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Hexcel 10-Q 2006

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, 2006

 

 

 

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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer    ý  Accelerated Filer    o  Non-Accelerated Filer  o

 

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes    o   No  ý

 

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 3, 2006

COMMON STOCK

 

93,655,565

 

 



 

HEXCEL CORPORATION AND SUBSIDIARIES

 

INDEX

 

PART I.

FINANCIAL INFORMATION

 

 

 

 

 

 

 

 

ITEM 1.

Condensed Consolidated Financial Statements (Unaudited)

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets — June 30, 2006 and December 31, 2005

 

 

 

 

 

 

Condensed Consolidated Statements of Operations — The Quarters and Six Months Ended June 30, 2006 and 2005

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows — The Six Months Ended June 30, 2006 and 2005

 

 

 

 

 

 

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 1A.

Risk Factors

 

 

 

 

 

 

 

 

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

 

 

 

 

 

 

 

ITEM 4.

Submission 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

 

(In millions, except per share data)

 

June 30,
2006

 

December 31,
2005

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

8.8

 

$

21.0

 

Accounts receivable, net

 

196.1

 

155.9

 

Inventories, net

 

160.6

 

150.4

 

Prepaid expenses and other current assets

 

35.1

 

43.0

 

Total current assets

 

400.6

 

370.3

 

 

 

 

 

 

 

Property, plant and equipment

 

721.4

 

726.0

 

Less accumulated depreciation

 

(405.2

)

(440.8

)

Net property, plant and equipment

 

316.2

 

285.2

 

 

 

 

 

 

 

Goodwill and other intangible assets

 

75.3

 

74.7

 

Investments in affiliated companies

 

15.5

 

14.3

 

Deferred tax assets

 

111.2

 

107.8

 

Other assets

 

32.7

 

28.3

 

 

 

 

 

 

 

Total assets

 

$

951.5

 

$

880.6

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Notes payable and current maturities of capital lease obligations

 

$

5.1

 

$

3.0

 

Accounts payable

 

95.6

 

94.5

 

Accrued liabilities

 

94.0

 

98.3

 

Total current liabilities

 

194.7

 

195.8

 

 

 

 

 

 

 

Long-term notes payable and capital lease obligations

 

422.5

 

416.8

 

Other non-current liabilities

 

59.2

 

57.3

 

Total liabilities

 

676.4

 

669.9

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

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

 

 

 

Common stock, $0.01 par value, 200.0 shares authorized, 95.3 shares issued at June 30, 2006 and 94.1 shares issued at December 31, 2005

 

1.0

 

0.9

 

Additional paid-in capital

 

475.4

 

455.0

 

Accumulated deficit

 

(190.4

)

(222.5

)

Accumulated other comprehensive income (loss)

 

8.4

 

(7.3

)

 

 

294.4

 

226.1

 

Less – Treasury stock, at cost, 1.7 shares at June 30, 2006 and 1.5 shares at December 31, 2005

 

(19.3

)

(15.4

)

Total stockholders’ equity

 

275.1

 

210.7

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

951.5

 

$

880.6

 

 

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)

 

2006

 

2005

 

2006

 

2005

 

Net sales

 

$

316.0

 

$

311.3

 

$

623.0

 

$

601.9

 

Cost of sales

 

244.3

 

240.7

 

480.2

 

465.5

 

Gross margin

 

71.7

 

70.6

 

142.8

 

136.4

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

28.8

 

26.5

 

59.5

 

53.1

 

Research and technology expenses

 

7.5

 

7.7

 

15.1

 

13.4

 

Business consolidation and restructuring expenses

 

1.1

 

0.4

 

4.1

 

0.8

 

Other income, net

 

 

(0.9

)

 

(0.7

)

Operating income

 

34.3

 

36.9

 

64.1

 

69.8

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

7.1

 

7.4

 

14.9

 

19.3

 

Non-operating expense

 

 

0.6

 

 

40.9

 

Income before income taxes

 

27.2

 

28.9

 

49.2

 

9.6

 

Provision for income taxes

 

10.7

 

3.6

 

19.3

 

7.2

 

Income before equity in earnings

 

16.5

 

25.3

 

29.9

 

2.4

 

Equity in earnings of affiliated companies

 

1.1

 

0.9

 

2.2

 

1.4

 

 

 

 

 

 

 

 

 

 

 

Net income

 

17.6

 

26.2

 

32.1

 

3.8

 

Deemed preferred dividends and accretion

 

 

(2.3

)

 

(4.6

)

Net income (loss) available to common shareholders

 

$

17.6

 

$

23.9

 

$

32.1

 

$

(0.8

)

 

 

 

 

 

 

 

 

 

 

Net income (loss) per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.19

 

$

0.44

 

$

0.34

 

$

(0.01

)

Diluted

 

$

0.18

 

$

0.28

 

$

0.34

 

$

(0.01

)

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

93.4

 

54.5

 

93.2

 

54.2

 

Diluted

 

95.5

 

94.9

 

95.4

 

54.2

 

 

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)

 

2006

 

2005

 

Cash flows from operating activities

 

 

 

 

 

Net income

 

$

32.1

 

$

3.8

 

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

 

 

 

 

 

Depreciation and amortization

 

23.4

 

24.1

 

Amortization of debt discount and deferred financing costs

 

0.9

 

1.2

 

Deferred income taxes

 

10.9

 

0.3

 

Business consolidation and restructuring expenses

 

4.1

 

0.8

 

Business consolidation and restructuring payments

 

(3.1

)

(1.1

)

Loss on early retirement of debt

 

 

40.9

 

Equity in earnings of affiliated companies

 

(2.2

)

(1.4

)

Dividends from affiliated companies

 

1.3

 

1.1

 

Share-based compensation

 

5.9

 

1.2

 

 

 

 

 

 

 

Changes in assets and liabilities:

 

 

 

 

 

Increase in accounts receivable

 

(33.6

)

(35.9

)

Increase in inventories

 

(5.9

)

(19.6

)

Decrease in prepaid expenses and other current assets

 

0.3

 

4.2

 

Decrease in accounts payable and accrued liabilities

 

(5.3

)

(21.1

)

Changes in other non-current assets and long-term liabilities

 

(7.4

)

(0.9

)

Net cash provided by (used for) operating activities

 

21.4

 

(2.4

)

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

Capital expenditures

 

(48.7

)

(16.6

)

Deposits for property purchases

 

(1.9

)

 

Proceeds from the sale of assets

 

 

1.4

 

