Hexcel Corporation and its subsidiaries, is a leading advanced composites company. We develop, manufacture, and market lightweight, high-performance composites, including carbon fibers, reinforcements, prepregs, honeycomb, matrix systems, adhesives and composite structures, for use in commercial aerospace, space and defense and industrial applications. Our products are used in a wide variety of end applications, such as commercial and military aircraft, rotorcraft, space launch vehicles and satellites, wind turbine blades, automotive and a wide variety of recreational equipment.

We serve international markets through manufacturing facilities and sales offices located in the United States, Europe and Asia, and through sales representation offices located in Asia, Australia and South America. We also hold a 50% interest in Asian Composites Manufacturing Sdn. Bhd., located in Malaysia, which manufactures composite structures for commercial aerospace.

Hexcel has two segments, Composite Materials and Engineered Products. The Composite Materials segment manufactures and markets carbon fibers, fabrics and specialty reinforcements, prepregs, structural adhesives, honeycomb, composite panels, molding compounds, polyurethane systems and laminates that are incorporated into many applications, including military and commercial aircraft, rotorcraft, wind turbine blades and recreational products. The Engineered Products segment manufactures and markets composite structures and precision machined honeycomb parts for use primarily in the aerospace industry. Composite structures are manufactured from a variety of composite and other materials, including prepregs, honeycomb, structural adhesives and advanced molding materials, using such manufacturing processes as autoclave processing, multi-axis numerically controlled machining, heat forming, compression molding and other composite manufacturing techniques.

The global economic downturn, significant supply chain inventory adjustments and availability of credit for end customers has affected demand from commercial aerospace customers and for wind energy programs. Though there are short term uncertainties, the focus on increasing alternative energy sources continues to promise a bright future for wind energy. More importantly, the compelling economics of new, lightweight, wide body aircraft that have become critical to end user demand remain intact. Although this translates into a favorable demand mix that includes a higher percentage of composite rich models, current economic conditions and new program delays lead us to be cautious in the near term regarding projected build-rates and wind energy project funding.

Net sales for the quarter were $257.1 million, 22.4% lower (21.1% lower in constant currency) than the $331.4 million reported for the third quarter of 2008. Year to date, net sales are 15.2% lower than last year in constant currency. The drop in sales is related to significant supply chain inventory adjustments, the rapid decline in the regional and business aircraft market and new program delays. The wind energy market is also now experiencing lower levels of demand as financing issues facing wind generator customers have begun to delay previously announced projects.

Therefore, in response to these tough market conditions, Hexcel has taken the difficult but necessary steps to control its cost structure in the near term while preserving our ability to meet customers' needs over the medium term. In the quarter we continued to reduce headcount, controllable costs, capital expenditures and inventories. We have furloughed workers at several plants and reduced the number of days that several of our facilities are in operation in an effort to better balance our cost structure with the current demand environment. These actions have translated into strong free cash flows (defined as cash provided by operating activities less capital expenditures) for the Company as we generated $36 million in free cash flow for the quarter, and we are now $58 million free cash flow positive for the year as compared to $82 million of usage in the first nine months of 2008.

There were significant working capital improvements as the lower sales volumes combined with concerted efforts to reduce accounts receivable and inventories resulted in $30 million of cash in 2009 from working capital as compared to a $75 million use of cash for the same period in 2008. Accrual basis additions to capital expenditures were $65.8 million in the first nine months of 2009, as compared to $125.8 million during the first nine months of 2008.

Commercial aerospace sales declined 27.8% (27.0% constant currency) for the quarter and 26.1% (23.8% constant currency) for the nine month period and were down across all sectors as our customers tightened inventory management as we enter a more cautious period. The majority of our sales to this market are for large aircraft produced by Airbus and Boeing. After a three year period of record orders from 2005 to 2007, followed by a robust year of orders in 2008, these two OEMs combined only had 193 net orders and a number of deferrals for the first nine months of 2009. This however, still leaves over 6,900 planes in backlog. Based on estimates from Airbus and Boeing, they expect to deliver about 960 aircraft in 2009 (717 were delivered in the first nine months on 2009), and if this happens it would exceed the previous highest number of deliveries of 914 in 1999. Nonetheless, the current poor global credit environment leads to significant concerns about the demand, timing and financial ability of airline operators to acquire new aircraft in backlog. As a result, there remains significant uncertainty and a wide range of views regarding new aircraft build schedules in 2010 and beyond. Offsetting this negative outlook to some extent, new aircraft such as the Boeing 787 and 747-8 as well as Airbus A380 and A350 will add incremental sales as they come into production and ramp-up to full production rates because of significant increased Hexcel content per plane.

