Hexcel
HXL
#2611
Rank
C$8.60 B
Marketcap
C$108.08
Share price
0.19%
Change (1 day)
31.85%
Change (1 year)

Hexcel - 10-Q quarterly report FY


Text size:
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

-----------------------------

FORM 10-Q
---
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
--- OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarter Ended September 30, 1998

or
---
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 X No
----- ----

Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
of reorganization confirmed by a US Bankruptcy Court. Yes X No
---- ----

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 November 11, 1998
-----
COMMON STOCK 36,305,076


================================================================================
HEXCEL CORPORATION AND SUBSIDIARIES


INDEX
<TABLE>
<CAPTION>

PAGE
<S> <C> <C>
PART I. FINANCIAL INFORMATION

Item 1. Condensed Financial Statements and Accompanying Notes

- Condensed Consolidated Balance Sheets --
September 30, 1998 (unaudited) and December 31, 1997 3

- Condensed Consolidated Statements of
Operations (unaudited) -- The Quarter and Year-to-Date
Periods Ended September 30, 1998 and 1997 4

- Condensed Consolidated Statements of
Cash Flows (unaudited) -- The Year-to-Date Periods
Ended September 30, 1998 and 1997 5

- Notes to Condensed Consolidated
Financial Statements 6

Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12


PART II. OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K 20


SIGNATURE 22
</TABLE>

2
PART I.  FINANCIAL INFORMATION

Item 1. Condensed Financial Statements and Accompanying Notes

HEXCEL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
UNAUDITED
-----------------------------------------
SEPTEMBER 30, DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1998 1997
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,870 $ 9,033
Accounts receivable 206,591 181,192
Inventories 224,683 165,321
Prepaid expenses and other assets 7,551 6,665
Deferred tax asset 16,955 24,839
- -----------------------------------------------------------------------------------------------------------------
Total current assets 459,650 387,050
- -----------------------------------------------------------------------------------------------------------------

Property, plant and equipment 607,546 488,916
Less accumulated depreciation (185,971) (157,439)
- -----------------------------------------------------------------------------------------------------------------
Net property, plant and equipment 421,575 331,477
Intangibles and other assets 513,313 93,059
- -----------------------------------------------------------------------------------------------------------------
Total assets $ 1,394,538 $ 811,586
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable and current maturities of long-term liabilities $ 18,185 $ 13,858
Accounts payable 83,009 70,011
Accrued liabilities 108,791 102,487
- -----------------------------------------------------------------------------------------------------------------
Total current liabilities 209,985 186,356
- -----------------------------------------------------------------------------------------------------------------

Long-term notes payable and capital lease obligations 803,195 304,546
Indebtedness to related parties 35,567 34,967
Other non-current liabilities 45,529 35,816
- -----------------------------------------------------------------------------------------------------------------
Total liabilities 1,094,276 561,685
- -----------------------------------------------------------------------------------------------------------------

Shareholders' equity:
Preferred stock, no par value, 20,000 shares authorized,
no shares issued or outstanding in 1998 and 1997 - -
Common stock, $0.01 par value, 100,000 shares authorized, 371 369
shares issued and outstanding of 37,135 in 1998 and 36,891 in 1997
Additional paid-in capital 270,879 266,830
Retained earnings (accumulated deficit) 33,005 (15,541)
Cumulative currency translation adjustment 6,660 (1,104)
- -----------------------------------------------------------------------------------------------------------------
310,915 250,554
Less- treasury stock, at cost, 847 shares in 1998, 35 shares in 1997 (10,653) (653)
- -----------------------------------------------------------------------------------------------------------------
Total shareholders' equity 300,262 249,901
- -----------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 1,394,538 $ 811,586
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.

3
HEXCEL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
UNAUDITED

-------------------------------------------------------------------
QUARTER ENDED SEPTEMBER 30, YEAR-TO-DATE ENDED SEPTEMBER 30,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 255,303 $ 226,611 $ 785,581 $ 682,249

Cost of sales 193,456 171,644 586,417 522,577
- ---------------------------------------------------------------------------------------------------------------------
Gross margin 61,847 54,967 199,164 159,672

Selling, general and administrative expenses 27,733 25,375 82,092 74,769
Research and technology expenses 5,840 4,828 16,906 13,524
Business acquisition and consolidation expenses 711 15,433 711 21,150
- ---------------------------------------------------------------------------------------------------------------------
Operating income 27,563 9,331 99,455 50,229
Interest expense 9,456 6,771 23,167 18,288
- ---------------------------------------------------------------------------------------------------------------------

Income before income taxes 18,107 2,560 76,288 31,941
Provision (benefit) for income taxes 6,609 (35,388) 27,742 (29,366)
- ---------------------------------------------------------------------------------------------------------------------
Net income $ 11,498 $ 37,948 $ 48,546 $ 61,307
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------


Net income per share:
Basic $ 0.31 $ 1.03 $ 1.32 $ 1.67
Diluted 0.29 0.87 1.15 1.48

Weighted average shares:
Basic 36,671 36,843 36,800 36,711
Diluted 45,424 46,491 46,134 45,474
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.

4
HEXCEL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
UNAUDITED
-------------------------------------
YEAR-TO-DATE ENDED SEPTEMBER 30,
(IN THOUSANDS) 1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>

CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 48,546 $ 61,307
Reconciliation to net cash provided (used) by operations:
Depreciation and amortization 30,932 28,011
Deferred income taxes 7,475 (39,000)
Write-off of purchased in-process technologies - 8,000
Business acquisition and consolidation payments (6,929) (27,342)
Accrued business acquisition and consolidation expenses 711 21,150
Working capital changes and other (32,649) (71,185)
- -------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities 48,086 (19,059)
- -------------------------------------------------------------------------------------------------------------------

CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (41,703) (31,695)
Cash paid for the Acquired Fabrics Business, net of $5,049 of acquired cash (453,027) -
Cash paid for the Acquired Fiberite Assets - (37,000)
Proceeds from sale of an interest in a joint venture - 5,000
Other (1,250) (2,000)
- -------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (495,980) (65,695)
- -------------------------------------------------------------------------------------------------------------------

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the senior and revolving credit facilities, and short-term 442,343 80,085
debt, net
Proceeds (repayments) on long-term debt, net 554 (6,746)
Purchase of treasury stock (10,000) -
Activity under stock plans 4,051 4,938
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 436,948 78,277
- -------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents 5,783 1,643
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------

Net decrease in cash and cash equivalents (5,163) (4,834)
Cash and cash equivalents at beginning of year 9,033 7,975
- -------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 3,870 $ 3,141
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.

5
HEXCEL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)


NOTE 1 -- BASIS OF ACCOUNTING

The accompanying condensed consolidated financial statements have been
prepared from the unaudited records of Hexcel Corporation and subsidiaries
("Hexcel" or the "Company") in accordance with generally accepted accounting
principles, and, in the opinion of management, include all adjustments necessary
to present fairly the balance sheet of the Company as of September 30, 1998, and
the results of operations for the quarters and year-to-date periods ended
September 30, 1998 and 1997, and the cash flows for the year-to-date periods
ended September 30, 1998 and 1997. The condensed consolidated balance sheet of
the Company as of December 31, 1997 was derived from the audited 1997
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 notes have been
reclassified to conform to the 1998 presentation. These condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's 1997 Annual
Report on Form 10-K.

As discussed in Note 2, Hexcel acquired from Clark-Schwebel, Inc. and
its subsidiaries (collectively "C-S") certain assets and assumed certain
operating liabilities of its industrial fabrics business (the "Acquired
Fabrics Business") on September 15, 1998. Accordingly, the condensed
consolidated balance sheet as of September 30, 1998 includes the financial
position of the Acquired Fabrics Business as of that date, and the condensed
consolidated statements of operations and cash flows include the results of
operations and cash flows of the Acquired Fabrics Business since the date of
acquisition.