Investment in affiliated companies

 

 

(7.5

)

Net cash used for investing activities

 

(50.6

)

(22.7

)

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

Proceeds from issuance of 6.75% senior subordinated notes

 

 

225.0

 

Proceeds from senior secured credit facility - revolver, net

 

6.6

 

35.0

 

Proceeds from senior secured credit facility – term B loan

 

 

225.0

 

Repayments of senior secured credit facility – term B loan

 

(0.5

)

(40.0

)

Redemption of 9.75% senior subordinated notes

 

 

(285.3

)

Redemption of 7.0% convertible subordinated debentures

 

 

(19.2

)

Redemption of 9.875% senior secured notes

 

 

(125.0

)

Payments of capital lease obligations and proceeds from other debt, net

 

1.3

 

4.1

 

Issuance costs related to debt offerings

 

 

(12.2

)

Debt retirement costs

 

 

(30.0

)

Activity under stock plans

 

10.4

 

5.8

 

Net cash provided by (used for) financing activities

 

17.8

 

(16.8

)

Effect of exchange rate changes on cash and cash equivalents

 

(0.8

)

3.2

 

Net decrease in cash and cash equivalents

 

(12.2

)

(38.7

)

Cash and cash equivalents at beginning of period

 

21.0

 

57.2

 

Cash and cash equivalents at end of period

 

$

8.8

 

$

18.5

 

 

 

 

 

 

 

Supplemental Data:

 

 

 

 

 

Cash interest paid

 

$

13.6

 

$

26.4

 

Cash taxes paid

 

$

4.7

 

$

6.9

 

 

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

 

4



 

HEXCEL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 1 — Significant Accounting Policies

 

In these notes, the terms “Hexcel”, “we,” “us,” or “our” mean Hexcel Corporation and subsidiary companies.

 

The accompanying condensed, consolidated financial statements represent the consolidation of Hexcel. See Note 1 to the consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2005. That note discusses our significant accounting policies.

 

Effective January 1, 2006, we adopted Statement of Financial Accounting Standards (“SFAS”) No. 123(R), Share-Based Payment (“SFAS 123(R)”), using the modified prospective transition method. SFAS 123(R) requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors based on estimated fair values on the grant date using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense on a straight-line basis over the requisite service periods in our condensed consolidated statement of operations. SFAS 123(R) requires that forfeitures be estimated at the time of grant in order to estimate the amount of share-based awards that will ultimately vest. Furthermore, SFAS 123(R) requires the monitoring of actual forfeitures and the subsequent adjustment to forfeiture rates to reflect actual forfeitures. Share-based compensation expense recognized in the condensed consolidated statement of operations for the quarter and six months ended June 30, 2006 includes (i) compensation expense for share-based awards granted prior to, but not yet vested as of December 31, 2005, based on the grant date fair value estimated in accordance with the provisions of SFAS 123, (ii) compensation expense for share-based awards granted subsequent to January 1, 2006, based on the fair value estimated in accordance with the provisions of SFAS 123(R), and (iii) a reduction for estimated forfeitures in accordance with SFAS 123(R). Share based compensation expense capitalized for the quarter and six months ended June 30, 2006 was not material.

 

Prior to our adoption of SFAS 123(R), stock-based compensation was accounted for under the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”), as allowed under SFAS 123. Under the intrinsic value method in APB 25, we did not record any compensation cost related to stock options issued in the majority of instances since the exercise price of stock options granted to employees equaled the market price of our stock at the date of grant. However, for restricted stock awards, the intrinsic value as of the date of grant was amortized to compensation expense over the vesting period.

 

Basis of Presentation

 

The accompanying condensed consolidated financial statements have been prepared from the unaudited records of Hexcel pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information. Certain information and footnote disclosures normally included in financial statements have been omitted pursuant to rules and regulations of the SEC.

 

 In the opinion of management, the condensed consolidated financial statements include all normal recurring adjustments necessary for a fair presentation of financial position, the results of operations and cash flows for the interim periods presented. The condensed consolidated balance sheet as of December 31, 2005 was derived from the audited 2005 consolidated balance sheet. Interim results are not necessarily indicative of results expected for any other interim period or for the full year. The information included in this Form 10-Q should be read in conjunction with Management’s Discussion and Analysis and the financial statements and notes thereto included in the Hexcel Corporation’s 2005 Annual Report on Form 10-K.

 

Certain prior period amounts in the condensed consolidated financial statements and accompanying notes have been reclassified to conform to the 2006 presentation.

 

New Accounting Standards

 

During June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”), to address diversity and clarify the accounting for uncertain tax positions. FIN 48 prescribes a comprehensive model as to how a company should recognize, present, and disclose in its financial statements uncertain tax positions that a company has taken or expects to take on its tax return. FIN 48 specifically requires companies to presume that the taxing authorities have full knowledge of the position and all relevant facts. Furthermore, based on this presumption, FIN 48 requires that the financial statements reflect expected future consequences of such positions.

 

Under FIN 48 an uncertain tax position needs to be sustainable at a more likely than not level based upon its technical merits before any benefit can be recognized. The tax benefit is measured as the largest amount that has a cumulative probability of greater

 

5



 

than 50% of being the final outcome. FIN 48 substantially changes the applicable accounting model (as the prior model followed the criterion of FAS 5, “Accounting for Contingencies,” recording a liability against an uncertain tax benefit when it was probable and estimable) and is likely to cause greater volatility in income statements as more items are recognized within income tax expense. FIN 48 also revises disclosure requirements and introduces a prescriptive, annual, tabular roll-forward of the unrecognized tax benefits. FIN 48 is effective as of the beginning of fiscal years that start after December 15, 2006 (as of January 1, 2007 for calendar year companies). Upon the adoption of FIN 48, companies will be required to evaluate the impact of adoption on its internal control processes to ensure that all uncertain tax positions are identified, assessed and continually monitored. We are currently reviewing the requirements of FIN 48 and are in the process evaluating the impact of FIN 48 on the Company.

 

Note 2 — Share-Based Compensation

 

Effective January 1, 2006, we adopted SFAS 123(R) using the modified prospective transition method. This method required us to apply the provisions of SFAS 123(R) to new awards and to any awards that were unvested as of our adoption date and did not require us to restate prior periods. The accompanying condensed consolidated financial statements as of and for the quarter and six months ended June 30, 2006 reflect the impact of SFAS 123(R). In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (“SAB 107”) relating to SFAS 123(R). We have applied the provisions of SAB 107 in our adoption of SFAS 123(R).

