- - a 43.3% share in Asahi-Schwebel Co., Ltd. ("Asahi-Schwebel"), headquartered
in Japan, which in turn has its own joint venture with AlliedSignal Inc. in
Taiwan; and
- - a 50.0% share in Clark-Schwebel Tech-Fab Company ("CS Tech-Fab")
headquartered in the United States.
5
CS-Interglas and Asahi-Schwebel are fiberglass fabric producers serving
primarily the European and Asian electronics and telecommunications industries.
CS Tech-Fab manufactures non-woven materials for roofing, construction and other
specialty applications. The unconsolidated net sales in 1998 for these joint
ventures were in excess of $300,000.
The acquisition of the Acquired Clark-Schwebel Business was accounted for
under the purchase method of accounting and was completed pursuant to an Asset
Purchase Agreement dated July 25, 1998, as amended, by and among Hexcel,
Stamford CS Acquisition Corp., and C-S (the "Asset Purchase Agreement"). Under
the Asset Purchase Agreement, Hexcel acquired the net assets of the acquired
business, other than certain excluded assets and liabilities, in exchange for
approximately $473,000 in cash. As part of the acquisition, Hexcel entered into
a $50,000 lease for property, plant and equipment used in the acquired business
from an affiliate of C-S, pursuant to a long-term lease with purchase options.
PRO FORMA FINANCIAL INFORMATION
The pro forma net sales, net income and diluted net income per share of
Hexcel for the year-to-date period ended June 30, 1998, after giving effect to
the acquisition of the Acquired Clark-Schwebel Business as if it had occurred on
January 1, 1998, were:
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6/30/98
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Pro forma net sales $ 641,942
Pro forma net income 38,309
Pro forma diluted net income per share $ 0.89
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NOTE 3 -- INVENTORIES
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6/30/99 12/31/98
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3/31/00 12/31/99
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Raw materials $ 86,58773.4 $ 90,88155.5
Work in progress 76,288 77,76954.9 47.8
Finished goods 38,103 44,54935.7 50.4
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Total inventories $ 200,978164.0 $ 213,199153.7
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NOTE 4 -- INVESTMENT IN CS-INTERGLAS
The Company has a fixed-price option to increase the equity position in
its CS-Interglas investment from 43.6% to 84%, which expires on December 31,
1999. In the Company's opinion, this fixed-price option is significantly
higher than its current fair market value. As a result, the Company intends
to allow the option to expire unexercised.
In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of" ("SFAS 121"), the Company is evaluating its investment in
CS-Interglas. A number of factors are leading to this evaluation, including a
decline in the investment's market value, changes in the business climate in
which the investment operates in and the Company's decision to allow the
option to expire unexercised. Once the Company's business plans have been
developed, the Company will assess the applicable fair value of its
investment in CS-Interglas.
6
NOTE 5--------------------------------------------------------------------------- ----- -------------- ---- --------------
NOTE 3 -- NOTES PAYABLE, CAPITAL LEASE OBLIGATIONS AND INDEBTEDNESS TO A RELATED PARTY
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6/30/--------------------------------------------------------------------------- -------------------- -------------------
3/31/00 12/31/99
12/31/98
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Senior credit facility $ 372,126330.8 $ 618,214303.0
European credit and overdraft facilities 10,586 16,3306.4 14.8
Senior subordinated notes, due 2009 240.0 240.0
Convertible subordinated notes, due 2003 114,435 114,435114.4 114.4
Convertible subordinated debentures, due 2011 25,625 25,625
Senior subordinated notes, due 2009 240,000 ---25.6 25.6
Various notes payable 408 5470.4 0.4
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Total notes payable 763,180 775,151717.6 698.2
Capital lease obligations 51,129 54,09247.1 48.6
Senior subordinated note payable to a related party,
net of unamortized discount of $1,055 and $1,801$0.9 as of June 30, 1999March 31, 2000 and
December 31, 1998, respectively 23,919 35,6751999 24.1 24.1
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Total notes payable, capital lease obligations and
indebtedness to a related party $ 838,228788.8 $ 864,918770.9
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5
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3/31/00 12/31/99
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Notes payable and current maturities of long-term liabilities $ 29,53026.4 $ 26,86734.3
Long-term notes payable and capital lease obligations,
less current maturities 784,779 802,376738.3 712.5
Indebtedness to a related party 23,919 35,67524.1 24.1
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Total notes payable, capital lease obligations and
indebtedness to a related party $ 838,228788.8 $ 864,918770.9
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SENIOR CREDIT FACILITY
In connection with the acquisition of the Acquiredindustrial fabrics business of
Clark-Schwebel, BusinessInc. on September 15, 1998, Hexcel obtained a new global credit
facility (the "Senior Credit Facility") to: (a) fund the purchase of the
Acquired Clark-Schwebel
Business;industrial fabrics business; (b) refinance the Company's existing revolving
credit facility; and (c) provide for ongoing working capital and other financing
requirements of the Company. InThe Senior Credit Facility was subsequently amended
on January 21, 1999, simultaneously withAugust 13, 1999 and March 7, 2000, to accommodate among
other things, the closingissuance of the Company's
$240,000$240.0 of 9.75% senior subordinated notes offering (see below),and the
Company amendedimpact of the decline in the Company's operating results on certain financial
covenants.
Effective with the March 7, 2000, amendment, the Senior Credit Facility
to, among other things, reduce the availableprovides Hexcel with approximately $516.5 of borrowing capacity, from $910,000subject to
$671,500, modify certain financial covenants and to
permit the offering. Approximately $544,000 of the Senior Credit Facility
expires in September 2004, with the balance expiring in 2005.
Depending on certain predetermined ratios and other conditions, interestlimitations. Interest on outstanding borrowings under the Senior Credit Facility is computed at an
annual rate rangingranges from approximately 0.75% to
2.25%3.00% in excess of the applicable London interbank rate, or at the option of Hexcel, at 0the
Company, from 0.0% to 1.25%2.00% in excess of the base rate of the administrative
agent for the lenders. ThePrior to March 2000, the upper limitlimits of these interest
ranges have been increased towere 2.75% and 1.75%
respectively as part of the August 13, 1999 amendment to the Senior Credit
Facility with the applicable rate continuing to be determined by the
Company's ratio of total debt to earnings before business acquisition and
consolidation expenses, other income, interest, taxes, depreciation and
amortization, and equity in earnings of affiliated companies., respectively. In addition, the Senior Credit
Facility is subject to a commitment fee rangingthat ranges from 0.23% to 0.50% per
annum of the total facility. The Senior Credit Facility is secured by a pledge
of shares of certain of Hexcel's subsidiaries.subsidiaries, as well as a security interest in
certain U.S. accounts receivable, inventories, and machinery and equipment.
Further, under certain defined circumstances, the Company has agreed to provide
the lenders with a security interest in certain additional U.S. accounts
receivable, inventories, machinery and equipment, and land and buildings on
September 30, 2000. The Company is subject to various financial covenants and
restrictions under the Senior Credit Facility, including a limitation on the
redemption of capital stock and a general prohibition against the payment of
dividends.
As further discussed in Note 9, Hexcel completed the sale of its Bellingham
aircraft interiors business on April 26, 2000, and used approximately $111.6 of
net proceeds from the sale to repay outstanding term debt under the Senior
Credit Facility. As a result of this repayment, the total borrowing capacity
available to the Company under the Senior Credit Facility was reduced from
approximately $516.5 to approximately $405. Outstanding borrowings under the
Senior Credit Facility totaled $212.8 on April 26, 2000, and unused borrowing
capacity was approximately $182.1 at that date. The Senior Credit Facility is
generally prohibited from paying dividends or
redeeming capital stock.scheduled to expire in September 2004, except for approximately $59 which is due
for repayment in September 2005.
SENIOR SUBORDINATED NOTES DUE 2009
On January 21, 1999, the Company issued $240,000$240.0 of 9.75% senior subordinated
notes due 2009 (the "Senior Subordinated Notes").2009. The Senior Subordinated Notessenior subordinated notes are general unsecured obligations
of Hexcel that bear interest at a rate of
9.75% per annum. Net proceeds of approximately $230,500 from this offering were
used to repay amounts owed under the Senior Credit Facility. The Senior
Subordinated
7Hexcel.
6
Notes are redeemable beginning in January of 2004, in whole or in part, at
the option of Hexcel. The redemption prices range from 104.9% to 100.0% of
the outstanding principal amount, depending on the period in which redemption
occurs.
SENIOR SUBORDINATED NOTE PAYABLE TO A RELATED PARTY
The increasing rate senior subordinated notenotes payable to a related party, isare payable to Ciba Specialty Chemicals Inc.,a
significant shareholder and is asubsidiaries of the shareholder, and are general
unsecured obligationobligations of Hexcel (the "Ciba Note"). Ciba Specialty Chemicals Inc.Hexcel. Effective February 2000, these notes bear
interest at a rate of 11.0% per annum, a rate which will increase by 0.5% per
annum each February thereafter until the notes mature in 2003. Prior to February
2000 and its
affiliate, Ciba Specialty Chemicals Corporation, collectively hold
approximately 49.4% of the Company's common stock. From February 28, 1996
through February 28, 1999, the Ciba Notethese notes bore interest at a rate of 10.5% and 7.5%
per annum. On February 28, 1999, the interest rate on the Ciba Note increased to
10.5% per annum, and will continue to increase by an additional 0.5% per year
thereafter until it matures in 2003. On February 17, 1999, the Company
redeemed $12,500 of the Ciba Note, with such repayment financed with
borrowings under the Company's Senior Credit Facility.respectively.
NOTE 64 -- BUSINESS ACQUISITION AND CONSOLIDATION EXPENSES
Over the past few years, the Company has announced two majorPROGRAMS
Total accrued business consolidation programs. In December 1998 and March 1999, the Company
announced a business acquisition and consolidation ("BA&C") program related
to the integration of the Acquired Clark-Schwebel Business and the
combination of its U.S., European and Pacific Rim composite materials
businesses into a single, global business unit (the "1998/1999 program").
Prior to this program, in May 1996, the Company announced a BA&C program
primarily related to the integration of the acquired composites businesses
from Ciba-Geigy Limited and Ciba-Geigy Corporation (the "Acquired Ciba
Business"). This program was later revised in December 1996, to include the
acquired carbon fibers and prepreg business from Hercules Incorporated as
well as other consolidation activities identified during the on-going
integration of the Acquired Ciba Business (collectively, the "1996 program").
These programs were designed to integrate the acquired businesses, streamline
operations, reduce operating costs, and position the Company for profitable
growth. More detailed discussions on each of these programs are set forth
below.
Total accrued BA&C expenses at December 31, 19981999 and
June 30, 1999, andMarch 31, 2000, activity during the six monthsquarter ended June 30, 1999March 31, 2000, and a brief
description for each of thesethe Company's business consolidation programs, are as
follows:
- --------------------------------------------------------------- -------------------- -------------- ----------------
SEPTEMBER DECEMBER
1999 1998
PROGRAM PROGRAM TOTAL
- --------------------------------------------------------------- -------------------- -------------- ----------------
BALANCE AS OF DECEMBER 31, 1999 $ 3.1 $ 1.0 $ 4.1
Business consolidation expenses 1.2 - 1.2
Cash expenditures (1.6) (0.4) (2.0)
Reclassification to accrued liabilities - (0.6) (0.6)
- --------------------------------------------------------------- -- -------------- ------- --------- ------ ---------
BALANCE AS OF MARCH 31, 2000 $ 2.7 $ - $ 2.7
- --------------------------------------------------------------- -- -------------- ------- --------- ------ ---------
SEPTEMBER 1999 PROGRAM
On September 27, 1999, Hexcel announced a business consolidation program
that entails a rationalization of manufacturing facilities for certain product
lines. The objectives of this program are to eliminate excess capacity and
overhead, improve manufacturing focus and yields, and create additional centers
of manufacturing excellence. Specific actions contemplated by this program
include consolidating the production of certain product lines, including moving
equipment and requalifying the respective product lines; vacating certain leased
facilities; and consolidating the Company's Composite materials business
segment's U.S. marketing, research and technology, and administrative functions
into one location. The consolidation program calls for the elimination of
approximately 400 positions (primarily manufacturing), and a total reduction in
occupied floor space of over 250,000 square feet. Total expenses and cash
expenditures for this program are expected to approximate $33 and $27
respectively. Expected cash expenditures include $6.0 of capital expenditures.
