hxl-10q_20200930.htm

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, 2020

☐	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

Preferred Share Purchase Rights

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 by 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 15, 2020
COMMON STOCK		83,535,720

HEXCEL CORPORATION AND SUBSIDIARIES

INDEX

			Page
PART I.	FINANCIAL INFORMATION

ITEM 1.	Condensed Consolidated Financial Statements (Unaudited)

	•	Condensed Consolidated Balance Sheets — September 30, 2020 and December 31, 2019	3

	•	Condensed Consolidated Statements of Operations — The quarter and nine months ended September 30, 2020 and 2019	4

	•	Condensed Consolidated Statements of Comprehensive Income — The quarter and nine months ended September 30, 2020 and 2019	4

	•	Condensed Consolidated Statements of Cash Flows — The nine months ended September 30, 2020 and 2019	5

	•	Condensed Consolidated Statements of Stockholders’ Equity — The quarter and nine months ended September 30, 2020 and 2019	6

	•	Notes to Condensed Consolidated Financial Statements	7

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		19

ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk		26

ITEM 4.	Controls and Procedures		26

PART II.	OTHER INFORMATION		26

ITEM 1.	Legal Proceedings		26

ITEM 1A.	Risk Factors		26

ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds		28

ITEM 6.	Exhibits		29

	SIGNATURE		30

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)	2020			2019
Assets
Current assets:
Cash and cash equivalents	$	68.0		$	64.4
Accounts receivable, net		149.9		227.6
Inventories, net		262.9		333.1
Contract assets		48.9		52.7
Prepaid expenses and other current assets		46.1		27.1
Total current assets		575.8			704.9

Property, plant and equipment		3,103.3			3,075.1
Less accumulated depreciation		(1,226.0	)		(1,132.3	)
Net property, plant and equipment		1,877.3			1,942.8

Goodwill and other intangible assets, net		276.6		280.4
Investments in affiliated companies		45.7		46.5
Other assets		196.7			154.0
Total assets	$	2,972.1		$	3,128.6

Liabilities and Stockholders' Equity
Current liabilities:
Short-term borrowings	$	0.5		$	9.5
Accounts payable		61.1		157.6
Accrued compensation and benefits		48.3		74.4
Accrued liabilities		65.6		81.1
Total current liabilities		175.5		322.6
Commitments and contingencies (see Note 12)
Long-term debt		998.7			1,050.6
Retirement obligations		55.5			53.3
Other non-current liabilities		243.0			256.0
Total liabilities		1,472.7			1,682.5
Stockholders' equity:
Common stock, $0.01 par value, 200.0 shares authorized, 109.6 shares and 109.3 shares issued at September 30, 2020 and December 31, 2019, respectively		1.1			1.1
Additional paid-in capital		845.1			829.9
Retained earnings		2,015.8			1,978.9
Accumulated other comprehensive loss		(85.2	)		(118.7	)
		2,776.8			2,691.2
Less – Treasury stock, at cost, 26.1 shares at September 30, 2020 and 25.7 shares at December 31, 2019, respectively.		(1,277.4	)		(1,245.1	)
Total stockholders' equity		1,499.4			1,446.1
Total liabilities and stockholders' equity	$	2,972.1		$	3,128.6

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

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)	2020			2019			2020			2019
Net sales	$	286.9		$	572.5		$	1,206.6		$	1,791.4
Cost of sales		273.4			414.6			997.3			1,297.5
Gross margin		13.5			157.9			209.3			493.9
Selling, general and administrative expenses		24.6			33.8			95.2			122.8
Research and technology expenses		10.7			14.2			36.0			43.3
Other operating expense		15.8			—			43.6			—
Operating income (loss)		(37.6	)		109.9			34.5			327.8
Interest expense, net		9.7			11.0			32.4			34.9
Income (loss) before income taxes, and equity in earnings from affiliated companies		(47.3	)		98.9			2.1			292.9
Provision for (benefit from) income taxes		(56.9	)		18.2			(48.7	)		62.4
Income before equity in earnings from affiliated companies		9.6			80.7			50.8			230.5
Equity in earnings (loss) from affiliated companies		0.1			(0.4	)		0.3			2.9
Net income	$	9.7		$	80.3		$	51.1		$	233.4
Basic net income per common share	$	0.12		$	0.94		$	0.61		$	2.74
Diluted net income per common share	$	0.12		$	0.93		$	0.61		$	2.71
Dividends per share	$	—		$	0.17		$	0.17		$	0.47
Weighted-average common shares:
Basic		83.8			85.1			83.7			85.1
Diluted		84.0			86.1			84.0			86.1

Hexcel Corporation and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income

	(Unaudited)						(Unaudited)
	Quarter Ended September 30,						Nine Months Ended September 30,
(In millions)	2020			2019			2020			2019
Net income	$	9.7		$	80.3		$	51.1		$	233.4
Currency translation adjustments		38.7			(33.1	)		22.7			(37.3	)
Net unrealized pension and other benefit actuarial gains (losses) and prior service credits (net of tax)		(1.0	)		0.3			(0.2	)		—
Net unrealized gains (losses) on financial instruments (net of tax)		15.1			(10.2	)		11.0			(15.8	)
Total other comprehensive income (loss)		52.8			(43.0	)		33.5			(53.1	)
Comprehensive income	$	62.5		$	37.3		$	84.6		$	180.3

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

Hexcel Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows

	(Unaudited)
	Nine Months Ended September 30,
(In millions)	2020			2019
Cash flows from operating activities
Net income	$	51.1		$	233.4
Reconciliation to net cash provided by operating activities:
Depreciation and amortization		106.0			107.1
Amortization related to financing		0.7			1.1
Deferred income taxes		(46.0	)		9.3
Equity in earnings from affiliated companies		(0.3	)		(2.9	)
Stock-based compensation		13.0			15.9
Merger and restructuring charges		43.6			—
Merger and restructuring cash payments		(30.3	)		—
Changes in assets and liabilities:
Decrease (increase) in accounts receivable		81.0			(29.5	)
Decrease (increase) in inventories		74.2			(56.8	)
Decrease (increase) in prepaid expenses and other current assets		1.5			(12.5	)
(Decrease) increase in accounts payable/accrued liabilities		(128.0	)		15.1
Other – net		(9.5	)		(2.9	)
Net cash provided by operating activities		157.0			277.3

Cash flows from investing activities
Capital expenditures		(47.8	)		(162.7	)
Acquisition of business		—			(163.2	)
Net cash used for investing activities		(47.8	)		(325.9	)

Cash flows from financing activities
Repayments of Euro term loan		(49.9	)		(9.0	)
Borrowing from senior unsecured credit facility - 2024		392.0			478.0
Repayment of senior unsecured credit facility - 2024		(403.0	)		(99.0	)
Borrowing from senior unsecured credit facility - 2021		—			345.0
Repayment of senior unsecured credit facility - 2021		—			(547.0	)
Repayment of finance lease obligation and other debt, net		(0.4	)		(0.6	)
Issuance costs related to senior credit facility		(1.3	)		(2.2	)
Dividends paid		(14.2	)		(39.9	)
Repurchase of stock		(24.6	)		(66.9	)
Activity under stock plans		(5.5	)		6.4
Net cash (used for) provided by financing activities		(106.9	)		64.8
Effect of exchange rate changes on cash and cash equivalents		1.3			(1.9	)
Net increase in cash and cash equivalents		3.6			14.3
Cash and cash equivalents at beginning of period		64.4			32.7
Cash and cash equivalents at end of period	$	68.0		$	47.0
Supplemental data:
Accrual basis additions to plant, property and equipment	$	39.4		$	160.9

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

Hexcel Corporation and Subsidiaries

Condensed Consolidated Statements of Stockholders’ Equity

For the Three and Nine Months ended September 30, 2020, and September 30, 2019

			Additional			Accumulated			Other						Total
			Paid-In			Retained			Comprehensive			Treasury			Stockholders’
(In millions)	Par		Capital			Earnings			Income (Loss)			Stock			Equity
Balance, December 31, 2018	$	1.1	$	798.3		$	1,726.5		$	(108.0	)	$	(1,095.9	)	$	1,322.0
Net income	—		—			72.2			—			—				72.2
Dividends paid on common stock	—		—				(12.7	)	—			—				(12.7	)
Change in other comprehensive income (loss) – net of tax	—		—			—				(5.9	)	—				(5.9	)
Stock based compensation	—			13.5		—			—				(5.5	)		8.0
Acquisition of treasury stock	—		—			—			—				(11.2	)		(11.2	)
Balance, March 31, 2019	$	1.1	$	811.8		$	1,786.0		$	(113.9	)	$	(1,112.6	)	$	1,372.4
Net income	—		—				80.9		—			—				80.9
Dividends paid on common stock	—		—				(12.8	)	—			—				(12.8	)
Change in other comprehensive income (loss) – net of tax	—		—			—				(4.2	)	—				(4.2	)
Stock based compensation	—			6.1		—			—			—				6.1
Balance, June 30, 2019	$	1.1	$	817.9		$	1,854.1		$	(118.1	)	$	(1,112.6	)	$	1,442.4
Net income	—		—				80.3		—			—				80.3
Dividends paid on common stock	—		—				(14.4	)	—			—				(14.4	)
Change in other comprehensive income (loss) – net of tax	—		—			—				(43.0	)	—				(43.0	)
Stock based compensation	—			8.8		—			—				(0.6	)		8.2
Acquisition of treasury stock	—		—			—			—				(55.7	)		(55.7	)
Balance, September 30, 2019	$	1.1	$	826.7		$	1,920.0		$	(161.1	)	$	(1,168.9	)	$	1,417.8


