HEXCEL CORP /DE/ - 10-Q Quarterly Report

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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FORM 10-Q

/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarter Ended September 30, 2002

or

/ / 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
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HEXCEL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

Delaware 94-1109521
(STATE OF INCORPORATION) (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

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 / /

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

CLASS OUTSTANDING AT NOVEMBER 8, 2002
COMMON STOCK 38,419,559

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HEXCEL CORPORATION AND SUBSIDIARIES

INDEX

1

PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

HEXCEL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.

2

HEXCEL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.

3

HEXCEL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.

4

HEXCEL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 -- BASIS OF ACCOUNTING

The accompanying condensed consolidated financial statements have been
prepared from the unaudited records of Hexcel Corporation and subsidiaries
("Hexcel" or "the Company") in accordance with accounting principles generally
accepted in the United States of America, and, in the opinion of management,
include all adjustments necessary to present fairly the balance sheet of the
Company as of September 30, 2002 and the results of operations for the quarters
and nine months ended September 30, 2002 and 2001, and the cash flows for the
nine months ended September 30, 2002 and 2001. The condensed consolidated
balance sheet of the Company as of December 31, 2001 was derived from the
audited 2001 consolidated balance sheet. Certain information and footnote
disclosures normally included in financial statements have been omitted pursuant
to rules and regulations of the Securities and Exchange Commission. Certain
prior period amounts in the condensed consolidated financial statements and
accompanying notes have been reclassified to conform to the 2002 presentation.
These condensed consolidated financial statements should be read in conjunction
with the consolidated financial statements and notes thereto included in the
Company's 2001 Annual Report on Form 10-K.

NOTE 2 - ACCOUNTING CHANGES

Effective January 1, 2002, the Company adopted Statements of Financial
Accounting Standards No. 141, "Business Combinations" ("FAS 141"), and No. 142,
"Goodwill and Other Intangible Assets" ("FAS 142"). FAS 141 requires that all
business combinations subsequent to June 30, 2001 be accounted for using the
purchase method of accounting. It also specifies the types of acquired
intangible assets that are required to be recognized and reported separate from
goodwill. FAS 142 changes the accounting for goodwill from an amortization
method to an impairment only approach. Upon adoption, goodwill is tested at the
reporting unit level annually and whenever events or circumstances occur
indicating that goodwill might be impaired. The assessment of possible
impairment is based upon a comparison of the reporting unit's fair value to its
carrying value. Amortization of goodwill, including goodwill recorded in past
business combinations, ceased upon adoption. There was no impairment of goodwill
upon adoption of FAS 142.

Net loss and net loss per share for the quarters and nine months ended
September 30, 2002 and 2001, and adjusted to exclude amortization expense, net
of tax, are as follows:

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The gross carrying amount and accumulated amortization of goodwill for the
Company's segments as of September 30, 2002 and December 31, 2001, are as
follows:

No goodwill or other purchased intangibles were acquired during the
quarters and nine months ended September 30, 2002 and 2001. Amortization expense
was $2.3 million in Reinforcements, $0.7 million in Composites and $0.3 million
in Structures for the quarter ended September 30, 2001, and $6.8 million, $2.0
million and $0.9 million for the nine months ended September 30, 2001,
respectively.

The Company also adopted Statement of Financial Accounting Standards No.
145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections" ("FAS 145") effective January 1,
2002. Among other matters, FAS 145 rescinds Statement of Financial Accounting
Standards No. 4, "Reporting Gains and Losses from Extinguishment of Debt," which
required all gains and losses from extinguishment of debt be aggregated and, if
material, classified as an extraordinary item, net of the related income tax
effect. In connection with its adoption, gains and losses from extinguishments
of debt will no longer be classified as extraordinary items in the Company's
statement of operations. In addition, prior period financial statements are to
be reclassified to reflect the new standard. As such, the Company reclassified
the $3.1 million extraordinary loss on early retirement of debt recorded in the
second quarter of 2001 as a separate line item below operating income in its
condensed consolidated statement of operations.

During the third quarter of 2002, the Company recognized a $0.5 million
gain on the early retirement of debt, related to the repurchase of $1.8 million
of its 7% Convertible Subordinated Debentures Due 2011, in satisfaction of an
annual sinking fund requirement. The debt was repurchased at market prices,
which resulted in a gain. In accordance with the requirements of FAS 145, the
gain has been reported as a separate line item below operating income.

In the second quarter of 2001, the Company recognized a $3.1 million loss
on the early retirement of $67.5 million aggregate principal amount of the
Company's outstanding 7% Convertible Subordinated Notes Due 2003 and the
redemption of the entire principal amount of $25.0 million of the Company's
Increasing Rate Senior Subordinated Note Due 2003 in connection with the
Company's issuance of $100.0 million of 9.75% Senior Subordinated Notes Due
2009.

NOTE 3 -- INVENTORIES

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NOTE 4 -- BUSINESS CONSOLIDATION AND RESTRUCTURING PROGRAMS

During the fourth quarter of 2001, the Company announced a program to
restructure its business operations as a result of its revised business outlook
for build rate reductions in commercial aircraft production in both 2002 and
2003 and due to the continued depressed business conditions in the electronics
market. The program includes company-wide reductions in managerial,
professional, indirect manufacturing and administrative employees along with
organizational rationalization. The Company continued the implementation of this
program during the first nine months of 2002, further reducing its workforce by
over 17%, to 4,450 employees. Management will continue to closely monitor
spending under the existing programs and evaluate opportunities that may exist
for future actions, as the Company continues to right-size the business in
response to existing conditions in the markets it serves.

Business consolidation and restructuring liabilities as of September 30,
2002 and December 31, 2001, and activity for the quarter and nine months ended
September 30, 2002, consisted of the following:

For the quarter ended September 30, 2002, the Company recognized a net
credit to business consolidation and restructuring expenses of $0.1 million.
This resulted in a $1.6 million reduction of previously accrued liabilities for
lower than expected employee severance and other benefit costs; offset in part
by a $1.1 million increase in restructuring liabilities for building leases, and
$0.4 million of expenses incurred and paid during the quarter.

For the nine months ended September 30, 2002, business consolidation and
restructuring expenses were $0.7 million, and consisted of equipment relocation
and re-qualification costs expensed as incurred of $1.7 million, net of a gain
on the sale of the previously idled Cleveland, Georgia facility of $0.5 million
recognized in the second quarter and the reversal of net reserves of $0.5
million recognized in the third quarter. Equipment relocation and
re-qualification costs related both to the planned closure of the Lancaster,
Ohio pre-preg manufacturing facility, as well as actions associated with the
restructuring program announced during the fourth quarter of 2001.

For the quarter and nine months ended September 30, 2001, the Company
recognized $4.4 million and $7.3 million of business consolidation and
restructuring expenses, respectively. Business consolidation and restructuring
expenses recognized related to actions announced in July 2001 for cost
reductions in the Reinforcements business segment and for costs incurred
pursuant to previously announced plant closure actions.

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NOTE 5 -- NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS

SENIOR CREDIT FACILITY

Hexcel has a global credit facility (the "Senior Credit Facility") with a
syndicate of banks to provide for ongoing working capital and other financing
requirements. The Senior Credit Facility, which consists of revolving credit,
overdraft and term loan facilities, provided Hexcel with committed lines of
approximately $320.8 million as of September 30, 2002, subject to certain
limitations. These commitments consisted of funded term loans of $108.8 million,
revolving credit and overdraft facilities of $182.0 million, and letter of
credit facilities of $30.0 million. As of September 30, 2002, drawings under the
revolving credit facility were $98.4 million leaving undrawn commitments under
the facilities of $83.5 million. As of September 30, 2002, letters of credit
issued under the facility approximated $24.0 million, of which $11.1 million
supported a loan to the Company's BHA Aero Composite Parts Co., Ltd. joint
venture in China. The Company is subject to various financial covenants and
restrictions under the Senior Credit Facility, including limitations on
incurring debt, granting liens, selling assets, repaying subordinated
indebtedness, redeeming capital stock and paying dividends. The Senior Credit
Facility is scheduled to expire in 2004, except for approximately $55.8 million
of term loans that are due for repayment in 2005.

