hxl-10q_20160930.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

For the Quarter Ended  September 30, 2016

or

Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934

For the transition period from                      to                    

Commission File Number 1-8472

 

Hexcel Corporation

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

94-1109521

(State of Incorporation)

 

(I.R.S. Employer Identification No.)

Two Stamford Plaza

281 Tresser Boulevard

Stamford, Connecticut 06901-3238

(Address of principal executive offices and zip code)

Registrant’s telephone number, including area code: (203) 969-0666

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer 

 

Accelerated filer 

 

 

 

Non-accelerated filer 

 

Smaller reporting company 

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

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

 

Class

 

Outstanding at October 14, 2016

COMMON STOCK

 

91,760,952

 

 

 

 

 


 

HEXCEL CORPORATION AND SUBSIDIARIES

INDEX

 

 

 

 

  

Page

PART I.

 

FINANCIAL INFORMATION

  

 

 

 

 

 

 

ITEM 1.

 

Condensed Consolidated Financial Statements (Unaudited)

  

 

 

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets — September 30, 2016 and December 31, 2015

  

3

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations — The Quarters and Nine Months Ended September 30, 2016 and 2015

  

4

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income — The Quarters and Nine Months Ended September 30, 2016 and 2015

  

4

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows — The Nine Months Ended September 30, 2016 and 2015

  

5

 

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

  

6

 

 

 

 

 

ITEM 2.

 

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

  

16

 

 

 

 

 

ITEM 3.

 

Quantitative and Qualitative Disclosures About Market Risk

  

23

 

 

 

 

 

ITEM 4.

 

Controls and Procedures

  

24

 

 

 

 

 

PART II.

 

OTHER INFORMATION

  

25

 

 

 

 

 

ITEM 1.

 

Legal Proceedings

  

25

 

 

 

 

 

ITEM 1A.

 

Risk Factors

  

25

 

 

 

 

 

ITEM 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

  

26

 

 

 

 

 

ITEM 6.

 

Exhibits and Reports on Form 8-K

  

26

 

 

 

 

 

SIGNATURE

  

27

 

 

 

2


 

PART I. FINANCIAL INFORMATION

 

ITEM 1. Condensed Consolidated Financial Statements (Unaudited)

Hexcel Corporation and Subsidiaries

 

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Unaudited)

 

 

 

September 30,

 

 

December 31,

 

(In millions)

 

2016

 

 

2015

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

45.7

 

 

$

51.8

 

Accounts receivable, net

 

 

254.4

 

 

 

234.0

 

Inventories

 

 

315.1

 

 

 

307.2

 

Prepaid expenses and other current assets

 

 

25.9

 

 

 

40.8

 

Total current assets

 

 

641.1

 

 

 

633.8

 

 

 

 

 

 

 

 

 

 

Property, plant and equipment

 

 

2,341.2

 

 

 

2,099.4

 

Less accumulated depreciation

 

 

(751.5

)

 

 

(673.8

)

Property, plant and equipment, net

 

 

1,589.7

 

 

 

1,425.6

 

 

 

 

 

 

 

 

 

 

Goodwill and other intangible assets

 

 

73.9

 

 

 

58.9

 

Investments in affiliated companies

 

 

48.3

 

 

 

30.4

 

Other assets

 

 

37.6

 

 

 

38.7

 

Total assets

 

$

2,390.6

 

 

$

2,187.4

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Current portions of capital lease and term loan

 

$

4.7

 

 

$

 

Accounts payable

 

 

149.3

 

 

 

148.9

 

Accrued liabilities

 

 

122.6

 

 

 

143.7

 

Total current liabilities

 

 

276.6

 

 

 

292.6

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies (see Note 11)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

 

670.2

 

 

 

576.5

 

Other non-current liabilities

 

 

184.4

 

 

 

138.7

 

Total liabilities

 

 

1,131.2

 

 

 

1,007.8

 

 

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Common stock, $0.01 par value, 200.0 shares authorized, 106.6 shares and 106.0 shares

   issued at September 30, 2016 and December 31, 2015

 

 

1.1

 

 

 

1.1

 

Additional paid-in capital

 

 

735.0

 

 

 

715.8

 

Retained earnings

 

 

1,205.2

 

 

 

1,044.4

 

Accumulated other comprehensive loss

 

 

(132.8

)

 

 

(123.9

)

 

 

 

1,808.5

 

