<PAGE>
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 30, 1999
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 US Bankruptcy Court. Yes X No
---- ----
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
CLASS OUTSTANDING AT NOVEMBER 11, 1999
----- --------------------------------
COMMON STOCK 36,522,104
<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
PART I. FINANCIAL INFORMATION
<S> <C>
ITEM 1. Condensed Consolidated Financial Statements
- Condensed Consolidated Balance Sheets --
September 30, 1999 and December 31, 1998 2
- Condensed Consolidated Statements of
Operations -- The Quarter and Year-to-Date Periods
Ended September 30, 1999 and 1998 3
- Condensed Consolidated Statements of
Cash Flows -- The Year-to-Date Periods
Ended September 30, 1999 and 1998 4
- Notes to Condensed Consolidated
Financial Statements 5
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 14
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 28
PART II. OTHER INFORMATION
ITEM 5. Other Information 29
ITEM 6. Exhibit and Reports on Form 8-K 29
SIGNATURE 29
</TABLE>
1
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
HEXCEL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------------------------------------------
UNAUDITED
------------------------------------
SEPTEMBER 30, DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1999 1998
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 7,824 $ 7,504
Accounts receivable 172,540 188,368
Inventories 182,845 213,199
Prepaid expenses and other assets 6,041 10,111
Deferred tax asset 24,311 19,844
- ------------------------------------------------------------------------------------------------------------
Total current assets 393,561 439,026
Property, plant and equipment 618,716 628,533
Less accumulated depreciation (220,424) (195,960)
- -------------------------------------------------------------------------------------------------------------
Net property, plant and equipment 398,292 432,573
Goodwill and other purchased intangibles, net of accumulated
amortization of $21,681 in 1999 and $11,742 in 1998 414,893 425,405
Investment in affiliated companies and other assets 105,027 107,157
- ------------------------------------------------------------------------------------------------------------
Total assets $ 1,311,773 $ 1,404,161
============================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current maturities of capital lease obligations $ 35,667 $ 26,867
Accounts payable 76,463 81,869
Accrued liabilities 105,377 110,708
- -------------------------------------------------------------------------------------------------------------
Total current liabilities 217,507 219,444
Long-term notes payable and capital lease obligations 752,511 802,376
Indebtedness to a related party 23,989 35,675
Other non-current liabilities 43,473 44,267
- -------------------------------------------------------------------------------------------------------------
Total liabilities 1,037,480 1,101,762
- -------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock, no par value, 20,000 shares authorized,
no shares issued or outstanding in 1999 and 1998 - -
Common stock, $0.01 par value, 100,000 shares authorized, shares
issued and outstanding of 37,345 in 1999 and 37,176 in 1998 373 372
Additional paid-in capital 273,258 271,469
Retained earnings 14,306 34,898
Accumulated other comprehensive income (loss) (2,991) 6,313
- -------------------------------------------------------------------------------------------------------------
284,946 313,052
Less - treasury stock, at cost, 847 shares in 1999 and 1998 (10,653) (10,653)
- -------------------------------------------------------------------------------------------------------------
Total stockholders' equity 274,293 302,399
- -------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 1,311,773 $ 1,404,161
============================================================================================================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
2
<PAGE>
<TABLE>
<CAPTION>
HEXCEL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
- ----------------------------------------------------------------------------------------------------------------------
UNAUDITED
---------------------------------------------------------------------
QUARTER ENDED SEPTEMBER 30, YEAR-TO-DATE ENDED SEPTEMBER 30,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 274,055 $ 255,303 $ 882,879 $ 785,581
Cost of sales 222,582 193,456 694,376 586,417
- ----------------------------------------------------------------------------------------------------------------------
Gross margin 51,473 61,847 188,503 199,164
Selling, general and administrative expenses 29,325 27,733 97,400 82,092
Research and technology expenses 5,798 5,840 18,545 16,906
Business acquisition and consolidation expenses 13,643 711 17,821 711
- ----------------------------------------------------------------------------------------------------------------------
Operating income 2,707 27,563 54,737 99,455
Interest expense 18,448 9,456 55,975 23,167
- ----------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (15,741) 18,107 (1,238) 76,288
Recovery of (provision for) income taxes 5,541 (6,609) 441 (27,742)
Equity in income and write-down of an
investment in affiliated companies (19,876) - (19,791) -
- ----------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (30,076) $ 11,498 $ (20,588) $ 48,546
======================================================================================================================
Net income (loss) per share:
Basic $ (0.82) $ 0.31 $ (0.56) $ 1.32
Diluted (0.82) 0.29 (0.56) 1.15
Weighted average shares:
Basic 36,493 36,671 36,438 36,800
Diluted 36,493 45,424 36,438 46,134
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
3
<PAGE>
<TABLE>
<CAPTION>
HEXCEL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
- -----------------------------------------------------------------------------------------------------------------------
UNAUDITED
--------------------------------------
YEAR-TO-DATE ENDED SEPTEMBER 30,
(IN THOUSANDS) 1999 1998
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (20,588) $ 48,546
Reconciliation to net cash provided by operating activities:
Depreciation and amortization 47,081 30,932
Deferred income taxes (10,751) 7,475
Accrued business acquisition and consolidation expenses 17,821 711
Business acquisition and consolidation payments (7,877) (6,929)
Equity in income and write-down of an investment in affiliated companies 19,791 -
Working capital changes and other 43,658 (30,010)
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 89,135 50,725
- -----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (26,705) (41,703)
Cash paid for the Acquired Clark-Schwebel Business, net of $5,049 of acquired cash - (453,027)
Investments in affiliated companies (2,000) (1,250)
- -----------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (28,705) (495,980)
- -----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds (repayments) of the credit facilities, net (273,397) 452,607
Proceeds from long-term debt and capital lease obligations, net 223,563 554
Debt issuance costs (10,734) (10,264)
Purchase of treasury stock - (10,653)
Activity under stock plans 1,280 2,065
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities (59,288) 434,309
- -----------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents (822) 5,783
- -----------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 320 (5,163)
Cash and cash equivalents at beginning of year 7,504 9,033
- -----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 7,824 $ 3,870
=======================================================================================================================
</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
(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 30, 1999, and
the results of operations for the quarter and year-to-date periods ended
September 30, 1999 and 1998, and the cash flows for the year-to-date periods
ended September 30, 1999 and 1998. The condensed consolidated balance sheet of
the Company as of December 31, 1998 was derived from the audited 1998
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 notes have been
reclassified to conform to the 1999 presentation. These condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's 1998 Annual
Report on Form 10-K.
As discussed in Note 2, Hexcel acquired from Clark-Schwebel, Inc. and its
subsidiaries ("C-S") certain assets and assumed certain operating liabilities of
its industrial fabrics business (the "Acquired Clark-Schwebel Business") on
September 15, 1998. Accordingly, the condensed consolidated balance sheets,
statements of operations and cash flows include the financial position, results
of operations and cash flows of the Acquired Clark-Schwebel Business as of such
date and for such periods that the business was owned by the Company.
NOTE 2 -- BUSINESS ACQUISITION
On September 15, 1998, the Company acquired certain assets and assumed
certain operating liabilities from C-S. The Acquired Clark-Schwebel Business is
engaged in the manufacture and sale of high-quality fiberglass fabrics, which
are used to make printed circuit boards for electronic equipment such as
computers, cellular telephones, televisions and automobiles. The Acquired
Clark-Schwebel Business also produces high performance specialty products for
use in insulation, filtration, wall and facade claddings, soft body armor and
reinforcements for composite materials. At the date of acquisition, the Acquired
Clark-Schwebel Business operated four manufacturing facilities in the
southeastern U.S. and had approximately 1,300 full time employees.
As part of this acquisition, Hexcel also acquired C-S's equity ownership
interests in the following three joint ventures:
- - a 43.6% share in CS-Interglas AG ("CSI") headquartered in Germany, together
with a fixed-price option to increase this equity interest to 84.0%. The
fixed-price option expires on December 31, 1999 and the exercise price is
significantly higher than its fair market value. Hexcel's acquisition of
the CSI equity interest and related option was completed on December 23,
1998;
- - a 43.3% share in Asahi-Schwebel Co., Ltd. ("Asahi-Schwebel"), headquartered
in Japan, which in turn has its own joint venture with AlliedSignal Inc. in
Taiwan; and
- - a 50.0% share in Clark-Schwebel Tech-Fab Company ("CS Tech-Fab")
headquartered in the United States.
5
<PAGE>
CSI and Asahi-Schwebel are fiberglass fabric producers serving primarily
European and Asian markets, respectively. CS Tech-Fab manufactures non-woven
materials for roofing, construction and other specialty applications. The
unconsolidated net sales in 1998 for these joint ventures were in excess of
$300,000.
The acquisition of the Acquired Clark-Schwebel Business was accounted for
under the purchase method of accounting and was completed pursuant to an Asset
Purchase Agreement dated July 25, 1998, as amended, by and among Hexcel,
Stamford CS Acquisition Corp., and C-S (the "Asset Purchase Agreement"). Under
the Asset Purchase Agreement, Hexcel acquired the net assets of the acquired
business, other than certain excluded assets and liabilities, in exchange for
approximately $473,000 in cash. As part of the acquisition, Hexcel entered into
a $50,000 lease for property, plant and equipment used in the acquired business
from an affiliate of C-S, pursuant to a long-term lease with purchase options.