Effective January 25, 2002, Hexcel entered into an amendment of the Senior
Credit Facility. The amendment provided for revised financial covenants through
2002; a 100 basis point increase in the interest spread payable over LIBOR for
advances under the facility; and an immediate decrease in the commitment of
revolving credit and overdraft facilities from a cumulative amount of $205.0
million to $190.0 million, with a further reduction to $182.0 million on or
before September 30, 2002. The 2002 revised, relaxed covenants were derived from
the Company's 2002 business plan projections plus a modest cushion. The Senior
Credit Facility financial covenants set certain maximum values for the Company's
leverage (the ratios of total and senior debt to Adjusted EBITDA), and certain
minimum values for its interest coverage (the ratio of Adjusted EBITDA to cash
interest expense) and fixed charge coverage (the ratio of Adjusted EBITDA less
capital expenditures to the sum of certain fixed expenses). In addition, during
the term of the amendment, all net proceeds generated through asset sales, and
most other liquidity events, in each case to the extent in excess of $2.5
million, and 100% of all net proceeds generated from litigation settlements and
judgments, must be used to prepay loans under the Senior Credit Facility. Hexcel
has also agreed to limit capital expenditures to $25.0 million during 2002, with
a $10.0 million limit during any quarter in 2002. At September 30, 2002, the
Company was in compliance with the covenants, as amended, under its Senior
Credit Facility.

In connection with the credit agreement amendment, Hexcel also agreed to
grant additional collateral. The Company had previously granted a security
interest in most of its U.S. accounts receivable,

8

inventory, property, plant, equipment and real estate. It had also pledged some
or all of the shares of certain subsidiaries. Under the terms of the amendment,
Hexcel has granted to the banks a security interest in additional U.S. accounts
receivable, inventory, property, plant, equipment and real estate, as well as
its intellectual property. In addition, during the second quarter of 2002, each
of a group of Hexcel's European subsidiaries granted to the banks a security
interest in its accounts receivable that secures certain local borrowings
advanced to that subsidiary.

The January 25, 2002 amendment relaxed the 2002 quarterly financial
covenants to accommodate the impact of the downturn in the commercial aerospace
and electronics markets. Under the terms of the amendment, the financial
covenants effective beginning with the quarter ending March 31, 2003 are those
that applied before the amendment. As these market conditions are expected to
continue during 2003, absent a refinancing, the Company will need to obtain a
further amendment of the facility by the end of the first quarter of 2003 to
accommodate its projected financial performance for that year. Given its
financial leverage, the Company's ability to comply with the financial covenants
and other terms of its senior debt could be compromised in the future if its
financial performance were to further deteriorate as a result of further
declines in the general macroeconomic environment or in key markets served by
the Company, or by other unforeseen events. There is no assurance that the
Company's senior lenders will further amend its financial covenants, if
required, or as to the terms under which such an amendment may be granted, or as
to whether the Company will be able to refinance the Senior Credit Facility on
acceptable terms. In addition, the Company may need the consent of its senior
lenders to redeem its 7% Convertible Subordinated Notes due August 1, 2003, and
there is no assurance that this consent, if sought, would be obtained.

9.75% SENIOR SUBORDINATED NOTES DUE 2009 AND REDEMPTION OF CERTAIN NOTES

On June 29, 2001, the Company issued $100.0 million of 9.75% Senior
Subordinated Notes Due 2009 at a price of 98.5% of face value. Net proceeds from
the offering were used to redeem $67.5 million aggregate principal amount of the
Company's outstanding 7% Convertible Subordinated Notes Due 2003 and to pay the
entire principal amount of $25.0 million of the Increasing Rate Senior
Subordinated Note Due 2003. The issuance and early retirement resulted in an
approximate $6.5 million cash expenditure for the period.

NOTE 6 - LITIGATION GAIN

In the second quarter of 2002, the Company recognized a litigation gain of
$9.8 million (net of related fees and expenses) in connection with a contract
dispute with Hercules, Inc. that arose out of the acquisition of Hercules'
Composites Products Division in 1996. The net cash proceeds received from
Hercules Inc. of $11.1 million were in satisfaction of the judgment entered in
favor of the Company after Hercules had exhausted all appeals from a lower court
decision in the New York courts.

NOTE 7 - INVESTMENTS IN AFFILIATED COMPANIES

During the second quarter of 2002, the Company agreed with its Asian
Electronics venture partner to restructure its minority interest in
Asahi-Schwebel Co. Ltd. Under the terms of the agreement, the Company reduced
its ownership interest in the joint venture from 43.3% to 33.3% in July 2002 and
received cash proceeds of $10.0 million. The cash proceeds were received on July
15, 2002. The agreement also included, among other matters, a put option in
favor of the Company to sell and a call option in favor of the Company's joint
venture partner to purchase the Company's remaining ownership interest in the
joint venture for $23.0 million. The options are simultaneously effective for a
six-month period beginning July 1, 2003. Reflecting these terms, the Company
wrote-down the carrying value of its remaining equity investment in this joint
venture to its estimated fair market value of $23.0 million,

9

recording a non-cash impairment charge of $4.0 million during the second quarter
of 2002. There was no tax benefit recognized on the write-down.

NOTE 8 -- NON-RECURRING EXPENSES

In January 2002 and in May 2001, the Company entered into amendments to the
Senior Credit Facility. In connection with these amendments, included in
interest expense in the nine months ended September 30, 2002 and 2001 are fees
and expenses incurred of $1.8 million and $1.0 million, respectively.

In connection with the retirement of the former chief executive officer,
the Company recorded compensation expenses of $4.7 million in the second quarter
of 2001 as a result of the early vesting of certain deferred compensation and
equity compensation awards together with a contractual termination payment.

NOTE 9 -- NET LOSS PER SHARE

The Company's convertible subordinated notes, due 2003, convertible
subordinated debentures, due 2011, and all outstanding stock options were
excluded from the computations of diluted net loss per share for the quarters
and nine months ended September 30, 2002 and 2001, as they were anti-dilutive.

NOTE 10 -- COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) represents net income (loss) and other gains
and losses affecting shareholders' equity that are not reflected in the
condensed consolidated statements of operations. The components of comprehensive
income (loss) for the quarters and nine months ended September 30, 2002 and 2001
were as follows:

10

NOTE 11 -- DERIVATIVE FINANCIAL INSTRUMENTS

INTEREST RATE CAP AGREEMENT

The Company's financial results are affected by interest rate changes on
its variable rate debt. In order to partially mitigate this interest rate risk,
the Company entered into a four-year interest rate cap agreement in 1998. This
agreement provides for a maximum fixed rate of 5.5% on the applicable London
interbank rate used to determine the interest on a notional amount of $50.0
million of variable rate debt under the Senior Credit Facility. The fair value
and carrying amount of this contract at September 30, 2002 and December 31,
2001, along with hedge ineffectiveness for the quarters and nine months ended
September 30, 2002 and 2001, were not material. The interest rate cap agreement
expired on October 29, 2002.

