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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

FORM 10–K

 

x

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

 

 

 

 

 

For the Fiscal Year Ended December 31, 2008

 

 

 

 

 

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)

 

Delaware

 

94-1109521

(State of Incorporation)

 

(I.R.S. Employer Identification No.)

 

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:

 

Title of each class

 

Name of each exchange on which registered

COMMON STOCK

 

NEW YORK STOCK EXCHANGE

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

 

Yes

 

x

 

No

 

o

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

 

Yes

 

o

 

No

 

x

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes

 

x

 

No

 

o

 

Indicate by check mark 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. o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer    x

 

Accelerated filer    o

 

Non-accelerated filer    o

 

Smaller reporting company    o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

 

Yes

 

o

 

No

 

x

 

The aggregate market value of the registrant’s common stock held by non-affiliates was $1,843,605,210 based on the reported last sale price of common stock on June 30, 2008, which is the last business day of the registrant’s 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.

 

Class

 

Outstanding as of February 10, 2009

COMMON STOCK

 

96,510,805

 

Documents Incorporated by Reference:

 

Proxy Statement for Annual Meeting of Stockholders (to the extent specified herein) — Part III.

 

 

 



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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”, “we”, “us”, or “our”), is a leading advanced composites company.  We develop, manufacture, and market lightweight, high-performance composites, including carbon fibers, reinforcements, prepregs, honeycomb, matrix systems, adhesives and composite structures, for use in commercial aerospace, space and defense and industrial applications. Our products are used in a wide variety of end applications, such as commercial and military aircraft, space launch vehicles and satellites, wind turbine blades, automotive, bikes, skis and a wide variety of other industrial applications.

 

We serve international markets through manufacturing facilities, sales offices and representatives located in the Americas, Asia Pacific and Europe.  We are also an investor in a joint venture in Malaysia, which manufactures composite structures for commercial aerospace. In July 2008 we completed the sale of our 40.48% interest in BHA Aero Composite Parts Co., Ltd. (“BHA”) to the Boeing Company.  BHA was located in Tianjin, China, and specializes in producing composite secondary structures and interior parts for aerospace applications.

 

Narrative Description of Business and Segments

 

We are a manufacturer of products within a single industry: Advanced Composites.  In 2007, we successfully concluded the reorganization of our former segments, Composites, Structures and Reinforcements in order to take full advantage of the many growing applications for advanced composite materials.  We narrowed our focus and consolidated our activities through divestitures of our European Architectural business and U.S. electronics, ballistics and general industrial product lines, while retaining and combining our Reinforcements’ activities related to advanced composites with the rest of the business.  The divested businesses are reported as discontinued operations within this annual report on Form 10-K.  Unless otherwise indicated, all information within this annual report on Form 10-K reflects the continuing operations of Hexcel.

 

Hexcel now reports two segments, Composite Materials and Engineered Products. The Composite Materials segment is comprised of our carbon fiber, reinforcements for composites, honeycomb core and matrix product lines.   The Engineered Products segment is comprised of lightweight high strength composite structures and specially machined honeycomb product lines.  All prior financial statement periods have been revised to reflect the current segment structure.

 

The following summaries describe the ongoing activities related to the Composite Materials and Engineered Products segments as of December 31, 2008.

 

Composite Materials

 

The Composite Materials segment manufactures and markets carbon fibers, fabrics and specialty reinforcements, prepregs, structural adhesives, honeycomb, composite panels, molding compounds, polyurethane systems and laminates that are incorporated into many applications, including military and commercial aircraft, wind turbine blades, recreational products and other industrial applications.

 

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The following table identifies the principal products and examples of the primary end-uses from the Composite Materials segment:

 

SEGMENT

 

PRODUCTS

 

PRIMARY END-USES

COMPOSITE MATERIALS

 

Carbon Fibers

 

·             Raw materials for prepregs

·             Filament winding for various space, defense and industrial applications

 

 

 

 

 

 

 

Industrial Fabrics and Specialty Reinforcements

 

·             Raw materials for prepregs and honeycomb

·             Composites and components used in aerospace, defense, wind energy, automotive, marine, recreation and other industrial applications

 

 

 

 

 

 

 

Prepregs and Other Fiber-Reinforced Matrix Materials

 

·             Composite structures

·             Commercial and military aircraft components

·             Satellites and launchers

·             Aeroengines

·             Wind turbine and helicopter blades

·             Yachts, trains and performance cars

·             Skis, snowboards, hockey sticks, and bicycles

 

 

 

 

 

 

 

Structural Adhesives

 

·             Bonding of metals, honeycomb and composite materials

 

 

 

 

 

 

 

Honeycomb

 

·             Composite structures and interiors

·             Impact and shock absorption systems

·             Helicopter blades

 

Carbon Fibers:  HexTow® carbon fibers are manufactured for sale to third-party customers as well as for our own use 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 finished composite components.  Key product applications include structural components for commercial and military aircraft, space launch vehicles, and certain other applications such as recreational and industrial equipment.

 

Industrial Fabrics and Specialty Reinforcements:  Industrial fabrics and specialty reinforcements are made from a variety of fibers, including carbon, aramid and other high strength polymers, several types of fiberglass, quartz, ceramic and other specialty fibers.  These reinforcements are used in the production of prepregs and other matrix materials used in primary and secondary structural aerospace applications such as wing components, horizontal and vertical stabilizer components, fairings, radomes and engine nacelles as well as overhead storage bins and other interior components.  Our reinforcements are also used in the manufacture of a variety of industrial and recreational products such as wind energy blades, automotive components, boats, surfboards, skis and other sporting goods equipment.

 

Prepregs:  HexPly® prepregs are manufactured for sale to third-party customers and for internal use by our Engineered Products segment 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.  Reinforcement fabrics used in the manufacture of prepregs include glass, carbon, aramid, quartz, ceramic

 

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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 new form of quasi-isotropic carbon fiber prepreg that enables small to medium sized composite components to be mass produced.  HexTOOL® is a specialized form of HexMC® for use in the cost-effective construction of high temperature composite tooling.  HexFIT® film infusion material is a product that combines resin films and dry fiber reinforcements to save lay-up time in production and enables the manufacture of large contoured composite structures, such as wind turbine blades.

 

Resins:  Polymer matrix materials are sold in bulk and film form for use in direct process manufacturing of composite parts.  Resins can be combined with fiber reinforcements in manufacturing processes such as resin transfer molding (RTM), resin film infusion (RFI) or vacuum assisted resin transfer molding (VARTM) to produce high quality composite components for both aerospace and industrial applications.

 

Structural Adhesives:  We manufacture and market a comprehensive range of Reduxâ film and paste adhesives.  These structural adhesives, which bond metal to metal and composites and honeycomb structures, are used in the aerospace industry and for many industrial applications.

 

Honeycomb:  HexWeb® honeycomb is a 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 acts as 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.

 

We produce 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 materials used in the manufacture of honeycomb include fiberglass, carbon fiber, thermoplastics, non-flammable aramid papers, aramid fiber and other specialty materials.

 

We sell 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.  Aerospace is the largest market for honeycomb products.  We also sell honeycomb for non-aerospace applications including automotive parts, sporting goods, building panels, high-speed trains and mass transit vehicles, energy absorption products, marine vessel compartments, and other industrial uses.  In addition, we produce honeycomb for our Engineered Products segment for use in manufacturing finished parts for airframe Original Equipment Manufacturers (“OEMs”).

 

The following table identifies the key customers and the major manufacturing facilities of the Composite Materials segment:

 

COMPOSITE MATERIALS

 

KEY CUSTOMERS

 

MAJOR
MANUFACTURING FACILITIES

 

Aernnova

 

Finmecanica

 

Casa Grande, Arizona

 

Alliant Techsystems

 

Gamesa

 

Decatur, Alabama

 

BAE Systems

 

GKN

 

Dagneux, France

 

The Boeing Company

 

Goodrich

 

Duxford, England

 

Bombardier

 

Lockheed Martin

 

Neumarkt, Austria

 

CFAN

 

Northrop Grumman

 

Les Avenieres, France

 

CTRM Aero Composites

 

Safran

 

Parla, Spain

 

Cytec Engineered Materials

 

Spirit Aerosystems

 

Salt Lake City, Utah

 

Daher

 

Textron

 

Seguin, Texas

 

EADS (including Airbus and Eurocopter)

 

Trek

 

Stade, Germany

 

Embraer-Empresa

 

United Technologies

 

Illescas, Spain

 

FACC

 

Vestas

 

Tianjin, China

 

 

Net sales for the Composite Materials segment to third-party customers were $1,075.3 million in 2008,

 

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$941.9 million in 2007 and $858.2 million in 2006, which represented approximately 81%, 80%, and 82%, of our net sales, respectively.  Net sales for composite materials are highly dependent upon the number of large commercial aircraft produced 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 4% of our total production of composite materials in 2008 was used internally by the Engineered Products segment.

 

Engineered Products

 

The Engineered Products segment manufactures and markets composite structures and precision machined honeycomb parts for use in the aerospace industry. Composite structures are manufactured from a variety of composite and other materials, including prepregs, honeycomb, structural adhesives and advanced molding materials, using such manufacturing processes as autoclave processing, multi-axis numerically controlled machining, heat forming, compression molding and other composite manufacturing techniques. Composite structures and machined honeycomb include such items as aerodynamic fairings, wing panels, rotor blades, and other specific aircraft components.

 

The following table identifies the principal products and examples of the primary end-uses from the Engineered Products segment:

 

SEGMENT

 

PRODUCTS

 

PRIMARY END-USES

 

ENGINEERED PRODUCTS

 

Composite Structures

 

·                  Aircraft structures and finished aircraft components, including wing to body fairings, wing panels, flight deck panels, door liners, helicopter blades, spars and tip caps

 

 

 

 

 

 

 

 

 

Machined Honeycomb

 

·                  Aircraft structural sub-components and semi-finished components used in helicopter blades, engine nacelles, and aircraft surfaces (flaps, wings, elevators and fairings)

 

 

Net sales for the Engineered Products segment to third-party customers were $249.6 million in 2008, $229.2 million in 2007, and $191.3 million in 2006, which represented approximately 19%, 20%, and 18%, of our net sales, respectively.

 

The Engineered Products business unit has a one-third ownership interest in a Malaysian joint venture, Asian Composites Manufacturing Sdn. Bhd. (“ACM”).  Under the terms of the joint venture agreement, Hexcel and Boeing have transferred the manufacture of certain semi-finished composite components to this joint venture.  Hexcel purchases the semi-finished composite components from the joint venture, inspects and performs additional skilled assembly work before delivering them to Boeing.  The joint venture also manufactures composite components for other aircraft component manufacturers.  ACM had revenue of $27.9 million and $30.2 million in 2008 and 2007, respectively.  For additional information on the Joint Venture investment see Note 5, Investments in Affiliated Companies.

 

The following table identifies the key customers and the major manufacturing facilities of the Engineered Products segment:

 

ENGINEERED PRODUCTS

 

KEY CUSTOMERS

 

MAJOR
MANUFACTURING FACILITIES

 

The Boeing Company

 

Kent, Washington

 

United Technologies

 

Pottsville, Pennsylvania

 

Spirit

 

Burlington, Washington

 

Bombardier

 

Welkenraedt, Belgium

 

Hawker / Beechcraft

 

Alor Setar, Malaysia (JV)

 

GKN

 

 

 

 

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Divested Businesses

 

In July of 2006, we announced our intention to explore strategic alternatives for portions of our previously reported Reinforcements segment.  In order to take full advantage of the many growing applications for advanced composite materials, we decided to narrow our focus and consolidate our activities around our carbon fiber, reinforcements for composites, honeycomb, matrix and engineered products product lines.  In doing so, we decided to combine our Reinforcements activities related to advanced composites with our previously reported Composites and Structures segments into a single organization, and explore the sale of our European Architectural business, our EBGI product lines and our interest in the TechFab joint venture, previously reported within the Reinforcements segment.

 

In December 2006, we completed the sale of our interest in TechFab LLC (“TechFab”) to our joint venture partner for $22.0 million in cash.  TechFab is headquartered in Anderson, SC and manufactures non-woven reinforcement materials used in the manufacture of construction and roofing materials, sail cloth and other specialty applications.  As a result of the sale, we recognized an after-tax gain of $9.6 million in the fourth quarter of 2006.  The TechFab joint venture was part of our previously reported Reinforcements segment.

 

In February 2007, we completed the sale of our European Architectural business.  Cash proceeds from the sale were $25.0 million.  As a result of the sale, we recognized an after-tax gain of $6.5 million.

 

In August 2007, we completed the sale of the EBGI portion of our reinforcements business.  Cash proceeds from the sale, net of transaction costs, were $58.5 million, resulting in a net after-tax loss of $3.4 million.  The sale included up to $12.5 million of additional payments contingent upon future sales of the Ballistics product line. The additional payments are capped with a maximum of $5.0 million in any individual year.  In 2008 the Company received $0.3 million. Additional payments, if any, will be recorded as income when earned.

 

With the completion of the EBGI sale, we received total cash proceeds from the above sales, before any earnout payments, of $106.0 million and recorded a net after-tax gain of $12.7 million.

 

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 20 “Discontinued Operations” and Note 5 “Investments in Affiliated Companies” to the accompanying consolidated financial statements of this Annual Report on Form 10-K for further information related to the status of our strategic review, results from discontinued operations and information related to our joint ventures.

 

Financial Information About Segments and Geographic Areas

 

Financial information and further discussion of our segments and geographic areas, including external sales and long-lived assets, are contained under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in Note 18 to the accompanying consolidated financial statements of this Annual Report on Form 10-K.

 

Significant Customers

 

Approximately 23%, 25%, and 24% of our 2008, 2007, and 2006 net sales, respectively, were to The Boeing Company (“Boeing”) and related subcontractors.  Of the 23.3% of sales to Boeing and its subcontractors in 2008, 18.3% related to commercial aerospace market applications and 5.0% related to space and defense market applications.  Approximately 24%, 22%, and 26% of our 2008, 2007, and 2006 net sales, respectively, were to European Aeronautic Defence and Space Company (“EADS”), including its business division Airbus Industrie (“Airbus”), and its subcontractors.  Of the 24.0% of sales to EADS and its subcontractors in 2008, 20.3% related to commercial aerospace market applications 3.7% related to space and defense market applications.

 

In 2008, Vestas Wind Systems A/S accounted for nearly 11% of the Company’s total net sales.  Prior to 2008, their sales were less than 10% of total net sales.  All of these sales are included in the Composite Materials segment and are in the Industrial market.

 

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Markets

 

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

 

 

 

2008

 

2007

 

2006

 

Net Sales by Market

 

 

 

 

 

 

 

Commercial aerospace

 

54

%

53

%

52

%

Industrial

 

23

 

25

 

27

 

Space and defense

 

23

 

22

 

21

 

Total

 

100

%

100

%

100

%

Net Sales by Geography (a)

 

 

 

 

 

 

 

United States

 

48

%

47

%

45

%

Europe

 

52

 

53

 

55

 

Total

 

100

%

100

%

100

%

 


(a)          Net sales by geography based on the location in which the sale was manufactured.

 

 

 

2008

 

2007

 

2006

 

Net Sales to External Customers (b)

 

 

 

 

 

 

 

United States

 

36

%

40

%

36

%

Europe

 

51

 

48

 

51

 

All Others

 

13

 

12

 

13

 

Total

 

100

%

100

%

100

%

 


(b)          Net sales to external customers based on the location to which the sale was delivered.

