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img129083765_0.jpg 

 

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 Quarterly Period Ended September 30, 2022

or

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

Commission File Number 1-8472

 

Hexcel Corporation

(Exact name of registrant as specified in its charter)

 

Delaware

 

94-1109521

(State or Other Jurisdiction of Incorporation or Organization)

 

(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

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common Stock, par value $0.01

 

HXL

 

New York Stock Exchange

 

 

 

 

 

 

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 every Interactive Data File required to be submitted 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 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

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

 

 

Emerging growth company

 

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

 

Outstanding at October 20, 2022

COMMON STOCK

 

84,171,313

 

 


 

HEXCEL CORPORATION AND SUBSIDIARIES

INDEX

 

 

 

 

 

Page

PART I.

 

FINANCIAL INFORMATION

 

3

 

 

 

 

 

ITEM 1.

 

Condensed Consolidated Financial Statements (Unaudited)

 

3

 

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets — September 30 2022, and December 31, 2021

 

3

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations — The quarter and nine months ended September 30, 2022 and 2021

 

4

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Loss — The quarter and nine months ended September 30, 2022 and 2021

 

4

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows — The nine months ended September 30, 2022 and 2021

 

5

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Stockholders’ Equity — The quarter and nine months ended September 30, 2022 and 2021

 

6

 

 

 

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

7

 

 

 

 

 

ITEM 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

18

 

 

 

 

 

ITEM 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

24

 

 

 

 

 

ITEM 4.

 

Controls and Procedures

 

24

 

 

 

 

 

PART II.

 

OTHER INFORMATION

 

25

 

 

 

 

 

ITEM 1.

 

Legal Proceedings

 

25

 

 

 

 

 

ITEM 1A.

 

Risk Factors

 

25

 

 

 

 

 

ITEM 6.

 

Exhibits

 

26

 

 

 

 

 

 

 

SIGNATURE

 

27

 

 

2


 

PART I. FINANCIAL INFORMATION

 

ITEM 1. Condensed Consolidated Financial Statements

Hexcel Corporation and Subsidiaries

Condensed Consolidated Balance Sheets

 

 

 

(Unaudited)

 

 

 

September 30,

 

 

December 31,

 

(In millions)

 

2022

 

 

2021

 

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

90.9

 

 

$

127.7

 

Accounts receivable, net

 

 

202.7

 

 

 

160.3

 

Inventories, net

 

 

303.1

 

 

 

245.7

 

Contract assets

 

 

32.9

 

 

 

30.5

 

Prepaid expenses and other current assets

 

 

43.0

 

 

 

39.5

 

Assets held for sale

 

 

12.6

 

 

 

12.6

 

Total current assets

 

 

685.2

 

 

 

616.3

 

 

 

 

 

 

 

 

Property, plant and equipment

 

 

3,004.6

 

 

 

3,110.0

 

Less accumulated depreciation

 

 

(1,375.3

)

 

 

(1,363.9

)

Net property, plant and equipment

 

 

1,629.3

 

 

 

1,746.1

 

 

 

 

 

 

 

 

Goodwill and other intangible assets, net

 

 

253.1

 

 

 

267.5

 

Investments in affiliated companies

 

 

47.0

 

 

 

44.6

 

Other assets

 

 

161.1

 

 

 

144.9

 

Total assets

 

$

2,775.7

 

 

$

2,819.4

 

 

 

 

 

 

 

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Short-term borrowings

 

$

0.3

 

 

$

0.9

 

Accounts payable

 

 

113.2

 

 

 

113.2

 

Accrued compensation and benefits

 

 

69.4

 

 

 

54.4

 

Financial instruments

 

 

39.9

 

 

 

5.7

 

Accrued liabilities

 

 

60.9

 

 

 

73.4

 

Total current liabilities

 

 

283.7

 

 

 

247.6

 

 

 

 

 

 

 

 

Long-term debt

 

 

797.0

 

 

 

822.4

 

Retirement obligations

 

 

47.4

 

 

 

52.6

 

Deferred income taxes

 

 

121.2

 

 

 

140.0

 

Other non-current liabilities

 

 

81.4

 

 

 

71.3

 

Total liabilities

 

 

1,330.7

 

 

 

1,333.9

 

Stockholders' equity:

 

 

 

 

 

 

Common stock, $0.01 par value, 200.0 shares authorized, 110.3 shares and 110.1 shares issued at September 30, 2022 and December 31, 2021, respectively

 

 

1.1

 

 

 

1.1

 

Additional paid-in capital

 

 

898.9

 

 

 

878.6

 

Retained earnings

 

 

2,076.4

 

 

 

2,012.5

 

Accumulated other comprehensive loss

 

 

(249.1

)

 

 

(126.5

)

 

 

 

2,727.3

 

 

 

2,765.7

 

Less – Treasury stock, at cost, 26.2 shares at September 30, 2022 and 26.1 shares
at December 31, 2021

 

 

(1,282.3

)

 

 

(1,280.2

)

Total stockholders' equity

 

 

1,445.0

 

 

 

1,485.5

 

Total liabilities and stockholders' equity

 

$

2,775.7

 

 

$

2,819.4

 

 

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

3


 

 

Hexcel Corporation and Subsidiaries

 

 

 

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Unaudited)

 

 

(Unaudited)

 

 

 

Quarter Ended September 30,

 

 

Nine Months Ended September 30,

 

(In millions, except per share data)

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Net sales

 

$

364.7

 

 

$

333.8

 

 

$

1,148.3

 

 

$

964.4

 

Cost of sales

 

 

282.9

 

 

 

267.8

 

 

 

890.3

 

 

 

783.4

 

Gross margin

 

 

81.8

 

 

 

66.0

 

 

 

258.0

 

 

 

181.0

 

Selling, general and administrative expenses

 

 

29.0

 

 

 

32.0

 

 

 

107.2

 

 

 

102.7

 

Research and technology expenses

 

 

11.6

 

 

 

10.4

 

 

 

33.8

 

 

 

33.5

 

Other operating expense (income)

 

 

0.4

 

 

 

0.8

 

 

 

(17.7

)

 

 

16.0

 

Operating income

 

 

40.8

 

 

 

22.8

 

 

 

134.7

 

 

 

28.8

 

Interest expense, net

 

 

9.0

 

 

 

9.5

 

 

 

27.0

 

 

 

29.1

 

Other income

 

 

-

 

 

 

-

 

 

 

(0.3

)

 

 

-

 

Income (loss) before income taxes, and equity in earnings from affiliated companies

 

 

31.8

 

 

 

13.3

 

 

 

108.0

 

 

 

(0.3

)

Income tax expense

 

 

6.8

 

 

 

5.1

 

 

 

24.2

 

 

 

1.6

 

Income (loss) before equity in earnings from affiliated companies

 

 

25.0

 

 

 

8.2

 

 

 

83.8

 

 

 

(1.9

)

Equity in earnings (losses) from affiliated companies

 

 

1.8

 

 

 

0.8

 

 

 

5.5

 

 

 

(0.9

)

Net income (loss)

 

$

26.8

 

 

$

9.0

 

 

$

89.3

 

 

$

(2.8

)

Basic net income (loss) per common share

 

$

0.32

 

 

$

0.11

 

 

$

1.06

 

 

$

(0.03

)

Diluted net income (loss) per common share

 

$

0.31

 

 

$

0.11

 

 

$

1.05

 

 

$

(0.03

)

Weighted-average common shares:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

84.4

 

 

 

84.1

 

 

 

84.4

 

 

 

84.1

 

Diluted

 

 

85.1

 

 

 

84.7

 

 

 

85.0

 

 

 

84.1

 

 

 

Hexcel Corporation and Subsidiaries

 

 

 

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Unaudited)

 

 

(Unaudited)

 

 

 

Quarter Ended September 30,

 

 

Nine Months Ended September 30,

 

(In millions)

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Net income (loss)

 

$

26.8

 

 

$

9.0

 

 

$

89.3

 

 

$

(2.8

)

Currency translation adjustments

 

 

(38.2

)

 

 

(14.5

)

 

 

(88.7

)

 

 

(22.3

)

Net unrealized pension and other benefit actuarial gains (losses) and prior service credits (net of tax)

 

 

4.7

 

 

 

1.0

 

 

 

12.4

 

 

 

(0.9

)

Net unrealized losses on financial instruments (net of tax)

 

 

(24.3

)

 

 

(7.1

)

 

 

(46.3

)

 

 

(11.0

)

Total other comprehensive loss

 

 

(57.8

)

 

 

(20.6

)

 

 

(122.6

)

 

 

(34.2

)

Comprehensive loss

 

$

(31.0

)

 

$

(11.6

)

 

$

(33.3

)

 

$

(37.0

)

 

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

 

 

4


 

 

Hexcel Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows

 

 

 

(Unaudited)

 

 

 

Nine Months Ended September 30,

 

(In millions)

 

2022

 

 

2021

 

Cash flows from operating activities

 

 

