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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

For the Quarter Ended June 30, 2012

or

For the transition period from                     to

Commission File Number 1-8472

Hexcel Corporation

(Exact name of registrant as specified in its charter)

Two Stamford Plaza

281 Tresser Boulevard

Stamford, Connecticut 06901-3238

(Address of principal executive offices and zip code)

Registrant’s telephone number, including area code: (203) 969-0666

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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

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

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HEXCEL CORPORATION AND SUBSIDIARIES

INDEX

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PART I.  FINANCIAL INFORMATION

ITEM 1.  Condensed Consolidated Financial Statements (Unaudited)

Hexcel Corporation and Subsidiaries

Condensed Consolidated Balance Sheets

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

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Hexcel Corporation and Subsidiaries

Condensed Consolidated Statements of Operations

Hexcel Corporation and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income

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

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Hexcel Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows

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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, 2011 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 for a fair presentation of financial position, results of operations and cash flows for the interim periods presented. The condensed consolidated balance sheet as of December 31, 2011 was derived from the audited 2011 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 2011 Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 7, 2012.

Investments in Affiliated Companies

We have a 50% equity ownership investment in an Asian joint venture Asian Composites Manufacturing Sdn. Bhd.  We have determined that this investment is not a variable interest entity.  As such, we account for our share of the earnings of this affiliated company using the equity method of accounting.

Note 2 — Net Income per Common Share

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Total shares underlying stock options of 0.5 million for the quarter and six months were excluded from the computation of diluted net income per share for the periods ended June 30, 2012, as they were anti-dilutive. Total shares underlying stock options of 1.1 million for the quarter and six months were excluded from the computation of diluted net income per share for the periods ended June 30, 2011, as they were anti-dilutive.

Note 3 — Inventories, net

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. employees and certain postretirement health care and life insurance benefit plans covering eligible U.S. retirees. We also participate in a union sponsored multi-employer pension plan covering certain U.S. employees with union affiliations.

Defined Benefit Retirement Plans

Net Periodic Benefit Costs

Net periodic benefit costs of our defined benefit retirement plans for the quarters and six months ended June 30, 2012 and 2011, were as follows:

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As discussed in Note 10, effective January 31, 2011 credited service for the participants in our U.K. defined benefit plan was frozen, as the plan was terminated and replaced with a defined contribution plan.  This change reduced the projected plan obligation by $1.6 million and also resulted in recognizing $5.7 million of prior unrecognized service credits as a curtailment gain.

Contributions

We generally fund our U.S. non-qualified defined benefit retirement plans when benefit payments are incurred. Under the provisions of these non-qualified plans, we expect to contribute $0.3 million in 2012 to cover unfunded benefits. We contributed $0.3 million to our U.S. non-qualified defined benefit retirement plans during the 2011 fiscal year.

We contributed $2.6 million and $2.5 million to our European defined benefit retirement plans in the second quarters of 2012 and 2011, respectively.  Contributions were $4.1 million and $3.9 million for the six months ended June 30, 2012 and 2011.  We plan to contribute approximately $7.8 million during 2012 to these European plans.  We contributed $6.2 million to our European plans during the 2011 fiscal year.

Postretirement Health Care and Life Insurance Benefit Plans

Net periodic benefit costs of our postretirement health care and life insurance benefit plans for the quarters and six months ended June 30, 2012 and 2011 were immaterial.

In connection with our postretirement plans, we contributed $0.1 million during each of the six-month periods ended June 30, 2012 and 2011, respectively.  Contributions during the second quarters of 2012 and 2011 were less than $0.1 million.  We periodically fund our postretirement plans to pay covered expenses as they are incurred.  Based on six months of activity, we expect to contribute approximately $0.3 million in 2012 to cover unfunded benefits.  We contributed $0.3 million to our postretirement plans during the 2011 fiscal year.

Note 5 — Debt

As discussed in Note 11, in June 2012 we redeemed the remaining $73.5 million of 6.75% senior subordinated notes at a call premium of 1.125%.  The redemption and related costs were funded solely from a $75 million add-on to our revolving loan portion of the senior secured credit facility.

Note 6 — Derivative Financial Instruments

Interest Rate Swap Agreements

In June 2012 and in 2010, we entered into agreements to swap $75 million and $98 million, respectively, of floating rate obligations for fixed rate obligations at 0.6725% and 1.03% against LIBOR in U.S. dollars.  Both swaps are scheduled to mature in March 2014, and were accounted for as cash flow hedges of our floating rate bank loans. To ensure the swaps were highly effective,

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all the principal terms of the swaps matched the terms of the bank loans.  The fair value of both interest rate swaps was a liability of $0.9 million at June 30, 2012 and the fair value of the $98 million interest rate swap was a liability $0.6 million at December 31, 2011.

