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, 2020 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, cash flows and statement of stockholders’ equity for the interim periods presented. The Condensed Consolidated Balance Sheet as of December 31, 2020 was derived from the audited 2020 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 2020 Annual Report on Form 10-K.
Investments in Affiliated Companies
We have a 50% equity investment in Aerospace Composites Malaysia Sdn. Bhd. and a 25% equity investment in HexCut Services SAS. These investments are accounted for using the equity method of accounting.
Assets Held for Sale
In early November 2020 we closed our wind energy prepeg production facility in Windsor, Colorado and as a result, certain plant assets to be sold have been recorded in “Assets held for sale” in the Condensed Consolidated Balance Sheets at both September 30, 2021 and December 31, 2020. The sale of these assets is expected to occur in the fourth quarter of 2021.
Recently Adopted Accounting Pronouncements
In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2018-14 (ASU 2018-14), Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20), which amends the current disclosure requirements regarding defined benefit pensions and other post retirement plans, and allows for the removal of certain disclosures, while adding certain new disclosure requirements. This standard is effective for fiscal years beginning after December 15, 2020. Adoption of this new standard did not have a significant impact to our disclosures.
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which amends and aims to simplify accounting disclosure requirements regarding a number of topics including intraperiod tax allocation, accounting for deferred taxes when there are changes in consolidation of certain investments, tax basis step up in an acquisition and the application of effective rate changes during interim periods, among other improvements. This standard is effective for fiscal years beginning after December 15, 2020. Adoption of this new standard did not have a material impact on the Company.
7
Note 2 — Net Income (Loss) Per Common Share
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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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2021
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|
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2020
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|
|
2021
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|
|
2020
|
|
Basic net income (loss) per common share:
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|
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|
|
|
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|
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Net income (loss)
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$
|
9.0
|
|
|
$
|
9.7
|
|
|
$
|
(2.8
|
)
|
|
$
|
51.1
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|
Weighted average common shares outstanding
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84.1
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|
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83.8
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84.1
|
|
|
|
83.7
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|
|
|
|
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|
|
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Basic net income (loss) per common share
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$
|
0.11
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$
|
0.12
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$
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(0.03
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)
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$
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0.61
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Diluted net income (loss) per common share:
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Net income (loss)
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9.0
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9.7
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(2.8
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)
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51.1
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Weighted average common shares outstanding — Basic
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84.1
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|
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83.8
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84.1
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|
|
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83.7
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Plus incremental shares from assumed conversions:
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Restricted stock units
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0.3
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0.1
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|
|
—
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0.2
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Stock options
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0.3
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0.1
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—
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0.1
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Weighted average common shares outstanding — Dilutive
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84.7
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|
|
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84.0
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84.1
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|
|
|
84.0
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|
|
|
|
|
|
|
|
|
|
|
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|
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Diluted net income (loss) per common share
|
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$
|
0.11
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|
|
$
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0.12
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|
|
$
|
(0.03
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)
|
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$
|
0.61
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Total common stock equivalents of 0.6 million and 1.5 million were excluded from the computation of diluted net income (loss) per share for the quarter ended September 30, 2021 and 2020 respectively, because to do so would have been anti-dilutive. Total common stock equivalents of 1.1 million and 0.9 million were excluded from the computation of diluted net income (loss) per share for the nine months ended September 30, 2021 and 2020, respectively, because to do so would have been anti-dilutive.
Note 3 — Inventories
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(In millions)
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September 30, 2021
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December 31, 2020
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Raw materials
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$
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112.0
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|
|
$
|
94.9
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Work in progress
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|
|
37.6
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|
|
|
23.6
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|
Finished goods
|
|
|
94.9
|
|
|
|
95.0
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Total Inventory
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$
|
244.5
|
|
|
$
|
213.5
|
|
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 quarter and nine months ended September 30, 2021 and 2020 were as follows:
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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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2021
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2020
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2021
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2020
|
|
U.S. Nonqualified Defined Benefit Retirement Plans
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Service cost
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$
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0.2
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$
