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SECURITIES AND EXCHANGE COMMISSION
================================================================================
WASHINGTON, D. C. 20549
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--------------------------------------------------------------------------------
FORM 10-Q
--------------------------------------------------------------------------------
X
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 2000
or
--------------------------------------------------------------------------------
Transition Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the transition period from to
Commission File Number 1-8472
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HEXCEL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 94-1109521
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
Two Stamford Plaza
281 Tresser Boulevard
Stamford, Connecticut 06901-3238
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)
Registrant's telephone number, including area code: (203) 969-0666
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No _____
----
Indicate 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
confirmed by a 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 9, 2000
----- --------------------------------
COMMON STOCK 36,957,362
================================================================================
<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
INDEX
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements
o Condensed Consolidated Balance Sheets--
September 30, 2000 and December 31, 1999 2
o Condensed Consolidated Statements of
Operations -- The Quarter and Year-to-Date Periods
Ended September 30, 2000 and 1999 3
o Condensed Consolidated Statements of
Cash Flows -- The Year-to-Date Periods
Ended September 30, 2000 and 1999 4
o Notes to Condensed Consolidated
Financial Statements 5
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 13
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 26
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K 27
SIGNATURE 29
1
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
HEXCEL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
-----------------------------------------------------------------------------------------------------------------
Unaudited
------------------------------------
<S> <C> <C>
SEPTEMBER 30, December 31,
(In millions, except per share data) 2000 1999
-----------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 13.8 $ 0.2
Accounts receivable 160.6 158.6
Inventories 152.4 153.7
Prepaid expenses and other assets 5.4 5.1
Deferred tax asset 9.9 10.2
-----------------------------------------------------------------------------------------------------------------
Total current assets 342.1 327.8
Property, plant and equipment 591.1 614.5
Less accumulated depreciation (239.6) (222.4)
-----------------------------------------------------------------------------------------------------------------
Net property, plant and equipment 351.5 392.1
Goodwill and other purchased intangibles, net of accumulated
amortization of $32.8 in 2000 and $24.9 in 1999 394.5 411.2
Investments in affiliated companies and other assets 128.3 130.8
-----------------------------------------------------------------------------------------------------------------
Total assets $ 1,216.4 $ 1,261.9
-----------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current maturities of capital lease obligations $ 26.6 $ 34.3
Accounts payable 77.0 80.3
Accrued liabilities 97.5 95.9
-----------------------------------------------------------------------------------------------------------------
Total current liabilities 201.1 210.5
Long-term notes payable and capital lease obligations 628.9 712.5
Indebtedness to a related party 24.3 24.1
Other non-current liabilities 46.4 44.7
-----------------------------------------------------------------------------------------------------------------
Total liabilities 900.7 991.8
Stockholders' equity:
Preferred stock, no par value, 20.0 shares authorized,
no shares issued or outstanding in 2000 and 1999 - -
Common stock, $0.01 par value, 100.0 shares authorized, shares
issued and outstanding of 37.8 in 2000 and 37.4 in 1999 0.4 0.4
Additional paid-in capital 279.5 273.6
Retained earnings 64.8 11.6
Accumulated other comprehensive loss (18.2) (4.8)
-----------------------------------------------------------------------------------------------------------------
326.5 280.8
Less - Treasury stock, at cost, 0.9 shares in 2000 and 0.8 in 1999 (10.8) (10.7)
-----------------------------------------------------------------------------------------------------------------
Total stockholders' equity 315.7 270.1
-----------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 1,216.4 $ 1,261.9
-----------------------------------------------------------------------------------------------------------------
</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,
<S> <C> <C> <C> <C>
(In millions, except per share data) 2000 1999 2000 1999
--------------------------------------------------------------------------------------------------------------------------
Net sales $ 247.5 $ 274.1 $ 798.8 $ 882.9
Cost of sales 195.8 222.6 624.4 694.4
--------------------------------------------------------------------------------------------------------------------------
Gross margin 51.7 51.5 174.4 188.5
Selling, general and administrative expenses 29.8 29.4 93.9 97.4
Research and technology expenses 5.0 5.8 16.6 18.6
Business consolidation expenses 3.3 13.6 4.5 17.8
--------------------------------------------------------------------------------------------------------------------------
Operating income 13.6 2.7 59.4 54.7
Gain on sale of
Bellingham aircraft interiors business - - -
68.3
Interest expense 16.0 18.4 51.6 55.9
--------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (2.4) (15.7) 76.1 (1.2)
Provision for (benefit from) income taxes (0.8) (5.5) 26.8 (0.4)
--------------------------------------------------------------------------------------------------------------------------
Income (loss) before equity in earnings (1.6) (10.2) 49.3 (0.8)
Equity in earnings and write-down of an
investment in affiliated companies 1.7 (19.9) 3.9 (19.8)
--------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 0.1 $ (30.1) $ 53.2 $ (20.6)
--------------------------------------------------------------------------------------------------------------------------
Net income (loss) per share:
Basic $ 0.00 $ (0.82) $ 1.45 $ (0.56)
Diluted 0.00 (0.82) 1.28 (0.56)
Weighted average shares:
Basic 36.9 36.5 36.7 36.4
Diluted 38.0 36.5 45.3 36.4
--------------------------------------------------------------------------------------------------------------------------
</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,
<S> <C> <C>
(In millions) 2000 1999
-----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 53.2 $ (20.6)
Reconciliation to net cash provided by operations:
Depreciation and amortization 43.9 47.1
Deferred income taxes 11.8 (10.8)
Gain on sale of Bellingham aircraft interiors business (68.3) -
Business consolidation expenses 4.5 17.8
Business consolidation payments (8.3) (7.8)
Equity in earnings and write-down of an investment in affiliated companies (3.9) 19.8
Working capital changes and other (20.1) 43.6
-----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 12.8 89.1
-----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (22.2) (26.7)
Proceeds from sale of Bellingham aircraft interiors business 113.3 -
Proceeds from sale of other assets 3.4 -
Investments in affiliated companies (6.0) (2.0)
-----------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) investing activities 88.5 (28.7)
-----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds (repayments) of credit facilities, net 30.6 (273.4)
Proceeds (repayments) of long-term debt and capital lease obligations, net (118.7) 223.6
Debt issuance costs (0.9) (10.8)
Activity under stock plans 2.2 1.3
-----------------------------------------------------------------------------------------------------------------------
Net cash used for financing activities (86.8) (59.3)
-----------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents (0.9) (0.8)
-----------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 13.6 0.3
Cash and cash equivalents at beginning of year 0.2 7.5
-----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 13.8 $ 7.8
-----------------------------------------------------------------------------------------------------------------------
</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 MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 1 -- BASIS OF ACCOUNTING
The accompanying condensed consolidated financial statements have been
prepared from the unaudited records of Hexcel Corporation and subsidiaries
("Hexcel" or the "Company") in accordance with generally accepted accounting
principles, and, in the opinion of management, include all adjustments necessary
to present fairly the balance sheet of the Company as of September 30, 2000, and
the results of operations for the quarter and year-to-date periods ended
September 30, 2000 and 1999, and the cash flows for the year-to-date periods
ended September 30, 2000 and 1999. The condensed consolidated balance sheet of
the Company as of December 31, 1999 was derived from the audited 1999
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 have been
reclassified to conform to the 2000 presentation. These condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's 1999 Annual
Report on Form 10-K.
NOTE 2 -- GAIN ON DISPOSITION OF BELLINGHAM AIRCRAFT INTERIORS BUSINESS
On April 26, 2000, Hexcel sold its Bellingham aircraft interiors business
("Bellingham") to Britax Cabin Interiors, Inc., a wholly owned subsidiary of
Britax International plc, for cash proceeds of $113.3. The sale resulted in an
after-tax gain of approximately $44, or $0.97 per diluted share. The Bellingham
business had sales and operating profit of approximately $70 and $8,
respectively, for 1999. Net proceeds from the sale were used to repay $111.6 of
outstanding term debt under the Company's senior credit facility. The condensed
consolidated financial statements and accompanying notes reflect Bellingham's
operating results as a continuing operation in the Engineered Products business
segment up to the date of disposal.
