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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K/A
(AMENDMENT NO. 1)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2002
or
/ / Transition Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the transition period from ____________ to ____________
Commission File Number 1-8472
HEXCEL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 94-1109521
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
281 Tresser Boulevard
Stamford, Connecticut 06901
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)
Registrant's telephone number, including area code: (203) 969-0666
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
COMMON STOCK NEW YORK STOCK EXCHANGE
PACIFIC STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act:
7% CONVERTIBLE SUBORDINATED NOTES DUE 2003
7% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2011
93/4% SENIOR SUBORDINATED NOTES DUE 2009
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K/A or any amendment to
this Form 10-K/A. /X/
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes /X/ No / /
The aggregate market value as of June 30, 2002 of voting common stock held
by non-affiliates of the registrant: $102,107,859
The number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Class Outstanding as of March 26, 2003
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COMMON STOCK 39,944,962
DOCUMENTS INCORPORATED BY REFERENCE:
PROXY STATEMENT FOR ANNUAL MEETING OF STOCKHOLDERS
(TO THE EXTENT SPECIFIED HEREIN) -- PART III.
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EXPLANATORY NOTE
The purpose of this Amendment No. 1 to the Annual Report on Form 10-K filed
with the Securities and Exchange Commission on March 3, 2003 is to provide
disclosure regarding the successful completion of previously announced financing
transactions and to present the related impact of such transactions on the
Company's consolidated financial and liquidity position. As a result of these
subsequent financing transactions, the Report of Independent Accountants has
been modified to exclude language expressing any doubts about the Company's
ability to continue as a going concern. This amendment also provides for the
filing of the financial statements of BHA Aero Composite Parts Co. Ltd., the
notes thereto, and the Report of Independent Accountants as required in
accordance with Rule 3-09(a) of Regulation S-X. In addition, certain minor
typographical errors have been corrected.
Except as otherwise expressly noted herein, this Amendment No. 1 to the
Annual Report on Form 10-K does not reflect any other events occurring after the
March 3, 2003 filing of the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 2002.
The Items of the Annual Report on Form 10-K for the fiscal year ended
December 31, 2002, which are amended herein are:
1. Item 1 - Business, has been amended to provide an update to the section
entitled "Significant Transactions" for subsequent closure of certain
financing transactions.
2. Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations, has been amended to provide an update to the
sections titled "Business Trends," "Significant Transactions" and
"Financial Condition" for the completion of certain financing
transactions.
3. Item 8 - Consolidated Financial Statements and Supplementary Data, has
been amended to (i) describe the subsequent closure of certain financial
transactions in Note 2 - "Refinancing of Capital Structure," (ii) update
Note 8 for the impact of such financing transactions, and (iii) add a
2002 unaudited pro forma column on the accompanying consolidated balance
sheets and Note 24 - "Subsequent Event - Pro Forma Consolidated Balance
Sheet (Unaudited)" to illustrate the effects of the subsequent financial
transactions, as if the transactions had occurred as of December 31,
2002..
4. Item 15(a).1 - Financial Statements, has been amended to include the
financial statements of BHA Aero Composite Parts Co. Ltd., the notes
thereto, and the Report of Independent Accountants.
PART I
ITEM 1. BUSINESS.
GENERAL DEVELOPMENT OF BUSINESS
Hexcel Corporation, founded in 1946, was incorporated in California in
1948, and reincorporated in Delaware in 1983. Hexcel Corporation and its
subsidiaries (herein referred to as "Hexcel" or "the Company"), is the world's
leading producer of advanced structural materials. The Company develops,
manufactures and markets lightweight, high-performance reinforcement products,
composite materials and composite structures for use in the commercial
aerospace, space and defense, electronics, and industrial markets. The Company's
products are used in a wide variety of end products, such as commercial and
military aircraft, space launch vehicles and satellites, printed wiring boards,
computers, cellular telephones, soft body armor, high-speed trains and ferries,
cars and trucks, wind turbine blades, reinforcements for bridges and other
structures, window blinds and a wide variety of recreational equipment.
The Company serves international markets through manufacturing facilities
and sales offices located in the United States and Europe, and through sales
offices located in Asia, Australia and South
1
America. The Company is also an investor in six joint ventures, three of which
manufacture and market reinforcement products in Europe, Asia and the United
States; one of which manufactures and markets composite materials in Japan; and
two of which manufacture composite structures and interiors in Asia.
SIGNIFICANT TRANSACTION - REFINANCING OF THE COMPANY'S CAPITAL STRUCTURE
On March 19, 2003, Hexcel successfully completed the refinancing of its
capital structure through the simultaneous closings of three financing
transactions: the completion of its previously announced sale of mandatorily
redeemable convertible preferred stock for $125.0 million, the issuance of
$125.0 million of 9-7/8% senior secured notes, due 2008, and the establishment
of a new $115.0 million senior secured credit facility, also due 2008.
The proceeds from the sale of the convertible preferred stock have been
used to provide for the redemption of $46.9 million principal amount of the
Company's 7% convertible subordinated notes, due 2003, and to repay outstanding
borrowings under the existing senior credit facility. Proceeds to be used to
redeem the 7% convertible subordinated notes have been remitted to US Bank
Trust, trustee for the notes, for the express purpose of retiring the
outstanding principal balance of the notes, plus accrued interest.
The remaining advances under the existing senior credit facility, after the
application of a portion of the equity proceeds, have been repaid with the
proceeds from the issuance of the Company's new 9-7/8% senior secured notes and
a new senior secured credit facility.
With the benefit of the financing transactions, the Company's next
significant scheduled debt maturity will not occur until 2008, with annual debt
and capital lease maturities ranging between $6.2 million and $12.5 million
prior to 2008. Total debt as of March 19, 2003, after giving pro forma effect to
these financing transactions and their related costs, was $531.6 million.
Each of the material agreements governing the issuance and terms of the
convertible preferred stock, the issuance and terms of the senior secured notes
and the terms of the new senior secured credit facility is filed as an exhibit
to this Annual Report on Form 10-K/A.
MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
On March 19, 2003, Hexcel issued 125,000 shares of a series A convertible
preferred stock and 125,000 shares of a series B convertible preferred stock for
$125.0 million in cash. Upon issuance, the total number of Hexcel's outstanding
common shares including potential shares issuable upon conversion of both of the
new series of convertible preferred stocks increased from approximately 38.6
million shares to approximately 88.4 million shares. In addition, common shares
authorized for issuance increased from 100.0 million shares to 200.0 million
shares.
Hexcel issued 77,875 shares of series A convertible preferred stock and
77,875 shares of series B convertible preferred stock to affiliates of Berkshire
Partners LLC and Greenbriar Equity Group LLC (the "Berkshire/Greenbriar
Investors") for a cash payment of approximately $77.9 million. The series A and
the series B convertible preferred stocks are mandatorily redeemable on January
22, 2010 for cash or for common stock at the Company's election. Both preferred
stocks are convertible, at the option of the holder, into common stock at a
conversion price of $3.00 per share, and will automatically be converted into
common stock if the closing trading price of the common stock for any period of
60 consecutive trading days ending after March 19, 2006 exceeds $9.00 per share.
The preferred stockholders are entitled to vote on an as converted basis with
Hexcel's common stockholders. The series A preferred stock accrues dividends at
a rate of 6% per annum following the third anniversary of the issuance.
Dividends may be paid in cash or added to the accrued value of the preferred
stock, at Hexcel's option. The series B preferred stock does not accrue
dividends. After giving effect to the issuances, the Berkshire/Greenbriar
Investors own approximately 35.2% of Hexcel's outstanding voting securities.
2
Hexcel has separately issued 47,125 shares of series A convertible
preferred stock and 47,125 shares of series B convertible preferred stock to
investment funds controlled by affiliates of The Goldman Sachs Group, Inc. (the
"Goldman Sachs Investors"), who currently own approximately 37.8% of Hexcel's
outstanding common stock, for a cash payment of approximately $47.1 million.
This issuance of preferred stock enabled the Goldman Sachs Investors to maintain
their current percentage ownership interest in Hexcel's voting securities,
consistent with their rights under the governance agreement entered into with
Hexcel in 2000.
In conjunction with the aforementioned transactions, Hexcel and the
Berkshire/Greenbriar Investors entered into a stockholders agreement, which
gives the Berkshire/Greenbriar Investors the right to nominate up to two
directors (of a total of ten) to Hexcel's board of directors and certain other
rights. The Goldman Sachs Investors will continue to have the right to nominate
up to three directors under the governance agreement entered into at the time of
their investment in Hexcel in 2000. The stockholders agreement and the amended
Goldman Sachs Investors governance agreement require that the approval of at
least six directors, including at least two directors not nominated by the
Berkshire/Greenbriar Investors or the Goldman Sachs Investors, be obtained for
board actions generally. The stockholders agreement also prohibits the purchase
of voting securities in excess of 39.5% of Hexcel's outstanding voting
securities unless approved by Hexcel's board. The Berkshire/Greenbriar
Investors and the Goldman Sachs Investors have agreed to an 18-month lock up on
the securities being issued, except for certain registered offerings.
SENIOR SECURED NOTES, DUE 2008
The Company also issued, through a private placement under Rule 144A,
$125.0 million of 9 7/8% senior secured notes at a price of 98.95% of face
value. The senior secured notes, due October 1, 2008, are secured by a first
priority security interest in substantially all of Hexcel's and its domestic
subsidiaries' property, plant and equipment, intangibles, intercompany notes and
other obligations receivable, and 100% of the outstanding voting stock of
certain of Hexcel's domestic subsidiaries. In addition, the senior secured notes
are secured by a pledge of 65% of the stock of Hexcel's French and UK first-tier
holding companies. This pledge of foreign stock is on an equal basis with a
substantially identical pledge of such stock given to secure the obligations
under the Company's new senior secured credit facility, described below. The
senior secured notes are also guaranteed by Hexcel's material domestic
subsidiaries. Hexcel has the ability to incur additional debt that would be
secured on an equal basis by the collateral securing the senior secured notes.
The amount of additional secured debt that may be incurred is currently limited
to $10.0 million, but may increase over time based on a formula relating to the
total net book value of Hexcel's domestic property, plant and equipment.
The Company will pay interest on the notes on April 1st and October 1st of
each year. The first payment will be made on October 1, 2003. The Company will
have the option to redeem all or a portion of the notes at any time during the
one-year period beginning April 1, 2006 at 104.938% of principal plus accrued
and unpaid interest. This percentage decreases to 102.469% for the one-year
period beginning April 1, 2007, and to 100.0% for the period beginning April 1,
2008. In addition, the Company may use the net proceeds from one or more equity
offerings at any time prior to April 1, 2006 to redeem up to 35% of the
aggregate principal amount of the notes at 109.875% of the principal amount,
plus accrued and unpaid interest.
The indenture governing the senior secured notes contains many other terms
and conditions, including limitations with respect to asset sales, incurrence of
debt, granting of liens, the making of restricted payments and entering into
transactions with affiliates.
Hexcel has agreed, under a registration rights agreement, to offer to all
noteholders the opportunity to exchange their notes for new notes that are
substantially identical to the existing notes except that the new notes will be
registered with the Securities and Exchange Commission ("SEC") and will not have
any restrictions on transfer. In the event that Hexcel cannot affect such an
exchange, Hexcel will be required to file a shelf registration statement with
the SEC to permit the noteholders to resell their notes generally without
restriction.
3
SENIOR SECURED CREDIT FACILITY
Also on March 19, 2003, Hexcel entered into a $115.0 million asset-backed
senior secured credit facility with a new syndicate of lenders led by Fleet
Capital Corporation as agent. The credit facility matures on March 31, 2008.
Borrowers under the credit facility include, in addition to Hexcel Corporation,
Hexcel's operating subsidiaries in the UK, Austria and Germany. The credit
facility provides for borrowings of U.S. dollars, Pound Sterling and Euro
currencies, including the issuance of letters of credit, with the amount
available to each borrower dependent on the borrowing base of that borrower and
its subsidiaries. For Hexcel Corporation and the UK borrower, the borrowing base
is determined by an agreed percentage of eligible accounts receivable and
eligible inventory, subject to certain reserves. The borrowing base of each of
the Austrian and German borrowers is based on an agreed percentage of eligible
accounts receivable, subject to certain reserves. In addition, the UK, Austrian
and German borrowers have facility sublimits of $12.5 million, $7.5 million and
$5.0 million, respectively. 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 0.75% to 3.25% or LIBOR plus a margin that can vary from
2.25% to 3.25%. The margin in effect for a borrowing at any given time depends
on the Company's fixed charge ratio and the currency denomination of such
borrowing. The credit facility also provides for the payment of customary fees
and expenses.
All obligations under the credit facility are secured by a first priority
security interest in accounts receivable, inventory and cash and cash
equivalents of Hexcel Corporation and its material domestic subsidiaries. In
addition, all obligations under the credit facility are secured by a pledge of
65% of the stock of Hexcel's French and UK first-tier holding companies. This
pledge of foreign stock is on an equal basis with a substantially identical
pledge of such stock given to secure the obligations under the senior secured
notes. The obligations of the UK borrower are secured by the accounts
receivable, inventory, and cash and cash equivalents of the UK borrower. The
obligations of the Austrian and German borrowers are secured by the accounts
receivable of the Austrian and German borrowers, respectively.
Hexcel is required to maintain various financial ratios throughout the term
of the credit facility. These financial covenants set maximum values for the
Company's leverage (the ratios of total and senior debt to EBITDA), fixed charge
coverage (the ratio of EBITDA, less capital expenditures and cash taxes, plus
cash dividends, to the sum of cash interest and scheduled debt amortization),
and capital expenditures (not to exceed specified annual expenditures). The
credit facility also contains limitations on, among other things, incurring
debt, granting liens, making investments, making restricted payments, entering
into transactions with affiliates and prepaying subordinated debt. The credit
facility also contains other customary terms relating to, among other things,
representations and warranties, additional covenants and events of default.
On March 19, 2003, the Company borrowed $13.0 million and issued letters of
credit totaling approximately $25.8 million under the new senior secured credit
facility.
CLASSIFICATION OF DEBT AND CAPITAL LEASE OBLIGATIONS AS OF DECEMBER 31, 2002
As of December 31, 2002, the Company had a scheduled debt obligation due
August 1, 2003, which, if made, would cause the Company to violate one or more
financial covenants in the Company's existing debt agreements. The Company also
required an amendment of its existing senior credit facility before the end of
the first quarter of 2003 to maintain compliance with the financial covenants
under that facility. As the anticipated refinancing of the Company's capital
structure was not completed as of February 28, 2003 (the 2002 financial
statement issuance date) and the Company had not obtained an amendment of the
aforementioned financial covenants, all debt and capital lease obligations had
been classified as current at December 31, 2002.
As a result of the March 19, 2003 refinancing transactions, the
uncertainties surrounding the Company's ability to meet its scheduled 2003 debt
maturities and comply with its debt covenants have been mitigated. Management
believes the Company will comply with the new debt covenants and has adequate
liquidity available to finance operations beyond December 31, 2003. Also as a
result of the refinancing transactions, substantially all of the Company's debt
will be reclassified to long-term at March 31, 2003 reflecting the new
scheduled debt maturities. The next significant scheduled
4
debt maturity will not occur until 2008, with annual debt and capital lease
maturities ranging between $6.2 million and $12.5 million prior to 2008. Refer
to Note 24, "Subsequent Event - Pro Forma Consolidated Balance Sheet
(Unaudited)."
NARRATIVE DESCRIPTION OF BUSINESS AND BUSINESS SEGMENTS
Hexcel is a vertically integrated manufacturer of products within a single
industry: Advanced Structural Materials. Hexcel's advanced structural materials
business is organized around three strategic business segments: Reinforcements,
Composites and Structures.
As part of the Company's November 2001 restructuring program, effective
January 1, 2002, management responsibility for the Company's carbon fiber
product line was transferred to the Composites business segment. As a result of
this change in management responsibilities, the Company changed its business
segment reporting to reflect the reclassification of this product line from the
Reinforcements segment to the Composites segment. The Company also changed the
names of its business segments to Reinforcements, Composites and Structures. The
Company's three business segments were previously known as Reinforcement
Products, Composite Materials and Engineered Products. Results for the years
ended December 31, 2001 and 2000 have been reclassified for comparative
purposes.
REINFORCEMENTS
The Reinforcements business segment manufactures and markets industrial
fabrics and other specialty reinforcement products. The following table
identifies the Reinforcements business segment's principal products and examples
of the primary end-uses:
BUSINESS SEGMENT PRODUCTS PRIMARY END-USE
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REINFORCEMENTS Industrial Fabrics and - Structural materials/components used in
Specialty Reinforcements aerospace, wind energy, automotive, marine,
recreation and other industrial applications
- Raw materials for prepregs and honeycomb
- Soft body armor and other security applications
- Electronic applications, including printed
wiring board substrates
- Window screens and blinds
- Civil engineering and construction applications
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INDUSTRIAL FABRICS AND SPECIALTY REINFORCEMENTS: Industrial fabrics and
specialty reinforcements are made from a variety of fibers, including several
types of fiberglass as well as carbon, aramid, quartz, ceramic and other
specialty fibers. These reinforcement products are sold to third-party customers
for use in a wide range of applications, including a variety of structural
materials and components used in aerospace, wind energy, marine, recreation and
other industrial applications, soft body armor and other security products,
printed wiring boards, window screens and other architectural products. They are
also used internally to manufacture prepregs and other composite materials.
REINFORCEMENTS
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KEY CUSTOMERS MANUFACTURING FACILITIES
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Armor Holdings Anderson, SC
Composites One Decines, France
Cytec Engineered Materials Les Avenieres, France
DHB Industries Seguin, TX
Endicott Interconnect Technologies Statesville, NC
Isola Laminate Systems Washington, GA
Nelco
Piad
Second Chance Body Armor
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5
The Reinforcements business segment's net sales to third party customers
were $217.9 million in 2002, $245.7 million in 2001 and $331.7 million in 2000,
which represented approximately 26%, 25% and 32% of the Company's net sales,
respectively. In addition, approximately 24%, 27% and 20% of the Company's total
production of reinforcement products was used internally to manufacture
composite materials in 2002, 2001 and 2000, respectively.
The Company also has equity ownership interests in three joint ventures in
the Reinforcements business segment: a 43.6% share in Interglas Technologies AG
("Interglas"), headquartered in Germany; a 33.3% share in Asahi-Schwebel Co.,
Ltd. ("Asahi-Schwebel"), headquartered in Japan, which in turn owns interests in
two joint ventures in Taiwan - a 50% interest in Nittobo Asahi Glass and 51%
interest in Asahi-Schwebel Taiwan; and a 50% share in Clark-Schwebel Tech-Fab
Company ("CS Tech-Fab"), headquartered in the United States. Interglas and
Asahi-Schwebel are fiberglass fabric producers serving the European and Asian
electronics and telecommunications industries. CS Tech-Fab manufactures
non-woven reinforcement materials for roofing, construction, sail cloth and
other specialty applications.
In 2002, the Company agreed with its Asian Electronics venture partner to
restructure its minority interest in Asahi-Schwebel. Under the terms of the
agreement, the Company reduced its ownership interest in the joint venture from
43.3% to 33.3% and received cash proceeds of $10.0 million. The agreement also
included, among other matters, a put option in favor of the Company to sell and
a call option in favor of the Company's joint venture partner to purchase the
Company's remaining ownership interest in the joint venture for $23.0 million.
The options are simultaneously effective for a six-month period beginning
July 1, 2003.
COMPOSITES
The Composites business segment manufactures and markets carbon fibers,
prepregs, structural adhesives, honeycomb, specially machined honeycomb parts
and composite panels, fiber reinforced thermoplastics, sheet moulding compounds,
polyurethane systems and laminates.
The following table identifies the Composites business segment's principal
products and examples of the primary end-uses:
BUSINESS SEGMENT PRODUCTS PRIMARY END-USE
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COMPOSITES Carbon Fibers - Raw materials for industrial fabrics and prepregs
- Filament winding for various space, defense and
industrial applications
Prepregs - Composite structures
- Commercial and military aircraft components
- Satellites and launchers
- Aeroengines
- Wind turbine rotor blades
- Yachts, trains and motor racing vehicles
- Skis, snowboards, hockey sticks, tennis rackets
and bicycles
Structural Adhesives - Bonding of metals, honeycomb and composite
materials
- Aerospace, ground transportation and industrial
applications
Honeycomb, - Composite structures and interiors
Honeycomb Parts & - Semi-finished components used in:
Composite Panels Helicopter blades
Aircraft surfaces (flaps, wing tips, elevators
and fairings)
High-speed ferries, truck and train components
Automotive components and impact protection
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CARBON FIBERS: Carbon fibers are manufactured for sale to third party
customers and for use by Hexcel in manufacturing certain reinforcements and
composite materials. Carbon fibers are woven into carbon fabrics, used as
reinforcement in conjunction with a resin matrix to produce pre-impregnated
composite materials (referred to as "prepregs") and used in filament winding and
advanced fiber placement to produce various other composite materials. Key
product applications
6
include structural components for commercial and military aircraft and space
launch vehicles, as well as certain other applications such as recreational
equipment.
PREPREGS: HexPly(R) prepregs are manufactured for sale to third party
customers and for use in manufacturing composite laminates and monolithic
structures, including finished components for aircraft structures and interiors.
Prepregs are manufactured by combining high performance reinforcement fabrics or
unidirectional fibers with a resin matrix to form a composite material with
exceptional structural properties not present in either of the constituent
materials. Industrial fabrics used in the manufacture of prepregs include glass,
carbon, aramid, quartz, ceramic, polyethylene and other specialty
reinforcements. Resin matrices include bismaleimide, cyanate ester, epoxy,
phenolic, polyester, polyimide and other specialty resins.
OTHER FIBER-REINFORCED MATRIX MATERIALS: New fiber reinforced matrix
developments include HexMC(R), a carbon fiber/epoxy sheet moulding compound that
enables small to medium sized composite components to be mass produced. Hexcel's
HexFIT(TM) film infusion material is a product that combines resin films and dry
fiber reinforcements to save lay-up time in production and enables large
contoured composite structures, such as wind turbine blades, to be manufactured.
Resin Film Infusion and Resin Transfer Moulding products are enabling quality
aerospace components to be manufactured using highly cost-effective processes.
STRUCTURAL ADHESIVES: Hexcel designs and markets a comprehensive range of
Redux(R) film adhesives and a newly launched range of Redux paste adhesives.
These structural adhesives, which bond metal to metal, composites and honeycomb
structures, are widely used in the aerospace industry and for many industrial
applications.
HONEYCOMB, HONEYCOMB PARTS AND COMPOSITE PANELS: HexWeb(R) honeycomb is a
unique, lightweight, cellular structure generally composed of hexagonal nested
cells. The product is similar in appearance to a cross-sectional slice of a
beehive. Honeycomb is primarily used as a lightweight core material and is a
highly efficient energy absorber. When sandwiched between composite or metallic
facing skins, honeycomb significantly increases the stiffness of the structure,
while adding very little weight.
Hexcel produces honeycomb from a number of metallic and non-metallic
materials. Most metallic honeycomb is made from aluminum and is available in a
selection of alloys, cell sizes and dimensions. Non-metallic honeycomb materials
include fiberglass, carbon, thermoplastics, non-flammable aramid papers and
other specialty materials.
Hexcel sells honeycomb as standard blocks and in slices cut from a block.
Honeycomb is also supplied as sandwich panels, with facing skins bonded to
either side of the core material. Hexcel also possesses advanced processing
capabilities that enable the Company to design and manufacture complex
fabricated honeycomb parts and bonded assemblies to meet customer
specifications.
Aerospace is the largest market for honeycomb products. Hexcel also sells
honeycomb for non-aerospace applications including high-speed trains and mass
transit vehicles, automotive parts, energy absorption products, marine vessel
compartments, portable shelters, business machine cabinets and other industrial
uses. In addition, the Company produces honeycomb for its Structures business
segment for use in manufacturing finished parts for airframe Original Equipment
Manufacturers (OEMs).
7
COMPOSITES
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KEY CUSTOMERS MANUFACTURING FACILITIES
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Alenia Burlington, WA
Alliant Techsystems Casa Grande, AZ
BAE Systems Dagneux, France
Boeing Decatur, AL
Bombardier Duxford, England
CFAN Linz, Austria
Cytec Engineered Materials Livermore, CA
Durakon Industries Parla, Spain
EADS (Airbus) Pottsville, PA
Embraer-Empresa Salt Lake City, UT
GKN Welkenraedt, Belgium
Lockheed Martin
Northrop Grumman
United Technologies
Vestas
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The Company operates sales offices in the United States located in Bedford,
Texas; Danbury, Connecticut; Dublin, California; Redmond, Washington; and Novi,
Michigan. In Europe, the Company operates sales offices at its manufacturing
sites as well as Pasching, Austria; Stade, Germany; and Saronno, Italy. The
Company also operates sales offices in Melbourne, Australia; Shanghai, China;
and Sao Paulo, Brazil.
The Composites business segment's net sales to third party customers were
$532.4 million in 2002, $638.8 million in 2001 and $594.5 million in 2000, which
represented approximately 62%, 63% and 56% of the Company's net sales,
respectively. Net sales for Composites are highly dependent upon commercial
aircraft build rates as further discussed under the captions "Significant
Customers," "Markets" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations." In addition, about 3% of the Company's
total production of composite materials is sold internally to the Reinforcements
and Structures business units.
The Company also owns a 45% equity interest in DIC-Hexcel Limited, a joint
venture with Dainippon Ink and Chemicals, Inc. This Composites joint venture is
located in Komatsu, Japan, and produces and sells prepregs, honeycomb and
decorative laminates using technology licensed from Hexcel and Dainippon Ink and
Chemicals, Inc.
STRUCTURES
The Structures business segment manufactures and markets composite
structures primarily for use in the aerospace industry. Composite structures are
manufactured from a variety of composite and other materials, including
prepregs, honeycomb and structural adhesives, using such manufacturing processes
as autoclave processing, multi-axis numerically controlled machining, press
laminating, heat forming and other composite manufacturing techniques. Composite
structures include such items as flap track fairings, engine cowls, wing panels
and other aircraft components.
The following table identifies the Structures business segment's principal
products and examples of the primary end-uses:
BUSINESS SEGMENT PRODUCTS PRIMARY END-USE
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STRUCTURES Composite Structures - Aircraft structures and finished aircraft components, including:
Flap track fairings
Engine cowls
Wing panels
Flight deck panels
Door liners
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8
The Structures business segment's net sales to third party customers were
$100.5 million in 2002, $124.9 million in 2001 and $129.5 million in 2000, which
represented approximately 12% of the Company's net sales in each year.
In April 2000, the Company sold its Bellingham aircraft interiors business.
This business was responsible for the design, engineering and manufacture of
commercial aircraft interior components and systems for airline refurbishment
applications. After giving effect to the disposition of the Bellingham aircraft
interiors business as if the transaction occurred at the beginning of 2000, net
sales would have been $110.6 million in 2000.
STRUCTURES
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KEY CUSTOMERS MANUFACTURING FACILITY
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Boeing Kent, WA
EADS (Airbus)
Mitsubishi Heavy Industries
Raytheon Company
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In addition, Hexcel has equity ownership interests in two joint ventures in
the Structures business unit: BHA Aero Composite Parts Co., Ltd. ("BHA Aero")
and Asian Composites Manufacturing Sdn. Bhd. ("Asian Composites"). In 1999,
Hexcel formed BHA Aero with Boeing and Aviation Industries of China (now known
as China Aviation Industry Corporation I) to manufacture composite parts for
secondary structures and interior applications for commercial aircraft. Hexcel
has a 33% equity ownership interest in this joint venture, which is located in
Tianjin, China. Also in 1999, Hexcel formed Asian Composites with Boeing, Sime
Link Sdn. Bhd., and Malaysia Helicopter Services Bhd. (now known as Naluri
Berhadto), 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. Asian Composites began
manufacturing and shipping products during the second half of 2001, while BHA
Aero began shipping composite structures in the first half of 2002.
FINANCIAL INFORMATION ABOUT BUSINESS SEGMENTS AND GEOGRAPHIC AREAS
Financial information and further discussion of Hexcel's business segments
and geographic areas, including external sales and long-lived assets, are
contained throughout the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and in Note 19 to the
accompanying consolidated financial statements of this Annual Report on Form
10-K/A.
SIGNIFICANT CUSTOMERS
Approximately 22%, 23% and 20% of Hexcel's 2002, 2001 and 2000 net sales,
respectively, were to The Boeing Company ("Boeing") and related subcontractors.
Of the 22% of sales to Boeing and its subcontractors in 2002, 17% and 5% related
to commercial aerospace and space and defense market applications, respectively.
Approximately 15%, 16% and 13% of Hexcel's 2002, 2001 and 2000 net sales,
respectively, were to EADS, including the business division Airbus Industrie
("Airbus"), and its subcontractors. Of the 15% of sales to EADS and its
subcontractors in 2002, 13% and 2% related to commercial aerospace and space and
defense market applications, respectively.
9
MARKETS
Hexcel's products are sold for a broad range of end uses. The following
tables summarize net sales to third-party customers by market and by geography
for each of the three years ended December 31:
2002 2001 2000
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NET SALES BY MARKET
Commercial aerospace 46% 53% 49%
Industrial 30 25 22
Space and defense 17 14 12
Electronics 7 8 17
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Total 100% 100% 100%
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NET SALES BY GEOGRAPHY (a)
United States 50% 52% 57%
U.S. exports 6 7 5
International 44 41 38
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Total 100% 100% 100%
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(a) Net Sales by Geography were based on the location in which the sale was
manufactured.
COMMERCIAL AEROSPACE
Historically, the commercial aerospace industry has led the development of
applications for advanced structural materials and components because it has the
strongest need for the performance properties of these materials and is well
positioned to maximize the economic benefits from their use. Accordingly, the
demand for advanced structural material products is closely correlated to the
demand for commercial aircraft.
Commercial aerospace activity fluctuates in relation to two principal
factors. First, the number of revenue passenger miles flown by the airlines
affects the size of the airline fleets and generally follows the level of
overall economic activity. The second factor, which is less sensitive to the
general economy, is the replacement and retrofit rates for existing aircraft.
These rates, resulting mainly from obsolescence, are determined in part by the
regulatory requirements established by various civil aviation authorities as
well as public concern regarding aircraft age, safety and noise. These rates may
also be affected by the desire of the various airlines for higher payloads and
more fuel-efficient aircraft, which in turn is influenced by the price of fuel.
Reflecting the demand factors noted above, the number of commercial
aircraft delivered by Boeing and Airbus declined by 48% from 1992 to 1995. At
the lowest point during this period, Boeing and Airbus reported combined
deliveries of 380 aircraft. Beginning in 1996, however, aircraft deliveries by
Boeing and Airbus began to rise, growing to a combined record peak of 914
aircraft in 1999. Combined aircraft deliveries declined to 684 aircraft in 2002.
In light of the tragic events that occurred on September 11, 2001 and the
negative impact on the commercial aerospace market, Boeing and Airbus
significantly reduced their build rates for 2002 and 2003 from rates previously
expected. Build rates are the number of aircraft the aircraft manufacturer plans
to produce. They may differ from deliveries when the manufacturer is increasing
or reducing its inventories of finished aircraft. This often happens when there
are significant increases or reductions in demand for commercial aircraft. The
impact of these changes on Hexcel will be influenced by two factors: the mix of
aircraft produced and the inventory supply chain effects of reduced aircraft
production. The dollar value of Hexcel's materials varies by aircraft type -
twin aisle aircraft use more Hexcel materials and products than narrow body
aircraft and newer designed aircraft use more Hexcel materials than older
generations. On average, Hexcel delivers products into the supply chain about
six months prior to aircraft delivery. Depending on the product, orders placed
with Hexcel are received anywhere between one and eighteen months prior to
delivery of the aircraft to the customer. With the impact of the changes in
demand for commercial aircraft in 2001, our commercial aerospace revenues
declined approximately 27% in 2002 compared with 2001.
10
Set forth below are historical deliveries as published by Boeing and
Airbus:
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
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Boeing (including
McDonnell Douglas) 572 409 312 256 271 375 563 620 491 527 381
Airbus 157 138 123 124 126 182 229 294 311 325 303
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Total 729 547 435 380 397 557 792 914 802 852 684
==================================================================================================
INDUSTRIAL MARKETS
Hexcel has focused its participation in industrial markets in areas where
the application of advanced structural material technology offers significant
benefits to the end user. As a result, the Company has chosen to focus on select
opportunities where high performance is the key product criterion. Future
opportunities and growth depend primarily upon the success of the individual
programs and industries in which the Company has elected to participate. Within
industrial markets, key applications include surface transportation
(automobiles, mass transit and high-speed rail and marine applications), wind
energy, soft body armor, recreational equipment (i.e. snowboards, tennis
rackets, hockey sticks and bicycles) and civil engineering. Hexcel's
participation in these markets is a valuable complement to its commercial and
military aerospace businesses, and the Company is committed to pursuing the
utilization of advanced structural material technology in its industrial
markets.
SPACE AND DEFENSE
The space and defense markets have historically been innovators in and
sources of significant demand for advanced structural materials. The aggregate
demand by space and defense customers is primarily a function of military
aircraft procurement by the United States and certain European governments, that
utilize advanced structural materials. The Company is currently qualified to
supply materials to a broad range of military aircraft and helicopter programs.
These programs include the F/A-18E/F Hornet, the F-22 Raptor, and the
Eurofighter/Typhoon, as well as the C-17, the V-22 Osprey tiltrotor aircraft,
and the Tiger and NH90 helicopters. In addition, there are new programs in
development such as the RAH-66 Comanche, the Joint Strike Fighter and the A400M
military transport that may enter production later in the decade. The benefits
that the Company obtains from these programs will depend upon which ones are
funded and the extent of such funding.
Contracts to supply materials for military and some commercial projects
contain provisions for termination at the convenience of the U.S. government or
the buyer. In the case of such a termination, Hexcel is entitled to recover
reasonable costs incurred plus a provision for profit on the incurred costs. In
addition, the Company is subject to U.S. government cost accounting standards in
accordance with applicable Federal Acquisition Regulations.
ELECTRONICS
The Company is one of the largest producers of high-quality, lightweight
fiberglass fabric substrates used in the fabrication of multilayer printed
wiring boards, which are integral to most advanced electronic products,
including computers, networking equipment, telecommunications equipment,
advanced cable television equipment, and automotive equipment. In addition to
its wholly-owned U.S. and European businesses, the Company has ownership
positions in the Interglas and Asahi-Schwebel joint ventures. Interglas and
Asahi-Schwebel are manufacturers of similar products in Europe, Japan and
Southeast Asia.
Starting in the first quarter of 2001, the industry experienced a severe
downturn, and a corresponding inventory correction began working its way through
the supply chain significantly impacting demand for fiberglass fabric
substrates. As the downturn continued through 2001, competition intensified for
the business that remained and pricing pressure increased. Depressed conditions
in this sector have continued through 2002 and into 2003. Meanwhile, import
quotas limiting Asian imports of fiberglass fabrics into the United States
expired at the end of 2001 and the migration of lower layer count printed wiring
board production to Asia has continued. Given excess production capacity
throughout the industry, pricing remains under pressure. With these continuing
industry conditions, the Company sees no evidence of a near-term recovery in
this market.
11
Further discussion of Hexcel's markets, including certain risks,
uncertainties and other factors with respect to "forward-looking statements"
about those markets, is contained under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
BACKLOG
In recent years, Hexcel's customers have increasingly demanded shorter
order lead times and "just-in-time" delivery performance. While the Company has
many multi-year contracts with its major aerospace customers, most of these
contracts specify the proportion of the customers' requirements that will be
supplied by the Company and the terms under which the sales will occur, not the
specific quantities to be procured. The Company's electronic and industrial
customers have always desired to order their requirements on as short a
lead-time as possible. The Company has recognized that over the last few years
the twelve-month order backlog is no longer a meaningful trend indicator and, as
a result, ceased monitoring it in the management of the business in 1999.
RAW MATERIALS AND PRODUCTION ACTIVITIES
Due to the vertically integrated nature of Hexcel's operations, the Company
produces several materials used in the manufacture of certain industrial
fabrics, composite materials and engineered products, as well as the
polyacrylonitrile ("PAN") precursor material used in the manufacture of carbon
fibers. Although the Company purchases most of the raw materials used in
production from third parties, it consumed internally approximately 50% and 25%
of its carbon fiber and industrial fabric production, respectively, in 2002.
Several key materials are available from relatively few sources, and in many
cases the cost of product qualification makes it impractical to develop multiple
sources of supply. The unavailability of these materials, which the Company does
not currently anticipate, could have a material adverse effect on the Company's
consolidated results of operations.
Hexcel's production activities are generally based on a combination of
"make-to-order" and "make-to-forecast" production requirements. The Company
coordinates closely with key suppliers in an effort to avoid raw material
shortages and excess inventories.
RESEARCH AND TECHNOLOGY; PATENTS AND KNOW-HOW
Hexcel's Research and Technology ("R&T") departments support the Company's
businesses worldwide. Through R&T activities, the Company maintains expertise in
chemical formulation and curatives, fabric forming and textile architectures,
advanced composite structures, process engineering, application development,
analysis and testing of composite materials, computational design, and other
scientific disciplines related to the Company's worldwide business base.
Additionally, Hexcel's R&T function performs a limited amount of contract
research and development in the United States and Europe for strategically
important customers and government agencies in other areas, such as carbon
fiber, ceramics, high temperature polymers, advanced textiles, and composite
structures manufacturing and testing.
Hexcel's products rely primarily on the Company's expertise in materials
science, textiles, process engineering and polymer chemistry. Consistent with
market demand, the Company has been placing more emphasis on cost effective
product design and lean manufacturing in recent years. Towards this end, the
Company has entered into formal and informal alliances, as well as licensing and
teaming arrangements, with several customers, suppliers, external agencies and
laboratories. The Company believes that it possesses unique capabilities to
design, develop and manufacture composite materials and structures. The Company
owns and maintains in excess of 100 patents worldwide, has licensed many key
technologies, and has granted technology licenses and patent rights to several
third parties in connection with joint ventures and joint development programs.
It is the Company's policy to actively enforce its proprietary rights. The
Company believes that the patents and know-how rights currently owned or
licensed by the Company are adequate for the conduct of its business.
12
Hexcel spent $14.7 million for research and technology in 2002, $18.6
million in 2001 and $21.2 million in 2000. These expenditures were expensed as
incurred. Although the Company reduced its level of research and technology
spending in 2002, it will continue to maintain its high standard of customer
service and make strategic investments in research and technology, as it deems
appropriate.
ENVIRONMENTAL MATTERS
The Company is subject to federal, state and local laws and regulations
designed to protect the environment and to regulate the discharge of materials
into the environment. The Company believes that its policies, practices and
procedures are properly designed to prevent unreasonable risk of environmental
damage and of associated financial liability. To date, environmental control
regulations have not had a significant adverse effect on the Company's overall
operations. A discussion of environmental matters is contained in Item 3, "Legal
Proceedings," and in Note 16 to the accompanying consolidated financial
statements included in this Annual Report on Form 10-K/A.
SALES AND MARKETING
A staff of salaried market managers, product managers and salespeople sell
and market Hexcel products directly to customers worldwide. The Company also
uses independent distributors and manufacturer representatives for certain
products, markets and regions.
COMPETITION
In the production and sale of advanced structural materials, Hexcel
competes with numerous U.S. and international companies on a worldwide basis.
The broad markets for the Company's products are highly competitive, and the
Company has focused on both specific markets and specialty products within
markets to obtain market share. In addition to competing directly with companies
offering similar products, the Company competes with producers of substitute
structural materials such as structural foam, wood, metal, and concrete.
Depending upon the material and markets, relevant competitive factors include
price, delivery, service, quality and product performance.
EMPLOYEES
As of December 31, 2002, Hexcel employed 4,245 full-time employees, 2,448
in the United States and 1,797 internationally. The number of full-time
employees has declined from 5,376 and 6,072 as of December 31, 2001 and 2000,
respectively, primarily due to Hexcel's business consolidation and restructuring
programs. The Company's business consolidation and restructuring programs
included the right-sizing of the Company in response to the forecasted
reductions in commercial aircraft production, the continued weakness in the
electronics market and the closure of manufacturing facilities. For further
discussion, refer to "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and to Note 4 to the accompanying
consolidated financial statements of this Annual Report on Form 10-K/A.
OTHER INFORMATION
The Company's internet address is www.hexcel.com. The Company makes
available, free of charge through its internet website, its Form 10-K's, 10-Q's
and 8-K's, and any amendments to these forms, as soon as reasonably practicable
after filing with the Securities and Exchange Commission.
13
ITEM 2. PROPERTIES
Hexcel owns and leases manufacturing facilities and sales offices located
throughout the United States and in other countries, as noted below. The
corporate offices and principal corporate support activities for the Company are
located in leased facilities in Stamford, Connecticut. The Company's research
and technology administration and principal laboratories are located in Dublin,
California; Duxford, United Kingdom; and Les Avenieres, France.
The following table lists the manufacturing facilities of Hexcel by
geographic location, approximate square footage, and principal products
manufactured. This table does not include manufacturing facilities owned by
entities in which the Company has a joint venture interest.
MANUFACTURING FACILITIES
Approximate Business
Facility Location Square Footage Segment Principal Products
----------------- -------------- -------- ------------------
United States:
Anderson, South Carolina 432,000 Reinforcements Industrial Fabrics
Burlington, Washington 73,000 Composites Honeycomb Parts
Casa Grande, Arizona 307,000 Composites Honeycomb and Honeycomb Parts
Decatur, Alabama 159,000 Composites PAN Precursor (used to produce Carbon Fibers)
Kent, Washington 573,000 Structures Composite Structures
Livermore, California 141,000 Composites Prepregs
Pottsville, Pennsylvania 134,000 Composites Honeycomb Parts
Salt Lake City, Utah 457,000 Composites Carbon Fibers; Prepregs
Seguin, Texas 204,000 Reinforcements Industrial Fabrics; Specialty Fabrics
Statesville, North Carolina 553,000 Reinforcements Electronic Fabrics; Industrial Fabrics
Washington, Georgia 160,000 Reinforcements Electronic Fabrics; Industrial Fabrics
International:
Dagneux, France 130,000 Composites Prepregs
Decines, France 90,000 Reinforcements Industrial Fabrics; Specialty Fabrics
Duxford, United Kingdom 440,000 Composites Prepregs; Honeycomb and Honeycomb Parts
Les Avenieres, France 411,000 Reinforcements Electronic Fabrics; Industrial Fabrics;
Specialty Fabrics
Linz, Austria 163,000 Composites Prepregs
Parla, Spain 43,000 Composites Prepregs
Welkenraedt, Belgium 223,000 Composites Honeycomb and Honeycomb Parts
Hexcel leases the facilities located in Anderson, South Carolina;
Washington, Georgia; Statesville, North Carolina; and the land on which the
Burlington, Washington, facility is located. The Company also leases portions of
the facilities located in Casa Grande, Arizona and Les Avenieres, France. The
remaining facilities are owned by the Company.
