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 March 31, 2018
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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth 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 April 16, 2018 |
COMMON STOCK |
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89,474,993 |
HEXCEL CORPORATION AND SUBSIDIARIES
INDEX
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Page |
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PART I. |
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ITEM 1. |
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● |
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Condensed Consolidated Balance Sheets — March 31, 2018 and December 31, 2017 |
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3 |
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Condensed Consolidated Statements of Operations — The three months ended March 31, 2018 and 2017 |
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4 |
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● |
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4 |
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Condensed Consolidated Statements of Cash Flows — The three months ended March 31, 2018 and 2017 |
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5 |
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● |
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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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18 |
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ITEM 3. |
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24 |
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ITEM 4. |
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24 |
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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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26 |
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28 |
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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March 31, |
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December 31, |
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(In millions) |
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2018 |
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2017 |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
49.8 |
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$ |
60.1 |
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Accounts receivable, net |
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295.6 |
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248.7 |
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Inventories, net |
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300.8 |
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314.0 |
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Contract assets |
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35.2 |
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― |
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Prepaid expenses and other current assets |
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34.5 |
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33.9 |
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Total current assets |
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715.9 |
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656.7 |
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Property, plant and equipment |
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2,815.1 |
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2,743.9 |
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Less accumulated depreciation |
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(913.0 |
) |
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(877.6 |
) |
Net property, plant and equipment |
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1,902.1 |
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1,866.3 |
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Goodwill and other intangible assets |
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150.2 |
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148.7 |
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Investments in affiliated companies |
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51.0 |
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47.7 |
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Other assets |
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65.5 |
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61.5 |
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Total assets |
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$ |
2,884.7 |
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$ |
2,780.9 |
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Liabilities and Stockholders' Equity |
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Current liabilities: |
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Current portions of debt |
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$ |
4.4 |
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$ |
4.3 |
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Accounts payable |
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154.8 |
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144.1 |
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Accrued compensation and benefits |
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64.7 |
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73.0 |
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Accrued liabilities |
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46.9 |
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40.7 |
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Total current liabilities |
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270.8 |
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262.1 |
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Commitments and contingencies (see Note 12) |
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Long-term debt |
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835.6 |
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805.6 |
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Retirement obligations |
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42.8 |
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45.4 |
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Other non-current liabilities |
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173.0 |
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172.7 |
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Total liabilities |
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1,322.2 |
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1,285.8 |
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Stockholders' equity: |
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Common stock, $0.01 par value, 200.0 shares authorized, 108.3 shares and 107.8 shares issued at March 31, 2018 and December 31, 2017, respectively |
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1.1 |
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1.1 |
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Additional paid-in capital |
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787.7 |
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774.3 |
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Retained earnings |
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1,548.7 |
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1,496.1 |
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Accumulated other comprehensive loss |
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(7.8 |
) |
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(45.0 |
) |
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2,329.7 |
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2,226.5 |
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Less – Treasury stock, at cost, 18.7 shares at March 31, 2018, and 18.2 shares at December 31, 2017, respectively. |
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(767.2 |
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(731.4 |
) |
Total stockholders' equity |
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1,562.5 |
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1,495.1 |
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Total liabilities and stockholders' equity |
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$ |
2,884.7 |
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$ |
2,780.9 |
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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 March 31, |
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(In millions, except per share data) |
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2018 |
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2017 |
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Net sales |
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$ |
540.1 |
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$ |
478.8 |
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Cost of sales |
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397.5 |
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344.7 |
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Gross margin |
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142.6 |
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134.1 |
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Selling, general and administrative expenses |
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46.4 |
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42.9 |
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Research and technology expenses |
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13.8 |
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12.6 |
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Operating income |
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82.4 |
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78.6 |
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Interest expense, net |
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8.0 |
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6.2 |
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Income before income taxes, and equity in earnings from affiliated companies |
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74.4 |
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72.4 |
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Provision for income taxes |
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14.1 |
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8.6 |
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Income before equity in earnings from affiliated companies |
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60.3 |
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63.8 |
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Equity in earnings from affiliated companies |
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1.3 |
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0.8 |
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Net income |
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$ |
61.6 |
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$ |
64.6 |
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Basic net income per common share |
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$ |
0.68 |
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$ |
0.71 |
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Diluted net income per common share |
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$ |
0.68 |
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$ |
0.70 |
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Dividends per share |
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$ |
0.125 |
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$ |
0.11 |
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Weighted-average common shares: |
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Basic |
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90.0 |
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91.4 |
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Diluted |
