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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549

FORM 10-K

For the transition period from                                      to                                     

Commission File Number 1-8472K

Hexcel Corporation
(Exact name of registrant as specified in its charter)

281 Tresser Boulevard
Stamford, Connecticut 06901
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (203) 969-0666
Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:
7% CONVERTIBLE SUBORDINATED NOTES DUE 2003
7% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2011
9³/4% SENIOR SUBORDINATED NOTES DUE 2009

        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 ý    No o

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).

Yes ý    No o

        The aggregate market value as of June 30, 2002 of voting common stock held by non-affiliates of the registrant: $102,107,859

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

Documents Incorporated by Reference:
Proxy Statement for Annual Meeting of Stockholders (to the extent specified herein)—Part III.

PART I

ITEM 1. Business.

General Development of Business

        Hexcel Corporation, founded in 1946, was incorporated in California in 1948, and reincorporated in Delaware in 1983. Hexcel Corporation and its subsidiaries (herein referred to as "Hexcel" or "the Company"), is the world's leading producer of advanced structural materials. The Company develops, manufactures and markets lightweight, high-performance reinforcement products, composite materials and composite structures for use in the commercial aerospace, space and defense, electronics, and industrial markets. The Company's products are used in a wide variety of end products, such as commercial and military aircraft, space launch vehicles and satellites, printed wiring boards, computers, cellular telephones, soft body armor, high-speed trains and ferries, cars and trucks, wind turbine blades, reinforcements for bridges and other structures, window blinds and a wide variety of recreational equipment.

        The Company serves international markets through manufacturing facilities and sales offices located in the United States and Europe, and through sales offices located in Asia, Australia and South America. The Company is also an investor in six joint ventures, three of which manufacture and market reinforcement products in Europe, Asia and the United States; one of which manufactures and markets composite materials in Japan; and two of which manufacture composite structures and interiors in Asia.

Significant Transactions

Refinancing of the Company's Capital Structure

        On December 18, 2002, Hexcel announced that it entered into definitive agreements providing for a new equity financing through the issuance of a total of 125,000 shares of a series A convertible preferred stock and 125,000 shares of a series B convertible preferred stock for $125.0 million in cash. Upon the closing of the transactions, the total number of Hexcel's outstanding common shares including shares issuable upon conversion of both of the new series convertible preferred stocks is expected to increase from approximately 38.4 million shares to approximately 88.2 million shares.

        Hexcel agreed to issue 77,875 shares of series A convertible preferred stock and 77,875 shares of series B convertible preferred stock to affiliates of Berkshire Partners LLC and Greenbriar Equity Group LLC (the "Berkshire/Greenbriar Investors") for a cash payment of approximately $77.9 million. The series A and the series B convertible preferred stocks will be mandatorily redeemable on January 22, 2010. Both preferred stocks will be convertible, at the option of the holder, into common stock at a conversion price of $3.00 per share, and will automatically be converted into common stock if the closing trading price of such common stock for any period of 60 consecutive trading days ending after the third anniversary of the original issuance date of the convertible preferred stock exceeds $9.00 per share. The preferred stocks will be entitled to vote on an as converted basis with Hexcel's common stock. The series A preferred stock will accrue dividends at a rate of 6% per annum following the third anniversary of the issuance, which dividends may be paid in cash or added to the accrued value of the preferred stock, at Hexcel's option. The series B preferred stock will not accrue dividends. After giving effect to the issuances, the Berkshire/Greenbriar Investors will own approximately 35.2% of Hexcel's outstanding voting securities.

        Hexcel has separately agreed to issue 47,125 shares of series A convertible preferred stock and 47,125 shares of series B convertible preferred stock to affiliates of Goldman Sachs (the "Goldman Sachs Investors"), who currently own approximately 37.8% of Hexcel's outstanding common stock, for a cash payment of approximately $47.1 million. This issuance of preferred stock will enable Goldman Sachs Investors to maintain their current percentage ownership interest in Hexcel's voting securities, consistent with their rights under the governance agreement entered into with Hexcel in 2000.

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        At the closing of the transactions, Hexcel and the Berkshire/Greenbriar Investors will enter into a stockholders agreement, which gives the Berkshire/Greenbriar Investors the right to nominate up to two directors (of a total of ten) to Hexcel's board of directors and certain other rights. The Goldman Sachs Investors will continue to have the right to nominate up to three directors under the governance agreement entered into at the time of their investment in Hexcel in 2000. The stockholders agreement and the amended Goldman Sachs Investors governance agreement will require that the approval of at least six directors, including at least two directors not nominated by the Berkshire/Greenbriar Investors or Goldman Sachs Investors, be obtained for board actions generally. The stockholders agreement will also prohibit the purchase of voting securities in excess of 39.5% of Hexcel's outstanding voting securities unless approved by Hexcel's board. The Berkshire/Greenbriar Investors and Goldman Sachs Investors have agreed to an 18-month lock up on the securities being issued, except for certain registered offerings.

        The $125.0 million equity investment is subject to customary closing conditions, including regulatory approvals and the approval of Hexcel's stockholders, as well as, a refinancing of its existing senior credit facility for a term of four or more years with certain threshold maturity and covenant requirements. If this equity investment were not to be completed before the end of the first quarter of 2003, the Company would require further amendment of the financial covenants under its existing senior credit facility, and if the equity investment were not to be completed at all, would need to arrange financing for the maturity of its 7% convertible subordinated notes, due August 1, 2003. While the Company believes that it will successfully complete the $125.0 million equity investment, there can be no assurances that the transaction will be completed.

        On February 14, 2003, a proxy statement was mailed to Hexcel's shareholders of record as of February 12, 2003, to solicit the vote of these shareholders and, among other things, to approve the issuance of the new preferred stocks and the common stock issuable upon the conversion of the preferred stocks. The special meeting of shareholders is scheduled to be held on March 18, 2003. The Company is negotiating the terms of new senior debt financings that, together with a portion of the proceeds from the sale of the preferred stocks, will refinance the senior credit facility as required by the terms of the equity investment. The new senior debt financings will include an asset based revolving credit facility that will have at least $30.0 million of undrawn availability at the closing of the transactions. Hexcel intends to close the equity transactions and the related refinancings shortly after the special meeting of shareholders, although there can be no assurance as to whether and when these transactions will close.

        The Company has a scheduled debt obligation due August 1, 2003, which, if made, would cause the Company to violate one or more financial covenants defined in the Company's existing debt agreements. The Company also requires an amendment of its senior credit facility before the end of the first quarter of 2003 to maintain compliance with its financial covenants. As the anticipated refinancing of the Company's capital structure was not completed as of February 28, 2003 (the 2002 financial statement issuance date) and the Company has not obtained an amendment of the aforementioned financial covenants, all debt has been classified as current at December 31, 2002.

        The proceeds from the preferred stock issuances will be used to reduce Hexcel's bank debt and to provide for the repayment in August 2003 of its 7% convertible subordinated notes, due 2003. With the redemption of the 7% convertible subordinated notes, due 2003, and the refinancing of the outstanding indebtedness under the senior credit facility, the Company will have addressed its largest debt maturities (described in Note 8 to the accompanying consolidated financial statements of this Annual Report on Form 10-K) for the next four years and will have adequate financing to accommodate its projected financial performance. Management believes that these actions, when completed, will likely resolve the uncertainty described above.

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Narrative Description of Business and Business Segments

        Hexcel is a vertically integrated manufacturer of products within a single industry: Advanced Structural Materials. Hexcel's advanced structural materials business is organized around three strategic business segments: Reinforcements, Composites and Structures.

        As part of the Company's November 2001 restructuring program, effective January 1, 2002, management responsibility for the Company's carbon fiber product line was transferred to the Composites 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 Reinforcements segment to the Composites segment. The Company also changed the names of its business segments to Reinforcements, Composites and Structures. The Company's three business segments were previously known as Reinforcement Products, Composite Materials and Engineered Products. Results for the years ended December 31, 2001 and 2000 have been reclassified for comparative purposes.

Reinforcements

        The Reinforcements business segment manufactures and markets industrial fabrics and other specialty reinforcement products. The following table identifies the Reinforcements business segment's principal products and examples of the primary end-uses:

        Industrial Fabrics and Specialty Reinforcements:    Industrial fabrics and specialty reinforcements are made from a variety of fibers, including several types of fiberglass as well as carbon, aramid, quartz, ceramic and other specialty fibers. These reinforcement products are sold to third-party customers for use in a wide range of applications, including a variety of structural materials and components used in aerospace, wind energy, marine, recreation and other industrial applications, soft body armor and other

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security products, printed wiring boards, window screens and other architectural products. They are also used internally to manufacture prepregs and other composite materials.

        The Reinforcements business segment's net sales to third party customers were $217.9 million in 2002, $245.7 million in 2001 and $331.7 million in 2000, which represented approximately 26%, 25% and 32% of the Company's net sales, respectively. In addition, approximately 24%, 27% and 20% of the Company's total production of reinforcement products was used internally to manufacture composite materials in 2002, 2001 and 2000, respectively.

