Retirement and Other Postretirement Benefit Plans

12 Months Ended

Dec. 31, 2011

Retirement and Other Postretirement Benefit Plans

Retirement and Other Postretirement Benefit Plans

Note 8 — Retirement and Other Postretirement Benefit Plans

We maintain qualified defined benefit retirement plans covering certain current and former European employees, as well as nonqualified defined benefit retirement plans and retirement savings plans covering certain eligible U.S. and European employees, and participate in a union sponsored multi-employer pension plan covering certain U.S. employees with union affiliations.  In addition, we provide certain postretirement health care and life insurance benefits to eligible U.S. retirees.

Accounting standards require the use of certain assumptions, such as the expected long-term rate of return, discount rate, rate of compensation increase, healthcare cost trend rates, and retirement and mortality rates, to determine the net periodic costs of such plans.  These assumptions are reviewed and set annually at the beginning of each year.  In addition, these models use an “attribution approach” that generally spreads individual events, such as plan amendments and changes in actuarial assumptions, over the service lives of the employees in the plan.  That is, employees render service over their service lives on a relatively smooth basis and therefore, the income statement effects of retirement and postretirement benefit plans are earned in, and should follow, the same pattern.

We use our actual return experience, future expectations of long-term investment returns, and our actual and targeted asset allocations to develop our expected rate of return assumption used in the net periodic cost calculations of our funded European defined benefit retirement plans.  Due to the difficulty involved in predicting the market performance of certain assets, there will be a difference in any given year between our expected return on plan assets and the actual return.  Following the attribution approach, each year’s difference is amortized over a number of future years.  Over time, the expected long-term returns are designed to approximate the actual long-term returns and therefore result in a pattern of income and expense recognition that more closely matches the pattern of the services provided by the employees.

We annually set our discount rate assumption for retirement-related benefits accounting to reflect the rates available on high-quality, fixed-income debt instruments.  The rates used have dropped over the past three years and are expected to drop an additional 50 basis points for 2012.  The rate of compensation increase for nonqualified pension plans, which is another significant assumption used in the actuarial model for pension accounting, is determined by us based upon our long-term plans for such increases and assumed inflation.  For the postretirement health care and life insurance benefits plan, we review external data and its historical trends for health care costs to determine the health care cost trend rates.  Retirement and termination rates are based primarily on actual plan experience.  The mortality table used for the U.S. plans is based on the RP2000 Mortality Table projected to 2012 and for the U.K. Plans the 140% PNA00 (YoB) long cohort with 1% underpin.

Actual results that differ from our assumptions are accumulated and amortized over future periods and, therefore, generally affect the net periodic costs and recorded obligations in such future periods.  While we believe that the assumptions used are appropriate, significant changes in economic or other conditions, employee demographics, retirement and mortality rates, and investment performance may materially impact such costs and obligations.

U.S. Defined Benefit Retirement Plans

We have nonqualified defined benefit retirement plans covering certain current and former U.S. employees that are funded as benefits are incurred.  Under the provisions of these plans, we expect to contribute approximately $0.3 million in 2012 to cover unfunded benefits.

Multi-Employer Plan

The Company is party to a multi-employer pension plan covering certain U.S. employees with union affiliations.  The plan is the Western Metal Industry Pension Fund, (“the Plan”).  The Plan's employer identification number is 91-6033499; the Plan number is 001.  In 2010, the Plan reported Hexcel Corporation as being an employer that contributed greater than 5% of the Plan’s total contributions.  The expiration date of the collective bargaining agreement and minimum funding arrangements is September 30, 2015.  The Plan has been listed in “critical status” since 2010.  The Plan adopted a Rehabilitation Plan in 2010.  This amendment reduced the adjustable benefits of the participants and levied a surcharge on employer contributions.  We expect the Company’s contribution to be about $1.0 million in 2012 and remain at that level over the next few years.

