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Hexcel 10-Q 2005

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32
  5. Ex-32

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C.  20549

 


 

FORM 10-Q

 

ý

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

For the Quarter Ended June 30, 2005

 

 

 

or

 

 

 

o

 

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   ý    No   o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).  Yes   ý  No   o

 

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 5, 2005

COMMON STOCK

 

54,888,698

 

 



 

HEXCEL CORPORATION AND SUBSIDIARIES

 

INDEX

 

PART I.

FINANCIAL INFORMATION

 

 

 

 

ITEM 1.

Condensed Consolidated Financial Statements (Unaudited)

 

 

 

 

 

      Condensed Consolidated Balance Sheets — June 30, 2005 and December 31, 2004

 

 

 

 

 

      Condensed Consolidated Statements of Operations — The Quarters and Six Months Ended June 30, 2005 and 2004

 

 

 

 

 

      Condensed Consolidated Statements of Cash Flows — The Six Months Ended June 30, 2005 and 2004

 

 

 

 

 

      Notes to Condensed Consolidated Financial Statements

 

 

 

 

ITEM 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

 

 

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk

 

 

 

 

ITEM 4.

Controls and Procedures

 

 

 

 

PART II.

OTHER INFORMATION

 

 

 

 

ITEM 1.

Legal Proceedings

 

 

 

 

ITEM 4.

Submission of Matters to a Vote of Security Holders

 

 

 

 

ITEM 6.

Exhibits and Reports on Form 8-K

 

 

 

 

SIGNATURE

 

 

 

1



 

PART I.  FINANCIAL INFORMATION

 

ITEM 1.  Condensed Consolidated Financial Statements (Unaudited)

 

Hexcel Corporation and Subsidiaries

Condensed Consolidated Balance Sheets

 

 

 

Unaudited

 

 

 

June 30,

 

December 31,

 

(In millions, except per share data)

 

2005

 

2004

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

18.5

 

$

57.2

 

Accounts receivable, net

 

176.4

 

153.5

 

Inventories, net

 

154.6

 

144.2

 

Prepaid expenses and other current assets

 

13.7

 

18.4

 

Total current assets

 

363.2

 

373.3

 

 

 

 

 

 

 

Property, plant and equipment

 

705.8

 

734.0

 

Less – accumulated depreciation

 

(441.7

)

(447.4

)

Property, plant and equipment, net

 

264.1

 

286.6

 

Goodwill

 

75.7

 

78.3

 

Investments in affiliated companies

 

14.0

 

5.5

 

Other assets

 

36.3

 

33.1

 

 

 

 

 

 

 

Total assets

 

$

753.3

 

$

776.8

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity (Deficit)

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Notes payable and current maturities of capital lease obligations

 

$

5.4

 

$

1.0

 

Accounts payable

 

90.8

 

94.8

 

Accrued liabilities

 

92.6

 

120.2

 

Total current liabilities

 

188.8

 

216.0

 

 

 

 

 

 

 

Long-term notes payable and capital lease obligations

 

447.9

 

430.4

 

Other non-current liabilities

 

65.8

 

64.3

 

Total liabilities

 

702.5

 

710.7

 

 

 

 

 

 

 

Mandatorily redeemable convertible preferred stock, 0.125 shares of series A and 0.125 shares of series B authorized, 0.101 shares of series A and 0.047 shares of series B issued and outstanding at June 30, 2005, and December 31, 2004

 

95.0

 

90.5

 

 

 

 

 

 

 

Stockholders’ equity (deficit):

 

 

 

 

 

Preferred stock, no par value, 20.0 shares authorized, no shares issued or outstanding

 

 

 

Common stock, $0.01 par value, 200.0 shares authorized,  56.3 shares issued at June 30, 2005 and 55.0 shares issued  at December 31, 2004

 

0.6

 

0.5

 

Additional paid-in capital

 

338.3

 

334.5

 

Accumulated deficit

 

(360.0

)

(363.8

)

Accumulated other comprehensive income (loss)

 

(7.7

)

18.4

 

 

 

(28.8

)

(10.4

)

Less – Treasury stock, at cost, 1.5 shares at June 30, 2005 and 1.4 shares at December 31, 2004

 

(15.4

)

(14.0

)

Total stockholders’ equity (deficit)

 

(44.2

)

(24.4

)

 

 

 

 

 

 

Total liabilities and stockholders’ equity (deficit)

 

$

753.3

 

$

776.8

 

 

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)

 

2005

 

2004

 

2005

 

2004

 

Net sales

 

$

311.3

 

$

272.2

 

$

601.9

 

$

535.0

 

Cost of sales

 

240.7

 

210.7

 

465.5

 

418.9

 

Gross margin

 

70.6

 

61.5

 

136.4

 

116.1

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

28.2

 

28.2

 

54.8

 

53.7

 

Research and technology expenses

 

6.0

 

5.0

 

11.7

 

9.9

 

Business consolidation and restructuring expenses

 

0.4

 

0.9

 

0.8

 

1.4

 

Other (income) expense, net

 

(0.9

)

1.5

 

(0.7

)

1.5

 

Operating income

 

36.9

 

25.9

 

69.8

 

49.6

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

7.4

 

11.9

 

19.3

 

24.3

 

Non-operating expense, net

 

0.6

 

0.5

 

40.9

 

0.6

 

Income before income taxes

 

28.9

 

13.5

 

9.6

 

24.7

 

Provision for income taxes

 

3.6

 

5.2

 

7.2

 

8.6

 

Income before equity in earnings

 

25.3

 

8.3

 

2.4

 

16.1

 

Equity in earnings of affiliated companies

 

0.9

 

0.5

 

1.4

 

0.8

 

Net income

 

26.2

 

8.8

 

3.8

 

16.9

 

Deemed preferred dividends and accretion

 

(2.3

)

(3.1

)

(4.6

)

(6.2

)

Net income (loss) available to common stockholders

 

$

23.9

 

$

5.7

 

$

(0.8

)

$

10.7

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.44

 

$

0.14

 

$

(0.01

)

$

0.27

 

Diluted

 

$

0.28

 

$

0.10

 

$

(0.01

)

$

0.19

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares:

 

 

 

 

 

 

 

 

 

Basic

 

54.5

 

39.2

 

54.2

 

39.0

 

Diluted

 

94.9

 

91.3

 

54.2

 

91.2

 

 

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)

 

2005

 

2004

 

Cash flows from operating activities

 

 

 

 

 

Net income

 

$

3.8

 

$

16.9

 

Reconciliation to net cash (used for) provided by operating activities:

 

 

 

 

 

Depreciation

 

24.1

 

26.5

 

Amortization of debt discount and deferred financing costs

 

1.2

 

1.7

 

Deferred income taxes (benefit)

 

0.3

 

(0.1

)

Business consolidation and restructuring expenses

 

0.8

 

1.4

 

Business consolidation and restructuring payments

 

(1.1

)

(2.8

)

Equity in earnings of affiliated companies

 

(1.4

)

(0.8

)

Working capital changes and other

 

(31.2

)

(21.9

)

Net cash (used for) provided by operating activities

 

(3.5

)

20.9

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

Capital expenditures

 

(16.6

)

(11.8

)

Proceeds from sale of assets

 

1.4

 

6.5

 

Dividends from affiliated companies

 

1.1

 

1.5

 

Investment in affiliated companies

 

