10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

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

For the Quarter Ended June 30, 2004

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 and 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 ý   No o

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

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

Class	Outstanding at August 3, 2004
COMMON STOCK	39,353,219

HEXCEL CORPORATION AND SUBSIDIARIES

INDEX

PART I.	FINANCIAL INFORMATION
ITEM 1.	Condensed Consolidated Financial Statements (Unaudited)
	•	Condensed Consolidated Balance Sheets — June 30, 2004 and December 31, 2003
	•	Condensed Consolidated Statements of Operations — The Quarters and Six Months Ended June 30, 2004 and 2003
	•	Condensed Consolidated Statements of Cash Flows — The Six Months Ended  June 30, 2004 and 2003
	•	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 4.	Submission of Matters to a Vote of Security Holders
ITEM 6.	Exhibits and Reports on Form 8-K
SIGNATURE

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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)	June 30, 2004			December 31, 2003
Assets
Current assets:
Cash and cash equivalents	$	45.1		$	41.7
Accounts receivable, net	156.6			126.2
Inventories, net	134.2			120.5
Prepaid expenses and other current assets	16.0			16.2
Total current assets	351.9			304.6
Property, plant and equipment	686.4			688.0
Less accumulated depreciation	(413.1		)	(394.1		)
Net property, plant and equipment	273.3			293.9
Goodwill	76.3			76.9
Investments in affiliated companies	6.7			7.4
Other assets	35.8			39.9
Total assets	$	744.0		$	722.7
Liabilities and Stockholders’ Equity (Deficit)
Current liabilities:
Notes payable and current maturities of capital lease obligations	$	1.0		$	2.1
Accounts payable	81.4			64.1
Accrued liabilities	108.1			97.7
Total current liabilities	190.5			163.9
Long-term notes payable and capital lease obligations	465.1			481.3
Other non-current liabilities	65.4			64.9
Total liabilities	721.0			710.1
Mandatorily redeemable convertible preferred stock, 0.125 shares of series A and 0.125 shares of series B authorized, issued and outstanding at June 30, 2004 and December 31, 2003	112.2			106.0
Stockholders’ equity (deficit):
Preferred stock, no par value, 20.0 shares authorized, no shares issued or outstanding at June 30, 2004 and at December 31, 2003	—			—
Common stock, $0.01 par value, 200.0 shares of stock authorized, and 40.0 shares issued at June 30, 2004 and December 31, 2003	0.4			0.4
Additional paid-in capital	301.0			303.5
Accumulated deficit	(375.7		)	(392.6		)
Accumulated other comprehensive income (loss)	(0.9		)	8.8
	(75.2		)	(79.9		)
Less – Treasury stock, at cost, 1.4 shares at June 30, 2004 and 1.3 shares at December 31, 2003	(14.0		)	(13.5		)
Total stockholders’ equity (deficit)	(89.2		)	(93.4		)
Total liabilities and stockholders’ equity (deficit)	$	744.0		$	722.7

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

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Hexcel Corporation and Subsidiaries

Condensed Consolidated Statements of Operations

	Unaudited
	Quarter Ended June 30,						Six Months Ended June 30,
(In millions, except per share data)	2004			2003			2004			2003
Net sales	$	272.2		$	234.1		$	535.0		$	462.7
Cost of sales	210.7			186.5			418.9			369.1
Gross margin	61.5			47.6			116.1			93.6
Selling, general and administrative expenses	28.2			23.8			53.7			47.6
Research and technology expenses	5.0			4.3			9.9			8.6
Business consolidation and restructuring expenses	0.9			0.7			1.4			1.4
Other income (expense), net	1.5			(1.8		)	1.5			(1.8		)
Operating income	25.9			20.6			49.6			37.8
Interest expense	11.9			13.9			24.3			27.6
Non-operating (income) expense, net	0.5			(1.4		)	0.6			2.6
Income before income taxes	13.5			8.1			24.7			7.6
Provision for income taxes	5.2			2.9			8.6			5.2
Income before equity in earnings (losses)	8.3			5.2			16.1			2.4
Equity in earnings (losses) of affiliated companies	0.5			(0.4		)	0.8			(0.8		)
Net income	8.8			4.8			16.9			1.6
Deemed preferred dividends and accretion	(3.1		)	(3.0		)	(6.2		)	(3.5		)
Net income (loss) available to common shareholders	$	5.7		$	1.8		$	10.7		$	(1.9	)
Net income (loss) per common share:
Basic	$	0.14		$	0.05		$	0.27		$	(0.05	)
Diluted	$	0.10		$	0.05		$	0.19		$	(0.05	)
Weighted-average common shares outstanding:
Basic	39.2			38.6			39.0			38.6
Diluted	91.3			39.3			91.2			38.6

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

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Hexcel Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows

	Unaudited
	Six Months Ended June 30,
(In millions)	2004			2003
Cash flows from operating activities
Net income	$	16.9		$	1.6
Reconciliation to net cash provided by operating activities:
Depreciation	26.5			25.4
Amortization of debt discount and deferred financing costs	1.7			1.8
Deferred income taxes (benefit)	(0.1		)	1.2
Business consolidation and restructuring expenses	1.4			1.4
Business consolidation and restructuring payments	(2.8		)	(5.5		)
Equity in (earnings) losses of affiliated companies	(0.8		)	0.8
Working capital changes and other	(21.9		)	(16.3		)
Net cash provided by operating activities	20.9			10.4
Cash flows from investing activities
Capital expenditures	(11.8		)	(7.0		)
Proceeds from the sale of assets	6.5			3.0
Dividends from an affiliated company	1.5			1.0
Net cash used for investing activities	(3.8		)	(3.0		)
Cash flows from financing activities
Proceeds from senior secured credit facilities, net	7.8			8.2
Proceeds from issuance of 9.875% senior secured notes, net of discount	—			123.7
Repayments of senior credit facility, net	—			(179.7		)
Redemption of 7% convertible subordinated notes	—			(46.9		)
Redemption of 9.75% senior subordinated notes	(22.9		)	—
Repayments of capital lease obligations and other debt, net	(1.2		)	(0.4		)
Proceeds from issuance of mandatorily redeemable convertible preferred stock	—			125.0
Issuance costs related to debt and equity offerings	—			(14.1		)
Activity under stock plans	1.9			0.1
Net cash provided by (used for) financing activities	(14.4		)	15.9
Effect of exchange rate changes on cash and cash equivalents	0.7			(1.6		)
Net increase in cash and cash equivalents	3.4			21.7
Cash and cash equivalents at beginning of period	41.7			8.2
Cash and cash equivalents at end of period	$	45.1		$	29.9
Supplemental Data:
Cash interest paid	$	24.4		$	25.8
Cash taxes paid	$	5.4		$	5.6

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

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HEXCEL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1 — Basis of Accounting

The accompanying condensed consolidated financial statements have been prepared from the unaudited records of Hexcel Corporation and its subsidiaries (“Hexcel” or “the Company”) in accordance with accounting principles generally accepted in the United States of America and, in the opinion of management, include all normal recurring adjustments necessary to present fairly the balance sheet of the Company as of June 30, 2004, the results of operations for the quarters and six months ended June 30, 2004 and 2003, and the cash flows for the six months ended June 30, 2004 and 2003.  The condensed consolidated balance sheet of the Company as of December 31, 2003 was derived from the audited 2003 consolidated balance sheet.  Certain information and footnote disclosures normally included in financial statements have been omitted pursuant to rules and regulations of the Securities and Exchange Commission.  Certain prior period amounts in the condensed consolidated financial statements and accompanying notes have been reclassified to conform to the 2004 presentation.  These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2003 Annual Report on Form 10-K.

Note 2 - Stock-Based Compensation

The Company accounts for stock-based compensation under the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”).  Accordingly, compensation expense is not recognized when options are granted at the fair market value on the date of grant.  However, the Company does recognize compensation expense for restricted stock and similar stock-based plans over the defined vesting periods.  As of June 30, 2004, the Company had several on-going stock-based compensation plans that provide for different types of equity awards, including stock options and various forms of restricted stock unit awards.

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

	Quarter Ended June 30,						Six Months Ended June 30,
(in millions, except per share data)	2004			2003			2004			2003
Net income (loss):
Net income (loss) available to common  shareholders, as reported	$	5.7		$	1.8		$	10.7		$	(1.9	)
Add:  Stock-based compensation expense included in reported net income (loss)	0.3			0.2			0.7			0.5
Deduct:  Stock-based compensation expense determined under fair value method for all awards	(1.2		)	(1.0		)	(2.4		)	(2.2		)
Pro forma net income (loss)	$	4.8		$	1.0		$	9.0		$	(3.6	)
Net income (loss) per common share:
Basic net income (loss) per common share:
As reported	$	0.14		$	0.05		$	0.27		$	(0.05	)
Pro forma	$	0.12		$	0.03		$	0.23		$	(0.09	)
Diluted net income (loss) per common share:
As reported	$	0.10		$	0.05		$	0.19		$	(0.05	)
Pro forma	$	0.09		$	0.03		$	0.17		$	(0.09	)

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No tax benefit was recognized on stock-based compensation expense as the Company establishes a non-cash valuation allowance attributable to currently generated U.S. net operating losses (refer to Note 13).  Stock-based compensation expense was not material to European operations.

The weighted average fair value of stock options granted during the six months ended June 30, 2004 and 2003 was $4.18 and $1.77, respectively, and estimated using the Black-Scholes option pricing model with the following weighted-average assumptions:

	2004		2003
Expected life (in years)	4		4
Interest rate	4.29	%	3.12	%
Volatility	71.68	%	78.09	%
Dividend yield	—		—

Note 3 - Inventories

(In millions)	June 30, 2004		December 31, 2003
Raw materials	$	51.9	$	42.9
Work in progress	36.4		35.9
Finished goods	45.9		41.7
Total inventories	$	134.2	$	120.5

Note 4 - Business Consolidation and Restructuring Programs

The aggregate business consolidation and restructuring liabilities as of June 30, 2004 and December 31, 2003, and activity for the quarter and six months ended June 30, 2004, consisted of the following:

(In millions)	Employee Severance			Facility & Equipment			Total
Balance as of December 31, 2003	$	4.2		$	1.7		$	5.9
Current period expenses	0.2			0.4			0.6
Change in estimated expenses	—			(0.1		)	(0.1		)
Net business consolidation and restructuring expenses	0.2			0.3			0.5
Cash expenditures	(0.9		)	(0.6		)	(1.5		)
Currency translation adjustments	(0.1		)	—			(0.1		)
Balance as of March 31, 2004	$	3.4		$	1.4		$	4.8
Business consolidation and restructuring expenses	0.3			0.6			0.9
Cash expenditures	(0.4		)	(0.9		)	(1.3		)
Balance as of June 30, 2004	$	3.3		$	1.1		$	4.4

Livermore Program

In the first quarter of 2004, the Company announced its intent to consolidate the activities of its Livermore, California facility into other operations, principally the Salt Lake City, Utah plant.  This business consolidation and restructuring action is accounted for under Statement of Financial Accounting Standards No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” which requires that a liability for a cost associated with an exit or disposal activity be recognized and measured, initially at fair value, only when the liability is incurred.  In addition, if terminated employees are required to render services beyond a minimum retention period in order to receive termination benefits, a liability for the termination benefits shall be measured initially at the communication date based on fair value and recognized ratably over the service period.  For the quarter and six months ended June 30, 2004, the Company recognized $0.2 million and $0.4 million of expense, respectively, for employee severance

6

based on the remaining employee service periods.  Costs associated with the facility’s closure, along with costs for relocation and re-qualification of equipment, are expected to occur over several years.

Business consolidation and restructuring liabilities as of June 30, 2004 and December 31, 2003, and activity of the Livermore program for the quarter and six months ended June 30, 2004, consisted of the following:

(In millions)	Employee Severance		Facility & Equipment		Total
Balance as of December 31, 2003	$	—	$	—	$	—
Business consolidation and restructuring expenses	0.2		—		0.2
Balance as of March 31, 2004	$	0.2	$	—	$	0.2
Business consolidation and restructuring expenses	0.2		—		0.2
Balance as of June 30, 2004	$	0.4	$	—	$	0.4

November 2001 Program

In November 2001, the Company announced a program to restructure its business operations as a result of its revised business outlook for build rate reductions in commercial aircraft production and due to depressed business conditions in the electronics market.  For the quarter and six months ended June 30, 2004, the Company recognized business consolidation and restructuring expenses of $0.6 million and $1.0 million, respectively, related to this program for equipment relocation and re-qualification costs that are expensed as incurred.  In addition, the Company decreased its accrued liabilities by $0.1 million for the six months ended June 30, 2004, due to a change in estimate.

Business consolidation and restructuring liabilities as of June 30, 2004 and December 31, 2003, and activity of the November 2001 program for the quarter and six months ended June 30, 2004, consisted of the following:

(In millions)	Employee Severance			Facility & Equipment			Total
Balance as of December 31, 2003	$	4.2		$	1.7		$	5.9
Current period expenses	—			0.4			0.4
Change in estimated expenses	—			(0.1		)	(0.1		)
Net business consolidation and restructuring expenses	—			0.3			0.3
Cash expenditures	(0.9		)	(0.6		)	(1.5		)
Currency translation adjustments	(0.1		)	—			(0.1		)
Balance as of March 31, 2004	$	3.2		$	1.4		$	4.6
Business consolidation and restructuring expenses	0.1			0.6			0.7
Cash expenditures	(0.4		)	(0.9		)	(1.3		)
Balance as of June 30, 2004	$	2.9		$	1.1		$	4.0

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Note 5 - Notes Payable and Capital Lease Obligations

(In millions)	June 30, 2004		December 31, 2003
Senior secured credit facility, due 2008	$	11.8	$	4.0
European credit and overdraft facilities	0.8		1.9
9.875% senior secured notes, due 2008, net of unamortized discount of $1.0 as of June 30, 2004 and $1.1 as of December 31, 2003	124.0		123.9
9.75% senior subordinated notes, due 2009, net of unamortized discount of $0.8 as of June 30, 2004 and $1.0 as of December 31, 2003 (a)	304.6		328.5
7.0% convertible subordinated debentures, due 2011	21.0		21.0
Total notes payable	462.2		479.3
Capital lease obligations	3.9		4.1
Total notes payable and capital lease obligations	$	466.1	$	483.4
Notes payable and current maturities of long-term liabilities	$	1.0	$	2.1
Long-term notes payable and capital lease obligations, less current maturities	465.1		481.3
Total notes payable and capital lease obligations	$	466.1	$	483.4

(a)Includes a decrease of $2.8 million at June 30, 2004 and a decrease of $0.5 million at December 31, 2003 for derivative contracts.  During the fourth quarter of 2003, the Company entered into interest rate swap agreements for an aggregate notional amount of $100.0 million, effectively converting the fixed interest rate of 9.75% into variable interest rates (see Note 12).

Senior Secured Credit Facility, due 2008

On March 19, 2003, Hexcel entered into a $115.0 million asset-backed senior secured credit facility (the “Senior Secured Credit Facility”) with a new syndicate of lenders led by Bank of America Business Capital Corporation (formerly Fleet Capital Corporation) as agent.  The credit facility matures on March 31, 2008.  In addition to Hexcel Corporation, the borrowers under the credit facility are Hexcel’s operating subsidiaries in the U.K., Austria and Germany.  The credit facility provides for borrowings of U.S. dollars, Pound Sterling and Euro currencies, including the issuance of letters of credit, with the amount available to each borrower dependent on the borrowing base of that borrower and its subsidiaries.  For Hexcel Corporation and the U.K. borrower, the borrowing base is determined by an agreed percentage of eligible accounts receivable and eligible inventory, subject to certain reserves.  The borrowing base of each of the Austrian and German borrowers is based on an agreed percentage of eligible accounts receivable, subject to certain reserves.  Borrowings under the credit facility bear interest at a floating rate based on either the agent’s defined “prime rate” plus a margin that can vary from 0.75% to 3.25% or LIBOR plus a margin that can vary from 2.25% to 3.25%.  The margin over the “prime rate” ranges from 0.75% to 1.75% for borrowings denominated in U.S. dollars and 2.25% to 3.25% for borrowings denominated in Pound Sterling and Euros.  The margin in effect for a borrowing at any given time depends on the Company’s fixed charge ratio and the currency denomination of such borrowing.  The credit facility also requires the payment of customary fees and expenses.

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

8

Hexcel is required to maintain various financial ratios throughout the term of the Senior Secured Credit Facility.  These financial covenants set maximum values for the Company’s leverage (the ratios of total and senior debt to EBITDA), fixed charge coverage (the ratio of EBITDA, less capital expenditures and cash taxes, plus cash dividends, to the sum of cash interest and scheduled debt amortization), and capital expenditures (not to exceed specified annual amounts).  This credit facility also contains limitations on, among other things, incurring debt, granting liens, making investments, making restricted payments, including dividends, entering into transactions with affiliates and prepaying subordinated debt.  The Senior Secured Credit Facility also contains other customary terms relating to, among other things, representations and warranties, additional covenants and events of default.  As of June 30, 2004, the Company was in compliance with the financial covenants under the Senior Secured Credit Facility.

As of June 30, 2004, the Company had borrowings of $11.8 million under this facility.  After taking into account a borrowing base of $91.2 million, less advances, letters of credit outstanding and other adjustments, the Company had undrawn revolver and overdraft availability under the facility of $56.9 million as of June 30, 2004.  Under this facility, Hexcel is able to issue letters of credit up to a sub-limit of $50.0 million, subject to availability.  At June 30, 2004, Hexcel had issued letters of credit totaling $22.5 million, of which $11.1 million supported a loan to the Company’s BHA Aero Composite Parts Co., Ltd. joint venture in China.  In addition, the Company had standby letters of credit of $0.9 million outstanding at June 30, 2004 that were separate from this facility.

Senior Secured Notes, due 2008

The senior secured notes, due October 1, 2008, are secured by a first priority security interest in substantially all of Hexcel’s and its domestic subsidiaries’ property, plant and equipment, intangibles, intercompany notes and other obligations receivable, and 100% of the outstanding voting stock of certain of Hexcel’s domestic subsidiaries.  In addition, the senior secured notes are secured by a pledge of 65% of the stock of Hexcel’s Danish first-tier and U.K. first and second-tier holding companies, and certain intercompany notes.  This pledge of foreign stock and intercompany notes is on an equal basis with a pledge of such stock given to secure the obligations under the Company’s Senior Secured Credit Facility.  The senior secured notes are also guaranteed by Hexcel’s material domestic subsidiaries.  Hexcel has the ability to incur additional debt that would be secured on an equal basis by the collateral securing the senior secured notes.  The amount of additional secured debt that may be incurred is the greater of $10.0 million and an amount based upon a formula relating to the total net book value of Hexcel’s domestic property, plant and equipment.

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

French Factoring Facility

The Company has an existing accounts receivable factoring facility with a third party to provide an additional 20.0 million Euros in borrowing capacity.  As of June 30, 2004, the Company did not have any accounts receivable factored under this facility.

European Credit and Overdraft Facilities

Certain of Hexcel’s 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.

9

Repurchase of Senior Subordinated Notes, due 2009

During the quarter and six months ended June 30, 2004, the Company repurchased $11.8 million and $21.8 million principal amount, respectively, of its 9.75% senior subordinated notes, due 2009, through open market purchases, incurring losses of $0.9 million and $1.6 million, respectively, on the early retirement of debt (see Note 9).

Note 6 – Mandatorily Redeemable Convertible Preferred Stock

On March 19, 2003, Hexcel received $119.8 million, after expenses of $5.2 million, from the issuance of 125,000 shares of a series A convertible preferred stock and 125,000 shares of a series B convertible preferred stock.  Both series of convertible preferred stock are mandatorily redeemable on January 22, 2010 generally for cash or for common stock at the Company’s discretion, unless the holder elects to take a lesser amount in cash, and in certain circumstances must be redeemed for cash.  Each share of series A and series B preferred stock is convertible, at the option of the holder, into that number of shares of common stock equal to the stated value of the share of preferred stock divided by the conversion price.  The stated value of each share of series A preferred stock is $1,000, the stated value of each share of series B preferred stock is $195.618, and the conversion price for each share of preferred stock is $3.00.  Both the series A preferred stock and series B preferred stock will automatically be converted into common stock if the closing trading price of the common stock for any period of 60 consecutive trading days ending after March 19, 2006 exceeds $9.00 per share.  If both series were fully converted, the total number of Hexcel’s outstanding common shares would increase by 49.8 million shares. The preferred stockholders are entitled to vote on an as converted basis with Hexcel’s common stockholders.

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

The issuance of the series A and series B convertible preferred stock has resulted in certain deductions being recognized in the Company’s consolidated statement of operations until such time as the preferred stock is converted to Hexcel common stock or redeemed.  These deductions are reported under a caption “deemed preferred dividends and accretion” and represent a reduction of net income (loss) in arriving at net income (loss) available to common shareholders.  The accretion of these components is a non-cash expense at the time of recognition.  However, cash may be utilized to pay future dividends and/or for the redemption of the preferred stock.  The Company recognized deemed preferred dividends and accretion of $3.1 million and $3.0 million for the quarters ended June 30, 2004 and 2003, respectively, and recognized $6.2 million and $3.5 million for the six months ended June 30, 2004 and 2003, respectively.  The recording of deemed preferred dividends and accretion began March 19, 2003.

Note 7 – Retirement and Other Postretirement Benefit Plans

Hexcel maintains 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.  The Company also participates in a union sponsored multi-employer pension plan covering certain U.S. employees with union affiliations.   Refer to the Company’s 2003 Annual Report on Form 10-K for further information regarding these plans.

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Defined Benefit Retirement Plans

Net Periodic Benefit Costs

Net periodic benefit costs of Hexcel’s defined benefit retirement plans for the quarters and six months ended June 30, 2004 and 2003, were as follows:

	Quarter Ended June 30,						Six Months Ended June 30,
(in millions)	2004			2003			2004			2003
U.S. Defined Benefit Retirement Plans
Service cost	$	0.2		$	0.2		$	0.4		$	0.4
Interest cost	0.5			0.4			0.9			0.8
Expected return on plan assets	(0.3		)	(0.3		)	(0.6		)	(0.6		)
Net amortization and deferral	0.2			0.2			0.5			0.4
Sub-total	0.6			0.5			1.2			1.0
Curtailment and settlement loss	0.2			0.2			0.4			0.4
Net periodic benefit costs	$	0.8		$	0.7		$	1.6		$	1.4
European Defined Benefit Retirement Plans
Service cost	$	0.6		$	0.5		$	1.2		$	1.0
Interest cost	1.2			1.0			2.4			2.0
Expected return on plan assets	(1.2		)	(0.9		)	(2.3		)	(1.9		)
Net amortization and deferral	0.5			0.3			0.9			0.7
Sub-total	1.1			0.9			2.2			1.8
Curtailment and settlement gain	(0.1		)	(0.1		)	(0.2		)	(0.2		)
Net periodic benefit costs	$	1.0		$	0.8		$	2.0		$	1.6

Contributions

The Company contributed $0.4 million to its U.S. qualified and nonqualified defined benefit retirement plans in each of the quarters ended June 30, 2004 and 2003, respectively.  Contributions were $0.9 million and $0.6 million for the six months ended June 30, 2004 and 2003, respectively.  Although no minimum funding contributions are required, the Company intends to contribute approximately $1.5 million during 2004 to its U.S. qualified pension plan to fund expected lump sum payments.  The Company generally funds its U.S. nonqualified defined benefit retirement plans when benefit payments are incurred.  Under the provisions of these nonqualified plans, the Company expects to contribute approximately $0.3 million in 2004 to cover unfunded benefits.  The Company contributed $1.7 million to its U.S. defined benefit retirement plans during its 2003 fiscal year.