PRO FORMA FINANCIAL INFORMATION
The pro forma net sales, net income and diluted net income per share of
Hexcel for the year-to-date period ended September 30, 1998, after giving effect
to the acquisition of the Acquired Clark-Schwebel Business as if it had occurred
on January 1, 1998, were:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
9/30/98
- --------------------------------------------------------------------------------
<S> <C>
Pro forma net sales $ 931,309
Pro forma net income 47,600
Pro forma diluted net income per share 1.13
- --------------------------------------------------------------------------------
</TABLE>
NOTE 3 -- BUSINESS ACQUISITION AND CONSOLIDATION PROGRAMS
Total accrued business acquisition and consolidation ("BA&C") expenses at
December 31, 1998 and September 30, 1999, and related activity during the nine
months ended September 30, 1999 for each of Hexcel's BA&C programs, were as
follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
SEPTEMBER DECEMBER
1999 1998 1996
PROGRAM PROGRAM PROGRAM TOTAL
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE AS OF DECEMBER 31, 1998 $ - $ 5,002 $ 3,200 $ 8,202
BA&C expenses 13,510 4,311 - 17,821
Cash expenditures - (5,306) (2,571) (7,877)
Non-cash usage, including asset write-downs (10,993) (2,342) 55 (13,280)
Reclassification of foreign government grant payable
to accrued liabilities - - (684) (684)
- --------------------------------------------------------------------------------------------------------------------
BALANCE AS OF SEPTEMBER 30, 1999 $ 2,517 $ 1,665 $ - $ 4,182
====================================================================================================================
</TABLE>
SEPTEMBER 1999 PROGRAM
On September 27, 1999, the Company announced a new business consolidation
program, entailing a further rationalization of manufacturing facilities for
certain product lines. The objectives of this program are to eliminate excess
capacity and overhead, improve manufacturing focus and yields, and create
additional centers of manufacturing excellence. Specific actions contemplated by
this BA&C program include consolidating the production of certain product lines,
including moving equipment and requalifying the respective product lines,
vacating certain leased facilities, and consolidating the
6
<PAGE>
Company's composite materials business segment's U.S. marketing, research and
technology, and administrative functions into one location. The consolidation
program calls for the elimination of approximately 400 positions (primarily
manufacturing), and a total reduction in occupied floor space of over 250,000
square feet. The consolidation program impacts all of the Company's business
segments and is anticipated to be completed by early 2002.
Total expenses for this program are expected to approximate $30,000, of
which $12,000 will be non-cash write-downs of existing equipment. The
write-downs are to reduce the applicable equipment to their estimated net
realizable value. Total cash expenditures for this program are expected to
approximate $24,000, which includes $6,000 of capital expenditures. As of
September 30, 1999, the Company has recorded $13,510 of BA&C expenses, including
$10,993 of non-cash write-downs on equipment, for this program.
Accrued BA&C expenses as of September 30, 1999, and related activity for
this program since the date of announcement, were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
EMPLOYEE FACILITY &
SEVERANCE & EQUIPMENT
SEPTEMBER 1999 PROGRAM RELOCATION RELOCATION TOTAL
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BA&C expenses $ 1,828 $ 11,682 $ 13,510
Non-cash usage, including asset write-downs - (10,993) (10,993)
- ------------------------------------------------------------------------------------------------
BALANCE AS OF SEPTEMBER 30, 1999 $ 1,828 $ 689 $ 2,517
================================================================================================
</TABLE>
As of September 30, 1999, accrued expenses for the September 1999 program
primarily reflected accrued severance and costs for early termination of certain
leases.
DECEMBER 1998 PROGRAM
In December 1998, the Company announced consolidation actions within its
reinforcement fabrics and composite materials business segments. These actions
included the integration of the Company's existing fabrics business with the
U.S. operations of the Acquired Clark-Schwebel Business, and the combination of
its U.S., European and Pacific Rim composite materials businesses into a single,
global business unit. The objectives of these actions were to eliminate
redundancies, improve manufacturing planning, and enhance customer service. The
Company substantially completed these actions in the first quarter of 1999,
which resulted in the elimination of approximately 100 operating, sales,
marketing and administrative positions.
On March 16, 1999, the Company expanded its actions relating to the
integration of the Acquired Clark-Schwebel Business with the announcement of the
closure of its Cleveland, Georgia facility, which, at that time, employed
approximately 100 manufacturing positions. This facility produced fabrics for
the electronics market and, the majority of its production equipment has been
relocated to the Company's Anderson, South Carolina facility. The closure of
this facility, which was completed on September 3, 1999, was the result of
current competitive conditions in the global market for electronic fiberglass
materials and was not expected at the time of the acquisition of the Acquired
Clark-Schwebel Business.
During the first nine months of 1999, the Company recorded $4,311 of BA&C
expenses for this program, primarily reflecting $2,342 of non-cash write-downs
of equipment that will be disposed of, costs associated with the closing and
relocation of certain equipment from the Company's Cleveland, Georgia facility,
and employee severance costs for additional administrative positions relating to
the consolidation of the composite materials business segment.
7
<PAGE>
Accrued BA&C expenses at December 31, 1998 and September 30, 1999, and
activity during the nine months ended September 30, 1999 for this program, were
as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
EMPLOYEE FACILITY &
SEVERANCE & EQUIPMENT
DECEMBER 1998 PROGRAM RELOCATION RELOCATION TOTAL
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BALANCE AS OF DECEMBER 31, 1998 $ 3,020 $ 1,982 $ 5,002
BA&C expenses 2,131 2,180 4,311
Cash expenditures (3,637) (1,669) (5,306)
Non-cash usage, including asset write-downs - (2,342) (2,342)
- ------------------------------------------------------------------------------------------------
BALANCE AS OF SEPTEMBER 30, 1999 $ 1,514 $ 151 $ 1,665
================================================================================================
</TABLE>
As of December 31, 1998, accrued BA&C expenses for this program primarily
consisted of severance for employees terminated in December 1998, costs for
early lease terminations, and equipment relocation costs incurred, but not yet
paid. As of September 30, 1999, the remaining accrued expenses for this program
primarily reflected severance costs for employees in the Company's Cleveland
facility as well as for those administrative employees terminated in the second
quarter of 1999. The Company's policy is to pay severance over a period of time
rather than in a lump-sum amount. The December 1998 program is expected to be
substantially completed by the end of 1999.
1996 PROGRAM
In May 1996, the Company announced a BA&C program primarily related to the
integration of the acquired composites businesses from Ciba-Geigy Limited and
Ciba-Geigy Corporation (the "Acquired Ciba Business"). This program was later
revised in December 1996, to include the acquired carbon fibers and prepreg
business from Hercules Incorporated as well as other consolidation activities
identified during the on-going integration of the Acquired Ciba Business. The
program was substantially completed in the second quarter of 1999, with the
disposal of the Company's operations in Brindisi, Italy (the "Brindisi
Operations").
As of December 31, 1998, accrued BA&C expenses for this program related to
the Brindisi Operations' employee retirement costs, and a foreign government
grant received by the Company that is required to be repaid over a period of
five years due to lower employee levels as a result of the consolidation
program. Cash expenditures for the nine months ended September 30, 1999,
primarily represented the employee retirement costs that were disbursed in
connection with the disposal of the Brindisi Operations. As of September 30,
1999, the program's remaining accrued expenses of $684, consisting of the
foreign government payable, was transferred to accrued liabilities.
NOTE 4 -- WRITE-DOWN ON AN INVESTMENT IN AN AFFILIATED COMPANY
In the third quarter of 1999, the Company wrote down its investment in CSI,
an affiliated company, by $20,000, to its estimated fair market value. The
write-down was the result of management's decision to allow its fixed-price
option to increase its equity investment in CSI from 43.6% to 84.0%, to expire
unexcersied, and an assessment that an other than temporary decline in the
investment occurred due to the deterioration in the financial condition of the
investment. The amount of write-down was determined based on available market
information and appropriate valuation methodologies. As of September 30, 1999,
the carrying value of Hexcel's investment in CSI was approximately $7,700.
The write-down has been included in "equity in income and write-down of an
investment in affiliated companies" in the accompanying condensed consolidated
statement of operations and is included in the Company's reinforcement products
business segment. The Company did not record a deferred tax benefit
8
<PAGE>
on the write-down because of limitations imposed by foreign tax laws on the
Company's ability to realize a tax benefit.
NOTE 5 -- INVENTORIES
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
9/30/99 12/31/98
- --------------------------------------------------------------------------------
<S> <C> <C>
Raw materials $ 73,168 $ 90,881
Work in progress 70,858 77,769
Finished goods 38,819 44,549
- --------------------------------------------------------------------------------
Total inventories $ 182,845 $ 213,199
================================================================================
</TABLE>
NOTE 6 -- NOTES PAYABLE, CAPITAL LEASE OBLIGATIONS AND INDEBTEDNESS TO A RELATED
PARTY
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
9/30/99 12/31/98
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Senior credit facility $ 345,684 $ 618,214
European credit and overdraft facilities 12,053 16,330
Senior subordinated notes, due 2009 240,000 -
Convertible subordinated notes, due 2003 114,435 114,435
Convertible subordinated debentures, due 2011 25,625 25,625
Various notes payable 408 547
- -------------------------------------------------------------------------------------------------------
Total notes payable 738,205 775,151
Capital lease obligations 49,973 54,092
Senior subordinated note payable to a related party,
net of unamortized discount of $983 and $1,801 as of
September 30, 1999 and December 31, 1998, respectively 23,989 35,675
- -------------------------------------------------------------------------------------------------------
Total notes payable, capital lease obligations and
indebtedness to a related party $ 812,167 $ 864,918
=======================================================================================================
Notes payable and current maturities of long-term liabilities $ 35,667 $ 26,867
Long-term notes payable and capital lease obligations,
less current maturities 752,511 802,376
Indebtedness to a related party 23,989 35,675
- -------------------------------------------------------------------------------------------------------
Total notes payable, capital lease obligations and
indebtedness to a related party $ 812,167 $ 864,918
=======================================================================================================
</TABLE>
SENIOR CREDIT FACILITY
In connection with the acquisition of the Acquired Clark-Schwebel Business
on September 15, 1998, Hexcel obtained a new global credit facility (the "Senior
Credit Facility") to: (a) fund the purchase of the Acquired Clark-Schwebel
Business; (b) refinance the Company's existing revolving credit facility; and
(c) provide for ongoing working capital and other financing requirements of the
Company. In January 1999, simultaneously with the closing of the Company's
$240,000 senior subordinated notes offering (see below), the Company amended the
Senior Credit Facility to, among other things, reduce the available borrowing
capacity from $910,000 to $671,500, modify certain financial covenants and
permit the offering. The term loans within the Senior Credit Facility are
repayable in annual installments ranging from $17,200 to $36,600, from 2000
through 2003, $99,700 in 2004 and $98,400 in 2005. The revolver portion of the
Senior Credit Facility is repayable in 2004.