(7.5

)

 

Net cash used for investing activities

 

(21.6

)

(3.8

)

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

Proceeds from 6.75% senior subordinated notes

 

225.0

 

 

Proceeds from senior secured credit facilities, net

 

220.0

 

7.8

 

Repayments of 9.75% senior subordinated notes

 

(285.3

)

(22.9

)

Redemption of 7.0% convertible subordinated debentures

 

(19.2

)

 

Redemption of 9.875% senior secured notes

 

(125.0

)

 

Proceeds from (repayments of) capital lease obligations and other debt, net

 

4.1

 

(1.2

)

Issuance costs related to debt offerings

 

(12.2

)

 

Debt retirement costs

 

(30.0

)

 

Activity under stock plans

 

5.8

 

1.9

 

Net cash used for financing activities

 

(16.8

)

(14.4

)

Effect of exchange rate changes on cash and cash equivalents

 

3.2

 

0.7

 

Net (decrease) increase in cash and cash equivalents

 

(38.7

)

3.4

 

Cash and cash equivalents at beginning of period

 

57.2

 

41.7

 

Cash and cash equivalents at end of period

 

$

18.5

 

$

45.1

 

 

 

 

 

 

 

Supplemental Data:

 

 

 

 

 

Cash interest paid

 

$

26.4

 

$

24.4

 

Cash taxes paid

 

$

6.9

 

$

5.4

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

4



 

HEXCEL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 1 – Basis of Accounting

 

The accompanying condensed consolidated financial statements have been prepared from the unaudited records of Hexcel Corporation and its 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 normal recurring adjustments necessary to present fairly the balance sheet of the Company as of June 30, 2005, the results of operations for the quarters and six months ended June 30, 2005 and 2004, and the cash flows for the six months ended June 30, 2005 and 2004.  The condensed consolidated balance sheet of the Company as of December 31, 2004 was derived from the audited 2004 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 2005 presentation.  These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2004 Annual Report on Form
10-K.

 

Note 2 – Refinancing of Long-Term Debt

 

During the first quarter of 2005, the Company took a series of actions to refinance substantially all of its long-term debt.  The purpose of the refinancing was to reduce interest expense, establish pre-payable senior debt and extend the maturities of the Company’s long-term debt.  The refinancing actions taken were as follows:

 

                  On January 27, 2005, the Company entered into an agreement to issue $225.0 million principal amount of 6.75% senior subordinated notes due 2015.

 

                  On January 31, 2005, the Company initiated a tender offer and consent solicitation with respect to its 9.875% senior secured notes due 2008.  The completion was subject to various conditions, including the closing of a new senior secured credit facility.

 

                  On February 1, 2005, the Company closed the issuance of $225.0 million principal amount of 6.75% senior subordinated notes due 2015.  The notes were offered pursuant to Rule 144A under the Securities Act of 1933 with registration rights.  The Company remitted $194.9 million of the net proceeds from the offering to the trustee for Hexcel’s 9.75% senior subordinated notes due 2009 for the purpose of redeeming $185.3 million principal amount of such notes (including the related accrued interest and call premium).

 

                  On March 1, 2005, the Company entered into a new $350.0 million senior secured credit facility (the “New Facility”), consisting of a $225.0 million term loan and a $125.0 million revolving loan.  The term loan under the New Facility is scheduled to mature on March 1, 2012 and the revolving loan under the New Facility is scheduled to expire on March 1, 2010.  The spread over LIBOR payable on advances under the New Facility is based on leverage.  Initially the interest rates on the term loan and revolving loan were LIBOR + 175bps and LIBOR +200bps, respectively.  The New Facility is secured by a pledge of assets that includes, among other things, the receivables, inventory, property, plant and equipment and intellectual property of Hexcel Corporation and its material U.S. subsidiaries, and 65% of the share capital of Hexcel’s Danish subsidiary and first-tier U.K. subsidiary.  Proceeds from a portion of the term loan under the New Facility were used to repurchase the outstanding $125.0 million principal amount of Hexcel’s 9.875% senior secured notes due 2008.  The total consideration paid for each $1,000 principal

 

5



 

amount of notes tendered and accepted for payment in accordance with the terms of the Offer to Purchase and Consent Solicitation Statement dated January 31, 2005 was $1,112.60 plus accrued and unpaid interest.  In addition, the New Facility replaced the Company’s existing $115.0 million five-year secured revolving credit facility.  The terminated credit facility was scheduled to expire on March 31, 2008.

 

                  Also on March 1, 2005, the Company announced that it had called for redemption the remaining $100.0 million principal amount of its 9.75% senior subordinated notes due 2009, and the remaining $19.2 million principal amount of its 7% convertible subordinated debentures due 2011.  The redemption price for the 9.75% senior subordinated notes was 103.9% or $103.9 million plus accrued interest.  The redemption price for the 7% Convertible Subordinated Debentures was 100% plus accrued interest.  The redemption date for each was March 31, 2005.  The redemptions were financed utilizing cash on hand together with advances under the term loan and revolving loan of its New Facility.

 

In connection with the refinancing, the Company recorded a loss on early retirement of debt of $40.3 million during the first quarter of 2005, consisting of tender offer and call premiums of $25.2 million, the write-off of unamortized deferred financing costs and original issuance discounts of $10.3 million, transaction costs of $1.2 million in connection with the repurchasing, and a loss of $3.6 million related to the cancellation of interest rate swap agreements.  The loss on early retirement of debt has been reported in the line item “non-operating expense, net” in the condensed consolidated statements of operations.

 

Cash costs of $42.2 million were incurred in completing the refinancing and included (i) the payment of $25.2 million of premiums to tender for the 9.875% senior secured notes due 2008 and to call the 9.75% senior subordinated notes due 2009, (ii) the payment of $13.4 million of transaction costs in connection with the issuance of the new debt, and the redemption of existing debt, and (iii) the fair value payment of $3.6 million to cancel the Company’s interest rate swap agreements related to $100.0 million principal amount of its 9.75% senior subordinated notes due 2009.

 

In addition, an aggregate amount of $9.9 million of accrued interest was paid as the debt securities were redeemed during the first quarter of 2005.  Interest expense in the first quarter of 2005 increased by $1.0 million, net of interest income, due to the lag between the issuance on February 1 of the 6.75% senior subordinated notes due 2015 and the partial redemption of the 9.75% senior subordinated notes due 2009 on March 3, 2005.

 

For further information on the refinancing, see Notes 6, 9 and 12.

 

 

Note 3 - Stock-Based Compensation

 

The Company accounts for stock-based compensation under the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”).  Accordingly, compensation expense is not recognized when options are granted at the fair market value on the date of grant.  However, the Company does recognize compensation expense for the granting of restricted stock and similar stock-based awards over the defined vesting periods.  As of June 30, 2005, the Company had several on-going stock-based compensation plans that provide for different types of equity awards, including stock options and various forms of restricted stock unit awards.