Sales and operating income for the Bellingham business were as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
Quarter Ended Year-to-Date Ended September
September 30, 30,
<S> <C> <C> <C> <C>
2000 1999 2000 1999
--------------------------------------------------------------------------------------------------------------------
Sales $ -- $ 22.0 $ 19.0 $ 48.8
Operating income $ -- $ 1.6 $ 0.6 $ 4.0
--------------------------------------------------------------------------------------------------------------------
NOTE 3 -- INVENTORIES
----------------------------------------------------------------------------------- --------------- ----------------
9/30/00 12/31/99
----------------------------------------------------------------------------------- --------------- ----------------
Raw materials $ 73.7 $ 55.5
Work in progress 45.3 47.8
Finished goods 33.4 50.4
----------------------------------------------------------------------------------- ---- ---------- ------ ---------
Total inventories $ 152.4 $ 153.7
----------------------------------------------------------------------------------- ---- ---------- ------ ---------
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
NOTE 4 -- NOTES PAYABLE, CAPITAL LEASE OBLIGATIONS AND INDEBTEDNESS TO A RELATED PARTY
----------------------------------------------------------------------------- ------------------ -------------------
<S> <C> <C>
9/30/00 12/31/99
----------------------------------------------------------------------------- ------------------ -------------------
Senior credit facility $ 218.7 $ 303.0
European credit and overdraft facilities 12.0 14.8
9.75% Senior subordinated notes, due 2009 240.0 240.0
7.0% Convertible subordinated notes, due 2003 114.4 114.4
7.0% Convertible subordinated debentures, due 2011 25.6 25.6
Various notes payable 0.3 0.4
----------------------------------------------------------------------------- ------ ----------- ----- -------------
Total notes payable 611.0 698.2
Capital lease obligations 44.5 48.6
11.0% Senior subordinated note payable to a related party, increasing at a
rate of 0.5% per annum, due 2003 24.3 24.1
----------------------------------------------------------------------------- ------ ----------- ----- -------------
Total notes payable, capital lease obligations and
indebtedness to a related party $ 679.8 $ 770.9
----------------------------------------------------------------------------- ------ ----------- ----- -------------
Notes payable and current maturities of long-term liabilities $ 26.6 $ 34.3
Long-term notes payable and capital lease obligations,
less current maturities 628.9 712.5
Indebtedness to a related party, net of unamortized discount of
$0.7 as of September 30, 2000 and $0.9 as of December 31, 1999 24.3 24.1
----------------------------------------------------------------------------- ------ ----------- ----- -------------
Total notes payable, capital lease obligations and
indebtedness to a related party $ 679.8 $ 770.9
----------------------------------------------------------------------------- ------ ----------- ----- -------------
</TABLE>
Senior Credit Facility
Hexcel's global credit facility (the "Senior Credit Facility") was amended
on March 7, 2000 and October 26, 2000, to accommodate, among other things, the
planned sale of assets, planned investment in additional manufacturing capacity
for selected products, the impact of the decline in the Company's operating
results in the second half of 1999 on certain financial covenants, the sale by
certain subsidiaries of Ciba Specialty Chemicals Holding Inc. of approximately
14.5 of the approximately 18 shares of Hexcel common stock held by them to an
investor group led by Goldman Sachs, a restructuring of the ownership of certain
of the Company's European subsidiaries, and a reallocation of $40 of revolving
loans from the U.S. to Europe. The Senior Credit Facility, as amended, provides
Hexcel with approximately $393 of borrowing capacity, subject to certain
limitations, at interest on outstanding borrowings ranging from 0.75% to 3.00%
in excess of the applicable London interbank rate, or at the option of the
Company, from 0.0% to 2.00% in excess of the base rate of the administrative
agent for the lenders. Prior to March 7, 2000, the upper limits of these
interest ranges were 2.75% and 1.75%, respectively. The Senior Credit Facility
is secured by a pledge of shares of certain of the Company's subsidiaries, as
well as security interests in certain U.S. accounts receivable, inventories, and
real property, plant and equipment. The Company is subject to various financial
covenants and restrictions under the Senior Credit Facility, including
limitations on incurring debt, granting liens, selling assets, redeeming capital
stock and paying dividends.
Unused borrowing capacity under the Senior Credit Facility was
approximately $167 on September 30, 2000. The Senior Credit Facility is
scheduled to expire in 2004, except for approximately $58 of term loans that are
due for repayment in 2005.
6
<PAGE>
NOTE 5 -- BUSINESS CONSOLIDATION PROGRAMS
Total accrued business consolidation expenses at December 31, 1999 and
September 30, 2000, activity during the nine months ended September 30, 2000,
and a brief description for each of the Company's business consolidation
programs, are as follows:
<TABLE>
----------------------------------------- -- ------------ --- --------------- ----------- --------------- ----------
<S> <C> <C> <C> <C> <C>
EMPLOYEE FACILITY & DECEMBER
SEVERANCE & EQUIPMENT 1998
RELOCATION RELOCATION TOTAL PROGRAM TOTAL
----------------------------------------- -- ------------ --- --------------- ----------- --------------- ----------
Total September 1999 Program
BALANCE AS OF DECEMBER 31, 1999 $ 2.5 $ 0.6 $ 3.1 $ 1.0 $ 4.1
Business consolidation expenses:
Current period expenses 2.3 5.6 7.9 - 7.9
Reversal of 1999 expenses (0.3) (3.1) (3.4) - (3.4)
----------------------------------------- -- ------------ --- --------------- --- ------- --- -------- --- ---------
Net business consolidation expenses 2.0 2.5 4.5 - 4.5
Cash expenditures (2.1) (5.8) (7.9) (0.4) (8.3)
Non-cash items:
Reversal of 1999 business
consolidation expenses - 3.1 3.1 - 3.1
Other non-cash usage - (0.2) (0.2) - (0.2)
----------------------------------------- -- ------------ --- --------------- --- ------- --- -------- --- ---------
Total non-cash items - 2.9 2.9 2.9
Reclassification to accrued liabilities - - - (0.6) (0.6)
----------------------------------------- -- ------------ --- --------------- --- ------- --- -------- --- ---------
BALANCE AS OF SEPTEMBER 30, 2000 $ 2.4 $ 0.2 $ 2.6 $ - $ 2.6
----------------------------------------- -- ------------ --- --------------- --- ------- --- -------- --- ---------
</TABLE>
September 1999 Program
On September 27, 1999, Hexcel announced a business consolidation program
that entails a rationalization of manufacturing facilities for certain product
lines. The objectives of this program are to eliminate excess capacity and
overhead, improve manufacturing focus and yields, and create additional centers
of manufacturing excellence. Specific actions contemplated by this program
include consolidating the production of certain product lines, including moving
equipment and requalifying the respective product lines; vacating certain leased
facilities; and consolidating the Company's Composite Materials business
segment's U.S. marketing, research and technology, and administrative functions
into one location.
In the second quarter of 2000, Hexcel amended its September 1999 business
consolidation program in response to the manufacturing constraints caused by an
increase in sales and production for its electronic woven glass fabrics and its
ballistic products. Due to the stronger than anticipated improvements in market
conditions, which are expected to continue beyond the current year, the Company
performed a manufacturing capacity review. The review concluded with the
decision to expand manufacturing capacity by purchasing additional looms and
revising the previous decision to consolidate a number of weaving activities at
the Company's Seguin, Texas and Anderson, South Carolina facilities. As a result
of the decision to not proceed to consolidate production between these
facilities, the Company reversed a total of $3.4 of business consolidation
expenses that were previously recognized in 1999, including $3.1 in non-cash
write-downs of machinery and equipment that was to have been sold or scrapped as
a result of the consolidation.
7
<PAGE>
The amended program calls for the elimination of approximately 270
positions (primarily manufacturing). Total expenses and cash expenditures for
the amended program (reflecting both the changes to the consolidation of weaving
activities and the most current estimates of the cost of the other actions) are
expected to approximate $26.0 and $25.0, respectively. Expected cash
expenditures include $8.0 of capital expenditures.
For the nine months ended September 30, 2000, Hexcel recognized $4.5 of
business consolidation expenses for this program, net of the $3.4 reversal
described above. As of December 31, 1999 and September 30, 2000, accrued
expenses for this program primarily reflected accrued severance and costs for
early termination of certain leases. The Company's policy is to pay severance
over a period of time rather than in a lump-sum amount.
December 1998 Program
In December 1998, Hexcel announced consolidation actions within its
Reinforcement Products and Composite Materials business segments. These actions
included the integration of the Company's existing fabrics business with the
U.S. operations of an acquired industrial fabrics business, and the combination
of the Company's U.S., European and Pacific Rim composite materials businesses
into a single global business unit. 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 an acquired industrial fabrics business with the announcement of
the closure of its Cleveland, Georgia, facility, which at that time employed
approximately 100 people in manufacturing positions. This facility produced
fabrics for the electronics market, and the majority of its production equipment
was 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
competitive conditions in the global market for electronic fiberglass materials,
and was not expected at the time of the acquisition of the industrial fabrics
business.
The December 1998 business consolidation program was substantially
completed by December 31, 1999, except for cash expenditures relating to accrued
severance which is expected to be paid over the next two years. Such amount has
been reclassified to accrued liabilities.
8
<PAGE>
<TABLE>
<CAPTION>
NOTE 6 -- NET INCOME (LOSS) PER SHARE
--------------------------------------------------------------------------------------------------------------------
Quarter Ended Year-to-Date Ended
September 30, September 30,
<S> <C> <C> <C> <C>
2000 1999 2000 1999
--------------------------------------------------------------------------------------------------------------------
Basic net income (loss) per share:
Net income (loss) $ 0.1 $ (30.1) $ 53.2 $ (20.6)
Weighted average common shares outstanding 36.9 36.5 36.7 36.4
--------------------------------------------------------------------------------------------------------------------
Basic net income (loss) per share $ 0.00 $ (0.82) $ 1.45 $ (0.56)
--------------------------------------------------------------------------------------------------------------------
Diluted net income per share:
Net income (loss) $ 0.1 $ (30.1) $ 53.2 $ (20.6)
Effect of dilutive securities -
Convertible subordinated notes, due 2003 - - 3.8 -
Convertible subordinated debentures, due 2011 - - 0.9 -
--------------------------------------------------------------------------------------------------------------------
Adjusted net income (loss) $ 0.1 $ (30.1) $ 57.9 $ (20.6)
--------------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding 36.9 36.5 36.7 36.4
Effect of dilutive securities -
Stock options 1.1 - 0.5 -
Convertible subordinated notes, due 2003 - - 7.2 -
Convertible subordinated debentures, due 2011 - - 0.9 -
--------------------------------------------------------------------------------------------------------------------
Diluted weighted average common shares outstanding 38.0 36.5 45.3 36.4
--------------------------------------------------------------------------------------------------------------------
Diluted net income (loss) per share $ 0.00 $ (0.82) $ 1.28 $ (0.56)
--------------------------------------------------------------------------------------------------------------------
</TABLE>
The convertible subordinated notes, due 2003, and the convertible
subordinated debentures, due 2011, were excluded from the 1999 and third quarter
2000 computations of diluted net income (loss) per share, as they were
antidilutive. Approximately 4 to 4.8 stock options were excluded from the 2000
and 1999 calculations of diluted net income (loss) per share. The exercise price
for these stock options ranged from approximately $8.19 to $30.38 per share,
with the weighted average price being approximately $15.50 per share in 2000 and
$12.52 per share in 1999.