U.S. Retirement Savings Plan

Under the retirement savings plan, eligible U.S. employees can contribute up to 75% of their annual compensation to an individual 401(k) retirement savings account.  The Company makes matching contributions equal to 50% of employee contributions, not to exceed 3% of employee compensation each year.  We also contribute an additional 2% to 4% of each eligible employee’s salary to an individual 401(k) retirement savings account, depending on the employee’s age.  This increases the maximum contribution to individual employee savings accounts to between 5% and 7% per year, before any profit sharing contributions that are made when we meet or exceed certain performance targets that are set annually.  These profit sharing contributions are made at the Company’s discretion and are targeted at 3% of an eligible employee’s pay, with a maximum of 4.5%.

U.S. Postretirement Plans

In addition to defined benefit and retirement savings plan benefits, we also provide certain postretirement health care and life insurance benefits to eligible U.S. retirees.  Depending upon the plan, benefits are available to eligible employees who retire after meeting certain age and service requirements and were employed by Hexcel as of February 1996.  Our funding policy for the postretirement health care and life insurance benefit plans is generally to pay covered expenses as they are incurred.  Under the provisions of these plans, we expect to contribute approximately $0.7 million in 2012 to cover unfunded benefits.

European Defined Benefit Retirement Plans

We have defined benefit retirement plans in the United Kingdom, Belgium, France and Austria covering certain employees of our subsidiaries in those countries.  The defined benefit plan in the United Kingdom (the “U.K. Plan”), the largest of the European plans, was terminated in 2011 and replaced with a defined contribution plan.  We recorded a curtailment gain of $5.7 million (after tax gain of $0.04 per diluted share) to recognize previously unrecognized prior service credits.  As of December 31, 2011, 56% of the total assets in the U.K. Plan were invested in equities.  Equity investments are made with the objective of achieving a return on plan assets consistent with the funding requirements of the plan, maximizing portfolio return and minimizing the impact of market fluctuations on the fair value of the plan assets.  As a result of an annual review of historical returns and market trends, the expected long-term weighted average rate of return for the U.K. Plan for the 2012 plan year will be 6.5% and 4.4% for the other European Plans as a group.

UK Defined Contribution Pension Plan

Under the Defined Contribution Section, eligible UK employees can belong to the Deferred Contribution Plan on a non-participatory basis or can elect to contribute 3%, 5% or 7% of their pensionable salary.  The Company will contribute 5%, 9% and 13% respectively.  The plan also provides life insurance and disability insurance benefits for members.

Retirement and Other Postretirement Plans - France

The employees of our French subsidiaries are entitled to receive a lump-sum payment upon retirement subject to certain service conditions under the provisions of the national chemicals and textile workers collective bargaining agreements.  The amounts attributable to the French plans have been included within the total expense and obligation amounts noted for the European plans.

Net Periodic Pension Expense

Net periodic expense for our U.S. and European qualified and nonqualified defined benefit pension plans and our retirement savings plans for the three years ended December 31, 2011 is detailed in the table below.

(In millions)	2011			2010		2009
Defined benefit retirement plans	$	(0.3	)	$	9.0	$	7.8
Union sponsored multi-employer pension plan	0.9			0.7		0.6
Retirement savings plans-matching contributions	2.9			2.5		2.4
Retirement savings plans-profit sharing contributions	8.0			6.5		5.4
Net periodic expense	$	11.5		$	18.7	$	16.2

Defined Benefit Retirement and Postretirement Plans

Net periodic cost of our defined benefit retirement and postretirement plans for the three years ended December 31, 2011, were:

(In millions)	U.S. Plans						European Plans
Defined Benefit Retirement Plans	2011		2010		2009		2011			2010			2009
Service cost	$	1.5	$	1.2	$	1.9	$	1.1		$	3.7		$	3.2
Interest cost	1.1		1.0		1.0		7.2			7.3			6.1
Expected return on plan assets	—		—		—		(7.8		)	(6.3		)	(5.0		)
Net amortization	1.6		0.9		0.2		0.7			1.2			0.4
Curtailment gain	—		—		—		(5.7		)	—			—
Net periodic pension cost	$	4.2	$	3.1	$	3.1	$	(4.5	)	$	5.9		$	4.7

