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SECURITIES AND EXCHANGE COMMISSION
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WASHINGTON, D. C. 20549
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FORM 10-Q
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X
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 2000
or
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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 AUGUST 11, 2000
----- ------------------------------
COMMON STOCK 36,881,456
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<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
INDEX
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements
o Condensed Consolidated Balance Sheets--
June 30, 2000 and December 31, 1999 2
o Condensed Consolidated Statements of
Operations -- The Quarter and Year-to-Date Periods
Ended June 30, 2000 and 1999 3
o Condensed Consolidated Statements of
Cash Flows -- The Year-to-Date Periods
Ended June 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 12
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 23
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders 23
ITEM 6. Exhibits and Reports on Form 8-K 24
SIGNATURE 25
1
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
HEXCEL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
UNAUDITED
------------------------------------
JUNE 30, DECEMBER 31,
(IN MILLIONS, EXCEPT PER SHARE DATA) 2000 1999
-----------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 7.0 $ 0.2
Accounts receivable 171.4 158.6
Inventories 155.1 153.7
Prepaid expenses and other assets 5.2 5.1
Deferred tax asset 10.1 10.2
-----------------------------------------------------------------------------------------------------------------
Total current assets 348.8 327.8
Property, plant and equipment 592.5 614.5
Less accumulated depreciation (234.7) (222.4)
-----------------------------------------------------------------------------------------------------------------
Net property, plant and equipment 357.8 392.1
Goodwill and other purchased intangibles, net of accumulated
amortization of $30.1 in 2000 and $24.9 in 1999 398.8 411.2
Investments in affiliated companies and other assets 124.9 130.8
-----------------------------------------------------------------------------------------------------------------
Total assets $ 1,230.3 $ 1,261.9
-----------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current maturities of capital lease obligations $ 29.7 $ 34.3
Accounts payable 82.8 80.3
Accrued liabilities 103.0 95.9
-----------------------------------------------------------------------------------------------------------------
Total current liabilities 215.5 210.5
Long-term notes payable and capital lease obligations 622.8 712.5
Indebtedness to a related party 24.2 24.1
Other non-current liabilities 46.9 44.7
-----------------------------------------------------------------------------------------------------------------
Total liabilities 909.4 991.8
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 37.6 in 2000 and 37.4 in 1999 0.4 0.4
Additional paid-in capital 276.2 273.6
Retained earnings 64.7 11.6
Accumulated other comprehensive loss (9.6) (4.8)
----------------------------------------------------------------------------------------------------------------
331.7 280.8
Less - treasury stock, at cost, 0.9 shares in 2000 and 0.8 in 1999 (10.8) (10.7)
----------------------------------------------------------------------------------------------------------------
Total stockholders' equity 320.9 270.1
----------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 1,230.3 $ 1,261.9
-----------------------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
HEXCEL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------
UNAUDITED
<S> <C> <C> <C> <C>
-----------------------------------------------------------------
QUARTER ENDED JUNE 30, YEAR-TO-DATE ENDED JUNE 30,
(IN MILLIONS, EXCEPT PER SHARE DATA) 2000 1999 2000 1999
--------------------------------------------------------------------------------------------------------------------
Net sales $ 271.6 $ 292.7 $ 551.4 $ 608.9
Cost of sales 211.1 226.4 428.7 471.8
--------------------------------------------------------------------------------------------------------------------
Gross margin 60.5 66.3 122.7 137.1
Selling, general and administrative expenses 31.2 33.7 64.1 68.1
Research and technology expenses 5.2 6.3 11.5 12.8
Business consolidation expenses - 1.4 1.2 4.2
--------------------------------------------------------------------------------------------------------------------
Operating income 24.1 24.9 45.9 52.0
Gain on sale of
Bellingham aircraft interiors business 68.3 - 68.3 -
Interest expense 17.2 18.4 35.6 37.5
--------------------------------------------------------------------------------------------------------------------
Income before income taxes 75.2 6.5 78.6 14.5
Provision for income taxes 26.5 2.3 27.7 5.1
--------------------------------------------------------------------------------------------------------------------
Income before equity in earnings 48.7 4.2 50.9 9.4
Equity in earnings of affiliated companies 1.7 0.1 2.2 0.1
--------------------------------------------------------------------------------------------------------------------
Net income $ 50.4 $ 4.3 $ 53.1 $ 9.5
--------------------------------------------------------------------------------------------------------------------
Net income per share:
Basic $ 1.38 $ 0.12 $ 1.45 $ 0.26
Diluted 1.14 0.12 1.24 0.26
Weighted average shares:
Basic 36.6 36.5 36.6 36.4
Diluted 45.5 36.6 45.2 36.5
--------------------------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
HEXCEL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
----------------------------------------------------------------------------------------------------------------------
UNAUDITED
<S> <C> <C>
-------------------------------------
YEAR-TO-DATE ENDED JUNE 30,
(IN MILLIONS) 2000 1999
----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 53.1 $ 9.5
Reconciliation to net cash provided by operations:
Depreciation and amortization 29.7 31.5
Deferred income taxes 16.5 (1.9)
Gain on sale of Bellingham aircraft interiors business (68.3) -
Accrued business consolidation expenses 1.2 4.2
Business consolidation payments (4.9) (6.6)
Equity in earnings of affiliated companies (2.2) (0.1)
Working capital changes and other (20.9) 11.5
----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 4.2 48.1
----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (12.9) (18.0)
Proceeds from sale of Bellingham aircraft interiors business 113.3 -
Proceeds from sale of other assets 1.1 -
Investments in affiliated companies (6.0) -
----------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) investing activities 95.5 (18.0)
----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of credit facilities, net (82.8) (247.3)
Proceeds (repayments) of long-term debt and capital lease obligations, net (9.5) 224.8
Debt issuance costs (0.9) (9.5)
Activity under stock plans 0.3 0.7
----------------------------------------------------------------------------------------------------------------------
Net cash used for financing activities (92.9) (31.3)
----------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents - (0.6)
----------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 6.8 (1.8)
Cash and cash equivalents at beginning of year 0.2 7.5
----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 7.0 $ 5.7
----------------------------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
</TABLE>
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 June 30, 2000, and the
results of operations for the quarter and year-to-date periods ended June 30,
2000 and 1999, and the cash flows for the year-to-date periods ended June 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.
