UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C.  20549

 

FORM 10–K

 

ý        ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

 

For the Fiscal Year Ended December 31, 2003

 

or

o        Transition Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934

 

For the transition period from                          to                          

 

Commission File Number 1-8472

 

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 DEBENTURES DUE 2011

 

9 3/4% SENIOR SUBORDINATED NOTES DUE 2009

 

9 7/8% SENIOR SECURED NOTES DUE 2008

 

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 of the registrant’s common stock held by non-affiliates was $75,673,424 based on the reported last sale price of common stock on June 30, 2003, which is the last business day of the registrants most recently completed second fiscal quarter.

 

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 a 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, industrial, space and defense, and electronics 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 for computers and cellular telephones, soft body armor, high-speed trains and ferries, cars and trucks, wind turbine blades, window blinds, bikes, skis 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 the Peoples Republic of China and Australia.  The Company is also an investor in four joint ventures; one of which manufactures and markets reinforcement products in the United States; one of which manufactures and markets composite materials in Japan; and two of which manufacture composite structures and interiors in Asia.

 

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.

 

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:

 

BUSINESS SEGMENT		PRODUCTS		PRIMARY END-USE
REINFORCEMENTS		Industrial Fabrics and Specialty Reinforcements		•    Structural materials/components used in aerospace, wind energy, automotive, marine, recreation and other industrial applications
				•    Raw materials for prepregs and honeycomb
				•    Soft body armor and other security applications
				•    Electronic applications, primarily printed wiring board substrates
				•    Window screens and blinds
				•    Civil engineering and construction applications

 

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

 

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Reinforcements

 

 

The Reinforcements business segment’s net sales to third party customers were $232.8 million in 2003, $217.9 million in 2002, and $245.7 million in 2001, which represented approximately 26%, 26% and 25% of the Company’s net sales, respectively.  In addition, approximately 26%, 24% and 27% of the Company’s total production of reinforcement products was used internally to manufacture composite materials in 2003, 2002, and 2001, respectively.

 

The Company also has, or had during the three year period ended December 31, 2003, 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 TechFab LLC (“Tech-Fab”), headquartered in the United States.  Interglas and Asahi-Schwebel are fiberglass fabric producers serving the European and Asian electronics and telecommunications industries.  Tech-Fab manufactures non-woven reinforcement materials for roofing, construction, sail cloth and other specialty applications.

 

In 2002, the Company agreed with its partner in Asahi-Schwebel to restructure its minority interest in the joint venture.  Under the terms of this 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 effective for a six-month period beginning July 1, 2003 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.   In July 2003, the Company exercised its option to sell the remaining interest in Asahi-Schwebel for $23.0 million in cash.  No gains or losses were recorded as a result of the sale, as the Company had previously written-down the carrying value of its remaining equity investment in Asahi-Schwebel to its estimated fair market value of $23.0 million in 2002.

 

Also in 2003, the Company sold its equity interest in its European reinforcement products joint venture, Interglas, for a nominal amount in conjunction with a bank sponsored financial restructuring of the affiliated company.  No gains or losses were recorded as a result of this transaction, as the Company had recognized a full impairment of its remaining equity interest in Interglas in 2001.

 

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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, gel coats and laminates.

 

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

 

BUSINESS SEGMENT		PRODUCTS		PRIMARY END-USE
COMPOSITES		Carbon Fibers		•    Raw materials for industrial fabrics and prepregs •    Filament winding for various space, defense and industrial applications
		Prepregs and Other Fiber-Reinforced Matrix Materials		•    Composite structures •    Commercial and military aircraft components •    Satellites and launchers •    Aeroengines •    Wind turbine rotor blades •    Yachts, trains and motor racing vehicles •    Skis, snowboards, hockey sticks, tennis rackets and bicycles
		Structural Adhesives		•    Bonding of metals, honeycomb and composite materials •    Aerospace, ground transportation and industrial applications
		Honeycomb, Honeycomb Parts & Composite Panels		•    Composite structures and interiors •    Semi-finished components used in: Helicopter blades Aircraft surfaces (flaps, wing tips, elevators and fairings) High-speed ferries, truck and train components Automotive components and impact protection

 

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, space launch vehicles, wind blade components, and 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 and Resin Transfer Moulding products are enabling quality aerospace components to be manufactured using highly cost-effective processes.

 

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Structural Adhesives:  Hexcel designs and markets a comprehensive range of Reduxâ film and paste adhesives.  These structural adhesives, which bond metal to metal, composites and honeycomb structures, are 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 nested hexagonal cells.  The product is similar in appearance to a cross-sectional slice of a beehive.  It can also be manufactured in asymmetric cell configurations for more specialized applications.  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, automotive parts, high-speed trains and mass transit vehicles, energy absorption products, marine vessel compartments, portable shelters, 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).

 

Composites

 

 

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In January 2004, the Company announced its intention to consolidate the activities of its Livermore, California facility into its other manufacturing facilities, principally into its Salt Lake City, Utah plant.  The Livermore, California facility will continue to operate until the Company has successfully transferred its production from Livermore to its other manufacturing facilities.

 

The Composites business segment’s net sales to third party customers were $584.8 million in 2003, $532.4 million in 2002 and $638.8 million in 2001, which represented approximately 65%, 62% and 63% 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, wing panels and other aircraft components.

 

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

 

BUSINESS SEGMENT		PRODUCTS		PRIMARY END-USE
STRUCTURES		Composite Structures		•    Aircraft structures and finished aircraft components, including: Flap track fairings Wing panels Flight deck panels Door liners

 

The Structures business segment’s net sales to third party customers were $79.3 million in 2003, $100.5 million in 2002 and $124.9 million in 2001, which represented approximately 9%, 12% and 12% of the Company’s net sales, respectively.  The revenue decline in the Structures business segment reflects Boeing’s build rates and the continued transition of work to its Asian joint ventures.

 

The Structures business unit has equity investments in two Asian joint ventures.  They consist of 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% 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.  Hexcel and Boeing have transferred the manufacture of certain composite components to these joint ventures.  Hexcel purchases the semi-finished composite components from the joint ventures, finishes them and delivers them to Boeing.  During 2003, these Asian joint ventures had combined revenues of $18.8 million.

 

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Structures

 

 

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 20 to the accompanying consolidated financial statements of this Annual Report on Form 10-K.

 

Significant Customers

 

Approximately 23%, 24% and 27% of Hexcel’s 2003, 2002 and 2001 net sales, respectively, were to The Boeing Company (“Boeing”) and related subcontractors.  Of the 23% of sales to Boeing and its subcontractors in 2003, 17% and 6% related to commercial aerospace and space and defense market applications, respectively.  Approximately 19%, 16% and 16% of Hexcel’s 2003, 2002 and 2001 net sales, respectively, were to EADS, including the business division Airbus Industrie (“Airbus”), and its subcontractors.  Of the 19% of sales to EADS and its subcontractors in 2003, 16% and 3% 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:

 

		2003		2002		2001
Net Sales by Market
Commercial aerospace		43	%	46	%	53	%
Industrial		31		30		25
Space and defense		20		17		14
Electronics		6		7		8
Total		100	%	100	%	100	%
Net Sales by Geography (a)
United States		48	%	50	%	52	%
U.S. exports		7		6		7
International		45		44		41
Total		100	%	100	%	100	%

 

(a)          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,

 

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is the replacement and retrofit rates for existing aircraft.  These retrofit 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 to improve operating costs with higher payloads and more fuel-efficient aircraft, which in turn is influenced by the price of fuel.

 

Each new generation of commercial aircraft has used increasing quantities of advanced structural materials, replacing traditional metals.  This follows the trend previously seen in military fighter aircraft where advanced structural materials may now exceed 50% of the weight of the airframe.  The most recently launched commercial aircraft programs continue the trend of increasing usage of advanced structural materials.  For instance, Airbus has indicated that the A380 is being built with 22% advanced structural materials by weight.  The first A380 aircraft are already in production with the first flight planned for 2005 and deliveries anticipated to start in 2006.  Hexcel has successfully contracted with its customers to supply a significant amount of the advanced structural materials for the initial production of this aircraft and is completing the qualification of its products.   During 2003, Boeing announced its plan to develop and launch the Boeing 7E7 which it anticipates will have an even greater content of advanced structural materials.  This trend continues to expand the market opportunity for advanced structural materials, and Hexcel and other composite materials manufacturers are developing a wide range of materials to meet the challenges of new commercial aircraft programs.  Of course, the benefit Hexcel ultimately derives from programs such as the 7E7 will depend upon a number of factors, including the design requirements of its customers, the suitability of the Company’s products to meet those requirements, the competitive position of the Company’s products against similar products offered by the Company’s competitors, and the requirements its customers and their subcontractors award to the Company.

 

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.  Although relatively stable in 2000 and 2001, combined aircraft deliveries declined to 684 aircraft in 2002 and further declined to 586 aircraft in 2003.

 

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 four to 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, the Company’s annual commercial aerospace revenues have declined approximately 28% since 2001.

 

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

 

		1992		1993		1994		1995		1996		1997		1998		1999		2000		2001		2002		2003
Boeing (including McDonnell Douglas)		572		409		312		256		271		375		563		620		491		527		381		281
Airbus		157		138		123		124		126		182		229		294		311		325		303		305
Total		729		547		435		380		397		557		792		914		802		852		684		586

 

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Industrial Markets

 

Hexcel groups under this market segment its revenues from applications for its products outside the aerospace and electronics markets.  A number of these applications represent emerging opportunities for the Company’s products.  In developing new applications, the Company seeks those opportunities where advanced structural material technology offers significant benefits to the end user, often applications that demand high physical performance.  Within this segment, key applications include soft body armor, wind energy, recreational equipment (i.e. bicycles, snowboards, tennis rackets and hockey sticks), and surface transportation (automobiles, mass transit and high-speed rail, and marine applications).  Hexcel’s participation in these market applications 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 where it offers the greatest customer value.

 

Space and Defense

 

The space and defense markets have historically been innovators in the use of, 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 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.  For example, the Department of Defense announced its plan to cancel the RAH-66 Comanche program on February 23, 2004.  Space applications for advanced structural materials include solid rocket booster cases; farings and payload doors for launch vehicles; and buss and solar arrays for military and commercial satellites.  The production of both launch vehicles and satellites has declined in recent years from a peak in the late 1990s.

 

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.  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 Western producers of high-quality, lightweight fiberglass fabric substrates used in the fabrication of printed wiring boards.  These printed wiring boards are integral to most advanced electronic products, including computers, networking equipment, telecommunications equipment, advanced cable television equipment, and automotive equipment.

 

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 2002 and 2003, competition intensified for the business that remained and pricing pressure increased because of excess production capacity throughout the industry.  Meanwhile, a migration of electronics equipment production from the U.S. to Asia continues to put additional pressure on the Company’s electronics business.  However, the Company’s electronics customers, particularly those serving the high-technology end of the market, are more optimistic going into 2004 than they were this time last year.

 

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

 

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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.

 

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 composites structures, 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 consumes internally approximately 50% and 25% of its carbon fiber and industrial fabric production, respectively.  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.

 

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 and polymer 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.

 

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 while seeking to improve the consistency of its products.  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 $17.7 million for R&T in 2003, $14.7 million in 2002 and $18.6 million in 2001.  Although a portion of the year-over-year increase was due to the impact of changes in foreign currency exchange rates, the Company increased its R&T spending in 2003, after cautious reductions during 2002, to support new products and new commercial aircraft qualification activities.  These expenditures were expensed as incurred.

 

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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 17 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.  In addition, the Company operates various sales offices in the United States, Europe, Australia and China.

 

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 and metal.  Depending upon the material and markets, relevant competitive factors include approvals, product performance, delivery, service and price.

 

Employees

 

As of December 31, 2003, Hexcel employed 4,084 full-time employees, 2,276 in the United States and 1,808 in other countries.  The number of full-time employees has declined from 4,245 and 5,376 as of December 31, 2002 and 2001, respectively, primarily due to Hexcel’s business consolidation and restructuring programs.  The business consolidation and restructuring program included the right-sizing of the Company in response to the forecasted reductions in commercial aircraft production, 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 3 to the accompanying consolidated financial statements of this Annual Report on Form 10-K.

 

Other Information

 

The Company’s internet website is www.hexcel.com.  The Company makes available, free of charge through its 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

 

Facility Location		Approximate Square Footage		Business Segment		Principal Products
United States:
Anderson, South Carolina		432,000		Reinforcements		Industrial Fabrics
Burlington, Washington		73,000		Composites		Honeycomb Parts
Casa Grande, Arizona		307,000		Composites		Honeycomb and Honeycomb Parts
Decatur, Alabama		159,000		Composites		PAN Precursor (used to produce Carbon Fibers)
Kent, Washington		433,000		Structures		Composite Structures
Livermore, California		141,000		Composites		Prepregs
Pottsville, Pennsylvania		134,000		Composites		Honeycomb Parts
Salt Lake City, Utah		457,000		Composites		Carbon Fibers; Prepregs
Seguin, Texas		204,000		Reinforcements		Industrial Fabrics; Specialty Reinforcements
Statesville, North Carolina		553,000		Reinforcements		Electronic Fabrics; Industrial Fabrics
Washington, Georgia		160,000		Reinforcements		Electronic Fabrics; Industrial Fabrics
International:
Dagneux, France		130,000		Composites		Prepregs
Decines, France		90,000		Reinforcements		Industrial Fabrics; Specialty Fabrics
Duxford, United Kingdom		440,000		Composites		Prepregs; Adhesives; Honeycomb and Honeycomb Parts
Les Avenieres, France		512,000		Reinforcements		Electronic Fabrics; Industrial Fabrics; Specialty Reinforcements
Linz, Austria		163,000		Composites		Prepregs
Parla, Spain		43,000		Composites		Prepregs
Welkenraedt, Belgium		223,000		Composites		Honeycomb and Honeycomb Parts

 

Hexcel leases 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.  During 2003, the Company retired a $25.6 million capital lease obligation that included facilities located in Anderson, South Carolina; Statesville, North Carolina; and Washington, Georgia.  The Company now owns these and all other remaining facilities.

 

The facilities located in Anderson, South Carolina; Burlington, Washington; Casa Grande, Arizona; Decatur, Alabama; Dublin, California; Kent, Washington; Livermore, California; Pottsville, Pennsylvania; Salt Lake City, Utah; Seguin, Texas; Statesville, North Carolina; and Washington, Georgia are subject to mortgages established to secure the senior secured notes issued March 19, 2003.  For further information, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and to Note 8 to the accompanying consolidated financial statements of this Annual Report on Form 10-K.

 

In January 2004, the Company announced its intention to consolidate the activities of its Livermore, California facility into its other manufacturing facilities, principally into its Salt Lake City, Utah plant.  The Livermore, California facility will continue to operate until the Company has successfully transferred its production from Livermore to its other manufacturing facilities.

 

11

 

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, environmental, employment, health and safety matters.  The Company estimates and accrues its liabilities resulting from such matters based on a variety of factors, including the stage of the proceeding; potential settlement value; assessments by internal and external counsel; and assessments by environmental engineers and consultants of potential environmental liabilities and remediation costs.  Such estimates may or may not include potential recoveries from insurers or 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, 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.  Hexcel has commenced remediation of this site in accordance with an approved plan; however, the ultimate cost of remediating the Lodi site will depend on developing circumstances.

 

In October 2003, Hexcel, along with 66 other entities, received a directive from the New Jersey Department of Environmental Protection (“NJDEP”), which requires the entities to assess whether operations at various New Jersey sites, including Hexcel’s Lodi facility, caused damage to natural resources in the Lower Passaic River watershed.  In February 2004, Hexcel received a similar general notice letter from the U.S. Environmental Protection Agency (“EPA”) which requests Hexcel, along with 42 other entities, consider helping to finance an estimated $10 million EPA study of environmental conditions in the Lower Passaic River watershed.  Hexcel believes it has viable defenses to the EPA and NJDEP claims with respect to the Lower Passaic River and Hexcel expects than many yet unnamed parties also will receive directives and/or notices from the NJDEP and EPA, respectively, but Hexcel’s ultimate liability, if any, under these claims cannot be determined at this time.