In 2008, other commercial aerospace sales, which include regional and business aircraft, totaled almost $200 million in 2008, while the current run rate based on the last two quarters is now in the range of $100 million per year. This reduction reflects the sharp

drop in demand that, for the most part, began in the second quarter of 2009 as a result of the current global economic environment.

Space and Defense sales were down 1.5% (flat in constant currency) for the quarter and essentially flat for the nine month period (up 3.5% in constant currency). We continue to benefit from our extensive qualifications to supply composite materials and, in some cases, composite structures to a broad range of rotorcraft, transport, fixed wing attack and satellite programs around the world. No one program represents more than 10% of our revenue in this market, but the C17 and F22 are among our important programs and could be curtailed in the future. These two programs combined account for about 15% of our Space and Defense sales. On the other hand, sales from rotorcraft, including the V22 tilt rotor program, and the eventual ramp-up of the Joint Strike Fighter and the new A400M transport are expected to offset the potential impact of one or two program cancellations over time.

Industrial sales were down 30.5% (27.9% in constant currency) for the quarter and down 19.5% (12.0% in constant currency) for the nine months from last year. Wind energy sales, which have historically been primarily European based, comprise more than half of the industrial sales and were down more than 25% in constant currency from third quarter 2008 levels, after being flat in constant currency for the first half of 2009 as compared to 2008. Existing and new wind turbine projects are clearly being hampered by difficult credit markets. Recent clarity in the American Recovery and Reinvestment Act of 2009 should help restart order flow in the U.S., where we have just had our first sales of qualified material from our new Windsor, Colorado facility. Our shipments to the American Centrifuge Project stopped in August as USEC, the developer of the American Centrifuge Project, works with the Department of Energy to try and obtain the necessary loan guarantees to enable them to resume the project.

The much lower sales volume more than offset improvements gained from factory productivity initiatives, headcount reductions, lower commodity and freight costs and overall good cost control for the quarter and nine months ended September 30, 2009. The strengthening of the Dollar against the Euro and the British pound over most of the last year creates mixed effects on our results. The Dollar movement against the two currencies resulted in a decrease in sales of $5.7 million in the quarter and $43.4 million in the nine-month period on a year over year basis. However, operating income was slightly favorably impacted by these same currency movements for the nine months of 2009 as compared to same period in 2008 as many European commercial aerospace sales are generally in US Dollars with related costs in Euros and British pounds.

Third Quarter and Nine Months Results



                           Quarter Ended September 30,                       Nine Months Ended September 30,
(In millions, except
per share data)             2009                2008         % Change         2009                  2008           % Change
Net sales              $         257.1     $         331.4      (22.4 )% $         841.7     $           1,035.4      (18.7 )%
Operating income                  19.6                35.9      (45.4 )%            89.2                   101.6      (12.2 )%
Net income                        10.4                33.0      (68.5 )%            50.6                    82.9      (39.0 )%
Diluted net income
per common share       $          0.11     $          0.34               $          0.52     $              0.85

Non-GAAP measures:
Adjusted operating
income                 $          17.9     $          36.6      (51.1 )% $          89.2     $             114.4      (22.0 )%
As a percentage of
net sales                          7.0 %              11.0 %                        10.6 %                  11.0 %
Adjusted net income    $           9.3     $          21.3      (56.3 )% $          50.6     $              64.0      (20.9 )%
Adjusted diluted
earnings per share     $          0.10     $          0.22               $          0.52     $              0.66

The Company uses non-GAAP financial operating measures, including sales measured in constant dollars, operating income adjusted for non-recurring operating expenses and business consolidation and restructuring expenses, net income adjusted for non-recurring expenses, the effective tax rate adjusted for certain one-time items and free cash flow. Management believes these non-GAAP measurements are meaningful to investors because they provide a view of Hexcel with respect to ongoing operating results and comparisons to prior periods. Non-recurring items and certain tax adjustments represent significant charges or credits that are important to an understanding of Hexcel's overall operating results in the periods presented. Such non-GAAP measurements are not determined in accordance with generally accepted accounting principles and should not be viewed as an alternative to GAAP measures of performance. The following is a reconciliation from GAAP to non-GAAP amounts for operating and net income.