 

SFAS 123(R) requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors based on estimated fair values on the grant date using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense on a straight-line basis over the requisite service periods in our condensed consolidated statement of operations.

 

SFAS 123(R) requires that forfeitures be estimated at the time of grant in order to estimate the amount of share-based awards that will ultimately vest. Furthermore, SFAS 123(R) requires the monitoring of actual forfeitures and the subsequent adjustment to forfeiture rates to reflect actual forfeitures. Share-based compensation expense recognized in the condensed consolidated statement of operations for the quarter and six months ended June 30, 2006 includes (i) compensation expense for share-based awards granted prior to, but not yet vested as of December 31, 2005, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS 123”), (ii) compensation expense for share-based awards granted subsequent to January 1, 2006, based on the fair value estimated in accordance with the provisions of SFAS 123(R), and (iii) a reduction for estimated forfeitures in accordance with SFAS 123(R). Share-based compensation expense capitalized for the quarter and six months ended June 30, 2006 was not material. In our pro forma information required under SFAS 123 for the periods prior to January 1, 2006, we accounted for forfeitures as they occurred.

 

Share-based compensation expense reduced our consolidated results of operations as follows:

 

 

 

Quarter Ended
June 30,

 

Six Months Ended
June 30,

 

(In millions, except per share data)

 

2006

 

2006

 

Impact on income before income taxes

 

$

(2.5

)

$

(5.9

)

Impact on net income available to common shareholders

 

$

(1.7

)

$

(4.0

)

Impact on net income per common share:

 

 

 

 

 

Basic

 

$

(0.02

)

$

(0.04

)

Diluted

 

$

(0.02

)

$

(0.04

)

 

Prior to our adoption of SFAS 123(R), stock-based compensation was accounted for under the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”), as allowed under SFAS 123. Under the intrinsic value method in APB 25, we did not record any compensation cost related to stock options issued in the majority of instances since the exercise price of stock options granted to employees equaled the market price of our stock at the date of grant. However, for restricted stock awards, the intrinsic value as of the date of grant was amortized to compensation expense over the vesting period.

 

6



 

For the quarter and six months ended June 30, 2005, we recorded a charge of $0.6 million and $1.1 million, respectively, for restricted stock awards under APB 25. The following table illustrates the effect on our net income (loss) and net income (loss) per share during the first quarter of 2005 assuming we had applied the fair value recognition provisions of SFAS 123, as amended by SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure”:

 

 

 

Quarter Ended
June 30,

 

Six Months
Ended June 30,

 

(In millions, except per share data)

 

2005

 

2005

 

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

 

$

23.9

 

$

(0.8

)

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

 

0.6

 

1.1

 

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

 

(1.5

)

(2.9

)

Pro forma net income (loss)

 

$

23.0

 

$

(2.6

)

 

 

 

 

 

 

Basic net income (loss) per common share:

 

 

 

 

 

As reported

 

$

0.44

 

$

(0.01

)

Pro forma

 

$

0.42

 

$

(0.05

)

 

 

 

 

 

 

Diluted net income (loss) per common share:

 

 

 

 

 

As reported

 

$

0.28

 

$

(0.01

)

Pro forma

 

$

0.27

 

$

(0.05

)

 

During the six month period ended June 30, 2006, cash received from stock option exercises was $7.5 million. We used $3.3 million in cash related to the shares withheld to satisfy employee tax obligations for restricted stock units (“RSUs”) and performance accelerated restricted stock units (“PARs”) converted during the six month period ended June 30, 2006. We realized a tax benefit of $6.2 million in connection with stock options exercised, and RSUs and PARs converted during the six month period ended June 30, 2006.

 

Prior to the adoption of SFAS 123(R), we presented all tax benefits of deductions resulting from the exercise of stock options and the conversions of restricted stock units as operating cash flows in the Condensed Consolidated Statement of Cash Flows. SFAS 123(R) requires that we classify the cash flows resulting from these tax benefits as financing cash flows. It has been our practice to issue new shares of our common stock upon the exercise of stock options or the conversion of stock units. In the future, we may consider utilizing treasury shares for stock option exercises or stock unit conversions.

 

Restricted Stock Units

 

RSUs are grants that entitle the holder to shares of common stock as the award vests (generally over three years). PARs are a form of RSU which are convertible to an equal number of shares of our common stock and generally vest at the end of a seven-year period or sooner upon the attainment of certain financial or stock performance objectives. Performance restricted stock units (“PRSUs”) are a form of RSUs in which the number of shares ultimately received depends on the extent to which we achieve a specified performance target. The number of PRSUs is based on a two-year performance period and the awards will generally vest after a subsequent one-year service period. At the end of the performance period, the number of shares of stock issued will be determined by adjusting upward or downward from the target in a range between 0% and 150% of the target amount. The final performance percentage, on which the payout will be based, considering performance metrics established for the performance period, will be determined by our Board of Directors or a Committee of the Board after the conclusion of the period.

 

We measure the fair value of RSUs, PARs and PRSUs based upon the market price of the underlying common stock as of the date of grant. RSUs, PARs and PRSUs are amortized over their applicable vesting period using the straight-line method. We granted 0.1 million RSUs for both the quarters ended March 31, 2006 and 2005. During the quarter ended March 31, 2006, we granted 0.1 million PRSUs. No PARs have been granted since 2000. PARs granted during 2000 were converted during the first quarter of 2006.

 

7



 

The following activity occurred under our existing incentive stock plan during the quarter and six months ended June 30, 2006:

 

(In millions, except share data)

 

Number of
Awards

 

Weighted Avg.
Grant Date
Fair Value per
Unit

 

Restricted Stock Awards:

 

 

 

 

 

Nonvested balance at December 31, 2005

 

0.5

 

$

9.44

 

Granted

 

0.1

 

21.88

 

Vested

 

(0.2

)

7.64

 

Forfeited

 

 

 

Nonvested balance at March 31, 2006

 

0.4

 

$

16.58

 

Granted

 

 

 

Vested

 

 

 

Forfeited

 

 

 

Nonvested balance at June 30, 2006

 

0.4

 

$

16.58

 

 

 

 

 

 

 

Performance Restricted Stock Awards:

 

 

 

 

 

Nonvested balance at December 31, 2005

 

 

$

 

Granted

 

0.1

 

21.97

 

Vested

 

 

 

Forfeited

 

 

 

Nonvested balance at March 31, 2006

 

0.1

 

$

21.97

 

Granted

 

 

 

Vested

 

 

 

Forfeited

 

 

 

Nonvested balance at June 30, 2006

 

0.1

 

$

21.97

 

 

As of June 30, 2006, there was total unrecognized compensation cost related to nonvested RSUs and PRSUs of $5.8 million, which is expected to be recognized generally over the remaining vesting period ranging from one year to three years.

