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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended March 31, 2001
or
[ ] Transition Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the transition period from to
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 the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Class Outstanding at May 10, 2001
----- ---------------------------
COMMON STOCK 37,514,742
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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, 2001 and December 31, 2000 2
o Condensed Consolidated Statements of
Operations -- The Quarters Ended
March 31, 2001 and 2000 3
o Condensed Consolidated Statements of
Cash Flows -- The Quarters Ended
March 31, 2001 and 2000 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 18
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K 20
SIGNATURE 20
1
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
HEXCEL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
- -----------------------------------------------------------------------------------------------------------------
UNAUDITED
---------------------------------------
MARCH 31, DECEMBER 31,
(IN MILLIONS, EXCEPT PER SHARE DATA) 2001 2000
- -----------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 7.2 $ 5.1
Accounts receivable 163.9 150.3
Inventories 162.8 155.4
Prepaid expenses and other assets 6.7 5.5
Deferred tax asset 7.7 9.7
- -----------------------------------------------------------------------------------------------------------------
Total current assets 348.3 326.0
Property, plant and equipment 610.3 615.3
Less accumulated depreciation (257.7) (255.6)
- -----------------------------------------------------------------------------------------------------------------
Net property, plant and equipment 352.6 359.7
Goodwill and other purchased intangibles, net of accumulated
amortization of $39.2 in 2001 and $36.1 in 2000 387.8 391.7
Investments in affiliated companies and other assets 136.8 134.0
- -----------------------------------------------------------------------------------------------------------------
Total assets $ 1,225.5 $ 1,211.4
=================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current maturities of capital lease obligations $ 16.7 $ 22.1
Accounts payable 88.0 69.4
Accrued liabilities 101.6 106.4
- -----------------------------------------------------------------------------------------------------------------
Total current liabilities 206.3 197.9
Long-term notes payable and capital lease obligations 663.2 651.5
Other non-current liabilities 48.8 46.3
- -----------------------------------------------------------------------------------------------------------------
Total liabilities 918.3 895.7
Stockholders' equity:
Preferred stock, no par value, 20.0 shares authorized,
No shares issued or outstanding in 2001 and 2000 -- --
Common stock, $0.01 par value, 100.0 shares authorized, 38.0 shares
issued and outstanding in 2001 and 2000 0.4 0.4
Additional paid-in capital 281.9 280.7
Retained earnings 71.3 65.8
Accumulated other comprehensive loss (35.2) (20.0)
- -----------------------------------------------------------------------------------------------------------------
318.4 326.9
Less - Treasury stock, at cost, 0.9 shares in 2001 and 2000 (11.2) (11.2)
- -----------------------------------------------------------------------------------------------------------------
Total stockholders' equity 307.2 315.7
- -----------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 1,225.5 $ 1,211.4
=================================================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
2
HEXCEL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
- -------------------------------------------------------------------------------------------------------------------
UNAUDITED
-------------------------------------
QUARTER ENDED MARCH 31,
(IN MILLIONS, EXCEPT PER SHARE DATA) 2001 2000
- -------------------------------------------------------------------------------------------------------------------
Net sales $ 276.2 $ 279.8
Cost of sales 216.1 217.6
- -------------------------------------------------------------------------------------------------------------------
Gross margin 60.1 62.2
Selling, general and administrative expenses 31.7 32.9
Research and technology expenses 4.7 6.3
Business consolidation expenses 1.1 1.2
- -------------------------------------------------------------------------------------------------------------------
Operating income 22.6 21.8
Interest expense 16.3 18.4
- -------------------------------------------------------------------------------------------------------------------
Income before income taxes 6.3 3.4
Provision for income taxes 2.2 1.2
Equity in earnings of affiliated companies 1.4 0.4
- -------------------------------------------------------------------------------------------------------------------
Net income $ 5.5 $ 2.6
===================================================================================================================
Net income per share:
Basic $ 0.15 $ 0.07
Diluted $ 0.15 $ 0.07
Weighted average shares:
Basic 37.2 36.6
Diluted 38.1 36.8
===================================================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
3
HEXCEL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
- -----------------------------------------------------------------------------------------------------------------------
UNAUDITED
--------------------------------------
QUARTER ENDED MARCH 31,
(IN MILLIONS) 2001 2000
- -----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 5.5 $ 2.6
Reconciliation to net cash provided by operating activities:
Depreciation and amortization 15.2 15.0
Deferred income taxes (3.6) (4.5)
Business consolidation expenses 1.1 1.2
Business consolidation payments (1.4) (2.0)
Equity in earnings of affiliated companies (1.4) (0.4)
Working capital changes and other (12.0) (18.0)
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities 3.4 (6.1)
- -----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (10.6) (4.4)
Investments in affiliated companies -- (3.4)
- -----------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (10.6) (7.8)
- -----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from credit facilities, net 15.5 26.5
Repayments of long-term debt and capital lease obligations, net (8.1) (7.9)
Debt issuance costs -- (0.9)
Activity under stock plans 0.1 0.1
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 7.5 17.8
- -----------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents 1.8 0.7
- -----------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 2.1 4.6
Cash and cash equivalents at beginning of year 5.1 0.2
- -----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 7.2 $ 4.8
=======================================================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
4
HEXCEL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 March 31, 2001 and the
results of operations and cash flows for the quarters ended March 31, 2001 and
2000. The condensed consolidated balance sheet of the Company as of December 31,
2000 was derived from the audited 2000 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 period amounts in the condensed consolidated
financial statements and accompanying notes have been reclassified to conform to
the 2001 presentation. These condensed consolidated financial statements should
be read in conjunction with the consolidated financial statements and notes
thereto included in the Company's 2000 Annual Report on Form 10-K.
NOTE 2 -- DISPOSITION OF BELLINGHAM AIRCRAFT INTERIORS BUSINESS
On April 26, 2000, Hexcel sold its Bellingham aircraft interiors business
("Bellingham") to Britax Cabin Interiors, Inc., a wholly owned subsidiary of
Britax International plc, for cash proceeds of $113.3 million. The sale resulted
in an after-tax gain of approximately $44 million or $0.97 per diluted share.