 

 

 

 

Net income (loss)

 

$

89.3

 

 

$

(2.8

)

Reconciliation to net cash used by operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

94.9

 

 

 

102.4

 

Amortization related to financing

 

 

0.6

 

 

 

2.7

 

Deferred income taxes

 

 

(8.5

)

 

 

(3.2

)

Equity in (earnings) losses from affiliated companies

 

 

(5.5

)

 

 

0.9

 

Stock-based compensation

 

 

15.2

 

 

 

16.2

 

Merger and restructuring expenses, net of payments

 

 

(6.1

)

 

 

(4.4

)

Gain on sale of asset

 

 

(19.4

)

 

 

-

 

Gain on sale of investment

 

 

(0.3

)

 

 

-

 

Changes in assets and liabilities:

 

 

 

 

 

 

Increase in accounts receivable

 

 

(53.1

)

 

 

(55.6

)

Increase in inventories

 

 

(82.0

)

 

 

(37.3

)

(Increase) decrease in prepaid expenses and other current assets

 

 

(11.6

)

 

 

3.6

 

Increase in accounts payable/accrued liabilities

 

 

31.7

 

 

 

43.3

 

Other  net

 

 

11.2

 

 

 

(1.6

)

Net cash provided by operating activities

 

 

56.4

 

 

 

64.2

 

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

Capital expenditures

 

 

(58.3

)

 

 

(15.0

)

Proceeds from sale of asset

 

 

21.2

 

 

 

-

 

Proceeds from sale of investments

 

 

0.5

 

 

 

-

 

Net cash used for investing activities

 

 

(36.6

)

 

 

(15.0

)

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

Borrowing from senior unsecured credit facility - 2024

 

 

35.0

 

 

 

-

 

Repayment of senior unsecured credit facility - 2024

 

 

(61.0

)

 

 

(49.0

)

Repayment of finance lease obligation and other debt, net

 

 

(0.4

)

 

 

(0.7

)

Dividends paid

 

 

(25.3

)

 

 

-

 

Activity under stock plans

 

 

3.1

 

 

 

4.9

 

Net cash used for financing activities

 

 

(48.6

)

 

 

(44.8

)

Effect of exchange rate changes on cash and cash equivalents

 

 

(8.0

)

 

 

(1.9

)

Net (decrease) increase in cash and cash equivalents

 

 

(36.8

)

 

 

2.5

 

Cash and cash equivalents at beginning of period

 

 

127.7

 

 

 

103.3

 

Cash and cash equivalents at end of period

 

$

90.9

 

 

$

105.8

 

Supplemental data:

 

 

 

 

 

 

Accrual basis additions to plant, property and equipment

 

$

49.1

 

 

$

14.3

 

 

 

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

 

5


 

Hexcel Corporation and Subsidiaries

Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)

For the Quarter and Nine Months ended September 30, 2022, and September 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

Other

 

 

 

 

 

Total

 

 

 

 

 

 

Paid-In

 

 

Retained

 

 

Comprehensive

 

 

Treasury

 

 

Stockholders’

 

(In millions)

 

Par

 

 

Capital

 

 

Earnings

 

 

Loss

 

 

Stock

 

 

Equity

 

Balance, December 31, 2020

 

$

1.1

 

 

$

849.7

 

 

$

1,996.4

 

 

$

(59.6

)

 

$

(1,277.4

)

 

$

1,510.2

 

Net loss

 

 

 

 

 

 

(14.0

)

 

 

 

 

 

 

(14.0

)

Change in other comprehensive loss– net of tax

 

 

 

 

 

 

 

 

(19.1

)

 

 

 

 

(19.1

)

Stock based compensation

 

 

 

 

11.8

 

 

 

 

 

 

 

(2.0

)

 

 

9.8

 

Balance, March 31, 2021

 

$

1.1

 

 

$

861.5

 

 

$

1,982.4

 

 

$

(78.7

)

 

$

(1,279.4

)

 

$

1,486.9

 

Net income

 

 

 

 

 

 

2.2

 

 

 

 

 

 

 

2.2

 

Change in other comprehensive income – net of tax

 

 

 

 

 

 

 

 

5.5

 

 

 

 

 

5.5

 

Stock based compensation

 

 

 

 

8.2

 

 

 

 

 

 

 

 

 

8.2

 

Balance, June 30, 2021

 

$

1.1

 

 

$

869.7

 

 

$

1,984.6

 

 

$

(73.2

)

 

$

(1,279.4

)

 

$

1,502.8

 

Net income

 

 

 

 

 

 

9.0

 

 

 

 

 

 

 

9.0

 

Change in other comprehensive loss– net of tax

 

 

 

 

 

 

 

 

(20.6

)

 

 

 

 

(20.6

)

Stock based compensation

 

 

 

 

3.7

 

 

 

 

 

 

 

(0.6

)

 

 

3.1

 

Balance, September 30, 2021

 

$

1.1

 

 

$

873.4

 

 

$

1,993.6

 

 

$

(93.8

)

 

$

(1,280.0

)

 

$

1,494.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

Other

 

 

 

 

 

Total

 

 

 

 

 

 

Paid-In

 

 

Retained

 

 

Comprehensive

 

 

Treasury

 

 

Stockholders’

 

(In millions)

 

Par

 

 

Capital

 

 

Earnings

 

 

Loss

 

 

Stock

 

 

Equity

 

Balance, December 31, 2021

 

$

1.1

 

 

$

878.6

 

 

$

2,012.5

 

 

$

(126.5

)

 

$

(1,280.2

)

 

$

1,485.5

 

Net income

 

 

 

 

 

 

17.8

 

 

 

 

 

 

 

17.8

 

Dividends on common stock ($0.10 per share)

 

 

 

 

 

 

(8.5

)

 

 

 

 

 

 

(8.5

)

Change in other comprehensive loss – net of tax

 

 

 

 

 

 

 

 

(17.6

)

 

 

 

 

(17.6

)

Stock based compensation

 

 

 

 

11.3

 

 

 

 

 

 

 

(1.4

)

 

 

9.9

 

Balance, March 31, 2022

 

$

1.1

 

 

$

889.9

 

 

$

2,021.8

 

 

$

(144.1

)

 

$

(1,281.6

)

 

$

1,487.1

 

Net income

 

 

 

 

 

 

44.7

 

 

 

 

 

 

 

44.7

 

Dividends on common stock ($0.10 per share)

 

 

 

 

 

 

(8.5

)

 

 

 

 

 

 

(8.5

)

Change in other comprehensive loss – net of tax

 

 

 

 

 

 

 

 

(47.2

)

 

 

 

 

(47.2

)

Stock based compensation

 

 

 

 

4.2

 

 

 

 

 

 

 

 

 

4.2

 

Balance, June 30, 2022

 

$

1.1

 

 

$

894.1

 

 

$

2,058.0

 

 

$

(191.3

)

 

$

(1,281.6

)

 

$

1,480.3

 

Net income

 

 

 

 

 

 

26.8

 

 

 

 

 

 

 

26.8

 

Dividends on common stock ($0.10 per share)

 

 

 

 

 

 

 

 

(8.4

)

 

 

 

 

 

 

 

 

(8.4

)

Change in other comprehensive loss– net of tax

 

 

 

 

 

 

 

 

(57.8

)

 

 

 

 

(57.8

)

Stock based compensation

 

 

 

 

4.8

 

 

 

 

 

 

 

(0.7

)

 

 

4.1

 

Balance, September 30, 2022

 

$

1.1

 

 

$

898.9

 

 

$

2,076.4

 

 

$

(249.1

)

 

$

(1,282.3

)

 

$

1,445.0

 

 

 

 

 

 

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

6


 

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, 2021 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, comprehensive loss, results of operations, cash flows and statement of stockholders’ equity for the interim periods presented. The Condensed Consolidated Balance Sheet as of December 31, 2021 was derived from the audited 2021 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 2021 Annual Report on Form 10-K.

Investments in Affiliated Companies

We have a 50% equity investment in Aerospace Composites Malaysia Sdn. Bhd. This investment is accounted for using the equity method of accounting.

 

Assets Held for Sale

In November 2020 we closed our wind energy prepreg production facility in Windsor, Colorado and as a result, certain plant assets to be sold with a carrying value of approximately $12.6 million have been recorded in “Assets held for sale” in the Condensed Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021. The sale of these assets is expected to occur during 2022.

During the first quarter of 2022, we entered into an agreement to sell our Dublin, California facility. The sale of the facility closed during the second quarter of 2022, and we received approximately $21.2 million in net proceeds from the sale and recorded a gain on the sale of approximately $19.4 million which is included in other operating (income) expense in the Condensed Consolidated Statement of Operations. The Company will be relocating certain of its Dublin-based research, technology and laboratory support personnel and equipment to a newly constructed facility in Salt Lake City, Utah.