 

Stock Options

 

Nonqualified stock options have been granted to our employees and directors under our stock compensation plan. Options granted generally vest over three years and expire ten years from the date of grant. Approximately 0.3 million and 0.6 million stock options were granted during the quarters ended March 31, 2006 and 2005, respectively. There were no stock options granted during the quarters ended June 30, 2006 and 2005.

 

A summary of option activity under the plan for the six month period ended June 30, 2006 is as follows:

 

(In millions, except share data)

 

Number of
Options

 

Weighted-Average
Exercise Price

 

Weighted-
Average
Remaining
Contractual Life
(in years)

 

Aggregate
Intrinsic Value

 

Outstanding at December 31, 2005

 

6.0

 

$

8.95

 

 

 

 

 

Options granted

 

0.3

 

$

21.95

 

 

 

 

 

Options exercised

 

(0.4

)

$

11.33

 

 

 

 

 

Options expired or forfeited

 

 

$

 

 

 

 

 

Outstanding at March 31, 2006

 

5.9

 

$

9.48

 

5.62

 

$

73.5

 

Exercisable at March 31, 2006

 

4.8

 

$

8.33

 

 

 

$

65.3

 

Options granted

 

 

$

 

 

 

 

 

Options exercised

 

(0.5

)

$

7.79

 

 

 

 

 

Options expired or forfeited

 

 

$

 

 

 

 

 

Outstanding at June 30, 2006

 

5.4

 

$

9.49

 

5.56

 

$

33.3

 

Exercisable at June 30, 2006

 

4.4

 

$

8.25

 

 

 

$

32.5

 

 

The total intrinsic value of options exercised during the quarter and six months ended June 30, 2006 was $7.3 million and $11.0 million, respectively. As of June 30, 2006, there was total unrecognized compensation cost related to nonvested stock options of $5.0 million, which is expected to be recognized generally over the remaining vesting period ranging from one year to three years.

 

8



 

Valuation Assumptions in Estimating Fair Value

 

We estimated the fair value of stock options at the grant date using the Black Scholes option pricing model with the following assumptions:

 

 

 

Six Months Ended June 30,

 

 

 

2006

 

2005

 

Risk-free interest rate*

 

4.50

%

3.74

%

Expected option life (in years) Executive

 

5.90

 

5.66

 

Expected option life (in years) Non-Executive

 

5.43

 

5.10

 

Dividend yield

 

%

%

Volatility *

 

46.44

%

56.33

%

Weighted-average fair value per option granted

 

$

10.87

 

$

7.88

 

 


*One grant of 13,263 stock options was valued with a volatility of 43.52% and a risk-free interest rate of 4.62%. It was granted on 3/20/06 and was the only one granted on that day.

 

We determine the expected option life for each grant based on ten years of historical option activity for two separate groups of employees (executive and non-executive). The weighted average expected life (“WAEL”) is derived from the average midpoint between the vesting and the contractual term and considers the effect of both the inclusion and exclusion of post-vesting cancellations during the ten-year period. As a result, the 2006 expected option life was increased from 5.66 years in 2005 to 5.90 years for the executive pool and from 5.10 years to 5.43 years for the non-executive pool.
 
Prior to 2006, we determined expected volatility based on actual historic volatility. With the adoption of SFAS 123(R), we determined expected volatility based on a blend of both historic volatility of our common stock and implied volatility of our traded options. We weighed both volatility inputs equally and took an average of both the historic and implied volatility to arrive at the volatility input for the Black-Scholes calculation. Consistent with 2005, the risk-free interest rate for the expected term is based on the U.S. Treasury yield curve in effect at the time of grant. No dividends were paid in either period; furthermore, we do not plan to pay any dividends in the future.
 

Retirement Provisions

 

Our 2005 and 2006 stock option, RSU, and PRSU agreements contain certain provisions related to the retirement of an employee. Employees who terminate employment other than for “cause” (as defined in the relevant employee option agreement), and who meet the definition of retirement in the relevant employee option agreement (age 65 or age 55 with 5 or more years of service with the company), will continue to have their options vest in accordance with the vesting schedule set in the option agreement. Prior to 2005, our stock incentive agreements for a small group of senior executives contained such a retirement provision and, upon the executive’s retirement, the option of RSU fully vests. RSUs are deemed to be vested when an employee reaches his defined retirement age. PRSUs differ from RSUs as an employee who is retirement eligible is only entitled to a pro-rata portion of his shares based on the portion of the performance period prior to retirement; however, if employed at the end of the performance period he is entitled to the entire grant. As a result of these provisions, under the terms of SFAS 123(R), we have accelerated the recognition of the compensation expense for any employee who received a grant in 2006 and who met the above definition of retirement eligibility, or who will meet the definition during the vesting period. As a result of these provisions, we recognized an additional $0.6 million and $2.5 million of share-based compensation expense during the second quarter and six months ended June 30, 2006, respectively. Prior to our adoption of SFAS 123(R), we did not recognize any additional expense in our consolidated results of operations or our pro-forma disclosures as a result of these retirement provisions until the date upon which an eligible employee retired.

 

Subsequent Grants

 

As of June 30, 2006, an aggregate of 4.0 million shares were authorized for future grant under our stock plan, which covers stock options, RSUs, PRSUs, PARS and at the discretion of Hexcel, could result in the issuance of other types of stock-based awards.

 

Employee Stock Purchase Plan (“ESPP”)

 

In addition, we maintain an ESPP, under which eligible employees may contribute up to 10% of their base earnings toward the quarterly purchase of our common stock at a purchase price equal to 85% of the fair market value of the common stock on the purchase date. As of June 30, 2006, the number of shares of common stock reserved for future issuances under the ESPP was 0.2 million. During 2005, 2004 and 2003, an aggregate total of approximately 0.1 million shares of common stock were issued under the ESPP.

