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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 2002
or
/ / Transition Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the transition period from __________ to __________
Commission File Number 1-8472
-------------------------
HEXCEL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 94-1109521
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
Two Stamford Plaza
281 Tresser Boulevard
Stamford, Connecticut 06901-3238
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)
Registrant's telephone number, including area code: (203) 969-0666
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate 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 9, 2002
----- -----------------------------
COMMON STOCK 38,394,213
================================================================================
HEXCEL CORPORATION AND SUBSIDIARIES
INDEX
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements
- Condensed Consolidated Balance Sheets--
June 30, 2002 and December 31, 2001 2
- Condensed Consolidated Statements of
Operations -- The Quarters and Six Months Ended
June 30, 2002 and 2001 3
- Condensed Consolidated Statements of
Cash Flows -- The Six Months Ended
June 30, 2002 and 2001 4
- Notes to Condensed Consolidated
Financial Statements 5
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 14
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 28
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 30
ITEM 4. Submission of Matters to a Vote of Security Holders 30
ITEM 6. Exhibits and Reports on Form 8-K 31
SIGNATURE 31
1
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
HEXCEL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------------------------------------
UNAUDITED
------------------------------
JUNE 30, DECEMBER 31,
(IN MILLIONS, EXCEPT PER SHARE DATA) 2002 2001
- --------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 3.9 $ 11.6
Accounts receivable, net 138.7 140.5
Inventories 133.2 131.7
Prepaid expenses and other assets 9.6 4.4
- --------------------------------------------------------------------------------------------------------------
Total current assets 285.4 288.2
Property, plant and equipment 632.0 617.0
Less accumulated depreciation (312.6) (287.8)
- --------------------------------------------------------------------------------------------------------------
Net property, plant and equipment 319.4 329.2
Goodwill, net 73.8 72.4
Investments in affiliated companies 47.3 56.9
Other assets 40.8 42.7
- --------------------------------------------------------------------------------------------------------------
Total assets $ 766.7 $ 789.4
==============================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current maturities of capital lease obligations $ 16.5 $ 17.4
Accounts payable 60.2 58.6
Accrued liabilities 117.5 131.7
- --------------------------------------------------------------------------------------------------------------
Total current liabilities 194.2 207.7
Long-term notes payable and capital lease obligations 641.6 668.5
Other non-current liabilities 49.1 45.8
- --------------------------------------------------------------------------------------------------------------
Total liabilities 884.9 922.0
Stockholders' equity:
Preferred stock, no par value, 20.0 shares authorized, no shares issued
or outstanding at June 30, 2002 and at December 31, 2001 - -
Common stock, $0.01 par value, 100.0 shares authorized, shares issued of
39.6 at June 30, 2002 and 39.4 at December 31, 2001 0.4 0.4
Additional paid-in capital 287.8 287.7
Accumulated deficit (371.8) (367.9)
Accumulated other comprehensive loss (21.4) (39.7)
- --------------------------------------------------------------------------------------------------------------
(105.0) (119.5)
Less - Treasury stock, at cost, 1.2 shares at June 30, 2002 and at
December 31, 2001 (13.2) (13.1)
- --------------------------------------------------------------------------------------------------------------
Total stockholders' equity (118.2) (132.6)
- --------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 766.7 $ 789.4
==============================================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
2
HEXCEL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
- -----------------------------------------------------------------------------------------------------------------
UNAUDITED
-----------------------------------------------------
QUARTER ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
(IN MILLIONS, EXCEPT PER SHARE DATA) 2002 2001 2002 2001
- -----------------------------------------------------------------------------------------------------------------
Net sales $ 221.2 $ 253.5 $ 443.3 $ 529.7
Cost of sales 176.4 201.8 358.9 417.9
- -----------------------------------------------------------------------------------------------------------------
Gross margin 44.8 51.7 84.4 111.8
Selling, general and administrative expenses 22.0 33.7 43.6 65.4
Research and technology expenses 3.2 4.8 7.2 9.5
Business consolidation and restructuring expenses 0.1 1.8 0.8 2.9
- -----------------------------------------------------------------------------------------------------------------
Operating income 19.5 11.4 32.8 34.0
Litigation gain 9.8 - 9.8 -
Interest expense 15.3 17.3 32.9 33.6
Loss on early retirement of debt - 3.1 - 3.1
- -----------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 14.0 (9.0) 9.7 (2.7)
Provision for income taxes 3.1 3.8 5.6 6.0
- -----------------------------------------------------------------------------------------------------------------
Income (loss) before equity in earnings 10.9 (12.8) 4.1 (8.7)
Equity in earnings (losses) of and write-down of an
investment in affiliated companies (5.6) 0.2 (8.0) 1.6
- -----------------------------------------------------------------------------------------------------------------
Net income (loss) $ 5.3 $ (12.6) $ (3.9) $ (7.1)
=================================================================================================================
Net income (loss) per share:
Basic $ 0.14 $ (0.34) $ (0.10) $ (0.19)
Diluted $ 0.14 $ (0.34) $ (0.10) $ (0.19)
Weighted average shares:
Basic 38.4 37.4 38.4 37.3
Diluted 39.1 37.4 38.4 37.3
=================================================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
3
HEXCEL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
=================================================================================================================
UNAUDITED
-------------------------
SIX MONTHS ENDED JUNE 30,
(IN MILLIONS) 2002 2001
- -----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (3.9) $ (7.1)
Reconciliation to net cash provided by (used for) operating activities:
Depreciation and amortization 23.5 30.7
Deferred income taxes 0.1 (3.3)
Business consolidation and restructuring expenses 0.8 2.9
Business consolidation and restructuring payments (14.8) (3.8)
Equity in (earnings) losses of and write-down of an investment in affiliated
companies 8.0 (1.6)
Loss on early retirement of debt - 0.7
Working capital changes and other 12.0 (32.1)
- -----------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities 25.7 (13.6)
- -----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (5.2) (21.9)
Other 0.8 (0.3)
- -----------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (4.4) (22.2)
- -----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds (repayments) of credit facilities, net (26.0) 40.9
Repayments of long-term debt and capital lease obligations, net (4.4) (2.2)
Debt issuance costs - (3.5)
Activity under stock plans 0.1 0.7
- -----------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities (30.3) 35.9
- -----------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents 1.3 1.1
- -----------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (7.7) 1.2
Cash and cash equivalents at beginning of period 11.6 5.1
- -----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 3.9 $ 6.3
=================================================================================================================
SUPPLEMENTAL DATA:
Cash interest paid $ 30.5 $ 37.4
Cash taxes paid, net of refunds $ (0.5) $ 7.9
=================================================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
4
HEXCEL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- BASIS OF ACCOUNTING
The accompanying condensed consolidated financial statements have been
prepared from the unaudited records of Hexcel Corporation and subsidiaries
("Hexcel" or "the Company") in accordance with accounting principles generally
accepted in the United States of America, and, in the opinion of management,
include all adjustments necessary to present fairly the balance sheet of the
Company as of June 30, 2002 and the results of operations for the quarters and
six months ended June 30, 2002 and 2001, and the cash flows for the six months
ended June 30, 2002 and 2001. The condensed consolidated balance sheet of the
Company as of December 31, 2001 was derived from the audited 2001 consolidated
balance sheet. Certain information and footnote disclosures normally included in
financial statements have been omitted pursuant to rules and regulations of the
Securities and Exchange Commission. Certain prior period amounts in the
condensed consolidated financial statements and accompanying notes have been
reclassified to conform to the 2002 presentation. These condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's 2001 Annual
Report on Form 10-K.
NOTE 2 -- ACCOUNTING CHANGES
Effective January 1, 2002, the Company adopted Statements of Financial
Accounting Standards No. 141, "Business Combinations" ("FAS 141"), and No. 142,
"Goodwill and Other Intangible Assets" ("FAS 142"). FAS 141 requires all
business combinations subsequent to June 30, 2001 be accounted for using the
purchase method of accounting. It also specifies the types of acquired
intangible assets that are required to be recognized and reported separate from
goodwill. FAS 142 changes the accounting for goodwill from an amortization
method to an impairment only approach. Upon adoption, goodwill is tested at the
reporting unit level annually and whenever events or circumstances occur
indicating that goodwill might be impaired. The assessment of possible
impairment is based upon a comparison of the reporting unit's fair value to its
carrying value. Amortization of goodwill, including goodwill recorded in past
business combinations, ceased upon adoption. There was no impairment of goodwill
upon adoption of FAS 142.
Net income (loss) and net income (loss) per share for the quarters and six
months ended June 30, 2002 and 2001, and adjusted to exclude amortization
expense, net of tax, are as follows:
===========================================================================================================
QUARTER ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 2002 2001 2002 2001
- -----------------------------------------------------------------------------------------------------------
NET INCOME (LOSS):
Net income (loss) $ 5.3 $ (12.6) $ (3.9) $ (7.1)
Goodwill amortization, net of tax - 3.2 - 5.3
- -----------------------------------------------------------------------------------------------------------
Adjusted net income (loss) $ 5.3 $ (9.4) $ (3.9) $ (1.8)
- -----------------------------------------------------------------------------------------------------------
BASIC NET INCOME (LOSS) PER SHARE:
Net income (loss) $ 0.14 $ (0.34) $ (0.10) $ (0.19)
Goodwill amortization, net of tax - 0.09 - 0.14
- -----------------------------------------------------------------------------------------------------------
Adjusted basic net income (loss) per share $ 0.14 $ (0.25) $ (0.10) $ (0.05)
- -----------------------------------------------------------------------------------------------------------
DILUTED NET INCOME (LOSS) PER SHARE:
Net income (loss) $ 0.14 $ (0.34) $ (0.10) $ (0.19)
Goodwill amortization, net of tax - 0.09 - 0.14
- -----------------------------------------------------------------------------------------------------------
Adjusted diluted net income (loss) per share $ 0.14 $ (0.25) $ (0.10) $ (0.05)
===========================================================================================================
5
The gross carrying amount and accumulated amortization of goodwill for the
Company's segments as of June 30, 2002 and December 31, 2001, are as follows:
=============================================================================================
JUNE 30, 2002 DECEMBER 31, 2001
(IN MILLIONS) GROSS CARRYING ACCUMULATED GROSS CARRYING ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
- ---------------------------------------------------------------------------------------------
Reinforcements $ 69.7 $ 29.7 $ 69.6 $ 29.7
Composites 29.8 12.6 27.9 12.0
Structures 23.5 6.9 23.5 6.9
- ---------------------------------------------------------------------------------------------
Goodwill $ 123.0 $ 49.2 $ 121.0 $ 48.6
=============================================================================================
No goodwill or other purchased intangibles were acquired during the
quarters and six months ended June 30, 2002 and 2001. Amortization expense was
$2.2 million in Reinforcements, $0.7 million in Composites and $0.3 million in
Structures for the quarter ended June 30, 2001, and $4.5 million, $1.3 million
and $0.6 million for the six months ended June 30, 2001, respectively.