 

Recently Enacted Government Legislation

 

On August 16, 2022, the U.S. enacted the Inflation Reduction Act (the "IRA") of 2022. The IRA contains a number of tax provisions including a new corporate alternative minimum tax, an excise tax on stock buybacks, and incentives for energy and climate initiatives. These provisions are effective for taxable years beginning after December 31, 2022. Currently, we do not qualify for the corporate alternative minimum tax. The impact of the excise tax will be dependent on the extent of share repurchases made in future periods. We are assessing the applicability and impact to Hexcel of incentives for energy and climate initiatives.

 

 

7


 

 

Note 2 — Net Income (Loss) Per Common Share

 

 

 

Quarter Ended September 30,

 

 

Nine Months Ended September 30,

 

(In millions, except per share data)

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Basic net income (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

26.8

 

 

$

9.0

 

 

$

89.3

 

 

$

(2.8

)

Weighted average common shares outstanding

 

 

84.4

 

 

 

84.1

 

 

 

84.4

 

 

 

84.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic net income (loss) per common share

 

$

0.32

 

 

$

0.11

 

 

$

1.06

 

 

$

(0.03

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted net income (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

26.8

 

 

$

9.0

 

 

 

89.3

 

 

 

(2.8

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding — Basic

 

 

84.4

 

 

 

84.1

 

 

 

84.4

 

 

 

84.1

 

Plus incremental shares from assumed conversions:

 

 

 

 

 

 

 

 

 

 

 

 

Restricted stock units

 

 

0.4

 

 

 

0.3

 

 

 

0.4

 

 

 

-

 

Stock options

 

 

0.3

 

 

 

0.3

 

 

 

0.2

 

 

 

-

 

Weighted average common shares outstanding — Dilutive

 

 

85.1

 

 

 

84.7

 

 

 

85.0

 

 

 

84.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted net income (loss) per common share

 

$

0.31

 

 

$

0.11

 

 

$

1.05

 

 

$

(0.03

)

 

Total common stock equivalents of 0.6 million and 0.6 million were excluded from the computation of diluted net income per share for the quarter ended September 30, 2022 and 2021, respectively, because to do so would have been anti-dilutive. Total common stock equivalents of 0.7 million and 1.1 million were excluded from the computation of diluted net income (loss) per share for the nine months ended September 30, 2022 and 2021, respectively, because to do so would have been anti-dilutive.

 

 

Note 3 Inventories

 

 

 

 

 

 

 

 

(In millions)

 

September 30, 2022

 

 

December 31, 2021

 

Raw materials

 

$

151.8

 

 

$

113.7

 

Work in progress

 

 

40.4

 

 

 

41.0

 

Finished goods

 

 

110.9

 

 

 

91.0

 

Total Inventory

 

$

303.1

 

 

$

245.7

 

 

 

Note 4 Retirement and Other Postretirement Benefit Plans

We maintain qualified and nonqualified defined benefit retirement plans covering certain current and former U.S. and European employees, retirement savings plans covering eligible U.S. and U.K. employees and certain postretirement health care and life insurance benefit plans covering eligible U.S. retirees. We also participate in a union sponsored multi-employer pension plan covering certain U.S. employees with union affiliations.

Defined Benefit Retirement Plans

Net Periodic Benefit Costs

Net periodic benefit costs of our defined benefit retirement plans for the three and nine months ended September 30, 2022 and 2021 were as follows:

 

 

 

Quarter Ended September 30,

 

 

Nine Months Ended September 30,

 

(In millions)

 

2022

 

 

2021

 

 

2022

 

 

2021

 

U.S. Nonqualified Defined Benefit Retirement Plans

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

0.3

 

 

$

0.2

 

 

$

0.9

 

 

$

0.8

 

Interest cost

 

 

0.1

 

 

-

 

 

 

0.3

 

 

 

0.2

 

Net amortization

 

 

0.3

 

 

 

0.3

 

 

 

0.7

 

 

 

0.5

 

Net periodic benefit cost

 

$

0.7

 

 

$

0.5

 

 

$

1.9

 

 

$

1.5

 

 

8


 

 

(In millions)

 

September 30, 2022

 

 

December 31, 2021

 

Amounts recognized on the balance sheet for U.S. nonqualified defined benefit retirement plans:

 

 

 

 

 

 

Accrued liabilities

 

$

3.5

 

 

$

2.7

 

Other non-current liabilities

 

 

21.1

 

 

 

21.3

 

Total accrued benefit

 

$

24.6

 

 

$

24.0

 

 

 

 

Quarter Ended September 30,

 

 

Nine Months Ended September 30,

 

(In millions)

 

2022

 

 

2021

 

 

2022

 

 

2021

 

European Defined Benefit Retirement Plans

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

0.1

 

 

$

0.2

 

 

$

0.5

 

 

$

0.7

 

Interest cost

 

 

0.6

 

 

 

0.5

 

 

 

1.7

 

 

 

1.6

 

Expected return on plan assets

 

 

(0.6

)

 

 

(0.8

)

 

 

(1.7

)

 

 

(2.6

)

Net amortization

 

 

0.6

 

 

 

0.3

 

 

 

1.8

 

 

 

0.8

 

Net periodic benefit cost

 

$

0.7

 

 

$

0.2

 

 

$

2.3

 

 

$

0.5

 

 

(In millions)

 

September 30, 2022

 

 

December 31, 2021

 

Amounts recognized on the balance sheet for European defined benefit retirement plans:

 

 

 

 

 

 

Other assets

 

$

6.1

 

 

$

6.9

 

 

 

 

 

 

 

 

Accrued liabilities

 

 

0.9

 

 

 

0.2

 

Other non-current liabilities

 

 

15.2

 

 

 

15.8

 

Total accrued benefit

 

$

16.0

 

 

$

16.0

 

 

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, 2022 and 2021, amounts unrelated to service costs were a charge of $1.0 million and $0.3 million, respectively. For the nine months ended September 30, 2022 and 2021, amounts unrelated to service costs were a charge of $2.9 million and $0.6 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 2022 to cover unfunded benefits. We expect to contribute a total of $3.2 million in 2022 to cover unfunded benefits.

We contributed $0.3 million to our European defined benefit retirement plans during the nine months ended September 30, 2022. We plan to contribute approximately $0.5 million during 2022 to our European plans.

Postretirement Health Care and Life Insurance Benefit Plans

We recorded $0.3 million and $0.2 million of net amortization gain deferral for the quarters ended September 30, 2022 and 2021, respectively and $0.8 million and $0.6 million for the nine months ended September 30, 2022 and 2021, respectively. Net periodic benefit costs of our postretirement health care and life insurance benefit plans for the nine months ended September 30, 2022 and 2021 were immaterial.

 

(In millions)

 

September 30, 2022

 

 

December 31, 2021

 

Amounts recognized on the balance sheet:

 

 

 

 

 

 

Accrued liabilities

 

$

0.3

 

 

$

0.3

 

Other non-current liabilities

 

1.5

 

 

 

1.5

 

Total accrued benefit

 

$

1.8

 

 

$

1.8

 

 

Amounts contributed in connection with our postretirement plans were immaterial for the nine months ended September 30, 2022. We periodically fund our postretirement plans to pay covered expenses as they are incurred. We expect to contribute less than $0.3 million in 2022 to cover unfunded benefits.

 

 

9


 

Note 5 –– Debt

 

(In millions)

 

September 30, 2022

 

 

December 31, 2021

 

Current portion of finance lease

 

$

0.3

 

 

$

0.9

 

Current portion of debt

 

 

0.3

 

 

 

0.9

 

Senior unsecured credit facility

 

 

99.0

 

 

 

125.0

 

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

 

 

(1.0

)

 

 

(1.2

)

Senior notes --- deferred financing costs

 

 

(2.4

)

 

 

(2.9

)

Non-current portion of finance lease and other debt

 

 

1.4

 

 

 

1.5

 

Long-term debt

 

 

797.0

 

 

 

822.4

 

Total debt

 

$

797.3

 

 

$

823.3

 

 

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 would not be subject to a maximum leverage ratio covenant but instead be required to maintain Liquidity (as defined in the Facility agreement) of at least $250 million. Additionally, during such period, the Company was 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 would be increased; the incremental facility would not be available; and if the Company’s public debt rating was downgraded to (i) BB or lower by Standard & Poor’s and (ii) Ba2 or lower by Moody’s, we would be required to grant liens on certain of our assets, which liens would 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, 2022 is BB+/Baa3. In addition, the Second Amendment provided that the Company would 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 from $1 billion to $750 million. As of September 30, 2022, we were in compliance with all debt covenants. As of April 1, 2022, the original terms and conditions to the Facility agreement were reinstated except that the amount of the lender's commitment remained at $750 million. Share repurchases restrictions that had been in effect per the Second Amendment expired on March 31, 2022.

As of September 30, 2022, total borrowings under the Facility were $99 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, 2022, there were no issued letters of credit under the Facility, resulting in undrawn availability under the Facility of $651 million. The weighted average interest rate for the Facility was 4.4% for the nine months ended September 30, 2022.