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91.2 |
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92.9 |
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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 March 31, |
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(In millions) |
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2018 |
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2017 |
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Net Income |
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$ |
61.6 |
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$ |
64.6 |
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Currency translation adjustments |
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31.6 |
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9.1 |
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Net unrealized pension and other benefit actuarial gains and prior service credits |
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(0.8 |
) |
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(0.2 |
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Net unrealized gains on financial instruments (net of tax) |
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4.8 |
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7.4 |
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Total other comprehensive income |
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35.6 |
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16.3 |
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Comprehensive income |
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$ |
97.2 |
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$ |
80.9 |
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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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Three Months Ended March 31, |
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(In millions) |
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2018 |
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2017 |
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Cash flows from operating activities |
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Net income |
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$ |
61.6 |
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$ |
64.6 |
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Reconciliation to net cash provided by operating activities: |
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Depreciation and amortization |
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29.8 |
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24.4 |
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Amortization related to financing |
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0.3 |
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0.4 |
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Deferred income taxes |
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10.1 |
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(5.1 |
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Equity in earnings from affiliated companies |
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(1.3 |
) |
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(0.8 |
) |
Stock-based compensation |
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9.9 |
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10.9 |
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Changes in assets and liabilities: |
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Increase in accounts receivable |
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(41.2 |
) |
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(19.5 |
) |
Increase in inventories |
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(14.6 |
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(10.9 |
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Decrease (increase) in prepaid expenses and other current assets |
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2.6 |
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(8.4 |
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Increase (decrease) in accounts payable/accrued liabilities |
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7.0 |
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(0.9 |
) |
Other – net |
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(1.6 |
) |
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(0.5 |
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Net cash provided by operating activities |
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62.6 |
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54.2 |
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Cash flows from investing activities |
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Capital expenditures |
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(59.5 |
) |
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(85.5 |
) |
Acquisition of business and investment in affiliate |
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― |
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(10.0 |
) |
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Net cash used for investing activities |
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(59.5 |
) |
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(95.5 |
) |
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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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― |
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398.3 |
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Issuance costs related to senior notes due 2027 |
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― |
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(3.7 |
) |
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Proceeds from settlement of treasury locks associated with senior notes due 2027 |
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― |
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10.0 |
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Proceeds from Euro term loan |
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― |
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37.4 |
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Borrowing from senior unsecured credit facility |
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133.0 |
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175.0 |
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Repayment from senior unsecured credit facility |
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(105.0 |
) |
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(455.0 |
) |
Repayment of capital lease obligation and other debt, net |
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― |
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(0.1 |
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Dividends paid |
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(11.2 |
) |
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(10.1 |
) |
Repurchase of stock |
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(30.1 |
) |
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(63.7 |
) |
Activity under stock plans |
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(2.2 |
) |
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(0.3 |
) |
Net cash (used in) provided by financing activities |
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(15.5 |
) |
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87.8 |
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Effect of exchange rate changes on cash and cash equivalents |
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2.1 |
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0.4 |
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Net (decrease) increase in cash and cash equivalents |
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(10.3 |
) |
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46.9 |
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Cash and cash equivalents at beginning of period |
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60.1 |
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35.2 |
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Cash and cash equivalents at end of period |
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$ |
49.8 |
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$ |
82.1 |
|
Supplemental data: |
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Accrual basis additions to property, plant and equipment |
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$ |
45.3 |
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$ |
92.9 |
|
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, 2017 for a discussion of our significant accounting policies. Significant changes to our accounting policies subsequent to the filing of our Form 10-K, relate solely to the adoption of Topic 606, Revenue from Contracts with Customers, are discussed below in Recent Accounting Pronouncements as well as in Note 9.
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, 2017 was derived from the audited 2017 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 2017 Annual Report on Form 10-K. Within the Unaudited Condensed Consolidated Statement of Cash Flows for the quarter ended March 31, 2017, borrowings and repayments related to our revolving credit facility previously presented net within financing activities have been presented gross to conform to the current year presentation.
Investments in Affiliated Companies
At March 31, 2018, we had 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.
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 (“ASC 606”). The update clarifies the principles for recognizing revenue and develops a common revenue standard for all industries. We adopted this new standard January 1, 2018, using the modified retrospective method. As a result of adopting this guidance under the modified retrospective method we adjusted the opening balance of our retained earnings by approximately $3.8 million, which represented the cumulative net earnings effect of revenue recognized over time prior to the date of adoption, related to those contracts whose performance obligations were not fully satisfied by the adoption date.
In February 2016, the 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 standard 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.
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 Company adopted this standard during the quarter ended March 31, 2018. There was no material impact on the Company’s Consolidated Statements of Cash Flows.
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 requires entities 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 is limited to the service cost component. We adopted this amendment on January 1, 2018. The adoption did not have a material impact to our financial statements or disclosures.
6
In August 2017, the FASB issued Accounting Standards Update No. 2017-12 (ASU 2017-12), Targeted Improvement to Accounting for Hedging Activities, which better aligns hedge accounting with an organization’s risk management activities in the financial statements. In addition, the standard simplified the application of hedge accounting guidance in areas where practice issues exist. We adopted this standard on January 1, 2018, with no material impact to our results of operations, or financial position.
In February 2018, the FASB issued Accounting Standards Update No. 2018-02 (ASU 2018-02), Income Statement—Reporting Comprehensive Income (Topic 220), which amends the previous guidance to allow for certain tax effects “stranded” in accumulated other comprehensive income, which are impacted by the Tax Cuts and Jobs Act (the “Act”), to be reclassified from accumulated other comprehensive income into retained earnings. This amendment pertains only to those items impacted by the new tax law and will not apply to any future tax effects stranded in accumulated other comprehensive income. This standard is effective for fiscal years beginning after December 15, 2018, and allows for early adoption. The Company elected to early adopt this standard during the quarter ended March 31, 2018. As a result of the adoption of this standard the Company reduced the opening balance of retained earnings by approximately $1.6 million.