The Company also adopted Statement of Financial Accounting Standards No.
145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections" ("FAS 145") effective January 1,
2002. Among other matters, FAS 145 rescinds Statement of Financial Accounting
Standards No. 4, "Reporting Gains and Losses from Extinguishment of Debt," which
required all gains and losses from extinguishment of debt be aggregated and, if
material, classified as an extraordinary item, net of the related income tax
effect. In connection with its adoption, gains and losses from extinguishments
of debt will no longer be classified as extraordinary items on the Company's
statement of operations. In addition, prior period financial statements are to
be reclassified to reflect the new standard. As such, the Company reclassified
the $3.1 million extraordinary loss on early retirement of debt recorded in the
second quarter of 2001 as a separate line item below operating income in its
condensed consolidated statement of operations.
The $3.1 million loss incurred in the second quarter of 2001 was the result
of the early retirement of $67.5 million aggregate principal amount of the
Company's outstanding 7% Convertible Subordinated Notes Due 2003 and the
redemption of the entire principal amount of $25.0 million of the Company's
Increasing Rate Senior Subordinated Note Due 2003 in connection with the
Company's issuance of $100.0 million of 9.75% Senior Subordinated Notes Due
2009.
NOTE 3 -- INVENTORIES
- ---------------------------------------------------------------------
(IN MILLIONS) 6/30/02 12/31/01
- ---------------------------------------------------------------------
Raw materials $ 59.8 $ 59.1
Work in progress 36.2 35.2
Finished goods 37.2 37.4
- ---------------------------------------------------------------------
Total inventories $ 133.2 $ 131.7
=====================================================================
NOTE 4 -- BUSINESS CONSOLIDATION AND RESTRUCTURING PROGRAMS
During the fourth quarter of 2001, the Company announced a program to
restructure its business operations as a result of its revised business outlook
for build rate reductions in commercial aircraft production in both 2002 and
2003 and due to the continued depressed business conditions in the electronics
market. The program includes company-wide reductions in managerial,
professional, indirect manufacturing and administrative employees along with
organizational rationalization. The Company continued the implementation of this
program during the first six months of 2002, further reducing its workforce by
745, or almost 15%, to 4,631 employees. The Company expects to further reduce
that number to less than 4,500 by the end of 2002.
6
Business consolidation and restructuring liabilities as of June 30, 2002
and December 31, 2001, and activity for the quarter and six months ended June
30, 2002, consisted of the following:
- --------------------------------------------------------------------------------------------------------
EMPLOYEE FACILITY &
(IN MILLIONS) SEVERANCE EQUIPMENT TOTAL
- --------------------------------------------------------------------------------------------------------
BALANCE AS OF DECEMBER 31, 2001 $ 30.5 $ 2.9 $ 33.4
Business consolidation and restructuring expenses - 0.7 0.7
Cash expenditures (8.5) (0.9) (9.4)
Currency translation adjustment (0.1) - (0.1)
- --------------------------------------------------------------------------------------------------------
BALANCE AS OF MARCH 31, 2002 21.9 2.7 24.6
Business consolidation and restructuring expenses - 0.1 0.1
Cash expenditures (4.6) (0.8) (5.4)
Currency translation adjustment 0.8 - 0.8
Other - 0.5 0.5
- --------------------------------------------------------------------------------------------------------
BALANCE AS OF JUNE 30, 2002 $ 18.1 $ 2.5 $ 20.6
========================================================================================================
For the quarter and six months ended June 30, 2002, the Company recognized
$0.1 million and $0.8 million, respectively, of business consolidation and
restructuring expenses for equipment relocation and re-qualification costs that
are expensed as incurred, net of the gain on the sale of the previously idled
Cleveland, Georgia facility. These costs related both to the planned closure of
the Lancaster, Ohio pre-preg manufacturing facility, as well as actions
associated with the restructuring program announced during the fourth quarter of
2001. The Company recognized $1.8 million and $2.9 million of business
consolidation and restructuring expenses relating to plant closure actions
during the quarter and six months ended June 30, 2001, respectively.
During the second quarter of 2002, the Company sold its previously idled
Cleveland, Georgia facility for net cash proceeds of $0.9 million. The net book
value of the property sold was $0.4 million, resulting in a gain on sale of $0.5
million. As the net book value of the property sold reflected a prior asset
write-down in connection with the business consolidation and restructuring
program announced in 1999, the gain of $0.5 million has been reported as an
offset to second quarter 2002 business consolidation and restructuring expenses
in the condensed consolidated statements of operations.
NOTE 5 -- NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS
- -----------------------------------------------------------------------------------------------------------------
(IN MILLIONS) 6/30/02 12/31/01
- -----------------------------------------------------------------------------------------------------------------
Senior Credit Facility $ 210.1 $ 233.9
European credit and overdraft facilities 2.3 3.5
9.75% Senior subordinated notes, due 2009 (net of unamortized discount
of $1.3 as of June 30, 2002 and $1.4 as of December 31, 2001) 338.7 338.6
7.0% Convertible subordinated notes, due 2003 46.9 46.9
7.0% Convertible subordinated debentures, due 2011 24.5 24.5
Various notes payable - 0.1
- -----------------------------------------------------------------------------------------------------------------
Total notes payable 622.5 647.5
Capital lease obligations 35.6 38.4
- -----------------------------------------------------------------------------------------------------------------
Total notes payable and capital lease obligations $ 658.1 $ 685.9
=================================================================================================================
Notes payable and current maturities of long-term liabilities $ 16.5 $ 17.4
Long-term notes payable and capital lease obligations, less current maturities 641.6 668.5
- -----------------------------------------------------------------------------------------------------------------
Total notes payable and capital lease obligations $ 658.1 $ 685.9
=================================================================================================================
7
SENIOR CREDIT FACILITY
Hexcel has a global credit facility (the "Senior Credit Facility") with a
syndicate of banks to provide for ongoing working capital and other financing
requirements. The Senior Credit Facility, which consists of revolving credit,
overdraft and term loan facilities, provided Hexcel with committed lines of
approximately $322.8 million as of June 30, 2002, subject to certain
limitations. These commitments consisted of funded term loans of $110.8 million
and revolving credit, overdraft and letter of credit facilities of $212.0
million. As of June 30, 2002, drawings under the revolving credit facility were
$99.3 million, while undrawn commitments under the revolving credit and
overdraft facilities were $82.7 million. In addition, the Company may issue
letters of credit up to a value of $30.0 million under the Senior Credit
Facility. The letters of credit facility reduces the funded debt the Company may
draw under the revolving credit and overdraft facilities. As of June 30, 2002,
letters of credit issued under the facility approximated $24.0 million, of which
$11.1 million supports a loan to the Company's BHA Aero Composite Parts Co.,
Ltd. joint venture in China. The Company is subject to various financial
covenants and restrictions under the Senior Credit Facility, including
limitations on incurring debt, granting liens, selling assets, repaying
subordinated indebtedness, redeeming capital stock and paying dividends. The
Senior Credit Facility is scheduled to expire in 2004, except for approximately
$55.8 million of term loans that are due for repayment in 2005.
Effective January 25, 2002, Hexcel entered into an amendment of the Senior
Credit Facility. The amendment provided for revised financial covenants through
2002; a 100 basis point increase in the interest spread payable over LIBOR for
advances under the facility; an immediate decrease in the commitment of
revolving credit and overdraft facilities from a cumulative amount of $235.0
million to $220.0 million, with a further reduction to $212.0 million on or
before September 30, 2002; and a requirement that the unused borrowing capacity
available under the Senior Credit Facility, together with all cash and cash
equivalents held by the Company, equal at least $30.0 million on June 30, 2002.
The revised covenants were derived from the Company's financial projections plus
a modest cushion. The Senior Credit Facility financial covenants set certain
maximum values for the Company's leverage (the ratios of total and senior debt
to Adjusted EBITDA), and certain minimum values for its interest coverage (the
ratio of Adjusted EBITDA to cash interest expense) and fixed charge coverage
(the ratio of Adjusted EBITDA less capital expenditures to the sum of certain
fixed expenses). In addition, during the term of the amendment, all net proceeds
generated through asset sales, and most other liquidity events, in each case to
the extent in excess of $2.5 million, and 100% of all net proceeds generated
from litigation settlements and judgments, must be used to prepay loans under
the Senior Credit Facility. Hexcel has also agreed to limit capital expenditures
to $25.0 million during 2002, with a $10.0 million limit during any quarter in
2002. At June 30, 2002, the Company was in compliance with all covenants. Unused
borrowing capacity available under the Senior Credit Facility together with all
cash and cash equivalents held by the Company at June 30, 2002 totaled $86.6
million, meeting the $30.0 million liquidity requirement as defined in the
amendment to the Senior Credit Facility. Net proceeds of $11.1 million received
from a successful litigation judgment were used to repay advances under the
Senior Credit Facility. Furthermore, the cumulative commitments under the
revolving loan facilities portion of the Senior Credit Facility were reduced by
$8.0 million to $212.0 million, meeting the requirement for this reduction on or
before September 30, 2002.
In connection with the credit agreement amendment, Hexcel also agreed to
grant additional collateral. The Company had previously granted a security
interest in most of its U.S. accounts receivable, inventory, property, plant,
equipment and real estate. It had also pledged some or all of the shares of
certain subsidiaries. Under the terms of the amendment, Hexcel has granted to
the banks a security interest in additional U.S. accounts receivable, inventory,
property, plant, equipment and real estate, as well as its intellectual
property. In addition, during the second quarter of 2002, each of a group of
8
Hexcel's European subsidiaries granted to the banks a security interest in its
accounts receivable that secures certain local borrowings advanced to that
subsidiary.
Given its financial leverage, the Company's future compliance with the
financial covenants and other terms of the Senior Credit Facility could be
compromised if its financial performance were to deteriorate as a result of
further declines in the general macroeconomic environment or in key markets
served by the Company, or by other unforeseen events. There can be no assurance
that relief from financial covenants, if necessary, will be obtained or as to
the terms under which it may be granted by the senior lenders. Under the terms
of the amendment, the financial covenants effective beginning with the quarter
ending March 31, 2003 are those that applied before the amendment. The Company
will need to substantially improve its financial performance or substantially
reduce its indebtedness in order to comply with the financial covenants in 2003,
and will therefore probably need to obtain a further amendment from its Senior
Credit Facility banks. There can be no assurance that the Company will be able
to effect any such amendment on commercially reasonable terms, or at all.
