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, 2009

 

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes o  No 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 companyo

(Do not check if a smaller reporting company)

 

 

 

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 $914,585,628 based on the reported last sale price of common stock on June 30, 2009, 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 9, 2010

COMMON STOCK

 

96,946,602

 

Documents Incorporated by Reference:

 

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

 

 

 



 

PART I

 

ITEM 1. Business.

 

General Development of Business

 

Hexcel Corporation, founded in 1946, was incorporated in California in 1948, and reincorporated in Delaware in 1983.  Hexcel Corporation and its subsidiaries (herein referred to as “Hexcel”, “the Company”, “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 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 presently 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.

 

The following summaries describe the ongoing activities related to the Composite Materials and Engineered Products segments as of December 31, 2009.

 

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.

 

2



 

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, fabrics and specialty reinforcements

·                  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, 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”). Carbon fiber is also used in filament winding, hand layup, automatic tape layup 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 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. 

 

3



 

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.  Honeycomb is also used in Acousti-Cap® where a non-metallic permeable cap material is embedded into honeycomb core that is used in aircraft engines to dramatically reduce noise during take off and landing without adding a structural weight penalty.  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

 

United Technologies

 

Illescas, Spain

FACC

 

Vestas

 

Tianjin, China

 

 

 

 

Windsor, Colorado

 

Net sales for the Composite Materials segment to third-party customers were $856.5 million in 2009, $1,075.3 million in 2008 and $941.9 million in 2007, which represented approximately 77%, 81% and 80%, 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 3% of our total production of composite materials in 2009 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.

 

4



 

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 $251.8 million in 2009, $249.6 million in 2008 and $229.2 million in 2007, which represented approximately 23%, 19% and 20% of our net sales, respectively.

 

The Engineered Products business unit has a 50% ownership interest in a Malaysian joint venture, Asian Composites Manufacturing Sdn. Bhd. (“ACM”).  Under the terms of the joint venture agreement, Hexcel and The Boeing Company (“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, and 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 $39.2 million, $27.9 million and $30.2 million in 2009, 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

Bombardier

 

Burlington, Washington

GKN

 

Pottsville, Pennsylvania

Hawker / Beechcraft

 

Welkenraedt, Belgium

Spirit Aerosystems

 

Alor Setar, Malaysia (JV)

United Technologies

 

 

 

Divested Businesses

 

In 2007, we completed the sales of the U.S. electronics, ballistics and general industrial (“EBGI”) portion of our reinforcements business and of our European Architectural business.  Cash proceeds from the sales were $58.5 million and $25.0 million, respectively.  As a result of the sales, we recognized an after-tax loss of $3.4 million on EBGI and an after-tax gain of $6.5 million on the European Architectural business.

 

The EBGI sale included up to $12.5 million of additional earn out 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 2009 and 2008 the Company received $2.0 million and $0.3 million, respectively.  The income recognized after providing for a litigation claim is included as Other expense, net on the consolidated statements of operations. Additional payments, if any, will be recorded as income when earned.  The earn out provision expires in August 2010.

 

See Note 19 “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 on the 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 17 to the accompanying consolidated financial statements of this Annual Report on Form 10-K.

 

5



 

Significant Customers

 

Approximately 27%, 23% and 25% of our 2009, 2008, and 2007 net sales, respectively, were to The Boeing Company (“Boeing”) and related subcontractors.  Of the 27% of overall sales to Boeing and its subcontractors in 2009, 21% related to Commercial Aerospace market applications and 6% related to Space and Defense market applications.  Approximately 22%, 24% and 22% of our 2009, 2008, and 2007 net sales, respectively, were to European Aeronautic Defence and Space Company (“EADS”), including its business division Airbus Industrie (“Airbus”), and its subcontractors.  Of the 22% of overall sales to EADS and its subcontractors in 2009, 19% related to Commercial Aerospace market applications and 3% related to Space and Defense market applications.

 

In 2009 and 2008, Vestas Wind Systems A/S accounted for nearly 12% and 11%, respectively, 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.

 

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:

 

 

 

2009

 

2008

 

2007

 

Net Sales by Market

 

 

 

 

 

 

 

Commercial Aerospace

 

50

%

54

%

53

%

Space and Defense

 

27

 

23

 

22

 

Industrial

 

23

 

23

 

25

 

Total

 

100

%

100

%

100

%

Net Sales by Geography (a)

 

 

 

 

 

 

 

United States

 

48

%

48

%

47

%

Europe

 

52

 

52

 

53

 

Total

 

100

%

100

%

100

%

 


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

 

 

 

2009

 

2008

 

2007

 

Net Sales to External Customers (b)

 

 

 

 

 

 

 

United States

 

42

%

36

%

40

%

Europe

 

45

 

51

 

48

 

All Others

 

13

 

13

 

12

 

Total

 

100

%

100

%

100

%

 


(b)          Net sales to external customers based on the location to which the product sold 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 2007 and has seen year on year growth of 1.3% and 7.4% during 2008 and 2007.  In 2009, they estimate a 4.1% decline in growth, but are expecting a return to growth in 2010. 

 

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Growth in passenger traffic requires growth in the size of the fleet of commercial aircraft operated by airlines worldwide.

 

A 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 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 commercial 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 B787 has a content of 50% or more composite materials by weight.  After several announced delays, the B787 maiden flight occurred in December 2009 and the aircraft is projected to enter into service in the fourth quarter of 2010.  In December 2006, Airbus formally launched the A350 XWB which is 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 of 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.  In 2009, Commercial Aerospace revenues declined by 22% as our customers adjusted their inventory levels and the business and regional jet market declined by more than 40% from 2008.

 

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

 

 

 

 

1995

 

1996

 

1997

 

1998

 

1999

 

2000

 

2001

 

2002

 

2003

 

2004

 

2005

 

2006

 

2007

 

2008

 

2009

 

Boeing

 

256

 

271

 

375

 

563

 

620

 

491

 

527

 

381

 

281

 

285

 

290

 

398

 

441

 

375

 

481

 

Airbus

 

124

 

126

 

182

 

229

 

294

 

311

 

325

 

303

 

305

 

320

 

378

 

434

 

453

 

483

 

498

 

Total

 

380

 

397

 

557

 

792

 

914

 

802

 

852

 

684

 

586

 

605

 

668

 

832

 

894

 

858

 

979

 

 

Commercial Aerospace represented 50% of our 2009 net sales. Approximately 78% of these revenues can be identified as sales to Boeing, Airbus and their subcontractors for the production of commercial aircraft.  Boeing and Airbus deliveries in 2009 were the highest in history, but we experienced much of that benefit in 2008. The balance of our Commercial Aerospace sales is related to regional and business aircraft manufacture, and other commercial aircraft applications. These applications also exhibit increasing utilization of composite materials with each new generation of aircraft.  After several years of growing more than 20% per year, business and regional aircraft sales declined by more than 40% in 2009 from 2008 due to production cutbacks.

 

Space and Defense

 

The Space and 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 utilizes advanced composites by the United States and certain European governments.  We are currently qualified to supply materials to a broad range of over 100 helicopter and military aircraft programs.  The top ten programs by revenues represent less than 50% of

 

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our Space & Defense revenues and no one program exceeds 10% 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 or not yet at full production rates such as the F-35 (Joint Strike Fighter or “JSF”), CH53K heavy lift helicopter, the S76D helicopter and the EADS A400M.  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, a prime contractor may flow down a “termination for convenience” 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, the Department of Defense Federal Acquisition Regulations Supplement, Cost Accounting Standards, and associated procurement laws.

 

Industrial Markets

 

The revenue for this market segment includes 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 2009 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 2009, the wind energy market accounted for more than half of our Industrial sales.  Based on announced orders and backlogs and factory schedules from our wind energy customers, we anticipate a significant inventory correction, and reduced sales, in the near term.  Our participation in these market applications complements our commercial and military aerospace businesses, and we are committed to pursuing the utilization of advanced structural material technology where it can generate significant value and we can maintain a sustainable competitive advantage.

 

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 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 precursor (“PAN”).  The primary raw material for PAN is acrylonitrile.  All of 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 also purchase significant quantities of carbon fiber from external sources for our own use.  The sources of carbon fiber we can use in any product or application are sometimes dictated by 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, we have doubled our PAN and carbon fiber capacity over the past three years to serve the growing needs of our customers and our own downstream products.  In October 2007, we announced another increase in PAN and carbon fiber capacity, which was originally scheduled to be completed by the end of 2010 and will increase our global capacity to a total of about 16 million pounds of carbon fiber.  Due to the changing demand outlook, we modified the pace of the project to reduce capital spending.  We now expect to complete the increase of our PAN capacity in the first half of  2010 and have delayed the target completion of our carbon fiber capacity expansion to 2012 or 2013.  After a new line starts production, it can take over a year to be certified for aerospace qualifications.  However, these lines can start supplying carbon fiber for many industrial and recreational applications within a short time period.

 

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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, we attempt 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, and have granted technology licenses and patent rights to several third parties primarily 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 do not believe that our business would be materially affected by the expiration of any single patent or series of related patents, or by the termination of any single license agreement or series of related license agreements.

 

We spent $30.1 million, $31.4 million and $34.2 million for R&T in 2009, 2008, and 2007, respectively.   In constant currency, our 2009 spending is about 3% higher than 2008.  Our spending on a quarter to quarter basis fluctuates depending upon the amount of  new product development and qualification activities, particularly in relation to commercial aircraft applications, that are in progress.   These expenditures are 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, 2009 and 2008 were $8.3 million and $9.2 million, respectively.  As of December 31, 2009 and December 31, 2008, $4.5 million and $3.8 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 $12.8 million and $14.1 million at December 31, 2009 and 2008, respectively.  Environmental remediation spending charged directly to our reserve balance for 2009, 2008, and 2007, was $2.8 million, $2.7 million and $2.7 million, respectively.  In addition, our operating costs relating to environmental compliance were $10.0 million, $11.1 million and $8.2 million, for 2009, 2008, and 2007, respectively, and were charged directly to expense.  Capital expenditures for environmental matters approximated $4.8 million, $7.3 million and $2.3 million for 2009, 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, as well as 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 14 to the accompanying consolidated

 

9



 

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, 2009, we employed 3,734 full-time employees and contract workers, 2,028 in the United States and 1,706 in other countries.  The number of full-time employees and contract workers as of December 31, 2008 and 2007 was 4,275 and 4,081, respectively.

