hxl-10q_20170630.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 June 30, 2017

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 

 

 

 

Emerging growth company

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

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 July 14, 2017

COMMON STOCK

 

89,778,622

 

 

 

 

 

 


 

HEXCEL CORPORATION AND SUBSIDIARIES

INDEX

 

 

 

 

  

Page

PART I.

 

FINANCIAL INFORMATION

  

 

 

 

 

 

 

ITEM 1.

 

Condensed Consolidated Financial Statements (Unaudited)

  

 

 

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets — June 30, 2017 and December 31, 2016

  

3

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations — The Quarters and Six Months Ended June 30, 2017 and 2016

  

4

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income — The Quarters and Six Months Ended June 30, 2017 and 2016

  

4

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows — The Six Months Ended June 30, 2017 and 2016

  

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

  

23

 

 

 

 

 

PART II.

 

OTHER INFORMATION

  

23

 

 

 

 

 

ITEM 1.

 

Legal Proceedings

  

23

 

 

 

 

 

ITEM 1A.

 

Risk Factors

  

23

 

 

 

 

 

ITEM 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

  

23

 

 

 

 

 

ITEM 6.

 

Exhibits and Reports on Form 8-K

  

24

 

 

 

 

 

                        SIGNATURE

  

25

 

 

 

2


 

PART I. FINANCIAL INFORMATION

 

ITEM 1. Condensed Consolidated Financial Statements (Unaudited)

Hexcel Corporation and Subsidiaries

 

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Unaudited)

 

 

 

June 30,

 

 

December 31,

 

(In millions)

 

2017

 

 

2016

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

45.5

 

 

$

35.2

 

Accounts receivable, net

 

 

253.3

 

 

 

245.6

 

Inventories

 

 

313.0

 

 

 

291.0

 

Prepaid expenses and other current assets

 

 

36.6

 

 

 

35.2

 

Total current assets

 

 

648.4

 

 

 

607.0

 

 

 

 

 

 

 

 

 

 

Property, plant and equipment

 

 

2,593.1

 

 

 

2,378.4

 

Less accumulated depreciation

 

 

(807.6

)

 

 

(752.8

)

Property, plant and equipment, net

 

 

1,785.5

 

 

 

1,625.6

 

 

 

 

 

 

 

 

 

 

Goodwill and other intangible assets

 

 

73.5

 

 

 

72.2

 

Investments in affiliated companies

 

 

63.9

 

 

 

53.1

 

Other assets

 

 

56.0

 

 

 

42.7

 

Total assets

 

$

2,627.3

 

 

$

2,400.6

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Current portions of capital lease and term loan

 

$

4.3

 

 

$

4.3

 

Accounts payable

 

 

139.5

 

 

 

137.3

 

Accrued liabilities

 

 

127.0

 

 

 

130.3

 

Total current liabilities

 

 

270.8

 

 

 

271.9

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies (see Note 11)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

 

817.3

 

 

 

684.4

 

Other non-current liabilities

 

 

208.9

 

 

 

199.4

 

Total liabilities

 

 

1,297.0

 

 

 

1,155.7

 

 

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Common stock, $0.01 par value, 200.0 shares authorized, 107.5 shares and 106.7 shares

   issued at June 30, 2017 and December 31, 2016, respectively

 

 

1.1

 

 

 

1.1

 

Additional paid-in capital

 

 

763.1

 

 

 

738.8

 

Retained earnings

 

 

1,360.6

 

 

 

1,254.7

 

Accumulated other comprehensive loss

 

 

(93.0

)

 

 

(174.4

)

 

 

 

2,031.8

 

 

 

1,820.2

 

Less – Treasury stock, at cost, 17.7 shares at June 30, 2017, and 15.3 shares

   at December 31, 2016

 

 

(701.5

)

 

 

(575.3

)

Total stockholders' equity

 

 

1,330.3

 

 

 

1,244.9

 

Total liabilities and stockholders' equity

 

$

2,627.3

 

 

$

2,400.6

 

 

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

 

 

 

3


 

Hexcel Corporation and Subsidiaries

Condensed Consolidated Statements of Operations

 

 

 

(Unaudited)

 

(Unaudited)

 

 

 

Quarter Ended June 30,

 

Six Months Ended June 30,

 