Note 2 — Net Income per Common Share
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Quarter Ended March 31, |
|
|||||
(In millions, except per share data) |
|
2018 |
|
|
2017 |
|
||
Basic net income per common share: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
61.6 |
|
|
$ |
64.6 |
|
Weighted average common shares outstanding |
|
|
90.0 |
|
|
|
91.4 |
|
|
|
|
|
|
|
|
|
|
Basic net income per common share |
|
$ |
0.68 |
|
|
$ |
0.71 |
|
|
|
|
|
|
|
|
|
|
Diluted net income per common share: |
|
|
|
|
|
|
|
|
Net income |
|
|
61.6 |
|
|
|
64.6 |
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding — Basic |
|
|
90.0 |
|
|
|
91.4 |
|
Plus incremental shares from assumed conversions: |
|
|
|
|
|
|
|
|
Restricted stock units |
|
|
0.5 |
|
|
|
0.5 |
|
Stock options |
|
|
0.7 |
|
|
|
1.0 |
|
Weighted average common shares outstanding — Dilutive |
|
|
91.2 |
|
|
|
92.9 |
|
|
|
|
|
|
|
|
|
|
Diluted net income per common share |
|
$ |
0.68 |
|
|
$ |
0.70 |
|
Total shares underlying stock options of $0.2 million were excluded from the computation of diluted net income per share for the three months ended March 31, 2018, and March 31, 2017, as they were anti-dilutive.
Note 3 — Inventories
|
|
March 31, |
|
|
December 31, |
|
||
(In millions) |
|
2018 |
|
|
2017 |
|
||
Raw materials |
|
$ |
133.2 |
|
|
$ |
126.7 |
|
Work in progress |
|
|
44.8 |
|
|
|
52.1 |
|
Finished goods |
|
|
122.8 |
|
|
|
135.2 |
|
Total Inventory |
|
$ |
300.8 |
|
|
$ |
314.0 |
|
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.
7
Defined Benefit Retirement Plans
Net Periodic Benefit Costs
Net periodic benefit costs of our defined benefit retirement plans for the quarter ended March 31, 2018 and 2017 were as follows:
|
|
Quarter Ended March 31, |
|
|||||
(In millions) |
|
2018 |
|
|
2017 |
|
||
U.S. Nonqualified Defined Benefit Retirement Plans |
|
|
|
|
|
|
|
|
Service cost |
|
$ |
0.3 |
|
|
$ |
0.3 |
|
Interest cost |
|
0.1 |
|
|
0.2 |
|
||
Net amortization and deferral |
|
― |
|
|
0.1 |
|
||
Net periodic benefit cost |
|
$ |
0.4 |
|
|
$ |
0.6 |
|
(In millions) |
|
March 31, 2018 |
|
|
December 31, 2017 |
|
||
Amounts recognized on the balance sheet: |
|
|
|
|
|
|
|
|
Accrued liabilities |
|
$ |
4.8 |
|
|
$ |
4.5 |
|
Other non-current liabilities |
|
|
17.1 |
|
|
16.9 |
|
|
|
|
$ |
21.9 |
|
|
$ |
21.4 |
|
|
|
Quarter Ended March 31, |
|
|||||
(In millions) |
|
2018 |
|
|
2017 |
|
||
European Defined Benefit Retirement Plans |
|
|
|
|
|
|
|
|
Service cost |
|
$ |
0.3 |
|
|
$ |
0.2 |
|
Interest cost |
|
1.1 |
|
|
1.1 |
|
||
Expected return on plan assets |
|
|
(2.4 |
) |
|
|
(2.0 |
) |
Net amortization and deferral |
|
|
0.1 |
|
|
0.1 |
|
|
Net periodic benefit credit |
|
$ |
(0.9 |
) |
|
$ |
(0.6 |
) |
(In millions) |
|
March 31, 2018 |
|
|
December 31, 2017 |
|
||
Amounts recognized on the balance sheet: |
|
|
|
|
|
|
|
|
Noncurrent asset |
|
$ |
36.6 |
|
|
$ |
32.2 |
|
|
|
|
|
|
|
|
|
|
Accrued liabilities |
|
|
1.1 |
|
|
|
0.3 |
|
Other non-current liabilities |
|
|
21.7 |
|
|
|
19.6 |
|
Total accrued benefit |
|
$ |
22.8 |
|
|
$ |
19.9 |
|
All costs related to our pensions are included as a component of operating income in our consolidated statements of operations. For the three months ended March 31, 2018 and 2017, amounts unrelated to service costs were a benefit of $1.1 million and $0.5 million, respectively.
8
We generally fund our U.S. non-qualified defined benefit retirement plans when benefit payments are incurred. We have contributed approximately $0.1 million in the first three months of 2018 to cover unfunded benefits. We expect to contribute a total of $4.6 million in 2018 to cover unfunded benefits. We contributed $0.1 million to our U.S. non-qualified defined benefit retirement plans during the first quarter of 2017.
We contributed $1.6 million and $1.3 million to our European defined benefit retirement plans in the first quarters of 2018 and 2017, respectively. We plan to contribute approximately $5.0 million during 2018 to our European plans.
