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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 June 30, 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 AUGUST 10, 2001
COMMON STOCK 36,661,077
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HEXCEL CORPORATION AND SUBSIDIARIES
INDEX
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements
o Condensed Consolidated Balance Sheet --
June 30, 2001 and December 31, 2000 2
o Condensed Consolidated Statement of
Operations -- The Quarters and Six Months Ended
June 30, 2001 and 2000 3
o Condensed Consolidated Statement of
Cash Flows -- The Six Months Ended
June 30, 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 21
PART II. OTHER INFORMATION
ITEM 2. Changes in Securities and Use of Proceeds 22
ITEM 4. Submission of Matters to a Vote of Security Holders 22
ITEM 6. Exhibits and Reports on Form 8-K 23
SIGNATURE 24
1
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
HEXCEL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
- ---------------------------------------------------------------------------------------------------------
UNAUDITED
-------------------------
JUNE 30, December 31,
(IN MILLIONS, EXCEPT PER SHARE DATA) 2001 2000
- ---------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 6.3 $ 5.1
Accounts receivable 166.6 150.3
Inventories 163.7 155.4
Prepaid expenses and other assets 7.5 5.5
Deferred tax asset 8.6 9.7
- ---------------------------------------------------------------------------------------------------------
Total current assets 352.7 326.0
Property, plant and equipment 613.6 615.3
Less accumulated depreciation (264.8) (255.6)
- ---------------------------------------------------------------------------------------------------------
Net property, plant and equipment 348.8 359.7
Goodwill and other purchased intangibles, net of accumulated
amortization of $42.2 in 2001 and $36.1 in 2000 386.9 391.7
Investments in affiliated companies and other assets 134.8 134.0
- ---------------------------------------------------------------------------------------------------------
Total assets $ 1,223.2 $ 1,211.4
=========================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current maturities of capital lease obligations $ 18.9 $ 22.1
Accounts payable 75.5 69.4
Accrued liabilities 104.0 106.4
- ---------------------------------------------------------------------------------------------------------
Total current liabilities 198.4 197.9
Long-term notes payable and capital lease obligations 691.6 651.5
Other non-current liabilities 47.1 46.3
- ---------------------------------------------------------------------------------------------------------
Total liabilities 937.1 895.7
STOCKHOLDERS' EQUITY:
Preferred stock, no par value, 20.0 shares of stock authorized,
no shares issued or outstanding in 2001 and 2000 -- --
Common stock, $0.01 par value, 100.0 shares of stock authorized,
shares issued and outstanding of 38.5 in 2001 and 38.0 in 2000 0.4 0.4
Additional paid-in capital 286.2 280.7
Retained earnings 58.7 65.8
Accumulated other comprehensive loss (48.0) (20.0)
- ---------------------------------------------------------------------------------------------------------
297.3 326.9
Less - Treasury stock, at cost, 0.9 shares in 2001 and 2000 (11.2) (11.2)
- ---------------------------------------------------------------------------------------------------------
Total stockholders' equity 286.1 315.7
- ---------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 1,223.2 $ 1,211.4
=========================================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
2
HEXCEL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
- ----------------------------------------------------------------------------------------------------------
UNAUDITED
---------------------------------------------------
QUARTER ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
(IN MILLIONS, EXCEPT PER SHARE DATA) 2001 2000 2001 2000
- ----------------------------------------------------------------------------------------------------------
Net sales $ 253.5 $ 271.6 $ 529.7 $ 551.4
Cost of sales 201.8 211.1 417.9 428.7
- ----------------------------------------------------------------------------------------------------------
Gross margin 51.7 60.5 111.8 122.7
Selling, general and administrative expenses 33.7 31.2 65.4 64.1
Research and technology expenses 4.8 5.2 9.5 11.5
Business consolidation expenses 1.8 -- 2.9 1.2
- ----------------------------------------------------------------------------------------------------------
Operating income 11.4 24.1 34.0 45.9
Gain on sale of Bellingham business -- 68.3 -- 68.3
Interest expense 17.3 17.2 33.6 35.6
- ----------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (5.9) 75.2 0.4 78.6
Provision for income taxes 3.8 26.5 6.0 27.7
- ----------------------------------------------------------------------------------------------------------
Income (loss) before equity in earnings (9.7) 48.7 (5.6) 50.9
Equity in earnings of affiliated companies 0.2 1.7 1.6 2.2
- ----------------------------------------------------------------------------------------------------------
Income (loss) before extraordinary item (9.5) 50.4 (4.0) 53.1
Extraordinary loss on early retirement of debt 3.1 -- 3.1 --
- ----------------------------------------------------------------------------------------------------------
Net income (loss) $ (12.6) $ 50.4 $ (7.1) $ 53.1
==========================================================================================================
Net income (loss) per share:
Basic:
Income (loss) before extraordinary item $ (0.26) $ 1.38 $ (0.11) $ 1.45
Extraordinary loss on early retirement of debt 0.08 -- 0.08 --
- ----------------------------------------------------------------------------------------------------------
Net income (loss) $ (0.34) $ 1.38 $ (0.19) $ 1.45
==========================================================================================================
Diluted:
Income (loss) before extraordinary item $ (0.26) $ 1.14 $ (0.11) $ 1.24
Extraordinary loss on early retirement of debt 0.08 -- 0.08 --
- ----------------------------------------------------------------------------------------------------------
Net income (loss) $ (0.34) $ 1.14 $ (0.19) $ 1.24
- ----------------------------------------------------------------------------------------------------------
Weighted average shares:
Basic 37.4 36.6 37.3 36.6
Diluted 37.4 45.5 37.3 45.2
==========================================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
3
HEXCEL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
- -----------------------------------------------------------------------------------------------
UNAUDITED
-------------------------
SIX MONTHS ENDED JUNE 30,
(IN MILLIONS) 2001 2000
- -----------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (7.1) $ 53.1
Reconciliation to net cash provided by operating activities:
Extraordinary loss on early retirement of debt 0.7 --
Depreciation and amortization 30.7 29.7
Deferred income taxes (3.3) 16.5
Gain on sale of Bellingham business -- (68.3)
Business consolidation expenses 2.9 1.2
Business consolidation payments (3.8) (4.9)
Equity in earnings of affiliated companies (1.6) (2.2)
Working capital changes and other (32.1) (20.9)
- -----------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities (13.6) 4.2
- -----------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (21.9) (12.9)
Proceeds from sale of Bellingham business -- 113.3
Proceeds from sale of other assets -- 1.1
Payment for acquisition (0.3) --
Investments in affiliated companies -- (6.0)
- -----------------------------------------------------------------------------------------------
Net cash provided by (used for) investing activities (22.2) 95.5