Accrued business consolidation expenses as of March 31, 2000, and related
activity for this program since December 31, 1999, were as follows:
- ---------------------------------------------------------------------------------------------------
1998/--------------------------------------------------------------- ----------------- ---------------- -----------------
EMPLOYEE FACILITY &
SEVERANCE & EQUIPMENT
SEPTEMBER 1999 1996
PROGRAM PROGRAMRELOCATION RELOCATION TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------ ----------------- ---------------- -----------------
BALANCE AS OF DECEMBER 31, 19981999 $ 5,0022.5 $ 3,2000.6 $ 8,202
BA&C3.1
Business consolidation expenses 4,178 - 4,1780.4 0.8 1.2
Cash expenditures (4,134) (2,502) (6,636)
Non-cash usage, including asset write-downs (2,053) 19 (2,034)(0.5) (1.1) (1.6)
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------ ---- ------------ ---- ----------- ------ ----------
BALANCE AS OF JUNE 30, 1999MARCH 31, 2000 $ 2,9932.4 $ 7170.3 $ 3,7102.7
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------ ---- ------------ ---- ----------- ------ ----------
BusinessFor the quarter ended March 31, 2000, Hexcel recognized $1.2 of business
consolidation activities were financed with operating cash
flows and borrowings under the Company's credit facility. The Company expects
that substantially all remaining cash expendituresexpenses for the 1998/this program. As of December 31, 1999 and 1996
programs will be completed by the endMarch 31,
2000, accrued expenses for this program primarily reflected accrued severance
and costs for early termination of 1999, with such expenditures being
funded through operating cash flows.
8certain leases. The Company's policy is to
pay severance over a period of time rather than in a lump-sum amount.
7
1998/1999DECEMBER 1998 PROGRAM
In December 1998, the CompanyHexcel announced consolidation actions within its
reinforcement fabricsReinforcement Products and composite materials businesses.Composite Materials business segments. These actions
included the integration of the Company's existing fabrics business with the
U.S. operations of the Acquired Clark-Schwebel Business,acquired industrial fabrics business, and the combination
of itsthe Company's U.S., European and Pacific Rim composite materials businesses
into a single global business unit. The objectives of these actions were intended to
eliminate redundancies, improve manufacturing planning, and enhance customer
service. The Company substantially completed these actions in the first quarter
of 1999, which resulted in the elimination of approximately 100 operating,
sales, marketing and administrative positionspositions.
On March 16, 1999, the Company expanded its actions relating to the
integration of the Acquired Clark-Schwebel Businessacquired industrial fabrics business with the announcement of
the closure of its Cleveland, Georgia, facility, which at that time employed
approximately 100 manufacturing personnel.positions. This facility producesproduced fabrics for
the electronics market, and a significant portionthe majority of its production equipment will bewas
relocated to the Company's Anderson, South Carolina facility. The planned closure of
this facility, which is expected to bewas completed in the
third quarter ofon September 3, 1999, iswas the result of current
competitive conditions in the global market for electronic fiberglass materials,
and was not expected at the time of the acquisition of the Acquired Clark-Schwebel Business.
During the first half of 1999, the Company recorded $4,178 of BA&C
expenses for the 1998/1999 program, primarily reflecting the costs of closing
its Cleveland, Georgia facility as well as the elimination of certain
additional administrative positions relating to theindustrial fabrics
business.
Accrued business consolidation of the
composite materials business unit. Included in the BA&C expense was a $1,815
non-cash write-down of equipment that will be disposed of at the Cleveland
facility. The Company expects to record an additional charge of approximately
$1,200 during the third quarter of 1999 relating to the relocation of certain
equipment from the Cleveland facility to the Company's Anderson, South
Carolina facility.
Accrued BA&C expenses at December 31, 1998 and June 30, 1999 and activity during the six months ended June 30, 1999 for the 1998/1999 program,
were as follows:
- --------------------------------------------------------------------------------------------------------------------
EMPLOYEE FACILITY &
SEVERANCE & EQUIPMENT
1998/1999 PROGRAM RELOCATION RELOCATION TOTAL
- --------------------------------------------------------------------------------------------------------------------
BALANCE AS OF DECEMBER 31, 1998 $ 3,020 $ 1,982 $ 5,002
BA&C expenses 2,131 2,047 4,178
Cash expenditures (2,556) (1,578) (4,134)
Non-cash usage, including asset write-downs --- (2,053) (2,053)
- --------------------------------------------------------------------------------------------------------------------
BALANCE AS OF JUNE 30, 1999 $ 2,595 $ 398 $ 2,993
- --------------------------------------------------------------------------------------------------------------------
As of DecemberMarch 31,
1998, accrued BA&C expenses for the 1998/1999 program
primarily consisted of severance for employees terminated in December 1998,
costs for early termination for certain leases, and equipment relocation
costs incurred, but not yet paid. The Company's policy is to pay severance
over a period of time rather than in a lump-sum amount. Cash expenditures
during the six months ended June 30, 19992000 for this program principallywere $1.0 and $0.6, respectively, all of which related to
accrued employee severance payments made to thosefor terminated employees, terminated in December
1998.and there were no business
consolidation expenses incurred for this program during the first quarter of
2000. As of June 30, 1999,March 31, 2000, the remaining accrued expenses for the 1998/1999
program primarily reflected severance and relocation costs for employees in
the Company's Cleveland facility and for those administrative employees
terminated in the second quarter of 1999. The 1998/1999 program is expected
to be substantially completed by the end of 1999.
9
1996 PROGRAM
In 1996, Hexcel announced plans to consolidate the Company's operations
over a period of three years. The objective of the program was to integrate
acquired assets and operations into Hexcel, and to reorganize the Company's
manufacturing and research activities around strategic centers dedicated to
select product technologies. TheDecember 1998 business consolidation program
was also
intended to eliminate excess manufacturing capacity and redundant
administrative functions. The Company expected that this consolidation
program would take approximately three years to complete, in part because of
the aerospace industry requirements to "qualify" specific equipment and
manufacturing facilitiessubstantially completed, except for the manufactureaccrued severance of certain products. These
qualification requirements increase$0.6, which
will be paid over the complexity, cost and time of moving
equipment and rationalizing manufacturing activities. Specific actions of the
consolidation program included the elimination of approximately 245
manufacturing, marketing and administrative positions, the closure of the
Anaheim, California facility acquired in connection with the Acquired Ciba
Business, the consolidation of the Company's manufacturing operations in
Europe, the consolidation of the Company's U.S. special process manufacturing
activities, and the integration of sales, marketing and administrative
resources. With the exception of certain nominal cash expenditures, the
program was completed in the second quarter of 1999 with the disposal of the
Company's operations in Brindisi, Italy (the "Italian Operations").
In the fourth quarter of 1998, the Company recorded $5,600 of BA&C
expenses relating to an asset impairment for its Italian Operations, which
was part of the Acquired Ciba Business. The purchase price originally
allocated to the Italian Operations was a net liability of approximately
$2,100. Since the acquisition, the Italian Operations had immaterial
revenues, incurred operating losses, and was not strategically important to
the Company. Consequently, the Company periodically evaluated the
recoverability of its carrying value pursuant to SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of." The Company again evaluated the recoverability of the carrying
value of its Italian Operations in the fourth quarter of 1998, in light of
its continuing operating losses and certain offers received from interested
buyers. In assessing whether an impairment had occurred, the Company
considered the offers received, as well as the future undiscounted cash flows
related to its Italian Operations. The estimate of fair value used in
determining the impairment charge was based on the offers received from the
interested buyers. In June 1999, the Company sold its Italian Operations for
immaterial proceeds, resulting in a loss on disposal that approximated
amounts accrued. The amounts accrued approximated the Italian Operations'
debt plus certain employee retirement costs, which the Company agreed to
maintain. The Company had accounted for its Italian Operations under its
Engineered Products business segment.
Accrued BA&C expenses at December 31, 1998 and June 30, 1999, and
activity during the six months ended June 30, 1999 for the 1996 BA&C program,
were as follows:
- -----------------------------------------------------------------------------------
EMPLOYEE FACILITY &
SEVERANCE & EQUIPMENT
1996 PROGRAM RELOCATION RELOCATION TOTAL
- -----------------------------------------------------------------------------------
BALANCE AS OF DECEMBER 31, 1998 $ 2,848 $ 352 $ 3,200
Cash expenditures (2,315) (187) (2,502)
Non-cash usage 19 --- 19
- -----------------------------------------------------------------------------------
BALANCE AS OF JUNE 30, 1999 $ 552 $ 165 $ 717
- -----------------------------------------------------------------------------------
As of December 31, 1998, accrued BA&C expenses for the 1996 program
related to employee retirement costs associated with terminations, a foreign
government grant received by the Company that is required to be repaid due to
lower employee levels as a result of the consolidation program, and
environmental costs related to a closed facility. Cash expenditures for the
six months ended
10
June 30, 1999, primarily represented the employee retirement costs that were
disbursed in connection with the disposal of the Company's Italian
Operations. As of June 30, 1999, remaining accrued BA&C expenses for the 1996
program consisted of the foreign government grant that is to be repaid over a
five year period and accrued environmental costs.next two years.
NOTE 75 -- NET INCOME PER SHARE
Computations of basic and diluted net income per share for the quarters
ended March 31, 2000 and 1999, are as follows:
- --------------------------------------------------------------------------------------------------------------------
QUARTER ENDED JUNE 30, YEAR-TO-DATE ENDED JUNE 30,
1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------- ------------------------- ----------------
2000 1999
- ------------------------------------------------------------------------- -------------- ---------- ----- ----------
Basic net income per share:
Net income $ 4,2802.6 $ 19,978 $ 9,488 $ 37,0485.2
Weighted average common shares outstanding 36,452 36,885 36,410 36,86736.6 36.4
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- -------------- ---------- ----- ----------
Basic net income per share $ 0.120.07 $ 0.54 $ 0.26 $ 1.000.14
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- -------------- ---------- ----- ----------
Diluted net income per share:
Net income $ 4,2802.6 $ 19,978 $ 9,488 $ 37,048
Effect of dilutive securities -
Convertible Subordinated Notes, due 2003 --- 1,272 --- 2,544
Convertible Subordinated Debentures, due 2011 --- 278 --- 556
- --------------------------------------------------------------------------------------------------------------------
Adjusted net income $ 4,280 $ 21,528 $ 9,488 $ 40,148
- --------------------------------------------------------------------------------------------------------------------5.2
Weighted average common shares outstanding 36,452 36,885 36,410 36,86736.6 36.4
Effect of dilutive securities -
Stock options 150 1,520 101 1,479
Convertible Subordinated Notes, due 2003 --- 7,239 --- 7,239
Convertible Subordinated Debentures, due 2011 --- 834 --- 8340.2 0.1
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- -------------- ---------- ----- ----------
Diluted weighted average common shares outstanding 36,602 46,478 36,511 46,41936.8 36.5
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- -------------- ---------- ----- ----------
Diluted net income per share $ 0.120.07 $ 0.46 $ 0.26 $ 0.860.14
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- -------------- ---------- ----- ----------
The Convertible Subordinated Notes,convertible subordinated notes, due 2003, and the Convertible
Subordinated Debentures,convertible
subordinated debentures, due 2011, were excluded from the 2000 and 1999
computations of diluted net income per share, as they were antidilutive. For the
quarterquarters ended March 31, 2000 and year-to-date periods ended June 30, 1999, approximately 4,000 stock
options, or substantially all of the Company's
outstanding stock options were excluded from the calculation of diluted net
income per share. The exercise price for these stock options ranged from
approximately $8.95$5.75 to $30.38,$30.68, with the weighted average price being
approximately $13.26. For the
quarter$11.18 in 2000 and year-to-date periods ended June 30, 1998, substantially all of
the Company's outstanding stock options were included$12.55 in the calculation of
diluted net income per share.
NOTE 8 -- COMPREHENSIVE INCOME (LOSS)1999.
NOTE 6 -- COMPREHENSIVE LOSS
---------------------------------------------------------------------------------------------------
QUARTER ENDED JUNE 30, YEAR-TO-DATE ENDED JUNE 30,
1999 1998 1999 1998
---------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------- ----------------------------------
QUARTER ENDED MARCH 31,
2000 1999
- --------------------------------------------------------------------------------- ----------------- ----------------
Net income $ 4,2802.6 $ 19,978 $ 9,488 $ 37,0485.2
Currency translation adjustment (5,793) 1,257 (12,798) (316)
---------------------------------------------------------------------------------------------------(3.0) (7.0)
- --------------------------------------------------------------------------------- ------ ---------- ----- ----------
Total comprehensive income (loss)loss $ (1,513)(0.4) $ 21,235 $ (3,310) $ 36,732
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------(1.8)
- --------------------------------------------------------------------------------- ------ ---------- ----- ----------
118
NOTE 97 -- SEGMENT INFORMATION
Hexcel evaluates the performance of its operating segments based on
adjusted income before business acquisition and consolidation expenses, interest, taxes and
equity in earningsincome of affiliated companies ("Adjusted EBIT"), and generally
accounts for intersegment sales based on arm's length prices. Corporate and
certain other expenses are not allocated to the operating segments.segments, except to
the extent that the expense can be directly attributable to the business
segment.