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, 2022 was 4.11% 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 $391.1 million at September 30, 2022.

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, 2022 was 5.07%. Based on quoted prices, the fair value of the senior unsecured notes due in 2025 was $277.3 million at September 30, 2022.

 

 

10


 

Note 6 Derivative Financial Instruments

Interest Rate Swap and Interest Lock Agreements

At September 30, 2022 and December 31, 2021, we had no interest rate swap agreements outstanding.

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, 2022 is a current asset of $12.0 million and a long-term asset of $27.6 million. The carrying value of the derivative at December 31, 2021 was a current asset of $4.0 million and a long-term asset of $3.4 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 have entered into contracts to exchange U.S. dollars for Euros and British pound sterling through December 2024. The aggregate notional amount of these contracts was $475.2 million and $316.4 million at September 30, 2022 and December 31, 2021, 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 $31.9 million and $60.3 million were recorded in other comprehensive (loss) income for the quarter and nine months ended September 30, 2022, respectively, and losses of $6.2 million and $10.2 million were recorded for the quarter and nine months ended September 30, 2021, respectively. We classified the $54.7 million carrying amount of these contracts as liabilities ($22.2 million of which is recorded in non-current liabilities) on the Condensed Consolidated Balance Sheets at September 30, 2022, and $1.9 million of the carrying amount of these contracts was classified in assets ($1.7 million of which was recorded in prepaid expenses and other current assets) and $6.8 million as liabilities (less than $3.9 million of which is in other non-current liabilities) at December 31, 2021. We recognized losses of $6.2 million and $10.5 million in gross margin during the quarter and nine months ended September 30, 2022, respectively, and gains of $1.5 million and $4.8 million for the quarter and nine months ended September 30, 2021, 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, 2022, we recognized net foreign exchange losses of $1.0 million and $2.0 million, respectively, in the Condensed Consolidated Statements of Operations. During the quarter and nine months ended September 30, 2021, we recognized net foreign exchange losses of $0.3 million and $1.1 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 assets at September 30, 2022, and $0.2 million classified in current liabilities on our Condensed Consolidated Balance Sheet at December 31, 2021.

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, 2022 and September 30, 2021 was as follows:

11


 

 

 

 

Quarter Ended September 30,

 

 

Nine Months Ended September 30,

 

(In millions)

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Unrealized (losses) gains at beginning of period, net of tax

 

$

(21.7

)

 

$

5.3

 

 

$

(3.5

)

 

$

10.6

 

Losses (gains) reclassified to net sales

 

 

4.8

 

 

 

(1.2

)

 

 

7.9

 

 

 

(3.7

)

Decrease in fair value

 

 

(24.7

)

 

 

(4.8

)

 

 

(46.0

)

 

 

(7.6

)

Unrealized losses at end of period, net of tax

 

$

(41.6

)

 

$

(0.7

)

 

$

(41.6

)

 

$

(0.7

)

 

Unrealized losses of $25.7 million recorded in accumulated other comprehensive loss, less taxes of $6.0 million, as of September 30, 2022, 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, 2022, we had commodity swap agreements with a notional value of $25.9 million. The swaps mature monthly through August 2024. 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 a liability of $9.3 million ($1.9 million of which was recorded in other non-current liabilities) at September 30, 2022, and an asset of $0.9 million ($0.9 million of which was recorded in prepaid expenses and other current assets) and a liability of $2.3 million ($0.8 million of which was recorded in other non-current liabilities) at December 31, 2021.

 

Note 7 — 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 our own and 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 $39.7 million and $63.9 million, respectively, at September 30, 2022 and $10.2 million and $9.3 million, respectively, at December 31, 2021. 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 was $39.6 million, at September 30, 2022 and the fair value of the assets was $7.4 million, at December 31, 2021.
Foreign exchange derivative assets and liabilities — valued using quoted forward foreign exchange prices at the reporting date. Fair value of assets and liabilities at September 30, 2022 was $0.1 million and $54.7 million, respectively. The fair value of assets and liabilities at December 31, 2021 was $1.9 million and $7.0 million, respectively.
Commodity swap agreements — valued using quoted forward commodity prices at the reporting date. Fair value of the liabilities at September 30, 2022 was $9.3 million. The fair value of the assets and liabilities at December 31, 2021 was $0.9 million and $2.3 million, respectively.

12


 

Counterparties to the above contracts are highly rated financial institutions, none of which experienced any significant downgrades in the three months ended September 30, 2022 that would reduce the receivable amount owed, if any, to the Company.

Liabilities classified as Level 3 — At September 30, 2022 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 8 — 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, 2022 and 2021:

 

 

 

Quarter Ended September 30,

 

 

Nine Months Ended September 30,

 

(In millions)

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Consolidated Net Sales

 

$

364.7

 

 

$

333.8

 

 

$

1,148.3

 

 

$

964.4

 

Commercial Aerospace

 

 

209.1

 

 

 

167.2

 

 

 

655.6

 

 

 

468.5

 

Space & Defense

 

 

108.6

 

 

 

110.4

 

 

 

338.7

 

 

 

329.0

 

Industrial

 

 

47.0

 

 

 

56.2

 

 

 

154.0

 

 

 

166.9

 

 

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, 2022 was as follows:

 

(In millions)

 

Composite Material

 

 

Engineered Products

 

 

Total

 

Balance at December 31, 2021

 

$

6.8

 

 

$

23.7

 

 

$

30.5

 

Net revenue billed

 

 

0.6

 

 

 

1.4

 

 

 

2.0

 

Balance at March 31, 2022

 

$

7.4

 

 

$

25.1

 

 

$

32.5

 

Net revenue billed

 

 

0.2

 

 

 

(2.6

)

 

 

(2.4

)

Balance at June 30, 2022

 

$

7.6

 

 

$

22.5

 

 

$

30.1

 

Net revenue billed

 

 

1.0

 

 

 

1.8

 

 

 

2.8

 

Balance at September 30, 2022

 

$

8.6

 

 

$

24.3

 

 

$

32.9

 

 

Accounts receivable, net, includes amounts billed to customers where the right to payment is unconditional.

 

 

Note 9 — Segment Information

The financial results for our operating segments are prepared using a management approach, which is consistent with the basis and manner in which we internally segregate financial information for the purpose of assisting in making internal operating decisions. We evaluate the performance of our operating segments based on operating income, and generally account for intersegment sales

13


 

based on arm’s length prices. Corporate and certain other expenses are not allocated to the operating segments, except to the extent that the expense can be directly attributable to the business segment.

Financial information for our operating segments for the quarters and nine months ended September 30, 2022 and 2021 were as follows:

 

 

 

(Unaudited)

 

 

 

Composite

 

 

Engineered

 

 

Corporate &

 

 

 

 

(In millions)

 

Materials

 

 

Products

 

 

Other (a)

 

 

Total

 

Quarter Ended September 30, 2022

 

 

 

 

 

 

 

 

 

 

 

 

Net sales to external customers

 

$

293.5

 

 

$

71.2

 

 

$

 

 

$

364.7

 

Intersegment sales

 

 

15.4

 

 

 

0.7

 

 

 

(16.1

)

 

 

 

Total sales

 

$

308.9

 

 

$

71.9

 

 

$

(16.1

)

 

$

364.7

 

Other operating expense

 

 

0.4

 

 

 

-

 

 

 

 

 

 

0.4

 

Operating income

 

 

41.4

 

 

 

6.0

 

 

 

(6.6

)

 

 

40.8

 

Depreciation and amortization

 

 

27.5

 

 

 

3.5

 

 

 

 

 

 

31.0

 

Stock-based compensation

 

 

1.0

 

 

 

0.3

 

 

 

1.1

 

 

 

2.4

 

Accrual basis additions to capital expenditures

 

 

17.9

 

 

 

2.8

 

 

 

0.1

 

 

 

20.8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter Ended September 30, 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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2022

 

 

 

 

 

 

 

 

 

 

 

 

Net sales to external customers

 

$

925.4

 

 

$

222.9

 

 

$

 

 

$

1,148.3

 

Intersegment sales

 

 

50.4

 

 

 

2.0

 

 

 

(52.4

)

 

 

 

Total sales

 

$

975.8

 

 

$

224.9

 

 

$

(52.4

)

 

$

1,148.3

 

Other operating (income) expense

 

 

1.6

 

 

 

0.1

 

 

 

(19.4

)

 

 

(17.7

)

Operating income (loss)

 

 

131.2

 

 

 

25.7

 

 

 

(22.2

)

 

 

134.7

 

Depreciation and amortization

 

 

84.2

 

 

 

10.6

 

 

 

0.1

 

 

 

94.9

 

Stock-based compensation

 

 

4.5

 

 

 

1.3

 

 

 

9.4

 

 

 

15.2

 

Accrual basis additions to capital expenditures

 

 

42.5

 

 

 

6.5

 

 

 

0.1

 

 

 

49.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 (income) 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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(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, 2021

 

$

93.4

 

 

$

174.1

 

 

$

267.5

 

Amortization expense

 

 

(0.4

)

 

 

(1.3

)

 

 

(1.7

)

Currency translation adjustments

 

 

(10.2

)

 

 

(2.5

)

 

 

(12.7

)

Balance at September 30, 2022

 

$

82.8

 

 

$

170.3

 

 

$

253.1

 

 

14


 

 

At September 30, 2022, the balance of goodwill and intangible assets was $183.4 million and $69.7 million, respectively.

