-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WNHNqEPiAnGp7NBg7WuK6rykEQf754J+l/jW/DQDjx/6K/sjsJFOlpLe28kmchSY RfroEUZPnlXk9O+fQwZsIg== 0000912057-96-026098.txt : 19961115 0000912057-96-026098.hdr.sgml : 19961115 ACCESSION NUMBER: 0000912057-96-026098 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960929 FILED AS OF DATE: 19961113 SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: HEXCEL CORP /DE/ CENTRAL INDEX KEY: 0000717605 STANDARD INDUSTRIAL CLASSIFICATION: METAL FORGING & STAMPINGS [3460] IRS NUMBER: 941109521 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08472 FILM NUMBER: 96662232 BUSINESS ADDRESS: STREET 1: 281 TRESSER BOULEVARD STREET 2: C/O TWO STAMFORD PLZ CITY: STAMFORD STATE: CT ZIP: 06901 BUSINESS PHONE: 5108479500 MAIL ADDRESS: STREET 1: 5794 W LAS POSITAS BLVD CITY: PLEASANTON STATE: CA ZIP: 945888781 10-Q 1 10-Q - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 ---------------------- FORM 10-Q / X / QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended September 29, 1996 or / / Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the transition period from _________ to ____________ Commission File Number 1-8472 ---------------------- HEXCEL CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) Delaware 94-1109521 (STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.) Two Stamford Plaza 281 Tresser Boulevard Stamford, Connecticut 06901-3238 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE) Registrant's telephone number, including area code: (203) 969-0666 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---- ---- Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan of reorganization confirmed by a U.S. Bankruptcy Court. Yes X No ---- ---- Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. Class Outstanding as of November 8, 1996 ----- ---------------------------------- COMMON STOCK 36,490,284 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- HEXCEL CORPORATION AND SUBSIDIARIES INDEX PAGE PART I. FINANCIAL INFORMATION Item 1. - Condensed Consolidated Statements of Operations -- The Quarter and Year-to-Date Periods Ended September 29, 1996 and October 1, 1995 2 - Condensed Consolidated Balance Sheets -- September 29, 1996 and December 31, 1995 3 - Condensed Consolidated Statements of Cash Flows -- The Year-to-Date Periods Ended September 29, 1996 and October 1, 1995 4 - Notes to Condensed Consolidated Financial Statements 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 15 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 22 SIGNATURES 23 HEXCEL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
- ---------------------------------------------------------------------------------------------------------- UNAUDITED -------------------------------------------------------------------- THE QUARTER ENDED THE YEAR-TO-DATE ENDED ------------------------------ -------------------------------- SEPTEMBER 29, October 1, SEPTEMBER 29, October 1, (IN THOUSANDS, EXCEPT PER SHARE DATA) 1996 1995 1996 1995 - ---------------------------------------------------------------------------------------------------------- Net sales $ 189,542 $ 81,366 $ 482,730 $ 257,544 Cost of sales (153,729) (65,478) (384,946) (208,806) - ---------------------------------------------------------------------------------------------------------- Gross margin 35,813 15,888 97,784 48,738 Selling, general and administrative expenses (25,642) (11,358) (67,003) (35,630) Business consolidation and acquisition expenses (1,382) - (35,802) - Other income, net 142 600 3,127 600 - ---------------------------------------------------------------------------------------------------------- Operating income (loss) 8,931 5,130 (1,894) 13,708 Interest expense (7,173) (2,260) (15,655) (6,702) Bankruptcy reorganization expenses - (410) - (3,361) - ---------------------------------------------------------------------------------------------------------- Income (loss) from continuing operations before income taxes 1,758 2,460 (17,549) 3,645 Provision for income taxes (1,412) (899) (3,924) (2,503) - ---------------------------------------------------------------------------------------------------------- Income (loss) from continuing operations 346 1,561 (21,473) 1,142 Discontinued operations: Losses during phase-out period - (171) - (468) - ---------------------------------------------------------------------------------------------------------- Net income (loss) $ 346 $ 1,390 $ (21,473) $ 674 - ---------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------- Net income (loss) per share and equivalent share: Primary and fully diluted: Continuing operations $ 0.01 $ 0.09 $ (0.66) $ 0.08 Discontinued operations - (0.01) - (0.03) - ---------------------------------------------------------------------------------------------------------- Net income (loss) $ 0.01 $ 0.08 $ (0.66) $ 0.05 - ---------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------- Weighted average shares and equivalent shares 37,430 18,094 32,305 14,958 - ---------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 2 HEXCEL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------------------------- UNAUDITED ------------------------------------- SEPTEMBER 29, December 31, (IN THOUSANDS, EXCEPT PER SHARE DATA) 1996 1995 - -------------------------------------------------------------------------------------------- ASSETS Current assets: Cash and equivalents $ 4,172 $ 3,829 Accounts receivable 151,375 65,888 Inventories 155,628 55,475 Prepaid expenses 3,869 2,863 - -------------------------------------------------------------------------------------------- Total current assets 315,044 128,055 - -------------------------------------------------------------------------------------------- Property, plant and equipment 446,656 203,580 Less accumulated depreciation (137,306) (117,625) - -------------------------------------------------------------------------------------------- Net property, plant and equipment 309,350 85,955 - -------------------------------------------------------------------------------------------- Intangible assets 49,038 1,832 Investments and other assets 9,794 14,760 - -------------------------------------------------------------------------------------------- Total assets $ 683,226 $ 230,602 - -------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable and current maturities of long-term liabilities $ 17,776 $ 1,802 Accounts payable 64,641 22,904 Accrued liabilities 66,200 41,779 Accrued business consolidation costs 24,165 - - -------------------------------------------------------------------------------------------- Total current liabilities 172,782 66,485 - -------------------------------------------------------------------------------------------- Notes payable and capital lease obligations, less current maturities 258,574 88,342 Indebtedness to related parties, less current maturities 31,528 - Deferred liabilities 49,629 27,401 - -------------------------------------------------------------------------------------------- Stockholders' equity Common stock, $0.01 par value, 100,000 shares authorized, shares issued and outstanding of 36,371 in 1996 and 18,091 in 1995 364 181 Additional paid-in capital 258,490 111,259 Accumulated deficit (91,454) (69,981) Minimum pension obligation adjustment (535) (535) Cumulative currency translation adjustment 3,848 7,450 - -------------------------------------------------------------------------------------------- Total stockholders' equity 170,713 48,374 - -------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 683,226 $ 230,602 - -------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------