Financial information onfor the Company's operating segments for the quarterquarters
ended March 31, 2000 and year-to-date periods ended June 30, 1999, and 1998, including pro
forma financial information, after giving effect to the acquisition of the
Acquired Clark-Schwebel Business as if it occurred on January 1, 1998, is as follows:
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------- ------------------ ----------------- ----------------- ----------------
REINFORCEMENT COMPOSITE ENGINEERED
PRODUCTS MATERIALS PRODUCTS TOTAL
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------- ------------------ ----------------- ----------------- ----------------
FIRST QUARTER ENDED JUNE 30, 19992000
- --------------------------------------------------------------------------------------------------------------------
-------------------------------------------- ---- ------------- -- -------------- --- ------------- -- -------------
Net sales to external customers $ 83,18087.1 $ 156,242146.5 $ 53,23246.2 $ 292,654279.8
Intersegment sales 30,972 1,83427.2 2.3 - 29.5
- -------------------------------------------- ---- ------------- -- -------------- --- 32,806
- --------------------------------------------------------------------------------------------------------------------------------- -- -------------
Total sales 114,152 158,076 53,232 325,460114.3 148.8 46.2 309.3
Adjusted EBIT 11,241 19,758 3,664 34,66310.5 18.5 3.2 32.2
Depreciation and amortization 8,857 5,027 1,036 14,9208.6 4.8 1.0 14.4
Business consolidation expenses 0.7 0.4 0.1 1.2
Capital expenditures 3,194 3,808 1,431 8,4331.0 3.0 0.4 4.4
- --------------------------------------------------------------------------------------------------------------------
PRO FORMA-------------------------------------------- ---- ------------- -- -------------- --- ------------- -- -------------
FIRST QUARTER ENDED JUNE 30, 19981999
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------- ---- ------------- -- -------------- --- ------------- -- -------------
Net sales to external customers $ 97,511 $ 170,622 $ 56,650 $ 324,78385.8 178.2 52.2 316.2
Intersegment sales 35,079 3,219 31 38,32935.7 2.8 - --------------------------------------------------------------------------------------------------------------------38.5
- -------------------------------------------- ---- ------------- -- -------------- --- ------------- -- -------------
Total sales 132,590 173,841 56,681 363,112121.5 181.0 52.2 354.7
Adjusted EBIT 22,048 23,149 5,462 50,65910.3 25.1 3.9 39.3
Depreciation and amortization 8,810 4,307 936 14,0538.9 5.1 0.9 14.9
Business consolidation expenses 2.6 0.1 0.1 2.8
Capital expenditures 5,813 8,823 2,008 16,644
- --------------------------------------------------------------------------------------------------------------------
QUARTER ENDED JUNE 30, 1998
- --------------------------------------------------------------------------------------------------------------------
Net sales to external customers $ 46,2654.2 $ 170,6223.6 $ 56,6501.5 $ 273,537
Intersegment sales 35,079 3,219 31 38,329
- --------------------------------------------------------------------------------------------------------------------
Total sales 81,344 173,841 56,681 311,866
Adjusted EBIT 15,839 23,149 5,462 44,450
Depreciation and amortization 3,785 4,307 936 9,028
Capital expenditures 4,019 8,823 2,008 14,850
- --------------------------------------------------------------------------------------------------------------------9.3
------------------------------------------- ---- ------------- -- -------------- --- ------------- -- -------------
129
- --------------------------------------------------------------------------------------------------------------------
REINFORCEMENT COMPOSITE ENGINEERED
PRODUCTS MATERIALS PRODUCTS TOTAL
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
YEAR-TO-DATE ENDED JUNE 30, 1999
- --------------------------------------------------------------------------------------------------------------------
Net sales to external customers $ 168,987 $ 333,442 $ 106,395 $ 608,824
Intersegment sales 66,700 4,610 --- 71,310
- --------------------------------------------------------------------------------------------------------------------
Total sales 235,687 338,052 106,395 680,134
Adjusted EBIT 21,514 46,155 6,260 73,929
Depreciation and amortization 17,759 10,064 2,041 29,864
Capital expenditures 7,383 7,300 3,097 17,780
- --------------------------------------------------------------------------------------------------------------------
PRO FORMA YEAR-TO-DATE ENDED JUNE 30, 1998
- --------------------------------------------------------------------------------------------------------------------
Net sales to external customers $ 200,873 $ 334,755 $ 106,314 $ 641,942
Intersegment sales 70,197 6,165 50 76,412
- --------------------------------------------------------------------------------------------------------------------
Total sales 271,070 340,920 106,364 718,354
Adjusted EBIT 44,392 49,224 8,372 101,988
Depreciation and amortization 18,232 8,556 1,710 28,498
Capital expenditures 10,585 15,297 2,908 28,790
- --------------------------------------------------------------------------------------------------------------------
YEAR-TO-DATE ENDED JUNE 30, 1998
- --------------------------------------------------------------------------------------------------------------------
Net sales to external customers $ 89,209 $ 334,755 $ 106,314 $ 530,278
Intersegment sales 70,197 6,165 50 76,412
- --------------------------------------------------------------------------------------------------------------------
Total sales 159,406 340,920 106,364 606,690
Adjusted EBIT 29,518 49,224 8,372 87,114
Depreciation and amortization 8,100 8,556 1,710 18,366
Capital expenditures 7,862 15,297 2,908 26,067
- --------------------------------------------------------------------------------------------------------------------
Reconciliations of the totals reported for the operating segments to
consolidated income before income taxes, are as follows:
- ---------------------------------------------------------------------------------------------------------------------
QUARTER ENDED JUNE 30, YEAR-TO-DATE ENDED JUNE 30,
---------------------------------------------------------------------------------
PRO FORMA PRO FORMA
1999 1998 1998 1999 1998 1998
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ ----------------------------------
QUARTER ENDED MARCH 31,
2000 1999
- ---------------------------------------------------------------------------------- ---------------- -----------------
Total Adjusted EBIT for reportable segments $ 34,66332.2 $ 50,659 $ 44,450 $ 73,929 $ 101,988 $ 87,11439.3
Less:
BA&CBusiness consolidation expenses 1,369 --- --- 4,178 --- ---1.2 2.8
Corporate, other expenses and eliminations 8,433 6,294 6,294 17,721 15,222 15,2229.2 9.4
Interest expense 18,421 16,059 6,744 37,527 32,490 13,71118.4 19.1
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- ----- ------------ ---- -----------
Consolidated income before income taxes $ 6,4403.4 $ 28,306 $ 31,412 $ 14,503 $ 54,276 $ 58,1818.0
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- ----- ------------ ---- -----------
NOTE 10 -8 -- SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information for the quarters ended March 31, 2000
and 1999, is as follows:
------------------------------------------------------
YEAR-TO-DATE ENDED JUNE 30,
1999 1998
------------------------------------------------------- --------------------------------------------------------------------------------- ----------------------------------
QUARTER ENDED MARCH 31,
2000 1999
- --------------------------------------------------------------------------------- ---------------- -----------------
Cash paid for:
Interest $ 20,73125.3 $ 12,136
Income taxes14.8
Taxes $ 10,087- $ 14,576
------------------------------------------------------1.5
- --------------------------------------------------------------------------------- ---- ----------- ----- -----------
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
BUSINESS OVERVIEWNOTE 9 -- SUBSEQUENT EVENT
On April 26, 2000, Hexcel completed the sale of its Bellingham aircraft
interiors business to Britax Cabin Interiors, Inc., a wholly owned subsidiary of
Britax International plc, for cash proceeds of $115.4, subject to certain
further post-closing adjustments. Net proceeds from the sale were used to repay
approximately $111.6 of the Company's term debt outstanding under its Senior
Credit Facility. The Company expects to recognize a pre-tax gain from the sale
of the Bellingham business of between $65 and $75 in the second quarter of
2000.
The table below reflects unaudited pro forma consolidated results of
Hexcel for the quarters ended March 31, 2000 and 1999, as if the sale had
occurred at the beginning of the periods presented.
-------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------- ----------------------------------
QUARTER ENDED JUNE 30,
------------------------------------------------MARCH 31,
2000 1999
- --------------------------------------------------------------------------------- ---------------- -----------------
Pro Formaforma net sales $ 263.2 $ 304.7
Pro forma net income 3.4 5.9
Pro forma net income per share $ 0.09 $ 0.16
- --------------------------------------------------------------------------------- ---- ----------- ----- -----------
10
Unaudited pro forma financial information for the Company's operating
segments for the quarters ended March 31, 2000 and 1999, is as follows:
- -------------------------------------------- ------------------ ----------------- ----------------- ----------------
REINFORCEMENT COMPOSITE ENGINEERED
PRODUCTS MATERIALS PRODUCTS TOTAL
- -------------------------------------------- ------------------ ----------------- ----------------- ----------------
PRO FORMA FIRST QUARTER 2000
- -------------------------------------------- ---- ------------- -- -------------- --- ------------- -- -------------
Net sales to external customers $ 87.1 $ 146.5 $ 29.6 $ 263.2
Intersegment sales 27.2 1.8 - 29.0
- -------------------------------------------- ---- ------------- -- -------------- --- ------------- -- -------------
Total sales 114.3 148.3 29.6 292.2
Adjusted EBIT 10.5 18.5 2.1 31.1
Depreciation and amortization 8.6 4.8 0.7 14.1
Business consolidation expenses 0.7 0.4 0.1 1.2
Capital expenditures 1.0 3.0 0.2 4.2
-------------------------------------------- ---- ------------- -- -------------- --- ------------- -- -------------
PRO FORMA FIRST QUARTER 1999
- -------------------------------------------- ------------- -- -------------- --- ------------- -- -------------
Net sales to external customers 85.8 178.2 40.7 304.7
Intersegment sales 35.7 2.4 - 38.1
- -------------------------------------------- ---- ------------- -- -------------- --- ------------- -- -------------
Total sales 121.5 180.6 40.7 342.8
Adjusted EBIT 10.3 25.1 3.0 38.4
Depreciation and amortization 8.9 5.1 0.7 14.7
Business consolidation expenses 2.6 0.1 0.1 2.8
Capital expenditures 4.2 3.6 0.6 8.4
------------------------------------------- ---- ------------- -- -------------- --- ------------- -- -------------
Unaudited pro forma assets by operating segment and a reconciliation of
these assets to Hexcel's pro forma consolidated assets, as of December 31, 1999,
is as follows:
- --------------------------------------------------------------------------------- ----------------------------------
AS OF DECEMBER 31,
PRO FORMA AS REPORTED
1999 1999
- --------------------------------------------------------------------------------- --------------- ------------------
Reinforcement products $ 712.5 $ 712.5
Composite materials 359.3 359.3
Engineered products 71.3 115.4
- --------------------------------------------------------------------------------- ---- ----------- ----- -----------
Total per reportable segments 1,143.1 1,187.2
Corporate assets 58.7 91.3
Eliminations (16.6) (16.6)
- --------------------------------------------------------------------------------- ---- ----------- ----- -----------
Total consolidated assets $ 1,185.2 $ 1,261.9
- --------------------------------------------------------------------------------- ---- ----------- ----- -----------
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FINANCIAL OVERVIEW
---------------------------------------------------------------------- ----------------------------------------
UNAUDITED
---------------------------------------------------------------------- ----------------------------------------
Quarter Ended March 31,
(IN MILLIONS, EXCEPT PER SHARE DATA) 2000 1999
1998 (a) 1998
-------------------------------------------------------------------------------------------------
---------------------------------------------------------------------- ------------------- --------------------
---------------------------------------------------------------------- --------- --------- --------- ----------
Net sales $ 292.7279.8 $ 324.8 $ 273.5316.2
Gross margin % 22.6% 25.5% 26.0%22.2% 22.4%
Adjusted operating income % (b) 9.0% 13.7% 13.9%(a) 8.2% 9.5%
Adjusted EBITDA (c)(b) $ 42.038.0 $ 59.2 $ 48.045.6
Business acquisition and consolidation expenses $ 1.41.2 $ --- $ ---2.8
Net income $ 4.32.6 $ 20.1 $ 20.05.2
Adjusted net income (b)(a) $ 5.23.4 $ 20.1 $ 20.0
-------------------------------------------------------------------------------------------------7.0
---------------------------------------------------------------------- --------- --------- --------- ----------
Diluted net income per share $ 0.120.07 $ 0.47 $ 0.460.14
Adjusted diluted net income per share (a) $ 0.09 $ 0.19
---------------------------------------------------------------------- --------- --------- --------- ----------
(a) Excludes business consolidation expenses and related income taxes, as
applicable.