9.75% SENIOR SUBORDINATED NOTES DUE 2009 AND REDEMPTION OF CERTAIN NOTES
On June 29, 2001, the Company issued $100.0 million of 9.75% Senior
Subordinated Notes Due 2009 at a price of 98.5% of face value. Net proceeds from
the offering were used to redeem $67.5 million aggregate principal amount of the
Company's outstanding 7% Convertible Subordinated Notes Due 2003 and to pay the
entire principal amount of $25.0 million of the Increasing Rate Senior
Subordinated Note Due 2003. The issuance and early retirement resulted in an
approximate $6.5 million cash expenditure for the period.
NOTE 6 -- LITIGATION GAIN
In the second quarter of 2002, the Company recognized a litigation gain of
$9.8 million (net of related fees and expenses) in connection with a contract
dispute with Hercules, Inc. that arose out of the acquisition of Hercules'
Composites Products Division in 1996. The net cash proceeds received from
Hercules Inc. of $11.1 million was in satisfaction of the judgment entered in
favor of the Company after Hercules had exhausted all appeals from a lower court
decision in the New York courts.
NOTE 7 -- INVESTMENTS IN AFFILIATED COMPANIES
During the second quarter of 2002, the Company agreed with its Asian
Electronics venture partner to restructure its minority interest in
Asahi-Schwebel Co. Ltd. Under the terms of the agreement, the Company reduced
its ownership interest in the joint venture from 43.3% to 33.3% in July 2002 and
received cash proceeds of $10.0 million. The cash proceeds were received on July
15, 2002. The agreement also included, among other matters, a put option in
favor of the Company to sell and a call option in favor of the Company's joint
venture partner to purchase the Company's remaining ownership interest in the
joint venture for $23.0 million. The options are simultaneously effective for a
six-month period beginning July 1, 2003. Reflecting these terms, the Company
wrote-down the carrying value of its remaining equity investment in this joint
venture to its estimated fair market value of $23.0 million, recording a
non-cash impairment of $4.0 million during the second quarter of 2002. There was
no tax benefit recognized on the write-down.
9
NOTE 8 -- NON-RECURRING EXPENSES
In January 2002 and in May 2001, the Company entered into amendments to the
Senior Credit Facility. In connection with these amendments, included in
interest expense in the six months ended June 30, 2002 and in the second quarter
of 2001 are fees and expenses incurred of $1.7 million and $1.0 million,
respectively.
In connection with the retirement of the former chief executive officer,
the Company recorded compensation expenses of $4.7 million in the second quarter
of 2001 as a result of the early vesting of certain deferred compensation and
equity compensation awards together with a contractual termination payment.
NOTE 9 -- NET INCOME (LOSS) PER SHARE
- -----------------------------------------------------------------------------------------------------------------
QUARTER ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 2002 2001 2002 2001
- -----------------------------------------------------------------------------------------------------------------
BASIC NET INCOME (LOSS) PER SHARE:
Net income (loss) $ 5.3 $ (12.6) $ (3.9) $ (7.1)
Weighted average common shares outstanding 38.4 37.4 38.4 37.3
- -----------------------------------------------------------------------------------------------------------------
Basic net income (loss) per share $ 0.14 $ (0.34) $ (0.10) $ (0.19)
=================================================================================================================
DILUTED NET INCOME (LOSS) PER SHARE:
Diluted net income (loss) $ 5.3 $ (12.6) $ (3.9) $ (7.1)
Weighted average common shares outstanding 38.4 37.4 38.4 37.3
Effect of dilutive securities - stock options 0.7 - - -
- -----------------------------------------------------------------------------------------------------------------
Diluted weighted average common shares outstanding 39.1 37.4 38.4 37.3
- -----------------------------------------------------------------------------------------------------------------
Diluted net income (loss) per share $ 0.14 $ (0.34) $ (0.10) $ (0.19)
=================================================================================================================
The Company's convertible subordinated notes, due 2003, convertible
subordinated debentures, due 2011, and stock options were excluded from the
computations of diluted net income (loss) per share for the quarter ended June
30, 2001 and the six months ended June 30, 2002 and 2001, as they were
anti-dilutive. The convertible notes and debentures were also excluded from the
computation of diluted net income per share for the quarter ended June 30, 2002,
as they were anti-dilutive.
NOTE 10 -- COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) represents net income (loss) and other gains
and losses affecting shareholders' equity that are not reflected in the
condensed consolidated statements of operations. The components of comprehensive
income (loss) for the quarters and six months ended June 30, 2002 and 2001 were
as follows:
- ------------------------------------------------------------------------------------------------------------
QUARTER ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
(IN MILLIONS) 2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------------
Net income (loss) $ 5.3 $ (12.6) $ (3.9) $ (7.1)
Net unrealized gain (loss) on financial instruments 7.0 (3.5) 6.7 (8.4)
Currency translation adjustment 16.6 (9.3) 11.6 (19.6)
- ------------------------------------------------------------------------------------------------------------
Total comprehensive income (loss) $ 28.9 $ (25.4) $ 14.4 $ (35.1)
============================================================================================================
10
NOTE 11 -- DERIVATIVE FINANCIAL INSTRUMENTS
INTEREST RATE CAP AGREEMENT
The Company's financial results are affected by interest rate changes on
its variable rate debt. In order to partially mitigate this interest rate risk,
the Company entered into a four-year interest rate cap agreement in 1998. This
agreement provides for a maximum fixed rate of 5.5% on the applicable London
interbank rate used to determine the interest on a notional amount of $50.0
million of variable rate debt under the Senior Credit Facility. The fair value
and carrying amount of this contract at June 30, 2002 and December 31, 2001,
along with hedge ineffectiveness for the quarters and six months ended June 30,
2002 and 2001, were not material.
FOREIGN CURRENCY FORWARD EXCHANGE CONTRACTS
A number of the Company's European subsidiaries are exposed to the impact
of exchange rate volatility between the U.S. dollar and the subsidiaries'
functional currencies, being either the Euro or the British Pound Sterling. To
minimize this exposure, Hexcel entered into a number of foreign currency forward
exchange contracts to exchange U.S. dollars for Euros at fixed rates on
specified dates through March 2005. The aggregate notional amount of these
contracts was $71.4 million at June 30, 2002 and $83.9 million at December 31,
2001. The purpose of these contracts is to hedge a portion of the forecasted
transactions of European subsidiaries under long-term sales contracts with
certain customers. These contracts are expected to provide the Company with a
more balanced matching of future cash receipts and expenditures by currency,
thereby reducing the Company's exposure to fluctuations in currency exchange
rates. For the quarter and six months ended June 30, 2002, hedge ineffectiveness
was immaterial and the fair value of the foreign currency cash flow hedges
recognized in "comprehensive income" was a gain of $7.0 million and $6.7
million, respectively. Over the next twelve months, approximately $0.8 million
of other comprehensive gains are expected to be reclassified into earnings as
the hedged sales are recorded.
NOTE 12 -- SEGMENT INFORMATION
The financial results for Hexcel's business segments are prepared using a
management approach, which is consistent with the basis and manner in which
Hexcel management internally segregates financial information for the purposes
of assisting in making internal operating decisions. Hexcel evaluates the
performance of its operating segments based on income before business
consolidation and restructuring expenses, interest, taxes and equity in earnings
(losses) of affiliated companies (referred to as "Adjusted operating income"),
and generally accounts for intersegment sales based on arm's length prices.
Corporate and certain other expenses are not allocated to the operating
segments, except to the extent that the expense can be directly attributable to
the business segment.
As part of the Company's restructuring plan announced in the fourth quarter
of 2001, effective January 1, 2002, management responsibility for the Company's
carbon fiber product line was transferred to the Composite Materials business
segment. As a result of this change in management responsibilities, the Company
changed its business segment reporting to reflect the reclassification of this
product line from the Reinforcement Products segment to the Composite Materials
segment. The Company also changed the names of its business segments. The
Company's three business segments are now known as Reinforcements, Composites
and Structures, rather than Reinforcement Products, Composite Materials and
Engineered Products. Results for the quarter and six months ended June 30, 2001
have been restated for comparative purposes.
11
Financial information for the Company's segments for the quarter and six
month periods ended June 30, 2002 and 2001, is as follows:
- ------------------------------------------------------------------------------------------------------------------
CORPORATE
(IN MILLIONS) REINFORCEMENTS COMPOSITES STRUCTURES & OTHER TOTAL
- ----------------------------------------------------------------------------------------------------------------
SECOND QUARTER 2002
- ----------------------------------------------------------------------------------------------------------------
Net sales to external customers $ 58.6 $ 137.7 $ 24.9 $ - $ 221.2
Intersegment sales 18.1 4.9 - - 23.0
- ----------------------------------------------------------------------------------------------------------------
Total sales 76.7 142.6 24.9 - 244.2
Adjusted operating income 6.3 19.1 0.4 (6.2) 19.6
Depreciation and amortization 4.0 7.0 0.7 - 11.7
Business consolidation and
restructuring expenses (0.5) 0.5 0.1 - 0.1
Capital expenditures 1.3 2.0 0.1 - 3.4
- ----------------------------------------------------------------------------------------------------------------
SECOND QUARTER 2001
- ----------------------------------------------------------------------------------------------------------------
Net sales to external customers $ 57.8 $ 162.6 $ 33.1 $ - $ 253.5
Intersegment sales 24.5 6.0 - - 30.5
- ----------------------------------------------------------------------------------------------------------------
Total sales 82.3 168.6 33.1 - 284.0
Adjusted operating income 0.4 24.1 0.6 (7.2) 17.9
Depreciation and amortization 6.6 7.7 1.0 0.2 15.5
Business consolidation and
restructuring expenses 0.2 1.6 - - 1.8
Capital expenditures 6.4 4.6 - 0.3 11.3
- ----------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 2002
- ----------------------------------------------------------------------------------------------------------------
Net sales to external customers $ 120.6 $ 269.4 $ 53.3 $ - $ 443.3
Intersegment sales 36.3 9.6 - - 45.9
- ----------------------------------------------------------------------------------------------------------------
Total sales 156.9 279.0 53.3 - 489.2
Adjusted operating income 10.1 34.6 1.3 (12.4) 33.6
Depreciation and amortization 8.0 14.1 1.4 - 23.5
Business consolidation and
restructuring expenses (0.2) 0.9 0.1 - 0.8
Capital expenditures 1.8 3.3 0.1 - 5.2
- ----------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 2001
- ----------------------------------------------------------------------------------------------------------------
Net sales to external customers $ 133.6 $ 333.4 $ 62.7 $ - $ 529.7
Intersegment sales 50.2 12.7 - - 62.9
- ----------------------------------------------------------------------------------------------------------------
Total sales 183.8 346.1 62.7 - 592.6
Adjusted operating income 9.1 47.6 0.9 (16.0) 41.6
Depreciation and amortization 13.2 15.0 2.0 0.5 30.7
Business consolidation and
restructuring expenses 0.3 2.6 - - 2.9
Capital expenditures 12.3 8.8 0.2 0.6 21.9
================================================================================================================
Adjusted operating income has been presented to provide a measure of
Hexcel's operating performance that is commonly used by investors and financial
analysts to analyze and compare companies. Adjusted operating income may not be
comparable to similarly titled financial measures of other companies. Adjusted
operating income does not represent an alternative measure of the Company's cash
flows or operating income, and should not be considered in isolation or as a
substitute for measures of performance presented in accordance with accounting
principles generally accepted in the United States of America.