NOTE 2 -- BUSINESS ACQUISITION

On September 15, 1998, the Company acquired certain assets and assumed
certain operating liabilities from C-S. The Acquired Fabrics Business is engaged
in the manufacturing and sale of high-quality fiber glass fabrics, which are
used in printed circuit boards found in electronic products, including
computers, cellular telephones, televisions, automobiles and home appliances.
The Acquired Fabrics Business also produces high performance specialty products
for use in insulation, filtration, wall and facade claddings, ballistics and
reinforcements for composite materials. The Acquired Fabrics Business operates
four manufacturing facilities in the southeastern U.S. and has approximately
1,300 full time employees. As part of its purchase of the Acquired Fabrics
Business, Hexcel also acquired from C-S significant equity ownership
interests in two joint ventures:

- - a 43.3% share in Asahi-Schwebel Co., Ltd. ("Asahi-Schwebel"), headquartered
in Japan, which in turn has its own joint venture with Allied Signal in
Taiwan; and
- - a 50% share in Clark-Schwebel Tech-Fab Company, headquartered in the U.S.

In addition, Hexcel has a contractual agreement to purchase a 43.6%
share in CS-Interglas AG ("CS-Interglas"), together with fixed-price options
to increase this equity interest to 84%. Hexcel's purchase of this joint
venture interest will be consummated when German regulatory approval is
obtained.

CS-Interglas and Asahi-Schwebel are fiber glass fabric producers serving
the European and Asian electronics and telecommunications industries. In
addition, CS-Interglas and Asahi-Schwebel have announced plans to build and
operate a jointly owned facility in the Philippines to serve the printed circuit
board laminating market in Southeast Asia. Clark-Schwebel Tech-Fab manufactures
non-woven materials for roofing, construction and other specialty applications.


6
The acquisition of the Acquired Fabrics Business was completed pursuant to
an Asset Purchase Agreement dated July 25, 1998, as amended, by and among
Hexcel, Stamford CS Acquisition Corp., and C-S (the "Asset Purchase Agreement").
Under the Asset Purchase Agreement, Hexcel acquired the net assets of the
Acquired Fabrics Business other than certain excluded assets and liabilities, in
exchange for approximately $453,000 in cash, subject to certain potential
adjustments. Hexcel also agreed to lease $50,000 of property, plant and
equipment used in the Acquired Fabrics Business from an affiliate of C-S,
pursuant to a long-term lease with purchase options. The Company has accounted
for the acquisition of the Acquired Fabrics Business using the purchase method
of accounting.

C-S currently owns 43.6% of the outstanding common stock of C-S Interglas
and has options to purchase up to an additional 40% of the common stock in C-S
Interglas. As part of the acquisition of the Acquired Fabrics Business, the
Company paid $11,000 as a prepayment for the acquisition of C-S's interest in
C-S Interglas. The Company has also agreed to pay an additional $19,000 to
purchase the interest in C-S Interglas upon approval of the German Federal
Cartel Commission. If such approval is not received on or before January 24,
1999, either the Company or C-S may terminate the Company's obligation to
acquire the joint venture interest, in which case the Company's commitment to
pay the additional $19,000 will be extinguished and the Company will be entitled
to receive a share of the sales proceeds resulting from the disposition of the
joint venture interest by C-S.

In connection with the acquisition of the Acquired Fabrics Business, the
Company obtained a new global credit facility (the "Senior Credit Facility")
that provides for up to $910,000 of borrowing capacity. Borrowings under the
Senior Credit Facility were used to: (a) fund the cash purchase price of
approximately $453,000; (b) refinance the Company's previous revolving credit
facility; and (c) provide for ongoing working capital and other financing
requirements of the Company.

HISTORICAL AND PRO FORMA FINANCIAL INFORMATION

The assets acquired and the liabilities assumed or incurred in connection
with the acquisition of the Acquired Fabrics Business were:

<TABLE>

<S> <C>
Estimated fair value of assets acquired:
Cash $ 5,049
Accounts receivable 20,249
Inventories 39,582
Net property, plant and equipment 70,000
Investments in joint ventures, intangibles and other assets 49,389
Goodwill 360,469
---------------------------------------------------------------------------------------------------------
Total assets acquired $ 544,738
---------------------------------------------------------------------------------------------------------

Estimated fair value of liabilities assumed or incurred:
Accounts payable and accrued liabilities $ 32,523
Capital lease obligations 50,000
Other non-current liabilities 4,139
---------------------------------------------------------------------------------------------------------
Total liabilities assumed or incurred $ 86,662
---------------------------------------------------------------------------------------------------------
Estimated fair value of net assets acquired $ 458,076
---------------------------------------------------------------------------------------------------------
Less-cash acquired (5,049)
---------------------------------------------------------------------------------------------------------
Net cash paid for the Acquired Fabrics Business $ 453,027
---------------------------------------------------------------------------------------------------------
</TABLE>

The allocations of purchase price to the assets acquired and liabilities
assumed or incurred in connection with the purchase of the Acquired Fabrics
Business are based on current estimates of fair values, and are subject to
change until September 15, 1999. The estimated fair value of net assets
acquired does not include the additional $19,000 needed to acquire the 43.6%
C-S Interglas joint venture interest.

7
The pro forma net sales, net income and diluted earnings per share of
Hexcel for the year-to-date periods ended September 30, 1998 and 1997, giving
effect to the acquisition of the Acquired Fabrics Business as if the acquisition
had occurred at the beginning of the periods presented, were:

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
THE YEAR-TO-DATE ENDED
-----------------------------------
9/30/98 9/30/97
- --------------------------------------------------------------------------------
<S> <C> <C>
Pro forma net sales $ 931,309 $ 862,655
Pro forma net income 48,434 61,854
Pro forma diluted earnings per share $ 1.15 $1.49
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>

NOTE 3 -- INVENTORIES

Inventories as of September 30, 1998 and December 31, 1997 were:

<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
9/30/98 12/31/97
- ---------------------------------------------------------------------------------
<S> <C> <C>
Raw materials $ 111,296 $ 90,429
Work in progress 63,625 47,953
Finished goods 49,762 26,939
- ---------------------------------------------------------------------------------
Total inventories $ 224,683 $ 165,321
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
</TABLE>

Inventories as of September 30, 1998, include $40,061 from the Acquired
Fabrics Business.

NOTE 4 -- NOTES PAYABLE, CAPITAL LEASE OBLIGATIONS AND INDEBTEDNESS TO
RELATED PARTIES

Notes payable, capital lease obligations and indebtedness to related
parties as of September 30, 1998 and December 31, 1997 were:

<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
9/30/98 12/31/97
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Senior credit facility $ 611,916 $ -
Revolving credit facility - 158,267
European credit and overdraft facilities 13,620 13,909
Convertible subordinated notes, due 2003 114,435 114,450
Convertible subordinated debentures, due 2011 25,625 25,625
Various notes payable 548 680
- -----------------------------------------------------------------------------------------------------
Total notes payable 766,144 312,931
Capital lease obligations 55,236 5,473
Senior subordinated notes payable to various
wholly-owned subsidiaries of Ciba Specialty
Chemicals Corp., who beneficially owns 49.7%
of the Company's outstanding stock, net of
unamortized discount of $1,909 and $2,233 as
of September 30, 1998 and December 31, 1997,
respectively 35,567 34,967
- -----------------------------------------------------------------------------------------------------
Total notes payable, capital lease obligations and
indebtedness to related parties $ 856,947 $ 353,371
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------

Notes payable and current maturities of long-term liabilities $ 18,185 $ 13,858
Long-term notes payable and capital lease obligations,
less current maturities 803,195 304,546
Indebtedness to related parties 35,567 34,967
- -----------------------------------------------------------------------------------------------------
Total notes payable, capital lease obligations and
indebtedness to related parties $ 856,947 $ 353,371
- -----------------------------------------------------------------------------------------------------
</TABLE>

SENIOR CREDIT FACILITY

In connection with the acquisition of the Acquired Fabrics Business (see
Note 2) on September 15, 1998, Hexcel obtained the Senior Credit Facility to:
(a) fund the purchase of the Acquired Fabrics Business; (b) refinance the
Company's existing Revolving Credit Facility; and (c) provide for ongoing
working capital and other financing requirements of the Company. The Senior
Credit Facility provides for up to $910,000 of borrowing capacity.