Postretirement Health Care and Life Insurance Benefit Plans
We recorded $0.3 million of net amortization gain deferral for the quarter ended March 31, 2018. Net periodic benefit costs of our postretirement health care and life insurance benefit plans for the quarters ended March 31, 2018 and 2017 were not material.
(In millions) |
|
March 31, 2018 |
|
|
December 31, 2017 |
|
||
Amounts recognized on the balance sheet: |
|
|
|
|
|
|
|
|
Accrued liabilities |
|
$ |
0.5 |
|
|
$ |
0.5 |
|
Other non-current liabilities |
|
3.9 |
|
|
3.6 |
|
||
Total accrued benefit |
|
$ |
4.4 |
|
|
$ |
4.1 |
|
In connection with our postretirement plans, we contributed about $0.1 million during the quarters ended March 31, 2018 and 2017. We periodically fund our postretirement plans to pay covered expenses as they are incurred. We expect to contribute approximately $0.2 million in 2018 to cover unfunded benefits.
Note 5 –– Debt
(In millions) |
|
March 31, 2018 |
|
|
December 31, 2017 |
|
||
Current portion of Euro term loan |
|
$ |
4.4 |
|
|
$ |
4.3 |
|
Current portion of debt |
|
|
4.4 |
|
|
|
4.3 |
|
Non-current portion of Euro term loan |
|
|
65.1 |
|
|
|
63.3 |
|
Senior unsecured credit facility- due 2021 |
|
|
78.0 |
|
|
|
50.0 |
|
4.7% senior notes due 2025 |
|
|
300.0 |
|
|
|
300.0 |
|
3.95% senior notes due 2027 |
|
|
400.0 |
|
|
|
400.0 |
|
Senior notes original issue discount |
|
|
(2.2 |
) |
|
|
(2.3 |
) |
Senior notes deferred financing costs |
|
|
(5.4 |
) |
|
|
(5.5 |
) |
Other debt |
|
|
0.1 |
|
|
|
0.1 |
|
Long-term debt |
|
|
835.6 |
|
|
|
805.6 |
|
Total debt |
|
$ |
840.0 |
|
|
$ |
809.9 |
|
|
|
|
|
|
|
|
|
|
In 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 effective interest rate for the quarter ended March 31, 2018 was 3.88% 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 $397.6 million at March 31, 2018.
In 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 effective interest rate for the first three months of 2018 was 4.84%. The fair value of the notes due in 2025 based on quoted prices utilizing Level 2 inputs was $313.6 million at March 31, 2018.
The Company has a revolving credit facility (the “Facility”) that allows up to $700 million of borrowings. The Facility matures in June 2021. The interest rate for the Facility at March 31, 2018 is LIBOR + 1.25%. The interest rate ranges from LIBOR + 0.875% to a maximum of LIBOR + 1.875%, depending upon the Company’s leverage ratio.
9
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.
As of March 31, 2018, total borrowings under the Facility were $78.0 million, which approximates fair value using Level 2 inputs. 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 March 31, 2018, there were no outstanding letters of credit under the Facility, resulting in undrawn availability under the Facility as of March 31, 2018 of $622.0 million. The weighted average interest rate for the revolver was 3.09% for the three months ended March 31, 2018.
In 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, and a second tranche for €35 million has a rate of Euribor +1.25% with a final maturity date of June 30, 2024. The loans are payable in annual installments that began on June 30, 2017, for the first tranche, and beginning on June 30, 2019, for the second. There is a zero percent floor on the Euribor. Amounts outstanding under this loan at March 31, 2018 were $69.5 million which approximates fair value using Level 2 inputs under the market approach. The facility is guaranteed by Hexcel Corporation. Required payments for beyond 2018 are as follows: $9.8 million for 2019 through 2022, $15.2 million for 2023, and $10.8 Million for 2024.
Note 6 — Derivative Financial Instruments
Interest Rate Swap and Interest Lock Agreements
As of March 31, 2018, the Company had approximately $50 million of interest rate swaps that swap floating rate obligations for fixed rate obligations at an average of 1.09% against LIBOR in U.S. dollars. The swap matures in September 2019. The swap was accounted for as a cash flow hedge of our floating rate bank loan. To ensure the swap was highly effective, all of the principal terms of the swap matched the term of the bank loan. The fair value of the interest rate swap was an asset of $1.0 million and $0.8 million at March 31, 2018 and December 31, 2017, respectively.
At March 31 2018, we had two interest swaps related to European debt obligations which had a combined notional value of approximately €56.4 million. These derivatives swapped floating rate obligations for fixed rates at a weighted average rate of 0.5% against EURIBOR in Euros. The swaps amortize through the final maturities of the obligations on June 30, 2023 and June 30, 2024, in annual installments. The derivatives are accounted for as cash flow hedges of the floating rate term loans. To ensure the swaps are highly effective, all of the principal terms of the swap matched the terms of the bank loans. The fair value of the interest rate swaps was a liability of $0.3 million and $0.4 million at March 31, 2018 and December 31, 2017, respectively.