        The Company also has equity ownership interests in three joint ventures in the Reinforcements business segment: a 43.6% share in Interglas Technologies AG ("Interglas"), headquartered in Germany; a 33.3% share in Asahi-Schwebel Co., Ltd. ("Asahi-Schwebel"), headquartered in Japan, which in turn owns interests in two joint ventures in Taiwan—a 50% interest in Nittobo Asahi Glass and 51% interest in Asahi-Schwebel Taiwan; and a 50% share in Clark-Schwebel Tech-Fab Company ("CS Tech-Fab"), headquartered in the United States. Interglas and Asahi-Schwebel are fiberglass fabric producers serving the European and Asian electronics and telecommunications industries. CS Tech-Fab manufactures non-woven reinforcement materials for roofing, construction, sail cloth and other specialty applications.

        In 2002, the Company agreed with its Asian Electronics venture partner to restructure its minority interest in Asahi-Schwebel. Under the terms of the agreement, the Company reduced its ownership interest in the joint venture from 43.3% to 33.3% and received cash proceeds of $10.0 million. 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.

Composites

        The Composites business segment manufactures and markets carbon fibers, prepregs, structural adhesives, honeycomb, specially machined honeycomb parts and composite panels, fiber reinforced thermoplastics, sheet moulding compounds, polyurethane systems and laminates.

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        The following table identifies the Composites business segment's principal products and examples of the primary end-uses:

        Carbon Fibers:    Carbon fibers are manufactured for sale to third party customers and for use by Hexcel in manufacturing certain reinforcements and composite materials. Carbon fibers are woven into carbon fabrics, used as reinforcement in conjunction with a resin matrix to produce pre-impregnated composite materials (referred to as "prepregs") and used in filament winding and advanced fiber placement to produce various other composite materials. Key product applications include structural components for commercial and military aircraft and space launch vehicles, as well as certain other applications such as recreational equipment.

        Prepregs:    HexPly® prepregs are manufactured for sale to third party customers and for use in manufacturing composite laminates and monolithic structures, including finished components for aircraft structures and interiors. Prepregs are manufactured by combining high performance reinforcement fabrics or unidirectional fibers with a resin matrix to form a composite material with exceptional structural properties not present in either of the constituent materials. Industrial fabrics used in the manufacture of prepregs include glass, carbon, aramid, quartz, ceramic, polyethylene and other specialty reinforcements. Resin matrices include bismaleimide, cyanate ester, epoxy, phenolic, polyester, polyimide and other specialty resins.

        Other Fiber-Reinforced Matrix Materials:    New fiber reinforced matrix developments include HexMC®, a carbon fiber/epoxy sheet moulding compound that enables small to medium sized composite components to be mass produced. Hexcel's HexFIT™ film infusion material is a product that combines resin films and dry fiber reinforcements to save lay-up time in production and enables large contoured composite structures, such as wind turbine blades, to be manufactured. Resin Film Infusion

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and Resin Transfer Moulding products are enabling quality aerospace components to be manufactured using highly cost-effective processes.

        Structural Adhesives:    Hexcel designs and markets a comprehensive range of Redux® film adhesives and a newly launched range of Redux paste adhesives. These structural adhesives, which bond metal to metal, composites and honeycomb structures, are widely used in the aerospace industry and for many industrial applications.

        Honeycomb, Honeycomb Parts and Composite Panels:    HexWeb® honeycomb is a unique, lightweight, cellular structure generally composed of hexagonal nested cells. The product is similar in appearance to a cross-sectional slice of a beehive. Honeycomb is primarily used as a lightweight core material and is a highly efficient energy absorber. When sandwiched between composite or metallic facing skins, honeycomb significantly increases the stiffness of the structure, while adding very little weight.

        Hexcel produces honeycomb from a number of metallic and non-metallic materials. Most metallic honeycomb is made from aluminum and is available in a selection of alloys, cell sizes and dimensions. Non-metallic honeycomb materials include fiberglass, carbon, thermoplastics, non-flammable aramid papers and other specialty materials.

        Hexcel sells honeycomb as standard blocks and in slices cut from a block. Honeycomb is also supplied as sandwich panels, with facing skins bonded to either side of the core material. Hexcel also possesses advanced processing capabilities that enable the Company to design and manufacture complex fabricated honeycomb parts and bonded assemblies to meet customer specifications.

        Aerospace is the largest market for honeycomb products. Hexcel also sells honeycomb for non-aerospace applications including high-speed trains and mass transit vehicles, automotive parts, energy absorption products, marine vessel compartments, portable shelters, business machine cabinets and other industrial uses. In addition, the Company produces honeycomb for its Structures business segment for use in manufacturing finished parts for airframe Original Equipment Manufacturers (OEMs).

        The Company operates sales offices in the United States located in Bedford, Texas; Danbury, Connecticut; Dublin, California; Redmond, Washington; and Novi, Michigan. In Europe, the Company operates sales offices at its manufacturing sites as well as Pasching, Austria; Stade, Germany; and

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Saronno, Italy. The Company also operates sales offices in Melbourne, Australia; Shanghai, China; and Sao Paulo, Brazil.

        The Composites business segment's net sales to third party customers were $532.4 million in 2002, $638.8 million in 2001 and $594.5 million in 2000, which represented approximately 62%, 63% and 56% of the Company's net sales, respectively. Net sales for Composites are highly dependent upon commercial aircraft build rates as further discussed under the captions "Significant Customers," "Markets", and "Management's Discussion and Analysis of Financial Condition and Results of Operations." In addition, about 3% of the Company's total production of composite materials is sold internally to the Reinforcements and Structures business units.

        The Company also owns a 45% equity interest in DIC-Hexcel Limited, a joint venture with Dainippon Ink and Chemicals, Inc. This Composites joint venture is located in Komatsu, Japan, and produces and sells prepregs, honeycomb and decorative laminates using technology licensed from Hexcel and Dainippon Ink and Chemicals, Inc.

Structures

        The Structures business segment manufactures and markets composite structures primarily for use in the aerospace industry. Composite structures are manufactured from a variety of composite and other materials, including prepregs, honeycomb and structural adhesives, using such manufacturing processes as autoclave processing, multi-axis numerically controlled machining, press laminating, heat forming and other composite manufacturing techniques. Composite structures include such items as flap track fairings, engine cowls, wing panels and other aircraft components.

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        The following table identifies the Structures business segment's principal products and examples of the primary end-uses:

        The Structures business segment's net sales to third party customers were $100.5 million in 2002, $124.9 million in 2001 and $129.5 million in 2000, which represented approximately 12% of the Company's net sales in each year.

        In April 2000, the Company sold its Bellingham aircraft interiors business. This business was responsible for the design, engineering and manufacture of commercial aircraft interior components and systems for airline refurbishment applications. After giving effect to the disposition of the Bellingham aircraft interiors business as if the transaction occurred at the beginning of 2000, net sales would have been $110.6 million in 2000.

        In addition, Hexcel has equity ownership interests in two joint ventures in the Structures business unit: BHA Aero Composite Parts Co., Ltd. ("BHA Aero") and Asian Composites Manufacturing Sdn. Bhd. ("Asian Composites"). In 1999, Hexcel formed BHA Aero with Boeing and Aviation Industries of China (now known as China Aviation Industry Corporation I) to manufacture composite parts for secondary structures and interior applications for commercial aircraft. Hexcel has a 33.3% equity ownership interest in this joint venture, which is located in Tianjin, China. Also in 1999, Hexcel formed Asian Composites with Boeing, Sime Link Sdn. Bhd., and Malaysia Helicopter Services Bhd. (now known as Naluri Berhadto), to manufacture composite parts for secondary structures for commercial aircraft. Hexcel has a 25% equity ownership interest in this joint venture, which is located in Alor Setar, Malaysia. Asian Composites began manufacturing and shipping products during the second half of 2001, while BHA Aero began shipping composite structures in the first half of 2002.

Financial Information About Business Segments and Geographic Areas

        Financial information and further discussion of Hexcel's business segments and geographic areas, including external sales and long-lived assets, are contained throughout the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" and in Note 19 to the accompanying consolidated financial statements of this Annual Report on Form 10-K.

Significant Customers

        Approximately 22%, 23% and 20% of Hexcel's 2002, 2001 and 2000 net sales, respectively, were to The Boeing Company ("Boeing") and related subcontractors. Of the 22% of sales to Boeing and its

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subcontractors in 2002, 17% and 5% related to commercial aerospace and space and defense market applications, respectively. Approximately 15%, 16% and 13% of Hexcel's 2002, 2001 and 2000 net sales, respectively, were to EADS, including the business division Airbus Industrie ("Airbus"), and its subcontractors. Of the 15% of sales to EADS and its subcontractors in 2002, 13% and 2% related to commercial aerospace and space and defense market applications, respectively.

Markets

        Hexcel's products are sold for a broad range of end uses. The following tables summarize net sales to third-party customers by market and by geography for each of the three years ended December 31:

(a)

Net Sales by Market have been restated in 2001 and 2000 for comparative purposes. Refer to Note 19 to the accompanying consolidated financial statements of this Annual Report on Form 10-K.



(b)

Net Sales by Geography were based on the location in which the sale was manufactured.

Commercial Aerospace

        Historically, the commercial aerospace industry has led the development of applications for advanced structural materials and components because it has the strongest need for the performance properties of these materials and is well positioned to maximize the economic benefits from their use. Accordingly, the demand for advanced structural material products is closely correlated to the demand for commercial aircraft.