- -----------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds (repayments) of credit facilities, net 40.9 (82.8)
Repayments of long-term debt and capital lease obligations, net (2.2) (9.5)
Debt issuance costs (3.5) (0.9)
Activity under stock plans 0.7 0.3
- -----------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities 35.9 (92.9)
- -----------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents 1.1 --
- -----------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 1.2 6.8
Cash and cash equivalents at beginning of period 5.1 0.2
- -----------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 6.3 $ 7.0
===============================================================================================
SUPPLEMENTAL DATA:
Cash interest paid $ 37.4 $ 32.7
Cash taxes paid $ 7.9 $ 2.9
===============================================================================================
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 June 30, 2001 and the
results of operations for the quarters and six months ended June 30, 2001 and
2000, and the cash flows for the six months ended June 30, 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 $44.0 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 were as
follows:
- --------------------------------------------------------------------------------------
QUARTER ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
(IN MILLIONS) 2001 2000 2001 2000
- --------------------------------------------------------------------------------------
Sales $ -- $ 2.4 $ -- $ 19.0
Operating income (loss) $ -- $ (0.6) $ -- $ 0.6
======================================================================================
NOTE 3 -- INVENTORIES
- --------------------------------------------------------------------------------
(IN MILLIONS) 6/30/01 12/31/00
- --------------------------------------------------------------------------------
Raw materials $ 68.2 $ 74.5
Work in progress 45.3 45.2
Finished goods 50.2 35.7
- --------------------------------------------------------------------------------
Total inventories $ 163.7 $ 155.4
================================================================================
5
NOTE 4 -- NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS
- -----------------------------------------------------------------------------------------------------------------
(IN MILLIONS) 6/30/01 12/31/00
- -----------------------------------------------------------------------------------------------------------------
Senior credit facility $ 252.0 $ 211.9
European credit and overdraft facilities 6.9 13.7
9.75% Senior subordinated notes, due 2009 (net of unamortized
discount of $1.5 in 2001) 338.5 240.0
Senior subordinated notes, due 2003 - 24.4
7.0% Convertible subordinated notes, due 2003 46.9 114.4
7.0% Convertible subordinated debentures, due 2011 25.6 25.6
Various notes payable 0.1 0.3
- -----------------------------------------------------------------------------------------------------------------
Total notes payable 670.0 630.3
Capital lease obligations 40.5 43.3
- -----------------------------------------------------------------------------------------------------------------
Total notes payable and capital lease obligations $ 710.5 $ 673.6
=================================================================================================================
Notes payable and current maturities of long-term liabilities $ 18.9 $ 22.1
Long-term notes payable and capital lease obligations,
less current maturities 691.6 651.5
- -----------------------------------------------------------------------------------------------------------------
Total notes payable and capital lease obligations $ 710.5 $ 673.6
=================================================================================================================
SENIOR CREDIT FACILITY
Hexcel's global credit facility (the "Senior Credit Facility") was amended
on October 26, 2000, March 7, 2000, May 11, 2001 and June 21, 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, a
restructuring of the ownership of certain of the Company's European
subsidiaries, the issuance of senior subordinated debt and the early redemption
of certain term debt.
The Senior Credit Facility, as amended, provides Hexcel with approximately
$356.1 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. As of June 30, 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 June 30, 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 $97.0 million on June 30, 2001. After giving effect to the most
restrictive financial covenant under the Senior Credit Facility, the maximum
amount of additional debt the Company could borrow as of June 30, 2001 was $32.9
million. The Company has outstanding letters of credit of approximately $7.1
million at June 30, 2001. 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
9.75% SENIOR SUBORDINATED NOTES DUE 2009 AND REDEMPTION OF CERTAIN NOTES
On June 29, 2001, the Company issued $100.0 million of 9.75% Senior
Subordinated Notes Due 2009 at a price of 98.5% of face value. Net proceeds from
the offering were used to redeem $67.5 million aggregate principal amount of the
Company's outstanding 7% Convertible Subordinated Notes Due 2003 and to pay the
entire principal amount of $25.0 million of the Increasing Rate Senior
Subordinated Note Due 2003. The issuance and early retirement resulted in an
approximate $6.5 million cash expenditure for the period.
NOTE 5 -- EXTRAORDINARY LOSS ON EARLY RETIREMENT OF DEBT
An extraordinary loss of $3.1 million was incurred in the second quarter
of 2001 as a result of the early retirement of $67.5 million aggregate principal
amount of the Company's outstanding 7% Convertible Subordinated Notes Due 2003
and the redemption of the entire principal amount of $25.0 million of the
Company's outstanding Increasing Rate Senior Subordinated Note Due 2003. There
was no tax benefit recognized on the extraordinary loss.
NOTE 6 -- NON-RECURRING EXPENSES
In connection with the retirement of the former chief executive officer,
John J. Lee, the Company recorded compensation expenses of $4.7 million in the
second quarter of 2001 as a result of the early vesting of certain deferred
compensation and equity compensation awards together with a contractual
termination payment.
In May 2001, the Company obtained an amendment to certain of its financial
covenants under its Senior Credit Facility. As a result of fees and expenses
associated with the amendment, interest expense for the second quarter of 2001,
was increased by approximately $1.0 million.
NOTE 7 -- BUSINESS CONSOLIDATION PROGRAMS
Total accrued business consolidation expenses at June 30, 2001 and
December 31, 2000, activity during the six months ended June 30, 2001, and a
brief description of the Company's business consolidation program follows:
- ----------------------------------------------------------------------------------------------
EMPLOYEE FACILITY &
Severance & Equipment
(In millions) Relocation Relocation Total
- ----------------------------------------------------------------------------------------------
BALANCE AS OF DECEMBER 31, 2000 $ 2.4 $ 0.3 $ 2.7
Business consolidation expenses 0.1 2.8 2.9
Cash expenditures (0.9) (2.9) (3.8)
Asset write-off -- (0.2) (0.2)
- -----------------------------------------------------------------------------------------------
BALANCE AS OF JUNE 30, 2001 $ 1.6 $ -- $ 1.6
===============================================================================================
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
7
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 six months ended June 30, 2001, Hexcel recognized $2.9 million of
business consolidation expenses. Accrued expenses as of June 30, 2001 reflect
accrued severance. The Company's policy is to pay severance over a period of
time rather than in a lump-sum amount.