 

 

1,637.4

 

Less – Treasury stock, at cost, 14.7 shares at September 30, 2016, and 12.5 shares

   at December 31, 2015

 

 

(549.1

)

 

 

(457.8

)

Total stockholders' equity

 

 

1,259.4

 

 

 

1,179.6

 

Total liabilities and stockholders' equity

 

$

2,390.6

 

 

$

2,187.4

 

 

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

 

 

 

3


 

Hexcel Corporation and Subsidiaries

Condensed Consolidated Statements of Operations

 

 

 

(Unaudited)

 

 

 

Quarter Ended September 30,

 

 

Nine Months Ended September 30,

 

(In millions, except per share data)

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Net sales

 

$

500.5

 

 

$

448.8

 

 

$

1,520.8

 

 

$

1,396.3

 

Cost of sales

 

 

364.8

 

 

 

324.7

 

 

 

1,091.8

 

 

 

991.3

 

Gross margin

 

 

135.7

 

 

 

124.1

 

 

 

429.0

 

 

 

405.0

 

Selling, general and administrative expenses

 

 

35.1

 

 

 

35.5

 

 

 

121.1

 

 

 

120.3

 

Research and technology expenses

 

 

11.5

 

 

 

10.6

 

 

 

34.8

 

 

 

33.5

 

Operating income

 

 

89.1

 

 

 

78.0

 

 

 

273.1

 

 

 

251.2

 

Interest expense, net

 

 

5.5

 

 

 

4.6

 

 

 

16.8

 

 

 

9.0

 

Non-operating expense

 

 

 

 

 

 

 

 

0.4

 

 

 

 

Income before income taxes, and equity in earnings from

   affiliated companies

 

 

83.6

 

 

 

73.4

 

 

 

255.9

 

 

 

242.2

 

Provision for income taxes

 

 

16.1

 

 

 

20.7

 

 

 

67.5

 

 

 

60.6

 

Income before equity in earnings from affiliated companies

 

 

67.5

 

 

 

52.7

 

 

 

188.4

 

 

 

181.6

 

Equity in earnings from affiliated companies

 

 

0.7

 

 

 

0.8

 

 

 

1.9

 

 

 

1.7

 

Net income

 

$

68.2

 

 

$

53.5

 

 

$

190.3

 

 

$

183.3

 

Basic net income per common share:

 

$

0.74

 

 

$

0.56

 

 

$

2.04

 

 

$

1.91

 

Diluted net income per common share:

 

$

0.72

 

 

$

0.55

 

 

$

2.01

 

 

$

1.88

 

Weighted-average common shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

92.7

 

 

 

95.8

 

 

 

93.1

 

 

 

96.2

 

Diluted

 

 

94.1

 

 

 

97.3

 

 

 

94.6

 

 

 

97.7

 

 

 

Hexcel Corporation and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income

 

 

 

(Unaudited)

 

 

 

Quarter Ended September 30,

 

 

Nine Months Ended September 30,

 

(In millions)

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Net Income

 

$

68.2

 

 

$

53.5

 

 

$

190.3

 

 

$

183.3

 

Currency translation adjustments

 

 

(0.4

)

 

 

(2.9

)

 

 

(11.0

)

 

 

(35.7

)

Net unrealized pension and other benefit actuarial gains

  and prior service credits

 

 

0.4

 

 

 

0.8

 

 

 

1.9

 

 

 

0.8

 

Net unrealized gains (losses) on financial instruments (net of tax)

 

 

1.7

 

 

 

3.6

 

 

 

0.2

 

 

 

(2.4

)

Total other comprehensive income (loss)

 

 

1.7

 

 

 

1.5

 

 

 

(8.9

)

 

 

(37.3

)

Comprehensive income

 

$

69.9

 

 

$

55.0

 

 

$

181.4

 

 

$

146.0

 

 

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

 

 

 

4


 

Hexcel Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows

 

 

 

(Unaudited)

 

 

 

Nine Months Ended September 30,

 

(In millions)

 

2016

 

 

2015

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net income

 

$

190.3

 

 

$

183.3

 

Reconciliation to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

69.0

 

 

 

56.5

 

Amortization of deferred financing costs and debt discount

 

 

1.4

 

 

 

0.8

 

Deferred income taxes

 

 

50.5

 

 

 

39.3

 

Equity in earnings from affiliated companies

 

 

(1.9

)