 

The Company has elected to continue following APB 25 to account for its stock-based compensation plans.  The effects on net income (loss) and net income (loss) per common share as if the Company had applied the fair value method of accounting for stock-based compensation in accordance with Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (“FAS 123R”) are as follows:

 

6



 

 

 

Quarter Ended June 30,

 

Six Months Ended June 30,

 

(in millions, except per share data)

 

2005

 

2004

 

2005

 

2004

 

Net income (loss):

 

 

 

 

 

 

 

 

 

Net income (loss) available to common stockholders, as reported

 

$

23.9

 

$

5.7

 

$

(0.8

)

$

10.7

 

Add: Stock-based compensation expense included in reported net income (loss)

 

0.6

 

0.3

 

1.1

 

0.7

 

Deduct: Stock-based compensation expense determined under fair value method for all awards

 

(1.5

)

(1.3

)

(2.9

)

(2.5

)

Pro forma net income (loss)

 

$

23.0

 

$

4.7

 

$

(2.6

)

$

8.9

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per common share:

 

 

 

 

 

 

 

 

 

Basic net income (loss) per common share:

 

 

 

 

 

 

 

 

 

As reported

 

$

0.44

 

$

0.14

 

$

(0.01

)

$

0.27

 

Pro forma

 

$

0.42

 

$

0.12

 

$

(0.05

)

$

0.23

 

 

 

 

 

 

 

 

 

 

 

Diluted net income (loss) per common share:

 

 

 

 

 

 

 

 

 

As reported

 

$

0.28

 

$

0.10

 

$

(0.01

)

$

0.19

 

Pro forma

 

$

0.27

 

$

0.09

 

$

(0.05

)

$

0.17

 

 

No tax benefit was recognized on stock-based compensation expense as the Company establishes a non-cash valuation allowance attributable to currently generated U.S. net operating losses (for further information see Note 13).  Stock-based compensation expense was not material to European operations.

 

The weighted average fair value of stock options granted during the six months ended June 30, 2005 and 2004 was $7.88 and $4.18, respectively, and estimated using the Black-Scholes option pricing model with the following weighted-average assumptions:

 

 

 

Six Months Ended June 30,

 

 

 

2005

 

2004

 

Expected life (in years)

 

5.5

 

4.0

 

Interest rate

 

3.74

%

4.29

%

Volatility

 

56.33

%

71.68

%

Dividend yield

 

 

 

 

In connection with the Company’s adoption of FAS 123R, the Company has retained a third party consultant to assist in the development of a measurement model for the Company’s share-based compensation.  The consultant has begun its accumulation of data, and is in the early design stages of assisting the Company in the development of the model. In addition, management is evaluating its options related to its method of adoption.

 

Note 4 – Inventories, net

 

(In millions)

 

June 30,
2005

 

December 31,
2004

 

Raw materials

 

$

58.3

 

$

51.7

 

Work in progress

 

36.2

 

36.6

 

Finished goods

 

60.1

 

55.9

 

Total inventories, net

 

$

154.6

 

$

144.2

 

 

7



 

Note 5 - Business Consolidation and Restructuring Programs

 

The aggregate business consolidation and restructuring liabilities as of June 30, 2005 and December 31, 2004, and activity for the quarter and six months ended June 30, 2005, consisted of the following:

 

(In millions)

 

Employee
Severance

 

Facility &
Equipment

 

Total

 

Balance as of December 31, 2004

 

$

3.3

 

$

1.0

 

$

4.3

 

Current period expenses

 

0.2

 

0.2

 

0.4

 

Cash expenditures

 

(0.5

)

(0.3

)

(0.8

)

Currency translation adjustments

 

(0.1

)

 

(0.1

)

Balance as of March 31, 2005

 

$

2.9

 

$

0.9

 

$

3.8

 

Current period expenses

 

0.2

 

0.2

 

0.4

 

Cash expenditures

 

 

(0.3

)

(0.3

)

Currency translation adjustments

 

(0.1

)

 

(0.1

)

Balance as of June 30, 2005

 

$

3.0

 

$

0.8

 

$

3.8

 

 

Livermore Program

 

In the first quarter of 2004, the Company announced its intent to consolidate the activities of its Livermore, California facility into its other facilities, principally the Salt Lake City, Utah plant.  For the quarter and six months ended June 30, 2005, the Company recognized $0.2 million and $0.4 million of expense, respectively, for employee severance based on the remaining employee service periods.  In addition, during the second quarter of 2005, the Company recognized $0.1 million of costs for equipment relocation and re-qualification costs that are expensed as incurred. Costs associated with the facility’s closure, along with costs for relocation and re-qualification of equipment, are expected to occur over several years.

 

Business consolidation and restructuring liabilities as of June 30, 2005 and December 31, 2004, and activity for the Livermore program for the quarter and six months ended June 30, 2005, consisted of the following:

 

(In millions)

 

Employee
Severance

 

Facility &
Equipment

 

Total

 

Balance as of December 31, 2004

 

$

0.8

 

$

 

$

0.8

 

Business consolidation and restructuring expenses

 

0.2

 

 

0.2

 

Balance as of March 31, 2005

 

$

1.0

 

$

 

$

1.0

 

Business consolidation and restructuring expenses

 

0.2

 

0.1

 

0.3

 

Cash expenditures

 

 

(0.1

)

(0.1

)

Balance as of June 30, 2005

 

$

1.2

 

$

 

$

1.2

 

 

November 2001 Program

 

In November 2001, the Company announced a program to restructure its business operations as a result of its revised business outlook due to reductions in commercial aircraft production rates and depressed business conditions in the electronics market.  For the quarter and six months ended June 30, 2005, the Company recognized business consolidation and restructuring expenses of $0.1 million and $0.3 million, respectively, related to this program for equipment relocation and re-qualification costs that are expensed as incurred.

 

8



 

Business consolidation and restructuring liabilities as of June 30, 2005 and December 31, 2004, and activity for the November 2001 program for the quarter and six months ended June 30, 2005, consisted of the following:

 

(In millions)

 

Employee
Severance

 

Facility &
Equipment

 

Total

 

Balance as of December 31, 2004

 

$

2.5

 

$

1.0

 

$

3.5

 

Current period expenses

 

 

0.2

 

0.2

 

Cash expenditures

 

(0.5

)

(0.3

)

(0.8

)

Currency translation adjustments

 

(0.1

)

 

(0.1

)

Balance as of March 31, 2005

 

$

1.9

 

$

0.9

 

$

2.8

 

Current period expenses

 

 

0.1

 

0.1

 

Cash expenditures

 

 

(0.2

)

(0.2

)

Currency translation adjustments

 

(0.1

)

 

(0.1

)

Balance as of June 30, 2005

 

$

1.8

 

$

0.8

 

$

2.6

 

 

Note 6 - Notes Payable and Capital Lease Obligations

 

(In millions)

 

June 30,
2005

 

December 31,
2004

 

Senior secured credit facility - revolver due 2010

 

$

35.0

 

$

 

Senior secured credit facility - term B loan due 2012

 

185.0

 

 

European credit and overdraft facilities

 

4.6

 

0.7

 

6.75% senior subordinated notes due 2015

 

225.0

 

 

9.875% senior secured notes due 2008, net of unamortized discount of $0.9 as of December 31, 2004

 

 

124.1

 

9.75% senior subordinated notes due 2009, net of unamortized discount of $0.6 as of December 31, 2004 (a)

 

 

283.3

 

7.0% convertible subordinated debentures due 2011

 

 

19.2

 

Total notes payable

 

449.6

 

427.3

 

Capital lease obligations

 

3.7

 

4.1

 

Total notes payable and capital lease obligations

 

$

453.3

 

$

431.4

 

 

 

 

 

 

 

Notes payable and current maturities of long-term liabilities

 

$

5.4

 

$

1.0

 

Long-term notes payable and capital lease obligations, less current maturities

 

447.9

 

430.4

 

Total notes payable and capital lease obligations

 

$

453.3

 

$

431.4

 

 


(a)          Includes a decrease of $1.4 million at December 31, 2004 for derivative contracts under SFAS No. 133.  During the fourth quarter of 2003, the Company entered into interest rate swap agreements for an aggregate notional amount of $100.0 million, effectively converting the fixed interest rate of 9.75% into variable interest rates.  In connection with the first quarter 2005 refinancing, the interest rate swap agreements were cancelled.  For further information, see Notes 2, 9 and 12.