FOREIGN CURRENCY FORWARD EXCHANGE CONTRACTS

A number of the Company's 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. To
minimize this exposure, Hexcel entered into a number of foreign currency forward
exchange contracts to exchange U.S. dollars for Euros at fixed rates on
specified dates through March 2005. The aggregate notional amount of these
contracts was $64.7 million at September 30, 2002 and $83.9 million at December
31, 2001. 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 the Company with a
more balanced matching of future cash receipts and expenditures by currency,
thereby reducing the Company's exposure to fluctuations in currency exchange
rates. For the quarter and nine months ended September 30, 2002, hedge
ineffectiveness was immaterial and the fair value of the foreign currency cash
flow hedges recognized in "comprehensive income" was a loss of $0.1 million and
gain of $6.6 million, respectively. Over the next twelve months, approximately
$0.7 million of other comprehensive gains are expected to be reclassified into
earnings as the hedged sales are recorded.

NOTE 12 -- SEGMENT INFORMATION

The financial results for Hexcel's business segments are prepared using a
management approach, which is consistent with the basis and manner in which
Hexcel management internally segregates financial information for the purposes
of assisting in making internal operating decisions. Hexcel evaluates the
performance of its operating segments based on income before business
consolidation and restructuring expenses, interest, taxes and equity in earnings
(losses) of affiliated companies (referred to as "Adjusted operating income"),
and generally accounts 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.

As part of the Company's restructuring plan announced in the fourth quarter
of 2001, effective January 1, 2002, management responsibility for the Company's
carbon fiber product line was transferred to the Composite Materials business
segment. As a result of this change in management responsibilities, the Company
changed its business segment reporting to reflect the reclassification of this
product line from the Reinforcement Products segment to the Composite Materials
segment. The Company also changed the names of its business segments. The
Company's three business segments are now known as Reinforcements, Composites
and Structures, rather than Reinforcement Products, Composite Materials and
Engineered Products. Results for the quarter and nine months ended September 30,
2001 have been restated for comparative purposes.

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Financial information for the Company's segments for the quarter and nine
month periods ended September 30, 2002 and 2001, is as follows:

Adjusted operating income has been presented to provide a measure of
Hexcel's operating performance that is commonly used by investors and financial
analysts to analyze and compare companies. Adjusted operating income may not be
comparable to similarly titled financial measures of other companies. Adjusted
operating income does not represent an alternative measure of the Company's cash
flows or operating income, and should not be considered in isolation or as a
substitute for measures of performance presented in accordance with accounting
principles generally accepted in the United States of America.

12

A reconciliation of consolidated operating income to adjusted operating
income is as follows:

NOTE 13 -- TAXES

The Company's tax provision for the quarter and nine months ended September
30, 2002 of $3.2 million and $8.8 million, respectively, was for taxes on
European income. The Company will continue to establish a non-cash valuation
allowance attributable to currently generated U.S. net operating losses until
such time as the U.S. operations have returned to consistent profitability.

The U.S. and European components of income (loss) before income taxes and
the provision for income taxes for the quarter and nine months ended September
30, 2002 are as follows:

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

FINANCIAL OVERVIEW

THIRD QUARTER RESULTS

(a) Excludes business consolidation and restructuring expenses. As of January
1, 2002, the Company adopted FAS 142 and ceased amortizing goodwill.
Goodwill amortization was $3.3 million in the third quarter of 2001.
(b) Excludes business consolidation and restructuring expenses, litigation
gain, gain on early retirement of debt, interest, taxes depreciation,
amortization, and equity in losses of and write-down of an investment in
affiliated companies.
(c) Reflects the impact of ceasing to record the tax benefits from U.S.
operating losses commencing in the second quarter of 2001.

Adjusted EBITDA and Adjusted operating income are not based on accounting
principles generally accepted in the United States of America, but are presented
to explain the impact of certain items and to provide a measure of the Company's
operating performance in a way that is commonly used by investors and financial
analysts to analyze and compare companies. In addition, Adjusted EBITDA is used
in the calculation of financial covenants under the Company's Senior Credit
Facility. These measures may not be comparable to similarly titled financial
measures of other companies, do not represent alternative measures of the
Company's cash flows or operating income, and should not be considered in
isolation or as substitutes for measures of performance presented in accordance
with generally accepted accounting principles.

RESULTS OF OPERATIONS

NET SALES: Net sales of $201.0 million for the third quarter of 2002 were
$39.6 million, or 16.5%, lower than net sales of $240.6 million for the third
quarter of 2001, reflecting a sharp reduction in sales to the commercial
aerospace market. Net sales to the commercial aerospace market declined as build
rates of commercial aircraft have been reduced as airline demand for new
commercial aircraft has declined. Net sales to industrial markets during the
third quarter of 2002 were slightly below the net sales earned in the same
period a year ago. The reduction in sales to these two markets was partially
offset by continued growth in revenues to the space and defense market. Net
sales to the electronics market were essentially flat with those earned in the
third quarter of 2001. Had the same U.S. dollar, British pound sterling and Euro
exchange rates applied in the third quarter of 2002 as in the third quarter of
2001, net sales for the third quarter of 2002 would have been $5.9 million
lower, or $195.1 million, reflecting the weakening of the U.S. dollar.

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The following table summarizes net sales to third-party customers by
segment and end market for the quarters ended September 30, 2002 and 2001,
respectively:

(a) The 2001 amounts have been reclassified for comparative purposes. See Note
12 to the accompanying condensed consolidated financial statements.

Commercial aerospace net sales decreased 31.1% to $89.0 million for the
third quarter of 2002, as compared to net sales of $129.2 million for the third
quarter of 2001. This decrease in comparable third quarter sales reflects a
reduction in commercial aircraft build rates by Airbus and Boeing during 2002.
Boeing has indicated that it expects to deliver approximately 370 aircraft in
2002, down from 527 in 2001, while Airbus anticipates 2002 deliveries to be
slightly lower than the 325 aircraft delivered in 2001. This guidance suggests
that combined Boeing and Airbus commercial aircraft deliveries in 2002 will be
about 20% lower than in 2001. As the Company delivers its products on average
four to six months before its customers deliver their aircraft, it is now
delivering against its customers' aircraft deliveries scheduled for the first
half of 2003. While Boeing projects that its deliveries in 2003 will be reduced
to a level between 270 and 290 aircraft, an approximate further 24% reduction,
it has already reduced its manufacturing production levels to reflect the
majority of the build rate reductions required to meet these reduced delivery
levels. Airbus has indicated its 2003 deliveries and production will be in the
order of 300 aircraft. Reflecting the forgoing, the Company continues to
anticipate that commercial aerospace revenues will decline approximately 25-30%
in 2002 compared to 2001. The public statements of Airbus and Boeing as to their
anticipated 2003 commercial aircraft deliveries suggest that the Company's 2003
commercial aerospace sales will be in the range of 0 to 10% lower than in 2002.

Construction of the first A380 aircraft has already commenced and the
Company is now delivering materials for the manufacture of this aircraft. While
the A380 is not expected to enter service until approximately 2006, the design
of the plane indicates that it will be the largest commercial aerospace consumer
of composite materials per aircraft. Almost 20% of its dry weight is expected to
be from composites, a significant increase above the level found even in today's
most advanced wide body aircrafts, the 777 and the A340-500/600.

Industrial net sales of $61.5 million for the third quarter of 2002 were
slightly below the $61.9 million earned in the third quarter of 2001, as the
Company saw reduced demand during the quarter for its reinforcement products
used in soft body armor. While sales of products for civilian soft body armor
applications remained strong, sales to U.S. military applications declined in
the quarter due largely to the timing of the release of contracts for military
body armor program requirements and due to product transition within the
military services. This creates some uncertainty for soft body armor sales over
the next few quarters until the military services refine their plans and
requirements. In addition to soft body armor applications, Hexcel's industrial
market segment includes the Company's sales to a range of non

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aerospace product applications including architectural, automotive, recreation
equipment, and wind energy applications.