At December 31, 2002, the facilities located in Burlington, Washington;
Casa Grande, Arizona; Decatur, Alabama; Dublin; California; Kent, Washington;
Livermore, California; Pottsville, Pennsylvania; Salt Lake City, Utah; and
Seguin, Texas were subject to mortgages in support of the bank syndicate that
provided the Company with its then existing senior credit facility. In
connection with the Company's refinancing of its capital structure on March 19,
2003, the then existing senior credit facility was repaid. Mortgages on these
same facilities were established in support of the collateral agent for the
holders of the Company's new senior secured notes issued March 19, 2003. Refer
to "Significant Transactions - Refinancing of the Company's Capital Structure"
under Item 1 - Business, of this Annual Report on Form 10-K/A.
14
ITEM 3. LEGAL PROCEEDINGS
Hexcel is involved in litigation, investigations and claims arising out of
the normal conduct of its business, including those relating to commercial
transactions, as well as to environmental, employment, health and safety
matters. The Company estimates and accrues its liabilities resulting from such
matters based on a variety of factors, including outstanding legal claims and
proposed settlements; assessments by internal and external counsel of pending or
threatened litigation; and assessments by environmental engineers and
consultants of potential environmental liabilities and remediation costs. Such
estimates exclude counterclaims against other third parties and are not
discounted to reflect the time value of money due to the uncertainty in
estimating the timing of the expenditures, which may extend over several years.
The Company believes that it has meritorious defenses and is taking
appropriate actions against such matters. While it is impossible to ascertain
the ultimate legal and financial liability with respect to certain contingent
liabilities and claims, the Company believes, based upon its examination of
currently available information, its experience to date, and advice from legal
counsel, that the individual and aggregate liabilities resulting from the
ultimate resolution of these contingent matters, after taking into consideration
its existing insurance coverage and amounts already provided for, will not have
a material adverse impact on the Company's consolidated results of operations,
financial position or cash flows.
ENVIRONMENTAL CLAIMS AND PROCEEDINGS
The Company is subject to numerous federal, state, local and foreign laws
and regulations that impose strict requirements for the control and abatement of
air, water and soil pollutants and the manufacturing, storage, handling and
disposal of hazardous substances and waste. These laws and regulations include
the Federal Comprehensive Environmental Response, Compensation, and Liability
Act ("CERCLA" or "Superfund"), the Clean Air Act, the Clean Water Act and the
Resource Conservation and Recovery Act, and analogous state laws and
regulations. Regulatory standards under these environmental laws and regulations
have tended to become increasingly stringent over time.
Hexcel has been named as a potentially responsible party with respect to
several hazardous waste disposal sites that it does not own or possess, which
are included on the Superfund National Priority List of the U.S. Environmental
Protection Agency or on equivalent lists of various state governments. Because
CERCLA provides for joint and several liability, the Company could be
responsible for all remediation costs at such sites, even if it is one of many
potentially responsible parties ("PRPs"). The Company believes, based on the
amount and the nature of its waste, and the number of other financially viable
PRPs, that its liability in connection with such matters will not be material.
Pursuant to the New Jersey Industrial Sites Recovery Act, Hexcel signed an
administrative consent order and later entered into a Remediation Agreement to
pay for the environmental remediation of a manufacturing facility it owns and
formerly operated in Lodi, New Jersey. The ultimate cost of remediating the Lodi
site will depend on developing circumstances.
Hexcel was party to a cost-sharing agreement regarding the operation of
certain environmental remediation systems necessary to satisfy a post-closure
care permit issued to a previous owner of the Company's Kent, Washington, site
by the U.S. Environmental Protection Agency. Under the terms of the cost-sharing
agreement, the Company was obligated to reimburse the previous owner for a
portion of the cost of the required remediation activities. Management has
determined that the cost-sharing agreement terminated in December 1998; however,
the other party disputes this determination.
At its Livermore, California facility, Hexcel has received a series of notices
of violation of air quality standards from the Bay Area Air Quality Management
District. Hexcel has investigated and corrected the issues, and has cooperated
with the District.
The Company's estimate of its liability as a PRP, of the remaining costs
associated with its responsibility to remediate the Lodi, New Jersey, and Kent,
Washington sites and for any fines and penalties that may be assessed relating
to the Livermore, California notices of violation is accrued in its consolidated
balance sheets.
15
OTHER PROCEEDINGS
Hexcel is aware of a grand jury investigation being conducted by the
Antitrust Division of the United States Department of Justice with respect to
the carbon fiber and carbon fiber prepreg industries. The Department of Justice
appears to be reviewing the pricing of all manufacturers of carbon fiber and
carbon fiber prepreg since 1993. The Company, along with other manufacturers of
these products, has received a grand jury subpoena requiring production of
documents to the Department of Justice. Toho Tenax Co. Ltd., one of their
subsidiaries and one of their employees have been indicted for obstruction of
justice; Toho and its subsidiary pleaded guilty to obstruction of justice and
received a combined fine of $500,000. No other indictments have been issued in
the case to date. The Company is not in a position to predict the direction or
outcome of the investigation; however, it is cooperating with the Department of
Justice.
In 1999, Hexcel was joined in a class action lawsuit alleging antitrust
violations in the sale of carbon fiber, carbon fiber industrial fabrics and
carbon fiber prepreg (Thomas & Thomas Rodmakers, Inc. et. al. v. Newport
Adhesives and Composites, Inc., et. al., Amended and Consolidated Class Action
Complaint filed October 4, 1999, United States District Court, Central District
of California, Western Division, CV-99-07796-GHK (CTx)). The Company was one of
many manufacturers joined in the lawsuit, which was spawned from the Department
of Justice investigation. The Court has granted the Plaintiff's motion to
certify the class. Discovery is continuing. The Company is not in a position to
predict the outcome of the lawsuit, but believes that the lawsuit is without
merit as to the Company.
Of the eleven companies that have opted out of the class in the Thomas &
Thomas Rodmakers, Inc. case, one, Horizon Sports Technologies, Inc., has filed a
case on its own behalf, with similar allegations (Horizon Sports Technologies,
Inc., v. Newport Adhesives and Composites, Inc., et. al., First Amended
Complaint filed October 15, 2002, United States District Court, Central District
of California, Southern Division, SACV 02-911 DOC (MLGX)). The Company is not in
a position to predict the outcome of the lawsuit, but believes that the lawsuit
is without merit as to the Company.
The Company has also been joined as a party in numerous class action
lawsuits in California and in Massachusetts spawned by the Thomas & Thomas
Rodmakers, Inc. class action. These actions also allege antitrust violations and
are brought on behalf of purchasers located in California and in Massachusetts,
respectively, who indirectly purchased carbon fiber products. The California
cases have been ordered to be coordinated in the Superior Court for the County
of San Francisco and are currently referred to as Carbon Fibers Cases I, II and
III, Judicial Council Coordinator Proceeding Numbers 4212, 4216 and 4222. The
California cases are Lazio v. Amoco Polymers Inc., et.al., filed August 21,
2000; Proiette v. Newport Adhesives and Composite, Inc. et. al., filed September
12, 2001; Simon v. Newport Adhesives and Composite, Inc. et. al., filed
September 21, 2001; Badal v. Newport Adhesives and Composite, Inc. et.al., filed
September 26, 2001; Yolles v. Newport Adhesives and Composite, Inc. et.al.,
filed September 26, 2001; Regier v. Newport Adhesives and Composite, Inc.
et.al., filed October 2, 2001; and Connolly v. Newport Adhesives and Composite,
Inc. et.al., filed October 4, 2001; Elisa Langsam v Newport Adhesives and
Composites, Inc, et al., filed October 4, 2001; Jubal Delong et al. v Amoco
Polymers, Inc. et al., filed October 26, 2001; and Louis V. Ambrosio v Amoco
Polymers, Inc. et. al., filed October 25, 2001. The Massachusetts case is
Ostroff v. Newport Adhesives and Composites, Inc. et. al., filed June 7, 2002 in
the Superior Court Department of the Trial Court of Middlesex, Massachusetts,
Civil Action No. 02-2385. The Company is not in a position to predict the
outcome of these lawsuits, but believes that the lawsuits are without merit as
to the Company.
In 1999, a QUI TAM case was filed under seal by executives of Horizon
Sports Technologies, Inc. alleging that Boeing and other prime contractors to
the United States Government and certain carbon fiber and carbon fiber prepreg
manufacturers, including the Company, submitted claims for payment to the U.S.
Government which were false or fraudulent because the defendants knew of the
alleged conspiracy to fix prices of carbon fiber and carbon prepreg described in
the above cases (Beck, on behalf of the United States of America, v. Boeing
Defense and Space Group, Inc., et. al., filed July 27, 1999, in the United
States District Court for the Southern District of California, Civil Action No.
99 CV 1557 JM JAH). The case was unsealed in 2002 when the U.S. advised that it
was unable to decide whether to intervene in the case based on the information
available to it at that time and the
16
Relators served the Company and other defendants. The Company is not in a
position to predict the outcome of the lawsuit, but believes that the lawsuit is
without merit as to the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Hexcel common stock is traded on the New York and Pacific Stock Exchanges.
The range of high and low sales prices of Hexcel common stock on the New York
Stock Exchange Composite Tape is contained in Note 23 to the accompanying
consolidated financial statements of this Annual Report on Form 10-K/A and is
incorporated herein by reference.
Hexcel did not declare or pay any dividends in 2002, 2001 or 2000. The
payment of dividends is generally prohibited under the terms of certain of the
Company's debt agreements.
On February 25, 2003, there were 1,363 holders of record of Hexcel common
stock.
ITEM 6. SELECTED FINANCIAL DATA
The information required by Item 6 is contained on page 33 of this Annual
Report on Form 10-K/A under the caption "Selected Financial Data" and is
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by Item 7 is contained on pages 34 to 60 of this
Annual Report on Form 10-K/A under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and is incorporated herein by
reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by Item 7A is contained under the heading "Market
Risks" on pages 56 to 58 of this Annual Report on Form 10-K/A and is
incorporated herein by reference.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by Item 8 is contained on pages 61 to 120 of this
Annual Report on Form 10-K/A under "Consolidated Financial Statements and
Supplementary Data" and is incorporated herein by reference. The Report of the
Independent Accountants is contained on page 63 of this Annual Report on Form
10-K/A under the caption "Report of Independent Accountants" and is incorporated
herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH INDEPENDENT ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
18
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT:
The information required by Item 10 will be contained in Hexcel's
definitive proxy statement for the 2003 Annual Meeting of Stockholders, which
will be filed with the Securities and Exchange Commission within 120 days after
the close of the fiscal year ended December 31, 2002. Such information is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 will be contained in Hexcel's
definitive proxy statement for the 2003 Annual Meeting of Stockholders, which
will be filed with the Securities and Exchange Commission within 120 days after
the close of the fiscal year ended December 31, 2002. Such information is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 will be contained in Hexcel's
definitive proxy statement for the 2003 Annual Meeting of Stockholders, which
will be filed with the Securities and Exchange Commission within 120 days after
the close of the fiscal year ended December 31, 2002. Such information is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 will be contained in Hexcel's
definitive proxy statement for the 2003 Annual Meeting of Stockholders, which
will be filed with the Securities and Exchange Commission within 120 days after
the close of the fiscal year ended December 31, 2002. Such information is
incorporated herein by reference.
ITEM 14. CONTROLS AND PROCEDURES
As of a date within 90 days of the filing date of this report, the
Company's Chief Executive Officer and Chief Financial Officer evaluated the
Company's disclosure controls and procedures (as defined in Rule 13a-14 and Rule
15d-14 under the Securities Exchange Act of 1934). Based on their evaluation,
they have concluded that the Company's disclosure controls and procedures are
effective to ensure that material information relating to the Company, including
its consolidated subsidiaries, would be made known to them, so as to be
reflected in periodic reports that the Company files or submits under the
Securities and Exchange Act of 1934.
There were no significant changes in the Company's internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation, nor were there any significant deficiencies or
material weaknesses in the Company's internal controls. As a result, no
corrective actions were required or undertaken.
19
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
a. 1. FINANCIAL STATEMENTS
i. The consolidated financial statements of Hexcel, the notes thereto,
and the Report of Independent Accountants are listed on page 61 of
this Annual Report on Form 10-K/A and are incorporated herein by
reference.
ii. The financial statements of BHA Aero Composite Parts Co. Ltd., the
notes thereto, and the Independent Auditors' Report are listed on page
61 of this Annual Report on Form 10-K/A and are incorporated herein by
reference.
2. FINANCIAL STATEMENT SCHEDULES
The financial statement schedule and the Report of Independent Accountants
required by Item 15(a)(2) are listed on page 61 of this Annual Report on
Form 10-K and are incorporated herein by reference.
b. REPORTS ON FORM 8-K
Current Report on Form 8-K dated October 23, 2002, relating to third
quarter of 2002 financial results.
Current Report on Form 8-K dated December 20, 2002, relating to
announcement of signed agreements to issue equity securities and planned
refinancing of existing senior credit facility.
c. EXHIBITS
EXHIBIT NO. DESCRIPTION
----------- -----------
2.1 Asset Purchase Agreement dated March 31, 2000 between Hexcel
Corporation and Britax Cabin Interiors, Inc. (incorporated herein
by reference to Exhibit 2.1 to Hexcel's Current Report on Form
8-K dated May 10, 2000).
3.1 Restated Certificate of Incorporation of Hexcel Corporation
(incorporated herein by reference to Exhibit 1 to Hexcel's
Registration Statement on Form 8-A dated July 9, 1996,
Registration No. 1-08472).
3.2 Certificate of Amendment of the Restated Certificate of
Incorporation of Hexcel Corporation.
3.3 Amended and Restated Bylaws of Hexcel Corporation.
4.1 Indenture dated as of January 21, 1999 between Hexcel Corporation
and The Bank of New York, as trustee, relating to the issuance of
the 93/4% Senior Subordinated Notes due 2009 (incorporated herein
by reference to Exhibit 4.1 to the Company's Registration
Statement on Form S-4 (No. 333-71601), filed on February 2,
1999).
4.2 Indenture dated as of July 24, 1996 between Hexcel Corporation
and First Trust of California, National Association, as trustee,
relating to the 7% Convertible Subordinated Notes due 2003 of the
Company (incorporated herein by reference to Exhibit 4 to
Hexcel's Quarterly Report on Form 10-Q for the quarter ended June
30, 1996).
4.3 Indenture dated as of August 1, 1986 between Hexcel and the Bank
of California, N.A., as trustee, relating to the 7% Convertible
Subordinated Notes due 2011 of the Company (incorporated herein
by reference to Exhibit 4.3 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1997).
20
4.3(a) Instrument of Resignation, Appointment and Acceptance, dated as
of October 1, 1993 (incorporated herein by reference to Exhibit
4.10 to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1993).
4.4 Indenture, dated as of March 19, 2003 among Hexcel Corporation,
the Guarantors named therein and Wells Fargo Bank Minnesota,
National Association, as trustee, relating to the 9.875% Senior
Secured Notes due 2008.
4.5 Certificate of Designation of Series A Convertible Preferred
Stock of Hexcel Corporation.
4.6 Certificate of Designation of Series B Convertible Preferred
Stock of Hexcel Corporation.
10.1 Credit and Guaranty Agreement, dated as of March 19, 2003, by and
among Hexcel Corporation, Hexcel Composites Limited, Hexcel
Composites GmbH (Austria), Hexcel Composites GmbH (Germany), the
Guarantors named therein, the lenders from time to time party
thereto, Fleet Capital Corporation, as Administrative Agent,
Fleet National Bank, London U.K. branch, trading as FleetBoston
Financial, as Fronting Bank and Issuing Bank, Fleet National
Bank, as Issuing Bank, and Fleet Securities Inc., as Lead
Arranger.
10.2 Security Agreement, dated as of March 19, 2003, by and among
Hexcel Corporation, Clark-Schwebel Corporation, Hexcel Pottsville
Corporation, Clark-Schwebel Holding Corp., CS Tech-Fab Holding,
Inc. and Fleet Capital Corporation, as Administrative Agent.
10.3* Hexcel Corporation 2003 Incentive Stock Plan.
10.4* Hexcel Corporation Incentive Stock Plan as amended and restated
January 30, 1997 (incorporated herein by reference to Exhibit 4.3
to the Company's Registration Statement on Form S-8, Registration
No. 333-36163).
10.4(a)* Hexcel Corporation Incentive Stock Plan as amended and restated
January 30, 1997 and further amended December 10, 1997
(incorporated herein by reference to Exhibit 10.5(a) to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997).
10.4(b)* Hexcel Corporation Incentive Stock Plan, as amended and restated
on January 30, 1997, and further amended on December 10, 1997 and
March 25, 1999 (incorporated herein by reference to Exhibit 4.3
of the Company's Registration Statement on Form S-8 filed on July
26, 1999).
10.4(c)* Hexcel Corporation Incentive Stock Plan, as amended and restated
on January 30, 1997, and further amended on December 10, 1997,
March 25, 1999 and December 2, 1999 (incorporated by reference to
Exhibit 10.3(c) of the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1999).
10.4(d)* Hexcel Corporation Incentive Stock Plan, as amended and restated
on February 3, 2000 (incorporated herein by reference to Annex A
of the Company's Proxy Statement dated March 31, 2000).
10.4(e)* Hexcel Corporation Incentive Stock Plan, as amended and restated
on December 19, 2000 (incorporated herein by reference to Exhibit
10.3(e) to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2000).
10.4(f)* Hexcel Corporation Incentive Stock Plan, as amended and restated
on December 19, 2000 and further amended on January 10, 2002
(incorporated herein by reference to Exhibit 10.3(f) to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2001).
21
10.5* Hexcel Corporation 1998 Broad Based Incentive Stock Plan
(incorporated herein by reference to Exhibit 4.3 of the Company's
Form S-8 filed on June 19, 1998, Registration No. 333-57223).
10.5(a)* Hexcel Corporation 1998 Broad Based Incentive Stock Plan, as
amended on February 3, 2000 (incorporated by reference to Exhibit
10.1 to Hexcel's Quarterly Report on Form 10-Q for the Quarter
ended June 30, 2000).
10.5(b)* Hexcel Corporation 1998 Broad Based Incentive Stock Plan, as
amended on February 3, 2000, and further amended on February 1,
2001 (incorporated herein by reference to Exhibit 10.4(b) to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2000).
10.5(c)* Hexcel Corporation 1998 Broad Based Incentive Stock Plan, as
amended on February 3, 2000, and further amended on February 1,
2001 and January 10, 2002 (incorporated herein by reference to
Exhibit 10.4(c) to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 2001).
10.5(d)* Hexcel Corporation 1998 Broad Based Incentive Stock Plan, as
amended on February 3, 2000, and further amended on February 1,
2001, January 10, 2002 and December 12, 2002 (incorporated herein
by reference to Exhibit 10.4(d) to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2002).
10.6* Hexcel Corporation Management Stock Purchase Plan (incorporated
herein by reference to Exhibit 10.9 to Hexcel's Quarterly Report
on Form 10-Q for the Quarter ended June 30, 1997).
10.6(a)* Hexcel Corporation Management Stock Purchase Plan, as amended on
March 25, 1999 (incorporated herein by reference to Exhibit 4.3
of the Company's Registration Statement on Form S-8 filed on July
26, 1999).
10.6(b)* Hexcel Corporation Management Stock Purchase Plan, as amended on
March 25, 1999 and December 2, 1999 (incorporated by reference to
Exhibit 10.5(b) of the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1999).
10.6(c)* Hexcel Corporation Management Stock Purchase Plan, as amended and
restated on February 3, 2000 (incorporated herein by reference to
Annex B of the Company's Proxy Statement dated March 31, 2000).
10.6(d)* Hexcel Corporation Management Stock Purchase Plan, as amended and
restated on December 19, 2000 (incorporated herein by reference
to Exhibit 10.5(d) to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 2000).
10.6(e)* Hexcel Corporation Management Stock Purchase Plan, as amended and
restated on March 19, 2003.
10.7* Hexcel Corporation Management Incentive Compensation Plan, as
amended and restated on December 19, 2000 and as further amended
on February 27, 2002 (incorporated herein by reference to Exhibit
10.6 to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 2001).
10.8* Hexcel Corporation Long-Term Incentive Plan (incorporated herein
by reference to Exhibit 10.7 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2001).
10.9* Form of Employee Option Agreement (2003) (incorporated herein by
reference to Exhibit 10.8 to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 2002).
22
10.10* Form of Employee Option Agreement (2002) (incorporated herein by
reference to Exhibit 10.8 to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 2001).
10.11* Form of Employee Option Agreement (2000) (incorporated herein by
reference to Exhibit 10.7 to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 2000).
10.12* Form of Employee Option Agreement Special Executive Grant (2000)
dated December 20, 2000 (incorporated by reference to Exhibit
10.8 of the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 2000).
10.13* Form of Employee Option Agreement Special Executive Grant (1999)
dated December 2, 1999 (incorporated by reference to Exhibit 10.7
of the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1999).
10.14* Form of Employee Option Agreement (1999) dated December 2, 1999
(incorporated by reference to Exhibit 10.8 of the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1999).
10.15* Form of Employee Option Agreement (1999) (incorporated herein by
reference to Exhibit 10.1 of the Company's Quarterly Report on
Form 10-Q for the Quarter ended March 31, 1999).
10.16* Form of Employee Option Agreement (1998) (incorporated herein by
reference to Exhibit 10.4 of the Company's Quarterly Report on
Form 10-Q for the Quarter ended September 30, 1998).
10.17* Form of Employee Option Agreement (1997) (incorporated herein by
reference to Exhibit 10.4 to Hexcel's Quarterly Report on Form
10-Q for the Quarter ended June 30, 1997).
10.18* Form of Employee Option Agreement (1996) (incorporated herein by
reference to Exhibit 10.5 to Hexcel's Quarterly Report on Form
10-Q for the Quarter ended March 31, 1996).
10.19* Form of Employee Option Agreement (1995) (incorporated herein by
reference to Exhibit 10.6 to Hexcel's Quarterly Report on Form
10-Q for the Quarter ended March 31, 1996).
10.20* Form of Retainer Fee Option Agreement for Non-Employee Directors
(2003) (incorporated herein by reference to Exhibit 10.19 the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2002).
10.21* Form of Retainer Fee Option Agreement for Non-Employee Directors
(2000) (incorporated by reference to Exhibit 10.16 of the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2000).
10.22* Form of Retainer Fee Option Agreement for Non-Employee Directors
(1999) (incorporated by reference to Exhibit 10.14 of the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1999).
10.23* Form of Retainer Fee Option Agreement for Non-Employee Directors
(1998) (incorporated herein by reference to Exhibit 10.11 to
Hexcel's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998).
10.24* Form of Retainer Fee Option Agreement for Non-Employee Directors
(1997) (incorporated herein by reference to Exhibit 10.8 to
Hexcel's Annual Report on Form 10-K
23
for the fiscal year ended December 31, 1997).
10.25* Form of Option Agreement (Directors) (incorporated herein by
reference to Exhibit 10.13 to Hexcel's Annual Report on Form 10-K
for the fiscal year ended December 31, 1995).
10.26* Form of Supplemental Compensation Option Agreement (Directors)
(incorporated herein by reference to Exhibit 10.23 to Hexcel's
Annual Report on Form 10-K for the fiscal year ended December 31,
2001).
10.27* Form of Performance Accelerated Restricted Stock Unit Agreement
(December 20, 2000) (incorporated herein by reference to Exhibit
10.22 to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 2000).
10.28* Form of Performance Accelerated Restricted Stock Unit Agreement
(Special Executive Grant December 2, 1999) (incorporated by
reference to Exhibit 10.19 of the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1999).
10.29* Form of Performance Accelerated Restricted Stock Unit Agreement
(December 2, 1999) (incorporated by reference to Exhibit 10.20 of
the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1999).
10.30* Form of Performance Accelerated Restricted Stock Unit Agreement
(1999) (incorporated herein by reference to Exhibit 10.2 to
Hexcel's Quarterly Report on Form 10-Q for the Quarter ended
March 31, 1999).
10.31* Form of Performance Accelerated Restricted Stock Unit Agreement
(1998) (incorporated herein by reference to Exhibit 10.2 to
Hexcel's Quarterly Report on Form 10-Q for the Quarter ended
March 31, 1998).
10.32* Form of Performance Accelerated Restricted Stock Unit Agreement
(1997) (incorporated herein by reference to Exhibit 10.5 to
Hexcel's Quarterly Report on Form 10-Q for the Quarter ended June
30, 1997).
10.33* Form of Performance Accelerated Restricted Stock Unit Agreement
(1996) (incorporated herein by reference to Exhibit 10.9 to
Hexcel's Quarterly Report on Form 10-Q for the Quarter ended
March 31, 1996).
10.34* Form of Restricted Stock Unit Agreement (2003) (incorporated
herein by reference to Exhibit 10.33 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 2002).
10.35* Form of Restricted Stock Unit Agreement (2002) (incorporated
herein by reference to Exhibit 10.31 to Hexcel's Annual Report on
Form 10-K for the fiscal year ended December 31, 2001).
10.36* Form of Reload Option Agreement (1997) (incorporated herein by
reference to Exhibit 10.8 of Hexcel's Quarterly Report on Form
10-Q for the Quarter ended June 30, 1997).
10.37* Form of Reload Option Agreement (1996) (incorporated herein by
reference to Exhibit 10.10 to Hexcel's Quarterly Report on Form
10-Q for the Quarter ended March 31, 1996).
10.38* Form of Exchange Performance Accelerated Stock Option Agreement
(incorporated Herein by reference to Exhibit 10.3 to Hexcel's
Quarterly Report on Form 10-Q for the Quarter ended September 30,
1998).
10.39* Form of Performance Accelerated Stock Option Agreement (Director)
(incorporated herein by reference to Exhibit 10.6 to Hexcel's
Quarterly Report on Form 10-Q for the Quarter ended June 30,
1997).
24
10.40* Form of Performance Accelerated Stock Option (Employee)
(incorporated herein by reference to Exhibit 10.7 to Hexcel's
Quarterly Report on Form 10-Q for the Quarter ended June 30,
1997).
10.41* Form of Grant of Restricted Stock Unit Agreement (incorporated
herein by reference to Exhibit 10.3 to Hexcel's Quarterly Report
on Form 10-Q for the Quarter ended March 31, 1999).
10.42* Form of Grant of Restricted Stock Unit Agreement (incorporated
herein by reference to Exhibit 10.10 to Hexcel's Quarterly Report
on Form 10-Q for the Quarter ended June 30, 1997).
10.43* Hexcel Corporation 1997 Employee Stock Purchase Plan, as amended
and restated as of March 19, 2003.
10.44* Employment Agreement dated as of July 30, 2001 between Hexcel
Corporation and David E. Berges (incorporated by reference herein
to Exhibit 10.37 to Hexcel's Registration Statement on Form S-4
(No. 333-66582), filed on August 2, 2001).
10.44(a)* Amendment, dated December 12, 2002, to Employment Agreement dated
as of July 30, 2001 between Hexcel Corporation and David E.
Berges (incorporated herein by reference to Exhibit 10.43(a) to
the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 2002).
10.44(b)* Employee Option Agreement dated as of July 30, 2001 between
Hexcel Corporation and David E. Berges (incorporated by reference
herein to Exhibit 10.37(a) to Hexcel's Registration Statement on
Form S-4 (No. 333-66582), filed on August 2, 2001).
10.44(c)* Employment Option Agreement (performance-based option) dated as
of July 30, 2001 between Hexcel Corporation and David E. Berges
(incorporated by reference herein to Exhibit 10.37(b) to Hexcel's
Registration Statement on Form S-4 (No. 333-66582), filed on
August 2, 2001).
10.44(d)* Restricted Stock Agreement dated as of July 30, 2001 between
Hexcel Corporation and David E. Berges (incorporated by reference
herein to Exhibit 10.37(c) to Hexcel's Registration Statement on
Form S-4 (No. 333-66582), filed on August 2, 2001).
10.44(e)* Supplemental Executive Retirement Agreement dated as of July 30,
2001 between Hexcel Corporation and David E. Berges (incorporated
by reference herein to Exhibit 10.37(d) to Hexcel's Registration
Statement on Form S-4 (No. 333-66582), filed on August 2, 2001).
10.44(f)* Letter Agreement dated August 1, 2001 between Hexcel Corporation
and David E. Berges (incorporated by reference herein to Exhibit
10.37(e) to Hexcel's Registration Statement on Form S-4 (No.
333-66582), filed on August 2, 2001).
10.44(g)* Letter Agreement dated August 28, 2001 between Hexcel Corporation
and David E. Berges (incorporated herein by reference to Exhibit
10.7 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2001).
10.45* Letter dated December 2, 1999 from Hexcel Corporation to Stephen
C. Forsyth, regarding the Company's Management Incentive
Compensation Plan for 1999 (incorporated by reference to Exhibit
10.35 of the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1999).
10.45(a)* Supplemental Executive Retirement Agreement dated as of May 10,
2000 between Hexcel Corporation and Stephen C. Forsyth
(incorporated herein by reference to Exhibit 10.5 of the
Company's Quarterly Report on Form 10-Q for the Quarter ended
June 30, 2000).
25
10.45(b)* Amendment to Agreements, dated as of October 11, 2000 by and
between Hexcel Corporation and Stephen C. Forsyth (incorporated
herein by reference to Exhibit 10.8 of the Company's Quarterly
Report on Form 10-Q for the Quarter ended September 30, 2000).
10.45(c)* Amendment to Amendments to Agreements, dated as of November 21,
2000, by and between Hexcel Corporation and Stephen C. Forsyth
(incorporated herein by reference to Exhibit 10.39(c) to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2000).
10.45(d)* First Amendment to Supplemental Executive Retirement Agreement
dated as of July 30, 2001 between Hexcel Corporation and Stephen
C. Forsyth (incorporated herein by reference to Exhibit 10.43(d)
to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 2001).
10.46* Letter dated December 2, 1999 from Hexcel Corporation to Ira J.
Krakower, regarding the Company's Management Incentive
Compensation Plan for 1999 (incorporated herein by reference to
Exhibit 10.40 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2000).
10.46(a)* Supplemental Executive Retirement Agreement dated as of May 10,
2000 between Hexcel and Ira J. Krakower (incorporated herein by
reference to Exhibit 10.6 of the Company's Quarterly Report on
Form 10-Q for the Quarter ended June 30, 2000).
10.46(b)* Amendment to Agreements, dated as of October 11, 2000 by and
between Hexcel Corporation and Ira J. Krakower (incorporated
herein by reference to Exhibit 10.7 of the Company's Quarterly
Report on Form 10-Q for the Quarter ended September 30, 2000).
10.46(c)* First Amendment to Supplemental Executive Retirement Agreement
dated as of July 30, 2001 between Hexcel Corporation and Ira J.
Krakower (incorporated herein by reference to Exhibit 10.44(c) to
the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 2001).
10.47* Form of Executive Severance Agreement between Hexcel and certain
executive officers dated as of February 3, 1999 (incorporated
herein by reference to Exhibit 10.6 to the Company's Quarterly
Report on Form 10-Q for the Quarter ended March 31, 1999).
10.48* Form of Executive Severance Agreement between Hexcel and certain
executive officers dated as of February 3, 1999 (incorporated
herein by reference to Exhibit 10.7 to the Company's Quarterly
Report on Form 10-Q for the Quarter ended March 31, 1999).
10.49* Amendment to Agreements, dated as of October 11, 2000 by and
between Hexcel Corporation and William Hunt (incorporated herein
by reference to Exhibit 10.14 of the Company's Quarterly Report
on Form 10-Q for the Quarter ended September 30, 2000).
10.49(a)* Amendment to Amendments to Agreements, dated as of November 21,
2000, by and between Hexcel Corporation and William Hunt
(incorporated herein by reference to Exhibit 10.45(a) to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2000).
10.50* Amendment to Agreements, dated as of October 11, 2000 by and
between Hexcel Corporation and David Tanonis (incorporated herein
by reference to Exhibit 10.12 of the Company's Quarterly Report
on Form 10-Q for the Quarter ended September 30, 2000).
10.51* Amendment to Agreements, dated as of October 11, 2000 by and
between Hexcel Corporation and Joseph Shaulson (incorporated
herein by reference to Exhibit 10.9 of the Company's Quarterly
Report on Form 10-Q for the Quarter ended September 30, 2000).
26
10.51(a)* Amendment to Amendments to Agreements, dated as of November 21,
2000, by and between Hexcel Corporation and Joseph Shaulson
(incorporated herein by reference to Exhibit 10.48(a) to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2000).
10.52 Lease Agreement, dated as of September 15, 1998, by and among
Clark-Schwebel Corporation (a wholly-owned subsidiary of Hexcel)
as lessee, CSI Leasing Trust as lessor, and William J. Wade as
co-trustee for CSI Leasing Trust (incorporated herein by
reference to Exhibit 10.2 of the Company's Quarterly Report on
Form 10-Q for the Quarter ended September 30, 1998).
10.53 Amended and Restated Governance Agreement, dated as of March 19,
2003, among LXH L.L.C., LXH II, L.L.C., GS Capital Partners 2000
L.P., GS Capital Partners 2000 Offshore, L.P., GS Capital
Partners 2000 Employee Fund, L.P., GS Capital Partners 2000 GmbH
& Co. Beteiligungs KG, Stone Street Fund 2000, L.P. and Hexcel
Corporation.
10.54 Stockholders Agreement, dated as of March 19, 2003, among
Berkshire Fund V, Limited Partnership, Berkshire Fund VI, Limited
Partnership, Berkshire Fund V Investment Corp., Berkshire Fund VI
Investment Corp., Berkshire Investors LLC, Greenbriar
Co-Investment Partners L.P, Greenbriar Equity Fund, L.P. and
Hexcel Corporation.
10.55 Amended and Restated Registration Rights Agreement, dated as of
March 19, 2003, by and among Hexcel Corporation, LXH, L.L.C., LXH
II, L.L.C., GS Capital Partners 2000 L.P., GS Capital Partners
2000 Offshore, L.P., GS Capital Partners 2000 Employee Fund,
L.P., GS Capital Partners 2000 GmbH & Co. Beteiligungs KG and
Stone Street Fund 2000, L.P.
10.56 Registration Rights Agreement, dated as of March 19, 2003, among
Hexcel Corporation, Berkshire Fund V, Limited Partnership,
Berkshire Fund VI, Limited Partnership, Berkshire Investors LLC,
Greenbriar Co-Investment Partners L.P. and Greenbriar Equity
Fund, L.P.
10.57 Agreement, dated October 11, 2000, by and among Hexcel
Corporation, LXH, L.L.C. and LXH II, L.L.C. (incorporated herein
by reference to Exhibit 10.1 to the Company's Current Report on
Form 8-K dated October 13, 2000).
10.58 Consent and Termination Agreement, dated as of October 11, 2000,
by and between Hexcel Corporation and Ciba Specialty Chemicals
Holding Inc. (incorporated herein by reference to Exhibit 10.2 to
the Company's Current Report on Form 8-K dated October 13, 2000).
10.59 Purchase Agreement, dated as of June 15, 2001, among Hexcel
Corporation and Credit Suisse First Boston Corporation, Deutsche
Banc Alex. Brown Inc., Goldman, Sachs & Co. and J.P. Morgan
Securities Inc (incorporated herein by reference to Exhibit 10.56
to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 2001).
10.60 Stock Purchase Agreement, dated as of December 18, 2002, by and
among Hexcel Corporation, Berkshire Investors LLC, Berkshire Fund
V, Limited Partnership, Berkshire Fund VI, Limited Partnership,
Greenbriar Equity Fund, L.P. and Greenbriar Co-Investment
Partners, L.P. (incorporated herein by reference to Exhibit 99.1
to the Company's Current Report on Form 8-K dated December 20,
2002).
10.61 Stock Purchase Agreement, dated as of December 18, 2002, by and
among Hexcel Corporation, GS Capital Partners 2000, L.P., GS
Capital Partners 2000 Offshore, L.P., GS Capital Partners 2000
Employee Fund, L.P., GS Capital Partners 2000 GmbH & Co.
Beteiligungs KG and Stone Street Fund 2000, L.P. (incorporated
herein by reference to Exhibit 99.2 to the Company's Current
Report on Form 8-K dated December 20, 2002).
27
10.62 Purchase Agreement, dated as of March 7, 2003, among Goldman,
Sachs & Co., Fleet Securities, Inc. and Hexcel Corporation.
10.63 Exchange and Registration Rights Agreement dated as of March 19,
2003 among Hexcel Corporation, Clark-Schwebel Holding Corp.,
Clark-Schwebel Corporation, Hexcel Pottsville Corporation and CS
Tech-Fab Holding, Inc.
10.64 Pledge and Security Agreement, dated as of March 19, 2003,
between Hexcel Corporation, Clark-Schwebel Holding Corp.,
Clark-Schwebel Corporation, Hexcel Pottsville Corporation, CS
Tech-Fab Holding, Inc. and Hexcel International, and HSBC Bank
USA, as Joint Collateral Agent.
10.65 Collateral Agency Agreement, dated as of March 19, 2003, by and
among Hexcel Corporation, HSBC Bank USA, as Joint Collateral
Agent, Well Fargo Bank Minnesota, National Association, as
trustee, and the representatives of the holders of Parity Lien
Debt who may become a party thereto.
10.66 Intercreditor and Agency Agreement dated as of March 19, 2003, by
and among HSBC Bank USA, as Joint Collateral Agent, Fleet Capital
Corporation, as Intercreditor Agent and Security Trustee, Fleet
Capital Corporation, as Administrative Agent under the Existing
Credit Facility, Well Fargo Bank Minnesota, National Association,
as trustee, and each other Credit Facility Agent that may become
a party thereto.
12.1 Statement regarding the computation of ratio of earnings to fixed
charges for the Company (incorporated herein by reference to
Exhibit 12.1 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2002).
21.1 Subsidiaries of the Company (incorporated herein by reference to
Exhibit 21.1 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2002).
23.1 Consent of Independent Accountants - PricewaterhouseCoopers LLP.
23.2 Consent of Independent Accountants - Deloitte Touche Tohmatsu
Certified Public Accountants Ltd.
24.1 Power of Attorney (included on signature page).
99.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
----------
* Indicates management contract or compensatory plan or arrangement.
28
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF
STAMFORD, STATE OF CONNECTICUT.
HEXCEL CORPORATION
March 31, 2003 /s/ DAVID E. BERGES
------------------------------- ------------------------------------
(Date) David E. Berges
Chief Executive Officer
KNOWN TO ALL PERSONS BY THESE PRESENTS, THAT EACH PERSON WHOSE SIGNATURE
APPEARS BELOW CONSTITUTES AND APPOINTS STEPHEN C. FORSYTH, HIS ATTORNEY-IN-FACT,
WITH THE POWER OF SUBSTITUTION, FOR HIM IN ANY AND ALL CAPACITIES, TO SIGN ANY
AMENDMENTS TO THIS REPORT, AND TO FILE THE SAME, WITH EXHIBITS THERETO AND OTHER
DOCUMENTS IN CONNECTION THEREWITH, WITH THE SECURITIES AND EXCHANGE COMMISSION,
HEREBY RATIFYING AND CONFIRMING ALL THAT SAID ATTORNEY-IN-FACT, OR HIS
SUBSTITUTE OR SUBSTITUTES, MAY DO OR CAUSE TO BE DONE BY VIRTUE HEREOF.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ DAVID E. BERGES Chairman of the March 31, 2003
------------------------------------ Board of Directors, President and
(David E. Berges) Chief Executive Officer
(PRINCIPAL EXECUTIVE OFFICER)
/s/ STEPHEN C. FORSYTH Executive Vice President and March 31, 2003
------------------------------------ Chief Financial Officer
(Stephen C. Forsyth) (PRINCIPAL FINANCIAL OFFICER)
/s/ WILLIAM J. FAZIO Corporate Controller March 31, 2003
------------------------------------ (PRINCIPAL ACCOUNTING OFFICER)
(William J. Fazio)
/s/ JOEL S. BECKMAN Director March 31, 2003
------------------------------------
(Joel S. Beckman)
/s/ H. ARTHUR BELLOWS, JR. Director March 31, 2003
------------------------------------
(H. Arthur Bellows, Jr.)
/s/ JAMES J. GAFFNEY Director March 31, 2003
------------------------------------
(James J. Gaffney)
29
/s/ SANJEEV K. MEHRA Director March 31, 2003
------------------------------------
(Sanjeev K. Mehra)
/s/ LEWIS RUBIN Director March 31, 2003
------------------------------------
(Lewis Rubin)
/s/ ROBERT J. SMALL Director March 31, 2003
------------------------------------
(Robert J. Small)
/s/ MARTIN L. SOLOMON Director March 31, 2003
------------------------------------
(Martin L. Solomon)
30
CERTIFICATIONS
I, David E. Berges, certify that:
1. I have reviewed this annual report on Form 10-K/A (Amendment No. 1) of
Hexcel Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
March 31, 2003 /s/ DAVID E. BERGES
---------------------------------- -------------------------------------
(Date) David E. Berges
Chairman of the Board of Directors,
President and Chief Executive Officer
31
I, Stephen C. Forsyth, certify that:
1. I have reviewed this annual report on Form 10-K/A (Amendment No. 1) of
Hexcel Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b. evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of the registrant's board of directors:
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
March 31, 2003 /s/ STEPHEN C. FORSYTH
---------------------------------- ----------------------------
(Date) Stephen C. Forsyth
Executive Vice President and
Chief Financial Officer
32
SELECTED FINANCIAL DATA
(IN MILLIONS, EXCEPT PER SHARE DATA)
The following table summarizes selected financial data as of and for the
five years ended December 31:
2002 2001 2000 1999 1998
------------------------------------------------------------------------------------------------------------------------
RESULTS OF OPERATIONS (a):
Net sales $ 850.8 $ 1,009.4 $ 1,055.7 $ 1,151.5 $ 1,089.0
Cost of sales 689.5 818.6 824.3 909.0 817.7
--------------------------------------------------------------
Gross margin 161.3 190.8 231.4 242.5 271.3
Selling, general and administrative expenses 85.9 120.9 123.9 128.7 117.9
Research and technology expenses 14.7 18.6 21.2 24.8 23.7
Business consolidation and restructuring expenses 0.5 58.4 10.9 20.1 12.7
Impairment of goodwill and other purchased
intangibles - 309.1 - - -
--------------------------------------------------------------
Operating income (loss) 60.2 (316.2) 75.4 68.9 117.0
Litigation gain 9.8 - - - -
Interest expense (62.8) (64.8) (68.7) (73.9) (38.7)
Gain (loss) on early retirement of debt 0.5 (2.7) - - -
Gain on sale of Bellingham aircraft interiors business - - 68.3 - -
--------------------------------------------------------------
Income (loss) before income taxes 7.7 (383.7) 75.0 (5.0) 78.3
Provision for (benefit from) income taxes 11.3 40.5 26.3 (1.7) 28.4
--------------------------------------------------------------
Income (loss) before equity in earnings (losses) (3.6) (424.2) 48.7 (3.3) 49.9
Equity in earnings (losses) of and write-downs of
an investment in affiliated companies (10.0) (9.5) 5.5 (20.0) 0.5
--------------------------------------------------------------
Net income (loss) $ (13.6) $ (433.7) $ 54.2 $ (23.3) $ 50.4
==============================================================
Net income (loss) per share: (b)
Basic $ (0.35) $ (11.54) $ 1.47 $ (0.64) $ 1.38
Diluted $ (0.35) $ (11.54) $ 1.32 $ (0.64) $ 1.24
Weighted average shares outstanding:
Basic 38.4 37.6 36.8 36.4 36.7
Diluted 38.4 37.6 45.7 36.4 45.7
--------------------------------------------------------------
FINANCIAL POSITION:
Total assets $ 708.1 $ 789.4 $ 1,211.4 $ 1,261.9 $ 1,404.2
Working capital $ (530.8) $ 80.5 $ 128.1 $ 117.3 $ 219.6
Long-term notes payable and capital lease obligations $ - $ 668.5 $ 651.5 $ 736.6 $ 838.1
Stockholders' equity (deficit) (c) $ (127.4) $ (132.6) $ 315.7 $ 270.1 $ 302.4
--------------------------------------------------------------
OTHER DATA:
Depreciation and amortization $ 47.2 $ 63.2 $ 58.7 $ 61.3 $ 47.5
Capital expenditures $ 14.9 $ 38.8 $ 39.6 $ 35.6 $ 66.5
Shares outstanding at year-end, less treasury stock 38.5 38.2 37.1 36.6 36.4
--------------------------------------------------------------
(a) The comparability of the data may be affected by acquisitions and
divestitures. The Company acquired Clark-Schwebel, a manufacturer of
high-quality fiberglass fabrics used to make printed wiring boards and high
performance specialty products used in insulation, filtration, wall and
facade claddings, soft body armor and reinforcements for composite
materials in 1998. The acquisition was accounted for using the purchase
method of accounting. The Bellingham aircraft interiors business was sold
in April 2000.