Net proceeds from the sale were used to repay $111.6 million of outstanding term
debt under the Company's Senior Credit Facility. The condensed consolidated
financial statements and accompanying notes reflect Bellingham's operating
results as a continuing operation in the Engineered Products business segment up
to the date of disposal.
Net sales and operating income for the Bellingham business is as follows:
- --------------------------------------------------------------------------------------------------------------------
QUARTER ENDED MARCH 31,
(IN MILLIONS) 2001 2000
- --------------------------------------------------------------------------------------------------------------------
Net sales $ -- $ 16.6
Operating income $ -- $ 1.1
====================================================================================================================
NOTE 3 -- INVENTORIES
- --------------------------------------------------------------------------------------------------------------------
(IN MILLIONS) 3/31/01 12/31/00
- --------------------------------------------------------------------------------------------------------------------
Raw materials $ 69.0 $ 74.5
Work in progress 46.2 45.2
Finished goods 47.6 35.7
- --------------------------------------------------------------------------------------------------------------------
Total inventories $ 162.8 $ 155.4
====================================================================================================================
5
NOTE 4 -- NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS
- --------------------------------------------------------------------------------------------------------------------
(IN MILLIONS) 3/31/01 12/31/00
- --------------------------------------------------------------------------------------------------------------------
Senior credit facility $ 227.9 $ 211.9
European credit and overdraft facilities 5.5 13.7
9.75% Senior subordinated notes, due 2009 240.0 240.0
Senior subordinated notes, due 2003 24.4 24.4
7.0% Convertible subordinated notes, due 2003 114.4 114.4
7.0% Convertible subordinated debentures, due 2011 25.6 25.6
Various notes payable 0.1 0.3
- --------------------------------------------------------------------------------------------------------------------
Total notes payable 637.9 630.3
Capital lease obligations 42.0 43.3
- --------------------------------------------------------------------------------------------------------------------
Total notes payable and capital lease obligations $ 679.9 $ 673.6
====================================================================================================================
Notes payable and current maturities of long-term liabilities $ 16.7 $ 22.1
Long-term notes payable and capital lease obligations,
less current maturities 663.2 651.5
- --------------------------------------------------------------------------------------------------------------------
Total notes payable and capital lease obligations $ 679.9 $ 673.6
====================================================================================================================
SENIOR CREDIT FACILITY
Hexcel's global credit facility (the "Senior Credit Facility") was amended
on October 26, 2000, March 7, 2000 and May 11, 2001, to accommodate, among other
things, the planned sale of assets, the planned investment in additional
manufacturing capacity for selected products, the impact of the decline in the
Company's operating results on certain financial covenants, the sale by an
investor group of approximately 14.5 million shares of Hexcel common stock held
by a significant shareholder of the Company, and a restructuring of the
ownership of certain of the Company's European subsidiaries.
The Senior Credit Facility, as amended, provides Hexcel with approximately
$357 million of borrowing capacity, subject to certain limitations. The Senior
Credit Facility is secured by a pledge of shares of certain of the Company's
foreign subsidiaries, as well as security interests in certain U.S. accounts
receivable, inventories, and real property, plant and equipment. The Company is
subject to various financial covenants and restrictions under the Senior Credit
Facility, including limitations on incurring debt, granting liens, selling
assets, redeeming capital stock and paying dividends. At March 31, 2001, the
Company was in compliance with all covenants.
Interest on outstanding borrowings under the Senior Credit Facility ranges
from 1.00% to 3.25% in excess of the applicable London interbank rate, or at the
option of the Company, from 0.25% to 2.25% in excess of the base rate of the
administrative agent for the lenders. Prior to May 11, 2001, the upper limits of
these interest ranges were 3.00% and 2.00%, respectively. In addition, the
Senior Credit Facility is subject to a commitment fee varying from approximately
0.20% to 0.50% per annum of the total facility. As of March 31, 2001 and
December 31, 2000, Hexcel had an interest rate cap agreement outstanding which
covered a notional amount of $50.0 million of the Senior Credit Facility,
providing a maximum fixed rate of interest of 5.5% on the applicable London
interbank rate.
Unused borrowing capacity under the Senior Credit Facility was
approximately $122 million on March 31, 2001. The Company has outstanding
letters of credit of approximately $7.0 million at March 31, 2001. The Company
expects that the Senior Credit Facility will be sufficient to fund its worldwide
operations for the foreseeable future. The Senior Credit Facility is scheduled
to expire in 2004, except for approximately $58 million of term loans that are
due for repayment in 2005.
6
SENIOR SUBORDINATED NOTES, DUE 2003
The Senior Subordinated Notes, due 2003 are general unsecured obligations of
Hexcel. Effective February 2001, these notes bear interest at a rate of 11.5%
per annum, a rate which will increase by 0.5% per annum each February thereafter
until the notes mature in 2003. Prior to February 2001 and February 2000, these
notes bore interest at a rate of 11.0% and 10.5% per annum, respectively. These
notes have a $0.6 million unamortized discount at March 31, 2001 and December
31, 2000.
NOTE 5 -- BUSINESS CONSOLIDATION PROGRAMS
Total accrued business consolidation expenses at March 31, 2001 and
December 31, 2000, activity during the three months ended March 31, 2001, and a
brief description of the Company's business consolidation program follows:
- --------------------------------------------------------------------------------------------------
EMPLOYEE FACILITY &
(IN MILLIONS) SEVERANCE & EQUIPMENT
RELOCATION RELOCATION TOTAL
- --------------------------------------------------------------------------------------------------
BALANCE AS OF DECEMBER 31, 2000 $ 2.4 $ 0.3 $ 2.7
Business consolidation expenses 0.1 1.0 1.1
Cash expenditures (0.5) (0.9) (1.4)
Asset write-off - (0.2) (0.2)
- --------------------------------------------------------------------------------------------------
BALANCE AS OF MARCH 31, 2001 $ 2.0 $ 0.2 $ 2.2
==================================================================================================
As a result of four substantial business acquisitions from 1996 through
1998 and the need to respond to significant changes in commercial aerospace and
space and defense markets, Hexcel initiated three business consolidation
programs in May 1996, December 1998 and September 1999. The primary purpose of
these programs has been to integrate acquired assets and operations into the
Company and to close or restructure insufficiently profitable facilities and
activities.