Depending on certain predetermined ratios and other conditions, interest
on outstanding borrowings under the Senior Credit Facility is computed at an
annual rate ranging from approximately 0.8 to 2.3% in excess of the
applicable London interbank rate or, at the option of Hexcel, at 0 to 1.3% in
excess of the base rate of the administrative agent for the lenders. In
addition, the Senior Credit Facility is subject to a commitment fee ranging
from 0.2 to 0.5% per annum of the total facility.

The Senior Credit Facility is secured by a pledge of stock of certain of
Hexcel's subsidiaries. In addition, the Company is subject to various
financial covenants and restrictions under the Senior Credit Facility, and is
generally prohibited from paying dividends or redeeming capital stock beyond
certain specified limits. Approximately $690,000 of the Senior Credit Facility
expires by September 2004, with the balance expiring in September 2005.

The Senior Credit Facility replaced the Company's previous revolving
credit facility which had provided up to $355,000 of borrowing capacity.
Interest on outstanding borrowings depended upon certain predetermined ratios
and other conditions and was computed at an annual rate ranging from
approximately 0.3% to 1.1% in excess of the applicable London interbank rate
or, at the option of Hexcel, at the base rate of the administrative agent for
the lenders. In addition, the revolving credit facility was subject to a
commitment fee ranging from approximately 0.2 to 0.4% per annum of the total
facility. The revolving credit facility, prior to its replacement, would have
expired in March 2003.

CAPITAL LEASE OBLIGATION

Hexcel also entered into a $50,000 capital lease for property, plant and
equipment used in the Acquired Fabrics Business (see Note 2). The lease
expires in September 2006 and includes various purchase options.

NOTE 5 -- BUSINESS ACQUISITION AND CONSOLIDATION EXPENSES

In 1996, Hexcel announced plans to consolidate the Company's operations
over a period of three years. The objective of the program was to integrate
acquired assets and operations into Hexcel, and to reorganize the Company's
manufacturing and research activities around strategic centers dedicated to
select product technologies. The business consolidation program was also
intended to eliminate excess manufacturing capacity and redundant
administrative functions.

As of September 30, 1998, the primary remaining activities of the
business consolidation program relate to the Company's European operations
and certain customer qualifications of equipment transferred within the U.S.
These qualification requirements increase the complexity, cost and time of
moving equipment and rationalizing manufacturing activities. As a result, the
Company continues to expect that the business consolidation program will take
to the end of 1998 to complete. Total expenses for the business consolidation
program, which remains unchanged since December 31, 1997, were $54,700. The
Company anticipates no significant additional expenses in relation to this
program. As of December 31, 1997 and September 30, 1998, accrued business
consolidation costs, representing estimated cash expenditures remaining to
complete the program, were approximately $12,000 and $7,900 respectively.

8
This business consolidation program does not include any activities that
may result from the integration of the Company's Acquired Fabrics Business.
As of September 30, 1998, the Company wrote off $711 of business acquisition
and consolidation expenses relating to transaction costs for a proposed
acquisition that was not consummated.

NOTE 6 -- PROVISION FOR INCOME TAXES

The effective income tax rate for the nine months ended September 30,
1998 was 36%. For the nine months ended September 30, 1997, the benefit for
income taxes was $29,366, which included a $39,000 reversal of a U.S. tax
valuation allowance.

Prior to September 30, 1997, the Company had fully provided valuation
allowances against its U.S. net deferred tax assets as there were
uncertainties in generating sufficient future taxable income to realize these
net deferred tax assets. On September 30, 1997, the Company reversed its U.S.
tax valuation allowance as it was more likely than not that these tax assets
would be realized. As a result, excluding the $39,000 U.S. valuation
allowance reversal, no provision for U.S. federal income taxes had been
recorded for the nine months ended September 30, 1997 due to the utilization
of net operating loss carryforwards. Since September 30, 1997, U.S. Federal
income taxes have been provided at approximately the statutory rate.

NOTE 7 -- EARNINGS PER SHARE

Computations of basic and diluted earnings per share are as follows:

<TABLE>
<CAPTION>
- -------------------------------------------- --------------------------------- -------------------------------------
QUARTER ENDED SEPTEMBER 30, YEAR-TO-DATE ENDED SEPTEMBER 30,
1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Basic earnings per share:
Net income $ 11,498 $ 37,948 $ 48,546 $ 61,307
Weighted average common shares outstanding 36,671 36,843 36,800 36,711
- --------------------------------------------------------------------------------------------------------------------

Basic earnings per share $ 0.31 $ 1.03 $ 1.32 $ 1.67
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------

Diluted earnings per share:
Net income $ 11,498 $ 37,948 $ 48,546 $ 61,307
Effect of dilutive securities -
Senior Subordinated Notes, due 2003 1,282 2,042 3,845 5,994
Senior Subordinated Debentures, due 2011 287 457 861 -
- --------------------------------------------------------------------------------------------------------------------
Adjusted net income $ 13,067 $ 40,447 $ 53,252 $ 67,301
- --------------------------------------------------------------------------------------------------------------------

Weighted average common shares outstanding 36,671 36,843 36,800 36,711
Effect of dilutive securities -
Stock options 681 1,573 1,262 1,522
Senior Subordinated Notes, due 2003 7,238 7,241 7,238 7,241
Senior Subordinated Notes, due 2011 834 834 834 -
- --------------------------------------------------------------------------------------------------------------------
Adjusted weighted average common shares
outstanding 45,424 46,491 46,134 45,474
- --------------------------------------------------------------------------------------------------------------------
Diluted earnings per share $ 0.29 $ 1.15 $ 0.87 $ 1.48
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
</TABLE>

The Convertible Subordinated Debentures, due 2011, were excluded from the
year-to-date period ended September 30, 1997 computation of diluted earnings per
share, as they were antidilutive. For the quarter and year-to-date periods ended
September 30, 1997, the net income effect of the Senior Subordinated Notes, due
2003, and for the quarter ended September 30, 1997, the net income effect of the
Senior Subordinated Notes, due 2011, were not tax effected as a provision for
U.S. income taxes was not recorded during these periods.

9
NOTE 8 -- COMPREHENSIVE INCOME

Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130").
SFAS 130 establishes standards for reporting comprehensive income and its
components, including presentation in an annual financial statement that is
displayed with the same prominence as other annual financial statements. Various
components of comprehensive income may, for example, consist of foreign currency
items, minimum pension liability adjustments and unrealized gains and losses on
certain investments classified as available-for-sale.