Space and defense net sales for the third quarter 2002 of $36.3 million
were 2.8% higher than the third quarter of 2001 net sales of $35.3 million.
Partially offsetting this increase are lower revenues from the depressed
satellite and launch vehicle markets and the V-22 program. In general, sales
associated with military aircraft and helicopters continue to trend upwards as
the new generation of military aircraft in the United States and Europe ramp up
in production. Approved and projected defense procurement budgets in the United
States and Europe support this outlook. The Company is currently qualified to
supply materials to a broad range of military aircraft and helicopters. These
programs include the F/A-18E/F (Hornet), the F-22 (Raptor), the European Fighter
Aircraft (Typhoon) as well as the C-17, the V-22 (Osprey) tilt rotor aircraft,
the RAH-66 (Comanche) and the NH90 helicopters. The benefits that the Company
will derive from these programs will depend upon which of these programs are
funded and the extent of such funding. Of particular note, production of the
V-22 (Osprey) in 2002 will be lower than 2001 as the aircraft goes through a
series of tests and re-design. Production levels will depend on the progress
made on program re-design and funding. The timing of these changes will
influence the rate and timing of growth in the Company's sales to its space and
defense market.

Electronics net sales of $14.2 million for the third quarter of 2002 were
the same as those earned in the third quarter of 2001. Revenues continue to be
affected by a severe industry downturn in the global electronics market first
seen in the first quarter of 2001 that has had a prolonged negative impact on
the demand for the Company's fiberglass fabric substrates used in the
fabrication of printed wiring boards. In addition, the migration of lower layer
count printed wiring board production from the United States to Asia has
continued and with excess industry production capacity, pricing remains under
pressure. In these continuing industry conditions, the Company sees no evidence
of a substantial near term recovery in this market. With the benefit of cost
controls and the stabilization of the revenue base, the Company generated a
modest, positive Adjusted EBITDA on electronics net sales for the quarter.

GROSS MARGIN: Gross margin for the third quarter of 2002 was $37.3 million,
or 18.6% of net sales, compared to gross margin of $43.8 million, or 18.2% of
net sales for the third quarter of 2001. Reductions in factory fixed costs as
part of the Company's restructuring programs have enabled the Company to
stabilize its gross margin percentage despite a net sales decline of 16.5% when
compared to the third quarter a year ago.

SELLING, GENERAL AND ADMINISTRATIVE ("SG&A") EXPENSES: SG&A expenses were
$18.5 million, or 9.2% of net sales, for the third quarter of 2002 compared with
$27.7 million, or 11.5% of net sales, for the third quarter of 2001. Excluding
the impact of the adoption of FAS 142 on goodwill amortization, SG&A expenses in
the third quarter of 2001 were $24.4 million, or 10.1% of net sales. The lower
SG&A expenses reported in the third quarter of 2002 reflect the benefits
achieved as a result of the Company's restructuring programs. Goodwill
amortization in the third quarter of 2001 was $3.3 million. (Refer to Note 2 to
the accompanying condensed consolidated financial statements).

RESEARCH AND TECHNOLOGY ("R&T") EXPENSES: R&T expenses for the third
quarter of 2002 were $3.8 million, or 1.9% of net sales, compared with $4.5
million, or 1.9% of net sales, for the third quarter of 2001.

OPERATING INCOME: Operating income was $15.1 million, or 7.5% of net sales,
in the third quarter of 2002, compared with $7.2 million, or 3.0% of net sales,
in the third quarter of 2001. Excluding a business consolidation and
restructuring credit of $0.1 million in the third quarter of 2002 and business
consolidation and restructuring expenses of $4.4 million in the third quarter of
2001, adjusted operating income was $15.0 million, or 7.5% of net sales, for the
third quarter of 2002, compared with $11.6

16

million, or 4.8% of net sales for 2001. The $3.4 million aggregate increase in
adjusted operating income reflects the reductions in SG&A and R&T expenses and
the impact of the adoption of FAS 142 on goodwill amortization. Adjusted
operating income in the third quarter of 2001 excluding goodwill amortization
was $14.9 million, essentially equal to that achieved by the Company in the
current quarter.

INTEREST EXPENSE: Interest expense was $15.5 million for the third quarter
of 2002, compared to $16.0 million for the third quarter of 2001. The $0.5
million reduction in interest expense year-on-year reflects the reductions in
total debt in the last twelve months and the benefit of the reductions in the
LIBOR interest rate, net of the increase in the spread over LIBOR that the
Company pays on its advances under its Senior Credit Facility.

GAIN ON EARLY RETIREMENT OF DEBT: During the third quarter of 2002, the
Company recognized a $0.5 million gain on the early retirement of debt,
related to the repurchase of $1.8 million of its 7% Convertible Subordinated
Debentures Due 2011, in satisfaction of an annual sinking fund requirement.
The debt was repurchased at market prices, which resulted in a gain. (Refer
to Note 2 to the accompanying condensed consolidated financial statements).

TAXES: The Company's tax provision of $3.2 million and $3.0 million in the
third quarter of 2002 and 2001, respectively, was for taxes on European income.
The Company will continue to establish a non-cash valuation allowance
attributable to currently generated U.S. net operating losses until such time as
the U.S. operations have returned to consistent profitability. (Refer to Note 13
to the accompanying condensed consolidated financial statements.)

EQUITY IN LOSSES OF AFFILIATED COMPANIES: Equity in losses of affiliated
companies was $0.5 million for the third quarter of 2002, primarily reflecting
losses reported by the Company's joint ventures in China and Malaysia as they
ramp up production of aerospace composite structures. For the third quarter of
2001, equity in losses of affiliated companies was $1.0 million. These losses by
affiliates do not affect the Company's cash flows.

YEAR-TO-DATE RESULTS

(a) Excludes business consolidation and restructuring expenses and compensation
expenses recorded in the second quarter of 2001 associated with the former
CEO's retirement. As of January 1, 2002, the Company adopted FAS 142 and
ceased amortizing goodwill. Goodwill amortization was $9.7 million in the
nine months ended September 30, 2001.
(b) Excludes business consolidation and restructuring expenses, litigation
gain, loss on early retirement of debt, interest, taxes depreciation,
amortization, equity in earnings (losses) of and write-down of an
investment in affiliated companies and compensation expenses recorded in
the second quarter of 2001 associated with the former CEO's retirement.
(c) Reflects the impact of ceasing to record the tax benefits from U.S.
operating losses beginning in the second quarter of 2001.

17

NET SALES: Net sales for the nine months of 2002 were $644.3 million, a
decrease of 16.4% when compared to the first nine months of 2001 net sales of
$770.3 million, reflecting lower sales to the commercial aerospace and
electronics markets. Net sales to the commercial aerospace market declined by
28.9% as build rates of commercial aircraft were reduced as airline demand for
new commercial aircraft has declined. Net sales to the electronics market were
30.9% lower than in the first nine months of 2001 reflecting the on-going impact
of the downturn in the global electronics industry that has impacted the demand
for the Company's fiberglass fabric substrates used in the fabrication of
printed wiring boards. The Company first saw the sharp decline in demand from
its electronics customers in the latter part of the first quarter of 2001. The
reduction in sales to these markets was partially offset by continued growth in
revenues to industrial and space and defense applications.

The following table summarizes net sales to third-party customers by
product group and market segment for the nine months ended September 30, 2002
and 2001, respectively:

GROSS MARGIN: Gross margin for the nine months ending September 30, 2002
was $121.7 million, or 18.9% of net sales, compared to gross margin of $155.6
million, or 20.2% of net sales, for the same period in 2001. The $33.9 million
decline in gross margin reflects the impact of the year-on-year sales declines
in the commercial aerospace and electronics markets offset, in part, by
reductions in factory fixed costs generated from the previously announced
restructuring programs.

