UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarter Ended September 30, 2015
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 |
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94-1109521 |
(State of Incorporation) |
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(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 x No o
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 x No o
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 x |
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Accelerated filer o |
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Non-accelerated filer o |
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Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes o No x
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
Class |
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Outstanding at October 14, 2015 |
COMMON STOCK |
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94,488,234 |
HEXCEL CORPORATION AND SUBSIDIARIES
INDEX
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PART I. |
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ITEM 1. |
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Condensed Consolidated Balance Sheets — September 30, 2015 and December 31, 2014 |
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4 |
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4 |
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Condensed Consolidated Statements of Cash Flows — The Nine Months Ended September 30, 2015 and 2014 |
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5 |
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6 |
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ITEM 2. |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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16 |
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ITEM 3. |
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22 |
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ITEM 4. |
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23 |
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PART II. |
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24 |
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ITEM 1. |
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24 |
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ITEM 1A. |
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24 |
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ITEM 2. |
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25 |
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ITEM 6. |
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25 |
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26 |
2
ITEM 1. Condensed Consolidated Financial Statements (Unaudited)
Hexcel Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
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(Unaudited) |
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September 30, |
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December 31, |
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(In millions) |
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2015 |
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2014 |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
43.2 |
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$ |
70.9 |
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Accounts receivable, net |
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257.6 |
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233.5 |
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Inventories |
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326.2 |
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290.1 |
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Prepaid expenses and other current assets |
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100.5 |
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87.2 |
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Total current assets |
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727.5 |
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681.7 |
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Property, plant and equipment |
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2,056.0 |
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1,868.7 |
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Less accumulated depreciation |
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(662.8 |
) |
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(630.5 |
) |
Property, plant and equipment, net |
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1,393.2 |
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1,238.2 |
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Goodwill and other intangible assets |
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59.2 |
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59.8 |
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Investments in affiliated companies |
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33.1 |
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34.2 |
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Other assets |
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27.7 |
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22.5 |
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Total assets |
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$ |
2,240.7 |
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$ |
2,036.4 |
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Liabilities and Stockholders' Equity |
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Current liabilities: |
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Short-term borrowings |
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$ |
— |
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$ |
1.3 |
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Accounts payable |
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134.2 |
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175.0 |
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Accrued liabilities |
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143.3 |
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134.3 |
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Total current liabilities |
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277.5 |
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310.6 |
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Commitments and contingencies (see Note 12) |
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Long-term debt |
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596.4 |
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415.0 |
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Other non-current liabilities |
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171.5 |
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160.9 |
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Total liabilities |
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1,045.4 |
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886.5 |
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Stockholders' equity: |
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Common stock, $0.01 par value, 200.0 shares authorized, 106.0 shares and 104.8 shares issued at September 30, 2015 and December 31, 2014 |
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1.1 |
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1.0 |
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Additional paid-in capital |
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712.9 |
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678.5 |
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Retained earnings |
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999.9 |
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845.5 |
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Accumulated other comprehensive loss |
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(107.0 |
) |
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(69.7 |
) |
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1,606.9 |
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1,455.3 |
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Less – Treasury stock, at cost, 11.5 shares at September 30, 2015, and 9.3 shares at December 31, 2014 |
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(411.6 |
) |
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(305.4 |
) |
Total stockholders' equity |