 

Commercial Aerospace

 

The commercial aerospace industry is our largest user of advanced composites.  The economic benefits airlines can obtain from weight savings in both fuel economy and aircraft range, combined with the design enhancement that comes from the advantages of advanced composites over traditional materials, have caused the industry to be the leader in the use of these materials.  While military aircraft and spacecraft have championed the development of these materials, commercial aerospace has had the greater consumption requirements and has commercialized the use of these products.  Accordingly, the demand for advanced structural material products is closely correlated to the demand for commercial aircraft.

 

The use of advanced composites in commercial aerospace is primarily in the manufacture of new commercial aircraft.  The aftermarket for these products is very small as many of these materials are designed to last for the life of the aircraft.  The demand for new commercial aircraft is driven by two principal factors, the first of which is airline passenger traffic (the number of revenue passenger miles flown by the airlines) which affects the required size of airline fleets.  According to the International Civil Aviation Organization, passenger traffic has grown at an annual compound rate of 5.5% from 1985 to 2006 and has seen year on year growth of 1.8% (estimate), 5.9% and 8.0% during 2008, 2007 and 2006, respectively.  Growth in passenger traffic requires growth in the size of the fleet of commercial aircraft operated by airlines worldwide.

 

The second factor, which is less sensitive to the general economy, is the replacement rates for existing aircraft.  The rates of retirement of passenger and freight aircraft, resulting mainly from obsolescence, are determined in part by the regulatory requirements established by various civil aviation authorities worldwide 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) and by reducing maintenance expense.  In addition, there is expected to be increasing pressure on airlines to replace their aging fleet with more fuel efficient and quieter aircraft to be more environmentally responsible.  When aircraft are retired from commercial airline fleets, they may be converted to cargo freight aircraft or scrapped.

 

An additional factor that may cause airlines to defer or cancel orders is their ability to obtain financing, including leasing, for new aircraft orders.  This will be dependent both upon the financial health of the

 

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airline operators, as well as the overall availability of financing in the marketplace.

 

Each new generation of commercial aircraft has used increasing quantities of advanced composites, replacing metals.  This follows the trend previously seen in military fighter aircraft where advanced composites may now exceed 50% of the weight of the airframe.  Early versions of commercial jet aircraft, such as the Boeing 707, which was developed in the early 1950’s, contained almost no composite materials.  One of the first aircraft to use a meaningful amount of composite materials, the Boeing 767 entered into service in 1983, and was built with an airframe containing approximately 6% composite materials.  The airframe of Boeing’s 777 aircraft, which entered service in 1995, is approximately 11% composite.  By comparison, the next generation of aircraft in development will contain significantly higher composite content by weight.  The Airbus A380, which was certified in December 2006, is being built with an airframe containing approximately 23% composite content by weight.  The first aircraft was delivered in 2007.  Boeing’s latest aircraft, the 787 has a content of 50% or more composite materials by weight.  After several announced delays, the 787 maiden flight is expected in 2009 and the aircraft is projected to enter into service in the first half of 2010.  In December 2006, Airbus formally launched the A350 XWB also projected to have a composite content of 50% or more by weight.  Airbus targets the A350 XWB to enter into service in 2013.  We refer to this steady expansion of the use of composites in aircraft as the “secular penetration of composites” as it increases our average sales per airplane over time.

 

The impact on Hexcel of Boeing and Airbus’ production rate changes is typically influenced by two factors: the mix of aircraft produced and the inventory supply chain effects of increases or reductions in aircraft production.  We have products on all Boeing and Airbus planes.  The dollar value of our materials varies by aircraft type — twin aisle aircraft use more of our materials than narrow body aircraft and newer designed aircraft use more our materials than older generations.  On average, for established programs we deliver products into the supply chain about six months prior to aircraft delivery.  Depending on the product, orders placed with us are received anywhere between one and eighteen months prior to delivery of the aircraft to the customer.  For aircraft that are in the ramp-up stage, such as the A350 and the B787, we will have sales as much as a few years in advance of the delivery.  Increased aircraft deliveries combined with the secular penetration of composites resulted in our commercial aerospace revenues increasing by approximately 14% in both 2008 and 2007.

 

Set forth below are historical aircraft deliveries as announced by Boeing (including McDonnell Douglas) and Airbus:

 

 

 

1994

 

1995

 

1996

 

1997

 

1998

 

1999

 

2000

 

2001

 

2002

 

2003

 

2004

 

2005

 

2006

 

2007

 

2008

 

Boeing

 

312

 

256

 

271

 

375

 

563

 

620

 

491

 

527

 

381

 

281

 

285

 

290

 

398

 

441

 

375

 

Airbus

 

123

 

124

 

126

 

182

 

229

 

294

 

311

 

325

 

303

 

305

 

320

 

378

 

434

 

453

 

483

 

Total

 

435

 

380

 

397

 

557

 

792

 

914

 

802

 

852

 

684

 

586

 

605

 

668

 

832

 

894

 

858

 

 

Commercial aerospace represented 54% of our 2008 net sales. Approximately 72% of these revenues can be identified as sales to Boeing, Airbus and their subcontractors for the production of commercial aircraft. Boeing’s 2008 deliveries were impacted by an approximate two month strike during the year resulting in a loss of about 100 aircraft from the planned delivery schedule.  The balance of our commercial aerospace sales is related to regional and business aircraft manufacture, and other commercial aircraft applications. Regional aircraft production has also increased over time, but does not directly follow the cycle of large commercial aircraft deliveries. These applications also exhibit increasing utilization of composite materials with each new generation of aircraft.

 

Industrial Markets

 

We group under this market segment revenue from applications for our products outside the commercial aerospace and space and defense markets. A number of these applications represent emerging opportunities for our products.  In developing new applications, we seek those opportunities where advanced composites technology offer significant benefits to the end user, often applications that demand high engineering performance.  Within this segment, the major end market sub-segments include, in order of size based on our 2008 sales, wind energy, general industrial applications, recreational equipment (e.g., skis and snowboards, bicycles and hockey sticks), and transportation (e.g., automobiles, mass transit and high-speed rail, and marine applications).  In 2008, the wind energy market accounted for more than half of our Industrial sales.  Our participation in these market applications complements our commercial and

 

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military aerospace businesses, and we are committed to pursuing the utilization of advanced structural material technology where they can generate significant value and we can maintain a sustainable competitive advantage.

 

Space & Defense

 

The space & defense market has historically been an innovator in the use of, and source of significant demand for, advanced composites.  The aggregate demand by space and defense customers is primarily a function of procurement of military aircraft that utilize advanced composites by the United States and certain European governments.  We are currently qualified to supply materials to a broad range of over 100 military aircraft and helicopter programs.  The top ten programs by revenues represent less than 50% of our Space & Defense revenues and no one program exceeds 15% of our revenues in this segment.  These programs include the C-17, F/A-18E/F Hornet, the F-22 Raptor, and the Eurofighter (Typhoon), as well as the V-22 Osprey tiltrotor aircraft, and the Blackhawk, Tiger and NH90 helicopters.  In addition, there are new programs in development such as the F-35 (Joint Strike Fighter or “JSF”), CH53K heavy lift helicopter and the EADS A400M military transport planned to enter production in the future.  The benefits that we obtain from these programs will depend upon which are funded and the extent of such funding.  Space applications for advanced composites include solid rocket booster cases, fairings and payload doors for launch vehicles, and buss and solar arrays for military and commercial satellites.

 

Contracts for military and some commercial programs may contain provisions applicable to both U.S. Government contracts and subcontracts.  For example, under a termination for convenience clause, the prime contractors may flow down this clause to materials suppliers such as Hexcel.  According to the terms of a contract, we may be subject to U.S. government Federal Acquisition Regulations, Department of Defense Federal Acquisition Regulations Supplement, Cost Accounting Standards, and associated procurement laws.

 

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

 

Backlog

 

In recent years, our customers have increasingly demanded shorter order lead times and “just-in-time” delivery performance.  While we have many multi-year contracts with our major aerospace customers, most of these contracts specify the proportion of the customers’ requirements that will be supplied by us and the terms under which the sales will occur, not the specific quantities to be procured.  Our industrial customers have always desired to order their requirements on as short a lead-time as possible.  As a result, twelve-month order backlog is not a meaningful trend indicator for us.

 

Raw Materials and Production Activities

 

 Our manufacturing operations are in many cases vertically integrated.  We produce carbon fibers, industrial fabrics, composite materials and composite structures as well as sell these materials to third-party customers for their use in the manufacture of their products.

 

We manufacture high performance carbon fiber from polyacrylonitrile (“PAN”) precursor produced at our Decatur, Alabama facility.  The primary raw material for PAN is acrylonitrile.  All the PAN we produce is for internal carbon fiber production.  We consume approximately 60% by value of the carbon fiber we produce and sell the remainder of our output to third-party customers.  However, as one of the world’s largest consumers of carbon fiber, we purchase significantly greater quantities of carbon fiber than we produce for our own use.  The sources of carbon fiber we can use in any product or application are sometimes dictated by its customer qualifications or certifications, otherwise we select a fiber based on performance, price and availability.  With the increasing demand for carbon fiber, particularly in aerospace applications, in 2005, we announced our plans to expand our PAN and carbon fiber capacity by about 50% to serve the growing needs of our customers and our own downstream products.  The first of the fiber lines was completed at the end of 2006 and production began in the first quarter of 2007.  The second line, a greenfield site near Madrid, Spain, was essentially completed in December 2007 and began production by end of the first quarter of 2008.  In October 2007, we announced another 70% increase in PAN and carbon

 

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fiber capacity, which will increase our nameplate capacity to a total of about 16 million pounds of carbon fiber by the end of 2010.  After a new line starts production, it can take over a year to be certified for aerospace qualifications.  However, these lines can start supplying fiber for many industrial and recreational applications in a very short time period.

 

We purchase glass yarn from a number of suppliers in the United States, Europe and Asia. Aramid and high strength fibers are produced by only a few companies, and during periods of high demand, can be in short supply.  In addition, epoxy and other specialty resins, aramid paper and aluminum specialty foils are used in the manufacture of composite products. A number of these products have only one or two sources qualified for use, so an interruption in their supply could disrupt our ability to meet our customer requirements. When entering into multi-year contracts with aerospace customers, the business attempts to get back-to-back commitments from key raw material suppliers.

 

Our manufacturing activities are primarily based on “make-to-order”, and to a lesser extent, “make-to-forecast” production requirements. We coordinate closely with key suppliers in an effort to avoid raw material shortages and excess inventories. However, many of the key raw materials we consume 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 lack of availability of these materials could under certain circumstances have a material adverse effect on our consolidated results of operations.

 

Research and Technology; Patents and Know-How

 

Research and Technology (“R&T”) departments support our businesses worldwide. Through R&T activities, we maintain expertise in precursor and carbon fiber, 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 our worldwide business base.

 

Our products rely primarily on our expertise in materials science, textiles, process engineering and polymer chemistry.  Consistent with market demand, we have been placing more emphasis on higher performing products and cost effective production processes while seeking to improve the consistency of our products and our capital efficiency.  Towards this end, we have entered into formal and informal alliances, as well as licensing and teaming arrangements, with several customers, suppliers, external agencies and laboratories.  We believe that we possess unique capabilities to design, develop and manufacture composite materials and structures.  We have over 400 patents and pending applications worldwide, have licensed many key technologies, and have granted technology licenses and patent rights to several third parties in connection with joint ventures and joint development programs.  It is our policy to actively enforce our proprietary rights.  We believe that the patents and know-how rights currently owned or licensed by Hexcel are adequate for the conduct of our business.

 

We spent $31.4 million, $34.2 million and $29.7 million for R&T in 2008, 2007, and 2006, respectively.  We increased our R&T spending in 2008 and 2007 as compared to 2006 to support new product development and qualification activities particularly in relation to commercial aircraft applications.  These expenditures were expensed as incurred.

 

Environmental Matters

 

We are subject to federal, state, local and foreign laws and regulations designed to protect the environment and to regulate the discharge of materials into the environment.  We believe that our policies, practices, and procedures are properly designed to prevent unreasonable risk of environmental damage and associated financial liability.  To date, environmental control regulations have not had a significant adverse effect on our overall operations.

 

Our aggregate environmental related accruals at December 31, 2008 and 2007 were $9.2 million and $3.2 million, respectively.  As of December 31, 2008 and December 31, 2007, $3.8 million and $2.1 million, respectively, were included in other current accrued liabilities, with the remainder included in other non-current liabilities.  As related to certain of our environmental matters, our accruals were estimated at the low end of a range of possible outcomes since there was no better point within the range.  If we had accrued for these matters at the high end of the range of possible outcomes, our accruals would have been $4.9 million and $4.6 million higher at December 31, 2008 and 2007, respectively.  Environmental

 

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remediation spending charged directly to our reserve balance for 2008, 2007, and 2006, was $2.7 million, $2.7 million, and $2.8 million, respectively.  In addition, our operating costs relating to environmental compliance were $11.1 million, $8.2 million, and $8.0 million, for 2008, 2007, and 2006, respectively, and were charged directly to expense.  Capital expenditures for environmental matters approximated $7.3 million, $2.3 million and $0.8 million for 2008, 2007 and 2006, respectively.

 

These accruals can change significantly from period to period due to such factors as additional information on the nature or extent of contamination, the methods of remediation required, changes in the apportionment of costs among responsible parties and other actions by governmental agencies or private parties, or the impact, if any, of Hexcel being named in a new matter.  A discussion of environmental matters is contained in Item 3, “Legal Proceedings,” and in Note 15 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 sales personnel sell and market our products directly to customers worldwide.  We also use independent distributors and manufacturer representatives for certain products, markets and regions.  In addition, we operate various sales representation offices in the Americas, Europe and Asia Pacific.

 

Competition

 

In the production and sale of advanced composites, we compete with a number of U.S. and international companies on a worldwide basis.  The broad markets for composites are highly competitive, and we have focused on both specific submarkets and specialty products within markets.  In addition to competing directly with companies offering similar products, we compete with producers of substitute composites such as structural foam, infusion technology, wood and metal.  Depending upon the material and markets, relevant competitive factors include approvals, database of usage, technology, product performance, delivery, service, price and customer preference for sole sourcing.

 

Employees

 

As of December 31, 2008, we employed 4,275 full-time employees and contract workers, 2,253 in the United States and 2,022 in other countries.  The number of full-time employees and contract workers as of December 31, 2007 and 2006 was 4,081 and 4,459, respectively.  The December 31, 2006 amount includes 587 people from the businesses that were sold in 2007.

 

Other Information

 

Our internet website is www.hexcel.com. We make available, free of charge through our website, our Form 10-Ks, 10-Qs and 8-K’s, and any amendments to these forms, as soon as reasonably practicable after filing with the Securities and Exchange Commission.

 

ITEM 1A. Risk Factors

 

An investment in our common stock or debt securities involves risks and uncertainties.  You should consider the following risk factors carefully, in addition to the other information contained in this Annual Report on Form 10-K, before deciding to purchase any of our securities.

 

Adverse macroeconomic and business conditions, as well as continued disruption in credit markets and government policy changes may significantly and negatively affect our revenues, profitability and financial condition.

 

Economic conditions in the United States and in foreign markets in which we operate could substantially affect our sales and profitability. Economic activity in the United States and throughout much of the world has undergone a sudden, sharp economic downturn. Global credit and capital markets have experienced unprecedented volatility and disruption. Business credit and liquidity have tightened in much of the world. Some of our suppliers, customers and counterparties could face adverse liquidity issues.  General concerns about the fundamental soundness of domestic and foreign economies may also cause customers to reduce their purchases.

