N o t e 1 - S i g n i f i c a n t A c c o u n t i n g P o l i c i e s
Nature of Operations
and Basis of Accounting
As discussed in Note 2, Hexcel acquired:
All of the above acquisitions were accounted for under the purchase method of accounting. Accordingly, the accompanying consolidated balance sheets, statements of operations, stockholders’ equity, and cash flows include the financial position, results of operations and cash flows of the businesses acquired as of such dates and for such periods that these businesses were owned by Hexcel.
Estimates and Assumptions
Cash and Cash Equivalents
Goodwill and Other
The company periodically reviews the recoverability of all long-term assets, including the related amortization period, whenever events or changes in circumstances indicate that the carrying amount of an asset might not be recoverable. The company determines whether there has been an impairment by comparing the anticipated undiscounted future net cash flows to the related asset’s carrying value. If an asset is considered impaired, the asset is written down to fair value which is either determined based on discounted cash flows or appraised values, depending on the nature of the asset.
Investment in Affiliated
N o t e 2 - B u s i n e s s A c q u i s i t i o n s
CS-Interglas and Asahi-Schwebel are fiberglass fabric producers serving the European and Asian electronics and telecommunications industries. CS Tech-Fab manufactures non-woven materials for roofing, construction and other specialty applications. The fixed-price options to increase the equity interest in CS-Interglas are significantly higher than their fair market value and expire on December 31, 1999. The unconsolidated net sales in 1998 for these joint ventures were in excess of $300,000.
The acquisition of the Acquired Clark-Schwebel Business was completed pursuant to an Asset Purchase Agreement dated July 25, 1998, as amended, by and among Hexcel, Stamford CS Acquisition Corp., and C-S (the “Asset Purchase Agreement”). Under the Asset Purchase Agreement, Hexcel acquired the net assets of the acquired business, other than certain excluded assets and liabilities, in exchange for approximately $473,000 in cash, including the $19,000 paid on December 23, 1998. The assets acquired and the liabilities assumed or incurred were:
The allocations of purchase price to the assets acquired and liabilities assumed or incurred in connection with the Acquired Clark-Schwebel Business are based on current estimates of fair values, and are subject to change until September 15, 1999. As part of the acquisition, Hexcel entered into a $50,000 lease for property, plant and equipment used in the acquired business from an affiliate of CS, pursuant to a long-term lease which includes purchase options. Refer to Note 7 for acquisition financing.
Acquired Ciba Business
& Acquired Hercules Business
The acquisition of the Acquired Ciba Business was consummated pursuant to a Strategic Alliance Agreement dated as of September 29, 1995, among Ciba and Hexcel, as amended (the “Strategic Alliance Agreement”). Under the Strategic Alliance Agreement, the company acquired the assets (including the capital shares of certain non-U.S. subsidiaries) and assumed the liabilities of the Acquired Ciba Business, other than certain excluded assets and liabilities, in exchange for: (a) 18,022 newly issued shares of Hexcel common stock; (b) $25,000 in cash; (c) senior subordinated notes in an aggregate principal amount of $37,476 (the “Ciba Senior Subordinated Notes”), with a fair value of $34,450; and (d) senior demand notes in an aggregate principal amount equal to the cash on hand at certain of the non-U.S. Subsidiaries included in the Acquired Ciba Business (the “Senior Demand Notes”). The total aggregate purchase price for the net assets acquired was approximately $209,000.
Hexcel acquired the assets of the composite products division of Hercules on June 27, 1996. The Acquired Hercules Business, which manufactures carbon fibers and prepregs for commercial aerospace, space and defense, general industrial and recreation markets, was purchased for $139,400 in cash.
The assets acquired and the liabilities assumed or incurred were:
The acquisition of the satellite business and certain technologies from Fiberite on September 30, 1997 was accounted for using the purchase method. Under this method, substantially all of the $37,000 purchase price, less the $8,000 write-off of the acquired in-process research and technology, was allocated to intangible assets. Transaction costs in relation to the downsized transaction were not material.
Pro Forma Financial
Pro forma adjustments giving effect to the Fiberite transaction as if it occurred at the beginning of 1997 would not have had a material effect to the company’s consolidated financial statements.
N o t e 3 - B u s i n e s s C o n s o l i d a t i o n
In December 1998, Hexcel announced consolidation actions within its reinforcement fabrics and composite materials businesses. These actions included the integration of Hexcel’s existing fabrics business with the U.S. operations of the Acquired Clark-Schwebel Business, and the combination of the company’s US, European and Pacific Rim composite materials businesses into a single, global business unit. These actions are intended to eliminate redundancies, improve manufacturing planning, and enhance customer service, and resulted in the elimination of approximately 100 operating, sales, marketing and administrative positions. As of December 31, 1998, the cost of these actions, together with a $6,400 non-cash charge for writing down certain assets held for disposition and another $711 incurred for costs related to a proposed acquisition that was not consummated, resulted in the recognition of $12,711 in business acquisition and consolidation expenses.