 

 

(1.7

)

Stock-based compensation

 

 

13.6

 

 

 

15.2

 

Excess tax benefits on stock-based compensation

 

 

 

 

 

(9.2

)

 

 

 

 

 

 

 

 

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Increase in accounts receivable

 

 

(16.8

)

 

 

(38.9

)

Increase in inventories

 

 

(5.0

)

 

 

(46.2

)

Increase in prepaid expenses and other current assets

 

 

(7.3

)

 

 

(6.0

)

Decrease in accounts payable/accrued liabilities

 

 

(9.1

)

 

 

(26.0

)

Other net

 

 

2.1

 

 

 

(2.8

)

Net cash provided by operating activities

 

 

286.8

 

 

 

164.3

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(231.8

)

 

 

(249.3

)

Acquisition of business and investments and advances to affiliates

 

 

(33.6

)

 

 

 

Net cash used for investing activities

 

 

(265.4

)

 

 

(249.3

)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

 

 

Proceeds from senior unsecured credit facility

 

 

63.0

 

 

 

 

Proceeds from Euro term loan

 

 

27.4

 

 

 

 

Proceeds from issuance of senior notes

 

 

 

 

 

300.0

 

Repayment of senior unsecured credit facility

 

 

 

 

 

(115.0

)

Other debt, net

 

 

(0.4

)

 

 

(1.2

)

Issuance costs related to credit facilities

 

 

(1.7

)

 

 

 

Deferred financing costs and discount related to long-term debt

 

 

 

 

 

(3.6

)

Dividends paid

 

 

(29.7

)

 

 

(28.9

)

Repurchase of stock

 

 

(84.9

)

 

 

(100.0

)

Activity under stock plans

 

 

(1.0

)

 

 

13.2

 

Net cash (used for) provided by financing activities

 

 

(27.3

)

 

 

64.5

 

Effect of exchange rate changes on cash and cash equivalents

 

 

(0.2

)

 

 

(7.2

)

Net decrease in cash and cash equivalents

 

 

(6.1

)

 

 

(27.7

)

Cash and cash equivalents at beginning of period

 

 

51.8

 

 

 

70.9

 

Cash and cash equivalents at end of period

 

$

45.7

 

 

$

43.2

 

Supplemental data:

 

 

 

 

 

 

 

 

Accrual basis additions to property, plant and equipment

 

$

232.6

 

 

$

227.8

 

 

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

 

 

 

5


 

HEXCEL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1 — Significant Accounting Policies

In these notes, the terms “Hexcel,” “the Company,” “we,” “us,” or “our” mean Hexcel Corporation and subsidiary companies. The accompanying condensed consolidated financial statements are those of Hexcel Corporation. Refer to Note 1 to the consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2015 for a discussion of our significant accounting policies.

Basis of Presentation

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

In the opinion of management, the Condensed Consolidated Financial Statements include all normal recurring adjustments as well as any non-recurring adjustments necessary to present a fair statement of financial position, results of operations and cash flows for the interim periods presented. The Condensed Consolidated Balance Sheet as of December 31, 2015 was derived from the audited 2015 consolidated balance sheet. Interim results are not necessarily indicative of results expected for any other interim period or for the full year. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our 2015 Annual Report on Form 10-K filed with the SEC on February 4, 2016.

Investments in Affiliated Companies

We have a 50% equity ownership investment in a joint venture Aerospace Composites Malaysia Sdn. Bhd. (“ACM”).  This investment is accounted for using the equity method of accounting. In the second quarter of 2016, the Company invested a total of $25.0 million in two new affiliates. The investments are each below a 20% ownership level and the Company accounts for these investments using the cost method.

Recent Accounting Pronouncements

In August 2015, the Financial Accounting Standards Board (“FASB”) postponed Accounting Standard Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers until 2018. The update clarifies the principles for recognizing revenue and develops a common revenue standard for all industries. Early application is permitted in 2017 for calendar year entities. We are currently evaluating the impact of adopting this prospective guidance on our consolidated results of operations and financial condition.

 

In March of 2016, the FASB issued Accounting Standards Update No. 2016-09 (ASU 2016-09) "Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting" intended to simplify the accounting for employee share-based payments. Under this guidance all excess tax benefits (“windfalls”) and deficiencies (“shortfalls”) related to employee stock compensation are recognized within income tax expense. Under prior guidance windfalls were recognized to Additional paid-in capital (“APIC”) and shortfalls were only recognized to the extent they exceed the pool of windfall tax benefits.