 

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

 

12

 

Company’s Kent, Washington, site by the EPA.  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.

 

The Company’s estimate of its liability as a PRP and the remaining costs associated with its responsibility to remediate the Lodi, New Jersey, and Kent, Washington sites is accrued in its consolidated balance sheets.

 

Other Proceedings

 

Hexcel has been advised that the Antitrust Division of the United States Department of Justice has closed its investigation of the carbon fiber and carbon fiber prepreg industries which commenced in 1999.  No indictments have been issued in the case to the Company or any of its employees or representatives.

 

As a result of the investigations, in 1999 Hexcel, along with others in the industry, 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 Court has certified the case as a class action.  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 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

 

13

 

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.

 

14

 

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 2003, 2002 or 2001.  The payment of dividends is generally prohibited under the terms of certain of the Company’s debt agreements.

 

On March 9, 2004, there were 1,368 holders of record of Hexcel common stock.

 

ITEM 6.  Selected Financial Data

 

The information required by Item 6 is contained on page 31 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 32 to 59 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 54 to 57 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 60 to 111 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 Auditors is contained on page 62 of this Annual Report on Form 10-K under the caption “Report of Independent Auditors” and is incorporated herein by reference.

 

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

 

None.

 

ITEM 9A.  Controls and Procedures

 

As of December 31, 2003, 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

 

15

 

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.

 

16

 

PART III

 

ITEM 10.  Directors and Executive Officers of the Registrant:

 

The information regarding directors and executive officers of the Company will be contained in Hexcel’s definitive proxy statement for the 2004 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, 2003.  Such information is incorporated herein by reference.

 

Code of Ethics

 

Hexcel has adopted the Code of Business Conduct, which applies to all directors, officers, and employees.  This Code is part of Hexcel’s Ethics and Business Conduct Program.  The Code will be available on Hexcel’s website prior to Hexcel’s 2004 Annual Meeting of Stockholders.  In addition, stockholders may obtain a copy of the Code free of charge by addressing a request to:

 

Hexcel Corporation

Attention:  Investor Relations Manager

281 Tresser Boulevard

Stamford, CT  06901

(203) 352-6826

http://www.hexcel.com

 

Any amendment to the Code of Business Conduct (other than technical, administrative or non-substantive amendments), or any waiver of a provision of the Code that applies to Hexcel’s Chief Executive Officer, Chief Financial Officer or Corporate Controller, will be promptly disclosed on Hexcel’s website.

 

Corporate Governance Guidelines and Committee Charters

 

Hexcel’s Corporate Governance Guidelines, as well as the charters of Hexcel’s Nominating and Corporate Governance, Audit, Compensation and Finance Committees, will be available on Hexcel’s website prior to Hexcel’s 2004 Annual Meeting of Stockholders.  In addition, stockholders may obtain a copy of these documents free of charge by making a request to the address indicated above.

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

The information regarding Section 16(a) beneficial ownership reporting compliance will be contained in Hexcel’s definitive proxy statement for the 2004 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, 2003.  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 2004 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, 2003.  Such information is incorporated herein by reference.

 

17

 

ITEM 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

The information required by Item 12 will be contained in Hexcel’s definitive proxy statement for the 2004 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, 2003.  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 2004 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, 2003.  Such information is incorporated herein by reference.

 

ITEM 14. Principal Accountant Fees and Services

 

The information required by Item 14 will be contained in Hexcel’s definitive proxy statement for the 2004 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, 2003.  Such information is incorporated herein by reference.

 

18

 

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 Auditors are listed on page 60 of this Annual Report on Form 10-K and are incorporated herein by reference.

 

2. Financial Statement Schedule

 

The financial statement schedule and the Report of Independent Auditors required by Item 15(a)(2) are listed on page 60 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 22, 2003, relating to third quarter of 2003 financial results.

 

c.  Exhibits

 

Exhibit No.		Description
2.1		Asset Purchase Agreement dated March 31, 2000 between Hexcel Corporation and Britax Cabin Interiors, Inc. (incorporated herein by reference to Exhibit 2.1 to Hexcel’s Current Report on Form 8-K dated May 10, 2000).
3.1		Restated Certificate of Incorporation of Hexcel Corporation (incorporated herein by reference to Exhibit 1 to Hexcel’s Registration Statement on Form 8-A dated July 9, 1996, Registration No. 1-08472).
3.2		Certificate of Amendment of the Restated Certificate of Incorporation of Hexcel Corporation (incorporated herein by reference to Exhibit 3.2 to the Company’s Annual Report on Form 10-K/A for the fiscal year ended December 31, 2002, filed on March 31, 2003).
3.3		Amended and Restated Bylaws of Hexcel Corporation (incorporated herein by reference to Exhibit 3.3 to the Company’s Annual Report on Form 10-K/A for the fiscal year ended December 31, 2002, filed on March 31, 2003).
4.1		Indenture dated as of January 21, 1999 between Hexcel Corporation and The Bank of New York, as trustee, relating to the issuance of the 9 ¾% Senior Subordinated Notes due 2009 (incorporated herein by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-4 (No. 333-71601), filed on February 2, 1999).
4.2		Indenture dated as of August 1, 1986 between Hexcel and the Bank of California, N.A., as trustee, relating to the 7% Convertible Subordinated Notes due 2011 of the Company (incorporated herein by reference to Exhibit 4.3 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1997).
4.2(a)		Instrument of Resignation, Appointment and Acceptance, dated as of October 1, 1993 (incorporated herein by reference to Exhibit 4.10 to the Company’s Annual Report on

 

19

 

		Form 10-K for the fiscal year ended December 31, 1993).
4.3		Indenture, dated as of March 19, 2003 among Hexcel Corporation, the Guarantors named therein and Wells Fargo Bank Minnesota, National Association, as trustee, relating to the 9.875% Senior Secured Notes due 2008 (incorporated herein by reference to Exhibit 4.4 to the Company’s Annual Report on Form 10-K/A for the fiscal year ended December 31, 2002, filed on March 31, 2003).
4.4		Certificate of Designation of Series A Convertible Preferred Stock of Hexcel Corporation (incorporated herein by reference to Exhibit 4.5 to the Company’s Annual Report on Form 10-K/A for the fiscal year ended December 31, 2002, filed on March 31, 2003).
4.5		Certificate of Designation of Series B Convertible Preferred Stock of Hexcel Corporation (incorporated herein by reference to Exhibit 4.6 to the Company’s Annual Report on Form 10-K/A for the fiscal year ended December 31, 2002, filed on March 31, 2003).
10.1		Credit and Guaranty Agreement, dated as of March 19, 2003, by and among Hexcel Corporation, Hexcel Composites Limited, Hexcel Composites GmbH (Austria), Hexcel Composites GmbH (Germany), the Guarantors named therein, the lenders from time to time party thereto, Fleet Capital Corporation, as Administrative Agent, Fleet National Bank, London U.K. branch, trading as FleetBoston Financial, as Fronting Bank and Issuing Bank, Fleet National Bank, as Issuing Bank, and Fleet Securities Inc., as Lead Arranger (incorporated herein by reference to Exhibit 10.1 to the Company’s Annual Report on Form 10-K/A for the fiscal year ended December 31, 2002, filed on March 31, 2003).
10.1(a)		Consent, dated as of December 5, 2003, to Credit and Guaranty Agreement dated March 19, 2003, by and among Hexcel Corporation, Hexcel Composites Limited, Hexcel Composites GmbH (Austria), Hexcel Composites GmbH (Germany), the Guarantors named therein, the lenders from time to time party thereto, Fleet Capital Corporation, as Administrative Agent, Fleet National Bank, London U.K. branch, trading as FleetBoston Financial, as Fronting Bank and Issuing Bank, Fleet National Bank, as Issuing Bank, and Fleet Securities Inc., as Lead Arranger.
10.2		Security Agreement, dated as of March 19, 2003, by and among Hexcel Corporation, Clark-Schwebel Corporation, Hexcel Pottsville Corporation, Clark-Schwebel Holding Corp., CS Tech-Fab Holding, Inc. and Fleet Capital Corporation, as Administrative Agent (incorporated herein by reference to Exhibit 10.2 to the Company’s Annual Report on Form 10-K/A for the fiscal year ended December 31, 2002, filed on March 31, 2003).
10.3*		Hexcel Corporation 2003 Incentive Stock Plan (incorporated herein by reference to Exhibit 10.3 to the Company’s Annual Report on Form 10-K/A for the fiscal year ended December 31, 2002, filed on March 31, 2003).
10.3(a)*		Hexcel Corporation 2003 Incentive Stock Plan as amended and restated December 11, 2003.
10.4*		Hexcel Corporation Incentive Stock Plan as amended and restated January 30, 1997 (incorporated herein by reference to Exhibit 4.3 to the Company’s Registration Statement on Form S-8, Registration No. 333-36163).
10.4(a)*		Hexcel Corporation Incentive Stock Plan as amended and restated January 30, 1997 and further amended December 10, 1997 (incorporated herein by reference to Exhibit 10.5(a) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31,

 

20

 

		1997).
10.4(b)*		Hexcel Corporation Incentive Stock Plan, as amended and restated on January 30, 1997, and further amended on December 10, 1997 and March 25, 1999 (incorporated herein by reference to Exhibit 4.3 of the Company’s Registration Statement on Form S-8 filed on July 26, 1999).
10.4(c)*		Hexcel Corporation Incentive Stock Plan, as amended and restated on January 30, 1997, and further amended on December 10, 1997, March 25, 1999 and December 2, 1999 (incorporated by reference to Exhibit 10.3(c) of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1999).
10.4(d)*		Hexcel Corporation Incentive Stock Plan, as amended and restated on February 3, 2000 (incorporated herein by reference to Annex A of the Company’s Proxy Statement dated March 31, 2000).
10.4(e)*		Hexcel Corporation Incentive Stock Plan, as amended and restated on December 19, 2000 (incorporated herein by reference to Exhibit 10.3(e) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000).
10.4(f)*		Hexcel Corporation Incentive Stock Plan, as amended and restated on December 19, 2000 and further amended on January 10, 2002 (incorporated herein by reference to Exhibit 10.3(f) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001).
10.5*		Hexcel Corporation 1998 Broad Based Incentive Stock Plan (incorporated herein by reference to Exhibit 4.3 of the Company’s Form S-8 filed on June 19, 1998, Registration No. 333-57223).
10.5(a)*		Hexcel Corporation 1998 Broad Based Incentive Stock Plan, as amended on February 3, 2000 (incorporated by reference to Exhibit 10.1 to Hexcel’s Quarterly Report on Form  10-Q for the Quarter ended June 30, 2000).
10.5(b)*		Hexcel Corporation 1998 Broad Based Incentive Stock Plan, as amended on February 3, 2000, and further amended on February 1, 2001 (incorporated herein by reference to Exhibit 10.4(b) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000).
10.5(c)*		Hexcel Corporation 1998 Broad Based Incentive Stock Plan, as amended on February 3, 2000, and further amended on February 1, 2001 and January 10, 2002 (incorporated herein by reference to Exhibit 10.4(c) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001).
10.5(d)*		Hexcel Corporation 1998 Broad Based Incentive Stock Plan, as amended on February 3, 2000, and further amended on February 1, 2001, January 10, 2002 and December 12, 2002 (incorporated herein by reference to Exhibit 10.4(d) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002).
10.6*		Hexcel Corporation Management Stock Purchase Plan (incorporated herein by reference to Exhibit 10.9 to Hexcel’s Quarterly Report on Form 10-Q for the Quarter ended June 30, 1997).
10.6(a)*		Hexcel Corporation Management Stock Purchase Plan, as amended on March 25, 1999 (incorporated herein by reference to Exhibit 4.3 of the Company’s Registration Statement

 

21

 

		on Form S-8 filed on July 26, 1999).
10.6(b)*		Hexcel Corporation Management Stock Purchase Plan, as amended on March 25, 1999 and December 2, 1999 (incorporated by reference to Exhibit 10.5(b) of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1999).
10.6(c)*		Hexcel Corporation Management Stock Purchase Plan, as amended and restated on February 3, 2000 (incorporated herein by reference to Annex B of the Company’s Proxy Statement dated March 31, 2000).
10.6(d)*		Hexcel Corporation Management Stock Purchase Plan, as amended and restated on December 19, 2000 (incorporated herein by reference to Exhibit 10.5(d) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000).
10.6(e)*		Hexcel Corporation Management Stock Purchase Plan, as amended and restated on March 19, 2003 (incorporated herein by reference to Exhibit 10.6(e) to the Company’s Annual Report on Form 10-K/A for the fiscal year ended December 31, 2002, filed on March 31, 2003).
10.7*		Hexcel Corporation Management Incentive Compensation Plan, as amended and restated on December 19, 2000 and as further amended on February 27, 2002 (incorporated herein by reference to Exhibit 10.6 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001).
10.8*		Hexcel Corporation Long-Term Incentive Plan (incorporated herein by reference to Exhibit 10.7 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001).
10.9*		Form of Employee Option Agreement (2004).
10.10*		Form of Employee Option Agreement (2003) (incorporated herein by reference to Exhibit 10.8 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002).
10.11*		Form of Employee Option Agreement (2002) (incorporated herein by reference to Exhibit 10.8 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001).
10.12*		Form of Employee Option Agreement (2000) (incorporated herein by reference to Exhibit 10.7 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000).
10.13*		Form of Employee Option Agreement Special Executive Grant (2000) dated December 20, 2000 (incorporated by reference to Exhibit 10.8 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000).
10.14*		Form of Employee Option Agreement Special Executive Grant (1999) dated December 2, 1999 (incorporated by reference to Exhibit 10.7 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1999).
10.15*		Form of Employee Option Agreement (1999) dated December 2, 1999 (incorporated by reference to Exhibit 10.8 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1999).

 

22

 

10.16*		Form of Employee Option Agreement (1999) (incorporated herein by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q for the Quarter ended March 31, 1999).
10.17*		Form of Employee Option Agreement (1998) (incorporated herein by reference to Exhibit 10.4 of the Company’s Quarterly Report on Form 10-Q for the Quarter ended September 30, 1998).
10.18*		Form of Employee Option Agreement (1997) (incorporated herein by reference to Exhibit 10.4 to Hexcel’s Quarterly Report on Form 10-Q for the Quarter ended June 30, 1997).
10.19*		Form of Employee Option Agreement (1996) (incorporated herein by reference to Exhibit 10.5 to Hexcel’s Quarterly Report on Form 10-Q for the Quarter ended March 31, 1996).
10.20*		Form of Employee Option Agreement (1995) (incorporated herein by reference to Exhibit 10.6 to Hexcel’s Quarterly Report on Form 10-Q for the Quarter ended March 31, 1996).
10.21*		Form of Retainer Fee Restricted Stock Unit Agreement for Non-Employee Directors (2004).
10.22*		Form of Retainer Fee Option Agreement for Non-Employee Directors (2003) (incorporated herein by reference to Exhibit 10.19 the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002).
10.23*		Form of Retainer Fee Option Agreement for Non-Employee Directors (2000) (incorporated by reference to Exhibit 10.16 of the Company’s Annual Report on Form  10-K for the fiscal year ended December 31, 2000).
10.24*		Form of Retainer Fee Option Agreement for Non-Employee Directors (1999) (incorporated by reference to Exhibit 10.14 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1999).
10.25*		Form of Retainer Fee Option Agreement for Non-Employee Directors (1998) (incorporated herein by reference to Exhibit 10.11 to Hexcel’s Annual Report on Form 10-K for the fiscal year ended December 31, 1998).
10.26*		Form of Retainer Fee Option Agreement for Non-Employee Directors (1997) (incorporated herein by reference to Exhibit 10.8 to Hexcel’s Annual Report on Form 10-K for the fiscal year ended December 31, 1997).
10.27*		Form of Option Agreement (Directors) (incorporated herein by reference to Exhibit 10.13 to Hexcel’s Annual Report on Form 10-K for the fiscal year ended December 31, 1995).
10.28*		Form of Supplemental Compensation Option Agreement (Directors) (incorporated herein by reference to Exhibit 10.23 to Hexcel’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001).
10.29*		Form of Performance Accelerated Restricted Stock Unit Agreement (December 20, 2000) (incorporated herein by reference to Exhibit 10.22 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000).
10.30*		Form of Restricted Stock Unit Agreement (2004).

