Hexcel Corporation (HXL, NYSE)
Industry: Aerospace & Defense
Annual report, fiscal year 2013


## ACCELERATE

A350-900AIRBUS



## FINANCIAL HIGHLIGHTS

<table><tr><td>(In millions except per share amounts)</td><td>2013</td><td>2012</td><td>2011</td></tr><tr><td>Net Sales</td><td>$1,678.2</td><td>$1,578.2</td><td>$1,392.4</td></tr><tr><td>Operating Income</td><td>$ 270.9</td><td>$ 248.8</td><td>$ 192.0</td></tr><tr><td>Net Income</td><td>$ 187.9</td><td>$ 164.3</td><td>$ 135.5</td></tr><tr><td>Diluted Net Income per share</td><td>$ 1.84</td><td>$ 1.61</td><td>$ 1.35</td></tr></table>

<table><tr><td>Non-GAAP Measures for year-over-year comparisons (see page 20 for definition)</td><td>2013</td><td>2012</td><td>2011</td></tr><tr><td>Adjusted Operating Income</td><td>$ 270.9</td><td>$ 239.3</td><td>$ 189.0</td></tr><tr><td>As a % of sales</td><td>16.1%</td><td>15.2%</td><td>13.6%</td></tr><tr><td>Adjusted Net Income</td><td>$ 188.5</td><td>$ 159.0</td><td>$ 124.9</td></tr><tr><td>Adjusted Diluted Net Income per share</td><td>$ 1.85</td><td>$ 1.56</td><td>$ 1.24</td></tr></table>

## AT HEXCEL, WE VALUE ...

Responsibility. We work with uncompromised integrity on behalf of our shareholders, employees and customers. We strive to be good citizens in the communities in which we live and work.

One Hexcel. We thrive on the contributions each person brings to the Company by valuing diversity, developing talent, fostering teamwork, and rewarding success.

Innovation. We embrace the curiosity to explore ideas, the passion to challenge the impossible, and the conviction to succeed beyond expectations.

Accountability. We are accountable – to customers, shareowners, the community, suppliers and to ourselves – for achieving superior performance by expecting excellence in everything we do.

## TO OUR
STOCKHOLDERS

When I joined Hexcel as President in 2009, I had done enough research to understand the company’s global reach and its technical and market strengths, but it took me several more months to grasp the true breadth of technology, and the remarkable strengths and character of the people of Hexcel. Four years later, when the Board of Directors asked me to become Chief Executive Officer, I was thrilled to accept the job because I had become more confident and passionate about the company’s people and prospects than ever.

## OUR STRATEGY REMAINS UNCHANGED:

We are a technology driven company focused on Advanced Composites, targeting markets with long-term growth potential where we can establish a sustainable, competitive advantage.




We supported the ramp-up of B787 production to ten aircraft per month and delivered technical innovations to meet important B737 MAX performance targets.

We take this strategy seriously, and use it as a prism through which we evaluate new market opportunities, target applications, customers and product innovations. As a world leader in advanced composites, we see the global penetration of composites occurring faster than ever – as the unique characteristics of our materials become more understood and valued, they increasingly become the material of choice for our customers.

To capture our rightful share of these rapidly expanding markets, we are now focused on accelerating the identification and development of innovations for the next generation of our customers' products and accelerating our capability to manufacture and deliver flawless products just in time. Accelerating doesn't mean rushing – it means working smarter, with best-in-class systems and processes.

## 2013 – A YEAR OF ACCOMPLISHMENTS AND MILESTONES

I am pleased to report that our 2013 financial performance once again set new records for Hexcel in sales, gross margin, operating income and net income. Adjusted operating income rose 13% to $271 million, a robust 16.1% of sales. Adjusted earnings per share increased nearly 19% over 2012, to $1.85. We generated $78 million in free cash flow while investing $195 million in capital expenditures for capacity. We carefully track our after-tax Return on Invested Capital (ROIC) and use this measure in our incentive plans. For 2013, our ROIC was 14.9% – putting us in the top 20% of public aerospace companies. Finally, the strength of our balance sheet enabled us to execute a $90 million stock repurchase program in 2013, with more repurchases planned in 2014.

This record-setting performance, which we have now delivered several years running, requires more than executing on the fundamentals – safety, quality, productivity. Our continued ability to deliver superior performance results from our relentless focus on anticipating customer needs, managing a pipeline of technological breakthroughs, and constantly improving our integrated supply chain. The highlights of 2013 affirm our approach.












In Commercial Aerospace, sales rose 14.9% over 2012. We provide a broad array of material and structural solutions for all Boeing aircraft, making it our largest customer in 2013. In January, Hexcel received a Boeing Silver Performance Excellence Award, our fourth consecutive award for superior performance. Also, as a key supplier to Boeing, we recognize the importance of continuous improvement and Hexcel has stepped up to respond to Boeing’s “Partnering For Success” program which seeks to reduce overall costs. Innovative technology improvements are a critical element in helping us reduce our customers’ costs without sacrificing our financial performance. In addition, we supported the ramp-up of B787 production to ten aircraft per month and delivered technical innovations to meet important B737 MAX performance targets. Finally, in November, we commissioned with Boeing a 40% expansion of our Malaysian joint venture plant, adding 125,000 square feet to respond to growing demand.

On June 14, the Airbus A350 XWB successfully completed its first flight and the first customer delivery remains on schedule for 2014. When Hexcel was first awarded the sole source position for primary structure composites on this new aircraft in 2008, the real work of partnering with our customer began in earnest. Our scientists and engineers worked tirelessly with their counterparts in Airbus to improve and optimize the performance characteristics of the materials we would supply. That collaboration spawned further innovations that resulted in Hexcel capturing additional content on the airplane. Hexcel now has $5 million of materials per aircraft on the A350 XWB, making it the largest program in our history.

Composite penetration also continues to advance in next-generation aircraft engines. Hexcel materials benefit from blades, engine nacelles and other structural parts requiring the strength, durability and weight-reduction properties of advanced composites. In June, we secured an approximately $1 billion long-term supply agreement with Safran, a key






## ACCELERATE EXPANSION

As we turn to 2014 and beyond, we see a world where advanced composite technologies have moved from adoption to expansion.



©Sikorsky CH53-K

customer for fan blades and containment cases on the LEAP-1 engine that was selected for the Airbus A320neo, the Boeing 737 MAX and the COMAC 919. We estimate that our content on the A320neo and B737 MAX will increase up to 50% versus the current aircraft. In addition, Safran awarded Hexcel with a Special Jury Prize – the first time that Safran has awarded this distinction to a supplier – for our work with Safran engineers in developing innovative, weight-saving components using our HexMC \( ^{®} \)  molding compound.

While many companies have seen decreases in their military business due to budget pressures, our Space and Defense sales grew 5.3% in 2013 as we continue to benefit from a broad range of programs in the US, Europe and Asia. Hexcel's Intermediate Modulus (IM) fiber remains the defense industry standard for the most demanding applications. The new composite-intensive F35 Joint Strike Fighter and A400M military transport are beginning their long-awaited ramp-up and our helicopter rotor blade business continues to grow.

Sounds too good to be true, doesn’t it? Well, we did hit a bump in the road in our industrial business, where the volatile wind turbine market was the largest factor in a sales decline of 21.4%. We see modest improvement coming for the wind energy market in 2014, but more importantly, we have deepened our relationships with key customers and are working to introduce new Hexcel products, including HexPly \( ^{®} \)  M79 prepreg, which combines low temperature cure and low exotherm capability while delivering the required mechanical performance to provide cost effective solutions. Beyond wind energy, the story of composite substitution for metals is beginning to take hold in the automotive sector, where we are engaged in development activities with leading automotive companies for complex composite applications.

As we turn to 2014 and beyond, we see a world where advanced composite technologies have moved from adoption to expansion. Our customers want partners that can not only keep pace but help them accelerate.






# ACCELERATE
VELOCITY

Our scientists and engineers partner closely with our customers to identify and develop material solutions that enable them to create next-generation aircraft, engines and wind turbines.



## ACCELERATE INNOVATION

Hexcel is first and foremost a technology company. Our scientists and engineers partner closely with our customers to identify and develop material solutions that enable them to create next-generation aircraft, engines and wind turbines. The product development cycle isn't just shortening for Hexcel – our customers feel the same pressures. And while our talented research and development teams have their "Aha!" moments, the historical basis for Hexcel's technical innovations lies in how disciplined and focused we are in pursuing solutions to our customers' needs.

Do we really understand our customers' aspirations and associated timeframes? How do we best coordinate and shepherd the methodical and painstaking work of testing and then proving technical solutions to complex chemical and mechanical challenges? In 2013, to accelerate our technology development, we refined our strategic planning process and the technology roadmaps for each of our product families to ensure our technical teams have explicit targets and timelines. To win, it is not enough to create products our customers want today – we need to identify future game-changers and then stake out a clear and realistic path to get there.

## ACCELERATE VELOCITY THROUGH OUR SUPPLY CHAIN

In December, we re-affirmed our target of $2.5 billion in revenues by 2017. Achieving that target requires a multi-year expansion of our manufacturing capacity, including projected capital expenditures for 2014 of $225 to $250 million. That level of investment and growth demands best-in-class project management and we have established an enviable track record of installing world-class manufacturing capacity on time and on budget. But this level of expansion also calls for processes and systems the company didn’t need when it was smaller.
We refined our strategic planning process and technology roadmaps for each of our product families to ensure our technical resources have explicit targets and timelines.



Hexcel has 18 manufacturing locations in eight different countries. We produce carbon fibers, we weave carbon and other fibers and we prepreg them with advanced resin systems. We produce an industry-leading product range of honeycomb core materials which are sold directly or shaped and contoured by us before being combined with prepregs to create end products, such as aircraft fairings and helicopter rotor blades. We have, to state the obvious, a complex, global supply chain, and every year we are expanding these operations significantly.

In 2013 we continued the heavy lifting to upgrade our processes and information systems to provide better visibility from one end of the supply chain to the other, improve production controls for better equipment up-time and yields, and optimize our operations through 5S and Six Sigma projects. When our customers visit our plants, they see the enormous progress we have made, but we are just getting started.

Our global Integrated Supply Chain team is focused on accelerating the velocity of our products through the supply chain. We have targeted innovations in our manufacturing processes which we believe will increase throughput to help reduce future capital expenditures and improve customer lead-times.

## ACCELERATE OUR UNDERSTANDING OF A CHANGING COMPETITIVE LANDSCAPE

The world of composites is changing rapidly. Projected growth in composite penetration in aerospace, industrial and emerging markets attracts new entrants as well as competing alternative technologies. We have bolstered our business development and intelligence resources to ensure we stay ahead of market developments and also stay alert to emerging technologies that would complement or expand our businesses through acquisition, joint venture or partnership. In addition, we plan to continue to formalize collaborations with leading universities and other companies to leverage our research and technology efforts as well as enhance our market insights.



# ACCELERATE
PROGRESS

We produce an industry-leading product range of honeycomb core materials which are sold directly or shaped and contoured by us before being combined with prepregs to create end products, such as aircraft fairings and helicopter rotor blades.






Dave Berges with his wife, Debra, in Toulouse, France, to witness the first flight of the new Airbus A350 XWB in June, 2013. Dave served as Chairman & CEO of Hexcel from 2001 to his retirement in December, 2013.

On behalf of all Hexcel associates, we thank Dave for his innumerable contributions to Hexcel, and wish him and Debra all the best in the next chapter of their lives.

## ACCELERATE OUR DEVELOPMENT OF THE PEOPLE OF HEXCEL

To quote John Cotter, “We know that leadership is very much related to change. As the pace of change accelerates, there is naturally a greater need for effective leadership.” We take the obligations of leadership seriously. Hexcel has a fantastic team of bright, highly-motivated people; we continue to focus on developing our people and becoming smarter and faster about how we identify and recruit talent. I cannot think of a more exciting company to work for than Hexcel. With double-digit commercial aerospace growth for years to come, and a collaborative, high-performance culture, we offer our employees and job applicants endless opportunities to contribute to our future success and grow their careers.

## ONE LAST POINT

After working closely for more than four years with Dave Berges, our previous CEO, I want to thank him for the lasting contributions he made to our company. Dave topped off an incredible twelve-year run by working with me and our board to make the CEO transition a seamless event for our customers, suppliers, investors and employees. He has been an invaluable mentor and colleague, and I pledge to take the Hexcel of today that Dave was so instrumental in building and accelerate our performance for years to come.



## FINANCIAL OVERVIEW

## Table of Contents

Selected Financial Data 14
Management's Discussion and Analysis of Financial Condition and Results of Operations 20
Business Overview 20
Forward-Looking Statements 30
Consolidated Financial Statements: Balance Sheets 31
Statements of Operations 32
Statements of Comprehensive Income 32
Statements of Stockholders' Equity 33
Statements of Cash Flows 34
Notes to the Consolidated Financial Statements 35
Management's Responsibility for Consolidated Financial Statements 62
Management's Report on Internal Control Over Financial Reporting 62
Report of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm 63



## Selected Financial Data

The following table summarizes selected financial data as of and for the five years ended December 31:

<table><tr><td>(In millions, except per share data)</td><td>2013</td><td>2012</td><td>2011</td><td>2010</td><td>2009</td></tr><tr><td>Results of Operations:</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Net sales</td><td>$ 1,678.2</td><td>$ 1,578.2</td><td>$1,392.4</td><td>$ 1,173.6</td><td>$ 1,108.3</td></tr><tr><td>Cost of sales</td><td>1,224.2</td><td>1,171.5</td><td>1,050.3</td><td>891.0</td><td>859.8</td></tr><tr><td>Gross margin</td><td>454.0</td><td>406.7</td><td>342.1</td><td>282.6</td><td>248.5</td></tr><tr><td>Selling, general and administrative expenses</td><td>141.4</td><td>130.7</td><td>120.5</td><td>118.5</td><td>107.2</td></tr><tr><td>Research and technology expenses</td><td>41.7</td><td>36.7</td><td>32.6</td><td>30.8</td><td>30.1</td></tr><tr><td>Other (income) expense, net</td><td>-</td><td>(9.5)</td><td>(3.0)</td><td>3.5</td><td>7.5</td></tr><tr><td>Operating income</td><td>270.9</td><td>248.8</td><td>192.0</td><td>129.8</td><td>103.7</td></tr><tr><td>Interest expense, net</td><td>7.3</td><td>10.0</td><td>11.6</td><td>23.2</td><td>26.1</td></tr><tr><td>Non-operating expense, net</td><td>1.0</td><td>1.1</td><td>4.9</td><td>6.8</td><td>-</td></tr><tr><td>Income before income taxes and equity in earnings</td><td>262.6</td><td>237.7</td><td>175.5</td><td>99.8</td><td>77.6</td></tr><tr><td>Provision for income taxes</td><td>76.0</td><td>74.1</td><td>41.6</td><td>22.9</td><td>22.0</td></tr><tr><td>Income before equity in earnings</td><td>186.6</td><td>163.6</td><td>133.9</td><td>76.9</td><td>55.6</td></tr><tr><td>Equity in earnings from investments in affiliated companies</td><td>1.3</td><td>0.7</td><td>1.6</td><td>0.5</td><td>0.7</td></tr><tr><td>Net income</td><td>$ 187.9</td><td>$ 164.3</td><td>$ 135.5</td><td>$ 77.4</td><td>$ 56.3</td></tr><tr><td>Basic net income per common share</td><td>$ 1.88</td><td>$ 1.64</td><td>$ 1.37</td><td>$ 0.79</td><td>$ 0.58</td></tr><tr><td>Diluted net income per common share</td><td>$ 1.84</td><td>$ 1.61</td><td>$ 1.35</td><td>$ 0.77</td><td>$ 0.57</td></tr><tr><td>Weighted-average shares outstanding:</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Basic</td><td>100.0</td><td>100.2</td><td>98.8</td><td>97.6</td><td>96.9</td></tr><tr><td>Diluted</td><td>102.1</td><td>102.0</td><td>100.7</td><td>99.9</td><td>98.2</td></tr><tr><td>Financial Position:</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Total assets</td><td>$ 1,836.1</td><td>$ 1,603.1</td><td>$ 1,376.1</td><td>$ 1,258.1</td><td>$ 1,246.6</td></tr><tr><td>Working capital</td><td>$ 387.7</td><td>$ 340.4</td><td>$ 276.8</td><td>$ 291.8</td><td>$ 259.4</td></tr><tr><td>Long-term notes payable and capital lease obligations</td><td>$ 292.0</td><td>$ 240.0</td><td>$ 238.3</td><td>$ 304.6</td><td>$ 358.8</td></tr><tr><td>Stockholders&#x27; equity (a)</td><td>$ 1,160.4</td><td>$ 994.1</td><td>$ 802.2</td><td>$ 659.4</td><td>$ 575.6</td></tr><tr><td>Other Data:</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Depreciation</td><td>$ 59.3</td><td>$ 57.2</td><td>$ 55.3</td><td>$ 53.2</td><td>$ 46.6</td></tr><tr><td>Accrual basis capital expenditures</td><td>$ 206.5</td><td>$ 241.3</td><td>$ 184.5</td><td>$ 60.7</td><td>$ 85.7</td></tr><tr><td>Shares outstanding at year-end, less treasury stock</td><td>98.9</td><td>99.9</td><td>98.8</td><td>97.4</td><td>96.6</td></tr></table>

(a) No cash dividends were declared per share of common stock during any of the five years ended December 31, 2013.

## General Development of Business

Hexcel Corporation, founded in 1946, was incorporated in California in 1948, and reincorporated in Delaware in 1983. Hexcel Corporation and its subsidiaries (herein referred to as "Hexcel", the "Company", "we", "us", or "our"), is a leading advanced composite company. We develop, manufacture, and market lightweight, high-performance structural materials, including carbon fibers, specialty reinforcements, prepregs and other fiber-reinforced matrix materials, honeycomb, adhesives, engineered honeycomb and composite structures, for use in Commercial Aerospace, Space & Defense and Industrial markets. Our products are used in a wide variety of end applications, such as commercial and military aircraft, space launch vehicles and satellites, wind turbine blades, automotive, a wide variety of recreational products and other industrial applications.

We serve international markets through manufacturing facilities, sales offices and representatives located in the Americas, Asia Pacific, Europe and Russia. We are also an investor in a joint venture in Malaysia, which manufactures composite structures for Commercial Aerospace applications.

## Narrative Description of Business and Segments

We are a manufacturer of products within a single industry: Advanced Composites. Hexcel has two reportable segments, Composite Materials and Engineered Products. The Composite Materials segment is comprised of our carbon fiber, specialty reinforcements, resins, prepregs and other fiber-reinforced matrix materials, and honeycomb core product lines. The Engineered Products segment is comprised of lightweight high strength composite structures, molded components and specialty machined honeycomb product lines.

The following summaries describe the ongoing activities related to the Composite Materials and Engineered Products segments as of December 31, 2013.

## Composite Materials

The Composite Materials segment manufactures and markets carbon fibers, fabrics and specialty reinforcements, prepregs and other fiber-reinforced matrix materials, structural adhesives, honeycomb, molding compounds, tooling materials, polyurethane systems and laminates that are incorporated into many applications, including military and commercial aircraft, wind turbine blades, recreational products, transport (cars, boats, trains) and other industrial applications.

The following table identifies the principal products and examples of the primary end-uses from the Composite Materials segment:

<table><tr><td>SEGMENT</td><td>PRODUCTS</td><td>PRIMARY END-USES</td></tr><tr><td>Composite Materials</td><td>Carbon Fibers</td><td>·Raw materials for prepregs, fabrics and specialty reinforcements
·Filament winding for various aerospace, defense and industrial applications</td></tr><tr><td></td><td></td><td></td></tr><tr><td>Fabrics and Specialty Reinforcements</td><td>·Raw materials for prepregs and honeycomb
·Composites and components used in aerospace, defense, wind energy, automotive, recreation and other industrial applications</td><td></td></tr><tr><td>Prepregs, Other Fiber-Reinforced Matrix Materials and Resins</td><td>·Composite structures
·Commercial and military aircraft components
·Satellites and launchers
·Aeroengines
·Wind turbine and helicopter blades
·Boats, trains and performance cars
·Skis, snowboards, hockey sticks, and bicycles</td><td></td></tr><tr><td>Structural Adhesives</td><td>·Bonding of metals, honeycomb and composite materials</td><td></td></tr><tr><td>Honeycomb</td><td>·Composite structures and interiors
·Impact and shock absorption systems
·Helicopter blades</td><td></td></tr></table>



Carbon Fibers: HexTower \( ^{®} \)  carbon fibers are manufactured for sale to third-party customers as well as for our own use in manufacturing certain reinforcements and composite materials. Carbon fibers are woven into carbon fabrics, used as reinforcement in conjunction with a resin matrix to produce pre-impregnated composite materials (referred to as “prepregs”). Carbon fiber is also used in filament winding, hand layup, automatic tape layup and advanced fiber placement to produce finished composite components. Key product applications include structural components for commercial and military aircraft, space launch vehicles, and certain other applications such as recreational and industrial equipment.

Fabrics and Specialty Reinforcements: Fabrics and specialty reinforcements are made from a variety of fibers, including carbon, aramid and other high strength polymers, several types of fiberglass, quartz, ceramic and other specialty fibers. These reinforcements are used in the production of prepregs and other matrix materials used in primary and secondary structural aerospace applications such as wing components, horizontal and vertical stabilizer components, fairings, radomes and engine blades and cases, engine nacelles as well as overhead storage bins and other interior components. Our reinforcements are also used in the manufacture of a variety of industrial and recreational products such as wind energy blades, automotive components, oil exploration and production equipment, boats, surfboards, skis and other sporting goods equipment.

Prepregs: HexPly \( ^{®} \)  prepregs are manufactured for sale to third-party customers and for internal use by our Engineered Products segment in manufacturing composite laminates and monolithic structures, including finished components for aircraft structures and interiors. Prepregs are manufactured by combining high-performance reinforcement fabrics or unidirectional fibers with a resin matrix to form a composite material that, when cured, has exceptional structural properties not present in either of the constituent materials. Prepreg reinforcements include glass, carbon, aramid, quartz, ceramic and other specialty fibers. Resin matrices include bismaleimide, cyanate ester, epoxy, phenolic, polyimide and other specialty resins.

Other Fiber-Reinforced Matrix Materials: New fiber reinforced matrix developments include HexMC \( ^{®} \) , a form of quasi-isotropic carbon fiber prepreg that enables small to medium sized composite components to be mass produced. HexTOOL \( ^{®} \)  is a specialized form of HexMC \( ^{®} \)  for use in the cost-effective construction of high temperature resistant composite tooling. HexFIT \( ^{®} \)  film infusion material is a product that combines resin films and dry fiber reinforcements to save lay-up time in production and enables the manufacture of large contoured composite structures, such as wind turbine blades.

Resins: HexFlow \( ^{®} \)  polymer matrix materials are sold in liquid and film form for use in direct process manufacturing of composite parts. Resins can be combined with fiber reinforcements in manufacturing processes such as resin transfer molding (RTM), resin film infusion (RFI) or vacuum assisted resin transfer molding (VARTM) to produce high quality composite components for both aerospace and industrial applications, without the need for customer investment in autoclaves.
Structural Adhesives: We manufacture and market a comprehensive range of Redux \( ^{®} \)  film and paste adhesives. These structural adhesives, which bond metal to metal and composites and honeycomb structures, are used in the aerospace industry and for many industrial applications.

Honeycomb: HexWeb \( ^{®} \)  honeycomb is a lightweight, cellular structure generally composed of a sheet of nested hexagonal cells. It can also be manufactured in over-expanded and asymmetric cell configurations to meet special design requirements such as contours or complex curvatures. Honeycomb is primarily used as a lightweight core material and acts as a highly efficient energy absorber. When sandwiched between composite or metallic facing skins, honeycomb significantly increases the stiffness of the structure, while adding very little weight.

We produce honeycomb from a number of metallic and non-metallic materials. Most metallic honeycomb is made from aluminum and is available in a selection of alloys, cell sizes and dimensions. Non-metallic materials used in the manufacture of honeycomb include fiberglass, carbon fiber, carbon fiber matrix and aramid papers, aramid fiber and other specialty materials.

We sell honeycomb as standard blocks and slices in cut foam a block. Honeycomb is also supplied as sandwich panels, with facing skins bonded to either side of the core material. Honeycomb is also used in Acousti-Cap \( ^{®} \)  where a non-metallic permeable cap material is embedded into honeycomb core that is used in aircraft engine nacelles to dramatically reduce noise during takeoff and landing without adding a structural weight penalty. Aerospace is the largest market for honeycomb products. We also sell honeycomb for non-aerospace applications including automotive parts, sporting goods, building panels, high-speed trains and mass transit vehicles, energy absorption products, marine vessel compartments, and other industrial uses. In addition, we produce honeycomb for our Engineered Products segment for use in manufacturing finished parts for airframe Original Equipment Manufacturers (OEMs).

Net sales for the Composite Materials segment to third-party customers were $1,286.9 million in 2013, $1,230.9 million in 2012 and $1,074.5 million in 2011, which represented between 77% and 78%, of our net sales each year. Net sales for composite materials are highly dependent upon the number of large commercial aircraft produced as further discussed under the captions "Significant Customers", "Markets" and "Management's Discussion and Analysis of Financial Condition and Results of Operations". In addition, about 5% of our total production of composite materials in 2013 was used internally in Engineered Products segment.

## Engineered Products

The Engineered Products segment manufactures and markets composite structures and precision machined honeycomb parts primarily for use in the aerospace industry. Composite structures are manufactured from a variety of composite and other materials, including prepregs, honeycomb, structural adhesives and advanced molding materials, using such material as autoclaves and industrial processing, multi-axis numerically controlled machining, heat forming, compression molding and other composite manufacturing techniques.

The following table identifies the principal products and examples of the primary end-uses from the Engineered Products segment:

<table><tr><td>SEGMENT</td><td>PRODUCTS</td><td>PRIMARY END-USES</td></tr><tr><td>Engineered Products</td><td>Composite Structures</td><td>·Aircraft structures and finished aircraft components, including wing to body fairings, wing panels, flight deck panels, door liners, helicopter blades, spars and tip caps</td></tr><tr><td></td><td>Engineered Honeycomb</td><td>·Aircraft structural sub-components and semi-finished components used in helicopter blades, engine nacelles, and aircraft surfaces (flaps, wings, elevators and fairings)</td></tr><tr><td></td><td>HexMC \( ^{®} \)  molded composite parts</td><td>·Complex geometric parts for commercial aircrafts to replace traditionally metal parts including window frames, primary structure brackets and fittings as well as for certain industrial applications</td></tr></table>

Net sales for the Engineered Products segment to third-party customers were $391.3 million in 2013, $347.3 million in 2012, and $317.9 million in 2011, which represented between 22% and 23% of our net sales each year.

