0001104659-06-032175.txt : 20060508 0001104659-06-032175.hdr.sgml : 20060508 20060508172422 ACCESSION NUMBER: 0001104659-06-032175 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20060331 FILED AS OF DATE: 20060508 DATE AS OF CHANGE: 20060508 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HEXCEL CORP /DE/ CENTRAL INDEX KEY: 0000717605 STANDARD INDUSTRIAL CLASSIFICATION: PLASTICS, MATERIALS, SYNTH RESINS & NONVULCAN ELASTOMERS [2821] IRS NUMBER: 941109521 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08472 FILM NUMBER: 06817804 BUSINESS ADDRESS: STREET 1: TWO STAMFORD PLAZA STREET 2: 281 TRESSER BLVD., 16TH FLOOR CITY: STAMFORD STATE: CT ZIP: 06901 BUSINESS PHONE: 203-969-0666 MAIL ADDRESS: STREET 1: TWO STAMFORD PLAZA STREET 2: 281 TRESSER BLVD., 16TH FLOOR CITY: STAMFORD STATE: CT ZIP: 06901 10-Q 1 a06-9628_110q.htm QUARTERLY REPORT PURSUANT TO SECTIONS 13 OR 15(D)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

	For the Quarter Ended March 31, 2006

	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.)

Two Stamford Plaza
281 Tresser Boulevard
Stamford, Connecticut		06901-3238
(Address of principal executive offices)		(zip code)

Registrant’s telephone number, including area code: (203) 969-0666

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 whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer x Accelerated Filer o Non-Accelerated Filer o

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes o No x

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

Class		Outstanding at May 4, 2006
COMMON STOCK		93,330,708

HEXCEL CORPORATION AND SUBSIDIARIES

INDEX


PART I.	FINANCIAL INFORMATION

ITEM 1.	Condensed Consolidated Financial Statements (Unaudited)

	· Condensed Consolidated Balance Sheets—March 31, 2006 and December 31, 2005

	· Condensed Consolidated Statements of Operations—The Quarters Ended March 31, 2006 and 2005

	· Condensed Consolidated Statements of Cash Flows—The Quarters Ended March 31, 2006 and 2005

	· Notes to Condensed Consolidated Financial Statements

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations

ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk

ITEM 4.	Controls and Procedures

PART II.	OTHER INFORMATION

ITEM 1A.	Risk Factors

ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds

ITEM 6.	Exhibits and Reports on Form 8-K

SIGNATURE

PART I. FINANCIAL INFORMATION

ITEM 1. Condensed Consolidated Financial Statements (Unaudited)

Hexcel Corporation and Subsidiaries
Condensed Consolidated Balance Sheets

	Unaudited
(In millions, except per share data)	March 31, 2006			December 31, 2005
Assets
Current assets:
Cash and cash equivalents	$	23.9		$	21.0
Accounts receivable, net	194.3			155.9
Inventories, net	156.3			150.4
Prepaid expenses and other current assets	35.2			43.0
Total current assets	409.7			370.3

Property, plant and equipment	689.5			726.0
Less accumulated depreciation	(392.1		)	(440.8		)
Net property, plant and equipment	297.4			285.2

Goodwill and intangible assets	74.8			74.7
Investments in affiliated companies	14.7			14.3
Deferred tax assets	111.6			107.8
Other assets	31.0			28.3

Total assets	$	939.2		$	880.6

Liabilities and Stockholders’ Equity
Current liabilities:
Notes payable and current maturities of capital lease obligations	$	6.5		$	3.0
Accounts payable	102.6			94.5
Accrued liabilities	88.6			98.3
Total current liabilities	197.7			195.8

Long-term notes payable and capital lease obligations	446.3			416.8
Other non-current liabilities	57.6			57.3
Total liabilities	701.6			669.9

Stockholders’ equity:
Preferred stock, no par value, 20.0 shares authorized, no shares issued or outstanding	—			—
Common stock, $0.01 par value, 200.0 shares authorized, 94.8 shares issued and outstanding at March 31, 2006 and 94.1 shares issued and outstanding at December 31, 2005	0.9			0.9
Additional paid-in capital	465.9			455.0
Accumulated deficit	(208.0		)	(222.5		)
Accumulated other comprehensive loss	(2.3		)	(7.3		)
	256.5			226.1

Less — Treasury stock, at cost, 1.6 shares at March 31, 2006 and 1.5 shares at December 31, 2005	(18.9		)	(15.4		)
Total stockholders’ equity	237.6			210.7

Total liabilities and stockholders’ equity	$	939.2		$	880.6

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

Hexcel Corporation and Subsidiaries
Condensed Consolidated Statements of Operations

	Unaudited
	Quarter Ended March 31,
(In millions, except per share data)	2006		2005
Net sales	$	307.0	$	290.6
Cost of sales	235.9		224.8
Gross margin	71.1		65.8

Selling, general and administrative expenses	30.7		26.5
Research and technology expenses	7.6		5.8
Business consolidation and restructuring expenses	3.0		0.4
Other expense	—		0.2
Operating income	29.8		32.9

Interest expense, net	7.8		11.9
Non-operating expense	—		40.3
Income (loss) before income taxes	22.0		(19.3		)
Provision for income taxes	8.6		3.6
Income (loss) before equity in earnings	13.4		(22.9		)
Equity in earnings of affiliated companies	1.1		0.5

Net income (loss)	14.5		(22.4		)
Deemed preferred dividends and accretion	—		(2.3		)
Net income (loss) available to common shareholders	$	14.5	$	(24.7	)

Net income (loss) per common share:
Basic	$	0.16	$	(0.46	)
Diluted	$	0.15	$	(0.46	)

Weighted average common shares outstanding:
Basic	92.9		53.9
Diluted	95.1		53.9

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

Hexcel Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows

	Unaudited
	Quarter Ended March 31,
(In millions)	2006			2005
Cash flows from operating activities
Net income (loss)	$	14.5		$	(22.4	)
Reconciliation to net cash used for operating activities:
Depreciation and amortization	11.6			12.3
Amortization of debt discount and deferred financing costs	0.4			0.8
Deferred income taxes	5.5			—
Business consolidation and restructuring expenses	3.0			0.4
Business consolidation and restructuring payments	(1.1		)	(0.8		)
Loss on early retirement of debt	—			40.3
Equity in earnings of affiliated companies	(1.1		)	(0.5		)
Share-based compensation	3.4			0.5

Changes in assets and liabilities:
Increase in accounts receivable	(36.6		)	(21.8		)
Increase in inventories	(4.6		)	(19.9		)
Decrease in prepaid expenses and other current assets	0.6			5.5
Decrease in accounts payable and accrued liabilities	(0.4		)	(20.3		)
Changes in other non-current assets and long-term liabilities	(4.8		)	(0.4		)
Net cash used for operating activities	(9.6		)	(26.3		)

Cash flows from investing activities
Capital expenditures	(22.4		)	(7.5		)
Deposits for property purchases	(1.8		)	—
Investment in affiliated companies	—			(7.5		)
Dividends from affiliated companies	0.8			—
Net cash used for investing activities	(23.4		)	(15.0		)

Cash flows from financing activities
Proceeds from issuance of 6.75% senior subordinated notes	—			225.0
Proceeds from senior secured credit facility, net	30.0			252.0
Redemption of 9.75% senior subordinated notes	—			(285.3		)
Redemption of 7.0% convertible subordinated debentures	—			(19.2		)
Redemption of 9.875% senior secured notes	—			(125.0		)
Proceeds from capital lease obligations and other debt, net	2.9			1.4
Issuance costs related to debt offerings	—			(11.8		)
Debt retirement costs	—			(30.0		)
Activity under stock plans	3.6			2.3
Net cash provided by financing activities	36.5			9.4
Effect of exchange rate changes on cash and cash equivalents	(0.6		)	0.9
Net increase (decrease) in cash and cash equivalents	2.9			(31.0		)
Cash and cash equivalents at beginning of period	21.0			57.2
Cash and cash equivalents at end of period	$	23.9		$	26.2

Supplemental Data:
Cash interest paid	$	10.5		$	24.3
Cash taxes paid	$	2.4		$	2.6

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

HEXCEL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1 — Basis of Presentation

In these notes, the terms “Hexcel”, “we,” “us,” or “our” mean Hexcel Corporation and subsidiary companies.

The accompanying condensed consolidated financial statements have been prepared from the unaudited records of Hexcel pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information. Certain information and footnote disclosures normally included in financial statements have been omitted pursuant to rules and regulations of the SEC.

In the opinion of management, the condensed consolidated financial statements include all normal recurring adjustments necessary for a fair presentation of financial position, the results of operations and cash flows for the interim periods presented. The condensed consolidated balance sheet as of December 31, 2005 was derived from the audited 2005 consolidated balance sheet. Interim results are not necessarily indicative of results expected for any other interim period or for the full year. The information included in this Form 10-Q should be read in conjunction with Management’s Discussion and Analysis and the financial statements and notes thereto included in the Hexcel Corporation’s 2005 Annual Report on Form 10-K.

Certain prior period amounts in the condensed consolidated financial statements and accompanying notes have been reclassified to conform to the 2006 presentation.

Note 2 — Share-Based Compensation

Effective January 1, 2006, we adopted Statement of Financial Accounting Standards (“SFAS”) No. 123(R), Share-Based Payment (“SFAS 123(R)”), using the modified prospective transition method. This method required us to apply the provisions of SFAS 123(R) to new awards and to any awards that were unvested as of our adoption date and did not require us to restate prior periods. The accompanying condensed consolidated financial statements as of and for the quarter ended March 31, 2006 reflect the impact of SFAS 123(R). In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (“SAB 107”) relating to SFAS 123(R). We have applied the provisions of SAB 107 in our adoption of SFAS 123(R).

SFAS 123(R) requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors based on estimated fair values on the grant date using an option-pricing model. 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 condensed consolidated statement of operations.

SFAS 123(R) requires that forfeitures be estimated at the time of grant in order to estimate the amount of share-based awards that will ultimately vest. Furthermore, SFAS 123(R) requires the monitoring of actual forfeitures and the subsequent adjustment to forfeiture rates to reflect actual forfeitures. Share-based compensation expense recognized in the condensed consolidated statement of operations for the quarter ended March 31, 2006 includes (i) compensation expense for share-based awards granted prior to, but not yet vested as of December 31, 2005, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS 123”), (ii) compensation expense for share-based awards granted subsequent to January 1, 2006, based on the fair value estimated in accordance with the provisions of SFAS 123(R), and (iii) a reduction for estimated forfeitures in accordance with SFAS 123(R). Share based compensation expense capitalized in the first quarter of 2006 was not material. In our pro forma information required under SFAS 123 for the periods prior to January 1, 2006, we accounted for forfeitures as they occurred.

Share-based compensation expense reduced our consolidated results of operations as follows:

(In millions, except per share data)	Quarter Ended March 31, 2006
Impact on income before income taxes	$	(3.4	)
Impact on net income available to common shareholders	$	(2.3	)
Impact on net income per common share:
Basic	$	(0.02	)
Diluted	$	(0.02	)

Prior to our adoption of SFAS 123(R), stock-based compensation was accounted for under the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”), as allowed under SFAS 123. Under the intrinsic value method in APB 25, we did not record any compensation cost related to stock options issued in the majority of instances since the exercise price of stock options granted to employees equaled the market price of our stock at the date of grant. However, for restricted stock awards, the intrinsic value as of the date of grant was amortized to compensation expense over the vesting period.

During the first quarter of 2005, we recorded a charge of $0.5 million for restricted stock awards under APB 25. The following table illustrates the effect on our net loss and net loss per share during the first quarter of 2005 assuming we had applied the fair value recognition provisions of SFAS 123, as amended by SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure”:

(In millions, except per share data)	Quarter Ended March 31, 2005
Net loss available to common shareholders, as reported	$	(24.7	)
Add: Stock-based compensation expense included in reported net loss	0.5
Deduct: Stock-based compensation expense determined under the fair value based method for all awards:	(1.4		)
Pro forma net loss	$	(25.6	)

Net loss per common share:
Basic and diluted — as reported	$	(0.46	)
Basic and diluted — pro forma	$	(0.48	)

During the quarter ended March 31, 2006, cash received from stock option exercises was $3.7 million. We used $2.9 million in cash related to the shares withheld to satisfy employee tax obligations for restricted stock units (“RSUs”) and performance accelerated restricted stock units (“PARs”) converted during the first quarter of 2006. We realized a tax benefit of $2.8 million in connection with stock options exercised, and RSUs and PARs converted during the first quarter of 2006.

Prior to the adoption of SFAS 123(R), we presented all tax benefits of deductions resulting from the exercise of stock options and the conversions of restricted stock units as operating cash flows in the Condensed Consolidated Statement of Cash Flows. SFAS 123(R) requires that we classify the cash flows resulting from these tax benefits as financing cash flows. It has been our practice to issue new shares of our common stock upon the exercise of stock options or the conversion of stock units. In the future, we may consider utilizing treasury shares for stock option exercises or stock unit conversions.

Restricted Stock Units

RSUs are grants that entitle the holder to shares of common stock as the award vests (generally over three years). PARs are a form of RSUs which are convertible to an equal number of shares of our common stock and generally vest over a seven-year period or sooner upon the attainment of certain financial or stock performance objectives. Performance restricted stock units (“PRSUs”) are a form of RSUs in which the number of shares ultimately received depends on our performance against a specified performance target. The number of PRSUs is based on a two-year performance period and the awards will generally vest after a subsequent one-year service period. At the end of the performance period, the number of shares of stock issued will be determined by adjusting upward or downward from the target in a range between 0% and 150%. The final performance percentage on which the payout will be based, considering performance metrics established for the performance period, will be determined by our Board of Directors or a Committee of the Board at its sole discretion.

We measure the fair value of RSUs, PARs and PRSUs based upon the market price of the underlying common stock as of the date of grant. RSUs, PARs and PRSUs are amortized over their applicable vesting period using the straight-line method. We granted 0.1 million RSUs during both the quarters ended March 31, 2006 and 2005. During the quarter ended March 31, 2006, we granted 0.1 million PRSUs. No PARs have been granted since 2001. PARs issued during 2001 were converted during the first quarter of 2006.

The following activity occurred under our existing restricted stock plan during the first quarter of 2006:

(In millions, except share data)	Number of Awards		Weighted Avg. Grant Date Fair Value per Unit
Restricted Stock Awards:
Nonvested balance at December 31, 2005	0.5		$	9.44
Granted	0.1		21.88
Vested	(0.2	)	7.64
Forfeited	—		—
Nonvested balance at March 31, 2006	0.4		$	16.58

Performance Restricted Stock Awards:
Nonvested balance at December 31, 2005	—		$	—
Granted	0.1		21.97
Vested	—		—
Forfeited	—		—
Nonvested balance at March 31, 2006	0.1		$	21.97

As of March 31, 2006, there was total unrecognized compensation cost related to nonvested RSUs and PRSUs of $6.6 million, which is expected to be recognized generally over the remaining vesting period ranging from one year to three years.

Stock Options

Nonqualified stock options have been granted to our employees and directors under our stock compensation plan. Options granted generally vest over three years and expire ten years from the date of grant. Approximately 0.3 million and 0.6 million stock options were granted during the quarters ended March 31, 2006 and 2005, respectively.

A summary of option activity under the plan for the quarter ended March 31, 2006 is as follows:

(In millions, except share data)	Number of Options		Weighted-Average Exercise Price		Weighted- Average Remaining Contractual Life (in years)	Aggregate Intrinsic Value
Outstanding at December 31, 2005	6.0		$	8.95
Options granted	0.3		$	21.95
Options exercised	(0.4	)	$	11.33
Options expired or forfeited	—		$	—
Outstanding at March 31, 2006	5.9		$	9.48	5.62	$	73.5
Exercisable at March 31, 2006	4.8		$	8.33		$	65.3

The total intrinsic value of options exercised during the quarter ended March 31, 2006 was $3.8 million. As of March 31, 2006, there was total unrecognized compensation cost related to nonvested stock options of $6.2 million, which is expected to be recognized generally over the remaining vesting period ranging from one year to three years.

Valuation Assumptions in Estimating Fair Value

We estimated the fair value of stock options at the grant date using the Black Scholes option pricing model with the following assumptions:

	Quarter Ended March 31,
	2006			2005
Risk-free interest rate*	4.50		%	3.74		%
Expected option life (in years) Executive	5.90			5.66
Expected option life (in years) Non-Executive	5.43			5.10
Dividend yield	—		%	—		%
Volatility*	46.44		%	56.33		%
Weighted-average fair value per option granted	$	10.87		$	7.88

*One grant of 13,263 stock options was valued with a volatility of 43.52% and a risk-free interest rate of 4.62%.It was granted on 3/20/06 and was the only one granted on that day.

We determine the expected option life for each grant based on ten years of historical option activity for two separate groups of employees (executive and non-executive). The weighted average expected life (“WAEL”) 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. As a result, the 2006 expected option life was increased from 5.66 years in 2005 to 5.90 years for the executive pool and from 5.10 years to 5.43 years for the non-executive pool.

Prior to 2006, we determined expected volatility based on actual historic volatility. With the adoption of SFAS 123(R), we determined expected volatility based on a blend of both historic volatility of our common stock and implied volatility of our traded options. We weighed both volatility inputs equally and took an average of both the historic and implied volatility to arrive at the volatility input for the Black-Scholes calculation. Consistent with 2005, the risk-free interest rate for the expected term is based on the U.S. Treasury yield curve in effect at the time of grant. No dividends were paid in either period; furthermore, we do not plan to pay any dividends in the future.