        Commercial aerospace activity fluctuates in relation to two principal factors. First, the number of revenue passenger miles flown by the airlines affects the size of the airline fleets and generally follows the level of overall economic activity. The second factor, which is less sensitive to the general economy, is the replacement and retrofit rates for existing aircraft. These rates, resulting mainly from obsolescence, are determined in part by the regulatory requirements established by various civil aviation authorities, as well, as public concern regarding aircraft age, safety and noise. These rates may also be affected by the desire of the various airlines for higher payloads and more fuel-efficient aircraft, which in turn is influenced by the price of fuel.

        Reflecting the demand factors noted above, the number of commercial aircraft delivered by Boeing and Airbus declined by 48% from 1992 to 1995. At the lowest point during this period, Boeing and Airbus reported combined deliveries of 380 aircraft. Beginning in 1996, however, aircraft deliveries by Boeing and Airbus began to rise, growing to a combined record peak of 914 aircraft in 1999. Combined aircraft deliveries declined to 684 aircraft in 2002.

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        In light of the tragic events that occurred on September 11, 2001 and the negative impact on the commercial aerospace market, Boeing and Airbus significantly reduced their build rates for 2002 and 2003 from rates previously expected. Build rates are the number of aircraft the aircraft manufacturer plans to produce. They may differ from deliveries when the manufacturer is increasing or reducing its inventories of finished aircraft. This often happens when there are significant increases or reductions in demand for commercial aircraft. The impact of these changes on Hexcel will be influenced by two factors: the mix of aircraft produced and the inventory supply chain effects of reduced aircraft production. The dollar value of Hexcel's materials varies by aircraft type—twin aisle aircraft use more Hexcel materials and products than narrow body aircraft and newer designed aircraft use more Hexcel materials than older generations. On average, Hexcel delivers products into the supply chain about six months prior to aircraft delivery. Depending on the product, orders placed with Hexcel are received anywhere between one and eighteen months prior to delivery of the aircraft to the customer. With the impact of the changes in demand for commercial aircraft in 2001, our commercial aerospace revenues declined approximately 27% in 2002 compared with 2001.

        Set forth below are historical deliveries as published by Boeing and Airbus:

Industrial Markets

        Hexcel has focused its participation in industrial markets in areas where the application of advanced structural material technology offers significant benefits to the end user. As a result, the Company has chosen to focus on select opportunities where high performance is the key product criterion. Future opportunities and growth depend primarily upon the success of the individual programs and industries in which the Company has elected to participate. Within industrial markets, key applications include surface transportation (automobiles, mass transit and high-speed rail and marine applications), wind energy, soft body armor, recreational equipment (i.e. snowboards, tennis rackets, hockey sticks and bicycles) and civil engineering. Hexcel's participation in these markets is a valuable complement to its commercial and military aerospace businesses, and the Company is committed to pursuing the utilization of advanced structural material technology in its industrial markets.

Space and Defense

        The space and defense markets have historically been innovators in and sources of significant demand for advanced structural materials. The aggregate demand by space and defense customers is primarily a function of military aircraft procurement by the United States and certain European governments, that utilize advanced structural materials. The Company is currently qualified to supply materials to a broad range of military aircraft and helicopter programs. These programs include the F/A-18E/F Hornet, the F-22 Raptor, and the Eurofighter/Typhoon, as well as the C-17, the V-22 Osprey tiltrotor aircraft, and the Tiger and NH90 helicopters. In addition, there are new programs in development such as the RAH-66 Comanche, the Joint Strike Fighter and the A400M military transport that may enter production later in the decade. The benefits that the Company obtains from these programs will depend upon which ones are funded and the extent of such funding.

        Contracts to supply materials for military and some commercial projects contain provisions for termination at the convenience of the U.S. government or the buyer. In the case of such a termination, Hexcel is entitled to recover reasonable costs incurred plus a provision for profit on the incurred costs.

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In addition, the Company is subject to U.S. government cost accounting standards in accordance with applicable Federal Acquisition Regulations.

Electronics

        The Company is one of the largest producers of high-quality, lightweight fiberglass fabric substrates used in the fabrication of multilayer printed wiring boards, which are integral to most advanced electronic products, including computers, networking equipment, telecommunications equipment, advanced cable television equipment, and automotive equipment. In addition to its wholly-owned U.S. and European businesses, the Company has ownership positions in the Interglas and Asahi-Schwebel joint ventures. Interglas and Asahi-Schwebel are manufacturers of similar products in Europe, Japan and Southeast Asia.

        Starting in the first quarter of 2001, the industry experienced a severe downturn, and a corresponding inventory correction began working its way through the supply chain significantly impacting demand for fiberglass fabric substrates. As the downturn continued through 2001, competition intensified for the business that remained and pricing pressure increased. Depressed conditions in this sector have continued through 2002 and into 2003. Meanwhile, import quotas limiting Asian imports of fiberglass fabrics into the United States expired at the end of 2001 and the migration of lower layer count printed wiring board production to Asia has continued. Given excess production capacity throughout the industry, pricing remains under pressure. With these continuing industry conditions, the Company sees no evidence of a near-term recovery in this market.

        Further discussion of Hexcel's markets and customers, including certain risks, uncertainties and other factors with respect to "forward-looking statements" about those markets and customers, is contained under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations."

Backlog

        In recent years, Hexcel's customers have increasingly demanded shorter order lead times and "just-in-time" delivery performance. While the Company has many multi-year contracts with its major aerospace customers, most of these contracts specify the proportion of the customers' requirements that will be supplied by the Company and the terms under which the sales will occur, not the specific quantities to be procured. The Company's electronic and industrial customers have always desired to order their requirements on as short a lead-time as possible. The Company has recognized that over the last few years the twelve-month order backlog is no longer a meaningful trend indicator and, as a result, ceased monitoring it in the management of the business in 1999.

Raw Materials and Production Activities

        Due to the vertically integrated nature of Hexcel's operations, the Company produces several materials used in the manufacture of certain industrial fabrics, composite materials and engineered products, as well as the polyacrylonitrile ("PAN") precursor material used in the manufacture of carbon fibers. Although the Company purchases most of the raw materials used in production from third parties, it consumed internally approximately 50% and 25% of its carbon fiber and industrial fabric production, respectively, in 2002. Several key materials are available from relatively few sources, and in many cases the cost of product qualification makes it impractical to develop multiple sources of supply. The unavailability of these materials, which the Company does not currently anticipate, could have a material adverse effect on the Company's consolidated results of operations.

        Hexcel's production activities are generally based on a combination of "make-to-order" and "make-to-forecast" production requirements. The Company coordinates closely with key suppliers in an effort to avoid raw material shortages and excess inventories.

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Research and Technology; Patents and Know-How

        Hexcel's Research and Technology ("R&T") departments support the Company's businesses worldwide. Through R&T activities, the Company maintains expertise in chemical formulation and curatives, fabric forming and textile architectures, advanced composite structures, process engineering, application development, analysis and testing of composite materials, computational design, and other scientific disciplines related to the Company's worldwide business base. Additionally, Hexcel's R&T function performs a limited amount of contract research and development in the United States and Europe for strategically important customers and government agencies in other areas, such as carbon fiber, ceramics, high temperature polymers, advanced textiles, and composite structures manufacturing and testing.

        Hexcel's products rely primarily on the Company's expertise in materials science, textiles, process engineering and polymer chemistry. Consistent with market demand, the Company has been placing more emphasis on cost effective product design and lean manufacturing in recent years. Towards this end, the Company has entered into formal and informal alliances, as well as licensing and teaming arrangements, with several customers, suppliers, external agencies and laboratories. The Company believes that it possesses unique capabilities to design, develop and manufacture composite materials and structures. The Company owns and maintains in excess of 100 patents worldwide, has licensed many key technologies, and has granted technology licenses and patent rights to several third parties in connection with joint ventures and joint development programs. It is the Company's policy to actively enforce its proprietary rights. The Company believes that the patents and know-how rights currently owned or licensed by the Company are adequate for the conduct of its business.

        Hexcel spent $14.7 million for research and technology in 2002, $18.6 million in 2001 and $21.2 million in 2000. These expenditures were expensed as incurred. Although the Company reduced its level of research and technology spending in 2002, it will continue to maintain its high standard of customer service and make strategic investments in research and technology, as it deems appropriate.

Environmental Matters

        The Company is subject to federal, state and local laws and regulations designed to protect the environment and to regulate the discharge of materials into the environment. The Company believes that its policies, practices and procedures are properly designed to prevent unreasonable risk of environmental damage and of associated financial liability. To date, environmental control regulations have not had a significant adverse effect on the Company's overall operations. A discussion of environmental matters is contained in Item 3, "Legal Proceedings," and in Note 16 to the accompanying consolidated financial statements included in this Annual Report on Form 10-K.

Sales and Marketing

        A staff of salaried market managers, product managers and salespeople sell and market Hexcel products directly to customers worldwide. The Company also uses independent distributors and manufacturer representatives for certain products, markets and regions.

Competition

        In the production and sale of advanced structural materials, Hexcel competes with numerous U.S. and international companies on a worldwide basis. The broad markets for the Company's products are highly competitive, and the Company has focused on both specific markets and specialty products within markets to obtain market share. In addition to competing directly with companies offering similar products, the Company competes with producers of substitute structural materials such as structural foam, wood, metal, and concrete. Depending upon the material and markets, relevant competitive factors include price, delivery, service, quality and product performance.