			Additional			Accumulated			Other						Total
			Paid-In			Retained			Comprehensive			Treasury			Stockholders’
(In millions)	Par		Capital			Earnings			Income (Loss)			Stock			Equity
Balance, December 31, 2019	$	1.1	$	829.9		$	1,978.9		$	(118.7	)	$	(1,245.1	)	$	1,446.1
Net income	—		—				42.4		—			—				42.4
Dividends paid on common stock	—		—				(14.2	)	—			—				(14.2	)
Change in other comprehensive income (loss) – net of tax	—		—			—				(36.6	)	—				(36.6	)
Stock based compensation	—			15.2		—			—				(7.2	)		8.0
Acquisition of treasury stock	—		—			—			—				(24.6	)		(24.6	)
Balance, March 31, 2020	$	1.1	$	845.1		$	2,007.1		$	(155.3	)	$	(1,276.9	)	$	1,421.1
Net loss	—		—				(1.0	)	—			—				(1.0	)
Change in other comprehensive income (loss) – net of tax	—		—			—				17.3		—				17.3
Stock based compensation	—			(0.5	)	—			—			—				(0.5	)
Balance, June 30, 2020	$	1.1	$	844.6		$	2,006.1		$	(138.0	)	$	(1,276.9	)	$	1,436.9
Net income	—		—				9.7		—			—				9.7
Change in other comprehensive income (loss) – net of tax	—		—			—				52.8		—				52.8
Stock based compensation	—			0.5		—			—				(0.5	)		0.0
Balance, September 30, 2020	$	1.1	$	845.1		$	2,015.8		$	(85.2	)	$	(1,277.4	)	$	1,499.4

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

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, 2019 for a discussion of our significant accounting policies.

Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared from the unaudited accounting records of Hexcel pursuant to rules and regulations of the Securities and Exchange Commission (“SEC”) and in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information. Certain information and footnote disclosures normally included in financial statements have been omitted pursuant to rules and regulations of the SEC. In the opinion of management, the condensed consolidated financial statements include all normal recurring adjustments as well as any non-recurring adjustments necessary to present fairly the statement of financial position, results of operations, cash flows and statement of stockholder’s equity for the interim periods presented. The condensed consolidated balance sheet as of December 31, 2019 was derived from the audited 2019 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 2019 Annual Report on Form 10-K.

Investments in Affiliated Companies

We have a 50% equity investment in Aerospace Composites Malaysia Sdn. Bhd. and a 25% equity investment in HexCut Services SAS. These investments are accounted for using the equity method of accounting.

Merger Termination

On January 12, 2020, we announced that we had entered into an agreement and plan of merger (the “Merger Agreement”) with Woodward, Inc. (“Woodward”), which provided for the combination of Hexcel and Woodward in an all stock merger of equals (the “Merger”). In response to the impact of the novel strain of coronavirus (“COVID-19”) pandemic, on April 5, 2020, Hexcel and Woodward entered into an agreement to terminate the Merger Agreement.

Recent Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2016-13, Financial Instruments – Credit Losses (Topic 326). The Accounting Standards Codification 326, Financial Instruments- Credit Losses (“ASC 326”) requires a financial asset measured at amortized cost basis to be presented at the net amount expected to be collected. We adopted the update, effective January 1, 2020, applying this standard to our Accounts Receivable and Contract Assets. Our high-quality credit review practice and good customer relationships has resulted in accounts receivable write offs below 0.5% of our annual sales. Due to the requirements of ASC 326, we have reviewed and refined our bad debt reserve process. Management reviews the average annual charge-off rate along with an assessment of current micro and macro-economic factors to determine any required reserves. If at any time management finds that there are significant changes to any of these contributing factors, the reserve will be adjusted accordingly. In the nine months ended September 30, 2020 we recorded $0.2 million of reserves and there were no write-offs against receivables resulting in a reserve balance of $0.8 million at September 30, 2020.

In August 2018, the FASB issued ASU No. 2018-14, Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20), which amends the current disclosure requirements regarding defined benefit pensions and other post retirement plans, and allows for the removal of certain disclosures, while adding certain new disclosure requirements. This standard is effective for fiscal years beginning after December 15, 2020 and allows for early adoption. We do not expect this new standard to have a significant impact to our disclosures.

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes which amends and aims to simplify accounting disclosure requirements regarding a number of topics including: intraperiod tax allocation, accounting for deferred taxes when there are changes in consolidation of certain investments, tax basis step up in an acquisition and the application of effective rate changes during interim periods, amongst other improvements. This standard is

effective for fiscal years beginning after December 15, 2020 and allows for early adoption. We are assessing the impact of this new standard on our consolidated balance sheets, statements of operations and our future disclosures.

Note 2 — Net Income Per Common Share

	Quarter Ended September 30,				Nine Months Ended September 30,
(In millions, except per share data)	2020		2019		2020		2019
Basic net income per common share:
Net income	$	9.7	$	80.3	$	51.1	$	233.4
Weighted average common shares outstanding		83.8		85.1		83.7		85.1

Basic net income per common share	$	0.12	$	0.94	$	0.61	$	2.74

Diluted net income per common share:
Net income		9.7		80.3		51.1		233.4

Weighted average common shares outstanding — Basic		83.8		85.1		83.7		85.1
Plus incremental shares from assumed conversions:
Restricted stock units		0.1		0.4		0.2		0.4
Stock options		0.1		0.6		0.1		0.6
Weighted average common shares outstanding — Dilutive		84.0		86.1		84.0		86.1

Diluted net income per common share	$	0.12	$	0.93	$	0.61	$	2.71

Total shares underlying stock options of 1.5 million and 0.9 million, were excluded from the computation of diluted net income per share for the three and nine months ended September 30, 2020, respectively, as they were anti-dilutive. Total shares underlying stock options of 0.1 million were excluded from the computation of diluted net income per share for both the three and nine months ended September 30, 2019, as they were anti-dilutive.

Rights Plan

On April 6, 2020, the Company declared a dividend of one preferred share purchase right (a “right”) for each outstanding share of the Company’s common stock and adopted a stockholder rights plan, as set forth in the rights agreement entered into as of April 6, 2020, between the Company and American Stock Transfer & Trust Company, LLC, as rights agent. The dividend was payable on April 16, 2020 to stockholders of record of the Company’s common stock on such date. In general, the rights plan works by imposing a significant penalty upon any person or group which acquires 15% or more of the outstanding common stock without the prior approval of the board. If the rights become exercisable, each right will allow its holder to purchase from the Company one one-hundredth of a share of Series A Junior Participating Preferred Stock for $150.00. This portion of a preferred share will give the stockholder approximately the same dividend, voting and liquidation rights as would one share of common stock. The rights will not be exercisable until ten days after the public announcement that a person or group has become an “acquiring person” (as defined in the rights agreement) by obtaining beneficial ownership of 15% or more of our outstanding common stock. Prior to exercise, the right does not give its holder any dividend, voting, or liquidation rights. The rights will expire on April 6, 2021. The rights were not exercisable at any time through September 30, 2020.