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0.3
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|
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$
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0.8
|
|
|
$
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0.9
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Interest cost
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-
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0.2
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|
|
0.2
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|
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0.4
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Net amortization
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0.3
|
|
|
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-
|
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|
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0.5
|
|
|
|
0.2
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|
Net periodic benefit cost
|
|
$
|
0.5
|
|
|
$
|
0.5
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|
|
$
|
1.5
|
|
|
$
|
1.5
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|
8
|
|
|
|
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|
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(In millions)
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September 30, 2021
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December 31, 2020
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Amounts recognized on the balance sheet for U.S. nonqualified defined benefit retirement plans:
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Accrued liabilities
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$
|
3.7
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|
|
$
|
3.8
|
|
Other non-current liabilities
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|
|
19.9
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|
|
19.4
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Total accrued benefit
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$
|
23.6
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|
$
|
23.2
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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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2021
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2020
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|
2021
|
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2020
|
|
European Defined Benefit Retirement Plans
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Service cost
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$
|
0.2
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$
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0.2
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|
|
$
|
0.7
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|
|
$
|
0.7
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Interest cost
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0.5
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|
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0.9
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|
|
|
1.6
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|
|
2.6
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|
Expected return on plan assets
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|
|
(0.8
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)
|
|
|
(1.7
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)
|
|
|
(2.6
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)
|
|
|
(5.1
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)
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Net amortization and deferral
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0.3
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0.1
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|
|
0.8
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|
|
0.3
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Net periodic benefit cost (credit)
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|
$
|
0.2
|
|
|
$
|
(0.5
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)
|
|
$
|
0.5
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|
$
|
(1.5
|
)
|
|
|
|
|
|
|
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(In millions)
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|
September 30, 2021
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|
December 31, 2020
|
|
Amounts recognized on the balance sheet for European defined benefit retirement plans:
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Other assets
|
|
$
|
35.0
|
|
|
$
|
31.5
|
|
|
|
|
|
|
|
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Accrued liabilities
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|
|
1.0
|
|
|
|
0.9
|
|
Other non-current liabilities
|
|
|
18.8
|
|
|
|
17.7
|
|
Total accrued benefit
|
|
$
|
19.8
|
|
|
$
|
18.6
|
|
All costs related to our pensions are included as a component of operating income in our Condensed Consolidated Statements of Operations. For the quarters ended September 30, 2021 and 2020, amounts unrelated to service costs were a charge of $0.3 million and a benefit of $0.5 million, respectively. For the nine months ended September 30, 2021 and 2020, amounts unrelated to service costs were a charge of $0.6 million and a benefit of $1.6 million, respectively.
Contributions
We generally fund our U.S. non-qualified defined benefit retirement plans when benefit payments are incurred. We contributed approximately $0.5 million in the first nine months of 2021 to cover unfunded benefits. We expect to contribute a total of $0.7 million in 2021 to cover unfunded benefits. We contributed $0.5 million to our U.S. non-qualified defined benefit retirement plans during the first nine months of 2020.
We contributed $2.2 million and $1.9 million to our European defined benefit retirement plans during the nine months ended September 30, 2021 and 2020 respectively. We plan to contribute approximately $5.6 million during 2021 to our European plans.
Postretirement Health Care and Life Insurance Benefit Plans
We recorded $0.2 million and $0.3 million of net amortization gain deferral for the quarters ended September 30, 2021 and 2020, respectively, and $0.6 million and $0.7 million for the nine months ended September 30, 2021 and 2020, respectively. Net periodic benefit costs of our postretirement health care and life insurance benefit plans for the quarters and nine months ended September 30, 2021 and 2020 were immaterial.
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(In millions)
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September 30, 2021
|
|
|
December 31, 2020
|
|
Amounts recognized on the balance sheet:
|
|
|
|
|
|
|
Accrued liabilities
|
|
$
|
0.4
|
|
|
$
|
0.4
|
|
Other non-current liabilities
|
|
2.2
|
|
|
|
2.2
|
|
Total accrued benefit
|
|
$
|
2.6
|
|
|
$
|
2.6
|
|
Amounts contributed in connection with our postretirement plans were immaterial for both the nine months ended September 30, 2021 and 2020. We periodically fund our postretirement plans to pay covered expenses as they are incurred. We expect to contribute less than $0.4 million in 2021 to cover unfunded benefits.
9
Note 5 –– Debt
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|
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|
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|
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(In millions)
|
|
September 30, 2021
|
|
|
December 31, 2020
|
|
Current portion of finance lease
|
|
$
|
0.9
|
|
|
$
|
0.9
|
|
Current portion of debt
|
|
|
0.9
|
|
|
|
0.9
|
|
Senior unsecured credit facility
|
|
|
179.0
|
|
|
|
228.0
|
|
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
|
|
|
(1.3
|
)
|
|
|
(1.5
|
)
|
Senior notes --- deferred financing costs
|
|
|
(3.0
|
)
|
|
|
(3.5
|
)
|
Non-current portion of finance lease and other debt
|
|
|
1.7
|
|
|
|
2.5
|
|
Long-term debt
|
|
|
876.4
|
|
|
|
925.5
|
|
Total debt
|
|
$
|
877.3
|
|
|
$
|
926.4
|
|
In June 2019, the Company refinanced its senior unsecured credit facility (the “Facility”), increasing borrowing capacity from $700 million to $1 billion. The Facility matures in June 2024. The interest rate ranges from LIBOR + 0.875% to a maximum of LIBOR + 1.50%, depending upon the better of the Company’s leverage ratio or the credit rating. The Facility agreement contains financial and other covenants, including, but not limited to customary restrictions on the incurrence of debt by our subsidiaries and the granting of liens, as well as the maintenance of an interest coverage ratio and a leverage ratio.