<TABLE>
<CAPTION>
NOTE 7 -- COMPREHENSIVE INCOME (LOSS)
--------------------------------------------------------------------------------------------------------------------
Quarter Ended September 30, Year-to-Date Ended September 30,
<S> <C> <C> <C> <C>
2000 1999 2000 1999
--------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 0.1 $ (30.1) $ 53.2 $ (20.6)
Currency translation adjustment (8.6) 3.5 (13.4) (9.3)
--------------------------------------------------------------------------------------------------------------------
Total comprehensive income (loss) $ (8.5) $ (26.6) $ 39.8 $ (29.9)
--------------------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE>
NOTE 8 -- SEGMENT INFORMATION
Hexcel evaluates the performance of its operating segments based on
adjusted income before business consolidation expenses, interest, taxes, equity
in earnings of affiliated companies, and gains on dispositions of businesses
("Adjusted EBIT"), and generally accounts for intersegment sales based on arm's
length prices. Corporate and certain other expenses are not allocated to the
operating segments, except to the extent that the expense can be directly
attributable to the business segment.
Financial information for the Company's operating segments for the quarter
and year-to-date periods ended September 30, 2000 and 1999, is as follows:
<TABLE>
<CAPTION>
--------------------------------------------- ----------------- ----------------- ----------------- ----------------
<S> <C> <C> <C> <C>
REINFORCEMENT COMPOSITE ENGINEERED
PRODUCTS MATERIALS PRODUCTS TOTAL
--------------------------------------------- --- ------------- -- -------------- --- ------------- -- -------------
THIRD QUARTER 2000
--------------------------------------------- --- ------------- -- -------------- --- ------------- -- -------------
Net sales to external customers $ 88.4 $ 133.1 $ 26.0 $ 247.5
Intersegment sales 20.9 1.8 - 22.7
--------------------------------------------- --- ------------- -- -------------- --- ------------- -- -------------
Total sales 109.3 134.9 26.0 270.2
Adjusted EBIT 11.4 14.7 0.2 26.3
Depreciation and amortization 8.3 4.5 0.7 13.5
Business consolidation expenses 0.2 2.7 0.4 3.3
Capital expenditures 4.2 4.1 0.4 8.7
--------------------------------------------- --- ------------- -- -------------- --- ------------- -- -------------
THIRD QUARTER 1999
--------------------------------------------- --- ------------- -- -------------- --- ------------- -- -------------
Net sales to external customers 81.3 134.6 58.2 274.1
Intersegment sales 24.9 2.1 - 27.0
--------------------------------------------- --- ------------- -- -------------- --- ------------- -- -------------
Total sales 106.2 136.7 58.2 301.1
Adjusted EBIT 6.3 12.0 6.4 24.7
Depreciation and amortization 8.9 5.1 0.9 14.9
Business consolidation expenses 3.5 8.1 1.3 12.9
Write-down of an investment in an
affiliated company 20.0 - - 20.0
Capital expenditures 3.0 4.2 1.5 8.7
--------------------------------------------- --- ------------- -- -------------- --- ------------- -- -------------
YEAR-TO-DATE ENDED SEPTEMBER 30, 2000
--------------------------------------------- --- ------------- -- -------------- --- ------------- -- -------------
Net sales to external customers 270.1 426.6 102.1 798.8
Intersegment sales 73.2 5.9 - 79.1
--------------------------------------------- --- ------------- -- -------------- --- ------------- -- -------------
Total sales 343.3 432.5 102.1 877.9
Adjusted EBIT 34.6 52.2 4.9 91.7
Depreciation and amortization 25.5 14.0 2.5 42.0
Business consolidation expenses (2.0) 5.1 1.4 4.5
Capital expenditures 8.5 11.7 0.9 21.1
--------------------------------------------- ------------- -- -------------- --- ------------- -- -------------
YEAR-TO-DATE ENDED SEPTEMBER 30, 1999
--------------------------------------------- --- ------------- -- -------------- --- ------------- -- -------------
Net sales to external customers 250.4 470.1 162.4 882.9
Intersegment sales 87.7 6.7 - 94.4
--------------------------------------------- --- ------------- -- -------------- --- ------------- -- -------------
Total sales 338.1 476.8 162.4 977.3
Adjusted EBIT 27.7 55.9 15.5 99.1
Depreciation and amortization 26.6 15.4 2.7 44.7
Business consolidation expenses 6.3 8.2 1.6 16.1
Write-down of an investment in an
affiliated company 20.0 - - 20.0
Capital expenditures $ 10.4 $ 11.8 $ 4.3 $ 26.5
--------------------------------------------- --- ------------- -- -------------- --- ------------- -- -------------
</TABLE>
10
<PAGE>
Reconciliations of the totals reported for the operating segments to
consolidated income (loss) before income taxes, are as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------
Quarter Ended September 30, Year-to-Date Ended September 30,
<S> <C> <C> <C> <C>
2000 1999 2000 1999
-----------------------------------------------------------------------------------------------------------------------
Total Adjusted EBIT for reportable segments $ 26.3 $ 24.7 $ 91.7 $ 99.1
Business consolidation expenses (3.3) (13.6) (4.5) (17.8)
Corporate, other expenses and eliminations (9.4) (8.4) (27.8) (26.6)
Interest expense (16.0) (18.4) (51.6) (55.9)
Gain on sale of Bellingham aircraft interiors
business - - 68.3 -
-----------------------------------------------------------------------------------------------------------------------
Consolidated income (loss) before income taxes $ (2.4) $ (15.7) $ 76.1 $ (1.2)
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
NOTE 9 -- SUPPLEMENTAL CASH FLOW INFORMATION
----------------------------------------------------------------------------------------------------------------------
Year-to-Date Ended September 30,
<S> <C> <C>
2000 1999
----------------------------------------------------------------------------------------------------------------------
Cash paid for:
Interest $ 56.3 $ 51.5
Income taxes $ 6.2 $ 7.7
----------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 10 -- COMMITMENTS AND CONTINGENCIES
On October 11, 2000, the Company announced that certain subsidiaries of
Ciba Specialty Chemicals Holding Inc. (collectively, "Ciba") entered into an
agreement to sell approximately 14.5 of the approximately 18 shares of Hexcel
common stock it owns to an investor group affiliated with Goldman Sachs (the
"Investor Group"). The shares to be acquired by the Investor Group represent
approximately 39% of the Company's outstanding common stock. In addition, the
Company and the Investor Group have agreed to a governance agreement that will
become effective on the closing of this transaction. Under the governance
agreement, the Investor Group will have the right to, among other things,
designate three directors to sit on the Company's ten member board of directors.
It is anticipated that this transaction will be completed during the fourth
quarter of 2000. The transaction was consented to by Hexcel's senior credit
facility banks on October 26, 2000, and has received early termination under
the provisions of the Hart-Scott-Rodino Act. However, the closing of the trans-
action remains subject to European regulatory approvals.
Hexcel expects to incur approximately $3 in costs in connection with this
transaction, including various legal, consulting, and regulatory compliance
expenses, as well as a non-cash charge attributable to the accelerated vesting
of certain stock-based compensation. Under the terms of the Company's various
stock option and management incentive plans, this transaction constitutes a
"change in control" event, resulting in all outstanding stock options becoming
vested and exercisable. The Chief Executive Officer has waived the vesting of
his stock options by such event. In addition, nine of the most senior executive
officers other than the Chief Executive Officer have agreed to defer the vesting
of their stock options such that any of their stock options that would have
otherwise vested immediately (or would have otherwise vested by their terms)
will vest one year after the closing with respect to half of such options, and
two years after the closing with respect to the remaining half of such options,
subject to earlier vesting in certain circumstances. As a result, approximately
1.3 stock options, with exercise prices ranging from $2.41 to $29.63 per share,
and a weighted average exercise price of $8.99 per share, will vest and become
exercisable on the closing of the transaction. In addition, at closing the
shares of the Company's common stock underlying a total of approximately 0.8
restricted stock units and performance accelerated restricted stock units
(collectively, "stock units") will be distributed. However, the Chief Executive
Officer has waived the vesting of his stock units, and nine of the most senior
executive officers other than the Chief Executive Officer have agreed to defer
the distribution of shares underlying their stock units (although not the
vesting of such stock units) such that any shares of common stock that would
have otherwise been distributed immediately will be distributed one year after
the closing with respect to half of such stock units, and two years after the
closing with respect to the remaining half of such stock units, subject to
earlier distribution under certain circumstances. As a result approximately 0.1
shares of the Company's common stock underlying approximately 0.1 of these stock
units will be distributed upon the closing of the transaction.
11
<PAGE>
In July 2000, Hexcel's board of directors authorized certain changes to the
Company's U.S. retirement benefit plans that are intended to improve the
flexibility and visibility of future retirement benefits. The significant
changes authorized were an increase in the amount that the Company will
contribute to individual 401(k) retirement savings accounts, beginning January
1, 2001, and an offsetting curtailment of the Company's U.S. defined benefit
retirement plan, effective December 31, 2000. Participants in the defined
benefit retirement plan will no longer accrue benefits under this plan after
December 31, 2000, although they will retain all benefits earned under this plan
as of that date. The Company estimates that the curtailment of the defined
benefit retirement plan will result in a non-recurring, non-cash credit of
approximately $4 to $5 that will be recognized in the fourth quarter of 2000.