 

Note 10 — 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, 2022 and December 31, 2021 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, 2021

 

$

(61.7

)

 

$

(3.1

)

 

$

(61.7

)

 

$

(126.5

)

Other comprehensive income (loss) before reclassifications

 

 

11.1

 

 

 

(25.6

)

 

 

(88.7

)

 

 

(103.2

)

Amounts reclassified from accumulated other comprehensive
loss

 

 

1.3

 

 

 

(20.7

)

 

 

 

 

(19.4

)

Other comprehensive income (loss)

 

 

12.4

 

 

 

(46.3

)

 

 

(88.7

)

 

 

(122.6

)

Balance at September 30, 2022

 

$

(49.3

)

 

$

(49.4

)

 

$

(150.4

)

 

$

(249.1

)

 

 

(1)
Includes forward foreign exchange contracts, interest rate derivatives and commodity swaps.

 

The amount of net (gains) losses reclassified to earnings from the unrecognized net defined benefit and postretirement plan costs and derivative products components of accumulated other comprehensive loss for the quarter and nine months ended September 30, 2022, were as follows:

 

 

 

Quarter Ended September 30, 2022

 

 

Nine Months Ended September 30, 2022

 

(In millions)

 

Pre-tax (gain) loss

 

 

Net of tax (gain) loss

 

 

Pre-tax (gain) loss

 

 

Net of tax (gain) loss

 

Defined Benefit and Postretirement Plan Costs

 

$

0.6

 

 

$

0.5

 

 

$

1.7

 

 

$

1.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative Products

 

 

 

 

 

 

 

 

 

 

 

 

  Foreign currency forward exchange contracts

 

 

6.2

 

 

 

4.8

 

 

 

10.5

 

 

 

7.9

 

  Commodity swaps

 

 

0.9

 

 

 

0.7

 

 

 

(0.2

)

 

 

(0.1

)

  Interest rate swaps

 

 

(31.9

)

 

 

(24.6

)

 

 

(36.9

)

 

 

(28.5

)

Total Derivative Products

 

$

(24.8

)

 

$

(19.1

)

 

$

(26.6

)

 

$

(20.7

)

 

 

Note 11 — 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 the hazardous waste at issue, and the number of other financially viable PRPs at each site, that our liability in connection with such environmental matters will not be material.

15


 

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. 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 PRPs for the lower eight miles of the Lower Passaic River. In December 2020, the allocator issued its non-binding report on PRP liability (including Hexcel’s) to the EPA. 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.

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, 2022 and December 31, 2021, our aggregate environmental related accruals were $0.9 million and $2.1 million, respectively. These amounts are included in non-current liabilities with the exception of $0.1 million at December 31, 2021 which was included in accrued liabilities.

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, 2022, and accrued warranty cost, included in “accrued liabilities” in the Condensed Consolidated Balance Sheets at September 30, 2022 and December 31, 2021, were as follows:

 

 

 

Product

 

(In millions)

 

Warranties

 

Balance as of December 31, 2021

 

$

2.5

 

Warranty expense

 

 

1.2

 

Deductions and other

 

 

(0.5

)

Balance as of March 31, 2022

 

$

3.2

 

Warranty expense

 

 

0.5

 

Deductions and other

 

 

(0.8

)

Balance as of June 30, 2022

 

$

2.9

 

Warranty expense

 

 

(0.1

)

Deductions and other

 

 

(0.3

)

Balance as of September 30, 2022

 

$

2.5

 

 

 

16


 

 

 

Note 12 — Restructuring

 

We recognized restructuring charges of $0.4 million and $1.5 million for the quarter and nine months ended September 30, 2022, respectively, primarily related to severance. Anticipated future cash payments as of September 30, 2022 were $2.6 million.

 

 

 

 

 

 

Activity for the Quarter Ended September 30, 2022

 

 

 

 

 

June 30,

 

 

Restructuring

 

 

 

 

 

Cash

 

 

 

 

 

September 30,

 

(In millions)

2022

 

 

Charge

 

 

FX Impact

 

 

Paid

 

 

Non-Cash

 

 

2022

 

Employee termination

$

2.8

 

 

$

0.4

 

 

$

(0.1

)

 

$

(0.5

)

 

$

 

 

$

2.6

 

Impairment and other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

$

2.8

 

 

$

0.4

 

 

$

(0.1

)

 

$

(0.5

)

 

$

 

 

$

2.6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Activity for the Nine Months Ended September 30, 2022

 

 

 

 

 

December 31,

 

 

Restructuring

 

 

 

 

 

Cash

 

 

 

 

 

September 30,

 

(In millions)

2021

 

 

Charge

 

 

FX Impact

 

 

Paid

 

 

Non-Cash

 

 

2022

 

Employee termination

$

9.0

 

 

$

1.4

 

 

$

(0.4

)

 

$

(7.4

)

 

$

 

 

$

2.6

 

Impairment and other

 

 

 

 

0.1

 

 

 

 

 

 

(0.1

)

 

 

 

 

 

 

Total

$

9.0

 

 

$

1.5

 

 

$

(0.4

)

 

$

(7.5

)

 

$

 

 

$

2.6

 

 

 

17


 

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Business Overview

We develop, manufacture, and market lightweight, high-performance structural materials, including carbon fibers, specialty reinforcements, prepregs and other fiber-reinforced matrix materials, honeycomb, adhesives, radio frequency/electromagnetic interference (“RF/EMI”) and microwave absorbing materials, engineered honeycomb and composite structures, for use in Commercial Aerospace, Space & Defense, and Industrial markets. We propel the future of flight, energy generation, transportation, and recreation through excellence in providing innovative high-performance material solutions that are lighter, stronger and tougher, helping to create a better world for us all.

We serve international markets through manufacturing facilities, sales offices and representatives located in the Americas, Asia Pacific, Europe, India, and Africa. We also have a presence in Malaysia where we are a partner in a joint venture which manufactures composite structures for Commercial Aerospace applications.

We are a manufacturer of products within a single industry: Advanced Composites. We have two reportable segments: Composite Materials and Engineered Products. The Composite Materials segment is comprised of our carbon fiber, specialty reinforcements, resin systems, prepregs and other fiber-reinforced matrix materials, and honeycomb core product lines and pultruded profiles. The Engineered Products segment is comprised of lightweight high strength composite structures, RF/EMI and microwave absorbing materials, engineered core and specialty machined honeycomb products with added functionality and thermoplastic additive manufacturing.

The Commercial Aerospace market began to see signs of recovery from the economic impacts of the COVID-19 pandemic in the second half of 2021 which has continued into the third quarter of 2022 with further growth in air travel and an increase in aircraft build rates. Despite this recovery, global logistics, supply chains, and inflationary pressures still remain a challenge. These challenges have had and may continue to have further negative impacts on our operations, supply chain, transportation networks and customers, all of which have and may continue to compress our financial results.

We are also continuing to monitor developments in the ongoing conflict between Russia and Ukraine including the related export controls and sanctions imposed on Russia by the U.S. and other countries. Although we are not experiencing direct material adverse effects upon our business, the global implications of the Russian/Ukraine conflict which include increased inflation, escalating energy costs, constrained raw material availability, and thus increasing costs, as well as embargos on flights from Russian airlines are impacting the global economy and the aerospace industry in particular.