The Engineered Products segment has a 50% ownership interest in a Malaysian joint venture, Aerospace Composites Malaysia Sdn. Bhd., formerly, Asian Composites Manufacturing Sdn. Bhd. ("ACM") with Boeing Worldwide Operations Limited. Under the terms of the joint venture agreement, Hexcel and The Boeing Company ("Boeing") have transferred the manufacture of certain semi-finished composite components to this joint venture. Hexcel purchases the semi-finished composite components from the joint venture, and inspects and performs additional skilled assembly work before delivering them to Boeing. The joint venture also manufactures composite components for other aircraft component manufacturers. ACM had revenue of $62 million in 2013, and $59 million and $51 million in 2012 and 2011, respectively.

## Financial Information About Segments and Geographic Areas

Financial information and further discussion of our segments and geographic areas, including external sales and long-lived assets, are contained under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" and in Note 16 to the accompanying consolidated financial statements of this Annual Report.

## SIGNIFICANT CUSTOMERS

Approximately 34%, 29% and 30% of our 2013, 2012 and 2011 net sales, respectively, were to Boeing and related subcontractors. Of the 34% of overall sales to Boeing and its subcontractors in 2013, 30% related to Commercial Aerospace market applications and 4% related to Space & Defense market applications. Approximately 29%, 28% and 27% of our 2013, 2012 and 2011 net sales, respectively, were to Airbus Group and its subcontractors. Of the 29% of overall sales to Airbus Group and its subcontractors in 2013, 26% related to Commercial Aerospace market applications and 3% related to Space & Defense market applications.

## PRIMARY END-USES

• Aircraft structures and finished aircraft components, including wing to body fairings, wing panels, flight deck panels, door liners, helicopter blades, spars and tip caps

• Aircraft structural sub-components and semi-finished components used in helicopter blades, engine nacelles, and aircraft surfaces (flaps, wings, elevators and fairings)

• Complex geometric parts for commercial aircrafts to replace traditionally metal parts including window frames, primary structure brackets and fittings as well as for certain industrial applications

## MARKETS

Our products are sold for a broad range of end-uses. The following tables summarize our net sales to third-party customers by market and by geography for each of the three years ended December 31:

<table><tr><td></td><td>2013</td><td>2012</td><td>2011</td></tr><tr><td>Net Sales by Market</td><td></td><td></td><td></td></tr><tr><td>Commercial Aerospace</td><td>65%</td><td>60%</td><td>59%</td></tr><tr><td>Space &amp; Defense</td><td>22</td><td>23</td><td>22</td></tr><tr><td>Industrial</td><td>13</td><td>17</td><td>19</td></tr><tr><td>Total</td><td>100%</td><td>100%</td><td>100%</td></tr></table>

<table><tr><td>Net Sales by Geography (a)</td><td></td><td></td><td></td></tr><tr><td>United States</td><td>52%</td><td>51%</td><td>52%</td></tr><tr><td>Europe and China</td><td>48</td><td>49</td><td>48</td></tr><tr><td>Total</td><td>100%</td><td>100%</td><td>100%</td></tr></table>

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

was manufactured.

<table><tr><td></td><td>2013</td><td>2012</td><td>2011</td></tr><tr><td>Net Sales to External Customers (b)</td><td></td><td></td><td></td></tr><tr><td>United States</td><td>46%</td><td>46%</td><td>44%</td></tr><tr><td>Europe</td><td>39</td><td>39</td><td>41</td></tr><tr><td>All Others</td><td>15</td><td>15</td><td>15</td></tr><tr><td>Total</td><td>100%</td><td>100%</td><td>100%</td></tr></table>

(b) Net sales to external customers based on the location to which the product sold was delivered.

## Commercial Aerospace

The Commercial Aerospace industry is our largest user of advanced composites. Commercial Aerospace represented 65% of our 2013 net sales. Approximately 85% of these revenues can be identified as sales to Airbus, Boeing and their subcontractors for the production of commercial aircraft. The remaining 15% of these revenues were for regional and business aircraft. The economic benefits airlines can obtain from weight savings in both fuel economy and aircraft range, combined with the design enhancement that comes from the advantages of advanced composites over traditional materials, have caused the industry to be the leader in the use of these



materials. While military aircraft and spacecraft have championed the development of these materials, Commercial Aerospace has had the greater consumption requirements and has commercialized the use of these products. Accordingly, the demand for advanced structural material products is closely correlated to the demand for new commercial aircraft.

The use of advanced composites in Commercial Aerospace is primarily in the manufacture of new commercial aircraft. The aftermarket for these products is very small as many of these materials are designed to last for the life of the aircraft. The demand for new commercial aircraft is driven by two principal factors, the first of which is airline passenger traffic (the number of revenue passenger miles flown by the airlines) which affects the required size of airline fleets. The International Air Transport Association (IATA) estimates 2013 revenue passenger miles were 5.3% higher than 2012. Growth in passenger traffic requires growth in the size of the fleet of commercial aircraft operated by airlines worldwide.

A second factor, which is less sensitive to the general economy, is the replacement rates for existing aircraft. The rates of retirement of passenger and freight aircraft, resulting mainly from obsolescence, are determined in part by the regulatory requirements established by various civil aviation authorities worldwide as well as public concern regarding aircraft age, safety and noise. These rates may also be affected by the desire of the various airlines to improve operating costs with higher payloads and more fuel-efficient aircraft (which in turn is influenced by the price of fuel) and by reducing maintenance expense. In addition, there is expected to be increasing pressure on airlines to replace their aging fleet with more fuel efficient and quieter aircraft to be more environmentally responsible. When aircraft are retired from commercial airline fleets, they may be converted to cargo freight aircraft or scrapped.

An additional factor that may cause airlines to defer or cancel orders is their ability to obtain financing, including leasing, for new aircraft orders. This will be dependent both upon the financial health of the airline operators, as well as the overall availability of financing in the marketplace.

Each new generation of commercial aircraft has used increasing quantities of advanced composites, replacing metals. This follows the trend previously seen in military fighter aircraft where advanced composites may now exceed 50% of the weight of the airframe. Early versions of commercial aircraft, such as the Boeing 707, which was developed in the early 1950's, contained almost no composite materials. One of the first commercial aircraft to use a meaningful amount of composite materials, the Boeing 767 entered into service in 1983, and was built with an airframe containing approximately 6% composite materials. The airframe of Boeing's 777 aircraft, which entered service in 1995, is approximately 11% composite. The Airbus A380, which was first delivered in 2007, has approximately 23% composite content by weight. Boeing's latest aircraft, the B787, which entered into service in September 2011, has a content of more than 50% composite materials by weight. In December 2006, Airbus formally launched the A350 XWB ("A350") which is also projected to have a composite content of 50% or more by weight. Airbus targets the A350 to enter into service in the fourth quarter of 2014. In 2011, both Airbus and Boeing announced new versions of their narrow body aircraft which will have new engines. Airbus's A320neo is expected to enter service in 2015 and Boeing's B737 MAX in 2017. It is expected that these new aircraft will offer more opportunities for composite materials than their predecessor. We refer to this steady expansion of the use of composites in aircraft as the "scalar penetration of composites" as it increases our average sales per airplane over time.

The impact on Hexcel of Airbus and Boeing's production rate changes is typically influenced by two factors: the mix of aircraft produced and the inventory supply chain effects of increases or reductions in aircraft production. We have products on all Airbus and Boeing planes. The dollar value of our materials than narrow body type – twin aisle aircraft use aircraft use more of our materials than aircraft and never designate, for established programs, we deliver older generations. On average, we have a mix of both products into the supply chain but also in some of our older, newer and older aircraft that are in the development or ramp-up on the product. For aircraft that are in the development or ramp-up stage, such as the A350, we will have sales as much as several years in advance of the delivery. Increased aircraft deliveries combined with the scalar penetration of composites resulted in our Commercial Aerospace revenues increasing by approximately 15% in 2013 and 2012 and 28% in 2011.

Set forth below are historical aircraft deliveries as announced by Airbus and Boeing:

<table><tr><td></td><td>1998</td><td>1999</td><td>2000</td><td>2001</td><td>2002</td><td>2003</td><td>2004</td><td>2005</td><td>2006</td><td>2007</td><td>2008</td><td>2009</td><td>2010</td><td>2011</td><td>2012</td><td>2013</td></tr><tr><td>Airbus</td><td>229</td><td>294</td><td>311</td><td>325</td><td>303</td><td>305</td><td>320</td><td>378</td><td>434</td><td>453</td><td>483</td><td>498</td><td>510</td><td>534</td><td>588</td><td>626</td></tr><tr><td>Boeing</td><td>563</td><td>620</td><td>491</td><td>527</td><td>381</td><td>281</td><td>285</td><td>290</td><td>398</td><td>441</td><td>375</td><td>481</td><td>462</td><td>477</td><td>601</td><td>648</td></tr><tr><td>Total</td><td>792</td><td>914</td><td>802</td><td>852</td><td>684</td><td>586</td><td>605</td><td>668</td><td>832</td><td>894</td><td>858</td><td>979</td><td>972</td><td>1,011</td><td>1,189</td><td>1,274</td></tr></table>

Approximately 85% of our Commercial Aerospace revenues can be identified as sales to Airbus, Boeing and their subcontractors for the production of commercial aircraft. Airbus and Boeing combined deliveries in 2013 were 1,274 aircraft, surpassing the previous high of 1,189 in 2012. Based on Airbus and Boeing public estimates, the combined deliveries in 2014 are expected to be higher than 2013. In 2013, the combined net orders reported by Airbus and Boeing were 2,858 planes, bringing their backlog at December 31, 2013 to 10,639 planes – the highest in history. The balance of our Commercial Aerospace sales is related to regional and business aircraft manufacture, and other commercial aircraft applications. These applications also exhibit increasing utilization of composite materials with each new generation of aircraft. Regional and business aircraft sales of $161.7 million in 2013 were slightly higher than the $161 million in sales in 2012, which was about 7% above 2011.

## Space & Defense

The Space & Defense market has historically been an innovator in the use of, and source of significant demand for, advanced composites. The aggregate demand by Space & Defense customers is primarily a function of procurement of military aircraft that utilizes advanced composites by the United States and certain European governments. We are currently qualified to supply materials to a broad range of over 100 helicopter, military aircraft and space programs. The top ten programs by revenues represent about 54% of our Space & Defense revenues and no one program exceeds 15% of our revenues in this market. Rotorcraft accounted for about 58% of Space & Defense sales in 2013. Key programs include the V-22 (Osprey) tilt rotor aircraft, Blackhawk, A400M military transport, C-17, F-35 (joint strike fighter or JSF), S76, AH-64 Apache, European Fighter Aircraft (Typhoon), CH-53 Super Stallion, F/A-18E/F (Hornet), NH90, and Tiger helicopters. In addition, our Engineered Products segment provides specialty value added services such as machining, sub-assembly, and even full blade manufacturing. The benefits that we obtain from these programs will depend upon which are funded and the extent of such funding. Space applications for advanced composites include solid rocket booster cases, fairings and payload doors for launch vehicles, and buss and solar arrays for military and commercial satellites.

Another trend providing positive growth for Hexcel is the further penetration of composites in helicopter blades. Numerous new helicopter programs in development, as well as upgrade or retrofit programs, have an increased reliance on Composite Materials products such as carbon fiber, prepregs, and honeycomb core to improve blade performance. In addition, our Engineered Products segment provides specialty value added services such as machining, sub-assembly, and even full blade manufacturing.
Contracts for military and some commercial programs may contain provisions applicable to both U.S. Government contracts and subcontractors. For example, a prime contractor may flow down a "termination for convenience" clause to materials suppliers such as Hexcel. According to the terms of a contract, we may be subject to U.S. government Federal Acquisition Regulations, the Department of Defense Federal Acquisition Regulations Supplement, Cost Accounting Standards, and associated procurement laws.

## Industrial Markets

The revenue for this market includes applications for our products outside the Commercial Aerospace and Space & Defense markets. A number of these applications represent emerging opportunities for our products. In developing new applications, we seek those opportunities where advanced composites technology offers significant benefits to the end user, often applications that demand high engineering performance. Within the Industrial Markets, the major end user sub-markets include, in order of size based on our 2013 sales, wind energy, general industrial applications (including those sold through distributors), recreational equipment (e.g., skis and snowboards, bicycles and hockey sticks), and transportation (e.g., automobiles, mass transit and high-speed rail, and marine applications). Our participation in industrial market applications complements our commercial and military aerospace businesses. We are committed to pursuing the utilization of advanced structural material technology where it can generate significant value and we can maintain a sustainable competitive advantage.

Further discussion of our markets, including certain risks, uncertainties and other factors with respect to "forward-looking statements" about those markets, is contained under the captions "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Risk Factors" (The Risk Factors are set forth in Hexcel's Annual Report on Form 10-K).

## EMPLOYEES

As of December 31, 2013, we employed 5,274 full-time employees and contract workers, 3,130 in the United States and 2,144 in other countries. Of the 5,274 full-time employees, approximately 19% were represented by collective bargaining agreements. We believe that our relations with employees and unions are good. The number of full-time employees and contract workers as of December 31, 2012 and 2011 was 4,973 and 4,508, respectively.



## BUSINESS OVERVIEW

<table><tr><td rowspan="2">(In millions, except per share data)</td><td colspan="3">Year Ended December 31,</td></tr><tr><td>2013</td><td>2012</td><td>2011</td></tr><tr><td>Net sales</td><td>$1,678.2</td><td>$1,578.2</td><td>$1,392.4</td></tr><tr><td>Gross margin %</td><td>27.1%</td><td>25.8%</td><td>24.6%</td></tr><tr><td>Other income, net</td><td>$—</td><td>$ (9.5)</td><td>$ (3.0)</td></tr><tr><td>Operating income (a)</td><td>$ 270.9</td><td>$ 248.8</td><td>$ 192.0</td></tr><tr><td>Operating income %</td><td>16.1%</td><td>15.8%</td><td>13.8%</td></tr><tr><td>Interest expense, net</td><td>$ 7.3</td><td>$ 10.0</td><td>$ 11.6</td></tr><tr><td>Non-operating expense</td><td>$ 1.0</td><td>$ 1.1</td><td>$ 4.9</td></tr><tr><td>Provision for income taxes</td><td>$ 76.0</td><td>$ 74.1</td><td>$ 41.6</td></tr><tr><td>Equity in earnings from investments in affiliated companies</td><td>$ 1.3</td><td>$ 0.7</td><td>$ 1.6</td></tr><tr><td>Net income (a)</td><td>$ 167.9</td><td>$ 164.3</td><td>$ 135.5</td></tr><tr><td>Diluted net income per common share</td><td>$ 1.84</td><td>$ 1.61</td><td>$ 1.35</td></tr></table>

(a) The Company uses non-GAAP financial measures, including sales measured in constant dollars, operating income adjusted for items included in other (income) expense, net, net income adjusted for items included in non-operating expenses, the effective tax rate adjusted for certain out of period 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. These 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. Reconciliations to adjusted operating income, adjusted net income and free cash flow are provided below:

<table><tr><td rowspan="2">(In millions)</td><td colspan="3">Year Ended December 31,</td></tr><tr><td>2013</td><td>2012</td><td>2011</td></tr><tr><td>GAAP operating income</td><td>$ 270.9</td><td>$ 248.8</td><td>$ 192.0</td></tr><tr><td>Other income, net (1)</td><td>—</td><td>(9.5)</td><td>(3.0)</td></tr><tr><td>Adjusted operating income (Non-GAAP)</td><td>$ 270.9</td><td>$ 239.3</td><td>$ 189.0</td></tr><tr><td>Adjusted operating income % of sales (Non-GAAP)</td><td>16.1%</td><td>15.2%</td><td>13.6%</td></tr></table>

<table><tr><td rowspan="2">(In millions)</td><td colspan="3">Year Ended December 31,</td></tr><tr><td>2013</td><td>2012</td><td>2011</td></tr><tr><td>GAAP net income</td><td>$ 187.9</td><td>$ 164.3</td><td>$ 135.5</td></tr><tr><td>Other income, net of tax (1)</td><td>—</td><td>(6.0)</td><td>(2.3)</td></tr><tr><td>Non-operating expense, net of tax (2)</td><td>0.6</td><td>0.7</td><td>3.0</td></tr><tr><td>Tax adjustments (3)</td><td>—</td><td>—</td><td>(11.3)</td></tr><tr><td>Adjusted net income (Non-GAAP)</td><td>$ 188.5</td><td>$ 159.0</td><td>$ 124.9</td></tr><tr><td>Adjusted diluted net income per share (Non-GAAP)</td><td>$ 1.85</td><td>$ 1.56</td><td>$ 1.24</td></tr></table>

<table><tr><td rowspan="2">(In millions)</td><td colspan="3">Year Ended December 31,</td></tr><tr><td>2013</td><td>2012</td><td>2011</td></tr><tr><td>Net cash provided by operating activities</td><td>$ 272.9</td><td>$ 232.4</td><td>$ 170.5</td></tr><tr><td>Less: Capital expenditures and deposits for capital purchases</td><td>(194.9)</td><td>(263.7)</td><td>(158.0)</td></tr><tr><td>Free cash flow (Non-GAAP)</td><td>$ 78.0</td><td>$ (31.3)</td><td>$ 12.5</td></tr></table>

(1) Other (income) expense, net for the year ended December 31, 2012 included income from a $9.6 million ($6.1 million after tax) business interruption insurance settlement related to a prior year claim, a $4.9 million ($3.1 million after tax) gain on the sale of land and a $5.0 million ($3.2 million after tax) charge for additional environmental reserves primarily for remediation of a manufacturing facility sold in 1986. Other (income) expense, net for the year ended December 31, 2011 included a $5.7 million ($4.1 million after tax) benefit from the curtailment of a pension plan and other expense of $2.7 million ($1.8 million after tax) for the increase in environmental reserves primarily for remediation of a manufacturing facility sold in 1986.

(2) Non-operating expense, net of tax, in 2013 was the accelerated amortization of deferred financing costs and the deferred expense on interest rate swaps related to repaying the term loan and refinancing our revolving credit facility in June 2013. Non-operating expense, net of tax, in 2012 and 2011 included $0.7 million and $3.0 million for the accelerated amortization of deferred financing costs and expensing of the call premium from redeeming $73.5 million in June 2012 and $150 million in February 2011 of the Company's 6.75% senior subordinated notes.

(3) Tax adjustments in 2011 included a $5.8 million benefit from the reversal of valuation allowances against net operating loss and foreign tax credit carryforwards and a tax benefit from the release of $5.5 million of reserves primarily for uncertain tax positions as a result of an audit settlement.

## BUSINESS TRENDS

Our total sales in 2013 increased 6% in constant currency over 2012. In constant currency and by market, our Commercial Aerospace sales increased 15%, Space & Defense sales increased 5%, and our Industrial sales decreased 23%. The Commercial Aerospace market represents 65% of our sales, followed by Space & Defense at 22% and Industrial at 13%.

- In 2013, our Commercial Aerospace sales increased by 15%. Sales to Airbus and Boeing and their subcontractors, which comprised 85% of our Commercial Aerospace sales, were up almost 18% with new program sales (A380, A350, B787 and B787-8) up about 25% and legacy aircraft related sales up 12%. Almost all of our Commercial Aerospace sales are for new aircraft production as we have only nominal aftermarket sales.

- Airbus and Boeing combined deliveries in 2013 were a record 1,274 aircraft, compared to the previous record of 1,189 aircraft in 2012. The demand for new commercial aircraft is principally driven by two factors. The first is airline passenger traffic (measured by revenue passenger miles) and the second is the replacement rate for existing aircraft. The International Air Transport Association (IATA) estimates 2013 revenue passenger miles were 5.3% higher than 2012. Combined orders for 2013 were 2,858 planes, compared to 2,036 orders for 2012. Backlog at the end of 2013 increased to 10,639 planes, over eight years of backlog at the 2013 delivery pace. Based on Airbus and Boeing announced projections, 2014 deliveries are estimated to be higher than 2013.

- Overall the Commercial Aerospace industry continues to utilize a greater proportion of advanced composite materials with each new generation of aircraft. These new programs include the A380, A350, B787, and the B747-8. As of December 2013, Airbus had a backlog of 182 orders for its A380 aircraft and has delivered 122. The A380 has 23% composite content by weight and has more Hexcel materials used in its production than any aircraft currently in service, over 83 million per plane. Hexcel has been awarded a contract to supply carbon fiber composite materials for major primary structures for the A350, which Airbus has indicated will have about 53% composite content by weight. In addition, we have opportunities for additional Hexcel products on the plane and our total content of materials per A350 will be approximately 5 million per aircraft and will be our largest program for both revenue per aircraft and total program. As of December 31, 2013, Airbus has received 812 orders for the A350, which it projects will enter into service in the fourth quarter of 2014. The B787 has more than 50% composite content by weight, including composite wings and fuselage, compared to the 11% composite content used in the construction of its B777 aircraft and 6% for the B767 (after craft it is primarily replacing. The B787 entered into service in September 2011. Hexcel has 1.3 million to 1.6 million of content per plane, depending upon which engines are used. As of December 31, 2013, Boeing had a backlog of 916 orders for its B787 aircraft and has delivered 114. While the B747-8 is structurally an aluminum intensive aircraft, new engines and nacelles provide Hexcel with the opportunity for significant additional revenues. The freighter version of the B747-8 went into service in October 2011 and the passenger version in June 2012. The B747-8 has slightly more Hexcel content per plane than the B787. Our sales on these four new programs comprised more than 30% of our total Commercial Aerospace sales and we expect them to represent an increasing percent of our Commercial Aerospace sales in the future.

- In addition to the new programs discussed above, both Airbus and Boeing have announced new versions of their narrowbody planes that will have new engines. Airbus's A320neo is expected to enter service in 2015, while the Boeing's B737 MAX is expected to enter service in 2017. Both of these aircraft are expected to provide opportunities for Hexcel to increase its content on these new programs up to 50% higher than on the current models of the A320 and B737.

- The regional and business aircraft market sales, which account for 15% of Commercial Aerospace sales, remained relatively flat with 2012 sales levels of $161 million.

- Our Space & Defense constant currency sales increased 5% over 2012. Rotorcraft sales continue to be strong and we continue to benefit from our extensive qualifications to supply composite materials and structures. New helicopter programs in development, as well as upgrade or retrofit programs, have an increased reliance on composite materials products such as carbon fiber, preprops, and honeycomb core to improve blade performance. Key programs include the V-22 (Osprey) tilt rotor aircraft, Blackhawk, Airbus Group A300M military transport, C-17, F-35 (joint strike fighter or JSF), S76, AH-64 Apache, CH-53 Super Stallion, F/A-18E/F (Hector), European Fighter Aircraft (Typhoon), NH90, and Tiger helicopters. In addition, our Engineered Products segment provides specialty value added services such as machining, sub-assembly, and even full blade manufacturing.

- Our Industrial constant currency sales decreased by 23% in 2013 from 2012. Industrial sales include wind energy, recreation, transportation and general industrial applications, with wind being the largest submarket. Excluding wind energy sales, the rest of the Industrial sales declined about 15% in constant currency as compared to 2012.

- Wind energy sales were down over 25% from the record levels in 2012, as sales in the U.S. declined more than 50% due to the push to install turbines before the U.S. Production Tax Credit (PTC) expired at the end of 2012. In January 2013, the PTC was extended for another year, and applies to projects that start construction before December 31, 2013. Hexcel's U.S. wind energy sales were less than 25% of the total of its wind energy sales in 2013. Total wind energy sales for each of the four quarters of 2013 were about the same level. Wind energy sales are expected to increase mid-single digits in 2014, which would return sales to 2011 levels.



## RESULTS OF OPERATIONS

Our sales of $1,678.2 million were $100.0 million, or 6%, higher than 2012 and our operating income of $270.9 million (or 16.1% of sales) was 9% higher than 2012. Other operating income for the year ended December 31, 2012 included income from a $9.6 million business interruption insurance settlement related to a prior year claim, a $4.9 million gain on the sale of land and a $5.0 million charge for additional environmental reserves primarily for remediation of a manufacturing facility sold in 1986. Excluding these items, operating income in 2013 was 13% higher than 2012. Net income in 2013 included $0.6 million (net of tax) for the accelerated amortization of deferred financing costs and the deferred expense on interest rate swaps related to repaying the term loan and refinancing our revolving credit facility in June 2013. Net income in 2012 and 2011 included non-operating expense of $0.7 million (net of tax) and $3.0 million (net of tax) for the accelerated amortization of deferred financing costs and expensing of the call premium from the redemption of $73.5 million in June 2012, and $150 million in February 2011 of the Company's 6.75% senior subordinated notes. Net income for 2011 also included tax benefits from the release of $1.13 million of reserves primarily for uncertain tax positions as a result of an audit settlement and the reversal of valuation allowances.

We have two reportable segments: Composite Materials and Engineered Products. Although these segments provide customers with different products and services, they often overlap within three end business markets: Commercial Aerospace, Space & Defense and Industrial. Therefore, we also find it meaningful to evaluate the performance of our segments through the three end business markets. Further discussion and additional financial information about our segments may be found in Note 16 to the accompanying consolidated financial statements of this Annual Report.
Net Sales: Consolidated net sales of $1,678.2 million for 2013 were $100.0 million higher than the $1,578.2 million of net sales for 2012. The sales increase in 2013 reflects increased volume in Commercial Aerospace driven by new aircraft programs and increased build rates. Consolidated net sales in 2012 increased 13% over the $1,392.4 million of sales in 2011 due to volume increases in Commercial Aerospace. Had the same U.S. dollar, British Pound sterling and Euro exchange rates applied in 2012 as in 2013 (“in constant currency”), consolidated net sales for 2013 would have been $889.9 million higher than 2012. In constant currency, consolidated net sales for 2012 would have been $206.5 million, or 15.1%, higher than 2011 net sales.

Composite Materials: Net sales of $1,286.9 million for 2013 increased $56.0 million over the $1,230.9 million for 2012 driven by a 173% increase in Commercial Aerospace sales. Space and Defense sales were up slightly over 2012 and Industrial sales declined $65.8 million. The decline in Industrial sales was driven by wind energy which faced tough comparisons to 2012, driven by the strong sales in the first half of 2012. In 2012, net sales of $1,230.9 million increased 14.6% over 2011 as Commercial Aerospace sales increased 170% and Space & Defense and Industrial sales both increased over 11%. Wind energy sales increased about 30% in 2012 over 2011.

Engineered Products: Net sales of $391.3 million for 2013 increased $44.0 million over the $347.3 million for 2012 driven by a 178% increase in Space & Defense sales. Commercial Aerospace sales increased 8.4% over 2012. There are not significant sales to the Industrial market from this segment. In 2012, net sales of $347.3 million increased 9.2% over 2011 as Space & Defense sales increased 13%.