 

During the first quarter of 2005, the Company refinanced substantially all of its long-term debt. In connection with the refinancing, the Company entered into a new $350.0 million senior secured credit facility, consisting of a $225.0 million term loan and a $125.0 million revolving loan.  Borrowings as of June 30, 2005 under the New Facility were $220.0 million, consisting of $185.0 million of term loans and $35.0 million of revolver loans.  In addition, the Company issued $225.0 million principal amount of 6.75% senior subordinated notes due 2015. The term loan under the New Facility is scheduled to mature on March 1, 2012 and the revolving loan under the New Facility is scheduled to expire on March 1, 2010. The New Facility replaced the Company’s existing $115.0 million five-year secured revolving credit facility.  The terminated credit facility was scheduled to expire on March 31, 2008. For further information, see Notes 2, 9 and 12.

 

9



 

Senior Secured Credit Facility

 

Under the original terms of the term loan portion of the New Facility, the Company is required to make quarterly principal payments of $0.6 million on March 1, June 1, September 1 and December 1 of each year commencing June 1, 2005 and continuing through and including March 1, 2011.  Commencing on June 1, 2011, and thereafter on September 1, 2011, December 1, 2011, and March 1, 2012, the Company’s quarterly scheduled principal payments under the original terms of the term loan portion of the New Facility increased to $52.9 million.  The term loan portion of the New Facility is scheduled to be paid in full upon payment of the last principal payment on March 1, 2012.

 

On June 1, 2005 the Company repaid $40.0 million principal amount of the term loan under the New Facility.  The payment included a principal prepayment of $39.4 million and the quarterly scheduled principal payment of $0.6 million noted above. As a result of the prepayment, the Company’s required principal payments under the term loan portion of the New Facility have been adjusted requiring the Company to make quarterly principal payments of $0.5 million on March 1, June 1, September 1, and December 1 of each year commencing June 1, 2006 and continuing through and including March 1, 2011.  Commencing on June 1, 2011 and thereafter on September 1, 2011, December 1, 2011, and March 1, 2012, the Company’s quarterly scheduled principal payment increases to $43.9 million.  As a result of the prepayment, the Company recorded a $0.6 million charge to non-operating expense for the accelerated write-off of related deferred financing costs.

 

Term loan borrowings under the New Facility bear interest at a floating rate based on the agent’s defined “prime rate” plus a margin that can vary from 0.50% to 0.75% or LIBOR plus a margin that can vary from 1.50% to 1.75%, while revolving loan borrowings under the New Facility bear interest at a floating rate based on either the agent’s defined “prime rate” plus a margin that can vary from 0.25% to 1.00%, or LIBOR plus a margin that can vary from 1.25% to 2.00%.  The margin in effect for a borrowing at any given time depends on the Company’s consolidated leverage ratio. Based on our leverage ratio at June 30, 2005, the Company would expect the margin to step down from 2.00% to 1.75% at the next measurement date of September 30, 2005. The weighted average interest rates for the actual borrowings on the New Facility were 4.9% and 5.1% for the quarter and six months ended June 30, 2005, respectively.  In accordance with the terms of the New Facility, initial borrowings were required to be made under the “prime rate” option, which resulted in interest borrowings at rates greater than those which would have been incurred using the LIBOR option.  Borrowings made and outstanding under the LIBOR option during the second quarter of 2005  were made at interest rates ranging from 4.875% to 5.313%, and borrowings made and outstanding under the LIBOR option during the six months ended June 30, 2005 were made at interest rates ranging between 4.625% and 5.313%.  In May 2005, the Company entered into interest rate swap agreements, which effectively converted $50.0 million of the variable interest rate term loan of the New Facility into fixed rate debt. As a result of these interest rate swap agreements, the Company will pay interest of 3.98% and 4.01% plus the margin in effect on Euro currency borrowings of $30.0 million and $20.0 million, respectively.

 

The New Facility was entered into by and among Hexcel Corporation and certain lenders.  In connection with the New Facility, two of the Company’s U.S. subsidiaries, Clark-Schwebel Holding Corp. and Hexcel Reinforcements Corp. (the “Guarantors”), entered into a Subsidiary Guaranty under which they guaranteed the obligations of Hexcel Corporation under the New Facility.  In addition, Hexcel Corporation and the Guarantors entered into a Security Agreement in which Hexcel Corporation and the Guarantors pledged certain assets as security for the New Facility.  The assets pledged include, among other things, the receivables, inventory, property, plant and equipment and intellectual property of Hexcel Corporation and the Guarantors, and 65% of the share capital of Hexcel’s Danish subsidiary and first-tier U.K. subsidiary.

 

10



 

The Company is required to maintain a minimum interest coverage ratio (based on the ratio of EBITDA, as defined in the credit agreement, to interest expense) and may not exceed a maximum leverage ratio (based on the ratio of total debt to EBITDA) throughout the term of the New Facility.  The New Facility also contains limitations on, among other things, incurring debt, granting liens, making investments, making restricted payments (including dividends), making capital expenditures, entering into transactions with affiliates and prepaying subordinated debt.  In addition, the New Facility contains other terms and conditions such as customary representations and warranties, additional covenants and customary events of default.

 

The New Facility permits the Company to issue letters of credit up to an aggregate amount of $40.0 million.  Any outstanding letters of credit reduce the amount available for borrowing under the revolving loan.  As of June 30, 2005, the Company had aggregate borrowings of $220.0 million outstanding under the New Facility consisting of $185.0 million of term loans and $35.0 million of revolving loans, and had issued letters of credit totaling $8.7 million.

 

6.75% Senior Subordinated Notes, due 2015

 

On February 1, 2005, the Company issued 6.75% senior subordinated notes due 2015 through a private placement under Rule 144A.  At the time of the issuance, pursuant to a registration rights agreement, Hexcel agreed to offer to all noteholders the opportunity to exchange their senior subordinated notes for new notes that are substantially identical to the senior subordinated notes except that the new notes would be registered with the Securities and Exchange Commission (“SEC”) and would not have any restrictions on transfer.  The exchange offer was completed on June 15, 2005, with all noteholders electing to exchange their notes for new notes registered with the SEC.  On June 16, 2005, the Company issued the new notes in exchange for the original notes.