The Company's total comprehensive income was as follows:

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
QUARTER ENDED SEPTEMBER 30, YEAR-TO-DATE ENDED SEPTEMBER 30,
1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $ 11,498 $ 37,948 $ 48,546 $ 61,307
Currency translation adjustment 8,080 (2,690) 7,764 (11,016)
- -------------------------------------------------------------------------------------------------------------------
Total comprehensive income $ 19,578 $ 35,258 $ 56,310 $ 50,291
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>

10
ITEM 2.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS


BUSINESS OVERVIEW

<TABLE>
<CAPTION>
- ------------------------------------------- -------------------------------- ------------------------------------
QUARTER ENDED SEPTEMBER 30, YEAR-TO-DATE ENDED SEPTEMBER 30,
(IN MILLIONS, EXCEPT PER SHARE DATA) 1998 1997 1998 1997
- ------------------------------------------- ----------------- --------------- ------------------- ---------------
<S> <C> <C> <C> <C>
Sales $255.3 $226.6 $785.6 $682.2
Gross margin % 24.2% 24.3% 25.4% 23.4%
Adjusted operating income % (a) 11.2% 10.9% 12.8% 10.5%
Adjusted EBITDA (b) $39.4 $34.4 $131.1 $99.4
Net income $11.5 $37.9 $48.5 $61.3
Adjusted net income (c) $12.8 $10.6 $49.5 $32.8
- ------------------------------------------- ----------------- --------------- ------------------- ---------------
- ------------------------------------------- ----------------- --------------- ------------------- ---------------

Diluted earnings per share $0.29 $0.87 $1.15 $1.48
Adjusted diluted earnings per share (c) $0.32 $0.26 $1.18 $0.81
- ------------------------------------------- ----------------- --------------- ------------------- ---------------
- ------------------------------------------- ----------------- --------------- ------------------- ---------------
</TABLE>

(a) Excludes business acquisition and consolidation expenses
(b) Excludes business acquisition and consolidation expenses and interest,
taxes, depreciation and amortization
(c) Excludes business acquisition and consolidation expenses and other
acquisition related costs and assumes a U.S. tax provision of 36% for 1997

Hexcel continued to benefit from strong commercial aerospace and space
and defense markets as sales, adjusted operating income and adjusted EBITDA
all reached record levels for the Company's third quarter. Excluding
acquisition-related charges and other nonrecurring items, adjusted earnings
per share for the third quarter of 1998 increased 23% to $0.32 per diluted
share, from $0.26 per share, for the same period in 1997.

On September 15, 1998, the Company completed its acquisition of the
industrial fabrics business (the "Acquired Fabrics Business") from
Clark-Schwebel, Inc., and its subsidiaries ("C-S"). The acquisition of the
Acquired Fabrics Business was a significant strategic transaction for Hexcel.
It establishes the Company as a leading global materials supplier to the
electronics and telecommunications industries, both of which have attractive
long-term growth potential. Furthermore, it diversifies the Company's
business beyond commercial aerospace, which now represents less than 50% of
sales, compared with 65% of sales prior to the acquisition. The acquisition
was accounted for using the purchase method of accounting, and accordingly,
the results of operations of the Acquired Fabrics Business since the date of
acquisition are included in the Company's 1998 third quarter results. Sales
and adjusted EBITDA for the Acquired Fabrics Business for the approximate two
week period ended September 30, 1998, were $7.0 million and $1.4 million,
respectively.

The estimated costs of integrating the Acquired Fabrics Business with
the Company's existing fabrics operations will be finalized in the fourth
quarter of 1998. The Company also expects a reduction in its previously
anticipated capital expenditures related to its existing fabrics operations.
A detailed discussion of the acquisition of the Acquired Fabrics Business is
contained in Note 2 to the Condensed Consolidated Financial Statements
included in this Quarterly Report on Form 10-Q.

RECENT DEVELOPMENTS AND OUTLOOK

Like many companies, Hexcel has been experiencing in recent months
increased volatility in business and economic conditions in its markets,
leading to reduced product demand and pricing pressures. A discussion of
specific impacts in certain product lines and related company improvement
initiatives follows. Notwithstanding this volatility, Hexcel remains focused
on its mission of being a global, vertically integrated advanced materials
company serving a variety of growth markets. The Company believes that
through successful execution of its business and operating strategies, it can
continue to build value for its customers while mitigating the challenging
market conditions that it faces today.

CARBON FIBERS: During October, the Company received notice of
significant cancellations of certain carbon fiber orders due for delivery in
the fourth quarter. Management believes that a number of the Company's
customers, particularly in the space and defense market, built excess
inventories in the last twelve months in response to significant shortages of
carbon fiber supply in 1997. Now that carbon fiber supplies have increased,
customers are starting to reduce their inventories and anticipate lower
purchasing needs for the next twelve months. These factors are expected to
result in surplus year-end inventories and a significant reduction in the
production of carbon fiber products in 1999 as compared to 1998. The Company
further expects that carbon fiber pricing in a number of applications is
likely to be lower in 1999. Despite these shorter term impacts, the Company
still anticipates growth in carbon fiber sales in 2000 and beyond as the new
military aircraft and launch vehicle programs enter full scale production
together with the benefit of new product applications that may be
commercialized.

COMPOSITE MATERIALS: As a result of the Asian economic crisis, the
Company anticipates that demand for commercial aircraft will level off with a
reduction in sales of wide-bodied aircraft offset by continued increases in
sales of narrow-bodied aircraft. Nevertheless, the Company continues to
benefit from the growth in Airbus aircraft production rates. In addition,
the Company's customers have emphasized the need for cost and inventory
reduction throughout the commercial aerospace supply chain. This is leading
to pricing pressures from the Company's customers, which the Company expects
to address, to the greatest extent possible, through cost reduction efforts,
substitution of lower cost composite materials in our customers end products
and price reductions from the Company's suppliers.

FABRICS: Towards the end the third quarter of 1998 and in the fourth
quarter to date, the Company experienced increased order volume for woven glass
fiber products used in electronic printed circuit board applications signaling
an end to the recent inventory correction in the electronics industry. However,
intense competition from Asia and Eastern Europe continues to place pressure on
the Company's prices for these products. The Company believes that the prices
and margins for products of its fabrics business are likely to remain under
pressure in 1999. The Company is actively pursuing opportunities for cost
reduction and capital expenditure avoidance in the consolidation of the Acquired
Fabrics Business with its existing fabrics operations in order to help offset
these market trends.

OTHER COMPANY INITIATIVES: In light of the factors discussed above,
the Company will face greater challenges in 1999 than it has seen in the last
three years. Accordingly, the Company plans to intensify its existing Lean
Enterprise and business consolidation programs and implement an aggressive
supply chain management program to achieve more rapid cost reductions
throughout its organization. As a first step, the Company has initiated a
reorganization of its business operations to focus on improved operating
effectiveness and to integrate the Acquired Fabrics Business with its
existing fabrics operations. This reorganization also includes the
consolidation of Hexcel's composite materials business into a single global
business unit. The Company anticipates finalizing certain of its accelerated
and expanded consolidation and cost reduction plans by the end of the fourth
quarter of 1998 and will recognize certain non-recurring costs in the
financial results for that quarter. As has been the case with prior
restructuring programs, these initiatives are expected to generate
increasingly significant improvements in the Company's operating cost
structure in 1999 and thereafter.

In pursuing the above plans, the Company will continue to focus on its
goal of generating $100 million in free cash flow in the fifteen month period
ending December, 1999. This free cash flow will be used to repay debt and,
following German regulatory approval, to fund expenditures related to the
acquisition of the equity interests in CS-Interglas.