U.S. Postretirement Plans	2011			2010			2009
Service cost	$	—		$	0.1		$	0.1
Interest cost	0.4			0.5			0.6
Net amortization and deferral	(0.3		)	(0.2		)	(0.3		)
Net periodic postretirement benefit cost	$	0.1		$	0.4		$	0.4

(In millions)	For the Year Ended December 31, 2011
Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income	U.S. Plans			European Plans			Postretirement Plans
Net loss (gain)	$	3.3		$	7.9		$	(1.6	)
Amortization of actuarial losses	(1.5		)	(0.9		)	—
Amortization of prior service credit (cost)	(0.1		)	5.9			0.4
Effect of foreign exchange	—			(0.6		)	—
Total recognized in other comprehensive income (pre-tax)	$	1.7		$	12.3		$	(1.2	)

The Company expects to recognize $3.0 million of net actuarial loss and an immaterial net prior service cost as a component of net periodic pension cost in 2012 for its defined benefit plans.  The recognition of net prior service credit and net actuarial gain as a component of net periodic postretirement benefit cost in 2012 is expected to be $0.5 million.

The benefit obligation, fair value of plan assets, funded status, and amounts recognized in the consolidated financial statements for our defined benefit retirement plans and postretirement plans, as of and for the years ended December 31, 2011 and 2010, were:

	Defined Benefit Retirement Plans
	U.S. Plans						European Plans						Postretirement Plans
(In millions)	2011			2010			2011			2010			2011			2010
Change in benefit obligation:
Benefit obligation - beginning of year	$	27.8		$	23.3		$	134.1		$	134.6		$	9.4		$	11.2
Service cost	1.5			1.2			1.1			3.7			—			0.1
Interest cost	1.1			1.0			7.2			7.3			0.4			0.5
Plan participants’ contributions	—			—			0.1			0.1			0.3			0.2
Actuarial loss (gain)	3.3			2.9			4.5			(2.2		)	(1.5		)	(1.9		)
Benefits and expenses paid	(0.3		)	(0.6		)	(4.7		)	(4.3		)	(0.6		)	(0.7		)
Curtailment and settlements	—			—			(1.7		)	(0.5		)	—			—
Currency translation adjustments	—			—			(0.8		)	(4.6		)	—			—
Benefit obligation - end of year	$	33.4		$	27.8		$	139.8		$	134.1		$	8.0		$	9.4
Change in plan assets:
Fair value of plan assets - beginning of year	$	—		$	—		$	106.9		$	93.3		$	—		$	—
Actual return on plan assets	—			—			2.7			12.3			—			—
Employer contributions	0.3			0.6			6.2			9.0			0.3			0.4
Plan participants’ contributions	—			—			0.1			0.1			0.3			0.3
Benefits and expenses paid	(0.3		)	(0.6		)	(4.7		)	(4.3		)	(0.6		)	(0.7		)
Currency translation adjustments	—			—			(0.4		)	(3.0		)	—			—
Settlement	—			—			—			(0.5		)	—			—
Fair value of plan assets - end of year	$	—		$	—		$	110.8		$	106.9		$	—		$	—
Amounts recognized in Consolidated Balance Sheets:
Current liabilities	$	0.3		$	0.9		$	0.4		$	0.5		$	0.7		$	0.8
Non-current liabilities	33.1			26.9			28.6			26.7			7.3			8.6
Total Liabilities	$	33.4		$	27.8		$	29.0		$	27.2		$	8.0		$	9.4
Amounts recognized in Accumulated Other Comprehensive Income:
Actuarial net (loss) gain	$	(9.4	)	$	(7.6	)	$	(36.6	)	$	(30.0	)	$	3.7		$	2.4
Prior service credit (cost)	(0.2		)	(0.3		)	(0.1		)	5.6			—			0.1
Total amounts recognized in accumulated other comprehensive (loss) income	$	(9.6	)	$	(7.9	)	$	(36.7	)	$	(24.4	)	$	3.7		$	2.5

The measurement date used to determine the benefit obligations and plan assets of the defined benefit retirement and postretirement plans was December 31, 2011.