12
<PAGE>
<TABLE>
<CAPTION>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL OVERVIEW
------------------------------------------------------------------------- -----------------------------------------
Quarter Ended September 30,
-----------------------------------------
<S> <C> <C>
(In millions, except per share data) 2000 1999
------------------------------------------------------------------------- --- ---------------- --------------------
PRO FORMA (a):
Sales $ 247.5 $ 252.1
Adjusted EBITDA (b) $ 31.0 $ 30.1
Adjusted net income (loss) (c) $ 2.2 $ (1.1)
Adjusted diluted earnings (loss) per share (c) $ 0.06 $ (0.03)
------------------------------------------------------------------------- --- ---------------- --- ----------------
AS REPORTED:
Sales $ 247.5 $ 274.1
Gross margin % $ 20.9% $ 18.8%
Adjusted operating income % (c) $ 6.8% $ 6.0%
Adjusted EBITDA (b) $ 31.0 $ 32.0
Net income (loss) $ 0.1 $ (30.1)
Adjusted net income (loss) (c) $ 2.2 $ (1.3)
Diluted earnings (loss) per share $ 0.00 $ (0.82)
Adjusted diluted earnings (loss) per share (c) $ 0.06 $ (0.04)
------------------------------------------------------------------------- --- ---------------- --- ----------------
</TABLE>
(a) Pro forma results give effect to the April 26, 2000 sale of the Bellingham
aircraft interiors business as if it had occurred at the beginning of 1999.
(b) Excludes business consolidation expenses, interest, taxes, depreciation,
amortization, and equity in income and a write-down of an investment in
affiliated companies.
(c) Excludes business consolidation expenses and a write-down of an investment
in an affiliated company.
Financial highlights for the third quarter of 2000:
- Due to the fact that over 40% of Hexcel's revenues are derived in Europe,
the third quarter is always the Company's seasonally weakest quarter of the
year, reflecting the impact of the European summer vacation schedule. After
giving allowance for these seasonal factors, the Company evidenced in the
third quarter a continuation of the positive revenue trends that began to
emerge in the first and second quarters of 2000. Sales to electronics and
industrial markets continued to grow, despite a further weakening of the
European currencies, reflecting improved economic conditions in Asia and
Europe, the growing use of electronic devices throughout the world, and the
Company's success in developing new product applications for wind energy
and automotive customers. In addition, commercial aerospace revenues,
excluding the Company's Engineered Products segment, equaled or exceeded
the levels of the prior year, reflecting the fact that this market has
stabilized. The Boeing Company ("Boeing") has publicly indicated that it
expects to sustain aircraft production at or slightly above the current
rate of about 490 per year, while Airbus Industrie ("Airbus") is reportedly
planning to increase aircraft deliveries from about 320 to more than 350 in
2001.
- Commercial aerospace sales by the Engineered Products segment were $8.8
million or 27% lower than the third quarter of 1999, reflecting the timing
of customer programs and the impact of Boeing's 1999 aircraft build rate
reductions. This business segment delivers its product to customers shortly
before aircraft completion and delivery. As a result, unlike Hexcel's other
segments, this business did not experience the impact of 1999 build rate
reductions until late in the fourth quarter of that year.
- Benefits from cost reduction actions and a return to revenue growth were
reflected in Hexcel's operating profitability. The Reinforcement Products
13
<PAGE>
segment increased its operating income by 80% compared to the third quarter
of 1999, benefiting from reduced costs, improved product mix and growth in
sales of both electronics and ballistics fabrics. The Composite Materials
segment improved its profitability by 23% on comparable revenues to the
third quarter of 1999, driven by cost reductions and improved productivity.
- In contrast, the Engineered Products segment generated operating income
significantly lower than the third quarter of 1999, after adjusting for the
pro forma impact of the sale of the Bellingham aircraft interiors business
on this segment's results. The Bellingham business was sold on April 26,
2000, for cash proceeds of $113.3 million. Hexcel continues to evaluate
strategic alternatives for the remaining aircraft structures and interiors
component of the Engineered Products segment.
- Equity in earnings of $1.7 million contributed strongly to third quarter
net income in 2000. The primary source of these earnings was Hexcel's
electronics fabrics joint venture in Asia, which is benefiting from the
increase in worldwide demand for electronics devices.
Looking to the fourth quarter of 2000, Hexcel expects that net sales will be a
little weaker than previously indicated in the Company's second quarter Report
on Form 10-Q, due to the timing of customer demand. This should result in EBITDA
for the quarter of between $33 and $35 million, before accounting for business
consolidation expenses and for the items described in Note 10 to accompanying
consolidated financial statements. As a result, the Company anticipates that pro
forma EBITDA for 2000, reflecting the sale of the Bellingham aircraft interiors
business, will be comparable to pro forma EBITDA for 1999. The Company continues
to anticipate that EBITDA will increase as revenues grow in 2001.
RESULTS OF OPERATIONS
Net Sales: Net sales of $247.5 million for the third quarter of 2000 were
$26.6 million or 10% lower than net sales for the third quarter of 1999 of
$274.1 million. Of this revenue decline, $22.0 million or 8% is attributable to
the fact that 1999 third quarter results include the Bellingham aircraft
interiors business that was sold on April 26, 2000. On a comparable pro forma
basis, giving effect to the sale of the Bellingham business as if it had
occurred at the beginning of 1999, net sales of $247.5 million for the 2000
third quarter were $4.6 million or 2% lower than pro forma net sales for the
1999 third quarter of $252.1 million.
The 2% decline in comparable pro forma net sales is primarily attributable
to the impact of changes in currency exchange rates and to lower sales of
engineered products to commercial aerospace customers, partially offset by the
growth in sales to electronics and industrial markets. Had the same U.S. Dollar,
British Pound and Euro exchange rates applied in the third quarter 2000 as in
the third quarter 1999, net sales for the 2000 quarter would have been $11.5
million higher than reported, or $259 million.
14
<PAGE>
The following table summarizes actual and pro forma net sales to
third-party customers by product group and market segment for the quarters ended
September 30, 2000 and 1999:
<TABLE>
<CAPTION>
----------------------------------- ---------------------------------------------------------------------------------
Unaudited
--------------- ---------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
COMMERCIAL SPACE &
(In millions) AEROSPACE DEFENSE ELECTRONICS INDUSTRIAL TOTAL
----------------------------------- --------------- ---------------- --------------- --------------- ----------------
THIRD QUARTER 2000
Reinforcement products $ 14.3 $ 2.6 $ 44.7 $ 26.8 $ 88.4
Composite materials 80.0 24.3 - 28.8 133.1
Engineered products 23.9 2.1 - - 26.0
----------------------------------- ---- ---------- ----- ---------- ---- ---------- ----- --------- ----- ----------
Total $ 118.2 $ 29.0 $ 44.7 $ 55.6 $ 247.5
48% 12% 18% 22% 100%
----------------------------------- ---- ---------- ----- ---------- ---- ---------- ----- --------- ----- ----------
THIRD QUARTER 1999
Reinforcement products $ 12.3 $ 4.2 $ 40.6 $ 24.2 $ 81.3
Composite materials 81.2 25.7 - 27.7 134.6
Engineered products (a) 54.7 3.5 - - 58.2
----------------------------------- ---- ---------- ----- ---------- ---- ---------- ----- --------- ----- ----------
Total (a) $ 148.2 $ 33.4 $ 40.6 $ 51.9 $ 274.1
54% 12% 15% 19% 100%
----------------------------------- ---- ---------- ----- ---------- ---- ---------- ----- --------- ----- ----------
PRO FORMA THIRD QUARTER 1999
Total (b) $ 126.2 $ 33.4 $ 40.6 $ 51.9 252.1
50% 13% 16% 21% 100%
----------------------------------- ---- ---------- ----- ---------- ---- ---------- ----- --------- ----- ----------
</TABLE>
(a) Net sales for the 1999 third quarter include $22.0 million of commercial
aerospace net sales by the Bellingham aircraft interiors business, which
was a component of the Company's Engineered Produces segment until this
business was sold on April 26, 2000.
(b) Pro forma net sales for the 1999 third quarter give effect to the sale of
the Bellingham business that occurred on April 26, 2000, as if it had
occurred at the beginning of 1999.
Commercial aerospace net sales decreased 20% to $118.2 million for the
third quarter of 2000, from $148.2 million for the third quarter of 1999. Of
this decrease, $22.0 million or 15% is attributable to the fact that 1999 third
quarter results include the Bellingham aircraft interiors business that was sold
on April 26, 2000. On a comparable pro forma basis, giving effect to the sale of
the Bellingham business as if it had occurred at the beginning of 1999,
commercial aerospace net sales of $118.2 million for the 2000 third quarter were
$8 million or 6% lower than pro forma commercial aerospace net sales for the
1999 third quarter of $126.2 million. The 6% decline in comparable pro forma
sales primarily reflects the impact of the weaker Euro exchange rate and the
impact of Boeing's 1999 build rate reductions on the Company's Engineered
Products business. This business segment delivers its product to customers
shortly before aircraft completion and delivery. As a result, this business did
not experience the impact of the 1999 build rate reductions until late in the
fourth quarter of 1999 and, thus, it will take longer to reflect any improvement
in commercial aerospace demand.
15
<PAGE>
Commercial aerospace net sales for the Company's Reinforcement Products and
Composite Materials businesses were slightly greater than the 1999 pro forma
third quarter, reflecting the stabilization of Boeing build rates and the
steadily improving performance of Airbus. Boeing has publicly indicated that it
expects to sustain aircraft production at or slightly above the current rate of
about 490 per year, while Airbus is reportedly planning to increase aircraft
deliveries from about 320 in 2000 to more than 350 in 2001. In addition,
independent forecasts indicate that continued growth in the production of
regional and business aircraft is expected. The benefit that the Company obtains
from any increase in build rates in 2001 will depend upon the mix of aircraft
that are produced, the continuing impact on the aerospace supply chain of the
pressure to reduce the cost of commercial aircraft, the continuing consolidation
of the industry, and the results of productivity improvement from the Company's
Lean Enterprise initiatives.