 

The senior subordinated notes are unsecured senior subordinated obligations of Hexcel Corporation.  Interest accrues at the rate of 6.75% per annum and is payable semi-annually in arrears on February 1 and August 1, beginning on August 1, 2005.  The senior subordinated notes mature on February 1, 2015.  The Company may not redeem the senior subordinated notes prior to February 1, 2010, except that the Company may use the net proceeds from one or more equity offerings at any time prior to February 1, 2008 to redeem up to 35% of the aggregate principal amount of the notes at 106.75% of the principal amount, plus accrued and unpaid interest.  The Company will have the option to redeem all or a portion of the senior subordinated notes at any time during the one-year period beginning February 1, 2010 at 103.375% of principal plus accrued and unpaid interest.  This percentage decreases to 102.25% for the one-year period beginning February 1, 2011, to 101.125% for the one-year period beginning February 1, 2012 and to 100.0% any time on or after February 1, 2013.  In the event of a “change of control” (as defined in the indenture), Hexcel is generally required to make an offer to all noteholders to purchase all outstanding senior subordinated notes at 101% of the principal amount plus accrued and unpaid interest.

 

The indenture contains various customary covenants including, but not limited to, restrictions on incurring debt, making restricted payments (including dividends), the use of proceeds from certain asset dispositions, entering into transactions with affiliates, and merging or selling all or substantially all of the Company’s assets.  The indenture also contains many other customary terms and conditions, including customary events of default, some of which are subject to grace and notice periods.

 

An affiliate of the Goldman Sachs Investors, a related party, performed underwriting services in connection with the Company’s private placement offering of the senior subordinated notes, and received $2.4 million for such services.  Refer to the Company’s 2004 Annual Report on Form 10-K for further information regarding related parties.

 

11



 

European Credit and Overdraft Facilities

 

Certain of Hexcel’s European subsidiaries have access to limited credit and overdraft facilities provided by various local banks.  These credit and overdraft facilities are primarily uncommitted facilities that are terminable at the discretion of the lenders.

 

French Factoring Facility

 

The Company has an existing accounts receivable factoring facility with a third party to provide an additional 20.0 million Euros in borrowing capacity at its French operating subsidiaries.  As of June 30, 2005, the Company did not have any accounts receivable factored under this facility.

 

 

Note 7 – Retirement and Other Postretirement Benefit Plans

 

Hexcel maintains qualified and nonqualified defined benefit retirement plans covering certain current and former U.S. and European employees and directors, retirement savings plans covering eligible U.S. employees and certain postretirement health care and life insurance benefit plans covering eligible U.S. retirees.  The Company also participates in a union sponsored multi-employer pension plan covering certain U.S. employees with union affiliations.   Refer to the Company’s 2004 Annual Report on Form 10-K for further information regarding these plans.

 

Defined Benefit Retirement Plans

 

Net Periodic Benefit Costs

 

Net periodic benefit costs of Hexcel’s defined benefit retirement plans for the quarters and six months ended June 30, 2005 and 2004 were as follows:

 

 

 

Quarter Ended June 30,

 

Six Months Ended June 30,

 

(in millions)

 

2005

 

2004

 

2005

 

2004

 

U.S. Defined Benefit Retirement Plans

 

 

 

 

 

 

 

 

 

Service cost

 

$

0.3

 

$

0.2

 

$

0.6

 

$

0.4

 

Interest cost

 

0.4

 

0.5

 

0.9

 

0.9

 

Expected return on plan assets

 

(0.3

)

(0.3

)

(0.6

)

(0.6

)

Net amortization and deferral

 

0.3

 

0.2

 

0.6

 

0.5

 

Sub-total

 

0.7

 

0.6

 

1.5

 

1.2

 

Curtailment and settlement loss

 

0.2

 

0.2

 

0.4

 

0.4

 

Net periodic benefit cost

 

$

0.9

 

$

0.8

 

$

1.9

 

$

1.6

 

 

 

 

 

 

 

 

 

 

 

European Defined Benefit Retirement Plans

 

 

 

 

 

 

 

 

 

Service cost

 

$

0.8

 

$

0.6

 

$

1.6

 

$

1.2

 

Interest cost

 

1.4

 

1.2

 

2.7

 

2.4

 

Expected return on plan assets

 

(1.4

)

(1.2

)

(2.7

)

(2.3

)

Net amortization and deferral

 

0.3

 

0.5

 

0.6

 

0.9

 

Sub-total

 

1.1

 

1.1

 

2.2

 

2.2

 

Curtailment and settlement gain

 

 

(0.1

)

 

(0.2

)

Net periodic benefit cost

 

$

1.1

 

$

1.0

 

$

2.2

 

$

2.0

 

 

Contributions

 

The Company contributed $0.6 million and $0.4 million to its U.S. qualified and nonqualified defined benefit retirement plans during the second quarters of 2005 and 2004, respectively.  Contributions were $1.2 million and $0.9 million for the six months ended June 30, 2005 and 2004, respectively. Although no minimum funding contributions are required, the Company intends to contribute approximately $1.5 million during 2005 to its U.S. qualified pension plan to fund expected lump sum payments.  The Company generally funds its U.S. nonqualified defined benefit retirement plans when benefit payments are due.  Under the provisions of these nonqualified plans, the Company expects to contribute

 

12



 

approximately $0.3 million in 2005 to cover unfunded benefits.  The Company contributed $2.0 million to its U.S. defined benefits retirement plans during its 2004 fiscal year.

 

In addition, the Company contributed $0.5 million and $0.6 million to its European defined benefit retirement plans during the second quarters of 2005 and 2004, respectively.  Total contributions were $1.1 million for both the six months ended June 30, 2005 and 2004. The Company plans to contribute approximately $2.1 million during 2005 to its European plans which will meet government requirements.  The Company contributed $2.3 million to its European plans during its 2004 fiscal year.

 

Postretirement Health Care and Life Insurance Benefit Plans

 

Net Periodic Postretirement Benefit Costs

 

Net periodic postretirement benefit costs of Hexcel’s postretirement health care and life insurance benefit plans for the quarters and six months ended June 30, 2005 and 2004 were as follows:

 

 

 

Quarter Ended June 30,

 

Six Months Ended June 30,

 

(in millions)

 

2005

 

2004

 

2005

 

2004

 

U.S. Postretirement Plans

 

 

 

 

 

 

 

 

 

Service cost

 

$

0.1

 

$

 

$

0.1

 

$

0.1

 

Interest cost

 

0.2

 

0.3

 

0.4

 

0.6

 

Net amortization and deferral

 

 

 

 

 

Net periodic postretirement benefit costs

 

$

0.3

 

$

0.3

 

$

0.5

 

$

0.7

 

 

Contributions

 

In connection with its postretirement plans, the Company contributed $0.4 million and $0.5 million for the second quarter of 2005 and 2004, respectively, and $0.7 million and $1.0 million during the six months ended June 30, 2005 and 2004, respectively.  The Company periodically funds its postretirement plans to pay covered expenses as they are incurred.  Under the provisions of these postretirement plans, the Company expects to contribute approximately $1.9 million in 2005 to cover unfunded benefits.  The Company contributed $1.7 million to its postretirement plans during its 2004 fiscal year.

 

Medicare Prescription Drug, Improvement and Modernization Act of 2003

 

The Company has reviewed the impact of the FASB Staff Position No. FAS 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” on its postretirement plans and has concluded that the enactment of the Act was not a significant event for its plans.  The effects of the Act were incorporated in the valuation at December 31, 2004, and the effects of the subsidy were not material.