(In millions, except per share data)

 

2017

 

 

2016

 

2017

 

2016

 

Net sales

 

$

491.3

 

 

$

522.6

 

$

970.1

 

$

1,020.3

 

Cost of sales

 

 

351.4

 

 

 

372.3

 

 

696.1

 

 

727.0

 

Gross margin

 

 

139.9

 

 

 

150.3

 

 

274.0

 

 

293.3

 

Selling, general and administrative expenses

 

 

38.1

 

 

 

38.6

 

 

81.0

 

 

86.0

 

Research and technology expenses

 

 

12.1

 

 

 

11.6

 

 

24.7

 

 

23.3

 

Operating income

 

 

89.7

 

 

 

100.1

 

 

168.3

 

 

184.0

 

Interest expense, net

 

 

6.8

 

 

 

5.7

 

 

13.0

 

 

11.3

 

Non-operating expense

 

 

 

 

 

0.4

 

 

 

 

0.4

 

     Income before income taxes, and equity in earnings from

         affiliated companies

 

 

82.9

 

 

 

94.0

 

 

155.3

 

 

172.3

 

Provision for income taxes

 

 

22.1

 

 

 

28.7

 

 

30.7

 

 

51.4

 

     Income before equity in earnings from affiliated companies

 

 

60.8

 

 

 

65.3

 

 

124.6

 

 

120.9

 

Equity in earnings from affiliated companies

 

 

0.8

 

 

 

0.8

 

 

1.6

 

 

1.2

 

     Net income

 

$

61.6

 

 

$

66.1

 

$

126.2

 

$

122.1

 

Basic net income per common share

 

$

0.68

 

 

$

0.71

 

$

1.39

 

$

1.31

 

Diluted net income per common share

 

$

0.67

 

 

$

0.70

 

$

1.37

 

$

1.29

 

Dividends per share

 

$

0.11

 

 

$

0.10

 

$

0.22

 

$

0.21

 

Weighted-average common shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Basic

 

 

90.7

 

 

 

93.1

 

 

91.1

 

 

93.3

 

    Diluted

 

 

92.0

 

 

 

94.6

 

 

92.4

 

 

94.7

 

 

 

Hexcel Corporation and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income

 

 

 

(Unaudited)

 

(Unaudited)

 

 

 

Quarter Ended June 30,

 

Six Months Ended June 30,

 

(In millions)

 

2017

 

 

2016

 

2017

 

2016

 

Net Income

 

$

61.6

 

 

$

66.1

 

$

126.2

 

$

122.1

 

Currency translation adjustments

 

 

49.4

 

 

 

(21.4

)

 

58.5

 

 

(10.6

)

Net unrealized pension and other benefit actuarial gains

  and prior service credits

 

 

(0.8

)

 

 

1.2

 

 

(1.0

)

 

1.5

 

Net unrealized gains on financial instruments (net of tax)

 

 

16.5

 

 

 

(10.8

)

 

23.9

 

 

(1.5

)

Total other comprehensive income

 

 

65.1

 

 

 

(31.0

)

 

81.4

 

 

(10.6

)

Comprehensive income

 

$

126.7

 

 

$

35.1

 

$

207.6

 

$

111.5

 

 

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)

 

 

 

Six Months Ended June 30,

 

(In millions)

 

2017

 

 

2016

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net income

 

$

126.2

 

 

$

122.1

 

Reconciliation to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

49.5

 

 

 

45.5

 

Amortization related to financing

 

 

0.4

 

 

 

1.1

 

Deferred income taxes

 

 

2.0

 

 

 

24.6

 

Equity in earnings from affiliated companies

 

 

(1.6

)

 

 

(1.2

)

Stock-based compensation

 

 

13.3

 

 

 

12.8

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Decrease (increase) in accounts receivable

 

 

2.4

 

 

 

(53.4

)

Increase in inventories

 

 

(11.6

)

 

 

(22.6

)

Increase in prepaid expenses and other current assets

 

 

(2.9

)

 

 

(5.6

)

Increase in accounts payable/accrued liabilities

 

 

5.0

 

 

 

9.3

 

Other net

 

 

(0.3

)

 

 

2.3

 

Net cash provided by operating activities

 

 

182.4

 

 

 