9
<PAGE>
Prior to August 13, 1999, interest on outstanding borrowings under the
Senior Credit Facility was computed at an annual rate ranging from approximately
0.75% to 2.25% in excess of the applicable London interbank rate, or at the
option of Hexcel, at 0 to 1.25% in excess of the base rate of the administrative
agent for the lenders. On August 13, 1999, the Company further amended its
Senior Credit Facility, modifying certain financial covenants and the applicable
interest rates payable, increasing the upper limit of these interest ranges to
2.75% and 1.75%, respectively. In addition, the Senior Credit Facility is
subject to a commitment fee ranging from 0.23% to 0.50% per annum of the total
facility. The Senior Credit Facility is secured by a pledge of shares of certain
of Hexcel's subsidiaries. The Company is subject to various financial covenants
and restrictions under the Senior Credit Facility, and is generally prohibited
from paying dividends or redeeming capital stock.
SENIOR SUBORDINATED NOTES, DUE 2009
On January 21, 1999, the Company issued $240,000 of senior subordinated
notes, due 2009 (the "Senior Subordinated Notes"). The Senior Subordinated Notes
are general unsecured obligations of Hexcel that bear interest at a rate of
9.75% per annum. Net proceeds of approximately $230,500 from this offering were
used to repay amounts owed under the Senior Credit Facility. The Senior
Subordinated Notes are redeemable beginning in January of 2004, in whole or in
part, at the option of Hexcel. The redemption prices range from 104.9% to 100.0%
of the outstanding principal amount, depending on the period in which redemption
occurs.
SENIOR SUBORDINATED NOTE PAYABLE TO A RELATED PARTY
The senior subordinated note payable to a related party, is payable to Ciba
Specialty Chemicals Inc., and is a general unsecured obligation of Hexcel (the
"Ciba Note"). Ciba Specialty Chemicals Inc. and its affiliate, Ciba Specialty
Chemicals Corporation, collectively hold approximately 49.4% of the Company's
common stock. Prior to February 28, 1999, the Ciba Note bore interest at a rate
of 7.5% per annum. On February 28, 1999, the interest rate on the Ciba Note
increased to 10.5% per annum, and will continue to increase by an additional
0.5% per year thereafter until it matures in 2003. On February 17, 1999, the
Company redeemed $12,500 of the Ciba Note, with such repayment financed with
borrowings under the Company's Senior Credit Facility.
NOTE 7 -- NET INCOME (LOSS) PER SHARE
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
QUARTER ENDED SEPTEMBER 30, YEAR-TO-DATE ENDED SEPTEMBER 30,
1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Basic net income (loss) per share:
Net income (loss) $ (30,076) $ 11,498 $ (20,588) $ 48,546
Weighted average common shares outstanding 36,493 36,671 36,438 36,800
Basic net income (loss) per share $ (0.82) $ 0.31 $ (0.56) $ 1.32
- ---------------------------------------------------------------------------------------------------------------------
Diluted net income (loss) per share:
Net income (loss) $ (30,076) $ 11,498 $ (20,588) $ 48,546
Effect of dilutive securities -
Convertible subordinated notes, due 2003 - 1,282 - 3,845
Convertible subordinated debentures, due 2011 - 287 - 861
- ---------------------------------------------------------------------------------------------------------------------
Adjusted net income (loss) $ (30,076) $ 13,067 $ (20,588) $ 53,252
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
QUARTER ENDED SEPTEMBER 30, YEAR-TO-DATE ENDED SEPTEMBER 30,
1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Weighted average common shares outstanding 36,493 36,671 36,438 36,800
Effect of dilutive securities -
Stock options - 681 - 1,262
Convertible subordinated notes, due 2003 - 7,238 - 7,238
Convertible subordinated debentures, due 2011 - 834 - 834
- ---------------------------------------------------------------------------------------------------------------------
Diluted weighted average common shares
outstanding 36,493 45,424 36,438 46,134
Diluted net income (loss) per share $ (0.82) $ 0.29 $ (0.56) $ 1.15
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
The convertible subordinated notes, due 2003, the convertible subordinated
debentures, due 2011, and stock options were excluded from the 1999 computations
of diluted net loss per share, as they were antidilutive. For the quarter ended
September 30, 1998, approximately 3,300 or 65% of the Company's outstanding
stock options were excluded in the calculation of diluted net income per share.
Substantially all of the Company's outstanding stock options were included in
the calculation of diluted net income per share for the nine months ended
September 30, 1998.
NOTE 8 -- COMPREHENSIVE INCOME (LOSS)
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
Quarter Ended September 30, Year-to-Date Ended September 30,
1999 1998 1999 1998
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income (loss) $ (30,076) $ 11,498 $ (20,588) $ 48,546
Currency translation adjustment 3,494 8,080 (9,304) 7,764
------------------------------------------------------------------------------------------------------
Total comprehensive income (loss) $ (26,582) $ 19,578 $ (29,892) $ 56,310
======================================================================================================
</TABLE>
NOTE 9 -- SEGMENT INFORMATION
Hexcel evaluates the performance of its operating segments based on
adjusted income before business acquisition and consolidation expenses,
interest, taxes and equity in income and write-down of an investment in
affiliated companies ("Adjusted EBIT"). Intersegment sales are generally
accounted for based on arm's length prices. Corporate and certain other expenses
are not allocated to the operating segments.
Financial information on the Company's operating segments for the quarter
and year-to-date periods ended September 30, 1999 and 1998, including pro forma
financial information, after giving effect to the acquisition of the Acquired
Clark-Schwebel Business as if it occurred on January 1, 1998, are as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
REINFORCEMENT COMPOSITE ENGINEERED
PRODUCTS MATERIALS PRODUCTS TOTAL
- ------------------------------------------------------------------------------------------------------------------
QUARTER ENDED SEPTEMBER 30, 1999
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales to external customers $ 81,315 $ 132,547 $ 60,193 $ 274,055
Intersegment sales 24,907 2,093 - 27,000
- ------------------------------------------------------------------------------------------------------------------
Total sales 106,222 134,640 60,193 301,055
Adjusted EBIT 6,264 12,619 5,851 24,734
Depreciation and amortization 8,847 4,989 996 14,832
BA&C expenses 3,544 8,211 1,327 13,082
Write-down of an investment in an
affiliated company 20,000 - - 20,000
Capital expenditures 3,028 4,257 1,504 8,789
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
REINFORCEMENT COMPOSITE ENGINEERED
PRODUCTS MATERIALS PRODUCTS TOTAL
- ------------------------------------------------------------------------------------------------------------------
PRO FORMA QUARTER ENDED SEPTEMBER 30, 1998
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales to external customers $ 82,297 $ 157,269 $ 49,801 $ 289,367
Intersegment sales 30,515 3,099 - 33,614
- ------------------------------------------------------------------------------------------------------------------
Total sales 112,812 160,368 49,801 322,981
Adjusted EBIT 15,813 18,729 3,581 38,123
Depreciation and amortization 8,561 4,435 892 13,888
Capital expenditures 4,184 8,011 1,710 13,905
- ------------------------------------------------------------------------------------------------------------------
QUARTER ENDED SEPTEMBER 30, 1998
- ------------------------------------------------------------------------------------------------------------------
Net sales to external customers $ 48,233 $ 157,269 $ 49,801 $ 255,303
Intersegment sales 30,515 3,099 - 33,614
- ------------------------------------------------------------------------------------------------------------------
Total sales 78,748 160,368 49,801 288,917
Adjusted EBIT 13,213 18,729 3,581 35,523
Depreciation and amortization 4,927 4,435 892 10,254
Capital expenditures 3,366 8,011 1,710 13,087
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
REINFORCEMENT COMPOSITE ENGINEERED
PRODUCTS MATERIALS PRODUCTS TOTAL
- ------------------------------------------------------------------------------------------------------------------
YEAR-TO-DATE ENDED SEPTEMBER 30, 1999
- --------------------------------------------------------------------------------------------------------------------
Net sales to external customers $ 250,302 $ 465,989 $ 166,588 $ 882,879
Intersegment sales 91,607 6,703 - 98,310
- --------------------------------------------------------------------------------------------------------------------
Total sales 341,909 472,692 166,588 981,189
Adjusted EBIT 27,778 58,774 12,111 98,663
Depreciation and amortization 26,606 15,053 3,037 44,696
BA&C expenses 6,313 8,304 1,527 16,144
Write-down of an investment in an
affiliated company 20,000 - - 20,000
Capital expenditures 10,411 11,557 4,601 26,569
- --------------------------------------------------------------------------------------------------------------------
PRO FORMA YEAR-TO-DATE ENDED SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------------------------------------------
Net sales to external customers $ 283,170 $ 492,024 $ 156,115 $ 931,309
Intersegment sales 100,712 9,264 50 110,026
- --------------------------------------------------------------------------------------------------------------------
Total sales 383,882 501,288 156,165 1,041,335
Adjusted EBIT 60,205 67,953 11,953 140,111
Depreciation and amortization 26,793 12,991 2,602 42,386
Capital expenditures 14,769 23,308 4,618 42,695
- --------------------------------------------------------------------------------------------------------------------
YEAR-TO-DATE ENDED SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------------------------------------------
Net sales to external customers $ 137,442 $ 492,024 $ 156,115 $ 785,581
Intersegment sales 100,712 9,264 50 110,026
- --------------------------------------------------------------------------------------------------------------------
Total sales 238,154 501,288 156,165 895,607
Adjusted EBIT 42,731 67,953 11,953 122,637
Depreciation and amortization 13,027 12,991 2,602 28,620
Capital expenditures 11,228 23,308 4,618 39,154
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE>
Reconciliations of the total Adjusted EBIT reported for the operating
segments to consolidated income before income taxes, are as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
QUARTER ENDED SEPTEMBER 30, YEAR-TO-DATE ENDED SEPTEMBER 30,
----------------------------------------------------------------------------------
Pro Forma Pro Forma
1999 1998 1998 1999 1998 1998
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total Adjusted EBIT for
reportable segments $ 24,734 $ 38,123 $ 35,523 $ 98,663 $ 140,111 $ 122,637
Less:
BA&C expenses 13,643 711 711 17,821 711 711
Corporate, other expenses and
eliminations 8,384 7,249 7,249 26,105 22,471 22,471
Interest expense 18,448 16,644 9,456 55,975 49,134 23,167
- --------------------------------------------------------------------------------------------------------------------
Consolidated income (loss)
before income taxes $ (15,741) $ 13,519 $ 18,107 $ (1,238) $ 67,795 $ 76,288
====================================================================================================================
</TABLE>
NOTE 10 -- SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
YEAR-TO-DATE ENDED SEPTEMBER 30,
1999 1998
-------------------------------------------------------------------------------
<S> <C> <C>
Cash paid for:
Interest $ 51,522 $ 21,911
Income taxes, net $ 7,684 $ 19,679
-------------------------------------------------------------------------------
</TABLE>
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
BUSINESS OVERVIEW
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------
QUARTER ENDED SEPTEMBER 30,
----------------------------------------------
Pro Forma
(IN MILLIONS, EXCEPT PER SHARE DATA) 1999 1998 (a) 1998
-------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 274.1 $ 289.3 $ 255.3
Gross margin % 18.8% 23.9% 24.2%
Adjusted operating income % (b) 6.0% 10.7% 11.1%
Adjusted EBITDA (c) $ 32.0 $ 45.6 $ 39.4
Business acquisition and consolidation expenses $ 13.6 $ 0.7 $ 0.7
Net income (loss) $ (30.1) $ 9.3 $ 11.5
Adjusted net income (loss) (d) $ (1.3) $ 9.7 $ 12.8
-------------------------------------------------------------------------------------------
Diluted net income (loss) per share $ (0.82) $ 0.24 $ 0.29
Adjusted diluted net income (loss) per share (d) $ (0.04) $ 0.25 $ 0.32
-------------------------------------------------------------------------------------------
</TABLE>
(a) Pro forma results give effect to the September 1998 acquisition of
Clark-Schwebel as if the transaction had occurred at the beginning of 1998.