The following table summarizes net sales to third-party customers by segment and end market in 2013, 2012 and 2011:

<table><tr><td>(In millions)</td><td>Commercial Aerospace</td><td>Space &amp; Defense</td><td>Industrial</td><td>Total</td></tr><tr><td>2013 Net Sales</td><td></td><td></td><td></td><td></td></tr><tr><td>Composite Materials</td><td>$ 804.3</td><td>$ 27.9</td><td>$ 210.7</td><td>$ 1,286.9</td></tr><tr><td>Engineered Products</td><td>280.2</td><td>104.0</td><td>7.1</td><td>391.3</td></tr><tr><td>Total</td><td>$ 1,084.5</td><td>$ 375.9</td><td>$ 217.8</td><td>$ 1,678.2</td></tr><tr><td></td><td>65%</td><td>22%</td><td>13%</td><td>100%</td></tr><tr><td>2012 Net Sales</td><td></td><td></td><td></td><td></td></tr><tr><td>Composite Materials</td><td>$ 685.7</td><td>$ 268.7</td><td>$ 276.5</td><td>$ 1,230.9</td></tr><tr><td>Engineered Products</td><td>258.4</td><td>88.3</td><td>0.6</td><td>347.3</td></tr><tr><td>Total</td><td>$ 944.1</td><td>$ 357.0</td><td>$ 277.1</td><td>$ 1,578.2</td></tr><tr><td></td><td>60%</td><td>23%</td><td>17%</td><td>100%</td></tr><tr><td>2011 Net Sales</td><td></td><td></td><td></td><td></td></tr><tr><td>Composite Materials</td><td>$ 586.1</td><td>$ 241.3</td><td>$ 247.1</td><td>$ 1,074.5</td></tr><tr><td>Engineered Products</td><td>237.4</td><td>78.1</td><td>2.4</td><td>317.9</td></tr><tr><td>Total</td><td>$ 823.5</td><td>$ 319.4</td><td>$ 249.5</td><td>$ 1,392.4</td></tr><tr><td></td><td>59%</td><td>23%</td><td>18%</td><td>100%</td></tr></table>

Commercial Aerospace: Net sales to the Commercial Aerospace market increased $140.4 million or 14.9% to $1,084.5 million for 2013 as compared to net sales of $944.1 million for 2012; 2012 net sales increased by $120.6 million as compared to net sales of $823.5 million for 2011. In constant currency, net sales to the Commercial Aerospace market increased $137.2 million, or 14.5% in 2013 and increased $126.8 million or 15.5% in 2012.

In 2013, sales for Airbus and Boeing programs increased 18% over the prior year, with new aircraft programs (A380, A350, B787 and B747) and new engines (B747-8) sales up 25% and legacy related sales 12% higher. Sales for the regional and business aircraft market were essentially flat with 2012 sales level.

Growth in 2012 over 2011 came from sales to Airbus and Boeing programs which increased 16% over the prior year, with new aircraft programs (A380, A350, B787 and B747-8) sales up over 25% and legacy related sales up more than 10%. Sales for the regional and business aircraft market increased 7% over 2011.

Space & Defense: Net sales of $375.9 million for 2013 increased 5.3% as compared to $357.0 million for 2012; 2012 net sales increased by 11.8% as compared to $319.4 million in 2011. In 2013, net sales in constant currency, increased $16.1 million or 4.5%; in 2012 the increase was $42.4 million or 13.5%. We continue to benefit from participating in a wide range of programs in the U.S., Europe and Asia, including rotorcraft, transport, fixed wing and satellite programs.

Industrial: Net sales of $217.8 million for 2013 decreased by $59.3 million, or 21.4%, compared to net sales of $277.1 million for 2012. In constant currency, net sales to the Industrial market decreased $64.3 million or 22.8% in 2012 and increased $373.3 million or 15.6% in 2012. Our wind energy submarket accounts for just over half of our Industrial sales. While wind energy sales were down over 25% in 2013 compared to the record sales levels in 2012, they were just 6% lower than 2011 and have remained at fairly constant levels over the past four quarters. We expect wind energy sales to increase in the mid-single digits in 2014 based on the strong backlog of our largest wind energy customer. We remain positive on the longer term outlook for our wind business. Future growth in wind is dependent on many factors including global economic growth, government incentives, competing energy costs, and wind turbine efficiency, among other factors. Our assets currently dedicated to production for the wind market represent less than 3% of Hexcel's total fixed assets at December 31, 2013. These assets can be modified for manufacturing products in markets other than wind energy.

Sales to the rest of the Industrial market other than wind were down about 15% in constant currency in 2013 as compared to 2012, after modest growth in 2012 over 2011.

Gross Margin: Gross margin for 2013 was $454.0 million or 27.1% of net sales as compared to $406.7 million or 25.8% of net sales in 2012. The increase reflected higher volume, better sales mix driven by higher aerospace sales and continued improvements in operating performance. Exchange rates had nominal impact on 2013 gross margin percentage and contributed about 30 basis points to the gross margin percentage improvement in 2012, as compared to 2011. The increase in 2012 also reflected higher sales volume and improvements in operating performance. Gross margin for 2011 was $342.1 million, or 24.6% of net sales.

Selling, General and Administrative ("SG&A") Expenses: SG&A expenses were $141.4 million or 8.4% of net sales for 2013 and $130.7 million or 8.3% of net sales for 2012, and $120.5 million or 8.7% of net sales for 2011. The increase in SG&A spending in 2013 reflects added infrastructure to support our growth and higher variable compensation. SG&A spending in 2012 was higher than 2011 as we increased infrastructure to support our growth.
Research and Technology ("R&T") Expenses: R&T expenses for 2013 were $41.7 million or 2.5% of net sales, $36.7 million or 2.3% of net sales in 2011 and $32.6 million or 2.3% of 2010 net sales. Spending has increased as we invest in new products and technology.

Other Income, Net: Other operating income for the year ended December 31, 2012 included income from a $9.6 million business interruption insurance settlement related to a prior year claim, a $4.9 million gain on the sale of land and a $5.0 million charge for additional environmental reserves primarily for remediation of a manufacturing facility sold in 1986. Other operating income, net for the year ended December 31, 2011 includes a $5.7 million benefit from the curtailment of a pension plan, partially offset by other expense of $2.7 million for the increase in environmental reserves primarily for remediation of a manufacturing facility sold in 1986.

Operating Income: Operating income for 2013 was $270.9 million compared with operating income of $248.8 million for 2012 and $192.0 million for 2011. Operating income as a percent of sales was 16.1%, 15.8% and 13.8% in 2013, 2012, and 2011, respectively. Improved gross margin drove the increase in operating margin in 2013 and 2012.

One of the Company's performance measures is operating income adjusted for other (income) expense, which is a non-GAAP measure. There were no adjustments to the 2013 operating income of $270.9 million or 16.1% of net sales. Adjusted operating income for the years ended December 31, 2012 and 2011 was $239.3 million and $189.0 million or 15.2% and 13.6% as a percentage of net sales, respectively. A reconciliation from operating income to adjusted operating income is provided on page 20.

Almost all of the Company's sales and costs are either in U.S. dollars, Euros or British Pound sterling, with approximately one-quarter of our sales in Euros or British Pound sterling. In addition, much of our European Commercial Aerospace business has sales denominated in dollars and costs denominated in all three currencies. The net impact is that the dollar weakens against the Euro and the British Pound sterling, sales will increase while operating income will decrease. We have an active hedging program to minimize the impact on operating income, but our operating income as a percentage of net sales is affected. Foreign exchange had nominal impact on our operating income percentage in 2013 while in 2012 operating income percentage were approximately 30 basis points better than the comparable prior year due to exchange rates.

Operating income for the Composite Materials segment increased $19.0 million to $276.3 million, as compared to $257.3 million for 2012. Operating income for Composite Materials, in 2012 and 2011, included $14.5 million and $5.7 million of other operating income as discussed above. Excluding the other operating items in 2012, operating income for Composite Materials would have increased by $33.5 million or 13.8% driven primarily by higher commercial aerospace sales volume. Operating income for the Engineered Products segment increased by $8.3 million compared with 2012 to $58.9 million, on higher sales volume in all markets. Operating income for the year ended December 31, 2012 for the Composite Materials segment increased $62.8 million or 32.2% to $257.3 million, as compared to $194.5 million for 2011, driven by productivity and good leverage on higher sales volume. Operating income for the Engineered Products segment decreased by $1.0 million compared with 2011 to $50.6 million, as higher sales volume was offset by unfavorable product mix and costs related to the start-up of new programs.

We did not allocate corporate net operating expenses of $64.3 million, $59.1 million and $54.1 million to segments in 2013, 2012, and 2011, respectively. Corporate and Other included $5.0 million and $2.7 million in 2012 and 2011, respectively, of other expenses, as discussed above.



Interest Expense: Interest expense was $7.3 million for 2013, $10.0 million for 2012, and $11.6 million for 2011. The sequential decrease in interest expense over the three years is due primarily to lower interest rates, largely as a result of the redemption of $73.5 million in June 2012 and $150 million in February 2011 of the Company's 6.75% senior subordinated notes, as well as the refinancing of the Company's revolving credit facility.

Provision for Income Taxes: Our 2013, 2012 and 2011 tax provision was $76.0 million, $74.1 million and $41.6 million for an effective tax rate of 28.9%, 31.2% and 23.7%, respectively. The 2013 provision benefited from the release of reserves from uncertain tax positions. The 2011 provision included benefits of $11.3 million from the reversal of valuation allowances against net operating loss and foreign tax credit carryforwards and from the release of reserves primarily for uncertain tax positions as a result of an audit settlement. Excluding these items, the 2013 and 2011 effective tax rates were 30.7% and 30.1%, respectively. We believe the adjusted effective tax rate, which is a non-GAAP measure, is meaningful since it provides insight to the tax rate of ongoing operations.

Equity in Earnings from Affiliated Companies: Equity in earnings represents our portion of the earnings from our joint venture in Malaysia.

Net Income: Net income was $187.9 million, or $1.84 per diluted common share for the year ended December 31, 2013 compared to $164.3 million, or $1.61 per diluted common share for 2012 and $135.5 million, or $1.35 per diluted share for 2011. Strong sales volume, particularly in the commercial aerospace market, coupled with good cost control led the growth in earnings from 2011 through 2013. Also see the table on page 20 for a reconciliation of GAAP net income from continuing operations to our adjusted "Non-GAAP" measure.

## SIGNIFICANT CUSTOMERS

Approximately 34%, 29% and 30% of our 2013, 2012 and 2011 net sales, respectively, were to Boeing and related subcontractors. Of the 34% of overall sales to Boeing and its subcontractors in 2013, 30% related to Commercial Aerospace market applications and 4% related to Space & Defense market applications. Approximately 29%, 28% and 27% of our 2013, 2012 and 2011 net sales, respectively, were to Airbus Group and its subcontractors. Of the 29% of overall sales to Airbus Group and its subcontractors in 2013, 26% related to Commercial Aerospace market applications and 3% related to Space & Defense market applications.

## FINANCIAL CONDITION

In 2013, we ended the year with total debt, net of cash, of $229.5 million and generated $78.0 million of free cash flow (cash provided by operating activities less cash paid for capital expenditures). In 2013, the Company bought back $90 million of shares, and has $110 million remaining under its currently authorized share repurchase program. In 2014, we expect our capital spending to be in the range of $225 million to $250 million as we expand capacity in line with our outlook, resulting in expected positive free cash flow of $25 million to $75 million. We expect our typical use of cash in the first half of 2014, which will be funded by our available borrowings under our credit facility.

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

## LIQUIDITY

Our cash on hand at December 31, 2013 was $65.5 million and we had $306.5 million borrowings available under our credit facility. Our total debt as of December 31, 2013 was $295.0 million, an increase of $38.4 million from the December 31, 2012 balance. The level of available borrowing capacity fluctuates during the course of the year due to factors including capital expenditures, interest and variable compensation payments, changes to working capital, share repurchases as well as timing of receipts and disbursements within the normal course of business.

Short-term liquidity requirements consist primarily of normal recurring operating expenses and working capital needs, capital expenditures and debt service requirements. We expect to meet our short-term liquidity requirements through net cash from operating activities, cash on hand and, if necessary, our revolving credit facility. As of December 31, 2013, long-term liquidity requirements consist primarily of obligations under our long-term debt obligations. We do not have any significant required debt repayments until June 2018 when our revolving credit facility expires.

Credit Facilities: In June 2013, the Company entered into a new $600 million senior secured revolving credit facility (the "Facility") that matures in 2018. The new facility replaces the Company's previous senior secured credit facility ($82.5 million term loan and a $360 million revolving loan) that would have expired in July 2015. The Facility permits us to issue letters of credit up to an aggregate amount of $40 million and allows us to draw up to $75 million in Euros. Amounts drawn in Euros or any outstanding letters of credit reduce the amount available for borrowing under the revolving loan. The initial interest rate was 50 basis points lower than the prior facility, and at the current leverage ratio the new rate is LIBOR + 1.25% (25 basis points lower than the initial rate). Outstanding letters of credit reduce the amount available for borrowing under our revolving loan. As of December 31, 2013, we had issued letters of credit under the Facility totaling $1.5 million, resulting in undrawn availability under the Facility as of December 31, 2013 of $306.5 million. In addition, we borrowed $3.0 million from the credit line established in China associated with our operations there.

The new facility contains financial and other covenants, including, but not limited to, restrictions on the incurrence of debt and the granting of liens, as well as the maintenance of an interest coverage ratio and a leverage ratio. In accordance with the terms of the new facility, we are required to maintain a minimum interest coverage ratio of 3.50 (based on the ratio of EBITDA, as defined in the credit agreement, to interest expense) and may not exceed a maximum leverage ratio of 3.50 (based on the ratio of total debt to EBITDA) throughout the term of the new facility. In addition, the new facility contains other terms and conditions such as customary representations and warranties, additional covenants and customary events of default. The new facility is less restrictive than the prior agreement. As of December 31, 2013, we were in compliance with all debt covenants and expect to remain in compliance.

We have a $10.0 million borrowing facility for working capital needs of our Chinese entity with an outstanding balance of $3.0 million at December 31, 2013. These funds can only be used locally and, accordingly, we do not include this facility in our borrowing capacity disclosures. The facility is guaranteed by Hexcel Corporation but is uncommitted and can be cancelled at any time.

Operating Activities: We generated $272.9 million in cash from operating activities during 2013, an increase of $40.5 million from 2012 primarily from higher earnings and lower working capital usage. Cash generated from operating activities during 2012 was $232.4 million, an increase of $61.9 million from 2011 also from higher earnings and lower working capital usage.

Investing Activities: Cash used for investing activities, primarily for capital expenditures, was $194.9 million in 2013 compared to $258.4 million in 2012 and $163.2 million in 2011.

The Company is in the process of expanding capacity over a multi-year period, primarily for manufacture of carbon fiber and preprops to support aerospace growth. These capital projects require large expenditures and long lead times, some taking up to two years to complete. Approximately 75% of the $287.1 million in construction in progress as of December 31, 2013 represents spending on expansion projects primarily at our Decatur, Alabama and Salt Lake City, Utah facilities. We expect a majority of these projects to be placed in service during 2014, with the remainder placed into service in 2015.

Financing Activities: Financing activities were a use of cash of $47.2 million in 2013 as compared to a source of cash of $8.2 million in 2012. In 2013 we borrowed a net $292.0 million from a new Senior Secured Credit Facility and repaid an $82.5 million term loan and a $166.0 million prior Senior Secured Credit Facility. As a result of the refinancing, we accelerated the unamortized financing costs related to the previous borrowings under the unamortized financing $1.0 million (after tax of $0.01 per diluting) in a pre-tax charge of $2.4 million of issuance costs related to the new debt. In addition, in 2013 we purchased $90 million of the Company's stock. In 2011 financing activities were a use of cash of $74.4 million. In 2012 and 2011, we redeemed $73.5 million and $150 million of our $225 million 6.75% senior subordinated notes at a call premium of 1.125% and 2.25%, respectively, and purchased $1.5 million of notes on the open market. The redemptions were principally funded by the add-ons to our then existing senior secured credit facility. As a result of the redemptions, we accelerated the unamortized financing costs of the senior subordinated notes and expensed the call premium incurring a pretax charge of $1.1 million (after tax of $0.01 per diluted share) and $4.9 million (after tax of $0.03 per diluted share) in 2012 and 2011, respectively. We repaid $57 million of the $135 million add on in 2011 using cash on hand.

Financial Obligations and Commitments: As of December 31, 2013, current debt maturities were $3.0 million. The next significant scheduled debt maturity will not occur until 2018, the year the senior secured credit facility matures. In addition, certain sales and administrative offices, data processing equipment and manufacturing equipment and facilities are leased under operating leases.

Total letters of credit issued and outstanding under the Senior Secured Credit Facility were $1.5 million as of December 31, 2013.

The following table summarizes the scheduled maturities as of December 31, 2013 of financial obligations and expiration dates of commitments for the years ended 2014 through 2018 and thereafter.

<table><tr><td>(1)</td><td>2014</td><td>2015</td><td>2016</td><td>2017</td><td>2018</td><td>Thereafter</td><td>Total</td></tr><tr><td>Senior secured credit facility - Revolver due 2018</td><td>$ -</td><td>$ -</td><td>$ -</td><td>$ -</td><td>$ 292.0</td><td>$ -</td><td>$ 292.0</td></tr><tr><td>Working capital facility</td><td>3.0</td><td>-</td><td>-</td><td>-</td><td>-</td><td>-</td><td>3.0</td></tr><tr><td>Subtotal</td><td>9.1</td><td>5.3</td><td>4.1</td><td>2.2</td><td>1.8</td><td>9.3</td><td>31.8</td></tr><tr><td>Operating leases</td><td>$ 12.1</td><td>$ 9.3</td><td>$ 4.1</td><td>$ 2.2</td><td>$ 293.8</td><td>$ 9.3</td><td>$ 326.8</td></tr><tr><td>Total financial obligations</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Letters of credit</td><td>$ 1.5</td><td>$ -</td><td>$ -</td><td>$ -</td><td>$ -</td><td>$ -</td><td>$ 1.5</td></tr><tr><td>Interest payments</td><td>7.6</td><td>7.0</td><td>6.9</td><td>6.9</td><td>5.3</td><td>-</td><td>33.7</td></tr><tr><td>Estimated benefit plan contributions</td><td>27.6</td><td>6.8</td><td>4.9</td><td>3.7</td><td>3.8</td><td>14.9</td><td>61.7</td></tr><tr><td>Other (a)</td><td>3.4</td><td>0.1</td><td>0.1</td><td>0.1</td><td>0.2</td><td>-</td><td>3.9</td></tr><tr><td>Total commitments</td><td>$ 52.2</td><td>$ 19.2</td><td>$ 16.0</td><td>$ 12.9</td><td>$ 303.1</td><td>$ 24.2</td><td>$ 427.6</td></tr></table>

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

$ 52.2 $ 19.2 $ 16.0 $ 12.9 $ 303.1 $ 24.2 $ 427.6



Environmental remediation reserve activity for the three years ended December 31, 2013 was as follows:

<table><tr><td rowspan="2">(In millions)</td><td colspan="3">For the year ended</td></tr><tr><td>December 31, December 31, 2013</td><td>2012</td><td>2011</td></tr><tr><td>Beginning remediation accrual balance</td><td>$ 6.6</td><td>$ 5.0</td><td>$ 7.3</td></tr><tr><td>Current period expenses</td><td>0.9</td><td>5.0</td><td>3.4</td></tr><tr><td>Cash expenditures</td><td>(3.6)</td><td>(3.4)</td><td>(5.7)</td></tr><tr><td>Ending remediation accrual balance</td><td>$ 3.9</td><td>$ 6.6</td><td>$ 5.0</td></tr><tr><td>Capital expenditures for environmental matters</td><td>$ 4.6</td><td>$ 2.4</td><td>$ 4.1</td></tr></table>

## MARKET RISKS

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

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

## Interest Rate Risks

Our long-term debt bears interest at variable rates. From time to time we have entered into interest rate swap agreements to change the underlying mix of variable and fixed interest rate debt. These interest rate swap agreements have modified the percentage of total debt that is exposed to changes in market interest rates. Assuming a 10% favorable and a 10% unfavorable change in the underlying weighted average interest rates of our variable rate debt and swap agreements, interest expense for 2013 of $7.3 million would have decreased to $7.0 million and increased to $7.6 million, respectively.

## Interest Rate Swaps

We have entered into approximately $150 million of interest rate swaps at December 31, 2013, that trade the LIBOR on our bank loan for a fixed rate at a weighted average rate of 0.81567%. These interest rate swaps are designated as cash flow hedges to floating rate bank loans and expire by September 2016. The fair value of interest rate swap agreements is recorded in other assets or other long-term liabilities with a corresponding amount to Other Comprehensive Income.

## Foreign Currency Exchange Risks

We operate nine manufacturing facilities in Europe, which generated approximately 47% of our 2013 consolidated net sales. Our European business activities primarily involve three major currencies – the U.S. dollar, the British pound, and the Euro. We also conduct business and sell products to customers throughout the world, including a joint venture interest in Malaysia. Most of the sales in these countries are denominated in U.S. dollars and they have local currency expenses. Currency risk for these locations is not considered material.

In 2013, our European subsidiaries had third-party sales of $785 million of which approximately 54% were denominated in U.S. dollars, 42% were denominated in Euros and 4% were denominated in British pounds. While we seek to reduce the exposure of our European subsidiaries to their sales in non-functional currencies through the purchase of raw materials in the same currency as that of the product sale, the net contribution of these sales to cover the costs of the subsidiary in its functional currency will vary with changes in foreign exchange rates, and as a result, so will the net exposure of our European subsidiaries' percentage margins and profitability. For revenues denominated in the functional currency of the subsidiary, changes in foreign currency exchange rates increase or decrease the value of these revenues in U.S. dollars but do not affect the profitability of the subsidiary in its functional currency. The value of our investments in these countries could be impacted by changes in currency exchange rates over time, and could impact our ability to profitably compete in international markets.

We attempt to net individual functional currency positions of our various European subsidiaries, to take advantage of natural offsets and reduce the need to employ foreign currency forward exchange contracts. We attempt to hedge some, but not necessarily all, of the net exposures of our European subsidiaries resulting from sales they make in non-functional currencies. The benefit of such hedges varies with time and the foreign exchange rates at which the hedges are set. For example, when the Euro strengthened against the U.S. dollar, the benefit of new hedges placed was much less than the value of hedges they replaced that were entered into when the U.S. dollar was stronger. We seek to place additional foreign currency hedges when the dollar strengthens against the Euro or British pound. We do not seek to hedge the value of our European subsidiaries' functional currency sales and profitability in U.S. dollars. We also enter into short-term foreign currency forward exchange contracts, usually with a term of ninety days or less, to hedge net currency exposures resulting from specifically identified transactions. Consistent with the nature of the economic hedge provided by such contracts, any unrealized gain or loss would be offset by corresponding decreases or increases, respectively, of the underlying transaction being hedged.

We have performed a sensitivity analysis as of December 31, 2013 using a modeling technique that measures the changes in the fair values arising from a hypothetical 10% adverse movement in the levels of foreign currency exchange rates relative to the U.S. dollar with all other variables held constant. The analysis covers all of our foreign currency hedge contracts. The sensitivity analysis indicated that a hypothetical 10% adverse movement in foreign currency exchange rates would have about a $2.4 million impact on our operating income. However, it should be noted that over time as the adverse movement (in our case a weaker dollar as compared to the Euro or the British Pound sterling) continues and new hedges are layered in at the adverse rate, the impact would be more significant. For example, had we not had any hedges in place for 2013, a 10% adverse movement would have reduced our operating income by about $16 million.

## Foreign Currency Forward Exchange Contracts

A number of our European subsidiaries are exposed to the impact of exchange rate volatility between the U.S. dollar and the subsidiaries' functional currencies, being either the Euro or the British Pound sterling. We entered into contracts to exchange U.S. dollars for Euros and British Pound sterling through March 2015. The aggregate notional amount of these contracts was $187.1 million and $201.2 million at December 31, 2013 and 2012, respectively. The purpose of these contracts is to hedge a portion of the forecasted transactions of European subsidiaries under long-term sales contracts with certain customers. These contracts are expected to provide us with a more balanced matching of future cash receipts and expenditures by currency, thereby reducing our exposure to fluctuations in currency exchange rates. For the three years ended December 31, 2013, hedge ineffectiveness was immaterial. Cash flows associated with these contracts are classified within net cash provided by operating activities of continuing operations.

The activity in “accumulated other comprehensive income (loss)” related to foreign currency forward exchange contracts for the years ended December 31, 2013, 2012 and 2011 was as follows:

<table><tr><td>(In millions)</td><td>2013</td><td>2012</td><td>2011</td></tr><tr><td>Unrealized gains (losses) at beginning of period</td><td>$ 2.4</td><td>$ (4.5)</td><td>$ (0.2)</td></tr><tr><td>(Losses) gains reclassified to net sales</td><td>(0.3)</td><td>2.4</td><td>(2.2)</td></tr><tr><td>Increase (decrease) in fair value, net of tax</td><td>5.1</td><td>4.5</td><td>(2.1)</td></tr><tr><td>Unrealized gains (losses) at end of period</td><td>$ 7.2</td><td>$ 2.4</td><td>$ (4.5)</td></tr></table>

Unrealized gains of $4.8 million recorded in “accumulated other comprehensive income,” net of tax, as of December 31, 2013 are expected to be reclassified into earnings over the next twelve months as the hedged sales are recorded. The impact of credit risk adjustments was immaterial for the three years.

In addition, non-designated foreign exchange forward contracts are used to hedge balance sheet exposures. The notional amounts outstanding at December 31, 2013 were U.S. $173.7 million against EUR, and GBP 11.0 million against EUR and at December 31, 2012 were U.S. $165.0 million against EUR and British Pound sterling 4.0 million against EUR. Any changes in fair value of these forward contracts are recorded in the consolidated statements of operations and were immaterial for the years 2013, 2012 and 2011.

## Utility Price Risks

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

## RECENTLY ISSUED ACCOUNTING STANDARDS

## New Accounting Pronouncements

ASU 2011-11 Balance Sheet (Topic 210); Disclosures about Offsetting Assets and Liabilities: In December 2011, the Financial Accounting Standards Board issued Accounting Standards Update 2011-11 which requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. ASU 2011-11 is effective for annual and interim reporting periods beginning on or after January 1, 2013. The Company has no offsetting agreements and as such, adoption of this guidance did not have any impact on the Company's reported financial results.

ASU 2013-02 Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income: In February 2013 the Financial Accounting Standards Board issued Accounting Standards Update 2013-02. The Company adopted this update in the first quarter of 2013. The amounts reclassified out of accumulated other comprehensive income during 2013 were not material.

ASU 2013-11 Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (Topic 740): In July 2013, the FASB issued ASU No. 2013-11, which requires an unrecognized tax benefit to be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward on a jurisdictional basis. ASU 2013-11 is expected to reduce diversity in practice by providing specific guidance on the presentation of unrecognized tax benefits. ASU 2013-11 was effective for fiscal years, and interim periods within those years, beginning after December 15, 2014. Early adoption is permitted and the Company has chosen to adopt ASU 2013-11 in the fourth quarter of 2013.