In addition, the Company contributed $0.6 million and $0.5 million to its European defined benefit retirement plans during the second quarter of 2004 and 2003, respectively.  Total contributions were $1.1 million and $1.0 million for the six months ended June 30, 2004 and 2003, respectively.  Meeting governing requirements, the Company plans to contribute approximately $2.3 million during 2004 to its European plans.  The Company contributed $2.0 million to its European plans during its 2003 fiscal year.

Postretirement Health Care and Life Insurance Benefit Plans

Net Periodic Postretirement Benefit Costs

Net periodic postretirement benefit costs of Hexcel’s postretirement health care and life insurance benefit plans for the quarters and six months ended June 30, 2004 and 2003, were as follows:

(in millions) Postretirement Plans	Quarter Ended June 30,					Six Months Ended June 30,
	2004		2003			2004		2003
Service cost	$	—	$	—		$	0.1	$	0.1
Interest cost	0.3		0.2			0.6		0.4
Net amortization and deferral	—		(0.1		)	—		(0.2		)
Net periodic postretirement benefit costs	$	0.3	$	0.1		$	0.7	$	0.3

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Contributions

The Company contributed $0.5 million and $0.4 million to its postretirement health care and life insurance benefit plans during the quarters ended June 30, 2004 and 2003, respectively, and $1.0 million and $0.9 million during the six months ended June 30, 2004 and 2003, respectively.  The Company periodically funds its postretirement plans to pay covered expenses as they are incurred.  Under the provisions of these postretirement plans, the Company expects to contribute approximately $1.8 million in 2004 to cover unfunded benefits.  The Company contributed $1.9 million to its postretirement plans during its 2003 fiscal year.

Medicare Prescription Drug, Improvement and Modernization Act

On December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”) became law.  The Act, among other things, introduces a prescription drug benefit under Medicare and a non-taxable federal subsidy paid to sponsors of postretirement benefit plans that provide retirees with a drug benefit at least “actuarially equivalent” to these new benefits under Medicare.  In May 2004, the FASB issued Staff Position No. FAS 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” (“FAS 106-2”), which provides guidance on the accounting for the effects of the Act to employers that sponsor postretirement health care benefit plans that provide prescription drugs.  The Company is currently evaluating the impact of FAS 106-2 on its postretirement benefit plan accounting and, as such, the accumulated benefit obligation and net periodic postretirement benefit cost in the condensed consolidated financial statements and accompanying notes do not reflect the effects of the Act on the Company’s accounting for its postretirement benefit plans.

Note 8 – Other Income (Expense), Net

	Quarter Ended June 30,					Six Months Ended June 30,
(in millions)	2004			2003		2004			2003
Gain on sale of assets	$	4.0		$	1.8	$	4.0		$	1.8
Accrual for certain legal matters	(5.5		)	—		(5.5		)	—
Other income (expense), net	$	(1.5	)	$	1.8	$	(1.5	)	$	1.8

During the second quarter of 2004, the Company sold surplus land at one of its U.S. facilities for net cash proceeds of $6.5 million, and recognized a $4.0 million gain.  In addition, during the quarter, the Company recorded an estimated accrual of $5.5 million in connection with the ongoing carbon fiber legal matters previously disclosed.

During the second quarter of 2003, the Company sold certain assets of its Structures business segment for $3.0 million in cash, recognizing a net gain of $1.8 million.

Note 9 – Non-operating Income (Expense), Net

	Quarter Ended June 30,					Six Months Ended June 30,
(in millions)	2004			2003		2004			2003
Gain relating to de-mutualization of an insurance company	$	0.4		$	—	$	1.0		$	—
Gain on expiration of contingent liability	—			1.4		—			1.4
Loss on early retirement of debt	(0.9		)	—		(1.6		)	(4.0		)
Non-operating income (expense), net	$	(0.5	)	$	1.4	$	(0.6	)	$	(2.6	)

During the first quarter of 2004, the Company became aware of an existing asset custodial account created upon the de-mutualization of an insurance company in December 2001.  Assets distributed to the custodial account resulted from the existence of certain group life insurance, disability and dental plans insured by the de-mutualized company.  The assets held in the account will be used to defray a portion of future funding requirements associated with these plans.  In connection therewith, the Company recognized a gain of $0.6 million in the first quarter of 2004.  During the second quarter of 2004, the Company sold the underlying securities obtained through the de-mutualization recognizing an additional gain of $0.4 million.

During the second quarter and first six months of 2004, the Company repurchased $11.8 million and $21.8 million principal amount, respectively, of its 9.75% senior subordinated notes, due 2009,

12

recognizing a $0.9 million and a $1.6 million loss on the early retirement of debt, respectively.  The losses resulted from market premiums paid, as well as the write-off of related unamortized deferred financing costs and original issuance discount.

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

In connection with its refinancing of its capital structure in the first quarter of 2003, the Company incurred a $4.0 million loss on early retirement of debt due to the write-off of unamortized deferred financing costs relating to the former senior credit facility and the 7% convertible subordinated notes due 2003.  Refer to the Company’s 2003 Annual Report on Form 10-K for further information on the refinancing transactions.

Note 10 - Net Income (Loss) Per Common Share

	Quarter Ended June 30,						Six Months Ended June 30,
(In millions, except per share data)	2004			2003			2004			2003
Basic net income (loss) per common share:
Net income	$	8.8		$	4.8		$	16.9		$	1.6
Deemed preferred dividends and accretion	(3.1		)	(3.0		)	(6.2		)	(3.5		)
Net income (loss) available to common shareholders	$	5.7		$	1.8		$	10.7		$	(1.9	)
Weighted average common shares outstanding	39.2			38.6			39.0			38.6
Basic net income (loss) per common share	$	0.14		$	0.05		$	0.27		$	(0.05	)
Diluted net income (loss) per common share:
Net income	$	8.8		$	4.8		$	16.9		$	1.6
Deemed preferred dividends and accretion	(3.1		)	(3.0		)	(6.2		)	(3.5		)
Net income (loss) available to common shareholders	$	5.7		$	1.8		$	10.7		$	(1.9	)
Plus: Deemed preferred dividends and accretion	3.1			—			6.2			—
Net income (loss) available to common shareholders  plus assumed conversions	$	8.8		$	1.8		$	16.9		$	(1.9	)
Weighted average common shares outstanding – Basic	39.2			38.6			39.0			38.6
Plus incremental shares from assumed conversions:
Restricted stock units	0.4			0.2			0.4			—
Stock options	1.9			0.5			2.0			—
Mandatorily redeemable convertible preferred stock	49.8			—			49.8			—
Weighted average common shares outstanding – Dilutive	91.3			39.3			91.2			38.6
Diluted net income (loss) per common share	$	0.10		$	0.05		$	0.19		$	(0.05	)

The assumed conversion of the Company’s convertible subordinated debentures, due 2011, (exchangeable for 0.7 million common shares) was excluded from the computations of diluted net income (loss) per common share for all periods, as they were antidilutive.

The assumed conversion of the Company’s mandatorily redeemable convertible preferred stock (convertible into 49.8 million common shares) and the Company’s former convertible subordinated notes, due 2003, (exchangeable for 3.0 million common shares) were excluded from the quarter and six months

13

ended June 30, 2003 computations of diluted net income (loss) per common share, as they were antidilutive.  The convertible subordinated notes, due 2003, were repaid in full on March 19, 2003.

Approximately 2.3 million and 0.7 million shares underlying outstanding stock options and restricted stock units were included in the computation of diluted net income per common share for the quarters ended June 30, 2004 and 2003, respectively.  The assumed conversions of a remaining 6.8 million shares and 8.6 million shares underlying outstanding stock options and restricted stock units were excluded from the computations of diluted net income per common share for the quarters ended June 30, 2004 and 2003, respectively, as they were antidilutive.

For the six months ended June 30, 2004, 2.4 million shares underlying outstanding stock options and restricted stock units were included in the computation of diluted net income per common share.  The assumed conversion of a remaining 6.7 million shares for the six months ended June 30, 2004, and all 9.3 million shares underlying outstanding stock options and restricted stock units for the six months ended June 30, 2003 were excluded from the computation of diluted net income (loss) per common share, as they were antidilutive.

Note 11 - Comprehensive Income

Comprehensive income represents net income (loss) and other gains and losses affecting shareholders’ equity (deficit) that are not reflected in the condensed consolidated statements of operations.  The components of comprehensive income for the quarters and six months ended June 30, 2004 and 2003 were as follows:

	Quarter Ended June 30,					Six Months Ended June 30,
(in millions)	2004			2003		2004			2003
Net income (loss) available to common shareholders	$	5.7		$	1.8	$	10.7		$	(1.9	)
Currency translation adjustments	(1.4		)	8.2		(5.7		)	11.5
Realized gains on sale of assets obtained from de-mutualization of insurance company	(0.4		)	—		—			—
Net unrealized gains (losses) on financial instruments	(1.7		)	0.8		(4.0		)	2.3
Comprehensive income	$	2.2		$	10.8	$	1.0		$	11.9

Note 12 - Derivative Financial Instruments

Interest Rate Swap Agreements

In October 2003, the Company entered into interest rate swap agreements for an aggregate notional amount of $100.0 million.  The interest rate swap agreements effectively convert the fixed interest rate of 9.75% on $100.0 million of the Company’s senior subordinated notes, due 2009, into variable interest rates.  The variable interest rates payable by the Company in connection with the swap agreements range from LIBOR + 6.12% to LIBOR + 6.16%, and are reset semiannually on January 15 and July 15 of each year the swap agreements are in effect.  Interest payment dates under the swap agreements of January 15 and July 15 match the interest payment dates set by the senior subordinated notes.  The interest rate swap agreements mature on January 15, 2009, the maturity date of the senior subordinated notes.  The swap agreements are cancelable at the option of the fixed rate payer under terms that mirror the call provisions of the senior subordinated notes due 2009.  The interest rate swap agreements are designated as fair value hedges, and are highly effective as assessed using the short-cut method under Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities.”  For the quarter and six months ended June 30, 2004, $0.6 million and $1.2 million were recognized as a reduction in “interest expense,” respectively.  The aggregate fair value and carrying amount of these swap agreements, as of June 30, 2004, was a $2.8 million decrease in notes payable.

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Cross-Currency Interest Rate Swap Agreement

In April 2003, the Company entered into a cross-currency interest rate swap agreement, which effectively exchanges a loan of 12.5 million Euros at a fixed rate of 7% for a loan with a notional amount of $13.5 million at a fixed rate of 6.02% over the term of the agreement expiring December 1, 2007.The Company entered into this agreement to effectively hedge interest and principal payments relating to an intercompany loan denominated in Euros.  The fair value and carrying amount of this swap agreement as of June 30, 2004 was a $2.2 million liability.During the quarters and six months ended June 30, 2004 and 2003, hedge ineffectiveness was immaterial.  The change in fair value recognized in “comprehensive income” was a net reduction of $0.1 million and $0.4 million for the quarters ended June 30, 2004 and 2003, respectively, and $0.2 million and $0.4 million for the six months ended June 30, 2004 and 2003, respectively.  Over the next twelve months, no material unrealized losses recorded in “accumulated other comprehensive loss” relating to this agreement are expected to be reclassified into earnings.

Foreign Currency Forward Exchange Contracts

A number of the Company’s European subsidiaries are exposed to the impact of exchange rate volatility between the U.S. dollar and the subsidiaries’ functional currencies, being either the Euro or the British Pound Sterling.  To minimize this exposure, Hexcel has entered into a number of foreign currency forward exchange contracts to exchange U.S. dollars for Euros and British Pound Sterling at fixed rates on specified dates through December 2005.The aggregate notional amount of these contracts was $38.6 million and $62.9 million at June 30, 2004 and December 31, 2003, respectively.  The purpose of these contracts is to hedge a portion of the forecasted transactions of European subsidiaries under long-term sales contracts with certain customers.  These contracts are expected to provide the Company with a more balanced matching of future cash receipts and expenditures by currency, thereby reducing the Company’s exposure to fluctuations in currency exchange rates.  For the quarters and six months ended June 30, 2004 and 2003, hedge ineffectiveness was immaterial.

The activity in “accumulated other comprehensive income (loss)” related to foreign currency forward exchange contracts for the quarters and six months ended June 30, 2004 and 2003 was as follows:

	Quarter Ended June 30,						Six Months Ended June 30,
(in millions)	2004			2003			2004			2003
Unrealized gains at beginning of period	$	4.2		$	4.9		$	6.4		$	3.4
Gains reclassified to net sales	(1.5		)	(0.9		)	(3.4		)	(1.4		)
Increase (decrease) in fair value	(0.1		)	2.1			(0.4		)	4.1
Unrealized gains at end of period	$	2.6		$	6.1		$	2.6		$	6.1

Unrealized gains of $2.6 million recorded in “accumulated other comprehensive loss,” net of tax, as of June 30, 2004 are expected to be reclassified into earnings over the next twelve months as the hedged sales are recorded.

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Note 13 – Taxes

The Company’s tax provision for the quarters and six months ended June 30, 2004 and 2003 was primarily for taxes on European income.  The Company will continue to adjust its tax provision rate through the establishment, or release, of a non-cash valuation allowance attributable to all currently generated U.S. and Belgian net operating income (losses) until such time as the U.S. and Belgian operations, respectively, generate sufficient taxable income to utilize the net operating losses in full.

The U.S. and foreign components of income before income taxes and the provision for income taxes for the quarters and six months ended June 30, 2004 and 2003 were as follows:

	Quarter Ended June 30, 2004						Six Months Ended June 30, 2004
	U.S.		Foreign		Total		U.S.		Foreign		Total
Income before income taxes	$	4.7	$	8.8	$	13.5	$	9.6	$	15.1	$	24.7
Provision for income taxes	0.6		4.6		5.2		0.8		7.8		8.6
Income before equity in earnings (losses) of affiliated companies	$	4.1	$	4.2	$	8.3	$	8.8	$	7.3	$	16.1

	Quarter Ended June 30, 2003						Six Months Ended June 30, 2003
	U.S.		Foreign		Total		U.S.			Foreign		Total
Income (loss) before income taxes	$	2.3	$	5.8	$	8.1	$	(4.6	)	$	12.2	$	7.6
Provision for income taxes	0.2		2.7		2.9		0.3			4.9		5.2
Income (loss) before equity in earnings (losses) of affiliated companies	$	2.1	$	3.1	$	5.2	$	(4.9	)	$	7.3	$	2.4

Net Operating Loss Carryforwards

As of June 30, 2004, Hexcel had net operating loss carryforwards for U.S. federal and Belgian income tax purposes of approximately $136.6 million and $8.7 million, respectively.  On March 19, 2003, the Company completed a refinancing of its capital structure.  As a result, the Company had an “ownership change” pursuant to IRC Section 382, which will limit the Company’s ability to utilize net operating losses against future U.S. taxable income to $5.3 million per annum.  The Company’s U.S. net operating losses expire beginning 2019 and through 2023.  The Company’s Belgian net operating losses can be carried forward without limitation.

Note 14 – Investments in Affiliated Companies

The Company has equity ownership investments in three Asian and one U.S. joint venture.  In connection therewith, the Company has considered the accounting and disclosure requirements of Financial Interpretation No. 46R “Consolidation of Variable Interest Entities,” and believes that certain of these investments would be considered “variable interest entities.”  However, the Company believes that it is not the primary beneficiary of such entities, and therefore, would not be required to consolidate these entities in its accounts.

In 1999, Hexcel, Boeing International Holdings, Ltd. and China Aviation Industry Corporation I formed a joint venture, BHA Aero Composite Parts Co., Ltd. (“BHA Aero”), to manufacture composite parts for secondary structures and interior applications for commercial aircraft.  Hexcel has a 33.3% equity ownership interest in this joint venture, which is located in Tianjin, China.  Revenues of BHA Aero for the last twelve months ended June 30, 2004 were $10.7 million.  In addition, in 1999, Hexcel formed another joint venture, Asian Composites Manufacturing Sdn. Bhd. (“Asian Composites”), with

16

Boeing Worldwide Operations Limited, Sime Link Sdn. Bhd., and Malaysia Helicopter Services Bhd. (now known as Naluri Berhad), to manufacture composite parts for secondary structures for commercial aircraft.  Hexcel has a 25% equity ownership interest in this joint venture, which is located in Alor Setar, Malaysia.  Revenues of Asian Composites for the last twelve months ended June 30, 2004 were $13.1 million.  Manufacturing activities of both BHA Aero and Asian Composites continue to ramp up as composite component manufacturing is transferred to them.  As of June 30, 2004, Hexcel had an equity investment balance of $0.2 million and an aggregate receivable balance of $2.9 million related to these joint ventures.  In addition, each of the equity owners of BHA Aero, including the Company, has an obligation to support a third party loan on a proportionate basis to their equity ownership interest.  The Company has met its obligation through an outstanding letter of credit of $11.1 million.  BHA Aero’s third party loans come due in 2004.   BHA Aero and its equity owners are in detailed discussions as to the refinancing of these loans and a re-capitalization of this joint venture.  The maturities of the existing third party loans have been extended to facilitate these discussions.  Such refinancing is anticipated to require additional cash contributions by BHA Aero’s equity owners in the form of equity as well as loan guarantees.  The Company does not anticipate that the value of such commitments will significantly exceed the value of the letter of credit they will replace.  Apart from the accounts receivable balances, the letter of credit supporting the third party loan to BHA Aero and its remaining investment in these ventures, Hexcel has no other significant exposures to loss with BHA Aero and Asian Composites.

As part of an acquisition in 1998, the Company obtained a 50% 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.  Revenues of TechFab for the last twelve months ended June 30, 2004 were $27.8 million.  At June 30, 2004, Hexcel had an equity investment balance in TechFab of $6.5 million.  Hexcel has no other significant exposures to loss with this joint venture.

Lastly, Hexcel owns a 45.3% equity interest in DIC-Hexcel Limited (“DHL”), a joint venture formed in 1990 with Dainippon Ink and Chemicals, Inc. (“DIC”).  This joint venture is located in Japan, and produces and sells prepregs, honeycomb and decorative laminates using technology licensed from Hexcel and DIC.  Revenues of DHL for the last twelve months ended June 30, 2004 were $9.4 million.  Due to DHL’s recognition of net losses in prior years, no equity investment balance remains for DHL at June 30, 2004.  Hexcel has no significant exposures to loss with this joint venture.

Note 15 – Product Warranty

The Company provides for an estimated amount of product warranty at the time revenue is recognized.  This estimated amount is provided by product and based on historical warranty experience.  In addition, the Company periodically reviews its warranty accrual and records any adjustments as deemed appropriate.  Warranty expense for the quarter and six months ended June 30, 2004 and accrued warranty cost, included in “other accrued liabilities” in the condensed consolidated balance sheets at June 30, 2004 and December 31, 2003, were as follows:

(In millions)	Product Warranties
Balance as of December 31, 2003	$	5.0
Warranty expense	1.1
Deductions and other	(0.3		)
Balance as of March 31, 2004	$	5.8
Warranty expense	1.8
Deductions and other	(1.2		)
Balance as of June 30, 2004	$	6.4

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Note 16 - Segment Information

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

Financial information for the Company’s segments for the quarters and six months ended June 30, 2004 and 2003, is as follows:

	Unaudited
(In millions)	Reinforcements		Composites		Structures		Corporate & Other			Total
Second Quarter 2004
Net sales to external customers	$	84.9	$	169.7	$	17.6	$	—		$	272.2
Intersegment sales	26.9		4.4		—		—			31.3
Total sales	111.8		174.1		17.6		—			303.5
Operating income (loss)	13.0		27.2		0.8		(15.1		)	25.9
Depreciation	4.2		8.5		0.5		—			13.2
Business consolidation and  restructuring expenses	0.3		0.6		—		—			0.9
Capital expenditures	2.1		4.2		0.1		0.9			7.3
Second Quarter 2003
Net sales to external customers	$	61.2	$	154.2	$	18.7	$	—		$	234.1
Intersegment sales	21.2		4.0		—		—			25.2
Total sales	82.4		158.2		18.7		—			259.3
Operating income (loss)	5.7		20.2		1.6		(6.9		)	20.6
Depreciation	4.1		8.3		0.5		—			12.9
Business consolidation and  restructuring expenses	0.1		0.5		0.1		—			0.7
Capital expenditures	1.4		3.2		0.1		—			4.7
Six Months Ended June 30, 2004
Net sales to external customers	$	159.0	$	340.8	$	35.2	$	—		$	535.0
Intersegment sales	53.3		9.0		—		—			62.3
Total sales	212.3		349.8		35.2		—			597.3
Operating income (loss)	20.6		49.8		1.3		(22.1		)	49.6
Depreciation	8.4		17.1		1.0		—			26.5
Business consolidation and  restructuring expenses	0.5		1.0		—		(0.1		)	1.4
Capital expenditures	3.6		7.2		0.1		0.9			11.8
Six Months Ended June 30, 2003
Net sales to external customers	$	119.1	$	301.7	$	41.9	$	—		$	462.7
Intersegment sales	44.2		9.3		—		—			53.5
Total sales	163.3		311.0		41.9		—			516.2
Operating income (loss)	9.6		39.0		2.8		(13.6		)	37.8
Depreciation	8.4		15.9		1.1		—			25.4
Business consolidation and  restructuring expenses	0.2		1.1		0.1		—			1.4
Capital expenditures	2.7		4.2		0.1		—			7.0

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Goodwill

The carrying amount of goodwill by segment is as follows:

(In millions)	June 30, 2004		December 31, 2003
Reinforcements	$	40.3	$	40.3
Composites	19.9		20.5
Structures	16.1		16.1
Goodwill	$	76.3	$	76.9

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Note 17 - Supplemental Guarantor Information

Certain subsidiaries of Hexcel have jointly, severally, fully and unconditionally guaranteed the Senior Secured Notes, due 2008.  Presented below is condensed consolidating information for Hexcel (parent, issuer and primary obligor of the debt), Hexcel Holdings (UK) Limited, Clark-Schwebel Holding Corp., Hexcel Reinforcements Corp. (formerly Clark-Schwebel Corporation), CS Tech-Fab Holding, Inc., Hexcel Pottsville Corporation and Hexcel International (guarantor subsidiaries), and the non-guarantor subsidiaries of Hexcel.  Hexcel wholly owns all of the subsidiary guarantors.  Hexcel Holdings (UK) Limited and Hexcel International became guarantors as of November 12, 2003.  As a result, these entities have been reflected as guarantors in the financial information presented below for all periods.