 

The Company early adopted ASU 2016-09 effective for the quarter ended March 31, 2016.  As a result of the adoption, tax benefits of $1.2 million and $2.4 million were recorded in the quarter and first nine months of 2016 reflecting the excess tax benefits. The adoption was on a prospective basis and therefore had no impact on prior years.  The Company also recorded an adjustment to opening retained earnings of $0.4 million to recognize U.S. net operating loss carryforwards attributable to excess tax benefits on stock compensation that had not been previously recognized to APIC because they did not reduce income taxes payable.

 

 

6


 

Note 2 — Net Income per Common Share

 

 

 

Quarter Ended September 30,

 

 

Nine Months Ended September 30,

 

(In millions, except per share data)

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Basic net income per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

68.2

 

 

$

53.5

 

 

$

190.3

 

 

$

183.3

 

Weighted average common shares outstanding

 

 

92.7

 

 

 

95.8

 

 

 

93.1

 

 

 

96.2

 

Basic net income per common share

 

$

0.74

 

 

$

0.56

 

 

$

2.04

 

 

$

1.91

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted net income per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

68.2

 

 

$

53.5

 

 

$

190.3

 

 

$

183.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding — Basic

 

 

92.7

 

 

 

95.8

 

 

 

93.1

 

 

 

96.2

 

Plus incremental shares from assumed conversions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restricted stock units

 

 

0.4

 

 

 

0.5

 

 

 

0.5

 

 

 

0.5

 

Stock options

 

 

1.0

 

 

 

1.0

 

 

 

1.0

 

 

 

1.0

 

Weighted average common shares outstanding — Dilutive

 

 

94.1

 

 

 

97.3

 

 

 

94.6

 

 

 

97.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dilutive net income per common share

 

$

0.72

 

 

$

0.55

 

 

$

2.01

 

 

$

1.88

 

 

 

Total shares underlying stock options of 0.4 million and 0.5 million were excluded from the computation of diluted net income per share for the quarter and nine months ended September 30, 2016,  respectively, as they were anti-dilutive. Total shares underlying stock options of 0.1 million were excluded from the computation of diluted net income per share for the quarter and nine months ended September 30, 2015 as they were anti-dilutive.  

 

Note 3 Inventories

 

 

 

September 30,

 

 

December 31,

 

(In millions)

 

2016

 

 

2015

 

Raw materials

 

$

129.2

 

 

$

120.7

 

Work in progress

 

 

49.3

 

 

 

54.7

 

Finished goods

 

 

136.6

 

 

 

131.8

 

Total inventory

 

$

315.1

 

 

$

307.2

 

 

 

 

Note 4 Retirement and Other Postretirement Benefit Plans

We maintain qualified and nonqualified defined benefit retirement plans covering certain current and former U.S. and European employees, retirement savings plans covering eligible U.S. and U.K. employees and certain postretirement health care and life insurance benefit plans covering eligible U.S. retirees. We also participate in a union sponsored multi-employer pension plan covering certain U.S. employees with union affiliations.

Defined Benefit Retirement Plans

Net Periodic Benefit Costs

Net periodic benefit costs of our defined benefit retirement plans for the quarters and nine months ended September 30, 2016 and 2015 were as follows:

 

 

 

Quarter Ended September 30,

 

 

 

Nine Months Ended September 30,

(In millions)

 

2016

 

 

2015

 

 

2016

 

 

 

2015

U.S. Nonqualified Defined Benefit Retirement Plans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

0.3

 

 

$

0.2

 

 

$

0.9

 

 

$

 

0.8

Interest cost

 

 

0.2

 

 

 

0.1

 

 

 

0.5

 

 

 

 

0.4

Net amortization and deferral

 

 

 

 

 

0.1

 

 

 

0.2

 

 

 

 

1.6

Net periodic benefit cost

 

$

0.5

 

 

$

0.4

 

 

$

1.6

 

 

$

 

2.8

7


 

 

 

 

September 30,
2016

 

 

December 31,
2015

 

Amounts recognized on the balance sheet:

 

 

 

Accrued liabilities

$

0.7

 

 

$

0.7

 

Other non-current liabilities

 

18.2

 

 

 

17.0

 

Total accrued benefit

$

18.9

 

 

$

17.7

 