(b) $ 0.14 $ 0.47 $ 0.46
-------------------------------------------------------------------------------------------------Excludes business consolidation expenses, interest, taxes, depreciation,
amortization and equity in income of affiliated companies.
(a)SALE OF BELLINGHAM AIRCRAFT INTERIORS BUSINESS
On April 26, 2000, Hexcel completed the sale of its Bellingham aircraft
interiors business to Britax Cabin Interiors, Inc., a wholly owned subsidiary of
Britax International plc, for cash proceeds of $115.4 million, subject to
certain further post-closing adjustments. Net proceeds from the sale were used
to repay approximately $111.6 million of the Company's term debt outstanding
under its senior credit facility. The Company expects to recognize a pre-tax
gain from the sale of the Bellingham business of approximately $65 million to
$75 million in the second quarter of 2000.
Pro forma results givesnet sales, net income and net income per share, after giving
effect to the September 1998 acquisitionsale of Clark
Schwebel,the Bellingham division as if the transaction had occurred
at the beginning of 1998.
(b) Excludes business acquisition2000, were $263.2 million, $3.4 million and consolidation expenses$0.09 per share,
respectively. Pro forma net sales, net income and related income
taxes, as applicable.
(c) Excludes business acquisition and consolidation expenses, interest, taxes,
depreciation, amortization, and equity in earnings of affiliated companies.
Net income for the second quarter of 1999 was $4.3 million, or $0.12 per
diluted share, compared with $20.0 million, or $0.46 per diluted share, for the
second quarter of 1998. Excluding business acquisition and consolidation
expenses of $1.4 million incurred in the second quarter of 1999, "Adjusted"
diluted net income per share was $0.14. For the quarter ended June 30, 1999,
Hexcel generated free cash flow (change in debt net of cash) of $24 million.
Hexcel used such free cash flow to repay amounts outstanding under its
various amortizing indebtedness.
During the second quarter of 1999, demand in a number of the markets Hexcel
serves was lower than anticipated. The Company's sales and gross margins for the
second quarter reflect reducedsame period in 1999, were $304.7 million, $5.9 million and $0.16 per share,
respectively. All of Bellingham's net sales volumewere made to the commercial
aerospace market
as a resultmarket. Hexcel continues to evaluate strategic alternatives for its
aircraft structures and interiors businesses in Kent, Washington, which is the
remaining component of the supply chain impacts of The Boeing Company's ("Boeing")
planned reduction in deliveries in 2000, lower prices in the global electronics
market because of intensified competition from Asia, and lower production and
sales of carbon fiber products. These market conditions were partially offset by
various cost savings initiatives. In light of these conditions, the Company
expects that Adjusted diluted earnings per share for the year will be in the
range of $0.60 to $0.70. Hexcel remains committed to improving performance by
continuing to reduce costs and increase productivity through itsEngineered Products business consolidation, global procurement and Lean Enterprise initiatives.
BUSINESS ACQUISITION
On September 15, 1998, the Company acquired certain assets and assumed
certain operating liabilities from Clark-Schwebel, Inc. and its subsidiaries
(the "Acquired Clark-Schwebel Business"). The Acquired Clark-Schwebel Business
is engaged in the manufacture and sale of high-quality fiberglass fabrics, which
are used to make printed circuit boards for electronic equipment such as
computers,
14
cellular telephones, televisions and automobiles. The Acquired Clark-Schwebel
Business also produces high performance specialty products for use in
insulation, filtration, wall and facade claddings, soft body armor and
reinforcements for composite materials.
As part of this acquisition, Hexcel also acquired Clark-Schwebel's equity
ownership interests in three joint ventures, CS-Interglas AG ("CS-Interglas")
headquartered in Germany, Asahi-Schwebel Co., Ltd. ("Asahi-Schwebel"),
headquartered in Japan, and Clark-Schwebel Tech-Fab Company ("CS Tech-Fab")
headquartered in the United States. CS-Interglas and Asahi-Schwebel are
fiberglass fabric producers serving primarily the European and Asian electronics
and telecommunications industries. CS Tech-Fab manufactures non-woven materials
for roofing, construction and other specialty applications. The unconsolidated
revenues in 1998 for these joint ventures were in excess of $300 million.
Hexcel acquired the net assets of the acquired business, other than certain
excluded assets and liabilities, in exchange for approximately $472.8 million in
cash. Hexcel also agreed to lease $50.0 million of property, plant and equipment
used in the acquired business from an affiliate of Clark-Schwebel, pursuant to a
long-term lease with purchase options.
Further discussions of the acquisition and its related financing are
contained in Notes 2 and 5 to the accompanying condensed consolidated financial
statements.segment.
RESULTS OF OPERATIONS
NET SALES: Net sales for the secondfirst quarter of 2000 decreased 12% to $279.8
million, compared with $316.2 million for the first quarter of 1999, primarily
as a result of lower commercial aerospace sales due to a reduction in The Boeing
Company's ("Boeing") commercial aircraft build rates. First quarter 2000 net
sales were $292.7also reduced by certain space and defense contracts which concluded
in the second half of 1999. Further, the strengthening of the U.S. dollar
against the Euro in the last twelve months has reduced revenues in U.S. dollar
terms by approximately $9 million compared with $273.5 million forto the secondfirst quarter of 1998 and $324.8
million for the second quarter of 1998 on a pro forma basis, after giving
effect to the acquisition of the Acquired Clark-Schwebel Business as if the
transaction had occurred at the beginning of 1998. The decrease in sales
compared to 1998 pro forma results primarily reflects reduced composite
materials sales to the commercial aerospace market and reduced sales of
reinforcement products, particularly in the general industrial and
recreational markets. The reduction in sales of reinforcement products to
electronic applications is the net impact of increased volume and lower
average pricing. On a constant currency basis, second quarter 1999 net sales
would not have been materially different than reported.1999.
12
The following table summarizes net sales to third-party customers by
product group and market segment for the quarterquarters ended June 30, 1999March 31, 2000 and pro
forma net sales for the quarter ended June 30, 1998:1999:
- ------------------------------------------------------------------------------------------------------------------------------------------------------------ ----------------------------------------------------------------------------
UNAUDITED
---------------------------------------------------------------------------------------------------- -------------- ------------- --------------- --------------
COMMERCIAL SPACE & GENERAL
(IN MILLIONS) AEROSPACE DEFENSE ELECTRONICS INDUSTRIAL RECREATION TOTAL
- --------------------------------------------------------------------------------------------------------------------
SECOND---------------------------------------- ---------------- -------------- ------------- --------------- --------------
FIRST QUARTER 19992000 NET SALES
Reinforcement products $ 13.415.6 $ 4.1 $ 43.6 $ 23.8 $ 87.1
Composite materials 92.6 19.8 - 34.1 146.5
Engineered products 43.7 2.5 - - 46.2
- ---------------------------------------- ----- ---------- --- ---------- -- ---------- ---- ---------- -- -----------
Total $ 151.9 $ 26.4 $ 43.6 $ 57.9 $ 279.8
54% 9% 16% 21% 100%
- ---------------------------------------- ----- ---------- --- ---------- -- ---------- ---- ---------- -- -----------
FIRST QUARTER 1999 NET SALES
Reinforcement products $ 15.3 $ 5.5 $ 42.242.3 $ 20.922.7 $ 1.2 $ 83.285.8
Composite materials 101.8 24.4 --- 17.7 12.3 156.2119.7 29.6 - 28.9 178.2
Engineered products 48.6 3.448.9 3.3 - - 52.2
- ---------------------------------------- ----- ---------- --- 1.3 --- 53.3
- ------------------------------------------------------------------------------------------------------------------------------ -- ---------- ---- -------- ---- -----------
Total $ 163.8183.9 $ 33.338.4 $ 42.242.3 $ 39.951.6 $ 13.5 $ 292.7
56% 11% 14% 14% 5%316.2
58% 12% 13% 17% 100%
- --------------------------------------------------------------------------------------------------------------------
PRO FORMA SECOND QUARTER 1998
Reinforcement products $ 13.0 $ 7.4 $ 45.4 $ 27.6 $ 4.2 $ 97.6
Composite materials 122.9 22.9---------------------------------------- ----- ---------- --- 12.6 12.2 170.6
Engineered products 53.3 2.3 --- 1.0 --- 56.6
- --------------------------------------------------------------------------------------------------------------------
Total $ 189.2 $ 32.6 $ 45.4 $ 41.2 $ 16.4 $ 324.8
58% 10% 14% 13% 5% 100%
- ------------------------------------------------------------------------------------------------------------------------------ -- ---------- ---- -------- ---- -----------
Commercial aerospace net sales decreased 13%17% to $163.8$151.9 million for the
secondfirst quarter of 1999,2000, from $189.2$183.9 million on a pro forma basis for the secondfirst quarter of 1998.1999. The
decline in sales was largely a resultprimarily reflects the impact of the effortsdecrease in aircraft
production rates by Boeing and its subcontractors to adjust inventories and procurementthat commenced last year, in
15
anticipation of lower
aircraft productiondeliveries in 2000. Partially offsetting this
decrease,Approximately 28% and 10% of Hexcel's 1999 net
sales were identifiable as sales to Boeing and related subcontractors, and
Airbus Industrie ("Airbus") and regional aircraft
producers. In addition, the Company's sales of products used to retrofit
aircraft interiors continue to grow, with a strong reception for its kit product
that extends the size of overhead stowage bins in narrow aisle aircraft.
Approximately 44% of Hexcel's pro forma full year 1998 net sales were to
Boeing, Airbus and related subcontractors. Based on published projections,
combinedsubcontractors, respectively. Planned
deliveries for Boeing and Airbus were 577 and 788 in 1997 and 1998,
respectively, and are expected to peak at 906 in 1999, before declining to
approximately 800 in 2000. The Company sells material for every model of commercial aircraft sold by Boeing and Airbus, withdeclined from 620 aircraft in 1999,
to 490 aircraft in 2000. Hexcel's first quarter 1999 net sales perreflected the
peak of Boeing's commercial aircraft ranging
from $0.1 million to over $1.0 million. Depending on the product, orders placed
with Hexcel are received anywhere between one and eighteen months prior to
delivery of the aircraft to the customer, with the average being approximately
six months. Asproduction, as the Company suppliesdelivers its
products on average six to nine months ahead of the delivery of an aircraft.
Boeing has publicly indicated that it may be able to sustain aircraft
production at the current level of 490 per year, due in part to the continued
economic recovery in Asia, while Airbus is projecting a commercialmodest increase in
aircraft it starteddeliveries to seemore than 300 per year. At the impact of future reduced Boeing
production rates on the procurement of the Company's productssame time, independent
forecasts indicate continued growth in the second
quarterproduction of 1999,regional and expects that it will continue to see this impact in the
second half of 1999.
During 1998, the Company's commercial aerospace customers started
emphasizing the need for material yield improvement as well as cost and
inventory reduction throughout the industry's supply chain. In response to these
pressures, the Company reduced the price of certain products in 1999. Further,
the Company is aware that by the fourth quarter of 1999, one customer will have
substituted one of Hexcel's premium products for a lower cost, lower priced
alternative product, which will also be provided by Hexcel. Although these
changes impact the Company's profit margins, they have been mitigated, in part,
by the Company's various cost reduction and efficiency improvement programs.business
aircraft.
Space and defense net sales for the secondfirst quarter of 2000 decreased 31% to
$26.4 million, from $38.4 million for the first quarter of 1999. This decrease
primarily reflects the conclusion of certain space and defense contracts in the
second half of 1999, were $33.3
million, or comparable to pro forma second quarter 1998 net salesas well as the impact of $32.6
million. The Company expects to benefit from a number of new U.S.declining demand for satellites
and European
military aircraft programs which continue to move towards full scale production
starting as early as late 2000.
The Company believes that,satellite launch vehicles in response to recent launch failures and concerns
about the financial viability of certain satellite ventures. However, Hexcel is
currently qualified to supply materials to a significant shortagebroad range of carbon fiber supply in 1997, a number of the Company's customers,
particularly thosemilitary aircraft
and helicopters scheduled to enter full-scale production in the spacenear future.