 

9



 

Note 3 – Inventories, Net

 

(In millions)

 

June 30,
2006

 

December 31,
2005

 

Raw materials

 

$

64.6

 

$

64.3

 

Work in progress

 

37.6

 

32.0

 

Finished goods

 

58.4

 

54.1

 

Total inventories

 

$

160.6

 

$

150.4

 

 

Note 4 - Business Consolidation and Restructuring Programs

 

The aggregate business consolidation and restructuring liabilities as of June 30, 2006 and December 31, 2005, and activity for the quarter and six months ended June 30, 2006, consisted of the following:

 

(In millions)

 

Employee
Severance

 

Facility &
Equipment

 

Total

 

Balance as of December 31, 2005

 

$

3.5

 

$

0.7

 

$

4.2

 

Business consolidation and restructuring expenses

 

2.4

 

0.6

 

3.0

 

Cash expenditures

 

(0.4

)

(0.7

)

(1.1

)

Balance as of March 31, 2006

 

5.5

 

0.6

 

6.1

 

Business consolidation and restructuring expenses

 

(0.1

)

1.2

 

1.1

 

Currency translation adjustments

 

0.1

 

 

0.1

 

Cash expenditures

 

(0.6

)

(1.4

)

(2.0

)

Balance as of June 30, 2006

 

$

4.9

 

$

0.4

 

$

5.3

 

 

Electronics Program

 

In December 2005, we announced plans to consolidate certain glass fabric production activities at our Les Avenieres, France plants. In January 2006, we announced plans to consolidate our U.S. electronics production activities into our Statesville, North Carolina plant and to close the plant in Washington, Georgia. These actions are aimed at matching regional production capacities with available demand. For the quarter and six months ended June 30, 2006, we reversed $0.1 million of expense and recognized $1.9 million of expense, respectively, for employee severance based on existing obligations as of the date of our announcement. In addition, the Company recorded expense of $0.9 million and $1.3 million for the quarter and six months ended June 30, 2006, respectively, associated with the facility closures and consolidation activities that was expensed as incurred. The program is expected to be substantially completed in 2006.

 

Business consolidation and restructuring liabilities as of June 30, 2006 and December 31, 2005, and activity for the Electronics Program for the quarter and six months ended June 30, 2006, consisted of the following:

 

(In millions)

 

Employee
Severance

 

Facility &
Equipment

 

Total

 

Balance as of December 31, 2005

 

$

0.2

 

$

 

$

0.2

 

Business consolidation and restructuring expenses

 

2.0

 

0.4

 

2.4

 

Cash expenditures

 

(0.4

)

(0.4

)

(0.8

)

Balance as of March 31, 2006

 

$

1.8

 

$

 

$

1.8

 

Business consolidation and restructuring expenses

 

(0.1

)

0.9

 

0.8

 

Cash expenditures

 

(0.4

)

(0.9

)

(1.3

)

Balance as of June 30, 2006

 

$

1.3

 

$

 

$

1.3

 

 

Livermore Program

 

In the first quarter of 2004, we announced our intent to consolidate the activities of our Livermore, California facility into other facilities, principally the Salt Lake City, Utah plant. For the quarter and six months ended June 30, 2006, we recognized $0.1 million and $0.5 million, respectively, of expense for employee severance, and recorded $0.3 million and $0.5 million, respectively, of expense associated with the relocation and re-qualification of equipment. During the first quarter of 2006, we determined that involuntary termination benefits under the Livermore Program should have been accounted for under the provisions of SFAS No. 112, Employers’ Accounting for Postemployment Benefits, instead of SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. As a result of this determination, we made an adjustment in the first quarter of 2006, and concluded that the impact was not material to either the current period nor to any prior periods. Costs associated with the

 

10



 

facility’s closure, along with costs for relocation and re-qualification of equipment, are expected to occur during the remaining term of the program, which is expected to be completed in the first half of 2007.

 

Business consolidation and restructuring liabilities as of June 30, 2006 and December 31, 2005, and activity for the Livermore Program for the quarter and six months ended June 30, 2006, consisted of the following:

 

(In millions)

 

Employee
Severance

 

Facility &
Equipment

 

Total

 

Balance as of December 31, 2005

 

$

1.4

 

$

 

$

1.4

 

Business consolidation and restructuring expenses

 

0.4

 

0.2

 

0.6

 

Cash expenditures

 

 

(0.2

)

(0.2

)

Balance as of March 31, 2006

 

$

1.8

 

$

 

$

1.8

 

Business consolidation and restructuring expenses

 

0.1

 

0.3

 

0.4

 

Cash expenditures

 

(0.1

)

(0.3

)

(0.4

)

Balance as of June 30, 2006

 

$

1.8

 

$

 

$

1.8

 

 

November 2001 Program

 

In November 2001, we announced a program to restructure business operations as a result of reductions in commercial aircraft production rates and due to depressed business conditions in the electronics market. This program is substantially complete. Severance and lease payments will continue into 2009.

 

Business consolidation and restructuring liabilities as of June 30, 2006 and December 31, 2005, and activity for the November 2001 Program for the quarter and six months ended June 30, 2006, consisted of the following:

 

(In millions)

 

Employee
Severance

 

Facility &
Equipment

 

Total

 

Balance as of December 31, 2005

 

$

1.9

 

$

0.7

 

$

2.6

 

Cash expenditures

 

 

(0.1

)

(0.1

)

Balance as of March 31, 2006

 

$

1.9

 

$

0.6

 

$

2.5

 

Business consolidation and restructuring expenses

 

(0.1

)

 

(0.1

)

Currency translation adjustments

 

0.1

 

 

0.1

 

Cash expenditures

 

(0.1

)

(0.2

)

(0.3

)

Balance as of June 30, 2006

 

$

1.8

 

$

0.4

 

$

2.2

 

 

Note 5 - Notes Payable and Capital Lease Obligations

 

(In millions)

 

June 30,
2006

 

December 31,
2005

 

Senior secured credit facility - revolver due 2010

 

$

11.6

 

$

5.0

 

Senior secured credit facility - term B loan due 2012

 

184.5

 

185.0

 

European credit and overdraft facilities

 

3.0

 

1.3

 

6.75% senior subordinated notes due 2015

 

225.0

 

225.0

 

Total notes payable

 

424.1

 

416.3

 

Capital lease obligations

 

3.5

 

3.5

 

Total notes payable and capital lease obligations

 

$

427.6

 

$

419.8

 

 

 

 

 

 

 

Notes payable and current maturities of long-term liabilities

 

$

5.1

 

$

3.0

 

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

 

422.5

 

416.8

 

Total notes payable and capital lease obligations

 

$

427.6

 

$

419.8

 

 

During the first quarter of 2005, we refinanced substantially all of our long-term debt. In connection with the refinancing, we entered into a new $350.0 million senior secured credit facility (the “Senior Secured Credit Facility”), consisting of a $225.0 million term loan and a $125.0 million revolving loan. In addition, we issued $225.0 million principal amount of 6.75% senior subordinated notes due 2015. The Senior Secured Credit Facility replaced our then existing $115.0 million five-year secured revolving credit facility. The terminated credit facility was scheduled to expire on March 31, 2008. The term loan under the Senior Secured Credit Facility is scheduled to mature on March 1, 2012 and the revolving loan under the Senior Secured Credit Facility is scheduled to expire on March 1, 2010.