                                        Quarter Ended September 30,         Nine Months Ended September 30,
(In millions, except per share
data)                                     2009               2008             2009                 2008
Operating income                     $         19.6     $         35.9   $          89.2     $           101.6
Adjustment to prior year gain on
sale of a business (a)                         (1.7 )                -              (1.7 )                   -
Environmental Expense (b)                         -                  -               1.7                   7.6
Business consolidation &
restructuring expense                             -                0.7                 -                   2.5
Pension Settlement Expense                        -                  -                 -                   2.7
Adjusted operating income            $         17.9     $         36.6   $          89.2     $           114.4

Net income                           $         10.4     $         33.0   $          50.6     $            82.9
Adjustment to prior year gain on
sale of a business (a)                         (1.1 )                -              (1.1 )                   -
Gain on sale of investment in
affiliated companies (c)                          -              (11.7 )               -                 (11.7 )
Tax adjustments (d)                               -                  -                 -                 (13.6 )
Environmental Expense (net of tax)
(b)                                               -                  -               1.1                   4.7
Pension Settlement Expense (net of
tax)                                              -                  -                 -                   1.7
Adjusted net income                  $          9.3     $         21.3   $          50.6     $            64.0

(b) The nine-month period of 2009 Environmental Expense adjustments relate to an increase to the estimated remediation costs for the Lodi, New Jersey site and another facility in France (sold in 2007). The nine-month period of 2008 Environmental Expense relates to an increase to the estimated remediation costs for the Lodi site.

(c) The third quarter of 2008 includes $11.7 million after tax gain from the sale of our joint venture interest in BHA.

(d) The nine months ended September 30, 2008 includes a total of $13.6 million in net benefit primarily related to the reinstatement of U.S. deferred tax assets which had been previously written off.

Net sales decreased for the quarter and nine months ended September 30, 2009 from the same periods in 2008, reflecting lower sales volume in Commercial Aerospace and Industrial markets. Sales for the quarter ended September 30, 2009 were 22.4% (21.1% in constant currency) lower than the same quarter in 2008 and sales for the nine months ended September 30, 2009 were 18.7% (15.2% in constant currency) lower than the nine months ended September 30, 2008.

The following table summarizes net sales to third-party customers by segment and end market for the quarters and nine months ended September 30, 2009 and 2008:

                             Quarter Ended September 30,                   Nine Months Ended September 30,
(In millions)                 2009                2008         % Change         2009               2008       % Change
Consolidated Net Sales   $         257.1     $         331.4      (22.4 )% $         841.7     $    1,035.4      (18.7 )%
Commercial Aerospace               127.5               176.5      (27.8 )%           419.1            567.1      (26.1 )%
Space & Defense                     74.5                75.6       (1.5 )%           226.5            224.8        0.8 %
Industrial                          55.1                79.3      (30.5 )%           196.1            243.5      (19.5 )%

Composite Materials      $         195.8     $         268.6      (27.1 )% $         654.0     $      839.0      (22.1 )%
Commercial Aerospace                86.4               131.9      (34.5 )%           289.8            423.6      (31.6 )%
Space & Defense                     54.5                58.5       (6.8 )%           169.2            175.4       (3.5 )%
Industrial                          54.9                78.2      (29.8 )%           195.0            240.0      (18.8 )%

Engineered Products      $          61.3     $          62.8       (2.4 )% $         187.7     $      196.4       (4.4 )%
Commercial Aerospace                41.1                44.6       (7.8 )%           129.3            143.5       (9.9 )%
Space & Defense                     20.0                17.1       17.0 %             57.3             49.4       16.0 %
Industrial                           0.2                 1.1      (81.8 )%             1.1              3.5      (68.6 )%

Commercial Aerospace: Net sales decreased $49.0 million, or 27.8% (27.0% on a constant currency basis), to $127.5 million for the third quarter of 2009. Net sales for the nine months ended September 30, 2009 decreased $148.0 million or 26.1% (23.8% on a constant currency basis) to $419.1 million from the nine months ended September 30, 2008. The supply chain inventory adjustments begun earlier in the year continued in full force resulting in exaggerated sales declines, particularly for Airbus programs. Sales from our Engineered Products segment were only down 2.4% for the quarter. These sales have much shorter lead times in advance of aircraft delivery and are less subject to significant inventory adjustments. As a result, these sales were the only ones impacted in September 2008 when the Boeing strike started last year. Revenues attributed to new aircraft programs (A380, A350, B787 and B747-8) for the third quarter were consistent with those in the first half of 2009, and slightly higher than last year. The impact of foreign exchange rates reduced Commercial Aerospace sales by $1.9 million and $16.8 million in the three and nine months ended September 30, 2009, respectively.

