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

FORM 10-Q

Commission File Number 1-8472

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

        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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ý    No o

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

HEXCEL CORPORATION AND SUBSIDIARIES

INDEX

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PART I. FINANCIAL INFORMATION

ITEM 1. Condensed Consolidated Financial Statements (Unaudited)

Hexcel Corporation and Subsidiaries
Condensed Consolidated Balance Sheets

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

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Hexcel Corporation and Subsidiaries
Condensed Consolidated Statements of Operations

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

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Hexcel Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows

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

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Hexcel Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)

Note 1—Basis of Accounting

        The accompanying condensed consolidated financial statements have been prepared from the unaudited records of Hexcel Corporation and its subsidiaries ("Hexcel" or "the Company") in accordance with accounting principles generally accepted in the United States of America and, in the opinion of management, include all adjustments necessary to present fairly the balance sheet of the Company as of June 30, 2003, the results of operations for the quarters and six months ended June 30, 2003 and 2002, and the cash flows for the six months ended June 30, 2003 and 2002. The condensed consolidated balance sheet of the Company as of December 31, 2002 was derived from the audited 2002 consolidated balance sheet. Certain information and footnote disclosures normally included in financial statements have been omitted pursuant to rules and regulations of the Securities and Exchange Commission. Certain prior period amounts in the condensed consolidated financial statements and accompanying notes have been reclassified to conform to the 2003 presentation. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's 2002 Annual Report on Form 10-K/A (Amendment No. 3).

Note 2—Refinancing of Capital Structure

        On March 19, 2003, the Company completed the refinancing of its balance sheet with the issuance of mandatorily redeemable convertible preferred stock for $125.0 million in cash, the issuance of $125.0 million principal amount of 9⁷/8% senior secured notes due 2008, and the establishment of a new $115.0 million senior secured credit facility due 2008. The proceeds from the sale of the convertible preferred stock were used to redeem the Company's 7% convertible subordinated notes due 2003 and to reduce senior debt outstanding under the Company's then existing senior credit facility. The remaining advances under the then existing senior credit facility, after the application of the equity proceeds, were repaid with proceeds from the issuance of the 9⁷/8% senior secured notes due 2008 and modest drawings under the new senior secured credit facility. In connection with the refinancing, the Company incurred a $4.0 million loss on early retirement of debt in the first quarter of 2003 due to the write-off of unamortized deferred financing costs related to the former senior credit facility and the 7% convertible subordinated notes due 2003. The loss on early retirement of debt was included in other income (expense) in the condensed consolidated statement of operations for the six months ended June 30, 2003. Refer to Notes 6 and 7 for further information on the refinancing transactions.

Note 3—Stock-Based Compensation

        The Company accounts for stock-based compensation under the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). Accordingly, compensation expense is not recognized when options are granted at the fair market value on the date of grant. However, the Company does recognize compensation expense for restricted stock and similar stock-based plans over the defined vesting periods. As of June 30, 2003, the Company had several on-going stock-based compensation plans, including stock options and various forms of restricted stock unit awards.

        The Company has elected to continue following APB 25 to account for its stock-based compensation plans. The effects on net income (loss) and net income (loss) per common share as if the Company had applied the fair value method of accounting for stock-based compensation in accordance with Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based

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Compensation" ("FAS 123") for the quarters and six months ended June 30, 2003 and 2002 are as follows:

        No tax benefit was recognized on stock-based compensation expense as the Company establishes a non-cash valuation allowance attributable to currently generated U.S. net operating losses (refer to Note 12). Stock-based compensation expense was not material to European operations.

        The weighted average fair value of stock options granted during the six months ended June 30, 2003 and 2002 was $1.77 and $1.96, respectively, and estimated using the Black-Scholes option pricing model with the following weighted-average assumptions:

Note 4—Inventories

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Note 5—Business Consolidation and Restructuring Programs

        Business consolidation and restructuring liabilities as of June 30, 2003 and December 31, 2002, and activity of the Company's two remaining programs for the quarter and six months ended June 30, 2003, consisted of the following:

November 2001 Program

        During the fourth quarter of 2001, the Company announced a program to restructure its business operations as a result of its revised business outlook for build rate reductions in commercial aircraft production through 2003 and due to the continued depressed business conditions in the electronics market. For the quarter and six months ended June 30, 2003, the Company recognized business consolidation and restructuring expenses of $0.3 million and $0.5 million, respectively, related to this program for equipment relocation and re-qualification costs that are expensed as incurred. In addition, $0.2 million of additional severance expense was recognized in the first six months of 2003 ($0.3 million additional severance expense in the first quarter and a $0.1 million reversal of severance expense in the second quarter) due to changes in estimate, while accrued liabilities for facility and equipment were reduced by $0.2 million also due to changes in estimate.