In September 2020, we amended the Facility to allow for relief from certain terms, including adjusting the maximum leverage ratio covenant for a defined period. On January 28, 2021, we further amended the Facility agreement (the “Second Amendment”) to provide that, from January 28, 2021 through and including March 31, 2022, we will not be subject to a maximum leverage ratio covenant but will instead be required to maintain Liquidity (as defined in the Facility agreement) of at least $250 million. Additionally, during such period, the Company will be subject to limitations on share repurchases, cash dividends, and its ability to incur secured debt, in each case subject to certain exceptions; the applicable margin and commitment fees are increased; the incremental facility will not be available; and if the Company’s public debt rating is downgraded to (i) BB or lower by Standard & Poor’s and (ii) Ba2 or lower by Moody’s, we will be required to grant liens on certain of our assets, which liens will be released upon the Company’s public debt rating being upgraded to BB+ or higher by Standard & Poor’s or Ba1 or higher by Moody’s. The Company’s public debt rating as of September 30, 2021 is BB+/Baa3. In addition, the Second Amendment provides that the Company will not be subject to an interest coverage ratio covenant until the test period ending December 31, 2021 and revolving commitments under the Facility were reduced to $750 million. In connection with the Second Amendment, we accelerated a portion of the deferred financing costs and recognized $0.9 million in interest expense during the first quarter of 2021. As of September 30, 2021, we were in compliance with all debt covenants.
As of September 30, 2021, total borrowings under the Facility were $179 million, which approximates fair value. The Facility agreement permits us to issue letters of credit up to an aggregate amount of $50 million. Outstanding letters of credit reduce the amount available for borrowing under the Facility. As of September 30, 2021, there were no issued letters of credit under the Facility, resulting in undrawn availability under the Facility of $571 million. The weighted average interest rate for the Facility was 4.16% for the nine months ended September 30, 2021.
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 0.25% each time a credit rating applicable to the notes is downgraded. Conversely, such increases would be reversed should the credit rating be subsequently upgraded. The maximum rate is 5.95%. The effective interest rate for the nine months ended September 30, 2021 was 4.08% inclusive of an approximately 0.25% benefit of treasury locks. Based on quoted prices the fair value of the senior unsecured notes due in 2027 was $437.4 million at September 30, 2021.
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. Conversely, such increases would be reversed should the credit rating be subsequently upgraded. The maximum rate is 6.7%. The effective interest rate for the nine months ended September 30, 2021 was 5.03%. Based on quoted prices, the fair value of the senior unsecured notes due in 2025 was $331.9 million at September 30, 2021.
Note 6 — Derivative Financial Instruments
Interest Rate Swap and Interest Lock Agreements
At September 30, 2021 and December 31, 2020, we had no interest rate swap agreements outstanding.
10
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 for hedge accounting purposes thus any change in fair value was recorded as a component of other comprehensive (loss) income. As part of the issuance of our 3.95% Senior Unsecured 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 (loss) income will be released to interest expense over the life of the 3.95% Senior Unsecured Notes. The effect of these treasury locks reduced the effective interest rate on these notes by approximately 0.25%.
Cross Currency and Interest Rate Swap Agreements
In November 2020, we entered into a cross currency and interest rate swap, which is designated as a cash flow hedge of a €270 million, 5-year amortizing, intercompany loan between one of our European subsidiaries and the U.S. parent company. Changes in the spot exchange are recorded to the general ledger and offset the fair value re-measurement of the hedged item. The net difference in the interest rates coupons is recorded as a credit to interest expense. The derivative swaps €270 million bearing interest at a fixed rate of 0.30% for $319.9 million plus fixed rate interest of 1.115%. The interest coupons settle semi-annually. The principal will amortize each year on November 15, as follows: for years 1 through 4, beginning November 15, 2021, €50 million versus $59.2 million, and a final settlement on November 15, 2025 of €70 million versus $82.9 million. The carrying value of the derivative at September 30, 2021 is a current asset of $3.2 million and a long-term asset of $2.1 million
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 2024. The aggregate notional amount of these contracts was $250.5 million and $250.3 million at September 30, 2021 and December 31, 2020, 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, losses of $6.2 million and $10.2 million were recorded in other comprehensive (loss) income for the quarter and nine months ended September 30, 2021, respectively, and gains of $14.4 million and losses of $0.1 million were recorded for the quarter and nine months ended September 30, 2020, respectively. We classified $3.2 million of the carrying amount of these contracts as assets ($3.1 million of which was recorded in prepaid expenses and other current assets) and $4.8 million as liabilities ($2.2 million of which is recorded in non-current liabilities) on the Condensed Consolidated Balance Sheets at September 30, 2021, $16.0 million of the carrying amount of these contracts was classified in assets ($10.7 million of which was recorded in prepaid expenses and other current assets) and $2.5 million as liabilities (less than $0.1 million of which is in other non-current liabilities) at December 31, 2020. We recognized net gains of $1.5 million and $4.8 million in gross margin during the quarter and nine months ended September 30, 2021, respectively, and net losses of $2.6 million and $12.7 million for the quarter and nine months ended September 30, 2020, respectively.