Retirement Provisions

Employees who terminate employment other than for “cause” (as defined in the relevant employee option agreement), and who meet the definition of retirement in the relevant employee option agreement (age 65 or age 55 with 5 or more years of service with the company), will continue to have their options vest in accordance with the vesting schedule set in the option agreement. Similar retirement provisions also apply to RSUs and PRSUs. RSUs are deemed to be vested when an employee reaches their defined retirement age. PRSUs differ from RSUs as an employee who is retirement eligible is only entitled to a pro-rata portion of their shares during the performance period; however, if employed at the end of the performance period they are entitled to the entire grant. As a result of these provisions, under the terms of SFAS 123(R), we have accelerated the recognition of the compensation expense for any employee who received a grant in 2006 and who met the above definition of retirement eligibility, or who will meet the definition during the vesting period. During the first quarter of 2006, we recognized an additional $1.9 million as a result of these retirement provisions. Prior to our adoption of SFAS 123(R), we did not recognize any additional expense in our consolidated results of operations or our pro-forma disclosures as a result of these retirement provisions until the date upon which an eligible employee retired.

Subsequent Grants

As of March 31, 2006, an aggregate of 3.9 million shares were authorized for future grant under our stock plan, which covers stock options, RSUs, PRSUs and PARS.

Employee Stock Purchase Plan (“ESPP”)

In addition, we maintain an ESPP, under which eligible employees may contribute up to 10% of their base earnings toward the quarterly purchase of our common stock at a purchase price equal to 85% of the fair market value of the common stock on the purchase date. As of March 31, 2006, the number of shares of common stock reserved for future issuances under the ESPP was 0.2 million. During 2005, 2004 and 2003, an aggregate total of approximately 0.1 million shares of common stock were issued under the ESPP.

Note 3 — Inventories

(In millions)	March 31, 2006		December 31, 2005
Raw materials	$	62.9	$	64.3
Work in progress	35.4		32.0
Finished goods	58.0		54.1
Total inventories	$	156.3	$	150.4

Note 4 — Business Consolidation and Restructuring Programs

The aggregate business consolidation and restructuring liabilities as of March 31, 2006 and December 31, 2005, and activity for the quarter ended March 31, 2006, consisted of the following:

(In millions)	Employee Severance			Facility & Equipment			Total
Balance as of December 31, 2005	$	3.5		$	0.7		$	4.2
Business consolidation and restructuring expenses	2.4			0.6			3.0
Cash expenditures	(0.4		)	(0.7		)	(1.1		)
Balance as of March 31, 2006	$	5.5		$	0.6		$	6.1

Electronics Program

In December 2005, we announced plans to consolidate certain glass fabric production activities at our Les Avenieres, France plants. In January 2006, we announced plans to consolidate our U.S. electronics production activities into our Statesville, North Carolina plant and to close the plant in Washington, Georgia. These actions are aimed at matching regional production capacities with available demand. For the quarter ended March 31, 2006, we recognized $2.0 million of expense for employee severance based on existing obligations as of the date of our announcement. In addition, the Company recorded expense of $0.4 million associated with the facility closures and consolidation activities that was expensed as incurred. The program is expected to be substantially completed in 2006.

Business consolidation and restructuring liabilities as of March 31, 2006 and December 31, 2005, and activity for the Electronics Program for the quarter ended March 31, 2006, consisted of the following:

(In millions)	Employee Severance			Facility & Equipment			Total
Balance as of December 31, 2005	$	0.2		$	—		$	0.2
Business consolidation and restructuring expenses	2.0			0.4			2.4
Cash expenditures	(0.4		)	(0.4		)	(0.8		)
Balance as of March 31, 2006	$	1.8		$	—		$	1.8

Livermore Program

In the first quarter of 2004, we announced our intent to consolidate the activities of our Livermore, California facility into other facilities, principally the Salt Lake City, Utah plant. For the quarter ended March 31, 2006, we recognized $0.4 million of expense for employee severance, and recorded $0.2 million of expense associated with the relocation and re-qualification of equipment. During the first quarter of 2006, we determined that involuntary termination benefits under the Livermore Program should have been accounted for under the provisions of SFAS No. 112, Employers’ Accounting for Postemployment Benefits, instead of SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. We made an adjustment as a result of this determination in the first quarter of 2006, and concluded that the impact was not material to either the current period nor to any prior periods. Costs associated with the facility’s closure, along with costs for relocation and re-qualification of equipment, are expected to occur during the remaining term of the program, which is expected to be completed early in 2007.

Business consolidation and restructuring liabilities as of March 31, 2006 and December 31, 2005, and activity for the Livermore Program for the quarter ended March 31, 2006, consisted of the following:

(In millions)	Employee Severance		Facility & Equipment			Total
Balance as of December 31, 2005	$	1.4	$	—		$	1.4
Business consolidation and restructuring expenses	0.4		0.2			0.6
Cash expenditures	—		(0.2		)	(0.2		)
Balance as of March 31, 2006	$	1.8	$	—		$	1.8

November 2001 Program

Business consolidation and restructuring liabilities as of March 31, 2006 and December 31, 2005, and activity for the November 2001 Program for the quarter ended March 31, 2006, consisted of the following:

(In millions)	Employee Severance		Facility & Equipment			Total
Balance as of December 31, 2005	$	1.9	$	0.7		$	2.6
Cash expenditures	—		(0.1		)	(0.1		)
Balance as of March 31, 2006	$	1.9	$	0.6		$	2.5

Note 5 — Notes Payable and Capital Lease Obligations

(In millions)	March 31, 2006		December 31, 2005
Senior secured credit facility - revolver due 2010	$	35.0	$	5.0
Senior secured credit facility - term B loan due 2012	185.0		185.0
European credit and overdraft facilities	4.3		1.3
6.75% senior subordinated notes due 2015	225.0		225.0
Total notes payable	449.3		416.3
Capital lease obligations	3.5		3.5
Total notes payable and capital lease obligations	$	452.8	$	419.8

Notes payable and current maturities of long-term liabilities	$	6.5	$	3.0
Long-term notes payable and capital lease obligations, less current maturities	446.3		416.8
Total notes payable and capital lease obligations	$	452.8	$	419.8

During the first quarter of 2005, we refinanced substantially all of our long-term debt. In connection with the refinancing, we entered into a new $350.0 million senior secured credit facility (the “Senior Secured Credit Facility”), consisting of a $225.0 million term loan and a $125.0 million revolving loan. In addition, we issued $225.0 million principal amount of 6.75% senior subordinated notes due 2015. The Senior Secured Credit Facility replaced our then existing $115.0 million five-year secured revolving credit facility. The terminated credit facility was scheduled to expire on March 31, 2008. The term loan under the Senior Secured Credit Facility is scheduled to mature on March 1, 2012 and the revolving loan under the Senior Secured Credit Facility is scheduled to expire on March 1, 2010.

Senior Secured Credit Facility

Borrowings as of March 31, 2006 under the Senior Secured Credit Facility were $220.0 million, consisting of $185.0 million of term loans and $35.0 million of revolver loans. As of December 31, 2005, borrowings under the Senior Secured Credit Facility were $190.0 million, consisting of $185.0 million of term loans and $5.0 million of revolver loans.

Term loan borrowings under the Senior Secured Credit Facility bear interest at a floating rate based on the agent’s defined “prime rate” plus a margin that can vary from 0.50% to 0.75%, or LIBOR plus a margin that can vary from 1.50% to 1.75%, while revolving loan borrowings under the Senior Secured Credit Facility bear interest at a floating rate based on either the agent’s defined “prime rate” plus a margin that can vary from 0.25% to 1.00%, or LIBOR plus a margin that can vary from 1.25% to 2.00%. The margin in effect for a borrowing at any given time depends on our consolidated leverage ratio. The weighted average interest rate for the actual borrowings on the Senior Secured Credit Facility was 6.3% for the quarter ended March 31, 2006. Borrowings made and outstanding under the LIBOR option at, or around, March 31, 2006 were made at interest rates ranging from 6.3125% to 6.5625%.

The Senior Secured Credit Facility was entered into by and among Hexcel Corporation and certain lenders. In connection with the Senior Secured Credit Facility two of Hexcel’s U.S. subsidiaries, Clark-Schwebel Holding Corp. and Hexcel Reinforcements Corp. (the “Guarantors”), entered into a Subsidiary Guaranty under which they guaranteed the obligations of Hexcel Corporation under the Senior Secured Credit Facility. In addition, Hexcel Corporation and the Guarantors entered into a Security Agreement in which Hexcel Corporation and the Guarantors pledged certain assets as security for the Senior Secured Credit Facility. The assets pledged include, among other things, the receivables, inventory, property, plant and equipment and intellectual property of Hexcel Corporation and the Guarantors, and 65% of the share capital of Hexcel’s Danish subsidiary and first-tier U.K. subsidiary.

In accordance with the terms of the Senior Secured Credit Facility, we are required to maintain a minimum interest coverage ratio (based on the ratio of EBITDA, as defined in the credit agreement, to interest expense) and may not exceed a maximum leverage ratio (based on the ratio of total debt to EBITDA) throughout the term of the facility. The Senior Secured Credit Facility also contains limitations on, among other things, incurring debt, granting liens, making investments, making restricted payments (including dividends), making capital expenditures, entering into transactions with affiliates and prepaying subordinated debt. 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.

6.75% Senior Subordinated Notes, due 2015

The senior subordinated notes are unsecured senior subordinated obligations of Hexcel Corporation. Interest accrues at the rate of 6.75% per annum and is payable semi-annually in arrears on February 1 and August 1, beginning on August 1, 2005. The senior subordinated notes mature on February 1, 2015. We may not redeem the senior subordinated notes prior to February 1, 2010, except that we may use the net proceeds from one or more equity offerings at any time prior to February 1, 2008 to redeem up to 35% of the aggregate principal amount of the notes at 106.75% of the principal amount, plus accrued and unpaid interest. We will have the option to redeem all, or a portion, of the senior subordinated notes at any time during the one-year period beginning February 1, 2010 at 103.375% of principal plus accrued and unpaid interest. This percentage decreases to 102.25% for the one-year period beginning February 1, 2011, to 101.125% for the one-year period beginning February 1, 2012 and to 100.0% any time on or after February 1, 2013. In the event of a “change of control” (as defined in the indenture), we are generally required to make an offer to all noteholders to purchase all outstanding senior subordinated notes at 101% of the principal amount plus accrued and unpaid interest.

The indenture contains various customary covenants including, but not limited to, restrictions on incurring debt, making restricted payments (including dividends), the use of proceeds from certain asset dispositions, entering into transactions with affiliates, and merging or selling all or substantially all of our assets. The indenture also contains many other customary terms and conditions, including customary events of default, some of which are subject to grace and notice periods.

European Credit and Overdraft Facilities

Certain of our European subsidiaries have access to limited credit and overdraft facilities provided by various local banks. These credit and overdraft facilities are primarily uncommitted facilities that are terminable at the discretion of the lenders.

French Factoring Facility

In 2003, we entered into an accounts receivable factoring facility with a third-party to provide an additional 20.0 million Euros in borrowing capacity. We terminated the facility effective March 31, 2006.

Note 6 — Retirement and Other Postretirement Benefit Plans

We maintain qualified and nonqualified defined benefit retirement plans covering certain current and former U.S. and European employees and directors, retirement savings plans covering eligible U.S. employees and certain postretirement health care and life insurance benefit plans covering eligible U.S. retirees. We also participate in a union sponsored multi-employer pension plan covering certain U.S. employees with union affiliations. Refer to our 2005 Annual Report on Form 10-K for further information regarding these plans.

Defined Benefit Retirement Plans

Net Periodic Benefit Costs

Net periodic benefit costs of our defined benefit retirement plans for the quarters ended March 31, 2006 and 2005 were as follows:

(In millions)	U.S. Plans Quarter Ended March 31,						European Plans Quarter Ended March 31,
Defined Benefit Retirement Plans	2006			2005			2006			2005
Service cost	$	0.3		$	0.3		$	0.9		$	0.8
Interest cost	0.5			0.5			1.3			1.3
Expected return on plan assets	(0.3		)	(0.3		)	(1.5		)	(1.3		)
Net amortization and deferral	0.3			0.3			0.2			0.3
Sub-total	0.8			0.8			0.9			1.1
Curtailment and settlement loss	0.2			0.2			—			—
Net periodic benefit cost	$	1.0		$	1.0		$	0.9		$	1.1

Contributions

We contributed $0.8 million and $0.6 million to our U.S. qualified and nonqualified defined benefit retirement plans during the first quarters of 2006 and 2005, respectively. Although no minimum funding contributions are required, we intend to contribute approximately $1.5 million during 2006 to our U.S. qualified pension plan to fund expected lump sum payments. We generally fund our U.S. nonqualified defined benefit retirement plans when benefit payments are incurred. Under the provisions of these nonqualified plans, we expect to contribute approximately $0.5 million in 2006 to cover unfunded benefits. We contributed $2.0 million to our U.S. defined benefits retirement plans during the 2005 fiscal year.

In addition, we contributed $0.8 million and $0.6 million to our European defined benefit retirement plans in the first quarters of 2006 and 2005, respectively. Meeting governing requirements, we plan to contribute approximately $2.4 million during 2006 to our European plans. We contributed $2.5 million to our European plans during the 2005 fiscal year.

Postretirement Health Care and Life Insurance Benefit Plans

Net Periodic Postretirement Benefit Costs

Net periodic postretirement benefit costs of our postretirement health care and life insurance benefit plans were $0.2 million, related to interest cost, for both the quarters ended March 31, 2006 and 2005.

Contributions

In connection with our postretirement plans, we contributed $0.2 million and $0.3 million for the first quarter of 2006 and 2005, respectively. We periodically fund our postretirement plans to pay covered expenses as they are incurred. Under the provisions of these postretirement plans, we expect to contribute approximately $1.5 million in 2006 to cover unfunded benefits. We contributed $1.5 million to our postretirement plans during the 2005 fiscal year.

Note 7 — Non-Operating Expense

	Quarter Ended March 31,
(In millions)	2006		2005

Loss on early retirement of debt	$	—	$	(40.3	)
Non-operating expense	$	—	$	(40.3	)

During the first quarter of 2005, we refinanced substantially all of our debt. In connection with the refinancing, we recorded a loss on early retirement of debt of $40.3 million during the first quarter of 2005, consisting of tender offer and call premiums of $25.2 million, the write-off of unamortized deferred financing costs and original issuance discounts of $10.3 million, transaction costs of $1.2 million in connection with the refinancing, and a loss of $3.6 million related to the cancellation of interest rate swap agreements.

Note 8 — Net Income (Loss) Per Common Share

	Quarter Ended March 31,
(In millions, except per share data)	2006		2005

*Basic net income (loss) per common share:*
Net income (loss)	$	14.5	$	(22.4	)
Deemed preferred dividends and accretion	—		(2.3		)
Net income (loss) available to common shareholders	$	14.5	$	(24.7	)
Weighted average common shares outstanding	92.9		53.9

Basic net income (loss) per common share	$	0.16	$	(0.46	)

*Diluted net income (loss) per common share:*
Net income (loss)	$	14.5	$	(22.4	)
Deemed preferred dividends and accretion	—		(2.3		)
Net income (loss) available to common shareholders	$	14.5	$	(24.7	)
Plus: Deemed preferred dividends and accretion	—		—
Net income (loss) available to common shareholders plus assumed conversions	$	14.5	$	(24.7	)

Weighted average common shares outstanding — Basic	92.9		53.9

Plus incremental shares from assumed conversions:
Restricted stock units	0.3		—
Stock options	1.9		—
Mandatorily redeemable convertible preferred stock	—		—
Weighted average common shares outstanding — Dilutive	95.1		53.9

Diluted net income (loss) per common share	$	0.15	$	(0.46	)

Total shares underlying stock options of 0.4 million were excluded from the computation of diluted net income per share for the first quarter ended March 31, 2006, as they were anti-dilutive.

The assumed conversion of mandatorily redeemable convertible preferred stock (convertible into 36.8 million shares of common stock), was excluded from the computation of diluted net loss per share for the first quarter of 2005, as it was anti-dilutive. Shares underlying stock options and restricted stock units of approximately 8.2 million were excluded from the computation of diluted net loss per share for the first quarter of 2005, as they were anti-dilutive.

Note 9 — Comprehensive Income (Loss)

Comprehensive income (loss) represents net income (loss) and other gains and losses affecting stockholders’ equity that are not reflected in the condensed consolidated statements of operations. The components of comprehensive income (loss) for the quarters ended March 31, 2006 and 2005 were as follows:

	Quarter Ended March 31,
(In millions)	2006			2005
Net income (loss) available to common shareholders	$	14.5		$	(24.7	)
Currency translation adjustments	2.1			(13.0		)
Minimum pension obligation	(0.2		)	—
Net unrealized gains (losses) on financial instruments	3.1			(1.0		)
Comprehensive income (loss)	$	19.5		$	(38.7	)

Note 10 — Derivative Financial Instruments

Interest Rate Swap Agreements

In the fourth quarter of 2003, we entered into interest rate swap agreements for an aggregate notional amount of $100.0 million. The interest rate swap agreements effectively converted the fixed interest rate of 9.75% on $100.0 million of our senior subordinated notes, due 2009, into variable interest rates. The variable interest rates payable in connection with the swap agreements ranged from LIBOR + 6.12% to LIBOR + 6.16%, and were reset semiannually on January 15 and July 15 of each year the swap agreements were in effect. Interest payment dates under the swap agreements of January 15 and July 15 matched the interest payment dates set by the senior subordinated notes, due 2009. The interest rate swap agreements were to mature on January 15, 2009, the maturity date of the senior subordinated notes, due 2009. The swap agreements were cancelable at the option of the fixed rate payer under terms that mirror the call provisions of the senior subordinated notes, due 2009. During the first quarter of 2005, both the underlying hedged item, the senior subordinated notes, due 2009, and also the hedges themselves were terminated. The carrying value at the time of the termination was a liability of $3.6 million. The expense associated with this liability upon termination has been recorded as “non-operating expense” in the condensed consolidated statement of operations in the first quarter of 2005. During the first quarter of 2005, hedge ineffectiveness was immaterial. A net gain of $0.2 million was recognized as a component of “interest expense” in the first quarter of 2005.