 

23

 

10.31*		Form of Restricted Stock Unit Agreement (2003) (incorporated herein by reference to Exhibit 10.33 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002).
10.32*		Form of Restricted Stock Unit Agreement (2002) (incorporated herein by reference to Exhibit 10.31 to Hexcel’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001).
10.33*		Form of Reload Option Agreement (1997) (incorporated herein by reference to Exhibit 10.8 of Hexcel’s Quarterly Report on Form 10-Q for the Quarter ended June 30, 1997).
10.34*		Form of Reload Option Agreement (1996) (incorporated herein by reference to Exhibit 10.10 to Hexcel’s Quarterly Report on Form 10-Q for the Quarter ended March 31, 1996).
10.35*		Form of Exchange Performance Accelerated Stock Option Agreement (incorporated Herein by reference to Exhibit 10.3 to Hexcel’s Quarterly Report on Form 10-Q for the Quarter ended September 30, 1998).
10.36*		Form of Performance Accelerated Stock Option Agreement (Director) (incorporated herein by reference to Exhibit 10.6 to Hexcel’s Quarterly Report on Form 10-Q for the Quarter ended June 30, 1997).
10.37*		Form of Performance Accelerated Stock Option (Employee) (incorporated herein by reference to Exhibit 10.7 to Hexcel’s Quarterly Report on Form 10-Q for the Quarter ended June 30, 1997).
10.38*		Form of Grant of Restricted Stock Unit Agreement (incorporated herein by reference to Exhibit 10.3 to Hexcel’s Quarterly Report on Form 10-Q for the Quarter ended March 31, 1999).
10.39*		Hexcel Corporation 1997 Employee Stock Purchase Plan, as amended and restated as of March 19, 2003 (incorporated herein by reference to Exhibit 10.43 to the Company’s Annual Report on Form 10-K/A for the fiscal year ended December 31, 2002, filed on March 31, 2003).
10.40*		Employment Agreement dated as of July 30, 2001 between Hexcel Corporation and David E. Berges (incorporated by reference herein to Exhibit 10.37 to Hexcel’s Registration Statement on Form S-4 (No. 333-66582), filed on August 2, 2001).
10.40(a)*		Amendment, dated December 12, 2002, to Employment Agreement dated as of July 30, 2001 between Hexcel Corporation and David E. Berges (incorporated herein by reference to Exhibit 10.43(a) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002).
10.40(b)*		Employee Option Agreement dated as of July 30, 2001 between Hexcel Corporation and David E. Berges (incorporated by reference herein to Exhibit 10.37(a) to Hexcel’s Registration Statement on Form S-4 (No. 333-66582), filed on August 2, 2001).
10.40(c)*		Employment Option Agreement (performance-based option) dated as of July 30, 2001 between Hexcel Corporation and David E. Berges (incorporated by reference herein to Exhibit 10.37(b) to Hexcel’s Registration Statement on Form S-4 (No. 333-66582), filed on August 2, 2001).

 

24

 

10.40(d)*		Supplemental Executive Retirement Agreement dated as of July 30, 2001 between Hexcel Corporation and David E. Berges (incorporated by reference herein to Exhibit 10.37(d) to Hexcel’s Registration Statement on Form S-4 (No. 333-66582), filed on August 2, 2001).
10.40(e)*		Letter Agreement dated August 1, 2001 between Hexcel Corporation and David E. Berges (incorporated by reference herein to Exhibit 10.37(e) to Hexcel’s Registration Statement on Form S-4 (No. 333-66582), filed on August 2, 2001).
10.40(f)*		Letter Agreement dated August 28, 2001 between Hexcel Corporation and David E. Berges (incorporated herein by reference to Exhibit 10.7 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001).
10.41*		Letter dated December 2, 1999 from Hexcel Corporation to Stephen C. Forsyth, regarding the Company’s Management Incentive Compensation Plan for 1999 (incorporated by reference to Exhibit 10.35 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1999).
10.41(a)*		Supplemental Executive Retirement Agreement dated as of May 10, 2000 between Hexcel Corporation and Stephen C. Forsyth (incorporated herein by reference to Exhibit 10.5 of the Company’s Quarterly Report on Form 10-Q for the Quarter ended June 30, 2000).
10.41(b)*		Amendment to Agreements, dated as of October 11, 2000 by and between Hexcel Corporation and Stephen C. Forsyth (incorporated herein by reference to Exhibit 10.8 of the Company’s Quarterly Report on Form 10-Q for the Quarter ended September 30, 2000).
10.41(c)*		Amendment to Amendments to Agreements, dated as of November 21, 2000, by and between Hexcel Corporation and Stephen C. Forsyth (incorporated herein by reference to Exhibit 10.39(c) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000).
10.41(d)*		First Amendment to Supplemental Executive Retirement Agreement dated as of July 30, 2001 between Hexcel Corporation and Stephen C. Forsyth (incorporated herein by reference to Exhibit 10.43(d) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001).
10.42*		Letter dated December 2, 1999 from Hexcel Corporation to Ira J. Krakower, regarding the Company’s Management Incentive Compensation Plan for 1999 (incorporated herein by reference to Exhibit 10.40 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000).
10.42(a)*		Supplemental Executive Retirement Agreement dated as of May 10, 2000 between Hexcel and Ira J. Krakower (incorporated herein by reference to Exhibit 10.6 of the Company’s Quarterly Report on Form 10-Q for the Quarter ended June 30, 2000).
10.42(b)*		Amendment to Agreements, dated as of October 11, 2000 by and between Hexcel Corporation and Ira J. Krakower (incorporated herein by reference to Exhibit 10.7 of the Company’s Quarterly Report on Form 10-Q for the Quarter ended September 30, 2000).
10.42(c)*		First Amendment to Supplemental Executive Retirement Agreement dated as of July 30, 2001 between Hexcel Corporation and Ira J. Krakower (incorporated herein by reference to Exhibit 10.44(c) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001).

 

25

 

10.43*		Form of Executive Severance Agreement between Hexcel and certain executive officers dated as of February 3, 1999 (incorporated herein by reference to Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q for the Quarter ended March 31, 1999).
10.44*		Form of Executive Severance Agreement between Hexcel and certain executive officers dated as of February 3, 1999 (incorporated herein by reference to Exhibit 10.7 to the Company’s Quarterly Report on Form 10-Q for the Quarter ended March 31, 1999).
10.45*		Amendment to Agreements, dated as of October 11, 2000 by and between Hexcel Corporation and William Hunt (incorporated herein by reference to Exhibit 10.14 of the Company’s Quarterly Report on Form 10-Q for the Quarter ended September 30, 2000).
10.45(a)*		Amendment to Amendments to Agreements, dated as of November 21, 2000, by and between Hexcel Corporation and William Hunt (incorporated herein by reference to Exhibit 10.45(a) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000).
10.45(b)*		Restricted Stock Unit Agreement dated as of February 12, 2004 between Hexcel Corporations and William Hunt.
10.46*		Amendment to Agreements, dated as of October 11, 2000 by and between Hexcel Corporation and David Tanonis (incorporated herein by reference to Exhibit 10.12 of the Company’s Quarterly Report on Form 10-Q for the Quarter ended September 30, 2000).
10.47*		Amendment to Agreements, dated as of October 11, 2000 by and between Hexcel Corporation and Joseph Shaulson (incorporated herein by reference to Exhibit 10.9 of the Company’s Quarterly Report on Form 10-Q for the Quarter ended September 30, 2000).
10.47(a)*		Amendment to Amendments to Agreements, dated as of November 21, 2000, by and between Hexcel Corporation and Joseph Shaulson (incorporated herein by reference to Exhibit 10.48(a) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000).
10.48		Amended and Restated Governance Agreement, dated as of March 19, 2003, among LXH L.L.C., LXH II, L.L.C., GS Capital Partners 2000 L.P., GS Capital Partners 2000 Offshore, L.P., GS Capital Partners 2000 Employee Fund, L.P., GS Capital Partners 2000 GmbH & Co. Beteiligungs KG, Stone Street Fund 2000, L.P. and Hexcel Corporation (incorporated herein by reference to Exhibit 10.53 to the Company’s Annual Report on Form 10-K/A for the fiscal year ended December 31, 2002, filed on March 31, 2003).
10.49		Stockholders Agreement, dated as of March 19, 2003, among Berkshire Fund V, Limited Partnership, Berkshire Fund VI, Limited Partnership, Berkshire Fund V Investment Corp., Berkshire Fund VI Investment Corp., Berkshire Investors LLC, Greenbriar Co-Investment Partners L.P, Greenbriar Equity Fund, L.P. and Hexcel Corporation (incorporated herein by reference to Exhibit 10.54 to the Company’s Annual Report on Form 10-K/A for the fiscal year ended December 31, 2002, filed on March 31, 2003).
10.50		Amended and Restated Registration Rights Agreement, dated as of March 19, 2003, by and among Hexcel Corporation, LXH, L.L.C., LXH II, L.L.C., GS Capital Partners 2000 L.P., GS Capital Partners 2000 Offshore, L.P., GS Capital Partners 2000 Employee Fund, L.P., GS Capital Partners 2000 GmbH & Co. Beteiligungs KG and Stone Street Fund 2000, L.P. (incorporated herein by reference to Exhibit 10.55 to the Company’s Annual Report on Form 10-K/A for the fiscal year ended December 31, 2002, filed on March 31, 2003).

 

26

 

10.51		Registration Rights Agreement, dated as of March 19, 2003, among Hexcel Corporation, Berkshire Fund V, Limited Partnership, Berkshire Fund VI, Limited Partnership, Berkshire Investors LLC, Greenbriar Co-Investment Partners L.P. and Greenbriar Equity Fund, L.P. (incorporated herein by reference to Exhibit 10.56 to the Company’s Annual Report on Form 10-K/A for the fiscal year ended December 31, 2002, filed on March 31, 2003).
10.52		Agreement, dated October 11, 2000, by and among Hexcel Corporation, LXH, L.L.C. and LXH II, L.L.C. (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated October 13, 2000).
10.53		Consent and Termination Agreement, dated as of October 11, 2000, by and between Hexcel Corporation and Ciba Specialty Chemicals Holding Inc. (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K dated October 13, 2000).
10.54		Purchase Agreement, dated as of June 15, 2001, among Hexcel Corporation and Credit Suisse First Boston Corporation, Deutsche Banc Alex. Brown Inc., Goldman, Sachs & Co. and J.P. Morgan Securities Inc (incorporated herein by reference to Exhibit 10.56 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001).
10.55		Stock Purchase Agreement, dated as of December 18, 2002, by and among Hexcel Corporation, Berkshire Investors LLC, Berkshire Fund V, Limited Partnership, Berkshire Fund VI, Limited Partnership, Greenbriar Equity Fund, L.P. and Greenbriar Co-Investment Partners, L.P. (incorporated herein by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K dated December 20, 2002).
10.56		Stock Purchase Agreement, dated as of December 18, 2002, by and among Hexcel Corporation, GS Capital Partners 2000, L.P., GS Capital Partners 2000 Offshore, L.P., GS Capital Partners 2000 Employee Fund, L.P., GS Capital Partners 2000 GmbH & Co. Beteiligungs KG and Stone Street Fund 2000, L.P. (incorporated herein by reference to Exhibit 99.2 to the Company’s Current Report on Form 8-K dated December 20, 2002).
10.57		Purchase Agreement, dated as of March 7, 2003, among Goldman, Sachs & Co., Fleet Securities, Inc. and Hexcel Corporation (incorporated herein by reference to Exhibit 10.62 to the Company’s Annual Report on Form 10-K/A for the fiscal year ended December 31, 2002, filed on March 31, 2003).
10.58		Exchange and Registration Rights Agreement dated as of March 19, 2003 among Hexcel Corporation, Clark-Schwebel Holding Corp., Clark-Schwebel Corporation, Hexcel Pottsville Corporation and CS Tech-Fab Holding, Inc. (incorporated herein by reference to Exhibit 10.63 to the Company’s Annual Report on Form 10-K/A for the fiscal year ended December 31, 2002, filed on March 31, 2003).
10.59		Pledge and Security Agreement, dated as of March 19, 2003, between Hexcel Corporation, Clark-Schwebel Holding Corp., Clark-Schwebel Corporation, Hexcel Pottsville Corporation, CS Tech-Fab Holding, Inc. and Hexcel International, and HSBC Bank USA, as Joint Collateral Agent (incorporated herein by reference to Exhibit 10.64 to the Company’s Annual Report on Form 10-K/A for the fiscal year ended December 31, 2002, filed on March 31, 2003).
10.60		Collateral Agency Agreement, dated as of March 19, 2003, by and among Hexcel Corporation, HSBC Bank USA, as Joint Collateral Agent, Well Fargo Bank Minnesota, National Association, as trustee, and the representatives of the holders of Parity Lien Debt

 

27

 

		who may become a party thereto (incorporated herein by reference to Exhibit 10.65 to the Company’s Annual Report on Form 10-K/A for the fiscal year ended December 31, 2002, filed on March 31, 2003).
10.61		Intercreditor and Agency Agreement dated as of March 19, 2003, by and among HSBC Bank USA, as Joint Collateral Agent, Fleet Capital Corporation, as Intercreditor Agent and Security Trustee, Fleet Capital Corporation, as Administrative Agent under the Existing Credit Facility, Well Fargo Bank Minnesota, National Association, as trustee, and each other Credit Facility Agent that may become a party thereto (incorporated herein by reference to Exhibit 10.66 to the Company’s Annual Report on Form 10-K/A for the fiscal year ended December 31, 2002, filed on March 31, 2003).
12.1		Statement regarding the computation of ratio of earnings to fixed charges for the Company.
21		Subsidiaries of the Company.
23.1		Consent of Independent Accountants - PricewaterhouseCoopers LLP (Hexcel Corporation).
23.2		Consent of Independent Accountants - PricewaterhouseCoopers LLP (Hexcel Holdings Denmark ApS and Hexcel Holdings (UK) Limited).
23.3		Consent of Independent Auditors - Deloitte Touche Tohmatsu (BHA Aero Composite Parts Co. Ltd.).
31.1		Certification of Chief Executive Officer, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Chief Financial Officer, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

* Indicates management contract or compensatory plan or arrangement.

 

28

 

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.

 

			Hexcel Corporation
March 12, 2004			/s/ DAVID E. BERGES
(Date)			David E. Berges Chief Executive Officer

 

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.