In addition, we enter into foreign exchange forward contracts which are not designated as hedges. These are used to provide an offset to transactional gains or losses arising from the remeasurement of non-functional monetary assets and liabilities such as accounts receivable. The change in the fair value of the derivatives is recorded in the statement of operations. There are no credit contingency features in these derivatives. During the quarter and nine months ended September 30, 2021, we recognized net foreign exchange losses of $0.3 million and $1.4 million, respectively, in the Condensed Consolidated Statements of Operations. During the quarter and nine months ended September 30, 2020, we recognized net foreign exchange losses of $0.9 million and $2.5 million, respectively. The net foreign exchange impact recognized from these hedges offset the translation exposure of these transactions. The carrying amount of the contracts for derivatives not designated as hedging instruments was $0.1 million classified in current liabilities at September 30, 2021, and $0.1 million classified in current liabilities on our Condensed Consolidated Balance Sheet at December 31, 2020.
11
The change in fair value of our foreign currency forward exchange contracts under hedge designations recorded net of tax within accumulated other comprehensive (loss) income for the quarters and nine months ended September 30, 2021 and September 30, 2020 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
(In millions)
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Unrealized gains (losses) at beginning of period, net of tax
|
|
$
|
5.3
|
|
|
$
|
(12.3
|
)
|
|
$
|
10.6
|
|
|
$
|
(8.4
|
)
|
(Gains) losses reclassified to net sales
|
|
|
(1.2
|
)
|
|
|
2.0
|
|
|
|
(3.7
|
)
|
|
|
9.7
|
|
(Decrease) increase in fair value
|
|
|
(4.8
|
)
|
|
|
11.1
|
|
|
|
(7.6
|
)
|
|
|
(0.5
|
)
|
Unrealized (losses) gains at end of period, net of tax
|
|
$
|
(0.7
|
)
|
|
$
|
0.8
|
|
|
$
|
(0.7
|
)
|
|
$
|
0.8
|
|
Unrealized gains of $0.9 million recorded in accumulated other comprehensive loss, less taxes of $0.1 million, as of September 30, 2021, are expected to be reclassified into earnings over the next twelve months as the hedged sales are recorded.
Commodity Swap Agreements
On occasion we enter into commodity swap agreements to hedge against price fluctuations of raw materials, including propylene (the principal component of acrylonitrile). As of September 30, 2021, we had commodity swap agreements with a notional value of $12.2 million. The swaps mature monthly through June 2023. The swaps are accounted for as a cash flow hedge of our forward raw material purchases. To ensure the swaps are highly effective, all of the critical terms of the swap matched the terms of the hedged items. The fair value of the commodity swap agreements was an asset of $4.6 million ($4.2 million of which was recorded in prepaid expenses and other current assets) and a liability of less than $0.1 million at September 30, 2021. The fair value of the commodity swap agreements was an asset of $2.2 million ($1.5 million of which was recorded in prepaid expenses and other current assets) and a liability of $1.1 million at December 31, 2020.
The effective tax rate for the quarter ended September 30, 2021 was 38.3% and included a discrete tax charge of $1.3 million primarily related to the remeasurement of the net state deferred tax liabilities. The tax expense for the nine months ended September 30, 2021 was $1.6 million and included a net discrete tax charge of $0.8 million primarily resulting from the revaluation of U.S. and foreign deferred tax liabilities. The tax benefit for the quarter ended September 30, 2020 was $56.9 million and included a $46.2 million benefit primarily due to the release of a valuation allowance in a foreign jurisdiction due to a legal entity rationalization and treasury realignment initiative. The tax benefit of $48.7 million for the first nine months of 2020 also included a $2.7 million benefit primarily for the release of reserves of unrecognized tax benefits as a result of tax audit settlements.
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 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 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 $13.1 million and $4.8 million, respectively, at September 30, 2021 and $18.4 million and $14.8 million, respectively,
12
at December 31, 2020. 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 Condensed Consolidated Balance Sheets.
Below is a summary of valuation techniques for all Level 2 financial assets and liabilities:
Cross Currency and Interest Rate Swap Agreements — valued using the USD Secured Overnight Financing Rate curves and quoted forward foreign exchange prices at the reporting date. The fair value of the assets were $5.3 million, at September 30, 2021 and the fair value of the assets and liabilities were $0.3 million and $11.1 million, respectively, at December 31, 2020.
Foreign exchange derivative assets and liabilities — valued using quoted forward prices at the reporting date. Fair value of assets and liabilities at September 30, 2021 was $3.2 million and $4.8 million, respectively. The fair value of assets and liabilities at December 31, 2020 was $16.0 million and $2.6 million, respectively.