NOTE 8 -- NET INCOME (LOSS) PER SHARE
- --------------------------------------------------------------------------------------------------------------------
QUARTER ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 2001 2000 2001 2000
- --------------------------------------------------------------------------------------------------------------------
Basic net income (loss):
Income (loss) before extraordinary item $ (9.5) $ 50.4 $ (4.0) $ 53.1
Extraordinary loss on early retirement of debt 3.1 -- 3.1 --
- --------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (12.6) $ 50.4 $ (7.1) $ 53.1
Weighted average common shares outstanding 37.4 36.6 37.3 36.6
- --------------------------------------------------------------------------------------------------------------------
Basic net income (loss) per share:
Income (loss) before extraordinary item $ (0.26) $ 1.38 $ (0.11) $ 1.45
Extraordinary loss on early retirement of debt 0.08 -- 0.08 --
- --------------------------------------------------------------------------------------------------------------------
Basic net income (loss) per share $ (0.34) $ 1.38 $ (0.19) $ 1.45
====================================================================================================================
Diluted net income (loss):
Income (loss) before extraordinary item $ (9.5) $ 50.4 $ (4.0) $ 53.1
Extraordinary loss on early retirement of debt 3.1 -- 3.1 --
- --------------------------------------------------------------------------------------------------------------------
Diluted net income (loss) (12.6) 50.4 (7.1) 53.1
Effect of dilutive securities--
Convertible subordinated notes, due 2003 -- 1.3 -- 2.5
Convertible subordinated debentures, due 2011 -- 0.3 -- 0.6
- --------------------------------------------------------------------------------------------------------------------
Adjusted diluted net income (loss) $ (12.6) $ 52.0 $ (7.1) $ 56.2
- --------------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding 37.4 36.6 37.3 36.6
Effect of dilutive securities--
Stock options -- 0.8 -- 0.5
Convertible subordinated notes, due 2003 -- 7.2 -- 7.2
Convertible subordinated debentures, due 2011 -- 0.9 -- 0.9
- --------------------------------------------------------------------------------------------------------------------
Diluted weighted average common shares outstanding 37.4 45.5 37.3 45.2
- --------------------------------------------------------------------------------------------------------------------
Diluted net income (loss) per share:
Income (loss) before extraordinary item $ (0.26) $ 1.14 $ (0.11) $ 1.24
Extraordinary loss on early retirement of debt 0.08 -- 0.08 --
- --------------------------------------------------------------------------------------------------------------------
Diluted net income (loss) per share $ (0.34) $ 1.14 $ (0.19) $ 1.24
====================================================================================================================
The convertible subordinated notes, due 2003, and the convertible
subordinated debentures, due 2011, were excluded from the 2001 computations of
diluted net income per share, as they were antidilutive. For the 2001 and 2000
periods, all and substantially all of the outstanding stock options,
respectively, were excluded from the computation of diluted earnings per share
due to their anitdilutive effect.
8
NOTE 9 -- COMPREHENSIVE INCOME (LOSS)
- ---------------------------------------------------------------------------------------------------------------------
QUARTER ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
(IN MILLIONS) 2001 2000 2001 2000
- ---------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (12.6) $ 50.4 $ (7.1) $ 53.1
Net derivative loss (3.5) -- (8.4) --
Currency translation adjustment (9.3) (1.7) (19.6) (4.8)
- ---------------------------------------------------------------------------------------------------------------------
Total comprehensive income (loss) $ (25.4) $ 48.7 $ (35.1) $ 48.3
=====================================================================================================================
NOTE 10 -- DERIVATIVE FINANCIAL INSTRUMENTS
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. At June 30, 2001, Hexcel had outstanding foreign exchange contracts to
exchange Euros at fixed rates on specified dates through March 2005. The
aggregate notional amount of these contracts is $100.7 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 and six months ended June 30, 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 $3.5 million and $8.4 million, respectively.
Over the next twelve-month period, approximately $2.0 million of the other
comprehensive 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. Hedge ineffectiveness for
the quarter and six months ended June 30, 2001 and the fair value of the
interest rate cap at June 30, 2001 were not material.
NOTE 11 -- SEGMENT INFORMATION
Hexcel evaluates the performance of its operating segments based on
operating income before business consolidation expenses and compensation
expenses associated with the former CEO's retirement ("Adjusted operating
income"), 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.
9
Financial information for the Company's segments for the quarter and six
month periods ended June 30, 2001 and 2000, is as follows:
- --------------------------------------------------------------------------------------------------------------------
UNAUDITED
- --------------------------------------------------------------------------------------------------------------------
REINFORCEMENT COMPOSITE ENGINEERED CORPORATE
(IN MILLIONS) PRODUCTS MATERIALS PRODUCTS & Other Total
- --------------------------------------------------------------------------------------------------------------------
SECOND QUARTER 2001
- --------------------------------------------------------------------------------------------------------------------
Net sales to external customers $ 64.2 $ 156.2 $ 33.1 $ -- $ 253.5
Intersegment sales 28.3 2.0 -- -- 30.3
- --------------------------------------------------------------------------------------------------------------------
Total sales 92.5 158.2 33.1 -- 283.8
Adjusted operating income 2.4 22.1 0.8 (7.4) 17.9
Depreciation and amortization 9.1 5.1 0.8 0.5 15.5
Business consolidation expenses 0.2 1.6 -- -- 1.8
Capital expenditures 6.4 4.5 -- 0.4 11.3
- --------------------------------------------------------------------------------------------------------------------
SECOND QUARTER 2000
- --------------------------------------------------------------------------------------------------------------------
Net sales to external customers $ 94.6 $ 147.0 $ 30.0 $ -- $ 271.6
Intersegment sales 25.1 1.8 -- -- 26.9
- --------------------------------------------------------------------------------------------------------------------
Total sales 119.7 148.8 30.0 -- 298.5
Adjusted operating income 12.7 19.0 1.5 (9.1) 24.1
Depreciation and amortization 8.6 4.7 0.8 0.6 14.7
Business consolidation expenses (2.9) 2.0 0.9 -- --
Capital expenditures 3.3 4.6 0.1 0.5 8.5
- --------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 2001
- --------------------------------------------------------------------------------------------------------------------
Net sales to external customers $ 150.6 $ 316.4 $ 62.7 $ -- $ 529.7
Intersegment sales 58.0 4.1 -- -- 62.1
- --------------------------------------------------------------------------------------------------------------------
Total sales 208.6 320.5 62.7 -- 591.8
Adjusted operating income 13.8 42.8 1.4 (16.4) 41.6
Depreciation and amortization 18.3 9.8 1.6 1.0 30.7
Business consolidation expenses 0.2 2.7 -- -- 2.9
Capital expenditures 12.6 8.4 0.2 0.7 21.9
- --------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 2000
- --------------------------------------------------------------------------------------------------------------------
Net sales to external customers $ 181.7 $ 293.5 $ 76.2 $ -- $ 551.4
Intersegment sales 52.3 4.1 -- -- 56.4
- --------------------------------------------------------------------------------------------------------------------
Total sales 234.0 297.6 76.2 -- 607.8
Adjusted operating income 23.2 37.5 4.7 (18.3) 47.1
Depreciation and amortization 17.2 9.5 1.8 1.2 29.7
Business consolidation expenses (2.2) 2.4 1.0 -- 1.2
Capital expenditures 4.3 7.6 0.5 0.5 12.9
====================================================================================================================
Adjusted operating income 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 operating income may not be
comparable to similarly titled financial measures of other companies. Adjusted
operating income 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.