Hexcel Corporation and Subsidiaries

Condensed Consolidating Balance Sheet

As of June 30, 2004

(In millions)	Parent			Guarantors			Non- Guarantors		Eliminations			Total
Assets
Current assets:
Cash and cash equivalents	$	21.2		$	5.2		$	18.7	$	—		$	45.1
Accounts receivable, net	36.2			71.3			49.1		—			156.6
Inter-company accounts receivable	134.5			242.2			18.2		(394.9		)	—
Inter-company interest receivable	3.6			—			0.3		(3.9		)	—
Inventories, net	34.5			64.5			35.2		—			134.2
Inter-company short-term notes receivable	23.9			—			13.4		(37.3		)	—
Prepaid expenses and other current assets	7.7			5.3			3.0		—			16.0
Total current assets	261.6			388.5			137.9		(436.1		)	351.9
Net property, plant and equipment	124.9			114.0			34.4		—			273.3
Goodwill	21.5			52.6			2.2		—			76.3
Investments in subsidiaries	(458.6		)	—			—		458.6			—
Investments in affiliated companies	—			6.5			0.2		—			6.7
Inter-company long-term notes receivable	887.4			—			18.1		(905.5		)	—
Other assets	24.5			40.1			1.6		(30.4		)	35.8
Total assets	$	861.3		$	601.7		$	194.4	$	(913.4	)	$	744.0
Liabilities and Stockholders’ Equity
Current liabilities:
Notes payable and current maturities  of capital lease obligations	$	0.1		$	0.1		$	0.8	$	—		$	1.0
Inter-company short-term notes payable	—			34.6			2.7		(37.3		)	—
Inter-company interest payable	—			3.7			—		(3.7		)	—
Accounts payable	12.3			37.6			31.5		—			81.4
Inter-company accounts payable	250.2			123.3			21.4		(394.9		)	—
Accrued liabilities	62.6			28.4			17.3		(0.2		)	108.1
Total current liabilities	325.2			227.7			73.7		(436.1		)	190.5
Long-term notes payable and capital leases	450.6			14.5			—		—			465.1
Inter-company long-term notes payable	—			898.8			6.7		(905.5		)	—
Other non-current liabilities	32.1			26.4			6.9		—			65.4
Total liabilities	807.9			1,167.4			87.3		(1,341.6		)	721.0
Mandatorily redeemable convertible preferred stock, 0.125 shares of series A and 0.125 shares of series B authorized, issued and outstanding at June 30 2004	112.2			—			—		—			112.2
Stockholder’s equity (deficit)	(58.8		)	(565.7		)	107.1		428.2			(89.2		)
Total liabilities and stockholders’ equity (deficit)	$	861.3		$	601.7		$	194.4	$	(913.4	)	$	744.0

20

Hexcel Corporation and Subsidiaries

Condensed Consolidating Balance Sheet

As of December 31, 2003

(In millions)	Parent			Guarantors			Non- Guarantors			Eliminations			Total
Assets
Current assets:
Cash and cash equivalents	$	27.8		$	8.8		$	5.1		$	—		$	41.7
Accounts receivable, net	28.3			52.8			45.1			—			126.2
Inter-company accounts receivable	121.9			194.6			6.9			(323.4		)	—
Inter-company interest receivable	6.4			—			—			(6.4		)	—
Inventories, net	34.7			55.1			30.7			—			120.5
Inter-company short-term notes receivable	208.4			—			14.3			(222.7		)	—
Prepaid expenses and other current assets	2.5			8.9			4.8			—			16.2
Total current assets	430.0			320.2			106.9			(552.5		)	304.6
Net property, plant and equipment	135.5			121.6			36.8			—			293.9
Goodwill	21.5			53.1			2.3			—			76.9
Investments in subsidiaries	(568.5		)	—			—			568.5			—
Investments in affiliated companies	—			6.2			1.2			—			7.4
Inter-company long-term notes receivable	802.0			1.4			18.8			(822.2		)	—
Other assets	26.7			43.1			2.6			(32.5		)	39.9
Total assets	$	847.2		$	545.6		$	168.6		$	(838.7	)	$	722.7
Liabilities and Stockholders’ Equity
Current liabilities:
Notes payable and current maturities  of capital lease obligations	$	0.1		$	0.1		$	1.9		$	—		$	2.1
Inter-company short-term notes payable	—			222.7			—			(222.7		)	—
Inter-company interest payable	—			6.4			—			(6.4		)	—
Accounts payable	9.5			35.5			19.1			—			64.1
Inter-company accounts payable	232.3			82.2			8.9			(323.4		)	—
Accrued liabilities	55.0			26.6			16.1			—			97.7
Total current liabilities	296.9			373.5			46.0			(552.5		)	163.9
Long-term notes payable and capital leases	474.3			7.0			—			—			481.3
Inter-company long-term notes payable	1.4			701.1			119.7			(822.2		)	—
Other non-current liabilities	29.5			27.6			7.8			—			64.9
Total liabilities	802.1			1,109.2			173.5			(1,374.7		)	710.1
Mandatorily redeemable convertible preferred stock, 0.125 shares of series A and 0.125 shares of series B authorized, issued and outstanding at December 31, 2003	106.0			—			—			—			106.0
Stockholders’ equity (deficit)	(60.9		)	(563.6		)	(4.9		)	536.0			(93.4		)
Total liabilities and stockholders’ equity (deficit)	$	847.2		$	545.6		$	168.6		$	(838.7	)	$	722.7

21

Hexcel Corporation and Subsidiaries

Condensed Consolidating Statement of Operations

For the Quarter Ended June 30, 2004

(In millions)	Parent			Guarantors			Non- Guarantors			Eliminations			Total
Net sales	$	90.5		$	161.4		$	69.4		$	(49.1	)	$	272.2
Cost of sales	71.5			133.4			54.9			(49.1		)	210.7
Gross margin	19.0			28.0			14.5			—			61.5
Selling, general and administrative expenses	15.1			9.2			4.4			(0.5		)	28.2
Research and technology expenses	2.1			2.1			0.8			—			5.0
Business consolidation and restructuring  expenses	0.4			0.3			0.2			—			0.9
Other expense, net	1.5			—			—			—			1.5
Operating income	(0.1		)	16.4			9.1			0.5			25.9
Interest income (expense)	3.6			(14.0		)	(1.5		)	—			(11.9		)
Non-operating expense, net	(0.5		)	—			—			—			(0.5		)
Income (loss) before income taxes	3.0			2.4			7.6			0.5			13.5
Provision for income taxes	0.7			1.6			2.9			—			5.2
Income (loss) before equity in earnings	2.3			0.8			4.7			0.5			8.3
Equity in earnings of subsidiaries	6.0			—			—			(6.0		)	—
Equity in earnings (losses) of affiliated  companies	—			0.8			(0.3		)	—			0.5
Net income (loss)	$	8.3		$	1.6		$	4.4		$	(5.5	)	$	8.8

 *****

Hexcel Corporation and Subsidiaries

Condensed Consolidating Statement of Operations

For the Quarter Ended June 30, 2003

(In millions)	Parent			Guarantors			Non- Guarantors			Eliminations			Total
Net sales	$	85.9		$	129.7		$	60.2		$	(41.7	)	$	234.1
Cost of sales	69.1			110.3			48.8			(41.7		)	186.5
Gross margin	16.8			19.4			11.4			—			47.6
Selling, general and administrative expenses	9.3			10.7			4.2			(0.4		)	23.8
Research and technology expenses	1.8			1.9			0.6			—			4.3
Business consolidation and restructuring  expenses	0.8			(0.2		)	0.1			—			0.7
Other income	(1.8		)	—			—			—			(1.8		)
Operating income	6.7			7.0			6.5			0.4			20.6
Interest income (expense)	0.6			(14.7		)	0.2			—			(13.9		)
Non-operating income	1.4			—			—			—			1.4
Income (loss) before income taxes	8.7			(7.7		)	6.7			0.4			8.1
Provision for (benefit from) income taxes	0.7			(0.2		)	2.4			—			2.9
Income (loss) before equity in earnings	8.0			(7.5		)	4.3			0.4			5.2
Equity in earnings (losses) of subsidiaries	(3.6		)	—			—			3.6			—
Equity in earnings (losses) of affiliated  companies	—			0.6			(1.0		)	—			(0.4		)
Net income (loss)	$	4.4		$	(6.9	)	$	3.3		$	4.0		$	4.8

22

Hexcel Corporation and Subsidiaries

Condensed Consolidating Statement of Operations

For the Six Months Ended June 30, 2004

(In millions)	Parent			Guarantors			Non- Guarantors			Eliminations			Total
Net sales	$	180.8		$	313.6		$	136.2		$	(95.6	)	$	535.0
Cost of sales	142.9			263.1			108.5			(95.6		)	418.9
Gross margin	37.9			50.5			27.7			—			116.1
Selling, general and administrative expenses	28.0			19.3			7.3			(0.9		)	53.7
Research and technology expenses	3.8			4.5			1.6			—			9.9
Business consolidation and restructuring  expenses	0.6			0.4			0.4			—			1.4
Other expense, net	1.5			—			—			—			1.5
Operating income	4.0			26.3			18.4			0.9			49.6
Interest income (expense)	8.1			(28.1		)	(4.3		)	—			(24.3		)
Non-operating expense, net	(0.6		)	—			—			—			(0.6		)
Income (loss) before income taxes	11.5			(1.8		)	14.1			0.9			24.7
Provision for income taxes	1.1			2.6			4.9			—			8.6
Income (loss) before equity in earnings	10.4			(4.4		)	9.2			0.9			16.1
Equity in earnings (losses) of subsidiaries	5.6			—			—			(5.6		)	—
Equity in earnings (losses) of affiliated  companies	—			1.7			(0.9		)	—			0.8
Net income (loss)	$	16.0		$	(2.7	)	$	8.3		$	(4.7	)	$	16.9

 *****

Hexcel Corporation and Subsidiaries

Condensed Consolidating Statement of Operations

For the Six Months Ended June 30, 2003

(In millions)	Parent			Guarantors			Non- Guarantors			Eliminations			Total
Net sales	$	177.2		$	251.3		$	119.8		$	(85.6	)	$	462.7
Cost of sales	142.4			214.5			97.8			(85.6		)	369.1
Gross margin	34.8			36.8			22.0			—			93.6
Selling, general and administrative expenses	18.2			20.7			9.5			(0.8		)	47.6
Research and technology expenses	3.5			3.7			1.4			—			8.6
Business consolidation and restructuring  expenses	1.4			(0.1		)	0.1			—			1.4
Other income	(1.8		)	—			—			—			(1.8		)
Operating income	13.5			12.5			11.0			0.8			37.8
Interest income (expense)	(0.8		)	(27.4		)	0.6			—			(27.6		)
Non-operating expense, net	(2.6		)	—			—			—			(2.6		)
Income (loss) before income taxes	10.1			(14.9		)	11.6			0.8			7.6
Provision for income taxes	0.8			0.2			4.2			—			5.2
Income (loss) before equity in earnings	9.3			(15.1		)	7.4			0.8			2.4
Equity in earnings (losses) of subsidiaries	(8.5		)	—			—			8.5			—
Equity in earnings (losses) of affiliated  companies	—			1.2			(2.0		)	—			(0.8		)
Net income (loss)	$	0.8		$	(13.9	)	$	5.4		$	9.3		$	1.6

23

Hexcel Corporation and Subsidiaries

Condensed Consolidating Statement of Cash Flows

For the Six Months Ended June 30, 2004

(In millions)	Parent			Guarantors			Non- Guarantors			Eliminations			Total
Cash flows from operating activities
Net income (loss)	$	16.0		$	(2.7	)	$	8.3		$	(4.7	)	$	16.9
Reconciliation to net cash provided by operations:
Depreciation	11.4			11.4			3.7			—			26.5
Amortization	1.7			0.9			—			(0.9		)	1.7
Deferred income taxes	0.3			(0.5		)	0.1			—			(0.1		)
Business consolidation and restructuring expenses	0.6			0.4			0.4			—			1.4
Business consolidation and restructuring payments	(1.0		)	(1.4		)	(0.4		)	—			(2.8		)
Equity in losses of subsidiaries	(5.6		)	—			—			5.6			—
Equity in (earnings) losses of affiliated companies	—			(1.7		)	0.9			—			(0.8		)
Net change in inter-company receivables/payables	5.2			(6.3		)	1.1			—			—
Working capital changes and other	0.3			(23.1		)	0.9			—			(21.9		)
Net cash provided by (used for) operating activities	28.9			(23.0		)	15.0			—			20.9
Cash flows from investing activities
Capital expenditures	(3.4		)	(5.6		)	(2.8		)	—			(11.8		)
Proceeds from the sale of assets	6.5			—			—						6.5
Dividends from an affiliated company	—			1.5			—						1.5
Net cash provided by (used for) investing activities	3.1			(4.1		)	(2.8		)	—			(3.8		)
Cash flows from financing activities
Proceeds of senior secured credit facility, net	—			7.8			—			—			7.8
Redemption of 9.75% senior subordinated notes	(22.9		)	—			—			—			(22.9		)
Repayments of capital lease obligations and other debt, net	—			(0.1		)	(1.1		)	—			(1.2		)
Proceeds (repayments) of inter-company debt, net	(17.6		)	15.3			2.3			—			—
Activity under stock plans	1.9			—			—			—			1.9
Net cash provided by (used for) financing activities	(38.6		)	23.0			1.2			—			(14.4		)
Effect of exchange rate changes on cash and cash  equivalents	—			0.5			0.2			—			0.7
Net increase (decrease) in cash and cash equivalents	(6.6		)	(3.6		)	13.6			—			3.4
Cash and cash equivalents at beginning of period	27.8			8.8			5.1			—			41.7
Cash and cash equivalents at end of period	$	21.2		$	5.2		$	18.7		$	—		$	45.1

24

Hexcel Corporation and Subsidiaries

Condensed Consolidating Statement of Cash Flows

For the Six Months Ended June 30, 2003

(In millions)	Parent			Guarantors			Non- Guarantors			Eliminations			Total
Cash flows from operating activities
Net income (loss)	$	0.8		$	(13.9	)	$	5.4		$	9.3		$	1.6
Reconciliation to net cash provided by operations:
Depreciation	11.0			11.1			3.3			—			25.4
Amortization	1.8			0.8			—			(0.8		)	1.8
Deferred income taxes	0.3			0.9			—			—			1.2
Business consolidation and restructuring expenses	1.4			(0.1		)	0.1			—			1.4
Business consolidation and restructuring payments	(3.1		)	(2.2		)	(0.2		)	—			(5.5		)
Equity in losses of subsidiaries	8.5			—			—			(8.5		)	—
Equity in (earnings) losses of affiliated companies	—			(1.2		)	2.0			—			0.8
Net change in inter-company receivables/payables	4.8			(1.0		)	(3.8		)	—			—
Working capital changes and other	(4.5		)	(10.6		)	(1.2		)	—			(16.3		)
Net cash provided by (used for) operating activities	21.0			(16.2		)	5.6			—			10.4
Cash flows from investing activities
Capital expenditures	(2.5		)	(2.5		)	(2.0		)	—			(7.0		)
Proceeds from the sale of assets	3.0			—			—			—			3.0
Dividends from affiliated companies	—			1.0			—			—			1.0
Net cash provided by (used for) investing activities	0.5			(1.5		)	(2.0		)	—			(3.0		)
Cash flows from financing activities
Proceeds from senior secured credit facilities, net	0.2			8.0			—			—			8.2
Proceeds from issuance of 9.875% senior secured notes, net of discount	123.7			—			—			—			123.7
Repayments of senior credit facility, net	(106.8		)	(71.3		)	(1.6		)	—			(179.7		)
Redemption of 7% convertible subordinated notes	(46.9		)	—			—			—			(46.9		)
Proceeds from (repayments of) capital lease obligations and other debt, net	(0.1		)	(2.6		)	2.3			—			(0.4		)
Proceeds from issuance of mandatorily redeemable  convertible preferred stock	125.0			—			—			—			125.0
Issuance costs related to debt and equity offerings	(14.1		)	—			—			—			(14.1		)
Proceeds (repayments) of long-term inter-company debt, net	(166.7		)	165.0			1.7			—			—
Inter-company distributions received (paid)	79.2			(73.4		)	(5.8		)	—			—
Activity under stock plans	0.1			—			—			—			0.1
Net cash provided by (used for) financing activities	(6.4		)	25.7			(3.4		)	—			15.9
Effect of exchange rate changes on cash and cash  equivalents	—			(1.6		)	—			—			(1.6		)
Net increase (decrease) in cash and cash equivalents	15.1			6.4			0.2			—			21.7
Cash and cash equivalents at beginning of period	(0.2		)	8.4			—			—			8.2
Cash and cash equivalents at end of period	$	14.9		$	14.8		$	0.2		$	—		$	29.9

25

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

Financial Overview

Second Quarter Results

	Quarter Ended June 30,
	Unaudited
(In millions, except per share data)	2004			2003
Net sales	$	272.2		$	234.1
Gross margin%	22.6		%	20.3		%
Operating income	$	25.9		$	20.6
Operating income%	9.5		%	8.8		%
Non-operating (income) expense, net	$	0.5		$	(1.4	)
Provision for income taxes	$	5.2		$	2.9
Equity in earnings (losses) of affiliated companies	$	0.5		$	(0.4	)
Net income	$	8.8		$	4.8
Deemed preferred dividends and accretion	$	(3.1	)	$	(3.0	)
Net income available to common shareholders	$	5.7		$	1.8
Diluted net income per common share	$	0.10		$	0.05

Results of Operations

Net Sales:  Net sales of $272.2 million for the second quarter of 2004 were $38.1 million, or 16.3%, higher than the $234.1 million of net sales for the second quarter of 2003.  The increase came from growth in the Company’s revenues from all four of its major market segments along with a favorable impact from changes in foreign currency exchange rates. Since the end of the second quarter of 2003, the Euro and the British Pound Sterling have strengthened against the U.S. dollar increasing the dollar value of sales made in euros and pounds.  Had the same U.S. dollar, British Pound Sterling and Euro exchange rates applied in the second quarter of 2004 as in the second quarter of 2003, net sales for the second quarter of 2003 would have been $33.1 million, or 14.1%, higher than the second quarter of 2003 at $267.2 million.

The following table summarizes net sales to third-party customers by segment and end market for the quarters ended June 30, 2004 and 2003, respectively:

	Unaudited
(In millions)	Commercial Aerospace			Industrial			Space & Defense			Electronics			Total
Second Quarter 2004
Reinforcements	$	15.9		$	53.5		$	—		$	15.5		$	84.9
Composites	83.6			39.1			47.0			—			169.7
Structures	15.1			—			2.5			—			17.6
Total	$	114.6		$	92.6		$	49.5		$	15.5		$	272.2
	42		%	34		%	18		%	6		%	100		%
Second Quarter 2003
Reinforcements	$	13.3		$	34.4		$	—		$	13.5		$	61.2
Composites	72.3			37.0			44.9			—			154.2
Structures	15.8			—			2.9			—			18.7
Total	$	101.4		$	71.4		$	47.8		$	13.5		$	234.1
	43		%	31		%	20		%	6		%	100		%

26

Commercial Aerospace: Net sales increased $13.2 million, or 13.0%, to $114.6 million for the second quarter of 2004, as compared to net sales of $101.4 million for the second quarter of 2003.  If adjusted to eliminate the favorable impact of changes in exchange rates, total sales to the commercial aerospace applications would have increased by $11.5 million, or 11.3%, compared to the second quarter of 2003.  The year-on-year increase reflects the stabilization in aircraft build rates, a favorable change in mix of aircraft, and the benefit of the new Airbus A380 program.  The Company’s commercial aerospace revenues are not only influenced by increases in commercial aircraft order and build rates, but also by the mix of aircraft that are produced.  For instance, twin aisle aircraft use more of Hexcel’s products than narrow body aircraft and newly designed aircraft such as the Airbus A380 use more of Hexcel’s products than aircraft of older generations.  As both Boeing and Airbus have indicated that their combined 2005 deliveries will show double-digit growth over 2004, and as the Company delivers products into the commercial aerospace supply chain on average four to six months prior to aircraft delivery, the Company expects continued year-on-year growth to this market in the coming quarters.

Industrial: Net sales of $92.6 million for the second quarter of 2004 increased by 29.7%, or $21.2 million, when compared to net sales of $71.4 million for the same quarter of 2003.  Excluding the favorable impact on foreign currency exchange rates of $2.0 million, sales to this market segment increased 26.9% year-on-year to $90.6 million.  The largest portion of this year-on-year revenue increase came from sales of reinforcement fabrics used in military soft body armor applications.  During the second quarter of 2004, the Company’s major customers received additional contract awards from the U.S. government.  While the supply chain for these reinforcement fabrics is now capacity limited, the significant order backlog held by the Company’s customers suggests that strong production levels will continue for some time.  Sales of composite materials to wind energy applications also increased year-on-year, and are expected to continue to contribute growth in the future.  Revenues to recreational applications were at a comparable level to the second quarter of 2003, while revenues from products used in other non-aerospace applications, including architectural, automotive and industrial, showed mixed results.

Space & Defense: Net sales to this market segment of $49.5 million for the second quarter of 2004 were up $1.7 million, or 3.6%, from the second quarter of 2003, despite the termination of the Comanche helicopter program that contributed $4.0 million of revenue to the same quarter last year.  On a constant foreign currency basis, net sales to this market increased $0.6 million, or 1.3%, year-on-year to $48.4 million.  Year-on-year growth continued to be driven by increased production of the F-22 Raptor, and higher demand for many U.S. and European helicopter and helicopter blade replacement programs.  Overall, the Company continues to benefit from its extensive qualifications to supply composite materials and composite structures to a broad range of military aircraft and helicopter programs in the U.S. and Europe.  However, the benefits the Company obtains from these programs tend to vary quarter to quarter based on customer ordering patterns and will depend upon the timing and extent of program funding.

Electronics: Net sales of $15.5 million for the second quarter of 2004 increased $2.0 million, or 14.8%, compared to net sales of $13.5 million for the same quarter last year.  If adjusted for the favorable impact of exchange rates, revenues to this market segment would have been $15.3 million in the second quarter of 2004.  As previously noted, the Company’s electronics product mix continues to shift towards higher-end applications.  This focus on advanced technology materials and specialty applications, together with some recovery in industry demand, is contributing to enhanced performance in this market segment.

Gross Margin:  Gross margin for the second quarter of 2004 was $61.5 million, or 22.6% of net sales, compared with $47.6 million, or 20.3% 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 the Company’s cost reduction programs initiated since 2001.  Depreciation for the

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second quarter of 2004 was $13.2 million compared to $12.9 million in the second quarter of 2003.  The slight increase in depreciation primarily reflects changes in foreign currency exchange rates.

Selling, General and Administrative (“SG&A”) Expenses:  SG&A expenses of $28.2 million for the second quarter of 2004 were $4.4 million higher than the $23.8 million in the second quarter of 2003.  The year-over-year increase in SG&A expenses reflects, among other factors, higher professional fees, incentive compensation, and the impact of higher foreign currency exchange rates.  As the U.S. dollar had weakened against the British Pound Sterling and Euro since June 30, 2003, SG&A expenses were approximately $0.5 million higher in the second quarter of 2004.

Research and Technology (“R&T”) Expenses:  R&T expenses for the second quarter of 2004 were $5.0 million compared with $4.3 million for the second quarter of 2003.  In both periods, R&T expenses were 1.8% of net sales.  The year-over-year quarterly increase in R&T expenses reflects the Company’s increased spending in support of new products and new commercial aircraft qualification activities, and the impact of changes in foreign currency exchange rates.

Other (Income) Expense, Net:Other expense, net was $1.5 million for the second quarter of 2004, as the Company recorded an estimated accrual of $5.5 million in connection with the ongoing carbon fiber legal matters previously disclosed, and a $4.0 million gain on the sale of surplus land at one of the Company’s U.S. manufacturing facilities. In the second quarter of 2003, the Company recognized other income of $1.8 million. The Company sold certain assets of its Structures business segment for $3.0 million in cash, recognizing a net gain of $1.8 million. Refer to Note 8 to the accompanying condensed consolidated financial statements.

Operating Income:  Operating income was $25.9 million, or 9.5% of net sales, in the second quarter of 2004, compared with $20.6 million, or 8.8% of net sales, in the second quarter of 2003.  The year-over-year increase in operating income was driven by higher net sales and gross margin, partially offset by higher SG&A and R&T expenses.  Business consolidation and restructuring expenses of $0.9 million in the second quarter of 2004 were slightly higher than the $0.7 million recognized in the second quarter of 2003.

Interest Expense:  Interest expense was $11.9 million for the second quarter of 2004, compared to $13.9 million for the second quarter of 2003.  The $2.0 million decline in interest expense reflects the substantial reduction in total debt during the 2003 calendar year, along with further reductions in the first half of 2004, and a $0.6 million reduction in interest expense resulting from an interest rate swap agreement entered into during the fourth quarter of 2003.