## OUR FORWARD-LOOKING STATEMENTS AND PROJECTIONS MAY TURN OUT TO BE INACCURATE.

This Annual Report includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to analyses and other information that are based on forecasts of future results and estimates of amounts not yet determinable. These statements also relate to future prospects, developments and business strategies. These forward-looking statements are identified by their use of terms and phrases such as "anticipate", "believe", "could", "estimate", "expect", "intend", "may", "plan", "predict", "project", "should", "would", "will" and similar terms and phrases, including references to assumptions. Such statements are based on current expectations, are inherently uncertain, and are subject to changing assumptions.

Such forward-looking statements include, but are not limited to: (a) the estimates and expectations based on aircraft production rates made publicly available by Airbus and Boeing; (b) the revenues we may generate from an aircraft model or program; (c) the impact of the possible push-out in deliveries of the Airbus and Boeing backlog and the impact of delays in the startup or ramp-up of new aircraft programs or the final Hexcel composite material content once the design and material selection has been completed; (d) expectations of composite content on new commercial aircraft programs and our share of those requirements; (e) expectations of growth in revenues from space and defense applications, including whether certain programs might be curtailed or discontinued; (f) expectations regarding growth in sales for wind energy, recreation and other industrial applications; (g) expectations regarding working capital trends and expenditures; (h) expectations as to the level of capital expenditures and when we will complete the construction and qualification of capacity expansions; (i) our ability to maintain and improve margins in light of the ramp-up of capacity and new facilities and the current economic environment; (j) the outcome of legal matters; (k) our projections regarding the realizability of net operating loss and tax credit carryforwards; and (l) the impact of various market risks, including fluctuations in interest rates, currency exchange rates, environmental regulations and tax codes, fluctuations in commodity prices, and fluctuations in the market price of our common stock, the impact of work stoppages or other labor disruptions and the impact of the above factors on our expectations of 2014 financial results. In addition, actual results may differ materially from the results anticipated in the forward looking statements due to a variety of factors, including but not limited to changing market conditions, increased competition, product mix, inability to achieve planned manufacturing improvements, cost reductions and capacity additions, and conditions in the financial markets.

Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results to be materially different. Such factors include, but are not limited to, the following: changes in general economic and business conditions; changes in current pricing and cost levels; changes in political and social conditions, and local regulations; foreign currency fluctuations; changes in aerospace delivery rates; reductions in sales to any significant customers, particularly Airbus, Boeing or Vestas; changes in sales mix; changes in government defense procurement budgets; changes in military aerospace programs technology; industry capacity; competition; disruptions of established supply channels, particularly where raw materials are obtained from a single or limited number of sources and cannot be substituted by unqualified alternatives; manufacturing capacity constraints; unforeseen vulnerability of our network and systems to interruptions or failures; and the availability, terms and deployment of capital.

If one or more of these risks or uncertainties materialize, or if underlying assumptions prove incorrect, actual results may vary materially from those expected, estimated or projected. In addition to other factors that affect our operating results and financial position, neither past financial performance nor our expectations should be considered reliable indicators of future performance. Investors should not use historical trends to anticipate results or trends in future periods. Further, our stock price is subject to volatility. Any of the factors discussed above could have an adverse impact on our stock price. In addition, failure of sales or income in any quarter to meet the investment community's expectations, as well as broader market trends, can have an adverse impact on our stock price. We do not undertake an obligation to update our forward-looking statements or risk factors (said Risk Factors are set forth in Hexcel's Annual Report on Form 10-K) to reflect future events or circumstances.

## Hexcel Corporation and Subsidiaries
Consolidated Balance Sheets
As of December 31,

<table><tr><td>(in millions, except per share data)</td><td>2013</td><td>2012</td></tr><tr><td>Assets</td><td></td><td></td></tr><tr><td>Current assets:</td><td></td><td></td></tr><tr><td>Cash and cash equivalents</td><td>$ 65.5</td><td>$ 32.6</td></tr><tr><td>Accounts receivable, net</td><td>232.4</td><td>229.0</td></tr><tr><td>Inventories</td><td>265.3</td><td>232.8</td></tr><tr><td>Prepaid expenses and other current assets</td><td>93.2</td><td>81.3</td></tr><tr><td>Total current assets</td><td>656.4</td><td>575.7</td></tr><tr><td>Property, plant and equipment, net</td><td>1,067.4</td><td>914.4</td></tr><tr><td>Goodwill and other intangible assets</td><td>61.0</td><td>57.8</td></tr><tr><td>Investments in affiliated companies</td><td>23.3</td><td>22.6</td></tr><tr><td>Deferred tax assets</td><td>10.3</td><td>15.4</td></tr><tr><td>Other assets</td><td>17.7</td><td>17.2</td></tr><tr><td>Total assets</td><td>$ 1,836.1</td><td>$ 1,603.1</td></tr></table>

<table><tr><td>Liabilities and Stockholders&#x27; Equity</td><td></td><td></td></tr><tr><td>Current liabilities:</td><td></td><td></td></tr><tr><td>Short-term borrowings and current maturities of long-term debt</td><td>$ 3.0</td><td>$ 16.6</td></tr><tr><td>Accounts payable</td><td>135.9</td><td>115.7</td></tr><tr><td>Accrued compensation and benefits</td><td>89.2</td><td>58.8</td></tr><tr><td>Other accrued liabilities</td><td>40.6</td><td>44.2</td></tr><tr><td>Total current liabilities</td><td>268.7</td><td>235.3</td></tr><tr><td>Long-term notes payable and capital lease obligations</td><td>292.0</td><td>240.0</td></tr><tr><td>Long-term retirement obligations</td><td>41.1</td><td>81.3</td></tr><tr><td>Other non-current liabilities</td><td>73.9</td><td>52.4</td></tr><tr><td>Total liabilities</td><td>675.7</td><td>609.0</td></tr></table>

Commitments and contingencies (see Note 13)

Stockholders' equity:
Common stock, $0.01 par value, 200.0 shares of stock authorized, 104.0 and 102.4 shares of stock

issued at December 31, 2013 and 2012, respectively

Additional paid-in capital

Retained earnings

Accumulated other comprehensive income (loss)

Less: Treasury stock, at cost, 5.1 and 2.5 shares at December 31, 2013 and 2012, respectively

Total stockholders' equity

Total liabilities and stockholders' equity

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



## Hexcel Corporation and Subsidiaries
Consolidated Statements of Operations
For the Years Ended December 31,

<table><tr><td>(In millions, except per share data)</td><td>2013</td><td>2012</td><td>2011</td></tr><tr><td>Net sales</td><td>$1,678.2</td><td>$1,578.2</td><td>$1,392.4</td></tr><tr><td>Cost of sales</td><td>1,224.2</td><td>1,171.5</td><td>1,050.3</td></tr><tr><td>Gross margin</td><td>454.0</td><td>406.7</td><td>342.1</td></tr><tr><td>Selling, general and administrative expenses</td><td>141.4</td><td>130.7</td><td>120.5</td></tr><tr><td>Research and technology expenses</td><td>41.7</td><td>36.7</td><td>32.6</td></tr><tr><td>Other income, net</td><td>-</td><td>(9.5)</td><td>(3.0)</td></tr><tr><td>Operating income</td><td>270.9</td><td>248.8</td><td>192.0</td></tr><tr><td>Interest expense, net</td><td>7.3</td><td>10.0</td><td>11.6</td></tr><tr><td>Non-operating expense</td><td>1.0</td><td>1.1</td><td>4.9</td></tr><tr><td>Income before income taxes and equity in earnings</td><td>262.6</td><td>237.7</td><td>175.5</td></tr><tr><td>Provision for income taxes</td><td>76.0</td><td>74.1</td><td>41.6</td></tr><tr><td>Income before equity in earnings</td><td>186.6</td><td>163.6</td><td>133.9</td></tr><tr><td>Equity in earnings from investments in affiliated companies</td><td>1.3</td><td>0.7</td><td>1.6</td></tr><tr><td>Net income</td><td>$ 187.9</td><td>$ 164.3</td><td>$ 135.5</td></tr><tr><td>Basic net income per common share:</td><td></td><td></td><td></td></tr><tr><td>Diluted net income per common share:</td><td></td><td></td><td></td></tr><tr><td>Weighted average common shares outstanding:</td><td></td><td></td><td></td></tr><tr><td>Basic</td><td>100.0</td><td>100.2</td><td>98.8</td></tr><tr><td>Diluted</td><td>102.1</td><td>102.0</td><td>100.7</td></tr></table>

## Hexcel Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income
For the Years Ended December 31,

<table><tr><td>(In millions)</td><td>2013</td><td>2012</td><td>2011</td></tr><tr><td>Net income</td><td>$ 187.9</td><td>$ 164.3</td><td>$ 135.5</td></tr><tr><td>Other comprehensive income (loss)</td><td></td><td></td><td></td></tr><tr><td>Currency translation adjustments</td><td>19.6</td><td>11.7</td><td>(10.1)</td></tr><tr><td>Net unrealized pension and other benefit actuarial gains (losses) and prior service credits, net of tax</td><td>16.9</td><td>(10.8)</td><td>(5.0)</td></tr><tr><td>Net unrealized gains (losses) on financial instruments, net of tax</td><td>6.1</td><td>7.0</td><td>(9.6)</td></tr><tr><td>Other comprehensive income (loss)</td><td>42.6</td><td>7.9</td><td>(24.7)</td></tr><tr><td>Comprehensive income</td><td>$ 230.5</td><td>$ 172.2</td><td>$ 110.8</td></tr></table>

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

## Hexcel Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity
For the Years Ended December 31, 2013, 2012 and 2011

<table><tr><td rowspan="2"></td><td colspan="3">Common Stock</td><td rowspan="2">Accumulated Other Comprehensive Income (Loss)</td><td rowspan="2">Treasury Stock</td><td rowspan="2">Total Stockholders&#x27; Equity</td></tr><tr><td>Par</td><td>Additional Paid-In Capital</td><td>Accumulated Retained Earnings</td></tr><tr><td>(In millions)</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Balance, December 31, 2010</td><td>$ 1.0</td><td>$ 552.3</td><td>$ 148.4</td><td>$ (15.1)</td><td>$ (27.2)</td><td>$ 659.4</td></tr><tr><td>Net income</td><td></td><td></td><td>135.5</td><td></td><td></td><td>135.5</td></tr><tr><td>Change in other comprehensive (loss) - net of tax</td><td></td><td></td><td></td><td>(24.7)</td><td></td><td>(24.7)</td></tr><tr><td>Stock based compensation</td><td></td><td>36.9</td><td></td><td></td><td></td><td>36.9</td></tr><tr><td>Acquisition of treasury stock</td><td></td><td></td><td></td><td></td><td>(4.9)</td><td>(4.9)</td></tr><tr><td>Balance, December 31, 2011</td><td>$ 1.0</td><td>$ 589.2</td><td>$ 283.9</td><td>$ (39.8)</td><td>$ (32.1)</td><td>$ 802.2</td></tr><tr><td>Net income</td><td></td><td></td><td>164.3</td><td></td><td></td><td>164.3</td></tr><tr><td>Change in other comprehensive income - net of tax</td><td></td><td></td><td></td><td>7.9</td><td></td><td>7.9</td></tr><tr><td>Stock based compensation</td><td></td><td>27.8</td><td></td><td></td><td></td><td>27.8</td></tr><tr><td>Acquisition of treasury stock</td><td></td><td></td><td></td><td></td><td>(8.1)</td><td>(8.1)</td></tr><tr><td>Balance, December 31, 2012</td><td>$ 1.0</td><td>$ 617.0</td><td>$ 448.2</td><td>$ (31.9)</td><td>$ (40.2)</td><td>$ 994.1</td></tr><tr><td>Net income</td><td></td><td></td><td>187.9</td><td></td><td></td><td>187.9</td></tr><tr><td>Change in other comprehensive income - net of tax</td><td></td><td></td><td></td><td>42.6</td><td></td><td>42.6</td></tr><tr><td>Stock based compensation</td><td></td><td>25.3</td><td></td><td></td><td></td><td>25.3</td></tr><tr><td>Acquisition of treasury stock</td><td></td><td></td><td></td><td></td><td>(89.5)</td><td>(89.5)</td></tr><tr><td>Balance, December 31, 2013</td><td>$ 1.0</td><td>$ 642.3</td><td>$ 636.1</td><td>$ 10.7</td><td>$ (129.7)</td><td>$ 1,160.4</td></tr></table>

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



## Hexcel Corporation and Subsidiaries
Consolidated Statements of Cash Flows
For the Years Ended December 31,

<table><tr><td>(In millions)</td><td>2013</td><td>2012</td><td>2011</td></tr><tr><td>Cash flows from operating activities</td><td></td><td></td><td></td></tr><tr><td>Net income</td><td>$ 187.9</td><td>$ 164.3</td><td>$ 135.5</td></tr><tr><td>Reconciliation to net cash provided by operating activities:</td><td></td><td></td><td></td></tr><tr><td>Depreciation</td><td>59.3</td><td>57.2</td><td>55.3</td></tr><tr><td>Amortization of debt discount and deferred financing costs</td><td>2.1</td><td>3.1</td><td>7.1</td></tr><tr><td>Deferred income taxes</td><td>16.4</td><td>30.9</td><td>23.4</td></tr><tr><td>Stock-based compensation</td><td>18.9</td><td>15.8</td><td>13.9</td></tr><tr><td>Excess tax benefits on stock-based compensation</td><td>(5.3)</td><td>(6.8)</td><td>(8.5)</td></tr><tr><td>Equity in earnings from investments in affiliated companies</td><td>(1.3)</td><td>(0.7)</td><td>(1.6)</td></tr><tr><td>Gain on sale of surplus real estate</td><td>-</td><td>(4.9)</td><td>-</td></tr><tr><td>Pension curtailment gain</td><td>-</td><td>-</td><td>(5.7)</td></tr></table>

<table><tr><td>Changes in assets and liabilities:</td><td></td><td></td><td></td></tr><tr><td>Decrease (increase) in accounts receivable</td><td>6.4</td><td>(28.1)</td><td>(28.2)</td></tr><tr><td>Increase in inventories</td><td>(28.4)</td><td>(15.2)</td><td>(48.8)</td></tr><tr><td>(Increase) decrease in prepaid expenses and other current assets</td><td>(3.3)</td><td>0.7</td><td>(1.1)</td></tr><tr><td>Increase in accounts payable and accrued liabilities</td><td>19.2</td><td>20.3</td><td>34.1</td></tr><tr><td>Increase (decrease) in other, net</td><td>1.0</td><td>(4.2)</td><td>(4.9)</td></tr><tr><td>Net cash provided by operating activities</td><td>272.9</td><td>232.4</td><td>170.5</td></tr></table>

<table><tr><td>Cash flows from investing activities</td><td></td><td></td><td></td></tr><tr><td>Capital expenditures and deposits for capital purchases</td><td>(194.9)</td><td>(263.7)</td><td>(158.0)</td></tr><tr><td>Proceeds from sale of surplus real estate</td><td>-</td><td>5.3</td><td>-</td></tr><tr><td>Settlement of foreign currency hedge</td><td>-</td><td>-</td><td>(5.2)</td></tr><tr><td>Net cash used for investing activities</td><td>(194.9)</td><td>(258.4)</td><td>(163.2)</td></tr></table>

<table><tr><td>Cash flows from financing activities</td><td></td><td></td><td></td></tr><tr><td>Borrowings from senior secured credit facility</td><td>309.0</td><td>87.0</td><td>135.0</td></tr><tr><td>Issuance costs related to debt</td><td>(2.4)</td><td>(0.6)</td><td>-</td></tr><tr><td>Capital lease obligations and other debt, net</td><td>(3.8)</td><td>(0.5)</td><td>(3.0)</td></tr><tr><td>Repayment of senior secured credit facility</td><td>(17.0)</td><td>-</td><td>-</td></tr><tr><td>Repayment of senior secured credit agreement - term loan</td><td>(85.0)</td><td>(7.5)</td><td>(5.0)</td></tr><tr><td>Repayment of prior senior secured credit facilities</td><td>(165.0)</td><td>-</td><td>(57.0)</td></tr><tr><td>Purchase of stock</td><td>(90.0)</td><td>-</td><td>-</td></tr><tr><td>Repayment of 6.75% senior subordinated notes</td><td>-</td><td>(73.5)</td><td>(151.5)</td></tr><tr><td>Call premium payment for 6.75% senior subordinated notes</td><td>-</td><td>(0.8)</td><td>(3.4)</td></tr><tr><td>Activity under stock plans and other</td><td>7.0</td><td>4.1</td><td>10.5</td></tr><tr><td>Net cash (used for) provided by financing activities</td><td>(47.2)</td><td>8.2</td><td>(74.4)</td></tr><tr><td>Effect of exchange rate changes on cash and cash equivalents</td><td>2.1</td><td>0.9</td><td>(0.6)</td></tr><tr><td>Net increase (decrease) in cash and cash equivalents</td><td>32.9</td><td>(16.9)</td><td>(67.7)</td></tr><tr><td>Cash and cash equivalents at beginning of year</td><td>32.6</td><td>49.5</td><td>117.2</td></tr><tr><td>Cash and cash equivalents at end of year</td><td>65.5</td><td>32.6</td><td>49.5</td></tr></table>

<table><tr><td>Supplemental information (See Note 14):</td><td></td><td></td><td></td></tr><tr><td>Accrual basis additions to property, plant and equipment</td><td>$ 206.5</td><td>$ 241.3</td><td>$ 184.5</td></tr></table>

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

## Notes To The Consolidated Financial Statements

## NOTE 1 – SIGNIFICANT ACCOUNTING POLICIES

## Nature of Operations

Hexcel Corporation and its subsidiaries (herein referred to as "Hexcel", "the Company", "we", "us", or "our"), is a leading advanced composites company. We develop, manufacture, and market lightweight, high-performance structural materials, including carbon fibers, specialty reinforcements, prepregs and other fiber-reinforced matrix materials, honeycomb, adhesive, engineered honeycomb and composite structures, for use in Commercial Aerospace, Space & Defense and Industrial Applications. Our products are used in a wide variety of end applications, such as commercial and military aircraft, space launch vehicles and satellites, wind turbine blades, automotive, a wide variety of recreational products and other industrial applications.

We serve international markets through manufacturing facilities, sales offices and representatives located in the Americas, Europe, Asia Pacific and Russia. We are also an investor in a joint venture, which manufactures composite structures for commercial aerospace.

## Principles of Consolidation

The accompanying consolidated financial statements include the accounts of Hexcel Corporation and its subsidiaries after elimination of all intercompany accounts, transactions and profits. We have a 50% equity ownership investment in an Asian joint venture Aerospace Composites Malaysia Sdn. Bhd. ("ACM"), formerly known as Asian Composites Manufacturing Sdn. Bhd. In accordance with accounting standards we have determined that this investment is not a variable interest entity and as we do not have the ability to exercise control over financial or operating decisions, this investment is accounted for using the equity method of accounting.

## Use of Estimates

Preparation of the accompanying consolidated financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

## Cash and Cash Equivalents

Cash and cash equivalents include cash on hand and all highly liquid investments with an original maturity of three months or less when purchased. Our cash equivalents are held in prime money market investments with strong sponsor organizations which are monitored on a continuous basis.

## Inventories

Inventories are stated at the lower of cost or market, with cost determined using the first-in, first-out and average cost methods. Inventory is reported at its estimated net realizable value based upon our historical experience with inventory becoming obsolete due to age, changes in technology and other factors.

## Property, Plant and Equipment

Property, plant and equipment, including capitalized interest applicable to major project expenditures, is recorded at cost. Asset and accumulated depreciation accounts are eliminated for dispositions, with resulting gains or losses reflected in earnings. Depreciation of plant and equipment is provided using the straight-line method over the estimated useful lives of the various assets. The estimated useful lives range from 10 to 40 years for buildings and improvements and from 3 to 25 years for machinery and equipment. Repairs and maintenance are expensed as incurred, while major replacements and betterments are capitalized and depreciated over the remaining useful life of the related asset.

In 2012, we reassessed the estimated useful lives of certain machinery and equipment. We increased the useful lives of this machinery and equipment from 20 years to 25 years, and increased the useful lives of other certain machinery and equipment from 10 – 12 years to 20 years. We determined that this adjustment to the useful lives of certain assets was a change in accounting estimate and we accounted for the change prospectively; i.e. the accounting change impacts the three months ended December 31, 2012 and future periods. See Note 3.

## Goodwill and Other Intangible Assets

Goodwill represents the excess of the purchase price over the fair value of the identifiable net assets of an acquired business. Goodwill is tested for impairment at the reporting unit level annually, or when events or changes in circumstances indicate that goodwill might be impaired. The Company's annual test for goodwill impairment was performed in the fourth quarter. The Company performed a qualitative assessment and determined that it was more likely than not that the fair values of our reporting units were not less than their carrying values and it was not necessary to perform the currently prescribed two-step goodwill impairment test.

We amortize the cost of other intangibles over their estimated useful lives unless such lives are deemed indefinite. The Company has indefinite-lived intangible assets, consisting of purchased emissions credits. These indefinite lived intangibles are tested annually for impairment as of November 30th, or when events or changes in circumstances indicate the potential for impairment. If the carrying amount of the indefinite lived intangible exceeds the fair value, the intangible asset is written down to its fair value. Fair value is calculated using discounted cash flows.

## Impairment of Long-Lived Assets

The Company reviews long-lived assets, including property, plant and equipment and identifiable intangible assets, for impairment whenever changes in circumstances or events may indicate that the carrying amounts are not recoverable. These indicators include: a significant decrease in the market price of a long-lived asset, a significant change in the extent or manner in which a long-lived asset is used or its physical condition, a significant adverse change in legal factors or business climate that could affect the value of a long-lived asset, an accumulation of costs significantly in excess of the amount expected for the acquisition or construction of a long-lived asset, a current period operating or cash flow loss combined with a history of losses associated with a long-lived asset and a current expectation that, more likely than not, a long-lived asset will be sold or otherwise disposed of significantly before the end of its previously estimated life.

## Software Development Costs

Costs incurred to develop software for internal-use are accounted for under Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." All costs relating to the preliminary project stage and the post-



implementation/operation stage are expensed as incurred. Costs incurred during the application development stage are capitalized and amortized over the useful life of the software. The amortization of capitalized costs commences when functionality of the computer software is achieved.

## Investments

We have a 50% equity ownership investment in an Asian joint venture Aerospace Composites Malaysia Sdn. Bhd., formerly Asian Composites Manufacturing Sdn. Bhd. In accordance with ASC 810 we have determined that this investment is not a variable interest entity. As such, we account for our share of the earnings of this affiliated company using the equity method of accounting. The Company continues to evaluate to make certain that the facts and circumstances associated with this investment have not changed with respect to accounting for a variable interest entity.

## Debt Financing Costs

Debt financing costs are deferred and amortized to interest expense over the life of the related debt. At December 31, 2013 and 2012, deferred debt financing costs, net of accumulated amortization, were $5.0 million and $4.6 million.

## Share-Based Compensation

The fair value of Restricted Stock Units (RSU's) is equal to the market price of our stock at date of grant and is amortized to expense ratably over the vesting period. Performance restricted stock units ("PRSUs") are a form of RSUs in which the number of shares ultimately received depends on the extent to which we achieve a specified performance target. The fair value of the PRSU is based on the closing market price of the Company's common stock on the date of grant and is amortized straight-line over the total vesting period. A change in the performance measure expected to be achieved is recorded as an adjustment in the period in which the change occurs. We use the Black-Scholes model to value compensation expense for all option-based payment awards made to employees and directors based on estimated fair values on the grant date. The value of the portion of the award that is ultimately expected to vest is recognized as expense on a straight-line basis over the requisite service periods in our consolidated statements of operations. The value of RSU's, PRSU's and Non-qualifying options awards for retirement eligible employees is expensed on the grant date as they are fully vested.

## Currency Translation

The assets and liabilities of international subsidiaries are translated into U.S. dollars at year-end exchange rates, and revenues and expenses are translated at average exchange rates during the year. Cumulative currency translation adjustments are included in "accumulated other comprehensive income (loss)" in the stockholders' equity section of the consolidated balance sheets. Gains and losses from foreign currency transactions are not material.

## Revenue Recognition

Our revenue is predominantly derived from sales of inventory, and is recognized when persuasive evidence of an arrangement exists, title and risk of loss passes to the customer, the sales price is fixed or determinable and collectability is reasonably assured. However, from time to time we enter into contractual arrangements for which other specific revenue recognition guidance is applied.

Recognition of revenue on bill and hold arrangements occurs only when risk of ownership has passed to the buyer, a fixed written commitment has been provided by the buyer, the goods are complete and ready for shipment, the goods are segregated from inventory, no performance obligations remain and a schedule for delivery of goods has been established. Revenues derived from design and installation services are recognized when the service is provided. Revenues derived from long-term construction-type contracts are accounted for using the percentage-of-completion method, and progress is measured on a cost-to-cost basis. If at any time expected costs exceed the value of the contract, the loss is recognized immediately.

## Product Warranty

We provide for an estimated amount of product warranty at the point a claim is probable and estimable. This estimated amount is provided by product and based on current facts, circumstances and historical warranty experience. Warranty expense was $1.2 million, $2.2 million and $2.0 million for the years ended December 31, 2013, 2012 and 2011 respectively.

## Research and Technology

Significant costs are incurred each year in connection with research and technology ("R&D") programs that are expected to contribute to future earnings. Such costs are related to the development and, in certain instances, the qualification and certification of new and improved products and their uses. R&D costs are expensed as incurred.

## Income Taxes

We provide for income taxes using the liability approach. Under the liability approach, deferred income tax assets and liabilities reflect tax net operating loss and credit carryforwards and the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting and income tax purposes. Deferred tax assets require a valuation allowance when it is more likely than not, based on the evaluation of positive and negative evidence, that some portion of the deferred tax assets may not be realized. The realization of deferred tax assets is dependent upon the timing and magnitude of future taxable income prior to the expiration of the deferred tax assets' attributes. When events and circumstances so dictate, we evaluate the realizability of our deferred tax assets and the need for a valuation allowance by forecasting future taxable income. Investment tax credits are recorded on a flow-through basis, which reflects the credit in net income as a reduction of the provision for income taxes in the same period as the credit is realized for federal income tax purposes. In addition, we recognize interest accrued related to unrecognized tax benefits as a component of interest expense and penalties as a component of income tax expense in the consolidated statements of operations.

## Concentration of Credit Risk

Financial instruments that potentially subject us to significant concentrations of credit risk consist primarily of trade accounts receivable. Two customers and their related subcontractors accounted for more than half of our annual net sales in 2013, 2012 and 2011. Refer to Note 16 for further information on significant customers. We perform ongoing credit evaluations of our customers' financial condition but generally do not require collateral or other security to support customer receivables. We establish an allowance for doubtful accounts based on factors surrounding the credit risk of specific customers, historical trends and other financial information. As of December 31, 2013 and 2012, the allowance for doubtful accounts was $0.9 million and $1.8 million, respectively. Bad debt expense was immaterial for all years presented.