134.9

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

    Capital expenditures

 

 

(169.2

)

 

 

(156.0

)

    Acquisition of business and investment in affiliate

 

 

(10.0

)

 

 

(33.6

)

Net cash used for investing activities

 

 

(179.2

)

 

 

(189.6

)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

 

 

Proceeds from senior notes due 2027 (including original issue discount of $1.7 million)

 

 

398.3

 

 

 

Issuance costs related to senior notes due 2027

 

 

(3.7

)

 

 

Proceeds from settlement of treasury locks associated with senior notes due 2027

 

 

10.0

 

 

 

Proceeds from Euro term loan

 

 

37.4

 

 

 

Repayments of Euro term loan

 

 

(4.1

)

 

 

Borrowing from senior unsecured debt facility

 

 

 

 

123.1

 

Issuance costs related to credit facility

 

 

 

 

(1.7

)

Repayment of senior unsecured credit facility

 

 

(300.0

)

 

 

Other debt, net

 

 

0.2

 

 

 

(0.2

)

Dividends paid

 

 

(20.1

)

 

 

(19.6

)

Repurchase of stock

 

 

(120.8

)

 

 

(54.9

)

Activity under stock plans

 

 

5.6

 

 

 

(4.7

)

Net cash provided by financing activities

 

 

2.8

 

 

 

42.0

 

Effect of exchange rate changes on cash and cash equivalents

 

 

4.3

 

 

 

(0.2

)

Net increase (decrease) in cash and cash equivalents

 

 

10.3

 

 

 

(12.9

)

Cash and cash equivalents at beginning of period

 

 

35.2

 

 

51.8

 

Cash and cash equivalents at end of period

 

 

45.5

 

 

38.9

 

Supplemental data:

 

 

 

 

 

 

 

 

Accrual basis additions to property, plant and equipment

 

$

170.1

 

 

$

142.2

 

 

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, 2016 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 fairly the statement of financial position, results of operations and cash flows for the interim periods presented.  The Condensed Consolidated Balance Sheet as of December 31, 2016 was derived from the audited 2016 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 2016 Annual Report on Form 10-K filed with the SEC on February 9, 2017.

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 2016, the Company invested a total of $30.0 million in three new affiliates. In 2017, the Company invested an additional $10 million in one of these 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 May 2014, the FASB issued Accounting Standard Update No. 2014-09 (ASU 2014-09), “Revenue from Contracts with Customers”. The update clarifies the principles for recognizing revenue and develops a common revenue standard for all industries. The new guidance is effective for the first quarter of 2018. Our implementation efforts include the identification of revenue within the scope of the guidance, the evaluation of revenue contracts under the guidance and assessing the qualitative and quantitative impacts of the new standard on our financial statements. We are in the process of assessing the anticipated impact of the amended standard on our financial statements.  We have several contracts that allow the customer to terminate for convenience, which we are evaluating. The revenue recognition treatment required under the new standard may vary in some instances from our current recognition at the time of shipment. Additionally, we intend to make certain policy elections, such as shipping and handling, within the amended standard that are consistent with our current accounting.

 

 We expect to complete our evaluation by the end of fiscal 2017, which will allow us to select an adoption method and determine the impact of the new standard on our consolidated results of operations and financial condition. The Company plans to adopt the new guidance on January 1, 2018.

 

In July 2015, the FASB issued Accounting Standards Update No.2015-11 (“ASU 2015-11”), Simplifying the Measurement of Inventory. The update requires that inventory within the scope of the guidance be measured at the lower of cost and net realizable value. The Company adopted this ASU in the first quarter of 2017 with no material impact on our consolidated balance sheets, results of operations and financial condition.

 

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2016-02 (ASU 2016-02), Leases. This ASU requires lessees to recognize a right of use asset and lease liability on the balance sheet for all leases, with the exception of short-term leases. The Company will adopt this ASU on January 1, 2019.  We are currently evaluating the impact of adopting this guidance on our consolidated balance sheets, results of operations and financial condition.

6


 

In March 2016, the FASB issued Accounting Standards Update No. 2016-06 (ASU 2016-06), Contingent put and call options in debt instruments. The new guidance clarifies that an exercise contingency does not need to be evaluated to determine whether it relates to interest rates and credit risk in an embedded derivative analysis. The new guidance will be effective for fiscal years beginning after December 15, 2016, including interim periods within those years. We adopted ASU 2016-06 effective for the quarter ended March 31, 2017 with no material impact on our consolidated balance sheets, results of operations and financial condition.