 

Signature		Title		Date
/s/ DAVID E. BERGES		Chairman of the		March 12, 2004
(David E. Berges)		Board of Directors, President and
		Chief Executive Officer
		(Principal Executive Officer)
/s/ STEPHEN C. FORSYTH		Executive Vice President and Chief Financial Officer (Principal Financial Officer)		March 12, 2004
(Stephen C. Forsyth)
/s/ WILLIAM J. FAZIO		Corporate Controller (Principal Accounting Officer)		March 12, 2004
(William J. Fazio)
/s/ JOEL S. BECKMAN		Director		March 12, 2004
(Joel S. Beckman)
/s/ H. ARTHUR BELLOWS, JR.		Director		March 12, 2004
(H. Arthur Bellows, Jr.)
/s/ JEFFREY C. CAMPBELL		Director		March 12, 2004
(Jeffrey C. Campbell)
/s/ SANDRA L. DERICKSON		Director		March 12, 2004
(Sandra L. Derickson)
/s/ JAMES J. GAFFNEY		Director		March 12, 2004
(James J. Gaffney)

 

29

 

/s/ SANJEEV K. MEHRA		Director		March 12, 2004
(Sanjeev K. Mehra)
/s/ PETER M. SACERDOTE		Director		March 12, 2004
(Peter M. Sacerdote)
/s/ ROBERT J. SMALL		Director		March 12, 2004
(Robert J. Small)
/s/ MARTIN L. SOLOMON		Director		March 12, 2004
(Martin L. Solomon)

 

30

 

Selected Financial Data

(In millions, except per share data)

 

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

 

		2003			2002			2001			2000			1999
Results of Operations (a) (b):
Net sales		$	896.9		$	850.8		$	1,009.4		$	1,055.7		$	1,151.5
Cost of sales		722.4			689.5			818.6			824.3			909.0
Gross margin		174.5			161.3			190.8			231.4			242.5
Selling, general and administrative expenses		95.0			85.9			120.9			123.9			128.7
Research and technology expenses		17.7			14.7			18.6			21.2			24.8
Business consolidation and restructuring expenses		4.0			0.5			58.4			10.9			20.1
Impairment of goodwill and other purchased intangibles		—			—			309.1			—			—
Operating income (loss)		57.8			60.2			(316.2		)	75.4			68.9
Interest expense		(53.6		)	(62.8		)	(64.8		)	(68.7		)	(73.9		)
Other income (expense), net		(0.4		)	10.3			(2.7		)	—			—
Gain on sale of Bellingham aircraft interiors business		—			—			—			68.3			—
Income (loss) before income taxes		3.8			7.7			(383.7		)	75.0			(5.0		)
Provision for (benefit from) income taxes		13.5			11.3			40.5			26.3			(1.7		)
Income (loss) before equity in earnings (losses)		(9.7		)	(3.6		)	(424.2		)	48.7			(3.3		)
Equity in earnings (losses) of and write-downs of an investment in affiliated companies		(1.4		)	(10.0		)	(9.5		)	5.5			(20.0		)
Net income (loss)		(11.1		)	(13.6		)	(433.7		)	54.2			(23.3		)
Deemed preferred dividends and accretion		(9.6		)	—			—			—			—
Net income (loss) available to common shareholders		$	(20.7	)	$	(13.6	)	$	(433.7	)	$	54.2		$	(23.3	)
Net income (loss) per share:
Basic		$	(0.54	)	$	(0.35	)	$	(11.54	)	$	1.47		$	(0.64	)
Diluted		$	(0.54	)	$	(0.35	)	$	(11.54	)	$	1.32		$	(0.64	)
Weighted average shares outstanding:
Basic		38.6			38.4			37.6			36.8			36.4
Diluted		38.6			38.4			37.6			45.7			36.4
Financial Position:
Total assets		$	722.7		$	708.1		$	789.4		$	1,211.4		$	1,261.9
Working capital		$	140.7		$	(530.8	)	$	80.5		$	128.1		$	117.3
Long-term notes payable and capital lease obligations		$	481.3		$	—		$	668.5		$	651.5		$	736.6
Stockholders’ equity (deficit) (c)		$	(93.4	)	$	(127.4	)	$	(132.6	)	$	315.7		$	270.1
Other Data:
Depreciation and amortization (b)		$	52.2		$	47.2		$	63.2		$	58.7		$	61.3
Capital expenditures		$	21.6		$	14.9		$	38.8		$	39.6		$	35.6
Shares outstanding at year-end, less treasury stock		38.7			38.5			38.2			37.1			36.6

 

(a)          The comparability of the data may be affected by acquisitions and divestitures.  The Company sold its Bellingham aircraft interiors business in April 2000.  Net sales and operating income for the Bellingham business were $18.9 million and $0.6 million, respectively, in 2000, and $70.0 million and $8.0 million, respectively in 1999.

 

(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, $13.1 million in 2000 and $13.4 million in 1999.

 

(c)          No cash dividends were declared per common stock during any of the five years ended December 31, 2003.

 

31

 

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

 

Business Overview

 

		Year Ended December 31,
(In millions, except per share data)		2003			2002			2001
Net sales		$	896.9		$	850.8		$	1,009.4
Gross margin %		19.5		%	19.0		%	18.9		%
Operating income (loss)		$	57.8		$	60.2		$	(316.2	)
Operating income (loss) %		6.4		%	7.1		%	(31.3		)%
Other income (expense), net		$	(0.4	)	$	10.3		$	(2.7	)
Provision for income taxes (a)		$	13.5		$	11.3		$	40.5
Equity in losses of and write-downs of an investment in affiliated companies		$	(1.4	)	$	(10.0	)	$	(9.5	)
Net loss		$	(11.1	)	$	(13.6	)	$	(433.7	)
Deemed preferred dividends and accretion		$	(9.6	)	$	—		$	—
Net loss available to common shareholders		$	(20.7	)	$	(13.6	)	$	(433.7	)
Diluted net loss per common share		$	(0.54	)	$	(0.35	)	$	(11.54	)

 

(a)          The Company’s tax provision primarily reflects taxes on foreign income.  Included in the 2003 year-end results is the impact of recognizing a non-cash valuation allowance on a Belgian deferred tax asset of $4.7 million.  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. and Belgian net operating income (losses) until such time as the U.S. and Belgian operations, respectively, generate income in future years to utilize the net operating losses in full.

 

Business Trends

 

During 2001, Hexcel began to experience significant changes in two of the markets it serves.

 

•                  In the first quarter of 2001, the Company saw the start of a significant reduction in the demand for its woven fiberglass fabrics used as substrates for printed wiring boards.  Annual net sales to electronics applications declined from their peak in 2000 of $181.2 million to $77.0 million in 2001.  In 2002, with the full annualized impact of the decline in demand, net sales were $58.3 million.  In 2003, net sales continued to languish at $52.8 million.

 

•                  In the autumn of 2001, the tragic events of September 11 precipitated a significant reduction in air travel, airline profitability and thereby the demand for 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 a result, 2002 annual net sales to the commercial aerospace market were $391.1 million, which were $147.8 million, or 27.4%, lower than the $538.9 million of net sales obtained in 2001.  The Company’s net sales to the commercial aerospace market remained depressed at $389.9 million in 2003.

 

The Company quickly responded to these major changes in these two markets by implementing the business consolidation and restructuring programs announced in July 2001 and November 2001.  These programs targeted reductions in the Company’s variable and fixed costs to coincide with the changes in the demand for its products.  In particular, the Company targeted reducing its cash fixed costs in 2002 by 20% compared to 2001.  The actual reduction achieved was 23%.  These cost reductions were predominantly accomplished through company-wide reductions in managerial, professional, indirect manufacturing and administrative employees, along with organizational rationalization.  Headcount has declined from over 6,200 in the third quarter of 2001 to 4,084 as of December 31, 2003.  This right sizing of the Company had enabled it to stabilize operating profitability over the past two years, despite the significant reductions in net sales.

 

32

 

While 2001 saw significant changes in demand from Hexcel’s commercial aerospace and electronic markets, over the past three years the Company has seen significant growth from its industrial and space and defense markets.

 

•                  During 2003, industrial market net sales of $274.9 million have increased 20.6% compared to annual net sales in 2000 on strength in products used in applications such as soft body armor, wind energy and recreational equipment.

 

•                  Net sales to the space and defense markets have grown strongly over the past three years with annual sales increasing $50.3 million, or 39.0%, to $179.3 million in 2003 from $129.0 million in 2000.  The Company continues to benefit from its extensive qualifications to supply composite materials and, in some cases, composite structures to a broad range of military aircraft and helicopter programs.

 

In 2001 and 2002, the Company focused on quick cost reductions to respond to the dramatic shift in demand from the electronics and commercial aerospace markets.  In 2003, the Company added focus on reducing and refinancing its near-term debt obligations to appropriately align its capital structure with the conditions of the markets the Company serves.  In March 2003, the Company simultaneously closed three financing transactions:

 

•                  Sale of mandatorily redeemable convertible preferred stock for $125.0 million;

 

•                  Issuance of $125.0 million of 9-7/8% senior secured notes; and

 

•                  Establishment of a $115.0 million senior secured credit facility.

 

With a net debt reduction benefit of $112.0 million from these refinancing transactions, along with $28.7 million from asset sales and the $31.1 million generated from operations, net of capital expenditures and dividend receipts, the Company reduced total debt, net of cash, by $171.8 million during the year to $441.7 million at December 31, 2003, a five year low.  Now that the Company has reduced its leverage to more normal levels and generated liquidity to manage and grow, the focus going forward is to build for growth and return to consistent net income profitability.

 

To build for growth, the Company continues to make strategic investments in R&T, sales and marketing organizations, and manufacturing assets.  In addition, with significant shifts to carbon fiber composite designs in aerospace, wind energy and recreation, the Company sees the opportunity to move advanced composite materials from niche to mainstream by undertaking certain “industrialization” initiatives.  As such, the Company has continued to work on a number of manufacturing rationalization initiatives as well as programs for the industrialization of certain of its products and processes.  In connection with such actions, in the first quarter of 2004, the Company announced its intent to consolidate the manufacturing activities of its Livermore, California facility into other operations, principally the Salt Lake City, Utah plant.  While these actions are expected to produce long-term savings, the main objective is to position the Company for growth.

 

Significant Transactions

 

Refinancing of the Company’s Capital Structure:

 

On March 19, 2003, Hexcel successfully completed the refinancing of its capital structure through the simultaneous closings of three financing transactions:  the sale of mandatorily redeemable convertible preferred stock for $125.0 million, the issuance of $125.0 million of 9-7/8% senior secured notes, due 2008, and the establishment of a $115.0 million senior secured credit facility, also due 2008.

 

The proceeds from the sale of the mandatorily redeemable convertible preferred stock were used to provide for the redemption of $46.9 million principal amount, plus accrued interest, of 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,

 

33

 

after the application of the mandatorily redeemable convertible preferred stock proceeds, were repaid with proceeds from the issuance of the Company’s 9-7/8% 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 in 2003 on early retirement of debt due to the write-off of unamortized deferred financing costs related to the then existing 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 consolidated statements of operations.

 

Repurchase of Long-term Debt and Retirement of Capital Lease Obligations:

 

During 2003, the Company utilized excess cash to repurchase long-term debt and retire capital lease obligations for a combined total of $37.3 million.  The Company repurchased $10.0 million principal amount of its 9.75% senior subordinated notes, due 2009, in an open market purchase and $1.7 million principal amount of its 7% convertible subordinated notes due 2011, meeting an annual sinking fund requirement.  The repurchases were made at or near par, resulting in no material gain or loss recognized from the transaction.  The 9.75% senior subordinated notes are general unsecured obligations of Hexcel.

 

Also in 2003, the Company retired a long-term capital lease obligation for $25.6 million.  In connection with a prior acquisition, the Company had entered into a $50.0 million capital lease for property, plant and equipment.  The lease was to expire in September 2006 with a final balloon payment, and included various fixed price purchase options.  The last purchase option was on September 30, 2003 for an amount of $24.9 million.  Prior to the expiration of this purchase option, the Company negotiated the retirement of this capital lease obligation.  The excess of capitalized lease obligation costs and legal fees over the carrying value of the debt in an aggregate amount of $0.9 million was recorded as an acquisition adjustment to the value of the fixed assets formerly under the lease and is being depreciated over the remaining useful lives of the fixed assets.

 

With the benefit of the financing transactions, the Company’s next significant scheduled debt maturity will not occur until 2008, with annual debt and capital lease maturities of approximating $2.0 million prior to 2008.  For additional information, see Notes 2, 8, and 10 to the accompanying consolidated financial statements of this Annual Report on Form 10-K.

 

Sale of Ownership in Joint Ventures:

 

In 2003, the Company exercised an option to sell its remaining interest in a Japanese electronics joint venture, Asahi-Schwebel Co. Ltd. (“ASCO”), for $23.0 million in cash.  No gains or losses were recorded on the sale, as the Company had previously written-down the carrying value of its remaining equity investment to $23.0 million in 2002.  The Company had previously agreed with its partner in ASCO to restructure its minority interest in 2002.  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 effective for a six-month period beginning July 1, 2003 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.  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, recording a non-cash impairment charge of $4.0 million in 2002.  There was no tax benefit recognized on the write-down.

 

Also in 2003, Hexcel sold its equity interest in Interglas Technologies AG (“Interglas”) for a nominal amount in conjunction with a bank sponsored financial restructuring of the affiliated company.  No gain or loss was recorded as a result of the sale, as Hexcel had previously recognized a full impairment of the remaining value of its equity interest in Interglas.  In 2001, the Company wrote-down its remaining investment in Interglas by $7.8 million.  The write-down was the result of an assessment that an other-than-temporary decline in value of 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

 

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Company did not record deferred tax benefits on the write-down because of limitations imposed by foreign tax laws and the Company’s ability to realize the tax benefits.

 

Results of Operations

 

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 20 to the accompanying consolidated financial statements of this Annual Report on Form 10-K.

 

2003 Compared to 2002

 

Net Sales:  Consolidated net sales of $896.9 million for 2003 were $46.1 million, or 5.4%, higher than the $850.8 million of net sales for 2002, primarily through growth in space and defense markets and a favorable impact of changes in foreign currency exchange rates.  Space and defense revenues increased $31.8 million, or 21.6%, year-on-year, reflecting higher military aircraft production and non-recurring revenues associated with an aircraft in development and tooling.  Approximately $6.8 million of the increase to these markets was due to foreign currency exchange rates.  Since the end of 2002, the Euro and the British pound sterling have strengthened against the U.S. dollar increasing the dollar value of sales made in euros and pounds.  Had the same U.S. dollar, British pound sterling and Euro exchange rates applied in 2003 as in 2002, consolidated net sales for 2003 would have been $6.5 million higher than the 2002 net sales of $850.8 million at $857.3 million.

 

The following table summarizes net sales to third-party customers by segment and end market in 2003 and 2002:

 

		Unaudited
(In millions)		Commercial Aerospace			Industrial			Space & Defense			Electronics			Total
2003 Net Sales
Reinforcements		$	51.1		$	128.9		$	—		$	52.8		$	232.8
Composites		273.6			146.0			165.2			—			584.8
Structures		65.2			—			14.1			—			79.3
Total		$	389.9		$	274.9		$	179.3		$	52.8		$	896.9
		43		%	31		%	20		%	6		%	100		%
2002 Net Sales
Reinforcements		$	49.0		$	110.6		$	—		$	58.3		$	217.9
Composites		256.6			143.3			132.5			—			532.4
Structures		85.5			—			15.0			—			100.5
Total		$	391.1		$	253.9		$	147.5		$	58.3		$	850.8
		46		%	30		%	17		%	7		%	100		%

 

Commercial Aerospace: Net sales to the commercial aerospace market decreased slightly to $389.9 million for 2003 as compared to net sales of $391.1 million for 2002.  Although sales by the Reinforcements and Composites business segments were up over 4.3% and 6.6%, respectively, revenues from the Structures business segment declined 23.7% reflecting year-on-year reductions in Boeing’s commercial aircraft build rates and continued transition of work to the Company’s Asian joint ventures.  If adjusted to eliminate the favorable impact of changes in exchange rates, total sales to the commercial aerospace market would have declined by $11.9 million, or 3.0%, compared to 2002.  Net sales by the Reinforcements and Composites business segments would have been $47.8 million and $266.2 million, respectively.  There was no exchange rate impact on sales by the Structures business segment.