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1,195.3 |
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1,149.9 |
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Total liabilities and stockholders' equity |
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$ |
2,240.7 |
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$ |
2,036.4 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
3
Hexcel Corporation and Subsidiaries
Condensed Consolidated Statements of Operations
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(Unaudited) |
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Quarter Ended September 30, |
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Nine Months Ended September 30, |
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(In millions, except per share data) |
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2015 |
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2014 |
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2015 |
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2014 |
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Net sales |
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$ |
448.8 |
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$ |
451.9 |
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$ |
1,396.3 |
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$ |
1,383.7 |
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Cost of sales |
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324.7 |
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329.9 |
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991.3 |
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1,003.4 |
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Gross margin |
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124.1 |
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122.0 |
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405.0 |
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380.3 |
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Selling, general and administrative expenses |
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35.5 |
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32.9 |
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120.3 |
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111.0 |
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Research and technology expenses |
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10.6 |
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10.1 |
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33.5 |
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34.6 |
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Other operating expense |
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— |
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— |
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— |
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6.0 |
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Operating income |
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78.0 |
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79.0 |
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251.2 |
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228.7 |
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Interest expense, net |
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4.6 |
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2.1 |
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9.0 |
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5.9 |
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Non-operating expense |
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— |
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0.5 |
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— |
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0.5 |
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Income before income taxes, and equity in earnings of affiliated companies |
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73.4 |
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76.4 |
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242.2 |
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222.3 |
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Provision for income taxes |
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20.7 |
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21.2 |
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60.6 |
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66.9 |
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Income before equity in earnings of affiliated companies |
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52.7 |
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55.2 |
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181.6 |
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155.4 |
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Equity in earnings from affiliated companies |
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0.8 |
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0.6 |
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1.7 |
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1.1 |
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Net income |
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$ |
53.5 |
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$ |
55.8 |
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$ |
183.3 |
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$ |
156.5 |
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Basic net income per common share: |
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$ |
0.56 |
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$ |
0.58 |
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$ |
1.91 |
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$ |
1.61 |
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Diluted net income per common share: |
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$ |
0.55 |
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$ |
0.57 |
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$ |
1.88 |
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$ |
1.58 |
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Weighted-average common shares: |
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Basic |
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95.8 |
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95.8 |
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96.2 |
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97.2 |
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Diluted |
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97.3 |
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97.7 |
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97.7 |
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99.2 |
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Hexcel Corporation and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
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(Unaudited) |
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Quarter Ended September 30, |
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Nine Months Ended September 30, |
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(In millions, except per share data) |
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2015 |
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2014 |
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2015 |
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2014 |
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Net Income |
|
$ |
53.5 |
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$ |
55.8 |
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$ |
183.3 |
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$ |
156.5 |
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Currency translation adjustments |
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(2.9 |
) |
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(36.5 |
) |
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(35.7 |
) |
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(35.6 |
) |
Net unrealized pension and other benefit actuarial losses and prior service credits |
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0.8 |
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1.5 |
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0.8 |
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1.2 |