        Business consolidation and restructuring activities for this program consisted of the following:

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September 1999 Program

        As a result of several substantial business acquisitions, the Company initiated a business consolidation program in September 1999. The primary purpose of the program 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 over three years to complete. These qualification requirements increase the complexity, cost and time of moving equipment and rationalizing manufacturing activities.

        For the quarter and six months ended June 30, 2003, the Company recognized $0.5 million and $0.9 million, respectively, of business consolidation expenses related to this program for equipment relocation and re-qualification costs that are expensed as incurred.

        Business consolidation and restructuring activities for this program consisted of the following:

Note 6—Mandatorily Redeemable Convertible Preferred Stock

        On March 19, 2003, Hexcel received $119.8 million, after expenses of $5.2 million, from the issuance of 125,000 shares of a series A convertible preferred stock and 125,000 shares of a series B convertible preferred stock. Hexcel issued 77,875 shares of each series to affiliates of Berkshire Partners LLC and Greenbriar Equity Group LLC. Separately, Hexcel issued 47,125 shares of each series to investment funds controlled by affiliates of The Goldman Sachs Group, Inc., a related party. Upon issuance, the total number of Hexcel's outstanding common shares, including potential shares issuable upon conversion of both of the new series of convertible preferred stock, increased from approximately 38.6 million shares to approximately 88.4 million shares. In addition, on March 18, 2003, the shareholders of the Company approved an increase in the common shares authorized for issuance from 100.0 million shares to 200.0 million shares.

        The series A and the series B convertible preferred stock is mandatorily redeemable on January 22, 2010 for cash or for common stock at the Company's discretion. Each share of series A and series B preferred stock is convertible, at the option of the holder, into that number of shares of common stock equal to the stated value of the share of preferred stock divided by the conversion price. The stated value of each share of series A preferred stock is $1,000, the stated value of each share of series B preferred stock is $195.618, and the conversion price for each share of preferred stock is $3.00. Both the series A preferred stock and series B preferred stock will automatically be converted into common stock if the closing trading price of the common stock for any period of 60 consecutive trading days ending after March 19, 2006 exceeds $9.00 per share. The preferred stockholders are entitled to vote on an as converted basis with Hexcel's common stockholders.

        Commencing on the third anniversary of the original issuance, holders of the series A convertible preferred stock will be entitled to receive dividends at an annual rate of 6% of the "accrued value." Accrued value is calculated as an amount equal to the sum of $1,195.618 per share and the aggregate of all accrued but unpaid dividends. Dividends are payable quarterly and may be paid in cash or added to the accrued value of the preferred stock, at the Company's option. The series B preferred stock does not accrue dividends.

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        The issuance of the series A and series B convertible preferred stock will result in certain deductions being recognized in the Company's consolidated statement of operations until such time as the preferred stock is converted to Hexcel common stock or redeemed. These deductions are reported under a caption "Deemed preferred dividends and accretion" and represent a reduction of net income (loss) in arriving at net income (loss) available to common shareholders. The Company recognized deemed preferred dividends and accretion of $3.0 million and $3.5 million for the quarter and six months ended June 30, 2003, respectively.

        "Deemed preferred dividends and accretion" is composed of four components: accrued dividends, discount, beneficial conversion feature, and deferred issuance costs. The accretion of these components is a non-cash expense at the time of recognition. However, cash may be utilized to pay future dividends and/or for the redemption of the preferred stock. In addition, in each instance, the components are accrued over the life of the convertible preferred stock using the effective interest method.

        The beneficial conversion feature to be accreted over the term of the convertible preferred stock has been estimated at $23.4 million. The beneficial conversion feature is the difference between the proceeds received from the issuance of the series A and series B convertible preferred stock, net of commitment fees, and the deemed fair market value at the closing of the Company's common stock into which the series A and series B convertible preferred stock is convertible. The deemed fair market value of the Company's common stock was calculated based upon the average price of the Company's common stock on March 19, 2003 of $2.93 per share.