The Company had treasury lock agreements to protect against unfavorable movements in the benchmark treasury rate related to the issuance of our 3.95% Senior Unsecured Notes. These hedges were designated as cash flow hedges thus any change in fair value was recorded as a component of other comprehensive income. As part of the issuance of our senior notes, we net settled these derivatives for $10 million in cash. As a result of settling these derivatives the previously deferred gains recorded in other comprehensive income will be released to interest expense over the life of the senior notes. The effect of these settled treasury locks will reduce the effective interest rate on the 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 September 2020, which we account for as cash flow hedges. The aggregate notional amount of these contracts was $294.9 million and $285.4 million at March 31, 2018 and December 31, 2017, 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 $8.4 million and $3.4 million, respectively, were recorded in other comprehensive income (“OCI”) for the three months ended March 31, 2018 and March 31, 2017 respectively. We classified the carrying amount of these contracts of $18.9 million in other assets and $0.9 million in other liabilities on the Condensed Consolidated Balance Sheets at March 31, 2018 and $14.7 million in other assets and $2.8 million in other liabilities at December 31, 2017. We recognized net gains of $2.3 million and
10
net losses of $6.6 million in gross margin during the three months ended March 31, 2018 and March 31, 2017 respectively. For the three months ended March 31, 2018 and 2017, 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 March 31, 2018 and 2017, we recognized net foreign exchange gains of $2.0 million and $1.5 million, respectively, in the Condensed Consolidated Statements of Operations. The net foreign exchange impact recognized from these hedges offset the translation exposure of these transactions. The carrying amount of the contracts for asset and liability derivatives not designated as hedging instruments was $0.3 million classified in other assets and $0.3 million in other liabilities and $1.3 million classified in other assets and $0.1 million in other liabilities on the March 31, 2018 and December 31, 2017 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 ended March 31, 2018 and March 31, 2017 was as follows:
|
|
Quarter Ended March 31, |
|
|
|||||
(In millions) |
|
2018 |
|
|
2017 |
|
|
||
Unrealized gains (losses) at beginning of period, net of tax |
|
$ |
8.6 |
|
|
$ |
(25.9 |
) |
|
(Gains) Losses reclassified to net sales |
|
|
(1.6 |
) |
|
|
5.0 |
|
|
Increase in fair value |
|
|
6.4 |
|
|
|
2.6 |
|
|
Unrealized gain (losses) at end of period, net of tax |
|
$ |
13.4 |
|
|
$ |
(18.3 |
) |
|
We expect to reclassify $7.7 million of unrealized gains into earnings over the next twelve months as the underlying hedge item, revenue, is recorded.
Note 7 — Income Taxes
The income tax provision for the quarter ended March 31, 2018, was $14.1 million compared to $8.6 million for the quarter ended March 31, 2017. The provision for the quarter ended March 31, 2017 included a nonrecurring discrete benefit of $9.1 million, related to the release of a valuation allowance in a foreign jurisdiction. Both periods benefited from deductions associated with share based compensation payments. Excluding discrete items, the Company’s 2018 annual estimated effective income tax rate is 25%.
The Tax Cuts and Jobs Act (the “Act”) enacted in 2017, resulted in the U.S. Federal income tax rate being reduced to 21% from 35% for the same period last year. During the measurement period, which is one year from the date of enactment, or the completion of all estimates made in connection with the Act, companies are permitted to make additional income tax adjustments and revisions of estimates related to the Act. Accordingly, the impact resulting from the Act is subject to further refinement of the Company’s calculations, changes in interpretation and assumptions, or issuance of additional guidance and regulations by the relevant tax authorities. During the quarter ended March 31, 2018, there were no adjustments made to previously made estimates related to the Act.
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 have no assets or liabilities that utilize Level 1 inputs. However, we have a significant amount of derivative instruments classified as liabilities and assets which utilize Level 2 inputs, and one liability that utilizes Level 3 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
11
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 $20.2 million and $1.5 million, respectively, at March 31, 2018. 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 $1.0 million and a liability of $0.3 million at March 31, 2018. |
|
• |
Foreign exchange derivative assets and liabilities — valued using quoted forward prices at the reporting date. Fair value of assets and liabilities at March 31, 2018 was $19.2 million and $1.2 million, respectively. |
Counterparties to the above contracts are highly rated financial institutions, none of which experienced any significant downgrades in the three months ended March 31, 2018 that would reduce the receivable amount owed, if any, to the Company.
Liabilities classified as Level 3— we have a liability for $2.9 million, which represented contingent consideration, that was recognized in connection with an acquisition completed during the prior year. This amount was estimated based on certain contractual stipulations which requires payments to made to the seller in the future based upon the achievement of certain results. We used forecasted results which were discounted using an internally derived discount rate. Future amounts payable may differ from this estimate by the difference between the actual and forecasted results. The amount of interest related to this liability accreted during the quarter was not significant.
