UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarter Ended September 30, 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 |
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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 ☒ 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 ☒ |
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Accelerated filer ☐ |
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Non-accelerated filer ☐ |
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Smaller reporting company ☐ |
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Emerging growth company ☐ |
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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 |
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Outstanding at October 13, 2017 |
COMMON STOCK |
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89,825,472 |
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, 2017 and December 31, 2016 |
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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, 2017 and 2016 |
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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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23 |
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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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24 |
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ITEM 6. |
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25 |
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27 |
2
ITEM 1. Condensed Consolidated Financial Statements
Hexcel Corporation and Subsidiaries |
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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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2017 |
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2016 |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
119.1 |
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$ |
35.2 |
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Accounts receivable, net |
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245.0 |
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245.6 |
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Inventories, net |
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313.4 |
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291.0 |
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Prepaid expenses and other current assets |
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30.0 |
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35.2 |
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Total current assets |
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707.5 |
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607.0 |
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Property, plant and equipment |
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2,662.3 |
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2,378.4 |
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Less accumulated depreciation |
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(836.8 |
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(752.8 |
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Net property, plant and equipment |
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1,825.5 |
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1,625.6 |
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Goodwill and other intangible assets |
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74.0 |
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72.2 |
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Investments in affiliated companies |
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67.1 |
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53.1 |
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Other assets |
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63.1 |
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42.7 |
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Total assets |
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$ |
2,737.2 |
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$ |
2,400.6 |
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Liabilities and Stockholders' Equity |
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Current liabilities: |
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Current portions of capital lease and term loan |
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$ |
4.2 |
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$ |
4.3 |
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Accounts payable |
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128.6 |
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137.3 |
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Accrued liabilities |
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125.0 |
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130.3 |
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Total current liabilities |
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257.8 |
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271.9 |
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Commitments and contingencies (see Note 11) |
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Long-term debt |
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829.6 |
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684.4 |
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Other non-current liabilities |
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223.1 |
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199.4 |
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Total liabilities |
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1,310.5 |
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1,155.7 |
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Stockholders' equity: |
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Common stock, $0.01 par value, 200.0 shares authorized, 107.5 shares and 106.7 shares issued at September 30, 2017 and December 31, 2016, respectively |
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1.1 |
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1.1 |
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Additional paid-in capital |
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766.5 |
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738.8 |
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Retained earnings |
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1,419.1 |
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1,254.7 |
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Accumulated other comprehensive loss |
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(57.2 |
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(174.4 |
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2,129.5 |
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1,820.2 |
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Less – Treasury stock, at cost, 17.7 shares at September 30, 2017, and 15.3 shares at December 31, 2016, respectively. |
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(702.8 |
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(575.3 |
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Total stockholders' equity |
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1,426.7 |
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1,244.9 |
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Total liabilities and stockholders' equity |
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$ |
2,737.2 |
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$ |
2,400.6 |
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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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(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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2017 |
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2016 |
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2017 |
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2016 |
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Net sales |
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$ |
491.5 |
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$ |
500.5 |
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$ |
1,461.6 |
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$ |
1,520.8 |
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Cost of sales |
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355.9 |
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364.8 |
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1,052.0 |
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1,091.8 |
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Gross margin |
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135.6 |
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135.7 |
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409.6 |
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429.0 |
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Selling, general and administrative expenses |
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34.7 |
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35.1 |
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115.7 |
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121.1 |
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Research and technology expenses |
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11.8 |
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11.5 |
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36.5 |
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34.8 |
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Operating income |
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89.1 |
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89.1 |
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257.4 |
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273.1 |
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Interest expense, net |
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7.0 |
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5.5 |
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20.0 |
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16.8 |
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Non-operating expense |
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— |
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— |
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— |
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0.4 |
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Income before income taxes, and equity in earnings from affiliated companies |
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82.1 |
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83.6 |
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237.4 |
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255.9 |
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Provision for income taxes |
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13.6 |
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16.1 |
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44.3 |
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67.5 |
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Income before equity in earnings from affiliated companies |
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68.5 |
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67.5 |
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193.1 |
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188.4 |
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Equity in earnings from affiliated companies |
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1.2 |
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0.7 |
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2.8 |
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1.9 |
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Net income |
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$ |
69.7 |
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$ |
68.2 |
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$ |
195.9 |
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$ |
190.3 |
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Basic net income per common share |
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$ |
0.77 |