Note 7—Notes Payable and Capital Lease Obligations

Senior Secured Credit Facility, due 2008

        On March 19, 2003, Hexcel entered into a $115.0 million asset-backed senior secured credit facility ("Senior Secured Credit Facility") with a new syndicate of lenders led by Fleet Capital Corporation as agent. The credit facility matures on March 31, 2008. In addition to Hexcel Corporation, the borrowers under the credit facility are Hexcel's operating subsidiaries in the U.K., Austria and Germany. The credit facility provides for borrowings of U.S. dollars, Pound Sterling and Euro currencies, including the issuance of letters of credit, with the amount available to each borrower dependent on the borrowing base of that borrower and its subsidiaries. For Hexcel Corporation and the U.K. borrower, the borrowing base is determined by an agreed percentage of eligible accounts receivable and eligible inventory, subject to certain reserves. The borrowing base of each of the Austrian and German

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borrowers is based on an agreed percentage of eligible accounts receivable, subject to certain reserves. Borrowings under the new facility bear interest at a floating rate based on either the agent's defined "prime rate" plus a margin that can vary from 0.75% to 3.25% or LIBOR plus a margin that can vary from 2.25% to 3.25%. The margin over the "prime rate" ranges from 0.75% to 1.75% for borrowings denominated in U.S. dollars and 2.25% to 3.25% for borrowings denominated in Pound Sterling and Euros. The margin in effect for a borrowing at any given time depends on the Company's fixed charge ratio and the currency denomination of such borrowing. The credit facility also requires the payment of customary fees and expenses.

        All obligations under the credit facility are secured by a first priority security interest in accounts receivable, inventory and cash and cash equivalents of Hexcel Corporation and its material domestic subsidiaries. In addition, all obligations under the credit facility are secured by a pledge of 65% of the stock of Hexcel's French and U.K. first-tier holding companies and certain foreign intercompany notes. This pledge of foreign stock and these foreign intercompany notes is on an equal basis with a substantially identical pledge of such stock and foreign intercompany notes given to secure the obligations under the senior secured notes. The obligations of the U.K. borrower are secured by the accounts receivable, inventory, and cash and cash equivalents of the U.K. borrower. The obligations of the Austrian and German borrowers are secured by the accounts receivable of the Austrian and German borrowers, respectively.

        Hexcel is required to maintain various financial covenant ratios throughout the term of the credit facility. These financial covenants set maximum values for the Company's leverage ratios for any fiscal quarter-end and capital expenditures, and set minimum values for the Company's fixed charge coverage ratio for any fiscal quarter-end. These financial maintenance covenants can be found in the credit agreement, which was filed as an exhibit to the Company's 2002 Annual Report on Form 10-K/A (Amendment No. 1).

        The credit facility also contains limitations on, among other things, incurring debt, granting liens, making investments, making restricted payments, entering into transactions with affiliates and prepaying subordinated debt. The credit facility contains other customary terms relating to, among other things, representations and warranties, additional covenants and events of default.

        At June 30, 2003, the Company had borrowings of $8.2 million under this facility. After taking into account a borrowing base of $78.2 million, less advances, letters of credit outstanding and other adjustments, the Company had undrawn revolver and overdraft availability under the facility of $49.0 million as of June 30, 2003. Additionally, Hexcel is able to issue letters of credit up to $50.0 million under this facility, subject to availability. At June 30, 2003, Hexcel had issued letters of credit totaling $21.3 million, of which $11.1 million supported a loan to the Company's BHA Aero Composite Parts Co., Ltd. joint venture in China. In addition, the Company had a standby letter of credit of $1.0 million outstanding at June 30, 2003, that was separate from this facility.

Senior Secured Notes, due 2008

        Also on March 19, 2003, the Company issued, through a private placement under Rule 144A, $125.0 million of 9⁷/8% senior secured notes at a price of 98.952% of face value. Interest on the notes is payable on April 1^st and October 1^st of each year. The first payment will be made on October 1, 2003. The senior secured notes, due October 1, 2008, are secured by a first priority security interest in substantially all of Hexcel's and its domestic subsidiaries' property, plant and equipment, intangibles, intercompany notes and other obligations receivable, and 100% of the outstanding voting stock of certain of Hexcel's domestic subsidiaries. In addition, the senior secured notes are secured by a pledge of 65% of the stock of Hexcel's French and U.K. first-tier holding companies. This pledge of foreign stock and the pledge of certain foreign intercompany notes is on an equal basis with a substantially identical pledge of such foreign stock and foreign intercompany notes given to secure the obligations under the Company's new senior secured credit facility, described above. The senior secured notes are also guaranteed by Hexcel's material domestic subsidiaries. Hexcel has the ability to incur additional

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debt that would be secured on an equal basis by the collateral securing the senior secured notes. The amount of additional secured debt that may be incurred is currently limited to $10.0 million, but may increase over time based on a formula relating to the total net book value or the appraised value of Hexcel's domestic property, plant and equipment pledged to the noteholders.