 

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-Ks, 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 impact 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 sudden, sharp changes.  Global credit and capital markets have experienced unprecedented volatility and disruption, which periodically has caused large fluctuations in the access and cost of liquidity around 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.

 

Changes in governmental banking, monetary and fiscal policies to stabilize 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.

 

At December 31, 2009, Boeing and Airbus had a combined backlog of 6,863 aircraft, which is about seven years of production at 2009 record deliveries.   To the extent any significant deferrals, cancellations or reduction in demand results in decreased aircraft

 

10



 

build rates, it would reduce net sales for our Commercial Aerospace products and as a result reduce our operating income.  Approximately 50% of our net sales for 2009 were derived from sales to the Commercial Aerospace industry, which includes 78% from Airbus and Boeing aircraft and 22% from regional and business jets.  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 delayed and may continue to delay 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 78%, and in the Space and Defense market, approximately 36%, of our 2009 net sales were made to Boeing and EADS (including Airbus) and their related subcontractors.  For the years ended December 31, 2009 and December 31, 2008, approximately 27% and 23% of our total consolidated net sales was made to Boeing and its related subcontractors, respectively, and approximately 22% and 24% of our total consolidated net sales, respectively, was made to EADS, including Airbus and its related subcontractors.  In the wind energy market, nearly 12% of our total sales in 2009 and 11% in 2008 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 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 and the increased demand for replacement helicopter blades may not continue. The production of military aircraft depends upon defense budgets and the related demand for defense and related equipment. Approximately 27% of our net sales in 2009 were derived from space and defense industries.

 

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 an 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:

 

11



 

·              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;

 

·              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 pounds 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 and hedge agreements 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, for which we believe we have adequate reserves.  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 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,

 

12



 

we may discover previously unknown environmental conditions and the cost of remediating such conditions may be material.  See “Legal Proceedings” below and Note 14 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

 

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; (b) the revenues we may generate from an aircraft model or program; (c)  the impact of the possible push-out in deliveries of the Airbus and Boeing backlog and the impact of delays in new aircraft programs or the final Hexcel composite material content once the design and material selection has been completed; (d) expectations of composite content on new commercial aircraft programs and our share of those requirements; (e) expectations of growth in revenues from space and defense applications, including whether certain programs might be curtailed or discontinued; (f) expectations regarding growth in sales for wind energy, recreation and other industrial applications; (g) expectations regarding working capital trends and expenditures; (h) expectations as to the level of capital expenditures and when we will complete the construction and qualification of capacity expansions; (i) our ability to maintain and improve margins in light of the ramp-up of capacity and new facilities and the current economic environment; (j) the outcome of legal matters; (k) our projections regarding the realizability of net operating loss and foreign tax credit carryforwards, and the impact of the above factors on our expectations of 2010 financial results; and (l) 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, Boeing or Vestas; changes in sales mix; changes in government defense procurement budgets; changes in military aerospace programs technology; industry capacity; competition; disruptions of established supply channels, particularly where raw materials are obtained from a single or limited number of sources and cannot be substituted by unqualified alternatives; 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 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.

 

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The following table lists our manufacturing facilities by geographic location, related segment, and principal products manufactured. This table does not include the manufacturing facility owned by ACM.

 

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

Windsor, Colorado

 

Composite Materials

 

Prepregs

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

Neumarkt, 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; Tianjin, China and Windsor, Colorado; 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 credit facility, we have granted mortgages 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.

 

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.

 

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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 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 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 $5.7 million as of December 31, 2009.

 

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 the 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 the EPA.  In October 2005, we, along with the other EPA notice recipients, were 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 the EPA to assume responsibility for the study pursuant to an Administrative Order on Consent.  Work on the study is ongoing.  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.  In June 2007, the 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 “action” options range from $900 million to $2.3 billion.  The PRP group provided comments to the 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.  We entered into a Joint Defense Agreement with many of the third-party defendants (approximately 120 to date).  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 water bodies, 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 answer is due February 11, 2010.  Our initial disclosures are due 45 days after filing our answer; however, substantially all additional third-party discovery and motions practice have been stayed until May 2010, with the possibility that the stay could be extended.   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 our 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 (“Ecology”) has issued a unilateral Enforcement Order requiring us to (a) maintain the interim remedial system and to perform system separation, (b) conduct a focused remedial investigation and (c) 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.  Hexcel and Ecology have entered into an agreement to modify certain work requirements and to extend certain deadlines, and we are

 

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in full compliance with the order as modified.

 

Environmental remediation reserve activity for the three years ended December 31, 2009 was as follows:

 

 

 

For the year ended December 31,

 

(In millions)

 

2009

 

2008

 

2007

 

Beginning remediation accrual balance

 

$

9.2

 

$

3.2

 

$

5.3

 

Current period expenses

 

1.9

 

8.7

 

0.6

 

Cash expenditures

 

(2.8

)

(2.7

)

(2.7

)

Ending remediation accrual balance

 

$

8.3

 

$

9.2

 

$

3.2

 

 

 

 

 

 

 

 

 

Capital expenditures for environmental matters

 

$

4.8

 

$

7.3

 

$

2.3

 

 

Environmental Summary

 

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, 2009 and 2008, our aggregate environmental related accruals were $8.3 million and $9.2 million, respectively.  As of December 31, 2009 and 2008, $4.5 million and $3.8 million, respectively, were 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 $12.8 million and $14.1 million at December 31, 2009 and 2008, 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.

 

Environmental remediation spending charged directly to our reserve balance was $2.8 million and $2.7 million for the years ended December 31, 2009 and 2008, respectively.  In addition, our operating costs relating to environmental compliance charged directly to expense were $10.0 million and $11.1 million for the years ended December 31, 2009 and 2008.  Capital expenditures for environmental matters were $4.8 million and $7.3 million for the years ended December 31, 2009 and 2008, respectively.

 

Litigation

 

Gurit Infringement Claim

 

On January 22, 2010, we and Gurit entered into a settlement and license agreement that provides for dismissal with prejudice of the litigation pending against our Austrian subsidiary in Germany and Austria upon our payment of $7.5 million.  Under the agreement we also obtained a license under a number of Gurit patents.   In the fourth quarter of 2009, we recorded a $7.5 million charge included in “Other expense, net” for this settlement.

 

Seemann Composites, Inc. v. Hexcel Corporation

 

Seemann Composites, Inc., (SCI) has sued us in the United States District Court, Southern District of Mississippi (Civil Action No. 1:09-cv-00675-HSO-JMR), filed September 16, 2009.  SCI alleges that we supplied the wrong or a defective finished fabric to them, through one of our distributors, and is seeking unspecified compensatory damages and $10 million punitive damages.  We intend to vigorously defend the suit.

 

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

 

16



 

stock on the New York Stock Exchange is contained in Note 22 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 2009, 2008 or 2007.  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 or pay down debt.

 

On February 8, 2010 there were 1,136 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, 2009

 

0

 

N/A

 

0

 

0

 

 

 

 

 

 

 

 

 

 

 

November 1 – November 30, 2009

 

0

 

N/A

 

0

 

0

 

 

 

 

 

 

 

 

 

 

 

December 1 – December 31, 2009

 

13,027

 

$

13.35

 

0

 

0

 

 

 

 

 

 

 

 

 

 

 

Total

 

13,027

(1)

$

13.35

 

 

0

 

0

 

 


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

 

ITEM 6. Selected Financial Data

 

The information required by Item 6 is contained on page 27 of this Annual Report on Form 10-K under the caption “Selected Financial Data” and is incorporated herein by reference.

 

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

 

The information required by Item 7 is contained on pages 29 to 45 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 42 to 44 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 48 to 82 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 47 of this Annual Report on Form 10-K under the caption “Report of Independent Registered Public Accounting Firm” and is incorporated herein by reference.

 

 

17



 

ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

None.

 

ITEM 9A. Controls and Procedures

 

Our Chief Executive Officer and Chief Financial Officer have evaluated our disclosure controls and procedures as of December 31, 2009 and have concluded that these disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.   These disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file or submit is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

 

Our Chief Executive Officer and Chief Financial Officer have concluded that there have not been any changes in our internal control over financial reporting during the fourth quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Management’s report on our internal control over financial reporting is contained on page 46 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 2010 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, 2009.  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 2010 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, 2009.  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 2010 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, 2009.  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 2010 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, 2009.  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 2010 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, 2009.  Such information is incorporated herein by reference.

 

18



 

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, 2009 and 2008

 

 

 

 

 

Consolidated Statements of Operations for each of the three years ended December 31, 2009

 

 

 

 

 

Consolidated Statements of Stockholders’ Equity and Comprehensive Income for each of the three years ended December 31, 2009

 

 

 

 

 

Consolidated Statements of Cash Flows for each of the three years ended December 31, 2009

 

 

 

 

 

Notes to the Consolidated Financial Statements

 

 

 

 

(2)

Financial Statement Schedule for the three years ended December 31, 2009:

 

 

 

 

 

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.

 

 

19



 

(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 May 12, 2009).