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$ |
0.74 |
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$ |
2.16 |
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$ |
2.04 |
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Diluted net income per common share |
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$ |
0.76 |
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$ |
0.72 |
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$ |
2.13 |
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$ |
2.01 |
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Dividends per share |
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$ |
0.125 |
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$ |
0.11 |
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$ |
0.345 |
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$ |
0.32 |
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Weighted-average common shares: |
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Basic |
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90.1 |
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92.7 |
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90.7 |
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93.1 |
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Diluted |
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91.4 |
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94.1 |
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92.1 |
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94.6 |
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Hexcel Corporation and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
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(Unaudited) |
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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) |
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2017 |
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2016 |
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2017 |
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2016 |
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Net Income |
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$ |
69.7 |
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$ |
68.2 |
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$ |
195.9 |
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$ |
190.3 |
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Currency translation adjustments |
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28.7 |
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(0.4 |
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87.2 |
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(11.0 |
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Net unrealized pension and other benefit actuarial gains and prior service credits |
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(0.6 |
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0.4 |
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(1.6 |
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1.9 |
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Net unrealized gains on financial instruments (net of tax) |
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7.7 |
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1.7 |
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31.6 |
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0.2 |
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Total other comprehensive income (loss) |
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35.8 |
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1.7 |
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117.2 |
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(8.9 |
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Comprehensive income |
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$ |
105.5 |
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$ |
69.9 |
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$ |
313.1 |
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$ |
181.4 |
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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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2017 |
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2016 |
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Cash flows from operating activities |
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Net income |
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$ |
195.9 |
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$ |
190.3 |
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Reconciliation to net cash provided by operating activities: |
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Depreciation and amortization |
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76.3 |
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69.0 |
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Amortization related to financing |
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0.6 |
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1.4 |
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Deferred income taxes |
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15.1 |
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50.5 |
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Equity in earnings from affiliated companies |
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(2.8 |
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(1.9 |
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Stock-based compensation |
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15.5 |
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13.6 |
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Changes in assets and liabilities: |
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Decrease (increase) in accounts receivable |
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19.7 |
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(16.8 |
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Increase in inventories |
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(6.7 |
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(5.0 |
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Decrease (increase) in prepaid expenses and other current assets |
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1.4 |
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(7.3 |
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Decrease in accounts payable/accrued liabilities |
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(9.8 |
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(9.1 |
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Other – net |
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3.3 |
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2.1 |
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Net cash provided by operating activities |
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308.5 |
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286.8 |
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Cash flows from investing activities |
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Capital expenditures |
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(221.3 |
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(231.8 |
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Acquisition of business and investment in affiliate |
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(12.0 |
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(33.6 |
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Net cash used for investing activities |
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(233.3 |
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(265.4 |
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Cash flows from financing activities |
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Proceeds from senior notes due 2027 (including original issue discount of $1.7) |
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398.3 |
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― |
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Issuance costs related to senior notes due 2027 |
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(3.7 |
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― |
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Proceeds from settlement of treasury locks associated with senior notes due 2027 |
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10.0 |
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― |
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Proceeds from Euro term loan |
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37.4 |
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27.4 |
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Repayments of Euro term loan |
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(4.1 |
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― |
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Borrowing from senior unsecured credit facility |
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― |
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63.0 |
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Issuance costs related to credit facility |
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― |
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(1.7 |
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Repayment of senior unsecured credit facility |
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(290.0 |
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― |
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Other debt, net |
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(0.4 |
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(0.4 |
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Dividends paid |
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(31.3 |
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(29.7 |
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Repurchase of stock |
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(122.0 |
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(84.9 |
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Activity under stock plans |
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6.8 |
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(1.0 |
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Net cash provided by (used in) financing activities |
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1.0 |
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(27.3 |
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Effect of exchange rate changes on cash and cash equivalents |
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7.7 |
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(0.2 |
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Net increase (decrease) in cash and cash equivalents |
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83.9 |
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(6.1 |
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Cash and cash equivalents at beginning of period |
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35.2 |
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51.8 |
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Cash and cash equivalents at end of period |
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119.1 |
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45.7 |
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Supplemental data: |
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Accrual basis additions to property, plant and equipment |
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$ |
218.0 |
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$ |
232.6 |
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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 $12 million in two 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 Financial Accounting Standards Board (“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 standard is effective for the first quarter of 2018. Our implementation efforts include the identification of revenue within the scope of the standard, 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 certain contracts under which we produce products with no alternative use and the Company has an enforceable right to payment. As a result, the Company will be required to record revenue for these contracts over time as opposed to at the time of shipment as we do today.