        The indenture governing the senior secured notes contains many other terms and conditions, including limitations with respect to asset sales, incurrence of debt, granting of liens, the making of restricted payments and entering into transactions with affiliates.

        Hexcel has commenced an exchange offer to all noteholders giving them the opportunity to exchange their notes for new notes that are substantially identical to the existing notes except that the new notes will be registered with the Securities and Exchange Commission ("SEC") and will not have any restrictions on transfer. In the event that Hexcel cannot affect such exchange, Hexcel will be required to file a shelf registration statement with the SEC to permit the noteholders to resell their notes generally without restriction.

French Factoring Facility

        In May 2003, the Company entered into an accounts receivable factoring facility with a third party to provide an additional 20.0 million Euros in borrowing capacity. Borrowings under this facility bear interest at 1.00% per annum over LIBOR plus a 0.18% usage fee. This facility also requires the payment of customary fees and expenses. As of June 30, 2003, the Company did not have any outstanding borrowings under this facility.

Classification of Debt and Capital Lease Obligations

        As of December 31, 2002, the Company had a scheduled debt obligation due August 1, 2003, which, if made, would have caused the Company to violate one or more financial covenants in the Company's then existing debt agreements. The Company also required an amendment of its then existing senior credit facility before the end of the first quarter of 2003 to maintain compliance with the financial covenants under that facility. 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 had not obtained an amendment of the aforementioned financial covenants, all debt and capital lease obligations were classified as current at December 31, 2002.

        As a result of the March 19, 2003 refinancing transactions, the uncertainties surrounding the Company's ability to meet its scheduled 2003 debt maturities and comply with its debt covenants were resolved. Management believes the Company will comply with the new debt covenants and has adequate liquidity available to finance operations beyond December 31, 2003. With these uncertainties resolved, substantially all of the Company's debt was reclassified to long-term at March 19, 2003 reflecting the new scheduled debt maturities.

Note 8—Other Income (Expense)

        In the second quarter of 2003, the Company sold certain assets of its Structures business segment for $3.0 million in cash. As a result of the transaction, the Company recognized a net gain of $1.8 million.

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        Also in the second quarter of 2003, the Company recognized a $1.4 million gain attributable to a prior business sale, which occurred in April 2000. Pursuant to the sale agreement, Hexcel retained a contingent obligation for certain customer warranty claims, which expired in the second quarter of 2003. As a result, the Company reversed the $1.4 million contingent liability established at the time of the sale.

        In connection with the refinancing of its balance sheet in the first quarter of 2003, the Company incurred a $4.0 million loss on early retirement of debt due to the write-off of unamortized deferred financing costs relating to the former senior credit facility and the 7% convertible subordinated notes due 2003. Refer to Notes 2, 6 and 7 for further information on the refinancing transactions.

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

Note 9—Net Income (Loss) Per Common Share

        The assumed conversions of the Company's former convertible subordinated notes, due 2003, exchangeable for 3.0 million common shares, and convertible subordinated debentures, due 2011, exchangeable for 0.7 million common shares were excluded from the computations of diluted net income (loss) per common share for all periods, as they were anti-dilutive. In the first quarter of 2003, the remaining $46.9 million principal amount of the convertible subordinated notes, due 2003, were repaid with proceeds from the sale of the mandatorily redeemable convertible preferred stock.

        The assumed conversion of the Company's mandatorily redeemable convertible preferred stock, convertible into 49.8 million common shares, was excluded from the quarter and six months ended

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June 30, 2003 computations of diluted net income (loss) per common share, as it was anti-dilutive in both periods.

        Approximately 0.7 million shares underlying outstanding stock options were included the computation of diluted net income per common share in both the quarters ended June 30, 2003 and 2002. The assumed conversions of a remaining 8.6 million shares and 8.0 million shares underlying outstanding stock options and restricted stock units were excluded from the computations of diluted net income per common share for the quarters ended June 30, 2003 and 2002, respectively, as they were anti-dilutive. For the six months ended June 30, 2003 and 2002, the assumed conversion of all 9.3 million and 8.7 million shares underlying outstanding stock options and restricted stock units, respectively, were excluded from the computations of diluted net loss per common share, as they were anti-dilutive.