       In August of 2016, the FASB issued Accounting Standards Update No. 2016-15 (ASU 2016-15) "Classification of Certain Cash Receipts and Cash Payments” which clarifies the classification of certain types of cash flows. The standard is effective for financial statements issued for fiscal years beginning after December 15, 2017. Early adoption beginning in 2016 was permitted. Retrospective application is required. The Company is not early adopting and expects this ASU to have a minimal impact on the Company’s Statements of Cash Flows.

In January 2017, the FASB issued ASU 2017-04, Simplifying the test for Goodwill Impairment, which removes the requirement to compare the implied fair value of goodwill with its carrying amount as part of step 2 of the goodwill impairment test. As a result, under the ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The ASU is effective for annual and interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company early adopted ASU 2017-04 effective for the quarter ended March 31, 2017, for use in its fourth quarter annual goodwill impairment testing.

 

Note 2 — Net Income per Common Share

 

 

 

Quarter Ended June 30,

 

Six Months Ended June 30,

 

(In millions, except per share data)

 

2017

 

 

2016

 

2017

 

 

2016

 

Basic net income per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

61.6

 

 

$

66.1

 

$

126.2

 

 

$

122.1

 

Weighted average common shares outstanding

 

 

90.7

 

 

 

93.1

 

 

91.1

 

 

 

93.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic net income per common share

 

$

0.68

 

 

$

0.71

 

$

1.39

 

 

$

1.31

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted net income per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

61.6

 

 

 

66.1

 

 

126.2

 

 

 

122.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding — Basic

 

 

90.7

 

 

 

93.1

 

 

91.1

 

 

 

93.3

 

Plus incremental shares from assumed conversions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restricted stock units

 

 

0.4

 

 

 

0.5

 

 

0.4

 

 

 

0.4

 

Stock options

 

 

0.9

 

 

 

1.0

 

 

0.9

 

 

 

1.0

 

Weighted average common shares outstanding — Dilutive

 

 

92.0

 

 

 

94.6

 

 

92.4

 

 

 

94.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted net income per common share

 

$

0.67

 

 

$

0.70

 

$

1.37

 

 

$

1.29

 

 

Total shares underlying stock options of 0.1 million and 0.2  million were excluded from the computation of diluted net income per share for the quarter and six months ended June 30, 2017, as they were anti-dilutive.  Total shares underlying stock options of 0.4 million and 0.6 million were excluded from the computation of diluted net income per share for the quarter and six months ended June 30, 2016, as they were anti-dilutive.  

 

Note 3 Inventories

 

 

 

June 30,

 

 

December 31,

 

(In millions)

 

2017

 

 

2016

 

Raw materials

 

$

130.9

 

 

$

120.6

 

Work in progress

 

 

48.9

 

 

 

53.7

 

Finished goods

 

 

133.2

 

 

 

116.7

 

Total Inventory

 

$

313.0

 

 

$

291.0

 

 

 

7


 

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 six months ended June 30, 2017 and 2016 were as follows:

 

 

 

Quarter Ended June 30,

 

Six Months Ended June 30,

(In millions)

 

2017

 

2016

 

2017

 

2016

U.S. Nonqualified Defined Benefit Retirement Plans

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

0.4

 

$

0.3

 

$

0.7

 

$

0.6

Interest cost

 

 

0.1

 

 

0.2

 

 

0.3

 

 

0.3

Settlement expense

 

 

0.1

 

 

 

 

0.1

 

 

Net amortization and deferral

 

 

0.1

 

 

0.1

 

 

0.2

 

 

0.2

Net periodic benefit cost

 

$

0.7

 

$

0.6

 

$

1.3

 

$

1.1

 

 

 

 

June 30, 2017

 

 

December 31, 2016

Amounts recognized on the balance sheet:

 

 

 

 

 

 

Accrued liabilities

 

$

1.1

 

$

1.1

Other non-current liabilities

 

 

19.6

 

 

18.6

 

 

$

20.7

 

$

19.7

 

 

 

Quarter Ended June 30,

 

 

Six Months Ended June 30,

 

(In millions)

 

2017

 

 

2016

 

 

2017

 

 

2016

 

European Defined Benefit Retirement Plans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

0.2

 

 

$

0.2

 

 

$

0.4

 

 

$

0.4

 

Interest cost

 

 

1.1

 

 

 

1.4

 

 

 

2.2

 

 

 

2.9

 

Expected return on plan assets

 

 

 

(2.1

)

 

 

 

(2.0

)

 

 

 

(4.1

)

 

 

 

(4.1

)

Net amortization and deferral

 

 

0.1

 

 

 

0.1

 

 

 

0.2

 

 

 

0.3

 

Net periodic benefit credit

 

$

 

(0.7

)

 

$

 

(0.3

)

 

$

 

(1.3

)

 

$

 

(0.5

)

 

 

 

 

June 30, 2017

 

 

 

December 31, 2016

Amounts recognized on the balance sheet:

 

 

 

 

 

 

 

 

Noncurrent asset

 

$

29.9

 

 

$

23.9

 

 

 

 

 

 

 

 

 

Accrued liabilities

 

 

1.2

 

 

 

0.4

Other non-current liabilities

 

 

 

19.0

 

 

 

16.2

Total accrued benefit

 

$

20.2

 

 

$

16.6

 

  

 

 

 

 

 

 

8


 

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 in each of the first two quarters of 2017 to cover unfunded benefits and expect to contribute a total of $1.1 million in 2017.  We contributed $0.2 million to our U.S. non-qualified defined benefit retirement plans during 2016.

We contributed $0.7 million and $2.4 million to our European defined benefit retirement plans in the second quarter of 2017 and 2016, respectively. Contributions to the defined benefit retirement plans were $2.0 million and $2.7 million for the six months ended June 30, 2017 and 2016, respectively. We plan to contribute approximately $5.1 million during 2017 to our European plans. We contributed $6.3 million to our European plans during 2016.

Postretirement Health Care and Life Insurance Benefit Plans

We recorded $0.3 million of net amortization gain deferral for the quarter and $0.6 million for the six months ended June 30, 2017. Net periodic benefit costs of our postretirement health care and life insurance benefit plans for the quarters and six months ended 2016 were not material.

 

 

 

June 30, 2017

 

December 31, 2016

Amounts recognized on the balance sheet:

 

 

 

 

 

 

Accrued liabilities

 

$

0.5

 

$

0.5

Other non-current liabilities

 

 

3.4

 

 

3.9

         Total accrued benefit

 

$

3.9

 

$

4.4

 

In connection with our postretirement plans, we contributed about $0.1 million during each of the quarters ended June 30, 2017 and 2016. We periodically fund our postretirement plans to pay covered expenses as they are incurred. We expect to contribute approximately $0.5 million in 2017 to cover unfunded benefits.  We contributed $0.1 million to our postretirement plans during 2016.

 

Note 5 –– Debt

 

 

 

 

 

 

 

 

 

 

(In millions)

 

June 30, 2017

 

 

December 31, 2016

 

Current portion of capital lease

 

$

0.2

 

 

$

0.5

 

Current portion of Euro term loan

 

 

4.1

 

 

 

3.8

 

Current portion of debt

 

$

4.3

 

 

$

4.3

 

Non-current portion of Euro term loan

 

 

60.4

 

 

 

22.6

 

Senior unsecured credit facility- revolving loan due 2021

 

 

65.0

 

 

 

365.0

 

4.7% senior notes due 2025

 

 

300.0

 

 

 

300.0

 

Senior notes due 2025 - original issue discount and deferred financing costs

 

 

(3.0

)

 

 

(3.2

)

3.95% senior notes due 2027

 

 

400.0

 

 

 

Senior notes due 2027 - original issue discount and deferred financing costs

 

 

(5.2

)

 

 

Other debt

 

 

0.1

 

 

 

Long-term debt

 

 

817.3

 

 

 

684.4

 

Total debt

 

$

821.6

 

 

$

688.7

 

 

In February 2017, the Company issued $400 million aggregate principal amount of 3.95% Senior Unsecured Notes due in 2027.  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 5.95%. The net proceeds of approximately $394.6 million were initially used to repay, in part, $350 million of our Senior Unsecured Revolving Credit Facility (the “Facility”) and the remainder was used for general purposes including share repurchase.  The conditions and covenants related to the senior notes are less restrictive than those of our Facility. The effective interest rate for the outstanding period in the first six months was 3.86% inclusive of the approximately 0.25% benefit of the treasury locks. The fair value of the senior notes due in 2027 based on quoted prices utilizing level 2 inputs was $410.4 million at June 30, 2017.