Quarter and year-to-date June 30, 2000 and 1999 sales and operating income
for the Bellingham business were as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
QUARTER ENDED JUNE 30, YEAR-TO-DATE ENDED JUNE 30,
2000 1999 2000 1999
--------------------------------------------------------------------------------------------------------------------
Sales $ 2.4 $ 15.3 $ 19.0 $ 26.9
Operating income (loss) $ (0.6) $ 1.5 $ 0.6 $ 2.4
--------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
NOTE 3 -- INVENTORIES
---------------------------------------------------------------------------------- ---------------- ----------------
<S> <C> <C>
6/30/00 12/31/99
---------------------------------------------------------------------------------- ---------------- ----------------
Raw materials $ 74.4 $ 55.5
Work in progress 46.2 47.8
Finished goods 34.5 50.4
---------------------------------------------------------------------------------- ----- ---------- ------ ---------
Total inventories $ 155.1 $ 153.7
---------------------------------------------------------------------------------- ----- ---------- ------ ---------
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
NOTE 4 -- NOTES PAYABLE, CAPITAL LEASE OBLIGATIONS AND INDEBTEDNESS TO A RELATED PARTY
--------------------------------------------------------------------------- -------------------- -------------------
<S> <C> <C>
6/30/00 12/31/99
--------------------------------------------------------------------------- -------------------- -------------------
Senior credit facility $ 211.0 $ 303.0
European credit and overdraft facilities 15.3 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 606.6 698.2
Capital lease obligations 45.9 48.6
11.0% Senior subordinated note payable to a related party, increasing
at a rate of 0.5% per annum, due 2003 24.2 24.1
--------------------------------------------------------------------------- -------- ----------- ----- -------------
Total notes payable, capital lease obligations and
indebtedness to a related party $ 676.7 $ 770.9
--------------------------------------------------------------------------- -------- ----------- ----- -------------
Notes payable and current maturities of long-term liabilities $ 29.7 $ 34.3
Long-term notes payable and capital lease obligations,
less current maturities 622.8 712.5
Indebtedness to a related party, net of unamortized discount of
$0.8 as of June 30, 2000 and $0.9 as of December 31, 1999 24.2 24.1
--------------------------------------------------------------------------- -------- ----------- ----- -------------
Total notes payable, capital lease obligations and
indebtedness to a related party $ 676.7 $ 770.9
--------------------------------------------------------------------------- -------- ----------- ----- -------------
</TABLE>
SENIOR CREDIT FACILITY
On March 7, 2000, the Company amended its global credit facility (the
"Senior Credit Facility") to accommodate, among other things, its planned sale
of assets and the impact of the decline in the Company's operating results in
the second half of 1999 on certain financial covenants. Prior to the sale of the
Bellingham business, the amended Senior Credit Facility provided Hexcel with
approximately $516.5 of borrowing capacity, subject to certain limitations, at
interest on outstanding borrowings ranging from 0.75% to 2.75% in excess of the
applicable London interbank rate, or at the option of the Company, from 0.0% to
1.75% in excess of the base rate of the administrative agent for the lenders.
The Senior Credit Facility is secured by a pledge of shares of certain of
Hexcel's subsidiaries, as well as a security interest in certain U.S. accounts
receivable, inventories, and machinery and equipment. Further, under certain
circumstances defined in the March 7, 2000 amendment, the Company has agreed to
provide the lenders with a security interest in certain additional U.S. accounts
receivable, inventories, machinery and equipment, and land and buildings as soon
as practicable after September 30, 2000. The Company is subject to various
financial covenants and restrictions under the Senior Credit Facility, including
a limitation on the redemption of capital stock and a general prohibition
against the payment of dividends.
As discussed in Note 2, net proceeds from the sale of the Bellingham
business were used to repay $111.6 of outstanding term debt under the Senior
Credit Facility. As a result of this repayment, the total borrowing capacity
available to the Company under the Senior Credit Facility was reduced to
approximately $405 and the upper limit of the interest ranges were increased to
3.00% and 2.00%, respectively. Unused borrowing capacity under the Senior Credit
Facility was approximately $187 on June 30, 2000. The Senior Credit Facility is
scheduled to expire in 2004, except for approximately $58 that is due for
repayment in 2005.
6
<PAGE>
NOTE 5 -- BUSINESS CONSOLIDATION PROGRAMS
Total accrued business consolidation expenses at December 31, 1999 and June
30, 2000, activity during the six months ended June 30, 2000, and a brief
description for each of the Company's business consolidation programs, are as
follows:
<TABLE>
--------------------------------------------------------------- ------------------ ------------------ --------------
<S> <C> <C> <C>
SEPTEMBER DECEMBER
1999 1998
PROGRAM PROGRAM TOTAL
--------------------------------------------------------------- ------------------ ------------------ --------------
BALANCE AS OF DECEMBER 31, 1999 $ 3.1 $ 1.0 $ 4.1
Business consolidation expenses:
Current period expenses 4.6 - 4.6
Reversal of 1999 expenses (3.4) - (3.4)
--------------------------------------------------------------- ---- ------------ ---- ------------- ---- ----------
Net business consolidation expenses 1.2 - 1.2
Cash expenditures (4.5) (0.4) (4.9)
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 JUNE 30, 2000 $ 2.7 $ - $ 2.7
--------------------------------------------------------------- ---- ------------ ---- ------------- ---- ----------
</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
other 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.
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.