 

Financial Overview

Results of Operations

 

 

 

Quarter Ended September 30,

 

 

Nine Months Ended September 30,

 

(In millions, except per share data)

 

2022

 

 

2021

 

 

% Change

 

 

2022

 

 

2021

 

 

% Change

 

Net sales

 

$

364.7

 

 

$

333.8

 

 

 

9.3

%

 

$

1,148.3

 

 

$

964.4

 

 

 

19.1

%

Net sales change in constant currency

 

 

 

 

 

 

 

 

12.2

%

 

 

 

 

 

 

 

 

21.7

%

Operating income

 

$

40.8

 

 

$

22.8

 

 

 

78.9

%

 

$

134.7

 

 

$

28.8

 

 

 

367.7

%

As a percentage of net sales

 

 

11.2

%

 

 

6.8

%

 

 

 

 

 

11.7

%

 

 

3.0

%

 

 

 

Net income (loss)

 

 

26.8

 

 

 

9.0

 

 

 

197.8

%

 

 

89.3

 

 

 

(2.8

)

 

 

3,289.3

%

Diluted net income (loss) per common share

 

$

0.31

 

 

$

0.11

 

 

 

181.8

%

 

$

1.05

 

 

$

(0.03

)

 

 

3,600.0

%

 

 

 

18


 

 

Net Sales

 

The following table summarizes net sales to third-party customers by segment and end market for the quarters and nine months ended September 30, 2022 and 2021:

 

 

 

Quarter Ended September 30,

 

 

Nine Months Ended September 30,

 

(In millions)

 

2022

 

 

2021

 

 

% Change

 

 

2022

 

 

2021

 

 

% Change

 

Consolidated Net Sales

 

$

364.7

 

 

$

333.8

 

 

 

9.3

%

 

$

1,148.3

 

 

$

964.4

 

 

 

19.1

%

Commercial Aerospace

 

 

209.1

 

 

 

167.2

 

 

 

25.1

%

 

 

655.6

 

 

 

468.5

 

 

 

39.9

%

Space & Defense

 

 

108.6

 

 

 

110.4

 

 

 

(1.6

)%

 

 

338.7

 

 

 

329.0

 

 

 

2.9

%

Industrial

 

 

47.0

 

 

 

56.2

 

 

 

(16.4

)%

 

 

154.0

 

 

 

166.9

 

 

 

(7.7

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Composite Materials

 

$

293.5

 

 

$

254.1

 

 

 

15.5

%

 

$

925.4

 

 

$

732.2

 

 

 

26.4

%

Commercial Aerospace

 

 

177.2

 

 

 

125.6

 

 

 

41.1

%

 

 

554.0

 

 

 

354.5

 

 

 

56.3

%

Space & Defense

 

 

70.2

 

 

 

73.5

 

 

 

(4.5

)%

 

 

220.7

 

 

 

214.3

 

 

 

3.0

%

Industrial

 

 

46.1

 

 

 

55.0

 

 

 

(16.2

)%

 

 

150.7

 

 

 

163.4

 

 

 

(7.8

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Engineered Products

 

$

71.2

 

 

$

79.7

 

 

 

(10.7

)%

 

$

222.9

 

 

$

232.2

 

 

 

(4.0

)%

Commercial Aerospace

 

 

31.9

 

 

 

41.6

 

 

 

(23.3

)%

 

 

101.6

 

 

 

114.0

 

 

 

(10.9

)%

Space & Defense

 

 

38.4

 

 

 

36.9

 

 

 

4.1

%

 

 

118.0

 

 

 

114.7

 

 

 

2.9

%

Industrial

 

 

0.9

 

 

 

1.2

 

 

 

(25.0

)%

 

 

3.3

 

 

 

3.5

 

 

 

(5.7

)%

 

Sales by Segment

 

Composite Materials: Net sales of $293.5 million in the third quarter of 2022 increased by $39.4 million or 15.5% from the prior year quarter. Commercial Aerospace sales increased $51.6 million or 41.1% in the third quarter of 2022 as compared to the prior year quarter primarily due to stronger A350 and A320neo sales. Net sales of $925.4 million for the first nine months of 2022 increased by $193.2 million or 26.4% compared to the same period last year driven by continued strength in Commercial Aerospace sales.

 

Engineered Products: For the third quarter of 2022, net sales of $71.2 million decreased $8.5 million or 10.7% as compared to the prior year quarter. The decrease was primarily driven by lower Commercial Aerospace sales which were down $9.7 million or 23.3% in the third quarter of 2022 as compared to the same period in 2021. Net sales of $222.9 million for the first nine months of 2022 decreased $9.3 million or 4.0% lower compared to the same period last year due to lower Commercial Aerospace sales.

 

Sales by Market

 

Commercial Aerospace sales of $209.1 million increased $41.9 million or 25.1% (26.5% in constant currency) for the third quarter of 2022 compared to the third quarter of 2021 led by the Airbus A350 and A320neo programs. Other Commercial Aerospace, which includes business jets and regional aircraft, increased 69.5% for the third quarter of 2022 compared to the third quarter of 2021 led by growth in the Gulfstream and Dassault platforms. Sales of $655.6 million for the first nine months of 2022, increased 39.9% (41.1% in constant currency) compared to the first nine months of 2021 on higher narrowbody and Airbus A350 sales, partially offset by lower Boeing 787 sales. Sales of Other Commercial Aerospace, which includes business jets and regional aircraft, increased 71.8% for the first nine months of 2022 compared to the same period in 2021.

 

Space & Defense sales of $108.6 million decreased 1.6% (flat in constant currency) for the third quarter of 2022 compared to the third quarter of 2021 due to the impact of foreign exchange rates on European military and space sales. Sales of $338.7 million for the first nine months of 2022 increased 2.9% (4.7% in constant currency) compared to the first nine months of 2021 led by the CH-53K program, civil rotorcraft, and Space sales, including satellites, launchers and rocket motors.

 

Total Industrial sales in the third quarter of 2022 of $47.0 million decreased 16.4% (8.4% in constant currency) compared to the third quarter of 2021 as a result of lower wind energy sales. Total Industrial sales of $154.0 million for the nine months of 2022, decreased 7.7% (1.0% in constant currency) compared to the first nine months of 2021 as growth in automotive, recreation and other industrial markets was more than offset by lower wind energy sales.

 

 

19


 

Gross Margin

 

 

 

Quarter Ended September 30,

 

 

Nine Months Ended September 30,

 

(In millions)

 

2022

 

 

2021

 

 

% Change

 

 

2022

 

 

2021

 

 

% Change

 

Gross margin

 

$

81.8

 

 

$

66.0

 

 

 

23.9

%

 

$

258.0

 

 

$

181.0

 

 

 

42.5

%

Percentage of sales

 

 

22.4

%

 

 

19.8

%

 

 

 

 

 

22.5

%

 

 

18.8

%

 

 

 

 

Gross margin for the third quarter of 2022 was 22.4% compared to 19.8% in the third quarter of 2021 and was 22.5% and 18.8% for the first nine months of 2022 and 2021, respectively. The improvements in the gross margin for both the third quarter and first nine months of 2022 compared to the same periods last year was primarily due to the higher sales and greater capacity utilization which led to improved cost absorption.

 

Operating Expenses

 

 

 

Quarter Ended September 30,

 

 

Nine Months Ended September 30,

 

(In millions)

 

2022

 

 

2021

 

 

% Change

 

 

2022

 

 

2021

 

 

% Change

 

SG&A expense

 

$

29.0

 

 

$

32.0

 

 

 

(9.4

)%

 

$

107.2

 

 

$

102.7

 

 

 

4.4

%

Percentage of sales

 

 

8.0

%

 

 

9.6

%

 

 

 

 

 

9.3

%

 

 

10.6

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

R&T expense

 

$

11.6

 

 

$

10.4

 

 

 

11.5

%

 

$

33.8

 

 

$

33.5

 

 

 

0.9

%

Percentage of sales

 

 

3.2

%

 

 

3.1

%

 

 

 

 

 

2.9

%

 

 

3.5

%

 

 

 

 

Selling, general and administrative expenses were lower for the third quarter of 2022 by $3.0 million as compared to the same period in 2021 driven by lower employee-related costs. Research and technology expenses for the third quarter of 2022 were $1.2 million higher than the prior year quarter primarily due to increases in materials and supplies and travel. Selling, general and administrative expenses were higher for the first nine months of 2022 compared to the same period in 2021, although lower as a percentage of sales, primarily due to higher employee-related costs which reflect the increase in global headcount. Research and technology expenses for the first nine months of 2022 were relatively flat compared to the prior year.

 

Operating Income

 

 

 

Quarter Ended September 30,

 

 

Nine Months Ended September 30,

 

(In millions)

 

2022

 

 

2021

 

 

% Change

 

 

2022

 

 

2021

 

 

% Change

 

Consolidated operating income

 

$

40.8

 

 

$

22.8

 

 

 

78.9

%

 

$

134.7

 

 

$

28.8

 

 

 

367.7

%

Operating margin

 

 

11.2

%

 

 

6.8

%

 

 

 

 

 

11.7

%

 

 

3.0

%

 

 

 

Composite Materials

 

 

41.4

 

 

 

30.0

 

 

 

38.0

%

 

 

131.2

 

 

 

61.9

 

 

 

112.0

%

Operating margin

 

 

13.4

%

 

 

11.1

%

 

 

 

 

 

13.4

%

 

 

8.0

%

 

 

 

Engineered Products

 

 

6.0

 

 

 

6.5

 

 

 

(7.7

)%

 

 

25.7

 

 

 

17.1

 

 

 

50.3

%

Operating margin

 

 

8.3

%

 

 

8.1

%

 

 

 

 

 

11.4

%

 

 

7.3

%

 

 

 

Corporate & Other

 

 

(6.6

)

 

 

(13.7

)

 

N/M

 

 

 

(22.2

)

 

 

(50.2

)

 

 

55.8

%

 

Operating income for the third quarters of 2022 and 2021 was $40.8 million and $22.8 million, respectively. Operating income for the first nine months of 2022 was $134.7 million compared to $28.8 million for the same period last year. The increase in operating income for the third quarter of 2022 over the same period last year was primarily driven by higher sales and strong gross margins. The increase in operating income for the first nine months of 2022 as compared to the same period in 2021 was also due to higher sales and strong gross margins as well as the gain on the sale of our Dublin, California facility and lower restructuring costs.