Commodity swap agreements — valued using quoted forward commodity prices at the reporting date. Fair value of the assets and liabilities at September 30, 2021 was $4.6 million and less than $0.1 million, respectively. The fair value of the assets and liabilities at December 31, 2020 was $2.2 million and $1.1 million, respectively.
Counterparties to the above contracts are highly rated financial institutions, none of which experienced any significant downgrades in the nine months ended September 30, 2021 that would reduce the receivable amount owed, if any, to the Company.
Liabilities classified as Level 3 — At September 30, 2021 we had a liability for $0.4 million, which represented contingent consideration that was recognized in connection with the Company’s Oxford Performance Materials, Inc. acquisition. This amount was estimated based on certain contractual stipulations which require payments to be 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.
Note 9 — Revenue
Our revenue is primarily derived from the sale of inventory under long-term contracts with our customers. We have determined that individual purchase orders (“PO”), the terms and conditions of which are taken with a master agreement, create the ASC 606 contracts which are generally short-term in nature. For those sales that are not tied to a long-term agreement, we generate a PO that is subject to our standard terms and conditions. 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. This regulation contains a termination for convenience clause (“T for C”), which requires that the customer pay for the cost of both the finished and unfinished goods at the time of cancellation plus a reasonable profit.
We recognize revenue over time for those agreements that have T for C, and where the products being produced have no alternative use. As our production cycle is typically nine months or less, it is expected that goods related to the revenue recognized over time will be shipped and billed within the next twelve months. Less than half of our agreements contain provisions which would require revenue to be recognized over time. All other revenue is recognized at a point in time.
We disaggregate our revenue based on market for analytical purposes. The following table details our revenue by market for the quarters and nine months ended September 30, 2021 and 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
(In millions)
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Consolidated Net Sales
|
|
$
|
333.8
|
|
|
$
|
286.9
|
|
|
$
|
964.4
|
|
|
$
|
1,206.6
|
|
Commercial Aerospace
|
|
|
167.2
|
|
|
|
128.8
|
|
|
|
468.5
|
|
|
|
695.6
|
|
Space & Defense
|
|
|
110.4
|
|
|
|
108.8
|
|
|
|
329.0
|
|
|
|
328.8
|
|
Industrial
|
|
|
56.2
|
|
|
|
49.3
|
|
|
|
166.9
|
|
|
|
182.2
|
|
13
Revenue recognized over time gives rise to contract assets, which represent revenue recognized but unbilled. Contract assets are included in our Condensed Consolidated Balance Sheets as a component of current assets. The activity related to contract assets for the nine months ended September 30, 2021 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Composite Material
|
|
|
Engineered Products
|
|
|
Total
|
|
Balance at December 31, 2020
|
|
$
|
7.8
|
|
|
$
|
35.3
|
|
|
$
|
43.1
|
|
Net revenue billed
|
|
|
1.6
|
|
|
|
(2.4
|
)
|
|
|
(0.8
|
)
|
Balance at March 31, 2021
|
|
$
|
9.4
|
|
|
$
|
32.9
|
|
|
$
|
42.3
|
|
Net revenue billed
|
|
|
(1.8
|
)
|
|
|
—
|
|
|
|
(1.8
|
)
|
Balance at June 30, 2021
|
|
$
|
7.6
|
|
|
$
|
32.9
|
|
|
$
|
40.5
|
|
Net revenue billed
|
|
|
(0.3
|
)
|
|
|
(1.8
|
)
|
|
|
(2.1
|
)
|
Balance at September 30, 2021
|
|
$
|
7.3
|
|
|
$
|
31.1
|
|
|
$
|
38.4
|
|
Accounts receivable, net includes amounts billed to customers where the right to payment is unconditional.
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.
14
Financial information for our operating segments for the quarters and nine months ended September 30, 2021 and 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
Composite
|
|
|
Engineered
|
|
|
Corporate &
|
|
|
|
|
(In millions)
|
|
Materials
|
|
|
Products
|
|
|
Other (a)
|
|
|
Total
|
|
Third Quarter 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales to external customers
|
|
$
|
254.1
|
|
|
$
|
79.7
|
|
|
$
|
—
|
|
|
$
|
333.8
|
|
Intersegment sales
|
|
|
15.0
|
|
|
|
0.4
|
|
|
|
(15.4
|
)
|
|
|
—
|
|
Total sales
|
|
$
|
269.1
|
|
|
$
|
80.1
|
|
|
$
|
(15.4
|
)
|
|
$
|
333.8
|
|
Other operating expense
|
|
|
0.8
|
|
|
|
-
|
|
|
|
-
|
|
|
|
0.8
|
|
Operating income (loss)
|
|
|
30.0
|
|
|
|
6.5
|
|
|
|
(13.7
|
)
|
|
|
22.8
|
|
Depreciation and amortization
|
|
|
30.1
|
|
|
|
3.6
|
|
|
|
-
|
|
|
|
33.7
|
|
Stock-based compensation
|
|
|
0.7
|
|
|
|
0.1
|
|
|
|
2.1
|
|
|
|
2.9
|
|
Accrual basis additions to capital expenditures
|
|
|
3.7
|
|
|
|
2.8
|
|
|
|
—
|
|
|
|
6.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales to external customers
|
|
$
|
215.7
|
|
|
$
|
71.2
|
|
|
$
|
—
|
|
|
$
|
286.9
|
|
Intersegment sales
|
|
|
7.8
|
|
|
|
0.7
|
|
|
|
(8.5
|
)
|
|
|
—
|
|
Total sales
|
|
$
|
223.5
|
|
|
$
|
71.9
|
|
|
$
|
(8.5
|
)
|
|
$
|
286.9
|
|
Other operating expense
|
|
|
16.4
|
|
|
|
—
|
|
|
|
(0.6
|
)
|
|
|
15.8
|
|
Operating (loss) income
|
|
|
(36.6
|
)
|
|
|
(2.7
|
)
|
|
|
1.7
|
|
|
|
(37.6
|
)
|
Depreciation and amortization
|
|
|
31.7
|
|
|
|
3.9
|
|
|
|
—
|
|
|
|
35.6
|
|
Stock-based compensation
|
|
|
1.5
|
|
|
|
0.5
|
|
|
|
(1.7
|
)
|
|
|
0.3
|
|
Accrual basis additions to capital expenditures
|
|
|
4.7
|
|
|
|
1.3
|
|
|
|
—
|
|
|
|
6.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales to external customers
|
|
$
|
732.2
|
|
|
$
|
232.2
|
|
|
$
|
—
|
|
|
$
|
964.4
|
|
Intersegment sales
|
|
|
42.8
|
|
|
|
1.8
|
|
|
|
(44.6
|
)
|
|
|
—
|
|
Total sales
|
|
$
|
775.0
|
|
|
$
|
234.0
|
|
|
$
|
(44.6
|
)
|
|
$
|
964.4
|
|
Other operating expense
|
|
|
16.3
|
|
|
|
(0.5
|
)
|
|
|
0.2
|
|
|
|
16.0
|
|
Operating income (loss)
|
|
|
61.9
|
|
|
|
17.1
|
|
|
|
(50.2
|
)
|
|
|
28.8
|
|
Depreciation and amortization
|
|
|
91.4
|
|
|
|
10.9
|
|
|
|
0.1
|
|
|
|
102.4
|
|
Stock-based compensation
|
|
|
2.1
|
|
|
|
0.4
|
|
|
|
13.7
|
|
|
|
16.2
|
|
Accrual basis additions to capital expenditures
|
|
|
10.7
|
|
|
|
3.6
|
|
|
|
—
|
|
|
|
14.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales to external customers
|
|
$
|
960.4
|
|
|
$
|
246.2
|
|
|
$
|
—
|
|
|
$
|
1,206.6
|
|
Intersegment sales
|
|
|
48.0
|
|
|
|
1.6
|
|
|
|
(49.6
|
)
|
|
|
—
|
|
Total sales
|
|
$
|
1,008.4
|
|
|
$
|
247.8
|
|
|
$
|
(49.6
|
)
|
|
$
|
1,206.6
|
|
Other operating expense
|
|
|
25.5
|
|
|
|
2.7
|
|
|
|
15.4
|
|
|
|
43.6
|
|
Operating income (loss)
|
|
|
75.0
|
|
|
|
3.3
|
|
|
|
(43.8
|
)
|
|
|
34.5
|
|
Depreciation and amortization
|
|
|
94.3
|
|
|
|
11.6
|
|
|
|
0.1
|
|
|
|
106.0
|
|
Stock-based compensation
|
|
|
5.9
|
|
|
|
1.6
|
|
|
|
5.5
|
|
|
|
13.0
|
|
Accrual basis additions to capital expenditures
|
|
|
35.4
|
|
|
|
4.0
|
|
|
|
—
|
|
|
|
39.4
|
|
(a)
We do not allocate corporate expenses to the operating segments.
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill and Intangible Assets
|
|
Composite
|
|
|
Engineered
|
|
|
|
|
(In millions)
|
|
Materials
|
|
|
Products
|
|
|
Total
|
|
Balance at December 31, 2020
|
|
$
|
98.7
|
|
|
$
|
179.1
|
|
|
$
|
277.8
|
|
Amortization expense
|
|
|
(1.5
|
)
|
|
|
(3.8
|
)
|
|
|
(5.3
|
)
|
Currency translation adjustments
|
|
|
(2.7
|
)
|
|
|
0.1
|
|
|
|
(2.6
|
)
|
Balance at September 30, 2021
|
|
$
|
94.5
|
|
|
$
|
175.4
|
|
|
$
|
269.9
|
|
At September 30, 2021, the balance of goodwill and intangible assets was $191.1 million and $78.8 million, respectively.
15
Note 11 — Accumulated Other Comprehensive Loss
Comprehensive loss represents net loss and other gains and losses affecting stockholders’ equity that are not reflected in the Condensed Consolidated Statements of Operations. The components of accumulated other comprehensive loss as of September 30, 2021 and December 31, 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Unrecognized
Net Defined
Benefit and
Postretirement
Plan Costs
|
|
|
Change in Fair
Value of
Derivatives
Products (1)
|
|
|
Foreign
Currency
Translation
|
|
|
Total
|
|
Balance at December 31, 2020
|
|
$
|
(40.4
|
)
|
|
$
|
15.6
|
|
|
$
|
(34.8
|
)
|
|
$
|
(59.6
|
)
|
Other comprehensive loss income before reclassifications
|
|
|
(1.4
|
)
|
|
|
(0.2
|
)
|
|
|
(22.3
|
)
|
|
|
(23.9
|
)
|
Amounts reclassified from accumulated other comprehensive
loss
|
|
|
0.5
|
|
|
|
(10.8
|
)
|
|
—
|
|
|
|
(10.3
|
)
|
Other comprehensive loss
|
|
|
(0.9
|
)
|
|
|
(11.0
|
)
|
|
|
(22.3
|
)
|
|
|
(34.2
|
)
|
Balance at September 30, 2021
|
|
$
|
(41.3
|
)
|
|
$
|
4.6
|
|
|
$
|
(57.1
|
)
|
|
$
|
(93.8
|
)
|
(1)
Includes forward foreign exchange contracts, interest rate derivatives and commodity swaps.
The amounts of net losses reclassified to earnings from the unrecognized net defined benefit and postretirement plan costs component of accumulated other comprehensive loss for the quarter and nine months ended September 30, 2021, were less than $0.3 million less taxes of less than $0.1 million and $0.5 million less taxes of less than $0.1 million, respectively. The amounts reclassified to earnings from the change in fair value of the derivatives products component of accumulated other comprehensive loss for the quarter and nine months ended September 30, 2021 were net gains of $1.5 million less taxes of $0.3 million and $4.8 million less taxes of $1.1 million, respectively, for those related to foreign currency forward exchange contracts and gains of $2.0 million less taxes of $0.5 million and $2.8 million less taxes of $0.7 million, respectively, related to commodity swaps. We also recorded net losses of $3.8 million less taxes of $0.9 million and net gains of $6.5 million less taxes of less than $1.5 million related to interest rate derivatives, for the three- and nine-month periods ended September 30, 2021, respectively.
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. While it is impossible to predict the ultimate resolution of litigation, investigations and claims asserted against us, we believe, based upon our examination of currently available information, our experience to date, and advice from legal counsel, that, after taking into account our existing insurance coverage and amounts already provided for, the currently pending legal proceedings against us will not have a material adverse impact on our consolidated results of operations, financial position or cash flows.
Environmental Matters
We have been named as a potentially responsible party (“PRP”) with respect to the below and other 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 the Federal Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA” or “Superfund”) 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, and the number of other financially viable PRPs, that our liability in connection with such environmental matters will not be material.
Lower Passaic River Study Area
Hexcel together with approximately 48 other PRPs that comprise the Lower Passaic Cooperating Parties Group (the “CPG”), are subject to a May 2007 Administrative Order on Consent (“AOC”) with the EPA requiring the CPG to perform a Remedial Investigation/Feasibility Study of environmental conditions of a 17-mile stretch of the Passaic River in New Jersey (the “Lower Passaic River”). 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 Lower Passaic River at an expected cost ranging from $0.97 billion to $2.07 billion. This estimate does not include any costs related to a future remedy for the upper nine miles of the Lower Passaic River. In August 2017, the EPA appointed an independent third-party allocation expert to make recommendations on the relative liability of approximately 120 identified non-government
16
PRPs. In December 2020, the allocator issued its non-binding report on PRP liability (including Hexcel’s) to the EPA, which did not result in any change to Hexcel’s accrual for the Passaic matter. We do not know to what extent, if at all, this non-binding report will impact the ultimate outcome of the matter. In October 2021, the EPA released a ROD selecting an interim remedy for the upper nine miles of the Lower Passaic River at an expected additional cost ranging from $308.7 million to $661.5 million. .
In October 2016, pursuant to a settlement agreement with the EPA, Occidental Chemical Corporation (“OCC”), one of the PRPs, commenced performance of the remedial design required by the ROD for the lower eight miles of the Lower Passaic River, reserving its right of cost contribution from all other PRPs. In June 2018, OCC filed suit against approximately 120 parties, including Hexcel, in the U.S. District Court of the District of New Jersey seeking cost recovery and contribution under CERCLA related to the Lower Passaic River. In July 2019, the court granted in part and denied in part the defendants’ motion to dismiss. In August 2020, the court granted defendants’ motion for summary judgement for certain claims. Discovery for the remaining claims is ongoing. On February 24, 2021, Hexcel and certain other defendants filed a third-party complaint against the Passaic Valley Sewerage Commission and certain New Jersey municipalities seeking recovery of Passaic-related cleanup costs incurred by defendants, as well as contribution for any cleanup costs incurred by OCC for which the court deems the defendants liable.