Space and defense net sales for the third quarter of 2000 decreased 13% to
$29.0 million, from third quarter 1999 net sales of $33.4 million. This decrease
primarily reflects the timing of certain space and defense contracts. Looking
forward, Hexcel is currently qualified to supply materials to a broad range of
military aircraft and helicopters scheduled to enter either full-scale
production in the near future or significantly increase existing production
rates. These programs include the V-22 (Osprey) tilt-rotor, the F/A-18E/F
(Hornet), the F-22 (Raptor), the European Fighter Aircraft (Typhoon), and the
RAH-66 (Comanche) and NH90 helicopters.
Electronics net sales increased 10% to $44.7 million for the third quarter
of 2000, from $40.6 million for the third quarter of 1999. The growth in sales
reflects a sustained increase in demand for lightweight fiberglass fabrics used
in electronic applications, driven by improved economic conditions in Asia and
Europe and the growing use of electronic devices throughout the world. Sales
growth for lightweight fiberglass fabrics is expected to continue to grow
through 2001 and beyond, and global manufacturing capacity appears to be
tightening. During 2000, Hexcel has been switching some of its heavyweight
fabric production capacity to meet lightweight fabric demand. In addition, the
Company has made commitments to install additional lightweight fabric looms to
meet the expected continuing growth in demand in this market.
Industrial net sales increased 7% to $55.6 million for the third quarter of
2000 from $51.9 million for the third quarter of 1999. The increase reflects
sales growth for soft body armor, wind energy applications and automotive
components. Sales of advanced structural materials to the wind energy and
automotive segments are currently growing at annualized rates in excess of 30%,
reflecting growing demand for low-cost, renewable energy supplies and improved
automobile safety, as well as Hexcel's success in developing products that
satisfy these customer applications.
Gross Margin: Gross margin for the third quarter of 2000 was $51.7 million
or 20.9% of net sales, compared with $51.5 million or 18.8% of net sales for the
third quarter of 1999. On a pro forma basis, giving effect to the sale of the
Bellingham business on April 26, 2000, as if it had occurred at the beginning of
1999, gross margin was $48.1 million or 19.1% of pro forma net sales for the
third quarter of 1999. The improvement in gross margin, relative to the pro
forma 1999 third quarter, reflects the benefits from the Company's cost
reduction and productivity improvement actions, as well as the impact of an
improved sales mix and higher sales to electronics and industrial markets.
Partially offsetting these gains were a reduction in the gross margins of the
Engineered Products business, which has not yet succeeded in aligning its costs
and productivity to lower Boeing build rates.
16
<PAGE>
Operating Income: Operating income was $13.6 million in the third quarter
of 2000, compared with $2.7 million in the third quarter of 1999. Excluding
business consolidation expenses, operating income for the third quarter of 2000
was $16.9 million or 6.8% of net sales, versus $16.3 million or 6.0% of net
sales for the third quarter of 1999. On a pro forma basis, giving effect to the
sale of the Bellingham business on April 26, 2000, as if it had occurred at the
beginning of 1999, operating income excluding business consolidation expenses
was $14.7 million or 5.8% of pro forma net sales for the 1999 third quarter.
Business consolidation expenses, which totaled $3.3 million in the third
quarter of 2000 and $13.6 million in the third quarter of 1999, are discussed
further under "Business Consolidation Programs" below.
The aggregate increase in operating income, excluding business
consolidation expenses, reflects the increase in gross margin over the pro forma
total for the third quarter of 1999 and a reduction in research and technology
expenses, partially offset by higher selling, general and administrative
("SG&A") expenses. Compared to the third quarter of 1999, the Reinforcement
Products segment increased its operating income by 80%, while the Composite
Materials segment increased its operating income by 23%. In contrast, the
Engineered Products segment experienced a 96% decline in operating income, after
adjusting for the sale of the Bellingham business on a pro forma basis.
SG&A expenses were $29.8 million or 12.0% of net sales for the third
quarter of 2000, compared with $29.4 million or 10.7% of net sales for the third
quarter of 1999. Adjusted to reflect the sale of the Bellingham business on a
pro forma basis, 1999 third quarter SG&A expenses were $27.5 million or 10.9% of
pro forma net sales . Third quarter 2000 SG&A expenses include a non-cash charge
of approximately $1 million relating to the accelerated vesting of certain
stock-based compensation that resulted from an increase in the quoted market
price of Hexcel's common stock. Research and technology expenses for the third
quarter of 2000 were $5.0 million or 2.0% of net sales, compared with $5.8
million or 2.1% of net sales for the third quarter of 1999.
Interest Expense: Interest expense was $16.0 million for the third quarter
of 2000, compared with $18.4 million for the third quarter of 1999. The decrease
in interest expense primarily reflects the reduction in term debt outstanding
under the Company's senior credit facility that resulted from the proceeds from
the sale of the Bellingham business, partially offset by higher interest rates
on variable-rate debt.
Equity in Earnings and Write-down of an Investment in Affiliated Companies:
Equity in earnings of affiliated companies for the third quarter of 2000 was
$1.7 million. The primary source of these earnings is the continued strong
performance of an electronics fabrics joint venture in Asia, which is benefiting
from the increase in worldwide demand for electronic devices. While it is
anticipated that market conditions for our Asian electronic fabrics joint
venture will remain favorable, Hexcel's reported share of equity in earnings may
fluctuate from quarter to quarter due to local seasonal trends.
In the third quarter of 1999, the Company wrote-down one of its investments
in a joint venture 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
options to increase this equity investment to expire unexercised and an
assessment that an other-than-temporary decline in the investment occurred. 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 a
tax benefit.
17
<PAGE>
Net Income (Loss) and Net Income (Loss) Per Share:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
Quarter Ended September 30,
<S> <C> <C>
(In millions, except per share amounts) 2000 1999
-------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 0.1 $ (30.1)
Adjusted net income (loss) (a) $ 2.2 $ (1.3)
Diluted net income (loss) per share $ 0.00 $ (0.82)
Diluted net income (loss) per share excluding goodwill amortization $ 0.06 $ (0.77)
Adjusted diluted net income (loss) per share (a) $ 0.06 $ (0.04)
Diluted weighted average shares outstanding 38.0 36.5
-------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Excludes business consolidation expenses and a write-down of an investment
in an affiliated company.
The Company's convertible subordinated notes, due 2003, and its
convertible subordinated debentures, due 2011, were excluded from the 1999 and
third quarter 2000 computations of net income (loss) per diluted share, as they
were antidilutive. Refer to Note 6 to the accompanying condensed consolidated
financial statements for the calculation of diluted net income (loss) per share.
Year-to-Date Results
<TABLE>
<CAPTION>
----------------------------------------------------------------------- --------------------------------------------
Year-to-Date Ended September 30,
<S> <C> <C>
(In millions, except per share data) 2000 1999
----------------------------------------------------------------------- ------- --------------- --------------------
PRO FORMA:
Sales $ 779.9 $ 834.1
Adjusted EBITDA $ 106.9 $ 114.9
Adjusted net income $ 13.8 $ 12.1
Adjusted diluted earnings per share $ 0.37 $ 0.33
----------------------------------------------------------------------- ------- --------------- ---- ---------------
AS REPORTED:
Sales $ 798.8 $ 882.9
Gross margin % 21.8% 21.4%
Adjusted operating income % 8.0% 8.2%
Adjusted EBITDA $ 107.8 $ 119.6
Net income (loss) $ 53.2 $ (20.6)
Adjusted net income $ 12.2 $ 11.0
Diluted earnings (loss) per share $ 1.28 $ (0.56)
Adjusted diluted earnings per share $ 0.33 $ 0.30
----------------------------------------------------------------------- ------- --------------- ---- ---------------
</TABLE>
Net Sales and Gross Margin: Net sales for the first nine months of 2000 of
$798.8 million were $84.1 million or 10% lower than net sales for the first nine
months of 1999 of $882.9 million. On a comparable pro forma basis, giving effect
to the sale of the Bellingham aircraft interiors business on April 26, 2000, as
if it had occurred at the beginning of 1999, net sales for the first nine months
of 2000 of $779.9 million were $54.2 million or 6% lower than net sales for the
first nine months of 1999 of $834.1 million.
In addition to the net revenue decline of $29.9 million attributable to the
fact that the Bellingham business was sold in April, net sales for the first
nine months of 2000 were reduced by the impact of Boeing's aircraft build rate
reductions in the second half of 1999, as well as the conclusion of specific
space and defense contracts and changes in currency exchange rates. Had the same
U.S. Dollar, British Pound and Euro exchange rates applied in the first nine
months of 2000 as in the first nine months of 1999, revenues for the 2000 period
would have been approximately $26 million higher than reported. Partially
offsetting these factors was continued growth in sales of fiberglass and aramid
reinforcement fabrics to electronics and industrial markets, as well as
increased sales of composite materials to wind energy, automotive and other
industrial customers.
Gross margin for the first nine months of 2000 was $174.4 million or 21.8%
of net sales, compared with gross margin of $188.5 million or 21.4% of net sales
for the same period of 1999. On a comparable pro forma basis, giving effect to
the sale of the Bellingham business as if it had occurred at the beginning of
1999, gross margin for the first nine months of 2000 was $169.8 million or 21.8%
of net sales, compared with gross margin for the first nine months of 1999 of
$179.3 million or 21.5% of net sales. Changes in gross margin reflect the impact
of the changes in net sales noted above, offset to some degree by cost
reductions and productivity improvements.