10
A reconciliation of Adjusted operating income to consolidated income
(loss) before income taxes is as follows:
- ------------------------------------------------------------------------------------------------------------------------
QUARTER ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
(IN MILLIONS) 2001 2000 2001 2000
- ------------------------------------------------------------------------------------------------------------------------
Total Adjusted operating income $ 17.9 $ 24.1 $ 41.6 $ 47.1
Business consolidation expenses (1.8) -- (2.9) (1.2)
Compensation expense associate with CEO's retirement (4.7) -- (4.7) --
Interest expense (17.3) (17.2) (33.6) (35.6)
Gain on sale of Bellingham aircraft interiors business -- 68.3 -- 68.3
- ------------------------------------------------------------------------------------------------------------------------
Consolidated income (loss) before income taxes $ (5.9) $ 75.2 $ 0.4 $ 78.6
========================================================================================================================
NOTE 12 -- TAXES
Since 1999, the Company has generated taxable profits in Europe offset by
net operating losses in the United States. During the same period, the Company's
U.S. operations have generated losses, in part, because most of the Company's
interest expense and goodwill amortization are serviced in the United States.
The Company has recorded the benefit of these net operating losses by increasing
the deferred tax asset carried on its balance sheet. As of March 31, 2001, the
deferred tax asset balance was $42.9 million. The sharp decline in electronics
revenues and the recognition of the non-recurring charges in the second quarter
of 2001 have significantly increased U.S. net operating losses in 2001 compared
to prior estimates. In light of this change in business outlook, in the second
quarter of 2001, the Company has determined to increase its tax provision rate
through the establishment of a non-cash valuation allowance attributable to
currently generated U.S. net operating losses. As a result, the Company recorded
a tax provision of $3.8 million for the second quarter of 2001. Further, the
Company did not recognize any tax benefit on the $3.1 million extraordinary loss
recorded in the second quarter of 2001. Going forward, the Company will continue
to reflect a tax provision on its European earnings. As a result, the Company's
effective tax rate may change from quarter to quarter based on relative U.S. and
European profitability. The amount of net deferred tax asset reflected on the
Company's balance sheet could be reduced if estimates of future U.S. taxable
income during the carry-forward period are reduced in light of future operating
performance. For the six months ended June 30, 2001, the U.S. loss before income
taxes was $27.7 million and the European income before income taxes was $28.1
million.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FINANCIAL OVERVIEW
- --------------------------------------------------------------------------------------------------------------
QUARTER ENDED JUNE 30,
-----------------------------------
(IN MILLIONS, EXCEPT PER SHARE DATA) 2001 2000
- --------------------------------------------------------------------------------------------------------------
PRO FORMA: (a)
Sales $ 253.5 $ 269.2
Gross margin % 20.4% 22.4%
Adjusted operating income (b) $ 17.9 $ 24.7
Adjusted operating income % (b) 7.1% 9.2%
Adjusted EBITDA (c) $ 33.4 $ 39.3
- --------------------------------------------------------------------------------------------------------------
AS REPORTED:
Sales $ 253.5 $ 271.6
Gross margin % 20.4% 22.3%
Adjusted operating income (b) $ 17.9 $ 24.1
Adjusted operating income % (b) 7.1% 8.9%
Adjusted EBITDA (c) $ 33.4 $ 38.8
Provision for income taxes (d) $ 3.8 $ 26.5
Equity in earnings of affiliated companies $ 0.2 $ 1.7
Income (loss) before extraordinary item $ (9.5) $ 50.4
Extraordinary loss on early retirement of debt $ 3.1 --
Net income (loss) $ (12.6) $ 50.4
Diluted earnings per share $ (0.34) $ 1.14
==============================================================================================================
(a) Pro forma results give effect to the April 26, 2000 sale the of the
Bellingham aircraft interiors business as if it had occurred on January 1,
2000.
(b) Excludes business consolidation expenses and compensation expenses
associated with the former CEO's retirement.
(c) Excludes business consolidation expenses, compensation expenses associated
with the former CEO's retirement, the gain from the April 2000 sale of the
Bellingham aircraft interiors business, interest, taxes, depreciation,
amortization, equity in earnings of affiliated companies, and the
extraordinary loss on early retirement of debt.
(d) 2001 reflects the impact of a reduced tax benefit from U.S. operating
losses. 2000 includes approximately $24.0 million of provision for income
taxes on the April 2000 gain from the sale of the Bellingham aircraft
interiors business.
Adjusted EBITDA and Adjusted operating income 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 results for the periods
ended June 30, 2001 to the pro forma results for the periods ended June 30,
2000. The 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.
12
RECENT EVENTS
The Board of Directors appointed Mr. David E. Berges to serve as Chairman
of the Board of Directors and Chief Executive Officer of the Company effective
as of July 30, 2001. Mr. Berges succeeds Mr. John J. Lee who retired in April of
2001.
RESULTS OF OPERATIONS
NET SALES: Net sales of $253.5 million for the second quarter of 2001 were
6% lower than 2000 second quarter pro forma revenue of $269.2 million. Had the
same U.S. dollar, British pound sterling and Euro exchange rates applied in the
second quarter of 2001 as in the second quarter of 2000, sales for the 2001
quarter would have been $259.3 million, or 4% lower than the pro forma sales for
the 2000 quarter.
The decline in sales was primarily due to the decline in electronics
revenues reflecting the impact of the electronics industry downturn. Increased
sales in the commercial aerospace market resulted from higher build rates for
Airbus, Boeing and several regional aircraft manufacturers and; in the
industrial market from the continued strength in the soft body armor market and
steady volume increases in wind energy and automotive components.