Non-Operating (Income) Expense, Net: Non-operating expense, net was $0.5 million for the second quarter of 2004, as the Company recognized a $0.9 million loss on the early retirement of debt. The loss was partially offset by a $0.4 million gain attributable to the sale of securities obtained through a de-mutualization of an insurance company. In the second quarter of 2003, the Company recognized non-operating income of $1.4 million attributable to a prior business sale which occurred in April 2000.  Pursuant to the sale agreement, Hexcel retained a contingent obligation for certain customer warranty claims, which expired in the second quarter of 2003. As a result the Company reversed the $1.4 million contingent liability established at the time of the sale. Refer to Note 9 to the accompanying condensed consolidated financial statements.

Provision for Income Taxes:  The provisions for income taxes of $5.2 million and $2.9 million in the second quarter of 2004 and 2003, respectively, were primarily for taxes on European income.  The Company will continue to adjust its tax provision rate through the establishment, or release, of a non-cash valuation allowance attributable to currently generated U.S. and Belgian net operating income (losses) until such time as the U.S. and Belgian operations generate sufficient taxable income to utilize the net operating losses in full.  Refer to Note 13 to the accompanying condensed consolidated financial statements.

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Equity in Earnings (Losses) of Affiliated Companies: Equity in earnings of affiliated companies for the second quarter of 2004 was $0.5 million, compared to equity in losses of $0.4 million in the second quarter of 2003.  The year-over-year increase was derived from higher equity in earnings at the Reinforcements business segment’s joint venture and lower equity in losses at the Structures business segment’s joint ventures in China and Malaysia.  Equity in earnings (losses) of affiliated companies does not affect the Company’s cash flows.  Refer to Note 14 to the accompanying condensed consolidated financial statements.

Deemed Preferred Dividends and Accretion: For the second quarter of 2004 and 2003, the Company recognized deemed preferred dividends and accretion of $3.1 million and $3.0 million, respectively.  Until such time as the mandatorily redeemable convertible preferred stock is converted to Hexcel common stock or redeemed, certain deductions for accrued dividends, discount, beneficial conversion feature, and deferred issuance costs will represent a reduction of net income (loss) in arriving at net income (loss) available to common shareholders.  The accretion of these deductions is a non-cash expense at the time of recognition.  Refer to Note 6 to the accompanying condensed consolidated financial statements.

Year-to-Date Results

	Six Months Ended June 30,
	Unaudited
(In millions, except per share data)	2004			2003
Net sales	$	535.0		$	462.7
Gross margin%	21.7		%	20.2		%
Operating income	$	49.6		$	37.8
Operating income%	9.3		%	8.2		%
Non-operating expense, net	$	0.6		$	2.6
Provision for income taxes	$	8.6		$	5.2
Equity in earnings (losses) of affiliated companies	$	0.8		$	(0.8	)
Net income	$	16.9		$	1.6
Deemed preferred dividends and accretion	$	(6.2	)	$	(3.5	)
Net income (loss) available to common shareholders	$	10.7		$	(1.9	)
Diluted net income (loss) per common share	$	0.19		$	(0.05	)

Results of Operations

Net Sales: Net sales for the first half of 2004 were $535.0 million, an increase of $72.3, or 15.6%, when compared to the first half of 2003 net sales of $462.7 million.  The increase came from growth in the Company’s revenues from all four of its major market segments along with a favorable impact from changes in foreign currency exchange rates.  Had the same U.S. dollar, British Pound Sterling and Euro exchange rates applied in the first half of 2004 as in the first half of 2003, net sales for the first six months of 2004 would have been $519.2 million, $56.5 million, or 12.2%, higher than the first six months of 2003.

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The following table summarizes net sales to third-party customers by product group and market segment for the six months ended June 30, 2004 and 2003, respectively:

	Unaudited
(In millions)	Commercial Aerospace			Industrial			Space & Defense			Electronics			Total
First Half 2004
Reinforcements	$	30.8		$	96.9		$	—		$	31.3		$	159.0
Composites	164.1			80.6			96.1			—			340.8
Structures	30.2			—			5.0			—			35.2
Total	$	225.1		$	177.5		$	101.1		$	31.3		$	535.0
	42		%	33		%	19		%	6		%	100		%
First Half 2003
Reinforcements	$	26.8		$	64.2		$	—		$	28.1		$	119.1
Composites	146.5			74.0			81.2			—			301.7
Structures	34.0			—			7.9			—			41.9
Total	$	207.3		$	138.2		$	89.1		$	28.1		$	462.7
	45		%	30		%	19		%	6		%	100		%

Commercial Aerospace: Net sales increased $17.8 million, or 8.6%, to $225.1 million for the first half of 2004 as compared to net sales of $207.3 million for the first half of 2003.   After adjusting for favorable exchange rates, net sales to the commercial aerospace market increased $13.0 million, or 6.3%, to $220.3 million, as aircraft build rates have stabilized since the sharp downturn that began in 2002.  The Company has also benefited from a favorable change in mix of aircraft that utilize more composite materials and the new Airbus A380 program.

Industrial:  Net sales of $177.5 million for the first half of 2004 increased by $39.3 million, or 28.4%, compared to net sales of $138.2 million in the first half of 2003.  While the strength of the British Pound Sterling and Euro inflated the value of sales of certain products by $7.0 million, net sales to the industrial market segments still increased $32.3 million year-on-year on strong growth in reinforcement fabrics used in military soft body armor applications.  Sales of composite materials to recreational and wind energy applications also increased year-on-year, and are expected to continue to contribute growth in the future.  Revenues from products used in other non-aerospace applications, including architectural and automotive, showed mixed results.

Space & Defense:  Net sales to the space and defense market segment continued to display the benefits of increasing military aircraft production with a $12.0 million, or 13.5%, year-over-year increase to $101.1 million for the first half of 2004.  On a constant foreign currency basis, net sales to this market increased $8.8 million, or 9.9%, year-on-year to $97.9 million.  The year-on-year growth was led by increased production of the F-22 Raptor, and higher demand for many U.S. and European helicopter and helicopter blade replacement programs, despite the cancellation of the Comanche helicopter program during the first quarter of 2004.  Sales to the Comanche program were $3.8 million and $5.4 million in the first six months of 2004 and 2003, respectively, and $14.1 million for the full year of 2003.  The Company continues to benefit from its extensive qualifications to supply composite materials and composite structures to a broad range of military aircraft and helicopter programs in the U.S. and Europe.

Electronics:  Net sales of $31.3 million for the first half of 2004 increased by $3.2 million, or 11.4%, compared to net sales of $28.1 million for the same period last year.  If adjusted for the favorable impact of exchange rates, revenues to this market segment would have been $30.5 million in the first half of 2004.  The Company’s focus on advanced technology materials and specialty applications, together with some recovery in industry demand, are contributing to enhanced performance in this market segment.

Gross Margin: Gross margin for the first six months of 2004 was $116.1 million, or 21.7% of net sales, compared to gross margin of $93.6 million, or 20.2% of net sales, for the same period in 2003.  The

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$22.5 million year-on-year improvement in gross margin reflects the impact of the contribution from higher net sales and the continuing benefits obtained from the Company’s cost reduction programs implemented over the past several years.  Depreciation was $26.5 million and $25.4 million for the six months ended June 30, 2004 and 2003, respectively.  The increase in depreciation primarily reflects changes in foreign currency exchange rates, higher capital expenditure rates, and accelerated depreciation associated with certain of the Company’s business consolidation and restructuring actions.

Selling, General and Administrative (“SG&A”) Expenses:  SG&A expenses were $53.7 million, or 10.0% of net sales, for the first six months of 2004 compared with $47.6 million, or 10.3% of net sales, for the first six months of 2003.  Included in SG&A expenses for the first six months of 2003 were $0.3 million of expenses incurred in connection with the refinancing transactions.  The increase in SG&A expenses reflects, among other factors, higher professional fees, incentive compensation and the impact of higher foreign currency exchange rates.  As the U.S. dollar had weakened against the British Pound Sterling and Euro since June 30, 2003, SG&A expenses were approximately $1.9 million higher in the first six months of 2004.

Research and Technology (“R&T”) Expenses: R&T expenses for the first six months of 2004 were $9.9 million compared with $8.6 million for the first six months of 2003.  In both periods, R&T expenses were 1.9% of net sales.  The $1.3 million, or 15.1%, year-over-year increase in R&T expenses reflects the Company’s increased spending in support of new products and new commercial aircraft qualification activities, and the impact of changes in foreign currency exchange rates.

Other (Income) Expense, Net: Other expense, net was $1.5 million for the first six months of 2004, as the Company recorded an estimated accrual of $5.5 million in connection with the ongoing carbon fiber legal matters previously disclosed, and a $4.0 million gain on the sale of surplus land at one of the Company’s U.S. manufacturing facilities. For the first six months of 2003, the Company recognized other income of $1.8 million. The Company sold certain assets of its Structures business segment for $3.0 million in cash, recognizing a net gain of $1.8 million. Refer to Note 8 to the accompanying condensed consolidated financial statements.

Operating Income: Operating income for the first six months of 2004 was $46.9 million, or 9.3% of net sales, compared with operating income of $37.8 million, or 8.2% of net sales, for the same period in 2003.  The increase in operating income was driven by increased net sales and a higher gross margin, which was partially offset by higher SG&A and R&T expenses.  Business consolidation and restructuring expenses were $1.4 million for each of the six months ended June 30, 2004 and 2003.

Interest Expense:  Interest expense for the first six months of 2004 was $24.3 million compared to $27.6 million for the first six months of 2003.  The $3.3 million year-on-year decrease in interest expense primarily reflects the substantial reduction in total debt during the 2003 calendar year, along with further reductions in the first half of 2004, and a $1.2 million reduction in interest expense resulting from an interest rate swap agreement entered into during the fourth quarter of 2003.

Non-Operating (Income) Expense, Net: Non-operating expense, net was $0.6 million for the first six months of 2004, as the Company recognized a $1.6 million loss on the early retirement of debt. The loss was partially offset by a $1.0 million gain attributable to the sale of securities obtained through a de-mutualization of an insurance company. For the first six months of 2003, the Company recognized non-operating expense of $2.6 million.  In connection with its refinancing of its capital structure in the first quarter of 2003, the Company incurred a $4.0 million loss on the early retirement of debt due to the write-off of unamortized, deferred financing costs relating to the former senior credit facility and the 7% convertible subordinated notes due 2003.  This loss was partially offset by a $1.4 million gain attributable to a prior business sale, which occurred in April 2000.  Pursuant to the sale agreement, Hexcel retained a contingent obligation for certain customer warranty claims, which expired in the second quarter of 2003. As a result the Company reversed the $1.4 million contingent liability established at the time of the sale. Refer to Note 9 to the accompanying condensed consolidated financial statements.

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Provision for Income Taxes:  The provisions for income taxes of $8.6 million and $5.2 million for the first six months of 2004 and 2003, respectively, were primarily for taxes on European income.  The Company will continue to adjust its tax provision rate through the establishment, or release, of a non-cash valuation allowance attributable to currently generated U.S. and Belgian net operating income (losses) until such time as the U.S. and Belgian operations, respectively, generate sufficient taxable income to utilize the net operating losses in full.  Refer to Note 13 to the accompanying condensed consolidated financial statements.

Equity in Earnings (Losses) of Affiliated Companies: Equity in earnings of affiliated companies for the first six months of 2004 was $0.8 million, compared to equity in losses of $0.8 million for the first six months of 2003.  The year-over-year improvement resulted from higher equity in earnings reported by the Reinforcements business segment’s joint venture and lower equity in losses associated with the Structures business segment’s joint ventures in China and Malaysia.  Equity in earnings (losses) of affiliated companies does not affect the Company’s cash flows.  Refer to Note 14 to the accompanying condensed consolidated financial statements.

Deemed Preferred Dividends and Accretion: For the first six months of 2004 and 2003, the Company recognized deemed preferred dividends and accretion of $6.2 million and $3.5 million, respectively.  The recording of deemed preferred dividends and accretion began March 19, 2003; the date the Company completed the refinancing of its capital structure.  Until such time as the mandatorily redeemable convertible preferred stock is converted to Hexcel common stock or redeemed, certain deductions for accrued dividends, discount, beneficial conversion feature, and deferred issuance costs will represent a reduction of net income (loss) in arriving at net income (loss) available to common shareholders.  The accretion of these deductions is a non-cash expense at the time of recognition.  Refer to Note 6 to the accompanying condensed consolidated financial statements.

Business Consolidation and Restructuring Programs

The aggregate business consolidation and restructuring liabilities as of June 30, 2004 and December 31, 2003, and activity for the quarter and six months ended June 30, 2004, consisted of the following:

(In millions)	Employee Severance			Facility & Equipment			Total
Balance as of December 31, 2003	$	4.2		$	1.7		$	5.9
Current period expenses	0.2			0.4			0.6
Change in estimated expenses	—			(0.1		)	(0.1		)
Net business consolidation and restructuring expenses	0.2			0.3			0.5
Cash expenditures	(0.9		)	(0.6		)	(1.5		)
Currency translation adjustments	(0.1		)	—			(0.1		)
Balance as of March 31, 2004	$	3.4		$	1.4		$	4.8
Business consolidation and restructuring expenses	0.3			0.6			0.9
Cash expenditures	(0.4		)	(0.9		)	(1.3		)
Balance as of June 30, 2004	$	3.3		$	1.1		$	4.4

Livermore Program

In the first quarter of 2004, the Company announced its intent to consolidate the activities of its Livermore, California facility into other operations, principally the Salt Lake City, Utah plant.  This business consolidation and restructuring action is accounted for under Statement of Financial Accounting Standards No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” which requires that a liability for a cost associated with an exit or disposal activity be recognized and measured, initially at fair value, only when the liability is incurred.  In addition, if terminated employees are required to render services beyond a minimum retention period in order to receive termination benefits, a liability for

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the termination benefits shall be measured initially at the communication date based on fair value and recognized ratably over the service period.  For the quarter and six months ended June 30, 2004, the Company recognized $0.2 million and $0.4 million of expense, respectively, for employee severance based on the remaining employee service periods.  Costs associated with the facility’s closure, along with costs for relocation and re-qualification of equipment, are expected to occur over several years.

November 2001 Program

In November 2001, the Company announced a program to restructure its business operations as a result of its revised business outlook for build rate reductions in commercial aircraft production and due to depressed business conditions in the electronics market.  For the quarter and six months ended June 30, 2004, the Company recognized business consolidation and restructuring expenses of $0.6 million and $1.0 million, respectively, related to this program for equipment relocation and re-qualification costs that are expensed as incurred.  In addition, the Company decreased its accrued liabilities by $0.1 million for the six months ended June 30, 2004, due to a change in estimate.  Cash expenditures for this program were $1.3 million and $2.8 million during the quarter and six months ended June 30, 2004, respectively, leaving an accrued liability balance of $4.0 million as of June 30, 2004.

Financial Condition

Liquidity:  As of June 30, 2004, the Company had cash and cash equivalents of $45.1 million and undrawn availability under its senior secured credit facility of $56.9 million.  Undrawn availability is the net of a borrowing base as of June 30, 2004 of $91.2 million less advances under the facility and outstanding letters of credit.  In addition, Hexcel has 20.0 million Euros of borrowing capacity available under an accounts receivable factoring facility at its French operating subsidiaries, and various European credit and overdraft facilities, which could be utilized to meet short-term working capital and operating cash requirements. As of June 30, 2004, the Company did not have any outstanding borrowings under its factoring facility.  The European credit and overdraft facilities are uncommitted lines and can be terminated at the option of the lender.

As of June 30, 2004, the Company’s total debt, net of cash after adding back cash for bond repurchase settlements of $1.8 million, was $422.8 million. This was a decrease of $18.9 million from $441.7 million as of December 31, 2003, reflecting the Company’s positive cash flow from operating activities, cash of $6.5 million received from the sale of surplus land, and cash of $1.5 million received in dividends from an affiliated company.  During the first six months of 2004, the Company used some of its excess cash on hand to repurchase $21.8 million principal amount of its 9.75% senior subordinated notes, due 2009.

Credit Facility:  On March 19, 2003, Hexcel entered into a $115.0 million asset-backed senior secured credit facility (the “Senior Secured Credit Facility”) with a new syndicate of lenders led by Bank of America Business Capital Corporation (formerly Fleet Capital Corporation) as agent.  The credit facility matures on March 31, 2008.  Borrowers under the credit facility include, in addition to Hexcel Corporation, Hexcel’s operating subsidiaries in the U.K., Austria and Germany.  The credit facility provides for borrowings of U.S. dollars, Pound Sterling and Euro currencies, including the issuance of letters of credit, with the amount available to each borrower dependent on the borrowing base of that borrower and its subsidiaries.  For Hexcel Corporation and the U.K. borrower, the borrowing base is determined by an agreed percentage of eligible accounts receivable and eligible inventory, subject to certain reserves.  The borrowing base of each of the Austrian and German borrowers is based on an agreed percentage of eligible accounts receivable, subject to certain reserves.  Borrowings under the new facility bear interest at a floating rate based on either the agent’s defined “prime rate” plus a margin that can vary from 0.75% to 3.25% or LIBOR plus a margin that can vary from 2.25% to 3.25%.  The margin over the “prime rate” ranges from 0.75% to 1.75% for borrowings denominated in U.S. dollars and 2.25% to 3.25% for borrowings denominated in Pound Sterling and Euros.  The margin in effect for a borrowing

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at any given time depends on the Company’s fixed charge ratio and the currency denomination of such borrowing.  The credit facility also provides for the payment of customary fees and expenses.

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

Hexcel is required to maintain various financial ratios throughout the term of the Senior Secured Credit Facility.  These financial covenants set maximum values for the Company’s leverage (the ratios of total and senior debt to EBITDA), fixed charge coverage (the ratio of EBITDA, less capital expenditures and cash taxes, plus cash dividends, to the sum of cash interest and scheduled debt amortization), and capital expenditures (not to exceed specified annual amounts).  This credit facility also contains limitations on, among other things, incurring debt, granting liens, making investments, making restricted payments, including dividends, entering into transactions with affiliates and prepaying subordinated debt.  The Senior Secured Credit Facility also contains other customary terms relating to, among other things, representations and warranties, additional covenants and events of default.  As of June 30, 2004, the Company was in compliance with the financial covenants under the Senior Secured Credit Facility.

As of June 30, 2004, the Company had outstanding borrowings of $11.8 million and issued letters of credit totaling $22.5 million, of which $11.1 million supported a third-party loan to BHA Aero Composite Parts Co., Ltd. (“BHA Aero”), under the Senior Secured Credit Facility.  Under this facility, Hexcel is able to issue letters of credit up to a sub-limit of $50.0 million, subject to availability.  In addition, the Company had standby letters of credit of $0.9 million outstanding at June 30, 2004 that were separate from this facility.

Operating Activities:  Net cash provided by operating activities was $20.9 million in the first six months of 2004, as compared to net cash provided by operating activities of $10.4 million in the first six months of 2003.  The year-on-year increase in net cash provided by operating activities was primarily due to an improvement in net income and lower business consolidation and restructuring payments, partially offset by higher working capital requirements compared to the first six months of 2003.

Investing Activities:  Net cash used for investing activities was $3.8 million in the first six months of 2004 compared with $3.0 million used in the same period last year.  Capital expenditures were $11.8 million for the first six months of 2004, compared to $7.0 million in the same period last year.   These expenditures were partially offset by proceeds of $6.5 million for the sale of surplus land in first six months of 2004 and $3.0 million for the sale of certain assets in the first six months of 2003.  In addition, the Company received dividends from an affiliated company of $1.5 million and $1.0 million for the six months ended June 30, 2004 and 2003, respectively.

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Financing Activities:  Net cash used for financing activities was $14.4 million in the first six months of 2004 compared to $15.9 million provided by financing activities in the first six months of 2003.  Although borrowings under the Senior Secured Credit Facility increased by $7.8 million during the first six months of 2004, the Company utilized excess cash to repurchase at a premium $21.8 million principal amount of its 9.75% senior subordinated notes, due 2009, and to repay other long-term debt and capital lease obligations of $1.2 million.

During the first six months of 2003, the Company completed the refinancing of its capital structure through the simultaneous closings of three financing transactions:  (i) the sale of mandatorily redeemable convertible preferred stock for $125.0 million in cash, (ii) the issuance of $125.0 million aggregate principal amount of 9.875% senior secured notes due 2008, in which the Company received $123.7 million in cash after discount, and (iii) the establishment of a new $115.0 million senior secured credit facility.  The proceeds from the sale of convertible preferred securities were used to redeem $46.9 million of 7% convertible subordinated notes due 2003 and to reduce senior debt outstanding under the Company’s then existing senior credit facility.  The Company repaid the remaining advances under the then existing facility, after the application of a portion of the equity proceeds, with the proceeds from the issuance of the Company’s new 9.875% senior secured notes and $12.0 million net borrowings on a new senior secured credit facility.  In connection with the refinancing, the Company paid $14.1 million of issuance costs.   Subsequent to these transactions, the Company repaid $3.8 million borrowings under the senior secured credit facility and $0.4 million other long-term debt and capital lease obligations during the first six months of 2003.

Financial Obligations and Commitments:  As of June 30, 2004, current maturities of notes payable and capital lease obligations were $1.0 million with no substantial debt repayments due until 2008.  Short-term debt obligations include $0.8 million of drawings under European credit and overdraft facilities and $0.2 million due under capital lease obligations.  The European credit and overdraft facilities provided to certain of the Company’s European subsidiaries by lenders outside of the Senior Secured Credit Facility are primarily uncommitted facilities that are terminable at the discretion of the lenders.  The Company has entered into several capital leases for buildings and warehouses with expirations through 2009.  In addition, certain sales and administrative offices, data processing equipment and manufacturing facilities are leased under operating leases.

Borrowings under the Senior Secured Credit Facility were $11.8 million as of June 30, 2004.  In addition, letters of credit totaling $22.5 million were issued under the Senior Secured Credit Facility.  As of June 30, 2004, the borrowing base under the credit facility was $91.2 million, providing the Company with undrawn revolver and overdraft revolver availability of $56.9 million, after deduction of advances, letters of credit outstanding and other adjustments.  Hexcel is able to issue letters of credit up to a sub-limit of $50.0 million, subject to availability, under this credit facility.  Borrowings under the Senior Secured Credit Facility mature on March 31, 2008.

The 7% convertible subordinated debentures, due 2011, require annual mandatory redemptions of $1.8 million through a sinking fund, with the principal balance due at maturity.  The Company satisfied the 2004 annual sinking fund requirement in 2003.  The next sinking fund payment is required prior to August 1, 2005.  The outstanding principal of $125.0 million under the 9.875% senior secured notes and the outstanding principal of $308.2 million under the 9.75% senior subordinated notes mature on October 1, 2008 and January 15, 2009, respectively.

Total letters of credit issued and outstanding were $23.4 million as of June 30, 2004, of which $11.1 million was issued in support of a loan to the Company’s BHA Aero Composite Parts Co., Ltd. joint venture in China (“BHA Aero”).  Approximately $22.5 million of these letters of credit were issued under

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the Senior Secured Credit Facility, with the remaining $0.9 million issued separately from this credit facility.  While the letters of credit issued on behalf of the Company will expire under their terms in 2004 and 2005, all of these will likely be re-issued except as modified by the BHA Aero refinancing discussed below.

On March 19, 2003, Hexcel issued 125,000 shares of a series A convertible preferred stock and 125,000 shares of a series B convertible preferred stock, which are mandatorily redeemable on January 22, 2010 generally for cash or for common stock at the Company’s discretion, unless the holder elects to take a lesser amount in cash, and under certain circumstances must be redeemed for cash.  Commencing on March 19, 2006, holders of the series A convertible preferred stock will be entitled to receive dividends at an annual rate of 6% of the “accrued value.”  Accrued value is calculated as an amount equal to the sum of $1,195.618 per share and the aggregate of all accrued but unpaid dividends.  Dividends are payable quarterly and may be paid in cash or added to the accrued value of the preferred stock, at the Company’s option.  The series B preferred stock does not accrue dividends.