 

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Changes in governmental banking, monetary and fiscal policies to restore liquidity and increase credit availability may not be effective. It is difficult to determine the extent of the economic and financial market problems and the many ways in which they may affect our suppliers, customers and our business in general. Continuation or further deterioration of these financial and macroeconomic conditions could have a significant adverse effect on our sales, profitability and results of operations.

 

The markets in which we operate can be cyclical, and downturns in them may adversely affect the results of our operations.

 

Some of the markets in which we operate have been, to varying degrees, cyclical and have experienced downturns.  A downturn in these markets could occur at any time, and in the event of a downturn, we have no way of knowing if, when and to what extent there might be a recovery. Any deterioration in any of the cyclical markets we serve could adversely affect our financial performance and operating results.

 

While Boeing and Airbus had three prior years of record orders and 2008 orders were still 70% more than the 2008 combined deliveries (resulting in a record combined backlog of 7,429 aircraft as of December 31, 2008), to the extent any significant deferrals, cancellations or reduction in demand results in decreased aircraft build rates, reduced net sales for our commercial aerospace products and could reduce our operating income. Approximately 54% of our net sales for 2008 were derived from sales to the commercial aerospace industry. Reductions in demand for commercial aircraft or a delay in deliveries could result from many factors, including a terrorist event similar to that which occurred on September 11, 2001 and any subsequent military response, changes in the propensity for the general public to travel by air, a rise in the cost of aviation fuel, a change in technology resulting in the use of alternative materials, consolidation and liquidation of airlines, availability of funding for new aircraft purchases or leases and slower macroeconomic growth.  Both Boeing and Airbus have experienced various delays in their newest aircraft programs, including the Boeing 787, 747-8, A400M and the ramp-up of the Airbus A380.  These delays have or could have delayed our expected growth or our effective utilization of capacity installed for such growth.  Future delays in these or other major Boeing or Airbus programs could similarly impact our results.

 

In addition, our customers continue to emphasize the need for cost reduction or other improvements in contract terms throughout the supply chain.  In response to these pressures, we may be required to accept increased risk or face the prospects of margin compression on some products in the future. Where possible, we seek to offset or mitigate the impact of such pressures through productivity and performance improvements, index clauses, currency hedging and other actions.

 

A significant decline in business with Boeing, EADS, Vestas, or other significant customers could materially impact our business, operating results, prospects and financial condition.

 

We have concentrated customers in the commercial aerospace and wind energy markets.  In the commercial aerospace market, approximately 72%, and in the space and defense market, approximately 38%, of our 2008 net sales were made to Boeing and EADS (including Airbus) and their related subcontractors.  For the years ended December 31, 2008 and December 31, 2007, approximately 23% and 25% of our total consolidated net sales was made to Boeing and its related subcontractors, respectively, and approximately 24% and 22% of our total consolidated net sales, respectively, was made to EADS, including Airbus and its related subcontractors.  In the wind energy market, nearly 11% of our total sales (but less than 10% in 2007) were made to Vestas Wind Systems A/S.  Significant changes in the demand for our customers’ end products, the share of their requirements that is awarded to us or changes in the design or materials used to construct their products could result in a significant loss of business with these customers.  The loss of, or significant reduction in purchases by, Boeing, EADS and Vestas or any of our

 

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other significant customers could materially impair our business, operating results, prospects and financial condition.  The level of purchases by our customers is often affected by events beyond their control, including general economic conditions, demand for their products, business disruptions, disruptions in deliveries, strikes and other factors.

 

Reductions in space and defense spending could result in a decline in our net sales.

 

The growth in military aircraft production that has occurred in recent years may not be sustained, individual programs important to Hexcel may be cancelled, production may not continue to grow nor may the increased demand for replacement helicopter blades continue. The production of military aircraft depends upon defense budgets and the related demand for defense and related equipment. Approximately 23% of our net sales in 2008 were derived from space and defense industries.

 

Changes to the capital expansion plans could materially impact our operating results and financial condition.

 

The company has significantly increased its capital expenditures in recent years, including capital expenditure spending of $177.3 million in 2008, $120.6 million in 2007 and $117.9 million in 2006.  During that period, major projects in progress or completed include carbon fiber lines in Salt Lake City, Utah and Spain, precursor lines in Decatur, Alabama, satellite prepreg plants in Germany and France and additional wind energy capacity in Austria and a new plant in China.  In October 2007 we announced an additional $180 million carbon fiber capacity which we now expect to be completed by the end of 2010.  Based on expected growth estimates, and in particular our commitment to the Airbus A350XWB, the company anticipates that it will continue a high level of capital expenditures for additional capacity for carbon fiber and other products through investing in existing and new facilities. Our capacity expansion plans could cost more than we anticipated, take longer to complete than scheduled, or fail to produce the quantity or quality of product to meet the requirements of customers.  This could result in our not achieving the growth in business that our capital expenditure plans were designed to deliver, resulting in much higher manufacturing and capital expenditure costs, pressure on our capital structure and a material adverse impact on our financial statements. In addition, these capital expansions are dependent on our ability to generate cash and/or have access to financing on a timely and cost effective basis.

 

A decrease in supply or increase in cost of raw materials could result in a material decline in our profitability.

 

Our profitability depends largely on the price and continuity of supply of raw materials, which are supplied through a sole source or a limited number of sources.  We purchase large volumes of raw materials, such as epoxy and phenolic resins, aluminum foil, carbon fiber, fiberglass yarn and aramid paper, any restrictions on the supply or the increase in the cost of our raw materials could significantly reduce our profit margins.  Efforts to mitigate restrictions on the supply or price increases of these raw materials by long-term purchase agreements, productivity improvements or by passing cost increases to our customers may not be successful.

 

We have substantial international operations subject to uncertainties which could affect our operating results.

 

We believe that revenue from sales outside the U.S. will continue to account for a material portion of our total revenue for the foreseeable future.  Additionally, we have invested significant resources in our international operations and we intend to continue to make such investments in the future. Our international operations are subject to numerous risks, including:

 

·              the difficulty of enforcing agreements and collecting receivables through some foreign legal systems;

 

·              foreign customers may have longer payment cycles than customers in the U.S.;

 

·              cost of compliance with international trade laws of all of the countries in which we do business, including export control laws, relating to sales and purchases of goods and equipment and transfers of technology;

 

·              tax rates in some foreign countries may exceed those of the U.S. and foreign earnings may be subject to withholding requirements or the imposition of tariffs, exchange controls or other restrictions;

 

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·              general economic and political conditions in the countries where we operate may have an adverse effect on our operations in those countries or not be favorable to our growth strategy;

 

·              governments may adopt regulations or take other actions that would have a direct or indirect adverse impact on our business and market opportunities; and

 

·              the potential difficulty in enforcing our intellectual property rights in some foreign countries, and the potential for the intellectual property rights of others to affect our ability to sell product in certain markets.

 

Any one of the above could adversely affect our financial condition and results of operations.

 

In addition, fluctuations in currency exchange rates may influence the profitability and cash flows of our business.  For example, our European operations sell some of the products they produce in U.S. dollars, yet the labor, overhead costs and portions of material costs incurred in the manufacture of those products is denominated in Euros or British pound sterling. As a result, the local currency margins of goods manufactured with costs denominated in local currency, yet sold in U.S. dollars, will vary with fluctuations in currency exchange rates, reducing when the U.S. dollar weakens against the Euro and British pound sterling. In addition, the reported U.S. dollar value of the local currency financial statements of our foreign subsidiaries will vary with fluctuations in currency exchange rates. While we enter into currency exchange rate hedges from time to time to mitigate these types of fluctuations, we cannot remove all fluctuations or hedge all exposures, and our earnings are impacted by changes in currency exchange rates.

 

During the past several years, some countries in which we operate or plan to operate have been characterized by varying degrees of inflation and uneven growth rates. We currently do not have political risk insurance in the countries in which we conduct business. While we carefully consider these risks when evaluating our international operations we cannot provide assurance that we will not be materially adversely affected as a result of such risks.

 

We could be adversely affected by environmental and safety requirements.

 

Our operations require the handling, use, storage and disposal of certain regulated materials and wastes. As a result, we are subject to various laws and regulations pertaining to pollution and protection of the environment, health and safety.  These requirements govern, among other things, emissions to air, discharge to waters and the generation, handling, storage, treatment and disposal of waste and remediation of contaminated sites.  We have made, and will continue to make, capital and other expenditures in order to comply with these laws and regulations.  These laws and regulations are complex, change frequently and could become more stringent in the future.

 

We have been named as a “potentially responsible party” under the U.S. Superfund law or similar state laws at several sites requiring clean up. These laws generally impose liability for costs to investigate and remediate contamination without regard to fault. Under certain circumstances liability may be joint and several, resulting in one responsible party being held responsible for the entire obligation.  Liability may also include damages to natural resources.  In connection with our Lodi, New Jersey facility, Hexcel, along with a number of other companies, has been directed by federal regulatory authorities to contribute to the assessment and restoration of a stretch of the Passaic River, a project currently estimated to cost $900 million to $2.3 billion.  We have also incurred and likely will continue to incur expenses to investigate and clean up certain of our existing and former facilities. We have incurred substantial expenses for work at these sites over a number of years, and these costs, for which we believe we have adequate reserves, will continue for the foreseeable future.  The ongoing operation of our manufacturing plants also entails environmental risks, and we may incur material costs or liabilities in the future which could adversely affect us.

 

In addition, we may be required to comply with evolving environmental, health and safety laws, regulations or requirements that may be adopted or imposed in the future or to address newly discovered information or conditions that require a response.  Although most of the our properties have been the subject of environmental site assessments, there can be no assurance that all potential instances of soil and groundwater contamination have been identified, even at those sites where assessments have been conducted. Accordingly, we may discover previously unknown environmental conditions and the cost of remediating such conditions may be material.  See “Legal Proceedings” below and Note 15 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

 

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Our forward-looking statements and projections may turn out to be inaccurate.

 

This 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) the estimates and expectations based on aircraft production rates made publicly available by Boeing and Airbus, the revenues we may generate from an aircraft model or program,; (b)  the impact of the possible push-out in deliveries of the Airbus and Boeing backlog and the impact of delays in new aircraft programs; (c) expectations of composite content on new commercial aircraft programs and our share of those requirements; (d) expectations of growth in revenues from space & defense applications; (e) expectations regarding growth in sales of composite materials for wind energy, recreation and other industrial applications; (f) expectations regarding working capital trends and expenditures; (g) expectations as to the level of capital expenditures and when we will complete the construction and qualification of capacity expansions; and (h) our ability to maintain and improve margins in light of the ramp-up of new facilities and the current economic environment; (i) our ability to refinance our credit facility, which expires in 2010, on acceptable terms; (j) our projections regarding the realizability of net operating loss and federal tax credit carry-forwards; and the impact of the above factors on our expectations of 2009 financial results; (k) the impact of various market risks, including fluctuations in interest rates, currency exchange rates, environmental regulations and tax codes; fluctuations in commodity prices, and fluctuations in the market price of our common stock.  In addition, actual results may differ materially from the results anticipated in the forward looking statements due to a variety of factors, including but not limited to changing market conditions, increased competition, product mix, inability to achieve planned manufacturing improvements and cost reductions, and conditions in the financial markets.

 

  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 our operating results and financial position, neither past financial performance nor our expectations should be considered reliable indicators of future performance. Investors should not use historical trends to anticipate results or trends in future periods. Further, our stock price is subject to volatility. Any of the factors discussed above could have an adverse impact on our 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 our stock price. We do not undertake an obligation to update our forward-looking statements or risk factors to reflect future events or circumstances.

 

ITEM 1B. Unresolved Staff Comments

 

None.

 

ITEM 2. Properties

 

We own and lease manufacturing facilities and sales offices located throughout the United States and

 

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in other countries, as noted below. The corporate offices and principal corporate support activities are located in leased facilities in Stamford, Connecticut. Our research and technology administration and principal laboratories are located in Dublin, California; Duxford, United Kingdom; and Les Avenieres, France.

 

The following table lists our manufacturing facilities by geographic location, related segment, and principal products manufactured. This table does not include manufacturing facilities owned by entities in which we have a joint venture interest.

 

Manufacturing Facilities

 

Facility Location

 

Segment

 

Principal Products

 

United States:

 

 

 

 

 

Decatur, Alabama

 

Composite Materials

 

PAN Precursor (used to produce Carbon Fibers)

 

Salt Lake City, Utah

 

Composite Materials

 

Carbon Fibers; Prepregs

 

Seguin, Texas

 

Composite Materials

 

Industrial Fabrics; Specialty Reinforcements

 

Casa Grande, Arizona

 

Composite Materials

 

Honeycomb and Honeycomb Parts

 

Kent, Washington

 

Engineered Products

 

Composite structures

 

Pottsville, Pennsylvania

 

Engineered Products

 

Specially machined Honeycomb Parts

 

Burlington, Washington

 

Engineered Products

 

Specially machined Honeycomb Parts

 

International:

 

 

 

 

 

Dagneux, France

 

Composite Materials

 

Prepregs

 

Nantes, France

 

Composite Materials

 

Prepregs

 

Les Avenieres, France

 

Composite Materials

 

Industrial Fabrics; Specialty Reinforcements

 

Illescas, Spain

 

Composite Materials

 

Carbon Fibers

 

Parla, Spain

 

Composite Materials

 

Prepregs

 

Linz, Austria

 

Composite Materials

 

Prepregs

 

Duxford, United Kingdom

 

Composite Materials

 

Prepregs; Adhesives; Honeycomb and Honeycomb Parts

 

Stade, Germany

 

Composite Materials

 

Prepregs

 

Welkenraedt, Belgium

 

Engineered Products

 

Specially machined Honeycomb Parts

 

Tianjin, China

 

Composite Materials

 

Prepregs

 

 

We lease the land and buildings in Nantes, France; Stade, Germany and Tianjin, China; and the land on which the Burlington, Washington facility is located.  We also lease portions of the facilities located in Casa Grande, Arizona and Les Avenieres, France.  We own all other remaining facilities.  In connection with our debt refinancing, on March 1, 2005, we granted mortgages in connection with our new senior secured credit facility on the facilities located in Casa Grande, Arizona; Decatur, Alabama; Dublin, California; Kent, Washington; Salt Lake City, Utah; and Seguin, Texas.  For further information, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and to Note 7 to the accompanying consolidated financial statements of this Annual Report on Form 10-K.

 

In July 2008, we announced plans to build a new Wind Energy Glass Prepreg facility in Windsor,

 

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Colorado.  This facility will be leased.  Production is expected to begin in the third quarter of 2009.

 

In connection with our portfolio review and the consolidation activities mentioned above, the sale of certain properties located in Anderson, South Carolina; Statesville, North Carolina; Washington, Georgia; and Decines, France were completed during 2007.

 

ITEM 3. Legal Proceedings

 

We are involved in litigation, investigations and claims arising out of the normal conduct of our business, including those relating to commercial transactions, environmental, employment, and health and safety matters.  We estimate and accrue our liabilities 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 are not discounted to reflect the time value of money due to the uncertainty in estimating the timing of the expenditures, which may extend over several years.

 

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

 

Environmental Matters

 

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

 

We have been named as a potentially responsible party (“PRP”) with respect to several hazardous waste disposal sites that we do not own or possess, which are included on, or proposed to be included on, the Superfund National Priority List of the U.S. Environmental Protection Agency (“EPA”) or on equivalent lists of various state governments.  Because CERCLA allows for joint and several liability in certain circumstances, we could be responsible for all remediation costs at such sites, even if we are one of many PRPs.  We believe, based on the amount and the nature of our waste, and the number of other financially viable PRPs, that our liability in connection with such matters will not be material.