 

Note 8 – Other (Income) Expense, Net

 

 

 

Quarter Ended June 30,

 

Six Months Ended June 30,

 

(in millions)

 

2005

 

2004

 

2005

 

2004

 

Gain on sale of assets

 

$

(1.4

)

$

(4.0

)

$

(1.4

)

$

(4.0

)

Accrual for certain legal matters

 

0.5

 

5.5

 

0.7

 

5.5

 

Other (income) expense, net

 

$

(0.9

)

$

1.5

 

$

(0.7

)

$

1.5

 

 

During the second quarters of 2005 and 2004, the Company sold surplus land at one of its U.S. facilities for net cash proceeds of $1.4 million and $6.5 million, respectively.  In connection with these sales, the Company recognized gains of $1.4 million and $4.0 million for the second quarters of 2005 and

 

13



 

2004, respectively.  In addition, the Company recorded estimated accruals of $0.5 million and $5.5 million during the second quarters of 2005 and 2004, respectively, in connection with the ongoing carbon fiber legal matters previously disclosed.

 

Note 9 – Non-Operating Expense, Net

 

 

 

Quarter Ended June 30,

 

Six Months Ended June 30,

 

(In millions)

 

2005

 

2004

 

2005

 

2004

 

 

 

 

 

 

 

 

 

 

 

Gain from the de-mutualization of an insurance company

 

$

 

$

(0.4

)

$

 

$

(1.0

)

Loss on early retirement of debt, net

 

0.6

 

0.9

 

40.9

 

1.6

 

Non-operating expense, net

 

$

0.6

 

$

0.5

 

$

40.9

 

$

0.6

 

 

During the first quarter of 2005, the Company refinanced substantially all of its debt.  In connection with the refinancing, the Company recorded a loss on early retirement of debt of $40.3 million during the first quarter of 2005, consisting of tender offer and call premiums of $25.2 million, the write-off of unamortized deferred financing costs and original issuance discounts of $10.3 million, transaction costs of $1.2 million in connection with the refinancing, and a loss of $3.6 million related to the cancellation of interest rate swap agreements.  For further information, see Notes 2, 6 and 12.

 

During the second quarter of 2005, the Company prepaid $39.4 million of the term B loan portion of the New Facility.  As a result of the prepayment, the Company recorded an additional $0.6 million loss on early retirement of debt resulting from the accelerated write-off of related deferred financing costs.

 

During the first quarter of 2004, the Company became aware of an existing asset custodial account created upon the de-mutualization of an insurance company in December 2001.  Assets distributed to the custodial account resulted from the existence of certain group life insurance, disability and dental plans insured by the de-mutualized company.  The assets held in the account will be used to defray a portion of future funding requirements associated with these plans.  In connection therewith, the Company recognized a gain of $0.6 million in the first quarter of 2004. During the second quarter of 2004, the Company sold the underlying securities obtained through the de-mutualization recognizing an additional gain of $0.4 million.

 

During the second quarter and first six months of 2004, the Company repurchased $11.8 million and $21.8 million principal amount, respectively, of its 9.75% senior subordinated notes, due 2009, recognizing a $0.9 million and a $1.6 million loss on the early retirement of debt, respectively.  The losses resulted from market premiums paid, as well as the write-off of related unamortized deferred financing costs and original issuance discount.

 

14



 

Note 10 - Net Income (Loss) Per Common Share

 

 

 

Quarter Ended June 30,

 

Six Months Ended June 30,

 

(In millions, except per share data)

 

2005

 

2004

 

2005

 

2004

 

 

 

 

 

 

 

 

 

 

 

Basic net income (loss) per common share:

 

 

 

 

 

 

 

 

 

Net income

 

$

26.2

 

$

8.8

 

$

3.8

 

$

16.9

 

Deemed preferred dividends and accretion

 

(2.3

)

(3.1

)

(4.6

)

(6.2

)

Net income (loss) available to common stockholders

 

$

23.9

 

$

5.7

 

$

(0.8

)

$

10.7

 

Weighted average common shares outstanding

 

54.5

 

39.2

 

54.2

 

39.0

 

Basic net income (loss) per common share

 

$

0.44

 

$

0.14

 

$

(0.01

)

$

0.27

 

 

 

 

 

 

 

 

 

 

 

Diluted net income (loss) per common share:

 

 

 

 

 

 

 

 

 

Net income

 

$

26.2

 

$

8.8

 

$

3.8

 

$

16.9

 

Deemed preferred dividends and accretion

 

(2.3

)

(3.1

)

(4.6

)

(6.2

)

Net income (loss) available to common stockholders

 

$

23.9

 

$

5.7

 

$

(0.8

)

$

10.7

 

Plus: Deemed preferred dividends and accretion

 

2.3

 

3.1

 

 

6.2

 

Net income (loss) available to common stockholders plus assumed conversions

 

$

26.2

 

$

8.8

 

$

(0.8

)

$

16.9

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding – Basic

 

54.5

 

39.2

 

54.2

 

39.0

 

 

 

 

 

 

 

 

 

 

 

Plus incremental shares from assumed conversions:

 

 

 

 

 

 

 

 

 

Restricted stock units

 

0.5

 

0.4

 

 

0.4

 

Stock options

 

3.1

 

1.9

 

 

2.0

 

Mandatorily redeemable convertible preferred stock

 

36.8

 

49.8

 

 

49.8

 

Weighted average common shares outstanding – Dilutive

 

94.9

 

91.3

 

54.2

 

91.2

 

Diluted net income (loss) per common share

 

$

0.28

 

$

0.10

 

$

(0.01

)

$

0.19

 

 

Total shares underlying stock options and restricted stock units of approximately 7.7 million were excluded in the computation of diluted net loss per share for the six months ended June 30, 2005, as they were anti-dilutive.  The assumed conversion of the mandatorily redeemable convertible preferred stock (convertible into 36.8 million shares of common stock), was also excluded from the computation of diluted net loss per share for the six months ended June 30, 2005, as it was anti-dilutive.

 

Shares underlying stock options and restricted stock units of approximately 0.3 million and 4.7 million were excluded from the computation of diluted earnings per share for the second quarters of 2005 and 2004, respectively, as they were anti-dilutive.  For the six months ended June 30, 2004, shares underlying stock options and restricted stock units of approximately 4.4 million were excluded from the computation of diluted earnings per share as they were anti-dilutive.

 

15



 

Note 11 - Comprehensive Income (Loss)

 

Comprehensive income (loss) represents net income (loss) and other gains and losses affecting stockholders’ equity (deficit) 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, 2005 and 2004 were as follows:

 

 

 

Quarter Ended June 30,

 

Six Months Ended June 30,

 

(in millions)

 

2005

 

2004

 

2005

 

2004

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) available to common stockholders

 

$

23.9

 

$

5.7

 

$

(0.8

)

$

10.7

 

Currency translation adjustments

 

(9.9

)

(1.4

)

(22.9

)

(5.7

)

Realized gains on sale of assets obtained from de-mutualization of insurance company

 

 

(0.4

)

 

 

Net unrealized losses on financial instruments

 

(2.2

)

(1.7

)

(3.2

)

(4.0

)

Comprehensive income (loss)

 

$

11.8

 

$

2.2

 

$

(26.9

)

$

1.0

 

 

Note 12 - Derivative Financial Instruments

 

Interest Rate Swap Agreements

 

In October 2003, the Company entered into interest rate swap agreements for an aggregate notional amount of $100.0 million.  The interest rate swap agreements effectively converted the fixed interest rate of 9.75% on $100.0 million of the Company’s senior subordinated notes due 2009 into variable interest rates.  The variable interest rates, payable by the Company in connection with the swap agreements, ranged from LIBOR + 6.12% to LIBOR + 6.16% and were reset semiannually on January 15 and July 15 of each year the swap agreements were in effect.  The interest rate swap agreements were designated as fair value hedges, and were deemed to be highly effective using the “short-cut” method under Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities,” (“FAS 133”).  In connection with the Company’s debt refinancing in the first quarter of 2005, the designated hedged bonds were called for redemption and the interest rate swap agreements were cancelled resulting in a $3.6 million loss recorded as part of the loss on early retirement of debt (for further information, see Notes 2, 6 and 9).  Prior to the cancellation of the interest rate swap agreements, during the first quarter of 2005, a gain of $0.2 million was recognized in interest expense, representing the effective element of the changes in fair values of the interest rate swaps.