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 ------------------------------------- SEPTEMBER 29, October 31, THE YEAR-TO-DATE ENDED (IN THOUSANDS) 1996 1995 - -------------------------------------------------------------------------------------------- Income (loss) from continuing operations $ (21,473) $ 1,142 Reconciliation to net cash provided (used) by continuing operations: Depreciation and amortization 17,975 8,691 Accrued business consolidation and acquisition expenses 35,802 - Business consolidation and acquisition payments (4,071) - Working capital changes and other (21,442) (18,956) - -------------------------------------------------------------------------------------------- Net cash provided (used) by continuing operations 6,791 (9,123) Net cash provided by discontinued operations - 548 - -------------------------------------------------------------------------------------------- Net cash provided (used) by operating activities 6,791 (8,575) - -------------------------------------------------------------------------------------------- Cash flows from investing activities: Capital expenditures (21,338) (6,836) Proceeds from equipment sold - 17 Cash paid for the Acquired Ciba Business (25,000) - Cash paid for the Acquired Hercules Business (141,820) - Proceeds from sale of Chandler, Arizona manufacturing facility and certain related assets and technology 1,560 26,694 Proceeds from sale of discontinued European resins business - 2,602 - -------------------------------------------------------------------------------------------- Net cash provided (used) by investing activities (186,598) 22,477 - -------------------------------------------------------------------------------------------- Cash flows from financing activities: Proceeds from issuance of long-term debt 278,784 4,117 Payments of long-term debt (111,307) (7,507) Proceeds of short-term debt, net 9,498 18,612 Proceeds from issuance of common stock 2,777 48,739 Payments of allowed claims pursuant to the Reorganization Plan - (78,144) - -------------------------------------------------------------------------------------------- Net cash provided (used) by financing activities 179,752 (14,183) - -------------------------------------------------------------------------------------------- Effect of exchange rate changes on cash and equivalents 398 (650) - -------------------------------------------------------------------------------------------- Net increase (decrease) in cash and equivalents 343 (931) Cash and equivalents at beginning of year 3,829 931 - -------------------------------------------------------------------------------------------- Cash and equivalents at end of period $ 4,172 $ - - -------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 4 HEXCEL CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) NOTE 1 -- BASIS OF ACCOUNTING The accompanying condensed consolidated financial statements have been prepared from the unaudited records of Hexcel Corporation and subsidiaries ("Hexcel" or the "Company") in accordance with generally accepted accounting principles, and, in the opinion of management, include all adjustments necessary to present fairly the balance sheet of the Company as of September 29, 1996, and the results of operations for the quarters and nine-month periods ended September 29, 1996 and October 1, 1995, and the cash flows for the nine-month periods ended September 29, 1996 and October 1, 1995. The condensed consolidated balance sheet of the Company as of December 31, 1995 was derived from the audited 1995 consolidated balance sheet. Certain information and footnote disclosures normally included in financial statements have been omitted pursuant to rules and regulations of the Securities and Exchange Commission. Certain prior quarter amounts in the condensed consolidated financial statements and notes have been reclassified to conform to the 1996 presentation. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's 1995 Annual Report on Form 10-K. As discussed in Note 2, Hexcel acquired the worldwide composites division of Ciba-Geigy Limited and Ciba-Geigy Corporation (collectively, "Ciba"), including Ciba's composite materials, parts and structures businesses (the "Acquired Ciba Business"), on February 29, 1996. In connection with the acquisition of the Acquired Ciba Business, The Company acquired Danutec Werkstoff AG ("Danutec"), an Austrian subsidiary of Ciba, on May 30, 1996. Accordingly, the condensed consolidated balance sheet as of September 29, 1996 includes the financial position of the Acquired Ciba Business and Danutec as of that date. The condensed consolidated statements of operations and cash flows for the nine-month period ended September 29, 1996 include the results of operations and cash flows, respectively, of the Acquired Ciba Business for the period from March 1, 1996 through September 29, 1996. The condensed consolidated statements of operations and cash flows for the nine-month period ended September 29, 1996 include the results of operations and cash flows, respectively, of Danutec for the period from May 31, 1996 through September 29, 1996. In addition, as discussed in Note 2, Hexcel acquired the composite products division of Hercules Incorporated ("Hercules"), including Hercules' carbon fibers and prepreg businesses (the "Acquired Hercules Business"), on June 27, 1996. Accordingly, the condensed consolidated balance sheet as of September 29, 1996 includes the financial position of the Acquired Hercules Business as of that date, and the condensed consolidated statements of operations and cash flows for the nine-month period ended September 29, 1996 include the results of operations and cash flows, respectively, of the Acquired Hercules Business for the period from June 28, 1996 through September 29, 1996. 5 NOTE 2 -- BUSINESS ACQUISITIONS ACQUIRED CIBA BUSINESS Hexcel acquired the worldwide composites division of Ciba on February 29, 1996. The Acquired Ciba Business is engaged in the manufacture and marketing of composite materials, parts and structures for aerospace, recreation and general industrial markets. Product lines include fabrics, prepregs, adhesives, honeycomb core, sandwich panels and fabricated components, as well as structures and interiors primarily for the commercial and military aerospace markets. The acquisition of the Acquired Ciba Business was consummated pursuant to a Strategic Alliance Agreement dated as of September 29, 1995 among Ciba and Hexcel, as amended (the "Strategic Alliance Agreement"). Under the Strategic Alliance Agreement, the Company acquired the assets (including the capital stock of certain non-U.S. subsidiaries) and assumed the liabilities of the Acquired Ciba Business other than certain excluded assets and liabilities in exchange for: (a) approximately 18 million newly issued shares of Hexcel common stock; (b) $25,000 in cash; and (c) undertakings to deliver to Ciba and/or one or more of its subsidiaries, following completion of certain post-closing adjustment procedures contemplated by the Strategic Alliance Agreement, senior subordinated notes in an aggregate principal amount of approximately $43,000, subject to certain adjustments (the "Senior Subordinated Notes"), and senior demand notes in a principal amount equal to the cash on hand at certain of the non-U.S. subsidiaries included in the Acquired Ciba Business (the "Senior Demand Notes"). In connection with the acquisition of the Acquired Ciba Business, Hexcel acquired Danutec, an Austrian subsidiary of Ciba, on May 30, 1996. The acquisition of Danutec was completed pursuant to the Strategic Alliance Agreement. Furthermore, under the terms of the Strategic Alliance Agreement, certain assets of Ciba affiliates that continue to act as distributors for the Acquired Ciba Business (the "Ciba Distributors") will be acquired by the Company from time to time prior to February 28, 1997. As of September 29, 1996, the aggregate principal amount of Senior Subordinated Notes which Hexcel has issued or is obligated to issue to Ciba, determined in accordance with the relevant provisions of the Strategic Alliance Agreement, was estimated at approximately $34,100. However, the actual aggregate principal amount of the Senior Subordinated Notes is expected to exceed $34,100 as a result of the pending acquisition from Ciba of certain assets of the Ciba Distributors that have not yet been transferred to Hexcel. Pursuant to the Strategic Alliance Agreement, the aggregate principal amount of the Senior Subordinated Notes will be adjusted to reflect the acquisition of these assets at such times as the acquisitions are completed. In connection with the acquisition of the Acquired Ciba Business, Hexcel obtained a three-year revolving credit facility of up to $175,000 (the "Senior Secured Credit Facility") to: (a) fund the cash component of the purchase price; (b) refinance outstanding indebtedness under certain U.S. and European credit facilities; and (c) provide for the ongoing working capital and other financing requirements of the Company, including business consolidation activities, on a worldwide basis. The Senior Secured Credit Facility was subsequently replaced with a new revolving credit facility in connection with the acquisition of the Acquired Hercules Business. 