 

 

 

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 May 21, 2009, entered into by and among Hexcel Corporation, the financial institutions from time to time party thereto, Banc of America Securities LLC, as syndication agent for the lenders, as a joint book manager and as a joint lead arranger, Deutsche Bank Securities Inc., as a joint book manager and as a joint lead arranger, HSBC Bank USA, National Association, as a documentation agent, RBS Citizens, N.A., as a documentation agent, Toronto Dominion (New York) LLC, as a documentation agent, and Deutsche Bank Trust Company Americas, as administrative agent for the lenders (incorporated by reference to Exhibit 99.3 to Hexcel’s Current Report on Form 8-K dated January 27, 2010).

 

 

 

10.2

 

Security Agreement, dated as of May 21, 2009, by and among Hexcel Corporation, each of the direct and indirect subsidiaries of Hexcel Corporation listed on the signature pages thereto, and each additional grantor that may become a party thereto after the date thereof in accordance with Section 21 thereof, and Deutsche Bank Trust Company Americas, as administrative agent for and representative of the lenders (incorporated by reference to Exhibit 99.4 to Hexcel’s Current Report on Form 8-K dated January 27, 2010).

 

 

 

10.3

 

Subsidiary Guaranty, dated as of May 21, 2009, by the parties listed on the signature pages thereto in favor of and for the benefit of Deutsche Bank Trust Company Americas, as agent for and representative of the financial institutions party to the Credit Agreement referred to therein and any Swap Counterparties (as defined therein) (incorporated by reference to Exhibit 99.5 to Hexcel’s Current Report on Form 8-K dated January 27, 2010).

 

 

 

10.4*

 

Hexcel Corporation 2003 Incentive Stock Plan (incorporated herein by reference to Exhibit 10.3 to the Company’s Annual Report on Form 10-K/A for the fiscal year ended December 31, 2002, filed on March 31, 2003).

 

 

 

10.4(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).

 

 

 

10.4(d)*

 

Hexcel Corporation 2003 Incentive Stock Plan, as amended and restated as of May 7, 2009.

 

20



 

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 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 (2010).

 

 

 

10.11*

 

Form of Employee Option Agreement (2009) (incorporated herein by reference to Exhibit 10.10 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008).

 

 

 

10.12*

 

Modification to Option Agreements (incorporated herein by reference to Exhibit 10.11 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008).

 

 

 

10.13*

 

Form of Employee Option Agreement (2008) (incorporated herein by reference to Exhibit 10.9 to the Company’s

 

21



 

 

 

Annual Report on Form 10-K for the fiscal year ended December 31, 2007)

 

 

 

10.14*

 

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)

 

 

 

10.15*

 

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).

 

 

 

10.16*

 

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).

 

 

 

10.17*

 

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).

 

 

 

10.18*

 

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).

 

 

 

10.19*

 

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).

 

 

 

10.20*

 

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).

 

 

 

10.21*

 

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).

 

 

 

10.22*

 

Form of Restricted Stock Unit Agreement (2010).

 

 

 

10.23*

 

Form of Restricted Stock Unit Agreement (2009) (incorporated herein by reference to Exhibit 10.24 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008).

 

 

 

10.24*

 

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).

 

 

 

10.25*

 

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).

 

 

 

10.26*

 

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).

 

 

 

10.27*

 

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).

 

 

 

10.28*

 

Form of Performance Based Award Agreement (2010).

 

 

 

10.29*

 

Form of Performance Based Award Agreement (2009) (incorporated herein by reference to Exhibit 10.32 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008).

 

 

 

10.30*

 

Modification to Performance Based Award Agreement (2008) (incorporated herein by reference to Exhibit 10.33 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008).

 

 

 

10.31*

 

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).

 

 

 

10.32*

 

Amended and Restated Employment Agreement between Hexcel Corporation and David E. Berges, dated

 

22



 

 

 

December 31, 2008 (incorporated herein by reference to Exhibit 99.1 to Hexcel’s Current Report on Form 8-K dated January 7, 2009).

 

 

 

10.32(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).

 

 

 

10.32(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).

 

 

 

10.32(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).

 

 

 

10.32(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).

 

 

 

10.32(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).

 

 

 

10.33*

 

Supplemental Executive Retirement Agreement dated October 28, 2009, between Nick L. Stanage and Hexcel Corporation (incorporated herein by reference to Exhibit 99.1 to Hexcel’s Current Report on Form 8-K dated October 28, 2009).

 

 

 

10.33(a)*

 

Employment and Severance Agreement between Hexcel Corporation and Nick L. Stanage, dated October 28, 2009 (incorporated herein by reference to Exhibit 99.2 to Hexcel’s Current Report on Form 8-K dated October 28, 2009). .

 

 

 

10.33(b)*

 

Form of Restricted Stock Unit Agreement, to be entered into on November 9, 2009, by and between Hexcel Corporation and Nick L. Stanage (incorporated herein by reference to Exhibit 99.3 to Hexcel’s Current Report on Form 8-K dated October 28, 2009).

 

 

 

10.33(c)*

 

Letter Agreement, dated October 28, 2009, by and between Hexcel Corporation and Nick L. Stanage (incorporated herein by reference to Exhibit 99.4 to Hexcel’s Current Report on Form 8-K dated October 28, 2009).

 

 

 

10.34*

 

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).

 

 

 

10.34(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).

 

 

 

10.35*

 

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).

 

 

 

10.35(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).

 

 

 

10.36*

 

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).

 

 

 

10.36(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).

 

23



 

10.37*

 

Supplemental Executive Retirement Agreement dated February 23, 2009, between Doron D. Grosman and Hexcel Corporation (incorporated herein by reference to Exhibit 99.1 to Hexcel’s Current Report on Form 8-K dated February 27, 2009).

 

 

 

10.37(a)*

 

Executive Severance Agreement between Hexcel Corporation and Doron D. Grosman, dated February 23, 2009 (incorporated herein by reference to Exhibit 99.2 to Hexcel’s Current Report on Form 8-K dated February 27, 2009).

 

 

 

10.37(b)*

 

Employee Option Agreement, dated as of February 23, 2009, by and between Doron D. Grosman and Hexcel Corporation (incorporated herein by reference to Exhibit 99.3 to Hexcel’s Current Report on Form 8-K dated February 27, 2009).

 

 

 

10.37(c)*

 

Restricted Stock Unit Agreement, entered into as of February 23, 2009, by and between Hexcel Corporation and Doron D. Grosman (incorporated herein by reference to Exhibit 99.4 to Hexcel’s Current Report on Form 8-K dated February 27, 2009).

 

 

 

10.37(d)*

 

Performance Based Award Agreement, entered into as of February 23, 2009, by and between Hexcel Corporation and Doron D. Grosman (incorporated herein by reference to Exhibit 99.5 to Hexcel’s Current Report on Form 8-K dated February 27, 2009).

 

 

 

10.37(e)*

 

Agreement, dated August 7, 2009, between Hexcel Corporation and Doron D. Grosman (incorporated by reference to Exhibit 99.3 of the Company’s Quarterly Report on Form 10-Q for the Quarter ended September 30, 2009).

 

 

 

10.38*

 

Director Compensation Program, as of May 10, 2007 (incorporated by reference to Exhibit 10.5 of the Company’s Quarterly Report on Form 10-Q for the Quarter ended June 30, 2007).

 

 

 

10.39*

 

Hexcel Corporation 2009 Employee Stock Purchase Plan.

 

 

 

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.

 

24



 

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 10, 2010

 

/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 10, 2010

(David E. Berges)

 

Board of Directors and

 

 

 

 

Chief Executive Officer

 

 

 

 

(Principal Executive Officer)

 

 

 

 

 

 

 

 

 

 

 

 

/s/ WAYNE PENSKY

 

Senior Vice President and

 

February 10, 2010

(Wayne Pensky)

 

Chief Financial Officer

 

 

 

 

(Principal Financial Officer)

 

 

 

 

 

 

 

/s/ KIMBERLY HENDRICKS

 

Vice President, Corporate Controller and

 

 

(Kimberly Hendricks)

 

Chief Accounting Officer

 

February 10, 2010

 

 

(Principal Accounting Officer)

 

 

 

 

 

 

 

/s/ JOEL S. BECKMAN

 

Director

 

February 10, 2010

(Joel S. Beckman)

 

 

 

 

 

 

 

 

 

/s/ LYNN BRUBAKER

 

Director

 

February 10, 2010

(Lynn Brubaker)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

/s/ JEFFREY C. CAMPBELL

 

Director

 

February 10, 2010

(Jeffrey C. Campbell)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

/s/ SANDRA L. DERICKSON

 

Director

 

February 10, 2010

(Sandra L. Derickson)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

/s/ W. KIM FOSTER

 

Director

 

February 10, 2010

(W. Kim Foster)

 

 

 

 

 

25



 

/s/ JEFFREY A. GRAVES

 

Director

 

February 10, 2010

(Jeffrey A. Graves)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

/s/ DAVID C. HILL

 

Director

 

February 10, 2010

(David C. Hill)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

/s/ DAVID C. HURLEY

 

Director

 

February 10, 2010

(David C. Hurley)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

/s/ DAVID L. PUGH

 

Director

 

February 10, 2010

(David L. Pugh)

 

 

 

 

 

26



 

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)

 

2009

 

2008

 

2007

 

2006

 

2005

 

 

 

 

 

 

 

 

 

 

 

 

 

Results of Operations (a):

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

1,108.3

 

$

1,324.9

 

$

1,171.1

 

$

1,049.5

 

$

957.6

 

Cost of sales

 

859.8

 

1,035.7

 

888.1

 

801.0

 

733.4

 

Gross margin

 

248.5

 

289.2

 

283.0

 

248.5

 

224.2

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

107.2

 

112.9

 

114.0

 

105.5

 

97.1

 

Research and technology expenses

 

30.1

 

31.4

 

34.2

 

29.7

 

24.8

 

Business consolidation and restructuring expenses

 

 

3.8

 

7.3

 

9.9

 

2.9

 

Other expense, net

 

7.5

 