Note 9 — Revenue
Our revenue is primarily derived from the sale of inventory under long-term agreements with our customers. We have determined that individual purchase orders (“PO”), whose terms and conditions taken with a master agreement, create the ASC 606 contracts which are generally short-term in nature. For those sales, which are not tied to a long-term agreement, we generate a PO that is subject to our standard terms and conditions. The majority of our sales are covered under long-term agreements, with the remaining sales coming from POs. Our agreements (including POs) generally do not have multiple performance obligations and thus do not require an allocation of a single price amongst multiple goods or services. All pricing is fixed and determinable. A majority of our revenue is earned when goods are shipped to a customer. In instances where our customers acquire our goods related to government contracts, the contracts are typically subject to terms similar, or equal to, the Federal Acquisition Regulation Part 52.249-2, which contains a termination for convenience clause (“T for C”). T for C allows for a customer to cancel a contract at any point for any reason, but also requires that the customer pay for the cost of both the finished and unfinished goods at the time of cancellation plus a reasonable profit relative to the work performed. Generally these arrangements relate to unique products manufactured to customer specifications, and thus have no alternative use.
Upon adoption of ASC 606 we recognize revenue over time for those agreements that have T for C, and where the products being produced have no alternative use. Prior to the adoption date, revenue related to these agreements was recognized when the goods were shipped, however, as a result of the adoption of ASC 606 a portion of our revenue may be earned in periods earlier than it would have been in prior years. The cumulative adjustment to retained earnings upon adoption represents those earnings, which would have been recognized in the previous year had ASC 606 been in effect during that time. As our production cycle is typically six months or less, it is expected that goods related to the revenue represented in that adjustment will be shipped and billed within the current year. Less than half of our agreements contain provisions which would require revenue to be recognized over time. For revenue recognized over time, we estimate the amount of revenue earned at a given point during the production cycle based on certain costs factors such as raw materials and labor, incurred to date, plus a reasonable profit. We believe this method, which is the cost-to-cost input method, best estimates the revenue recognizable for T for C agreements.
We disaggregate our revenue based on market for analytical purposes. The following table details our revenue by market for the three months ended March 31, 2018 and 2017:
|
|
Quarter Ended March 31, |
||
(In millions) |
|
2018 |
|
2017 |
Consolidated Net Sales |
|
$ 540.1 |
|
$ 478.8 |
Commercial Aerospace |
|
382.7 |
|
347.2 |
Space & Defense |
|
90.1 |
|
76.7 |
Industrial |
|
67.3 |
|
54.9 |
12
Revenue recognized over time gives rise to contract assets, which represent revenue recognized but unbilled. Contract assets are included in our Consolidated Balance Sheets as a component of current assets. The activity related to contracts assets as of March 31, 2018 is as follows:
|
|
Composite |
|
|
Engineered |
|
|
|
|
|
||
(In millions) |
|
Materials |
|
|
Products |
|
|
Total |
|
|||
Opening adjustment - January 1, 2018 |
|
$ |
15.1 |
|
|
$ |
23.0 |
|
|
$ |
38.1 |
|
Net revenue billed |
|
|
(0.5 |
) |
|
|
(2.4 |
) |
|
|
(2.9 |
) |
Balance at March 31, 2018 |
|
$ |
14.6 |
|
|
$ |
20.6 |
|
|
$ |
35.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Upon adoption of ASC 606, the Company recorded $38.1 million of contract assets for revenue that was unbilled at December 31, 2017, and a $33.0 million reduction in inventory representing the value of the inventory associated with the revenue recognized over time, with the offset recorded to the opening balance of retained earnings (less $1.3 million in taxes). Amounts billed, and subsequently reclassified to trade accounts receivable, during the quarter ended March 31, 2018, which relate to the beginning balance (opening adjustment) of contract assets, were approximately $36.0 million. Accounts receivable, net includes amounts billed to customers where the right to payment is unconditional.
The financial results were not significantly impacted by the adoption of ASC 606. Compared to historical accounting under ASC 605 revenue was $2.9 million lower, gross margin was $0.7 million lower and diluted earnings per share decreased by just over one half of one cent for the quarter ended March 31, 2018. At March 31, 2018 our inventory was $30.8 million lower as a result of the impact of ASC 606.