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Employees

        As of December 31, 2002, Hexcel employed 4,245 full-time employees, 2,448 in the United States and 1,797 internationally. The number of full-time employees has declined from 5,376 and 6,072 as of December 31, 2001 and 2000, respectively, primarily due to Hexcel's business consolidation and restructuring programs. The Company's business consolidation and restructuring programs included the right-sizing of the Company in response to the forecasted reductions in commercial aircraft production, the continued weakness in the electronics market and the closure of manufacturing facilities. For further discussion, refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations" and to Note 4 to the accompanying consolidated financial statements of this Annual Report on Form 10-K.

Other Information

        The Company's internet address is www.hexcel.com. The Company makes available, free of charge through its internet website, its Form 10-K's, 10-Q's and 8-K's, and any amendments to these forms, as soon as reasonably practicable after filing with the Securities and Exchange Commission.

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ITEM 2. Properties

        Hexcel owns and leases manufacturing facilities and sales offices located throughout the United States and in other countries, as noted below. The corporate offices and principal corporate support activities for the Company are located in leased facilities in Stamford, Connecticut. The Company's research and technology administration and principal laboratories are located in Dublin, California; Duxford, United Kingdom; and Les Avenieres, France.

        The following table lists the manufacturing facilities of Hexcel by geographic location, approximate square footage, and principal products manufactured. This table does not include manufacturing facilities owned by entities in which the Company has a joint venture interest.

Manufacturing Facilities

        Hexcel leases the facilities located in Anderson, South Carolina; Washington, Georgia; Statesville, North Carolina; and the land on which the Burlington, Washington, facility is located. The Company also leases portions of the facilities located in Casa Grande, Arizona and Les Avenieres, France. The remaining facilities are owned by the Company.

        The facilities located in Burlington, Washington; Casa Grande, Arizona; Decatur, Alabama; Dublin; California; Kent, Washington; Livermore, California; Pottsville, Pennsylvania; Salt Lake City,

14

Utah; and Seguin, Texas are subject to mortgages in support of the bank syndicate that provides the Company with its senior credit facility.

ITEM 3. Legal Proceedings

        Hexcel is involved in litigation, investigations and claims arising out of the normal conduct of its business, including those relating to commercial transactions, as well as to environmental, employment, health and safety matters. The Company estimates and accrues its liabilities resulting from such matters based on a variety of factors, including outstanding legal claims and proposed settlements; assessments by internal and external counsel of pending or threatened litigation; and assessments by environmental engineers and consultants of potential environmental liabilities and remediation costs. Such estimates exclude counterclaims against other third parties and 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.

        The Company believes that it has meritorious defenses and is taking appropriate actions against such matters. While it is impossible to ascertain the ultimate legal and financial liability with respect to certain contingent liabilities and claims, the Company believes, based upon its examination of currently available information, its 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 its existing insurance coverage and amounts already provided for, will not have a material adverse impact on the Company's consolidated results of operations, financial position or cash flows.

Environmental Claims and Proceedings

        The Company is subject to numerous federal, state, local and foreign laws and regulations that impose strict requirements for the control and abatement of air, water and soil pollutants and the manufacturing, storage, handling and disposal of hazardous substances and waste. These laws and regulations include the Federal Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA" or "Superfund"), the Clean Air Act, the Clean Water Act and the Resource Conservation and Recovery Act, and analogous state laws and regulations. Regulatory standards under these environmental laws and regulations have tended to become increasingly stringent over time.

        Hexcel has been named as a potentially responsible party with respect to several hazardous waste disposal sites that it does not own or possess, which are included on the Superfund National Priority List of the U.S. Environmental Protection Agency or on equivalent lists of various state governments. Because CERCLA provides for joint and several liability, the Company could be responsible for all remediation costs at such sites, even if it is one of many potentially responsible parties ("PRPs"). The Company believes, based on the amount and the nature of its waste, and the number of other financially viable PRPs, that its liability in connection with such matters will not be material.

        Pursuant to the New Jersey Industrial Sites Recovery Act, Hexcel signed an administrative consent order and later entered into a Remediation Agreement to pay for the environmental remediation of a manufacturing facility it owns and formerly operated in Lodi, New Jersey. The ultimate cost of remediating the Lodi site will depend on developing circumstances.

        Hexcel was 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 the Company's Kent, Washington, site by the U.S. Environmental Protection Agency. Under the terms of the cost-sharing agreement, the Company was obligated to reimburse the previous owner for a portion of the cost of the required remediation activities. Management has determined that the cost-sharing agreement terminated in December 1998; however, the other party disputes this determination.

15

        At its Livermore, California facility, Hexcel has received a series of notices of violation of air quality standards from the Bay Area Air Quality Management District. Hexcel has investigated and corrected the issues, and has cooperated with the District.

        The Company's estimate of its liability as a PRP, of the remaining costs associated with its responsibility to remediate the Lodi, New Jersey, and Kent, Washington sites and for any fines and penalties that may be assessed relating to the Livermore, California notices of violation is accrued in its consolidated balance sheets.

Other Proceedings

        Hexcel is aware of a grand jury investigation being conducted by the Antitrust Division of the United States Department of Justice with respect to the carbon fiber and carbon fiber prepreg industries. The Department of Justice appears to be reviewing the pricing of all manufacturers of carbon fiber and carbon fiber prepreg since 1993. The Company, along with other manufacturers of these products, has received a grand jury subpoena requiring production of documents to the Department of Justice. Toho Tenax Co. Ltd., one of their subsidiaries and one of their employees have been indicted for obstruction of justice; Toho and its subsidiary pleaded guilty to obstruction of justice and received a combined fine of $500,000. No other indictments have been issued in the case to date. The Company is not in a position to predict the direction or outcome of the investigation; however, it is cooperating with the Department of Justice.

        In 1999, Hexcel was joined in a class action lawsuit alleging antitrust violations in the sale of carbon fiber, carbon fiber industrial fabrics and carbon fiber prepreg (Thomas & Thomas Rodmakers, Inc. et. al. v. Newport Adhesives and Composites, Inc., et. al., Amended and Consolidated Class Action Complaint filed October 4, 1999, United States District Court, Central District of California, Western Division, CV-99-07796-GHK (CTx)). The Company was one of many manufacturers joined in the lawsuit, which was spawned from the Department of Justice investigation. The Court has granted the Plaintiff's motion to certify the class. Discovery is continuing. The Company is not in a position to predict the outcome of the lawsuit, but believes that the lawsuit is without merit as to the Company.

        Of the eleven companies that have opted out of the class in the Thomas & Thomas Rodmakers, Inc. case, one, Horizon Sports Technologies, Inc., has filed a case on its own behalf, with similar allegations (Horizon Sports Technologies, Inc., v. Newport Adhesives and Composites, Inc., et. al., First Amended Complaint filed October 15, 2002, United States District Court, Central District of California, Southern Division, SACV 02-911 DOC (MLGX)). The Company is not in a position to predict the outcome of the lawsuit, but believes that the lawsuit is without merit as to the Company.

        The Company has also been joined as a party in numerous class action lawsuits in California and in Massachusetts spawned by the Thomas & Thomas Rodmakers, Inc. class action. These actions also allege antitrust violations and are brought on behalf of purchasers located in California and in Massachusetts, respectively, who indirectly purchased carbon fiber products. The California cases have been ordered to be coordinated in the Superior Court for the County of San Francisco and are currently referred to as Carbon Fibers Cases I, II and III, Judicial Council Coordinator Proceeding Numbers 4212, 4216 and 4222. The California cases are Lazio v. Amoco Polymers Inc., et.al., filed August 21, 2000; Proiette v. Newport Adhesives and Composite, Inc. et. al., filed September 12, 2001; Simon v. Newport Adhesives and Composite, Inc. et. al., filed September 21, 2001; Badal v. Newport Adhesives and Composite, Inc. et.al., filed September 26, 2001; Yolles v. Newport Adhesives and Composite, Inc. et.al., filed September 26, 2001; Regier v. Newport Adhesives and Composite, Inc. et.al., filed October 2, 2001; and Connolly v. Newport Adhesives and Composite, Inc. et.al., filed October 4, 2001; Elisa Langsam v Newport Adhesives and Composites, Inc, et al., filed October 4, 2001; Jubal Delong et al. v Amoco Polymers, Inc. et al., filed October 26, 2001; and Louis V. Ambrosio

16

v Amoco Polymers, Inc. et. al., filed October 25, 2001. The Massachusetts case is Ostroff v. Newport Adhesives and Composites, Inc. et. al., filed June 7, 2002 in the Superior Court Department of the Trial Court of Middlesex, Massachusetts, Civil Action No. 02-2385. The Company is not in a position to predict the outcome of these lawsuits, but believes that the lawsuits are without merit as to the Company.

        In 1999, a qui tam case was filed under seal by executives of Horizon Sports Technologies, Inc. alleging that Boeing and other prime contractors to the United States Government and certain carbon fiber and carbon fiber prepreg manufacturers, including the Company, submitted claims for payment to the U.S. Government which were false or fraudulent because the defendants knew of the alleged conspiracy to fix prices of carbon fiber and carbon prepreg described in the above cases (Beck, on behalf of the United States of America, v. Boeing Defense and Space Group, Inc., et. al., filed July 27, 1999, in the United States District Court for the Southern District of California, Civil Action No. 99 CV 1557 JM JAH). The case was unsealed in 2002 when the U.S. advised that it was unable to decide whether to intervene in the case based on the information available to it at that time and the Relators served the Company and other defendants. The Company is not in a position to predict the outcome of the lawsuit, but believes that the lawsuit is without merit as to the Company.