The following table summarizes actual and pro forma net sales to
third-party customers by product groups and market segments for the quarters
ended June 30, 2001 and 2000, respectively:
- --------------------------------------------------------------------------------------------------------------------------------
UNAUDITED
-------------------------------------------------------------------
COMMERCIAL SPACE &
(IN MILLIONS) AEROSPACE DEFENSE ELECTRONICS INDUSTRIAL TOTAL
- --------------------------------------------------------------------------------------------------------------------------------
SECOND QUARTER 2001 NET SALES
Reinforcement products $ 16.2 $ 3.1 $ 16.5 $ 28.4 $ 64.2
Composite materials 95.5 25.2 -- 35.5 156.2
Engineered products 29.3 3.8 -- -- 33.1
- --------------------------------------------------------------------------------------------------------------------------------
Total $ 141.0 $ 32.1 $ 16.5 $ 63.9 $ 253.5
56% 13% 6% 25% 100%
- --------------------------------------------------------------------------------------------------------------------------------
PRO FORMA (a)
SECOND QUARTER 2000 NET SALES
Reinforcement products $ 17.1 $ 3.5 $ 46.8 $ 27.2 $ 94.6
Composite materials (b) 85.0 28.5 -- 33.5 147.0
Engineered products 25.5 2.1 -- -- 27.6
- --------------------------------------------------------------------------------------------------------------------------------
Total $ 127.6 $ 34.1 $ 46.8 $ 60.7 $ 269.2
47% 13% 17% 23% 100%
- --------------------------------------------------------------------------------------------------------------------------------
(a) Pro forma net sales give effect to the April 26, 2000 sale of the
Bellingham aircraft interiors business as if it had occurred on January 1,
2000.
(b) 2000 has been reclassified for comparative purposes.
Commercial aerospace net sales increased 10.5% to $141.0 million for the
second quarter of 2001, as compared to pro forma net sales of $127.6 million for
the second quarter of 2000. This increase in comparable second 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 composite materials and
engineered products businesses reflect the impact of higher build rates while
reinforcement products sales decreased slightly due to the timing of deliveries
during the quarter. Boeing has confirmed that it expects to meet its projections
to deliver approximately 530 aircraft in 2001 and has reduced projected 2002
deliveries to between 510 to 520 aircraft. Airbus has recently disclosed that
they will increase production at a slower
13
rate than previously projected but that they still anticipate delivering 400
aircraft in 2003 compared to 289 in 2000. The adjusted Boeing projections and
the recently-lowered Airbus projections still reflect an increase over 2000
deliveries. 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 impact of the continuing pressure on the aerospace supply chain 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 second quarter 2001 of $32.1 million
reflect a $2.0 million, or 6%, decrease from second quarter 2000 pro forma net
sales of $34.1 million. This decrease is reflected primarily in the Company's
composite material and reinforcement products businesses, offset slightly by an
increase in the Company's engineered products segment. The quarter is reflective
of normal quarter-to-quarter timing variations in deliveries and the Company
continues to view the space and defense revenue trend as positive. 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, which are reflected in the Company's reinforcement
products segment, were $16.5 million in the second quarter of 2001, a decrease
of 65% from pro forma net sales of $46.8 million in the comparable 2000 quarter.
This decline reflects the downturn in the electronics industry and the ensuing
adjustments throughout the electronics industry supply chain. Demand for
Hexcel's woven electronic glass fabrics that are the reinforcement for printed
circuit boards declined sharply at the end of the first quarter of 2001 in the
United States. Lower demand was the net result of finished electronics goods
producers responding to their excess inventories by cutting back on their
purchases, which has impacted the entire supply chain. Customer requirements
have remained at these much reduced levels throughout the second quarter. This
market decline became evident in the Company's wholly owned operations in France
and at its Asian joint venture during the second quarter of 2001. In response to
these market conditions, the Company has idled manufacturing capacity, cut
non-essential expenditures, laid off some production employees and furloughed
others. The Company will continue to monitor the situation closely and make
further adjustments if warranted by market developments. The Company continues
to look for signs of improving demand and an end to the inventory correction;
however, there remains limited visibility down the electronics supply chain.
With this lack of visibility and the seasonal impact of the European vacation
period, the Company concludes that electronics revenues will not recover in the
third quarter of 2001 and may be weaker than they were in the second quarter of
2001.
Industrial net sales increased 5% to $63.9 million for the second quarter
of 2001 from $60.7 million pro forma net sales for the same 2000 quarter. The
increase reflects sales growth in several segments, especially fabrics
(reinforcement segment) used in the ballistic market and in composite materials
for the wind energy and automotive markets. 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 second quarter of 2001 was $51.7
million or 20.4% of net sales, compared to gross margin of $60.4 million or
22.4% of net sales on a pro forma basis for the second quarter of 2000. The
decrease in gross margin reflects the impact of the sharp decrease in
electronics
14
sales and the corresponding reduction in production at our U.S. electronics
fabrics manufacturing plants, which more than offset the improved margin in the
composite materials segment reflecting the strong aerospace market. Increased
energy costs for the second quarter of 2001 compared to the same 2000 quarter
contributed to the gross margin decline by approximately $1.3 million.
OPERATING INCOME: Operating income was $11.4 million, or 4.5%, of net
sales in the second quarter of 2001, compared with $24.7 million, or 9.2%, of
pro forma net sales in the second quarter of 2000. Excluding business
consolidation expenses and compensation expenses associated with the former
CEO's retirement, operating income for the second quarter of 2001 was $17.9
million, or 7.1% of net sales, a decrease of $6.8 million, or 27.5% when
compared to the same 2000 quarter on a pro forma basis. Business consolidation
expenses totaled $1.8 million and compensation expenses associated with the
former CEO's retirement totaled $4.7 million in the second quarter of 2001.
The aggregate decrease in operating income, excluding the business
consolidation expenses and the compensation expenses associated with the former
CEO's retirement, reflects the decrease in gross margin partially offset by a
decrease in selling, general and administrative ("SG&A) expenses and a slight
reduction in research and technology expenses. The reinforcement products
segment decreased its operating income by 81.1% reflecting the electronics
industry downturn discussed earlier, while the composite materials segment
increased its operating income by 16.3%, excluding business consolidation
expenses, as compared to the pro forma 2000 second quarter. The engineered
products segment reported a decrease in operating income of $1.3 million
compared to the second quarter of 2000, after adjusting for the sale of the
Bellingham business on a pro forma basis. The performance of this business
significantly deteriorated in the second half of 2000 as the business mix
changed. The Company is pursuing a series of actions focused on progressively
improving the performance of this business segment.
SELLING, GENERAL AND ADMINISTRATIVE ("SG&A") expenses were $33.7 million
or 13.3% of net sales for the second quarter of 2001. Excluding compensation
expenses associated with the former CEO's retirement, expenses were $29.0
million, or 11.4%, compared with $30.8 million, or 11.4% of net sales for the
second quarter of 2000 on a pro forma basis. This decrease reflects the impact
of initiatives to reduce or defer expenses to mitigate the impact of the
reduction in sales to the electronics market segment. Research and technology
expenses for the second quarter of 2001 were $4.8 million, or 1.9% of net sales,
compared with $4.9 million, or 1.8% of net sales, on a pro forma basis, for the
second quarter of 2000.
INTEREST EXPENSE: Interest expense was $17.3 million for the second
quarter of 2001, compared to $17.2 million for the second quarter of 2000.