Note 3 — Inventories


(In millions)	September 30, 2020		December 31, 2019
Raw materials	$	121.5	$	154.9
Work in progress		26.7		40.9
Finished goods		114.7		137.3
Total Inventory	$	262.9	$	333.1

Note 4 — Retirement and Other Postretirement Benefit Plans

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

Defined Benefit Retirement Plans

Net Periodic Benefit Costs

Net periodic benefit costs of our defined benefit retirement plans for the quarter and nine months ended September 30, 2020 and 2019 were as follows:

	Quarter Ended September 30,				Nine Months Ended September 30,
(In millions)	2020		2019		2020		2019
U.S. Nonqualified Defined Benefit Retirement Plans
Service cost	$	0.3	$	0.3	$	0.9	$	0.9
Interest cost		0.2		0.2		0.4		0.5
Net amortization	—		—			0.2	—
Net periodic benefit cost	$	0.5	$	0.5	$	1.5	$	1.4

(In millions)	September 30, 2020		December 31, 2019
Amounts recognized on the balance sheet for U.S. nonqualified defined benefit retirement plans:
Accrued liabilities	$	1.3	$	1.4
Other non-current liabilities		19.4		18.9
Total accrued benefit	$	20.7	$	20.3

	Quarter Ended September 30,						Nine Months Ended September 30,
(In millions)	2020			2019			2020			2019
European Defined Benefit Retirement Plans
Service cost	$	0.2		$	0.3		$	0.7		$	0.8
Interest cost		0.9			1.1			2.6			3.3
Expected return on plan assets		(1.7	)		(2.1	)		(5.1	)		(6.5	)
Net amortization and deferral		0.1		—				0.3			0.2
Net periodic benefit credit	$	(0.5	)	$	(0.7	)	$	(1.5	)	$	(2.2	)

(In millions)	September 30, 2020		December 31, 2019
Amounts recognized on the balance sheet for European defined benefit retirement plans:
Other assets	$	45.7	$	45.2

Accrued liabilities		1.7		0.6
Other non-current liabilities		19.3		18.9
Total accrued benefit	$	21.0	$	19.5

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, 2020 and 2019, amounts unrelated to service costs were a benefit of $0.5 million and $0.8 million, respectively. For the nine months ended September 30, 2020 and 2019, amounts unrelated to service costs were a benefit of $1.6 million and $2.5 million, respectively.

Contributions

We generally fund our U.S. non-qualified defined benefit retirement plans when benefit payments are incurred. We have contributed approximately $0.5 million in the first nine months of 2020 to cover unfunded benefits. We expect to contribute a total of $1.4 million in 2020 to cover unfunded benefits. We contributed $0.5 million to our U.S. non-qualified defined benefit retirement plans during the first nine months of 2019.

We contributed $3.0 million and $3.3 million to our European defined benefit retirement plans during the nine months ended September 30, 2020 and 2019, respectively. We plan to contribute approximately $5.0 million during 2020 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, 2020 and 2019, respectively; and $0.8 million and $0.7 million for the nine months ended September 30, 2020 and 2019, respectively. Net periodic benefit costs of our postretirement health care and life insurance benefit plans for the quarters and nine months ended September 30, 2020 and 2019 were immaterial.

(In millions)	September 30, 2020		December 31, 2019
Amounts recognized on the balance sheet:
Accrued liabilities	$	0.5	$	0.5
Other non-current liabilities	2.6		2.6
Total accrued benefit	$	3.1	$	3.1

Amounts contributed in connection with our postretirement plans were immaterial for both the nine months ended September 30, 2020 and 2019. We periodically fund our postretirement plans to pay covered expenses as they are incurred. We expect to contribute less than $0.5 million in 2020 to cover unfunded benefits.

Note 5 –– Debt

(In millions)	September 30, 2020			December 31, 2019
Current portion of finance lease	$	0.5		$	0.6
Current portion of Euro term loan		—			8.9
Current portion of debt		0.5			9.5
Non-current portion of Euro term loan		—			41.5
Senior unsecured credit facility		302.0			313.0
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		(1.5	)		(1.7	)
Senior notes --- deferred financing costs		(3.7	)		(4.2	)
Non-current portion of finance lease and other debt		1.9			2.0
Long-term debt		998.7			1,050.6
Total debt	$	999.2		$	1,060.1

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. During the second quarter of 2020, the interest rate for the Facility increased to LIBOR + 1.125%, reflecting a change in the leverage ratio. As of September 30, 2020, total borrowings under the Facility were $302 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, 2020, there were no issued letters of credit under the Facility, resulting in undrawn availability under the Facility of $698 million, subject to ongoing covenant compliance. The weighted average interest rate for the Facility was 1.76% for the nine months ended September 30, 2020.

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. As defined in the Facility agreement, we are required to maintain a minimum interest coverage ratio of 3.50 (based on the ratio of EBITDA to interest expense) and may not exceed a maximum leverage ratio of 3.75 (based on the ratio of total debt to EBITDA) with a step up to 4.25 allowed following certain acquisitions. In addition, the Facility agreement contains other customary terms and conditions such as representations and warranties, additional covenants and events of default.

In September 2020, we amended our Facility (the “Amendment”) to allow for relief from certain terms of the Facility from October 1, 2020 through and including September 30, 2021 (the “Covenant Relief Period”). During the Covenant Relief Period, we are required to maintain a leverage ratio not greater than: 4.25, 5.75, 5.00 and 4.25, respectively, for each of the quarterly test periods from December 31, 2020 through September 30, 2021. During the Covenant Relief Period, consolidated total debt is calculated net of unrestricted cash and cash equivalents in an amount not to exceed $200 million. Additionally, during the Covenant Relief Period, we are subject to (i) limitations on share repurchases, (ii) further limitations on the incurrence of secured indebtedness, and (iii) an increase in pricing based on the then existing leverage ratio.

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 nine months ended September 30, 2020 was 3.87% inclusive of approximately a 0.25% benefit of treasury locks. Based on quoted prices, the fair value of the senior unsecured notes due in 2027 was $431.1 million at September 30, 2020.

In January 2020, we used $49.9 million to repay and terminate the Euro term loan.

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, 2020 was 4.83%. Based on quoted prices, the fair value of these notes was $334.0 million at September 30, 2020.

Note 6 — Derivative Financial Instruments

Interest Rate Swap and Interest Lock Agreements

In January 2020, we terminated €45 million of interest rate swaps when we repaid the Euro term loan recognizing a charge of $0.7 million. These interest rate swaps fixed the interest rate at a weighted average of 0.5%. These swaps were designated as cash flow hedges to floating rate bank loans, therefore, the fair value of the agreements was recorded in other assets or as a liability with a corresponding amount to other comprehensive loss.

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; therefore, any change in fair value was recorded as a component of other comprehensive loss. As part of the issuance of these notes, we net settled the derivatives and therefore the previously deferred gains recorded in other comprehensive loss will be released to interest expense over the life of the senior notes. The effect of these treasury locks reduced the effective interest rate on these notes by approximately 0.25%.

Foreign Currency Forward Exchange Contracts

A number of our European subsidiaries are exposed to the impact of exchange rate volatility between the U.S. dollar and the subsidiaries’ functional currencies, being either the Euro or the British Pound sterling. We entered into contracts to exchange U.S. dollars for Euros and British Pound sterling through March 2023, which we account for as cash flow hedges. The aggregate notional amount of these contracts was $272.5 million and $426.9 million at September 30, 2020 and December 31, 2019, respectively. The purpose of these contracts is to hedge a portion of the forecasted transactions of our European subsidiaries under long-term sales contracts with certain customers. These contracts are expected to provide us with a more balanced matching of future cash receipts and expenditures by currency, thereby reducing our exposure to fluctuations in currency exchange rates. The effective portion of the hedges, gains of $14.4 million and losses of $0.1 million, were recorded in other comprehensive loss for the quarter and nine months ended September 30, 2020 and losses of $16.9 million and $25.7 million for the quarter and nine months ended September 30, 2019. We classified $7.2 million of the carrying amount of these contracts as assets ($4.6 million of which was recorded in prepaid expenses and other current assets) and $6.5 million as liabilities ($0.7 million of which is recorded in non-current liabilities), on the condensed consolidated balance sheets at September 30, 2020, and $3.7 million of the carrying amount of these contracts was classified in assets ($1.3 million of which was recorded in prepaid expenses and other current assets) and $15.5 million as liabilities ($2.9 million of which is in other non-current liabilities) at December 31, 2019. We recognized net losses of $2.6 million and $12.7 million in gross

margin during the quarter and nine months ended September 30, 2020, and net losses of $3.8 million and $8.4 million for the quarter and nine months ended September 30, 2019.

In addition, we enter into foreign exchange forward contracts which are not designated as hedges. These are used to provide an offset to transactional gains or losses arising from the re-measurement of non-functional monetary assets and liabilities such as accounts receivable. The change in the fair value of the derivatives is recorded in the statement of operations. There are no credit contingency features in these derivatives. During the quarters ended September 30, 2020 and 2019, we recognized net foreign exchange losses of $0.9 million and losses of $1.3 million, respectively, in the condensed consolidated statements of operations. During the nine months ended September 30, 2020 and 2019, we recognized net foreign exchange losses of $2.5 million and $1.9 million, respectively. The net foreign exchange impact recognized from these hedges offsets the translation exposure of these transactions. The carrying amount of the contracts for derivatives not designated as hedging instruments was $0.2 million classified as current assets at September 30, 2020, and $0.6 million as current assets and less than $0.1 million of current liabilities on our consolidated balance sheets at December 31, 2019, in the condensed consolidated balance sheets.