In May 2005, we entered into an agreement to swap $50.0 million of a floating rate obligation for a fixed rate obligation at an average of 3.99% against LIBOR in U.S. dollars. The term of the swap is 3 years, and is scheduled to mature on July 1, 2008. The swap is accounted for as a cash flow hedge of a floating rate bank loan. To ensure the swap is highly effective, all the principal terms of the swap match the terms of the bank loan. The fair value of this swap at March 31, 2006 was an asset of $1.3 million. A net gain of $0.1 million was recognized as a component of “interest expense” in the first quarter of 2006. A net increase of $0.6 million for the quarter ended March 31, 2006 was recognized as a component of “accumulated other comprehensive loss.” Over the next twelve months, unrealized gains of $0.6 million recorded in “accumulated other comprehensive loss” relating to this agreement are expected to be reclassified into earnings.

Cross-Currency Interest Rate Swap Agreement

In 2003, we entered into a cross-currency interest rate swap agreement, which effectively exchanges a loan of 12.5 million Euros at a fixed rate of 7% for a loan with a notional amount of $13.5 million at a fixed rate of 6.02% over the term of the agreement expiring December 1, 2007. We entered into this agreement to effectively hedge interest and principal payments relating to an intercompany loan denominated in Euros. The balance at March 31, 2006 of both the loan and the swap agreement, after scheduled amortization, was 8.5 million Euros against $9.2 million. The fair value and carrying amount of this swap agreement was a liability of $1.5 million at March 31, 2006. During the first quarters of 2006 and 2005, hedge ineffectiveness was immaterial. A net increase of $0.6 million and net reduction of $0.2 million for the quarters ended March 31, 2006 and 2005, respectively, was recognized as a component of “accumulated other comprehensive loss.” Over the next twelve months, unrealized losses of $0.2 million recorded in “accumulated other comprehensive loss” relating to this agreement are expected to be reclassified into earnings.

Foreign Currency Forward Exchange Contracts

A number of our European subsidiaries are exposed to the impact of exchange rate volatility between the U.S. dollar and the subsidiaries’ functional currencies, either the Euro or the British Pound Sterling. We have entered into contracts to also exchange U.S. dollars for Euros and British Pound Sterling through December 2008. The aggregate notional amount of these contracts was $95.0 million and $112.9 million at March 31, 2006 and December 31, 2005, respectively. The purpose of these contracts is to hedge a portion of the forecasted transactions of European subsidiaries under long-term sales contracts with certain customers. These contracts are expected to provide us with a more balanced matching of future cash receipts and expenditures by currency, thereby reducing our exposure to fluctuations in currency exchange rates. For the quarters ended March 31, 2006 and 2005, hedge ineffectiveness was immaterial.

The activity in “accumulated other comprehensive loss” related to foreign currency forward exchange contracts for the quarters ended March 31, 2006 and 2005 was as follows:

	Quarter Ended March 31,
(In millions)	2006			2005
Unrealized (losses) gains at beginning of period	$	(2.3	)	$	1.3
Losses (gains) reclassified to net sales	0.6			(0.4		)
Increase (decrease) in fair value	1.2			(0.3		)
Comprehensive income (loss)	$	(0.5	)	$	0.6

Unrealized losses of $0.5 million recorded in “accumulated other comprehensive loss,” as of March 31, 2006 are expected to be reclassified into earnings over the next twelve months as the hedged sales are recorded.

Foreign Currency Options

Consistent with our strategy to create cash flow hedges of foreign currency exposures, we purchased foreign currency options to exchange U.S. dollars for British Pound Sterling beginning in the fourth quarter of 2004. The nominal amount of such options was $7.5 million at March 31, 2006 and December 31, 2005. The options are designated as cash flow hedges. There was no ineffectiveness during the first quarters of 2006 and 2005. During the first quarter of 2006 and 2005, the change in fair value recognized in “accumulated other comprehensive loss” was an increase of $0.1 million and a decrease of $0.1 million, respectively.

Note 11 — Investments in Affiliated Companies

We have equity ownership investments in three Asian joint ventures and one U.S. joint venture. In connection therewith, we have considered the accounting and disclosure requirements of FASB Interpretation No. 46R, Consolidation of Variable Interest Entities, and believe that certain of these investments would be considered “variable interest entities.” However, we also believe that we are not the primary beneficiary of such entities, and therefore, are not required to consolidate these entities.

BHA Aero Composite Parts Co., Ltd.

In 1999, Hexcel, Boeing International Holdings, Ltd. (“Boeing”) and China Aviation Industry Corporation I (“AVIC”) formed a joint venture, BHA Aero Composite Parts Co., Ltd. (“BHA Aero”). This joint venture is located in Tianjin, China, and manufactures composite parts for secondary structures and interior applications for commercial aircraft. Summary information related to our investment in BHA Aero follows:

	Quarter Ended March 31,
(In millions)	2006			2005
Equity ownership	40.48		%	40.48		%
Last twelve months’ (“LTM”) revenues	$	18.8		$	14.5
Equity investment balance	$	5.4		$	5.1
Accounts receivable balance	$	2.6		$	1.8

On January 26, 2005, BHA Aero completed the refinancing of its bank debt, which resulted in a new five year bank term loan agreement supported by a pledge of BHA Aero’s fixed assets and guarantees from Boeing and AVIC. As part of the refinancing, we agreed to reimburse Boeing and AVIC for a proportionate share of the losses they would incur if their guarantees of the new bank loan were to be called, up to a limit of $6.1 million. Our reimbursement agreement with Boeing and AVIC relating to the BHA Aero joint venture meets the definition of a guarantee in accordance with the provisions of FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, (“FIN 45”). Accordingly, we recorded a $0.5 million liability, and a corresponding increase in our investment in BHA Aero, during the first quarter of 2005 based upon the estimated fair value of the guarantee. Apart from outstanding accounts receivable balances, our investment in this venture, and our agreement to reimburse Boeing and AVIC for a proportionate share of the losses they would incur if their guarantees of the new bank loan were to be called, we have no other significant exposures to loss related to BHA Aero.

Asian Composites Manufacturing Sdn. Bhd.

In 1999, Hexcel formed a joint venture, Asian Composites Manufacturing Sdn. Bhd. (“Asian Composites”), with Boeing Worldwide Operations Limited, Sime Link Sdn. Bhd., and Malaysia Helicopter Services Bhd. (now known as Naluri Berhad). This joint venture is located in Alor Setar, Malaysia, and manufactures composite parts for secondary structures for commercial aircraft. Summary information related to our investment in Asian Composites follows:

	Quarter Ended March 31,
(In millions)	2006			2005
Equity ownership	25.00		%	25.00		%
LTM revenues	$	20.7		$	15.0
Equity investment balance	$	3.6		$	2.5
Accounts receivable balance	$	1.1		$	1.6

Apart from outstanding accounts receivable balances, and our investment in this venture, we have no other significant exposures to loss related to Asian Composites.

TechFab LLC

As part of an acquisition in 1998, Hexcel obtained an equity ownership interest in TechFab LLC (“TechFab”), a Reinforcements joint venture that manufactures non-woven reinforcement materials for roofing, construction, sail cloth and other specialty applications. Summary information related to our investment in TechFab follows:

	Quarter Ended March 31,
(In millions)	2006			2005
Equity ownership	50.00		%	50.00		%
LTM revenues	$	39.5		$	30.6
Equity investment balance	$	5.7		$	6.5

Apart from our investment in this venture, we have no other significant exposures to loss related to TechFab.

DIC-Hexcel Limited

In 1990, Hexcel formed a joint venture, DIC-Hexcel Limited (“DHL”), with Dainippon Ink and Chemicals, Inc. (“DIC”). This joint venture is located in Komatsu, Japan, and produces and sells prepregs, honeycomb and decorative laminates using technology licensed from Hexcel and DIC. Summary information related to our investment in DIC is as follows:

	Quarter Ended March 31,
(In millions)	2006			2005
Equity ownership	45.30		%	45.30		%
LTM revenues	$	17.4		$	11.3
Equity investment balance	$	—		$	—

During the first quarter of 2005, we entered into a letter of awareness, whereby we became contingently liable to pay DIC up to $1.8 million with respect to DHL’s debt obligations under certain circumstances. This contingent obligation met the definition of a guarantee in accordance with the provisions of FIN 45. Accordingly, we recorded a liability on our condensed consolidated balance sheet for the estimated fair value of the guarantee of $0.2 million. As of March 31, 2006 and 2005, Hexcel has no equity investment balance relating to DHL as we previously considered this investment to be impaired. We have no significant exposures to loss relating to this joint venture other than our letter of awareness to pay DIC with respect to DHL’s debt obligations under certain circumstances.

In December 2005, Hexcel and DIC decided to dissolve the DHL joint venture. The dissolution will be completed during 2006. On January 20, 2006, Hexcel renewed a letter of awareness it had provided to DIC, whereby Hexcel is currently contingently liable to pay up to $1.3 million with respect to DHL’s debt obligations under certain circumstances. In April 2006, pursuant to its plan of dissolution, DHL sold its land and buildings. Proceeds from this sale were sufficient to repay the entire bank loan. As a result, Hexcel has been relieved of its $1.3 million guarantee in support of DHL’s bank facility. The remaining proceeds from the dissolution will be used to repay existing obligations of DHL, and any residual will be distributed in accordance with the terms of the governing agreements between the parent companies. The dissolution is not expected to generate a significant gain or loss for Hexcel.

Note 12 — Segment Information

The financial results for our business segments are prepared using a management approach, which is consistent with the basis and manner in which we internally segregate financial information for the purpose of assisting in making internal operating decisions. We evaluate the performance of our operating segments based on operating income, and generally account for intersegment sales based on arm’s length prices. Corporate and certain other expenses are not allocated to the operating segments, except to the extent that the expense can be directly attributable to the business segment.

Financial information for our business segments for the quarters ended March 31, 2006 and 2005 is as follows:

	Unaudited
(In millions)	Reinforcements		Composites		Structures		Corporate & Other			Total

First Quarter 2006
Net sales to external customers	$	68.6	$	214.6	$	23.8	$	—		$	307.0
Intersegment sales	35.9		7.9		—		—			43.8
Total sales	104.5		222.5		23.8		—			350.8

Operating income (loss)	7.9		29.9		2.6		(10.6		)	29.8
Depreciation and amortization	3.7		7.4		0.5		—			11.6
Business consolidation and restructuring expenses	2.4		0.7		—		(0.1		)	3.0
Capital expenditures and deposits for property purchases	2.3		20.6		0.1		1.2			24.2

First Quarter 2005
Net sales to external customers	$	76.9	$	195.7	$	18.0	$	—		$	290.6
Intersegment sales	36.4		6.5		—		—			42.9
Total sales	113.3		202.2		18.0		—			333.5

Operating income (loss)	12.1		28.1		1.1		(8.4		)	32.9
Depreciation	3.7		8.1		0.5		—			12.3
Business consolidation and restructuring expenses	—		0.4		—		—			0.4
Capital expenditures	0.5		6.9		—		0.1			7.5

Goodwill and Intangible Assets

The carrying amount of goodwill and intangibles assets by segment is as follows:

(In millions)	March 31, 2006		December 31, 2005
Reinforcements	$	40.2	$	40.2
Composites	18.5		18.4
Structures	16.1		16.1
Goodwill	$	74.8	$	74.7

The carrying value of the intangible asset included above was $2.4 million at March 31, 2006 and December 31, 2005.

Note 13 — Commitments and Contingencies

We are involved in litigation, investigations and claims arising out of the normal conduct of its business, including those relating to commercial transactions, environmental, employment, health and safety matters. 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 may or may not include potential recoveries from insurers or other third parties and are not discounted to reflect the time value of money due to the uncertainty in estimating the timing of the expenditures, which may extend over several years.

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 its existing insurance coverage and amounts already provided for, will not have a material adverse impact on the our consolidated results of operations, financial position or cash flows.

Environmental Claims and Proceedings

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.

As of March 31, 2006 and December 31, 2005, our aggregate environmental accruals were $4.3 million and $4.2 million, respectively. As of March 31, 2006 and December 31, 2005, $1.4 million was included in accrued liabilities in both periods, with the remainder included in other non-current liabilities. As related to certain of our environmental matters, the accrual was 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 accrual would have been $2.2 million higher at March 31, 2006 and $1.9 million higher at December 31, 2005. 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.

Operating costs for the first quarter of 2006 relating to environmental compliance were approximately $1.9 million. Capital expenditures for environmental matters approximated $0.1 million in the first quarter of 2006.

Other Proceedings

We have previously disclosed that it has settled several lawsuits alleging antitrust violations in the sale of carbon fiber, carbon fiber industrial fabrics and carbon fiber prepreg. The lawsuits were Thomas & Thomas Rodmakers, Inc. et. al. v. Newport Adhesives and Composites, Inc., et. al., Amended and Consolidated Class Action Complaint filed October 4, 1999, United States District Court, Central District of California, Western Division, CV-99-07796-GHK (CTx);, numerous class action lawsuits in California and in Massachusetts spawned by the Thomas & Thomas Rodmakers, Inc. class action; Horizon Sports Technologies, Inc., v. Newport Adhesives and Composites, Inc., et al., No. CV-99-7796 (C.D. Cal.); and United States ex rel. Beck, et al., v. Hexcel Corp., et al., Civil Action No. 99-CV- 1557 (S.D. Cal.). With respect to all of such lawsuits, we denied and continue to deny the allegations, but believed that the costs of continuing defense outweighed the costs of settlement. Eleven companies opted out of the class in the Thomas & Thomas Rodmakers, Inc. case. We have statute of limitation tolling agreements with two of the opt out companies and with one co-defendant that also purchased product of the alleged conspiracy. To date, none of the opt-out companies nor the co-defendant has asserted any claim against us. Hercules Incorporated (‘‘Hercules’’) was one of a number of co-defendants in the above antitrust lawsuits. In 2004, Hercules filed an action against us seeking a declaratory judgment that, pursuant to a 1996 Sale and Purchase Agreement between Hercules and Hexcel (whereby we acquired the carbon fiber and prepreg assets of Hercules) we are required to defend and indemnify Hercules against any liabilities of Hercules alleged in these cases (Hercules Incorporated v. Hexcel Corporation, Supreme Court of the State of New York, County of New York, No. 604098/04). Hercules settled the above antitrust lawsuits for an aggregate of $24.4 million. We are not in a position to predict the outcome of the lawsuit with Hercules, but intend to defend it vigorously.

On February 9, 2006, the U.S. Department of Justice (‘‘DOJ’’) informed us that it wished to enter into a statute of limitations tolling agreement covering possible civil claims the United States could assert against us with respect to Zylon fiber fabric that we made and was incorporated into allegedly defective body armor manufactured by some of our customers. The Zylon fiber was produced by Toyobo Co., Ltd. (‘‘Toyobo’’), woven into fabric by us and supplied to customers who required Zylon fabric for their body armor systems. Some of this body armor was sold by such customers to U.S. Government agencies or to state or local agencies under a DOJ program that provides U.S. Government funding for the purchase of body armor by law enforcement personnel.

In 2003, there were two incidents involving the alleged in-service failure of Zylon body armor manufactured by Second Chance Body Armor (‘‘Second Chance’’). We understand that the root cause of these failures is still under investigation. For some time prior to these incidents, Toyobo had been providing data to the industry showing that certain physical properties of Zylon fiber were susceptible to degradation over time and under certain environmental conditions. Following these incidents, the National Institute of Justice (‘‘NIJ’’), a division of the DOJ, and a number of body armor manufacturers conducted extensive investigations of Zylon fiber and body armor containing Zylon fiber. These investigations ultimately resulted in a number of voluntary recalls of Zylon body armor by certain manufacturers and a finding by the NIJ that Zylon fiber is not suitable for use in body armor. Prior to these findings, the DOJ had filed civil actions against Toyobo and Second Chance alleging that they had conspired to withhold information on the

degradation of Zylon, caused defective body armor to be purchased under the U.S. Government funding program, and therefore were liable to the U.S. Government under the False Claims Act and various common law claims. In addition, a number of private civil actions were commenced against Toyobo and Second Chance, certain of which we understand have been settled by Toyobo. Although Second Chance’s assets were purchased by another body armor manufacturer (Armor Holdings Inc.), we understand our Zylon-related liabilities were retained and that Second Chance is currently in a liquidation proceeding under Chapter 7 of the U.S. Bankruptcy Code. The DOJ actions are still pending against Toyobo and Second Chance. The DOJ’s tolling request indicates that it is evaluating whether to assert claims against us. We are currently evaluating the DOJ’s tolling request. On March 8, 2006, we entered into a tolling agreement with the DOJ which excludes the period between February 14, 2006 and September 1, 2006 when determining whether civil claims asserted by the United States in respect of the above matters are time-barred.

Letters of Credit

Letters of credit are purchased guarantees that ensure the performance or payment to third parties in accordance with specified terms and conditions. We had $4.1 million and $4.0 million letters of credit outstanding at March 31, 2006 and December 31, 2005, respectively.