These programs include the V-22 (Osprey) tilt-rotor, the F/A-18E/F (Hornet), the
F-22 (Raptor), the European Fighter Aircraft (Typhoon), and defense market, purchased and/or ordered
more carbon fiber than they needed during 1997the RAH-66
(Comanche) and 1998. Now that carbon
fiber supplies are more certain, customers are reducing their inventories and
purchasing less carbon fiber in 1999. Further the Company's sales of carbon
fiber to commercial aerospace applications are reflecting the trends in that
market. While the Company is seeking to find opportunities to sell its
short-term excess capacity in other markets, the increase in worldwide carbon
fiber capacity limits the prices at which such surplus capacity can be sold.NH90 helicopters.
Electronics net sales decreased 7%increased 3% to $42.2$43.6 million for the secondfirst quarter
of 1999,2000, from $45.4$42.3 million on a pro forma basis for the second
quarter of 1998. The reduction in electronics net sales primarily reflects
the impact of price reductions, net of volume increases, for the Company's
electronic fiberglass products. Global pricing across the PCB laminate supply
chain has been reduced over the last twelve months due to intense competition
from Asian manufacturers seeking to sell their excess capacity in Western
markets. Nevertheless, the prices for electronic fiberglass products have
been relatively stable during the second quarter of 1999, after the last
round of price reductions that were made in the first quarter of 1999. The Company has been successfulincrease in sales
reflects sales volume growth for Hexcel's lightweight fiberglass fabrics used in
electronic applications, partially offsetting these price reductionsoffset by obtaining lower raw material prices.a decrease in sales of heavyweight
electronic fabrics. The increase in sales of lightweight fiberglass fabrics
reflects both the growing use of electronic devices throughout the world, as
well as the Company's success in securing additional business from a major
producer of high-quality printed circuit board laminates.
13
Demand for lightweight fiberglass fabrics continues to grow and global
manufacturing capacity appears to be tightening. During the first quarter of
2000, Hexcel started to switch some of its heavyweight fabric production
capacity to meet lightweight fabric demand. In addition, the Company continuesplans to
seek opportunitiesinstall additional lightweight fabric looms by the end of the year to reducemeet the
costexpected continuing growth in demand, and is evaluating how it may further
expand its lightweight fabric manufacturing capacity to support market growth.
Industrial net sales for the first quarter of its products, and during2000 increased 12% to $57.9
million, from $51.6 million for the first quarter of 1999, announced the closure of its Cleveland, Georgia plant as a
targeted cost reduction action.
General industrial netprimarily reflecting
growth in sales for wind energy applications and increased sales of $39.9 million for the second quarter of
1999 were comparable to pro forma second quarter 1998 net sales of $41.2
million. Recreation net sales decreased 18% in the second
16
quarter of 1999 to $13.5 million compared to pro forma second quarter 1998 net
sales of $16.4 million, reflecting reduced customer demand for certain products
in this market, including, one particular customer who has changed the design of
many of its athletic shoes to alternative materials.
BACKLOG: The backlog of commercial aerospace and space and defense orders
scheduled for delivery in the next 12 months was as follows:
-----------------------------------------------------------------------------------------
UNAUDITED
-----------------------------------------------------------
COMMERCIAL SPACE AND
(IN MILLIONS) AEROSPACE DEFENSE TOTAL
-----------------------------------------------------------------------------------------
AS OF JUNE 30, 1999
Reinforcement products $ 8.7 $ 5.9 $ 14.6
Compositecomposite
materials 157.0 35.7 192.7
Engineered products 141.4 10.4 151.8
-----------------------------------------------------------------------------------------
Total $ 307.1 $ 52.0 $ 359.1
-----------------------------------------------------------------------------------------
AS OF DECEMBER 31, 1998
Reinforcement products $ 5.9 $ 6.5 $ 12.4
Composite materials 226.9 40.1 267.0
Engineered products 165.1 7.6 172.7
-----------------------------------------------------------------------------------------
Total $ 397.9 $ 54.2 $ 452.1
-----------------------------------------------------------------------------------------
AS OF JUNE 30, 1998
Reinforcement products $ 10.0 $ 15.5 $ 25.5
Composite materials 215.0 48.1 263.1
Engineered products 159.1 9.2 168.3
-----------------------------------------------------------------------------------------
Total $ 384.1 $ 72.8 $ 456.9
-----------------------------------------------------------------------------------------
The decrease in the Company's commercial aerospace backlog is
attributable to build rates, which are expected to peak in 1999, and the
continuing trend towards shorter lead times and better supply-chain
management by the industry overall. Because the Company supplies its products
ahead of the delivery of a commercial aircraft, it has started to experience
the impact of the lower anticipated deliveries of Boeing aircraft in 2000.
The decrease in the Company's space and defense backlog compared to June 30,
1998 is also believed to be primarily attributable to the continuing trend
towards shorter lead times and better supply-chain management by the industry
overall. Backlog for the Company's other markets is not a material trend
indicator and accordingly, such amounts are not presented.automotive industry.
GROSS MARGIN: Gross margin for the secondfirst quarter of 19992000 was $66.3$62.2 million,
or 22.6%22.2% of net sales, compared with $71.2$70.8 million, or 26.0%22.4% of net sales, for
the secondfirst quarter of 1998 and $82.9 million, or 25.5% of net sales,
for pro forma second quarter 1998.1999. The decrease compared to 1998 pro formadecline in gross margin dollars, relative to the
first quarter of 1999, reflects reducedlower sales volume and selected lower pricing inlevels, while the commercial aerospace market asmaintenance of a
result ofcomparable gross margin percentage reflects the supply chain impacts of Boeing's
planned reduction in deliveries in 2000, lower prices in the global electronics
market because of intensified competition from Asia, and lower production, sales
and weaker sales mix of carbon fiber products. These impacts have been partially
offset by various cost savings initiatives. The Company is pursuing efforts to
further reduce costs and increase productivity through its business
consolidation, global procurement and Lean Enterprise initiatives. By mid-1999,
the Company's Lean Enterprise program had been extended to a large portionbeneficial impact of the
Company's U.S. and European locations, and will continue to be extended to
all of its locations by the end of 1999. The improvements in cost and
productivity are expected to be offset by the impact of lower commercial
aerospace demand in the U.S. and customer requirements for reductions in the
costs of the products that they purchase from the Company.reduction activities.
OPERATING INCOME: Operating income was $24.9$21.8 million in the secondfirst quarter
of 1999,2000, or 8.5%7.8% of net sales, compared with $38.2$27.1 million in the secondfirst quarter
of 1998,1999, or 13.9%8.6% of net sales. Excluding 17
business acquisition and consolidation expenses,
1999 second quarter operating income in the first quarter of 2000 was $26.2$23.0 million or 9.0%8.2% of net
sales.sales, compared with $29.9 million, or 9.5% of net sales, in the first quarter
of 1999. The aggregate decrease in operating income, excluding business
acquisition and consolidation ("BA&C") expenses, reflects the decrease in net sales, and gross margins, and increasedpartially offset by
a reduction in selling, general and administrative ("SG&A") and research and technology ("R&T")
expenses over the
secondfirst quarter 1998.of 1999. SG&A expenses were $33.7$32.9 million, or 11.5%11.8% of net sales
for the secondfirst quarter of 19992000 compared with $27.2$34.4 million, or 9.9%10.9% of net sales
for the secondfirst quarter of 1998. The aggregate dollar
increase in SG&A was primarily attributable to the Acquired Clark-Schwebel
Business, including $2.3 million of goodwill amortization,1999. Research and costs associated
with the implementation of the Company's Lean Enterprise and supply-chain
initiatives. R&Ttechnology expenses for the second quarter of 1999 were $6.3
million, or 2.2%2.3% of net sales which were comparable to secondfor the first quarter 1998 expenses of $5.92000 compared with $6.5
million, or 2.2% of net sales.
INTEREST EXPENSE: Interest expense was $18.4 million, or 6.3%2.1% of net sales in the second quarter of 1999, compared to $6.7 million, or 2.5% of net sales,
in the second quarter of 1998. The increase primarily reflects the additional
financing required for the Acquired Clark-Schwebel Business.
EQUITY IN EARNINGS OF AFFILIATED COMPANIES: As part of the Acquired
Clark-Schwebel Business, the Company acquired interests in three joint
ventures. Competitive conditions in the electronics market, arising from the
Asian economic recession last year, continued to impact the performance of two
of these joint ventures during the secondfirst quarter of 1999.
As a result, the
Company recognized a nominal amount of equity in earnings of affiliated
companies in the second quarter of 1999.
NET INCOME AND NET INCOME PER SHARE: Net income for the second quarter of
1999 was $4.3 million compared with $20.0 million for the second quarter of
1998. Pro forma second quarter 1998 net income, after giving effect to the
acquisition of the Acquired Clark-Schwebel Business as if the transaction had
occurred at the beginning of 1998, was $20.1 million.
-----------------------------------------------------------------------------------------------------------------
FOR THE QUARTER ENDED JUNE 30,
-----------------------------------------
Pro FormaNET INCOME AND NET INCOME PER SHARE:
- ---------------------------------------------------------------------------------------------------------------------
(IN MILLIONS, EXCEPT PER SHARE AMOUNT)DATA) 2000 1999
1998 1998
-----------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
Net income $ 2.6 $ 5.2
Diluted net income per share $ 0.120.07 $ 0.47 $ 0.46
Adjusted diluted net income per share, excluding BA&C expenses $ 0.14 $ 0.47 $ 0.46
Diluted net income per share, excluding goodwill amortization $ 0.170.13 $ 0.51 $ 0.47
Diluted weighted average shares outstanding 36.6 46.5 46.5
-----------------------------------------------------------------------------------------------------------------
The decrease in the number of weighted average shares is primarily
attributable to the exclusion of 8.1 million of potential common shares relating
to the Convertible Subordinated Notes, due 2003, and the Convertible
Subordinated Debentures, due 2011, which were antidilutive in the 1999 period.
Refer to Note 7 to the accompanying condensed consolidated financial statements
for the calculation and the number of shares used for diluted net income per
share.
18
YEAR-TO-DATE RESULTS
-----------------------------------------------------------------------------------------------
YEAR-TO-DATE ENDED JUNE 30,
------------------------------------------------
Pro Forma
(IN MILLIONS, EXCEPT PER SHARE DATA) 1999 1998 1998
-----------------------------------------------------------------------------------------------
Net sales $ 608.9 $ 642.0 $ 530.3
Gross margin % 22.5% 25.5% 25.9%
Adjusted operating income % 9.2% 13.5% 13.6%
Adjusted EBITDA $ 87.6 $ 116.7 $ 91.8
Business acquisition & consolidation expenses $ 4.2 $ --- $ ---
Net income $ 9.5 $ 38.3 $ 37.0
Adjusted net income $ 12.2 $ 38.3 $ 37.0
-----------------------------------------------------------------------------------------------
Diluted net income per share $ 0.26 $ 0.89 $ 0.86
Adjusted diluted net income per share $ 0.33 $ 0.89 $ 0.86
-----------------------------------------------------------------------------------------------
NET SALES AND GROSS MARGIN: Net sales for the first half of 1999 were
$608.9 million, compared with $530.3 million for the first half of 1998 and pro
forma first half 1998 net sales of $642.0 million. Gross margin for the first
half of 1999 was $137.1 million, or 22.5% of sales, versus gross margin of
$137.3 million, or 25.9% of sales, for the same period in 1998 and $163.9
million, or 25.5% of net sales, for pro forma first half of 1998. The decrease
in net sales and gross margin compared to pro forma 1998 results primarily
reflect the factors previously discussed. On a constant currency basis, 1999
year-to-date net sales would not have been materially different than reported.
The following table summarizes net sales to third-party customers by
product group and market segment for the year-to-date period ended June 30, 1999
and pro forma net sales for the year-to-date period ended June 30, 1998:
- --------------------------------------------------------------------------------------------------------------------
UNAUDITED
------------------------------------------------------------------------------------
COMMERCIAL SPACE & GENERAL
(IN MILLIONS) AEROSPACE DEFENSE ELECTRONICS INDUSTRIAL RECREATION TOTAL
- --------------------------------------------------------------------------------------------------------------------
FIRST HALF 1999
Reinforcement products $ 25.1 $ 11.0 $ 84.5 $ 42.4 $ 6.0 $ 169.0
Composite materials 224.2 51.9 --- 36.0 21.3 333.4
Engineered products 97.5 6.7 --- 2.3 --- 106.5
- --------------------------------------------------------------------------------------------------------------------
Total $ 346.8 $ 69.6 $ 84.5 $ 80.7 $ 27.3 $ 608.9
57% 11% 14% 13% 5% 100%
- --------------------------------------------------------------------------------------------------------------------
PRO FORMA FIRST HALF 1998
Reinforcement products $ 24.2 $ 14.6 $ 97.6 $ 54.4 $ 10.2 $ 201.0
Composite materials 241.7 44.3 --- 25.9 22.8 334.7
Engineered products 99.4 5.1 --- 1.8 --- 106.3
- --------------------------------------------------------------------------------------------------------------------
Total $ 365.3 $ 64.0 $ 97.6 $ 82.1 $ 33.0 $ 642.0
57% 10% 15% 13% 5% 100%
- --------------------------------------------------------------------------------------------------------------------
OPERATING INCOME: Operating income for the first six months of 1999 was
$52.0 million, compared with $71.9 million for the same period in 1998.