Interest expense for the 2001 quarter includes bank amendment fees of
approximately $1.0 million related to the amendment of certain financial
covenants under the Senior Credit Facility. (Refer to Note 4 to the accompanying
condensed consolidated financial statements.) Interest expense for the second
quarter of 2001, excluding the bank amendment fees, decreased by approximately
$1.0 million compared to the second quarter of 2000 reflecting the reduction of
debt due to the net proceeds from the Bellingham transaction and declining
interest rates on the Company's Senior Credit Facility.
EQUITY IN EARNINGS OF AFFILIATED COMPANIES: Equity in earnings of
affiliated companies for the second quarter of 2001 was $0.2 million compared to
$1.7 million for the second quarter of 2000. The $1.5 million decrease reflects
the impact of the electronics market decline on the Company's Asian
reinforcement products joint venture and the effect of start-up losses
associated with the engineered products joint ventures in China and Malaysia.
The earnings contribution from the Asian reinforcement products joint venture is
anticipated to show a further decline in the third quarter and when combined
with the start-up losses of the two engineered products joint ventures will
result in the Company reporting
15
a loss for its joint venture interests in the third quarter of 2001. These
changes in performance do not affect the Company's cash flows.
TAXES: Since 1999, the Company has generated taxable profits in Europe
offset by net operating losses in the United States. During the same period, the
Company's U.S. operations have generated losses, in part, because most of the
Company's interest expense and goodwill amortization are serviced in the United
States. The Company has recorded the benefit of these net operating losses by
increasing the deferred tax asset carried on its balance sheet. As of March 31,
2001, the deferred tax asset balance was $42.9 million. The sharp decline in
electronics revenues and the recognition of the non-recurring charges in the
second quarter of 2001 have significantly increased U.S. net operating losses in
2001 compared to prior estimates. In light of this change in business outlook,
in the second quarter the Company has determined to increase its tax provision
rate through the establishment of a non-cash valuation allowance attributable to
currently generated U.S. net operating losses. As a result, the Company recorded
a tax provision of $3.8 million for the second quarter of 2001. Further, the
Company did not recognize any tax benefit on the $3.1 million extraordinary loss
recorded in the second quarter of 2001. Going forward, the Company will continue
to reflect a tax provision on its European earnings. As a result, the Company's
effective tax rate may change from quarter to quarter based on relative U.S. and
European profitability. The amount of net deferred tax asset reflected on the
Company's balance sheet could be reduced if estimates of future U.S. taxable
income during the carry-forward period are reduced in light of future operating
performance. For the six months ended June 30, 2001, the U.S. loss before income
taxes was $27.7 million and the European income before income taxes was $28.1
million.
EXTRAORDINARY LOSS: An extraordinary loss of $3.1 million was incurred in
the second quarter of 2001 as a result of the early retirement of $67.5 million
aggregate principal amount of the Company's outstanding 7% Convertible
Subordinated Notes Due 2003 and the redemption of the entire principal amount of
$25.0 million of the Company's outstanding Increasing Rate Senior Subordinated
Note Due 2003. There was no tax benefit recognized on the extraordinary loss.
YEAR-TO-DATE RESULTS
- ----------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30,
--------------- ------------------
(IN MILLIONS, EXCEPT PER SHARE DATA) 2001 2000
- ----------------------------------------------------------------------------------------------------------
PRO FORMA: (a)
Sales $ 529.7 $ 532.4
Gross margin % 21.1% 22.2%
Adjusted operating income (b) $ 41.6 $ 46.6
Adjusted operating income % (b) 7.9% 8.8%
Adjusted EBITDA (c) $ 72.3 $ 75.9
- ----------------------------------------------------------------------------------------------------------
AS REPORTED:
Sales $ 529.7 $ 551.4
Gross margin % 21.1% 22.2%
Adjusted operating income (b) $ 41.6 $ 47.1
Adjusted operating income % (b) 7.9% 8.5%
Adjusted EBITDA (c) $ 72.3 $ 76.8
Provision for income taxes (d) $ 6.0 $ 27.7
Equity in earnings of affiliated companies $ 1.6 $ 2.2
Extraordinary loss on early retirement of debt $ 3.1 --
Net income (loss) $ (7.1) $ 53.1
Diluted earnings (loss) per share $ (0.19) $ 1.24
==========================================================================================================
16
(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 compensation expenses
associated with the former CEO's retirement.
(c) Excludes business consolidation expenses, compensation expenses associated
with the former CEO's retirement, the gain from the April 2000 sale of the
Bellingham aircraft interiors business, interest, taxes, depreciation,
amortization, equity in earnings of affiliated companies and the
extraordinary loss on early retirement of debt.
(d) 2001 reflects the impact of a reduced tax benefit from U.S. operating
losses. 2000 includes approximately $24.0 million of provision for income
taxes on the April 2000 gain from the sale of the Bellingham aircraft
interiors business.
NET SALES AND GROSS MARGIN: Net sales for the first half of 2001 were
$529.7 million, a decrease of 0.5% when compared to the first half of 2000 pro
forma net sales of $532.4 million. Gross margin for the first half of 2001 was
$111.8 million or 21.1% versus pro forma gross margin of $118.1 million, or
22.2% of pro forma net sales for the same period in 2000. The strengthening of
the U.S. dollar against the British pound sterling and the Euro in the last
twelve months has reduced first half revenues by approximately $13.0 million
compared to the first half of 2000. Increased utility costs in the U.S. for the
six-month period has reduced gross margins by approximately $3.3 million
compared to the same 2000 period. The decrease in net sales and gross margin
percentage compared to 2000 results primarily reflects the factors previously
discussed.