In 1996, Hexcel announced plans to consolidate the company’s operations over a period of three years. The objective of the program was to integrate acquired assets and operations into Hexcel, and to reorganize the company’s manufacturing and research activities around strategic centers dedicated to select product technologies. The business consolidation program was also intended to eliminate excess manufacturing capacity and redundant administrative functions. Specific actions of the consolidation program included the elimination of 245 manufacturing, marketing and administrative positions, the closure of the Anaheim, California facility acquired in connection with the purchase of the Acquired Ciba Business, the reorganization of the company’s manufacturing operations in Europe, the consolidation of the company’s US special process manufacturing activities, and the integration of sales, marketing and administrative resources. Management expected that this consolidation program would take approximately three years to complete, in part because of the aerospace industry requirements to “qualify” specific equipment and manufacturing facilities for the manufacture of certain products. These qualification requirements increase the complexity, cost and time of moving equipment and rationalizing manufacturing activities.
As of December 31, 1998, the primary remaining activities of this consolidation program relate to the company’s European operations and certain customer qualifications of equipment transferred within the US The company expects that activities related to this consolidation program will be completed in 1999. Total expenses for this program, which remains unchanged since December 31, 1997, were $54,700, excluding $12,973 of expenses relating to the Fiberite transaction, which were not included in the original program.
Total accrued business acquisition and consolidation expenses at December 31, 1998, 1997 and 1996 and activity during the three years then ended were as follows:
Non-cash items consist of asset write-downs and currency translation effects. Accrued business consolidation costs of $8,202 and $12,173 as of December 31, 1998 and 1997, respectively, were included in “other accrued liabilities” in the accompanying consolidated balance sheets. Business consolidation activities were financed with operating cash flows and borrowings under the Senior and Revolving Credit Facilities. In addition, in 1997, the company received $8,500 of net proceeds, which approximated book value, from the sale of its Anaheim, California facility.
N o t e 4 - I n v e n t o r i e s
N o t e 5 - P r o p e r t y, P l a n t a n d E q u i p m e n t
o t e 6 - I n v e s t m e n t i n A f f
i l i a t e d C o m p a n i e s a n d
As of December 31, 1998 and 1997, Hexcel owned a 45% equity interest in DIC-Hexcel Limited (“DHL”), a joint venture with Dainippon Ink and Chemicals, Inc. (“DIC”). This joint venture, which owns and operates a manufacturing facility in Komatsu, Japan, was formed in 1990 and produces and sells prepregs, honeycomb, decorative laminates and bulk molding compounds using technology licensed from Hexcel and DIC. In December of 1996, Hexcel and DIC reached an agreement to continue the DHL joint venture and expand its operations. The company and DIC agreed to fund the joint venture’s operations through 1998 by each contributing an additional $3,250 in cash, payable in installments through 1998. Of this amount, $1,250 and $2,000 was paid in 1998 and 1997, respectively. In addition, the company and DIC agreed to contribute certain additional technology and product manufacturing rights to DHL. Under the terms of the agreements, Hexcel remains contingently liable to pay DIC up to $4,500 with respect to DHL’s bank debt, but the possibility that such repayment will be required has diminished as a result of the improvement in DHL’s business prospects. As of December 31, 1998, the company’s investment in DIC is zero.
In addition to the above joint ventures, in 1998, the company reached an agreement in principle with the Boeing Company (“Boeing”) and Aviation Industries of China to form a joint venture, BHA Aero Composite Parts Co., Ltd., to manufacture composite parts for secondary structures and interior applications for commercial aircraft. This joint venture will be located in Tianjin, China. Also in 1998, the company signed an agreement with Boeing, Sime Darby Berhad and Malaysia Helicopter Services (now known as Naluri Berhad) to form another joint venture, Asian Composite Manufacturing Sdn. Bhd., to manufacture composite parts for secondary structures for commercial aircraft. This joint venture will be located in Alor Setar, Malaysia. Products manufactured by both joint ventures will be shipped to the company’s Kent, Washington facility for final assembly, inspection and shipment to Boeing as well as other customers worldwide. It is anticipated that the first parts will be delivered to customers in 2001. The company’s total estimated financial commitment to both of these joint ventures will be approximately $31,000, which is expected to be made in increments through 2001. However, completion of these projects and related investments remain subject to certain significant conditions, including foreign government approvals.
N o t e 7 - N o t e s P a y a b l e
Depending on certain predetermined ratios and other conditions, interest on outstanding borrowings under the Senior Credit Facility is computed at an annual rate ranging from approximately 0.75% to 2.25% in excess of the applicable London interbank rate, or at the option of Hexcel, at 0 to 1.25% in excess of the base rate of the administrative agent for the lenders. In addition, the Senior Credit Facility is subject to a commitment fee ranging from 0.23% to 0.50% per annum of the total facility. As of December 31, 1998, the company had an interest rate cap agreement outstanding which covers a notional amount of $50,000 of the variable rate Senior Credit Facility providing a maximum fixed rate of 5.5%. The cost of the interest rate cap is being amortized to interest expense over the term of the contract and the unamortized amount approximated fair value at December 31, 1998.