 

 

 

 

Quarter Ended September 30,

 

 

Nine Months Ended September 30,

 

(In millions)

 

2016

 

 

2015

 

 

2016

 

 

2015

 

European Defined Benefit Retirement Plans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

0.2

 

 

$

0.2

 

 

$

0.6

 

 

$

0.6

 

Interest cost

 

 

1.5

 

 

 

1.6

 

 

 

4.4

 

 

 

4.9

 

Expected return on plan assets

 

 

(2.1

)

 

 

(2.3

)

 

 

(6.2

)

 

 

(6.8

)

Net amortization and deferral

 

 

0.2

 

 

 

0.3

 

 

 

0.5

 

 

 

0.7

 

Net periodic benefit credit

 

$

(0.2

)

 

$

(0.2

)

 

$

(0.7

)

 

$

(0.6

)

 

 

September 30,
2016

 

 

December 31,
2015

 

Amounts recognized on the balance sheet:

 

 

 

Noncurrent asset

$

17.6

 

 

$

13.6

 

 

 

 

 

 

 

 

 

Accrued liabilities

 

0.9

 

 

 

0.4

 

Other non-current liabilities

 

17.8

 

 

 

15.6

 

Total accrued benefit

$

18.7

 

 

$

16.0

 

Contributions

We generally fund our U.S. non-qualified defined benefit retirement plans when benefit payments are incurred. Under the provisions of these non-qualified plans, we have contributed approximately $0.1 million for the first nine months of 2016 to cover unfunded benefits and expect to contribute a total of $0.2 million in 2016. We contributed $4.9 million to our U.S. non-qualified defined benefit retirement plans during 2015.

We contributed $1.2 million and $1.3 million to our European defined benefit retirement plans in the third quarters of 2016 and 2015, respectively. Contributions to the defined benefit retirement plans were $4.9 million and $4.0 million for the nine months ended September 30, 2016 and 2015, respectively. We plan to contribute approximately $6.0 million during 2016 to these European plans. We contributed $4.3 million to our European plans during 2015.

Postretirement Health Care and Life Insurance Benefit Plans

Net periodic benefit costs of our postretirement health care and life insurance benefit plans for the quarters and nine months ended September 30, 2016 and 2015 were immaterial.

 

 

September 30,
2016

 

 

December 31,
2015

 

Amounts recognized on the balance sheet:

 

 

 

Accrued liabilities

$

0.5

 

 

$

0.6

 

Other non-current liabilities

 

4.7

 

 

 

4.7

 

Total accrued benefit

$

5.2

 

 

$

5.3

 

In connection with our postretirement plans, we contributed about $0.1 million during each of the nine-month periods ended September 30, 2016 and 2015. We periodically fund our postretirement plans to pay covered expenses as they are incurred. Based upon nine months of activity, we expect to contribute approximately $0.2 million in 2016 to cover unfunded benefits. We contributed $0.2 million to our postretirement plans during 2015.

 

8


 

Note 5 –– Debt

 

 

 

September 30,

 

 

December 31,

 

(In millions)

 

2016

 

 

2015

 

Current portion of capital lease

 

$

0.8

 

 

$

 

Current portion of Euro term loan

 

 

3.9

 

 

 

 

Current portion of debt

 

 

4.7

 

 

$

 

Senior unsecured credit facility- revolving loan due 2021

 

 

350.0

 

 

 

 

Non-current portion of Euro term loan

 

 

23.5

 

 

 

 

 

Senior unsecured credit facility - revolving loan due 2019

 

 

 

 

 

280.0

 

4.7% senior notes due 2025

 

 

300.0

 

 

 

300.0

 

Senior notes - original issue discount and deferred financing costs

 

 

(3.3

)

 

 

(3.5

)

Long-term debt

 

 

670.2

 

 

 

576.5

 

Total debt

 

$

674.9

 

 

$

576.5

 

 

   In June 2016, the Company amended and extended its $700 million senior unsecured credit facility (“the Facility”). The maturity of the Facility was extended from September 2019 to June 2021. The amendment provided for a modest reduction in interest costs, as well as less restrictive covenants. The interest rate for the revolver is LIBOR + 1.25%. The interest rate ranges from LIBOR + 0.875% to a maximum of LIBOR + 1.875%, depending upon the Company’s leverage ratio. At September 30, 2016 total borrowings under the Facility were $350 million, which approximates fair value. The Facility permits us to issue letters of credit up to an aggregate amount of $40 million. Outstanding letters of credit reduce the amount available for borrowing under our revolving loan. As of September 30, 2016 we had issued letters of credit under the Facility totaling $2.1 million, resulting in undrawn availability under the Facility as of September 30, 2016 of $347.9 million.