(b) Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards No.142, "Goodwill and Other Intangible Assets," ("FAS
142"). Prior to adopting FAS 142, goodwill was amortized on a straight-line
basis over estimated economic lives, ranging from 15 years to 40 years. As
a result of adopting FAS 142, goodwill is no longer amortized, but instead
is tested for impairment at the reporting unit level at least annually and
whenever events or changes in circumstances indicate that goodwill might be
impaired. Amortization of goodwill and other purchased intangibles was
$12.5 million in 2001 and $13.1 million in 2000.
(c) No cash dividends were declared per common stock during any of the five
years ended December 31, 2002.
33
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
BUSINESS OVERVIEW
YEAR ENDED DECEMBER 31,
----------------------------------------
(IN MILLIONS, EXCEPT PER SHARE DATA) 2002 2001 2000
-----------------------------------------------------------------------------------------------------------
Net sales (a) $ 850.8 $ 1,009.4 $ 1,055.7
Gross margin % 19.0% 18.9% 21.9%
Operating income $ 60.2 $ (316.2) $ 75.4
Operating income % 7.1% - 7.1%
Provision for income taxes (b) $ 11.3 $ 40.5 $ 26.3
Litigation gain $ 9.8 $ - $ -
Equity in earnings (losses) of and write-downs of
an investment in affiliated companies $ (10.0) $ (9.5) $ 5.5
Net income (loss) $ (13.6) $ (433.7) $ 54.2
Diluted earnings (loss) per share $ (0.35) $ (11.54) $ 1.32
-----------------------------------------------------------------------------------------------------------
(a) Giving effect to the April 26, 2000 sale of the Bellingham aircraft
interiors business as if the transaction had occurred on January 1,
2000, net sales would have been $1,036.8 million in 2000.
(b) Reflects the impact of ceasing to record the tax benefits from U.S.
operating losses commencing during the second quarter of 2001. In
addition, 2001 results reflect the impact of the write-down of U.S.
deferred tax assets in the fourth quarter of 2001. The 2000 results
include $24.0 million of provision for income taxes on the April 2000
gain from the sale of the Bellingham aircraft interiors business.
BUSINESS TRENDS
The Company has experienced major changes in two of the significant markets
for its products during 2001 and 2002. Towards the end of the first quarter of
2001, the Company experienced a significant reduction in the demand for its
woven fiberglass fabrics used as substrates for printed wiring boards. In 2001,
net sales from such electronics applications declined $104.2 million or 58%
compared to 2000. During 2002, sales declined a further $18.7 million to $58.3
million, as the full annual effect of the changes in the industry were evident.
The tragic events of September 11 precipitated a significant reduction in
the production of new build commercial aircraft. In late 2001, both Airbus and
Boeing announced reductions in build rates that were implemented by the middle
of 2002. As the Company delivers on average six months ahead of its customer's
delivery of an aircraft, the Company experienced reduced revenues commencing in
the first quarter, 2002. Full year 2002 net sales to the commercial aerospace
sector were $147.8 million or 27.4% lower than 2001 at $391.1 million.
The Company has responded to these major changes in its two largest
historic markets by implementing a major restructuring program it announced in
November 2001. This program targeted reducing the Company's fixed costs ahead of
the changes in the demand for its products. The program also provided for the
cost of reducing variable costs as customer demand declined. These cost
reductions have predominantly been accomplished by a sharp reduction in the
Company's work force. Headcount has declined from a high of over 6,200 during
the third quarter, 2001 to 4,245 as of December 31, 2002. This right sizing of
the Company has enabled it to stabilize operating profitability despite the
significant reduction in net sales.
The changes in business performance and outlook required that the Company
obtain an amendment to the financial maintenance covenants under its existing
senior credit facility to accommodate its anticipated performance in 2002. The
Company's bank syndicate and the Company entered into an amendment of the
financial covenants on January 25, 2002. The Company has since been in
compliance with those covenants. With the benefit of reductions in capital
expenditures and working capital as well as the receipt of proceeds from a
litigation settlement and the sale of a portion of an equity interest in an
affiliated company, the Company reduced its total debt during 2002 by $64.2
million despite incurring cash restructuring costs of $24.3 million.
34
Although the Company has stabilized operating profitability and reduced its
total debt during 2002, a significant amount of debt remains outstanding. The
remaining $46.9 million of 7% convertible subordinated notes are due for
redemption on August 1, 2003 and the revolving credit and overdraft lines under
the existing senior credit facility are due on September 14, 2004. The Company
has therefore sought new equity capital and announced on December 18, 2002 that
it has entered into definitive agreements providing for a new equity financing
through the issuance of a total of 125,000 shares of a series A convertible
preferred stock and 125,000 shares of a series B convertible preferred stock for
$125.0 million in cash. The intent is to right-size the capital structure of the
Company to its current business circumstances.
On March 19, 2003, Hexcel successfully completed the refinancing of its
capital structure through the simultaneous closings of three financing
transactions: the completion of its previously announced sale of mandatorily
redeemable convertible preferred stock for $125.0 million, the issuance of
$125.0 million of 9-7/8% senior secured notes, due 2008, and the establishment
of a new $115.0 million senior secured credit facility, also due 2008.
The proceeds from the sale of the convertible preferred stock have been
used to provide for the redemption of $46.9 million principal amount of the
Company's 7% convertible subordinated notes, due 2003, and to repay outstanding
borrowings under the existing senior credit facility. Proceeds to be used to
redeem the 7% convertible subordinated notes have been remitted to US Bank
Trust, trustee for the notes, for the express purpose of retiring the
outstanding principal balance of the notes, plus accrued interest.
The remaining advances under the existing senior credit facility, after the
application of a portion of the equity proceeds, have been repaid with the
proceeds from the issuance of the Company's new 9-7/8% senior secured notes and
a new senior secured credit facility.
With the benefit of the financing transactions, the Company's next
significant scheduled debt maturity will not occur until 2008, with annual debt
and capital lease maturities ranging between $6.2 million and $12.5 million
prior to 2008. Total debt as of March 19, 2003, after giving pro forma effect to
these financing transactions and their related costs, was $531.6 million.
LITIGATION SETTLEMENT:
In June 2002, the Company benefited from a judgment entered in litigation
with Hercules Corporation arising from a contract dispute in connection with the
1996 purchase of the Hercules' Composites Products Division. Hexcel received
approximately $11.1 million from Hercules in satisfaction of a judgment entered
after Hercules had exhausted all appeals from a lower court decision in favor of
Hexcel in the New York Courts. The net cash proceeds from the settlement were
used to reduce outstanding debt under the senior credit facility.
SALE OF OWNERSHIP IN A JOINT VENTURE:
In 2002, the Company agreed with its Asian Electronics venture partner to
restructure its minority interest in Asahi-Schwebel Co., Ltd.
("Asahi-Schwebel"). Under the terms of the agreement, the Company reduced its
ownership interest in the joint venture from 43.3% to 33.3% and received cash
proceeds of $10.0 million. The agreement also included, among other matters, a
put option in favor of the Company to sell and a call option in favor of the
Company's joint venture partner to purchase the Company's remaining ownership
interest in the joint venture for $23.0 million. The options are simultaneously
effective for a six-month period beginning July 1, 2003. Reflecting these terms,
the Company wrote-down the carrying value of its remaining equity investment in
this joint venture to its estimated fair market value of $23.0 million,
recording a non-cash impairment charge of $4.0 million. There was no tax benefit
recognized on the write-down. The net cash proceeds from this sale were used to
reduce outstanding debt under the senior credit facility.
35
RESULTS OF OPERATIONS
2002 COMPARED TO 2001
NET SALES: Consolidated net sales for 2002 were $850.8 million, a decrease
of 15.7% when compared to 2001 net sales of $1,009.4 million, reflecting lower
sales to the commercial aerospace and electronics markets. Net sales to the
commercial aerospace market declined by 27.4% as build rates of new commercial
aircraft were reduced. Net sales to the electronics market were 24.3% lower than
in 2001, reflecting the full year impact of a severe electronics industry
downturn that was first seen late in the first quarter of 2001. The reduction in
net sales to these markets was partially offset by continued growth in revenues
to industrial and space and defense markets of 1.5% and 2.9%, respectively. Had
the same U.S. dollar, British pound and Euro exchange rates applied in 2002 as
in 2001, consolidated net sales for 2002 would have been approximately $837.6
million, reflecting the weakening of the U.S. dollar over the twelve months.
Hexcel has three reportable segments: Reinforcements, Composites and
Structures. Although these strategic business units provide customers with
different products and services, they often overlap within four end markets:
Commercial Aerospace, Industrial, Space & Defense, and Electronics. The Company
finds it meaningful to evaluate the performance of its segments through the four
end markets. Further discussion and additional financial information about the
Company's segments may be found in Note 19 to the accompanying consolidated
financial statements of this Annual Report on Form 10-K.
The following table summarizes net sales to third-party customers by
segment and end market in 2002 and 2001:
UNAUDITED
----------------------------------------------------------------------------
COMMERCIAL SPACE &
(IN MILLIONS) AEROSPACE INDUSTRIAL DEFENSE ELECTRONICS TOTAL
--------------------------------------------------------------------------------------------------------------
2002 NET SALES
Reinforcements $ 49.0 $ 110.6 $ - $ 58.3 $ 217.9
Composites 256.6 143.3 132.5 - 532.4
Structures 85.5 - 15.0 - 100.5
--------------------------------------------------------------------------------------------------------------
Total $ 391.1 $ 253.9 $ 147.5 $ 58.3 $ 850.8
46% 30% 17% 7% 100%
--------------------------------------------------------------------------------------------------------------
2001 NET SALES (a)
Reinforcements $ 54.5 $ 114.2 $ - $ 77.0 $ 245.7
Composites 374.1 136.0 128.7 - 638.8
Structures 110.3 - 14.6 - 124.9
--------------------------------------------------------------------------------------------------------------
Total $ 538.9 $ 250.2 $ 143.3 $ 77.0 $ 1,009.4
53% 25% 14% 8% 100%
--------------------------------------------------------------------------------------------------------------
(a) As part of a restructuring program, the Company changed the responsibility
and reporting of one of its product lines effective January 1, 2002.
Hexcel's business segment reporting has therefore been revised in 2002.
Coincident with this change, Hexcel revised the names of its reporting
business segments to Reinforcements, Composites and Structures. The 2001
results have been restated for comparative purposes.
Commercial aerospace net sales decreased 27.4% to $391.1 million for 2002,
as compared to net sales of $538.9 million for 2001. This decrease in comparable
net sales reflects a reduction in commercial aircraft build rates by Airbus and
Boeing during 2002 and into the first half of 2003. Boeing delivered 381
aircraft in 2002, down from 527 in 2001, and projects that its deliveries in
2003 will be reduced by approximately 25% to a level between 270 and 290
aircraft. Airbus' 2002 aircraft deliveries were 303, slightly lower than the 325
aircraft delivered in 2001. Airbus has indicated its 2003 deliveries and
production will be approximately 300 aircraft. This guidance suggests that
combined Boeing and Airbus commercial aircraft deliveries in 2003 will be about
15% lower than in 2002. The impact on the Company's commercial aerospace
revenues of the further forecasted reduction in aircraft deliveries in 2003 will
likely be smaller. As the Company delivers its products on average six months
ahead of the delivery of an aircraft, it has been experiencing customer demand
that approximates the 2003 forecasted deliveries for several months. The
Company's commercial aerospace revenues in the second half of 2003 will start to
reflect its customers anticipated deliveries
36
of commercial aircraft in 2004. In addition to the number of aircraft produced,
the Company's commercial aerospace revenues are influenced by the mix of
aircraft that are produced, as twin aisle aircraft use more of the Company's
products than narrow body aircraft and newly designed aircraft use more than
older generations. Unlike many aerospace suppliers, Hexcel's sales to this
market are almost entirely driven by new aircraft build rates with no material
aftermarket content.
Airbus is well into the launch of their new jumbo aircraft, the Airbus
A380. Hexcel's deliveries of material for this aircraft have already begun to
support certification and test requirements. While the Airbus A380 is not
expected to enter service until approximately 2006, the design of the plane
indicates that it will be the largest commercial aerospace consumer of composite
materials per aircraft. About 19% of its dry weight is expected to be from
composites, a significant increase above the level found even in today's most
advanced wide body aircrafts, the Boeing 777 and the Airbus A340-500/600.
Industrial net sales of $253.9 million for 2002 were slightly higher than
the $250.2 million recorded in 2001. This year-on-year increase was highlighted
by strong growth in demand for composite materials used in wind energy
applications and continued strength in demand for the Company's products used in
other non-aerospace applications, including architectural, automotive, civilian
body armor, rail and marine, and various recreational equipment. While sales of
the Company's reinforcement fabrics used in soft body armor applications
increased slightly in 2002, sales to U.S. military applications began to decline
in the second half of 2002, due largely to the timing of the placement of new
contracts with the Company's customers for military body armor programs. Due to
the lack of clarity in military soft body armor demand, the Company's Industrial
revenues may fluctuate for several quarters even though the prospects for growth
from wind energy and other applications remain strong.
Space and defense net sales for 2002 of $147.5 million were 2.9% higher
than the 2001 net sales of $143.3 million. In general, sales associated with
military aircraft and helicopters continue to trend upwards as the new
generation of military aircraft in the United States and Europe ramp up in
production. Approved and projected defense procurement budgets in the United
States and Europe support this outlook. The Company is currently qualified to
supply materials to a broad range of military aircraft and helicopters. These
programs include the F/A-18E/F (Hornet), the F-22 (Raptor), the European Fighter
Aircraft (Typhoon), the C-17, the V-22 (Osprey) tilt rotor aircraft, the Tiger
and the NH90 helicopters. The benefits that the Company will derive from these
programs will depend upon which of these programs are funded and the extent of
such funding.
Electronics net sales of $58.3 million for 2002 were 24.3% lower than net
sales of $77.0 million in 2001. Revenues continue to be affected by a severe
industry downturn in the global electronics market first seen in the first
quarter of 2001 that has had a prolonged negative impact on the demand for the
Company's fiberglass fabric substrates used in the fabrication of printed wiring
boards. In addition, import quotas limiting Asian imports of fiberglass fabrics
into the U.S. expired at the end of 2001 and migration of lower layer count
printed wiring board production from the United States to Asia has continued.
With excess industry production capacity, pricing remains under pressure. With
these industry conditions continuing, the Company sees no evidence of a
near-term recovery in this market.
GROSS MARGIN: Gross margin for 2002 was $161.3 million, or 19.0% of net
sales, compared to gross margin of $190.8 million, or 18.9% of net sales, in
2001. The $29.5 million decline in gross margin reflected the impact of the
year-on-year sales declines in the commercial aerospace and electronics markets.
While gross margins declined, the Company actually improved gross margin as a
percentage of net sales by exceeding its goals for reductions in factory fixed
costs in the previously announced restructuring programs.
Although the gross margin in the Reinforcements segment declined $1.6
million compared to 2001 due to the electronics market declined, gross margin as
a percentage of sales actually improved 130 basis points to 16.9% in 2002, as
raw material prices and manufacturing costs reductions more than offset lower
revenues. Gross margins earned by the Composites and the Structures segments
declined $23.6 million and $4.2 million, respectively, when compared to 2001.
Manufacturing cost
37
reductions were able to hold percentage gross margins steady in the Composites
segment. The Structures segment's gross margin as a percentage of sales declined
250 basis points, as it ramped up the transition of existing programs to build
composite structures for commercial aircraft for its Asian joint ventures and
received new programs from Boeing.
SELLING, GENERAL AND ADMINISTRATIVE ("SG&A") EXPENSES: SG&A expenses were
$85.9 million, or 10.1% of net sales, in 2002 compared with $120.9 million, or
12.0% of net sales, in 2001. Excluding compensation expenses associated with the
former CEO's retirement of $4.7 million in 2001 and the impact of the adoption
of FAS 142 on goodwill amortization, SG&A expenses in 2001 were $103.7 million,
or 10.3% of net sales. The net year-on-year reduction of $17.8 million, or
17.2%, after adjustments, reflects the impact of the Company's restructuring
programs to reduce expenses to mitigate the reduction in sales in the commercial
aerospace and electronics markets. Goodwill amortization in 2001 was $12.5
million.
RESEARCH AND TECHNOLOGY ("R&T") EXPENSES: R&T expenses were $14.7 million,
or 1.7% of net sales, in 2002 compared to $18.6 million, or 1.8% of net sales,
in 2001. Over the past two years the Company has concentrated its R&T efforts on
developing new materials to meet the emerging needs of our customers, as well as
expanding the range of applications for reinforcements and composite materials.
OPERATING INCOME: Operating income for 2002 was $60.2 million, or 7.1% of
net sales, compared with an operating loss of $316.2 million in 2001. Excluding
business consolidation and restructuring expenses of $0.5 million and $58.4
million incurred in 2002 and 2001, respectively, a $309.1 million impairment of
goodwill and other purchased intangibles in 2001, $4.7 million of compensation
expenses associated with the former CEO's retirement in 2001, and $12.5 million
in amortization expense incurred in 2001, operating income would have been $60.7
million, or 7.1% of net sales, for 2002 compared with $68.5 million, or 6.8% of
net sales, for 2001. This $7.8 million decline in operating income, after these
adjustments, reflects the year-on-year decrease in gross margins offset, in
part, by reductions in SG&A and R&T expenses.
Operating income, after excluding the segments' attributable share of the
aforementioned items, in the Reinforcements segment increased $3.7 million, as
compared with 2001, to $19.1 million reflecting the benefits obtained from
restructuring programs during the year. The Composites segment's operating
income, after such exclusions, decreased by $13.0 million, as declines in net
sales outpaced cost reductions. With the impact of the transition of programs to
its Asian joint ventures and the start up of new programs received from Boeing,
the Structures segment's operating income was $1.8 million lower than in 2001.
The Company did not allocate corporate operating expenses of $26.7 million and
$30.0 million to operating segments in 2002 and 2001, respectively.
LITIGATION GAIN: In 2002, the Company recognized a litigation gain of $9.8
million (net of related fees and expenses) in connection with a contract dispute
with Hercules, Inc. that arose out of the acquisition of Hercules' Composites
Products Division in 1996. The net cash proceeds received from Hercules Inc. of
$11.1 million were in satisfaction of the judgment entered in favor of the
Company after Hercules had exhausted all appeals from a lower court decision in
the New York courts.
INTEREST EXPENSE: Interest expense for 2002 was $62.8 million compared to
$64.8 million in 2001. Included in interest expense for 2002 and 2001 was
approximately $1.8 million and $1.0 million, respectively, of fees and expenses
incurred in connection with bank amendments. Excluding these fees and expenses,
interest expense was $61.0 million in 2002 and $63.8 million in 2001. This $2.8
million reduction in interest expense year-on-year reflects the reductions in
total debt in the last twelve months, the benefit of the reductions in LIBOR,
net of the increase in the spread over LIBOR that the Company pays on its
advances under its senior credit facility. For additional information, see Note
8 to the accompanying consolidated financial statements of this Annual Report on
Form 10-K/A.
GAIN (Loss) ON EARLY RETIREMENT OF DEBT: In 2002, the Company recognized a
$0.5 million gain on the early retirement of debt, related to the repurchase of
$1.8 million of its 7% convertible subordinated debentures, due 2011, in
satisfaction of an annual sinking fund requirement. The debt was repurchased at
market prices, which resulted in a gain.
38
A loss of $2.7 million was recorded in 2001 as a result of the early
retirement of $67.5 million aggregate principal amount of the Company's
outstanding 7% convertible subordinated notes, due 2003, and the redemption of
the entire principal amount of $25.0 million of the Company's increasing rate
senior subordinated notes, due 2003. With the adoption of Statement of Financial
Accounting Standards No. 145, "Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections," on January 1,
2002, the $2.7 extraordinary loss on early retirement of debt reported in 2001
was reclassified as a separate line item below operating income in the
consolidated statements of operations. There was no tax benefit recognized on
the loss because of limitations on the Company's ability to realize the tax
benefits.
PROVISION FOR INCOME TAXES: The Company's tax provision of $11.3 million
for 2002 primarily reflects taxes on foreign income. The Company will continue
to establish a non-cash valuation allowance attributable to currently generated
U.S. net operating losses until such time as the U.S. operations have returned
to consistent profitability.
The Company had a tax provision of $40.5 million in 2001, reflecting the
impact of reduced tax benefits recorded for U.S. operating losses resulting from
a change in business outlook and the inclusion in its tax provision of a $30.7
million valuation allowance for previously reported U.S. deferred tax assets.
Due to a sharp decline in electronics revenues, the Company determined during
the second quarter of 2001 to increase its tax provision rate through the
establishment of a non-cash valuation allowance attributable to currently
generated U.S. net operating losses until such time as the U.S. operations
return to consistent profitability. Due to the effect of significant events that
have occurred since the end of the second quarter, including the delay in the
anticipated recovery in the electronics market, anticipated reductions in
commercial aircraft production, and a general weakening of the economy, along
with the sizable impairments to certain long-lived assets in the fourth quarter
of 2001, the Company reduced its estimates for future U.S. taxable income during
the carryforward period. As a result, the Company concluded that it was
appropriate to establish a full valuation allowance on its U.S. deferred tax
assets, which resulted in a $32.6 million valuation allowance for previously
reported tax assets. For additional information, see Note 12 to the accompanying
consolidated financial statements of this Annual Report on Form 10-K/A.
EQUITY IN LOSSES OF AND WRITE-DOWN OF AN INVESTMENT IN AFFILIATED
COMPANIES: Equity in losses of affiliated companies was $10.0 million in 2002,
slightly larger than equity in losses of $9.5 million in 2001. Excluding the
$4.0 million write-down of its investment in Asahi-Schwebel in 2002 and a $7.8
million write-down of its investment in Interglas Technologies AG ("Interglas")
in 2001, equity in losses were $6.0 million in 2002 compared to $1.7 million in
2001. The increase in equity losses was due to the impact of the continued
electronics market conditions affecting the Company's Asian electronics joint
venture and increased year-over-year losses reported by the Company's joint
ventures in China and Malaysia as they ramp up production of aerospace composite
structures.
In 2002, the Company wrote-down the carrying value of its remaining equity
investment in Asahi-Schwebel to its estimated fair market value of $23.0 million
resulting from an agreement with the Company's joint venture partner to
restructure its minority interest. The $7.8 million write-down of Interglas in
2001 was the result of an assessment that an other-than-temporary decline in
value in the investment had occurred due to a severe industry downturn and the
resulting impact on the financial condition of this company. The amount of the
write-down was determined based on available market information and appropriate
valuation methodologies. The Company did not record deferred tax benefits on the
write-downs because of limitations imposed by foreign tax laws and the Company's
ability to realize the tax benefits.
NET LOSS AND NET LOSS PER SHARE:
(IN MILLIONS, EXCEPT PER SHARE DATA) 2002 2001
--------------------------------------------------------------------------------
Net loss $ (13.6) $ (433.7)
Diluted net loss per share $ (0.35) $ (11.54)
Diluted weighted average shares outstanding 38.4 37.6
--------------------------------------------------------------------------------
The Company's convertible subordinated notes, due 2003, its convertible
subordinated debentures, due 2011 and all of its stock options were excluded
from the 2002 and 2001 computation
39
of diluted net loss per share, as they were antidilutive. Refer to Note 14 to
the accompanying consolidated financial statements of this Annual Report on Form
10-K for the calculation and number of shares used for diluted net loss per
share.
2001 COMPARED TO 2000
NET SALES: Consolidated net sales were $1,009.4 million in 2001, a 4.4%
decline from $1,055.7 million in 2000. Giving effect to the sale of the
Bellingham aircraft interiors business, that occurred on April 26, 2000, as if
the transaction had occurred on January 1, 2000, net sales for 2000 would have
been $1,036.8 million, resulting in a decline of 2.6%. The decline was due to a
severe industry downturn and inventory correction in the electronics market for
the Company's fiberglass fabric substrates, with net sales to that market down
$104.2 million, or 57.5%, year-on-year. The downturn was partially offset by
modest growth in the Composites segment of $44.3 million, or 7.5%, continued
expansion in non-electronic markets for Reinforcements of $18.2 million, or
12.1%, and increased revenues, excluding the Bellingham business, for Structures
of $14.3 million, or 12.9%. Net sales in 2000 generated by the Bellingham
aircraft interiors business prior to its sale were $18.9 million. Had the same
U.S. dollar, British pound and Euro exchange rates applied in 2001 as in 2000,
consolidated net sales would have been approximately $1,019.5 million in 2001.
The following table summarizes net sales to third-party customers by
segment and end market in 2001 and 2000:
UNAUDITED
-----------------------------------------------------------------------------
COMMERCIAL SPACE &
(IN MILLIONS) AEROSPACE INDUSTRIAL DEFENSE ELECTRONICS TOTAL
--------------------------------------------------------------------------------------------------------------
2001 NET SALES (a)
Reinforcements $ 54.5 $ 114.2 $ - $ 77.0 $ 245.7
Composites 374.1 136.0 128.7 - 638.8
Structures 110.3 - 14.6 - 124.9
--------------------------------------------------------------------------------------------------------------
Total $ 538.9 $ 250.2 $ 143.3 $ 77.0 $ 1,009.4
53% 25% 14% 8% 100%
--------------------------------------------------------------------------------------------------------------
2000 NET SALES (a)
Reinforcements $ 53.6 $ 96.9 $ - $ 181.2 $ 331.7
Composites 343.8 130.9 119.8 - 594.5
Structures (b) 120.3 - 9.2 - 129.5
--------------------------------------------------------------------------------------------------------------
Total $ 517.7 $ 227.8 $ 129.0 $ 181.2 $ 1,055.7
49% 22% 12% 17% 100%
--------------------------------------------------------------------------------------------------------------
(a) As part of a restructuring program, the Company changed the responsibility
and reporting of one of its product lines effective January 1, 2002.
Hexcel's business segment reporting has therefore been revised in 2002.
Coincident with this change, Hexcel revised the names of its reporting
business segments to Reinforcements, Composites and Structures. The 2001
and 2000 results have been restated for comparative purposes.
(b) Giving effect to the sale of the Bellingham aircraft interiors business,
that occurred on April 26, 2000, as if it had occurred on January 1, 2000,
net sales for 2000 would have been $1,036.8 million. The Bellingham
business had $18.9 million of sales to the commercial aerospace market in
2000. This business was a component of the Company's Structures segment
until this business was sold.
Commercial aerospace net sales increased 4.1% to $538.9 million in 2001
compared with $517.7 million in 2000. Excluding $18.9 million in net sales
generated by the Bellingham aircraft interiors business, net sales increased
8.0% from $498.8 million. The increase in comparable net sales reflected higher
build rates and product mix of commercial aircraft produced at Airbus, Boeing
and several regional aircraft manufacturers. Airbus and Boeing delivered a
combined 852 commercial aircraft in 2001, a 6.5% improvement over the 800
delivered in 2000. The Company's net sales are impacted by the mix of aircraft
that are produced, as twin aisle aircraft use more of the Company's materials
than narrow body aircraft and newly designed aircraft use more of the Company's
materials than older generations.
Industrial net sales increased 9.8% to $250.2 million in 2001 from $227.8
million in 2000. The increase reflected strong sales growth in reinforcement
fabrics used in the manufacture of soft body
40
armor and in composite materials used for wind energy applications. The Company
also continued to obtain growth through new automotive applications driven by
new programs that use the Company's honeycomb core to provide impact protection
and lightweight structural products. Growth in this market was bound by slightly
lower net sales to recreational markets tracking macroeconomic trends in
consumer spending and travel.
Space and defense net sales in 2001 were $143.3 million, which reflected a
$14.3 million, or 11.1%, increase from comparable sales in 2000. Sales
associated with military aircraft and helicopters continued to trend upwards as
the new generation of military aircraft in the United States and Europe ramped
up in production. The Company is qualified to supply materials to a broad range
of military aircraft and helicopter product programs. These programs, which
utilize significantly greater amounts of Hexcel products than previous
generations, include the F/A-18E/F (Hornet), the F-22 (Raptor), the European
Fighter Aircraft (Typhoon) as well as the C-17, the V-22 (Osprey) tilt rotor
aircraft, the RAH-66 (Comanche) and the NH90 helicopters. The benefits that the
Company obtains from these programs in a fiscal period often depend upon which
ones are funded and the extent of such funding.
Electronics net sales were $77.0 million in 2001, a decrease of 57.5% from
net sales of $181.2 million in 2000. This decline reflected the impact of a
severe industry downturn and inventory correction in the global electronics
industry that impacted the demand for the Company's fiberglass fabric substrates
used in the fabrication of printed wiring boards. The origins of this downturn
had many causes including the end of the so called "tech boom," a sharp
reduction in telecommunications infrastructure investments and declining
macroeconomic trends. Lower demand resulted in finished goods producers and
their subcontractors seeking to liquidate their excess electronics inventories
by cutting back on their purchases, which affected the entire supply chain. The
Company first saw the impact of this downturn in its U.S. operations in the
latter part of the first quarter of 2001. In the second quarter of 2001, U.S.
demand weakened further and the Company's European operations, together with its
joint venture interests in Europe and Asia, saw the same precipitative decline
in customer demand. These reduced demand conditions persisted for the balance of
2001 with sales revenues down in excess of 65% for the second, third and fourth
quarters compared to the same quarters in 2000. As the downturn continued
through 2001, competition intensified for the business that remained and pricing
pressures increased.
GROSS MARGIN: Gross margin for 2001 was $190.8 million, or 18.9% of sales,
versus $231.4 million, or 21.9% of sales, in 2000. The decrease primarily
reflected the impact of the sharp decline in electronics sales in the Company's
Reinforcements segment where gross margin fell approximately 7.7% to 15.6% of
sales. While the Company had taken actions to significantly reduce costs in the
electronics business, it was not able to reduce fixed costs pro-rata to the
change in sales given the magnitude of the shortfall in revenues and its
decision to retain manufacturing capacity to meet increased demand when, or if,
the market recovers. Gross margins earned by the Company's Composites and
Structures segments, as a percent of sales, declined approximately 1.0% to 3.0%
below those earned in 2000 due to various factors including the impact of the
company-wide focus on dramatically reducing inventories ahead of 2002's
anticipated fall-off in commercial aerospace revenues, higher utility costs and
changes in sales mix. The Company's inventories declined $23.7 million during
2001 to $131.7 million. Utility costs in the United States for 2001 increased by
approximately $3.2 million compared to 2000.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling, general and
administrative expenses were $120.9 million, or 12.0% of net sales, in 2001
compared with $123.9 million, or 11.7% of net sales, in 2000. SG&A expenses,
excluding the $4.7 million of compensation expenses associated with the former
CEO's retirement and giving effect to the sale of the Bellingham business as if
it had occurred on January 1, 2000, were $116.2 million, or 11.5% of net sales,
in 2001 compared with $121.3 million, or 11.7% of net sales, in 2000. This
decrease reflected lower corporate expenses of $4.1 million, of which $2.2
million reflected costs incurred in connection with the change in control event
in 2000. Amortization expense of $12.5 million and $13.1 million was included in
SG&A expenses for 2001 and 2000, respectively.
41
RESEARCH AND TECHNOLOGY EXPENSES: Research and technology expenses were
$18.6 million, or 1.8% of net sales, in 2001 compared to $21.2 million, or 2.0%
of net sales, in 2000. Giving effect to the sale of the Bellingham aircraft
interiors business as if it had occurred January 1, 2000, research and
technology expenses would have been $19.5 million in 2000, or 1.9% of net sales.
Nearly seventy percent of R&T expenses in 2001 related to developing new
applications for composite materials.
OPERATING INCOME: Operating loss for 2001 was $316.2 million compared with
operating income of $75.4 million for 2000. Excluding a $309.1 million
impairment charged for goodwill and other purchased intangibles and $4.7 million
of compensation expenses associated with the former CEO's retirement in 2001,
along with business consolidation and restructuring expenses of $58.4 million
and $10.9 million incurred during 2001 and 2000, respectively, operating income
would have been $56.0 million, or 5.5% of net sales, in 2001 compared with $86.3
million, or 8.2% of net sales, in 2000.
INTEREST EXPENSE: Interest expense for 2001 was $64.8 million compared to
$68.7 million in 2000. Although the Company slightly increased its average
borrowings during 2001 compared to 2000, interest expense declined when compared
to 2000 due to lower weighted average interest rates on the Company's senior
credit facility resulting from the progressive reductions in LIBOR during the
year. Included in interest expense in 2001 are bank amendment fees of
approximately $1.0 million related to the May 2001 amendment of certain
financial covenants under the then existing senior credit facility.
PROVISION FOR INCOME TAXES: The Company's tax provision of $40.5 million in
2001 reflected the impact of reduced tax benefits recorded for U.S. operating
losses resulting from a change in business outlook for the Company and the
inclusion in its tax provision of a $30.7 million valuation allowance for
previously reported U.S. deferred tax assets. In 2000, the provision for income
taxes was $26.3 million, which primarily related to a gain on the sale of the
Bellingham aircraft interiors business.
EQUITY IN EARNINGS (LOSSES) OF AND WRITE-DOWNS OF AN INVESTMENT IN
AFFILIATED COMPANIES: Equity in losses of affiliated companies was $9.5 million
in 2001, including a $7.8 million write-down of the Company's investment in
Interglas. Excluding the Interglas write-down, equity in losses of affiliated
companies was $1.7 million compared with earnings of $5.5 million in 2000,
reflecting the impact of the electronics industry downturn on the operating
results of the Company's Reinforcements joint venture in Asia as well as
start-up losses associated with the Structures joint ventures in China and
Malaysia.
NET INCOME (LOSS) AND NET INCOME (LOSS) PER SHARE:
(IN MILLIONS, EXCEPT PER SHARE DATA) 2001 2000
-------------------------------------------------------------------------------
Net income (loss) $ (433.7) $ 54.2
Diluted net income (loss) per share $ (11.54) $ 1.32
Diluted weighted average shares outstanding 37.6 45.7
-------------------------------------------------------------------------------
The Company's convertible subordinated notes, due 2003, its convertible
subordinated debentures, due 2011 and all of its stock options were excluded
from the 2001 computation of diluted net loss per share, as they were
antidilutive. Approximately 4.5 million stock options were excluded from the
2000 calculation of diluted net income per share as their exercise price was
higher than the Company's average share price. Refer to Note 14 to the
accompanying consolidated financial statements of this Annual Report on Form
10-K/A for the calculation and number of shares used for diluted net income
(loss) per share.
IMPAIRMENT OF GOODWILL AND OTHER PURCHASED INTANGIBLES
During the fourth quarter of 2001, the Company reviewed its long-lived
assets, particularly goodwill and other purchased intangibles acquired in recent
years, for impairment. The review was undertaken in response to changes in
market conditions and the Company's revised outlook resulting from a sharp
decline in demand for the Company's woven glass fabrics, primarily in the
electronics market, and the announced reductions in commercial airline
production due to the tragic events of
42
September 11, 2001. The Company also revised its forecasts of revenue growth for
its acquired satellite business due to the continuing slowdown in commercial
satellite launches following the financial failures of a number of satellite
based telecommunication projects and the postponement of others. These adverse
changes in market conditions have led to the lowering of revenue forecasts
associated with certain businesses in the Reinforcements and Composites
segments.
Based on this review, the Company determined that the long-lived assets of
the fabrics business acquired from Clark-Schwebel in 1998 and the satellite
business acquired from Fiberite, Inc. in 1997 were not fully recoverable. The
Company recorded non-cash impairment charges of $292.1 million and $17.0 million
related to the goodwill and other purchased intangibles associated with the
Clark-Schwebel and Fiberite acquisitions, respectively. The amounts of the
impairment charges were calculated as the excess of the carrying value of the
assets over their fair values. Fair values were determined using discounted
future cash flow models, market valuations and third party appraisals, where
appropriate. There were no tax benefits recognized on the impairments because of
limitations on the Company's ability to realize the tax benefits.
BUSINESS CONSOLIDATION AND RESTRUCTURING PROGRAMS
NOVEMBER 2001 PROGRAM
In November 2001, the Company announced a program to restructure its
business operations in accordance with a revised business outlook for build rate
reductions in commercial aircraft production, the continued depressed business
conditions in the electronics market and the weakness in the general economy.
The program targeted a 20% reduction in cash fixed costs, or $60.0 million,
compared to previous spending rates and included company-wide reductions in
managerial, professional, indirect manufacturing and administrative employees
along with organizational rationalization. In connection with the program, the
Company recognized charges of $47.9 million in the fourth quarter of 2001.
During 2002, the Company continued the implementation of this program, reducing
its workforce, since announcement, by approximately 25% to 4,245 employees and
achieving a cash fixed cost reduction of 22.8% for the full year 2002 as
compared to 2001.
In 2002, the Company recognized a net change in estimated business
consolidation and restructuring expenses related to this program of $0.7
million. This resulted from a $1.8 million reduction of previously accrued
liabilities as employee severance and other benefit costs were lower than
previously expected, offset in part, by a $1.1 million increase in restructuring
liabilities for facility lease termination costs. An additional $1.2 million was
expensed as incurred in 2002.
JULY 2001 PROGRAM
As a result of the weakness in the electronics market, the Company
initiated cost reduction actions in July 2001. These actions incorporated steps
to furlough employees, idle manufacturing and cut non-essential expenditures, by
effecting a reduction in the work force of approximately 275 employees primarily
in the Reinforcements and Composites business segments. In connection with the
program, the Company recognized a charge of $3.9 million in the third quarter of
2001. During 2002, the Company reviewed its remaining liability under the
program and recognized a change in estimated business consolidation and
restructuring expenses of $0.6 million, as employee severance and other benefit
costs were lower than previously expected.
DECEMBER 1998 AND SEPTEMBER 1999 PROGRAMS
As a result of several substantial business acquisitions, the Company
initiated business consolidation programs in December 1998 and September 1999.
The primary purpose of these programs was to integrate acquired assets and
operations into the Company, and to close or restructure insufficiently
profitable facilities and activities. Due to aerospace industry requirements to
"qualify" specific equipment and manufacturing processes for certain products,
some business consolidation actions have taken up to three years to complete.
These qualification requirements increase the complexity, cost and time of
moving equipment and rationalizing manufacturing activities. In connection with
these business consolidation programs, the Company closed three manufacturing
facilities, vacated approximately 560 thousand square feet of manufacturing
space, and eliminated more than 700 manufacturing, marketing and administrative
positions.
43
In 2000, the Company added two further actions to the September 1999
business consolidation program. The Company decided to close the two smaller of
its four U.S. prepreg manufacturing facilities - one in Lancaster, Ohio and
another in Gilbert, Arizona. The Gilbert, Arizona facility was closed in 2001
and the closure of the Lancaster, Ohio facility was completed in 2002. The
manufacturing output from these two plants is now being produced by the two
remaining U.S. prepreg facilities in Livermore, California and Salt Lake City,
Utah. In connection with the program, including the program revisions, the
Company recognized a charge of $14.3 million in 2000.
In addition, during 2000, Hexcel amended its September 1999 business
consolidation program in response to the manufacturing constraints caused by a
stronger than expected increase in sales and production for its electronic woven
glass fabrics and its ballistic protection products. Based on these improved
market conditions and a manufacturing capacity review, the Company decided to
expand its capacity by purchasing additional looms and revising the previous
decision to consolidate a number of weaving activities at two of the Company's
facilities. As a result of the decision not to proceed to consolidate
production, the Company reversed a total of $3.4 million of business
consolidation expenses that were previously recognized in 1999, including $3.1
million in non-cash write-downs of machinery and equipment that was to have been
sold or scrapped as a result of the consolidation.
In 2002, the Company recognized a change in estimated business
consolidation expenses related to this program of $0.5 million, as actual
employee severance was lower than previously expected. Business consolidation
expenses for equipment relocation and re-qualification costs, expensed as
incurred, were $1.6 million and $6.5 million in 2002 and 2001, respectively.
Equipment relocation and re-qualification costs primarily related to the planned
closure of the Lancaster, Ohio and Gilbert, Arizona pre-preg manufacturing
facilities. In addition, the Company recognized a benefit on the sale of a
previously idled Cleveland, Georgia facility of $0.5 million by reversing
expenses previously accrued in 1999.