The change in fair value of our foreign currency forward exchange contracts under hedge designations recorded net of tax within accumulated other comprehensive loss for the quarters and nine months ended September 30, 2020 and September 30, 2019 was as follows:

	Quarter Ended September 30,						Nine Months Ended September 30,
(In millions)	2020			2019			2020			2019
Unrealized losses at beginning of period, net of tax	$	(12.3	)	$	(13.8	)	$	(8.4	)	$	(10.6	)
Losses reclassified to net sales		2.0			3.0			9.7			6.5
Increase (decrease) in fair value		11.1			(12.9	)		(0.5	)		(19.6	)
Unrealized gains (losses) at end of period, net of tax	$	0.8		$	(23.7	)	$	0.8		$	(23.7	)

Unrealized losses of $1.2 million recorded in accumulated other comprehensive loss, plus a net tax benefit of $0.1 million, as of September 30, 2020, 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, 2020, we had commodity swap agreements with a notional value of $10.6 million. The swaps mature monthly through March 2022. The swaps are accounted for as a cash flow hedge of our forward raw material purchases. To ensure the swaps are highly effective, all of the critical terms of the swap matched the terms of the hedged items. The fair value of the commodity swap agreements was a liability of $3.2 million ($0.2 million of which was in other non-current liabilities) at September 30, 2020, and a liability of $5.4 million ($1.1 million of which was in other non-current liabilities) at December 31, 2019.

Note 7 — Income Taxes

The tax provision for the current quarter included a $46.2 million benefit primarily due to the release of a valuation allowance due to a legal entity rationalization and treasury realignment initiative. The tax provision for the first nine months of 2020 also included a $2.7 million benefit primarily for the release of reserves of unrecognized tax benefits as a result of tax audit settlements. The quarter and nine months ended September 30, 2019 included a $3.0 million benefit primarily due to tax credits identified in the quarter. Given the adverse impact of COVID-19 on our earnings, the effective tax rate in 2020 is not meaningful.

Note 8 — Fair Value Measurements

The authoritative guidance for fair value measurements establishes a hierarchy for observable and unobservable inputs used to measure fair value, into three broad levels, which are described below:

•

Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.

•

Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.

•

Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.

In determining fair value, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as consider counterparty credit risk in our assessment of fair value.

We have no assets or liabilities that utilize Level 1 inputs. However, we have derivative instruments classified as liabilities and assets which utilize Level 2 inputs, and one liability that utilizes Level 3 inputs.

For derivative assets and liabilities that utilize Level 2 inputs, we prepare estimates of future cash flows of our derivatives, which are discounted to a net present value. The estimated cash flows and the discount factors used in the valuation model are based on observable inputs, and incorporate non-performance risk (the credit standing of the counterparty when the derivative is in a net asset position, and the credit standing of Hexcel when the derivative is in a net liability position). The fair value of these assets and liabilities was $7.4 million and $9.7 million and $4.3 million and $21.7 million, respectively, at September 30, 2020 and December 31, 2019. 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:

•	Interest rate swaps — valued using LIBOR yield curves at the reporting date. The fair value of the liabilities were $0.6 million at December 31, 2019. There were no interest rate swaps outstanding at September 30, 2020.

•

Foreign exchange derivative assets and liabilities — valued using quoted forward prices at the reporting date. Fair value of assets and liabilities at September 30, 2020 was $7.4 million and $6.5 million, respectively. The fair value of assets and liabilities at December 31, 2019 was $4.3 million and $15.7 million, respectively.

•	Commodity raw materials — valued using quoted forward prices at the reporting date. Fair value of liabilities at September 30, 2020 and December 31, 2019 was $3.2 million and $5.4 million, respectively.

Counterparties to the above contracts are highly rated financial institutions, none of which experienced any significant downgrades in the nine months ended September 30, 2020 that would reduce the receivable amount owed, if any, to the Company.

Liabilities classified as Level 3 — At September 30, 2020 we have a liability for $3.2 million, which represents 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. There were no payments and the amount of interest related to this liability accreted was not material during the nine months ended September 30, 2020.

Note 9 — Revenue

Our revenue is primarily derived from the sale of inventory under long-term agreements with our customers. We have determined that individual purchase orders (“PO”), whose terms and conditions taken with a master agreement, create the ASC 606 contracts which are generally short-term in nature. For those sales, which are not tied to a long-term agreement, we generate a PO that is subject to our standard terms and conditions. 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 six 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.

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, 2020 and 2019:

	Quarter Ended September 30,				Nine Months Ended September 30,
(In millions)	2020		2019		2020		2019
Consolidated Net Sales	$	286.9	$	572.5	$	1,206.6	$	1,791.4
Commercial Aerospace	128.8		385.9			695.6		1,217.9
Space & Defense		108.8		109.8		328.8		329.4
Industrial	49.3			76.8	182.2		244.1

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, 2020 is as follows:


(In millions)	Composite Material			Engineered Products			Total
Balance at December 31, 2019	$	12.8		$	39.9		$	52.7
Net revenue billed		(1.4	)		4.6			3.2
Balance at March 31, 2020	$	11.4		$	44.5		$	55.9
Net revenue billed		0.5			(1.7	)		(1.2	)
Balance at June 30, 2020	$	11.9		$	42.8		$	54.7
Net revenue billed		(3.2	)		(2.6	)		(5.8	)
Balance at September 30, 2020	$	8.7		$	40.2		$	48.9

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

Note 10 — Segment Information

The financial results for our operating segments are prepared using a management approach, which is consistent with the basis and manner in which we internally segregate financial information for the purpose of assisting in making internal operating decisions. We evaluate the performance of our operating segments based on operating income, and generally account for intersegment sales based on arm’s length prices. Corporate and certain other expenses are not allocated to the operating segments, except to the extent that the expense can be directly attributable to the business segment.

Financial information for our operating segments for the quarters and nine months ended September 30, 2020 and 2019 were as follows:

	(Unaudited)
	Composite			Engineered			Corporate &
(In millions)	Materials			Products			Other (a)			Total
Third Quarter 2020
Net sales to external customers	$	215.7		$	71.2		$	—		$	286.9
Intersegment sales		7.8			0.7			(8.5	)		—
Total sales	$	223.5		$	71.9		$	(8.5	)	$	286.9
Other operating expense		16.4			—			(0.6	)		15.8
Operating income (loss)		(36.6	)		(2.7	)		1.7			(37.6	)
Depreciation and amortization		31.7			3.9			—			35.6
Stock-based compensation		1.5			0.5			(1.7	)		0.3
Accrual basis additions to capital expenditures		4.7			1.3			—			6.0

Third Quarter 2019
Net sales to external customers	$	448.0		$	124.5		$	—		$	572.5
Intersegment sales		23.3			—			(23.3	)		—
Total sales	$	471.3		$	124.5		$	(23.3	)	$	572.5
Operating income (loss)		100.1			20.3			(10.5	)		109.9
Depreciation and amortization		30.7			3.7			—			34.4
Stock-based compensation		1.2			0.2			1.0			2.4
Accrual basis additions to capital expenditures		51.0			2.3			—			53.3

Nine Months Ended September 30, 2020
Net sales to external customers	$	960.4		$	246.2		$	—		$	1,206.6
Intersegment sales		48.0			1.6			(49.6	)		—
Total sales	$	1,008.4		$	247.8		$	(49.6	)	$	1,206.6
Other operating expense		25.5			2.7			15.4			43.6
Operating income (loss)		75.0			3.3			(43.8	)		34.5
Depreciation and amortization		94.3			11.6			0.1			106.0
Stock-based compensation		5.9			1.6			5.5			13.0
Accrual basis additions to capital expenditures		35.4			4.0			—			39.4

Nine Months Ended September 30, 2019
Net sales to external customers	$	1,419.7		$	371.7		$	—		$	1,791.4
Intersegment sales		64.0			0.1			(64.1	)		—
Total sales	$	1,483.7		$	371.8		$	(64.1	)	$	1,791.4
Operating income (loss)		324.4			51.4			(48.0	)		327.8
Depreciation and amortization		95.7			11.3			0.1			107.1
Stock-based compensation		6.4			1.4			8.1			15.9
Accrual basis additions to capital expenditures		156.8			4.1			—			160.9

(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, 2019	$	96.2		$	184.2		$	280.4
Amortization expense		(1.2	)		(3.7	)		(4.9	)
Currency translation adjustments		1.1		—				1.1
Balance at September 30, 2020	$	96.1		$	180.5		$	276.6

At September 30, 2020, the balance of goodwill and intangible assets was $190.9 million and $85.7 million, respectively. During the first quarter of 2020 the Company determined that the economic uncertainty caused by the COVID-19 pandemic was a trigger for an impairment review of goodwill with no other triggers for impairment identified. As a result of management’s review, we determined that it was not more likely than not that there was impairment.