9


 

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 conditions and covenants related to the senior notes are less restrictive than those of our Facility. The effective interest rate for the outstanding period in the first six months was 4.85%. The fair value of the notes due in 2025 based on quoted prices utilizing level 2 inputs was $322.1 million at June 30, 2017.

As of June 30, 2017, total borrowings under our $700 million Facility were $65 million, which approximates fair value using level 2 inputs. The Company utilized its Facility at various borrowing levels with $451 million and $524 million representing the highest amounts borrowed within the six months ended June 30, 2017 and 2016, respectively. 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 June 30, 2017, we had no outstanding letters of credit under the Facility, resulting in undrawn availability under the Facility as of June 30, 2017 of $635.0 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 2.24% for the first six months of 2017. The average interest rate was 1.82% for 2016.

In June 2016, we entered into a 60 million term loan.  The loan has two tranches of which the first tranche for 25 million has a rate of Euribor +1.2% and a final maturity date of June 30, 2023.  The first tranche is repayable in seven equal annual installments, which began on June 30, 2017.  The second tranche for 35 million has a rate of Euribor +1.25% and a final maturity date of June 30, 2024. The first annual amortization payment for the second tranche is due June 30, 2019.  There is a zero percent floor on the Euribor. The outstanding amounts at June 30, 2017 and December 31, 2016 are €56.4 million (or $64.5 million) and €25 million (or $26.4 million), which approximates fair value.  The term loan is guaranteed by Hexcel Corporation.

 

Note 6 Derivative Financial Instruments

Interest Rate Swap and Interest Lock Agreements

       As of June 30, 2017, the Company had agreements to swap $50 million of floating rate obligations for fixed rate obligations at an average of 1.087% against LIBOR in U.S. dollars, which matures in 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 an asset of $0.6 million at June 30, 2017 and an asset of $0.7 million at December 31, 2016.

In December 2016, we swapped €25.0 million of floating rate obligations for fixed rate obligations at a rate of 0.365% against EURIBOR in Euros. The swap amortizes over seven equal annual installments, which began on June 30, 2017 until the final maturity on June 30, 2023. In April 2017, we swapped €35.0 million of floating rate obligations at a rate of 0.59% against EURIBOR in Euros. The swap amortizes over six unequal annual installments beginning June 30, 2019 until the final maturity on June 30, 2024.  Both derivatives are accounted for as cash flow hedges of the floating rate Euro term loan. To ensure the swap is highly effective, all of the principal terms of the swap matched the terms of the bank loan. The fair value of the interest rate swaps was a liability of $0.3 million at June 30, 2017 and a liability of $0.1 million at December 31, 2016.

          The Company also uses treasury locks to protect against unfavorable movements in the benchmark treasury rate related to forecasted debt issuances. In September 2016 and February 2017, the Company entered into interest rate treasury lock agreements with notional values of $150 million and $100 million for the 2017 note issuance. We accounted for these interest rate treasury locks as cash flow hedges so any change in fair value was recorded into other comprehensive income and then amortized into interest expense over the life of the bonds upon issuance. On February 15, 2017, we issued senior notes due 2027 and received $10.0 million in cash in settlement of the derivatives. The amount recorded in other comprehensive income will be released to interest expense over the life of the senior notes. The effect of these treasury locks is to reduce the interest rate on these senior notes by approximately 0.25%.

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 December 2019, which we account for as cash flow hedges. The aggregate notional amount of these contracts was $358.4 million and $423.8 million at June 30, 2017 and December 31, 2016, respectively.  