7
<PAGE>
Accrued business consolidation expenses at December 31, 1999 and June 30,
2000, and related activity for this program for the first half of 2000, were as
follows:
<TABLE>
--------------------------------------------------------------- ----------------- ---------------- -----------------
<S> <C> <C> <C>
EMPLOYEE FACILITY &
SEVERANCE & EQUIPMENT
SEPTEMBER 1999 PROGRAM RELOCATION RELOCATION TOTAL
--------------------------------------------------------------- ----------------- ---------------- -----------------
BALANCE AS OF DECEMBER 31, 1999 $ 2.5 $ 0.6 $ 3.1
Business consolidation expenses:
Current period expenses 1.9 2.7 4.6
Reversal of 1999 expenses (0.3) (3.1) (3.4)
--------------------------------------------------------------- ---- ------------ ---- ----------- ------ ----------
Net business consolidation expenses 1.6 (0.4) 1.2
Cash expenditures (1.6) (2.9) (4.5)
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
--------------------------------------------------------------- ---- ------------ ---- ----------- ------ ----------
BALANCE AS OF JUNE 30, 2000 $ 2.5 $ 0.2 $ 2.7
--------------------------------------------------------------- ---- ------------ ---- ----------- ------ ----------
</TABLE>
For the six months ended June 30, 2000, Hexcel recognized $1.2 of business
consolidation expenses for this program, net of the $3.4 reversal as described
above. As of December 31, 1999 and June 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 PER SHARE
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
QUARTER ENDED JUNE 30, YEAR-TO-DATE ENDED JUNE 30,
2000 1999 2000 1999
--------------------------------------------------------------------------------------------------------------------
Basic net income per share:
Net income $ 50.4 $ 4.3 $ 53.1 $ 9.5
Weighted average common shares outstanding 36.6 36.5 36.6 36.4
--------------------------------------------------------------------------------------------------------------------
Basic net income per share $ 1.38 $ 0.12 $ 1.45 $ 0.26
--------------------------------------------------------------------------------------------------------------------
Diluted net income per share:
Net income $ 50.4 $ 4.3 $ 53.1 $ 9.5
Effect of dilutive securities -
Convertible subordinated notes, due 2003 1.3 - 2.5 -
Convertible subordinated debentures, due 2011 0.3 - 0.6 -
--------------------------------------------------------------------------------------------------------------------
Adjusted net income $ 52.0 $ 4.3 $ 56.2 $ 9.5
--------------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding 36.6 36.5 36.6 36.4
Effect of dilutive securities -
Stock options 0.8 0.1 0.5 0.1
Convertible subordinated notes, due 2003 7.2 - 7.2 -
Convertible subordinated debentures, due 2011 0.9 - 0.9 -
--------------------------------------------------------------------------------------------------------------------
Diluted weighted average common shares outstanding 45.5 36.6 45.2 36.5
--------------------------------------------------------------------------------------------------------------------
Diluted net income per share $ 1.14 $ 0.12 $ 1.24 $ 0.26
--------------------------------------------------------------------------------------------------------------------
</TABLE>
The convertible subordinated notes, due 2003, and the convertible
subordinated debentures, due 2011, were excluded from the 1999 computations of
diluted net income per share, as they were antidilutive. Approximately 4,000 to
4,500 stock options were excluded from the 2000 and 1999 calculations of diluted
net income per share. The exercise price for these stock options ranged from
approximately $6.51 to $30.38, with the weighted average price being
approximately $12.50 in 2000 and $13.26 in 1999.
<TABLE>
<CAPTION>
NOTE 7 -- COMPREHENSIVE INCOME (LOSS)
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
QUARTER ENDED JUNE 30, YEAR-TO-DATE ENDED JUNE 30,
2000 1999 2000 1999
--------------------------------------------------------------------------------------------------------------------
Net income $ 50.4 $ 4.3 $ 53.1 $ 9.5
Currency translation adjustment (1.7) (5.8) (4.8) (12.8)
--------------------------------------------------------------------------------------------------------------------
Total comprehensive income (loss) $ 48.7 $ (1.5) $ 48.3 $ (3.3)
--------------------------------------------------------------------------------------------------------------------
</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 June 30, 2000 and 1999, is as follows:
<TABLE>
--------------------------------------------- ----------------- ----------------- ----------------- ----------------
<S> <C> <C> <C> <C>
REINFORCEMENT COMPOSITE ENGINEERED
PRODUCTS MATERIALS PRODUCTS TOTAL
--------------------------------------------- --- ------------- -- -------------- --- ------------- -- -------------
SECOND QUARTER 2000
--------------------------------------------- --- ------------- -- -------------- --- ------------- -- -------------
Net sales to external customers $ 94.6 $ 147.0 $ 30.0 $ 271.6
Intersegment sales 25.1 1.8 - 26.9
--------------------------------------------- --- ------------- -- -------------- --- ------------- -- -------------
Total sales 119.7 148.8 30.0 298.5
Adjusted EBIT 12.7 19.0 1.5 33.2
Depreciation and amortization 8.6 4.7 0.8 14.1
Business consolidation expenses (2.9) 2.0 0.9 -
Capital expenditures 3.3 4.6 0.1 8.0
--------------------------------------------- --- ------------- -- -------------- --- ------------- -- -------------
SECOND QUARTER 1999
--------------------------------------------- --- ------------- -- -------------- --- ------------- -- -------------
Net sales to external customers 83.3 157.3 52.1 292.7
Intersegment sales 27.1 1.8 - 28.9
--------------------------------------------- --- ------------- -- -------------- --- ------------- -- -------------
Total sales 110.4 159.1 52.1 321.6
Adjusted EBIT 11.1 18.8 5.2 35.1
Depreciation and amortization 8.8 5.2 0.9 14.9
Business consolidation expenses 0.2 - 0.2 0.4
Capital expenditures 3.2 4.0 1.3 8.5
--------------------------------------------- --- ------------- -- -------------- --- ------------- -- -------------
YEAR-TO-DATE ENDED JUNE 30, 2000
--------------------------------------------- --- ------------- -- -------------- --- ------------- -- -------------
Net sales to external customers 181.7 293.5 76.2 551.4
Intersegment sales 52.3 4.1 - 56.4
--------------------------------------------- --- ------------- -- -------------- --- ------------- -- -------------
Total sales 234.0 297.6 76.2 607.8
Adjusted EBIT 23.2 37.5 4.7 65.4
Depreciation and amortization 17.2 9.5 1.8 28.5
Business consolidation expenses (2.2) 2.4 1.0 1.2
Capital expenditures 4.3 7.6 0.5 12.4
--------------------------------------------- ------------- -- -------------- --- ------------- -- -------------
YEAR-TO-DATE ENDED JUNE 30, 1999
--------------------------------------------- --- ------------- -- -------------- --- ------------- -- -------------
Net sales to external customers 169.1 335.5 104.3 608.9
Intersegment sales 62.8 4.6 - 67.4
--------------------------------------------- --- ------------- -- -------------- --- ------------- -- -------------
Total sales 231.9 340.1 104.3 676.3
Adjusted EBIT 21.4 43.9 9.1 74.4
Depreciation and amortization 17.7 10.3 1.8 29.8
Business consolidation expenses 2.8 0.1 0.3 3.2
Capital expenditures $ 7.4 $ 7.6 $ 2.8 $ 17.8
--------------------------------------------- --- ------------- -- -------------- --- ------------- -- -------------