ITEM 4. Submission of Matters to a Vote of Security Holders

        None.

17

PART II

ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters

        Hexcel common stock is traded on the New York and Pacific Stock Exchanges. The range of high and low sales prices of Hexcel common stock on the New York Stock Exchange Composite Tape is contained in Note 23 to the accompanying consolidated financial statements of this Annual Report on Form 10-K and is incorporated herein by reference.

        Hexcel did not declare or pay any dividends in 2002, 2001 or 2000. The payment of dividends is generally prohibited under the terms of certain of the Company's debt agreements.

        On February 25, 2003, there were 1,363 holders of record of Hexcel common stock.

ITEM 6. Selected Financial Data

        The information required by Item 6 is contained on page 34 of this Annual Report on Form 10-K under the caption "Selected Financial Data" and is incorporated herein by reference.

ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

        The information required by Item 7 is contained on pages 35 to 63 of this Annual Report on Form 10-K under "Management's Discussion and Analysis of Financial Condition and Results of Operations" and is incorporated herein by reference.

ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk

        The information required by Item 7A is contained under the heading "Market Risks" on pages 59 to 61 of this Annual Report on Form 10-K and is incorporated herein by reference.

ITEM 8. Consolidated Financial Statements and Supplementary Data

        The information required by Item 8 is contained on pages 64 to 112 of this Annual Report on Form 10-K under "Consolidated Financial Statements and Supplementary Data" and is incorporated herein by reference. The Report of the Independent Accountants is contained on page 66 of this Annual Report on Form 10-K under the caption "Report of Independent Accountants" and is incorporated herein by reference.

ITEM 9. Changes In and Disagreements With Independent Accountants on Accounting and Financial Disclosure

        None.

PART III

ITEM 10. Directors and Executive Officers of the Registrant:

        The information required by Item 10 will be contained in Hexcel's definitive proxy statement for the 2003 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year ended December 31, 2002. Such information is incorporated herein by reference.

ITEM 11. Executive Compensation

        The information required by Item 11 will be contained in Hexcel's definitive proxy statement for the 2003 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange

18

Commission within 120 days after the close of the fiscal year ended December 31, 2002. Such information is incorporated herein by reference.

ITEM 12. Security Ownership of Certain Beneficial Owners and Management

        The information required by Item 12 will be contained in Hexcel's definitive proxy statement for the 2003 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year ended December 31, 2002. Such information is incorporated herein by reference.

ITEM 13. Certain Relationships and Related Transactions

        The information required by Item 13 will be contained in Hexcel's definitive proxy statement for the 2003 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year ended December 31, 2002. Such information is incorporated herein by reference.

ITEM 14. 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 known 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 IV

ITEM 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K

a.

1. Financial Statements

The consolidated financial statements of Hexcel, the notes thereto, and the Report of Independent Accountants are listed on page 64 of this Annual Report on Form 10-K and are incorporated herein by reference.

2.

Financial Statement Schedules

The financial statement schedule and the report of independent accountants required by Item 15(a)(2) are listed on page 64 of this Annual Report on Form 10-K and are incorporated herein by reference.

b.

Reports on Form 8-K

Current Report on Form 8-K dated October 23, 2002, relating to third quarter of 2002 financial results.

Current Report on Form 8-K dated December 20, 2002, relating to announcement of signed agreements to issue equity securities and planned refinancing of existing senior credit facility.

c.

Exhibits

20

21

22

23

24

25

26

27

28

*

Indicates management contract or compensatory plan or arrangement.

29

SIGNATURES

        Pursuant to the requirements of Section 13 or 15(d) 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, in the City of Stamford, State of Connecticut.

        Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

30

31

February 26, 2003

CERTIFICATIONS

I, David E. Berges, certify that:

        1.    I have reviewed this annual report on Form 10-K of Hexcel Corporation;

        2.    Based on my knowledge, this annual 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 annual report;

        3.    Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual 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 annual 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 annual report (the "Evaluation Date"); and

        c)    presented in this annual 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 annual 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.

32

February 26, 2003

I, Stephen C. Forsyth, certify that:

        1.    I have reviewed this annual report on Form 10-K of Hexcel Corporation;

        2.    Based on my knowledge, this annual 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 annual report;

        3.    Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual 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 annual 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 annual report (the "Evaluation Date"); and

        c.    presented in this annual 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 annual 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.

33

Selected Financial Data

        The following table summarizes selected financial data as of and for the five years ended December 31:

(a)

The comparability of the data may be affected by acquisitions and divestitures. The Company acquired Clark-Schwebel, a manufacturer of high-quality fiberglass fabrics used to make printed wiring boards and high performance specialty products used in insulation, filtration, wall and façade claddings, soft body armor and reinforcements for composite materials in 1998. The acquisition was accounted for using the purchase method of accounting. The Bellingham aircraft interiors business was sold in April 2000.

(b)

Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No.142, "Goodwill and Other Intangible Assets," ("FAS 142"). Prior to adopting FAS 142, goodwill was amortized on a straight-line basis over estimated economic lives, ranging from 15 years to 40 years. As a result of adopting FAS 142, goodwill is no longer amortized, but instead is tested for impairment at the reporting unit level at least annually and whenever events or changes in circumstances indicate that goodwill might be impaired. Amortization of goodwill and other purchased intangibles was $12.5 million in 2001 and $13.1 million in 2000.

(c)

No cash dividends were declared per common stock during any of the five years ended December 31, 2002.

34

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

Business Overview

(a)

Giving effect to the April 26, 2000 sale of the Bellingham aircraft interiors business as if the transaction had occurred on January 1, 2000, net sales would have been $1,036.8 million in 2000.



(b)

Reflects the impact of ceasing to record the tax benefits from U.S. operating losses commencing during the second quarter of 2001. In addition, 2001 results reflect the impact of the write-down of U.S. deferred tax assets in the fourth quarter of 2001. The 2000 results include $24.0 million of provision for income taxes on the April 2000 gain from the sale of the Bellingham aircraft interiors business.

Business Trends

        The Company has experienced major changes in two of the significant markets for its products during 2001 and 2002. Towards the end of the first quarter of 2001, the Company experienced a significant reduction in the demand for its woven fiberglass fabrics used as substrates for printed wiring boards. In 2001, net sales from such electronics applications declined $104.2 million or 58% compared to 2000. During 2002, sales declined a further $18.7 million to $58.3 million, as the full annual effect of the changes in the industry were evident.

        The tragic events of September 11 precipitated a significant reduction in the production of new build commercial aircraft. In late 2001, both Airbus and Boeing announced reductions in build rates that were implemented by the middle of 2002. As the Company delivers on average six months ahead of its customer's delivery of an aircraft, the Company experienced reduced revenues commencing in the first quarter, 2002. Full year 2002 net sales to the commercial aerospace sector were $147.8 million or 27.4% lower than 2001 at $391.1 million.

        The Company has responded to these major changes in its two largest historic markets by implementing a major restructuring program it announced in November 2001. This program targeted reducing the Company's fixed costs ahead of the changes in the demand for its products. The program also provided for the cost of reducing variable costs as customer demand declined. These cost reductions have predominantly been accomplished by a sharp reduction in the Company's work force. Headcount has declined from a high of over 6,200 during the third quarter, 2001 to 4,245 as of

35

December 31, 2002. This right sizing of the Company has enabled it to stabilize operating profitability despite the significant reduction in net sales.

        The changes in business performance and outlook required that the Company obtain an amendment to the financial maintenance covenants under its senior credit facility to accommodate its anticipated performance in 2002. The Company's bank syndicate and the Company entered into an amendment of the financial covenants on January 25, 2002. The Company has since been in compliance with those covenants. With the benefit of reductions in capital expenditures and working capital as well as the receipt of proceeds from a litigation settlement and the sale of a portion of an equity interest in an affiliated company, the Company reduced its total debt during 2002 by $64.2 million despite incurring cash restructuring costs of $24.3 million.

        Although the Company has stabilized operating profitability and reduced its total debt during 2002, a significant amount of debt remains outstanding. The remaining $46.9 million of 7% convertible subordinated notes are due for redemption on August 1, 2003 and the revolving credit and overdraft lines under the senior credit facility are due on September 14, 2004. The Company has therefore sought new equity capital and announced on December 18, 2002 that it has entered into definitive agreements providing for a new equity financing through the issuance of a total of 125,000 shares of a series A convertible preferred stock and 125,000 shares of a series B convertible preferred stock for $125.0 million in cash. The Company is now negotiating the refinancing of its senior credit facility with the intent that the debt issued to refinance the senior credit facility will have a term of four or more years. While there can be no assurances that these refinancing actions will be completed, the intent is to right-size the capital structure of the Company to its current business circumstances. Hexcel intends to close the equity transactions and the related refinancings shortly after the special meeting of shareholders on March 18, 2003.