18
<PAGE>
The following table summarizes net sales to third-party customers by
product group and market segment for the year-to-date periods ended September
30, 2000 and 1999:
<TABLE>
<CAPTION>
--------------------------- -------------------------------------------------------------------------------------
Unaudited
-------------- ------------------ -------------- ------------------ -----------------
<S> <C> <C> <C> <C> <C>
COMMERCIAL SPACE &
(In millions) AEROSPACE DEFENSE ELECTRONICS INDUSTRIAL TOTAL
--------------------------- -------------- ------------------ -------------- ------------------ -----------------
FIRST NINE MONTHS OF 2000
Reinforcement products $ 47.0 $ 10.2 $ 135.1 $ 77.8 $ 270.1
Composite materials 261.7 70.2 - 94.7 426.6
Engineered products (a) 95.5 6.6 - - 102.1
---------------------------- ----- ---------- --- ----------- --- ---------- ----- ------------ ----- -----------
Total (a) $ 404.2 $ 87.0 $ 135.1 $ 172.5 $ 798.8
51% 11% 17% 21% 100%
---------------------------- ----- ---------- --- ----------- --- ---------- ----- ------------ ----- -----------
PRO FORMA FIRST NINE MONTHS OF 2000
Total (b) $ 385.3 $ 87.0 $ 135.1 $ 172.5 $ 779.9
50% 11% 17% 22% 100%
---------------------------- ----- ---------- --- ----------- --- ---------- ----- ------------ ----- -----------
FIRST NINE MONTHS OF 1999
Reinforcement products $ 41.1 $ 15.2 $ 125.0 $ 69.0 $ 250.3
Composite materials 302.3 81.3 - 86.5 470.1
Engineered products (a) 152.3 10.2 - - 162.5
---------------------------- ----- ---------- --- ----------- --- ---------- ----- ------------ ----- -----------
Total (a) $ 495.7 $ 106.7 $ 125.0 $ 155.5 $ 882.9
56% 12% 14% 18% 100%
---------------------------- ----- ---------- --- ----------- --- ---------- ----- ------------ ----- -----------
PRO FORMA FIRST NINE MONTHS OF 1999
Total (b) $ 446.9 $ 106.7 $ 125.0 $ 155.5 $ 834.1
54% 13% 15% 18% 100%
---------------------------- ----- ---------- --- ----------- --- ---------- ----- ------------ ----- -----------
</TABLE>
(a) Net sales for the first nine months of 2000 include $18.9 million of
commercial aerospace net sales by the Bellingham aircraft interiors
business, which was a component of the Company's Engineered Products
segment until this business was sold on April 26, 2000. Net sales for the
first nine months of 1999 include $48.8 million of commercial aerospace
net sales by the Bellingham business.
(b) Pro forma net sales for the first nine months of 2000 and 1999 give effect
to the sale of the Bellingham business that occurred on April 26, 2000, as
if it had occurred at the beginning of 1999.
Operating Income: Operating income was $59.4 million or 7.4% of net sales
for the first nine months of 2000, of which $0.4 million was contributed by the
Bellingham business. This compares with operating income of $54.7 million or
6.2% of net sales for the first nine months of 1999, of which $4.0 million was
contributed by the Bellingham business. Excluding business consolidation
expenses, operating income was $63.9 million or 8.0% of net sales for the 2000
period, and $72.5 million or 8.2% of net sales for the 1999 period. Business
consolidation expenses, which totaled $4.5 million and $17.8 million for the
first nine months of 2000 and 1999, respectively, are discussed further under
"Business Consolidation Programs" below.
The sale of the Bellingham business in April reduced operating income
before business consolidation expenses for the first nine months of 2000 by $3.6
million, compared with the same period of 1999. Results for the first nine
months of 2000 were also impacted by lower sales from the Company's Composite
Materials and Engineered Products segments, which was offset by decreases in
SG&A and research and technology expenses.
SG&A expenses were $93.9 million or 11.8% of net sales for the first nine
months of 2000, versus $97.4 million or 11.0% of net sales for the first nine
months of 1999. Approximately $1.5 million of the net decline in SG&A expenses
is attributable to the sale of the Bellingham business on April 26, 2000, with
the remaining decrease primarily reflecting the impact of cost reduction efforts
and changes in currency exchange rates. Research and technology expenses were
$16.6 million or 2.1% of net sales for the first nine months of 2000, compared
with $18.6 million or 2.1% of net sales for the same year-to-date period in
1999.
Interest Expense: Interest expense for the first nine months of 2000 was
$51.6 million, compared to $55.9 million for the same period of 1999. The
decrease in interest expense primarily reflects the reduction in outstanding
term debt under Hexcel's senior credit facility which resulted from the sale of
the Bellingham business, partially offset by higher interest rates on
variable-rate debt.
19
<PAGE>
Equity in Earnings and Write-down of an Investment in Affiliated Companies:
Equity in earnings of affiliated companies for the year-to-date period ended
September 30, 2000 was $3.9 million, reflecting improved operating results for
Hexcel's electronic fabrics joint venture in Asia. The improved operating
performance results from the increased demand for electronics fabrics in Asia.
This compares to a $19.8 million loss for equity in earnings and a write-down of
an investment in affiliated companies for the comparable period of 1999.
Net Income (Loss) and Net Income (Loss) Per Share:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
Year-to-Date Ended September 30,
<S> <C> <C>
(In millions, except per share amounts) 2000 1999
-------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 53.2 $ (20.6)
Adjusted net income $ 12.2 $ 11.0
Diluted net income (loss) per share $ 1.28 $ (0.56)
Diluted net income (loss) per share excluding goodwill amortization $ 1.42 $ (0.42)
Adjusted diluted net income per share $ 0.33 $ 0.30
Diluted weighted average shares outstanding 45.3 36.4
-------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company's convertible subordinated notes, due 2003, and its convertible
subordinated debentures, due 2011, were excluded from the 1999 computation of
net loss per diluted share, as they were antidilutive. Refer to Note 6 to the
accompanying condensed consolidated financial statements for the calculation of
diluted net income (loss) per share.
FINANCIAL CONDITION AND LIQUIDITY
Senior Credit Facility
Hexcel's global credit facility (the "Senior Credit Facility") was amended
on March 7, 2000 and October 26, 2000, to accommodate, among other things, the
planned sale of assets, planned investment in additional manufacturing capacity
for selected products, the impact of the decline in the Company's operating
results in the second half of 1999 on certain financial covenants, the sale by
certain subsidiaries of Ciba Specialty Chemicals Holding Inc. of approximately
14.5 million of the approximately 18 million shares of Hexcel common stock held
by them to an investor group led by Goldman Sachs, a restructuring of the
ownership of certain of the Company's European subsidiaries, and a reallocation
of $40 million of revolving loans from the U.S. to Europe. The Senior Credit
Facility, as amended, provides Hexcel with approximately $393 million of
borrowing capacity. The Senior Credit Facility is secured by a pledge of shares
of certain of the Company's subsidiaries, as well as security interests in
certain U.S. accounts receivable, inventories, and real property, plant and
equipment. The Company is subject to various financial covenants and
restrictions under the Senior Credit Facility, including limitations on
incurring debt, granting liens, selling assets, redeeming capital stock and
paying dividends.
20
<PAGE>
Hexcel completed the sale of its Bellingham aircraft interiors business on
April 26, 2000, and used approximately $111.6 million of net proceeds from the
sale to repay outstanding term debt under the Senior Credit Facility. As of
September 30, 2000, unused borrowing capacity under the Senior Credit Facility
was approximately $167 million.
Hexcel expects that the Senior Credit Facility will be sufficient to fund
its worldwide operations for the foreseeable future. The Senior Credit Facility
is scheduled to expire in 2004, except for approximately $58 million of term
debt that is due for repayment in 2005. Further discussion of the Company's
financial resources is contained in Note 4 to the accompanying condensed
consolidated financial statements.
Capital Expenditures
Capital expenditures totaled $22.2 million for the first nine months of
2000 compared to $26.7 million for the first nine months of 1999. Hexcel expects
total capital expenditures in 2000 to approximate $40 million, as compared to
$35.6 million for 1999. The aggregate expected increase in capital expenditures
reflects the Company's decision to purchase additional looms to expand its
manufacturing capacity for lightweight electronic fabrics and, to a lesser
extent, the planned acquisition of additional composites manufacturing equipment
in response to specific business opportunities with certain wind energy and
automotive customers.
Pro Forma Adjusted EBITDA, Adjusted EBITDA, Cash Flows and Ratio of Earnings to
Fixed Charges
Pro Forma Adjusted EBITDA: Pro forma earnings before business consolidation
expenses, other income, interest, taxes, depreciation and amortization, equity
in earnings and a write-down in an investment in an affiliated company, and the
gain from the sale of the Bellingham aircraft interiors business ("Adjusted
EBITDA"), was $106.9 million for the first nine months of 2000, compared with
$114.9 million for the first nine months of 1999.
First Nine Months, 2000: Adjusted EBITDA was $107.8 million. Net cash
provided by operating activities was $12.8 million, as approximately $9 million
of net income, excluding a $44 million after-tax gain on the disposition of the
Bellingham business, $43.9 million of non-cash depreciation and amortization,
and $11.8 million of deferred income taxes, were offset by $20.1 million of cash
used for working capital. The increase in working capital primarily reflects
increased receivables from customers in markets and regions that have extended
payment terms as well as an increase in inventory.
Net cash provided by investing activities was $88.5 million, primarily
reflecting the net cash proceeds received from the sale of the Bellingham
business, partially offset by $22.2 million of capital expenditures and $6.0
million of investments made to the Company's joint ventures in China and
Malaysia. Net cash used for financing activities was $86.8 million, primarily
reflecting the application of net proceeds from the sale of the Bellingham
business to the Company's Senior Credit Facility.