12
A reconciliation of consolidated operating income to adjusted operating
income is as follows:
- ------------------------------------------------------------------------------------------------------------
QUARTER ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
(IN MILLIONS) 2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------------
Consolidated operating income $ 19.5 $ 11.4 $ 32.8 $ 34.0
Business consolidation and restructuring expenses 0.1 1.8 0.8 2.9
Compensation expense associate with CEO's retirement - 4.7 - 4.7
- ------------------------------------------------------------------------------------------------------------
Adjusted operating income $ 19.6 $ 17.9 $ 33.6 $ 41.6
============================================================================================================
NOTE 13 --TAXES
The Company's tax provision for the quarter and six months ended June 30,
2002 of $3.1 million and $5.6 million, respectively, was for taxes on European
income. The Company did not provide for income taxes in the United States in the
second quarter of 2002 as it utilized its net operating loss carryforwards. The
Company will continue to establish a non-cash valuation allowance attributable
to currently generated U.S. net operating losses until such time as the U.S.
operations have returned to consistent profitability.
The U.S. and European components of income (loss) before income taxes and
the provision for income taxes for the quarter and six months ended June 30,
2002 are as follows:
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, 2002 JUNE 30, 2002
--------------------------------------- -------------------------------------
U.S. Europe Total U.S. Europe Total
---------- --------- --------- --------- --------- --------
Income (loss) before income
taxes $ 4.8 $ 9.2 $ 14.0 $ (6.4) $ 16.1 $ 9.7
Provision for income taxes 0.1 3.0 3.1 0.2 5.4 5.6
--------------------------------------- -------------------------------------
Income (loss) before equity
in earnings $ 4.7 $ 6.2 $ 10.9 $ (6.6) $ 10.7 $ 4.1
======================================= =====================================
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FINANCIAL OVERVIEW
SECOND QUARTER RESULTS
- ----------------------------------------------------------------------------------------------
QUARTER ENDED JUNE 30,
------------------------
(IN MILLIONS, EXCEPT PER SHARE DATA) 2002 2001
- ----------------------------------------------------------------------------------------------
Net sales $ 221.2 $ 253.5
Gross margin % 20.3% 20.4%
Operating income $ 19.5 $ 11.4
Adjusted operating income (a) $ 19.6 $ 17.9
Adjusted EBITDA (b) $ 31.3 $ 33.4
Provision for income taxes (c) $ 3.1 $ 3.8
Litigation gain $ 9.8 $ -
Equity in earnings (losses) of and write-down of an
investment in affiliated companies $ (5.6) $ 0.2
Net income (loss) $ 5.3 $ (12.6)
Diluted net income (loss) per share $ 0.14 $ (0.34)
==============================================================================================
(a) Excludes business consolidation and restructuring expenses and compensation
expenses recorded in the second quarter of 2001 associated with the former
CEO's retirement. As of January 1, 2002, the Company adopted FAS 142 and
ceased amortizing goodwill. Goodwill amortization was $3.2 million in the
second quarter of 2001.
(b) Excludes business consolidation and restructuring expenses, litigation
gain, loss on early retirement of debt, interest, taxes depreciation,
amortization, equity in earnings (losses) of and write-down of an
investment in affiliated companies, and compensation expenses recorded in
the second quarter of 2001 associated with the former CEO's retirement.
(c) Reflects the impact of ceasing to record the tax benefits from U.S.
operating losses commencing in the second quarter of 2001.
Adjusted EBITDA and Adjusted operating income are not based on accounting
principles generally accepted in the United States of America, but are presented
to explain the impact of certain items and to provide a measure of the Company's
operating performance in a way that is commonly used by investors and financial
analysts to analyze and compare companies. In addition, Adjusted EBITDA is used
in the calculation of financial covenants under the Company's Senior Credit
Facility. These measures may not be comparable to similarly titled financial
measures of other companies, 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.
RESULTS OF OPERATIONS
NET SALES: Net sales of $221.2 million for the second quarter of 2002 were
12.7% lower than net sales of $253.5 million for the second quarter of 2001,
reflecting a sharp reduction in sales to the commercial aerospace market and
modestly lower sales in the electronics market. Net sales to the commercial
aerospace market declined as build rates of commercial aircraft were reduced due
to a decrease in end demand from commercial airlines. Net sales to the
electronics market were modestly lower compared to the levels achieved in the
second quarter of 2001 as demand for lightweight fiberglass fabric substrates
used in the fabrication of printed wiring boards remained at the depressed
levels seen in the prior year. The reduction in sales to these markets was
partially offset by continued growth in revenues to space and defense and
industrial markets. Had the same U.S. dollar, British Pound Sterling and Euro
exchange rates applied in the second quarter of 2002 as in the second quarter of
2001, net sales for the second quarter of 2002 would have been $3.5 million
lower, or $217.7 million, reflecting the weakening of the U.S. dollar.
14
The following table summarizes net sales to third-party customers by
segment and end market for the quarters ended June 30, 2002 and 2001,
respectively:
- --------------------------------------------------------------------------------------------------------
UNAUDITED
------------------------------------------------------------------------
COMMERCIAL SPACE &
(IN MILLIONS) AEROSPACE DEFENSE ELECTRONICS INDUSTRIAL TOTAL
- --------------------------------------------------------------------------------------------------------
SECOND QUARTER 2002
Reinforcements $ 13.6 $ - $ 14.5 $ 30.5 $ 58.6
Composites 67.9 34.8 - 35.0 137.7
Structures 20.9 4.0 - - 24.9
- --------------------------------------------------------------------------------------------------------
Total $ 102.4 $ 38.8 $ 14.5 $ 65.5 $ 221.2
46% 18% 6% 30% 100%
- --------------------------------------------------------------------------------------------------------
SECOND QUARTER 2001 (A)
Reinforcements $ 14.3 $ - $ 16.5 $ 27.0 $ 57.8
Composites 97.1 29.1 - 36.4 162.6
Structures 29.3 3.8 - - 33.1
- --------------------------------------------------------------------------------------------------------
Total $ 140.7 $ 32.9 $ 16.5 $ 63.4 $ 253.5
56% 13% 6% 25% 100%
- --------------------------------------------------------------------------------------------------------
(a) The 2001 amounts have been reclassified for comparative purposes, and
reflect the change in reporting segments made by the Company effective
January 1, 2002. See Note 12 to the accompanying condensed consolidated
financial statements.
Commercial aerospace net sales decreased 27.2% to $102.4 million for the
second quarter of 2002, as compared to net sales of $140.7 million for the
second quarter of 2001. This decrease in comparable second quarter sales
reflects lower build rates at Airbus and Boeing. Boeing expects to deliver
approximately 370 aircraft in 2002, down from 527 in 2001, while Airbus
anticipates 2002 deliveries to be slightly lower than the 325 aircraft delivered
in 2001. Both Boeing and Airbus anticipate further reductions in deliveries in
2003. This guidance suggests that combined Boeing and Airbus commercial aircraft
deliveries in 2002 will be about 20% lower than in 2001. In addition, Boeing,
Airbus and their subcontractors are working to consume excess supply chain
inventories as production is reduced. Recent statements suggest that regional
aircraft manufactures will deliver a similar number of aircraft as they did in
2001. The impact of these changes on the Company will be influenced by two
additional factors: (a) the mix of aircraft that are produced, as twin aisle
aircraft use more of the Company's products than narrow body aircraft and newly
designed aircraft use more than older generations, and (b) the speed by which
the aircraft manufacturers reduce their production to the new demand levels and,
thereby, the effect of reduced aircraft production on the inventory supply
chain. Reflecting the forgoing, the Company continues to anticipate that
commercial aerospace revenues will decline approximately 25-30% in 2002 compared
to 2001.
Space and defense net sales for the second quarter 2002 of $38.8 million
were $5.9 million, or 17.9%, higher than the second quarter of 2001 net sales of
$32.9 million. Partially offsetting this increase are lower revenues from the
satellite and launch vehicle markets, and the V-22 program. In general, sales
associated with military aircraft and helicopters continue to trend upwards as
the new generation of military aircraft in the United States and Europe ramp up
in production. Forecasts by both the United States and European defense
departments support this outlook. The Company is currently qualified to supply
materials to a broad range of military aircraft and helicopters scheduled to
enter either full-scale production in the near future or significantly increase
existing production rates. These programs include the F/A-18E/F (Hornet), the
F-22 (Raptor), the European Fighter Aircraft (Typhoon) as well as the C-17, the
V-22 (Osprey) tilt rotor aircraft, the RAH-66 (Comanche) and the NH90
helicopters. The benefits the Company obtains from these programs tend to vary
quarter to quarter and will depend upon which ones are funded and the extent of
such funding. Of particular note, the production of the V-22 (Osprey) in 2002 is
projected to be lower than 2001 as modifications are made to the aircraft. A
return to the prior production levels will depend on the progress made on
modifications and program funding. The timing
15
of these changes in rate may influence the rate and timing of growth in the
Company's sales to its space and defense market.
Electronics net sales were $14.5 million in the second quarter of 2002, a
decrease of 12.1% from net sales of $16.5 million in the comparable 2001
quarter. This decline reflects the on-going impact of a downturn in the global
electronics industry that impacted the demand for the Company's fiberglass
fabric substrates used in the fabrication of printed wiring boards. The Company
first saw the impact of this downturn in its U.S. operations in the latter part
of the first quarter of 2001. With the benefit of cost reductions and the
stabilization of the revenue base, this market recorded a small but positive
adjusted EBITDA for the second consecutive quarter, after several quarters of
losses or breakeven performance. As the results of the second quarter of 2002
would indicate, there is still no evidence of a substantial recovery in this
industry. In addition, import quotas limiting Asian imports of fiberglass
fabrics into the United States expired at the end of 2001 and the migration of
lower layer count printed wiring board production from the United States to Asia
has continued. Given the length and complexity of the supply chain, the Company
has little visibility as to when and to what extent demand may recover. With
this lack of visibility and the seasonal impact of the European vacation period,
the Company believes that electronics revenues will not substantially recover in
the third quarter of 2002 and will likely be weaker than they were in the second
quarter of 2002.