(b) Excludes business acquisition and consolidation ("BA&C") expenses.
(c) Excludes BA&C expenses, interest, taxes, depreciation, amortization, and
equity in income and write-down of an investment in affiliated companies.
(d) Excludes BA&C expenses and other acquisition related costs, net of
applicable tax benefits, and a write-down of an investment in an affiliated
company.
Net loss for the third quarter of 1999 was $30.1 million, or $0.82 per
diluted share, compared with net income of $11.5 million, or $0.29 per diluted
share, for the third quarter of 1998. Excluding business acquisition and
consolidation ("BA&C") expenses of $13.6 million and a $20.0 million non-cash
charge to write-down a joint venture investment, net loss per diluted share for
the third quarter of 1999 was $0.04. This compares to net income of $0.32 per
diluted share for the same period in 1998, excluding BA&C expenses of $0.7
million and other acquisition related costs. For the quarter ended September 30,
1999, Hexcel generated free cash flow (change in debt net of cash) of $28.2
million. The outstanding balance of the Company's debt has now been reduced by
$52.8 million since the beginning of the year.
During the third quarter of 1999, demand in a number of the markets Hexcel
serves was lower than anticipated. The Company's sales and gross margins for the
third quarter reflect lower production and sales of carbon fiber products,
reduced sales volume to the commercial aerospace market as a result of the
supply chain impacts of The Boeing Company's ("Boeing") planned reduction in
aircraft deliveries in 2000, inventory adjustments by the Company's aerospace
customers to improve working capital and manufacturing cycle times, and lower
prices in the global electronics market because of intensified competition from
Asia. These market conditions were partially offset by growth in the sales of
lightweight electronic fabrics and certain general industrial market
applications, as well as various cost savings initiatives.
BUSINESS ACQUISITION
On September 15, 1998, the Company acquired certain assets and assumed
certain operating liabilities from Clark-Schwebel, Inc. and its subsidiaries
(the "Acquired Clark-Schwebel Business"). The Acquired Clark-Schwebel Business
is engaged in the manufacture and sale of high-quality fiberglass
14
<PAGE>
fabrics, which are used to make printed circuit boards for electronic equipment
such as computers, cellular telephones, televisions and automobiles. The
Acquired Clark-Schwebel Business also produces high performance specialty
products for use in insulation, filtration, wall and facade claddings, soft body
armor and reinforcements for composite materials.
As part of this acquisition, Hexcel also acquired Clark-Schwebel, Inc.'s
equity ownership interests in three joint ventures, CS-Interglas AG ("CSI")
headquartered in Germany, Asahi-Schwebel Co., Ltd., headquartered in Japan, and
Clark-Schwebel Tech-Fab Company, headquartered in the United States. CSI and
Asahi-Schwebel Co., Ltd. are fiberglass fabric producers serving the European
and Asian markets, respectively. Clark-Schwebel Tech Fab Company manufactures
non-woven materials for roofing, construction and other specialty applications.
The unconsolidated revenues in 1998 for these joint ventures were in excess of
$300 million.
Hexcel acquired the net assets of the acquired business, other than certain
excluded assets and liabilities, in exchange for approximately $472.8 million in
cash. Hexcel also agreed to lease $50.0 million of property, plant and equipment
used in the acquired business from an affiliate of Clark-Schwebel, Inc.,
pursuant to a long-term lease with purchase options.
Further discussions of the acquisition and its related financing are
contained in Notes 2 and 6 to the accompanying condensed consolidated financial
statements.
RESULTS OF OPERATIONS
NET SALES: Net sales for the third quarter of 1999 were $274.1 million,
compared with $255.3 million for the third quarter of 1998 and $289.3 million
for the third quarter of 1998 on a pro forma basis, after giving effect to the
acquisition of the Acquired Clark-Schwebel Business as if the transaction had
occurred at the beginning of 1998. The decrease in sales compared to 1998 pro
forma results primarily reflects reduced third party sales and lower internal
usage of the Company's carbon fiber products, declining Boeing build rates and
inventory adjustments by certain aerospace customers. The decrease was partially
offset by growth in the sales of lightweight electronic fabrics and certain
general industrial market applications. On a constant currency basis, third
quarter 1999 net sales would not have been materially different than reported.
The following table summarizes net sales to third-party customers by
product group and market segment for the quarter ended September 30, 1999 and
pro forma net sales for the quarter ended September 30, 1998:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
UNAUDITED
-------------------------------------------------------------------------------------
COMMERCIAL SPACE & GENERAL
(IN MILLIONS) AEROSPACE DEFENSE ELECTRONICS INDUSTRIAL RECREATION TOTAL
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
THIRD QUARTER 1999
Reinforcement products $ 12.3 $ 4.2 $ 40.6 $ 23.2 $ 1.0 $ 81.3
Composite materials 79.5 26.1 - 16.5 10.5 132.6
Engineered products 54.7 3.5 - 2.0 - 60.2
- --------------------------------------------------------------------------------------------------------------------
Total $ 146.5 $ 33.8 $ 40.6 $ 41.7 $ 11.5 $ 274.1
54% 12% 15% 15% 4% 100%
- --------------------------------------------------------------------------------------------------------------------
PRO FORMA THIRD QUARTER 1998
Reinforcement products $ 11.2 $ 7.0 $ 36.5 $ 23.1 $ 4.4 $ 82.2
Composite materials 113.7 22.5 - 12.6 8.5 157.3
Engineered products 45.9 2.6 - 1.3 - 49.8
- --------------------------------------------------------------------------------------------------------------------
Total $ 170.8 $ 32.1 $ 36.5 $ 37.0 $ 12.9 $ 289.3
59% 11% 13% 13% 4% 100%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE>
Commercial aerospace net sales decreased 14% to $146.5 million for the
third quarter of 1999, from $170.8 million on a pro forma basis for the third
quarter of 1998. The supply chain impacts of Boeing's anticipated reduction in
aircraft deliveries in 2000 accounted for approximately 60% of the decline in
commercial aerospace sales in the quarter. The balance of the decline is
attributable to inventory adjustments by aerospace customers in the U.S.,
Europe, and certain export markets, in connection with their efforts to improve
working capital and reduce manufacturing cycle times, and to price reductions
for certain commercial aerospace products made at the start of the year in
response to market conditions.
Approximately 44% of Hexcel's pro forma full year 1998 net sales were to
Boeing, Airbus Industrie ("Airbus") and related subcontractors. Based on
published projections, combined deliveries for Boeing and Airbus were 577 and
788 in 1997 and 1998, respectively, and are expected to peak at 920 in 1999,
before declining to approximately 800 in 2000. The Company sells material for
every model of commercial aircraft sold by Boeing and Airbus, with sales per
aircraft ranging from $0.1 million to over $1.0 million. Depending on the
product, orders placed with Hexcel are received anywhere between one and
eighteen months prior to delivery of the aircraft to the customer, with the
average being approximately six months. As the Company supplies its products
ahead of the delivery of a commercial aircraft, it started to see the impact of
future reduced Boeing production rates on the procurement of the Company's
products in the second quarter of 1999, and expects that it will continue to see
this impact for the remainder of 1999.
During 1998, the Company's commercial aerospace customers started
emphasizing the need for material yield improvement as well as cost and
inventory reductions throughout the industry's supply chain. In response to
these pressures, the Company reduced the price of certain products in 1999.
Further, the Company is aware that during the fourth quarter of 1999, one
customer will have substituted one of Hexcel's premium priced product for a
lower priced product, which will also be provided by Hexcel. Although these
changes impact the Company's profit margins, they have been mitigated, in part,
by the Company's various cost reduction and efficiency improvement programs.
Space and defense net sales for the third quarter of 1999 were $33.8
million, which approximates pro forma third quarter 1998 net sales of $32.1
million. The Company is currently qualified to supply materials to several new
U.S. and European military aircraft programs, which are expected to enter
full-scale production starting in late 2000 and 2001.