We expect to complete our evaluation by the end of fiscal 2017, which will allow us to determine the impact of the new standard on our consolidated results of operations and financial condition. The Company plans to adopt the new standard on January 1, 2018 using the modified retrospective method.
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 Accounting Standards Update No. 2017-04 (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.
In March 2017, the FASB issued Accounting Standards Update No. 2017-07 (ASU 2017-07), Compensation-Retirement Benefits, that amends the presentation of net periodic pension cost and net periodic postretirement benefit cost. This amendment will require an entity to disaggregate the service cost component from the other components of net periodic benefit cost, to report the service cost component in the same line item as other compensation costs and to report the other components of net periodic benefit cost separately as a line item below operating income on our statement of operations. In addition, capitalization of net periodic benefit cost in assets will be limited to the service cost component. This amendment is effective on January 1, 2018. This amendment is required to be adopted (i) retrospectively with respect to the disaggregation of the service cost component from the other components of net periodic benefit cost and the separate reporting of the other components of net periodic benefit cost outside of operating income and (ii) prospectively with respect to the capitalization in assets of the service cost component. We are currently evaluating the impact of this amendment on our financial position, results of operations and cash flows.
In August 2017, the FASB issued Accounting Standards Update No. 2017-12 (ASU 2017-12), Targeted Improvement to Accounting for Hedging Activities, which better align hedge accounting with an organization’s risk management activities in the financial statements. In addition, the ASU simplifies the application of hedge accounting guidance in areas where practice issues exist. The ASU is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted, including interim periods within those years. We expect this ASU to have a minimal impact on our consolidated balance sheets, results of operations and financial condition.
7
Note 2 — Net Income per Common Share
|
|
Quarter Ended September 30, |
|
Nine Months Ended September 30, |
|
||||||||||
(In millions, except per share data) |
|
2017 |
|
|
2016 |
|
2017 |
|
|
2016 |
|
||||
Basic net income per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
69.7 |
|
|
$ |
68.2 |
|
$ |
195.9 |
|
|
$ |
190.3 |
|
Weighted average common shares outstanding |
|
|
90.1 |
|
|
|
92.7 |
|
|
90.7 |
|
|
|
93.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per common share |
|
$ |
0.77 |
|
|
$ |
0.74 |
|
$ |
2.16 |
|
|
$ |
2.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
69.7 |
|
|
|
68.2 |
|
|
195.9 |
|
|
|
190.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding — Basic |
|
|
90.1 |
|
|
|
92.7 |
|
|
90.7 |
|
|
|
93.1 |
|
Plus incremental shares from assumed conversions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock units |
|
|
0.4 |
|
|
|
0.4 |
|
|
0.4 |
|
|
|
0.5 |
|
Stock options |
|
|
0.9 |
|
|
|
1.0 |
|
|
1.0 |
|
|
|
1.0 |
|
Weighted average common shares outstanding — Dilutive |
|
|
91.4 |
|
|
|
94.1 |
|
|
92.1 |
|
|
|
94.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per common share |
|
$ |
0.76 |
|
|
$ |
0.72 |
|
$ |
2.13 |
|
|
$ |
2.01 |
|
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 nine months ended September 30, 2017, as they were anti-dilutive. Total shares underlying stock options of 0.4 million and 0.5 million were excluded from the computation of diluted net income per share for the quarter and nine months ended September 30, 2016, as they were anti-dilutive.