Excluding business acquisition and consolidation expenses of $4.2 million
incurred in the first half of 1999, the aggregate decrease in operating
income is the result of lower sales and gross margins, primarily in the
commercial aerospace and electronics markets, and lower carbon fiber
production and sales, as well as increases in SG&A and R&T expenses. SG&A
expenses were $68.1 million, or 11.2% of sales, for the first half of 1999,
compared to $54.4 million, or 10.3% of sales, for the same period in 1998.
The increase in SG&A expenses was primarily attributable to the Acquired
Clark-Schwebel Business, including $4.6 million of goodwill amortization, and
costs associated with the implementation of the Company's Lean Enterprise and
supply-chain
19
initiatives. R&T expenses were $12.8 million, or 2.1% of sales, for the first
half of 1999, compared to $11.1 million, or 2.1% of sales, for the comparable
1998 period.
INTEREST EXPENSE: Interest expense for the first half of 1999 was $37.5
million, or 6.2% of net sales, compared to $13.7 million, or 2.6% of net sales,
in the first half of 1998. The increase primarily reflects the additional
financing required for the Acquired Clark-Schwebel Business.
EQUITY IN EARNINGS OF AFFILIATED COMPANIES: As previously discussed,
competitive conditions in the electronics market have impacted the
performance of the Company's joint ventures, resulting in a nominal amount of
equity in earnings of affiliated companies in the year-to-date period ended
June 30, 1999.
NET INCOME AND NET INCOME PER SHARE: Net income for the first half of 1999
was $9.5 million versus $37.0 million for the comparable 1998 period. Pro forma
1998 year-to-date net income, after giving effect to the acquisition of the
Acquired Clark-Schwebel Business as if the transaction had occurred at the
beginning of 1998, was $38.3 million.
-----------------------------------------------------------------------------------------------------
YEAR-TO-DATE ENDED JUNE 30,
-----------------------------------
Pro Forma
(IN MILLIONS, EXCEPT PER SHARE AMOUNT) 1999 1998 1998
-----------------------------------------------------------------------------------------------------
Diluted net income per share $ 0.26 $ 0.89 $ 0.860.20
Adjusted diluted net income per share, excluding BA&Cbusiness consolidation expenses $ 0.330.09 $ 0.89 $ 0.86
Diluted net income per share, excluding goodwill amortization $ 0.36 $ 0.97 $ 0.880.19
Diluted weighted average shares outstanding 36.8 36.5
46.4 46.4
-----------------------------------------------------------------------------------------------------
The decrease in the number- ---------------------------------------------------------------------------------------------------------------------
Refer to Note 5 to the accompanying condensed consolidated financial
statements for the calculation of diluted weighted average shares is primarily
attributable to the exclusion of 8.1 million of potential common shares relating
to the Convertible Subordinated Notes, due 2003, and the Convertible
Subordinated Debentures, due 2011, which were antidilutive in the 1999 period.
Refer to Note 7 to the accompanying condensed consolidated financial statements
for the calculation and the number of shares used for diluted net income per share.
FINANCIAL CONDITION AND LIQUIDITY
FINANCIAL RESOURCES
Debt, net of cash, as of June 30, 1999 was $832.5 million compared to
$857.5 million as of December 31, 1998. The Company generated free cash flow of
$25.0 million during the six months ended June 30, 1999. The generation of free
cash flow was used to repay the Company's debt and transaction costs associated
with the senior subordinated notes offering (see below).SENIOR CREDIT FACILITY
In connection with the acquisition of the Acquiredindustrial fabrics business of
Clark-Schwebel, BusinessInc. on September 15, 1998, Hexcel obtained a new global credit
facility (the "Senior Credit Facility") to: (a) fund the purchase of the
Acquired
Clark-Schwebel Business;industrial fabrics business; (b) refinance the Company's existing revolving credit
facility; and (c) provide for ongoing working capital and other financing
requirements of the Company. The Senior Credit Facility was subsequently amended
on January 21, 1999, August 13, 1999 and March 7, 2000, to accommodate, among
other things, the issuance of $240.0 million of 9.75% senior subordinated notes
and the impact of the decline in the Company's operating results on certain
financial covenants.
14
Effective with the March 7, 2000, amendment, the Senior Credit Facility
provides up
to $671.5Hexcel with approximately $516.5 million of borrowing capacity, of which, approximately $544 millionsubject
to certain limitations. Interest on outstanding borrowings ranges from 0.75% to
3.00% in excess of the facility expires in September 2004, withapplicable London interbank rate, or at the balance expiring in 2005.
In January 1999, simultaneously with the closingoption of the
Company's $240.0
million offeringCompany, from 0.0% to 2.00% in excess of 9 3/4% senior subordinated notes offering, the Company
amendedbase rate of the administrative
agent for the lenders. Prior to March 2000, the upper limits of these interest
ranges were 2.75% and 1.75%, respectively. In addition, the Senior Credit
Facility is subject to among other things, reducea commitment fee that ranges from 0.23% to 0.50% per
annum of the available borrowing capacity from $910.0 milliontotal facility. The Senior Credit Facility is secured by a pledge
of shares of certain of Hexcel's subsidiaries, as well as a security interest in
certain U.S. accounts receivable, inventories, and machinery and equipment.
Further, under certain defined circumstances, the Company has agreed to $671.5 million, modifyprovide
the lenders with a security interest in certain additional U.S. accounts
receivable, inventories, machinery and equipment, and land and buildings on
September 30, 2000. The Company is subject to various financial covenants and
permitrestrictions under the offering. On August 13, 1999, the
Company further amended its Senior Credit Facility, modifying certain
financial covenantsincluding a limitation on the
redemption of capital stock and a general prohibition against the applicable interest rates payable, increasingpayment of
dividends.
Hexcel completed the interest expense to the Company for borrowings under the facility by about
1/4%.
20
On January 21, 1999, the Company issued $240.0sale of its Bellingham aircraft interiors business on
April 26, 2000, and used approximately $111.6 million of Senior
Subordinated Notes due 2009 (the `Senior Subordinated Notes"). The Senior
Subordinated Notes are general unsecured obligations of Hexcel that bear
interest at a rate of 9 3/4% per annum. Netnet proceeds of approximately $230.5
million from this offering were usedthe
sale to repay amounts owedoutstanding term debt under the Senior Credit Facility. TheAs a
result of this repayment, the total borrowing capacity available to the Company
under the Senior Subordinated Notes are redeemable beginning in
January of 2004, in whole or in part, at the option of Hexcel. The redemption
prices rangeCredit Facility was reduced from 104.9%approximately $516.5 million
to 100.0% of the outstanding principal amount,
depending on the period in which redemption occurs. On February 17, 1999, Hexcel
redeemed $12.5 million of its increasing rate senior subordinated notes payable
to its affiliate, Ciba Specialty Chemicals Inc. Such redemption was financed
withapproximately $405 million. Outstanding borrowings under the Company's Senior Credit
Facility.
On June 18, 1999, the Company commenced its offer to exchange all of its
outstanding Senior Subordinated Notes which were sold under Rule 144A of the
Securities Act of 1933 for a like principal amount of new senior subordinated
notes which were registered under the Securities Act of 1933. This exchange
offerFacility totaled $212.8 million on April 26, 2000, and unused borrowing
capacity was completed on July 19, 1999 with all original Senior Subordinated
Notes outstanding being exchanged for the new notes. The form and terms of
the new notes are identical in all material respects to the original notes.approximately $182.1 million at that date.
The Company expects that its financial resources, including the Senior Credit Facility will be sufficient to
fund the Company'sits worldwide operations for the foreseeable future. The Senior Credit
Facility is scheduled to expire in September 2004, except for approximately $59
million which is due for repayment in September 2005. Further discussion of the
Company's financial resources is contained in Note 53 to the accompanying
condensed consolidated financial statements.
CAPITAL EXPENDITURES
Capital expenditures totaled $18.0$4.4 million for the first halfthree months of
19992000 compared to $27.4$9.4 million for the first halfthree months of 1998 and $30.1 million for the
first half of 1998 on a pro forma basis.1999. The Company
anticipates that its 1999expects total capital expenditures will approximate $40 to $45 million, compared to pro forma
full year 1998 capital expendituresfor 2000 of approximately $70$40 million. The decrease
reflects reduced spending due to changing market conditions, the expected
benefits from the Company's Lean Enterprise program, and a commitment by Hexcel
to reduce its debt.
OTHER CAPITAL COMMITMENTS
Hexcel has total estimated financial commitments to its joint ventures
in China and Malaysia of approximately $31 million. These commitments are
expected to be made in increments through 2001, including an estimated $5
million in the second half of 1999. Investments in these joint ventures to
date have been nominal.
ADJUSTED EBITDA, CASH FLOWS AND RATIO OF EARNINGS TO FIXED CHARGES
FIRST HALF, 1999:QUARTER, 2000: Earnings before business acquisition and consolidation expenses, other income,
interest, taxes, depreciation, and amortization, and equity in earningsincome of affiliated
companies ("Adjusted EBITDA") for the first quarter of 2000 was $87.6$38.0 million.
Net cash used for operating activities was $6.1 million, as working capital
changes of $18.0 million and deferred income taxes of $4.5 million more than
offset $2.6 million of net income, $15.0 million of depreciation and
amortization and cash provided by all other operating activities.
Net cash used for investing activities was $7.8 million, reflecting the
Company's capital expenditures and investments in affiliated companies for the
quarter. Net cash provided by financing activities was $17.8 million.
FIRST QUARTER, 1999: Adjusted EBITDA for the first quarter of 1999 was
$45.6 million. Net cash provided by operating activities was $48.1$17.3 million, as
$9.5$5.2 million of net income $31.5and $15.6 million of non-cash depreciation and
amortization
and $11.5 million of working capital changes more than offset cash used by all other operating activities.
21
Net cash used for investing activities was $18.0$9.4 million, reflecting the
Company's capital expenditures for the first six months of 1999.quarter. Net cash used for financing
activities was $31.3$12.4 million, primarily reflecting a net debt
repayment of $22.5 million, and $9.5$9.0 million of debt issuance
costs pertaining to the issuance of the Senior Subordinated Notes.
FIRST HALF, 1998:Company's senior subordinated notes.
Adjusted EBITDA was $91.8 million. Pro forma Adjusted
EBITDA, after giving effect to the acquisition of the Acquired Clark-Schwebel
Business as if the transaction had occurred at the beginning of 1998, was $116.7
million. Net cash provided by operating activities was $22.8 million, as
increased working capital of $38.2 million and restructuring payments of $3.1
million partially offset $37.0 million of net income and $27.1 million of
non-cash depreciation and amortization and deferred income taxes. The increase
in working capital reflected higher levels of accounts receivable and inventory
due to higher sales volume, as well as reductions in accrued liabilities from
peak year-end levels, primarily due to the payments made in 1998 for capital
projects and employee incentive and benefit programs incurred during 1997.
Net cash used for investing activities was $28.1 million, primarily
reflecting $27.4 million of capital expenditures. Net cash provided by financing
activities totaled $2.3 million.
Adjusted EBITDA and pro forma Adjusted EBITDA havehas been presented to provide a measure of Hexcel's
operating performance that is commonly used by investors and financial analysts
to analyze and compare companies. Adjusted EBITDA may not be comparable to
similarly titled financial measures of other companies. Adjusted EBITDA and pro forma Adjusted EBITDA dodoes not
represent alternative measures of the Company's cash flows or operating income,
and should not be considered in isolation or as substitutesa substitute for measures of
performance presented in accordance with generally accepted accounting
principles.