The Facility contains financial and other covenants, including, but not limited to, restrictions on the incurrence of debt and the granting of liens, as well as the maintenance of an interest coverage ratio and a leverage ratio.  In accordance with the terms of the  Facility, we are required to maintain a minimum interest coverage ratio of 3.50 (based on the ratio of EBITDA, as defined in the credit agreement, to interest expense) and may not exceed a maximum leverage ratio of 3.50 (based on the ratio of total debt to EBITDA) throughout the term of the Facility.  In addition, the Facility contains other terms and conditions such as customary representations and warranties, additional covenants and customary events of default. The average interest rate on the Facility was 1.8% for the nine months of 2016. The average interest rate was 1.8% for 2015.

In June 2016 we also entered into a 60 million ($67.4 million) term loan.  The loan has two tranches of which the first tranche for 25 million has a six month availability period at a rate of Euribor +1.2% and a final maturity date of June 30, 2023. The second tranche for 35 million has a one year availability period at a rate of Euribor +1.25% and a final maturity date of June 30, 2024. There is a zero percent floor on the Euribor. The loans are payable in annual installments, beginning on June 30, 2017 and June 30, 2019, respectively. We had $27.4 million outstanding under this loan at September 30, 2016, which approximates fair value.

 

In August 2015, the Company issued $300 million aggregate principal amount of 4.7% Senior Unsecured Notes due in 2025.  The interest rate on these senior notes may be increased by 0.25% each time a credit rating applicable to the notes is downgraded. The maximum rate is 6.7%. The net proceeds of approximately $296.4 million were initially used to repay, in part, the Facility. The conditions and covenants related to the senior notes are less restrictive than those of our Facility. The effective interest rate for the outstanding nine-month period of 2016 was 4.8%. The fair value of the senior notes based on quoted prices utilizing level 2 inputs was $319.3 million at September 30, 2016.

 

 

Note 6 Derivative Financial Instruments

Interest Rate Swap and Interest Lock Agreements

     During the third quarter, the Company entered into interest rate swaps with a notional value of $50 million. These new swaps replaced $50 million which matured in September 2016. As of September 30, 2016 the Company had two agreements to swap $50 million each of floating rate obligations for fixed rate obligations at an average of 1.09% and 0.89% against LIBOR in U.S. dollars. Of the total of $100 million of swaps outstanding at September 30, 2016, $50 million matures on each of March 2017 and September 2019. The swaps were accounted for as cash flow hedges of our floating rate bank loans. To ensure the swaps were highly effective, all of the principal terms of the swaps matched the terms of the bank loans. The fair value of the interest rate swaps was a liability of $0.1 million at both September 30, 2016 and December 31, 2015.

9


 

          The Company also uses treasury locks to protect against unfavorable movements in the benchmark treasury rate related to forecasted debt issuances. On September 22, 2016, the Company entered into an interest rate treasury lock agreement with a notional value of $150 million for a forecasted 2017 debt issuance.  We account for this interest rate treasury lock as a cash flow hedge so any change in fair value is recorded into other comprehensive income and then amortized into interest expense over the life of the bonds upon issuance. As of September 30, 2016, the fair value of this the treasury lock was $0.9 million and is recorded in current liabilities and other comprehensive income, net of tax. The interest rate lock had no impact on net income or cash flows from operations for the nine months ended September 30, 2016.