 

The sharp downturn in commercial aircraft build rates, that affected the Company’s revenues from the start of 2002, appears to have leveled off.  While Boeing delivered 281 aircraft in 2003, down from 381 and 527 in 2002 and 2001, respectively, Airbus’ deliveries of 305 aircraft in 2003 were slightly above

 

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deliveries achieved in 2002.  Boeing has publicly forecasted that its deliveries in 2004 will remain at a level between 275 and 290 aircraft; and Airbus has indicated its 2004 deliveries and production will be approximately 300 aircraft.  As commercial aircraft build rates in 2004 are projected to be comparable to last year, the Company anticipates that its 2004 commercial aerospace revenues will be at a similar level to 2003.

 

The recovery of the Company’s commercial aerospace revenues, when it occurs, will not only be influenced by increases in commercial aircraft order and build rates, but also by the mix of aircraft that are produced, as twin aisle aircraft use more of Hexcel’s products than narrow body aircraft and newly designed aircraft use more of Hexcel’s products than aircraft of older generations.  For instance, Airbus has indicated that its new jumbo aircraft, the Airbus A380 will have the highest advanced structural material content to-date of a large commercial aircraft when it enters service in 2006.  Hexcel’s deliveries of material for this aircraft have already begun to support certification and test requirements.  Airbus has advised that it anticipates the A380 will have about 22% of its dry weight built from advanced structural materials, 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.  Furthermore, during 2003, Boeing announced its plan to develop and launch the Boeing 7E7 which it anticipates will have an even greater content of advanced structural materials.  This trend continues to expand the market opportunity for advanced structural materials, and Hexcel and other composite materials manufacturers are developing a wide range of materials to meet the challenges of new commercial aircraft programs.  Of course, the benefit Hexcel ultimately derives from programs such as the 7E7 will depend upon a number of factors, including the design requirements of its customers, the suitability of the Company’s products to meet those requirements, the competitive position of the Company’s products against similar products offered by the Company’s competitors, and the requirements its customers and their subcontractors award to the Company.

 

Industrial: Net sales of $274.9 million for 2003 increased by $21.0 million, or 8.3%, compared to net sales of $253.9 million in 2002.  The strength of the Euro inflated the value of 2003 sales of certain products, such as products used in wind energy, architectural and recreational product applications.  Excluding the favorable impact on foreign currency exchange rates, net sales to this market would have been comparatively flat year-over-year.  Both sales of reinforcement fabrics used in soft body armor and sales of composite materials used in recreational equipment showed double-digit growth in 2003.  Wind energy revenues were lower in the second half of 2003 compared to the second half of 2002, and for the full year, due to customer requirements and new product transitions.  Revenues from all other products used in other non-aerospace applications, including architectural, automotive and industrial, showed mixed results.  As sales of ballistic reinforcement fabrics for military applications seem set to remain at the current high levels in 2004 and wind energy revenues are anticipated to grow through both market growth and product evolution, the Company has forecasted that its industrial revenues will show modest growth in 2004.

 

Space & Defense: Net sales of $179.3 million increased $31.8 million, or 21.6%, in 2003.  On a constant foreign currency basis, net sales to this market were up $25.0 million, or 16.9%, year-on-year.  The increase was led by higher aircraft production, as well as $7.2 million of non-recurring tooling revenues associated with an aircraft in development.  In general, the Company continues to benefit from its extensive qualifications to supply composite materials and, in some cases, composite structures to a broad range of military aircraft and helicopter programs, including 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 obtains from these programs tend to vary quarter to quarter based on customer ordering patterns and will often depend upon the timing and extent of program funding.  For example, the Department of Defense announced its plan to cancel the RAH-66 Comanche program on February 23, 2004.  Space applications for advanced structural materials include solid rocket booster cases; farings and payload doors for launch vehicles; and buss and solar arrays for military and commercial satellites.  The production of both launch vehicles and satellites has declined in

 

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recent years from a peak in the late 1990s.  Overall, the Company anticipates modest revenue growth from this market in 2004.

 

Electronics: Net sales of $52.8 million in 2003 declined $5.5 million, or 9.4%, year-over-year.  Although the Company did see a small improvement in the Company’s sales in the U.S., it was more than offset by further declines in Europe.  Sales of fiberglass fabric substrates used in the fabrication of printed wiring boards continued to be affected by weakness in the global electronics market and pricing pressures from excess production capacity.  In addition, a migration of electronics equipment production from the United States to Asia continues to put additional pressure on the Company’s electronics business.  However, the Company’s electronics customers, particularly those serving the high-technology end of the market, are more optimistic going into 2004 than they were this time last year.

 

Gross Margin: Gross margin for 2003 was $174.5 million, or 19.5% of net sales, compared to gross margin of $161.3 million, or 19.0% of net sales, in 2002.  The $13.2 million year-on-year improvement in gross margin reflected the impact of higher net sales and the benefits obtained from the Company’s cost reduction programs, as operations have adjusted to lower levels of production.  These benefits obtained were offset slightly by higher depreciation and utility costs.  Depreciation increased $5.0 million to $52.2 million in 2003 from $47.2 million in 2002.  The increase in depreciation primarily reflected changes in foreign currency exchange rates and increased depreciation associated with certain of the Company’s restructuring actions.

 

Although the gross margin in the Reinforcements business segment increased $0.4 million compared to 2002, gross margin as a percentage of sales actually declined one percentage point to 11.8% in 2003.  Higher variable manufacturing costs and product mix contributed to the decline in gross margin as a percentage of sales.  For instance, during 2003 the Reinforcements business segment experienced a large increase in lower margin sales to the Ballistics market while sales in the higher margin electronics market declined.  Gross margin earned by the Composites business segment was $11.4 million higher than 2002.  Reductions in manufacturing cost contributed to gross margin results and enabled gross margin as a percentage of sales to remain relatively steady in the Composites segment year-over-year.  Gross margin at the Structures business segment increased $1.8 million year-over-year to $6.4 million in 2003.  The Structures segment’s gross margin improvement results primarily from manufacturing cost reductions obtained through previously implemented business consolidation and restructuring programs, as the business segment continues to transition certain existing programs to build composite structures for commercial aircraft to its Asian joint ventures.

 

Selling, General and Administrative (“SG&A”) Expenses:  SG&A expenses were $95.0 million, or 10.6% of net sales, for 2003 compared with $85.9 million, or 10.1% of net sales, for 2002.  The year-on-year increase in SG&A expenses reflected the impact of higher foreign currency exchange rates of $5.7 million, as the U.S. dollar had weakened against the British pound and Euro since the end of 2002, along with higher insurance premiums and new regulatory compliance costs.  Included in SG&A expenses for 2003 were $0.5 million of incremental expenses related to a work stoppage at the Kent, Washington facility.  Included in SG&A expenses for 2002 were approximately $1.5 million of expenses associated with the Company’s agreement to issue mandatorily redeemable convertible preferred stock.

 

Research and Technology (“R&T”) Expenses: R&T expenses for 2003 were $17.7 million, or 2.0% of net sales, compared with $14.7 million, or 1.7% of net sales, for 2002.  The $3.0 million increase was due to increased spending in support of new products and new commercial aircraft qualification activities and the impact of higher foreign currency exchange rates.

 

Operating Income: Operating income for 2003 was $57.8 million, or 6.4% of net sales, compared with operating income of $60.2 million, or 7.1% of net sales, for 2002.  The decline in operating income was driven by higher SG&A, R&T, and business consolidation and restructuring expenses, partially offset by the year-over-year increase in gross margin.  Business consolidation and restructuring expenses were $4.0 million in 2003 compared to $0.5 million in 2002, and primarily related to an increase in equipment relocation and re-qualification costs that were expensed as incurred.

 

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Operating income at the Reinforcements business segment declined $3.4 million, as compared with 2002, to $16.2 million.  The decline was due to higher SG&A and R&T expenses of $1.5 million and a $2.3 million increase in business consolidation and restructuring expenses, partially offset by an increase in gross margin of $0.4 million.  The Composites segment’s operating income increased $1.0 million year-over-year to $66.8 million in 2003.  Although SG&A and R&T expenses increased $10.5 million from 2002, gross margin improved by $11.4 million and restructuring expenses declined $0.1 million year-over-year.  The Structures segment’s operating income improved by $1.6 million compared with 2002 to $2.0 million, primarily reflecting higher gross margin.  The Company did not allocate corporate operating expenses of $27.2 million and $25.6 million to operating segments in 2003 and 2002, respectively.

 

Interest Expense:  Interest expense for 2003 was $53.6 million compared to $62.8 million for 2002. The $9.2 million decline in interest expense reflected lower debt balances, fees and amortization rates.  During 2003, the Company lowered its outstanding debt by $138.3 million, reducing cash interest expense by $6.7 million.  In addition, banking, commitment and amendment fees declined $2.0 million year-over-year to $1.7 million in 2003.  Amortization of financing costs and discounts were $0.5 million lower than in 2002.

 

Other Income (Expense):  Other income (expense) was a net expense of $0.4 million for 2003 compared to income of $10.3 million for 2002.  The net expense of $0.4 million in 2003 included a $4.0 million loss on early retirement of debt offset by net gains of $2.2 million, net of customary closing costs, from the sale of certain assets of the Company’s Structures business segment and a $1.4 million gain attributable to the expiration of a contingent obligation of a prior business sale.  The $4.0 million loss on early retirement of debt was incurred in connection with the refinancing transactions executed in March 2003, as the Company wrote-off unamortized deferred financing costs relating to the former senior credit facility and the 7% convertible subordinated notes, due 2003.

 

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 Company also recognized a $0.5 million gain in 2002 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.

 

Provision for Income Taxes:  The provisions for income taxes of $13.5 million and $11.3 million for 2003 and 2002, respectively, were primarily for taxes on European income and included a non-cash valuation allowance of $4.7 million in 2003 on a deferred tax asset previously recognized by a Belgian subsidiary.  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. and Belgian net operating income (losses) until such time as the U.S. and Belgian operations, respectively, generate sufficient taxable income to utilize the net operating losses in full.  For additional information, see Note 13 to the accompanying consolidated financial statements of this Annual Report on Form 10-K.

 

Equity in Losses of and Write-down of an Investment in Affiliated Companies:  Equity in losses of affiliated companies was $1.4 million in 2003 primarily reflecting losses reported by the Structures business segment’s joint ventures in China and Malaysia as they continued to ramp up production of aerospace composite structures, partially offset by equity in earnings of Tech-Fab LLC, a Reinforcement business segment joint venture in the U.S.

 

Equity in losses of affiliated companies was $10.0 million in 2002 and included a $4.0 million write-down of an investment in the Company’s Japanese electronic materials joint venture, ASCO.  As a result of an agreement with the Company’s joint venture partner to restructure its minority interest in ASCO, the Company wrote-down the carrying value of its remaining equity investment in ASCO to its estimated fair market value of $23.0 million.  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.

 

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The remaining $6.0 million of equity in losses was due to operating losses at ASCO and at the joint ventures in China and Malaysia.

 

During 2003, the Company exercised its option to sell its remaining interest in ASCO for $23.0 million in cash, and also sold its equity interest in its European reinforcement products joint venture, Interglas, for a nominal amount in conjunction with a bank sponsored financial restructuring of the affiliated company.  No gains or losses were recorded as a result of these transactions, as the Company had previously written-down the carrying value of its remaining equity investment in ASCO to its estimated fair market value of $23.0 million in 2002 and had recognized a full impairment of its remaining equity interest in Interglas in 2001.

 

Deemed Preferred Dividends and Accretion:  The Company recognized deemed preferred dividends and accretion of $9.6 million in 2003.  Until such time as the mandatorily redeemable convertible preferred stock is converted to Hexcel common stock or redeemed, the accretion of certain deductions for accrued dividends, discount, beneficial conversion feature, and deferred issuance costs will be reported as a reduction of net income (loss) in arriving at net income (loss) available to common shareholders.  Deemed preferred dividends and accretion is a non-cash expense at the time of recognition.  There were no deemed preferred dividends and accretion in 2002.  For additional information, see Note 10 to the accompanying consolidated financial statements of this Annual Report on Form 10-K.

 

Net Loss Available to Common Shareholders and Net Loss Per Common Share:

 

(In millions, except per share data)		2002			2002
Net loss available to common shareholders		$	(20.7	)	$	(13.6	)
Diluted net loss per common share		$	(0.54	)	$	(0.35	)
Diluted weighted average shares outstanding		38.6			38.4

 

The Company’s convertible subordinated notes, due 2003, convertible subordinated debentures, due 2011, and all stock options were excluded from the 2003 and 2002 computations of diluted net loss per common share, as they were antidilutive.  The convertible subordinated notes, due 2003, were repaid in full in March 2003.  In addition, the Company’s mandatorily redeemable convertible preferred stock issued on March 19, 2003 was excluded from the 2003 computation, as it was antidilutive.  For additional information, see Note 14 to the accompanying consolidated financial statements of this Annual Report on Form 10-K.

 

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.

 

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

 

		Unaudited
(In millions)		Commercial Aerospace			Industrial			Space & Defense			Electronics			Total
2002 Net Sales
Reinforcements		$	49.0		$	110.6		$	—		$	58.3		$	217.9
Composites		256.6			143.3			132.5			—			532.4
Structures		85.5			—			15.0			—			100.5
Total		$	391.1		$	253.9		$	147.5		$	58.3		$	850.8
		46		%	30		%	17		%	7		%	100		%
2001 Net Sales (a)
Reinforcements		$	54.5		$	114.2		$	—		$	77.0		$	245.7
Composites		374.1			136.0			128.7			—			638.8
Structures		110.3			—			14.6			—			124.9
Total		$	538.9		$	250.2		$	143.3		$	77.0		$	1,009.4
		53		%	25		%	14		%	8		%	100		%

 

(a)          As part of the November 2001 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. 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.

 

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 reflected 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 projected that its deliveries in 2003 would 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 had indicated its 2003 deliveries and production would be approximately 300 aircraft.  As the Company delivers its products on average four to six months ahead of the delivery of an aircraft, it had been experiencing customer demand that approximated the 2003 forecasted deliveries for several months.

 

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.

 

Space & 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 continued to trend upwards as the new generation of military aircraft in the United States and Europe ramped up in production.  The Company has extensive qualifications to supply composite materials and composite structures to a broad range of military aircraft and helicopter programs in the U.S. and Europe.

 

Electronics: Net sales of $58.3 million for 2002 were 24.3% lower than net sales of $77.0 million in 2001.  Revenues continued 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 continued.

 

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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 decline, gross margin as a percentage of sales actually improved 1.3 percentage 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 2.5 percentage 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 Statement of Financial Accounting Standards No.142, “Goodwill and Other Intangible Assets,” 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, reflected the impact of the Company’s restructuring programs to reduce expenses to mitigate the reduction in sales in the commercial aerospace and electronics markets.  Included in SG&A expenses for 2002 were approximately $1.5 million of expenses associated with the Company’s agreement to issue mandatorily redeemable convertible preferred stock.  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.  In 2002 and 2001, the Company had concentrated its R&T efforts on developing new materials to meet the emerging needs of its 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 goodwill 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, reflected 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.

 

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

 

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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 reflected the reductions in total debt during 2002, the benefit of the reductions in LIBOR, net of the increase in the spread over LIBOR that the Company had paid on its advances under its then existing senior credit facility.

 

Other Income (Expense): 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. Also 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.  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 reflected taxes on foreign 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 sufficient taxable income to utilize the net operating losses in full.

 

 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 had occurred since the end of the second quarter of 2001, 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 13 to the accompanying consolidated financial statements of this Annual Report on Form 10-K.

 

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 ASCO in 2002 and a $7.8 million write-down of its investment in 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 ramped up production of aerospace composite structures.