All of the business consolidation activities initiated in 1996 and 1998
have been completed as of December 31, 2000, although cash expenditures relating
to accrued severance will continue to be paid through 2001. As of March 31,
2001, the entire September 1999 program was completed with the exception of the
fourth quarter 2000 amendment, which includes the closure of two manufacturing
facilities and the elimination of an additional 60 positions (primarily
manufacturing positions). The business consolidation activities related to the
fourth quarter 2000 amendment are not expected to be completed until early 2002.
For the three months ended March 31, 2001, Hexcel recognized $1.1 million
of business consolidation expenses. Accrued expenses as of March 31, 2001
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.
7
NOTE 6 -- NET INCOME PER SHARE
- ------------------------------------------------------------------------------------------------------------
QUARTER ENDED MARCH 31,
(IN MILLIONS, EXCEPT PER SHARE DATA) 2001 2000
- ------------------------------------------------------------------------------------------------------------
Basic net income per share:
Net income $ 5.5 $ 2.6
Weighted average common shares outstanding 37.2 36.6
- ------------------------------------------------------------------------------------------------------------
Basic net income per share $ 0.15 $ 0.07
============================================================================================================
Diluted net income per share:
Net income $ 5.5 $ 2.6
Weighted average common shares outstanding 37.2 36.6
Effect of dilutive securities -
Stock options 0.9 0.2
- ------------------------------------------------------------------------------------------------------------
Diluted weighted average common shares outstanding 38.1 36.8
- ------------------------------------------------------------------------------------------------------------
Diluted net income per share $ 0.15 $ 0.07
============================================================================================================
The convertible subordinated notes, due 2003, and the convertible
subordinated debentures, due 2011, were excluded from the first quarter 2001 and
2000 computations of diluted net income per share, as they were antidilutive.
For the quarters ended March 31, 2001 and 2000, 3.9 million and substantially
all of the outstanding stock options were excluded from the calculation of
diluted net income per share, respectively. The exercise price for these stock
options ranged from approximately $11.00 to $29.63 per share, with the weighted
average price being approximately $12.87 per share in 2001 and $11.18 per share
in 2000.
NOTE 7 -- COMPREHENSIVE INCOME (LOSS)
-----------------------------------------------------------------------------------------------------------
QUARTER ENDED MARCH 31,
(IN MILLIONS) 2001 2000
-----------------------------------------------------------------------------------------------------------
Net income $ 5.5 $ 2.6
Net derivative loss (4.9) -
Currency translation adjustment (10.3) (3.0)
-----------------------------------------------------------------------------------------------------------
Total comprehensive loss $ (9.7) $ (0.4)
============================================================================================================
NOTE 8 -- DERIVATIVE FINANCIAL INSTRUMENTS
The Company adopted Statement of Financial Accounting Standards No. 133,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, as amended by
Statement of Financial Accounting Standards No. 137, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES - DEFERRAL OF THE EFFECTIVE DATE OF FASB
STATEMENT NO. 133, AN AMENDMENT OF FASB NO. 133, and Statement of Financial
Accounting Standards No. 138, ACCOUNTING FOR CERTAIN DERIVATIVE INSTRUMENTS AND
CERTAIN HEDGING ACTIVITIES, AN AMENDMENT OF FASB STATEMENT NO. 133 (referred
herein as FAS 133), on January 1, 2001. There was no transition adjustment
recorded, as the amount was immaterial to earnings and other comprehensive loss.
DERIVATIVES POLICY
As a result of the Company's global operating and financing activities, Hexcel
is exposed to various market risks that may affect its operational results and
financial position. These market risks include, but are not limited to,
fluctuations in interest rates, which impact the amount of interest the Company
must pay on certain variable rate debt, and fluctuations in currency exchange
8
rates, which impact the U.S. dollar value of transactions, assets and
liabilities denominated in foreign currencies. The Company considers its
strategic use of cash flow hedges to be a prudent method of managing interest
rate and foreign currency exchange rate sensitivities.
The Company formally documents all relationships between hedging instruments and
hedged items, as well as its risk management objectives and strategy for
undertaking various hedging transactions. The hedging instruments are assessed
for effectiveness at the inception of the hedge and throughout the term of the
hedge designation. As long as the hedge remains highly effective, changes in the
fair value of the Company's cash flow hedges are recorded in other comprehensive
income, until earnings are affected by the transaction being hedged.
Ineffectiveness is recorded immediately in the income statement. All derivatives
are recognized on the balance sheet at their fair value. The Company
discontinues hedge accounting prospectively when (1) it determines that the
derivative is no longer effective in offsetting changes in the cash flows of a
hedged item (including hedged items such as forecasted transactions); (2) the
derivative expires or is sold, terminated, or exercised; (3) it is no longer
probable that the forecasted transaction will occur; or (4) management
determines that designating the derivative as a hedging instrument is no longer
appropriate.
The market risk associated with interest rate and foreign exchange contracts
is managed by the Company through monitoring of parameters that limit the
types and degree of market risk that may be undertaken. The Company's
derivative activities are regulated by written policies and procedures that
are managed and monitored for compliance by the Finance Management Committee
(FMC). The FMC is composed of the chief financial officer, the chief
accounting officer, the assistant treasurer, and other senior managers of the
Company as may be appointed to the committee from time to time. The FMC
periodically reports to the Audit Committee on the scope of the Company's
derivative activities. The Company's policies together with the decisions and
guidelines of the FMC: (a) sets forth risk-management philosophy and
objectives through a corporate policy, (b) provides guidelines for derivative
instrument usage, and (c) establishes procedures for control and valuation,
counterparty credit approval, and monitoring and reporting of derivative
activity. The use of derivative financial instruments to hedge exposures to
changes in exchange rates and interest rates exposes the Company to credit
risk. The Company minimizes the credit risk in derivative instruments by (a)
entering into transactions with high-quality counterparties whose credit
ratings are AA/Aa or higher, (b) limiting the amount of exposure to each
counterparty, and (c) monitoring the financial condition of its
counterparties.