Note 3 — Inventories
|
|
September 30, |
|
|
December 31, |
|
||
(In millions) |
|
2017 |
|
|
2016 |
|
||
Raw materials |
|
$ |
133.6 |
|
|
$ |
120.6 |
|
Work in progress |
|
|
46.8 |
|
|
|
53.7 |
|
Finished goods |
|
|
133.0 |
|
|
|
116.7 |
|
Total Inventory |
|
$ |
313.4 |
|
|
$ |
291.0 |
|
Note 4 — Retirement and Other Postretirement Benefit Plans
We maintain qualified and nonqualified defined benefit retirement plans covering certain current and former U.S. and European employees, retirement savings plans covering eligible U.S. and U.K. employees and certain postretirement health care and life insurance benefit plans covering eligible U.S. retirees. We also participate in a union sponsored multi-employer pension plan covering certain U.S. employees with union affiliations.
Defined Benefit Retirement Plans
Net Periodic Benefit Costs
Net periodic benefit costs of our defined benefit retirement plans for the quarters and nine months ended September 30, 2017 and 2016 were as follows:
|
|
Quarter Ended September 30, |
|
|
Nine Months Ended September 30, |
|||||||||
(In millions) |
|
2017 |
|
2016 |
|
|
2017 |
|
2016 |
|||||
U.S. Nonqualified Defined Benefit Retirement Plans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
|
$ |
0.4 |
|
$ |
0.3 |
|
|
$ |
1.1 |
|
$ |
0.9 |
|
Interest cost |
|
|
0.1 |
|
|
0.2 |
|
|
|
0.4 |
|
|
0.5 |
|
Settlement expense |
|
|
0.2 |
|
|
― |
|
|
|
0.3 |
|
|
― |
|
Net amortization and deferral |
|
|
0.1 |
|
|
|
— |
|
|
|
0.3 |
|
|
0.2 |
Net periodic benefit cost |
|
$ |
0.8 |
|
$ |
0.5 |
|
|
$ |
2.1 |
|
$ |
1.6 |
8
|
|
|
September 30, 2017 |
|
|
December 31, 2016 |
Amounts recognized on the balance sheet: |
|
|
|
|
|
|
Accrued liabilities |
|
$ |
1.1 |
|
$ |
1.1 |
Other non-current liabilities |
|
|
20.3 |
|
|
18.6 |
|
|
$ |
21.4 |
|
$ |
19.7 |
|
|
Quarter Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||||||
(In millions) |
|
2017 |
|
|
2016 |
|
|
2017 |
|
|
2016 |
|
||||||||
European Defined Benefit Retirement Plans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
|
$ |
0.3 |
|
|
$ |
0.2 |
|
|
$ |
0.7 |
|
|
$ |
0.6 |
|
||||
Interest cost |
|
|
1.1 |
|
|
|
1.5 |
|
|
|
3.3 |
|
|
|
4.4 |
|
||||
Expected return on plan assets |
|
|
|
(2.0 |
) |
|
|
|
(2.1 |
) |
|
|
|
(6.1 |
) |
|
|
|
(6.2 |
) |
Net amortization and deferral |
|
|
|
— |
|
|
|
0.2 |
|
|
|
0.2 |
|
|
|
0.5 |
|
|||
Net periodic benefit credit |
|
$ |
|
(0.6 |
) |
|
$ |
|
(0.2 |
) |
|
$ |
|
(1.9 |
) |
|
$ |
|
(0.7 |
) |
|
|
|
September 30, 2017 |
|
|
|
December 31, 2016 |
|
Amounts recognized on the balance sheet: |
|
|
|
|
|
|
|
|
Noncurrent asset |
|
$ |
32.9 |
|
|
$ |
23.9 |
|
|
|
|
|
|
|
|
|
|
Accrued liabilities |
|
|
|
1.0 |
|
|
|
0.4 |
Other non-current liabilities |
|
|
|
19.7 |
|
|
|
16.2 |
Total accrued benefit |
|
$ |
20.7 |
|
|
$ |
16.6 |
Contributions
We generally fund our U.S. non-qualified defined benefit retirement plans when benefit payments are incurred. We did not make any contributions under the provisions of these non-qualified plans in the third quarter of 2017 and we have contributed approximately $0.1 million in the first nine months of 2017 to cover unfunded benefits. We 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 $0.9 million and $1.2 million to our European defined benefit retirement plans in the third quarters of 2017 and 2016, respectively. Contributions to the defined benefit retirement plans were $2.8 million and $4.9 million for the nine months ended September 30, 2017 and 2016, respectively. We plan to contribute approximately $4.6 million during 2017 to our European plans. We contributed $6.0 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 $0.9 million for the nine months ended September 30, 2017. Net periodic benefit costs of our postretirement health care and life insurance benefit plans for the quarters and nine months ended September 30, 2017 and 2016 were not material.