 

In 2002, the Company wrote-down the carrying value of its remaining equity investment in ASCO 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

 

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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 Available to Common Shareholders and Net Loss Per Common Share:

 

(In millions, except per share data)		2002			2001
Net loss available to common shareholders		$	(13.6	)	$	(433.7	)
Diluted net loss per common share		$	(0.35	)	$	(11.54	)
Diluted weighted average shares outstanding		38.4			37.6

 

The Company’s convertible subordinated notes, due 2003, convertible subordinated debentures, due 2011, and all stock options were excluded from the 2002 and 2001 computations of diluted net loss per common share, as they were antidilutive.  For additional information, see Note 14 to the accompanying consolidated financial statements of this Annual Report on Form 10-K.

 

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, depressed business conditions in the electronics market and 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 2001.  The Company continued the implementation of this program in 2002 and 2003, reducing its workforce over 25% since the announcement to 4,084 employees as of December 31, 2003.

 

In 2003, the Company recognized a net change in estimate increasing business consolidation and restructuring expenses related to this program by $0.3 million, as additional severance expense of $0.4 million was offset in part by a $0.1 million reduction in accrued liabilities for facility and equipment.  In 2002, the Company recognized a net change in estimate reducing business consolidation and restructuring expenses related to this program by $0.7 million.  This decrease in 2002 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.  Additional business consolidation and restructuring expenses related to this program for equipment relocation and re-qualification costs of $2.2 million and $1.2 million were expensed as incurred in 2003 and 2002, respectively.

 

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 facilities 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 2001.  During 2002, the Company reviewed its remaining liability under the program and recognized a change in estimate reducing business consolidation and restructuring expenses by $0.6 million, as employee severance and other benefit costs were lower than previously expected.  This program was completed in 2002.

 

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

 

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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 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.

 

The Company added two further actions to the September 1999 business consolidation program in 2000.  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 2002, the Company recognized a change in estimate reducing business consolidation expenses related to this program by $0.5 million, as actual employee severance was lower than previously expected.  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.  Business consolidation expenses for equipment relocation and re-qualification costs, expensed as incurred, were $1.5 million, $1.6 million and $6.5 million in 2003, 2002 and 2001, respectively.  Equipment relocation and re-qualification costs primarily related to the planned closure of the Lancaster, Ohio and Gilbert, Arizona prepreg manufacturing facilities.  These programs were completed in 2003.

 

The aggregate business consolidation and restructuring activities for the three years ended December 31, 2003, consisted of the following:

 

(in millions)		Employee Severance			Facility & Equipment			Total
Balance as of January 1, 2001		$	2.4		$	0.3		$	2.7
Business consolidation and restructuring expenses		34.5			23.9			58.4
Cash expenditures		(6.4		)	(5.6		)	(12.0		)
Non-cash usage, including asset write-downs		—			(15.7		)	(15.7		)
Balance as of December 31, 2001		$	30.5		$	2.9		$	33.4
Business consolidation and restructuring expenses
Current period expenses		—			2.8			2.8
Reversal of 1999 business consolidation expenses		—			(0.5		)	(0.5		)
Change in estimated expenses		(2.9		)	1.1			(1.8		)
Net business consolidation and restructuring expenses		(2.9		)	3.4			0.5
Cash expenditures		(20.5		)	(3.8		)	(24.3		)
Currency translation adjustment		0.9			—			0.9
Non-cash items:
Reversal of 1999 business consolidation expenses		—			0.5			0.5
Non-cash usage, including asset write-downs		—			(0.5		)	(0.5		)
Total non-cash items		—			—			—
Balance as of December 31, 2002		$	8.0		$	2.5		$	10.5
Business consolidation and restructuring expenses
Current period expenses		—			3.7			3.7
Change in estimated expenses		0.4			(0.1		)	0.3
Net business consolidation and restructuring expenses		0.4			3.6			4.0
Cash expenditures		(4.8		)	(4.3		)	(9.1		)
Non-cash usage, including asset write-downs		—			(0.1		)	(0.1		)
Currency translation adjustment		0.6			—			0.6
Balance as of December 31, 2003		$	4.2		$	1.7		$	5.9

 

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In the first quarter of 2004, the Company announced its intent to consolidate the activities of its Livermore, California facility into other operations, principally the Salt Lake City, Utah plant.  In addition, the Company has continued to work on the rationalization of its European honeycomb manufacturing operations and the consolidation of its European manufacturing of architectural products and products used as reinforcement for composite materials.  The Company continues to explore opportunities for high volume process automation and the industrialization of products and processes.  The objectives of these actions are to both produce long-term savings and to position the Company for growth.  These business consolidation and restructuring actions will be accounted for under Statement of Financial Accounting Standards No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” which requires that a liability for a cost associated with an exit or disposal activity be recognized and measured, initially at fair value, only when the liability is incurred.  This change in accounting, adopted as of January 1, 2003, is expected to result in a delayed recognition of certain types of costs, especially facility closure costs.

 

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.  These adverse changes in market conditions 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.

 

Retirement and Other Postretirement Benefit Plans

 

Hexcel maintains qualified and nonqualified defined benefit retirement plans covering certain U.S. and European employees, as well as retirement savings plans covering eligible U.S. employees, and participates in a union sponsored multi-employer pension plan covering certain U.S. employees with union affiliates.  In addition, Hexcel provides certain postretirement health care and life insurance benefits to eligible U.S. retirees.  Benefits under the defined benefit retirement plans are generally based on years of service and employee compensation under either a career average or final pay benefits method.    Depending on the plan, postretirement health care and life insurance benefits are available to eligible employees who retire on or after age 58 or 65 after rendering a minimum of 15 years or 25 years of service to Hexcel.

 

Under the retirement savings plans, eligible U.S. employees can contribute up to 16% of their compensation to an individual 401(k) retirement savings account.  Hexcel makes matching contributions equal to 50% of employee contributions, not to exceed 3% of employee compensation.  The Company also makes profit sharing contributions when it meets or exceeds certain performance targets, which are set annually.

 

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Effective December 31, 2000, the Company made certain changes to its U.S. retirement benefit plans that were intended to improve the flexibility and visibility of future retirement benefits for employees.  These changes included an increase in the amount that the Company contributes to individual 401(k) retirement savings accounts and an offsetting curtailment of the Company’s U.S. qualified defined benefit retirement plan (“U.S. Qualified Plan”).  Beginning January 1, 2001, the Company started to contribute an additional 2% to 3% of each eligible employee’s salary to an individual 401(k) retirement savings account, depending on the employee’s age.  This increases the maximum contribution to individual employee savings accounts to between 5% and 6% per year, before any profit sharing contributions.   Offsetting the estimated incremental cost of this additional benefit, participants in the Company’s U.S. Qualified Plan no longer accrued benefits under this plan after December 31, 2000, and no new employees will become participants.  However, employees retained all benefits earned under this plan as of that date.

 

Hexcel accounts for its defined benefit retirement plans and its postretirement benefit plans using actuarial models required by Statement of Financial Accounting Standards No. 87, “Employers’ Accounting for Pensions,” and No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions,” respectively.  These actuarial models require the use of certain assumptions, such as the expected long-term rate of return, discount rate, rate of compensation increase, healthcare cost trend rates, and retirement and mortality rates, to determine the net periodic costs of such plans.   These assumptions are reviewed and set annually at the beginning of each year.  In addition, these models use an “attribution approach” that generally spreads individual events, such as plan amendments and changes in actuarial assumptions, over the service lives of the employees in the plan.  That is, employees render service over their service lives on a relatively smooth basis and therefore, the income statement effects of retirement and postretirement benefit plans are earned in, and should follow, the same pattern.

 

Hexcel uses its actual return experience, future expectations of long-term investment returns, and its actual and targeted asset allocations to develop its expected rate of return assumption used in the net periodic cost calculations of its funded U.S. and European defined benefit retirement plans.  Due to the difficulty involved in predicting the market performance of certain assets, there will almost always be a difference in any given year between the Company’s expected return on plan assets and the actual return.  Following the attribution approach, each year’s difference is spread over a number of future years.  Over time, the expected long-term returns are designed to approximate the actual long-term returns and therefore result in a pattern of income and expense recognition that more closely matches the pattern of the services provided by the employees.  As actual returns experience over the past three years were less than the expected returns for certain of the Company’s defined benefit retirement plans, the shortfall between actual and expected returns will be recognized in the net periodic pension cost calculations over a number of subsequent years, along with any other differences arising in future years.  In addition, as a result of an annual review of historical returns and recent asset allocations, the Company reduced its expected long-term return on the U.S. defined benefit retirement plan assets for the 2003 plan year from a historical rate of 9.0% to 7.5%.  The expected long-term rate of return for the 2004 plan year will remain at 7.5%.

 

Hexcel annually sets its discount rate assumption for retirement-related benefits accounting to reflect the rates available on high-quality, fixed-income debt instruments.  Recent declines in discount rates have increased the Company’s net periodic costs for the three years ended December 31, 2003 and the unfunded status of the Company’s funded plans as of December 31, 2003 and 2002.  The discount rate assumption used to calculate net periodic retirement related costs for the U.S. plans in 2003 was 6.0% compared to a discount rate of 6.75% used in 2002 and 7.25% used in 2001.  The rate of compensation increase, which is another significant assumption used in the actuarial model for pension accounting, is determined by the Company based upon its long-term plans for such increases and assumed inflation.  Rates used by the Company have remained relatively constant over the past three years and are expected to remain constant for 2004.  For the postretirement health care and life insurance benefits plan, the Company reviews external data and its historical trends for health care costs to determine the health care cost trend rates.  Retirement and mortality rates are based primarily on actual plan experience.

 

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Actual results that differ from the Company’s assumptions are accumulated and amortized over future periods and, therefore, generally affect the net periodic costs and recorded obligations in such future periods.  While the Company management believes that the assumptions used are appropriate, significant changes in economic or other conditions, employee demographics, retirement and mortality rates, and investment performance may materially impact such costs and obligations.

 

For more information regarding the Company’s retirement and other postretirement benefit plans, see Note 12 to the accompanying consolidated financial statements of this Annual Report on Form 10-K.

 

Medicare Prescription Drug, Improvement and Modernization Act of 2003

 

On December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003  (the “Act”) was enacted by U.S. lawmakers.  The Act, among other things, introduces a prescription drug benefit under Medicare and a non-taxable federal subsidy paid to sponsors of postretirement benefit plans that provide retirees with a drug benefit at least “actuarially equivalent” to these new benefits under Medicare.   In January 2004, the FASB issued Staff Position No. FAS 106-1 in response to the new Act, permitting sponsors of postretirement benefit plans that provide prescription drug benefits to retirees to make a one-time election to defer accounting for any effects of the Act.  If deferral is elected, the deferral must remain in effect until the earlier of (a) issuance of guidance by the FASB on how to account for the federal subsidy or (b) the remeasurement of plan assets and obligations subsequent to January 31, 2004.  For the year ended December 31, 2003, the Company elected to defer accounting for the effects of the Act.  As a result, the accumulated benefit obligation or net periodic benefit cost in the consolidated financial statements and accompanying notes do not reflect such effects of the Act on the Company’s postretirement plans for 2003.  Future authoritative guidance on the accounting for the Act is pending and could, when issued, require the Company to change previously reported financial information.  Although the Company does not expect to receive federal subsidies under the Act, the Company may benefit from certain changes in actuarial assumptions.  The Company believes that any benefits obtained through such changes would not have a material impact on the Company’s consolidated financial position or results of operations.

 

Significant Customers

 

Approximately 23%, 24% and 27% of the Company’s 2003, 2002 and 2001 net sales, respectively, were to Boeing and its subcontractors.  Of the 23% of sales to Boeing and its subcontractors in 2003, 17% and 6% related to commercial aerospace and space and defense market applications, respectively.  Approximately 19%, 16% and 16% of the Company’s 2003, 2002 and 2001 net sales, respectively, were to EADS, including Airbus, and its subcontractors.  Of the 19% of sales to EADS and its subcontractors in 2003, 16% and 3% related to commercial aerospace and space and defense market applications, respectively.

 

Financial Condition

 

Liquidity:  As of December 31, 2003, the Company had cash and cash equivalents of $41.7 million and undrawn availability under its senior secured credit facility of $45.2 million.  In addition, as of December 31, 2003, Hexcel had 20.0 million Euros of borrowing capacity available under an accounts receivable factoring facility at its French operating subsidiaries, and various European credit and overdraft facilities, which could be utilized to meet short-term working capital and operating cash requirements.

 

As of December 31, 2003, the Company’s total debt, net of cash, was $441.7 million, a decrease of $171.8 million from $613.5 million as of December 31, 2002.  Total debt, net of cash, was reduced $112.0 million in March of 2003 as a result of the Company’s refinancing transactions. Excluding the benefit of the refinancing transactions, total debt, net of cash, decreased by $59.8 million as the Company generated cash through operations, and generated cash as a result of the sale of an ownership interest in an affiliated company and the sale of certain assets.  In July 2003, the Company exercised its option to sell

 

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its remaining interest in its Japanese electronics joint venture for $23.0 million in cash.  In 2003, the Company also sold certain operating and real estate assets of its Structures business segment generating $5.7 million in cash.  The Company used excess cash generated to repay debt, including capital lease obligations.  In 2003, the Company repurchased $10.0 million principal amount of its 9.75% senior subordinated notes due 2009, through open market purchases and $1.7 million principal amount of its 7% convertible subordinated notes due 2011, meeting an annual sinking fund requirement.  In addition, the Company retired a $25.6 million capital lease obligation.

 

Credit Facilities: On March 19, 2003, Hexcel entered into a $115.0 million asset-backed senior secured credit facility (“Senior Secured Credit Facility”) with a syndicate of lenders to provide for ongoing working capital and other financing requirements through maturity on March 31, 2008.  Borrowers under the Senior Secured Credit Facility include, in addition to Hexcel Corporation, Hexcel’s operating subsidiaries in the U.K., Austria and Germany.  This 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 borrowers is based on an agreed percentage of eligible accounts receivable, subject to certain reserves.  In addition, the U.K., Austrian and German borrowers have facility sublimits of $12.5 million, $7.5 million and $5.0 million, respectively.  Borrowings under this credit 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 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 provides for the payment of customary fees and expenses.

 

All obligations under the Senior Secured 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 Danish and U.K. first-tier holding companies, and certain intercompany notes.  This pledge of foreign stock and intercompany notes is on an equal basis with a substantially identical pledge of such stock 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 Corporation and its material domestic subsidiaries guarantee all borrowings under the Senior Secured Credit Facility.

 

Hexcel is required to maintain various financial ratios throughout the term of the Senior Secured Credit Facility.  These financial covenants set maximum values for the Company’s leverage (the ratios of total and senior debt to EBITDA), fixed charge coverage (the ratio of EBITDA, less capital expenditures and cash taxes, plus cash dividends, to the sum of cash interest and scheduled debt amortization), and capital expenditures (not to exceed specified annual expenditures).  This credit facility also contains limitations on, among other things, incurring debt, granting liens, making investments, making restricted payments, including dividends, entering into transactions with affiliates and prepaying subordinated debt.  The Senior Secured Credit Facility also contains other customary terms relating to, among other things, representations and warranties, additional covenants and events of default.  At December 31, 2003, the Company was in compliance with the financial covenants under the Senior Secured Credit Facility.

 

As of December 31, 2003, the Company had outstanding borrowings of $4.0 million and issued letters of credit totaling $22.6 million, of which $11.1 million supported a third-party loan to BHA Aero Composite Parts Co., Ltd. (“BHA Aero”), under the Senior Secured Credit Facility.  The borrowing base under the credit facility was $71.8 million as of December 31, 2003, providing the Company with undrawn revolver and overdraft revolver availability of $45.2 million, after deduction of advances, letters of credit outstanding and other adjustments.  Hexcel is able to issue letters of credit up to a sub-limit of $50.0 million, subject to availability, under this credit facility.