Note 11 — Accumulated Other Comprehensive Loss

Comprehensive income (loss) represents net income 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, 2020 and December 31, 2019 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, 2019	$	(22.4	)	$	(6.9	)	$	(89.4	)	$	(118.7	)
Other comprehensive income (loss) before reclassifications		—			(2.3	)		22.7			20.4
Amounts reclassified from accumulated other comprehensive loss		(0.2	)		13.3		—				13.1
Other comprehensive income (loss)		(0.2	)		11.0			22.7			33.5
Balance at September 30, 2020	$	(22.6	)	$	4.1		$	(66.7	)	$	(85.2	)

(1)

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

The amounts of net gains reclassified to earnings from the unrecognized net defined benefit and postretirement plan costs component of accumulated other comprehensive loss for the quarter and nine months ended September 30, 2020, were $0.1 million less taxes of less than $0.1 million, and $0.5 million less taxes of $0.3 million, respectively. The amounts reclassified to earnings from the change in fair value of the derivatives component of accumulated other comprehensive loss for the quarter and nine months ended September 30, 2020 were net losses of $2.6 million less taxes of $0.6 million and $12.7 million less taxes of $3.0 million, for those related to foreign currency forward exchange contracts and $1.5 million less taxes of $0.4 million and $4.9 million less taxes of $1.2 million, related to commodity swaps. We also recorded net gains of $0.3 million less taxes of $0.1 million and net gains of $0.1 million less taxes of less than $0.1 million related to interest rate derivatives, in the three and nine month periods ended September 30, 2020, respectively.

Note 12 — Commitments and Contingencies

We are involved in litigation, investigations and claims arising out of the normal conduct of our business, including those relating to commercial transactions, environmental, employment and health and safety matters. While it is impossible to predict the ultimate resolution of litigation, investigations and claims asserted against us, we believe, based upon our examination of currently available information, our experience to date, and advice from legal counsel, that, after taking into account our existing insurance coverage and amounts already provided for, the currently pending legal proceedings against us will not have a material adverse impact on our consolidated results of operations, financial position or cash flows.

Environmental Matters

We have been named as a potentially responsible party (“PRP”) with respect to the below hazardous waste disposal sites that we do not own or possess, which are included on, or proposed to be included on, the Superfund National Priority List of the U.S. Environmental Protection Agency (“EPA”) or on equivalent lists of various state governments. Because the Federal Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA” or “Superfund”) allows for joint and several liability in certain circumstances, we could be responsible for all remediation costs at such sites, even if we are one of many PRPs. We believe, based on the amount and nature of our waste, and the number of other financially viable PRPs, that our liability in connection with such environmental matters will not be material.

Lower Passaic River Study Area

Hexcel together with approximately 48 other PRPs that comprise the Lower Passaic Cooperating Parties Group (the “CPG”), are subject to a May 2007 Administrative Order on Consent (“AOC”) with the EPA requiring the CPG to perform a Remedial Investigation/Feasibility Study of environmental conditions of a 17-mile stretch of the Passaic River in New Jersey (the “Lower Passaic River”). We were included in the CPG based on our operations at our former manufacturing site in Lodi, New Jersey.

In March 2016, the EPA issued a Record of Decision (“ROD”) setting forth the EPA’s selected remedy for the lower eight miles of the Lower Passaic River at an expected cost ranging from $0.97 billion to $2.07 billion. This estimate does not include any costs related to a future remedy for the upper nine miles of the Lower Passaic River. In August 2017, the EPA appointed an independent third party allocation expert to make recommendations on the relative liability of approximately 120 identified non-government PRP’s. The allocation is expected to be completed by the end of 2020.

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, 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. We do not know whether this litigation will impact the EPA’s allocation process or the ultimate outcome of the matter.

The accrual was approximately $2.1 million as of September 30, 2020 and December 31, 2019. Given the uncertainty associated with the many elements of the Superfund process for the Lower Passaic River, the amounts accrued may not be indicative of the amounts for which we will ultimately be responsible.

Omega Chemical Corporation Superfund Site, Whittier, California

We are a PRP at a former chemical waste site in Whittier, California. The PRPs at Omega have established The Omega Chemical Site PRP Organized Group, (the “OPOG”), and are currently investigating and remediating soil and groundwater at the site pursuant to a Consent Decree with the EPA. The OPOG has attributed to Hexcel either 1.2% or 2.18% of the waste tonnage (dependent on the specific location within the Omega Chemical Site) sent to the site. In addition to the Omega site specifically, the EPA is investigating the scope of regional groundwater contamination in the vicinity of the Omega site and issued a ROD. The OPOG members have been served notice by the EPA as PRPs who will be required to be involved in the remediation of the regional groundwater contamination in that vicinity as well. As a member of the OPOG, Hexcel will incur costs associated with the investigation and remediation of the Omega site and the regional groundwater remedy, although our ultimate liability, if any, in connection with this matter cannot be determined at this time. The total accrued liability relating to potential liability for both the Omega site and regional groundwater remedies was $0.2 million at September 30, 2020, and at December 31, 2019.

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 both September 30, 2020 and December 31, 2019, our aggregate environmental related accruals were $2.5 million, of which $0.6 million was included in current other accrued liabilities with the remainder included in other non-current liabilities. As related to certain environmental matters the accrual was estimated at the low end of a range of possible outcomes since no amount within the range is a better estimate than any other amount. If we had accrued, for those sites where we are able to estimate our liability, at the high end of the range of possible outcomes, our accrual would have been $16 million higher at September 30, 2020 and December 31, 2019.

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, 2020, and accrued warranty cost, included in “other accrued liabilities” in the condensed consolidated balance sheets at September 30, 2020 and December 31, 2019, were as follows:

	Product
(In millions)	Warranties
Balance as of December 31, 2019	$	5.5
Warranty expense		1.3
Deductions and other		(2.3	)
Balance as of March 31, 2020	$	4.5
Warranty expense		—
Deductions and other		(1.5	)
Balance as of June 30, 2020	$	3.0
Warranty expense		0.4
Deductions and other		(0.4	)
Balance as of September 30, 2020	$	3.0

Note 13 — Other Operating Expense

We took a restructuring charge of $15.8 million in the third quarter of which $9.4 million related to asset impairments as part of the planned closure of our Windsor, Colorado plant and the remainder was for severance costs related to additional job reductions. In the nine months ended 2020, other operating expense of $43.6 million included second quarter severance costs and costs related to the terminated merger agreement with Woodward. Anticipated future cash payments as of September 30, 2020 were $4.7 million.

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. Our products are used in a wide variety of end applications, such as commercial and military aircraft, space launch vehicles and satellites, wind turbine blades, automotive, recreational products and other industrial applications.

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

We have two segments, Composite Materials and Engineered Products. The Composite Materials segment is comprised of our carbon fiber, specialty reinforcements, resins, prepregs and other fiber-reinforced matrix materials, 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.

On March 11, 2020, the World Health Organization (“WHO”) declared the COVID-19 outbreak a pandemic. The outbreak has resulted in governments around the world implementing increasingly stringent measures to help control the spread of the virus, including quarantines, “shelter in place” and “stay at home” orders, travel restrictions, business curtailments, school closures, and other measures. In addition, governments and central banks in several parts of the world have enacted fiscal and monetary stimulus measures to counteract the impacts of COVID-19.

Our company is a sole provider for many programs, including critical defense programs. Consistent with national guidelines and with state and local orders to date, we are currently operating across our footprint with some temporary site closures. Notwithstanding our continued operations, COVID-19 has had and may have further negative impacts on our operations, supply chain, transportation networks and customers, all of which have and may continue to compress our margins, even after the preventative and precautionary measures that we, other businesses, and governments, are taking. The COVID-19 outbreak is a widespread public health crisis that is adversely affecting the economies and financial markets globally. The resulting economic downturn has, and could for an extended period of time, adversely affect demand for our products and contribute to volatile supply and demand conditions affecting prices and volumes in the markets for our products, services and raw materials. The progression of the pandemic could also continue to negatively impact our business or results of operations through the temporary closure of our operating locations or those of our customers or suppliers.

During the third quarter of 2020, our operations, margins and results were adversely impacted by lower demand for our products due to substantial reductions in original equipment manufacturer build rates combined with a move to reduce inventory throughout our supply chain, particularly carbon fiber. Since the outbreak began, we have seen the impacts of COVID-19 on our markets and operations including significant decreases in air traffic, temporary shutdowns of our customers’ and suppliers’ facilities and decreased demand from our customers. In response, we have taken certain mitigating actions to align our costs with the lower sales and to preserve liquidity including eliminating approximately 30% of our labor costs, curtailing discretionary spend, and suspending dividend payments and stock repurchases. The extent to which COVID-19 continues to adversely impact our business depends on future developments, which are highly uncertain and unpredictable, including new information concerning the effectiveness of actions globally to contain or mitigate its effects. While we expect the pandemic to continue to negatively impact our results of operations, cash flows and financial position, the current level of uncertainty over the economic and operational impacts of COVID-19 means the related financial impact to us cannot be reasonably estimated at this time.