        The Company has a scheduled debt obligation due August 1, 2003, which, if made, would cause the Company to violate one or more financial covenants defined in the Company's existing debt agreements. The Company also requires an amendment of its senior credit facility before the end of the first quarter of 2003 to maintain compliance with its financial covenants. As the anticipated refinancing of the Company's capital structure was not completed as of February 28, 2003 (the 2002 financial statement issuance date) and the Company has not obtained an amendment of the aforementioned financial covenants, all debt has been classified as current at December 31, 2002.

Litigation Settlement:

        In June 2002, the Company benefited from a judgment entered in litigation with Hercules Corporation arising from a contract dispute in connection with the 1996 purchase of the Hercules' Composites Products Division. Hexcel received approximately $11.1 million from Hercules in satisfaction of a judgment entered after Hercules had exhausted all appeals from a lower court decision in favor of Hexcel in the New York Courts. The net cash proceeds from the settlement were used to reduce outstanding debt under the senior credit facility.

Sale of Ownership in a Joint Venture:

        In 2002, the Company agreed with its Asian Electronics venture partner to restructure its minority interest in Asahi-Schwebel Co., Ltd. ("Asahi-Schwebel"). Under the terms of the agreement, the Company reduced its ownership interest in the joint venture from 43.3% to 33.3% and received cash proceeds of $10.0 million. 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

36

estimated fair market value of $23.0 million, recording a non-cash impairment charge of $4.0 million. There was no tax benefit recognized on the write-down. The net cash proceeds from this sale were used to reduce outstanding debt under the senior credit facility.

Results of Operations

2002 Compared to 2001

        Net Sales:    Consolidated net sales for 2002 were $850.8 million, a decrease of 15.7% when compared to 2001 net sales of $1,009.4 million, reflecting lower sales to the commercial aerospace and electronics markets. Net sales to the commercial aerospace market declined by 27.4% as build rates of new commercial aircraft were reduced. Net sales to the electronics market were 24.3% lower than in 2001, reflecting the full year impact of a severe electronics industry downturn that was first seen late in the first quarter of 2001. The reduction in net sales to these markets was partially offset by continued growth in revenues to industrial and space and defense markets of 1.5% and 2.9%, respectively. Had the same U.S. dollar, British pound and Euro exchange rates applied in 2002 as in 2001, consolidated net sales for 2002 would have been approximately $837.6 million, reflecting the weakening of the U.S. dollar over the twelve months.

        Hexcel has three reportable segments: Reinforcements, Composites and Structures. Although these strategic business units provide customers with different products and services, they often overlap within four end markets: Commercial Aerospace, Industrial, Space & Defense, and Electronics. The Company finds it meaningful to evaluate the performance of its segments through the four end markets. Further discussion and additional financial information about the Company's segments may be found in Note 19 to the accompanying consolidated financial statements of this Annual Report on Form 10-K.

        The following table summarizes net sales to third-party customers by segment and end market in 2002 and 2001:

(a)

As part of a restructuring program, the Company changed the responsibility and reporting of one of its product lines effective January 1, 2002. Hexcel's business segment reporting has therefore been revised in 2002. Coincident with this change, Hexcel revised the names of its reporting business segments to Reinforcements, Composites and Structures. The 2001 results have been restated for comparative purposes.

37

        Commercial aerospace net sales decreased 27.4% to $391.1 million for 2002, as compared to net sales of $538.9 million for 2001. This decrease in comparable net sales reflects a reduction in commercial aircraft build rates by Airbus and Boeing during 2002 and into the first half of 2003. Boeing delivered 381 aircraft in 2002, down from 527 in 2001, and projects that its deliveries in 2003 will be reduced by approximately 25% to a level between 270 and 290 aircraft. Airbus' 2002 aircraft deliveries were 303, slightly lower than the 325 aircraft delivered in 2001. Airbus has indicated its 2003 deliveries and production will be approximately 300 aircraft. This guidance suggests that combined Boeing and Airbus commercial aircraft deliveries in 2003 will be about 15% lower than in 2002. The impact on the Company's commercial aerospace revenues of the further forecasted reduction in aircraft deliveries in 2003 will likely be smaller. As the Company delivers its products on average six months ahead of the delivery of an aircraft, it has been experiencing customer demand that approximates the 2003 forecasted deliveries for several months. The Company's commercial aerospace revenues in the second half of 2003 will start to reflect its customers anticipated deliveries of commercial aircraft in 2004. In addition to the number of aircraft produced, the Company's commercial aerospace revenues are influenced by the mix of aircraft that are produced, as twin aisle aircraft use more of the Company's products than narrow body aircraft and newly designed aircraft use more than older generations. Unlike many aerospace suppliers, Hexcel's sales to this market are almost entirely driven by new aircraft build rates with no material aftermarket content.

        Airbus is well into the launch of their new jumbo aircraft, the Airbus A380. Hexcel's deliveries of material for this aircraft have already begun to support certification and test requirements. While the Airbus 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. About 19% 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 Boeing 777 and the Airbus A340-500/600.

        Industrial net sales of $253.9 million for 2002 were slightly higher than the $250.2 million recorded in 2001. This year-on-year increase was highlighted by strong growth in demand for composite materials used in wind energy applications and continued strength in demand for the Company's products used in other non-aerospace applications, including architectural, automotive, civilian body armor, rail and marine, and various recreational equipment. While sales of the Company's reinforcement fabrics used in soft body armor applications increased slightly in 2002, sales to U.S. military applications began to decline in the second half of 2002, due largely to the timing of the placement of new contracts with the Company's customers for military body armor programs. Due to the lack of clarity in military soft body armor demand, the Company's Industrial revenues may fluctuate for several quarters even though the prospects for growth from wind energy and other applications remain strong.

        Space and defense net sales for 2002 of $147.5 million were 2.9% higher than the 2001 net sales of $143.3 million. 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), the C-17, the V-22 (Osprey) tilt rotor aircraft, the Tiger 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.

        Electronics net sales of $58.3 million for 2002 were 24.3% lower than net sales of $77.0 million in 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, import quotas limiting Asian imports of fiberglass fabrics into the U.S. expired at the end of 2001 and migration of lower layer count printed wiring board production from the United States to Asia has

38

continued. With excess industry production capacity, pricing remains under pressure. With these industry conditions continuing, the Company sees no evidence of a near-term recovery in this market.

        Gross Margin:    Gross margin for 2002 was $161.3 million, or 19.0% of net sales, compared to gross margin of $190.8 million, or 18.9% of net sales, in 2001. The $29.5 million decline in gross margin reflected the impact of the year-on-year sales declines in the commercial aerospace and electronics markets. While gross margins declined, the Company actually improved gross margin as a percentage of net sales by exceeding its goals for reductions in factory fixed costs in the previously announced restructuring programs.

        Although the gross margin in the Reinforcements segment declined $1.6 million compared to 2001 due to the electronics market declined, gross margin as a percentage of sales actually improved 130 basis points to 16.9% in 2002, as raw material prices and manufacturing costs reductions more than offset lower revenues. Gross margins earned by the Composites and the Structures segments declined $23.6 million and $4.2 million, respectively, when compared to 2001. Manufacturing cost reductions were able to hold percentage gross margins steady in the Composites segment. The Structures segment's gross margin as a percentage of sales declined 250 basis points, as it ramped up the transition of existing programs to build composite structures for commercial aircraft for its Asian joint ventures and received new programs from Boeing.

        Selling, General and Administrative ("SG&A") Expenses:    SG&A expenses were $85.9 million, or 10.1% of net sales, in 2002 compared with $120.9 million, or 12.0% of net sales, in 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 $103.7 million, or 10.3% of net sales. The net year-on-year reduction of $17.8 million, or 17.2%, after adjustments, 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 2001 was $12.5 million.

        Research and Technology ("R&T") Expenses:    R&T expenses were $14.7 million, or 1.7% of net sales, in 2002 compared to $18.6 million, or 1.8% of net sales, in 2001. Over the past two years the Company has concentrated its R&T efforts on developing new materials to meet the emerging needs of our customers, as well as expanding the range of applications for reinforcements and composite materials.

        Operating Income:    Operating income for 2002 was $60.2 million, or 7.1% of net sales, compared with an operating loss of $316.2 million in 2001. Excluding business consolidation and restructuring expenses of $0.5 million and $58.4 million incurred in 2002 and 2001, respectively, a $309.1 million impairment of goodwill and other purchased intangibles in 2001, $4.7 million of compensation expenses associated with the former CEO's retirement in 2001, and $12.5 million in amortization expense incurred in 2001, operating income would have been $60.7 million, or 7.1% of net sales, for 2002 compared with $68.5 million, or 6.8% of net sales, for 2001. This $7.8 million decline in operating income, after these adjustments, reflects the year-on-year decrease in gross margins offset, in part, by reductions in SG&A and R&T expenses.

        Operating income, after excluding the segments' attributable share of the aforementioned items, in the Reinforcements segment increased $3.7 million, as compared with 2001, to $19.1 million reflecting the benefits obtained from restructuring programs during the year. The Composites segment's operating income, after such exclusions, decreased by $13.0 million, as declines in net sales outpaced cost reductions. With the impact of the transition of programs to its Asian joint ventures and the start up of new programs received from Boeing, the Structures segment's operating income was $1.8 million lower than in 2001. The Company did not allocate corporate operating expenses of $26.7 million and $30.0 million to operating segments in 2002 and 2001, respectively.