</TABLE>
10
<PAGE>
Reconciliations of the totals reported for the operating segments to
consolidated income before income taxes, are as follows:
<TABLE>
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
QUARTER ENDED JUNE 30, YEAR-TO-DATE ENDED JUNE 30,
2000 1999 2000 1999
--------------------------------------------------------------------------------------------------------------------
Total Adjusted EBIT for reportable segments $ 33.2 $ 35.1 $ 65.4 $ 74.4
Business consolidation expenses - (1.4) (1.2) (4.2)
Corporate, other expenses and eliminations (9.1) (8.8) (18.3) (18.2)
Interest expense (17.2) (18.4) (35.6) (37.5)
Gain on sale of Bellingham aircraft interiors
business 68.3 - 68.3 -
--------------------------------------------------------------------------------------------------------------------
Consolidated income before income taxes $ 75.2 $ 6.5 $ 78.6 $ 14.5
--------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
NOTE 9 -- SUPPLEMENTAL CASH FLOW INFORMATION
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
YEAR-TO-DATE ENDED JUNE 30,
2000 1999
--------------------------------------------------------------------------------------------------------------------
Cash paid for:
Interest $ 32.7 $ 20.7
Income taxes $ 2.9 $ 10.1
--------------------------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL OVERVIEW
------------------------------------------------------------------------- -----------------------------------------
<S> <C> <C>
QUARTER ENDED JUNE 30,
-----------------------------------------
(IN MILLIONS, EXCEPT PER SHARE DATA) 2000 1999
------------------------------------------------------------------------- --- ---------------- --------------------
PRO FORMA (a):
Sales $ 269.2 $ 277.4
Adjusted EBITDA (b) $ 39.3 $ 40.3
Adjusted net income (c) $ 7.3 $ 5.4
Adjusted diluted net income per share (c) $ 0.19 $ 0.15
------------------------------------------------------------------------- --- ---------------- --- ----------------
AS REPORTED:
Sales $ 271.6 $ 292.7
Gross margin % 22.3% 22.7%
Adjusted operating income % (c) 8.9% 9.0%
Adjusted EBITDA (b) $ 38.8 $ 42.0
Net income $ 50.4 $ 4.3
Adjusted net income (c) $ 6.5 $ 5.2
Diluted net income per share $ 1.14 $ 0.12
Adjusted diluted net income per share (c) $ 0.17 $ 0.14
------------------------------------------------------------------------- --- ---------------- --- ----------------
</TABLE>
(a) Pro forma results give effect to the April 26, 2000 sale of the Bellingham
aircraft interiors business as if the transaction had occurred at the
beginning of the periods presented.
(b) Excludes business consolidation expenses, interest, taxes, depreciation,
amortization, equity in earnings of affiliated companies, and the gain from
the sale of the Bellingham aircraft interiors business.
(c) Excludes business consolidation expenses, the gain from the sale of the
Bellingham aircraft interiors business, and related income taxes, as
applicable.
Financial highlights for Hexcel in the second quarter of 2000 include:
- On April 26, 2000, Hexcel completed the sale of its Bellingham aircraft
interiors business ("Bellingham") to Britax Cabin Interiors, Inc., a wholly
owned subsidiary of Britax International plc, for cash proceeds of $113.3
million. The sale resulted in an after-tax gain of approximately $44
million, or $0.97 per diluted share. Net proceeds from the sale were used
to repay $111.6 million of outstanding term debt under Hexcel's senior
credit facility. The Bellingham business had sales and operating income of
approximately $70 million and $8 million, respectively, in 1999, all of
which were made to the commercial aerospace market. Hexcel continues to
evaluate strategic alternatives for its aircraft structures and interiors
businesses in Kent, Washington, which is the remaining component of the
Company's Engineered Products business segment.
- Hexcel experienced a continuation of the positive trends that began to
emerge in the first quarter of 2000. Airbus Industrie ("Airbus") and The
Boeing Company ("Boeing") are anticipated to deliver a combined total of
more than 800 aircraft in 2000, and there are further expectations that
they will exceed this level of deliveries in 2001. The impact upon the
Company's performance will depend upon the mix of aircraft produced as well
as the net effect of continuing cost pressures throughout the commercial
aerospace supply chain. Such supply chain pressures are driven by the
competitive pricing of commercial aircraft and the continuing consolidation
of the industry.
12
<PAGE>
- The Company is also beginning to reap additional benefits from its emphasis
on high-growth market segments. Sales of lightweight glass and aramid
fabrics to electronics, architectural and ballistics markets continued to
rise, while use of the Company's advanced composites for wind energy,
automotive and other industrial applications also continued to increase.
Further, the ramp up of full scale production of a number of new military
aircraft is anticipated to benefit the Company in 2001 and beyond.
- In response to the increasing demand for lightweight glass and aramid
fabrics, Hexcel's manufacturing capacity is constrained and the Company
intends to purchase additional looms to help meet the demand for its
products. Further, the Company concluded to revise its September 1999
business consolidation program that originally entailed the consolidation
of a number of weaving activities between two of Hexcel's facilities. As a
result of this amendment, the Company reversed $3.4 million of business
consolidation expenses that were previously recorded in 1999. Further
discussions are included in "Business Consolidation Programs."
- Looking to the second half of 2000, Hexcel anticipates that after the usual
seasonal impact of the European vacation period on its third quarter
performance, fourth quarter EBITDA should be comparable to the Company's
second quarter 2000 results. As a result, the Company continues to
anticipate that pro forma EBITDA for 2000, reflecting the sale of
Bellingham, will be comparable to pro forma EBITDA for 1999.
- Hexcel has made significant progress in the last eighteen months to reduce
its indebtedness by almost $190 million and improve the structure of its
balance sheet. While the Company is benefiting from improving market
conditions, it remains focused on continuing to reduce costs, increasing
productivity and further reducing its leverage.
RESULTS OF OPERATIONS
NET SALES: Net sales for the second quarter of 2000 decreased 7% to $271.6
million, compared with $292.7 million for the second quarter of 1999. Results
for the second quarter of 2000 include those of the Bellingham business up to
the date of sale. After giving effect to the disposition of the Bellingham
business as if the transaction had occurred at the beginning of the periods
presented, net sales for the second quarter of 2000 were $269.2 million, a 3%
decline over the second quarter 1999 net sales of $277.4 million. The decline in
sales was primarily a result of lower commercial aerospace sales due to a
reduction in Boeing's commercial aircraft build rates and the conclusion of
certain space and defense contracts in the second half of 1999. These declines
were partially offset by increased sales of glass and aramid fabrics for
electronics and industrial applications as well as increased sales of composite
materials to wind energy and automotive markets. On a constant currency basis
second quarter 2000 net sales would have been approximately $10 million higher
than reported.