The following table summarizes actual and pro forma net sales to
third-party customers by product group and market segment for the six month
periods ended June 30, 2001 and 2000, respectively:
- -------------------------------------------------------------------------------------------------------------------
UNAUDITED
-------------------------------------------------------------------------------
COMMERCIAL SPACE &
(IN MILLIONS) AEROSPACE DEFENSE ELECTRONICS INDUSTRIAL TOTAL
- -------------------------------------------------------------------------------------------------------------------
FIRST HALF 2001
Reinforcement products $ 34.3 $ 8.6 $ 51.2 $ 56.5 $ 150.6
Composite materials 194.8 52.1 -- 69.5 316.4
Engineered products 55.3 7.4 -- -- 62.7
- -------------------------------------------------------------------------------------------------------------------
$ 284.4 $ 68.1 $ 51.2 $ 126.0 $ 529.7
Total 53% 13% 10% 24% 100%
- -------------------------------------------------------------------------------------------------------------------
PRO FORMA FIRST HALF 2000
Reinforcement products $ 32.7 $ 7.6 $ 90.4 $ 51.0 $ 181.7
Composite materials 181.7 45.9 -- 65.9 293.5
Engineered products 52.6 4.6 -- -- 57.2
- -------------------------------------------------------------------------------------------------------------------
$ 267.0 $ 58.1 $ 90.4 $ 116.9 $ 532.4
Total 50% 11% 17% 22% 100%
===================================================================================================================
OPERATING INCOME: Operating income for the first six months of 2001 was
$34.0 million, compared with pro forma operating income of $45.4 million for the
same period in 2000. Excluding business consolidation expenses of $2.9 million
and $1.2 million incurred in the first half of 2001 and 2000, respectively, and
excluding $4.7 million of compensation expenses associated with the former CEO's
retirement in the 2001 period, operating income was $41.6 million, or 7.9% of
net sales for 2001 compared with $46.6 million, or 8.8% of pro forma net sales
for 2000. The aggregate decrease in operating income is the result of lower
sales and gross margins, and higher SG&A expenses partially offset by a decrease
in research and technology expenses. SG&A expenses, excluding $4.7 million of
compensation expenses associated with the former CEO's retirement, were $60.7
million, or 11.5% of net sales for the first half of 2001, compared to pro forma
SG&A of $60.3 million, or 11.3% of pro forma net sales for the same period in
2000. Research and technology expenses were $9.5 million, or 1.8% of net sales
for the first half of 2001, compared to $11.2 million, or 2.1% of net sales for
the comparable 2000 period, on a pro forma basis.
17
INTEREST EXPENSE: Interest expense for the first half of 2001 was $33.6
million compared to $32.5 million pro forma interest expense for the first half
of 2000. The increase in interest expense resulted primarily from bank amendment
fees of approximately $1.0 million related to the 2001 amendment of certain
financial covenants under the Senior Credit Facility. (Refer to Note 6 to the
accompanying condensed consolidated financial statements).
EQUITY IN EARNINGS OF AFFILIATED COMPANIES: Equity in earnings of
affiliated companies for the six month period ended June 30, 2001 was $1.6
million compared to $2.2 million for the same period of 2000, reflecting the
impact of the electronics industry downturn on the operating results of the
Company's electronics fabrics joint venture in Asia as well as the planned
start-up costs associated with the engineered products joint ventures in China
and Malaysia.
TAXES: The Company's tax provision of $6.0 million for the first half of
2001 reflects the impact of reduced tax benefits recorded for U.S. operating
losses resulting from the change in business outlook for the Company. (Refer to
Note 12 to the accompanying condensed consolidated financial statements.)
EXTRAORDINARY LOSS: An extraordinary loss of $3.1 million was incurred in
the second quarter of 2001 as a result of the early retirement and redemption of
certain long-term debt of the Company. (Refer to Note 5 to the accompanying
condensed consolidated financial statements.)
EBITDA AND ADJUSTED EBITDA
Earnings before business consolidation expenses, the 2001 compensation
expenses associated with the former CEO's retirement, the gain from the April
2000 sale of the Bellingham aircraft interiors business, interest, taxes,
depreciation, amortization, equity in earnings of affiliated companies and the
extraordinary loss on early retirement of debt ("Adjusted EBITDA") for the
second quarter 2001 was $33.4 million, a decrease of 15%, when compared to pro
forma Adjusted EBITDA for the second quarter 2000 of $39.3 million. Adjusted
EBITDA for the first half of 2001 was $72.3 million, a decrease of 4.7%,
compared to the first half of 2000 pro forma Adjusted EBITDA of $75.9 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.
18
A reconciliation of net income (loss) before extraordinary item to EBITDA and
Adjusted EBITDA for the applicable periods follows:
- ---------------------------------------------------------------------------------------------------------------------
QUARTER ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
(IN MILLIONS) 2001 2000 (a) 2001 2000 (a)
- ---------------------------------------------------------------------------------------------------------------------
Net income (loss) before extraordinary item $ (9.5) $ 51.3 $ (4.0) $ 54.7
Provision for income taxes 3.8 26.9 6.0 28.4
Interest expense 17.3 16.4 33.6 32.7
Depreciation and amortization expense 15.5 14.7 30.7 29.4
Equity in earnings of affiliated companies (0.2) (1.7) (1.6) (2.2)
- ---------------------------------------------------------------------------------------------------------------------
EBITDA 26.9 107.6 64.7 143.0
Business consolidation expenses 1.8 2.9 1.2
Compensation expenses related to CEO's retirement 4.7 -- 4.7 --
Gain on sale of Bellingham aircraft interiors business -- (68.3) -- (68.3)
- ---------------------------------------------------------------------------------------------------------------------
Adjusted EBITDA $ 33.4 $ 39.3 $ 72.3 $ 75.9
=====================================================================================================================
(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 used for operating activities was
$13.6 million for the first half of 2001 as compared to net cash provided by
operating activities of $4.2 million for the first half of 2000. This decrease
is primarily due to lower net income and an increase in working capital
requirements for the 2001 period. The increase in working capital requirements
is due to the increased inventory levels resulting primarily from the fall-off
in the electronics market demand and increased accounts receivable resulting
from strong sales in all but the electronics market.
INVESTING: Net cash used for investing activities in the first six months of
2001 was $22.2 million compared to $95.5 million provided by investing
activities in the 2000 first half. The 2000 period reflects the receipt of the
proceeds from the sale of the Bellingham business, offset by capital
expenditures of $12.9 million and $6.0 million of investments made in the
Company's joint ventures in China and Malaysia. The 2001 use of $22.2 million
primarily represents capital expenditures for the Company's continued efforts
toward process improvements and capacity additions for high-growth product
applications such as electronics, automotive and wind energy; and environmental,
safety and maintenance initiatives.
FINANCING: During the six months ended June 30, 2001, net cash of $35.9 million
was provided by financing activities compared with net cash used of $92.9
million in the six months ended June 30, 2000. The 2000 period reflects the
repayment of debt from the proceeds received from the sale of the Bellingham
business. As of June 30, 2001, Hexcel's total debt outstanding was $710.5
million, an increase of $36.9 million from the outstanding balance as of
December 31, 2000. The increase in debt reflects the declining revenue in the
electronics business and the increase in working capital requirements, the
funding of capital expenditures and the costs associated with the issuance of
the senior subordinated debt and the subsequent retirement of debt. The Company
is targeting to reverse some of this increase in debt in the second half of the
year through targeting working capital reduction and reduced capital
expenditures.
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. In
May 2001, certain financial covenants under the Senior Credit Facility were
19
amended to accommodate the impact of the sharp fall-off in electronics sales
volume on the Company. If the electronics market does not begin to recover
before the end of the year, the Company may need to further amend these
covenants. There can be no assurance such relief; if necessary, will be obtained
or as to the terms under which it may be granted by the senior lenders, if
requested. For further information regarding the Company's financial resources,
see Note 4 to the accompanying condensed consolidated financial statements.