The following table summarizes the maturities of financial obligations and expiration dates of commitments as of June 30, 2004, for the remaining six months of 2004, for the years ended 2005 through 2008, and thereafter:

(In millions)	Remaining Six Months of 2004		2005		2006		2007		2008		Thereafter		Total
Senior Secured Credit Facility	$	—	$	—	$	—	$	—	$	11.8	$	—	$	11.8
European credit and overdraft  Facilities	0.8		—		—		—		—		—		0.8
9.875% Senior secured notes (a)	—		—		—		—		125.0		—		125.0
9.75% Senior subordinated notes (b)	—		—		—		—		—		308.2		308.2
7.0% Convertible subordinated  debentures	—		1.8		1.8		1.8		1.8		13.8		21.0
Capital leases	0.1		0.3		0.3		0.3		0.4		2.5		3.9
Subtotal	0.9		2.1		2.1		2.1		139.0		324.5		470.7
Operating leases	2.4		4.2		3.5		2.3		1.8		9.3		23.5
Total financial obligations	$	3.3	$	6.3	$	5.6	$	4.4	$	140.8	$	333.8	$	494.2
Letters of credit	$	20.6	$	2.8	$	—	$	—	$	—	$	—	$	23.4
Interest payments		22.6		46.1		45.9		45.8		43.8		17.6		221.8
Benefit plan contributions	3.1		—		—		—		—		—		3.1
Total commitments	$	46.3	$	48.9	$	45.9	$	45.8	$	43.8	$	17.6	$	248.3

(a)At June 30, 2004, the unamortized discount on the $125.0 million of 9.875% senior secured notes issued March 19, 2003 was $1.0 million.

(b)At June 30, 2004, the unamortized discount on the additional $100.0 million of 9.75% senior subordinated notes, issued June 29, 2001, was $0.8 million.  In addition, the recorded value of the notes was reduced by the fair value basis adjustment of $2.8 million attributable to certain interest rate swap agreements.

The Company and two other equity owners of BHA Aero have an obligation to support a third party loan on a proportionate basis to their equity ownership interests.  The Company has met its obligation through an outstanding letter of credit of $11.1 million.  BHA Aero’s third party loans come due in 2004.  BHA Aero and its equity owners are in detailed discussions as to the refinancing of these loans and a re-capitalization of this joint venture.  The maturities of the existing third party loans have been extended to facilitate these discussions.  Such refinancing is anticipated to require additional cash contributions by BHA Aero’s equity owners in the form of equity as well as loan guarantees.  The Company does not anticipate that the value of such commitments will significantly exceed the value of the letter of credit they will replace.

The Company’s ability to make scheduled payments of principal, or to pay interest on, or to refinance its indebtedness, including its public notes, or to fund planned capital expenditures, will depend on its future performance and conditions in the financial markets.  The Company’s future performance is

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subject to economic, financial, competitive, legislative, regulatory and other factors that are beyond its control.  The Company has significant leverage and there can be no assurance that the Company will generate sufficient cash flow from its operations, or that sufficient future borrowings will be available under its Senior Secured Credit Facility, to enable the Company to service its indebtedness, including its public notes, or to fund its other liquidity needs.

As liquidity permits, the Company may from time to time seek to retire its outstanding public debt through open market purchases, privately negotiated transactions or otherwise.  Whether the Company makes any such repurchases, and the terms of any such repurchases, will depend on prevailing market conditions, the Company’s liquidity position, contractual restrictions and other factors.

For further information regarding the Company’s financial resources, obligations and commitments, see Notes 5 and 6 to the accompanying condensed consolidated financial statements and Notes 2, 8, 9, 10 and 17 to the consolidated financial statements of the 2003 Annual Report on Form 10-K.

Critical Accounting Policies

For information regarding the Company’s critical accounting policies, refer to the Company’s 2003 Annual Report on Form 10-K.

Recently Issued Accounting Policies

In May 2004, the FASB issued Staff Position No. FAS 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” (“FAS 106-2”), which provides guidance on the accounting for the effects of the Medicare Prescription Drug, Improvement and Modernization Act (the “Act”) to employers that sponsor postretirement health care plans that provide prescription drug benefits.  In its guidance as provided by FAS 106-2, the FASB concluded that the favorable impact of the Act on the accumulated benefit obligation and net periodic postretirement benefit cost on or after the date of enactment should be reflected in a company’s financial statements.  However, until such time an enterprise is able to determine whether the benefits provided by its plan are actuarially equivalent, FAS 106-2 requires that the enterprise disclose:

(a)The existence of the Act; and

(b)The fact that measures of the accumulated benefit obligation or net periodic postretirement benefit cost as recorded in its financial statements do not reflect any amount associated with the Act because the employer has yet to make such a determination.

In addition, FAS 106-2 requires that in the first period in which an enterprise includes the effect of the Act in measuring its accumulated benefit obligation and net periodic postretirement benefit cost, it shall disclose:

(a)The impact of the Act on the accumulated benefit obligation related to benefits attributed to past services;

(b)The effect of the Act on the measurement of net periodic postretirement benefit costs for the current period; and

(c)Any other disclosures required by FASB Statement No. 132 (revised) that requires “an explanation of any significant change in the accumulated benefit obligation or plan assets not otherwise apparent in the other disclosures required by this statement.”

Hexcel is currently evaluating the impact of FAS 106-2 on its postretirement benefit plan accounting and, as such, the accumulated benefit obligation and net periodic benefit cost in the condensed

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consolidated financial statements and accompanying notes do not reflect the effects of the Act on the Company’s accounting for its postretirement benefit plans.

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 the use of terms and phrases such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “should,” “will,” and similar terms and phrases, including references to assumptions.  Such statements are based on current expectations, are inherently uncertain, and are subject to changing assumptions.

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

Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results to be materially different.  Such factors include, but are not limited to, the following: changes in general economic and business conditions; changes in current pricing and cost levels; changes in political, social and economic conditions and local regulations, particularly in Asia and Europe; foreign currency fluctuations; changes in aerospace delivery rates; reductions in sales to any significant customers, particularly Airbus or Boeing; changes in sales mix; changes in government defense procurement budgets; changes in military aerospace programs or technology; industry capacity; competition; disruptions of established supply channels; manufacturing capacity constraints; and the availability, terms and deployment of capital.  Additional information regarding these factors is contained in Hexcel’s Annual Report on Form 10-K for the year ended December 31, 2003.

If one or more of these risks or uncertainties materialize, or if underlying assumptions prove incorrect, actual results may vary materially from those expected, estimated or projected.  In addition to other factors that affect Hexcel’s operating results and financial position, neither past financial performance nor the Company’s expectations should be considered reliable indicators of future performance.  Investors should not use historical trends to anticipate results or trends in future periods.  Further, the Company’s stock price is subject to volatility.  Any of the factors discussed above could have an adverse impact on the Company’s stock price.  In addition, failure of sales or income in any quarter to meet the investment community’s expectations, as well as broader market trends, can have an adverse impact on the Company’s stock price.The Company does not undertake an obligation to update its forward-looking statements or risk factors to reflect future events or circumstances.

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ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

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

The Company attempts to net individual exposures, when feasible, taking advantage of natural offsets.  In addition, the Company employs interest rate swap agreements and foreign currency forward exchange contracts for the purpose of hedging certain specifically identified interest 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.  The Company does not use financial instruments for trading or speculative purposes.

Interest Rate

The Company’s financial results are affected by interest rate changes on certain of its debt instruments.  In order to manage its exposure to interest rate movements or variability, the Company may from time-to-time enter into interest rate swap agreements and other financial instruments.

Interest Rate Swap Agreements

In October 2003, the Company entered into interest rate swap agreements for an aggregate notional amount of $100.0 million.  The interest rate swap agreements effectively convert the fixed interest rate of 9.75% on $100.0 million of the Company’s senior subordinated notes, due 2009, into variable interest rates.  The variable interest rates payable by the Company in connection with the swap agreements range from LIBOR + 6.12% to LIBOR + 6.16%, and are reset semiannually on January 15 and July 15 of each year the swap agreements are in effect.  Interest payment dates under the swap agreements of January 15 and July 15 match the interest payment dates set by the senior subordinated notes.  The interest rate swap agreements mature on January 15, 2009, the maturity date of the senior subordinated notes.  The swap agreements are cancelable at the option of the fixed rate payer under terms that mirror the call provisions of the senior subordinated notes due 2009.  The interest rate swap agreements are designated as fair value hedges, and are highly effective as assessed using the short-cut method under Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities.”  For the quarter and six months ended June 30, 2004, $0.6 million and $1.2 million were recognized as a reduction in “interest expense,” respectively.  The aggregate fair value and carrying amount of these swap agreements, as of June 30, 2004, was a $2.8 million decrease in notes payable.

Cross-Currency Interest Rate Swap Agreement

In April 2003, the Company entered into a cross-currency interest rate swap agreement, which effectively exchanges a loan of 12.5 million Euros at a fixed rate of 7% for a loan with a notional amount of $13.5 million at a fixed rate of 6.02% over the term of the agreement expiring December 1, 2007.The Company entered into this agreement to effectively hedge interest and principal payments relating to an intercompany loan denominated in Euros.  The fair value and carrying amount of this swap agreement as of June 30, 2004 was a $2.2 million liability.During the quarters and six months ended June 30, 2004 and 2003, hedge ineffectiveness was immaterial.  The change in fair value recognized in “comprehensive income” was a net reduction of $0.1 million and $0.4 million for the quarters ended June 30, 2004 and 2003, respectively, and $0.2 million and $0.4 million for the six months ended June 30, 2004 and 2003, respectively.  There was no change in fair value recognized in the quarter ended June 30, 2004.  Over the

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next twelve months, no material unrealized losses recorded in “accumulated other comprehensive loss” relating to this agreement are expected to be reclassified into earnings.

Foreign Currency Exchange Risks

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

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

Foreign Currency Forward Exchange Contracts

A number of the Company’s European subsidiaries are exposed to the impact of exchange rate volatility between the U.S. dollar and the subsidiaries’ functional currencies, being either the Euro or the British Pound Sterling.  To minimize this exposure, Hexcel has entered into a number of foreign currency forward exchange contracts to exchange U.S. dollars for Euros and British Pound Sterling at fixed rates on specified dates through December 2005.The aggregate notional amount of these contracts was $38.6 million and $62.9 million at June 30, 2004 and December 31, 2003, respectively.  The purpose of these contracts is to hedge a portion of the forecasted transactions of European subsidiaries under long-term sales contracts with certain customers.  These contracts are expected to provide the Company with a more balanced matching of future cash receipts and expenditures by currency, thereby reducing the Company’s exposure to fluctuations in currency exchange rates.  For the quarters and six months ended June 30, 2004 and 2003, hedge ineffectiveness was immaterial.

The activity in “accumulated other comprehensive income (loss)” related to foreign currency forward exchange contracts for the quarters and six months ended June 30, 2004 and 2003 was as follows:

	Quarter Ended June 30,						Six Months Ended June 30,
(in millions)	2004			2003			2004			2003
Unrealized gains at beginning of period	$	4.2		$	4.9		$	6.4		$	3.4
Gains reclassified to net sales	(1.5		)	(0.9		)	(3.4		)	(1.4		)
Increase (decrease) in fair value	(0.1		)	2.1			(0.4		)	4.1
Unrealized gains at end of period	$	2.6		$	6.1		$	2.6		$	6.1

Unrealized gains of $2.6 million recorded in “accumulated other comprehensive loss,” net of tax, as of June 30, 2004 are expected to be reclassified into earnings over the next twelve months as the hedged sales are recorded.

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For further information regarding the Company’s market risks, refer to the Company’s 2003 Annual Report on Form 10-K.

ITEM 4. Controls and Procedures

As of June 30, 2004, the Company’s Chief Executive Officer and Chief Financial Officer evaluated the Company’s disclosure controls and procedures (as defined in Rule 13a-14 and Rule 15d-14 under the Securities Exchange Act of 1934).  Based on their evaluation, they have concluded that the Company’s disclosure controls and procedures are effective to ensure that material information relating to the Company, including its consolidated subsidiaries, would be made known to them, so as to be reflected in periodic reports that the Company files or submits under the Securities and Exchange Act of 1934.

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

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PART II.  OTHER INFORMATION

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

The Annual Meeting of Stockholders of the Company was held on June 3, 2004 (the “Meeting”) in Stamford, Connecticut.  Stockholders holding shares of Hexcel common stock and Hexcel preferred stock representing, in the aggregate, 87,371,910 votes were present at the Meeting, either in person or by proxy, constituting a quorum.  The following matters were submitted to the Company’s stockholders for a vote at the Meeting, with the results of the vote indicated:

1)Each of the ten nominees to the Board of Directors was elected by the stockholders to serve as directors until the next annual meeting of stockholders and until their successors are duly elected and qualified:

DIRECTOR	FOR	WITHHELD
Joel S. Beckman	87,241,062	130,848
H. Arthur Bellows, Jr.	87,241,876	130,034
David E. Berges	87,241,982	129,928
Jeffrey C. Campbell	87,227,501	144,409
Sandra L. Derickson	87,225,809	146,101
James J. Gaffney	87,191,523	180,387
Sanjeev K. Mehra	87,205,356	166,554
Peter M. Sacerdote	87,242,242	129,668
Robert J. Small	87,205,911	165,999
Martin L. Solomon	87,240,753	131,157

2)The proposal to approve Hexcel’s Management Incentive Compensation Plan:

Votes For	Votes Against	Abstentions
72,678,571	632,456	1,800,252

3)The proposal to ratify PricewaterhouseCoopers LLP as Independent Auditors for the Company for 2004:

Votes For	Votes Against	Abstentions
87,013,278	204,554	154,078

ITEM 6.  Exhibits and Reports on Form 8-K

(a) Exhibits:

Exhibit No.	Description
3.1	Restated Bylaws of Hexcel Corporation.
10.1	Hexcel Corporation Management Incentive Compensation Plan, as amended and restated on April 12, 2004.
31.1	Certification of Chief Executive Officer, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

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31.2	Certification of Chief Financial Officer, as Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(b) Reports on Form 8-K:

Current Report on Form 8-K dated April 22, 2004 relating to the Company’s first quarter of 2004 financial results.

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
August 9, 2004	/s/ William J. Fazio
(Date)	William J. Fazio Corporate Controller and Chief Accounting Officer

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EXHIBIT INDEX

Exhibit No.	Description
3.1	Restated Bylaws of Hexcel Corporation.
10.1	Hexcel Corporation Management Incentive Compensation Plan, as amended and restated on April 12, 2004.
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, as Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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EX-3.1

Exhibit 3.1

BYLAWS OF HEXCEL CORPORATION

A DELAWARE CORPORATION

AMENDED AND RESTATED AS OF JUNE 3, 2004

OFFICES

1.PRINCIPAL EXECUTIVE OFFICE. The principal executive office of the Corporation is hereby fixed and located at 2 Stamford Plaza, Stamford, Connecticut. The Board of Directors is hereby granted full power and authority to change the place of said principal executive office from time to time.

2.OTHER OFFICES. The registered office of the Corporation in the State of Delaware is hereby fixed and located at 1209 Orange Street, Wilmington, Delaware, c/o The Corporation Trust Company. The Board of Directors is hereby granted full power and authority to change the place of said registered office within the State of Delaware from time to time. The Corporation may also have offices in such other places in the United States or elsewhere as the Board of Directors may from time to time designate or as the business of the Corporation may from time to time require.

STOCKHOLDERS

3.PLACE OF MEETINGS.  Stockholders’ meetings shall be held at such place, whether within or without the State of Delaware, as the Board of Directors shall, by resolution, designate.

4.ANNUAL MEETINGS. Annual meetings of stockholders shall be held on such dates and at such times as shall be designated from time to time by the Board of Directors and stated in the notice of such annual meeting. At such annual meetings directors shall be elected and such other business as may be properly brought before such meeting shall be conducted.

Written notice of each annual meeting shall be mailed to or delivered to each stockholder of record entitled to vote thereat not less than ten (10) days nor more than sixty (60) days before the date of such annual meeting. Such notice shall specify the place, the day, and the hour of such meeting, and the matters which the Board of Directors intends to present for action by the stockholders.

Except to the extent, if any, specifically provided to the contrary in the Certificate of Incorporation or these Bylaws, to be properly brought before an annual meeting, all business must be either (a) specified in the notice of annual meeting (or any

supplement thereto) given by or at the direction of the Board of Directors, (b) otherwise properly brought before the annual meeting by or at the direction of the Board of Directors or (c) otherwise properly brought before the annual meeting by a stockholder of record who complies with the notice procedures set forth below. In addition to any other applicable requirements, for business (including the nomination of a person or persons for election to the Board of Directors) to be properly brought before any annual meeting by a stockholder, the stockholder must have given timely notice thereof, in proper form, to the Secretary of the Corporation. To be timely, a stockholder’s notice must be delivered to or mailed and received at the principal executive offices of the Corporation not less than one hundred twenty (120) days prior to the anniversary date of the notice given to stockholders in connection with the immediately preceding annual meeting. To be in proper form, a stockholder’s notice to the Secretary must be in writing and must set forth with respect to each matter the stockholder proposes to bring before the annual meeting (a) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (b) the name and record address of the stockholder proposing such business, (c) the class or series and number of shares of the capital stock of the Corporation that are owned beneficially or of record by the stockholder and the length of time that the shares have been held, (d) as to each person whom the stockholder proposes to nominate for election to the Board of Directors, (i) the name, age, business address and residence address of the person, (ii) the person’s resume or a listing of his or her qualifications to be a director of the Corporation, and (iii) such other information that the Board of Directors may require from time to time, (e) a description of all arrangements or understandings between such stockholder and any other person or persons (including their name(s)) in connection with the proposal of such business (or the nomination of any person or persons for election to the Board of Directors) by any stockholder and any material interest of such stockholder in such business (or nomination), (f) any other information that would be required to be disclosed in a proxy statement or other filing required to be made in connection with the solicitation of proxies for the proposal (or the election of a person or persons to the Board of Directors) pursuant to the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder if such stockholder were engaged in such a solicitation and (g) a representation that such stockholder or a representative thereof intends to appear in person at the annual meeting to bring such business before the meeting (or nominate a person or persons for election to the Board of Directors). Any such notice relating to the nomination of a person or persons for election to the Board of Directors must be accompanied by a written consent of each proposed nominee to being named as a nominee and to serve as a director if elected.

The Chairman of the annual meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting in accordance with the provisions of this Section 4 and any such business not properly brought before the meeting shall not be transacted at the meeting.

5.SPECIAL MEETINGS. Special meetings of the stockholders may be called at any time and for any purpose or purposes by the Board of Directors, the Chairman of the Board, the Chief Executive Officer or by a committee of the Board of

2

Directors which has been duly designated by the Board of Directors and whose powers and authority, as provided in a resolution of the Board of Directors or in these Bylaws, include the power to call such meetings. If and to the extent that any special meeting of stockholders may be called by any other person or persons specified in any provision of the Certificate of Incorporation or any amendment thereto, or any certificate filed under Section 151(g) of the General Corporation Law of the State of Delaware (the “GCL”) designating the number of shares of Preferred Stock to be issued and the rights, preferences, privileges and restrictions granted to and imposed on the holders of such designated Preferred Stock, then such special meeting may also be called by such person or persons in the manner, at the times and for the purposes so specified. Except in special cases where other express provision is made by statute, notice of such special meeting shall be given in the same manner as for an annual meeting of stockholders. Such notice shall also specify the general nature of the business to be transacted at the meeting, and no business shall be transacted at the special meeting except as specified in such notice (or any supplement thereto).

6.ADJOURNED MEETINGS AND NOTICE THEREOF. Any stockholders’ meeting, annual or special, whether or not a quorum is present, may be adjourned from time to time by the chairman of such meeting or by the vote of a majority of the shares present in person or represented by proxy at such meeting, but in the absence of a quorum no other business may be transacted at such meeting.

Notice of an adjourned meeting need not be given if (a) the meeting is adjourned for thirty (30) days or less, (b) the time and place of the adjourned meeting are announced at the meeting at which the adjournment is taken, and (c) no new record date is fixed for the adjourned meeting. Otherwise, notice of the adjourned meeting shall be given as if the adjourned meeting were a new meeting.

7.VOTING. Except as otherwise provided by applicable law, the Certificate of Incorporation, any certificate filed under Section 151(g) of the GCL or these Bylaws, a stockholder shall be entitled to one vote for each share held of record on the record date fixed for the determination of the stockholders entitled to notice of and to vote at a meeting or, if no such date is fixed, the date determined in accordance with applicable law. If any share is entitled to more or less than one vote on any matter, all references herein to a majority or other proportion of shares shall refer to a majority or other proportion of the voting power of shares entitled to vote on such matter.

8.QUORUM. A majority of the outstanding shares entitled to vote, represented in person or by proxy, shall constitute a quorum for the transaction of business. No business may be transacted at a meeting in the absence of a quorum other than the adjournment of such meeting, except that if a quorum is present at the commencement of a meeting, business may be transacted until the meeting is adjourned even though the withdrawal of stockholders results in less than a quorum being present in person or by proxy at such meeting. If a quorum is present at a meeting, the affirmative vote of a majority of the shares present or represented by proxy at the meeting and entitled to vote on any matter shall be the act of the stockholders unless the vote of a

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larger number is required by applicable law, the Certificate of Incorporation or these Bylaws. If a quorum is present at the commencement of a meeting but the withdrawal of stockholders results in less than a quorum being present in person or by proxy at such meeting, the affirmative vote of a majority of the shares required to constitute a quorum shall be the act of the stockholders unless the vote of a larger number is required by applicable law, the Certificate of Incorporation or these Bylaws.

9.PROXIES. A stockholder may be represented at any meeting of stockholders by a written proxy signed by the person entitled to vote or by such person’s duly authorized attorney-in-fact. A proxy must bear a date within three (3) years prior to the meeting, unless the proxy specifies a different length of time. A revocable proxy is revoked by a writing delivered to the Secretary of the Corporation stating that the proxy is revoked or by a subsequent proxy executed by, or by attendance at the meeting and voting in person by, the person executing the proxy.

10.CHAIRMAN AND SECRETARY AT MEETINGS.  At any meeting of stockholders, the Chairman of the Board of Directors, or in his absence, a person designated by the Board of Directors, shall preside at and act as chairman of the meeting.  The Secretary, or in his absence a person designated by the chairman of the meeting, shall act as secretary of the meeting.

11.INSPECTORS. The Board of Directors may, in advance of any meeting of stockholders, appoint one or more inspectors to act at such meeting or any adjournment thereof. Each inspector, before entering upon the discharge of his duties, shall take and sign an oath to faithfully execute the duties of inspector. The inspector(s) shall determine the number of shares of capital stock of the Corporation outstanding and the voting power of each, the number of shares present or represented by proxy at the meeting, the existence of a quorum, the validity and effect of proxies, and shall receive votes, ballots or consents, count and tabulate all votes, ballots or consents, determine the results of any election or vote, and do such acts as are proper to conduct the election or vote with fairness to all stockholders. At the request of the chairman of the meeting, the inspectors shall make a written report of any matters determined by them. No director or candidate for the office of director shall act as an inspector of an election of directors.

12.LIST OF STOCKHOLDERS. The Secretary of the Corporation shall prepare and make, at least ten (10) days before every meeting of the stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall

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also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present.