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 December 2014.  The aggregate notional amount of these contracts was $275.8 million and $168.9 million at June 30, 2012 and December 31, 2011, respectively.  The purpose of these contracts is to hedge a portion of the forecasted transactions of European subsidiaries under long-term sales contracts with certain customers.  These contracts are expected to provide us with a more balanced matching of future cash receipts and expenditures by currency, thereby reducing our exposure to fluctuations in currency exchange rates.  The effective portion of the hedges, losses of $7.8 million and $3.1 million, were recorded in other comprehensive income (“OCI”) for the three months and six months ended June 30, 2012, respectively, and gains of $2.7 million and $7.5 million for the three- and six-month periods ended June 30, 2011, respectively.  The carrying amount of these contracts was $0.8 million classified in other assets and $8.0 million in other liabilities on the Condensed Consolidated Balance Sheets at June 30, 2012 and $0.6 million in other assets and $6.1 million classified in other liabilities at December 31, 2011.  During the three months ended June 30, 2012 and 2011, we recognized net losses of $0.8 million and net gains of $1.8 million, respectively, recorded in gross margin.  During the six months ended June 30, 2012 and 2011, we recognized net losses of $1.3 million and net gains of $1.3 million, respectively, recorded in gross margin.  For the quarters and six-month periods ended June 30, 2012 and 2011, hedge ineffectiveness was immaterial.

In addition, we enter into foreign exchange forward contracts which are not designated as hedges.  These are used to provide an offset to transactional gains or losses arising from the remeasurement of non-functional monetary assets and liabilities such as accounts receivable.  The change in the fair value of the derivatives is recorded in the statement of operations.  There are no credit contingency features in these derivatives.  During the quarters ended June 30, 2012 and 2011, we recognized net foreign exchange losses of $3.2 million and foreign exchange gains of $2.7 million, respectively, in the Condensed Consolidated Statements of Operations.  During the six-month periods ended June 30, 2012 and 2011, we recognized net foreign exchange losses of $0.1 million and net foreign exchange gains of $7.7 million respectively, in the Consolidated Statements of Operations. The net foreign exchange impact recognized from these hedges offset the translation exposure of these transactions.  The carrying amount of the contracts for asset and liability derivatives not designated as hedging instruments was $1.0 million classified in other assets and $0.4 million in other liabilities and $0.1 million classified in other assets and $3.8 million in other liabilities on the June 30, 2012 and December 31, 2011 Condensed Consolidated Balance Sheets, respectively.

The change in fair value of our foreign currency forward exchange contracts under hedge designations recorded net of tax within accumulated other comprehensive income for the quarters and six months ended June 30, 2012 and 2011 was as follows:

As of June 30, 2012, unrealized losses recorded in “accumulated other comprehensive income,” net of tax, total $5.9 million, of which $3.4 million are expected to be reclassified into earnings over the next twelve months as the hedged sales are recorded.

Note 7 — Income Taxes

The income tax provisions for the quarter and six months ended June 30, 2012 were $22.1 million and $40.5 million, respectively.  The effective tax rate for both periods was just under 32%.  The income tax provisions for the quarter and six months ended June 30, 2011 were $9.3 million and $21.5 million, respectively, and the effective tax rates were 20.0% and 25.4%, respectively.  The second quarter of 2011 results reflect the release of $5.5 million of reserves primarily for uncertain tax positions as a result of an audit settlement.  Excluding this benefit, the effective tax rates would have been 31.8% and 31.9% for the 2011 second quarter and six-month periods.

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Note 8 — Fair Value Measurements

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

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

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

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

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

We do not have any significant assets or liabilities that utilize Level 3 inputs. In addition, we have no assets or liabilities that utilize Level 1 inputs.  For derivative assets and liabilities that utilize Level 2 inputs, we prepare estimates of future cash flows of our derivatives, which are discounted to a net present value.  The estimated cash flows and the discount factors used in the valuation model are based on observable inputs, and incorporate non-performance risk (the credit standing of the counterparty when the derivative is in a net asset position, and the credit standing of Hexcel when the derivative is in a net liability position).  The fair value of these assets and liabilities was approximately $1.8 million and $9.3 million, respectively at June 30, 2012.  Below is a summary of valuation techniques for all Level 2 financial assets and liabilities:

·                  Interest rate swap — valued using LIBOR yield curves at the reporting date.  Fair value was a liability of $0.9 million at June 30, 2012.

·                  Foreign exchange derivative assets and liabilities — valued using quoted forward foreign exchange prices at the reporting date. Fair value of assets and liabilities at June 31, 2012 was $1.8 million and $8.4 million, respectively.

Counterparties to the above contracts are highly rated financial institutions, none of which experienced any significant downgrades in the three months ended June 30, 2012 that would reduce the receivable amount owed, if any, to the Company.

·                  Money market funds —are classified as cash equivalents. Fair value at June 31, 2012 was $11.0 million, the same as book value.

·                  Senior secured facility term loan - Fair value at June 30, 2012 was $90 million, the same as book value.

Note 9 — Segment Information

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

Financial information for our business segments for the quarters and six months ended June 30, 2012 and 2011 is as follows:

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