The aggregate business consolidation and restructuring activities for the
three years ended December 31, 2002, consisted of the following:
EMPLOYEE FACILITY &
(IN MILLIONS) SEVERANCE EQUIPMENT TOTAL
-------------------------------------------------------------------------------------------------------------
BALANCE AS OF JANUARY 1, 2000 $ 3.5 $ 0.6 $ 4.1
Business consolidation expenses:
Current period expenses 3.7 10.6 14.3
Reversal of 1999 business consolidation expenses (0.3) (3.1) (3.4)
-------------------------------------------------------------------------------------------------------------
Net business consolidation expenses 3.4 7.5 10.9
Cash expenditures (3.9) (7.9) (11.8)
Non-cash items:
Reversal of 1999 business consolidation expenses - 3.1 3.1
Non-cash usage, including asset write-downs (0.6) (3.0) (3.6)
-------------------------------------------------------------------------------------------------------------
Total non-cash items (0.6) 0.1 (0.5)
-------------------------------------------------------------------------------------------------------------
BALANCE AS OF DECEMBER 31, 2000 $ 2.4 $ 0.3 $ 2.7
Business consolidation and restructuring expenses 34.5 23.9 58.4
Cash expenditures (6.4) (5.6) (12.0)
Non-cash usage, including asset write-downs - (15.7) (15.7)
-------------------------------------------------------------------------------------------------------------
BALANCE AS OF DECEMBER 31, 2001 $ 30.5 $ 2.9 $ 33.4
Business consolidation and restructuring expenses
Current period expenses - 2.8 2.8
Reversal of 1999 business consolidation expenses - (0.5) (0.5)
Change in estimated expenses (2.9) 1.1 (1.8)
-------------------------------------------------------------------------------------------------------------
Net business consolidation and restructuring expenses (2.9) 3.4 0.5
Cash expenditures (20.5) (3.8) (24.3)
Currency translation adjustment 0.9 - 0.9
Non-cash items:
Reversal of 1999 business consolidation expenses - 0.5 0.5
Non-cash usage, including asset write-downs - (0.5) (0.5)
-------------------------------------------------------------------------------------------------------------
Total non-cash items - - -
-------------------------------------------------------------------------------------------------------------
BALANCE AS OF DECEMBER 31, 2002 $ 8.0 $ 2.5 $ 10.5
=============================================================================================================
44
As of December 31, 2002, the December 1998, September 1999 and July 2001
programs have been substantially completed, while the November 2001 program will
be substantially completed in 2003. Management will continue to closely monitor
spending under the November 2001 program and evaluate opportunities that may
exist for future actions, as the Company continues to right-size the business in
response to existing conditions in the markets it serves.
RETIREMENT AND OTHER POSTRETIREMENT BENEFIT PLANS
Hexcel maintains qualified and nonqualified defined benefit retirement
plans covering certain U.S. and European employees, as well as retirement
savings plans covering eligible U.S. employees, and participates in a union
sponsored multi-employer pension plan covering certain U.S. employees with union
affiliates. In addition, Hexcel also provides certain postretirement health care
and life insurance benefits to eligible U.S. retirees.
Hexcel accounts for its defined benefit retirement plans and its
postretirement benefit plans using actuarial models required by Statement of
Financial Accounting Standards No. 87, "Employers' Accounting for Pensions," and
No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions," respectively. These actuarial models require the use of certain
assumptions, such as the expected long-term rate of return, discount rate, rate
of compensation increase, healthcare cost trend rates, and retirement and
mortality rates, to determine the net periodic costs of such plans. These
assumptions are reviewed and set annually at the beginning of each year. In
addition, these models use an "attribution approach" that generally spreads
individual events, such as plan amendments and changes in actuarial assumptions,
over the service lives of the employees in the plan. That is, employees render
service over their service lives on a relatively smooth basis and therefore, the
income statement effects of retirement and postretirement benefit plans are
earned in, and should follow, the same pattern.
Hexcel uses its long-term historical actual return experience, its expected
investment mix of the plans' assets, and future estimates of long-term
investment returns to develop its expected rate of return assumption used in the
net periodic cost calculations of its U.S. and European defined benefit
retirement plans. Due to the difficulty involved in predicting the market
performance of certain assets, there will almost always be a difference in any
given year between the Company's expected return on plan assets and the actual
return. Following the attribution approach, each year's difference is spread
over a number of future years. Over time, the expected long-term returns are
designed to approximate the actual long-term returns and therefore result in a
pattern of income and expense recognition that more closely matches the pattern
of the services provided by the employees. As actual returns experience over the
past three years were less than the expected returns for certain of the
Company's defined benefit retirement plans, the shortfall between actual and
expected returns will be recognized in the net periodic pension cost
calculations over a number of subsequent years, along with any other differences
arising in future years. In addition, as a result of a review of recent asset
returns and expected future trends, the Company reduced its expected long-term
return on the U.S. defined benefit retirement plan assets from a historical 9.0%
to 7.5% for the 2003 plan year. This change, along with minor adjustments in the
expected long-term rate of return on plan assets for certain European defined
benefit retirement plans, is expected to result in additional net periodic
pension costs in 2003.
Hexcel annually sets its discount rate assumption for retirement-related
benefits accounting to reflect the rates available on high-quality, fixed-income
debt instruments. Recent changes in discount rates have not had any significant
impact on the Company's net periodic costs for the three years ended December
31, 2002. The discount rate assumption to be used to calculate net periodic
retirement related costs in 2003 is 6.75% compared to a discount rate of 7.25%
used in 2002. The rate of compensation increase, which is another significant
assumption used in the actuarial model for pension accounting, is determined by
the Company based upon its long-term plans for such increases and assumed
inflation. Rates used by the Company have remained relatively constant over the
past three years and are expected to remain constant for 2003. For the
postretirement health care and life insurance benefits plan, the Company reviews
external data and its historical trends for health care costs to determine the
health care cost trend rates. Retirement and mortality rates are based primarily
on actual plan experience.
45
Actual results that differ from the Company's assumptions are accumulated
and amortized over future periods and, therefore, generally affect the net
periodic costs and recorded obligations in such future periods. While management
believes that the assumptions used are appropriate, significant changes in,
economic or other conditions, employee demographics, retirement and mortality
rates, and investment performance may materially impact such costs and
obligations. For more information regarding costs and assumptions for the
Company's retirement and other postretirement benefit plans, see Note 11 to the
accompanying consolidated financial statements of this Annual Report on Form
10-K/A.
Effective December 31, 2000, the Company made certain changes to its U.S.
defined benefit and retirement savings plans that were intended to improve the
flexibility and visibility of future retirement benefits for employees. These
changes included an increase in the amount that the Company will contribute to
individual 401(k) retirement savings accounts and an offsetting curtailment of
the Company's U.S. qualified defined benefit retirement plan. Beginning January
1, 2001, the Company started to contribute an additional 2% to 3% of each
eligible employee's salary to an individual 401(k) retirement savings account,
depending on the employee's age. This increased the maximum contribution to
individual employee savings accounts to between 5% and 6% per year, before any
profit sharing contributions. Offsetting the estimated incremental cost of this
additional benefit, participants in the Company's U.S. qualified defined benefit
retirement plan no longer accrued benefits under this plan after December 31,
2000, and no new employees will become participants. However, employees retained
all benefits earned under this plan as of that date. The 2000 results included
$5.1 million of non-cash pre-tax income (equivalent to $3.3 million of after-tax
income) attributable to the curtailment of this defined benefit retirement plan.
SIGNIFICANT CUSTOMERS
Approximately 22%, 23% and 20% of the Company's 2002, 2001 and 2000 net
sales, respectively, were to Boeing and its subcontractors. Of the 22% of sales
to Boeing and its subcontractors in 2002, 17% and 5% related to commercial
aerospace and space and defense market applications, respectively. Approximately
15%, 16% and 13% of the Company's 2002, 2001 and 2000 net sales, respectively,
were to EADS, including Airbus, and its subcontractors. Of the 15% of sales to
EADS and its subcontractors in 2002, 13% and 2% related to commercial aerospace
and space and defense market applications, respectively.
SIGNIFICANT TRANSACTIONS
REFINANCING OF THE COMPANY'S CAPITAL STRUCTURE
On March 19, 2003, Hexcel successfully completed the refinancing of its
capital structure through the simultaneous closings of three financing
transactions: the completion of its previously announced sale of mandatorily
redeemable convertible preferred stock for $125.0 million, the issuance of
$125.0 million of 9-7/8% senior secured notes, due 2008, and the establishment
of a new $115.0 million senior secured credit facility, also due 2008.
The proceeds from the sale of the convertible preferred stock have been
used to provide for the redemption of $46.9 million principal amount of the
Company's 7% convertible subordinated notes, due 2003, and to repay outstanding
borrowings under the existing senior credit facility. Proceeds to be used to
redeem the 7% convertible subordinated notes have been remitted to US Bank
Trust, trustee for the notes, for the express purpose of retiring the
outstanding principal balance of the notes, plus accrued interest.
The remaining advances under the existing senior credit facility, after the
application of a portion of the equity proceeds, have been repaid with the
proceeds from the issuance of the Company's new 9-7/8% senior secured notes and
a new senior secured credit facility.
With the benefit of the financing transactions, the Company's next
significant scheduled debt maturity will not occur until 2008, with annual debt
and capital lease maturities ranging between $6.2
46
million and $12.5 million prior to 2008. Total debt as of March 19, 2003, after
giving pro forma effect to these financing transactions and their related costs,
was $531.6 million.
Each of the material agreements governing the issuance and terms of the
convertible preferred stock, the issuance and terms of the senior secured notes
and the terms of the new senior secured credit facility is filed as an exhibit
to this Annual Report on Form 10-K/A.
MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
On March 19, 2003, Hexcel issued 125,000 shares of a series A convertible
preferred stock and 125,000 shares of a series B convertible preferred stock for
$125.0 million in cash. Upon issuance, the total number of Hexcel's outstanding
common shares including potential shares issuable upon conversion of both of the
new series of convertible preferred stocks increased from approximately 38.6
million shares to approximately 88.4 million shares. In addition, common shares
authorized for issuance increased from 100.0 million shares to 200.0 million
shares.
Hexcel issued 77,875 shares of series A convertible preferred stock and
77,875 shares of series B convertible preferred stock to affiliates of Berkshire
Partners LLC and Greenbriar Equity Group LLC (the "Berkshire/Greenbriar
Investors") for a cash payment of approximately $77.9 million. The series A and
the series B convertible preferred stocks are mandatorily redeemable on January
22, 2010 for cash or for common stock at the Company's election. Both preferred
stocks are convertible, at the option of the holder, into common stock at a
conversion price of $3.00 per share, and will automatically be converted into
common stock if the closing trading price of the common stock for any period of
60 consecutive trading days ending after March 19, 2006 exceeds $9.00 per share.
The preferred stockholders are entitled to vote on an as converted basis with
Hexcel's common stockholders. The series A preferred stock accrues dividends at
a rate of 6% per annum following the third anniversary of the issuance.
Dividends may be paid in cash or added to the accrued value of the preferred
stock, at Hexcel's option. The series B preferred stock does not accrue
dividends. After giving effect to the issuances, the Berkshire/Greenbriar
Investors own approximately 35.2% of Hexcel's outstanding voting securities.
Hexcel has separately issued 47,125 shares of series A convertible
preferred stock and 47,125 shares of series B convertible preferred stock to
investment funds controlled by affiliates of The Goldman Sachs Group, Inc. (the
"Goldman Sachs Investors"), who currently own approximately 37.8% of Hexcel's
outstanding common stock, for a cash payment of approximately $47.1 million.
This issuance of preferred stock enabled the Goldman Sachs Investors to maintain
their current percentage ownership interest in Hexcel's voting securities,
consistent with their rights under the governance agreement entered into with
Hexcel in 2000.
In conjunction with the aforementioned transactions, Hexcel and the
Berkshire/Greenbriar Investors entered into a stockholders agreement, which
gives the Berkshire/Greenbriar Investors the right to nominate up to two
directors (of a total of ten) to Hexcel's board of directors and certain other
rights. The Goldman Sachs Investors will continue to have the right to nominate
up to three directors under the governance agreement entered into at the time of
their investment in Hexcel in 2000. The stockholders agreement and the amended
Goldman Sachs Investors governance agreement require that the approval of at
least six directors, including at least two directors not nominated by the
Berkshire/Greenbriar Investors or the Goldman Sachs Investors, be obtained for
board actions generally. The stockholders agreement also prohibits the purchase
of voting securities in excess of 39.5% of Hexcel's outstanding voting
securities unless approved by Hexcel's board. The Berkshire/Greenbriar
Investors and the Goldman Sachs Investors have agreed to an 18-month lock up on
the securities being issued, except for certain registered offerings.
SENIOR SECURED NOTES, DUE 2008
The Company also issued, through a private placement under Rule 144A,
$125.0 million of 9 7/8% senior secured notes at a price of 98.95% of face
value. The senior secured notes, due October 1, 2008, are secured by a first
priority security interest in substantially all of Hexcel's and its domestic
subsidiaries' property, plant and equipment, intangibles, intercompany notes and
other obligations receivable, and 100% of the outstanding voting stock of
certain of Hexcel's domestic subsidiaries. In addition, the senior secured notes
are secured by a pledge of 65% of the stock of
47
Hexcel's French and UK first-tier holding companies. This pledge of foreign
stock is on an equal basis with a substantially identical pledge of such stock
given to secure the obligations under the Company's new senior secured credit
facility, described below. The senior secured notes are also guaranteed by
Hexcel's material domestic subsidiaries. Hexcel has the ability to incur
additional debt that would be secured on an equal basis by the collateral
securing the senior secured notes. The amount of additional secured debt that
may be incurred is currently limited to $10.0 million, but may increase over
time based on a formula relating to the total net book value of Hexcel's
domestic property, plant and equipment.
The Company will pay interest on the notes on April 1st and October 1st of
each year. The first payment will be made on October 1, 2003. The Company will
have the option to redeem all or a portion of the notes at any time during the
one-year period beginning April 1, 2006 at 104.938% of principal plus accrued
and unpaid interest. This percentage decreases to 102.469% for the one-year
period beginning April 1, 2007, and to 100.0% for the period beginning April 1,
2008. In addition, the Company may use the net proceeds from one or more equity
offerings at any time prior to April 1, 2006 to redeem up to 35% of the
aggregate principal amount of the notes at 109.875% of the principal amount,
plus accrued and unpaid interest.
The indenture governing the senior secured notes contains many other terms
and conditions, including limitations with respect to asset sales, incurrence of
debt, granting of liens, the making of restricted payments and entering into
transactions with affiliates.
Hexcel has agreed, under a registration rights agreement, to offer to all
noteholders the opportunity to exchange their notes for new notes that are
substantially identical to the existing notes except that the new notes will be
registered with the Securities and Exchange Commission ("SEC") and will not have
any restrictions on transfer. In the event that Hexcel cannot affect such an
exchange, Hexcel will be required to file a shelf registration statement with
the SEC to permit the noteholders to resell their notes generally without
restriction.
SENIOR SECURED CREDIT FACILITY
Also on March 19, 2003, Hexcel entered into a $115.0 million asset-backed
senior secured credit facility with a new syndicate of lenders led by Fleet
Capital Corporation as agent. The credit facility matures on March 31, 2008.
Borrowers under the credit facility include, in addition to Hexcel Corporation,
Hexcel's operating subsidiaries in the UK, Austria and Spain. The credit
facility provides for borrowings of U.S. dollars, Pound Sterling and Euro
currencies, including the issuance of letters of credit, with the amount
available to each borrower dependent on the borrowing base of that borrower. For
Hexcel Corporation and the UK borrower, the borrowing base is determined by an
agreed percentage of eligible accounts receivable and eligible inventory,
subject to certain reserves. The borrowing base of each of the Austrian and
German borrowers is based on an agreed percentage of eligible accounts
receivable, subject to certain reserves. In addition, the UK, Austrian and
German borrowers have facility sublimits of $12.5 million, $7.5 million and $5.0
million, respectively. 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 0.75% to 3.25% or LIBOR plus a margin that can vary from
2.25% to 3.25%. The margin in effect for a borrowing at any given time depends
on the Company's fixed charge ratio and the currency denomination of such
borrowing. The credit facility also provides for the payment of customary fees
and expenses.
All obligations under the credit facility are secured by a first priority
security interest in accounts receivable, inventory and cash and cash
equivalents of Hexcel Corporation and its material domestic subsidiaries. In
addition, all obligations under the credit facility are secured by a pledge of
65% of the stock of Hexcel's French and UK first-tier holding companies. This
pledge of foreign stock is on an equal basis with a substantially identical
pledge of such stock given to secure the obligations under the senior secured
notes. The obligations of the UK borrower are secured by the accounts
receivable, inventory, and cash and cash equivalents of the UK borrower. The
obligations of the Austrian and German borrowers are secured by the accounts
receivable of the Austrian and German borrowers, respectively.
48
Hexcel is required to maintain various financial ratios throughout the term
of the credit facility. These financial covenants set maximum values for the
Company's leverage (the ratios of total and senior debt to EBITDA), fixed charge
coverage (the ratio of EBITDA, less capital expenditures and cash taxes, plus
cash dividends, to the sum of cash interest and scheduled debt amortization),
and capital expenditures (not to exceed specified annual expenditures). The
credit facility also contains limitations on, among other things, incurring
debt, granting liens, making investments, making restricted payments, entering
into transactions with affiliates and prepaying subordinated debt. The credit
facility also contains other customary terms relating to, among other things,
representations and warranties, additional covenants and events of default.
On March 19, 2003, the Company borrowed $13.0 million and issued letters of
credit totaling approximately $25.8 million under the new senior secured credit
facility.
CLASSIFICATION OF DEBT AND CAPITAL LEASE OBLIGATIONS AS OF DECEMBER 31, 2002
As of December 31, 2002, the Company had a scheduled debt obligation due
August 1, 2003, which, if made, would cause the Company to violate one or more
financial covenants in the Company's existing debt agreements. The Company also
required an amendment of its existing senior credit facility before the end of
the first quarter of 2003 to maintain compliance with the financial covenants
under that facility. As the anticipated refinancing of the Company's capital
structure was not completed as of February 28, 2003 (the 2002 financial
statement issuance date) and the Company had not obtained an amendment of the
aforementioned financial covenants, all debt and capital lease obligations had
been classified as current at December 31, 2002.
As a result of the March 19, 2003 refinancing transactions, the
uncertainties surrounding the Company's ability to meet its scheduled 2003 debt
maturities and comply with its debt covenants have been mitigated. Management
believes the Company will comply with the new debt covenants and has adequate
liquidity available to finance operations beyond December 31, 2003. Also as a
result of the refinancing transactions, substantially all of the Company's debt
will be reclassified to long-term at March 31, 2003 reflecting the new
scheduled debt maturities. The next significant scheduled debt maturity will not
occur until 2008, with annual debt and capital lease maturities ranging between
$6.2 million and $12.5 million prior to 2008. Refer to Note 24, "Subsequent
Event - Pro Forma Consolidated Balance Sheet (Unaudited)."
PURCHASE OF APPROXIMATELY 14.5 MILLION SHARES OF HEXCEL COMMON STOCK BY AN
INVESTOR GROUP
On December 19, 2000, the Goldman Sachs Investors completed the purchase of
approximately 14.5 million of the approximately 18 million shares of Hexcel
common stock owned by subsidiaries of Ciba Specialty Chemicals Holding, Inc. The
shares acquired by the Goldman Sachs Investors represented approximately 39% of
the Company's outstanding common stock. In addition, the Company and the Goldman
Sachs Investors entered into a governance agreement that became effective on
December 19, 2000. Under this governance agreement, the Goldman Sachs Investors
have the right to, among other things, designate up to three directors to sit on
the Company's board of directors. Upon the closing of the new preferred stock
issuances, the Goldman Sachs Investors and the Company will amend the governance
agreement, which will continue to give the Goldman Sachs Investors the right to
designate up to three members to sit on the Company's board of directors.
In connection with this transaction, Hexcel incurred $2.2 million of costs,
all of which were included in "selling, general, and administrative expenses"
during the fourth quarter of 2000. These costs and expenses included legal,
consulting, and regulatory compliance expenses, as well as a non-cash charge
attributable to the accelerated vesting of certain stock-based compensation and
to certain amendments to an executive retirement plan.
SALE OF THE BELLINGHAM AIRCRAFT INTERIORS BUSINESS
On April 26, 2000, Hexcel sold its Bellingham aircraft interiors business
to Britax Cabin Interiors, Inc., a wholly owned subsidiary of Britax
International plc, for cash proceeds of $113.3 million. The sale resulted in a
pre-tax gain of $68.3 million and an after-tax gain of $44.3 million, or $0.97
per diluted share. Net proceeds from the sale were used to repay $111.6 million
of outstanding term debt under the Company's Senior Credit Facility.
49
The Bellingham business generated net sales of $18.9 million for the period
from January 1 through April 26, 2000, and contributed $0.6 million of operating
income in the corresponding periods. The Bellingham business was engaged in the
manufacture and sale of airline interior refurbishment products and its
operating results were reflected as a component of the Company's Structures
business segment up to the date of disposal.
FINANCIAL CONDITION
LIQUIDITY: As of December 31, 2002, the Company had cash and cash
equivalents of $8.2 million and available undrawn commitments under its existing
senior credit facility of $87.9 million. The Company's total debt, net of cash,
was $613.5 million, a decrease of $60.8 million from $674.3 million as of
December 31, 2001. The decrease in net debt reflected cash generated from (a)
reductions in capital expenditures compared to prior years; (b) significant
reductions in working capital, as accounts receivable and inventory balances
were managed lower to match sales and cost reduction programs; (c) collection of
a litigation settlement; and (d) the sale of an ownership interest of an
affiliated company. This reduction in net debt during 2002 was achieved despite
incurring business consolidation and restructuring cash payments of $24.3
million, cash interest payments of $59.3 million and cash taxes of $8.4 million.
CREDIT FACILITY: Hexcel had a global credit facility (the "Senior Credit
Facility") with a syndicate of banks to provide for ongoing working capital and
other financing requirements. The Senior Credit Facility, which consisted of
revolving credit, overdraft and term loan facilities, provided Hexcel with
committed lines of approximately $297.6 million as of December 31, 2002, subject
to certain limitations. These commitments consisted of funded term loans of
$106.8 million, revolving credit and overdraft facilities of $160.8 million, and
letter of credit facilities of $30.0 million. As of December 31, 2002, drawings
under the revolving credit facility were $72.9 million, leaving available,
undrawn commitments under the facilities of $87.9 million. As of December 31,
2002, letters of credit issued under the facility approximated $24.2 million, of
which $11.1 million supports a loan to the Company's BHA Aero joint venture. The
Company was subject to various financial covenants and restrictions under the
Senior Credit Facility, including limitations on incurring debt, granting liens,
selling assets, repaying subordinated indebtedness, redeeming capital stock and
paying dividends. The Senior Credit Facility was scheduled to expire in 2004,
except for approximately $55.8 million of term loans that are due for repayment
in 2005. The Senior Credit Facility was paid in full on March 19, 2003.
Effective January 25, 2002, Hexcel entered into an amendment of the Senior
Credit Facility. The amendment provided for revised financial covenants through
2002; a 100 basis point increase in the interest spread payable over LIBOR for
advances under the facility; and an immediate decrease in the commitment of
revolving credit and overdraft facilities from a cumulative amount of $205.0
million to $190.0 million, with a further reduction to $182.0 million on or
before September 30, 2002. The amendment also provided for a 25 basis point
increase on January 1, 2003 if the Company did not reduce the commitment by a
further $25.0 million, prior to that date. The 2002 revised, relaxed covenants
were derived from the Company's 2002 business plan projections plus a modest
cushion. The Senior Credit Facility financial covenants set certain maximum
values for the Company's leverage (the ratios of total and senior debt to an
adjusted EBITDA), and certain minimum values for its interest coverage (the
ratio of an adjusted EBITDA to cash interest expense) and fixed charge coverage
(the ratio of an adjusted EBITDA less capital expenditures to the sum of certain
fixed expenses). The Senior Credit Facility agreement defined adjusted EBITDA as
earnings before interest, taxes, depreciation, amortization, business
consolidation and restructuring expenses and certain other non-cash income and
expense. Adjusted EBITDA as defined by this agreement was $109.4 million in 2002
and $119.2 million in 2001. In addition, during the term of the amendment, all
net proceeds generated through asset sales, and most other liquidity events, in
each case to the extent in excess of $2.5 million, and 100% of all net proceeds
generated from litigation settlements and judgments, must be used to prepay
loans under the Senior Credit Facility. Hexcel agreed to limit capital
expenditures to $25.0 million during 2002, with a $10.0 million limit during any
quarter in 2002. At December 31, 2002, the Company was in compliance with the
covenants, as amended, under its Senior Credit Facility and has met all its
required commitment reductions.
50
In connection with the credit agreement amendment, Hexcel also granted
additional collateral. The Company had previously granted a security interest in
most of its U.S. accounts receivable, inventory, property, plant, equipment and
real estate. It had also pledged some or all of the shares of certain
subsidiaries. Under the terms of the amendment, Hexcel granted to the banks a
security interest in additional U.S. accounts receivable, inventory, property,
plant, equipment and real estate, as well as its intellectual property. In
addition, each of a group of Hexcel's European subsidiaries granted a security
interest in its accounts receivable that secures certain local borrowings
advanced to that subsidiary.
The Senior Credit Facility had been subject to several previous amendments
to accommodate, among other things, the planned sale of assets, the planned
investments in additional manufacturing capacity for selected products, the
impact of the decline of the Company's operating results on certain financial
covenants, the purchase by an investor group of approximately 14.5 million
shares of Hexcel common stock held by a significant shareholder of the Company,
a restructuring of the ownership of certain of the Company's European
subsidiaries, the issuance of additional senior subordinated debt and the early
redemption of certain term debt. In connection with the 2002 and previous
amendments, included in interest expense in 2002 and 2001 are fees and expenses
incurred of approximately $1.8 million and $1.0 million, respectively.
The January 25, 2002 amendment relaxed the 2002 quarterly financial
covenants to accommodate the impact of the downturn in the commercial aerospace
and electronics markets. Under the terms of the amendment, the financial
covenants effective beginning with the quarter ending March 31, 2003 are those
that applied before the amendment. As these market conditions experienced in
2002 are expected to continue during 2003, the Company needed to obtain a
further amendment of the facility before the end of the first quarter of 2003 to
accommodate its projected financial performance for that quarter and be in
compliance with the financial covenants as provided in the Senior Credit
Facility agreement, or refinance the facility. The Company executed a
refinancing of the facility on March 19, 2003.
OPERATING ACTIVITIES: Net cash provided by operating activities was $65.9
million in 2002, reflecting positive working capital management and a reduced
net loss, after excluding depreciation of $47.2 million and equity in losses and
write-downs of an investment in affiliated companies of $10.0 million.
Reductions in accounts receivable and inventory balances generated operating
cash flows of $35.6 million and $25.8 million, respectively. The Company was
able to generate substantial operating cash flows even after incurring
restructuring cash payments of $24.3 million and accounts payable and accrued
liabilities decreasing by $15.7 million during the year.
Net cash flows provided by operating activities were $35.0 million in 2001.
Although the Company's net loss for the year was $433.7 million, its operating
earnings generated $22.8 million of cash in 2001 after excluding non-cash equity
losses of $9.5 million, $309.1 million of non-cash impairment charges for
goodwill and other purchased intangibles, $63.2 million of non-cash depreciation
and amortization charges, $27.6 million of non-cash charges in deferred tax
assets, $0.7 million of non-cash extraordinary charges and $46.4 million of
non-cash and unpaid business consolidation and restructuring expenses. During
2001, working capital management resulted in reductions in accounts receivable
and inventory balances. These reductions along with reductions in other assets
were offset in part by increases in accounts payable and accrued expenses
resulting in an increase in cash of $12.2 million.
In 2000, net cash provided by operating activities was $33.0 million with
the major sources of cash provided by net income, excluding the after-tax gain
from the sale of the Bellingham aircraft interiors business, of $9.9 million and
non-cash depreciation and amortization of $58.7 million. However, these sources
of operating cash flow were offset by $5.5 million of non-cash income from
affiliated companies and $5.1 million of non-cash income from the curtailment of
a U.S. defined benefit retirement plan. In addition, increases in accounts
receivable and inventories used a total of $24.7 million of cash.
51
INVESTING ACTIVITIES: Net cash used for investing activities was $2.3
million in 2002. Cash used for capital expenditures of $14.9 million was offset,
in part, by the Company receiving $10.0 million from a partial sale of an
ownership interest in an affiliated company, $1.5 million from the sale of other
assets, and $1.1 million net from other investing activities.
Net cash used for investing activities was $38.3 million in 2001, primarily
reflecting capital expenditures of $38.8 million and the receipt of $0.8 million
dividend from an affiliated company.
Net cash provided by investing activities was $68.8 million in 2000,
reflecting net cash proceeds from the sale of the Bellingham aircraft interiors
business of $113.3 million and from the sale of other assets of $3.4 million,
partially offset by $39.6 million of capital expenditures and $8.3 million of
investments in joint venture affiliates in China and Malaysia.
FINANCING ACTIVITIES: Net cash used for financing activities was $67.3
million in 2002, as the Company used excess cash to repay a portion of its
Senior Credit Facility, and long-term debt and capital lease obligations.
Net cash provided by financing activities was $8.6 million in 2001, largely
due to net borrowings of $12.5 million. During 2001, the Company issued an
additional $100.0 million of 9.75% senior subordinated notes, due 2009, at a
price of 98.5% at face value. Net proceeds from the issuance were used to redeem
$67.5 million aggregate principal amount of the Company's outstanding
convertible subordinated notes, due 2003, and to pay the entire principal amount
of $25.0 million of the increasing rate senior subordinated note, due 2003. In
addition, the Company paid $3.5 million of debt issuance costs.
Net cash used for financing activities was $95.0 million in 2000, as net
cash proceeds from the sale of the Bellingham aircraft interiors business were
used to reduce outstanding indebtedness under the Company's Senior Credit
Facility.
FINANCIAL OBLIGATIONS AND COMMITMENTS: As of December 31, 2002, scheduled
current maturities of notes payable and capital lease obligations were $61.9
million with a substantial debt repayment of $46.9 million due on August 1, 2003
upon the maturity of the Company's 7% convertible subordinated notes. Scheduled
amortization under the Company's existing Senior Credit Facility was
approximately $8.6 million in 2003. Capital lease amortization and operating
lease rental payments in 2003 will approximate $6.2 million and $2.9 million,
respectively. Limited credit and overdraft facilities of $0.2 million provided
to certain of the Company's European subsidiaries by lenders outside of the
Senior Credit Facility are primarily uncommitted facilities that are terminable
at the discretion of the lenders.
Prior to the refinancing transactions completed on March 19, 2003, the
Company had a scheduled debt obligation due August 1, 2003, which, if made,
would have caused the Company to violate one or more financial covenants defined
in the Company's then existing debt agreements. The Company also required an
amendment of its existing Senior Credit Facility before the end of the first
quarter of 2003 to maintain compliance with its financial covenants. As the
anticipated refinancing of the Company's capital structure was not completed as
of February 28, 2003 (the 2002 financial statement issuance date) and the
Company had not obtained an amendment of the aforementioned financial
covenants, all notes payable and capital lease obligations have been classified
as current at December 31, 2002. Refer to Notes 2, 8 and 9 to the accompanying
consolidated financial statements of this Annual Report on Form 10-K/A for
further information regarding the classification of notes payable and
capital lease obligations.
The Senior Credit Facility consisted of revolving credit and overdraft
facilities and term loan borrowings. Revolving credit borrowings under the
facility of $72.9 million are repayable in 2004. Term loan borrowings totaling
$106.8 million at December 31, 2002 are repayable in installments of $8.6
million in 2003, $42.4 million in 2004 and $55.8 million in 2005.
52
The 7% convertible subordinated debentures, due 2011, are repayable under
mandatory redemptions of $1.8 million per annum through 2011, with the principal
balance due at maturity. The Company satisfied the 2003 annual sinking fund
requirement in the fourth quarter of 2002. The debt was repurchased at market
prices, which resulted in a $0.5 million gain on the early retirement of debt.
In accordance with the requirements of FAS 145, the gain has been reported as a
separate line item below operating income in the consolidated statements of
operations. The $340.0 million principal amount of the 9.75% senior subordinated
notes is repayable in full in 2009.
The Company entered into a $50.0 million capital lease in 1998 for
property, plant and equipment used in the acquired Clark-Schwebel business. The
lease expires in September 2006 and includes various purchase options. The last
fixed price purchase option is on September 30, 2003 for an amount of $24.9
million. If the Company does not exercise its purchase option, on the lease
expiration date, the Company will have the option to purchase the leased assets
at the greater of $5.0 million or the fair value of the assets as of that date.
The Company has also entered into several capital leases for buildings and
warehouses with expirations through 2009. In addition, certain sales and
administrative offices, data processing equipment and manufacturing facilities
are leased under operating leases.
On June 29, 2001, the Company issued $100.0 million of senior subordinated
notes, due 2009, at a price of 98.5% of face value. Net proceeds from the
issuance were used to redeem $67.5 million aggregate principal amount of the
Company's outstanding convertible subordinated notes, due 2003, and to pay the
entire principal amount of $25.0 million of the Company's increasing rate senior
subordinated note, due 2003. The refinancing reduced the Company's 2003 debt
maturities from $149.5 million to $57.6 million. The net impact of the
refinancing is estimated to increase annual interest expense by approximately
$2.4 million before tax. The cash costs associated with the issuance and early
retirements amounted to approximately $6.5 million.
In 1999, the Company, Boeing and Aviation Industries of China (now known as
China Aviation Industry Corporation I) 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
has a 33.3% equity interest in this joint venture, which is located in Tianjin,
China. In addition, in 1999, the Company formed another joint venture, Asian
Composites Manufacturing Sdn. Bhd. ("Asian Composites"), with Boeing, Sime Link
Sdn. Bhd., and Malaysia Helicopter Services Bhd. (now known as Naluri Berhadto),
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. Asian Composites began shipping engineered
products to customers during the second half of 2001, while BHA Aero began
deliveries in early 2002. During 2000, Hexcel made cash equity investments
totaling $8.3 million in these joint ventures. No additional cash equity
investments were made during 2002 and 2001. As of December 31, 2002 and 2001,
the Company had an outstanding letter of credit of $11.1 million in support of a
loan to BHA Aero.
53
The following table summarizes the scheduled maturities of financial
obligations and expiration dates of commitments for the years ended 2003 through
2007 and thereafter (see Notes 2 and 8 to the accompanying consolidated
financial statements of this Annual Report on Form 10-K/A for discussion on the
December 31, 2002 debt classification):
(IN MILLIONS) 2003 2004 2005 2006 2007 Thereafter TOTAL
----------------------------------------------------------------------------------------------------------------------------
Senior Credit Facility $ 8.6 $ 115.3 $ 55.8 $ - $ - $ - $ 179.7
European credit and overdraft
facilities 0.2 - - - - - 0.2
9.75% senior subordinated notes(a) - - - - - 340.0 340.0
7.0% convertible subordinated notes 46.9 - - - - - 46.9
7.0% convertible subordinated
debentures - 1.8 1.8 1.8 1.8 15.5 22.7
Capital leases 6.2 6.6 7.0 10.7 0.3 2.6 33.4
----------------------------------------------------------------------------------------------------------------------------
SUBTOTAL 61.9 123.7 64.6 12.5 2.1 358.1 622.9
Operating leases 2.9 2.5 2.6 1.7 0.7 2.0 12.4
----------------------------------------------------------------------------------------------------------------------------
TOTAL FINANCIAL OBLIGATIONS(b) $ 64.8 $ 126.2 $ 67.2 $ 14.2 $ 2.8 $ 360.1 $ 635.3
============================================================================================================================
Letters of credit $ 25.9 $ - $ - $ - $ - $ - $ 25.9
Other commitments 1.5 - - - - - 1.5
----------------------------------------------------------------------------------------------------------------------------
TOTAL COMMITMENTS $ 27.4 $ - $ - $ - $ - $ - $ 27.4
============================================================================================================================
(a) At December 31, 2002, the unamortized discount on the additional $100.0
million of 9.75% senior subordinated notes, issued June 29, 2002, was
approximately $1.2 million.
(b) Due to the subsequent closure of certain financing transactions, scheduled
maturities have significantly changed. See Notes 2 and 24 to the
accompanying consolidated financial statements of this Annual Report on
Form 10-K/A for further discussion on such financing transactions and their
impact on scheduled maturities.
Total letters of credit issued and outstanding were $25.9 million as of
December 31, 2002, of which $11.1 million was issued in support of a loan to BHA
Aero. While the letters of credit issued on behalf of the Company will expire
under their terms in 2003, most, if not all, will be re-issued.
The Company's ability to make scheduled payments of principal, or to pay
interest on, or to refinance its indebtedness, including its public notes, or to
fund planned capital expenditures, will depend on its future performance and
conditions in the financial markets. The Company's future performance is subject
to economic, financial, competitive, legislative, regulatory and other factors
that are beyond its control. The Company has significant leverage and there can
be no assurance that the Company will generate sufficient cash flow from its
operations, or that it can incur sufficient future borrowings, to enable the
Company to service its indebtedness, including its public notes, or to fund its
other liquidity needs.
For further information regarding the Company's financial obligations and
commitments, see Notes 2, 8, 9 and 16 to the accompanying consolidated
financial statements of this Annual Report on Form 10-K/A.
CRITICAL ACCOUNTING POLICIES
Hexcel's discussion and analysis of its financial condition and results of
operations are based upon Hexcel's consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of the consolidated financial
statements requires Hexcel to make estimates and assumptions that affect the
reported amounts of assets and liabilities, disclosure of contingent assets and
liabilities, and the reported amounts of revenue and expenses. Although Hexcel
evaluates its estimates, which are based on historical experience and on various
other assumptions that are believed to be reasonable under the circumstances, on
an on-going basis, actual results may differ from these estimates under
different assumptions or conditions. Hexcel believes the following items are the
Company's critical accounting policies and more significant estimates and
assumptions used in the preparation of its consolidated financial statements.
54
Hexcel estimates the collectibility of its accounts receivable from
customers by establishing allowances for doubtful accounts. A considerable
amount of judgment is necessary to assess the realizability of these receivables
and the credit-worthiness of each customer. If the financial condition of
Hexcel's customers were to deteriorate, resulting in an impairment of their
ability to make payments, additional allowances may be required.
Hexcel states inventories at the lower of cost or market. This requires
Hexcel to write-down its inventory for estimated obsolescence or unmarketable
inventory equal to the difference between the cost of inventory and the
estimated market value to reflect assumptions about future demand and market
conditions. If actual future demand and market conditions are less favorable
than anticipated, additional inventory write-downs may be required.
Hexcel provides for an estimated amount of product warranty at the time
revenue is recognized. This estimated amount is provided by product and based on
actual warranty experience. While Hexcel engages in extensive product quality
programs and processes, including actively monitoring and evaluating the quality
of its component and material suppliers, Hexcel's product warranty obligations
are affected by product failure rates and material usage. Should actual product
failure rates and material usage differ from the Company's estimates, revisions
to the estimated product warranty costs would be required.
Hexcel records significant reserves in connection with its business
consolidation and restructuring programs. These reserves include estimates for
employee severance costs, the settlement of contractual obligations, the fair
value of certain assets held for sale and the timing of facility closures.
Management closely monitors these actions and the related costs, and believes
such estimates to be reasonable. However, if actual results differ from these
estimates, it would have an impact on Hexcel's financial performance in the
period such revision was made. In addition, certain of the expenses associated
with the Company's business consolidation programs, including equipment moving
and relocation costs, can not be accrued under accounting principles generally
accepted in the United States of America and are expensed as incurred.
Hexcel has recorded goodwill as a result of prior business acquisitions.
Goodwill recorded represents the excess of purchase price over the fair value of
the identifiable net assets of an acquired business. Effective January 1, 2002,
Hexcel adopted Statement of Financial Accounting Standards No.142, "Goodwill and
Other Intangible Assets," ("FAS 142"). Prior to adopting FAS 142, goodwill was
amortized on a straight-line basis over estimated economic lives, ranging from
15 years to 40 years. As a result of adopting FAS 142, goodwill is no longer
amortized but instead is tested for impairment at the reporting unit level at
least annually and whenever events or changes in circumstances indicate that
goodwill might be impaired. A reporting unit is the lowest level of an entity
that is a business and can be distinguished from other activities, operations,
and assets of the entity. If, during the annual impairment review, the book
value of the reporting unit exceeds the fair value, the implied fair value of
the reporting unit's goodwill is compared with the carrying amount of the unit's
goodwill. If the carrying amount exceeds the implied fair value, goodwill is
written down to its implied value. FAS 142 requires management to estimate the
fair value of each reporting unit, as well as the fair value of the assets and
liabilities of each reporting unit, other than goodwill. The implied fair value
of goodwill is determined as the difference between the fair value of a
reporting unit, taken as a whole, and the fair value of the assets and
liabilities of such reporting unit. No impact to the Company's consolidated
financial statements was identified upon completion of the transitional
impairment test required by FAS 142. The Company's annual impairment testing
date will be during the fourth quarter of each year. In 2001, the Company
recognized an impairment charge of $309.1 on goodwill and other purchased
intangibles acquired through previous acquisitions (see Note 3 to the
accompanying consolidated financial statements of this Annual Report on Form
10-K).
Hexcel has significant other long lived assets. Hexcel reviews these
assets for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. The assessment of
possible impairment is based on the Company's ability to recover the carrying
value of the assets from the estimated undiscounted future net cash flows,
before interest and taxes, of the related operations. If these cash flows are
less than the carrying value of such assets, an impairment loss is recognized
for the difference between estimated fair value and carrying value. The
55
measurement of impairment requires estimates of these cash flows and fair value.
The calculation of fair value may be determined based either on discounted cash
flows or third party appraised values depending on the nature of the asset.
Hexcel records a valuation allowance to reduce its deferred tax assets to
the amount that is more likely than not to be realized. While Hexcel has
considered future taxable income and ongoing prudent and feasible tax planning
strategies in assessing the need for the valuation allowance, these factors are
highly subjective and are subject to change based upon market conditions, the
Company's ability to execute its restructuring programs and other factors. In
2001, Hexcel recorded a valuation allowance against nearly all of its deferred
tax assets. In the event Hexcel were to determine that it would be able to
realize its deferred tax assets in the future, an adjustment to the valuation
allowance on deferred tax assets would increase income in the period such
determination was made. Likewise, should Hexcel determine that it would not be
able to realize all or part of its remaining net deferred tax asset in the
future, an adjustment to the deferred tax asset would be charged to income in
the period such determination was made.
Hexcel holds equity interests in affiliated companies having operations or
technology in areas within its strategic focus, one of which is publicly traded.
Hexcel records an investment impairment charge when it believes an investment
has experienced a decline in value that is other than temporary. This judgmental
decision reflects many factors. Future adverse changes in market conditions or
poor operating results of underlying investments could result in further losses
or an inability to recover the carrying value of the investments, thereby
possibly requiring an impairment charge in the future. The Company recorded
investment impairment charges of $4.0 million in 2002 and $7.8 million in 2001,
relating to its investments in Asahi-Schwebel Co. Ltd. and Interglas
Technologies AG, respectively.
Hexcel has designated certain derivative financial instruments as foreign
exchange hedges of future sales transactions at certain foreign subsidiaries.