## Derivative Financial Instruments

We use various financial instruments, including foreign currency forward exchange contracts and interest rate swap agreements, to manage our exposure to market fluctuations by generating cash flows that offset, in relation to their amount and timing, the cash flows of certain foreign currency denominated transactions or underlying debt instruments. We mark our foreign exchange forward contracts to fair value. The change in the fair value is recorded in current period earnings. When the derivatives qualify, we designate our foreign currency forward exchange contracts as cash flow hedges against forecasted foreign currency denominated transactions and report the effective portions of changes in fair value of the instruments in "accumulated other comprehensive income (loss)" until the underlying hedged transactions affect income. We designate our interest rate swap agreements as fair value or cash flow hedges against specific debt instruments and recognize interest differentials as adjustments to interest expense as the differentials may occur. We do not use financial instruments for trading or speculative purposes.

In accordance with accounting guidance, we recognize all derivatives as either assets or liabilities on our balance sheet and measure those instruments at fair value.

## Self-insurance

We are self-insured up to specific levels for certain medical and health insurance and workers' compensation plans. Accruals are established based on actuarial assumptions and historical claim experience, and include estimated amounts for incurred but not reported claims.

## New Accounting Pronouncements

ASU 2011-11 Balance Sheet (Topic 210); Disclosures about Offsetting Assets and Liabilities: In December 2011, the Financial Accounting Standards Board issued Accounting Standards 2011-11 which requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. ASU 2011-11 is effective for annual and interim reporting periods beginning on or after January 1, 2013. The Company has no offsetting agreements and as such, adoption of this guidance did not have any impact on the Company's reported financial results.

ASU 2013-02 Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income: In February 2013 the Financial Accounting Standards Board issued Accounting Standards Update 2013-02. The Company adopted this update in the first quarter of 2013. The amounts reclassified out of accumulated other comprehensive income during 2013 were not material.

ASU 2013-11 Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (Topic 740): In July 2013, the FASB issued ASU No. 2013-11, which requires an unrecognized tax benefit to be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward on a jurisdictional basis. ASU 2013-11 is expected to reduce diversity in practice by providing specific guidance on the presentation of unrecognized tax benefits. ASU 2013-11 was effective for fiscal years, and interim periods within those years, beginning after December 15, 2014. Early adoption is permitted and the Company has chosen to adopt ASU 2013-11 in the fourth quarter of 2013.

## NOTE 2 – INVENTORIES

<table><tr><td rowspan="2">(In millions)</td><td colspan="2">December 31,</td></tr><tr><td>2013</td><td>2012</td></tr><tr><td>Raw materials</td><td>$ 103.4</td><td>$ 95.0</td></tr><tr><td>Work in progress</td><td>62.2</td><td>51.2</td></tr><tr><td>Finished goods</td><td>99.7</td><td>86.6</td></tr><tr><td>Total inventories</td><td>$ 265.3</td><td>$ 232.8</td></tr></table>



## NOTE 3 – NET PROPERTY, PLANT AND EQUIPMENT

<table><tr><td rowspan="2">(In millions)</td><td colspan="2">December 31,</td></tr><tr><td>2013</td><td>2012</td></tr><tr><td>Land</td><td>$ 50.9</td><td>$ 41.9</td></tr><tr><td>Buildings</td><td>396.2</td><td>298.3</td></tr><tr><td>Equipment</td><td>957.0</td><td>783.4</td></tr><tr><td>Construction in progress</td><td>257.1</td><td>335.6</td></tr><tr><td>Property, plant and equipment</td><td>1,661.2</td><td>1,459.2</td></tr><tr><td>Less accumulated depreciation</td><td>(593.8)</td><td>(544.8)</td></tr><tr><td>Net property, plant and equipment</td><td>$1,067.4</td><td>$914.4</td></tr></table>

Depreciation expense related to property, plant and equipment for the years ended December 31, 2013, 2012 and 2011, was $59.3 million, $57.2 million and $55.3 million, respectively. Capital-

ized interest of $2.9 million and $3.1 million for 2013 and 2012, respectively, was included in construction in progress and is associated with our carbon fiber expansion programs. Capitalized costs associated with software developed for internal use were $4.4 million and $2.8 million for 2013 and 2012, respectively.

In 2012, we reassessed the estimated useful lives of certain machinery and equipment. We increased the useful lives of certain machinery and equipment from 20 years to 25 years, and increased the useful lives of certain other machinery and equipment from 10 - 12 years to 20 years. We determined that this adjustment to the useful lives of certain assets is a change in accounting estimate and we accounted for the change prospectively; i.e. the accounting change impacts the three months ended December 31, 2012 and future periods. For the quarter and year ended December 31, 2012, the change in accounting estimate lowered depreciation expense by approximately $1.25 million (pre-tax), which was reflected in Gross Margin, or by approximately $0.01 earnings per basic and diluted common share.

## NOTE 4 – GOODWILL AND PURCHASED INTANGIBLE ASSETS

Changes in the carrying amount of gross goodwill and other purchased intangibles for the years ended December 31, 2013 and 2012, by segment, are as follows:

<table><tr><td>(In millions)</td><td>Composite Materials</td><td>Engineered Products</td><td>Total</td></tr><tr><td>Balance as of December 31, 2011</td><td>$ 41.3</td><td>$ 16.1</td><td>$ 57.4</td></tr><tr><td>Currency translation adjustments and other</td><td>0.4</td><td>—</td><td>0.4</td></tr><tr><td>Balance as of December 31, 2012</td><td>$ 41.7</td><td>$ 16.1</td><td>$ 57.8</td></tr><tr><td>Additions</td><td>3.0</td><td>—</td><td>3.0</td></tr><tr><td>Amortization expense</td><td>(0.1)</td><td>—</td><td>(0.1)</td></tr><tr><td>Currency translation adjustments and other</td><td>0.4</td><td>—</td><td>0.4</td></tr><tr><td>Balance as of December 31, 2013</td><td>$ 45.0</td><td>$ 16.1</td><td>$ 61.1</td></tr></table>

We performed our annual impairment review of goodwill as of November 30, 2013 and determined that it was more likely than not that the fair values of our reporting units are above their carrying values. The addition to intangible assets in 2013 represents a license agreement with a third party. The goodwill and intangible asset balances as of December 31, 2013 include $36.3 million of indefinite-lived intangible assets, $2.9 of a definitive-lived intangible asset and $54.6 million of goodwill.

## NOTE 5 - DEBT

<table><tr><td>(In millions)</td><td>December 31, 2013</td><td>December 31, 2012</td></tr><tr><td>Foreign operation&#x27;s working capital line of credit</td><td>$ 3.0</td><td>$ 4.8</td></tr><tr><td>Current maturities of capital lease and other obligations</td><td>—</td><td>1.8</td></tr><tr><td>Current maturities of term loan Short-term borrowings and current maturities of long-term debt</td><td>—</td><td>10.0</td></tr><tr><td>Senior secured credit facility — revolving maturities of long-term debt</td><td>3.0</td><td>16.6</td></tr><tr><td>Senior secured credit facility —revolving loan due 2018</td><td>292.0</td><td>—</td></tr><tr><td>Senior secured credit facility —term loan due 2015</td><td>—</td><td>75.0</td></tr><tr><td>Senior secured credit facility —revolving loan due 2015</td><td>—</td><td>165.0</td></tr><tr><td>Long-term debt</td><td>292.0</td><td>240.0</td></tr><tr><td>Total debt</td><td>$ 295.0</td><td>$ 256.6</td></tr></table>

## Estimated Fair Values of Notes Payable

We did not have any notes payable outstanding at December 31, 2013.

## Senior Secured Credit Facility

In June 2013 we entered into a new $600 million senior secured revolving credit facility which matures in June 2018. The new facility replaces the Company's previous senior secured credit facility ($82.5 million term loan and a $360 million revolving loan) that would have expired in July 2015. At the current leverage ratio the new rate is LIBOR + 1.25% or 75 basis points lower than the prior facility. In addition to the lower interest rates and fees on undrawn balances, the new facility provides greater flexibility. The proceeds from the new facility were used to repay all amounts, and terminate all commitments outstanding under the Company's credit agreement and to pay fees and expenses in connection with the refinancing. As a result of the refinancing, the Company accelerated certain unamortized financing costs of the credit facility being replaced and the deferred expense on related interest rate swaps incurring a pretax charge of $1.0 million in the second quarter of 2013.

The new facility contains financial and other covenants, including, but not limited to, restrictions on the incurrence of debt and the granting of liens, as well as the maintenance of an interest coverage ratio and a leverage ratio. In accordance with the terms of the new facility, we are required to maintain a minimum interest coverage ratio of 3.50 (based on the ratio of EBITDA, as defined in the credit agreement, to interest expense) and may not exceed a maximum leverage ratio of 3.50 (based on the ratio of total debt to EBITDA) throughout the term of the new facility. In addition, the new facility contains other terms and conditions such as customary representations and warranties, additional covenants and customary events of default.

Additionally, at December 31, 2013 we have interest rate swaps totaling approximately $150 million that expire before September 2016. These interest rate swaps are designated as cash flow hedges to our term loan. The interest rate swaps trade LIBOR for a fixed rate at an average rate of 0.81567%.

## 6.75% Senior Subordinated Notes, due 2015

On February 1, 2005, we issued $225 million of 6.75% senior subordinated notes due 2015. The notes were unsecured senior subordinated obligations of Hexcel Corporation. Interest accrued at the rate of 6.75% per annum and were payable semi-annually in arrears on February 1 and August 1.

In June 2012 and February 2011, we redeemed $73.5 million and $150 million of these notes at a call premium of 1.125% and 2.25%, respectively, and purchased $1.5 million of notes on the open market. The redemptions were primarily funded by a $75 million and $135 million add-on to the Facility in 2012 and December 2010. As a result of the redemptions, we accelerated the unamortized financing costs of the senior subordinated notes being redeemed and expensed the call premium incurring a pretax charge of $1.1 million (after tax of $0.01 per diluted share) and $4.9 million (after tax of $0.03 per diluted share) in 2012 and 2011, respectively.

## Other Credit Facility

We have a $10.0 million borrowing facility for working capital needs of our Chinese entity with an outstanding balance of $3.0 million on December 31, 2013. The facility contains a $10.0 million revolving credit line. These funds can only be used locally, and accordingly, we do not include this facility in our borrowing capacity disclosures. The facility is guaranteed by Hexcel Corporation, but is uncommitted and cancellable by the lender at any time.

## Aggregate Maturities of Debt

The table below reflects aggregate scheduled maturities of debt as of December 31, 2013.

<table><tr><td>Payable during the years ending December 31:</td><td>(In millions)</td></tr><tr><td>2014</td><td>$ 3.0</td></tr><tr><td>2015</td><td>—</td></tr><tr><td>2016</td><td>—</td></tr><tr><td>2017</td><td>—</td></tr><tr><td>2018</td><td>292.0</td></tr><tr><td>Total debt</td><td>$ 295.0</td></tr></table>



## NOTE 6 - LEASING ARRANGEMENTS

On February 1, 2013 we exercised our purchase option on a capital lease for a building. In March 2013 we sold the building. The related assets, accumulated depreciation, and related liability balances under capital leasing arrangements, as of December 31, 2012 and 2011, were:

<table><tr><td>(in millions)</td><td>2012</td><td>2011</td></tr><tr><td>Property, plant and equipment</td><td>$ 3.7</td><td>$ 3.7</td></tr><tr><td>Less accumulated depreciation</td><td>(1.6)</td><td>(1.6)</td></tr><tr><td>Net property, plant and equipment</td><td>$ 2.1</td><td>$ 2.1</td></tr><tr><td>Capital lease obligations</td><td>$ 1.8</td><td>$ 2.0</td></tr><tr><td>Less current maturities</td><td>(1.8)</td><td>(0.2)</td></tr><tr><td>Long-term capital lease obligations, net</td><td>$ -</td><td>$ 1.8</td></tr></table>

Certain sales and administrative offices, data processing equipment and manufacturing facilities are leased under operating leases. We recognize rental expense on operating leases straight-line over the term of a lease. Total rental expense was $16.1 million in 2013, $15.4 million in 2012 and $15.2 million in 2011.

Scheduled future minimum lease payments as of December 31, 2013 were:

<table><tr><td colspan="2">(In millions)</td></tr><tr><td>Payable during the years ending December 31:</td><td>Operating Leases</td></tr><tr><td>2014</td><td>9.1</td></tr><tr><td>2015</td><td>5.3</td></tr><tr><td>2016</td><td>4.1</td></tr><tr><td>2017</td><td>2.2</td></tr><tr><td>2018</td><td>1.8</td></tr><tr><td>Thereafter</td><td>9.3</td></tr><tr><td>Total minimum lease payments</td><td>$ 31.8</td></tr></table>

## NOTE 7 – RETIREMENT AND OTHER POSTRETIREMENT BENEFIT PLANS

We maintain qualified defined benefit retirement plans covering certain current and former European employees, as well as nonqualified defined benefit retirement plans and retirement savings plans covering certain eligible U.S. and European employees, and participate in a union sponsored multi-employer pension plan covering certain U.S. employees with union affiliations. In addition, we provide certain postretirement health care and life insurance benefits to eligible U.S. retirees.

Accounting standards require the use of certain assumptions, such as the expected long-term rate of return, discount rate, rate of compensation increase, healthcare cost trend rates, and retirement and mortality rates, to determine the net periodic costs of such plans. These assumptions are reviewed and set annually at the beginning of each year. In addition, these models use an “attribution approach” that generally spreads individual events, such as plan amendments and changes in actuarial assumptions, over the service lives of the employees in the plan. That is, employees render service over their service lives on a relatively smooth basis and therefore, the income statement effects of retirement and postretirement benefit plans are earned in, and should follow, the same pattern.

We use our actual return experience, future expectations of long-term investment returns, and our actual and targeted asset allocations to develop our expected rate of return assumption used in the net periodic cost calculations of our funded European defined benefit retirement plans. Due to the difficulty involved in predicting the market performance of certain assets, there will be a difference in any given year between our expected return on plan assets and the actual return. Following the attribution approach, each year's difference is amortized over a number of future years. Over time, the expected long-term returns are designed to approximate the actual long-term returns and therefore result in a pattern of income and expense recognition that more closely matches the pattern of the services provided by the employees.

We annually set our discount rate assumption for retirement-related benefits accounting to reflect the rates available on high-quality, fixed-income debt instruments. The rates used reached a low point as of 2012 and rebounded during 2013 and are expected to remain stable for 2014. The rate of compensation increase for nonqualified pension plans, which is another significant assumption used in the actuarial model for pension accounting, is determined by us based upon our long-term plans for such increases and assumed inflation. For the postretirement health care and life insurance benefits plan, we review external data and its historical trends for health care costs to determine the health care cost trend rates. Retirement and termination rates are based primarily on actual plan experience. The mortality table used for the U.S. plans is based on the RP2000 Mortality Table projected to 2020 and for the UK. Plans the S1NA table with CMI 2011 projections (1.5% p.a. future improvements).

Actual results that differ from our assumptions are accumulated and amortized over future periods and, therefore, generally affect the net periodic costs and recorded obligations in such future periods. While we believe that the assumptions used are appropriate, significant changes in economic or other conditions, employee demographics, retirement and mortality rates, and investment performance may materially impact such costs and obligations.

## U.S. Defined Benefit Retirement Plans

We have nonqualified defined benefit retirement plans covering certain current and former U.S. employees that are funded as benefits are incurred. Under the provisions of these plans, we expect to contribute approximately $23.8 million in 2014 to cover unfunded benefits.

## Multi-Employer Plan

The Company is party to a multi-employer pension plan covering certain U.S. employees with union affiliations. The plan is the Western Metal Industry Pension Fund, (“the Plan”). The Plan’s employer identification number is 91-6033499; the Plan number is 001. In 2012, the Plan reported Hexcel Corporation as being an employer that contributed greater than 5% of the Plan’s total contributions. The expiration date of the collective bargaining agreement is September 30, 2015. The Plan has been listed in “critical status” and has been operating in accordance with a Rehabilitation Plan since 2010. The Plan, as amended under the Rehabilitation Plan, reduced the adjustable benefits of the participants and levied a surcharge on employer contributions. The Company has contributed approximately $1.0 million in 2013, 2012 and 2011. We expect the Company’s contribution to be about $1.0 million in 2014 and remain at that level over the next few years.

## U.S. Retirement Savings Plan

Under the retirement savings plan, eligible U.S. employees can contribute up to 75% of their annual compensation to an individual 401(k) retirement savings account. The Company makes matching contributions equal to 50% of employee contributions, not to exceed 3% of employee compensation each year. We also contribute an additional 2% to 40% of each eligible employee's salary to an individual 401(k) retirement savings account, depending on the employee's age. This increases the maximum contribution to individual employee savings accounts to between 5% and 7% per year, before any profit sharing contributions that are made when we meet or exceed certain performance targets that are set annually. These profit sharing contributions are made at the Company's discretion and are targeted at 3% of an eligible employee's pay, with a maximum of 4.5%.

## U.S. Postretirement Plans

In addition to defined benefit and retirement savings plan benefits, we also provide certain postretirement health care and life insurance benefits to eligible U.S. retirees. Depending upon the plan, benefits are available to eligible employees who retire after meeting certain age and service requirements and were employed by Hexcel as of February 1996. Our funding policy for the postretirement health care and life insurance benefit plans is generally to pay covered expenses as they are incurred. Under the provisions of these plans, we expect to contribute approximately $0.6 million in 2014 to cover unfunded benefits.

## European Defined Benefit Retirement Plans

We have defined benefit retirement plans in the United Kingdom, Belgium, France and Austria covering certain employees of our subsidiaries in those countries. The defined benefit plan in the United Kingdom (the "U.K. Plan"), the largest of the European plans, was terminated in 2011 and replaced with a defined contribution plan. We recorded a curtailment gain of $5.7 million (after tax gain of $0.04 per diluted share) to recognize previously unrecognized prior service credits. As of December 31, 2013, 57% of the total assets in the U.K. Plan were invested in equities. Equity investments are made with the objective of achieving a return on plan assets consistent with the funding requirements of the plan, maximizing portfolio return and minimizing the impact of market fluctuations on the fair value of the plan assets. As a result of an annual review of historical returns and market trends, the expected long-term weighted average rate of return for the U.K. Plan for the 2014 plan year will be 6.5% and 3.25% to 4.5% for the other European Plans as a group.

## U.K. Defined Contribution Pension Plan

Under the Defined Contribution Section, eligible U.K. employees can belong to the Deferred Contribution Plan on a non-participatory basis or can elect to contribute 3%, 5% or 7% of their pensionable salary. The Company will contribute 5%, 9% and 13% respectively. The plan also provides life insurance and disability insurance benefits for members.

## Retirement and Other Postretirement Plans - France

The employees of our French subsidiaries are entitled to receive a lump-sum payment upon retirement subject to certain service conditions under the provisions of the national chemicals and textile workers collective bargaining agreements. The amounts attributable to the French plans have been included within the total expense and obligation amounts noted for the European plans.

## Net Periodic Pension Expense

Net periodic expense for our U.S. and European qualified and non-qualified defined benefit pension plans and our retirement savings plans for the three years ended December 31, 2013 is detailed in the table below.

<table><tr><td>(In millions)</td><td>2013</td><td>2012</td><td>2011</td></tr><tr><td>Defined benefit retirement plans</td><td>$ 7.3</td><td>$ 5.4</td><td>$ (0.3)</td></tr><tr><td>Union sponsored multi-employer pension plan</td><td>1.6</td><td>1.2</td><td>0.9</td></tr><tr><td>Retirement savings plans-matching contributions</td><td>3.0</td><td>3.3</td><td>2.9</td></tr><tr><td>Retirement savings plans-profit sharing contributions</td><td>6.7</td><td>7.6</td><td>8.0</td></tr><tr><td>Net periodic expense</td><td>$ 18.6</td><td>$ 17.5</td><td>$ 11.5</td></tr></table>



## Defined Benefit Retirement and Postretirement Plans

Net periodic cost of our defined benefit retirement and postretirement plans for the three years ended December 31, 2013, were:

<table><tr><td rowspan="2">(In millions)</td><td colspan="4">U.S. Plans</td><td colspan="4">European Plans</td></tr><tr><td>2013</td><td>2012</td><td>2011</td><td>2013</td><td>2012</td><td>2011</td><td></td><td></td></tr><tr><td>Defined Benefit Retirement Plans</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Service cost</td><td>$ 1.7</td><td>$ 1.3</td><td>$ 1.5</td><td>$ 0.7</td><td>$ 0.5</td><td>$ 1.1</td><td></td><td></td></tr><tr><td>Interest cost</td><td>0.8</td><td>1.1</td><td>1.1</td><td>6.9</td><td>6.6</td><td>7.2</td><td></td><td></td></tr><tr><td>Expected return on plan assets</td><td>-</td><td>-</td><td>-</td><td>(8.0)</td><td>(7.3)</td><td>(7.8)</td><td></td><td></td></tr><tr><td>Net amortization</td><td>4.0</td><td>2.3</td><td>1.6</td><td>1.2</td><td>0.9</td><td>0.7</td><td></td><td></td></tr><tr><td>Curtailment gain</td><td>-</td><td>-</td><td>-</td><td>-</td><td>-</td><td>(5.7)</td><td></td><td></td></tr><tr><td>Net periodic pension cost (income)</td><td>$ 6.5</td><td>$ 4.7</td><td>$ 4.2</td><td>$ 0.8</td><td>$ 0.7</td><td>$ (4.5)</td><td></td><td></td></tr></table>

<table><tr><td>(In millions)</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>U.S. Postretirement Plans</td><td>2013</td><td>2012</td><td>2011</td><td></td><td></td><td></td></tr><tr><td>Interest cost</td><td>0.2</td><td>0.3</td><td>0.4</td><td></td><td></td><td></td></tr><tr><td>Net amortization and deferral</td><td>(0.4)</td><td>(0.5)</td><td>(0.3)</td><td></td><td></td><td></td></tr><tr><td>Net periodic postretirement benefit (income) cost</td><td>(0.2)</td><td>(0.2)</td><td>(0.1)</td><td></td><td></td><td></td></tr></table>

<table><tr><td rowspan="2">(In millions)</td><td colspan="4">Defined Benefit Retirement Plans</td><td colspan="4">Postretirement Plans</td></tr><tr><td>U.S. Plans</td><td colspan="3">European Plans</td><td colspan="3">Change in plan assets:</td></tr><tr><td></td><td>2013</td><td>2012</td><td>2013</td><td>2012</td><td>2013</td><td>2012</td><td></td></tr><tr><td>Other Changes in Plan Assets and Benefit Obligations</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Recognized in Other Comprehensive Income</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Net loss (gain)</td><td>$ 1.0</td><td>$ 3.1</td><td>$ (16.5)</td><td>$ 12.1</td><td>$ (1.6)</td><td>$ 0.1</td><td></td></tr><tr><td>Amortization of actuarial (losses)</td><td>(3.9)</td><td>(2.2)</td><td>(1.3)</td><td>(0.9)</td><td>0.4</td><td>0.5</td><td></td></tr><tr><td>Amortization of prior service cost</td><td>(0.1)</td><td>(0.1)</td><td>-</td><td>-</td><td>-</td><td>-</td><td></td></tr><tr><td>Effect of foreign exchange</td><td>-</td><td>-</td><td>0.2</td><td>1.9</td><td>-</td><td>-</td><td></td></tr><tr><td>Total recognized in other comprehensive income (pre-tax)</td><td>$ (3.0)</td><td>$ 0.8</td><td>$ (17.6)</td><td>$ 13.1</td><td>$ (1.2)</td><td>$ 0.6</td><td></td></tr></table>

The Company expects to recognize $2.4 million of net actuarial loss and an immaterial net prior service cost as a component of net periodic pension cost in 2014 for its defined benefit plans. The recognition of net prior service credit and net actuarial gain as a component of net periodic postretirement benefit cost in 2014 is expected to be immaterial.

The benefit obligation, fair value of plan assets, funded status, and amounts recognized in the consolidated financial statements for our defined benefit retirement plans and postretirement plans, as of and for the years ended December 31, 2013 and 2012, were:

<table><tr><td rowspan="2">(In millions)</td><td colspan="4">Defined Benefit Retirement Plans</td><td colspan="4">Postretirement Plans</td></tr><tr><td>U.S. Plans</td><td colspan="3">European Plans</td><td colspan="4">(In millions)</td></tr><tr><td>Change in benefit obligation:</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Benefit obligation - beginning of year</td><td>$ 38.6</td><td>$ 33.4</td><td>$ 164.8</td><td>$ 139.8</td><td>$ 8.1</td><td>$ 8.0</td><td></td><td></td></tr><tr><td>Service cost</td><td>1.7</td><td>1.3</td><td>0.7</td><td>0.5</td><td>-</td><td>-</td><td></td><td></td></tr><tr><td>Interest cost</td><td>0.8</td><td>1.1</td><td>6.8</td><td>6.6</td><td>0.2</td><td>0.3</td><td></td><td></td></tr><tr><td>Plan participants&#x27; contributions</td><td>-</td><td>-</td><td>0.1</td><td>0.1</td><td>0.1</td><td>0.1</td><td></td><td></td></tr><tr><td>Actuarial loss (gain)</td><td>1.1</td><td>3.1</td><td>(8.3)</td><td>15.2</td><td>(1.6)</td><td>0.1</td><td></td><td></td></tr><tr><td>Benefits and expenses paid</td><td>(0.3)</td><td>(0.3)</td><td>(4.9)</td><td>(3.7)</td><td>(0.4)</td><td>(0.4)</td><td></td><td></td></tr><tr><td>Currency translation adjustments</td><td>-</td><td>-</td><td>3.5</td><td>6.3</td><td>-</td><td>-</td><td></td><td></td></tr><tr><td>Benefit obligation - end of year</td><td>$ 41.9</td><td>$ 38.6</td><td>$ 162.7</td><td>$ 164.8</td><td>$ 6.4</td><td>$ 8.1</td><td></td><td></td></tr><tr><td>Change in plan assets:</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Fair value of plan assets - beginning of year</td><td>$ -</td><td>$ -</td><td>$ 128.3</td><td>$ 110.8</td><td>$ -</td><td>$ -</td><td></td><td></td></tr><tr><td>Actual return on plan assets</td><td>-</td><td>-</td><td>16.2</td><td>10.3</td><td>-</td><td>-</td><td></td><td></td></tr><tr><td>Employer contributions</td><td>0.3</td><td>0.3</td><td>5.9</td><td>5.7</td><td>0.3</td><td>0.3</td><td></td><td></td></tr><tr><td>Plan participants&#x27; contributions</td><td>-</td><td>-</td><td>0.1</td><td>0.1</td><td>0.1</td><td>0.1</td><td></td><td></td></tr><tr><td>Benefits and expenses paid</td><td>(0.3)</td><td>(0.3)</td><td>(4.9)</td><td>(3.7)</td><td>(0.4)</td><td>(0.4)</td><td></td><td></td></tr><tr><td>Currency translation adjustments</td><td>-</td><td>-</td><td>3.7</td><td>5.1</td><td>-</td><td>-</td><td></td><td></td></tr><tr><td>Fair value of plan assets - end of year</td><td>$ -</td><td>$ -</td><td>$ 149.3</td><td>$ 128.3</td><td>$ -</td><td>$ -</td><td></td><td></td></tr><tr><td>Amounts recognized in Consolidated Balance Sheets:</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Noncurrent Assets</td><td>$ -</td><td>$ -</td><td>$ 2.7</td><td>$ -</td><td>$ -</td><td>$ -</td><td></td><td></td></tr><tr><td>Current liabilities</td><td>$ 23.8</td><td>$ 0.3</td><td>$ 0.4</td><td>$ 0.4</td><td>$ 0.6</td><td>$ 0.6</td><td></td><td></td></tr><tr><td>Non-current liabilities</td><td>18.1</td><td>38.3</td><td>15.7</td><td>36.1</td><td>5.8</td><td>7.5</td><td></td><td></td></tr><tr><td>Total Liabilities</td><td>$ 41.9</td><td>$ 38.6</td><td>$ 16.1</td><td>$ 36.5</td><td>$ 6.4</td><td>$ 8.1</td><td></td><td></td></tr></table>

<table><tr><td>Noncurrent Assets</td><td>$ 23.8</td><td>$ 0.3</td><td>$ 0.4</td><td>$ 0.4</td><td>$ 0.6</td><td>$ 0.6</td></tr><tr><td>Current liabilities</td><td>18.1</td><td>38.3</td><td>15.7</td><td>36.1</td><td>5.8</td><td>7.5</td></tr><tr><td>Non-current liabilities</td><td>$ 41.9</td><td>$ 38.6</td><td>$ 16.1</td><td>$ 36.5</td><td>$ 6.4</td><td>$ 8.1</td></tr></table>

<table><tr><td colspan="5">Amounts recognized in Accumulated Other Comprehensive Income:</td></tr><tr><td>Actuarial net (loss) gain</td><td>$ (7.3)</td><td>$ (10.2)</td><td>$ (32.2)</td><td>$ (49.7)</td></tr><tr><td>Prior service cost</td><td>(0.1)</td><td>(0.2)</td><td>(0.1)</td><td>(0.1)</td></tr><tr><td>Total amounts recognized in accumulated other comprehensive (loss) income</td><td>$ (7.4)</td><td>$ (10.4)</td><td>$ (32.3)</td><td>$ (49.8)</td></tr></table>

The measurement date used to determine the benefit obligations and plan assets of the defined benefit retirement and postretirement plans was December 31, 2013.