15
Reconciliations of net income to EBITDA and Adjusted EBITDA for the
quarters ended March 31, 2000 and 1999, are as well as thefollows:
- ------------------------------------------------------------------------------------ --------------- ----------------
(IN MILLIONS) 2000 1999
- ------------------------------------------------------------------------------------ ------ -------- ----- ----------
Net income $ 2.6 $ 5.2
Provision for income taxes 1.2 2.8
Interest expense 18.4 19.1
Depreciation and amortization expense 15.0 15.6
Equity in income of affiliated companies (0.4) -
Other - 0.1
- ------------------------------------------------------------------------------------ ------ -------- ----- ----------
EBITDA 36.8 42.8
Business consolidation expenses 1.2 2.8
- ------------------------------------------------------------------------------------ ------ -------- ----- ----------
Adjusted EBITDA $ 38.0 $ 45.6
- ------------------------------------------------------------------------------------ ------ -------- ----- ----------
The ratio of earnings to fixed charges for the applicable periods, are as follows:
- ---------------------------------------------------------------------------------------------------------------------
QUARTER ENDED JUNE 30, YEAR-TO-DATE ENDED JUNE 30,
------------------------------------------------------------------------
PRO FORMA PRO FORMA
(IN MILLIONS) 1999 1998 1998 1999 1998 1998
- ---------------------------------------------------------------------------------------------------------------------
Net income $ 4.3 $ 20.1 $ 20.0 $ 9.5 $ 38.3 $ 37.0
Provision for income taxes 2.2 10.3 11.4 5.0 19.7 21.2
Interest expense 18.4 16.1 6.7 37.5 32.5 13.7
Depreciation and amortization expense 15.8 14.8 9.9 31.5 29.9 19.9
Equity in earnings of affiliated companies (0.1) (2.1) --- (0.1) (3.7) ---
- ---------------------------------------------------------------------------------------------------------------------
EBITDA 40.6 59.2 48.0 83.4 116.7 91.8
Business acquisition and consolidation
expenses 1.4 --- --- 4.2 --- ---
- ---------------------------------------------------------------------------------------------------------------------
Adjusted EBITDA $ 42.0 $ 59.2 $ 48.0 $ 87.6 $ 116.7 $ 91.8
- ---------------------------------------------------------------------------------------------------------------------
Ratio of earnings to fixed charges 1.3x 5.4x 2.9x 1.4x 5.1x 2.8x
- ---------------------------------------------------------------------------------------------------------------------
The decrease in the earnings to fixed charges ratios reflect the Company's
lower operating incomequarters ended March 31,
2000 and higher interest costs.1999, were 1.2x and 1.4x, respectively. The calculation of earnings to
fixed charges assumes that one-third of the Company's rental expense is
attributable to interest expense.
22
INVESTMENT IN CS-INTERGLAS AG
The Company has a fixed-price option to increase the equity position in
its CS-Interglas investment from 43.6% to 84%, which expires onBUSINESS CONSOLIDATION PROGRAMS
Total accrued business consolidation expenses at December 31, 1999. In1999 and
March 31, 2000, activity during the Company's opinion, this fixed-price option is significantly
higher than its current fair market value. Asquarter ended March 31, 2000, and a result, the Company intends
to allow the option to expire unexercised.
In accordance with Statementbrief
description for each of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of", the Company is evaluating its investment in CS-Interglas.
A number of factors are leading to this evaluation, including, a decline in
the investment's market value, changes in the business climate in which the
investment operates in and the Company's decision to allow the option to
expire unexercised. Once the Company's business plans have been developed,
the Company will assess the applicable fair value of its investment in
CS-Interglas.
BUSINESS ACQUISITION AND CONSOLIDATION ACTIVITIES
Over the past few years, the Company hasconsolidation programs is as
follows:
- --------------------------------------------------------------- -------------------- -------------- ----------------
SEPTEMBER DECEMBER
1999 1998
(IN MILLIONS) PROGRAM PROGRAM TOTAL
- --------------------------------------------------------------- -------------------- -------------- ----------------
BALANCE AS OF DECEMBER 31, 1999 $ 3.1 $ 1.0 $ 4.1
Business consolidation expenses 1.2 - 1.2
Cash expenditures (1.6) (0.4) (2.0)
Reclassification to accrued liabilities - (0.6) (0.6)
- --------------------------------------------------------------- -- -------------- ------- --------- ------ ---------
BALANCE AS OF MARCH 31, 2000 $ 2.7 $ - $ 2.7
- --------------------------------------------------------------- -- -------------- ------- --------- ------ ---------
SEPTEMBER 1999 PROGRAM
On September 27, 1999, Hexcel announced and undertaken two majora business consolidation programs.program
that entails a rationalization of manufacturing facilities for certain product
lines. The objectives of this program are to eliminate excess capacity and
overhead, improve manufacturing focus and yields, and create additional centers
of manufacturing excellence. Specific actions contemplated by this program
include consolidating the production of certain product lines, including moving
equipment and requalifying the respective product lines; vacating certain leased
facilities; and consolidating the Company's Composite materials business
segment's U.S. marketing, research and technology, and administrative functions
into one location. The consolidation program calls for the elimination of
approximately 400 positions (primarily manufacturing), and a total reduction in
occupied floor space of over 250,000 square feet. Total expenses and cash
expenditures for this program are expected to approximate $33 million and $27
million respectively. Expected cash expenditures include $6.0 million of capital
expenditures.
16
Accrued business consolidation expenses as of March 31, 2000, and
related activity for this program since December 31, 1999, were as follows:
- --------------------------------------------------------------- ----------------- ---------------- -----------------
EMPLOYEE FACILITY &
SEVERANCE & EQUIPMENT
(IN MILLIONS) RELOCATION RELOCATION TOTAL
- --------------------------------------------------------------- ----------------- ---------------- -----------------
BALANCE AS OF DECEMBER 31, 1999 $ 2.5 $ 0.6 $ 3.1
Business consolidation expenses 0.4 0.8 1.2
Cash expenditures (0.5) (1.1) (1.6)
- --------------------------------------------------------------- ---- ------------ ---- ----------- ------ ----------
BALANCE AS OF MARCH 31, 2000 $ 2.4 0.3 2.7
- --------------------------------------------------------------- ---- ------------ ---- ----------- ------ ----------
For the quarter ended March 31, 2000, Hexcel recognized $1.2 million of
business consolidation expenses for this program. As of December 31, 1999 and
March 31, 2000, accrued expenses for this program primarily reflected accrued
severance and costs for early termination of certain leases. The Company's
policy is to pay severance over a period of time rather than in a lump-sum
amount.
DECEMBER 1998 PROGRAM
In December 1998, Hexcel announced consolidation actions within its
reinforcement fabricsReinforcement Products and composite materials
businesses.Composite Materials business segments. These actions
included the integration of Hexcel'sthe Company's existing fabrics business with the
U.S. operations of the Acquired Clark-Schwebel Business,acquired industrial fabrics business, and the combination
of the Company's U.S., European and Pacific Rim composite materials businesses
into a single global business unit. In 1996, Hexcel
announced plansThe objectives of these actions were to
integrateeliminate redundancies, improve manufacturing planning, and consolidate its acquired composites and carbon
fibers and prepreg businesses into Hexcel, including reorganizing the Company's
manufacturing and research activities around strategic centers dedicated to
select product technologies.enhance customer
service. The Company's consolidation activities with respect
toCompany substantially completed these programs are expected to be substantially complete by the end of 1999.
Duringactions in the first halfquarter
of 1999, which resulted in the elimination of approximately 100 operating,
sales, marketing and administrative positions.
On March 16, 1999, the Company recorded $4.2 millionexpanded its actions relating to the
integration of BA&C
expenses, primarily reflecting the costsacquired industrial fabrics business with the announcement of
closingthe closure of its Cleveland, Georgia, facility, as well aswhich at that time employed
approximately 100 manufacturing positions. This facility produced fabrics for
the eliminationelectronics market, and the majority of certain additional administrative
positions relating to the consolidation of the composite materials business
unit. Included in the 1999 BA&C expense,its production equipment was
a $1.8 million non-cash write-down
of equipment that will be disposed of from the Cleveland facility. The Company
expects to record an additional charge of approximately $1.2 million during the
third quarter of 1999 relating to the relocation of certain equipment from the
Cleveland facilityrelocated to the Company's Anderson, South Carolina facility. In
addition toThe closure of
this facility, which was completed on September 3, 1999, was the Cleveland, Georgia facility closure, the Company is continuing
to conduct a global capacity review, as well as a reviewresult of
its administrative
activities. These reviews may resultcompetitive conditions in the closing or right-sizingglobal market for electronic fiberglass materials,
and was not expected at the time of additional facilities or further reductions in administrative personnelthe acquisition of the industrial fabrics
business.
Accrued business consolidation expenses at December 31, 1999 and as
a result, additional consolidation charges may be recognized in 1999.
For the six months ended June 30, 1999, the Company disbursed $6.6March 31,
2000 for this program, were $1.0 million for its BA&C activities, with such expenditures being financed with operating
cash flows. These expenditures primarilyand $0.6 million, respectively, all of
which related to accrued employee severance paymentsfor terminated employees, and there
were no business consolidation expenses incurred for this program during the
disposalfirst quarter of the Company's Italian Operations. In June 1999, the Company sold its
Italian Operations, which was originally part of the 1996 acquired composites
business, for immaterial proceeds, resulting in a loss on disposal that
approximated amounts accrued. The amounts accrued approximated the Italian
operations' debt plus certain employee retirement costs, which the Company
agreed to either maintain or pay out.2000. As of June 30, 1999, the Company had accrued BA&C expenses of approximately
$3.7 million, which is expected to be disbursed in the second half of 1999.
23
Estimated savings from the Company's recent BA&C activities include
approximately $10 million per year for those actions announced in December 1998
and approximately $5 million per year relating to the closure of the Company's
Cleveland facility and the disposal of its Italian operations. The Company has
already begun to realize those savings fromMarch 31, 2000, the December 1998 actions.
Further discussionsbusiness
consolidation program was substantially completed, except for the accrued
severance of $0.6 million, which will be paid over the Company's BA&C activities are containednext two years.
17
RECENTLY ISSUED ACCOUNTING STANDARDS
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition," which
provides guidance on the recognition, presentation, and disclosure of revenue in
Note
6financial statements filed with the SEC. SAB 101 outlines the basic criteria
that must be met in order to recognize revenue, and provides guidance for
disclosures related to revenue recognition policies. In March 2000, the SEC
issued SAB 101A, "Amendment: Revenue Recognition in Financial Statements," which
extends the effective date of SAB 101 to the accompanying condensed financial Statements
YEAR 2000 READINESS DISCLOSURE
Hexcel, like most other companies, is continuing to address whether its
information technology systems and non-information technology devices with
embedded microprocessors (collectively "Business Systems and Devices") will
recognize and process dates starting with the year 2000 and beyond (the "Year
2000"). The Year 2000 issue can arise at any point in the Company's supply,
manufacturing, processing and distribution chains. Hexcel does not, however,
manufacture or sell products that contain microprocessors or software.
In early 1998, Hexcel established a central Year 2000 project office to
coordinate and monitor progress towards achieving corporate-wide Year 2000
compliance. With certain exceptions, the Company is near completion of its
repairing, replacing and testing phases for its Year 2000 issues that have been
identified as "critical" to the Company's operations, and is proceeding, as
targeted, to substantially complete its contingency plans by the thirdsecond quarter of 1999. A discussion of the Company's critical Business Systems and Devices,
suppliers and vendors as they pertain to the Company's Year 2000 issues, as of
June 30, 1999,2000. At this
time, management is detailed as follows:
BUSINESS SYSTEMS & DEVICES
In order to address the Year 2000 issue as it relates to the Company's
Business Systems and Devices, Hexcel developed, and is in the process of
implementing, a six phase plan. The Company is also using external consulting
services, where appropriate, as part of its efforts to address its Year 2000
issue. The components of this plan and their related status, as of June 30,
1999, are detailed below and apply to both the Company's Business Systems and
its Devices:
(1) INVENTORY: This phase, which was completed in December 1998, consisted
of compiling a detailed listing of the Company's Business Systems and
Devices likely to be impacted by the Year 2000 issue.
(2) RISK ASSESSMENT AND ASSIGNING PRIORITIES: This phase consisted ofstill assessing the likelihood that a Business System or Device is not Year
2000 compliant as well as assigning a priorityimpact of importance to the
particular Business System or Device as it relates to the Company's
business operations. This phase was completed in December 1998.
(3) ASSESSING COMPLIANCE: This phase consisted of assessing Year 2000
complianceSAB 101 on the Company's
Business Systems or Devices which have
been identified as essential to the Company's businessfinancial position and results of operations.
In assessing compliance, the Company performed a variety of tasks
including, obtaining Year 2000 compliance statements and information
from the Company's vendors and service providers. This phase was
completed in March 1999. However, the Company is dependent upon its
suppliers and service providers to continue to inform Hexcel as to any
updates or changes to the information supplied to Hexcel.