Unrealized losses on these foreign exchange contracts have not been recognized
in the Company's consolidated statement of operations based on management's
determination that the forecasted sales are probable of occurring and that the
hedges have been effective in mitigating the foreign exchange risks associated
with these future sales. The hedging contracts cover only a portion of the
forecasted sales, and therefore, management considers the likelihood of not
reaching the designated level of forecasted sales to be low. However, if the
designated levels of forecasted sales are not achieved in the timeframe that
management anticipates, Hexcel would need to report the unrealized losses on
these derivative instruments in income.
Hexcel is involved in litigation, investigations and claims arising out of
the normal conduct of its business, including those relating to commercial
transactions, as well as to environmental, health and safety matters. The
Company estimates and accrues its liabilities resulting from such matters based
on a variety of factors, including outstanding legal claims and proposed
settlements; assessments by internal and external counsel of pending or
threatened litigation; and assessments by environmental engineers and
consultants of potential environmental liabilities and remediation costs. The
Company believes it has adequately accrued for these potential liabilities;
however, facts and circumstances may change that could cause the actual
liability to exceed the estimates, or that may require adjustments to the
recorded liability balances in the future.
MARKET RISKS
As a result of its global operating and financing activities, Hexcel is
exposed to various market risks that may affect its consolidated results of
operations and financial position. These market risks include fluctuations in
interest rates, which impact the amount of interest the Company must pay on
certain variable-rate debt, and fluctuations in currency exchange rates, which
impact the U.S. dollar value of transactions, assets and liabilities denominated
in foreign currencies. The Company's primary currency exposures are in Europe,
where the Company has significant business activities. To a lesser extent, the
Company is also exposed to fluctuations in the prices of certain commodities,
such as electricity, natural gas, aluminum and certain chemicals.
Hexcel attempts to net individual exposures on a consolidated basis, when
feasible, to take advantage of natural offsets. In addition, the Company employs
and foreign currency forward
56
exchange contracts for the purpose of hedging certain specifically identified
net currency exposures. The use of these financial instruments is intended to
mitigate some of the risks associated with fluctuations in currency exchange
rates, but does not eliminate such risks. The Company does not use financial
instruments for trading or speculative purposes.
INTEREST RATE RISKS
Hexcel's long-term debt bears interest at both fixed and variable rates. As
a result, the Company's consolidated results of operations are affected by
interest rate changes on its variable rate debt. Assuming a 10% favorable and a
10% unfavorable change in the underlying weighted average interest rates of the
Company's variable rate debt, interest expense for 2002 of $62.8 million would
have been $61.5 million and $64.1 million, respectively.
Hexcel's financial results are affected by interest rate changes on its
variable rate debt. In order to partially mitigate this interest rate risk, the
Company entered into a five-year interest rate cap agreement in 1998. The
agreement provided for a maximum fixed rate of 5.5% on the applicable London
interbank rate used to determine the interest on a notional amount of $50.0
million of variable rate debt under the Senior Credit Facility. The fair value
and carrying amount of this contract at December 31, 2001, along with hedge
ineffectiveness for the period ended October 29, 2002 and the year ended
December 31, 2001, were not material. The interest rate cap agreement expired on
October 29, 2002.
CURRENCY EXCHANGE RISKS
Hexcel has significant business activities in Europe. The Company operates
seven manufacturing facilities in Europe, which generated approximately 44% of
2002 consolidated net sales. The Company's European business activities
primarily involve three major currencies - the U.S. dollar, the British pound,
and the Euro. The Company also conducts business or has joint venture
investments in Japan, China, Malaysia, Australia and Brazil, and sells products
to customers throughout the world. The majority of the Company's transactions
with customers and joint venture affiliates outside of Europe are denominated in
U.S. dollars, thereby limiting the Company's exposure to short-term currency
fluctuations involving these countries. However, the value of the Company's
investments in these countries could be impacted by changes in currency exchange
rates over time, as could the Company's ability to profitably compete in
international markets.
Hexcel attempts to net individual currency positions at its various
European operations, to take advantage of natural offsets and reduce the need to
employ foreign currency forward exchange contracts. The Company also enters into
short-term foreign currency forward exchange contracts, usually with a term of
ninety days or less, to hedge net currency exposures resulting from specifically
identified transactions. Consistent with the nature of the economic hedge
provided by such contracts, any unrealized gain or loss would be offset by
corresponding decreases or increases, respectively, of the underlying
transaction being hedged.
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.
During 2001, Hexcel entered into a number of foreign currency forward exchange
contracts to exchange U.S. dollars for Euros at fixed rates on specified dates
through March 2005. The aggregate notional amount of these contracts was $58.0
million and $83.9 million at December 31, 2002 and 2001, respectively. The
purpose of these contracts is to hedge a portion of the forecasted transactions
of European subsidiaries under long-term sales contracts with certain customers.
These contracts are expected to provide the Company with a more balanced
matching of future cash receipts and expenditures by currency, thereby reducing
the Company's exposure to fluctuations in currency exchange rates. For the years
ended December 31, 2002 and 2001, hedge ineffectiveness was immaterial and the
fair value of the foreign currency cash flow hedges recognized in "comprehensive
income (loss)" was a net gain of $9.3 million and a net loss of $5.9 million,
respectively. Approximately $2.0 million of the amounts recorded in other
comprehensive income are expected to be reclassified into earnings in fiscal
2003 as the hedged sales are recorded.
57
Assuming a 10% increase in the value of the Euro relative to the U.S.
dollar, the aggregate fair value of these contracts would constitute a $9.2
million asset of the Company. Alternatively, assuming a 10% decrease in the
value of the Euro relative to the U.S. dollar, the aggregate fair value of these
contracts would represent a $2.4 million liability of the Company.
UTILITY PRICE RISKS
The Company has exposure to utility price risks as a result of volatility
in the cost and supply of energy and in natural gas prices. To minimize this
risk, the Company enters into fixed price contracts at certain of the
manufacturing locations for a portion of its energy usage for periods of up to
three years. Although these contracts would reduce the risk to the Company
during the contract period, future volatility in the supply and pricing of
energy and natural gas could have an impact on the consolidated results of
operations of the Company.
OTHER RISKS
As of December 31, 2002, the aggregate fair values of the Company's senior
subordinated notes, due 2009, convertible subordinated notes, due 2003, and the
convertible subordinated debentures, due 2011, were approximately $295.8
million, $46.2 million and $13.6 million, respectively. The convertible debt
securities are convertible into Hexcel common stock at a price of $15.81 and
$30.72 per share, respectively. Fair values were estimated on the basis of
quoted market prices, although trading in these debt securities is limited and
may not reflect fair value. The fair values are subject to fluctuations based on
the Company's performance, its credit rating, and changes in interest rates for
debt securities with similar terms. Due to the conversion feature in the
convertible securities, changes in the value of the Company's stock may affect
the fair value of these convertible securities.
Assuming that all other factors remain constant, the fair values of
Hexcel's convertible subordinated notes, due 2003, and the convertible
subordinated debentures, due 2011, would not be significantly impacted by a 10%
change, either favorable or unfavorable, in the market price of the Company's
common stock.
Although fair value may be a proxy for the cost to repay the Company's
indebtedness, the trust indentures for the Company's senior subordinated notes,
due 2009; convertible subordinated notes, due 2003; and convertible subordinated
debentures, due 2011 require that the Company repay the principal value of the
indebtedness at maturity.
RECENTLY ISSUED ACCOUNTING STANDARDS
In April 2002, the FASB issued Statement of Financial Accounting Standards
No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections" ("FAS 145"). Among other matters,
FAS 145 rescinds FASB Statement No. 4, "Reporting Gains and Losses from
Extinguishment of Debt," which required all gains and losses from extinguishment
of debt be aggregated and, if material, classified as an extraordinary item, net
of the related income tax effect. As a result, the criteria in Accounting
Principles Board Opinion 30 will now be used to classify those gains and losses.
The Company adopted FAS 145 as of January 1, 2002. As a result, a $2.7
extraordinary loss on early retirement of debt recorded in 2001 was reclassified
as a separate line item below operating income in its consolidated statements of
operations.
In June 2002, the FASB issued Statement of Financial Accounting Standards
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities"
("FAS 146"). FAS 146 requires that a liability for a cost associated with an
exit or disposal activity be recognized and measured, initially at fair value,
only when the liability is incurred; therefore, nullifying Emerging Issues Task
Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring)" ("EITF 94-3") that required a liability for an exit cost to
be recognized at the date of an entity's commitment to an exit plan. This change
in accounting would be expected to result in a delayed recognition of certain
types of costs, especially facility closure costs. The provisions of FAS 146 are
effective for exit or disposal activities that are initiated after December 31,
2002. Since FAS 146 is effective only for new exit or
58
disposal activities, adoption of this standard will not affect amounts currently
reported in the Company's consolidated financial statements. However, the
adoption of FAS 146 could affect the types and timing of costs included in any
future business consolidation and restructuring programs, if implemented. The
Company adopted FAS 146 as of January 1, 2003.
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure." FAS 148 amends FAS 123 and APB Opinion No. 28, "Interim Financial
Reporting" to present alternative methods of transition for an entity that
voluntarily adopts the fair value based method of accounting for stock-based
employee compensation, and provides modifications to the disclosure provisions
to require prominent disclosure about the effects on reported net income of an
entity's accounting policy decisions with respect to stock-based employee
compensation in quarterly and annual financial statements. At this time, the
Company has not voluntarily adopted the fair value method of FAS 123. However,
appropriate disclosures about the effects on reported net income of the
Company's accounting policy with respect to stock-based employee compensation
are provided.
In November 2002, the FASB issued Financial Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others," ("FIN 45"). FIN 45 requires a
guarantor to disclose (a) the nature of the guarantee, including the approximate
term of the guarantee, how the guarantee arose, and the events or circumstances
that would require the guarantor to perform under the guarantee; (b) the maximum
potential amount of future payments under the guarantee; (c) the carrying amount
of the liability, if any, for the guarantor's obligations under the guarantee;
and (d) the nature and extent of any recourse provisions or available collateral
that would enable the guarantor to recover the amounts paid under the guarantee.
FIN 45 also clarifies that a guarantor is required to recognize, at the
inception of a guarantee, a liability at fair value for the obligations it has
undertaken in issuing the guarantee, including its ongoing obligation to stand
ready to perform over the term of the guarantee in the event that the specified
triggering events or conditions occur. The initial recognition and initial
measurement provisions of FIN 45 are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002. As the disclosure
requirements in FIN 45 are effective for financial statements ending after
December 15, 2002, the Company included the new disclosure herein.
FIN 45 also addresses the disclosure requirements regarding product
warranties. Instead of disclosing the maximum potential amount of future
payments under the product warranty guarantee, a guarantor is required to
disclose its accounting policy and methodology used in determining its liability
for product warranties, as well as, a tabular reconciliation of the changes in
the guarantor's product warranty liability for the reporting period.
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
This annual report includes forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995. These statements relate
to analyses and other information that are based on forecasts of future results
and estimates of amounts not yet determinable. These statements also relate to
future prospects, developments and business strategies. These forward-looking
statements are identified by their use of terms and phrases such as
"anticipate," "believe," "could," "estimate," "expect," "intend," "may," "plan,"
"predict," "project," "should," "will," and similar terms and phrases, including
references to assumptions. Such statements are based on current expectations,
are inherently uncertain, and are subject to changing assumptions.
Such forward-looking statements include, but are not limited to: (a)
estimates of commercial aerospace production and delivery rates, including those
of Airbus and Boeing; (b) expectations regarding growth in sales to regional and
business aircraft manufacturers, and to the aircraft aftermarket; (c)
expectations regarding the growth in the production of military aircraft,
helicopters and launch vehicle programs in 2003 and beyond; (d) expectations
regarding the recovery of demand for electronics fabrics used in printed wiring
boards, as well as future business trends in the electronics fabrics industry;
(e) expectations regarding the demand for soft body armor made of aramid and
specialty fabrics; (f) expectations regarding growth in sales of composite
materials for
59
wind energy, automotive and other industrial applications; (g) estimates of
changes in net sales by market compared to 2002; (h) expectations regarding the
Company's equity in the earnings (losses) of joint ventures, as well as joint
venture investments and loan guarantees; (i) expectations regarding working
capital trends and capital expenditures; (j) the availability and sufficiency of
the Senior Secured Credit Facility and other financial resources to fund the
Company's worldwide operations in 2003 and beyond and (k) the impact of various
market risks, including fluctuations in the interest rates underlying the
Company's variable-rate debt, fluctuations in currency exchange rates,
fluctuations in commodity prices, and fluctuations in the market price of the
Company's common stock.
Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause actual results to be materially
different. Such factors include, but are not limited to, the following: changes
in general economic and business conditions; changes in current pricing and cost
levels; changes in political, social and economic conditions and local
regulations, particularly in Asia and Europe; foreign currency fluctuations;
changes in aerospace delivery rates; reductions in sales to any significant
customers, particularly Airbus or Boeing; changes in sales mix; changes in
government defense procurement budgets; changes in military aerospace programs
technology; industry capacity; competition; disruptions of established supply
channels; manufacturing capacity constraints; and the availability, terms and
deployment of capital.
If one or more of these risks or uncertainties materialize, or if
underlying assumptions prove incorrect, actual results may vary materially from
those expected, estimated or projected. In addition to other factors that affect
Hexcel's operating results and financial position, neither past financial
performance nor the Company's expectations should be considered reliable
indicators of future performance. Investors should not use historical trends to
anticipate results or trends in future periods. Further, the Company's stock
price is subject to volatility. Any of the factors discussed above could have an
adverse impact on the Company's stock price. In addition, failure of sales or
income in any quarter to meet the investment community's expectations, as well
as broader market trends, can have an adverse impact on the Company's stock
price. The Company does not undertake an obligation to update its
forward-looking statements or risk factors to reflect future events or
circumstances.
60
CONSOLIDATED FINANCIAL STATEMENTS
Description Page
---------------------------------------------------------------------------------------------------------------------
Management Responsibility for Consolidated Financial Statements 62
Report of Independent Accountants 63
Consolidated Financial Statements Hexcel Corporation and Subsidiaries:
Consolidated Balance Sheets as of December 31, 2002 and 2001 64
Consolidated Statements of Operations for each of the three years ended December 31, 2002 65
Consolidated Statements of Stockholders' Equity (Deficit) and Comprehensive Income (Loss)
for each of the three years ended December 31, 2002 66
Consolidated Statements of Cash Flows for each of the three years ended December 31, 2002 67
Notes to the Consolidated Financial Statements 68-103
Independent Auditors' Report 104
Financial Statements BHA Aero Composite Parts Co. Ltd.:
Balance Sheets as of December 31, 2002 and 2001 105
Statements of Operations for each of the three years ended December 31, 2002 106
Statements of Owners' Equity for each of the three years ended December 31, 2002 107
Statements of Cash Flows for each of the three years ended December 31, 2002 108
Notes to the Financial Statements 109-118
Report of Independent Accountants on Financial Statement Schedule 119
Schedule of Valuation and Qualifying Accounts 120
61
MANAGEMENT RESPONSIBILITY FOR CONSOLIDATED FINANCIAL STATEMENTS
Hexcel management has prepared and is responsible for the consolidated
financial statements and the related financial data contained in this report.
These financial statements, which include estimates, were prepared in accordance
with accounting principles generally accepted in the United States of America.
Management uses its best judgment to ensure that such statements reflect fairly
the consolidated financial position, results of operations and cash flows of the
Company.
Hexcel maintains accounting and other control systems which management
believes provide reasonable assurance that financial records are reliable for
purposes of preparing financial statements, and that assets are safeguarded and
accounted for properly. Underlying this concept of reasonable assurance is the
premise that the cost of control should not exceed benefits derived from
control.
The Audit Committee of the Board of Directors reviews and monitors the
financial reports and accounting practices of Hexcel. These reports and
practices are reviewed regularly by management and by the Company's independent
accountants, PricewaterhouseCoopers LLP, in connection with the audit of the
Company's consolidated financial statements. The Audit Committee, composed
solely of outside directors, meets periodically, separately and jointly, with
management and the independent accountants.
/s/ DAVID E. BERGES
----------------------------------
David E. Berges
CHIEF EXECUTIVE OFFICER
/s/ STEPHEN C. FORSYTH
----------------------------------
Stephen C. Forsyth
CHIEF FINANCIAL OFFICER
/s/ WILLIAM J. FAZIO
----------------------------------
William J. Fazio
CHIEF ACCOUNTING OFFICER
62
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Hexcel Corporation:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of stockholders' equity (deficit)
and comprehensive income (loss) and of cash flows present fairly, in all
material respects, the financial position of Hexcel Corporation and its
subsidiaries at December 31, 2002 and 2001, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2002 in conformity with accounting principles generally accepted in the
United States of America. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As discussed in Notes 1 and 3 to the consolidated financial statements, the
Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets" effective January 1, 2002.
/s/ PRICEWATERHOUSECOOPERS LLP
------------------------------
PricewaterhouseCoopers LLP
Stamford, Connecticut
February 28, 2003, except for Notes 2 and 8 which are as of March 19, 2003
63
HEXCEL CORPORATION AND SUBSIDIARIES Unaudited
CONSOLIDATED BALANCE SHEETs Pro Forma
AS OF DECEMBER 31, (see Note 24)
-----------------------------------------------------------------------------------------------------------------
(IN MILLIONS, EXCEPT PER SHARE DATA) 2002 2002 2001
-----------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 12.6 $ 8.2 $ 11.6
Accounts receivable, net 117.3 117.3 140.5
Inventories, net 113.6 113.6 131.7
Prepaid expenses and other assets 9.2 9.2 4.4
-----------------------------------------------------------------------------------------------------------------
Total current assets 252.7 248.3 288.2
Net property, plant and equipment 309.4 309.4 329.2
Goodwill, net 74.4 74.4 72.4
Investments in affiliated companies 34.0 34.0 56.9
Other assets 46.9 42.0 42.7
-----------------------------------------------------------------------------------------------------------------
Total assets $ 717.4 $ 708.1 $ 789.4
=================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable and current maturities of capital lease
obligations $ 6.2 $ 621.7 $ 17.4
Accounts payable 54.9 54.9 58.6
Accrued compensation and benefits 37.6 37.6 42.6
Accrued interest 15.9 19.1 18.8
Business consolidation and restructuring liabilities 10.5 10.5 33.4
Other accrued liabilities 35.3 35.3 33.7
-----------------------------------------------------------------------------------------------------------------
Total current liabilities 160.4 779.1 204.5
Long-term notes payable and capital lease obligations 512.4 - 668.5
Long-term retirement obligations 48.1 48.1 31.3
Other non-current liabilities 8.3 8.3 17.7
-----------------------------------------------------------------------------------------------------------------
Total liabilities 729.2 835.5 922.0
-----------------------------------------------------------------------------------------------------------------
Commitments and contingencies (see Note 16)
Mandatorily redeemable convertible preferred stock,
125,000 series A shares and 125,000 series B shares
authorized, issued and outstanding 96.4 - -
Stockholders' equity (deficit):
Preferred stock, no par value, 20.0 shares of stock
authorized, no shares issued or outstanding - - -
Common stock, $0.01 par value, 100.0 shares of stock
authorized, shares issued of 39.8 at December 31, 2002
and 39.4 at December 31, 2001 0.4 0.4 0.4
Additional paid-in capital 311.6 288.2 287.7
Accumulated deficit (385.7) (381.5) (367.9)
Accumulated other comprehensive loss (21.2) (21.2) (39.7)
-----------------------------------------------------------------------------------------------------------------
(94.9) (114.1) (119.5)
Less- Treasury stock, at cost, 1.3 shares at December 31, 2002
and 1.2 shares at December 31, 2001 (13.3) (13.3) (13.1)
-----------------------------------------------------------------------------------------------------------------
Total stockholders' equity (deficit) (108.2) (127.4) (132.6)
-----------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity (deficit) $ 717.4 $ 708.1 $ 789.4
=================================================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
64
HEXCEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS, EXCEPT PER SHARE DATA) 2002 2001 2000
---------------------------------------------------------------------------------------------------------------
Net sales $ 850.8 $ 1,009.4 $ 1,055.7
Cost of sales 689.5 818.6 824.3
---------------------------------------------------------------------------------------------------------------
Gross margin 161.3 190.8 231.4
Selling, general and administrative expenses 85.9 120.9 123.9
Research and technology expenses 14.7 18.6 21.2
Business consolidation and restructuring expenses 0.5 58.4 10.9
Impairment of goodwill and other purchased intangibles - 309.1 -
---------------------------------------------------------------------------------------------------------------
Operating income (loss) 60.2 (316.2) 75.4
Litigation gain 9.8 - -
Interest expense (62.8) (64.8) (68.7)
Gain (loss) on early retirement of debt 0.5 (2.7) -
Gain on sale of Bellingham aircraft interiors business - - 68.3
---------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 7.7 (383.7) 75.0
Provision for income taxes 11.3 40.5 26.3
---------------------------------------------------------------------------------------------------------------
Income (loss) before equity in earnings (losses) (3.6) (424.2) 48.7
Equity in earnings (losses) of and write-downs of
an investment in affiliated companies (10.0) (9.5) 5.5
---------------------------------------------------------------------------------------------------------------
Net income (loss) $ (13.6) $ (433.7) $ 54.2
===============================================================================================================
Net income (loss) per share:
Basic $ (0.35) $ (11.54) $ 1.47
Diluted $ (0.35) $ (11.54) $ 1.32
Weighted average shares:
Basic 38.4 37.6 36.8
Diluted 38.4 37.6 45.7
===============================================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
65
HEXCEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) AND COMPREHENSIVE
INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
COMMON STOCK
------------------ RETAINED ACCUMULATED
ADDITIONAL EARNINGS OTHER TOTAL
PAID-IN (ACCUMULATED COMPREHENSIVE TREASURY STOCKHOLDERS' COMPREHENSIVE
(IN MILLIONS) PAR CAPITAL DEFICIT) INCOME (LOSS) SHARES EQUITY (DEFICIT) INCOME (LOSS)
-----------------------------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 1, 2000 $ 0.4 $ 273.6 $ 11.6 $ (4.8) $ (10.7) $ 270.1
Net income 54.2 54.2 $ 54.2
Currency translation adjustment (10.2) (10.2) (10.2)
Minimum pension obligation (5.0) (5.0) (5.0)
-----------
Comprehensive income $ 39.0
===========
Activity under stock plans and other 7.1 (0.5) 6.6
--------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2000 $ 0.4 $ 280.7 $ 65.8 $ (20.0) $ (11.2) $ 315.7
Net loss (433.7) (433.7) $ (433.7)
Currency translation adjustment (12.1) (12.1) (12.1)
Net unrealized loss on financial
instruments (5.9) (5.9) (5.9)
Minimum pension obligation (1.7) (1.7) (1.7)
-----------
Comprehensive loss $ (453.4)
===========
Activity under stock plans and other 7.0 (1.9) 5.1
--------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2001 $ 0.4 $ 287.7 $ (367.9) $ (39.7) $ (13.1) $ (132.6)
Net loss (13.6) (13.6) $ (13.6)
Currency translation adjustment 19.6 19.6 19.6
Net unrealized gain on financial
instruments 9.3 9.3 9.3
Minimum pension obligation (10.4) (10.4) (10.4)
-----------
Comprehensive loss $ (4.9)
===========
Activity under stock plans and other 0.5 (0.2) 0.3
--------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2002 $ 0.4 $ 288.2 $ (381.5) $ (21.2) $ (13.3) $ (127.4)
====================================================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
66
HEXCEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 2002 2001 2000
------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (13.6) $ (433.7) $ 54.2
Reconciliation to net cash provided by operations:
Depreciation 47.2 50.7 45.6
Amortization of goodwill and other intangibles assets - 12.5 13.1
Deferred income taxes 1.7 27.6 8.6
Business consolidation and restructuring expenses 0.5 58.4 10.9
Business consolidation and restructuring payments (24.3) (12.0) (11.8)
Impairment of goodwill and other purchased intangibles - 309.1 -
Loss (gain) on early retirement of debt (0.5) 0.7 -
Gain on sale of Bellingham aircraft interiors business - - (68.3)
Gain on curtailment of pension plan - - (5.1)
Equity in (earnings) losses of and write-downs of
an investment in affiliated companies 10.0 9.5 (5.5)
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 35.6 4.6 (7.7)
Decrease (increase) in inventories 25.8 20.6 (17.0)
Decrease (increase) in prepaid expenses and other assets (1.7) 1.1 (0.4)
Increase (decrease) in accounts payable and accrued
liabilities (15.7) (19.2) 10.7
Changes in other non-current assets and long-term liabilities 0.9 5.1 5.7
------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 65.9 35.0 33.0
------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (14.9) (38.8) (39.6)
Proceeds from sale of an ownership in an affiliated company 10.0 - -
Proceeds from sale of Bellingham aircraft interiors business - - 113.3
Proceeds from sale of other assets 1.5 - 3.4
Dividends from (investments in) affiliated companies 1.6 0.8 (8.3)
Other (0.5) (0.3) -
------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) investing activities (2.3) (38.3) 68.8
------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds (repayments) of credit facilities, net (57.4) 24.6 29.5
Proceeds from issuance of long-term debt - 98.5 -
Repayments of long-term debt and capital lease obligations (9.9) (110.6) (126.0)
Debt issuance costs - (3.5) (0.9)
Activity under stock plans and other - (0.4) 2.4
------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities (67.3) 8.6 (95.0)
------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents 0.3 1.2 (1.9)
------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (3.4) 6.5 4.9
Cash and cash equivalents at beginning of year 11.6 5.1 0.2
------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 8.2 $ 11.6 $ 5.1
==================================================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
67
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS AND BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of Hexcel
Corporation and its subsidiaries ("Hexcel" or "the Company"), after elimination
of intercompany transactions and accounts. Investments in affiliated companies
in which the Company's interests are generally between 20% and 50%, and where
the Company does not control the financial and operating decisions, are
accounted for using the equity method of accounting.
Hexcel is a leading producer of advanced structural materials. The Company
develops, manufactures and markets lightweight, high-performance reinforcement
products, composite materials and composite structures for use in commercial
aerospace, space and defense, electronics, and industrial applications. The
Company's materials are used in a wide variety of end products, such as
commercial and military aircraft, space launch vehicles and satellites, printed
wiring boards, computers, cellular telephones, soft body armor, high-speed
trains and ferries, cars and trucks, wind turbine blades, reinforcements for
bridges and other structures, window blinds, skis, snowboards and other
recreational equipment.
The Company serves international markets through manufacturing facilities
and sales offices located in the United States and Europe, and through sales
offices located in Asia, Australia and South America. The Company is also an
investor in six joint ventures; three of which manufacture and market
reinforcement products in Europe, Asia and the United States; one manufactures
and markets composite materials in Japan; and two manufacture composite
structures in Asia.
As discussed in Note 22, Hexcel sold its Bellingham aircraft interiors
business on April 26, 2000. As a result of this transaction, the statements of
operations, of stockholders' equity (deficit) and comprehensive income (loss),
and of cash flows include the financial position, results of operations and cash
flows of the Bellingham aircraft interiors business as of such dates and for
such periods that the business was owned.
USE OF ESTIMATES
The preparation of the consolidated financial statements and related
disclosures in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities, and the reported amounts of revenues and
expenses. Estimates are used for, but not limited to, allowances for doubtful
accounts, inventory allowances, product warranty, depreciation and amortization,
business consolidation and restructuring costs, impairment of long-lived assets,
employee benefits, taxes, and contingencies. Actual results could differ from
those estimates.
CASH AND CASH EQUIVALENTS
All highly liquid investments with original maturities of three months or
less are considered to be cash equivalents. These investments consist primarily
of Eurodollar time deposits and are stated at cost, which approximates fair
value.
INVENTORIES
Inventories are valued at the lower of cost or market, with cost determined
using the first-in, first-out and average cost methods. The Company provides
allowances for obsolete and unmarketable inventory. As of December 31, 2002 and
2001, inventory allowances were $21.3 million and $25.1 million, respectively.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost and depreciated over
estimated useful lives using accelerated and straight-line methods. The
estimated useful lives range from 10 to 40 years for buildings and improvements
and from 3 to 20 years for machinery and equipment. Repairs and
68
maintenance are expensed as incurred, while major replacements and betterments
are capitalized and depreciated over the estimated life of the related asset.
GOODWILL AND OTHER PURCHASED INTANGIBLES
Goodwill represents the excess of the purchase price over the fair value of
the identifiable net assets of an acquired business. Effective January 1, 2002,
the Company adopted Statement of Financial Accounting Standards No.142,
"Goodwill and Other Intangible Assets," ("FAS 142"). Prior to adopting FAS 142,
goodwill was amortized on a straight-line basis over estimated economic lives,
ranging from 15 to 40 years. As a result of adopting FAS 142, goodwill is no
longer amortized, but instead is tested for impairment at the reporting unit
level at least annually and whenever events or changes in circumstances indicate
that goodwill might be impaired. A reporting unit is the lowest level of an
entity that is a business and can be distinguished from other activities,
operations, and assets of the entity. If, during the annual impairment review,
the book value of the reporting unit exceeds the fair value, the implied fair
value of the reporting unit's goodwill is compared with the carrying amount of
the unit's goodwill. If the carrying amount exceeds the implied fair value,
goodwill is written down to its implied value. FAS 142 requires management to
estimate the fair value of each reporting unit, as well as the fair value of the
assets and liabilities of each reporting unit, other than goodwill. The implied
fair value of goodwill is determined as the difference between the fair value of
a reporting unit, taken as a whole, and the fair value of the assets and
liabilities of such reporting unit. No impact to the Company's consolidated
financial statements was identified upon completion of the transitional
impairment test required by FAS 142. The Company's annual impairment testing
date will be during the fourth quarter of each year. In 2001, the Company
recognized an impairment charge of $309.1 million on goodwill and other
purchased intangibles acquired through previous acquisitions (see Note 3).
IMPAIRMENT OF LONG-LIVED ASSETS
Other long-lived assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. The assessment of possible impairment is based on the Company's
ability to recover the carrying value of the assets from the estimated
undiscounted future net cash flows, before interest and taxes, of the related
operations. If these cash flows are less than the carrying value of such assets,
an impairment loss is recognized for the difference between estimated fair value
and carrying value. The measurement of impairment requires estimates of these
cash flows and fair value. The calculation of fair value may be determined based
either on discounted cash flows or third party appraised values depending on the
nature of the asset.
INVESTMENTS
The Company has investments in affiliated companies with equity interests
ranging from 25% to 50%. Hexcel does not control the financial and operating
decisions of these companies and, therefore, accounts for its share of their
operating performance using the equity method of accounting. Future adverse
changes in market conditions or poor operating results of the underlying
investments could result in losses and the inability to recover the carrying
value of the investments, thereby possibly requiring an impairment charge. The
Company reviews its investments for impairment whenever events or changes in
circumstances indicate that the carrying amount of the investments may not be
recoverable. The Company records an investment impairment charge when the
decline in value is considered to be other than temporary. The Company recorded
an impairment of $4.0 million in 2002 and $7.8 million in 2001, relating to its
investments in Asahi-Schwebel Co. Ltd. and Interglas Technologies AG,
respectively (see Note 7).
DEBT FINANCING COSTS
Debt financing costs are deferred and amortized to interest expense over
the life of the related debt, which ranges from 7 to 10 years. At December 31,
2002 and 2001, deferred debt financing costs were $11.7 million and $15.5
million, net of accumulated amortization of $14.5 million and $10.7 million,
respectively, and are included in "other assets" in the consolidated balance
sheets.
69
STOCK-BASED COMPENSATION
Stock-based compensation is accounted for 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 restricted
stock and similar stock-based plans over the defined vesting periods. As of
December 31, 2002, the Company had several on-going stock-based compensation
plans, including stock options, restricted stock and various forms of restricted
stock unit awards, which are described further in Note 13.
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 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, "Accounting for Stock-Based
Compensation" ("FAS 123") for the years ended December 31, 2002, 2001 and 2000
are as follows:
(IN MILLIONS, EXCEPT PER SHARE DATA) 2002 2001 2000
------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS):
Net income (loss), as reported $ (13.6) $ (433.7) $ 54.2
ADD: Stock-based compensation expense included in
reported net income, net of tax 0.8 2.0 4.5
DEDUCT: Stock-based compensation expense determined
under fair value based method for all awards, net of tax (6.0) (5.9) (9.8)
------------------------------------------------------------------------------------------------------------------
Pro forma net income (loss) $ (18.8) $ (437.6) $ 48.9
NET INCOME (LOSS) PER SHARE: Basic net income (loss) per share:
As reported $ (0.35) $ (11.54) $ 1.47
Pro forma $ (0.49) $ (11.64) $ 1.33
Diluted net income (loss) per share:
As reported $ (0.35) $ (11.54) $ 1.32
Pro forma $ (0.49) $ (11.64) $ 1.21
------------------------------------------------------------------------------------------------------------------
CURRENCY TRANSLATION
The assets and liabilities of international subsidiaries are translated
into U.S. dollars at year-end exchange rates, and revenues and expenses are
translated at average exchange rates during the year. Cumulative currency
translation adjustments are included in "accumulated other comprehensive loss"
in the stockholders' equity section of the consolidated balance sheets. Realized
gains and losses from currency exchange transactions are recorded in "selling,
general and administrative expenses" in the consolidated statements of
operations and were not material to Hexcel's consolidated results of operations
in 2002, 2001 or 2000.
REVENUE RECOGNITION
Product sales are recognized when all significant contractual obligations
have been satisfied and collection of the resulting receivable is reasonably
assured, which is generally at the time of shipment. Revenues derived from
design, installation and support services are recognized when the service is
provided, or alternatively, when the product to which the service relates is
delivered to the customer. The Company accrues for sales returns and allowances
based on its historical experience at the time of sale.
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.
70
SHIPPING AND HANDLING COSTS
The Company recognizes shipping and handling costs as incurred as a
component of "cost of sales" in the consolidated statements of operations.
Shipping or handling costs billed to the customer for reimbursement purposes
were not significant.
RESEARCH AND TECHNOLOGY
Research and technology costs are expensed as incurred.
INCOME TAXES
The Company provides for income taxes using the liability approach
prescribed by the Financial Accounting Standards Board ("FASB") in Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("FAS
109"). Under the liability approach, deferred income tax assets and liabilities
reflect tax carryforwards and the tax effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting and
income tax purposes. Deferred tax assets require a valuation allowance when it
is more likely than not that some portion of the deferred tax assets may not be
realized. The realization of deferred tax assets is dependent upon the timing
and magnitude of future taxable income prior to the expiration of the deferred
tax assets' attributes. When events and circumstances so dictate, the Company
evaluates the realizability of its deferred tax assets and the need for a
valuation allowance by forecasting future taxable income. In 2001, the Company
established a full valuation allowance on its U.S. deferred tax assets. The
amount of the deferred tax assets considered realizable, however, could change
if estimates of future U.S. taxable income during the carry-forward period
improve (see Note 12).
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject Hexcel to significant
concentrations of credit risk consist primarily of trade accounts receivable.
The Company's sales to two customers and their related subcontractors accounted
for approximately 37%, 39% and 33% of the Company's 2002, 2001 and 2000 net
sales, respectively. The Company performs ongoing credit evaluations of its
customers' financial condition but generally does not require collateral or
other security to support customer receivables. The Company establishes an
allowance for doubtful accounts based on factors surrounding the credit risk of
specific customers, historical trends and other financial information. As of
December 31, 2002 and 2001, the allowance for doubtful accounts was $5.1 million
and $8.5 million, respectively. Bad debt expense was a net credit of $(0.9)
million in 2002, $3.4 million in 2001 and $0.7 million in 2000.
DERIVATIVE FINANCIAL INSTRUMENTS
Hexcel uses various financial instruments, including foreign currency
forward exchange contracts and interest rate cap agreements, to manage its risk
to market fluctuations by generating cash flows that offset, in relation to
their amount and timing, the cash flows of certain foreign currency denominated
transactions or underlying debt instruments. The Company designates its foreign
currency forward exchange contracts as cash flow hedges against forecasted
foreign currency denominated transactions and reports the effective portions of
changes in fair value of the instruments in "other comprehensive income" until
the underlying hedged transactions affect income. The Company designates its
interest rate cap agreements as cash flow hedges against specific debt
instruments and recognizes interest differentials as adjustments to interest
expense as the differentials may occur. The most recent effective interest rate
cap agreement expired on October 29, 2002. The Company does not use financial
instruments for trading or speculative purposes.
Effective January 1, 2001, Hexcel adopted Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("FAS 133"), and its corresponding amendments under Financial
Accounting Standards No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities," ("FAS 138"). FAS 133 requires an entity to
recognize all derivatives as either assets or liabilities on its balance sheet
and measure those instruments at fair value. Gains or losses resulting from
changes in the fair values of those derivatives are accounted for depending on
the use of the derivative and whether it qualifies for hedge accounting. The
adoption of FAS 133 and FAS 138 did not have a material effect on the Company's
consolidated financial position or results of operations (see Note 15).
71
SELF-INSURANCE
Hexcel is self-insured up to specific levels for certain liabilities.
Accruals are established based on actuarial assumptions and historical claim
experience, and include estimated amounts for incurred but not reported claims.
Effective January 1, 2002, Hexcel expanded its self-insured medical program to
cover the majority of U.S. non-union employees, in order to more effectively
manage its medical costs. The program includes "stop loss" insurance, which caps
Hexcel's risk at $250,000 per individual per annum. By its nature, as compared
to traditional insurance plans, self-insured medical coverage may increase the
monthly volatility in cash flows of the Company.
RECENTLY ISSUED ACCOUNTING STANDARDS
In April 2002, the FASB issued Statement of Financial Accounting Standards
No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections" ("FAS 145"). Among other matters,
FAS 145 rescinds FASB Statement No. 4, "Reporting Gains and Losses from
Extinguishment of Debt," which required all gains and losses from extinguishment
of debt be aggregated and, if material, classified as an extraordinary item, net
of the related income tax effect. As a result, the criteria in Accounting
Principles Board Opinion 30 will now be used to classify those gains and losses.
The Company adopted FAS 145 as of January 1, 2002. As a result, a $2.7 million
extraordinary loss on early retirement of debt recorded in 2001 was reclassified
as a separate line item below operating income in the consolidated statements of
operations (see Note 8).
In June 2002, the FASB issued Statement of Financial Accounting Standards
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities"
("FAS 146"). FAS 146 requires that a liability for a cost associated with an
exit or disposal activity be recognized and measured, initially at fair value,
only when the liability is incurred; therefore, nullifying Emerging Issues Task
Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring)" ("EITF 94-3") that required a liability for an exit cost to
be recognized at the date of an entity's commitment to an exit plan. This change
in accounting would be expected to result in a delayed recognition of certain
types of costs, especially facility closure costs. The provisions of FAS 146 are
effective for exit or disposal activities that are initiated after December 31,
2002. Since FAS 146 is effective only for new exit or disposal activities,
adoption of this standard will not affect amounts currently reported in the
Company's consolidated financial statements. However, the adoption of FAS 146
could affect the types and timing of costs included in any future business
consolidation and restructuring programs. The Company adopted FAS 146 as of
January 1, 2003.
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure," ("FAS 148"). FAS 148 amends FAS 123 and Accounting Principles Board
Opinion No. 28, "Interim Financial Reporting" to present alternative methods of
transition for an entity that voluntarily adopts the fair value based method of
accounting for stock-based employee compensation, and provides modifications to
the disclosure provisions to require prominent disclosure about the effects on
reported net income of an entity's accounting policy decisions with respect to
stock-based employee compensation in quarterly and annual financial statements.
At this time, the Company has not voluntarily adopted the fair value method of
accounting under FAS 123. However, appropriate disclosures about the effects on
reported net income of the Company's accounting policy with respect to
stock-based employee compensation are provided above.
In November 2002, the FASB issued Financial Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others," ("FIN 45"). FIN 45 requires a
guarantor to disclose (a) the nature of the guarantee, including the approximate
term of the guarantee, how the guarantee arose, and the events or circumstances
that would require the guarantor to perform under the guarantee; (b) the maximum
potential amount of future payments under the guarantee; (c) the carrying amount
of the liability, if any, for the guarantor's obligations under the guarantee;
and (d) the nature and extent of any recourse provisions or available collateral
that would enable the guarantor to recover the amounts paid under the guarantee.
FIN 45 also clarifies that a guarantor is required to recognize, at the
inception of a
72
guarantee, a liability at fair value for the obligations it has undertaken in
issuing the guarantee, including its ongoing obligation to stand ready to
perform over the term of the guarantee in the event that the specified
triggering events or conditions occur. The initial recognition and initial
measurement provisions of FIN 45 are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002. As the disclosure
requirements in FIN 45 are effective for financial statements with periods
ending after December 15, 2002, the Company has included the new disclosures
herein.
FIN 45 also addresses the disclosure requirements regarding product
warranties. Instead of disclosing the maximum potential amount of future
payments under the product warranty guarantee, a guarantor is required to
disclose its accounting policy and methodology used in determining its liability
for product warranties, as well as, a tabular reconciliation of the changes in
the guarantor's product warranty liability for the reporting period (see Note
16).
RECLASSIFICATIONS
Certain prior year amounts in the accompanying consolidated financial
statements and related notes have been reclassified to conform to the 2002
presentation.
NOTE 2 - REFINANCING OF CAPITAL STRUCTURE
On March 19, 2003, Hexcel successfully completed the refinancing of its
capital structure through the simultaneous closings of three financing
transactions: the completion of its previously announced sale of mandatorily
redeemable convertible preferred stock for $125.0 million, the issuance of
$125.0 million of 9-7/8% senior secured notes, due 2008, and the establishment
of a new $115.0 million senior secured credit facility, also due 2008.
The proceeds from the sale of the convertible preferred stock have been
used to provide for the redemption of $46.9 million principal amount of the
Company's 7% convertible subordinated notes, due 2003, and to repay outstanding
borrowings under the existing senior credit facility. Proceeds to be used to
redeem the 7% convertible subordinated notes have been remitted to US Bank
Trust, trustee for the notes, for the express purpose of retiring the
outstanding principal balance of the notes, plus accrued interest.
The remaining advances under the existing senior credit facility, after the
application of a portion of the equity proceeds, have been repaid with the
proceeds from the issuance of the Company's new 9-7/8% senior secured notes and
a new senior secured credit facility.
MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
On March 19, 2003, Hexcel issued 125,000 shares of a series A convertible
preferred stock and 125,000 shares of a series B convertible preferred stock for
$125.0 million in cash. Upon issuance, the total number of Hexcel's outstanding
common shares including potential shares issuable upon conversion of both of the
new series of convertible preferred stocks increased from approximately 38.6
million shares to approximately 88.4 million shares. In addition, common shares
authorized for issuance increased from 100.0 million shares to 200.0 million
shares.