The total accumulated benefit obligation (“ABO”) for the U.S. defined benefit retirement plans was $40.9 million and $38.0 million as of December 31, 2013 and 2012, respectively. The European Plans’ ABO exceeded plan assets as of December 31, 2013 and 2012, by $11.0 million and $32.3 million, respectively. These plans’ ABO was $17.5 million and $160.6 million as of December 31, 2013 and 2012, respectively. The ABO and plan assets of the U.K. Plan are not included in the 2013 disclosures as the plan is no longer underfunded.

As of December 31, 2013 and 2012, the accrued benefit costs for the defined benefit retirement plans and postretirement benefit plans included within “accrued compensation and benefits” was $24.8 million and $1.3 million, respectively, and within “other non-current liabilities” was $39.6 million and $81.9 million, respectively, in the accompanying consolidated balance sheets.

## Fair Values of Pension Assets

The following table presents pension assets measured at fair value at December 31, 2013 and 2012 utilizing the fair value hierarchy discussed in Note 19:

<table><tr><td>(In millions)</td><td>December 31,</td><td>Fair Value Measurements at December 31, 2013</td></tr><tr><td>Description</td><td>2013</td><td>Level 1 Level 2 Level 3</td></tr><tr><td>Equity funds</td><td>$ 83.3</td><td>$ - $ 83.3</td></tr><tr><td>Active corporate bond fund</td><td>58.5</td><td>- 58.5</td></tr><tr><td>Diversified investment funds</td><td>2.9</td><td>- 2.9</td></tr><tr><td>Insurance contracts</td><td>3.6</td><td>- 3.6</td></tr><tr><td>Cash and cash equivalents</td><td>1.0</td><td>- 1.0</td></tr><tr><td>Total assets</td><td>$149.3</td><td>$ - $ 142.8</td></tr></table>

<table><tr><td></td><td colspan="3">December 31,</td><td colspan="3">Fair Value Measurements at December 31, 2012</td></tr><tr><td>Description</td><td colspan="2">2012</td><td>Level 1</td><td>Level 2</td><td>Level 3</td><td></td></tr><tr><td>Equity funds</td><td>$ 70.0</td><td></td><td>$ -</td><td>$ 70.0</td><td>$ -</td><td></td></tr><tr><td>Active corporate bond fund</td><td>52.1</td><td></td><td>-</td><td>52.1</td><td>-</td><td></td></tr><tr><td>Diversified investment funds</td><td>3.1</td><td></td><td>-</td><td>0.3</td><td>2.8</td><td></td></tr><tr><td>Insurance contracts</td><td>3.1</td><td></td><td>-</td><td>-</td><td>3.1</td><td></td></tr><tr><td>Total assets</td><td colspan="2">$ 128.3</td><td>$ -</td><td>$ 122.4</td><td>$ 5.9</td><td></td></tr></table>

<table><tr><td>(In millions)</td><td>Balance at January 1, 2013</td><td>Actual return on plan assets</td><td>Purchases, sales and settlements</td><td>Changes due to exchange rates</td><td>Balance at December 31, 2013</td></tr><tr><td>Reconciliation of Level 3 Assets</td><td>$ 2.8</td><td>$ 0.2</td><td>$ (0.2)</td><td>$ 0.1</td><td>$ 2.9</td></tr><tr><td>Diversified investment funds</td><td>3.1</td><td>0.1</td><td>0.2</td><td>0.2</td><td>3.6</td></tr><tr><td>Insurance contracts</td><td>$ 5.9</td><td>$ 0.3</td><td>$ -</td><td>$ 0.3</td><td>$ 6.5</td></tr></table>

<table><tr><td></td><td>Balance at January 1, 2012</td><td>Actual return on plan assets</td><td>Purchases, sales and settlements</td><td>Changes due to exchange rates</td><td>Balance at December 31, 2012</td></tr><tr><td>Reconciliation of Level 3 Assets</td><td>$ 2.5</td><td>$ 0.2</td><td>$ 0.1</td><td>$ -</td><td>$ 2.8</td></tr><tr><td>Diversified investment funds</td><td>2.6</td><td>0.2</td><td>0.2</td><td>0.1</td><td>3.1</td></tr><tr><td>Insurance contracts</td><td>$ 5.1</td><td>$ 0.4</td><td>$ 0.3</td><td>$ 0.1</td><td>$ 5.9</td></tr></table>

Plan assets are invested in a number of unit linked pooled funds by an independent asset management group. Equity funds are split 50/50 between U.K. and overseas equity funds (North America, Japan, Asia Pacific and Emerging Markets). The asset management firm uses quoted prices in active markets to value the assets.

The Bond Allocation is invested in a number of Active Corporate Bond funds which are pooled funds. The Corporate Bond funds primarily invest in corporate fixed income securities denominated in British Pounds Sterling with credit ratings of BBB- and above. We use quoted prices in active markets to value the assets.

Diversified investment funds are invested in an external pension fund which in turn invests in a range of asset classes including equities and government and corporate bonds, hedge funds and private equity. The fair value of the assets as of December 31, 2013 is equal to the fair value of the assets as of January 1, 2013, as provided by the external pension fund, adjusted for cash flows over the year and the estimated investment return on underlying assets over the year.

Insurance contracts contain a minimum guaranteed return. The fair value of the assets is equal to the total amount of all individual technical reserves plus the non-allocated employer's financing fund reserves at the valuation date. The individual technical and financing fund reserves are equal to the accumulated paid contributions taking into account the insurance tarification and any allocated profit sharing return.

The actual allocations for the pension assets at December 31, 2013 and 2012, and target allocations by asset class, are as follows:

<table><tr><td>Asset Class</td><td>Percentage of Plan Assets</td><td>Target Allocations</td><td>Percentage of Plan Assets</td><td>Target Allocations</td></tr><tr><td>U.K. Equity Fund</td><td>2013</td><td>2013</td><td>2012</td><td>2012</td></tr><tr><td>Overseas Equity Fund</td><td>28.1%</td><td>30.6%</td><td>28.0%</td><td>28.6%</td></tr><tr><td>Active Corporate Bond Funds</td><td>27.7</td><td>30.6</td><td>26.6</td><td>28.6</td></tr><tr><td>Insurance Contracts</td><td>39.2</td><td>34.5</td><td>40.6</td><td>38.2</td></tr><tr><td>Diversified Investment Funds</td><td>2.4</td><td>2.4</td><td>2.4</td><td>2.4</td></tr><tr><td>Cash and cash equivalents</td><td>1.9</td><td>1.9</td><td>2.4</td><td>2.2</td></tr><tr><td>Total</td><td>0.7</td><td>-</td><td>-</td><td>-</td></tr><tr><td></td><td>100%</td><td>100%</td><td>100%</td><td>100%</td></tr></table>



## ASSUMPTIONS

The assumed discount rate for pension plans reflects the market rates for high-quality fixed income debt instruments currently available. The Buck Standard Yield Curve was used for the U.S. non-qualified and postretirement plans. For the U.K. plan, plan cash flows were not available and therefore we considered the derived yield to market on a representative bond of suitable duration taken from Buck's synthetic bond yield curve. We believe that the timing and amount of cash flows related to these instruments is expected to match the estimated defined benefit payment streams of our plans. The assumed discount rate for the U.S. non-qualified plans has changed to use individual discount rates for each plan based on their associated cash flows.
Salary increase assumptions are based on historical experience and anticipated future management actions. For the postretirement health care and life insurance benefit plans, we review external data and our historical trends for health care costs to determine the health care cost trend rates. Retirement rates are based primarily on actual plan experience and on rates from previously mentioned mortality tables. Actual results that differ from our assumptions are accumulated and amortized over future periods and, therefore, generally affect the net periodic costs and recorded obligations in such future periods. While we believe that the assumptions used are appropriate, significant changes in economic or other conditions, employee demographics, retirement and mortality rates, and investment performance may materially impact such costs and obligations.

Assumptions used to estimate the actuarial present value of benefit obligations at December 31, 2013, 2012 and 2011 are shown in the following table. These year-end values are the basis for determining net periodic costs for the following year.

<table><tr><td></td><td>2013</td><td>2012</td><td>2011</td></tr><tr><td>U.S. defined benefit retirement plans:</td><td></td><td></td><td></td></tr><tr><td>Discount rates</td><td>0.1% - 4.0%</td><td>2.0%</td><td>3.2%</td></tr><tr><td>Rate of increase in compensation</td><td>3.0%</td><td>3.0%-5.8%</td><td>3.0%</td></tr><tr><td>Expected long-term rate of return on plan assets</td><td>N/A</td><td>N/A</td><td>N/A</td></tr><tr><td>European defined benefit retirement plans:</td><td></td><td></td><td></td></tr><tr><td>Discount rates</td><td>3.0% - 4.6%</td><td>3.25% - 4.5%</td><td>4.5% - 4.75%</td></tr><tr><td>Rates of increase in compensation</td><td>3.0%</td><td>3.0%</td><td>3.0%</td></tr><tr><td>Expected long-term rates of return on plan assets</td><td>4.0% - 6.5%</td><td>4.0% - 6.5%</td><td>4.25% - 6.5%</td></tr><tr><td>Postretirement benefit plans:</td><td></td><td></td><td></td></tr><tr><td>Discount rates</td><td>3.8%</td><td>2.75%</td><td>3.85%</td></tr></table>

The following table presents the impact that a one-percentage-point increase and a one-percentage-point decrease in the expected long-term rate of return and discount rate would have on the 2014 pension expense, and the impact on our retirement obligation as of December 31, 2013 for a one-percentage-point change in the discount rate:

<table><tr><td>(In millions)</td><td>Non-Qualified Pension Plans</td><td>Retiree Medical Plans</td><td>U.K. Retirement Plan</td></tr><tr><td>Periodic pension expense</td><td></td><td></td><td></td></tr><tr><td>One-percentage-point increase:</td><td></td><td></td><td></td></tr><tr><td>Expected long-term rate of return</td><td>$ N/A</td><td>$ N/A</td><td>$ (1.4)</td></tr><tr><td>Discount rate</td><td>$ (0.1)</td><td>$ -</td><td>$ (0.2)</td></tr><tr><td>One-percentage-point decrease:</td><td></td><td></td><td></td></tr><tr><td>Expected long-term rate of return</td><td>$ N/A</td><td>$ N/A</td><td>$ 1.4</td></tr><tr><td>Discount rate</td><td>$ 0.3</td><td>$ -</td><td>$ 0.4</td></tr><tr><td>Retirement obligation</td><td></td><td></td><td></td></tr><tr><td>One-percentage-point increase in discount rate</td><td>$ (1.1)</td><td>$ (0.4)</td><td>$ (21.2)</td></tr><tr><td>One-percentage-point decrease in discount rate</td><td>$ 1.2</td><td>$ 0.4</td><td>$ 26.8</td></tr></table>

The annual rate of increase in the per capita cost of covered health care benefits is assumed to be 8.0% for medical non-Medicare eligible, 6.0% for Medicare eligible and 5.0% for dental and vision for 2014. The medical rates are assumed to gradually decline to 4.5% by 2021, whereas dental and vision rates are assumed to remain constant at 5.0%. A one-percentage-point increase and a one-percentage-point decrease in the assumed health care cost trend would have an insignificant impact on the total of service and interest cost components, and would have an unfavorable and a favorable impact of approximately $0.2 million and $0.2 million on the postretirement benefit obligation for both 2013 and 2012, respectively.

## NOTE 8 - INCOME TAXES

Income before income taxes and the provision for income taxes, for the three years ended December 31, 2013, were as follows:

<table><tr><td>(In millions)</td><td>2013</td><td>2012</td><td>2011</td></tr><tr><td>Income before income taxes:</td><td></td><td></td><td></td></tr><tr><td>U.S.</td><td>$ 149.8</td><td>$ 137.4</td><td>$ 106.3</td></tr><tr><td>International</td><td>112.8</td><td>100.3</td><td>69.2</td></tr><tr><td>Total income before income taxes</td><td>$ 262.6</td><td>$ 237.7</td><td>$ 175.5</td></tr><tr><td>Provision for income taxes:</td><td></td><td></td><td></td></tr><tr><td>Current:</td><td></td><td></td><td></td></tr><tr><td>U.S.</td><td></td><td></td><td></td></tr><tr><td>International</td><td></td><td></td><td></td></tr><tr><td>Deferred provision for income taxes</td><td></td><td></td><td></td></tr><tr><td>Total provision for income taxes</td><td>$ 30.5</td><td>$ 36.9</td><td>$ 10.6</td></tr><tr><td></td><td>29.2</td><td>20.7</td><td>7.6</td></tr><tr><td></td><td>59.7</td><td>57.6</td><td>18.2</td></tr><tr><td>Deferred provision for income taxes</td><td></td><td></td><td></td></tr><tr><td>Total provision for income taxes</td><td>13.1</td><td>10.4</td><td>24.4</td></tr><tr><td></td><td>3.2</td><td>6.1</td><td>(1.0)</td></tr><tr><td></td><td>16.3</td><td>16.5</td><td>23.4</td></tr><tr><td></td><td>$ 76.0</td><td>$ 74.1</td><td>$ 41.6</td></tr></table>

A reconciliation of the provision for income taxes at the U.S. federal statutory income tax rate of 35% to the effective income tax rate, for the three years ended December 31, 2013, is as follows:

<table><tr><td>(In millions)</td><td>2013</td><td>2012</td><td>2011</td></tr><tr><td>Provision for taxes at U.S. federal statutory rate</td><td>$ 91.9</td><td>$ 83.2</td><td>$ 61.5</td></tr><tr><td>State and local taxes, net of federal benefit</td><td>2.0</td><td>2.2</td><td>2.2</td></tr><tr><td>Foreign effective rate differential</td><td>(12.5)</td><td>(10.3)</td><td>(8.4)</td></tr><tr><td>Research and Development tax credits</td><td>(2.8)</td><td>(0.7)</td><td>(2.0)</td></tr><tr><td>Other</td><td>(2.6)</td><td>0.5</td><td>(0.2)</td></tr><tr><td>Tax Settlement</td><td>-</td><td>0.2</td><td>(5.5)</td></tr><tr><td>Change in valuation allowance</td><td>-</td><td>(1.0)</td><td>(6.0)</td></tr><tr><td>Total provision for income taxes</td><td>$ 76.0</td><td>$ 74.1</td><td>$ 41.6</td></tr></table>

The 2013 tax provision includes a benefit for U.S. Research and Development (“R&D”) tax credits comprised of the current year R&D tax credit and a catch-up adjustment for the prior year R&D tax credit which was excluded from last years’ provision due to the expiration of the tax credit at December 31, 2011. The current R&D tax credit expired December 31, 2013.

Included in the 2011 provision were certain tax benefits relating to the reversal of valuation allowances on net operating losses in certain foreign jurisdictions and U.S. foreign tax credit carryforwards as it became more likely than not that these deferred tax assets would be realized. The 2011 provision also reflects the favorable impact of a tax audit settlement in one of the foreign jurisdictions.
As of December 31, 2013 and 2012, we did not have a U.S. income tax provision for undistributed earnings of international subsidiaries. We do not currently have any specific plans to repatriate funds from our international subsidiaries; however we may do so in the future if a dividend can be remitted with no material tax impact. Such earnings are considered to be permanently reinvested. Estimating the tax liability that would result if these earnings were repatriated is not practicable at this time.



## Deferred Income Taxes

Deferred income taxes result from tax attributes including foreign tax credits, net operating loss carryforwards and temporary differences between the recognition of items for income tax purposes and financial reporting purposes. Principal components of deferred income taxes as of December 31, 2013 and 2012 are:

<table><tr><td colspan="3">(In millions)</td><td>2013</td><td>2012</td></tr><tr><td>Assets</td><td></td><td></td><td></td><td></td></tr><tr><td>Net operating loss carryforwards</td><td></td><td></td><td>$ 63.6</td><td>$ 56.2</td></tr><tr><td>Unfunded pension liability and other postretirement obligations</td><td></td><td></td><td>16.0</td><td>15.3</td></tr><tr><td>Advanced payments from foreign affiliates</td><td></td><td></td><td>28.9</td><td>22.3</td></tr><tr><td>Tax credit carryforwards</td><td></td><td></td><td>11.2</td><td>35.4</td></tr><tr><td>Stock based compensation</td><td></td><td></td><td>14.4</td><td>12.6</td></tr><tr><td>Other comprehensive income</td><td></td><td></td><td>6.0</td><td>14.0</td></tr><tr><td>Reserves and other</td><td></td><td></td><td>18.9</td><td>14.7</td></tr><tr><td>Subtotal</td><td></td><td></td><td>159.0</td><td>170.5</td></tr><tr><td>Valuation allowance</td><td></td><td></td><td>(62.3)</td><td>(49.4)</td></tr><tr><td>Total assets</td><td></td><td></td><td>$ 96.7</td><td>$ 121.1</td></tr><tr><td>Liabilities</td><td></td><td></td><td></td><td></td></tr><tr><td>Accelerated depreciation</td><td></td><td></td><td>(63.4)</td><td>(50.1)</td></tr><tr><td>Accelerated amortization</td><td></td><td></td><td>(9.2)</td><td>(8.2)</td></tr><tr><td>Other</td><td></td><td></td><td>(0.8)</td><td>(0.2)</td></tr><tr><td>Total liabilities</td><td></td><td></td><td>$ (73.4)</td><td>$ (58.5)</td></tr><tr><td>Net deferred tax asset</td><td></td><td></td><td>$ 23.3</td><td>$ 62.6</td></tr></table>

Deferred tax assets and deferred tax liabilities as presented in the consolidated balance sheets as of December 31, 2013 and 2012 are as follows and are recorded in prepaid expenses and other current assets, deferred tax assets, other accrued liabilities and other non-current liabilities in the consolidated balance sheets:

<table><tr><td>(In millions)</td><td>2013</td><td>2012</td></tr><tr><td>Current deferred tax assets, net</td><td>$ 63.3</td><td>$ 62.5</td></tr><tr><td>Current deferred tax liability, net</td><td>(1.4)</td><td>(0.2)</td></tr><tr><td>Long-term deferred tax assets, net</td><td>10.3</td><td>15.4</td></tr><tr><td>Long-term deferred tax liability, net</td><td>(48.9)</td><td>(15.1)</td></tr><tr><td>Net deferred tax assets</td><td>$ 23.3</td><td>$ 62.6</td></tr></table>

In July 2013, the FASB issued ASU No. 2013-11, which requires an unrecognized tax benefit to be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward on a jurisdictional basis. ASU 2013-11 was effective for fiscal years, and interim periods within those years, beginning after December 15, 2014. Early adoption is permitted and the Company has chosen to adopt ASU 2013-11 in the fourth quarter of 2013. The adoption of this standard resulted in a reduction of the Company's long term deferred tax assets by $21.4 million.

The deferred tax assets for the respective periods were assessed for recoverability and, where applicable, a valuation allowance was recorded to reduce the total deferred tax asset to an amount that will, more likely than not, be realized in the future. The net change in the total valuation allowance for the years ended December 31, 2013 and 2012 was an increase of $12.9 million and $10.0 million, respectively. The valuation allowance as of December 31, 2013 and 2012 relates primarily to net operating loss carryforwards of our foreign subsidiaries, and certain state net operating loss carryforwards for which we have determined, based upon historical results and projected future book and taxable income levels, that a valuation allowance should continue to be maintained.

Although realization is not assured, we have concluded that it is more-likely-than-not that the deferred tax assets, for which a valuation allowance was determined to be unnecessary, will be realized in the ordinary course of operations based on the available positive and negative evidence, including scheduling of deferred tax liabilities and projected income from operating activities. The amount of the net deferred tax assets considered realizable, however, could be reduced in the near term if actual future income or income tax rates are lower than estimated, or if there are differences in the timing or amount of future reversals of existing taxable or deductible temporary differences.

## Net Operating Loss & Tax Credit Carryforwards

At December 31, 2013, we had tax credit carryforwards for U.S. tax purposes of $28.8 million available to offset future income taxes. These credits will begin to expire if not utilized in 2014.

We also had net operating loss carryforwards for foreign income tax purposes of $231.8 million, for which there are valuation allowances of $214.8 million as of December 31, 2013. Our foreign net operating losses can be carried forward without limitation in Belgium, Luxembourg and U.K. The carryforward period in Spain and China is limited to 18 and 5 years, respectively. We have a full valuation allowance against certain foreign net operating losses for which the Company believes it is not more likely than not that the net operating losses will be utilized.

## Uncertain Tax Positions

Our unrecognized tax benefits at December 31, 2013, relate to various Foreign and U.S. jurisdictions. The following table summarizes the activity related to our unrecognized tax benefits:

<table><tr><td rowspan="2">(In millions)</td><td colspan="3">Unrecognized Tax Benefits</td></tr><tr><td>2013</td><td>2012</td><td>2011</td></tr><tr><td>Balance as of January 1,</td><td></td><td></td><td></td></tr><tr><td>Additions based on tax positions related to the current year</td><td>$ 32.6</td><td>$ 12.5</td><td>$ 20.1</td></tr><tr><td>Additions/(reductions) for tax positions of prior years</td><td>5.2</td><td>1.7</td><td>1.5</td></tr><tr><td>Decreases relating to settlements with tax authorities</td><td>5.7</td><td>19.0</td><td>(1.1)</td></tr><tr><td>Expiration of the statute of limitations for the assessment of taxes</td><td>-</td><td>-</td><td>(6.7)</td></tr><tr><td>Other, including currency translation</td><td>(1.3)</td><td>(0.8)</td><td>(1.6)</td></tr><tr><td>Balance as of December 31,</td><td>0.5</td><td>0.2</td><td>0.3</td></tr><tr><td></td><td>$ 42.7</td><td>$ 32.6</td><td>$ 12.5</td></tr></table>

Included in the unrecognized tax benefits of $42.7 million at December 31, 2013 was $39 million of tax benefits that, if recognized, would impact our annual effective tax rate. In addition, we recognize interest accrued related to unrecognized tax benefits as a component of interest expense and penalties as a component of income tax expense in the consolidated statements of operations. The Company recognized $0.7 million, $0.1 million, ($0.1) million of interest expense (income) related to the above unrecognized tax benefits in 2013, 2012 and 2011, respectively. The Company had accrued interest of approximately $1.6 million and $0.9 million as of December 31, 2013 and 2012, respectively. During 2013 we did not reverse any interest and in 2012, we reversed $0.1 million related to the unrecognized tax benefits.

We are subject to taxation in the U.S. and various states and foreign jurisdictions. The U.S. tax returns have been audited through 2007. Foreign and U.S. state jurisdictions have statutes of limitations generally ranging from 3 to 5 years. Years still open to examination by foreign tax authorities in major jurisdictions include Austria (2007 onward), Belgium (2011 onward), France (2011 onward), Spain (2004 onward) and U.K. (2011 onward). We are currently under examination in certain of the foreign jurisdictions.

As of December 31, 2013, we had uncertain tax positions for which it is reasonably possible that amounts of unrecognized tax benefits could significantly change over the next year. These uncertain tax positions relate to our tax returns from 2004 onward, some of which are currently under examination by certain European tax authorities. During 2011, the Company settled an audit with foreign tax authorities in one of the jurisdictions under examination. The favorable settlement resulted in a reduction of uncertain tax benefits of approximately $5.5 million which was recognized in 2011. As of December 31, 2013, the Company has not classified any of the unrecognized tax benefits as a current liability as it does not expect to settle any of the tax positions under examinations in various jurisdictions within the next twelve months.

We expect that the amount of unrecognized tax benefits will continue to change in the next twelve months as a result of ongoing tax deductions, the resolution of audits and the passing of the statute of limitations. We are unable to make a reliable estimate of the eventual cash flows of the $42.7 million of unrecognized tax benefits.