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Net unrealized gains (losses) on financial instruments (net of tax) |
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3.6 |
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(9.4 |
) |
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(2.4 |
) |
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(11.5 |
) |
Total other comprehensive income (loss) |
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1.5 |
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(44.4 |
) |
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(37.3 |
) |
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(45.9 |
) |
Comprehensive income |
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$ |
55.0 |
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$ |
11.4 |
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$ |
146.0 |
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$ |
110.6 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
Hexcel Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
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(Unaudited) |
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Nine Months Ended September 30, |
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(In millions) |
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2015 |
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2014 |
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Cash flows from operating activities |
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Net income |
|
$ |
183.3 |
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$ |
156.5 |
|
Reconciliation to net cash provided by operating activities: |
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Depreciation and amortization |
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56.5 |
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52.6 |
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Amortization of deferred financing costs and debt discount |
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0.8 |
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1.3 |
|
Deferred income taxes |
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39.3 |
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50.5 |
|
Equity in earnings from affiliated companies |
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(1.7 |
) |
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(1.1 |
) |
Stock-based compensation |
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15.2 |
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14.0 |
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Excess tax benefits on stock-based compensation |
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(9.2 |
) |
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(5.5 |
) |
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Changes in assets and liabilities: |
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Increase in accounts receivable |
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(38.9 |
) |
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(30.4 |
) |
Increase in inventories |
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(46.2 |
) |
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(44.6 |
) |
Increase in prepaid expenses and other current assets |
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(6.0 |
) |
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(11.6 |
) |
(Decrease) increase in accounts payable/accrued liabilities |
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(26.0 |
) |
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10.7 |
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Other – net |
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(2.8 |
) |
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(0.6 |
) |
Net cash provided by operating activities |
|
|
164.3 |
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|
191.8 |
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Cash flows from investing activities |
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Capital expenditures |
|
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(249.3 |
) |
|
|
(194.4 |
) |
Net cash used for investing activities |
|
|
(249.3 |
) |
|
|
(194.4 |
) |
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Cash flows from financing activities |
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Proceeds from issuance of senior notes |
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|
300.0 |
|
|
|
— |
|
Proceeds from senior unsecured credit facility |
|
|
— |
|
|
|
481.0 |
|
Proceeds from previous senior secured credit facility |
|
|
— |
|
|
|
189.0 |
|
Repayment of previous senior secured credit facility |
|
|
— |
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|
|
(481.0 |
) |
Repayment of other debt, net |
|
|
(1.2 |
) |
|
|
(0.2 |
) |
Deferred financing costs and discount related to long-term debt |
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(3.6 |
) |
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(1.3 |
) |
Repayment of senior unsecured credit facility |
|
|
(115.0 |
) |
|
|
(51.0 |
) |
Dividends paid |
|
|
(28.9 |
) |
|
|
— |
|
Repurchase of stock |
|
|
(100.0 |
) |
|
|
(160.0 |
) |
Activity under stock plans |
|
|
13.2 |
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|
2.2 |
|
Net cash provided by (used for) financing activities |
|
|
64.5 |
|
|
|
(21.3 |
) |
Effect of exchange rate changes on cash and cash equivalents |
|
|
(7.2 |
) |
|
|
(3.9 |
) |
Net decrease in cash and cash equivalents |
|
|
(27.7 |
) |
|
|
(27.8 |
) |
Cash and cash equivalents at beginning of period |
|
|
70.9 |
|
|
|
65.5 |
|
Cash and cash equivalents at end of period |
|
$ |
43.2 |
|
|
$ |
37.7 |
|
|
|
|
|
|
|
|
|
|
Supplemental data: |
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|
|
|
|
|
|
Accrual basis additions to property, plant and equipment |
|
$ |
227.8 |
|
|
$ |
179.2 |
|
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, 2014 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, 2014 was derived from the audited 2014 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 2014 Annual Report on Form 10-K filed with the SEC on February 5, 2015.
Investments in Affiliated Companies
We have 50% equity ownership investments in an Asian joint venture Aerospace Composites Malaysia Sdn. Bhd. (“ACM”) and in Formax UK Limited (“Formax”). These investments are accounted for using the equity method of accounting.
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 April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The guidance is effective January 1, 2016 with early adoption permitted. The Company adopted this update in the third quarter of 2015 upon the issuance of our senior notes. See Note 5.
6
Note 2 — Net Income per Common Share
|
|
Quarter Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
(In millions, except per share data) |
|
2015 |
|
|
2014 |
|
|
2015 |
|
|
2014 |
|
||||
Basic net income per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
53.5 |
|
|
$ |
55.8 |
|
|
$ |
183.3 |
|
|
$ |
156.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
95.8 |
|
|
|
95.8 |
|
|
|
96.2 |
|
|
|
97.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per common share |
|
$ |
0.56 |
|
|
$ |
0.58 |
|
|
$ |
1.91 |
|
|
$ |
1.61 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
53.5 |
|
|
$ |
55.8 |
|
|
$ |
183.3 |
|
|
$ |
156.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding — Basic |
|
|
95.8 |
|
|
|
95.8 |
|
|
|
96.2 |
|
|
|
97.2 |
|
Plus incremental shares from assumed conversions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock units |
|
|
0.5 |
|
|
|
0.7 |
|
|
|
0.5 |
|
|
|
0.8 |
|
Stock options |
|
|
1.0 |
|
|
|
1.2 |
|
|
|
1.0 |
|
|
|
1.2 |
|
Weighted average common shares outstanding — Dilutive |
|
|
97.3 |
|
|
|
97.7 |
|
|
|
97.7 |
|
|
|
99.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive net income per common share |
|
$ |
0.55 |
|
|
$ |
0.57 |
|
|
$ |
1.88 |
|
|
$ |
1.58 |
|
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. Total shares underlying stock options of 0.2 million were excluded from the computation of diluted net income per share for the quarter and nine months ended September 30, 2014, as they were anti-dilutive.
Note 3 — Inventories
|
|
September 30, |
|
|
December 31, |
|
||
(In millions) |
|
2015 |
|
|
2014 |
|
||
Raw materials |
|
$ |
137.5 |
|
|
$ |
111.1 |
|
Work in progress |
|
|
46.6 |
|
|
|
48.5 |
|
Finished goods |
|
|
142.1 |
|
|
|
130.5 |
|
Total inventory |
|
$ |
326.2 |
|
|
$ |
290.1 |
|
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.
7
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, 2015 and 2014, were as follows:
|
|
Quarter Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
(In millions) |
|
2015 |
|
|
2014 |
|
|
2015 |
|
|
2014 |
|
||||
U.S. Nonqualified Defined Benefit Retirement Plans |
|
|
|
|
||||||||||||
Service cost |
|
$ |
0.2 |
|
|
$ |
0.3 |
|
|
$ |
0.8 |
|
|
$ |
0.8 |
|
Interest cost |
|
|
0.1 |
|
|
|
0.2 |
|
|
|
0.4 |
|
|
|
0.6 |
|
Net amortization and deferral |
|
|
0.1 |
|
|
|
— |
|
|
|
1.6 |
|
|
|
1.9 |
|
Settlement expense |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2.7 |
|
Net periodic benefit cost |
|
$ |
0.4 |
|
|
$ |
0.5 |
|
|
$ |
2.8 |
|
|
$ |
6.0 |
|
|
September 30, |
|
|
December 31, |
|
||
Amounts recognized on the balance sheet: |
|
|
|
||||
Accrued liabilities |
$ |
0.5 |
|
|
$ |
4.5 |
|
Other non-current liabilities |
|
15.5 |
|
|
|
14.6 |
|
Total accrued benefit |
$ |
16.0 |
|
|
$ |
19.1 |
|
|
|
Quarter Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
(In millions) |
|
2015 |
|
|
2014 |
|
|
2015 |
|
|
2014 |
|
||||
European Defined Benefit Retirement Plans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
|
$ |
0.2 |
|
|
$ |
0.2 |
|
|
$ |
0.6 |
|
|
$ |
0.6 |
|
Interest cost |
|
|
1.6 |
|
|
|
1.7 |
|
|
|
4.9 |
|
|
|
5.3 |
|
Expected return on plan assets |
|
|
(2.3 |
) |
|
|
(2.4 |
) |
|
|
(6.8 |
) |
|
|
(7.2 |
) |
Net amortization and deferral |
|
|
0.3 |
|
|
|
0.2 |
|
|
|
0.7 |
|
|
|
0.5 |
|
Net periodic benefit credit |
|
$ |
(0.2 |
) |
|
$ |
(0.3 |
) |
|
$ |
(0.6 |
) |
|
$ |
(0.8 |
) |
|
September 30, |
|
|
December 31, |
|
||
Amounts recognized on the balance sheet: |
|
|
|
||||
Noncurrent asset |
$ |
8.7 |
|
|
$ |
3.3 |
|
|
|
|
|
|
|
|
|
Accrued liabilities |
|
1.5 |
|
|
|
0.4 |
|
Other non-current liabilities |
|
17.4 |
|
|
|
17.1 |
|
Total accrued benefit |
$ |
18.9 |
|
|
$ |
17.5 |
|
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 $4.7 million in the first nine months of 2015 to cover unfunded benefits and expect to contribute an additional $0.3 million in 2015. We contributed $25.7 million to our U.S. non-qualified defined benefit retirement plans during the 2014 fiscal year.
We contributed $1.3 million and $1.7 million to our European defined benefit retirement plans in the third quarters of 2015 and 2014, respectively. Contributions to the defined benefit retirement plans were $4.0 million and $4.9 million for the nine months ended September 30, 2015 and 2014. We plan to contribute approximately $5.2 million during 2015 to these European plans. We contributed $6.1 million to our European plans during the 2014 fiscal year.
8
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, 2015 and 2014 were immaterial.
|
September 30, |
|
|
December 31, |
|
||
Amounts recognized on the balance sheet: |
|
|
|
||||
Accrued liabilities |
$ |
0.6 |
|
|
$ |
0.6 |
|
Other non-current liabilities |
|
5.6 |
|
|
|
5.7 |
|
Total accrued benefit |
$ |
6.2 |
|
|
$ |
6.3 |
|
In connection with our postretirement plans, we contributed $0.1 million and $0.2 million during the nine-month periods ended September 30, 2015 and 2014, respectively. Contributions during the third quarters of 2015 and 2014 were each about $0.1 million. We periodically fund our postretirement plans to pay covered expenses as they are incurred. Based on nine months of activity, we expect to contribute approximately $0.2 million in 2015 to cover unfunded benefits. We contributed $0.2 million to our postretirement plans during the 2014 fiscal year.
Note 5 — Debt
(In millions) |
|
September 30, |
|
|
December 31, |
|
||
Working capital line of credit — China |
|
$ |
— |
|
|
$ |
1.3 |
|
Short-term borrowings |
|
|
— |
|
|
|
1.3 |
|
4.7% senior notes due 2025 |
|
|
300.0 |
|
|
|
— |
|
Senior notes - original issue discount |
|
|
(0.8 |
) |
|
|
— |
|
Senior notes - deferred finance costs |
|
|
(2.8 |
) |
|
|
— |
|
Senior unsecured credit facility — revolving loan due 2019 |
|
|
300.0 |
|
|
|
415.0 |
|
Long-term debt |
|
|
596.4 |
|
|
|
415.0 |
|
Total debt |
|
$ |
596.4 |
|
|
$ |
416.3 |
|
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, our Senior Unsecured Revolving Credit Facility (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 period in the third quarter was 4.76%. The fair value of the senior notes based on quoted prices utilizing level 2 inputs was $303 million at September 30, 2015.
In April 2015, the FASB issued ASU 2015-03, which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the associated debt liability. For public business entities, the standard is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption of the amendments in this update is permitted for financial statements that have not been previously issued. We adopted this standard during the third quarter of 2015 upon the issuance of our Senior Unsecured Notes due 2025. The balance for unamortized deferred financing costs and debt discount related to the senior notes was $3.6 million at September 30, 2015. The adoption of the ASU did not affect the classification of deferred financing cost related to our Facility.
At September 30, 2015, total borrowings under our $700 million Facility were $300 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, 2015 we had issued letters of credit under the Facility totaling $2.1 million, resulting in undrawn availability under the Facility as of September 30, 2015 of $397.9 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 2.0% for the quarter and 1.84% for the first nine months of 2015. The average interest rate was 1.88% for 2014.
9
Note 6 — Derivative Financial Instruments
Interest Rate Swap Agreements
As of September 30, 2015 the Company had two agreements to swap $75 million of floating rate obligations for fixed rate obligations at an average of 0.959% and 0.754% against LIBOR in U.S. dollars. Of the total of $150 million of swaps outstanding at September 30, 2015, $50 million matures each of March 2016, September 2016, and March 2017. All of the swaps were accounted for as cash flow hedges of our floating rate bank loans. To ensure the swaps were highly effective, all 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 $0.5 million at September 30, 2015 and an asset of $0.1 million and a liability of $0.3 million at December 31, 2014.
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 2018, which we account for as cash flow hedges. The aggregate notional amount of these contracts was $375.7 million and $255.8 million at September 30, 2015 and December 31, 2014, 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 $0.3 million and losses of $16.3 million, were recorded in other comprehensive income (“OCI”) for the three months and nine months ended September 30, 2015, respectively, and losses of $10.8 million and $9.0 million for the three and nine-month periods ended September 30, 2014, respectively. We classified the carrying amount of these contracts of $2.2 million in other assets and $17.8 million in other liabilities on the Condensed Consolidated Balance Sheets at September 30, 2015 and $0.3 million in other assets and $12.7 million classified in other liabilities at December 31, 2014. During the three months ended September 30, 2015 and 2014, we recognized net losses of $4.2 million and net gains of $1.6 million, respectively, recorded in gross margin. During the nine months ended September 30, 2015 and 2014, we recognized net losses of $13.0 million and net gains of $5.0 million, respectively, recorded in gross margin. For the quarters ended September 30, 2015 and 2014, 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, 2015 and 2014, we recognized net foreign exchange gains of $1.5 million and net foreign exchange losses of $8.2 million, respectively, in the Condensed Consolidated Statements of Operations. During the nine-month periods ended September 30, 2015 and 2014, we recognized net foreign exchange losses of $12.5 million and $7.9 million, respectively, in the Condensed Consolidated Statements of Operations in gross margin. 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 $1.8 million classified in other assets and less than $0.1 million in other liabilities and $0.8 million classified in other assets and $5.5 million in other liabilities on the September 30, 2015 and December 31, 2014 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, 2015 and 2014 was as follows:
|
|
Quarter Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
(In millions) |
|
2015 |
|
|
2014 |
|
|
2015 |
|
|
2014 |
|
||||
Unrealized (losses) gains at beginning of period, net of tax |
|
$ |
(25.2 |
) |
|
$ |
6.1 |
|
|
$ |
(9.2 |
) |
|
$ |
7.2 |
|
Losses (gains) reclassified to net sales |
|
|
4.6 |
|
|
|
(1.2 |
) |
|
|
7.4 |
|
|
|
(3.5 |
) |
Increase (decrease) in fair value |
|
|
5.3 |
|
|
|
(7.4 |
) |
|
|
(13.5 |
) |
|
|
(6.2 |
) |
Unrealized (losses) gains at end of period, net of taxes |
|
$ |
(15.3 |
) |
|
$ |
(2.5 |
) |
|
$ |
(15.3 |
) |
|
$ |
(2.5 |
) |
We expect to reclassify $9.0 million of unrealized losses into earnings over the next twelve months as the hedged sales are recorded.