Hexcel issued 77,875 shares of series A convertible preferred stock and
77,875 shares of series B convertible preferred stock to affiliates of Berkshire
Partners LLC and Greenbriar Equity Group LLC (the "Berkshire/Greenbriar
Investors") for a cash payment of approximately $77.9 million. The series A and
the series B convertible preferred stocks are mandatorily redeemable on January
22, 2010 for cash or for common stock at the Company's election. Both preferred
stocks are convertible, at the option of the holder, into common stock at a
conversion price of $3.00 per share, and will automatically be converted into
common stock if the closing trading price of the common stock for any period of
60 consecutive trading days ending after March 19, 2006 exceeds $9.00 per share.
The
73
preferred stockholders are entitled to vote on an as converted basis with
Hexcel's common stockholders. The series A preferred stock accrues dividends at
a rate of 6% per annum following the third anniversary of the issuance.
Dividends may be paid in cash or added to the accrued value of the preferred
stock, at Hexcel's option. The series B preferred stock does not accrue
dividends.
Hexcel has separately issued 47,125 shares of series A convertible
preferred stock and 47,125 shares of series B convertible preferred stock to
investment funds controlled by affiliates of The Goldman Sachs Group, Inc. (the
"Goldman Sachs Investors") for a cash payment of approximately $47.1 million.
In conjunction with the aforementioned transactions, Hexcel and the
Berkshire/Greenbriar Investors entered into a stockholders agreement, which
gives the Berkshire/Greenbriar Investors the right to nominate up to two
directors (of a total of ten) to Hexcel's board of directors and certain other
rights. The Goldman Sachs Investors will continue to have the right to nominate
up to three directors under the governance agreement entered into at the time of
their investment in Hexcel in 2000. The stockholders agreement and the amended
Goldman Sachs Investors governance agreement require that the approval of at
least six directors, including at least two directors not nominated by the
Berkshire/Greenbriar Investors or the Goldman Sachs Investors, be obtained for
board actions generally. The stockholders agreement also prohibits the purchase
of voting securities in excess of 39.5% of Hexcel's outstanding voting
securities unless approved by Hexcel's board. The Berkshire/Greenbriar
Investors and the Goldman Sachs Investors have agreed to an 18-month lock up on
the securities being issued, except for certain registered offerings.
SENIOR SECURED NOTES, DUE 2008
The Company also issued, through a private placement under Rule 144A,
$125.0 million of 9 7/8% senior secured notes at a price of 98.95% of face
value. The senior secured notes, due October 1, 2008, are secured by a first
priority security interest in substantially all of Hexcel's and its domestic
subsidiaries' property, plant and equipment, intangibles, intercompany notes and
other obligations receivable, and 100% of the outstanding voting stock of
certain of Hexcel's domestic subsidiaries. In addition, the senior secured notes
are secured by a pledge of 65% of the stock of Hexcel's French and UK first-tier
holding companies. This pledge of foreign stock is on an equal basis with a
substantially identical pledge of such stock given to secure the obligations
under the Company's new senior secured credit facility, described below. The
senior secured notes are also guaranteed by Hexcel's material domestic
subsidiaries. Hexcel has the ability to incur additional debt that would be
secured on an equal basis by the collateral securing the senior secured notes.
The amount of additional secured debt that may be incurred is currently limited
to $10.0 million, but may increase over time based on a formula relating to the
total net book value of Hexcel's domestic property, plant and equipment.
The Company will pay interest on the notes on April 1st and October 1st of
each year. The first payment will be made on October 1, 2003. The Company will
have the option to redeem all or a portion of the notes at any time during the
one-year period beginning April 1, 2006 at 104.938% of principal plus accrued
and unpaid interest. This percentage decreases to 102.469% for the one-year
period beginning April 1, 2007, and to 100.0% for the period beginning April 1,
2008. In addition, the Company may use the net proceeds from one or more equity
offerings at any time prior to April 1, 2006 to redeem up to 35% of the
aggregate principal amount of the notes at 109.875% of the principal amount,
plus accrued and unpaid interest.
The indenture governing the senior secured notes contains many other terms
and conditions, including limitations with respect to asset sales, incurrence of
debt, granting of liens, the making of restricted payments and entering into
transactions with affiliates.
Hexcel has agreed, under a registration rights agreement, to offer to all
noteholders the opportunity to exchange their notes for new notes that are
substantially identical to the existing notes except that the new notes will be
registered with the Securities and Exchange Commission ("SEC") and will not have
any restrictions on transfer. In the event that Hexcel cannot affect such an
exchange, Hexcel will be required to file a shelf registration statement with
the SEC to permit the noteholders to resell their notes generally without
restriction.
74
An affiliate of Goldman Sachs Investors, a related party, performed
underwriting services in connection with the Company's private placement
offering of senior secured notes, and received $2.3 million for such services
rendered.
SENIOR SECURED CREDIT FACILITY
Also on March 19, 2003, Hexcel entered into a $115.0 million asset-backed
senior secured credit facility with a new syndicate of lenders led by Fleet
Capital Corporation as agent. The credit facility matures on March 31, 2008.
Borrowers under the credit facility include, in addition to Hexcel Corporation,
Hexcel's operating subsidiaries in the UK, Austria and Germany. The credit
facility provides for borrowings of U.S. dollars, Pound Sterling and Euro
currencies, including the issuance of letters of credit, with the amount
available to each borrower dependent on the borrowing base of that borrower and
its subsidiaries. For Hexcel Corporation and the UK borrower, the borrowing base
is determined by an agreed percentage of eligible accounts receivable and
eligible inventory, subject to certain reserves. The borrowing base of each of
the Austrian and German borrowers is based on an agreed percentage of eligible
accounts receivable, subject to certain reserves. In addition, the UK, Austrian
and German borrowers have facility sublimits of $12.5 million, $7.5 million and
$5.0 million, respectively. 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 0.75% to 3.25% or LIBOR plus a margin that can vary from
2.25% to 3.25%. The margin in effect for a borrowing at any given time depends
on the Company's fixed charge ratio and the currency denomination of such
borrowing. The credit facility also provides for the payment of customary fees
and expenses.
All obligations under the credit facility are secured by a first priority
security interest in accounts receivable, inventory and cash and cash
equivalents of Hexcel Corporation and its material domestic subsidiaries. In
addition, all obligations under the credit facility are secured by a pledge of
65% of the stock of Hexcel's French and UK first-tier holding companies. This
pledge of foreign stock is on an equal basis with a substantially identical
pledge of such stock given to secure the obligations under the senior secured
notes. The obligations of the UK borrower are secured by the accounts
receivable, inventory, and cash and cash equivalents of the UK borrower. The
obligations of the Austrian and German borrowers are secured by the accounts
receivable of the Austrian and German borrowers, respectively.
Hexcel is required to maintain various financial ratios throughout the term
of the credit facility. These financial covenants set maximum values for the
Company's leverage (the ratios of total and senior debt to EBITDA), fixed charge
coverage (the ratio of EBITDA, less capital expenditures and cash taxes, plus
cash dividends, to the sum of cash interest and scheduled debt amortization),
and capital expenditures (not to exceed specified annual expenditures). The
credit facility also contains limitations on, among other things, incurring
debt, granting liens, making investments, making restricted payments, entering
into transactions with affiliates and prepaying subordinated debt. The credit
facility also contains other customary terms relating to, among other things,
representations and warranties, additional covenants and events of default.
On March 19, 2003, the Company borrowed $13.0 million and issued letters of
credit totaling approximately $25.8 million under the new senior secured credit
facility.
CLASSIFICATION OF DEBT AND CAPITAL LEASE OBLIGATIONS AS OF DECEMBER 31, 2002
As of December 31, 2002, the Company had a scheduled debt obligation due
August 1, 2003, which, if made, would cause the Company to violate one or more
financial covenants in the Company's existing debt agreements. The Company also
required an amendment of its existing senior credit facility before the end of
the first quarter of 2003 to maintain compliance with the financial covenants
under that facility. As the anticipated refinancing of the Company's capital
structure was not completed as of February 28, 2003 (the 2002 financial
statement issuance date) and the Company had not obtained an amendment of the
aforementioned financial covenants, all debt and capital lease obligations had
been classified as current at December 31, 2002.
As a result of the March 19, 2003 refinancing transactions, the
uncertainties surrounding the Company's ability to meet its scheduled 2003 debt
maturities and comply with its debt covenants have been mitigated. Management
believes the Company will comply with the new debt covenants and has
75
adequate liquidity available to finance operations beyond December 31, 2003.
Also as a result of the refinancing transactions, substantially all of the
Company's debt will be reclassified to long-term at March 31, 2003 reflecting
the new scheduled debt maturities. Refer to Note 24, "Subsequent Event - Pro
Forma Consolidated Balance Sheet (Unaudited)."
NOTE 3 - GOODWILL AND OTHER PURCHASED INTANGIBLES
Upon the Company's adoption of FAS 142 as of January 1, 2002, amortization
of goodwill ceased. Although no amortization expense was recognized in 2002, the
consolidated statements of operations include amortization expense of $12.5
million in 2001 and $13.1 million in 2000.
Net income (loss) and net income (loss) per share for the years ended
December 31, 2002, 2001 and 2000, adjusted to exclude amortization expense, net
of tax, are as follows:
(IN MILLIONS) 2002 2001 2000
-----------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS):
Net income (loss) $ (13.6) $ (433.7) $ 54.2
Goodwill amortization, net of tax - 11.2 8.5
-----------------------------------------------------------------------------------------------------------------
Adjusted net income (loss) $ (13.6) $ (422.5) $ 62.7
-----------------------------------------------------------------------------------------------------------------
BASIC NET INCOME (LOSS) PER SHARE:
Net income (loss) $ (0.35) $ (11.54) $ 1.47
Goodwill amortization, net of tax - 0.30 0.23
-----------------------------------------------------------------------------------------------------------------
Adjusted basic net income (loss) per share $ (0.35) $ (11.24) $ 1.70
-----------------------------------------------------------------------------------------------------------------
DILUTED NET INCOME (LOSS) PER SHARE:
Net income (loss) $ (0.35) $ (11.54) $ 1.32
Goodwill amortization, net of tax - 0.30 0.19
-----------------------------------------------------------------------------------------------------------------
Adjusted diluted net income (loss) per share $ (0.35) $ (11.24) $ 1.51
=================================================================================================================
The gross carrying amount and accumulated amortization of goodwill, by the
Company's reportable segments, as of December 31, 2002 and 2001, are as follows:
DECEMBER 31, 2002 DECEMBER 31, 2001
--------------------------------------------- ------------------------------------------
GROSS GROSS
CARRYING ACCUMULATED CARRYING ACCUMULATED
(IN MILLIONS) AMOUNT AMORTIZATION NET AMOUNT AMORTIZATION NET
------------------------------------------------------------------------------------------------------------------
Reinforcements $ 69.9 $ 29.8 $ 40.1 $ 69.6 $ 29.7 $ 39.9
Composites 31.1 13.4 17.7 27.9 12.0 15.9
Structures 23.5 6.9 16.6 23.5 6.9 16.6
------------------------------------------------------------------------------------------------------------------
Goodwill $ 124.5 $ 50.1 $ 74.4 $ 121.0 $ 48.6 $ 72.4
==================================================================================================================
Changes in the net carrying amount of goodwill for the years ended December
31, 2002, 2001 and 2000, by reportable segment, are as follows:
(IN MILLIONS) REINFORCEMENTS COMPOSITES STRUCTURES TOTAL
------------------------------------------------------------------------------------------------------------------
BALANCE AS OF JANUARY 1, 2000 $ 350.3 $ 36.9 $ 24.0 $ 411.2
Amortization of goodwill and other
purchased intangibles (9.1) (2.7) (1.3) (13.1)
Sale of Bellingham aircraft interiors business - - (4.9) (4.9)
Currency translation adjustment and other - (1.5) - (1.5)
------------------------------------------------------------------------------------------------------------------
BALANCE AS OF DECEMBER 31, 2000 $ 341.2 $ 32.7 $ 17.8 $ 391.7
Amortization of goodwill and other
purchased intangibles (9.1) (2.2) (1.2) (12.5)
Impairment of goodwill and other
purchased intangibles (292.1) (17.0) - (309.1)
Acquired goodwill - 2.9 - 2.9
Currency translation adjustment (0.1) (0.5) - (0.6)
------------------------------------------------------------------------------------------------------------------
BALANCE AS OF DECEMBER 31, 2001 $ 39.9 $ 15.9 $ 16.6 $ 72.4
Currency translation adjustment 0.2 1.8 - 2.0
==================================================================================================================
BALANCE AS OF DECEMBER 31, 2002 $ 40.1 $ 17.7 $ 16.6 $ 74.4
==================================================================================================================
As of December 31, 2002 and 2001, other purchased intangibles had no
carrying value.
76
IMPAIRMENT OF GOODWILL AND OTHER PURCHASED INTANGIBLES
During the fourth quarter of 2001, the Company reviewed its long-lived
assets under FASB Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," particularly goodwill and other purchased intangibles acquired
in recent years, for impairment. The review was undertaken in response to
changes in market conditions and the Company's revised business outlook
resulting from a sharp decline in demand for the Company's woven glass fabrics,
primarily in the electronics market, and the announced reductions in commercial
airline production following the tragic events of September 11, 2001. The
Company also revised its forecasts of revenue growth for its acquired satellite
business due to the continuing slow down in commercial satellite launches
following the financial failure of a number of satellite based telecommunication
projects and the postponement of others. These adverse changes in market
conditions led to the lowering of revenue forecasts associated with certain
businesses in the Reinforcements and Composites segments.
Based on this review, the Company determined that the long-lived assets,
including goodwill, of the fabrics business acquired from Clark-Schwebel in 1998
and the satellite business acquired from Fiberite in 1997 were not fully
recoverable. The Company recorded non-cash impairment charges of $292.1 million
and $17.0 million related to the goodwill and other purchased intangibles
associated with the Clark-Schwebel and Fiberite acquisitions, respectively. The
amounts of the impairment charges were calculated as the excess of the carrying
value of the assets over their fair values. Fair values were determined using
discounted future cash flow models, market valuations and third party
appraisals, where appropriate. There were no tax benefits recognized on the
impairments because of limitations on the Company's ability to realize the tax
benefits.
NOTE 4 - BUSINESS CONSOLIDATION AND RESTRUCTURING PROGRAMS
The aggregate business consolidation and restructuring activities for the
three years ended December 31, 2002, consisted of the following:
EMPLOYEE FACILITY &
(IN MILLIONS) SEVERANCE EQUIPMENT TOTAL
-----------------------------------------------------------------------------------------------------------------
BALANCE AS OF JANUARY 1, 2000 $ 3.5 $ 0.6 $ 4.1
Business consolidation expenses:
Current period expenses 3.7 10.6 14.3
Reversal of 1999 business consolidation expenses (0.3) (3.1) (3.4)
-----------------------------------------------------------------------------------------------------------------
Net business consolidation expenses 3.4 7.5 10.9
Cash expenditures (3.9) (7.9) (11.8)
Non-cash items:
Reversal of 1999 business consolidation expenses - 3.1 3.1
Non-cash usage, including asset write-downs (0.6) (3.0) (3.6)
-----------------------------------------------------------------------------------------------------------------
Total non-cash items (0.6) 0.1 (0.5)
-----------------------------------------------------------------------------------------------------------------
BALANCE AS OF DECEMBER 31, 2000 $ 2.4 $ 0.3 $ 2.7
Business consolidation and restructuring expenses 34.5 23.9 58.4
Cash expenditures (6.4) (5.6) (12.0)
Non-cash usage, including asset write-downs - (15.7) (15.7)
-----------------------------------------------------------------------------------------------------------------
BALANCE AS OF DECEMBER 31, 2001 $ 30.5 $ 2.9 $ 33.4
Business consolidation and restructuring expenses
Current period expenses - 2.8 2.8
Reversal of 1999 business consolidation expenses - (0.5) (0.5)
Change in estimated expenses (2.9) 1.1 (1.8)
-----------------------------------------------------------------------------------------------------------------
Net business consolidation and restructuring expenses (2.9) 3.4 0.5
Cash expenditures (20.5) (3.8) (24.3)
Currency translation adjustment 0.9 - 0.9
Non-cash items:
Reversal of 1999 business consolidation expenses - 0.5 0.5
Non-cash usage, including asset write-downs - (0.5) (0.5)
-----------------------------------------------------------------------------------------------------------------
Total non-cash items - - -
-----------------------------------------------------------------------------------------------------------------
BALANCE AS OF DECEMBER 31, 2002 $ 8.0 $ 2.5 $ 10.5
=================================================================================================================
77
NOVEMBER 2001 PROGRAM
In November 2001, the Company announced a program to restructure its
business operations in accordance with a revised business outlook for build rate
reductions in commercial aircraft production, the continued depressed business
conditions in the electronics market and the weakness in the general economy.
The program targeted a 20% reduction in cash fixed costs, or $60.0 million,
compared to previous spending rates and included company-wide reductions in
managerial, professional, indirect manufacturing and administrative employees
along with organizational rationalization. In connection with the program, the
Company recognized charges of $47.9 million in the fourth quarter of 2001.
During 2002, the Company continued the implementation of this program in 2002,
reducing its workforce, since announcement, by approximately 25% to 4,245
employees.
In 2002, the Company recognized a net change in estimated business
consolidation and restructuring expenses related to this program of $0.7
million. This resulted from a $1.8 million reduction of previously accrued
liabilities as employee severance and other benefit costs were lower than
previously expected, offset in part, by a $1.1 million increase in restructuring
liabilities for facility lease termination costs. An additional $1.2 million was
expensed as incurred in 2002.
Business consolidation and restructuring activities for this program
consisted of the following:
EMPLOYEE FACILITY &
(IN MILLIONS) SEVERANCE EQUIPMENT TOTAL
-----------------------------------------------------------------------------------------------------------------
BALANCE AS OF DECEMBER 31, 2000 $ - $ - $ -
Business consolidation and restructuring expenses 30.8 17.1 47.9
Cash expenditures (3.2) - (3.2)
Non-cash usage, including asset write-downs - (14.3) (14.3)
-----------------------------------------------------------------------------------------------------------------
BALANCE AS OF DECEMBER 31, 2001 $ 27.6 $ 2.8 $ 30.4
Business consolidation and restructuring expenses
Current period expenses - 1.2 1.2
Change in estimated expenses (1.8) 1.1 (0.7)
-----------------------------------------------------------------------------------------------------------------
Net business consolidation and restructuring expenses (1.8) 2.3 0.5
Cash expenditures (18.9) (2.1) (21.0)
Non-cash usage, including asset write-downs - (0.5) (0.5)
Currency translation adjustment 0.9 - 0.9
=================================================================================================================
BALANCE AS OF DECEMBER 31, 2002 $ 7.8 $ 2.5 $ 10.3
=================================================================================================================
JULY 2001 PROGRAM
As a result of the weakness in the electronics market, the Company
initiated cost reduction actions in July 2001. These actions incorporated steps
to furlough employees, idle manufacturing facilities and cut non-essential
expenditures, by effecting a reduction in the work force of approximately 275
employees primarily in the Reinforcements and Composites business segments. In
connection with the program, the Company recognized a charge of $3.9 million in
2001. During 2002, the Company reviewed its remaining liability under the
program and recognized a change in estimated business consolidation and
restructuring expenses of $0.6 million, as employee severance and other benefit
costs were lower than previously expected.
Business consolidation and restructuring activities for this program
consisted of the following:
EMPLOYEE FACILITY &
(IN MILLIONS) SEVERANCE EQUIPMENT TOTAL
-----------------------------------------------------------------------------------------------------------------
BALANCE AS OF DECEMBER 31, 2000 $ - $ - $ -
Business consolidation and restructuring expenses 3.6 0.3 3.9
Cash expenditures (2.1) (0.2) (2.3)
-----------------------------------------------------------------------------------------------------------------
BALANCE AS OF DECEMBER 31, 2001 $ 1.5 $ 0.1 $ 1.6
Change in estimated expenses (0.6) - (0.6)
Cash expenditures (0.9) (0.1) (1.0)
-----------------------------------------------------------------------------------------------------------------
BALANCE AS OF DECEMBER 31, 2002 $ - $ - $ -
=================================================================================================================
78
DECEMBER 1998 AND SEPTEMBER 1999 PROGRAMS
As a result of several substantial business acquisitions, the Company
initiated business consolidation programs in December 1998 and September 1999.
The primary purpose of these programs was to integrate acquired assets and
operations into the Company, and to close or restructure insufficiently
profitable facilities and activities. Due to aerospace industry requirements to
"qualify" specific equipment and manufacturing processes for certain products,
some business consolidation actions have taken up to three years to complete.
These qualification requirements increase the complexity, cost and time of
moving equipment and rationalizing manufacturing activities. In connection with
these business consolidation programs, the Company closed three manufacturing
facilities, vacated approximately 560 thousand square feet of manufacturing
space, and eliminated more than 700 manufacturing, marketing and administrative
positions.
In 2000, the Company added two further actions to the September 1999
business consolidation program. The Company decided to close the two smaller of
its four U.S. prepreg manufacturing facilities - one in Lancaster, Ohio and
another in Gilbert, Arizona. The Gilbert, Arizona facility was closed in 2001
and the closure of the Lancaster, Ohio facility was completed in 2002. The
manufacturing output from these two plants is now being produced by the two
remaining U.S. prepreg facilities in Livermore, California and Salt Lake City,
Utah. In connection with the program, including the program revisions, the
Company recognized a charge of $14.3 million in 2000.
In addition, during 2000, Hexcel amended its September 1999 business
consolidation program in response to the manufacturing constraints caused by a
stronger than expected increase in sales and production for its electronic woven
glass fabrics and its ballistic protection products. Based on these improved
market conditions and a manufacturing capacity review, the Company decided to
expand its capacity by purchasing additional looms and revising the previous
decision to consolidate a number of weaving activities at two of the Company's
facilities. As a result of the decision not to proceed to consolidate
production, the Company reversed a total of $3.4 million of business
consolidation expenses that were previously recognized in 1999, including $3.1
million in non-cash write-downs of machinery and equipment that was to have been
sold or scrapped as a result of the consolidation.
In 2002, the Company recognized a change in estimated business
consolidation expenses related to this program of $0.5 million, as actual
employee severance was lower than previously expected. Business consolidation
expenses for equipment relocation and re-qualification costs, expensed as
incurred, were $1.6 million and $6.5 million in 2002 and 2001, respectively.
Equipment relocation and re-qualification costs primarily related to the planned
closure of the Lancaster, Ohio and Gilbert, Arizona prepreg manufacturing
facilities. In addition, the Company recognized a benefit on the sale of a
previously idled Cleveland, Georgia facility of $0.5 million by reversing
expenses previously accrued in 1999.
79
Business consolidation activities for the December 1998 and September 1999
programs consisted of the following:
EMPLOYEE FACILITY &
(IN MILLIONS) SEVERANCE EQUIPMENT TOTAL
-----------------------------------------------------------------------------------------------------------------
BALANCE AS OF JANUARY 1, 2000 (a) $ 3.5 $ 0.6 $ 4.1
Business consolidation expenses:
Current period expenses 3.7 10.6 14.3
Reversal of 1999 business consolidation expenses (0.3) (3.1) (3.4)
-----------------------------------------------------------------------------------------------------------------
Net business consolidation expenses 3.4 7.5 10.9
Cash expenditures (3.9) (7.9) (11.8)
Non-cash items:
Reversal of 1999 business consolidation expenses - 3.1 3.1
Non-cash usage, including asset write-downs (0.6) (3.0) (3.6)
-----------------------------------------------------------------------------------------------------------------
Total non-cash items (0.6) 0.1 (0.5)
-----------------------------------------------------------------------------------------------------------------
BALANCE AS OF DECEMBER 31, 2000 $ 2.4 $ 0.3 $ 2.7
Business consolidation expenses 0.1 6.5 6.6
Cash expenditures (1.1) (5.4) (6.5)
Non-cash usage, including asset write-downs - (1.4) (1.4)
-----------------------------------------------------------------------------------------------------------------
BALANCE AS OF DECEMBER 31, 2001 $ 1.4 $ - $ 1.4
Business consolidation expenses
Current period expenses - 1.6 1.6
Reversal of 1999 business consolidation expenses - (0.5) (0.5)
Change in estimated expenses (0.5) - (0.5)
-----------------------------------------------------------------------------------------------------------------
Net business consolidation expenses (0.5) 1.1 0.6
Cash expenditures (0.7) (1.6) (2.3)
Non-cash reversal of 1999 business consolidation expenses - 0.5 0.5
=================================================================================================================
BALANCE AS OF DECEMBER 31, 2002 $ 0.2 $ - $ 0.2
=================================================================================================================
(a) The December 1998 program had an accrued liability balance of $1.0 million
for employee severance at January 1, 2000, which was utilized during 2000.
As of December 31, 2002, the December 1998, September 1999 and July 2001
programs have been essentially completed, while the November 2001 program will
be substantially completed in 2003. Management will continue to closely monitor
spending under the November 2001 program and evaluate opportunities that may
exist for future actions, as the Company continues to right-size the business in
response to existing conditions in the markets it serves.
NOTE 5 - INVENTORIES
DECEMBER 31,
(IN MILLIONS) 2002 2001
--------------------------------------------------------------------------------
Raw materials $ 40.7 $ 59.1
Work in progress 37.6 35.2
Finished goods 35.3 37.4
--------------------------------------------------------------------------------
Inventories $ 113.6 $ 131.7
================================================================================
NOTE 6 - NET PROPERTY, PLANT AND EQUIPMENT
DECEMBER 31,
(IN MILLIONS) 2002 2001
-------------------------------------------------------------------------------
Land $ 21.1 $ 23.5
Buildings 140.2 132.7
Equipment 470.7 443.8
Construction in Progress 10.8 17.0
-------------------------------------------------------------------------------
Property, plant and equipment 642.8 617.0
Less accumulated depreciation (333.4) (287.8)
-------------------------------------------------------------------------------
Net property, plant and equipment $ 309.4 $ 329.2
===============================================================================
80
NOTE 7 - INVESTMENTS IN AFFILIATED COMPANIES
In 1999, Hexcel, Boeing International Holdings, Ltd. and Aviation
Industries of China (now known as China Aviation Industry Corporation I) 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 has a 33.3% equity ownership interest in this joint
venture, which is located in Tianjin, China. 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 Berhadto), 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. Asian Composites began shipping composite structures to
customers during the second half of 2001, while BHA Aero began deliveries in the
first half of 2002. During 2000, Hexcel made cash equity investments totaling
$8.3 million in these two joint ventures. No additional cash equity investments
were made during 2002 and 2001. As of December 31, 2002 and 2001, the Company
had an outstanding letter of credit of $11.1 million in support of a loan to BHA
Aero (see Note 16).
The Company also has equity ownership interests in three joint ventures
which manufacture reinforcement products: a 43.6% share in Interglas
Technologies AG ("Interglas"), headquartered in Germany; a 33.3% share in
Asahi-Schwebel Co., Ltd. ("Asahi-Schwebel"), headquartered in Japan, which in
turn owns interests in two joint ventures in Taiwan - a 50% interest in Nittobo
Asahi Glass and a 51% interest in Asahi-Schwebel Taiwan; and a 50% share in
Clark-Schwebel Tech-Fab Company ("CS Tech-Fab"), headquartered in the United
States. Interglas and Asahi-Schwebel are fiberglass fabric producers serving the
European and Asian manufacturers of printed circuit board laminates and other
reinforcement product applications. CS Tech-Fab manufactures non-woven
reinforcement materials for roofing, construction, sail cloth and other
specialty applications.
In 2002, the Company agreed with its Asian Electronics venture partner to
restructure its minority interest in Asahi-Schwebel. Under the terms of the
agreement, the Company reduced its ownership interest in the joint venture from
43.3% to 33.3% and received cash proceeds of $10.0 million. The agreement also
included, among other matters, a put option in favor of the Company to sell and
a call option in favor of the Company's joint venture partner to purchase the
Company's remaining ownership interest in the joint venture for $23.0 million.
The options are simultaneously effective for a six-month period beginning July
1, 2003. Reflecting these terms, the Company wrote-down the carrying value of
its remaining equity investment in this joint venture to its estimated fair
market value of $23.0 million, recording a non-cash impairment charge of $4.0
million. There was no tax benefit recognized on the write-down.
In 2001, the Company wrote-down its investment in Interglas by $7.8
million. The write-down was the result of an assessment that an
other-than-temporary decline in value of the investment had occurred due to a
severe industry downturn and the resulting impact on the financial condition of
this company. The amount of the write-down was determined based on available
market information and appropriate valuation methodologies. The Company did not
record deferred tax benefits on the write-down because of limitations imposed by
foreign tax laws and the Company's ability to realize the tax benefits.
Lastly, Hexcel owns a 45% equity interest in DIC-Hexcel Limited ("DHL"), a
joint venture 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. Hexcel is
contingently liable to pay DIC up to $1.5 million with respect to DHL's debt
under certain defined circumstances through January 31, 2004, unless renewed.
This contingent liability will cease upon DHL's repayment of the underlying
loan.
81
Summarized condensed combined financial information for these joint
ventures as of December 31, 2002 and 2001 and for the three years ended December
31, 2002 is as follows:
(IN MILLIONS) DECEMBER 31,
SUMMARIZED CONDENSED COMBINED BALANCE SHEETS 2002 2001
------------------------------------------------------------------------------------------------------------------
Current assets $ 106.0 $ 132.0
Noncurrent assets 209.7 213.3
------------------------------------------------------------------------------------------------------------------
Total assets $ 315.7 $ 345.3
Current liabilities $ 66.8 $ 52.0
Noncurrent liabilities 99.2 87.0
------------------------------------------------------------------------------------------------------------------
Total liabilities 166.0 139.0
Minority Interest 20.3 21.3
Partners' equity 129.4 185.0
------------------------------------------------------------------------------------------------------------------
Total liabilities and partners' equity $ 315.7 $ 345.3
==================================================================================================================
For the Year Ended December 31,
SUMMARIZED CONDENSED COMBINED STATEMENTS OF OPERATIONS 2002 2001 2000
------------------------------------------------------------------------------------------------------------------
Net sales $ 232.7 $ 276.5 $ 337.3
Cost of sales 207.5 204.5 250.2
------------------------------------------------------------------------------------------------------------------
Gross profit 25.2 72.0 87.1
Other costs and expenses 78.6 76.0 79.8
------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (53.4) $ (4.0) $ 7.3
==================================================================================================================
NOTE 8 - NOTES PAYABLE
DECEMBER 31,
(IN MILLIONS) 2002 2001
------------------------------------------------------------------------------------------------------------------
Senior Credit Facility $ 179.7 $ 233.9
European credit and overdraft facilities 0.2 3.5
Senior subordinated notes, due 2009 (net of unamortized discount
of $1.2 and $1.4 as of December 31, 2002 and 2001) 338.8 338.6
Convertible subordinated notes, due 2003 46.9 46.9
Convertible subordinated debentures, due 2011 22.7 24.5
Various notes payable - 0.1
------------------------------------------------------------------------------------------------------------------
Total notes payable 588.3 647.5
Capital lease obligations 33.4 38.4
------------------------------------------------------------------------------------------------------------------
Total notes payable and capital lease obligations $ 621.7 $ 685.9
==================================================================================================================
Notes payable and current maturities of capital lease obligations $ 621.7 $ 17.4
Long-term notes payable and capital lease obligations, less current maturities - 668.5
------------------------------------------------------------------------------------------------------------------
Total notes payable and capital lease obligations $ 621.7 $ 685.9
==================================================================================================================
SENIOR CREDIT FACILITY
Hexcel had a global credit facility (the "Senior Credit Facility") with a
syndicate of banks to provide for ongoing working capital and other financing
requirements. The Senior Credit Facility, which consisted of revolving credit,
overdraft and term loan facilities, provided Hexcel with committed lines of
approximately $297.6 million as of December 31, 2002, subject to certain
limitations. These commitments consisted of funded term loans of $106.8 million,
revolving credit and overdraft facilities of $160.8 million, and letter of
credit facilities of $30.0 million. As of December 31, 2002, drawings under the
revolving credit facility were $72.9 million, leaving undrawn commitments under
the facilities of $87.9 million. As of December 31, 2002, letters of credit
issued under the facility approximated $24.2 million, of which $11.1 million
supports a loan to the Company's BHA Aero joint venture. The Company was subject
to various financial covenants and restrictions under the Senior Credit
Facility, including limitations on incurring debt, granting liens, selling
assets, repaying subordinated indebtedness, redeeming capital stock and paying
dividends. The Senior Credit Facility was scheduled to expire in 2004, except
for approximately $55.8 million of
82
term loans that are due for repayment in 2005. The Senior Credit Facility was
paid in full on March 19, 2003 (see Note 2).
Effective January 25, 2002, Hexcel entered into an amendment of the Senior
Credit Facility. The amendment provided for revised financial covenants through
2002; a 100 basis point increase in the interest spread payable over LIBOR for
advances under the facility; and an immediate decrease in the commitment of
revolving credit and overdraft facilities from a cumulative amount of $205.0
million to $190.0 million, with a further reduction to $182.0 million on or
before September 30, 2002. The amendment also provided for a 25 basis point
increase on January 1, 2003 if the Company did not reduce the commitment by a
further $25.0 million, prior to that date. The Senior Credit Facility financial
covenants set certain maximum values for the Company's leverage (the ratios of
total and senior debt to an Adjusted EBITDA), and certain minimum values for its
interest coverage (the ratio of an Adjusted EBITDA to cash interest expense) and
fixed charge coverage (the ratio of an Adjusted EBITDA less capital expenditures
to the sum of certain fixed expenses). In addition, during the term of the
amendment, all net proceeds generated through asset sales, and most other
liquidity events, in each case to the extent in excess of $2.5 million, and 100%
of all net proceeds generated from litigation settlements and judgments, must be
used to prepay loans under the Senior Credit Facility. Hexcel also agreed to
limit capital expenditures to $25.0 million during 2002, with a $10.0 million
limit during any quarter in 2002. At December 31, 2002, the Company was in
compliance with the covenants, as amended, under its Senior Credit Facility.
In connection with the credit agreement amendment, Hexcel also agreed to
grant additional collateral. The Company had previously granted a security
interest in most of its U.S. accounts receivable, inventory, property, plant,
equipment and real estate. It had also pledged some or all of the shares of
certain subsidiaries. Under the terms of the amendment, Hexcel granted to the
banks a security interest in additional U.S. accounts receivable, inventory,
property, plant, equipment and real estate, as well as its intellectual
property. In addition, each of a group of Hexcel's European subsidiaries granted
a security interest in its accounts receivable that secured certain local
borrowings advanced to that subsidiary.
The Senior Credit Facility had been subject to several previous amendments
to accommodate, among other things, the planned sale of assets, the planned
investments in additional manufacturing capacity for selected products, the
impact of the decline of the Company's operating results on certain financial
covenants, the purchase by an investor group of approximately 14.5 million
shares of Hexcel common stock held by a significant shareholder of the Company,
a restructuring of the ownership of certain of the Company's European
subsidiaries, the issuance of additional senior subordinated debt and the early
redemption of certain term debt. In connection with the 2002 and previous
amendments, included in interest expense in 2002 and 2001 are fees and expenses
incurred of approximately $1.8 million and $1.0 million, respectively.
The January 25, 2002 amendment relaxed the 2002 quarterly financial
covenants to accommodate the impact of the downturn in the commercial aerospace
and electronics markets. Under the terms of the amendment, the financial
covenants effective beginning with the quarter ending March 31, 2003 were to be
those that applied before the amendment. As these market conditions experienced
in 2002 are expected to continue during 2003, the Company needed to obtain a
further amendment of the facility before the end of the first quarter of 2003 to
accommodate its projected financial performance for that quarter and to be in
compliance with the financial covenants as provided in the Senior Credit
Facility agreement, or refinance the facility. The Company executed a
refinancing of the facility on March 19, 2003 (see Note 2).
83
The weighted average interest rate on the Senior Credit Facility was 7.71%,
8.50% and 11.55% for the years ended December 31, 2002, 2001 and 2000,
respectively. During the three years ended December 31, 2002, interest rates
have been in the following ranges:
IN EXCESS OF THE BASE RATE OF
IN EXCESS OF THE APPLICABLE THE ADMINISTRATIVE AGENT FOR
LONDON INTERBANK RATE THE LENDERS
--------------------------- -----------------------------
January 2002 to December 2002 2.00% - 4.25% 1.25% - 3.25%
May 2001 to January 2002 1.00% - 3.25% 0.25% - 2.25%
March 2000 to May 2001 0.75% - 3.00% 0.00% - 2.00%
Prior to March 2000 0.75% - 2.50% 0.00% - 1.50%
--------------------------------------------------------------------------------------------------------------
The Senior Credit Facility was subject to a commitment fee varying from
approximately 0.20% to 0.50% per annum of the total facility.
At December 31, 2001, Hexcel had an interest rate cap agreement outstanding
which covered a notional amount of $50.0 million of the Senior Credit Facility,
providing a maximum fixed rate of 5.50% on the applicable London interbank rate.
The agreement expired on October 29, 2002 (see Note 15).
EUROPEAN CREDIT AND OVERDRAFT FACILITIES
In addition to the Senior Credit Facility, 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. The
interest rates on these credit and overdraft facilities for the three years
ended December 31, 2002, ranged from 1.5% to 6.6%.
SENIOR SUBORDINATED NOTES, DUE 2009
On January 21, 1999, the Company issued $240.0 million of 9.75% senior
subordinated notes, due 2009. On June 29, 2001, the Company offered an
additional $100.0 million under the same indenture at a price of 98.5% of face
value. The senior subordinated notes are general unsecured obligations of
Hexcel.
Net proceeds from the subsequent offering were used to redeem $67.5 million
aggregate principal amount of the Company's outstanding 7% convertible
subordinated notes, due 2003, and to pay the entire principal amount of $25.0
million of the increasing rate senior subordinated note, due 2003. As a result
of the redemption, the Company recognized a $2.7 million loss on the early
retirement debt. With the adoption of FAS 145 on January 1, 2002, the $2.7
million extraordinary loss on early retirement of debt recorded in 2001 was
reclassified as a separate line item below operating income in the consolidated
statements of operations. There was no tax benefit recognized on the loss
because of limitations on the Company's ability to realize the tax benefits.
CONVERTIBLE SUBORDINATED NOTES, DUE 2003
The convertible subordinated notes carry an annual interest rate of 7.00%
and are convertible into Hexcel common stock at any time on or before August 1,
2003, unless previously redeemed, at a conversion price of $15.81 per share,
subject to adjustment under certain conditions. The convertible subordinated
notes are redeemable, in whole or in part, at the Company's option at any time,
at various redemption prices set forth in the convertible notes indenture, plus
accrued interest. On June 29, 2001, $67.5 million aggregate principal amount of
the convertible subordinated notes was redeemed.
CONVERTIBLE SUBORDINATED DEBENTURES, DUE 2011
The convertible subordinated debentures carry an annual interest rate of
7.00% and are convertible into shares of Hexcel common stock prior to maturity,
unless previously redeemed, at a conversion price of $30.72 per share. Mandatory
redemption of the convertible debentures was scheduled to begin in 2002 through
annual sinking fund requirements of $1.1 million in 2002 and $1.8
84
million in each year thereafter. The Company satisfied the 2002 annual sinking
fund requirement in 2001. In 2002, the Company recognized a $0.5 million gain on
the early retirement of debt, relating to the repurchase of $1.8 million in
satisfaction of the 2003 sinking fund requirement. The debt was repurchased at
market prices, which resulted in a gain. In accordance with the requirements of
FAS 145, the gain has been reported as a separate line item below operating
income in the consolidated statements of operations.
INCREASING RATE SENIOR SUBORDINATED NOTE, DUE 2003
The increasing rate senior subordinated note, due 2003 was a general
unsecured obligation payable to certain subsidiaries of Ciba Specialty Chemicals
Holding, Inc. Effective February 1999, the interest rate on the note was 10.50%
per annum, a rate which increased by 0.50% per annum each February thereafter
until the repayment of principal. The average interest rate on the note was
11.42% in 2001 and 10.96% in 2000. The note was redeemed in full on June 29,
2001 with the proceeds of the $100.0 million issuance of 9.75% senior
subordinated notes, due 2009.
AGGREGATE MATURITIES OF NOTES PAYABLE
The table below reflects aggregate scheduled maturities of notes payable,
excluding capital lease obligations (see Note 9):
Payable during the years ending December 31: (IN MILLIONS)
---------------------------------------------------------------------------
2003 $ 55.7
2004 117.1
2005 57.6
2006 1.8
2007 1.8
Thereafter 355.5
---------------------------------------------------------------------------
Total notes payable $ 589.5
===========================================================================
The aggregate maturities of notes payable in 2003 include European credit
and overdraft facilities of $0.2 million, which are repayable on demand. At
December 31, 2002, the unamortized discount on the additional $100.0 million
senior subordinated notes, due 2009, issued on June 29, 2001, was $1.2 million.
DEBT CLASSIFICATION AS OF DECEMBER 31, 2002
As described in Note 2, as the anticipated refinancing of the capital
structure was not completed as of February 28, 2003 (the 2002 financial
statement issuance date) and the Company had not obtained an amendment of the
aforementioned financial covenants, all debt had been classified as current at
December 31, 2002.
ESTIMATED FAIR VALUES OF NOTES PAYABLE
The Senior Credit Facility and the various European credit facilities
outstanding as of December 31, 2002 and 2001 are variable-rate debt obligations.
Accordingly, the estimated fair values of each of these debt obligations
approximate their respective book values. The approximate, aggregate fair values
of the Company's other notes payable as of December 31, 2002 and 2001 were as
follows:
(IN MILLIONS) 2002 2001
------------------------------------------------------------------------------------------------
Senior subordinated notes, due 2009 $ 295.8 $ 190.4
Convertible subordinated notes, due 2003 46.2 27.0
Convertible subordinated debentures, due 2011 13.6 15.5
================================================================================================
The aggregate fair values of the above notes payable were estimated on the
basis of quoted market prices; however, trading in these securities is limited
and may not reflect actual fair value.
85
NOTE 9 - LEASING ARRANGEMENTS
Assets, accumulated depreciation, and related liability balances under
capital leasing arrangements, as of December 31, 2002 and 2001, were:
(IN MILLIONS) 2002 2001
--------------------------------------------------------------------------------------
Property, plant and equipment $ 55.3 $ 61.1
Less accumulated depreciation (31.4) (26.3)
--------------------------------------------------------------------------------------
Net property, plant and equipment $ 23.9 $ 34.8
======================================================================================
Capital lease obligations $ 33.4 $ 38.4
Less current maturities (6.2) (5.6)
--------------------------------------------------------------------------------------
Long-term capital lease obligations, net $ 27.2 $ 32.8
======================================================================================
Certain sales and administrative offices, data processing equipment and
manufacturing facilities are leased under operating leases. Rental expense under
operating leases was $3.8 million in 2002, $5.4 million in 2001, and $7.0
million in 2000.