6 ACQUIRED HERCULES BUSINESS Hexcel acquired the assets of the composite products division of Hercules (including the stock of Hercules Aerospace Espana, S.A. ("HAESA")) on June 27, 1996. The Acquired Hercules Business, which manufactures carbon fibers and prepregs for aerospace, recreation and general industrial markets, was purchased for $135,000 in cash subject to certain post-closing adjustments. (As of September 29, 1996, the adjusted purchase price, including certain transaction costs, was estimated at approximately $141,820.) Hexcel and Hercules have agreed that in the event applicable Spanish antitrust authorities were to take certain adverse actions in respect to the Company's acquisition of HAESA, Hexcel has the option to sell its interest in HAESA back to Hercules for the allocated purchase price paid for HAESA. In connection with the acquisition of the Acquired Hercules Business, Hexcel replaced the Senior Secured Credit Facility with a new revolving credit facility (the "Revolving Credit Facility") of up to $310,000. As a result of the Company's issuance of convertible subordinated notes on July 24, 1996 (see Note 6), maximum availability under the Revolving Credit Facility was reduced from $310,000 to approximately $250,000, in accordance with the terms of that facility. Proceeds from the Revolving Credit Facility were used to repay approximately $70,100 of outstanding borrowings under the Senior Secured Credit Facility and to finance the purchase of the Acquired Hercules Business. Borrowings under the Revolving Credit Facility are also available for ongoing working capital and other financing requirements of the Company, including business consolidation activities, on a worldwide basis (see Note 3). HISTORICAL AND PRO FORMA FINANCIAL INFORMATION The assets acquired and the liabilities assumed or incurred in connection with the acquisitions of the Acquired Ciba Business and the Acquired Hercules Business were:
- -------------------------------------------------------------------------------------- ACQUIRED ACQUIRED TOTAL CIBA HERCULES ACQUIRED BUSINESS BUSINESS BUSINESSES - -------------------------------------------------------------------------------------- ASSETS ACQUIRED: Accounts receivable $ 53,861 $ 16,819 $ 70,680 Inventories 63,640 22,289 85,929 Net property, plant and equipment 120,823 109,740 230,563 Intangible assets 44,597 -- 44,597 Other assets 3,069 642 3,711 - -------------------------------------------------------------------------------------- Total assets acquired $ 285,990 $ 149,490 $ 435,480 - -------------------------------------------------------------------------------------- LIABILITIES ASSUMED OR INCURRED: Accounts payable and accrued liabilities $ 61,099 $ 7,688 $ 68,787 Notes payable and capital lease obligations 37,851 141,303 179,154 Indebtedness to related parties, less current maturities 31,528 -- 31,528 Deferred liabilities 14,331 499 14,830 - -------------------------------------------------------------------------------------- Total liabilities assumed or incurred $ 144,809 $ 149,490 $ 294,299 - -------------------------------------------------------------------------------------- Increase in Common Stock and Additional Paid-in Capital $ 141,181 -- $ 141,181 - -------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------
7 The acquisitions of the Acquired Ciba Business and the Acquired Hercules Business are subject to certain post-closing adjustments, including, among others, adjustments resulting from the acquisition of certain assets of the Ciba Distributors from time to time prior to February 28, 1997 and adjustments related to certain changes in the working capital of the Acquired Hercules Business. In addition, the allocations of purchase price to the assets acquired and liabilities assumed or incurred in connection with the acquisitions of the Acquired Ciba Business and the Acquired Hercules Business are based on preliminary estimates of fair values, and are subject to change. The pro forma net sales, net loss and net loss per share of Hexcel for the nine-months periods ended September 29, 1996 and October 1, 1995, giving effect to the acquisitions of the Acquired Ciba Business and the Acquired Hercules Business as if those acquisitions had occurred at the beginning of the periods presented, were: - --------------------------------------------------------------------------- THE YEAR-TO-DATE ENDED ----------------------------------- 9/29/96 10/1/95 - --------------------------------------------------------------------------- Pro forma net sales $ 585,994 $ 576,889 Pro forma net loss (24,875) (8,205) Pro forma net loss per share (0.68) (0.25) - --------------------------------------------------------------------------- - --------------------------------------------------------------------------- Weighted average shares and equivalent shares used in computing pro forma net loss per share 36,424 32,980 - --------------------------------------------------------------------------- - --------------------------------------------------------------------------- NOTE 3 -- BUSINESS CONSOLIDATION On May 9, 1996, Hexcel announced that its Board of Directors had approved a plan for consolidating the Company's operations over a period of three years. The total expense of this program is estimated to be approximately $49,000, including $1,382 and $35,802 of expenses recorded in the third quarter and first nine months of 1996, respectively, and the remainder to be recorded in future periods. Cash expenditures necessary to complete the business consolidation program are expected to total approximately $44,000, net of estimated proceeds from asset sales. The objective of the business consolidation program is to integrate acquired assets and operations into Hexcel, and to reorganize the Company's manufacturing and research activities around strategic centers dedicated to select product technologies. The business consolidation is also intended to eliminate excess manufacturing capacity and redundant administrative functions. Specific actions contemplated by the consolidation program include the previously announced closure of the Anaheim, California facility acquired from Ciba, the closure of a portion of the Welkenraedt, Belgium facility, the reorganization of the Company's manufacturing operations in France, the consolidation of the Company's U.S. special process manufacturing activities, and the integration of sales and marketing resources. The consolidation program calls for the elimination of approximately 470 existing positions at certain locations, partially offset by the addition of new positions at other locations. Management expects that the business consolidation program will take up to three years to complete, in part because of aerospace industry requirements to "qualify" specific equipment and manufacturing facilities for the manufacture of certain products. These qualification requirements increase the complexity, cost and time of moving equipment and rationalizing 8 manufacturing activities. Based on Hexcel's experience with previous plant consolidations, compliance with these qualification requirements necessitates an approach to the consolidation of manufacturing facilities that will require two to three years to complete. Changes in accrued business consolidation costs for the period from December 31, 1995 to September 29, 1996 were as follows:
- -------------------------------------------------------------------------------------------------- EMPLOYEE FACILITY SEVERANCE CLOSURE & AND EQUIPMENT RELOCATION RELOCATION OTHER TOTAL - -------------------------------------------------------------------------------------------------- BALANCE AS OF 12/31/95 -- -- -- -- THE QUARTER ENDED 3/31/96: Accrued expenses -- -- $ 5,211 $ 5,211 Cash expenditures -- -- (1,191) (1,191) Non-cash usage -- -- (3,635) (3,635) - -------------------------------------------------------------------------------------------------- BALANCE AS OF 3/31/96 -- -- 385 385 THE QUARTER ENDED 6/30/96: Accrued expenses $ 15,587 $ 6,678 6,944 29,209 Purchase price adjustments 8,401 2,816 139 11,356 Cash expenditures -- -- (1,065) (1,065) Non-cash usage, including asset write-downs -- (6,678) (4,678) (11,356) - -------------------------------------------------------------------------------------------------- BALANCE AS OF 6/30/96 23,988 2,816 1,725 28,529 THE QUARTER ENDED 9/29/96: Accrued expenses 420 378 584 1,382 Cash expenditures (1,199) (349) (267) (1,815) Non-cash usage, including asset write-downs -- -- (44) (44) - -------------------------------------------------------------------------------------------------- BALANCE AS OF 9/29/96 $ 23,209 $ 2,845 $ 1,998 $ 28,052 - -------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------