The following table summarizes pro forma net sales to third-party customers
by product group and market segment for the quarters ended June 30, 2000 and
1999:
13
<PAGE>
<TABLE>
----------------------------------- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
UNAUDITED
--------------- ---------------- --------------- --------------- ----------------
COMMERCIAL SPACE &
(IN MILLIONS) AEROSPACE DEFENSE ELECTRONICS INDUSTRIAL TOTAL
----------------------------------- --------------- ---------------- --------------- --------------- ----------------
PRO FORMA SECOND QUARTER 2000
Reinforcement products $ 17.1 $ 3.5 $ 46.8 $ 27.2 $ 94.6
Composite materials 87.5 26.0 - 33.5 147.0
Engineered products 25.5 2.1 - - 27.6
----------------------------------- ---- ---------- ----- ---------- ---- ---------- ----- --------- ----- ----------
Total $ 130.1 $ 31.6 $ 46.8 $ 60.7 $ 269.2
48% 12% 17% 23% 100%
----------------------------------- ---- ---------- ----- ---------- ---- ---------- ----- --------- ----- ----------
PRO FORMA SECOND QUARTER 1999
Reinforcement products $ 13.5 $ 5.5 $ 42.2 $ 22.1 $ 83.3
Composite materials 101.4 26.0 - 29.9 157.3
Engineered products 33.4 3.4 - - 36.8
----------------------------------- ---- ---------- ----- ---------- ---- ---------- ----- --------- ----- ----------
Total $ 148.3 $ 34.9 $ 42.2 $ 52.0 $ 277.4
53% 13% 15% 19% 100%
----------------------------------- ---- ---------- ----- ---------- ---- ---------- ----- --------- ----- ----------
</TABLE>
Pro forma commercial aerospace net sales decreased 12% to $130.1 million
for the second quarter of 2000, from $148.3 million for the second quarter of
1999. The decline in sales primarily reflects the impact of the decrease in
aircraft production rates by Boeing that commenced last year, in anticipation of
lower aircraft deliveries in 2000. Approximately 38% of Hexcel's 1999 net sales
were identifiable as sales to Boeing, Airbus and their related subcontractors.
Planned deliveries of commercial aircraft by Boeing declined from 620 aircraft
in 1999, to an estimated 490 aircraft in 2000. The Company delivers its products
on average six to nine months ahead of the delivery of an aircraft.
Boeing has publicly indicated that it may be able to increase aircraft
deliveries in 2001 by 10% to 15% above the number of forecasted deliveries of
490 in 2000. This improved outlook is due in part to the continued economic
recovery in Asia. Meanwhile, industry analysts are projecting a modest increase
in aircraft deliveries by Airbus to about 320 in 2000 and to more than 350 in
2001. At the same time, 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, and the
results of productivity improvement from the Company's Lean Enterprise
initiatives.
Pro forma space and defense net sales for the second quarter of 2000
decreased 9% to $31.6 million, from $34.9 million in the second quarter of 1999.
This decrease primarily reflects the conclusion of certain space and defense
contracts in the second half of 1999. However, 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.
Pro forma electronics net sales increased 11% to $46.8 million for the
second quarter of 2000, from $42.2 million for the second quarter of 1999. This
increase reflects sales volume growth for Hexcel's lightweight fiberglass
fabrics used in electronic applications, partially offset by a decrease in sales
of heavyweight electronic fabrics. The increase in sales of lightweight
fiberglass fabrics reflects the improved economic conditions in Asia and Europe
and the growing use of electronic devices throughout the world.
14
<PAGE>
Demand for lightweight fiberglass fabrics is expected to continue to grow
and global manufacturing capacity appears to be tightening. During the first
quarter of 2000, Hexcel started to switch some of its heavyweight fabric
production capacity to meet lightweight fabric demand. In addition, the Company
plans to install additional lightweight fabric looms by the end of the year to
meet the expected continuing growth in demand, and is taking additional steps to
expand its lightweight fabric manufacturing capacity to support market growth.
Pro forma industrial net sales increased 17% to $60.7 million for the second
quarter of 2000 from $52.0 million for the second quarter of 1999. The increase
reflects sales growth for soft body armor, wind energy applications and
automotive components.
GROSS MARGIN: Gross margin for the second quarter of 2000 was $60.5
million, or 22.3% of net sales, compared with $66.3 million, or 22.7% of net
sales, for the second quarter of 1999. The decline in gross margin dollars,
relative to the second quarter 1999, reflects the impact of lower sales levels,
a change in the mix of products sold as well as the impact of the sale of
Bellingham on April 26, 2000.
OPERATING INCOME: Operating income was $24.1 million in the second quarter
of 2000, or 8.9% of net sales, compared with $24.9 million in the second quarter
of 1999, or 8.5% of net sales. Excluding business consolidation expenses,
operating income for the second quarter of 1999 was $26.3 million, or 9.0% of
net sales. The aggregate decrease in operating income reflects the decrease in
net sales, partially offset by a reduction in selling, general and
administrative ("SG&A") and research and technology ("R&T") expenses over the
second quarter 1999. SG&A expenses were $31.2 million, or 11.5% of net sales for
the second quarter of 2000, compared with $33.7 million, or 11.5% of net sales
for the second quarter of 1999, reflecting a decrease in spending as well as the
disposition of the Bellingham business. R&T expenses for the second quarter of
2000 were $5.2 million, or 1.9% of net sales, compared with $6.3 million, or
2.2% of net sales, for the second quarter 1999.
INTEREST EXPENSE: Interest expense was $17.2 million for the second quarter
of 2000, compared with $18.4 million for the second quarter of 1999. The
decrease in interest expense primarily reflects the reduction in term debt
outstanding under the Company's senior credit facility which resulted from the
proceeds from the sale of the Bellingham business, partially offset by rising
interest rates on variable-rate debt.
EQUITY IN EARNINGS OF AFFILIATED COMPANIES: Equity in earnings of
affiliated companies for the second quarter of 2000 was $1.7 million compared to
$0.1 million for the second quarter of 1999, reflecting improved operating
results of the Company's electronic fabrics joint venture in Asia.
NET INCOME AND NET INCOME PER SHARE:
<TABLE>
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
QUARTER ENDED JUNE 30,
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 2000 1999
-------------------------------------------------------------------------------------------------------------------
Net income $ 50.4 $ 4.3
Adjusted net income (a) $ 6.5 $ 5.2
Diluted net income per share $ 1.14 $ 0.12
Diluted net income per share excluding goodwill amortization $ 1.19 $ 0.18
Adjusted diluted net income per share (a) $ 0.17 $ 0.14
Diluted weighted average shares outstanding 45.5 36.6
-------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Excludes business consolidation expenses, the gain from the sale of the
Bellingham aircraft interiors business, and related income taxes, as
applicable.