SELLING, GENERAL AND ADMINISTRATIVE ("SG&A") EXPENSES: SG&A expenses were
$62.1 million, or 9.6% of net sales, for the first nine months of 2002 compared
with $93.1 million, or 12.1% of net sales, for the first nine months of 2001.
Excluding compensation expenses associated with the former CEO's retirement of
$4.7 million in 2001 and the impact of the adoption of FAS 142 on goodwill
amortization, SG&A expenses in 2001 were $78.7 million, or 10.2% of net sales.
The net year-on-year reduction of $16.6 million, or 21.1%, reflects the impact
of the Company's restructuring programs to reduce expenses to mitigate the
reduction in sales in the commercial aerospace and electronics markets. Goodwill
amortization in the first nine months of 2001 was $9.7 million. (Refer to Note 2
to the accompanying condensed consolidated financial statements).

RESEARCH AND TECHNOLOGY ("R&T") EXPENSES: R&T expenses for the first nine
months of 2002 were $11.0 million, or 1.7% of net sales, compared with $14.0
million, or 1.8% of net sales, for the first nine months of 2001.

OPERATING INCOME: Operating income for the first nine months of 2002 was
$47.9 million, or 7.4% of net sales, compared with operating income of $41.2
million, or 5.3% of net sales, for the same period in 2001. Excluding business
consolidation and restructuring expenses of $0.7 million and $7.3 million
incurred in the first nine months of 2002 and 2001, respectively, and excluding
$4.7 million of

18

compensation expenses associated with the former CEO's retirement in 2001,
adjusted operating income was $48.6 million, or 7.5% of net sales for 2002,
compared with $53.2 million, or 6.9% of net sales for 2001. The $4.6 million
aggregate decline in adjusted operating income reflects the year-on-year
decrease in gross margins offset, in part, by reductions in SG&A and R&T
expenses and the impact of the adoption of FAS 142 on goodwill amortization.
Adjusted operating income in the first nine months of 2001 excluding goodwill
amortization was $62.9 million.

LITIGATION GAIN: In the second quarter of 2002, the Company recognized a
litigation gain of $9.8 million (net of related fees and expenses) in connection
with a contract dispute with Hercules, Inc. that arose out of the acquisition of
Hercules' Composites Products Division in 1996. The net cash proceeds received
from Hercules Inc. of $11.1 million were in satisfaction of the judgment entered
in favor of the Company after Hercules had exhausted all appeals from a lower
court decision in the New York courts.

INTEREST EXPENSE: Interest expense for the first nine months of 2002 was
$48.4 million compared to $49.6 million for the first nine months of 2001.
Included in interest expense in the first nine months of 2002 and 2001 was $1.8
million and $1.0 million, respectively, of fees and expenses incurred in
connection to bank amendments. Excluding these fees and expenses, interest
expense was $46.6 million for the first nine months of 2002 and $48.6 million
for the first nine months of 2001. The $2.0 million reduction in interest
expense year-on-year reflects the reductions in total debt in the last twelve
months, the benefit of the reductions in the LIBOR interest rate, net of the
increase in the spread over LIBOR that the Company pays on its advances under
its Senior Credit Facility, offset, in part, by the impact of the issuance of
$100.0 million of 9.75% Senior Subordinated Notes Due 2009 at the end of the
second quarter of 2002.

GAIN (LOSS) ON EARLY RETIREMENT OF DEBT: During the third quarter of 2002,
the Company recognized a $0.5 million gain on the early retirement of debt,
related to the repurchase of $1.8 million of its 7% Convertible Subordinated
Debentures Due 2011, in satisfaction of an annual sinking fund requirement. The
debt was repurchased at market prices, which resulted in a gain.

The $3.1 million loss on early retirement of debt incurred in the second
quarter of 2001 resulted from the retirement of $67.5 million aggregate
principal amount of the Company's outstanding 7% Convertible Subordinated Notes
Due 2003 and the redemption of the entire principal amount of $25.0 million of
the Company's outstanding Increasing Rate Senior Subordinated Note Due 2003 in
connection with the Company's issuance of $100.0 million of 9.75% Senior
Subordinated Notes due 2009. (Refer to Note 2 to the accompanying condensed
consolidated financial statements.)

TAXES: The Company's tax provision of $8.8 million for the first nine
months of 2002 was for taxes on European income. The Company will continue to
establish a non-cash valuation allowance attributable to currently generated
U.S. net operating losses until such time as the U.S. operations have returned
to consistent profitability. (Refer to Note 13 to the accompanying condensed
consolidated financial statements.)

EQUITY IN EARNINGS (LOSSES) OF AND WRITE-DOWN OF AN INVESTMENT IN
AFFILIATED COMPANIES: Equity in losses of affiliated companies for the nine
months ended September 30, 2002 was $8.5 million compared to equity in earnings
of $0.6 million for the same period of 2001. The loss in the first nine months
of 2002 reflects the impact of a $4.0 million write-down of an investment in an
affiliated company, the impact of the electronics market decline on the
Company's Asian electronics joint venture and losses reported by the Company's
joint ventures in China and Malaysia as they ramp up production of aerospace
composite structures. These losses by affiliates do not affect the Company's
cash flows. (Refer to Note 7 to the accompanying condensed consolidated
financial statements).

19

EBITDA, ADJUSTED EBITDA, AND ADJUSTED OPERATING INCOME

EBITDA, Adjusted EBITDA, and Adjusted operating income are not based on
accounting principles generally accepted in the United States of America, but
are presented to explain the impact of certain items and to provide a measure of
the Company's operating performance in a way that is commonly used by investors
and financial analysts to analyze and compare companies. In addition, Adjusted
EBITDA is used in the calculation of financial covenants under the Company's
Senior Credit Facility. These measures may not be comparable to similarly titled
financial measures of other companies, do not represent alternative measures of
the Company's cash flows or operating income, and should not be considered in
isolation or as substitutes for measures of performance presented in accordance
with generally accepted accounting principles.

A reconciliation of net loss to EBITDA and Adjusted EBITDA and a
reconciliation of operating income to Adjusted operating income for the quarters
and nine months ended September 30, 2002 and 2001 are as follows:

FINANCIAL CONDITION

LIQUIDITY: As of September 30, 2002, the Company's total debt, net of cash,
was $636.0 million, a decrease of $38.3 million from $674.3 million as of
December 31, 2001. Net debt decreased during the first nine months of 2002 as
the Company collected $11.1 million from Hercules, Inc. in satisfaction of a
litigation judgment entered in favor of the Company, sold an ownership interest
in an Asian electronics joint venture for $10.0 million, obtained a tax refund
of $3.0 million, sold the Cleveland, Georgia facility for $0.9 million, and
generated cash from operations primarily from the management of working capital.
Furthermore, the decrease in total debt, net of cash, was after cash business
consolidation and restructuring payments of $19.5 million, cash interest paid of
$54.9 million, capital expenditures of $8.5 million, and a non-recurring payment
to the estate of the former chief executive officer relating to deferred
compensation and retirement benefits of $8.0 million. As of September 30, 2002,
the Company had cash and cash equivalents of $16.2 million and available undrawn
commitments under its Senior

20

Credit Facility of $83.5 million. Accrued business consolidation and
restructuring expenses remaining to be paid in cash as of September 30, 2002 are
estimated to approximate $15.4 million.