The Company believes that, in response to a significant shortage of carbon
fiber supply in 1997, a number of the Company's customers, particularly those in
the space and defense market, purchased and/or ordered more carbon fiber than
they needed during 1997 and 1998. Now that carbon fiber supplies are more
certain, customers have reduced their inventories and have purchased less carbon
fiber in 1999. Further, significant increases in the installed capacity of the
carbon fiber industry during the past year have made it difficult for the
Company to sell its own excess carbon fiber capacity, resulting in an operating
utilization rate for the Company's carbon fiber facilities that is currently
less than 60%. While the Company is seeking to find opportunities to sell its
short-term excess capacity in other markets, the increase in worldwide carbon
fiber capacity limits the prices at which such surplus capacity can be sold. The
Company anticipates that demand for its carbon fiber products will grow as new
military aircraft programs move into full-scale production and the Company
develops new applications for its products.
Electronics net sales grew 11% to $40.6 million for the third quarter of
1999, from $36.5 million on a pro forma basis for the third quarter of 1998.
Despite prices remaining depressed during the third quarter of 1999, the
increase was due to greater demand for lightweight fabrics used in the
construction of multi-layer printed circuit boards. The Company continues to
believe that the electronics market offers growth
16
<PAGE>
potential, and anticipates that demand for lightweight glass fabrics will
continue to grow, fueled by consumer demand for personal electronic devices.
General industrial net sales increased 13% to $41.7 million for the third
quarter of 1999, from $37.0 million on a pro forma basis for the third quarter
of 1998, reflecting the growing use of Hexcel materials in applications such as
wind energy and automobiles. Recreation net sales for the third quarter of 1999
of $11.5 million were comparable to pro forma third quarter 1998 net sales of
$12.9 million.
BACKLOG: The backlog of commercial aerospace and space and defense orders
scheduled for delivery in the next 12 months was as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
UNAUDITED
----------------------------------------------
COMMERCIAL SPACE AND
(IN MILLIONS) AEROSPACE DEFENSE TOTAL
---------------------------------------------------------------------------
<S> <C> <C> <C>
AS OF SEPTEMBER, 1999
Reinforcement products $ 2.8 $ 3.1 $ 5.9
Composite materials 128.8 23.2 152.0
Engineered products 124.7 6.9 131.6
---------------------------------------------------------------------------
Total $ 256.3 $ 33.2 $ 289.5
---------------------------------------------------------------------------
AS OF DECEMBER 31, 1998
Reinforcement products $ 5.9 $ 6.5 $ 12.4
Composite materials 226.9 40.1 267.0
Engineered products 165.1 7.6 172.7
---------------------------------------------------------------------------
Total $ 397.9 $ 54.2 $ 452.1
---------------------------------------------------------------------------
AS OF SEPTEMBER 30, 1998
Reinforcement products $ 7.8 $ 5.4 $ 13.2
Composite materials 175.0 39.9 214.9
Engineered products 145.3 11.5 156.8
---------------------------------------------------------------------------
Total $ 328.1 $ 56.8 $ 384.9
---------------------------------------------------------------------------
</TABLE>
The decrease in the Company's commercial aerospace backlog is attributable
to aircraft build rates, which are expected to peak in 1999, as well as the
continuing trend towards shorter lead times and better supply-chain management
by the industry overall. Because the Company supplies its products ahead of the
delivery of a commercial aircraft, it has started to experience the impact of
the lower anticipated deliveries of Boeing aircraft in 2000. Backlog for the
Company's other markets is not a material trend indicator and, accordingly, such
amounts are not presented.
GROSS MARGIN: Gross margin for the third quarter of 1999 was $51.5 million,
or 18.8% of net sales, compared with $61.8 million, or 24.2% of net sales, for
the third quarter of 1998 and $69.3 million, or 23.9% of net sales, for the
third quarter of 1998 on a pro forma basis. The impact of reduced sales volumes,
price reductions, and unabsorbed costs were only partially offset by the
Company's cost reduction programs:
- - The reduced volume of carbon fiber sales and reductions in the
Company's inventory of carbon fiber products, have resulted in
unabsorbed costs in this high fixed cost product line, decreasing gross
margin in the third quarter of 1999 by approximately $10 million
compared to the pro forma third quarter of 1998.
- - Lower prices in electronics (net of raw material cost reductions) and
commercial aerospace markets account for approximately $6 million of
the reduction in gross margin. The margin benefit from the growth in
electronics sales volumes fully offset the impact of lower electronics
pricing, resulting in dollar margins being at the same level as the pro
forma third quarter of 1998.
17
<PAGE>
- - Reduced sales volumes from commercial aerospace build rate and
inventory reductions, together with all other changes, account for a
further $8 million decline in gross margin.
- - These decrements in gross margin were partially offset by realized cost
reductions from the Company's previously announced business
consolidation initiatives and other actions of approximately $6 million
in the quarter. Such cost savings are anticipated to grow in subsequent
quarters as the Company's cost reduction initiatives are completed.
OPERATING INCOME: Operating income for the third quarter of 1999 was $2.7
million, compared with $27.6 million for the same period in 1998. Excluding BA&C
expenses of $13.6 million and $0.7 million incurred in the third quarter of 1999
and 1998, respectively, operating income for the third quarter of 1999 was $16.3
million, or 6.0% of net sales, compared with $28.3 million in the third quarter
of 1998, or 11.1% of net sales. The aggregate decrease in operating income,
excluding BA&C expenses, reflects the decrease in sales and gross margins, and
increased selling, general and administrative ("SG&A") expenses over the third
quarter 1998. SG&A expenses were $29.3 million, or 10.7% of net sales for the
third quarter of 1999, compared with $27.7 million, or 10.9% of net sales for
the third quarter of 1998. The aggregate dollar increase in SG&A was primarily
attributable to $2.3 million of additional goodwill amortization that arose from
the acquisition of the Acquired Clark-Schwebel Business. R&T expenses for the
third quarter of 1999 and 1998, were $5.8 million.
INTEREST EXPENSE: Interest expense was $18.4 million in the third quarter
of 1999, compared to $9.5 million in the third quarter of 1998. The increase
primarily reflects the additional financing required for the Acquired
Clark-Schwebel Business.
EQUITY IN INCOME AND WRITE-DOWN OF AN INVESTMENT IN AFFILIATED COMPANIES:
As part of the Acquired Clark-Schwebel Business, the Company acquired interests
in three joint ventures. Competitive conditions in the electronics market
continued to impact the performance of two of these joint ventures during the
third quarter of 1999. As a result, the Company recognized a nominal amount of
equity in earnings of affiliated companies in the third quarter of 1999.
In the third quarter of 1999, the Company wrote down its investment in CSI,
an affiliated company, by $20.0 million, to its estimated fair market value. The
write-down was the result of management's decision to allow its fixed-price
option to increase its investment in CSI from 43.6% to 84.0%, to expire
unexercised and an assessment that an other than temporary decline in the
investment occurred due to the deterioration in the financial condition of the
investment. The Company did not record a deferred tax benefit on the write-down
because of limitations imposed by foreign tax laws on the Company's ability to
realize the tax benefit. Further discussions of the write-down are contained in
Note 4 to the accompanying condensed consolidated financial statements.
<TABLE>
<CAPTION>
NET INCOME (LOSS) AND DILUTED NET INCOME (LOSS) PER SHARE:
-----------------------------------------------------------------------------------------------------------------
UNAUDITED
-----------------------------------------
FOR THE QUARTER ENDED SEPTEMBER 30,
-----------------------------------------
Pro Forma
(IN MILLIONS, EXCEPT PER SHARE DATA) 1999 1998 1998
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income (loss) $ (30.1) $ 9.3 $ 11.5
Diluted net income (loss) per share $ (0.82) $ 0.24 $ 0.29
Adjusted diluted net income (loss) per share, excluding BA&C
expenses, other acquisition costs and a write-down on an
investment in an affiliated company $ (0.04) $ 0.25 $ 0.32
Diluted net income (loss) per share, excluding goodwill amortization $ (0.77) $ 0.29 $ 0.30
Diluted weighted average shares outstanding 36.5 45.4 45.4
-----------------------------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE>
The decrease in the number of weighted average shares is attributable to
the exclusion of 8.1 million potential common shares relating to the convertible
subordinated notes, due 2003, and the convertible subordinated debentures, due
2011, which were antidilutive in the 1999 period. Refer to Note 7 to the
accompanying condensed consolidated financial statements for the calculation and
the number of shares used for diluted net income (loss) per share.
<TABLE>
<CAPTION>
YEAR-TO-DATE RESULTS
----------------------------------------------------------------------------------------
YEAR-TO-DATE ENDED SEPTEMBER 30,
----------------------------------------
Pro Forma
(IN MILLIONS, EXCEPT PER SHARE DATA) 1999 1998 1998
----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 883.0 $ 931.3 $ 785.6
Gross margin % 21.4% 25.0% 25.4%
Adjusted operating income % 8.2% 12.6% 12.8%
Adjusted EBITDA $ 119.6 $ 162.4 $ 131.1
Business acquisition & consolidation expenses $ 17.8 $ 0.7 $ 0.7
Net income (loss) $ (20.6) $ 47.6 $ 48.5
Adjusted net income $ 10.9 $ 48.0 $ 49.8
----------------------------------------------------------------------------------------
Diluted net income (loss) per share $ (0.56) $ 1.13 $ 1.15
Adjusted diluted net income per share $ 0.30 $ 1.14 $ 1.18
----------------------------------------------------------------------------------------
</TABLE>
NET SALES AND GROSS MARGIN: Net sales for the first nine months of 1999
were $883.0 million, compared with $785.6 million for the comparable period of
1998 and $931.3 million for the same period on a pro forma basis. Gross margin
for the first nine months of 1999 was $188.6 million, or 21.4% of net sales,
versus gross margin of $199.2 million, or 25.4% of net sales, for the same
period in 1998 and $233.2 million, or 25.0% of net sales, for the first nine
months of 1998 on a pro forma basis. The decrease in net sales and gross margin
compared to pro forma 1998 results primarily reflect the factors previously
discussed. On a constant currency basis, 1999 year-to-date net sales would not
have been materially different than reported.