## NOTE 9 - CAPITAL STOCK

## Common Stock Outstanding

Common stock outstanding as of December 31, 2013, 2012 and 2011 was as follows:

<table><tr><td>(Number of shares in millions)</td><td>2013</td><td>2012</td><td>2011</td></tr><tr><td>Common stock:</td><td></td><td></td><td></td></tr><tr><td>Balance, beginning of year</td><td>102.4</td><td>101.0</td><td>99.5</td></tr><tr><td>Activity under stock plans</td><td>1.6</td><td>1.4</td><td>1.5</td></tr><tr><td>Balance, end of year</td><td>104.0</td><td>102.4</td><td>101.0</td></tr><tr><td>Treasury stock:</td><td></td><td></td><td></td></tr><tr><td>Balance, beginning of year</td><td>2.5</td><td>2.2</td><td>2.2</td></tr><tr><td>Issued under stock plans</td><td>-</td><td>-</td><td>(0.5)</td></tr><tr><td>Repurchased</td><td>2.6</td><td>0.3</td><td>0.5</td></tr><tr><td>Balance, end of year</td><td>5.1</td><td>2.5</td><td>2.2</td></tr><tr><td>Common stock outstanding</td><td>98.9</td><td>99.9</td><td>98.8</td></tr></table>

In July 2013, our Board authorized us to repurchase an additional $150 million of our outstanding common stock. The Company spent $40 million to repurchase 896,653 shares of common stock during the fourth quarter of 2013 under this authorized Repurchase Plan, of which 148,990 shares were settled in January 2014.

In December 2012, our Board authorized us to repurchase up to $50 million of our outstanding common stock ("Repurchase Plan"). During the six-month period ended June 30, 2013 the Company repurchased a total of 1,573,588 shares at a cost of $50 million and completed the December 2012 Repurchase Plan.

## NOTE 10 – STOCK-BASED COMPENSATION

The following table details the stock-based compensation expense by type of award for the years ended December 31, 2013, 2012 and 2011:

<table><tr><td rowspan="2">(In millions, except per share data)</td><td colspan="3">Year Ended December 31,</td></tr><tr><td>2013</td><td>2012</td><td>2011</td></tr><tr><td>Non-qualified stock options</td><td>$ 3.8</td><td>$ 4.5</td><td>$ 4.1</td></tr><tr><td>Restricted stock, service based (“RSUs”)</td><td>6.0</td><td>6.5</td><td>5.0</td></tr><tr><td>Restricted stock, performance based (“PRSUs”)</td><td>8.8</td><td>4.6</td><td>4.7</td></tr><tr><td>Employee stock purchase plan</td><td>0.3</td><td>0.2</td><td>0.1</td></tr><tr><td>Stock-based compensation expense</td><td>$ 18.9</td><td>$ 15.8</td><td>$ 13.9</td></tr></table>

Tax benefit from stock options exercised during the period

$ 5.3 $ 6.8 $ 8.5



## Non-Qualified Stock Options

Non-qualified stock options have been granted to our employees and directors under our stock compensation plan. Options granted generally vest over three years and expire ten years from the date of grant.

A summary of option activity under the plan for the three years ended December 31, 2013 is as follows:

<table><tr><td></td><td>Number of Options (In millions)</td><td>Weighted-Average Exercise Price</td><td>Weighted-Average Remaining Contractual Life (in years)</td></tr><tr><td>Outstanding at December 31, 2010</td><td>4.5</td><td>$ 10.84</td><td>5.16</td></tr><tr><td>Options granted</td><td>0.6</td><td>$ 19.19</td><td></td></tr><tr><td>Options exercised</td><td>(1.6)</td><td>$ 8.17</td><td></td></tr><tr><td>Options expired or forfeited</td><td>(0.1)</td><td>$ 12.93</td><td></td></tr><tr><td>Outstanding at December 31, 2011</td><td>3.4</td><td>$ 13.55</td><td>6.45</td></tr><tr><td>Options granted</td><td>0.5</td><td>$ 25.03</td><td></td></tr><tr><td>Options exercised</td><td>(0.6)</td><td>$ 10.41</td><td></td></tr><tr><td>Options expired or forfeited</td><td>—</td><td>$ 21.82</td><td></td></tr><tr><td>Outstanding at December 31, 2012</td><td>3.3</td><td>$ 15.67</td><td>6.26</td></tr><tr><td>Options granted</td><td>0.3</td><td>$ 28.27</td><td></td></tr><tr><td>Options exercised</td><td>(0.6)</td><td>$ 14.44</td><td></td></tr><tr><td>Outstanding at December 31, 2013</td><td>3.0</td><td>$ 17.30</td><td>5.96</td></tr></table>

<table><tr><td></td><td colspan="2">Year Ended December 31,</td></tr><tr><td>(In millions, except weighted average exercise price)</td><td>2013</td><td>2012</td></tr><tr><td>Aggregate intrinsic value of outstanding options</td><td>$ 82.5</td><td>$ 37.4</td></tr><tr><td>Aggregate intrinsic value of exercisable options</td><td>$ 66.9</td><td>$ 29.5</td></tr><tr><td>Total intrinsic value of options exercised</td><td>$ 10.9</td><td>$ 9.1</td></tr><tr><td>Total number of options exercisable</td><td>2.2</td><td>2.2</td></tr><tr><td>Weighted average exercise price of options exercisable</td><td>$ 14.09</td><td>$ 13.57</td></tr><tr><td>Total unrecognized compensation cost on nonvested options (a)</td><td>$ 1.6</td><td>$ 2.1</td></tr></table>

(a) Unrecognized compensation cost relates to nonvested stock options and is expected to be recognized over the remaining vesting period ranging from one year to three years.

The following table summarizes information about non-qualified stock options outstanding as of December 31, 2013:

<table><tr><td rowspan="2">Range of Exercise Prices</td><td colspan="3">Options Outstanding</td><td colspan="3">Options Exercisable</td></tr><tr><td>Number of Options Outstanding (a)</td><td>Weighted Average Remaining Life (in Years)</td><td>Weighted Average Exercise Price</td><td>Number of Options Exercisable (a)</td><td>Weighted Average Exercise Price</td><td></td></tr><tr><td>$ 7.83 - 10.90</td><td>1.1</td><td>5.59</td><td>$ 9.38</td><td>1.1</td><td>$ 9.38</td><td></td></tr><tr><td>$ 14.51 - 21.11</td><td>1.0</td><td>4.97</td><td>$ 18.54</td><td>0.8</td><td>$ 17.45</td><td></td></tr><tr><td>$ 22.00 - 28.27</td><td>0.9</td><td>7.58</td><td>$ 25.79</td><td>0.3</td><td>$ 23.54</td><td></td></tr><tr><td>$ 7.83 - 28.27</td><td>3.0</td><td>5.96</td><td>$ 17.30</td><td>2.2</td><td>$ 14.09</td><td></td></tr></table>

(a) in millions

## Valuation Assumptions in Estimating Fair Value

We estimated the fair value of stock options at the grant date using the Black-Scholes option pricing model with the following assumptions for the years ended December 31, 2013, 2012 and 2011:

<table><tr><td></td><td>2013</td><td>2012</td><td>2011</td></tr><tr><td>Risk-free interest rate</td><td>1.08%</td><td>0.83%</td><td>1.88%</td></tr><tr><td>Expected option life (in years)</td><td></td><td></td><td></td></tr><tr><td>Executive</td><td>6.32</td><td>5.44</td><td>4.84</td></tr><tr><td>Expected option life (in years)</td><td></td><td></td><td></td></tr><tr><td>Non-Executive</td><td>4.80</td><td>4.45</td><td>4.71</td></tr><tr><td>Dividend yield</td><td>−%</td><td>−%</td><td>−%</td></tr><tr><td>Volatility</td><td>40.12%</td><td>45.76%</td><td>44.08%</td></tr><tr><td>Weighted-average fair value per option granted</td><td>$ 11.07</td><td>$ 10.24</td><td>$ 7.65</td></tr></table>

We determine the expected option life for each grant based on ten years of historical option activity for two separate groups of employees (executive and non-executive). The weighted-average expected life ("WAEL") is derived from the average midpoint between the vesting and the contractual term and considers the effect of both the inclusion and exclusion of post-vesting cancellations during the ten-year period. Expected volatility is calculated based on a blend of both historic volatility of our common stock and implied volatility of our traded options. We weigh both volatility inputs equally and utilize the average as the volatility input for the Black-Scholes calculation. The risk-free interest rate for the expected term is based on the U.S. Treasury yield curve in effect at the time of grant and corresponding to the expected term. No dividends were paid in either period.
Restricted Stock Units – Service Based

As of December 31, 2013, a total of 592,882 shares of service based restricted stock ("RSUs") were outstanding, which vest based on years of service under the 2003 and 2013 incentive stock plans. RSUs are granted to key employees, executives and directors of the Company. The fair value of the RSU is based on the closing market price of the Company's common stock on the date of grant and is amortized on a straight line basis over the requisite service period. The stock-based compensation expense recognized is based on an estimate of shares ultimately expected to vest, and therefore it has been reduced for estimated forfeitures.

The table presented below provides a summary of the Company's RSU activity for the years ended December 31, 2013, 2012 and 2011:

<table><tr><td></td><td>Number of RSUs (In millions)</td><td>Weighted-Average Grant Date Fair Value</td></tr><tr><td>Outstanding at December 31, 2010</td><td>1.0</td><td>$ 11.76</td></tr><tr><td>RSUs granted</td><td>0.3</td><td>$ 20.63</td></tr><tr><td>RSUs issued</td><td>(0.4)</td><td>$ 12.51</td></tr><tr><td>Outstanding at December 31, 2011</td><td>0.9</td><td>$ 14.49</td></tr><tr><td>RSUs granted</td><td>0.3</td><td>$ 25.26</td></tr><tr><td>RSUs issued</td><td>(0.4)</td><td>$ 12.10</td></tr><tr><td>Outstanding at December 31, 2012</td><td>0.8</td><td>$ 18.90</td></tr><tr><td>RSUs granted</td><td>0.2</td><td>$ 28.95</td></tr><tr><td>RSUs issued</td><td>(0.4)</td><td>$ 15.70</td></tr><tr><td>Outstanding at December 31, 2013</td><td>0.6</td><td>$ 23.79</td></tr></table>

As of December 31, 2013, there was total unrecognized compensation cost related to nonvested RSUs of $3.1 million, which is to be recognized over the remaining vesting period ranging from one year to three years.



## Restricted Stock Units – Performance Based

As of December 31, 2013, a total of 453,897 shares of performance based restricted stock ("PRSUs") were outstanding under the 2003 and 2013 incentive stock plans. The total amount of PRSUs that will ultimately vest is based on the achievement of various financial performance targets set forth by the Company's Compensation Committee on the date of grant. PRSUs are based on a three year performance period. Based on current projections and performance targets, it is estimated that an additional 0.3 million performance shares may be issuable for the 2011, 2012 and 2013 awards. The fair value of the PRSU is based on the closing market price of the Company's common stock on the date of grant and is amortized straight-line over the total three year period. A change in the performance measure expected to be achieved is recorded as an adjustment in the period in which the change occurs.

The table presented below provides a summary, of the Company's PRSU activity, at original grant amounts, for the years ended December 31, 2013, 2012 and 2011:

<table><tr><td></td><td>Number of PRSUs (in millions)</td><td>Weighted-Average Grant Date Fair Value</td></tr><tr><td>Outstanding at December 31, 2010</td><td>0.6</td><td>$ 9.77</td></tr><tr><td>PRSUs granted</td><td>0.1</td><td>$ 19.02</td></tr><tr><td>Outstanding at December 31, 2011</td><td>0.7</td><td>$ 11.53</td></tr><tr><td>PRSUs granted</td><td>0.1</td><td>$ 25.03</td></tr><tr><td>PRSUs additional performance shares</td><td>0.2</td><td>$ 8.00</td></tr><tr><td>PRSUs issued</td><td>(0.5)</td><td>$ 8.28</td></tr><tr><td>Outstanding at December 31, 2012</td><td>0.5</td><td>$ 16.93</td></tr><tr><td>PRSUs granted</td><td>0.2</td><td>$ 28.27</td></tr><tr><td>PRSUs additional performance shares</td><td>0.3</td><td>$ 10.72</td></tr><tr><td>PRSUs issued</td><td>(0.5)</td><td>$ 10.64</td></tr><tr><td>Outstanding at December 31, 2013</td><td>0.5</td><td>$ 24.60</td></tr></table>

As of December 31, 2013, there was total unrecognized compensation cost related to nonvested PRSUs of $3.7 million, which is to be recognized over the remaining vesting period ranging from one year to three years. The final amount of compensation cost to be recognized is dependent upon our financial performance.

## Stock-Based Compensation Cash Activity

During 2013, cash received from stock option exercises and from employee stock purchases was $9.8 million. We used $7.4 million in cash related to the shares withheld to satisfy employee tax obligations for NQOs exercised and RSUs and PRSUs converted during the year ended December 31, 2013. We realized a tax benefit of $5.3 million in connection with stock options exercised and RSUs and PRSUs converted during 2013.

We classify the cash flows resulting from these tax benefits as financing cash flows. We either issue new shares of our common stock or utilize treasury shares upon the exercise of stock options or the conversion of stock units.

## Shares Authorized for Grant

As of December 31, 2013, an aggregate of 3.8 million shares were authorized for future grant under our stock plan, which covers stock options, RSUs, PRSUs and at the discretion of Hexcel, could result in the issuance of other types of stock-based awards.

## Employee Stock Purchase Plan ("ESPP")

The Company offers an ESPP, which allows for eligible employees to contribute up to 10% of their base earnings toward the quarterly purchase of our common stock at a purchase price equal to 85% of the fair market value of the common stock. There were 31,003 and 31,448 ESPP shares purchased in 2013 and 2012, respectively.

## NOTE 11 - NET INCOME PER COMMON SHARE

Computations of basic and diluted net income per common share for the years ended December 31, 2013, 2012 and 2011, are as follows:

<table><tr><td>(in millions, except per share data)</td><td>2013</td><td>2012</td><td>2011</td></tr><tr><td>Net income</td><td>$ 187.9</td><td>$ 164.3</td><td>$ 135.5</td></tr><tr><td>Basic net income per common share:</td><td></td><td></td><td></td></tr><tr><td>Weighted average common shares outstanding</td><td>100.0</td><td>100.2</td><td>98.8</td></tr><tr><td>Basic net income per common share</td><td>$ 1.88</td><td>$ 1.64</td><td>$ 1.37</td></tr><tr><td>Diluted net income per common share:</td><td></td><td></td><td></td></tr><tr><td>Weighted average common shares outstanding - Basic</td><td>100.0</td><td>100.2</td><td>98.8</td></tr><tr><td>Plus incremental shares from assumed conversions:</td><td></td><td></td><td></td></tr><tr><td>Restricted stock units</td><td>0.7</td><td>0.8</td><td>0.9</td></tr><tr><td>Stock options</td><td>1.4</td><td>1.0</td><td>1.0</td></tr><tr><td>Weighted average common shares outstanding - Diluted</td><td>102.1</td><td>102.0</td><td>100.7</td></tr><tr><td>Diluted net income per common share</td><td>$ 1.84</td><td>$ 1.61</td><td>$ 1.35</td></tr><tr><td>Anti-dilutive shares outstanding, excluded from computation</td><td>-</td><td>0.5</td><td>0.3</td></tr></table>



## NOTE 12 – DERIVATIVE FINANCIAL INSTRUMENTS

## Interest Rate Swap Agreements

In June 2012 and in 2010, we entered into agreements to swap $75 million and $98 million, respectively, of floating rate obligations for fixed rate obligations at 0.6725% and 1.03% against LIBOR in U.S. dollars. Both swaps were scheduled to mature in March 2014. As a result of our refinancing of the bank loan, we de-designated the notional $98 million swap which resulted in a charge of $0.4 million. In September, we terminated the swap and settled for cash of $0.4 million. Also in September, we entered into three new interest rate swaps, whereby we pay a fixed rate in exchange for floating LIBOR. The maturity dates of the new swaps are from March 2016 to September 2016 at an average rate of 0.81567%.

All swaps are accounted for as cash flow hedges of our floating rate bank loans. To ensure the swaps were highly effective, all of the principal terms of the swaps matched the terms of the bank loans. The remaining balance of the swaps at December 31, 2013 was approximately $150 million. The fair value of all interest rate swaps was a liability of $0.6 million and $1.0 million at December 31, 2013 and 2012, respectively.

## Foreign Currency Forward Exchange Contracts

A number of our European subsidiaries are exposed to the impact of exchange rate volatility between the U.S. dollar and the subsidiaries' functional currencies, being either the Euro or the British Pound sterling. We entered into contracts to exchange U.S. dollars for Euros and British Pound sterling through June 2016. The aggregate notional amount of these contracts was $187.1 million and $201.2 million at December 31, 2013 and December 31, 2012, respectively. The purpose of these contracts is to hedge a portion of the forecasted transactions of European subsidiaries under long-term sales contracts with certain customers. These contracts are expected to provide us with a more balanced matching of future cash receipts and expenditures by currency, thereby reducing our exposure to fluctuations in currency exchange rates. The effective portion of the hedges was a gain of $7.9 million, $6.4 million and $2.9 million, for the years ended December 31, 2013, 2012 and 2011, respectively and are recorded in other comprehensive income ("OCI"). At December 31, 2013, $11.5 million of the carrying amount of these contracts was classified in other assets and $0.6 million in other liabilities on the consolidated balance sheets and $3.6 million in other assets and $1.6 million classified in other liabilities at December 31, 2012. During the years ended December 31, 2013, 2012 and 2011, we recognized a net gain of $3.1 million and a net gain of $3.1 million, respectively, recorded in gross margin. For the three years ended December 31, 2013, 2012 and 2011, hedge ineffectiveness was immaterial.
In addition, we enter into foreign exchange forward contracts which are not designated as hedges. These are used to provide an offset to transactional gains or losses arising from the remeasurement of non-functional monetary assets and liabilities such as accounts receivable. The change in the fair value of the derivatives is recorded in the statement of operations. There are no credit contingency features in these derivatives. During the years ended December 31, 2013, 2012 and 2011, we recognized a net foreign exchange gain of $7.6 million, a gain of $5.3 million, and a loss of $4.8 million, respectively, in the consolidated statements of operations The carrying amount of the contracts for asset and liability derivatives not designated as hedging instruments was $2.6 million classified in other assets and $0.1 million in other liabilities and $3.1 million classified in other assets and $0.1 million in other liabilities on the December 31, 2013 and 2012 consolidated balance sheets, respectively.

The activity in “accumulated other comprehensive income (loss)” related to foreign currency forward exchange contracts for the years ended December 31, 2013, 2012 and 2011 was as follows:

<table><tr><td></td><td>2013</td><td>2012</td><td>2011</td></tr><tr><td>Unrealized gains (losses) at beginning of period</td><td>$2.4</td><td>$(4.5)</td><td>$(0.2)</td></tr><tr><td>(Losses) gains reclassified to net sales</td><td>(0.3)</td><td>2.4</td><td>(2.2)</td></tr><tr><td>Increase (decrease) in fair value, net of tax of $2.8 million, $1.9 million and ($0.8) million in 2013, 2012 and 2011 respectively</td><td>5.1</td><td>4.5</td><td>(2.1)</td></tr><tr><td>Unrealized gains (losses) at end of period</td><td>$7.2</td><td>$2.4</td><td>$(4.5)</td></tr></table>

Unrealized gains of $4.8 million recorded in “accumulated other comprehensive income”, net of tax of $2.3 million, as of December 31, 2013 are expected to be reclassified into earnings over the next twelve months as the hedged sales are recorded. The impact of credit risk adjustments was immaterial for the three years.

## NOTE 13 – COMMITMENTS AND CONTINGENCIES

We are involved in litigation, investigations and claims arising out of the normal conduct of our business, including those relating to commercial transactions, environmental, employment, health and safety matters. We estimate and accrue our liabilities resulting from such matters based on a variety of factors, including the stage of the proceeding; potential settlement value; assessments by internal and external counsel; and assessments by environmental engineers and consultants of potential environmental liabilities and remediation costs. Such estimates are not discounted to reflect the time value of money due to the uncertainty in estimating the timing of the expenditures, which may extend over several years.

While it is impossible to ascertain the ultimate legal and financial liability with respect to certain contingent liabilities and claims, we believe, based upon our examination of currently available information, our experience to date, and advice from legal counsel, that the individual and aggregate liabilities resulting from the ultimate resolution of these contingent matters, after taking into consideration our existing insurance coverage and amounts already provided for, will not have a material adverse impact on our consolidated results of operations, financial position or cash flows.

## Environmental Matters

We are subject to various U.S. and international federal, state and local environmental, and health and safety laws and regulations. We are also subject to liabilities arising under the Federal Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA" or "Superfund"), the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act, and similar state and international laws and regulations that impose responsibility for the control, remediation and abatement of air, water and soil pollutants and the manufacturing storage, handling and disposal of hazardous substances and waste.

We have been named as a potentially responsible party ("PRP") with respect to several hazardous waste disposal sites that we do not own or possess, which are included on, or proposed to be included on, the Superfund National Priority List of the U.S. Environmental Protection Agency ("EPA") or on equivalent lists of various state governments. Because CERCLA allows for joint and several liability in certain circumstances, we could be responsible for all remediation costs at such sites, even if we are one of many PRPs. We believe, based on the amount and nature of our waste, and the number of other financially viable PRPs, that our liability in connection with such matters will not be material.

## Lodi, New Jersey Site

Pursuant to the New Jersey Industrial Site Recovery Act, Hexcel entered into an Administrative Consent Order for the environmental remediation of a manufacturing facility we own and formerly operated in Lodi, New Jersey. We have been remediating this site in accordance with a State approved plan and continue to do so under the New Jersey Licensed Site Remediation Professional program. Hexcel has completed the primary remediation activities and we are in the process of conducting testing to support a monitored natural attenuation (MNA) program. The accrual is $1.7 million at December 31, 2013.

## Lower Passaic River Study Area

In October 2003, we received, along with 66 other entities, a directive from the New Jersey Department of Environmental Protection ("NJDEP") that requires the entities to assess whether operations at various New Jersey sites, including our former manufacturing site in Lodi, New Jersey, caused damage to natural resources in the Lower Passaic River watershed. The NJDEP later dismissed us from the Directive. In February 2004, 42 entities including Hexcel, received a general notice letter from the EPA which requested that the entities consider helping to finance an estimated $10 million towards an EPA study of environmental conditions in the Lower Passaic River watershed. In May 2005, we voluntarily signed into an agreement with the EPA to participate (bringing the total number of participating entities to 43) in financing such a study up to $10 million, in the aggregate. Since May 2005, a number of additional PRPs have joined into the agreement with the EPA. In October 2005, we along with the other EPA notice recipients were advised by the EPA that the notice recipients' share of the costs of the EPA study was expected to significantly exceed the earlier EPA estimate. While we and the other recipients were not obligated by our agreement to share in such excess, a Group of notice recipients (73 companies including Hexcel) negotiated an agreement with the EPA to assume responsibility for the study pursuant to an Administrative Order on Consent. We believe we have viable defenses to the EPA claims and expect that other as yet unnamed parties will also receive notices from the EPA. In June 2007, the EPA issued a draft Focused Feasibility Study ("FFS") that considers interim remedial options for the lower eight miles of the river, in addition to a "no action" option. The estimated costs for the six options ranged from $900 million to $2.3 billion. The PRP Group provided comments to the EPA on the FFS; the EPA has not yet taken further action. The Administrative Order on Consent regarding the study does not cover work contemplated by the FFS. In June 2012, without admitting liability, we along with 69 other PRPs entered into a further agreement with EPA to remove and cap contaminant sediments near River Mile 10.9 of the Lower Passaic River at an approximate cost of $20 million. We accrued $0.5 million in the second quarter of 2012 for our expected allocation of these costs. Work at River Mile 10.9 is ongoing. Furthermore, the Federal Trustee for natural resources has indicated their intent to perform a natural resources damage assessment on the river and invited the PRPs to participate in the development and performance of this assessment. The PRP Group, including Hexcel, has not agreed to participate in the assessment at this time. Our ultimate liability for investigatory costs, remedial costs and/or natural resource damages in connection with the Lower Passaic River cannot be determined at this time.

On February 4, 2009, Tierra Solutions ("Tierra") and Maxus Energy Corporation ("Maxus") filed a third party complaint in New Jersey Superior Court against us and over 300 other entities in an action brought against Tierra and Maxus (and other entities) by the State of New Jersey. New Jersey's suit against Tierra and Maxus relates to alleged discharges of contaminants by Tierra and Maxus to the Passaic River and seeks payment of all past and future costs the State has and will incur regarding cleanup and removal of contaminants, investigation of the Passaic River and related water bodies, assessment of natural resource injuries and other specified injuries. The third party complaint seeks contribution from us for all or part of the damages that Tierra and Maxus may owe to the State. At a case management conference held in March 2013, the Court announced that most third-party defendants had reached a tentative settlement with the State of New Jersey which, if approved by the Court, would end the state court litigation as to participating third-party defendants. We committed to join the settlement and if the settlement is approved by the Court, we would pay New Jersey $0.3 million. This amount was accrued in the first quarter of 2013. In December 2013, the Court entered the settlement and entered an order dismissing participating third-party defendants from the litigation. We have paid our settlement amount into escrow pending any appeal of the Court's orders. The scope of Hexcel's continued involvement in the litigation depends on whether the settlement becomes final and no longer subject to appeal.



## Kent, Washington Site

We were party to a cost-sharing agreement regarding the operation of certain environmental remediation systems necessary to satisfy a post-closure care permit issued to a previous owner of our Kent, Washington site by the EPA. Under the terms of the cost-sharing agreement, we were obligated to reimburse the previous owner for a portion of the cost of the required remediation activities. The previous owner, who also continues to own an adjacent site, has installed certain remediation and isolation technologies and is operating those in accordance with an order agreed with the State of Washington. This isolation is expected to ultimately prevent further migration of contaminants to our site and enable us to perform a cleanup of our site. We and the Washington Department of Ecology have reached an agreed order to perform certain cleanup activities on our site by certain deadlines, and we are in full compliance with the order as modified. The total accrued liability related to this matter was $0.8 million at December 31, 2013.

## Omega Chemical Corporation Superfund Site, Whittier, CA

We are a potentially responsible party at a former chemical waste site in Whittier, CA. The PRPs at Omega have established a PRP Group, the "Omega PRP Group", and are currently investigating and remediating soil and groundwater at the site pursuant to a Consent Decree with the EPA. The Omega PRP Group has attributed approximately 1.07% of the waste tonnage sent to the site to Hexcel. In addition to the Omega site specifically, the EPA is investigating the scope of regional groundwater contamination in the vicinity of the Omega site and issued a Record of Decision; the Omega PRP Group members have been notified by the EPA as PRP's who will be required to be involved in the remediation of the regional groundwater contamination in that vicinity as well. As a member of the Omega PRP group, Hexcel will incur costs associated with the investigation and remediation of the Omega site and the regional groundwater remedy, although our ultimate liability, if any, in connection with this matter cannot be determined at this time, we have accrued $0.6 million relating to potential liability for both the Omega site and regional groundwater remedies.