11
RESULTS OF OPERATIONS

NET SALES: The following table summarizes net sales to third-party
customers by product group and market segment for the quarters ended September
30, 1998 and 1997:

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
COMMERCIAL SPACE & GENERAL
(IN MILLIONS) AEROSPACE DEFENSE ELECTRONICS INDUSTRIAL RECREATION TOTAL
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
THIRD QUARTER 1998 NET SALES
Fibers and Fabrics $ 5.7 $ 7.0 $ 14.8 $ 16.3 $ 4.4 $ 48.2
Composite Materials 110.1 22.5 - 13.9 8.5 155.0
Engineered Products 49.5 2.6 - - - 52.1
- --------------------------------------------------------------------------------------------------------------------
Total $ 165.3 $ 32.1 $ 14.8 $ 30.2 $ 12.9 $ 255.3
65% 12% 6% 12% 5% 100%
- --------------------------------------------------------------------------------------------------------------------
THIRD QUARTER 1997 NET SALES (A)
Fibers and Fabrics $ 4.2 $ 4.1 $ 10.0 $ 18.9 $ 3.5 $ 40.7
Composite Materials 96.3 15.5 - 14.1 12.5 138.4
Engineered Products 45.6 1.9 - - - 47.5
- --------------------------------------------------------------------------------------------------------------------
Total $ 146.1 $ 21.5 $ 10.0 $ 33.0 $ 16.0 $ 226.6

65% 9% 4% 15% 7% 100%
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
</TABLE>

(a) Certain amounts have been reclassified from those previously reported

Net sales for the third quarter of 1998 increased by 13% to $255.3 million,
from $226.6 million for the third quarter of 1997. Excluding sales attributable
to the Acquired Fabrics Business, sales for the third quarter of 1998 were
$248.3 million, or an increase of 10% over the third quarter of 1997. The sales
growth was primarily due to strong sales of composite products to commercial
aerospace customers, primarily in Europe, as well as to the space and defense
markets. On a constant currency basis, third quarter 1998 sales would have been
about $3 million lower than reported.

Commercial aerospace net sales increased to $165.3 million for the third
quarter of 1998, from $146.1 million for the third quarter of 1997, an
increase of 13%. Approximately 46% of Hexcel's 1997 net sales were to Boeing,
Airbus, and related subcontractors. The Company sells material on every model
of commercial aircraft sold by Boeing and Airbus, with sales per aircraft
ranging from $0.2 million to over $1.0 million per aircraft on the Boeing
777. Boeing and Airbus indicate combined current unfilled orders of more than
3,000 aircraft, with build rates expecting to peak in 1999 and 2001 for
Boeing and Airbus, respectively. The Company believes that total commercial
aircraft demand of about 800 planes per year appears sustainable for a number
of years as compared to 820 planes expected to be delivered in 1998.
Depending on the product, orders placed with Hexcel are received anywhere
between one and eighteen months prior to delivery of the aircraft to the
customer. As a result, the Company is expecting that sales in this segment
will start leveling off from today's record levels.

Space and defense net sales for the third quarter of 1998 increased 49% to
$32.1 million, from $21.5 million for the third quarter of 1997. The increase
reflects improved sales of composite materials to select military programs as
well as the Company's acquisition of Fiberite, Inc.'s satellite business on
September 30, 1997.

Electronic sales increased $4.8 million, to $14.8 million for the third
quarter of 1998, compared to $10.0 million for the third quarter of 1997. The
increase reflects the Company's acquisition of the Acquired Fabrics Business.
Despite a world-wide reduction in electronic industry sales volume
experienced earlier this summer, primarily resulting from inventory
adjustments, the Company has experienced a recent increase in sales orders
which is consistent with predictions from industry analysts that the market
is beginning to recover. However, pricing in this market remains subject to
extreme pressures and the Company continues to concede to price reductions,
particularily due to Asian and Eastern European competition. Any resulting
price reductions are expected to be partially offset by lower material costs.

12
Net sales in the general industrial and recreational markets decreased
marginally in the third quarter of 1998 as compared to the third quarter of
1997, primarily due to reduced customer demand for products in these markets.

BACKLOG: The following tables summarize the backlog of orders to be
delivered within twelve months, by product group as of September 30, 1998,
December 31, 1997 and September 30, 1997:

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
NON-
(IN MILLIONS) AEROSPACE(1) AEROSPACE(2) TOTAL
- --------------------------------------------------------------------------------------------
<S> <S> <S> <S>
AS OF SEPTEMBER 30, 1998
Fibers and Fabrics $ 13.2 $ 16.7 $ 29.9
Composite Materials 214.9 20.3 235.2
Engineered Products 156.8 0.4 157.2
- --------------------------------------------------------------------------------------------
Total $ 384.9 $ 37.4 $ 422.3
- --------------------------------------------------------------------------------------------
AS OF DECEMBER 31, 1997
Fibers and Fabrics $ 33.3 $ 24.4 $ 57.7
Composite Materials 273.2 19.1 292.3
Engineered Products 170.0 - 170.0
- --------------------------------------------------------------------------------------------
Total $ 476.5 $ 43.5 $ 520.0
- --------------------------------------------------------------------------------------------
AS OF SEPTEMBER 30, 1997
Fibers and Fabrics $ 45.6 $ 31.0 $ 76.6
Composite Materials 232.5 22.3 254.8
Engineered Products 162.2 - 162.2
- --------------------------------------------------------------------------------------------
TOTAL $ 440.3 $ 53.3 $ 493.6
- --------------------------------------------------------------------------------------------
</TABLE>

(1) Includes commercial aerospace and space and defense markets
(2) Includes electronics, general industrial and recreation markets

Backlog for aerospace materials was $384.9 million as of September 30,
1998, a 19% decrease over backlog as of December 31, 1997 and a 13% decrease
over backlog as of September 30, 1997. The decrease in backlog probably
reflects a number of factors, including a continuing trend toward shorter
lead times and better supply-chain management by the industry overall. In
the light of changing conditions in the aerospace industry, twelve month
backlog information may no longer be a material trend indicator. The Company
continues to closely watch the economic situation in Asia, along with overall
aircraft orders and production trends, to monitor future growth.

Backlog for the non-aerospace markets was $37.4 million as of September
30, 1998, compared to $43.5 million as of December 31, 1997 and $53.3 million
as of September 30, 1997. The decrease in backlog is primarily attributable
to a decrease in orders from customers in the recreational market. Customers
in the electrical, general industrial and recreational markets generally
operate with little advance purchasing and thus, backlog is subject to
certain fluctuations. The Acquired Fabrics Business also operates with
nominal backlog. The Company's backlog in the non-aerospace markets for the
next twelve months is therefore not necessarily a meaningful indicator of
future sales.

GROSS MARGIN: Gross margin for the third quarter of 1998 was $61.8
million, or 24.2% of net sales, compared to $55.0 million, or 24.3% of net
sales, for the third quarter of 1997. As anticipated, the Company's gross
margin percentage has leveled off as the current business consolidation
program reaches completion and commercial aerospace growth flattens. The
Company is, however, pursuing efforts to reduce its cost structure and
increase its productivity through its "Lean Enterprise" initiatives, which
will extend to all U.S. locations by year end and to the European facilities
in 1999. The expected improvement in cost and productivity may be partially
offset by customer demand for price reductions.

13
OPERATING INCOME: Operating income was $27.6 million in the third quarter
of 1998, or 10.8% of net sales, compared with $9.3 million in the third quarter
of 1997 or 4.1% of net sales. The aggregate increase in operating income
reflects the higher sales volume and a $14.7 million decrease in business
acquisition and consolidation expenses over the third quarter of 1997.
Offsetting the latter are increases in selling, general and administrative
("SG&A") and research and technology ("R&T") expenses. SG&A expenses were $27.7
million, or 10.9% of net sales for the third quarter of 1998, compared with
$25.4 million, or 11.1% of net sales for the third quarter of 1997. The increase
in SG&A expenses primarily reflects higher sales levels. R&T expenses were $5.9
million, or 2.2% of net sales for the third quarter of 1998, compared with $4.9
million, or 2.0% of net sales for the third quarter of 1997.