CASH FLOW HEDGES
FOREIGN CURRENCY - A number of the European subsidiaries of Hexcel are exposed
to the impact of exchange rate volatility between the U.S. dollar and the
subsidiaries' functional currencies, being either the Euro or the British pound
sterling. In January 2001, Hexcel entered into foreign exchange contracts to
exchange Euros at fixed rates on specified dates through March 2005. The
aggregate notional amount of these contracts is $96.7 million. The purpose of
these contracts is to hedge a portion of the forecasted transactions of European
subsidiaries under long-term sales contracts with certain customers. The forward
exchange contracts are expected to provide the Company with a more balanced
matching of future cash receipts and expenditures by currency, thereby reducing
the Company's exposure to fluctuations in currency exchange rates. For the
quarter ended March 31, 2001, hedge ineffectiveness was immaterial and the fair
value of the foreign currency cash flow hedges recognized in other comprehensive
income was a loss of $4.9 million. Over the next twelve-month period, a $1.0
million loss is expected to be reclassified into earnings as the hedged sales
are recorded.
INTEREST RATE - Hexcel's results are affected by interest rate changes on its
variable rate debt. In order to partially mitigate this interest rate risk, the
Company entered into a five-year interest rate cap agreement in 1998. This
agreement provides for a maximum fixed interest rate of 5.5% on the applicable
London interbank rate used to determine the interest on $50.0 million of
variable rate debt under the Senior Credit Facility.
9
For the quarter ended March 31, 2001, hedge ineffectiveness and the fair
value of the interest rate cap at March 31, 2001 was not material.
DERIVATIVE INSTRUMENTS COMPONENT OF OTHER COMPREHENSIVE INCOME (LOSS):
-----------------------------------------------------------------------------------------------------
(IN MILLIONS)
-----------------------------------------------------------------------------------------------------
Balance, December 31, 2000 $ -
Current period cash flow hedging (4.9)
-----------------------------------------------------------------------------------------------------
Total Derivative instruments at March 31, 2001 $ (4.9)
=====================================================================================================
NOTE 9 -- SEGMENT INFORMATION
Hexcel evaluates the performance of its operating segments based on
adjusted income before business consolidation expenses, interest, taxes and
equity in earnings 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, except to
the extent that the expense can be directly attributable to the business
segment.
Financial information for the Company's segments for the periods ended March 31,
2001 and 2000, is as follows:
HEXCEL CORPORATION AND SUBSIDIARIES
ACTUAL AND PRO FORMA SEGMENT DATA
- -------------------------------------------------------------------------------------------------------------------
UNAUDITED
- -------------------------------------------------------------------------------------------------------------------
REINFORCEMENT COMPOSITE ENGINEERED CORPORATE
(IN MILLIONS) PRODUCTS MATERIALS PRODUCTS & OTHER(1) TOTAL
-----------------------------------------------------------------------------
FIRST QUARTER 2001
- -------------------------------------------------------------------------------------------------------------------
Net sales to external customers $ 86.4 $ 160.2 $ 29.6 $ - $ 276.2
Intersegment sales 29.7 2.1 - - 31.8
- -------------------------------------------------------------------------------------------------------------------
Total sales 116.1 162.3 29.6 - 308.0
Adjusted EBIT(2) 11.4 20.7 0.6 (9.0) 23.7
Depreciation and amortization 9.2 4.7 0.8 0.5 15.2
Business consolidation expenses - 1.1 - - 1.1
Capital expenditures 6.2 3.9 0.2 0.3 10.6
- -------------------------------------------------------------------------------------------------------------------
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(2) 10.5 18.5 2.1 (9.2) 21.9
Depreciation and amortization 8.6 4.8 0.7 0.6 14.7
Business consolidation expenses 0.7 0.4 0.1 - 1.2
Capital expenditures 1.0 3.0 0.2 - 4.2
- -------------------------------------------------------------------------------------------------------------------
FIRST QUARTER 2000
- -------------------------------------------------------------------------------------------------------------------
Net sales to external customers $ 87.1 $ 146.5 $ 46.2 $ - 279.8
Intersegment sales 27.2 2.3 - - 29.5
- -------------------------------------------------------------------------------------------------------------------
Total sales 114.3 148.8 46.2 - 309.3
Adjusted EBIT(2) 10.5 18.5 3.2 (9.2) 23.0
Depreciation and amortization 8.6 4.8 1.0 0.6 15.0
Business consolidation expenses 0.7 0.4 0.1 - 1.2
Capital expenditures 1.0 3.0 0.4 - 4.4
===================================================================================================================
(1) The Company does not allocate corporate expenses to its business segments.
(2) Consists of earnings before interest, taxes, business consolidation
expenses and equity in earnings of affiliated companies.
10
Adjusted EBIT has 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 EBIT may not be comparable to similarly titled
financial measures of other companies. Adjusted EBIT does not represent an
alternative measure of the Company's cash flows or operating income, and should
not be considered in isolation or as a substitute for measures of performance
presented in accordance with generally accepted accounting principles.
A reconciliation of Adjusted EBIT reported for the segments to consolidated
income before income taxes is as follows:
- -------------------------------------------------------------------------------------------------------------------
QUARTER ENDED MARCH 31,
- -------------------------------------------------------------------------------------------------------------------
PRO FORMA
(IN MILLIONS) 2001 2000 2000
- -------------------------------------------------------------------------------------------------------------------
Total Adjusted EBIT $ 23.7 $ 23.0 $ 21.9
Less: Business consolidation expenses 1.1 1.2 1.2
Interest expense 16.3 18.4 16.1
- -------------------------------------------------------------------------------------------------------------------
Consolidated income before income taxes $ 6.3 $ 3.4 $ 4.6
===================================================================================================================
NOTE 10 -- SUPPLEMENTAL CASH FLOW INFORMATION
-------------------------------------------------------------------------------------------------------------------
QUARTER ENDED MARCH 31,
-------------------------------------------------------------------------------------------------------------------
(IN MILLIONS) 2001 2000
-------------------------------------------------------------------------------------------------------------------
Cash paid for:
Interest $ 25.2 $ 25.3
Income taxes $ 1.9 $ --
====================================================================================================================
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FINANCIAL OVERVIEW
- ---------------------------------------------------------------------------------------------------------------------
QUARTER ENDED MARCH 31,
-------------------------------------
(IN MILLIONS, EXCEPT PER SHARE DATA) 2001 2000
- ---------------------------------------------------------------------------------------------------------------------
PRO FORMA (a):
Sales $ 276.2 $ 263.2
Adjusted EBITDA (b) $ 38.9 $ 36.5
Adjusted net income (c) $ 6.2 $ 4.2
Adjusted diluted earnings per share (c) $ 0.16 $ 0.11
- ---------------------------------------------------------------------------------------------------------------------
AS REPORTED:
Sales $ 276.2 $ 279.8
Gross margin % 21.8% 22.2%
Adjusted operating income % (d) 8.6% 8.2%
Adjusted EBITDA (b) $ 38.9 $ 38.0
Net income $ 5.5 $ 2.6
Adjusted net income (c) $ 6.2 $ 3.4
Diluted earnings per share $ 0.15 $ 0.07
Adjusted diluted earnings per share (c) $ 0.16 $ 0.09
- ---------------------------------------------------------------------------------------------------------------------
(a) Pro forma results give effect to the April 26, 2000 sale of the Bellingham
aircraft interiors business as if it had occurred on January 1, 2000.