The Senior Credit Facility is secured by a pledge of shares of certain of Hexcel’s subsidiaries. In addition, the company is subject to various financial covenants and restrictions under the Senior Credit Facility, and is generally prohibited from paying dividends or redeeming capital stock. Approximately $544,000 of the Senior Credit Facility, after the issuance of the Senior Subordinated Notes, expires by September 2004, with the balance expiring in 2005.
As a result of obtaining the Senior Credit Facility and the Amended Revolving Credit Facility (see below), the company wrote off approximately $1,600 of capitalized debt financing costs in 1998. This amount is included in “interest expense” in the accompanying consolidated statement of operations for 1998.
Interest on outstanding borrowings on the Amended Revolving Credit Facility depended upon certain predetermined ratios and other conditions and was computed at an annual rate ranging from approximately 0.3% to 1.1% in excess of the applicable London interbank rate or, at the option of Hexcel, at the base rate of the administrative agent for the lenders. In addition, the Amended Revolving Credit Facility was subject to a commitment fee ranging from approximately 0.2% to 0.4% per annum of the total facility. Interest on outstanding borrowings under the Revolving Credit Facility was computed at an annual rate of 0.4% in excess of the applicable London interbank rate or, at the option of Hexcel, at the base rate of the administrative agent for the lenders. The Revolving Credit Facility was also subject to a commitment fee of approximately 0.2% per annum on the unused portion of the facility.
and Overdraft Facilities
Notes, due 2003
The Convertible Subordinated Notes are redeemable beginning in August of 1999, in whole or in part, at the option of Hexcel. The redemption prices range from 103.5% to 100.0% of the outstanding principal amount, depending on the period in which redemption occurs. As of December 31, 1998, $65 of the Convertible Subordinated Notes had been converted resulting in the issuance of 4 shares of common stock.
Debentures, due 2011
Ciba Senior Subordinated
The Ciba Senior Subordinated Notes are general unsecured obligations of Hexcel that bear interest for three years at a rate of 7.5% per annum, payable semiannually from February 29, 1996. The interest rate will increase to 10.5% per annum on the third anniversary of the purchase of the Acquired Ciba Business (February 28, 1999), and by an additional 0.5% per year thereafter until the Ciba Senior Subordinated Notes mature in the year 2003.
At the date of issue, the aggregate fair value of the Ciba Senior Subordinated Notes was $3,026 less than the aggregate principal amount. The original discount of $3,026 reflects the absence of certain call protection provisions from the terms of the Ciba Senior Subordinated Notes and the difference between the stated interest rate on the Ciba Senior Subordinated Notes and the estimated market rate for debt obligations of comparable quality and maturity. This discount, which is amortized over the life of the Ciba Senior Subordinated Notes, had an unamortized balance of $1,801 and $2,233 as of December 31, 1998 and 1997, respectively.
On February 17, 1999, the company repaid $12,500 of its Ciba Senior Subordinated Notes payable. The repayment was financed with borrowings under the company’s Senior Credit Facility. As a result of the repayment, the company will write-off approximately $600 of the unamortized discount in 1999.
As discussed in Note 9, Hexcel has various financial and other relationships with CSC. Accordingly, the company’s net indebtedness to CSC under the Ciba Senior Subordinated Notes has been classified as “indebtedness to related parties” in the accompanying consolidated balance sheets.
9.75% Senior Subordinated
Notes, due 2009
of Notes Payable and Indebtedness to Related Parties
Fair Values of Notes Payable
The aggregate fair values of the Convertible Subordinated Notes, due 2003, and the Convertible Subordinated Debentures, due 2011, are estimated on the basis of quoted market prices, although trading in these debt securities is limited and may not reflect fair value. The aggregate fair value of the Convertible Subordinated Notes, due 2003, was approximately $96,100 and $196,000 as of December 31, 1998 and 1997, respectively. The aggregate fair value of the Convertible Subordinated Debentures, due 2011, was approximately $19,000 and $25,500 as of December 31, 1998 and 1997, respectively.
N o t e 8 - L e a s i n g A r r a n g e m e n t s
Assets, accumulated depreciation and related liability balances under capital leasing arrangements as of December 31, 1998 and 1997, were:
As discussed in Note 2, Hexcel entered into a $50,000 capital lease for property, plant and equipment used in the Acquired Clark-Schwebel Business. The lease expires in September 2006 and includes various purchase options.
Certain sales and administrative offices, data processing equipment, and manufacturing facilities are leased under operating leases. Rental expense under operating leases was $4,656 in 1998, $4,559 in 1997 and $4,623 in 1996.
Future minimum lease payments as of December 31, 1998, were:
Total minimum capital lease payments include $17,956 of imputed interest.