Industrial net sales increased 3.3% to $65.5 million for the second quarter
of 2002 from net sales of $63.4 million for the same 2001 quarter. The increase
reflects higher demand for fabrics used in soft body armor and composite
materials used in recreational and general industrial applications. Demand for
composite materials used in wind turbine rotor blades and automotive
applications showed continued strength, but experienced a slight revenue decline
year-on-year as sales for these applications were seasonally high in the second
quarter of 2001. In addition, sales for composite materials used in wind turbine
rotor blades were negatively impacted in the quarter by a four-month delay in
extending the U.S. tax credit for renewable energy. The tax credit was
reinstated in April 2002 and extended retroactively for two years to December
31, 2003. Absent a significant deterioration in the general macroeconomic
environment, Hexcel expects sales to soft body armor and automotive customers to
grow in 2002, driven by growing demand for security and regulations providing
for improved automobile safety.
Looking forward, as has been evident in prior years, it is anticipated that
the Company's revenues in the third quarter of 2002 will be seasonally lower
than those reported in the second quarter of 2002. This seasonal reduction in
revenues results from the summer vacation periods recognized by the Company's
European customers.
GROSS MARGIN: Gross margin for the second quarter of 2002 was $44.8
million, or 20.3% of net sales, compared to gross margin of $51.7 million, or
20.4% of net sales for the second quarter of 2001. The $6.9 million decline in
gross margin reflects the year-on-year declines in revenues to commercial
aerospace and electronics markets offset, in part, by the favorable impact of
cash fixed costs reductions primarily generated from the previously announced
restructuring programs.
SELLING, GENERAL AND ADMINISTRATIVE ("SG&A") EXPENSES: SG&A expenses were
$22.0 million, or 10.0% of net sales, for the second quarter of 2002 compared
with $33.7 million, or 13.3% of net sales, for the second quarter of 2001.
Excluding compensation expenses associated with the former CEO's retirement of
$4.7 million in 2001 and the impact of the adoption of FAS 142 on goodwill
amortization, SG&A expenses in 2001 were $25.8 million, or 10.2% of net sales.
The balance of the decrease reflects the impact of the Company's restructuring
programs to reduce expenses to mitigate the reduction in sales in the commercial
aerospace and electronics markets. Goodwill amortization in the second quarter
of 2001 was $3.2 million. (Refer to Note 2 to the accompanying condensed
consolidated financial statements).
16
RESEARCH AND TECHNOLOGY ("R&T") EXPENSES: R&T expenses for the second
quarter of 2002 were $3.2 million, or 1.4% of net sales, compared with $4.8
million, or 1.9% of net sales, for the second quarter of 2001.
OPERATING INCOME: Operating income was $19.5 million, or 8.8% of net sales,
in the second quarter of 2002, compared with $11.4 million, or 4.5% of net
sales, in the second quarter of 2001. Excluding business consolidation and
restructuring expenses of $0.1 million and $1.8 million incurred in the second
quarter of 2002 and 2001, respectively, and excluding $4.7 million of
compensation expenses associated with the former CEO's retirement in 2001,
adjusted operating income was $19.6 million, or 8.9% of net sales, for the
second quarter of 2002, compared with $17.9 million, or 7.1% of net sales for
2001. The $1.7 million aggregate increase in adjusted operating income reflects
the reductions in SG&A and R&T expenses and the impact of the adoption of FAS
142 on goodwill amortization. Adjusted operating income in the second quarter of
2001 excluding goodwill amortization was $21.1 million, $1.6 million higher that
the current quarter.
LITIGATION GAIN: In the second quarter of 2002, the Company recognized a
litigation gain of $9.8 million (net of related fees and expenses) in connection
with a contract dispute with Hercules, Inc. that arose out of the acquisition of
Hercules' Composites Products Division in 1996. The net cash proceeds received
from Hercules Inc. of $11.1 million was in satisfaction of the judgment entered
in favor of the Company after Hercules had exhausted all appeals from a lower
court decision in the New York courts.
INTEREST EXPENSE: Interest expense was $15.3 million for the second quarter
of 2002, compared to $17.3 million for the second quarter of 2001. Interest
expense for the 2001 quarter includes bank amendment fees of approximately $1.0
million related to the amendment of certain financial covenants under the Senior
Credit Facility. Excluding the bank amendment fees, interest expense was $16.3
million in the second quarter of 2001. The remaining $1.0 million reduction in
interest expense year-on-year reflects lower Company borrowings and lower
interest rates on variable debt.
LOSS ON EARLY RETIREMENT OF DEBT: The $3.1 million loss on early retirement
of debt incurred in the second quarter of 2001 resulted from the early
retirement of $67.5 million aggregate principal amount of the Company's
outstanding 7% Convertible Subordinated Notes Due 2003 and the redemption of the
entire principal amount of $25.0 million of the Company's outstanding Increasing
Rate Senior Subordinated Note Due 2003 in connection with the Company's issuance
of $100.0 million of 9.75% Senior Subordinated Notes due 2009. (Refer to Note 2
to the accompanying condensed consolidated financial statements).
TAXES: The Company's tax provision of $3.1 million and $3.8 million in the
second quarter of 2002 and 2001, respectively, was for taxes on European income.
The Company did not provide for income taxes in the United States in the second
quarter of 2002 as it utilized its net operating loss carryforwards. The Company
will continue to establish a non-cash valuation allowance attributable to
currently generated U.S. net operating losses until such time as the U.S.
operations have returned to consistent profitability. (Refer to Note 13 to the
accompanying condensed consolidated financial statements.)
EQUITY IN EARNINGS (LOSSES) OF AND WRITE-DOWN OF AN INVESTMENT IN
AFFILIATED COMPANIES: During the second quarter of 2002, the Company agreed with
its Asian Electronics joint venture partner to restructure its minority interest
in the joint venture. Under the terms of the agreement, in July 2002 the Company
reduced its ownership interest in the venture from 43.3% to 33.3% and received
$10.0 million in cash. The agreement also included, among other matters, a put
option in favor of the Company to sell and a call option in favor of the
Company's joint venture partner to purchase the Company's remaining ownership
interest in the joint venture for $23.0 million. The options are simultaneously
effective for a
17
six-month period beginning July 1, 2003. Reflecting these terms, the Company
wrote-down the carrying value of its remaining equity investment in this joint
venture to its estimated fair market value of $23.0 million, recording a
non-cash impairment of $4.0 million during the second quarter of 2002. There was
no tax benefit recognized on the write-down.
Excluding this write-down, the equity in losses of affiliated companies was
$1.6 million for the second quarter of 2002 compared to equity in earnings of
$0.2 million for the same period of 2001, reflecting the on-going impact of the
electronics market decline on the Company's Asian electronics joint venture and
start-up losses associated with the Structures joint ventures in China and
Malaysia. These losses by affiliates do not affect the Company's cash flows.
YEAR-TO-DATE RESULTS
- ----------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30,
------------------------------
(IN MILLIONS, EXCEPT PER SHARE DATA) 2002 2001
- ----------------------------------------------------------------------------------------------
Net sales $ 443.3 $ 529.7
Gross margin % 19.0% 21.1%
Operating income $ 32.8 $ 34.0
Adjusted operating income (a) $ 33.6 $ 41.6
Adjusted EBITDA (b) $ 57.1 $ 72.3
Provision for income taxes (c) $ 5.6 $ 6.0
Litigation gain $ 9.8 $ -
Equity in earnings (losses) of and write-down of an
investment in affiliated companies $ (8.0) $ 1.6
Net loss $ (3.9) $ (7.1)
Diluted net loss per share $ (0.10) $ (0.19)
==============================================================================================
(a) Excludes business consolidation and restructuring expenses and compensation
expenses recorded in the second quarter of 2001 associated with the former
CEO's retirement. As of January 1, 2002, the Company adopted FAS 142 and
ceased amortizing goodwill. Goodwill amortization was $6.4 million in the
six months ended June 30, 2001.
(b) Excludes business consolidation and restructuring expenses, litigation
gain, loss on early retirement of debt, interest, taxes depreciation,
amortization, equity in earnings (losses) of and write-down of an
investment in affiliated companies and compensation expenses recorded in
the second quarter of 2001 associated with the former CEO's retirement.
(c) Reflects the impact of ceasing to record the tax benefits from U.S.
operating losses commencing in the second quarter of 2001.
NET SALES: Net sales for the first half of 2002 were $443.3 million, a
decrease of 16.3% when compared to the first half of 2001 net sales of $529.7
million, reflecting lower sales to the commercial aerospace and electronics
markets. Net sales to the commercial aerospace market declined by 27.9% as build
rates of commercial aircraft were reduced due to a decrease in end demand from
commercial airlines. Net sales to the electronics market were 39.5% lower
compared to the levels achieved in the first half of 2001 reflecting the
on-going impact of the downturn in the global electronics industry that has
impacted the demand for the Company's fiberglass fabric substrates used in the
fabrication of printed wiring boards. The Company first saw the sharp decline in
demand from its electronics customers in the latter part of the first quarter of
2001. The reduction in sales to these markets was partially offset by continued
growth in revenues to space and defense and industrial markets.
18
The following table summarizes net sales to third-party customers by
product group and market segment for the six months ended June 30, 2002 and
2001, respectively:
- ----------------------------------------------------------------------------------------------------------------
UNAUDITED
--------------------------------------------------------------------------------
COMMERCIAL SPACE &
(IN MILLIONS) AEROSPACE DEFENSE ELECTRONICS INDUSTRIAL TOTAL
- ----------------------------------------------------------------------------------------------------------------
FIRST HALF 2002
Reinforcements $ 26.0 $ - $ 31.0 $ 63.6 $ 120.6
Composites 134.2 66.3 - 68.9 269.4
Structures 45.6 7.7 - - 53.3
- ----------------------------------------------------------------------------------------------------------------
Total $ 205.8 $ 74.0 $ 31.0 $ 132.5 $ 443.3
46% 17% 7% 30% 100%
- ----------------------------------------------------------------------------------------------------------------
FIRST HALF 2001
Reinforcements $ 29.0 $ - $ 51.2 $ 53.4 $ 133.6
Composites 201.2 60.9 - 71.3 333.4
Structures 55.3 7.4 - - 62.7
- ----------------------------------------------------------------------------------------------------------------
Total $ 285.5 $ 68.3 $ 51.2 $ 124.7 $ 529.7
54% 13% 10% 23% 100%
================================================================================================================
GROSS MARGIN: Gross margin for the first six months of 2002 was $84.4
million, or 19.0% of net sales, compared to gross margin of $111.8 million, or
21.1% of net sales, for the same period in 2001. The $27.4 million decline in
gross margin reflects the impact of the year-on-year sales declines in the
commercial aerospace and electronics markets offset, in part, by the favorable
impact of cash fixed costs reductions primarily generated from the previously
announced restructuring programs.
SELLING, GENERAL AND ADMINISTRATIVE ("SG&A") EXPENSES: SG&A expenses were
$43.6 million, or 9.8% of net sales, for the first six months of 2002 compared
with $65.4 million, or 12.3% of net sales, for the first six months of 2001.