The outstanding $46.9 million of the Company's 7% Convertible Subordinated
Notes are due for redemption on August 1, 2003. The Company is actively pursuing
several alternatives, including the issuance of equity, to finance this junior
debt maturity as well as potentially reducing the total leverage of the Company.
Depending upon the alternative selected, the redemption of the 7% convertible
Subordinated Notes due August 1, 2003 may require the consent of the Company's
Senior Credit Facility syndicate of banks and/or a majority of the holders of
the Company's 9 3/4% Senior Subordinated Notes Due 2009. In addition, absent a
refinancing, the Company will need to obtain a relaxation of its quarterly
financial covenants under the Senior Credit Facility before the end of the first
quarter of 2003 to accommodate its projected quarterly financial performance in
2003. Given its financial leverage, the Company's ability to comply with the
financial covenants and other terms of any senior debt could be compromised in
the future if its financial performance were to further deteriorate as a result
of further declines in the general macroeconomic environment, or in key markets
served by the Company, or by other unforeseen events. There is no assurance that
the Company will complete any of the financing alternatives that it is pursuing,
obtain any needed amendments and consents from its bank syndicate or
bondholders, as to the terms on which any such financing amendments or consents
might be obtained, or continue to comply with financial and other terms of any
senior debt.

CREDIT FACILITY: Hexcel has a global credit facility (the "Senior Credit
Facility") with a syndicate of banks to provide for ongoing working capital and
other financing requirements. The Senior Credit Facility, which consists of
revolving credit, overdraft and term loan facilities, provided Hexcel with
committed lines of approximately $320.8 million as of September 30, 2002,
subject to certain limitations. These commitments consisted of funded term loans
of $108.8 million, revolving credit and overdraft facilities of $182.0 million,
and letter of credit facilities of $30.0 million. As of September 30, 2002,
drawings under the revolving credit facility were $98.4 million leaving undrawn
commitments under the facilities of $83.5 million. As of September 30, 2002,
letters of credit issued under the facility approximated $24.0 million, of which
$11.1 million supported a loan to the Company's BHA Aero Composite Parts Co.,
Ltd. joint venture in China. The Company is subject to various financial
covenants and restrictions under the Senior Credit Facility, including
limitations on incurring debt, granting liens, selling assets, repaying
subordinated indebtedness, redeeming capital stock and paying dividends. The
Senior Credit Facility is scheduled to expire in 2004, except for approximately
$55.8 million of term loans that are due for repayment in 2005.

Effective January 25, 2002, Hexcel entered into an amendment of the Senior
Credit Facility. The amendment provided for revised financial covenants through
2002; a 100 basis point increase in the interest spread payable over LIBOR for
advances under the facility; and an immediate decrease in the commitment of
revolving credit and overdraft facilities from a cumulative amount of $205.0
million to $190.0 million, with a further reduction to $182.0 million on or
before September 30, 2002. The 2002 revised, relaxed covenants were derived from
the Company's 2002 business plan projections plus a modest cushion. The Senior
Credit Facility financial covenants set certain maximum values for the Company's
leverage (the ratios of total and senior debt to Adjusted EBITDA), and certain
minimum values for its interest coverage (the ratio of Adjusted EBITDA to cash
interest expense) and fixed charge coverage (the ratio of Adjusted EBITDA less
capital expenditures to the sum of certain fixed expenses). In addition, during
the term of the amendment, all net proceeds generated through asset sales, and
most other liquidity events, in each case to the extent in excess of $2.5
million, and 100% of all net proceeds generated from litigation settlements and
judgments, must be used to prepay loans under the Senior Credit Facility. Hexcel
has also agreed to limit capital expenditures to $25.0 million during 2002, with
a $10.0 million limit during any quarter in 2002. At September 30, 2002, the
Company was in compliance with the covenants, as amended, under its Senior
Credit Facility.

21

In connection with the credit agreement amendment, Hexcel also agreed to
grant additional collateral. The Company had previously granted a security
interest in most of its U.S. accounts receivable, inventory, property, plant,
equipment and real estate. It had also pledged some or all of the shares of
certain subsidiaries. Under the terms of the amendment, Hexcel has granted to
the banks a security interest in additional U.S. accounts receivable, inventory,
property, plant, equipment and real estate, as well as its intellectual
property. In addition, during the second quarter of 2002, each of a group of
Hexcel's European subsidiaries granted to the banks a security interest in its
accounts receivable that secures certain local borrowings advanced to that
subsidiary.

The January 25, 2002 amendment relaxed the 2002 quarterly financial
covenants to accommodate the impact of the downturn in the commercial aerospace
and electronics markets. Under the terms of the amendment, the financial
covenants effective beginning with the quarter ending March 31, 2003 are those
that applied before the amendment. As noted above, absent a refinancing, the
Company will need to obtain a further amendment of the facility by the end of
the first quarter of 2003 to accommodate its projected financial performance for
that year.

OPERATING ACTIVITIES: Net cash provided by operating activities was $35.4
million for the first nine months of 2002 compared to net cash provided by
operating activities of $24.4 million for the first nine months of 2001. Net
cash provided by operating activities in the 2002 period results from operating
income generated in the period, the cash receipt of $11.1 million from Hercules,
Inc., resolving a litigation dispute and decreases in accounts receivable and
inventories on a constant currency basis. The cash generated was offset, in
part, by business consolidation and restructuring payments of $19.5 million and
a non-recurring payment of $8.0 million to the estate of the former chief
executive officer relating to accrued deferred compensation and retirement
benefits. Net cash provided by operating activities for the first nine months of
2001 resulted from operating income, partially offset by business consolidation
and restructuring payments of $5.4 million.

INVESTING ACTIVITIES: Net cash provided by investing activities was $3.0
million for the nine months ended September 30, 2002. This compared with net
cash used for investing activities of $30.4 million in the same period of 2001.
The net cash generated by investing activities in the 2002 period reflects the
receipt of $10.0 million in connection with the sale of an ownership interest in
the Company's Asian electronics joint venture and net proceeds of $0.9 million
for the sale of the Cleveland, Georgia facility, offset, in part, by capital
expenditures of $8.5 million. Cash used in investing activities in the first
nine months of 2001 of $30.4 million consists primarily of capital expenditures
made in the period. The January 25, 2002 amendment to the Senior Credit Facility
incorporates a planned level of capital expenditures of $25.0 million in 2002 as
a limit for the year, while restricting them to $10.0 million in any one quarter
of 2002. Within these limitations, the Company plans to continue its efforts
toward process improvements, modest capacity additions, where necessary, and
maintaining plant infrastructure.

FINANCING ACTIVITIES: Net cash used for financing activities in the first
nine months of 2002 was $35.2 million as the Company continued to use any excess
cash generated to pay down Company indebtedness. Net cash provided by financing
activities for the nine months ended September 30, 2001 was $16.5 million, as
the Company had net borrowings from its Senior Credit Facility. On June 29,
2001, the Company issued $100.0 million of 9.75% Senior Subordinated Notes Due
2009, at a price of 98.5%. Net proceeds from the offering were used to redeem
$67.5 million aggregate principal amount of the outstanding 7% Convertible
Subordinated Notes Due 2003, and to pay the entire principal amount of $25.0
million of the Increasing Rate Senior Subordinated Note Due 2003. The
refinancing reduced the Company's 2003 debt maturities from $114.4 million to
$46.9 million. The Company incurred debt issuance costs of $3.5 million.

22

FINANCIAL OBLIGATIONS AND COMMITMENTS: As of September 30, 2002, current
maturities of notes payable and capital lease obligations were $63.3 million.
Current maturities increased during the quarter reflecting the August 1, 2003
maturity of the Company's 7% Convertible Subordinated Notes. The Company is
actively pursuing several alternatives, including the issuance of equity, to
finance this junior debt maturity as well as potentially reducing its total
leverage within the terms of its various debt indentures and financing
agreements. There is no assurance that the Company will be able to affect any
such refinancing on commercially reasonable terms, or at all.