During the first quarter of 1996, Hexcel incurred $3,635 of compensation expense resulting from stock options which vested in connection with the acquisition of the Acquired Ciba Business. This compensation expense is based on the difference between the exercise price of the stock options granted and the market price of Hexcel's common stock on February 21, 1996, the date that the Company's stockholders approved the incentive stock plan under which these options were granted. The recognition of compensation expense in connection with these stock options resulted in a corresponding $3,635 increase in the additional paid-in capital of the Company. During the second quarter of 1996, Hexcel accrued $11,356 of business consolidation costs that are directly attributable to the Acquired Ciba Business. The accrual of these costs has been reflected as an adjustment to the purchase of the Acquired Ciba Business, resulting in a corresponding increase in the intangible assets of the Company. 9 During the second quarter of 1996, Hexcel wrote down various assets by $9,325, in connection with the decision to close a portion of one manufacturing facility and dispose of certain manufacturing equipment, as well as to dispose of certain research equipment and related assets. These write-downs were required to reduce the applicable assets to estimated net realizable value. During the third quarter of 1996, Hexcel incurred $1,382 of business acquisition and consolidation expenses to assimilate acquired operations, such as the consolidation of U.S. special process manufacturing and the integration of sales and marketing. As of September 29, 1996, $3,887 of accrued business consolidation costs were included in "Deferred liabilities" in the accompanying condensed consolidated balance sheet. NOTE 4 -- INVENTORIES Inventories as of September 29, 1996 and December 31, 1995 were:
- ---------------------------------------------------------------------- 9/29/96 12/31/95 - ---------------------------------------------------------------------- Raw materials $ 74,207 $ 22,257 Work in progress 41,191 13,688 Finished goods 37,796 17,778 Supplies 2,434 1,752 - ---------------------------------------------------------------------- Total inventories $ 155,628 $ 55,475 - ---------------------------------------------------------------------- - ----------------------------------------------------------------------
Hexcel acquired inventories totaling $85,929 in connection with the acquisitions of the Acquired Ciba Business and the Acquired Hercules Business. NOTE 5 -- INTANGIBLE ASSETS Intangible assets as of September 29, 1996 are comprised primarily of goodwill and various identified intangible assets attributable to the acquisition of the Acquired Ciba Business. No goodwill has been recorded in connection with the acquisition of the Acquired Hercules Business. Substantially all intangible assets are amortized over a period of 20 years. 10 NOTE 6 -- NOTES PAYABLE, CAPITAL LEASE OBLIGATIONS AND INDEBTEDNESS TO RELATED PARTIES Notes payable, capital lease obligations and indebtedness to related parties as of September 29, 1996 and December 31, 1995 were:
- -------------------------------------------------------------------------------------------------- 9/29/96 12/31/95 - -------------------------------------------------------------------------------------------------- Revolving Credit Facility $ 101,425 -- 1995 U.S. credit facility -- $ 30,091 European credit facilities and notes payable 23,333 18,064 Senior Subordinated Notes payable to Ciba, net of discount 31,528 -- Convertible Subordinated Notes 114,500 -- 7% convertible subordinated debentures, due 2011 25,625 25,625 Obligations under IDRB variable rate demand notes, due through 2024, net 8,450 11,990 Capital lease obligations 1,720 3,217 Various U.S. notes payable 1,297 1,157 - -------------------------------------------------------------------------------------------------- Total notes payable, capital lease obligations and indebtedness to related parties $ 307,878 $ 90,144 - -------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------- Notes payable and current maturities of long-term liabilities $ 17,776 $ 1,802 Notes payable and capital lease obligations, less current maturities 258,574 88,342 Indebtedness to related parties, less current maturities 31,528 -- - -------------------------------------------------------------------------------------------------- Total notes payable, capital lease obligations and indebtedness to related parties $ 307,878 $ 90,144 - -------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------
REVOLVING CREDIT FACILITY In connection with the acquisition of the Acquired Hercules Business on June 27, 1996, Hexcel obtained the Revolving Credit Facility to: (a) refinance outstanding indebtedness under the Senior Secured Credit Facility; (b) finance the purchase of the Acquired Hercules Business; and (c) provide for the ongoing working capital and other financing requirements of the Company, including business consolidation activities, on a worldwide basis. The Revolving Credit Facility initially provided for up to $310,000 in borrowing capacity. However, as a result of the Company's issuance of convertible subordinated notes on July 24, 1996, maximum availability under the Revolving Credit Facility was reduced from $310,000 to approximately $250,000, in accordance with the terms of that facility. Interest on outstanding borrowings under the Revolving Credit Facility is computed at an annual rate of 0.4% in excess of the applicable London interbank rate or, at the option of Hexcel, at the base rate of the administrative agent for the lenders. In addition, the Revolving Credit Facility is subject to a commitment fee of approximately 0.2% per annum on the unused portion of the facility and a letter of credit fee of up to 0.4% per annum on the outstanding face amount of letters of credit. As of September 29, 1996, letters of credit with an aggregate face amount of $12,555 were outstanding under the Revolving Credit Facility. The Revolving Credit Facility is secured by a pledge of stock of certain of Hexcel's subsidiaries. In addition, the Company is subject to various financial covenants and restrictions under the Revolving Credit Facility, and is generally prohibited from paying dividends or redeeming capital stock. The Revolving Credit Facility expires in February 1999. 11 The Revolving Credit Facility replaced the Senior Secured Credit Facility, which had previously replaced certain U.S. and European credit facilities that were available to the Company and in use as of December 31, 1995. As a result of the extinguishment of the Senior Secured Credit Facility, Hexcel wrote off $1,800 of capitalized debt financing costs in the second quarter of 1996. The Company wrote off $1,600 of capitalized debt financing costs in the first quarter of 1996 in connection with the extinguishment of certain U.S. and European credit facilities. Both write-offs are included in "Interest expense" in the accompanying condensed consolidated statements of operations for the applicable periods. CONVERTIBLE SUBORDINATED NOTES On July 24, 1996, Hexcel completed an offering of $114,500 in convertible subordinated notes due 2003 (the "Convertible Subordinated Notes"). The Convertible Subordinated Notes carry an annual interest rate of 7% and are convertible into Hexcel common stock at a conversion price of $15.81 per share. Net proceeds of $111,351 from this offering were used to repay outstanding borrowings under the Revolving Credit Facility. The Convertible Subordinated Notes are redeemable on or after August 9, 1999, in whole or in part, at the option of Hexcel. The redemption prices range from 103.5% to 100.0% of the outstanding principal amount, depending on the period in which redemption occurs. SENIOR SUBORDINATED NOTES PAYABLE TO CIBA-GEIGY In connection with the acquisition of the Acquired Ciba Business, Hexcel has delivered or undertaken to deliver to Ciba an aggregate principal amount of Senior Subordinated Notes. The Senior Subordinated Notes are general unsecured obligations of the Company. As discussed in Note 2, the aggregate principal amount of Senior Subordinated Notes which Hexcel has issued or is obligated to issue to Ciba, determined in accordance with the Strategic Alliance Agreement, was approximately $34,100 as of September 29, 1996. However, the actual aggregate principal amount of the Senior Subordinated Notes is expected to exceed this amount as a result of the pending acquisition of certain assets of the Ciba Distributors that have not yet been transferred to the Company. As of September 29, 1996, the aggregate fair value of the obligation to issue the Senior Subordinated Notes which Hexcel has issued or is obligated to issue was $31,528, which is $2,572 lower than the aggregate principal amount as of that date. The $2,572 discount reflects the absence of certain call protection provisions from the terms of the Senior Subordinated Notes and the difference between the stated interest rate on the Senior Subordinated Notes and the estimated market rate for debt obligations of comparable quality and maturity. The Senior Subordinated Notes bear interest for three years at a rate of 7.5% per annum, payable semiannually, from February 29, 1996. The interest rate will increase to 10.5% per annum on the third anniversary of the acquisition of the Acquired Ciba Business, and by an additional 0.5% per year thereafter until the Senior Subordinated Notes mature in the year 2003. As of September 29, 1996, Ciba owned 49.7% of Hexcel's issued and outstanding common stock, and four of the Company's ten directors were members of Ciba management. Accordingly, the Company's obligation to issue the Senior Subordinated Notes has been classified as "Indebtedness to related parties" in the accompanying condensed consolidated balance sheet as of September 29, 1996. 