10


 

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, gains of $18.7 million and $22.0 million, respectively, were recorded in other comprehensive income (“OCI”) for the three and six months ended June 30, 2017 and losses of $15.1 million and $9.3 million, respectively, were recorded in other comprehensive income (“OCI”) for the three and six months ended June 30, 2016. We classified the carrying amount of these contracts of $7.2 million in other assets and $8.4 million in other liabilities on the Condensed Consolidated Balance Sheets at June 30, 2017 and $33.9 million in other liabilities at December 31, 2016. During the three and six months ended June 30, 2017, we recognized net losses of $4.2 million and $10.8 million in gross margin, respectively. During the three and six months ended June 30, 2016, we recognized net losses of $3.4 million and $8.5 million in gross margin, respectively.  For the quarters and six months ended June 30, 2017 and 2016, 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 re-measurement 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 June 30, 2017 and 2016, we recognized net foreign exchange gains of $9.9 million and losses of $1.6 million, respectively, in the Condensed Consolidated Statements of Operations. During the six months ended June 30, 2017 and 2016, we recognized net foreign exchange gains of $11.4 million and of $2.7 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 $6.5 million classified in other assets and $0.1 million in other liabilities and $1.0 million classified in other assets and $0.3 million in other liabilities on the June 30, 2017 and December 31, 2016 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 six months ended June 30, 2017 and 2016 was as follows:

 

 

 

Quarter Ended June 30,

 

 

Six Months Ended June 30,

 

(In millions)

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Unrealized losses at beginning of period, net of tax

 

$

(18.3

)

 

$

(5.7

)

 

$

(25.9

)

 

$

(15.0

)

Losses reclassified to net sales

 

 

3.3

 

 

 

1.7

 

 

 

8.3

 

 

 

6.1

 

Increase (decrease) in fair value

 

 

13.7

 

 

 

(12.5

)

 

 

16.3

 

 

 

(7.6

)

Unrealized losses at end of period, net of tax

 

$

(1.3

)

 

$

(16.5

)

 

$

(1.3

)

 

$

(16.5

)

 

We expect to reclassify $3.4 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 second quarter and the first half period ended June 30, 2017 was $22.1 million and $30.7 million.  The effective tax rate for the second quarter was 26.7% as the quarter benefitted from favorable state tax return to provision adjustments and deductions associated with share-based compensation payments. The provision for the first quarter of 2017 included a nonrecurring discrete benefit of $9.1 million from the release of a valuation allowance in a foreign jurisdiction. The effective tax rate, excluding this benefit, for the first half of 2017 was 25.7% as compared to 29.8% in 2016, as both periods benefitted from deductions associated with share-based compensation payments.
        

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.

11


 

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 $14.3 million and $8.8 million, respectively, at June 30, 2017. 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 an asset of $0.6 million and a liability of $0.3 million at June 30, 2017.

 

 

Foreign exchange derivative assets and liabilities — valued using quoted forward prices at the reporting date. Fair value of assets and liabilities at June 30, 2017 was $13.7 million and $8.5 million, respectively.

Counterparties to the above contracts are highly rated financial institutions, none of which experienced any significant downgrades in the quarter ended June 30, 2017 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.

Financial information for our operating segments for the quarters and six months ended June 30, 2017 and 2016 is as follows:

 

12


 

 

 

(Unaudited)

 

 

 

Composite

 

 

Engineered

 

 

Corporate &

 

 

 

 

 

 

 

(In millions

 

Materials

 

 

Products

 

 

Other (a)

 

 

 

 

Total

 

Second Quarter 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales to external customers

 

$

397.3

 

 

$

94.0

 

 

$

 

 

 

 

$

491.3

 

Intersegment sales

 

 

15.1

 

 

 

 

 

 

(15.1

)

 

 

 

 

 

Total sales

 

 

412.4

 

 

 

94.0

 

 

 

(15.1

)

 

 

 

 

491.3

 

Operating income

 

 

92.1

 

 

 

12.1

 

 

 

(14.5

)

 

 

 

 

89.7

 

Depreciation and amortization

 

 

23.3

 

 

 

1.8

 

 

 

 

 

 

 

 

25.1

 

Stock-based compensation

 

 

1.2

 

 

 

0.2

 

 

 

1.0

 

 

 

 

 

2.4

 

Accrual basis additions to capital expenditures

 

 

74.5

 

 

 

2.7

 

 

 

 

 

 

 

 

77.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Second Quarter 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales to external customers

 

$

425.3

 

 

$

97.3