Derivative Financial Instruments

12 Months Ended

Dec. 31, 2011

Derivative Financial Instruments

Derivative Financial Instruments

Note 13 — Derivative Financial Instruments

Interest Rate Swap Agreements

In the fourth quarter 2010, we entered into an agreement to swap $98 million of a floating rate obligation for a fixed rate obligation at an average of 1.03% against LIBOR in U.S. dollars, which is scheduled to mature on March 31, 2014. The swap was accounted for as a cash flow hedge of our floating rate bank loan. To ensure the swap was highly effective, all of the principal terms of the swap matched the terms of the bank loan.  The fair value of the interest rate swap was a liability of $0.6 million at December 31, 2011.

Cross-Currency Interest Rate Swap Agreement

In September 2011, our cross-currency interest rate swap agreement, with a notional value of $63.4 million, to hedge a portion of our net Euro investment in Hexcel SASU (France) matured, resulting in a $5.2 million payment which is included in cash from investing activities on the consolidated statements of cash flows.  To the extent it was effective, gains and losses were recorded as an offset in the cumulative translation account, the same account in which translation gains and losses on the investment in Hexcel France SA were recorded. We received interest in U.S. dollars quarterly and paid interest in Euros on the same day.  U.S. interest was based on the three month LIBOR.  Euro interest was based on the three month EURIBOR.  The fair value of the swap at December 31, 2010 was a liability of $3.0 million.  Net charges to interest expense of $0.6 million and $0.3 million related to the interest coupons were recorded during 2011 and 2010, respectively.  The net amount of gains/losses included in the CTA adjustment during the reporting periods were a loss of $3.5 million, a gain of $5.4 million and a loss of $1.2 million in 2011, 2010 and 2009, respectively.

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 May 2014.  The aggregate notional amount of these contracts was $168.9 million and $124.2 million at December 31, 2011 and 2010, 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 was a gain of $2.9 million, $3.9 million and a loss of $4.1 million for the years ended December 31, 2011, 2010 and 2009, respectively, and are recorded in OCI.  We exclude the forward points which resulted in a gain of $1.4 million (recorded as a reduction of interest expense) from the effectiveness assessment for the current year, and immaterial amounts in 2010 and 2009.  The carrying amount of these contracts was $0.6 million in other assets and $6.6 million classified in other liabilities on the Consolidated Balance Sheets.  During the year ended December 31, 2011 we recognized net gains of $3.1 million recorded in sales and cost of sales. During the year ended December 31, 2010 we recognized net losses of $5.7 million recorded in sales and cost of sales.  For the three years ended December 31, 2011, hedge ineffectiveness was immaterial.  Cash flows associated with these contracts are classified within net cash provided by operating activities.

In addition, we enter into foreign exchange forward contracts which are not designated as hedges. The change in the fair value of the derivatives is recorded in the consolidated statements of operations.  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.  There are no credit contingency features in these derivatives.  The carrying amount of the contracts for asset and liability derivatives not designated as hedging instruments was $0.1 million classified in other assets and $3.8 million in other liabilities and $0.3 million classified in other assets and $1.7 million in other liabilities on the December 31, 2011 and 2010 Consolidated Balance Sheets, respectively.

The activity in “accumulated other comprehensive income (loss)” related to foreign currency forward exchange contracts for the years ended December 31, 2011, 2010 and 2009 was as follows:

(In millions)	2011			2010			2009
Unrealized losses at beginning of period	$	(0.2	)	$	(1.4	)	$	(8.9	)
Gains (losses) reclassified to net sales	(2.2		)	3.9			4.3
(Decrease) increase in fair value, net of tax	(2.1		)	(2.7		)	3.2
Unrealized losses at end of period	$	(4.5	)	$	(0.2	)	$	(1.4	)

Unrealized losses of $2.2 million recorded in “accumulated other comprehensive loss,” net of tax, as of December 31, 2011 are expected to be reclassified into earnings over the next twelve months as the hedged sales are recorded.  The impact of credit risk adjustments was immaterial.

In addition, non-designated foreign exchange forward contracts are used to hedge balance sheet exposures, such as recognized foreign denominated receivables and payables. The notional amounts outstanding at December 31, 2011 and 2010, respectively, are U.S. $149.0 million against EUR, and U.S. $85.9 million and GBP 1.0 million against EUR. The change in fair value of these forward contracts is recorded in the consolidated statements of operations and was immaterial for the years 2011, 2010 and 2009.