DIRECTORS

13.POWERS. Subject to any limitations contained in the Certificate of Incorporation, these Bylaws or the GCL as to actions to be authorized or approved by the stockholders, and subject to the duties of directors as prescribed by these Bylaws, all corporate powers shall be exercised by or under the ultimate direction of, and the business and affairs of the Corporation shall be managed by, or under the ultimate direction of, the Board of Directors.

14.CERTAIN DEFINITIONS.  For purposes of these Bylaws:

An “AFFILIATE” of any Person means 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. “CONTROL” has the meaning specified in Rule 12b-2 under the Exchange Act as in effect on March 19, 2003.

Any person shall be deemed to “BENEFICIALLY OWN”, to have “BENEFICIAL OWNERSHIP” of, or to be “BENEFICIALLY OWNING” any securities (which securities shall also be deemed “BENEFICIALLY OWNED” by such Person) that such Person is deemed to “beneficially own” within the meaning of Rules 13d-3 and 13d-5 under the Exchange Act, as in effect on March 19, 2003; provided, that, except for the rights set forth in Section 3.02 of the Governance Agreement or in Section 3.02 of the Stockholders Agreement, any Person shall be deemed to Beneficially Own any securities that such Person has the right to acquire, whether or not such right is exercisable immediately.

“BERKSHIRE/GREENBRIAR ADDITIONAL SHARES” means, as of any date of determination, shares of the Corporation’s Common Stock the Beneficial Ownership of which may be acquired by the Berkshire/Greenbriar Investors pursuant to grants of stock options or other stock-based awards to the Berkshire/Greenbriar Directors by the Corporation pursuant to any stock option or stock incentive plan approved by the Board of Directors of the Corporation, including without limitation the Hexcel Incentive Stock Plan.

“BERKSHIRE/GREENBRIAR DIRECTORS” means Berkshire/Greenbriar Nominees who are elected or appointed to serve as members of the Board of Directors.

“BERKSHIRE/GREENBRIAR INVESTORS” means any of (i) Berkshire Fund V, Limited Partnership, a Massachusetts limited partnership (“Berkshire V”), (ii) Berkshire Fund VI, Limited Partnership, a Massachusetts limited partnership (“Berkshire VI”), (iii) Berkshire Investors LLC, a Massachusetts limited liability company (“Berkshire Investors”), (iv) Berkshire Fund V Investment Corp., a Massachusetts corporation (“Berkshire V Investment Corp.”) (for so long as it Beneficially Owns Voting Securities), (v) Berkshire Fund VI Investment Corp., a Massachusetts corporation

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(“Berkshire VI Investment Corp.”) (for so long as it Beneficially Owns Voting Securities), (vi) Greenbriar Co-Investment Partners, L.P., a Delaware limited partnership (“Greenbriar Co-Investment”), (vii)Greenbriar Equity Fund, L.P., a Delaware limited partnership (“Greenbriar Fund”), or (viii) any investment entity controlled or under common control with either of Berkshire Partners LLC or Greenbriar Equity Group, LLC; provided, however, that any such Person specified in clause (viii) that desires to acquire Voting Securities in accordance with the Stockholders Agreement shall, as a condition to acquiring any such Voting Securities, execute a joinder agreement in which it shall agree to be bound by the provisions of the Stockholders Agreement to the same extent as the Berkshire/Greenbriar Investors and shall thereafter be deemed to be an “Investor” for all purposes of the Stockholders Agreement unless such Person does not hold any Voting Securities.

“BERKSHIRE/GREENBRIAR NOMINEES” means such Persons as are so designated by the Berkshire/Greenbriar Investors, as such designations may change from time to time, to serve as members of the Board of Directors pursuant to Sections 17 and 18.

“BUYOUT TRANSACTION” means a tender offer, merger or any similar transaction that offers holders of Voting Securities (other than, if applicable, the Person proposing such transaction) the opportunity to dispose of the Voting Securities Beneficially Owned by such holders or otherwise contemplates the acquisition by any Person or Group of Voting Securities that would result in Beneficial Ownership by such Person or Group of a majority of the Voting Securities outstanding, or a sale of all or substantially all of the Corporation’s assets.

“COMMON STOCK” means the common stock of the Corporation, par value $0.01 per share, and any equity securities issued or issuable in exchange for or with respect to such common stock by way of a stock dividend, stock split or combination of shares or in connection with a reclassification, recapitalization, merger, consolidation or other reorganization.

“CONVERTIBLE PREFERRED STOCK” means, collectively, the Series A Convertible Preferred Stock and the Series B Convertible Preferred Stock.

“EXCHANGE ACT” means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.

“GOLDMAN ADDITIONAL SHARES” means, as of any date of determination, up to 255,381 shares of Common Stock (as equitably adjusted to reflect any stock split, combination, reorganization, recapitalization, reclassification or other similar event involving the Common Stock), in the aggregate, (i) the Beneficial Ownership of which may be acquired inadvertently from time to time by The Goldman Sachs Group, Inc. or its Affiliates acting in connection with their activities as a broker or dealer registered under Section 15 of the Exchange Act or as an asset manager (excluding Affiliates formed for the purpose of effecting principal transactions) or (ii) the Beneficial

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Ownership of which may be acquired by the Goldman Investors pursuant to grants of stock options or other stock-based awards to the Goldman Directors by the Corporation pursuant to any stock option or stock incentive plan approved by the Board of Directors of the Corporation, including without limitation the Hexcel Incentive Stock Plan; provided, that if and for so long as The Goldman Sachs Group, Inc. and its Affiliates collectively Beneficially Own less than 30% of the Total Voting Power of the Corporation, the maximum number of Goldman Additional Shares shall be 400,000 (as equitably adjusted to reflect any stock split, combination, reorganization, recapitalization, reclassification or other similar event involving the Common Stock).

“GOLDMAN DIRECTORS” means Goldman Nominees who are elected or appointed to serve as members of the Board of Directors.

“GOLDMAN INVESTORS” means any of (i) the LXH Investors, (ii) the Limited Partnerships, or (iii) The Goldman Sachs Group, Inc. or any direct or indirect Subsidiary of the Goldman Sachs Group, Inc. formed for the purpose of effecting principal transactions; provided, however, that any such Person specified in clause (iii) that desires to acquire Voting Securities in accordance with the Governance Agreement shall, as a condition to acquiring any such Voting Securities, execute a joinder agreement in which it shall agree to be bound by the provisions of the Governance Agreement to the same extent as the Goldman Investors and shall thereafter be deemed to be an “Investor” for all purposes of the Governance Agreement unless such Person does not hold any Voting Securities.

“GOLDMAN NOMINEES” means such Persons as are so designated by the Goldman Investors, as such designations may change from time to time, to serve as members of the Board of Directors pursuant to Sections 17 and 18.

“GOVERNANCE AGREEMENT” means the Amended and Restated Governance Agreement, dated as of March 19, 2003, among LXH, L.L.C., a Delaware limited liability company (“LXH”), LXH II, L.L.C., a Delaware limited liability company (“LXH II” and together with LXH, the “LXH Investors”), GS Capital Partners 2000 L.P., a Delaware limited partnership (“GS 2000”), GS Capital Partners 2000 Offshore, L.P., a Cayman Islands exempted limited partnership (“GS 2000 Offshore”), GS Capital Partners 2000 Employee Fund, L.P., a Delaware limited partnership (“GS 2000 Employee”), GS Capital Partners 2000 GmbH & Co. Beteiligungs KG, a German limited partnership (“GS 2000 Germany”), Stone Street Fund 2000, L.P., a Delaware limited partnership (“Stone Street” and, collectively with GS 2000, GS 2000 Offshore, GS 2000 Employee and GS 2000 Germany, the “Limited Partnerships”), and the Corporation.

“GOVERNMENTAL ENTITY” means any court, administrative agency, regulatory body, commission or other governmental authority, board, bureau or instrumentality, domestic or foreign and any subdivision thereof.

“GROUP” has the meaning set forth in Section 13(d) of the Exchange Act as in effect on March 19, 2003.

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“HEXCEL INCENTIVE STOCK PLAN” means the Hexcel Corporation Incentive Stock Plan, as amended and restated through March 19, 2003 and any subsequent amendment thereto or replacement thereof approved by the Board of Directors of the Corporation.

“INDEPENDENT DIRECTOR” means a director of the Corporation who is not an Investors’ Director and who (i) is not and has never been an officer, employee, partner or director of any of the Investors or their respective Affiliates or associates (as defined in Rule 12b-2 under the Exchange Act), in each case other than the Corporation and (ii) has no affiliation or compensation, consulting or contractual relationship with any of the Investors or their respective Affiliates or associates (in each case other than the Corporation) such that a reasonable person would regard such director as likely to be unduly influenced by any of such Persons or any of their respective Affiliates or associates (in each case other than the Corporation).

“INITIAL BERKSHIRE/GREENBRIAR SHARES” means (i) the 77,875 shares  of Series A Convertible Preferred Stock purchased by the Berkshire/Greenbriar Investors pursuant to the Stock Purchase Agreement, dated December 18, 2002, by and among the Corporation and the Berkshire/Greenbriar Investors (the “Berkshire/Greenbriar Purchase Agreement”), (ii) the 77,875 shares of Series B Convertible Preferred Stock purchased by the Berkshire/Greenbriar Investors pursuant to the Berkshire/Greenbriar Purchase Agreement  and (iii) any shares of the Corporation’s Common Stock issuable upon conversion of the shares of Series A Convertible Preferred Stock or Series B Convertible Preferred Stock (as equitably adjusted to reflect any stock split, combination, reorganization, recapitalization, reclassification or other similar event involving the Common Stock or Convertible Preferred Stock, as applicable).

“INITIAL GOLDMAN SHARES” means (i) the 47,125 shares of Series A Convertible Preferred Stock purchased by the Limited Partnerships pursuant to the Stock Purchase Agreement, dated December 18, 2002, by and among the Corporation and the Limited Partnerships (the “Goldman Purchase Agreement”), (ii) the 47,125 shares of Series B Convertible Preferred Stock purchased by the Limited Partnerships pursuant to the Goldman Purchase Agreement and (iii) any shares of the Corporation’s Common Stock issuable upon conversion of the shares of Series A Convertible Preferred Stock or Series B Convertible Preferred Stock (as equitably adjusted to reflect any stock split, combination, reorganization, recapitalization, reclassification or other similar event involving the Common Stock or Convertible Preferred Stock, as applicable).

“INVESTORS” means the Berkshire/Greenbriar Investors and the Goldman Investors.

“INVESTORS’ DIRECTORS” means Berkshire/Greenbriar Directors and Goldman Directors.

“INVESTORS’ NOMINEES” means Berkshire/Greenbriar Nominees and

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Goldman Nominees.

“NON-BERKSHIRE/GREENBRIAR DIRECTOR” means a director of the Corporation who is not a Berkshire/Greenbriar Director and who (i) is not and has never been an officer, employee, partner or director of any of the Berkshire/Greenbriar Investors or their Affiliates or associates (as defined in Rule 12b-2 under the Exchange Act), in each case other than the Corporation, and (ii) has no affiliation or compensation, consulting or contractual relationship with any of the Berkshire/Greenbriar Investors or their Affiliates or associates (in each case other than the Corporation) such that a reasonable person would regard such director as likely to be unduly influenced by any of such Persons or any of their Affiliates or associates (in each case other than the Corporation)

“NON-GOLDMAN DIRECTOR” means a director of the Corporation who is not a Goldman Director and who (i) is not and has never been an officer, employee, partner or director of any of the Goldman Investors or their Affiliates or associates (as defined in Rule 12b-2 under the Exchange Act), in each case other than the Corporation, and (ii) has no affiliation or compensation, consulting or contractual relationship with any of the Goldman Investors or their Affiliates or associates (in each case other than the Corporation) such that a reasonable person would regard such director as likely to be unduly influenced by any of such Persons or any of their Affiliates or associates (in each case other than the Corporation)

“NYSE” means the New York Stock Exchange.

“ORIGINAL GOLDMAN SHARES” means the 14,561,000 shares of Common Stock Beneficially Owned by the Goldman Investors on March 19, 2003 (as equitably adjusted to reflect any stock split, combination, reorganization, recapitalization, reclassification or other similar event involving the Common Stock).

“PERSON” means any individual, Group, corporation, firm, partnership, joint  venture, trust, business association, organization, Governmental Entity or other entity.

“SERIES A CONVERTIBLE PREFERRED STOCK” means the Series A Convertible Preferred Stock, without par value, of the Corporation.

“SERIES B CONVERTIBLE PREFERRED STOCK” means the Series B Convertible Preferred Stock, without par value, of the Corporation.

“SIGNIFICANT SUBSIDIARY” has the meaning set forth in Rule 1-02 of Regulation S-X under the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder as in effect on March 19, 2003.

“STOCKHOLDERS AGREEMENT” means the Stockholders Agreement, dated as of March 19, 2003, among the Berkshire/Greenbriar Investors and the Corporation.

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“SUBSIDIARY” means, with respect to any Person, as of any date of determination, any other Person as to which such Person owns, directly or indirectly, or otherwise controls, more than 50% of the voting shares or other similar interests.

“TOTAL VOTING POWER OF THE CORPORATION” means the total number of votes that may be cast in the election of directors of the Corporation if all Voting Securities outstanding or treated as outstanding pursuant to the final two sentences of this definition were present and voted at a meeting held for such purpose. The percentage of the Total Voting Power of the Corporation Beneficially Owned by any Person is the percentage of the Total Voting Power of the Corporation that is represented by the total number of votes that may be cast in the election of directors of the Corporation by Voting Securities Beneficially Owned by such Person. In calculating such percentage, each share of Convertible Preferred Stock shall be outstanding or shall be treated as outstanding for all purposes of this Agreement without regard to the Person holding such share until such time as such share of Convertible Preferred Stock is redeemed or repurchased by the Company or converted into Common Stock in accordance with the Certificate of Designations of the Series A Convertible Preferred Stock or the Certificate of Designations of the Series B Convertible Preferred Stock, as applicable.  In calculating such percentage, the Voting Securities Beneficially Owned by any Person that are not outstanding but are subject to issuance upon exercise or exchange of rights of conversion or any options, warrants or other rights Beneficially Owned by such Person shall be deemed to be outstanding for the purpose of computing the percentage of the Total Voting Power of the Corporation represented by Voting Securities Beneficially Owned by such Person, but shall not be deemed to be outstanding for the purpose of computing the percentage of the Total Voting Power of the Corporation represented by Voting Securities Beneficially Owned by any other Person.

“VOTING SECURITIES” means the Common Stock, the Convertible Preferred Stock and any other securities of the Corporation or any Subsidiary of the Corporation entitled to vote generally in the election of directors of the Corporation or such Subsidiary of the Corporation.

15.NUMBER OF DIRECTORS.   (a) Except as provided in Subsection 6.1 of the Certificate of Incorporation and subject to compliance with Section 17, the authorized number of directors of this Corporation shall be not less than three (3) nor more than fifteen (15), with the exact number of directors within such range specified in subsection (b) below, or, if not so specified, with the exact number of directors within such range fixed from time to time by resolution of the Board of Directors.

(b) It is hereby specified that this Corporation shall have ten (10) directors, one of whom shall be designated the Chairman of the Board. The Chairman of the Board shall be designated by a majority of the members of the Board of Directors.

16.ELECTION.   (a) Directors shall hold office until the annual meeting next following their election and until their successors are nominated, elected and qualified pursuant to these Bylaws; subject, however, to their prior resignation, death

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or removal as provided by the Certificate of Incorporation, these Bylaws or applicable law.

Subject to the Certificate of Incorporation and Subsections (b), (c), (d) and (e) hereof, any vacancies in the Board of Directors for any reason, and any newly created directorships resulting from any increase in the number of directors, may be filled by the Board of Directors, acting by a majority of the directors then in office, even if less than a quorum; and any directors so chosen shall hold office until the next election of the class for which such directors shall have been chosen, and until their successors shall be elected and qualified or until their earlier death, resignation or removal.

(b) If at any time a member of the Board of Directors resigns (pursuant to this Section 16 or otherwise) or is removed in accordance with applicable law or these By-laws, a new member shall be designated to replace such member until the next election of directors. If, consistent with Section 17, the replacement director is to be (i) a Berkshire/Greenbriar Director, the party that designated such Berkshire/Greenbriar Director shall designate the replacement Berkshire/Greenbriar Director or (ii) a Goldman Director, the party that designated such Goldman Director shall designate the replacement Goldman Director. Except as set forth in paragraph (d) below, if consistent with Section 17, the replacement director is to be a Director other than an Investors’ Director, the remaining Independent Directors shall designate the replacement director.

(c) Subject to paragraph (d) below, if at any time (i) the number of Berkshire/Greenbriar Nominees entitled to be nominated to the Board of Directors in accordance with these Bylaws in an election of directors presented to stockholders would decrease, within 10 days thereafter the Berkshire/Greenbriar Investors shall cause a sufficient number of Berkshire/Greenbriar Directors to resign from the Board of Directors so that the number of Berkshire/Greenbriar Directors on the Board of Directors after such resignation(s) equals the number of Berkshire/Greenbriar Nominees that the Berkshire/Greenbriar Investors would have been entitled to designate had an election of directors taken place at such time. The Berkshire/Greenbriar Investors shall also cause a sufficient number of Berkshire/Greenbriar Directors to resign from any relevant committees of the Board of Directors so that such committees are comprised in the manner contemplated by Section 19 after giving effect to such resignations, or (ii) the number of Goldman Nominees entitled to be nominated to the Board of Directors in accordance with these Bylaws in an election of directors presented to stockholders would decrease, within 10 days thereafter the Goldman Investors shall cause a sufficient number of Goldman Directors to resign from the Board of Directors so that the number of Goldman Directors on the Board of Directors after such resignation(s) equals the number of Goldman Nominees that the Goldman Investors would have been entitled to designate had an election of directors taken place at such time. The Goldman Investors shall also cause a sufficient number of Goldman Directors to resign from any relevant committees of the Board of Directors so that such committees are comprised in the manner contemplated by Section 19 after giving effect to such resignations. Any vacancies created by the resignations required by this Subsection (c) shall be filled by Independent Directors.

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(d) If at any time the percentage of the Total Voting Power of the Corporation Beneficially Owned by the Berkshire/Greenbriar Investors or the Goldman Investors decreases as a result of an issuance of Voting Securities by the Corporation (other than any of the issuances described in the last sentence of this Section 16(d)), such Investors may notify the Corporation that such Investors intend to acquire a sufficient amount of additional Voting Securities necessary to maintain their then current level of Board of Directors representation within 90 days. In such event, until the end of such period (and thereafter if such Investors in fact restore their percentage of the Total Voting Power of the Corporation during such period and provided that such Investors continue to maintain the requisite level of Beneficial Ownership of Voting Securities in accordance with Section 17) the Board of Directors shall continue to have the number of Berkshire/Greenbriar Directors or Goldman Directors, as applicable, that corresponds to the percentage of the Total Voting Power of the Corporation Beneficially Owned by such Investors prior to such issuance of Voting Securities by the Corporation. Notwithstanding any provision in the Governance Agreement or the Stockholders Agreement to the contrary, the provisions of this Section 16(d) shall not apply to any issuance of Voting Securities (x) upon conversion of any convertible securities which are either outstanding on, March 19 2003 (including, without limitation, issuances of securities upon any payment of dividends on, redemption of, or otherwise payable with respect to the Series A Convertible Preferred Stock or Series B Convertible Preferred Stock) or approved by the Board of Directors or a duly authorized committee of the Board of Directors after March 19, 2003 in accordance with Section 2.06 of the Governance Agreement and with Section 2.06 of the Stockholders Agreement or (y) pursuant to employee or director stock option or incentive compensation or similar plans outstanding as of March 19, 2003 or, subsequent to March 19, 2003, approved by the Board of Directors or a duly authorized committee of the Board of Directors.

(e) Whenever the holders of any one or more classes or series of Preferred Stock issued by the Corporation shall have the right, voting separately by class or series, to elect directors at any annual or special meeting of stockholders, the election, term of office, filling of vacancies, removal and other features of such directorships shall be governed by the terms of the Certificate of Incorporation applicable thereto, and by the terms of any certificate filed pursuant to Section 151(g) of the GCL designating such class or series and the rights, preferences, privileges and restrictions granted to and imposed on the holders of such designated Preferred Stock.

17.BOARD REPRESENTATION. (a) (i) For so long as the Berkshire/Greenbriar Investors Beneficially Own 15% or more of the Total Voting Power of the Corporation, subject to Sections 16(d) and 17(a)(iv), the Corporation shall exercise all authority under applicable law to cause any slate of directors presented to stockholders for election to the Board of Directors to consist of such nominees that, if elected, would result in the Board of Directors consisting of two Berkshire/Greenbriar Directors and eight Non-Berkshire/Greenbriar Directors (including at least five Independent Directors); provided, however, that in the event the Total Voting Power of the Corporation Beneficially Owned by the Berkshire/Greenbriar Investors at any time is below 15% of the Total Voting Power of the Corporation, the Berkshire/Greenbriar Investors shall have no further right to nominate two Directors pursuant to this Section 17(a)(i); provided,

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further, that if the Berkshire/Greenbriar Investors, directly or indirectly, during the term of the Stockholders Agreement shall have sold, transferred or otherwise disposed of, on a cumulative basis, Beneficial Ownership of shares of Common Stock and/or Convertible Preferred Stock together representing 66²/₃% or more of the Total Voting Power of the Corporation represented by the Initial Berkshire/Greenbriar Shares as of March 19, 2003, to Persons who are not Berkshire/Greenbriar Investors, then the Corporation shall exercise all authority under applicable law to cause any slate of directors presented to stockholders for election to the Board of Directors to consist of such nominees that, if elected, would result in the Board of Directors consisting of one Berkshire/Greenbriar Director and nine Non-Berkshire/Greenbriar Directors (including at least six Independent Directors).

(ii) For so long as the Berkshire/Greenbriar Investors Beneficially Own less than 15% but at least 10% of the Total Voting Power of the Corporation, subject to Sections 16(d) and 17(a)(iv), the Corporation shall exercise all authority under applicable law to cause any slate of directors presented to stockholders for election to the Board of Directors to consist of such nominees that, if elected, would result in the Board of Directors consisting of one Berkshire/Greenbriar Director and nine Non-Berkshire/Greenbriar Directors (including at least six Independent Directors); provided, however, that in the event the Total Voting Power of the Corporation Beneficially Owned by the Berkshire/Greenbriar Investors at any time is below 10% of the Total Voting Power of the Corporation, the Berkshire/Greenbriar Investors shall have no further right to nominate one Berkshire/Greenbriar Director pursuant to this Section 17(a)(ii).

(iii) Berkshire/Greenbriar Additional Shares shall not be included in any calculation of the Berkshire/Greenbriar Investors’ Beneficial Ownership of the Total Voting Power of the Corporation under these Bylaws.

(iv) Notwithstanding anything in these By-Laws, the Corporation may increase the size of the Board of Directors through the appointment of one or more additional independent directors (as such term is used in the NYSE listing requirements) in order to comply with any applicable law, regulation or NYSE rule; provided, that, in the event of any such change, the Corporation will use its commercially reasonable best efforts to give the Berkshire/Greenbriar Investors the right to nominate, as nearly as possible, that proportion of the directors as permitted by the terms of Sections 17(a)(i) and 17(a)(ii).  Any director appointed to the Board of Directors pursuant to the first clause of this Section 17(a)(iv) shall be selected by a majority of the Independent Directors and shall be an Independent Director.  Each of the Berkshire/Greenbriar Investors shall perform any and all actions as reasonably requested by the Corporation in order for the Board of Directors to be changed pursuant to this Section 7(a)(iv).