10.2

 

12.6

 

 

15.1

 

Operating income

 

103.7

 

130.9

 

114.9

 

103.4

 

84.3

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

26.1

 

20.2

 

22.5

 

23.7

 

29.6

 

Non-operating expense, net

 

 

 

 

 

40.9

 

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

 

77.6

 

110.7

 

92.4

 

79.7

 

13.8

 

Provision (benefit) for income taxes

 

22.0

 

15.6

 

33.4

 

34.7

 

(113.8

)

Income from continuing operations before equity in earnings and discontinued operations

 

55.6

 

95.1

 

59.0

 

45.0

 

127.6

 

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

 

0.7

 

16.1

 

4.3

 

19.9

 

3.6

 

Net income from continuing operations

 

56.3

 

111.2

 

63.3

 

64.9

 

131.2

 

Income (loss) from discontinued operations, net of tax

 

 

 

(2.0

)

1.0

 

10.1

 

Net income

 

56.3

 

111.2

 

61.3

 

65.9

 

141.3

 

Deemed preferred dividends and accretion

 

 

 

 

 

(30.8

)

Net income (loss) available to common shareholders

 

$

56.3

 

$

111.2

 

$

61.3

 

$

65.9

 

$

110.5

 

Basic net income (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.58

 

$

1.15

 

$

0.67

 

$

0.70

 

$

1.67

 

Discontinued operations

 

 

 

(0.02

)

0.01

 

0.17

 

Net income per common share

 

$

0.58

 

$

1.15

 

$

0.65

 

$

0.71

 

$

1.84

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted net income (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.57

 

$

1.14

 

$

0.66

 

$

0.68

 

$

1.40

 

Discontinued operations

 

 

 

(0.02

)

0.01

 

0.11

 

Net income per common share

 

$

0.57

 

$

1.14

 

$

0.64

 

0.69

 

$

1.51

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

Basic

 

96.9

 

96.4

 

94.7

 

93.4

 

60.0

 

Diluted

 

98.2

 

97.6

 

96.5

 

95.5

 

93.7

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial Position (a):

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

1,246.6

 

$

1,210.3

 

$

1,060.5

 

$

1,014.5

 

$

880.6

 

Working capital

 

$

259.4

 

$

256.5

 

$

190.7

 

$

206.5

 

$

174.5

 

Long-term notes payable and capital lease obligations

 

$

358.8

 

$

392.5

 

$

315.5

 

$

409.8

 

$

416.8

 

Stockholders’ equity (b)

 

$

575.6

 

$

509.2

 

$

427.6

 

$

301.6

 

$

210.7

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Data (a):

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

$

46.6

 

$

43.9

 

$

39.8

 

$

37.4

 

$

38.8

 

Accrual basis capital expenditures

 

$

85.7

 

$

177.3

 

$

120.6

 

$

117.9

 

$

64.3

 

Shares outstanding at year-end, less treasury stock

 

98.6

 

96.4

 

95.8

 

93.8

 

92.6

 

 

27



 


(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, 2009.

 

28



 

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

 

Business Overview

 

 

 

Year Ended December 31,

 

(In millions, except per share data)

 

2009

 

2008

 

2007

 

Net sales

 

$

1,108.3

 

$

1,324.9

 

$

1,171.1

 

Gross margin %

 

22.4

%

21.8

%

24.2

%

Business consolidation and restructuring expenses

 

$

 

$

3.8

 

$

7.3

 

Other expense, net

 

$

7.5

 

$

10.2

 

$

12.6

 

Operating income

 

$

103.7

 

$

130.9

 

$

114.9

 

Operating income %

 

9.4

%

9.9

%

9.8

%

Interest expense, net

 

$

26.1

 

$

20.2

 

$

22.5

 

Provision for income taxes

 

$

22.0

 

$

15.6

 

$

33.4

 

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

 

$

0.7

 

$

16.1

 

$

4.3

 

Income from continuing operations (a)

 

$

56.3

 

$

111.2

 

$

63.3

 

Loss from discontinued operations, net of tax

 

$

 

$

 

$

(2.0

)

Net income (a)

 

$

56.3

 

$

111.2

 

$

61.3

 

Diluted net income per common share

 

$

0.57

 

$

1.14

 

$

0.64

 

 


(a) The Company uses non-GAAP financial operating measures, including sales measured in constant dollars, operating income adjusted for non-recurring operating expenses and business consolidation and restructuring expenses,  net income adjusted for non-recurring expenses, the effective tax rate adjusted for certain one-time items and free cash flow.  Management believes these non-GAAP measurements are meaningful to investors because they provide a view of Hexcel with respect to ongoing operating results and comparisons to prior periods.  Non-recurring items and certain tax adjustments 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 determined 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)

 

2009

 

2008

 

2007

 

GAAP net income from continuing operations

 

$

56.3

 

$

111.2

 

$

63.3

 

Tax adjustments (1)

 

 

(26.2

)

(1.9

)

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

 

 

(11.7

)

 

Other expense, net of tax (2)

 

5.6

 

6.4

 

8.1

 

Adjusted net income from continuing operations (Non-GAAP)

 

$

61.9

 

$

79.7

 

$

69.5

 

 


(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 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.

 

(2) Other expense, net of tax, in 2009 includes $5.6 million in legal settlement expense, $1.1 million in environmental expenses for previously sold operations offset by a $1.1 million adjustment to a prior year gain on sale of operations.  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

 

After six consecutive years of sales growth, we experienced a 16% decline in 2009.  In constant currency, our Commercial Aerospace sales declined 20% and our Industrial sales declined 15%, while our Space & Defense sales were flat.  The Commercial Aerospace market now represents about half of our sales, followed by Space & Defense at 27% and Industrial at 23%.

 

·                  In 2009, our Commercial Aerospace sales declined by 22% (20% in constant currency) due to customer inventory destocking and a 40% decline in the business and regional jet market.  Airbus and Boeing related sales comprised 78% of our Commercial Aerospace sales, with the business and regional jet market accounting for the remaining 22%.  Airbus related sales were down 24% as these programs were affected more by customer inventory adjustments.  Boeing related sales were only down 5% as sales in 2008 were affected by the almost two month strike in the second half of the year.  Almost all of our Commercial Aerospace sales are for new aircraft and as we have only nominal aftermarket sales.

 

29



 

·                  Airbus and Boeing combined deliveries in 2009 hit a record high of 979 aircraft, the previous high was 914 aircraft in 1999.  In 2008, they delivered 858 aircraft, as fourth quarter deliveries were impacted by the Boeing strike.  The demand for new commercial aircraft is principally driven by two factors.  The first is airline passenger traffic (measured by revenue passenger miles) and the second is the replacement rate for existing aircraft.  The current poor global economic environment resulted in a decline in 2009 passenger and freight traffic which led to cancelled and delayed orders for future periods, though the International Air Transport Association (IATA) forecasts 2010 revenue passenger miles to return to growth.  Combined orders for 2009 were 413 planes, down significantly compared to 1,439 for 2008.  However, backlog at the end of 2009 remained high at 6,863 (92% of 2008 backlog) or about seven years of production at 2009 delivery rates.  We remain encouraged by the recent successful first flights for several aerospace programs that should benefit us in 2010 and beyond.  Airbus and Boeing remain confident in their 2010 outlook but have been less definitive on their expectations for 2011.  While we expect there will be a better balance of our customers’ orders to actual deliveries in 2010, the uncertainty around 2011 could affect our 2010 second half sales as, on average, we ship six months prior to aircraft delivery.

 

·                  Overall the Commercial Aerospace industry continues to utilize 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 10 and 12 deliveries in 2009 and 2008, respectively.  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.  At December 31, 2009 Airbus had a backlog of 179 orders for the A380.  Hexcel has been awarded a contract to supply carbon fiber composite materials for major primary structures for the A350, which Airbus has indicated will have at least 50% composite content by weight.  This contract covers the entire family of the A350 aircraft through 2025 and as the design and usage of various composite materials have yet to be finalized, the amount of revenue this award will generate has not yet been determined.  In addition, there will be opportunities for additional Hexcel products for the plane which we are actively pursuing.  By December 31, 2009, Airbus had received 505 orders for the A350, which it projects will enter into service in 2013.  Boeing had recorded 851 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 B777 aircraft and 6% for the B767 the aircraft it is primarily replacing.  After several announced delays, the B787 maiden flight occurred in December 2009 and the aircraft is projected to enter into service in the fourth 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.  While the B747-8  is structurally an aluminum intensive aircraft, new engines and nacelles provide Hexcel with the opportunity for significant additional revenues.  The freighter version of the B747-8 is now expected to be in service in the fourth quarter of 2010 and the passenger version in the fourth quarter of 2011. The B747-8 had its maiden flight on February 8, 2010.  We expect the B747-8 to have slightly more Hexcel content per plane than the B787.  In 2009, our sales on these four new programs comprised just less than 15% of our total Commercial Aerospace sales but for 2010 and beyond we expect them to represent an increasing percent of our Commercial Aerospace sales.

 

·                  Our business and regional jet sales peaked at almost $200 million in 2008 after several years of over 20% growth per year.  This segment of the market was significantly impacted by the general deterioration of the global economy and announced production cut-backs in 2009.  After a strong first quarter of 2009, these sales have dropped to about a $100 million per year run-rate, which we expect to continue through 2010.

 

·                  Our Space & Defense sales were essentially flat with 2008.  Rotorcraft sales continue to be strong and we continue to benefit from our extensive qualifications to supply composite materials and structures.  Key programs include the C-17, F/A-18E/F (Hornet), 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.  The benefits we obtain from these programs will depend upon which are funded and resultant production rates. Longer term, rotorcraft programs and the ramp-up of the JSF should more than offset the end of the F22 program and eventually, the C17.  The F22 has about 2.5 times the Hexcel content per aircraft than the JSF.

 

·                  Our Industrial sales declined by 19% (15% decline in constant currency) in 2009 from 2008.  Industrial sales include wind energy, recreation, transportation and general industrial applications, with wind comprising over half of the sales.  The weak economic conditions depressed demand in the recreation, transportation and general industrial markets.  In addition, we stopped shipments in August 2009 to USEC’s American Centrifuge Project as USEC tries to obtain the necessary loan guarantees to resume the project.  While USEC is still pursuing the project, we do not expect any shipments in 2010 for the project.

 

·                  While wind energy revenues for the full year 2009 were about 15% lower than 2008 in constant currency, the run rate for the last three quarters was about 25% lower than 2008.  Difficult credit markets affected wind energy sales, as funding for renewable energy products was reduced.  We have two primary customers in wind energy and based on announced orders and backlogs and factory schedules, we anticipate a significant inventory correction and thus lower sales in the near term.  While the global push

 

30



 

for renewable energy remains strong, there has been fewer turbine project announcements in recent quarters and as a result, we remain cautious in our 2010 outlook.

 

·                  Our current expectations are that total revenues for 2010 will be flat to slightly declining as compared to 2009 on a constant currency basis.  However, the volatile nature of the global economy and potential effects on our customers adds 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, Space & Defense and Industrial.  Therefore, we also find it meaningful to evaluate the performance of our segments through the three end business markets.  Further discussion and additional financial information about our segments may be found in Note 17 to the accompanying consolidated financial statements of this Annual Report on Form 10-K.

 

Net Sales:  Consolidated net sales of $1,108.3 million for 2009 were $216.6 million, lower than the $1,324.9 million of net sales for 2008.  The decline in sales in 2009 reflects the volume declines in Commercial Aerospace and Industrial markets.  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, as the increase was attributable to sales growth within Commercial Aerospace.  Had the same U.S. dollar, British Pound Sterling and Euro exchange rates applied in 2008 as in 2009 (“in constant currency”), consolidated net sales for 2009 would have been $189.1 million, or 14.4%, lower than 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.

 

The following table summarizes net sales to third-party customers by segment and end market segment in 2009, 2008 and 2007:

 

(In millions)

 

Commercial
Aerospace

 

Space &
Defense

 

Industrial

 

Total

 

2009 Net Sales

 

 

 

 

 

 

 

 

 

Composite Materials

 

$

384.7

 

$

220.5

 

$

251.3

 

$

856.5

 

Engineered Products

 

171.5

 

78.9

 

1.4

 

251.8

 

Total

 

$

556.2

 

$

299.4

 

$

252.7

 

$

1,108.3

 

 

 

50

%

27

%

23

%

100

%

2008 Net Sales

 

 

 

 

 

 

 

 

 

Composite Materials

 

$

530.7

 

$

235.9

 

$

308.7

 

$

1,075.3

 

Engineered Products

 

179.6

 

66.0

 

4.0

 

249.6

 

Total

 

$

710.3

 

$

301.9

 

$

312.7

 

$

1,324.9

 

 

 

54

%

23

%

23

%

100

%

2007 Net Sales

 

 

 

 

 

 

 

 

 

Composite Materials

 

$

455.2

 

$

194.3

 

$

292.4

 

$

941.9

 

Engineered Products

 

166.6

 

61.4

 

1.2

 

229.2

 

Total

 

$

621.8

 

$

255.7

 

$

293.6

 

$

1,171.1

 

 

 

53

%

22

%

25

%

100

%

 

Commercial Aerospace:  Net sales to the Commercial Aerospace market segment declined by $154.1 million to $556.2 million for 2009 as compared to net sales of $710.3 million for 2008; 2008 net sales increased by $88.5 million or 14.2% to $710.3 million as compared to net sales of $621.8 million for 2007.  Net sales of the Composite Materials segment were $146.0 million lower, down 27.5%  from 2008 and $75.5 million higher in 2008, up 16.6% from 2007.  Net sales of the Engineered Products segment decreased by $8.1 million or 4.5% to $171.5 million in 2009 and increased by $13.0 million or 7.8% to $179.6 million in 2008.  In constant currency, net sales to the Commercial Aerospace market segment decreased $141.9 million, or 20.3% in 2009 and increased $84.4 million or 13.5% in 2008.

 

      The full year decline of 20% represents an improvement over the 24%, in constant currency, decline experienced through the first nine months of 2009, partly because the sales in the second half of 2008 were adversely affected by a nearly two month Boeing strike which started in September 2008.  For 2009, supply chain inventory adjustments resulted in exaggerated sales declines, particularly for Airbus programs which were down 24% compared to 2008.  Sales for Boeing programs were down 5% in 2009 as compared to the strike impacted 2008 sales.  While sales to new programs such as the A380, B787, A350, and B747-8 were up in the fourth quarter of 2009 as compared to 2008, they were lower for the year, primarily due to the previously announced B787 delays.  For the year, new program sales represent less than 15% of Commercial Aerospace revenues.

 

31



 

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 higher in 2008 as compared to 2007, but represent less than 15% of Commercial Aerospace revenues.

 

Space & Defense:  Net sales of $299.5 million for 2009 were essentially flat as compared to net sales of $301.9 million for 2008.  In 2008, net sales increased $46.2 million, or 18.1%, for 2008 as compared to net sales of $255.7 million for 2007. In 2009 foreign exchange had a minimal impact on sales, while net sales in constant currency in 2008 increased $41.8 million, or 16.1%.  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 rotorcraft programs.  About half of our Space & Defense sales are comprised of rotorcraft programs, including commercial and military programs from the Americas, Europe and Asia Pacific.

 

Industrial:  Net sales of $252.7 million for 2009 decreased by $60.0 million, or 19.2%, compared to net sales of $312.7 million in 2008; 2008 net sales increased by $19.1 million, or 6.5%, compared to net sales of $293.6 million in 2007.  In constant currency, net sales to the Industrial market segment decreased $46.0 million or 15.4% in 2009 compared to an increase of $2.2 million or 0.7% in 2008. Wind energy comprised more than half of the Industrial sales in 2009.  After a five year run with a compound annual growth rate over 30%, we experienced a 15% constant currency decline in 2009 as funding for renewable energy projects was reduced due to the weak credit markets.  Sales to automotive, recreation and other general industrial markets in 2009 and 2008 were at their lowest level in years, reflecting both weak markets and selective portfolio pruning.

 

Gross Margin: Gross margin for 2009 of $248.5 million, or 22.4% of net sales, was a higher percentage than the gross margin of $289.2 million, or 21.8% of net sales, in 2008 despite a 16.3% decline in sales. The increase reflected many year over year operational improvements, lower input costs, cost controls and improved sales mix.  For the year, exchange rates only had a minor favorable impact over 2008.  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 China.  In addition, we estimated that the extraordinary volatility in exchange rates, energy, and oil based input materials resulted in a 125 basis point reduction in gross margin.

 

Selling, General and Administrative (“SG&A”) Expenses:  SG&A expenses were $107.2 million, or 9.7% of net sales for 2009, $112.9 million, or 8.5% of 2008 net sales, and $114.0 million or 9.7% of 2007 net sales.  The favorable trend of declining SG&A expenses continued in 2009 as we reduced headcount and implemented tight cost controls in response to increasingly difficult market conditions.  2009 also benefitted from favorable foreign exchange rates.  The $1.1 million decrease in 2008 SG&A expenses from 2007 reflected 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.

 

Research and Technology (“R&T”) Expenses: R&T expenses for 2009 were $30.1 million, or 2.7% of net sales, $31.4 million, or 2.4% of 2008 net sales, and $34.2 million or 2.9% of 2007 net sales.  The decline in R&T expenses in 2009 was mainly due to favorable foreign exchange rates.  The $2.8 million decrease in 2008 was due to lower costs associated with certifying our products and processes to customer specifications (“qualification costs”).  In 2007, we incurred qualification costs associated 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: There were no business consolidation and restructuring expenses in 2009.  Business consolidation and restructuring expenses were $3.8 million for 2008 and $7.3 million for 2007.  Almost all of these expenses relate to the December 2007 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:  For 2009, other expense reflects a $7.5 million charge related to a licensing agreement, settling a patent litigation matter.  Other expense of $10.2 million during 2008 consisted of a $7.6 million environmental reserve charge related to a manufacturing facility sold in 1986 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.

 

32


 

 


 

Operating Income: Operating income for 2009 was $103.7 million compared with operating income of $130.9 million for 2008 and $114.9 million in 2007.  Operating income as a percent of sales was 9.4%, 9.9% and 9.8% in 2009, 2008 and 2007 respectively.  The $27.2 million decrease in 2009 operating income is due in part to significantly lower sales volumes.  The 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, 2009, 2008 and 2007 was $111.2 million, $145.0 million and $114.9 million or 10.0%, 10.9% and 11.5% as a percentage of net sales, respectively.  A reconciliation to adjusted operating income is provided on page 29.

 

Almost all of the Company’s sales and costs are either in U.S. dollars, Euros or GBP, and 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 currencies.  The net impact is that as the dollar weakens against the Euro and the GBP, sales will increase while 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 affected.  Our 2009 operating income percentage is approximately 40 basis points worse than 2008 due to exchange rates and our 2008 operating income percentage is approximately 30 basis points worse than 2007 due to exchange rates.

 

Operating income for the Composite Materials segment decreased $47.4 million or 29.8% to $111.4 million, as compared to $158.8 million for 2008.  The decrease in operating income is the result of lower segment revenue of $218.8 million and the $7.5 million legal settlement which is included in the Composite Materials segment.  Operating income for the Engineered Products segment increased by $9.2 million compared with 2008 to $36.0 million, as results were helped by both operational improvements, better product mix and lower development costs related to the B787.

 

We did not allocate corporate net operating expenses of $43.7 million, $54.7 million and $49.2 million to segments in 2009, 2008 and 2007, respectively.  As discussed above, 2008 and 2007 had $10.2 million and $9.4 million of other expenses included in Corporate and Other.  The 2008 increase also reflects the costs incurred related to the proxy contest.  The 2007 expense 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 was $26.1 million for 2009, $20.2 million for 2008 and $22.5 million for 2007.  The increase in 2009 resulted from higher debt levels and the accelerated amortization of deferred financing costs as a result of the repayment of a term loan.  The decrease in 2008 was primarily due to lower average interest rates on our senior secured credit facility and the 2007 interest expense includes $1.1 million of accelerated amortization as a result of repayment of part of the term loan.

 

Provision (Benefit) for Income Taxes:    In 2009, our tax provision was $22.0 million for an effective tax rate of 28.4%. The 2008 provision of $15.6 million or 14.1% effective tax rate included 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 2008 tax provision 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.  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.  Excluding these benefits, the adjusted effective tax was 37.8% for 2008 and 38.2% in 2007.  The improvement in the effective tax rate in 2009 compared to the adjusted effective tax rate in 2008 reflects the actions we have taken over the past few years.  We expect our effective tax rate to be around 30% before discrete items. We believe the 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:  In 2009, equity in earnings represents our portion of the earnings from our joint venture in Malaysia.  Equity in earnings from and gain on sale of investments in affiliated companies during 2008 included a pre-tax gain of $12.5 million from the sale of our interest in BHA Aero Composite Parts Co., Ltd. (“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 2007 was $4.3 million and included our share of equity income from ACM and BHA.  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 $56.3 million, or $0.57 per diluted share for the year ended December 31, 2009 compared to $111.2 million, or $1.14 per diluted common share for 2008 and $63.3 million or

 

33



 

$0.66 per diluted share for 2007.  The changes reflect the results discussed above, primarily lower sales volume in 2009 and the one-time tax benefits and gain on sale of our interest in BHA in 2008.  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 2009 and 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 additional information, see Note 19 to the accompanying consolidated financial statements of this Annual Report on Form 10-K.

 

Business Consolidation and Restructuring Programs

 

A majority of costs in 2007 and 2008 were related to the realignment of our organization into a single business.  The aggregate business consolidation and restructuring activities for the three years ended December 31, 2009, consisted of the following:

 

(In millions)

 

Employee
Severance

 

Facility &
Equipment

 

Total

 

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

)

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

)

Balance as of December 31, 2008

 

2.0

 

0.9

 

2.9

 

Cash expenditures

 

(1.3

)

(0.4

)

(1.7

)

Currency translation adjustments and other adjustments

 

(0.2

)

 

(0.2

)

Balance as of December 31, 2009

 

$

0.5

 

$

0.5

 

$

1.0

 

 

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. We terminated the U.S. qualified defined benefit plan as of April 1, 2007.  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 2007 and an additional $6.9 million was made in 2008 to complete the liquidation.

 

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.

 

We continue to maintain our defined benefit retirement plans in the United Kingdom, Belgium, France 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, 2009, 60% 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.  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 2010 plan year will be 7.2% and 4.5% for the other European Plans as a group.

 

We use actuarial models to account for our pension and postretirement plans, which 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.

 

34



 

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 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 5.96%  for 2009 and 5.64% and 5.70% for 2008 and 2007, 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.  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 27%, 23%, and 25% of our 2009, 2008, and 2007 net sales, respectively, were to Boeing and related subcontractors.  Of the 27% of sales to Boeing and its subcontractors in 2009, 21% related to Commercial Aerospace market applications and 6% related to Space and Defense market applications.  Approximately 22%, 24%, and 22% of our 2009, 2008, and 2007 net sales, respectively, were to European Aeronautic Defence and Space Company (“EADS”), including its business division Airbus Industrie (“Airbus”), and its subcontractors.  Of the 22% of sales to EADS and its subcontractors in 2009, 19% related to Commercial Aerospace market applications and 3% related to Space and Defense market applications.

 

Vestas Wind Systems A/S accounted for 12% of the Company’s total net sales in 2009 and nearly 11% in 2008.  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.

 

Divestitures

 

In 2007, we completed the sales of the EBGI portion of our reinforcements business and our European Architectural business.  Cash proceeds from the sales were $58.5 million and $25.0 million, respectively.  As a result of the sales, we recognized an after-tax loss of $3.4 million on EBGI and an after-tax gain of $6.5 million on the European Architectural business.

 

The EBGI sale included up to $12.5 million of additional earn out 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 2009 and 2008 the Company received $2.0 million and $0.3 million, respectively.  The income recognized, after providing for a related litigation claim is included as “Other expense, net” on the consolidated statements of operations.  Additional payments, if any, will be recorded as income when earned.  The earn out provision expires in August 2010.

 

Financial Condition

 

As a result of actions taken in response to the recent deterioration in the global economy, including tight monitoring of our cash costs and aligning the pace of our capital expenditures with our current growth assumptions, we generated $173 million of operating cash flow in 2009.  We expect our capital spending in 2010 to be less than $75 million.  We expect 2010 to be another good year of cash generation although we do not expect to realize significant cash inflow as we did from the working capital improvements related to 2009’s sales decline.

 

35



 

We have a portfolio of derivatives related to currencies and interest rates.  We monitor our counterparties and we only use those rated A 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 nonperformance risk.

 

Liquidity

 

Our cash on hand at December 31, 2009 was $110.1 million as compared to $50.9 million at December 31, 2008.  The $110.1 million is held in cash and prime money market investments with strong sponsor organizations which are monitored on a continuous basis.  In January 2010, we used a portion of this cash to pay down our term loan by $30 million.  Over the last three years, net cash from operating activities has provided a source of funds ranging between $97.5 million and $172.8 million per year.

 

Our total debt as of December 31, 2009 was $392.3 million, a decrease of $2.3 million from the December 31, 2008 balance.  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.

 

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 our short-term liquidity requirements through net cash from operating activities, cash on hand and our revolving credit facility. The new facility provides more flexibility for capital expenditures than the old facility and we believe the amounts available are adequate for most of our projected growth scenarios.  As of December 31, 2009, long-term liquidity requirements consist primarily of obligations under our long-term debt obligations.  We do not have any significant required debt repayments until September 2013, but will be repaying the term loan at a rate of approximately $1.8 million per quarter with our next required payment not due until February 2011.

 

Credit Facilities:  On May 21, 2009, Hexcel Corporation entered into a new $300 million senior secured credit facility, consisting of a $175 million term loan and a $125 million revolving loan.  At December 31, 2009, our $125 million revolver facility is undrawn (other than by outstanding letters of credit).  The term loan matures on May 21, 2014 and the revolving loan matures on May 21, 2013.  Proceeds from the term loan, and from an initial borrowing under the revolving loan, were used to repay all amounts, and terminate all commitments, outstanding under Hexcel’s previous credit agreement and to pay fees and expenses in connection with the refinancing.  We incurred $10.3 million in issuance costs related to the refinancing of the Senior Secured Credit Facility, which will be expensed over the life of the facility, and recorded $1.7 million of interest expense related to the accelerated amortization of deferred financing costs associated with the previous credit facility.  The credit agreement contains financial and other covenants, including, but not limited to, restrictions on the incurrence of debt and the granting of liens, as well as the maintenance of an interest coverage ratio and a leverage ratio, and limitations on capital expenditures.  Depending on our leverage ratio, there may be a mandatory repayment each year based on 50% of the cash flow generated for the year, as defined in the agreement.  A violation of any of these covenants could result in a default under this facility, which would permit the lenders to accelerate the payment of all borrowings and to terminate the facility.  In addition, such a default could, under certain circumstances, permit the holders of other outstanding unsecured debt to accelerate the repayment of such obligations.

 

In accordance with the terms of the Senior Secured Credit Facility, we are required to maintain a minimum interest coverage ratio of 4.00 (based on the ratio of EBITDA, as defined in the credit agreement, to interest expense) and may not exceed a maximum leverage ratio of 2.75 (based on the ratio of total debt to EBITDA) throughout the term of the Senior Secured Credit Facility.  In addition, the Senior Secured Credit Facility contains other terms and conditions such as customary representations and warranties, additional covenants and customary events of default.  As of December 31, 2009, we were in compliance with all debt covenants and expect to remain in compliance.

 

The Senior Secured Credit Facility permits us to issue letters of credit up to an aggregate amount of $40 million.  Any outstanding letters of credit reduce the amount available for borrowing under the revolving loan.  As of December 31, 2009, we had issued letters of credit totaling $3.5 million under the Senior Secured Credit Facility.  As we had no borrowings under the revolving loan at December 31, 2009, total undrawn availability under the Senior Secured Credit Facility as of December 31, 2009 was $121.5 million. Terms of the credit facility are further discussed in Note 6 to the accompanying consolidated financial statements.

 

Term and revolving loans borrowed as LIBOR-based loans bear interest at a rate of LIBOR plus 4%, and term and revolving loans borrowed as U.S. base rate loans bear interest at the base rate plus 3%.  There is a LIBOR floor of 2.5%, and a base rate floor of 4%.  The margin for revolving loans will decrease by 50 basis points if Hexcel’s leverage ratio decreases below 2 to 1, and will decrease an additional 25 basis points if Hexcel’s leverage ratio decreases below 1.75 to 1.  The term loan was borrowed at closing and once repaid cannot be reborrowed.  The term loan is now scheduled to be repaid at a rate of approximately $1.8 million per quarter starting in the second quarter of 2011 and increasing to $14.7 million in August 2013 with two final payments of $44.0 million in 2014. In September 2009, we prepaid $8.8 million of the term loan which represented the first four scheduled quarterly payments which resulted in $0.2 million of accelerated amortization of deferred financing costs.  In January 2010, we paid down the term loan by $30 million, which included a $26.4 million mandatory payment based on 50% of the cash flow generated in 2009, as defined in

 

36



 

the agreement, and the $1.8 million required payment due in December 2010.  At December 31, 2009, the Company had no borrowings outstanding under the revolving loan.

 

We have a $5.0 million borrowing facility for working capital needs of our Chinese entity with an outstanding balance of $3.0 million at December 31, 2009.  These funds can only be used locally, accordingly we do not include this facility in our borrowing capacity disclosures.  The facility expires on November 20, 2010 and is guaranteed by Hexcel Corporation.

 

Operating Activities:  We generated $172.8 million in cash from operating activities during 2009, an increase of $75.3 million from 2008 predominantly from working capital efficiencies.  Decreases in accounts receivable and inventories contributed $70.2 million.  This was partly offset by decreases in accounts payable and accrued liabilities of $28.1 million and increases in other current assets.  The positive changes in working capital requirements are attributable to the decline in sales during the year along with strong collections of outstanding accounts receivable and improved inventory control.

 

Net cash generated from operating activities during 2008 was $97.5 million.  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.  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 during 2007 was $100.9 million.  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.

 

Investing Activities:  Net cash used for investing activities was $104.4 million in 2009 compared to $153.6 million in 2008.  We made cash payments for capital expenditures of $98.4 million and $175.9 million during 2009 and 2008, respectively, primarily related to our carbon fiber expansion programs, discussed in further detail below.  We also increased our ownership in the ACM joint venture to a 50% interest.  During 2008, we received total proceeds of $22.3 million from the sale of our interest in BHA. Capital expenditures in 2010 are expected to be less than $75 million.  Net cash used for investing activities was $100.9 million in 2007.  We made capital expenditures of $115.2 million and we received proceeds of $84.0 million in connection with the sales of our EBGI and European Architectural businesses.

 

Financing Activities:  Financing activities used $12.7 million of net cash in 2009 compared with $80.1 million of cash provided in 2008.  This year, we refinanced our Senior Secured Credit Facility and received $171.5 million of proceeds from a new term loan.  The new borrowings were used to repay $167.0 million of term loans existing under the previous facility and $10.3 million of debt issuance costs related to the refinancing.  We reduced the term loan balance by $10.9 million, making one scheduled repayment and four voluntary prepayments.  In addition we borrowed $3.0 million from our Chinese working capital line of credit.  During 2008, we received $79.3 million of proceeds from our Senior Secured Credit Facility in order to fund our cash needs.  Net cash used for financing activities 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.

 

Financial Obligations and Commitments:  As of December 31, 2009, current maturities of notes payable and capital lease obligations were $33.5 million.  The next significant scheduled debt maturity will not occur until 2013, in the amount of $14.7 million plus any outstanding balance on the revolving loan.  Our next scheduled term loan payment of $0.1 million is due in February 2011.  We have several capital leases for buildings with expirations through 2021.  In addition, certain sales and administrative offices, data processing equipment and manufacturing equipment and facilities are leased under operating leases.

 

Total letters of credit issued and outstanding under the Senior Secured Credit Facility were $3.5 million as of December 31, 2009.  We had no letters of credit issued separately from this credit facility.

 

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

 

(In millions)

 

2010

 

2011

 

2012

 

2013

 

2014

 

Thereafter

 

Total

 

Senior secured credit facility — revolver due 2010

 

$

 

$

 

$

 

$

 

$

 

$

 

$

 

Senior secured credit facility — term B loan due 2014 (a)

 

30.0

 

5.6

 

7.4

 

33.0

 

88.1

 

 

164.1

 

Working capital facility

 

3.0

 

 

 

 

 

 

 

 

 

 

 

3.0

 

6.75% senior subordinated notes due 2015

 

 

 

 

 

 

225.0

 

225.0

 

Capital leases and other

 

0.5

 

0.8

 

0.3

 

 

 

2.0

 

3.6

 

Subtotal

 

33.5

 

6.4

 

7.7

 

33.0

 

88.1

 

227.0

 

395.7

 

Operating leases

 

11.2

 

7.8

 

6.3

 

5.9

 

5.2

 

14.2

 

50.6

 

Total financial obligations

 

$

44.7

 

$

14.2

 

$

14.0

 

$

38.9

 

$

93.3

 

$

241.2

 

$

446.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Letters of credit

 

$

3.5

 

$

 

$

 

$

 

$

 

$

 

$

3.5

 

Interest payments

 

22.5

 

22.3

 

21.9

 

21.6

 

17.3

 

1.2

 

106.8

 

Estimated benefit plan contributions

 

8.1

 

8.0

 

10.4

 

9.0

 

9.1

 

61.4

 

106.0

 

Other (b)

 

4.5

 

1.3

 

1.0

 

1.0

 

0.5

 

 

8.3

 

Total commitments

 

$

88.3

 

$

45.8

 

$

47.3

 

$

70.5

 

$

120.2

 

$

303.8

 

$

670.9

 

 

37



 


(a) $30.0 million for 2010 represents mandatory and voluntary prepayments made in January 2010.

(b) Other represents estimated spending for environmental matters at known sites.

 

As of December 31, 2009, we had $19.4 million of unrecognized tax benefits.  This represents tax benefits associated with various tax positions taken, or expected to be taken, on domestic and international tax returns that have not been recognized in our financial statements due to uncertainty regarding their resolution.  The resolution or settlement of these tax positions with the taxing authorities is at various stages.  We estimate that we will settle certain tax audits in 2010 and have classified $2.4 million of the unrecognized tax benefit as a current liability.  We are unable to make a reliable estimate of the eventual cash flows of the remaining $17.0 million of unrecognized tax benefits.

 

For further information regarding our financial obligations and commitments, see Notes 6, 7, 8, 13 and 14 to the accompanying consolidated financial statements of this Annual Report on Form 10-K.

 

Critical Accounting Policies

 

Our consolidated financial statements are prepared based upon the selection and application of accounting principles generally accepted in the United States of America, which require us to make estimates and assumptions about future events that affect amounts reported in our financial statements and accompanying notes.  Future events and their effects cannot be determined with absolute certainty.  Therefore, the determination of estimates requires the exercise of judgment.  Actual results could differ from those estimates, and any such differences may be significant to the financial statements.  The accounting policies below are those we believe are the most critical to the preparation of our financial statements and require the most difficult, subjective and complex judgments.  Our other accounting policies are described in the accompanying notes to the consolidated financial statements of this Annual Report on Form 10-K.

 

Accounts Receivable

 

We ensure that accounts receivable balances are reported at net realizable value by establishing an appropriate allowance for doubtful accounts.  The allowance for doubtful accounts is based upon, among other factors, a review of the credit-worthiness of our customers, our historical loss experience, and the economic environment within which we operate, and requires a considerable amount of judgment.  We estimate our allowance for doubtful accounts based upon two sets of criteria: a review of specifically identified individual customer accounts that are evaluated for collectability, and an overall evaluation of the collectability of our total accounts receivable.

 

Individual specific customer accounts are reviewed for collectability when, based upon current information and events, there exists a potential write-off of all, or a portion, of a customer’s outstanding receivable balance.  Factors considered in assessing collectability include a customer’s extended payment delinquency, an assessment of a customer’s credit-worthiness and a consideration of a customer’s request for restructuring, or its filing for protection under the bankruptcy code.  An allowance for doubtful accounts is established based upon our assessment of the uncollectible portion of the accounts receivable balance.

 

In addition, an overall evaluation of the collectability of our total accounts receivable balance is performed by giving consideration to such factors as past collection experience, available credit insurance, customer and industry trends, economic and market conditions, the financial condition of customers (i.e. bankruptcy, liens, increases in days sales outstanding), and current overall aging trends when compared to the previous years’ aging of accounts receivable.  Based upon this evaluation, an additional allowance for doubtful accounts may be established.

 

Our total allowance for doubtful accounts at December 31, 2009 and 2008 was $1.9 million and $2.1 million, respectively, representing approximately 1.2% and 1.1% of gross accounts receivable at December 31, 2009 and December 31, 2008, respectively.

 

Inventories

 

We ensure that inventories are reported at the lower of cost or market by establishing appropriate reserves for excess, obsolete and unmarketable inventories and, if appropriate, reducing inventories to current estimated market values.  Cost is determined using the standard cost method for our Composite Materials segment and by either the weighted average cost method or the standard cost

 

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method for our Engineered Products segment.  Cost of inventories includes the cost of raw material, purchased parts, labor and production overhead cost.  We regularly review inventory quantities on hand and record a reserve for excess and obsolete inventories based primarily on age of inventory, historical usage and the estimated forecast of product demand and production requirements.  Our estimates of future product demand may prove to be inaccurate, in which case we may have understated or overstated the provision required for excess and obsolete inventories.  When we have determined that our current inventory levels exceed future demand, inventories are adjusted by increasing reserve balances and recording a charge at the time of such determination thus reducing inventories to estimated net realizable value.  In instances where it is determined that current inventory levels are deemed to be lower than estimated future demand, no adjustment is required.

 

Our inventory reserves at December 31, 2009 and 2008 were $23.9 million and $23.2 million, respectively, representing 13.2% and 10.6% of gross inventories at December 31, 2009 and 2008, respectively.

 

Product Warranties

 

We provide for an estimated amount of potential liability related to product warranty.  The amount of the warranty liability accrued reflects our estimate of the expected future costs of warranty claims.  The estimate for warranty obligations is applicable to both of our segments, and is estimated on the basis of two components: a review of specifically identified potential warranty claims, and an overall evaluation of potential product warranty liability.  The warranty reserve established is reviewed periodically, and at least quarterly, for adequacy and appropriateness of amount.

 

Individual specific warranty claims are reviewed for possible accrual when, based upon current information and events, a potential individual warranty matter has been identified.  In those instances when judgment would indicate that an accrual is appropriate a product warranty claim liability will be established.  Specific accruals are supported by written documentation from our sales and marketing organization that would include the nature of the issue, the expected resolution date and estimated amount or range of liability.  We would accrue for the estimated warranty claim at an amount no less than the minimum estimated potential liability and no more than the potential maximum estimated amount.  The accrual amount may change only with documentation of a specific change in the estimated impact amount or range of potential liability.

 

In addition, an overall evaluation of the adequacy of the accrual for product warranty liability is performed to address warranty claims that are in process, or expected to be processed.  The adequacy of the accrual is estimated after giving consideration to the dollar amount of open warranty claims in process, the expected cost of rework versus replacement, and historical expense levels for non-significant claims versus sales levels.

 

While we engage in extensive product quality programs and processes, including actively monitoring and evaluating the quality of our component and material suppliers, our product warranty obligations are affected by product failure rates and material usage.  Should actual product failure rates and material usage differ from our estimates, revisions to the estimated product warranty costs would be required.

 

Our accrual for product warranties at December 31, 2009 and 2008 was $3.7 million and $3.8 million, respectively.  Our product warranty expense was $0.6 million, $1.4 million and $1.8 million for the years ended 2009, 2008 and 2007, respectively.

 

Deferred Tax Assets

 

As of December 31, 2009 we have $104.6 million in net deferred tax assets consisting of deferred tax assets of $156.6 million offset by deferred tax liabilities of $21.2 million and a valuation allowance of $30.8 million. As of December 31, 2008, we had $119.8 million in net deferred tax assets consisting of deferred tax assets of $156.1 million offset by deferred tax liabilities of $20.2 million and a valuation allowance of $16.1 million.

 

The determination of the required valuation allowance and the amount, if any, of deferred tax assets to be recognized involves significant estimates regarding the timing and amount of reversal of taxable temporary differences, future taxable income and the implementation of tax planning strategies.  In particular, we are required to weigh both positive and negative evidence in determining whether a valuation allowance is required.  Positive evidence would include, for example, a strong earnings history, an event that will increase our taxable income through a continuing reduction in expenses, and tax planning strategies indicating an ability to realize deferred tax assets.  Negative evidence would include, for example, a history of operating losses and losses expected in future years.

 

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 the 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

 

39



 

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.

 

In addition to the valuation allowance against the FTC described above, the valuation allowance as of December 31, 2009 relates to certain net operating loss carryforwards of our foreign subsidiaries, general business credits, and state net operating loss carryforwards for which we have determined, based upon historical results and projected future book and taxable income levels, that a valuation allowance should continue to be maintained.

 

Uncertain Tax Positions

 

Our unrecognized tax benefits at December 31, 2009 of $19.4 million, relate to various Foreign and U.S. jurisdictions.  Included in the unrecognized tax benefits of $19.4 million at December 31, 2009 was $16.1 million of tax benefits that, if recognized, would impact our annual effective tax rate.  In addition, we recognize interest accrued related to unrecognized tax benefits as a component of interest expense and penalties as a component of income tax expense in the condensed consolidated statements of operations.  During 2009, we accrued potential interest of $0.2 million, net of reversals, related to unrecognized tax benefits.  We have recorded a liability of $2.8 million for the payment of interest as of December 31, 2009.

 

We are subject to taxation in the U.S. and various states and foreign jurisdictions.  The U.S. federal statute of limitations remains open for prior years; however the U.S. tax returns have been audited through 2006 and currently tax year 2007 is under audit. Foreign and U.S. state jurisdictions have statutes of limitations generally ranging from 3 to 5 years. Years still open to examination by foreign tax authorities in major jurisdictions include Austria (2002 onward), Belgium (2003 onward), France (2007 onward), Spain (2004 onward) and UK (2007 onward).  We are currently under examination in various U.S. state and foreign jurisdictions.

 

As of December 31, 2009, we had uncertain tax positions for which it is reasonably possible that amounts of unrecognized tax benefits could significantly change over the next year.  These uncertain tax positions relate to our tax returns from 2003 onward, some of which are currently under examination by certain European and U.S. taxing authorities.  We are unable to provide an estimate of possible change to the unrecognized tax benefits related to these tax positions.  As of December 31, 2009, we classified approximately $2.4 million of unrecognized tax benefits as a current liability, representing income tax positions under examination in various jurisdictions which we expect to settle over the next twelve months.

 

We expect that the amount of unrecognized tax benefits will continue to change in the next twelve months as a result of ongoing tax deductions, the resolutions of audits and the passing of the certain statutes of limitations.

 

Long-Lived Assets and Goodwill

 

We have significant long-lived assets.  We review these assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  The assessment of possible impairment is based upon our ability to recover the carrying value of the assets from the estimated undiscounted future net cash flows, before interest and taxes, of the related operations.  If these cash flows are less than the carrying value of such assets, an impairment loss is recognized for the difference between estimated fair value and carrying value.  The measurement of impairment requires estimates of these cash flows and fair value.  The calculation of fair value is determined based on discounted cash flows.  In determining fair value a considerable amount of judgment is required to determine discount rates, market premiums, financial forecasts, and asset lives.  In 2007, the impairment review indicated the fair value of certain purchased intangible assets and fixed assets were less than the carrying amount of the assets, we therefore recorded an impairment charge of $3.0 million during the fourth quarter of 2007.  No impairment charges were recorded in either 2009 or 2008.

 

In addition, we review goodwill for impairment at the reporting unit level at least annually, and whenever events or changes in circumstances indicate that goodwill might be impaired.  We have four reporting units within the Composite Materials segment, each of which are components that constitute a business for which discrete financial information is available and for which appropriate management regularly reviews the operating results.  Within the Engineered Products segment, the reporting unit is the segment as it comprises only a single component.  If, during the annual impairment review, the book value of the reporting unit exceeds the fair value, the implied fair value of the reporting unit’s goodwill is compared with the carrying amount of the unit’s goodwill.  If the carrying amount exceeds the implied fair value, goodwill is written down to its implied value.  The implied fair value of goodwill is determined as the difference between the fair value of a reporting unit, taken as a whole, and the fair value of the assets and liabilities of such reporting unit.  Fair value is calculated using discounted cash flows, based on a discount rate derived from the weighted average cost of capital for other companies in the industry adjusted to the higher end of the range to represent the companies more comparable in size to Hexcel.  The other assumptions included in the discounted cash flow methodology included forecasted revenues, gross profit margins, operating income margins, working capital cash flow, and perpetual growth rates, among others, all of which require significant judgments by management.  Future cash flows can be affected by changes in industry or market conditions.  During the fourth quarter of 2009, we updated valuations for all reporting units with goodwill using discounted cash flow analyses, based

 

40



 

upon estimated forward-looking information regarding market share, revenues and costs for each reporting unit as well as appropriate discount rates.  As a result of these valuations, we determined that goodwill was not impaired.

 

Share-Based Compensation

 

                        Restricted stock units (“RSUs”) are grants that entitle the holder to shares of common stock as the award vests (generally over three years).  Performance restricted stock units (“PRSUs”) are a form of RSUs in which the number of shares ultimately received depends on the extent to which we achieve a specified performance target.  At the end of the performance period, the number of shares of stock to be issued will be determined based on the extent to which the pre-determined performance criteria is met, and can range between 0% and 150% of the target amount for PRSUs issued prior to 2008 and between 0% and 200% of the target amount for PRSUs issued in 2008 and 2009.  The awards for 2008 and prior are based on a two-year performance period, with the awards generally vesting after a subsequent one-year service period.  Based on the formula, no PRSUs were earned for the 2008 award.  The 2009 award is based on a three-year performance period (2009-2011) that provides for segmentation in which each of the three performance periods have one or more performance measures identical to those under the management incentive plan, limited by the achievement of the cumulative performance target for the three-year period. The final performance percentage, on which the payout will be based, considering performance metrics established for the performance period, will be certified by our Board of Directors or a Committee of the Board after the conclusion of the performance period.

 

We use the Black-Scholes model to value compensation expense for all option-based payment awards made to employees and directors based on estimated fair values on the grant date.  The value of the portion of the award that is ultimately expected to vest is recognized as expense on a straight-line basis over the requisite service periods in our consolidated statements of operations.  We determine the expected option life for each grant based on ten years of option activity for two separate groups of employees (executive and non-executive).  The weighted-average expected life is derived from the average midpoint between the vesting and the contractual term and considers the effect of both the inclusion and exclusion of post-vesting cancellations during the ten-year period.  Expected volatility is calculated based on a blend of both historic volatility of our common stock and implied volatility of our traded options.  We weigh both volatility inputs equally and utilize the average as the volatility input for the Black-Scholes calculation.  The risk-free interest rate for the expected term is based on the U.S. Treasury zero coupon rate yield curve in effect at the time of grant.  No dividends were paid in any period; furthermore, we do not plan to pay any dividends in the foreseeable future.

 

Commitments and Contingencies

 

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, health and safety matters.  We estimate and accrue our liabilities resulting from such matters based upon 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.  We believe we have adequately accrued for these potential liabilities; however, facts and circumstances may change, such as new developments, or a change in approach, including a change in settlement strategy or in an environmental remediation plan, that could cause the actual liability to exceed the estimates, or may require adjustments to the recorded liability balances in the future.

 

Our estimate of liability as a potentially responsible party (“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, 2009 and 2008, our aggregate environmental related accruals were $8.3 million and $9.2 million, respectively. As of December 31, 2009 and 2008, $4.5 million and $3.8 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 $12.8 million and $14.1 million at December 31, 2009 and 2008, 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.

 

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Environmental remediation reserve activity for the three years ended December 31, 2009 as follows:

 

 

 

For the year ended

 

(In millions)

 

December 31,
2009

 

December 31,
2008

 

December 31,
2007

 

Beginning remediation accrual balance

 

$

9.2

 

$

3.2