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        Litigation Gain:    In 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 2002 was $62.8 million compared to $64.8 million in 2001. Included in interest expense for 2002 and 2001 was approximately $1.8 million and $1.0 million, respectively, of fees and expenses incurred in connection with bank amendments. Excluding these fees and expenses, interest expense was $61.0 million in 2002 and $63.8 million in 2001. This $2.8 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 LIBOR, net of the increase in the spread over LIBOR that the Company pays on its advances under its senior credit facility. For additional information, see Note 8 to the accompanying consolidated financial statements of this Annual Report on Form 10-K.

        Gain (Loss) on Early Retirement of Debt:    In 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.

        A loss of $2.7 million was recorded in 2001 as a result of 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 notes, due 2003. With the adoption of 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," on January 1, 2002, the $2.7 extraordinary loss on early retirement of debt reported in 2001 was reclassified as a separate line item below operating income in the consolidated statements of operations. There was no tax benefit recognized on the loss because of limitations on the Company's ability to realize the tax benefits.

        Provision for Income Taxes:    The Company's tax provision of $11.3 million for 2002 primarily reflects taxes on foreign 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 Company had a tax provision of $40.5 million in 2001, reflecting the impact of reduced tax benefits recorded for U.S. operating losses resulting from a change in business outlook and the inclusion in its tax provision of a $30.7 million valuation allowance for previously reported U.S. deferred tax assets. Due to a sharp decline in electronics revenues, the Company determined during the second quarter of 2001 to increase its tax provision rate through the establishment of a non-cash valuation allowance attributable to currently generated U.S. net operating losses until such time as the U.S. operations return to consistent profitability. Due to the effect of significant events that have occurred since the end of the second quarter, including the delay in the anticipated recovery in the electronics market, anticipated reductions in commercial aircraft production, and a general weakening of the economy, along with the sizable impairments to certain long-lived assets in the fourth quarter of 2001, the Company reduced its estimates for future U.S. taxable income during the carryforward period. As a result, the Company concluded that it was appropriate to establish a full valuation allowance on its U.S. deferred tax assets, which resulted in a $32.6 million valuation allowance for previously reported tax assets. For additional information, see Note 12 to the accompanying consolidated financial statements of this Annual Report on Form 10-K.

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        Equity in Losses of and Write-down of an Investment in Affiliated Companies:    Equity in losses of affiliated companies was $10.0 million in 2002, slightly larger than equity in losses of $9.5 million in 2001. Excluding the $4.0 million write-down of its investment in Asahi-Schwebel in 2002 and a $7.8 million write-down of its investment in Interglas Technologies AG ("Interglas") in 2001, equity in losses were $6.0 million in 2002 compared to $1.7 million in 2001. The increase in equity losses was due to the impact of the continued electronics market conditions affecting the Company's Asian electronics joint venture and increased year-over-year losses reported by the Company's joint ventures in China and Malaysia as they ramp up production of aerospace composite structures.

        In 2002, the Company wrote-down the carrying value of its remaining equity investment in Asahi-Schwebel to its estimated fair market value of $23.0 million resulting from an agreement with the Company's joint venture partner to restructure its minority interest. The $7.8 million write-down of Interglas in 2001 was the result of an assessment that an other-than-temporary decline in value in the investment had occurred due to a severe industry downturn and the resulting impact on the financial condition of this company. The amount of the write-down was determined based on available market information and appropriate valuation methodologies. The Company did not record deferred tax benefits on the write-downs because of limitations imposed by foreign tax laws and the Company's ability to realize the tax benefits.

Net Loss and Net Loss Per Share:

        The Company's convertible subordinated notes, due 2003, its convertible subordinated debentures, due 2011 and all of its stock options were excluded from the 2002 and 2001 computation of diluted net loss per share, as they were antidilutive. Refer to Note 14 to the accompanying consolidated financial statements of this Annual Report on Form 10-K for the calculation and number of shares used for diluted net loss per share.

2001 Compared to 2000

        Net Sales:    Consolidated net sales were $1,009.4 million in 2001, a 4.4% decline from $1,055.7 million in 2000. Giving effect to the sale of the Bellingham aircraft interiors business, that occurred on April 26, 2000, as if the transaction had occurred on January 1, 2000, net sales for 2000 would have been $1,036.8 million, resulting in a decline of 2.6%. The decline was due to a severe industry downturn and inventory correction in the electronics market for the Company's fiberglass fabric substrates, with net sales to that market down $104.2 million, or 57.5%, year-on-year. The downturn was partially offset by modest growth in the Composites segment of $44.3 million, or 7.5%, continued expansion in non-electronic markets for Reinforcements of $18.2 million, or 12.1%, and increased revenues, excluding the Bellingham business, for Structures of $14.3 million, or 12.9%. Net sales in 2000 generated by the Bellingham aircraft interiors business prior to its sale were $18.9 million. Had the same U.S. dollar, British pound and Euro exchange rates applied in 2001 as in 2000, consolidated net sales would have been approximately $1,019.5 million in 2001.

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        The following table summarizes net sales to third-party customers by segment and end market in 2001 and 2000:

(a)

As part of a restructuring program, the Company changed the responsibility and reporting of one of its product lines effective January 1, 2002. Hexcel's business segment reporting has therefore been revised in 2002. Coincident with this change, Hexcel revised the names of its reporting business segments to Reinforcements, Composites and Structures. The 2001 and 2000 results have been restated for comparative purposes.



(b)

Giving effect to the sale of the Bellingham aircraft interiors business, that occurred on April 26, 2000, as if it had occurred on January 1, 2000, net sales for 2000 would have been $1,036.8 million. The Bellingham business had $18.9 million of sales to the commercial aerospace market in 2000. This business was a component of the Company's Structures segment until this business was sold.

        Commercial aerospace net sales increased 4.1% to $538.9 million in 2001 compared with $517.7 million in 2000. Excluding $18.9 million in net sales generated by the Bellingham aircraft interiors business, net sales increased 8.0% from $498.8 million. The increase in comparable net sales reflected higher build rates and product mix of commercial aircraft produced at Airbus, Boeing and several regional aircraft manufacturers. Airbus and Boeing delivered a combined 852 commercial aircraft in 2001, a 6.5% improvement over the 800 delivered in 2000. The Company's net sales are impacted by the mix of aircraft that are produced, as twin aisle aircraft use more of the Company's materials than narrow body aircraft and newly designed aircraft use more of the Company's materials than older generations.

        Industrial net sales increased 9.8% to $250.2 million in 2001 from $227.8 million in 2000. The increase reflected strong sales growth in reinforcement fabrics used in the manufacture of soft body armor and in composite materials used for wind energy applications. The Company also continued to obtain growth through new automotive applications driven by new programs that use the Company's honeycomb core to provide impact protection and lightweight structural products. Growth in this market was bound by slightly lower net sales to recreational markets tracking macroeconomic trends in consumer spending and travel.

        Space and defense net sales in 2001 were $143.3 million, which reflected a $14.3 million, or 11.1%, increase from comparable sales in 2000. Sales associated with military aircraft and helicopters continued to trend upwards as the new generation of military aircraft in the United States and Europe ramped up in production. The Company is qualified to supply materials to a broad range of military

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aircraft and helicopter product programs. These programs, which utilize significantly greater amounts of Hexcel products than previous generations, 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 obtains from these programs in a fiscal period often depend upon which ones are funded and the extent of such funding.

        Electronics net sales were $77.0 million in 2001, a decrease of 57.5% from net sales of $181.2 million in 2000. This decline reflected the impact of a severe industry downturn and inventory correction in the global electronics industry that impacted the demand for the Company's fiberglass fabric substrates used in the fabrication of printed wiring boards. The origins of this downturn had many causes including the end of the so called "tech boom," a sharp reduction in telecommunications infrastructure investments and declining macroeconomic trends. Lower demand resulted in finished goods producers and their subcontractors seeking to liquidate their excess electronics inventories by cutting back on their purchases, which affected the entire supply chain. The Company first saw the impact of this downturn in its U.S. operations in the latter part of the first quarter of 2001. In the second quarter of 2001, U.S. demand weakened further and the Company's European operations, together with its joint venture interests in Europe and Asia, saw the same precipitative decline in customer demand. These reduced demand conditions persisted for the balance of 2001 with sales revenues down in excess of 65% for the second, third and fourth quarters compared to the same quarters in 2000. As the downturn continued through 2001, competition intensified for the business that remained and pricing pressures increased.

        Gross Margin:    Gross margin for 2001 was $190.8 million, or 18.9% of sales, versus $231.4 million, or 21.9% of sales, in 2000. The decrease primarily reflected the impact of the sharp decline in electronics sales in the Company's Reinforcements segment where gross margin fell approximately 7.7% to 15.6% of sales. While the Company had taken actions to significantly reduce costs in the electronics business, it was not able to reduce fixed costs pro-rata to the change in sales given the magnitude of the shortfall in revenues and its decision to retain manufacturing capacity to meet increased demand when, or if, the market recovers. Gross margins earned by the Company's Composites and Structures segments, as a percent of sales, declined approximately 1.0% to 3.0% below those earned in 2000 due to various factors including the impact of the company-wide focus on dramatically reducing inventories ahead of 2002's anticipated fall-off in commercial aerospace revenues, higher utility costs and changes in sales mix. The Company's inventories declined $23.7 million during 2001 to $131.7 million. Utility costs in the United States for 2001 increased by approximately $3.2 million compared to 2000.