The total accumulated benefit obligation (“ABO”) for the U.S. defined benefit retirement plans was $33.0 million and $26.8 million as of December 31, 2011 and 2010, respectively.  The European Plans’ ABO exceeded plan assets as of December 31, 2011 and 2010, by $25.8 million and $22.1 million, respectively.  These plans’ ABO was $136.6 million and $129.1 million as of December 31, 2011 and 2010, respectively.

As of December 31, 2011 and 2010, the accrued benefit costs for the defined benefit retirement plans and postretirement benefit plans included within “accrued compensation and benefits” was $1.4 million and $2.2 million, respectively, and within “other non-current liabilities” was $69.0 million and $62.2 million, respectively, in the accompanying consolidated balance sheets.

Benefit payments for the plans are expected to be as follows:

(In millions)	U.S. Plans		European Plans		Postretirement Plans
2012	$	0.3	$	3.8	$	0.7
2013	7.1		3.8		0.9
2014	1.4		3.5		0.9
2015	18.0		3.7		0.8
2016	4.7		4.1		0.7
2017-2021	5.7		24.6		3.2
	$	37.2	$	43.5	$	7.2

Fair Values of Pension Assets

The following table presents pension assets measured at fair value at December 31, 2011 utilizing the fair value hierarchy discussed in Note 20:

(In millions)	December 31,		Fair Value Measurements at December 31, 2011
Description	2011		Level 1		Level 2		Level 3
Equity funds	$	59.7	$	—	$	59.7	$	—
Active corporate bond fund	45.6		—		45.6		—
Diversified investment funds	2.9		—		0.4		2.5
Insurance contracts	2.6		—		—		2.6
Total assets	$	110.8	$	—	$	105.7	$	5.1

Reconciliation of Level 3 Assets	Balance at January 1, 2011		Actual return on plan assets		Purchases, sales and settlements			Changes due to exchange rates			Balance at December 31, 2011
Diversified investment funds	$	2.8	$	—	$	(0.3	)	$	—		$	2.5
Insurance contracts	2.7		0.1		(0.1		)	(0.1		)	2.6
Total level 3 assets	$	5.5	$	0.1	$	(0.4	)	$	(0.1	)	$	5.1

Plan assets are invested in a number of unit linked pooled funds by an independent asset management group.  Equity funds are split 50/50 between U.K. and overseas equity funds (North America, Japan, Asia Pacific and Emerging Markets).  The asset management firm uses quoted prices in active markets to value the assets.

The Bond Allocation is invested in a number of Active Corporate Bond funds which are pooled funds.  The Corporate Bond funds primarily invest in corporate fixed income securities denominated in British Pounds Sterling with credit ratings of BBB- and above.  We use quoted prices in active markets to value the assets.

Diversified investment funds are invested in an external pension fund which in turn invests in a range of asset classes including equities and government and corporate bonds, hedge funds and private equity.  The fair value of the assets is equal to the fair value of the assets as of January 1, 2011, as provided by the external pension fund, adjusted for cash flows over the year and the estimated investment return on underlying assets over the year.

Insurance contracts contain a minimum guaranteed return.  The fair value of the assets is equal to the total amount of all individual technical reserves plus the non allocated employer’s financing fund reserves at the valuation date.  The individual technical and financing fund reserves are equal to the accumulated paid contributions taking into account the insurance tarification and any allocated profit sharing return.