(b)(i) For so long as the Goldman Investors Beneficially Own 20% or more of the Total Voting Power of the Corporation, subject to Sections 16(d) and 17(b)(vi), the Corporation shall exercise all authority under applicable law to

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cause any slate of directors presented to stockholders for election to the Board of Directors to consist of such nominees that, if elected, would result in the Board of Directors consisting of three Goldman Directors and seven Non-Goldman Directors (including at least five Independent Directors); provided, however, that if the Goldman Investors, directly or indirectly, during the term of the Governance Agreement shall have sold, transferred or otherwise disposed of, on a cumulative basis, Beneficial Ownership of shares of Common Stock  and/or Convertible Preferred Stock together representing 33 ¹/₃% or more of the Total Voting Power of the Corporation represented by the aggregate number of Original Goldman Shares and Initial Goldman Shares as of March 19, 2003 to Persons that are not Goldman Investors, then the Corporation shall exercise all authority under applicable law to cause any slate of directors presented to stockholders for election to the Board of Directors to consist of such nominees that, if elected, would result in the Board of Directors consisting of two Goldman Directors and eight Non-Goldman Directors (including at least six Independent Directors)

(ii) For so long as the Goldman Investors Beneficially Own less than 20% but at least 15% of the Total Voting Power of the Corporation, subject to Sections 16(d) and 17(b)(vi), the Corporation shall exercise all authority under applicable law to cause any slate of directors presented to stockholders for election to the Board of Directors to consist of such nominees that, if elected, would result in the Board of Directors consisting of two Goldman Directors and eight Non-Goldman Directors (including at least six Independent Directors); provided, however, that if the Goldman Investors, directly or indirectly, during the term of the Governance Agreement shall have sold, transferred or otherwise disposed of, on a cumulative basis, Beneficial Ownership of shares of Common Stock and/or Convertible Preferred Stock together representing 66²/₃% or more of the Total Voting Power of the Corporation represented by the aggregate number of Original Goldman Shares and Initial Goldman Shares as of the March 19, 2003 to Persons that are not Goldman Investors, then the Corporation shall exercise all authority under applicable law to cause any slate of directors presented to stockholders for election to the Board of Directors to consist of such nominees that, if elected, would result in the Board of Directors consisting of one Goldman Director and nine Non-Goldman Directors (including at least seven Independent Directors).

(iii) For so long as the Goldman Investors Beneficially Own less than 15% but at least 10% of the Total Voting Power of the Corporation, subject to Sections 16(d) and 17(b)(vi), the Corporation shall exercise all authority under applicable law to cause any slate of directors presented to stockholders for election to the Board of Directors to consist of such nominees that, if elected, would result in the Board of Directors consisting of one Goldman Director and nine Non-Goldman Directors (including at least seven Independent Directors).

(iv) In order to determine (x) the number of Goldman Nominees to be included in any slate of directors to be presented to stockholders for election to the Board of Directors and (y) the percentage of the Total Voting Power of the Corporation Beneficially Owned by the Goldman Investors for purposes of

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Section 20, the Goldman Investors shall be deemed to Beneficially Own a percentage of the Total Voting Power of the Corporation that is no more than (1) 39.3% of the Total Voting Power of the Corporation less (2) the percentage of the Total Voting Power of the Corporation represented by any Voting Securities disposed of, directly or indirectly, by the Goldman Investors to Persons that are not Goldman Investors since March 19, 2003.

(v) The Goldman Additional Shares shall not be included in any calculation of the Goldman Investors’ Beneficial Ownership of the Total Voting Power of the Corporation under these Bylaws.

(vi) Notwithstanding anything in these By-Laws, the Corporation may increase the size of the Board of Directors through the appointment of one or more additional independent directors (as such term is used in the NYSE listing requirements) in order to comply with any applicable law, regulation or NYSE rule; provided, that, in the event of any such change, the Corporation will use its commercially reasonable best efforts to give the Goldman Investors the right to nominate, as nearly as possible, that proportion of the directors as permitted by the terms of Sections 17(b)(i), 17(b)(ii) and 17(b)(iii).  Any director appointed to the Board of Directors pursuant to the first clause of this Section 17(b)(vi) shall be selected by a majority of the Independent Directors and shall be an Independent Director.  Each of the Goldman Investors shall perform any and all actions as reasonably requested by the Corporation in order for the Board of Directors to be changed pursuant to this Section 17(b)(vi).

18.DESIGNATION OF SLATE.   Any Berkshire/Greenbriar Nominees or Goldman Nominees that are included in a slate of directors pursuant to Section 17 shall be designated by the Berkshire/Greenbriar Investors, in accordance with the Stockholders Agreement, on the one hand, or the Goldman Investors, in accordance with the Governance Agreement, on the other hand, respectively.  Any Non-Berkshire/Greenbriar Director nominees and any Non-Goldman Director nominees who are to be included in any slate of directors pursuant to Section 17 shall be designated by majority vote of the then incumbent Directors who are not Investors’ Directors (including the Chairman of the Board if he or she is an Independent Director). The Corporation’s nominating committee, if any (or if there is no such nominating committee, the Board of Directors or any other duly authorized committee thereof) shall nominate each person so designated.

19.COMMITTEE MEMBERSHIP. (i) So long as the Berkshire/Greenbriar Investors shall be entitled to designate two Berkshire/Greenbriar Nominees for election to the Board of Directors, the finance, compensation, nominating, audit and any other committee of the Board of Directors shall consist of at least one Berkshire/Greenbriar Director; provided, however, that if no Berkshire/Greenbriar Director is  eligible for membership on an above-listed committee under then-applicable listing standards of the NYSE or any other applicable law, rule or regulation, then such committee of the Board of Directors shall include a Berkshire/Greenbriar Director only when so permitted by the listing standards of the NYSE or any other applicable law, rule

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or regulation; provided, further, that the Corporation shall exercise all authority under applicable law, rule and regulation to permit the inclusion of any Berkshire/Greenbriar Director designated by the Berkshire/Greenbriar Investors on such committee, including, without limitation, causing an increase in the number of directors on such committee and (ii) so long as the Goldman Investors shall be entitled to designate two or more Goldman Nominees for election to the Board of Directors, the finance, compensation, nominating, audit and any other committee of the Board of Directors shall consist of at least one Goldman Director; provided, however, that if no Goldman Director is eligible for membership on an above-listed committee under then-applicable listing standards of the NYSE or any other applicable law, rule or regulation, then such committee of the Board of Directors shall include a Goldman Director only when so permitted by the listing standards of the NYSE or any other applicable law, rule or regulation; provided, further, that the Corporation shall exercise all authority under applicable law, rule and regulation  to permit the inclusion of any Goldman Director designated by the Goldman Investors on such committee, including, without limitation, causing an increase in the number of directors on such committee.  To the extent that (i) Berkshire/Greenbriar Directors are not eligible for membership on the finance committee, compensation committee, nominating committee, audit committee and/or other committees of the Board of Directors, the Berkshire/Greenbriar Investors shall be entitled to designate a representative to attend and observe such committee meetings, provided that the observation is not prohibited by applicable listing standards, laws, rules or regulations, and (ii) Goldman Directors are not eligible for membership on the finance committee, compensation committee, nominating committee, audit committee and/or other committees of the Board of Directors, the Goldman Investors shall be entitled to designate a representative to attend and observe such committee meetings, provided that the observation is not prohibited by applicable listing standards, laws, rules or regulations.

20.APPROVALS.  The Board of Directors shall not authorize, approve or ratify any of the following actions without the approval of (i) a majority of the Berkshire/Greenbriar Investors’ Directors for so long as and at any time the Berkshire/Greenbriar Investors Beneficially Own 15% or more of the Total Voting Power of the Corporation, and, if the Berkshire/Greenbriar Investors’ percentage Beneficial Ownership of the Total Voting Power of the Corporation is reduced below 15% by an issuance of Voting Securities by the Corporation, no such authorization, approval or ratification shall be given by the Board of Directors without the approval of a majority of the Berkshire/Greenbriar Directors (x) until 10 business days after the Corporation notifies the Berkshire/Greenbriar Investors in writing of such issuance, and (y) if the Berkshire/Greenbriar Investors shall have notified the Corporation within 10 business days after their receipt of a written notification of such issuance that the Berkshire/Greenbriar Investors, pursuant to the option granted to the Berkshire/Greenbriar Investors by Section 3.02 of the Stockholders Agreement, intend to acquire a sufficient amount of Voting Securities within such 90-day period referred to therein, so that the Berkshire/Greenbriar Investors will Beneficially Own at least 15% of the Total Voting Power of the Corporation by the end of such 90-day period subject to Section 16(d), during the 90-day period following an issuance of Voting Securities by the Corporation that causes the Berkshire/Greenbriar Investors to Beneficially Own less than 15% of the Total Voting Power of the Corporation and (ii) a majority of the Goldman

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Directors for so long as and at any time (subject to the provisions of Sections 17(b)(vi)) the Goldman Investors Beneficially Own 15% or more of the Total Voting Power of the Corporation and, if the Goldman Investors’ percentage Beneficial Ownership of the Total Voting Power of the Corporation is reduced below 15% by an issuance of Voting Securities by the Corporation, no such authorization, approval or ratification shall be given by the Board of Directors without the approval of a majority of the Goldman Directors (x) until 10 business days after the Corporation notifies the Goldman Investors in writing of such issuance, and (y) if the Goldman Investors shall have notified the Corporation within 10 business days after their receipt of a written notification of such issuance that the Goldman Investors, pursuant to the option granted to the Goldman Investors by Section 3.02 of the Governance Agreement, intend to acquire a sufficient amount of Voting Securities within such 90-day period referred to therein, so that the Goldman Investors will Beneficially Own at least 15% of the Total Voting Power of the Corporation by the end of such 90-day period subject to Section 16(d), during the 90-day period following an issuance of Voting Securities by the Corporation that causes the Goldman Investors to Beneficially Own less than 15% of the Total Voting Power of the Corporation:

(a)any merger, consolidation, acquisition or other business combination involving the Corporation or any Subsidiary of the Corporation (other than a Buyout Transaction) if the value of the consideration to be paid or received by the Corporation and/or its stockholders in any such individual transaction or in such transaction when added to the aggregate value of the consideration paid or received by the Corporation and/or its stockholders in all other such transactions approved by the Board of Directors during the immediately preceding 12 months exceeds the greater of (x) $75 million or (y) 11% of the Corporation’s total consolidated assets;

(b)any sale, transfer, assignment, conveyance, lease or other disposition or any series of related dispositions of any assets, business or operations of the Corporation or any of its Subsidiaries (other than a Buyout Transaction) if the value of the assets, business or operations so disposed during the immediately preceding 12 months exceeds the greater of (x) $75 million or (y) 11% of the Corporation’s total consolidated assets; or

(c)any issuance by the Corporation or any Significant Subsidiary of the Corporation of equity or equity-related securities (other than (i) pursuant to customary employee or director stock option or incentive compensation or similar plans approved by the Board of Directors or a duly authorized committee of the Board of Directors, (ii) pursuant to transactions solely among the Corporation and its wholly owned Subsidiaries (including any Subsidiaries which would be wholly owned by the Corporation but for the issuance of directors’ or shareholders’ qualifying shares), (iii) upon conversion of convertible securities or upon exercise of warrants or options, which convertible securities, warrants or options are either outstanding on March 19, 2003 (including, without limitation, issuances of securities upon any payment of dividends on, redemption of, or otherwise payable with respect to the Series A Convertible Preferred Stock or the Series B Convertible Preferred Stock), or approved by the Board of Directors or a duly authorized committee of the Board of Directors after March 19, 2003,

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in accordance with Section 2.06 of the Governance Agreement and Section 2.06 of the Stockholders Agreement, or (iv) in connection with any mergers, consolidations, acquisitions or other business combinations involving the Corporation or any Subsidiary of the Corporation which are approved by the Board of Directors or a duly authorized committee of the Board of Directors in accordance with Section 2.06 of the Governance Agreement and Section 2.06 of the Stockholders Agreement (if either is applicable)) for which the consideration received by the Corporation for such transactions during the immediately preceding 12 months exceeds $25 million.

21.NONEXCLUSIVITY.  The Goldman Investors’ and the Berkshire/Greenbriar Investors’ rights under Sections 14, 15, 16, 17, 18, 19, and 20 shall not be deemed exclusive of any rights related to similar matters to which the Goldman Investors and the Berkshire/Greenbriar Investors may be entitled under these Bylaws, the Certificate of Incorporation, any agreement (including the Governance Agreement and the Stockholders Agreement) or otherwise.

22.QUORUM AND REQUIRED VOTE.  Six (6) of the directors then in office, including at least two Independent Directors, shall constitute a quorum for the transaction of business. Except as otherwise provided by the Certificate of Incorporation or these Bylaws, every act or decision done or made by a majority of the directors present at a meeting duly held at which a quorum is present is the act of the Board of Directors.  Subject to Section 3.03 of the Governance Agreement and Section 3.03 of the Stockholders Agreement, as applicable, for so long as there are any Goldman Directors or Berkshire/Greenbriar Investors Directors serving on the Board of Directors, the Board of Directors shall not authorize, approve or ratify any action, at a meeting of the Board of Directors, by written consent or otherwise, without the approval of a minimum of six (6) members of the Board of Directors, of which at least two (2) of such six (6) members shall be Independent Directors, or in the event that the Board of Directors shall consist of less than six (6) members due to vacancies on the Board of Directors, the approval of all members of the Board of Directors, shall be required for authorization, approval or ratification of any action.

23.REMOVAL.  Except as provided in the Certificate of Incorporation and in Section 16 hereof, a director may be removed from office at any time, with or without cause, by the affirmative vote of the holders of a majority of the outstanding shares entitled to vote at an election of directors. No reduction in the number of directors shall have the effect of removing any director prior to the expiration of his term.

24.RESIGNATION.   Any director may resign by giving written notice to the Chairman of the Board, the Chief Executive Officer, the Secretary or the Board of Directors.  Such resignation shall be effective when given unless the notice specifies a later time.  The resignation shall be effective regardless of whether it is accepted by the Corporation.

25.COMPENSATION.  If the Board of Directors so resolves, the directors, including the Chairman of the Board, shall receive compensation and expenses of attendance at meetings of the Board of Directors and committees of the Board of

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Directors. Nothing herein shall preclude any director from serving the Corporation in another capacity and receiving compensation for such service.

26.COMMITTEES.   Subject to Section 19, the Board of Directors may, by resolution adopted by a majority of the authorized number of directors, designate one or more committees, each consisting of two or more directors, to serve at the pleasure of the Board of Directors. In the absence or disqualification of any member of a committee of the Board of Directors, the other members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may, subject to Section 19, unanimously appoint another member of the Board of Directors to act in the place of such absent or disqualified member. The Board of Directors may, subject to Section 19, designate one or more directors as alternate members of a committee who may replace any absent member at any meeting of the committee. To the extent permitted by resolution of the Board of Directors, a committee may exercise all of the authority of the Board of Directors to the extent permitted by Section 141(c) of the GCL.

27.TIME AND PLACE OF MEETINGS AND TELEPHONE MEETINGS .  Immediately following each annual meeting of stockholders (or at such other time and place as may be determined by the Board of Directors), the Board of Directors shall hold a regular meeting for purposes of organizing the Board of Directors, electing officers, appointing committees and transacting other business. The Board of Directors may establish by resolution the times, if any, that other regular meetings of the Board of Directors shall be held. All meetings of directors shall be held at the principal executive office of the Corporation or at such other place, whether within or without the State of Delaware, as shall be designated in the notice for the meeting or in a resolution of the Board of Directors. Directors may participate in a meeting through use of conference telephone or similar communications equipment, so long as all directors participating in such meeting can hear each other.

28.CALL.  Meetings of the Board of Directors, whether regular or special, may be called by the Chairman of the Board, the Chief Executive Officer, the Secretary or any two directors.

29.NOTICE.  Regular meetings of the Board of Directors may be held without notice if the date and time of such meetings have been fixed by the Board of Directors. Special meetings shall be held upon four days’ notice by mail, 24 hours notice delivered personally or by telephone, telegraph or confirmed fax or on such shorter notice as the person or persons calling such meeting may deem necessary or appropriate under the circumstances. Regular meetings shall be held upon similar notice if notice is required for such meetings. Neither a notice nor a waiver of notice need specify the purpose of any regular or special meeting. Notice sent by mail, telegram or fax shall be addressed to a director at his business or home address/fax number as shown upon the records of the Corporation, or at such other address/fax number as the director specifies in writing delivered to the Corporation, or if such an address/fax number is not so shown on such records and no written instructions have been received from the director, at the place at which meetings of directors are regularly held. Such mailing, telegraphing, delivery or

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transmittal, as above provided, shall be due, legal and personal notice to such director. If a meeting is adjourned for more than 24 hours, notice of the adjourned meeting shall be given prior to the time of such meeting to the directors who were not present at the time of the adjournment.

30.MEETING WITHOUT REGULAR CALL AND NOTICE.  The transaction of business at any meeting of the Board of Directors, however called and noticed or wherever held, is as valid as though transacted at a meeting duly held after regular call and notice if a quorum is present and if, either before or after the meeting, each of the directors not present signs a written waiver of notice, a consent to holding the meeting or an approval of the minutes of the meeting. For such purposes, a director shall not be considered present at a meeting if, although in attendance at the meeting, the director protests the lack of notice prior to the meeting or at its commencement.

31.ACTION WITHOUT MEETING.  Any action required or permitted to be taken by the Board of Directors may be taken without a meeting, if all of the members of the Board of Directors individually or collectively consent in writing to such action. In addition, all directors (including those who are not members of a particular committee) shall receive notice of, and shall be entitled to attend, all meetings of any committee of the Board of Directors. Only those directors who are members of a particular committee shall be entitled to vote at meetings thereof.

32.COMMITTEE MEETINGS.  The principles set forth in Sections 27 through 31 of these Bylaws shall also apply to committees of the Board of Directors and to actions taken by such committees.

33.HONORARY ADVISORS TO THE BOARD.  The Board of Directors may appoint one or more Honorary Advisors, who shall hold such position for such period, shall have such authority and perform such duties as the Board of Directors may specify, subject to change at any time by the Board of Directors. An Honorary Advisor to the Board of Directors shall not be a director for any purpose or with respect to any provision of the Certificate of Incorporation, these Bylaws or of the GCL, and shall have no vote as a director. However, an Honorary Advisor to the Board of Directors may receive such compensation and expense reimbursement as the Board of Directors shall from time to time determine.

OFFICERS

34.TITLES AND RELATION TO BOARD OF DIRECTORS.  The officers of the Corporation shall include a Chief Executive Officer, a President and a Secretary. The Board of Directors may also choose a Chairman of the Board, one or more Vice Chairmen of the Board, a Chief Operating Officer, a Chief Financial Officer, a General Counsel, a Treasurer, and one or more Vice Presidents (who may be designated Executive or Senior Vice Presidents), Assistant Secretaries, Assistant Treasurers or other officers. All officers shall perform their duties and exercise their powers subject to the direction of the Chief Executive Officer and the overriding direction of the Board of Directors. If there shall occur a vacancy in any office, in the absence of the appointment

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of a replacement by the Board of Directors, the Chief Executive Officer shall have the right and power to appoint a Secretary, a Treasurer, a Chief Operating Officer, a Chief Financial Officer, a General Counsel, one or more additional Vice Presidents (who may be designated Executive or Senior Vice Presidents), one or more Assistant Secretaries and one or more Assistant Treasurers, all of whom shall serve at the pleasure of the Board of Directors, and shall perform their duties and exercise their powers subject to the direction of the Chief Executive Officer and the overriding direction of the Board of Directors. Any number of offices may be held simultaneously by the same person.

35.ELECTION, TERM OF OFFICE AND VACANCIES.  At its regular annual meeting, the Board of Directors shall choose the officers of the Corporation. The officers shall hold office until their successors are chosen, except that the Board of Directors may remove any officer at any time. Subject to Section 34 of these Bylaws, if an office becomes vacant for any reason, the vacancy shall be filled by the Board of Directors.

36.RESIGNATION.  Any officer may resign at any time upon written notice to the Corporation without prejudice to the rights, if any, of the Corporation under any contract to which the officer is a party. Such resignation shall be effective when given unless the notice specifies a later time. The resignation shall be effective regardless of whether it is accepted by the Corporation.

37.COMPENSATION. The Board of Directors shall fix the compensation of the Chairman of the Board, any Vice Chairman, the Chief Executive Officer and the President and may fix the salaries of other employees of the Corporation including the other officers. If the Board of Directors does not fix the salaries of the other officers, the Chief Executive Officer shall fix such salaries.

38.CHAIRMAN OF THE BOARD.  The Chairman of the Board shall, if present, preside at all meetings of the Board of Directors, and exercise and perform such other powers and duties as may be from time to time assigned to him by the Board of Directors or prescribed by these Bylaws.

39.CHIEF EXECUTIVE OFFICER.  Unless otherwise determined by the Board of Directors, the Chief Executive Officer shall be deemed general manager of the Corporation. The Chief Executive Officer shall effectuate orders and resolutions of the Board of Directors and exercise such other powers and perform such other duties as the Board of Directors shall from time to time prescribe.

40.PRESIDENT AND VICE PRESIDENTS.  Unless otherwise determined by the Board of Directors, in the absence or disability of the Chief Executive Officer, the President, and in the absence or disability of the President, the Vice President (who may be designated Executive or Senior Vice President), if any, or if more than one, the Vice Presidents (who may be designated Executive or Senior Vice Presidents) in order of their rank as fixed by the Board of Directors or, if not so ranked, the Vice President (who may be designated Executive or Senior Vice President) designated by the Board of Directors, shall perform all the duties of the Chief Executive Officer, and when

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so acting shall have all the powers of, and be subject to all the restrictions upon, the Chief Executive Officer. The President and Vice Presidents (who may be designated Executive or Senior Vice Presidents) shall have such other powers and perform such other duties as from time to time may be prescribed for them by the Board of Directors or these Bylaws.

41.SECRETARY.  The Secretary (or in his absence an Assistant Secretary or, if there be no Assistant Secretaries, another person designated by the Board of Directors) shall have the following powers and duties:

(a)RECORD OF CORPORATE PROCEEDINGS.  The Secretary shall attend all meetings of the Board of Directors and its committees and shall record all votes and the minutes of such meetings in a book to be kept for that purpose at the principal executive office of the Corporation or at such other place as the Board of Directors may determine. The Secretary shall keep at the Corporation’s principal executive office the original or a copy of these Bylaws, as amended from time to time.

(b)RECORD OF SHARES.  Unless a transfer agent is appointed by the Board of Directors to keep a share register, the Secretary shall keep at the principal executive office of the Corporation a share register showing the names of the stockholders and their addresses, the number and class of shares held by each, the number and date of certificates issued, and the number and date of cancellation of each certificate surrendered for cancellation.

(c)NOTICES.  The Secretary shall give such notices as may be required by law or these Bylaws.

(d)ADDITIONAL POWERS AND DUTIES. The Secretary shall exercise such other powers and perform such other duties as the Board of Directors or the Chief Executive Officer shall from time to time prescribe.

42.TREASURER. Unless otherwise determined by the Board of Directors, the Treasurer of the Corporation shall be its chief financial officer, and shall have custody of the corporate funds and securities and shall keep adequate and correct accounts of the Corporation’s properties and business transactions. The Treasurer shall disburse such funds of the Corporation as may be ordered by the Board of Directors or by one or more persons authorized by the Board of Directors, taking proper vouchers for such disbursements, and when requested shall render to the Chief Executive Officer, the Board of Directors and, if applicable, the Chief Financial Officer, an account of all transactions and the financial condition of the Corporation and shall exercise such other powers and perform such other duties as the Board of Directors, the Chief Executive Officer or, if applicable, the Chief Financial Officer shall prescribe.