 

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To increase borrowing capacity, in 2003 Hexcel entered into an accounts receivable factoring facility with a third party to provide an additional 20.0 million Euros in borrowing capacity at its French operating subsidiaries through January 2007.  As of December 31, 2003, the Company did not have any outstanding borrowings under this factoring facility.  In addition, the Company has available European credit and overdraft facilities, which can be utilized to meet short-term working capital and operating cash requirements.  These European credit and overdraft facilities are uncommitted lines and can be terminated at the option of the lender.

 

Operating Activities: Net cash provided by operating activities was $46.9 million in 2003, or $19.0 million lower than net cash provided by operating activities in 2002.  During 2003, the Company’s working capital requirements remained fairly steady while the Company reported a $44.0 million reduction in working capital requirements in 2002.  The decline in working capital in 2002 reflected the impact of declines in revenues in the aerospace and electronics markets and the impact of positive working capital management.  Net loss improved $2.5 million year-over-year to a net loss of $11.1 million.  Depreciation expense increased $5.0 million to $52.2 million in 2003, and business consolidation and restructuring expenses increased $3.5 million to $4.0 million in 2003.  The Company reduced its cash payments for business consolidation and restructuring costs to $9.1 million in 2003, down from $24.3 million in 2002.  Equity in losses of and write-down of an investment in affiliated companies was $1.4 million in 2003, compared to $10.0 million in 2002.  Amortization of debt discount and deferred financing costs were $3.5 million in 2003, while deferred income taxes were $4.8 million.

 

Net cash provided by operating activities was $65.9 million in 2002, reflecting positive working capital management and a reduced net loss, after excluding depreciation of $47.2 million and equity in losses and write-downs of an investment in affiliated companies of $10.0 million.  Reductions in accounts receivable and inventory balances generated operating cash flows of $35.6 million and $25.8 million, respectively.  The Company was able to generate substantial operating cash flows even after incurring restructuring cash payments of $24.3 million and accounts payable and accrued liabilities decreasing by $15.7 million during the year.

 

Net cash flows provided by operating activities were $35.0 million in 2001.  Although the Company’s net loss for the year was $433.7 million, its operating earnings generated $26.1 million of cash in 2001 after excluding non-cash equity losses of $9.5 million, $309.1 million of non-cash impairment charges for goodwill and other purchased intangibles, $67.2 million of non-cash depreciation and amortization charges, $27.6 million of non-cash charges in deferred tax assets, and $46.4 million of non-cash and unpaid business consolidation and restructuring expenses.  During 2001, working capital management resulted in reductions in accounts receivable and inventory balances.  These reductions along with reductions in other assets were offset in part by increases in accounts payable and accrued expenses resulting in an increase in cash of $8.9 million.

 

Investing Activities:  Net cash provided by investing activities was $9.1 million in 2003.  Cash used for capital expenditures of $21.6 million was more than offset by the Company’s receipt of $23.0 million from the sale of its remaining ownership interest in an affiliated company, $5.7 million from the sale of other assets, and $2.0 million in dividends from affiliated companies.  With focus on both productivity improvements and preparing for growth, the Company anticipates cash used for capital expenditures will be approximately $30.0 million in 2004.

 

Net cash used for investing activities was $2.3 million in 2002.  Cash used for capital expenditures of $14.9 million was offset, in part, by the Company’s receipt of $10.0 million from a partial sale of an ownership interest in an affiliated company, $1.5 million from the sale of other assets, and a $1.6 million dividend from an affiliated company.

 

Net cash used for investing activities was $38.3 million in 2001, primarily reflecting capital expenditures of $38.8 million and the receipt of $0.8 million dividend from an affiliated company.

 

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Financing Activities:  Net cash used for financing activities was $26.9 million in 2003.  On March 19, 2003, the Company completed the refinancing of its capital structure through the simultaneous closings of three financing transactions:  the sale of mandatorily redeemable convertible preferred stock for $125.0 million in cash; the issuance of $125.0 million aggregate principal amount of 9-7/8% senior secured notes due 2008, in which the Company received $123.7 million in cash after discount; and the establishment of a $115.0 million senior secured credit facility.  The proceeds from the sale of mandatorily redeemable convertible preferred stock were used to provide for the redemption of $46.9 million of 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 were repaid with proceeds from the issuance of the Company’s 9-7/8% senior secured notes, due 2008, and modest drawings under the new senior secured credit facility.  In total, $179.7 million in borrowings under the existing senior credit facility were repaid in the refinancing.  In addition, the Company paid $14.1 million of issuance costs related to the refinancing in the first quarter of 2003.

 

During 2003, the Company utilized excess cash to repurchase long-term debt and retire capital lease obligations of $37.3 million.  The Company repurchased $10.0 million principal amount of its 9.75% senior subordinated notes, due 2009, through open market purchases and $1.7 million principal amount of its 7% convertible subordinated notes due 2011, meeting an annual sinking fund requirement.  The Company also retired a $25.6 million long-term capital lease obligation.  In addition, the Company repaid $1.9 million of other debt, and received $0.3 million under stock incentive plans during 2003.  Net borrowings under the senior secured credit facility were $4.0 million at December 31, 2003.

 

Net cash used for financing activities was $67.3 million in 2002, as the Company used excess cash to repay a portion of its then existing credit facility, long-term debt and capital lease obligations.

 

Net cash provided by financing activities was $8.6 million in 2001, largely due to net borrowings of $12.5 million.  During 2001, the Company issued an additional $100.0 million of 9.75% senior subordinated notes, due 2009, at a price of 98.5% at face value.  Net proceeds from the issuance were used to redeem $67.5 million aggregate principal amount of the Company’s outstanding convertible subordinated notes, due 2003, and to pay the entire principal amount of $25.0 million of the increasing rate senior subordinated note, due 2003.  In addition, the Company paid $3.5 million of debt issuance costs.

 

Financial Obligations and Commitments:  As of December 31, 2003, current maturities of notes payable and capital lease obligations were $2.1 million.  With the benefit of the Company’s refinancing in March of 2003, the Company’s next significant scheduled debt maturity will not occur until 2008, with annual debt and capital leases maturities of approximately $2.0 million prior to 2008.  Debt obligations maturing in 2004 include $1.9 million of drawings under certain European credit and overdraft facilities and $0.2 million due under certain capital lease obligations.  The European credit and overdraft facilities provided to certain of the Company’s European subsidiaries by lenders outside of the Senior Secured Credit Facility are primarily uncommitted facilities that are terminable at the discretion of the lenders.  The Company had entered into several capital leases for buildings and warehouses with expirations through 2009.  In addition, certain sales and administrative offices, data processing equipment and manufacturing facilities are leased under operating leases.

 

On March 19, 2003, as part of its refinancing, the Company entered into the Senior Secured Credit Facility.  Borrowings under the facility as of December 31, 2003 were $4.0 million.  In addition, letters of credit totaling $22.6 million, of which $11.1 million supported a third-party loan to BHA Aero, were issued under the Senior Secured Credit Facility.  As of December 31, 2003, the borrowing base under the credit facility was $71.8 million, providing the Company with undrawn revolver and overdraft revolver availability of $45.2 million, after deduction of advances, letters of credit outstanding and other adjustments.  Hexcel is able to issue letters of credit up to a sub-limit of $50.0 million, subject to availability, under this credit facility.  Borrowings under the Senior Credit Facility mature on March 31, 2008.

 

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The 7% convertible subordinated debentures, due 2011, require annual mandatory redemptions of $1.8 million through a sinking fund, with the principal balance due at maturity.  The Company satisfied the 2004 annual sinking fund requirement in 2003.  The next sinking fund payment is required prior to August 1, 2005.  The outstanding principal of $125.0 million under the 9.875% senior secured notes and the outstanding $330.0 million principal amount under the 9.75% senior subordinated notes mature on October 1, 2008 and January 15, 2009, respectively.

 

Total letters of credit issued and outstanding were $23.5 million as of December 31, 2003, of which $11.1 million was issued in support of a loan to the Company’s BHA Aero Composite Parts Co., Ltd. joint venture in China.  Approximately $22.6 million of these letters of credit were issued under the Senior Secured Credit Facility, with the remaining $0.9 million issued separately from this credit facility.  While the letters of credit issued on behalf of the Company will expire under their terms in 2004, most, if not all, will be re-issued.

 

As of December 31, 2003, Hexcel was contingently liable to pay Dainippon Ink and Chemicals, Inc (“DIC”) up to $1.5 million with respect to DIC-Hexcel Limited’s (“DHL”) bank debt under certain defined circumstances through January 31, 2004, unless renewed.  DHL, a composites materials joint venture with Dainippon Ink and Chemicals, Inc., located in Japan, produces and sells prepregs, honeycomb and decorative laminates using technology licensed from Hexcel and DIC.  In January 2004, the underlying debt was repaid by DHL, thus eliminating Hexcel’s contingent obligation.

 

On March 19, 2003, Hexcel issued 125,000 shares of a series A convertible preferred stock and 125,000 shares of a series B convertible preferred stock, which are mandatorily redeemable on January 22, 2010 generally for cash or for common stock at the Company’s discretion, unless the holder elects to take a lesser amount in cash, and under certain circumstances must be redeemed for cash.  Commencing on March 19, 2006, 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.

 

The following table summarizes the scheduled maturities of financial obligations and expiration dates of commitments for the years ended 2004 through 2008 and thereafter:

 

(In millions)		2004			2005			2006			2007			2008			Thereafter			Total
Senior Secured Credit Facility		$	—		$	—		$	—		$	—		$	4.0		$	—		$	4.0
European credit and overdraft facilities		1.9			—			—			—			—			—			1.9
9.875% senior secured notes (a)		—			—			—			—			125.0						125.0
9.75% senior subordinated notes (b)		—			—			—			—			—			330.0			330.0
7.0% convertible subordinated debentures		—			1.8			1.8			1.8			1.8			13.8			21.0
Capital leases		0.2			0.3			0.3			0.3			0.4			2.6			4.1
Subtotal		2.1			2.1			2.1			2.1			131.2			346.4			486.0
Operating leases		4.7			4.2			3.5			2.3			1.8			9.3			25.8
Total financial obligations		$	6.8		$	6.3		$	5.6		$	4.4		$	133.0		$	355.7		$	511.8
Letters of credit		$	23.5		$	—		$	—		$	—		$	—		$	—		$	23.5
Benefit plan contributions		5.9			—			—			—			—			—			5.9
Other commitments		1.5			—			—			—			—			—			1.5
Total commitments		$	30.9		$	—		$	—		$	—		$	—		$	—		$	30.9

 

(a)          At December 31, 2003, the unamortized discount on the $125.0 million of 9.875% senior secured notes issued March 19, 2003 was $1.1 million.

(b)         At December 31, 2003, the unamortized discount on the additional $100.0 million of 9.75% senior subordinated notes, issued June 29, 2001, was $1.0 million.  In addition, the notes were reduced by the fair value basis adjustment of $0.5 million attributable to certain interest rate swap agreements.

 

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In May 2004, the loan to the Company’s BHA Aero joint venture in China supported by the $11.1 million letter of credit is due.  BHA Aero and its shareholders are currently exploring how it may be refinanced.  Such refinancing may require additional cash equity contributions and/or guarantees to be provided by BHA Aero’s shareholders.   The Company does not anticipate that the value of such commitments will significantly exceed the value of the letter of credit they will replace.

 

The Company’s ability to make scheduled payments of principal, or to pay interest on, or to refinance its indebtedness, including its public notes, or to fund planned capital expenditures, will depend on its future performance and conditions in the financial markets.  The Company’s future performance is subject to economic, financial, competitive, legislative, regulatory and other factors that are beyond its control.  The Company has significant leverage and there can be no assurance that the Company will generate sufficient cash flow from its operations, or that sufficient future borrowings will be available under its Senior Secured Credit Facility, to enable the Company to service its indebtedness, including its public notes, or to fund its other liquidity needs.  The Company may from time to time seek to retire its outstanding public debt through open market purchases, privately negotiated transactions or otherwise.  Whether the Company makes any such repurchases, and the terms of any such repurchases, will depend on prevailing market conditions, the Company’s liquidity position, contractual restrictions and other factors.

 

For further information regarding the Company’s financial obligations and commitments, see Notes 2, 8, 9, 10 and 17 to the accompanying consolidated financial statements of this Annual Report on Form 10-K.

 

Critical Accounting Policies

 

Hexcel’s discussion and analysis of its financial condition and results of operations are based upon Hexcel’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of the consolidated financial statements requires Hexcel to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of revenue and expenses.  Although Hexcel evaluates its estimates, which are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, on an on-going basis, actual results may differ from these estimates under different assumptions or conditions.  Hexcel believes the following items are the Company’s critical accounting policies and more significant estimates and assumptions used in the preparation of its consolidated financial statements.

 

Hexcel estimates the collectibility of its accounts receivable from customers by establishing allowances for doubtful accounts. A considerable amount of judgment is necessary to assess the realizability of these receivables and the credit-worthiness of each customer.  If the financial condition of Hexcel’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

 

Hexcel states inventories at the lower of cost or market.  This requires Hexcel to write-down its inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value to reflect assumptions about future demand and market conditions.  If actual future demand and market conditions are less favorable than anticipated, additional inventory write-downs may be required.

 

Hexcel provides for an estimated amount of product warranty at the time revenue is recognized.  This estimated amount is provided by product and based on actual warranty experience.  While Hexcel engages in extensive product quality programs and processes, including actively monitoring and evaluating the quality of its component and material suppliers, Hexcel’s product warranty obligations are affected by product failure rates and material

 

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usage.  Should actual product failure rates and material usage differ from the Company’s estimates, revisions to the estimated product warranty costs would be required.

 

Hexcel had recorded significant reserves in connection with its business consolidation and restructuring programs initiated prior to its adoption of Financial Accounting Standards No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” (“FAS 146”) as of January 1, 2003.  These reserves included estimates for employee severance costs, the settlement of contractual obligations, the fair value of certain assets held for sale and the timing of facility closures.  Management closely monitors these actions and the related costs, and believes such estimates to be reasonable.  However, if actual results differ from these estimates, it would have an impact on Hexcel’s financial performance in the period such revision was made.  In addition, certain of the expenses associated with the Company’s previously initiated business consolidation and restructuring programs, including equipment moving and relocation costs, are expensed as incurred.  As the provisions of FAS 146 are effective for exit or disposal activities that are initiated after December 31, 2002, the Company will recognize and measure, initially at fair value, a liability for costs associated with future business consolidation and restructuring programs as the liability is incurred.

 

Hexcel has recorded goodwill as a result of prior business acquisitions.  Goodwill recorded represents the excess of purchase price over the fair value of the identifiable net assets of an acquired business.  Effective January 1, 2002, Hexcel 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.  A reporting unit is the lowest level of an entity that is a business and can be distinguished from other activities, operations, and assets of the entity.  If, during the annual impairment review, the book value of the reporting unit exceeds the fair value, the implied fair value of the reporting unit’s goodwill is compared with the carrying amount of the unit’s goodwill.  If the carrying amount exceeds the implied fair value, goodwill is written down to its implied value.  FAS 142 requires management to estimate the fair value of each reporting unit, as well as the fair value of the assets and liabilities of each reporting unit, other than goodwill.  The implied fair value of goodwill is determined as the difference between the fair value of a reporting unit, taken as a whole, and the fair value of the assets and liabilities of such reporting unit.  No impact to the Company’s consolidated financial statements was identified upon completion of the transitional impairment test required by FAS 142.  The Company’s annual impairment testing date is during the fourth quarter of each year.  In 2001, the Company recognized an impairment charge of $309.1 on goodwill and other purchased intangibles acquired through previous acquisitions (see Note 6 to the accompanying consolidated financial statements of this Annual Report on Form 10-K).