On January 12, 2020, we announced that we had entered into an agreement and plan of merger (the “Merger Agreement”) with Woodward, Inc. (“Woodward”), which provided for the combination of Hexcel and Woodward in an all stock merger of equals (the “Merger”). In response to the impact of the COVID-19 pandemic, on April 5, 2020, Hexcel and Woodward entered into an agreement to terminate the Merger Agreement.

Net sales for the quarter were $286.9 million, 49.9% lower (49.7% in constant currency) than the $572.5 million reported for the third quarter of 2019. Declines in demand in the Commercial Aerospace and Industrial markets drove the decrease in sales for the quarter.

Sales to other commercial aerospace, which includes regional and business aircraft customers, were down 49.6% for the third quarter of 2020 as compared to 2019 as demand was negatively impacted by the global pandemic, particularly business jets.

Space & Defense sales of $108.8 million decreased 0.9% (0.5% in constant currency) for the quarter as compared to the third quarter of 2019. The decrease was due to lower demand from a number of European space & defense programs as aggregate U.S. space & defense sales were up moderately in the third quarter of 2020 compared to the third quarter of 2019.

Total Industrial sales of $49.3 million for the third quarter of 2020 were down 35.8% (37.5% in constant currency) as compared to the 2019 period. Wind energy sales (the largest submarket in Industrial), experienced a decline of 40.4% compared to the third quarter of 2019. This reduction reflects a customer demand shift in the U.S. market. As a result of this demand change, Hexcel will close its wind energy prepreg production facility in Windsor, Colorado in early November 2020 that served the U.S. market. The Hexcel wind material prepreg production facility in Austria that serves the European market and the wind material facility in China, that serves the Asian market, continue to operate to produce materials for our wind energy customers.

Gross margin for the third quarter of 2020 decreased to 4.7% as compared to 27.6% for the third quarter of 2019. The deterioration reflects the under absorption of fixed overhead from lower sales levels magnified by the temporary idling of select production facilities during the period to align production with demand.

Selling, general and administrative and research and technology expenses for the third quarter of 2020 were 26% lower than the prior year as on-going realignment actions and headcount reductions reduce the cost structure. Other operating expense of $15.8 million, for the third quarter of 2020, primarily included the restructuring charge for the Windsor facility closure and additional severance costs across a number of facilities.

Operating cash flow for the first nine months of 2020 was $157.0 million compared to $277.3 million in 2019 on lower earnings partially offset by favorable working capital usage. For the first nine months of 2020, capital expenditures were $47.8 million as compared to $162.7 million in the first nine months of 2019. Free cash flow (defined as cash provided by operating activities less capital expenditures) for the nine months ended September 30, 2020 was a use of $109.2 million versus $114.6 million in the comparable period of 2019.

Financial Overview

Results of Operations

	Quarter Ended September 30,									Nine Months Ended September 30,
(In millions, except per share data)	2020			2019			% Change			2020			2019			% Change
Net sales	$	286.9		$	572.5			(49.9	)%	$	1,206.6		$	1,791.4			(32.6	)%
Net sales change in constant currency								(49.7	)%								(32.6	)%
Operating income (loss)	$	(37.6	)	$	109.9			(134.2	)%	$	34.5		$	327.8			(89.5	)%
As a percentage of net sales		(13.1	)%		19.2	%					2.9	%		18.3	%
Net income		9.7		80.3			N/M				51.1		233.4				(78.1	)%
Diluted net income per common share	$	0.12		$	0.93		N/M			$	0.61		$	2.71			(77.5	)%

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 (loss), net income (loss) and earnings (loss) per share adjusted for items included in operating expense and non-operating expenses; and free cash flow. Management believes these non-GAAP measurements are meaningful to investors because they provide a view of Hexcel with respect to ongoing operating results and comparisons to prior periods. These adjustments 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 measurements 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 (loss), adjusted net income (loss), adjusted diluted net income (loss) per share and free cash flow are provided below.

	Operating Income (Loss)
	Quarter Ended September 30,						Nine Months Ended September 30,
(In millions)	2020			2019			2020		2019
GAAP operating income (loss)	$	(37.6	)		$	109.9	$	34.5	$	327.8
Other operating expense (a)		15.8				—		43.6		—
Adjusted operating income (loss) (non-GAAP)	$	(21.8	)		$	109.9	$	78.1	$	327.8

(a) The quarter and nine months ended September 30, 2020 includes restructuring expenses as well as costs related to the terminated merger with Woodward.

	Quarter Ended September 30,													Nine Months Ended September 30,
	2020							2019						2020						2019
(In millions, except per diluted share data)	Net Income (Loss)			EPS				Net Income			EPS			Net Income			EPS			Net Income			EPS
GAAP	$	9.7			$	0.12		$	80.3		$	0.93		$	51.1		$	0.61		$	233.4		$	2.71
Other operating expense (a)		12.2				0.14			—			—			33.7			0.40			—			—
Discrete tax benefit (b)		(46.2	)			(0.55	)		(3.0	)		(0.03	)		(48.9	)		(0.58	)		(3.0	)		(0.03	)
Adjusted (non-GAAP)	$	(24.3	)		$	(0.29	)	$	77.3		$	0.90		$	35.9		$	0.43		$	230.4		$	2.68

(a) The quarter and nine months ended September 30, 2020 included restructuring expenses as well as costs related to the terminated merger with Woodward.
(b) The quarter and nine months ended September 30, 2020 included a tax benefit primarily due to the release of a valuation allowance in a foreign jurisdiction.

	Nine Months Ended September 30,
(In millions)	2020			2019
Net cash provided by operating activities	$	157.0		$	277.3
Less: Capital expenditures		(47.8	)		(162.7	)
Free cash flow (non-GAAP)	$	109.2		$	114.6

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, 2020 and 2019:

	Quarter Ended September 30,							Nine Months Ended September 30,
(In millions)	2020		2019		% Change			2020		2019		% Change
Consolidated Net Sales	$	286.9	$	572.5		(49.9	)%	$	1,206.6	$	1,791.4		(32.6	)%
Commercial Aerospace		128.8		385.9		(66.6	)%		695.6		1,217.9		(42.9	)%
Space & Defense		108.8		109.8		(0.9	)%		328.8		329.4		(0.2	)%
Industrial	49.3			76.8		(35.8	)%	182.2		244.1			(25.4	)%

Composite Materials	$	215.7	$	448.0		(51.9	)%	$	960.4	$	1,419.7		(32.4	)%
Commercial Aerospace		95.6		294.5		(67.5	)%		567.6		941.6		(39.7	)%
Space & Defense		71.9		78.9		(8.9	)%		214.5		236.2		(9.2	)%
Industrial		48.2		74.6		(35.4	)%		178.3	241.9			(26.3	)%

Engineered Products	$	71.2	$	124.5		(42.8	)%	$	246.2	$	371.7		(33.8	)%
Commercial Aerospace	33.2		91.4			(63.7	)%		128.0	276.3			(53.7	)%
Space & Defense		36.9		30.9		19.4	%		114.3		93.2		22.6	%
Industrial		1.1		2.2		(50.0	)%		3.9		2.2		77.3	%

Sales by Segment

Composite Materials: Net sales of $215.7 million in the third quarter of 2020 decreased $232.3 million from the $448.0 million in sales for the prior year quarter, driven by declines in Commercial Aerospace and Industrial. Net sales of $960.4 million for the first nine months of 2020 decreased 32.4% compared to the same period last year. In Commercial Aerospace, there were significantly lower sales across all major programs as build rates across Commercial Aerospace have decreased significantly and rapidly in response to the COVID-19 pandemic compounded by extensive supply chain adjustments. The decline in Space & Defense sales was primarily related to lower military aircraft structure sales outside of the Americas. The decline in Wind energy sales was primarily related to a shift in the type of product our customer demands in the U.S. market. As a result of this demand change, Hexcel will close its wind energy prepreg production facility in Windsor, Colorado in early November 2020 that served the U.S. market.

Engineered Products: Net sales of $71.2 million in the third quarter of 2020 decreased $53.3 million from the $124.5 million for 2019. Net sales of $246.2 million for the first nine months of 2020 decreased 33.8% compared to the same period last year. The declines primarily reflect lower sales for the Boeing 737 MAX as well as lower build rates across Commercial Aerospace in response to the COVID-19 pandemic. The increase in Space & Defense sales reflects the growth in U.S. military helicopter programs.