The actual allocations for the pension assets at December 31, 2011 and 2010, and target allocations by asset class, are as follows:

	Percentage Of Plan Assets		Target Allocations		Percentage Of Plan Assets		Target Allocations
Asset Class	2011		2011		2010		2010
U.K. Equity Fund	27.8	%	31.0	%	29.9	%	30.4	%
Overseas Equity Fund	26.1		31.0		30.7		30.4
Active Corporate Bond Funds	41.1		32.9		34.3		34.1
Insurance Contracts	2.4		2.6		2.5		2.5
Diversified Investment Funds	2.6		2.5		2.6		2.6
Total	100	%	100	%	100	%	100	%

Assumptions

The assumed discount rate for pension plans reflects the market rates for high-quality fixed income debt instruments currently available.  We used the Mercer Yield Curve to set our discount rate for the European plans, the U.S. non-qualified plans and the U.S. postretirement plans.  We believe that the timing and amount of cash flows related to these instruments is expected to match the estimated defined benefit payment streams of our plans.

Salary increase assumptions are based on historical experience and anticipated future management actions.  For the postretirement health care and life insurance benefit plans, we review external data and our historical trends for health care costs to determine the health care cost trend rates.  Retirement rates are based primarily on actual plan experience and on rates from previously mentioned mortality tables.  Actual results that differ from our assumptions are accumulated and amortized over future periods and, therefore, generally affect the net periodic costs and recorded obligations in such future periods.  While we believe that the assumptions used are appropriate, significant changes in economic or other conditions, employee demographics, retirement and mortality rates, and investment performance may materially impact such costs and obligations.

Assumptions used to estimate the actuarial present value of benefit obligations at December 31, 2011, 2010 and 2009 are shown in the following table.  These year-end values are the basis for determining net periodic costs for the following year.

	2011	2010	2009
U.S. defined benefit retirement plans:
Discount rates	3.20%	3.70%	4.55%
Rate of increase in compensation	3.0%	3.5%	3.5%
Expected long-term rate of return on plan assets	N/A	N/A	N/A
European defined benefit retirement plans:
Discount rates	4.5% - 4.75%	5.0% - 5.3%	5.25% - 5.7%
Rates of increase in compensation	3.0%	3.0% - 4.25%	3.0% - 4.25%
Expected long-term rates of return on plan assets	4.25% – 6.5%	4.5% – 7.0%	4.5% – 6.3%
Postretirement benefit plans:
Discount rates	3.85%	4.45%	5.1%

The following table presents the impact that a one-percentage-point increase and a one-percentage-point decrease in the expected long-term rate of return and discount rate would have on the 2012 pension expense, and the impact on our retirement obligation as of December 31, 2011 for a one-percentage-point change in the discount rate:

	Non Qualified			Retiree Medical			U.K. Retirement
(In millions)	Pension Plans			Plans			Plan
Periodic pension expense
One-percentage-point increase:
Expected long-term rate of return	$	N/A		$	N/A		$	(1.1	)
Discount rate	$	(0.1	)	$	0.1		$	(0.6	)
One-percentage-point decrease:
Expected long-term rate of return	$	N/A		$	N/A		$	1.1
Discount rate	$	0.1		$	(0.1	)	$	0.1
Retirement obligation
One-percentage-point increase in discount rate	$	(1.2	)	$	(0.5	)	$	(18.8	)
One-percentage-point decrease in discount rate	$	1.3		$	0.5		$	22.2

The annual rate of increase in the per capita cost of covered health care benefits is assumed to be 7.1% for medical and 5.0% for dental and vision for 2012.  The medical rates are assumed to gradually decline to 4.5% by 2025, whereas dental and vision rates are assumed to remain constant at 5.0%.  A one-percentage-point increase and a one-percentage-point decrease in the assumed health care cost trend would have an insignificant impact on the total of service and interest cost components, and would have an unfavorable and a favorable impact of approximately $0.2 million and $0.3 million on the postretirement benefit obligation for both 2011 and 2010, respectively.