Guarantees

During the first quarter of 2005, we entered into a reimbursement agreement with Boeing and AVIC in connection with the recapitalization of BHA Aero. The reimbursement agreement provides that Hexcel would reimburse Boeing and AVIC for a proportionate share of the losses we would incur if their guarantees of the new bank loan were to be called, up to a limit of $6.1 million. In addition, during the first quarter of 2006, Hexcel renewed a letter of awareness, whereby Hexcel became contingently liable to pay DIC up to $1.3 million with respect to DHL’s debt obligations in the event of default. Both of these contingent obligations meet the definition of a guarantee in accordance with the provisions of FIN 45. Accordingly, we recorded a liability in our condensed consolidated balance sheet for the estimated fair value of the guarantees. The liabilities recorded for the BHA Aero and DIC guarantees were $0.5 million and $0.2 million, respectively. For further information, see Note 11.

Product Warranty

We provide for an estimated amount of product warranty expense at the time revenue is recognized. This estimated amount is provided by product and based on historical warranty experience. In addition, we periodically review our warranty accrual and record any adjustments as deemed appropriate. Warranty expense for the quarter ended March 31, 2006, and accrued warranty cost, included in “accrued liabilities” in the condensed consolidated balance sheets at March 31, 2006 and December 31, 2005, was as follows:

(In millions)	Product Warranties
Balance as of December 31, 2005	$	3.2
Warranty expense	0.8
Deductions and other	(0.6		)
Balance as of March 31, 2006	$	3.4

In April 2006, one of our customers in the soft body armor segment, advised us that there was a potential quality issue with one of the fabric styles supplied to that customer. The customer also advised that this could result in warranty claims against us. We are currently investigating this matter but, to date, have not determined the validity or extent of any such claim, and therefore no reserve has been established at this time.

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Financial Overview

	Quarter Ended March 31,
	Unaudited
(In millions, except per share data)	2006			2005
Net sales	$	307.0		$	290.6
Gross margin %	23.2		%	22.6		%
Operating income	$	29.8		$	32.9
Operating income %	9.7		%	11.3		%
Non-operating expense	$	—		$	(40.3	)
Provision for income taxes	$	8.6		$	3.6
Equity in earnings of affiliated companies	$	1.1		$	0.5
Net income (loss)	$	14.5		$	(22.4	)
Deemed preferred dividends and accretion	$	—		$	(2.3	)
Net income (loss) available to common shareholders	$	14.5		$	(24.7	)
Diluted net income (loss) per common share	$	0.15		$	(0.46	)

Results of Operations

Net Sales: Net sales of $307.0 million for the first quarter of 2006 were $16.4 million, or 5.6%, higher than the $290.6 million of net sales for the first quarter of 2005. The increase was driven by growth in the Commercial Aerospace and Space & Defense markets, but was partially offset by declines in the Industrial and Electronics markets as well as the unfavorable impact of foreign exchange rates. Had the same U.S. dollar, British pound sterling and Euro exchange rates applied in the first quarter of 2006 as in the first quarter of 2005, net sales for the first quarter of 2006 would have been $316.0 million, $25.4 million, or 8.7%, higher than the first quarter of 2005.

The following table summarizes net sales to third-party customers by segment and end market for the quarters ended March 31, 2006 and 2005, respectively:

	Unaudited
(In millions)	Commercial Aerospace			Industrial			Space & Defense			Electronics			Total
First Quarter 2006
Reinforcements	$	17.9		$	36.6		$	—		$	14.1		$	68.6
Composites	115.5			51.1			48.0			—			214.6
Structures	19.8			—			4.0			—			23.8
Total	$	153.2		$	87.7		$	52.0		$	14.1		$	307.0
	50		%	28		%	17		%	5		%	100		%
First Quarter 2005
Reinforcements	$	17.3		$	42.8		$	—		$	16.8		$	76.9
Composites	98.3			50.6			46.8			—			195.7
Structures	15.6			—			2.4			—			18.0
Total	$	131.2		$	93.4		$	49.2		$	16.8		$	290.6
	45		%	32		%	17		%	6		%	100		%

Commercial Aerospace: Net sales increased $22.0 million, or 16.8%, to $153.2 million for the first quarter of 2006, as compared to net sales of $131.2 million for the first quarter of 2005. If adjusted to eliminate the changes in exchange rates, total sales to commercial aerospace applications would have increased by $25.1 million, or 19.1%, compared to the first quarter of 2005. Net sales to this market by each of the Company’s business segments increased when compared with the first quarter of 2005 with sales by the Structures and Composites business segments having the greatest increases at 26.9% and 17.5%, respectively. The overall year-over-year improvement was driven by scheduled increases in aircraft production in 2006 at Boeing and Airbus. We saw increases in the sales of our materials to the OEM equipment manufacturers and their subcontractors, including a pickup in shipments of materials associated with the Airbus A380 program.

Industrial: Net sales of $87.7 million for the first quarter of 2006 were $5.7 million, or 6.1% lower than the net sales of $93.4 million for the same quarter of 2005. Computed using the same exchange rates as applied in the first quarter of 2005, constant currency sales to this market decreased 1.6% year-on-year to $91.9 million. Sales of composite products to wind energy applications increased 7.9% over the prior year, or 17.6% on a constant currency basis, due to the continued underlying growth in global wind turbine installations. Ballistics revenues declined 18.8% compared to the first quarter of 2005, as demand for soft body armor

continued to settle back from the surge levels we saw in 2004. We continue to expect lower ballistics revenues in 2006 as end customer requirements transition to sustaining levels. Sales to other industrial applications, including recreational products, continued to be constrained by the global shortage of industrial carbon fiber.

Space & Defense: Net sales to this market for the first quarter of 2006 were $52.0 million, an increase of $2.8 million, or 5.7%, when compared to the first quarter of 2005. Computed using the same foreign currency exchange rates as applied in the first quarter of 2005, net sales to this market of $53.4 million were up $4.2 million, or 8.5%, year-on-year. Demand for composite materials and structures across a broad range of military programs, including U.S. and European helicopter programs, remained strong during the first quarter of 2006. Our revenues from military and space programs tend to vary from quarter to quarter more than revenues from programs in other market segments, due to customer ordering patterns and the timing of manufacturing campaigns.

Electronics: Net sales of $14.1 million for the first quarter of 2006 were $2.7 million, or 16.1%, lower than the net sales of $16.8 million for the first quarter of 2005. Computed using the same foreign currency exchange rates as applied in the first quarter of 2005, revenues to this market would have been $14.4 million in the first quarter of 2006, a decrease of 14.3% over the same period a year ago.

Gross Margin: Gross margin for the first quarter of 2006 was $71.1 million, or 23.2% of net sales, compared with $65.8 million, or 22.6% of net sales, for the same period last year. The increase in gross margin reflects the contribution of higher net sales, the mix of those sales and the continuing benefits obtained from our cost containment focus. The increase in gross margin was partially offset by higher raw material and utility costs. Depreciation and amortization expense for the first quarter of 2006 was $11.6 million compared to $12.3 million in the first quarter of 2005.

Selling, General and Administrative Expenses (“SG&A”): SG&A expenses of $30.7 million for the first quarter of 2006 were $4.2 million higher than the first quarter of 2005. SG&A expenses were 10.0% of net sales in the first quarter of 2006 compared to 9.1% of net sales in the first quarter of 2005. The year-over year increase in SG&A expenses includes an increase of $2.6 million related to share based compensation, reflecting the impact of our adoption of Financial Accounting Board Statement No. 123 (R) Share Based Payment, and secondary offering transaction costs of $1.2 million which were expensed during the first quarter of 2006.

Research and Technology Expenses (“R&T”): R&T expenses for the first quarter of 2006 were $7.6 million, or 2.5% of net sales, compared with $5.8 million, or 2.0% of net sales, for the first quarter of 2005. The year-over-year increase in R&T expenses reflects our increased spending in support of new products and new commercial aircraft qualification activities.

Operating Income: Operating income was $29.8 million, or 9.7% of net sales, in the first quarter of 2006, compared with $32.9 million, or 11.3% of net sales, in the first quarter of 2005. The year-over-year decrease in operating income was driven by higher share based compensation expense of $2.9 million, higher business consolidation and restructuring expenses of $2.6 million, and $1.2 million of secondary offering transaction costs. These increases were partially offset by the overall increase in net sales and the continued positive impact of our ongoing cost containment initiatives.

Operating income for the first quarter of 2006 for the Reinforcements business unit was $4.2 million lower than last year. Higher business consolidation and restructuring expenses, lower sales prices, and higher stock based compensation expenses were the primary factors for the lower operating income.

Operating income for the Composites business unit was $1.8 million higher this quarter versus last year. The favorable impact of higher sales volumes was principally offset by higher overhead spending, higher operating expenses and increased stock based compensation expenses. Overhead spending and operating expenses were higher primarily due to higher raw material costs, increased utility costs, and higher qualification expenses.

Operating income for the Structures business unit increased $1.5 million compared to last year. This favorable impact is primarily due to higher sales volumes due to increased build rates and revenue from new programs.

The operating loss for the corporate segment was $2.2 million worse than last year. This unfavorable impact resulted from higher stock based compensation costs and the secondary offering expenses booked in the first quarter of 2006.

Non-Operating Expense: During the first quarter of 2005, we refinanced substantially all of our debt. In connection with the refinancing, we recorded a loss on early retirement of debt of $40.3 million during the first quarter of 2005, consisting of tender offer and call premiums of $25.2 million, the write-off of unamortized deferred financing costs and original issuance discounts of $10.3 million, transaction costs of $1.2 million in connection with the refinancing, and a loss of $3.6 million related to the cancellation of interest rate swap agreements.

Interest Expense: Interest expense was $7.8 million for the first quarter of 2006, compared to $11.9 million for the first quarter of 2005. The reduction in interest expense reflects the full quarter impact of the benefits of lower interest rates resulting from our first quarter 2005 refinancing.

Provision for Income Taxes: The provision for income taxes for the first quarter of 2006 was $8.6 million, or 39% of income before income taxes. This compares to the provision for income taxes of $3.6 million, or 19% of income before taxes in the first quarter of 2005. The provision for income taxes of $3.6 million in the first quarter of 2005 was primarily for taxes on European income as we continued to adjust our tax provision rate during that quarter through the establishment, or release, of a non-cash valuation allowance attributable to currently generated U.S. and Belgian net pre-tax income and losses.

Equity in Earnings of Affiliated Companies: Equity in earnings of affiliated companies for the first quarter of 2006 was $1.1 million, compared to $0.5 million in the first quarter of 2005. The year-over-year increase in equity in earnings reflects improved operating performance at our joint ventures in China and Malaysia. Equity in earnings of affiliated companies does not affect the Company’s cash flows. For further information, see Note 11 to the accompanying condensed consolidated financial statements.

Deemed Preferred Dividends and Accretion: During the first quarter of 2005, we recognized deemed preferred dividends and accretion of $2.3 million. We recognized no preferred dividends and accretion during the first quarter of 2006. During the fourth quarter of 2005, the holders of the remaining mandatorily redeemable convertible preferred stock converted that stock into shares of our common stock. As a result of the conversion, there are no longer any shares of any class of capital stock outstanding other than the common stock.

Business Consolidation and Restructuring Programs

Business consolidation and restructuring liabilities as of March 31, 2006 and December 31, 2005, and activity for the quarter ended March 31, 2006, consisted of the following:

(In millions)	Employee Severance			Facility & Equipment			Total
Balance as of December 31, 2005	$	3.5		$	0.7		$	4.2
Business consolidation and restructuring expenses	2.4			0.6			3.0
Cash expenditures	(0.4		)	(0.7		)	(1.1		)
Balance as of March 31, 2006	$	5.5		$	0.6		$	6.1

Electronics Program

In December 2005, we announced plans to consolidate certain glass fabric production activities at our Les Avenieres, France plants. In January 2006, we announced plans to consolidate our U.S. electronics production activities into our Statesville, North Carolina plant and to close the plant in Washington, Georgia. These actions are aimed at matching regional production capacities with available demand. For the quarter ended March 31, 2006, we recognized $2.0 million of expense for employee severance based on existing obligations as of the date of our announcement. In addition, we recorded expense of $0.4 million associated with the facility closures and consolidation activities. Cash expenditures for this program were $0.8 million during the first quarter of 2006, leaving an accrued liability balance of $1.8 million as of March 31, 2006.

Livermore Program

In the first quarter of 2004, we announced our intent to consolidate the activities our Livermore, California facility into other facilities, principally the Salt Lake City, Utah plant. For the quarter ended March 31, 2006, we recognized $0.4 million of expense for employee severance, and recorded $0.2 million of expense associated with the relocation and re-qualification of equipment. During the first quarter of 2006, we determined that involuntary termination benefits under the Livermore Program should have been accounted for under the provisions of SFAS No. 112, Employers’ Accounting for Postemployment Benefits, instead of SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. We made an adjustment as a result of this determination in the first quarter of 2006, and concluded that the impact was not material to either the current period nor to any prior periods. Costs associated with the facility’s closure, along with costs for relocation and re-qualification of equipment, are expected to occur during the remaining term of the program, which is expected to be completed by the end of 2006. Cash expenditures for this program were $0.2 million during the first quarter of 2006, leaving an accrued liability balance of $1.8 million as of March 31, 2006.

November 2001 Program

In November 2001, we announced a program to restructure business operations as a result of our revised business outlook as a result of reductions in commercial aircraft production rates and due to depressed business conditions in the electronics market. This program is substantially complete. Severance and lease payments will continue into 2009. Cash expenditures for this program were $0.1 million during the first quarter of 2006, leaving an accrued liability balance of $2.5 million as of March 31, 2006.

Financial Condition

Liquidity: As of March 31, 2006, we had cash and cash equivalents of $23.9 million. Aggregate borrowings as of March 31, 2006 under the Senior Secured Credit Facility were $220.0 million, consisting of $185.0 million of term loans and $35.0 million of revolver loans. The Senior Secured Credit Facility permits us to issue letters of credit up to an aggregate amount of $40.0 million. Any outstanding letters of credit reduce the amount available for borrowing under the revolving loan. As of March 31, 2006, we had issued letters of credit under the Senior Secured Credit Facility totaling $3.9 million. Undrawn availability under the Senior Secured Credit Facility was $86.1 million as of March 31, 2006.

In addition, we have additional borrowing capacity under various European credit and overdraft facilities, which could be utilized to meet short-term working capital and operating cash requirements. As of March 31, 2006, we had outstanding borrowings of $4.3 million under these facilities. The European credit and overdraft facilities are uncommitted lines and can be terminated at the option of the lender.

Our total debt, net of cash, as of March 31, 2006 was $428.9 million, an increase of $30.1 million from total debt, net of cash of $398.8 million as of December 31, 2005. The increase in net debt reflects the impact of expenditures made during the first quarter of 2006 associated with our carbon fiber expansion program, and the historical first quarter impact of the timing of our annual benefit payments and traditional seasonal working capital builds.

Operating Activities: Net cash used for operating activities was $9.6 million in the first quarter of 2006, as compared to net cash used by operating activities of $26.3 million in the first quarter of 2005. The year-over year decrease in net cash used by operations reflects the impact of our increased profitability in addition to an overall increase in working capital. In particular, sales strengthened as the quarter progressed, increasing the quarter end accounts receivable balance. Historically, we use cash in the first quarter of the year as working capital traditionally increases from the seasonal December low levels, and as a result of the timing of our annual incentive compensation and benefit payments.

Investing Activities: Net cash used for investing activities was $23.4 million in the first quarter of 2006 compared with $15.0 million used in the first quarter of 2005. The year over year increase is primarily attributable to an increase in capital expenditures of $14.9 million and deposits for property purchases of $1.8 million in connection with our carbon fiber expansion programs. During the first quarter of 2005, we made a $7.5 million equity investment in the BHA Aero joint venture located in Tianjin, China, increasing our ownership position in the joint venture from 33.33% to 40.48%.

Financing Activities: Financing activities provided $36.5 million of net cash in the first quarter of 2006. During the first quarter of 2006, we utilized $30.0 million of borrowing capacity from our Senior Secured Credit Facility, increased our borrowing under European credit and overdraft facilities and generated cash of $3.6 million from activity under our stock plans.

During the first quarter of 2005, financing activities provided $9.4 million of net cash. We refinanced substantially all of our long-term debt during the quarter. In connection with the refinancing, we entered into the Senior Secured Credit Facility, consisting of a $225.0 million term loan and a $125.0 million revolving loan. In addition, we issued $225.0 million principal amount of 6.75% senior subordinated notes due 2015. The Senior Secured Credit Facility replaced our then existing $115.0 million five-year secured revolving credit facility. Proceeds from the Senior Secured Credit Facility and the new senior subordinated notes were used to redeem $285.3 million principal amount of the 9.75% senior subordinated notes due 2009, repurchase $125.0 million principal amount of the 9.875% senior secured notes due 2008, redeem $19.2 million principal amount of the 7.0% convertible subordinated debentures due 2011, and pay $41.8 million of cash transaction costs related to the refinancing.

Financial Obligations and Commitments: As of March 31, 2006, current maturities of notes payable and capital lease obligations were $6.5 million. With the benefit of our debt refinancing in the first quarter of 2005, the next significant scheduled debt maturity will not occur until 2010, with annual debt and capital lease maturities ranging from $2.2 million to $37.0 million prior to 2011. Short-term debt obligations include $4.3 million of drawings under European credit and overdraft facilities. The European credit and overdraft facilities provided to certain of our European subsidiaries by lenders outside of the Senior Secured Credit Facility are primarily uncommitted facilities that are terminable at the discretion of the lenders. We have entered into several capital leases for buildings and warehouses with expirations through 2012. In addition, certain sales and administrative offices, data processing equipment and manufacturing facilities are leased under operating leases.