 

In May 2005, the Company entered into interest rate swap agreements for an aggregate notional amount of $50.0 million.  The interest rate swap agreements effectively converted $50.0 million of the variable interest rate Term B Loan of the New Facility into fixed interest rates. As a result of these agreements, the Company will pay interest of 3.98% and 4.01% plus the margin in effect on Euro currency borrowings of $30.0 million and $20.0 million, respectively. Interest payments are due January 1, April 1, July 1, and October 1, beginning with July 1, 2005.  The interest rate swap agreements mature on July 1, 2008. For the quarter ended June 30, 2005, hedge ineffectiveness was immaterial. The fair value and carrying amount of the agreement at June 30, 2005 was a liability of $0.1 million.

 

Cross-Currency Interest Rate Swap Agreement

 

The Company entered into a five year cross-currency and interest rate swap agreement in 2003, which effectively exchanges a loan of 12.5 million Euros at a fixed rate of 7% for a loan with a notional amount of $13.5 million at a fixed rate of 6.02% over the term of the agreement expiring December 1, 2007.  The Company entered into this agreement to effectively hedge interest and principal payments relating to an intercompany loan denominated in Euros.  The fair value and carrying amount of this swap agreement as of June 30, 2005 was a liability of $2.0 million.  During the second quarters and six months ended June

 

16



 

30, 2005 and 2004, hedge ineffectiveness was immaterial. The change in fair value recognized in “comprehensive loss” was a net reduction of $0.1 million for the quarter ended June 30, 2004, and $0.2 million for both the six months ended June 30, 2005 and 2004, respectively.  There was no change in fair value for the quarter ended June 30, 2005.  Over the next twelve months, no material unrealized losses recorded in “accumulated other comprehensive loss” relating to this agreement are expected to be reclassified into earnings.

 

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 has entered into a number of foreign currency forward exchange contracts to exchange U.S. dollars for Euros and British Pounds at fixed rates on specified dates through December 2006.  The aggregate notional amount of these contracts was $82.1 million and $18.2 million at June 30, 2005 and December 31, 2004, 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 quarters and six months ended June 30, 2005 and 2004, hedge ineffectiveness was immaterial.  The change in fair value of the foreign currency cash flow hedges recognized in “comprehensive loss” was a net reduction of $1.7 million and $1.6 million for the quarters ended June 30, 2005 and 2004, respectively, and $2.4 million and $3.8 million for the six months ended June 30, 2005 and 2004, respectively.

 

The activity in “accumulated other comprehensive income (loss)” related to foreign currency forward exchange contracts for the quarters and six months ended June 30, 2005 and 2004 was as follows:

 

 

 

Quarter Ended June 30,

 

Six Months Ended June 30,

 

(in millions)

 

2005

 

2004

 

2005

 

2004

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains at beginning of period

 

$

0.6

 

$

4.2

 

$

1.3

 

$

6.4

 

Gains reclassified to net sales

 

 

(1.5

)

(0.4

)

(3.4

)

Decrease in fair value

 

(1.7

)

(0.1

)

(2.0

)

(0.4

)

Comprehensive income (loss)

 

$

(1.1

)

$

2.6

 

$

(1.1

)

$

2.6

 

 

Unrealized losses of $1.1 million recorded in “accumulated other comprehensive loss,” net of tax, as of June 30, 2005 are expected to be reclassified into earnings over the next twelve months as the hedged sales are recorded.

 

Foreign Currency Options

 

Consistent with our strategy to create cash flow hedges of foreign currency exposures, the Company purchased foreign currency options to exchange U.S. dollars for British Pound Sterling and Euros beginning in the fourth quarter of 2004. The nominal amount of the options was $13.5 million and $10.0 million at June 30, 2005 and December 31, 2004, respectively.  During the second quarter and six months ended June 30, 2005, the change in fair value recognized in “comprehensive loss” was a reduction of $0.5 million and $0.6 million, respectively.

 

17



 

Note 13 – Taxes

 

The U.S. and foreign components of income (loss) before income taxes and the provision for income taxes for the quarters and six months ended June 30, 2005 and 2004 were as follows:

 

 

 

Quarter Ended
June 30, 2005

 

Six Months Ended
June 30, 2005

 

(In millions)

 

U.S.

 

Foreign

 

Total

 

U.S.

 

Foreign

 

Total

 

Income before income taxes

 

$

21.5

 

$

7.4

 

$

28.9

 

$

(4.3

)

$

13.9

 

$

9.6

 

Provision for income taxes

 

0.1

 

3.5

 

3.6

 

0.3

 

6.9

 

7.2

 

Income before equity in earnings (losses) of affiliated companies

 

$

21.4

 

$

3.9

 

$

25.3

 

$

(4.6

)

$

7.0

 

$

2.4

 

 

 

 

Quarter Ended
June 30, 2004

 

Six Months Ended
June 30, 2004

 

 

 

U.S.

 

Foreign

 

Total

 

U.S.

 

Foreign

 

Total

 

Income before income taxes

 

$

4.7

 

$

8.8

 

$

13.5

 

$

9.6

 

$

15.1

 

$

24.7

 

Provision for income taxes

 

0.6

 

4.6

 

5.2

 

0.8

 

7.8

 

8.6

 

Income before equity in earnings of affiliated companies

 

$

4.1

 

$

4.2

 

$

8.3

 

$

8.8

 

$

7.3

 

$

16.1

 

 

The Company’s tax provision for the quarters and six months ended June 30, 2005 and 2004 was primarily for taxes on European income. The Company continues to adjust its tax provision rate through the establishment, or release, of a non-cash valuation allowance attributable to currently generated U.S. and Belgian net operating income (losses). Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes,” requires Hexcel to weigh both positive and negative evidence in determining whether a valuation allowance is required. Positive evidence would include, for example, a strong earnings history, an event that will increase the Company’s taxable income through a continuing reduction in expenses and tax planning strategies indicating an ability to realize deferred tax assets. While the performance of the Company’s U.S. operations has improved significantly in recent quarters, the Company has determined that the valuation allowances related to both the U.S. and Belgium deferred tax assets should continue to be maintained until such time as significant positive evidence exists and outweighs the negative evidence in regards to whether or not a valuation allowance is required. Until such time as it reverses the valuation allowance, the Company will continue to report earnings (losses) without a tax provision (benefit) on its U.S. and Belgium pre-tax income (losses), respectively.