On June 29, 2001, the Company issued $100.0 million of 9.75% Senior
Subordinated Notes Due 2009 at a price of 98.5%. Net proceeds from the offering
were used to redeem $67.5 million aggregate principal amount of the Company's
outstanding 7% Convertible Subordinated Notes Due 2003 and to pay the entire
principal amount of $25.0 million of the Increasing Rate Senior Subordinated
Note Due 2003. The refinancing reduced the Company's 2003 debt maturities from
$149.5 million to $57.6 million. Debt maturities remaining in 2001 are $9.2
million and in 2002 are $9.7 million. The net impact of the offering is
estimated to increase quarterly interest expense by approximately $0.6 million
before tax. The cash costs associated with these financing actions amounted to
approximately $6.5 million.
RATIO OF EARNINGS TO FIXED CHARGES: The ratio of earnings to fixed charges for
the quarter and six months ended June 30, 2001 was 0.7x and 1.0x, respectively,
compared to 5.5x and 3.4x for the same 2000 periods 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.
RECENTLY ISSUED ACCOUNTING STANDARDS
On July 20, 2001, the Financial Accounting Standards Board (FASB) issued
FASB Statement No. 142 (FAS 142), "Goodwill and Other Intangible Assets." FAS
142 changes the accounting for goodwill from an amortization method to an
impairment-only approach. Upon adoption of FAS 142, goodwill will be tested at
the reporting unit level annually and whenever events or circumstances occur
indicating that goodwill might be impaired. Amortization of goodwill, including
goodwill recorded in past business combinations, will cease. The adoption date
for the Company will be January 1, 2002. The Company has not yet determined what
the impact of FAS 142 will be on the Company's results of operations and
financial position.
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 the electronics
market and the future demand for electronics fabrics, and related manufacturing
capacity utilization; (e) expectations regarding sales growth, sales mix, and
gross margins; (f) expectations regarding the performance of the Company's joint
venture interests; (g) expectations regarding the Company's financial condition
and liquidity; (h) 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
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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.
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.
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. At June 30, 2001, Hexcel has outstanding foreign exchange contracts to
exchange Euros at fixed rates on specified dates through March 2005. The
aggregate notional amount of these contracts is $100.7 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 and six months ended June 30, 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 $3.5 million and $8.4 million, respectively.
Over the next twelve-month period, approximately $2.0 million of the other
comprehensive 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 and six
months ended June 30, 2001, hedge ineffectiveness and the fair value of the
interest rate cap at June 30, 2001 were 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.
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PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On April 11, 2001, Hexcel issued 283,276 shares of common stock to Applied
Fiber Systems, Ltd. ("AFS"), as part of the consideration paid to AFS to acquire
from AFS its fiber reinforced thermoplastics business. The aggregate
consideration paid to AFS at the closing was approximately $3.1 million in a
combination of cash, shares of Hexcel common stock and liabilities of AFS
assumed by Hexcel. Hexcel is also obligated to make certain payments to AFS in
the future if the net sales of the acquired business exceed certain levels and,
at Hexcel's option, a portion of these payments may be made in shares of Hexcel
common stock. Hexcel relied upon Rule 506 of Regulation D under the Securities
Act of 1933 (the "Securities Act") in concluding that the sale of 283,276 shares
of Hexcel common stock to AFS on April 11, 2001 was exempt from the registration
requirements of the Securities Act pursuant to Section 4(2) thereof. Such
reliance was based on the facts that such sale was privately negotiated, that
AFS was the sole purchaser, and that all requirements of Rule 506 were complied
with in connection with such sale.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of the Company was held on May 10, 2001
(the "Meeting") in Stamford, Connecticut. Stockholders holding 35,530,346 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:
Each of the nine 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:
DIRECTOR FOR WITHHELD
H. Arthur Bellows, Jr. 35,387,538 142,808
Robert S. Evans 32,583,607 2,946,739
James J. Gaffney 35,385,167 145,179
Marshall S. Geller 35,396,301 134,045
Harold E. Kinne 32,581,877 2,948,469
Sanjeev K. Mehra 35,384,917 145,429
Lewis Rubin 35,391,113 139,233
Peter M. Sacerdote 35,386,913 143,433
Martin L. Solomon 35,410,013 120,333
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
Exhibit No. Description
3.1 Amended and Restated Bylaws of Hexcel Corporation
(incorporated by reference herein to Exhibit 3.2 to Hexcel's
Registration Statement on Form S-4 (No. 333-66582), filed on
August 2, 2001).
10.1 Fifth Amendment and Consent, dated as of May 11, 2001, to the
Second Amended and Restated Credit Agreement, dated as of
September 15, 1998, among Hexcel Corporation and the Foreign
Borrowers from time to time party 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 (incorporated by
reference herein to Exhibit 10.1(h) to Hexcel's Registration
Statement on Form S-4 (No. 333-66582), filed on August 2,
2001).
10.2 Sixth Amendment and Consent, dated as of June 21, 2001, to
the Second Amended and Restated Credit Agreement, dated as of
September 15, 1998, among Hexcel Corporation and the Foreign
Borrowers from time to time party 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 (incorporated by
reference herein to Exhibit 10.1(i) to Hexcel's Registration
Statement on Form S-4 (No. 333-66582), filed on August 2,
2001).
10.3 Agreement, dated as of April 27, 2001, by and between Hexcel
Corporation and John J. Lee (incorporated by reference herein
to Exhibit 10.38(n) to Hexcel's Registration Statement on
Form S-4 (No. 333-66582), filed on August 2, 2001).
10.4 Amendment, dated as of April 25, 2001, to the Governance
Agreement dated as of December 19, 2000 among LXH, L.L.C.,
LXH II, L.L.C., Hexcel Corporation and the other parties
listed on the signature pages thereto (incorporated by
reference herein to Exhibit 10.51(a) to Hexcel's Registration
Statement on Form S-4 (No. 333-66582), filed on August 2,
2001).
(b) REPORTS ON FORM 8-K:
Current Report on Form 8-K dated April 19, 2001, relating to the Company's
first quarter 2001 financial results.
Current Report on Form 8-K dated April 30, 2001, relating to the
retirement of the Company's chairman and chief executive officer, John J.
Lee.
Current Report on Form 8-K dated May 8, 2001, relating to the death of the
Company's chairman and former chief executive officer, John J. Lee.
Current Report on Form 8-K dated June 15, 2001, relating to the issuance
of $100 million principal amount of senior subordinated notes and the use
of the proceeds from such issuance.
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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 14, 2001 /s/ William J. Fazio
- ------------------------------ -------------------------------------------
(Date) William J. Fazio
Corporate Controller and
Chief Accounting Officer
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