 

Lodi, New Jersey Site

 

Pursuant to the New Jersey Industrial Site Recovery Act, we entered into a Remediation Agreement to pay for the environmental remediation of a manufacturing facility we own and formerly operated in Lodi, New Jersey.  We have 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.  The total accrued liability related to this matter was $7.0 million as of December 31, 2008.

 

Lower Passaic River Study Area

 

In October 2003, we received, along with 66 other entities, a directive from the New Jersey Department of Environmental Protection (“NJDEP”) that requires the entities to assess whether operations at various New Jersey sites, including our former manufacturing site in Lodi, New Jersey, caused damage to natural resources in the Lower Passaic River watershed. In May, 2005, the NJDEP dismissed us from the Directive. In February 2004, 42 entities, including Hexcel, received a general notice letter from the EPA which requested that the entities consider helping to finance an estimated $10 million towards an EPA study of environmental conditions in the Lower Passaic River watershed.  In May 2005, we signed onto an agreement with EPA to participate (bringing the total number of participating entities to 43) in financing such a study up to $10 million, in the aggregate. Since May, 2005, a number of additional PRPs have joined into the agreement with EPA.  In October 2005, we along with the other EPA notice recipients were

 

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advised by the EPA that the notice recipients’ share of the costs of the EPA study was expected to significantly exceed the earlier EPA estimate.  While we and the other recipients were not obligated by our agreement to share in such excess, a Group of notice recipients (73 companies including Hexcel) negotiated an agreement with EPA to assume responsibility for the study pursuant to an Administrative Order on Consent.  Although we believe we have viable defenses to the EPA claims and expect that other as yet unnamed parties also will receive notices from the EPA, we have established a reserve as of December 31, 2007 for our estimated cost in relation to the EPA study.  In June 2007, EPA issued a draft Focused Feasibility Study (“FFS”) that considers six interim remedial options for the lower eight miles of the river, in addition to a “no action” option.  The estimated costs for the six options range from $900 million to $2.3 billion.  The PRP Group provided comments to EPA on the FFS; EPA has not yet taken further action.  The Administrative Order on Consent regarding the study does not cover work contemplated by the FFS.  Furthermore, the Federal Trustees for natural resources have indicated their intent to perform a natural resources damage assessment on the river and invited the PRPs to participate in the development and performance of this assessment.  The PRP Group, including Hexcel, has not agreed to participate in the assessment at this time. Finally, on February 4, 2009, Tierra Solutions (“Tierra”) and Maxus Energy Corporation (“Maxus”) filed a third party complaint in New Jersey Superior Court against us and over 300 other entities in an action brought against Tierra and Maxus (and other entities) by the State of New Jersey.  New Jersey’s suit against Tierra and Maxus relates to alleged discharges of contaminants by Tierra and Maxus to the Passaic River and seeks payment of all past and future costs the State has and will incur regarding cleanup and removal of contaminants, investigation of the Passaic River and related waterbodies, assessment of natural resource injuries and other specified injuries.  The third party complaint seeks contribution from us for all or part of the damages that Tierra and Maxus may owe to the State.  We have not yet responded to the complaint.  Our ultimate liability for investigatory costs, remedial costs and/or natural resource damages in connection with the Lower Passaic River cannot be determined at this time.

 

Kent, Washington Site

 

We were party to a cost-sharing agreement regarding the operation of certain environmental remediation systems necessary to satisfy a post-closure care permit issued to a previous owner of the Kent, Washington, site by the EPA. Under the terms of the cost-sharing agreement, we were obligated to reimburse the previous owner for a portion of the cost of the required remediation activities. Management has determined that the cost-sharing agreement terminated in December 1998; however, the other party disputes this determination.  The Washington Department of Ecology has issued a unilateral Enforcement Order to us requiring us to (a) maintain the interim remedial system and to perform system separation, (b) to conduct a focused remedial investigation and (c) to conduct a focused feasibility study to develop recommended long term remedial measures.  We asserted defenses against performance of the order, particularly objecting to the remediation plan proposed by the previous owner, who still owns the adjacent contaminated site.  However, we are currently complying with the order, with one exception, without withdrawing our defenses. As a result of a dispute resolution procedure, Hexcel and Ecology have reached an agreement to extend certain deadlines, which we believe remove current and potential compliance issues.

 

Omega Chemical Corporation Superfund Site, Whittier, CA

 

We are a PRP at a former chemical waste site in Whittier, CA. The PRPs at Omega have established a PRP Group, the “Omega PRP Group”, and are currently investigating and remediating soil and groundwater at the site pursuant to a Consent Decree with the EPA, entered into in March 2000. Hexcel contributed approximately 0.01% of the waste tonnage sent to the site during its operations.  In addition to the Omega site specifically, there is regional groundwater contamination in the area as well. EPA has not determined who it will identify as PRPs to investigate and, as necessary, remediate the regional groundwater contamination.  Although it is likely that Hexcel will incur costs associated with the regional investigation and remediation as a member of the Omega Group, our ultimate liability, if any, in connection with this matter cannot be determined at this time.

 

Environmental remediation reserve activity for the years ended December 31, 2008, 2007, 2006 was as follows:

 

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For the year ended December 31,

 

(In millions)

 

2008

 

2007

 

2006

 

Beginning remediation accrual balance

 

$

3.2

 

$

5.3

 

$

4.2

 

Current period expenses

 

8.7

 

0.6

 

3.9

 

Cash expenditures

 

(2.7

)

(2.7

)

(2.8

)

Ending remediation accrual balance

 

$

9.2

 

$

3.2

 

$

5.3

 

 

 

 

 

 

 

 

 

Capital expenditures for environmental matters

 

$

7.3

 

$

2.3

 

$

0.8

 

 

Our estimate of liability as a PRP and our remaining costs associated with our responsibility to remediate the Lodi, New Jersey; Kent, Washington; and other sites are accrued in the consolidated balance sheets. As of December 31, 2008 and 2007, our aggregate environmental related accruals were $9.2 million and $3.2 million, respectively. As of December 31, 2008 and 2007, $3.8 million and $2.1 million, respectively, was included in current other accrued liabilities, with the remainder included in other non-current liabilities.  As related to certain environmental matters, the accrual was estimated at the low end of a range of possible outcomes since no amount within the range is a better estimate than any other amount.  If we had accrued for these matters at the high end of the range of possible outcomes, our accrual would have been $4.9 million and $4.6 million higher at December 31, 2008 and 2007, respectively.

 

These accruals can change significantly from period to period due to such factors as additional information on the nature or extent of contamination, the methods of remediation required, changes in the apportionment of costs among responsible parties and other actions by governmental agencies or private parties, or the impact, if any, of being named in a new matter.

 

Litigation

 

Gurit Infringement Claim

 

Our Austrian subsidiary has been sued in Germany and Austria by Gurit, a European prepreg competitor of materials sold into the wind energy market. Gurit alleges that the Company’s HexFIT®  prepreg made in Austria and sold in Germany to Vestas infringes a Gurit EU patent. Gurit has also has had its counsel issue a “cease and desist” letter with respect to our sales to a minor wind energy customer in Denmark. Vestas is our largest wind energy customer and manufactures blades for wind turbines in Germany, Denmark and Spain. The suits seek an injunction to prevent the Company from making or selling HexFIT in Germany and Austria and also seek damages for past infringement. Regarding the Gurit patent itself, after losing an opposition proceeding in the European patent office (EPO), generally asserting that the patent was not valid based on prior art, we have lodged an appeal in the EPO based on new prior art not previously considered when the patent was granted or when the opposition was decided. It may take more than a year before we know the outcome of the appeal. We believe that HexFIT as made today does not infringe the patent and intend to vigorously defend the suits and prosecute the appeal.

 

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

 

None.

 

PART II
 

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

 

Hexcel common stock is traded on the New York Stock Exchange.  The range of high and low sales prices of our common stock on the New York Stock Exchange Composite Tape is contained in Note

 

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24 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 2008, 2007 or 2006.  The payment of dividends is limited under the terms of certain of our debt agreements. Hexcel does not have any intent of paying dividends in the foreseeable future, as cash generated from operations will be used primarily to support capital expenditures.

 

On February 10, 2009 there were 1,167 holders of record of our common stock.

 

The following chart provides information regarding repurchases of Hexcel common stock:

 

Period

 

(a)
Total Number
of Shares (or
Units)
Purchased

 

(b)
Average Price
Paid per
Share (or
Unit)

 

(c)
Total Number of
Shares (or Units)
Purchased as Part
of Publicly
Announced Plans
or Programs

 

(d)
Maximum Number (or
Approximate Dollar
Value) of Shares (or
Units) that May Yet Be
Purchased Under the
Plans or Programs

 

October 1 — October 31, 2008

 

0

 

N/A

 

0

 

0

 

 

 

 

 

 

 

 

 

 

 

November 1 — November 30, 2008

 

0

 

N/A

 

0

 

0

 

 

 

 

 

 

 

 

 

 

 

December 1 — December 31, 2008

 

210

 

$

11.23

 

0

 

0

 

Total

 

210

(1)

$

11.23

 

0

 

0

 

 

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.

 


(1) All Shares were delivered by an employee in payment of the exercise price of non-qualified stock options.

 

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Table of Contents

 

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

 

The information required by Item 7 is contained on pages 33 to 55 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 51 to 54 of this Annual Report on Form 10-K and is incorporated herein by reference.

 

ITEM 8. Financial Statements and Supplementary Data

 

The information required by Item 8 is contained on pages 59 to 103 of this Annual Report on Form 10-K under “Consolidated Financial Statements and Supplementary Data” and is incorporated herein by reference. The Report of Independent Registered Public Accounting Firm is contained on page 58 of this Annual Report on Form 10-K under the caption “Report of Independent Registered Public Accounting Firm” 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

 

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.  In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

 

The Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on the foregoing, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective.

 

Management’s report on our internal control over financial reporting is contained on page 57 of this Annual Report on Form 10-K and is incorporated herein by reference.

 

ITEM 9B. Other Information

 

None.

 

PART III

 

ITEM 10.  Directors, Executive Officers and Corporate Governance

 

The information required by Item 10 will be contained in our definitive proxy statement for the 2009 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, 2008.  Such information is incorporated herein by reference.

 

ITEM 11.  Executive Compensation

 

The information required by Item 11 will be contained in our definitive proxy statement for the 2008 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission within

 

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120 days after the close of the fiscal year ended December 31, 2008.  Such information is incorporated herein by reference.

 

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

 

The information required by Item 12 will be contained in our definitive proxy statement for the 2008 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, 2008.  Such information is incorporated herein by reference.

 

ITEM 13.  Certain Relationships and Related Transactions, and Director Independence

 

The information required by Item 13 will be contained in our definitive proxy statement for the 2008 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, 2008.  Such information is incorporated herein by reference.

 

ITEM 14.  Principal Accountant Fees and Services

 

The information required by Item 14 will be contained in our definitive proxy statement for the 2008 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, 2008.  Such information is incorporated herein by reference.

 

PART IV

 

ITEM 15.  Exhibits and Financial Statement Schedules

 

(a)  Financial Statements, Financial Statement Schedules and Exhibits

 

(1)  Financial Statements:

 

Report of Independent Registered Public Accounting Firm

 

Consolidated Balance Sheets as of December 31, 2008 and 2007

 

Consolidated Statements of Operations for each of the three years ended December 31, 2008

 

Consolidated Statements of Stockholders’ Equity and Comprehensive Income for each of the three years ended December 31, 2008

 

Consolidated Statements of Cash Flows for each of the three years ended December 31, 2008

 

Notes to the Consolidated Financial Statements

 

(2)  Financial Statement Schedule for the three years ended December 31, 2008:

 

Schedule II — Valuation and Qualifying Accounts

 

Consent of Independent Registered Public Accounting Firm

 

All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or the notes thereto.

 

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Table of Contents

 

(3)  Exhibits:

 

The following list of exhibits includes exhibits submitted with this Form 10-K as filed with the SEC and those incorporated by reference to other filings.

 

Exhibit No.

 

Description

 

 

 

2.1

 

Asset Purchase Agreement, dated as of June 21, 2007 by and among JPS Industries, Inc., Hexcel Corporation and Hexcel Reinforcements Corp. (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K dated June 26, 2007).

 

 

 

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 by reference to Exhibit 3 to Hexcel’s Current Report on Form 8-K dated December 17, 2007).

 

 

 

4

 

Indenture dated as of February 1, 2005 between Hexcel Corporation and The Bank of New York, as trustee, relating to the issuance of the 6.75% Senior Subordinated Notes due 2015 (incorporated by reference to Exhibit 99.1 to Hexcel’s Current Report on Form 8-K dated February 4, 2005).

 

 

 

10.1

 

Credit Agreement, dated as of March 1, 2005 by and among Hexcel Corporation, as Borrower, the Lenders listed therein, as Lenders, Banc of America Securities LLC, as Syndication Agent and Joint Lead Arranger, Deutsche Bank Securities Inc., as Sole Book Manager and Joint Lead Arranger, Deutsche Bank Trust Company Americas, as Administrative Agent, and Credit Suisse First Boston and Wachovia Bank, National Association, as Documentation Agents (incorporated by reference to Exhibit 10.1 to Hexcel’s Current Report on Form 8-K dated March 2, 2005).

 

 

 

10.1(a)

 

First Amendment to Credit Agreement, dated as of December 5, 2006 by and among Hexcel Corporation, the financial institutions listed therein, as Lenders, and Deutsche Bank Trust Company Americas, as administrative agent for the Lenders (incorporated by reference to Exhibit 99.1 to Hexcel’s Current Report on Form 8-K dated December 11, 2006).

 

 

 

10.1(b)

 

Second Amendment to Credit Agreement, dated as of May 30, 2008, by and among Hexcel Corporation, the financial institutions listed therein, as Lenders, and Deutsche Bank Trust Company Americas, as administrative agent for the Lenders (incorporated by reference to Exhibit 10.1 to Hexcel’s Current Report on Form 8-K dated May 30, 2008).

 

 

 

10.2

 

Security Agreement, dated as of March 1, 2005 by and among Hexcel Corporation, each of the subsidiary guarantors listed therein, and each additional guarantor that may become a party, and Deutsche Bank Trust Company Americas, as Administrative Agent for and representative of the beneficiaries defined therein (incorporated by reference to Exhibit 10.2 to Hexcel’s Current Report on Form 8-K dated March 2, 2005).

 

 

 

10.3

 

Subsidiary Guaranty, dated as of March 1, 2005 by Clark-Schwebel Holding Corp. and Hexcel Reinforcements Corp., as Guarantors, in favor of and for the benefit of Deutsche Bank Trust Company Americas, as agent for and representative of any swap counterparties defined therein and the lenders party to the Credit Agreement (incorporated by reference to Exhibit 10.3 to Hexcel’s Current Report on Form 8-K dated March 2, 2005)

 

 

 

10.4*

 

Hexcel Corporation 2003 Incentive Stock Plan (incorporated herein by reference to Exhibit 

 

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Table of Contents

 

 

 

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).

 

 

 

10.4(a)*

 

Hexcel Corporation 2003 Incentive Stock Plan as amended and restated December 11, 2003 (incorporated herein by reference to Exhibit 10.3(a) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003).

 

 

 

10.4(b)*

 

Hexcel Corporation 2003 Incentive Stock Plan as amended and restated May 19, 2005 (incorporated herein by reference to Exhibit 99.2 to the Company’s Current Report on Form 8-K dated May 24, 2005).