Note 10—Comprehensive Income

        Comprehensive income represents net income (loss) and other gains and losses affecting shareholders' equity (deficit) that are not reflected in the condensed consolidated statements of operations. The components of comprehensive income for the quarters and six months ended June 30, 2003 and 2002 were as follows:

Note 11—Derivative Financial Instruments

Foreign Currency Forward Exchange Contracts

        A number of the Company's European subsidiaries are exposed to the impact of exchange rate volatility between the U.S. dollar and the subsidiaries' functional currencies, being either the Euro or the British pound sterling. To minimize this exposure, Hexcel has entered into a number of foreign currency forward exchange contracts to exchange U.S. dollars for Euros at fixed rates on specified dates through March 2005. The aggregate notional amount of these contracts was $38.6 million at June 30, 2003 and $58.0 million at December 31, 2002. The purpose of these contracts is to hedge a portion of the forecasted transactions of European subsidiaries under long-term sales contracts with certain customers. These contracts are expected to provide the Company with a more balanced matching of future cash receipts and expenditures by currency, thereby reducing the Company's exposure to fluctuations in currency exchange rates. For the quarters and six months ended June 30, 2003, hedge ineffectiveness was immaterial and the fair value of the foreign currency cash flow hedges, recognized as a component of "comprehensive income," was a net gain of $1.2 million and $2.7 million, respectively. Over the next twelve months, approximately $3.7 million of gains recorded in "accumulated other comprehensive loss" are expected to be reclassified into earnings as the hedged sales are recorded.

Cross-Currency Interest Rate Swap Agreement

        In April 2003, the Company entered into a five-year cross-currency interest rate swap agreement, which effectively exchanges a loan of 12.5 million Euros at a fixed rate of 7% for a loan with a notional amount of $13.5 million at a fixed rate of 6.02% over the term of the agreement. The Company entered into this agreement to effectively hedge interest and principal payments relating to an

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intercompany loan denominated in Euros. The fair value and carrying amount of this swap agreement as of June 30, 2003 was a $1.2 million liability. During the quarter ended June 30, 2003, hedge ineffectiveness was immaterial. A net loss of $0.4 million was recognized as a component of "comprehensive income". Over the next twelve months, no material unrealized losses recorded in "accumulated other comprehensive loss" relating to this agreement are expected to be reclassified into earnings.

Note 12—Taxes

        The Company's tax provision for the quarters and six months ended June 30, 2003 and 2002 was primarily for taxes on European income. The Company will continue to adjust its tax provision rate through the establishment, or release, of a non-cash valuation allowance attributable to currently generated U.S. net operating income (losses) until such time as the U.S. operations generate income in future years to utilize the net operating losses in full.

        During the second quarter of 2003, the Company recorded a $0.6 million provision for income taxes in the U.S. for foreign withholding tax expenses on distributions received from its European subsidiaries. As the U.S. operations continue to generate net operating losses, the Company is unable to offset the foreign withholding tax with respective foreign tax credits in the U.S.

        The U.S. and European components of income (loss) before income taxes and the provision for income taxes for the quarters and six months ended June 30, 2003 and 2002 are as follows:

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Net Operating Loss Carryforwards

        As of June 30, 2003, Hexcel had net operating loss carryforwards for U.S. federal and Belgium income tax purposes of approximately $92.3 million and $7.2 million, respectively. As a result of the Company's issuance of mandatorily redeemable convertible preferred stock (described in Note 6), the Company has experienced an "ownership change" pursuant to IRC Section 382, which will limit the Company's ability to utilize net operating losses created prior to March 19, 2003 against future U.S. taxable income to approximately $5.3 million annually.

Note 13—Investments in Affiliated Companies

        In January 2003, the Financial Accounting Standards Board issued Financial Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"). FIN 46 explains how to identify variable interest entities and how an enterprise assesses its interests in a variable interest entity to decide whether to consolidate that entity. Accordingly, FIN 46 requires existing unconsolidated variable interest entities to be consolidated by their "primary beneficiaries" if the entities do not effectively disperse "equity investment risks" among the parties involved. Variable interest entities that effectively disperse risks are not to be consolidated. However, the following additional disclosures are required for an enterprise that holds a significant interest in a "variable interest entity" but is not the primary beneficiary: (i) the nature of its involvement and when the involvement began, (ii) the nature, purpose, size and activities of the entity, and (iii) the enterprise's maximum exposure to loss as a result of its involvement.

        The Company has considered its equity investments and believes that certain of these investments would be considered "variable interest entities." However, management believes that the Company is not the primary beneficiary of such entities, and therefore, would not be required to consolidate these entities in its accounts. The Company has made the additional disclosures as follows.