15
<PAGE>
The Company's convertible subordinated notes, due 2003, and its
convertible subordinated debentures, due 2011, were excluded from the 1999
computations of net income 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 per share.
<TABLE>
<CAPTION>
YEAR-TO-DATE RESULTS
----------------------------------------------------------------------- --------------------------------------------
<S> <C> <C>
YEAR-TO-DATE ENDED JUNE 30,
(IN MILLIONS, EXCEPT PER SHARE DATA) 2000 1999
----------------------------------------------------------------------- ------- --------------- --------------------
PRO FORMA:
Sales $ 532.4 $ 582.0
Adjusted EBITDA $ 75.9 $ 84.8
Adjusted net income $ 11.5 $ 13.1
Adjusted diluted net income per share $ 0.31 $ 0.36
----------------------------------------------------------------------- ------- --------------- ---- ---------------
AS REPORTED:
Sales $ 551.4 $ 608.9
Gross margin % 22.2% 22.5%
Adjusted operating income % 8.5% 9.2%
Adjusted EBITDA $ 76.8 $ 87.6
Net income $ 53.1 $ 9.5
Adjusted net income $ 9.9 $ 12.2
Diluted net income per share $ 1.24 $ 0.26
Adjusted diluted net income per share $ 0.27 $ 0.33
----------------------------------------------------------------------- ------- --------------- ---- ---------------
</TABLE>
NET SALES AND GROSS MARGIN: Net sales for the first half of 2000 decreased
9% to $551.4 million, compared with $608.9 million for the first half of 1999.
Pro forma net sales for the first half of 2000 were $532.4 million, a 9% decline
over the first half of 1999 pro forma net sales of $582.0 million. Gross margin
for the first half of 2000 was $122.7 million, or 22.2% of net sales, versus
gross margin of $137.1 million, or 22.5% of net sales, for the same period in
1999. The strengthening of the U.S. dollar against the Euro in the last twelve
months reduced first half revenues by approximately $19 million compared to the
first half of 1999. The decrease in net sales and maintenance in gross margin
percentage compared to 1999 results primarily reflect the factors previously
discussed.
The following table summarizes pro forma net sales to third-party customers
by product group and market segment for the year-to-date periods ended June 30,
2000 and 1999:
<TABLE>
--------------------------- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
UNAUDITED
-------------- ------------------ -------------- -------------- ---------------------
COMMERCIAL SPACE &
(IN MILLIONS) AEROSPACE DEFENSE ELECTRONICS INDUSTRIAL TOTAL
--------------------------- -------------- ------------------ -------------- -------------- ---------------------
PRO FORMA FIRST HALF 2000
Reinforcement products $ 32.7 $ 7.6 $ 90.4 $ 51.0 $ 181.7
Composite materials 181.7 45.9 - 65.9 293.5
Engineered products 52.6 4.6 - - 57.2
---------------------------- ----- ---------- --- ----------- --- ---------- ----- ------------ ----- -----------
Total $ 267.0 $ 58.1 $ 90.4 $ 116.9 $ 532.4
50% 11% 17% 22% 100%
---------------------------- ----- ---------- --- ----------- --- ---------- ----- ------------ ----- -----------
PRO FORMA FIRST HALF 1999
Reinforcement products $ 28.8 $ 11.0 $ 84.4 $ 44.8 $ 169.0
Composite materials 221.1 55.6 - 58.8 335.5
Engineered products 70.8 6.7 - - 77.5
---------------------------- ----- ---------- --- ----------- --- ---------- ----- ------------ ----- -----------
Total $ 320.7 $ 73.3 $ 84.4 $ 103.6 $ 582.0
55% 13% 14% 18% 100%
---------------------------- ----- ---------- --- ----------- --- ---------- ----- ------------ ----- -----------
</TABLE>
16
<PAGE>
OPERATING INCOME: Operating income for the first six months of 2000 was
$45.9 million, compared with $52.0 million for the same period in 1999.
Excluding business consolidation expenses of $1.2 million and $4.2 million
incurred in the first half of 2000 and 1999, respectively, operating income was
$47.1 million, or 8.5%, of net sales for 2000 compared with $56.2 million, or
9.2% of net sales, for 1999. The aggregate decrease in operating income is the
result of lower sales and gross margins, partially offset by a decrease in SG&A
and R&T expenses. SG&A expenses were $64.1 million, or 11.6% of net sales, for
the first half of 2000, compared to $68.1 million, or 11.2% of net sales, for
the same period in 1999, reflecting a decrease in spending as well as the
disposition of the Bellingham business. R&T expenses were $11.5 million, or 2.1%
of net sales, for the first half of 2000, compared to $12.8 million, or 2.1% of
net sales, for the comparable 1999 period.
INTEREST EXPENSE: Interest expense for the first half of 2000 was $35.6
million, compared to $37.5 million, for the first half of 1999. The decrease in
interest expense primarily reflects the reduction in term debt outstanding under
the Company's senior credit facility, partially offset by rising interest rates
on variable-rate debt.
EQUITY IN EARNINGS OF AFFILIATED COMPANIES: Equity in earnings of
affiliated companies for the year-to-date period ended June 30, 2000 was $2.2
million compared to $0.1 million for the same period in 1999, reflecting
improved operating results of the Company's electronic fabrics joint venture in
Asia.
<TABLE>
<CAPTION>
NET INCOME AND NET INCOME PER SHARE:
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
YEAR-TO-DATE ENDED JUNE 30,
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 2000 1999
-------------------------------------------------------------------------------------------------------------------
Net income $ 53.1 $ 9.5
Adjusted net income $ 9.9 $ 12.2
Diluted net income per share $ 1.24 $ 0.26
Diluted net income per share excluding goodwill amortization $ 1.34 $ 0.37
Adjusted diluted net income per share $ 0.27 $ 0.33
Diluted weighted average shares outstanding 45.2 36.5
-------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company's convertible subordinated notes, due 2003, and its convertible
subordinated debentures, due 2011, were excluded from the 1999 computations of
net income 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 per share.