(b) Excludes business consolidation expenses, interest, taxes, depreciation,
amortization, and equity in earnings of affiliated companies.
(c) Excludes business consolidation expenses and related income taxes.
(d) Excludes business consolidation expenses.
Adjusted EBITDA, Adjusted net income, Adjusted operating income and
Adjusted diluted earnings per share have 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. These measures may not be comparable
to similarly titled financial measures of other companies. These measures do not
represent alternative measures of the Company's cash flows or operating income,
and should not be considered in isolation or as a substitute for measures of
performance presented in accordance with generally accepted accounting
principles.
The following discussions use comparisons of the March 31, 2001 results to
the March 31, 2000 pro forma results, which give effect to the April 26, 2000
sale of the Bellingham aircraft interiors business as if it had occurred on
January 1, 2000.
RECENT EVENTS
On April 27, 2001, the Company announced that its chief executive officer,
Mr. John J. Lee had been diagnosed with cancer and was stepping down as chief
executive officer of the Company. As an interim measure, and to assist the
senior management during this transition, the board asked two directors, Martin
L. Solomon and Sanjeev K. Mehra, to act in their capacity as directors as an
office of the chief executive until a successor is appointed. In addition, the
board established a search committee to begin the process of evaluating
potential CEO candidates. Mr. Lee's retirement by virtue of disability triggered
the early vesting of certain deferred compensation and equity compensation
awards together with a termination payment. As a result of the early vesting and
the termination payment, the Company will record certain
12
non-recurring compensation expenses in the second quarter 2001 financial
statements of approximately $5 million.
RESULTS OF OPERATIONS
NET SALES: Net sales of $276.2 million for the first quarter of 2001 were
5% higher than 2000 first quarter pro forma revenue of $263.2 million. Had the
same U.S. dollar, British pound and Euro exchange rates applied in the first
quarter of 2001 as in the first quarter of 2000, sales for the 2001 quarter
would have been $283.2 million, or 8% higher than the pro forma sales for the
2000 quarter.
The revenue increase was attributable to growth in the commercial aerospace
market as a result of higher build rates for Airbus, Boeing and several regional
aircraft manufacturers and increased production in the space and defense market
related to several programs, partially offset by lower sales volumes in the
electronics market.
The following table summarizes actual and pro forma net sales to
third-party customers by product groups and market segments for the quarters
ended March 31, 2001 and 2000, respectively:
- ---------------------------------------------------------------------------------------------------------------------
UNAUDITED
---------------------------------------------------------------------------------
COMMERCIAL SPACE &
(IN MILLIONS) AEROSPACE DEFENSE ELECTRONICS INDUSTRIAL TOTAL
- ---------------------------------------------------------------------------------------------------------------------
FIRST QUARTER 2001
Reinforcement products $ 18.1 $ 5.5 $ 34.7 $ 28.1 $ 86.4
Composite materials 99.3 26.9 - 34.0 160.2
Engineered products 26.0 3.6 - - 29.6
- ---------------------------------------------------------------------------------------------------------------------
Total $ 143.4 $ 36.0 $ 34.7 $ 62.1 $ 276.2
52% 13% 13% 22% 100%
- ---------------------------------------------------------------------------------------------------------------------
PRO FORMA FIRST QUARTER 2000 (a)
Reinforcement products $ 15.6 $ 4.1 $ 43.6 $ 23.8 $ 87.1
Composite materials (b) 90.8 23.3 - 32.4 146.5
Engineered products 27.1 2.5 - - 29.6
- ---------------------------------------------------------------------------------------------------------------------
Total $ 133.5 $ 29.9 $ 43.6 $ 56.2 $ 263.2
51% 11% 17% 21% 100%
- ---------------------------------------------------------------------------------------------------------------------
FIRST QUARTER 2000
Reinforcement products $ 15.6 $ 4.1 $ 43.6 $ 23.8 $ 87.1
Composite materials (b) 90.8 23.3 - 32.4 146.5
Engineered products 43.7 2.5 - - 46.2
- ---------------------------------------------------------------------------------------------------------------------
Total $ 150.1 $ 29.9 $ 43.6 $ 56.2 $ 279.8
54% 11% 15% 20% 100%
- ---------------------------------------------------------------------------------------------------------------------
(a) Pro forma net sales give effect to the sale of the Bellingham business
that occurred on April 26, 2000, as if it had occurred on January 1, 2000.
(b) 2000 has been reclassified for comparative purposes.
Commercial aerospace net sales increased 7.4% to $143.4 million for the
first quarter of 2001, as compared to pro forma net sales of $133.5 million for
the first quarter of 2000. This increase in comparable first quarter sales
reflects higher build rates at Airbus, Boeing and several regional aircraft
manufacturers, partially offset by the impact of the weaker dollar against the
Euro and the British pound sterling.
Commercial aerospace net sales for the Company's reinforcement products
and composite materials businesses increased due to the higher build rates. The
commercial aerospace revenue of the engineered products business is program and
contract specific so this business has not yet derived any net revenue growth
from build rate changes. Boeing has confirmed that it expects to meet its
projections to deliver approximately 530 aircraft in 2001 and another 530 in
13
2002, an increase over 2000 deliveries; and Airbus has confirmed production
plans to increase deliveries to over 300 per year through 2003. The benefit
that the Company obtains from any increase in build rates in 2001 and 2002
will depend upon the mix of aircraft that are produced, the continuing impact
on the aerospace supply chain of the pressure to reduce the cost of
commercial aircraft and the results of productivity improvement from the
Company's Lean Enterprise initiatives.