24
(4) REPAIRING OR REPLACING: This phase consists of repairing and replacing
non-Year 2000 compliant Business Systems and Devices which are
essential to Hexcel's operations. This phase is approximately 90%
complete, which approximates the Company's original estimate of having
this phase substantially completed by June 30, 1999. Remaining items
to repair or replace primarily consist of wide area network upgrades,
telecommunications, and quality assurance and time and attendance
systems, for certain of the Company's facilities. These items are
anticipated to be repaired or replaced in the second half of 1999.
(5) TESTING: This phase consists of testing the repair or replacement of
those Business Systems and Devices, which are essential to the
Company's business operations. Hexcel also intends to test the
integration of the various Business Systems and Devices within the
Company's manufacturing processes. This phase is approximately 85%
complete, and is dependent upon the timing of completion of phase
four.
(6) DEVELOPING CONTINGENCY PLANS: This phase consists of developing
alternative plans in the event that a business interruption occurs
from a Year 2000 issue. Hexcel is in the early stages of this phase.
The Company has targeted September 30, 1999 as the date for
substantial completion of its contingency plans, however, the Company
believes that this phase will be on-going through to the year 2000.
SUPPLIERS & CUSTOMERS
Hexcel is also gathering information from its significant suppliers and
customers concerning their Year 2000 issues as a means of assessing risks and
developing alternatives. The Company has sent out surveys to all of its
significant suppliers and customers to determine what steps, if any, those
companies are taking to remediate their respective Year 2000 issues. Hexcel is,
however, dependent upon its suppliers and customers with respect to the
completeness and accuracy of such responses.
As of June 30, 1999, the Company has received responses from over 80% of
its significant suppliers and 50% of its significant customers. The responses
from the Hexcel's suppliers generally indicate that these parties are taking
actions to ensure that their ability to supply products or services to the
Company will not be impaired. To the extent that supplier responses to Year 2000
readiness are unsatisfactory, the Company will attempt to reduce risks of
interruptions, with such options including changes in suppliers to those who
have demonstrated Year 2000 readiness, and accumulation of inventory. The
responses from the Hexcel's customers also generally indicate that these parties
are taking actions to ensure their ability to purchase products from the Company
will not be impaired. The Company will continue to monitor the status of all of
its significant suppliers' and customers' Year 2000 readiness through to the
year 2000, in order to determine whether additional or alternative measures are
necessary.
Total estimated costs to address Hexcel's Year 2000 issues, including
preparing the Company's Business Systems and Devices to become Year 2000
compliant, is approximately $4.6 million, or $0.9 million less than the
Company's original estimate of $5.5 million. The decrease in the total estimated
costs is due to the development of less costly alternatives and the difficulties
in the original estimation process. The total estimated costs includes
approximately $2.5 million of capital expenditures to be used for the purchase
of certain capital equipment to replace equipment which is currently not Year
2000 compliant. As of June 30, 1999, approximately $2.5 million has been
incurred. The remaining estimated balance of $2.1 million represents costs to
repair or replace those items identified in phase four as well as internal costs
to manage the Company's central Year 2000 project office. The estimate does not
include any costs associated with the implementation of the Company's
contingency plans, which are in the process of being developed, however, the
Company does not anticipate these costs to be material. Hexcel
25
has not used any external resources to independently verify these cost
estimates. Due to resource constraints caused by the Year 2000 issue, the
Company is deferring other information technology projects. These deferrals,
however, are not expected to have a material adverse effect on the Company's
results of operations or financial condition.
Hexcel is progressing with the development of its Year 2000 contingency
plans. These plans are expected to be substantially completed by September 30,
1999. The Company is currently unable to assess the most reasonably likely worst
case scenarios. However, if necessary remediation actions are not completed in a
timely manner, or if Hexcel's suppliers and customers do not successfully
address their Year 2000 issues, the Company estimates that a disruption in
operations could occur. Such a disruption could result in, for example, delays
in the receipt of raw materials and distribution of finished goods, or errors in
customer orders. These consequences could have a material impact on the
operations, liquidity and financial condition of Hexcel. The Company presently
believes that by implementing its plans, including modifications to existing
Business Systems and Devices and conversion to new or upgraded software and
other systems, the Year 2000 issue will not pose significant operational
problems for the Company.
RECENTLY ISSUED ACCOUNTING STANDARD
In June 1999,1998, the Financial Accounting Standards Board ("FASB") issued Statement No.
137 (SFAS 137),133, "Accounting for Derivative Instruments and Hedging Activities--Deferral of the Effective Date of FASB Statement No. 133--an
amendment of FASB Statement No. 133."Activities" ("SFAS
133"). This Statement requires companies to record derivatives on the balance
sheet as assets and liabilities, measured at fair value. Gains or losses
resulting from changes in the values of those derivatives would be accounted for
depending on the use of the derivative and whether it qualifies for hedge
accounting. SFAS 137133, which will be adopted on January 1, 2001, is not expected
to have a material impact on Hexcel's consolidated financial statements. This Statement is
effective for fiscal years beginning after June 15, 2000. Hexcel will adopt this
accounting standard as required by January 1, 2001.
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
Certain statements contained in "Management's Discussion and Analysis of
Financial Condition and Results of Operations," that are not of historical fact,
constitute "forward-looking statements".statements." Such forward-looking statements
include, but are not limited to: (a) estimates of commercial aerospace
production and delivery rates, including those of Boeing and Airbus; (b)
expectations regarding the growth in the production of military aircraft and
launch vehicle programs;helicopters; (c) estimates of the change in net
sales in total and by market compared to pro forma 1998 net sales; (d) expectations regarding the impact of pricing pressures from Hexcel's
customers; (e) expectations regarding the ability of Hexcel to pass along
price reductions to its customers; (f) expectations regardinggrowth in demand for electronics
fabrics as well as future sales
based on current backlog; (g)industry capacity utilization; (d) expectations
regarding sales growth, sales mix, and gross margins, manufacturing productivity and capital expenditures; (h)margins; (e) estimates of pro forma
1999 financial data; (f) expectations regarding Hexcel's full year 1999 diluted net income per share;
(i)2000 capital expenditures,
including the installation of additional fiberglass fabric looms; (g)
expectations regarding Hexcel's financial condition and liquidity, as
well as future free cash flows and Adjusted EBITDA; (j)liquidity; (h) estimated
additional business acquisitionexpenses, and consolidation expensesrelated cash costs, to be incurred in 1999; (k)
expectations regarding the expenditures, benefits and savings of Hexcel's
Lean Enterprise,for business
consolidation programs; and procurement programs, including
the closure of the Company's Cleveland, GA facility; (l) expectations
regarding full year 1999 capital expenditures and contributions to Hexcel's
joint ventures in China and Malaysia; (m) expectations regarding the fair
value of the CS-Interglas option and the investment in CS-Interglas; and;
(n) the impact of the Year 2000
26
issue,(i) the estimated costs associated with becoming Year 2000 compliant andgain resulting from the estimated target date for substantial completionsale of
remediation.Bellingham.
Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause actual results to be materially
different. Such factors include, but are not limited to, the following: the
integration of the Acquired Clark-Schwebel Business without disruption to
manufacturing, marketing and distribution activities; changes
in general economic and business conditions; changes in current pricing levels;
changes in political, social and economic conditions and local regulations,
particularly in Asia and Europe; foreign currency fluctuations; changes in
aerospace delivery rates; reductions in sales to any significant customers,
particularly Boeing or Airbus; changes in sales mix; changes in government
defense procurement budgets; changes in military aerospace programs technology;
industry capacity; competition; disruptions of established supply channels;
manufacturing capacity constraints; and the availability, terms and deployment
of capital; and the ability
of Hexcel to accurately estimate the cost of systems preparation and
successfully implement required actions for Year 2000 compliance.capital. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause actual results to be materially
different. Additional information regarding these factors is contained in the
Company's Annual Report on Form 10-K for the year ended December 31, 1998.1999.
18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A discussionOn April 26, 2000, Hexcel completed the sale of market risk exposures is includedits Bellingham aircraft
interiors business to Britax Cabin Interiors, Inc., a wholly owned subsidiary of
Britax International plc, for cash proceeds of $115.4 million, subject to
certain further post-closing adjustments. Net proceeds from the sale were used
to repay $111.6 million of the Company's term debt outstanding under its
variable rate Senior Credit Facility. Assuming a 10% favorable and unfavorable
change in Part II, Item 7A,the underlying weighted average interest rates of Hexcel's Annual Report on Form 10-K for the fiscal year ended December 31, 1998.
There hasCompany's
variable rate debt, the 1999 pro forma net loss would have been no material change to this information during the six months
ended June 30, 1999.as follows:
- --------------------------------------------------------------------------- ----------------------------------------
YEAR ENDED DECEMBER 31,
AS REPORTED PRO FORMA
1999 1999
- --------------------------------------------------------------------------- ----------------- ----------------------
Net loss $ 23.3 $ 23.2
10% favorable change 22.0 22.7
10% unfavorable change $ 24.6 $ 23.7
- --------------------------------------------------------------------------- ------- --------- ------- --------------
PART II. OTHER INFORMATION
HEXCEL CORPORATION AND SUBSIDIARIES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of the Company was held on May 20, 1999
(the "Meeting") in Stamford, Connecticut. Stockholders holding 35,119,685 shares
of Hexcel common stock were present at the Meeting, either in person or by
proxy, constituting a quorum. The following matter was submitted to the
Company's stockholders for a vote at the Meeting, with the results of the vote
indicated:
(1) Each of the ten nominees to the Board of Directors was elected by the
stockholders to serve as directors until the next annual meeting of
stockholders and until their successors are duly elected and qualified:
27
DIRECTOR FOR WITHHELD
John M. D. Cheesmond 34,944,501 175,184
Marshall S. Geller 34,944,501 175,184
Harold E. Kinne 34,944,501 175,184
John J. Lee 34,944,314 175,371
John J. McGraw 34,944,501 175,184
Martin Riediker 34,944,501 175,184
Stanley Sherman 34,944,501 175,184
Martin L. Solomon 34,944,501 175,184
George S. Springer 34,944,501 175,184
Franklin S. Wimer 34,944,501 175,184
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS:
10.1 Hexcel Corporation Incentive Stock Plan, as amended and
restated on January2.1 Consent letter dated March 30, 1997, and further amended on
December 10, 1997 and March 25, 1999 (incorporated herein by
reference2000 relating to Exhibit 4.3 of the Company's Registration
Statement on Form S-8 filed on July 26, 1999).
10.2 Hexcel Corporation Management Stock Purchase Plan, as
amended on March 25, 1999 (incorporated herein by reference
to Exhibit 4.3 of the Company's Registration Statement on
Form S-8 filed on July 26, 1999).
10.3 SecondThird
Amendment dated August 13, 1999March 7, 2000 to the Second Amended and
Restated Credit Agreement by and among Hexcel
Corporation and the Foreign Borrowers from time to time
parties thereto, the banks and other financial institutions
from time to time parties thereto, Citibank, N.A., as
Documentation Agent, and Credit Suisse First Boston, as
Administrative Agent.
22.1 The Company's Proxy Statement dated April 12, 1999,
containing the full text of the proposals referred to in
Item 4, which was previously filed electronically, is hereby
incorporated by reference.August 13, 1999.
27. Financial Data Schedule.Schedule (electronic filing only).
(B) REPORTS ON FORM 8-K:
Current Report on Form 8-K dated June 25, 1999,April 6, 2000 relating to the
commencementa press
release issued by the Company announcing an agreement to sell its
Bellingham aircraft interiors business to Britax Cabin Interiors, Inc.,
a wholly owned subsidiary of its offer to exchange any and all of
its outstanding 9 3/4% Senior Subordinated Notes due 2009 which were
sold under Rule 144A.Britax International plc.
Current Report on Form 8-K dated July 6, 1999,May 10, 2000, relating to the Company's estimated second quarter earnings.
Current Report on Form 8-K dated July 21, 1999, relating to the
Company's second quarter 1999 financial results, and the completionsale of
the Company's exchange offer for all of its outstanding 9 3/4% Senior
Subordinated Notes due 2009.
28Bellingham aircraft interiors business to Britax Cabin
Interiors, Inc. on April 26, 2000, and pro forma financial information
reflecting such sale.
19
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized, and in the capacity indicated.
HEXCEL CORPORATION
(Registrant)
August 16, 1999May 15, 2000 /s/ Wayne C. PenskyKirk G. Forbeck
- ---------------------------- ----------------------------------------------------------------- --------------------
(Date) Wayne C. Pensky,
Vice President; Corporate Controller; andKirk G. Forbeck,
Chief Accounting Officer
2920