The Senior Credit Facility consists of revolving credit and overdraft
facilities and term loan borrowings. Revolving credit borrowings under the
facility of $98.4 million at September 30, 2002 are repayable in 2004. Term loan
borrowings totaling $108.8 million at September 30, 2002 are repayable in
installments through 2005. European credit and overdraft facilities provided to
certain of the Company's European subsidiaries by lenders outside of the Senior
Credit Facility totaling $2.0 million at September 30, 2002 are primarily
uncommitted facilities that are terminable at the discretion of the lenders.

Total letters of credit issued and outstanding were $24.0 million as of
September 30, 2002, of which $11.1 million was issued in support of a bank loan
to the Company's BHA Aero Composite Parts Co., Ltd. joint venture in China.
While the letters of credit issued on behalf of the Company will expire under
their terms in 2002 and 2003, most, if not all, will be re-issued.

Hexcel is contingently liable to pay Dainippon Ink and Chemicals, Inc
("DIC") up to $2.3 million with respect to DIC-Hexcel Limited's bank debt.
DIC-Hexcel Limited, a composites materials joint venture with Dainippon Ink and
Chemicals, Inc., located in Komatsu, Japan, produces and sells pre-pregs,
honeycomb and decorative laminates using technology licensed from Hexcel and
DIC.

The following table summarizes the maturities of financial obligations and
expiration dates of commitments for the remaining three months of 2002 and for
the years ended 2003 through 2006 and thereafter:

The Company's ability to make scheduled payments of principal, or to pay
interest on, or to refinance its indebtedness, including its public notes, or to
fund planned capital expenditures, will depend on its future performance,
conditions in the financial markets and the terms of its various debt
agreements. The Company's future performance is subject to economic, financial,
competitive, legislative, regulatory and other factors that are beyond its
control. There can be no assurance that the Company will generate sufficient
cash flow from its operations, or that sufficient future borrowings will be
available under its

23

Senior Credit Facility, to enable the Company to service its indebtedness,
including its public notes, or to fund its other liquidity needs. In addition,
the Company may need to refinance or amend all or a substantial portion of its
indebtedness on or before maturity.

For further information regarding the Company's financial resources,
obligations and commitments see Note 5 to the accompanying condensed
consolidated financial statements and Notes 8 and 16 to the consolidated
financial statements of the 2001 Annual Report on Form 10-K.

CRITICAL ACCOUNTING POLICIES

In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("FAS 142"). FAS 142 changes the accounting for goodwill from
an amortization method to an impairment only approach. In accordance with FAS
142, goodwill will be tested at the reporting unit level annually and whenever
events or circumstances occur indicating that goodwill might be impaired. The
assessment of possible impairment is based upon a comparison of the reporting
unit's fair value to its carrying value. Impairment occurs if the carrying value
of goodwill at the reporting unit level exceeds its fair value. Fair value may
be determined using traditional valuation techniques including discounted cash
flow analyses, market value comparables or other appropriate methods. Events or
changes in circumstances, such as market conditions, could significantly impact
fair values and require adjustments to recorded asset balances in the future. In
addition, pursuant to FAS 142, amortization of goodwill, including goodwill
recorded in past business combinations, ceased upon adoption. While the Company
adopted FAS 142 as of January 1, 2002 with no impact to its consolidated
financial position, future consolidated results of operations will be impacted
to the extent amortization is no longer recorded by the Company, and if events
and circumstances occur which may reduce the fair values of recorded assets. For
the third quarter and first nine months of 2001, the Company's reported results
of operations reflected amortization expense of $3.3 million and $9.7 million,
respectively.

In order to more effectively manage the medical costs of the Company,
effective January 1, 2002, Hexcel expanded its self-insured medical program to
cover the majority of U.S. non-union employees. The program includes "stop loss"
insurance, which caps the Company's risk at $250,000 per individual per annum.
By its nature, as compared to traditional insurance plans, self-insured medical
coverage may increase the monthly volatility in cash flows of the Company.
Included in the condensed consolidated results of operations for third quarter
and first nine months of 2002 is the Company's best estimate of the costs of the
program based upon actuarial assumptions and the Company's claim experiences.
Assumptions used in these computations will be reviewed periodically throughout
the year. Any required adjustments to the expense accrual rates will be made as
appropriate.

For further information regarding the Company's critical accounting
policies, refer to the Company's 2001 Annual Report on Form 10-K.

RECENTLY ISSUED ACCOUNTING STANDARDS

In June 2002, the FASB issued Statement of Financial Accounting Standards
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities"
("FAS 146"). FAS 146 requires that a liability for a cost associated with an
exit or disposal activity be recognized and measured, initially at fair value,
only when the liability is incurred; therefore, nullifying Emerging Issues Task
Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring)" ("EITF 94-3") that required a liability for an exit cost to
be recognized at the date of an entity's commitment to an exit plan. This change
in accounting would be expected to result in a delayed recognition of certain
types of costs, especially facility closure costs. The

24

provisions of FAS 146 are effective for exit or disposal activities that are
initiated after December 31, 2002. Since FAS 146 is effective only for new exit
or disposal activities, adoption of this standard will not affect amounts
currently reported in the Company's consolidated financial statements. However,
the adoption of FAS 146 could affect the types and timing of costs included in
any future business consolidation and restructuring programs, if implemented.
The Company is currently evaluating the impact of this new standard.

FORWARD-LOOKING STATEMENTS AND RISK FACTORS

Certain statements contained in "Management's Discussion and Analysis of
Financial Condition and Results of Operations," constitute "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 the use
of terms and phrases such as "anticipate," "believe," "could," "estimate,"
"expect," "intend," "may," "plan," "predict," "project," "should," "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)
estimates of commercial aerospace build rates and aircraft deliveries, including
those of Airbus and Boeing; (b) expectations regarding growth in sales to
regional and business aircraft manufacturers, and to the aircraft aftermarket;
(c) expectations regarding the growth in the production of military aircraft,
helicopters and launch vehicle programs including the V-22 (Osprey) in 2002 and
beyond; (d) expectations regarding the timing of the recovery of demand for
electronics fabrics used in printed wiring boards ; (e) expectations regarding
the demand by civil and military customers for soft body armor made of aramid
and specialty fabrics; (f) expectations regarding growth in sales of composite
materials for wind energy, automotive and other industrial applications; (g)
estimates of changes in net sales by market compared to 2001; (h) expectations
regarding the Company's equity in the earnings of joint ventures, as well as
joint venture investments and loan guarantees; (i) expectations regarding
working capital trends and capital expenditures; (j) the requirement to obtain a
relaxation of the 2003 quarterly financial covenants under the Senior Credit
Facility; (k) the evaluation of alternatives to finance the maturity of the 7%
Convertible Subordinated Notes due August 1, 2003 and the potential to reduce
total leverage; and (l) the impact of various market risks, including
fluctuations in the interest rates underlying the Company's variable-rate debt,
fluctuations in currency exchange rates, fluctuations in commodity prices, and
fluctuations in the market price of the Company's common stock.

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: changes
in general economic and business conditions; changes in current pricing and cost
levels; changes in political, social and economic conditions and local
regulations, particularly in Asia and Europe; foreign currency fluctuations;
changes in aerospace production or delivery rates; reductions in sales to any
significant customers, particularly Airbus or Boeing; changes in sales mix;
changes in government defense procurement budgets; changes in military aerospace
programs or technology; industry capacity; competition; disruptions of
established supply channels; manufacturing capacity constraints; and the
availability, terms and deployment of capital. Additional information regarding
these factors is contained in Hexcel's Annual Report on Form 10-K for the year
ended December 31, 2001.