Space and defense net sales for the first quarter of 2001 increased 20.4%
to $36.0 million, from first quarter 2000 pro forma net sales of $29.9 million.
This increase is reflected primarily in the Company's composite material and
reinforcement products businesses and is due to increased sales related to
several programs, including the F/A-18 and the Eurofighter as well as Boeing's
Delta Launchers family. Looking forward, the requirements of both the United
States and European armed forces continue to support an outlook of increased
procurement of military aircraft and helicopters and the new generation of
military aircraft use more of Hexcel's products. Hexcel is currently qualified
to supply materials to a broad range of military aircraft and helicopters
scheduled to enter either full-scale production in the near future or
significantly increase existing production rates. These programs include the
F/A-18E/F (Hornet), the F-22 (Raptor), the European Fighter Aircraft (Typhoon)
as well as the C-17, the V-22 (Osprey) tiltrotor aircraft, the RAH-66 (Comanche)
and the NH90 helicopters. The benefits the Company obtains from these programs
will depend upon which ones are funded and the extent of such funding.
Electronics net sales were $34.7 million in the first quarter of 2001, a
decrease of 20.4% from pro forma net sales of $43.6 million in the comparable
2000 quarter. This decline reflects the downturn in the U.S. electronics
industry and the ensuing adjustments throughout the electronics industry supply
chain. Demand for Hexcel's woven electrical fabrics that are the reinforcement
for printed circuit boards declined sharply at the end of the first quarter of
2001. This reduction in demand was the net result of finished electronic goods
producers responding to their excess inventories by cutting back on their
purchases, which has impacted the entire supply chain. In April 2001, this
effect started to become evident in the Company's wholly owned operations in
France and at its Asian joint venture. In response to these market conditions,
the Company has idled manufacturing capacity and furloughed some production
employees, and will continue to monitor the situation closely and make further
adjustments if warranted by market developments. Customer orders in April and so
far in May have remained at the reduced levels seen in March. The Company's
customers are not yet able to determine when the market will return to more
normalized levels that reflect the fundamental growth rate of the electronics
industry. With this lack of visibility, the Company must conclude that
electronics revenues will be lower still in the second quarter than they were in
the first quarter.
Industrial net sales increased 10.4% to $62.1 million for the first
quarter of 2001 from $56.2 million pro forma net sales for the same 2000
quarter. The increase reflects sales growth in several segments, especially
fabrics (reinforcement segment) used in ballistic and architectural markets and
in composite materials for the wind energy market. Absent a significant
deterioration in the general macroeconomic environment, Hexcel expects sales to
wind energy and automotive customers to grow in 2001, driven by growing demand
for low-cost sources of renewable energy and improved automobile safety, as well
as Hexcel's success in developing products that satisfy these customer
applications.
GROSS MARGIN: Gross margin for the first quarter of 2001 was $60.1 million
or 21.8% of net sales, compared to gross margin of $57.7 million or 21.9% of net
sales on a pro forma basis for the first quarter of 2000. The increase in gross
margin reflects the sales increases discussed above offset by the negative
impact of increased energy costs, particularly in the western United States, and
reduced production at our U.S. electronics fabrics manufacturing plants. Energy
costs in the first quarter of 2001 were approximately $2 million higher than in
the first quarter of 2000.
14
OPERATING INCOME: Operating income was $22.6 million or 8.2% of net sales
in the first quarter of 2001, compared with $ 20.7 million or 7.9% of net sales
on a pro forma basis in the first quarter of 2000. Excluding business
consolidation expenses, operating income for the first quarter of 2001 was $23.7
million or 8.6% of net sales, versus $21.9 million or 8.3% of net sales on a pro
forma basis for the first quarter of 2000. Business consolidation expenses
totaled $1.1 million in the first quarter of 2001 and $1.2 million in the
comparable 2000 quarter. (Refer to Note 5 of the accompanying condensed
consolidated financial statements.)
The aggregate increase in operating income, excluding business
consolidation expenses, reflects the increase in gross margin over the pro forma
total for the first quarter of 2000 and a slight reduction in research and
technology expenses, partially offset by higher selling, general and
administrative ("SG&A") expenses. The Reinforcement Products segment increased
its operating income by 8.6%, while the Composite Materials segment increased
its operating income by 11.9%, excluding business consolidation expenses, as
compared to the first quarter of 2000 on a pro form basis. The Engineered
Products segment reported a decrease in operating income of $1.5 million, after
adjusting for the sale of the Bellingham business on a pro forma basis,
reflecting the reduced performance from the business that became evident in the
second half of 2000. The Company is pursuing a series of actions focused on
progressively improving the performance of this business segment.
SG&A expenses were $31.7 million or 11.5% of net sales for the first
quarter of 2001, compared with $30.8 million or 11.7% of net sales on a pro
forma basis for the first quarter of 2000. Research and technology expenses for
the first quarter of 2001 were $4.7 million or 1.7% of net sales, compared with
$5.0 million or 1.9% of net sales on a pro forma basis for the first quarter of
2000.
INTEREST EXPENSE: Interest expense was $16.3 million for the first quarter
of 2001, compared to $18.4 million for the first quarter of 2000. The decrease
in interest expense primarily reflects the reduction in term debt outstanding
under the Company's Senior Credit Facility that resulted from the use of the
proceeds from the sale of the Bellingham business to pay down debt.
EQUITY IN EARNINGS OF AFFILIATED COMPANIES: Equity in earnings of
affiliated companies for the first quarter of 2001 was $1.4 million compared to
$0.4 million for the first quarter of 2000 reflecting the strong performance of
the Company's electronics fabrics venture in Asia, partially offset by the
initial start-up costs of the Company's engineered products ventures in China
and Malaysia. The start-up costs of those joint ventures during 2001 are
anticipated to reduce the Company's reported equity in earnings by approximately
half compared to 2000. The electronics industry market conditions discussed
above have also started to impact Asian customer demand and are anticipated to
reduce the second quarter 2001 equity in earnings from the Company's Asian
electronic fabrics joint venture.