Scheduled future minimum lease payments as of December 31, 2002 were:
TYPE OF LEASE
(IN MILLIONS) ------------------------------
Payable during years ending December 31: CAPITAL OPERATING
--------------------------------------------------------------------------------------------------
2003 $ 8.7 $ 2.9
2004 8.7 2.5
2005 8.5 2.6
2006 11.4 1.7
2007 0.5 0.7
Thereafter 3.4 2.0
--------------------------------------------------------------------------------------------------
Total minimum lease payments $ 41.2 $ 12.4
==================================================================================================
Less amounts representing interest 7.8
--------------------------------------------------------------------------------
Present value of future minimum capital lease payments 33.4
Less current obligations under capital leases 6.2
--------------------------------------------------------------------------------
Long-term obligations under capital lease $ 27.2
================================================================================
CLASSIFICATION AS OF DECEMBER 31, 2002
As described in Note 2, the anticipated refinancing of the capital
structure was not completed as of February 28, 2003 (the 2002 financial
statement issuance date) and the Company has not obtained an amendment of the
aforementioned financial covenants; therefore, all capital lease obligations
have been classified as current at December 31, 2002.
NOTE 10 - RELATED PARTIES
CHANGE IN CONTROL
On December 19, 2000, the Goldman Sachs Investors completed a purchase of
approximately 14.5 million of the approximately 18 million shares of Hexcel
common stock owned by subsidiaries of Ciba Specialty Chemicals Holding, Inc. The
shares acquired by the Goldman Sachs Investors represented approximately 39% of
the Hexcel's outstanding common stock. In addition, the Company and the Goldman
Sachs Investors entered into a governance agreement that became effective on
December 19, 2000. Under this governance agreement, the Goldman Sachs Investors
have the right to, among other things, designate up to three directors to sit on
the Company's board of directors.
Hexcel incurred $2.2 million of costs in connection with this transaction,
all of which were included in "selling, general, and administrative expenses" in
2000. These costs and expenses included legal, consulting, and regulatory
compliance expenses, as well as a non-cash charge attributable to the
accelerated vesting of certain stock-based compensation and to certain
amendments to an executive retirement plan. Under the terms of the Company's
various stock option and
86
management incentive plans, the transaction constituted a "change in control"
event, resulting in all outstanding stock options becoming vested and
exercisable. The former Chief Executive Officer waived the vesting of his stock
options by such event. In addition, nine of the most senior executive officers
other than the former Chief Executive Officer agreed to defer the vesting of
their stock options such that any of their stock options that would have
otherwise vested immediately (or would have otherwise vested by their terms)
vested one year after the closing with respect to half of such options, and two
years after the closing with respect to the remaining half of such options,
subject to earlier vesting in certain circumstances. As a result, approximately
1.3 million stock options, with exercise prices ranging from $2.41 to $29.63 per
share, and a weighted average exercise price of $8.99 per share, vested and
became exercisable on December 19, 2000 (see Note 13).
In addition, due to the change in control event, shares of the Hexcel's
common stock underlying a total of approximately 0.8 million restricted stock
units and performance accelerated restricted stock units (collectively, "stock
units") were distributed. However, the former Chief Executive Officer waived the
vesting of his stock units, and nine of the most senior executive officers other
than the former Chief Executive Officer agreed to defer the distribution of
shares underlying their stock units (although not the vesting of such stock
units), such that any shares of common stock that would have otherwise been
distributed immediately would be distributed one year after the closing with
respect to half of such stock units, and two years after the closing with
respect to the remaining half of such stock units, subject to earlier
distribution under certain circumstances (see Note 13).
NOTE 11 - RETIREMENT AND OTHER POSTRETIREMENT BENEFIT PLANS
Hexcel maintains qualified and nonqualified defined benefit retirement
plans covering certain U.S. and European employees, as well as retirement
savings plans covering eligible U.S. employees. The defined benefit retirement
plans are generally based on years of service and employee compensation under
either a career average or final pay benefits method, except as described below.
The Company also participates in a union sponsored multi-employer pension plan
covering certain U.S. employees with union affiliations.
In addition to defined benefit and retirement savings plan benefits, Hexcel
also provides certain postretirement health care and life insurance benefits to
eligible U.S. retirees. Depending upon the plan, benefits are available to
eligible employees who retire on or after age 58 or 65 after rendering a minimum
of 15 years or 25 years of service to Hexcel.
Under the retirement savings plans, eligible U.S. employees can contribute
up to 16% of their compensation to an individual retirement savings account.
Hexcel makes matching contributions equal to 50% of employee contributions, not
to exceed 3% of employee compensation. The Company also makes profit sharing
contributions when it meets or exceeds certain performance targets, which are
set annually.
Effective December 31, 2000, the Company made certain changes to its U.S.
retirement benefit plans that were intended to improve the flexibility and
visibility of future retirement benefits for employees. These changes included
an increase in the amount that the Company will contribute to individual 401(k)
retirement savings accounts and an offsetting curtailment of the Company's U.S.
qualified defined benefit retirement plan. Beginning January 1, 2001, the
Company started to contribute an additional 2% to 3% of each eligible employee's
salary to an individual 401(k) retirement savings account, depending on the
employee's age. This increases the maximum contribution to individual employee
savings accounts to between 5% and 6% per year, before any profit sharing
contributions. Offsetting the estimated incremental cost of this additional
benefit, participants in the Company's U.S. qualified defined benefit retirement
plan no longer accrued benefits under this plan after December 31, 2000, and no
new employees will become participants. However, employees retained all benefits
earned under this plan as of that date. The Company recognized a non-cash
curtailment gain of $5.1 million (an after-tax gain of approximately $3.3
million) in 2000 as a result of the amendment to its defined benefit retirement
plan.
87
The net periodic expense for all of these defined benefit and retirement
savings plans, for the three years ended December 31, 2002, was:
(IN MILLIONS) 2002 2001 2000
--------------------------------------------------------------------------------------------------------------------
Defined benefit retirement plans $ 6.8 $ 4.1 $ (1.2)
Union sponsored multi-employer pension plan 0.2 0.3 0.3
Retirement savings plans-matching contributions 4.5 5.0 2.9
Retirement savings plans-profit sharing and incentive contributions 6.5 7.0 5.0
--------------------------------------------------------------------------------------------------------------------
Net periodic expense $ 18.0 $ 16.4 $ 7.0
--------------------------------------------------------------------------------------------------------------------
The net periodic cost of Hexcel's defined benefit retirement and U.S.
postretirement plans for the three years ended December 31, 2002, were:
(IN MILLIONS) U.S. PLANS EUROPEAN PLANS
DEFINED BENEFIT RETIREMENT PLANS 2002 2001 2000 2002 2001 2000
-----------------------------------------------------------------------------------------------------------------------
Service cost $ 0.7 $ 0.6 $ 3.0 $ 4.3 $ 2.4 $ 2.4
Interest cost 1.6 1.8 1.8 3.0 2.9 2.5
Expected return on plan assets (1.4) (1.4) (1.3) (4.1) (4.1) (4.5)
Net amortization and deferral 0.5 0.5 0.4 1.7 - (0.2)
-----------------------------------------------------------------------------------------------------------------------
Sub-total 1.4 1.5 3.9 4.9 1.2 0.2
Curtailment and settlement (gain) loss 0.5 1.0 (5.3) - 0.4 -
-----------------------------------------------------------------------------------------------------------------------
Net periodic pension cost (benefit) $ 1.9 $ 2.5 $ (1.4) $ 4.9 $ 1.6 $ 0.2
=======================================================================================================================
POSTRETIREMENT PLANS - U.S. PLANS 2002 2001 2000
--------------------------------------------------------------------------------
Service cost $ 0.1 $ 0.2 $ 0.2
Interest cost 0.8 1.0 1.0
Net amortization and deferral (0.5) (0.4) (0.4)
--------------------------------------------------------------------------------
Net periodic postretirement benefit cost $ 0.4 $ 0.8 $ 0.8
================================================================================
88
The benefit obligation, fair value of plan assets, funded status, and
amounts recognized in the consolidated financial statements for Hexcel's defined
benefit retirement plans and U.S. postretirement plans, as of and for the years
ended December 31, 2002 and 2001, were:
DEFINED BENEFIT RETIREMENT PLANS
----------------------------------------------
U.S. PLANS EUROPEAN PLANS POSTRETIREMENT PLANS
(IN MILLIONS) 2002 2001 2002 2001 2002 2001
----------------------------------------------------------------------------------------------------------------------------
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation - beginning of year $ 27.7 $ 24.1 $ 56.3 $ 49.8 $ 14.2 $ 14.2
Service cost 0.7 0.6 4.3 2.4 0.1 0.2
Interest cost 1.6 1.8 3.0 2.9 0.8 1.0
Plan participants' contributions - - 0.5 0.7 0.4 0.1
Amendments 0.6 1.8 - - (1.7) -
Actuarial loss (gain) 1.0 3.6 (3.1) 2.4 0.7 0.2
Benefits paid (4.7) (1.9) (1.0) (0.8) (1.5) (1.0)
Curtailment and settlement (gain) loss (1.0) (2.3) - 0.4 - (0.5)
Foreign exchange translation - - 6.5 (1.5) - -
----------------------------------------------------------------------------------------------------------------------------
Benefit obligation - end of year $ 25.9 $ 27.7 $ 66.5 $ 56.3 $ 13.0 $ 14.2
----------------------------------------------------------------------------------------------------------------------------
CHANGE IN PLAN ASSETS:
Fair value of plan assets - beginning of
year $ 14.5 $ 14.7 $ 51.9 $ 60.4 $ - $ -
Actual return on plan assets (0.9) (0.5) (10.3) (8.3) - -
Employer contributions 4.4 2.2 1.4 1.2 1.1 0.9
Plan participants' contributions - - 0.5 0.7 0.4 0.1
Benefits paid (4.7) (1.9) (1.0) (0.8) (1.5) (1.0)
Currency translation adjustments - - 5.0 (1.7) - -
Settlements (1.5) - - 0.4 - -
----------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets - end of year $ 11.8 $ 14.5 $ 47.5 $ 51.9 $ - $ -
----------------------------------------------------------------------------------------------------------------------------
RECONCILIATION OF FUNDED STATUS TO NET
AMOUNT RECOGNIZED:
Unfunded status $ (14.1) $ (13.2) $ (19.0) $ (4.4) $ (13.0) $ (14.2)
Unrecognized actuarial loss (gain) 8.9 6.1 25.9 13.0 (2.9) 0.9
Unrecognized prior service cost 2.3 1.9 - - (1.9) (5.2)
----------------------------------------------------------------------------------------------------------------------------
Net amount recognized $ (2.9) $ (5.2) $ 6.9 $ 8.6 $ (17.8) $ (18.5)
----------------------------------------------------------------------------------------------------------------------------
AMOUNTS RECOGNIZED IN CONSOLIDATED BALANCE
SHEETS:
Prepaid benefit costs $ - $ - $ 6.9 $ 8.6 $ - $ -
Intangible asset 1.7 1.5 - - - -
Accrued benefit liability (13.6) (13.4) (11.3) - (17.8) (18.5)
Accumulated other comprehensive income
(before tax for European Plans) 9.0 6.7 11.3 - - -
----------------------------------------------------------------------------------------------------------------------------
Net amount recognized $ (2.9) $ (5.2) $ 6.9 $ 8.6 $ (17.8) $ (18.5)
============================================================================================================================
The total accumulated benefit obligation for pension plans with accumulated
benefit obligations in excess of plan assets was $66.3 million and $23.1 million
as of December 31, 2002 and 2001, respectively. A minimum pension obligation was
recorded to the extent such excesses exceed the liability recognized under
Statement of Financial Accounting Standards No. 87, "Employers' Accounting for
Pensions." Offsetting amounts were recorded in "intangible assets" to the extent
of unrecognized prior service costs, with the remainder recorded in "accumulated
other comprehensive income." Amortization of loss and other prior service costs
is calculated on a straight-line basis over the expected future years of service
of the plans' active participants. Assets for the defined benefit pension plans
generally consist of publicly traded equity securities, bonds and cash
investments.
As of December 31, 2002 and 2001, the prepaid benefit cost was included in
"other assets" in the accompanying consolidated balance sheets. For the same
periods, the accrued benefit costs for the U.S. defined retirement plans and
postretirement benefit plans were included in "accrued compensation and
benefits" and "other non-current liabilities," respectively, in the accompanying
consolidated balance sheets.
89
Assumptions used to estimate the actuarial present value of benefit
obligations at December 31, 2002, 2001, and 2000 were as follows:
(IN MILLIONS) 2002 2001 2000
--------------------------------------------------------------------------------------------------------------------
U.S. defined benefit retirement plans:
Discount rates 6.8% 7.3% 7.5%
Rate of increase in compensation 4.5% 4.5% 4.5%
Expected long-term rate of return on plan assets 9.0% 9.0% 9.0%
European defined benefit retirement plans:
Discount rates 5.3% - 6.0% 5.8% - 6.0% 5.8% - 6.0%
Rates of increase in compensation 2.5% - 3.8% 2.5% - 4.0% 2.5% - 4.0%
Expected long-term rates of return on plan assets 5.0% - 7.8% 5.8% - 7.0% 6.5% - 7.0%
Postretirement benefit plans:
Discount rates 6.8% 7.0% - 7.3% 7.0% - 7.5%
====================================================================================================================
The per capita cost of covered health care benefits increased by 22.0% in
2002. The annual rate of increase in the per capita cost of covered health care
benefits is assumed to be approximately 6.6% for medical and 5.0% for dental and
vision for 2003. The medical rates are assumed to gradually decline to 5.3% by
2012, whereas dental and vision rates are assumed to remain constant at 5.0%.
The table below presents the impact of a one-percentage-point increase and
a one-percentage-point decrease in the assumed health care cost trend on the
total of service and interest cost components, and on the postretirement benefit
obligation.
(IN MILLIONS) 2002 2001
-------------------------------------------------------------------------------------------
One-percentage-point increase:
Effect on total service and interest cost components $ 0.1 $ 0.1
Effect on postretirement benefit obligation $ 0.8 $ 1.1
One-percentage-point decrease:
Effect on total service and interest cost components $ (0.1) $ (0.1)
Effect on postretirement benefit obligation $ (0.7) $ (0.9)
===========================================================================================
NOTE 12 - INCOME TAXES
Income (loss) before income taxes and the provision for income taxes, for
the three years ended December 31, 2002, were as follows:
(IN MILLIONS) 2002 2001 2000
--------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes:
U.S. $ (22.5) $ (411.9) $ 22.4
International 30.2 28.2 52.6
--------------------------------------------------------------------------------------------------------------------
Total income (loss) before income taxes $ 7.7 $ (383.7) $ 75.0
====================================================================================================================
Provision for income taxes:
Current:
U.S. $ - $ - $ -
International 9.6 12.9 17.7
--------------------------------------------------------------------------------------------------------------------
Current provision for income taxes 9.6 12.9 17.7
--------------------------------------------------------------------------------------------------------------------
Deferred:
U.S. 0.5 30.7 9.0
International 1.2 (3.1) (0.4)
--------------------------------------------------------------------------------------------------------------------
Deferred provision for income taxes 1.7 27.6 8.6
--------------------------------------------------------------------------------------------------------------------
Total provision for income taxes $ 11.3 $ 40.5 $ 26.3
====================================================================================================================
90
A reconciliation of the provision for income taxes at the U.S. federal
statutory income tax rate of 35% to the effective income tax rate, for the three
years ended December 31, 2002, is as follows:
(IN MILLIONS) 2002 2001 2000
--------------------------------------------------------------------------------------------------------------------
Provision for taxes at U.S. federal statutory rate $ 2.7 $ (134.3) $ 26.3
U.S. state taxes, less federal tax benefit - - 0.3
Impact of different international tax rates, permanent
differences and other 0.1 (3.1) (0.2)
Valuation allowance 8.5 177.9 (0.1)
--------------------------------------------------------------------------------------------------------------------
Total provision for income taxes $ 11.3 $ 40.5 $ 26.3
====================================================================================================================
In 2002, the Company received a dividend of $74.0 million from one of its
foreign subsidiaries, which is taxable for U.S. income tax purposes. The taxable
income resulting from the dividend is fully offset by net operating losses. The
utilization of net operating losses results in a corresponding reduction in the
valuation allowance.
The Company has made no U.S. income tax provision for approximately $80.4
million of undistributed earnings of international subsidiaries as of December
31, 2002. Such earnings are considered to be permanently reinvested.
DEFERRED INCOME TAXES
Deferred income taxes result from net operating loss carryforwards and
temporary differences between the recognition of items for income tax purposes
and financial reporting purposes. Principal components of deferred income taxes
as of December 31, 2002 and 2001, were:
(IN MILLIONS) 2002 2001
-------------------------------------------------------------------------------------
Net operating loss carryforwards $ 55.4 $ 70.0
Reserves and other, net 43.6 48.3
Accelerated depreciation (27.0) (23.5)
Accelerated amortization 94.9 92.3
Unfunded pension liability 6.7 2.4
Valuation allowance (167.4) (185.0)
-------------------------------------------------------------------------------------
Net deferred tax asset $ 6.2 $ 4.5
=====================================================================================
Since 1999, the Company has generated taxable income in Europe offset by
net operating loss ("NOL") carryforwards in the United States. The Company's
U.S. operations have generated such losses, in part, because most of the
Company's interest expense and goodwill amortization are serviced in the United
States. Through the first quarter of 2001, the Company recognized the benefit of
these NOL carryforwards by increasing the deferred tax asset carried on its
balance sheet.
During the second quarter of 2001, the Company began to experience a sharp
decline in revenues from its electronics market. As a result, the Company
reevaluated its ability to continue to recognize a benefit for U.S. net
operating losses generated, and determined to increase its tax provision rate
through the establishment of a non-cash valuation allowance attributable to the
currently generated U.S. net operating losses until such time as the U.S.
operations return to consistent profitability. Due to the effect of significant
events that have occurred since such time, including the delay in anticipated
recovery in the electronics market, anticipated reductions in commercial
aircraft production, and a general weakening of the economy, along with the
sizable impairments on certain long-lived assets recognized in the fourth
quarter of 2001, the Company reduced its estimates for future U.S. taxable
income during the carryforward period. As such, the Company established a full
valuation allowance on its U.S. deferred tax assets, which resulted in a tax
provision of $32.6 million in the fourth quarter of 2001 to record a valuation
allowance on previously reported tax assets.
Deferred tax assets require a valuation allowance when it is more likely
than not that some portion of the deferred tax assets may not be realized. The
realization of the deferred tax assets is dependent upon the timing and
magnitude of future taxable income prior to the expiration of the deferred tax
attributes. The amount of the deferred tax assets considered realizable,
however, could change if estimates of future taxable U.S. income during the
carry-forward period improve.
91
NET OPERATING LOSS CARRYFORWARDS
As of December 31, 2002, Hexcel had net operating loss carryforwards for
U.S. federal and Belgium income tax purposes of approximately $156.9 million and
$7.2 million, respectively. If the Company issues the new preferred stock
described in Note 2, the Company will likely experience 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.
NOTE 13 - STOCKHOLDERS' EQUITY (DEFICIT)
COMMON STOCK OUTSTANDING
(NUMBER OF SHARES IN MILLIONS) 2002 2001 2000
--------------------------------------------------------------------------------------------------------------------
Common stock:
Balance, beginning of year 39.4 38.0 37.4
Activity under stock plans 0.4 1.4 0.6
--------------------------------------------------------------------------------------------------------------------
Balance, end of year 39.8 39.4 38.0
--------------------------------------------------------------------------------------------------------------------
Treasury stock:
Balance, beginning of year 1.2 0.9 0.8
Repurchased 0.1 0.3 0.1
--------------------------------------------------------------------------------------------------------------------
Balance, end of year 1.3 1.2 0.9
--------------------------------------------------------------------------------------------------------------------
Common stock outstanding 38.5 38.2 37.1
====================================================================================================================
STOCK-BASED INCENTIVE PLANS
Hexcel has various stock option and management incentive plans for eligible
employees, officers, and directors. These plans provide for awards in the form
of stock options, stock appreciation rights, restricted stock, restricted stock
units and other stock-based awards. Options to purchase common stock are
generally granted at the fair market value on the date of grant. Substantially
all of these options have a ten-year term and generally vest over a three-year
period, except that the vesting period may be accelerated under certain
circumstances. At December 31, 2002, the aggregate number of shares of stock
issuable under these plans was 9.9 million shares.
As of December 31, 2002, 2001, and 2000, Hexcel had outstanding a total of
0.1 million, 0.2 million and 0.7 million of performance accelerated restricted
stock units ("PARS"), respectively. PARS are convertible to an equal number of
shares of Hexcel common stock and generally vest at the end of a seven-year
period, subject to certain terms of employment and other circumstances that may
accelerate the vesting period. Approximately 0.1 million, 0.6 million and 0.2
million PARS were converted into Hexcel common stock in 2002, 2001 and 2000,
respectively. In 2001 and 2000, 0.1 million and 0.5 million PARS were granted
and 0.1 million and 0.7 million PARS vested, respectively. No PARS were granted
in 2002.
In 2002, Hexcel granted 0.3 million restricted stock units to eligible
officers. Restricted stock units are convertible to an equal number of shares of
Hexcel common stock and generally vest ratably over a three-year period.
One-third of the restricted stock units were converted to stock in the first
quarter of 2003. In addition, the Company's Chief Executive Officer received
approximately 0.1 million shares of common stock in connection with his hiring
in July 2001, restricted during a twenty-month vesting period.
Compensation expense of $0.8 million, $2.0 million and $4.5 million was
recognized in 2002, 2001 and 2000, respectively, in regards to the PARS,
restricted stock units and the Chief Executive Officer's restricted stock. In
2000, $2.4 million of compensation expense was recognized due to accelerated
vesting of PARS as a result of the attainment of certain financial and other
performance target, as well as the change in control event. Compensation expense
is recognized based on the quoted market price of Hexcel common stock on the
date of grant.
92
Stock option data for the years ended December 31, 2002, 2001 and 2000,
was:
NUMBER OF WEIGHTED AVERAGE
(IN MILLIONS, EXCEPT PER SHARE DATA) OPTIONS EXERCISE PRICE
--------------------------------------------------------------------------------------------------
Options outstanding as of January 1, 2000 5.9 $ 11.18
Options granted 1.6 $ 9.23
Options exercised (0.3) $ 6.52
Options expired or canceled (0.5) $ 11.85
--------------------------------------------------------------------------------------------------
Options outstanding as of December 31, 2000 6.7 $ 10.56
Options granted 1.3 $ 10.17
Options exercised (0.2) $ 6.02
Options expired or canceled (0.4) $ 10.72
--------------------------------------------------------------------------------------------------
Options outstanding as of December 31, 2001 7.4 $ 10.62
Options granted 1.3 $ 2.66
Options exercised - $ -
Options expired or canceled (0.8) $ 10.61
--------------------------------------------------------------------------------------------------
Options outstanding as of December 31, 2002 7.9 $ 8.81
==================================================================================================
As previously discussed in Note 10, approximately 1.3 million of stock
options, with exercise prices ranging from $2.41 to $29.63 per share, and having
a weighted average exercise price of $8.99 per share, became vested as a result
of the change in control event in 2000. The total number of options exercisable
as of December 31, 2002, 2001 and 2000 were 5.7 million, 5.4 million and 3.9
million, respectively, at a weighted average exercise price per share of $10.45,
$10.70 and $10.80, respectively.
The following table summarizes information about stock options outstanding
as of December 31, 2002 (in millions, except per share data):
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER OF AVERAGE AVERAGE NUMBER OF AVERAGE
RANGE OF OPTIONS REMAINING EXERCISE OPTIONS EXERCISE
EXERCISE PRICES OUTSTANDING LIFE (IN YEARS) PRICE EXERCISABLE PRICE
------------------------------------------------------------------------------------------------------------------
$ 1.37 - 2.74 1.2 9.02 $ 2.62 0.1 $ 1.41
$ 2.87 - 6.36 1.2 4.37 $ 5.55 1.1 $ 5.56
$ 6.37 - 9.94 1.1 4.38 $ 9.19 1.0 $ 9.14
$ 9.95 - 10.50 1.1 8.53 $ 10.45 0.3 $ 10.43
$ 10.51 - 11.88 0.8 4.51 $ 11.14 0.7 $ 11.17
$ 11.89 - 12.11 1.5 3.98 $ 12.00 1.5 $ 12.00
$ 12.12 - 29.63 1.0 3.34 $ 15.35 1.0 $ 15.36
------------------------------------------------------------------------------------------------------------------
$ 1.37 - 29.63 7.9 5.70 $ 8.81 5.7 $ 10.45
==================================================================================================================
The weighted average fair value of stock options granted during 2002, 2001
and 2000 was $1.96, $4.87 and $4.48, respectively, and estimated using the
Black-Scholes model with the following weighted-average assumptions:
2002 2001 2000
----------------------------------------------------------------------------------------
Expected life (in years) 5 4 4
Interest rate 2.78% 4.35% 6.50%
Volatility 88.6% 68.9% 40.1%
Dividend yield - - -
========================================================================================
EMPLOYEE STOCK PURCHASE PLAN ("ESPP")
Hexcel maintains an ESPP, under which eligible employees may contribute up
to 10% of their base earnings toward the quarterly purchase of the Company's
common stock at a purchase price equal to 85% of the fair market value of the
common stock on the purchase date. The maximum number of shares of common stock
reserved for issuance under the ESPP is 0.5 million. During 2002, 2001 and 2000,
an aggregate total of approximately 0.2 million shares of common stock were
issued under the ESPP.
93
NOTE 14 - NET INCOME (LOSS) PER SHARE
Computations of basic and diluted net income (loss) per share for the
years ended December 31, 2002, 2001 and 2000, are as follows:
(IN MILLIONS, EXCEPT PER SHARE DATA) 2002 2001 2000
--------------------------------------------------------------------------------------------------------------------
NET INCOME (loss):
Net income (loss) $ (13.6) $ (433.7) $ 54.2
Effect of dilutive securities:
Convertible subordinated notes, due 2003 - - 5.1
Convertible subordinated debentures, due 2011 - - 1.1
--------------------------------------------------------------------------------------------------------------------
Adjusted net income (loss) for diluted purposes $ (13.6) $ (433.7) $ 60.4
====================================================================================================================
BASIC NET INCOME (loss) PER SHARE:
Weighted average common shares outstanding 38.4 37.6 36.8
Basic net income (loss) per share $ (0.35) $ (11.54) $ 1.47
====================================================================================================================
DILUTED NET INCOME (loss) PER SHARE:
Weighted average common shares outstanding 38.4 37.6 36.8
Effect of dilutive securities:
Stock options - - 0.8
Convertible subordinated notes, due 2003 - - 7.2
Convertible subordinated debentures, due 2011 - - 0.9
--------------------------------------------------------------------------------------------------------------------
Diluted weighted average common shares outstanding 38.4 37.6 45.7
Diluted net income (loss) per share $ (0.35) $ (11.54) $ 1.32
====================================================================================================================
The convertible subordinated notes, due 2003, the convertible subordinated
debentures, due 2011, and all of the stock options were excluded from the 2002
and 2001 computations of diluted net loss per share, as they were antidilutive.
Approximately 4.5 million stock options were excluded from the 2000 calculation
of diluted net income per share as their exercise price was higher than the
Company's average stock price. The exercise price for these stock options ranged
from approximately $9.19 to $29.63 per share, with the weighted average price
being approximately $12.55 per share.
NOTE 15 - DERIVATIVE FINANCIAL INSTRUMENTS
INTEREST RATE CAP AGREEMENT
The Company's financial results are affected by interest rate changes on
its variable rate debt. In order to partially mitigate this interest rate risk,
the Company entered into a five-year interest rate cap agreement in 1998. The
agreement provided for a maximum fixed rate of 5.5% on the applicable London
interbank rate used to determine the interest on a notional amount of $50.0
million of variable rate debt under the Senior Credit Facility. The fair value
and carrying amount of this contract at December 31, 2001, along with hedge
ineffectiveness for the period ended October 29, 2002 and the year ended
December 31, 2001, were not material. The interest rate cap agreement expired on
October 29, 2002.
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.
During 2001, Hexcel entered into a number of foreign currency forward exchange
contracts to exchange U.S. dollars for Euros at fixed rates on specified dates
through March 2005. The aggregate notional amount of these contracts was $58.0
million and $83.9 million at December 31, 2002 and 2001, respectively. The
purpose of these contracts is to hedge a portion of the forecasted transactions
of European subsidiaries under long-term sales contracts with certain customers.
These contracts are expected to provide the Company with a more balanced
matching of future cash receipts and expenditures by currency, thereby reducing
the Company's exposure to fluctuations in currency exchange rates. For the years
ended December 31, 2002 and 2001, hedge
94
ineffectiveness was immaterial and the fair value of the foreign currency cash
flow hedges recognized in "comprehensive income (loss)" was a net gain of $9.3
million and a net loss of $5.9 million, respectively. Approximately $2.0 million
of the amounts recorded in other comprehensive income is expected to be
reclassified into earnings in fiscal 2003 as the hedged sales are recorded.
NOTE 16 - COMMITMENTS AND CONTINGENCIES
Hexcel is involved in litigation, investigations and claims arising out of
the normal conduct of its business, including those relating to commercial
transactions, as well as to environmental, employment and health and safety
matters. The Company estimates and accrues its liabilities resulting from such
matters based on a variety of factors, including outstanding legal claims and
proposed settlements; assessments by internal and external counsel of pending or
threatened litigation; and assessments by environmental engineers and
consultants of potential environmental liabilities and remediation costs. Such
estimates exclude counterclaims against other third parties and are not
discounted to reflect the time value of money due to the uncertainty in
estimating the timing of the expenditures, which may extend over several years.
The Company believes that it has meritorious defenses and is taking
appropriate actions against such matters. While it is impossible to ascertain
the ultimate legal and financial liability with respect to certain contingent
liabilities and claims, the Company believes, based upon its examination of
currently available information, its experience to date, and advice from legal
counsel, that the individual and aggregate liabilities resulting from the
ultimate resolution of these contingent matters, after taking into consideration
its existing insurance coverage and amounts already provided for, will not have
a material adverse impact on the Company's consolidated results of operations,
financial position or cash flows.
ENVIRONMENTAL CLAIMS AND PROCEEDINGS
Hexcel has been named as a potentially responsible party with respect to
several hazardous waste disposal sites that it does not own or possess, which
are included on the Superfund National Priority List of the U.S. Environmental
Protection Agency or on equivalent lists of various state governments. Because
CERCLA provides for joint and several liability, the Company could be
responsible for all remediation costs at such sites, even if it is one of many
potentially responsible parties ("PRPs"). The Company believes, based on the
amount and the nature of its waste, and the number of other financially viable
PRPs, that its liability in connection with such matters will not be material.
Pursuant to the New Jersey Industrial Sites Recovery Act, Hexcel signed an
administrative consent order and a later Remediation Agreement to pay for the
environmental remediation of a manufacturing facility it owns and formerly
operated in Lodi, New Jersey. The ultimate cost of remediating the Lodi site
will depend on developing circumstances.
Hexcel was party to a cost-sharing agreement regarding the operation of
certain environmental remediation systems necessary to satisfy a post-closure
care permit issued to a previous owner of the Company's Kent, Washington site by
the U.S. Environmental Protection Agency. Under the terms of the cost-sharing
agreement, the Company was obligated to reimburse the previous owner for a
portion of the cost of the required remediation activities. Management has
determined that the cost-sharing agreement terminated in December 1998; however,
the other party disputes this determination.
At its Livermore, California facility, Hexcel has received a series of
notices of violation of air quality standards from the Bay Area Air Quality
Management District. Hexcel has investigated and corrected the issues and has
cooperated with the District.
The Company's estimate of its liability as a PRP, of the remaining costs
associated with its responsibility to remediate the Lodi, New Jersey, and Kent,
Washington sites and for any fines and penalties that may be assessed relating
to the Livermore, California notices of violation is accrued in the accompanying
consolidated balance sheets.
95
OTHER PROCEEDINGS
Hexcel is aware of a grand jury investigation being conducted by the
Antitrust Division of the United States Department of Justice with respect to
the carbon fiber and carbon fiber prepreg industries. The Department of Justice
appears to be reviewing the pricing of all manufacturers of carbon fiber and
carbon fiber prepreg since 1993. The Company, along with other manufacturers of
these products, has received a grand jury subpoena requiring production of
documents to the Department of Justice. Toho Tenax Co. Ltd., one of their
subsidiaries and one of their employees have been indicted for obstruction of
justice; Toho and its subsidiary pleaded guilty to obstruction of justice and
received a combined fine of $500,000. No other indictments have been issued in
the case to date. The Company is not in a position to predict the direction or
outcome of the investigation; however, it is cooperating with the Department of
Justice.
In 1999, Hexcel was joined in a class action lawsuit alleging antitrust
violations in the sale of carbon fiber, carbon fiber industrial fabrics and
carbon fiber prepreg (Thomas & Thomas Rodmakers, Inc. et. al. v. Newport
Adhesives and Composites, Inc., et. al., Amended and Consolidated Class Action
Complaint filed October 4, 1999, United States District Court, Central District
of California, Western Division, CV-99-07796-GHK (CTx)). The Company was one of
many manufacturers joined in the lawsuit, which was spawned from the Department
of Justice investigation. The Court has granted the Plaintiff's motion to
certify the class. Discovery is continuing. The Company is not in a position to
predict the outcome of the lawsuit, but believes that the lawsuit is without
merit as to the Company.
Of the eleven companies that have opted out of the class in the Thomas &
Thomas Rodmakers, Inc. case, one, Horizon Sports Technologies, Inc., has filed a
case on its own behalf, with similar allegations (Horizon Sports Technologies,
Inc., v. Newport Adhesives and Composites, Inc., et. al., First Amended
Complaint filed October 15, 2002, United States District Court, Central District
of California, Southern Division, SACV 02-911 DOC (MLGX)). The Company is not in
a position to predict the outcome of the lawsuit, but believes that the lawsuit
is without merit as to the Company.
The Company has also been joined as a party in numerous class action
lawsuits in California and in Massachusetts spawned by the Thomas & Thomas
Rodmakers, Inc. class action. These actions also allege antitrust violations and
are brought on behalf of purchasers located in California and in Massachusetts,
respectively, who indirectly purchased carbon fiber products. The California
cases have been ordered to be coordinated in the Superior Court for the County
of San Francisco and are currently referred to as Carbon Fibers Cases I, II and
III, Judicial Council Coordinator Proceeding Numbers 4212, 4216 and 4222. The
California cases are Lazio v. Amoco Polymers Inc., et.al., filed August 21,
2000; Proiette v. Newport Adhesives and Composite, Inc. et. al., filed September
12, 2001; Simon v. Newport Adhesives and Composite, Inc. et. al., filed
September 21, 2001; Badal v. Newport Adhesives and Composite, Inc. et.al., filed
September 26, 2001; Yolles v. Newport Adhesives and Composite, Inc. et.al.,
filed September 26, 2001; Regier v. Newport Adhesives and Composite, Inc.
et.al., filed October 2, 2001; and Connolly v. Newport Adhesives and Composite,
Inc. et.al., filed October 4, 2001; Elisa Langsam v Newport Adhesives and
Composites, Inc, et al., filed October 4, 2001; Jubal Delong et al. v Amoco
Polymers, Inc. et al., filed October 26, 2001; and Louis V. Ambrosio v Amoco
Polymers, Inc. et. al., filed October 25, 2001. The Massachusetts case is
Ostroff v. Newport Adhesives and Composites, Inc. et. al., filed June 7, 2002 in
the Superior Court Department of the Trial Court of Middlesex, Massachusetts,
Civil Action No. 02-2385. The Company is not in a position to predict the
outcome of these lawsuits, but believes that the lawsuits are without merit as
to the Company.
In 1999, a QUI TAM case was filed under seal by executives of Horizon
Sports Technologies, Inc. alleging that Boeing and other prime contractors to
the United States Government and certain carbon fiber and carbon fiber prepreg
manufacturers, including the Company, submitted claims for payment to the U.S.
Government which were false or fraudulent because the defendants knew of the
alleged conspiracy to fix prices of carbon fiber and carbon prepreg described in
the above cases (Beck, on behalf of the United States of America, v. Boeing
Defense and Space Group, Inc., et. al., filed July 27, 1999, in the United
States District Court for the Southern District of California, Civil Action No.
99 CV 1557 JM JAH). The case was unsealed in 2002 when the U.S. advised that it
was unable to decide whether to intervene in the case based on the information
available to it at that time and the Relators served the Company and other
defendants. The Company is not in a position to predict the outcome of the
lawsuit, but believes that the lawsuit is without merit as to the Company.
96
LETTERS OF CREDIT
Letters of credit are purchased guarantees that ensure the performance or
payment to third parties in accordance with specified terms and conditions. The
Company had $25.9 million and $19.4 million letters of credit outstanding at
December 31, 2002 and 2001, respectively, of which $11.1 million was issued in
support of a loan to the Company's BHA Aero joint venture in 2001.
LOAN GUARANTEES
The Company has a contingent liability to pay DIC up to $1.5 million with
respect to DHL's debt (see Note 7).
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. Warranty expense for the years ended
December 31, 2002, 2001 and 2000, and accrued warranty cost, included in "other
accrued liabilities" in the consolidated balance sheets at December 31, 2002 and
2001, was as follows:
PRODUCT
(IN MILLIONS) WARRANTIES
-------------------------------------------------------------------------------
BALANCE AS OF JANUARY 1, 2000 $ 6.6
Warranty expense 3.2
Deductions and other (4.5)
-------------------------------------------------------------------------------
BALANCE AS OF DECEMBER 31, 2000 $ 5.3
Warranty expense 6.0
Deductions and other (6.3)
-------------------------------------------------------------------------------
BALANCE AS OF DECEMBER 31, 2001 $ 5.0
Warranty expense 2.9
Deductions and other (3.9)
-------------------------------------------------------------------------------
BALANCE AS OF DECEMBER 31, 2002 $ 4.0
===============================================================================
NOTE 17 - SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information, including non-cash financing and
investing activities, for the years ended December 31, 2002, 2001 and 2000,
consist of the following:
(IN MILLIONS) 2002 2001 2000
-------------------------------------------------------------------------------------------------------
Cash paid for:
Interest $ 59.3 $ 62.0 $ 63.3
Taxes $ 8.4 $ 20.4 $ 11.5
-------------------------------------------------------------------------------------------------------
Non-cash items:
Common stock issued under incentive plans $ 2.0 $ 6.6 $ 4.2
-------------------------------------------------------------------------------------------------------
97
NOTE 18 - COMPREHENSIVE INCOME (Loss)
Comprehensive income (loss) represents net income (loss) and other gains
and losses affecting shareholders' equity (deficit) that are not reflected in
the consolidated statements of operations. The components of accumulated other
comprehensive loss as of December 31, 2002 and 2001 were as follows:
(IN MILLIONS) 2002 2001
-----------------------------------------------------------------------------------------------------
Currency translation adjustments $ (7.5) $ (27.1)
Minimum pension obligations (17.1) (6.7)
Net unrealized gains (losses) on financial instruments 3.4 (5.9)
-----------------------------------------------------------------------------------------------------
Accumulated other comprehensive loss $ (21.2) $ (39.7)
=====================================================================================================
NOTE 19 - SEGMENT INFORMATION
The financial results for Hexcel's business segments have been 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
performance based on operating income and generally accounts for intersegment
sales based on arm's-length prices. Corporate and other expenses are not
allocated to the business segments, except to the extent that the expenses can
be directly attributable to the business segments. Accounting principles used in
the segment information are generally the same as those used for the
consolidated financial statements.
As part of the Company's November 2001 restructuring program, effective
January 1, 2002, management responsibility for the Company's carbon fiber
product line was transferred to the Composites business segment. As a result of
this change in management responsibilities, the Company changed its business
segment reporting to reflect the reclassification of this product line from the
Reinforcements segment to the Composites segment. The Company also changed the
names of its business segments to Reinforcements, Composites and Structures. The
Company's three business segments were previously known as Reinforcement
Products, Composite Materials and Engineered Products. Results for the years
ended December 31, 2001 and 2000 have been reclassified for comparative
purposes. Hexcel's business segments and related products are as follows:
REINFORCEMENTS: This segment manufactures and sells carbon, glass and
aramid fiber fabrics. These reinforcement products comprise the foundation of
most composite materials, parts and structures. The segment weaves electronic
fiberglass fabrics that are a substrate for printed circuit boards. All of the
Company's electronics sales come from reinforcement fabric sales. This segment
also sells products for industrial applications such as decorative blinds and
soft body armor. In addition, this segment sells to the Company's Composites
business segment, and to other third-party customers in the commercial aerospace
and space and defense markets.
COMPOSITES: This segment manufactures and sells carbon fibers and composite
materials, including prepregs, honeycomb, structural adhesives, sandwich panels
and specially machined honeycomb parts, primarily to the commercial aerospace
and space and defense markets, as well as to industrial markets. This segment
also sells to the Company's Structures business segment.
STRUCTURES: This segment manufactures and sells a range of lightweight,
high-strength composite structures primarily to the commercial aerospace and
space and defense markets. As discussed in Note 22, the Structures business
segment includes the results of the Bellingham aircraft interiors business, up
to the date of its disposal on April 26, 2000. The Bellingham business
manufactured and sold composite interiors to the aircraft refurbishment market.