 

 

 

10.4(c)*

 

Hexcel Corporation 2003 Incentive Stock Plan as amended and restated December 31, 2008 (incorporated herein by reference to Exhibit 99.12 to the Company’s Current Report on Form 8-K dated January 7, 2009).

 

 

 

10.5*

 

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).

 

 

 

10.5(a)*

 

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).

 

 

 

10.5(b)*

 

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).

 

 

 

10.5(c)*

 

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).

 

 

 

10.5(d)*

 

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).

 

 

 

10.6*

 

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).

 

 

 

10.6(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).

 

 

 

10.6(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).

 

 

 

10.6(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).

 

 

 

10.6(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

 

24



Table of Contents

 

 

 

10-K for the fiscal year ended December 31, 2002).

 

 

 

10.7*

 

Hexcel Corporation Management Stock Purchase Plan, as amended and restated on May 19, 2005 (incorporated herein by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K dated May 24, 2005).

 

 

 

10.7(a)*

 

Hexcel Corporation Management Stock Purchase Plan, as amended and restated on December 31, 2008 (incorporated herein by reference to Exhibit 99.15 to the Company’s Current Report on Form 8-K dated January 7, 2009).

 

 

 

10.8*

 

Hexcel Corporation Management Incentive Compensation Plan, as Amended and Restated on December 31, 2008 (incorporated herein by reference to Exhibit 99.13 to the Company’s Current Report on Form 8-K dated January 7, 2009).

 

 

 

10.9*

 

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).

 

 

 

10.10*

 

Form of Employee Option Agreement (2009).

 

 

 

10.11*

 

Modification to Option Agreements.

 

 

 

10.12*

 

Form of Employee Option Agreement (2008) (incorporated herein by reference to Exhibit 10.9 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007)

 

 

 

10.13*

 

Form of Employee Option Agreement (2007) (incorporated herein by reference to Exhibit 10.9 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006)

 

 

 

10.14*

 

Form of Employee Option Agreement (2005 and 2006) (incorporated herein by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K dated January 12, 2005).

 

 

 

10.15*

 

Form of Employee Option Agreement (2004) (incorporated herein by reference to Exhibit 10.9 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003).

 

 

 

10.16*

 

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).

 

 

 

10.17*

 

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).

 

 

 

10.18*

 

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).

 

 

 

10.19*

 

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).

 

 

 

10.20*

 

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).

 

 

 

10.21*

 

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).

 

 

 

10.22*

 

Form of Employee Option Agreement (1999) (incorporated herein by reference to Exhibit 10.1

 

 

 

 

25



Table of Contents

 

 

 

of the Company’s Quarterly Report on Form 10-Q for the Quarter ended March 31, 1999).

 

 

 

10.23*

 

Form of Retainer Fee Option Agreement for Non-Employee Directors (2000-2002) (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 Restricted Stock Unit Agreement (2009).

 

 

 

10.25*

 

Form of Restricted Stock Unit Agreement (2008) (incorporated by reference to Exhibit 10.26 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007).

 

 

 

10.26*

 

Form of Restricted Stock Unit Agreement (2007) (incorporated by reference to Exhibit 10.29 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006).

 

 

 

10.27*

 

Form of Restricted Stock Unit Agreement (2006) (incorporated by reference to Exhibit 99.1 of the Company’s Current Report on Form 8-K dated February 13, 2006).

 

 

 

10.28*

 

Form of Amended and Restated Restricted Stock Unit Agreement (2006, 2007) (incorporated by reference to Exhibit 99.9 of the Company’s Current Report on Form 8-K dated January 7, 2009).

 

 

 

10.29*

 

Form of Restricted Stock Unit Agreement for Non-Employee Directors (2008) (incorporated by reference to Exhibit 10.2 of the Company’s Quarterly Report on Form 10-Q for the Quarter ended June 30, 2008).

 

 

 

10.30*

 

Form of Amended and Restated Restricted Stock Unit Agreement for Non-Employee Directors (2004 and 2005 retainer fee grants, and 2007 annual grant) (incorporated by reference to Exhibit 99.7 of the Company’s Current Report on Form 8-K dated January 7, 2009).

 

 

 

10.31*

 

Form of Amended and Restated Restricted Stock Unit Agreement for Non-Employee Directors (2004, 2005 and 2006 annual grants) (incorporated by reference to Exhibit 99.8 of the Company’s Current Report on Form 8-K dated January 7, 2009).

 

 

 

10.32*

 

Form of Performance Based Award Agreement (2009).

 

 

 

10.33

 

Modification to Performance Based Award Agreement (2008).

 

 

 

10.34*

 

Form of Performance Based Award Agreement (2008) (incorporated by reference to Exhibit 10.35 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007).

 

 

 

10.35*

 

Form of Performance Based Award Agreement (2007) (incorporated by reference to Exhibit 10.38 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006).

 

 

 

10.36*

 

Form of Amended and Restated Performance Based Award Agreement (2007) (incorporated by reference to Exhibit 99.11 of the Company’s Current Report on Form 8-K dated January 7, 2009).

 

 

 

10.37*

 

Form of Performance Based Award Agreement (2006) (incorporated by reference to Exhibit 99.2 of the Company’s Current Report on Form 8-K dated February 13, 2006).

 

 

 

10.38*

 

Form of Amended and Restated Performance Based Award Agreement (2006) (incorporated by reference to Exhibit 99.10 of the Company’s Current Report on Form 8-K dated January 7, 2009).

 

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10.39*

 

Hexcel Corporation Nonqualified Deferred Compensation Plan, Effective as of January 1, 2005, Amended and Restated as of December 31, 2008 (incorporated herein by reference to Exhibit 99.14 to Hexcel’s Current Report on Form 8-K dated January 7, 2009).

 

 

 

10.40*

 

Amended and Restated Employment Agreement between Hexcel Corporation and David E. Berges, dated December 31, 2008 (incorporated herein by reference to Exhibit 99.1 to Hexcel’s Current Report on Form 8-K dated January 7, 2009).

 

 

 

10.40(a)*

 

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(b)*

 

Employee 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).

 

 

 

10.40 (c)*

 

Amended and Restated Supplemental Executive Retirement Agreement dated December 31, 2008, between David E. Berges and Hexcel Corporation (incorporated herein by reference to Exhibit 99.2 to Hexcel’s Current Report on Form 8-K dated January 7, 2009).

 

 

 

10.40(d)*

 

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(e)*

 

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*

 

Amended and Restated Executive Severance Agreement between Hexcel Corporation and Wayne C. Pensky, dated December 31, 2008 (incorporated herein by reference to Exhibit 99.4 to Hexcel’s Current Report on Form 8-K dated January 7, 2009).

 

 

 

10.41(a)*

 

Amended and Restated Executive Deferred Compensation Agreement between Hexcel Corporation and Wayne C. Pensky, dated December 31, 2007 (incorporated herein by reference to Exhibit 99.3 to Hexcel’s Current Report on Form 8-K dated January 7, 2008).

 

 

 

10.42*

 

Amended and Restated Executive Severance Agreement between Hexcel Corporation and Ira J. Krakower, dated December 31, 2008 (incorporated herein by reference to Exhibit 99.5 to Hexcel’s Current Report on Form 8-K dated January 7, 2009).

 

 

 

10.42(a)*

 

Amended and Restated Supplemental Executive Retirement Agreement dated December 31, 2008, between Ira J. Krakower and Hexcel Corporation (incorporated herein by reference to Exhibit 99.3 to Hexcel’s Current Report on Form 8-K dated January 7, 2009).

 

 

 

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).

 

 

 

10.43*

 

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).

 

 

 

10.43(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).

 

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Table of Contents

 

10.43(b)*

 

Service Agreement, dated January 1, 1992, between Ciba-Geigy PLC (subsequently assigned to Hexcel Composites Limited) and William Hunt (incorporated herein by reference to Exhibit 10.46(b) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007).

 

 

 

10.43(c)*

 

Letter Agreement regarding pension and life assurance benefits, dated August 19, 1992 between Ciba-Geigy PLC (subsequently assigned to Hexcel Composites Limited) and William Hunt (incorporated herein by reference to Exhibit 10.2 of the Company’s Quarterly Report on Form 10-Q for the Quarter ended March 31, 2005).

 

 

 

10.43(d)*

 

Letter Agreement regarding pension and related benefits, dated January 21, 1999, between Hexcel Composites Limited, Hexcel Corporation and William Hunt (incorporated herein by reference to Exhibit 10.3 of the Company’s Quarterly Report on Form 10-Q for the Quarter ended March 31, 2005).

 

 

 

10.43(e)

 

Letter agreement dated April 3, 2008 between Hexcel Composites Limited and William Hunt, modifying the letter agreement regarding pension and related benefits, dated January 21, 1999, between Hexcel Composites Limited, Hexcel Corporation and William Hunt (incorporated herein by reference to Exhibit 10.3 of the Company’s Quarterly Report on Form 10-Q for the Quarter ended June 30, 2008).

 

 

 

10.43(f)

 

Modification to Supplemental Pension Arrangement between Hexcel Composites Limited and William Hunt (incorporated herein by reference to Exhibit 10.4 of the Company’s Quarterly Report on Form 10-Q for the Quarter ended June 30, 2008).

 

 

 

10.44*

 

Amended and Restated Executive Severance Agreement between Hexcel Corporation and Robert G. Hennemuth, dated December 31, 2008 (incorporated herein by reference to Exhibit 99.6 to Hexcel’s Current Report on Form 8-K dated January 7, 2009).

 

 

 

10.44(a)*

 

Amended and Restated Executive Deferred Compensation Agreement between Hexcel Corporation and Robert G. Hennemuth, dated December 31, 2007 (incorporated herein by reference to Exhibit 99.4 to Hexcel’s Current Report on Form 8-K dated January 7, 2008).

 

 

 

10.45*

 

Director Compensation Program, as of December 15, 2005 (incorporated herein by reference to Exhibit 99.1 to Hexcel’s Current Report on Form 8-K dated December 20, 2005).

 

 

 

21

 

Subsidiaries of the Company.

 

 

 

23

 

Consent of Independent Registered Public Accounting Firm.

 

 

 

24

 

Power of Attorney (included on signature page).

 

 

 

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

 

Certification of Chief Executive Officer and 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



Table of Contents

 

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.

 

 

 

Hexcel Corporation

 

 

 

 

 

 

February 12, 2009

 

/s/ DAVID E. BERGES

(Date)

 

David E. Berges

 

 

Chief Executive Officer

 

 

KNOWN TO ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints each of David E. Berges, Wayne C. Pensky and Ira J. Krakower, individually, his attorney-in-fact, with the power of substitution, for him in any and all capacities, to sign any amendments to this report, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each said attorney-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof.

 

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

 

February 12, 2009

 

(David E. Berges)

 

Board of Directors and

 

 

 

 

 

Chief Executive Officer

 

 

 

 

 

(Principal Executive Officer)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

/s/ WAYNE C. PENSKY

 

Senior Vice President and

 

February 12, 2009

 

(Wayne C. Pensky)

 

Chief Financial Officer

 

 

 

 

 

(Principal Financial Officer)

 

 

 

 

 

 

 

 

 

/s/ MARK I. CLAIR

 

Vice President, Corporate Controller and

 

 

 

(Mark I. Clair)

 

Chief Accounting Officer

 

February 12, 2009

 

 

 

(Principal Accounting Officer)

 

 

 

 

 

 

 

 

 

/s/ JOEL S. BECKMAN

 

Director

 

February 12, 2009

 

(Joel S. Beckman)

 

 

 

 

 

 

 

 

 

 

 

/s/ LYNN BRUBAKER

 

Director

 

February 12, 2009

 

(Lynn Brubaker)

 

 

 

 

 

 

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Table of Contents

 

/s/ JEFFREY C. CAMPBELL

 

Director

 

February 12, 2009

 

(Jeffrey C. Campbell)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

/s/ SANDRA L. DERICKSON

 

Director

 

February 12, 2009

 

(Sandra L. Derickson)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

/s/ W. KIM FOSTER

 

Director

 

February 12, 2009

 

(W. Kim Foster)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

/s/ JEFFREY A. GRAVES

 

Director

 

February 12, 2009

 

(Jeffrey A. Graves)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

/s/ DAVID C HILL

 

Director

 

February 12, 2009

 

(David C. Hill)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

/s/ DAVID C HURLEY

 

Director

 

February 12, 2009

 

(David C. Hurley)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

/s/ DAVID L PUGH

 

Director

 

February 12, 2009

 

(David L. Pugh)

 

 

 

 

 

 

30



Table of Contents

 

Selected Financial Data

 

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

 

(In millions, except per share data)

 

2008

 

2007

 

2006

 

2005

 

2004

 

 

 

 

 

 

 

 

 

 

 

 

 

Results of Operations (a):

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

1,324.9

 

$

1,171.1

 

$

1,049.5

 

$

957.6

 

$

837.0

 

Cost of sales

 

1,035.7

 

888.1

 

801.0

 

733.4

 

647.9

 

Gross margin

 

289.2

 

283.0

 

248.5

 

224.2

 

189.1

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

112.9

 

114.0

 

105.5

 

97.1

 

98.3

 

Research and technology expenses

 

31.4

 

34.2

 

29.7

 

24.8

 

23.0

 

Business consolidation and restructuring expenses

 

3.8

 

7.3

 

9.9

 

2.9

 

2.7

 

Other expense, net

 

10.2

 

12.6

 

 

15.1

 

3.0

 

Operating income

 

130.9

 

114.9

 

103.4

 

84.3

 

62.1

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

20.2

 

21.4

 

23.6

 

29.6

 

43.4

 

Non-operating expense, net

 

 

1.1

 

0.1

 

40.9

 

2.2

 

Income from continuing operations before income taxes, equity in earnings and discontinued operations

 

110.7

 

92.4

 

79.7

 

13.8

 

16.5

 

Provision (benefit) for income taxes

 

15.6

 

33.4

 

34.7

 

(113.8

)

2.6

 

Income from continuing operations before equity in earnings and discontinued operations

 

95.1

 

59.0

 

45.0

 

127.6

 

13.9

 

Equity in earnings from and gain on sale of investments in affiliated companies

 

16.1

 

4.3

 

19.9

 

3.6

 

1.1

 

Net income from continuing operations

 

111.2

 

63.3

 

64.9

 

131.2

 

15.0

 

Income (loss) from discontinued operations, net of tax

 

 

(2.0

)

1.0

 

10.1

 

13.8

 

Net income

 

111.2

 

61.3

 

65.9

 

141.3

 

28.8

 

Deemed preferred dividends and accretion

 

 

 

 

(30.8

)

(25.4

)

Net income (loss) available to common shareholders

 

$

111.2

 

$

61.3

 

$

65.9

 

$

110.5

 

$

3.4

 

Basic net income (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

1.15

 

$

0.67

 

$

0.70

 

$

1.67

 

$

(0.27

)

Discontinued operations

 

 

(0.02

)

0.01

 

0.17

 

0.35

 

Net income per common share

 

$

1.15

 

$

0.65

 

$

0.71

 

$

1.84

 

$

0.09

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted net income (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

1.14

 

$

0.66

 

$

0.68

 

$

1.40

 

$

(0.25

)

Discontinued operations

 

 

(0.02

)

0.01

 

0.11

 

0.33

 

Net income per common share

 

$

1.14

 

$

0.64

 

0.69

 

$

1.51

 

$

0.08

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

Basic

 

96.4

 

94.7

 

93.4

 

60.0

 

39.3

 

Diluted

 

97.6

 

96.5

 

95.5

 

93.7

 

42.1

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial Position (a):

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

1,210.3

 

$

1,060.5

 

$

1,014.5

 

$

880.6

 

$

776.8

 

Working capital

 

$

256.5

 

$

190.7

 

$

206.5

 

$

174.5

 

$

157.3

 

Long-term notes payable and capital lease obligations

 

$

392.5

 

$

315.5

 

$

409.8

 

$

416.8

 

$

430.4

 

Stockholders’ equity (deficit) (b)

 

$

509.2

 

$

427.6

 

$

301.6

 

$

210.7

 

$

(24.4

)

 

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Table of Contents

 

Other Data (a):

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

$

43.9

 

$

39.8

 

$

37.4

 

$

38.8

 

$

41.5

 

Capital expenditures and deposits for capital purchases

 

$

177.3

 

$

120.6

 

$

117.9

 

$

64.3

 

$

35.0

 

Shares outstanding at year-end, less treasury stock

 

96.4

 

95.8

 

93.8

 

92.6

 

53.6

 

 


(a)          All financial data presented has been restated to report our U.S. EBGI business and our Architectural business in France as discontinued operations.

(b)         No cash dividends were declared per share of common stock during any of the five years ended December 31, 2008.

 

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Table of Contents

 

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

 

Business Overview

 

 

 

Year Ended December 31,

 

(In millions, except per share data)

 

2008

 

2007

 

2006

 

Net sales

 

$

1,324.9

 

$

1,171.1

 

$

1,049.5

 

Gross margin %

 

21.8

%

24.2

%

23.7

%

Business consolidation and restructuring expenses

 

$

3.8

 

$

7.3

 

$

9.9

 

Other expense, net

 

$

10.2

 

$

12.6

 

$

 

Operating income

 

$

130.9

 

$

114.9

 

$

103.4

 

Operating income %

 

9.9

%

9.8

%

9.9

%

Interest expense

 

$

20.2

 

$

21.4

 

$

23.6

 

Provision for income taxes

 

$

15.6

 

$

33.4

 

$

34.7

 

Equity in earnings from and gain on sale of investments in affiliated companies

 

$

16.1

 

$

4.3

 

$

19.9

 

Income from continuing operations

 

$

111.2

 

$

63.3

 

$

64.9

 

Income (loss) from discontinued operations, net of tax

 

$

 

$

(2.0

)

$

1.0

 

Net income (a)

 

$

111.2

 

$

61.3

 

$

65.9

 

Diluted net income per common share

 

$

1.14

 

$

0.64

 

$

0.69

 

 

(a) One of the Company’s performance measures is net income adjusted for significant non-recurring income and expenses, which is a non-GAAP measure. Adjusted net income for the years ended December 31, 2008, 2007 and 2006 was $79.7 million, $69.5 million, and $48.5 million.  Management believes that net income before significant non-recurring items, which is a non-GAAP measurement, is meaningful to investors because it provides a view of Hexcel with respect to ongoing operating results. Non-recurring items represent significant charges or credits that are important to an understanding of Hexcel’s overall operating results in the periods presented.  Such non-GAAP measurements are not recognized in accordance with generally accepted accounting principles and should not be viewed as an alternative to GAAP measures of performance. A reconciliation to adjusted net income is provided below:

 

 

 

Year Ended December 31,

 

(In millions)

 

2008

 

2007

 

2006

 

GAAP net income from continuing operations

 

$

111.2

 

$

63.3

 

$

64.9

 

Tax adjustments (1)

 

(26.2

)

(1.9

)

(6.7

)

Gain on sale of investments in affiliated companies, net of tax

 

(11.7

)

 

 

(9.6

)

Other expense, net (2)

 

6.4

 

8.1

 

 

 

Adjusted net income (Non-GAAP)

 

$

79.7

 

$

69.5

 

$

48.5

 

 

(1) Tax adjustments include non-cash benefits of $26.2 million for the year ended December 31, 2008 arising from the reversal of valuation allowances against U.S. deferred tax assets and reinstatement of U.S. deferred tax assets which were previously written off.  See Note 9 in the accompanying

 

33



Table of Contents

 

consolidated financial statements for further detail. The 2007 tax adjustment includes a $1.9 million benefit from a change in estimate of state net deferred tax assets.  The 2006 amount represents the reversal of valuation allowances.

(2) Other expense in 2008 includes $1.7 million of pension settlement expense and $4.7 million of environmental expenses, both net of tax.  2007 includes $5.7 million of pension settlement expense and $2.4 million of impairment costs, both net of tax.

 

Business Trends

 

The primary markets we serve continued to grow in 2008, as our customers continue to expand their use of advanced composites.  2008 was our fifth consecutive year of sales growth, and our average annual sales growth rate from 2003 to 2008 was 12.7%.  Commercial aerospace market accounted for 54% of our 2008 sales, 72% of which was derived from sales to Airbus, Boeing and their subcontractors.   Space and Defense market accounted for 23% of our 2008 sales, with the Industrial markets comprising the remaining 23%.

 

·                  After three prior years of record orders reported by Airbus and Boeing, 2008 orders declined to the still robust level of 1,444 aircraft.  This is 68.5% more than the combined 858 new commercial aircraft deliveries in 2008, and resulted in a record combined backlog of 7,429 aircraft as of December 31, 2008 at Airbus and Boeing.  Nonetheless, the current poor global economic environment is causing global passenger and freight traffic to decline, which leads to significant doubts about the timing and ability of airline operators to fund or lease new aircraft in backlog.   Accordingly, there is significant caution and a wide range of views regarding deliveries in 2010 and beyond.  As Hexcel generally ships six months in advance of a delivery, 2010 delivery schedules will impact our second half of 2009 sales.   2009 deliveries for Airbus and Boeing are forecasted by them to be around 960 aircraft, and there remains confidence in those forecasts as the OEM’s have said that customer financing is in place as well as that there are other customers willing to take the place of any customers who can not complete their purchases.   If those deliveries occur, it would be the highest in history, exceeding the prior high of 914 deliveries in 1999.

 

·              2008 provided further confirmation of the longstanding trend of the commercial aerospace industry utilizing a greater proportion of advanced composite materials with each new generation of aircraft.  These new programs include the A380, B787, B747-8 and the A350.  Only the A380 is in service with the first delivery in October 2007 and 12 deliveries in 2008.  The Airbus A380 has 23% composite content by weight and has more Hexcel material used in its production than any aircraft previously manufactured, over $3 million per plane.  Airbus now expects to deliver 18 in 2009, and we expect Hexcel’s 2009 sales for the A380 to be in line with 2008.  As of January 31, 2009 Boeing has recorded 879 orders and commitments for its B787 aircraft.  The B787 will have about 52% composite content by weight, including composite wings and fuselage, compared to the 11% composite content used in the construction of its 777 aircraft and 6% for the 767 the aircraft it is primarily replacing.  The development of 787 has had several delays and is now expected to enter into service in the first quarter of 2010.  Hexcel estimates that it has $1.3 million to $1.6 million of content per plane, depending upon which engines are used.  The 747-8, while structurally an aluminum intensive aircraft, new engines and nacelles provide the opportunity for significant Hexcel revenues.  The freighter version of the 747-8 is now expected to be in service in the third quarter of 2010 and the passenger version in the second quarter of 2011.

 

·              In December 2006, Airbus announced the launch of the A350 which they indicated will also have at least 50% composite content by weight.  On May 30, 2008, Hexcel announced that it had been awarded a contract to supply carbon fiber composite materials for major primary structures for the A350.  The award covers the entire family of the A350 aircraft through 2025 and we estimate the award will generate revenues of $4-$5 billion over the life of the contract.  At December 31,

 

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Table of Contents

 

2008, Airbus has received 483 orders for the A350, which they project will enter into service in 2013.

 

·              Our commercial aerospace sales increased by 14.2% in 2008 compared to 2007 (13.5% in constant currency).  Airbus and Boeing related sales comprised approximately 72% of our commercial aerospace sales.  The rest of our commercial aerospace sales are principally to the regional and business aircraft markets.  These sales were up over 20% for the year, though the large growth rate we have seen over the last five years in these markets slowed in the second half of the year.  We expect the regional and business aircraft sales to decline in 2009 as compared to 2008, as the business jet and smaller aircraft markets are experiencing the impact of the general economic decline.

 

·              Our Space and Defense sales of $301.9 million were 18.1% higher as compared to 2007 (16.1% in constant currency).  We continue to benefit from our extensive qualifications to supply composite materials and, in some cases, composite structures to a broad range of rotorcraft, transport, fixed wing attack and satellite programs around the world. Key programs include the C-17, F/A-18E/F (Hornet), the F-22 (Raptor), the European Fighter Aircraft (Typhoon), the V-22 (Osprey) tilt rotor aircraft, the Blackhawk, the NH90, the S76 and the Tiger helicopters; the F-35 (joint strike fighter or JSF), and the EADS A400M military transport aircraft currently under development.  The benefits we obtain from these programs will depend upon which are funded and the extent of such funding.  We expect that Space and Defense revenue over time will grow at its historical 8% per year pace, and 2009 will return to revenue growth in the single digits.

 

·              Our Industrial sales of $312.7 million were 6.5% higher as compared to 2007 (0.7% higher in constant currency).  Industrial sales include wind energy, recreation, transportation and general industrial applications, with wind in 2008 accounting for over 50% of our Industrial sales.  Wind energy growth was again in the mid-teens for the year as compared to 2007 in constant currency.  The growth of the wind energy market will be, in part, dependent on public policy, including establishing and achieving renewable energy targets, and availability of project financing for the developers of wind farms.  Recreation, transportation and general industrial applications were at their lowest levels in years, reflecting both weak markets and selective portfolio pruning.  Demand for our products in these markets are driven by both the success of particular applications as well as the general overall economy

 

·                  In December 2008, we had our first sales to the American Centrifuge Project, for which we have an approximate $100 million contract to sell carbon fiber over about three years, with 2010 and 2011 being the largest years.  These sales should help offset any further decline in 2009 sales from recreation, auto and general industrial sub-markets.

 

·                  While we have some concerns about the end users’ availability of funding for future wind projects, we expect another double digit growth year from wind energy as new global capacity comes on line and U.S. policy warms to renewable energy sources.

 

·              Our current expectations are that in total our revenues will be flat in 2009 as compared to 2008 on a constant currency basis.  The volatile nature of the global economy and potential effects on our customers has added a good deal of uncertainty to our outlook.

 

 Results of Operations

 

We have two reportable segments: Composite Materials and Engineered Products.  Although these segments provide customers with different products and services, they often overlap within three end business markets: Commercial Aerospace, Industrial and Space & Defense.   Therefore, we also find it meaningful to evaluate the performance of our segments through the three end business markets.  Further

 

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discussion and additional financial information about our segments may be found in Note 18 to the accompanying consolidated financial statements of this Annual Report on Form 10-K.

 

Net Sales:  Consolidated net sales of $1,324.9 million for 2008 were $153.8 million, or 13.1% higher than the $1,171.1 million of net sales for 2007. Consolidated net sales of $1,171.1 million for 2007 were $121.6 million, or 11.6% higher than the $1,049.5 million of net sales for 2006. The increase for both periods was primarily attributable to sales growth within Commercial Aerospace.  Had the same U.S. dollar, British Pound Sterling and Euro exchange rates applied in 2007 as in 2008 (“in constant currency”), consolidated net sales for 2008 would have been $128.4 million, or 10.7% higher than 2007 net sales of $1,196.5 million (restated “in constant currency” using 2008 rates).  Had the same U.S. dollar, British Pound Sterling and Euro exchange rates applied in 2006 as in 2007 (“in constant currency”), consolidated net sales for 2007 would have been $87.0 million, or 8.0% higher than 2006 net sales of $1,084.1 million (restated “in constant currency” using 2007 rates).

 

The following table summarizes net sales to third-party customers by segment and end market segment in 2008 and 2007:

 

(In millions)

 

Commercial
Aerospace

 

Industrial

 

Space &
Defense

 

Total

 

2008 Net Sales

 

 

 

 

 

 

 

 

 

Composite Materials

 

$

530.7

 

$

308.7

 

$

235.9

 

$

1,075.3

 

Engineered Products

 

179.6

 

4.0

 

66.0

 

249.6

 

Total

 

$

710.3

 

$

312.7

 

$

301.9

 

$

1,324.9

 

 

 

54

%

23

%

23

%

100

%

2007 Net Sales

 

 

 

 

 

 

 

 

 

Composite Materials

 

$

455.2

 

$

292.4

 

$

194.3

 

$

941.9

 

Engineered Products

 

166.6

 

1.2

 

61.4

 

229.2

 

Total

 

$

621.8

 

$

293.6

 

$

255.7

 

$

1,171.1

 

 

 

53

%

25

%

22

%

100

%

2006 Net Sales

 

 

 

 

 

 

 

 

 

Composite Materials

 

$

409.5

 

$

275.8

 

$

172.9

 

$

858.2

 

Engineered Products

 

137.8

 

4.4

 

49.1

 

191.3

 

Total

 

$

547.3

 

$

280.2

 

$

222.0

 

$

1,049.5

 

 

 

52

%

27

%

21

%

100

%

 

Commercial Aerospace:  Net sales to the commercial aerospace market segment increased by $88.5 million or 14.2% to $710.3 million for 2008 as compared to net sales of $621.8 million for 2007; 2007 net sales increased by $74.5 million or 13.6% to $621.8 million for 2007 as compared to net sales of $547.3 million for 2006.  Net sales of the Composite Materials segment were $75.5 million higher, up 16.6% from 2007 and $45.7 million higher, up 11.2% from 2006.  Net sales of the Engineered Products segment increased by $13.0 million or 7.8% to $179.6 million in 2008 and increased by $28.8 million or 20.9% to $166.6 million in 2007.  In constant currency, net sales to the commercial aerospace market segment increased $84.4 million, or 13.5% in 2008 and $63.8 million or 11.4% in 2007.

 

As a result of the nearly two month Boeing strike which started September 6, 2008, sales to Boeing and its related subcontractors were flat for the year compared to 2007 levels, losing all of the significant growth they generated in the first eight months of 2008.  Airbus and its subcontractor sales were up over 20% for the year thanks to a very strong first half of 2008.  Sales to the remainder of the commercial aerospace market (primarily regional and business jet manufacturers) were also up over 20% for the year, though the large growth rates we have seen over the last five years in these markets slowed in the second half of the year.  Sales to new programs such as the A380, B787, A350, and B747-8 were up for the year, but still represent less than 15% of commercial aerospace revenues.

 

Our overall year-over-year improvement in 2007 as compared to 2006 was driven by increases in aircraft production by Boeing, Airbus, their subcontractors and other aircraft manufacturers, as well as the

 

 

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resultant growth in demand by aircraft engine and nacelle manufacturers.  For the year, Boeing and its subcontractors, manufacturers of engines and nacelles, and regional aircraft producers as a group were up over 25% as compared to 2006.  Airbus and its subcontractor sales ended down about 5% from the prior year, as the comparisons for the first half of 2007 were significantly impacted by the June 2006 announcement of the A380 delay.

 

Industrial:  Net sales of $312.7 million for 2008 increased by $19.1 million, or 6.5%, compared to net sales of $293.6 million in 2007; 2007 net sales increased by $13.4 million, or 4.8%, compared to net sales of $280.2 million in 2006.  In constant currency, net sales to the industrial market segment increased $2.2 million or 0.7% in 2008 compared to a decrease of $5.2 million or 1.7% in 2007. Wind energy comprised more than half of the industrial sales in 2008. Wind energy revenue grew in the mid-teens for both years on a constant currency basis.  Our new China wind plant has begun production and we have broken ground on our new wind facility in Colorado to support the growing global demand.

 

Sales to automotive, recreation and other general industrial markets in 2008 were at their lowest level in years, reflecting both weak markets and selective portfolio pruning.  In 2007, sales to recreation and other industrial markets for the year were down about 9% due to capacity constraints, selective portfolio pruning and a weak winter sports market.

 

Space & Defense:  Net sales of $301.9 million increased $46.2 million, or 18.1%, for 2008 as compared to net sales of $255.7 million for 2007.  In 2007, net sales increased $33.7 million, or 15.2%, for 2007 as compared to net sales of $222.0 million for 2006. In constant currency, net sales increased $41.8 million, or 16.1% in 2008 and $28.4 million, or 12.5% in 2007.  After a flat 2006, both 2007 and 2008 had growth well above our historic 8 to 10% average, as we benefitted from a broad range of programs in the US, Europe and Asia, including rotorcraft, fixed wing attack, transport and satellite programs. We continue to benefit from our ability to supply composite materials and, in some cases, composite structures to a broad range of military aircraft and helicopter programs.

 

Gross Margin: Gross margin for 2008 was $289.2 million, or 21.8% of net sales, compared to gross margin of $283.0 million, or 24.2% of net sales, in 2007.  The 240 basis point decline in gross margin was due to a variety of factors including about 125 basis points of incremental fixed and start-up costs associated with the new facilities in Spain, France, Germany and now China.  Also for the year, we estimate that the extraordinary volatility in exchange rates, energy, and oil based input materials cost us at least another 125 basis points in gross margin, but these issues have for the most part now subsided.

 

Gross margin for 2007 was $283.0 million, or 24.2% of net sales, compared to gross margin of $248.5 million, or 23.7% of net sales, in 2006.  The improvement reflects primarily the contribution of higher net sales from Commercial Aerospace, Space & Defense and Wind Energy end markets, the product mix of those markets and improved operating efficiencies somewhat offset by higher maintenance, labor, freight and depreciation expenses.

 

Selling, General and Administrative (“SG&A”) Expenses:  SG&A expenses were $112.9 million, or 8.5% of net sales for 2008, $114.0 million, or 9.7% of 2007 net sales, and $105.5 million or 10.1% of 2006 net sales.  The $1.1 million decrease in 2008 SG&A expenses reflects good control of costs, particularly in the latter part of the year in light of the Boeing strike and changing economic environment and favorable foreign exchange rates towards the end of the year.  The $8.5 million increase in 2007 SG&A expenses reflects, among other factors, $3.9 million attributed to changes in foreign exchange rates, and an increase of $2.1 million for share-based compensation primarily from grants issued at the beginning of the year.  The remaining is primarily due to general increases in incentive compensation, salaries and benefits and costs related to personnel changes.

 

Research and Technology Expenses: R&T expenses for 2008 were $31.4 million, or 2.4% of net sales, $34.2 million, or 2.9% of 2007 net sales, and $29.7 million or 2.8% of 2006 net sales.  The $2.8 million decrease in 2008 and the $4.5 million increase in 2007 were due to higher qualification costs in 2007 (i.e. costs associated with certifying our products and processes to customer specifications) associated

 

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with the acceleration of opportunities for composites on new commercial aircraft programs including the Boeing 787 and investment in the development of new products and applications.

 

Business Consolidation and Restructuring Expenses: Business consolidation and restructuring expenses for 2008 were $3.8 million, $7.3 million for 2007 and $9.9 million for 2006.  Almost all of these expenses relate to the December 2006 program to realign our company into a single business and address stranded costs resulting from divestitures due to our portfolio realignment, and clean-up expenses associated with preparing the Livermore, California land for sale after closing the manufacturing facility located on that site.

 

Other Expense, Net:  Other operating expense of $10.2 million during 2008 consisted of a $7.6 million environmental reserve charge related to a previously disclosed liability and a $2.7 million final charge in relation to the termination of our U.S. defined benefit plan. Other Expenses in 2007 were $12.6 million comprised of the initial $9.4 million charge related to the termination of our U.S. defined benefit plan and an impairment charge for technology of $3.2 million.  There were no other expenses in 2006.

 

Operating Income: Operating income for 2008 was $130.9 million compared with operating income of $114.9 million for 2007 and $103.4 million in 2006.  Operating income as a percent of sales was 9.9% , 9.8%  and 9.9% in 2008, 2007 and 2006 respectively.  The $16.0 million increase in 2008 operating income is due in part to greater sales for 2008 and good control of Operating Expenses partially offset by the incremental fixed and start-up costs associated with the new facilities.

 

One of the Company’s performance measures is operating income adjusted for non-recurring operating expenses and business consolidation and restructuring expenses, which is a non-GAAP measure. Adjusted operating income for the years ended December 31, 2008, 2007 and 2006 was $145.0 million, $134.8 million and $114.5 million or 10.9%, 11.5% and 10.9% as a percentage of net sales, respectively.  A reconciliation to adjusted operating income is provided on page 33.  Almost all of the Company’s sales and costs are either in dollars, Euros or GBP.   Approximately one-third of our sales are in Euros or GBP, in addition much of our European commercial aerospace business has sales denominated in dollars and costs denominated in all three of the currencies.  The net of all this activity is that as the dollar weakens against the Euro and the GBP, our sales will increase while our operating income will decrease.   We have an active hedging program to minimize the impact on operating income, but our operating income as a percentage of net sales is effected.    While the dollar has recently strengthened, our 2008 operating income percentage is approximately 60 basis points worse than 2007 due to exchange rates and our 2007 operating income percentage is approximately 30 basis points worse than 2006 also due to exchange rates.

 

Operating income for the Composite Materials segment increased $16.0 million or 11.2% to $158.8 million, as compared to $142.8 million for 2007.  The increase in operating income is the result of an additional $139.6 million of segment revenue offset by new facilities costs. Operating income for the Engineered Products segment increased by $5.5 million compared with 2007 to $21.3 million, as results were helped by both volume and lower development costs related to the 787.

 

We did not allocate corporate net operating expenses of $54.7 million, $49.2 million and $35.8 million to segments in 2008, 2007 and 2006, respectively.  As discussed above, 2008 and 2007 had $10.3 million and $9.4 million of other expenses included in this segment.  The 2008 increase also reflects the costs incurred earlier in the year related to the proxy contest.  The increase in 2007 is primarily attributable to the pension settlement expense of $9.4 million and increased SG&A of $4.0 million from the higher stock and incentive compensation costs and the costs related to personnel changes.

 

Interest Expense:  Interest expense for 2008 was $20.2 million, $21.4 million for 2007 and $23.6 million for 2006.  The decrease in both 2008 and 2007 was primarily due to lower average interest rates on our senior secured credit facility resulting in a $2.8 million decrease in expense and lower bank fees of $0.7 million.

 

Non-Operating Expense, Net:  There were no non-operating expenses in 2008. Non-operating expense in 2007 is comprised of $1.1 million reflecting the accelerated amortization of deferred financing costs as a result of prepayments of the Company’s bank term loan with the net proceeds from asset sales.

 

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Provision (Benefit) for Income Taxes:  During 2008, we recorded a tax provision of $15.6 million or 14.1% effective tax rate. Included in the 2008 provision were certain tax benefits relating to the implementation of tax planning strategies which enabled the Company to revise its estimate of U.S. net operating loss (NOL) and foreign tax credit (FTC) carry-forwards expected to be realized in the future. The tax provision for year included $26.2 million of net tax benefits primarily attributable to changing prior year foreign taxes paid from a deduction to a credit and the reversal of valuation allowances against net operating losses and the reinstatement of net operating losses which were previously written off. The Company has additional FTCs for which we have recorded valuation allowances, but we will not reverse these valuation allowances until such time that we believe it is more likely than not that they are realizable. Excluding these benefits the adjusted effective tax rate for the year was 37.8%.  The 2007 provision of $33.4 million or 36.1% effective tax rate included a $1.9 million benefit, which includes an adjustment of $2.3 million to certain prior period balances to primarily record additional deferred tax assets arising from state net operating loss carry-forwards, offset by other discrete items of $0.4 million.  The 2006 provision of $34.7 million or 43.5% effective tax rate included a $4.5 million benefit for the reversal of a valuation allowance against our U.S. deferred tax assets related to capital losses.   Excluding these benefits the adjusted effective tax was 38.2% for 2007 and 49.2% in 2006.  We believe adjusted effective tax rate, which is a non GAAP measure, is meaningful since it provides insight to the tax rate of ongoing operations.

 

Equity in Earnings from and Gain on Sale of Investments in Affiliated Companies:   Equity in earnings from and gain on sale of investments in affiliated companies during 2008 of $16.1 million increased by $11.8 million from 2007 due to the inclusion of a pre-tax gain of $12.5 million from the sale of our interest in BHA during 2008 to our joint venture partner for $22.3 million in cash.  Equity in earnings from and gain on sale of investments in affiliated companies during 2006 was $19.9 million as it included a pre-tax gain of $15.7 million from the sale of our interest in TechFab LLC during 2006 to our joint venture partner for $22.0 million in cash.  For additional information, see Note 5 to the accompanying consolidated financial statements of this Annual Report on Form 10-K.

 

Income from Continuing Operations:  Net income from continuing operations was $111.2 million, or $1.14 per diluted share for the year ended December 31, 2008 compared to $63.3 million, or $0.66 per diluted common share for 2007 and $64.9 million or $0.68 per diluted share for 2006.  The increase reflects the results discussed above, also see the above table for a reconciliation of GAAP net income from continuing operations to our adjusted “Non-GAAP” measure.

 

Income (Loss) from Discontinued Operations, Net:  There was no activity from discontinued operations in 2008.  Net loss from discontinued operations was $2.0 million, or $0.02 per diluted common share for the year ended December 31, 2007, which includes a net gain of $3.1 million related to the sales of the U.S. EBGI product lines and the European Architectural business.  For the year ended December 31, 2006, our discontinued operations resulted in net income of $1.0 million, or $0.01 per diluted common share.  The change in results from discontinued operations, excluding the 2007 gain on sales, was $6.1 million, primarily resulting from an after-tax charge of $9.7 million recognized during 2007 related to a litigation settlement.  Our net gain on the sales of discontinued businesses consists of a $6.5 million gain on the sale our Architectural business and a $3.4 million loss on the sale of our U.S. EBGI product lines.  For additional information, see Note 20 to the accompanying consolidated financial statements of this Annual Report on Form 10-K.

 

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Business Consolidation and Restructuring Programs

 

The aggregate business consolidation and restructuring activities for the three years ended December 31, 2008, consisted of the following:

 

(In millions)

 

Employee
Severance

 

Facility &
Equipment

 

Total

 

Balance as of December 31, 2005

 

$

3.5

 

$

0.7

 

$

4.2

 

Business consolidation and restructuring expenses

 

8.0

 

1.9

 

9.9

 

Cash expenditures

 

(1.4

)

(2.3

)

(3.7

)

Currency translation adjustments

 

0.6

 

 

0.6

 

Balance as of December 31, 2006

 

$

10.7

 

$

0.3

 

$

11.0

 

Business consolidation and restructuring expenses:

 

2.0

 

5.3

 

7.3

 

Cash expenditures

 

(9.6

)

(5.3

)

(14.9

)

Currency translation adjustments and other adjustments

 

 

 

 

Balance as of December 31, 2007

 

$

3.1

 

$

0.3

 

$

3.4

 

Business consolidation and restructuring expenses

 

0.8

 

3.0

 

3.8

 

Cash expenditures

 

(1.9

)

(2.4

)

(4.3

)

Currency translation adjustments and other adjustments

 

 

 

 

Balance as of December 31, 2008

 

$

2.0

 

$

0.9

 

$

2.9

 

 

December 2006 Program

 

In December 2006, we announced that we had begun the process of realigning our organization into a single business and addressing stranded costs that will result from divestitures associated with our portfolio realignment.  During 2008, 2007 and 2006, we recorded business consolidation and restructuring expenses of $1.7 million, $3.0 million and $7.6 million in connection with this action.  This program is essentially complete.

 

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

 

(In millions)

 

Employee
Severance

 

Facility &
Equipment

 

Total

 

Balance as of December 31, 2005

 

$

 

$

 

$

 

Business consolidation and restructuring expenses

 

7.4

 

0.2

 

7.6

 

Cash expenditures

 

(0.4

)

(0.2

)

(0.6

)

Balance as of December 31, 2006

 

$

7.0

 

$

 

$

7.0

 

Business consolidation and restructuring expenses

 

2.8

 

0.2

 

3.0

 

Cash expenditures

 

(7.8

)

 

(7.8

)

Non-cash usage, including asset write-downs

 

 

(0.2

)

(0.2

)

Currency translation adjustments

 

0.3

 

 

0.3

 

Balance as of December 31, 2007

 

$

2.3

 

$

 

$

2.3

 

Business consolidation and restructuring expenses

 

0.4

 

1.3

 

1.7

 

Cash expenditures

 

(1.5

)

(0.4

)

(1.9

)

Currency translation adjustments and other adjustments

 

 

 

 

Balance as of December 31, 2008

 

$

1.2

 

$

0.9

 

$

2.1

 

 

Livermore 2004 Program

 

In the first quarter of 2004, we announced our intent to consolidate the activities of our Livermore, California facility into other facilities, principally the Salt Lake City, Utah plant.  The plant ceased operations on March 31, 2007.  The Livermore facility has now been dismantled and the site is being remediated as part of the preparation for the sale of the property, with the related costs being expensed as incurred.  Minor amounts of clean-up expenses may continue to be incurred into 2009.

 

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Retirement and Other Postretirement Benefit Plans

 

We maintain qualified and nonqualified defined benefit retirement plans covering certain current and former European employees, as well as nonqualified defined benefit retirement plans and a retirement savings plans covering eligible U.S. employees, and participate in a union sponsored multi-employer pension plan covering certain U.S. employees with union affiliations.  In addition, we provide certain postretirement health care and life insurance benefits to eligible U.S. retirees.  In December 2006, our Board of Directors voted to terminate the U.S. qualified defined benefit plan as of April 1, 2007.

 

Under the retirement savings plans, eligible U.S. employees can contribute up to 20% of their compensation to an individual 401(k) retirement savings account.  We make matching contributions equal to 50% of employee contributions, not to exceed 3% of employee compensation.

 

During the fourth quarter of 2007, we obtained approval from the Pension Benefit Guarantee Corporation and the Internal Revenue Service to proceed with the termination of the U.S. Qualified Defined Benefit Plan.  In December 2007 we began the process of distributing lump-sum benefit payments and purchasing annuity contracts for all the U.S. qualified plan participants.  During 2008, and 2007 we distributed $26.8 million out of the pension fund in the form of lump-sum payments.  Cash contributions from Hexcel to the pension fund for the lump sum distributions were $3.3 million in the fourth quarter of 2007 and an additional $6.9 million was made in the first quarter of 2008 to complete the liquidation.

 

We continue to maintain our defined benefit retirement plans in the United Kingdom, Belgium, and Austria covering certain employees of our subsidiaries in those countries.  The defined benefit plan in the United Kingdom (the “U.K. Plan”) is the largest of the European plans.  As of December 31, 2008, 75% of the total assets in the U.K. Plan were invested in equities.  Equity investments are made with the objective of achieving a return on plan assets consistent with the funding requirements of the plan, maximizing portfolio return and minimizing the impact of market fluctuations on the fair value of the plan assets.  We use long-term historical actual return experience to develop the expected long-term rate of return assumptions used in the net periodic cost calculations of our U.K. Plan.  As a result of an annual review of historical returns and market trends, the expected long-term weighted average rate of return for the U.K. Plan for the 2009 plan year will be 7.1% and 7.0% for the European Plans as a group.

 

We account for our defined benefit retirement plans and our postretirement benefit plans using actuarial models required by Statement of Financial Accounting Standards No. 87, Employers’ Accounting for Pensions (“SFAS 87”), No. 88, Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits (“SFAS 88”), No. 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions (“SFAS 106”) and No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106, and 132(R).

 

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.

 

We use our actual return experience, future expectations of long-term investment returns, and our actual and targeted asset allocations to develop our expected rate of return assumption used in the net periodic cost calculations of our funded 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 our expected return on plan assets and the actual return.  Following the attribution approach, each year’s difference is amortized 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

 

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income and expense recognition that more closely matches the pattern of the services provided by the employees.

 

We annually set our discount rate assumption for retirement-related benefits accounting to reflect the rates available on high-quality, fixed-income debt instruments.  The discount rate assumption used to calculate net periodic retirement related costs for the European funded plans was 5.64% for 2008 and 5.70% and 5.0% for 2007 and 2006, respectively.  The rate of compensation increase, which is another significant assumption used in the actuarial model for pension accounting, is determined by us based upon our long-term plans for such increases and assumed inflation.  These rates have remained relatively constant over the past three years and are expected to remain constant for 2009.  For the postretirement health care and life insurance benefits plan, we review 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.

 

Actual results that differ from our assumptions are accumulated and amortized over future periods and, therefore, generally affect the net periodic costs and recorded obligations in such future periods.  While we believe 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 our pension and other postretirement benefit plans, see Note 8 to the accompanying consolidated financial statements of this Annual Report on Form 10-K.

 

Significant Customers

 

Approximately 23%, 25%, and 24% of our 2008, 2007, and 2006 net sales, respectively, were to The Boeing Company (“Boeing”) and related subcontractors.  Of the 23% of sales to Boeing and its subcontractors in 2008, 18% related to commercial aerospace market applications and 5% related to space and defense market applications.  Approximately 24%, 22%, and 26% of our 2008, 2007, and 2006 net sales, respectively, were to European Aeronautic Defence and Space Company (“EADS”), including its business division Airbus Industrie (“Airbus”), and its subcontractors.  Of the 24% of sales to EADS and its subcontractors in 2008, 20% related to commercial aerospace market applications 4% related to space and defense market applications.

 

In 2008, Vestas Wind Systems A/S accounted for nearly 11% of the Company’s total net sales.   Prior to 2008, their sales were less than 10% of total net sales.  All of these sales are included in the Composite Materials segment and are in the Industrial market.

 

Portfolio Review

 

In July of 2006, we announced our intention to explore strategic alternatives for portions of our previously reported Reinforcements segment.  In order to take full advantage of the many growing applications for advanced composite materials, we decided to narrow our focus and consolidate our activities around our carbon fiber, reinforcements for composites, honeycomb, matrix and engineered products product lines.  In doing so, we decided to combine our Reinforcements activities related to advanced composites with our previously reported Composites and Structures segments into a single organization, and explore the sale of our European Architectural business, our EBGI product lines and our interest in the TechFab joint venture, previously reported within the Reinforcements segment.

 

In December of 2006, we completed the sale of our interest in TechFab LLC (“TechFab”) to our joint venture partner for $22.0 million in cash.  TechFab is headquartered in Anderson, SC and manufactures non-woven reinforcement materials used in the manufacture of construction and roofing materials, sail cloth and other specialty applications.  As a result of the sale, we recognized an after-tax gain of $9.6 million in the fourth quarter of 2006.

 

In February of 2007, we completed the sale of our European Architectural business.  Cash proceeds from the sale were $25.0 million.  As a result of the sale, we recognized an after-tax gain of $6.5 million.

 

On August 6, 2007, we completed the sale of the EBGI portion of our reinforcements business.  Cash

 

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proceeds from the sale, net of transaction costs, were $58.5 million, resulting in a net after-tax loss of $3.4 million.  The sale included up to $12.5 million of additional earnout payments contingent upon annual sales for three years of the Ballistics product line.  The additional payments are capped with a maximum of $5.0 million in any individual year.  In 2008 the Company received $0.3 million. Additional payments, if any, will be recorded as income when earned.  The earnout provision expires in August 2010.

 

With the completion of the EBGI sale, our previously announced portfolio review has reached a successful conclusion, resulting in total cash proceeds, before any earnout payments, of $105.5 million and a net after-tax gain of $12.7 million.

 

Financial Condition

 

We have conducted a review of our exposures to the recent severe deterioration in the financial markets and global economy.  As a result we have taken a number of actions, including tight monitoring of all our cash costs and aligning the pace of our capital expenditures with our current growth assumptions.   We have plans for $100 million of capital spending in 2009, with much of it in the first half as we complete carbon fiber and wind capacity projects already in progress.  We target 2009 to be cash flow positive for the year, though we do expect to be negative in the first half as a result of the timing of the capital spending and other seasonal factors.  

 

We have a portfolio of derivatives related to currencies and interest rates.  We monitor our counterparties and we only use those rated AA or better.  Further, as a result of the volatile foreign exchange markets, many of these derivatives have moved into a liability position reducing our exposure to counterparty risk.

 

Liquidity

 

Short-term liquidity requirements consist primarily of normal recurring operating expenses and working capital needs; capital expenditures and debt service requirements.  We expect to meet these short-term requirements through cash, net cash from operating activities and our and revolving credit facility. 

 

Our cash on hand at December 31, 2008 was $50.9 million as compared to $28.1 million at December 31, 2007.  The $50.9 million is held in cash and prime money market investments with strong sponsor organizations which are monitored on a continuous basis.  Over the last three years, net cash from operating activities has provided a source of funds ranging between $98.3 million and $106.3 million per year.  

 

The Company has a senior secured credit facility (the “Senior Secured Credit Facility”) in place, consisting of $166.7 million in term loans outstanding and a $125.0 million revolving loan as further discussed under the Credit Facilities section.  Our total debt as of December 31, 2008 was $394.6 million, an increase of $78.7 million from the December 31, 2007 balance.  Our $125 million revolver facility is undrawn (other than by outstanding letters of credit) and as of December 31, 2008 had $111.1 million available for borrowings and expires March 1, 2010.  Scheduled debt payments in the next year are nominal.  We have evaluated our bank group participating in our revolving credit facility to reassure committed revolver availability.  To date we have not experienced any limitations on our ability to access this facility as we monitor our counterparties on a continuous basis.  During the fourth quarter we borrowed against our revolving credit facility, and subsequently paid down the balance prior to December 31, 2008,  The level of available borrowing capacity fluctuates during the course of the year due to factors including, capital expenditures, interest and incentive plan payments, as well as timing of receipts and disbursements within the normal course of business. 

 

As of December 31, 2008, our long-term liquidity requirements consisted primarily of obligations under our long-term debt obligations.  While we only have $2.1 million of debt due in 2009, our revolver facility expires on March 1, 2010.  Accordingly, we expect to refinance our Senior Secured Credit Facility in 2009.  The availability and terms of any such financing will depend upon market and other conditions at the time.  Though we do expect our borrowing costs will be higher than they are currently under our current Senior Secured Credit Facility. 

 

Our U.S. pension plan assets were distributed as part of the termination discussed above; however we are monitoring our foreign plan assets for impacts on future funding requirements and expense.  Our largest exposure is in the UK, where the fair value of the assets was approximately $69 million at December 31, 2008. This asset value compares to a benefit obligation of approximately $81 million.  Additionally, if the actual rate of return differs considerably from the expected rate of return, the amount of future contributions to these plans could change accordingly. 

 

Recent events in the credit markets have had an adverse impact on the financial markets.  We have not yet been significantly affected by the distress being experienced in the credit markets; however no assurances can be made that this could not change in the future.

 

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Credit Facilities:  On March 1, 2005, we entered into a $350.0 million senior secured credit facility, consisting of a $225.0 million term loan and a $125.0 million revolving loan.  On May 30, 2008, Hexcel Corporation and its lenders entered into the second amendment to its Senior Secured Credit Facility pursuant to which Hexcel borrowed $80.0 million of additional term loans, designated as term loan C.  The net proceeds were used to pay down the revolving loan balance under the credit facility to restore availability under the revolver.  All other terms of the credit facility, including the collateral package, subsidiary guarantees and financial and other covenants, remain unchanged.

 

Term loan B under the Senior Secured Credit Facility is scheduled to mature on March 1, 2012; term loan C under the facility mature on April 1, 2012, one month after maturity of the existing term loan B under the credit facility and the revolving loan under the Senior Secured Credit Facility is scheduled to expire on March 1, 2010. 

 

Term loan B borrowings under the Senior Secured Credit Facility bear interest at a floating rate based on the agent’s defined “prime rate” plus a margin that can vary from 0.875% to 1.125% or LIBOR plus a margin that can vary from 1.875% to 2.125%.  Upon entering the term loan C agreement, the interest rate margin on term loan B was increased by 37.5 basis points, a level slightly below that of term loan C. Term loan C borrowings under the Senior Secured Credit Facility bear interest at a floating rate based on the agent’s defined “prime rate” plus a margin that can vary from 1.25% to 1.50% or LIBOR plus a margin that can vary from 2.25% to 2.50%. Revolving loan borrowings under the Senior Secured Credit Facility bear interest at a floating rate based on either the agent’s defined “prime rate” plus a margin that can vary from 0.25% to 1.00%, or LIBOR plus a margin that can vary from 1.25% to 2.00%.  The margin in effect for a borrowing at any given time depends on our consolidated leverage ratio.  The weighted average interest rate for the actual borrowings on the Senior Secured Credit Facility was 5.01% for the year ended December 31, 2008.  Borrowings made under the LIBOR option during the year ended December 31, 2008 were made at interest rates ranging from 3.875% to 6.5625%.

 

Principal payments on the term loan C are due quarterly in similar proportion to term loan B, with substantially all of the principal due in the second half of 2011 and the first half of 2012.  Any voluntary or mandatory prepayments of term loans by Hexcel will be applied pro rata among the previously existing term loans and the new term loans.  The interest rate for the new term loans is based on LIBOR plus a margin, and was determined based on current market pricing.  In accordance with the terms of the credit facility regarding the borrowing of additional loans, The Senior Secured Credit Facility is secured by a pledge of assets that includes, among other things, the receivables, inventory, property, plant and equipment and intellectual property of Hexcel Corporation and our material U.S. subsidiaries and 65% of the equity interest of our first-tier U.K. subsidiary.  In addition, the Senior Secured Credit Facility permits us to issue letters of credit up to an aggregate amount of $40.0 million, of which $13.9 million were outstanding as of December 31, 2008.  Any outstanding letters of credit reduce the amount available for borrowing under the revolving loan. 

 

We are required to maintain various financial ratios throughout the term of the Senior Secured Credit Facility.  These financial covenants set maximum values for our leverage (the ratio of total debt to EBITDA), interest coverage (the ratio of EBITDA to book interest), and capital expenditures (not to exceed specified annual expenditures).  For 2009, our capital expenditure limitation is $100 million.  We have plans in place to spend the $100 million in 2009, but in the event estimated future customer requirements require us to accelerate our capital spending plan, we may not be able to do so if we are unable to refinance the credit facility or obtain an amendment waiver.  The Senior Secured 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.  In addition, the Senior Secured Credit Facility contains other customary terms relating to, among other things, representations and warranties, additional covenants and events of default.  At December 31, 2008, we were in compliance with the financial covenants under the Senior Secured Credit Facility and we expect to remain in compliance.

 

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Operating Activities:  We generated $98.9 million from operating activities during 2008, a decrease of $7.4 million from 2007.  Net income plus non-cash items contributed $145.0 million of cash flow.  This was partly offset by increased working capital requirements primarily due to the 13% sales growth during 2008, including $25.7 million in reductions in accounts payables and accrued liabilities primarily as a result of high capital expenditures in December 2007 which were paid in 2008.  Other uses of cash during 2008 included $7.5 million of tax payments related to the sale in 2007 of the European architectural business and the $7.1 million final cash contribution to the U.S. defined pension plan.

 

Net cash generated from operating activities of continuing operations during 2007 was $106.3 million, an increase of $8.0 million from 2006.  Net income generated from continuing operations plus non-cash charges (depreciation and amortization) contributed $107.3 million of cash flow.  The 2007 cash from operating activities did benefit from a $21.0 million increase in accounts payable and accrued liabilities as a result of the timing of expenditures in December 2007, that resulted in payments in January 2008.  Cash used for inventory increased by $4.7 million during 2007.  We made contributions to our post retirement plans during 2007 of $13.0 million, including $5.9 million specifically related to our U.S. qualified pension plan.  The contribution to post retirement plans during 2006 was $7.7 million.  Dividends of $1.3 million were received from an affiliated company during 2006.

 

Investing Activities:  Net cash used for investing activities was $155.0 million in 2008 compared to $37.4 million in 2007.  We made capital expenditures of $177.3 million and $120.6 million during 2008 and 2007, respectively, primarily related to our carbon fiber expansion programs, discussed in further detail below.  During 2008, we received total proceeds of $22.3 million from the sale of our interest in BHA. In 2007 we received proceeds of $84.0 million in connection with the sales of our EBGI and European Architectural businesses.  During 2006, we received proceeds of $22.0 million in connection with the sale of our ownership interest in TechFab, an affiliated company.

 

With increased demand for our products, we made capital expenditures in 2007 and 2008 to increase our manufacturing capacity, and will make further expenditures in 2009.  Capital expenditures for 2009 are projected to be approximately $100 million.

 

Financing Activities:  Net cash provided by financing activities in 2008 was $80.1 million, primarily reflecting the term loan C borrowings.  Net cash used for financing activities of continuing operations in 2007 was $75.5 million.  This use of cash was primarily due to repayments of long-term debt totaling $96.2 million during the year, generated from the asset sales mention above.  During 2007, we received $21.3 million of cash from activity under stock plans.   Net cash provided by financing activities was $2.5 million during 2006.  During 2006, we received $10.6 million from activity under stock plans.   In addition, we made net payments of $6.4 million on the outstanding balance of our senior secured credit facility and made capital lease payments and other debt of $1.7 million.

 

Financial Obligations and Commitments:  As of December 31, 2008, current maturities of notes payable and capital lease obligations were $ 2.1 million.  We have entered into several capital leases for buildings and warehouses with expirations through 2021.  In addition, certain sales and administrative offices, data processing equipment and manufacturing facilities are leased under operating leases.

 

Total letters of credit issued and outstanding under the Senior Secured Credit Facility were $13.9 million as of December 31, 2008.  We had no letters of credit issued separately from this credit facility.

 

The following table summarizes the scheduled maturities as of December 31, 2008 of financial obligations and expiration dates of commitments for the years ended 2009 through 2013 and thereafter.

 

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(In millions)

 

2009

 

2010

 

2011

 

2012

 

2013

 

Thereafter

 

Total

 

Senior secured credit facility — revolver due 2010

 

$

 

$

 

$

 

$

 

$

 

$

 

$

 

Senior secured credit facility — term B loan due 2012

 

0.9

 

0.9

 

64.3

 

21.4

 

 

 

87.5

 

Senior secured credit facility — term C loan due 2012

 

0.8

 

0.8

 

39.2

 

38.8

 

 

 

79.6

 

6.75% senior subordinated notes due 2015