43.OTHER OFFICERS AND AGENTS.  Such other officers and agents as the Board of Directors may choose shall perform such duties and have such powers as from time to time may be assigned to them by the Board of Directors. The Board of Directors may delegate to any other officer of the Corporation the power to choose such other officers and to prescribe their respective duties and powers.

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SHARES

44.CERTIFICATES.  Every stockholder shall be entitled to have a certificate or certificates certifying the number and class of shares of the capital stock of the Corporation owned by him. All such certificates shall be signed in the manner prescribed in the GCL. Any signature on such certificates may be a facsimile signature. The Board of Directors shall have the power to appoint one or more transfer agents and/or registrars for the transfer or registration of certificates of stock of any class, and may require stock certificates to be countersigned or registered by one or more of such transfer agents and/or registrars.

45.TRANSFERS OF SHARES OF CAPITAL STOCK.  Transfers of shares shall be made only upon the transfer books of the Corporation, kept at the office of the Corporation or transfer agents and/or registrars designated by the Board of Directors. Before any new certificate is issued, the old certificate shall be surrendered for cancellation.

46.STOCKHOLDERS OF RECORD.  Only stockholders of record shall be entitled to be treated by the Corporation as the holders in fact of the shares standing in their respective names and the Corporation shall not be bound to recognize any equitable or other claim to or interest in any share of any other person, whether or not it shall have express or other notice thereof, except as expressly provided by law.

47.LOST, STOLEN OR DESTROYED CERTIFICATES.  The Corporation may cause a new stock certificate to be issued in place of any certificate previously issued by the Corporation alleged to have been lost, stolen or destroyed. The Corporation may, at its discretion and as a condition precedent to such issuance, require the owner of such certificate to deliver an affidavit stating that such certificate was lost, stolen or destroyed, or to give the Corporation a bond or other security sufficient to indemnify it against any claim that may be made against it, including any expense or liability, on account of the alleged loss, theft or destruction or the issuance of a new certificate.

48.STOCKHOLDERS RECORD DATE.  In order that the Corporation may determine the stockholders entitled to notice of and to vote at any meeting of stockholders or any adjournment thereof, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix a record date, which shall be not more than sixty (60) days nor less than ten (10) days before the date of such meeting. A determination of stockholders of record entitled to notice of and to vote at a meeting of stockholders shall apply to any adjournment of the meeting, provided, however, that the Board of Directors may fix a new record date for the adjourned meeting, and shall fix a

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new record date for such adjourned meeting if the adjourned meeting is to take place more than thirty (30) days from the date set for the original meeting.

49.DIVIDENDS.  Subject to the provisions of the Certificate of Incorporation and the GCL, the Board of Directors may, out of funds legally available therefor, declare dividends upon the stock of the Corporation. Before the declaration of any dividend, the Board of Directors may set apart, out of any funds of the Corporation available for dividends, such sum or sums as from time to time in its discretion may be deemed proper for working capital or as a reserve fund to meet contingencies or for such other purposes as shall be deemed conducive to the interests of the Corporation.

AMENDMENTS

50.ADOPTION OF AMENDMENTS.  The Board of Directors is authorized and empowered from time to time in its discretion to make, alter, amend or repeal these Bylaws, except as such power may be restricted or limited by the GCL; provided, however, that the provisions set forth in Sections 14, 16(a)-(d), 17, 18, 19, 20 or this Section 50 shall not be amended or repealed unless the Investors shall have consented thereto in writing. Notwithstanding the foregoing (i) those provisions of  Sections 14, 16(b)-(d), 17, 18, 19, 20 and the proviso in the preceding sentence of this Section 50 pertaining to the Berkshire/Greenbriar Investors shall be automatically repealed and cease to have any force or effect on the date upon which the Berkshire/Greenbriar Investors’ rights under the Stockholders  Agreement terminate pursuant to the terms of such agreement and (ii) those provisions of Sections 14, 16(b)-(d), 17, 18, 19, 20 and the proviso in the preceding sentence of this Section 50 pertaining to the Goldman Investors shall be automatically repealed and cease to have any force or effect on the date upon which the Goldman Investors’ rights under the Governance Agreement terminate pursuant to the terms of such agreement

51.RECORD OF AMENDMENTS.  Whenever an amendment or new bylaw is adopted, it shall be copied in the book to be kept for that purpose at the principal executive office of the Corporation or at such other place as the Board of Directors may determine. If any bylaw is repealed, the fact of repeal with the date of the meeting at which the repeal was enacted or written consent with respect thereto was filed shall be stated in said book.

CORPORATE SEAL

52.FORM OF SEAL.  The corporate seal shall be circular in form, and shall have inscribed thereon the name of the Corporation, the date of its incorporation and the word “Delaware”.

MISCELLANEOUS

53.CHECKS, DRAFTS, ETC.  All checks, drafts, or other orders for payment of money, notes, or other evidences of indebtedness, issued in the name of or payable by or to the Corporation, shall be signed or endorsed by the Chief Executive

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Officer, the President, the Chief Financial Officer, the Treasurer or such other person or persons as may from time to time be so authorized in accordance with a resolution of the Board of Directors.

54.CONTRACTS, ETC.; HOW EXECUTED.  Except as otherwise provided in these Bylaws, the Chief Executive Officer, the President, any Vice President (who may be designated Executive or Senior Vice President) or Treasurer, or such other officer or officers as may from time to time be so authorized in accordance with a resolution of the Board of Directors, shall have the power and authority to sign and execute on behalf of the Corporation deeds, conveyances and contracts, and any and all other documents requiring execution by the Corporation. The Board of Directors may authorize any other officer or officers, or agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the Corporation, and such authority may be general or confined to specific instances.

55.REPRESENTATION OF SHARES OF OTHER CORPORATIONS. The Chief Executive Officer, the President or any Vice President (who may be designated Executive or Senior Vice President) or the Secretary or Assistant Secretary of the Corporation are authorized to vote, represent, and exercise on behalf of the Corporation all rights incident to any and all shares of any other corporation or corporations standing in the name of the Corporation. The authority herein granted to said officers to vote or represent on behalf of the Corporation any and all shares held by the Corporation in any other corporation or corporations may be exercised either by such officers in person or by any other person authorized so to do by proxy or power of attorney duly executed by said officers.

56.INSPECTION OF BYLAWS.  The Corporation shall keep in its principal office for the transaction of business the original or a copy of these Bylaws as amended or otherwise altered to date, certified by the Secretary, which shall be open to inspection by the stockholders at all reasonable times during office hours.

57.FISCAL YEAR.  The fiscal year of the Corporation shall be fixed by resolution of the Board of Directors.

58.CONSTRUCTION AND DEFINITIONS.  Unless the context otherwise requires, the general provisions, rules and construction, and definitions contained in the GCL shall govern the construction of these Bylaws. Without limiting the generality of the foregoing, the masculine gender includes the feminine and neuter, the singular number includes the plural and the plural number includes the singular, and the term “person” includes a corporation or other entity or organization as well as a natural person.

59.SEVERABILITY.   If any provision of these Bylaws is determined to be invalid, void, illegal or unenforceable, the remaining provisions of these Bylaws shall continue to be valid and enforceable and shall in no way be affected, impaired or invalidated thereby.

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EX-10.1

Exhibit 10.1

HEXCEL CORPORATION
MANAGEMENT INCENTIVE COMPENSATION PLAN
As Amended and Restated on April 12, 2004

I.  Purpose

The purpose of the Hexcel Corporation Management Incentive Compensation Plan (the “Plan”) is to advance the interests of Hexcel Corporation (the “Company”) by providing an incentive for those key employees who have a direct, measurable opportunity to advance the Company’s goals and promote the growth and long-range interests of the Company. In addition, it is intended that the Plan create linkage between performance and compensation, align management’s interests with the interests of stockholders and encourage team management and corporate success. A further purpose of the Plan is to serve as a qualified performance-based compensation program under Section 162 (m) of the Code (as defined below) in order to preserve the Company’s tax deduction for compensation paid under the Plan to the Chief Executive Officer of the Company.

II.  Definitions

(a)“Adjusted GBU EBITDA” shall mean EBITDA before business consolidation and restructuring expenses.

(b)“Adjusted EBITDA” shall mean, with respect to a GBU, GBU EBITDA before business consolidation and restructuring expenses.

(c)“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.

(d)“Award” shall mean the amount (if any) payable to a Participant in respect of a Plan Year pursuant to the Plan.

(e)“Beneficial Owner” (and variants thereof) shall have the meaning given in Rule 13d-3 promulgated under the Exchange Act.

(f)“Board” shall mean the Board of Directors of the Company.

(g)“Cause” shall mean (i) the willful and continued failure by the Participant to substantially perform the Participant’s duties with the Company (other than any such failure resulting from the Participant’s incapacity due to physical or mental illness) after a written demand for substantial performance is delivered to the Participant by the Company, which demand specifically identifies the manner in which the Company believes that the Participant has not substantially performed the Participant’s duties, or (ii) the willful engaging by the Participant in conduct which is demonstrably and materially injurious to the Company or its Subsidiaries, monetarily or otherwise. For purposes of clauses (i) and (ii) of this definition, no act, or failure to act, on the Participant’s part shall be deemed “willful” unless done, or omitted to

be done, by the Participant not in good faith and without reasonable belief that the Participant’s act, or failure to act, was in the best interest of the Company.

(h)“CEO” shall mean the Chief Executive Officer of the Company.

(i)“Change in Control” shall have the meaning given in Article XV hereof.

(j)“Code” shall mean the Internal Revenue Code, as amended.

(k)“Committee” shall mean the Compensation Committee of the Board or such other committee of the Board as may be designated from time to time to administer the Plan.

(l)“Company” shall mean Hexcel Corporation, a Delaware corporation.

(m)“Consolidated Operating Cash Flow” shall mean the Company’s operating cash flow computed as the sum of Adjusted EBITDA, changes in working capital (on a constant currency basis), capital expenditures, cash dividends received and cash payments made for business consolidation and restructuring expenses.

(n)“Consolidated Operating Income” shall mean the net income of the Company and its Subsidiaries before preferred dividends and accretion, equity in earnings (losses) of affiliated companies, income taxes, interest expense and other non-operating gains and losses of the Company.

(o)“Disability” shall mean that, as a result of the Participant’s incapacity due to physical or mental illness or injury, the Participant shall not have performed all or substantially all of the Participant’s usual duties as an employee for a period of more than one-hundred-fifty (150) days in any period of one-hundred-eighty (180) consecutive days.

(p)“EBIT” shall mean net income of the Company and its Subsidiaries before preferred dividends and accretion, equity in earnings (losses) of affiliated companies and income taxes.

(q)“EBITDA” shall mean EBIT before depreciation and amortization.

(r)“EBT” shall mean net income of the Company and its Subsidiaries before preferred dividends and accretion, equity in earnings (losses) of affiliated companies and income taxes.

(s)“EPS (basic)” shall mean the consolidated net earnings (losses) available to common shareholders of the Company and its Subsidiaries per share of issued and outstanding Stock.

(t)“EPS (diluted)” shall mean the consolidated net earnings (losses) available to common shareholders of the Company and its Subsidiaries per share of Stock on a fully diluted basis.

(u)“Eligible Employee” shall mean any officer or employee of the Company or a Subsidiary.

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(v)“Exchange Act” shall mean the Securities Exchange Act of 1934, as amended from time to time.

(w)“GBU EBITDA” shall mean, with respect to a GBU, EBIT before depreciation and amoritzation.

(x)“GBU Operating Cash Flow” shall mean, with respect to a GBU, operating cash flow computed as the sum of Adjusted EBITDA, changes in working capital (on a constant currency basis), capital expenditures, cash dividends received and cash payments made for business consolidation and restructuring expenses.

(y)“Management Stock Purchase Plan” shall mean the Hexcel Corporation Management Stock Purchase Plan, as amended from time to time.

(z)“Participant” shall mean any Eligible Employee who is approved by the Committee, in its sole discretion, for participation in the Plan in any Plan Year.

(aa)“Performance Goals” shall mean any one or more criteria and objectives established by the Committee which must be met during the Plan Year as a condition of the Participant’s receipt of an Award in respect of such Plan Year. Performance Goals applicable to the CEO shall be based upon the extent of attainment of a level of Adjusted EBITDA, Consolidated Operating Cash Flow, Consolidated Operating Income, EBIT, EBITDA, EBT, EPS (basic), EPS (diluted), ROE, Revenue, RONA, Stock Price or SVA. Performance Goals applicable to any Participant other than the CEO may be any performance measurement relating to the Company, a Subsidiary or business unit which the Committee deems appropriate as well as the extent of attainment by a Participant of individual performance objectives.

(bb)“Person”, as used in Article XV hereof, shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) of the Exchange Act.

(cc)“Plan” shall mean this Hexcel Corporation Management Incentive Compensation Plan, as amended from time to time.

(dd)“Plan Year” shall mean each calendar year during which the Plan is in effect.

(ee)“Restricted Stock Units” shall mean the units in which an Award is partially or wholly payable pursuant to Article VI hereof and which are issuable pursuant to the Management Stock Purchase Plan.

(ff)“ROE” shall mean return on the equity of the Company and its Subsidiaries on a consolidated basis.

(gg)“Revenue” shall mean the consolidated net sales of the Company and its Subsidiaries.

(hh)“RONA” shall mean return on the consolidated net assets of the Company and its Subsidiaries.

(ii)“Stock” shall mean shares of common stock of the Company, par value $.01 per share.

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(jj)“Stockholders Agreement” shall mean any stockholders agreement, governance agreement or other similar agreement between the Company and a holder or holders of Voting Securities.

(kk)“Stock Price” shall mean the price of the Company’s Stock as reported on the New York Stock Exchange Consolidated Transactions Tape.

(ll)“Subsidiary” shall mean any subsidiary corporation of the Company consolidated with the Company for financial reporting purposes.

(mm)“SVA” shall mean return on the weighted average cost of capital of the Company.

(nn)“Target Incentive Award” shall have the meaning given in Section V(A) hereof.

(oo)“Voting Securities” means Common Stock and any other securities of the Company entitled to vote generally in the election of directors of the Company.

III.  Administration

Administration of the Plan shall be by the Committee, which shall, in applying and interpreting the provisions of the Plan, have full power and authority to construe, interpret and carry out the provisions of the Plan.  All decisions, interpretations and actions of the Committee under the Plan shall be at the Committee’s sole and absolute discretion and shall be final, conclusive and binding upon all parties. No member of the Board or the Committee shall be liable for any action taken or determination made in good faith with respect to the Plan or any Award granted hereunder.

IV.  Eligibility for Participation

The Committee shall have full and complete discretion in determining which Eligible Employees may be Participants in the Plan in any Plan Year. Participation in the Plan in any Plan Year shall not confer any right on any Participant to participate in any subsequent Plan Year.

V.  Determination of Awards

A.Establishment of Target Incentive Awards and Performance Goals.  No later than ninety (90) days after the beginning of a Plan Year the Committee shall establish for each Participant (i) a Target Incentive Award for such Plan Year and the applicable Performance Goals in respect of such Plan Year and (ii) the amount of Award payable under the Plan as a percentage (which may exceed one hundred (100%) percent) of the Target Incentive Award, derived from the degree of achievement of the applicable Performance Goals. The Performance Goals established by the Committee may be (but need not be) different each Plan Year and different goals may be applicable to different Participants. As soon as practicable after the establishment of the Target Incentive Award and Performance Goals, each Participant shall be notified in writing of such Target Incentive Award and the corresponding Performance Goals.

B.Amount of Award Payable Normally.  The Committee shall determine the Award payable to each Participant from the degree of achievement of the applicable Performance Goals. The Committee may, in its sole discretion, (a) increase the amount of any Award otherwise

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payable to any Participant (other than the CEO) or (b) decrease or eliminate the amount payable to a Participant (including the CEO), in each case to reflect such Participant’s individual performance or such other factors as the Committee deems relevant, or in recognition of changed or special circumstances. The amount of the Award payable to the CEO for any Plan Year shall not exceed $2,000,000.

C.Amount of Award with Change of Employment Status.  In the event of a change in employment status of a Participant (other than the CEO) during the Plan Year, the Committee may, in its sole discretion, adjust the Award determinants for the Participant based upon the Participant’s new status.

D.Amount of Award with Termination of Employment or Change in Control.  Except as otherwise provided in this paragraph, payment of an Award to a Participant for a particular Plan Year shall be made only if the Participant is employed by the Company or one of its Subsidiaries on the last day of the Plan Year. Notwithstanding any other provision of the Plan, in the case of a Participant’s voluntary termination of employment with the Company or a Subsidiary or upon termination of employment with the Company or a Subsidiary for Cause during a Plan Year, the Committee may, in its sole discretion, authorize the full or partial payment of an Award for such Plan Year, if the Participant was actively employed for at least six months during the Plan Year. In the case of a Participant’s separation from service due to Disability or death or, in the case of a Participant’s (other than the CEO) involuntary termination of employment by the Company or a Subsidiary other than for Cause, a Participant shall be entitled to receive an Award, prorated for the period of active employment with the Company or a Subsidiary during the Plan Year, payable in accordance with Article VI below. In the case of a Change in Control of the Company during a Plan Year, a Participant shall be entitled to receive an Award, prorated for the period of active employment with the Company or a Subsidiary during such Plan Year and prior to the Change in Control, computed as if applicable Performance Goals had been attained at the one hundred (100%) percent level and payable in cash no later than the fifth (5th) day following the Change in Control.

VI.  Payment of Awards

A.Timing of Payment.  Except as provided in the last sentence of Section V(D) hereof, an Award which becomes payable to a Participant pursuant to Article V hereof shall be paid to the Participant (or the Participant’s estate in the event of the Participant’s death) as soon as practicable after the close of the Plan Year and certification by the Committee of the degree of achievement of the relevant Performance Goals. No Participant shall have the unconditional right to an Award hereunder until the Plan Year has concluded and the exact amount of the Award (if any) has been determined and certified by the Committee.

B.Payment in Cash and/or Restricted Stock Units.  At the election of each Participant who has been designated by the Committee as a participant in the Management Stock Purchase Plan, up to fifty (50%) percent of the Participant’s Award for any Plan Year shall be paid in Restricted Stock Units pursuant to, and subject to the terms and conditions of, the Management Stock Purchase Plan; provided, however, that the Participant’s Award for any Plan Year in which a Change in Control occurs shall be paid totally in cash. The Committee, in its discretion, may permit a Participant in the Management Stock Purchase Plan who first becomes employed by the Company or a Subsidiary during a given Plan Year to elect to have up to one-hundred (100%) percent of the Participant’s Award for such Plan Year paid in such Restricted Stock Units. The number of Restricted Stock Units to be paid to a Participant shall be calculated in accordance with the Management Stock Purchase Plan. Payment of the balance of the Participant’s Award for

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such Plan Year (or all thereof if no election of Restricted Stock Units is made by the Participant) shall be made in cash. Payments of portions of any Awards made in Restricted Stock Units pursuant to the Management Stock Purchase Plan may be referred to therein as “purchases” of such Restricted Stock Units.

VII.  Deferral Elections

The Committee may, at its option, establish written procedures pursuant to which Participants are permitted to defer the receipt of Awards payable under the Plan.

VIII.  Accounting Determinations

The Committee reserves sole discretion in adopting and changing, from time to time, the accounting principles and practices reflected in audited financial statements of the Company and, in its sole and absolute judgment, to make such other adjustments in Company financial results and/or Performance Goals as may be deemed reasonable, including, without limitation, changes to reflect acquisitions, divestitures, other corporate capital reorganizations, recapitalization or extraordinary events.

IX.  Amendment and Termination of Plan

The Compensation Committee of the Board reserves the right, at any time including during a Plan Year, to amend, suspend or terminate the Plan, in whole or in part, in any manner, and for any reason, and without the consent of any Participant, or other person; provided, that no such amendment, suspension or termination shall adversely affect the payment of any Award for a Plan Year ending prior to the action amending, suspending or terminating the Plan or the payment of any Award payable pursuant to the last sentence of Section V(D) hereof or the rights of a Participant pursuant to any agreement with the Company or any Subsidiary.

X.  Governing Law

The provisions of the Plan shall be governed and construed in accordance with the laws of the State of Delaware without giving effect to the choice of law principles thereof.

XI.  Miscellaneous Provisions

Nothing contained in the Plan shall give any employee the right to be retained in the employment of the Company or a Subsidiary or affect the right of the Company or a Subsidiary to dismiss any employee. The Plan shall not constitute a contract between the Company or a Subsidiary and any employee. Unless approved by the Committee in respect of a particular Plan Year, no Participant shall have any right to be granted an Award hereunder. Nothing contained in the Plan shall restrict the Committee’s power to grant any employee an award or bonus outside the scope of this Plan.

XII.  No Alienation of Benefits

Except insofar as may otherwise be required by law, no amount payable at any time under the Plan shall be subject in any manner to alienation by anticipation, sale, transfer, assignment, bankruptcy, pledge, attachment, charge or encumbrance of any kind, nor in any manner be subject to the debts or liabilities of a Participant, and any attempt to so alienate or subject any such amount, whether presently or thereafter payable, shall be void.

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XIII.  No Right, Title or Interest in Company’s Assets

Nothing contained in the Plan, and no action taken pursuant to its provisions, shall create, or be construed to create, a trust of any kind, or fiduciary relationship between the Company or a Subsidiary and any Participant or any other person. To the extent that any person acquires a right to receive payments from the Company under the Plan, such rights shall be no greater than the right of an unsecured general creditor of the Company. All payments to be made hereunder shall be paid from the general funds of the Company, and no special or separate funds shall be established, and no segregation of assets shall be made, to assure payment thereof.

XIV.  No Stock Subject to the Plan

No shares of Stock shall be reserved for, or issued under, the Plan. To the extent that Awards are paid in Restricted Stock Units, each Restricted Stock Unit shall be issued under, and subject to the terms and conditions of, the Management Stock Purchase Plan.

XV.  Change in Control

Unless otherwise specified by the Committee at the commencement of a Plan Year, for purposes of the Plan the term “Change in Control” shall mean any of the following events:

(1) any Person is or becomes the Beneficial Owner, directly or indirectly, of 40% or more of either (a) the then outstanding 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: (i) any acquisition by the Company or any of its Controlled Affiliates, (ii) 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 April 12, 2004, 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 date whose election, or nomination for election by the Company’s stockholders, was made or approved pursuant to the terms of each then existing Stockholders Agreement or 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

(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 (a) pursuant to which 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,

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more than 50%, respectively, of the outstanding common stock and the combined voting power of the then 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 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) 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 (b) 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.

XVI.  Interpretation

The Plan is designed and intended to comply with Section 162 (m) of the Code to the extent applicable to the CEO as a “covered person” as defined therein, and the Plan shall be construed in a manner to so comply.

XVII.  Effective Date and Term

This Plan is hereby amended and restated as authorized by the Compensation Committee on April 12, 2004, subject to shareholder approval.

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EX-31.1

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)) 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)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

c)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 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:

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.

August 9, 2004	/s/ David E. Berges
(Date)	David E. Berges Chairman of the Board of Directors, President and Chief Executive Officer

EX-31.2

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;

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 and 15d-15(e)) 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)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

c)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 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 the registrant’s board of directors:

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.

August 9, 2004	/s/ Stephen C. Forsyth
(Date)	Stephen C. Forsyth Executive Vice President and Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Hexcel Corporation (the “Company”) on Form 10-Q for the period ending June 30, 2004 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, 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.

August 9, 2004	/s/ David E. Berges
(Date)	David E. Berges Chairman of the Board of Directors, President and Chief Executive 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.

EX-32.2

Exhibit 32.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Hexcel Corporation (the “Company”) on Form 10-Q for the period ending June 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, 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.

August 9, 2004	/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.