98
The following table presents financial information on the Company's
business segments as of December 31, 2002, 2001 and 2000, and for the years then
ended:
CORPORATE/
(IN MILLIONS) REINFORCEMENTS COMPOSITES STRUCTURES ELIMINATIONS TOTAL
------------------------------------------------------------------------------------------------------------------------
Third-Party Sales
2002 $ 217.9 $ 532.4 $ 100.5 $ - $ 850.8
2001 245.7 638.8 124.9 - 1,009.4
2000 331.7 594.5 129.5 - 1,055.7
------------------------------------------------------------------------------------------------------------------------
Intersegment sales
2002 $ 70.3 $ 17.2 $ - $ (87.5) $ -
2001 90.2 22.7 - (112.9) -
2000 84.1 21.3 - (105.4) -
------------------------------------------------------------------------------------------------------------------------
Operating income (loss)
2002 $ 19.6 $ 65.8 $ 0.4 $ (25.6) $ 60.2
2001 (304.6) 37.0 (4.5) (44.1) (316.2)
2000 42.7 62.2 4.1 (33.6) 75.4
------------------------------------------------------------------------------------------------------------------------
Depreciation and amortization
2002 $ 15.4 $ 29.3 $ 2.4 $ 0.1 $ 47.2
2001 26.1 32.1 4.1 0.9 63.2
2000 23.9 28.7 4.7 1.4 58.7
------------------------------------------------------------------------------------------------------------------------
Equity in earnings (losses) of and
write-down of an investment in
affiliated companies
2002 $ (5.2) $ - $ (4.8) $ - $ (10.0)
2001 (6.5) - (3.0) - (9.5)
2000 5.9 - (0.4) - 5.5
------------------------------------------------------------------------------------------------------------------------
Business consolidation and
restructuring expenses (net
credits)
2002 $ (0.5) $ 1.9 $ 0.2 $ (1.1) $ 0.5
2001 18.8 24.5 5.7 9.4 58.4
2000 (1.4) 11.1 1.3 (0.1) 10.9
------------------------------------------------------------------------------------------------------------------------
Business consolidation and
restructuring payments
2002 $ 7.9 $ 11.2 $ 1.6 $ 3.6 $ 24.3
2001 2.7 7.6 0.1 1.6 12.0
2000 2.2 7.1 1.9 0.6 11.8
------------------------------------------------------------------------------------------------------------------------
Segment assets
2002 $ 245.4 $ 435.5 $ 80.8 $ (53.6) $ 708.1
2001 272.3 433.4 101.6 (17.9) 789.4
2000 605.7 482.4 102.0 21.3 1,211.4
------------------------------------------------------------------------------------------------------------------------
Investments in affiliated companies
2002 $ 29.2 $ - $ 4.8 $ - $ 34.0
2001 47.3 - 9.6 - 56.9
2000 59.6 - 12.5 - 72.1
------------------------------------------------------------------------------------------------------------------------
Capital expenditures
2002 $ 4.0 $ 10.4 $ 0.4 $ 0.1 $ 14.9
2001 18.0 19.3 0.6 0.9 38.8
2000 13.5 23.3 1.1 1.7 39.6
========================================================================================================================
99
GEOGRAPHIC DATA
Net sales and long-lived assets, by geographic area, consisted of the
following for the three years ended December 31, 2002, 2001 and 2000:
(IN MILLIONS) 2002 2001 2000
--------------------------------------------------------------------------------------------------------
NET SALES TO EXTERNAL CUSTOMERS:
United States $ 479.5 $ 595.1 $ 650.7
--------------------------------------------------
International
France 160.6 166.8 164.6
United Kingdom 60.5 71.5 75.0
Other 150.2 176.0 165.4
--------------------------------------------------------------------------------------------------------
Total international 371.3 414.3 405.0
--------------------------------------------------------------------------------------------------------
Total consolidated net sales $ 850.8 $ 1,009.4 $ 1,055.7
--------------------------------------------------------------------------------------------------------
LONG-LIVED ASSETS:
United States $ 225.3 $ 254.2 $ 281.4
--------------------------------------------------
International
France 34.3 30.4 33.4
United Kingdom 35.3 30.7 33.6
Other 31.7 29.2 26.7
--------------------------------------------------------------------------------------------------------
Total international 101.3 90.3 93.7
--------------------------------------------------------------------------------------------------------
Total consolidated long-lived assets $ 326.6 $ 344.5 $ 375.1
========================================================================================================
Net sales are attributed to geographic areas based on the location in which
the sale originated. U.S. net sales include U.S. exports to non-affiliates of
$54.2 million, $72.6 million and $47.7 million, for the years ended December 31,
2002, 2001 and 2000, respectively, of which, $12.1 million for the year ended
December 31, 2000 were sales attributable to the Bellingham aircraft interiors
business. Long-lived assets primarily consist of property, plant and equipment
and other tangible assets.
SIGNIFICANT CUSTOMERS
To the extent that the end application of net sales can be identified, The
Boeing Company and its subcontractors accounted for approximately 22%, 23% and
20% of 2002, 2001 and 2000 net sales, respectively. Similarly, EADS, including
Airbus and its subcontractors accounted for approximately 15%, 16% and 13% of
2002, 2001 and 2000 net sales, respectively.
NOTE 20 - LITIGATION GAIN
In 2002, the Company recognized a litigation gain of $9.8 million (net of
related fees and expenses) in connection with a contract dispute with Hercules,
Inc. that arose out of the acquisition of Hercules' Composites Products Division
in 1996. The net cash proceeds received from Hercules Inc. of $11.1 million were
in satisfaction of the judgment entered in favor of the Company after Hercules
had exhausted all appeals from a lower court decision in the New York courts.
NOTE 21 - NON-RECURRING EXPENSES
In connection with the retirement of the former Chief Executive Officer,
the Company recorded compensation expenses of $4.7 million in 2001 as a result
of the early vesting of certain deferred compensation and equity compensation
awards together with a contractual termination payment. These expenses are
included in "selling, general and administrative expenses" in the consolidated
statement of operations.
NOTE 22 - GAIN ON SALE OF BELLINGHAM AIRCRAFT INTERIORS BUSINESS
On April 26, 2000, Hexcel sold its Bellingham aircraft interiors business
to Britax Cabin Interiors, Inc., a wholly owned subsidiary of Britax
International plc, for cash proceeds of $113.3 million. The sale resulted in a
pre-tax gain of $68.3 million and an after-tax gain of approximately $44.3
million (or $0.97 per diluted share). Net proceeds from the sale were used to
repay $111.6 million of
100
outstanding term debt under the Company's Senior Credit Facility. The
consolidated financial statements and accompanying notes reflect Bellingham's
operating results as a continuing operation in the Structures business segment
up to the date of disposal. Net sales and operating income for the Bellingham
business were $18.9 million and $0.6 million, respectively, in 2000.
NOTE 23 - QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial data for the years ended December 31, 2002 and 2001,
were:
FIRST SECOND THIRD FOURTH
(IN MILLIONS) QUARTER QUARTER QUARTER QUARTER
---------------------------------------------------------------------------------------------------------------------
2002
---------------------------------------------------------------------------------------------------------------------
Net sales $ 222.1 $ 221.2 $ 201.0 $ 206.5
Gross margin 39.6 44.8 37.3 39.6
Business consolidation and restructuring
expenses (net credits) 0.7 0.1 (0.1) (0.2)
Operating income 13.3 19.5 15.1 12.3
Litigation gain - 9.8 - -
Loss (gain) on early retirement of debt - - (0.5) -
Net income (loss) (9.2) 5.3 (3.6) (6.1)
---------------------------------------------------------------------------------------------------------------------
Net income (loss) per share:
Basic $ (0.24) $ 0.14 $ (0.09) $ (0.16)
Diluted $ (0.24) $ 0.14 $ (0.09) $ (0.16)
---------------------------------------------------------------------------------------------------------------------
Market price:
High $ 4.99 $ 5.40 $ 4.35 $ 3.15
Low $ 2.14 $ 3.50 $ 2.36 $ 1.25
---------------------------------------------------------------------------------------------------------------------
2001
---------------------------------------------------------------------------------------------------------------------
Net sales $ 276.2 $ 253.5 $ 240.6 $ 239.1
Gross margin 60.1 51.7 43.8 35.2
Business consolidation and restructuring expenses 1.1 1.8 4.4 51.1
Impairment of goodwill and other purchased
intangibles - - - 309.1
Operating income (loss) (a) 22.6 11.4 7.2 (357.4)
Loss (gain) on early retirement of debt - 3.1 - (0.4)
Net income (loss) (a) 5.5 (12.6) (12.8) (413.8)
---------------------------------------------------------------------------------------------------------------------
Net income (loss) per share:
Basic $ 0.15 $ (0.34) $ (0.34) $ (10.88)
Diluted $ 0.15 $ (0.34) $ (0.34) $ (10.88)
---------------------------------------------------------------------------------------------------------------------
Market price:
High $ 12.40 $ 12.99 $ 12.69 $ 4.06
Low $ 8.76 $ 8.90 $ 3.96 $ 1.98
=====================================================================================================================
(a) Operating and net loss for the second quarter of 2001 include
compensation expenses of $4.7 million in connection with the
retirement of the former Chief Executive Officer (see Note 21).
Hexcel has not declared or paid cash dividends per common stock during the
periods presented.
NOTE 24 - SUBSEQUENT EVENT - PRO FORMA CONSOLIDATED BALANCE SHEET (UNAUDITED)
The unaudited pro forma consolidated balance sheet as of December 31, 2002
has been prepared to illustrate the effect of (i) the issuance of $125.0 million
mandatorily redeemable convertible preferred stock, (ii) the private placement
under Rule 144A of $125.0 million 9-7/8% senior secured notes, due 2008, and
(iii) the establishment of a new $115.0 million senior secured credit facility,
as if the transactions had occurred as of December 31, 2002. The proceeds from
the sale of mandatorily redeemable convertible preferred stock have been used
to provide for the redemption of the Company's 7%
101
convertible subordinated notes, due 2003, and to repay outstanding borrowings
under the existing senior credit facility. The remaining advances under the
existing senior credit facility, after the application of a portion of the
equity proceeds, have been repaid with the proceeds from the issuance of the
Company's new 9-7/8% senior secured notes and a new senior credit facility. The
transactions closed on March 19, 2003 (see Note 2).
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 2002
(IN MILLIONS, EXCEPT PER SHARE DATA) HISTORICAL ADJUSTMENTS PRO FORMA
----------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 8.2 $ 4.4 (a) $ 12.6
Accounts receivable, net 117.3 - 117.3
Inventories, net 113.6 - 113.6
Prepaid expenses and other assets 9.2 - 9.2
----------------------------------------------------------------------------------------------------------------
Total current assets 248.3 4.4 252.7
Net property, plant and equipment 309.4 - 309.4
Goodwill, net 74.4 - 74.4
Investments in affiliated companies 34.0 - 34.0
Other assets 42.0 4.9 46.9
----------------------------------------------------------------------------------------------------------------
Total assets $ 708.1 $ 9.3 $ 717.4
================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable and current maturities of capital lease $ 621.7 $ (615.5) (a) $ 6.2
obligations
Accounts payable 54.9 - 54.9
Accrued compensation and benefits 37.6 - 37.6
Accrued interest 19.1 (3.2) (a) 15.9
Business consolidation and restructuring liabilities 10.5 - 10.5
Other accrued liabilities 35.3 - 35.3
----------------------------------------------------------------------------------------------------------------
Total current liabilities 779.1 (618.7) 160.4
Long-term notes payable and capital lease obligations - 512.4 (a) 512.4
Long-term retirement obligations 48.1 - 48.1
Other non-current liabilities 8.3 - 8.3
----------------------------------------------------------------------------------------------------------------
Total liabilities 835.5 (106.3) 729.2
----------------------------------------------------------------------------------------------------------------
Mandatorily redeemable convertible preferred stock,
125,000 series A shares and 125,000 series B shares
authorized, issued and outstanding - 96.4 (b) 96.4
Stockholders' equity (deficit):
Preferred stock, no par value, 20.0 shares of stock
authorized, no shares issued or outstanding - - -
Common stock, $0.01 par value, 100.0 shares of stock
authorized, shares issued of 39.8 at December 31, 2002 0.4 - 0.4
Additional paid-in capital 288.2 23.4 (b) 311.6
Accumulated deficit (381.5) (4.2) (c) (385.7)
Accumulated other comprehensive loss (21.2) - (21.2)
----------------------------------------------------------------------------------------------------------------
(114.1) 19.2 (94.9)
Less- Treasury stock, at cost, 1.3 shares at December 31, 2002 (13.3) - (13.3)
----------------------------------------------------------------------------------------------------------------
Total stockholders' equity (deficit) (127.4) 19.2 (108.2)
----------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity (deficit) $ 708.1 $ 9.3 $ 717.4
================================================================================================================
(a) The Company received gross proceeds of $123.7 million from the issuance of
9-7/8% senior secured notes, due 2008, after discount of $1.3 million,
along with $125.0 million of gross proceeds from the issuance of
mandatorily redeemable convertible preferred stock. The proceeds from the
issuance of the senior secured notes, together with a portion of the
proceeds from the issuance of mandatorily redeemable convertible preferred
stock, were used to repay
102
$179.9 million of the Company's existing Senior Credit Facility, accrued
interest of $1.8 million on the existing Senior Credit Facility as of
December 31, 2002 and a portion of total estimated transaction fees and
expenses of $14.3 million (which includes the preferred stock issuance
expenses of $5.2 million). The remaining portion of the proceeds from the
issuance of the mandatorily redeemable convertible preferred stock was
remitted to US Bank Trust, trustee for the Company's 7% Convertible
Subordinated Notes due August 1, 2003, for the express purpose of retiring
the remaining $46.9 million of such notes and paying the accrued interest
thereon of $1.4 million as of December 31, 2002. Estimated excess cash
proceeds of approximately $4.4 million will be used for general corporate
purposes. A substantial portion of the Company's indebtedness has been
reclassified as long-term to reflect scheduled debt payments after the
refinancing transactions.
(b) The Company received net proceeds of $119.8 million, after issuance
expenses of $5.2 million, from the issuance of 125,000 shares of series A
preferred stock and 125,000 shares of series B preferred stock. In
addition, a beneficial conversion feature of $23.4 million was recognized.
The beneficial conversion feature is the implicit discount on the preferred
stock computed based upon the conversion to the underlying common stock at
the conversion price of $3.00 per share and the average market price of
Hexcel common stock on March 19, 2003 of $2.93 per share.
(c) As the result of the repayment of the existing Senior Credit Facility and
the 7% convertible subordinated notes, due 2003, the Company wrote-off $4.2
million unamortized discount and capitalized debt issuance costs.
103
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS OF BHA AERO COMPOSITE PARTS CO., LTD.
(A Sino-foreign equity joint venture established in the People's Republic of
China)
We have audited the accompanying balance sheets of BHA Aero Composite Parts Co.,
Ltd. (the "Company") as of December 31, 2002 and 2001, and the related
statements of operations, owners' equity and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the BHA Aero Composite Parts Co., Ltd. at
December 31, 2002 and 2001, and the results of its operations and its cash flows
for the years then ended in conformity with accounting principles generally
accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 3 to the
financial statements, the Company's recurring losses from operations and
accumulated deficit raise substantial doubt about its ability to continue as a
going concern. Management's plans concerning these matters are also described in
Note 3. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
The accompanying statements of operations, owners' equity and cash flows for the
year ended 2000 have been complied by us in accordance with Statements on
Standards for Accounting and Review Services issued by the American Institute of
Certified Public Accountants. A compilation is limited to presenting information
that is the representation of management in the form of financial statements. We
have not audited or reviewed such financial statements and, accordingly do not
express an opinion or any other form of assurance on them.
/s/ Deloitte Touche Tomatsu
---------------------------
Deloitte Touche Tohmatsu
Certified Public Accountants Ltd.
Beijing, China
March 2, 2003
104
BHA AERO COMPOSITE PARTS CO., LTD.
BALANCE SHEETS
December 31, December 31,
2001 2002 2002
------------ ----------- -----------
RMB RMB US$
ASSETS
Current assets:
Cash 104,374,290 3,516,469 424,833
Account receivable - related party - 5,423,054 655,172
Other receivables - others 3,150,437 1,154,352 139,460
- related party - 364,013 43,977
Value-added tax receivable 696,125 3,512,760 424,385
Prepaid expenses 59,087 139,595 16,865
Advance to suppliers 34,196 2,271,093 274,376
Inventories 12,291,162 18,354,749 2,217,480
----------- ------------ -----------
Total current assets 120,605,297 34,736,085 4,196,548
----------- ------------ -----------
Property, plant and equipment, net 260,526,689 250,780,914 30,297,430
----------- ------------ -----------
TOTAL ASSETS 381,131,986 285,516,999 34,493,978
=========== ============ ===========
LIABILITIES AND OWNERS' EQUITY
Current Liabilities:
Accounts payable - trade 625,138 4,002,034 483,495
- related party - 41,221 4,980
Other payables - others 32,071,673 5,233,684 632,294
- related parties 1,494,514 9,646,676 1,165,438
Accrued expenses 16,745,053 11,105,218 1,341,647
----------- ------------ -----------
Total current liabilities 50,936,378 30,028,833 3,627,854
Long-term Liabilities:
Deferred tax liability 406,000 406,000 49,050
Long-term bank loans 216,022,240 233,416,680 28,199,616
----------- ------------ -----------
Total long-term liabilities 216,428,240 233,822,680 28,248,666
----------- ------------ -----------
Total liabilities 267,364,618 263,851,513 31,876,520
----------- ------------ -----------
Commitments (Note 12)
Owners' Equity:
Paid in capital 165,562,762 165,562,762 20,002,025
Accumulated losses (51,795,394) (143,897,276) (17,384,567)
----------- ------------ -----------
113,767,368 21,665,486 2,617,458
----------- ------------ -----------
TOTAL LIABILITIES AND OWNERS' EQUITY 381,131,986 285,516,999 34,493,978
=========== =========== ===========
See accompanying notes to financial statements.
105
BHA AERO COMPOSITE PARTS CO., LTD.
STATEMENTS OF OPERATIONS
Year ended Year ended
December 31, December 31, Year ended December 31,
2000 2001 2002 2002
------------ ------------ ----------- -----------
RMB RMB RMB US$
(unaudited)
Sales - - 14,878,101 1,797,458
Cost of sales - - (52,441,976) (6,335,638)
---------- ----------- ----------- -----------
Gross loss - - (37,563,875) (4,538,180)
Operating expenses:
Selling, general and administrative (3,288,193) (49,399,753) (46,880,099) (5,663,694)
---------- ----------- ----------- -----------
Loss from operations (3,288,193) (49,399,753) (84,443,974) (10,201,874)
---------- ----------- ----------- -----------
Other income (expense):
Interest income - 2,405,474 669,453 80,878
Interest expense - (541,730) (7,640,625) (923,082)
Foreign exchange loss - (79,896) (197,930) (23,912)
Other - (485,296) (488,806) (59,054)
---------- ----------- ----------- -----------
- 1,298,552 (7,657,908) (925,170)
---------- ----------- ----------- -----------
Net loss before income tax provision 3,288,193 48,101,201 92,101,882 11,127,044
Income tax provision - deferred - 406,000 - -
---------- ----------- ----------- -----------
Net loss 3,288,193 48,507,201 92,101,882 11,127,044
========== =========== =========== ===========
See accompanying notes to financial statements.
106
BHA AERO COMPOSITE PARTS CO., LTD.
STATEMENTS OF OWNERS' EQUITY
Accumulated Total owners'
Paid-in capital losses equity
--------------- ------------ -------------
RMB RMB RMB
Balance, January 1, 2000 (unaudited) 66,516,090 - 66,516,090
Capital contribution (unaudited) 99,046,672 - 99,046,672
Net loss (unaudited) - (3,288,193) (3,288,193)
----------- ------------ -----------
Balance, January 1, 2001 165,562,762 (3,288,193) 162,274,569
Net loss - (48,507,201) (48,507,201)
----------- ------------ -----------
Balance, December 31, 2001 165,562,762 (51,795,394) 113,767,368
Net loss - (92,101,882) (92,101,882)
----------- ------------ -----------
Balance, December 31, 2002 165,562,762 (143,897,276) 21,665,486
=========== ============ ===========
In US$ 20,002,025 (17,384,567) 2,617,458
=========== ============ ===========
See accompanying notes to financial statements.
107
BHA AERO COMPOSITE PARTS CO., LTD.
STATEMENTS OF CASH FLOWS
December 31, December 31, December 31,
2000 2001 2002 2002
------------ ------------ ------------ ------------
RMB RMB RMB US$
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss (3,288,193) (48,507,201) (92,101,882) (11,127,044)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 265,193 2,416,887 18,641,555 2,252,130
Gain on disposal of fixed assets - - 101,990 12,322
CHANGES IN OPERATING ASSETS AND LIABILITIES
Account receivable - related party - - (5,423,054) (655,172)
Other receivables - others (632,997) (2,517,440) 1,996,085 241,151
- related parties - - (364,013) (43,977)
Value-added tax receivable - (696,125) (2,816,635) (340,284)
Prepaid expenses (59,523) 436 (80,508) (9,726)
Advance to suppliers - (34,196) (2,236,897) (270,245)
Inventories - (12,291,162) (6,063,587) (732,556)
Accounts payable - trade - 625,138 3,376,896 407,971
- related party - - 41,221 4,980
Other payables - others 7,078,763 906,489 (1,257,055) (151,868)
- related parties - 8,152,162 984,882
Accrued expenses 1,290,756 15,454,297 (5,639,835) (681,362)
Deferred tax liability - 406,000 - -
----------- ------------ ------------ ------------
Net cash used in operating activities 4,653,999 (44,236,877) (83,673,557) (10,108,798)
----------- ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital contribution 99,046,672 - - -
Purchase of property, plant and equipment (27,643,083) (209,984,751) (34,697,037) (4,191,830)
Proceeds received from disposal of fixed assets - - 118,333 14,296
----------- ------------ ------------ ------------
Net cash used in investing activities 71,403,589 (209,984,751) (34,578,704) (4,177,534)
----------- ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Bank borrowings - 216,022,240 17,394,440 2,101,463
----------- ------------ ------------ ------------
Net cash provided by financing activities - 216,022,240 17,394,440 2,101,463
----------- ------------ ------------ ------------
Net increase (decrease) in cash 76,057,588 (38,199,388) (100,857,821) (12,184,870)
Cash at beginning of year 66,516,090 142,573,678 104,374,290 12,609,703
----------- ------------ ------------ ------------
Cash at end of year 142,573,678 104,374,290 3,516,469 424,833
=========== ============ ============ ============
Supplemental Cash Flow Information
Cash paid during the year:
Interest - 1,922,079 7,250,911 876,000
=========== ============ ============ ============
See accompanying notes to financial statements.
108
BHA AERO COMPOSITE PARTS CO., LTD.
NOTES TO THE FINANCIAL STATEMENTS
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
BHA Aero Composite Parts Co., Ltd. (the "Company") was incorporated in
Tianjin, the People's Republic of China ("PRC") as a Sino-foreign equity
joint venture with an operation period of 22 years commencing July 8, 1999.
The Company is invested by Hexcel China Holdings Corporation ("Hexcel
China"), Boeing International Holdings, Ltd. ("Boeing") and China Aviation
Industry Corporation ("China Aviation"). Total registered capital of the
Company is US$20,000,001, which is equivalent to RMB165,562,762, and each
investor has equal share in the Company.
The Company is primarily engaged in the manufacturing of aero composite
parts. Major raw materials were purchased from Hexcel Corporation and all
sales have been made to Hexcel Corporation, in year 2002 and 2001. Hexcel
Corporation is the holding company of Hexcel China.
2. BASIS OF PREPARATION OF FINANCIAL STATEMENTS
The financial statements of the Company are prepared in accordance with
accounting principles generally accepted in the United States of America
("US GAAP"). This basis of accounting differs from that used in the
statutory financial statements of the Company, which are required to be
prepared in accordance with the accounting principles and the relevant
financial regulations as established by the Ministry of Finance of the PRC
("PRC GAAP"). There was no material difference except for capitalization of
borrowing cost and recognition of deferred tax.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GOING CONCERN - The accompanying financial statements have been prepared on
a going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. As shown in
the financial statements for the year ended December 31, 2002, the Company
incurred a net loss of RMB92,101,882 (US$11,127,044) and cash flows used in
operating activities totaled RMB83,673,557(US$10,108,798). These factors
indicate that the Company may potentially be unable to continue as a going
concern.
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts
and classification of liabilities that might be necessary should the
Company be unable to continue as a going concern. The Company's
continuation as a going concern is dependent upon its ability to generate
sufficient cash flows to meet its obligations on a timely basis, to obtain
additional financing and ultimately to attain successful operations.
Management believes the Company can meet its obligations and sustain
operations from a combination of additional equity and/or debt financing,
which it is currently seeking, and the release of new products.
109
BHA AERO COMPOSITE PARTS CO., LTD.
NOTES TO THE FINANCIAL STATEMENTS
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES - Inventories are stated at the lower of cost (weighted
average) or market.
PROPERTY, PLANT AND EQUIPMENT, NET - Property, plant and equipment is
stated at cost less accumulated depreciation and amortization. Depreciation
and amortization is computed over its estimate useful life using the
straight-line method as follows:
Land use rights Over the shorter of lease term or operation period
Buildings 20 years
Machinery and production equipment 10 years
System software and related
electronic equipment 5 years
Motor vehicles 5 years
The Company constructs certain of its production equipment. In addition to
costs under the construction contracts, internal costs directly related to
the construction of such equipment including interest and salaries of
certain employees, are capitalized. No depreciation is charged on
construction in progress until the assets are operational.
IMPAIRMENT OF LONG-LIVED ASSETS - Long-lived assets are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may no longer be recoverable. When these events
occur, the Company measures impairment by comparing the carrying value of
the long-lived assets to the estimated undiscounted future cash flows
expected to result from use of the assets and their eventual disposition.
If the sum of the expected undiscounted cash flows is less than the
carrying amount of the assets the Company would recognize an impairment
loss. There was no impairment in the carrying value of long-lived assets at
December 31, 2002 and 2001.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The Company's financial instruments
consist of cash, accounts receivable, accounts payable and bank borrowings.
At December 31, 2002 and 2001, the fair value of such instruments
approximated their financial statements carrying amounts.
REVENUE RECOGNITION - Revenue from products sold directly to the customer
is recognized upon delivery. The Company does not record a provision for
estimated returns and warranty costs at the time revenue is recognized.
Estimated returns and warranty costs have not been material in any period
presented.
FOREIGN CURRENCIES - Transactions in currencies other than RMB are
translated at the approximate rates ruling on the dates of the
transactions. Monetary assets and liabilities denominated in currencies
other than RMB are translated at the rates ruling on the balance sheet
date. Exchange gains and losses are taken to the statement of operations.
110
BHA AERO COMPOSITE PARTS CO., LTD.
NOTES TO THE FINANCIAL STATEMENTS
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONVENIENCE TRANSLATION INTO UNITED STATES DOLLARS - The financial
statements are presented in Renminbi. The translation of Renminbi amounts
into United States dollars has been made for the convenience of the reader
and has been made at the rate of exchange quoted by the People's Bank of
China on December 31, 2002 of RMB8.2773 to US$1.00. Such translation
amounts should not be construed as representations that the Renminbi
amounts could be readily converted into United States dollars at that rate
or any other rate.
COMPREHENSIVE LOSS - SFAS No. 130, "Reporting Comprehensive Income"
requires that an enterprise report by major components and as a single
total, the change in its net assets from non-owner sources. Comprehensive
loss equals net loss for both years ended December 31, 2002 and 2001.
CAPITALIZATION OF INTEREST - The Company capitalized interest costs based
upon the cost of capital projects in progress during 2001. Capitalized
interest of RMB2,708,650 (US$327,238) in 2001, has been added to the cost
of the underlying assets during the period and is amortized over the
respective useful lives of the assets. Amortization expenses relating to
capitalized interest for the year was RMB135,432 (US$16,362), RMB11,286 and
nil (unaudited) for 2002, 2001 and 2000, respectively.
INCOME TAXES - Deferred income taxes are provided using the asset and
liability method. Under this method, deferred income taxes are recognized
for all significant temporary differences between the tax and financial
statement bases of assets and liabilities and for net operating loss and
tax credit carry forwards. The tax consequences of those differences are
classified as current or non-current based upon the classification of the
related asset or liability in the financial statements. A valuation
allowance is provided to reduce the amount of deferred tax asset if it is
considered more likely than not that some portion of, or all of, the
deferred tax asset will not be realized.
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles in the United States of
America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
SEGMENT INFORMATION - The company reports segment data pursuant to SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information",
which establishes annual and interim reporting standards for an
enterprise's business segments and related disclosures about its products,
services, geographic areas and major customers. The Company operates in one
reportable segments (Note 13).
111
BHA AERO COMPOSITE PARTS CO., LTD.
NOTES TO THE FINANCIAL STATEMENTS
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENTLY ISSUED ACCOUNTING STANDARDS - In June 2001, the Financial
Accounting Standards Board issued ("FASB") issued SFAS No.141, "Business
Combinations," and SFAS No.142, "Goodwill and Other Intangible Assets."
SFAS No.141 requires that all business combinations initiated after June
30, 2001 be accounted for under the purchase method and addresses the
initial recognition and measurement of goodwill and other intangible assets
acquired in a business combination. SFAS No.142 addresses the initial
recognition and measurement of intangible assets acquired outside of a
business combination and the accounting for goodwill and other intangible
assets subsequent to their acquisition. SFAS No.142 provides that
intangible assets with indefinite useful lives will not be amortized, but
will be tested at least annually for impairment. The Company did not have
goodwill or other intangible assets at December 31, 2002. Consequently, the
adoption of SFAS No.142, effective January 1, 2002, did not have an impact
on its financial statements.
In August 2001, FASB issued SFAS No.144, "Accounting for Impairment of
Disposal of Long-Lived Assets". SFAS No.144 supersedes SFAS No.121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," and addresses financial accounting and reporting
for the impairment or disposal of long-lived assets. The adoption of SFAS
No.144, effective January 1, 2002, did not have an impact on its financial
statements.
In June 2002, the FASB issued SFAS No.146, "Accounting for Costs Associated
with Exit or Disposal Activities," which addresses accounting for
restructuring and similar costs. SFAS No.146 supersedes previous accounting
guidance, principally Emerging Issue Task Force Issue ("EITF") No.94-3. The
Company will adopt the provisions of SFAS No.146 for restructuring
activities initiated after December 31, 2002. SFAS No.146 requires that the
liability for costs associated with an exit or disposal activity be
recognized when the liability is incurred. Under EITF No.94-3, a liability
for an exit cost was recognized at the date of commitment to an exit plan.
SFAS No.146 also establishes that the liability should initially be
measured and recorded at fair value. Accordingly, SFAS No.146 may affect
the timing of recognizing future restructuring costs as well as the amounts
recognized. The Company does not believe the adoption of such
interpretation will have a material impact on its results of operations or
financial position.
In November 2002, the FASB issued Interpretation Number 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). This interpretation
requires certain disclosures to be made by a guarantor in its interim and
annual financial statements about its obligations under certain guarantees
that it has issued. It also requires a guarantor to recognize, at the
inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. The disclosure requirements of FIN 45
are effective for interim and annual periods after December 15, 2002 and
the Company has adopted those requirements for these financial statements.
The initial recognition and initial measurement requirements of FIN 45 are
effective prospectively for guarantees issued or modified after December
31, 2002. The Company does not believe the adoption of such interpretation
will have a material impact on its results of operations or financial
position.
112
BHA AERO COMPOSITE PARTS CO., LTD.
NOTES TO THE FINANCIAL STATEMENTS
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In January 2003, the FASB issued FIN 46, "Consolidation of Variable
Interest Entities." This interpretation requires existing unconsolidated
variable interest entities to be consolidated by their primary
beneficiaries if the entities do not effectively disperse risks among
parties involved. It explains how to identify variable interest entities
and how an enterprise assesses its interests in a variable interest entity
to decide whether to consolidate that entity. This interpretation applies
in the first fiscal year or interim period beginning after June 15, 2003,
to variable interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003. The Company does not
believe the adoption of such interpretation will have a material impact on
its results of operations or financial position.
4. INVENTORIES
December 31, December 31,
2001 2002 2002
------------ ---------- ---------
RMB RMB US$
Raw materials 12,291,162 13,201,120 1,594,858
Work in progress - 3,963,747 478,870
Finished goods - 1,189,882 143,752
---------- ---------- ---------
Inventories 12,291,162 18,354,749 2,217,480
========== ========== =========
5. PROPERTY, PLANT AND EQUIPMENT, NET
December 31, December 31,
2001 2002 2002
------------ ----------- ----------
RMB RMB US$
Land use rights 5,092,160 5,092,237 615,205
Buildings 156,098,987 161,513,897 19,512,872
Machinery and production equipment 88,363,675 84,550,008 10,214,686
System software and related electronic equipment 7,897,039 19,515,807 2,357,750
Motor vehicles 2,025,789 1,534,589 185,397
----------- ----------- ----------
259,459,650 272,206,538 32,885,910
Less: Accumulated depreciation and amortization (2,682,079) (21,425,624) (2,588,480)
----------- ----------- ----------
256,777,571 250,780,914 30,297,430
Projects under construction 3,749,118 - -
----------- ----------- ----------
Property, plant and equipment, net 260,526,689 250,780,914 30,297,430
=========== =========== ==========
The depreciation and amortization expense for 2002, 2001 and 2000 was
RMB18,641,555 (US$2,252,130), RMB2,416,887 and RMB265,193 (unaudited),
respectively.
113
BHA AERO COMPOSITE PARTS CO., LTD.
NOTES TO THE FINANCIAL STATEMENTS
6. ACCRUED EXPENSES
December 31, December 31,
2001 2002 2002
------------ ---------- ---------
RMB RMB US$
Interest accrual 1,328,300 1,718,015 207,557
Payroll accrual 12,842,780 3,661,610 442,368
Other accruals 2,573,973 5,725,593 691,722
---------- ---------- ---------
Accrued expenses 16,745,053 11,105,218 1,341,647
========== ========== =========
7. LONG TERM BANK LOANS
As of December 31, 2002, the Company had total long term credit facilities,
composed of US dollar loan and RMB loan facilities, for working capital
purposes totaling US$21,333,334 and RMB88,320,000 (equivalent to
US$10,670,146) expiring in May 2004 and July 2004 respectively. The US
dollar loan facilities are guaranteed by Hexcel China and Boeing and the
RMB loan facilities are guaranteed by China Aviation. Unused facilities was
US$2,533,334 and RMB10,516,560 (equivalent to US$1,270,530) as of December
31, 2002.
December 31, December 31,
2001 2002 2002
------------ ----------- ----------
RMB RMB US$
Loans drawn down from US dollar facilities bear
interest at rate of LIBOR plus 0.5% per annum
(2.417% weighted average in 2002) and due in
May 2004 144,012,840 155,613,240 18,800,000
Loans drawn down from RMB facilities bear interest at
a rate of 4.437% per annum and due in July 2004. 72,009,400 77,803,440 9,399,616
----------- ----------- ----------
216,022,240 233,416,680 28,199,616
=========== =========== ==========
8. TAXATION
INCOME TAX
The Company is governed by the Income Tax Law of the PRC (the "Income Tax
Laws"). Under the Income Tax Laws, companies generally are subject to
income tax at an effective rate of 33% (30% state income taxes plus 3%
local income taxes) on income as reported in their statutory financial
statements after appropriate tax adjustments unless the enterprise is
located in specially designated regions or cities for which more favorable
effective rates apply.
114
BHA AERO COMPOSITE PARTS CO., LTD.
NOTES TO THE FINANCIAL STATEMENTS
8. TAXATION - Continued
Pursuant to the Income Tax Laws, companies approved as manufacturing
enterprises with operation period more than 10 years are eligible for a
two-year exemption from income tax followed by a 50% reduction of income
tax for the next three years. Since the Company is located in Tianjin new
technology development zone, it also enjoys a reduced income tax rate at
15% with approval.
No current year tax provision has been made as the Company does not has any
taxable income in 2002 and 2001.
DEFERRED TAX
Significant components of the Company's deferred income tax liabilities are
as follows:
December 31, December 31,
2001 2002 2002
------------ ---------- ---------
RMB RMB US$
Deferred tax liabilities:
Interest capitalization (406,000) (406,000) (49,050)
------------ ---------- ---------
Total deferred tax liabilities (406,000) (406,000) (49,050)
============ ========== =========
Significant components of deferred income tax assets are as follows:
December 31, December 31,
2001 2002 2002
--------------- ----------- ----------
RMB RMB US$
Deferred tax assets:
Net operating loss carry forwards - 12,556,000 1,516,920
Inventory valuation - 1,395,000 168,533
Depreciation and amortization 8,114,000 8,968,000 1,083,445
---------- ----------- ----------
Total deferred tax assets 8,114,000 22,919,000 2,768,898
Valuation allowance (8,114,000) (22,919,000) (2,768,898)
---------- ----------- ----------
Total net deferred tax assets - - -
========== =========== ==========
At December 31, 2002, the Company had tax loss carry-forwards of
approximately RMB83.71 million (US$10.11 million), which expire in 2007.
The utilization of the carry forwards is dependant upon the future
profitability of the Company. A full valuation allowance was taken by the
Company due to the uncertainties of their eventual realization.
115
BHA AERO COMPOSITE PARTS CO., LTD.
NOTES TO THE FINANCIAL STATEMENTS
9. VALUE ADDED TAX
The Company is subject to value added tax at a rate of 17% on product
sales. Value added tax payable on sales is computed net of value added tax
paid on purchases for all domestic sales. For all good produced for
overseas sales purpose, the Company is entitled to an exemption on value
added taxes on the sales amount and conversely the input value added tax
levied on the raw materials purchased is allowed to be settled with any
domestic sales incurred in the future. The Company did not generate any
domestic sales in 2002, 2001 and 2000 therefore the Company has not
recorded any value added tax payable.
10. DISTRIBUTION OF PROFITS
As stipulated by the relevant laws and regulations applicable to China's
foreign investment enterprises, the Company is required to make
appropriations from net income as determined under accounting principles
generally accepted in the PRC ("PRC GAAP") to non-distributable reserves
which include a general reserve, an enterprise expansion reserve and a
employee welfare and bonus reserve.
The general reserve is used to offset future extraordinary losses as
defined under PRC GAAP. The Company may, upon a resolution passed by the
owners, convert the general reserve into capital. The employee welfare and
bonus reserve is used for the collective welfare of the employees of the
Company. The enterprise expansion reserve is used for the expansion of the
Company and can be converted to capital subject to approval by the relevant
authorities. The Company did not record any reserves in 2002, 2001 and 2000
as the Company incurred loss under PRC GAAP. Therefore was not required to
record such reserves.
11. RELATED PARTY TRANSACTIONS
All sales generated in 2002 were made to Hexcel Corporation. The balance
related to such sales is included in account receivable - related party
balance.
The Company purchases raw materials from Hexcel Corporation. Total raw
materials purchased from Hexcel Corporation in 2002, 2001 and 2000 was
RMB1.68 million (US$0.20 million), Nil and Nil (unaudited), respectively.
The balance related to such purchases are included in accounts payable -
related party balance.
Other receivables from related party represented reimbursements paid on
behalf of Hexcel Corporation, which are non-interest bearing, unsecured and
repayable on demand.
116
BHA AERO COMPOSITE PARTS CO., LTD.
NOTES TO THE FINANCIAL STATEMENTS
11. RELATED PARTY TRANSACTIONS - Continued
Other payables to investors are as follows:
December 31, December 31,
2001 2002 2002
------------ --------- ---------
RMB RMB US$
Royalty fee payables:
Hexcel Corporation - 80,559 9,733
Boeing - 40,279 4,866
China Aviation - 60,419 7,299
------------ --------- ---------
- 181,257 21,898
------------ --------- ---------
Temporary advance:
Hexcel Corporation 275,991 275,991 33,344
------------ --------- ---------
Reimbursements:
Hexcel Corporation 1,218,523 7,139,157 862,498
Boeing - 2,050,271 247,698
------------ --------- ---------
1,218,523 9,189,428 1,110,196
------------ --------- ---------
1,494,514 9,646,676 1,165,438
============ ========= =========
The reimbursements represents salaries and related benefits paid by the
investors on behalf of the Company.
Pursuant to the royalty agreements signed between the Company and the
investors. Royalty fee is calculated based on a fixed percentage of the
cash collection of the Company's annual sales and is payable on a
semi-annual basis. Accordingly, the Company has recorded RMB181,257
(US$21,898) in 2002 and Nil in 2001, and 2000 in royalty expenses.
At December 31, 2002 and 2001, the investors have guaranteed the Company's
bank credit facilities and bank borrowings.
12. COMMITMENTS
Operating lease - As of December 31, 2002, the Company was committed under
certain operating leases, requiring annual rental expense as follows:
RMB US$
2003 2,727,000 329,455
2004 365,000 44,097
--------- -------
3,092,000 373,552
========= =======
117
BHA AERO COMPOSITE PARTS CO., LTD.
NOTES TO THE FINANCIAL STATEMENTS
12. COMMITMENTS - Continued
The rent expense in 2002, 2001 and 2000 was RMB3,889,533 (US$469,904),
RMB3,250,379 and RMB274,443 (unaudited), respectively.
Commitments - at December 31, 2002, the Company had purchase commitments to
purchase machinery and equipment for approximately RMB200,000 (US$24,000)
from a third party by April 30, 2003.
13. SEGMENT REPORTING
SFAS No. 131 requires disclosures regarding products and services,
geographic areas, and major customers. The Company operates in one
reportable segment. For the year ended December 31, 2002, the Company
recorded revenue from a customer from the United States.
The Company generates revenue from one segment, products for aero composite
parts. The Company's business activities and accounts receivable are with a
sole customer, Hexcel Corporation. The Company will maintain allowances for
estimated potential bad debt losses and will revise its estimates of
collectibility on a periodic basis. There is no history of bad debt
experience with Hexcel Corporation and collection of receivable is
reasonably assured.
The Company's business growth is dependent on demand from Hexcel
corporation. The slow down of airline industry globally will have a
material adverse effect on the Company's business. The Company's customer
base is concentrated and the loss of Hexcel Corporation could cause the
Company's business to suffer.
14. EMPLOYEE RETIREMENT BENEFITS AND POST- RETIREMENT BENEFITS
The Company's employees in the PRC are entitled to retirement benefits
calculated with reference to their basic salaries on retirement and their
length of service in accordance with a government managed benefit plan. The
government is responsible for the benefit liability to these retired
employees. The Company has to contribute to the fund based on 25.7% of the
employees' basic monthly salaries. The expense of such arrangements to the
Company was approximately RMB1,187,111 (US$143,418), RMB764,406 and
RMB50,158 (unaudited) for the years ended December 31, 2002, 2001 and 2000,
respectively. The Company is not obligated under any other post-retirement
plans and does not provide any post-employment benefits.
118
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of Hexcel Corporation:
Our audits of the consolidated financial statements referred to in our report
dated February 28, 2003, except for Notes 2 and 8 which are as of March 19,
2003, appearing in this Annual Report on Form 10-K/A to Stockholders of Hexcel
Corporation also included an audit of the financial statement schedule listed in
Item 15(a)(2) of this Form 10-K/A. In our opinion, this financial statement
schedule presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Stamford, Connecticut
February 28, 2003, except for Notes 2 and 8 which are as of March 19, 2003
119
SCHEDULE II
HEXCEL CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT CHARGED BALANCE
BEGINNING (CREDITED) DEDUCTIONS AT END OF
(IN MILLIONS) OF YEAR TO EXPENSE AND OTHER YEAR
--------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2002
Allowance for doubtful accounts $ 8.5 $ (0.9) $ (2.5) $ 5.1
Allowance for obsolete and unmarketable
inventory 25.1 7.6 (11.4) 21.3
Valuation allowance for deferred tax asset 185.0 8.5 (26.1) 167.4
YEAR ENDED DECEMBER 31, 2001
Allowance for doubtful accounts $ 7.0 $ 3.4 $ (1.9) $ 8.5
Allowance for obsolete and unmarketable
inventory 30.7 6.3 (11.9) 25.1
Valuation allowance for deferred tax asset 6.2 180.3 (1.5) 185.0
YEAR ENDED DECEMBER 31, 2000
Allowance for doubtful accounts $ 5.7 $ 0.7 $ 0.6 $ 7.0
Allowance for obsolete and unmarketable
inventory 28.7 17.7 (15.7) 30.7
Valuation allowance for deferred tax asset 6.4 (0.1) (0.1) 6.2
120