The following table summarizes net sales to third-party customers by
product group and market segment for the year-to-date period ended September 30,
1999 and pro forma net sales for the year-to-date period ended September 30,
1998:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
UNAUDITED
-------------------------------------------------------------------------------------
COMMERCIAL SPACE & GENERAL
(IN MILLIONS) AEROSPACE DEFENSE ELECTRONICS INDUSTRIAL RECREATION TOTAL
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FIRST NINE MONTHS 1999
Reinforcement products $ 37.4 $ 15.2 $ 125.1 $ 65.6 $ 7.0 $ 250.3
Composite materials 303.7 78.0 - 52.5 31.8 466.0
Engineered products 152.2 10.2 - 4.3 - 166.7
- --------------------------------------------------------------------------------------------------------------------
Total $ 493.3 $ 103.4 $ 125.1 $ 122.4 $ 38.8 $ 883.0
56% 12% 14% 14% 4% 100%
- --------------------------------------------------------------------------------------------------------------------
PRO FORMA FIRST NINE MONTHS 1998
Reinforcement products $ 35.4 $ 21.6 $ 134.1 $ 77.5 $ 14.6 $ 283.2
Composite materials 355.4 66.8 - 38.5 31.3 492.0
Engineered products 145.3 7.7 - 3.1 - 156.1
- --------------------------------------------------------------------------------------------------------------------
Total $ 536.1 $ 96.1 $ 134.1 $ 119.1 $ 45.9 $ 931.3
58% 10% 14% 13% 5% 100%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
19
<PAGE>
OPERATING INCOME: Operating income for the first nine months of 1999 was
$54.7 million, compared with $99.5 million for the same period in 1998.
Excluding BA&C expenses of $17.8 million and $0.7 million incurred in the first
nine months of 1999 and 1998, respectively, the aggregate decrease in operating
income is the result of lower carbon fiber production and sales, lower sales and
gross margins in the commercial aerospace and electronics markets, and increases
in SG&A and R&T expenses. SG&A expenses were $97.4 million, or 11.0% of sales,
for the first nine months of 1999, compared to $82.1 million, or 10.4% of sales,
for the same period in 1998. The increase in SG&A expenses was primarily
attributable to the Acquired Clark-Schwebel Business, including $6.8 million of
goodwill amortization, and costs associated with the implementation of the
Company's Lean Enterprise and supply-chain initiatives. R&T expenses were $18.5
million, or 2.1% of sales, for the first nine months of 1999, compared to $16.9
million, or 2.2% of sales, for the comparable 1998 period.
INTEREST EXPENSE: Interest expense for the first nine months of 1999 was
$56.0 million, compared to $23.2 million in the first nine months of 1998. The
increase primarily reflects the additional financing required for the Acquired
Clark-Schwebel Business.
EQUITY IN INCOME AND WRITE-DOWN OF AN INVESTMENT IN AFFILIATED COMPANIES:
As previously discussed, competitive conditions in the electronics market have
impacted the performance of the Company's joint ventures, resulting in a nominal
amount of equity in earnings of affiliated companies in the year-to-date period
ended September 30, 1999. The Company also recorded a non-cash $20.0 million
charge, with no associated tax benefit, in the third quarter of 1999 to
write-down its investment in CSI to fair market value. Further discussions of
the write-down are contained in Note 4 to the accompanying condensed
consolidated financial statements.
<TABLE>
<CAPTION>
NET INCOME (LOSS) AND NET INCOME (LOSS) PER SHARE:
-----------------------------------------------------------------------------------------------------------------
UNAUDITED
--------------------------------------
YEAR-TO-DATE ENDED SEPTEMBER 30,
--------------------------------------
Pro Forma
(IN MILLIONS, EXCEPT PER SHARE DATA) 1999 1998 1998
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income (loss) $(20.6) $ 47.6 $ 48.5
Diluted net income per share $(0.56) $ 1.13 $ 1.15
Adjusted diluted net income per share, excluding BA&C expenses $ 0.30 $ 1.14 $ 1.18
Diluted net income per share, excluding goodwill amortization $(0.42) $ 1.19 $ 1.15
Diluted weighted average shares outstanding 36.4 46.1 46.1
-----------------------------------------------------------------------------------------------------------------
</TABLE>
The decrease in the number of diluted weighted average shares is
attributable to the exclusion of 8.1 million potential common shares relating to
the convertible subordinated notes, due 2003, and the convertible subordinated
debentures, due 2011, which were antidilutive in the 1999 period. Refer to Note
7 to the accompanying condensed consolidated financial statements for the
calculation and the number of shares used for diluted net income (loss) per
share.
FINANCIAL CONDITION AND LIQUIDITY
FINANCIAL RESOURCES
Debt, net of cash, as of September 30, 1999 was $804.3 million compared to
$857.5 million as of December 31, 1998. The Company generated free cash flow of
$28.2 million during the quarter ended September 30, 1999. Since the beginning
of the year, the Company has reduced its debt by $52.8 million.
20
<PAGE>
In connection with the acquisition of the Acquired Clark-Schwebel Business
on September 15, 1998, Hexcel obtained a new global credit facility (the "Senior
Credit Facility") to: (a) fund the purchase of the Acquired Clark-Schwebel
Business; (b) refinance the Company's existing revolving credit facility; and
(c) provide for ongoing working capital and other financing requirements of the
Company. The term loans within the Senior Credit Facility are repayable in
annual installments ranging from $17.2 million to $36.6 million, from 2000
through 2003, $99.7 million in 2004 and $98.4 million in 2005. The revolver
portion of the Senior Credit Facility is repayable in 2004.
In January 1999, simultaneously with the closing of the Company's $240.0
million offering of 9 3/4% senior subordinated notes offering, the Company
amended the Senior Credit Facility to, among other things, reduce the available
borrowing capacity from $910.0 million to $671.5 million, modify certain
financial covenants and permit the offering. On August 13, 1999, the Company
further amended its Senior Credit Facility, modifying certain financial
covenants and the applicable interest rates payable, increasing the interest
expense to the Company for borrowings under the facility by about 1/4%.
The Senior Credit Facility contains a number of customary financial
covenants, including specified maximum ratios of indebtedness and senior
indebtedness to Adjusted EBITDA, and specified minimum ratios of Adjusted EBITDA
to interest expense and fixed charges, all as defined in the credit agreement.
Although the Company is in compliance with all of these financial covenants,
continuation of the current trend in Adjusted EBITDA, or increases in future
indebtedness, interest expense or fixed charges, would result in non-compliance
with one or more of such financial covenants. If the current trend in Adjusted
EBITDA continues, Hexcel will need to secure an amendment or waiver of the
financial covenants under the Senior Credit Facility early in 2000.
On January 21, 1999, the Company issued $240.0 million of senior
subordinated notes, due 2009 (the `Senior Subordinated Notes") under Rule 144A
of the Securities Act of 1933. The Senior Subordinated Notes are general
unsecured obligations of Hexcel that bear interest at a rate of 9 3/4% per
annum. Net proceeds of approximately $230.5 million from this offeriNg were used
to repay amounts owed under the Senior Credit Facility. The Senior Subordinated
Notes are redeemable beginning in January of 2004, in whole or in part, at the
option of Hexcel. The redemption prices range from 104.9% to 100.0% of the
outstanding principal amount, depending on the period in which redemption
occurs. On June 18, 1999, the Company commenced its offer to exchange all of its
outstanding Senior Subordinated Notes for a like principal amount of new senior
subordinated notes which were registered under the Securities Act of 1933. This
exchange offer was completed on July 19, 1999 with all original Senior
Subordinated Notes outstanding being exchanged for the new notes. The form and
terms of the new notes are identical in all material respects to the original
notes.
On February 17, 1999, Hexcel redeemed $12.5 million of its increasing rate
senior subordinated notes payable to its affiliate, Ciba Specialty Chemicals
Inc. Such redemption was financed with borrowings under the Company's Senior
Credit Facility.
The Company expects that its financial resources, including the Senior
Credit Facility, will be sufficient to fund the Company's worldwide operations
for the foreseeable future. Further discussion of the Company's financial
resources is contained in Note 6 to the accompanying condensed consolidated
financial statements.
CAPITAL EXPENDITURES
Capital expenditures totaled $26.7 million for the first nine months of
1999 compared to $41.7 million for the first nine months of 1998 and $45.2
million for the first nine months of 1998 on a pro forma basis. The Company
anticipates that its 1999 capital expenditures will approximate $40 million,
compared to pro forma full year 1998 capital expenditures of approximately $70
million. The decrease
21
<PAGE>
reflects reduced spending due to changing market conditions, the expected
benefits from the Company's Lean Enterprise program, and a commitment by Hexcel
to reduce its debt.
OTHER CAPITAL COMMITMENTS
Hexcel has total estimated financial commitments to its joint ventures in
China and Malaysia of approximately $30 million. These commitments, which
comprise of a combination of equity investments, loans and loan guarantees, are
expected to be fulfilled in increments through 2001. The Company made a total of
$2.0 million in equity investments in these joint ventures in the first nine
months of 1999, and expects to invest an additional $2.9 million in the fourth
quarter of 1999.
ADJUSTED EBITDA, CASH FLOWS AND RATIO OF EARNINGS TO FIXED CHARGES
FIRST NINE MONTHS, 1999: Earnings before business acquisition and
consolidation expenses, other income, interest, taxes, depreciation,
amortization, and equity in income and write-down of an investment in affiliated
companies ("Adjusted EBITDA") for the first nine months of 1999 was $119.6
million. Net cash provided by operating activities was $89.1 million, as $47.1
million of non-cash depreciation and amortization, $19.8 million of equity in
income and write-down of an investment in affiliated companies, $43.7 million of
working capital changes and $17.8 million of BA&C expenses more than offset
$20.6 million of net loss, and cash used by all other operating activities. The
decrease in working capital reflects lower levels of receivables and inventory
due to lower sales volume as well as the benefits from the Company's Lean
Enterprise program.