 

Interest Expense, Net

 

 

 

Quarter Ended September 30,

 

 

Nine Months Ended September 30,

 

(In millions)

 

2022

 

 

2021

 

 

% Change

 

 

2022

 

 

2021

 

 

% Change

 

Interest expense, net

 

$

9.0

 

 

$

9.5

 

 

 

(5.3

)%

 

$

27.0

 

 

$

29.1

 

 

 

(7.2

)%

 

Interest expense for both the quarter and nine months ended September 30, 2022 was lower compared to the prior year periods due to lower average debt levels, partially offset by higher interest rates.

 

 

20


 

Provision for Income Taxes

 

 

 

Quarter Ended September 30,

 

 

Nine Months Ended September 30,

 

(In millions)

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Income tax expense

 

$

6.8

 

 

$

5.1

 

 

$

24.2

 

 

$

1.6

 

Effective tax rate

 

 

21.4

%

 

 

38.3

%

 

 

22.4

%

 

N/M

 

 

The tax expense for the quarter ended September 30, 2022 was $6.8 million compared to $5.1 million for the third quarter of 2021. The quarter ended September 30, 2022 included a discrete tax charge of $1.3 million resulting from the true-up of a deferred tax item. The quarter ended September 30, 2021 included a discrete tax charge of $1.3 million related to the remeasurement of the net state deferred tax liabilities. The tax expense for the first nine months ended September 30, 2022 was $24.2 million compared to $1.6 million for the same period of 2021. The tax expense for the nine months ended September 30, 2021 included a net discrete tax charge of $0.8 million resulting from the revaluation of U.S. and foreign deferred tax liabilities.

 

Financial Condition

Liquidity: Cash on hand at September 30, 2022 was $90.9 million as compared to $127.7 million at December 31, 2021. As of September 30, 2022, total debt was $797.3 million as compared to $823.3 million at December 31, 2021.

 

In September 2020, we amended our Facility to allow for relief from certain terms, including adjusting the maximum leverage ratio covenant for a defined period. On January 28, 2021, we entered into the Second Amendment, which further amended the Facility agreement to provide that, from January 28, 2021 through and including March 31, 2022, we would not be subject to a maximum leverage ratio covenant but instead be required to maintain Liquidity (as defined in the Facility agreement) of at least $250 million. Effective April 1, 2022, the original terms and conditions to the Facility agreement were reinstated except the borrowing capacity which remained at $750 million. Share repurchases restrictions that had been in effect per the Second Amendment expired on March 31, 2022. The remaining authorization under the share repurchase program at September 30, 2022 was $217 million.

 

As of September 30, 2022, total borrowings under the Facility were $99 million, which approximated 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, 2022, there were no issued letters of credit under the Facility, resulting in undrawn availability under the Facility of $651 million. The weighted average interest rate for the Facility was 4.4% for the nine months ended September 30, 2022.

We expect to meet our short-term liquidity requirements (including capital expenditures) through net cash from operating activities, cash on hand and the Facility. As of September 30, 2022, long-term liquidity requirements consist primarily of obligations under our long-term debt obligations. We do not have any significant required debt repayments until June 2024 when the Facility expires.

 

In 2021, the Company applied for the Aviation Manufacturing Jobs Protection ("AMJP") program, created under the American Rescue Plan Act of 2021, which provides funding to eligible businesses to pay up to half of their compensation costs for certain categories of employees, for up to six months. To qualify for funding, eligible companies must have involuntarily furloughed or laid off at least 10% of its U.S. workforce or have experienced at least a 15% decline in 2020 global operating revenue. In September 2021, the U.S. Department of Transportation announced that it had approved for the Company to receive up to $20.9 million under the AMJP program. The Company received $10.5 million of the offered funds in the fourth quarter of 2021 and anticipates receiving the remaining funds in 2022.

 

On October 24, 2022, our Board of Directors declared a quarterly dividend of $0.10 per share payable to stockholders of record as of November 4, 2022, with a payment date of November 14, 2022.

Operating Activities: Net cash provided by operating activities for the first nine months of 2022 was $56.4 million compared to $64.2 million for the same period last year. Working capital was a cash use of $115.0 million for the first nine months of 2022 compared to a use of $46.0 million in the same period in 2021 primarily driven by higher inventory and accounts receivable to support higher sales.

 

21


 

Investing Activities: Net cash used for investing activities was $36.6 million and $15.0 million in the first nine months of 2022 and 2021, respectively. The first nine months of 2022 included net proceeds of approximately $21.2 million from the sale of our Dublin, California facility. Capital expenditures for the first nine months of 2022 were $58.3 million compared to $15.0 million in the same period in 2021. The increase in capital expenditures is primarily driven by two ongoing construction projects for the previously announced construction of a research and technology innovation center in Salt Lake City, Utah. and the expansion of Hexcel’s facility in Morocco.

Financing Activities: Net cash used for financing activities was $48.6 million for first nine months of 2022 compared to $44.8 million in the same period in 2021. Borrowings under the Facility during the first nine months of 2022 were $35.0 million, while repayments were $61.0 million compared to $49.0 million in the prior year. In the first quarter of 2022, we reinstated our quarterly dividend payment, which had previously been suspended as of early 2020. $25.3 million in dividend payments were made to shareholders during the first nine months of 2022.

Financial Obligations and Commitments: The next significant scheduled debt maturity will not occur until 2024, when the Facility matures. Certain sales and administrative offices, data processing equipment and manufacturing facilities are leased under operating leases.

Critical Accounting Estimates

Our Condensed Consolidated Financial Statements are prepared in accordance with U.S. GAAP. In connection with the preparation of our financial statements, we are required to make assumptions and estimates about future events, and apply judgments that affect reported amounts of assets, liabilities, revenues, expenses and related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends and other factors management believes to be relevant at the time our Condensed Consolidated Financial Statements are prepared. On a regular basis, management reviews accounting policies, assumptions, estimates and judgments to ensure our financial statements are presented fairly and in accordance with U.S. GAAP. However, because future events and their effects cannot be determined with certainty, actual results may differ from our assumptions and estimates, and such differences could be material.

We describe our significant accounting policies and critical accounting estimates in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.

 

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 resulting from such matters based upon 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. We believe we have adequately accrued for these potential liabilities; however, facts and circumstances may change, such as new developments, or a change in approach, including a change in settlement strategy or in an environmental remediation plan, or in our existing insurance coverage, that could cause the actual liability to exceed the estimates, or may require adjustments to the recorded liability balances in the future. For further discussion, see Note 11, Commitments and Contingencies, to the accompanying Condensed Consolidated Financial Statements of this Form 10-Q.

Non-GAAP Financial Measures

The Company uses non-GAAP financial measures, including sales and expenses measured in constant dollars (prior year sales and expenses measured at current year exchange rates); operating income, net income and earnings per share adjusted for items included in operating expense and non-operating expenses; and free cash flow. Management believes these non-GAAP measures are meaningful to investors because they provide a view of Hexcel with respect to ongoing operating results and comparisons to prior periods. These adjustments can represent significant charges or credits that we believe are important to an understanding of Hexcel’s overall operating results in the periods presented. Such non-GAAP measures are not determined in accordance with generally accepted accounting principles and should not be viewed in isolation or as an alternative to or substitutes for GAAP measures of performance. Our calculation of these measures may not be comparable to similarly titled measures used by other companies, and the measures exclude financial information that some may consider important in evaluating our performance. Reconciliations to adjusted operating income, adjusted net income, adjusted diluted net income per share and free cash flow are provided below.