Environmental remediation reserve activity for the three years ended December 31, 2013 was as follows:

<table><tr><td rowspan="2">(In millions)</td><td colspan="3">For the year ended December 31,</td></tr><tr><td>2013</td><td>2012</td><td>2011</td></tr><tr><td>Beginning remediation accrual balance</td><td>$ 6.6</td><td>$ 5.0</td><td>$ 7.3</td></tr><tr><td>Current period expenses</td><td>0.9</td><td>5.0</td><td>3.4</td></tr><tr><td>Cash expenditures</td><td>(3.6)</td><td>(3.4)</td><td>(5.7)</td></tr><tr><td>Ending remediation accrual balance</td><td>$ 3.9</td><td>$ 6.6</td><td>$ 5.0</td></tr><tr><td>Capital expenditures for environmental matters</td><td>$ 4.6</td><td>$ 2.4</td><td>$ 4.1</td></tr></table>

## Environmental Summary

Our estimate of liability as a PRP and our remaining costs associated with our responsibility to remediate the Lodi, New Jersey; Kent, Washington; and other sites are accrued in the consolidated balance sheets. As of December 31, 2013 and 2012, our aggregate environmental related accruals were $3.9 million and $6.6 million, respectively. As of December 31, 2013 and 2012, $3.4 million and $4.2 million, respectively, were included in current other accrued liabilities, with the remainder included in other non-current liabilities. As related to certain environmental matters, except for the Lodi site, the accruals were estimated at the low end of a range of possible outcomes since no amount within the range is a better estimate than any other amount. If we had accrued, for those sites where we are able to estimate our liability, at the high end of the range of possible outcomes, our accrual would have been $6.5 million and $9.2 million at December 31, 2013 and 2012, respectively.

These accruals can change significantly from period to period due to such factors as additional information on the nature or extent of contamination, the methods of remediation required, changes in the apportionment of costs among responsible parties and other actions by governmental agencies or private parties, or the impact, if any, of being named in a new matter.

Environmental remediation spending charged directly to our reserve balance was $3.6 million and $3.4 million for the years ended December 31, 2013 and 2012, respectively. In addition, our operating costs relating to environmental compliance charge directly to expense were $13.5 million and $13.1 million for the years ended December 31, 2013 and 2012.

## Product Warranty

Warranty expense for the years ended December 31, 2013, 2012 and 2011, and accrued warranty cost, included in "other accrued liabilities" in the consolidated balance sheets were as follows:

<table><tr><td></td><td colspan="2">Product Warranties</td></tr><tr><td>(In millions)</td><td>2013</td><td>2012</td></tr><tr><td>Balance as of December 31, 2010</td><td>$ 4.3</td><td></td></tr><tr><td>Warranty expense</td><td>2.0</td><td></td></tr><tr><td>Deductions and other</td><td>(0.6)</td><td></td></tr><tr><td>Balance as of December 31, 2011</td><td>$ 5.7</td><td></td></tr><tr><td>Warranty expense</td><td>2.2</td><td></td></tr><tr><td>Deductions and other</td><td>(2.8)</td><td></td></tr><tr><td>Balance as of December 31, 2012</td><td>$ 5.1</td><td></td></tr><tr><td>Warranty expense</td><td>1.2</td><td></td></tr><tr><td>Deductions and other</td><td>(1.8)</td><td></td></tr><tr><td>Balance as of December 31, 2013</td><td>$ 4.5</td><td></td></tr></table>

## NOTE 14 – SUPPLEMENTAL CASH FLOW

Supplemental cash flow information, for the years ended December 31, 2013, 2012 and 2011, consisted of the following:

<table><tr><td>(In millions)</td><td>2013</td><td>2012</td><td>2011</td></tr><tr><td>Cash paid for:</td><td></td><td></td><td></td></tr><tr><td>Interest</td><td>$ 7.6</td><td>$ 12.6</td><td>$ 15.5</td></tr><tr><td>Taxes</td><td>$ 49.0</td><td>$ 23.4</td><td>$ 10.2</td></tr></table>

## NOTE 15 – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

Comprehensive income represents net income and other gains and losses affecting stockholders' equity that are not reflected in the consolidated statements of operations. The components of accumulated other comprehensive income (loss) as of December 31, 2013 and 2012 were as follows:

<table><tr><td>(In millions)</td><td>2013</td><td>2012</td></tr><tr><td>Currency translation adjustments (a)</td><td>$ 26.7</td><td>$ 7.1</td></tr><tr><td>Net unrealized gains on financial instruments, net of tax (b)</td><td>8.2</td><td>2.2</td></tr><tr><td>Pension obligation adjustment, net of tax (c)</td><td>(24.2)</td><td>(41.2)</td></tr><tr><td>Accumulated other comprehensive income (loss)</td><td>$ 10.7</td><td>$ (31.9)</td></tr></table>

(a) The currency translation adjustments are not currently adjusted for income taxes as they relate to indefinite investments in non-U.S. subsidiaries.

(b) Reduced by the tax impact of ($1.8 million and ($0.1) million at December 31, 2013 and 2012, respectively.

(c) Reduced by the tax impact of $1.1 million and $16.0 million at December 31, 2013 and 2012, respectively.

## NOTE 16 – SEGMENT INFORMATION

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

In addition to the product line-based segmentation of our business, we also monitor sales into our principal end markets as a means to understanding demand for our products. Therefore, for each segment, we have also reported disaggregated sales by end market.



The following table presents financial information on our segments as of December 31, 2013, 2012 and 2011, and for the years then ended.

<table><tr><td>(In millions)</td><td>Composite Materials</td><td>Engineered Products</td><td>Corporate &amp; Other</td><td>Total</td></tr><tr><td>Third-Party Sales</td><td></td><td></td><td></td><td></td></tr><tr><td>2013</td><td>$1,286.9</td><td>$391.3</td><td>$ -</td><td>$1,678.2</td></tr><tr><td>2012</td><td>1,230.9</td><td>347.3</td><td>-</td><td>1,578.2</td></tr><tr><td>2011</td><td>1,074.5</td><td>317.9</td><td>-</td><td>1,392.4</td></tr><tr><td>Intersegment sales</td><td></td><td></td><td></td><td></td></tr><tr><td>2013</td><td>$ 68.0</td><td>$ 1.8</td><td>$ (69.8)</td><td>$ -</td></tr><tr><td>2012</td><td>56.8</td><td>2.0</td><td>(58.8)</td><td>-</td></tr><tr><td>2011</td><td>53.8</td><td>1.6</td><td>(55.4)</td><td>-</td></tr><tr><td>Operating income (loss)</td><td></td><td></td><td></td><td></td></tr><tr><td>2013</td><td>$ 276.3</td><td>$ 58.9</td><td>$ (64.3)</td><td>$ 270.9</td></tr><tr><td>2012</td><td>257.3</td><td>50.6</td><td>(59.1)</td><td>248.8</td></tr><tr><td>2011</td><td>194.5</td><td>51.6</td><td>(54.1)</td><td>192.0</td></tr><tr><td>Depreciation</td><td></td><td></td><td></td><td></td></tr><tr><td>2013</td><td>$ 54.4</td><td>$ 4.7</td><td>$ 0.2</td><td>$ 59.3</td></tr><tr><td>2012</td><td>52.6</td><td>4.5</td><td>0.1</td><td>57.2</td></tr><tr><td>2011</td><td>50.8</td><td>4.3</td><td>0.2</td><td>55.3</td></tr><tr><td>Equity in earnings from affiliated companies</td><td></td><td></td><td></td><td></td></tr><tr><td>2013</td><td>$ -</td><td>$ 1.3</td><td>$ -</td><td>$ 1.3</td></tr><tr><td>2012</td><td>-</td><td>0.7</td><td>-</td><td>0.7</td></tr><tr><td>2011</td><td>-</td><td>1.6</td><td>-</td><td>1.6</td></tr><tr><td>Other (income) expense, net</td><td></td><td></td><td></td><td></td></tr><tr><td>2012</td><td>(14.5)</td><td>-</td><td>5.0</td><td>(9.5)</td></tr><tr><td>2011</td><td>(5.7)</td><td>-</td><td>2.7</td><td>(3.0)</td></tr><tr><td>Segment assets</td><td></td><td></td><td></td><td></td></tr><tr><td>2013</td><td>$1,479.2</td><td>$244.0</td><td>$ 112.9</td><td>$ 1,836.1</td></tr><tr><td>2012</td><td>1,295.4</td><td>215.2</td><td>92.5</td><td>1,603.1</td></tr><tr><td>2011</td><td>1,076.0</td><td>192.3</td><td>107.8</td><td>1,376.1</td></tr><tr><td>Investments in affiliated companies</td><td></td><td></td><td></td><td></td></tr><tr><td>2013</td><td>$ -</td><td>$ 23.3</td><td>$ -</td><td>$ 23.3</td></tr><tr><td>2012</td><td>-</td><td>22.6</td><td>-</td><td>22.6</td></tr><tr><td>2011</td><td>-</td><td>21.7</td><td>-</td><td>21.7</td></tr><tr><td>Accrual basis additions to property, plant and equipment</td><td></td><td></td><td></td><td></td></tr><tr><td>2013</td><td>$ 194.6</td><td>$ 11.9</td><td>$ -</td><td>$ 206.5</td></tr><tr><td>2012</td><td>228.6</td><td>12.5</td><td>0.2</td><td>241.3</td></tr><tr><td>2011</td><td>176.6</td><td>6.9</td><td>1.0</td><td>184.5</td></tr></table>

## Geographic Data

Net sales and long-lived assets, by geographic area, consisted of the following for the three years ended December 31, 2013, 2012 and 2011:

<table><tr><td>(In millions)</td><td>2013</td><td>2012</td><td>2011</td></tr><tr><td>Net sales by Geography (a):</td><td></td><td></td><td></td></tr><tr><td>United States</td><td>$ 871.0</td><td>$ 801.4</td><td>$ 721.5</td></tr><tr><td>International</td><td></td><td></td><td></td></tr><tr><td>France</td><td>321.1</td><td>302.9</td><td>257.6</td></tr><tr><td>Spain</td><td>164.8</td><td>150.6</td><td>142.6</td></tr><tr><td>United Kingdom</td><td>110.9</td><td>114.7</td><td>102.1</td></tr><tr><td>Austria</td><td>96.2</td><td>105.0</td><td>95.5</td></tr><tr><td>Other</td><td>114.2</td><td>103.6</td><td>73.1</td></tr><tr><td>Total international</td><td>807.2</td><td>776.8</td><td>670.9</td></tr><tr><td>Total consolidated net sales</td><td>$ 1,678.2</td><td>$ 1,578.2</td><td>$ 1,392.4</td></tr></table>

<table><tr><td>Net Sales to External Customers (b):</td><td></td><td></td><td></td></tr><tr><td>United States</td><td>$ 765.2</td><td>$ 719.4</td><td>$ 615.7</td></tr><tr><td>International</td><td></td><td></td><td></td></tr><tr><td>France</td><td>146.1</td><td>144.4</td><td>132.3</td></tr><tr><td>Germany</td><td>135.2</td><td>128.2</td><td>87.7</td></tr><tr><td>Spain</td><td>154.7</td><td>123.9</td><td>120.8</td></tr><tr><td>United Kingdom</td><td>81.4</td><td>82.2</td><td>80.2</td></tr><tr><td>Other</td><td>395.6</td><td>380.1</td><td>355.7</td></tr><tr><td>Total international</td><td>913.0</td><td>858.8</td><td>776.7</td></tr><tr><td>Total</td><td>$ 1,678.2</td><td>$ 1,578.2</td><td>$ 1,392.4</td></tr></table>

<table><tr><td>Long-lived assets (c):</td><td></td><td></td><td></td></tr><tr><td>United States</td><td>$ 854.6</td><td>$ 733.5</td><td>$ 568.2</td></tr><tr><td>International</td><td></td><td></td><td></td></tr><tr><td>United Kingdom</td><td>92.6</td><td>83.8</td><td>68.4</td></tr><tr><td>Spain</td><td>73.2</td><td>68.2</td><td>60.5</td></tr><tr><td>France</td><td>55.8</td><td>37.9</td><td>36.0</td></tr><tr><td>Other</td><td>75.5</td><td>48.8</td><td>46.4</td></tr><tr><td>Total international</td><td>297.1</td><td>238.7</td><td>211.3</td></tr><tr><td>Total consolidated long-lived assets</td><td>$ 1,151.7</td><td>$ 972.2</td><td>$ 779.5</td></tr></table>

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

(b) Net sales to external customers based on the location to which the product sold was delivered.

(c) Long-lived assets primarily consist of property, plant and equipment, net and goodwill.

## Significant Customers and Suppliers

Boeing and its subcontractors accounted for approximately 34%, 29% and 30% of 2013, 2012 and 2011 net sales, respectively. Similarly, Airbus Group, including Airbus and its subcontractors, accounted for approximately 29%, 28% and 27% of 2013, 2012 and 2011 net sales, respectively. In the Composite Materials segment approximately 24%, 19% and 20% of sales for 2013, 2012 and 2011, respectively, were to Boeing and its subcontractors. Approximately 35%, 34% and 33% of sales for 2013, 2012 and 2011, respectively were to Airbus Group and its subcontractors. In the Engineered Products segment approximately 68%, 66% and 64% of sales for 2013, 2012 and 2011, respectively were to Boeing and its subcontractors.
A significant decline in business with Boeing or Airbus Group could materially impact our business, operating results, prospects and financial condition.

Certain key raw materials we consume are available from relatively few sources, and in many cases the cost of product qualification makes it impractical to develop multiple sources of supply. The lack of availability of these materials could under certain circumstances materially impact our consolidated results of operations.



## NOTE 17 – OTHER INCOME, NET

Other income, net for the two years ended December 31, 2012, consisted of the following:

<table><tr><td>(In millions)</td><td>2012</td><td>2011</td></tr><tr><td>Business interruption insurance settlement</td><td>$ (9.6)</td><td>$ —</td></tr><tr><td>Gain on sale of land</td><td>(4.9)</td><td>—</td></tr><tr><td>Pension curtailment gain</td><td>—</td><td>(5.7)</td></tr><tr><td>Environmental expense</td><td>5.0</td><td>2.7</td></tr><tr><td>Other income, net</td><td>$ (9.5)</td><td>$ (3.0)</td></tr></table>

In 2012, the company settled a business interruption insurance claim resulting from tornado damage in 2011 and recorded operating income of $9.6 million. Also in 2012, the Company recorded a pre-tax gain of $4.9 million on the sale of land from a previously closed manufacturing facility and $5.0 million of charges primarily for additional remediation of a manufacturing facility sold in 1986.

Effective January 31, 2011, credited service for the participants in our UK, plan was frozen. This resulted in recognizing $5.7 million of prior unrecognized service credits as a curtailment gain and also reduced the projected plan obligation by $1.6 million. Also in 2011, the Company recorded an additional $2.7 million in expense for additional environmental reserves primarily to remediate our former Lodi, New Jersey manufacturing facility that was sold in 1986 as further discussed in Note 13 to the consolidated financial statements.

## NOTE 18 – NON-OPERATING EXPENSE

In June 2013, the Company entered into a new $600 million senior secured revolving credit facility that will mature in five years. The new facility replaces the Company's previous senior secured credit facility ($82.5 million term loan and a $360 million revolving loan) that would have expired in July 2015. As a result of the refinancing, we accelerated certain unamortized financing costs of the credit facility being replaced and the deferred expense on related interest rate swaps incurring a pretax charge of $1.0 million in the second quarter of 2013.

In June 2012 and February 2011, we redeemed $73.5 million and $150 million of our 6.75% senior subordinated notes at a call premium of 1.125% and 2.25%, respectively. As a result of the redemption, we accelerated the unamortized financing costs of the senior subordinated notes redeemed and expensed the call premium incurring a pretax charge of $1.1 million and $4.9 million, in 2012 and 2011, respectively.

## NOTE 19 – FAIR VALUE MEASUREMENTS

The fair values of our financial instruments are classified into one of the following categories:

- Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.

- Level 2: Observable inputs other than quoted prices in active markets, but corroborated by market data.

- Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.

In determining fair value, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as consider our own and counterparty credit risk. At December 31, 2013 and 2012, we did not have any assets or liabilities that utilize Level 3 inputs.

For derivative assets and liabilities that utilize Level 2 inputs, we prepare estimates of future cash flows of our derivatives, which are discounted to a net present value. The estimated cash flows and the discount factors used in the valuation model are based on observable inputs, and incorporate non-performance risk (the credit standing of the counterparty when the derivative is in a net asset position, and the credit standing of Hexcel when the derivative is in a net liability position). The fair value of these assets and liabilities was approximately $14.0 million and $1.3 million, and approximately $6.6 million and $2.7 million respectively at December 31, 2013 and 2012. In addition, the fair value of these derivative contracts, which are subject to a master netting arrangement under certain circumstances, is presented on a gross basis in the consolidated balance sheet.

Below is a summary of valuation techniques for all Level 2 financial assets and liabilities:

- Interest rate swap – valued using LIBOR yield curves at the reporting date. Fair value was a liability of $0.6 million at December 31, 2013.

- Foreign exchange derivative assets and liabilities – valued using quoted forward foreign exchange prices at the reporting date. Fair value of assets and liabilities at December 31, 2013 was $14.0 million and $0.7 million, respectively.

Counterparties to the above contracts are highly rated financial institutions, none of which experienced any significant downgrades in 2013 that would reduce the receivable amount owed, if any, to the Company.

## NOTE 20 - QUARTERLY FINANCIAL AND MARKET DATA (UNAUDITED)

Quarterly financial and market data for the years ended December 31, 2013 and 2012 were:

<table><tr><td>(In millions)</td><td>First Quarter</td><td>Second Quarter</td><td>Third Quarter</td><td>Fourth Quarter</td></tr><tr><td>2013</td><td></td><td></td><td></td><td></td></tr><tr><td>Net sales</td><td>$ 416.5</td><td>$ 422.6</td><td>$ 412.3</td><td>$ 426.8</td></tr><tr><td>Gross margin</td><td>112.0</td><td>116.8</td><td>112.1</td><td>113.1</td></tr><tr><td>Operating income</td><td>63.0</td><td>71.9</td><td>69.0</td><td>67.0</td></tr><tr><td>Net income</td><td>43.6</td><td>48.5</td><td>48.7</td><td>47.1</td></tr><tr><td>Net income per common share:</td><td></td><td></td><td></td><td></td></tr><tr><td>Basic</td><td>$ 0.43</td><td>$ 0.49</td><td>$ 0.49</td><td>$ 0.47</td></tr><tr><td>Diluted</td><td>$ 0.43</td><td>$ 0.48</td><td>$ 0.48</td><td>$ 0.46</td></tr><tr><td>Market price:</td><td></td><td></td><td></td><td></td></tr><tr><td>High</td><td>$ 30.23</td><td>$ 35.46</td><td>$ 39.67</td><td>$ 44.69</td></tr><tr><td>Low</td><td>$ 26.50</td><td>$ 27.64</td><td>$ 33.88</td><td>$ 38.09</td></tr><tr><td>2012</td><td></td><td></td><td></td><td></td></tr><tr><td>Net sales</td><td>$ 400.1</td><td>$ 399.2</td><td>$ 391.6</td><td>$ 387.3</td></tr><tr><td>Gross margin</td><td>106.4</td><td>105.5</td><td>99.2</td><td>95.6</td></tr><tr><td>Other income, net</td><td>—</td><td>(9.5)</td><td>—</td><td>—</td></tr><tr><td>Operating income</td><td>60.6</td><td>73.9</td><td>60.0</td><td>54.3</td></tr><tr><td>Net income</td><td>39.6</td><td>48.0</td><td>39.8</td><td>36.9</td></tr><tr><td>Net income per common share:</td><td></td><td></td><td></td><td></td></tr><tr><td>Basic</td><td>$ 0.40</td><td>$ 0.48</td><td>$ 0.40</td><td>$ 0.37</td></tr><tr><td>Diluted</td><td>$ 0.39</td><td>$ 0.47</td><td>$ 0.39</td><td>$ 0.36</td></tr><tr><td>Market price:</td><td></td><td></td><td></td><td></td></tr><tr><td>High</td><td>$ 26.71</td><td>$ 27.80</td><td>$ 26.49</td><td>$ 27.29</td></tr><tr><td>Low</td><td>$ 23.42</td><td>$ 23.05</td><td>$ 22.53</td><td>$ 23.55</td></tr></table>



## MANAGEMENT'S RESPONSIBILITY FOR CONSOLIDATED FINANCIAL STATEMENTS

Hexcel management has prepared and is responsible for the consolidated financial statements and the related financial data contained in this report. These financial statements, which include estimates, were prepared in accordance with accounting principles generally accepted in the United States of America. Management uses its best judgment to ensure that such statements reflect fairly the consolidated financial position, results of operations and cash flows of the Company.

The Audit Committee of the Board of Directors reviews and monitors the consolidated financial statements and accounting policies of Hexcel. These financial statements and policies are reviewed regularly by management and such financial statements are audited by our independent registered public accounting firm, PricewaterhouseCoopers LLP. The Audit Committee, composed solely of outside directors, meets periodically, separately and jointly, with management and the independent registered public accounting firm.

## MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Hexcel management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended, as a process designed by, or under the supervision of, the company's principal executive and principal financial officers and effected by the company's board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
• pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company;

• provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and

• provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements.

Hexcel management has assessed the effectiveness of our internal control over financial reporting as of December 31, 2013. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework, as described in our assessment, management concluded that, as of December 31, 2013, our internal control over financial reporting was effective.

The effectiveness of Hexcel's internal control over financial reporting, as of December 31, 2013, has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report that appears on page 63.

## REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of Hexcel Corporation

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of stockholders' equity and comprehensive income and of cash flow present fairly, in all material respects, the financial position of Hexcel Corporation and its subsidiaries at December 31, 2013 and 2012, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2013 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) (1992). The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on these financial statements and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial reporting. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.



Stamford, Connecticut
February 5, 2014



Hexcel Corporation, S&P 500, S&P Aerospace and Defense Select Index, Russell 2000 and Custom Peer Group



■ Hexcel Corporaton

S&P 500

S&P Aerospace & Defense Select Industry Index

Russell 2000

Custom Peer Group

<table><tr><td>Date</td><td>Hexcel Corporation</td><td>S&amp;P 500</td><td>S&amp;P Aerospace &amp; Defense Select Index</td><td>Russell 2000</td><td>Custom Peer Group</td></tr><tr><td>December 2008</td><td>$ 100.00</td><td>$ 100.00</td><td>$ 100.00</td><td>$ 100.00</td><td>$ 1000.00</td></tr><tr><td>December 2009</td><td>$ 175.64</td><td>$ 126.46</td><td>$ 130.44</td><td>$ 127.17</td><td>$ 136.26</td></tr><tr><td>December 2010</td><td>$ 244.79</td><td>$ 145.51</td><td>$ 158.02</td><td>$ 161.32</td><td>$ 189.14</td></tr><tr><td>December 2011</td><td>$ 327.60</td><td>$ 148.59</td><td>$ 161.98</td><td>$ 154.59</td><td>$ 190.81</td></tr><tr><td>December 2012</td><td>$ 364.82</td><td>$ 172.37</td><td>$ 190.90</td><td>$ 179.86</td><td>$ 234.07</td></tr><tr><td>December 2013</td><td>$ 604.74</td><td>$ 228.19</td><td>$ 304.30</td><td>$ 249.69</td><td>$ 332.72</td></tr></table>

(1) Total shareholder return assuming $100 invested on December 31, 2008 and reinvestment of dividends on quarterly basis.

## HEXCEL CORPORATION

## BOARD OF DIRECTORS

Nick L. Stange
Chairman of the Board,
Chief Executive Officer & President
Hexcel Corporation

Joel S. Beckman
Managing Partner
Greenbriar Equity Group LLC
Finance Committee \( ^{*} \) 
Compensation Committee

Lynn Brubaker
Former Aerospace Executive
Audit Committee
Nominating & Corporate Governance
Committee \( ^{*} \) 

Jeffrey C. Campbell
Executive Vice President & CFO
American Express
Audit Committee \( ^{*} \) 

Sandra L. Derickson
Former Financial Services Executive
Compensation Committee
Nominating & Corporate Governance
Committee

W. Kim Foster \( ^{**} \) 
Former Executive Vice President & CFO
FMC Corporation
Audit Committee
Nominating & Corporate Governance
Committee

Thomas A. Gendron
Chairman, CEO & President
Woodward, Inc.
Compensation Committee

Jeffrey A. Graves
Chief Executive Officer
MTS Systems Corporation
Finance Committee
Nominating & Corporate Governance
Committee

David C. Hill
Former President & CEO
Sun Chemical Corporation
Audit Committee
Finance Committee

David L. Pugh
Former Chairman & CEO,
Applied Industrial Technologies
Compensation Committee*

*Denotes Committee Chair
** Denotes Lead Director

## OFFICERS

Nick L. Stange
Chairman of the Board,
Chief Executive Officer & President

Wayne Pensky
Senior Vice President and
Chief Financial Officer

Ira J. Krakower
Senior Vice President,
General Counsel and Secretary

Robert G. Hennemuth
Senior Vice President,
Human Resources

Kimberly Hendricks
Vice President, Corporate Controller and
Chief Accounting Officer

Michael Macintyre
Treasurer

## CORPORATE INFORMATION

Executive Offices
Hexcel Corporation
Two Stamford Plaza
281 Tresser Boulevard
Stamford, CT 06901-3238
(203) 969-0666
www.hexcel.com

## INVESTOR RELATIONS

To receive Hexcel's 10-K and other financial publications free of charge, please contact the Investor Relations Department at Hexcel's Executive Offices, or at www.hexcel.com

## TRANSFER AGENT & REGISTRAR

American Stock Transfer & Trust Company
40 Wall Street
New York, NY 10005
(800) 937-5449
info@amstock.com

## STOCK EXCHANGES

Hexcel common stock is listed on the New York Stock Exchange and the Paris Euronext exchange under the symbol "HXL"

Hexcel has included as exhibits to its Annual Report on Form 10-K for fiscal year 2013 filed with the Securities and Exchange Commission the certificates of Hexcel's Chief Executive Officer and Chief Financial Officer required under section 302 of the Sarbanes-Oxley act. Hexcel's Chief Executive Officer submitted to the New York Stock Exchange (NYSE) in 2013 a certificate certifying that he is not aware of any violations by Hexcel of NYSE corporate governance listing standards.

## ABOUT HEXCEL

Hexcel is a leading global producer of advanced composites, serving commercial aerospace, space and defense and various industrial markets. The Company is a leader in the production of carbon fiber, woven and specialty reinforcements, prepregs and other fiber-reinforced matrix systems, honeycombs and composite structures. Hexcel materials are used in thousands of products, making everyday life easier for millions of people around the world. The lightweight, tailorable nature of our materials has helped transform numerous industries over the past 66 years by making products lighter, stronger and faster. We are the strength within many of today's lightweight, high-performance products.

<table><tr><td>Stock Price</td><td>2013</td><td>2012</td><td>2011</td></tr><tr><td>High</td><td>$44.69</td><td>$27.80</td><td>$25.84</td></tr><tr><td>Low</td><td>$26.50</td><td>$22.53</td><td>$17.58</td></tr></table>

As of March 5, 2014, Hexcel had approximately 69,300 stockholders.