 

Net Operating Loss Carryforwards

 

As of December 31, 2004, Hexcel had net operating loss carryforwards for U.S. federal and Belgian income tax purposes of approximately $113.3 million and $16.9 million, respectively.  On March 19, 2003, the Company completed a refinancing of its capital structure.  As a result, the Company had an “ownership change” pursuant to IRC Section 382, which will limit the Company’s ability to utilize net operating losses against future U.S. taxable income to $5.3 million per annum.  The Company’s U.S. net operating losses expire beginning 2019 and through 2022.  The Company’s Belgian net operating losses can be carried forward without limitation.

 

Note 14 – Investments in Affiliated Companies

 

The Company has equity ownership investments in three Asian and one U.S. joint venture.  In connection therewith, the Company has considered the accounting and disclosure requirements of Financial Interpretation No. 46R “Consolidation of Variable Interest Entities,” and believes that certain of these investments would be considered “variable interest entities.”  However, the Company also believes

 

18



 

that it is not the primary beneficiary of such entities, and therefore, would not be required to consolidate these entities.

 

In 1999, Hexcel, Boeing International Holdings, Ltd. (“Boeing”) and China Aviation Industry Corporation I (“AVIC”) formed a joint venture, BHA Aero Composite Parts Co., Ltd. (“BHA Aero”), to manufacture composite parts for secondary structures and interior applications for commercial aircraft.  Hexcel’s initial equity ownership interest in this joint venture, which is located in Tianjin, China, was 33.3%.  Revenues of BHA Aero for the twelve months ended June 30, 2005 were $16.0 million.  In addition, in 1999, Hexcel formed another joint venture, Asian Composites Manufacturing Sdn. Bhd. (“Asian Composites”), with Boeing Worldwide Operations Limited, Sime Link Sdn. Bhd., and Malaysia Helicopter Services Bhd. (now known as Naluri Berhad), to manufacture composite parts for secondary structures for commercial aircraft.  Hexcel has a 25% equity ownership interest in this joint venture, which is located in Alor Setar, Malaysia.  Revenues of Asian Composites for the twelve months ended June 30, 2005 were $16.8 million.  As of June 30, 2005, Hexcel had an equity investment balance of $7.6 million and an aggregate receivable balance of $4.1 million related to these joint ventures.

 

Each of the equity owners of BHA Aero, including the Company, had an obligation as of December 31, 2004 to support a third party loan on a proportionate basis to its equity ownership interest.  The Company met this obligation through an outstanding letter of credit of $11.1 million.  During the first quarter of 2005, BHA Aero and its equity owners (Hexcel, Boeing and AVIC) completed a previously announced re-capitalization of BHA Aero and a refinancing of BHA Aero’s third party loans. In connection with the recapitalization, on January 19, 2005, Hexcel and Boeing made their respective cash equity investments of $7.5 million, resulting in an increase in each of their respective ownership interests from 33.33% to 40.48%.  On January 26, 2005, the refinancing of BHA Aero’s bank debt was completed resulting in a new five year bank term loan agreement supported by a pledge of BHA Aero’s fixed assets and guarantees from Boeing and AVIC.  As part of the refinancing, Hexcel agreed to reimburse Boeing and AVIC for a proportionate share of the losses they would incur if their guarantees of the new bank loan were to be called, up to a limit of $6.1 million, and on February 15, 2005, Hexcel’s standby letter of credit of $11.1 million, which supported BHA Aero’s previous bank loan, was terminated.  Hexcel’s reimbursement agreement with Boeing and AVIC relating to its BHA Aero joint venture meets the definition of a guarantee in accordance with the provisions of FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” (“FIN 45”).  Accordingly, the Company recorded a $0.5 million liability, and a corresponding increase in its investment in BHA Aero based upon the estimated fair value of the guarantee.  Apart from outstanding accounts receivable balances, Hexcel’s investment in these ventures, and Hexcel’s agreement to reimburse Boeing and AVIC for a proportionate share of the losses they would incur if their guarantees of the new bank loan were to be called, Hexcel has no other significant exposures to loss with BHA Aero and Asian Composites.

 

As part of an acquisition in 1998, the Company obtained a 50% equity ownership interest in TechFab LLC (“TechFab”), a Reinforcements joint venture that manufactures non-woven reinforcement materials for roofing, construction, sail cloth and other specialty applications.  Revenues of TechFab for the twelve months ended June 30, 2005 were $32.3 million.  At June 30, 2005, Hexcel had an equity investment balance in TechFab of $6.4 million.  Hexcel has no other significant exposures to loss with respect to this joint venture.

 

Lastly, Hexcel owns a 45.3% equity interest in DIC-Hexcel Limited (“DHL”), a joint venture formed in 1990 with Dainippon Ink and Chemicals, Inc. (“DIC”).  This joint venture is located in Komatsu, Japan, and produces and sells prepregs, honeycomb and decorative laminates using technology licensed from Hexcel and DIC.  Revenues of DHL for the twelve months ended June 30, 2005 were $12.5 million.  Due to DHL’s recognition of net losses in prior years, no equity investment balance remains for DHL at June 30, 2005.  During the first quarter of 2005, Hexcel entered into a letter of awareness, whereby

 

19



 

Hexcel became contingently liable to pay DIC up to $1.8 million with respect to DHL’s new debt obligations under certain circumstances.  This contingent obligation meets the definition of a guarantee in accordance with the provisions of FIN 45.  Accordingly, the Company recorded a liability on its condensed consolidated balance sheet for the estimated fair value of the guarantee.  The liability recorded for the DIC guarantee was $0.2 million and the fair value of the commitment of $0.2 million was expensed.  Hexcel has no other significant exposures to loss with this joint venture.

 

Note 15 – Product Warranty

 

The Company provides for an estimated amount of product warranty at the time revenue is recognized.  This estimated amount is provided by product and based on historical warranty experience.  In addition, the Company periodically reviews its warranty accrual and records any adjustments as deemed appropriate.  Warranty expense for the quarter and six months ended June 30, 2005, and accrued warranty cost, included in “accrued liabilities” in the condensed consolidated balance sheets at June 30, 2005 and December 31, 2004 was as follows:

 

(In millions)

 

Product
Warranties

 

Balance as of December 31, 2004

 

$

5.1

 

Warranty expense

 

0.3

 

Deductions and other

 

(1.1

)

Balance as of March 31, 2005

 

$

4.3

 

Warranty expense

 

0.2

 

Deductions and other

 

(0.8

)

Balance as of June 30, 2005

 

$

3.7

 

 

Note 16 - 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 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.

 

20



 

Financial information for the Company’s segments for the quarters and six months ended June 30, 2005 and 2004 is as follows:

 

 

 

Unaudited

 

(In millions)

 

Reinforcements

 

Composites

 

Structures

 

Corporate
& Other

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Second Quarter 2005

 

 

 

 

 

 

 

 

 

 

 

Net sales to external customers

 

$

77.2

 

$

213.5

 

$

20.6

 

$

 

$

311.3

 

Intersegment sales

 

33.1

 

6.0

 

 

 

39.1

 

Total sales

 

110.3

 

219.5

 

20.6

 

 

350.4

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

11.6

 

31.4

 

2.2

 

(8.3

)

36.9

 

Depreciation

 

3.5

 

7.9

 

0.4

 

 

11.8

 

Business consolidation and restructuring expenses

 

 

0.4

 

 

 

0.4

 

Capital expenditures

 

1.8

 

7.2

 

 

0.1

 

9.1

 

 

 

 

 

 

 

 

 

 

 

 

 

Second Quarter 2004