We have elected the following practical expedients allowed under ASC 606:
|
• |
Payment terms with our customers which are one year or less, are not considered a performance obligation. |
|
• |
Shipping and handling fees and costs incurred in connection with products sold are recorded in cost of sales in our Consolidated Statements of Operations, and are not considered a performance obligation to our customers. |
|
• |
Our performance obligations on our orders are generally satisfied within one year from a given reporting date therefore we omit disclosure of the transaction price allocated to remaining performance obligations on open orders. |
Note 10 — 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 ended March 31, 2018 and 2017 were as follows:
13
|
|
(Unaudited) |
|
|||||||||||||
|
|
Composite |
|
|
Engineered |
|
|
Corporate & |
|
|
|
|
|
|||
(In millions) |
|
Materials |
|
|
Products |
|
|
Other (a) |
|
|
Total |
|
||||
First Quarter 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales to external customers |
|
$ |
444.6 |
|
|
$ |
95.5 |
|
|
$ |
— |
|
|
$ |
540.1 |
|
Intersegment sales |
|
|
19.2 |
|
|
|
— |
|
|
|
(19.2 |
) |
|
|
— |
|
Total sales |
|
$ |
463.8 |
|
|
$ |
95.5 |
|
|
$ |
(19.2 |
) |
|
$ |
540.1 |
|
Operating income |
|
|
91.0 |
|
|
|
9.9 |
|
|
|
(18.5 |
) |
|
|
82.4 |
|
Depreciation and amortization |
|
|
27.5 |
|
|
|
2.3 |
|
|
|
— |
|
|
|
29.8 |
|
Stock-based compensation |
|
|
3.6 |
|
|
|
0.7 |
|
|
|
5.6 |
|
|
|
9.9 |
|
Accrual basis additions to capital expenditures |
|
|
45.3 |
|
|
|
— |
|
|
|
— |
|
|
|
45.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales to external customers |
|
$ |
387.5 |
|
|
$ |
91.3 |
|
|
$ |
— |
|
|
$ |
478.8 |
|
Intersegment sales |
|
|
17.1 |
|
|
|
— |
|
|
|
(17.1 |
) |
|
|
— |
|
Total sales |
|
$ |
404.6 |
|
|
$ |
91.3 |
|
|
$ |
(17.1 |
) |
|
$ |
478.8 |
|
Operating income |
|
|
81.9 |
|
|
|
13.0 |
|
|
|
(16.3 |
) |
|
|
78.6 |
|
Depreciation and amortization |
|
|
22.5 |
|
|
|
1.8 |
|
|
|
0.1 |
|
|
|
24.4 |
|
Stock-based compensation |
|
|
3.4 |
|
|
|
0.7 |
|
|
|
6.8 |
|
|
|
10.9 |
|
Accrual basis additions to capital expenditures |
|
|
86.6 |
|
|
|
6.3 |
|
|
|
— |
|
|
|
92.9 |
|
|
(a) |
We do not allocate Corporate expenses to the operating segments. |
Goodwill and Intangible Assets
The carrying amount of gross goodwill and intangible assets by segment is as follows:
|
|
March 31, |
|
|
December 31, |
|
||
(In millions) |
|
2018 |
|
|
2017 |
|
||
Composite Materials |
|
$ |
105.4 |
|
|
$ |
103.7 |
|
Engineered Products |
|
44.8 |
|
|
|
45.0 |
|
|
Goodwill and intangible assets |
|
$ |
150.2 |
|
|
$ |
148.7 |
|
No impairments have been recorded against these amounts.
Note 11 — Accumulated Other Comprehensive (Loss) Income
Comprehensive income represents net income and other gains and losses affecting stockholders’ equity that are not reflected in the Consolidated Statements of Operations. The components of accumulated other comprehensive (loss) income as of March 31, 2018 and December 31, 2017 were as follows:
(In millions) |
|
Unrecognized Defined Benefit and Postretirement Plan Costs |
|
|
Change in Fair Value of Derivatives Products (1) |
|
|
Foreign Currency Translation |
|
|
Total |
|
||||
Balance at December 31, 2017 |
|
$ |
(18.5 |
) |
|
$ |
14.8 |
|
|
$ |
(41.3 |
) |
|
$ |
(45.0 |
) |
Other comprehensive (loss) income before reclassifications |
|
|
(0.7 |
) |
|
|
8.2 |
|
|
|
31.6 |
|
|
|
39.1 |
|
Amounts reclassified from accumulated other comprehensive loss |
|
|
(0.1 |
) |
|
|
(1.8 |
) |
|
― |
|
|
|
(1.9 |
) |
|
Other comprehensive (loss) income |
|
|
(0.8 |
) |
|
|
6.4 |
|
|
|
31.6 |
|
|
|
37.2 |
|
Balance at March 31, 2018 |
|
$ |
(19.3 |
) |
|
$ |
21.2 |
|
|
$ |
(9.7 |
) |
|
$ |
(7.8 |
) |
|
|
(1) |
Includes forward foreign exchange contracts and interest rate derivatives |
The amounts reclassified to earnings from the unrecognized net defined benefit and postretirement plan costs component of accumulated other comprehensive loss for the quarter were not material. The amounts reclassified to earnings from the change in fair
14
value of the derivatives component of accumulated other comprehensive loss for the three months ended March 31, 2018 were net gains of $2.5 million net taxes of $0.7 million. The currency translation adjustments are not currently adjusted for income taxes as they relate to indefinite investments in non-U.S. subsidiaries.
Note 12 — Commitments and Contingencies
We are involved in litigation, investigations and claims arising out of the normal conduct of our business, including those relating to commercial transactions, environmental, employment, and health and safety matters. We estimate and accrue our liabilities when a loss becomes probable and estimable. These judgments take into consideration a variety of factors, including the stage of the proceeding; potential settlement value; assessments by internal and external counsel; and assessments by environmental engineers and consultants of potential environmental liabilities and remediation costs. Such estimates are not discounted to reflect the time value of money due to the uncertainty in estimating the timing of the expenditures, which may extend over several years.
While it is impossible to ascertain the ultimate legal and financial liability with respect to certain contingent liabilities and claims, we believe, based upon our examination of currently available information, our experience to date, and advice from legal counsel, that the individual and aggregate liabilities resulting from the ultimate resolution of these contingent matters, after taking into consideration our existing insurance coverage and amounts already provided for, will not have a material adverse impact on our consolidated results of operations, financial position or cash flows.
Environmental Matters
We are subject to various international, U.S., state and local environmental, and health and safety laws and regulations. We are also subject to liabilities arising under the Federal Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA” or “Superfund”), the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act, and similar state and international laws and regulations that impose responsibility for the control, remediation and abatement of air, water and soil pollutants and the manufacturing, storage, handling and disposal of hazardous substances and waste.