NET INCOME AND NET INCOME PER SHARE:
-------------------------------------------------------------------------------------------------------------------
QUARTER ENDED MARCH 31,
PRO FORMA
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 2001 2000(a)
-------------------------------------------------------------------------------------------------------------------
Net income $ 5.5 $ 3.4
Adjusted net income (b) $ 6.2 $ 4.2
Diluted net income per share $ 0.15 $ 0.09
Diluted net income per share excluding goodwill amortization $ 0.20 $ 0.17
Adjusted diluted net income per share (b) $ 0.16 $ 0.11
Diluted weighted average shares outstanding 38.1 36.8
-------------------------------------------------------------------------------------------------------------------
(a) Pro forma results give effect to the April 26, 2000 sale of the Bellingham
aircraft interiors business as if the transaction had occurred on January
1, 2000.
(b) Excludes business consolidation expenses and related income taxes.
15
The Company's convertible subordinated notes, due 2003, and its
convertible subordinated debentures, due 2011, were excluded from the 2001 and
2000 computations of net income per diluted share, as they were antidilutive.
(Refer to Note 6 of the accompanying condensed consolidated financial statements
for the calculation of diluted net income per share.)
EBITDA AND ADJUSTED EBITDA: Earnings before business consolidation
expenses, other income, interest, taxes, depreciation and amortization and
equity in earnings of affiliated companies ("Adjusted EBITDA") for the first
quarter 2001 was $38.9 million, an increase of 6.6% above the 2000 first quarter
pro forma Adjusted EBITDA of $36.5 million.
Adjusted EBITDA and pro forma Adjusted EBITDA have 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 and pro forma Adjusted EBITDA may not be comparable to similarly titled
financial measures of other companies. Adjusted EBITDA and pro forma Adjusted
EBITDA do not represent alternative measures of the Company's cash flows or
operating income, and should not be considered in isolation or as substitutes
for measures of performance presented in accordance with generally accepted
accounting principles.
A reconciliation of net income to EBITDA and Adjusted EBITDA for the
applicable periods follows:
- ---------------------------------------------------------------------------
QUARTER ENDED MARCH 31,
PRO FORMA
(IN MILLIONS) 2001 2000(a)
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
Net income $ 5.5 $ 3.4
Provision for income taxes 2.2 1.5
Interest expense 16.3 16.1
Depreciation and amortization expense 15.2 14.7
Equity in income of affiliated companies 1.4 0.4
- ---------------------------------------------------------------------------
EBITDA 37.8 35.3
Business consolidation expenses 1.1 1.2
- ---------------------------------------------------------------------------
Adjusted EBITDA $ 38.9 $ 36.5
===========================================================================
(a) Pro forma results give effect to the April 26, 2000 sale of the Bellingham
aircraft interiors business as if the transaction had occurred on January
1, 2000.
FINANCIAL CONDITION AND LIQUIDITY
CASH FLOW FROM OPERATING ACTIVITIES: Net cash provided by operating activities
was $3.4 million in the first quarter of 2001 as compared to net cash used for
operating activities of $6.1 million for the 2000 first quarter. This increase
is due to higher net income, a decrease in working capital requirements and a
slight decrease in deferred income taxes in the first quarter of 2001. The
working capital improvement is due to the timing of certain cash expenditures,
which more than offset the increased inventory levels resulting primarily from
the fall-off in the electronics market demand and the increased accounts
receivable resulting from increased sales. As a result, the improvement is
anticipated to reverse in the second quarter of 2001.
INVESTING: Net cash used for investing activities in the first quarter of 2001
was $10.6 million compared to $7.8 million used in the 2000 first quarter. The
increase in capital expenditures of $6.2 million represents the Company's
continued efforts toward process improvements, capacity additions for
high-
16
growth product applications such as electronics, automotive and wind energy; and
environmental, safety and maintenance initiatives.
FINANCING: During the first quarter of 2001, net cash of $7.5 million was
provided by financing activities compared with net cash provided of $17.8
million in the first quarter of 2000. As of March 31, 2001, Hexcel's total debt
outstanding was $679.9 million, an increase of $6.3 million from the outstanding
balance as of December 31, 2000. The increase in debt was needed to finance the
Company's working capital requirements and to fund capital expenditures. The
Company believes that its current Senior Credit Facility and long-term
borrowings will be adequate to fund its ongoing business operations for the
foreseeable future.
The Company is subject to various financial covenants and restrictions
under the Senior Credit Facility, including limitations on incurring debt,
granting liens, selling assets, redeeming capital stock and paying dividends.
At March 31, 2001, the Company was in compliance with all covenants. In
anticipation of continuing lower sales volume in the electronics market, on
May 11, 2001, the Company amended certain of its financial covenants under
the Senior Credit Facility. As a result, the Company currently anticipates
continued compliance with all financial covenants for the remainder of 2001.
For further information regarding the Company's financial resources, see Note
4 of the accompanying condensed consolidated financial statements.
RATIO OF EARNINGS TO FIXED CHARGES: The ratio of earnings to fixed charges for
the quarter ended March 31, 2001 was 1.4x compared to 1.3x for the same 2000
quarter on a pro forma basis. The calculation of earnings to fixed charges
assumes that one-third of the Company's rental expense is attributable to
interest expense.
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." Such forward-looking statements
include, but are not limited to: (a) estimates of sales and EBITDA; (b)
estimates of commercial aerospace production and delivery rates, including those
of Boeing and Airbus; (c) expectations regarding the growth in the production of
military aircraft and helicopters; (d) expectations regarding future demand for
electronics fabrics, and related manufacturing capacity utilization; (e)
expectations regarding sales growth, sales mix, and gross margins; (f)
expectations concerning certain compensation expenses associated with the
retirement of Mr. John J. Lee by virtue of disability; (g) expectations
regarding 2001 capital expenditures; (h) expectations regarding the performance
of the Company's joint venture interests; (i) expectations regarding the
Company's financial condition and liquidity; (j) estimated expenses, cash costs,
and savings for business consolidation programs.
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: 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 production or 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 or technology; industry capacity; competition;
disruptions of established supply channels; manufacturing capacity
constraints; and the availability, terms and deployment of capital.