Sales to other aerospace sectors, which include regional and business aircraft customers, were down over 50% as compared to the third quarter 2008 as the impact of announced production cut-backs in this segment has been felt since last quarter.

Space & Defense: Net sales decreased $1.1 million, or 1.5% (essentially flat on a constant currency basis), to $74.5 million for the third quarter of 2009. Net sales for the nine months ended September 30, 2009 increased $1.7 million, or 0.8% (3.5% on a constant currency basis) to $226.5 million. Rotorcraft sales continue to be strong. The impact of foreign exchange rates reduced Space and Defense sales by $0.9 million and $5.9 million in the three and nine months ended September 30, 2009, respectively.

Industrial: Net sales decreased $24.2 million, or 30.5% (a decrease of 27.9% on a constant currency basis), to $55.1 million for the third quarter of 2009. Net sales for the nine months ended September 30, 2009 decreased $47.4 million or 19.5% (a decrease of 12.0% on constant currency basis) to $196.1 million. Wind energy sales, which have historically been primarily European based, comprise more than half of the industrial sales and were down more than 25% in constant currency from third quarter 2008. Existing and new wind turbine projects are clearly being hampered by difficult credit markets. The impact of foreign exchange rates reduced Industrial sales by $2.9 million and $20.7 million in the three and nine months ended September 30, 2009, respectively.

                                  Gross Margin



                           Quarter Ended September 30,                     Nine Months Ended September 30,
(In millions)                2009               2008        % Change          2009                 2008         % Change
Gross margin            $         52.1     $         71.1      (26.7 )% $          192.2     $          227.3      (15.4 )%
Percentage of sales               20.3 %             21.5 %                         22.8 %               22.0 %

The decrease in gross margin of $19.0 million for the third quarter of 2009 and $35.1 million for the first nine months of 2009 resulted primarily from lower sales volume, which more than offset the year-on-year operational improvements, cost controls and headcount reductions taken during the periods. Our headcount is now 15% lower than the June 2008 peak. The gross margin percentage declined 1.4% from the second quarter of 2009, due to both lower volumes and modest headwinds from exchange rates. Foreign exchange rates contributed about 40 basis points to the quarter's improved gross margin percentage over last year and over 50 basis points on a year-to-date basis.

Depreciation and amortization expense, included in cost of sales during the quarter increased $1.2 million to $10.6 million, though on a constant currency basis the expense increased by $1.5 million. For the first nine months of 2009, depreciation and amortization expense increased $1.4 million to $30.9 million, though on a constant currency basis the expense increased $3.2 million.

Selling, General and Administrative Expenses ("SG&A")

                           Quarter Ended September 30,                     Nine Months Ended September 30,
(In millions)                2009               2008        % Change          2009                 2008         % Change
SG&A expense            $         25.8     $         26.9       (4.1 )% $           80.4     $           88.9       (9.6 )%
Percentage of sales               10.0 %              8.1 %                          9.6 %                8.6 %

SG&A expenses for the third quarter and nine-month period decreased from last year reflecting lower spending due to headcount reductions and overall tight cost control which more than offset inflationary increases. Foreign exchange rates reduced SG&A expenses by approximately $0.9 million and $4.9 million for the quarter and nine months of 2009, respectively.

Research and Technology Expenses ("R&T")

                         Quarter Ended September 30,                    Nine Months Ended September 30,
(In millions)              2009              2008        % Change          2009                 2008         % Change
R&T expense            $         8.4     $         7.6       14.1 %  $           22.6     $           24.1       (6.2 )%
Percentage of sales              3.3 %             2.3 %                          2.7 %                2.3 %

R&T expenses for the quarter and nine months ended September 30, 2009 increased 14% (about 20% on a constant currency basis), from last year, primarily due to higher qualification costs for new programs. These qualification costs will vary from quarter to quarter. R&T costs decreased 6.2% for the nine-month period compared to last year primarily from favorable foreign exchange rates. R&T expenses were up 3% on a constant currency basis for the nine month period.