        Selling, General and Administrative Expenses:    Selling, general and administrative expenses were $120.9 million, or 12.0% of net sales, in 2001 compared with $123.9 million, or 11.7% of net sales, in 2000. SG&A expenses, excluding the $4.7 million of compensation expenses associated with the former CEO's retirement and giving effect to the sale of the Bellingham business as if it had occurred on January 1, 2000, were $116.2 million, or 11.5% of net sales, in 2001 compared with $121.3 million, or 11.7% of net sales, in 2000. This decrease reflected lower corporate expenses of $4.1 million, of which $2.2 million reflected costs incurred in connection with the change in control event in 2000. Amortization expense of $12.5 million and $13.1 million was included in SG&A expenses for 2001 and 2000, respectively.

        Research and Technology Expenses:    Research and technology expenses were $18.6 million, or 1.8% of net sales, in 2001 compared to $21.2 million, or 2.0% of net sales, in 2000. Giving effect to the sale of the Bellingham aircraft interiors business as if it had occurred January 1, 2000, research and technology expenses would have been $19.5 million in 2000, or 1.9% of net sales. Nearly seventy percent of R&T expenses in 2001 related to developing new applications for composite materials.

        Operating Income:    Operating loss for 2001 was $316.2 million compared with operating income of $75.4 million for 2000. Excluding a $309.1 million impairment charged for goodwill and other

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purchased intangibles and $4.7 million of compensation expenses associated with the former CEO's retirement in 2001, along with business consolidation and restructuring expenses of $58.4 million and $10.9 million incurred during 2001 and 2000, respectively, operating income would have been $56.0 million, or 5.5% of net sales, in 2001 compared with $86.3 million, or 8.2% of net sales, in 2000.

        Interest Expense:    Interest expense for 2001 was $64.8 million compared to $68.7 million in 2000. Although the Company slightly increased its average borrowings during 2001 compared to 2000, interest expense declined when compared to 2000 due to lower weighted average interest rates on the Company's senior credit facility resulting from the progressive reductions in LIBOR during the year. Included in interest expense in 2001 are bank amendment fees of approximately $1.0 million related to the May 2001 amendment of certain financial covenants under the senior credit facility.

        Provision for Income Taxes:    The Company's tax provision of $40.5 million in 2001 reflected the impact of reduced tax benefits recorded for U.S. operating losses resulting from a change in business outlook for the Company and the inclusion in its tax provision of a $30.7 million valuation allowance for previously reported U.S. deferred tax assets. In 2000, the provision for income taxes was $26.3 million, which primarily related to a gain on the sale of the Bellingham aircraft interiors business.

        Equity in Earnings (Losses) of and Write-downs of an Investment in Affiliated Companies:    Equity in losses of affiliated companies was $9.5 million in 2001, including a $7.8 million write-down of the Company's investment in Interglas. Excluding the Interglas write-down, equity in losses of affiliated companies was $1.7 million compared with earnings of $5.5 million in 2000, reflecting the impact of the electronics industry downturn on the operating results of the Company's Reinforcements joint venture in Asia as well as start-up losses associated with the Structures joint ventures in China and Malaysia.

Net Income (Loss) and Net Income (Loss) Per Share:

        The Company's convertible subordinated notes, due 2003, its convertible subordinated debentures, due 2011 and all of its stock options were excluded from the 2001 computation of diluted net loss per share, as they were antidilutive. Approximately 4.5 million stock options were excluded from the 2000 calculation of diluted net income per share as their exercise price was higher than the Company's average share price. Refer to Note 14 to the accompanying consolidated financial statements of this Annual Report on Form 10-K for the calculation and number of shares used for diluted net income (loss) per share.

Impairment of Goodwill and Other Purchased Intangibles

        During the fourth quarter of 2001, the Company reviewed its long-lived assets, particularly goodwill and other purchased intangibles acquired in recent years, for impairment. The review was undertaken in response to changes in market conditions and the Company's revised outlook resulting from a sharp decline in demand for the Company's woven glass fabrics, primarily in the electronics market, and the announced reductions in commercial airline production due to the tragic events of September 11, 2001. The Company also revised its forecasts of revenue growth for its acquired satellite business due to the continuing slowdown in commercial satellite launches following the financial failures of a number of satellite based telecommunication projects and the postponement of others.

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These adverse changes in market conditions have led to the lowering of revenue forecasts associated with certain businesses in the Reinforcements and Composites segments.

        Based on this review, the Company determined that the long-lived assets of the fabrics business acquired from Clark-Schwebel in 1998 and the satellite business acquired from Fiberite, Inc. in 1997 were not fully recoverable. The Company recorded non-cash impairment charges of $292.1 million and $17.0 million related to the goodwill and other purchased intangibles associated with the Clark-Schwebel and Fiberite acquisitions, respectively. The amounts of the impairment charges were calculated as the excess of the carrying value of the assets over their fair values. Fair values were determined using discounted future cash flow models, market valuations and third party appraisals, where appropriate. There were no tax benefits recognized on the impairments because of limitations on the Company's ability to realize the tax benefits.

Business Consolidation and Restructuring Programs

November 2001 Program

        In November 2001, the Company announced a program to restructure its business operations in accordance with a revised business outlook for build rate reductions in commercial aircraft production, the continued depressed business conditions in the electronics market and the weakness in the general economy. The program targeted a 20% reduction in cash fixed costs, or $60.0 million, compared to previous spending rates and included company-wide reductions in managerial, professional, indirect manufacturing and administrative employees along with organizational rationalization. In connection with the program, the Company recognized charges of $47.9 million in the fourth quarter of 2001. During 2002, the Company continued the implementation of this program, reducing its workforce, since announcement, by approximately 25% to 4,245 employees and achieving a cash fixed cost reduction of 22.8% for the full year 2002 as compared to 2001.

        In 2002, the Company recognized a net change in estimated business consolidation and restructuring expenses related to this program of $0.7 million. This resulted from a $1.8 million reduction of previously accrued liabilities as employee severance and other benefit costs were lower than previously expected, offset in part, by a $1.1 million increase in restructuring liabilities for facility lease termination costs. An additional $1.2 million was expensed as incurred in 2002.

July 2001 Program

        As a result of the weakness in the electronics market, the Company initiated cost reduction actions in July 2001. These actions incorporated steps to furlough employees, idle manufacturing and cut non-essential expenditures, by effecting a reduction in the work force of approximately 275 employees primarily in the Reinforcements and Composites business segments. In connection with the program, the Company recognized a charge of $3.9 million in the third quarter of 2001. During 2002, the Company reviewed its remaining liability under the program and recognized a change in estimated business consolidation and restructuring expenses of $0.6 million, as employee severance and other benefit costs were lower than previously expected.

December 1998 and September 1999 Programs

        As a result of several substantial business acquisitions, the Company initiated business consolidation programs in December 1998 and September 1999. The primary purpose of these programs was to integrate acquired assets and operations into the Company, and to close or restructure insufficiently profitable facilities and activities. Due to aerospace industry requirements to "qualify" specific equipment and manufacturing processes for certain products, some business consolidation actions have taken up to three years to complete. These qualification requirements increase the complexity, cost and time of moving equipment and rationalizing manufacturing activities. In

45

connection with these business consolidation programs, the Company closed three manufacturing facilities, vacated approximately 560 thousand square feet of manufacturing space, and eliminated more than 700 manufacturing, marketing and administrative positions.

        In 2000, the Company added two further actions to the September 1999 business consolidation program. The Company decided to close the two smaller of its four U.S. prepreg manufacturing facilities—one in Lancaster, Ohio and another in Gilbert, Arizona. The Gilbert, Arizona facility was closed in 2001 and the closure of the Lancaster, Ohio facility was completed in 2002. The manufacturing output from these two plants is now being produced by the two remaining U.S. prepreg facilities in Livermore, California and Salt Lake City, Utah. In connection with the program, including the program revisions, the Company recognized a charge of $14.3 million in 2000.

        In addition, during 2000, Hexcel amended its September 1999 business consolidation program in response to the manufacturing constraints caused by a stronger than expected increase in sales and production for its electronic woven glass fabrics and its ballistic protection products. Based on these improved market conditions and a manufacturing capacity review, the Company decided to expand its capacity by purchasing additional looms and revising the previous decision to consolidate a number of weaving activities at two of the Company's facilities. As a result of the decision not to proceed to consolidate production, the Company reversed a total of $3.4 million of business consolidation expenses that were previously recognized in 1999, including $3.1 million in non-cash write-downs of machinery and equipment that was to have been sold or scrapped as a result of the consolidation.

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        In 2002, the Company recognized a change in estimated business consolidation expenses related to this program of $0.5 million, as actual employee severance was lower than previously expected. Business consolidation expenses for equipment relocation and re-qualification costs, expensed as incurred, were $1.6 million and $6.5 million in 2002 and 2001, respectively. Equipment relocation and re-qualification costs primarily related to the planned closure of the Lancaster, Ohio and Gilbert, Arizona pre-preg manufacturing facilities. In addition, the Company recognized a benefit on the sale of a previously idled Cleveland, Georgia facility of $0.5 million by reversing expenses previously accrued in 1999.

        The aggregate business consolidation and restructuring activities for the three years ended December 31, 2002, consisted of the following: