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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

For the Quarter Ended March 31, 2013

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

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

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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, 2012 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, 2012 was derived from the audited 2012 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 2012 Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 8, 2013.

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.

Recently Adopted Accounting Pronouncements

In February 2013 the Financial Accounting Standards Board issued Accounting Standards Update 2013-02 “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income”.  The Company adopted this update in the current quarter. The amounts reclassified out of accumulated other comprehensive income during the three-month period were not material.

Note 2 — Net Income per Common Share

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Total shares underlying stock options of 0.8 million and 0.5 million were excluded from the computation of diluted net income per share for the quarters ended March 31, 2013 and 2012, respectively, 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 ended March 31, 2013 and 2012 were as follows:

Contributions

We generally fund our U.S. non-qualified defined benefit retirement plans when benefit payments are due.  Under the provisions of these non-qualified plans, we expect to contribute $0.3 million in 2013 to cover unfunded benefits.  We contributed $0.3 million to our U.S. non-qualified defined benefit retirement plans during the 2012 fiscal year.

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We contributed $1.5 million and $1.6 million to our European defined benefit retirement plans in the first quarter of 2013 and 2012, respectively.  We plan to contribute approximately $5.8 million during 2013 to these European plans.  We contributed $5.7 million to our European defined benefit retirement plans during the 2012 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 ended March 31, 2013 and 2012 were immaterial.

In connection with our postretirement plans, we contributed $0.1 million during each of the first quarters ended March 31, 2013 and 2012, respectively.  We periodically fund our postretirement plans to pay covered expenses as they are incurred.  We expect to contribute approximately $0.6 million in 2013 to cover unfunded benefits.  We contributed $0.3 million to our postretirement plans during the 2012 fiscal year.

Note 5 — Debt

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, 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 $0.8 million at March 31, 2013 and a liability of $1.0 million at December 31, 2012.

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 September 2015.  The aggregate notional amount of these contracts was $212.0 million and $201.2 million at March 31, 2013 and December 31, 2012, 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 $7.7 million and gains of $4.7 million, were recorded in other comprehensive income (“OCI”) for the three-month periods ended March 31, 2013, and 2012.  The $0.9 million carrying amount of these contracts was classified in other assets and $5.5 million in other liabilities on the condensed consolidated balance sheets at March 31, 2013 and $3.6 million in other assets and $1.6 million classified in other liabilities at December 31, 2012.  During the three months ended March 31, 2013 and 2012, we recognized a net $0.2 million increase and a $0.5 million reduction of gross margin, respectively.  For the quarters ended March 31, 2013 and 2012, hedge ineffectiveness was immaterial.

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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 March 31, 2013 and 2012, we recognized a net foreign exchange loss of $4.7 million and foreign exchange gains of $3.2 million, respectively, in the condensed 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 $0.1 million classified in other assets and $4.4 million in other liabilities and $3.1 million classified in other assets and $0.1 million in other liabilities on the March 31, 2013 and December 31, 2012 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 ended March 31, 2013 and 2012 was as follows:

As of March 31, 2013, unrealized losses recorded in “accumulated other comprehensive income,” net of tax, total $3.8 million, of which $3.0 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 quarters ended March 31, 2013 and 2012 were $17.9 million and $18.4 million, respectively. Our effective tax rate for the current quarter was 29.2% as compared to 31.9% in 2012.  This quarter benefitted from the extension of the 2012 and 2013 U.S. Research & Development tax credits that was enacted in January 2013.  The full benefit from 2012 was taken in the first quarter of 2013 and reduced the rate by one percentage point.  Implementation of tax planning strategies and the mix of income by country accounted for the remaining improvement in the tax rate.

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).  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 $0.8 million at March 31, 2013.

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·                  Foreign exchange derivative assets and liabilities — valued using quoted forward foreign exchange prices at the reporting date.  Fair value of assets and liabilities at March 31, 2013 was $1.0 million and $9.9 million, respectively.

·                  Senior secured facility term loan - Fair value at March 31, 2013 was $82.5 million, the same as book value.

Counterparties to the above contracts are highly rated financial institutions, none of which experienced any significant downgrades in the three months ended March 31, 2013 that would reduce the receivable amount owed, if any, to the Company.

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 operating segments for the quarters ended March 31, 2013 and 2012 is as follows:

(a)   We do not allocate corporate expenses to the operating segments.

Goodwill and Intangible Assets

The carrying amount of gross goodwill and intangible assets by segment is as follows:

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No impairments have been recorded against these amounts.

Note 10 — 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 when a loss becomes probable and estimable. These judgments take into consideration 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.  Such estimates are not discounted to reflect the time value of money due to the uncertainty in estimating the timing of the expenditures, which may extend over several years.

While it is impossible to ascertain the ultimate legal and financial liability with respect to certain contingent liabilities and claims, we believe, based upon our examination of currently available information, our experience to date, and advice from legal counsel, that the individual and aggregate liabilities resulting from the ultimate resolution of these contingent matters, after taking into consideration our existing insurance coverage and amounts already provided for, will not have a material adverse impact on our consolidated results of operations, financial position or cash flows.

Environmental Matters

We are subject to various U.S. and international federal, state and local environmental, and health and safety laws and regulations.  We are also subject to liabilities arising under the Federal Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA” or “Superfund”), the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act, and similar state and international laws and regulations that impose responsibility for the control, remediation and abatement of air, water and soil pollutants and the manufacturing, storage, handling and disposal of hazardous substances and waste.

We have been named as a potentially responsible party (“PRP”) with respect to several 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 CERCLA 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, our existing insurance coverage, the amounts already provided for and the number of other financially viable PRPs, that our liability in connection with such matters will not be material.

Lodi, New Jersey Site

Pursuant to the New Jersey Industrial Site Recovery Act, Hexcel entered into an Administrative Consent Order for the environmental remediation of a manufacturing facility we own and formerly operated in Lodi, New Jersey.  We have not operated this site since 1986.  We have been remediating this site in accordance with a State approved plan and continue to do so under the New Jersey Licensed Site Remediation Professional program.  The primary remediation activities have been completed and we now believe that the remediation has removed most of the contamination.  However, there are still select contaminated areas that we will have to continue remediating using alternative methods.  The accrual is $4.0 million at March 31, 2013.

Lower Passaic River Study Area

In October 2003, we received, along with 66 other entities, a directive from the New Jersey Department of Environmental Protection (“NJDEP”) that requires the entities to assess whether operations at various New Jersey sites, including our former manufacturing site in Lodi, New Jersey, caused damage to natural resources in the Lower Passaic River watershed.  The NJDEP later dismissed us from the Directive.  In February 2004, 42 entities including Hexcel, received a general notice letter from the EPA which requested that the entities consider helping to finance an estimated $10 million towards an EPA study of environmental conditions in the Lower Passaic River watershed.  In May 2005, we voluntarily signed into an agreement with the EPA to participate (bringing the total number of participating entities to 43) in financing such a study up to $10 million, in the aggregate.  Since May 2005, a number of additional PRPs have joined into the agreement with the EPA.  In October 2005, we along with the other EPA notice recipients were advised by the EPA that the notice recipients’ share of the costs of the EPA study was expected to significantly exceed the earlier EPA estimate.  While we and the other recipients were not obligated by our agreement to share in such excess, a Group of notice recipients (73 companies including Hexcel) negotiated an agreement with the EPA to assume responsibility for the study pursuant to an Administrative Order on Consent.  We believe we have viable defenses to the EPA claims and expect that other as yet unnamed parties will also receive notices from the EPA.  In June 2007, the EPA issued a draft Focused Feasibility Study (“FFS”) that considers interim remedial options for the lower eight miles of the river, in addition to a “no action” option.  The estimated costs for the six options ranged from $900 million to $2.3 billion.  The PRP Group provided comments to the EPA on the FFS; the EPA has not yet taken further action.  The Administrative Order on Consent regarding the study does not cover work contemplated by the FFS.  In June 2012, without admitting liability, we along with 69 other PRPs entered into a further agreement with EPA to remove and cap contaminated sediments near River Mile 10.9 of the Lower Passaic River at an approximate cost of $20 million. We accrued $0.5 million in the second quarter of 2012 for our expected allocation of these costs.  Furthermore, the Federal Trustee for natural resources

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have indicated their intent to perform a natural resources damage assessment on the river and invited the PRPs to participate in the development and performance of this assessment.  The PRP Group, including Hexcel, has not agreed to participate in the assessment at this time.

On February 4, 2009, Tierra Solutions (“Tierra”) and Maxus Energy Corporation (“Maxus”) filed a third party complaint in New Jersey Superior Court against us and over 300 other entities in an action brought against Tierra and Maxus (and other entities) by the State of New Jersey.  New Jersey’s suit against Tierra and Maxus relates to alleged discharges of contaminants by Tierra and Maxus to the Passaic River and seeks payment of all past and future costs the State has and will incur regarding cleanup and removal of contaminants, investigation of the Passaic River and related water bodies, assessment of natural resource injuries and other specified injuries.  The third party complaint seeks contribution from us for all or part of the damages that Tierra and Maxus may owe to the State.  We filed our answer to the complaint and served our initial disclosures, and have produced initial documents to Tierra and Maxus, pursuant to an order of the court.  The court’s trial plan and subsequent orders contemplate multiple trial tracks involving third-party defendants (including Hexcel) culminating with trials commencing as early as April 2013.  However, at a case management conference held in March 2013, the Court announced that most third-party defendants had reached a tentative settlement with the State of New Jersey which, if approved by the Court, would end the state court litigation as to participating third-party defendants.  We committed to join the settlement and if the settlement is approved by the Court, we would pay New Jersey $0.3 million.  This amount was accrued in the first quarter of 2013.  It is anticipated that the settlement will be brought to the Court for approval in the second half of 2013.  The litigation presently has been stayed as to parties participating in the settlement.  The scope of Hexcel’s continued involvement in the litigation depends on whether the Court approves the settlement and dismisses Hexcel from the case, which is uncertain at this time.  Our ultimate liability for investigatory costs, remedial costs and/or natural resource damages in connection with the Lower Passaic River cannot be determined at this time.

Kent, Washington Site

We were party to a cost-sharing agreement regarding the operation of certain environmental remediation systems necessary to satisfy a post-closure care permit issued to a previous owner of our Kent, Washington site by the EPA.  Under the terms of the cost-sharing agreement, we were obligated to reimburse the previous owner for a portion of the cost of the required remediation activities.  The previous owner, who also continues to own an adjacent site, has installed certain remediation and isolation technologies and is operating those in accordance with an order agreed with the State of Washington.  This isolation is expected to prevent further migration of contaminants to our site and enable us to perform a cleanup of our site.  We and the Washington Department of Ecology have reached an agreed order to perform certain cleanup activities on our site by certain deadlines, and we are in full compliance with the order as modified.  The total accrued liability related to this matter was $1.0 million at March 31, 2013.

Omega Chemical Corporation Superfund Site, Whittier, CA

We are a potentially responsible party at a former chemical waste site in Whittier, CA. The PRPs at Omega have established a PRP Group, the “Omega PRP Group”, and are currently investigating and remediating soil and groundwater at the site pursuant to a Consent Decree with the EPA.  The Omega PRP Group has attributed approximately 1.07% of the waste tonnage sent to the site to Hexcel.  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 recently issued a Record of Decision; the Omega PRP Group members have been noticed by the EPA as PRP’s 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 Omega PRP group, 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, we have accrued $0.6 million relating to potential liability for both the Omega site and regional groundwater remedies.

Summary of Environmental Reserves

Our estimate of liability as a PRP and our remaining costs associated with our responsibility to remediate the Lodi, New Jersey; Kent, Washington; Omega Chemical and other sites are accrued in the condensed consolidated balance sheets.  As of March 31, 2013, our aggregate environmental related accruals were $6.7 million, of which $4.2 million was included in accrued liabilities with the remainder included in non-current liabilities.  As related to certain environmental matters, except for the Lodi site, 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 these matters at the high end of the range of possible outcomes, our accrual would have been $1.5 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 and other actions by governmental agencies or private parties, or the impact, if any, of being named in a new matter.

Environmental remediation spending charged to our reserve balance for the quarters ended March 31, 2013 and 2012 was $0.8 million and $1.6 million, respectively.  In addition, our operating costs relating to environmental compliance charged to expense were $3.3 million and $2.8 million for the quarters ended March 31, 2013 and 2012, respectively.  Capital expenditures for environmental matters were $0.8 million and $0.3 million for the quarters ended March 31, 2013 and 2012, respectively.

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Product Warranty

We provide for an estimated amount of product warranty expense at the time revenue is recognized.  This estimated amount is provided by product and based on historical warranty experience.  In addition, we periodically review our warranty accrual and record any adjustments as deemed appropriate.  Warranty expense for the quarter ended March 31, 2013, and accrued warranty cost, included in “accrued liabilities” in the condensed consolidated balance sheets at March 31, 2013 and December 31, 2012, was as follows:

Note 11 — Stock Repurchase Plan

In December 2012, our Board authorized us to repurchase up to $50 million of our outstanding common stock (“Repurchase Plan”). During the quarter, the Company invested $15 million and bought back 530,730 shares under its authorized Repurchase Plan.

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, engineered honeycomb and composite structures, for use in Commercial Aerospace, Space & Defense and Industrial Applications.  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, bikes, skis and a wide variety of recreational products and other industrial applications.

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

Hexcel has 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, and honeycomb core product lines.  The Engineered Products segment is comprised of lightweight high strength composite structures, molded components and specialty machined honeycomb product lines.

Net sales for the quarter were $416.5 million, 4.1% higher (3.9% in constant currency) than the $400.1 million reported for the first quarter of 2012, led by the aerospace market.

Commercial Aerospace sales of $268.9 million increased 11.0% (10.8% in constant currency) for the quarter as compared to the first quarter of 2012.  Revenues attributed to new aircraft programs (A380, A350, B787, B747-8) increased nearly 20% versus the same period last year.  Our B787 shipments continued to show strong growth in support of production rate increases.  Airbus and Boeing legacy aircraft related sales for the quarter were up over 10% compared to 2012, as we experienced increasing demand related to line-rate increases.

Sales to other commercial aerospace, which include regional and business aircraft customers, declined modestly for the first quarter compared to 2012, as well as on a sequential basis.

Space & Defense sales of $96.0 million were 13.1% higher (12.9% in constant currency) than the first quarter of 2012.  Growth came from both rotorcraft and military fixed wing aircraft programs.

Total Industrial sales of $51.6 million for the first quarter of 2013 were weak across the board at 29.2% lower (29.5% in constant currency) than the first quarter of 2012.  As expected, wind sales were down over 30% from the record levels in the first half of 2012 and about 9% lower than the fourth quarter of 2012. 

Gross margin increased to 26.9% of net sales for the quarter as compared to 26.6% in the same period last year, benefitting from strong volume and continued improvement in operating performance. Selling, general and administrative expenses were 3.8% higher than the first quarter of 2012 primarily driven by the timing of stock based compensation expense.  Research and technology expenses in the first quarter of 2013 of $11.0 million were $1.8 million higher than the comparable 2012 period.  

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Free cash flow (defined as cash provided by operating activities less capital expenditures) for the first quarter of 2013 was a use of $15 million versus a use of $61 million in 2012, as seasonal effects typically cause cash usage in the first quarter.  The lower usage was due to lower capital expenditures, as cash used for capital expenditures was $48 million in the first quarter of 2013 as compared to $83 million in 2012. We continue to expect 2013 accrual basis capital expenditures to be in the range of $180 million to $200 million.

Financial Overview

Results of Operations

Net Sales

The following table summarizes net sales to third-party customers by segment and end market for the quarters ended March 31, 2013 and 2012:

Commercial Aerospace: Net sales increased $26.6 million, or 11.0% (10.8% on a constant currency basis), to $268.9 million for the first quarter of 2012.  New aircraft programs (A380, A350, B787, B747-8) increased nearly 20% versus the same period last year.  Our B787 shipments continued to show strong growth in support of production rate increases.  Airbus and Boeing legacy aircraft related sales for the quarter were up almost 10% compared to the first quarter of 2012.  Sales to other commercial aerospace, which includes regional and business aircraft customers, declined modestly for the first quarter compared to 2012, as well as on a sequential basis.

Space & Defense: Net sales increased $11.1 million, or 13.1% (12.9% in constant currency), to $96.0 million for the first quarter of 2013.  Growth came from both rotorcraft and military fixed wing aircraft programs.

Industrial: Net sales for the first quarter of 2013 decreased $21.3 million, or 29.2% (down 29.5% on a constant currency basis) as compared to the first quarter of 2012.  As expected, wind sales were down over 30% from the record levels in the first half of 2012

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and about 9% lower than the fourth quarter of 2012. 

Gross Margin

We achieved a gross margin percentage of 26.9% in the first quarter of 2013 benefitting from strong volume and continued improvement in operating performance. Foreign exchange rates contributed a nominal benefit to the higher gross margin percentage.

Operating Expenses

SG&A and R&T expenses as a percentage of sales were 11.7% in the first quarter of 2013, as compared to 11.4% for the 2012 period.  R&T expenses were $1.8 million higher than the comparable 2012 period primarily due to investments for the next generation of composites.

Operating Income