The Senior Secured Credit Facility permits us to issue letters of credit up to an aggregate amount of $40.0 million. Any outstanding letters of credit reduce the amount available for borrowing under the revolving loan. As of March 31, 2006, we had issued letters of credit under the Senior Secured Credit Facility totaling $3.9 million. Undrawn availability under the Senior Secured Credit Facility was $86.1 million as of March 31, 2006. The term loan under the Senior Secured Credit Facility is scheduled to mature on March 1, 2012 and the revolving loan under the credit facility is scheduled to expire on March 1, 2010.

During the first quarter of 2005, we issued $225.0 million principal amount of 6.75% senior subordinated notes. The senior

subordinated notes mature on February 1, 2015.

Total letters of credit issued and outstanding were $4.1 million as of March 31, 2006. Approximately $3.9 million of these letters of credit were issued under the revolving credit portion of the Senior Secured Credit Facility, with the remaining $0.2 million issued separately from this facility. While the letters of credit issued on our behalf will expire under their terms in 2006 and 2007, all of these will likely be re-issued.

During the first quarter of 2005, we entered into a reimbursement agreement with Boeing and AVIC in connection with the recapitalization of BHA Aero. The reimbursement agreement provides that we would reimburse Boeing and AVIC for a proportionate share of the losses they would incur if their guarantees of the new bank loan were to be called, up to a limit of $6.1 million. In addition, during the first quarter of 2006, we renewed our letter of awareness, whereby we became contingently liable to pay under certain circumstances Dainippon Ink and Chemicals, Inc up to $1.3 million with respect to DIC-Hexcel Ltd’s debt obligations. In April 2006, pursuant to the plan of dissolution, DHL sold its land and buildings. Proceeds from this sale were sufficient to repay the entire bank loan. As a result, we have been relieved of our $1.3 million guarantee in support of DHL’s bank facility.

The following table summarizes the maturities of financial obligations and expiration dates of commitments as of March 31, 2006, for the remaining nine months of 2006, for the years ended 2007 through 2010, and thereafter:

(In millions)	Remaining Nine Months of 2006		2007		2008		2009		2010		Thereafter		Total
Senior secured credit facility — revolver due 2010	$	—	$	—	$	—	$	—	$	35.0	$	—	$	35.0
Senior secured credit facility — term B loan due 2012	1.4		1.9		1.9		1.9		1.9		176.0		185.0
European credit and overdraft facilities	4.3		—		—		—		—		—		4.3
6.75% senior subordinated notes due 2015	—		—		—		—		—		225.0		225.0
Capital leases	0.3		0.3		0.3		0.4		0.1		2.1		3.5
Subtotal	6.0		2.2		2.2		2.3		37.0		403.1		452.8
Operating leases	4.0		3.7		2.7		1.9		1.5		5.9		19.7
Total financial obligations	$	10.0	$	5.9	$	4.9	$	4.2	$	38.5	$	409.0	$	472.5

Letters of credit	$	3.1	$	1.0	$	—	$	—	$	—	$	—	$	4.1
Interest payments	22.2		29.5		29.3		29.2		27.6		83.2		221.0
Benefit plan contributions	4.1		—		—		—		—		—		4.1
Other commitments	7.4		—		—		—		—		—		7.4
Total commitments	$	36.8	$	30.5	$	29.3	$	29.2	$	27.6	$	83.2	$	236.6

Our ability to make scheduled payments of principal, or to pay interest on, or to refinance our indebtedness, including our public notes, or to fund planned capital expenditures, will depend on our future performance and conditions in the financial markets. Our future performance is subject to economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. We have significant leverage and there can be no assurance that we will generate sufficient cash flow from our operations, or that sufficient future borrowings will be available under the Senior Secured Credit Facility, to enable us to service our indebtedness, including our public notes, or to fund our other liquidity needs.

Critical Accounting Policies

For information regarding our critical accounting policies, refer to our 2005 Annual Report on Form 10-K.

Recently Issued Accounting Policies

Effective January 1, 2006, we adopted SFAS 123(R), using the modified prospective transition method. This method required us to apply the provisions of SFAS 123(R) to new awards and to any awards that were unvested as of our adoption date and did not require us to restate prior periods. SFAS 123(R) requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors based on estimated fair values. SFAS 123(R) requires companies to estimate the fair value of share-based payment awards on the grant date using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in our condensed consolidated statement of operations. In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (“SAB 107”) relating to SFAS 123(R). We have applied the provisions of SAB 107 in our adoption of SFAS 123(R).

Forward-Looking Statements and Risk Factors

Certain statements contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” constitute “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) expectations regarding the demand for soft body armor made of aramid and specialty fabrics; (b) expectations as to the availability of carbon fiber for non-aerospace applications; (c) expectations as to the impact of increasing prices of raw materials and utilities used in the manufacture of its products; (d) expectations regarding the our equity in the earnings (losses) of joint ventures, as well as joint venture investments and loan guarantees; (e) expectations regarding working capital trends and capital expenditures; (j) the availability and sufficiency under our senior credit facilities and other financial resources to fund our worldwide operations in 2005 and beyond; and (f) the impact of various market risks, including fluctuations in the interest rates underlying our variable-rate debt, fluctuations in currency exchange rates, fluctuations in commodity prices, and fluctuations in the market price of our common stock.

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

If one or more of these risks or uncertainties materialize, or if underlying assumptions prove incorrect, actual results may vary materially from those expected, estimated or projected. In addition to other factors that affect 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 the 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 3. Quantitative and Qualitative Disclosures about Market Risk

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

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

Interest Rates

Our financial results are affected by interest rate changes on certain of our debt instruments. Without the benefit of interest rate swap agreements our ratio of floating debt to total debt was about 49% as of March 31, 2006. In order to manage our exposure to interest rate movements or variability, we may from time-to-time enter into interest rate swap agreements and other financial instruments. In May 2005, we entered into interest rate swap agreements for an aggregate notional amount of $50.0 million, effectively converting a portion of the variable rate term loan of the Senior Secured Credit Facility into fixed rate debt. As a result of this interest rate swap agreement, our ratio of floating debt to total debt as of March 31, 2006 was reduced to approximately 38%.

Interest Rate Swap Agreements

In the fourth quarter of 2003, we entered into interest rate swap agreements for an aggregate notional amount of $100.0 million. The interest rate swap agreements effectively converted the fixed interest rate of 9.75% on $100.0 million of our senior subordinated notes, due 2009, into variable interest rates. The variable interest rates payable in connection with the swap agreements ranged from LIBOR + 6.12% to LIBOR + 6.16%, and were reset semiannually on January 15 and July 15 of each year the swap agreements were in effect. Interest payment dates under the swap agreements of January 15 and July 15 matched the interest payment dates set by the senior subordinated notes, due 2009. The interest rate swap agreements were to mature on January 15, 2009, the maturity date of the senior subordinated notes, due 2009. The swap agreements were cancelable at the option of the fixed rate payer under terms that mirror the call provisions of the senior subordinated notes, due 2009. During the first quarter of 2005, both the underlying hedged item, the senior subordinated notes, due 2009, and also the hedges themselves were terminated. The carrying value at the time of the termination was a liability of $3.6 million. The expense associated with this liability upon termination has been recorded as “non-operating expense,” in the condensed consolidated statement of operations during the first quarter of 2005. During the first quarter of 2005, hedge ineffectiveness was immaterial. A net gain of $0.2 million was recognized as a component of “interest expense” in the first quarter of 2005.

In May 2005, we entered into an agreement to swap $50.0 million of a floating rate obligation for a fixed rate obligation at an average of 3.99% against LIBOR in U.S. dollars. The term of the swap is 3 years, and is scheduled to mature on July 1, 2008. The swap is accounted for as a cash flow hedge of our floating rate bank loan. To ensure the swap is highly effective, all the principal terms of the swap match the terms of the bank loan. The fair value of this swap at March 31, 2006 was an asset of $1.3 million. A net gain of $0.1 million was recognized as a component of “interest expense” in the first quarter of 2006. A net increase of $0.6 million for the quarter ended March 31, 2006 was recognized as a component of “accumulated other comprehensive loss.” Over the next twelve months, unrealized gains of $0.6 million recorded in “accumulated other comprehensive loss” relating to this agreement are expected to be reclassified into earnings.

Cross-Currency Interest Rate Swap Agreement

Foreign Currency Exchange Risks

We have significant business activities in Europe. We operate seven manufacturing facilities in Europe, which generate approximately 47% of our 2005 consolidated net sales. Our European business activities primarily involve three major currencies — the U.S. dollar, the British pound, and the Euro. We also conduct business or have joint venture investments in Japan, China and Malaysia, and sell products to customers throughout the world. A significant portion of our transactions with customers and joint venture affiliates outside of Europe are denominated in U.S. dollars, thereby limiting the our exposure to short-term currency fluctuations involving these countries. However, the value of our investments in these countries could be impacted by changes in currency exchange rates over time, as could our ability to profitably compete in international markets.

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

Foreign Currency Forward Exchange Contracts

A number of our European subsidiaries are exposed to the impact of exchange rate volatility between the U.S. dollar and the subsidiaries’ functional currencies, either the Euro or the British Pound Sterling. We have entered into contracts to exchange U.S. dollars for Euros and British Pound Sterling through December 2008. The aggregate notional amount of these contracts was $95.0 million and $112.9 million at March 31, 2006 and December 31, 2005, respectively. The purpose of these contracts is to hedge a portion of the forecasted transactions of European subsidiaries under long-term sales contracts with certain customers. These contracts are expected to provide us with a more balanced matching of future cash receipts and expenditures by currency, thereby reducing our exposure to fluctuations in currency exchange rates. For the quarters ended March 31, 2006 and 2005, hedge ineffectiveness was immaterial.

The activity in “accumulated other comprehensive loss” related to foreign currency forward exchange contracts for the quarters ended March 31, 2006 and 2005 was as follows:

	Quarter Ended March 31,
(In millions)	2006			2005
Unrealized (losses) gains at beginning of period	$	(2.3	)	$	1.3
Losses (gains) reclassified to net sales	0.6			(0.4		)
Increase (decrease) in fair value	1.2			(0.3		)
Comprehensive income (loss)	$	(0.5	)	$	0.6

Foreign Currency Options

Consistent with our strategy to create cash flow hedges of foreign currency exposures, we purchased foreign currency options to exchange U.S. dollars for British Pound Sterling beginning in the fourth quarter of 2004. The nominal amount of the options was $7.5 million at March 31, 2006 and December 31, 2005. The options are designated as cash flow hedges. There was no ineffectiveness during the first quarters of 2006 and 2005. During the first quarter of 2006 and 2005, the change in fair value recognized in “accumulated other comprehensive loss” was an increase of $0.1 million and a decrease of $0.1 million, respectively.

Utility Price Risks

We have exposure to utility price risks as a result of volatility in the cost and supply of energy and in natural gas. To minimize the risk, from time to time we enter into fixed price contracts at certain of our manufacturing locations for a portion of the energy usage for periods up to one year. Although these contracts would reduce our risk during the contract period, future volatility in the supply and pricing of energy and natural gas could have an impact on our future consolidated results of operations.

For further information regarding market risks, refer to our 2005 Annual Report on Form 10-K.

ITEM 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of March 31, 2006, our Chief Executive Officer and Chief Financial Officer evaluated our disclosure controls and procedures (as defined in Rule 13a-14 and Rule 15d-14 under the Securities Exchange Act of 1934). Based on their evaluation, they have concluded that our disclosure controls and procedures are effective to ensure that material information relating to the Company, including our consolidated subsidiaries, would be made known to them, so as to be reflected in periodic reports that we file or submit under the Securities and Exchange Act of 1934. The evaluation did not result in the identification of any changes in our internal control over financial reporting that occurred during the first quarter ended March 31, 2006 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Changes in Internal Controls

There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, nor were there any material weaknesses in our internal controls. As a result, no corrective actions were required or undertaken.

PART II. OTHER INFORMATION

ITEM 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2005, which could materially affect our business, financial condition or future results. In addition, future uncertainties may increase the magnitude of these adverse affects or give rise to additional material risks not now contemplated.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

(c)

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
January 1 — January 31, 2006	0		N/A		0	0
February 1 — February 28, 2006	0		N/A		0	0
March 1 — March 31, 2006	4,332		$	20.11	0	0
Total	4,332	(1)	$	20.11	0	0

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

ITEM 6. Exhibits and Reports on Form 8-K

(a) Exhibits:

Exhibit No.			Description
1			Underwriting Agreement, dated as of March 9, 2005, between Hexcel Corporation and Goldman, Sachs & Co. and Credit Suisse Securities (USA) LLC as representatives of the several underwriters named on schedule I thereto (incorporated by reference to Exhibit 1 to the Company’s Current Report on Form 8-K dated March 15, 2006).

3			Amended and Restated Bylaws of Hexcel Corporation (incorporated by reference to Exhibit 3 to the Company’s Current Report on Form 8-K dated March 15, 2006).

10.1			Executive Severance Agreement between Hexcel and Robert G. Hennemuth, dated as of March 20, 2006.

10.2			Executive Deferred Compensation and Consulting Agreement, dated as of March 20, 2006, between Hexcel Corporation and Robert G. Hennemuth.

10.3			Form of restricted stock unit agreement (incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K dated February 13, 2006).

10.4			Form of performance based award agreement (incorporated by reference to Exhibit 99.2 to the Company’s Current Report on Form 8-K dated February 13, 2006).

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.

(b) Reports on Form 8-K:

Current Report on Form 8-K dated January 3, 2006 announcing the naming of a new member to Hexcel’s Board of Directors and the conversion of all outstanding convertible preferred stock into common stock.

Current Report on Form 8-K dated January 27, 2006 relating to the Company’s fourth quarter and full year 2004 financial results.

Current Report on Form 8-K dated February 6, 2006, correcting certain reported amounts for the quarter and year ended December 31, 2004 contained in the “Cash flows from investing activities” section of the earnings release included with the January 27, 2006 Current Report on Form 8-K.

Current Report on Form 8-K dated February 13, 2006, relating to a variety of executive compensation matters (including the Company’s cash bonus plan for 2006, cash bonus awards for 2005 and the perquisites allowance for the CEO), and annual long-term equity incentive grants for 2006.

Current Report on Form 8-K dated March 2, 2006, in which Hexcel advised of an increase in the benefit of the reversal of its valuation allowance as of December 31, 2005.

Current Report on Form 8-K dated March 9, 2006, providing an update to a previously reported litigation proceeding and including as an exhibit certain pro forma financial information that was later included in the final prospectus relating to an offering of common stock by stockholders of Hexcel.

Current Report on Form 8-K dated March 15, 2006 relating to an offering of common stock by stockholders of Hexcel and the resignation of two members of Hexcel’s Board of Directors.

Current Report on Form 8-K dated March 24, 2006, relating to the hiring of a new Senior Vice President, Human Resources, and certain compensation agreements entered into with such executive.

Signature

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

		Hexcel Corporation


May 8, 2006		/s/ William J. Fazio
(Date)		William J. Fazio
		Corporate Controller and
		Chief Accounting Officer

EXHIBIT INDEX

Exhibit No.		Description
1		Underwriting Agreement, dated as of March 9, 2005, between Hexcel Corporation and Goldman, Sachs & Co. and Credit Suisse Securities (USA) LLC as representatives of the several underwriters named on schedule I thereto (incorporated by reference to Exhibit 1 to the Company’s Current Report on Form 8-K dated March 15, 2006).

3		Amended and Restated Bylaws of Hexcel Corporation (incorporated by reference to Exhibit 3 to the Company’s Current Report on Form 8-K dated March 15, 2006)

10.1		Executive Severance Agreement between Hexcel and Robert G. Hennemuth, dated as of March 20, 2006.

10.2		Executive Deferred Compensation and Consulting Agreement, dated as of March 20, 2006, between Hexcel Corporation and Robert G. Hennemuth.

10.3		Form of restricted stock unit agreement (incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K dated February 13, 2006).

10.4		Form of performance based award agreement (incorporated by reference to Exhibit 99.2 to the Company’s Current Report on Form 8-K dated February 13, 2006).

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.

EX-10.1 2 a06-9628_1ex10d1.htm EX-10

Exhibit 10.1

EXECUTIVE SEVERANCE AGREEMENT

AGREEMENT made as of the 20th day of March, 2006, between HEXCEL CORPORATION, a Delaware corporation with offices at Stamford, Connecticut (the “Company”), and Robert G. Hennemuth (the “Executive”).

WHEREAS, the Company is engaged in the business of developing, manufacturing and marketing carbon fibers, fabrics, high-performance composite materials and parts therefrom for the commercial aerospace, space and defense, recreation and industrial markets throughout the world, and hereafter may engage in other areas of business (collectively, the “Business”);

WHEREAS, the Executive, as a result of training, expertise and personal application over the years, has acquired and will continue to acquire considerable and unique expertise and knowledge which are of substantial value to the Company in the conduct, management and operation of the Business;

WHEREAS, the Company is willing to provide the Executive with certain benefits in the event of the termination of the Executive’s employment with the Company, including in the event of a Change in Control (as hereinafter defined); and

WHEREAS, the Executive, in consideration of receiving such benefits from the Company, is willing to afford certain protection to the Company in regard to the confidentiality of its information, ownership of inventions and competitive activities.