If one or more of these risks or uncertainties materialize, or if
underlying assumptions prove incorrect, actual results may vary materially from
those expected, estimated or projected. In addition to other factors that affect
Hexcel's operating results and financial position, neither past financial

25

performance nor the Company's expectations should be considered reliable
indicators of future performance. Investors should not use historical trends to
anticipate results or trends in future periods. Further, the Company's stock
price is subject to volatility. Any of the factors discussed above could have an
adverse impact on the Company's stock price. In addition, failure of sales or
income in any quarter to meet the investment community's expectations, as well
as broader market trends, can have an adverse impact on the Company's stock
price. The Company does not undertake an obligation to update its
forward-looking statements or risk factors to reflect future events or
circumstances.

26

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As a result of its global operating and financing activities, Hexcel is
exposed to various market risks that may affect its consolidated results of
operations and financial position. These market risks include, but are not
limited to, fluctuations in interest rates, which impact the amount of interest
the Company must pay on certain variable rate debt, and fluctuations in currency
exchange rates, which impact the U.S. dollar value of transactions, assets and
liabilities denominated in foreign currencies. The Company's primary currency
exposures are in Europe, where the Company has significant business activities.
To a lesser extent, the Company is also exposed to fluctuations in the prices of
certain commodities, such as electricity, natural gas, aluminum and certain
chemicals.

The Company attempts to net individual exposures, when feasible, taking
advantage of natural offsets. In addition, the Company may employ interest rate
cap agreements and foreign currency forward exchange contracts for the purpose
of hedging certain specifically identified interest rate and net currency
exposures. The use of these financial instruments is intended to mitigate some
of the risks associated with fluctuations in interest rates and currency
exchange rates, but does not eliminate such risks. The Company does not use
financial instruments for trading or speculative purposes.

INTEREST RATE RISKS

The Company's financial results are affected by interest rate changes on
its variable rate debt. In order to partially mitigate interest rate risks, the
Company entered into a four-year interest rate cap agreement in 1998. This
agreement provided for a maximum fixed rate of 5.5% on the applicable London
interbank rate used to determine the interest on a notional amount of $50.0
million of variable rate debt under the Senior Credit Facility. The fair value
and carrying amount of this contract as of September 30, 2002 and December 31,
2001, along with hedge ineffectiveness for the quarters and nine months ended
September 30, 2002 and 2001, were not material. The interest rate cap agreement
expired on October 29, 2002.

CURRENCY EXCHANGE RISKS

Hexcel has significant business activities in Europe. The Company operates
seven manufacturing facilities in Europe, which generated approximately 41% of
2001 consolidated net sales. The Company's European business activities
primarily involve three major currencies - the U.S. dollar, the British Pound
Sterling, and the Euro. The Company also conducts business or has joint venture
investments in Japan, China, Malaysia, Australia and Brazil, and sells products
to customers throughout the world. The majority of the Company's transactions
with customers and joint venture affiliates outside of Europe are denominated in
U.S. dollars, thereby limiting the Company's exposure to short-term currency
fluctuations involving these countries. However, the value of the Company's
investments in these countries could be impacted by changes in currency exchange
rates over time, as could the Company's ability to profitably compete in
international markets.

Hexcel attempts to net individual currency positions at its various
European operations, to take advantage of natural offsets and reduce the need to
employ foreign currency forward exchange contracts. The Company also enters into
short-term foreign currency forward exchange contracts, usually with a term of
ninety days or less, to mitigate net currency exposures resulting from
specifically identified transactions. These contracts are not designated as
hedges for accounting purposes, and gains or losses on these contracts would be
recorded immediately in the Company's consolidated statements of operations.
Consistent with the nature of the economic hedge provided by such contracts, any
gains or losses on these contracts would be offset by corresponding decreases or
increases, respectively, of the underlying transaction being hedged. Such gains
and losses have not been material.

27

A number of the Company's 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. To
minimize this exposure, Hexcel has entered into a number of foreign currency
forward exchange contracts to exchange U.S. dollars for Euros at fixed rates on
specified dates through March 2005. The aggregate notional amount of these
contracts was $64.7 and $83.9 at September 30, 2002 and December 31, 2001,
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 the Company with
a more balanced matching of future cash receipts and expenditures by currency,
thereby reducing the Company's exposure to fluctuations in currency exchange
rates. For the quarter and nine months ended September 30, 2002, hedge
ineffectiveness was immaterial and the fair value of the foreign currency cash
flow hedges recognized in "comprehensive income" was a loss of $0.1 million and
a gain of $6.6 million, respectively. Over the next twelve months, approximately
$0.7 million of other comprehensive gains are expected to be reclassified into
earnings as the hedged sales are recorded.

UTILITY PRICE RISKS
To minimize the exposure of volatility in utility prices, the Company
enters into fixed price contracts at certain of the manufacturing locations for
a portion of its energy usage for periods of up to three years. Although these
contracts would reduce the risk to the Company during the contract period,
future volatility in the cost and supply of energy and natural gas could have an
impact on the results of operations of the Company.

For further information regarding the Company's market risks, refer to the
Company's 2001 Annual Report on Form 10-K and Registration Statement on Form S-4
filed with the SEC on August 2, 2001.

ITEM 4. CONTROLS AND PROCEDURES

As of a date within 90 days of the filing date of this report, the
Company's Chief Executive Officer and Chief Financial Officer evaluated the
Company's disclosure controls and procedures (as defined in Rule 13a-14 and Rule
15d-14 under the Securities Exchange Act of 1934). Based on their evaluation,
they have concluded that the Company's disclosure controls and procedures are
effective to ensure that material information relating to the Company, including
its consolidated subsidiaries, would be made know to them, so as to be reflected
in periodic reports that the Company files or submits under the Securities and
Exchange Act of 1934.

There were no significant changes in the Company's internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation, nor were there any significant deficiencies or
material weaknesses in the Company's internal controls. As a result, no
corrective actions were required or undertaken.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

On May 10, 1999, the Company filed a complaint against Hercules, Inc. in
the Supreme Court of New York, seeking recovery of certain disputed items
relating to the 1996 purchase by Hexcel of the Hercules Composite Products
Division. On June 1, 2001, Hexcel was awarded a judgment in the amount of $7.3
million plus interest for a total of $10.2 million. Hercules appealed the
judgment and interest continued to accrue. In June 2002, the Company received
$11.1 million from Hercules Inc. in satisfaction of the judgment after Hercules
had exhausted all appeals.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) EXHIBITS:

EXHIBIT NO. DESCRIPTION

99.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.

99.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.

(b) REPORTS ON FORM 8-K:

Current Report on Form 8-K dated July 24, 2002, relating to the Company's
second quarter 2002 financial results.

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

November 14, 2002 /s/ William J. Fazio
(Date) -----------------------------------------
William J. Fazio
Corporate Controller and
Chief Accounting Officer

29

CERTIFICATIONS

I, David E. Berges, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Hexcel Corporation;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;

b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors:

a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and

6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

November 14, 2002 /s/ David E. Berges
(Date) -----------------------------------------
David E. Berges
Chairman of the Board of Directors,
President and Chief Executive Officer

30

I, Stephen C. Forsyth, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Hexcel Corporation;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a. designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;

b. evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and

c. presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of the registrant's board of directors:

a. all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and

b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and

6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

November 14, 2002 /s/ Stephen C. Forsyth
(Date) -----------------------------------------
Stephen C. Forsyth
Executive Vice President and
Chief Financial Officer

31

EXHIBIT INDEX

EXHIBIT NO. DESCRIPTION

99.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.

99.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.

32