First Nine Months, 1999: Adjusted EBITDA was $119.6 million for the first
nine months of 1999. Net cash provided by operating activities was $89.1
million, as $47.1 million of non-cash depreciation and amortization, $19.8
million of a write-down of an investment in an affiliated company, $17.8 million
of business consolidation expenses and $43.6 million of working capital changes
more than offset a net loss of $20.6 million and cash used by all other
operating activities.
Net cash used for investing activities was $28.7 million reflecting the
Company's capital expenditures for the first nine months of 1999. Net cash used
for financing activities was $59.3 million, primarily reflecting a net debt
repayment of $49.8 million and $10.8 million of debt issuance costs. In the
first quarter of 1999, Hexcel issued $240.0 million of 9.75% senior subordinated
notes, and applied the proceeds, net of $9.5 million of debt issuance costs, to
its Senior Credit Facility.
Adjusted EBITDA and pro forma Adjusted EBITDA have been presented to
provide a measure of Hexcel's operating performance that is commonly used by
investors and financial analysts to analyze and compare companies. Adjusted
EBITDA and pro forma Adjusted EBITDA may not be comparable to similarly titled
financial measures of other companies. Adjusted EBITDA and pro forma Adjusted
EBITDA do not represent alternative measures of the Company's cash flows or
operating income, and should not be considered in isolation or as substitutes
for measures of performance presented in accordance with generally accepted
accounting principles.
21
<PAGE>
Reconciliations of net income to EBITDA and Adjusted EBITDA as well as the
ratio of earnings to fixed charges, for the applicable periods, are as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
Quarter Ended September 30, Year-to-Date Ended September 30,
<S> <C> <C> <C> <C>
(In millions) 2000 1999 2000 1999
---------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 0.1 $ (30.1) $ 53.2 $ (20.6)
Provision for (benefit from) income taxes (0.8) (5.5) 26.8 (0.4)
Interest expense 16.0 18.4 51.6 55.9
Depreciation and amortization expense 14.1 15.6 43.9 47.1
Equity in earnings and write-down of an
investment in affiliated companies (1.7) 19.9 (3.9) 19.8
Other - 0.1 - -
---------------------------------------------------------------------------------------------------------------------
EBITDA 27.7 18.4 171.6 101.8
Business consolidation expenses 3.3 13.6 4.5 17.8
Gain on sale of Bellingham aircraft interiors business - - (68.3) -
---------------------------------------------------------------------------------------------------------------------
Adjusted EBITDA $ 31.0 $ 32.0 $ 107.8 $ 119.6
---------------------------------------------------------------------------------------------------------------------
Ratio of earnings to fixed charges 1.0x N/A 2.5x 0.6x
---------------------------------------------------------------------------------------------------------------------
</TABLE>
The calculation of earnings to fixed charges assumes that one-third of the
Company's rental expense is attributable to interest expense. The increase in
earnings to fixed charges from 1999 to 2000 primarily reflects the gain from the
sale of the Bellingham business. For the quarter ended September 30, 1999, the
deficiency of earnings to fixed charges was $16.8 million.
BUSINESS CONSOLIDATION PROGRAMS
Total accrued business consolidation expenses at December 31, 1999 and
September 30, 2000, activity during the nine months ended September 30, 2000,
and a brief description for each of the Company's business consolidation
programs is as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------- ------------------ ------------------ --------------
<S> <C> <C> <C>
SEPTEMBER DECEMBER
1999 1998
(In millions) PROGRAM PROGRAM TOTAL
--------------------------------------------------------------- ------------------ ------------------ --------------
BALANCE AS OF DECEMBER 31, 1999 $ 3.1 $ 1.0 $ 4.1
Business consolidation expenses:
Current period expenses 7.9 - 7.9
Reversal of 1999 expenses (3.4) - (3.4)
--------------------------------------------------------------- ---- ------------ ---- ------------- ---- ----------
Net business consolidation expenses 4.5 - 4.5
Cash expenditures (7.9) (0.4) (8.3)
Non-cash items:
Reversal of 1999 business consolidation expenses 3.1 - 3.1
Other non-cash usage (0.2) - (0.2)
--------------------------------------------------------------- ---- ------------ ---- ------------- ---- ----------
Total non-cash items 2.9 - 2.9
Reclassification to accrued liabilities - (0.6) (0.6)
--------------------------------------------------------------- ---- ------------ ---- ------------- ---- ----------
BALANCE AS OF SEPTEMBER 30, 2000 $ 2.6 $ - $ 2.6
--------------------------------------------------------------- ---- ------------ ---- ------------- ---- ----------
</TABLE>
22
<PAGE>
September 1999 Program
On September 27, 1999, Hexcel announced a business consolidation program
that entails a rationalization of manufacturing facilities for certain product
lines. The objectives of this program are to eliminate excess capacity and
overhead, improve manufacturing focus and yields, and create additional centers
of manufacturing excellence. Specific actions contemplated by this program
include consolidating the production of certain product lines, including moving
equipment and requalifying the respective product lines; vacating certain leased
facilities; and consolidating the Company's Composite Materials business
segment's U.S. marketing, research and technology, and administrative functions
into one location.
In response to increasing demand for fiberglass and aramid fabrics used in
electronics and other industrial applications, Hexcel amended its September 1999
business consolidation program in the second quarter of 2000. Over the last nine
months, sales and production of lightweight glass and aramid fabrics showed
greater than anticipated growth. This trend is projected to continue into the
fourth quarter and beyond. The sales growth reflects improved economic
conditions in Asia and Europe and the growing use of electronic devices
throughout the world. As a result of this increased demand, Hexcel's
manufacturing capacity for certain high-performance fabrics has become
constrained. Having undertaken a capacity planning review in the second quarter
of 2000, the Company decided to purchase additional looms, as well as to revise
its previous plan to consolidate a number of weaving activities at its Seguin,
Texas and Anderson, South Carolina facilities. These actions are expected to
enable the Company to increase its weaving capacity, particularly for
lightweight electronic fabrics, and meet the expanding needs of its customers.
In light of the decision to halt the planned consolidation of fabric
production, Hexcel reversed in the second quarter of 2000 a total of $3.4
million in business consolidation expenses that were previously recognized in
1999. The reversal included $3.1 million in non-cash write-downs of machinery
and equipment that was to have been sold or scrapped as a result of the
consolidation. The Company also expects to avoid incurring future cash
expenditures for business consolidation activities of approximately $4.2
23
<PAGE>
million. All of the other initiatives included in this business consolidation
program are continuing approximately as planned.
Hexcel originally estimated that the September 1999 business consolidation
program would incur $24 million of cash costs, including capital expenditures,
and that the program would deliver annual savings of more than $23 million by
2001. Due to the amendment to the program, as well as more current estimates for
costs of the other consolidation actions, the Company now anticipates that it
will incur a similar level of cash costs, with approximately $16 million of
annual savings directly attributable to consolidation activities. These savings
are before the additional contribution from increased sales of lightweight
fabrics that necessitated the change to the program. Hexcel anticipates that the
cost savings to be foregone by revising the 1999 business consolidation program
will be more than offset by the benefit of increased revenues from electronics
and other industrial markets in the year 2000 and beyond.
December 1998 Program
In December 1998, Hexcel announced consolidation actions within its
Reinforcement Products and Composite Materials business segments. These actions
included the integration of the Company's existing fabrics business with the
U.S. operations of an acquired industrial fabrics business, and the combination
of the Company's U.S., European and Pacific Rim composite materials businesses
into a single global business unit. 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 industrial fabrics business with the announcement of
the closure of its Cleveland, Georgia, facility, which at that time employed
approximately 100 people in manufacturing positions. This facility produced
fabrics for the electronics market, and the majority of its production equipment
was 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
competitive conditions in the global market for electronic fiberglass materials,
and was not expected at the time of the acquisition of the industrial fabrics
business.
The December 1998 business consolidation program was substantially
completed by December 31, 1999, except for cash expenditures relating to accrued
severance, which is expected to be paid over the next two years. Such amount has
been reclassified to accrued liabilities.
Refer to Note 5 to the accompanying condensed consolidated financial
statements for further discussions regarding the Company's business
consolidation programs.
FOURTH QUARTER TRANSACTIONS
Purchase of Approximately 14.5 Million Shares of Hexcel Common Stock by an
Investor Group Led by Goldman Sachs
On October 11, 2000, the Company announced that certain subsidiaries of
Ciba Specialty Chemicals Holding Inc. (collectively, "Ciba") entered into an
agreement to sell approximately 14.5 million of the approximately 18 million
shares of Hexcel common stock it owns to an investor group affiliated with
Goldman Sachs (the "Investor Group"). The shares to be acquired by the Investor
Group represent approximately 39% of the Company's outstanding common stock. In
addition, the Company and the Investor Group have agreed to a governance
agreement that will become effective on the closing of this transaction. Under
the governance agreement, the Investor Group will have the right to, among other
24
<PAGE>
things, designate three directors to sit on the Company's ten member board of
directors. It is anticipated that this transaction will be completed during the
fourth quarter of 2000. The transaction was consented to by Hexcel's senior
credit facility banks on October 26, 2000, and has received early termination
under the provisions of the Hart-Scott Rodino Act. However, the closing of the
transaction remains subject to European regulatory approvals.
Once this transaction closes, Ciba will own approximately 3.5 million
shares of the Company's common stock and its existing governance agreement with
the Company, including its right to designate directors, will terminate. Ciba
has stated that its investment in Hexcel is non-strategic and it is anticipated
that Ciba will explore options for the future disposition of its remaining
interest in the Company.