NOW, THEREFORE, in consideration of the mutual covenants of the Executive and the Company and of the Executive’s continued employment with the Company, the parties agree as follows:

1. Position and Duties. The Executive shall initially serve as Senior Vice President, Human Resources of the Company and shall have such duties, responsibilities, and authority as he may have as of the date hereof (or any position to which he may be promoted after the date hereof). The Executive shall devote substantially all his working time and efforts to the business and affairs of the Company.

2. Place of Performance. In connection with the Executive’s employment by the Company, the Executive shall be based at the principal executive offices of the Company in Stamford, Connecticut, except for required travel on the Company’s business.

3. Termination. The Executive’s employment hereunder may be terminated under the following circumstances:

(a) Death. The Executive’s employment hereunder shall automatically terminate upon his death.

(b) Disability. The Company may terminate the Executive’s employment hereunder due to the Executive’s inability to perform the customary duties of his employment by reason of any medical or psychological illness or condition that is expected to be permanent or of indefinite duration.

(c) Cause. The Company may terminate the Executive’s employment hereunder for Cause. The following shall constitute Cause:

(i) the willful and continued failure by the Executive to substantially perform his duties with the Company (other than any such failure resulting from the Executive’s incapability due to physical or mental illness or any such actual or anticipated failure after the issuance of a Notice of Termination by the Executive for Good Reason) after demand for substantial performance is delivered by the Company that specifically identifies the manner in which the Company believes the Executive has not substantially performed his duties; or

(ii) the willful engaging by the Executive in misconduct that is demonstrably and materially injurious to the Company, monetarily or otherwise including, but not limited to, conduct that violates the covenant not to compete in Section 6 hereof. No act, or failure to act, on the Executive’s part shall be considered “willful” unless done, or omitted to be done, by him not in good faith and without reasonable belief that his action or omission was in the best interest of the Company. Notwithstanding the foregoing, the Executive shall not be deemed to have been terminated for Cause without (i) reasonable notice from the Board to the Executive setting forth the reasons for the Company’s intention to terminate for Cause, (ii) delivery to the Executive of a resolution duly adopted by the affirmative vote of two-thirds or more of the Board then in office (excluding the Executive if he is then a member of the Board) at a meeting of the Board called and held for such purpose, finding that in the good faith opinion of the Board, the Executive was guilty of the conduct herein set forth and specifying the particulars thereof in detail, (iii) an opportunity for the Executive, together with his counsel, to be heard before the Board, and (iv) delivery to the Executive of a Notice of Termination from the Board specifying the particulars thereof in detail.

(d) Good Reason. The Executive may terminate his employment hereunder for Good Reason. The following shall constitute Good Reason:

(i) A diminution in the Executive’s position, duties, responsibilities or authority (except during periods when the Executive is unable to perform all or substantially all of his duties or responsibilities on account of illness (either physical or mental) or other incapacity);

(ii) A reduction in the Executive’s annual rate of base salary as in effect on the date hereof or as the same may be increased from time to time;

(iii) Failure by the Company to continue in effect any compensation plan in which the Executive participates which is material to the Executive’s total compensation, unless an equitable arrangement (embodied in an ongoing substitute plan) has been made with respect to such plan, or failure by the Company to continue the Executive’s participation therein (or in such substitute plan) on a basis not materially less favorable to the Executive;

(iv) Failure by the Company to continue to provide the Executive with benefits substantially similar to those enjoyed by the Executive under any of the Company’s pension, savings, life insurance, medical, health and accident, or disability plans in which the Executive was participating (except for across-the-board changes similarly affecting all senior executives of the Company and all senior executives of any Person in control of the Company), or failure by the Company to continue to provide the Executive with the number of paid vacation days per year equal to the greater of (i) 20 and (ii) the number to which the Executive is entitled in accordance with the Company’s vacation policy;

(v) Failure to provide facilities or services which are suitable to the Executive’s position;

(vi) Failure of any successor (whether direct or indirect, by purchase of stock or assets, merger, consolidation or otherwise) to the Company to assume the Company’s obligations hereunder or failure by the Company to remain liable to the Executive hereunder after such assumption;

(vii) Any termination by the Company of the Executive’s employment which is not effected pursuant to a Notice of Termination satisfying the requirements of a Notice of Termination contained in this Agreement;

(viii) The relocation of the Executive’s principal place of employment to a location more than fifty (50) miles from the Executive’s principal place of employment as at the date hereof; or

(ix) Failure to pay the Executive any portion of current or deferred compensation within seven (7) days of the date such compensation is due.

The Executive’s continued employment shall not constitute consent to, or waiver of rights with respect to, any circumstance constituting Good Reason hereunder; provided, however, that the Executive shall be deemed to have waived his rights pursuant to circumstances constituting Good Reason hereunder if he shall not have provided the Company a Notice of Termination within ninety (90) days following his knowledge of the occurrence of circumstances constituting Good Reason.

(e) Other Than Death, Disability, Cause or Good Reason. (i) The Company may terminate the Executive’s employment, other than as provided in Sections (3)(a), (b) or (c) hereof, upon written notice to the Executive and (ii) the Executive may terminate his employment with the Company, other than as provided in Section 3(d) hereof, upon written notice to the Company.

(f) Notice of Termination; Date of Termination. Any termin-ation of the Executive’s employment by the Company or by the Executive (other than a termination pursuant to Section 3(a) hereof) shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 10. For purposes of this Agreement,

(i) “Notice of Termination” shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive’s employment under the provision so indicated, and

(ii) “Date of Termination” shall mean (A) if the Executive’s employment is terminated pursuant to Section 3(a), the date of his death, (B) if the Executive’s employment is terminated pursuant to Section 3(b), thirty days after Notice of Termination is given (provided that the Executive shall not have returned substantially to full-time performance of the Executive’s duties during such thirty day period), (C) if the Executive’s employment is terminated pursuant to Sections 3(c), (d) or (e), the date specified in the Notice of Termination (provided that such date shall not be more than thirty days from the date Notice of Termination is given and, in the case of a termination for Cause, shall not be less than fifteen days from the date Notice of Termination is given), or (D) if the Executive terminates his employment and fails to provide written notice to the Company of such termination, the date of such termination.

4. Compensation Upon Death, Disability or Termination.

(a) If the Executive’s employment is terminated by his death, the Company shall pay the Executive’s legal representative (i) at the time such payments are due, the Executive’s full base salary through the Date of Termination at the rate in effect at the Date of Termination and all other unpaid amounts, if any, to which the Executive is entitled as of the Date of Termination including any reimbursable business expenses and amounts earned under any compensation plan or program (including the Bonus Plan), and (ii) within ten days following the

date of the Executive’s death, a lump sum payment in an amount by which (A) the total amount received by the beneficiary or estate of the Executive as payment under the basic insurance provided by and at the expense of the Company on the Executive’s life is less than (B) twice the sum of (I) the Executive’s annual base salary in effect as of the Date of Termination and (II) the Executive’s Average Annual Bonus (the term “Average Annual Bonus” shall mean the average of the last three annual bonus amounts awarded to the Executive under the Company’s Management Incentive Compensation Plan, or any successor, alternate or supplemental plan (the “Bonus Plan”) or, if the Executive has not participated in the Bonus Plan for three completed annual award periods, the average of the annual bonus amounts awarded, provided that any award made in respect of an annual award period in which the Executive did not participate for the full period (the “Pro-Rata Award”) shall be annualized for purposes of computing the Average Bonus Amount by multiplying the Pro-Rata Award by a fraction, of which the numerator is 365 and the denominator is the number of days during which the Executive participated in such annual award period).

(b) During any period that the Executive fails to perform his duties hereunder as a result of incapacity due to physical or mental illness the Executive shall continue to receive his full base salary at the rate then in effect for such period (offset by any payments to the Executive received pursuant to disability benefit plans maintained by the Company) until his employment is terminated pursuant to Section 3(b) hereof; and, within ten days following such termination, the Company shall pay the Executive all unpaid amounts, if any, to which the Executive is entitled as of the Date of Termination including any reimbursable business expenses and amounts earned under any compensation plan or program (including the Bonus Plan).

(c) If the Executive’s employment is terminated by the Company for Cause or by the Executive for other than Good Reason, the Company shall at the time such payments are due pay the Executive his full base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given and all other unpaid amounts, if any, to which the Executive is entitled as of the Date of Termination including any reimbursable business expenses and amounts earned under any compensation plan or program (including the Bonus Plan), and the Company shall, thereafter, have no further obligations to the Executive under this Agreement.

(d) If (1) the Company shall terminate the Executive’s employment other than for Disability and other than for Cause or (2) the Executive shall terminate his employment for Good Reason, then

(i) the Company shall pay the Executive on the Date of Termination, by wire transfer to the bank account designated by the Executive, the Executive’s full base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given (disregarding any reduction in salary rate

which would constitute a Good Reason) and all other unpaid amounts, if any, to which the Executive is entitled as of the Date of Termination including any reimbursable business expenses and amounts earned under any compensation plan or program (including the Bonus Plan);

(ii) in lieu of any further salary payments to the Executive for periods subsequent to the Date of Termination, the Company shall pay to the Executive on the Date of Termination, by wire transfer to the bank account designated by the Executive, an amount equal to the product of (A) the sum of (1) the Executive’s annual base salary in effect at the time the Notice of Termination is given (disregarding any reduction in salary rate which would constitute a Good Reason) and (2) the Executive’s Average Annual Bonus, and (B) (x) if the Executive terminates his employment or the Company terminates the Executive’s employment, in either case within two years after the occurrence of a Change in Control, the number three or (y) in any other case, the number one; and

(iii) the Company shall continue the participation of the Executive for a period of one year (except, if the Executive terminates his employment or the Company terminates the Executive’s employment, in either case within two years after the occurrence of a Change in Control, such period shall be three years), in all medical, health, life and other employee “welfare” plans and programs in which the Executive participated immediately prior to the Date of Termination, provided that the Executive’s continued participation is possible under the general terms and provisions of such plans and programs. In the event that the Executive’s participation in any such plan or program is barred, the Company shall by other means provide the Executive with benefits equivalent to those which the Executive would otherwise have been entitled to receive under such plans and programs from which his continued participation is barred.

(e) If the Company shall terminate the Executive’s employment other than for Cause, or the Executive shall terminate his employment for Good Reason, during the period of a Potential Change in Control or at the request of a person who, directly or indirectly, takes any action designed to cause a Change in Control, then the Company shall make payments and provide benefits to the Executive under this Agreement as though a Change in Control had occurred immediately prior to such termination. A “Potential Change in Control” shall exist during the period commencing at the time the Company enters into any agreement or arrangement which, if consummated, would result in a Change in Control and ending at the time such agreement or arrangement either (i) results in a Change in Control or (ii) terminates, expires or otherwise becomes of no further force or effect.

(f) For purposes of this Agreement, a “Change in Control” shall mean the first to occur of the following events:

(1) Any person (as defined in Section 3(a)(9) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as modified

and used in Sections 13(d) and 14(d) of the Exchange Act) (a “Person”) is or becomes the Beneficial Owner (within the meaning of Rule 13d-3 promulgated under the Exchange Act), directly or indirectly, of 40% or more of either (A) the then outstanding common stock of the Company (the “Outstanding Common Stock”) or (B) the combined voting power of the then outstanding securities entitled to vote generally in the election of directors of the Company (the “Total Voting Power”); excluding, however, the following: (x) any acquisition by the Company or any of its Controlled Affiliates (an “Affiliate” of any Person shall mean any other Person that directly or indirectly, through one or more intermediaries, Controls, is Controlled by, or is under common Control with, such first Person; the term “Control” shall have the meaning specified in Rule 12b-2 under the Exchange Act); (y) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any of its Controlled Affiliates; and (iii) any Person who becomes such a Beneficial Owner in connection with a transaction described in the exclusion within paragraph (3) below; or

(2) A change in the composition of the Board such that the individuals who, as of the effective date of this Agreement, constitute the Board (such individuals shall be hereinafter referred to as the “Incumbent Directors”) cease for any reason to constitute at least a majority of the Board; provided, however, for purposes of this definition, that any individual who becomes a director subsequent to such effective date, whose election, or nomination for election by the Company’s stockholders, was made or approved by a vote of at least a majority of the Incumbent Directors (or directors whose election or nomination for election was previously so approved) shall be considered a member of the Incumbent Board; but, provided, further, that any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a person or legal entity other than the Board shall not be considered a member of the Incumbent Board;

(3) There is consummated a merger or consolidation of the Company or any direct or indirect subsidiary of the Company or a sale or other disposition of all or substantially all of the assets of the Company (“Corporate Transaction”); excluding, however, such a Corporate Transaction pursuant to which (1) all or substantially all of the individuals and entities who are the Beneficial Owners, respectively, of the Outstanding Common Stock and Total Voting Power immediately prior to such Corporate Transaction will Beneficially Own, directly or indirectly, more than 50%, respectively, of the outstanding common stock and the combined voting power of the then outstanding securities entitled to vote generally in the election of directors of the company resulting from such Corporate Transaction (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company’s assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Corporate Transaction, of

the Outstanding Common Stock and Total Voting Power, as the case may be, and (2) immediately following which the individuals who comprise the Board immediately prior thereto constitute at least a majority of the board of directors of the company resulting from such Corporate Transaction (including, without limitation, a company which as a result of such transaction owns the Company or all or substantially all of the Company’s assets either directly or through one or more subsidiaries); or

(4) The approval by the stockholders of the Company of a complete liquidation or dissolution of the Company.

(g) Excise Tax.

(1) Modified Gross-Up. It shall be determined whether this Section 4(g)(1) applies prior to any determination pursuant to Section 4(g)(2) hereof. This Section 4(g)(1) shall apply if “Total Payments” (as defined in Section 4(g)(1)(i)) are equal to or exceed one-hundred-and-ten percent (110%) of the “Safe Harbor Amount”. The “Safe Harbor Amount” is the amount to which the Total Payments would hypothetically have to be reduced so that no portion of the Total Payments would be subject to the Excise Tax (as defined in Section 4(g)(1)(i)).

(i) If any of the payments or benefits received or to be received by the Executive in connection with a Change in Control or the Executive’s termination of employment in respect of a Change in Control, whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any Person whose actions result in a Change in Control or any Person affiliated with the Company or such Person (all such payments and benefits, excluding the Gross-Up Payment, being hereinafter referred to as the “Total Payments”) will be subject to the excise tax (the “Excise Tax”) imposed under Section 4999 of the Internal Revenue Code of 1986, as amended (the “Code”), the Company shall pay to the Executive an additional amount (the “Gross-Up Payment”) such that the net amount retained by the Executive, after deduction of any Excise Tax on the Total Payments and any federal, state and local income and employment taxes and Excise Tax upon the Gross-Up Payment, shall be equal to the Total Payments.

(ii) For purposes of determining whether any of the Total Payments will be subject to the Excise Tax and the amount of such Excise Tax, (A) all of the Total Payments shall be treated as “parachute payments” (within the meaning of Section 280G(b)(2) of the Code) unless, in the opinion of tax counsel (“Tax Counsel”) reasonably acceptable to the Executive and selected by the accounting firm which was, immediately prior to the Change in Control, the Company’s independent auditor (the “Auditor”), such payments or benefits (in whole or in part) do not constitute parachute payments, including by reason of Section 280G(b)(4)(A) of the Code, (B) all “excess parachute payments” within the meaning of Section 280G(b)(l) of the Code shall be treated as subject to the Excise Tax unless, in the opinion of Tax Counsel, such excess parachute payments (in whole

or in part) represent reasonable compensation for services actually rendered (within the meaning of Section 280G(b)(4)(B) of the Code) in excess of the base amount (within the meaning of Section 280G(b)(3) of the Code) allocable to such reasonable compensation, or are otherwise not subject to the Excise Tax, and (C) the value of any noncash benefits or any deferred payment or benefit shall be determined by the Auditor in accordance with the principles of Sections 280G(d)(3) and (4) of the Code. If the Auditor is prohibited by applicable law or regulation from performing the duties assigned to it hereunder, then a different auditor, acceptable to both the Company and the Executive, shall be selected. The fees and expenses of Tax Counsel and the Auditor shall be paid by the Company. For purposes of determining the amount of the Gross-Up Payment, the Executive shall be deemed to pay federal income tax at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of the Executive’s residence on the Date of Termination (or if there is no Date of Termination, then the date on which the Gross-Up Payment is calculated for purposes of this Section), net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes.

(iii) In the event that the Excise Tax is finally determined to be less than the amount taken into account hereunder in calculating the Gross-Up Payment, the Executive shall repay to the Company, within five (5) business days following the time that the amount of such reduction in the Excise Tax is finally determined, the portion of the Gross-Up Payment attributable to such reduction (plus that portion of the Gross-Up Payment attributable to the Excise Tax and federal, state and local income and employment taxes imposed on the Gross-Up Payment being repaid by the Executive, to the extent that such repayment results in a reduction in the Excise Tax and a dollar-for-dollar reduction in the Executive’s taxable income and wages for purposes of federal, state and local income and employment taxes, plus interest on the amount of such repayment at 120% of the rate provided in Section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is determined to exceed the amount taken into account hereunder in calculating the Gross-Up Payment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall make an additional Gross-Up Payment in respect of such excess (plus any interest, penalties or additions payable by the Executive with respect to such excess) within five (5) business days following the time that the amount of such excess is finally determined. The Executive and the Company shall each reasonably cooperate with the other in connection with any administrative or judicial proceedings concerning the existence or amount of liability for Excise Tax with respect to the Total Payments.