Sales by Market

Commercial Aerospace sales of $128.8 million decreased 66.6% (66.3% in constant currency) for the quarter as compared to the third quarter of 2019. Sales across all major programs were down substantially with the largest impact related to the A350. Boeing 737 MAX sales continue to be at a very low level. Build rate reductions driven by the COVID-19 pandemic combined with significant inventory destocking led to the reduced sales levels. Additional build rate reductions publicly announced at the end of July 2020 by two significant customers is further extending the destocking. Sales of $695.6 million, for the first nine months of 2020, decreased 42.9% compared to the first nine months of 2019 due to significant production cuts across the major aircraft programs announced during the second and third quarters of 2020 and only limited sales for the Boeing 737 MAX program. The decline was compounded by significant destocking in the supply chain, which is amplified as build rates have moved even lower.

Sales to Other Commercial Aerospace, which includes regional and business aircraft customers, were down 49.6% for the third quarter of 2020 as compared to 2019 due to significantly lower business jet demand and have declined 23.5% year to date.

Total Industrial sales of $49.3 million for the third quarter of 2020 were down 35.8% (37.5% in constant currency) as compared to the 2019 period and decreased 25.4% for the first nine months as compared to last year. Wind energy sales (the largest submarket in Industrial) experienced a decline of 40.4% compared to the third quarter of 2019. The reduction reflects a customer demand shift in the U.S. market. As a result of this demand change, Hexcel will close its wind energy prepreg production facility in Windsor, Colorado in early November 2020 that served the U.S. market. The Hexcel wind material prepreg production facility in Austria that serves the European market and the wind material facility in China that serves the Asian market continue to operate to produce materials for our wind energy customers. Wind energy sales experienced a decline of 25.8% for the first nine months of 2020 as compared to the same period in 2019 due to production disruptions caused by the pandemic and lower customer demand, specifically in the U.S.

Gross Margin

	Quarter Ended September 30,									Nine Months Ended September 30,
(In millions)	2020			2019			% Change			2020			2019			% Change
Gross margin	$	13.5		$	157.9			(91.5	)%	$	209.3		$	493.9			(57.6	)%
Percentage of sales		4.7	%		27.6	%					17.3	%		27.6	%

Gross margin for the third quarter of 2020 declined to 4.7% compared to 27.6% in the third quarter of 2019 and was 17.3% and 27.6% for the first nine months of 2020 and 2019, respectively. The dramatic reduction in demand combined with the unfavorable mix impact of lower carbon fiber sales drove the decline in margin performance in 2020.

Operating Expenses

	Quarter Ended September 30,									Nine Months Ended September 30,
(In millions)	2020			2019			% Change			2020			2019			% Change
SG&A expense	$	24.6		$	33.8			(27.2	)%	$	95.2		$	122.8			(22.5	)%
Percentage of sales		8.6	%		5.9	%					7.9	%		6.9	%

R&T expense	$	10.7		$	14.2			(24.6	)%	$	36.0		$	43.3			(16.9	)%
Percentage of sales		3.7	%		2.5	%					3.0	%		2.4	%

Selling, general and administrative and research and technology expenses were lower, for both the quarter and nine month periods ended September 30, 2020, than the prior year’s comparable periods, as cost reduction actions began to take effect, including headcount reductions and minimizing discretionary spending.

Operating Income (Loss)

	Quarter Ended September 30,									Nine Months Ended September 30,
(In millions)	2020			2019			% Change			2020			2019			% Change
Consolidated operating income (loss)	$	(37.6	)	$	109.9			(134.2	)%	$	34.5		$	327.8			(89.5	)%
Operating margin		(13.1	)%		19.2	%					2.9	%		18.3	%
Composite Materials		(36.6	)		100.1			(136.6	)%		75.0		324.4				(76.9	)%
Operating margin		(16.4	)%		21.2	%					7.4	%		21.9	%
Engineered Products		(2.7	)	20.3				(113.3	)%		3.3		51.4				(93.6	)%
Operating margin		(3.8	)%		16.3	%					1.3	%		13.8	%
Corporate & Other		1.7			(10.5	)		(116.2	)%		(43.8	)		(48.0	)		(8.8	)%

We had an operating loss of $37.6 million for the third quarter of 2020 compared to income of $109.9 million for the third quarter of 2019. Operating income for the first nine months of 2020 and 2019 was $34.5 million and $327.8 million, respectively. The three and nine month periods ended September 30, 2020 included $15.8 million and $43.6 million, respectively, of other operating expense primarily related to restructuring charges and costs related to the Merger. In 2020, operating margins were negatively impacted by the dramatic reduction in demand for our products and the margin mix impact of lower carbon fiber sales.

Interest Expense, Net

	Quarter Ended September 30,							Nine Months Ended September 30,
(In millions)	2020		2019		% Change			2020		2019		% Change
Interest expense, net	$	9.7	$	11.0		(11.8	)%	$	32.4	$	34.9		(7.2	)%

Interest expense for the third quarter and nine months ended September 30, 2020 was lower due to lower effective interest rates, when compared to the same periods last year.

Provision for (Benefit from) Income Taxes

	Quarter Ended September 30,						Nine Months Ended September 30,
(In millions)	2020			2019			2020			2019
Income tax (benefit) expense	$	(56.9	)	$	18.2		$	(48.7	)	$	62.4
Effective tax rate	N/M				18.4	%	N/M				21.3	%

The tax provision for the current quarter included a $46.2 million benefit primarily due to the release of a valuation allowance in a foreign jurisdiction. The tax provision for the first nine months of 2020 also included a $2.7 million benefit primarily for the release of reserves of unrecognized tax benefits as a result of tax audit settlements. The three months and first nine months ended September 30, 2019 included a $3.0 million benefit primarily due to tax credits identified in the quarter. Given the adverse impact of COVID-19 on our earnings the effective tax rate in 2020 is not meaningful.

Financial Condition

Liquidity: As of September 30, 2020, our total debt, net of cash, was $931.2 million, as compared to $995.7 million at December 31, 2019. At September 30, 2020, total borrowings under our $1 billion Senior Unsecured Revolving Credit Facility (the

“Facility”) were $302 million. The Facility agreement permits us to issue letters of credit up to an aggregate amount of $50.0 million. Any outstanding letters of credit reduce the amount available for borrowing under the Facility. As of September 30, 2020, we had not issued any letters of credit under the Facility, resulting in undrawn availability under the Facility of $698 million, subject to ongoing covenant compliance.

The Facility agreement contains financial and other covenants, including, but not limited 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. As defined in the Facility agreement, we are required to maintain a minimum interest coverage ratio of 3.50 (based on the ratio of EBITDA to interest expense) and may not exceed a maximum leverage ratio of 3.75 (based on the ratio of total debt to EBITDA) with a step up to 4.25 allowed following certain acquisitions. In addition, the Facility agreement contains other customary terms and conditions such as representations and warranties, additional covenants and events of default. As detailed in Note 5 to the condensed consolidated financial statements the Facility was amended in September 2020 to provide for a Covenant Relief Period from October 1, 2020 through and including September 30, 2021.

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, 2020, 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.

Operating Activities: Net cash provided by operating activities was $157.0 million for the first nine months of 2020 compared to $277.3 million in the 2019 period on lower earnings partially offset by favorable working capital usage. Working capital generated $28.7 million in 2020 as compared to a use of $83.7 million in 2019.

Investing Activities: Net cash used for investing activities was $47.8 million and $325.9 million in the first nine months of 2020 and 2019, respectively. The 2019 period included $163.2 million for the ARC Technologies, Inc. (“ARC”) acquisition. Capital expenditures were $47.8 million and $162.7 million in 2020 and 2019, respectively.

Financing Activities: Financing activities used $106.9 million of cash in the first nine months of 2020 and provided $64.8 million in the same period in 2019. The 2019 period included amounts borrowed from our Facility to fund the ARC acquisition. In 2020, the Company used $49.9 million to repay and terminate the Euro term loan. We also returned $38.8 million to stockholders from stock repurchases and dividends in the first nine months of 2020 compared to $106.8 million in 2019.

In response to the COVID-19 pandemic we announced that we have suspended our dividend payments and stock repurchases.

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, 2019.

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, that could cause the actual liability to exceed the estimates, or may require adjustments to the recorded liability balances in the future.