 

 Hexcel has significant other long lived assets.  Hexcel reviews these assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  The assessment of possible impairment is based on the Company’s ability to recover the carrying value of the assets from the estimated undiscounted future net cash flows, before interest and taxes, of the related operations.  If these cash flows are less than the carrying value of such assets, an impairment loss is recognized for the difference between estimated fair value and carrying value.  The measurement of impairment requires estimates of these cash flows and fair value.  The calculation of fair value may be determined based either on discounted cash flows or third party appraised values depending on the nature of the asset.

 

Hexcel records a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized.  While Hexcel has considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, these factors are highly subjective and are subject to change based upon market conditions, the Company’s ability to execute its restructuring programs and other factors.  Hexcel recorded a valuation allowance against nearly all of its U.S. deferred tax assets in 2001, and against all of its Belgian deferred tax assets in 2003.

 

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In the event Hexcel were to determine that it would be able to realize its deferred tax assets in the future, an adjustment to the valuation allowance on deferred tax assets would increase income in the period such determination was made.  Likewise, should Hexcel determine that it would not be able to realize all or part of its remaining net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income in the period such determination was made.

 

Hexcel holds equity interests in affiliated companies having operations or technology in areas within its strategic focus.  Hexcel records an investment impairment charge when it believes an investment has experienced a decline in value that is other than temporary.  This judgmental decision reflects many factors.  Future adverse changes in market conditions or poor operating results of underlying investments could result in further losses or an inability to recover the carrying value of the investments, thereby possibly requiring an impairment charge in the future.   The Company recorded investment impairment charges of $4.0 million in 2002 and $7.8 million in 2001, relating to its investments in Asahi-Schwebel Co. Ltd. and Interglas Technologies AG, respectively.

 

Hexcel has designated certain derivative financial instruments as foreign exchange hedges of future sales transactions at certain foreign subsidiaries.  Unrealized gains and losses on these foreign exchange contracts have not been recognized in the Company’s consolidated statements of operations based on management’s determination that the forecasted sales are probable of occurring and that the hedges have been effective in mitigating the foreign exchange risks associated with these future sales.  The hedging contracts cover only a portion of the forecasted sales, and therefore, management considers the likelihood of not reaching the designated level of forecasted sales to be low.  However, if the designated levels of forecasted sales are not achieved in the timeframe that management anticipates, Hexcel would need to report the unrealized gains and losses on these derivative instruments in income.

 

Hexcel is involved in litigation, investigations and claims arising out of the normal conduct of its business, including those relating to commercial transactions, environmental, health and safety matters.  The Company estimates and accrues its liabilities resulting from such matters based on a variety of factors, including the stage of the proceeding; potential settlement value; assessments by internal and external counsel; and assessments by environmental engineers and consultants of potential environmental liabilities and remediation costs.  The Company believes it has adequately accrued for these potential liabilities; however, facts and circumstances may change that could cause the actual liability to exceed the estimates, or that may require adjustments to the recorded liability balances in the future.

 

Market Risks

 

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

 

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

 

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Interest Rate Risks

 

Hexcel’s long-term debt bears interest at both fixed and variable rates.  In addition, and because of the relatively high percentage of debt that is at a fixed rate, the Company has entered into interest rate swap agreements.  These interest rate swap agreements have increased the percentage of total debt that is exposed to changes in market interest rates.  Assuming a 10% favorable and a 10% unfavorable change in the underlying weighted average interest rates of the Company’s variable rate debt and swap agreements, interest expense for 2003 of $53.6 million would have been $52.9 million and $54.3 million, respectively.

 

Interest Rate Swap Agreements

 

In the fourth quarter of 2003, the Company entered into interest rate swap agreements for an aggregate notional amount of $100.0 million.  The interest rate swap agreements effectively convert the fixed interest rate of 9.75% on $100.0 million of the Company’s senior subordinated notes, due 2009, into variable interest rates.  The variable interest rates payable by the Company in connection with the swap agreements range from LIBOR + 6.12% to LIBOR + 6.16%, and are reset semiannually on January 15 and July 15 of each year the swap agreements are in effect.  Interest payment dates under the swap agreements of January 15 and July 15 match the interest payment dates set by the senior subordinated notes.  The interest rate swap agreements mature on January 15, 2009, the maturity date of the senior subordinated notes.  The swap agreements are cancelable at the option of the fixed rate payer under terms that mirror the call provisions of the senior subordinated notes due 2009.  The aggregate fair value and carrying amount of these swap agreements, as of December 31, 2003, was a $0.5 million reduction in notes payable.  For the year ended December 31, 2003, hedge ineffectiveness was immaterial, and a net gain of $0.5 million was recognized as a reduction in “interest expense.”

 

Cross-Currency Interest Rate Swap Agreement

 

In 2003, the Company entered into a 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 expiring December 1, 2007.  The Company entered into this agreement to effectively hedge interest and principal payments relating to an intercompany loan denominated in Euros.  The fair value and carrying amount of this swap agreement as of December 31, 2003 was a $2.5 million liability.  During 2003, hedge ineffectiveness was immaterial.  A net loss of $0.5 million for the year ended December 31, 2003, was recognized as a component of “comprehensive income (loss)”.  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.

 

Interest Rate Cap Agreement

 

In 1998, the Company entered into a five-year interest rate cap agreement that provided a maximum fixed rate of 5.5% on the applicable London interbank rate used to determine the interest on a notional amount of $50.0 million of variable rate debt under the former Senior Credit Facility.  The interest rate cap agreement expired on October 29, 2002.  The hedge ineffectiveness for the period ended October 29, 2002 and the year ended December 31, 2001, were not material.

 

Foreign Currency Exchange Risks

 

Hexcel has significant business activities in Europe.  The Company operates seven manufacturing facilities in Europe, which generated approximately 45% of its 2003 consolidated net sales.  The Company’s European business activities primarily involve three major currencies – the U.S. dollar, the British pound, and the Euro.  The Company also conducts business or has joint venture investments in Japan, China, Malaysia, and Australia, and sells products to customers throughout the world.  A significant portion of the Company’s transactions with customers and joint venture affiliates outside of Europe are denominated in U.S. dollars, thereby limiting the Company’s exposure to short-term currency fluctuations involving these countries.  However, the value of the Company’s investments in these countries could be impacted by changes in currency exchange rates over time, as could the Company’s ability to profitably compete in international markets.

 

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Hexcel attempts to net individual currency positions at its various European operations, to take advantage of natural offsets and reduce the need to employ foreign currency forward exchange contracts.  The Company also enters into short-term foreign currency forward exchange contracts, usually with a term of ninety days or less, to hedge net currency exposures resulting from specifically identified transactions.  Consistent with the nature of the economic hedge provided by such contracts, any unrealized gain or loss would be offset by corresponding decreases or increases, respectively, of the underlying transaction being hedged.

 

Hexcel has performed a sensitivity analysis as of December 31, 2003 using a modeling technique that measures the changes in the fair values arising from a hypothetical 10% adverse movement in the levels of foreign currency exchange rates relative to the U.S. dollar with all other variables held constant.  The analysis covers all of the Company’s foreign currency contracts offset by the underlying exposures.  The foreign currency exchange rates used were based on market rates as of December 31, 2003.  The sensitivity analysis indicated that a hypothetical 10% adverse movement in foreign currency exchange rates would result in a loss in fair values of $3.2 million.

 

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, in 2001, Hexcel entered into a number of foreign currency forward exchange contracts to exchange U.S. dollars for Euros at fixed rates on specified dates through March 2005.  During the fourth quarter of 2003, Hexcel entered into similar contracts to also exchange U.S. dollars for Euros through March 2005.  The aggregate notional amount of these contracts was $62.9 million and $58.0 million at December 31, 2003 and 2002, respectively.  The purpose of these contracts is to hedge a portion of the forecasted transactions of European subsidiaries under long-term sales contracts with certain customers.  These contracts are expected to provide the Company with a more balanced matching of future cash receipts and expenditures by currency, thereby reducing the Company’s exposure to fluctuations in currency exchange rates.  For the three years ended December 31, 2003, hedge ineffectiveness was immaterial.  The change in fair value of the foreign currency cash flow hedges recognized in “comprehensive income (loss)” was a net gain of $3.0 million and $9.3 million in 2003 and 2002, respectively, and a net loss of $5.9 million in 2001.  Approximately $5.8 million of the amount recorded in “accumulated other comprehensive income” is expected to be reclassified into earnings in fiscal 2004 as the hedged sales are recorded.

 

Utility Price Risks

 

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

 

Other Risks

 

As of December 31, 2003, the aggregate fair values of the Company’s senior secured notes, due 2008; senior subordinated notes, due 2009; and the convertible subordinated debentures, due 2011, were approximately $140.9 million, $345.7 million and $17.5 million, respectively.  The convertible subordinated debentures are convertible into Hexcel common stock at a price of $30.72 per share.  Fair values were estimated on the basis of quoted market prices, although trading in these debt securities is limited and may not reflect fair value.  The fair values are subject to fluctuations based on the Company’s performance, its credit rating, and changes in interest rates for debt securities with similar terms.  Due to the conversion feature in the convertible subordinated debentures, changes in the value of the Company’s stock may affect the fair value of these convertible securities.

 

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Assuming that all other factors remain constant, the fair values of Hexcel’s convertible subordinated debentures, due 2011, would not be significantly impacted by a 10% change, either favorable or unfavorable, in the market price of the Company’s common stock.

 

Although fair value may be a proxy for the cost to repay the Company’s indebtedness, the trust indentures for the Company’s senior secured notes, due 2008; senior subordinated notes, due 2009; and convertible subordinated debentures, due 2011 require that the Company to repay the principal value of the indebtedness at maturity.

 

Recently Issued Accounting Standards

 

In January 2003, the FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”).  The FASB later revised FIN 46 in December 2003, providing multiple effective dates based on the nature as well as the creation date of the variable interest entities (“VIEs”).  FIN 46 explains how to identify VIEs and how an enterprise assesses its interests in a VIE to decide whether to consolidate that entity.  Accordingly, FIN 46 requires an existing unconsolidated VIE to be consolidated by their “primary beneficiaries” with further disclosure.  An enterprise that holds a significant interest in a VIE but is not the primary beneficiary is still required to include the following additional disclosures:  (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 investments in affiliated companies and believes that certain of these affiliated companies would be considered VIEs.  However, management believes that the Company is not the primary beneficiary of such entities; and therefore, is not required to consolidate such entities into its accounts.  As such the Company has continued to use the equity method of accounting for these entities.  The Company has made additional disclosures required of an enterprise that holds a significant interest in a VIE but is not the primary beneficiary (see Note 7 to the accompanying consolidated financial statements of this Annual Report on Form 10-K).

 

In April 2003, the FASB issued Statement of Financial Accounting Standards No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” (“FAS 149”).  FAS 149 amends and clarifies the accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under FAS 133.  FAS 149 was effective for contracts entered into or modified after June 30, 2003, and should be applied prospectively.  The Company adopted the provisions of FAS 149 during the third quarter of 2003 with no impact to its consolidated financial position or results of operations.

 

In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity” (“FAS 150”).  FAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity in its statement of financial position.  It requires that an issuer classify a financial instrument that is within its scope as a liability, because the financial instrument embodies an obligation of the issuer.  In addition, FAS 150 requires that dividends or other amounts attributable to those certain financial instruments be reflected as interest expense in a company’s statement of operations.  FAS 150 became effective during the third quarter of 2003.  At the effective date, the Company determined that the requirements of FAS 150 do not apply to the Company’s outstanding mandatorily redeemable convertible preferred stock.  FAS 150, as issued, created an exclusion for mandatorily redeemable convertible preferred stock which is convertible into shares of common stock at the option of the holder at any time at a conversion price that is “not so far out of the money at the option’s inception that the likelihood of conversion would be remote.”  Since, at the issuance date, the holders’ conversion price of $3.00 per share approximated the price of the Company’s common stock of $2.93 per share, the Company’s mandatorily redeemable convertible preferred stock issuance met the requirements for such exclusion from FAS 150.  As a result, upon adoption, the Company did not reclassify its mandatorily redeemable convertible preferred stock to a liability, nor was

 

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it required to treat its deemed preferred dividends and accretion as interest expense.  The accounting for the mandatorily redeemable preferred stock will remain the same as presented in prior periods.

 

In December 2003, the FASB revised Statement of Financial Accounting Standards No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits”  (“FAS 132”).  While the revised FAS 132 retains the disclosures required by the previous statement, additional disclosures have been added in response to concerns expressed by users of financial statements.  Those additional disclosures include information describing the types of plan assets, investment strategy, measurement date(s), plan obligations, cash flows and components of net periodic benefit cost recognized during interim periods.  Certain of these additional disclosures for U.S. plans are required in a company’s financial statements effective December 15, 2003, while other disclosures and the disclosures for foreign plans are required in a company’s financial statements effective June 15, 2004.   The Company has made the additional disclosures required for its U.S. plans (see Note 12 to the accompanying consolidated financial statements of this Annual Report on Form 10-K).

 

Forward-Looking Statements and Risk Factors

 

This Annual Report on Form 10-K includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  These statements relate to analyses and other information that are based on forecasts of future results and estimates of amounts not yet determinable.  These statements also relate to future prospects, developments and business strategies.  These forward-looking statements are identified by their use of terms and phrases such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “should,” “will,” and similar terms and phrases, including references to assumptions.  Such statements are based on current expectations, are inherently uncertain, and are subject to changing assumptions.

 

Such forward-looking statements include, but are not limited to: (a) estimates of commercial aerospace production and delivery rates, including those of Airbus and Boeing; (b) expectations regarding the growth in the production of military aircraft, helicopters and launch vehicle programs in 2004 and beyond; (c) expectations regarding future business trends in the electronics fabrics industry; (d) expectations regarding the demand for soft body armor made of aramid and specialty fabrics; (e) expectations regarding growth in sales of composite materials for wind energy, automotive and other industrial applications; (f) estimates of changes in net sales by market compared to 2003; (g) expectations regarding the Company’s equity in the earnings (losses) of joint ventures, as well as joint venture investments and loan guarantees; (h) expectations regarding working capital trends and capital expenditures; (i) the availability and sufficiency of the Senior Secured Credit Facility and other financial resources to fund the Company’s worldwide operations in 2004 and beyond; and (j) the impact of various market risks, including fluctuations in the interest rates underlying the Company’s variable-rate debt, fluctuations in currency exchange rates, fluctuations in commodity prices, and fluctuations in the market price of the Company’s common stock.

 

Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results to be materially different.  Such factors include, but are not limited to, the following: changes in general economic and business conditions; changes in current pricing and cost levels; changes in political, social and economic conditions and local regulations, particularly in Asia and Europe; foreign currency fluctuations; changes in aerospace delivery rates; reductions in sales to any significant customers, particularly Airbus or Boeing; changes in sales mix; changes in government defense procurement budgets; changes in military aerospace programs technology; industry capacity; competition; disruptions of established supply channels; manufacturing capacity constraints; and the availability, terms and deployment of capital.

 

If one or more of these risks or uncertainties materialize, or if underlying assumptions prove incorrect, actual results may vary materially from those expected, estimated or projected.  In addition to other factors that affect Hexcel’s operating results and financial position, neither past financial performance nor the Company’s expectations should be considered reliable indicators of future

 

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performance.  Investors should not use historical trends to anticipate results or trends in future periods.  Further, the Company’s stock price is subject to volatility.  Any of the factors discussed above could have an adverse impact on the Company’s stock price.  In addition, failure of sales or income in any quarter to meet the investment community’s expectations, as well as broader market trends, can have an adverse impact on the Company’s stock price.  The Company does not undertake an obligation to update its forward-looking statements or risk factors to reflect future events or circumstances.

 

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