|
|
September 30, 2017 |
|
December 31, 2016 |
||
Amounts recognized on the balance sheet: |
|
|
|
|
|
|
Accrued liabilities |
|
$ |
0.5 |
|
$ |
0.5 |
Other non-current liabilities |
|
|
3.7 |
|
|
3.9 |
Total accrued benefit |
|
$ |
4.2 |
|
$ |
4.4 |
In connection with our postretirement plans, we contributed about $0.1 million during each of the quarters ended September 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 $0.2 million to our postretirement plans during 2016.
9
|
|
|
|
|
|
|
|
|
(In millions) |
|
September 30, 2017 |
|
|
December 31, 2016 |
|
||
Current portion of capital lease |
|
$ |
— |
|
|
$ |
0.5 |
|
Current portion of Euro term loan |
|
|
4.2 |
|
|
|
3.8 |
|
Current portion of debt |
|
$ |
4.2 |
|
|
$ |
4.3 |
|
Non-current portion of Euro term loan |
|
|
62.4 |
|
|
|
22.6 |
|
Senior unsecured credit facility- revolving loan due 2021 |
|
|
75.0 |
|
|
|
365.0 |
|
4.7% senior notes due 2025 |
|
|
300.0 |
|
|
|
300.0 |
|
Senior notes due 2025 - original issue discount and deferred financing costs |
|
|
(2.9 |
) |
|
|
(3.2 |
) |
3.95% senior notes due 2027 |
|
|
400.0 |
|
|
― |
|
|
Senior notes due 2027 - original issue discount and deferred financing costs |
|
|
(5.1 |
) |
|
― |
|
|
Other debt |
|
|
0.2 |
|
|
― |
|
|
Long-term debt |
|
|
829.6 |
|
|
|
684.4 |
|
Total debt |
|
$ |
833.8 |
|
|
$ |
688.7 |
|
In February 2017, the Company issued $400 million in 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 repurchases. 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 nine months was 3.86% inclusive of approximately a 0.25% benefit of treasury locks. The fair value of the senior notes due in 2027 based on quoted prices utilizing Level 2 inputs was $410.0 million at September 30, 2017.
In August 2015, the Company issued $300 million in 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 first nine-months of 2017 was 4.85%. The fair value of the notes due in 2025 based on quoted prices utilizing Level 2 inputs was $323.4 million at September 30, 2017.
As of September 30, 2017, total borrowings under our $700 million Facility were $75 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 nine months ended September 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 September 30, 2017, we had no outstanding letters of credit under the Facility, resulting in undrawn availability under the Facility as of September 30, 2017 of $625.0 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 2.36% for the nine months of 2017. The average interest rate was 1.8% 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 September 30, 2017 and December 31, 2016 were €56.4 million (or $66.6 million) and €25 million (or $26.4 million), which approximates fair value. The term loan is guaranteed by Hexcel Corporation.
10
Note 6 — Derivative Financial Instruments
Interest Rate Swap and Interest Lock Agreements
As of September 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 were assets of $0.6 million and $0.7 million at September 30, 2017 and December 31, 2016, respectively.
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 were liabilities of $0.4 million and $0.1 million at September 30, 2017 and December 31, 2016, respectively.