INTEREST EXPENSE: Interest expense was $9.5 million in the third quarter of
1998, compared with $6.8 million in the third quarter of 1997. The increase in
interest expense is primarily due to the additional financing required for the
Acquired Fabrics Business as well as a $1.1 million write-off of capitalized
loan fees for the Company's previous credit facility.

PROVISION FOR INCOME TAXES: The effective income tax rate for the quarter
September 30, 1998 was 36%. For the quarter ended September 30, 1997, the
benefit for income taxes was $35.4 million, which included a $39.0 million
reversal of a U.S. tax valuation allowance.

Prior to September 30, 1997, the Company had fully provided valuation
allowances against its U.S. net deferred tax assets as there were uncertainties
in generating sufficient future taxable income to realize these net deferred tax
assets. On September 30, 1997, the Company reversed its U.S. tax valuation
allowance as it was more likely than not that these tax assets would be
realized. As a result, excluding the $39.0 million U.S. valuation allowance
reversal, no provision for U.S. federal income taxes had been recorded for the
nine months ended September 30, 1997 due to the utilization of net operating
loss carryforwards. Going forward, the Company expects that its U.S. income tax
rate will approximate the statutory rate.

NET INCOME AND EARNINGS PER SHARE: Net income for the third quarter of 1998
was $11.5 million, or $0.29 per diluted share, compared with net income for the
third quarter of 1997 of $37.9 million, or $0.87 per diluted share. Results for
the 1998 third quarter include approximately $1.3 million of after-tax,
acquisition-related charges. The 1997 third quarter results include $15.4
million of business acquisition and consolidation expenses and a non-recurring
credit resulting from the reversal of a $39 million deferred tax reserve against
the income tax provision. Excluding these items, and assuming an income tax rate
of 36% on U.S. pretax income, adjusted earnings per share for the third quarter
of 1998 and 1997 would have been $0.32 and $0.26 per diluted share,
respectively.

There were 45.4 million diluted weighted average shares of common stock
outstanding during the third quarter of 1998, versus 46.5 million during the
third quarter of 1997. The decrease in the number of diluted weighted average
shares is primarily attributable to a decrease in the inclusion of stock
options as a result of a decline in the Company's average stock price for the
quarter relative to the average exercise price of stock options outstanding.
A portion of the decrease is also attributable to the Company's repurchase of
0.8 million shares of its common stock, which were acquired during the third
quarter of 1998. Refer to Note 7 of the accompanying condensed consolidated
financial statements for the calculation and the number of shares used for
diluted earnings per share.

YEAR-TO-DATE

NET SALES AND GROSS MARGIN: Net sales for the first nine months of 1998
were $785.6 million, compared with $682.2 million for the comparable 1997
period. Excluding sales attributable to the Acquired Fabrics Business, sales
for the first nine months of 1998 were $778.6 million, an increase of 14%
percent over the comparable 1997 period. On a constant currency basis, sales
for the first nine months of 1998 would have been about $8 million higher
than reported. Gross margin for the first nine months

14
of 1998 was $199.2 million, or 25.4% of sales, versus gross margin of $159.7
million, or 23.4% of sales, for the same period in 1997. These increases
primarily reflect the same factors noted above.

The following table summarizes net sales to third-party customers by
product group and market segment for the year-to-date period ended September 30,
1998 and 1997:

<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
COMMERCIAL SPACE & GENERAL
(IN MILLIONS) AEROSPACE DEFENSE ELECTRONICS INDUSTRIAL RECREATION TOTAL
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
YEAR-TO-DATE ENDED SEPT. 30, 1998
Fibers and Fabrics $ 14.0 $ 21.6 $ 39.8 $ 47.4 $ 14.6 $ 137.4
Composite Materials 345.5 66.8 - 41.6 31.3 485.2
Engineered Products 155.2 7.7 - - - 162.9
- ---------------------------------------------------------------------------------------------------------------------------
Total $ 514.7 $ 96.1 $ 39.8 $ 89.0 $ 45.9 $ 785.5
66% 12% 5% 11% 6% 100%
- ---------------------------------------------------------------------------------------------------------------------------
YEAR-TO-DATE ENDED SEPT. 30, 1997 (a)
Fibers and Fabrics $ 18.0 $ 10.1 $ 37.6 $ 54.1 $ 8.0 $ 127.8
Composite Materials 289.0 45.8 - 46.7 44.9 426.4
Engineered Products 119.6 7.0 - 1.4 - 128.0
- ---------------------------------------------------------------------------------------------------------------------------
Total $ 426.6 $ 62.9 $ 37.6 $ 102.2 $ 52.9 $ 682.2
63% 9% 6% 15% 8% 100%
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>

(a) Certain amounts have been reclassified from those previously reported

OPERATING INCOME: Operating income for the first nine months of 1998 was
$99.5 million, compared with $50.2 million for the same period in 1997.
Excluding business acquisition and consolidation expenses of $0.7 million and
$21.2 million incurred in the first nine months of 1998 and 1997, respectively,
the improvement in operating income is the result of higher sales volume,
partially offset by increases in SG&A and R&T expenses. SG&A expenses were $82.1
million, or 10.4% of sales, for the first nine months of 1998, compared to $74.8
million, or 11.0% of sales, for the same period in 1997. The increase in SG&A
expenses is the result of higher sales volume. R&T expenses were $16.9 million,
or 2.2% of sales, for the first nine months of 1998, compared to $13.5 million,
or 2.0% of sales, for the comparable 1997 period.

INTEREST EXPENSE: Interest expense was $23.2 million for the first nine
months of 1998, compared with $18.3 million for the comparable 1997 period. The
increase in interest expense is primarily due to the additional financing
required for the Acquired Fabrics Business as well as working capital needs, and
$1.6 million write-off of capitalized loan fees for the Company's previous
credit facilities.

PROVISION FOR INCOME TAXES: The effective income tax rate for the first
nine months of 1998 was 36%. For the first nine months of 1997, the benefit for
income taxes was $29.4 million, which included a $39.0 million reversal of a
U.S. tax valuation allowance, as previously discussed.

NET INCOME AND EARNINGS PER SHARE: The 1998 year-to-date net income was
$48.5 million, or $1.15 per diluted share, versus $61.3 million, or $1.48 per
diluted share, for the comparable period of 1997. Year-to-date results for
the 1998 include approximately $1.3 million of after-tax, acquisition-related
charges. The 1997 year-to-date results include $21.2 million of business
acquisition and consolidation expenses and a non-recurring credit resulting
from the reversal of a $39 million deferred tax reserve

15
against the income tax provision. Excluding these items, and assuming an
income tax rate of 36% on U.S. pretax income, adjusted earnings per share for
the year-to-date periods ended September 30, 1998 and 1997 would have been
$1.18 and $0.81 per diluted share, respectively.

There were approximately 46.1 million diluted weighted average shares of
common stock outstanding during the first nine months of 1998, versus 45.5
million during the first nine months of 1997. The increase in the number of
diluted weighted average shares primarily reflects the inclusion in the 1998
period of 0.8 million of potential common shares relating to the $25.6 million
Convertible Subordinated Debentures, due 2011, which were antidilutive in the
1997 period. Refer to Note 7 to the accompanying condensed consolidated
financial statements for the calculation and the number of shares used for
diluted earnings per share.


FINANCIAL CONDITION AND LIQUIDITY

SENIOR CREDIT FACILITY

In connection with the acquisition of the Acquired Fabrics Business on
September 15, 1998, Hexcel obtained the Senior Credit Facility to: (a) fund the
purchase of the Acquired Fabrics Business; (b) refinance the Company's existing
Revolving Credit Facility; and (c) provide for ongoing working capital and other
financing requirements of the Company. The Senior Credit Facility provides for
up to $910 million of borrowing capacity.