Our estimate of liability as a potentially responsible party and our remaining costs associated with our responsibility to remediate the Lower Passaic River in New Jersey and other sites are accrued in the condensed consolidated balance sheets. As of September 30, 2020, our aggregate environmental related accruals were $2.5 million, of which $0.6 million was included in accrued liabilities, with the remainder included in non-current liabilities. As related to certain environmental matters, the accrual was estimated at the low end of a range of possible outcomes since no amount within the range is a better estimate than any other amount. If we had accrued at the high end of the range of possible outcomes, for those sites where we are able to estimate our liability, our accrual would have been approximately $16 million higher. These accruals can change significantly from period to period due to such factors as additional information on the nature or extent of contamination, the methods of remediation required changes in the apportionment of costs among responsible parties, the amount of insurance coverage and other actions by governmental agencies or private parties, or the impact, if any, of being named in a new matter.

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,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “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 possible 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 the build rate and return to service of the Boeing 737 MAX and the related impact on our revenues; (e) expectations of composite content on new commercial aircraft programs and our share of those requirements; (f) expectations regarding revenues for space and defense applications, including whether certain programs might be curtailed or discontinued; (g) expectations regarding sales for wind energy, recreation, automotive and other industrial applications; (h) expectations regarding working capital trends and expenditures and inventory levels; (i) expectations as to the level of capital expenditures and when we will complete the construction of capacity expansions and qualification of new products; (j) expectations regarding our ability to maintain and improve margins in view of the current economic environment; (k) expectations regarding the outcome of legal matters or the impact of changes in laws or regulations; (l) our projections regarding our tax rate; (m) the anticipated impact of the COVID-19 pandemic on worldwide air travel and aircraft programs, as well as on our customers and suppliers and, in turn, on our operations and financial results; and (n) the anticipated impact of the above factors and various market risks on our expectations of financial results for 2020 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, ongoing restrictions on movement and travel, employee absenteeism and reduced consumer 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, Boeing or Vestas, including reduction in revenue related to a prolonged suspension of production of the Boeing 737 MAX, as well as due to the impact of COVID-19 pandemic; inability to effectively adjust production and inventory levels to align with reduced demand; inability to effectively motivate and retain necessary workforce; changes in sales mix; changes in current pricing and cost levels; 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; supply chain disruptions; inability to install, staff and qualify necessary capacity or complete planned manufacturing improvements to meet customer demand; cybersecurity breaches or intrusions; currency exchange rate fluctuations; changes in global political, social and economic conditions, including, but not limited to, the effect of change in global trade policies and the exit of the U.K. from the European Union; work stoppages or other labor disruptions; and 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, 2019, as well as in Item 1A. “Risk Factors” of this Form 10-Q. We do not undertake an 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 broad effects of COVID-19 as a result of its negative impact on the global economy and major financial markets, there have been no material changes in market risk from the information provided in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

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, 2020, and with the participation of the Company's management have concluded that these disclosure controls and procedures are 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.

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, 2020 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 12 on pages 16 through 18 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, 2019, 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 10-K, except as set forth in the below risk factor and that, due to the termination of the Merger Agreement, the risk factors set forth in the Form 10-K under “Risks Relating to the Proposed Merger with Woodward” are no longer applicable.

Our business has been and will continue to be adversely affected by the COVID-19 pandemic. The extent to which the COVID-19 pandemic will adversely impact our business, financial condition and results of operations is highly uncertain and cannot be predicted.

In March 2020, the World Health Organization characterized the outbreak of COVID-19 as a pandemic. The COVID-19 pandemic has created significant uncertainty and economic disruption. Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the extent of the adverse impact of the COVID-19 pandemic on our business, and there is no guarantee our efforts to address the adverse impacts of COVID-19 will be effective.

We have experienced operational interruptions as a result of COVID-19, including the temporary suspension of operations due to the inability to staff facilities or government-imposed restrictions, which has had an adverse effect on the productivity and profitability of such manufacturing facilities, and in turn an adverse effect on our business and operations. While most of our manufacturing sites are currently in operation, we have reduced or furloughed certain operations in response to government measures, employee welfare concerns and the impact of COVID-19 on the global demand and supply chain. Our manufacturing operations may be further adversely affected by impacts from COVID-19 including, among other things, additional government actions and other responsive measures, further decreases in demand and/or deeper supply chain disruptions, and health and availability of essential onsite

personnel. To comply with local regulations and ensure workplace safety, enhanced cleaning and sanitation procedures and protocols for the use of personal protective equipment have been instituted, as well as work cell zoning to ensure social distancing, for those sites that remain operational.

In addition, several countries, including the United States, have taken steps to restrict air travel, and many companies have adopted policies prohibiting non-essential business travel by their employees. Even in the absence of formal restrictions and prohibitions, contagious illness and fear of contagion adversely affects travel behavior. Approximately 68% of our net sales for fiscal year ended December 31, 2019 were derived from sales to Commercial Aerospace customers, which included 87% from Airbus and Boeing aircraft, and 13% from regional and business aircraft. Current travel restrictions, as well as changes in the propensity for the general public to travel by air as a result of the COVID-19 pandemic, has caused reductions in demand for commercial aircraft, which has had an adverse impact our net sales and operating results and may continue to do so for an extended period of time. While we are unable to predict the magnitude and duration of such impact at this time, the loss of, or significant reduction in, purchases by Airbus or Boeing will materially impair our business, operating results, prospects and financial condition.

Furthermore, the COVID-19 pandemic has resulted in market volatility which has caused a precipitous decline in our stock price subjecting us to increased takeover risk, impaired our ability to declare dividends or other distributions and conduct share buybacks, and may impact our ability to comply with the covenants contained in the agreements that govern our indebtedness and raise additional funds when and as needed. We may also incur additional costs to remedy damages caused by business disruptions, performance delays or interruptions, payment defaults or bankruptcy of our third-party customers and suppliers, which could adversely affect our financial condition and results of operations.

To the extent the COVID-19 pandemic or any worsening of the global business and economic environment as a result thereof adversely affects our business and financial results, it may also have the effect of heightening or exacerbating many of the other risks described in Part I, Item 1A, “Risk Factors,” in our Annual Report on Form 10-K for our fiscal year ended December 31, 2019, such as those relating to the cyclical nature of the markets in which we operate, our ability to maintain manufacturing efficiency, disruption of our operations at our manufacturing facilities or in our supply chain, cybersecurity threats and risks generally associated with international business operations.

Due to the evolving and highly uncertain nature of this event, we cannot predict at this time the full extent to which the COVID-19 pandemic will adversely impact our business, results and financial condition, which will depend on many factors that are not known at this time. These include, among others, the extent of harm to public health, the continued disruption to the manufacturing of and demand for our products, our ability to effectively manage inventory levels and adjust our production schedules to align with reduced demand, potential future restructuring, impairment and other charges, the impact of the global business and economic environment on liquidity and the availability of capital, the costs incurred to keep our employees safe while maintaining continued operations, and our ability to effectively motivate and retain the necessary workforce. We are staying in close communication with our manufacturing facilities, employees, customers, and suppliers, and acting to mitigate the impact of this dynamic and evolving situation through cost-savings and other measures, which may not be successful and are subject to the factors described above, many of which are uncertain or outside of our control.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

During the third quarter of 2020 we did not repurchase any shares of outstanding common stock. We suspended our share repurchase program for the second and third quarters of 2020 as a result of the impacts of the COVID-19 pandemic and we have limitations on share repurchases through September 2021 under the amended Facility. The Company still has $217.2 million available under the $500 million stock repurchase program that our Board announced on May 7, 2018.

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

ITEM 6. Exhibits

EXHIBIT INDEX

Exhibit No.		Description



3.1		Certificate of Designations of Series A Junior Participating Preferred Stock of Hexcel Corporation, as filed with the Secretary of the State of Delaware on April 6, 2020 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K dated April 6, 2020).

4.1		Rights Agreement, dated as of April 6, 2020, between Hexcel Corporation and American Stock Transfer & Trust Company, LLC, which includes the form of Certificate of Designations as Exhibit A, the form of Right Certificate as Exhibit B and the Summary of Rights to Purchase Preferred Shares as Exhibit C (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K dated April 6, 2020).

10.1		Mutual Termination Agreement, dated as of April 5, 2020, between Hexcel Corporation, Woodward, Inc. and Genesis Merger Sub, Inc. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated April 6, 2020).

10.2		First Amendment to Credit Agreement, dated as of September 28, 2020, by and among Hexcel Corporation, the lenders party thereto, and Citizens Bank, N.A., as administrative agent (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated September 28, 2020).

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.

101.INS		Inline XBRL Instance Document: The XBRL Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

101.SCH		Inline XBRL Taxonomy Extension Schema

101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase

101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase

101.LAB		Inline XBRL Taxonomy Extension Label Linkbase

101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase

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

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 19, 2020		/s/ Kimberly Hendricks
(Date)		Kimberly Hendricks
		Senior Vice President, Corporate Controller and
		Chief Accounting Officer (on behalf of the registrant and as the registrant’s Principal Accounting Officer)