Excluding compensation expenses associated with the former CEO's retirement of
$4.7 million in 2001 and the impact of the adoption of FAS 142 on goodwill
amortization, SG&A expenses in 2001 were $54.3 million, or 10.3% of net sales.
The net year-on-year reduction of $10.9 million, or 20%, reflects the impact of
the Company's restructuring programs to reduce expenses to mitigate the
reduction in sales in the commercial aerospace and electronics markets. Goodwill
amortization in the first six months of 2001 was $6.4 million. (Refer to Note 2
to the accompanying condensed consolidated financial statements).
RESEARCH AND TECHNOLOGY ("R&T") EXPENSES: R&T expenses for the first six
months of 2002 were $7.2 million, or 1.6% of net sales, compared with $9.5
million, or 1.8% of net sales, for the first six months of 2001.
OPERATING INCOME: Operating income for the first six months of 2002 was
$32.8 million, or 7.4% of net sales, compared with operating income of $34.0
million, or 6.4% of net sales, for the same period in 2001. Excluding business
consolidation and restructuring expenses of $0.8 million and $2.9 million
incurred in the first six months of 2002 and 2001, respectively, and excluding
$4.7 million of compensation expenses associated with the former CEO's
retirement in 2001, adjusted operating income was $33.6 million, or 7.6% of net
sales for 2002, compared with $41.6 million, or 7.9% of net sales for 2001. The
$8.0 million aggregate decline in adjusted operating income reflects the
year-on-year decrease in gross margins offset, in part, by reductions in SG&A
and R&T expenses and the impact of the adoption of FAS 142 on goodwill
amortization. Adjusted operating income in the first six months of 2001
excluding goodwill amortization was $40.4 million, $7.6 million or 22.4% higher
that the first six months of 2002.
LITIGATION GAIN: In the second quarter of 2002, the Company recognized a
litigation gain of $9.8 million (net of related fees and expenses) in connection
with a contract dispute with Hercules, Inc. that arose out of the acquisition of
Hercules' Composites Products Division in 1996. The net cash proceeds
19
received from Hercules Inc. of $11.1 million was in satisfaction of the judgment
entered in favor of the Company after Hercules had exhausted all appeals from a
lower court decision in the New York courts.
INTEREST EXPENSE: Interest expense for the first six months of 2002 was
$32.9 million compared to $33.6 million interest expense for the first six
months of 2001. Included in interest expense in the first six months of 2002 and
2001 was $1.7 million and $1.0 million, respectively, of fees and expenses
incurred in connection to bank amendments. Excluding these fees and expenses,
interest expense was $31.2 million for the first six months of 2002 and $32.6
million for the first six months of 2001. The $1.4 million reduction in interest
expense year-on-year reflects lower Company borrowings and lower interest rates
on variable debt.
LOSS ON EARLY RETIREMENT OF DEBT: The $3.1 million loss on early retirement
of debt incurred in the second quarter of 2001 results from the early retirement
of $67.5 million aggregate principal amount of the Company's outstanding 7%
Convertible Subordinated Notes Due 2003 and the redemption of the entire
principal amount of $25.0 million of the Company's outstanding Increasing Rate
Senior Subordinated Note Due 2003 in connection with the Company's issuance of
$100.0 million of 9.75% Senior Subordinated Notes due 2009. (Refer to Note 2 to
the accompanying condensed consolidated financial statements.)
TAXES: The Company's tax provision of $5.6 million for the first six months
of 2002 was for taxes on European income. The Company did not provide for income
taxes in the United States in the second quarter of 2002 as it utilized its net
operating loss carryforwards. The Company will continue to establish a non-cash
valuation allowance attributable to currently generated U.S. net operating
losses until such time as the U.S. operations have returned to consistent
profitability. (Refer to Note 13 to the accompanying condensed consolidated
financial statements.)
EQUITY IN EARNINGS (LOSSES) OF AND WRITE-DOWN OF AN INVESTMENT IN
AFFILIATED COMPANIES: Equity in losses of affiliated companies for the six
months ended June 30, 2002 was $8.0 million compared to equity in earnings of
$1.6 million for the same period of 2001. The loss in the first six months of
2002 reflects the impact of a $4.0 million write-down of an investment in an
affiliated company, the on-going impact of the electronics market decline on the
Company's Asian electronics joint venture, and start-up losses associated with
the Structures' joint ventures in China and Malaysia. (Refer to Note 7 to the
accompanying condensed consolidated financial statements.)
20
EBITDA, ADJUSTED EBITDA, AND ADJUSTED OPERATING INCOME
EBITDA, Adjusted EBITDA, and Adjusted operating income are not based on
accounting principles generally accepted in the United States of America, but
are presented to explain the impact of certain items and to provide a measure of
the Company's operating performance in a way that is commonly used by investors
and financial analysts to analyze and compare companies. In addition, Adjusted
EBITDA is used in the calculation of financial covenants under the Company's
Senior Credit Facility. These measures may not be comparable to similarly titled
financial measures of other companies, 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.
A reconciliation of net income (loss) to EBITDA and Adjusted EBITDA and a
reconciliation of operating income to Adjusted operating income for the quarters
and six months ended June 30, 2002 and 2001 are as follows:
===================================================================================================================
QUARTER ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
(IN MILLIONS) 2002 2001 2002 2001
- -------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 5.3 $ (12.6) $ (3.9) $ (7.1)
Interest expense 15.3 17.3 32.9 33.6
Provision for income taxes 3.1 3.8 5.6 6.0
Depreciation and amortization expense 11.7 15.5 23.5 30.7
Equity in (earnings) losses of and write-down of
an investment in affiliated companies 5.6 (0.2) 8.0 (1.6)
- -------------------------------------------------------------------------------------------------------------------
EBITDA $ 41.0 $ 23.8 $ 66.1 $ 61.6
Business consolidation and restructuring expenses 0.1 1.8 0.8 2.9
Litigation gain (9.8) - (9.8) -
Loss on early retirement of debt - 3.1 - 3.1
Compensation expenses related to former CEO's
retirement - 4.7 - 4.7
- -------------------------------------------------------------------------------------------------------------------
ADJUSTED EBITDA $ 31.3 $ 33.4 $ 57.1 $ 72.3
===================================================================================================================
Operating income $ 19.5 $ 11.4 $ 32.8 $ 34.0
Business consolidation and restructuring expenses 0.1 1.8 0.8 2.9
Compensation expenses related to former CEO's
retirement - 4.7 - 4.7
- -------------------------------------------------------------------------------------------------------------------
ADJUSTED OPERATING INCOME $ 19.6 $ 17.9 $ 33.6 $ 41.6
===================================================================================================================
FINANCIAL CONDITION
LIQUIDITY: As of June 30, 2002, the Company's total debt, net of cash, was
$654.2 million, a decrease of $20.1 million from $674.3 million as of December
31, 2001. Net debt decreased during the first half of 2002 as the Company
collected $11.1 million from Hercules, Inc. in satisfaction of a litigation
judgment entered in favor of the Company, sold the Cleveland, Georgia facility
for $0.9 million, and productively managed working capital. Furthermore, the
decrease was after business consolidation and restructuring payments, cash
interest paid, capital expenditures, and a non-recurring payment to the estate
of the former chief executive officer relating to deferred compensation and
retirement benefits.
As of June 30, 2002, the Company had cash and cash equivalents of $3.9
million and available undrawn commitments under its Senior Credit Facility of
$82.7 million. During the first six months of 2002 the Company has reduced its
cash fixed costs and capital expenditures from their 2001 levels, while
generating cash from reductions in working capital as its revenues have
declined. Such actions have
21
defrayed the cash costs of its business consolidation and restructuring programs
year-to-date. Accrued business consolidation and restructuring expenses
remaining to be paid in cash as of June 30, 2002 are estimated to approximate
$20.0 million.
CREDIT FACILITY: Hexcel has a global credit facility (the "Senior Credit
Facility") with a syndicate of banks to provide for ongoing working capital and
other financing requirements. The Senior Credit Facility, which consists of
revolving credit, overdraft and term loan facilities, provided Hexcel with
committed lines of approximately $322.8 million as of June 30, 2002, subject to
certain limitations. These commitments consisted of funded term loans of $110.8
million and revolving credit, letter of credit and overdraft facilities of
$212.0 million. As of June 30, 2002, drawings under the revolving credit
facility were $99.3 million, while undrawn commitments under the revolving
credit and overdraft facilities were $82.7 million. In addition, the Company may
issue letters of credit up to a value of $30.0 million under the Senior Credit
Facility. The letters of credit facility reduces the funded debt the Company may
draw under the revolving credit and overdraft facilities. As of June 30, 2002,
letters of credit issued under the facility approximated $24.0 million, of which
$11.1 million supports a bank loan to the Company's BHA Aero Composite Parts
Co., Ltd. joint venture in China. The Company is subject to various financial
covenants and restrictions under the Senior Credit Facility, including
limitations on incurring debt, granting liens, selling assets, repaying
subordinated indebtedness, redeeming capital stock and paying dividends. The
Senior Credit Facility is scheduled to expire in 2004, except for approximately
$55.8 million of term loans that are due for repayment in 2005.
Effective January 25, 2002, Hexcel entered into an amendment to the Senior
Credit Facility. The amendment provides for revised financial covenants through
2002; a 100 basis point increase in the interest spread payable over LIBOR for
advances under the facility; an immediate decrease in the commitment of
revolving credit and overdraft facilities from a cumulative amount of $235.0
million to $220.0 million, with a further reduction to $212.0 million on or
before September 30, 2002; and a requirement that the unused borrowing capacity
available under the Senior Credit Facility, together with all cash and cash
equivalents held by the Company, equal at least $30.0 million on June 30, 2002.
The revised covenants were derived from the Company's financial projections plus
a moderate cushion for unanticipated events. The Senior Credit Facility
financial covenants set certain maximum values for the Company's leverage (the
ratios of total and senior debt to Adjusted EBITDA), and certain minimum values
for its interest coverage (the ratio of Adjusted EBITDA to cash interest
expense) and fixed charge coverage (the ratio of Adjusted EBITDA less capital
expenditures to the sum of certain fixed expenses). In addition, during the term
of the amendment, all net proceeds generated through asset sales, and most other
liquidity events, in each case to the extent in excess of $2.5 million, and 100%
of all net proceeds generated from litigation settlements and judgments, must be
used to prepay loans under the Senior Credit Facility. Hexcel has also agreed to
limit capital expenditures to $25.0 million during 2002, with a $10.0 million
limit during any quarter in 2002. At June 30, 2002, the Company was in
compliance with all covenants. Unused borrowing capacity available under the
Senior Credit Facility together with all cash and cash equivalents held by the
Company at June 30, 2002 totaled $86.6 million, meeting the $30.0 million
liquidity requirement as defined in the amendment to the Senior Credit Facility.