Depending on certain predetermined ratios and other conditions, interest
on outstanding borrowings under the Senior Credit Facility is computed at an
annual rate ranging from approximately 0.8 to 2.3% in excess of the
applicable London interbank rate, or at the option of Hexcel, at 0 to 1.3% in
excess of the base rate of the administrative agent for the lenders. In
addition, the Senior Credit Facility is subject to a commitment fee ranging
from 0.2 to 0.5% per annum of the total facility. As of September 30, 1998,
the Company had approximately $295 million of available borrowings under the
facility.

The Senior Credit Facility is secured by a pledge of stock of certain of
Hexcel's subsidiaries. In addition, the Company is subject to various financial
covenants and restrictions under the Senior Credit Facility, and is generally
prohibited from paying dividends or redeeming capital stock. Approximately
$690,000 of the Senior Credit Facility expires by September 2004, with the
balance expiring in September 2005.

The Senior Credit Facility replaced the Company's existing revolving
credit facility, which had provided up to $355 million of borrowing capacity.
Interest on outstanding borrowings depended upon certain predetermined ratios
and other conditions and was computed at an annual rate ranging from
approximately 0.3% to 1.1% in excess of the applicable London interbank rate,
or at the option of Hexcel, at the base rate of the administrative agent for
the lenders. In addition, the revolving credit facility was subject to a
commitment fee ranging from approximately 0.2 to 0.4% per annum of the total
facility. The revolving credit facility, prior to its replacement, would have
expired in March 2003.

CAPITAL LEASE OBLIGATION

Hexcel also entered into a $50 million capital lease for property, plant
and equipment used in the Acquired Fabrics Business. The lease expires in
September 2006 and includes various purchase options.

16
STOCK BUYBACK PLANS

As of September 30, 1998, the Company completed its previously announced
program to repurchase $10 million of its outstanding common stock. During the
period from August 6, 1998 to September 10, 1998, Hexcel repurchased a total of
0.8 million shares at an average cost of $12.32 per share.

On September 24, 1998, the Board of Directors approved a plan to repurchase
up to an additional $10 million of its common stock. The Board of Directors may
also approve additional stock buybacks from time to time subject to market
conditions and the terms of the Company's credit agreements. The purchases may
be made in the open market at prevailing prices or in privately negotiated
transactions.


EBITDA AND CASH FLOWS

YEAR-TO-DATE, 1998: Adjusted EBITDA for the first nine months of 1998 was
$131.1 million, a 32% increase over the comparable 1997 period. Net cash
provided by operating activities was $48.1 million, as increased working capital
of $32.6 million and restructuring payments of $6.9 million partially offset
$48.5 million of net income and $38.4 million of non-cash depreciation and
amortization and deferred income taxes. The increase in working capital reflects
higher levels of accounts receivable and inventory due to higher sales volume,
as well as reductions in accrued liabilities from peak year-end levels,
primarily due to the payment of obligations in 1998 for capital projects and
employee incentive and benefit programs incurred during 1997.

Net cash used for investing activities was $496.0 million, reflecting
the net cash paid for the Acquired Fabrics Business, net of cash acquired, of
$453.0 million and capital expenditures of $41.7 million. Net cash provided
by financing activities was $436.9 million, primarily reflecting $442.8
million of funds borrowed under the new Senior Credit Facility as well as
$10.0 million of acquired treasury stock.

YEAR-TO-DATE, 1997: Adjusted EBITDA for the first nine months of 1997 was
$99.4 million. Net cash used for operating activities was $19.1 million,
primarily as the result of the increase in working capital of $71.2 million,
business acquisition and consolidation payments of $27.3 million, as well as the
deferred income tax allowance reversal of $39.0 million, all of which more than
offset $61.3 million of net income, $28.0 million of depreciation and
amortization and $29.2 million of business acquisition and consolidation
expenses. The substantial increase in working capital reflects higher levels of
accounts receivable and inventory resulting from increased sales and production
volumes. The working capital increase also reflects reductions in accrued
liabilities from peak year-end levels, primarily due to the payment in 1997 of
obligations incurred during 1996 for capital projects and employee incentive and
benefit programs.

Net cash used for investing activities was $65.7 million. This primarily
reflects $31.7 million of capital expenditures, $37.0 million related to the
acquisition of the satellite business and a license of technology from
Fiberite, Inc. and the receipt of $5.0 million in connection with the sale of
a 50% equity interest in the Knytex joint venture. Net cash used for
investing activities were funded by borrowings under the Revolving Credit
Facility.

Adjusted EBITDA has been presented to provide a measure of Hexcel's
operating performance that is commonly used by investors and financial analysts
to analyze and compare companies. Adjusted EBITDA does not represent an
alternative measure of the Company's cash flows or operating income, and should
not be considered in isolation or as a substitute for measures of performance
presented in accordance with generally accepted accounting principles.

17
CAPITAL EXPENDITURES

Capital expenditures increased to $41.7 million in the first nine months of
1998, from $31.7 million in the first nine months of 1997. This increase is
attributable to capital expenditures incurred in connection with the business
consolidation program as well as expenditures to improve manufacturing processes
and to expand production capacity for select product lines that are in high
demand.


BUSINESS CONSOLIDATION

In 1996, Hexcel announced plans to consolidate the Company's operations
over a period of three years. The objective of the program was to integrate
acquired assets and operations into Hexcel, and to reorganize the Company's
manufacturing and research activities around strategic centers dedicated to
select product technologies. The business consolidation program was also
intended to eliminate excess manufacturing capacity and redundant administrative
functions.

As of September 30, 1998, the primary remaining activities of the business
consolidation program relate to the Company's European operations and certain
customer qualifications of equipment transferred within the U.S. These
qualification requirements increase the complexity, cost and time of moving
equipment and rationalizing manufacturing activities. As a result, the Company
continues to expect that the business consolidation program will take to the end
of 1998 to complete. Total expenses for the business consolidation program,
which remains unchanged since December 31, 1997, were $54.7 million. The Company
anticipates no significant additional expenses in relation to this program. As
of December 31, 1997 and September 30, 1998, accrued business consolidation
costs, representing estimated cash expenditures remaining to complete the
program, were approximately $12.0 million and $7.9 million, respectively.

This business consolidation program does not include any activities that
may result from the integration of the Company's Acquired Fabrics Business or
due to changes in market conditions, as discussed above. As of September 30,
1998, the Company wrote-off $0.7 million of business acquisition and
consolidation expenses relating to transaction costs for a proposed
acquisition that was not consummated.

YEAR 2000

Hexcel, like most other companies, is continuing to address whether its
information technology systems and non-information technology devices with
embedded microprocessors (collectively "Business Systems") will recognize and
process dates starting with the year 2000 and beyond (the "Year 2000"). The
Year 2000 issue can arise at any point in the Company's supply,
manufacturing, processing, and distribution chains. The Company's actions on
its Year 2000 issue are applicable to the Acquired Fabrics Business.

In order to address the Year 2000 issue, the Company has developed and
implemented a six phase plan divided into the following components: (1)
inventory; (2) risk assessment and assigning priorities; (3) assessing
compliance; (4) repairing or replacing; (5) testing; and (6) developing
contingency plans. In addition, the Company established a central Year 2000
issue project office to coordinate and monitor progress towards achieving
corporate-wide Year 2000 compliance. The Company is also using external
consulting services, where appropriate, as part of its efforts to address its
Year 2000 issue.