We have been named as a potentially responsible party (“PRP”) with respect to several hazardous waste disposal sites that we do not own or possess, which are included on, or proposed to be included on, the Superfund National Priority List of the U.S. Environmental Protection Agency (“EPA”) or on equivalent lists of various state governments. Because CERCLA allows for joint and several liability in certain circumstances, we could be responsible for all remediation costs at such sites, even if we are one of many PRPs. We believe, based on the amount and nature of our waste, our existing insurance coverage, the amounts already provided for and the number of other financially viable PRPs, that our liability in connection with such matters will not be material.
Lower Passaic River Study Area
Hexcel and a group of approximately 51 other PRPs comprise the Lower Passaic Cooperating Parties Group (the “CPG”). Hexcel and the CPG are subject to a May 2007 Administrative Order on Consent (“AOC”) to perform a Remedial Investigation/Feasibility Study (“RI/FS”) of environmental conditions in the Lower Passaic River watershed. We were included in the CPG based on our operations at our former manufacturing site in Lodi, New Jersey.
In March 2016, the EPA issued a Record of Decision (“ROD”) setting forth the EPA’s selected remedy for the lower eight miles of the river. The ROD calls for capping and dredging of the lower eight miles of the Passaic River, with the placement of an engineered cap over the entire eight miles, at an expected cost ranging from $0.97 billion to $2.07 billion, according to the EPA. Because the EPA has not yet selected a remedy for the upper nine miles of the Lower Passaic River, this estimate range does not include any costs related to a future remedy for the upper portion of the river. Now that it has issued the final ROD, the EPA will seek to hold some combination of the PRPs liable to perform the work selected through the ROD. At this point, we have not yet determined our allocable share of performing the selected remedy. However, based on a review of the Company’s position, and as no point within the range is a more probable outcome than any other point, the Company has determined that its accrual is sufficient at this time. The accrual balance was $2.0 million as of March 31, 2018 and $2.1 million at December 31, 2017. Despite the issuance of the final ROD, there continues to be many uncertainties associated with the selected remedy, the Company’s allocable share of the remediation and the amount of insurance coverage. Given those uncertainties, the amounts accrued may not be indicative of the amounts for which the Company is ultimately responsible and will be refined as events in the remediation process develop.
Omega Chemical Corporation Superfund Site, Whittier, California
We are a PRP at a former chemical waste site in Whittier, California. The PRPs at Omega have established a PRP Group, (the “Omega PRP Group”), and are currently investigating and remediating soil and groundwater at the site pursuant to a Consent Decree with the EPA. The Omega PRP Group has attributed approximately 1.07% of the waste tonnage sent to the site to Hexcel. In addition
15
to the Omega site specifically, the EPA is investigating the scope of regional groundwater contamination in the vicinity of the Omega site and issued a Record of Decision; the Omega PRP Group members have been served notice by the EPA as PRPs who will be required to be involved in the remediation of the regional groundwater contamination in that vicinity as well. As a member of the Omega PRP Group, Hexcel will incur costs associated with the investigation and remediation of the Omega site and the regional groundwater remedy, although our ultimate liability, if any, in connection with this matter cannot be determined at this time. The total accrued liability relating to potential liability for both the Omega site and regional groundwater remedies was $0.6 million at both March 31, 2018 and at December 31, 2017, respectively.
Summary of Environmental Reserves
Our estimate of liability as a PRP and our remaining costs associated with our responsibility to remediate the Lower Passaic River and other sites are accrued in the consolidated balance sheets. As of March 31, 2018, our aggregate environmental related accruals were $2.7 million, of which $0.8 million was included in accrued liabilities with the remainder included in non-current liabilities. As of December 31, 2017, our aggregate environmental related accruals were $2.8 million, of which $0.9 million was included in accrued liabilities with the remainder included in non-current liabilities. As related to certain environmental matters the accrual was estimated at the low end of a range of possible outcomes since no amount within the range is a better estimate than any other amount. If we had accrued at the high end of the range of possible outcomes for those sites where we are able to estimate our liability, our accrual would have been $16 million higher. These accruals can change significantly from period to period due to such factors as additional information on the nature or extent of contamination, the methods of remediation required, changes in the apportionment of costs among responsible parties, amount of insurance coverage, and other actions by governmental agencies or private parties, or the impact, if any, of being named in a new matter.
Environmental remediation spending charged to our reserve balance for each of the quarters ended March 31, 2018 and 2017 was $0.1 million. In addition, our operating costs relating to environmental compliance charged to expense were $2.5 million and $2.4 million for the quarters ended March 31, 2018 and 2017, respectively.
16
We provide standard assurance-type warranties for our products, which cannot be purchased separately and do not meet the criteria to be considered a performance obligation. Warranty expense for the quarter ended March 31, 2018, and accrued warranty cost, included in “accrued liabilities” in the Condensed Consolidated Balance Sheets at March 31, 2018 and December 31, 2017, were as follows:
|
|
Product |
|
||
(In millions) |
|
Warranties |
|
||
Balance as of December 31, 2017 |
|
$ |
|
3.6 |
|
Warranty expense |