The accrual related to the Lower Passaic River site was approximately $2.1 million as of September 30, 2021 and December 31, 2020. Given the uncertainty associated with the many elements of the Superfund process for the Lower Passaic River, the amounts accrued may not be indicative of the amounts for which we will ultimately be responsible.
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 Condensed Consolidated Balance Sheets. As of September 30, 2021 and December 31, 2020, our aggregate environmental related accruals were $2.2 million and $2.4 million, respectively, of which $0.2 million and $0.5 million, respectively, was included in accrued liabilities with the remainder included in other 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, for those sites where we are able to estimate our liability, at the high end of the range of possible outcomes, our accrual would have been $16 million higher at September 30, 2021 and December 31, 2020.
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 and other actions by governmental agencies or private parties, or the impact, if any, of being named in a new matter.
Product Warranty
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 nine months ended September 30, 2021, and accrued warranty cost, included in “accrued liabilities” in the Condensed Consolidated Balance Sheets at September 30, 2021 and December 31, 2020, were as follows:
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|
|
|
|
|
|
Product
|
|
(In millions)
|
|
Warranties
|
|
Balance as of December 31, 2020
|
|
$
|
2.6
|
|
Warranty expense
|
|
|
0.2
|
|
Deductions and other
|
|
|
(0.3
|
)
|
Balance as of March 31, 2021
|
|
$
|
2.5
|
|
Warranty expense
|
|
|
(0.5
|
)
|
Deductions and other
|
|
|
(0.2
|
)
|
Balance as of June 30, 2021
|
|
$
|
1.8
|
|
Warranty expense
|
|
|
0.3
|
|
Deductions and other
|
|
|
(0.3
|
)
|
Balance as of September 30, 2021
|
|
$
|
1.8
|
|
Note 13 — Other Operating Expense
We recognized restructuring charges of $0.8 million and $18.3 million for the quarter and nine months ended September 30, 2021, respectively, primarily related to severance and asset impairments. Anticipated future cash payments as of September 30, 2021 were $10.3 million. For the nine months ended September 30, 2021, other operating expenses also included a benefit related to the reduction of a contingent liability.
17
For the quarter ended September 30, 2020, we recognized a restructuring charge of $15.8 million, of which $9.4 million related to asset impairments for the planned closure of our Windsor, Colorado plant, and the remainder was primarily related to severance due to job reductions. For the nine months ended 2020, other operating expense of $43.6 million primarily related to costs associated with the terminated merger agreement with Woodward, Inc. as well as restructuring charges related to job reductions.
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Activity for the Quarter Ended September 30, 2021
|
|
|
|
|
|
June 30,
|
|
|
Restructuring
|
|
|
|
|
|
Cash
|
|
|
|
|
|
September 30,
|
|
(In Millions)
|
2021
|
|
|
Charge
|
|
|
FX Impact
|
|
|
Paid
|
|
|
Non-Cash
|
|
|
2021
|
|
Employee termination
|
$
|
12.5
|
|
|
$
|
0.7
|
|
|
$
|
(0.3
|
)
|
|
$
|
(2.6
|
)
|
|
$
|
—
|
|
|
$
|
10.3
|
|
Impairment and other
|
|
—
|
|
|
|
0.1
|
|
|
|
—
|
|
|
|
(0.1
|
)
|
|
|
—
|
|
|
|
—
|
|
Total
|
$
|
12.5
|
|
|
$
|
0.8
|
|
|
$
|
(0.3
|
)
|
|
$
|
(2.7
|
)
|
|
$
|
—
|
|
|
$
|
10.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Activity for the Nine Months Ended September 30, 2021
|
|
|
|
|
|
December 31,
|
|
|
Restructuring
|
|
|
|
|
|
Cash
|
|
|
|
|
|
September 30,
|
|
(In Millions)
|
2020
|
|
|
Charge
|
|
|
FX Impact
|
|
|
Paid
|
|
|
Non-Cash
|
|
|
2021
|
|
Employee termination
|
$
|
14.2
|
|
|
$
|
11.4
|
|
|
$
|
(0.6
|
)
|
|
$
|
(14.7
|
)
|
|
$
|
—
|
|
|
$
|
10.3
|
|
Impairment and other
|
|
—
|
|
|
|
6.9
|
|
|
|
—
|
|
|
|
(3.6
|
)
|
|
|
(3.3
|
)
|
|
|
—
|
|
Total
|
$
|
14.2
|
|
|
$
|
18.3
|
|
|
$
|
(0.6
|
)
|
|
$
|
(18.3
|
)
|
|
$
|
(3.3
|
)
|
|
$
|
10.3
|
|
18