(2) Valley. This Section 4(g)(2) shall apply only if it has been previously determined that Section 4(g)(1) hereof does not apply. This Section 4(g)(2) shall then apply if the “Total Payments” (as defined in Section 4(g)(2)(i)) would be subject (in whole or part) to the “Excise Tax” (as defined in

Section 4(g)(2)(i)) and the Total Payments are less than one-hundred-and-ten percent (110%) of the “Safe Harbor Amount” (as defined in Section 4(g)(1)).

(i) Notwithstanding any other provisions of this Agreement, in the event that any payment, benefit, property or right received or to be received by the Executive in connection with a Change in Control or the Executive’s termination of employment in respect of a Change in Control (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any Person whose actions result in a Change in Control or any Person affiliated with the Company or such Person) (all such payments, benefits, properties and rights being hereinafter referred to as the “Total Payments”) would be subject (in whole or part) to the tax (the “Excise Tax”) imposed by Section 4999 of the Internal Revenue Code of 1986, as amended, or any successor provision (the “Code”), then the payments and benefits provided under Section 4(d) or 4(e) hereof (“Severance Payments”) which are cash shall first be reduced, and the noncash Severance Payments shall thereafter be reduced, to the extent necessary so that no portion of the Total Payments is subject to the Excise Tax, but only if (A) the net amount of such Total Payments, as so reduced (and after subtracting the net amount of federal, state and local income taxes on such reduced Total Payments) is greater than or equal to (B) the net amount of such Total Payment without such reduction (but after subtracting the net amount of federal, state and local income taxes on such Total Payments and the amount of Excise Tax to which the Executive would be subject in respect of such unreduced Total Payments); provided, however, that the Executive may elect (by waiving the receipt or enjoyment of all or any portion of the noncash Severance Payments at such time and in such manner that the Severance Payments so waived shall not constitute a “payment” within the meaning of Section 280G(b) of the Code) to have the noncash Severance Payments reduced (or eliminated) prior to any reduction of the cash Severance Payments.

(ii) For purposes of determining whether and the extent to which the Total Payments will be subject to the Excise Tax (A) no portion of the Total Payments the receipt or enjoyment of which the Executive shall have waived at such time and in such manner as not to constitute a “payment” within the meaning of Section 280G(b) of the Code shall be taken into account, (B) no portion of the Total Payments shall be taken into account which, in the written opinion of tax counsel (“Tax Counsel”) reasonably acceptable to the Executive and selected by the accounting firm (the “Auditor”) which was, immediately prior to the Change in Control, the Company’s Independent auditor, does not constitute a “parachute payment” within the meaning of Section 280G(b)(4)(A) of the Code) and, in calculating the Excise Tax, no portion of such Total Payments shall be taken into account which, in the written opinion of Tax Counsel, constitutes reasonable compensation for services actually rendered within the meaning of Section 280G(b)(4)(B) of the Code, in excess of the Base Amount allocable to such reasonable compensation, and (C) the value of any noncash benefit or any deferred payment or benefit included in the Total Payments shall be determined by the

Auditor in accordance with the principles of Sections 280G(d)(3) and (4) of the Code. If the Auditor is prohibited by applicable law or regulation from performing the duties assigned to it hereunder, then a different auditor, acceptable to both the Company and the Executive, shall be selected. The fees and expenses of Tax Counsel and the Auditor shall be paid by the Company.

(3) Other Terms. At the time that payments are made under this Agreement, the Company shall provide the Executive with a written statement setting forth the manner in which such payments were calculated and the basis for such calculations including, without limitation, any opinions, or other advice the Company has received from Tax Counsel, the Auditor or other advisors or consultants (and all such opinions or advice shall be in writing, shall be attached to the statement and shall expressly state that the Executive may rely thereon). If the Executive objects to the Company’s calculations, the Company shall pay to the Executive such portion of the payments as the Executive determines is necessary to result in the proper application of Section 4(g)(1)(i) or 4(g)(2)(i) above. The Executive and the Company shall each reasonably cooperate with the other in connection with any administrative or judicial proceeding concerning the existence or amount of liability for Excise Tax with respect to the Total Payments.

5. No Mitigation. The Executive shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in this Agreement be reduced by any compensation earned by the Executive as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by the Executive to the Company, or otherwise.

6. Non-Competition; Non-Solicitation; Non-Disparagement.

(a) The Executive acknowledges that, as a senior management employee, the Executive will be involved, on a high level, in the development, implementation and management of the Company’s global business plans, including those which involve the Company’s finances, research, marketing, planning, operations, and acquisition strategies. By virtue of the Executive’s position and knowledge of the Company, the Executive acknowledges that his employment by a competitor of the Company represents a serious competitive danger to the Company, and that the use of the Executive’s experience and knowledge about the Company’s business, strategies and plans by a competitor can and would constitute a valuable competitive advantage over the Company. In view of the foregoing, and in consideration of the payments made to the Executive under this Agreement, the Executive covenants and agrees that, if the Executive’s employment is terminated and the Company has fulfilled its obligations under this Agreement, for a period of one year (or three years if the Executive receives payments under clause (B)(x) of Section 4(d)(ii) hereof) after the Date of Termination the Executive will not (A) engage, in any capacity, directly or indirectly, including but not limited as employee,

agent, consultant, manager, executive, owner or stockholder (except as a passive investor holding less than a 5% equity interest in any enterprise) in any business entity engaged in competition with the Business conducted by the Company on the Date of Termination anywhere in the world, or (B) solicit a customer of the Business in violation of clause (A); provided, that the Executive may be employed by a competitor of the Company so long as the Executive’s duties and responsibilities do not relate directly or indirectly to the business segment of the new employer which is actually or potentially competitive with the Business.

(b) The Company (for itself and its officers and directors) and the Executive mutually agree and covenant not to disparage the reputation or character of the other.

7. Assignment of Inventions. The Executive agrees that all processes, technologies, designs and inventions, including new contributions, improvements, ideas and discoveries, whether patentable or not (collectively “Inventions”), conceived, developed, invented or made by the Executive prior to the Date of Termination shall belong to the Company, provided that such Inventions grew out of the Executive’s work with the Company or any of its subsidiaries or affiliates, are related in any manner to the business (commercial or experimental) of the Company or any of its subsidiaries or affiliates or are conceived or made on the Company’s time or with the use of the Company’s facilities or materials. At the request of the Company, the Executive shall (i) promptly disclose such Inventions to the Company, (ii) assign to the Company, without additional compensation, all patent and other rights to such Inventions for the United States and foreign countries, (iii) sign all papers necessary to carry out the foregoing, and (iv) give testimony or otherwise take action in support of the Executive’s status as the inventor of such Inventions, in each case at the Company’s expense.

8. Confidentiality. In addition to any obligation regarding Inventions, the Executive acknowledges that the trade secrets and confidential and proprietary information of the Company, its subsidiaries and affiliates, including without limitation:

(a) unpublished information concerning:

(i) research activities and plans,

(ii) marketing or sales plans,

(iii) pricing or pricing strategies,

(iv) operational techniques, and

(v) strategic plans;

(b) unpublished financial information, including information concerning revenues, profits and profit margins;

(d) any “material inside information” as such phrase is used for purposes of the Securities Exchange Act of 1934, as amended; all constitute valuable, special and unique information of the Company, its subsidiaries and affiliates. In recognition of this fact, the Executive agrees that the Executive will not disclose any such trade secrets or confidential or proprietary information (except (i) information which becomes publicly available without violation of this Agreement, (ii) information of which the Executive, prior to disclosure by the Executive, did not know and should not have known was disclosed to the Executive by a third party in violation of any other person’s confidentiality or fiduciary obligation, (iii) disclosure required in connection with any legal process (provided the Executive promptly gives the Company written notice of any legal process seeking to compel such disclosure and reasonably cooperates in the Company’s attempt to eliminate or limit the scope of such disclosure) and (iv) disclosure while employed by the Company which the Executive reasonably and in good faith believes to be in or not opposed to the interests of the Company) to any person, firm, corporation, association or other entity, for any reason or purpose whatsoever, nor shall the Executive make use of any such information for the benefit of any person, firm, corporation or other entity except on behalf of the Company, its subsidiaries and affiliates.

9. Binding Agreement. This Agreement and all rights of the Executive hereunder shall inure to the benefit of and be enforceable by the Executive’s personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive should die while any amounts would still be payable to him hereunder if he had continued to live, all such amounts, unless otherwise provided in this Agreement, shall be paid to the Executive’s devisee, legatee, or other designee or, if there be no such designee, to the Executive’s estate.

10. Notice. Notices, demands and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered, if delivered personally, or mailed by United States certified or registered mail, return receipt requested, postage prepaid, and when received if delivered otherwise, addressed as follows:

	If to the Executive:

		241 Plymouth Road
		West Palm Beach, Florida 33405

	If to the Company:
		Hexcel Corporation
		281 Tresser Blvd.
		Stamford, CT 06901-3238

Attn: General Counsel

or to such other address as any party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt.

11. General Provisions. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by the Executive (or, if applicable, his legal representative) and the Company. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Connecticut without regard to its conflicts of law principles.

12. Validity and Enforceability. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. It is the desire and intent of the parties that the provisions of Sections 6, 7 and 8 hereof shall be enforceable to the fullest extent permitted by applicable law or public policy. If any such provision or the application thereof to any person or circumstance shall, to any extent, be construed to be invalid or unenforceable in whole or in part, then such provision shall be construed in a manner so as to permit its enforceability to the fullest extent permitted by applicable law or public policy. In any case, the remaining provisions or the application thereof to any person or circumstance other than those to which they have been held invalid or unenforceable, shall remain in full force and effect.

13. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument.

14. Arbitration. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration, conducted before a panel of three arbitrators in the State of Connecticut, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator’s award in any court having jurisdiction; provided, however, that the Company shall be entitled to seek a restraining order or injunction in any court of competent jurisdiction to prevent any continuation of any violation of the provisions of Sections 6, 7 or 8 hereof.

15. Entire Agreement. This Agreement is the entire agreement or understanding between the Company and the Executive regarding the subject matter hereof.

16. Remedies. The Executive agrees that in addition to any other remedy provided at law or in equity or in this Agreement, the Company shall be entitled to a temporary restraining order and both preliminary and permanent injunctions restraining Executive from violating any provision of Sections 6, 7 and 8 hereof. In the event the Company fails to make any payment to the Executive when due, the Executive, in addition to any other remedy available at law or in equity, shall be entitled to interest on such unpaid amounts from the date such payment was due to the date actual payment is received by the Executive, at the legal rate applicable to unpaid judgments. The Company shall pay to the Executive all legal, audit, and actuarial fees and expenses as a result of the termination of employment, including all such fees and expenses incurred in contesting, arbitrating or disputing any action or failure to act by the Company or in seeking to obtain or enforce any right under this Agreement or any other plan, arrangement or agreement with the Company, provided that the Executive has obtained a final determination supporting at least part of his claim and there has been no determination that the balance of his claim was made in bad faith.

17. Consent to Jurisdiction and Forum. The Executive hereby expressly and irrevocably agrees that any action, whether at law or in equity, permitted to be brought by the Company under this Agreement may be brought in the State of Connecticut or in any federal court therein. The Executive hereby irrevocably consents to personal jurisdiction in such court and to accept service of process in accordance with the provisions of the laws of the State of Connecticut. In the event the Company commences any such action in the State of Connecticut or in any Federal court therein, the Company shall reimburse the Executive for the reasonable expenses incurred by the Executive in his appearance in such forum which are in addition to the expenses the Executive would have incurred by appearing in the forum of the Executive’s residence at that time, including but not limited to additional legal fees.

18. Term of Agreement. The term of this Agreement (the “Term”) shall begin on March 20, 2006 (the “Effective Date”) and shall end on the third anniversary thereof; provided however that, commencing on the third anniversary of the Effective Date and on each subsequent anniversary of the Effective Date (each such anniversary, a “Renewal Date”), the Term shall automatically be extended for one additional year unless, not later than the date which is one year prior to such Renewal Date, the Company shall have given notice to the Executive not to extend the Term for such one additional year.

	HEXCEL CORPORATION

	By:	/s/ Ira J. Krakower
		Name: Ira J. Krakower
		Title: Senior Vice President


		/s/ Robert G. Hennemuth
		Executive

EX-10.2 3 a06-9628_1ex10d2.htm EX-10

Exhibit 10.2

Executive Deferred Compensation Agreement

The Executive Deferred Compensation and Consulting Agreement, better known as EDCA, is a non-qualified, unfunded, supplemental pension plan for key executives.

Each year benefits are accrued at one and one-half percent of that year’s base salary plus bonus payment and added to the prior year accrual balance. That accumulated benefit is then given a present value based on group annuity mortality tables and the current PBGC immediate interest rate. At retirement the monthly accrued present value benefit is payable as a 10-year certain and life annuity. The Plan also provides for the continuation of life, medical and dental benefits at retirement based on certain criteria as outlined in the Agreement.

EXECUTIVE DEFERRED COMPENSATION

AND CONSULTING AGREEMENT

THIS AGREEMENT is entered into as of March 20, 2006 (“Effective Date”), at Stamford, Connecticut, between HEXCEL CORPORATION, a Delaware corporation (“Hexcel” or the “Company”), and Robert G. Hennemuth (“Employee”), on the basis of the following facts and understandings:

RECITALS

A. Employee is a key executive of Hexcel and is expected to make substantial contributions to its success.

B. Hexcel wishes to provide certain retirement, death and similar benefits for Employee in the expectation that such benefits will serve as an incentive to Employee to continue in the employ of Hexcel until his retirement or death and as an incentive to protect Hexcel’s trade secrets and other confidential and proprietary information. Hexcel also wishes to receive the benefits of Employee’s advice and consultation following retirement, which will be compensated for by the payments to be made hereunder.

C. The Compensation Committee of Hexcel’s Board of Directors (the “Board”) has authorized Hexcel to enter into this Executive Deferred Compensation Agreement with Employee.

AGREEMENT

NOW, THEREFORE, in consideration of the services to be rendered in the future by Employee, the parties hereto agree as follows:

1. RETIREMENT AND CONSULTING INCOME

1.1. Normal Retirement. If Employee retires or otherwise ceases to be employed by Hexcel on or after his 65th birthday, Employee shall receive a monthly amount of consulting and retirement income payment, without any specification as to the amount allocated to either. Such payments shall commence the calendar month following Employee’s retirement or other termination of employment and shall continue for one hundred twenty (120) such payments or until payment for the month in which Employee dies, whichever is the last to occur.

Retirement Before Age 65. If Employee retires or otherwise ceases to be employed by Hexcel after his 40th birthday but prior to his 65th birthday, his consulting and retirement income payments, without any specification as to the amount allocated to either, computed pursuant to Section 1.2, shall commence the calendar month following his 65th birthday and shall continue for one hundred twenty (120) such payments or until payment for the month in which Employee dies, whichever is the last to occur. Should the Employee request that such payments commence at an earlier date and Hexcel, in its sole and absolute discretion, consents thereto in writing, the monthly amounts payable shall be the amount actuarially reduced to reflect the appropriate benefit according to the employee’s age.

Employee shall not be entitled to any benefits under this Agreement if Employee ceases to be employed by Hexcel prior to attaining his 40th birthday.

1.2. The monthly consulting and retirement income payments shall be equal to one-twelfth (1/12th) of the following: One and one-half percent (1 1/2%) of the aggregate base salary and incentive cash bonuses paid to Employee by Hexcel subsequent to the Effective Date, multiplied by a fraction, the numerator of which shall be the total number of whole calendar months of Employee’s employment by Hexcel subsequent to the Effective Date and the denominator of which will be 67. In no event shall such fraction exceed 1 (67/67).

1.3. Benefits. In lieu of the payments described in Sections 1.1 and 1.2, and provided that Hexcel, in its sole and absolute discretion, consents thereto in writing, Employee may elect any other form of retirement benefit actuarially equivalent thereto. Employee’s election of benefits under this Section 1.3 shall not relieve Employee of his obligation under Paragraph 3.

2. DEATH BENEFITS. If Employee dies after his 40th birthday but prior to his 65th birthday and prior to commencement of payments to him pursuant to Sections 1.1 or 1.2, benefit will be payable to his designated beneficiary in lieu of any amount specified in Paragraph 1, a monthly pension for the balance of such beneficiary’s lifetime which is actuarially equivalent to the lump sum death benefit. In lieu of said monthly pension, on the condition that Hexcel, in its sole discretion, consents thereto in writing, such beneficiary may elect any other form of pension benefit actuarially equivalent thereto, based on the actuarial assumptions, such election to be made by written notice to Hexcel, in form satisfactory to Hexcel, within sixty (60) days following the Employee’s death.

If Employee dies after commencement of payments to him pursuant to Sections 1.1 or 1.2, but prior to the receipt of 120 such payments or after his 65th birthday, but prior to receiving the first payment under Section 1.1, his designated beneficiaries shall receive such payments until the aggregate number of payments to Employee and his beneficiary totals 120.

3. AGREEMENTS OF EMPLOYEE. As a material part of the consideration for this Agreement and as a condition precedent to Hexcel’s obligation to make each payment to Employee or Employee’s successors hereunder, Employee agrees as follows:

3.1. Consultation Services. For a period of ten years following the effective date of retirement or other termination of employment, Employee shall render consultation services to Hexcel from time to time upon request of Hexcel, in all areas of Hexcel’s business; provided, however, that Hexcel shall only make such requests at reasonable times and locations in light of Employee’s other commitments, and upon reasonable prior notice; and provided further that the extent of said consultation services shall be limited to not more than ten (10) working days (on the basis of eight-hour work days) per year unless agreed to by Employee. The parties acknowledge that Employee, while providing consultation services hereunder, will be acting in the capacity of an independent contractor and not an employee, and Hexcel shall not have the power to direct or control the manner in which Employee performs his duties as consultant. Hexcel shall reimburse Employee for any expenses incurred by Employee in carrying out his obligations, provided such expenses were approved in advance by Hexcel in writing.