12 NOTE 7 -- DEFERRED LIABILITIES Deferred liabilities as of September 29, 1996 and December 31, 1995 were comprised primarily of various pension, retirement and post-retirement benefit liabilities, as well as deferred tax liabilities and certain other long-term obligations. NOTE 8 -- NON-CASH FINANCING ACTIVITIES In addition to a cash payment of $25,000 and the obligations to issue the Senior Subordinated Notes and the Senior Demand Notes, the consideration paid for the Acquired Ciba Business included approximately 18 million shares of newly issued Hexcel common stock. The aggregate value of these shares was estimated to be approximately $144,200, based on a discounted market price of $8 per share multiplied by the number of shares issued. The discounted market price of $8 per share was based on a market price of $10 per share during a reasonable period before and after December 12, 1995, the date that the terms for determining the total consideration to be paid by the Company were finalized, and a discount rate of 20%. The 20% discount reflects the illiquidity of the Hexcel common stock issued to Ciba caused by the size of Ciba's holding, the contractual restrictions on transferring such shares and, accordingly, limitations on the price Ciba could realize, the contractual limitation on the per share price Ciba could realize in certain types of transactions, the fact that such shares are "restricted securities" within the meaning of the Securities Act of 1933, and various other factors. NOTE 9 -- OTHER INCOME, NET Other income of $3,127 for the nine-month period ended September 29, 1996 was largely attributable to the receipt of an additional $1,560 of cash in connection with the disposition of the Chandler, Arizona manufacturing facility and certain related assets in 1994, and to the partial settlement for $1,054 of a claim arising from the sale of certain assets in 1991. NOTE 10 -- BANKRUPTCY REORGANIZATION On January 12, 1995, the United States Bankruptcy Court for the Northern District of California entered an order dated January 10, 1995 confirming the First Amended Plan of Reorganization (the "Reorganization Plan") proposed by Hexcel and the Official Committee of Equity Security Holders (the "Equity Committee"). On February 9, 1995, the Reorganization Plan became effective and Hexcel emerged from the bankruptcy reorganization proceedings which had begun on December 6, 1993, when Hexcel filed a voluntary petition for relief under the provisions of Chapter 11 of the United States Bankruptcy Code. The Reorganization Plan which became effective on February 9, 1995 provided, among other things, for the reinstatement or payment in full, with interest, of all allowed claims, including prepetition accounts payable and notes payable. On February 9, 1995, Hexcel paid $78,144 in prepetition claims and interest, and reinstated another $60,575 in prepetition liabilities. The payment of claims and interest was financed with: (a) cash proceeds of $26,694 received in the first quarter of 1995 from the sale of the Company's Chandler, Arizona manufacturing facility 13 and related assets; (b) cash proceeds of $2,602 received in the first quarter of 1995 from the sale of the Company's European resins business; (c) the $50,000 in cash received from Mutual Series Fund Inc. in connection with a standby purchase agreement with respect to a subscription rights offering for additional shares of new common stock; and (d) borrowings under a U.S. revolving credit facility. The subscription rights offering for additional shares of new common stock was subsequently concluded on April 6, 1995, with a total of 10.8 million shares of new common stock having been issued between February 9, 1995 and April 6, 1995. Professional fees and other costs directly related to bankruptcy proceedings were expensed as incurred, and have been reflected in the condensed consolidated statement of operations for the quarter and nine-month period ended October 1, 1995 as "Bankruptcy reorganization expenses." Bankruptcy reorganization expenses consisted primarily of professional fees paid to legal and financial advisors of Hexcel, the Equity Committee and the Official Committee of Unsecured Creditors. In addition, these expenses included incentives for employees to remain with the Company for the duration of bankruptcy proceedings and the write-off of previously capitalized costs related to the issuance of prepetition debt, as required by generally accepted accounting principles. The resolution of certain bankruptcy-related issues, including the final settlement of disputed claims and professional fees, resulted in bankruptcy reorganization expenses being incurred after the effective date of the Reorganization Plan. 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS BUSINESS ACQUISITIONS AND CONSOLIDATION BUSINESS ACQUISITIONS Hexcel Corporation and subsidiaries ("Hexcel" or the "Company") acquired the worldwide composites division of Ciba-Geigy Limited and Ciba-Geigy Corporation (collectively, "Ciba"), including Ciba's composite materials, parts and structures businesses (the "Acquired Ciba Business"), on February 29, 1996. The Acquired Ciba Business is engaged in the manufacture and marketing of composite materials, parts and structures for aerospace, recreation and general industrial markets. Product lines include fabrics, prepregs, adhesives, honeycomb core, sandwich panels and fabricated components, as well as structures and interiors primarily for the commercial and military aerospace markets. Hexcel acquired the assets of the composite products division of Hercules Incorporated ("Hercules"), including Hercules' carbon fibers and prepreg businesses (the "Acquired Hercules Business"), on June 27, 1996. The Acquired Hercules Business is engaged in the manufacture of carbon fibers and prepregs for aerospace, recreation and general industrial markets. In connection with the acquisitions of the Acquired Ciba Business and the Acquired Hercules Business, Hexcel has been reorganized into strategic business units with manufacturing and marketing responsibilities for specific product groups. These strategic business units are as follow: FIBERS AND FABRICS -- The Fibers and Fabrics business unit, which is organized around various product lines, manufactures and markets carbon fibers, woven fiberglass, and carbon and aramid reinforcements. Certain of these carbon fibers are used by the Company in the production of fabrics, and certain of these fabrics are used by the Company in the production of prepegs and select honeycomb products. The Company acquired its carbon fibers business from Hercules on June 27, 1996, and expanded its fabrics business as a result of the acquisition of the Acquired Ciba business. COMPOSITE MATERIALS -- The Composite Materials business unit, which is organized around U.S. and European markets, manufactures and markets prepregs, adhesives, honeycomb and honeycomb sandwich panels, as well as machined and fabricated honeycomb parts (which are often referred to as "special process" honeycomb). Certain prepreg and honeycomb products are used by the Company in the production of aircraft structures and interiors. The Company expanded its composite materials business as a result of the acquisitions of the Acquired Ciba Business and the Acquired Hercules Business. STRUCTURES AND INTERIORS -- The Structures and Interiors business unit manufactures and markets a variety of lightweight composite structures and interior systems primarily for aerospace use. The Company acquired its structures and interiors business from Ciba on February 29, 1996. Further discussion of Hexcel's business acquisitions is contained in Note 2 to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q. 15 BUSINESS CONSOLIDATION