Net cash used for investing activities was $28.7 million, reflecting the
Company's capital expenditures and investments in affiliated companies for the
first nine months of 1999. Net cash used for financing activities was $59.3
million, reflecting a net debt reduction and $10.8 million of debt issuance
costs primarily pertaining to the issuance of the Senior Subordinated Notes.
FIRST NINE MONTHS, 1998: Adjusted EBITDA and pro forma Adjusted EBITDA for
the first nine months of 1998 was $131.1 million and $162.4 million,
respectively. Net cash provided by operating activities was $50.7 million, as
increased working capital of $30.0 million and BA&C payments of $6.9 million
partially offset $48.5 million of net income and $38.4 million of non-cash
depreciation and amortization and deferred income taxes. The increase in working
capital reflects higher levels of accounts receivable and inventory due to
higher sales volume, as well as reductions in accrued liabilities from peak
year-end levels, primarily due to the payment of obligations in 1998 for capital
projects and employee incentive and benefit programs incurred during 1997.
Net cash used for investing activities was $496.0 million, primarily
reflecting the net cash paid for the Acquired Clark-Schwebel Business, net of
cash acquired, of $453.0 million and capital expenditures of $41.7 million. Net
cash provided by financing activities was $434.3 million, primarily reflecting
$452.6 million of funds borrowed under the new Senior Credit Facility less $10.3
million of cash used for debt issuance costs and $10.7 million of acquired
treasury stock.
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 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.
22
<PAGE>
Reconciliations of net income (loss) to EBITDA and Adjusted EBITDA as well
as the ratio of earnings to fixed charges, for the applicable periods, are as
follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
UNAUDITED
- ---------------------------------------------------------------------------------------------------------------------
QUARTER ENDED SEPTEMBER 30, YEAR-TO-DATE ENDED SEPTEMBER 30,
------------------------------------------------------------------------
PRO FORMA PRO FORMA
(IN MILLIONS) 1999 1998 1998 1999 1998 1998
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net income (loss) $ (30.1) $ 9.3 $ 11.5 $ (20.6) $ 47.6 $ 48.5
Provision for (recovery of) income taxes (5.4) 4.9 6.6 (0.4) 24.7 27.8
Interest expense 18.4 16.6 9.5 55.9 49.1 23.2
Depreciation and amortization expense 15.6 14.8 11.1 47.1 44.7 30.9
Equity in income and write-down of an
investment in affiliated companies 19.9 (0.7) - 19.8 (4.4) -
- ---------------------------------------------------------------------------------------------------------------------
EBITDA 18.4 44.9 38.7 101.8 161.7 130.4
BA&C expenses 13.6 0.7 0.7 17.8 0.7 0.7
- ---------------------------------------------------------------------------------------------------------------------
Adjusted EBITDA $ 32.0 $ 45.6 $ 39.4 $ 119.6 $ 162.4 $ 131.1
- ---------------------------------------------------------------------------------------------------------------------
Ratio of earnings to fixed charges N/A 1.8x 2.8x 0.6x 2.4x 4.1x
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
The decrease in the earnings to fixed charges ratios, reflect the Company's
lower operating income, higher interest costs and BA&C expenses. The ratio of
earnings to fixed charges is equal to net income (loss), excluding income taxes
and interest expense, divided by interest expense. Interest expense includes
approximately one-third of the Company's rental expense. For the quarter ended
September 30, 1999, the deficiency of earnings to fixed charges was $16.8
million.
BUSINESS ACQUISITION AND CONSOLIDATION PROGRAMS
Total accrued BA&C expenses at December 31, 1998 and September 30, 1999,
and related activity during the nine months ended September 30, 1999 for each of
Hexcel's BA&C programs, were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
SEPTEMBER DECEMBER
1999 1998 1996
PROGRAM PROGRAM PROGRAM TOTAL
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE AS OF DECEMBER 31, 1998 $ - $ 5,002 $ 3,200 $ 8,202
BA&C expenses 13,510 4,311 - 17,821
Cash expenditures - (5,306) (2,571) (7,877)
Non-cash usage, including asset write-downs (10,993) (2,342) 55 (13,280)
Reclassification of foreign government grant payable
to accrued liabilities - - (684) (684)
- --------------------------------------------------------------------------------------------------------------------
BALANCE AS OF SEPTEMBER 30, 1999 $ 2,517 $ 1,665 $ - $ 4,182
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
SEPTEMBER 1999 PROGRAM
On September 27, 1999, the Company announced a new business consolidation
program, entailing a further rationalization of manufacturing facilities for
certain product lines. The objectives of this program are to eliminate excess
capacity and overhead, improve manufacturing focus and yields, and create
additional centers of manufacturing excellence. Specific actions contemplated by
this BA&C program include consolidating the production of certain product lines,
including relocating equipment and requalifying the respective product lines,
vacating certain leased facilities, and consolidating the Company's composite
materials business segment's U.S. marketing, research and technology, and
23
<PAGE>
administrative functions into one location. The consolidation program calls for
the elimination of approximately 400 positions (primarily manufacturing), and a
total reduction in occupied floor space of over 250,000 square feet. The
consolidation program impacts all of the Company's business segments and is
anticipated to be completed by early 2002, with annualized operating cost
savings of more than $24 million.
Total expenses for this program are expected to approximate $30 million, of
which $12 million will be non-cash write-downs of existing equipment. The
write-downs are to reduce the applicable equipment to their estimated net
realizable value. Total cash expenditures for this program are expected to
approximate $24 million, which includes $6 million of capital expenditures. As
of September 30, 1999, the Company has recorded $13.5 million of BA&C expenses,
including $11.0 million of non-cash write-downs on equipment, for this program.
The business consolidation program consists of a number of initiatives, the
most significant of which are:
REINFORCEMENT PRODUCTS - The consolidation of the production of U.S. glass
and aramid fabrics used in industrial and recreational applications into
the Anderson, SC facility. Going forward, the Seguin, TX facility will
focus on being the U.S. center of excellence for aerospace and carbon
fabrics.
COMPOSITE MATERIALS - The Livermore, CA facility will be the center of
excellence for prepregs manufactured by the solvent impregnation process.
Production of certain solvent impregnation products at the Lancaster, OH
facility will be transferred to Livermore, and Lancaster will focus on the
production of prepreg substrates used in Hexcel's manufacture of honeycomb
materials and parts.
The Salt Lake City, UT facility will be the center of excellence for
prepregs manufactured by the hot-melt impregnation process. Production of
hot-melt impregnation products at the Livermore facility will be
transferred to Salt Lake City.
US marketing, research and technology, and administrative functions will be
consolidated into one location.
ENGINEERED PRODUCTS - The production of engineered structures and OEM
aircraft interiors will be consolidated into the Kent, WA facilities, and
the Bellingham, WA facility will focus on the design and manufacture of
retrofit components for the aircraft interior aftermarket.
A projected financial summary of the September 1999 BA&C program is as
follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
(IN MILLIONS) 1999 2000 2001 2002 TOTAL
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Estimated Cash Costs
Cash expenses $ 3 $ 12 $ 2 $ 1 $ 18
Capital expenditures - 4 1 1 6
----------------------------------------------------------------------------------------------
Total $ 3 $ 16 $ 3 $ 2 $ 24
----------------------------------------------------------------------------------------------
Estimated Expenses
Cash expenses (including accruals) $ 5 $ 11 $ 1 $ 1 $ 18
Non-cash write downs 11 1 - - 12
----------------------------------------------------------------------------------------------
Total $ 16 $ 12 $ 1 $ 1 $ 30
----------------------------------------------------------------------------------------------
Estimated Cash Savings $ 1 $ 12 $ 23 $ 24 $ 60
----------------------------------------------------------------------------------------------
</TABLE>
24
<PAGE>
DECEMBER 1998 PROGRAM
In December 1998, the Company announced consolidation actions within its
reinforcement fabrics and composite materials business segments. These actions
included the integration of the Company's existing fabrics business with the
U.S. operations of the Acquired Clark-Schwebel Business, and the combination of
its U.S., European and Pacific Rim composite materials businesses into a single,
global business unit. The objectives of these actions were to eliminate
redundancies, improve manufacturing planning, and enhance customer service. The
Company substantially completed these actions in the first quarter of 1999,
which resulted in the elimination of approximately 100 operating, sales,
marketing and administrative positions. Estimated annual cash savings from these
business consolidation activities, which the Company has already begun to
realize, are approximately $10 million.
On March 16, 1999, the Company expanded its actions relating to the
integration of the Acquired Clark-Schwebel Business with the announcement of the
closure of its Cleveland, GA facility, which, at that time, employed
approximately 100 manufacturing positions. This facility produced fabrics for
the electronics market and, the majority of its production equipment has been
relocated to the Company's Anderson, SC facility. The closure of this facility,
which was completed on September 3, 1999, was the result of current competitive
conditions in the global market for electronic fiberglass materials and was not
expected at the time of the acquisition of the Acquired Clark-Schwebel Business.
The closure of this facility is anticipated to generate $3.5 million in
annualized savings beginning in the fourth quarter of 1999.
During the first nine months of 1999, the Company recorded $4.3 million of
BA&C expenses for this program, primarily reflecting costs associated with the
closing and relocation of equipment from the Company's Cleveland, GA facility,
$2.3 million of non-cash write-downs of equipment that will be disposed of, and
employee severance costs for additional administrative positions relating to the
consolidation of the composite materials business segment.
1996 PROGRAM
In May 1996, the Company announced a BA&C program primarily related to the
integration of the acquired composites businesses from Ciba-Geigy Limited and
Ciba-Geigy Corporation (the "Acquired Ciba Business"). This program was later
revised in December 1996, to include the acquired carbon fibers and prepreg
business from Hercules Incorporated as well as other consolidation activities
identified during the on-going integration of the Acquired Ciba Business. The
program was substantially completed in the second quarter of 1999, with the
disposal of the Company's operations in Brindisi, Italy.