3.2. Competitive Activity. Employee acknowledges that the pursuit of Competitive Activity, as defined below, would necessarily involve the use or disclosure of Confidential Information. To forestall such disclosure, use, and breach, to protect Hexcel’s

benefits under Section 3.1, and in consideration of the benefits provided Employee under Sections l, Employee agrees that for a period of ten (10) years after termination of his employment, or so long as he is receiving benefits under this Agreement, whichever is the shorter period, he shall not, directly or indirectly, (i) divert or attempt to divert from Hexcel or its successors, assigns, or affiliated companies (“Hexcel Companies”) any business of any kind in which it or they are engaged at the time of Employee’s termination or any business acquired by one of the Hexcel Companies within six months after such termination if said acquisition was in the process of negotiation at the time of such termination (hereinafter collectively designated “Hexcel’s Business”), including, without limitation, the solicitation of or interference with any of its or their customers; (ii) solicit for employment any person employed by any of the Hexcel Companies; or (iii) engage (as a partner, substantial owner, employee, associate, consultant, agent or otherwise) in any business activity that is or may be competitive with Hexcel’s Business in any county of any state or in any territory or foreign country where any of the Hexcel Companies conducts any portion of Hexcel’s Business (“Competitive Activity”), unless Employee can prove that any action taken in contravention of this subsection 3.2(iii) was done without the use in any way of Confidential Information.

4. CONDITIONS TO PAYMENT OF COMPENSATION.

4.1. No Vested Benefit. The parties acknowledge that the sums payable to Employee hereunder increase pursuant to the formula set forth in Section 1.2 based upon the length of Employee’s employment with Hexcel - i.e., Employee receives credit in such formulas over the period of his employment. Hexcel may, at any time upon thirty (30) days’ prior written notice to Employee, terminate Employee’s right to receive such credit for future employment with Hexcel, which shall not, however, affect such credit accrued up to the

effective date of such termination. Notwithstanding such employment credit, the amounts computed in accordance with such formulas are payable to Employee only on the terms and subject to the conditions contained in this Agreement, including, without limitation, the conditions specified in Sections 4.2 and 4.3.

4.2. Termination of Employment. Causes. Hexcel’s obligation to make payments to Employee hereunder is subject to the condition precedent that Hexcel has not terminated Employee’s employment by reason of Employee’s theft, fraud, embezzlement or felony, provided that the foregoing is directly connected with his employment and Hexcel determines, in its sole and absolute discretion, that such act is inimical to its best interests, or by reason of violation of Section 3.2 hereof, or for wrongfully disclosing any secret process or imparting any confidential information, or intentionally doing any other act materially inimical to the best interests of Hexcel. In case of any such termination of Employee’s employment by Hexcel, all of Employee’s rights and benefits hereunder shall terminate.

4.3. Breaches of Agreement. Hexcel’s obligation to make payments to Employee hereunder is subject to the further conditions precedent (a) that Employee has not breached or violated any term, convenant or provision of this Agreement, including, without limitation, those set forth in Section 3.2, and (b) Employee has not engaged in any of the acts mentioned in Section 4.2 while an employee of Hexcel, which acts are discovered subsequent to Employee’s retirement or other termination of employment. In case of any such breach or violation under clause (a) or if Employee has engaged in the acts referred to in clause (b) all of Employee’s rights and benefits hereunder shall terminate.

4.4. Preservation of Remedies. In addition to the conditions precedent to Hexcel’s obligations hereunder for any payments or benefits, Hexcel shall also be entitled to all of its

legal and equitable remedies resulting from any breach or violation of this Agreement by Employee, including, without limitation, recovery from Employee of all damages resulting from such breach or violation.

5. CHANGE IN CONTROL. If there is a change of control of Hexcel, Employee’s right to receive payments the effective date of such change in control shall vest. Employee shall have the option to receive a lump sum payment equal to the present value of such payments within thirty (30) days of such change in control, or to receive payments pursuant to the terms of Section 1.

5.1 The term “Change in Control” shall mean any of the following events:

(a) Any person (as defined in Section 3(a)(9) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as modified and used in Sections 13(d) and 14(d) of the Exchange Act) (a “Person”) is or becomes the Beneficial Owner (within the meaning of Rule 13d-3 promulgated under the Exchange Act), directly or indirectly, of 40% or more of either (1) the then outstanding common stock of the Company (the “Outstanding Common Stock”) or (2) the combined voting power of the then outstanding securities entitled to vote generally in the election of directors of the Company (the “Total Voting Power”); excluding, however, the following: (A) any acquisition by the Company or any of its Controlled Affiliates (an “Affiliate” of any Person shall mean any other Person that directly or indirectly, through one or more intermediaries, Controls, is Controlled by, or is under common Control with, such first Person; the term “Control” shall have the meaning specified in Rule 12b-2 under the Exchange Act); (B) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any of its Controlled

Affiliates; and (C) any Person who becomes such a Beneficial Owner in connection with a transaction described in the exclusion within paragraph (c) below; or

(b) A change in the composition of the Board such that the individuals who, as of the effective date of this Agreement, constitute the Board (such individuals shall be hereinafter referred to as the “Incumbent Directors”) cease for any reason to constitute at least a majority of the Board; provided, however, for purposes of this definition, that any individual who becomes a director subsequent to such effective date, whose election, or nomination for election by the Company’s stockholders, was made or approved by a vote of at least a majority of the Incumbent Directors (or directors whose election or nomination for election was previously so approved) shall be considered a member of the Incumbent Board; but, provided, further, that any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a person or legal entity other than the Board shall not be considered a member of the Incumbent Board; or

(c) There is consummated a merger or consolidation of the Company or any direct or indirect subsidiary of the Company or a sale or other disposition of all or substantially all of the assets of the Company (“Corporate Transaction”); excluding, however, such a Corporate Transaction pursuant to which (1) all or substantially all of the individuals and entities who are the Beneficial Owners, respectively, of the Outstanding Common Stock and Total Voting Power immediately prior to such Corporate Transaction will Beneficially Own, directly or indirectly, more than 50%, respectively, of the outstanding common stock and the combined voting power of the then outstanding securities entitled to

vote generally in the election of directors of the company resulting from such Corporate Transaction (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company’s assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Corporate Transaction, of the Outstanding Common Stock and Total Voting Power, as the case may be, and (2) immediately following which the individuals who comprise the Board immediately prior thereto constitute at least a majority of the board of directors of the company resulting from such Corporate Transaction (including, without limitation, a company which as a result of such transaction owns the Company or all or substantially all of the Company’s assets either directly or through one or more subsidiaries); or

(d) the approval by the stockholders of the Company of a complete liquidation or dissolution of the Company:

6. RIGHTS OF PARTIES.

6.1. Change of Beneficiary. Employee shall have the right at any time to change the person or persons designated as beneficiary or contingent beneficiary on the Beneficiary Designation form attached hereto or by written notice to Hexcel in form satisfactory to Hexcel. Such change of beneficiary shall become effective upon receipt and approval by Hexcel. If Employee is married, such change of beneficiary shall be subject to the written consent of Employee’s spouse.

6.2. No Employment Agreement. Nothing contained in this Agreement shall be construed as giving to Employee the right to continued employment with Hexcel.

6.3. Other Retirement Plans. Nothing in this Agreement shall affect any right the Employee may otherwise have to participate in or under any retirement plan of Hexcel or other entity.

7. NOTICES. Any notice required or permitted to be given under this Agreement shall be sufficient if in writing and sent by prepaid certified or registered mail to his last known residence in the case of Employee, or its principal office in the case of Hexcel.

8. TRANSFER OF INTEREST. Except as otherwise expressly provided herein, Employee agrees, on behalf of his heirs, legatees, personal representatives and designated beneficiaries, that this Agreement and the rights, interests and benefits hereunder shall not be sold, assigned, conveyed, hypothecated, or otherwise transferred, and no such interest shall be subject to any liabilities or obligations of any bankruptcy proceedings, claims or creditors, attachment, garnishment, execution, levy or other legal process against any such person or his property, provided, however, that if Employee is indebted to Hexcel for any reason whatsoever at the time of any distribution or distributions, Hexcel shall have the right to apply so much of such distribution as may be necessary to satisfy Employee’s indebtedness to Hexcel.

9. ARBITRATION.

9.1. Arbitrable Claims. All disputes between Employee (and his attorneys, successors, and assigns) and Hexcel (and its affiliates, shareholders, directors, officers, employees, agents, successors, attorneys, and assigns) of any kind whatsoever, including without limitation, all disputes relating in any manner to the employment or termination of Employee, and all disputes arising under this Agreement (“Arbitrable Claims”) shall be resolved by arbitration. All persons and entities specified in the preceding sentence (other than

Hexcel and Employee) shall be considered third-party beneficiaries of the rights and obligations created by this Section on Arbitration. Arbitrable Claims shall include, but are not limited to, contract (express or implied) and tort claims of all kinds, as well as all claims based on any federal, state, or local law, statute, or regulation, excepting only claims under applicable workers’ compensation law and unemployment insurance claims. Arbitration shall be final and binding upon the parties and shall be the exclusive remedy for all Arbitrable Claims, except that Hexcel may, at its option, seek injunctive relief and damages in court for any breach of Section 3.2 of this Agreement. Subject to the foregoing sentence, THE PARTIES HEREBY WAIVE ANY RIGHTS THEY MAY HAVE TO TRIAL BY JURY IN REGARD TO ARBITRABLE CLAIMS.

9.2. Procedure. Arbitration of Arbitrable Claims shall be in accordance with the Employment Dispute Resolution Rules of the American Arbitration Association (“AAA Employment Rules”), except as provided otherwise in this Agreement. Arbitration shall be initiated by providing written notice to the other party with a statement of the claim(s) asserted, the facts upon which the claim(s) are based, and the remedy sought. In any arbitration, the burden of proof shall be allocated as provided by applicable law. Either party may bring an action in court to compel arbitration under this agreement and to enforce an arbitration award. Otherwise, neither party shall initiate or prosecute any lawsuit or administrative action in any way related to any Arbitrable Claim. The Federal Arbitration Act shall govern the interpretation and enforcement of this Section.

9.3 Arbitrator Selection and Authority. All disputes involving Arbitrable Claims shall be decided by a single arbitrator. The arbitrator shall be selected by mutual agreement of the parties within thirty (30) days of the mailing or hand delivery, as applicable,

of the notice initiating the arbitration. If the parties cannot agree on an arbitrator, then the complaining party shall notify the AAA and request selection of an arbitrator in accordance with the AAA Employment Rules. The arbitrator shall have the same authority as a court to award equitable relief, damages, costs, and fees as provided by law for the particular claim(s) asserted. The fees of the arbitrator shall be paid by the losing party, as identified by the arbitrator. The arbitrator shall have exclusive authority to resolve all Arbitrable Claims, including, but not limited to, any claim that all or any part of this Agreement is void or unenforceable.

9.4. Confidentiality. All proceedings and documents prepared in connection with any Arbitrable Claim shall be confidential and, unless otherwise required by law, the subject matter thereof shall not be disclosed to any person other than the parties to the proceeding, their counsel, witnesses and experts, the arbitrator, and, if involved, the court and court staff. All documents filed with the arbitrator or with a court shall be filed under seal. The parties shall stipulate to all arbitration and court orders necessary to effectuate fully the provisions of this subsection concerning confidentiality.

9.5. Continuing Obligations. The rights and obligations of Employee and Hexcel set forth in this Section 9 shall survive the termination of Employee’s employment and the expiration of this Agreement.

10. INSURANCE BENEFITS

10.1. Life Insurance. Subject to Sections 10.3 and 10.4, Hexcel shall keep in force and pay for life insurance for Employee should Employee retire or otherwise cease to be employed by Hexcel (“termination”) in the following amounts so long as Employee has not received all of the payments to which Employee is entitled under this Agreement.

(a) For the period prior to the time Employee has received any payments under this Agreement and prior to the Employee’s 65th birthday, an amount equal to two (2) times the present value of Employee’s potential payments hereunder (in accordance with Section 1.2 at the time of termination), provided such insurance shall not exceed the amount of life insurance on Employee in effect at the time of retirement or other termination.

Example:

Salary $80,000

Employee Insurance $240,000

Present Value of Potential Payments $200,000

Then lesser of

2 X $200,000 = $400,000

Insurance at term = $240,000

Therefore, $240,000 life insurance.

After Employee’s 65th birthday, but only while Employee is receiving payments under this Agreement, an amount equal to one (1) times the present value of Employee’s potential payments hereunder (in accordance with Section 1.2 at the time of retirement or other termination), provided such insurance shall not exceed the amount of life insurance on Employee in effect at the time of termination.

Example:

Salary $80,000

Employee Insurance $240,000

Present Value of Potential Payments $200,000

Then lesser of

1 X $200,000 = $200,000

Employee Insurance = $240,000

Therefore, $200,000 life insurance.

10.2. Medical and Dental Insurance. Hexcel, at its expense, shall continue to cover Employee in its group medical and dental insurance plan during those periods life insurance is maintained for Employee pursuant to Section 10.1.

10.3. Termination of Benefits. Notwithstanding anything set forth herein, Employee shall not be entitled to any benefits under Sections 10.1 and 10.2 should Employee receive a lump sum benefit hereunder or after Employee’s 75th birthday.

10.4. Eligibility. Notwithstanding anything set forth herein, Hexcel shall have no obligations under sections 10.1 or 10.2 unless all of the following conditions precedent are satisfied:

(a) At the time of Employee’s retirement or other termination, he was employed by Hexcel for not less than five (5) years; and

(b) Employee was not terminated for any reason set forth in Section

4.2; and

(c) Employee is in full compliance with his obligations under this Agreement, including without limitation his obligations under Section 3.2.

11. MISCELLANEOUS. All payments received pursuant to this Agreement shall be subject to applicable payroll taxes and taxes withholding. This Agreement shall inure to the

benefit of and be binding upon the successors and assigns of Hexcel and the heirs, legatees, personal representatives and designated beneficiaries of Employee.

The parties understand and agree that the preceding Sections recite the sole consideration for this Agreement and that no representation or promise has been made by Employee or Hexcel in regard to the subject matter of this Agreement, except as expressly set forth in this Agreement. This Agreement shall supersede all prior or contemporaneous agreements and understandings between the parties whether written or oral, express or implied, with respect to executive deferred compensation, except to the extent that the provisions of any such agreement have been expressly referred to in this Agreement as having continued effect.

This Agreement may not be modified, amended, or terminated except by an instrument in writing, signed by each of the parties.

Notwithstanding anything to the contrary contained in this Agreement, if any provisions hereof, or the application thereof to any circumstance, is held invalid for any reason whatsoever, such invalid provision shall be severable and shall not affect any other provision hereof or the application thereof to any other circumstances which can be given effect without such invalid provisions or application. This Agreement is entered into in contemplation of and shall be interpreted and enforced in accordance with Delaware law. For convenience, references to the Employee herein are masculine, but shall be deemed to include the feminine gender if Employee is female. Paragraph and Section headings have been inserted for convenience only, and in no way shall be used to interpret or otherwise affect the terms of this Agreement.

TO EVIDENCE THEIR AGREEMENT to the foregoing, the parties have executed this Agreement the day and year first above written.

		HEXCEL CORPORATION
		a Delaware corporation


/s/ ROBERT G. HENNEMUTH	By	/s/ IRA J. KRAKOWER
Robert G. Hennemuth		Ira J. Krakower
		Senior Vice President

DESIGNATION OF BENEFICIARY

Primary Beneficiary(ies):

Secondary Beneficiary(ies) in event Primary Beneficiary(ies) dies prior to receipt of all payments due:

Employee shall have the right to change the above beneficiary designations by written notice in accordance with the provisions of Section 6.1 of the Agreement.

To be signed only in the event a primary beneficiary other than Employee’s spouse is named:

Designation of beneficiary approved this _____ day of ____________________.


	Spouse of Employee

EX-31.1 4 a06-9628_1ex31d1.htm EX-31

Exhibit 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, David E. Berges, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Hexcel Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

May 8, 2006		/s/ DAVID E. BERGES
(Date)
		David E. Berges
		Chairman of the Board of Directors, President
		and Chief Executive Officer

EX-31.2 5 a06-9628_1ex31d2.htm EX-31

Exhibit 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, Stephen C. Forsyth, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Hexcel Corporation;

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

May 8, 2006		/s/ STEPHEN C. FORSYTH
(Date)
		Stephen C. Forsyth
		Executive Vice President and
		Chief Financial Officer

EX-32 6 a06-9628_1ex32.htm EX-32

Exhibit 32

CERTIFICATIONS 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

In connection with the Quarterly Report of Hexcel Corporation (the “Company”) on Form 10-Q for the period ending March 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, David E. Berges, Chairman of the Board of Directors, President and Chief Executive Officer of the Company, and Stephen C. Forsyth, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

May 8, 2006		/s/ DAVID E. BERGES
(Date)		David E. Berges
		Chairman of the Board of Directors,
		President and Chief Executive Officer


May 8, 2006		/s/ STEPHEN C. FORSYTH
(Date)		Stephen C. Forsyth
		Executive Vice President and
		Chief Financial Officer

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Hexcel Corporation and will be retained by Hexcel Corporation and furnished to the Securities and Exchange Commission or its staff upon request.