 

11



 

Senior Secured Credit Facility

 

Term loan borrowings under the Senior Secured Credit 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 Senior Secured Credit 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 our consolidated leverage ratio. The weighted average interest rate for the actual borrowings on the Senior Secured Credit Facility was 6.723% and 6.529% for the quarter ended and six months ended June 30, 2006, respectively. Borrowings made under the LIBOR option during the quarter ended June 30, 2006 were made at interest rates ranging from 6.6250% to 7.1250%, and borrowings made under the LIBOR option during the six months ended June 30, 2006 were made at interest rates ranging from 6.2500% to 7.1250%.

 

The Senior Secured Credit Facility was entered into by and among Hexcel Corporation and certain lenders. In connection with the Senior Secured Credit Facility two of Hexcel’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 Senior Secured Credit 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 Senior Secured Credit 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.

 

In accordance with the terms of the Senior Secured Credit Facility, we are required to maintain a minimum interest coverage ratio of 3.75 (based on the ratio of EBITDA, as defined in the credit agreement, to interest expense) and may not exceed a maximum leverage ratio of 3.50 (based on the ratio of total debt to EBITDA) throughout the term of the facility. The Senior Secured Credit 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 Senior Secured Credit Facility contains other terms and conditions such as customary representations and warranties, additional covenants and customary events of default.

 

The Senior Secured Credit Facility permits us 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, 2006, we had issued letters of credit totaling $4.4 million. In addition, we had commercial letters of credit of $0.2 million outstanding at June 30, 2006 that were separate from this facility.

 

6.75% Senior Subordinated Notes, due 2015

 

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. We may not redeem the senior subordinated notes prior to February 1, 2010, except that we 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. We 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), we are 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 our 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.

 

European Credit and Overdraft Facilities

 

Certain of our 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

 

In 2003, we entered into an accounts receivable factoring facility with a third-party to provide an additional 20.0 million Euros in borrowing capacity. We terminated the facility effective March 31, 2006.

 

12



 

Note 6 – Retirement and Other Postretirement Benefit Plans

 

We maintain 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. We also participate in a union sponsored multi-employer pension plan covering certain U.S. employees with union affiliations. Refer to our 2005 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 our defined benefit retirement plans for the quarters and six months ended June 30, 2006 and 2005 were as follows:

 

 

 

Quarter Ended June 30,

 

Six Months Ended June 30,

 

(In millions)

 

2006

 

2005

 

2006

 

2005

 

U.S. Defined Benefit Retirement Plans

 

 

 

 

 

 

 

 

 

Service cost

 

$

0.3

 

$

0.3

 

$

0.6

 

$

0.6

 

Interest cost

 

0.5

 

0.4

 

1.0

 

0.9

 

Expected return on plan assets

 

(0.3

)

(0.3

)

(0.6

)

(0.6

)

Net amortization and deferral

 

0.3

 

0.3

 

0.6

 

0.6

 

Sub-total

 

0.8

 

0.7

 

1.6

 

1.5

 

Curtailment and settlement loss

 

0.3

 

0.2

 

0.5

 

0.4

 

Net periodic benefit cost

 

$

1.1

 

$

0.9

 

$

2.1

 

$

1.9

 

 

 

 

 

 

 

 

 

 

 

European Defined Benefit Retirement Plans

 

 

 

 

 

 

 

 

 

Service cost

 

$

0.8

 

$

0.8

 

$

1.7

 

$

1.6

 

Interest cost

 

1.5

 

1.4

 

2.8

 

2.7

 

Expected return on plan assets

 

(1.5

)

(1.4

)

(3.0

)

(2.7

)

Net amortization and deferral

 

0.2

 

0.3

 

0.4

 

0.6

 

Sub-total

 

1.0

 

1.1

 

1.9

 

2.2

 

Curtailment and settlement loss

 

 

 

 

 

Net periodic benefit cost

 

$

1.0

 

$

1.1

 

$

1.9

 

$

2.2

 

 

Contributions

 

We contributed $0.9 million and $0.6 million to our U.S. qualified and nonqualified defined benefit retirement plans during the second quarters of 2006 and 2005, respectively. Contributions were $1.7 million and $1.2 million for the six months ended June 30, 2006 and 2005, respectively. Although no minimum funding contributions are required, we intend to contribute approximately $2.1 million during 2006 to our U.S. qualified pension plan to fund expected lump sum payments. We generally fund our U.S. nonqualified defined benefit retirement plans when benefit payments are incurred. Under the provisions of these nonqualified plans, we expect to contribute approximately $0.5 million in 2006 to cover unfunded benefits. We contributed $2.0 million to our U.S. defined benefits retirement plans during the 2005 fiscal year.

 

In addition, we contributed $0.8 million and $0.5 million to our European defined benefit retirement plans in the second quarters of 2006 and 2005, respectively. Total contributions were $1.6 million and $1.1 million for the six months ended June 30, 2006 and 2005, respectively. Meeting governing requirements, we plan to contribute approximately $2.4 million during 2006 to our European plans. We contributed $2.5 million to our European plans during the 2005 fiscal year.

 

Postretirement Health Care and Life Insurance Benefit Plans

 

Net Periodic Postretirement Benefit Costs

 

Net periodic postretirement benefit costs of our postretirement health care and life insurance benefit plans were $0.2 million and $0.3 million, including service cost and interest cost, for the quarters ended June 30, 2006 and 2005, respectively. For the six months ended June 30, 2006 and 2005, net periodic postretirement benefit costs, including service cost and interest cost, were $0.4 million and $0.5 million, respectively.

 

13



 

Contributions

 

In connection with our postretirement plans, we contributed $0.3 million and $0.4 million for the second quarter of 2006 and 2005, respectively, and $0.5 million and $0.7 million during the six months ended June 30, 2006 and 2005, respectively. We periodically fund our postretirement plans to pay covered expenses as they are incurred. Under the provisions of these postretirement plans, we expect to contribute approximately $1.0 million in 2006 to cover unfunded benefits. We contributed $1.5 million to our postretirement plans during the 2005 fiscal year.