FINANCIAL CONDITION AND LIQUIDITY
SENIOR CREDIT FACILITY
On March 7, 2000, the Company amended its global credit facility (the
"Senior Credit Facility") to accommodate, among other things, its planned sale
of assets and the impact of the decline in the Company's operating results in
the second half of 1999 on certain financial covenants. Prior to the sale of the
Bellingham business, the amended Senior Credit Facility provided Hexcel with
approximately $516.5 million of borrowing capacity, subject to certain
limitations at interest on outstanding borrowings ranging from 0.75% to 2.75% in
excess of the applicable London interbank rate, or at the option of the Company,
from 0.0% to 1.75% in excess of the base rate of the administrative agent for
the lenders. In addition, the Senior Credit Facility is subject to a commitment
fee that ranges from 0.23% to 0.50% per annum of the total facility. The Senior
Credit Facility is secured by a pledge of shares of certain of Hexcel's
subsidiaries, as well as a security interest in certain U.S. accounts
receivable, inventories, and machinery and equipment. Further, under certain
circumstances defined in the March 7, 2000 amendment, the Company has agreed to
provide the lenders with a security interest in certain additional U.S. accounts
receivable, inventories, machinery and equipment, and land and buildings as soon
as practicable after September 30, 2000. The Company is subject to various
financial covenants and restrictions under the Senior Credit Facility, including
a limitation on the redemption of capital stock and a general prohibition
against the payment of dividends.
17
<PAGE>
Hexcel completed the sale of the Bellingham 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 a result of this
repayment, the total borrowing capacity available to the Company under the
Senior Credit Facility was reduced to approximately $405 million and the upper
limit of the interest ranges were increased to 3.00% and 2.00%, respectively.
Unused borrowing capacity under the Senior Credit Facility was approximately
$187 on June 30, 2000.
The Company expects that the Senior Credit Facility will be sufficient to
fund its worldwide operations for the foreseeable future. The Senior Credit
Facility is scheduled to expire in 2004, except for approximately $58 million
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 $12.9 million for the first half of 2000
compared to $18.0 million for the first half of 1999. The Company expects total
capital expenditures in 2000 to be approximately $40 to $45 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.
ADJUSTED EBITDA, CASH FLOWS AND RATIO OF EARNINGS TO FIXED CHARGES
FIRST HALF, 2000: Earnings before business consolidation expenses, other
income, interest, taxes, depreciation and amortization, equity in earnings of
affiliated companies, and the gain from the sale of the Bellingham aircraft
interiors business ("Adjusted EBITDA") was $76.8 million. Net cash provided by
operating activities was $4.2 million, as approximately $9 million of net
income, excluding a $44 million after-tax gain on the disposition of the
Bellingham business, $29.7 million of non-cash depreciation and amortization,
and $16.5 million of deferred income taxes, was offset by $20.9 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.
Net cash provided by investing activities was $95.5 million, primarily
reflecting the net cash proceeds received from the sale of the Bellingham
business, partially offset by capital expenditures for the first six months of
2000 and $6.0 million of investments made to the Company's joint ventures in
China and Malaysia. Net cash used for financing activities was $92.9 million,
primarily reflecting the application of net proceeds from the sale of the
Bellingham business to the Company's Senior Credit Facility.
18
<PAGE>
FIRST HALF, 1999: Adjusted EBITDA was $87.6 million for the first half of
1999. Net cash provided by operating activities was $48.1 million, as $9.5
million of net income, $31.5 million of non-cash depreciation and amortization,
and $11.5 million of working capital changes more than offset cash used by all
other operating activities.
Net cash used for investing activities was $18.0 million reflecting the
Company's capital expenditures for the first six months of 1999. Net cash used
for financing activities was $31.3 million, primarily reflecting a net debt
repayment of $22.5 million and $9.5 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 has been presented to provide a measure of Hexcel's
operating performance that is commonly used by investors and financial analysts
to analyze and compare companies. Adjusted EBITDA may not be comparable to
similarly titled financial measures of other companies. Adjusted EBITDA does 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.
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>
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
QUARTER ENDED JUNE 30, YEAR-TO-DATE ENDED JUNE 30,
(IN MILLIONS) 2000 1999 2000 1999
---------------------------------------------------------------------------------------------------------------------
Net income $ 50.4 $ 4.3 $ 53.1 $ 9.5
Provision for income taxes 26.5 2.3 27.7 5.1
Interest expense 17.2 18.4 35.6 37.5
Depreciation and amortization expense 14.7 15.8 29.7 31.5
Equity in earnings of affiliated companies (1.7) (0.1) (2.2) (0.1)
Other - (0.1) - (0.1)
---------------------------------------------------------------------------------------------------------------------
EBITDA 107.1 40.6 143.9 83.4
Business consolidation expenses - 1.4 1.2 4.2
Gain on sale of Bellingham aircraft interiors business (68.3) - (68.3) -
---------------------------------------------------------------------------------------------------------------------
Adjusted EBITDA $ 38.8 $ 42.0 $ 76.8 $ 87.6
---------------------------------------------------------------------------------------------------------------------
Ratio of earnings to fixed charges 5.5x 1.3x 3.3x 1.4x
---------------------------------------------------------------------------------------------------------------------
</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.
19
<PAGE>
BUSINESS CONSOLIDATION PROGRAMS
Total accrued business consolidation expenses at December 31, 1999 and June
30, 2000, activity during the six months ended June 30, 2000, and a brief
description for each of the Company's business consolidation programs is as
follows:
<TABLE>
--------------------------------------------------------------- ------------------ ------------------ --------------
<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 4.6 - 4.6
Reversal of 1999 expenses (3.4) - (3.4)
--------------------------------------------------------------- ---- ------------ ---- ------------- ---- ----------
Net business consolidation expenses 1.2 - 1.2
Cash expenditures (4.5) (0.4) (4.9)
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 JUNE 30, 2000 $ 2.7 $ - $ 2.7
--------------------------------------------------------------- ---- ------------ ---- ------------- ---- ----------
</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 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 six
months, sales and production of lightweight glass and aramid fabrics showed
greater than anticipated growth. This trend is projected to continue into the
second half of the year 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, 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 includes $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
million. All of the other initiatives included in this business consolidation
program are continuing approximately as planned.
20
<PAGE>
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 $16 million of
annual savings directly attributable to consolidation activities. These savings
are before the additional contribution from increased sales of lightweight
fabrics that necessitated the change to the program. Hexcel anticipates that the
cost savings to be foregone by revising the 1999 business consolidation program
will be more than offset by the benefit of increased revenues from electronics
and other industrial markets in the year 2000 and beyond.