Hexcel expects to incur approximately $3 million in costs in connection
with this transaction, including various legal, consulting, and regulatory
compliance expenses, as well as a non-cash charge attributable to the
accelerated vesting of certain stock-based compensation. Under the terms of the
Company's various stock option and management incentive plans, this transaction
constitutes a "change in control" event, resulting in all outstanding stock
options becoming vested and exercisable. The Chief Executive Officer has waived
the vesting of his stock options by such event. In addition, nine of the most
senior executive officers other than the Chief Executive Officer have agreed to
defer the vesting of their stock options such that any of their stock options
that would have otherwise vested immediately (or would have otherwise vested by
their terms) will vest one year after the closing with respect to half of such
options, and two years after the closing with respect to the remaining half of
such options, subject to earlier vesting in certain circumstances. As a result,
approximately 1.3 million stock options, with exercise prices ranging from $2.41
to $29.63 per share, and a weighted average exercise price of $8.99 per share,
will vest and become exercisable on the closing of the transaction. In addition,
at closing the shares of the Company's common stock underlying a total of
approximately 0.8 million restricted stock units and performance accelerated
restricted stock units (collectively, "stock units") will be distributed.
However, the Chief Executive Officer has waived the vesting of his stock units,
and nine of the most senior executive officers other than the Chief Executive
Officer have agreed to defer the distribution of shares underlying their stock
units (although not the vesting of such stock units) such that any shares of
common stock that would have otherwise been distributed immediately will be
distributed one year after the closing with respect to half of such stock units,
and two years after the closing with respect to the remaining half of such stock
units, subject to earlier distribution under certain circumstances. As a result
approximately 0.1 million shares of the Company's common stock underlying
approximately 0.1 million of these stock units will be distributed upon the
closing of the transaction.
U.S. Retirement Benefit Plan Changes
In July 2000, Hexcel's board of directors authorized certain changes to the
Company's U.S. retirement benefit plans that are intended to improve the
flexibility and visibility of future retirement benefits. The significant
changes authorized were an increase in the amount that the Company will
contribute to individual 401(k) retirement savings accounts, beginning January
1, 2001, and an offsetting curtailment of the Company's U.S. defined benefit
retirement plan, effective December 31, 2000. Participants in the defined
benefit retirement plan will no longer accrue benefits under this plan after
December 31, 2000, although they will retain all benefits earned under this plan
as of that date. The Company estimates that the curtailment of the defined
benefit retirement plan will result in a non-recurring, non-cash credit of
approximately $4 to $5 million that will be recognized in the fourth quarter of
2000.
RECENTLY ISSUED ACCOUNTING STANDARDS
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 summarizes certain of the SEC's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
Hexcel is required to adopt SAB 101 in the fourth quarter of 2000
(retroactive to January 1, 2000). Management is still evaluating the provisions
of SAB 101, and has not yet determined the impact of this pronouncement, if any,
on the Company's revenue recognition policies.
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). This Statement requires companies to record derivatives on the balance
sheet as assets and liabilities, measured at fair value. Gains or losses
resulting from changes in the values of those derivatives would be accounted for
depending on the use of the derivative and whether it qualifies for hedge
accounting. Management is still evaluating the provisions of SFAS 133, and has
not yet determined the impact of this pronouncement on the Company's policies
for identifying and measuring derivatives.
25
<PAGE>
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation - an interpretation of APB Opinion No. 25" ("FIN 44"). This
Interpretation clarifies the definition of employee for the purposes of applying
Accounting Practice Board Opinion No. 25, Accounting for Stock Issued to
Employees ("APB 25"), the criteria for determining whether a plan qualifies as a
noncompensatory plan, the accounting consequences of various modifications to
the terms of a previously fixed stock option or award, and the accounting for an
exchange of stock compensation awards in a business combination. This
Interpretation is effective July 1, 2000, but certain conclusions in this
Interpretation cover specific events that occur after either December 15, 1998,
or January 12, 2000. Management believes that FIN 44 will not have a material
effect on the financial position or results of operations of the Company.
Due to the fact that management is still evaluating the provisions of SAB
101 and SFAS 133, Hexcel has not yet determined if these pronouncements will
have an impact on the Company's financial position and results of operations.
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
Certain statements contained in "Management's Discussion and Analysis of
Financial Condition and Results of Operations," that are not of historical fact,
constitute "forward-looking statements." Such forward-looking statements
include, but are not limited to: (a) estimates of sales and EBITDA; (b)
estimates of commercial aerospace production and delivery rates, including those
of Boeing and Airbus; (c) expectations regarding the growth in the production of
military aircraft and helicopters; (d) expectations regarding the growth in
demand for electronics fabrics, and related manufacturing capacity utilization;
(e) expectations regarding sales growth, sales mix, and gross margins; (f)
expectations regarding 2000 capital expenditures; (g) expectations regarding the
performance of the Company's joint venture interests; (h) expectations regarding
the Company's financial condition and liquidity; (i) estimated expenses, cash
costs, and savings for business consolidation programs; (j) estimated
transaction costs and related expenses for the change in ownership transaction;
and (k) estimates of a non-recurring, non-cash credit related to the curtailment
of a U.S. benefit retirement plan.
Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause actual results to be materially
different. Such factors include, but are not limited to, the following: changes
in general economic and business conditions; changes in current pricing levels;
changes in political, social and economic conditions and local regulations,
particularly in Asia and Europe; foreign currency fluctuations; changes in
aerospace production or delivery rates; reductions in sales to any significant
customers, particularly Boeing or Airbus; changes in sales mix; changes in
government defense procurement budgets; changes in military aerospace programs
or technology; industry capacity; competition; disruptions of established supply
channels; manufacturing capacity constraints; and the availability, terms and
deployment of capital. Additional information regarding these factors is
contained in the Company's Annual Report on Form 10-K for the year ended
December 31, 1999.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
On April 26, 2000, Hexcel completed the sale of its Bellingham aircraft
interiors business to Britax Cabin Interiors, Inc., a wholly owned subsidiary of
Britax International plc, for cash proceeds of $113.3 million. Net proceeds from
the sale were used to repay $111.6 million of the Company's term debt
outstanding under its variable rate Senior Credit Facility. Assuming a 10%
favorable and unfavorable change in the underlying weighted average interest
rates of the Company's variable rate debt, the 1999 net loss and pro forma net
loss would have been as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------- ----------------------------------------
Year Ended December 31,
<S> <C> <C>
As Reported Pro forma
1999 1999
--------------------------------------------------------------------------- ----------------- ----------------------
Net loss $ 23.3 $ 23.2
10% favorable change 22.0 22.7
10% unfavorable change $ 24.6 $ 23.7
--------------------------------------------------------------------------- ------- --------- ------- --------------
</TABLE>
26
<PAGE>
PART II. OTHER INFORMATION
HEXCEL CORPORATION AND SUBSIDIARIES
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS:
10.1 Agreement, dated as of October 11, 2000, by and among Hexcel
Corporation, LXH, L.L.C. and LXH II, L.L.C. (incorporated herein
by reference to Exhibit 10.1 to the Company's Current Report on
Form 8-K dated October 13, 2000).
10.2 Consent and Termination Agreement, dated as of October 11, 2000,
by and between Hexcel Corporation and Ciba Specialty Chemicals
Holding Inc. (incorporated herein by reference to Exhibit 10.2 to
the Company's Current Report on Form 8-K dated October 13, 2000).
10.3 Fourth Amendment and Consent dated October 6, 2000 to the Second
Amended and Restated Credit Agreement by and among Hexcel
Corporation and the Foreign Borrowers from time to time parties
thereto, the banks and other financial institutions from time to
time parties thereto, Citibank, N.A., as Documentation Agent, and
Credit Suisse First Boston, as Administrative Agent
10.4 Amended and Restated Employment Agreement dated October 11, 2000
between Hexcel and John J. Lee.
10.5 Second Amendment to Supplemental Executive Retirement Agreement
dated October 1, 2000 between Hexcel and John J. Lee.
10.6 Amendment to Agreements dated October 11, 2000 between Hexcel and
Harold E. Kinne.
10.7 Amendment to Agreements dated October 11, 2000 between Hexcel and
Ira Krakower.
10.8 Amendment to Agreements dated October 11, 2000 between Hexcel and
Stephen Forsyth.
10.9 Amendment to Agreements dated October 11, 2000 between Hexcel and
Joseph Shaulson.
10.10 Amendment to Agreements dated October 11, 2000 between Hexcel
and Steven Warshaw.
10.11 Amendment to Agreements dated October 11, 2000 between Hexcel and
Robert Mathews.
10.12 Amendment to Agreements dated October 11, 2000 between Hexcel and
David Tanonis.
10.13 Amendment to Agreements dated October 11, 2000 between Hexcel and
Justin Taylor.
10.14 Amendment to Agreements dated October 11, 2000 between Hexcel and
William Hunt.
10.15 Executive Severance Agreement between Hexcel and Robert F.
Matthews dated as of July 1, 2000 (incorporated herein by
reference to Exhibit 10.2 to the Company's Quarterly Report on
Form 10-Q for the Quarter ended June 30, 2000).
27 Financial Data Schedule (electronic filing only).
27
<PAGE>
(B) REPORTS ON FORM 8-K:
Current Report on Form 8-K dated November 3, 2000, relating to the
Company's third quarter 2000 financial results.
Current Report on Form 8-K dated October 13, 2000, relating to a press
release issued by the Company announcing that an investor group led by Goldman
Sachs agreed to purchase approximately 14.5 million shares of Hexcel common
stock owned by Ciba Specialty Chemicals.
Current Report on Form 8-K dated July 31, 2000, relating to the
Company's second quarter 2000 financial results.
28
<PAGE>
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 14, 2000 /s/ Kirk G. Forbeck
-------------------------------- ------------------------------
(Date) Kirk G. Forbeck,
Chief Accounting Officer
29
<PAGE>