On May 9, 1996, Hexcel announced that its Board of Directors had approved a plan for consolidating the Company's operations over a period of three years. The total expense of this consolidation program is estimated to be approximately $49 million, including $35.8 million of expenses recorded during the first three quarters of 1996 and the remainder to be recorded in future periods. Cash expenditures necessary to complete the business consolidation are expected to total approximately $44 million, net of estimated proceeds from asset sales. The objective of the business consolidation program is to integrate acquired assets and operations into Hexcel, and to reorganize the Company's manufacturing and research activities around strategic centers dedicated to select product technologies. The consolidation program is also intended to eliminate excess manufacturing capacity and redundant administrative functions. Specific actions initiated under the consolidation program include the closure of the Anaheim, California facility acquired from Ciba, the closure of a portion of the Welkenraedt, Belgium facility, the reorganization of the Company's manufacturing operations in France, the consolidation of the Company's U.S. special process manufacturing activities, and the integration of sales and marketing resources. Management expects that the business consolidation program will take up to three years to complete, in part because of aerospace industry requirements to "qualify" specific equipment and manufacturing facilities for the manufacture of certain products. Based on Hexcel's experience with previous plant consolidations, these qualification requirements necessitate an approach to the consolidation of manufacturing facilities that will require two to three years to complete. Management estimates that the business consolidation will result in annual cost savings of approximately $28 million when it is fully implemented in 1999. During the period from 1996 through 1998, the cash costs associated with the consolidation program, net of estimated proceeds from asset sales, are expected to approximately equal the incremental cash savings generated by the program during the same period. The acquisition of the Acquired Hercules Business is expected to facilitate certain aspects of the business consolidation, including the closure of the Anaheim, California facility acquired from Ciba and the closure of a portion of the Welkenraedt, Belgium facility. However, this acquisition temporarily slowed some consolidation actions during the third quarter of 1996. These delays, which resulted from the effort required to complete the acquisition and evaluate its impact on the consolidation program, are not anticipated to have a significant impact on the three-year implementation schedule for consolidating Hexcel's operations. Furthermore, the total cost of the consolidation program is not expected to change as a result of the acquisition of the Acquired Hercules Business. Further discussion of the business consolidation program is contained in Note 3 to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q. 16 RESULTS OF OPERATIONS THIRD QUARTER Net sales for the third quarter of 1996 were $189.5 million, compared with net sales for the third quarter of 1995 of $81.4 million. Excluding the business operations acquired from Ciba and Hercules, sales for the third quarter of 1996 were approximately $92 million, a 13% increase over the third quarter of 1995. This increase was largely attributable to improved sales of composite materials to aerospace customers, particularly carbon core, and reflects the initial impact of recently announced increases in product rates for certain commercial aircraft. Sales by strategic business unit for the third quarter of 1996, and sales by the corresponding product groups for the third quarter of 1995, were as follows:
- -------------------------------------------------------------------- THE QUARTER ENDED - -------------------------------------------------------------------- (IN MILLIONS) 9/29/96 10/1/95 - -------------------------------------------------------------------- Fibers and Fabrics $ 43.4 $ 28.0 Composite Materials 120.4 53.4 Structures and Interiors 25.7 -- - -------------------------------------------------------------------- Total Net Sales $ 189.5 $ 81.4 - -------------------------------------------------------------------- - --------------------------------------------------------------------
Gross margin for the third quarter of 1996 was $35.8 million, or 18.9% of sales, compared with gross margin for the third quarter of 1995 of $15.9 million, or 19.5% of sales. Excluding the business operations acquired from Ciba and Hercules, gross margin for the 1996 quarter was approximately $22 million, or 23.9% of sales. The improved gross margin performance of the operations owned by Hexcel prior to 1996 reflects higher sales volumes, as well as manufacturing efficiencies resulting from the restructuring program initiated in 1992 and 1993. Hexcel generated operating income of $8.9 million for the third quarter of 1996, compared with $5.1 million for the third quarter of 1995. Selling, general and administrative expenses ("SG&A expenses") were $25.6 million in the 1996 quarter, or 13.5% of sales, versus $11.4 million in the 1995 quarter, or 14.0% of sales. The increase in SG&A expenses primarily reflects the addition of the acquired businesses. The Company also incurred $1.4 million of business consolidation and acquisition expenses in the third quarter of 1996. The third quarter of 1995 includes $0.6 million of other income received in connection with the sale of a manufacturing facility and related assets in 1994. Net income for the third quarter of 1996 was $0.3 million, or $0.01 per share, compared with $1.4 million, or $0.08 per share, for the third quarter of 1995. The 1996 quarter includes $7.2 million of interest expense, versus $2.3 million for the 1995 quarter. This increase primarily reflects the additional debt used to finance the business acquisitions. There were approximately 37.4 million weighted average shares and equivalent shares outstanding during the third quarter of 1996, compared with 18.1 million during the third quarter of 1995. The difference in the number of weighted average shares and equivalent shares primarily reflects the issuance of approximately 18 million shares of new common stock to Ciba on February 29, 1996, in connection with the acquisition of the Acquired Ciba Business. 17 YEAR-TO-DATE Net sales for the first nine months of 1996 were $482.7 million, compared with $257.5 million for the first nine months of 1995. Excluding the business operations acquired from Ciba and Hercules, sales for the first nine months of 1996 were approximately $289 million, a 12% increase over the comparable period of 1995. This increase reflects the same factors noted above. Sales by strategic business unit for the nine-month period ended September 29, 1996, and sales by the corresponding product groups for the nine-month period ended October 1, 1995, were as follows:
- -------------------------------------------------------------------- THE YEAR-TO-DATE ENDED - -------------------------------------------------------------------- (IN MILLIONS) 9/29/96 10/1/95 - -------------------------------------------------------------------- Fibers and Fabrics $ 113.3 $ 89.6 Composite Materials 310.2 167.9 Structures and Interiors 59.2 -- - -------------------------------------------------------------------- Total Net Sales $ 482.7 $ 257.5 - -------------------------------------------------------------------- - --------------------------------------------------------------------