        In 1999, Hexcel, Boeing International Holdings, Ltd. and China Aviation Industry Corporation I formed a joint venture, BHA Aero Composite Parts Co., Ltd. ("BHA Aero"), 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. Last twelve month revenues for BHA Aero were $5.3 million. In addition, in 1999, Hexcel formed another joint venture, Asian Composites Manufacturing Sdn. Bhd. ("Asian Composites"), with Boeing Worldwide Operations Limited, Sime Link Sdn. Bhd., and Malaysia Helicopter Services Bhd. (now known as Naluri Berhad), 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. Last twelve month revenues for Asian Composites were $8.9 million. Manufacturing activities of both BHA Aero and Asian Composites continue to ramp up as composite component manufacturing is transferred to them. At June 30, 2003, Hexcel had an equity investment balance of $2.7 million and an aggregate receivable balance of $2.6 million related to these joint ventures. In addition, the Company has an outstanding letter of credit of $11.1 million supporting a loan to BHA Aero. Hexcel has no other significant exposures to loss with BHA Aero and Asian Composites.

        As part of an acquisition in 1998, the Company obtained equity ownership interests in three joint ventures which manufacture reinforcement products: a 43.6% share in Interglas Technologies AG ("Interglas"), headquartered in Germany; a 43.3% share in Asahi-Schwebel Co., Ltd. ("Asahi-Schwebel"), headquartered in Japan; and a 50% share in Clark-Schwebel Tech-Fab Company, headquartered in the United States. Clark-Schwebel Tech-Fab Company was converted into a limited liability company on March 27, 2003 and changed its legal name to TechFab LLC ("TechFab"). Interglas and Asahi-Schwebel are fiberglass fabric producers serving the European and Asian manufacturers of printed circuit board laminates and other reinforcement product applications. In 2001, Hexcel recognized an impairment charge for its remaining equity investment in Interglas, as the entity's

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net losses were deemed to be other than temporary. In 2002, Hexcel 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 were simultaneously effective for a six-month period beginning July 1, 2003. Reflecting these terms, the Company wrote-down the carrying value of its remaining equity investment in this joint venture to its estimated fair market value of $23.0 million during the second quarter of 2002. TechFab manufactures non-woven reinforcement materials for roofing, construction, sail cloth and other specialty applications. TechFab has approximately $25 million in annual revenues. At June 30, 2003, Hexcel had an equity investment balance in TechFab of $6.4 million. Hexcel has no other significant exposures to loss with these joint ventures.

        Lastly, Hexcel owns a 45.3% equity interest in DIC-Hexcel Limited ("DHL"), a joint venture formed in 1990 with Dainippon Ink and Chemicals, Inc. ("DIC"). This joint venture is located in Japan, and produces and sells prepregs, honeycomb and decorative laminates using technology licensed from Hexcel and DIC. DHL has annual revenues of approximately $10 million. Due to DHL's recognition of net losses in prior years, no equity investment balance remains for DHL at June 30, 2003. However, Hexcel is contingently liable to pay DIC up to $1.5 million with respect to DHL's debt under certain defined circumstances through January 31, 2004, unless renewed. This contingent liability will cease upon DHL's repayment of the underlying loan.

Subsequent Event

        In July 2003, the Company exercised its option to sell the remaining interest in its Japanese electronics joint venture, Asahi-Schwebel, for $23.0 million in cash. The Company received the cash proceeds on July 14, 2003. The Company expects to continue to work with its former joint venture partner on initiatives in the electronics business.

Note 14—Product Warranty

        The Company provides for an estimated amount of product warranty at the time revenue is recognized. This estimated amount is provided by product and based on historical warranty experience. Warranty expense for the quarter and six months ended June 30, 2003, and accrued warranty cost, included in "other accrued liabilities" in the consolidated balance sheets at June 30, 2003 and December 31, 2002 was as follows:

Note 15—Segment Information

        The financial results for Hexcel's business segments are prepared using a management approach, which is consistent with the basis and manner in which Hexcel management internally segregates

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financial information for the purposes of assisting in making internal operating decisions. Hexcel evaluates the performance of its operating segments based on operating income, and generally accounts for intersegment sales based on arm's length prices. Corporate and certain other expenses are not allocated to the operating segments, except to the extent that the expense can be directly attributable to the business segment.

        Financial information for the Company's segments for the quarter and six month periods ended June 30, 2003 and 2002, is as follows: