<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
----------------------
FORM 10-Q
/ X / QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 29, 1996
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
----------------------
HEXCEL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 94-1109521
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
Two Stamford Plaza
281 Tresser Boulevard
Stamford, Connecticut 06901-3238
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)
Registrant's telephone number, including area code: (203) 969-0666
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
---- ----
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a
plan of reorganization confirmed by a U.S. Bankruptcy Court. Yes X No
---- ----
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Class Outstanding as of November 8, 1996
----- ----------------------------------
COMMON STOCK 36,490,284
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<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
INDEX
PAGE
PART I. FINANCIAL INFORMATION
Item 1.
- Condensed Consolidated Statements of
Operations -- The Quarter and Year-to-Date Periods
Ended September 29, 1996 and October 1, 1995 2
- Condensed Consolidated Balance Sheets --
September 29, 1996 and December 31, 1995 3
- Condensed Consolidated Statements of
Cash Flows -- The Year-to-Date Periods Ended
September 29, 1996 and October 1, 1995 4
- Notes to Condensed Consolidated
Financial Statements 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURES 23
<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
UNAUDITED
--------------------------------------------------------------------
THE QUARTER ENDED THE YEAR-TO-DATE ENDED
------------------------------ --------------------------------
SEPTEMBER 29, October 1, SEPTEMBER 29, October 1,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1996 1995 1996 1995
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 189,542 $ 81,366 $ 482,730 $ 257,544
Cost of sales (153,729) (65,478) (384,946) (208,806)
- ----------------------------------------------------------------------------------------------------------
Gross margin 35,813 15,888 97,784 48,738
Selling, general and administrative
expenses (25,642) (11,358) (67,003) (35,630)
Business consolidation and
acquisition expenses (1,382) - (35,802) -
Other income, net 142 600 3,127 600
- ----------------------------------------------------------------------------------------------------------
Operating income (loss) 8,931 5,130 (1,894) 13,708
Interest expense (7,173) (2,260) (15,655) (6,702)
Bankruptcy reorganization expenses - (410) - (3,361)
- ----------------------------------------------------------------------------------------------------------
Income (loss) from continuing
operations before income taxes 1,758 2,460 (17,549) 3,645
Provision for income taxes (1,412) (899) (3,924) (2,503)
- ----------------------------------------------------------------------------------------------------------
Income (loss) from
continuing operations 346 1,561 (21,473) 1,142
Discontinued operations:
Losses during phase-out period - (171) - (468)
- ----------------------------------------------------------------------------------------------------------
Net income (loss) $ 346 $ 1,390 $ (21,473) $ 674
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
Net income (loss) per share and
equivalent share:
Primary and fully diluted:
Continuing operations $ 0.01 $ 0.09 $ (0.66) $ 0.08
Discontinued operations - (0.01) - (0.03)
- ----------------------------------------------------------------------------------------------------------
Net income (loss) $ 0.01 $ 0.08 $ (0.66) $ 0.05
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
Weighted average shares and
equivalent shares 37,430 18,094 32,305 14,958
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.
2
<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
UNAUDITED
-------------------------------------
SEPTEMBER 29, December 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1996 1995
- --------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 4,172 $ 3,829
Accounts receivable 151,375 65,888
Inventories 155,628 55,475
Prepaid expenses 3,869 2,863
- --------------------------------------------------------------------------------------------
Total current assets 315,044 128,055
- --------------------------------------------------------------------------------------------
Property, plant and equipment 446,656 203,580
Less accumulated depreciation (137,306) (117,625)
- --------------------------------------------------------------------------------------------
Net property, plant and equipment 309,350 85,955
- --------------------------------------------------------------------------------------------
Intangible assets 49,038 1,832
Investments and other assets 9,794 14,760
- --------------------------------------------------------------------------------------------
Total assets $ 683,226 $ 230,602
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current maturities of
long-term liabilities $ 17,776 $ 1,802
Accounts payable 64,641 22,904
Accrued liabilities 66,200 41,779
Accrued business consolidation costs 24,165 -
- --------------------------------------------------------------------------------------------
Total current liabilities 172,782 66,485
- --------------------------------------------------------------------------------------------
Notes payable and capital lease obligations, less
current maturities 258,574 88,342
Indebtedness to related parties, less current
maturities 31,528 -
Deferred liabilities 49,629 27,401
- --------------------------------------------------------------------------------------------
Stockholders' equity
Common stock, $0.01 par value, 100,000 shares
authorized, shares issued and outstanding
of 36,371 in 1996 and 18,091 in 1995 364 181
Additional paid-in capital 258,490 111,259
Accumulated deficit (91,454) (69,981)
Minimum pension obligation adjustment (535) (535)
Cumulative currency translation adjustment 3,848 7,450
- --------------------------------------------------------------------------------------------
Total stockholders' equity 170,713 48,374
- --------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 683,226 $ 230,602
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
UNAUDITED
-------------------------------------
SEPTEMBER 29, October 31,
THE YEAR-TO-DATE ENDED (IN THOUSANDS) 1996 1995
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Income (loss) from continuing operations $ (21,473) $ 1,142
Reconciliation to net cash provided (used) by
continuing operations:
Depreciation and amortization 17,975 8,691
Accrued business consolidation and acquisition
expenses 35,802 -
Business consolidation and acquisition payments (4,071) -
Working capital changes and other (21,442) (18,956)
- --------------------------------------------------------------------------------------------
Net cash provided (used) by continuing operations 6,791 (9,123)
Net cash provided by discontinued operations - 548
- --------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities 6,791 (8,575)
- --------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (21,338) (6,836)
Proceeds from equipment sold - 17
Cash paid for the Acquired Ciba Business (25,000) -
Cash paid for the Acquired Hercules Business (141,820) -
Proceeds from sale of Chandler, Arizona
manufacturing facility and certain related
assets and technology 1,560 26,694
Proceeds from sale of discontinued European
resins business - 2,602
- --------------------------------------------------------------------------------------------
Net cash provided (used) by investing
activities (186,598) 22,477
- --------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 278,784 4,117
Payments of long-term debt (111,307) (7,507)
Proceeds of short-term debt, net 9,498 18,612
Proceeds from issuance of common stock 2,777 48,739
Payments of allowed claims pursuant to the
Reorganization Plan - (78,144)
- --------------------------------------------------------------------------------------------
Net cash provided (used) by financing
activities 179,752 (14,183)
- --------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and equivalents 398 (650)
- --------------------------------------------------------------------------------------------
Net increase (decrease) in cash and equivalents 343 (931)
Cash and equivalents at beginning of year 3,829 931
- --------------------------------------------------------------------------------------------
Cash and equivalents at end of period $ 4,172 $ -
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 1 -- BASIS OF ACCOUNTING
The accompanying condensed consolidated financial statements have been
prepared from the unaudited records of Hexcel Corporation and subsidiaries
("Hexcel" or the "Company") in accordance with generally accepted accounting
principles, and, in the opinion of management, include all adjustments
necessary to present fairly the balance sheet of the Company as of September
29, 1996, and the results of operations for the quarters and nine-month
periods ended September 29, 1996 and October 1, 1995, and the cash flows for
the nine-month periods ended September 29, 1996 and October 1, 1995. The
condensed consolidated balance sheet of the Company as of December 31, 1995
was derived from the audited 1995 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 quarter amounts in the
condensed consolidated financial statements and notes have been reclassified
to conform to the 1996 presentation. These condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's 1995 Annual Report on
Form 10-K.
As discussed in Note 2, Hexcel acquired the worldwide composites
division of Ciba-Geigy Limited and Ciba-Geigy Corporation (collectively,
"Ciba"), including Ciba's composite materials, parts and structures
businesses (the "Acquired Ciba Business"), on February 29, 1996. In
connection with the acquisition of the Acquired Ciba Business, The Company
acquired Danutec Werkstoff AG ("Danutec"), an Austrian subsidiary of Ciba, on
May 30, 1996. Accordingly, the condensed consolidated balance sheet as of
September 29, 1996 includes the financial position of the Acquired Ciba
Business and Danutec as of that date. The condensed consolidated statements
of operations and cash flows for the nine-month period ended September 29,
1996 include the results of operations and cash flows, respectively, of the
Acquired Ciba Business for the period from March 1, 1996 through September
29, 1996. The condensed consolidated statements of operations and cash flows
for the nine-month period ended September 29, 1996 include the results of
operations and cash flows, respectively, of Danutec for the period from May
31, 1996 through September 29, 1996.
In addition, as discussed in Note 2, Hexcel acquired the composite
products division of Hercules Incorporated ("Hercules"), including Hercules'
carbon fibers and prepreg businesses (the "Acquired Hercules Business"), on
June 27, 1996. Accordingly, the condensed consolidated balance sheet as of
September 29, 1996 includes the financial position of the Acquired Hercules
Business as of that date, and the condensed consolidated statements of
operations and cash flows for the nine-month period ended September 29,
1996 include the results of operations and cash flows, respectively, of the
Acquired Hercules Business for the period from June 28, 1996 through
September 29, 1996.
5
<PAGE>
NOTE 2 -- BUSINESS ACQUISITIONS
ACQUIRED CIBA BUSINESS
Hexcel acquired the worldwide composites division of Ciba on February
29, 1996. The Acquired Ciba Business is engaged in the manufacture and
marketing of composite materials, parts and structures for aerospace,
recreation and general industrial markets. Product lines include fabrics,
prepregs, adhesives, honeycomb core, sandwich panels and fabricated components,
as well as structures and interiors primarily for the commercial and military
aerospace markets.
The acquisition of the Acquired Ciba Business was consummated pursuant
to a Strategic Alliance Agreement dated as of September 29, 1995 among Ciba
and Hexcel, as amended (the "Strategic Alliance Agreement"). Under the
Strategic Alliance Agreement, the Company acquired the assets (including the
capital stock of certain non-U.S. subsidiaries) and assumed the liabilities
of the Acquired Ciba Business other than certain excluded assets and
liabilities in exchange for: (a) approximately 18 million newly issued
shares of Hexcel common stock; (b) $25,000 in cash; and (c) undertakings to
deliver to Ciba and/or one or more of its subsidiaries, following completion
of certain post-closing adjustment procedures contemplated by the Strategic
Alliance Agreement, senior subordinated notes in an aggregate principal
amount of approximately $43,000, subject to certain adjustments (the "Senior
Subordinated Notes"), and senior demand notes in a principal amount equal to
the cash on hand at certain of the non-U.S. subsidiaries included in the
Acquired Ciba Business (the "Senior Demand Notes").
In connection with the acquisition of the Acquired Ciba Business, Hexcel
acquired Danutec, an Austrian subsidiary of Ciba, on May 30, 1996. The
acquisition of Danutec was completed pursuant to the Strategic Alliance
Agreement. Furthermore, under the terms of the Strategic Alliance Agreement,
certain assets of Ciba affiliates that continue to act as distributors for
the Acquired Ciba Business (the "Ciba Distributors") will be acquired by the
Company from time to time prior to February 28, 1997.
As of September 29, 1996, the aggregate principal amount of Senior
Subordinated Notes which Hexcel has issued or is obligated to issue to Ciba,
determined in accordance with the relevant provisions of the Strategic
Alliance Agreement, was estimated at approximately $34,100. However, the
actual aggregate principal amount of the Senior Subordinated Notes is
expected to exceed $34,100 as a result of the pending acquisition from Ciba
of certain assets of the Ciba Distributors that have not yet been transferred
to Hexcel. Pursuant to the Strategic Alliance Agreement, the aggregate
principal amount of the Senior Subordinated Notes will be adjusted to reflect
the acquisition of these assets at such times as the acquisitions are
completed.
In connection with the acquisition of the Acquired Ciba Business, Hexcel
obtained a three-year revolving credit facility of up to $175,000 (the
"Senior Secured Credit Facility") to: (a) fund the cash component of the
purchase price; (b) refinance outstanding indebtedness under certain U.S. and
European credit facilities; and (c) provide for the ongoing working capital
and other financing requirements of the Company, including business
consolidation activities, on a worldwide basis. The Senior Secured Credit
Facility was subsequently replaced with a new revolving credit facility in
connection with the acquisition of the Acquired Hercules Business.
6
<PAGE>
ACQUIRED HERCULES BUSINESS
Hexcel acquired the assets of the composite products division of
Hercules (including the stock of Hercules Aerospace Espana, S.A. ("HAESA"))
on June 27, 1996. The Acquired Hercules Business, which manufactures carbon
fibers and prepregs for aerospace, recreation and general industrial markets,
was purchased for $135,000 in cash subject to certain post-closing
adjustments. (As of September 29, 1996, the adjusted purchase price,
including certain transaction costs, was estimated at approximately
$141,820.) Hexcel and Hercules have agreed that in the event applicable
Spanish antitrust authorities were to take certain adverse actions in respect
to the Company's acquisition of HAESA, Hexcel has the option to sell its
interest in HAESA back to Hercules for the allocated purchase price paid for
HAESA.
In connection with the acquisition of the Acquired Hercules Business,
Hexcel replaced the Senior Secured Credit Facility with a new revolving
credit facility (the "Revolving Credit Facility") of up to $310,000. As a
result of the Company's issuance of convertible subordinated notes on July
24, 1996 (see Note 6), maximum availability under the Revolving Credit
Facility was reduced from $310,000 to approximately $250,000, in accordance
with the terms of that facility. Proceeds from the Revolving Credit Facility
were used to repay approximately $70,100 of outstanding borrowings under the
Senior Secured Credit Facility and to finance the purchase of the Acquired
Hercules Business. Borrowings under the Revolving Credit Facility are also
available for ongoing working capital and other financing requirements of the
Company, including business consolidation activities, on a worldwide basis
(see Note 3).
HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
The assets acquired and the liabilities assumed or incurred in
connection with the acquisitions of the Acquired Ciba Business and the
Acquired Hercules Business were:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
ACQUIRED ACQUIRED TOTAL
CIBA HERCULES ACQUIRED
BUSINESS BUSINESS BUSINESSES
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS ACQUIRED:
Accounts receivable $ 53,861 $ 16,819 $ 70,680
Inventories 63,640 22,289 85,929
Net property, plant and
equipment 120,823 109,740 230,563
Intangible assets 44,597 -- 44,597
Other assets 3,069 642 3,711
- --------------------------------------------------------------------------------------
Total assets acquired $ 285,990 $ 149,490 $ 435,480
- --------------------------------------------------------------------------------------
LIABILITIES ASSUMED OR INCURRED:
Accounts payable and accrued
liabilities $ 61,099 $ 7,688 $ 68,787
Notes payable and capital
lease obligations 37,851 141,303 179,154
Indebtedness to related
parties, less current
maturities 31,528 -- 31,528
Deferred liabilities 14,331 499 14,830
- --------------------------------------------------------------------------------------
Total liabilities assumed or
incurred $ 144,809 $ 149,490 $ 294,299
- --------------------------------------------------------------------------------------
Increase in Common Stock and
Additional Paid-in Capital $ 141,181 -- $ 141,181
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
The acquisitions of the Acquired Ciba Business and the Acquired Hercules
Business are subject to certain post-closing adjustments, including, among
others, adjustments resulting from the acquisition of certain assets of the
Ciba Distributors from time to time prior to February 28, 1997 and
adjustments related to certain changes in the working capital of the Acquired
Hercules Business. In addition, the allocations of purchase price to the
assets acquired and liabilities assumed or incurred in connection with the
acquisitions of the Acquired Ciba Business and the Acquired Hercules Business
are based on preliminary estimates of fair values, and are subject to change.
The pro forma net sales, net loss and net loss per share of Hexcel for
the nine-months periods ended September 29, 1996 and October 1, 1995, giving
effect to the acquisitions of the Acquired Ciba Business and the Acquired
Hercules Business as if those acquisitions had occurred at the beginning of
the periods presented, were:
- ---------------------------------------------------------------------------
THE YEAR-TO-DATE ENDED
-----------------------------------
9/29/96 10/1/95
- ---------------------------------------------------------------------------
Pro forma net sales $ 585,994 $ 576,889
Pro forma net loss (24,875) (8,205)
Pro forma net loss per share (0.68) (0.25)
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
Weighted average shares and equivalent
shares used in computing pro forma net
loss per share 36,424 32,980
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
NOTE 3 -- BUSINESS CONSOLIDATION
On May 9, 1996, Hexcel announced that its Board of Directors had
approved a plan for consolidating the Company's operations over a period of
three years. The total expense of this program is estimated to be
approximately $49,000, including $1,382 and $35,802 of expenses recorded in
the third quarter and first nine months of 1996, respectively, and the
remainder to be recorded in future periods. Cash expenditures necessary to
complete the business consolidation program are expected to total
approximately $44,000, net of estimated proceeds from asset sales.
The objective of the business consolidation program is to integrate
acquired assets and operations into Hexcel, and to reorganize the Company's
manufacturing and research activities around strategic centers dedicated to
select product technologies. The business consolidation is also intended to
eliminate excess manufacturing capacity and redundant administrative
functions. Specific actions contemplated by the consolidation program
include the previously announced closure of the Anaheim, California facility
acquired from Ciba, the closure of a portion of the Welkenraedt, Belgium
facility, the reorganization of the Company's manufacturing operations in
France, the consolidation of the Company's U.S. special process manufacturing
activities, and the integration of sales and marketing resources. The
consolidation program calls for the elimination of approximately 470 existing
positions at certain locations, partially offset by the addition of new
positions at other locations.
Management expects that the business consolidation program will take up
to three years to complete, in part because of aerospace industry
requirements to "qualify" specific equipment and manufacturing facilities for
the manufacture of certain products. These qualification requirements
increase the complexity, cost and time of moving equipment and rationalizing
8
<PAGE>
manufacturing activities. Based on Hexcel's experience with previous plant
consolidations, compliance with these qualification requirements necessitates
an approach to the consolidation of manufacturing facilities that will
require two to three years to complete.
Changes in accrued business consolidation costs for the period from
December 31, 1995 to September 29, 1996 were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
EMPLOYEE FACILITY
SEVERANCE CLOSURE &
AND EQUIPMENT
RELOCATION RELOCATION OTHER TOTAL
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE AS OF 12/31/95 -- -- -- --
THE QUARTER ENDED 3/31/96:
Accrued expenses -- -- $ 5,211 $ 5,211
Cash expenditures -- -- (1,191) (1,191)
Non-cash usage -- -- (3,635) (3,635)
- --------------------------------------------------------------------------------------------------
BALANCE AS OF 3/31/96 -- -- 385 385
THE QUARTER ENDED 6/30/96:
Accrued expenses $ 15,587 $ 6,678 6,944 29,209
Purchase price adjustments 8,401 2,816 139 11,356
Cash expenditures -- -- (1,065) (1,065)
Non-cash usage, including
asset write-downs -- (6,678) (4,678) (11,356)
- --------------------------------------------------------------------------------------------------
BALANCE AS OF 6/30/96 23,988 2,816 1,725 28,529
THE QUARTER ENDED 9/29/96:
Accrued expenses 420 378 584 1,382
Cash expenditures (1,199) (349) (267) (1,815)
Non-cash usage, including
asset write-downs -- -- (44) (44)
- --------------------------------------------------------------------------------------------------
BALANCE AS OF 9/29/96 $ 23,209 $ 2,845 $ 1,998 $ 28,052
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
</TABLE>
During the first quarter of 1996, Hexcel incurred $3,635 of compensation
expense resulting from stock options which vested in connection with the
acquisition of the Acquired Ciba Business. This compensation expense is
based on the difference between the exercise price of the stock options
granted and the market price of Hexcel's common stock on February 21, 1996,
the date that the Company's stockholders approved the incentive stock plan
under which these options were granted. The recognition of compensation
expense in connection with these stock options resulted in a corresponding
$3,635 increase in the additional paid-in capital of the Company.
During the second quarter of 1996, Hexcel accrued $11,356 of business
consolidation costs that are directly attributable to the Acquired Ciba
Business. The accrual of these costs has been reflected as an adjustment to
the purchase of the Acquired Ciba Business, resulting in a corresponding
increase in the intangible assets of the Company.
9
<PAGE>
During the second quarter of 1996, Hexcel wrote down various assets by
$9,325, in connection with the decision to close a portion of one
manufacturing facility and dispose of certain manufacturing equipment, as
well as to dispose of certain research equipment and related assets. These
write-downs were required to reduce the applicable assets to estimated net
realizable value.
During the third quarter of 1996, Hexcel incurred $1,382 of business
acquisition and consolidation expenses to assimilate acquired operations, such
as the consolidation of U.S. special process manufacturing and the
integration of sales and marketing.
As of September 29, 1996, $3,887 of accrued business consolidation costs
were included in "Deferred liabilities" in the accompanying condensed
consolidated balance sheet.
NOTE 4 -- INVENTORIES
Inventories as of September 29, 1996 and December 31, 1995 were:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
9/29/96 12/31/95
- ----------------------------------------------------------------------
<S> <C> <C>
Raw materials $ 74,207 $ 22,257
Work in progress 41,191 13,688
Finished goods 37,796 17,778
Supplies 2,434 1,752
- ----------------------------------------------------------------------
Total inventories $ 155,628 $ 55,475
- ----------------------------------------------------------------------
- ----------------------------------------------------------------------
</TABLE>
Hexcel acquired inventories totaling $85,929 in connection with the
acquisitions of the Acquired Ciba Business and the Acquired Hercules Business.
NOTE 5 -- INTANGIBLE ASSETS
Intangible assets as of September 29, 1996 are comprised primarily of
goodwill and various identified intangible assets attributable to the
acquisition of the Acquired Ciba Business. No goodwill has been recorded in
connection with the acquisition of the Acquired Hercules Business.
Substantially all intangible assets are amortized over a period of 20 years.
10
<PAGE>
NOTE 6 -- NOTES PAYABLE, CAPITAL LEASE OBLIGATIONS AND INDEBTEDNESS TO
RELATED PARTIES
Notes payable, capital lease obligations and indebtedness to related
parties as of September 29, 1996 and December 31, 1995 were:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
9/29/96 12/31/95
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Revolving Credit Facility $ 101,425 --
1995 U.S. credit facility -- $ 30,091
European credit facilities and notes payable 23,333 18,064
Senior Subordinated Notes payable to Ciba, net
of discount 31,528 --
Convertible Subordinated Notes 114,500 --
7% convertible subordinated debentures, due 2011 25,625 25,625
Obligations under IDRB variable rate demand notes,
due through 2024, net 8,450 11,990
Capital lease obligations 1,720 3,217
Various U.S. notes payable 1,297 1,157
- --------------------------------------------------------------------------------------------------
Total notes payable, capital lease obligations and
indebtedness to related parties $ 307,878 $ 90,144
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
Notes payable and current maturities of long-term liabilities $ 17,776 $ 1,802
Notes payable and capital lease obligations, less current
maturities 258,574 88,342
Indebtedness to related parties, less current maturities 31,528 --
- --------------------------------------------------------------------------------------------------
Total notes payable, capital lease obligations and
indebtedness to related parties $ 307,878 $ 90,144
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
</TABLE>
REVOLVING CREDIT FACILITY
In connection with the acquisition of the Acquired Hercules Business on
June 27, 1996, Hexcel obtained the Revolving Credit Facility to: (a)
refinance outstanding indebtedness under the Senior Secured Credit Facility;
(b) finance the purchase of the Acquired Hercules Business; and (c) provide
for the ongoing working capital and other financing requirements of the
Company, including business consolidation activities, on a worldwide basis.
The Revolving Credit Facility initially provided for up to $310,000 in
borrowing capacity. However, as a result of the Company's issuance of
convertible subordinated notes on July 24, 1996, maximum availability under
the Revolving Credit Facility was reduced from $310,000 to approximately
$250,000, in accordance with the terms of that facility.
Interest on outstanding borrowings under the Revolving Credit Facility is
computed at an annual rate of 0.4% in excess of the applicable London
interbank rate or, at the option of Hexcel, at the base rate of the
administrative agent for the lenders. In addition, the Revolving Credit
Facility is subject to a commitment fee of approximately 0.2% per annum on
the unused portion of the facility and a letter of credit fee of up to 0.4%
per annum on the outstanding face amount of letters of credit. As of
September 29, 1996, letters of credit with an aggregate face amount of
$12,555 were outstanding under the Revolving Credit Facility.
The Revolving Credit Facility is secured by a pledge of stock of certain of
Hexcel's subsidiaries. In addition, the Company is subject to various
financial covenants and restrictions under the Revolving Credit Facility, and
is generally prohibited from paying dividends or redeeming capital stock.
The Revolving Credit Facility expires in February 1999.
11
<PAGE>
The Revolving Credit Facility replaced the Senior Secured Credit Facility,
which had previously replaced certain U.S. and European credit facilities
that were available to the Company and in use as of December 31, 1995. As a
result of the extinguishment of the Senior Secured Credit Facility, Hexcel
wrote off $1,800 of capitalized debt financing costs in the second quarter of
1996. The Company wrote off $1,600 of capitalized debt financing costs in
the first quarter of 1996 in connection with the extinguishment of certain
U.S. and European credit facilities. Both write-offs are included in
"Interest expense" in the accompanying condensed consolidated statements of
operations for the applicable periods.
CONVERTIBLE SUBORDINATED NOTES
On July 24, 1996, Hexcel completed an offering of $114,500 in convertible
subordinated notes due 2003 (the "Convertible Subordinated Notes"). The
Convertible Subordinated Notes carry an annual interest rate of 7% and are
convertible into Hexcel common stock at a conversion price of $15.81 per
share. Net proceeds of $111,351 from this offering were used to repay
outstanding borrowings under the Revolving Credit Facility.
The Convertible Subordinated Notes are redeemable on or after August 9,
1999, in whole or in part, at the option of Hexcel. The redemption prices
range from 103.5% to 100.0% of the outstanding principal amount, depending on
the period in which redemption occurs.
SENIOR SUBORDINATED NOTES PAYABLE TO CIBA-GEIGY
In connection with the acquisition of the Acquired Ciba Business, Hexcel
has delivered or undertaken to deliver to Ciba an aggregate principal amount
of Senior Subordinated Notes. The Senior Subordinated Notes are general
unsecured obligations of the Company. As discussed in Note 2, the aggregate
principal amount of Senior Subordinated Notes which Hexcel has issued or is
obligated to issue to Ciba, determined in accordance with the Strategic
Alliance Agreement, was approximately $34,100 as of September 29, 1996.
However, the actual aggregate principal amount of the Senior Subordinated
Notes is expected to exceed this amount as a result of the pending
acquisition of certain assets of the Ciba Distributors that have not yet been
transferred to the Company.
As of September 29, 1996, the aggregate fair value of the obligation to
issue the Senior Subordinated Notes which Hexcel has issued or is obligated
to issue was $31,528, which is $2,572 lower than the aggregate principal
amount as of that date. The $2,572 discount reflects the absence of certain
call protection provisions from the terms of the Senior Subordinated Notes
and the difference between the stated interest rate on the Senior
Subordinated Notes and the estimated market rate for debt obligations of
comparable quality and maturity. The Senior Subordinated Notes bear interest
for three years at a rate of 7.5% per annum, payable semiannually, from
February 29, 1996. The interest rate will increase to 10.5% per annum on the
third anniversary of the acquisition of the Acquired Ciba Business, and by an
additional 0.5% per year thereafter until the Senior Subordinated Notes
mature in the year 2003.
As of September 29, 1996, Ciba owned 49.7% of Hexcel's issued and
outstanding common stock, and four of the Company's ten directors were
members of Ciba management. Accordingly, the Company's obligation to issue
the Senior Subordinated Notes has been classified as "Indebtedness to related
parties" in the accompanying condensed consolidated balance sheet as of
September 29, 1996.
12
<PAGE>
NOTE 7 -- DEFERRED LIABILITIES
Deferred liabilities as of September 29, 1996 and December 31, 1995 were
comprised primarily of various pension, retirement and post-retirement
benefit liabilities, as well as deferred tax liabilities and certain other
long-term obligations.
NOTE 8 -- NON-CASH FINANCING ACTIVITIES
In addition to a cash payment of $25,000 and the obligations to issue the
Senior Subordinated Notes and the Senior Demand Notes, the consideration paid
for the Acquired Ciba Business included approximately 18 million shares of
newly issued Hexcel common stock. The aggregate value of these shares was
estimated to be approximately $144,200, based on a discounted market price of
$8 per share multiplied by the number of shares issued. The discounted
market price of $8 per share was based on a market price of $10 per share
during a reasonable period before and after December 12, 1995, the date that
the terms for determining the total consideration to be paid by the Company
were finalized, and a discount rate of 20%. The 20% discount reflects the
illiquidity of the Hexcel common stock issued to Ciba caused by the size of
Ciba's holding, the contractual restrictions on transferring such shares and,
accordingly, limitations on the price Ciba could realize, the contractual
limitation on the per share price Ciba could realize in certain types of
transactions, the fact that such shares are "restricted securities" within
the meaning of the Securities Act of 1933, and various other factors.
NOTE 9 -- OTHER INCOME, NET
Other income of $3,127 for the nine-month period ended September 29, 1996
was largely attributable to the receipt of an additional $1,560 of cash in
connection with the disposition of the Chandler, Arizona manufacturing
facility and certain related assets in 1994, and to the partial settlement
for $1,054 of a claim arising from the sale of certain assets in 1991.
NOTE 10 -- BANKRUPTCY REORGANIZATION
On January 12, 1995, the United States Bankruptcy Court for the Northern
District of California entered an order dated January 10, 1995 confirming the
First Amended Plan of Reorganization (the "Reorganization Plan") proposed by
Hexcel and the Official Committee of Equity Security Holders (the "Equity
Committee"). On February 9, 1995, the Reorganization Plan became effective
and Hexcel emerged from the bankruptcy reorganization proceedings which had
begun on December 6, 1993, when Hexcel filed a voluntary petition for relief
under the provisions of Chapter 11 of the United States Bankruptcy Code.
The Reorganization Plan which became effective on February 9, 1995
provided, among other things, for the reinstatement or payment in full, with
interest, of all allowed claims, including prepetition accounts payable and
notes payable. On February 9, 1995, Hexcel paid $78,144 in prepetition
claims and interest, and reinstated another $60,575 in prepetition
liabilities. The payment of claims and interest was financed with: (a) cash
proceeds of $26,694 received in the first quarter of 1995 from the sale of
the Company's Chandler, Arizona manufacturing facility
13
<PAGE>
and related assets; (b) cash proceeds of $2,602 received in the first quarter
of 1995 from the sale of the Company's European resins business; (c) the
$50,000 in cash received from Mutual Series Fund Inc. in connection with a
standby purchase agreement with respect to a subscription rights offering for
additional shares of new common stock; and (d) borrowings under a U.S.
revolving credit facility. The subscription rights offering for additional
shares of new common stock was subsequently concluded on April 6, 1995, with
a total of 10.8 million shares of new common stock having been issued between
February 9, 1995 and April 6, 1995.
Professional fees and other costs directly related to bankruptcy
proceedings were expensed as incurred, and have been reflected in the
condensed consolidated statement of operations for the quarter and nine-month
period ended October 1, 1995 as "Bankruptcy reorganization expenses."
Bankruptcy reorganization expenses consisted primarily of professional fees
paid to legal and financial advisors of Hexcel, the Equity Committee and the
Official Committee of Unsecured Creditors. In addition, these expenses
included incentives for employees to remain with the Company for the duration
of bankruptcy proceedings and the write-off of previously capitalized costs
related to the issuance of prepetition debt, as required by generally
accepted accounting principles. The resolution of certain bankruptcy-related
issues, including the final settlement of disputed claims and professional
fees, resulted in bankruptcy reorganization expenses being incurred after the
effective date of the Reorganization Plan.
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
BUSINESS ACQUISITIONS AND CONSOLIDATION
BUSINESS ACQUISITIONS
Hexcel Corporation and subsidiaries ("Hexcel" or the "Company") acquired
the worldwide composites division of Ciba-Geigy Limited and Ciba-Geigy
Corporation (collectively, "Ciba"), including Ciba's composite materials,
parts and structures businesses (the "Acquired Ciba Business"), on February
29, 1996. The Acquired Ciba Business is engaged in the manufacture and
marketing of composite materials, parts and structures for aerospace,
recreation and general industrial markets. Product lines include fabrics,
prepregs, adhesives, honeycomb core, sandwich panels and fabricated
components, as well as structures and interiors primarily for the commercial
and military aerospace markets.
Hexcel acquired the assets of the composite products division of Hercules
Incorporated ("Hercules"), including Hercules' carbon fibers and prepreg
businesses (the "Acquired Hercules Business"), on June 27, 1996. The
Acquired Hercules Business is engaged in the manufacture of carbon fibers and
prepregs for aerospace, recreation and general industrial markets.
In connection with the acquisitions of the Acquired Ciba Business and the
Acquired Hercules Business, Hexcel has been reorganized into strategic
business units with manufacturing and marketing responsibilities for specific
product groups. These strategic business units are as follow:
FIBERS AND FABRICS -- The Fibers and Fabrics business unit, which is
organized around various product lines, manufactures and markets carbon
fibers, woven fiberglass, and carbon and aramid reinforcements. Certain
of these carbon fibers are used by the Company in the production of
fabrics, and certain of these fabrics are used by the Company in the
production of prepegs and select honeycomb products. The Company acquired
its carbon fibers business from Hercules on June 27, 1996, and expanded its
fabrics business as a result of the acquisition of the Acquired Ciba
business.
COMPOSITE MATERIALS -- The Composite Materials business unit, which is
organized around U.S. and European markets, manufactures and markets
prepregs, adhesives, honeycomb and honeycomb sandwich panels, as well as
machined and fabricated honeycomb parts (which are often referred to as
"special process" honeycomb). Certain prepreg and honeycomb products are
used by the Company in the production of aircraft structures and interiors.
The Company expanded its composite materials business as a result of the
acquisitions of the Acquired Ciba Business and the Acquired Hercules
Business.
STRUCTURES AND INTERIORS -- The Structures and Interiors business unit
manufactures and markets a variety of lightweight composite structures and
interior systems primarily for aerospace use. The Company acquired its
structures and interiors business from Ciba on February 29, 1996.
Further discussion of Hexcel's business acquisitions is contained in Note 2
to the Condensed Consolidated Financial Statements included in this Quarterly
Report on Form 10-Q.
15
<PAGE>
BUSINESS CONSOLIDATION
On May 9, 1996, Hexcel announced that its Board of Directors had approved a
plan for consolidating the Company's operations over a period of three years.
The total expense of this consolidation program is estimated to be
approximately $49 million, including $35.8 million of expenses recorded
during the first three quarters of 1996 and the remainder to be recorded in
future periods. Cash expenditures necessary to complete the business
consolidation are expected to total approximately $44 million, net of
estimated proceeds from asset sales.
The objective of the business consolidation program is to integrate
acquired assets and operations into Hexcel, and to reorganize the Company's
manufacturing and research activities around strategic centers dedicated to
select product technologies. The consolidation program is also intended to
eliminate excess manufacturing capacity and redundant administrative
functions. Specific actions initiated under the consolidation program
include the closure of the Anaheim, California facility acquired from Ciba,
the closure of a portion of the Welkenraedt, Belgium facility, the
reorganization of the Company's manufacturing operations in France, the
consolidation of the Company's U.S. special process manufacturing activities,
and the integration of sales and marketing resources.
Management expects that the business consolidation program will take up to
three years to complete, in part because of aerospace industry requirements
to "qualify" specific equipment and manufacturing facilities for the
manufacture of certain products. Based on Hexcel's experience with previous
plant consolidations, these qualification requirements necessitate an
approach to the consolidation of manufacturing facilities that will require
two to three years to complete. Management estimates that the business
consolidation will result in annual cost savings of approximately $28 million
when it is fully implemented in 1999. During the period from 1996 through
1998, the cash costs associated with the consolidation program, net of
estimated proceeds from asset sales, are expected to approximately equal the
incremental cash savings generated by the program during the same period.
The acquisition of the Acquired Hercules Business is expected to facilitate
certain aspects of the business consolidation, including the closure of the
Anaheim, California facility acquired from Ciba and the closure of a portion
of the Welkenraedt, Belgium facility. However, this acquisition temporarily
slowed some consolidation actions during the third quarter of 1996. These
delays, which resulted from the effort required to complete the acquisition
and evaluate its impact on the consolidation program, are not anticipated to
have a significant impact on the three-year implementation schedule for
consolidating Hexcel's operations. Furthermore, the total cost of the
consolidation program is not expected to change as a result of the
acquisition of the Acquired Hercules Business.
Further discussion of the business consolidation program is contained in
Note 3 to the Condensed Consolidated Financial Statements included in this
Quarterly Report on Form 10-Q.
16
<PAGE>
RESULTS OF OPERATIONS
THIRD QUARTER
Net sales for the third quarter of 1996 were $189.5 million, compared with
net sales for the third quarter of 1995 of $81.4 million. Excluding the
business operations acquired from Ciba and Hercules, sales for the third
quarter of 1996 were approximately $92 million, a 13% increase over the third
quarter of 1995. This increase was largely attributable to improved sales of
composite materials to aerospace customers, particularly carbon core, and
reflects the initial impact of recently announced increases in product rates
for certain commercial aircraft.
Sales by strategic business unit for the third quarter of 1996, and sales
by the corresponding product groups for the third quarter of 1995, were as
follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
THE QUARTER ENDED
- --------------------------------------------------------------------
(IN MILLIONS) 9/29/96 10/1/95
- --------------------------------------------------------------------
<S> <C> <C>
Fibers and Fabrics $ 43.4 $ 28.0
Composite Materials 120.4 53.4
Structures and Interiors 25.7 --
- --------------------------------------------------------------------
Total Net Sales $ 189.5 $ 81.4
- --------------------------------------------------------------------
- --------------------------------------------------------------------
</TABLE>
Gross margin for the third quarter of 1996 was $35.8 million, or 18.9% of
sales, compared with gross margin for the third quarter of 1995 of $15.9
million, or 19.5% of sales. Excluding the business operations acquired from
Ciba and Hercules, gross margin for the 1996 quarter was approximately $22
million, or 23.9% of sales. The improved gross margin performance of the
operations owned by Hexcel prior to 1996 reflects higher sales volumes, as
well as manufacturing efficiencies resulting from the restructuring program
initiated in 1992 and 1993.
Hexcel generated operating income of $8.9 million for the third quarter of
1996, compared with $5.1 million for the third quarter of 1995. Selling,
general and administrative expenses ("SG&A expenses") were $25.6 million in
the 1996 quarter, or 13.5% of sales, versus $11.4 million in the 1995
quarter, or 14.0% of sales. The increase in SG&A expenses primarily reflects
the addition of the acquired businesses. The Company also incurred $1.4
million of business consolidation and acquisition expenses in the third
quarter of 1996. The third quarter of 1995 includes $0.6 million of other
income received in connection with the sale of a manufacturing facility and
related assets in 1994.
Net income for the third quarter of 1996 was $0.3 million, or $0.01 per
share, compared with $1.4 million, or $0.08 per share, for the third quarter
of 1995. The 1996 quarter includes $7.2 million of interest expense, versus
$2.3 million for the 1995 quarter. This increase primarily reflects the
additional debt used to finance the business acquisitions. There were
approximately 37.4 million weighted average shares and equivalent shares
outstanding during the third quarter of 1996, compared with 18.1 million
during the third quarter of 1995. The difference in the number of weighted
average shares and equivalent shares primarily reflects the issuance of
approximately 18 million shares of new common stock to Ciba on February 29,
1996, in connection with the acquisition of the Acquired Ciba Business.
17
<PAGE>
YEAR-TO-DATE
Net sales for the first nine months of 1996 were $482.7 million, compared
with $257.5 million for the first nine months of 1995. Excluding the business
operations acquired from Ciba and Hercules, sales for the first nine months
of 1996 were approximately $289 million, a 12% increase over the comparable
period of 1995. This increase reflects the same factors noted above.
Sales by strategic business unit for the nine-month period ended
September 29, 1996, and sales by the corresponding product groups for the
nine-month period ended October 1, 1995, were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
THE YEAR-TO-DATE ENDED
- --------------------------------------------------------------------
(IN MILLIONS) 9/29/96 10/1/95
- --------------------------------------------------------------------
<S> <C> <C>
Fibers and Fabrics $ 113.3 $ 89.6
Composite Materials 310.2 167.9
Structures and Interiors 59.2 --
- --------------------------------------------------------------------
Total Net Sales $ 482.7 $ 257.5
- --------------------------------------------------------------------
- --------------------------------------------------------------------
</TABLE>
Gross margin for the first nine months of 1996 was $97.8 million, or 20.3%
of sales, versus gross margin for the same period of 1995 of $48.7 million,
or 18.9% of sales. The aggregate increase in gross margin as a percentage of
sales reflects the improved performance of operations owned by Hexcel prior
to 1996, partially negated by the results of the acquired businesses.
Excluding the business operations acquired from Ciba and Hercules, gross
margin for the first nine months of 1996 was approximately $69 million, or
23.9% of sales.
The operating loss for the first nine months of 1996 was $1.9 million,
compared with operating income for the same period of 1995 of $13.7 million.
SG&A expenses were $67.0 million in the 1996 period, or 13.9% of sales,
versus $35.6 million in the 1995 period, or 13.8% of sales. Results for the
nine-month period ended September 29, 1996 include $35.8 million of business
consolidation and acquisition expenses. Results for this period also include
$3.1 million of other income, which was largely attributable to the receipt
of an additional $1.6 million of cash in connection with the sale of a
manufacturing facility and related assets in 1994, and to the partial
settlement for $1.1 million of a claim arising from the sale of certain
assets in 1991. Results for the comparable period of 1995 include $0.6
million of other income.
The 1996 year-to-date net loss was $21.5 million, or $0.66 per share,
versus net income of $0.7 million, or $0.05 per share, for the comparable
period of 1995. The 1996 net loss includes $15.7 million of interest
expense, compared with $6.7 million for the 1995 period, and reflects the
additional debt used to finance the business acquisitions as well as the
write-off of $3.4 million of capitalized debt financing costs. The 1995
year-to-date period also includes $3.4 million of bankruptcy reorganization
expenses. There were approximately 32.3 million weighted average shares and
equivalent shares outstanding during the first nine months of 1996, versus
15.0 million during the first nine months of 1995. The difference in the
number of weighted average shares and equivalent shares reflects the issuance
of approximately 18 million shares of new common stock to Ciba on February
29, 1996 in connection with the acquisition of the Acquired Ciba Business, as
well as the weighted average of 10.8 million shares of new common
18
<PAGE>
stock issued between February 9, 1995 and April 6, 1995 in connection with a
subscription rights offering and standby purchase agreement.
CAPITAL RESOURCES AND LIQUIDITY
FINANCIAL RESOURCES
In connection with the acquisition of the Acquired Ciba Business, Hexcel
obtained a three-year revolving credit facility of up to $175 million (the
"Senior Secured Credit Facility") to: (a) fund the cash component of the
purchase price; (b) refinance outstanding indebtedness under certain U.S. and
European credit facilities; and (c) provide for the ongoing working capital
and other financing requirements of the Company, including business
consolidation activities, on a worldwide basis. The Senior Secured Credit
Facility was replaced in the second quarter of 1996 by a new revolving credit
facility (the "Revolving Credit Facility") obtained in connection with the
acquisition of the Acquired Hercules Business.
On June 27, 1996, Hexcel obtained the Revolving Credit Facility to: (a)
refinance outstanding indebtedness under the Senior Secured Credit Facility;
(b) finance the purchase of the Acquired Hercules Business; and (c) provide
for the ongoing working capital and other financing requirements of the
Company, including business consolidation activities, on a worldwide basis.
As of September 29, 1996, maximum availability under the Revolving Credit
Facility was approximately $250 million, and outstanding borrowings and
letter of credit commitments totaled approximately $114.0 million. The
Revolving Credit Facility expires in February 1999.
On July 24, 1996, Hexcel completed an offering of $114.5 million in
convertible subordinated notes due in 2003 (the "Convertible Subordinated
Notes"). The Convertible Subordinated Notes carry an annual interest rate of
7% and are convertible into Hexcel common stock at a conversion price of
$15.81 per share. The net proceeds of $111.4 million from this offering were
used to repay outstanding borrowings under the Revolving Credit Facility.
Management expects that the financial resources of Hexcel will be
sufficient to fund the Company's worldwide operations. Further discussion of
the Company's financial resources is contained in Note 6 to the Condensed
Consolidated Financial Statements included in this Quarterly Report on Form
10-Q.
CASH FLOWS
Net cash provided by operating activities during the first nine months of
1996 was $6.8 million. Earnings before business consolidation and
acquisition expenses, other income, interest, taxes, depreciation and
amortization ("Adjusted EBITDA") was $48.8 million. This was largely offset
by $15.7 million of interest expense, a $29.0 million increase in accounts
receivable and inventories, and $4.1 million of cash payments for business
consolidation activities. The increase in accounts receivable and
inventories resulted from higher sales and production levels. The acquisition
of working capital acquired in connection with the acquisitions of the
Acquired Ciba Business and the Acquired Hercules Business is not an element
of operating cash flow.
19
<PAGE>
During the first nine months of 1995, operating activities used $8.6
million of cash. Adjusted EBITDA was $18.4 million, but the Company incurred
$6.7 million of interest expense, paid $6.6 million in restructuring costs,
and experienced a net increase in accounts receivable and inventories,
largely as a result of higher sales levels. The primary restructuring
activities during the period were the consolidation of certain honeycomb
manufacturing operations at the Company's Casa Grande, Arizona facility,
which is now complete, and the implementation of a new management information
system.
Cash flows from investing and financing activities for the first nine
months of 1996 primarily reflect the acquisition of the Acquired Ciba
Business and Acquired Hercules Business. In addition to the cash
consideration paid for the Acquired Ciba Business, Hexcel issued
approximately 18 million shares of new common stock to Ciba and incurred
obligations to issue various notes payable to Ciba totaling over $39 million,
approximately $5 million of which were repaid during the third quarter of
1996.
Cash flows from investing and financing activities for the first nine
months of 1995 consisted primarily of the proceeds from the sale of certain
assets, the proceeds from the sale of Hexcel common stock pursuant to a
subscription rights offering and standby purchase agreement, and the payment
of allowed claims pursuant to the Company's Chapter 11 reorganization plan.
Adjusted EBITDA is presented for purposes of describing the significant
components of Hexcel's operating cash flows, and is not presented as an
alternative measure of those cash flows or of the Company's operating results
as determined in accordance with generally accepted accounting principles.
CAPITAL EXPENDITURES
Capital expenditures were $21.3 million for the first nine months of 1996,
compared with $6.8 million for the first nine months of 1995. Approximately
$12.7 million of the 1996 total was incurred during the third quarter,
reflecting the increased level of spending resulting from the two business
acquisitions and the subsequent commencement of the business consolidation
program. Management expects that capital expenditures will equal or exceed
the third quarter level during the fourth quarter of 1996, as business
consolidation efforts and the expansion of the Company's fiber production
capacity continue. Such expenditures will be financed with cash generated
from operations and borrowings under available credit facilities.
RISKS, UNCERTAINTIES AND OTHER FACTORS WITH RESPECT TO "FORWARD-LOOKING
STATEMENTS"
Certain statements in this Quarterly Report on Form 10-Q under the captions
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Notes to Condensed Consolidated Financial Statements" and
elsewhere constitute "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors
that may cause the actual results, performance or achievements of Hexcel, or
industry results, to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. Such factors include, among others, the following: general
economic and business conditions; industry capacity; changes in customer
preferences;
20
<PAGE>
demographic changes; competition; changes in methods of distribution and
technology; changes in political, social and economic conditions and local
regulations, particularly in Europe and Asia; the assimilation of the
Acquired Ciba Business; the assimilation of the Acquired Hercules Business;
the loss of any significant customers; changes in business strategy or
development plans; indebtedness of the Company; quality of management,
business abilities and judgment of the Company's personnel; availability of
qualified personnel; the availability, terms and deployment of capital;
changes in, or the failure to comply with, government regulations; and
various other factors referenced in this Quarterly Report on Form 10-Q. The
Company assumes no obligation to update the forward-looking information to
reflect actual results or changes in the factors affecting such
forward-looking information.
The forward-looking information referred to above includes, but is not
limited to, the estimated total cost of Hexcel's business consolidation
program, the estimated amount of cash expenditures to complete the program
and the estimated annual cost savings resulting from the consolidation
program. In addition to the risks, uncertainties and other factors referred
to above which may cause actual amounts to differ materially from estimated
amounts, such estimates of total costs, cash expenditures and annual cost
savings are based on various factors and were derived utilizing numerous
important assumptions, including: (a) achieving estimated reductions in the
number of total employees within anticipated time frames and at currently
projected severance costs levels, while maintaining work flow in the business
areas affected; (b) the ability to maintain manufacturing know-how with
respect to production processes conducted at facilities that will be closed
or at which the number of employees will be reduced, including cooperation by
employees who will be terminated; (c) the assimilation and integration of the
Acquired Ciba Business with the Company's operations without disruption to
manufacturing, marketing and distribution activities; (d) the assimilation of
the production processes at closed facilities with production at other
Company facilities without undue disruption to the manufacturing, marketing
and distribution functions, including the cooperation of customers in
connection with requalifying the subject products for various customer and
government programs; and (e) selling vacated facilities within anticipated
time frames at anticipated selling prices. The failure of these assumptions
to be realized may cause the actual total cost of the consolidation program,
the actual amount of cash expenditures to complete the program and the actual
annual cost savings resulting from the program to differ materially from the
estimates.
21
<PAGE>
PART II. OTHER INFORMATION
HEXCEL CORPORATION AND SUBSIDIARIES
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10.1. Consent Number 1 and First Amendment dated as of
July 3, 1996 to the Credit Agreement dated as of
June 27, 1996 among Hexcel Corporation and certain
of its subsidiaries as borrowers, the institution
party thereto as lenders, the institutions party
thereto as issuing banks, Citibank, N.A. as
collateral agent and Credit Suisse as administrative
agent (incorporated herein by reference to Exhibit
10.2 to Hexcel Corporation's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1996).
10.2 Modifications dated as of July 8, 1996 to the First
Amendment to the Credit Agreement among Hexcel
Corporation and certain of its subsidiaries as
borrowers, the institutions party thereto as
lenders, the institutions party thereto as issuing
banks, Citibank, N.A. as collateral agent and Credit
Suisse as administrative agent (incorporated herein
by reference to Exhibit 10.3 to Hexcel Corporation's
Quarterly Report on Form 10-Q for the quarter ended
June 30, 1996).
11. Statement Regarding Computation of Per Share
Earnings.
27. Financial Data Schedule (electronic filing only).
(b) Reports on Form 8-K:
Current Report on Form 8-K dated July 12, 1996, relating to
the consummation of the acquisition of the composite products
division of Hercules Incorporated (including financial
statements of the business acquired and pro forma financial
information).
Current Report on Form 8-K/A dated July 26, 1996, relating to
the consummation of the acquisition of the Composite Products
Division of Hercules Incorporated (including financial
statements of the business acquired and pro forma financial
information).
22
<PAGE>
SIGNATURES
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)
November 12, 1996 /s/ Wayne C. Pensky
- --------------------- ---------------------------
(Date) Wayne C. Pensky,
Corporate Controller and
Chief Accounting Officer
23
<PAGE>
EXHIBIT 11
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS - UNAUDITED
The Company reports net income (loss) per share data on primary and
fully diluted bases. Primary net income (loss) per share is based upon the
weighted average number of outstanding common shares and common equivalent
shares from stock options. Fully diluted net income (loss) per share is
based upon (a) the weighted average number of outstanding common shares
and common equivalent shares from stock options and adjusted for the assumed
conversion of the 7% convertible subordinated debentures and (b) net income
(loss) increased by the expenses on the debentures, due 2003, and 2011,
respectively. Computations of net income (loss) per share on the primary
and fully diluted bases for the third quarter and first three quarters of
1996 and 1995 were:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
THE QUARTER ENDED THE YEAR-TO-DATE ENDED
---------------------------- --------------------------------
SEPTEMBER 29, October 1, SEPTEMBER 29, October 1,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1996 1995 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PRIMARY NET INCOME (LOSS) PER SHARE AND EQUIVALENT SHARE
- ----------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations $ 346 $ 1,561 $ (21,473) $ 1,142
Loss from discontinued operations - (171) - (468)
- ----------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 346 $ 1,390 $ (21,473) $ 674
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding 36,322 18,094 32,305 14,958
Weighted average common equivalent shares from
stock options 1,108 - - -
- ----------------------------------------------------------------------------------------------------------------------------
Weighted average common shares and equivalent shares 37,430 18,094 32,305 14,958
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
Primary net income (loss) per share and equivalent
share from (1):
Continuing operations $ 0.01 $ 0.09 $ (0.66) $ 0.08
Discontinued operations - (0.01) - (0.03)
- ----------------------------------------------------------------------------------------------------------------------------
Primary net income (loss) per share and equivalent
share (1) $ 0.01 $ 0.08 $ (0.66) $ 0.05
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
FULLY DILUTED NET INCOME (LOSS) PER SHARE AND
EQUIVALENT SHARE
- ----------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations $ 346 $ 1,561 $ (21,473) $ 1,142
Loss from discontinued operations - (171) - (468)
- ----------------------------------------------------------------------------------------------------------------------------
Net income (loss) 346 1,390 (21,473) 674
Interest and issuance costs - 7% convertible
debentures, due 2003 986 - 986 -
Interest and issuance costs - 7% convertible
debentures, due 2011 295 295 885 889
- ----------------------------------------------------------------------------------------------------------------------------
Adjusted net income (loss) $ 1,627 $ 1,685 $ (19,602) $ 1,563
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding 36,322 18,094 32,305 14,958
Weighted average common equivalent shares
Stock options 1,299 - 1,159 -
7% convertible debentures, due 2003 5,411 - 1,804 -
7% convertible debentures, due 2011 834 834 834 834
- ----------------------------------------------------------------------------------------------------------------------------
Weighted average common shares and equivalent shares 43,866 18,928 36,102 15,792
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
Fully diluted net income (loss) per share and
equivalent share from (1):
Continuing operations $ 0.01 $ 0.09 $ (0.66) $ 0.08
Discontinued operations - (0.01) - (0.03)
- ----------------------------------------------------------------------------------------------------------------------------
Fully diluted net income (loss) per share and
equivalent share (1) $ 0.01 $ 0.08 $ (0.66) $ 0.05
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) For the third quarter and first three quarters of 1996 and 1995, the
primary and fully diluted net income (loss) per share were the same
because both the primary and fully diluted computation was antidilutive.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-29-1996
<CASH> 4,172
<SECURITIES> 0
<RECEIVABLES> 158,509
<ALLOWANCES> 7,134
<INVENTORY> 155,628
<CURRENT-ASSETS> 315,044
<PP&E> 446,656
<DEPRECIATION> 137,306
<TOTAL-ASSETS> 683,226
<CURRENT-LIABILITIES> 172,782
<BONDS> 0
0
0
<COMMON> 364
<OTHER-SE> 170,349
<TOTAL-LIABILITY-AND-EQUITY> 683,226
<SALES> 482,730
<TOTAL-REVENUES> 482,730
<CGS> 384,946
<TOTAL-COSTS> 384,946
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,655
<INCOME-PRETAX> (17,549)
<INCOME-TAX> 3,924
<INCOME-CONTINUING> (21,473)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (21,473)
<EPS-PRIMARY> (0.66)
<EPS-DILUTED> (0.66)
</TABLE>