Gross margin for the first nine months of 1996 was $97.8 million, or 20.3% of sales, versus gross margin for the same period of 1995 of $48.7 million, or 18.9% of sales. The aggregate increase in gross margin as a percentage of sales reflects the improved performance of operations owned by Hexcel prior to 1996, partially negated by the results of the acquired businesses. Excluding the business operations acquired from Ciba and Hercules, gross margin for the first nine months of 1996 was approximately $69 million, or 23.9% of sales. The operating loss for the first nine months of 1996 was $1.9 million, compared with operating income for the same period of 1995 of $13.7 million. SG&A expenses were $67.0 million in the 1996 period, or 13.9% of sales, versus $35.6 million in the 1995 period, or 13.8% of sales. Results for the nine-month period ended September 29, 1996 include $35.8 million of business consolidation and acquisition expenses. Results for this period also include $3.1 million of other income, which was largely attributable to the receipt of an additional $1.6 million of cash in connection with the sale of a manufacturing facility and related assets in 1994, and to the partial settlement for $1.1 million of a claim arising from the sale of certain assets in 1991. Results for the comparable period of 1995 include $0.6 million of other income. The 1996 year-to-date net loss was $21.5 million, or $0.66 per share, versus net income of $0.7 million, or $0.05 per share, for the comparable period of 1995. The 1996 net loss includes $15.7 million of interest expense, compared with $6.7 million for the 1995 period, and reflects the additional debt used to finance the business acquisitions as well as the write-off of $3.4 million of capitalized debt financing costs. The 1995 year-to-date period also includes $3.4 million of bankruptcy reorganization expenses. There were approximately 32.3 million weighted average shares and equivalent shares outstanding during the first nine months of 1996, versus 15.0 million during the first nine months of 1995. The difference in the number of weighted average shares and equivalent shares reflects the issuance of approximately 18 million shares of new common stock to Ciba on February 29, 1996 in connection with the acquisition of the Acquired Ciba Business, as well as the weighted average of 10.8 million shares of new common 18 stock issued between February 9, 1995 and April 6, 1995 in connection with a subscription rights offering and standby purchase agreement. CAPITAL RESOURCES AND LIQUIDITY FINANCIAL RESOURCES In connection with the acquisition of the Acquired Ciba Business, Hexcel obtained a three-year revolving credit facility of up to $175 million (the "Senior Secured Credit Facility") to: (a) fund the cash component of the purchase price; (b) refinance outstanding indebtedness under certain U.S. and European credit facilities; and (c) provide for the ongoing working capital and other financing requirements of the Company, including business consolidation activities, on a worldwide basis. The Senior Secured Credit Facility was replaced in the second quarter of 1996 by a new revolving credit facility (the "Revolving Credit Facility") obtained in connection with the acquisition of the Acquired Hercules Business. On June 27, 1996, Hexcel obtained the Revolving Credit Facility to: (a) refinance outstanding indebtedness under the Senior Secured Credit Facility; (b) finance the purchase of the Acquired Hercules Business; and (c) provide for the ongoing working capital and other financing requirements of the Company, including business consolidation activities, on a worldwide basis. As of September 29, 1996, maximum availability under the Revolving Credit Facility was approximately $250 million, and outstanding borrowings and letter of credit commitments totaled approximately $114.0 million. The Revolving Credit Facility expires in February 1999. On July 24, 1996, Hexcel completed an offering of $114.5 million in convertible subordinated notes due in 2003 (the "Convertible Subordinated Notes"). The Convertible Subordinated Notes carry an annual interest rate of 7% and are convertible into Hexcel common stock at a conversion price of $15.81 per share. The net proceeds of $111.4 million from this offering were used to repay outstanding borrowings under the Revolving Credit Facility. Management expects that the financial resources of Hexcel will be sufficient to fund the Company's worldwide operations. Further discussion of the Company's financial resources is contained in Note 6 to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q. CASH FLOWS Net cash provided by operating activities during the first nine months of 1996 was $6.8 million. Earnings before business consolidation and acquisition expenses, other income, interest, taxes, depreciation and amortization ("Adjusted EBITDA") was $48.8 million. This was largely offset by $15.7 million of interest expense, a $29.0 million increase in accounts receivable and inventories, and $4.1 million of cash payments for business consolidation activities. The increase in accounts receivable and inventories resulted from higher sales and production levels. The acquisition of working capital acquired in connection with the acquisitions of the Acquired Ciba Business and the Acquired Hercules Business is not an element of operating cash flow. 19 During the first nine months of 1995, operating activities used $8.6 million of cash. Adjusted EBITDA was $18.4 million, but the Company incurred $6.7 million of interest expense, paid $6.6 million in restructuring costs, and experienced a net increase in accounts receivable and inventories, largely as a result of higher sales levels. The primary restructuring activities during the period were the consolidation of certain honeycomb manufacturing operations at the Company's Casa Grande, Arizona facility, which is now complete, and the implementation of a new management information system. Cash flows from investing and financing activities for the first nine months of 1996 primarily reflect the acquisition of the Acquired Ciba Business and Acquired Hercules Business. In addition to the cash consideration paid for the Acquired Ciba Business, Hexcel issued approximately 18 million shares of new common stock to Ciba and incurred obligations to issue various notes payable to Ciba totaling over $39 million, approximately $5 million of which were repaid during the third quarter of 1996. Cash flows from investing and financing activities for the first nine months of 1995 consisted primarily of the proceeds from the sale of certain assets, the proceeds from the sale of Hexcel common stock pursuant to a subscription rights offering and standby purchase agreement, and the payment of allowed claims pursuant to the Company's Chapter 11 reorganization plan. Adjusted EBITDA is presented for purposes of describing the significant components of Hexcel's operating cash flows, and is not presented as an alternative measure of those cash flows or of the Company's operating results as determined in accordance with generally accepted accounting principles. CAPITAL EXPENDITURES Capital expenditures were $21.3 million for the first nine months of 1996, compared with $6.8 million for the first nine months of 1995. Approximately $12.7 million of the 1996 total was incurred during the third quarter, reflecting the increased level of spending resulting from the two business acquisitions and the subsequent commencement of the business consolidation program. Management expects that capital expenditures will equal or exceed the third quarter level during the fourth quarter of 1996, as business consolidation efforts and the expansion of the Company's fiber production capacity continue. Such expenditures will be financed with cash generated from operations and borrowings under available credit facilities. RISKS, UNCERTAINTIES AND OTHER FACTORS WITH RESPECT TO "FORWARD-LOOKING STATEMENTS" Certain statements in this Quarterly Report on Form 10-Q under the captions "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Notes to Condensed Consolidated Financial Statements" and elsewhere constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of Hexcel, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: general economic and business conditions; industry capacity; changes in customer preferences; 20 demographic changes; competition; changes in methods of distribution and technology; changes in political, social and economic conditions and local regulations, particularly in Europe and Asia; the assimilation of the Acquired Ciba Business; the assimilation of the Acquired Hercules Business; the loss of any significant customers; changes in business strategy or development plans; indebtedness of the Company; quality of management, business abilities and judgment of the Company's personnel; availability of qualified personnel; the availability, terms and deployment of capital; changes in, or the failure to comply with, government regulations; and various other factors referenced in this Quarterly Report on Form 10-Q. The Company assumes no obligation to update the forward-looking information to reflect actual results or changes in the factors affecting such forward-looking information. The forward-looking information referred to above includes, but is not limited to, the estimated total cost of Hexcel's business consolidation program, the estimated amount of cash expenditures to complete the program and the estimated annual cost savings resulting from the consolidation program. In addition to the risks, uncertainties and other factors referred to above which may cause