 

Note 7 – Other (Income) Expense, Net

 

 

 

Quarter Ended June 30,

 

Six Months Ended June 30,

 

(In millions)

 

2006

 

2005

 

2006

 

2005

 

 

 

 

 

 

 

 

 

 

 

Gain on sale of an asset

 

$

 

$

(1.4

)

$

 

$

(1.4

)

Accrual for certain legal matters

 

 

0.5

 

 

 

0.7

 

Other (income) expense, net

 

$

 

$

(0.9

)

$

 

$

(0.7

)

 

During the second quarter of 2005, we sold surplus land at one of our U.S. facilities for net cash proceeds of $1.4 million. In connection with this sale, we recognized a gain of $1.4 million. In addition, we recorded estimated accruals of $0.5 million and $0.2 million during the second quarter and the first quarter of 2005, respectively, in connection with the settlement of ongoing carbon fiber legal matters previously disclosed.

 

Note 8 – Non-Operating Expense

 

 

 

Quarter Ended June 30,

 

Six Months Ended June 30,

 

(In millions)

 

2006

 

2005

 

2006

 

2005

 

 

 

 

 

 

 

 

 

 

 

Loss on early retirement of debt

 

$

 

$

0.6

 

$

 

$

40.9

 

Non-operating expense

 

$

 

$

0.6

 

$

 

$

40.9

 

 

During the first quarter of 2005, we refinanced substantially all of our debt. In connection with the refinancing, we 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.

 

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

 

14



 

Note 9 - Net Income (Loss) Per Common Share

 

 

 

Quarter Ended June 30,

 

Six Months Ended June 30,

 

(In millions, except per share data)

 

2006

 

2005

 

2006

 

2005

 

 

 

 

 

 

 

 

 

 

 

Basic net income (loss) per common share:

 

 

 

 

 

 

 

 

 

Net income

 

$

17.6

 

$

26.2

 

$

32.1

 

$

3.8

 

Deemed preferred dividends and accretion

 

 

(2.3

)

 

(4.6

)

Net income (loss) available to common shareholders

 

$

17.6

 

$

23.9

 

$

32.1

 

$

(0.8

)

Weighted average common shares outstanding

 

93.4

 

54.5

 

93.2

 

54.2

 

Basic net income (loss) per common share

 

$

0.19

 

$

0.44

 

$

0.34

 

$

(0.01

)

 

 

 

 

 

 

 

 

 

 

Diluted net income (loss) per common share:

 

 

 

 

 

 

 

 

 

Net income

 

$

17.6

 

$

26.2

 

$

32.1

 

$

3.8

 

Deemed preferred dividends and accretion

 

 

(2.3

)

 

(4.6

)

Net income (loss) available to common shareholders

 

$

17.6

 

23.9

 

32.1

 

(0.8

)

Plus: Deemed preferred dividends and accretion

 

 

2.3

 

 

 

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

 

$

17.6

 

$

26.2

 

$

32.1

 

$

(0.8

)

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding – Basic

 

93.4

 

54.5

 

93.2

 

54.2

 

 

 

 

 

 

 

 

 

 

 

Plus incremental shares from assumed conversions:

 

 

 

 

 

 

 

 

 

Restricted stock units

 

0.3

 

0.5

 

0.3

 

 

Stock options

 

1.8

 

3.1

 

1.9

 

 

Mandatorily redeemable convertible preferred stock

 

 

36.8

 

 

 

Weighted average common shares outstanding – Dilutive

 

95.5

 

94.9

 

95.4

 

54.2

 

Diluted net income (loss) per common share

 

$

0.18

 

$

0.28

 

$

0.34

 

$

(0.01

)

 

Total shares underlying stock options of 0.4 million were excluded from the computation of diluted net income per share for both the quarter and six months ended June 30, 2006, as they were anti-dilutive.

 

The assumed conversion of mandatorily redeemable convertible preferred stock (convertible into 36.8 million shares of common stock), was 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 7.7 million were excluded from the computation of diluted net loss per share for the quarter and six months ended June 30, 2005, respectively, as they were anti-dilutive.

 

Note 10 - Comprehensive Income (Loss)

 

Comprehensive income (loss) represents net income (loss) and other gains and losses affecting stockholders’ equity that are not reflected in the condensed consolidated statements of operations. The components of comprehensive income (loss) for the quarters and six months ended June 30, 2006 and 2005 were as follows:

 

 

 

Quarter Ended June 30,

 

Six Months Ended June 30,

 

(In millions)

 

2006

 

2005

 

2006

 

2005

 

Net income (loss) available to common stockholders

 

$

17.6

 

$

23.9

 

$

32.1

 

$

(0.8

)

Currency translation adjustments

 

7.9

 

(9.9

)

10.0

 

(22.9

)

Minimum pension obligation

 

 

 

(0.2

)

 

Net unrealized gains (losses) on financial instruments

 

2.8

 

(2.2

)

5.9

 

(3.2

)

Comprehensive income (loss)

 

$

28.3

 

$

11.8

 

$

47.8

 

$

(26.9

)

 

15



 

Note 11 - Derivative Financial Instruments

 

Interest Rate Swap Agreements

 

In the fourth quarter of 2003, we 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 our senior subordinated notes, due 2009, into variable interest rates. The variable interest rates payable 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. Interest payment dates under the swap agreements of January 15 and July 15 matched the interest payment dates set by the senior subordinated notes due 2009. The interest rate swap agreements were to mature on January 15, 2009, the maturity date of the senior subordinated notes due 2009. The swap agreements were cancelable at the option of the fixed rate payer under terms that mirror the call provisions of the senior subordinated notes due 2009. During the first quarter of 2005, both the underlying hedged item, the senior subordinated notes, due 2009, and also the hedges themselves were terminated. The carrying value at the time of the termination was a liability of $3.6 million. The expense associated with this liability upon termination has been recorded as “non-operating expense” in the condensed consolidated statement of operations in the first quarter of 2005. During the first quarter of 2005, hedge ineffectiveness was immaterial. A net gain of $0.2 million was recognized as a component of “interest expense” in the first quarter of 2005.