Net proceeds of $11.1 million received from a successful litigation judgment
were used to repay advances under the Senior Credit Facility. Furthermore, the
cumulative commitments under the revolving loan facilities portion of the Senior
Credit Facility were reduced by $8.0 million to $212.0 million, meeting the
requirement for this reduction on or before September 30, 2002.
In connection with the credit agreement amendment, Hexcel also agreed to
grant additional collateral. The Company had previously granted a security
interest in most of its U.S. accounts receivable, inventory, property, plant,
equipment and real estate. It had also pledged some or all of the shares of
certain subsidiaries. Under the terms of the amendment, Hexcel has granted to
the banks a security interest in additional U.S. accounts receivable, inventory,
property, plant, equipment and real estate, as
22
well as its intellectual property. In addition, during the second quarter of
2002 each of a group of Hexcel's European subsidiaries granted to the banks a
security interest in its accounts receivable that secure certain local
borrowings advanced to that subsidiary.
Given its financial leverage, the Company's future compliance with the
financial covenants and other terms of the Senior Credit Facility could be
compromised if its financial performance were to deteriorate as a result of
further declines in the general macroeconomic environment or in key markets
served by the Company, or by other unforeseen events. There can be no assurance
that relief from financial covenants, if necessary, will be obtained or as to
the terms under which it may be granted by the senior lenders. Under the terms
of the amendment, the financial covenants effective beginning with the quarter
ending March 31, 2003 are those that applied before the amendment. The Company
will need to substantially improve its financial performance or substantially
reduce its indebtedness in order to comply with the financial covenants in 2003,
and will therefore probably need to obtain a further amendment from its Senior
Credit Facility banks. There can be no assurance that the Company will be able
to affect any such amendment on commercially reasonable terms, or at all.
OPERATING ACTIVITIES: Net cash provided by operating activities was $25.7
million for the first six months of 2002 compared to net cash used for operating
activities of $13.6 million for the first six months of 2001. Net cash provided
by operating activities in the 2002 period results from operating income
generated in the period, the cash receipt of $11.1 million from Hercules, Inc.
resolving a litigation dispute and decreases in accounts receivable and
inventories on a constant currency basis. The cash generated was offset, in
part, by business consolidation and restructuring payments of $14.8 million and
a non-recurring payment of $8.0 million to the estate of the former chief
executive officer relating to accrued deferred compensation and retirement
benefits. Net cash used for operating activities of $13.6 million for the first
six months of 2001 results primarily from increases in inventory levels from the
fall-off in the electronics market demand, increased accounts receivable from
strong sales in all but the electronics market, and business consolidation and
restructuring payments of $3.8 million.
INVESTING ACTIVITIES: Net cash used for investing activities was $4.4
million for the six months ended June 30, 2002 compared with $22.2 million used
in the same period of 2001, primarily reflecting a $16.7 million reduction in
capital expenditures and the receipt of net proceeds of $0.9 million for the
sale of the Cleveland, Georgia facility. The January 25, 2002 amendment to the
Senior Credit Facility incorporates a planned level of capital expenditures of
$25.0 million in 2002 as a limit for the year, while restricting them to $10.0
million in any one quarter of 2002. Within these limitations, the Company plans
to continue its efforts toward process improvements, modest capacity additions
where necessary, and toward environmental, safety and maintenance initiatives.
FINANCING ACTIVITIES: Net cash used for financing activities in the first
six months of 2002 was $30.3 million as the Company continued to use any excess
cash generated to pay down Company indebtedness. Net cash provided by financing
activities for the six months ended June 30, 2001 was $35.9 million, as the
Company had net borrowings from its Senior Credit Facility. On June 29, 2001,
the Company issued $100.0 million of 9.75% Senior Subordinated Notes, due 2009,
at a price of 98.5%. Net proceeds from the offering were used to redeem $67.5
million aggregate principal amount of the outstanding 7% Convertible
Subordinated Notes, due 2003, and to pay the entire principal amount of $25.0
million of the Increasing Rate Senior Subordinated Note Due 2003. The
refinancing reduced the Company's 2003 debt maturities from $114.4 million to
$46.9 million.
FINANCIAL OBLIGATIONS AND COMMITMENTS: As of June 30, 2002, current
maturities of notes payable and capital lease obligations were $16.5 million.
The Company's next substantial debt repayment is the maturity of $46.9 million
convertible subordinated notes due August 2003. The Company is evaluating its
options to finance this maturity within the terms of its various debt indentures
and financing
23
agreements. There can be no assurance that the Company will be able to affect
any such a refinancing on commercially reasonable terms, or at all.
The Senior Credit Facility consists of revolving credit and overdraft
facilities and term loan borrowings. Revolving credit borrowings under the
facility of $99.3 million at June 30, 2002 are repayable in 2004. Term loan
borrowings totaling $110.8 million at June 30, 2002 are repayable in
installments through 2005. European credit and overdraft facilities provided to
certain of the Company's European subsidiaries by lenders outside of the Senior
Credit Facility totaling $2.3 million at June 30, 2002 are primarily uncommitted
facilities that are terminable at the discretion of the lenders.
Total letters of credit issued and outstanding were $24.0 million as of
June 30, 2002, of which $11.1 million was issued in support of a bank loan to
the Company's BHA Aero Composite Parts Co., Ltd. joint venture in China. While
the letters of credit issued on behalf of the Company will expire under their
terms in 2002 and 2003, most, if not all, will be re-issued.
Hexcel is contingently liable to pay Dainippon Ink and Chemicals, Inc
("DIC") up to $2.3 million with respect to DIC-Hexcel Limited's bank debt.
DIC-Hexcel Limited, a composites materials joint venture with Dainippon Ink and
Chemicals, Inc., located in Komatsu, Japan, produces and sells pre-pregs,
honeycomb and decorative laminates using technology licensed from Hexcel and
DIC.
The following table summarizes the maturities of financial obligations and
expiration dates of commitments for the remaining six months of 2002 and for the
years ended 2003 through 2006 and thereafter:
- -----------------------------------------------------------------------------------------------------------------------
(IN MILLIONS) 2002 2003 2004 2005 2006 Thereafter TOTAL
- -----------------------------------------------------------------------------------------------------------------------
Senior Credit Facility $ 4.0 $ 8.6 $ 141.7 $ 55.8 $ - $ - $ 210.1
European credit and overdraft
facilities 2.3 - - - - - 2.3
9.75% Senior subordinated notes - - - - - 340.0 340.0
7.0% Convertible subordinated notes - 46.9 - - - - 46.9
7.0% Convertible subordinated
debentures - 1.8 1.8 1.8 1.8 17.3 24.5
Capital leases 2.8 6.0 6.5 7.0 10.7 2.6 35.6
- -----------------------------------------------------------------------------------------------------------------------
SUBTOTAL 9.1 63.3 150.0 64.6 12.5 359.9 659.4
Operating leases 1.5 2.4 2.1 1.9 1.4 2.5 11.8
- -----------------------------------------------------------------------------------------------------------------------
TOTAL FINANCIAL OBLIGATIONS $ 10.6 $ 65.7 $ 152.1 $ 66.5 $ 13.9 $ 362.4 $ 671.2
=======================================================================================================================
Letters of credit $ 20.2 $ 3.8 $ - $ - $ - $ - $ 24.0
Other commitments - 2.3 - - - - 2.3
- -----------------------------------------------------------------------------------------------------------------------
TOTAL COMMITMENTS $ 20.2 $ 6.1 $ - $ - $ - $ - $ 26.3
=======================================================================================================================
The Company's ability to make scheduled payments of principal, or to pay
interest on, or to refinance its indebtedness, including its public notes, or to
fund planned capital expenditures, will depend on its future performance and
conditions in the financial markets. The Company's future performance is subject
to economic, financial, competitive, legislative, regulatory and other factors
that are beyond its control. There can be no assurance that the Company will
generate sufficient cash flow from its operations, or that sufficient future
borrowings will be available under its Senior Credit Facility, to enable the
Company to service its indebtedness, including its public notes, or to fund its
other liquidity needs. In addition, the Company may need to refinance or amend
all or a substantial portion of its indebtedness on or before maturity.
Furthermore, effective with the January 25, 2002 amendment, the Company and the
bank syndicate to the Senior Credit Facility revised its financial covenants
through 2002. Under the terms of the amendment, the financial covenants
beginning with the quarter ending March 31, 2003 are those
24
that applied before the amendment. The Company will need to substantially
improve its financial performance or substantially reduce its indebtedness in
order to comply with the financial covenants in 2003, and will therefore
probably need to obtain a further amendment from its Senior Credit Facility
banks. There can be no assurance that the Company will be able to affect any
such refinancing or amendment on commercially reasonable terms, or at all.
For further information regarding the Company's financial resources,
obligations and commitments see Note 5 to the accompanying condensed
consolidated financial statements and Notes 8 and 16 to the consolidated
financial statements of the 2001 Annual Report on Form 10-K.
CRITICAL ACCOUNTING POLICIES
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("FAS 142"). FAS 142 changes the accounting for goodwill from
an amortization method to an impairment only approach. In accordance with FAS
142, goodwill will be tested at the reporting unit level annually and whenever
events or circumstances occur indicating that goodwill might be impaired. The
assessment of possible impairment is based upon a comparison of the reporting
unit's fair value to its carrying value. Impairment occurs if the carrying value
of goodwill at the reporting unit level exceeds its fair value. Fair value may
be determined using traditional valuation techniques including discounted cash
flow analyses, market value comparables or other appropriate methods. Events or
changes in circumstances, such as market conditions, could significantly impact
fair values and require adjustments to recorded asset balances in the future. In
addition, pursuant to FAS 142, amortization of goodwill, including goodwill
recorded in past business combinations, ceased upon adoption. While the Company
adopted FAS 142 as of January 1, 2002 with no impact to its consolidated
financial position, future consolidated results of operations will be impacted
to the extent amortization is no longer recorded by the Company, and if events
and circumstances occur which may reduce the fair values of recorded assets. For
the second quarter and first six months of 2001, the Company's reported results
of operations reflected amortization charges of $3.2 million and $6.4 million,
respectively.
In order to more effectively manage the medical costs of the Company,
effective January 1, 2002, Hexcel expanded its self-insured medical program to
cover the majority of U.S. non-union employees. The program includes "stop loss"
insurance, which caps the Company's risk at $250,000 per individual per annum.
By its nature, as compared to traditional insurance plans, self-insured medical
coverage may increase the monthly volatility in cash flows of the Company.
Included in the condensed consolidated results of operations for second quarter
and first six months of 2002 is the Company's best estimate of the costs of the
program based upon actuarial assumptions and the Company's claim experiences.