actual amounts to differ materially from estimated amounts, such estimates of total costs, cash expenditures and annual cost savings are based on various factors and were derived utilizing numerous important assumptions, including: (a) achieving estimated reductions in the number of total employees within anticipated time frames and at currently projected severance costs levels, while maintaining work flow in the business areas affected; (b) the ability to maintain manufacturing know-how with respect to production processes conducted at facilities that will be closed or at which the number of employees will be reduced, including cooperation by employees who will be terminated; (c) the assimilation and integration of the Acquired Ciba Business with the Company's operations without disruption to manufacturing, marketing and distribution activities; (d) the assimilation of the production processes at closed facilities with production at other Company facilities without undue disruption to the manufacturing, marketing and distribution functions, including the cooperation of customers in connection with requalifying the subject products for various customer and government programs; and (e) selling vacated facilities within anticipated time frames at anticipated selling prices. The failure of these assumptions to be realized may cause the actual total cost of the consolidation program, the actual amount of cash expenditures to complete the program and the actual annual cost savings resulting from the program to differ materially from the estimates. 21 PART II. OTHER INFORMATION HEXCEL CORPORATION AND SUBSIDIARIES Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: 10.1. Consent Number 1 and First Amendment dated as of July 3, 1996 to the Credit Agreement dated as of June 27, 1996 among Hexcel Corporation and certain of its subsidiaries as borrowers, the institution party thereto as lenders, the institutions party thereto as issuing banks, Citibank, N.A. as collateral agent and Credit Suisse as administrative agent (incorporated herein by reference to Exhibit 10.2 to Hexcel Corporation's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996). 10.2 Modifications dated as of July 8, 1996 to the First Amendment to the Credit Agreement among Hexcel Corporation and certain of its subsidiaries as borrowers, the institutions party thereto as lenders, the institutions party thereto as issuing banks, Citibank, N.A. as collateral agent and Credit Suisse as administrative agent (incorporated herein by reference to Exhibit 10.3 to Hexcel Corporation's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996). 11. Statement Regarding Computation of Per Share Earnings. 27. Financial Data Schedule (electronic filing only). (b) Reports on Form 8-K: Current Report on Form 8-K dated July 12, 1996, relating to the consummation of the acquisition of the composite products division of Hercules Incorporated (including financial statements of the business acquired and pro forma financial information). Current Report on Form 8-K/A dated July 26, 1996, relating to the consummation of the acquisition of the Composite Products Division of Hercules Incorporated (including financial statements of the business acquired and pro forma financial information). 22 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, and in the capacity indicated. HEXCEL CORPORATION (Registrant) November 12, 1996 /s/ Wayne C. Pensky - --------------------- --------------------------- (Date) Wayne C. Pensky, Corporate Controller and Chief Accounting Officer 23 EX-11 2 EXHIBIT 11 EXHIBIT 11 STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS - UNAUDITED The Company reports net income (loss) per share data on primary and fully diluted bases. Primary net income (loss) per share is based upon the weighted average number of outstanding common shares and common equivalent shares from stock options. Fully diluted net income (loss) per share is based upon (a) the weighted average number of outstanding common shares and common equivalent shares from stock options and adjusted for the assumed conversion of the 7% convertible subordinated debentures and (b) net income (loss) increased by the expenses on the debentures, due 2003, and 2011, respectively. Computations of net income (loss) per share on the primary and fully diluted bases for the third quarter and first three quarters of 1996 and 1995 were:
- ---------------------------------------------------------------------------------------------------------------------------- THE QUARTER ENDED THE YEAR-TO-DATE ENDED ---------------------------- -------------------------------- SEPTEMBER 29, October 1, SEPTEMBER 29, October 1, (IN THOUSANDS, EXCEPT PER SHARE DATA) 1996 1995 1996 1995 - ---------------------------------------------------------------------------------------------------------------------------- PRIMARY NET INCOME (LOSS) PER SHARE AND EQUIVALENT SHARE - ---------------------------------------------------------------------------------------------------------------------------- Income (loss) from continuing operations $ 346 $ 1,561 $ (21,473) $ 1,142 Loss from discontinued operations - (171) - (468) - ---------------------------------------------------------------------------------------------------------------------------- Net income (loss) $ 346 $ 1,390 $ (21,473) $ 674 - ---------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------- Weighted average common shares outstanding 36,322 18,094 32,305 14,958 Weighted average common equivalent shares from stock options 1,108 - - - - ---------------------------------------------------------------------------------------------------------------------------- Weighted average common shares and equivalent shares 37,430 18,094 32,305 14,958 - ---------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------- Primary net income (loss) per share and equivalent share from (1): Continuing operations $ 0.01 $ 0.09 $ (0.66) $ 0.08 Discontinued operations - (0.01) - (0.03) - ---------------------------------------------------------------------------------------------------------------------------- Primary net income (loss) per share and equivalent share (1) $ 0.01 $ 0.08 $ (0.66) $ 0.05 - ---------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------- FULLY DILUTED NET INCOME (LOSS) PER SHARE AND EQUIVALENT SHARE - ---------------------------------------------------------------------------------------------------------------------------- Income (loss) from continuing operations $ 346 $ 1,561 $ (21,473) $ 1,142 Loss from discontinued operations - (171) - (468) - ---------------------------------------------------------------------------------------------------------------------------- Net income (loss) 346 1,390 (21,473) 674 Interest and issuance costs - 7% convertible debentures, due 2003 986 - 986 - Interest and issuance costs - 7% convertible debentures, due 2011 295 295 885 889 - ---------------------------------------------------------------------------------------------------------------------------- Adjusted net income (loss) $ 1,627 $ 1,685 $ (19,602) $ 1,563 - ---------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------- Weighted average common shares outstanding 36,322 18,094 32,305 14,958 Weighted average common equivalent shares Stock options 1,299 - 1,159 - 7% convertible debentures, due 2003 5,411 - 1,804 - 7% convertible debentures, due 2011 834 834 834 834 - ---------------------------------------------------------------------------------------------------------------------------- Weighted average common shares and equivalent shares 43,866 18,928 36,102 15,792 - ---------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------- Fully diluted net income (loss) per share and equivalent share from (1): Continuing operations $ 0.01 $ 0.09 $ (0.66) $ 0.08 Discontinued operations - (0.01) - (0.03) - ---------------------------------------------------------------------------------------------------------------------------- Fully diluted net income (loss) per share and equivalent share (1) $ 0.01 $ 0.08 $ (0.66) $ 0.05 - ---------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------
(1) For the third quarter and first three quarters of 1996 and 1995, the primary and fully diluted net income (loss) per share were the same because both the primary and fully diluted computation was antidilutive. EX-27 3 EX 27
5 1,000 9-MOS DEC-31-1996 JAN-01-1996 SEP-29-1996 4,172 0 158,509 7,134 155,628 315,044 446,656 137,306 683,226 172,782 0 0 0 364 170,349 683,226 482,730 482,730 384,946 384,946 0 0 15,655 (17,549) 3,924 (21,473) 0 0 0 (21,473) (0.66) (0.66)
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