 

In May 2005, we entered into an agreement to swap $50.0 million of a floating rate obligation for a fixed rate obligation at an average of 3.99% against LIBOR in U.S. dollars. The term of the swap is 3 years, and is scheduled to mature on July 1, 2008. The swap is accounted for as a cash flow hedge of a floating rate bank loan. To ensure the swap is highly effective, all the principal terms of the swap match the terms of the bank loan. The fair value of this swap at June 30, 2006 was an asset of $1.6 million. A net gain of $0.1 million and $0.2 million was recognized as a component of “interest expense” for the quarter and six months ended June 30, 2006, respectively. A net increase of $0.1 million and $0.7 million for the quarter and six months ended June 30, 2006, respectively, was recognized as a component of “accumulated other comprehensive loss.”  Over the next twelve months, unrealized gains of $0.7 million recorded in “accumulated other comprehensive income (loss)” relating to this agreement are expected to be reclassified into earnings.

 

Cross-Currency Interest Rate Swap Agreement

 

In 2003, we entered into a cross-currency interest rate swap agreement, 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, 2008. We entered into this agreement to effectively hedge interest and principal payments relating to an intercompany loan denominated in Euros. The balance at June 30, 2006 of both the loan and the swap agreement, after scheduled amortization, was 8.5 million Euros against $10.7 million. The fair value and carrying amount of this swap agreement was a liability of $2.0 million at June 30, 2006. During the second quarters and six months ended June 30, 2006 and 2005, hedge ineffectiveness was immaterial. A net decrease of $0.1 million for the quarter ended June 30, 2006 and a net increase of $0.5 million for the six months ended June 30, 2006, was recognized as a component of “accumulated other comprehensive loss.”  During the first six months of 2005, a reduction of $0.2 million was recognized as a component of “accumulated other comprehensive income (loss)”. Over the next twelve months, unrealized losses of $0.1 million recorded in “accumulated other comprehensive income (loss)” relating to this agreement are expected to be reclassified into earnings.

 

Foreign Currency Forward Exchange Contracts

 

A number of our European subsidiaries are exposed to the impact of exchange rate volatility between the U.S. dollar and the subsidiaries’ functional currencies, either the Euro or the British Pound Sterling. We have entered into contracts to exchange U.S. dollars for Euros and British Pound Sterling through December 2008. The aggregate notional amount of these contracts was $80.2 million and $112.9 million at June 30, 2006 and December 31, 2005, 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 us with a more balanced matching of future cash receipts and expenditures by currency, thereby reducing our exposure to fluctuations in currency exchange rates. For the quarters and six months ended June 30, 2006 and 2005, hedge ineffectiveness was immaterial.

 

16



 

The activity in “accumulated other comprehensive income (loss)” related to foreign currency forward exchange contracts for the quarters and six months ended June 30, 2006 and 2005 was as follows:

 

 

 

Quarter Ended June 30,

 

Six Months Ended June 30,

 

(In millions)

 

2006

 

2005

 

2006

 

2005

 

Unrealized (losses) gains at beginning of period

 

$

(0.5

)

$

0.6

 

$

(2.3

)

$

1.3

 

Losses (gains) reclassified to net sales

 

0.1

 

 

0.7

 

(0.4

)

Increase (decrease) in fair value

 

2.6

 

(1.7

)

3.8

 

(2.0

)

Comprehensive income (loss)

 

$

2.2

 

$

(1.1

)

$

2.2

 

$

(1.1

)

 

Unrealized gains of $1.2 million recorded in “accumulated other comprehensive income (loss),” as of June 30, 2006 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 for foreign currency exposures, we purchased foreign currency options to exchange U.S. dollars for British Pound Sterling beginning in the fourth quarter of 2004. The nominal amount of such options was $3.8 million at June 30, 2006 and $7.5 million at December 31, 2005. The options are designated as cash flow hedges. There was no ineffectiveness during the second quarters and six months ended June 30, 2006 and 2005. During the second quarter and six months ended June 30, 2006, the change in fair value recognized in “accumulated other comprehensive income (loss)” was an increase of $0.2 million and $0.3 million, respectively. During the second quarter and six months ended June 30, 2005, the change in fair value recognized in “accumulated other comprehensive income (loss)” was a decrease of $0.5 million and $0.6 million, respectively.

 

Note 12 – Investments in Affiliated Companies

 

We have equity ownership investments in three Asian joint ventures and one U.S. joint venture. In connection therewith, we have considered the accounting and disclosure requirements of FASB Interpretation No. 46R, Consolidation of Variable Interest Entities, and believe that certain of these investments would be considered “variable interest entities.”  However, we also believe that we are not the primary beneficiary of such entities, and therefore, are not required to consolidate these entities.

 

BHA Aero Composite Parts Co., Ltd.

 

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”). This joint venture is located in Tianjin, China, and manufactures composite parts for secondary structures and interior applications for commercial aircraft. Summary information related to our investment in BHA Aero follows:

 

 

 

As of June 30,

 

(In millions)

 

2006

 

2005

 

Equity ownership

 

40.48

%

40.48

%

Last twelve months’ (“LTM”) revenues

 

$

21.3

 

$

16.0

 

Equity investment balance

 

$

5.7

 

$

5.0

 

Accounts receivable balance

 

$

2.4

 

$

2.0

 

 

On January 26, 2005, BHA Aero completed the refinancing of its bank debt, which resulted 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, we 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. Our reimbursement agreement with Boeing and AVIC relating to the 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, we recorded a $0.5 million liability, and a corresponding increase in our investment in BHA Aero, during the first quarter of 2005 based upon the estimated fair value of the guarantee. Apart from outstanding accounts receivable balances, our investment in this venture, and our 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, we have no other significant exposures to loss related to BHA Aero.

 

17



 

Asian Composites Manufacturing Sdn. Bhd.

 

In 1999, Hexcel formed a 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). This joint venture is located in Alor Setar, Malaysia, and manufactures composite parts for secondary structures for commercial aircraft. Summary information related to our investment in Asian Composites follows:

 

 

 

As of June 30,

 

(In millions)

 

2006

 

2005

 

Equity ownership

 

25.00

%

25.00

%

LTM revenues

 

$

22.1

 

$

16.8

 

Equity investment balance

 

$

4.1

 

$

2.6

 

Accounts receivable balance

 

$

1.2

 

$

2.1

 

 

Apart from outstanding accounts receivable balances, and our investment in this venture, we have no other significant exposures to loss related to Asian Composites.

 

TechFab LLC

 

As part of an acquisition in 1998, Hexcel obtained an 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. Summary information related to our investment in TechFab follows:

 

 

 

As of June 30,

 

(In millions)

 

2006

 

2005

 

Equity ownership

 

50.00

%

50.00

%