Foreign Currency Forward Exchange Contracts

A number of our European subsidiaries are exposed to the impact of exchange rate volatility between the U.S. dollar and the subsidiaries’ functional currencies, being either the Euro or the British Pound sterling. We entered into contracts to exchange U.S. dollars for Euros and British Pound sterling through March 2019, which we account for as cash flow hedges. The aggregate notional amount of these contracts was $389.1 million and $417.5 million at September 30, 2016 and December 31, 2015, respectively. The purpose of these contracts is to hedge a portion of the forecasted transactions of European subsidiaries under long-term sales contracts with certain customers. These contracts are expected to provide us with a more balanced matching of future cash receipts and expenditures by currency, thereby reducing our exposure to fluctuations in currency exchange rates.The effective portion of the hedges, losses of $1.4 million and $10.7 million, respectively, were recorded in other comprehensive income (“OCI”) for the three and nine months ended September 30, 2016, and losses of $0.3 million and $16.3 million for the three and nine months ended September 30, 2015. We classified the carrying amount of these contracts of $1.8 million in other assets and $20.0 million in other liabilities on the Condensed Consolidated Balance Sheets at September 30, 2016 and $0.9 million in other assets and $22.1 million classified in other liabilities at December 31, 2015. During the three and nine months ended September 30, 2016, we recognized net losses of $5.0 million and $13.5 million in gross margin, respectively. During the three and nine months ended September 30, 2015, we recognized net losses of $4.2 million and of $13.0 million in gross margin, respectively. For the quarters ended September 30, 2016 and 2015, hedge ineffectiveness was immaterial.

In addition, we enter into foreign exchange forward contracts which are not designated as hedges. These are used to provide an offset to transactional gains or losses arising from the remeasurement of non-functional monetary assets and liabilities such as accounts receivable.  The change in the fair value of the derivatives is recorded in the statement of operations. There are no credit contingency features in these derivatives. During the quarters ended September 30, 2016 and 2015, we recognized net foreign exchange gains of $0.8 million and $1.5 million, respectively, in the Condensed Consolidated Statements of Operations. During the nine months ended September 30, 2016 and 2015, we recognized net foreign exchange gains of $3.4 million andnet foreign exchange losses of $12.5 million, respectively, in the Condensed Consolidated Statements of Operations. The net foreign exchange impact recognized from these hedges offset the translation exposure of these transactions. The carrying amount of the contracts for asset and liability derivatives not designated as hedging instruments was $0.2 million classified in other assets and $0.1 million in other liabilities and $0.4 million classified in other assets and $0.4 million in other liabilities on the September 30, 2016 and December 31, 2015 Condensed Consolidated Balance Sheets, respectively.

The change in fair value of our foreign currency forward exchange contracts under hedge designations recorded net of tax within accumulated other comprehensive income for the quarters and nine months ended September 30, 2016 and 2015 was as follows:

 

 

 

Quarter Ended September 30,

 

 

Nine Months Ended September 30,

 

(In millions)

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Unrealized losses at beginning of period, net of tax

 

$

(16.5

)

 

$

(15.3

)

 

$

(15.0

)

 

$

(9.2

)

Losses reclassified to net sales

 

 

4.0

 

 

 

3.8

 

 

 

10.1

 

 

 

11.2

 

Decrease in fair value

 

 

(1.7

)

 

 

(0.2

)

 

 

(9.3

)

 

 

(13.7

)

Unrealized losses at end of period, net of tax

 

$

(14.2

)

 

$

(11.7

)

 

$

(14.2

)

 

$

(11.7

)

 

We expect to reclassify $9.8 million of unrealized losses into earnings over the next twelve months as the hedged sales are recorded.

 

 

Note 7 — Income Taxes

 

The income tax provision for the quarter ended September 30, 2016 was $16.1 million, including a net benefit of $6.6 million from the release of reserves for uncertain tax positions. The effective tax rate, excluding this benefit, for the third quarter was 27.2% as compared to 28.2% in 2015, as both periods primarily benefitted from favorable tax return to provision adjustments. The 2015 nine-month period income tax provision of $60.6 million included $11.6 million of benefits primarily related to the release of reserves for uncertain tax positions. Excluding these discrete benefits, our effective tax rate was 30.5% for the nine-month period of 2016, as

10


 

compared to 30.6% for the nine-month period of 2015.  

    
   Effective for the quarter ended March 31, 2016, the Company early adopted Accounting Standards Update No. 2016-09 (ASU 2016-09) "Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting". Under this guidance all excess tax benefits (“windfalls”) and deficiencies (“shortfalls”) related to employee stock compensation are recognized within income tax expense. Under prior guidance, windfalls were recognized to APIC and shortfalls were only recognized to the extent they exceed the pool of windfall tax benefits. 

    
As a result of the adoption, tax benefits of $1.2 million and $2.4 million were recorded in the quarter and first nine months of 2016, respectively, reflecting the excess tax benefits. The adoption was on a prospective basis and therefore had no impact on prior years.  The Company also recorded an adjustment to opening retained earnings of $0.4 million to recognize U.S. net operating loss carryforwards attributable to excess tax benefits on stock compensation that had not been previously recognized to APIC because they did not reduce income taxes payable, see Note 1.      
      