Assumptions used in these computations will be reviewed periodically throughout
the year. Any required adjustments to the expense accrual rates will be made as
appropriate.
For further information regarding the Company's critical accounting
policies, refer to the Company's 2001 Annual Report on Form 10-K.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2002, the FASB issued Statement of Financial Accounting Standards
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities"
("FAS 146"). FAS 146 requires that a liability for a cost associated with an
exit or disposal activity be recognized and measured, initially at fair value,
only when the liability is incurred; therefore, nullifying Emerging Issues Task
Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring)" ("EITF 94-3") that required a liability for an exit cost to
be
25
recognized at the date of an entity's commitment to an exit plan. This change in
accounting would be expected to result in a delayed recognition of certain types
of costs, especially facility closure costs. The provisions of FAS 146 are
effective for exit or disposal activities that are initiated after December 31,
2002. Since FAS 146 is effective only for new exit or disposal activities,
adoption of this standard will not affect amounts currently reported in the
Company's consolidated financial statements. However, the adoption of FAS 146
could affect the types and timing of costs included in any future business
consolidation and restructuring programs, if implemented. The Company is
currently evaluating the impact of this new standard.
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
Certain statements contained in "Management's Discussion and Analysis of
Financial Condition and Results of Operations," constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. These statements relate to analyses and other information that are
based on forecasts of future results and estimates of amounts not yet
determinable. These statements also relate to future prospects, developments and
business strategies. These forward-looking statements are identified by the use
of terms and phrases such as "anticipate," "believe," "could," "estimate,"
"expect," "intend," "may," "plan," "predict," "project," "should," "will," and
similar terms and phrases, including references to assumptions. Such statements
are based on current expectations, are inherently uncertain, and are subject to
changing assumptions.
Such forward-looking statements include, but are not limited to: (a)
estimates of commercial aerospace production and delivery rates, including those
of Airbus and Boeing; (b) expectations regarding growth in sales to regional and
business aircraft manufacturers, and to the aircraft aftermarket; (c)
expectations regarding the growth in the production of military aircraft,
helicopters and launch vehicle programs including the V-22 (Osprey) in 2002 and
beyond; (d) expectations regarding the recovery of demand for electronics
fabrics used in printed wiring boards, as well as future business trends in the
electronics fabrics industry; (e) expectations regarding the demand for soft
body armor made of aramid and specialty fabrics; (f) expectations regarding
growth in sales of composite materials for wind energy, automotive and other
industrial applications; (g) estimates of changes in net sales by market
compared to 2001; (h) expectations regarding the Company's actions to reduce
headcount and eliminate $60.0 million of cash overhead expense; (i) expectations
regarding the Company's equity in the earnings of joint ventures, as well as
joint venture investments and loan guarantees; (j) expectations regarding
working capital trends and capital expenditures; (k) the availability and
sufficiency of the Senior Credit Facility and other financial resources to fund
the Company's worldwide operations in 2002 and beyond; and (l) the impact of
various market risks, including fluctuations in the interest rates underlying
the Company's variable-rate debt, fluctuations in currency exchange rates,
fluctuations in commodity prices, and fluctuations in the market price of the
Company's common stock.
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 and cost
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 Airbus or Boeing; 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 Hexcel's Annual Report on Form 10-K for the year
ended December 31, 2001.
26
If one or more of these risks or uncertainties materialize, or if
underlying assumptions prove incorrect, actual results may vary materially from
those expected, estimated or projected. In addition to other factors that affect
Hexcel's operating results and financial position, neither past financial
performance nor the Company's expectations should be considered reliable
indicators of future performance. Investors should not use historical trends to
anticipate results or trends in future periods. Further, the Company's stock
price is subject to volatility. Any of the factors discussed above could have an
adverse impact on the Company's stock price. In addition, failure of sales or
income in any quarter to meet the investment community's expectations, as well
as broader market trends, can have an adverse impact on the Company's stock
price. The Company does not undertake an obligation to update its
forward-looking statements or risk factors to reflect future events or
circumstances.
27
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a result of its global operating and financing activities, Hexcel is
exposed to various market risks that may affect its consolidated results of
operations and financial position. These market risks include, but are not
limited to, fluctuations in interest rates, which impact the amount of interest
the Company must pay on certain variable rate debt, and fluctuations in currency
exchange rates, which impact the U.S. dollar value of transactions, assets and
liabilities denominated in foreign currencies. The Company's primary currency
exposures are in Europe, where the Company has significant business activities.
To a lesser extent, the Company is also exposed to fluctuations in the prices of
certain commodities, such as electricity, natural gas, aluminum and certain
chemicals.
The Company attempts to net individual exposures on a consolidated basis,
when feasible, taking advantage of natural offsets. In addition, the Company
employs an interest rate cap agreement and foreign currency forward exchange
contracts for the purpose of hedging certain specifically identified interest
rate and net currency exposures. The use of these financial instruments is
intended to mitigate some of the risks associated with fluctuations in interest
rates and currency exchange rates, but does not eliminate such risks. The
Company does not use financial instruments for trading or speculative purposes.
INTEREST RATE RISKS
The Company's financial results are affected by interest rate changes on
its variable rate debt. In order to partially mitigate interest rate risks, the
Company entered into a four-year interest rate cap agreement in 1998. This
agreement provides for a maximum fixed rate of 5.5% on the applicable London
interbank rate used to determine the interest on a notional amount of $50.0
million of variable rate debt under the Senior Credit Facility. The fair value
and carrying amount of this contract as of June 30, 2002 and December 31, 2001,
along with hedge ineffectiveness for the quarters and six months ended June 30,
2002 and 2001, were not material.
CURRENCY EXCHANGE RISKS
Hexcel has significant business activities in Europe. The Company operates
seven manufacturing facilities in Europe, which generated approximately 41% of
2001 consolidated net sales. The Company's European business activities
primarily involve three major currencies - the U.S. dollar, the British Pound
Sterling, and the Euro. The Company also conducts business or has joint venture
investments in Japan, China, Malaysia, Australia and Brazil, and sells products
to customers throughout the world. The majority of the Company's transactions
with customers and joint venture affiliates outside of Europe are denominated in
U.S. dollars, thereby limiting the Company's exposure to short-term currency
fluctuations involving these countries. However, the value of the Company's
investments in these countries could be impacted by changes in currency exchange
rates over time, as could the Company's ability to profitably compete in
international markets.
Hexcel attempts to net individual currency positions at its various
European operations on a consolidated basis, to take advantage of natural
offsets and reduce the need to employ foreign currency forward exchange
contracts. The Company also enters into short-term foreign currency forward
exchange contracts, usually with a term of ninety days or less, to mitigate net
currency exposures resulting from specifically identified transactions. These
contracts are not designated as hedges for accounting purposes, and gains or
losses on these contracts would be recorded immediately in the Company's
consolidated statements of operations. Consistent with the nature of the
economic hedge provided by such contracts, any gains or losses on these
contracts would be offset by corresponding decreases or increases, respectively,
of the underlying transaction being hedged. Such gains and losses have not been
material.
28
A number of the Company's European subsidiaries are exposed to the impact
of exchange rate volatility between the U.S. dollar and the subsidiaries'
functional currencies, being either the Euro or the British Pound Sterling. To
minimize this exposure, Hexcel has entered into a number of foreign currency
forward exchange contracts to exchange U.S. dollars for Euros at fixed rates on
specified dates through March 2005. The aggregate notional amount of these
contracts was $71.4 and $83.9 at June 30, 2002 and December 31, 2001,
respectively. The purpose of these contracts is to hedge a portion of the
forecasted transactions of European subsidiaries under long-term sales contracts
with certain customers. These contracts are expected to provide the Company with
a more balanced matching of future cash receipts and expenditures by currency,
thereby reducing the Company's exposure to fluctuations in currency exchange
rates. For the quarter and six months ended June 30, 2002, hedge ineffectiveness
was immaterial and the fair value of the foreign currency cash flow hedges
recognized in "comprehensive income" was a gain of $7.0 million and a gain of
$6.7 million, respectively. Over the next twelve months, approximately $0.8
million of other comprehensive gains are expected to be reclassified into
earnings as the hedged sales are recorded.
UTILITY PRICE RISKS
To minimize the exposure of volatility in utility prices, the Company
enters into fixed price contracts at certain of the manufacturing locations for
a portion of its energy usage for periods of up to three years. Although these
contracts would reduce the risk to the Company during the contract period,
future volatility in the cost and supply of energy and natural gas could have an
impact on the results of operations of the Company.
For further information regarding the Company's market risks, refer to the
Company's 2001 Annual Report on Form 10-K and Registration Statement on Form S-4
filed with the SEC on August 2, 2001.
29
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On May 10, 1999, the Company filed a complaint against Hercules, Inc. in
the Supreme Court of New York, seeking recovery of certain disputed items
relating to the 1996 purchase by Hexcel of the Hercules Composite Products
Division. On June 1, 2001, Hexcel was awarded a judgment in the amount of $7.3
million plus interest for a total of $10.2 million. Hercules appealed the
judgment and interest continued to accrue. In June 2002, the Company received
$11.1 million from Hercules Inc. in satisfaction of the judgment after Hercules
had exhausted all appeals.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of the Company was held on May 9, 2002
(the "Meeting") in Stamford, Connecticut. Stockholders holding 36,852,765 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 nine nominees to the Board of Directors was elected by the
stockholders to serve as directors until the next annual meeting of
stockholders and until their successors are duly elected and qualified:
DIRECTOR FOR WITHHELD
H. Arthur Bellows, Jr. 36,123,751 729,014
David E. Berges 36,699,804 152,961
Sandra L. Derickson 36,723,227 129,538
James J. Gaffney 36,630,690 222,075
Marshall S. Geller 36,708,289 144,476
Sanjeev K. Mehra 36,630,690 222,075
Lewis Rubin 36,723,851 128,914
Peter M. Sacerdote 34,848,732 2,004,033
Martin L. Solomon 36,723,651 129,114
2) The proposal to ratify PricewaterhouseCoopers LLP as Independent Auditors
for the Company for 2002:
For 36,633,927
Against 146,744
Abstained 72,094
3) The proposal to approve the Company's Long-Term Incentive Plan:
For 36,238,190
Against 500,892
Abstained 113,683
30
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS:
Exhibit No. Description
----------- -----------
99.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(B) REPORTS ON FORM 8-K:
Current Report on Form 8-K dated April 26, 2002, relating to the Company's
first quarter 2002 financial results.
Current Report on Form 8-K dated May 17, 2002, relating to changes in
business segment reporting.
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.
HEXCEL CORPORATION
August 14, 2002 /s/ William J. Fazio
- ---------------------------------- ------------------------------------
(Date) William J. Fazio
Corporate Controller and
Chief Accounting Officer
31
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
99.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32