Commodity Hedging
10
Beginning in 2015, we began a program to reduce the impact of the purchase price variability of a key raw material. The purpose of these contracts is to hedge a portion of the forecasted purchases thereby reducing our exposure to the impact of price variations. The effective portion of these hedges was recorded in OCI for the three and nine-month periods ending September 30, 2015. For the three and nine-month periods ended September 30, 2015, the impact of these hedges on our financial statements was immaterial. We classified the carrying amount of these contracts of $0.8 million in other liabilities on the Condensed Consolidated Balance Sheets at September 30, 2015.
Note 7 — Income Taxes
The income tax provisions for the quarter and nine months ended September 30, 2015 were $20.7 million and $60.6 million, respectively. The effective tax rate for the third quarter and nine-month period of 2015 was 28.2% and 25.0%, respectively. The 2015 third quarter included a $1.8 million benefit from favorable tax return to provision adjustments. The first quarter of 2015 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 for the nine months was 30.6%. The income tax provisions for the quarter and nine months ended September 30, 2014 were $21.2 million and $66.9 million, respectively. The effective tax rate for the third quarter of 2014 was 27.7%. The 2014 third quarter included a $1.7 million benefit from favorable tax return to provision adjustments and the release of reserves for uncertain tax provisions. The effective tax rate for the nine-month 2014 period was 30.1%.
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 $4.0 million and $19.2 million, respectively at September 30, 2015. 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 $0.5 million at September 30, 2015. |
|
● |
Foreign exchange and commodity derivative assets and liabilities — valued using quoted forward prices at the reporting date. Fair value of assets and liabilities at September 30, 2015 was $4.0 million and $18.7 million, respectively. |
Counterparties to the above contracts are highly rated financial institutions, none of which experienced any significant downgrades in the three months ended September 30, 2015 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, 2015 and 2014 is as follows:
|
|
(Unaudited) |
|
|||||||||||||
(In millions) |
|
Composite |
|
|
Engineered |
|
|
Corporate |
|
|
Total |
|
||||
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 (a) |
|
|
74.1 |
|
|
|
14.2 |
|
|
|
(10.3 |
) |
|
|
78.0 |
|
Depreciation and amortization |
|
|
17.7 |
|
|
|
1.5 |
|
|
|
0.1 |
|
|
|
19.3 |
|
Stock-based compensation expense |
|
|
0.7 |
|
|
|
0.1 |
|
|
|
— |
|
|
|
0.8 |
|
Accrual basis additions to capital expenditures |
|
|
83.1 |
|
|
|
3.2 |
|
|
|
— |
|
|
|
86.3 |
|
Third Quarter 2014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales to external customers |
|
$ |
342.9 |
|
|
$ |
109.0 |
|
|
$ |
— |
|
|
$ |
451.9 |
|
Intersegment sales |
|
|
16.4 |
|
|
|
0.4 |
|
|
|
(16.8 |
) |
|
|
— |
|
Total sales |
|
|
359.3 |
|
|
|
109.4 |
|
|
|
(16.8 |
) |
|
|
451.9 |
|
Operating income (a) |
|
|
74.4 |
|
|
|
16.7 |
|
|
|
(12.1 |
) |
|
|
79.0 |
|
Depreciation and amortization |
|
|
16.4 |
|
|
|
1.3 |
|
|
|
0.1 |
|
|
|
17.8 |
|
Stock-based compensation expense |
|
|
0.9 |
|
|
|
0.2 |
|
|
|
1.4 |
|
|
|
2.5 |
|
Accrual basis additions to capital expenditures |
|
|
72.4 |
|
|
|
2.0 |
|
|
|
— |
|
|
|
74.4 |
|
Nine Months Ended September 30, 2015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales to external customers |
|
$ |
1,088.3 |
|
|
$ |
308.0 |
|
|
$ |
— |
|
|
$ |
1,396.3 |
|
Intersegment sales |
|
|
56.2 |
|
|
|
0.1 |
|
|
|
(56.3 |
) |
|