 

Note 8 — Fair Value Measurements

The authoritative guidance for fair value measurements establishes a hierarchy for observable and unobservable inputs used to measure fair value, into three broad levels, which are described below:

 

Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.

 

Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.

 

Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.

In determining fair value, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as consider counterparty credit risk in our assessment of fair value.

We do not have any significant assets or liabilities that utilize Level 3 inputs. In addition, we have no assets or liabilities that utilize Level 1 inputs. For derivative assets and liabilities that utilize Level 2 inputs, we prepare estimates of future cash flows of our derivatives, which are discounted to a net present value. The estimated cash flows and the discount factors used in the valuation model are based on observable inputs, and incorporate non-performance risk (the credit standing of the counterparty when the derivative is in a net asset position, and the credit standing of Hexcel when the derivative is in a net liability position). The fair value of these assets and liabilities was approximately $1.9 million and $21.1 million, respectively, at September 30, 2016. In addition, the fair value of these derivative contracts, which are subject to a master netting arrangement under certain circumstances, is presented on a gross basis in the consolidated balance sheet.

Below is a summary of valuation techniques for all Level 2 financial assets and liabilities:

 

Interest rate swaps — valued using LIBOR yield curves at the reporting date. Fair value was a liability of $0.1 million at September 30, 2016.

 

Treasury Locks — valued using 10 Yr. US Treasury prices at the reporting date.  Fair value was a liability of $0.9 million at September 30, 2016.

 

Foreign exchange derivative assets and liabilities — valued using quoted forward prices at the reporting date. Fair value of assets and liabilities at September 30, 2016 was $1.9 million and $20.1 million, respectively.

Counterparties to the above contracts are highly rated financial institutions, none of which experienced any significant downgrades in the nine months ended September 30, 2016 that would reduce the receivable amount owed, if any, to the Company.

 

Note 9 — Segment Information

The financial results for our operating segments are prepared using a management approach, which is consistent with the basis and manner in which we internally segregate financial information for the purpose of assisting in making internal operating decisions. We evaluate the performance of our operating segments based on operating income, and generally account for intersegment sales based on arm’s length prices. Corporate and certain other expenses are not allocated to the operating segments, except to the extent that the expense can be directly attributable to the business segment.

11


 

Financial information for our operating segments for the quarters and nine months ended September 30, 2016 and 2015 is as follows:

 

 

 

(Unaudited)

 

 

 

Composite

 

 

Engineered

 

 

Corporate &

 

 

 

 

 

(In millions

 

Materials

 

 

Products

 

 

Other (a)

 

 

Total

 

Third Quarter 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales to external customers

 

$

398.2

 

 

$

102.3

 

 

$

 

 

$

500.5

 

Intersegment sales

 

 

16.2

 

 

 

 

 

 

(16.2

)

 

 

 

Total sales

 

 

414.4

 

 

 

102.3

 

 

 

(16.2

)

 

 

500.5

 

Operating income

 

 

88.8

 

 

 

12.9

 

 

 

(12.6

)

 

 

89.1

 

Depreciation and amortization

 

 

21.7

 

 

 

1.8

 

 

 

 

 

 

23.5

 

Stock-based compensation

 

 

0.7

 

 

 

 

 

 

0.1

 

 

 

0.8

 

Accrual basis additions to capital expenditures

 

 

84.4

 

 

 

5.9

 

 

 

0.1

 

 

 

90.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Third Quarter 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales to external customers

 

$

347.4

 

 

$

101.4

 

 

$

 

 

$

448.8

 

Intersegment sales

 

 

15.9

 

 

 

 

 

 

(15.9

)

 

 

 

Total sales

 

 

363.3

 

 

 

101.4

 

 

 

(15.9

)

 

 

448.8

 

Operating income

 

 

74.1

 

 

 

14.2

 

 

 

(10.3

)

 

 

78.0

 

Depreciation and amortization

 

 

17.7

 

 

 

1.5

 

 

 

0.1

 

 

 

19.3

 

Stock-based compensation

 

 

0.7

 

 

 

0.1

 

 

 

 

 

 

0.8

 

Accrual basis additions to capital expenditures

 

 

83.1

 

 

 

3.2

 

 

 

 

 

 

86.3