With respect to the Company's Business Systems and its Year 2000 project,
the Company expects that all of its locations will have completed the first two
phases, including estimating remediation costs, by December 1998. Certain of the
Company's locations are, however, in more advanced phases, including assessing
compliance and repairing and replacing certain of their Business Systems. With
the

18
Company's evaluation of its Business Systems still in progress, the Company
is not in a position to state the total cost of remediation of all its Year
2000 issues nor has it determined the extent of contingency planning that may
be required. Amounts expensed as of September 30, 1998 were immaterial.

The Company has initiated formal communications with all of its significant
suppliers and customers to determine the extent to which the Company maybe
vulnerable to those third parties' failure to remediate their Year 2000 issues.
To the extent that supplier responses to Year 2000 readiness are unsatisfactory,
the Company will attempt to reduce risks of interruptions, with such options
including changes in suppliers to those who have demonstrated Year 2000
readiness, and accumulation of inventory. The Company is also monitoring the
status of its significant customers as a means of assessing risks and developing
alternatives.

The Company presently believes that by implementing its plans, including
modifications to existing Business Systems and conversion to new or upgraded
software and other systems, the Year 2000 issue will not pose significant
operational problems for the Company. However, if necessary remediation actions
are not completed in a timely manner, or the Company's suppliers and customers
do not successfully address their Year 2000 issues, the Year 2000 issue could
have a material impact on the operations, liquidity and financial condition of
the Company.


RECENTLY ISSUED ACCOUNTING STANDARDS

In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use". Effective for fiscal years
beginning after December 15, 1998, this SOP requires that entities capitalize
certain internal-use software costs once certain criteria are met. The Company
does not expect SOP 98-1 to have a material impact on its consolidated financial
statements.

In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up
Activities". Effective for fiscal years beginning after December 15, 1998, this
SOP requires start-up activities and organization costs be expensed as incurred.
The Company does not expect SOP 98-5 to have a material impact on its
consolidated financial statements.

In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). This Statement requires companies to record derivatives on the balance
sheet as assets and liabilities, measured at fair value. Gains or losses
resulting from changes in the values of those derivatives would be accounted for
depending on the use of the derivative and whether it qualifies for hedge
accounting. SFAS 133 is not expected to have a material impact on Hexcel's
consolidated financial statements. This Statement is effective for fiscal years
beginning after June 15, 1999. Hexcel will adopt this accounting standard as
required by January 1, 2000.


RISKS, UNCERTAINTIES AND OTHER FACTORS WITH RESPECT TO "FORWARD-LOOKING
STATEMENTS"

Certain statements contained in "Management's Discussion and Analysis of
Financial Condition and Results of Operations," that are not of historical
fact, constitute "forward-looking statements". Such forward-looking
statements include, but are not limited to: (a) expectations regarding
consummation of the proposed acquisition of the CS-Interglas interest,
including obtaining local regulatory approval; (b) expectations regarding
cost savings and earnings resulting from the Acquired Fabrics Business; (c)
estimates of commercial aerospace, including Boeing and Airbus, production
rates; (d) expectations regarding the growth in the production of military
aircraft and launch vehicle in 2000 and beyond; (e) expectations regarding
the recovery of the electronics market; (f) expectations regarding the impact
of pricing pressures from the Company's customers; (g) expectations regarding
future sales based on current backlog; (h) expectations regarding sales
growth, sales mix, gross margins, manufacturing productivity, capital
expenditures and effective tax rates; (i) expectations regarding Hexcel's
financial condition and liquidity, as well as future free cash flows; (j) the
estimated total cost of the Company's business consolidation program and the
estimated amount of cash expenditures to complete the program; (k)
expectations regarding the costs and benefits of accelerating and expanding
the Company's Lean Enterprise and business consolidation programs and
implementing a supply chain management program; and (l) the Year 2000 issue
and the impact it could have on the Company.

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: obtaining local regulatory approval for the acquisition of the C-S
Interglas joint venture interest; the integration of the Acquired Fabrics
Business, without disruption to manufacturing, marketing and distribution
activities; general economic and business conditions; changes in current
pricing levels; changes in political, social and economic conditions and
local regulations, particularly in Asia and Europe; foreign currency
fluctuations; changes in aerospace build rates; the loss of any significant
customers, particularly Boeing or Airbus; changes in sales mix; changes in
government defense procurement budgets; technology; industry capacity;
competition; disruptions of established supply channels; manufacturing
capacity constraints; the availability, terms and deployment of capital; and
the ability of the Company to accurately estimate the cost of systems
preparation and successful implementation for Year 2000 compliance.
Additional information regarding these factors is contained in the Company's
Annual Report on Form 10-K for the year ended December 31, 1997.

19
PART II. OTHER INFORMATION

Item 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) EXHIBITS:

<TABLE>
<S> <C>
2.1 Amendment No. 1 to Asset Purchase Agreement by and among Hexcel,
Stamford CS Acquisition Corp., Clark-Schwebel Holdings, Inc., and
Clark-Schwebel, Inc., dated as of September 15, 1998
(incorporated by reference to Exhibit 2.1 of the Company's
Current Report on Form 8-K, filed on September 24, 1998).

10.1 Second Amended and Restated Credit Agreement, dated as of
September 15, 1998, by and among Hexcel and certain of its
subsidiaries as borrowers, the lenders from time to time parties
thereto, Citibank, N.A. as documentation agent, and Credit Suisse
First Boston as lead arranger and as administrative agent for the
lenders.

10.2 Lease Agreement, dated as of September 15, 1998, by and among
Clark-Schwebel Corporation (a wholly-owned subsidiary of Hexcel)
as lessee, CSI Leasing Trust as lessor, and William J. Wade as
co-trustee for CSI Leasing Trust.

10.3 Form of Exchange Performance Accelerated Stock Option Agreement.

10.4 Form of 1998 Employee Option Agreement.

10.5 Summary of Terms of Employment (effective as of July 15, 1998)
between Hexcel and Harold E. Kinne, President and Chief Operating
Officer of Hexcel.

10.6 Employment Agreement dated as of July 25, 1998 (effective date
September 15, 1998) between Hexcel and Richard Wolfe, Executive
V.P. of Manufacturing of Clark-Schwebel Corporation (a
wholly-owned subsidiary of Hexcel).

10.7 Employment Agreement dated as of July 25, 1998 (effective date
September 15, 1998) between Hexcel and Jack Schwebel, Co-Chairman
of Clark-Schwebel Corporation (a wholly-owned subsidiary of
Hexcel).

10.8 Employment Agreement dated as of July 25, 1998 (effective date
September 15, 1998) between Hexcel and William D. Bennison,
President of Clark-Schwebel Corporation (a wholly-owned
subsidiary of Hexcel).

27. Financial Data Schedule.
</TABLE>
20
(b)  REPORTS ON FORM 8-K:

Current Report on Form 8-K dated August 11, 1998 relating to the Company's
stock buyback plan.

Current Report on Form 8-K dated September 24, 1998 relating to the
consummation of the acquisition of certain assets and assumption of
certain operating liabilities of Clark-Schwebel, Inc. and its subsidiaries.

Current Report on Form 8-K dated October 9, 1998 relating to the Company's
stock buyback plan.

Current Report on Form 8-K dated October 22, 1998 relating to the Company's
third quarter 1998 sales, EBITDA and net income.

Current Report on Form 8-K/A dated November 12, 1998 amending the Company's
Current Report on Form 8-K dated September 24, 1998 to include the
financial statements of Clark-Schwebel, Inc. and its subsidiaries.

21
SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized, and in the capacity
indicated.

HEXCEL CORPORATION
(Registrant)



NOVEMBER 16, 1998 /s/ Wayne C. Pensky
----------------- ------------------------
(Date) Wayne C. Pensky,
Corporate Controller and
Chief Accounting Officer

22