The following table summarizes the estimated cash costs, business
consolidation expenses and cash savings for Hexcel's September 1999 business
consolidation program, as amended:
<TABLE>
----------------------------------------------- --------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
UNAUDITED
------------- ------------- -------------- ----------- ------------
($ IN MILLIONS) 1999 2000 2001 2002 TOTAL
------------------------------------------------ ------------- ------------- -------------- ----------- ------------
CASH COSTS
Cash expenses $ 1 $ 14 $ 2 $ - $ 17
Capital expenditures - 6 2 - 8
------------------------------------------------ ---- -------- --- --------- ----- -------- --- ------- ----- ------
Total $ 1 $ 20 $ 4 $ - $ 25
------------------------------------------------ ---- -------- --- --------- ----- -------- --- ------- ----- ------
EXPENSES
Cash expenses (including accruals) $ 4 $ 11 $ 2 $ - $ 17
Non-cash write-downs 12 (3) - - 9
------------------------------------------------ ---- -------- --- --------- ----- -------- --- ------- ----- ------
Total $ 16 $ 8 $ 2 $ - $ 26
------------------------------------------------ ---- -------- --- --------- ----- -------- --- ------- ----- ------
CASH SAVINGS $ 1 $ 8 $ 15 $ 16 $ 40
------------------------------------------------ ---- -------- --- --------- ----- -------- --- ------- ------ -----
OTHER FACTS
------------------------------------------------ ---- -------- --- --------- ----- -------- --- ---------------------
Reduction in personnel (primarily manufacturing) 270
Reduction in occupied space 210,000 square feet
------------------------------------------------ ---- -------- --- --------- ----- ----------------------------------
</TABLE>
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 the 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.
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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.
Refer to Note 5 to the accompanying condensed consolidated financial
statements for further discussions regarding the Company's business
consolidation programs.
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.
The Company is required to adopt SAB 101 in the fourth quarter of 2000
(retroactive to January 1, 2000) and is awaiting interpretive guidance, not yet
issued by the SEC, to complete its assessment of the impact SAB 101 may have on
the Company's financial statements.
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. SFAS 133, which will be adopted on January 1, 2001, is not expected
to have a material impact on Hexcel's consolidated financial statements.
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 electronic fabrics as well as capacity utilization; (e) expectations
regarding sales growth, sales mix, and gross margins; (f) expectations regarding
2000 capital expenditures; (g) expectations regarding Hexcel's financial
condition and liquidity; and (h) estimated expenses, cash costs, and savings for
business consolidation programs.
Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause actual results to be materially
different. Such factors include, but are not limited to, the following: changes
in general economic and business conditions; changes in current pricing levels;
changes in political, social and economic conditions and local regulations,
particularly in Asia and Europe; foreign currency fluctuations; changes in
aerospace delivery rates; reductions in sales to any significant customers,
particularly Boeing or Airbus; changes in sales mix; changes in government
defense procurement budgets; changes in military aerospace programs technology;
industry capacity; competition; disruptions of established supply channels;
manufacturing capacity constraints; and the availability, terms and deployment
of capital. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause actual results to be materially
different. Additional information regarding these factors is contained in the
Company's Annual Report on Form 10-K for the year ended December 31, 1999.
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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>
--------------------------------------------------------------------------- ----------------------------------------
<S> <C> <C>
YEAR ENDED DECEMBER 31,
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>
PART II. OTHER INFORMATION
HEXCEL CORPORATION AND SUBSIDIARIES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of the Company was held on May 11, 2000
(the "Meeting") in Stamford, Connecticut. Stockholders holding 34,920,780 shares
of Hexcel common stock were present at the Meeting, either in person or by
proxy, constituting a quorum. The following matters were submitted to the
Company's stockholders for a vote at the Meeting, with the results of the vote
indicated:
(1) Each of the ten nominees to the Board of Directors was elected by the
stockholders to serve as directors until the next annual meeting of
stockholders and until their successors are duly elected and qualified:
DIRECTOR FOR WITHHELD
-------- --- --------
Robert S. Evans 32,890,575 2,030,205
Marshall S. Geller 32,889,122 2,031,658
Walter D. Hosp 32,887,887 2,032,893
Harold E. Kinne 32,889,489 2,031,291
John J. Lee 32,868,446 2,052,334
John J. McGraw 32,890,575 2,030,205
Martin Riediker 32,887,887 2,032,893
Lewis Rubin 32,890,575 2,030,205
Stanley Sherman 32,890,575 2,030,205
Martin L. Solomon 32,890,575 2,030,205
23
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(2) The proposal to approve and adopt the Company's Incentive Stock Plan as
amended and restated as of February 3, 2000 received the following votes:
For 30,936,267
Against 3,460,962
Abstained 523,551
(3) The proposal to approve and adopt the Company's Management Stock Purchase
Plan as amended and restated as of February 3, 2000 received the following
votes:
For 33,664,575
Against 733,597
Abstained 522,608
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS:
10.1 Hexcel Corporation 1998 Broad Based Incentive Stock Plan,
as amended February 3, 2000.
10.2 Executive Severance Agreement between Hexcel and
Robert F. Matthews dated as of July 1, 2000.
10.3 Executive Severance Agreement betwen Hexcel and
Steven T. Warshaw dated as of April 17, 2000.
10.4 Supplemental Executive Retirement Agreement dated
as of May 10, 2000 between Hexcel and Harold E. Kinne.
10.5 Supplemental Executive Retirement Agreement dated
as of May 10, 2000 between Hexcel and Stephen C. Forsyth.
10.6 Supplemental Executive Retirement Agreement dated
as of May 10, 2000 between Hexcel and Ira J. Krakower.
27. Financial Data Schedule (electronic filing only).
(B) REPORTS ON FORM 8-K:
Current Report on Form 8-K dated April 6, 2000 relating to a press
release issued by the Company announcing an agreement to sell its
Bellingham aircraft interiors business to Britax Cabin Interiors, Inc.,
a wholly owned subsidiary of Britax International plc.
Current Report on Form 8-K dated April 25, 2000, relating to the
Company's first quarter 2000 financial results.
Current Report on Form 8-K dated May 10, 2000, relating to the sale of
the Company's Bellingham aircraft interiors business to Britax Cabin
Interiors, Inc. on April 26, 2000, and pro forma financial information
reflecting such sale.
Current Report on Form 8-K dated July 31, 2000, relating to the
Company's second quarter 2000 financial results, and the amendment to
the Company's business consolidation program.
24
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized, and in the capacity indicated.
HEXCEL CORPORATION
(Registrant)
August 14, 2000 /s/ Kirk G. Forbeck
---------------------------- -------------------------------------------
(Date) Kirk G. Forbeck,
Chief Accounting Officer
25
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