Further discussions on the Company's BA&C programs are contained in Note 4
to the accompanying condensed consolidated financial statements
YEAR 2000 READINESS DISCLOSURE
Hexcel, like most other companies, has addressed whether its information
technology systems and non-information technology devices with embedded
microprocessors (collectively "Business Systems and Devices") will recognize and
process dates starting with the year 2000 and beyond (the "Year 2000"). The Year
2000 issue can arise at any point in the Company's supply, manufacturing,
processing and distribution chains. Hexcel does not, however, manufacture or
sell products that contain microprocessors or software.
In early 1998, Hexcel established a central Year 2000 project office to
coordinate and monitor progress towards achieving corporate-wide Year 2000
compliance. With certain exceptions associated
25
<PAGE>
with site-specific items not having broad impact to business operations, the
Company has substantially completed its Year 2000 plan. A discussion of the
Company's critical Business Systems and Devices, suppliers and vendors as they
pertain to the Company's Year 2000 issues, as of October 31, 1999, are detailed
as follows:
BUSINESS SYSTEMS & DEVICES
In order to address the Year 2000 issue as it relates to the Company's
Business Systems and Devices, Hexcel developed a six-phase plan. The Company
also used external consulting services, where appropriate, as part of its
efforts to address its Year 2000 issue. The components of this plan and their
related completion date, as of October 31, 1999, are detailed below:
(1) INVENTORY: This phase, which was completed in December 1998, consisted of
compiling a detailed listing of the Company's Business Systems and
Devices likely to be impacted by the Year 2000 issue.
(2) RISK ASSESSMENT AND ASSIGNING PRIORITIES: This phase consisted of
assessing the likelihood that a Business System or Device is not Year
2000 compliant as well as assigning a priority of importance to the
particular Business System or Device as it relates to the Company's
business operations. This phase was completed in December 1998.
(3) ASSESSING COMPLIANCE: This phase consisted of assessing Year 2000
compliance on the Company's Business Systems or Devices which have been
identified as essential to the Company's business operations. In
assessing compliance, the Company performed a variety of tasks including,
obtaining Year 2000 compliance statements and information from the
Company's vendors and service providers. This phase was completed in
March 1999. However, the Company is dependent upon its suppliers and
service providers to continue to inform Hexcel as to any updates or
changes to the information supplied to Hexcel.
(4) REPAIRING OR REPLACING: This phase consists of repairing and replacing
non-Year 2000 compliant Business Systems and Devices which are essential
to Hexcel's operations. With certain exceptions, this phase was
substantially completed in October 1999. Remaining items to repair or
replace primarily consist of site-specific devices, which do not have
broad enterprise implications. Also, four of the Company's locations are
still pending wide area network upgrades. All of these items are
anticipated to be repaired or replaced, and tested in the last two months
of 1999.
(5) TESTING: This phase consisted of testing the repair or replacement of
those Business Systems and Devices, which are essential to the Company's
business operations. This phase also included the testing of the
integration of the various Business Systems and Devices within the
Company's manufacturing processes. This phase was substantially completed
in October 1999, except for those items discussed in phase four, which
will be completed in the last two months of 1999.
(6) DEVELOPING CONTINGENCY PLANS: This phase consisted of developing
alternative plans in the event that a business interruption occurs from a
Year 2000 issue. This phase was substantially completed in October 1999,
however, the Company believes that this phase will be on-going through to
the year 2000.
SUPPLIERS & CUSTOMERS
Hexcel has also gathered information from its significant suppliers and
customers concerning their Year 2000 issues as a means of assessing risks and
developing alternatives. The Company has sent out surveys to all of its
significant suppliers and customers to determine what steps, if any, those
companies
26
<PAGE>
are taking to remediate their respective Year 2000 issues. Hexcel is, however,
dependent upon its suppliers and customers with respect to the completeness and
accuracy of such responses.
As of October 31, 1999, the Company has received responses from
substantially all of its significant suppliers and customers. The responses from
Hexcel's suppliers generally indicated that these parties are taking actions to
ensure that their ability to supply products or services to the Company will not
be impaired. In order to reduce the risk of interruptions, the Company is in the
process of changing a few suppliers to those who have demonstrated Year 2000
readiness. The Company is also evaluating accumulating certain inventories for a
limited number of items. The responses from Hexcel's customers also generally
indicate that these parties are taking actions to ensure their ability to
purchase products from the Company will not be impaired. The Company will
continue to monitor the status of its significant suppliers' and customers' Year
2000 readiness through the end of 1999, in order to determine whether additional
or alternative measures are necessary.
Total estimated costs to address Hexcel's Year 2000 issues, including
preparing the Company's Business Systems and Devices to become Year 2000
compliant, is approximately $4.6 million, or $0.9 million less than the
Company's original estimate of $5.5 million. The decrease in the total estimated
costs is due to the development of less costly alternatives and uncertainties in
the original estimation process. The total estimated costs includes
approximately $2.5 million of capital expenditures to be used for the purchase
of certain capital equipment to replace equipment which is currently not Year
2000 compliant. As of October 31, 1999, approximately $3.5 million of the total
estimated costs, including the replacement of capital equipment, have been
incurred. The remaining estimated balance of $1.1 million represents costs to
replace and test those items identified in phase four, internal costs to manage
the Company's central Year 2000 project office, and amounts reserved for
contingencies, which may be spent in the first quarter of 2000. Due to resource
constraints caused by the Year 2000 issue, the Company deferred other
information technology projects. These deferrals, however, did not have a
material adverse effect on the Company's results of operations or financial
condition.
The Company presently believes that its Business Systems and Devices,
including those items still remaining to be repaired or replaced, and tested,
will not pose significant operational problems for the Company with respect to
the Year 2000 issue. However, if Hexcel's suppliers and customers do not
successfully address their Year 2000 issues, a disruption in operations could
occur. Such a disruption could result in, for example, delays in the receipt of
raw materials and distribution of finished goods, or errors in customer orders.
These consequences could have a material impact on the operations, liquidity and
financial condition of Hexcel.
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 commercial aerospace
production and delivery rates, including those of Boeing and Airbus; (b)
expectations regarding the growth in military aircraft programs; (c) estimates
of the change in net sales in total and by market compared to pro forma 1998 net
sales; (d) expectations regarding sales growth in the electronics market; (e)
expectations regarding future sales based on current backlog; (f) expectations
regarding sales growth, sales mix, gross margins, and capital expenditures; (g)
expectations regarding Hexcel's business consolidation programs, including
estimated savings, cash costs, expenses, personnel reductions, program timing
and reduction in occupied floor space; (h) expectations regarding Hexcel's
financial condition and liquidity, including Adjusted EBITDA, future
indebtedness, interest expense or fixed charges; (i) expectations regarding the
benefits of Hexcel's Lean Enterprise and procurement programs;
27
<PAGE>
(j) expectations regarding capital contributions to Hexcel's joint ventures in
China and Malaysia, and; (k) the impact of the Year 2000 issue, and the
estimated costs associated with becoming Year 2000 compliant.
Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause actual results to be materially
different. Such factors include, but are not limited to, the following: changes
in general economic and business conditions; changes in current pricing levels;
changes in political, social and economic conditions and local regulations,
particularly in Asia and Europe; foreign currency fluctuations; changes in
aerospace delivery rates; reductions in sales to any significant customers,
particularly Boeing or Airbus; changes in sales mix; changes in government
defense procurement budgets; changes in military aerospace programs technology;
industry capacity; competition; disruptions of established supply channels;
manufacturing capacity constraints; the assimilation of the Company's business
consolidation programs without undue disruption to manufacturing, marketing and
distribution functions, including the cooperation of customers in connection
with requalifying products; the ability to meet financial projections and
financial covenants, or secure an amendment or waiver of the financial
covenants; and the ability of Hexcel to accurately estimate the cost of systems
preparation and successfully implement required actions for Year 2000
compliance. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause actual results to be materially
different. Additional information regarding these factors is contained in the
Company's Annual Report on Form 10-K for the year ended December 31, 1998.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A discussion of market risk exposures is included in Part II, Item 7A, of
Hexcel's Annual Report on Form 10-K for the fiscal year ended December 31, 1998.
There has been no material change to this information during the nine months
ended September 30, 1999.
28
<PAGE>
PART II. OTHER INFORMATION
HEXCEL CORPORATION AND SUBSIDIARIES
ITEM 5. OTHER INFORMATION
Effective as of November 11, 1999, Mr. Robert S. Evans and Mr. Lewis Rubin
were elected to the Board of Directors of Hexcel Corporation to fill the
vacancies caused by the death of Mr. Franklin S. Wimer and the resignation of
Mr. George S. Springer. Mr. Rubin was also elected to serve as a member of the
Audit Committee of the Board of Directors.
ITEM 6. EXHIBIT AND REPORTS ON FORM 8-K
(A) EXHIBIT:
27. Financial Data Schedule.
(B) REPORTS ON FORM 8-K:
Current Report on Form 8-K dated September 30, 1999, relating to the
Company's announcement of a new business consolidation plan and the
Company's estimated third quarter earnings.
Current Report on Form 8-K dated October 21, 1999, relating to the
Company's third quarter 1999 financial results.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized, and in the capacity indicated.
HEXCEL CORPORATION
(Registrant)
November 15, 1999 /s/ Kirk G. Forbeck
- -------------------------------- -----------------------------------------
(Date) Kirk G. Forbeck,
Chief Accounting Officer
29
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 7,824
<SECURITIES> 0
<RECEIVABLES> 178,033
<ALLOWANCES> 5,493
<INVENTORY> 182,845
<CURRENT-ASSETS> 393,561
<PP&E> 618,716
<DEPRECIATION> 220,424
<TOTAL-ASSETS> 1,311,773
<CURRENT-LIABILITIES> 217,507
<BONDS> 776,500
0
0
<COMMON> 373
<OTHER-SE> 273,920
<TOTAL-LIABILITY-AND-EQUITY> 1,311,773
<SALES> 882,879
<TOTAL-REVENUES> 882,879
<CGS> 694,376
<TOTAL-COSTS> 133,766
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 55,975
<INCOME-PRETAX> (1,238)
<INCOME-TAX> (441)
<INCOME-CONTINUING> (20,588)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (20,588)
<EPS-BASIC> (0.56)
<EPS-DILUTED> (0.56)
</TABLE>