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 March 2020, which we account for as cash flow hedges. The aggregate notional amount of these contracts was $317.6 million and $423.8 million at September 30, 2017 and December 31, 2016, respectively. The purpose of these contracts is to hedge a portion of the forecasted transactions of our 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 $9.7 million and $31.7 million, respectively, were recorded in other comprehensive income (“OCI”) for the three and nine months ended September 30, 2017 and losses of $1.4 million and $10.7 million, respectively, were recorded in OCI for the three and nine months ended September 30, 2016. We classified the carrying amount of these contracts of $13.5 million in other assets and $4.3 million in other liabilities on the Condensed Consolidated Balance Sheets at September 30, 2017 and $33.9 million in other liabilities at December 31, 2016. During the three and nine months ended September 30, 2017, we recognized net losses of $0.6 million and $11.4 million in gross margin, respectively. During the three and nine months ended September 30, 2016, we recognized net losses of $5.0 million and $13.5 million in gross margin, respectively. For the quarters and nine months ended September 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 September 30, 2017 and 2016, we recognized net foreign exchange gains of $4.0 million and $0.8 million, respectively, in the Condensed Consolidated Statements of Operations. During the nine months ended September 30, 2017 and 2016, we recognized net foreign exchange gains of $15.4 million and of $3.4 million, respectively, in the Condensed Consolidated Statements of Operations. The net foreign exchange impact recognized from these hedges offset the translation exposure of these transactions. The carrying amount of the contracts for asset and liability derivatives not designated as hedging instruments was $0.1 million classified in other assets and $1.6 million in other liabilities and $1.0 million classified in other assets and $0.3 million in other liabilities on the September 30, 2017 and December 31, 2016 Condensed Consolidated Balance Sheets, respectively.
11
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, 2017 and 2016 was as follows:
|
|
Quarter Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
(In millions) |
|
2017 |
|
|
2016 |
|
|
2017 |
|
|
2016 |
|
||||
Unrealized losses at beginning of period, net of tax |
|
$ |
(1.3 |
) |
|
$ |
(16.5 |
) |
|
$ |
(25.9 |
) |
|
$ |
(15.0 |
) |
Losses reclassified to net sales |
|
|
0.6 |
|
|
|
4.0 |
|
|
|
8.9 |
|
|
|
10.1 |
|
Increase (decrease) in fair value |
|
|
7.2 |
|
|
|
(1.7 |
) |
|
|
23.5 |
|
|
|
(9.3 |
) |
Unrealized gains (losses) at end of period, net of tax |
|
$ |
6.5 |
|
|
$ |
(14.2 |
) |
|
$ |
6.5 |
|
|
$ |
(14.2 |
) |
We expect to reclassify $1.7 million of unrealized gains into earnings over the next twelve months as the hedged sales are recorded.
Note 7 — Income Taxes
The income tax provisions for the third quarter and nine months ended September 30, 2017 were $13.6 million and $44.3 million. The effective tax rate for the third quarter was 16.5% as the quarter benefitted from the impact of tax credits identified during the quarter as well as deductions associated with share-based compensation payments. The third quarter provision also included a non-recurring discrete tax benefit of $4.2 million from the reversal of provisions for uncertain tax provisions. The income tax provision for the quarter ended September 30, 2016 was $16.1 million, including a net benefit of $6.6 million from the release of reserves for uncertain tax positions. The provision for the first nine months of 2017 also 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 these benefits, for the nine months of 2017 was 24.2% as compared to 30.5% in 2016, as both periods benefitted from deductions associated with share-based compensation payments in addition to the tax credits identified in 2017.
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 $14.1 million and $6.3 million, respectively, at September 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 $0.4 million at September 30, 2017. |
|
• |
Foreign exchange derivative assets and liabilities — valued using quoted forward prices at the reporting date. Fair value of assets and liabilities at September 30, 2017 was $13.5 million and $5.9 million, respectively. |
Counterparties to the above contracts are highly rated financial institutions, none of which experienced any significant downgrades in the nine months ended September 30, 2017 that would reduce the receivable amount owed, if any, to the Company.
12
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 nine months ended September 30, 2017 and 2016 were as follows:
|
|
(Unaudited) |
|
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|
|
Composite |
|
|
Engineered |
|
|
Corporate & |
|
|
|
|
|
|
|
|||
(In millions |
|
Materials |
|
|
Products |
|
|
Other (a) |
|
|
|
|
Total |
|
||||
Third Quarter 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales to external customers |
|
$ |
398.9 |
|
|
$ |
92.6 |
|
|
$ |
— |
|
|
|
|
$ |
491.5 |
|
Intersegment sales |
|
|
16.4 |
|
|
|
— |
|
|
|
(16.4 |
) |
|
|