Additional information regarding these factors is contained in the Company's
Annual Report on Form 10-K for the year ended December 31, 2000.
17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a result of the Company's global operating and financing activities, Hexcel
is exposed to various market risks that may affect its operational results and
financial position. These market risks include, but are not limited to,
fluctuations in interest rates, which impact the amount of interest the Company
must pay on certain variable rate debt, and fluctuations in currency exchange
rates, which impact the U.S. dollar value of transactions, assets and
liabilities denominated in foreign currencies. The Company considers its
strategic use of cash flow hedges to be a prudent method of managing interest
rate and foreign currency exchange rate sensitivities.
DERIVATIVES POLICY
The Company formally documents all relationships between hedging instruments and
hedged items, as well as its risk management objectives and strategy for
undertaking various hedging transactions. The hedging instruments are assessed
for effectiveness at the inception of the hedge and throughout the term of the
hedge designation. As long as the hedge remains highly effective, changes in the
fair value of the Company's cash flow hedges are recorded in other comprehensive
income, until earnings are affected by the transaction being hedged.
Ineffectiveness is recorded immediately in the income statement. All derivatives
are recognized on the balance sheet at their fair value. The Company
discontinues hedge accounting prospectively when (1) it determines that the
derivative is no longer effective in offsetting changes in the cash flows of a
hedged item (including hedged items such as forecasted transactions); (2) the
derivative expires or is sold, terminated, or exercised; (3) it is no longer
probable that the forecasted transaction will occur; or (4) management
determines that designating the derivative as a hedging instrument is no longer
appropriate.
The market risk associated with interest rate and foreign exchange contracts
is managed by the Company through monitoring of parameters that limit the
types and degree of market risk that may be undertaken. The Company's
derivative activities are regulated by written policies and procedures that
are managed and monitored for compliance by the Finance Management Committee
(FMC). The FMC is composed of the chief financial officer, the chief
accounting officer, the assistant treasurer, and other senior managers of the
Company as may be appointed to the committee from time to time. The FMC
periodically reports to the Audit Committee on the scope of the Company's
derivative activities. The Company's policies together with the decisions and
guidelines of the FMC: (a) sets forth risk-management philosophy and
objectives through a corporate policy, (b) provides guidelines for derivative
instrument usage, and (c) establishes procedures for control and valuation,
counterparty credit approval, and monitoring and reporting of derivative
activity. The use of derivative financial instruments to hedge exposures to
changes in exchange rates and interest rates exposes the Company to credit
risk. The Company minimizes the credit risk in derivative instruments by (a)
entering into transactions with high-quality counterparties whose credit
ratings are AA/Aa or higher, (b) limiting the amount of exposure to each
counterparty, and (c) monitoring the financial condition of its
counterparties.
FOREIGN EXCHANGE AND INTEREST RATE RISKS:
FOREIGN EXCHANGE - A number of the European subsidiaries of Hexcel are exposed
to the impact of exchange rate volatility between the U.S. dollar and the
subsidiaries' functional currencies, being either the Euro or the British pound
sterling. In January 2001, Hexcel entered into foreign exchange contracts to
exchange Euros at fixed rates on specified dates through March 2005. The
aggregate notional amount of these contracts is $96.7 million. The purpose of
these contracts is to hedge a portion of the forecasted transactions of European
subsidiaries under long-term sales contracts with certain customers. The forward
exchange contracts are expected to provide the Company with a more balanced
matching of future cash receipts and expenditures by currency, thereby reducing
the Company's exposure to fluctuations in currency exchange rates. For the
quarter ended March 31, 2001, hedge ineffectiveness was immaterial and the fair
18
value of the foreign currency cash flow hedges recognized in other
comprehensive income was a loss of $4.9 million. Over the next twelve-month
period, a $1.0 million loss is expected to be reclassified into earnings as
the hedged sales are recorded.
INTEREST RATE - Hexcel's results are affected by interest rate changes on its
variable rate debt. In order to partially mitigate this interest rate risk, the
Company entered into a five-year interest rate cap agreement in 1998. This
agreement provides for a maximum fixed interest rate of 5.5% on the applicable
London interbank rate used to determine the interest on $50.0 million of
variable rate debt under the Senior Credit Facility. For the quarter ended March
31, 2001, hedge ineffectiveness and the fair value of the interest rate cap at
March 31, 2001, was not material.
UTILITY PRICE RISKS:
During the fourth quarter of 2000 and continuing into 2001, there has been
unprecedented volatility in the cost and supply of energy and in natural gas
prices in the United States, particularly in the western states where the
Company has many of its U.S. manufacturing facilities. Continued significant
price changes are likely to have an impact on the Company's results of
operations. In anticipation of continued volatility, the Company is exploring
options to reduce energy consumption and to better control the price paid for
energy sources. However, the outcome of the U.S. energy situation and its impact
on the U.S. economy is unpredictable at this time and may pose unforeseen future
risk.
Refer to the Company's 2000 Annual Report on Form 10-K for further information
on market risks.
19
PART II. OTHER INFORMATION
HEXCEL CORPORATION AND SUBSIDIARIES
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
10.1 Fifth Amendment, dated as of May 11, 2001, to the Second and
Amended and Restated Credit Agreement, dated as of September 14, 1998,
among Hexcel Corporation and the Foreign Borrowers from time to time
party thereto, the banks and other financial institutions from time to
time party thereto, Citibank, N.A., as Documentation Agent, and Credit
Suisse First Boston, as Administrative Agent.
(b) REPORTS ON FORM 8-K:
Current Report on Form 8-K dated January 19, 2001, relating to the
Company's fourth quarter 2000 and 2000 year-end results.
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)
May 15, 2001 /s/ William J. Fazio
- ----------------------------------- ---------------------------------
(Date) William J. Fazio
Corporate Controller and
Chief Accounting Officer
20
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
10.1 Fifth Amendment, dated as of May 11, 2001, to the Second and
Amended and Restated Credit Agreement, dated as of September
14, 1998, among Hexcel Corporation and the Foreign Borrowers
from time to time party thereto, the banks and other financial
institutions from time to time party thereto, Citibank, N.A.,
as Documentation Agent, and Credit Suisse First Boston, as
Administrative Agent.