 

22


 

 

 

Operating Income

 

 

Quarter Ended September 30,

 

 

Nine Months Ended September 30,

 

(In millions)

2022

 

 

2021

 

 

2022

 

 

2021

 

GAAP operating income

 

$

40.8

 

 

 

$

22.8

 

 

$

134.7

 

 

$

28.8

 

Other operating expense (income) (a)

 

 

0.4

 

 

 

 

0.8

 

 

 

(17.7

)

 

 

16.0

 

Adjusted operating income (non-GAAP)

 

$

41.2

 

 

 

$

23.6

 

 

$

117.0

 

 

$

44.8

 

 

 

 

 

Quarter Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

(In millions, except per diluted share data)

 

Net Income

 

 

Diluted Net Income Per Share

 

 

Net income

 

 

Diluted Net Income Per Share

 

 

Net Income

 

 

Diluted Net Income Per Share

 

 

Net (Loss) Income

 

 

Diluted Net (Loss) Income Per Share

 

GAAP net income (loss)

 

$

26.8

 

 

$

0.31

 

 

$

9.0

 

 

$

0.11

 

 

$

89.3

 

 

$

1.05

 

 

$

(2.8

)

 

$

(0.03

)

Other operating expense (income), net of tax (a)

 

 

0.3

 

 

 

-

 

 

 

0.7

 

 

 

-

 

 

 

(15.2

)

 

 

(0.19

)

 

 

11.7

 

 

 

0.14

 

Other income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(0.3

)

 

 

-

 

 

 

-

 

 

 

-

 

Tax expense (b)

 

 

1.3

 

 

 

0.02

 

 

 

1.3

 

 

 

0.02

 

 

 

1.3

 

 

 

0.02

 

 

 

0.8

 

 

 

-

 

Adjusted net income (non-GAAP)

 

$

28.4

 

 

$

0.33

 

 

$

11.0

 

 

$

0.13

 

 

$

75.1

 

 

$

0.88

 

 

$

9.7

 

 

$

0.11

 

 

(a)
The nine months ended September 30, 2022 included the net gain of $19.4 million from the sale of the Dublin, California facility and both the quarter and nine months ended September 30, 2022 included restructuring costs. The quarter and nine months ended September 30, 2021 included restructuring costs primarily related to severance and the nine months ended September 30, 2021 also included a benefit related to the reduction of a contingent liability.
(b)
The quarter and nine months ended September 30, 2022 included a discrete tax charge of $1.3 million resulting from the true-up of a deferred tax item. The quarter ended September 30, 2021 included a discrete tax charge of $1.3 million related to the remeasurement of net state deferred tax liabilities. The nine months ended September 30, 2021 included a net discrete tax charge of $0.8 million primarily resulting from the revaluation of U.S. and foreign deferred tax liabilities..

 

 

 

Nine Months Ended September 30,

 

(In millions)

 

2022

 

 

2021

 

Net cash used for operating activities

 

$

56.4

 

 

$

64.2

 

Less: Capital expenditures

 

 

(58.3

)

 

 

(15.0

)

Free cash flow (non-GAAP)

 

$

(1.9

)

 

$

49.2

 

 

Forward-Looking Statements

This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to analyses and other information that are based on forecasts of future results and estimates of amounts not yet determinable. These statements also relate to future prospects, developments and business strategies. These forward-looking statements are identified by their use of terms and phrases such as “anticipate,” “believe,” "foresee" “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should," "seek," “target,” “would,” “will” and similar terms and phrases, including references to assumptions. Such statements are based on current expectations, are inherently uncertain and are subject to changing assumptions.

Such forward-looking statements include, but are not limited to: (a) the estimates and expectations based on aircraft production rates provided by Airbus, Boeing and others; (b) the revenues we may generate from an aircraft model or program; (c) the impact of the push-out in deliveries of the Airbus and Boeing backlog and the impact of delays in the startup or ramp-up of new aircraft programs or the final Hexcel composite material content once the design and material selection have been completed; (d) expectations with regard to regulatory clearances or the build rate of the Boeing 737 MAX or Boeing 787 and the related impact on our revenues; (e) expectations with regard to raw material cost and availability; (f) expectations of composite content on new commercial aircraft programs and our share of those requirements; (g) expectations regarding revenues from space and defense applications, including whether certain programs might be curtailed or discontinued; (h) expectations regarding sales for wind energy, recreation, automotive and other industrial applications; (i) expectations regarding working capital trends and expenditures and inventory levels; (j) expectations as to the level of capital expenditures and completion of capacity expansions and qualification of new products; (k)

23


 

expectations regarding our ability to improve or maintain margins; (l) expectations regarding the outcome of legal matters or the impact of changes in laws or regulations or government policies; (m) our projections regarding our tax rate; (n) expectations with regard to the continued impact of the COVID-19 pandemic and the impact of the conflict between Russia and Ukraine on worldwide air travel and aircraft programs, as well as on our customers and suppliers and, in turn, on our operations and financial results; (o) expectations regarding our strategic initiatives and other goals, including, but not limited to, our sustainability goals; (p) expectations regarding the sale of certain of our assets; and (q) the anticipated impact of the above factors and various market risks on our expectations of financial results for 2022 and beyond.

Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results to be materially different. Such factors include, but are not limited to, the following: the impact of the COVID-19 pandemic (including continued disruption in global financial markets and supply chains, ongoing restrictions on movement and travel, employee absenteeism and labor shortages, and reduced demand for air travel) on the operations, business and financial condition of Hexcel and its customers and suppliers; reductions in sales to any significant customers, particularly Airbus or Boeing, including related to the timing of pending regulatory clearances for the Boeing 737 MAX and the Boeing 787, as well as due to the impact of the COVID-19 pandemic; our ability to effectively adjust production and inventory levels to align with customer demand; our ability to effectively motivate, retain and hire the necessary workforce; our ability to successfully implement or realize our business strategies, plans, goals and objectives of management, including our sustainability goals and any restructuring or alignment activities in which we may engage; the impact of any government mandated COVID-19 precautions, including mandatory vaccination; changes in sales mix; changes in current pricing and cost levels, including cost inflation, as well as increasing energy prices resulting from the conflict between Russia and Ukraine; changes in aerospace delivery rates; changes in government defense procurement budgets; changes in military aerospace program technology; timely new product development or introduction; industry capacity; increased competition; availability and cost of raw materials, including the impact of supply shortages and inflation; supply chain disruptions, which may be exacerbated by the conflict between Russia and Ukraine; inability to install, staff and qualify necessary capacity or complete capacity expansions to meet customer demand; cybersecurity-related risks, including the potential impact of breaches or intrusions; currency exchange rate fluctuations; changes in political, social and economic conditions, including, but not limited to, the effect of change in global trade policies, such as sanctions imposed as a result of the conflict between Russia and Ukraine; work stoppages or other labor disruptions; our ability to successfully complete any strategic acquisitions, investments or dispositions; compliance with environmental, health, safety and other related laws and regulations, including those related to climate change; the effects of natural disasters, which may be worsened by the impact of climate change, and other severe catastrophic events; the potential impact of environmental, social and governance matters; and the unexpected outcome of legal matters or impact of changes in laws or regulations.

Although we believe that these forward-looking statements are based on reasonable assumptions, you should be aware that many factors could affect our actual results of operations and could cause actual results to differ materially from those expressed in the forward-looking statements. As a result, the foregoing factors should not be construed as exhaustive and should be read together with other cautionary statements included in this and other reports we file with the SEC. For additional information regarding certain factors that may cause our actual results to differ from those expected or anticipated, see the information under the caption “Risk Factors,” which is located in Item 1A of Part I of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021. We do not undertake any obligation to update our forward-looking statements or risk factors to reflect future events or circumstances, except as otherwise required by law.

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

Except for the continued broad effects of COVID-19 and the Russian/Ukraine conflict on market risk, there have been no material changes in our market risk from the information provided in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

 

ITEM 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our Chief Executive Officer and Chief Financial Officer have evaluated our disclosure controls and procedures as of September 30, 2022, and with the participation of the Company's management have concluded that these disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. These disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file or submit is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

24


 

Changes in Internal Control over Financial Reporting

Our Chief Executive Officer and Chief Financial Officer have concluded that there have not been any changes in our internal control over financial reporting during the three months ended September 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

PART II. OTHER INFORMATION

 

ITEM 1. Legal Proceedings

The information required by Item 1 is contained within Note 11 on pages 15 through 16 of this Form 10-Q and is incorporated herein by reference.

ITEM 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021, which could materially affect our business, financial condition or future results. There have been no material changes in the Company's risk factors from the aforementioned Form 10-K.

ITEMS 2, 3, 4, and 5 are not applicable, and therefore have been omitted.

 

25


 

ITEM 6. Exhibits

EXHIBIT INDEX

 

Exhibit No.

 

Description

10.1*

 

Form of Performance Based Award Agreement for Executive Officers (2022) (incorporated herein by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2022).

10.2*

 

Form of Performance Based Award Agreement for Non-U.S. Executive Officers (2022) (incorporated herein by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2022).

10.3*

 

Hexcel Corporation Director Compensation Program (incorporated herein by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2022).

10.4*

 

Separation Agreement for Robert G. Hennemuth (incorporated herein by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2022).

31.1

 

Certification of Chief Executive Officer, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

 

Certification of Chief Financial Officer, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32

 

Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)

101

 

 

The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30 31, 2022, formatted in Inline XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statements of Comprehensive Loss, (iv) Condensed Consolidated Statements of Cash Flows, (v) Condensed Consolidated Statements of Stockholders’ Equity, and (vi) Notes to Condensed Consolidated Financial Statements.

 

104

 

Cover Page Interactive Data File: the cover page XBRL tags are embedded within the Inline XBRL document and are contained within Exhibit 101.

 

* Indicates management contract or compensatory plan or arrangement

 

26


 

Signature

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

Hexcel Corporation

 

 

 

October 24, 2022

 

/s/ Amy S. Evans

(Date)

 

Amy S. Evans

 

 

Senior Vice President,

 

 

Chief Accounting Officer

 

27


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